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Saturday, April 23, 2011

Blue Dart Exp.: Indian postal dept. should learn from it:

            Blue Dart Express was most recently in the news on the strength of rumours that the foreign management is buying back the publicly listed shares of the company and delisting the company from the Indian bourses. It was in 2005 that DHL Express acquired management control by buying 81% of the equity of Blue Dart Couriers from the original three Indian promoters. Some three years earlier in 2002 the majority stake in DHL the American courier company was acquired by Deutsche Post, the German giant, and the company was in turn renamed as DHL Express. (DHL is the acronym of the surnames of the three original founders). The 81% stake in the company is currently held by DHL Express (Singapore) Pte Ltd. The company was incorporated in 1983 and has to date completed 27 years of existence, though it has only led to the presentation of the 20th annual report of the company.
          Blue Dart Express is today South Asia's number one express air and integrated transportation, distribution, and logistics management company. It claims that it commands a 40.1% market share in the domestic air express industry. In the 'ground segment' the company has garnered a market share of 8.5%. The management states that this market dominance did not happen by chance. It has made huge investments in building an infrastructure that is unparalleled in the entire South Asia region - across the vast Indian geography and beyond. It has a fleet of 7 Boeing aircraft, thousands of vehicles, several hundred facilities, and over 6,000 staff. At end December, 2010 it boasted a gross block of Rs 3.3 bn. This included Rs 396 m worth of freehold land, Rs 30 m worth of goodwill and Rs 856 m worth of aircraft and components. (Whether it owns these aircraft outright or whether the associate company Blue Dart Aviation also has a large finger in this pie is not clear.) Barring the aircraft, it is really not all that capital intensive.
         The interesting point to note here is that the accumulated depreciation was as high as 50% of the depreciable gross block as at end December 2010. Needless to add it is highly human recourses intensive - with an emoluments bill of Rs 1.5 bn for the latest completed year. This expenditure grew by 10% over that of the preceding year. The exact number of staff that it employs is not known, but assuming HR strength of say 6,100, it works out to an average employee payout of Rs 244,000 per year. Its biggest asset, really, is putting in place its superior logistics management capabilities through the harnessing of its HR skills, and in the ensuing dexterity of its funds management, which has enabled the company to be debt free.
On a roll
           The company is definitely on the roll, what with the 'income from operations' growing 72% compounded from Rs 6.7 bn to Rs 11.5 bn between the base year 2006 and 2010. With total income (including other income) growing at the same pace, the pre-tax profit and the post tax profit grew 80% and 88% respectively. More significantly, the turnover from operations grew by 26.7% to Rs 11.5 bn in 2010, compared to Rs 905 m recorded in the preceding year, with the business operations netting a pre-tax margin of 12.2% (Rs 1.4 bn) against 10.2% (Rs 930 m) that it recorded previously. With the tax provision maintained at a uniform 33% of pre-tax profits for both years, the post tax profit grew 55% to Rs 943 m. For whatever reason, the company is very miserly when turning on the dividend spigot. The payout on this score as a percentage of post tax profits (excluding dividend tax) was a very minuscule 2.5% (Rs 23.7 m) against 3.9% (Rs 23.7 m) previously. (This is also another very good reason why the company is debt free.)
Shareholder rewards not expressly implied
            What is however coming across very clearly is that the company does not have a well defined dividend issue policy or even a bonus issue policy in place. For not only is the company miserly when it comes to sharing its cash dividend tidings with its shareholders (especially given that the German parent has such a humungous holding in the company, or is it because of this reason?) it is just as diffident when it comes to the matter of the issue of 'free shares'. Against a paid up equity capital base of Rs 237 m, the accumulated reserves were in excess of Rs 5 bn. The interesting aspect here is that the accretion of this paid up equity over the years is in itself largely due to the capitalisation of free reserves. Bonus shares account for 74% of the paid up equity, but this may have happened prior to the management having changed hands.
            The lack of clarity on such basic matters of paramount importance to its shareholders is even more surprising as the management claims that the basic philosophy of Corporate Governance at Blue Dart is to achieve business excellence and to create and enhance the value for its shareholders, customers, employees and business associates.
Cash rich with minimal investment options
           With a lot of loose cash lying around the company has parked Rs 762 m into readily encashable debt instruments at year end. It has also invested Rs 14.6 m in the equity of a wholly owned subsidiary Concorde Air Logistics Ltd, and Rs 183 m in the equity of an associate Blue Dart Aviation Ltd, in which it has a 49% stake. Why did it limit its holding to 49%, and who holds the balance 51% please? The shares in the subsidiary with a face value of Rs 10 each was acquired at Rs 133 per share, while the shares in the associate with a similar face value were acquired at Rs 15.6 per share. Why did the management pay such an astronomical premium to acquire the shares in the subsidiary, or even pay the 51% premium on the face value to acquire the shares in the associate? It has also advanced a loan of Rs 1.1 bn to the associate, and paid an amount of Rs 215 m as aircraft payload deposit on its behalf (which in all probability is an inter-corporate deposit). Thus the total sum paid up upfront for Blue Dart Aviation is Rs 1.5 bn.
          The dividend income from its debt fund holdings aggregated to Rs 33 m, while it earned not a dime from its group investments. It also made a play by buying and selling securities worth a humungous Rs 19.8 bn during the year, but what it earned in the bargain is not readily discernable, as any income arising from this exercise has not been separately documented. It has earned its tithes from the loan that it has advanced to its associate as also on the inter-corporate deposit that it advanced to it. But when this capital investment will see any dividend inflows, or some such, is another ball game altogether.
The subsidiary muddle
        The subsidiary Concorde Air Logistics, for which it paid out top dollar, is a pipsqueak by any reckoning. The wonder is that it sees value in owning such a company. The bulk of its piggly wiggly fixed assets consist of goodwill- period. It is engaged in the business of clearing and forwarding of time sensitive air cargo packages. So the volume of business that it can chalk up here is limited per se. It earns its bread under two heads - services and commission. Why such a breakup? The total income that it logged in for the 12 months ended December 2010 was Rs 25 m. In this top line get up, services income accounted for a little over 60%, with commissions bringing in the balance. There is also some marginal 'other income'. It scraped through with a profit after tax of Rs 1.7 m (Rs 2.2 m previously). It may be noted that the vast bulk of its depreciation of Rs 1.8 m is on account of amortisation of the balance goodwill showing in its books. It also bought and sold mutual fund investments to the tune of Rs 99 m during the year, but does not appear to have made any money on revenue account in the process.
        In spite of pushing time bound cargo, the company has to extend a large credit line to the users of its services. Trade debtor dues at year end accounted for 54% of all services/ commission income, against a phenomenal 95% in the preceding year. What type of credit extension is this to garner business under such a niche head of account? The point is that it doles out much less credit for its regular business. So what is going on here? The associate company Blue Dart Aviation appears to making some minor profits. The company's 49% stake in the equity earned it a profit of Rs 450,000 during 2010.
       The company has got a spate of fellow subsidiaries, which sport such names of DHL Express (India) Pvt Ltd, DHL Lemuir Logistics Pvt Ltd, and Skyline Air Logistics Limited. These are all companies incorporated in India and are operating in the India orbit and they look like they are all operating in the same line of business that Blue Dart is in. It will help if the management of Blue Dart can shed some light on what these worthies are up to and what incomes they ring up, and how they complement or compete with the listed entity.  ……….

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