Madras Cements ‘CSR’ Funds Going to Promoter-Run Trust, Analysts Crying Foul


CSR & Competitiveness

Madras Cements is making investors queasy by its donations to a promoter-run trust for building an engineering college. Madras Cements is making investors queasy by its donations to a promoter-run trust for building an engineering college.

CHENNAI: South India’s No. 2 cement maker Madras Cements, whose industry-beating margins made it a top performer at the bourses last year, is now making investors queasy by its donations to a promoter-run trust for building an engineering college. The Chennai-based company, headed by one of India’s highest-paid corporate honchos PR Ramasubrahmaneya Rajha, has set aside a total of 30.5 crore till now for the Raja Charity Trust, owned by the promoter family. This includes 24.5 crore in 2012-13 (just over 6% of net profit) and a further 6 crore in the first quarter of this fiscal (8.7% of net profit). The donations have “contributed to an increase in other expenditure and added to our concerns,” said Milind Raginwar, analyst at SBICap Securities.

CEO AV Dharmakrishnan, however, defended the move, telling Economic Times it is part of the company’s corporate social responsibility activity and that there is no need for concern. “We need a lot of manpower, and we felt that this is the right time to start an engineering college as we already have the expertise,” he said.

“Though there are a lot of engineering colleges, what we believe in is quality education,” he adds. The trust already runs schools near the company’s factories in Andhra Pradesh, Tamil Nadu and Karnataka. The 300-seat engineering college will come up in Rajapalayam in southern Tamil Nadu, a state where a huge appetite for engineering education seems to have led to massive oversupply.

It is estimated that this year about 40% of the over 2 lakh seats on offer have had no takers, in line with the situation in the other engineering education hubs of India. The controversy over the spending comes at a time when lawmakers have just passed the new Companies Bill, which, among other things, requires a company with over 1,000 crore in turnover to spend at least 2% of the average net profit of three preceding years on corporate social responsibility each year.

But analysts have already given the cement maker’s move a thumbs-down. Madras Cements’ stock has shed 31% so far this year, a sea change in fortunes from last year. It ended 2012 as the fifth top-performing stock, with a jump of 139% in value, aided by huge operating margins that were the envy of even large peers such as Ambuja Cement, Ultratech Cement and ACC.

“The recent stock price correction factors in the negatives such as group-company donations and a restrained first quarter performance,” Jaspreet Singh Arora and Manish Valecha, analysts at Anand Rathi, wrote in a research report. Analysts aren’t worried about the fundamentals of this Rs 4,500-crore Ramco group flagship as much as they are about the corporate social responsibility spends. That too when economic markers are weak. Madras Cements posted a 44% drop in first-quarter net profit to Rs 69 crore on the back of lower realisations and higher cost.

Shriram Subramanian, founder and MD of InGovern Research Services, India’s first proxy advisory and corporate governance research firm, had a more fundamental reason to oppose the move. He said, “Minority shareholders have a claim on part of the funds. Invariably, such contributions are for non-core activities without shareholder approval.”

Also, Subramanian said, “Promoters should use their personal wealth for such initiatives, like Shiv Nadar and Azim Premji have done, rather than use company funds.” Earlier this year, Madras Cements became one of companies to be allowed by the All India Council for Technical Education to start engineering colleges.

(Economic Times, 16 August 2013)

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