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Mahindra Lifespace: Self sustaining growth - Outside View by Luke Verghese
 
 
Mahindra Lifespace: Self sustaining growth

The financials of this company is like a breath of fresh air as compared to that of some of its peers

One of India's top ten builders

A member of the eponymous Mahindra and Mahindra group, this real estate developer is chronologically a relative pup in the field of construction activity. The latest annual report is but the 15th annual report of the company. The company however proudly claims that it has been voted as one of India's top 10 builders at the Construction World Architect and Builder Awards 2011, for the second year running. It is not known what yardsticks were used to arrive at this exalted conclusion. But from a purview of the brief financial highlights of the company for the last decade it would appear that <>Mahindra Lifespace is a very sedately and organically run company as compared to the swashbuckling exploits put on display by its more illustrious country cousins. A manageable level of debt (including NIL debt in three successive years) a steady increase in revenues each year over that of the preceding year, and wonder of wonders, its ability to report a higher pre-tax moolah in every successive year barring the financial year 2008-09.

The dependence on other income

But it must also be added that the higher pre-tax figures has to contend with a large component of other income that it comes loaded with. In 2011-12 for example, the other income accounted for 31% of pre-tax profit as compared to a considerably smaller 20% in the preceding year. But I will delve more on this development later on in the copy. And as is the norm in the construction industry it makes do with a string of siblings to help it in its onward journey. The key siblings number six - out of a total number of 11 siblings (In totality there are 12 enterprises under the control of the parent, as also another seven fellow subsidiaries or so). The book value of its investments in the equity capital of its siblings amounts to Rs 2.2 bn and in the preference capital of Rs 1 bn. And as is the wont, the parent has outstanding loans of Rs 2.1 bn due from the six siblings. The book value of its total investments in all its siblings, associates etc amounts to Rs 3.2 bn. Separately it also boasts current investments of the value of Rs 1.3 bn - but they are of the free float variety.

The company operates in two project segments - residential and integrated developments. With a view to expanding its footprint it is in the process of unveiling some new lines of activity. In the residential segment 'it is advanced stages of developing an affordable housing product for the low income segment'. In the integrated development space the company 'is looking to tap opportunities close to high growth corridors by developing smaller industrial parks with value added support facilities. That apart, it is also looking to having lower lead times and easier land acquisition for a faster turnaround'.

The revenue take

On a standalone basis the company achieved a turnover including other income of Rs 5.2 bn and a pre-tax profit of Rs 1.7 bn in 2011-12.On a consolidated basis the company achieved revenues of Rs 7 bn and a pre-tax profit of Rs 1.9 bn. Presently the promoters and promoter group hold a strategically important 51.05% of the paid up capital of Rs 408 m. What is equally important to note here is that the FIIs collectively hold another large chunk of 25.55% of the capital. In other words it infers that the floating stock on tap is limited and any action in the secondary market leads to wide fluctuations. (The share gyrated from a high of Rs 427 to a low of Rs 235 during the financial year). The reserves and surplus on the other hand amounted to Rs 10.7 bn. But the catch here is that the share premium reserves in this total figure amounted to Rs 6.8 bn. It may not be out of place to state that the company has cottoned on to just about the 'right' mode to raise permanent capital.

In a nutshell this industry by and large tends to display the buccaneering spirit of Indian entrepreneurship. The emphasis really is on titillation and obfuscation than on creating shareholder wealth. The mantra of Mahindra Lifespace however can roughly be translated as follows - hasten slowly and cautiously. For starters, its main revenue stream also includes receipts which have no revenue expenses - albeit on a minor scale. (The emerging trend in the construction industry is for builders to lease out space in buildings rather than to resort to rummaging the entire property at one go. In this manner there is a steady cash flow over the years as compared to a one time receipt). Its revenues consist of 'income from operations' of Rs 4.7 bn (marginally lower than in the preceding year) and 'other income' of Rs 522 m. The former accounted for 90% of revenues while the latter chipped in with the remaining 10%. The operating income is almost 96% made up of 'income from projects' -but there is also Income from 'operation of commercial complexes' of Rs 125 m accounting for another 2.7%. The amount is miniscule but still it is making a point. Project management fees, and profit from the sale of properties together at Rs 45 m brought in the balance moolah. The latter two receipts amounting to Rs 170 m have no corresponding revenue expenses attached to them, and are therefore basically money for jam.

The company has also turned in a profit on revenues accruing from projects even without the help of other income. The big iffy point about construction companies lies in the booking of receipts and expenses as revenue income, revenue expense, or as capital expenditure, and also in the timing of their accounting. The auditor's acknowledge that this is a technically complex matter in their report to the shareholders. The technicality lies in the estimates of the percentage of completion, costs to completion and the projections of revenues expected from projects, and the realisability of construction work in progress. The emphasis here is to pay obeisance to the documentation given by the management on this aspect.

The other income factor

The company has accounted for other income of Rs 522 m. This is inclusive of dividend income of Rs 164 m and interest income from inter- corporate deposits of Rs 167 m. Such accretals would amount to small beer relative to the outlay of funds in corporate investments, and loans and advances that it has made in this respect - but still some. The other pickings include bank deposit income etc and miscellaneous income of Rs 77 m. The company possesses a medley of investments. It has equity and preference stakes in siblings and associates of the book value of Rs 3.2 bn. Only three of the siblings' appear to offer any return on the investment made by the parent in them by paying dividends. The total dividends accruing to the parent as a result would amount to a middling Rs 99 m, though the parent has accounted for only Rs 55.5 m - and arising it says from Mahindra World City Developers Ltd. (On what basis the company has accounted for such a quantum of dividend income from this company - as the parent owns only 82.6% of its voting stock- is not readily ascertainable). Besides, it does not appear to have accounted for the preference dividends due from two of its siblings. One of the three siblings which declared a dividend-Mahindra Residential Developers - is a curiosity. The parent's investment in this company is not showing up in the investment schedule of the parent. But this company is listed as a subsidiary in the 'summary statement of the financial performance of the subsidiaries'. Also, the parent has only a 48.3% stake in this offspring - but it qualifies as a sibling because the board is apparently controlled by the parent. It is not clear in what manner the parent holds its stake in Mahindra Residential Developers.

At year end the parent also has advanced sums to the tune of Rs 2.16 bn to its siblings, etc. It is not immediately decipherable if these advances have led to any interest income in return-but it may have. In this potpourri mix the parent also decided to advance inter corporate deposits to the siblings - apparently to get the message across that they have to also earn their living. The interest charged on such deposits is not known as inter-corporate deposits are oftentimes rolled over several times in a year.

Attempt at financial management

The second and another important aspect of this company's functioning is that even though it has sprouted its fair share of siblings and associates - in whom and to whom it has invested or advanced large dollops of company funds to - the company is still able to subsist on minimum borrowings. This is indeed a far cry from other major real estate developers whose financials I have analysed. The company as I stated earlier makes do with 12 siblings-though it shows investments in only 11 of them - two joint ventures, one associate, and one step down subsidiary. As I stated earlier, the debt load per-se at year end is contained at Rs 1.7 bn against Rs 1 bn previously. And the reason for even this level of debt load is because of the severe mismatch between the current assets at year end and the current liabilities. The current assets amounted to Rs 11.4 bn against current liabilities of a mere Rs 2.6 bn. The largest item of current assets is short term loans and advances at Rs 4.6 bn (including advances to related parties of Rs 2.2 bn), followed by inventories at Rs 2.3 bn. (The inventories weigh heavily on the company - amounting to over 52% of the revenues realised from projects).

The investment schedule

The current investments - consisting of 'ready to market' debt instruments amounts to Rs 1.3 bn (the company also bought and sold debt instruments worth Rs 4.4 bn during the year) -- and cash balances of Rs 1.3 bn largely make up the balance of its current assets. However, the company does not appear to have made even a dime by flipping its debt portfolio this way and that. It prefers the dividend stripping model it appears. But at the same time if one x's out its cash hoard and its holding in debt instruments against the year- end debt burden, the company is actually more than debt free. For some earthly reason, the company sees value in keeping the debt load in its books. Interestingly enough, the trade debtors at year end amount to only a slice over 19% of revenues booked from projects. But on the flip side, the current liabilities do not reveal any advance received from prospective clients.

The company's cash flow statement is not exactly the best guide on how to manage funds flows-but it is a lot less chaotic than that of some of its peers in the industry. Cash flow generation from operations was down to a trickle due mainly to a high outlay on inventory accretals. It then went on invest some Rs 1.7 bn in its siblings and other fellow travellers. The latter decision however led to two contradictory developments. On the one hand there was a sharp fall in its cash balances at year end to Rs 1.2 bn from Rs 2 bn previously, but it also simultaneously led to an increase in borrowings by Rs 700 m!

The sibling factor

As stated earlier it has authored 12 siblings whose brief financials have been published. Some four of them are non entities with miniscule capital bases and non- existent revenues. But among the performers the standout is Mahindra World City (Jaipur) Ltd. A capital base of Rs 2 bn is accompanied by a total asset base of Rs 6.2 bn. It roped in a turnover of Rs 9.1 bn and dished out a profit before tax of Rs 130 m. It is also one of three siblings which forked out a dividend. Almost in similar vein is Mahindra World City Developers with a capital base of Rs 850 m and a total asset base of Rs 4.1 bn. This company rustled up revenues of Rs 604 m and managed a pre-tax profit of Rs 154 m.

A most noteworthy entity is Mahindra Residential Developers with a middling paid up capital of Rs 2.6 m. It boasted a gross asset base of Rs 836 m and rang up revenues of Rs 550 m. It is also a high profit business judging from the pre-tax profit of Rs 136 m. It is a pity that the parent only has a 48% stake in this firm. Who owns the balance stake please? The other siblings should also take a leaf out of this company's functioning. But it still sounds a bit incredulous that a company with a pip squeak capital base of Rs 2.6 m can pull a rabbit out of the hat with such ease - so to speak. The only company of some note raising a red flag, sort of, is Mahindra Integrated Township. It has a paid up capital of Rs 503 m and negative reserves of Rs 134 m. It also drummed up a loss of Rs 30 m on revenues of Rs 291 m during the year.

The holding pattern of the parent in its siblings also appears to suffer from some lacunae. For example the parent holds 94.8% of the capital base of Mahindra Integrated Township Ltd. The capital base of this sibling stands at Rs 504 m. (It is assumed that the entire capital base consists of equity shares). The parent has a 94.8% stake in this capital. This would imply that the company would be holding 47.74 m shares in this company. But in reality the parent holds only 37 m shares. How does one reconcile this anomaly?

Inspite of the minor irritations that one encounters this is one real estate developer which appears to be on song.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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