A muddled performance which does not offer much confidence to an investor
A family owned enterprise
Trying to make any good sense at all of the operations of a company engaged in the construction business is difficult enough, given the accounting that the companies adopt for billing of revenues, for sub-contracting work, for work in progress, for inventories and the like. A perusal of the accounts of this rather oddly named company given its profession only buttresses this viewpoint. It is a Delhi headquartered company which has seen 23 summers pass by - and if one may add the company does not appear to have very much cheer to offer at the end of it. This is notwithstanding the fact that the company issued bonus shares in the ratio of 1:1 in the financial year 2010-11. Consequently the paid up equity capital doubled to Rs 205.4 m comprising of 205.4 m shares of Re 1 each. The reserves and surplus largely comprising share premium and general reserves -stands at an impressive Rs 5.4 bn however. The three principal promoters sport the surname Kashyap and are very safely ensconced in the gaddi with a combined holding of 71.13% of the outstanding capital. This holding is almost equally divided among the three promoters, with Vinod Kashyap chairing the board. The three promoter directors helped themselves to a combined remuneration of Rs 26 m during the year. But thanks to the inadequate bottom-line that the company was able to rustle up, the remuneration was in excess of the limits by Rs 22.4 m. The company has recovered the excess amount that it paid, but it has simultaneously applied to the Central government for regularisation of the excess payment. For the matter of record the company managed to scrape by with a pre-tax bottom-line of Rs 38 m against Rs 748 m that it recorded in the preceding year.
The hold of the siblings
The reasons for recording a sharply lower profit before tax are many and include what looks like the sponging off of the parent by its siblings. Like all companies in the construction biz B.L. Kashyap and Sons makes do with a number of juniors - but unlike other companies of similar hue these juniors and their offspring in turn take on a different meaning. For example the company has advanced loans to related parties - meaning group companies which at end March 2012 amounted to Rs 4.16 bn, up from Rs 3.74 bn previously. (But the auditor's report states that the number of such parties to whom the loans have been advanced to number three, and the year end dues amount to Rs 3.1 bn). One is unable to reconcile the two figures. It has also advanced Rs 278 m as inter-corporate deposits to its siblings, and in turn availed of inter-corporate deposits from them. It is all in the family you see. Separately, there are short term advances amounting to Rs 480 m at year end. Whether these advances too pertain to dosh given to group companies or not is not known. Now juxtapose these advances with the total borrowings of Rs 5.86 bn at year end, as compared to a marginally lower figure of Rs 5.27 bn previously. The company has debited a total finance cost of Rs 913 m to P&L account during the year against Rs 651 m previously. This figure includes interest charges of Rs 822 m - implying an interest rate of 14% or more on a rough reckoning. (The parent in turn has accounted for interest receipts on long term loans that it in turn has advanced - in the other income schedule). But I will delve on this aspect later on in this copy.
Some other question marks
Besides this factor, there are several other question marks too. Though the cash flow statement reveals that the company earned a positive cash flow on its operations during the year, it has defaulted on its repayment dues to the banks and financial institutions. The total dues in default on capital and interest account totes up to Rs 157 m. It generated a positive cash flow of Rs 270 m from operations during the year. But this cash flow, and separately, the interest receipt of Rs 492 m generated from investing activities, was required to take care of numerous other exigencies on revenue and capital account. The auditor's report also notes that the company faces a provident fund demand of Rs 5.77 bn from the PF authorities for the period April 2005 to December 2010. (The notes to the accounts states that the figure is Rs 5.93 bn). This is the first time that I have come across such a wacky outstanding demand, and that too a demand as humungous as this, and from of all people-the PF authorities. The company says the demand notice is sub-judice. Separately, there is a large pending IT demand for Rs 590 m pertaining to several past assessment years. Again, a note to the accounts states that based on assessment notices received from the IT department for the years 2002-03 to 2009-10 the company has deposited a sum of Rs 1.23 bn - but the company has gone on appeal against the demand notices. This would appear to be a rather strange way of paying ones tax dues. Does not the company pay advance tax to start with as required under law?
The slide in profits
As stated earlier the pre-tax profits slid sharply to Rs 38 m from Rs 748 m previously. This is basically because the cost of materials consumed etc and including power consumed and hire charges etc, rose more sharply than the increase in revenues. Revenues from operations rose a slice over 25% to Rs 19.2 bn. But the consumption cost of materials etc rose 31.4% to Rs 13.2 bn. Add to this the sharp rise in employee benefit expenses, and the company faced a double whammy. If this was not enough the interest costs rose 40% to Rs 913 m. (But for the large doles, the interest costs could have been kept well under check). And, but for the effect of 'Other income' which rose gently to Rs 483 m from Rs 466 m previously, the company would have been completely in hock. Besides the large sums doled out to its chelas, the company has to suffer large inventory baggage and even larger trade receivables. And to compound matters some half of the trade receivables are dues in excess of six months. The company has tried to limit the damage to some extent by taking moneys upfront-or so it appears. There is a sum of Rs 3.2 bn shown under a curiously titled sub-head called 'Mobilisation advance' under the head of Current Liabilities against liabilities of Rs 2.88 bn previously - which probably pertains to what I am inferring to. The current assets at year- end is almost at par with the current liabilities -which almost stands in the company's favour -but it was still tough going at the end of the day.
How exactly the company benefits from entertaining its siblings in the manner it does is a matter which I am unable to comprehend. It has three wholly owned siblings, one partly owned sibling, and two step down siblings (subsidiaries of subsidiaries). It also boasts of 12 other related parties and one joint venture. The company does not directly hold any stake in its 12 related parties or in its joint venture. In which event how does the joint venture become a joint venture? Anyways, the company has a cumulative investment of Rs 139 m in the form of equity/preference shares in its four direct siblings. Separately it also has investments in other companies amounting to Rs 53 m which includes an equity stake of Rs 50 m in Jay Pee Infratech. It earned a princely dividend of Rs 0.68 m from all its investments cumulatively. Fair enough -no complaint here. Siblings and other side investments by and large are for circus shows and little else.
The makeup of the siblings
But it is the makeup of these siblings which makes for comic reading. Besides the fact that some of them do subcontracting work for the parent, there is very little else on offer. The company with the highest paid up capital is BLK Lifestyle with a capital base of Rs 100 m. It has negative reserves of Rs 9.3 m and total assets of Rs 509 m. It realised revenues of Rs 414 m and made a post tax profit of Rs 16 m. It has yet to wipe out its accumulated losses or some such. Next in line is Soul Space Projects Ltd. It has a paid up capital of Rs 21 m, negative reserves of Rs 29 m, total assets of Rs 5.4 bn, investments of Rs 2.5 bn, revenues of Rs 2.6 m and a pre-tax loss of Rs 12.3 m. These are extremely incongruous figures and the sums simply do not add up. This sibling is the investment arm of the company and in all probability the bulk of the loans advanced by the parent to its siblings have been forked over to this worthy. (The investments in the associates of the parent may well have been engineered through this sibling). Furthermore, the investments made by the sibling can be categorised as deadwood - from the dividend point of view, and as revealed by its own revenues. Not that the parent is complaining. The other two siblings - Security information Systems and BLK Infrastructure Ltd -are both mothballed outfits based on their brief financials, with negative reserves and zilch revenues.
The siblings' contd...
Then there are the two step down siblings which are even more comic. One has a paid up capital of Rs 10 m, and total assets of Rs 612 m, and nothing else to show. The other has a similar paid up capital, and assets of Rs 71 m with nothing else on offer. This is about as colourful as the financials can get. What exactly was the purpose of incorporating the two step-downs please? It appears that the directors of the parent think that the siblings owe no explanation to the shareholders of the parent regarding the state of their balance sheet. Such warped mindsets should be made to undergo a change in beliefs by incorporating suitable amendments in this respect in the venerable Companies Act.
More to the point, the parent as stated earlier had at year end advanced large dollops of moneys to its siblings etc. The loans and advances schedule reveals a figure of Rs 4.16 bn, besides ICDs of the value of Rs 278 m. The parent has shown an income receipt of Rs 455 m in the other income schedule. Presumably this income pertains to the interest on the loan that the company forked out to its siblings etc. If so, then this large interest receipt looks an unlikely possibility, as the inherent financial position of the siblings on the face of it would not have permitted the payment of such a large sum of cash. How the siblings achieved this feat is simply beyond me. But, somehow, the parent has made it all possible.
Whatever be its financials the share is witnessing quite some activity in the bourses. The Re 1 face value share gyrated from a high of Rs 29.10 to a low of Rs 7.60 during the financial year. An investment in construction companies is definitely not for the faint hearted.
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 Verghese. 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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