Unitech: Stretched to the limit - Outside View by Luke Verghese

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Unitech: Stretched to the limit
Feb 8, 2012

The company is attempting to grow too fast, and forgetting simultaneously that there are no free lunches in the frenetic pursuit of its goals

A pan India presence

The New Delhi based 40 year old corporate entity, with an almost pan India presence, is in the business of real estate development of residential, commercial, retail and hospitality properties. The main focus is on development of large mixed use townships. It is also developing several special economic zones (SEZs) for the IT and the ITeS sector. That is to say barring industrial construction in the main, its activities cover the entire hog of real estate business development. Unitech states that it has about 80 ongoing projects covering a total area of 40 m sqft at various stages of development. These projects are spread over different geographies in India, further increasing the complexity in terms of project execution. The company is in the process of demerging businesses that come under the ambit of Unitech Infra into a separate entity.

In terms of operational parameters the company is a humungous entity - that is for sure. The standalone entity registered a turnover - including other income of Rs 21.6 bn during the year. This is marginally lower than the Rs 22.3 bn that it recorded in the preceding year. (The sales income consists very largely of revenue receipts from the real estate division, followed by the consultancy division, and lastly from the construction division). The pre-tax profit for the year was Rs 5.1 bn against Rs 5.4 bn previously. As a consolidated entity, the group comprises 293 subsidiary companies, four joint ventures, and six associate companies. Of this lot 38 subsidiaries are incorporated outside India, as also are three joint ventures. (Revenue wise, the consolidated group is substantially larger. A total income of Rs 32.9 bn and a pre-tax profit of Rs 8.5 bn was what the company could rustle up in 2010-11).

The travails of being a holding company

And in case you did not know, the book value of its investments in its siblings at year end toted up to Rs 20.5 bn. The vast bulk generate no revenues, but more on this later on in the copy. And if that is not enough, the advances that it has made to its subsidiaries at year end to acquire land for real estate projects amounted to Rs 18.9 bn. At year end the company has trade debt dues of Rs 16.8 bn from 11 subsidiaries. The company states that these trade debts are unsecured and unconfirmed, but considered good! (One of the basic requirements of any audit is in getting confirmations of all capital account balances including that of debtor dues and creditor payables at year end. And if one cannot obtain balance confirmations from one’s own subsidiary companies, then this is the end of the road, in a manner of speaking). It gets more and more illuminating as we trundle along its 110 page annual report. The parent also had loans of Rs 32.7 bn due from 104 subsidiaries at year end! Not including the corporate guarantees of Rs 12.8 bn given on behalf of the siblings. Then there are share application moneys pending allotment to the tune of Rs 10 bn. Further, there are another 14 enterprises owned or significantly influenced by key management personnel or their relatives.

Profits and cash flows do not always match

But in reality, one gets the feeling that all is not well. And why do I say this? One of the more fascinating aspects of the accounting profession is that it is very malleable, and it is easily able to adjust to the ground realities. It possesses the leeway to create entries which has the effect of drastically altering the ways and means position of an enterprise at any point of time - especially at the year-end. (Or what can euphemistically be referred to as changing water into wine). Consider the specific instance of Unitech Limited. The parent, or the standalone entity, as stated earlier, reported a pre-tax profit of Rs 7.3 bn on gross revenues of Rs 21.6 bn. But the fact of the matter is that as per the cash flow statement, the company simultaneously registered a negative cash flow from operations of Rs 9.3 bn during the year. (For the matter of record, the company also reported a negative cash flow from operations of a whopping Rs 27 bn in the preceding year). In simple English it means that the company was out of pocket in its day to day revenue operations.

In both the years however, the company declared a dividend too. But the catch here is that in both years it declared and paid a naam-ke-vaaste dividend. This was resorted to only to generate the feel good factor on the one hand, and to keep the minority shareholders in good humour to some extent on the other. In 2010-11 the dividend payout, excluding the dividend tax, amounted to 5% of the post tax profit. In the preceding year the dividend payment accounted for 9% of the post tax profit. This is no body’s idea of a dividend payment. The ostensible reason advanced for this niggardly payout is that given the economic scenario and the future fund requirements of the company, the funds have to be conserved. But that is not the real reason, as stated earlier. Besides, if one were to look at the big picture in the P&L account statement - from the ‘amount available for appropriation’ point of view then the dividend payout picture gets completely muddled. The point is that the company has resorted to the trick of keeping large surplus carry forward balances, representing prior years’ undistributed profits etc. at hand, and which have not been transferred to reserves. This has been resorted to for the sole purpose of adding some colour to the bottom-line. This is nothing but a smoke screen, and besides, there is psychological strength in flashing large numbers.

The company is overstretched

The problem is that the company is stretched, overstretched if one may so. This is precisely what the cash flow statement reveals. It is not able to sell its projects fast enough to generate badly needed cash, leading to a severe mishmash in cash flow. The result is that there is a severe pile up of trade receivables on the one hand, which is accelerating at a faster trot that the pile up in trade payables. On the other hand it also has to service the interest on the large debt that it has taken on to service the land bank that it has acquired, as also the projects on hand. To give a bird’s eye view of the mess that it has landed itself into, take a look at one statistic. The trade receivables at year end amounted to almost 94% of the total revenues attributable to such receivables! How in heaven’s name could Unitech have achieved the impossible? What type of billing pattern does the company follow? The company has got it all wrong if this indeed is the reality. Consequently, the borrowings piled up too. The total interest paid out during the year was Rs 4.7 bn, but fortunately only Rs 3.3 bn of this payout got debited to the P&L account. The balance payout was apparently capitalised. (However the picture was a lot conkier in the preceding year - the total interest payout was Rs 7.5 bn). The problem is that it takes considerable time to monetise the land bank from the point of acquisition. Besides, at year end, it had contracted to acquire additional land on which the deferred liability (to pay) amounted to Rs 11 bn.

And in an effort to extricate itself from the cash flow mess, the company goes to extraordinary lengths to generate the cash. The sales receipt schedule shows revenue accruals under eight heads of account. Separately it also lists interest receipts under another six heads of account. It generated interest income of Rs 3.6 bn in 2010-11, against Rs 2.9 bn previously. Top of the pops here is the interest received on loans to subsidiary companies. It amounted to a neat Rs 3.1 bn against Rs 2.5 bn previously. This is a remarkable achievement. It is nice to know that the subsidiary companies are actually in a position to pay their interest tithes to the parent. This income receipt would roughly work out to a 10% return on its outstanding balances on this score. These incomes are substantial in the overall aggregation of the bottom-line. In 2010-11 such interest receipts accounted for 50% of pre-tax profit, against a marginally lower 40% previously. But, significantly, there is a zero return on its investments portfolio. And as stated earlier, the book value of its investment portfolio at year end was a monstrous Rs 20.5 bn. Needless to add this lack of return must be bleeding the parent no end unless it is able to get its comeuppance back in some other form through other inter-se deals, but which are not readily decipherable. The Rs 10 bn lying in share application moneys which when allotted will go to add to the non performing value of its investments.

A breakup of the revenues

The sales receipts in 2010-11 mark quite a change from the compendium in the preceding year. It was so badly off key that it was forced to sell its land bank on the one hand, and its land rights on the other. These two heads of income generated a cash flow of Rs 4.5 bn. There were no such revenue receipts in the preceding year. (But the preceding year compensated for by generating income from liquidated damages of Rs 510 m).The company also generated revenues of Rs 2.1 bn (Rs 6.7 bn previously) through income from sales of investments in real estate projects. Such receipts can be referred to as a highly variable source of revenues. Put simply, it generates large sums of money each year through very unorthodox means. Hence, estimating Unitech’s gross revenues in advance each year become a non brainer in a manner of speaking. However, the bulk of its sales revenues, or Rs 12.3 bn, accrued from an item called Real Estate Projects. In this grouping is an entry called ‘Percentage of completion method projects’ - which appears to be yet another discretionary form of income accounting. Getting an informed view of the revenues of realty companies is nothing short of a mug’s game it appears.

If this is not beguiling enough, the segment wise portrayal of its results puts the matter in another perspective - where the revenues are generated under three heads of account. The real estate division is the prima donna with revenues of Rs 16.9 bn and handsome segmental profits of Rs 8.1 bn. (This is a fantastic return by any yardstick). The construction division is a bit player with almost zero profit generation. (On what basis it segments its revenues is not known). The bomb shell here is the Consultancy division with revenues of Rs 778 m and segment profits of a like amount. How is this possible? This is really working out to be far out stuff.

The numerous siblings

And how are its numerous siblings - the children of a lesser god and on whom the parent has lavished love and affection, managing? They are paying their interest tithes on their borrowings for sure. The parent has also appended the brief financials of all the 293 siblings in the annual report, as is statutorily required. They are a colourful bunch alright, and they are also far too numerous to take a call on at length. In a nutshell, their contribution to the apple pre-tax bottom-line. And, as stated earlier not one company has deemed it expedient to pay any dividend. But, then, it is the parent who controls every aspect of their functioning.

Unitech has spawned a number of extra large siblings which boast of humungous asset bases, but generate zilch revenues. Consider for example the following companies. Top of the pops is Firisa Holdings Ltd. This obviously is some sort of a holding company of the group and is a US dollar denominated entity. It boasts total assets of Rs 3.9 bn but has no revenue incomes or expenses for that matter to show. Of similar genre is Risster Holdings Ltd, again a US dollar denominated company, with a similar total asset base of Rs 3.9 bn and very little else. Or take Nuwell Ltd, another US dollar based entity with total assets of Rs 2.5 bn, but is a total blank otherwise. There should be a limit to absurdity. What earthly purpose is achieved by conceiving such companies? Is there any purpose or direction here please? Managements should be made accountable to their shareholders for the performance of the siblings too. Giving them a perceived free rein of hand can lead to unwarranted situations as in the above instance. There are innumerable companies of similar vein that it has progenied, but they are far too numerous to list here. To be exact there are 271 siblings which have yet to open their account and register any revenues! To get to the point how does this rank for creativity? Now you know why this company is facing a deficit in cash flows.

The contribution to the top-line is in reality accounted for by a handful of companies. The company generating the largest sound-bites in revenue terms is Unitech High Tech Developers with revenues of Rs 2.4 bn. Next in line is Unitech Power Transmission with revenues of Rs 1.8 bn, (why is it muddling around in https://www.equitymaster.com/research-it/sector-info/power/?) and Bengal Unitech Universal Infrastructure with revenues of Rs 1.6 bn. But the company with the highest total asset base is Unitech Acacia Projects with total assets of Rs 26 bn. This is followed by Unitech High Tech Developers with total assets of Rs 24.5 bn, and Bengal Unitech Universal Infrastructure Pvt. Ltd with assets of Rs 17.2 bn. But such icons as states earlier are few and far between. The management has made no mention of what it intends to do with the many offspring at its disposal, or what it intends to make of the high funda foreign currency denominated entities. And if these letter head companies. are suddenly given the mandate to germinate life of their own, then the parent will have to think of taking on board a lot more lubricants to finance their business activities. A frightening scenario if one may add.

Unless the management makes a genuine effort to scale down its activities to a more manageable level and learn to live within its means, there is really very little to recommend in this share.

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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