What's in a name?
One has to dig deep into the innards of the annual report to figure out the full form nameplate of Ansal Properties and Infrastructure. The front cover has anointed it as ANSAL API, as do many of the inside pages. And, as is the flavour of the times, the annual report comes replete with a mission statement and a letter to the members of the company from the pater familias, Mr Sushil Ansal. The vision and mission not surprisingly is to fulfil the growing aspirations of its customers by building world class real estate solutions and redefining lifestyle standards. The chairman in his message lets out that they are now geared to further the transition in the company by donning an all new identity built on the foundation of excellence, teamwork and commitment. These are brave new words that the company is bandying, alright.
A middle level player
It would therefore be an appropriate moment in time to see what this company is all about. In Capital Market magazine's listing of 104 publicly listed construction companies, it qualifies as a lower middle order player of sorts, revenue wise. The company ratted up gross revenues including other income of Rs 10.9 bn in 2010-11, against revenues of Rs 7.8 bn previously, with pre-tax profits of Rs 1.2 bn against Rs 922 m previously. The biggest player by far in the listing is JP Associates with gross revenues of Rs 130 bn in 2010-11, followed by IVRCL with revenues of Rs 56.5 bn. The company measures in at the 33rd spot, top-line wise.
The company's principal focus area appears to be Uttar Pradesh, followed by the home states of Haryana and Punjab, and followed in succession by Rajasthan. According to the directors' report, the company is in the process of developing mega sized townships in Lucknow, Greater Noida, Gurgaon and Mohali in Punjab. The biggest single project on hand is the development of 3,530 acres in Lucknow, which will include villas, flats, shops and office complexes, shopping malls, schools, educational institutions, hospitals, clubs, hotels, the must have golf course, recreational facilities and what have you. Nothing has escaped the eye it appears. The Gurgaon project will see the development of 2,504 acres and so on. The other projects involve much smaller land outlays. The management claims that it currently boasts a total land bank of 10,136 acres, out of which 43% is in NCR. The total saleable area is 312 million square feet. To help achieve its objectives it has also given birth to a host of subsidiaries, infrastructure companies, and joint venture companies which have collectively swallowed up investments of the book value of Rs 2.1 bn. To give one an idea of the size involved, it has 49 subsidiaries or step down subsidiaries, 10 joint ventures 81 associates, and 15 associates in which it has a significant influence. And as the schedules reveal, Ansal Properties has had an infinite number of deals in what are euphemistically termed as 'significant transactions' with related parties. The details of the deals run into six pages of fine print. But to be fair to the management, the consolidated results for the year show a higher top-line and bottom-line than the standalone entity. And for a real estate company that is no mean achievement.
Modest size of operations
The turnover per-se is still modest. But given the scale of its intentions there are signs of the big picture in the offing. The gross current assets at year end amounted to a humungous Rs 43.2 bn, which includes inventories of the value of Rs 22.4 bn. The Loans and advances were also sizeable at Rs 12.6 bn - but more on this development later on in this show. The accumulated debt in turn is large at Rs 13.6 bn. The paid up capital at Rs 787 m in comparison is pidgin, but it is backed up by book reserves of Rs 15 bn. It is significant that a slice over 64% of all reserves is accounted for by reserves falling in the category of 'Securities Premium Account'. All construction companies without exception seem to be skimping on the owned capital factor. They give more emphasis to borrowed capital, while dishing out advances like confetti, and such like. And when the going gets tough the warts begin to show.
Ansal Properties too is unable to get its act together. For sure the company's revenues are growing at a fast pace. Sales income from its mainstay rose 44% to Rs 10.7 bn, from Rs 7.4 bn previously. Other income on the other hand dropped to Rs 227 m from Rs 330 m previously. Overall, the revenues including other income rose 41% to Rs 10.9 bn. The vast bulk of the sales revenues were generated by income classified as 'real estate sales' and 'Income from development rights'. But, in either year, the company registered a negative cash flow from operations. It was out of pocket to the tune of Rs 186 m against a similar charge of Rs 744 m previously. The principal factors affecting positive cash flow generation was the massive rise in inventories, trade receivables, and in loans and advances, which completely eclipsed the growth in trade payables. Matters were hardly in its favour when the company was forced to plonk down Rs 557 m on the purchase of investments. The company however made good the shortfall by issuing additional share capital to the tune of Rs 2.9 bn at a hefty premium to the face value. It does not help one bit that the Rs 2.2 bn invested in the equity of its subsidiaries and joint ventures does not generate a dime in dividends. It does not help either that 25% of the total employee remuneration of Rs 463 m is accounted for by the 4 executive directors! This is taking professionalism a little too far.
The additional capital was raised for a specific purpose. The notes to the accounts says that the amount of Rs 3 bn that the company received in additional capital was fully utilised for its ongoing projects, repayment of loans/debentures, investments, corporate expense, the works. On the borrowings front this is what really happened. It repaid loans to the tune of Rs 3.7 bn and it borrowed moneys to the tune of Rs 3.8 bn! So in a manner of speaking, it did repay loans I guess.
The emphasis on debt
Given the emphasis on debt, and the demands on working capital loans during the course of the accounting year, the company has paid a whopper on interest account. The total payment on this count was Rs 2.1 bn, though a large slice of this payout of Rs 1.1 bn was debited to capital account. On a rough calculation it would work out to an outage of 15% per annum in toto. Construction companies also get considerable leeway between charging of costs to revenue or to capital on the expenditure side of the equation. The item of expenditure under which this good work is carried out is called work-in-progress, and appears to largely determine which way the P&L account swings. In the case of Ansal Properties, the total expenditure on this account for the year was Rs 26.8 bn. But Rs 20.6 bn of this expenditure got transferred to capital account, leaving Rs 6.2 bn to be debited to the expenditure side of the revenue account. But the revenue expenditure side reveals a debit entry of Rs 6.9 bn as a result, instead of Rs 6.2 bn, an anomaly which I am unable to reconcile. There is a similar apparent discrepancy in the preceding year too.
But where the shoe really pinches from the viewpoint of the minority shareholders of the parent company is the manner in which it has advanced monies to its group companies including joint ventures. The total advances, including advances made on behalf of the parent at year end amounted to Rs 12.6 bn. It is not exactly known from the manner in which the data has been presented, the extent of the loans advanced to its siblings etc. But from the details made available a sum of at-least Rs 9 bn has been advanced on their behalf. It is quite possible that another Rs 1 bn may have been advanced on their behalf in the form of advances to contractors/suppliers etc. In other words the vast bulk of the advances are on behalf of its siblings. That is to say the siblings are bigger beneficiaries of the functioning of the parent than the parent itself! It would also infer that the siblings for whatever reason are undercapitalised and hence the need to hang on to the apron strings of the parent for succour. This then is the power enjoyed by joint stock companies where there is a holding company and which in turn leads to subsidiaries, which live off the parent on the one hand, and are not directly answerable to the shareholders of the parent on the other. That is not all. The parent is also standing guarantee for large sums of loans advanced directly to the siblings by lenders, and which involves direct payment of guarantee fees and such like.
And what is the direct cash returns that it enjoys on such advances? The other income schedule shows income from loans of Rs 82 m and income from debentures of Rs 18 m. In addition to the lack of any dividend return on its investments, the company does not get more than a farthing on the loans advanced to its younger brethren. The returns if any therefore rest in the inter-se transactions that it has with them and is classified under significant transactions with related parties. For an analyst this part of the game is pure guesswork.
And what do the muted results of the siblings have to show? Excepting Ansal Hitech Township, Ansal Colours engineering, and Ansal IT City Parks, which have a relatively large capital base, the other 45 companies whose financials are available, have a paid up capital of Rs 0.5 m each. The real big boy in this list is Ansal Hitech, with a paid up capital of Rs 600 m and total assets of Rs 2.7 bn. It toted up revenues of Rs 499 m and rustled up a pre-tax profit of Rs 246 m. That is truly a swell return on sales, something that the parent is unable to match. The next one in the pecking order is Ansal Colours Engineering. This is some sort of a indecipherable company. It has a paid up capital of Rs 200 m, negative reserves of Rs 7 m, and total assets of Rs 216 m. This is where it gets beyond any reasoning. It registered a negative turnover of Rs 3.8 m, and managed a negative post tax profit of an identical figure! Wow, now this is show time folks! For how in heaven's name can a company register a negative turnover in the first place please? The pre-tax loss has not been stated, which may have well been an identical figure. It has to be a printing mistake or something.
Ansal IT City Parks is also a curious oddball of sorts. On a capital base of Rs 23 m it had reserves of Rs 109 m and boasted total assets of Rs 772 m. This is where it gets to be interesting. It has a very negligent turnover and not worth mentioning here. But on this negligent turnover it ratted up a pre-tax loss of Rs 10.7 m. After a negative provision for tax of Rs 9.8 m it managed to report a pre-tax loss of only Rs 0.9 m! Fancy the tax man giving a credit for losses incurred! This entity must be into facilities management or some such. Another non entity appears to be Delhi Towers Ltd. It has a paid up capital of Rs 0.5 m, negative reserves of Rs 22.5 m and total assets of a mere Rs 5.4 m. But on a turnover of Rs 29.1 m it generated a pre-tax profit of Rs 26.4 m. This is definitely a feat worth emulating, and at this rate it should be able to wipe out its accumulated losses in the next accounting year. There are other nuggets like this one, but then the copy gets to be a bit too long.
Companies such as this may be given the cold shoulder if that is the best option available.
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.