The company's financials does not tend to set right the sullied reputation of the construction industry
An old hand in the business
The company website says that it has over 30 years of experience in the realty development industry. But the annual general meeting notice in the latest annual report calls for the 24th annual general meeting of the company. It may have operated in some other legal form in the initial stages of its career path. This company is quite unique in a manner of speaking. It is a very closely held company which appears to be stretching itself to the very outer limits in its rush to push forward. One would be moved to think that the company will implode sooner than later.
Closely held sure it is for sure. In one schedule which furnishes the total breakup of the holding in the company under different categories, the promoter and promoter group control 82.5% of the outstanding equity of Rs 728 m. In the category specifying the names of shareholders holding more than 5% each of the equity, the immediate family of the chairman Hemant M Shah are detailed as holding 62.7% of the voting capital of Rs 728 m either in their individual capacity or in the HUF format. The chairman Hemantbhai gets to control only 17.45% of the total face value of the stock on hand either individually or in the HUF capacity. A category called others therefore controls the balance 37.30% making for cent percent.In other words family group members holding 19.8% of the voting capital have individual shares of less than 5%.
A baffling set offinancials
The balance sheet and P&L account figures one has to contend with are humungous and baffling in certain respects to say the least. The paid up capital is beefed up by reserves and surplus of Rs 15.6 bn. The reserves however consist of security premium reserves of Rs 6 bn and debenture redemption reserve of Rs 1.04 bn. The company has very sensibly retained Rs 6.55 bn as surplus in the P&L account to take care of exigencies like the lack of any post depreciation profits to pay out dividend. The debt of various hues including overdrawn bank balances and negative current account balance in firms and joint ventures amounts to another Rs 16.95 bn against Rs 15.75 bn previously. The current and non-current investments together amount to Rs 6.89 bn against Rs 6.35 bn previously. This in turn encompasses a vast swath of investment outlets comprising of joint stock companies which are either subsidiaries, or are jointly held companies, or are associate companies. The list stretches on to other investments and includes investments in debenture holdings in group companies, and investment in partnership firms, and joint venture companies. The list separately includes advances towards investment in the share capital of group companies amounting to Rs 1.19 bn, and investments in partnership firms and JVs amounting to Rs 35m. The extent of the largesse is most heart warming. It has also forked out loans and advances to group companies amounting to a humungous Rs 14.61 bn (what is the collateral hold the parent has on these advances?). It gets more impressive as we glide along. The value of inventory at year end was a most impressive Rs 7 bn, and trade receivables of Rs 1.03 bn. Juxtapose the latter two figures with the revenues from operations of Rs 2.6 bn during the year. We are also nonchalantly informed that the balances of trade payables and advances to suppliers are subject to confirmation and consequential adjustment.
The list of subsidiaries run into 26 nos, and another 13 companies going under the nomenclature of jointly owned companies. Not including 11 companies categorised as associate companies, with four companies thrown in under the designation of 'Others'. There are five companies listed as partnership firms with another six companies within the definition of joint ventures. Many of these group companies given their nameplate are operating in very diverse lines of business-and the results are there for all to see. The total investment outlay in all the companies/partnership firms and joint ventures did not yield a dime as dividends in either year. There is nothing to fret about here though. That is the general practise in India Inc. Then there is the list of related party disclosures which lists the names of 83 companies within the 'combine'. This is getting to be real swell.
The revenue receipts in turn are another interesting potpourri. It realised income from the sale of properties etc of Rs 863 m and from an item called 'profit on sale of investments in subsidiaries, JVs etc' of Rs 1.4 bn. Is this a group adjustment figure or what? Then there is the income from project management services amounting to Rs 342 m. This makes for quite a concoction. This receipt has to be seen in the light of the value of unsold properties pegged at Rs 6.95 bn against Rs 5.32 bn previouslyandclassified under the heading of inventories. Given the manner in which realty companies' account for their revenues and profits, it is difficult for an outsider to get a fix on when Hubtown will be able to book these figures in its books. It is in the timing for accounting purposes that realty companies get to choose in terms of booking of revenues, of expenses, and on capital account that is very crucial here. In this context the unbilled revenues amount to another Rs 1.57 bn against Rs 2.11 bn previously. The other major receipt during the year comprises of the 'other income' component. It amounted to Rs 1.72 bn against Rs 1.35 bn previously. This receipt is almost as large as the main body of the revenue accretals.
The other income factor
The interest income in the 'other income' component makes for an interesting read. It includes interest on loans amounting to Rs 1.58 bn (this figure can be stage managed however given the proximity of the lender and the borrower), interest on bank deposits of Rs 21 m and others of Rs 65 m. This interest on loans and advancesobviously refers to the advances that it has dished out to its group companies. There are other such advances too but they do not qualify for levy of interest as they refer to share application moneys, advance given to land owners, and such like. As stated earlier the total sum of interest bearing advances to its many offspring including 'others' amounts to Rs 14.61 bn. This includes loans & advances to group companies amounting to Rs 12.79bn. However a separate schedule lists out the outstanding loans as on year end doled out to 32 subsidiaries totalling Rs 2.5 bn, another Rs 6.38 bn to 10 associate companies, and yet another Rs 1.13 bn to nine partnerships firms-amounting in all to Rs 10 bn. This amount excludes the payments made by the parent on behalf of subsidiaries, associates, JVs and such like amounting to another Rs 2.51 bn. By including this figure the total amount would add up to Rs 12.51 bn. (I am unable to fully reconcile these figures with the balance sheet total in this respect). It would also appear from these statistics that the parent company is just a little more concerned about promoting the welfare of its group entities (see further below) than in coming to grips with ground realities of the functioning of the parent unit. Minority shareholders for all practical purposes get to have any say only in the functioning of the parent company, while the management gets to control all arms of the extended lever. Not that anyone is complaining though.
Now consider the bottom-line implications. It realised a pre-tax profit of Rs 328 m against a pre-tax of Rs 1.55 bn previously. This fall in numbers between the two years was on dual count. A lower revenue realisation on the one hand, and the booking of a loss of Rs 44 m on its share of profit/loss from its numerous JVs etc, against a profit booking of Rs 1.38 bn previously on the other. That in effect makes for a backward flip of Rs 1.82 bn. As a matter of fact the drop in profits in the latter year can be attributed entirely to the booking of this loss-period. There is no explanation forthcoming in the directors' report for this dramatic change in the fortunes of its JVs within a 12 month period. Quite obviously a negative fallout of much import happened during the year which led to the flip flop. Helping to keep a lid on the expenditure side was the company's ability to rope in sufficient advance payments from customers which more than covered the trade receivables due from the sale of property.
High dependence on debt
With the high dependence on debt to finance its operations (arising purely from the confetti dished out to group companies) the interest payout too is having an impact of sorts on the bottom-line. The debit on this count amounted to Rs 2.8 bn against Rs 2.3 bn previously. This is the single highest expenditure item in the P&L account in either year! In this context why the company has chosen not to issue more capital at a premium to its shareholders remains unanswered. One possible answer is that the promoters are keen to keep their hold in the voting capital at the present percentage levels and are more than happy with the present goings on. Actually it makes eminent sense to issue further capital. The share price of the company in the secondary market traded within a range of Rs 259 at the higher end and Rs 166 at the lower end during the last financial year on a face value of Rs 10. Issuing capital at a premium is actually money for jam-as the percentage dividend has to be paid out only on the face value, the dividend can be skipped or reduced for whatever reason, and the issue of capital remains in the books as permanent debt. At one stroke the company can re-arrange its books to make it all look hunky dory.
But in the midst of this heightened corporate activity one must also add that the company manages its cash flow fairly admirably. The company raised Rs 2.22 bn from operating activities. With a most skilful husbanding of its resources in terms of interest receipts, and loans and advances etc it was out of tune to the extent of only Rs 193 m in its cash flow from investing activities. Consequently it could make do with only an additional borrowing of Rs 730 m to make ends meet. It helped of course that the dividend payout was reduced drastically.
The financials of the siblings
Given the plethora of undertakings under its wing it does cause some concern that it has furnished the brief financials of only 26 other enterprises. By its own reckoning it boasts of 33 siblings. It is an unholy mix of underlings at first sight. Some 14 siblings in this listing have NIL revenues or negligent revenues to start with. Some 15 siblings make do with paid up share capital bases of Rs 0.5 m each. This figure appears to be some sort of lucky number with the group. Another seven numbers make do with paid up equity capital bases of Rs 0.3m or below.
The maha paradox here is that companies with small paid up capital bases boast revenues which are much larger than those companies with large capital bases. (Besides, some of the company nameplates suggest that they are into businesses far removed from the construction industry-example: Citygold Education Research Ltd and, Citygold Farming Pvt. Ltd. Just about anything goes it would appear). For example Devkrupa Build Tech with a paid up capital of Rs 0.5 m and negative reserves of Rs 48 m begat revenues of Rs 259 m and a pre-tax profit of Rs 55 m. Citygold Farming has a capital base of Rs 26 m, reserves of Rs 281m, total assets of Rs 1.32 bn, and revenues of a mere Rs 0.8 m. And guess what the company turned up a pre-tax loss of Rs 5.4 m. These figures per-se are extremely incongruous to say the least. All in all the companies which have totted up pre-tax losses are far more numerous in number than the ones which have their bottom lines inked in black. A bizarre set of cronies is the impression one gets. What exactly is the game plan here please?
It will help if managements of companies do not treat siblings as their private pocket borough simply because the Companies Act is rather silent on the rights of minority shareholders to question managements on their working. It will also help if minority shareholders are treated with some more respect.
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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