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Prestige Estates Projects: Not investment worthy - Outside View by Luke Verghese
 
 
Prestige Estates Projects: Not investment worthy

With the many wheels within the wheels at work within the group, it is the proprietors who stand to shine under the arc lights as the company surges ahead

A shining jewel?

Prestige Estates Projects Ltd. claims that it is 'the shining jewel in the crown of Indian real estate'. It goes on to add that 'as with the finest gemstones of the highest quality, we apply the three Cs of cut, clarity, and carat to our business ensure that our very development is a diamond of the first water'. This is followed by eight colour pages of various precious jewels. However, from the subsequent data that is made available, I am not very clear if I have imbibed the essence of the message that the company is sending out. Overall the company has spent a bomb on the annual report.

The company divides its business into five segments. Residential -- comprising of apartments, villas, townships, and plotted developments, Commercial -- consisting of office space, built to suit campuses, SEZs, and IT Parks, Retail -- consisting of malls, hospitality consisting of resorts, serviced apartments, hotels and food courts, and Services -- consisting of property management, construction management, interior design and such like. It would appear to have covered the entire gamut of possible avenues in the realty industry.

Realty companies do their math differently from most commercial enterprises. Their principal future revenue streams stem from their land bank and the buildable space that can be constructed on it. The pricing depends on its perceived branding and other market vagaries, and that forms the crux of their wellbeing. Besides, the booking of revenue streams does not follow a financial year schedule. The profits that emanate from any construction contract get booked only at the final stage and they are susceptible to several vicissitudes-not the least of which are the many regulatory red flags which government agencies have purposely erected to add to project costs. This in turn leads to the quid pro quo padding of the cost and size of the project.

The travails of a realty company

Fortunately this arithmetic works to someone's advantage-otherwise no construction would happen. And, in the case of fixed price contracts-- as are most such contracts-- one has to fix a suitable margin for unforeseen cost escalations on materials inputs and work stoppages that arise due to a variety of exigencies. Almost every project gets invariably delayed due to a variety of factors leading to vexed tempers and some more. There are penalty clauses to contend with too-though there is an easy way out here too. (Fortunately, The Competition Commission of India is putting a stop to this sordid one sided practice.) The revenue flows also depend on the pro rata cash streams that come in from fixed payment schedules and on loan funding with lenders of finance. Such accruals make the tabulation of the full year revenues a mug's game. There are also assorted legal issues to be sorted out too. Then there is valuation on inventories at year end and the capitalisation of revenue expenses such as interest costs which has the effect of making or marring the bottom-line of a company. It is a very dextrous exercise indeed.

The startling fact is that none of this has lessened the entrepreneurial juices of prospective builders. As a matter of fact there is always a surfeit of activity in this very vital sector. Quite obviously there is a method in the madness. The sad fact is also that owners of branded construction companies live a sybaritic lifestyle even if the institutions that they nurture are unable to pay even a modest dividend at the end of the accounting year. Of late construction majors have started leasing out commercial space rather than sell the space outright given the very obvious cash flow and capital appreciation benefits built into this system.

A voluminous annual report

The cannily named Prestige has come out with a 234 page annual report and accounts statement for the benefit of the investor fraternity. Of this, some 100 pages consist of verbose matter. It also makes do with 21 siblings --which in turn accounts for some of the bulk. Then there are the joint venture undertakings and 14 identifiable partnership firms to account for too. Several of the partnership firms count Prestige as the majority partner with immediate family members holding the balance minority stake in various ratios. (Quite obviously the interest of the family takes precedence over the interests of the non-management shareholders). This report is the 16th annual report of the Bangalore headquartered company, and it operates exclusively in the south of the Vindhyas.

It was not very long ago that the company made a public issue of capital. And judging from the current statistics on its shareholder population it was not a very successful issue in terms of numbers. The company boasted of only 7,058 shareholders at year end, and the promoters controlled 75% of the outstanding voting capital. With FIIs controlling another 15.5%, it does not leave for much balance floating stock. It would appear that the investing public do not repose much faith in construction companies. The Rs 10 face value share oscillated between a high of Rs 195 and a low of Rs 99 during the financial year. The paid up capital weighed in at Rs 3.5 bn at year end.

The standalone company registered revenues of Rs 15.1 bn during the year -sharply higher than the revenues of Rs 7.4 bn that it recorded previously. Other income - which is becoming a vital ingredient in company bottom-lines --tossed in another Rs 939 m against Rs 538 m previously. I may add here that other income accounted for a sizeable 24% of the pre-tax profit against a larger 30% previously. In keeping with the rise in revenues, the profit before tax amounted to Rs 3.9 bn against Rs 1.8 bn previously.

Mega cross company cash flows

Large realty companies require financing skills of the third kind. Mega cash flow in and out of the company is the order of the day. This primarily arises from the need to create an ever larger land bank to upstage the competition and once the land bank is acquired the company has to build on it to realise value. It is customary for such companies to set up siblings and JVs of all shapes and sizes to make do with peculiar demands for realising saleable space. This leads to the situation where the parent has to also make the most of doling out loans and advances of all permutations and combinations to group companies, taking advance deposits from clientele, acquiring borrowings --both long and short term --from lenders of finance, large inventories of semi finished and completed projects, inter-corporate deposits, and short term investments of surplus funds in debt instruments - the works. The seeding of new entities in turn generates mega portfolio investments in group companies which do not yield any visible cash returns to the parent. And Prestige Estates is a case in point.

At year end the standalone company had total borrowings of Rs 15.6 bn -up from Rs 11.7 bn previously. (The total interest payout debited to P&L account rose to Rs 2 bn from Rs 1.55 bn during the year). It had noncurrent investments - investments in group companies' etc-- amounting to Rs 9.9 bn against Rs 6.4 bn previously. (Of this total, debenture investments amount to Rs 1.1 bn roughly against Rs 878 m previously). The outlay in current investments amounted to a more sedate Rs 854 m against Rs 870 m previously. The refundable deposits amounted to a further Rs 4.5 bn while the advances from customers aggregated to Rs 11.7 bn. There are other deposits too in relation to lease and maintenance. The long and short term loans and advances to related parties toted up to Rs 5.2 bn.

The annexure to the auditor's report has an intriguing declaration on this point. It states that the company granted loans aggregating Rs 1.15 bn TO SIX parties during the year. At year end the outstanding balance on such loans granted aggregated Rs 3.3 bn (including interest accrued) and the maximum amount involved during the year was Rs 4.1 bn (including interest accrued). It goes on to add that the company has taken loans aggregating Rs 4.4 bn FROM SIX parties during the year. At year end the outstanding balances of such loans taken aggregated Rs 983 m (including interest accrued) and the maximum amount involved during the year was Rs 1.15 bn (including interest accrued). In other words, funds are moving seamlessly in every direction.

Then there are moneys lying in inter- corporate deposits (given on gratis to siblings) amounting to Rs 1 bn. These are large sums of loose cash floating around and managing it dexterously demands acquired skills. Then there is the corporate guarantees given on behalf of 'companies under the same management' amounting to Rs 19.6 bn at year end. Not including bank guarantees given on behalf of the parent etc. This makes for large sums of 'contingent liabilities' that it could be answerable for at year end. It also makes do with a cash balance of Rs 3.7 bn at year end. Seemingly large cash balances do not make for good investment management though.

The other income

Dwelving on the return on investment, the other income schedule has the following information to offer. It earned interest income of Rs 603 m ---receipts from bank deposits and debt mutual funds mostly and dividend income of Rs 99 m from investments in equity mutual funds. There is also income from the share of profit from partnership firms amounting to Rs 209 m, and the balance sum is accounted for by miscellaneous income. This cash return on its investments does not add up to anything given the size of its portfolio which consists of long term investments, and loans and advances etc. But this is the reality of the matter. Mercifully, the current liabilities at year end at Rs 31.6 bn is more than overshadowed by the current assets -including cash on hand -- of Rs 36.4 bn.

By the by, the company is also fixed assets heavy. It boasted a gross block of Rs 6.7 bn at year end which generated revenues of Rs 15.1 bn as stated earlier-but there is a catch here. The largest individual item in this schedule is Buildings at Rs 3.6 bn, followed by furniture and fixtures at Rs 847 m under leasehold development, and separately, plus Rs 638 m held under freehold development. Plant and machinery comes in at a poor third with a gross value of Rs 536 m. Quite obviously from the classification pattern the company owns quite a slice of owned built up properties-which is stated herein at historical costs.

The principal item of revenue expenditure by far is the dual entries of cost of sales on projects and purchase of stock units amounting to Rs 8.7 bn and accounting for almost 58% of revenue from operations. In the preceding year it amounted to 46% of such revenues-showing in effect the wide variations that can occur in the realty biz on a crucial item of revenue expenditure. The next three biggest items of revenue expense are 'property and facilities operating expenses', finance costs debited to P&L account, and employee benefit expenses.

The many offspring

It is the notes forming a part of the financial statements which makes for some eye opening stuff. In the related party disclosure schedule it discloses the names of 21 siblings, six companies in which it has a significant influence, 11 joint ventures, and 28 associates, partnership firms, trusts etc in which some of the management team is interested. The minority shareholder however only gets to see a brief flash of the financial position of the 21 siblings. Only ten of the siblings are either 100% owned or very close to this figure. The financials resemble a jigsaw puzzle of sorts. Fully ten of the siblings generate no revenues -but that is hardly surprising. Of the balance, not a single one has deigned to pay out any dividend.

The largest sibling by far in terms of paid up share capital is Prestige Whitefield Investments and Developments with a paid up capital of Rs 1.20 bn and total assets of Rs 1.8 bn. For whatever purported reason, this company is yet to commence its revenue bearing innings. The largest in terms of total asset base is Cessna Garden Developers with total assets of Rs 8.1 bn. This company is on a roll clocking revenues of Rs 1 bn and a pre-tax profit of Rs 213 m. There are several siblings who are clocking large revenues but are simultaneously gasping for breath at the bottom line level-such as Prestige Leisure Resorts Pvt Ltd and K2K Infrastructure India. Yet others like Prestige Garden Resorts, Nothland Holding Company and Valdel Xtent Outsourcing Solutions have ponied up losses larger than their top line. Like the proverbial curates egg the overall performance results are good in parts. It is unlikely that these siblings will contribute directly to the wellbeing of the parent for some time to come-till they get their act together.

All in all, this company in its current operating status does not appear to be a good investment proposition to an investor.

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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