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Il&Fs Engineering: Efforts to resurrect still to yield results - Outside View by Luke Verghese

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Il&Fs Engineering: Efforts to resurrect still to yield results
May 10, 2013

The fully jiggered EPC (engineering/procurement/construction) company is being given a new lease of life by its present promoters

A tie up with the Saudi Bin Laden group

IL&FS Engineering and Construction Company is presently a joint venture with the Saudi Bin Laden group. The latter we are informed is one of the leading multinational infrastructure, development, construction, and project management Company. SBG Projects Investment Ltd, which is a part of Saudi Bin Laden, was co-opted as a co promoter of the company in June 2010 with a 20% equity stake in the equity capital. (This was definitely a very bold move on the part of the Indian promoters). The Indian company specialises in the EPC (engineering, procurement and construction) business. This company has seen some 24 summers pass by in its journey as a corporate entity.

The current chief promoter of the Indian venture is Infrastructure Leasing and Financial Services Ltd (IL&FS)-the mother hen of the group bearing its initials. IL&FS was inducted into the management of the company in 2009 on the express orders of the Company Law Board to turn around its operations. The erstwhile promoter of the company was Ramalinga Raju of Satyam infamy. IL&FS in turn was promoted by the Central Bank of India, Housing Development and Finance Company (HDFC), and the Unit Trust of India (UTI). Subsequently other institutional shareholders like The State Bank of India, the LIC, a Japanese company Orix, and the Dubai Investment Authority also came on board. IL&FS in turn has a very distinctive mandate-that of catalysing the development of infrastructure in the country. That is to say the development of infrastructure projects and the creation of value added financial services. IL&FS seems to have spawned some eight companies bearing its initials.

The major shareholders

According to the schedule which lists the shareholding pattern of IL&FS Engineering, the promoters hold 29.78% of the paid up equity capital. Bodies corporate control another 41.88% of the capital. (This list includes ICICI and the Saudi Bin Laden group among others-but more on this later). Collectively the holding of the corporates would amount to 71.66% of the capital base of Rs 898 m. The total capital base at year end including the preference capital base amounts to Rs 3.40 bn. The preference capital base in turn consists of cumulative redeemable preference shares, and optionally convertible cumulative redeemable preference shares. The preference share capital of Rs 2.5 bn is almost completely subscribed to by the PSU banks. It is not known whether this capital issue was forced down their throats or not -but it is entirely possible given the government hold on the banks. The latter capital structure also infers that the equity capital will go up on the conversion of the preference shares into equity, and the simultaneous extinguishment of the preference shares.

The schedule showing the list of shareholders holding more than 5% shares of the company shows a slightly different structure. Infrastructure Leasing and Financial Services Ltd (IL&FS) and IL&FS Financial Services Ltd (IFIN) together hold 29.78% of the voting capital. (Too many similar sounding names get one all muddled up). The Saudi Bin Laden group holds another 27.91% of the capital and is the second largest shareholder. The two principal shareholders between them hold 57.69% of the equity capital. Three other corporate shareholders including ICICI Bank together hold another 18.35% of the capital base. It is not known whether the two other corporate shareholders -- SNR Investments and Veeyas Investments --are also joint promoters but if they are - then the total promoter holding going by this schedule is 76%. The company is today also the not so proud owner of seven companies sporting the first name Maytas (Satyam spelt backwards) which are all in some sort of a bind due to the questionable cross border flow of moneys within the Satyam group of companies, and it has now fallen on its lot to try and set the account books right.

Still haemorrhaging

The company on its part is also haemorrhaging and that was the reason why the accounts were extended by six months to close for an 18 month period. The company refers to the extended closing as a part of the capital restructuring scheme. Thanks to the scheme the accumulated losses of the company amounting to Rs 6.1 bn were set off against the share premium reserves. Another bunch of seemingly incomprehensible entries were accorded in the ‘surplus lying in the in the P&L account’ which converted a debit balance of Rs 4.3 bn at the beginning of the year to a credit balance of Rs 723 m by the end of the year. This reverse engineering makes for a massive turnaround in its wellbeing. I have noticed that it always happens like this when the accounts have to be inverted to make for a more presentable set of figures, with the accountants resorting to ingenious gobbledygook tricks to make it happen.

From the directors’ report it appears that some of the group underlings, Maytas SNC, are even unable to furnish their accounts as on balance sheet date. Such is the rot in the group. The consolidated results of the group include the unaudited financial statements of all the joint ventures. There is also the unresolved issue of outstanding inter corporate deposits running into billions of rupees due from and due to group companies including Satyam Computer Services, which the present management is not quite able to come to grips with.

Bagging new projects

Notwithstanding the turmoil that the company has been enduring the report states that during the eighteen month period April to September 2012 the company bagged projects worth Rs 21.4 bn. During this period it completed projects worth Rs 8 bn and that the order book position as at year end was Rs 84.3 bn. The company recorded a gross income of Rs 21.4 bn and negative results after provision for interest but before provision of depreciation. The market on its part took both a high and low viewpoint on the company’s functioning. The Rs 10 face value scrip oscillating from a high of Rs 230 in April 2011 to a low of Rs 48.50 in January 2012 and closing at Rs 52 in September 2012.

To make a long story short the company generated revenues of Rs 20.4 bn and other income of Rs 1 bn during the 18 month period. The revenues in turn accrue under multiple heads of account-including revenues from equipment hiring, revenues from design consultancy, and Rs 281 m from reversal of provisions for estimated future loss on projects. (One does not know the efficability or otherwise to sustain such disparate revenue streams in succeeding years). On an annualised basis the revenues from operations rose substantially. But unfortunately so did the operational expenses, and, finance costs and depreciation provision too. The company on an average would have paid a coupon rate in excess of 14% on its year end debt. Consequently, the loss after depreciation but before exceptional items and prior period items amounted to Rs 1.36 bn against Rs 1.20 bn previously. Finance costs are a big bugbear having risen to Rs 2.13 bn from Rs 743 m previously-reflecting sharply high debt levels.

Rising debt levels

The company has ended the year with total debt of Rs 13.65 bn against Rs 8.46 bn previously. The increase in debt has been brought about by higher long term working capital needs. The cash flow statement avers that the company generated positive cash of Rs 808 m from operations against a negative cash flow of Rs 970 m in the preceding year. That in itself is a revelation. But where it was put paid was in the demands of other group companies which had to be provided with extra cash of Rs 3 bn, and other corporate advances of Rs 767 m. It also led to the purchase of Rs 366 m of securities of its siblings as new share capital. Hopefully, something positive will arise from these outflows of capital-but expect no direct returns immediately. The fixed assets fortunately do not sponge very much off the company-it is asset light here. It was also forced to purchase ‘pass through securities’-whatever that is -- valued at Rs 766 m which had to be pledged with its principal promoter as some sort of a security I would guess-but for what earthly purpose I knoweth not. The principal promoter is letting all concerned know who is the real badshah here. Such extraneous demands led to additional borrowings.

The investment portfolio

The book value of its investments portfolio at year end amounted to Rs 2.90 bn. This includes a portfolio investment of Rs 2.26 bn (against Rs 1.5 bn previously) in the form of ‘pass through certificates’ in Maytas Investment Trust and it is fully pledged to IL&FS Ltd under a very complicated formula. Another investment is in Maytas Infra Saudi Arabia Company valued at Rs 332 m against Rs NIL previously. This company is shown as a subsidiary. (The parent has seven siblings and investments in six of them-but the investments barring the stake in the Saudi venture, is a combined pittance). The third largest investment is in the preference shares of Bangalore Elevated Tollways valued at Rs 244 m against Rs NIL previously. As one can see the bulk of the investments were effected during the year. The total other income during the year amounted to a very respectable Rs 1 bn against Rs 500 m previously. It does not include any dividends accruing from its portfolio investments -but let that be. What it does include is the interest income of Rs 41 m from bank deposits, and interest income of Rs 734 m ( Rs 185 m previously) from inter corporate deposits. How it managed the latter feat is not readily known--but either way it obviously involved very dexterous management of resources given the demand for funds during the year. The company does show ICDs of the value of Rs 3.44 bn outstanding at year end, the same as in the preceding year. But this figure pertains to a disputed and claimed sum of money, and it is not known whether the company received any interest on this ICD. Or, do the investments in ‘pass through securities’ account for this interest perhaps? Anyways, it is a taxing effort to get a proper fix.

Under the schedule of ‘names of related parties’ the parent is shown as having eight siblings. The investment schedule shows seven siblings. The related party schedule gives the names of 10 joint ventures. But in the investment schedule it is shown as having only two joint ventures-and with zero investments! It has an investment in one associate and had inter-se dealings with it. The investment schedule also reveals a head of account going by the name of ‘Investment in association of persons’ numbering five such. Separately it also has 15 joint ventures which are in the nature of jointly controlled operations. Mark the wording here. A footnote states that the company’s share in the assets, liabilities, income and expenditure are duly accounted for in the accounts of the company. One wonders when it will drum up some other such concoction. It is also a very complex and muddling portfolio to say the very least.

The bulk of the large inter-se transactions between the parent and its associates -barring Maytas Properties -are of a capital nature. In the case of Maytas Properties the inter-se transactions are large both on capital and revenue account. The company’s interest in its joint ventures ranges from a low of 25% to a high of 70%. But the income and expenditure generated by these ventures by and large is of a relatively minor value.

The auditor’s take

The auditors in their report to the shareholders state that the consolidated financial statements include the unaudited financial statements of six joint ventures and seven subsidiaries with aggregate assets of Rs 3.37 bn as on Sep 30, 2012, and aggregate revenues of Rs 1.93 bn. The report goes on to add that the accompanying consolidated financial statements do not include the consequential impacts that may have been required had the audited financial statements of the joint ventures and subsidiaries been made available.

The revenue account figures of the subsidiaries given in the briefest for possible do not for a pretty sight make. Barring the Saudi venture the other six companies do not boast of any revenues or any cash flow at all. The siblings include such exotica as plantation companies or some such. Alteast this is what one can make of it from their name plates. The five joint ventures whose brief financials are also available are not on any better wicket-with some of them yet to open their account.

The situation is about as bizarre as it can get as at the close of the extended financial year end. But irrespective of the intrigues at hand the share price jiggered from a high of Rs 230 in April 2011 to a low of Rs 49 in Jan 2012 (face value Rs 10). The share continued to rule at the lower end of the price range for the rest of the extended financial year. The market has its own way of digesting the flow of information that it gets buffeted with --and therein hangs a tale.

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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