Deciphering the annual reports of construction companies is infinitely more complex than say facing off against Viswanathan Anand across the chess board. The accounting is so complex, it does not even make any sense to try and comprehend. There appear to be far too many 'subjective' valuations, that ultimately adds up to the final not so easy to digest picture.
The income recognition from projects appear to fall under three mainstream heads: properties held for development, properties under development and, properties held for sale. The timing of the revenue accrual and, the profit or loss recognition, is the key to the whole exercise. The valuation of incomplete projects at year end adds to the grind. The interest paid during the year, and which is apportioned under 'revenue' expenditure and 'capital' expenditure complicates the picture ad nauseum.
Potpourri of figures
Further magnifying the already muddled picture, is the fascination of construction company managements to fund new projects by floating subsidiaries/affiliates/ partnerships/associations and proprietorships, even if they are of the mere dummy variety. The consolidated accounts are thus a potpourri of figures. And when the going is hunky-dory, the industry fat cats allow greed to get the better of their sixth sense, and they then go that extra mile and over extend themselves. In the bad times that follow, these worthies continue to prosper at the cost of all the other stakeholders, who take it all in, in mute silence.
Too many subsidiaries to count
And in the case of Puravankara Projects the situation has become so hot; it appears that the management does not even know how many affiliates and subsidiaries the company has. Under the heading of the 'group structure' the number of 'operational' subsidiaries and affiliates totals 15, including 9 Indian subsidiaries, 3 overseas subsidiaries and, 3 associate companies. But further on in the report, the number of Indian subsidiaries 'seeking exemption...' is shown as 16 which include the 9 subsidiaries mentioned earlier, a further 7 companies not mentioned earlier and, along with 2 of the 3 overseas subsidiaries, the total number of companies comes to 18. The latter list does not include the 3 associate companies mentioned either. Somewhere along the way we are also duly informed that there are a further 11 entities controlled by 'key management personnel' which come under the definition of 'other related parties'. Can it get more complex than this please? Not surprisingly, not all the group companies are audited by the parent company auditor.
So what has Puravankara Projects got to show for all this 'thinking ahead' preparations? It just about managed to recommend an equity dividend of 10% for FY10. This is of course a quantum leap from its performance in the preceding year when the annual report was posted to shareholders only in November 2009. This year the company has been very prompt in sending its working results to shareholders on schedule. The company however makes up for its surly bottom-line performance by boasting its distinction of having been given a high sounding international award for its project Purva Park.
The 18 subsidiaries as per the second list (including the 2 incorporated outside the country), all of which are also of fairly recent vintage, recorded losses of sorts. Two of these, Melmont Construction and Provident Housing, the latter being the affordable housing takeaway of the group, have assets in excess of Rs 1 bn and have also recorded a turnover of sorts. Barring these 2, the other 16 subsidiaries managed the feat of recording losses without even generating any turnover! They are apparently still in the takeoff stage awaiting flight, at some point of time in the future. The parent at this point of time is hardly in any position to rustle up the money to advance as loans, and help them to gasp for breath at least till they reach adolescence.
All the subsidiaries have paid up equity capitals which are far below the norm required to finance the traditionally highly capital intensive projects in this sector. The British Virgin Islands subsidiary has a paid up capital of a mere Rs 0.5 m and appears to be a subsidiary of a different kind.
Some of these 'non performing' assets seem to have been acquired at a premium. Nile Developers its wholly owned subsidiary has a paid up equity of Rs 1 m but this investment cost the parent company Rs 3.4 m. Amazingly enough this company which appears to be merely idling, like the vast majority of the other subsidiaries, has reserves of Rs 70 m and total assets of Rs 200 m! To make a long story short then, Puravankara Projects had equity investments of Rs 527 m at year end in its subsidiaries and affiliates, not including loans to associates of Rs 174 m, and loans to subsidiaries of Rs 2 bn. What it got in return during the year from these 'investments' was a princely Rs 11 m as interest, which came from the loan that it extended to its associates. Small wonder then that the parent was in hock, and had to borrow Rs 431 m at year end, from its promoter and holder of 90% of its equity, Mr. Ravi Puravankara.
The CEO in his report to the shareholders chortles about the handsome returns that it gained from its joint venture with Keppel Land of Singapore. What these handsome returns are have not been specified. Its subsequent partnership with Homex too has apparently paid off 'handsomely' the CEO adds. But there is no firm evidence of any such affiliation whatsoever with Homex in the annual report.
Construction companies by and large are an insufferable concoction.
Disclosure: Please note that I am a shareholder of this company
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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