The annual report of Puravankara Projects Ltd for the period ended March 31, 2011, is printed on glossy map litho paper in 4 color format. Presumably this has been resorted to, either to shore up confidence in the group, or better still, to show the world that the good times are rolling in. Like all realty companies, Puravankara too went through a forgettable spell in 2008 and 2009, when the industry almost got taken after the land price bubble burst. But this is a cyclical industry where when one bubble breaks; it sets in motion just the ideal conditions for the germination of the next bubble. History always repeats itself in this industry.
Such is the present state of euphoria that the management is still quite heady on the exact quantum of projects that the company is currently executing. The 'Puravankara in Brief' snapshot states that it is currently executing 35 m sq ft of projects across Bengaluru, Chennai, Coimbatore and Kochi. The Chairman in his missive to the shareholders in the facing page, however has a different take on the goings on, and elucidates that the company is currently executing 25 m sq ft of projects across the same space. Both figures cannot be right concurrently, but both can be wrong. The great helmsman Mr Ravi Puravankara also informs that the company is also aggressively looking at expanding into newer markets with the clear aim of becoming a Pan India player by the close of this decade. That gives the company a short span of 8 years to achieve its objective - a very formidable task if one may say so. It is also a very unique company in one other aspect. Ravi the founder chairman personally holds 89.9% of the outstanding equity of the company, and is thus firmly ensconced in the driver's seat. His son Ashish makes do with a piddling shareholding.
Wearing many hats
The Group's business spectrum currently consists of three segments - Premium housing under the flagship brand Puravankara, Affordable housing under the Provident brand and Infrastructure and Contracting segment under Starworth Infrastructure and Construction Ltd. The company apparently also pays a lot of emphasis on its financial management practices. The accounting aspects of the company's operations are spread out in detail over six pages of the 'Management Discussion and Analysis Report'. The group results comprise of that of the standalone company and of the consolidated entity.
So what is this group up to? Taking a call on the performance results of real estate development companies is a mug's game at best because of the manner in which their revenues are derived and assets are accounted for. Companies have willy nilly to account for revenues based on the 'percentage of completion for revenue recognition from projects' as mandated by the Institute of Chartered Accountants of India. This is a complex exercise as they have to also factor in the impact of revisions made to estimates in the financial statements for the period in which such changes are determined, and so on and so forth. In the year in which the project is completed the revenues tend to get a boost, but profit margins can take a dive too.
The consolidated entity in this instance consists of the parent, 12 wholly owned subsidiaries (including three overseas subsidiaries) and four associate companies. There are also another three companies which probably come under the category of indirect subsidiaries or some such. This would make for a total of 19 companies. Not to mention another 12 entities which qualify as 'controlled by key management personnel'. The latter include leisure resorts, real estate developers, trusts, and proprietorships. It would seem that the management has been well advised. For the matter of record, in 2010-11, the parent recorded revenues of Rs 4.1 bn (Rs 5 bn previously) and pre-tax profits of Rs 949 m (Rs 1.6 bn previously). The consolidated results rustled up revenues of Rs 6 bn (Rs 4.8 bn) and a pre-tax profit of Rs 1.4 bn (Rs 1.7 bn).
The many complexities in its accounting
The directors' report of the parent company makes no mention for the decline in revenues and profits. The verbiage is strictly limited to the disclosure of statutory information. Since this is not a manufacturing establishment there are no volume capacities, production and sales. However as stated earlier the revenues fell by 17% to Rs 4.1 bn during the latest year. Separately, the company also boasts rental income and income from interiors etc, but these are minor add ons. In line with the fall in revenues, the cost of revenues, which includes material and contract costs, direct costs, etc, fell 8% to Rs 2.8 bn. This item of expenditure is net of the land cost of Rs 422 m at year end against Rs 1.4 bn previously. What this land cost refers to is not readily known. But let that be. Selling expenses though minor rocketed 123% to Rs 163 m. It appears there was a major advertising and sales promotion binge during the year.
There does not appear to be any direct linkage to the fall in revenues and profits during the year to the value of land, and the properties under development. As a matter of fact, the year end land and property valuations are baffling to the extreme. The properties held for development in the balance sheet is valued at Rs 9.6 bn against Rs 11.5 bn previously, or lower by 17%. However the properties under development in the current assets schedule is valued at Rs 10.8 bn against Rs 6 bn previously, or higher by 80%. While the value of its marketable assets was being shifted around, its loan funds at year end are higher by Rs 3.3 bn at Rs 11.1 bn. The moneys advanced to its associates and subsidiaries are also blooming. The year-end balance due on this count was Rs 2.4 bn against Rs 2.1 bn. In reality the company also functions as some sort of a banker to its subsidiaries and associates. It advanced humungous sums of monies to them during the year, the bulk of which is repaid at year end. Presumably this cycle gets to be repeated all over again the next year.
The melting pot called interest charges
And that brings us to another interesting point. Namely, the finance charges debited to the P&L account for the year. On a rough guesstimate the company would have a paid an interest rate of 14% on its loan funds during the year. That is to say a gross interest payout of Rs 1.3 bn. (This payout excludes loan and processing charges of Rs 127 m etc). But Rs 991 m of this payout of Rs 1.3 bn got debited to capital account as part of project cost development. Another Rs 416 m also got 'xed' out as it was 'expended as part of cost of revenue'. (Presumably this sum was expensed from revenues). That makes for a total of Rs 1.4 bn in interest charges which was moved out. Then there are interest receipts to the company to the tune of Rs 80 m, which includes an item called 'Others' and adds up to Rs 40 m against NIL previously. Thus the net debit to the P&L account is a mere Rs 54 m. This makes for a fantastic write-down on the interest outflow account.
The interest receipt shows an income of Rs 9.4 m from associates. The loan to associates at year end amounted to Rs 115 m against Rs 174 m previously. On a rough reckoning that would work out to a percentage receipt of 6.4%.There is no mention of any interest receipt from loans advanced to subsidiaries though.The total advances on this count at year end were a healthy Rs 2.4 bn, and the monies were hogged by some 20 companies. (All and sundry are entitled to the bounty it appears). The lack of any interest receipt infers that the advances amount to an interest free loan. The parent pays interest on its borrowings though. It therefore ends up being a double whammy for the parent. The opportunity cost of capital gets to be even more taxing if one calculates the full value of the loans advanced during the year. But let that be too.
As a matter of fact the cash flow statement of the parent is a mishmash of fund flows during the year. So much so that the company was out of pocket to the tune of Rs 3.1 bn on cash flows from operations, while it generated Rs 1.7 bn in cash flows from investing activities. Since it was still out of pocket, the company perforce had to raise Rs 1.5 bn in extra cash during the year to tide over the demand for manna. Presumably, given the very nature of the business, this is how all real estate development companies with subsidiaries, are run.
The many flunkies that it supports
And how would the flunkies be going about their business, given the extra large supply of free oxygen that is administered to them? The company has direct investments in 18 subsidiaries, and investments in five associates, adding up to an investment value of Rs 537 m. None of these siblings appear to have paid any dividend, just as they do not pay any interest. But there is no problem here at all. The vast bulk of the subsidiaries appear to be basically some sort of minor dummy investments. They may take off at some future point in time. The only subsidiary in which it has an investment of substance is Puravankara Lanka Holdings. The value of its investment is Rs 54 m at par. (Concurrently there is also another Lankan subsidiary called Puravankara Projects Lanka Pvt Ltd, with a similar equity outlay, but this company is a subsidiary of the former). Its two big ticket investments are in two of its associates, Keppel Puravankara Development, with an investment outlay of Rs 176 m of Rs 10 each at par, and Keppel Magus Development with an outlay of Rs 221 m of Rs 610 per share. For some reason it separately shows another equity investment of Rs 44 m in Keppel Puravankara Development at a par value of Rs 10 each.
The brief summary of the working results that the parent has furnished is more than entertaining. Only two of the companies have revenues-Provident Housing, and Starworth Infrastructure. The former is on a roll recording a turnover of Rs 1.8 bn and mopping up a pre-tax profit of Rs 549 m. But sad to say it did not humor the parent with any dividend payment. Provident also has total assets of Rs 1 bn. It has relatively meager borrowings of Rs 223 m from the parent, but apparently did not pay any interest to the parent on its borrowings. Starworth (which is into infrastructure and contracting) on the other hand trotted out revenues of Rs 57 m, but popped up a pre-tax loss of Rs 6.2 m. It had negative reserves of Rs 15 m on a paid up capital of Rs 0.5 m. It also borrowed funds of Rs 36 m during the year but miraculously paid it all back at year end.
An odd bunch
The rest of the list is a bunch of oddities. Melmont Construction is a case in point. It has a paid up capital base of Rs 0.1m, negative reserves of Rs 37 m, and total assets of Rs 1.2 bn. ( More than 51% of the outstanding loans of Rs 2.4 bn that the parent dished out to its subsidiaries/associates is made to this company. And, just what has it done with these funds please?) Melmont just about rustled up a turnover of Rs 0.2 m, but recorded a pre-tax loss of Rs 14.5 m. None of the above figures makes for any sense whatsoever. But that sad to say this is the reality. Purva Realities, Nile Developers and Vaigai Developers are three other grotesque oddities in their own right. Purva has a paid up capital of Rs 0.1 m, boasts negative reserves, has total assets of Rs 360 m, recorded zilch revenues and posted a marginal loss. It is also the second largest loan recipient from its parent with out-standings of Rs 288 m. Nile has a paid up capital of Rs 1 m, reserves of Rs 71 m, total assets of Rs 198 m, and recorded no revenues. But it still ponied up a pretax profit of Rs 0.6 m. Vaigai in a sense was keeping company here, except that instead of a pretax profit, it posted a meager pre-tax loss. Prudential Housing and Centurion Housing are two other notable negative standouts.
It will be helpful if the parent could give an explanation for the vicarious performance results of its many foundlings. Exactly how does the parent expect the siblings to repay their borrowings from it please? Or is there something else going on her please?
Editor's Note: Purvankara Projects Limited has sent us their views on the article above. We encourage our viewers to read the same here...
Luke's response to management comments:
The management's comments on the volume of contracts being executed merely clarifies that the projects currently being executed is of the order of 25 mn square feet
The number of subsidiaries that the company has was taken from the data published on page 38 of the annual report, what is stated there is what I have reproduced unless this information is not in order. Page 39 of the report lists the names of 19 subsidiaries which tallies with what I have written. The managementís comment of 18 subsidiaries is at variance with this list.
The management has not denied that the company makes no mention regarding the decline in revenues and profits and the verbiage is strictly limited to the disclosure of statutory information. I was only commenting on the directors' report and not on what was stated in the foot notes. The company in its reply has furnished additional information.
With reference to my comments on the lack of any direct linkage to the decline in revenues and profits during the year to the land and properties under development, the company has now clarified the difference in valuation of properties held for development and land which is under development. This is precisely the point that I was making as well.
As refers to my comments on the parent functioning as a banker to its subsidiaries and associates, the reply by the company is no way at variance with what I had stated.
On the interest outflow account, I had only commented on the schedule 21 on page 78 of the annual report which is self explanatory. The fact is that the total interest paid out and the total interest debited to the P&L account is at wide variance.
Similarly in the case of interest receipt the company has not denied that there is no mention of any interest receipt from loans advanced to its subsidiaries. The fact is that the parent pays interest on the loans and the subsidiaries do not pay interest on the loans advanced by the parent.
As regards the cash flow statement please refer to page 88 of the annual report where the company has provided the statement in detail. The cash flow from operating activities was a negative Rs 3.1 bn. This is the point I was making
As for the subsidiaries not paying any dividend or not paying any interest has not been denied by the management.
Disclosure: I hold 200 shares in Purvankara Projects
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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