Punj Lloyd is a multipronged amorphous business entity which appears to have stretched itself to the limit.
Stretched to the limit
Punj Lloyd is a Delhi based EPC (engineering, procurement and construction) major that focuses on emerging markets across the globe. The parent and its subsidiaries (it has furnished the brief financials of 62 subsidiary companies) we are informed, are actively involved in projects in India, South Asia, South East Asia, the Caspian, The Middle East and North Africa, and, some parts of the UK and Europe. (The parent added 14 new subsidiaries/ step down subsidiaries during the year). Its business is divided into four global verticals-energy, civil and infrastructure, engineering, and other businesses. The energy business is by far the largest constituent of its four verticals. But the engineering construction industry drums up very complex chess moves. For example, the company's exposure in the energy sector is divided into oil and gas, offshore, and, power. The oil and gas business is again divided into pipelines, tanks and terminals, and process plants, and so on. 'Other businesses' includes defence, renewable energy, and upstream operations. The company has devoted fifteen pages of fine print on its varied global operations.
Besides, the way engineering contracts are panned out, each new contract necessitates the incorporation of a new entity or a new JV or some such. The consolidated statement for example supplies the names of 18 subsidiaries, 47 step down subsidiaries, 22 jointly controlled entities, 3 associate companies, 2 associates of subsidiaries, and 4 associates of step down subsidiaries. That is a grand total of 96 ventures in some form or the other, besides the parent. These numbers are different from an earlier schedule listing the names of 62 subsidiaries.
But financially speaking, what is this 23 year old company all about? Well for starters, the bigger your scale of operations, the more outstretched you are, and the more varied your lines of operations, the harder the fall in times of distress. (The company however has a different take on its scale of operations. Punj Lloyd says 'derives its strength from the different languages, cultures, religions and geographies of its manpower which immensely facilitates its operations across multiple geographies'). The problem is that it is overextended in the MENA (Middle East and North Africa) region especially in Libya, and the chickens are now coming home to roost.
EPC companies per-se have to factor in a host of issues across the spectrum. Payment issues, arbitrations issues, liquidated damages, claims and counter claims, accounting for contracts on completed works and incomplete works, billing issues, the sudden and sharp rise in the price of major inputs - the list is long and winding. Besides, companies which have operations across the seven seas also have to contend with sudden and unexpected political and economic upheavals. Higher costs tend to up project outlays and they are then faced with the problem of recovering the additional costs from clients. The company's latest results reflect several dilemmas.
Abridged statement of accounts
The company has deigned to provide only the abridged audited statement of accounts of its working. Why such a large player has chosen to present only the abbreviated statement of accounts and not the full form accounts does not appear to have been adequately addressed herein. But the auditors nevertheless have in spite of this short-changing, voiced their concerns, on the accounting policies adopted by the management in their report to the shareholders. The company has in turn replied giving its own point of view. The differing viewpoints is on the need or otherwise to provide for receivables, inventories, unbilled work in progress, contingencies, liquidated damages, disputed direct and indirect tax liabilities, arbitration and legal proceedings, and accumulated losses of subsidiaries. The figures involved run into humungous sums.
It may not be out of place here to mention that there was income tax raid on the company in March 2010 under a search and seizure operation. During the operation, statements of company officials were recorded in which they were made to offer some unaccounted income of the company. The company now states that the above statements were made under duress and it has retracted the above statements subsequently. Assessment proceedings are now on and the tax liability that may arise on this count is presently unascertainable.
The standalone revenues including other income dropped to Rs 44.8 bn from Rs 75.4 bn while the profit before tax slid more dramatically to Rs 107 m from Rs 4.1 bn previously. Just like that! What must be noted here is that the other income component in this revenue agglomeration was a neat Rs 4.5 bn against Rs 4.6 bn previously. Juxtapose this other income with the pre-tax profit and you will get the big picture. The performance results of the consolidated entity were in another league. It recorded gross revenues including other income of Rs 81.9 bn against Rs 108.7 bn previously. But this was capped by a loss before tax of Rs 504 m against a loss of Rs 1.2 bn previously. But for the other income component of Rs 3.3 bn against Rs 4.3 bn previously the red ink would have been of a much darker hue. This other income is made up of a number of disparate income streams, which are not necessarily of a recurring nature. But more on this matter later.
From the patchy financials that have been made available, the company at end March 2011 had an equity share capital of Rs 664 m. The shareholding pattern of the promoters in the equity base is quite unique. The Indian promoters have a 13.9% holding, while the foreign promoters have a 23.2% stake. Cumulatively, the holding of the two promoters is 37.1%. Who these foreign promoters are, has not been readily spelt out in the composition of the board of directors, as only Mr Atul Punj, the chairman of the board, has been shown as the promoter director. But let that be.
More on the financials
The equity capital base of Rs 664 m is buttressed by reserves and surplus of Rs 34.9 bn. But the catch here is that 24.6 bn of theses reserves are merely book entry reserves, created by the revaluation of assets! Smart thinking alright! (The net fixed assets at year end incidentally, were valued at Rs 12.4 bn). The total reserves are down from Rs 35.1 bn previously. The reserves and surplus are almost matched by interest bearing loans and redeemable debentures, adding up to Rs 33 bn. On the application side these monies have been splashed largely in the coffers of subsidiary companies either as loans or as equity. The balance is mostly pumped into inventories or trade debtors. Construction companies fortunately have to only make do with only meagre fixed assets.
The inventories at year end were valued at Rs 37 bn. To put matters in perspective, this valuation almost equals the contract revenue of Rs 40.2 bn that it billed during the year. The investments in its subsidiaries added up to Rs 4.8 bn, while the investments in others came to Rs 1.7 bn. That is a cumulative total of Rs 6.5 bn. Further, the loans to its subsidiaries wanted up to Rs 15.7 bn, while the loans to 'others' piled up a further Rs 6 bn. These two figures add up to Rs 21.7 bn. It may be noted here that the vast bulk of the loans advanced to its subsidiaries is accounted for by just one sibling. Namely its Singapore based offspring sporting the name Punj Lloyd Pte Ltd. This company owes the parent Rs 13.3 bn. Not including any accumulated interest if any. The parent also has a capital stake of Rs 3 bn in this offspring.
The footnotes state a very curious aside and its wording is very distinct. The foot note says that it has advanced large sums to a subsidiary in Singapore which is now in the boondocks. Significantly it does not pen a name to this subsidiary. It also says this worthy has accumulated losses of Rs 8 bn as on March 2011. But by looking at the figures in other corresponding schedules the subsidiary appears to be none other than Punj Lloyd Pte Ltd. But no provision has been made by the parent on any count as it is a going concern and it holds certain strategic investments. (Separately, the parent has given corporate guarantees on behalf of its numerous siblings for a total value of Rs 48.3 bn, and bank guarantees for Rs 8.3 bn). Wonder what the guarantee commission payable on such largesse is?
The subsidiary largesse
And what pray were the direct earnings to the parent from this confetti that it splashed out on or to its siblings? The other income schedule shows dividend income of Rupees Sixty eight thousand, while the amount received on interest income was Rs 211 m. The details of this interest income are not known. This is not exactly the ideal performance yardstick that even a nutty investment manager would have ordered, but this is the reality of the matter. The parent obviously has humungous inter-se dealings with its siblings, but one is not privy to the details given the censored nature of the audited accounts.
The profit before tax of the parent as stated earlier had sunk to Rs 107 m from Rs 4.1 bn previously. (Inspite of the precipitous fall in profits, the company managed the feat of churning out a positive cash flow from operations to the tune of Rs 9.4 bn against a negative cash flow of Rs 12.7 bn that it registered previously).The fall in profits as seen from the expenditure side of the equation was largely occasioned by such major items as 'contractor charges' and 'interest charges' both of whom did not show much variance with the figures that it splashed out in the preceding year, and a heavy dose of interest charges amounting to Rs 3.1 bn. As may be expected there is a liberal bad debts and such like write off amounting to Rs 94 m.
The many siblings
Of the 18 subsidiaries that it has listed out in the Punj Lloyd group comprising 96 companies, 13 are based out of India. The other countries featured in the list are Saudi, Kazakhstan, Indonesia, Singapore and the British Virgin Islands. Of the 47 step down subsidiaries, 14 are out of Singapore. This is followed by 5 companies based out of Indonesia. The other countries having multi operations include Libya, Malaysia, China, the UK, and Mauritius etc. Of the 7 jointly controlled entities, the bulk is India based. One cannot take a call on the 15 jointly controlled operations as the country base is not mentioned in all cases.
It is next to impossible to get into the nitty gritty of the performance results of the 62 companies that it has appended with the report. But there are some standout points. Some 34 companies in this list did not record any turnover! Not one of the siblings declared a dividend either. But the top of the pops (in an intriguing sort of way) of the companies which did record a turnover is the Singapore sibling, Punj Lloyd Pte Ltd. This company has a capital base of Rs 3 bn, positive reserves of Rs 5.8 bn, investments of its own valued at Rs 1.4 bn, a turnover of Rs 5.8 bn and a pre-tax profit of Rs 943 m. These figures do not in any way add justice to the footnote that the parent has appended about it being in the dog house. Quite to the contrary! How could a company with accumulated losses of Rs 8 bn, have positive reserves for starters? Unless of course there are two Singapore based companies sporting the same name. There are 14 subsidiaries in all based out of Singapore whose financials have been published, but none of them sport similar characteristics either. So what is the catch here?
Some colourful entities
The parent also boasts of another nugget called Simon Carves Ltd, a UK based offspring with subsidiaries elsewhere. On a teeny weenie capital base of Rs 27 m, it has negative reserves of Rs 15.7 bn and total assets of Rs 4 bn. On revenues of Rs 2 bn it racked up a loss of Rs 760 m. How can a company with such a narrow capital base rig up assets and revenues of such a high order? Has the parent provided for the losses of this subsidiary? But there is a similarly named 100% subsidiary based out of Singapore which appears to be on the roll. On a wisp of a capital base of Rs 18 m and total assets of Rs 716 m, it rang up sales of Rs 1.2 bn, and a pre-tax profit of Rs 154 m.
There are two other very big ticket enterprises. One of them is Sembavang Engineers & Constructions Pte Ltd. It has by far the highest paid up capital among all the siblings weighing in at Rs 6.7 bn. But some of the sheen is taken away by the negative reserves of Rs 1.9 bn. It also boasts the highest total asset base of Rs 14.7 bn and the highest turnover of Rs 15.7 bn. But the pre-tax profit was a more sedate Rs 172 m. The other is Punj Lloyd Oil and Gas Malaysia. On a mere capital base of Rs 11 m, it has reserves of Rs 1.2 bn, total assets of Rs 6.6 bn, and it racked up a turnover of Rs 9.3 bn. The pre-tax profit added up to Rs 765 m.
It also has given birth to a few colourful subsidiaries based out of 'tax havens'. One such is Punj Lloyd International Ltd based out of the British Virgin Islands. It has a capital base of Rs 4.4 m, an investment bank worth Rs 25.3 m, total assets of Rs 54 m, a NIL turnover, but managed the feat of running up a pre-tax loss of Rs 10 m. The Gibraltar subsidiary is a study in contrast. On a next to nothing capital base of Rs 45,000, it had investments valued at Rs 68 m, total income of Rs 14 m and a pre-tax profit of Rs 11.4 m. This company probably has the best pre-tax profit to turnover ratio and the best return on capital employed. The two Mauritius subsidiaries appear to belong to the comatose variety for whatever reason. This is about as hotch potch as it can get then.
It would appear that investors should stay clear of enterprises such as this.
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.