Evaluating Moats through Floats
A post on Evaluating MOATS through FLOATS
Firstly some disclosures the idea of evaluating moats through floats was inspired from this amazing post from Professor Sanjay Bakshi
Secondly the candidate chosen to be evaluated is borrowed from Amit Arora 's blog - Poddar Developers Ltd
Now lets begin, Poddar developers ltd is a small Mumbai based real estate developer interestingly the Group is focusing on the value housing segments in Mumbai, within the MMRDA region. Value housing or Affordable housing as it commonly called has huge demand in India. Poddar developers have a significant presence in Mumbai suburban region through multiple projects, you can access details here
So much so for our candidate now lets quickly define FLOAT - It is other people's money which company holds temporarily. Durable FLOAT is something which becomes a cost less revolving fund for the company. The common sources for FLOAT are
- Trade payables (Look for companies who buys at Credit but sell in Cash )
- Customer Advances
- Deferred taxes (Companies having advantageous tax situation - unlikely to be durable)
Durable FLOATS create higher ROE and ROCE for the companies, reason - they are using other people's temporary money to run their operations
How to calculate FLOAT for company , I am trying to simplify here
Assets - Financial Assets (Cash & Investments) will give your Operational assets
Operational Assets - Debt - Equity = FLOAT exercised by company (Operational assets funded by FLOAT)
Having learned how to calculate FLOAT, Lets apply this to the consolidated financial statements of Poddar Developers Ltd
Poddar Developers Ltd - 31.03.2014 Financial Assets Total(Rs Lacs) Total(Rs Lacs) Funded by Float Cash 1368 Equity 6685 Current Investment 322 1690 Debt 2028 Operating Assets 19661 Float 12638 64.28% Total Assets 21351 Total Liabilities 21351
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Prestige - Larger company strictly not comparable to Poddar as it doesn't caters to affordable housing
Prestige Industries Ltd -31.03.2014 Financial Assets Total(Rs Lacs) Total(Rs Lacs) Funded by Float Cash 33,954 Equity 2,97,919 Current Investment 18,801 52755 Debt 294467 Operating Assets 881489 Float 341858 38.78% Total Assets 9,34,244 Total Liabilities 9,34,244
Clearly a lower percentage funded by FLOAT
Sobha - Larger company strictly not comparable to Poddar as it doesn't caters to affordable housing
Sobha Developers Ltd -31.03.2013 Financial Assets Total(Rs Lacs) Total(Rs Lacs) Funded by Float Cash 670 Equity 21,468 Current Investment 2 672 Debt 13536 Operating Assets 47924 Float 13592 28.36% Total Assets 48,596 Total Liabilities 48,596
Clearly a lower percentage funded by FLOAT like prestige
Ashiana Housing - Larger than Poddar however it also caters to affordable housing segment
Ashiana Housing - 31.03.2014 Financial Assets Total(Rs Lacs) Total(Rs Lacs) Funded by Float Cash 5723 Equity 28,446 Current Investment 5657 11380 Debt 913 Operating Assets 49893 Float 31915 63.97% Total Assets 61,273 Total Liabilities 61,273
Very similar to Poddar numbers, Almost 64% funded by FLOAT
Now second check that I wanted to run was consistency of FLOAT for Poddar developers through financial years. So here we go
Poddar Developers Ltd -31.03.2013 Financial Assets Total(Rs Lacs) Total(Rs Lacs) Funded by Float Cash 2772 Equity 5976 Current Investment 0 2772 Debt 3373 Operating Assets 17099 Float 10522 61.54% Total Assets 19871 Total Liabilities 19871
For FY 2013 numbers are consistent, Now lets go just a few years back to 2010
Poddar Developers Ltd -31.03.2010 Financial Assets Total(Rs Lacs) Total(Rs Lacs) Funded by Float Cash 897 Equity 5326 Current Investment 2349 3246 Debt 357 Operating Assets 2884 Float 447 15.50% Total Assets 6130 Total Liabilities 6130
The number is astonishly low, on digging up the 2010 Annual report figured out that is only in late 2010, that the company has forayed in
Affordable housing segment
From 2011 till 2014 the FLOAT numbers are constant, Next check was to check the sources of the FLOAT - A sustainable source could mean MOAT
Here is the 2014 breakdown of FLOAT
Poddar Developers - 31.03.2014 (Total - Rs Lacs) Trade Payables 297 2.35% Land rights 157 1.24% Others 813 6.43% Advance from Cust. 11124 88.02% Provisions 248 1.96% Total 12638 100.00%
88% is from customer advances a very good sign, What was the case in 2013 ?
Poddar Developers - 31.03.2014 (Total - Rs Lacs) Trade Payable 39 0.37% Land rights 157 1.49% Others 448 4.26% Advance from Cust. 9583 91.08% Provisions 295 2.80%
Again 91% is due to advances received from customers. FLOAT from this category is sustainable if demand situation for company's product keeps up
When we ran our peer analysis, Ashiana had similar float percentage compared to Poddar, This prompted to get there break up of FLOAT for Ashiana
Ashiana Housing - 31.03.2014 (Total - Rs Lacs) Trade Payable 1,158 3.63% Land rights 0 0.00% Others 1245 3.90% Advance from Cust. 28367 88.88% Provisions 1145 3.59%
Again similar results, the bulk of FLOAT is coming as advances from customers
Now we are sure about two things
a. There is definitely FLOAT available to Poddar developers
b. Most of it comes as advances from customers, which in theory given demand situation for Affordable housing is sustainable
Now million dollar question is how effectively Poddar developers is deploying this FLOAT ? If deployed effectively a durable FLOAT becomes MOAT
We would run two tests to ascertain this, first a simple one - Has the ROE or ROCE of the company improved from FY 2011 onwards (as before FY 2011 it was also in garment business)
Profitability Ratios 2014 2013 2012 2011 2010 Return On Capital Employed(%) 14.53 6.29 3.54 3.25 1.65
Yes it has
Second - Is the working capital requirement reducing ? Is Company earning defensive profits
Poddar Developers Ltd ( Financial Information - Rs Lacs) Year 2014 2013 2012 2011 2010 2009 Accrual profit for the year 788.62 766.53 -₹ 82.34 ₹ 184.08 199.98309 410.75309 Extra ordinary items -₹ 240.20 ₹ 0.00 -₹ 590.01 Shares Outstanding (Actual) 52,04,500 52,04,500 52,04,500 52,04,500 52,04,500 52,04,500 Accrual EPS 15.15 14.73 3.03 3.54 3.84 19.23 Purchase of Fixed Asset 22.83 74.01 253.47 157.25 -₹ 7 -85.93 Sale of Fixed Asset ₹ 0 ₹ 0 ₹ 0 ₹ 0 Net Purchase ₹ 23 ₹ 74 ₹ 253 ₹ 157 -₹ 7 -₹ 86 Depreciation for Year 57.55 89.71 ₹ 75 ₹ 21 ₹ 16 ₹ 20 Investment in Fixed Assets -₹ 35 -₹ 16 ₹ 178 ₹ 136 -₹ 23 -₹ 107 Fixed Investment to Depreciation -0.60 -0.18 2.36 6.33 -1.48 -5.27 Current Assets (Excl Cash) ₹ 18,411 ₹ 12,243 ₹ 8,639 ₹ 5,523 Current Liabilities ₹ 12,602 ₹ 12,685 ₹ 7,711 3069 Working Capital ₹ 5,809 -₹ 442 ₹ 928 ₹ 2,454 ₹ 2,279 ₹ 402 Investment in Working Capital ₹ 6,251 -₹ 1,370 -₹ 1,525 ₹ 175 ₹ 1,877 Defensive Profit -₹ 5,428 ₹ 2,153 ₹ 1,265 -₹ 127 -₹ 1,654 Defensive EPS -104.28 41.36 24.31 -2.43 -31.77
2012 and 2013 had impressive defensive EPS as the working capital became negative, But in 2014 it turned to whopping negative figure for -104.28
Why such heavy investment in working capital in 2014 ? And we turn to Annual report
It's the inventory which has shot up
On further scrutinizing item 6 the biggest item in inventory in annual report we figure out that this is actually an advance for developement rights
Having negative defensive EPS is not uncommon for small and growing companies, The problem starts when one tries to eat more than what one can digest
So does Poddar have a sustainable MOAT due to FLOAT ?
My take - it has a consistent FLOAT but I would need to see few more years of execution before I would become comfortable with assigning a sustainable or Durable MOAT to Poddar developers
Don't ask me the second million dollar question - Is the consistent FLOAT available at reasonable valuations ? That we have to take in some other post
Till then happy reading
Disc - It is safe to assume I have vested interest in all stocks that are discussed here