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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So for FY14 64.28% of the company’s operating assets were funded by FLOAT, Before jumping in joy 🙂 I wanted to check whether this is common in real estate sector. I ran similar maths for
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
Hi Vivek, Just read this post of your following your tweets on Poddar’s results.
Want to understand your investment philosophy in micro & mid cap space. Assuming that you have analyzed both Ashaina and Poddar in detail and consider to be worthy investments. How do you go about accumulating shares of these companies, if presented a good market (like the one we saw in the past few weeks), would you allocate the desired % of portfolio in one shot, or would you be willing to accumulate over a period of time (keeping track of the results/biz environment etc). The reason I ask, both these companies have low revenue figures (under 200 Cr annually) and 1-2 bad years may lead to an erosion in their business model, thus also affecting your investment thesis. So a bit more color on investment philosophy will be helpful.
Hi Aman,
My approach of accumulation may not suit everyone, however still detailing it out,I allocate sizeable position at start say almost 60% of my allocation to the company and then increase as my conviction increase. I like both companies and sector so I would invest in both here again I would not worry much about net worth getting wiped out as they are not in cyclical business
Hope I have answered you
Hi…I am new to your blog. I have been investing from last 4-5 years. i can not match your data of poddar with their AR. i can see assets as 18876.22. could you kindly clarify how you get into those number of 21351 as asset. Also DEBT part it is 1325.69, your debt is as per this page is 2028. it is great concept but could you please help me understanding?
Hi Arnab,
Here is the excel I used for post, hope it helps and welcome to world of investing and learning
Link http://1drv.ms/1AajiTc
Thanks a lot Vivek. i went through you sheet. it is very nice. i was checking standalone one so that was the confusion. Anyway i have been doing investment from last couple of years but now doing detail analysis as well as reading a lot. your site is great and will wait for your next topic….very nice the way you put sanjay Bakshi’s concept. poddar seems to be a different kind of real estate player like Ashiana which i own.
Thanks Arnab
This is simply superb analysis. Highly Insightful.
Many Thanks!!!
Vikas Kukreja
Thanks Vikas