Disclaimer at the Outset ~ This Blogpost is not a Recommendation but only an endeavour to interpret what is in the public domain given the latest developments & to thus spell out risks that have played up. I intend to showcase this at my Equity Training Sessions
Toll Free Court Order has Noida Toll Bridge Toiling down over 35% to Rs 14
I have never been a fan of Noida Toll Bridge for many years now for two straight reasons :
1-Corporate Governance ~ In November 1997 a Service Concession Agreement for the Noida Toll Bride and Mayur Vihar Link Road was entered into by the Company,it’s promoter IL & FS & NOIDA,UP Govt.Its been a huge controversy since inception in both granting the Concession to IL & FS company Noida Toll Bridge & the subsequent padding of recoverable Project Cost which incredulously kept being padded every year even after completion because of the absolutely deliberately lenient Agreement Terms that allowed this for any designated returns ( a high 20% pa) that were not attained in the year.There was no cap on Operational Costs too in the Agreement & this allowed the Company to present poor returns and thus pad up project costs to be recovered.Much of the Operational Costs found their way into higher Salaries,Commissions & Perks for the retired IAS Officers who had founded IL & FS and this Company. The Spirit of the PPP was severely dented .Private Benefits at the expense of the Public.Project Costs that should have been @ Rs 200 crs balloned to over Rs 408 crs & then padded up to over Rs 1000 crs !….it was a unprecedented CAGR of designated returns yet to be recovered ! that allowed the company to collect till infinity even beyond the at least 30 year concession granted in the November 1997 agreement.It was only last year on July 9,2015 a modified agreement froze the amount payable as on March 31,2011 & terminates the Agreement on March 31,2031.The Company also has development rights under the Agreement but it has not yet recognised these in their Financial Statements.These could amount to Hundreds of Crores in itself.
2-I saw it as a range bound stock with no serious capital appreciation and just dividend yield, as it’s model was simply just toll collection & then dividend payments once it broke out in 2010.Predictable Flows & DCF captured the range valuation. The expectations of non linear flows through recognition of Development Rights did inflate share price once or twice but till date this has not happened & given Allahabad court order to stop charging user fees now arises a ? mark if at all will they arise.The Court however has upheld the Concession Agreement but ruled inoperative the collection of any levy or Toll Fee
As a Trainer of Equity Valuation had wondered why several years ago it was introduced heavily in a PMS which later was converted to a MF.I have observed that the MF exited their full 4.7% holding of 87.48 lakh shares in the past week High Dividend of 30% on a Share Price then of @ Rs 25 did give a high Tax Free Dividend Yield of 12.5%.But the Price Erosion has wiped out significant Principal Investment
It’s Funny the Company’s FY 16 Annual Report on Page 33 shows this as sold on January 29, 2016 and that the MF had a nil holding at March 31, 2016!The Volumes on NSE & BSE do not support this & neither were there any Bulk or Block Deals in January 2016
Interesting Extracts from the Auditors Report in FY 16 Annual Report
The Auditors are Luthra & Luthra & these two segments of their Report in the FY 16 Annual Report caught my eye
- EMPHASIS OF MATTER We draw attention to Note 2(b) and 27 of the consolidated financial statement wherein significant elements of the financial statements have been determined based on management estimates(which in turn are based on technical evaluations by independent experts). These include a. Intangible Assets covered under service concession arrangements carried at ` 53,736 lacs (75% of the total assets), the useful lives and the annual amortisation thereof;b. Provision for Overlay carried at ` 1229 lacs in respect of intangible assets covered under service concession arrangements; Our opinion is not modified in respect of these matters.
- g) With respect to the other matters to be included in the Auditor’s Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according to the explanations given to us: i. The Consolidated financial statements disclose the impact of pending litigations on the consolidated financial position of the Group– Refer Note 29 to the consolidated financial statements.
How can we Interpret this in view of the Allahabad Court Ruling to make the DND Toll Free
1 -Emphasis of Matter
The Auditors have not qualified their report but their saving grace has been including the Management estimated Valuation of Intangibles as an Emphasis of Matter.This Intangible is the ‘Right to Collect Toll’ and as on March 31,2016 had a carrying Value of Rs 537.36 crs.View this in context of Networth of Rs 518.60 crs & Total Fixed Assets of Rs 553 crs.It shoots across Networth Value & is 97% of the Fixed Assets !
The Modified Terms of the Concession Agreement as on July 9,2015 now freezes the Amount to be Payable to Company or Recoverable by them as on March 31,2011.It also states the termination date as March 31,2031 when the Company has to hand over Bridge to NOIDA Authorities
FY 16 shows Toll Collections were Rs 111.69 crs,@ 84% of Total Income of Rs 133 crs +.FY 16 Operational Profit before Tax was just over Rs 60 crs but largely reversal of Deferred Tax benefit of Rs 23.4 crs has propped up PAT to Rs 82.4 crs .This reversal is on account of change in useful life of assets & a certain portion of timing differences reversing in respect of depreciation during the tax holiday period .This leads to an EPS of Rs 4.43 on an Equity (FV Rs 10) of Rs 186.20 crs.Company has maintained dividend at 30% split equally in FY 16 between Interim & Final.In FY 15 the Interim was Rs 2 while Final was Rs 1.Dividend Payout was over 65%
Two Straight Impacts of the Allahabad Court Order,unless the Supreme Court grants a stay, is that Company now cannot charge Toll Fees & thus will loose out nearly all Revenue Income Cash Flows imparing both it’s ability to pay Dividends as well as the carrying value of Intangibles. The Company’s policy is to assess the Value annually or even sooner if an event indicates it must. The Court Order is this event and the Company must assess, and Auditors must reassess the carrying Value of Intangibles of Rs 537.36 crs as on March 31,2016. Auditors have to revisit their Auditors Report on such a material post Balance Sheet event in that can they rely on the Management’s assessment !.Half Yearly Results at September 30,2016 have to disclose this court order & it would be interesting to see if financials are indeed adjusted for this & how would the Auditors opine on this.It no longer can remain just as an Emphasis of Matter
2- Impact of Litigations
The auditors have stated this
“The Consolidated financial statements disclose the impact of pending litigations on the consolidated financial position of the Group”
Really? …. the phraseology is interesting.Certainly the Statements ‘disclose’ the litigations but their ‘impact’ on Networth or on sustainability of operations is not laid out clearly for obvious reasons
Note 29 of the FY 16 Consolidated Accounts referred to in the Auditors Report reveals a host of litigations of which two significant ones are
~ Income Tax raising a demand for Rs 196.47 crs in FY 16 & Rs 424.73 crs for earlier years largely on account of addition of arrears of designated returns (explained above) recoverable from future toll revenues …that’s a whopping over Rs 620 crs ! ~ no provisions have been made as the Company believes that based on legal opinion the outcome of appeals will be in favour of the Company
~Public Interest Litigations have been filed in the Allahabad & Delhi High Courts to make the Bridges Toll Free.Company believes that there is reasonable probability for success and at this stage there is no financial impact
Wow ! now that Allahabad Court gave it’s order of October 26,2016 in favour of Federation of Noida Resident Welfare Associations ( FONRWA) who had filed the PIL the Company’s ‘reason to be’ is in question. The Company’s Board of Directors & Promoters can no longer continue to state that they believe they will succeed in litigation. Auditors might just need to question if in light of developments can they audit it as a Going Concern!
The Company has send this Notification on October 26, 2016 to the Exchanges
“As has been disclosed in the annual reports of the Company, the local resident welfare associations (Federation of Noida Resident Welfare Associations FONRWA) had filed a Public Interest Litigation in the Allahabad High Court challenging the validity of the Concession Agreement entered into between NOIDA and Noida Toll Bridge Company. The PIL had been filed in the year 2012.
The Honourable High Court of Judicature at Allahabad has pronounced its judgement today at 4pm. The judgement although upholding the Concession Agreement has held the two specific provisions relating to levy and collection of fee to be inoperative and has directed the Company to stop collecting the user fee thereby making the facility Toll Free. The Company in compliance with the Judgement of the Honorable High Court of Allahabad has stopped collection of user fee subject to the outcome of its appeal against the said judgement before the Hon’ble Supreme Court of India. The Company is in the process of filing an appeal with the Supreme Court, against this judgement. The rights of the Company to the DND under the Concession Agreement remain valid and remains asset of the Company.”
On October 28, 2016 it again send this Notification
The Company has filed an appeal before the Hon’ble Supreme Court of India against the judgement of the Hon’ble High Court of Allahabad in case of FONRWA Vs NTBCL that had been delivered on October 26, 2016.
The Appeal has been admitted today by the Hon’ble Supreme Court of India and an interim order is expected to be delivered after the Hon’ble Supreme Court resumes after the Diwali break.
As it appears with the Allahabad Court Ruling to make DND toll free,the Carrying Value of Intangibles of Rs 537 crs stands fully or considerably impaired thus wiping of networth & most of Company’s Revenues
The Future depends on the Company’s success in the Supreme Court & the quantum of development rights that it recognises in the Accounts & in my view resolving IT Disputes which are huge in quantum
Otherwise this Toll Bridge becoming Toll Free would have taken it’s Toll on the Company reducing it to being without Assets & Revenues & only IT Disputed Liabilities !
I observe some brave support and buying ,even bulk deals,at @ Rs 14 but do know the Risks….typically the Conservatives get out as did the MF and the Aggressives are getting in to play the High Risks now as they did several years ago in the tragic Global Trust Bank debacle !….not saying….just reiterating risks involved
As I stated at the beginning ,I have never been a fan of Noida Toll Bridge & for those who were in it as a Value & Divdend Play have seen Value eroded as Litigation Risks play up
September 2016 Shareholding showed over 81000 shareholders had faith in this Company,including a host of Indian & Overseas Institutional Funds ….that was before this October 26,2016 Allahabad Court adverse ruling
I see a few airing views that such an adverse Ruling is not good for the success of present & future PPP Ventures and Private Participation in such will be difficult to attract given such risks playing out. The NOIDA Resident Associations should drown this argument forcefully in that this PPP Venture Agreement was an exception & was atrociously flawed right from the inception in that it the Company itself was the Executor & Judge in issues.It required a PIL to clip wings
On a Broader Issue of Retail Investor Education & Protection that continues to nag me is that unless the Exchanges seriously take up proactively & reactively the matter of seeking Clarifications and interpreting Company replies in depth to seek further clarification & also interpreting Company Notifications more seriously and following up in depth with the company rather than just accepting what the Company sends and posting on their websites ,Retail Investors will remain vulnerable to the pitfalls
The Matter is now in the Supreme Court & despite any Interim Order,the matter would become Long Term ….. & even a Long Term Value Fund has voted to take the loss & not remain Long Term in it
That’s the Beauty of Equity Markets ~ There are Risk Takers & then there are Risk Takers !