By CL Jose
FY21 profit just around Rs2 crore; ‘Kerala Govt owns 80 pc in Uralungal’
The previous three years were also no different with the net profit ranging between Rs2-3.6 crore.
Uralungal is one of the largest cooperative contracting companies in India with about 13,000-strong workforce and projects worth thousands of crores to its credit so far.
But the profitability history of the company has been incommensurate with the revenue it has been generating. This has indeed raised many an eyebrow, especiaally since Uralungal has been at the heart of several heated verbal exchanges between the ruling front and Opposition in the past several years.
The pertinent question is whether the Society has failed to generate sizeable profit continually or is it that a major chunk of the profit generated by ULCCS is being given away to its thousands of member employees as bonus, adding heavily to the expense of the company and ultimately pulling down the profitability to ‘low single-digit crores’.
ULCCS has completed more than 7,500 major projects in Kerala and projects worth more than Rs4,555.68 crore are in various stages of completion, according to official reports.
Major clients of the Society include National Highways Department for Highway projects, Public Works Department of Govt of Kerala for State Road Development, Central Ministries such as Ministry of Panchayat Raj for rural roads under Pradhan Mantri Gram Sadak Yojana (PMGSY), several state government ministries such as Local Self Government, Co-operation, Tourism etc., and a host of reputed private enterprises.
It may be quite inexplicable to an onlooker that ULCCS with a workforce of 13,000 and enjoying privileged access to contracts worth billions of rupees, with ‘no-questions-asked’, has been humbled by its paltry net profit of just Rs2 crore on a not-so-bad turnover of Rs1000 -odd crore in FY21.
(No financials of the company are availabe on the Uralungal site and hence businessbenchmark.newshas gathered the numbers from reports of CAG, ratings agencies, etc.)
Acuite Ratings & Research agency has said in its report, “As a cooperative society, ULCCS distributes the profits to its member labourers in the form of bonuses every year and maintains minimal operating margins.”
Govt owns 80 pc
On the one hand, this cooperative society called ULCCS is 80 per cent owned by the Government of Kerala (GoK) and on the other, as the rating agency Acuite rightly manifests through numbers, the financial challenges Uralungal is currently facing are not that insignificant as to be glossed over.
“ULCCS’ financial position is considerably stretched as observed from its leveraged capital structure and weak coverage indicators as on end-FY21,” Acuite had observed last year.
The management seems to be giving away a big chunk of the potential profit as largesse to its employees by virtue of they being members of the cooperative society that owns the company, notwithstanding the fact that they collectively own only 20 per cent of the society.
The lion’s share, at 80 per cent, of the society (as is claimed by Acuite) is owned by the Kerala Government, and in the bonus distribution process, its legitimate share of profit has been whittled down to just 80 per cent of the left-over net profit of Rs2 crore.
Profit too low
According to Infomerics Ratings, another agency, ULCCS is sitting on a debt of Rs697.23 crore as of May 31, 2021.
The Society has earned only a net profit of Rs2.2 crore for FY18 on an operating income of Rs596.12 crore.
In FY19, against an operating income of Rs709.61 crore, the Society closed the year with a net profit of Rs3.23 crore. In FY20 too, the net profit was Rs3.66 crore, according to Acuite estimate.
According to financial analysts, rather than distributing almost the entire profit to employees as bonus, it’s vital for ULCCS to undergird its finances, especially its debt servicing, which is quite a daunting task as flagged by the rating agencies through actual numbers.
Moreover, management is obliged to ensure the legitimate profit share for the 80 per cent shareholder in the society, the Government of Kerala.
As mentioned before, the high leveraging of capital by Uralungal is amply manifested by its total ‘debt/total net-worth ratio’ of 6.7 times as of FY21 compared with 5.85 times a year earlier; both are said to be on higher side by far as per industry standards.
DSCR, ICR raise concerns
There are views that the Society needs to focus more on its debt servicing as its debt service coverage ratio (DSCR) stood at a precarious 0.31 times, even as its interest coverage ratio (ICR) was at 1.11 times in FY21.
The 0.31 times DSCR unequivocally implies that the Society has only sufficient net operating income to cover 31 per cent of its annual debt payments (as of FY21).
“A DSCR of less than 1 means negative cash flow, which means that the borrower will be unable to cover or pay current debt obligations without drawing on outside sources – in essence, borrowing more,” a chartered accountant decoded the ratio jargons.
On the interest coverage ratio (ICR), it is understood that while an ICR of 1.5 times may be the minimum acceptable level, 2 or higher is preferred by analysts and investors, whereas, ULCCS is far below that, at 1.11 times.