Investigation:Trick or Teak?

Is Anubhav Plantations sowing the saplings Of safe returns? Or is it only cultivating frauds through its agro-forestry schemes? BT conducts a behind-the-claims enquiry.

Money doesn't grow on trees. And certainly not on those that the high-profile Anubhav Plantations (Anubhav) claims it is trying to grow. Although it is desperately attempting to stay out of the shadow of the Great Plantations Scam of the Nineties, South India's largest agro-forestry company could be uprooted by the very business that it has been aggressively pursuing for the last 6 years. For, its plantations-where ignorance is opportunity, where regulation is toothless, where investors pay investors-now threaten to grow into deep trouble for the Chennai-based company.

To be sure, while many of its competitors have already attracted the ire of both investors and regulators, Anubhav-which says it has between 70,000 and 1,20,000 investors, from whom it has raised Rs 121 crore until now-has steered clear of controversy so far. True, the company, whose high-decibel advertising has earned it a prominent place in a business comprising 1,000 companies, hasn't defaulted on repayments-yet. And, to be fair, it has also planted more trees than most of its peers. But there are still too many problems overhanging the company's financial projections for the small investor to stay confident about it. Specifically:

Just how is Anubhav able to pay its investors? How long will it be able to sustain the paybacks? Are its schemes at all capable of generating the returns that the company promises? BT met the Chairman of the Anubhav Group, C. Natesan, besides investors, investment consultants, analysts, and competitors to piece together the answers to the mystery that is becoming Anubhav.

Once a low-profile entrepreneur in the construction business, the 47-year-old Natesan is today the Chairman of a Rs 250-crore group which, apart from its teak-plantation schemes, is also involved in the timeshare, finance, and real estate businesses. In fact, he has emerged as a prominent player in the plantation sector, with as many as 4 companies in the field: Anubhav Agrotech, Anubhav Green Farm & Resorts, Anubhav Plantations, and Anubhav Royal Orchards Exports. ''I always wanted to plant trees. As a child, I used to feel sad seeing trees being burnt down in my village at Govindaperi in Tirunelveli,'' says Natesan.

But the teak business has done much more than merely satisfy Natesan's green desires; it has also brought in the greenbacks. Perhaps the hub of Natesan's Mother Nature-and-notes greenprint is the Anubhav Teak Farm Scheme. Under the plan-which has recently been rated DCR IND 4, or a speculative category investment, by Duff & Phelps Credit Rating India-an investor has 2 options. Option A assures the investor a return that is 77 times the original investment while Option B promises a 66-fold one. The minimum deposit that an investor must make is Rs 6,000, and the maximum he can is Rs 60,000.

Under Option A, an investor who makes a deposit of Rs 6,000 gets a piece of land, measuring 300 square feet, with 3 teak saplings on it. This scheme has a tenure of 20 years, during which Anubhav is the self-appointed caretaker of the land and the trees. The investor gets back Rs 1,000 every year for the first 6 years; an additional Rs 6,000 at the end of the 6th year; and another Rs 12,000 after the 12th year. Finally, at the end of the 20th year, the investor gets Rs 3 lakh or 40 cubic feet of teak, whichever he prefers. Option B offers similar, though not identical, returns. While the annual returns in the first 6 years are replaced by a payback of Rs 15,000 at the end of the 6th year, the rest of the payments remain the same.

A variation is the Good Earth Unit scheme-at present, unrated by a credit rating agency and, hence, inoperative-where a similar investment of Rs 6,000 brings an investor not outright ownership of the land, but a 5-year lease of 100 square feet. He, in turn, sublets the land to the company, with the returns amounting to bi-annual payments of Rs 500, and Rs 5,000 at the end of the 5th year. And a bonus 1.13 cubic metres of teak-valued at Rs1 lakh-at the end of the 20th year.

Dangling these carrots, Anubhav claims to have mobilised Rs 121 crore, using some of it to, it claims, plant 1.70 million trees on 1,063 acres at Bodi, Palani, and Tirunelveli in Tamil Nadu. In all fairness, BT's day-long visit to the 616-acre Bodi hub-the biggest of the 5 that Anubhav claims to have-did reveal teak trees at various stages of growth, with the plantations being supervised by agriculture graduates. Says a former associate of Natesan: ''He has handled his image very carefully, and by associating Anubhav with the World Wide Fund For Nature, he has obtained respectability for his business.''

Where is the money with which Anubhav services its deposits coming from? Even by the company's logic, it cannot be from the trees. Remember, the company admits that it has invested the amount generated from each depositor on buying the land and the saplings earmarked for them. Add on its other operational expenses-and Anubhav should, logically, be left with no money to pay its depositors under Option A of the Teak Farm Scheme. The obvious conclusion: either the entire amount of Rs 6,000 is not being invested in land and saplings. Or, the investments of fresh depositors are servicing the earlier sets of investors. Says a Chennai-based financial services business analyst: ''What investors don't understand is that the company is using their own money to pay them back albeit in instalments.'' Adds Jayant Thakur, 33, the CEO of the Mumbai-based chartered accountancy firm, Jayant Thakur & Co.: ''That's bound to happen since plantations take a long time to generate income.''

What's crucial, therefore, is how much Anubhav is actually investing on its land and saplings. At present, land prices in the interior of Tamil Nadu, like Tirunelveli District, are low: an acre-43,560 square feet-of land at Bodi, near Madurai, costs as little as Rs 35,000. At these rates, the price-tag for 300 square feet is a mere Rs 240. Add Rs 10 for the saplings and other expenses-and that still leaves Anubhav with Rs 5,750 out of the Rs 6,000 it collects from every investor. Even a return of 15 per cent from a safe investment would yield Anubhav Rs 862.50 a year, leaving a gap of only Rs 137.50 with the payback liability of Rs 1,000 even while keeping the principal intact.

Actually, this mathematics would work for the company for each of the first 12 years. At the end of that period, the original Rs 6,000 would have swelled to Rs 43,850, leaving more than enough for the payback. But problems are likely to crop up when the scheme approaches its 20th year, when Anubhav will have to pay every investor Rs 3 lakh, as per Option A. That's where the trees come in. According to Anubhav's estimates, each of the 3 trees will grow to a volume of 1.13 cubic metres, with each cubic metre of wood fetching a price of Rs 88,286. Or, Rs 2.99 lakh. Thus, Anubhav will be able to fulfil its promises to its investors only if both its volume and price-assumptions are accurate-assuming it has ploughed the money into growing trees in the first place.

Avers D. Gnanasuria Bahavan, 47, Vice-President (Projects), Anubhav: ''We are planting teak scientifically. Our trees are achieving growth-levels that are 3 times that of those growing in the wild.'' Counters S. K. Khetarpal, 45, the Joint Secretary in the Department of Revenue and Forests, Maharashtra, who has written a doctoral thesis on teak plantations: ''It will be a miracle if they can achieve it (their projections).'' His computations suggest that Anubhav is overestimating the volume of wood that the trees will yield. ''The timber yield of trees with a girth of 60 cm and above will be merely 5.10 cubic feet per tree in 15 years even if one uses quality soil,'' he asserts. Natesan's defence: ''My projections are vindicated by the results we have achieved in 6 years. We have been able to obtain quality timber valued at Rs 1.20 lakh for every 1,800 square feet of land.''

Should investors like you feel confident then? An independent evaluation conducted by a Chennai-based plantations consultant, A. Sivasankaran, suggests as much. Estimating Anubhav's yields between 1998 and 2000, he puts the total realisable value from the plantations at Rs 675 crore. In 1998, he reckons, Anubhav will fell 4,38,969 trees to get 3,76,825 cubic feet of wood. At a price of Rs 2,400 per cubic foot, he estimates revenues of Rs 90.44 crore in 1998, followed by Rs 140 crore in 1999, and Rs 445 crore in 2000. Since Anubhav's pay-out liabilities, even on its present deposit-base of Rs 127 crore, will be Rs 10.10 crore, Rs 36.62 crore, and Rs 76.72 crore, respectively, in those years, its investors should, in theory, feel safe.

However, this study makes certain assumptions to the plantation company's advantage. For one, a price escalation of 10 per cent every year has been factored in. But, as the supply of teak from various plantation schemes increases, that is unlikely to be sustained. Second, the estimated price of Rs 2,400 per cubic foot assumes a value-addition of Rs 800 per cubic foot despite the fact that hardly any value-addition is involved in chopping down trees and selling them. Moreover, Anubhav doesn't appear to be spending much money on maintaining its plantations. With cultivation and land development expenses amounting to Rs 2 crore in 1996-97-the latest year for which its audited financial results are available-that works out to an expense of 42 paise per square foot of the 1,084 acres of plantations that Anubhav claims to have.

Worse, bowing to pressure from the Securities & Exchange Board of India (SEBI), Anubhav has now scaled back its per-tree volume projections to 20 cubic feet although investors are still being promised 40 cubic feet. Thus, unless the projected teak prices double, the company will not be able to realise the assured value. But the company hardly sees it that way. Explains Natesan: ''The projections have been scaled down because of SEBI. Our trees will still achieve the 40 cubic feet-target. And each tree will have a back-up.'' Some trust this vision. ''I am confident that the scheme will work. Of course, it is too early to predict anything since a plantation business is vulnerable to natural problems,'' says S. Krishna Mohan, 36, a Chennai-based investor in the group's schemes.

Not having cut down even one tree on its plantations, Anubhav is not in a position to derive any of its income from trees. Despite that, in its 1996-97 P&L account, it professes a plantation income of Rs 35.32 crore. Judging from the perfect fit, the amount could well be nothing but money raised from investors the previous year. Add up the Rs 64.79 lakh accounting for half the receipts of 1995-96 and the Rs 2.56 crore for half the receipts of 1996-97 under the Land Scheme; Rs 11.60 crore for receipts under the Teak Farm Scheme in 1996-97; and Rs 20.50 crore for funds mobilised by the Good Earth Unit Scheme in 1996-97-and the aggregate works out to, coincidentally, Rs 35.32 crore. With its expenses totalling Rs 35.01 crore, Anubhav's net profits stood at Rs 38.69 lakh. Says Thakur: ''Their non-productive expenses are very high, so the profitability comes down.''

Where has the investors' money really gone? Anubhav's fixed assets-which reflect investments in agricultural and office equipment, electrical fittings, and vehicles-amount to Rs 10.21 crore. Worse, as on March 31, 1997, it had negative current assets of Rs 6.40 crore, implying that its liabilities were greater than its assets. Even more worrying, from the investor's perspective, is the fact that the company's paid-up equity capital is just Rs 36 lakh while its borrowings, both secured and unsecured, amount to Rs 2.64 crore. And it had a loans-and-advances figure of Rs 25.95 crore, of which Rs 10.75 crore had been lent to Anubhav Foundations, Anubhav Green Farms & Resorts, Anubhav Resorts, Anubhav Foundations, and Anubhav Communications. In the schedule explaining the loan provisions, it is mentioned that the monies have been advanced mainly to fund the purchase of residential apartments (Anubhav Foundations) and farm land (Anubhav Green Farms), and to meet the expenses incurred on advertising and marketing (Anubhav Communications). But it does not explain why the money raised from investors for investing in plantations should be diverted to other companies and activities-or what returns the investor can expect from them. ''We have to invest the surplus somewhere, and the group's companies have done well by investing the money in real estate, which has more than doubled its value in the past 3 years,'' argues Natesan.

Since no accounting system has been devised for them, plantation companies are able to get away with any kind of financial reporting. Although SEBI has mandated credit ratings for all of them, there are no yardsticks, leaving even the rating agencies in the dark. Typically, they look at future cash-flows irrespective of whether they come from new investors or from plantations. Such a rating does not address the crux of the problem: that a new investor's money can be used to service the original investor.

Admits a manager with a Chennai-based rating agency: ''It is all very unclear right now. Without doubt, all plantation companies are high-risk investments.'' If investors aren't bothered, it is because the rewards are high too. Explains another executive with a rating agency: ''One reason why investors come flocking to them is that the interest earned on such schemes is treated as agricultural income and, hence, is exempt from taxation.'' Adds Thakur: ''Plantation companies circumvent the tax norms.''

In April, 1998, SEBI issued show-cause notices to 11 plantation companies for not having their schemes rated. And it is also trying to identify those which continue to operate their schemes despite the ban. But, given the sheer population of such companies, it is impossible for the regulator to monitor them individually. Complains S.A. Dave, 60, who heads a SEBI committee set up to formulate regulations to govern plantation companies: ''They are expected to provide us a lot of information, but that is not forthcoming. Even auditors have not been able to get much information out of them.''

Moreover, there are no benchmarks for returns: nobody knows how many teak trees should be planted on 1 acre of land, what kind of growth to expect from a teak plantation, when to cut the trees and sell them, and where teak prices are going to rule in future. So long as the basic ground-rules are not drawn up, investors are bound to get mauled in the jungle of the agro-forestry business. Eventually, Anubhav may turn out to be one of the safer bets. Or, it may well fall victim to the inherent flaws of the business. For, as the company's rickety finances prove, all plantation schemes may, ultimately, offer their investors only a bitter harvest of losses. But that's not the experience Anubhav is promising.

THE MAN AND HIS EMPIRE

The GRQ syndrome is alive and well in C. Natesan. Like hundreds of other entrepreneurs who not only dream of getting rich quick, but have also taken their first steps towards fulfilling their dream, the commerce graduate from Chennai's Vivekananda College, who dropped out of a course in chartered accountancy, has already acquired an ostentatious lifestyle. He drives a Toyota Corolla, works out of a plush office in Chennai's upmarket Royapettah area, and consults a gleaming gold watch when he wants to check the time. It's been a sudden transition for the man whose business debut was in the form of a consultancy, Yours Faithfully Consultancy, in 1983. In 1984, he entered the construction business with 3 partners, quitting it three years later to set up the Anubhav Foundation, which still constructs residential flats. It was only in 1992 that Natesan scented opportunity, and started expanding his business empire, which now comprises 7 companies, all of which are either partnership firms or private limited companies. His ambition: to take the turnover of his group to Rs 500 crore from Rs 160 crore, with the mobilisation of money from investors being the primary growth strategy. ''I am a God-fearing man,'' he says, citing one apparent reason for not planning to hoodwink investors. But, despite the avowals of playing his business by the book, Natesan is extremely secretive about the financial performance of his group, refusing to part with the annual reports of companies other than Anubhav Plantations, arguing that he is ''not obliged to disclose them.'' Of course, unlike many other plantation entrepreneurs, Natesan has no history of chicanery or of defaulting on investors' dues. He also has a strategy for ensuring the success of his venture: forward-integrating from teak into knocked-down furniture. ''I am getting the machinery from Sweden,'' he declares. ''Or my construction businesses will buy the teak.'' Ultimately, however, it is the shaky economics of the business, that may end up soiling Natesan's hitherto-clean record. Unless, that is, he can cultivate a way to make his trees-instead of his investors-pay for the returns that he promises.