The Worrying Message Adlabs Imagica’s Accounting Move Sends To Investors

A recent accounting move by Adlabs Entertainment Ltd. revealed some dismaying news about the company’s financial future.

The owner of theme park Adlabs Imagica wrote-off a deferred tax asset worth Rs 165.41 crore in the fourth quarter of 2018-19, according to its exchange filing.

That suggests it doesn’t expect to turn a profit any time soon.

To be clear, the write-off is as per accounting standards, but the message it sends should be worrying for investors.

Deferred Tax Asset?

The provisions of the Income Tax Act, 1961, allow a company to set off its losses against future taxable profits, subject to certain conditions. This right to set off losses against future profits is recognised as a deferred tax asset in a company’s books as the asset helps in reducing future tax liability.

As per the Indian Accounting Standard 12 (Ind AS 12), a company can recognise a deferred tax asset in the books when there is a probability of taxable profits in future, said Gautam Nayak, chartered accountant and partner at CNK & Associates LLP.

As of March 2018, Adlabs had recognised a deferred tax asset of Rs 165.41 crore, almost all of which was on account of business losses, according to its financial year 2017-18 annual report. That suggests the company expected to turn profitable in the near future and that it would utilise the deferred tax asset against future taxable profits.

The Write-Off

But that view on profits seems to have changed now. At the end of March 2019, the company wrote off its entire deferred tax asset balance of Rs 165.41 crore. That suggests Adlabs can no longer see any probability of future taxable profits.

“The deferred tax asset balance write-off indicates that as per the company, it is no longer probable for them to have taxable profits in future to utilise the tax asset balance,” said Nayak.

In other words, the losses will continue for the foreseeable future.

Adlabs didn’t comment on that, putting the move down to plain accounting.

In an emailed comment to BloombergQuint, the company said, “Pursuant to the recommendation of the statutory auditors as well as deliberations of the management and board of directors, the company has reversed the deferred tax assets. The same is in view of the guiding principles laid down in IND AS 12.”

How Did It Come To This?

Adlabs opened theme park Imagica in 2013. Located near Pune in Maharashtra, the park boasts of rides, a water park, a snow park and Novotel, a four-star hotel. In the six years since then, the company hasn’t made a profit. The imposition of a goods and services tax at 28 percent in 2017 hurt business. The GST rate was later lowered to 18 percent.

In FY19, Adlabs Imagica witnessed a 5.1 percent year-on-year decline in footfalls to 16.35 lakh, according to its media statement. That, along with aggressive discounts, led to a drop in revenue and increase in losses in its primary business segment in the last financial year. The tickets segment revenue dropped 12 percent to Rs 114 crore and operational loss increased 72 percent to Rs 76 crore. The rooms segment also doubled losses to Rs 14 crore. Food and beverage, and merchandise made operational profits, but both are minor contributors to the company’s top and bottom line.

Between FY14 and FY19, the company’s revenue rose from Rs 103.8 crore to Rs 246.67 crore, but the increase in expenditure was sharper and its losses rose too—from Rs 52.76 crore in FY14 to Rs 155.17 crore in FY18. In FY19, the company suffered a loss of Rs 347.43 crore on account of a deferred tax asset write-off.

In FY18, the company sold non-core assets, land and hotel, to help repay debt. But there’s still Rs 1,072.59 crore outstanding. Earlier this year, it defaulted on the loan, and ratings agency ICRA Ltd., which rated the long-term Rs 1,100-crore term loan of Adlabs, said the company had stopped cooperating with the agency. The loan is now labelled “issuer not cooperating”.

Adlabs Enterntainment’s stock has lost 95.64 percent of its value since listing. The closing share price of the company was at Rs 7.75 on May 28, 2019, down from Rs 177.55 on the day of listing (April 10, 2015).