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India Equity Research Reports, IPO and Stock News
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Annual report analysis provides vital information on companies’ overall performance
and helps developing outlook on them based on historical events. It highlights the true
economic profit against companies’ reported profit as well as the health of the balance
sheet.
To analyse annual reports, we have covered the following aspects:
Income statement analysis:
• Economic profits vis‐à‐vis reported profits
• Direct debit to reserves
• Break up profitability into operating activities, financing activities (ROE
analyser)
• Analysing contribution of subsidiaries as well as parent, to the overall
profitability of the consolidated entity.
Balance sheet analysis:
• Non‐operational risks
• Capital structure
• Break up into operating and financial assets
• Intangibles and off BS items
• Working capital analysis
• Net worth analysis
Cash flow analysis
Key insights from MD&A
Segmental information analysis.
Accounting policy analysis:
• A framework, wherein accounting policies adopted by a company are analysed
and compared with globally accepted policies. The likely impact on
convergence with more logical accounting practices (IFRS) is highlighted.
• Change in accounting policy/ estimates by the company and its impact on the
profitability.
Generic issues observed across multiple companies
Companies raising money through acceptances (quasi‐debt) mode, which is
classified along with current liabilities, helps understate debt and boosts operating
cash flows and RoCE. It also enhances the valuation based on EV/EBIDTA multiples
since debt imbibed in current liabilities does not get adjusted.
SPV structure used to boost profitability: SPVs is funded through preference capital
or future convertible hence does not qualify for the definition of subsidiary. IFRS will
require consolidation of SPVs as well hence will lead to elimination of intra group
transactions.
Boosting net worth by amalgamating group companies.
High court permission taken to make exceptions to usual accounting practices and
write off interest, operating expenditure, asset write offs directly through reserves.
Redemption premium on debt instruments and FCCBs written off directly through
reserves (securities premium account).
Treasury shares held by companies to act as quasi‐promoter shareholding and also
to aid net worth of company. However, the dividend tax on these shares is borne by
the company.
Significant transaction with promoter group companies.
Selective early adoption of IFRS principles to report superior revenues and
profitability (like AS 30 on hedge accounting, BOT accounting pension losses etc.)
Concern with pension funds ‐ actual cash outflows from company /reduction in
value of assets not being charged through the P&L but through reserves.
Cash efficient partnership based tax structure ‐ used to save MAT outflows ‐ may
not be sustainable.
High unhedged forex payables to impact future profitability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Annual report analysis provides vital information on companies’ overall performance
and helps developing outlook on them based on historical events. It highlights the true
economic profit against companies’ reported profit as well as the health of the balance
sheet.
To analyse annual reports, we have covered the following aspects:
Income statement analysis:
• Economic profits vis‐à‐vis reported profits
• Direct debit to reserves
• Break up profitability into operating activities, financing activities (ROE
analyser)
• Analysing contribution of subsidiaries as well as parent, to the overall
profitability of the consolidated entity.
Balance sheet analysis:
• Non‐operational risks
• Capital structure
• Break up into operating and financial assets
• Intangibles and off BS items
• Working capital analysis
• Net worth analysis
Cash flow analysis
Key insights from MD&A
Segmental information analysis.
Accounting policy analysis:
• A framework, wherein accounting policies adopted by a company are analysed
and compared with globally accepted policies. The likely impact on
convergence with more logical accounting practices (IFRS) is highlighted.
• Change in accounting policy/ estimates by the company and its impact on the
profitability.
Generic issues observed across multiple companies
Companies raising money through acceptances (quasi‐debt) mode, which is
classified along with current liabilities, helps understate debt and boosts operating
cash flows and RoCE. It also enhances the valuation based on EV/EBIDTA multiples
since debt imbibed in current liabilities does not get adjusted.
SPV structure used to boost profitability: SPVs is funded through preference capital
or future convertible hence does not qualify for the definition of subsidiary. IFRS will
require consolidation of SPVs as well hence will lead to elimination of intra group
transactions.
Boosting net worth by amalgamating group companies.
High court permission taken to make exceptions to usual accounting practices and
write off interest, operating expenditure, asset write offs directly through reserves.
Redemption premium on debt instruments and FCCBs written off directly through
reserves (securities premium account).
Treasury shares held by companies to act as quasi‐promoter shareholding and also
to aid net worth of company. However, the dividend tax on these shares is borne by
the company.
Significant transaction with promoter group companies.
Selective early adoption of IFRS principles to report superior revenues and
profitability (like AS 30 on hedge accounting, BOT accounting pension losses etc.)
Concern with pension funds ‐ actual cash outflows from company /reduction in
value of assets not being charged through the P&L but through reserves.
Cash efficient partnership based tax structure ‐ used to save MAT outflows ‐ may
not be sustainable.
High unhedged forex payables to impact future profitability.
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