The Hindu Business Line : Parents, not subsidiaries, contribute most to consolidated profit

Mumbai, July 18 For all the corporate talk about inorganic growth, subsidiaries do not contribute significantly to the consolidated financial performance for most blue-chip corporates.

Data for the top 25 companies in 2006-07 shows that profit of the parent company (standalone) accounted for most of the total consolidated profit.

The total profit of these 25 companies on their standalone performance amounted to Rs 45,928 crore, representing nearly 86 per cent of the total consolidated profit of Rs 53,512 crore.

But there are exceptions. Sterlite, for instance, reported net profit of Rs 4,386 crore on consolidated basis, but its standalone business earned a profit of just Rs 784 crore.

This means that the subsidiaries, namely Bharat Aluminium Company Ltd, Thalanga Copper Mines and Copper Mines of Tasmania, accounted for 82 per cent of the consolidated profit.

L&T is another instance where subsidiaries are contributing a good chunk to the consolidated profit, 37 per cent during the fiscal gone by.

On the other hand, the performance of VSNL is a case of subsidiary company dragging down the parent’s performance; Rs 154 crore out of standalone profit of Rs 468 crore.

On the turnover front too, subsidiaries do not really run the show. Their contribution to the consolidated performance measures 20 per cent.

The parent companies chalked up turnover of Rs 4,02,268 crore on their own in 2006-07 but the subsidiaries chipped with a meagre amount, relatively, to achieve total group turnover of Rs 5,03,488 crore.

But Grasim’s performance highlights the fact that the relatively modest contribution of subsidiaries to the consolidated profit is despite their accounting for a significant chunk of group turnover.

Its subsidiaries accounted for nearly 40 per cent of the turnover, but only 22 per cent of profit.

The limited sample of blue chip companies might show that subsidiaries make only a modest contribution to their operations. But that has not prevented the analyst community from swearing by consolidated numbers.

“We definitely look at the consolidated figures,” said Mr Ketan Karani, Vice-President of Kotak Securities Ltd.

“Sterlite’s share price reflects the business of its subsidiaries too,” said Ms Deena A. Mehta, Managing Director of Asit C. Mehta Investment Intermediaries Ltd.

Mr Pankaj Pandey, Chief Manager of ICICI Direct, referred to the valuation framework to suggest that standalone performance alone isn’t enough.

“If the subsidiaries are in different businesses, then multiples (PE ratio) are assigned after considering the margins of that particular business.”

The emphasis on consolidated performance is a recent phenomenon, said another analyst.

“Perception has changed in the past couple of years. Now, companies are valuated on consolidated basis,” said Mr Bhavesh Shah, Head of Research of Asit C. Mehta Investment Intermediaries Ltd.

However, in specific cases, standalone numbers have to be taken due to lack of data, said Mr Dipen Shah, Vice-President (Private Client Group Research) of Kotak Securities.

While stock exchanges remain the authentic source of data for investors, consolidated information is not at all available in the case of BSE; on the NSE, data is available only for some companies.

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