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Krishnan Thiagarajan

CORPORATE India has failed to put its best foot forward on `segment reporting' — disclosing corporate performance under different business segments — even four years after this became mandatory.

Blame it on the regulation allowing management discretion on segment disclosures or the reluctance of select high-profile companies to share proprietary information with competitors, but segment reporting in the current form has had limited utility for retail investors.

At the same time, credit should go to a fair proportion of high-profile companies, such as ITC, Hindustan Lever, Grasim Industries and Dr Reddy's Lab, as also scores of medium-sized companies that have adhered to the letter and spirit of segment reporting and set the standards to judge the rest of the corporate sector by.

Yardsticks that count

Unless the management is willing to share segmental information, it is difficult to assess the financial performance of a diversified company or multiple divisions within a core activity.

For retail investors, segment reporting offers two critical yardsticks for comparison of performance across divisions: the profitability of a rupee of sales or a rupee of investment in each business the company is engaged in.

After all, if there were a case of consistent under-performance by one business, shareholders would want to know why they should stay invested in such a segment.

Sometimes, the explanation is that a particular business may not be currently profitable but has the potential to become a money-spinner. In such a situation, the investor would want to be satisfied that the management is running the business as profitably as the competition.

A measurement of relative profit margin on sales or total capital employed helps the investor get a fix on the quality of managerial performance as he is able to compare performance across different companies in the same business. For instance, in capital-intensive businesses such as engineering, oil or FMCG, the return on capital employed (ROCE) is a useful indicator of how effectively a company or a division is utilising/sweating its assets.

Despite the limitations of these ratios, segment reporting offers retail investors the best shot at tracking the performance of a company across various divisions and to some extent levels the playing field with institutional investors.

Using these two yardsticks, Business Line tested the usefulness of segment reporting by companies in the S&P CNX 500 basket (and outside it) in terms of its relevance, the restructuring signals it provided and comparability across different sectors.

Relevance of segments

Taking shelter under primary segment: Nestle India, one of the prominent FMCG companies has claimed that its primary business segment is food, and that this business activity falls within the single primary segment specified by AS-17 (Accounting Standard) prescribed by the ICAI. It adds that its food business incorporates groups such as milk products and nutrition, beverages, prepared dishes and cooking aids, chocolates and confectionery, which mainly have similar risks and returns.

At the global level, Nestle SA, headquartered in Switzerland, provides the break-up of its revenues, profits, assets and capital expenditure across its six product groups: beverages, milk products, nutrition and ice-cream, prepared dishes and cooking aids, chocolate, confectionery and biscuits, pet-care and pharmaceutical products.

However, its principal business, even at the global level, is food. Its competitor Hindustan Lever (in some product groups) provides break-ups across beverages and processed foods to help compare the margins and returns across its different businesses.

Companies such as Ranbaxy Laboratories and GlaxoSmithKline Pharma have stuck to the single segment classification, even as peers such as Dr Reddy's Labs or Orchid Chemicals provide break-ups under formulations, bulk drugs and more.

In automobiles, Tata Motors has also stuck to the single segment, claiming that it is exclusively engaged in the business of automobile products consisting of all types of commercial and passenger vehicles.

Grouping segments: Eveready Industries, in its latest financial statements has stated that it is in the business of dry cells, flashlights and packet-tea, which come under a single business segment of FMCG (fast moving consumer goods).

In the year ended March 31, 2004, it had disclosed the performance of the tea segment separately. But since the sale of its bulk tea division in 2004-05, it has changed its mode of disclosure.

Or, take, Exide Industries, a player in the lead battery segment used in industrial and automotive sectors. Till 2002-03, the company was providing the segment-wise break-up of lead batteries into industrial and automotive batteries. But since then, Exide has stated that it operates in a single segment of lead acid batteries and dropped its earlier break-up.

In contrast, companies such as Asahi India Glass have retained the segment break-up between automotive and float glass, even in the latest financial statements for 2004-05.

The overall picture clearly suggests that it is the top-line companies that are reluctant to make segment disclosures, while medium sized companies appear to have a much better reporting record. Unless the regulatory mechanism is toned up, several mid-cap companies may join the large-cap league, and get away with skimpy disclosures.

Comparability across sectors

Apart from relevance, another key objective of segment reporting is to help users benefit from an enhanced degree of comparability with other enterprises. The scope for meaningful comparison of performance among different companies in a sector or across sectors has been constrained by two elements:

Greater uniformity in segment reporting: Take a simple sector such as air-conditioners. Owing to classification issues, any comparison in margins or ROCE between Blue Star and Voltas is difficult to perform.

While Blue Star has classified its core/largest segment as `central air-conditioning system',

Voltas terms it `electromechanical projects and services', which includes domestic air-conditioning and refrigeration and other solutions. In the absence of uniformity in presentation, it becomes difficult to interpret the ROCE and margins.

Contrast this with the paints sector, where there is scope for meaningful comparison among three mid-sized companies — ICI India, Berger Paints and Goodlass Nerolac. Though this needs to be sub-divided further under industrial or decorative, the margin/ROCE comparison does provide a good starting point for investors to pursue the right line of questioning with the management.

Broadening the reportable segment: In the guise of uniformity, companies are increasingly resorting to categorising their businesses under a single segment. In particular, classification under FMCG is the trickiest to resolve, as its sweep has become really broad — from food, health and hygiene products to personal care (including toothpastes).

Apart from this, companies in different sectors will have to consider broadening the reportable segment to help investors compare financial performance. The steel sector will have to be segmented into long and flat products, to make better sense of Tata Steel's results vis-à-vis that of Steel Authority of India.

Similarly, Tata Motors' performance will have to be broken up into passenger/utility and commercial vehicles to compare it with that of Ashok Leyland.

In the capital goods sector, companies such as BHEL, ABB, Alstom Projects, Ingersoll Rand and Thermax will have to further sub-divide their main segments for meaningful comparisons.

Other sectors too will have to be considered on these lines, based on the best disclosure practices employed by companies in that sector.

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