The Hindu Business Line : Ascent of the 'extraordinary'

In a trend reflective of the buoyant phase in the economy, both the nature and number of `extraordinary items' figuring in the profit and loss account of companies have gone up sharply.

The robust earnings picture of Corporate India for the fourth quarter of 2005-06 has already propelled the market to new heights.

On a higher financial base, companies have managed to sustain a strong revenue and post-tax earnings growth for 2005-06. What is far more encouraging is that India Inc. has also been able to maintain operating profit and gross profit margins at the same level as in the previous year, establishing the resilience to handle challenges on the input and interest cost front. Trawling through the earnings announcements of 1,300 companies for 2005-06, however, shows that `extraordinary items' is a facet that still remains tucked away deep in the financial statements.

In a trend somewhat reflective of the buoyant phase in the economy, both the nature and number of `extraordinary items' figuring in the profit and loss account of companies have gone up sharply in recent times.

While it does not figure prominently in the financial statements (classified conveniently under `other income' in some cases), its impact on select companies is quite material and worth taking cognisance of. In tune with the market trends, the nature of extraordinary items can be broadly categorised under these heads:

Sale of non-core business

In order to focus on their core competence, companies have been selling or shedding equity stake in their non-core businesses. Not that this trend is new, except that there are cash rich buyers willing to acquire these company segments.

In end-April, GlaxoSmithkline Pharmaceuticals India approved the sale of its animal health business as a going concern to French-based Virbac Animal Health for Rs 207 crore. Apart from contributing 10-12 per cent of revenues, the latest segment profitability also shows that other businesses (which included the animal health business) has lower profit before interest and tax margin of 17 per cent compared to 37 per cent for the core pharma business. At the global level, too, Glaxo has been exiting the animal health business.

Or, consider the recent sale of equity stake by JSW Steel in JSW Energy to Samarth Holdings, one of its associate companies for a total consideration of Rs 513.7 crore. The profit on sale of this stake amounts to Rs 369.2 crore has been included in other income. JSW Energy was initially planned as a power supplier for JSW Steel, but with this stake divestment, the management plans to enter the power business on a full-fledged basis.

Profits from real-estate, investments

The revival of the real-estate story and strong underlying market performance has contributed to several companies logging extraordinary incomes on this count. Consider Mukand, which recently sold its land at Kurla, a Mumbai suburb, and is also planning to commercially develop another 10-acre property in the city. For 2005-06, the company recorded a net surplus on sale of land at Kurla, amounting to Rs 213.86 crore. Similarly, Tube Investments has for 2005-06 registered a profit on sale of its building in Chennai for Rs 21.4 crore, apart from profit on sale of long term investment for Rs 89 crore. These two items have been reflected under `other income'. It is likely that other companies may also log similar gains in the coming years.

Several companies have used the sharp rise in stock prices to book profits on their existing investments. For instance, Kirloskar Oil Engines has recorded extraordinary income, which includes profit on sale of shares of Cummins India and Mahle Filter Systems Pvt. Ltd. Other companies that have cashed in on the stock market boom are Jaiprakash Associates, UB Holdings or Sutlej Industries.

Write-offs/impairment

Companies have also been using the bullish times to provide or write-off some of the investments that they have made in the past. Consider Asian Paints. In the latest quarter, the company has made a provision for the diminution in the value of long-term investment in its wholly-owned subsidiary, Asian Paints (International) for Rs 33.60 crore.

Similarly, in the latest quarter, Sonata Software has written off investments of Rs 9.3 crore in SpinAway eBusiness Solutions and Rs 2.2 crore in Abikso Development, Cyprus.

In stark contrast, some companies are also completely cleaning up their books to participate in the buoyant economic phase in a fresh avatar.

In the latest quarter, Himachal Futuristic Communication has taken a one-time non-recurring, non-cash extraordinary charge of Rs 952.42 crore for the diminution in the value of investments and other doubtful and non-realisable assets.

This charge is expected to bring the company's capital employed in line with its core operations.

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