The Hindu Business Line : ‘Other income’

Had you followed the quarterly results of companies over the last one year, you would not have missed the huge growth in ‘other income’ earned by them. In the June, September and December quarters of 2007, the ‘other income’ component had grown by a whopping 48 per cent, 42 per cent and 82 per cent respectively over the corresponding previous quarters of 2006 .

Concerns raised on this front subsided only in the March 2008 quarter when the growth was much slower and later in the April-June 2008 period where the year-on-year growth was only 2 per cent.

Quality of earnings

Why did this rise in ‘other income’ raise apprehensions? For any stakeholder in a company, what matters as much as the company’s earnings is the quality and sources of these earnings.

A higher proportion of income from core operations always lends greater credence to the quality. A higher ‘other income’ component can camouflage the real performance of the company by either boosting profits or minimising losses.

The results of Tata Motors for the June quarter is a case in point. The fall in net profits could have been sharper than the reported 30 per cent but for a huge rise in other income from Rs 86 crore in the June 2007 quarter to Rs 316 crore in the first quarter of this year.

In fact, higher ‘other income’ had cushioned the earnings in the immediately preceding quarter as well.

Operational vs Financial income

With the case for taking note of ‘other income’ now established, let’s proceed with understanding the income from various sources that is reported under the ‘other income’ head .

Broadly, other income may either be financial or operational.

Dividend received from investments, interest received from banks, interest on receivables and on advances to vendors are good examples of ‘financial other income’.

Income from scrap sales, rentals from the leasing of assets by companies in the engineering/capital goods space are typical of ‘other income’ arising from operations.

For small companies, these items could be a significant source of income.

Hence, the next time you calculate operating profits/margins for a company, remember not to leave out the ‘other income’ completely.

That portion of ‘other income’ that is attributed to operations must be added with net sales before deducting the expenses. But, at the same time, take care to not include items such as income from joint ventures earned by the company when calculating operating margins.

These items, though arising from operations, are better off being added at the net profit level.

The best place to get the break-up of the ‘other income’ is the schedules to the profit and loss account in the company’s annual report.

One-time income

While ‘other income’ from operations may be sustainable, there are one-off items such as exchange gain on forex transactions and income from sale of investments which may zoom the ‘other income’ during a particular quarter.

One must guard against such a spike as it is purely temporary and not sustainable.

Forex gains made by companies was one of the reasons for the huge growth in ‘other income’ in the last few quarters talked about earlier.

Similarly, the reason behind the substantial growth in Tata Motors’ ‘other income’ is the boost it received from partial divestment of its stake in a few group companies such as HV Axels, HV Transmissions and Tata Autocomp Systems.

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