The Hindu Business Line : What lies beneath the numbers

Quarterly results announcements from companies are nowadays accompanied by much fanfare, with television anchors plying the management with questions and stock prices reacting to every reported number. However, what is contained in the numbers can sometimes be far less significant than what lies beneath, in the ‘notes to accounts.’ A look at the notes accompanying the quarterly results provides a great deal of insight into the nature and quality of the earnings reported. In addition, the notes provide information on changes in accounting policies through adoption of new standards or guidelines.

Skewing profits

Instances of ‘other operating income’ or ‘extraordinary income’ often skew the much-watched net profit figure. A breakdown of the ‘other or extraordinary income’ can help you gauge how much of a push or pull one-off items had on earnings.

To cite an instance, FMCG giant Hindustan Unilever had an income of around Rs 30 crore on selling property and a one-time restructuring charge of Rs 166 crore for a settlement with HUL employees of a shuttered unit during the September quarter.

The latter expense is unlikely to be a recurring one and may lead to a better profit picture in future quarters. Similarly, Mahindra and Mahindra realised a “windfall” profit of close to Rs 70 crore from the IPO of their subsidiary, Mahindra Holidays. Their ‘other operating income’ also included a net octroi refund of Rs 48 crore compared to Rs 18 crore for the same quarter last year. Spin-offs or sale of operating units which are stated in the notes, could also lead to lower revenues in the following quarters.

Policy changes

Altered accounting policies tucked away in the notes may also help investors decipher how much of a company’s growth really comes from operational factors. For instance, Jet Airways altered the method of depreciating their aircraft which lead to a retroactive gain of Rs 91 crore for 2008-09. This dramatically altered the extent of red ink, which was further reduced by a tax credit. Both the CENVAT credit and changed depreciation policy were stated in the notes.

Outlook

Smaller details are also mentioned in the notes that could help an investor gauge the company’s potential. Manufacturing companies, for example, often give out order book size or upcoming capacities. For instance, capital goods manufacturer BHEL has an outstanding order book of close to Rs 126,000 crore. Jaiprakash Industries, in its notes, states how commissioning new capacity dented its quarterly margins. Their projected capacity of 23 million tonnes per annum March 2010 against 14.7 million tonnes per annum for FY-09 is also vital data indicative of an increased volume of business.

Forex factor

Companies with operations and income in foreign currencies have to provide an accurate picture of costs in Indian denomination; information on the same will be available in the notes. Realty major DLF’s overseas subsidiary, Silverlink Holding, is in litigation with shareholders over a repurchase programme.

The liability of this programme remains unknown. Tata Power has set aside Rs 227 crore as ‘other deposits’ to Reliance Infrastructure as part of a bank guarantee for litigation over refunds due. Tata Power stands to either regain the Rs 227 crore or lose the amount and some more. The refund amount was Rs 354 crore and the interest was close to Rs 150 crore.

But why are these cases of interest to an investor? Well, the magnitude of the settlement arising from winning or losing these cases could have an impact on the way investors view the ‘risk’ associated with these companies.

The schedules and notes to accounts are a vital accounting tool to provide data in a complete and accessible manner. Investors would find it prudent to pay heed to notes to get a complete picture of how a business is faring.

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