Multiple start-ups like BYJU’S and OYO have come under scrutiny for their accounting standards like reporting employee costs as capital expenses or claiming profitability on the back of adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) which excludes ESOP (employee stock ownership plan) costs. 

Recently, Anurag Singal, who runs a valuation practice BetaFin Partners, raised questions around the sanctity of BYJU’S valuation.

“If we analyse BYJU’S financial projections shared with its Registered Valuer, they change drastically in a matter of three months. For instance, in August 2021, Byju’s projected ₹127 crore profit after tax (PAT) for FY22, and ₹382 crore PAT in FY23. Three months later, in November 2021, the edtech company changed its projections to ₹209 crore PAT in FY22, and a loss of ₹692 crore in FY23,” Singal told businessline.

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He added that normally there cannot be a solid reason to explain such massive quantum of changes in such a short span of time. ‘It could simply be that the numbers are so engineered so as to arrive at a particular value, which must match the latest fund-raise,” said Singhal.

Mohnish Wadhwa, CEO at CapDeck Advisors, said, “valuation reports most of the time are just taken to meet the regulatory requirements and miss explaining the economics behind.. so it will be premature to comment anything only on the basis of such reports and without getting into real assumptions behind the value.” 

Valuation has always been a science and its all about at what value a buyer is willing to buy and a seller is willing to sell, Wadhwa added. In real world, valuations depend on a lot of economic factors like whether the investor will strategically add value to the product, government policies and cash need of the product at a particular point in time.

Adjusted EBITDA numbers

On the other hand, hospitality major OYO was questioned for claiming that it has turned EBITDA positive on the back of adjusted EBITDA numbers which excluded ESOP costs of the company. Similarly, start-ups like PhonePe and Pepperfry have also reported adjusted EBITDA numbers in FY21-22. 

There’s no standardised measure for EBITDA, giving companies latitude to decide what to include and what to exclude. Commenting on this practice of financial reporting, Mohamad Faraz, Founding Partner, Upsparks, said, “multiple Indian start-ups have been using the EBITDA metric of late, especially the ones who have gone public. Most such companies consider adjusted EBITDA as EBITDA without counting employee stock option (ESOP) costs. These costs form a lion’s share of these businesses and excluding them facilitates masking losses.”

While the reason for adjusting EBITDA is to get a normalised number that is not distorted by irregular gains, losses, or other items, in reality it often achieves the reverse effect. Faraz added that adjusted EBITDA in many cases is used as a questionable proxy for cashflow and an unrealistic valuation tool.

‘Fake accounting’

Commenting on such financial reporting, former Infosys Director and current Chairman of Manipal Global Education, Mohandas Pai, recently said, “This is fake accounting! There is nothing like an adjusted EBITDA. They are trying to mislead investors with such fake accounting. Regulators and stock exchanges should stop such misreporting in India.”

In response, OYO’s Group CFO, Abhishek Gupta tweeted, “EBITDA is clearly reported and is higher ₹Rs 10.57cr for Q1FY23 than adjusted EBITDA of ₹7.26cr. Other Income is not included in EBITDA & adjusted EBITDA. All numbers are from audited signed financial statements. Global non-GAAP(Generally Accepted Accounting Principles) metrics are defined transparently.”

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