Deccan Chronicle results - Boy O Boy!!

I got an early morning call today from a very amused Ninad asking me to go online ASAP and check out Deccan Chronicle's quarter and year-end results for September 2012. Now everybody knows that there have been a lot of problems the company is facing and the whole situation has raised a lot of unanswered questions too. But to be honest, I was totally unprepared for what I saw in the results. The P&L is screwed, but the balance sheet is royally screwed. Check out the result.
Seeing the balance sheet took me back to the days when I was an 11th standard commerce student. Those days, while solving accounts sums in class, we used to do virtually anything possible so that the balance sheet tallies. :-) Something similar seems to be the case with Deccan Chronicle's current results!
The company has extended its accounting year from March to September. So the current year end results are for 18 months vis-a-vis the 12 month period for March 2011 and are hence not comparable. Let us see what all the company has managed to achieve during these 18 months..

• Revenues for the 18 month period are down by Rs.190 cr as compared to the previous 12 month period, from Rs.976 cr to Rs.786 cr. Well thats no big deal, it happens.
• What is a big deal is that inspite of revenues being down Rs.190 cr, the total expenses are up by a whopping Rs.500 cr! This has been led by a huge increase in the raw materials consumed as well as 'other expenses'. Hmm!
• Finance costs are up from Rs.59 cr to Rs.733 cr!! The company has reported a whopping Rs.1040 cr loss during the period. 
• Public shareholding is up from 36% to 61%, inspite of a buyback being done during this period. 

The balance sheet is something which is beyond funny!

• The entire reserves of the company have been eroded due to the loss and the net worth of the company (and the book value) has come down from Rs.1280 cr to Rs.10 cr! So much for investing on the basis of book value per share!
• Total borrowings have gone up from Rs.713 cr to Rs.3900 cr!! Cash on the balance sheet has disappeared, from Rs.704 cr to Rs.16 cr.
• Inventories are down by Rs.110 cr and debtors are down by Rs.120 cr.
• So basically, current assets have gone down, freeing up cash, lot of money has been borrowed and cash itself is down. Total cash generation this way is around Rs.4100 cr. So where has all this money raised gone??
• Well, fixed assets are up, from Rs.926 cr to Rs.3870 cr. Ahhh so thats where the money has gone. I do wonder what fixed assets they might have bought though.
• Point No.6 to the notes says that liabilities includes Rs.3987 cr due to lenders as a result of restructuring of operations and recasting of financial statements! Maaan thats one biggg recast!! 

Like my 11th standard teacher used to say.. beta, your balance sheet has tallied, but it makes no sense!!

All this raises the following questions in my mind, a lot of which have no answers!

• Has there been an accounting fraud in the company? Well it does seem so, since the company has talked about 'recasting' its financial statements.
• Well, so why has there been no admission of guilt, no senti letter from the promoter etc, like in Satyam's case?? Why has no legal action been taken against anybody? Who is responsible?
• What was the rating agency doing? They could not locate any problem with the company for quite some time until recently, when it was already too late. Here is an article on the same. So whats the use of a credit rating anyway? 
• What were the banks doing? Even in the March 2012 result, finance costs are low. Maybe the reported debts were also low. Now suddenly it materialises that a lot of banks have lent them a lot of money!
• What were we doing?! Could investors have known about this? I never tracked or held this stock, but I went through the previous years' annual reports after the problems surfaced and to be honest, at least I could not find any problem with them. If it was a well managed accounting fraud, there is no way to find it out!

Lessons learnt:

• Primary research is extremely important. Its not that it was an unknown fact that DC was fudging numbers, as this article says. One needs to get out of the excel sheet and annual report to get a better understanding of the business.
• Our mind is tuned to availability bias. So everytime some company faces problems like this, we immediately remember the huge returns which risk-takers earned in a Satyam or a Wockhardt-like distressed case. We remember this since this is what gets talked about around us and is available to our brain all the time. No one talks about the huge number of cases on the other side like an Asian Electronics or a Pyramid Siamira, in which investors lost their shirts (and I guess, other assorted items of clothing)
• Unless the entire extent and quantum of problem is known, it does not make sense to buy a falling star. People did talk about buying DC when it came down from Rs.100 to Rs.20, saying aur kitna neeche jayega..well its at Rs.5 today and falling. Better to err on the side of being cautious and suffer opportunity losses in such cases. 

Cheers and happy, safe investing!!!

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