Monday, July 30, 2012

Annual Reports and revised Schedule VI

The annual reports season is upon us. This is a very exciting time for anyone who is serious about investing. Annual reports give a lot of information and are extremely useful for analysis.
However, from FY12 onwards, the New Schedule VI has come into effect. The presentation of financial statements (as well as schedules and notes to accounts) is governed by Schedule VI. As a result, the way in which the financial statements are presented this year onwards will be completely different from those of last year. This, of course, completely screws up my excel sheets as I will have to rearrange the numbers to make it comparable to previous years. Very irritating indeed, but totally unavoidable!
Therefore, one should know how the presentation is done now, so that the financial statements can be understood and appreciated better. Specially, on the balance sheet side, the way long term and short term/current liabilities are presented has changed significantly. Many documents are available on the net regarding the new Schedule VI. The Institute of Company Secretaries of India has come up with a well drafted note which explains the entire difference between the old and the new schedule. The note can be accessed here. Please go through the same, it is very important.

A couple of negative points about the new Schedule VI come to mind;
1) It is no longer mandatory to give details of management remuneration in the financial statements. (although computation still has to be done as per the Companies Act). I think this is a big big negative. Unreasonable managerial remuneration is one of the points which tells investors about the quality of management and the disclosures of this should not have been discontinued.
2) A bigger and more worrying point is that now it is no longer mandatory to give Quantitative Details. Earlier, companies had to disclose the details of raw material and sales, product wise, in terms of quantity and rupees. This enabled calculation of per unit cost of raw material and sales. For me, this was something invaluable, which has now been discontinued and is a huge negative as far as my research and analysis goes. Sad, very sad.

Well, no use cribbing. The law is the law and it is us investors who will have to adjust our analysis accordingly. Knowing about these things is therefore very important so that decision-making can be done properly..

Cheers and happy investing..


Anonymous said...

Dear Neeraj,

Can you share how the changes related to quasi-equity will affect your analysis part???

Sorry if this question sounds silly, but am new to this world of investing !!!

Mahesh said...

This is totally crap schedule IV changes. WTF...these changes will increase scam and increase no.of vijay mallay's.

i am totally sad on this development front.

better to trade then invest. DAM schedule IV.

Anonymous said...

Hi Neeraj,

I had just finished doing my summer internship which involved analysis of businesses and the biggest insight were the Quantitative Details.. this was a eureka moment for me, i had actually began to understand how stuff work!

How do you plan to tackle this issue Neeraj?

Milind said...

Currently, a company has to get shareholders' approval before it
decides remuneration of management.
Has this provision also changed?

What is the appropriate level of
management remuneration, as a
percentage of Net profit?

Neeraj Marathe said...

Hello Anon,
This does not affect our analysis if we know what has changed etc..

Hello Mahesh,
Well, i suck at trading, so i will stick to investing..we have to learn new things happening..

Hi Invictus,
Well, i plan to tackle this issue by understanding how the new presentation norms work!

Hello Milind,
No the norms have not changed, only the disclosure requirements have changed. I personally do not look at mgmt remuneration as a % of profits depends on the complexities of the business..if its too complex, mgmt deserves high remuneration and vice in a company like ILFS Investment Managers, remuneration has to high, they deserve it..but in a company like Noida Toll, where there is not much mgmt required really, remuneration shouldnt be very high..hope this helped..


Mahesh said...

Thanks Neeraj Sir for giving gann on remuneration front between simple and complex biz model.

I have another question...what are genuine criteria for stock split...i am bit wary of this stock split...after reading essays of WB..stock split makes me some what uncomfortable..please let me know your views on this front..would be great full.


Neeraj Marathe said...

Hello Mahesh,
In my view, a genuine criteria for stock split is high market price (in absolute terms). Lowering share price increases liquidity, which is the demand of many shareholders to the mgmt of companies. Such companies may opt for a stock split. From investing/analysis perspective, it makes no difference to me, to be honest..

Ketan Shah said...

Hi Neeraj,

This is indeed quite important (negative) change. Any idea, would it be effective for 2012-13 annual reports? Because in FY 2011-12, annual reports, I still see these details.

I'm sure that the regulators would have some rational to do so, what would be your guess about their rational?

Pradeep said...

I agree with your views. Another pain point is that the current portion of long term debt is included in "Other current liabilities". So when looking at the balance sheet filed with the exchange, one can't figure out actual DE ratio of the company. One needs the Annual report to figure that out!

Neeraj Marathe said...

Hello Ketan,
Yes it is applicable to FY12 ARs. Its due to integration with IFRS, presentation has been changed..

Hello Pradeep,
Ya i totally agree..i honestly do not like the new way of reporting..but maybe, i am uncomfy just coz its new and i am not used to it..time will tell!

mukesh said...

As far as managerial remuneration is concerned, companies have to disclose that thing as part of the Corporate Governance Report (both director's remuneration and employees receiving remuneration of more than Rs. 5 lakhs per month or Rs. 60 lakhs annually. So that won't be a big problem.
However the real trouble is Quantitative details. I think the main idea behind such move was that India is primarily a service-led economy where quantitative details are not applicable. However we as investors need to know at least units of sales (if not units of opening and closing stocks)to find out if the growth is volume-led or price-led. The question is how do we do that? John Train in his book "Money Masters of Our Time" recommends multiplying two ratios for finding out unit sales :(and I quote) "retained operating margin on sales and turnover rate of gross operating assets...the latter being a measure of capital required to produce $1 of sales", though I couldn't really grasp what he said. What do you think?



now im sincerely convinced that the Neeraj's of the world are indeed a pessimistic a look)

on a more serious note shouldnt there be a checklist on the managers of or money/promoters? sinceresly confused about how to distinguish b/w the current crop of indian promoters

Neeraj Marathe said...

I am not particularly pessimistic..i just believe in calling a spade a spade!
I do not think there can be a chklist to understand the mgmt/promoter changes on a case to case basis.