Tuesday, January 22, 2013

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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Anil Kumar Tulsiram said...

Excellent Neeraj

You are absolutely right. I did fall into availability bias and yes it was Satyam. I experimented by investing a small amount but realized how difficult it is to accept mistake and book loss. Moreover before investing this is what I noted "Audit fees is very high at 75 lakh. In 2011, it increased by 25 lakh. When profits are under pressure, that too in a year in which net profits decline by more than 40%. Prakash jagran pays audit fees to PwC around 80 lakhs. It has turnover more than 1,000 cr. and profits more than 200 cr. (DC turnover 1,000 cr. and profits 10 crs." I did guessed that this high audit fees is for 'Co-operation' with promoters, but did never thought the problem could be this severe.

Rohit Chauhan said...

their fixed assets are supposedly intangibles - brands :) as per the notes

btw, if you are looking for entertainment -read cranes software annual report. interesting case study


Neeraj Marathe said...

Thnx for sharing your experience Anil...

Yes Rohit, intangibles have increased as per the notes.. but if u see, they were there in the 2011 AR also.. besides, intangibles don't usually need a cash outflow, which is why I am saying that I dont know for sure what the fixed assets are!

Rohit Chauhan said...

Hi neeraj
I know ...i was being sarcastic :)
in the notes they have specified the following likely reason for the increase in fixed assets

Intangible asset under development - 2905 crs

come on ...kingfisher, deccan all of them have so much intangibles on the balance sheet ..like cocacola :) and that needs so much cash !!!

we now have the visible proof of a negative moat :) :)

oraunak said...

Another one for the 'Gone Concern' box.

There can be a comic book with one hilarious financial statement published, every quarter. It'd be a good educational experience.

Thanks for sharing your observations Neeraj. Scary balance sheet. It does remind us that not all brands are destined for greatness.

Anonymous said...

Zenith Birla may go under the same category. How can we protect ourselves from such companies before it is too late?

Praveen Munaga said...

Can we take Arshiya too under the same Falling Knife case

Neeraj Marathe said...

Hi Rohit,
As usual, i couldnt understand that you were being sarcastic :)

Hi Ronak,
Gone concern is really funny! :)

Hi Anon,
I really dont know anything about Zenith Birla, so cant comment.

Hi Praveen,
Yes absolutely.


Bhaskar Jain said...

Thanks Neeraj.

I liked this article - does a good postmortem - http://forbesindia.com/article/boardroom/saving-deccan-chronicle/33693/0

Neeraj Marathe said...

Thnx for the article Bhaskar..i agree its a nice article..

Anonymous said...

"Intangible asset under development" seems to have been developed to a perfect level to get equity into positive territory. How convenient !!

Anonymous said...

what abt Zylog, fraud not yet proven ? But no answers from mgmt.

Neeraj Marathe said...

Hi Anon,
Sorry, but i have never looked into Zylog.

Anonymous said...


Nice article. One more candidate in the list is Opto Circuits. I am dreading that we will see similar losses all of a sudden in it. Even today it trades at market cap of 2000 cr.

Neeraj Marathe said...

Hi Anon,
I completely agree with you. There are a lot of questionable things with the accounting and the business of the company.

Raja said...

Hilarious !

They gave you some very good material to write about :)


Anonymous said...

If they have so much fixed assets ..then ways t problem ...its safe to invest ryt ???

Neeraj Marathe said...

Hi Anon,
Sure, its safe to invest..but only if u understand what the assets are, what its value is..what the liabilities are, how much are the books cooked, etc..
if you dont understand all of these, then i dont think its safe to invest!!

Anonymous said...

I'm holding few shares at an average of 5.8 Neeraj.I started accmulating it when it was 10 n even now I'm buying in small quantities.
I know its sounds sort of crazy to buy now but my point of view is
1.politics -they r close to congress n I'm dead sure everything will be sorted out b4 elections.
2.brand name-its not a easy task to open a new entity and run,deccan is still the no1 paper in AP,surely in top5 in south india.
3.Banks-court is blaming banks to provide such huge loans,but banks always said deccan had assets.all top lenders(banks) withdrew case frm dissolve t company.

I feel it'll take a while to sort out things,I'm expecting same moment as Satyam .

Neeraj Marathe said...

Hi Anon,
If i may ask, since you are every confident, why are you holding just few shares? This is an opportunity of a lifetime in that case!

Neeraj Marathe said...

:-) Ya they did Raja.

Grow Well Finance said...

Hello Sir,

How u account for charges against the rating agencies... as the company was rated on high notch.

Neeraj Marathe said...

Didnt understand the question..