Consolidated revenues give better picture

Indian companies are nurturing subsidiaries larger than themselves. The revenues of the parent, in some cases, are dwarfed by the subsidiaries’ revenues. So, one has to check consolidated financials to get an accurate picture of its finances.

There are well-known examples like Tata Tea-Tetley, Mahindra & Mahindra –Tech Mahindra which have subsidiaries that contributed significantly. Bharat Forge is another example, where its consolidated sales were higher compared to its standalone revenues by about 90% in FY06. There are 45 companies whose consolidated sales during FY’06 are higher compared to standalone sales by at least 75%.

There is a new crop of companies making aggressive acquisitions. Suzlon Energy’s acquisition of Belgium-based Hansen will give it a Rs 1,200-crore business to add to its existing Rs 3,788 crore revenues. Then, there is GHCL, which makes soda ash and textiles.

Three acquisitions later, its revenues from its overseas arms estimated at over Rs 2,000 crore will be nearly thrice its standalone revenues. Punj Lloyd recently acquired Singapore-based SembCorp’s engineering & construction business, giving it a Rs 2,900 crore business, 50% higher than its standalone revenues.

Tata Chemicals acquired Brunner Mond in FY06, a UK-based soda ash maker that tripled its soda ash capacity to 3 m tonnes. Contrast that with the Indian soda ash market which is only 1.8m tonnes. Revenue figures for Brunner Mond are not available, but for the two months of FY06 for which financials were consolidated, sales was Rs 360 crore.Annualising this, we get Rs 2,000 crore, or more than half its current turnover. Tata Chemicals’ fertilizers business contributes Rs 2,325 crore or 58% of consolidated sales.

These companies will figure in the list in the coming years. While acquisitions spark disparity, diversification is another reason. Zee Telefilms operates its cable distribution and DTH business through subsidiaries. India Infoline and Indiabulls have subsidiaries for different parts of their business. Thus, Indiabulls’ consolidated sales is thrice than the standalone figure, while India Infoline’s is higher by over 4 times.

If consolidation has an impact on revenues, it does so on profits too. For example, Tata Tea’s consolidated sales are higher by 218%, net profit is higher by only 60%. In the case of Godrej Industries, consolidated profit is actually lower than the standalone sales. In such cases, reasons are usually due to one of the subsidiaries incurring a loss or a decline in profits. At times, it is also due to inherently low profitability of the business of a subsidiary.

For investors, consolidated financials becomes much more critical compared to standalone performance. Getting a correct picture as far as sales and profits are concerned is crucial.

More so in the case of profits, because while revenues will usually be higher on a consolidated basis, the net profit figure provides a check on health of the overall entity. Where subsidiaries are not doing well, or are less profitable than the parent, it can affect overall profitability, which in turn could impact valuation too.