F&O Update: Big overseas buys dragged down profit last fiscal

The standalone business and revenue support from wholly owned subsidiaries having similar product lines rescued India Inc from posting sharp declines in profit in the year ended March 2009, when big-size overseas acquisitions began to bleed profusely.

A comparative analysis of standalone and consolidated results of 426 listed companies show net profit from standalone business declined 9.8 per cent, compared to a 15.6 per cent decline in consolidated earnings.

This higher decline in consolidated earnings is attributed to a 47.3 per cent fall in profit of wholly owned subsidiaries operating here and losses from big-bang overseas acquisitions by Tata Motors, Hindalco and Dr Reddy’s Laboratories. Of the sample taken for this study, the 158 wholly owned subsidiaries, including overseas acquisitions of parent companies, reported higher net loss at Rs 14,321 crore in 2008-09, compared to a net loss of Rs 4,058 crore recorded by 139 companies in 2007-08.

The local business showed good resilience, with 139 standalone companies posting a net loss of Rs 4,058 crore compared to a net loss of Rs 2,080 crore made by 29 companies in 2007-08. With most parent companies maintaining the profitability from standalone business, their share of net profit in consolidated accounts increased to 90.5 per cent in 2008-09 from 84.8 per cent in 2007-08.

However, subsidiaries and new acquisitions aided revenue growth, with net sales other than standalone business rising at a higher pace of 33.8 per cent, compared to a 18.2 per cent rise in net sales from standalone business. Tata Motors added Rs 32,271 crore from Jaguar-Land Rover and Hindalco added Rs 7,000 crore from Novelis.
  CORPORATE PERFORMANCE: CONSOLIDATED VS STANDALONE
 
 Growth rate in 2008-09(%)
Consolidated Standalone Subsidiaries
Net sales 21.88 18.20 33.80
Total expenditure 27.04 22.10 43.33
Operating profit -2.40 -0.20 -9.38
Interest 49.86 74.60 8.22
Net profit -15.50 -9.80 -47.20
Operating margins % 15.35 16.13 13.10

The big-bang overseas acquisitions by Tata Motors, Hindalco and Dr Reddy’s Laboratories to grow inorganically came at the wrong time, together puting a hole of Rs 6,730 crore into their consolidated accounts. Aditya Birla Nuvo suffered a loss of Rs 568 crore in the garments, life insurance and BPO ventures. Punj Lloyd made a net loss of Rs 546 crore due to cost overrun and performance guarantee claims by the client on the SABIC project. Tata Motors recorded a net loss of Rs 3,500 crore from its subsidiaries and acquisitions of Jaguar-Land Rover (JLR). JLR, which was acquired last year, recorded an operating loss of Rs 1,777 crore. The interest cost for subsidiaries rose by Rs 797 crore, while depreciation increased by Rs 980 crore in absolute terms. Tata Steel recorded a loss of Rs 250 crore from subsidiaries, as the company provided Rs 4,094 crore for impairment of assets and restructuring of Tata Steel Europe.

Hindalco booked non-cash unrealised derivative loss of around Rs 2,381 crore for 2008-09. The derivatives were used to hedge exposures to aluminum, primarily related to customer fixed-price contracts, other commodities and currency. The derivatives’ loss thus put a Rs 1,745 crore hole into the company’s consolidated accounts. Dr Reddy's Laboratories reported huge losses of Rs 1,463 crore due to extraordinary expenses and a goodwill write-off of Rs 1,376.6 crore in its German subsidiary, Betapharm. The profit making Indian subsidiaries stood by their parents to show robust show in consolidated accounts. Reliance Communication, DLF, Sterlite Industries, Tata Tea and United Phosphorus get more than 60 per cent of profit through subsidiaries’ accounts. Jindal Steel & Power showed a 140 per cent rise in consolidated net profit, largely due to subsidiary Jindal Power, which contributed Rs 1,582 crore profit.