January 5, 2017

Q&A: Consolidated vs Standalone Financials, Buyback, Bonus Shares

www.drvijaymalik.com has a section dedicated to answering queries of readers: “Ask Your Queries”. Over time, many readers have asked their queries related to many aspects of stock analysis and sought clarifications about investing. I have responded to these queries as replies to their comments.

“Q&A” series is an attempt to share the queries & their responses, which have featured on “Ask Your Queries” section, with all the readers. The primary aim of this new feature is to share the knowledge with other readers of the website, who might have similar queries.

The current article in this series provides responses related to:
  • Consolidated and standalone financials
  • Premium during buyback of shares
  • Role of current maturity of long-term debt (CMLTD) in total borrowings
  • The impact of new/bonus shares on P/E ratio, EPS etc.
  • Getting information about small/mid cap stocks 

Answers to readers' queries on consolidated vs standalone financials, buyback, new/bonus shares, mid/small cap stocks, debt CMLTD, stock equity value fundamental investing



Query


Hi,

Can you please help me understand the difference between the standalone PAT/PBT/TO etc. with Consolidated?
  1. In case company reports Cons. PAT > Stand PAT - does the parent company owns the entire PAT and also liable for corresponding Capex?
  2. What happens in case subsidiary is also listed - how should the revenue and profits are shared? What number should be used by an investor to understand the health of the business?
  3. In case Cons PAT < Stand PAT or let's say Cons PAT < 0 and Stand PAT > 0 what does this mean for the group company?
  4. Where and how to understand which numbers to take for the analysis?

Looking forward to learning from you on this.

Thanks,


A:


Hi,

Thanks for writing to us!

1) In case company reports Cons. PAT > Stand PAT - does the parent company owns the entire PAT and also liable for corresponding Capex?

The consolidated PAT represents entire standalone PAT (i.e. parent company's PAT) + the PAT of subsidiaries, JVs etc. in the proportion of the shareholding of the parent company in these entities.

2) What happens in case subsidiary is also listed - how should the revenue and profits are shared? What number should be used by an investor to understand the health of the business?

For the parent company from the point of view of consolidation, it does not matter whether the subsidiary is listed or unlisted. In case the subsidiary is listed, it would mean that the share of parent would be less than 100% and the respective portion would be adjusted while arriving at the consolidated PAT.


3) In case Cons PAT < Stand PAT or let's say Cons PAT < 0 and Stand PAT > 0 what does this mean for the group company?

Such situation means that the subsidiaries/JVs as a whole are making losses, which is reducing the consolidated PAT and makes it less than standalone PAT

4) Where and how to understand which numbers to take for the analysis?

We advise that investors should use consolidated financial numbers to assess the complete business picture of any company.


Hope it answers your concerns.

All the best for your investing journey!

Regards

Dr. Vijay Malik


Query


During buyback of shares, what % premium on share price do you consider as much higher. For example Allcargo logistics is also buying back shares @195. At the time of announcement its shares were quoting at 158. It’s 25% premium.

However, in some companies, promoters do not participate in the buyback, whereas in Allcargo they are participating.

So how to determine whether the buyback is good for the minority shareholder. In one case company is paying higher premium whereas in other case promoters are participating.

So up to what premium is ok? And how should we see it when promoters are participating in the buyback (as in the case of Allcargo)?

Regards,


A:


Hi,

Thanks for writing to me!

There is no clear cut level for the justified premium. Usually, the buyback price is kept at a bit premium to the current market price so as to incentivise the shareholders to sell shares to the company. Here, I believe that any premium of 10-15% should be fine.

The cases, where the shareholders should be cautious, are usually the cases where the buyback price is disproportionately high. I remember a case of GTL Ltd in 2006-07 when it came up with buyback offer at ₹300/- while the share price at the time of the announcement of the buyback was about 150-160/-.


You may read more about my thoughts on the promoters submitting their shares in the buyback in the following article:


Most of the times such buybacks where promoters also take part are an alternative to dividend distribution with lower tax impacts.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Dr. Vijay Malik


Query


Current Maturity of Long Term Debt (CMLTD)

Hello Vijay,

I had downloaded your Excel template that is useful for my analysis thank you for that.


I have few things know about your excel template, as per your excel template total debt is referred as borrowing from the data sheet. Borrowing means (long-term borrowing +short term borrowing)? Or anything else I need to add? If it is only long term + short term borrowing then as per balance sheet for 2014 it should be ₹69cr and 2015 it should be ₹49cr but in our template, it is showing ₹100cr and ₹63cr. why is it so? I have referred many company annual reports and I have the same error.

Please clarify

Regards


A:


Hi,

Thanks for writing to me and subscribing to the premium services of drvijaymalik.com!

Total debt includes: 
  1. Long term debt
  2. Short term debt and
  3. Current maturity of long-term debt (CMLTD), which is included in the section "Other current liabilities (OCL)" in the balance sheet. 

An investor would find the amount of CMLTD when she reads the detailed notes/schedules, which provide the breakup of OCL.

Once the investor adds up LTD + STD + CMLTD, then the correct amount of total debt would be arrived at.


Hope it clarifies your queries!

All the best for your investing journey!

Regards

Dr. Vijay Malik


Query


Sir could you please give me some idea on adjusted eps and peg ratio (mainly when new shares are issued either bonus shares or right shares).

Do I need to adjust P/E ratio when new bonus or right shares are issued? If so, then historical eps will always be low since when new shares are issued, past earnings are to be divided by new increase number of shares and this gives the impression that eps is always growing.

And how to calculate peg ratio when new bonus or right shares are issued. G in peg is growth in eps. If there were no new shares, then eps and peg ratio will be easy to get and compare but with new shares, everything is diluted and I am confused what right method for getting correct calculations is.

Thank you very much.


A:


Hi Ramesh,

Thanks for writing to me!

There is no change in either P/E ratio or PEG ratio on the issuance of new shares under bonus shares. Both the share price as well as the EPS changes in the same proportion. For example, if one additional share for one existing share is issued, then both the share price, as well as EPS, will become half. The growth rate of EPS in percentage will remain the same. Therefore, there will be no change in P/E or PEG.


In the case of the rights issue, the issuance of new shares will bring in additional cash, which would lead to an increase in book value and reduction in debt to equity ratio, improved liquidity. Therefore, the equation will not be as simple as it was in the case of bonus shares. The market may increase or decrease the P/E ratio of the stock after the rights issue depending upon the market response.

In order to avoid the confusion related to change in EPS and price per share etc., which results in issuance of new shares, it is advised that investors calculate P/E ratio by the formula (Market Capitalization / Net profit after tax). This formula will simplify the understanding for the investor as the net profit figure does not change upon issuance of new shares.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Dr. Vijay Malik


Query


Hello Dr. Vijay Malik,

First of all, I would like to thank you for creating such useful pool of information and I must say your writings are very encouraging and extremely useful for a retail investor.

I am not sure if this is the right place to post my query but I found it to be relevant place in a way so I am putting it up here. My concern is "How to get reliable information especially on small cap/mid cap stocks"

I read your analysis and Q&A on Zenith Fiber although it is one year old and things might even change in a year time. But the key concern I thought was management not expanding the capacity. I thought I will check on the capacity utilisation levels currently and then see if they can push the existing assets to get more production or they are maxed out and they definitely need to invest more to build up the extra capacity. The annual report (latest available on Moneycontrol) didn't mention anything on the existing capacity and/or future expansion plan.


When I googled this, I found a news item in Business Standard. As per this news, they were going to expand to 50% capacity in 2011. However, in the analysis details, I noticed that the capacity hasn't changed since last 10 years. Now, I couldn’t find any news item confirming that above plans went up for a toss or couldn't be executed for some reason.

It would be great if you can comment on the capacity issue of Zenith Fiber. Also, in general, if you can suggest any other source of reliable information apart from Moneycontrol, screener, and company website to confirm such level of details which can really be crucial for our investing decision?

Thank you so much in advance for your time and your guidance!!!

Best Regards,


A:


Hi Abhishek,

Thanks for your feedback & appreciation! I am happy that you found the articles useful!

I would not be able to go into the specific issue of Zenith's capacity addition. However, let me tell you about the sources that can be used to assess capacity expansion or utilization levels of a company.
  1. Company's Annual reports of the period around the expected capacity addition would describe the progress and status of capacity addition plans. 
  2. Company website along with corporate presentations would mention about the capacity additions
  3. Credit rating reports of the company around the period of capacity addition, would comment about the funding plans of the company, progress of projects as per plan and cost overruns if any.
  4. If none of the above sources provides the investor with the required information, then the investor should contact the company directly by calling/emailing the investor's contact person (usually the company secretary). 

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Dr. Vijay Malik 

P.S:

  • To know about the stocks in my portfolio, their relative composition, cost price, details of all our buy/sell transactions since July 30, 2017 as well as to get updates about any future buy/sell transaction in my portfolio, you may subscribe to the premium service:  Follow My Portfolio with Latest Buy/Sell Transactions Updates (Premium Service)
  • We use a customized stock analysis excel template which is now compatible with screener.in. This customized excel template is now available for download as a premium feature. For further details and download: Click Here
  • You may learn more about our stock analysis approach in the e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
  • You may read more company analyses based on our stock investing approach in the Company Analysis e-book series, which is spread across multiple volumes: Click Here
  • I have used the financial data provided by screener.in and the annual reports of the companies mentioned above while conducting analysis for this article.




DISCLAIMER


Registration Status with SEBI:


I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013

Details of Financial Interest in the Subject Company:



Currently, I do not own stocks of any of the companies discussed above