Q&A: Revaluation Reserve, Meeting Management etc.

Modified on July 5, 2018

The current article in this series provides responses related to:

  • Revaluation reserves and its impact on taxes & valuation
  • Meeting with managements & share warrants
  • Capitalization of investments in wholly owned subsidiaries
  • Usage of last 10 years of financial data for analysis of companies

 

Query

Read: Analysis: Indo Count Industries Limited

Hi Vijay,

Thank you for sharing your knowledge and made my day in knowledge accumulation. The notes on Revaluation Reserves is very interesting. Please clarify, does the company also considers the same methodology in calculating net depreciation (after revaluation) for computation of corporate tax. If they do, what’s the advantage as there will be more tax outgo in initial years?

Please correct me if I miss anything.

Thank you.

Please also suggest me some company Annual Reports you find it more interesting and knowledgeable.

Author’s Response:

Hi,

Thanks for writing to me! I am happy that you found the article useful.

The company has been showing lesser tax in cash flow statement than the tax expense in profit & loss statement. Even though the company has shown net tax paid (adjusting for refunds, if any), still, the difference of the tax between P&L and CF statement is significant. Looking at the amount of difference in tax between two statements for FY2016 (₹73 cr), it looks highly likely that there would be many other factors other than the treatment of revaluation reserve, which has led to this difference.

Read: Understanding the Annual Report of a Company

One reason might be that the revaluation reserve, which is adjusted from depreciation in P&L might not be adjusted in IT return filing, which can be one of the reasons leading to the higher tax payout in P&L. It needs to be confirmed by any tax consultant or from the company.

The higher tax payout as per P&L might not be a very undesirable thing for promoters as even after payment of 33% tax on it, the balance 67% gets reflected in PAT, which in turn increases the EPS and thereby increases the share price, which in majority of cases is based on a P/E ratio. Therefore, as the EPS increases, the market sentiment towards the stock changes and this, in turn, expands the P/E ratio as well, which in turn creates wealth.

A similar case was seen in Emami Limited. You may read its annual report as well as the analysis of Emami Limited present on drvijaymalik.com

Read Analysis: Emami Limited (Emami, Himani and Zandu brands)

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Query

Hi,

Two questions:

  1. How Important is meeting the management as companies typically do not disclose all the details in annual reports and most of the information is not available online regarding the company. What is your approach regarding this?
  2. Since reading the Indo count analysis – I had a different thought, given that management has increased stake in the company, definitely, they expect stocks to give them a better return. Wouldn’t it be in fact be likely for us to invest some portion and track the progress? As we can see in the case of Indo count itself, it has a good return. I am sure management would not risk their equity valuation going down.

What would be your take on this?

Author’s Response:

Hi,

Thanks for writing to me!

1) I do not believe that meeting the management is necessary for making an investment decision. On the contrary, meeting the management might introduce biases in the investor’s analysis. I believe that the major stress should be given on analysis of publically available information about the company, management’s decisions and their outcomes to create an opinion about the competence and shareholder friendliness of the management.

An investor may attend analyst conference calls or meet investor relations/company management to understand the business of the company, however, one should not get influenced and misinterpret the management vision as a sign of competence.

The investor should have her own independent opinion about the management quality based on the data evidence.

Read: Why Management Assessment is the Most Critical Factor in Stock Investing?

2) The interpretation of the events like warrants allotment & their usage for personal benefits is dependent on the investor. A market is a place where different people interpret same information differently and then take opposite sides of the trade (buy & sell).

I believe that an investor should choose an investing approach, which she feels comfortable about. In case, an investor believes that the warrants subscription by the promoters is a sign that share price is going to rise, then she may take an appropriate investing decision.

On the contrary, if an investor believes that such a step is like taking advantage of minority shareholders, which most of the times, cannot influence such decisions, then she may refrain from investing in such stocks.

Read: Choosing the Stock Picking Approach Suitable to You

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Query

Hi Vijay,

What are your views on capitalizing the WOS (Wholly Owned Subsidiaries) by Quick Heal Technologies Limited?

Author’s Response:

Hi,

Thanks for writing to me!

Looking at the disclosure, it seems that the company has made investments in its subsidiaries by subscribing to shares of the subsidiaries. This is normal practice and such investments are reflected in the non-current investments section of the balance sheet under equity investments.

On the face of it, it seems like a normal business transaction. The details of the treatment of the same in the FY2017 annual report might throw some more light on the transaction.

Read: Understanding the Annual Report of a Company

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Query

Hello Sir,

As I know your analytical approaches that we should watch at least past 10 years track record of the company, but sir, if we take back 10 years back then I think the script which able to become multibagger already became multibagger I mean already went up so much , how are u left this sir, please explain. thanks doc

Author’s Response:

Hi,

Thanks for writing to me!

There are different investors in the market, who specialize in investing in companies at different stages of their life cycle.

There are some investors who believe in investing in newly formed business: like seed funding, angel investors, venture capitalists.

There are other investors, which invest in businesses that have seen the light of the day and have a history of operations of a few years like private equity funds.

Then, there are investors who invest only in large established companies and prefer dividends and safety of capital.

It is, therefore, advised that an investor should find out her own preferred area of investing and search for companies accordingly.

In case, an investor believes that a company with 10 years of good performance would have already become a multibagger, then she should focus on companies, which have a shorter period of good performance.

Read: Choosing the Stock Picking Approach Suitable to You

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Dr. Vijay Malik

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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