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Suzlon Earnings Fall 92% but reported as an actual gain

Economic Times reports:

Suzlon Energy Ltd, the world’s No 4 wind turbine maker, said on Thursday its consolidated quarterly net profit rose almost doubled, boosted by rising orders, despite a foreign exchange loss.

Suzlon said consolidated net profit in the April-June quarter rose to 393.8 billion rupees ($9 million), compared to 200 million rupees reported a year ago. The company said its June quarter net profit was hurt by a 1.5 billion rupee forex loss

(Note: 393.8 billion rupees is not equal to $9 million.)

Now look at the NSE pages for Suzlon results, for Q1 2008-09 versus Q1 2007-08.

The EPS for this year is Rs. 0.01 versus Rs. 0.13 for last year. (0.65 is displayed, but you have to adjust that for a 1:5 split)

That is a DROP of 92%, not the “doubling” of net profit as announced by this article. In fact, Suzlon itself has announced to the exchange:

Suzlon Energy Limited has informed the Exchange regarding the consolidated Results for the quarter ended on 30-JUN-2008 as follows: Net Sales of Rs. 276046 lacs for quarter ending on 30-JUN-2008 against Rs. 194463 lacs for the quarter ending on 30-JUN-2007. Net Profit / (Loss) of Rs. 135 lacs for the quarter ending on 30-JUN-2008 against Rs. 1889 lacs for the quarter ending on 30-JUN-2007.

Given that, the article is plain wrong – and it seems to me that in the hurry to get the article out, the author failed to independently verify the results.

You might say that before “minority interest” the results show a 39 cr. profit, which is double, no?

I say how can you disregard minority interest? The funda: Take a company (call it “HugeCo”) that own 51% stake in another company (call it “SmallCo”) , and someone else (“Chotu”) owns 49%. HugeCo has its own standalone business, but in consolidated results must include SmallCo’s results too.

Now SmallCo makes Rs. 500 in sales, and Rs. 100 in net profit. In “Consolidated” results, HugeCo will add Rs. 500 to its own sales and the FULL Rs. 100 to its profit. It will also add SmallCos other details (Expenses, EBIDTA, etc.) to it’s p&L statements.

But obviously the entire Rs. 100 is not HugeCos, no? Rs. 49 is actually Chotu’s part of the deal – so Rs. 49 is subtracted from HugeCos consolidated net profit as “Minority Interest”.

So Suzlon has only made Rs. 1.35 crores, an EPS of 1 paise.

Against 13 paise last year. EPS has thus dropped 92%.
(Even Moneycontrol gets it wrong. Bloomberg is the only correct answer, it seems.)

  • Anonymous says:

    >how did they calculated their last year (Q1 2007-08) net profit. if last year 19 crs includes minority interest as well then this year 39 crs including minority interest is really double the profit

    (actually we should compare “consolidated net profit excluding x% of minority shareholding smallco profit” for last year vs same this year).

    all this financial engineering makes things too complex 🙁

  • Deepak Shenoy says:

    >Last year, post minority interest deduction was 18 odd cr. THis year it’s 1.35 cr. Simple – that’s a 92% drop.

    They acquired most of REPower this year, so funda of deducting minority interest would kick in largely this year instead of last.

  • amit says:

    >thanks for this very informative post.

    when a company simply declares “consolidated net profit” is it usually after deduction of minority interest or before deduction? take announcements on bse for example.

  • Deepak Shenoy says:

    >amit: Any company worth its salt will announce cons. net profit AFTER minority interest deduction. Even Suzlon, in declaration to the exhcnage, has annuonced the result after minority interest.

  • cairless says:

    >Nice Analysis.

    Few of my observations:
    1. The figure 393.8 billion is just a typo. It should be million instead. (Note: 393.8 million rupees is equal to $9 million.)

    2. Please see the enclosed excel file detailing the consolidated and standalone results of Suzlon.

    Actually, the company had raised USD 500 million through FCCBs last year. On account of the same, there has been a notional forex loss of Rs 163 Crore. It is only a notional loss provided in line with the accounting standards.
    Adjusting for the same, the EPS of the consolidated entity in Q1 FY09 works out to be 1.1 against 0.13 in the last quarter. Its a growth of 741%. However, if this exceptional item is not adjusted, then as you pointed out, fall in EPS works out to be 93%.

    As a long term investor, I would be happy that the company has recorded a blockbustor growth (if I look at the numbers from the right perspective); and not be too sad about the blip in the reported EPS, which in this case is not a true representation as explained above.


  • Deepak Shenoy says:

    >cairless: I must disagree. They took on forex gains earlier, which wasn’t discounted on EPS, so why should we discount forex losses? They are not one time – they are m2m and therefore should be considered as they are. Ignoring M2M losses happens at ones own peril.

    Now one could be fundamental about it and say Suzlon has a bright future – I don’t deny that, as wind energy has a definitely good future – but that these results are horrendous is a fact.

  • cairless says:

    >I know for sure that this is a notional loss. The accounting standards make it mandatory for companies to provide for this notional forex loss out of prudence. There is no cash outflow on account of this. I am sure. This practice is being followed by a lot of companies that have raised funds through FCCBs.

    How this works:
    Say in April 2005, a company raises Euro 500 million in FCCBs at a contracted rate of 1 Euro= Rs 53. This means that at the time of redemption, say due in 2012, the company will repay the premium along with the redemption premium (aka zero coupon bonds, there are no intermediate coupons) at the rate of 1 Euro= Rs 53).

    However, at the balance sheet date i.e. 31st March 2006, the company needs to provide for the exchange gain/ loss. Say, at 31st Mar 06, the exchange rate is 1 Euro= Rs 60. Then, a forex loss of Rs X has to be provided, where X= 500 *( 60 – 53).

    And it is a notional loss, there is no cash outflow.

  • Deepak Shenoy says:

    >cairless: It’s a loss. It’s not a cash outflow. Every loss need not have a cash outflow. For instance if you write off a bad debt you don’t have a cash outflow ON THE DAY you write it off.

    SImilarly at some point Suzlon generated a cash positive profit when the dollar went down against the rupee. When it went back up, the dollar change resulted in an M2M loss. The loss is in the fact that the debenture they have (which is a liability) needs MORE rupees to pay back now as compared to one qtr earlier. If they choose to close the loan right now, they have to pay more rupees than was earlier expected, hence the m2m.

    If the dollar slides against the rupee then they will get an M2M profit. I wont see many people arguing against the M2m profit.

    If the Rate of the coupon is fixed (say Rs. 53 per euro) then there is no question of M2M loss. The rate was left open, and Mr. Suzlon did not take a currency hedge, so they have a currency m2m loss. Big deal? Yes of course – there is a potential cash loss if the FCCB is to be repaid at the current date.

    Notional or not, it’s a loss. It impacts EPS. It is the true picture of a company. I don’t deny anyone a forex gain, but I will not allow them to say oh only notional loss. Such losses can kill a company in more ways than you can imagine.

    You have the right to a different view, but to me this means suzlon has 1 paise EPS. Nothing else.

  • cairless says:

    >i’m just trying to putmyo verp riced MBA education to some use

  • Deepak Shenoy says:

    >cairless: Lol! That comment was hilarious – sorry for sounding acerbic, you see I don’t have the advantage of an MBA so I sometimes have this black-and-white notion versus various shades of grey….