4.

Corporate analysis

4.1 Annual Report

Previous | Next Annual report is a document, every listed companies should present annual report in AGM (Annual General Meeting) every year as per SEBI (Security Exchange Board of India) guidelines. It is the duty of the management of the company to present its view on the company's previous year's performance and its future outlook to its shareholders. After all, the shareholders have funded the management's long-term objective. Through the annual report, the management conveys its views on the economy, on the sector that it represents the performance relative to the industry and the future growth prospects. Every shareholder is supposed to receive a copy of the annual report. Even if one is not a shareholder of a company, the latest annual reports, quarterly statements and other information filed by a company are available at www.sebiedifar.nic.in. Investor can make an assessment of the company's performance and strengths by comparing the following.

Current performance with the past performance. The performance of the company with the performance of competitors in the same industry. The performance of the company with the performance of companies in different industries.

Content of annual report

Each annual report contains reports and financial statements. The important reports are Chairman's speech, Director's report and Auditor's report. Balance sheet, Profit & Loss statement and Cash flow statement are financial statements.

Chairman's speech: The Chairman talks about the general direction of the
company and the industry, some times the economy. He usually makes his speech at the company's annual general meeting (AGM), which is often published as an advertisement in newspapers and magazines. The Chairman's speech of 73rd Annual General Meeting of the Associated Cement Companies (ACC) Limited is provided here for your reference.

Director's report: Like the chairman's speech, the directors' report is not legally
necessary. Directors report usually have justifications for a bad performance and

how the company plans to avoid this in future, as well as pats on the back for good results. Results: The performance of the company in the relevant year. Here, the directors are meant to read into the performance and address their concerns. Instead, many companies simply rehash elements of the profit-and-loss statement and the balance sheet without going into the merits of each item. Dividend: Dividend announcements are also part of the directors' report. Companies are declaring dividend on two ways. These are per share basis and percentage basis. Capacity utilisation: Although this is relevant only to manufacturing companies, it deserves a closer look. Investors have to find the reasons for increases or decreases in capacity utilisation. Segmental reporting: Here's where to look for the performance of the company's individual divisions. This is important because one segment may be dragging down the company's overall performance. It's also a must-see in evaluating any management move to hive off divisions to a separate company. Subsidiary companies: Details about the performance of the subsidiary companies.

Auditor's report: In most cases the auditor's report states that the profit and
loss account and balance sheet give a true and fair view. But it can also tell you if the management is up to any unacceptable or unethical accounting practices. The auditor's report also tells you if there has been a change in accounting policies, which make comparisons with prior performance less meaningful.

Financial summary: This includes the company's long-term past performance.

Again, while this is not compulsory, many companies have started revealing this. That a company is ready to give its shareholders this information is a good sign. Here, companies provide two kinds of data. Fundamental data: Most companies give 10-year data. Things covered under this include equity capital, net worth, sales, earnings per share (EPS), dividend, and book value per share. But some companies give data for fewer years. Technical data: Some companies even give share price data for the past year in the form of graph as well as high and low prices in BSE and NSE. It also gave the price range of its listed GDRs (converted to Indian rupee for comparison).

Balance sheet: The balance sheet is a statement of the company's financial

position at a specific date, which is normally the last day of the company's accounting year. It summarises the position of the assets and the liabilities of the

company as at that date. 'Assets' refer to what the company owns and various debts owing to it. 'Liabilities' refer to what the company owes to its shareholders and its creditors. Balance sheet is explained in chapter 4.2.

Profit & Loss statement: It's the first thing investors look at, and it certainly has
the most immediate impact on the stock price. The profit and loss (P&L) statement gives vital information on the operations, profitability and growth of the company. Quarterly and half-yearly results are abridged forms of the P&L statement. It summarises the financial year's operations of a business in the bottom line, which after accounting for every expenses could be either a profit or a loss. Profit and loss statement is explained in chapter 4.3.

Cash flow statement: Companies need to deal with various entities during the
course of their business, which may result in financial transactions. But, to do so, the company needs cash. Hence, it is essential for companies to improve their respective cash generating abilities. Better management of these cash inflows and outflows and its respective short and long-term obligations translate into an impressive cash flow statement. Cash flow statement is explained in chapter 4.4.

Miscellaneous information: Companies can also provide a host of other

information that can influence your investment decision. The only problem is that all of them do not provide this, making comparisons difficult. Number of employees: This helps you assess whether a company is an efficient manager of manpower as indicated by falling employee costs per unit of sales. Shareholding pattern: Annual report gives a detailed break-up of share holding pattern between individuals, corporate, Foreign Institutional Investors (FIIs), government and government-sponsored institutions, and the management. Risk management: Risk management is the another area on which most annual reports draw a blank. Each company has to give the perceived risks the company is facing and how the management plans to tackle them. Market information: Several other forms of information can also interest shareholders. These include stock exchange information such as book closure date, record date for dividend, price performance of shares listed outside India (like GDR and ADS). Annexure to the directors' report: Particularly the one that tells you the salaries your executives are being paid. Basically, it helps you decide whether the management at the top needs a change or is giving you value for money.

Diagnosing annual report

The investors should go through the annual report to understand different aspects like target vs achievement, consistency factor, peer comparison and auditor comments. Each one is explained below. Target Vs achievement: One factor that could enable investors to understand the management of the company is to try and match what the management expected at the start of the year and whether it materialized. If a company expected its revenues to grow by 40% in a year and landed up with a 20% growth at the end of the year, it is important to understand what is the reason for the same? Consistency factor: It is not only important to look at what the management is saying in one year but over a period of 2 to 3 years in the past. More than anything else, for long-term investors, it is pertinent to have a confidence in the management before investing in that stock. A two to three year reading of the management statement will enable investor to firm a view on whether the management is directing the company towards its long-term vision and how. Peer comparison: If you are planning to invest/stay invested in say, ICICI Bank and you have got the annual report, it will also be useful to understand what State Bank of India (the competitor) is saying about industry performance and future prospects. Auditor comments: It is important to read the auditors report of the company and understand whether auditors have qualified the financial statements. By qualified, we mean whether the auditors found the information disclosed by the company adequate to prepare the accounts and whether the accounting policies are appropriate. There are companies wherein the auditors have failed to qualify the financial statement. So investor has to be sure that the financial statements reflect the true picture. If an investor makes an effort to understand these aspects, it is possible to arrive a overall view of the company's position in that industry and the management's ability to steer the company through ups and downs. Finally the management's interest in shareholders return is reflected in the annual report.

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