The public sector capital goods bellwether company Bharat Heavy
Electricals Limited (BHEL), reported its earnings for the fourth quarter and
financial year ended on 31 March 2020. The numbers were poor and quite off the
mark from what the equity research analysts had forecasted. For the quarter
4QFY20, the company reported total revenue of Rs50.5bn (vs Rs103.7 yoy); and
for the full year FY20 the company reported revenue of Rs210.9bn (vs Rs304.41bn
yoy). The revenue for the quarter was down ~51% yoy; and for the full year it
was down ~29% yoy.
The research updates on BHEL by various brokerages raised three
points in mind, which I find are critical for investors (especially the smaller
one like me) to assimilate. I would like to share these points with the readers
as follows:
(a) In the notes to
account, BHEL reported that in 9 days of lockdown (23rd March to 31 March)
Rs40bn of revenue was lost. This is appx 39% of the 4QFY19 revenue and 13% of
the full year FY19 revenue.
A large number of companies which have declared results so far
have reported similar loss of revenue. (Please note I am talking about revenue
here not profit). To me this sounds disproportionate for most of the companies.
I have spoken some senior chartered accountants to understand
this phenomenon. Most of them informed that it is a regular practice amongst
Indian corporates to manipulate the revenue of the month of March. In some
cases the revenue of March month is shifted to next financial year (April); and
in the other cases the revenue earned in April is accounted for in the month of
March. In the last week of the year, some auto and FMCG companies dump
inventory to their dealers to book revenue which is not actually earned.
Conversely, in cases where the companies want to show lower revenue and/or
profit, they book "sales returns" in the month of March and
"resale" in the subsequent months.
In case of project oriented companies (real estate, project
construction etc), which follows percentage of completion method the practice
of manipulating the revenue for month of March could be even more widespread.
Please note that lower revenue booked in the Month of March by
most companies is certainly not due to accounting issues, for they get full 3
months to complete the accounts for the financial year and month of March.
(b) The consensus estimates
of various equity analysts for BHEL 4QFY20 revenue was Rs87bn. It reported
revenue of Rs50.5bn instead. There have been wide divergences in the analysts'
estimates and actual reported number, even when adjusted for no recurring and
exceptional items. In past five year, I have noticed, the one year forward
Nifty EPS estimates consistently diverging 12-18% from the actual numbers.
This must raise serious questions about the efficacy and utility
of the forecasting portion of the equity research function. There is enough
evidence that the forecasting by research analysts has been off the mark; still
a large number of non institutional investors place material reliance of such
forecasts. SEBI must consider making it mandatory for the research analysts to adequately
explain the divergence in their forecasts and the actual adjusted numbers; else
the analysts may be restrained from making forecasts.
(c) BHEL is a navratna
company. For past one decade it's been racing fast downhill to join the junk
yard with MTNL, Air India et al. Quarter after quarter its balance sheet is
deteriorating; and revenue & profit growth is declining. No one in the
government however appears concerned. Its hard to fathom, why BHEL was not
privatized a decade ago, and why it is not being done even today!
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