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Saturday, August 13, 2011

Suzlon Jul-11 Rs 216Cr Hansen sale loss-bloodbath or AS-4?

Suzlon manufactures and sells wind turbine generators. Since 2008, it faced quality issues(resulting in warranty payouts & lost sales), higher interest costs(due to ill timed all-cash acquisitions at steep valuations) etc. Its troubles could fill a book, but suffice to say that it has struggled on all fronts till 2008, and was in threat of default on FCCBs till in Jun-11, it lowered the conversion price to Rs 54/share(close to the then prevailing market price). But the topic of this article is to point out a common tactic used by companies to window dress profits. I will present the facts below, it is for you to draw your conclusions. All information is based on the press release of FY2010-11 numbers(http://www.suzlon.com/images/investor_quaterly_result/50_Results_Audited_FY11.pdf) In investing/accounting parlance, a blood bath is booking extra/unwarranted expenses in a period where you can blame the loss on something/somebody else, so that you can show profits in subsequent years. This is generally done in M&As(where reserves are built for 'integration costs') or as happened with a leading Indian bank recently(where a new MD implemented conservative accounting when he took charge in 4Q'2011).
  1. AS-4(Contingencies and Events occuring after Balance sheet date) states that if events happening between balance sheet date and finalization of accounts, were indicative of conditions prevailing as on balance sheet date, then that effect should be given in accounts
  2. On 25 Jul 2011, Suzlon signed the agreement to dispose off 26% stake in Hansen, at a loss of Rs 216 crores. This showed that the book value was overstated by Rs 206 crores, as at disposal date.
  3. If the deal was being negotiated as on 31st Mar 2011 OR if the 26% Hansen stake was showing indications of impairment('over valuation'), then adjusting this loss in FY2010-11 was justified. 
  4. But if the deal was initiated and closed after Mar-11, then this loss should have been booked in the period it happened viz FY 2011-12 only.  
  5. Suzlon opted to book this loss in FY2010-11, thereby boosting the consolidated net loss to Rs 1323 crores(an increase of about 20%+ net loss). But the present FY viz 2011-12 was benefited.
  6. The 1Q'12(quarter ending Jun-11) results showed a consolidated net profit of Rs 60Crores, which certainly buoyed the market sentiment, given the general persistent gloom about USA/EU.
In their defence, I should state two things
  1. The deal might actually have been under process as of Mar-11. But then, it seems odd to me that it closed 4 months later, yet was deemed to reflect conditions prevailing as on Mar-11
  2. The auditors may have taken a firm line and mandated the more conservative approach, with which the company happily complied so that they could boost the 1Q'12 profit by not recording that loss then.
Only the company and their auditors would know which version is correct. But from the investor perspective, one should note that Suzlon is not one to opt for conservative accounting. The FY2010-11 audited press release contains quite a few examples where they have disagreed with their auditors(recognize deferred tax assets despite uncertainty) or avoided booking liability they deem contingent(sub judice electricity duty tariff dispute, FCCB redemption premiun). Hence, giving the benefit of doubt is a bit difficult in this case.