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Monday, October 29, 2012

Don't judge a company by gloss of its annual report

Its that time of the year where annual reports have been released for FY 2011-12(even the laggards like the R-ADAG group etc have done so). Hence, many of you must be reading them time and again. For fundamental/value investors, a recommended step is to start off with the publicly available financials(i.e annual report/10K/20-F). The better quality information/presentation of that document, the likelier the investor is to read it. However, merely because the annual report is jazzy/well presented does not mean the company is good. For instance, Satyam Computers won the ICAI award for best financial reporting(so ironic!) during the years the scam was one. I could write an entire book on examples of glossy misleading annual report, but I leave that for a later date, and instead focus on this post. What investors should keep an eye out however, is the involvement of annual report consultants/PR agencies in designing the annual report. Now, the very fact of involvement indicates a management obsessed enough with their share price/external reporting so as to engage an external agency for the same. One may think that as long as the information is well presented, then why bother about WHO is responsible for it? The reason is one can understand that whatever the management says, it is concerned about investor relations/stock price, and at a higher risk of earnings management/taking decisions keeping the stock price in mind. Also, one should not falsely attribute financial acumen to the CFO/in-house staff-they do have acumen to outsource it, but the business model understanding/presentation etc which may otherwise imply a well trained finance/strategy team, may just be due to that consultant, with the operational team not really looking into it.

Naturally, no company flaunts its association with their annual report consultants, but any consultant worth its salt, usually puts its name at the last page. For instance, see how the Shree Renuka Sugars annual report last page contains the company name/logo and in fine print and written upside down, the consultant's name!  Also, one can google for 'Concept and Design' or 'A...product' to identify these, but last page suffices.

A few agency names I've come across while reading annual reports are(with names of company in bracket)
  1. Wyatt Solutions(www.wyatt.co.in)-Shree Renuka Sugars
  2. Trisys(www.trisyscom.com)-Greenply, Reliance, BPL, Saregama India Ltd and VSNL
  3. Numero Uno(http://www.numerouno-india.com/)-Persistent Systems-this incidentally is a company which consistently wins ICAI's awards for best presented financials.