How management affects financial reporting-the case of Tata Power and Adani Power

As a veteran reader of annual reports would know, accounts (even audited ones) are subject to several adjustments/interpretations. This is because on the same facts, different people can take the same view. Auditors merely ensure that the management interpretation does not cross canons of incorrectness.

Facts in brief
Adani and Tata had bidded for coal based power plants respectively with capacities tied up under power purchase agreements (“PPAs”) for twenty five years with substantially fixed tariffs. The PPAs for these plants were made based on the commitments / understanding that domestic coal linkages would be available to meet the fuel requirements. However, adequate coal linkages were not made available due to various reasons not attributable to the respective subsidiary companies. In response to pleas for compensating the losses due to above, the respective state electricity regulators had granted part relief in form of interim compensatory tariffs, however this matter was litigated and has not reached finality as of now.

Stance taken by Adani Power-Recognize revenue
As per the assessment by the Management, it would not be unreasonable to expect ultimate collection of an equivalent amount as the CT towards relief due to impact of Force Majeure events which is predicated on the legal advice that the CERC may be guided by the principles of restitution / mitigation of the impact of the promulgation of the Indonesian Regulations and non-availability of short supply in determining the extent of impact of Force Majeure events. In view of the aforesaid, the Company has continued to recognise total revenue of H3,374.66 Crores on account of the CT upto 31st March, 2016 (including H674.19 Crores for the year ended 31st March, 2016 and H857.35 Crores for the year ended 31st March, 2015) based on the formula and methodology prescribed by CERC vide its order dated 21st February, 2014 considering the same as the most appropriate basis for measuring impact of the Force Majeure

Stance Taken by Tata Power-No revenue recognition-Director's report for FY 2015
CGPL has been legally advised that it has a good arguable case. However, in view of the pending appeal as mentioned above and considering that the amounts associated are significant, CGPL has not recognised revenue amounting to ` 757.89 crore for the year ended 31st March, 2015 and ` 1,019.06 crore for the period from 1st April, 2012 to 31st March, 2014. 
Above stance not expected to change as the company has not recorded this income in the audited accounts for the year ended 31 Mar 2016.


Takeaway
Both the below companies are audited by the same Big 4 auditor Deloitte. Yet on very similar facts and the identical rulings, the companies took a very different view to revenue recognition, and the . Tata Power conservatively chose not to record revenue considering the high stakes involved, while Adani Power decided to record it basis management assessment. Accounting risk is therefore higher in the latter, from an investor perspective. While the statutory auditor has qualified the audit report in Adani possibly for this reason citing it as an internal control weakness, this is more a process rebuke than calling it wrong accounting
According to the information and explanations given to us and based on our audit, a material weakness has been identified as at 31st March, 2016 in the Company relating to inadequate internal financial controls over financial reporting in respect of revenue recognition on account of additional tariff claims pending determination by regulator, and final outcome of the litigations.

Vikas WSP-why it deserves its P/E multiple of 1 despite great results

Whenever shale gas discoveries are announced in USA/EU, guar gum prices shoot up(since it is used as a fracking material in shale gas extraction), and then Vikas WSP gets into the news. Punters shoot up the stock price hoping to benefit from the hike in realizations, or from the appreciating rupee, considering that most of the company's sales are from exports. However, those who forget the past are bound to commit mistakes in the future, nowhere is this more relevant than Vikas WSP. Let us see the (in)glorious highlights of this company

1. FY 2012-13 annual report not available on www.bseindia.com despite AGM notice being filed. I had to download it from http://www.vikaswspltd.in/annual-reports/2012-13.pdf and even this is NOT a complete annual report-it just has auditor's report and financial statements! An elementary omission(or maybe not?)
2. Auditor remuneration dropped 40% y-o-y without a reduction in activities/scale. Commendable if this is cost cutting, but then what does it hold for audit quality? Incidently, the old firm a Big4 auditor BSR & Co(an Indian member of KPMG) was dropped from 2011-12 onwards, after its emphasis of matter in the audit report.
3. Inconsistent information. For example. domestic sales of Rs 730 Crs as disclosed in segment disclosure< domestic sales of Rs 558 Crs as disclosed in revenue note.    
4.  Working Capital position seems precarious with advance to suppliers increasing 25x from Rs 25crores to Rs 563 Crs. While this is backed by customer advances(Rs 170crs in Fy13 vs Rs 120crs in FY12), this is not an encouraging sign.
5. Lolmax corporate governance/basic lack of knowledge of secretarial procedures:- While appointing a relative as a director, the explanation was Ms. Kamini Jindal has been appointed by the Board as  an Additional Director w.e.f. 16.07.2012. Ms. Kamini Jindal is a person with excellent academic background and possesses good educational qualifications. She is
   Bachelor of Arts and Master of Philosophy. She is the youngest in the Board of the company. Considering and seeking attention and interest of youth, your Directors recommend appointment of Ms. Kamini Jindal as Director of the Company(emphasis added). For god's sake, why pretend to empower youth? And why omit the (obvious) fact of other family directors being interested in the matter?
6. Punter driven stock: For example http://mmb.moneycontrol.com/stock-message-forum/vikaswsp/comments/1501
7. Possible value trap-low Pitrovski score http://www.equitymaster.com/detail.asp?date=06/12/2013&story=1&title=A-sure-shot-method-of-avoiding-value-traps
8. Probable short term loss due to purchase commitments:- Vikas WSP currently has 60,000 tonnes of guar polymer production capacity which is running full. An additional 30,000 tonnes of capacity is expected to commence commercial production by the end of the current financial year. For 100% capacity utilization, the company requires 70 lakh bags of guar seed which has already been insured. Probably this is what the supplier advance is towards    Against the assured price of Rs 50 a kg, guar seed price has now fallen below Rs 42 a kg http://smartinvestor.in/common/srchoutdet-190588-car-Guar_seed_price_fall_pushes_Vikas_WSP_in_tight_spot.html

Bottomline, if you are fine with a great performance albeit speculative investors and err.management with political aspirations, then go ahead. Otherwise, in this bear market, such stocks are avoidable for me.