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Wednesday, February 11, 2009

Severe de-rating may just be in the offing for these companies

These are some of the companies which may have done some sort of a "gafla" kinda stuff.After satyam"s lesson one should take utmost care in evaluating company valuations and its inherent aspects.Below mentioned are some of the big names which may well take you for a horrendous ride in near future.Stay safe folks.

1.Anantraj Industries:-A North Indian commercial developer, transferred part of one of its projects (0.52mn sf out of 0.75mn sf in a mall in Delhi ) to itswholly owned subsidiary and consequently showed equivalent revenues in its standalone results (93% of 1QFY09 revenues).As against standalone revenues of Rs1.72bn and net profit of Rs1.52bn, consolidated revenues are Rs104.8m and net profit of Rs77.6m. Out of the consolidated revenue of Rs104.8m, Rs68.05m (65%) is from the ceramics business.

2.DLF:-DLFs non-DAL revenues declined 44% QoQ to Rs22.5bn and around 40% of sales have been to DAL, a group entity. 44% of debtors are DAL and of total debtors, the share of DAL has increased during the quarter with DAL receivables increasing by Rs14.5bn QoQ.During 1QFY09, sales to DAL were Rs15.6bn, which is marginally higher thanthe increase in receivables from DAL. We would like to add that DLFs high level of transactions with group company DAL and high level of receivables has been apoint of debate since it went public.

3.Dr Reddys Labs:-Dr. Reddy`s has adjusted mark to market losses on outstanding US$250m of hedges in balance sheet, while P&L reflects forex gains realised.Thecompany also reclassified its contract manufacturing business (CPS) revenues into API and Formulations, which makes it difficult to analyse its segmental performance.

4.Himatsingka Siede:-Himatsingka in one derivative contract had mark to market losses of US$41.5m as on March 24, 2008 and no provision has been made since thecompany has filed a case in court against the concerned bank. In case of another derivative contract, mark to market loss of Rs1.58bn as on 30th June has not been provided for since the derivative contract is still open.

5.HCL Tech:-HCL Tech has normally had a very large hedge position compared to itsrevenue base. While the rupee was appreciating, the company reaped benefitsof this and reported US$79.2m in Forex gains in FY07. The company has always maintained that it would prefer to lock-in a constant INR/US$ rate through hedging rather thansuffer from the currency volatility.However, the company unwound US$540m of hedges in Jun-08 and booked large Forex losses. We find this change in Forex policy surprising and the company has likely brought forward its potential FY09 FX losses to 4QFY08 through this change in policy.

6.JP Associates:-Jaiprakash Associates did not provide for FX losses on outstanding FCCBs of US$400m through its P&L and plans to provide for the FX losses/ gains atthe end of the year.

7.Jet Airways:-Jet Airways changed its depreciation policy from WDV to SLM, and thereby wrote back Rs9.2bn into its P&L, which helped the company to report profitsduring the quarter. It also helped Jet to report higher net worth, which will help in keeping reported gearing low. This is a one-time exercise. Jet also capitalised Forex loss of Rs6.2bn on Forex debt and adjusted it against carrying value of fixed assets.

8.Prajay Engineers Syndicate:-Hyderabad based developer, reported a loss in its fourth quarter results against expectations of a profit. The company "lost" records for a project worth 40% of its annual revenues at the site office.The company in its press release said - "After the year end, basic records relating to sale agreements / revenue and construction expenses of one of the Projects of property development were lost at the site office, Vishakhapatnam. The auditors in their report have stated that they were not able to verify the books and records relating to income of Rs1437.71m and relevant construction cost of Rs752.654m. Management is making all efforts to locate/ retrieve the lost records."

9. Ranbaxy:-Pharma major has mark to market losses of Rs9.09bn on forex derivativecontracts, which have not been provided for because the company believes "the gain on fair valuation of underlying transactions against which the derivative transactions were undertaken amount to Rs10.3bn." This argument is against the principles of conservative accounting wherein mark to market losses are being offset against assumed future profits.

10. Reliance Communications:-Telecom Company has adjusted short term quarterly fluctuations in foreign exchange rates related to liabilities and borrowings to the carrying cost of fixed assets. The company adjusted Rs1.09bn of realized and Rs9.55bn of unrealized Forex losses in the above manner.In addition, the company has not recognised Rs3.99bn of translation losses on FCCBs, since the FCCBs can potentially get converted, although the FCCBs are out of money. Adjusted for all the above, the company would have virtually no profits in 1QFY09.

I can be reached at:arunanalyst@rediffmail.

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