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May 31, 2012, 02.11 PM IST | Source: Moneycontrol.com

Don't be fooled by earnings, see cash flow: Ican's Singhvi

Fourth quarter corporate earnings may have broadly met market expectations, but Anil Singhvi, chairman of Ican Investment Advisors feels the numbers are a sham.

Santosh Nair

Moneycontrol Bureau

Fourth quarter corporate earnings may have broadly met market expectations, but Anil Singhvi, chairman of Ican Investment Advisors feels the numbers are a sham.

"The quality of earnings was pathetic," says Singhvi, who is also founder of Institutional Investor Advisory Services, a firm that advises large shareholders on corporate governance issues and voting on shareholder resolutions.

"By deferring implementation of AS 11 (Accounting Standard 11), the government has helped corporate balance sheet reparation. So, much of the adverse impact of rupee depreciation is not showing in the P&L (profit & loss) numbers of some of the large companies," says Singhvi.

AS11 would have made it mandatory for corporates to show the losses from rupee depreciation in the profit & loss statement, instead of capitalizing it (or showing it in the balance sheet) as is the current norm.

"If you followed rigorous accounting norms, you could have even seen negative growth in quite a few companies’ earnings," says Singhvi, accusing many companies of window dressing their earnings.

The rupee has been hitting fresh lows for the last couple of weeks, and is down over 11% since February.

He expects corporate earnings to be under pressure this financial year, and says the situation will remain grim.

"We could suffer for some more time. Interest rates will stay high, and I won’t be surprised if the RBI does a U-turn and hikes interest rates further," he says.

"On reported numbers, corporate earnings could grow 10-12% at best this year. But I would advise investors not to be misled by reported earnings. Net profit can be anything, EPS can be anything, but free cash flows don’t lie. Check the free cash flow, and you will know the financial health of the company. Cash is king, P&L is just an opinion," says Singhvi, a chartered accountant by training, and who spent a good part of his stint at Gujarat Ambuja Cement overseeing corporate finance and treasury.

Having been part of the cement industry for nearly 23 years, Singhvi appears to have a soft corner for the sector when it comes to investment bets. But it is also something borne out of a sound understanding of the industry dynamics.

"I would any day buy a cement stock than an IT stock, because the cement industry is backed by solid assets. Cement stocks did much better than expected last year because (cement) prices did not collapse the way most people were expecting them to. True, supply exceeds demand even now, but the cement industry is much more mature and that explains the stable prices," Singhvi says, adding that he expects the trend to sustain.

"Cement stocks offer protection in two ways: earnings growth in good times, and asset backing in bad times. Even if sales are slow, you still have the cement plant. In an inflationary environment, the price of a cement plant will never go down, even if cement prices fluctuate," he says, adding that he could be stress on management efficiency and corporate governance practices.

But could stable cement prices have to do with cartelisation by the cement companies?. The Competition Commission of India is shortly set to make public its report on the probe into charges that cement companies formed a cartel to push up cement prices.

Singhvi denies stable cement prices have to do with cartelisation by the players.

"Cartelisation is possible if there are only four or five dominant players, not when there are 45-odd players. Also, cement companies are not making super profits as would have been the case if they were indeed profiteering. Most companies are making a RoI (return on investment) lower than their weighted average cost of capital of about 17-18%. Capacity utilisation is low at 80%, but that can be due to a variety of reasons, and cement is not the only sector operating at below capacity," Singhvi says.

About a year back, Singhvi along with Amit Tandon, ex-MD, Fitch Ratings set up IIAS as he felt that with heady days of the bull market past, now was the time to address corporate governance issues.

"Globally, India ranks among the worst markets when it comes to abuse of minority shareholders by promoters. But much of the excesses were swept under the carpet as long as there was growth. Now that growth has stopped, and investors are asking tough questions," says Singhvi.

He mentions Escorts’ court convened meeting to approve its controversial restructuring plan.

"First of all, you hold the meeting on a Sunday and that too at a location like Panchkula which is not easily accessible. And then you declare the resolution as having been passed after 10 days and do not give the details about the number of votes," says Singhvi.

However, he does not like to be described as 'shareholder activist'.

"Our goal to help shareholders maximize their returns by asking the right kind of questions and taking informed decisions," Singhvi says, and then adds as an afterthought, "but what’s wrong with shareholder activism? In India, people seem to appreciate activism only when it comes from the judiciary."

Recently, Singhvi has publicly questioned some of the actions by leading companies such as Piramal Healthcare and Hero Honda.

Doesn’t that make Singhvi unpopular among his friends from the corporate world?

"I was never a popular person even otherwise. But I have received support from many corporates which practiced good governance, but were at a disadvantage vis-à-vis other companies with poor corporate governance, but could manage the policy environment," Singhvi says. 

There have not been too many instances of shareholder activism in India.

But that is changing, even if at a slow pace.

"Look at the way TCI (The Childrens’ Investment Fund) has locked horns with the coal ministry and the government. Despite the Presidential decree, Coal India is yet to sign a single FSA (fuel supply agreement). And TCI holds barely 2% in Coal India. So TCI's efforts are having some impact after all," says Singhvi.

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