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Sectors in Focus

Major Corporate Developments This Week

1. Alhuwalia Contracts: Company gets Rs 572 crore order from Airport Authority of India for development of new civil enclave at Darbhanga Airport in Bihar
2. RVNL: Company signs MoU with Delhi Metro Rail Corp for participation in upcoming projects in India and abroad
3. Railtel corporation: Company secured order worth Rs.239.6m
4. Shilpa Medicare: Company’s CDMO customer reported positive results from pivotal clinical trial & placed binding purchase order.
5. Raymond: Company Board approves demerger of Raymond Realty and Raymond Limited. 1 equity share of Raymond Realty every 1 equity share of Raymond Limited
6. BGR Energy: Company to raise up to ₹1,000 cr via rights issue
7. KDDL: Company board meeting on July 9 to consider a proposal for buyback of shares
8. IRCON: Company gets order worth ₹750.82 crore from Rail Vikas Nigam Limited (RVNL)
9. Krsnaa Diagnostics: Receives order from Bhabha Atomic Research Centre for providing Tele Reporting Services for Radiology at the BARC Hospital, Mumbai
10. GE T&D India: Company has received of order from Grid Solutions SAS, France, Broad consideration or size of the orders 64 million Euros
11. Brigade Enterprises: Company signs joint development agreement for 1.2 million square foot residential project in Bengaluru
12. Coal India: Coal production from captive and commercial coal growth at 35% in first quarter of FY25: Government
13. Indiabulls Real Estate: Changes name to EquinoxIndia Developments effective July 8 following approvals from stock exchanges
14. KEC International: Company gets new orders worth Rs 1,017 crore in its T&D and renewables businesses.
15. Health care Global: Company approves acquisition of 196-bedded Vizag Hospital in Vishakhapatnam for over Rs 362 crore.
16. KCP: Company have approved the proposal of railway siding project along with input material handling equipment and system & cement grinding hydraulic roller press at Andhra Pradesh
17. Moschip: Company in pact with C-DAC and Socionext for making high performance computing processor AUM
18. IEX: Total electricity volume at 10,185 MU, up 24.7% YoY, up 18 percent.
19. Waaree Energies: Company bags order to supply 900 MW of modules for Serentica Renewables in Rajasthan
20. Puravankara Ltd: Company acquires 7-acre land parcel in Hebbagodi, Bengaluru, with potential GDV of Rs. 900 Crore
21. DCX Systems: Company gets order worth Rs 1,250 crore for electric modules from L&T.
22. IOL Chemicals: Company gets China’s Drug Regulatory Authority NMPA nod for ‘Fenofibrate’, allowing the company to export it into China market.

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Forensic Accounting Framework: When Higher Risk Does Not Lead to Higher Returns

In this week's edition, we delve into a critical aspect of financial analysis: the forensic accounting framework. Specifically, we'll explore how certain accounting practices can present higher risks that do not necessarily translate to higher returns. This understanding is vital for making informed investment decisions and avoiding potential pitfalls.

Income Statement Checks

CFO as a % of EBITDA: This ratio is essential for assessing the quality of earnings. A discrepancy between Cash Flow from Operations (CFO) and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) may indicate aggressive revenue recognition practices. If a company shows high earnings but low cash flow, it could signal that the reported profits are not translating into actual cash, posing a higher risk for investors.

Provisioning for Debtors: Evaluating how a company provisions for debtors can reveal aggressive provisioning policies. Overstating provisions can create hidden reserves that can be used to smooth earnings in future periods. Conversely, under-provisioning can inflate profits in the short term but lead to significant write-offs later. Both practices can mislead investors about the true risk and return profile of the company.

Balance Sheet Checks

Contingent Liabilities as a % of Net Worth: Contingent liabilities represent potential financial obligations that might arise in the future. A high percentage of contingent liabilities relative to net worth can indicate substantial off-balance-sheet risks. These hidden risks can surface unexpectedly, undermining the company's financial stability and, subsequently, investor returns.

Cash Theft Checks

CWIP to Gross Block: Capital Work in Progress (CWIP) as a ratio to Gross Block is a key indicator of capital expenditure management. A high CWIP ratio may suggest unsubstantiated or prolonged capital expenditures, possibly masking inefficiencies or fraudulent activities. Such practices can drain resources without generating corresponding returns, increasing risk without improving return prospects.

Auditor Checks

Growth in Auditors' Remuneration to Growth in Revenues: An unusual growth rate in auditors' fees compared to the company's revenue growth can raise red flags. If auditors are being compensated disproportionately more than the company's revenue growth, it might indicate compromised objectivity. This could lead to overlooked discrepancies or fraudulent activities, presenting unseen risks to investors.

Conclusion

Higher risks in accounting practices, as highlighted by these forensic accounting checks, do not necessarily lead to higher returns. In fact, they often mask underlying issues that can erode investor confidence and financial stability. By incorporating these checks into your investment analysis, you can better identify potential red flags and make more informed decisions, thereby safeguarding your investments from undue risk. Stay vigilant and always look beyond the surface to understand the true financial health of your investments.

🚀 My Content For This Week 🎬 YouTube: Transformer Sector Deep Dive | Top Transformer Stocks in India​ ​ 📋 Twitter: Vivek Mashrani, CFA @MashraniVivek 📚📚 Recently, I came across a fascinating book titled 7 Powers: The Foundations of Business Strategy by Hamilton Helmer. This insightful book outlines 7 key concepts that give businesses a competitive edge and create barriers for rivals https://twitter.com/i/web/status/1809560409533280281 5:39 PM • Jul 6, 2024 0 Retweets 2 Likes Read 1 replies ​

🎙️ My Weekly Podcast For You

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Keep Compounding...

Vivek Mashrani, CFA Founder, TechnoFunda Investing

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