Is Shaw Wallace Hiding Its Huge Headaches?

BALANCE SHEET ANALYSIS
Is Shaw Wallace Hiding Its Huge Headaches?

To report net profits of Rs 10.38 crore in 1997-98, the liquor giant deployed several book-keeping boosters.

By Dilip Maitra

M.R. Chhabria, Chairman, SWC Candy, they say, is dandy, but liquor is always quicker. No wonder, despite everything, the Rs 795.23-crore Shaw Wallace suddenly reported a 3,000 per cent increase in its profits in its last financial year (which ended on June 30, 1998). "Shaw Wallace registered a turnover of Rs 792 crore, a growth of 22 per cent over the corresponding period last year. The company proved its detractors wrong by reporting net profits of Rs 10.38 crore against Rs 34 lakh in 1996-97," wrote its truly non-resident Indian Chairman, M.R. `Manu' Chhabria, in the 1997-98 annual report.

In other words, the Calcutta-based liquor giant isn't reeling from the previous year's hangover even though Chhabria himself hasn't visited the country since November, 1996. With the Enforcement Directorate and the Company Law Board investigating the siphoning off of money from his companies, Chhabria fears that he will be arrested as soon he descends on an Indian airport.

Fit for a case-study? Yes, but of a balance-sheet kind. With Chhabria incommunicado, a clear-headed look at Shaw Wallace's annual report, instead, quickly dispels the feeling of headiness. According to a fine-print reading, Shaw Wallace may actually have registered operational losses of Rs 12.54 crore in the last financial year, with only innovative accounting diluting the red marks on the balance-sheet.

One profits-booster--part of the 15 qualifications from the company's auditors, S.R. Batliboi and Lodha & Co.--is a change in the basis of accounting of lease-rentals, which resulted in an increase in its profits by Rs 7.83 crore. While Shaw Wallace used to charge the entire lease-rental to the Profit & Loss (P&L) Account, it adopted a new accounting standard last year whereby rentals for financial leases were segregated into 2 parts: one pertaining to the cost of the assets, and the other to the interest component by applying an implicit internal rate of return. Only the latter was included in the P&L Account. The result: an understatement of expenses, and a corresponding hike in profits.

While the change is perfectly legitimate, the auditors qualified it because it was done with retrospective effect. In another move, Shaw Wallace wrote back unclaimed balances and liabilities/provisions as Other Income aggregating to Rs 14.65 crore in 1997-98. In the notes to the accounts, the management justifies the write-back, saying that the liabilities had been carried forward for several years without any claims from the concerned parties, and that there was no likelihood of it materialising in future. Said the auditors, who did not agree: "Supporting documents (in support of unclaimed liability) in many cases were not readily available."

Then, Shaw Wallace has invested in the shares and debentures of its subsidiaries and other companies in the group, and also advanced loans to investment subsidiaries which, in turn, invested in other subsidiaries and companies in the group. With the recent merger of 14 subsidiaries with the parent company, Shaw Wallace's investments went up to Rs 137 crore on June 30, 1998, against Rs 53 crore a year ago. What is startling is that their market value at the end of June, 1998, was only Rs 45 crore. To be fair, this is a notional loss, and there was no need for the company to provide for it in the 1997-98 accounts. But, since Shaw Wallace will have to account for some of these losses in the future, it could have done so last year.

In addition, there will be a negative impact on the bottomline in future as the company will amalgamate more subsidiaries into itself. Last year, when Shaw Wallace acquired 14 investment subsidiaries, it had to write off Rs 91.15 crore from its reserves to provide for the difference between their liabilities and assets. This, in turn, created an imbalance in the gearing ratio. A sharp drop in reserves--Shaw Wallace's real reserves at the end of 1997-98 stood at Rs 44.58 crore against Rs 125.36 crore in the previous year--slashed its net worth by half to Rs 92 crore, and pushed up the debt-equity ratio to 4.32 from 2.20 in the previous year.

To ease its financial constraints, Shaw Wallace, after selling off its consumer products division to Henkel-SPIC for Rs 51.05 crore in January, 1999, plans to sell off the gelatine, agro-chemicals, and international trading businesses too. However, to keep its shareholders happy in future, Shaw Wallace will have to do more than sell off units--or rewrite its accounts.

Issue Contents Write to us Subscriptions Syndication