NHAI: Is it a Going concern?

NHAI has been issuing tax-free NCDs and Capital gain bonds (54 EC).

Just how safe is your money investing in these bonds?

The Comptroller and Auditor General (CAG) report for the year 2014-15 mentions:

“The Balance Sheet and Profit and Loss Account dealt with by this report have not been

drawn up in the format approved by the Government of India under Section 34(2)(g) of

NHAI Act, 1988 and Rule 6(1)(b) of NHAI Rules 1990.”

“We have serious reservations regarding the maintenance of proper books of accounts and other relevant records by the Authority …”

“Overstatement of fixed assets- capital works in progress by NHAI has resulted in overstatement of Fixed assets – CWIP by Rs. 1,40,797 crores and understatement of loss for the year to the same extent.”

NHAI discloses loss for the year 2014-15 of Rs. 198 crores. If the above were to be given effect to, the loss would shoot up drastically to Rs. 1,40,995 crores. Enough to wipe out the capital and questioning the going concern basis.

Bond Investors generally rely on certain safety measures such as the Interest coverage ratios, Net Income ratios, Debt-Equity ratios, etc. Here the authenticity of the books of accounts itself is under serious question. So it is unclear what safety, if any, is afforded to the bond investors.

NHAI Rules require NHAI to set aside certain reserves each year to provide for redemption of bonds. However, the CAG report mentions no reserve funds have been created for 54EC Bonds, NCDs and loan from ADB.

Despite such adverse financial conditions rating agencies such as CRISIL had no qualms whatsoever in giving the highest rating. The role of rating agencies is already under the scanner in case of Amtek and Ricoh.

It is a matter of grave concern why the Finance Ministry and the Department of Revenue continue to provide Section 54 EC and tax-free exemption and not take sufficient steps to protect small investors.

 

Wipro – Any surprise or Beginning of a Continuum?

Wipro has reported a 6.72% decrease in the consolidated net profit for the quarter ended 30^th June 2016 as compared to 30^th June 2015. Is the profit decrease a surprise or have conditions been conducive to a lower growth rate for some time now? 

If we consider the period from 2009-2016, employee expenses (including travel and sub-contracting fees) registered a growth of 1.61 times from Rs. 11,501 crores to Rs. 30,059 crores. Over the same period, net revenues increased only 1.08 times from Rs. 21,507 crores to Rs. 44,685 crores. In other words, revenue growth has not been able to match up with the employee expenses growth.

Compare this with TCS where employee expenses grew 2.84 times and revenues increased 2.99 times over the seven-year period. Employee cost drivers are critical to the information technology industry. If the revenues are not able to better or match-up with the employee expenses the slip is going to start showing and that is what is happening with Wipro.

 

Further, the ratio of employee expenses to net revenues has increased almost 14% compared to 7.14% for Infosys and a decrease of 2.36% for TCS over the seven-year period.

Moreover, there is an across the board decrease in segment results across all the segments (except healthcare). Considering the aggregate segment results, the operating profit ratio has declined 2.56% over a period of just two years (2014-16). Wipro was not giving a breakup of service segments before 2014.

The combination of increased employee expenses and lower segment results has been building up for some time now and the effect is only beginning to show.

Welcome

Benjamin Graham gave the definition of investment as: "An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."

This in essence sets out the difference between investments and speculation with the emphasis being on thorough analysis and safety of principal. This is further reinforced with the concept of margin of safety stressed time and again by the Investment Guru. Margin of safety essentially implying that even with good stocks there is a good price to buy them at and a not so good price to buy them at.

This blog is my attempt to apply the philosophy of Benjamin Graham to the Indian context.

Small investors such as myself do not have the access to management or personal information or the other razzmatazz as the FIIs and DFIs do. What we do have is a discriminating and rational mind that can discern the business environment and earn adequate returns while staying protected.

So then that's what this blog is about: To help you stay protected.  Happy Reading.