Quarterly results to fall further as companies clean books

Quarterly results to fall further as companies clean books
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First Published: Mon, Jan 12 2009. 01 15 AM IST
Updated: Mon, Jan 12 2009. 01 15 AM IST
Mumbai: One immediate fallout of the fraud at Satyam Computer Services Ltd would be worse-than-expected financial results for other companies, as regulators tighten scrutiny and force firms to clean up their balance sheets, analysts say.
On Friday, capital market regulator Securities and Exchange Board of India (Sebi) said the financial results of Sensex and Nifty-listed companies would have to be reviewed by a committee appointed by it.
“We are more convinced than before that a lot of one-off losses (some booked in the balance sheet) are going to come out in the upcoming two reporting seasons,” analysts Nilesh Jasani and Arya Sen of Swiss financial services firm Credit Suisse Group AG wrote in a note to clients on 9 January, two days after Satyam chairman B. Ramalinga Raju confessed to cooking the company’s books.
As the financial year audited account period nears its end in March, many firms are likely to reveal more losses, the analysts wrote.
There isn’t any evidence yet of other firms falsifying their books or cheating their shareholders, but financial analysts and experts raised concerns about corporate governance standards in the country. In the aftermath of the Satyam fraud, share prices of the company as well as other firms perceived to be less trustworthy, were hammered last week.
Even before the Satyam scandal broke out, analysts had predicted a year-on-year decline in profits for the December quarter, the first in up to six years, due to the collapse in the commodity market and slowdown in demand, as reported by Mint on 6 January.
Brokerage Prabhudas Lilladher Pvt. Ltd, for instance, had forecast a 14.3% decline in the earnings of the companies it tracks, excluding banks. Motilal Oswal Financial Services Ltd sees a 11.2% decline in the earnings of the firms it tracks and a 5.8% dip in the profits for the 30 companies that are part of the Sensex, India’s most widely tracked stock index.
Auditor reservations
“This quarter may appear to be worse than what was feared,” said Vinod Kumar Sharma of Anagram Securities Ltd, an Ahmedabad-based brokerage. “You might see a sizeable number of qualifications as auditors get tougher.”
Qualifications are reservations expressed by auditors over issues such as the truth of financial numbers and these are carried in a company’s annual report.
Analysts expect profits in the December quarter to be hit further as companies become more guarded about booking forward earnings and spreading expenditure over reporting periods. Tougher auditing and a scramble by companies to boost their image would also see changes in the balance sheet. For instance, companies may have a relook at the value of their investments in unlisted subsidiaries, which could cause a shrinking of the balance sheet, as overall valuations have come down in a depressed market, analysts said.
“A lot of cleaning up will happen in the aftermath of Satyam,” said Manish Sonthalia, vice-president (equity strategy) at Motilal Oswal. “Companies may make disclosures which they would have not done otherwise. We will see a rerating of stocks.”
Such a rerating could occur especially after the audit peer review ordered by Sebi. “If after the peer review, the numbers they had put out before stand justified, companies will get rerated (upwards). If the numbers aren’t justified, then derating will take place,” said Sonthalia.
After Raju confessed to falsifying Satyam’s accounts to the tune of at least Rs7,136 crore, the Sensex lost more than 930 points, or 9%, over two trading sessions.
Credit Suisse has advised investors to wait and watch in the near term, and this has found an echo among some fund managers as well.
“I am not really sure now what numbers to trust. The whole trust in the system has been shaken,” said the head of equity investments at a foreign company-partnered mutual fund. He wanted to remain anonymous as he isn’t authorized to speak to the media.
But some analysts consider Satyam to be a one-off case.
“If companies do (make changes this quarter), then it will mean they have done something wrong,” said Hitesh Agarwal, research head at Angel Broking Ltd. “It’s not a corporate governance issue, it’s a fraud.”
Still, corporate governance would improve as investor and analyst scrutiny becomes intense and companies raise their reporting standards over the next one-two years.
ravi.k@livemint.com
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First Published: Mon, Jan 12 2009. 01 15 AM IST