Sales accounted under GST could distort September quarter picture
Investors are in for a surprise when the September quarter results are declared. This will be the first earnings season post-goods and services tax (GST) and differences in how sales will be recorded now are likely to distort reported growth figures. Companies have cautioned about this in their analyst meets and conference calls. Some may provide some comparison to help investors figure out underlying growth but others may not. In the absence of a mandatory requirement to disclose, investors may be left holding numbers that are not comparable.
Nestlé India Ltd told investors in its recent analyst meet that reported sales growth will be slower by 5.25 percentage points, and at the product category level the impact could be between 1.5 and 2.5 percentage points. Earlier, Hindustan Unilever Ltd (HUL) had alerted investors that its reported sales could be lower by 7.5 percentage points post-GST. Dabur India Ltd’s management too had mentioned that its reported sales will shrink by about 6% due to the shift to GST. The examples mentioned are of consumer goods firms but this applies to all companies who pay GST.
Why is this happening? Earlier, companies were reporting revenue after deducting value- added tax levied by the states but before deducting excise. Now, sales will be reported after deducting GST (which has subsumed both state and central taxes), which means only the net amount will be disclosed. Sure, some firms do disclose excise separately every quarter even now (which can be used to calculate sales net of excise) but some don’t.
That means one may have a situation where this quarter’s sales can’t be compared to the year-ago numbers, unless companies volunteer a like-to-like comparison. Many companies may show shrinkage in revenues or lower growth in revenues in the current year, post adoption of GST, said Sai Venkateshwaran, partner and head (accounting advisory services) at KPMG in India.
Not only will the sales growth figures not be comparable, it will affect linked ratios as well. For example, Nestlé India has said this can affect ratios such as cost as a percentage of sales, profit margins, asset turnover ratios and working capital turnover. In most cases, profitability will increase but this will be mainly because the base has shrunk.
What is the way out? Dolphy D’Souza, partner at an Indian member firm of EY Global, says it would be a good practice to disclose the movement from the earlier regime to the GST regime so that investors can comprehend the impact of the change. Some firms are likely to do so. HUL has said it will disclose comparisons so that investors can understand the numbers better. It was among the few companies to provide a reconciliation when the shift to quarterly reporting under Indian Accounting Standards happened.
Not having this comparison uniformly affects the ability to compare performance across companies in a sector. And to also evaluate change in a company’s performance compared to how it did in the previous quarters. It would be a good idea to mandate companies to give comparable figures, so that investors have a better picture of the underlying performance of the company. This can be done by an amendment to Schedule III of the Companies Act and also an amendment to the Securities and Exchange Board of India Listing Regulations, said Venkateshwaran.
Unless that happens, investors may have a tough time comprehending quarterly results of such companies till the June 2018 quarter. In that case, they should look at the underlying numbers closely before reacting to the reported results.