New Accounting Standards - Kotak - Jun 2016

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000 Adoption of Ind-AS from 1QFY17 Indian companies will have to gradually adopt th e revised Indian Accounting Standards (Ind -AS) from April 1, 2016. Companies (l isted or unlisted) with a net worth of ` 5 bn or more will move to Ind-AS from April 1, 2016, all listed companies from April 1, 2017 and unl isted companies with a net worth of ` 2.5 bn or more from April 1, 2017. Banks and NBFCs will adopt the new accounting standards from April 1, 2018. Revenues, EBITDA and EPS will be different in several cases; cash flows will not change We discuss differences between Ind-AS and the previous accounting standard (Indian GAAP) across several broad areas in Exhibit 1 for companies under our coverage. Revenues, EBITDA and EPS may look different in several cases under Ind-AS compared to IGAAP. Companies adopting Ind-AS from April 1, 2016 will have to mandatorily provide comparative financial statements prepared under Ind-AS for the previous year (FY2016) and balance sheet ( opening Ind-AS balance sheet) for FY2015 also. Revenues (excise duty), EBITDA (JV accounting), interest costs and EPS (treasury shares) different We highlight a few broad areas of changes b etween the new and old standards and discuss the more arcane stuff in the analysi s of individual companies in the exhibit. (1 ) Revenues will be reported gross of excise duty and net of discounts and incentives, which will result in optically higher revenues and lower EBITDA margin. (2) JV accounting (subject to the issue of control) will move to equity accounting rather than consolidation, which would depress EBITDA; net profits will be unchanged. (3) I nterest rate on certain types of instruments will be charged as effective interest rate and will include coupon rate, r edemption premium and issue expenses. (4) Treasury shares will need to be eliminated, which would increase the reported EPS of certain companies; net profits will be unchanged. Valuation methodologies already largely capture the likely changes to earnings We would highlight that the Street is already capturing some of the ‘changes’ under Ind -AS in valuations. For example, in the case of companies with treasury shares (BPCL, IOCL, RIL, UNSP to name a few), the Street a lready excludes treasury shares (as i s required under Ind-AS) to compute the fair valuation of companies on ` /share basis or adds back the value of the treasury shares in the SoTP valuation. Similarly, we add back over burden removal (OBR, a portion of which will not be required to be provided under Ind- AS and will optically boost Coal India’s EPS) to the reported EBITDA of Coal India while computing its fair value. We would note that cash flows and valuations of the companies should n ot change simply because of reported numbers being different versus those under IGAAP or versus Street estimates based on IGAAP. Strategy India New (accounting standards) and old (valuations). It is hard to get excited by accounting in general and we would advise investors the same as Indian companies transition to the new accounting standard (Indian Accounting Standards—Ind-AS) from April 1, 2016. Reported numbers for revenues, EBITDA and EPS may look different in several cases versus those prepared under the old accounting standard or versus Street estimates. However, cash flows and valuations will not change materially. INDI JUNE 29, 2016 NEW RELEASE BSE-30: 26,740 QUICK NUMBERS Companies with net worth of ` 5 bn or more to apply Ind-AS from April 1, 2016 Smaller companies and banks & NBFCs will apply Ind-AS from April 1, 2017 and April 1, 2018 respectively Sanjeev Prasad [email protected] Mumbai: +91-22-4336-0830 Akhilesh Tilotia [email protected] Mumbai: +91-22-4336-0897 Sunita Baldawa [email protected] Mumbai: +91-22-4336-0 896

New Accounting Standards - Kotak - Jun 2016

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