Standalone Vs Consolidated Revenues:
To diversify its existing operations/ venture into different industries/territories/ expansion purposes a company may open up new companies which are completely (100%) or majority owned/controlled (subsidiaries), share operations/Joint control with others (JV) or even invest some amount of money in different companies (associates).
These individual entities may engage in different operations themselves and generate revenues and/or play a role in generating revenue or reducing cost for the Parent standalone Entity.
So analysing which part of an entity or company is sourcing how much revenue is really important to establish the importance and role of each company within the umbrella of the entire consolidated entity. (More on these will be covered in future blogs where we will understand different Financial investments and consolidation of entities. But for now, just knowing these basics should be enough.)
One may have seen two sets of financials always disclosed in an Annual report, a set of Standalone Financial statements and a set of Consolidated financial statements.
Standalone shows the financial performance of only the parent company. Consolidated shows the financial performance of the parent company combined with its subsidiary companies, associate companies and joint ventures together as one umbrella.
Sometimes, it makes a lot of sense to observe Revenue being generated at a subsidiary level. This is done to check how much of the revenues are being generated and contributed by each of the companies towards the entity. One may also take innovative analytical angles around understanding how much capital is being allocated in individual subsidies and how much turnover is being generated from that capital to judge the capital allocation and future plans of the Entity. More such angles would be covered after we study assets, Inventory and COGS.
Case Study: Cera Sanitaryware - Saving Cost
Also a lot of times subsidiaries can be created to help the parent company with some portion of the business value chain. For example Cera created a subsidiary for Packaging, in such a case, it's important to analyse how much capital was invested in the subsidiary and how much cost saving the Parent company availed on account of the subsidiary along with the additional expenses to run the subsidiary. So, net benefit should be seen and if this subsidiary by chance sells some material to external companies apart from CERA to generate external revenue then total benefits = external revenue + parent level net benefit.
Case Study: VIP Industries - Manufacturing
Let’s take a look at VIP Industries to understand sources of revenue for both Standalone Entity and Consolidated Entity
First step, to gather a list of Associates, JV, Subsidiaries, one can refer to MGT-9 form which we just discussed in previous sections. Taking a look,
We see that VIP Industries Limited (Parent company) has 5 subsidiaries (wholly owned)
Blow Plast Retail Ltd, India
VIP Industries Bangladesh Pvt Ltd, BD
VIP Industries BD Manufacturing Pvt Ltd, BD
VIP Luggage BD Pvt Ltd, BD
VIP Accessories BD Pvt Ltd, BD
From the Annual report we can see that Standalone figures of VIP Industries Limited (Parent Company) has generated a total revenue of 1714 Cr by itself,
Source: VIP Industries AR-20 (Standalone Revenue Figures).
Whereas the consolidated revenue figures of VIP Industries Limited (as overall Entity) stand at 1718 Cr almost the same as Standalone!
Source: VIP Industries AR-20 (Consolidated Revenue)
One might wonder, what are the 5 subsidiaries doing! Might as well shut the subsidiaries.
We would be wrong in making that conclusion and this is precisely why we have taken this example to help you understand how Entity wise revenues should be analysed.
Whenever such a situation arises where standalone and consolidated revenue figures are almost the same, one may suspect that the subsidiaries are doing nothing.
To figure out Individual subsidiary level revenues, one can open the AOC-1 form from the Annual report (usually disclosed at the end of the annual report). This form helps an analyst judge subsidiary level financials such as Turnover, Operating profit, Assets, Liabilities and much more.
As we can see from the screenshot above, it's clearly non zero for most of the subsidiaries. Then why is it that the Consolidated and Standalone revenues are almost the same?
Answer to this mystery is Inter-related party transactions. Upon taking a deeper look in subsidiaries annual reports (which is now a compulsion for Consolidated Entity to disclose), you will notice that all Bangladesh subsidiaries, sell their final products to VIP Industries (Parent company) which eventually sells it outside. Screenshots below:
VIP Industries Bangladesh Pvt Ltd, BD:
VIP Industries BD Manufacturing Pvt Ltd, BD:
VIP Luggage BD Pvt Ltd, BD:
VIP Accessories BD Pvt Ltd, BD:
So the subsidiaries have been generating revenues individually by selling the majority of their goods only to the parent company which eventually sells it outside.
One can also verify this by taking a look at the Related party transactions footnote from Standalone financial statements of VIP Industries (Parent company). The purchases of the Parent company from the subsidiaries (which would be revenue for subsidiaries) match very much approximately to the Turnover figures of individual subsidiaries from AOC-1.
Note: Marginal differences may be there between the purchases and subsidiary revenues as the figures have been converted to INR based on transaction date exchange rates for related party transactions, whereas the AOC-1 INR figures have been converted to INR based on the latest exchange rate specified in the form.
At a Standalone level, we see revenues generated by the parent company and at a consolidated level, the inter-related party transactions will cancel each other out, cause revenue of subsidiary is purchase of parent company, and as an Entity, it's only VIP Industries, the parent company which is transacting with Companies outside the Entity, hence Standalone revenue approximately equals to Consolidated revenues. Hence, to put it in a simple equation:
Standalone revenue = Only Parent Company revenue
Consolidated revenue = Parent company Revenue + Subsidiaries revenues - Interrelated party transaction revenues (upstream or downstream)
Taking the Revenue figures from the previously discussed AOC-1, a decent graphical representation of what's happening:
This is a decent example of upstream transactions, where subsidiaries are selling to the parent company which eventually sells it outside. An analyst may come across more such examples, upstream, downstream or a combination of both while analysing live companies. Studying sources of revenues help us get better clarity of structure of the entire entity, but also, the importance of each and every company in driving the business as a whole.
VIP Industries was one example where Consolidated and Standalone revenue were almost the same. Typically, we can expect Consolidated revenues to be more than the standalone revenues, however the reverse can also be true.
Read our Next Blog 110 - Analysing Sources of Revenue Part 4 for an interesting case study on the same topic