Along with segmental information under the new accounting system, there is a mandate for a company to provide geographic revenue bifurcation from where the revenue is generated. Analysing revenue, geography wise, provides a lot of insights regarding the new areas of growth a business may be trying to venture into.
As we saw earlier, customer wise revenue analysis gives an opportunity for us to see how the customer’s industry momentum drives manufacturing company’s business. Similarly, before projecting business growth, an analyst needs to take a look at various factors impacting the target geography as well, where the company’s final products/ services are being sold.
Case Study: Ajanta Pharma
When we take a look at the geographic segmental information from its AR 2021, we see a segment named Africa Institution.
Source: Ajanta Pharma AR2021
This geographic segment indicates the Anti-Malarial product being sold in Africa which is sponsored by WHO’s funding bodies to deal with Malaria in African Countries.
Source: Co Website
WHO’s funding allocation towards anti-malaria was reduced by 10% from USD 92mn in 2017 to USD 82mn in 2019. This reduction led to price erosion and a decrease in volumes, impacting anti-malaria suppliers like Ajanta Pharma. Apart from this contraction, the anti-malaria funding had been constantly increasing for the past 15 years.
For the Ajanta Pharma case study, one can understand, the sales growth of Anti-Malaria drugs is directly impacted based on grants provided by WHO’s funding bodies. Ajanta Pharma reaped benefits of these growing grants for anti-malaria drugs for the past 15 years, which seem to have slowed down in recent years.
Moving to the next analytical perspective, Looking at the geographic revenue thumbprints may also provide us with detailed insights regarding the business capabilities/ limitations on costings to sell its end product.
Case Study: Cement Industry
Cement commodity has the least value to weight ratio. As a result, the transportation cost is extremely high relative to the revenue figures cement may bring to the company. So for cement companies, it's really important to be able to sell their final product in that limited geography from their grinding unit, at a lucrative price to end up being profitable.
The firms can't open grinding units across the nation to be able to sell the product, as grinding units need to be close to the Limestone mines to avoid high transportation costs for the raw materials. Limestone mines are auctioned upon expiry of their current leases, so eventually, where a company is going to sell its products mainly boils down to one single thing, limestone mine lease allocation!
Another important angle which an analyst needs to understand is that geographic segments dont always imply end consumer location and thus sometimes may not be useful to take a look at. Business reports the location where the goods have been sold, however, what if your products were bought by a dealer from a different geography who eventually sells it to some other geography? Your business’s revenue growth won't be driven by the dealer’s economy’s growth but the end consumers’!! (which may be impossible for you to point your finger on)
Case Study: PI Industries
If we take a look at their footnote, one would see
However, the management makes it explicitly clear in the concall that these buyers across globe are known to resell it through all geographies thus making geographic breakup meaningless for an analyst to use.
Concall: Q4 FY2020
Please read our blog 115 - Analysing Sources of Revenue part 9 to understand how to detect seasonality in a company topline. This will be the final blog of our analysing the sources of revenue series.