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How to read an annual report – the 6 valuable sections


July 8, 2021

A company’s Annual Report is a statutory document that contains material facts and information about the company. This makes it among the most reliable sources for information on a company. In this article, we will try to give examples of where in an annual report you can find information that is useful for your understanding of business and financials. This is an illustrative article and not an exhaustive one.

Annual Report, how to read an annual report

Key sections of an Annual Report

  1. Chairman’s statement
  2. 10 Year financial highlights
  3. Management Discussion & Analysis
  4. Board’s report
  5. Corporate governance report
  6. Auditor’s Report
  7. Financial Statements

The first five sections will give qualitative information such as on people helming the company, business structure, growth, outlook and governance. The last two will provide quantitative information on the financial performance and position of the company.

Let’s take the qualitative aspect first and then the quantitative.

#1 Chairman’s Statement

This section gives quick insights on the company’s business and its future. In large business groups, this can be an excellent read.

#2 Board of Directors

Know the people behind a company when you are first looking up a company in an emerging growth sector. Understanding the people behind may be valuable to boost confidence while investing in emerging growth companies. There will be nominee directors represented by large private equity investors as well. This may open an additional avenue to track performance of companies they have invested in the past. Information such as this can also give some comfort on the kind of leadership and experience a company has access to.

Nominee directorship of major PE investors and Independent Directors with high reputation are important information to watch out for in case of emerging growth companies

To highlight a few examples, there is Renuka Ramnath of Multiples PE on the Board of PVR. Sumeet Nagar of Malabar Investments is on the board of Safari Industries. Pulak Prasad of Nalanda Capital is on the Board of companies such as Vaibhav Global and Just Dial

Independent Directors, fast growing electronics manufacturing company Dixon Technologies has appointed former RBI Deputy Governor Dr Rakesh Mohan as an independent director. Former NASSCOM President Som Mittal is part of Sheela Foam’s board. Former Hyundai India President BVR Subbu is the Chairman of EV subsidiary of Greaves Cotton

#3 Management Discussion and Analysis

This section contains a good amount of data and reasoning behind a company’s performance for the year, what the company plans to do, industry, and so on. Based on the depth of the explanations provided in this section, it’s a great trove of information that helps assess a company’s performance and prospects. Typically, this section covers the following areas; 

  • CEO comments/ Q&A on the year gone by. For example, Tata Consumer has undergone significant business transformation in FY20. There is a lot to understand on strategy, impact of reorganization, impact on market valuations, and so on. The company gave a detailed Q&A section with the newly appointed CEO in its FY-20 annual report and continued it in FY21, with updates on integration milestones and merger synergies.  

For mid-sized FMCG player Jyothi Labs, FY21 is a year of transformation as the founder-Chairman stepped down and passed on the reins to his two daughters in the roles of Managing Director and Whole-time Director, while Independent Director R Lakshminarayanan has taken over as Chairman. 

  • Structure of industry in terms of the opportunity size, factors leading/ailing growth, competitive intensity, structural changes that have taken place and so on. This will give you the basics about the industry the company operates in, upon which you can build further through other sources. It makes it easier to understand the company’s performance as well.

The annual report of HDFC AMC is rich in macro-economic data, both domestic and global, that have a bearing on equity market performance. It contains data on Govt debt and spending, GDP growth, fiscal deficit, currency movements, capital flows, corporate profitability, stock market performance and valuations. For any investor looking for a consolidated set of factors affecting equity market performance, this is a good read. The report has even more data on mutual fund industry, growth, AUM composition, recent developments, and outlook.

  • Business growth and factors that have led to growth, or reasons for slack in performance. This is specific to the company itself. It tells you what steps the company took to drive growth which gives you an idea about sustainability of that growth. It explains the key events that led to that year’s performance.

For example, in its annual report, Infosys detailed major deals it won during FY21 as it was a record year for it. It followed this up with insights on industry, its strategy, digital transformation business, strengths & capabilities, and competition. 

For Federal Bank, a mid-sized private bank, its annual report explains progress achieved on the digital front including AI based initiatives, milestones on e-commerce transactions, and API banking to emerge as a strong player in this space. 

  • Segment-wise information, where companies have varied product/service basket. This helps understand which segment contributes more to growth and profitability and the focus areas for the company. 

Consider Tata Elxsi, a mid-sized differentiated IT company. Autonomous driving & OTT platforms related areas contribute to 41% and 44% of revenue, respectively. In its annual report, it provided detailed insights on how technology and internet revolution including 5G are re-shaping the prospects of these key industries and how the company is placed to capture that opportunity.

  • Capital expenditure plans that provide visibility on whether a company is investing for growth or not. 
  • Acquisitions or other business transformation initiatives such as mergers, de-mergers, CEO change, and so on. Sometimes, it will be important to read the annual reports for at least 3 years where companies have undergone a significant business transformation, to capture the change.  

For instance, ABB India has gone through significant business realignment in its January-December 2020 fiscal year. Having demerged and sold its working capital intensive, but sizable power grids business, it is focusing on emerging areas such as electrification, industrial automation & robotics, though orders are still slow. 

FY21 was a big year for Hindustan Unilever as it acquired GSK’s consumer business for about Rs. 40,000 crore, bringing brands such as Boost & Horlicks into its fold. A mammoth acquisition, HUL paid through shares rather than cash.  Apart from business insights, there is a lot more on the accounting side as well related to this acquisition (brand value, goodwill, IPR accounting). If you’re keen on knowing how to look at business transformations, give this analysis on Tata Steel Long Products a read.   

  • SWOT analysis

It is important to take everything you read here with a pinch of salt. Remember that companies will tend to showcase their best performance and plans. Read Annual Reports for at least 3 years to see if the company has been delivering on what it has planned.

#4 Board’s Report

This statutory report provides information on areas including financial performance of subsidiary companies. There are two areas of interest here.  

  • Management Remuneration: This is important in case of family-owned companies where the Board will comprise mainly family members. A check on this section becomes necessary where the promoter stake as well as dividend payout are low. Such issues are less likely in larger companies due to shareholder activism, the rise of proxy advisory firms and tighter regulations recently.

For example, shareholders of Apollo Tyres rejected the re-appointment of Mr. Neeraj Kanwar as Managing Director of the company in its 2018 AGM on the issue of high managerial remuneration. Consequent to that, the promoters have taken a cut of 30% of their remuneration 

  • Related party transactions: This vouches for transparency of transactions between group companies. Related party transactions are not bad on their own, as companies with subsidiaries and associates often engage in several such transactions. But the nature of transactions and the amounts involved matters and where they are not transparent nor with good reason will help flag governance issues. 

Britannia Industries, though a well-run business, has been in news multiple times in the last 3 years over inter-corporate deposits with group companies. Even recently, the issue popped up after it issued inter-corporate deposits worth Rs. 320 crore. ICRA has highlighted this in its September 2020 rating report as a key monitorable. Even in good companies, investors should look out for such transactions if they are part of diversified business groups.

Vedanta Group companies have faced issues with related party transactions when cash-rich companies used to give out loans to cash-strapped companies.  

CG Power (Formerly Crompton Greaves), Eveready Industries (now major stake by Dabur group), Zee Entertainment, Sintex Industries and Café Coffee Day are some prominent companies that bent under unrelated diversification and related party transactions issues.  

Now, let’s take the more quantitative sections in the annual report – primarily, the financial statements.

#5 Auditors’ Report

Auditors’ opinion on financial statements is expressed in this section. There will be separate audit reports on standalone and consolidated financial statements. If a company has material subsidiaries which contribute significantly to cashflows, check the opinion of the statutory auditor with respect to disclosure of information on such subsidiaries.

If there are any “qualifications” – i.e., areas of concern regarding the company’s accounts or practices – it should necessarily be looked into. For instance, auditors expressed qualified opinion on financial statements of Va Tech Wabag in FY20 that its Austria subsidiary had not been audited, a material subsidiary.

#6 Financial Statements

There will be both Standalone and Consolidated statements comprising Balance Sheet, Profit & Loss Account and Cash Flow Statement. While the Balance Sheet and P&L will give a summary of financial information, detailed information will be available in the Notes to Accounts or Schedules. This is the meat of the financial statements and offers insight into the company’s financials that you will not be able to get from the main P&L or balance sheet.

Below are a few examples of what you can look for in the Notes to Accounts:

  • Notes to Investments – Non-Current will detail investments in shares of companies including associates or JVs, or other interest/ return generating long term investments 

Info edge, the company that owns Naukri.com is also a significant shareholder in new age technology unicorns like Zomato and policybazaar.com. Here is an extract of its investments in FY20.  The company’s market value will be the sum of its own business value plus true market value of investments. It is only in an annual report that you can get detailed disclosure of such information.

Likewise, Trent classified its investment in fashion retailer Inditex (ZARA) and Massimo Dutti as financial investments.  Inditex reported Rs. 1,570 crore in revenue and Rs.104 crore in profit in FY20. For Eicher Motors, its JV with Volvo is accounted for as investment in Joint Venture under non-current assets. You won’t be able to correctly judge the contribution of these businesses to a company’s market value from the P&L and balance sheet alone.

  • In the case of acquisitions or mergers, companies will give details on the merger accounting as notes to the Schedules. 

HUL, for example, acquired GSK Consumer Healthcare in FY21 in a transaction worth Rs. 40,000 crore. The big change you can notice in financials is that the shareholders’ equity expanded from Rs 7,815 crore in FY2020 to Rs 47,199 crore in FY21 due to acquisition accounting. So, do not be surprised to see RoE falling sharply.

  • Change in accounting policy and its impact: When Ind As 116 came into effect from FY20, it changed the EBIDTA profile of companies in sectors such as retail, quick service restaurants, hotels, cinema halls, logistics, due to changes in the way expenses such as lease rent and depreciation were accounted for. Below is an extract from Trent’s (owner of chains such as Westside, Landmark, and Star Bazaar) FY-20 annual report.
Annual Report

Source : Trent Ltd FY2020 Annual Report

So, for such companies, it would be necessary to read previous years’ annual reports as well. 

  • Expense break-ups and other details: The notes also provide granular details of operating and other expenses, where the P&L would provide only the broad top-level expense outgo. Similarly, details on aspects such as receivables, loans and advances, liabilities can be found in the notes. For example, in receivables, you can find a break-up of receivables over 6 months old - if this is persistent, then you need to dig deeper.

For example, going through the balance sheet of a PSU recently, the total inventory was more than previous year sales, while receivables are half of sales. But, fortunately for this company, the government is the buyer and the high receivables appears to be a matter of delays and approvals alone.

On the other hand, VA-Tech Wabag has receivables as high as 78% of FY20 sales, for a business with single digit EBIDTA margins.

Be cautious about companies growing fast using high working capital. Corrective phases can be painful.  Such issues are common in order-book driven sectors such as construction, infrastructure, or capital goods, as well as those entering long-term contracts

What to watch in FY2021 annual reports for key sectors

Because we had an unusual FY21, every company’s annual report will have important insights. In some of the key sectors, here’s what you can look out for in their annual reports:

  • Financials – How they weathered the COVID crisis and what they foresee on asset quality, collection efficiency, and recapitalization. 
  • IT – Outlook on global IT spends and business growth, talent hiring in new areas, capabilities in emerging business areas.
  • Metals – Latest production capacity, product profile, outlook on metal prices and sustainability
  • Consumption sectors - Urban consumption, which is the hardest hit, encompassing fashion retail, QSR, hotels, malls, or multiplexes. Watch for balance sheet quality, equity dilution, debt increase. In FMCG and other sectors that derive growth from the rural sector, the impact of the wider Covid spread in the second wave.
  • Auto ancillaries – Ancillary companies are more asset, labor and working capital heavy. So, they are harder hit than automobile companies in bad times and vice versa. Look for how they were able to manage their finances and how they are positioned to deal with disruptions.

In this article, we have tried to give you what you can understand from each section in the annual report. Putting these together will help you understand the company. Of course, do note that while we have done our best to give you as diverse a set of pointers to look for, it is not exhaustive.

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Unless the client notifies us before the end of his/her subscription period, or the client cancels the auto-renewal mandate within the period specified by law, that the client does not wish to renew his/her subscription, the client’s subscription will renew for the period defined by the client’s subscription plan. We will charge the subscription using the same payment method that you previously used.

Although the client may notify to us his/her intention to his/her subscription, such notice will only take effect at the end of his/her then current subscription period, and he/she will not receive a refund other than as set out under Clause 8 in these Terms.

The client may notify us of his/her wish to cancel his/her subscription by sending an email to [email protected]. The client must provide at least 5 business days advance notice for this to be implemented.

Refunds: There can be no cancellation and refund of subscription fee paid once the subscription is active, other than as stated in Clause 8 of these Terms. If the client is entitled to a refund as specified under Clause 8 of these Terms, the RA will credit that refund to the card or other payment method used by the client to submit payment, unless it has expired - in which case the RA will contact the client to proceed with the refund. If we do issue a refund or credit due to circumstances outside the obligations specified under Clause 8, we are under no obligation to issue the same or a similar refund in the future.

General disclaimers: The recommendations made herein in the Research Services are expression of views and/or opinions and should not be deemed or construed to be advice for the purpose of purchase or sale of any security, nor a solicitation or offering on any investment/ trading opportunity on behalf of the company, AMC, insurance company, or issuer of security referred to herein.

The content and research reports generated by the RA does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities.

The information/ opinion/ views mentioned in research reports or by the RA are not meant to serve as a professional guide to the client or recipients of this Report. The research report, recommendation, or any other content published by the RA do not assure or guarantee any minimum or fixed returns to the client or recipients of the reports/ recommendations/ content.

Use of this information is at the client’s own risk. The client must make his/ her own investment decisions based on his/her specific investment objective and financial position and using such independent advisors as he/she believes necessary. The services rendered by the RA are on a best-effort basis. All information in the content or research report of the RA is provided on an as is basis. Information is believed to be reliable but the RA does not warrant its completeness or accuracy and expressly disclaim all warranties and conditions of any kind, whether express or implied.

While due care has been taken to ensure that the disclosures, information, and opinions given are fair and reasonable, PrimeInvestor Financial Research Pvt Ltd and/or none of its officers, directors, partners, employees, agents, subsidiaries, affiliates or business associates shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information/ opinions/ views contained in the research report and recommendations that form part of the Research Service, and/or mails, social media or notifications issued by PrimeInvestor Financial Research Pvt Ltd or any other agency appointed/authorised by PrimeInvestor Financial Research Pvt Ltd. Returns and performance figures mentioned in the research report represent past performance and should not be constituted to be future returns or guaranteed returns.

Any agreements, transactions or other arrangements made between the client and any third party named on (or linked to from) the Website are at your own responsibility and entered into at your own risk. Any information that you receive via the Website, whether or not it is classified as “real time”, may have stopped being current by the time it reaches you. Market price information may be rounded up/down and therefore may not be entirely accurate.

The purpose of these disclosures is to provide essential information about the Research Services in a manner to assist and enable the prospective client/client in making an informed decision for engaging in Research Services before onboarding.

History, present business and background: PrimeInvestor Financial Research Private Limited is registered with SEBI as Research Analyst with registration no. INH200008653. The Research Analyst got its registration on August 19, 2021 and is engaged in offering research and recommendation services.

Disciplinary history: There are no pending material litigations or legal proceedings against the Research Analyst. As on date, no penalties / directions have been issued by SEBI under the SEBI Act or Regulations made thereunder against the Research Analyst relating to Research Analyst services.

Details of the RA's associates: No associates.

Usage of Website Content: This Website is controlled and operated by the RA. All material, including research reports, recommendations, portfolios, ratings, lists of financial products, illustrations, statements, opinions, views, photographs, products, images, artwork, designs, text, graphics, logos, button icons, images, audio and video clips and software (collectively, “Content”) are protected by copyrights, trademarks and other intellectual property rights that are owned and controlled by the RA or by other parties that have licensed their material to us.

Except where otherwise agreed in writing with the RA, material on the Website is solely for the client’s personal, non-commercial use. Except as provided below, the client must not copy, reproduce, republish, upload, post, transmit or distribute such material in any way, including by e-mail or other electronic means and whether directly or indirectly and the client must not assist any other person to do so.

Without the prior written consent of the RA, modification of the materials, use of the materials on any other web site or networked computer environment or use of the materials for any purpose other than personal, non-commercial use is a violation of the copyrights, trademarks and other proprietary rights, and is prohibited. Any use for which the client receives any remuneration, whether in money or otherwise, is a commercial use for the purposes of these Terms.

The client may occasionally distribute a copy of a research report, or a portion of the same, from the Website in non-electronic form to a few individuals without charge, provided the client includes all copyright and other proprietary rights notices in the same form in which the notices appear, original source attribution, and the phrase “Used with permission from PrimeInvestor Financial Research Pvt. Ltd.”

While the client may occasionally download and store research reports or information from the Website for his/her personal use, he/she may not otherwise provide others with access to the same. The foregoing does not apply to any sharing functionality we provide through the Website that expressly allows the client to share Content or links to Content with others. In addition, the client may not use Content he/she has downloaded for personal use to develop or operate an automated trading system or for data or text mining.

The client agrees not to rearrange or modify the Content available through the Website. The client agrees not to display, post, frame, or scrape the Content for use on another website, app, blog, product or service, except as otherwise expressly permitted by these Terms. You agree not to create any derivative work based on or containing the research products and Content. The framing or scraping of or in-line linking to the Services or any Content contained thereon and/or the use of webcrawler, spidering or other automated means to access, copy, index, process and/or store any Content made available on or through the Services other than as expressly authorized by us is prohibited.

The client further agrees to abide by exclusionary protocols (e.g., Robots.txt, Automated Content Access Protocol (ACAP), etc.) that may be used in connection with the Research Services. The client may not access parts of the Research Services to which he/she is not authorized, or attempt to circumvent any restrictions imposed on your use or access of the Services.

As a general rule, the client may not use the Content, including without limitation, any Content made available through one of our RSS Feeds, in any commercial product or service, without our express written consent.

The client may not create apps, extensions, or other products and services that use our Content without our permission. The client may not aggregate or otherwise use our Content in a manner that could reasonably serve as a substitute for a subscription to the Website.

The client may not access or view the Services with the use of any scripts, extensions, or programs that alter the way the Services are displayed, rendered, or transmitted to you without our written consent.

The client agrees not to use the Services for any unlawful purpose. We reserve the right to terminate or restrict the client's access to the Website if, in our opinion, the client's use of the Services may violate any laws, regulations or rulings, infringe upon another person's rights or violate these Terms.

Prohibited content: The Website includes comments sections, blogs and other interactive features that allow interaction among clients and between clients and the RA. We call the information posted by or contributed by users “Contributed Content.” In the course of availing of the Research Services or uploading any post or comment on the Website, the client shall not post any Contributed Content that (i) contains nude, semi-nude, sexually suggestive photos, (ii) tends or is likely to abuse, harass, threaten, impersonate or intimidate other users of the Website and/or Research Services, (iii) is lascivious or appeals to the prurient interest or if its effect is such as to tend to deprave and corrupt persons who are likely to use or have access to the Website and/or Services, or (iv) otherwise violates, is prohibited or restricted by applicable law, rule or regulation, is offensive or illegal or violates the rights of, harms or threatens the safety of other users of the Website and/or Services (collectively “Prohibited Content”).

We reserve the right to cease to provide the client with the Research Services or access to the Website, or terminate your subscription, with immediate effect and without notice and liability, for violating these Terms, applicable law, rules or regulations and reserves the right to remove Prohibited Content which is in violation of these Terms, or is otherwise abusive, illegal or disruptive. The determination of whether any content constitutes Prohibited Content, violates these Terms, or is otherwise abusive illegal or disruptive, is subject to the sole determination of the Firm.

Changes to Research Services: We are constantly endeavouring to improve the quality of Research Services provided to our clients. Due to this, the form and nature of the Research Services provided may change from time to time without any prior notice to the client. We reserve the right to introduce and initiate new features, functionalities, components to the Website and/or Research Services and/or change, alter, modify, or discontinue existing ones without any prior notice to the client.

Warranty and liability disclaimer: The Website, Research Services, and all the materials and services, included on or otherwise made available to the client through this Website is provided by the RA on an “as is” and “as available” basis without any representation or warranties, express or implied except otherwise specified in writing. Without prejudice to the foregoing paragraph, the RA does not warrant that:

  • This Website and/or Research Services will be constantly available, or available at all;
  • The information on this Website or provided through the Research Services is complete, true, accurate or not misleading; or
  • The quality of any products, services, information, or other material that you obtain through the Website or Services will meet your expectations.

The RA, to the fullest extent permitted by law, disclaims all warranties, whether express or implied, including the warranty of merchantability, fitness for particular purpose and non-infringement. The RA makes no warranties about the accuracy, reliability, completeness, or timeliness of the Website, Research Services, Content, Contributed Content, Services, software, text, graphics and links.

The RA does not warrant that this Website, Research Services, information, content, materials, or any other material included on or otherwise made available to you through this Website, their servers, or electronic communication sent by the RA are free of viruses or other harmful components.

Nothing on this Website constitutes, or is meant to constitute, advice of any kind.

Indemnification: The client:

  1. Represents, warrants and covenants that no materials of any kind provided by him/her will:
    1. Violate, plagiarise, or infringe upon the rights of any third party, including copyright, trademark, privacy or other personal or proprietary rights; or
    2. Contain libellous, Prohibited Content or other unlawful material;
  2. Hereby agree to indemnify, defend and hold harmless the RA and all of the RA’s officers, directors, owners, agents, customers/clients, information providers, affiliates, licensors and licensees (collectively, the “Indemnified Parties”) from and against any and all liability and costs, including, without limitation, reasonable advocate’s fees, incurred by the Indemnified Parties in connection with any claim arising out of any breach by the client of these Terms or the foregoing representations, warranties and covenants. The client shall cooperate as fully as reasonably required in the defence of any such claim. The RA reserves the right, at its own expense, to assume the exclusive defence and control of any matter subject to indemnification by the client.

Applicable law: This Website, including the Content and Contributed Content and information contained herein, and the provision of Research Services shall be governed by the Securities and Exchange Board of India, laws of the Republic of India and the courts of Chennai, India which shall retain exclusive jurisdiction to entertain any proceedings in relation to any disputes arising out of the same. As such, the laws of India shall govern any transaction completed using this Website.

Information gathered and tracked: Information submitted or collected on the Website or pursuant to the use of the Services is stored in a database. Specifically, we store the username, name, e-mail address, contact number, as submitted or collected on our Website or through the provision of the Research Services. We may use such information to send out occasional promotional materials, including alerts on new Services available, or other promotional and marketing material relating to our clients and customers.

In accordance with the Information Technology Act 2000, the name and the details of the Grievance Officer at PrimeInvestor is provided below:

Mr. Srikanth Meenakshi
PrimeInvestor Financial Research Pvt. Ltd., Registered office: 659, 4th Avenue, D-Sector, Anna Nagar Western Extension, Chennai 600 101.
Email: [email protected]

11. Mandatory notice:

Clients shall be requested to go through Do’s and Don’ts while dealing with RA as specified in SEBI master circular no. SEBI/HO/MIRSD-POD-1/P/CIR/2024/49 dated May 21, 2024 or as may be specified by SEBI from time to time.

12. Optional Centralised Fee Collection Mechanism:

SEBI has operationalized a centralized fee collection mechanism for IA and RA. Under this mechanism, clients shall pay fees to IAs/RAs through a designated platform/portal administered by a recognized Administration and Supervision body. This is an optional mechanism for the registered entities. At this time, PrimeInvestor has opted out of this fee collection mechanism. Therefore, all subscription payments for the Research Services will be through the modes as specified in Clause 5 of these Terms.

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