Thursday, May 21, 2009

Standalone vs Consolidated





With the help of StatCounter, I have been able to find what people are looking for while investment. There was a search yesterday on Google by one investor which led to my blog and the search keyword was what the title of this post is. Many people want to know what is the difference between the two kinds of results published by the companies. Let me give you the definition:

Standalone Financial Results of a company includes only the revenue, expenditure and other items for the company.

When a company has some stake in another company, the other company is called subsidiary of the parent company.

Subsidiaries can be of many types:

  1. Wholly owned subsidiary: The parent owns 100% shares of the subsidiary.
  2. Majority owned subsidiary: The parent owns more than 50% shares of the subsidiary.
  3. The rest is also divided in two types
  • Company holding greater than or equal to 20% shares but less than 50% shares of a subsidiary.
  • Company holding less than 20% shares of a subsidiary.


The GAAP says when a company publishes consolidated financial results, it should follow the following rules:
  1. If a company holds more than 50% stake in a subsidiary company, the consolidated financial results of the company should add all the revenue, expenditure, profits and other items to its financial results in respective items but the profits; that does not belong to the company due to minority shareholders owning shares of subsidiary, should be shown as minority interest. Thus if a company owns 100% in a subsidiary company, minority interest is 0.
  2. If a company holds more than 20% stake in a subsidiary company but less than 50%, the consolidated financial results of the company should add the proportionate revenue, expenditure, profits and other items to its financial results in respective items, i.e. If a company A owns 25% stake in company B, B's 25% revenue, 25% expenditure, 25% profits etc. should be added to the respective items of A's standalone results to get the consolidated results.
  3. If a company holds less than 20% stake in a subsidiary company, the consolidated financial results of the company should not be any different from its standalone results.
Let's understand this by example. Look at L&T's Standalone results and Consolidated results for FY2008. L&T has many subsidiaries like L&T Infotech, L&T Finance and L&T has very different shareholding for each of its subsidiaries. When the L&T creates it's consolidated results, it follows the above three GAAP principles to add the revenue, expenditure, profits and other items to its standalone numbers to get the consolidated results.

Because of case 3, P/E of some company sometimes may not reflect the true picture of the company's valuations. There is one significant example of this in Indian stock market, HDFC holds 19.xx% in HDFC Bank, thus HDFC's consolidated results do not include the profits, revenue and other items from HDFC Bank. HDFC Bank is valued at around 50K Crore, 19.xx% of it is around 10K Crore. HDFC itself is valued at 60K Crore with a P/E of 26. But if you remove HDFC Bank's valuations from it, P/E comes down to 22. I am not sure if the market is adding HDFC Bank's valuations to HDFC.



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8 comments:

Novice Trader said...

very useful post. Thank you very much! :)

Azmath said...

Good post. Thank You.

Azmath said...

good post, thank you.

richa said...

thnks...realy helpful..

Phani said...

Really great . Could you help me with some other doubts regarding business, i mean stock markets.

Lord_Voldemort said...

Nice explanation dude! really appreciate the help especially when its explained in Indian context :)

domainhos said...

I am not familiar with this information. This information is really helpful for me. Thanks for sharing.
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akkiboy said...

SO what numbers should one look at?

Standalone or Consolidated? Please answer it as if it were a general thumb rule.

Thanks

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