Subsidiaries reduce profits for 2 out of 5 companies

Vidya Bala

BL Research Bureau Subsidiary operations transformed Tata Motors’ standalone profits of Rs 1,000 crore into a loss of Rs 2,505 crore, on consolidation, in the just-concluded financial year.

But Tata Motors is not a lone case of subsidiary operations actually weighing on the parent’s profits.

A comparative analysis suggests that two in five companies in the BSE 100 witnessed lower profits or slipped into losses on consolidation in 2008-09.

This suggests that subsidiaries were not of much help in adding to the returns for the parent company.

Business Line studied 82 of the BSE 100 companies that have presented their consolidated as well as standalone earnings for the year.

Overseas buys drag

Companies that made acquisitions (mostly leveraged) over the last couple of years were mostly the ones to suffer from lower profits on consolidation. These buyouts, mostly overseas and often not in the best of health, have dragged the profits of quite a few Indian companies, especially in the auto, engineering and metal sectors.

Tata Motors, Punj Lloyd, Tata Steel, Bajaj Auto, Hindalco and JSW Steel are instances where acquired subsidiaries substantially chipped away standalone profits.

For some companies such as Dr Reddy’s Laboratories and Punj Lloyd, subsidiaries even converted the profits of the parent company into consolidated losses. For instance, Dr Reddy’s net profits of Rs 561 crore moved into oblivion on consolidation; its losses stood at Rs 917 crore after ‘impairment’ of tangible assets and goodwill on acquisitions made a few years ago.

Punj Lloyd, on the other hand, has been troubled by the soured contract of a subsidiary, which it acquired a couple of years ago. For others such as Aditya Birla Nuvo and ICICI Bank, losses from the nascent insurance business dented the parent’s earnings.

Lower return on capital employed

Corporates that have ploughed in a substantial sum into these subsidiaries may have to wait for the operations to start yielding sizeable benefits.

Companies such as Jindal Steel, and Hindalco, for instance, appear to have employed as much as 30 per cent of their total consolidated capital (including debt) in subsidiary companies, going by figures declared in the segment-wise financial results.

For Tata Steel, consolidated operations returned just 7 per cent on capital employed in comparison to the 33 per cent return generated by the parent company.

However, subsidiaries do not always have to be viewed with caution. Acquisitions often take time to achieve synergies that translates into better profitability for the parent. Crompton Greaves is a classic case, wherein the company acquired troubled overseas companies and successfully turned them around.

The company’s subsidiaries contributed close to 30 per cent to the total profits in FY-09 compared to 23 per cent in FY-08. Tata Tea, Indiabulls Real Estate, Sterlite Industries and Aban Offshore are some of the companies that received a significant boost to their total earnings as a result of subsidiaries.