Monday, August 22, 2016

Beware of companies in low tax sectors-these may bite you

While reading about failure patterns of listed Indian companies, some themes caught my eye. One of them is that certain sectors had a high share of corporate mishaps. Whether it is the plantation investments Ponzi schemes of the 1990s, real estate boom of the early 2000s, some things never change. The below post tries to analyze and explain why

  1. Agriculture-Tax free income hence cannot correlate tax payments to reported income. Also, there is usually indirect tax exemption as well, so possibility to raise 'accommodation bills without any other offsetting check/VAT chain'. Forensic audits ordered/pending for Kaveri Seeds and Camson Biotech, and the near insolvency of India's largest rose grower Karuturi networks, illustrate the point, that accounting issues in these sectors do exist. Other examples like Transgene Biotech also exist. 
  2. Education-Like how Chinese shell companies were incorporated abroad (with local operating partnerships) to circumvent Chinese FDI restrictions, Indian companies resorted to agreements with trusts etc to make money from the traditionally non profit education sector. This did not end well for Educomp and Everonn, both of whom are facing distress..
  3. Scrap Sales-This sector again operates on cash, hence for companies whose raw material/finished product uses scrap/recyling, there is a risk of siphoning out. While companies like Ganesha Ecosphere have thankfully not reported frauds so far, this risk exists.
  4. Real Estate-Nearly all the players experience high leverage and low profits despite ever mounting prices. It seems promoters become rich(eg DLF) with outside interests(eg land) disguised via land ownerships/shell companies, while shareholders face negative returns
  5. Jewellery-This industry is notorious for trust based/cash transactions. There were pan India strikes when PAN was introduced for high value transactions, and when excise was proposed-even at a much higher exemption threshold. Examples of frauds in this sector include Winsome Diamonds, while financial distressed firms include Gitanjali Gems

Bottomline-Triangulation of data is always useful and being subject to direct/indirect taxes(and the resultant audits/returns/investigation) helps outside investors to detect red flags, or exit somewhat in time. Of course, as I outlined in an earlier post, this exit may be premature but one is informed atleast

1 comment:

  1. Such a nice and useful information posted here for us on real estate plots and homes. Thanks for sharing here with us.
    row house in indore