Sunday, November 13, 2011

Interesting Accounting - Jyothy Laboratories

I was listening to the current quarter concall of Jyothy Laboratories and came across some interesting accounting.
In the month of May 11, Jyothy Laboratories announced the acquisition of Henkel’s stake in its Indian subsidiary Henkel India, gaining a foothold in the detergent market. Henkel India has been losing money for sometime and Jyothy has initiated action in turning the business around. As part of the exercise Jyothy has borrowed money on its balance sheet and lent that money to Henkel to manage debt on its books.
In the current quarter Jyothy has borrowed over Rs 460 crores ( 4600 Rated Taxable Zero Coupon Non Convertible Debentures  of a face value of Rs 10 lacs) by issuing short term debentures to the bank and lent the same to Henkel India. The debenture has been issued for a period of 91 days and will be redeemable at a premium of Rs 26,801.47 per debenture.
Now comes the interesting part. Jyothy in its current quarters results has booked other income of 14.82 crores. Nearly about 12 crores of it is interest paid by Henkel India to the parent for the money that Jyothy has lent to it. It is a significant amount considering the fact that Jyothy’s PBT for the quarter is Rs 16.93 crores.
But guess what, there is no corresponding interest expense booked in Jyothy’s accounts against the income that they are booking. On the concall the management said that since it is a zero coupon debenture which is being redeemed at a premium, the company is allowed to write of the redemption premium ( which is essentially interest) from the reserve and surplus. So magically they are booking interest income in the profit and loss account and expensing it out in the balance sheet.

Not really Ujjala bright and clean I must admit 


Rajeev Thakkar said...

Hi Ninad, Something very similar has been done by Housing Development Finance Corporation (HDFC) in the past. These things are "legally" correct but logically atrocious.

Ninad Kunder said...

Hi Rajeev

Especially when the impact is very material. You are right though it is legally correct just leaves a sour taste.



Anonymous said...

Good Post. It is very important to be careful of such managements to tend to "manage" earnings without too much of consideration of ethics.


Prasobh said...

Hi Ninad,

Thanks for your pinpointed analysis.

Forgive my ignorance.. You have mentioned that the interest of 12 crore paid by Henkel to Jyothy in the current quarter.But I couldn't find such an information in Henkel's sep 11 results. Can you please enlighten me on this ?

Best Regards,

Ninad Kunder said...


Yep it is a important variable to always factor in.

Ninad Kunder said...


I was also initially perplexed but the number is reflected in the consolidated quarterly numbers for Henkel.

Raja said...

Hi Ninad,

How do you get to know about these kind of con calls in advance ?

Is there common way in which this information is shared by companies ?