Regarding R & D expenses
Many people make a mistake in this section for several companies. So I am conveying my understanding on this in details. There is no specific requirement to call out R&D expenses from various heads in AR or accounting. There are many other companies too which I have come across in the past who call out nothing on R&D separately. For eg. Heranba, or look at Supriya Life, they talk about being totally R&D driven companies and R&D spend is just 3Cr in this section (for Supriya). However, if you go through the DRHPs you’ll figure out R&D spends are incorporated in other sections including COGS too.
For Best Agrolife in particular… there are various heads under which R&D expenses are captured along with expenses related to other heads.
- Employee expenses (there are more than 50 staff in Gajraula unit & another 15 in formulation unit). Was fortunate to get an opportunity to visit both facilities.
- Consumption of stores & spares
- Outsourced services cost (for field technicians hired on contractual basis, outside laboratories engaged). I was told that on an average there are ~300 field staff for demo / trials.
- Legal & Professional Expenses (for experts & universities engaged)
- Travelling and Conveyance
- Miscellaneous Expenses
For Best, based on my notes the R&D spends are as below
Rs Cr | FY21 | FY22 | FY23E |
---|---|---|---|
R&D expenses | 12.3 | 15.2 | 20 |
As a % of sales | 1.2% | 1.2% | 1.1% |
The probable reasons for lower freight outward expenses in comparison to others are .
- B2B & P2P business was 85% of total business and it is on Freight to pay basis only
- On B2C business till last year company was majorly present in North region only as against a pan India distribution (going forward)
- The freight cost for supplies to distributer is built up in their commission structure in some of areas
- This year Freight outward cost should increase with increase in the B2C business
Reasons I understand for lower Other expenses in the past
- Lower expenses on Freight outward as rightly pointed out by you. Detailed my understanding above.
- FY 22 consolidate numbers capture only a part of the year for one of the subsidiaries as it was consolidated effective from mid October 2021 only
- 1H23 other expenses figure is already reported Rs 63 cr with increased B2C business
Consolidated vs Standalone Ebitda
Again, I feel this is a common mistake of too much analysis. I am not too big a fan of analysing Sub and Parent separately in cases of 100% subs. There’s much more to accounting and reasons behind financials for cost bookings than what we understand as investors from merely superficial number crunching through Annual Reports.
Case in point being your interpretation of Best Agrolife is not correct - The Consolidated sales is Rs 1164 cr & standalone sales is Rs 1009 cr this doesn’t imply that subsidiary sales are residual Rs 155 cr. I know for a fact that subsidiary sales on standalone basis are closer to 600cr but due to intercompany sales elimination the consolidated numbers come to Rs 1164 cr. So on subsidiary sales the Ebitda number works out to be closer to 25% & not 96% .
But like I said in any case margins should be looked on consolidated basis only as most of corporate OH expenses are incurred in parent company.
On a more general note though, one has to see how much analysis is leading to paralysis. It is great to dig deeper into accounting and notes, but in India, reporting and accounting systems are still not as advanced and developed, especially more so for companies where you and I are trying to find VALUE. I go with an approach of taking two things hand in hand. Financials along with business understanding & management reading.
This also, leaves some scope for re-rating once things improves every which way. Because re-rating mostly happens where there are perception issues, and you need to identify that they are mere perceptions!
Cheers.
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