We are not talking here of teeny-weeny corporate Johnnies come lately, but of veritable megaliths of corporate India. Take TELCO. The net profits of this automobile major have nose-dived by 67 per cent in 1998-99 as compared to 1997-98. The net profit of Rs 295 crore in 1997-98 plummeted to a meagre Rs 97 crore in 1998-99. Even this vastly reduced profit figure has been artificially propped up, in fact pulled out like a rabbit from the corporate hat, by an other income of Rs 37 crore. Without this, Telco's net profit would have been just Rs 60 crore, orone-fifth of its net profit in the previous year.

A closer analysis reveals that the operating profitability of Telco's operations have, in fact, drastically declined in 1998-99 as against 1997-98. The real eye-opener is that the company's sales have dropped by only less than 10 per cent during 1998-99 as compared to 1997-98. Sales were Rs 6,600 crore in 1998-99, as against Rs 7,327 crore in 1997-98. What does this mean? It means that the intrinsic profitability of the company's operations is alarmingly declining. The sidelight of a higher interest outgo during the last fiscal, at Rs 310 crore, as compared to Rs 272 crore during the earlier year, carries the concomitant tale of supplementary borrowing and capital deployment not being sweated as efficiently as its earlier investments in its business.

Telco's competitor and the Hinduja group flagship company, Ashok Leyland Limited has blared its bugle about a 11 per cent rise in its net profit during 1998-99, as against 1997-98. The company's profit aftertax (PAT) trotted up to Rs 20.36 crore during 1998-99, from Rs 18.40 crore in 1997-98. The company's Managing Director R. Seshasaye claims that the company had actually achieved a turnaround in 1998-99, which was one of the most difficult years. He reinforced the point by citing the 50 per cent drop in the commercial vehicles market in the last two years.

But a closer look at the accounts of the company paint a different story. Ashok Leyland's profit and loss account for 1998-99 would actually have been awash in red had it not been for the saving grace of an other income of Rs 28.95 crore. In fact, the net profit of Rs 18.40 crore can be deemed to be totally on account of this other income of Rs 28.95 crore. It is also interesting that when the company has, strictly in terms of figures to the first decimal, improved its net profit by 10.6 per cent between 1997-98 and 1998-99, the other income itself has increased by 7 per cent, from Rs 27.17 crore to Rs. 28.95 crore. The rise in other income is thereforetrying to keep pace with the increase in PAT

Another telling case study is that of Bajaj Auto Limited. According to the company's Board, Bajaj has surpassed market expectations in its results for 1998-99. The company reported a 16.4 per cent rise in its net profit, which touched Rs 540.5 crore in 1998-99 from the Rs 464.1 crore in 1997-98. In spite of the tepid growth of the economy, the company is proud of having been able to increase its sales by 12 per cent from Rs 3,271 crore in 1997-98 to Rs 3,642 crore in 1998-99. But the company's other income, outside its earnings from its operations, grew by as high as 14 per cent during the same period. The other income was Rs 233 crore during 1997-98; and it shot up to Rs 265 crore during 1998-99. What needs to be underscored more a 12 per cent sales growth in an admittedly sluggish economy, or an even more striking 14 per cent rise in other income? Of course, the rise in Bajaj's PAT is also due to the change in its method of computing depreciation and the lowertax incidence during 1998-99. The extent to which other income builds up the sales and profitability comes out very clearly in the analysis of the financial results of over 500 companies by Probity Research.

When all these 500 companies were considered as a whole, sales grew by only 10.2 per cent, compared to the consistent 18 to 20 per cent annual growth in previous years. For the 1998-99, the total sales of all these companies worked out to Rs 86,365.35 crore, as against Rs 78,401.22 crore during 1997-98, a marginal spurt of over 10 per cent. But PAT of these companies in toto climbed up by 12 per cent to Rs 7,828.18 crore in 1998-99 from Rs 6,991 crore during the previous FY. Probity Research attributes this remarkable enhancement of profitability (in spite of the tardy sales growth and the higher interest burden borne by these companies during the year) to considerable belt tightening and cost reduction by the corporate sector. The interest burden was 17.7 per cent higher in the last fiscal, at Rs5,049.16 crore, as compared to the Rs 4,290.42 crore during 1997-98.

On the other hand, a major chunk of these higher profits came from other income, the sale of the investments made by these companies in other companies, and the disposal of assets. The other income of the companies analysed by Probity rocketed by as much as 22 per cent between 1997-98 and 1998-99. The other income of these 500-and-odd companies was placed at Rs 2,353.19 crore for 1997-98, and it magically zoomed to Rs 2,871.95 crore in 1998-99.

Revaluation of assets is another innovative stratagem that accountants have rustled up to dress up corporate balance sheets. Between two consecutive accounting years, the sales turnover of these companies studied by Probity climbed up by a meagre 10.2 per cent, due to the prevalent climate of recession. The companies are thumping their chests about their improved efficiency of operations and successful cost reduction on the strength of a 12 per cent jump in net profits. But everyone is strangelysilent about the phenomenal 22 per cent growth in other income!

The improved business efficiency is clearly a mirage. The improved profits are entirely due to the significant boost in other income. As you pore over one company's balance sheet after another's, what you discover is the same pattern of padding to prop up profits. TISCO registered a 12 per cent drop in its net profit during 1998-99, clocking Rs 282.23 crore against Rs 322.08 crore in 1997-98, in spite of a huge rise in its other income. The other income more than doubled from Rs 83.09 crore in 1997-98 to Rs 177.78 crore in 1998-99!

Mangalore Refinery and Petrochemicals boosted its other income by nearly 50 per cent from Rs 131.67 crore in 1997-98 to Rs 205.15 crore in 1998-99. In spite of this, its PAT sunk by more than half between these two years, from Rs 28.38 crore in 1997-98 to Rs 14.06 crore in 1998-99! The other income of Vam Organic Chemicals Limited rose more than 10-fold in two consecutive FYs, from Rs 26 lakh in 1997-98 to Rs 2.73crore in 1998-99! During the same period, its net sales sputtered a lot and spurted slightly from Rs 478.94 crore to Rs 479.05 crore.

The exception may prove the rule. But if income from exceptional items, as other income is sometimes christened in accounting jargon, becomes the determinant of the rise in profits, it surely spells an underlying malaise in performance. The time has come to study corporate results through cash flow rather than profits. After all, as accountants themselves tell you, profit is a matter of opinion, while cash is a matter of fact!

The author is a freelance writer