To some extent, offering segment data is an attempt to improve disclosures to retail investors and make available information provided earlier only to institutional investors. Business Line looked at the segment reporting done by the broadbased BL-250 (Business Line Index of 250 companies) and some select companies outside this basket for the financial years 2001-02 and 2002-03 to see how they stacked up on these objectives.

Dominance of `single segment'

Several companies in the sample bypassed the spirit of the segment reporting regulation, claiming that they operated in a single reportable segment. Based on the differing risk profile, end-customers and product categories, reporting under different heads may offer greater clarity on financial performance. But companies have avoided making any such move.

For instance, Tata Engineering has, over the past year and a half (six quarters), claimed that it is exclusively engaged in the business of automotive products consisting of all types of commercial and passenger vehicles.

No doubt, the company is predominantly into automotive products. But to assert that commercial vehicles (heavy and light) and passenger cars belong to the same risk profile is, indeed, faulty reasoning, to say the least. When Ashok Leyland, its competitor, states that it is in the commercial vehicles business and operates in a single segment, that does make sense.

The same can be said for a host of other companies that provide segment-wise break-ups but without adding any value for shareholders. Companies such as Tata Steel (maker of flat and long steel products), Nestle India (confectionery, culinary products and semi-processed foods and beverages) Ranbaxy Laboratories (bulk drugs, formulations and generics) Blue Star (industrial and consumer cooling units) and Reliance Industries, to name a few, fall in this category.

In practically all these industry classes, other companies (even low-profile ones) offer more details than these majors are willing to share with shareholders. In steel, for instance, Maharashtra Seamless provides a segment-wise break-up into seamless pipes and ERW-pipes.

At the other end of the spectrum are companies such as Exide Industries which, for 2001-02 and a couple of quarters in 2002-03, provided a segment-wise break-up of its primary business of lead batteries into industrial and automotive categories. But for 2002-03, it said that it operates in a single segment of "lead acid batteries" and dropped the break-up provided earlier.

Comparability across sectors

Owing to the dominance of the single segment classification or variance in segment-wise break-up by companies, comparability of segment performance across different industries is almost impossible. Consider these industries:

Aluminium: Hindalco and National Aluminium (Nalco) are the two prominent players in this category. Both reported segment performance for 2002-03. Nalco provided a break-up into chemicals (including alumina) and aluminium, while Hindalco provided a break-up of aluminum alone as a separate segment.

A cursory examination reveals that the profit before interest and tax (PBIT) margin (segment PBIT / segment revenue) of the aluminium business of both are around the same level — 25.60 per cent for Nalco and 27.80 per cent for Hindalco for 2002-03.

However, there is a stark difference in the return on capital employed (PBIT / capital employed) for the two companies, with Nalco at 12.25 per cent and Hindalco at 17.15 per cent. This is because Hindalco is present both in the upstream and downstream aluminium businesses, while Nalco is only in the upstream business.

Unless Hindalco provides the break-up for its upstream and downstream (such as foils, extrusions and rolled products) businesses separately, drawing any meaningful comparison between the two companies is difficult.

Pharmaceuticals: The two pharma companies in the limelight are Ranbaxy Laboratories and Dr. Reddy's Labs. Both are involved in more or less the same business categories — bulk drugs, formulations, generics and drug discovery (or research and development). While Dr. Reddy's has provided segment information across these categories, Ranbaxy has classified its business into `pharmaceuticals' and `others'.

Hence, the possibility of drawing up any meaningful benchmarks for PBIT margin for the industry is practically non-existent. Even across the second-tier pharma companies, this problem persists. Players such as Aurobindo Pharma also provide the break-up between bulk drugs and formulations, while others such as Sun Pharma, Wockhardt or Burroughs Wellcome classify pharma as a single segment.

This lack of comparability seems to be a problem across other industry categories, including steel, petrochemicals, automobiles (including two-wheelers and four-wheelers) and shipping.

Scope for improved disclosures

Select industrial groups such as the Tatas and Reliance, or prominent companies such as Ranbaxy, which should be setting an example for other companies, seem to be ignoring the spirit of segmented disclosures.

There is an urgent need for SEBI to discuss the need for improved disclosures by companies within these groups.

For instance, there is a need to classify steel on the basis of flat and long products, to draw a distinction between commercial vehicles and passenger cars, or upstream and downstream non-ferrous metals, such as aluminium or copper.

This alone will improve the cause of the small investors in line with the objectives of segment reporting.

In interpreting segment reporting data, investors have to keep three elements in mind.

First, the high percentage of inter-segment revenue to total segment revenue raises questions on whether these transfers took place at market prices or if they were based on some other formula.

This tends to make segment PBIT a less reliable indicator.

For instance, for 2002-03, IPCL's inter-segment/intra-segment revenues jumped to nearly 41 per cent of total segment revenues — up from 35 per cent in 2001-02.

It is important to mandate companies with high inter-segment revenues to make disclosures accounting for inter-segment transfers.

The disclosure made by Nalco in the performance for the quarter ended June 30 may offer some guidance on this score. Similarly, investors need to ensure that unallocable expenditure and unallocable capital employed (segment assets less segment liabilities not allocated to any specific segment) may lead to inflation or overstatement of returns in a specific segment.

A comparison over the past two years — 2002-03 and 2001-02 — shows that the top 100 companies (with a few exceptions) have effected sharp reductions in these two unallocable expense/capital heads. Though this is an encouraging trend for performance analysis, it needs to monitored closely.

Those interested in detailed information on segment reporting may refer to Accounting Standard 17 on Segment Reporting issued by the ICAI (icai.org).

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