For one, the annual turnover increased Rs 2,772 crore (6 per cent of sales) as a result of a change in accounting for provision made for warranties in respect of construction contracts. The company earlier followed a policy of creating a provision of 2.5 per cent of the contract value and deferred the warranty provision as well as the corresponding revenue until completion of trial operation. This has now been changed to providing warranty costs at 2.5 per cent of revenue progressively as and when the revenue is recognised. Accounting for this change, revenue as well as fresh provisions were higher. The sales growth eliminating this change was at a more sedate 19 per cent. However, given that this policy is going to be followed in future as well, the same has to be construed as a recurring event.
Similarly, the company has changed its policy on accounting for leave liability for employees to actuarial basis from accrual basis, and also changed its method of depreciation on cranes, based on their useful life. This has reduced the depreciation charged.
The above three changes together resulted in increasing the company's profit before tax for FY-11 by a good Rs 983 crore. Eliminating these, profits before tax grew by a still healthy 22 per cent. However, given that these are policy changes and not one-off adjustments, their impact would be recurring and hence have to be considered for future financial performance.
Net of the above impacts, raw materials consumed to sales declined by about 1.3 percentage points for FY-11 compared with a year ago. Despite cost controls, the competitive environment at present may not help the company keep up its operating profit margins at current levels of 20 per cent.
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