At the end of every financial year, from about June to August , companies release their annual reports for the previous fiscal. While analyst and media conference calls, investor presentations and press releases are made available every quarter by many companies, the annual report is a detailed document useful for all investors, including retail players. It helps one comprehensively make a assess a company’s business prospects and plans for the future.

While the entire annual report of a company should preferably be studied carefully, there are many important sections that investors must go through for better insights. A lot of qualitative information in these reports that makes for interesting reading outside of just cold number-based analysis.

Some of these are the director/board’s report, 10-year financial highlights, management discussion and analysis, detailed financial statements and their schedules, related party transactions and the like.

Though annual reports differ across companies, the broad structure is somewhat similar, at least with regard to firms with larger capitalisation.

Read on for more on how you can make the best use of a company’s annual report.

Board’s report

Almost all annual reports have this section. A brief section on the financial results — standalone and consolidated — gives a gist of the operational numbers. Then, there are sections on dividends paid and capital expenditure.

One key section here is the capital allocation policy — that decides how the company will reward its shareholders periodically with regular and special dividends and buybacks.

For instance, the FY2023 annual report of Infosys states that the company looks to distribute around 85 per cent of its free cash flow over a period of time. That gives an idea of what investors are likely to receive in future. Infosys had ₹20,443 crore as of FY23 in free cash flow.

TCS’ annual report indicates that it distributes 80-100 per cent of its free cash flow to shareholders.

Another key metric available is the salary of top personnel and the ratio with respect to the median remuneration. In the case of TCS, Rajesh Gopinathan (ex-CEO) and NG Subramaniam (COO) got 427 times and 345 times the median salary of the company. Investors can judge if the senior management is being rewarded appropriately in line with the company’s performance.

Performance overview

Before giving the financial overview, detailed statements from the chairman and the CEO are addressed to shareholders and outline the financial performance for the year gone by, challenges to be addressed, the macroeconomic environment and the company’s competitive positioning.

Some companies give detailed performance reports of each product category that they manufacture.

Hindustan Unilever, for example, lists the performance of almost all its top brands from home care, beauty & personal care, and food & refreshment segments. That gives insight into the demand environment in the economy, the trends in rural and urban India and so on.

For example, its FY23 annual report says that Surf Excel alone has crossed $1 billion in turnover. All FMCG companies spend a lot on media and advertisements. HUL’s report indicates that digital media contributed over 25 per cent of the total media spending during FY23. The annual report itself can be a good proxy for gauging consumer demand to a reasonable extent.

MDA, financial statements and schedules

Before getting into the financial statements, there is a section on management discussion and analysis (MDA), which gives segment/sector/product/geography-wise lowdown on the industry, economy and company. Strength, weakness, opportunities and threats (SWOT) analysis may also be available.

Probably one of the most important parts is the section on financial statements and explanatory schedules. It highlights some cost or expense heads that may not get regular attention. For example, Infosys hires sub-contractors in addition to regular employees, to fill gaps in skills or for urgent project requirements or even lack of visa availability to offshore personnel to be sent onsite. These recruits are typically quite expensive. The cost of technical sub-contractors was a whopping ₹19,096 crore in FY23 or 15.3 per cent of revenues. It was ₹16,298 crore in FY22. Such details can help understand margin pressures from lesser-known heads.

In Nestle India’s CY22 annual report, under the ‘cost of materials consumed’ section, one can see details of packing and raw materials. Packing materials cost nearly ₹1,340 crore for the company, a 20 per cent increase over CY21.

Related party transactions

Many companies do business with group entities or sister concerns. By law, these must be done at arm’s length and fairly so that any sales or transfer of assets isn’t unfair to minority shareholders.

HDFC Bank’s FY22 annual report shows that it purchased home loans worth about ₹28,205 crore from its parent, HDFC. Now, HDFC would continue to service these loans and HDFC Bank would pay the former a servicing fee.

Avenue Supermarts’ (DMart) FY22 annual report contains information about the sale and purchase of goods worth ₹2,900 crore to its subsidiary Avenue E-commerce Limited (AEL) with a 3 per cent mark-up. The explanation is that AEL serves DMart’s online customers and that AEL would recover costs and a mark-up of 3 per cent to negate any impact on its profit and loss statement.

Avenue Supermarts has further invested ₹3,500 crore as equity capital in AEL.

All these are but a few interesting parameters available in the annual report. Make a habit of reading the reports of companies you have invested in.

Take note
Board’s report gives a gist of the operational numbers
Management discussion and analysis offers insights from the corporate leadership
Keep an eye on related party transactions to understand if they have been done fairly
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