You're invited to try out the new version of Value Research Online. Click here to begin:

Trouble in the making

The companies listed below have contingent liabilities higher than equity

  • TweetTweet
  • LinkedinLinkedin
  • FacebookShare

In air force, stealth aircraft have a special place. They are deadlier than ordinary aircraft because they can't be detected by most radars. Indeed, what is insidious and invisible has the potential to cause greater harm than what is visible.

Subscribe to the Value Research Insight newsletter

This reminds us of contingent liabilities. These are financial obligations that could materialise in the future. If you study just the balance sheet, you may not realise their presence. However, if you study the notes to financial statements, they could be found. The balance sheet doesn't reflect them as they haven't occurred yet. But they have the potential to make a dent in the balance sheet if they occur.

Examples of contingent liabilities include tax disputes, pending lawsuits, guarantees, etc.

The table below lists companies whose contingent liabilities are more than equity and have been increasing in the past three years. This means that if these liabilities are realised, the entire equity of these companies could be wiped off.

If you are still wondering whether this really happens, is a case in point. Its costs from litigation resulted in the company's equity base turning negative.

While valuing a company, hence, do see the contingent liabilities. If not anything, that will help you preclude the need for a contingency plan later.

Problems to solve

Company Name Market cap
(Rs cr)
Contingent liabilities-to-shareholders' funds (%) Disputes/issues
2018 2017 2016
Ashoka Buildcon 3401 543 240 173 Claims, tax disputes, bank guarantees
Reliance Naval 758 478 160 90 Service tax, excise duty, sales tax
Coal India 144260 396 137 90 General disputes
Hinduja Ventures 683 382 42 32 Service tax, licence fee
Reliance Comm 1828 341 22 18 Litigation and spectrum charges; custom and excise duties; service tax
Network 18 3450 327 287 204 Decreasing shareholder funds
GMR Infrastructure 10050 297 220 147 Decreasing shareholder funds
HCL Infosystems 650 287 72 66 Increase in excise duty and income tax
Jaiprakash Associates 1511 234 198 61 Income-tax disputes
Hindustan Aeronautics 22392 176 147 142 Sales-tax and income-tax disputes
Gateway Distriparks 1173 173 147 145 Bank guarantees
Schneider Electric 2340 169 71 29 Increase in excise and sales duties and income tax
Gujarat State Petronet 8973 163 68 67 Bank guarantees and contractual disputes
Future Retail 21725 162 149 3 Corporate guarantees
Future Enterprises 1560 153 119 4 Guarantees
Usha Martin 1009 150 106 29 Fuel surcharge matters, increase in excise and sales duties, tax disputes
PNC Infratech 3308 140 114 94 Sales-tax disputes, bank guarantees
Mahindra Holidays 2731 135 134 121 Luxury tax and matters pertaining to revenue recognition
NBCC 9909 131 127 109 VAT and income-tax disputes
Panacea Biotec 1216 117 102 79 Decreasing shareholder funds
TV18 Broadcast 6103 109 107 88 Lawsuits for copyright and objectionable content, defamation suits
Atul Auto 736 107 36 11 Bank guarantees
Zee Media Corporation 800 102 66 7 Corporate guarantees
Data as on March 01, 2019

Are you missing an opportunity to invest in great stocks at low valuations? There are thousands of listed companies in India and yet only a handful that are worth investing at a particular time and at a particular price.

Our equity team has sifted through hundreds of companies and selected stocks that you should invest in. This list now has 37 stocks on it, and new ones are being added every month. Thousands of our members are using stagnant equity markets to buy great stocks at low prices. Membership of Value Research Stock Advisor is available at a 40% to 60% discount.

Learn more and become a member

comments powered by Disqus