Quess Corp – A quest for inorganic growth turning into a series of miscalculations – Fintelligence

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Company Overview: Quess Corp Limited is engaged in the business of providing services in technology solutions, people services, facility management, industrials and internet business. The Company undertook an initial public offer and subsequently got its equity shares listed on the Bombay Stock Exchange and National Stock Exchange effective 12th July 2016. Thomas Cook (India) Limited became the parent company and Fairfax Financial Holding Limited became the ultimate holding company of the Group with effect from 14th May 2013. However, Thomas Cook (India) Limited ceased to be the parent company and Fairfax Financial Holding Limited ceased to be the ultimate holding company of Quess Corp Limited with effect from 1st March 2018.

While going through the financial statements of Quess Corp Ltd for FY19, I noticed that ‘Goodwill on acquisition’ was, by far, the largest asset in its consolidated balance Sheet accounting for roughly 43% of its total net worth. And hence I decided to dig a little deeper to understand how these acquired businesses (based on which goodwill has been recorded) have really fared over the years vis a vis the price paid to acquire them (Purchase consideration/Deal value).

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According to Indian Accounting Standard (Ind AS) 36 – “Goodwill recognised in a business combination is an asset representing the future economic benefits arising from other assets acquired in a business combination.”

What this means is that goodwill represents the future economic benefits that will be derived from the businesses acquired. If any time in the future the management believes that no economic benefit is going to arise from a particular acquisition, it will have to impair the goodwill relating to it. As discussed above, goodwill being such a large part of the net worth needs to be evaluated for its carrying value and that can be done by judging the acquisition from which that goodwill arose. The best way to do that is to calculate the economic profit earned from it. Now, lets look at few of those acquisitions to understand their performance and whether or not they have created value for the company

As we can see, Return on Investment (ROI) from the above four acquisitions have not been able to beat Quess Corp’s cost of capital, thereby destroying value. Since these acquisitions have performed poorly in the last couple of years, goodwill arising on them, which by the way, accounts for more than 50% of the total consolidated goodwill (excluding goodwill arising on merger with Manipal Integrated system businesses), should be impaired as no economic benefit is expected out of them. Now here’s the funny thing. The management has impaired goodwill on some of these acquisitions but instead of admitting to the fact that it was due to inefficient and uneconomical investment decisions made by them in the first place, they have used Covid as an excuse. Below is an excerpt from consolidated financial results of Q4FY20.

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Finally, lets look at how to judge an acquisition made by a company, step by step:

  1. Determine the purchase consideration paid by the acquirer. You can find this in ‘Notes to accounts’ in the Annual report.
  2. Divide ‘Profit after tax’ of the acquired company by the purchase consideration paid by the acquirer, to get the Return on Investment (ROI). Financial details of the acquired companies can be found in form AOC-1 in the Annual report.
  3. Calculate the Weighted average cost of capital (WACC) of the acquirer.
  4. Economic Profit from an acquisition= ROI – WACC. If the economic profit is positive, it means that the acquisition has earned excess return over the company’s cost of capital, thereby creating value. If the economic profit is negative i.e. an economic loss, it means that the acquisition has destroyed value.

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Amey Chheda

Amey Chheda

Amey is a Chartered Accountant, an Equity Investor, and a Blogger.
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