How to read the annual report of a company like HDFC AMC, ITC.

How to read the annual report of any company?

The question here is the annual report is very big, with more than 300 pages. But with less time, it becomes important for you to know which pages and details as an investor. Today's article is on how can you read the annual report of the company efficiently I will make sure to give a real-life example on how to read annual reports to make you understand better.

I'm going to use two company's balance sheet: HDFC AMC and ITC, both are for educational purposes, please don't misunderstand that we are promoting these shares. We do not give buying and selling advice.

Let's begin with today's article. I will be able to divide this text into completely different components. however before beginning the article, if you've got not signed to DEV’S INVEST NOTES-BLOGOSPHERE yet, then Subscribe it! in order that you do not miss out on any of our articles.

Let's move on to the main topic Lets take HDFC AMC report. I have already highlighted the main details here. 

What is an annual report?

The annual report tells us the detail of the business done by the company in the last year. The annual report will give you important details to investors for them to decide whether they want to invest in the company or not Let's start with HDFC AMC's report.

I will teach you which are the important aspects for you as an investor. To begin with, there is detail about the company, their philosophy, company's process and risk management,Since last 20 years company is operating their business. In the first few pages, you can find the details of their business and their business objective.

Now you can see the content of the whole annual reports as an index. If I give you an overview, You can see in the corporate overview, KPI's, on where did the company perform well In product Suite, you can see the products of the company and what is the company's philosophy and what initiatives have company taken in the last financial year. You can see all this incorporate overview The second part which is very important for every investor, Management Discussion and Analysis Management tells you here about business and things that impacted the company's performance in last year.

If you see any company's management discussion this year, they would have all spoken of COVID and would have discussed how COVID impacted their business as a whole Friends, And the financial reports, to evaluate the performance, you can check a company's balance sheet, profit & loss, changes in equity and cash flow.

These details will be found in the annual report Warren Buffet says that numbers are important but numbers are just one parameter of the analysis which tells you whether you should invest or not in the company.

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People usually only see this financial statement and decide whether you should invest or not but it is said that when you invest in a share, you are investing in its company thus it's important to know its business, management, growth and future growth of the company. If you see by the side, performance highlight is mentioned, the Company's performance like for AMC it's very important to note their Asset Under Management, where they have spoken of it and unique investors and employees.

Moving forward, they have mentioned the vision of the company that it wants to become a dominant player in India's mutual fund's space It wants to emphasize on its ethics and professional conduct. Here you can see that the company wants to grow keeping in mind its professional conduct and ethics. 

If you move further you can see Investment risk management it is important for any AMC to jot how they are managing their risk From here you can see the investment risk management of the company. The company sells its product suite here in the Annual Report, which all products does the company have They have 23 schemes in Equity. In debt, 90 schemes. In liquid, they have 2 schemes and 7 other schemes. From here, you come to know in which particular asset class has the company invested in by the side, you can see the category of asset classes and its AUM.

Now here the company would try to explain what they tried to achieve, the problems they faced If you want to see the financial snapshot of the business if I talk about AMC then how much is the AUM. They would segregate here on how much is in the Equity and Debt Moving on, the company tells us the presence in the company, its footprints.

When you are seeing the annual report of the company, your objective to not only understand its business but also about its industry. Cause that company might be operating in some company. There might be some factor which influenced the whole industry.

 

"An annual report, you will learn about the company and its industry well. Like many people, if you are not familiar with the AMC industry, how will you understand the annual report. Friends, each and every terminology related to the AMC industry has been explained in detail here So that you can do a good analysis and decide whether to invest or not."

Key Performance Indicators. Every industry has different KPIs. Revenue from Operations is important for every company. If I talk about a bank, you can also see the NPA of the bank cause NPA is a key performing indicator in banking sector Key performance indicators are different for every industry, for AMC sector these indicators are important Here company is showing you its performance year on year in each parameter.

You can see this overview to analyze the company's growth but my suggestion is, here you can see a 14.40% CAGR for revenue from operations but you should also keep another company's annual report open with another company from the AMC sector and compare it with its growth to get a fair idea on how the company performed in comparison with the industry.

Here are the KPIs that you can check in-depth on page no. 10 and 11 in HDFC AMC's annual report. After that, there is the chairman message which tells you about the company like I have highlighted a few things. Here he is talking about COVID, he has said that the last year wasn't good but as a positive message chairman is saying the overall structure and the growth story is unchanged It has been impacted temporarily and in the long term, it will come back into shape.

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Further, he has mentioned how HDFC AMC can utilize this opportunity and grow further Here you can understand how the management is thinking in the adverse situation to grow.

Here you can see MD's message where he will tell you about the company. He talks a bit about the company. How the company performed in the important parameters like the AUM, he even talks about the impact of COVID on them, MD will overall tell you the impact of COVID and how company recently grew.

Further Digitization has been given an important place that too at the beginning of the report. This shows the importance it is giving to digitalize its services in the future. Another important parameter, the board of directors.

Warren Buffet always looks at the management of the company first Now let's look at the company's board. Many people used to ask where can they find the Board Of Directors In the annual report, there is a particular page for board of directors. You can see the whole detail here.

What was their prior position? Was he an executive director or a non-executive director? Who is an independent director?

You can do a search on the name as well and his prior work ex. These are important details to know before investing in a business with the numbers in order to do a good analysis. Now the next part, Management Discussion and Analysis. If you see the annual report, you will find it in Page no.27.

The company tells you about all the factors on which it got affected. With global, it will also mention domestic risk. The factors cause of which its industry, company got impacted I have highlighted the important parts here, the factors that affected were Global pandemic, Oil prices, Global GDP. Talking about debt funds, policy rates are very important which has been mentioned in the management analysis how REPO rates have been cut from 2020.

This part doesn't just tell you how to do an analysis on the company. This tells you how to analyze the business. You can choose a good company from all the different companies. About India, it is mentioned that its GDP was low in the last decade, 4.25%. This part is very important which you should read in detail.

If you have yet, then download the report and read it from page no. 25 currency movements impact the company deeply, it has been explained in detail here. Talking about India's investment, if equity is moving up and down a lot then it impacts the FPI flows heavily. They have started selling. You can see the details here in management analysis. They have kept the debt market separate here. Mainly there is debt or equity in mutual funds.

Management already mentioned everything about Equity. They have mentioned debt in more detail here as we could see a lot of problems in the Debt side. Here they have mentioned in the detail of which event happened when that impacted the debt market. Here is the industry insight. It tells you about the numbers of industry.

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You already read in the Management Analysis and discussion on which were the events that impacted the entire industry. It mentioned how the company performed financially but now this no. tells you about the industry.

Now say this company's AUM has grown by 5% but if the industry AUM has grown by 20% then the company hasn't performed well. This can give you a comparative analysis of how the company performed in comparison to the industry. You can go to page no. 25 and read it.

Here you will find the measures taken by SEBI to reduce the impact of the pandemic. After that, you can see the business overview, operational performance, this is very important to judge a company's performance from the operations point of view.

A very important part is to know the overall outlook, on what you think the outlook of your company looks like what is company planning strategically, you can see that in the outlook of the company in Pg no. 42. You can read about it in detail. Talking about the investment world, compliance becomes very important You can read about the compliance here.

Friends, the important part is Review Of Operations It mentions the reason behind the decline in operational efficiency. Like its AUM declined, the reason being COVID. They have further mentioned that when the pandemic came they made a business continuity plan which they initiated and implemented.

There are many details that you can skip if you don't have time for it. If you have extra time, skim through the pages but the things I told you were the important things which should not be missed Now the next part, it tells us about the shareholding pattern. It's important as it tells you the stake held by promoters.

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You can see the companies that have invested Like how many shares did mutual funds, Banks, Venture funds, FII's bought in this company. You can see it in Pg No. 45. Here you can see in offered for sale on how much percentage stake has been sold out by the promoters. You can see its impact here. Promoter, Standard Life Investment Ltd had a 29% stake. Via OFS, it sold off its 3% stake Now it has 26.84% stake left. All information is clearly mentioned in the annual report.

Now details of directors. I discussed it above as well Here you will know if any committee meetings happened, how many meetings did each director attend In order to understand the seriousness, you should check if the directors attended all the meetings or not If not, then how many meetings did the director miss, you can see those details here In board meetings, which director attended how many meetings.

Total no. of meetings here You can also see how many directors attended the AGM or how many directors were absent Coming to financial statements which you will get after Pg.100, you can see the things which you might be seeing in different websites. If I talk about balance sheet, profit & loss statement, cash flow statement. You can see all the details here. You can skip the Audit and go for the Annual report.

As you can see the balance sheet it has been compared on a YoY basis so that you can do a comparative analysis on where it fared well and didn't. Then you can see the P&L which has been compared with the last year as well. After annual statements, the company discusses these things in-depth in a page called.

Notes To Financial Statement, these are notes on how everything has been analyzed which gives a better understanding Rest is the technical information, if you want to skip it, you may. But if you have time, you may skim through it.

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If I conclude, when you start looking at it again, you understand about the business, key financial indicators Company's Vision, Management Discussions and an overall understanding analysis on the business which can help you make a good decision, If I give you an overall of ITC. You will find the same format for ITC as well. Almost all annual formats are in the same format.

If you skim through it properly, you can do a good analysis ITC first discusses its brands then the vision, its main indicators where the company has performed well ITC tells you the products it has newly launched in the new financial year. You can see all these details here.

If you go down, the company tries to explain about its company really well. Now, you know how to properly read the Annual Report of a company. If you follow the pattern that I followed with HDFC AMC, you will never choose the wrong company. You can choose a good company for the long term which would be very beneficial.

Again I will repeat, you are not buying a share, you are buying a business. When your thinking will change, your chances of making a profit will automatically increase.

I hope you would have liked this article, If you liked, then comment and tell us, if even you read the annual report if we have missed anything important in the annual report.

Let us know in the comments cause friends, the annual report is really lengthy, if we start discussing it in whole, it might take 2,3 hours. But I thought of sharing the important points so that you can do an independent analysis of your own.

The two companies report we used: HDFC AMC and ITC, we are not giving any recommendations. We don't recommend on buying and selling any shares. If you have to buy and sell do your own analysis, then decide whether you should buy it or not.

Friends, I hope you would possibly have likeable this text. If we've taken any company's name within the article then it's just for instructional functions. we have a tendency to ne'er advise you to take a position in a very mutual fund or a specific stock. we have a tendency to produce articles strictly for instructional functions. If you likeable this text. Press Like! suggest me, 

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Disclaimer: The annual reports used in the article are for educational purposes only.

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