Blog 115 - Analysing Sources of Revenue part 9

Some businesses generate the majority of their revenues in particular quarters/ months/ seasons of the year. The don't have streamlined sales throughout the year hence financial performance exhibits seasonality in the data. Almost every research analyst out there, tracks peak quarter/ seasons performance of the company to understand how the full year performance is going to look like.

To study seasonality, we can take a look at the Quarterly financials as well as Annual financial statements. Though Quarterly figures are unaudited in India, we can take a look at those figures and see how much they contribute to annual sales across multiple years to figure out a trend and if this trend makes any sense or connects with the business.

Case Study: Monte Carlo

Monte Carlo Fashion Ltd is engaged in manufacturing designer woollen/ cotton readymade apparel and trading of readymade apparel and other products. Let us take a look at their revenue quarter-wise and understand whether their sales are linear during the year or is it scattered/ seasonal.

You can find “Quarterly statements” on the company's website, generally under the “Investor Relations” section or in the corporate announcement section on BSE. After downloading quarterly statements, an analyst needs to punch Revenue figures (consolidated) quarterwise to and then common size the data to (Quarterly Revenue/ Total revenue from that particular year) to get an idea how much % sales are being made quarterly. We have calculated it for you below:

Please note: Often candidates are confused with Quarterly definitions, to be very clear on that, Q1 FY19 would be 1st April 2018 to 30th June 2018 and likewise, Q4 FY19 would be 1st Jan2019 to 31st March 2019.

From the above table we can easily differentiate that Quarter-3 for the company is the highest revenue contributor because it’s the start of winter season. Given the company is into winter wear manufacturing, it sees over 50% of its sales in the third quarter of the year. For such companies, it becomes very important for an analyst to track “Peak quarter revenue of current year v/s Last year peak quarter revenue” instead of QoQ revenue (Current quarter Vs previous quarter growth figure) which won’t give you much essence about growth.

From the 2021 performance, we can observe that COVID hit India really hard in the first two quarters of FY21. Thanks to the extensive vaccination programmes, the economy opened up in the third quarter,the most important quarter for Monte Carlo (which stayed flat in comparison to the same quarter last year). Thus, the COVID impact on Monte carlo wasn't that bad (14% down YoY) as it may have been for companies which saw major revenues in the first quarter of the year when the entire nation was in a lockdown!

Case Study: Kaveri Seeds

Another such example is Kaveri seeds. As we saw earlier they sell cotton seeds and given India sees the Kharif season from June-Oct (due to most of the rainfall), the seed sales are maximum in the first quarter of the year (April-Jun). Almost about 70% of the sales are generated in the first quarter of the year!

Source- Kaveri Seeds AR 21

One may question, why this firm didn't face music in the 2021 COVID? Considering the firm falls under essential services, they were aided significantly by the government (relaxation during lockdown) to provide seeds to farmers; they didn't face much heat in the lockdown.

Source: Q1 FY21 Concall

Also a very important to track while analysing seasonality of revenue is it’s trend. Even after maintaining margins and returns of the business if a company is able to diversify away it’s seasonality it leads to good stability in the business model. If we look at the above data of Kaveri we can clearly see that even after excluding COVID year of FY 21 Kvaeri’s dependency on Q1 revenues has decreased from 76% to 67%.

Please note apart from quarter cyclicality, periodic revenue analysis may show a pattern of revenues across years owing to cyclicality of the sectors or industries a company may be operating in. More on these we will be covering when we understand the capacity utilisation topic within Assets.

This is the end of our Analysing the sources of Revenue Series which we covered in 9 parts. Please read Blogs 107 to Blog 115 for complete understanding of Sources of Revenue.