It’s a curious corporate case of profit and loss. It’s a company that earns huge amounts of cash, but it’s legally a loss-making firm. It’s hugely efficient, which enables it to expand furiously while grabbing lucrative and profitable projects. Thanks to this expansion and growth, it finds itself in the red.
This is the peculiar case of Delhi Metro Rail Corporation (DMRC), which is in the middle of a furious political fight between the federal and state governments in India.
The story of public transport in India is largely one of monumental failures, but the Delhi Metro stands out as a key exception. But a recent increase in fares by the federal government sparked a spat between Delhi Chief Minister Arvind Kejriwal, founder of the Aam Aadmi Party, and the federal minister of state for urban housing, Hardeep Singh Puri, who is from the rival Bharatiya Janta Party (BJP). At the heart of the battle lies an old debate between profitability and the need for an affordable public transport system.
With a strict reading of the balance sheet, DMRC can prove that it incurs losses, and this is why it increased its fares twice, and by huge percentages, this year. Look between the numbers, however, and you will find that DMRC is one of the highest-earning companies in India. More important, given the manner in which it is hugely subsidized, it should reduce fares, not increase them.
How is this possible? How can a company be a cash generator and a loss-maker at the same time? How can it expand frenetically and still be in the red?
Notional losses
In its 2016-17 fiscal year (ended March 31), the company incurred a “total comprehensive loss” of nearly 2.5 billion rupees (US$38.5 million). That’s huge as a number, but not as grave when you consider that the figure is less than 0.5% of its annual revenues. But then there is another aspect to its profit and loss account – its cash profits.
But there was only one entry that contributed to the transformation from cash profits to net losses. This was “depreciation and amortization” expense. If this is taken out of the calculation, DMRC earned a profit of almost 13 billion rupees. Had the depreciation not been there, it would have reported a huge profit.
There are two aspects to depreciation. It’s not an expense; it’s not paid out to anyone. It’s only a balance-sheet entry to denote the wear-and-tear on plant and machinery, and other assets of a company. It’s legitimate to the extent that equipment degenerates, and has to be written off completely over a period of time. However, the fact remains that without depreciation, DMRC makes huge profits. In terms of cash that is earned versus cash that has to be paid, it is in the black. This is clearly evident from the cash-flow statement of the company.
In 2016-17, the cash it generated from “operating activities” was a whopping 60 billion rupees. From its “financing activities”, the net cash flow for the year was another almost 60 billion rupees. It was only from the “investing activities”, which are amounts allocated for growth and expansion, that there was a net cash outflow, as should be expected, of more than 80 billion rupees.
In Delhi Metro’s case, depreciation is so high because of its frenetic expansion, turning a cash profit into a loss on paper. Ironically, efficiency, expansion, and ability to complete most projects on schedule actually drove up its depreciation costs.
Take the worth of its assets in the form of “property, plant and equipment”, which is more than 320 billion rupees. “Capital work-in-progress” comprised another 240 billion rupees. These huge investments due to rapid expansion drive up the depreciation costs each year. So despite the cash DMRC generates, it shows a loss in the balance sheet. Ironically, DMRC’s efficiency, while winning contracts for projects outside Delhi, is also adding to its “losses” on paper, for the same reasons.
Its annual earnings from “external projects” were more than 24.5 billion rupees, or 40% higher. For example, it earned more than 10 billion rupees from Kochi Metro Rail and the government of Kerala state, and more than 4.5 billion rupees from Noida Metro Rail Corporation in the neighboring state of Uttar Pradesh. In the future, DMRC is likely to earn huge amounts from Jaipur Metro Rail Corporation and Amravati Metro Rail.
While new projects boosted DMRC’s revenues, the latter got advantages in terms of other sops and benefits. These were in the form of equity inflows, grants, and low-interest loans. For example, the state and central governments have regularly sunk in huge amounts as equity capital each year. In 2015-16, the equity inflow exceeded 20 billion rupees, which came down to 6 billion rupees in the next year. As of March 31, 2017, the total equity base of DMRC was a huge 189 billion rupees. Then there are the “monetary grants” from the various official agencies and governments, which totaled 84 billion rupees.
Not to forget that DMRC gets its loans at ridiculously low rates – from 0-1.4%. The highest interest it has paid so far, as per its 2016-17 annual report, is 2.3%. This explains why the company’s interest outflow is only 2.4 billion rupees, or less than 0.5% of the annual turnover.
Given its cash profits, which turn into notional losses only because of huge depreciation, and the grants and cheap loans, DMRC should be subsidizing its passengers, rather than raising its fares on a regular basis. One of the biggest successes of “public transport” in India should work in “public interest”, rather than attempting to become a profitable entity, which it is anyway.
They are reducing the cost of Delhi IGI airport line….but increases the cost of other lines..
Being a student i suffers a lot…i have to travel with metro and it causes costly to me…
There should be something for the students
But there should be something for the students….
Ten percent concession for students must be there apart from using cards
Sir, although your equation is mathematically correct, but one variable that’s missing is the purpose. While some subsidy may be a burden on government but still serves the larger public which is already feeling under high income disparity and increasing inflation. Unlike a text book problem it’s a much more socially integrated public problem which has to be dealt keeping public sentiment and service too in mind.
Saurabh Goyal correct diversion of money is never wrong. D problem comes only ven it starts getting misused, which is always d case in India. Further don’t tell me dat metro isn’t earning from d humongous amount of ads it displays everywhere, starting from coaches to d name of stations themselves. And don’t u think that the only solution to so many problems Delhi is facing rt now ranging from traffic to pollution to scarcity of natural resources to global warming has a solution in a cheap DM, but no no, v’ll spend cores on d earthquake in Nepal but refuse to think abt d pockets of d poor in our own country
I am amazed at the ignorance of financial expertise of the writer.
He seems to forget that for any management if any asset created if it doesn’t have the funds to repair itself and to improve its life , then it is a monumental failure of the management of the organisation.
Accounting of DMRC is perfect. Loss means you are showing that revenues being generated are short and have weakness or it is inability to to service the huge repayments of laoans and interest plus depreciation funds needed to expand and keep its safety and other aspects of running on a sound basis.
Why if it was so profitable to run the Metro , the airline metro route operator, Reliance would have abomdoned it. Delhi needs a healthy , clean , reliable metro service. Delhi people are willing to pay for it as they have largely ignored the AAP politics in this regard.
Government is making fool of public by making entities like DMRC, ONGC so that it can suck up from the people in the name of company.
Make the Indian railways profitable if you can Mr. Mod….
Indian metro should provide more rooftop seats to maximise profits.
Why stop here? Why should we only subsidize "public transport"? The government and its enterprises are earning "cash profit" as per the author’s terms in all their ventures. In that case the government can start giving everything for free. Yeah… Why should the government make the commuters pay an extra Rs. 10/- when it can pay fully for their trips by cutting down on essential capital expenditure.
Why should we care about the employees of DMRC? No.. They don’t need yearly pay hikes. Let their standard of living be the same for the years to come. And surely they can tell their families that bonus this year was deferred because some people want to continue paying less for metro travel.
Why should the government invest in new infrastructure or maintain the existing infrastructure and prevent it from collapsing. Let the ceilings collapse, paint rip off, lights fuse. Why should we even pay for security. Surely we can take care of all our security. After all, Delhi is famed for its security isn’t it?
Why should we follow standard accounting convention and provide for capital recovery. Surely we’ll have "whopping profits" if we disregard accounting rules completely.
Why should we be self sustainable? We can surely get loans at "absurdly low interest rates" in the future also! We can always borrow to repair, paying for fuel, salaries, power, and other opex instead of essential capex.
Finally, why should we even think about our future generation? We are saving Rs.10/- today right. The government can surely take care of them with us not paying anything. We will pass over the loan burden to the future generations. They will surely understand as to why they have poor, crumbling, inadequate infrastructure because their ancestors didn’t feel like rightfully paying for their travel.
Hurrah for Communism!
Manish Yadav, metro employee too has to use travel cards to travel in metro..my family/friends too are sharing the load. Manish..what u want, will lead to delhi metro to graveyard in coming 10-15yrs, otherwise DMRC is a role model and continue to be a flag bearer of clean public transport of emerging indian cities. So, do not get tampered by these politically driven people.
Amit Saini You have taken facts from false sources… You will know correct operating cost percentage from DMRC annual report. As you mentioned of indial railway, you have yourself has supported my opinion. Lack of funds, will indeed lead DMRC to indian railway like condition- untidy coaches, long delays, fatal accidents and so on. Motive of Profits are only to spend on better facilities without being a sick PSU.
”If depreciation is not counted, DMRC is highly profitable”
The only way to not count depreciation is to not have any asset.
No depreciation = no metro rail.
It is because GOI spent thousands of crores that there is metro in Delhi and there has to be depreciation
The author understands finance and accounting very well and is using that knowledge to fool the other 99% of the people who don’t
Rakesh Sehgal Please take yourself and a bunch of your colleagues on a "fact finding mission" to Venezuela to see first hand what that kind of nonsense leads a country into. We elected you to be centrist non-corrupt able administrators and you are nothing but a bunch of incompetent populists
If you try to meddle with depreciation & don’t reinvest in growth/efficiency Guardian newspaper from UK will publish people hanging in foot boards of trains and for employees of DMRC they can potentially look at fate of textile/steel mills who passed the depreciation money in repricing downwards pricing of products or giving away as dividend.
I think Indian railways also has a major problem with 75% of its revenues going for pensions/employee cost leaving little room for investing in passanger amenities like faster trains, increasing railway network,better quality & maintainance & long term better cost structure.
The right approach is to follow telecom/power sector route where you appoint a independent regulator for product pricing with representatives from consumers,government,suppliers,operators for sustainable & comfortable journeys for all.
Thank you for your service. I travel In metro daily. And although the fare has doubled this year, It’s still the best mode of transport in Delhi and neighboring cities. And I totally agree with you. Most of the Indians always want everything to be free. I think we should pay for what we use.