A software company capitalises 45% of its R&D while peers capitalise 10%. Restate its EBITDA margin and free cash flow on a peer basis.

On a peer policy Datrova's EBITDA margin is 17%, not 24%, and its all-in free cash flow is Rs 140 crore, not Rs 320 crore. Expensing an extra Rs 140 crore of R&D takes EBITDA from Rs 480 crore to Rs 340 crore and EBIT from Rs 330 crore to Rs 250 crore. The cash is identical either way, but the company's free cash flow leaves out Rs 180 crore spent on engineers. At 20x EBITDA the policy is worth Rs 2,800 crore of enterprise value.

Because it moves a cost below the line EBITDA stops at. A household that calls its children's tuition an investment rather than an expense does not have more money at the end of the month, but its monthly budget looks healthier. A capitalised cost never enters EBITDA; it returns later as amortisation, which EBITDA ignores by construction. Datrova expenses only Rs 220 crore of its Rs 400 crore of R&D. On a 10% policy it would expense Rs 360 crore, so its EBITDA would be Rs 340 crore, not Rs 480 crore.

Because a margin gap between two companies on different policies is partly a gap in bookkeeping. Restating to a common policy is the first step before comparing margins; without it you are comparing two rulers, not two businesses. Datrova's reported 24% would sit above peers at 18% and look like a better product. At 17% on the same policy, it is slightly below them. The rising capitalisation rate, 30% three years ago and 45% now, adds a second question: is Datrova building more products worth capitalising, or capitalisingRecording a cost as an asset on the balance sheet and spreading it over future years as amortisation, instead of charging it all in the year it is spent. more of the same work to protect its margin?

The cash does not change: Datrova paid its engineers Rs 400 crore whatever the accounts call it. What changes is where the payment appears. Capitalised development sits in investing cash flow, so operating cash flow of Rs 400 crore looks strong. Datrova's own free cash flow, operating cash less property capex, excludes Rs 180 crore of salaries and overstates the cash the business generates by more than double. All-in, free cash flow is Rs 140 crore, and on a peer policy it is also Rs 140 crore, because the policy only moves the line.

Close with the valuation. At the sector's 20x, reported EBITDA supports Rs 9,600 crore of enterprise value and restated EBITDA Rs 6,800 crore, a 29% gap created by one accounting choice. Say the limit plainly: some development really does create a durable asset, and a company building a new platform may capitalise legitimately. The test is whether amortisation keeps pace with capitalisation; here Rs 180 crore goes in and Rs 90 crore comes out, so the asset and future amortisation are both growing.