A pharma company carries contingent liabilities of Rs 1,200 crore against net worth of Rs 2,000 crore, mainly tax disputes, and has just changed auditor. How would you size the risk in value per share?

About Rs 12.6 a share, roughly 2% of the price, on base-case odds. Weighting each claim by its chance of loss gives an expected Rs 395 crore, worth Rs 251 crore today after a four-year wait at 12%. The full Rs 1,200 crore, Rs 60 a share, is the wrong number. The auditor's exit does not change the claims but should raise the odds you use until you read why it left: on stressed odds the hit is about Rs 21 a share.

Because a contingent liabilityA possible obligation that depends on a future event, such as a court ruling, and is disclosed in the notes rather than booked, because a loss is not yet probable. is a possibility, not a bill. A family facing a traffic challan they plan to contest does not budget for the fine in full or ignore it; they think about the chance they lose and budget for that. Contingent liabilities belong in value once weighted by likelihood: claim times probability, discounted for the wait. Subtracting all Rs 1,200 crore, Rs 60 a share, assumes Morvane loses every case, including one it has already won twice at the tribunal.

From the evidence the note and the history give you. Transfer pricing gets 30% because Morvane won the same issue twice; GST 50% because the whole industry is contesting and nobody has won yet; customs 20%; the guarantee 10% because the subsidiary earns money. Expected cost is Rs 180, 175, 30 and 10 crore, Rs 395 crore in all. Discounting four years at 12% multiplies it by 0.636, giving Rs 251 crore, Rs 12.6 a share. Say too that interest often accrues on tax demands, which would add to the loss in the cases Morvane loses.

It changes your confidence in the inputs, not the claims themselves. Until you have read the outgoing auditor's stated reasons, use stressed odds: that lifts the hit by about 70% to Rs 21.3 a share, 3.5% of the price. Indian rules require a listed company to disclose why an auditor resigned; confirm the current framework, then read that disclosure, the last audit report for any qualification or emphasis of matter, and whether the contingent liabilities note changed in wording or size under the new firm.

Close with the view: on the evidence given, the disputes are a manageable Rs 13 to Rs 21 a share, not the Rs 60 a headline screen would show. The auditor's exit is the bigger question, because it can mean a disagreement over exactly these provisions. If the reasons are benign, fees or rotation, the base case stands; if they mention access to information or disagreement on accounting, the whole set of accounts deserves a wider discount than any per-share number captures.