Reshamdhara Textiles sells 22% of its revenue to a promoter-owned distributor at prices 8% above arm's length, paid in 150 days against 45 for other customers. Restate revenue, margin and working capital at arm's length.

At arm's length, revenue is about Rs 984 crore, EBITDA about Rs 104 crore and the margin 10.5%, not 12.0%; and Rs 63 crore of extra receivables sits with the promoter's distributor. The 8% premium on Rs 220 crore is Rs 16.3 crore of revenue with no cost behind it. The distributor's 150 days against 45 ties up Rs 90 crore rather than Rs 27 crore, which costs about Rs 6.3 crore a year to fund. Reported profit is inflated, and the company is lending the promoter the cash to pay for it.

Because the price was not set by a market. When the buyer and the seller answer to the same family, the price can be whatever makes the listed company look best, and the promoter recovers the difference on the other side. It is like a shop reporting record sales after its owner's cousin bought the stock at a premium and has not paid for it yet. The arm's lengthThe price two unrelated parties would agree on in an open market; the standard against which related-party deals are tested. price here is what independent distributors pay, 8% less, so the first job is to strip the premium out.

Rs 220 crore is the inflated figure, so the arm's length figure is 220 over 1.08, Rs 203.7 crore, and the overstatement is Rs 16.3 crore. The fabric cost the same to make whoever bought it, so the whole Rs 16.3 crore comes out of EBITDA: restated revenue Rs 983.7 crore, EBITDA Rs 103.7 crore, margin 10.5% against the reported 12.0%. Fourteen percent of the reported profit is a transfer from the promoter's distributor that the promoter can switch off, or reverse, at will.

Convert the days into rupees. Rs 220 crore of sales at 150 days is Rs 90.4 crore of receivables; at the 45 days everyone else gets it would be Rs 27.1 crore. The difference, Rs 63 crore, is an interest-free loan from the listed company to the promoter's business, funded by a bank line at 10%, so it costs about Rs 6.3 crore a year. Company-wide receivable days are 68 against the 45 the business would show without the related party, which is the number a credit analyst would first flag as odd. After the premium and the funding cost, the economic EBITDA is nearer Rs 97 crore.

That the headline numbers describe the family's arrangements as much as the business. Use the restated margin for valuation and peer comparison, treat the Rs 63 crore as a loan to the promoter when you measure leverage, and ask the three questions that decide whether this is sloppy or deliberate: is the premium disclosed and approved by independent directors, has the distributor's balance been growing faster than its sales, and could the Rs 90 crore be collected if the promoter chose not to pay? A rising related-party balance alongside a flat reported margin is the pattern that precedes write-offs. Say the limit: the 8% premium comes from a sample of invoices, and a proper exercise would reconcile every related-party invoice for the year.