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Submitted in fulfillment ofthe Post Moduleassignment for

Financial Analysis andControl Systems

by

Anthony Joseph Prakash

Student No.0661033

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Contents

1. Introduction 3

2. Introduction to Subros Ltd 42.1 Introduction 42.2 Manufacturing 42.3 Research and Development 52.4 Human Resources Management 5

2.5 Environment & Social Responsibility 5

3. Review of the year gone by3.1 Introduction 63.2 Quantities, Net Sales and PBT 6

3.2.1 Raw Material Cost reduction 83.2.2 Increase in Other Income

3.3 Dividend, EPS and Share Price

4. Application of Funds 11

4.1 Fixed and Tangible Assets 114.2 Current Assets. 12

4.2.1 Raw Material 124.2.2 Finished Goods 124.2.3 Sundry Debtors 124.2.4 Cash & Bank Balances 13

4.2.5 Loans and Advances 134.3 Current Liabilities 14

4.3.1 Sundry Creditors and Interest 134.3.2 Warranty Costs 134.3.3 Retirement benefits 14

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5. Cash Flow Statement 15

6. Five year Ratio Analysis 176.1 Introduction 176.2 Profitability Ratios 186.3 Efficiency Ratios 226.4 Liquidity Ratios 276.5 Investment Ratios 29

7. Conclusion 30

7.1 Investment Potential 307.2 The Road ahead 31

8. References 32

9. Bibliography 32

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1. Introduction

As a part of the Post Module Assignment, I have chosen to analyse the 2005-

2006 Annual Report of Subros Ltd. (hereafter called Subros), a leading car air

conditioner manufacturer in India. I have chosen a manufacturing company from

the automobile sector, because it is which is one of the fastest growing sectors in

India. The automobile sector growth in India is second only to IT and

Biotechnology boom. To top this the automobile sector is the largest employer

in the manufacturing sector in India.

Most of the global players like Toyota, General Motors, Ford and Honda have set

up manufacturing facilities in India. India is well on its way to becoming a major

global hub for automobiles and automobile components. The presence of global

players brings to the fore improved quality and manufacturing standards. Many

companies are well on their way to becoming world class manufacturing facilities.

The emerging scenario makes it all the more important to analyse the financial

health of companies in the automobile sector. It is also imperative that the Indian

Automobile companies meet up to world financial standards in terms of

profitability and financial ratios. In my analysis I have used the Annual Report of

Sona Koyo Steering systems, another automobile sector company for the sake of

comparison. Although both have varied products, the results thrown up are

interesting. In order to have an overview of the performance of Subros on the

global front, the Annual Report of Behr GmbH is used for comparison. Behr

GmbH is in the same business of manufacturing car air conditioners and the

comparison makes interesting reading.

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2. Introduction to Subros

2.1 Introduction

Subros is a leading car air conditioner manufacturer in India. Subros was

established in 1985 as a joint venture between the Suri Brothers, Denso

Corporation, Japan and Suzuki Motor Corporation, Japan.

The company has grown from a capacity of 15,000 AC units in 1985 comprising

of largely an assembly operation, into the largest and only integrated

manufacturing unit in India for Auto Air Conditioning systems. The company has

the capability to manufacture compressors, condensers, heat exchangers and allthe connecting elements that are required to complete the ACLoop.

Subros has three plants in Noida, Manesar and Pune. It also has a R&D center

and Tool room at Noida. The manufacturing capacity has grown to a level of

7,50,000 AC units per annum and there is a plan to go to a level of 1,000,000 per

annum by 2008.

2.2 Manufacturing

The companys manufacturing infrastructure is the best in the class with a lot of

focus on low cost automation. The company manufactures two main

components viz the Air conditioning system and the Fan motor assembly. It is

the only company in India, which has the infrastructure to manufacture all the

components in the A/c loop.

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2.3 Research and Development

Research & Development is high on Subross agenda. The focus on shorter

product development cycles has prompted investments in prototyping and

simulation softwares. State of the art validation and test centers give Subros a

competitive edge.

Also helping in shortening the lead times is a state of the art Tool Room involved

in the manufacture of jigs and fixtures.

2.4 Human Resources Management

Subros firmly believes that Employees are its greatest assets. Well structured

training programs and improvement programs like Quality circles, TPM and TQM

ensure Total Employee Involvement at all levels.

2.5 Environment and Social Responsibility

The Environment and Social Responsibility find special mention at Subros. The

company uses environment friendly refrigerant for its air conditioners and also

sponsors trees and green areas across major metros in India. Subros started a

school for children with special needs in 1990. Subros also sponsors treatment

for children suffering from cancer.

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3. Review of the year gone by

3.1 Introduction

Buoyed a growing economy and increasing levels of disposal income, the

Passenger car segment in India is seeing tremendous growth. According to

ACMA [1], the compounded annual growth rate of passenger car production in

the period 2000-2005 stands at 17% as compared to 8% in the previous five-year

period. ACMA [1] also states that the Auto component industry has achieved a

Compounded Annual Growth Rate of 20% in the 2000-2005 period as compared

to 9% in the previous five-year period. Although the year 2005-2006 saw agrowth of only 7.7 % in the passenger car segment as against a growth of 17.8 %

in 2004-2005, Subros has managed to grow significantly. This is evident from

the latest financials of the company.

3.2 Quantities, Net Sales and PBT

Figure 3.1: Comparison of quantities.

3.643.93

2.843.08

6.487.01

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

2005 2006

Quantityinlacs

A/c's

Blowers

Total

As shown in figure 3.1, number of units sold in 2005-2006 grew by 8.1 % to 7.01 lac

units. The Auto component Industry in this period grew by 7.7%.

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Figure 3.2: Net Sales and PBT (Profit Before Tax)

5906356490

350

289

0

10000

20000

30000

40000

50000

60000

70000

2005 2006

Rsinlacs

0

50

100

150

200

250

300

350

400

Rsinlacs

Net Sales Value

PBT

4%

20%

The net sales value dropped by 4%, as can be seen in figure 3.2, although the

Profit before Tax increased by 20% to Rs. 350 lacs. The drop in Net sales value

can be attributed to the sharp decline in Unit Sale Price** (Figure3.3). Pressure

from competition and market demands has forced Subros to bring about a 12%

reduction in the Unit Sale Price.

Figure 3.3: Unit Sale Price

8058.5

9114.7

7400.0

7600.0

7800.0

8000.08200.0

8400.0

8600.0

8800.0

9000.0

9200.0

2005 2006

ValueinRs

12%

Reduction

** Calculated by dividing the Net Sale value by the total number of units sold.

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Subros has nevertheless managed to maintain a growth of 20% in the PBT. This

is primarily due to two reasons.

a) Reduction in Raw Material cost.

b) Marginal increase in other income

3.2.1 Raw Material cost reduction

Figure 3.4: Unit Raw Material Cost

6991.7

5839.4

5200.0

5400.0

5600.0

5800.0

6000.0

6200.0

6400.0

6600.0

6800.0

7000.0

7200.0

2005 2006

ValueinRs

16%

Reduction

The unit raw material cost++ has reduced by 16 % in the last year (Figure 3.4).

This has been achieved by bringing down the import content of Raw Material.

The resulting reduction has helped Subros reduce its Raw Material Cost for the

year although the volumes have increased. It is apparent from figure 3.5 that an

aggressive indigenisation plan in is place at Subros. This is also mentioned in theDirectors Report (Page 7). Costs of imported components are high due to the

high import duties. This in turn results in high raw material costs. Therefore it is

very important that the localization content of raw material is steadily increased.

++ Calculated by dividing the raw material cost by the total number of units sold.

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Figure 3.5: Raw Material Percentage of Imports and Indigenous.

35

65

45

55

0%

20%

40%

60%

80%

100%

Percentage

2005 2006

Imported

Indigenou