Financial Analysis – Manufacturing/ Light Engineering

IndustryVer 1.3

31/01/2013

GMITE7- Group 7

22

KEY TOPICS

• Industry, Companies, Background, and why we chose them? -1 min

• Summary of their B/S and P/L statements – 1-2 min

• Critical Ratios for both companies – 6-7 min

• Inference/Observations/Recommendations 3-4 min

• Any questions? 1-2 min

INDUSTRY, COMPANIES, BACKGROUND, AND WHY WE CHOSE THEM?

• What comprises of Light Engineering Industry?

• Fosters industrial and economic growth by producing intermediate equipment/components for use in final products or infrastructure such as

(a) power, (b) mining, (c) oil and gas, (d) consumer goods, (e) automotive and the (f) general manufacturing sector.

• Highly labor intensive, generates ample employment opportunities in the economy (skilled and semi-skilled labor)

• Sub sectors: Roller Bearing Industry, Welding Equipment, Medical and Surgical Instruments, Process Control Instruments, Steel Pipes and Tubes, Bicycle Industry, etc

• Examples: MRF, Apollo, Titan, Tube Investments, Havells, Crompton Greaves, ABB, V-Guard, etc

• What did we choose?• Crompton Greaves (CG)

Vs• Tube Investments of India (TI)

• Why did we choose them?• Have different products, consumers, markets and

nature of business (though in light engineering sector)• Intention was to understand the nitty-gritty details of

Annual Reports of two slightly different companies, and not take similar companies like MRF-Apollo or Crompton Greaves- Havells India.

• Standalone Reports : Focus only on light engineering part

• What do these companies do?Crompton Greaves Tube Investments of India

• Key Businesses : Power Systems, Industrial Systems and Consumer Products

• Leader in energy infrastructure, power distribution equipment, green energy, locomotive equipment and solutions

• Significant player in consumer space

• Key Businesses : Cycle/ Components/ Electrical Scooters, Engineering, Metal formed Products.

• Key contributors of chains and other metal produces for automobile, process industry

• Leaders in bicycles, fitness equipment and eco-friendly electric bikes.

• Impetus on bicycles as mode of transport and leisure/fitness

SUMMARY OF THEIR B/S AND P/L STATEMENTS

Summary of B/S - Equity and LiabilitiesCG FY12

Share Capital

Reserves & Surplus

Non Current Liabili-ties

Current Liabilities

CG FY11Share Capital

Reserves & Surplus

Non Current Liabili-ties

Current Liabilities

TI FY12

Share Capital

Reserves & Surplus

Non Current Liabilities

Current Liabilities

TI FY11Share Capital

Reserves & Surplus

Non Current Liabilities

Current Liabilities

• CG- Reserves and surplus increased by 3 % YOY and approx 15% more as compared with TI• Non Current liabilities decreased by 3 % YOY•Negligible short term borrowings, 25% out of 40% current liabilities are “Trade Payables”

• TI- Not many changes YOY.• Non current liabilities 18 times that of CG• Out of 40% current liabilities, 11% are short term borrowings and 21% are “Trade Payables”

Summary of B/S - Assets

15%

12%

11%10%

39%

7%6%

CG FY12 Fixed Assets

Non Current Investments

Current Investments

Inventories

Trade Receivables

Cash and Eq.

Short Term Loans

23%

9%10%

10%

38%

4% 6%

CG FY11Fixed Assets

Non Current Investments

Current Investments

Inventories

Trade Receivables

Cash and Eq.

Short Term Loans

25%

36%0%16%

17%3% 2%

TI FY12Fixed Assets

Non Current Investments

Current Investments

Inventories

Trade Receivables

Cash and Eq.

Short Term Loans

25%

38%1%

17%

16%1% 2%

TI FY11Fixed Assets

Non Current Investments

Current Investments

Inventories

Trade Receivables

Cash and Eq.

Short Term Loans

• CG- Fixed assets decreased by 8% YOY• Non Current investments increased by 3 % YOY• Trade receivable is a heavy proportion of 38% (may be nature of business)

• CG- Fixed assets remains same YOY and are 10% higher that CG• Non Current investments decreased by 2 % YOY and are 3 times that of CG• Trade receivable is almost constant at 17% and is almost half than CG

Summary of P/L - Expenses

59%21%

6%2%

0%11%

CG FY12Raw Material

Purchase of Traded Goods

Employee Cost

Depreciation & Ammortization

Finance Costs

Others

59%21

%

6%2%

0% 12%

CG FY11Raw Material

Purchase of Traded Goods

Employee Cost

Depreciation & Ammor-tization

Finance Costs

Others

61%

6%8%2%2%

21%

TI FY12Raw Material

Purchase of Traded Goods

Employee Cost

Depreciation & Ammor-tization

Finance Costs

Others

60%

5%9%2%2%

21%

TI FY11Raw Material

Purchase of Traded Goods

Employee Cost

Depreciation & Ammor-tization

Finance Costs

Others

• CG- Over all expenses structure remained consistent YOY• Raw material costs are more that 50% of overall expense• OPEX is at 11-12% for CG

• CG- Over all expenses structure remained consistent YOY• Raw material costs are more that 50% of overall expense, comparable to CG• OPEX is at 21%, very high, almost double than CG

Summary of P/L – Income, Profits, Cash Flow

CG FY12

CG FY11

TI FY12

TI FY11

01020304050607080

COGSOPEXGross ProfitProfit before TaxNet ProfitFinance costs

• Gross profit for CG is less but net profit is more, owing to high OPEX of TI•TI’s Finance costs, though not comparable in over all scenario, are 5 times that of CG•Cash or Cash Equivalents for CG is almost 4 times that of TI at end of FY12, though both companies have increased it substantially from FY11

Cash Flow CG FY12 CG FY11 TI FY12 TI FY11

Net Cash from operating activities

390 256 256 261

Net Cash from investing activities

(-68) (-500) (-155) (164)

Net Cash from financing activities

(-152) (153) (-28) (92)

Net Increase/Decrease

170 (-397) 72 5

CRITICAL RATIOS FOR BOTH COMPANIES

12

Review - LiquidityCG CG TI TI

Current Ratio 1.84 1.70 0.92 0.87 Current Assets/ Current Liabilities

Acid Test Ratio 1.59 1.45 0.54 0.47(Current Assets -

Inventories)/ Current Liabilities

Average Collection Period 96.57 91.15 45.19 45.24

Average Receivables / Average Per day

sales

Inventory Holding Period 32.24 33.84 61.74 69.23 Average Inventory /

Avg Per day COS

• Overall CG’s liquidity position is better in comparison with TI. • CG has invested in current assets [Mutual funds]• CG has increased accounts receivable, hence higher current assets

• TI fares better than CG in average receivables area, which could be due to underlying nature of business. • Supplier and customer payments terms are similar for CG• TI is more into components for auto/process industries as well as

consumer items like bicycles/fitness equipment, which are typically cash sales. CG is for long term infrastructure companies

• Retail business of CG is insignificant compared to TI• CG has less debt but more cash, cash is possibly waiting for acquisitions?

13

Review - TurnoverCG(2012) CG(2011) TI(2012) TI(2011)

A/C Receivables TO Ratio 3.78 4.0 8.08 8.07

Net Sales/Net Accounts

Receivables

Inventory Turnover 11.32 10.79 5.91 5.27 COGS/Inventory

Accounts Payable TO Ratio 4.35 3.99 4.36 3.96

Cost of Goods Sold/Accounts

Payable

Fixed Assets TO 9.71 6.56 5.46 5.12 Net Sales/Fixed Assets

Total Assets TO 1.44 1.48 1.33 1.27 Net Sales / Total Assets

• Inventory Turnover is very good for CG implying better supply-chain, sales efforts and operations efficiency

• Days inventory holding is high for TI because CG stocks against pre orders as compared with consumer driven TI.

• TI’s A/C receivables turnover ratio is better, which could be due to more transactional nature of end users/consumers. CG’s customers are large corporates/Govt bodies for infrastructure with longer gestation period.

• CG’s Fixed Asset Turnover is high, in spite of comparable Total assets turnover between TI and CG• CG has the ability to generate more revenue out of capital spending (asset

utilization is higher)• Though CG requires more current assets, accounts receivable, besides

investments(Mutual funds), “cash and cash equivalents”(bank balances) is the major factor. This is also reflected in A/C Receivables TO ratio.

14

Review – Leverage RatiosCG CG TI TI

Debt Ratio 0.41 0.44 0.58 0.58 Total Debt/Total Assets

Debt Equity Ratio 0.69 0.77 1.37 1.40 Long Term Debt/ Share holder’s equity

Long Term Debt Equity Ratio 0.0 0.00 0.38 0.37 Long Term Debt/

Share holder’s equity

Interest coverage 24.46 44.65 3.22 3.66 EBIT / Total interest

DSCR[Debt Service

Coverage Ratio]20.83 30.80 0.42 0.44

(PAT + Interest+ Tax)/(interest+loan

repayment)

• Higher Debt and Debt-Equity Ratio for TI indicates higher borrowings for working capital requirement.

• DE ratio is also risky unless interest coverage ratio and DSCR are high, which is not the case for TI.

• Interest coverage and DSCR implies that TI will be always striving to source its operational costs which in turn has an effect on PAT

• Creditors will be willing to finance CG as compared to TI (Zero long term debt)

• TI uses most of its debts for its opex, which is not good position.• They are just able to sustain day to day expenses

15

Review- ProfitabilityCG CG TI TI

Gross Profit margin 22.42% 27.65 31.24 32.15 Gross Profit/Net Sales

Net Profit Margin 7.70% 11.48 5.12 5.63 Net Profit/Net SalesOperating Profit Margin

(%) 10.32% 15.33 6.96 8.01 EBIT/Net Sales

Operating Cash Profit Margin 8.93% 13.99 4.8 5.72 EBITDA/Net Sales

Return on assets 8.54% 6.27% 9.69% 10.98% PAT/Total AssetsReturn on

Investment/Earning Power (No of times)

11.05% 16.98% 6.82% 7.14% EBIT/total assets

Return on Equity (%) 18.69 30.13 16.15 17.11 PAT/share holder's funds

• Gross profit ratio is low for CG where as net profit ratio is high, indicating that TI has more op-ex and finance costs and overheads• TI is generating more cash from operations, whereas overall

expense is still high due to operational activities• Lower operating cash profit margin for TI, because of heavy OPEX• TI’s Return on Equity is mixed indication, which could be attributed

to lesser proportion of share holder money and more of leverage money contributing to net profit as against ROE of CG.

INFERENCE/OBSERVATIONS/RECOMMENDATIONS

Observations• Creditor View Point

• CG’s liquidity position is very good and the resulting profit ratios, turn-over ratios• CG’s leverage ratio is very good again, leaving it with enough potential/capacity to go

for larger borrowing• CG is poised for growth, which is lucrative for creditors

• Investor View Point• At the outset the P-E and earnings per share may seem lucrative as an investor• The recent leverage ratios and interest coverage maybe a risky proposition, besides

the direct linkage to consumer linked industries/markets vs CG’s focus on infrastructure, green energy, which are focus areas of emerging markets

• Retail investor:• Debt-Equity ratios is good for CG

• Institutional investor:• High Cash balance and good asset turnover is advantageous for CG. • As institutional investor, looks impressive on capitalizing current lower market

price of CG and potential acquisitions owing to cash-balance

• Supplier View Point• CG is better from supplier point of view:

• CG has better cash and less debt• CG has more predictable inventory given the nature of business

• Good inventory turn over by CG tends to imply that CG maybe a better consumer/partner to work with on supply-chain part

Any Questions?

Review Objective: Performance, Position, Potential. • As Creditors, we are interested in the liquidity review.Review points: 1. How well the company handles future demand for cash. 2. How the company has used past Borrowings 3. Current Capital structure4. Past debt servicing i.e. whether source of repayment is operations or

borrowing.

• As Investors, we are interested in future earning stream Review points 1. Performance record 2. Future potential expected return 3. Competitive position

• As Supplier, we are interested in liquidity ratios. [almost same objective as creditor]

Review points 1. Cash reserves, ability to pay back for supplied material2. Avg. number of days payables outstanding 3. Average Number of Days Receivables Outstanding

Some points:

Head CG FY12 CG FY11 TI FY12 TI FY11

Income 6560 6047 3520 3012

COGS 5090 4375 2420 2044

Gross Profit 1470 1672 1100 968

Net Profit 504 695 180 169

1. Gross profit for both companies is comparable in FY12, but Net profit of CG is more than 3 times TI. Why?

2. Finance costs of TI are 5 times that of CG3. Cash or Cash Equivalents for CG is almost 4 times that of TI at

end of FY12, though both companies have increased it substantially from FY11

4. Both companies use same method to account for depreciation.. -> Need more details?

5. Any other points?