Ratio Analysis Report

SUMMER REPORT ON

FINANCIAL STATEMENT ANALYSIS &

BENCHMARKING AT

TATA STEEL LTD. (WIRE DIVISION) (2011)

Prepared By:

Rajdeep Asrani

Amrita School of Business

FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011

TATA STEEL WIRE DIVISION 2

ACKNOWLEDGEMENT

I am grateful to thank TATA Steel, Wire Division for giving me this great opportunity to do

my Summer Internship Project with them. I take the privilege to sincerely thank Mr. Sunil

Bhaskaran, EIC, Global Wires Business, TATA steel, in creating the opportunity for a summer

project in the finance department of this division. I would like to thank Mr. Sanjiv Verma,

Financial Controller, Wires Division, TATA steel, for making everything possible for me

during the entire course of the project. I am also thankful to my Company Guide, Mr.

Pradeep Poojari, Manager Finance & Accounts Department, Wires Division, TATA Steel, for

his guidance and support during the entire course of the project. I am thankful to the Core

Finance Team, of the company for their guidance, support and encouragement to give my

best during the Internship Programme. I also take great pleasure in thanking my faculty

guide, Prof. R.K Murthy, Amrita School of Business, Amrita VishwaVidyapeetham for giving

me the moral support and inspiration to perform well and make the Summer Internship

Project successful. I also take this opportunity to thank Prof. Deepak Gupta, Professor,

Marketing, Amrita School of Business, Amrita Vishwavidyapeetham and Placement

committee, Amrita School of Business, without whose help I wouldnt have got such a

wonderful corporate exposure at Wires Division, TATA Steel, Mumbai. I specially thank all

the Managers, Officers and the Staff members with whom I interacted during the course of

my project for their support and cooperation.



Table of Contents

1) Introduction

1.1) Introduction to Tata Steel Wire Division .4

1.2) Introduction 11

1.3) 12

2) Horizontal Analysis................................................................................................15

3) Ratio Analysis and Benchmarking

3.1) TSWD- Comparison with past performance (Ratio Trend Analysis) 22

3.2) 52

a) About the Competitors 3

b) 7

3.3) Comparison with the Tata Steel Global Wire Entities 2

a) About the Global Wire Entities 93

b) Ratio Comparison 104

4) Limitations of my Study .119

5) Conclusion 120

6) References 121



1.1) Introduction to Tata Steel Wire Division

Tata Steel Wire Division is the pioneer of steel wire industry in India and is the

largest manufacturer and market leader in India. TSWD 1is the only manufacturer of steel

wires in India which is present all over India catering to the needs of all four industry sectors

namely Auto, Construction, Power and Retail.

Background-Tata Steel Wire Division

Steel wire manufacturing is a fragmented industry with many small and medium

sized manufacturers and most of the steel wire manufacturers are privately owned and

owner driven. In India only Tata Steel, Usha Martin, Rajratan Global Wires and Ramsarup

industries are in public domain, rest all units are privately owned.

TSWD was setup in 1958 as Special Steels Limited to manufacture steel wires for

making umbrella ribs. Setting up of these manufacturing facilities was one of first steps that

the company took in bringing new steel wires for the Indian markets, where after many

wires were introduced which resulted in development of the markets and also growth and

consolidation of the company

Tata Steel Wire Division is one of the founder members of the trade association

named The Steel Wire Manufacturers Association of India. SWMAI ensures that there is a

platform for sharing concerns and as a single body representative with regulatory

authorities and customer/supplier associations. Today around 50% of the wire

manufacturing capacity is registered under the SWMAI.

The wires supplied by TSWD are intermediate products which are converted or

assembled into products which in turn touch the end consumers. TSWD customers in the

institutional business are the original equipment manufacturers such as tyre manufacturers

1 TSWD and Global Wires India have been used interchangeably



like MRF, JK Tyres, Apollo tyres etc. These customers have clearly defined technical

specifications and thus any changes in the wires specifications require formal approvals and

long drawn laboratory and field approvals. Hence new product development in steel wire

industry can either be achieved by introducing newer wires in a market which has yet to

develop or by making subtle changes in product specifications and making process

improvements which will enhance usage for customer applications. TSWD has been

constantly striving to create customer value by offering these differentiated products. TSWD

made a radical change and changed the rules of Indian wire manufacturers by creating a

retail segment portfolio. It launched its brand Tata Wiron in 2004 and built a channel from

scratch to support its efforts.

Organizational Profile

Wire division is the market leader and pioneer in wire manufacturing in India over

the past 50 years, Established in 1958 as steel wire manufacturing company it was taken

over by Tata Steel in 1984. In 2002 wire division became a separate profit centre under long

product division (Tata Steel). Year 2008 saw the wire division become a part of global wire

business (Tata Steel). The global wires business was created to bring about integration in

Tata Steel groups various businesses and also for developing the wire business globally. The

global wires business of Tata steel group consists of Wire division (India), The Siam Industrial

Wire Co. Ltd (Thailand), Wuxi Jinyang Metal Products Co. Ltd. (China) and Lanka Special

Steel Ltd (Sri Lanka) and Indian steel & wire products (ISWP). The total revenue of Global

Wires Business was more than USD 500 Mn for FY10.

FIG: TATA STEEL GLOBAL WIRES BUSINESS ENTITIES

GLOBAL WIRES

TATA STEEL WIRE

DIVISION

LANKA SPECIAL

STEELS LTD., SRI LANKA

WUXI JINYANG METAL

PRODUCTS, CHINA

SIAM INDUSTRIAL

WIRE CO. LTD.,

THAILAND

INDIAN STEEL & WIRE

PRODUCTS LTD.



The wire division (India) has an annual capacity of 335,000 MT of steel wires across

4 plants (self owned), 8 plants (outsourced) and one subsidiary. WD also has a Wire Rod Mill

(West) whose operations are under control of the Chief-WD and the sale of wire rods is

controlled by Long Products Division of Tata Steel. WRM West has an annual capacity of

295,000 MT. The Products rolled includes Mild Steel and various grades of High Carbon Wire

Rods. WD has 8 sales offices, 19 stockyards and 27 Galvanized Wire Distributors.

Table: Key differences in WD Plants

OWNERSHIP

Owned and managed

by WD

Owned by WD and

managed by Managing Agency

100% subsidiary

Outsourced

TWP1 TWP2 INDORE DWP ISWP EPA

ASSETS

WIRE DIVISION

Partly by ISWP and

WD

EPA

RM

ARRANGED BY WD

PEOPLE

On rolls of WD and

some non core activities outsourced

On rolls of Managing

agency except very few key personnel from WD

On rolls of ISWP

On rolls of EPA

Products and Delivery Mechanism

The Wire Division caters to the needs of institutional as well as retail segments of the

Market. The institutional segment consists of Automobile industry, Infrastructure and

power. The products used by the automobile sector are Tyre Beads and springs. PC Strands

and PC wires are used by the infrastructure sector whereas the power sector uses ACSR

(Aluminium Conductor Steel Reinforced). The products for the retail segment of the market

include Galvanized wire for Farming, Poultry and Fencing. The institutional segment

contributes to the maximum part of revenues and profits of the wire division. About 96% of

the sales volume is sold domestically and about 4% exported. The chart below shows the

breakup of profits and revenues across various business segments.



Fig:Wire Division-Market Segments

PRODUCTS

AUTOMOTIVE

(i) Tyre Bead Wire

(ii) Spring Wire

INFRASTRUCTURE

(i) PC Strands WIres

(ii) PC Wire

POWER

(i) Aluminium Conductor Steel Reinforced (ACSR)

(ii) Cable Armour Wires

RETAIL

(i) GI Wires

(ii) MIG Wires

(iii) Mesh Wires

67%

33%

Business Segments by Revenue

Institutional Retail

70%

30%

Business Segments by Profit(FY10)

Institutional Retail



Selfowned Subsidiary Outsourced Type of Wire TWP1 TWP2 Indore

Operations Doddabalapur

operations ISWP EPAs

Tarapur Tarapur Jamshedpur All India Total capacity

Motor Tyre Bead X X

LRPC X X Galvanized Wire X X X Spring Steel Wire X X

Single PC Wire X X X ACSR X X

Current

Production capacities(MT)

86,000 84,000 47,000 12,000 60,000 46,000 3,35,000

Table: Mapping of Products and Plants

The Wire Division has adopted Theory of Constraints (ToC) which has led to major

improvements in the delivery mechanism. Stock buffers have been introduced at plant

warehouses, select stockyards, distributors and customers premises to enable Vendor

Managed Inventory (VMI) for enterprise customers replenishment model for key

distributors. Further simplified Drum-Buffer-Rope (SDBR) concept has been implemented to

improve Supply chain reliability. As a result of these mechanisms the supply chain is reliable

and is a key differentiator as compared to the competitors of WD.

Wire Division has a workforce of 1037 full time employees. All three plants at

Tarapur have unions and collective bargaining is done with respective unions of each plant.

At Tarapur all the core operations are performed by the employees whereas support

services like packing and material handling are outsourced to agencies having expertise in

those areas.

At Doddabalapur and Indore the operations are handled by Managing Agencies in

order to manage the labour costs



Flow of Raw Materials

The Wire business is downstream to steel and various stages in the wire making

process is shown below.

Fig:Wire making process

The steel billets are supplied by Long Products Division (Jamshedpur). The billets are

then hot rolled to wire rods at WRM West, ISWP and ISIM and these wire rods are finally

converted into wires at wire plants. The technology used by the Wire Division is highly

effective and provides them a competitive edge over other wire manufacturers. WDs

purchases are approximately 66% of the sales turnover. Major value in purchase is of billets

from Tata Steels Long Product Division. The division has a supplier base of 1600, of which

50 suppliers account for more than 70% of the value purchases for raw materials and critical

production consumables. These suppliers are known as MOU suppliers and play a key role in

the supply chain at WD.

Fig: Flow of Raw Materials

Steel Making

Continuous Cast Billets

Hot Rolled Wire Rods

Wires



Organizational Situation

WD is a market leader in India and provides a wide range of products all over India. With a

total sales of FY10 being 244,465 MT, WD is way ahead of its nearest competitor i.e. Usha

Martin having sales of approximately 104,000 MT. Competition to WD in India is largely

unorganized, fragmented and regional. Most units are owner driven, operating in specific

sectors and catering to nearby regions only. WD competes for MTB with Rajratan in

northern India, with Bedmutha for GI wires in Western India, with Bajrang for PC wires in

North India, Aarti Steel for spring steel in North India etc. TSWD has been constantly striving

to create customer value by offering various differentiated products and will continue its

journey of shaping the wire industry by offering wire products solutions in the future.



1.2) Introduction to the Project

Project Title

Financial Statement Analysis and Benchmarking

Objectives:

i) Understand the Financial Statements of the company and analyse them.

ii) Compare the performance of the company with the past performance.

iii) Carry out the Ratio analysis in order to judge the performance in a better way

and draw inferences based on the calculated ratios.

iv) Compare the results of the ratio analysis with that of the major competitors

and find the areas of improvement if any.

v) Performance comparison with the Global Wires Entities.

vi) Based on the above study suggest recommendations to the company.



1.3) Introduction to Financial Statement Analysis

Financial statement analysis is the collective name for tools and techniques that are

intended to provide relevant information to decision makers. While information found in

the published financial statements is often not enough to form conclusive judgements about

firms performance, financial statements do provide important clues about what needs to

be examined in greater detail. Analysis of financial statements is of interest to lenders,

investors, security analysts, managers, corporate boards, regulators and others. The

purpose of such an analysis is to assess a companys financial health and performance which

may range from a simple analysis of the short term liquidity position of the firm to a

comprehensive assessment of the strengths and weaknesses of the firm in various areas. It

is helpful in assessing corporate excellence, judging creditworthiness, forecasting bond

ratings and assessing market risk.

Financial statement analysis consists of comparisons for the same company over

periods of time and for different companies in the same industry or different industries.

Financial statement analysis enables to evaluate past performance and financial position

and also predict future performance. Various factors such as benchmark financial ratios,

past performance of the company and industry standards are used as pertinent standards of

comparisons to determine whether the results of financial statement analysis are

favourable or unfavourable.

Techniques of Financial Statement Analysis

Very few numbers in financial statements are significant in themselves. But

meaningful inferences can be drawn from their relationship to other amounts or their

change from one period to another. The tools of financial statement analysis help in

establishing significant relationships and changes. The most commonly used analytical

techniques are:

i) Horizontal Analysis

ii) Trend Analysis

iii) Vertical Analysis

iv) Ratio Analysis



Horizontal Analysis2

Financial statements present comparative information for the current year as well as

the previous year. Horizontal analysis is a simple approach to financial statement analysis

that involves calculating amount and percentage changes from the previous year to current

year in order to draw inferences.

Trend Analysis

Trend analysis is an extension of horizontal analysis to many years and involves

calculation of percentage changes in financial statement items for a number of successive

years. A value of 100 is first assigned to the financial statement items in a past financial year

used as a base year and then the financial statement items in the following years are

expressed as a percentage of base year value. Trend analysis over longer periods helps in

identifying certain basic changes in the nature of the business.

Vertical Analysis

Vertical analysis is the proportional expression of each item on a financial statement

to the statement total. The results of vertical analysis are presented in the form of common-

size statements in which the items within each statement are expressed in percentages of

some common number and always add up to 100. It is conventional to express items in the

profit and loss account as percentage of sales, and balance sheet items as percentages of

total shareholders funds and liabilities. Vertical analysis helps in making comparisons of

companies that differ in size since the financial statements are expressed in comparable

common size format. Common size statements are especially useful in presentations where

the focus is on overall comparisons.

Ratio Analysis3

Ratio analysis involves establishing a relevant financial relationship between

components of financial statements. Two companies may have earned the same amount of

profit in a year, but unless the profit is related to sales or total assets, it is not possible to

2 Only Horizontal analysis and

3 Ratio analysis is used in the project for performance Appraisal of the company



conclude which of them is more profitable. Ratio analysis helps in identifying significant

relationships between financial statement items for further investigation. If used with

understanding of industry factors and general economic conditions, it can be a powerful

tool for recognizing a companys strengths as well as potential trouble spots.



2) Horizontal Analysis- Wire Division

A) Financials

TATA STEEL WIRE DIVISION(TSWD) Profit & Loss Accounts

INR CRORES

2011 2010 2009 2008 2007

INCOME

Sales and other operating income 1296.13 1113.77 1466.55 1205.08 1200.25

Less: Excise duty 117.86 85.41 162.40 154.10 150.72

Net sales 1178.27 1028.36 1304.15 1050.98 1049.53

Other income 14.20 11.64 1.76 11.00 10.16

TOTAL INCOME 1192.47 1040.00 1305.91 1061.98 1059.69

EBITDA 46.47 50.21 10.34 48.37 37.90

Depriciation 14.66 8.26 7.18 7.15 7.55

Amortisation 0.00 0.00 0.00 0.00 0.00

EBIT

31.81 41.95 3.16 41.22 30.35

Interest 0.00 0.00 0.00 0.00 0.00

PBT

31.81 41.95 3.16 41.22 30.35

Taxes 0.00 0.00 0.00 0.00 0.00

PAT

31.81 41.95 3.16 41.22 30.35

NOPAT

31.81 41.95 3.16 41.22 30.35



TATA STEEL WIRE DIVISION(TSWD) Balance Sheets

INR CRORES Mar-11 Mar-10 Mar-09 Mar-08 Mar-07

SOURCES OF FUNDS :

Share Capital 0.00 0.00 0.00 0.00 0.00

Reserves Total 31.81 41.95 3.16 41.22 30.35

Equity Share Warrants 0.00 0.00 0.00 0.00 0.00

Equity Application Money 0.00 0.00 0.00 0.00 0.00

Total Shareholders Funds 31.81 41.95 3.16 41.22 30.35

Minority Interest 0.00 0.00 0.00 0.00 0.00

Secured Loans 1.72 1.68 0.00 0.00 0.00

Unsecured Loans 0.00 0.00 0.00 0.00 0.00

Total Loan Funds 1.72 1.68 0.00 0.00 0.00

Current Account 225.02 173.26 186.57 106.53 124.83

Others(Deffered Tax) 0.00 0.00 0.00 0.00 0.00

Total Liabilities 258.55 216.89 189.73 147.75 155.18

APPLICATION OF FUNDS :

Gross Block 339.40 326.65 256.61 206.53 185.99

Less: Accumulated Depreciation 117.80 107.30 100.78 97.62 93.32

Less: Impairment of Assets 0.00 0.00 0.00 0.00 0.00

Net Block 221.60 219.35 155.83 108.91 92.67

Investments 0.00 0.00 0.00 0.00 0.00

Current Assets, Loans & Advances

Inventories 84.43 53.63 65.51 64.26 59.41

Sundry Debtors 37.22 21.39 26.06 33.30 43.82

Other Assets 0.00 0.00 0.00 0.00 0.00

Cash and Bank -0.21 -0.86 0.40 1.38 6.60

Loans and Advances 11.66 15.26 14.94 24.99 18.65

Total Current Assets 133.10 89.42 106.91 123.93 128.48

Current Liabilities and Provisions 96.16 91.88 73.01 85.09 65.97

Net Current Assets 36.94 -2.46 33.90 38.84 62.51

Miscellaneous Expenses not written off 0.00 0.00 0.00 0.00 0.00

Total Assets 258.54 216.89 189.73 147.75 155.18



B) Year wise Analysis4

FY 2008

Condensed Profit & Loss Account

(Rs Crores) 2008 2007 2008

INCOME

Change in amount

% change

Net sales 1050.98 1049.53 1.45 0.14%

Other income 11.00 10.16 0.84 8.27%

TOTAL INCOME 1061.98 1059.69 2.29 0.22%

Expenses 1013.61 1021.79 -8.18 -0.80%

EBITDA 48.37 37.90 10.47 27.63%

EBIT 41.22 30.35 10.87 35.82%

PAT 41.22 30.35 10.87 35.82%

Condensed Balance Sheet

Mar-08 Mar-07 2008

(Rs. Crores)

Change in amount

% Change

Net Block 108.91 92.67 16.24 17.52%

Investments 0.00 0.00 0.00 0.00%


Inventories 64.26 59.41 4.85 8.16%

Sundry Debtors 33.30 43.82 -10.52 -24.01%

Other Assets 0.00 0.00 0.00 0.00%

Cash and Bank 1.38 6.60 -5.22 -79.09%

Loans and Advances 24.99 18.65 6.34 33.99%

Total Current Assets 123.93 128.48 -4.55 -3.54%

Current Liabilities and Provisions 85.09 65.97 19.12 28.98%

Net Current Assets 38.84 62.51 -23.67 -37.87%

Miscellaneous Expenses not written off 0.00 0.00 0.00 0.00%

Total Assets 147.75 155.18 -7.43 -4.79%

In 2008 the net profit increased to 41.22 from 30.35 in 2007, an increase of

approximately 36% which explains the impressive performance in the financial year. The

Sales of Wire Division increased by 0.14% and it explains the 15% increase in the profit. Also

the Other Income which contributed 27% of the profit increased by nearly 9% and explains

another 8% increase in the net profit. Although there was an increase in the sales and other

4 Percentage Changes have been calculated wrt last year and year end balances have been used for comparison



income, the company was able to reduce their expenditure by almost 1% and this reduction

in the expenditure resulted in 75% increase in the net profit. Hence reduction in their

expenditure was the major reason for the increase in profits of the company which

otherwise would have increased in line with the sales growth. The total assets in 2008

decreased but still the company managed an increase in sales which is an indicator of the

good performance in the financial year 2008 and also indicates better management of the

assets. The fixed assets increased by almost 18% suggesting expansion of the in house

capacity.

FY 2009

Condensed Profit & Loss Account 2009 2008 2009

Figures in Rs. Crores change in amount

% change

Net sales 1304.15 1050.98 253.17 24.09%

Other income 1.76 11.00 -9.24 -83.98%

TOTAL INCOME 1305.91 1061.98 243.93 22.97%

Expenses 1295.57 1013.61 281.96 27.82%

EBITDA 10.34 48.37 -38.03 -78.62%

EBIT 3.16 41.22 -38.06 -92.33%

PAT 3.16 41.22 -38.06 -92.33%

Condensed Balance Sheet Mar-09 Mar-08 2009

(Rs. Crores)

change in

amount

% change

Net Block 155.83 108.91 46.92 43.08%


Inventories 65.51 64.26 1.25 1.95%

Sundry Debtors 26.06 33.30 -7.24 -21.74%

Other Assets 0.00 0.00 0.00 0.00%

Cash and Bank 0.40 1.38 -0.98 -71.01%

Loans and Advances 14.94 24.99 -10.05 -40.22%


Current Liabilities and Provisions 73.01 85.09 -12.08 -14.20%

Net Current Assets 33.90 38.84 -4.94 -12.72%

Total Assets 189.73 147.75 41.98 28.41%

In the financial year 2009 the net profit went down by 92.33% with respect to the

net profit in 2008. The Other Income which contributed 27% of the profit in 2008 saw a



reduction of around 84% and thus explains 25% reduction in the profit. The sales in 2009

increased by 24% but along with the sales there was an increase in the expenses also. The

expenses increased by 27% which was greater than the increase in the sales and hence

contributed heavily to the reduction in profit in 2009. The fixed assets in FY 2009 increased

by almost 44% which again signals the continuation of expansion of the in house capacity.

The increase in total assets (i.e. 28%) was greater than the increase in the sales and

indicates the deteriorated performance and poor assets management. The performance in

2009 is an indicator of the economic crisis that prevailed in the country and affected every

business sector. Hence exceptionally low profits can be attributed mainly to the economic

downturn.

FY 2010


Figures in Rs. Crores

change in

amount

% change

Net sales 1028.36 1304.15 -275.78 -21.15%

Other income 11.64 1.76 9.87 560.15%

TOTAL INCOME 1040.00 1305.91 -265.91 -20.36%

Expenses 989.79 1295.57 -305.78 -23.60%

EBITDA 50.21 10.34 39.87 385.59% EBIT 41.95 3.16 38.79 1227.53% PAT 41.95 3.16 38.79 1227.53%


Figures in Rs. Crores change in amount

% change

Net Block 219.35 155.83 63.52 40.76%

Investments 0.00 0.00 0.00 0.00%


Sundry Debtors 21.39 26.06 -4.67 -17.92%

Other Assets 0.00 0.00 0.00 0.00%

Cash and Bank -0.86 0.40 -1.26 -315.00%

Loans and Advances 15.26 14.94 0.32 2.14%



Net Current Assets -2.46 33.90 -36.36 -107.26%

Total Assets 216.89 189.73 27.16 14.32%



The performance in the financial year 2010 is more or less similar to that in 2008.

The net profit in 2010 increased by approximately 1227% with respect to that of 2009.

Although there was a drop in the sales compared to 2009 but the drop in sales was because

of relocation of the Borivali plant to Tarapur. The market for steel in 2010 was good and the

inventory levels in 2010 which were the lowest in the 5 years support that fact. The net

profit in 2010 increased by approximately 1200% and that increase in profit is due to an

exceptional increase in the other income which increased by 560% and reduction in the

expenses. The fixed assets continued to increase signalling continued expansion of the in

house capacity. As mentioned earlier the inventory levels were the lowest in 2010

(Reduction of 18% from 2009) and were reduced below the normal level due to excellent

market conditions. The decrease in debtors by 18% can be attributed to the change in the

credit policy which was strict compared to the previous years.

FY 2011


(Figures in Rs. Crores) change in amount

% change

Net sales 1178.27 1028.36 149.91 14.58%

Other income 14.20 11.64 2.56 22.04%

TOTAL INCOME 1192.47 1040.00 152.47 14.66%

Expenses 1146.00 989.79 156.21 15.78%

EBITDA 46.47 50.21 -3.74 -7.45%

EBIT 31.81 41.95 -10.14 -24.17% PAT 31.81 41.95 -10.14 -24.17%


(Figures in Rs. Crores) change in amount

% change

Net Block 221.60 219.35 2.25 1.03%


Inventories 84.43 53.63 30.80 57.43%

Sundry Debtors 37.22 21.39 15.83 74.01%

Other Assets 0.00 0.00 0.00 0.00%

Cash and Bank -0.21 -0.86 0.65 -75.58%

Loans and Advances 11.66 15.26 -3.60 -23.59%

Total Current Assets 133.10 89.42 43.68 48.85%


Net Current Assets 36.94 -2.46 39.40 -1601.63%



The net profit for the financial year 2011 reduced by approximately 25% with respect

to the net profit in 2010. Even though there was an increase in sales and other income the

profit reduced by 25% with respect to 2010 because the margins were reduced due to the

market conditions and the increase in expenditure which was greater than the sales growth

explains the reduced profit. The fixed assets increased only marginally which indicates that

the expansion that was in process since 2008 was completed in 2011. The increase in total

assets was greater than the sales growth which shows the problems in assets management.

C) Overall Performance Summary

Wire Division has been profitable during most of the years except in the year 2009

when the profits of the company dipped drastically owing to adverse market conditions due

to economic crisis prevailing in the country.

The fixed assets has been continuously increasing since 2008 which shows that the

Wire Division has been continuously increasing their in-house capacity which has been

completed in 2011.

0

10

20

30

40

50

2007 2008 2009 2010 2011

Net Profit

Net Profit

0

50

100

150

200

250

2007 2008 2009 2010 2011

Net Fixed Assets

Net Fixed Assets



3.1) TSWD- Comparison with past performance

Financial ratios are divided into five broad categories

i) Liquidity Ratios

ii) Leverage Ratios

iii) Turnover Ratios

iv) Profitability Ratios

v) Valuation ratios

The important ratios used for the analysis are described below along with the analysis of

TSWDs performance over the last five years.

Liquidity Ratios

Liquidity refers to the ability of a firm to meet its obligations in the short run, usually

one year. Liquidity ratios are generally based on the relationship between current assets

(the sources for meeting short term obligations) and current liabilities. The important

liquidity ratios are: Current Ratio, Quick Ratio, and Cash Ratio.

A) Current Ratio

Current ratio is defined as the relationship between current assets and current

liabilities. This ratio is also known as "working capital ratio". It is a measure of general

liquidity and is most widely used to make the analysis for short term financial position or

liquidity of a firm. It is a widely used indicator of a companys ability to pay its debts in the

short term. It shows the amount of current assets a company has per rupee of current

liabilities. Current ratio is expressed as follows:

Current Ratio = Current assets

Current Liabilities

The two basic components of this ratio are current assets and current liabilities.

Current assets include cash and those assets which can be easily converted into cash within

a short period of time, generally, one year, such as marketable securities or

readily realizable investments, bills receivables, sundry debtors, (excluding bad debts or



provisions), inventories, work in progress, etc. Prepaid expenses should also be included in

current assets because they represent payments made in advance which will not have to be

paid in near future.

Current liabilities are those obligations which are payable within a short period of tie

generally one year and include outstanding expenses, bills payable, sundry creditors, bank

overdraft, accrued expenses, short term advances, income tax payable, dividend payable,

etc.

This ratio is a general and quick measure of liquidity of a firm. It represents the

margin of safety or cushion available to the creditors. It is an index of the firms financial

stability and the strength of working capital. A relatively high current ratio is an indication

that the firm is liquid and has the ability to pay its current obligations in time and when they

become due. On the other hand, a relatively low current ratio represents that the liquidity

position of the firm is not good and the firm shall not be able to pay its current liabilities in

time without facing difficulties. An increase in the current ratio represents improvement in

the liquidity position of the firm while a decrease in the current ratio represents there has

been deterioration in the liquidity position of the firm. Normally a current ratio of 2:1 is

considered satisfactory. The idea of having double the current assets as compared to the

current liabilities is to provide a cushion for the delays and losses in the realization of

current assets. However care should be taken while interpreting the current ratio because

firms having less than 2:1 ratio may be having a better liquidity than even firms having more

than 2:1 ratio. This is because of the reason that current ratio measures the quantity of the

current assets and not the quality of current assets. If a firms current assets include debtors

which are not recoverable or stocks which are slow moving or obsolete, the current ratio

may be high but it does not represent a good liquidity position.



Fig: Current Ratio trend for TSWD

Over the past five years Global Wires, India has witnessed variability in the current

ratio. The current ratio was as high as 1.95 in 2007 and as low as 0.97 in 2010. Global wire,

Indias ratio was 1.46 in 2008 and 2009 and nearly 1.38 in the financial year 2011.

The variability in the current ratio occurs mainly due to variability in the composition

of current assets or the current liabilities. The graph below shows the trend of current

assets and current liabilities over the period of five years, from financial year 2007 to 2011.

Fig: Trend of current assets and current liabilities

2007 2008 2009 2010 2011

TSWD 1.947551918 1.456575391 1.464456924 0.973225947 1.384151414

0

0.5

1

1.5

2

2.5

Current Ratio

0

20

40

60

80

100

120

140

2007 2008 2009 2010 2011

Current Assets

Current Liabilities



In the year 2007, the current assets amounted to 128.48 whereas total current

liabilities in the year 2007 were nearly 65. The total current assets were almost twice the

current liabilities. The current ratio for the year 2007 comes out to be 1.95 which implies

that the company had current assets worth Rs. 1.95 per rupee of current liabilities and

company was in a strong liquidity position and was perfectly capable of paying back its

current obligations. As is the case with most manufacturing firms, inventory constituted

almost 50% of the current assets and the debtors were nearly 35% of the total current

assets.

In the financial year 2008 the current assets reduced to 123.94 and the current

liabilities increased to 85.09 which explains the decrease in the current ratio. Even though

there was a marginal increase in the inventory levels, the total assets still went down, the

major reason being the decrease in the sundry debtors. Owing to better debtor

Yearwise Breakup of Current Assets (TSWD)

Inventory Sundry Debtors Cash & Bank Loans & Advances Total Current Assets

2007 59.41 43.82 6.60 18.65 128.48

2008 64.26 33.30 1.39 24.99 123.94

2009 65.51 26.06 0.40 14.95 106.92

2010 53.63 21.39 -0.86 15.26 89.42

2011 84.43 37.22 -0.21 11.66 133.10

Breakup Expressed as percentage(TSWD)

Inventory Sundry Debtors Cash & Bank Loans & Advances Total Current Assets

2007 46.24% 34.11% 5.14% 14.52% 100.00%

2008 51.85% 26.87% 1.12% 20.16% 100.00%

2009 61.27% 24.37% 0.37% 13.98% 100.00%

2010 59.98% 23.92% -0.96% 17.07% 100.00%

2011 63.43% 27.96% -0.16% 8.76% 100.00%



management, the debtors were reduced by approximately 25%. The increase in the

inventory levels and decrease in the debtors did not mean that the company sales had gone

down, instead there was an increase in the sales as is evident from the graph below. The

current ratio thus came down to nearly 1.5 which meant the liquidity of the company had

gone down, but was still satisfactory as the company had current assets worth Rs. 1.5 per

rupee of current liability.

Fig: Trends in the various current assets

Fig: Company sales from the year 2007 to 2011

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

2007 2008 2009 2010 2011

Inventories

Sundry debtors

Cash & Bank

Loans & Advances

0

200

400

600

800

1000

1200

1400

2007 2008 2009 2010 2011

Sales

Sales



In the year 2009 there was a reduction in both current assets as well as current

liabilities by almost an equal amount. Thus the current ratio was unaffected from 2008.

There was a reduction in the debtors and loans & advances and a marginal increase in the

inventory level.

The liquidity of the company was greatly affected in the year 2010 and the current

ratio went down to less than 1, the lowest in the past four years. The current assets and the

current liabilities reached almost the same level. This reduction in the liquidity of the

company was mainly due to the plant relocation process due to which the operations were

affected. The sales of the company went down, the inventory levels were reduced. There

was a reduction in debtors and Loans & advances and the current liabilities were also

reduced.

The year 2011 was the year of recovery where the company tried to achieve the

same kind of stability and liquidity which it had enjoyed in the previous years. The efforts

were successful to a certain extent and the company operations were back to normal. There

was an increase in the current assets as well as current liabilities and the current ratio was

1.38 which meant that the company had achieved the satisfactory liquidity position but

there is still room for improvement.

Global Wire, India aims for a current ratio of 1.5 when the competition is intense and

a current ratio of 2 when there is less competition. The company was successful in reaching

its target and was fairly stable and liquid in all the years except in 2010 wherein the

company operations were affected due to the relocation process, but the company started

recovering in 2011 and was only just short of its target. But now having achieved the

desired stability it would like to achieve the target on a regular basis and maintain

consistency in its performance and strengthen its working capital management.



B) Quick Ratio

Quick ratio is calculated as a supplement to the current ratio and is an indicator of a

companys short term liquidity. It measures the companys ability to meet its short term

obligations with its most liquid assets. All current assets are not equally liquid. While cash is

readily available to make payments to suppliers and debtors can be quickly converted into

cash, inventories are two steps away from conversion into cash (sale and collection). Thus a

large current ratio by itself is not a satisfactory measure of liquidity when inventories

constitute a major part of the current assets. Therefore or is

computed as a supplement to the current ratio. This ratio relates relatively more liquid

current assets, usually current assets less inventories, to current liabilities. Quick ratio is

calculated as follows:

TSWD- Trend Analysis

Fig: Quick Ratio Trend

2007 2008 2009 2010 2011

TSWD 1.047 0.7014 0.5672 0.3895 0.506135607

0

0.2

0.4

0.6

0.8

1

1.2

TSWD

Acid-test Ratio = Quick Assets

Current Liabilities

Where Quick assets = Current assets-Inventory



As evident from the above graph, the quick ratio of the Wire Division is on the lower

side every year with the highest being 1.05 in 2007 and the lowest being 0.39 in 2010. The

quick ratio is calculated to find the ability of the company to pay back its current obligations

using its most liquid assets. As already shown the inventory forms the major part of the

current assets owned by the wire division. So when inventory is removed from the current

assets to calculate its liquidity, the quick ratio is bound to be low because the cash balance

is almost negligible. The reason for such low cash balance is the handling of cash by the HO

and not Wire Division. So when most liquid assets of the company are considered, only

debtors and loans and advances come into the picture which form only 40 - 50% of its total

current assets, hence such low values of Quick ratio. But that should not be a cause of worry

because as already shown Wire Divisions current ratio is satisfactory, moreover the

inventory turnover ratio of the company is very high, averaging about 18 times a year

meaning its inventory is quickly converted to cash.

The Quick ratio has been constantly declining majorly because of the the constant

decrease in the debtors over the years owing to the strict credit and collection policy of the

company.

C) Cash Ratio

Cash ratio is an indicator of companys ability to meet its current liabilities with its

most liquid asset i.e. Cash. Cash ratio is calculated as follows:

Cash Ratio = Cash & Bank Bal. + Current Investments

Current Liabilities

The cash ratio is generally a more conservative look at a companys ability to cover

its liabilities than many other liquidity ratios. This is due to the fact that inventory and

accounts receivable are left out of the equation. Since these two accounts are a large part of

many companies, this ratio should not be used in determining company value, but simply as

one factor in determining liquidity.




Fig: Cash ratio trend of TSWD

The graph above shows very low values for the cash ratio from 2007 to 2009 and

negative in the financial years 2010 and 2011. But as already explained above, the cash is

handled centrally by the Tata Steel and not Wire Division. Hence such low value of cash ratio

is not a cause of worry.

2007 2008 2009 2010 2011

TSWD 0.10 0.02 0.01 -0.01 0.00

-0.02

0.00

0.02

0.04

0.06

0.08

0.10

0.12

Cash Ratio



Coverage Ratios

Coverage ratios are used to show the relationship between the debt servicing

commitments and the sources for meeting these burdens. The most important coverage

ratio is Interest Coverage Ratio

A) Interest Coverage Ratio

The Interest Coverage Ratio is also known as debt service ratio or debt service

coverage ratio and is defined as:

Interest Coverage Ratio = PBIT

Interest

Interest Coverage Ratio is a measure of the protection available to the creditors for

payment of interest charges by the company. It relates the fixed interest charges to the

income earned by the business and indicates whether the business has earned sufficient

profits to pay periodically the interest charges. A high interest coverage ratio means that the

firm can easily meet its interest burden even if earnings before interest and taxes suffer a

considerable decline. A low interest coverage ratio may result in financial embarrassment

when earnings decline. This ratio is widely used by lenders to assess a firms debt capacity

and is also a major determinant of bond rating.

As a general rule of thumb, investors generally do not prefer an interest coverage

ratio under 1.5. An interest coverage ratio below 1.0 indicates that the business is having

difficulties generating the cash necessary to pay its interest obligations. The history and

consistency of earnings is tremendously important. The more consistent a companys

earnings, the lower the interest coverage ratio can be.




Fig: Interest Coverage Ratio Trend

As evident from the above graph, Global Wire, Indias interest coverage ratio has

been on the higher side every year with 2009 being an exception when the ratio came down

to 0.31 which was far below the desired level. The graphs below show the trends in the

Profit before interest and tax and the interest charges of Global Wires, India.

Fig: Variations in PBIT and Interest Charges

2007 2008 2009 2010 2011

TSWD 2.98 4.04 0.31 5.40 4.51

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Interest Coverage Ratio

0

5

10

15

20

25

30

35

40

45

2007 2008 2009 2010 2011

Interest Charges

PBIT

GOOD

Good



The above graph shows that the variation in the interest coverage ratio is mainly due

to the variations in PBIT, Interest charges being fairly constant over the years. The dip in the

PBIT in 2009 explains the low interest coverage ratio that year. The reason for such low PBIT

was the economic crisis that prevailed in the country that year.

Thus the company was more than capable of meeting its debt servicing

commitments in all the years except in 2009 where the company faced difficulties in paying

the debt charges due to the low profits earned that year.

Turnover Ratios

Turnover ratios, also referred to as activity ratios or asset management ratios,

measure how efficiently the assets are employed by a firm. These ratios are besed on the

relationship between the level of activity, represented by sales or cost of goods sold, and

levels of various assets. The important turnover ratios are: Inventory turnover, average

collection period, debtors turnover, fixed assets turnover and total assets turnover.

Generally averages are used to calculate these ratios.

A) Inventory Turnover Ratio5

Inventory turnover ratio or stock turnover ratio is the relationship between cost of

goods sold during a particular period of time and the cost of average inventory during a

particular period. It measures how fast the inventory is moving through the firm and

generating sales. It is defined as:

Inventory turnover ratio measures the velocity of conversion of stock into sales.

Usually a high inventory turnover ratio indicates efficient management of inventory because

more frequently the stocks are sold, the lesser amount of money is required to finance the

inventory, A low inventory turnover ratio indicates inefficient management of inventory. A

low inventory turnover implies over-investment in inventories, dull business, poor quality of

5 Net sales instead of COGS has been used for the calculation of Inventory turnover ratio

Inventory Turnover Ratio = Cost of goods sold

Average Inventory



goods, stock accumulation, accumulation of obsolete and slow moving goods and low

profits as compared to total investment. However this interpretation may not be always

true as a high inventory turnover may be caused by a low level of inventory which may

result in frequent stock outs and loss of sales and customer goodwill.

The norms for interpreting the inventory turnover ratio are different for different

firms depending upon the nature of industry and business conditions.


Fig: Inventory turnover ratio trend for TSWD

The Inventory turnover ratio has been very high every year with the highest being

approximately 20 in the year 2009 and the lowest being approximately 17 in 2008. On an

average the inventory turnover ratio hovers around 17 which implies that the TSWDs

inventory is fast moving and converted into sales approximately 17 times in an year. The

high inventory turnover ratio also signifies the high efficiency of TSWDs inventory

management. The graph below shows the variation in the inventory levels and the average

inventory over the years.

2007 2008 2009 2010 2011

TSWD 17.6659 16.9965 20.0994 17.2631 17.06895553

15

15.5

16

16.5

17

17.5

18

18.5

19

19.5

20

20.5

Inventory Turnover Ratio GOOD

Good



Fig: Sales and average inventory trends

The above graph shows that the average inventory levels throughout the year ranges

between 60 and 70 with only marginal variations. Hence major changes in the inventory

turnover ratio can be attributed to changes in the sales of the company. The high turnover

ratio also confirms the conclusion made for the current ratio i.e. even though inventory

forms the major portion of the current assets but still the company is liquid due its fast

moving inventory.

B) Inventory Holding Period

Inventory holding period is also referred to as days inventory and is used to calculate

the average time that inventory is held. It is defined as:

Inventory holding period = 365

Inventory Turnover Ratio

A high inventory holding period indicates that there is a lack of demand for the

product being sold.

0

200

400

600

800

1000

1200

1400

2007 2008 2009 2010 2011

Sales

Average Inventory



TSWD- Trend analysis

The efficiency of the inventory management leads to a high inventory turnover ratio

which in turns leads to a very low inventory holding period. TSWDs inventory holding

period is low for all the years and the average holding period is approximately 20 days. The

graph below shows the inventory holding period for the period of five years from the year

2007 to 2011.

As shown in the graph, the inventory holding period was the lowest for the year

2009 i.e. 18.16 days and the highest for the year 2008. Such low inventory holding period

indicates that the demand for TSWDs products is very high and they manage their inventory

quite efficiently and thus are able to reduce their interest, storage and other expenses.

C) 6

A firm may sell goods on cash as well as on credit. Credit is one of the important

elements of sales promotion. The volume of sales can be increased by following a liberal

credit policy but a liberal credit policy may result in tying up substantial funds of a firm in

the form of trade debtors. Trade debtors are expected to be converted into cash within a 6 Due to unavailability of credit sales, total net sales has been used for calculation

2007 2008 2009 2010 2011

TSWD 20.66 21.48 18.16 21.14 21.38

16.00

17.00

18.00

19.00

20.00

21.00

22.00

Inventory Holding Period GOOD

Good



short period of time and are included in current assets. Hence the liquidity position of the

firm to pay its short term obligations in time depends upon the quality of its trade debtors.

Debtors turnover ratio indicates the velocity of debt collection of a firm i.e. the

number of times average debtors are turned over during a year. Debtors turnover ratio is

defined as:

Debtors' Turnover Ratio = Sales

Average Sundry Debtors

The debtor turnover ratio reflects the efficacy of firms credit and collection policy. A

high turnover ratio implies that the credit and collection policies are efficient and that the

debtors are being converted rapidly into cash. Similarly a low turnover ratio implies

inefficient management of debtors or less liquid debtors.


The graph shows that the debtor turnover ratio for 2007 and 2008 was on the lower

side with 23.95 and 27.26 times respectively. The reason for the low debtor turnover ratio

being, the liberal credit and collection policy followed by the company. Due to the liberal

policy followed the company had difficulties in converting their debtors to cash on time and

2007 2008 2009 2010 2011

TSWD 23.95 27.26 43.94 43.35 40.21

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

Debtors Turnover Ratio GOOD

Good



there were many customers who were on the list of regular defaulters especially the

government agencies TSWD dealt with. But in the following years there was an enormous

increase in the debtor turnover ratio owing to the changes in the credit and collection

policy. The increase debtor turnover ratio shows efforts made by the company to improve

their debtors portfolio and collection policies. The debtors turnover ratio from 2009 to 2011

averaged between 41 to 45 times. As per the new policy TSWD decided not to deal with any

new government agencies but they still fulfil their prior commitments and still deal with

some government agencies.

The graphs below show the variation in the debtors and the sales from the year 2007

to 2011 which shows the reason for increase in the ratio and again confirms the efficacy of

the companys credit and collection policy.

Fig: Sales trend of TSWD

Fig: Average Debtors trend of TSWD

0

500

1000

1500

2007 2008 2009 2010 2011

Sales

Sales

0

10

20

30

40

50

2007 2008 2009 2010 2011

Average Debtors

Average Debtors



D) Average Collection Period

The average collection period is the number of days, on average, that it takes a

company to collect its credit accounts or its accounts receivables. In other words it is the

average number of days required to convert receivables into cash. It is defined as:

Average Collection Period(Days) = 365

Debtors' Turnover Ratio

The average collection period is generally compared with the firms credit terms to

judge the efficiency of credit management. As a general rule of thumb, Outstanding

receivables should not exceed credit terms by more than 10-15 days. An average collection

period which is shorter than the credit period allowed by the firm should be interpreted

with care because it either mean efficiency of credit management or excessive conservatism

in credit granting that may result in the loss of some desirable sales.


Calculated as a supplement to the debtor turnover ratio, average collection period

confirms the efficacy of the credit and collection policy followed by TSWD. The collection

period was nearly 15 days in 2007 and 13 days in 2008 showing some improvement. But

since 2011, The collection period has been continuously hovering between 8 to 9 days

showing the drastic improvement in the collection policy.

2007 2008 2009 2010 2011

TSWD 15.24 13.39 8.31 8.42 9.08

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Average Collection Period GOOD

Good



E) Fixed Assets Turnover Ratio

Fixed assets turnover ratio measures sales per rupee of investment in fixed assets

i.e. it measures a companys ability to generate net sales from fixed asset investments

specifically property, plant and equipment- net of depreciation. Fixed assets turnover ratio

is expressed as follows:

Fixed Assets Turnover Ratio = Sales

Average Net Fixed Assets

If the turnover ratio is high it implies that the company is managing its fixed assets

efficiently whereas a low turnover ratio implies that the company has more assets than it

requires for its operations. This ratio is used as an important measure in manufacturing

industries where major purchases are made for property, plant and equipment(PP&E) to

help increase output.


The fixed assets turnover ratio for TSWD was 11.33 in 2007, 10.43 in 2008 and 9.85

in 2009. There is a continuous decline in the fixed assets turnover ratio. The decline was

only marginal in 2008 and 2009. In 2010 there was a major decline and the turnover ratio

decreased to 5.48 in 2010 and 5.34 in 2011. The graphs below explain the reason for the

decline the fixed assets turnover ratio.

2007 2008 2009 2010 2011

TSWD 11.33 10.43 9.85 5.48 5.34

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Fixed Assets Turnover Ratio GOOD

Good



As seen in the graph there has been a continuous increase in the fixed assets

indicating the expansion of the in-house capacity since 2007. While the capacity has been

increasing at a fixed rate, the sales of the company have not been increasing at the same

rate.

In 2008 there was a marginal increase in both the fixed assets as well as the sales,

but the increase in the fixed assets was greater than the increase in the sales and hence a

minor decline in the fixed assets turnover ratio.

In 2009 there was a considerable increase in both the fixed assets and the sales.

While there was an increase of 31% in the fixed assets, the sales increase only by 24% and

hence a decline in the fixed assets turnover ratio.

0

200

400

600

800

1000

1200

1400

2007 2008 2009 2010 2011

Sales

Sales

0

50

100

150

200

250

2007 2008 2009 2010 2011

Average Net Fixed Assets

Average Net FixedAssets



In the year 2010 there was a considerable decline in the fixed assets turnover ratio.

The fixed assets increased by 41% but in turn the sales dropped by approximately 21%

leading to a decline in the turnover ratio which meant that all the assets were not fully

utilized. The main reason for the underutilization of the assets was the plant relocation

process due to which there was a considerable decrease in the sales also. Similarly in the

year 2011 the plant was not yet completely stabilized and thus the assets were not utilized

to its fullest. Although there was an increase in the sales but that increase was not

considerable enough to affect the turnover ratio. Since the stabilization of the plant takes at

least 2 years to stabilize, the effect of the relocation is expected in the year 2012 also.

F) Total Assets Turnover Ratio

Total assets turnover ratio measures how efficiently assets are employed, overall. It

measures the ability of a company to use its assets to generate sales. The total asset

turnover ratio considers all assets including fixed assets, like plant and equipment, as well as

the current assets. Total asset turnover ratio is expressed as follows:

Total Assets Turnover Ratio = Sales

Average Total Assets

A high turnover ratio implies that the assets are being managed efficiently whereas a

low ratio indicates inefficient management. The problem might be due to one or more asset

categories comprising total assets.


The graph below shows the trend of the total assets turnover ratio and is almost in

line with the fixed assets turnover ratio for the same reasons as explained above. The total

asset turnover ratio was continuously increasing till 2009 indicating that the total assets

were being managed efficiently.



The total assets turnover ratio was as high as 7.73 in 2009 but in 2010 there was

adecline in the total assets turnover ratio and the ratio dropped to 5.06. The graph below

explains the factors responsible for the decline of the total assets turnover ratio.

The graph explains the decline of total assets turnover ratio in 2010. The sales

dropped considerably and the fixed assets increased leading to an increase in the total

2007 2008 2009 2010 2011

TSWD 6.76 6.94 7.73 5.06 4.96

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Total Assets Turnover Ratio

0

500

1000

1500

2007 2008 2009 2010 2011

Sales

Sales

0

100

200

300

2007 2008 2009 2010 2011

Total Assets

Total Assets

GOOD

Good



assets and thus the turnover dropped indicating the instability due to the relocation

process. Similarly in 2011 the turnover ratio was almost the same as 2010 again indicating

the instability in the business and showing that the assets are not being utilized to their

fullest.

Profitability Ratios

Profitability ratios measure the degree of operating success of a company and reflect

the final result of business operations. There are two types of profitability ratios: profit

margin ratios and rate of return ratios. Profit margin ratios show the relationship between

profit and sales. Since profit can be measured at different stages, there are several

measures of profit margin. Some important profit margins used for analysis are EBITDA

Margin and Net Profit Margin. Rate of return ratios reflect the relationship between profit

and investment. Some important rate of return ratios used for analysis are: Return on

Assets, Earning Power and Return on Invested Capital (ROIC).

A) EBITDA Margin

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation.

EBITDA margin shows the margin left after meeting manufacturing expenses, selling, general

and administration expenses. This earnings measure is of particular interest in cases where

companies have large amounts of fixed assets which are subject to heavy depreciation

charges or in case where a company has a large amount of acquired intangible assets and is

thus subject to large amortisation charges. EBITDA Margin for a company is calculated as

follows:

EBITDA Margin = Earnings before interest, taxes, depreciation and amortisation

Sales




The profit margins for TSWD have been consistently on the lower side with the

lowest being a meagre 0.79% in2009 and the highest being 4.88% in 2010.

The EBITDA margin increased to 4.60% in 2008 from 3.61% in 2007 indicating the

improved profitability and performance compared to 2007. The year 2009 saw the lowest

profits with the EBITDA margin dropping to just 0.79%. The drastic decline in the Earnings

can be owed to the economic crisis at that time.

The year 2010 was the best financial year from 2007 to 2011 in terms of profit. Due

to excellent market conditions even after relocation and declined sales the company was

2007 2008 2009 2010 2011

TSWD 3.61% 4.60% 0.79% 4.88% 3.94%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

EBITDA Margin

0

10

20

30

40

50

60

2007 2008 2009 2010 2011

EBITDA

EBITDA



able to make profits which were higher compared to the past years. The EBITDA margin rose

to almost 5%. But in 2011 again there was a decline in the profits owing to the competitive

market and the EBITDA margin dropped to 3.94%.

B) Net Profit Margin

This ratio also known as Return on Sales (ROS), measures the amount of net profit

earned by each rupee of revenue. It measures the overall efficiency of production,

administration, selling, financing, pricing and tax management. Net profit margin is

calculated as follows:


The only reduction from EBITDA is the Depreciation charges. The taxes are centrally

paid and hence not deducted from the profits earned. The graph below shows the EBITDA

and the depreciation charges each year.

2007 2008 2009 2010 2011

TSWD 2.89% 3.92% 0.24% 4.08% 2.70%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Net Profit Margin

Net Profit Margin = Net Profit

Sales



The depreciation is fairly constant with marginal changes. But there is almost 77%

increase in the depreciation charges and hence the net profit margin is greatly affected in

2011. The trends are in line with the EBITDA margin except in 2011. In 2011 even though

the EBITDA margin was higher compared to that in 2007 but the net profit margin is lower in

2011 because of the difference in the depreciation charges.

The net profit margin is the highest for 2010 owing to the excellent market

conditions and is lowest in 2009 owing to the economic crisis that prevailed at that time.

C) Return on Assets

Return on Assets, also known as Return on Investment, is a measure of profitability

from a given level of investment. It can be calculated as follows:

Return on Asset measure the profit per rupee invested on the assets. This figure is

also used to gauge the asset intensity of the business.

0

10

20

30

40

50

60

2007 2008 2009 2010 2011

EBITDA

Depriciation

Return on Assets = Profit After Tax





The Return on Asset exhibits a lot of variability. The return was highest in 2008 i.e.

27.21% and the lowest in 2009 i.e. 1.87%. The graphs below explain the variability in the

return on assets.

2007 2008 2009 2010 2011

TSWD 19.56% 27.21% 1.87% 20.63% 13.38%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Return on Assets

0

20

40

60

2007 2008 2009 2010 2011

Net Profit

Net Profit

0

100

200

300

2007 2008 2009 2010 2011

Total Assets

Total Assets



In 2007 the return on assets was 19.56% which implies that the company earned a

profit of Rs.19.56 for each rupee invested in the assets.

In 2008 there was a reduction in the total assets owing to the decrease in the current

assets but the net profit increased and hence there was an increase in the return on the

investment. In 2008 TSWD earned Rs. 27.21 for each rupee invested in the assets and

indicates the high performance.

In 2009 the profits declined considerably owing to the economic crisis but the

average total assets increases thus the company earned only Rs. 1.87 for each rupee

invested in the assets.

In 2010 the companys profits increased and also the total assets making the return

equal to 20.63%. In 2011 the profits reduced compared to 2010 owing to the competitive

market conditions but the total assets increased reducing the return on assets to only

13.38%.

D) Earning Power

The Earning Power is defined as:

Earning Power = Profit Before Interest and Tax


Earning power is a measure of business performance which is not affected by

interest charges and tax burden. It abstracts away the effect of capital structure and tax

factor and focuses on operating performance. Hence it is eminently suited for inter-firm

comparision. Further, it is internally consistent. The numerator represents a measure of pre-

tax earnings belonging to all sources of finance and the denominator represents total

financing.



The graph above shows the earning power for the financial years 2007 to 2011. The

earning power is high for all the years except in 2009 and follows the same trend as the

return on assets.

E) Return On Invested Capital

Return On Invested Capital (ROIC) is the amount of profit that a company earns for

every rupee invested into the business. It is used to judge how well the company generate

earnings from capital invested in the business. ROIC of a company is calculated as follows:

2007 2008 2009 2010 2011

TSWD 19.56% 27.21% 1.87% 20.63% 13.38%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Earning Power

2007 2008 2009 2010 2011

TSWD 22% 29% 10% 30% 15%

0%

5%

10%

15%

20%

25%

30%

35%

ROIC

Return On Invested Capital = NOPBIT

YEAR END AVERAGE INVESTED CAPITAL



The Return on invested capital is constantly increasing except for the sudden dip in

2009 owing to the recession in the country. In 2010, despite of the relocation process, the

company earned high profits compared to the previous years, owing to the excellent market

conditions. In 2011 again the ROIC of TSWD declined because of the instability in the

business due to the relocation process which affected the profits of the company.



3.2) Cross Sectional Analysis or Benchmarking

Benchmarking is the process of comparing ones business processes and

performance metrics to the industry or the industry bests. The process of benchmarking

involves identifying the best firms in the industry and comparing their results with their own

results.

The process of benchmarking thus enables to learn how well the competitors are

doing and the reasons for their success. Thus Benchmarking allows organisations to develop

plans on how to make improvements or adopt specific best practices, usually with the aim

of increasing some aspect of performance.

Steel wire manufacturing is a fragmented industry with many small and medium

sized manufacturers and most of the steel wire manufacturers are privately owned and

owner driven.

Tata Steel Wire Division is a market leader in India and provides a wide range of

products all over India. Competition to WD in India is largely unorganized, fragmented and

regional. Most units are owner driven, operating in specific sectors and catering to nearby

regions only. WD competes for MTB with Rajratan in northern India, with Bedmutha for GI

wires in Western India, Aarti Steel for spring steel in North India etc.

Thus Ratio analysis is has been carried out for all the major competitors to compare

their performance with that of the Wire Division. The major competitors for whom the ratio

analysis has been carried out are Rajratan Global Wires Limited, Usha Martin Limited,

Ramsarup Industries Limited, Aarti Steels Limited and Bedmutha Industries Ltd.

The information and the products profile of all the competitors has been given

below.



3.2.A) About The Competitors

Background

Rajratan Global Wire Ltd

Industry :Steel - Wires

Incorporation Year 1988

Chairman -

Managing Director Sunil Chordia

Company Secretary Vineet Chopra

Auditor Fadnis & Gupte

Registered Office

Rajratan House,

11/2 Meera Path Dhenu Market,

Indore, 452003, Madhya Pradesh

Telephone 91-0731-2533716/2546401

Fax 91-0731-2542534

E-mail [email protected]

Website http://www.rgwl.co.in

Face Value (Rs) 10

BSE Code 517522

BSE Group B

NSE Code -

Bloomberg RGW IN

Reuters RAJR.BO

ISIN Demat INE451D01011

Market Lot -

Listing Mumbai

Financial Year End 3

Book Closure Month Jul

AGM Month Aug

Registrar's Name & Address

Link Intime India Pvt Ltd, C-13 Pannalal Silk, Mills Cmpd LBS Marg, Bhandup West, Mumbai - 400 078.

91-022-25963838

91-022-25946969
mailto:[email protected]



A) About Rajratan Global Wires Ltd

Rajratan Global Wire Limited (RGWL) is one of the leading manufacturers of High

Carbon Steel Wire in India, specializing in Automotive Tyre Bead Wire. High quality spring

and Rope Wires are other speciality products of the company.

RGWL has most modern factory at Pithampur which is 25 km from Indore, a

prominent industrial city in Central India. The quest for quality, excellence and progress

driven by the total dedication of a competent and professional team is the hallmark of

RGWL. With its state of art plant RGWL is equipped to produce high value steel wires with

precise product characteristics.

RGWLs Tyre Bead Wire business in India has a global scale of operation and to take

the tradition of quality and excellence further, RGWL has formed a 100% subsidiary

company Rajratan Thai Wire Co. Ltd. (RTWL) and started an ultra modern facility to produce

Automotive Tyre Bead Wire in Thailand. This is a true step towards globalization efforts of

RGWL.

RGWL is an ISI TS 16949 (2002) certified company for its entire range of automotive

tyre bead wires.

B) Products

The major products manufactured by RGWL are as follows:

i) Tyre Bead



Tyre Bead Wire is a high carbon bronze coated steel wire used in all tyres. The main

function of bead wire is to hold the tyre on the rim and to resist the action the inflated

pressure, which constantly tries to force it off. The bead is the crucial link through which the

vehicle load is transferred from rim to the tyre. It significantly affects the safety, strength

and durability of tyres. Various standard sizes of Bead Wire are regularly manufactured by

RGWL. In addition Bead Wires in other sizes and higher tensile grades are also supplied as

per the specific customer requirement.

ii) PC Wires and Strands

The use of high tensile steel in prestressing concrete results in considerable saving of

cement and steel. Prestressed concrete wires and strands have found applications in

construction of bridges, silos, buildings, dams etc and in manufacture of mass produced

components like

Ratio Analysis Report

Documents

Transcript of Ratio Analysis Report