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1. Analyze the trend of operating expenses as a proportion of
sales for the current year and previous year and explain its
impact on your earnings after tax?
SOLUTIONOperating expenses include the following:
Particulars ( in Crores) C.Y. 2012 () P.Y. 2011 ()Raw Materials 26,368.23 21,729.15Power & Fuel Cost 779.77 477.79Employee Cost 6,873.06 3,801.95Other Manufacturing Expenses 15,171.36 13,712.05Selling and Administration Expenses 3,886.83 2,861.86Miscellaneous Expenses 1,316.48 1,595.15
Less: Pre-operative ExpensesCapitalised
27.96 75.61
Total Expenditure
Sales
54,367.77
64,313.11
44,102.34
51,819.81
Operating Expenses
Operating Expense as a percentage of sales =
X100Sales
Operating Expense as a percentage of sales for 2012 = 84.54%
Operating Expense as a percentage of sales for 2011 = 85.11%
ANALYSIS
The operating expenses, when compared to the amount of Sales, it is very
high. The company has to take steps in order to control its expenses or it
will result in decreasing profits. Further, it may result in losses for thecompany which is not a good sign. Though the operating expense ratio
has been on a higher side, the companys profit after tax has increased
which is shown in the table below due to increased amount of sales.
EARNINGS AFTER TAX
Particulars ( in Crores) C.Y. 2012 () P.Y. 2011 ()Earnings After Tax 4,690.96 4,455.15
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2. What are your inferences from the segment reporting of
your company? Name any two areas where you would like to
see improvement?
SOLUTIONThe major segments of L & T Ltd. are as follows:
Turnkey projects
Construction
Engineered products & services
Power projects
Electrical & Electronic products & systems
IT & Engineering services
Machinery & Industrial products
Financial Services
Railway Projects
Ship Building
ENGINEERING, CONSTRUCTION & CONTRACTS DIVISION
Engineering, Construction & Contracts Division (ECCD) undertakes
engineering, design and construction of infrastructure, buildings, factories,
water supply and metallurgical & material handling projects covering civil,
mechanical, electrical and instrumentation engineering disciplines.
Supported by a proven track record of over sixty-seven years, covering all
types of buildings, industrial sectors and infrastructure development, the
Division undertakes lump sum turnkey construction with single-source
responsibility. The Division has to its credit many prestigious landmarkconstructions in the country.
ENGINEERING & CONSTRUCTION (HYDROCARBON)
DIVISION
Engineering & Construction Division designs, engineers and executes
world-class projects for the hydrocarbon sector with single-point
responsibility from front-end design through detailed engineering,
modular fabrication, procurement, project management, construction and
installation, to commissioning. Strategic alliances with world leaders
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enable the Division to access advanced know-how and deliver projects
that meet stringent Health, Safety & Environment, quality requirements
and time schedules. The Division has a good track record of executing
large size and complex projects on turnkey basis in Oil & Gas, Petroleum
Refining, Petrochemicals, Fertilisers and Water Technology sectors.Division's major capabilities include in-house engineering, R & D centers,
engineering joint ventures with reputed international companies, offshore
installation capabilities, world class fabrication facilities, experienced &
competent project execution team and safe work culture.
EPC POWER DIVISION
The 2010-2011 has seen the emergence of EPC Power Division as a
credible player in the power sector. This is gratifying as the success of EPC
Power is critical to the Company's performance. Definitive steps havebeen taken by the Division, whereby, the Company will be providing
equipment and services encompassing nearly 75% to 85% in value terms
of a thermal power plant. On January 11, 2011, the Company dedicated its
Boiler and Steam Turbine Generator manufacturing facilities at Hazira,
Gujarat to the nation. The facilities have been set at an investment of
nearly Rs. 2000 crore, to usher in a new era of super critical technology
equipment in Indian power plants. The year also saw substantial progress
in setting up the facilities for manufacture of Power Auxiliaries at Hazira.
The high pressure piping fabrication facility was commissioned andproduction has commenced in March 2011.
HEAVY ENGINEERING DIVISION
Larsen & Toubro manufactures and supplies custom-designed, engineered
critical equipment & systems to core sector industries like Fertilizer,
Refinery, Petrochemical, Chemical, Oil & Gas, Thermal & Nuclear Power,
Aerospace and Equipment & Systems for Defence applications. The
division has manufacturing & fabrication facilities at Mumbai, Hazira,
Baroda and Visakhapatnam. A Strategic Systems Complex for integrationand testing of weapon systems, sensors and engineering systems is
located at Talegaon in Maharashtra. A Precision Manufacturing Facility has
been set up at Coimbatore in Tamil Nadu to cater to the needs of precision
machined / manufactured components & assemblies.
SHIP BUILDING DIVISION
The division has its ship building facility operational at Hazira in Gujarat.
Construction of a new modern Shipyard is in progress at Katupalli in
Tamilnadu. The new yard will focus on construction and repairs/refits ofDefence and Specialized Commercial Vessels. The shipyard management
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is focusing on establishing proper systems and processes to increase the
operational efficiencies and reduce cycle time to meet customer
expectations on quality and delivery. There have been sustained efforts to
tie-up with major global shipyards for technology transfer.
ELECTRICAL & ELECTRONICS DIVISION
The division has Electrical & Automation and Medical Equipment &
Systems businesses. While the former manufactures switchgear
components and a host of electrical and automation products, the latter is
a strategic business unit offering world class and state-of-the-art medical
equipment to the medical fraternity. The Electrical & Automation has five
manufacturing facilities in India and six overseas facilities located in the
Gulf region, south-east Asia and the Asia Pacific. During 2010-2011,
Medical Business saw increased acceptance for its Patient Monitors by
renowned hospitals in the country. This business also upgraded the
technology base for 'Pulse Oximetry' module and 'Non-Invasive Blood
Pressure' module.
MACHINERY & INDUSTRIAL PRODUCTS DIVISION
The division has maintained its leadership position in the Construction and
Mining Equipment, exploiting opportunities in the market. Machinery &Industrial Products Division (MIPD) comprises three Strategic Business
Groups - Construction & Mining Machinery (CM), Industrial Machinery (IM)
and Industrial Products (IP). CM markets and renders support for
Construction & Mining Equipment and comprises the Construction &
Mining marketing unit, Service centers for Earthmoving Machines. Its
manufacturing JV facility for Earthmoving Machinery is located at
Bangalore and the facility for undercarriage systems of its Subsidiary is at
Talegaon.
IT & INTEGRATED ENGINEERING SERVICES
Integrated Engineering Services (IES) provides leading-edge engineering
solutions to multiple industry sectors covering automotive, aerospace,
consumer electronics, consumer packaged goods, marine, medical
devices, off-highway equipment, railways, pharmaceuticals, oil & gas,
utilities and industrial products. It has global headquarter at Vadodara,
Gujarat and operates from dedicated off-shore engineering centers at
Vadodara, Mysore, Mumbai, Chennai and Bangalore in tandem with onsite
teams to cater to engineering requirements of global clients, many of
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them are Fortune 500 Companies. It has more than 4,000 dedicated
associates to deliver high-quality engineering and design solutions.
FINANCIAL SERVICES
L&T has a strong financial services division providing a range of servicesmost of which are falling under the listed holding company of L&T
Financial Holdings Ltd. The portfolio of the division comprises of
Equipment finance, Infrastructure Finance, General Insurance, Mutual
Fund, Portfolio Management Services etc.
The company has concentrated on all its subsidiaries equally.
Improvements have been made & are being made day by day in order to
increase its profitability. So, there is none which has to be concentrated
upon specifically for improvement.
3. The companys working capital position is comfortable and
is in line with the conventional rules. Do you agree? Explain
SOLUTIONWorking capital represents operating liquidity available to a business,
organization or other entity, including governmental entity. Net working
capital is calculated as current assets minus current liabilities.
Net Working Capital = Current Assets Current Liabilities
Particulars ( in Crores) C.Y. 2012 () P.Y. 2011 ()Working Capital 10,748.15 26,348.16
1. Basis of accounting
The Company maintains its accounts on accrual basis following the
historical cost convention in accordance with generally accepted
accounting principles [GAAP] except for the revaluation of certain fixed
assets in compliance with the provisions of the Companies Act, 1956 and
the Accounting Standards as specified in the Companies (Accounting
Standards) Rules, 2006 prescribed by the central government. Further,
the guidance notes / announcements issued by the Institute of Chartered
Accountants of India (ICAI) are also considered, wherever applicable
except to the extent where compliance with other statutory promulgations
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viz. SEBI guidelines override the same requiring a different treatment. The
preparation of financial statements in conformity with GAAP requires that
the management of the Company makes estimates and assumptions that
affect the reported amounts of income and expenses of the period, the
reported balances of assets and liabilities and the disclosures relating tocontingent liabilities as of the date of the financial statements. Examples
of such estimates include the useful lives of tangible and intangible fixed
assets, allowance for doubtful debts/advances, future obligations in
respect of retirement benefit plans, etc. Difference, if any, between the
actual results and estimates is recognized in the period in which the
results are known.
2. Presentation of financial statements
The Balance Sheet and the Statement of Profit and Loss are prepared andpresented in the format prescribed in the Schedule VI to the Companies
Act, 1956 (the Act). The Cash Flow Statement has been prepared and
presented as per the requirements of Accounting Standard (AS) 3 Cash
Flow Statements. The disclosure requirements with respect to items in
the Balance Sheet and Statement of Profit and Loss, as prescribed in the
Schedule VI to the Act, are presented by way of notes forming part of
accounts along with the other notes required to be disclosed under the
notified Accounting Standards and the Listing Agreement. Amounts in the
financial statements are presented in Indian Rupees in crore [1 crore = 10
million] rounded off to two decimal places in line with the requirements of
Schedule VI. Per share data are presented in Indian Rupees to two
decimals places.
3. Revenue recognition
Revenue is recognized based on nature of activity when consideration can
be reasonably measured and there exists reasonable certainty of its
recovery.
4. Your Chairman has indicated the strategy and your
companys outlook for the future. Discuss these areas in the
light of the inflationary conditions in our country.
SOLUTION
FUTURE OUTLOOK:
Some segments within these sectors holding out promise of growth in
FY13 are:
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INFRASTRUCTURE
a) Roads the program of road building continues and in FY13, NHAI is
likely to bid over 8,000 km of road contracts, some through construction
awards and the majority through BOT concessions.
b Metro and Mono Rail a number of Tier-1 and Tier-2 cities have kick-
started projects to implement metro and / or mono rail systems, since this
has proven to be one of the best solutions for decongesting urban traffic.
c Railways Business With the Dedicated Freight Corridor taking shape,
large opportunities are expected to materialise commencing FY13. Indian
Railways is also augmenting and upgrading its network, which gives rise
to business potential in this area.
d Water Projects Standard water management facilities (bulktransmission, water treatment, effluent treatment, etc.) as well as
advanced water solutions such as Desalination and Reverse Osmosis
plants provide good opportunity for growth. Apart from domestic markets,
your Company expects good prospects in Qatar, Saudi Arabia, UAE and
Oman by offering total water solutions.
e Urban Infrastructure Strong drivers such as population density, high
nominal GDP growth, high domestic savings and increasing aspiration
levels are driving an urban transformation. This is opening up
opportunities in areas of residential housing, commercial office space,
hotels, hospitals, educational institutions and shopping complexes in Tier
1, 2 & 3 cities.
f Airports The Aviation industry seems to be poised for sustained
growth with increasing trends of both passenger and cargo traffic,
annually. Opportunities are opening up with expansion plans of many non-
metro airports in India and internationally in the Middle East, Asia, Africa
and South East Asia.
g International Markets Your Company is targeting the Middle East
and other Asian markets for infrastructure business in areas such as
Airports, Roads, Bridges, Water Treatment and Power Transmission.
HEAVY ENGINEERING
The Company is one of the worlds leading manufacturers of the
technology-intensive custom-built equipment and expects to continue its
growth in process equipment in FY13. Although the unfortunate
Fukushima nuclear incident in Japan has reduced the pace of growth inthis sector, your Company is targeting international prospects such as
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Spent Fuel storage equipment and decommissioning of Generation II
plants. The defence sector shows good promise in the medium to long
term - both in land and marine business segments. The DefenceOffset
Programme and recent Government initiatives for encouraging private
sector for partnering with Defence Public Sector Undertakings provide arange of opportunities.
HYDROCARBON
Indias efforts to achieve minimum energy security can only be successful
through investment in development of upstream assets. While capex
spends on downstream facilities creation is likely to remain modest for
some time, investment in deep sea projects and new pipeline networks
are likely generate opportunity. Fertiliser capex is likely to revive in FY13
and should provide promising business opportunities. Your Companysthrust on international markets has yielded results, with several
prestigious international project orders during the year. In addition to GCC
markets, your Company is targeting select opportunities in new
geographies like South East Asia, Australia, Africa & CIS through local
country presence, strategic partnerships, etc.
THERMAL POWER
While power is one of the largest bottlenecks to economic growth,
investment decisions to set up fresh capacity for coal and gas fired powerplants remain uncertain due to constraints of coal / gas, land, water,
environment clearance and long term finance. While boiler and turbine
manufacturing capacities are likely to be well utilised for the current year,
improved order inflow is critical for a robust FY14. The Company, however,
is geared to leverage its capabilities in the power sector both in India and
nearby countries.
POWER TRANSMISSION & DISTRIBUTION
Your Company has demonstrated an impressive order book growth inFY12 both in domestic and international markets, backed by strong EPC,
fabrication, testing and execution capabilities. The increased investments
in India by government undertakings and strengthening of transmission
grids in GCC countries provide significant business opportunities for power
transmission and distribution business.
METALLURGICAL & MATERIAL HANDLING
The short term outlook in this area remains challenging due to
complexities of present mining policies, delays in land acquisition and
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environmental clearances. The demand, however, for metals in the
medium tolong term is expected to grow, driven by capex plans by
Integrated Steel Players, increased consumption and investments in
infrastructure. Material handling prospects are also looking up in areas of
power, mining, steel and ports.
ELECTRICAL & AUTOMATION
Although sluggish offtake from industrial sectors led to muted overall
growth in FY12, agriculture and buildings sectors are providing growth
opportunities to this business. Business is focusing on forging ahead with
world class contemporary products, and has filed 162 patent applications
in FY12. The Electrical & Automation business can expect an upward
momentum when the general economy improves.
MACHINERY & INDUSTRIAL PRODUCTS
Machinery & Industrial Products business has been affected by general
slowdown, deceleration in industrial activity, and restrictions on mining. In
Industrial Products, valves maintained the positive trend in FY12,
registering a healthy growth in order inflow and sales. Sustained oil & gas
project activities in the Middle East, North Africa and Australia provide
good opportunities. The Construction Machinery Business successfully
sustained the performance of the preceding year in a market which
witnessed intense competition. The Business Unit has maintained itsleadership position in the premium market segment and strengthened its
position with new offerings in Large Size Mining Equipment.
INFORMATION TECHNOLOGY & INTEGRATED
ENGINEERING SERVICES
L&T Infotech, a wholly owned subsidiary, grew at 30% Y-o-Y on a
consolidated basis with over 90% of its revenues from overseas clients.
Profit after Tax grew by 33% in spite of withdrawal of STPI Tax benefits in
FY12 through tax policy change. L&T Infotech has taken several initiatives
for operational excellence, tapping new markets and forging strategic
alliances to provide solutions in upcoming technologies. Integrated
Engineering Services, an SBU within L&T and a provider of engineering
services, is a global operator with 94% of its business from overseas. It
has shown a robust growth of 64% in the revenues during the current
fiscal, despite economic slowdown in USA, Europe, etc. With growing
clientele, the business is poised for encouraging growth over the next few
years.
FINANCIAL SERVICES
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L&T Finance Holdings Ltd. made its debut in Equity Capital Markets in
FY12 through a maiden IPO which received overwhelming response from
investors. The business continued its growth momentum during FY12 with
a 42% growth in its consolidated Total Income and a growth of 16% in
Profits after Tax. The Loans and advances extended by the FinancialServices Companies have grown by 39% and stands at ` 25,442 Cr at end-
FY12. The Financial Services group is now a broad-based, diversified
Financial Services provider and is benefiting from a solid growth platform.
DEVELOPMENTAL PROJECTS
Your company has built a significant portfolio of assets coveringconcessions, mainly in roads, ports, power generation and Metro rail. The
majority of projects are in various stages of completion. While returns on
developmental projects are typically back-ended, your Company would be
seeking to unlock value through churning of mature assets within the
portfolio and through equity partnership.
EFFECT OF INFLATION
Inflation has become a chronic problem whose effects permeate the entire
construction industry. Owners are not only paying for the increased costsof facilities and capital but also for premiums on construction prices
because of the uncertainties of inflation and its side effects. Contractors
are faced with severe uncertainty in bidding and financing work on
projects. Productivity is affected because contractors cannot accurately
forecast long-term returns on their investments and are required to divert
necessary capital to meet resource costs. Owners and contractors must
plan for these effects and attempt to reduce the risks entailed. In
particular, the proper assignment of economic risks in contracting should
reduce costs in the long term, although this would entail considerablechange in construction industry operations.
Rising inflation, interest rates, or construction costs could reduce the
demand for the companys services. In addition, it bears the risk of rising
inflation with respect to those contracts that are fixed-price and may be at
risk to the effects of rising inflation with respect to those contracts that
are guaranteed maximum-price. Therefore, increases in inflation, interest
rates or construction costs could have a material adverse effect on the
business, financial condition, and results of operations.
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5. Name any three highlights of Management discussion
analysis and your opinion about the same.
SOLUTION
GLOBAL ECONOMIC CONDITION
The world economy continues to face challenges on the road to sustained
recovery. Advanced Economies that seemed to be shaping well at the
start of 2011 lost steam towards the fag-end of the year and this
uncertainty is clouding the prospects for global growth during 2012. The
growth momentum was impacted as the protracted debt crisis in the euro
area and fiscal fragilities dampened business and consumer confidence.
The economic crisis and its ramifications have accelerated the shift of
economic power from the developed to the emerging nations and exposed
a fragile world with limited capacity to respond to systemic risks. The
consequence has been volatile and low growth which is likely to stay for
some time to come. Near term, the growth prospects for 2012-2013
remain uncertain, with growth petering out in the euro area and
moderating in the emerging markets, while a better-than expected
recovery is shaping up in the US. The baseline scenario suggests that
global growth may continue to be low in 2012, with a recession in the euro
area as the region makes the much needed fiscal adjustment. Meanwhile,
the resource rich Middle East and North Africa (MENA) region has been
facing significant internal challenges and geopolitical risks. In addition,there is the risk of large potential pill overs to the region from Europe. The
year 2011-2012 was abetted by the continuing global volatility and
challenges. These uncertainties led to widespread risk aversion and
adversely affected capital flows to new projects. The competition for
limited opportunities, led to socio-political tensions, increasing
protectionism, reassessment of regulation and more importantly,
heightened competition for scarce natural resources.
BUSINESS CHALLENGES:
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Order prospects of the Company especially from Power, Infrastructure,
Defence, Fertiliser, Water and Railways in India largely depend upon the
policy direction and availability of resources to finance large projects. In
spite of large demand for power, projects for setting up of new power
plants are not gaining momentum due to fuel shortage, delays inobtaining environmental clearances, issues associated with land
acquisition and competition from Chinese equipment manufacturers.
Political stability, good governance and speedy decision making hold the
key for achieving growth in the order inflow. The businesses of the
Company are also focusing on harnessing international prospects, mainly
from the Middle East region in 2012-2013. The forays into international
markets would mean dealing with many challenges such as stiff
competition from multinational players, regulatory requirements of local
sourcing etc. Margins would remain under pressure during 2012-2013 with
inflationary conditions and continuing competition from domestic and
international players. The volatility in commodity prices and foreign
currency exchange rates are expected to pose challenges to the operating
margins. Conditions of tight liquidity and elevated interest rates are
expected to prevail in 2012-2013. The working capital levels unless
managed well are likely to trend higher.
HUMAN RESOURCE DEVELOPMENT:
Talent management, leadership development and succession planning arethe major focus areas for the Company. The individual business units have
been focusing on acquiring and retaining the talent with requisite
competencies. Specific high impact programmes are being conducted for
leadership development. The Company has invested in setting up various
in-house training and development centres. L&T-Project Management
Institute in Baroda is accredited by PMI of USA. The Company runs
Construction Skill Training Institutes (CSTI) in association with the Ministry
of Rural Development, GOI and some of the State Governments at 7
locations across India for imparting vocational training to rural youth on
skills such as masonry, carpentry, plumbing etc.
6. Explain the salient features of the companys taxation as
brought out by the note on accounts.
SOLUTIONTax on income for the current period is determined on the basis of taxable
income and tax credits computed in accordance with the provisions of the
Income Tax Act 1961, and based on the expected outcome ofassessments/appeals. Deferred tax is recognised on timing differences
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between the income accounted in financial statements and the taxable
income for the year, and quantified using the tax rates and laws enacted
or substantively enacted as on the Balance Sheet date. Deferred tax
assets relating to unabsorbed depreciation/business losses /losses under
the head capital gains are recognised and carried forward to the extentthere is virtual certainty that sufficient future taxable income will be
available against which such deferred tax assets can be realised. Other
deferred tax assets are recognised and carried forward to the extent that
there is a reasonable certainty that sufficient future taxable income will be
available against which such deferred tax assets can be realised.
7. Analyze the short term and long term solvency of the
company using the key ratios. Also link the long termsolvency ratios to capital structure and EPS.
SOLUTION
ANALYSIS OF LONG TERM ASSETS & LIABILITIES
Analysis of long term liabilities includes the assessment of long term
solvency ratios which includes
Debt Equity Ratio
Debt to Total Assets Ratio
Proprietary Ratio
LONG TERM SOLVENCY RATIOS (LEVERAGE RATIOS)
Long term solvency ratio conveys a firms ability to meet the interest/
costs and repayment schedule of its long-term obligations. It helps the
creditors to know the capacity of a business concern to pay debt in the
future.
DEBT EQUITY RATIO
Debt Equity ratio measures the relationship of long term debt to
shareholders funds.
Long term debt
Debt Equity ratio =
Shareholders funds
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DEBT EQUITY RATIOS FROM 2008 2012
2012 2011 2010 2009 2008
1.23 1.49 1.17 1.46 1.14
ANALYSIS
A debt equity ratio of 1.23:1 in 2012 means that for every 1 of Equity,the company has a debt of1.23, from the above information it can be
understood that among the 5 years, of information taken, Debt Equity
Ratio is highest in the year 2011.
A high debt - equity ratio means that a company is aggressive in financing
its growth with debt. If a lot of debt is used to finance increased
operations (high debt to equity), the company could potentially generate
more earnings than it would have without this outside financing. If this
were to increase earnings by a greater amount than the debt cost
(interest), then the shareholders benefit as more earnings are being
spread among the same amount of shareholders. The debt/equity ratio
also depends on the industry in which the company operates.
In general, if the company is in debt more than 40-50%, the company
needs to look at its financial statements more carefully and compare itself
to other companies in the industry as it may be in financial difficulty.
If the ratio has risen dramatically over time, then any company needs to
take a closer look at its borrowing practices and why it has need for more
debt financing.
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LONG TERM DEBT TO TOTAL ASSETS RATIO
A measurement representing the percentage of a firm's assets that are
financed with loans and financial obligations lasting more than one year.
Long term debt to total assets ratio = Long term Debt
Total Assets
LONG TERM DEBT TO TOTAL ASSETS RATIO FROM 2008
2012:
2012 2011 2010 2009 20080.50 0.59 0.53 0.58 0.51
ANALYSIS
A long term debt to total assets ratio of 0.5:1 in 2012 means that every
1 of Total asset is financed by 0.5 of long term debt. It is evident from
the above information that the firms highest long term debt to total
assets ratio was in the year 2011 and the lowest was in 2012.
This ratio provides a general measure of the financial position of a
company, including its ability to meet financial requirements foroutstanding loans. A decrease in this ratio would suggest that the
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company is progressively becoming less dependent on debt to grow their
business.
A fluctuation in this ratio indicates that there are frequent changes in the
composition of long term debt & total assets in the business over the
years.
PROPRIETARY RATIO
This is a variant of debt equity ratio. It measures the relationship between
Net worth and total assets.
Proprietary Ratio = Net worth
Total Assets
PROPRIETARY RATIO FROM 2008 2012
2012 2011 2010 2009 2008
40% 40% 45% 39% 45%
ANALYSIS
A proprietary ratio of 40% in 2012 indicates that 60% of the funds have
been supplied by outside creditors. The proprietary ratio is highest in the
years 2010 & 2008 (45%) indicating that 55% of the funds has been
generated from outside creditors.
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If this ratio is high, it indicates that a company has a sufficient amount of
equity to support the functions of the business, and probably has room in
its financial structure to take on additional debt, if necessary. Conversely,
a low ratio indicates that the business may be making use of too much
debt or trade payables rather than equity, to support operations (whichmay place the company at a risk of bankruptcy).
SHORT TERM SOLVENCY
CURRENT RATIO
The ratio measures the company's ability to pay back its short-term
liabilities (debt and payables) with its short-term assets (cash, inventory,
receivables).
Current Ratio = Current Assets
Current Liabilities
CURRENT RATIO FOR 2008 2012:
2012 2011 2010 2009 2008
1.23 1.86 1.77 1.67 1.64
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ANALYSIS
The Current Ratio is 1.23:1 in 2012 which is below the ideal ratio of 2:1.
The company has maintained a constant current ratio around 1.64 to 1.86
through the years 2008 to 2011.
For the lenders, current ratio is very helpful for them to determine
whether a company has a sufficient level of liquidity to pay liabilities. They
would prefer a high current ratio since it reduces their risk.
For the shareholders, current ratio is also important to them to discover
the weakness in the financial position of a business. They would prefer a
lower current ratio so that more of the companys assets can be used for
growing business.
Investors should look at the trend of the current ratio of the company,types of current assets the company has and how quickly these can be
converted into cash to meet companys current liabilities.
Every industry has its own norms of current ratio. Acceptable current
ratios vary from industry to industry and are generally between 1.5 and 3
for healthy businesses. If a company's current ratio is in this range, then it
generally indicates good short-term financial strength. If current liabilities
exceed current assets (the current ratio is below 1), then the company
may have problems meeting its short-term obligations. If the current ratio
is too high, then the company may not be efficiently using its current
assets or its short-term financing facilities. This may also indicate
problems in working capital management.
LIQUID RATIO/ QUICK RATIO/ ACID TEST RATIO
Quick ratio establishes a relationship between quick assets and quick
liability. An asset is liquid if it can be converted into cash immediately or
reasonably soon without a loss of value.
Liquid Ratio = Liquid Assets
Current Liabilities
LIQUID RATIOS FOR 2008 2012
2012 2011 2010 2009 2008
0.52 0.59 0.68 0.66 0.62
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ANALYSIS
Generally, a quick ratio of 1:1 is considered to represent a satisfactory
current financial condition. It is 0.52:1 in the year 2012 representing that
for every 1 of Current Liability, there is 0.52 of quick assets.
Liquid ratio is more rigorous test of liquidity than the current ratio because
it eliminates inventories and prepaid expenses as a part of current assets.
Usually a high liquid ratio indicates that the firm is liquid and has the
ability to meet its current or liquid liabilities in time and on the other hand
a low liquidity ratio represents that the firm's liquidity position is not good.
Although liquidity ratio is more rigorous test of liquidity than the current
ratio, yet it should be used cautiously. A liquid ratio of 1:1 does not
necessarily mean satisfactory liquidity position of the firm if all the debtors
cannot be realized and cash is needed immediately to meet the currentobligations. In the same manner, a low liquid ratio does not necessarily
mean a bad liquidity position as inventories are not absolutely non-liquid.
Hence, a firm having a high liquidity ratio may not have a satisfactory
liquidity position if it has slow-paying debtors. On the other hand, a firm
having a low liquid ratio may have a good liquidity position if it has a fast
moving inventories.
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ABSOLUTE LIQUID RATIO
Absolute Liquidity ratio is also known as Super Quick ratio or Cash Position
Ratio. This ratio establishes a relationship between absolute liquid assets
and current liabilities.
Absolute Liquid Ratio = Absolute Liquid assets
Current Liabilities
ABSOLUTE LIQUID RATIOS FOR 2008 2012
2012 2011 2010 2009 2008
0.07 0.12 0.14 0.07 0.10
ANALYSIS
As compared to the standard ratio of 0.5:1, the companys absolute liquid
ratio is very less i.e. 0.07:1 in 2012 & in 2009. The firms liquidity position
has to be improved.
This ratio is used to examine absolute liquid position of the firm. If this
ratio is 0.5:1 it indicates that the firm has enough cash to pay to its
creditors. Secondly it also shows that firm is not paying attention towards
credit purchases and avoids the use of short term loan from the banks.
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EARNINGS PER SHARE
The portion of a company's profit allocated to each outstanding share of
common stock. Earnings per share serves as an indicator of a company's
profitability.
Earnings per Share = Profit after Tax/ No. of Equity shares
EARNINGS PER SHARE FROM 2008 2012
2012 2011 2010 2009 2008
74.11 70.96 88.46 62.92 76.93
/
ANALYSIS
The EPS is highest in 2010. This shows that the equity shareholders are
getting higher returns from the company. This also encourages more
investors to invest in the company. Since EPS is unstable over the years, it
is very difficult for the investors to predict the amount of investment they
can make in the company which may discourage the investors to invest.
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LONG TERM CAPITAL STRUCTURE EPS
The capital structure has increased over the years because of the
following reasons
Proceeds from Issue of shares (incl. share premium)
Proceeds from 0ther Long Term Borrowings
This results in fluctuations in EPS as along with the capital structure the
profits after taxes also fluctuate. Also the interest paid on debentures will
reduce the earnings available to equity shareholders thereby having a
direct impact on EPS.
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8. Using the information from the cash flow statement, explain
how investing activity is supported by financing and
operating activity. Are you happy with this form of funding?
Give reasons.
SOLUTION
ANALYSIS OF CASH FLOW STATEMENT
2012 2011 2010 2009 2008
Operating Activities -6340.73 -1615.61 2117.84 495.96 -1239.22
Investing Activities -5864.18 -5928.72 -5025.34 -5076.89 -6615.34
Finaning Activities 12081.61 7868.18 4770.05 4479.19 7697.32
-10000
-5000
0
5000
10000
15000
Cash Flows from various activities
Operating Activities
Investing Activities
Finaning Activities
Operating Activities shows how much cash comes from sales of the
company's goods and services, less the amount of cash needed to make
and sell those goods and services. Investors tend to prefer companies that
produce a net positive cash flow from operating activities. High growth
companies, tend to show negative cash flow from operations in their
formative years. At the same time, changes in cash flow from operations
typically offer a preview of changes in net future income. Normally it's a
good sign when it goes up. If net income is much higher than cash flow,
the company may be speeding or slowing its booking of income or costs.
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Cash flows from Operating activities is negative for few years and positive
for few years whereas the Financing activities are positive throughout all
the 5 years. The Investing activities are also negative in nature. It is
evident from the graph & table that the funds from Financing activities are
used to finance the Operating & Investing activities.The Depreciation has increased over the years due to investment of funds
in purchase of fixed assets. There is also repayment of short-term loan &
advances 2010 onwards. The trade payables are high due to large
purchases throughout the years. This means that the company has
outstanding dues to pay. There is also presence of high amount of trade
receivables which means that the company is ought to receive payment
from its buyers. It is highest in 2012. The proposed dividend is set aside
along all the years in order to make the payment in the next financial
year. The company has also sold a part of its assets in all the years. Thecompany may have incurred a profit or loss on doing so. Here, as the
figures are negative, the company has incurred a loss on sale of assets
may be due to non-performing assets. Similarly, the company has also
sold its investments and it might have occurred a profit or loss on sale of
investments.
Investing activities largely reflects the amount of cash the company has
spent on capital expenditures, such as new equipment or anything else
that needed to keep the business going. It also includes acquisitions of
other businesses and monetary investments such as money market funds.
Larsen & Toubro Ltd. has purchased a large amount of fixed assets in all
the respective years. Purchase of fixed asset & investments are major
contributors to cash outflows in investing activities, this means in simple
words that the negative figure in investing activities is due to the
purchase of fixed assets & investments. Also, the sale of fixed assets has
taken place in all the years but this sale is less when compared to the
purchases. Sale of fixed assets has led to a profit or loss from sale as
mentioned in the operating activities above. Sale of investments iscomparatively more to sale of fixed assets thereby substantiating the fact
that profit or loss from investments is much higher than profit or loss from
sale of fixed assets. The company has also received interest and dividend
from its investments in all the years.
Financing activities describes the goings-on of cash associated with
outside financing activities. Typical sources of cash inflow would be cash
raised by selling stock and bonds or by bank borrowings. Likewise, paying
back a bank loan would be of a cash out-flow, as would dividend payments
and common stock repurchases.
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The company has issued shares during all the 5 years leading to proceeds
from issue of shares. Also, it has receipts from other long term borrowings
from outsiders. The company has also paid off its long term borrowings to
an extent. The other payments made by the company are dividends and
interest.L & Ts financing activities finances its investing and operating activities.
This shows that the financing receipts are used and not operating income
and investing receipts to finance its operations. This shows that the
receipts from investments are very low which might be due to continuous
depreciation of the assets and investments which results in a decrease in
the sale value of these assets and investments.
9. The operational and financial highlights give a clear
direction to the companys growth outlook. Discuss this in the
light of the macro- economic conditions in India and across the
globe.
SOLUTION
1. POLITICAL FACTORS
(i) SEZ Act to Boost infrastructural Development
SEZ is the new destination for real investor. Currently 150 SEZs
are approved out of 85 SEZs are in the IT/ITES area and the 10-
15 SEZs in the electronics area. 130 SEZs are developed by real
estate developers which constitute of about 50% of the total SEZ
area.
(ii) FDI Liberalization to Augment Industry Growth:
Recent amendments by the government have made accessibility
to the required capital much easier. Opening of FDI in
construction and allowing developers to raise capital in
international market has led to development of larger projects
benchmarked against international standard.
(iii) REITs(Real Estate investment trusts) to Positively affect
real Estate Business
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The proposed introduction of REMF (Real Estate Mutual Fund) and
REIT will boost real estate investment from the small investors
point of view. This will allow small investors to enter real estate
market with the contribution as less than Rs 10,000. The concept
of REIT is on the verge of entering India and would be structuredas company dedicated to owing and in most cases operating
income producing real estate such apartments, shopping centers,
offices & warehouses.
2. ECONOMIC FACTORS
(i) Growth in Construction Activity Stimulating GDP Growth:
India is witnessing tremendous growth & expansion of
construction activities and construction is largest component of
GDP. It has been growing at a rate over 10% in the past few
years when GDP growth is around 8%. Within construction; sector
such as roads, railways, housing and power have been keen
drivers.
(ii) Rate Hikes Unlikely to Slow down Growth:
It has been analyzed that the residential prices has been
increased by about 15-20% on average in the last one year.
There has been strong growth in demand supported by rising
disposable incomes, low interest rates, and fiscal incentives on
both interest and principal payment and increasing urbanization.
3. SOCIAL FACTORS
(i) Shifting Consumption Pattern to Fuel industry Growth
The consumption pattern of Indian households is undergoing a
gradual, but steady change. Increased exposure to western
lifestyle has altered the consumption pattern of Indian people.
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(ii) Rising Urbanization to Boost Industrial Growth:
Urban infrastructure consist of drinking water, sanitation, sewage
systems, electricity and gas distribution, urban transport, primaryhealth services, and environmental regulation. Many of these
services are in the nature of local public goods with the benefits
from improved urban infrastructure. The urban population in
India will grow by 85 million over the next 10years.
(iii) Green Building in India:
The green building movement has gained tremendous
momentum during 3 to 4 years, ever since the Green Business
center embarked on achieving the prestigious LEED rating for
their own center at Hyderabad. The Platinum rating for green
building has sensitized the stakeholders of construction industry.
There is tremendous potential for construction of green building
in India.
4. TECHNOLOGICAL FACTORS
(i) Low Technology Adoption to Hinder Growth:
The poor state of technology adopted by the construction sector
adversely affects its performance. Upgrading of technology is
required both in the manufacturing of construction material and
in construction activities. As a large number of construction
materials are manufactured in the unorganized sector, effective
monitoring and regulation of the production of these material to
ensure proper quality become difficult. Use of low grade
technology in the construction sector lead to low value addition
and low productivity, apart from poor or substandard quality of
construction and time overruns in projects.
(ii) Construction As Per Indian Requirements:
The construction needs to be done as per Indian standards andrequirements which will demand considerable changes from the
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international requirements. The Infrastructure requirements of
India are much different as the population spread, increasing
urbanization, increasing slums, the small space for roads, the
water problems are more.
(iii) Ready-Mix-Concrete being Experienced With:
The Ready mix concrete business in India is in its infancy. For
example, 70% of cement produced in a developed country like
Japan is used ready mix concrete business there. Here in India,
Ready Mix concrete business uses around 2% of total cement
production. The increasing use of ready mix not only saves time
but also improves quality.
5. ENVIORMENTAL FACTORS
Technological solutions helps in integrating the supply chain,
hence reduce losses and increase profitability
With the entry of global companies into the Indian market,
advanced technologies, are used in engineering &
Construction.
With the development or evolution of infrastructure sector,
many of the MNC enter into Indian market
Environmental situation affect the infrastructure sector.
Infrastructure such as roads and bridges affect the many
sector such as automobile sector etc.
LEGAL FACTORS
Ensure a balanced transition to open trade at minimal risk to the
Indian economy and local industry.
Indian government infrastructure policy aimed at promoting an
integrated, phased and conductive growth of the Indian
infrastructure sector.
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Confirms the governments intention on harmonizing the regulatory
standards with the rest of the world
Establish an international hub for engineering & construction
companies so that new technology can be used
Legal provisions relating to safety measures