ratio analysis report
DESCRIPTION
Annalysis of fianancial ratiosTRANSCRIPT
-
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.
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 3
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 4
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 5
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.
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 6
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.
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 7
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 8
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 9
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 10
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.
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 11
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.
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 12
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 13
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 14
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.
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 15
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 16
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 17
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%
Current Assets, Loans & Advances
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 18
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%
Current Assets, Loans & Advances
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%
Total Current Assets 106.91 123.93 -17.02 -13.73%
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 19
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
Condensed Profit & Loss Account 2010 2009 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%
Condensed Balance Sheet Mar-10 Mar-09 2010
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%
Current Assets, Loans & Advances
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%
Total Current Assets 89.42 106.91 -17.49 -16.36%
Current Liabilities and Provisions 91.88 73.01 18.87 25.85%
Net Current Assets -2.46 33.90 -36.36 -107.26%
Total Assets 216.89 189.73 27.16 14.32%
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 20
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
Condensed Profit & Loss Account 2011 2010 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%
Condensed Balance Sheet Mar-11 Mar-10 2011
(Figures in Rs. Crores) change in amount
% change
Net Block 221.60 219.35 2.25 1.03%
Current Assets, Loans & Advances
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%
Current Liabilities and Provisions 96.16 91.88 4.28 4.66%
Net Current Assets 36.94 -2.46 39.40 -1601.63%
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 21
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 22
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 23
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.
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 24
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 25
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%
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 26
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 27
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.
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 28
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 29
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.
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 30
TSWD- Trend Analysis
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 31
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.
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 32
TSWD- Trend Analysis
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 33
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 34
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.
TSWD- Trend Analysis
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 35
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 36
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 37
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.
TSWD- Trend Analysis
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 38
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 39
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.
TSWD- Trend Analysis
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 40
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.
TSWD- Trend Analysis
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 41
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 42
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.
TSWD- Trend Analysis
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.
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 43
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 44
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 45
TSWD- Trend Analysis
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 46
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:
TSWD- Trend Analysis
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 47
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
Average Total Assets
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 48
TSWD- Trend Analysis
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 49
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
Average Total Assets
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.
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 50
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 51
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.
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 52
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.
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 53
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] -
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 54
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
-
FINANCIAL STATEMENT ANALYSIS & BENCHMARKING 2011
TATA STEEL WIRE DIVISION 55
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