Operating Efficiency Analysis

Group 2Ashish Jha (15P012)Deepak Kumar (15P015)Hardik Paharia (15P022)Mouparna Saha (15P032)Rahul Srinivasan (15P042)Sourobh Das (15P052)

Background• UPL Limited – formerly known as United Phosphorus Limited

• Business Group – Excel Shroff

• Incorporated on 2nd January, 1985 as Vishwanath Commercials Limited

• Global generic crop protection company, headquartered at Mumbai, India

• UPL, Advanta and UEL, the three companies in the group, listed on the Indian stock exchange, with a combined market capitalization of approx$2.5 billion

• Customer base in 123 companies with 24 manufacturing sites out of which 10 are in India

Debtors Turnover Ratio

• Debtors turnover ratio is used to determine if the company is efficiently managing its resources

• This ratio helps to calculate the cycle of clearing of debts in a year, which gives an idea of the operating efficiency of the company

Performance of UPL with respect to Debtor Turnover Ratio

Comparison with other companies

• Industry Average : 4.15• UPL’s debtor turnover ratio falls below that of the industry average and significantly lower than a few other big players in the same sector

Average Collection Period• This gives the average time it takes for the debtors to clear

their dues in the financial year under consideration

Creditors Turnover Ratio• This gives the ratio between the total purchases made to that

of the amount owed to creditors in a given financial year

Average Payment Period• This is derived from the Creditors Turnover Ratio and gives

the average time it takes to clear out a cycle of payments by the company

Stock Turnover Ratio or the Inventory Ratio

• In accounting, the Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year

• The equation for inventory turnover equals the Net Sales divided by the inventory

Performance of UPL with respect to Debtor Turnover Ratio

Comparison with other companies

• Industry Average : 6.37• UPL’s inventory turnover ratio falls below that of the industry average and it is comparable to a few other big players in the same sector

Average Holding Period• This gives an idea of the average time it takes for the

inventory to get replaced in the warehouses

Assets Turnover ratio• Indicates efficiency with which a company is deploying its

assets for generating revenues

• Higher the ratio, better the company is performing as higher ratio implies that company is generating more revenue per rupee of assets

Performance of UPL with respect to Asset Turnover Ratio

Performance of UPL with respect to Fixed Asset Turnover Ratio

• For UPL as well as Industry, Assets turnover ratio has been continuously improving since last 5 years

• But the asset turnover ratio of UPL has been lower than the industry average

• Lower ratios mean that the company isn't using its assets efficiently and most likely have management or production problems

• The improvement in assets turnover ratio of UPL can be attributed to increase in net sales over the years

Comparison with other companies

Competitors of UPL are maintaining significantly higher ratio owing to their better assets utilization

Fixed Asset Turnover Ratio• The fixed-asset turnover ratio measures a company's ability to

generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation

• A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues

Performance of UPL with respect to Fixed Asset Turnover Ratio

Performance of UPL with respect to Fixed Asset Turnover Ratio

• Average value of Fixed Asset Turnover Ratio for the past 5 years = 1.772 (industry average for the past 5 years = 2.168)

• Low Fixed Asset Turnover Ratio of 1.91 (March 2015) as compared to industry average of 2.33

• A low ratio means inefficient or under-utilization of fixed assets

• Sales are low or the investment in plant and equipment is too high

Comparison with Other Companies

• For the year 2014, we can see the fixed asset turnover ration of UPL has been lower than the industry average, as well as than the other companies in this sector

• Excel Crop Care Ltd. has a high Fixed Asset Turnover Ratio indicating that they have generated strong sales for the level of fixed assets they have used

Equity Turnover Ratio• This ratio measures a company’s ability to generate sales given its

investment in total equity. A ratio of X means for every 1 rupee invested in equity company generate X rupee revenue.

• Higher the ratio, better is the performance of the company

Performance of UPL with respect to Equity Turnover Ratio

• As we can see from the data, this ratio has constantly increased for last 4 years, it is because of a better increase in net sales when compared to average total equity

• This is a really good sign for the stockholders of the company

Comparison with other Companies

• Even though the equity turnover ratio of UPL is above 1, it is much below other companies• The value of equity turnover for other companies lies between 2.5 to 3.5 but for UPL it is just 1.5• UPL is not utilizing it’s shareholder’s equity well when compared to other companies

Revenue per Employee Ratio• The sales/revenue per employee ratio tells about a company's

sales in relation to the number of employees they have.

• This ratio is very useful when comparing a company with other companies in the same industry

• Higher the ratio, better is the performance of the company

Performance of UPL with respect to Revenue per Employee Ratio

Industry Average = 1.006

Performance of UPL with respect to Revenue per Employee Ratio

• Industry Average = 1.006

• As we can see from the data, UPL has been consistently outperforming its competitors year after year as far as Revenue per Employee Ratio is concerned

• There is a steady increase in its own performance too over the years

Comparison with other companies

• Labor needs vary from industry to industry, and labor-intensive companies will typically have lower revenue per employee ratios than companies that require less labor

• Relatively high revenue per employee is a positive sign that suggests the company is finding ways to squeeze more sales (revenue) out of each of its workers

Overall Efficiency Ratio Analysis• Though a company may have a high efficiency ratio, this does not

necessarily mean it is profitable• Efficiency ratios are generally used by analysts and investors to

evaluate how well a company is managed and how efficiently it utilizes its assets and handles liabilities

• Efficiency ratios can indeed provide an indication of profitability, but even though a company may be well-managed and operating efficiently, it does not automatically mean the company is turning a profit

• UPL comparatively has lower operating efficiency ratios but has been consistently outperforming its peers since the past 10 years, which clearly indicate the scope that UPL has left itself in terms of managing its inventory and debt cycles

Future Outlook• The Company aims to focus on superior supply chain management,

smarter procurement, as well as comprehensive administration and control at its facilities

• The Company intends to align processes across locations through a common information sharing platform

• All formulations are developed using in-house and environment-friendly technologies, strengthening long-term sustainability

• The Company is setting up active ingredient manufacturing plants in India, Europe and America to enhance market proximity at a time when China is emerging as a higher cost global player