29800904 a project on ratio analysis of financial statements working capital management at hvtl tata...

KOUSTUV BUSINESS SCHOOL 1 | Page

KOUSTUV BUSINESS SCHOOL

A Project Report on Ratio Analysis of Financial Statements &

Working of Capital Management at HV Transmissions Ltd,

Jamshedpur

SUBMITTED TO:

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SUBMITTED BY:

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KOUSTUV BUSINESS SCHOOL

BHUBANESWAR

JULY`2009

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CERTIFICATE BY GUIDE

This is to certify that the following student is submitting the project report titled

“ A Ratio Analysis Of Financial Statements & Working Of Capital Management at HV

TRANSMISSIONS Ltd. It is the original and bonafide work submitted in partial fulfillment

of the requirement for the award of PGDM program.

Prof. GOPAL PRUSETH

(Project Guide)

KBS, Bhubaneswar


ACKNOWLEDGEMENT

In the course of this project I got an insight into the automobile industry, came

to know a lot about the basic working of an automobile company.

First and foremost I am very proud to be a student of Koustuv Business

School, Bhubaneswar and am most grateful for having been given the chance to work

with a reputed company like HVTL at the beginning of my career.

I would fail to do my duty if I didn’t take this opportunity to thank my faculty guide,

Prof. Gopal Pruseth for his timely help and guidance. I would like to thank him whole

heartedly for making me work harder so as to gain a more in depth knowledge of the

subject which I am sure will help me a lot in the long run as well. I would say that this

project wouldn’t have been the same without his support, guidance, encouragement

and constant demand for improvement.

I am extremely grateful to Mr. Amitava Roy (AGM, Finance, HVTL) for granting

permission to carry out the project work in his department. My company guide, Mr.

Amit Kumar Agarwal, Manager is another person who has played a key role in the

development of me as a person, in the completion of this project and in being educated

about the automobile industry in general. Without the knowledge, attention and time

that he has bestowed on me, this project would simply have been impossible. He is truly

an inspiration for me and drove me towards working harder than my expectations which

simply made me more ready for the corporate life. He truly gave me the corporate

exposure I had thought of.

I would also like to thank Mr. Ashok Kumar, Mr. Girish Shivramakrishnan,

Mrs. Sunayana for their immense support and guidance which helped me in

understanding various aspects of the subject. I would also like to thank all the

employees of the finance department for their valuable support, cooperation & help.

GOPAL KUMAR AGARWAL


INDEX

Declaration

Certificate By Guide

Acknowledgement

TOPICS

Introduction

Project Title

Objectives Of the Project

Methodology

Company Profile

The AutoMobile Industry

Tata Group

Tata Motors

HVTL Ltd

Financial Highlights of the Company

Ratio Analysis

Working Capital

Working Capital Management

Conclusion

Recommendations

Sources & Bibliography


PART- A

INTRODUCTION


PROJECT TITLE

A Project on Ratio Analysis of Financial Statements & Working of Capital Management at

HVTL Ltd, Jamshedpur a 85% subsidiary of Tata Motors.

OBJECTIVES OF THE PROJECT

To analyse the financial statement of HV TRANSMISSIONS LIMITED from the Year

2003-04 to 2008-09.

To interpret the analysis and the trend of the financial results.

To use various activity ratios and liquidity ratios to find out the activity of assets

and liabilities and to find out the liquidity position of the company.

Standardize financial information for comparisons.

Evaluate current operations .

Compare performance with past performance.

Compare performance against other firms or industry standards.

Study the efficiency of operations.

Study the risk of operations.


METHODOLOGY

Data Collection

Primary Source

Annual reports published by company.

Respondents of HV Transmissions Ltd.

Secondary Source

Via mail, SEC or company websites.

Published collections of data.

Investment sites on the web.

Official web site of the company.

SAP

Data Presentation

Graphical and tabular representation of the collected data has been done to show the

financial position of the HVTL firm.

Data Analysis & Interpretation

Here an analysis of the annual reports of the last five fiscal years (2003-04 to

2008-09) has been done. Various ratios have been calculated to find out the profitability

and leverage of the firm.

Various working capital ratios has been calculated to observe the working

capital changes and comparisons have been made to of the last four years. A thorough

study has been made about the Inventory management system of the company and an

effort has been made to find out how well the company manages its inventories.

I have tried to evaluate the firm’s performance by using the past data of the

firm with the present data, by the time series analysis over the period of 5 to 6 years.


THE AUTOMOBILE INDUSTRY

Indian automobile industry has grown leaps and bounds since 1898, a time

when a car had touched the Indian streets for the first time. At present it holds a

promising tenth position in the entire world. The monthly sales of passenger cars in

India exceed 100,000 units . A surge in economic growth rate and purchasing power led

to growth in the Indian automobile industry, which grew at a rate of 17% on an average.

The industry provided employment to a total of 13.1 million people as of 2006-07, which

includes direct and indirect employment. The export sector grew at a rate of 30% per

year during early 21st century.

India was one of the largest manufacturers of tractors in the world in 2005-

06, when it produced 2,93,000 units.

India is :

1. The second largest Two Wheeler manufacturer.

2. The Largest Tractor Manufacturer.

3. 4th largest Passenger Vehicle market in Asia.

4. 5th largest Commercial Vehicle manufacturer in the world.

5. The largest three wheeler market .

6. India has the fourth largest car market in the world.


THE INDIAN AUTOMOBILE SECTOR

Although India is the fifth largest automobile manufacturer in the world, penetration

level in the country is very low, especially in the case of passenger cars. This opens a

huge opportunity for the automobile companies to explore the Indian market. Changing

demography also adds to the increasing demand for the vehicles. The Indian automobile

industry has also made a substantial effort in developing the R & D infrastructure. This

has helped in upgrading the technology and at the same time, reduced production cost.

This provides good export opportunities for Indian manufacturers, which are being

duly exploited by Tata motors, Ashok Leyland, Maruti in the African, and South

American markets.

The fast growth of this industry is evident by the spurt in demand for automobiles in

the last few years. This is well supported by the economic reforms that have been put in

place, particularly in the financial sector and in foreign direct investment. During the last

decade, conscious efforts have been made to fine-tune state policy to enable the Indian

automobile industry to realize its potential to the fullest.

Abolition of licensing and removal of quantitative restrictions coupled with

initiatives to bring the policy framework in step with WTO requirements have set the

industry on a progressive path. The freeing of the industry from this restrictive

environment has helped it to restructure, absorb new technologies and align itself to

global development.


Increasing competition as a result of liberalization has led to continuous

modernization as well as substantial price reduction keeping pace with the international

standards. Moreover, auto finance with aggressive marketing strategies has played a big

role in boosting the automobile demand.

Major Manufacturers Of Automobiles in India:-

Tata Motors

Maruti Udyog Ltd.

General Motors India

Ford India Ltd.

Eicher Motors

Bajaj Auto

Daewoo Motors India

Hero Motors

Hindustan Motors

Hyundai Motor India Ltd.

Royal Enfield Motors

TVS Motors

DC Designs

Swaraj Mazda Ltd


PART- B

COMPANY PROFILE


ORIGIN OF TATA MOTORS

TATA MOTORS, formely known as TELCO (Tata Engineering & Locomotive Company) is a multinational corporation headquatered in Mumbai,India. It is a largest automobile & commercial vehicle manufacturing company. The OICA ranked it as the world 20th largest automaker, based on figures for 2006.

TATA MOTORS was established in the year 1945. It is a part of TATA GROUP. It presence indeed cuts across the length and breadth of India. Over 3 million Tata vehicles runs on Indian roads, since the first rolled out in 1954.

Jamsetji Nusserwanji Tata starts a private trading firm, laying the foundation of the Tata Group. The Tata Group comprises 96 operating companies in seven business sectors: information systems and communications; engineering; materials; services; energy; consumer products; and chemicals. The Group was founded by Jamsetji Tata in the mid 19th century, a period when India had just set out on the road to gaining independence from British rule. Consequently, Jamsetji Tata and those who followed him aligned business opportunities with the objective of nation building. This approach remains enshrined in the Group's ethos to this day.

The Tata family of companies shares a set of five core values: integrity,

understanding, excellence, unity and responsibility. These values, which have been part

of the Group's beliefs and convictions from its earliest days, continue to guide and drive

the business decisions of Tata companies. The Group and its enterprises have been

steadfast and distinctive in their adherence to business ethics and their commitment to

corporate social responsibility.

http://www.tata.com/0_about_us/history/pioneers/jamsetji_tata.htm


TATA GROUP


HVTL (SUBSIDIARY OF TATA MOTORS)

HV Transmissions Limited is a leading manufacturer of automotive transmissions, components & engineering applications for a wide range of medium & heavy commercial vehicles.

HVTL was established on 13th March 2000 as a major subsidiary of Tata Motors by taking over operations of Tata Motors’ erstwhile Gearbox Division. Our manufacturing facilities are located in the industrial belt of Jamshedpur in the state of Jharkhand, 250 kms from Kolkata, India’a leading metro city and is well connected by road and rail to other major cities / locations.

The Company provides products and services of superior quality, matching with the current economic and business trends in Medium and Heavy Commercial Vehicle market.

HVTL has an asset base of Rs. 278.74 crores and its turnover during 2008-09 was Rs. 142.59 crores . The Company is spread over an area of 81,440 sq. meters.


The Company has a capacity of producing 1,50,000 gear boxes per year.

HVTL’s inherent strength also lies in its excellent in-house Tool room & Tool Re-Grinding facilities, prompt component development and a modern Heat Treatment shop.

HVTL's core competencies are emphasized through excellence in engineering, manufacturing standards & ultimate utilization of human potential.

The Strength of HVTL lies in:-

Strong Parentage of TML. Strong Manufacturing Base High Cost Competitiveness in Products offered. Professional Management Qualified & skilled manpower Extensive experience & expertise in Transmissions Manufacturing acquired over

the years ( Since year 1954). Product portfolio capable of serving diverse needs (vehicles of varying power-

weight ratios) & flexible to adaptation to vehicles of diverse makes Initiatives like TPM, KAIZEN, 5S, 6 Sigma, ISO/TS 16949 :2002 (E) HVTL has signed the BE-BP Agreement with Tata Sons & has scored in the band of

450-550 in the previous TBEM External Assessment .

'All resulting in an environment congenial for learning, creativity and innovation’


MARKET SHARE OF HVTL

Across the domestic market – HVTL 46% market share (No. 1 OE supplier).

In Tata Motors, we have 71% market share, TML Pune has 26% & others 3%.

100% TML, Pune M&HCV gear box volumes will be on loaded to HVTL.

VISION

To be a Most preffered partner for transmissions to existing & potential customers in Domestic & International markets, offering best value for money & become a Rs. 1500 Crore company by 2014-2015.


MISSION

Vendors & Services providers :- To foster a long- term relationship for mutual

growth.

Employees :- To create seamless organization that inculcated and promotes

innovation, excellence, safe and high performance work culture adhering to Tata

code of conduct.

Shareholders :- To consistently create shareholder value through sustainable and

profitable growth by continuously seeking new business opportunities and

employing best method and practices and employing best in class technologies.

Customers :- To provide best value for mobet to customers through quality, cost

effective & innovative transmissions solutions.

Community :- To proactively participate in environmental protection & welfare of

communities around us.

CORE VALUES

Integrity.

Customer Focus.

Corporate Citizenship.

Passion for Engineering.

Innovation.

J. R. D Tata

“ No success or achievement in material terms is worthwhile unless it serves the needs or interests of the country and its people and is achieved by fair and honest means.”


HVTL Function in a harmonious atmosphere stemming from adopting of the basic tenets

of the Tata Group’s philosophy of respect for employees and a high concern for their

needs and welfare.

HVTL’S Culture is driven by ownership, responsibility and accountability at different

levels which had led to sure, systematic and continues improvement and learning. This

is distinctly evident form quantum and sustained improvements. One such example is

the significant improvements of product.

The Culture Of HVTL is characterised by:

A passion for engineering and innovation among the employees-a major transformation of facilities in the past years has taken place with many firsts in India such as unique high quality-low cost semi automated assembly line, automated shim selection, conveyorised and automatic painting, semi automated SqF line, 5-chamber shot blasting to mention a few.

An increasing seamless work-culture through an approach of defining accountability that ensures empowerment and calls for involvement in various functions of the organization to deliver objectives.

A learning and collaborative culture fostered by soliciting externally sourced expertise which has led to setting up of modern facilities at significantly low costs.

A team based culture with CFTs to achieve stretch targets on cost, quality and other key objectives. This culture, while fostering high performance also enables HVTL to strengthen its Coe competency of being the lowest cost manufacturer of M&HCV transmissions. In fact during the recent down turn HVTL was not only able to maintain the profit in the third and fourth quarters but also achieved marked improvements in areas such as variable conversion cost.


MANAGEMENT

Board of Directors –HVTL

Name Position

Mr. P M Telang Chairman

Mr. C Ramakrishnan Director

Mr. S B Borwankar Director

Mr. Govind Shankarnarayanan Director

Mr. N S Kulkarni Director

Chief Executive Officer

Name Position

Mr. M L Bapna CEO

Chief Financial Officer

Name Position

Mr. Amitava Roy CFO

Company Secretary

Name Position

Mr. Vispi S Patel Company Secretary


Certificates Awarded to HVTL


Factors Contributing to Continous Development, & High Performance

HV Transmissions is a part of the engineering business of TATA group of

companies that is India’s largest and best-known conglomerate, with a turnover

touching Rs.33, 000 Crores, ($ 7 Billion).

Having an Asset base of Rs.293.03 Crores.

Turnover for 2008-09 was Rs.142.59 Crores

A manpower base of 1528 men

An area of 81440 square meters

Production capacity of 150000 GBS per year

The company’s strength lies in:

Skilled & highly committed employees

In house tool room and tool regrinding facilities

Prompt component development centre

Modern heat treatment shop

It is the sole supplier of gearboxes to Tata Engineering Jamshedpur and Lucknow

for their entire range of commercial vehicles which they produce.

The company also supplies gearboxes to Vehicle Factory, Jabalpur for fitment on

vehicles for the Indian Army which is a remarkable achievement for it.


The company has its own Tool room and Tool regrinding facilities as well as a

modern Heat Treatment shop consisting of Continuous Carburizing furnaces and

quenching presses.

The manufacturing operations are being carried out on modern State of the Art

machine tools with close quality monitoring and extensive and rigorous testing

facilities regularly.

Focussed approach to on Process Control systems helps the company to meet

quality standards and delivery commitments for their customer’s.

HVTL’s core competencies are emphasized through excellence in engineering,

manufacturing standards and ultimate utilization of human potential.

SAP 4.6 ERP(R/3ECG 6) software is central tool for information management at

HVTL. It is used to integrate all business processes and supports effective decision

making. It covers all functional areas and departments including finance.


RELATIONSHIP WITH TATA MOTORS

The technical relationship between the Holding company TATA MOTORS LTD. &

subsidiary HV TRANSMISSIONS LTD. is that of a Job worker. Job working means

performing some operations on the raw materials or components of one organization

by another organization, due to specialization by the latter organization or outsourcing

/not having required capacity by the former organization. The latter organization is

known as the Job worker of the former one, for which the job worker gets revenue

commonly known as PROCESSING CHARGES.

The job worker gets the required material supply form the supplying organization on

which operations are performed and thereafter the output is returned to the supplier

for use in further production.

The job worker is a system where, the job worker processes the material & components

supplied to them into finished products & has to bear the expenses of conversion, which

is paid to them in the form of PROCESSING CHARGES.

Financial Highlights of the Company

HVTL has an authorized share capital of 5,00,00,000 equity shares of Rs. 10 each. It has

issued, subscribed and paid up capital of 4,00,00,000 equity shares of Rs. 10 each. Of the

above, 340000000 equity shares are held by Tata motors, the holding company.


From being a loss making company in its initial years, HVTL is now in the pink of financial

health. Production numbers have steadily moved up and so has HVTLs’ sales. All

financial results of HVTL have improved over the years as a reflection of overall

performance improvement.

In view of strong financial performance board of directors declared payment of an

interim dividend of Rs. 3.50 per share. And final dividend of Rs. 1.50 per share on

40000000 equity shares fully paid up on March 31, 2008 consequently total dividend of

Rs. 5 was given.

TURNOVER

Turnover has more than doubled since 2002-03, not only through rise in volumes but

also through change in product mix and higher focus on spare parts. This shows that the

firm is getting good business from its customers and the firm has been able to increase

its customer base. Due to global recession the turnover slightly decreased.


Profit after Tax, Profit before Tax and EBIDT

Profit before taxes (PBT) and Profit after taxes (PAT) have increased many fold on

account of increased volumes, higher efficiencies and better fund management. EBIDT

(Earnings before Interest, Depreciation and Taxes) dipped slightly in 2005-06 due to

market corrections in salary structure and higher provisions on account of retirement

benefits. With increased volumes and better productivity it has improved.

PAT, PBT and EBIDT fell sharply due to global recession since the contraction in demand.


Earnings per Share and Dividend per Share

HVTL has been paying higher dividend to its shareholders. The dividend per share

increased considerably from Rs. 1.5 per share to Rs. 5 per share. This shows that the

company is concerned for the maximization of the firm’s value which in turn maximizes

shareholders profitability.


PRODUCTS OF HVTL


GBS – 40 Synchromesh Gear Box


GBS- 50 Synchromesh Gear Box


GBS- 600 Synchromesh Gear Box


Auxiliary Gear Box


GBS- 750/680 & GBS- 1400/9


RATIO ANALYSIS

Financial ratio analysis is the calculation and comparison of ratios which are derived

from the information in a company's financial statements. The level and historical

trends of these ratios can be used to make inferences about a company's financial

condition, its operations and attractiveness as an investment.

This is the measure of inter relationship between different sections of the

financial statements which then is compared with the budgeted or forecasted results,

prior year results and or the Industrial results. To be most important ratios must include

a study of underlying data. Ratios should be taken as guides that are useful in evaluating

a company’s financial position and operations and making comparisons with results

inprevious years or with other companies. The primary purpose of ratios is to point out

areas needing further investigations. Ratios will not carry meaningful business reasoning

if there is no supporting quantitative and financial information.

When it comes to investing, analyzing financial statement information (also

known as quantitative analysis), is one of, if not the most important element in the

fundamental analysis process.

Ratios are relationship expressed in mathematical terms between 2 individual

groups of figures connected with each other. Different ratios are calculated to analyze

and study different aspects of a firm. Ratios have been classified into the following

groups:

Liquidity ratios

Activity ratios

Leverage ratios

Profitability ratios


THE USE OF FINANCIAL RATIOS

Financial Ratio are used as a relative measure that facilitates the evaluation of

efficiency or condition of a particular aspect of a firm's operations and status.

Ratio Analysis involves methods of calculating and interpreting financial ratios

in order to assess a firm's performance and status.

Assessment of the firm’s past, present and future financial conditions.

Done to find firm’s financial strengths and weaknesses.

Primary Tools.

Financial Statements.

Comparison of financial ratios to past, industry, sector and all firms

SIGNIFICANCE OF USING RATIOS

The significance of a ratio can only truly be appreciated when:

It is compared with other ratios in the same set of financial statements.

It is compared with the same ratio in previous financial statements (trend

analysis).

It is compared with a standard of performance (industry average). Such a

standard may be either the ratio which represents the typical performance of the

trade or industry, or the ratio which represents the target set by management as

desirable for the business.


USERS OF RATIO ANALYSIS

TRADE CREDITORS are interested in firm’s ability to meet their claims over a very

short period of time. Their analysis will therefore, confine to the evaluation of the

firm’s liquidity position.

SUPPLIERS OF LONG TERM DEBT, on the other hand ,are concerned with the

firm’s long term solvency and survival. They analyse the firm’s profitability over

time, it’s ability to generate cash to be able to pay interest and repay principal

and the relationship between various sources of funds (capital structure

relationships). Long term creditors do analyse the historical financial statements,

but they place more emphasis on the firm’s projected, or proforma, financial

statements to make analysis about its future solvency and profitability.

INVESTORS, who have invested their money in the firm’s shares, are most

concerned about the firm’s earnings. They restore more confidence in those firms

that show steady growth in earnings. As such, they concentrate on the analysis of

the firm’s present and future profitability. They are also interested in the firm’s

financial structure to the extent it influences the firm’s earnings ability and risk.

MANAGEMENT of the firm would be interested in every aspect of the financial

analysis. It is their overall responsibility to see that the resources of the firm are

used most effectively and efficiently, and the firm’s financial condition is sound.


MANAGERIAL USES OF RATIO ANALYSIS

The following are the important managerial uses of ratio analysis helps in financial

forecasting : Ratio analysis is very helpful in financial forecasting. Ratios relating to past

sales, profits and financial positions from the basis for setting future trends.

Helps in Comparison: With the help of ratio analysis, ideal ratios can be

composed and they can be used for comparing a firm’s progress and

performance. Inter firm comparison or comparison with industry averages is

made possible by ratio analysis.

Financial Solvency of the Firm: Ratio analysis indicates the trends in financial

solvency of the firm. Solvency has two dimensions long term solvency and short

term solvency. Long term solvency refers to the financial viability of a firm and it

is closely related with the existing financial structure. On the other hand, short

term solvency is the liquidity position of the firm. With the help of ratio analysis

conclusion can be drawn regarding the firm’s liquidity and long term solvency

position.

Evaluation of Operating Efficiency : Ratio analysis throws light on the degree

of efficiency in the management and utilization of its assets and resources.

Various activity ratios measure this kind of operational efficiency and indicate the

guidelines for economy in costs, operations and time.

Communication Value : Different financial ratios communicate the strength

and financial standing of the firms to the internal and external parties. They

indicate the over all profitability and capital gearing etc. of the firm.

Other Uses : Financial ratios are very helpful in the diagnosis of financial health

of a firm. They highlight liquidity the, solvency, profitability and capital gearing

etc. of the firm.


INTERPRETATION OF RATIOS

The interpretation of ratios is an important factor. Through calculation is also important

but it is only a clerical task whereas interpretation needs skills, intelligence and

forsightedness. The interpretation of the ratios can be done in the following ways.

Single Absolute Ratio : Generally speaking one cannot draw meaningful

conclusions when a single ratio is considered in isolation. But single ratios may be

studied in relation to certain rules of thumb which are based upon well proven

contentions.

Groups of Ratio : Ratios may be interpreted by calculating a group of related

ratios. A single ratio supported by related additional ratios becomes more

understandable and meaningful.

Historical Comparisons: One of the easiest and most popular ways of

evaluating the performance of the firm is to compare its present ratios with the

past ratios called comparison over time.

Projected Ratios : Ratios can also be calculated for future standard based upon

the projected financial statements. Ratio calculation on actual financial

statements can be used for comparison with the standard ratios to find out

variance, if any. Such variance helps in interpreting and taking corrective action

for improvement in future.

Inter firm Comparison: Ratios of one firm can also be compared with the ratios

of some other selected firms in the same industry at the same industry at the

same point of time.


LIMITATIONS OF RATIO ANALYSIS

A firm’s industry category is often difficult to identify.

Published industry averages are only guidelines.

Accounting practices differ across firms.

Sometimes difficult to interpret deviations in ratios.

Industry ratios may not be desirable targets.

Seasonality affects ratios .

TYPES OF RATIOS

Liquidity Ratios – can current debts be met

Leverage Ratios – can all debts be met

Activity Ratios – how efficient is the operation.

Profitability Ratios – how profitable is the operation


FINANCIAL STATISTICS OF HVTL


NET SALES

Gross sales for a period after cash discounts, returns, and freight expenses have been

deducted.

The sales figures are encouraging as there is a positive trend and the rate of increase is

considerably high. However considering the fact that it has only one customer in the

form of Tata Motors Limited the figures infers an increase in sales of TML. So in order to

increase sales in a higher rate HVTL should diversify its market. The net sales went up

from Rs 13924.05 lakhs in year 2000-01 to Rs 19197.82 in year 2007-08 but decreased to

14259.23 in the year 2008 – 09.


Profit Before Interest and Tax

PBIT is essentially Net Income with interest, taxes, depreciation, and amortization added

back to it. It can be used to analyze and compare profitability between companies and

industries because it eliminates the effects of financing and accounting decisions.

However, this is a non-GAAP measure that allows a greater amount of discretion as to

what is (and is not) included in the calculation.


Observation

The profit before interest and tax has gone up from -836.38 lakhs to 7632.56 lakhs in

2007-08 .This is a big achievement for HVTL. As it has proved its credibility as an

organization.


Profit Before Tax -PBT

A profitability measure that looks at a company's profits before the company has to pay

corporate income tax. This measure deducts all expenses from revenue including

interest expenses and operating expenses, but it leaves out the payment of tax.

This measure combines all of the company's profits before tax, including

operating, non-operating, continuing operations and non-continuing operations. PBT

exists because tax expense is constantly changing and taking it out helps to give an

investor a good idea of changes in a company's profits or earnings from year to year.


Observation

The profit before tax is rising in a consistent rate showing a very positive trend from

Rs.-2203.96 lakhs in year 2000-01 to Rs.7246 in 2007-08 reducing to 2583.1 in 2008-09.

Profit after tax (PAT)

It the net profit earned by the company after deducting all expenses like interest,

depreciation and tax.

PAT can be fully retained by a company to be used in the business. However

dividend is paid to the share holders from this residue.


Observation

The profit after tax is rising in a consistent rate showing a very positive trend from

Rs.-2202.96 lakhs in year 2000-01 to Rs.4744.32 in 2007-08 .


LIQUIDITY RATIOS

Liquidity refers to the ability of a firm to meet its short-term financial obligations when

and as they fall due.

The main concern of liquidity ratio is to measure the ability of the firms to meet

their short-term maturing obligations. Failure to do this will result in the total failure of

the business, as it would be forced into liquidation.

Common liquidity ratios include the current ratio, the quick ratio and the

operating cash flow ratio.

Current Ratio : The current ratio is a popular financial ratio used to test a

company's liquidity (also referred to as its current or working capital position) by

deriving the proportion of current assets available to cover current liabilities.

The concept behind this ratio is to ascertain whether a company's short-

term assets (cash, cash equivalents, marketable securities, receivables and

inventory) are readily available to pay off its short-term liabilities (notes payable,

current portion of term debt, payables, accrued expenses and taxes). In theory,

the higher the current ratio, the better.

Current assets normally includes cash, marketable securities, accounts

receivable and inventories. Current liabilities consist of accounts payable, short

term notes payable, short-term loans, current maturities of long term debt,

accrued income taxes and other accrued expenses (wages).

Interpretation

1. Relatively high ratio values mean that the business is liquid, but cash is not

working.

2. If the current ratio is greater than 1.0, the business is liquid.

3. If the current ratio is less than 1.0, the business is illiquid.


Observation

HVTL has a current ratio ranging between 0.42 to 0.79. This indicates that the current

assets of the firm are less than the current liabilities. This is because the firm has always

maintained a negative net working capital. Its current liabilities have always been

greater than current assets. Current liabilities is greater than current assets which shows

that the company is able to recover its debtors faster and has a good bargaining facility

with its suppliers.


Quick ratio : The quick ratio -the quick assets ratio or the acid-test ratio -is a

liquidity indicator that further refines the current ratio by measuring the amount

of the most liquid current assets there are to cover current liabilities. The quick

ratio is more conservative than the current ratio because it excludes inventory

and other current assets, which are more difficult to turn into cash. Therefore, a

higher ratio means a more liquid current position.

Interpretation

1. Relatively high ratio values mean that the business is liquid, but cash is

not working.

2. If the current ratio is greater than 1.0, the business is liquid.

3. If the current ratio is less than 1.0, the business is illiquid.


Observation

The firm keeps a small fraction of the current assets in liquid form. The managerial

efficiency of the firm prevents any situation of default in payment of current liabilities.

LEVERAGE RATIO

The ratios indicate the degree to which the activities of a firm are supported by

creditors’ funds as opposed to owners.

The relationship of owner’s equity to borrowed funds is an important indicator

of financial strength.


The debt requires fixed interest payments and repayment of the loan and legal

action can be taken if any amounts due are not paid at the appointed time. A relatively

high proportion of funds contributed by the owners indicates a cushion (surplus) which

shields creditors against possible losses from default in payment.

Note: The greater the proportion of equity funds, the greater the degree of financial

strength. Financial leverage will be to the advantage of the ordinary shareholders as

long as the rate of earnings on capital employed is greater than the rate payable on

borrowed funds.

Debt Ratio : The debt ratio compares a company's total debt to its total

assets, which is used to gain a general idea as to the amount of leverage being

used by a company. A low percentage means that the company is less dependent

on leverage, i.e., money borrowed from and/or owed to others. The lower the

percentage, the less leverage a company is using and the stronger its equity

position. In general, the higher the ratio, the more risk that company is

considered to have taken on.

A debt ratio of greater than 1 indicates that a company has more debt

than assets, meanwhile, a debt ratio of less than 1 indicates that a company has

more assets than debt. Used in conjunction with other measures of financial

health, the debt ratio can help investors determine a company's level of risk.


Observation

This ratio compares the total debt (long term as well as short term) with total

assets. Up to the financial year 2007-08 total debts were a small proportion of

total assets. However in the year 2008-09, total debts have become almost equal

to total assets the reason being the term loan raised in the year 2008-09.

Debt-Equity Ratio : The debt-equity ratio is another leverage ratio that

compares a company's total liabilities to its total shareholders' equity. This is a

measurement of how much suppliers, lenders, creditors and obligors have

committed to the company versus what the shareholders have committed.

To a large degree, the debt equity ratio provides another vantage point on a

company's leverage position, in this case, comparing total liabilities to

shareholders' equity, as opposed to total assets in the debt ratio. Similar to the

debt ratio, a lower the percentage means that a company is using less leverage

and has a stronger equity position.


Observation

The ratio indicates to what extent long term debts have been employed in

relation to shareholders funds. The extent of employment of long term debts in

relation to shareholders funds has increased to 0.61 in 2007-08. The sudden hike

in the ratio is because the company took a term loan in the financial year

2007-08.

Interest Coverage Ratio : This ratio measures the debt servicing capacity

of a firm as fixed interest on long term loan is concerned. It is determined by

dividing the operating profits or earnings before interest and taxes (EBIT) by the

fixed interest charges on loans. Thus, interest 45 coverage = EBIT / Interest From

the point of view of the creditors, the larger the coverage, the greater is the

ability of the firm to handle fixed charge capabilities and the more assured is the

payment of interest to the creditors. However, too high a ratio may imply unused

debt capacity.


The lower the ratio, the more the company is burdened by debt expense.

When a company's interest coverage ratio is 1.5 or lower, its ability to meet

interest expenses may be questionable. An interest coverage ratio below 1

indicates the company is not generating sufficient revenues to satisfy interest

expenses.

Present and prospective loan creditors such as bondholders, are vitally

interested to know how adequate the interest payments on their loans are

covered by the earnings available for such payments.

Owners, managers and directors are also interested in the ability of the

business to service the fixed interest charges on outstanding debt.


Observation

This ratio measures the ability of a firm to service debts. HVTL has a favorable

interest coverage ratio which means that in the year 2006-07. HVTL had operating

profits which were 19 times that of its interest liability. The interest coverage

ratio decreased considerably in 2007-08 because fresh debts were raised by the

firm in the year 2007-08 the service of the term loan required huge funds still

decreasing in 2008-09.

Financial Leverage Ratio : Financial leverage refers to presence of fixed

charge in the income statement of the firm. Interest amount does not change

with PBIT, whereas the residual profits available to shareholders is affected by a

change in PBIT. Thus the ratio measures the relationship between PBIT and PBT.


Observation

Financial leverage refers to presence of fixed charge in the income statement of

the firm. Interest amount does not change with EBIT, whereas the residual profits

available to shareholders is affected by a change in EBIT.

Thus the ratio measures the relationship between PBIT and PBT.

For the last 4 years, the FL ratio has been favorable. This indicates that the firm is

trading on Equity.

ACTIVITY RATIO

Accounting ratios that measure a firm's ability to convert different accounts

within their balance sheets into cash or sales. Companies will typically try to turn

their production into cash or sales as fast as possible because this will generally

lead to higher revenues.

Such ratios are frequently used when performing fundamental analysis on

different companies. The asset turnover ratio and inventory turnover ratio are

good examples of activity ratios.

Inventory Turnover Ratio : Inventory Turnover Ratio indicates how fast

inventory is sold. A high ratio is good from the viewpoint of liquidity and vice

versa. A low ratio would signify that inventory does not sell fast and stays on the

shelf or in the warehouse for a long time.


Observation

The inventory turn over ratio ranges from 8.43 in the year 2000-01 to 8.50 in the

year 2008-09. It was highest in the year 2002-03 due to inventory control

measures taken by the management. However, it has reduced since then and

measures need to be taken to increase it .

Days Of Inventory Holding :

The number of days inventory is also known as average inventory period and

inventory holding period.

A high number of days inventory indicates that their is a lack of demand for the

product being sold.

A low days inventory ratio (inventory holding period) may indicate that the

company is not keeping enough stock on hand to meet demands.


Observation

The number of days of inventory holding has been fluctuating since inception it

gradually came down to its lowest in year 2002-03 but went up once again.

However, it is seen that it ranges from 43.31 days of inventory holding in year

2000-01 to 42.96 days in year 2008-09.

Fixed Asset Turnover Ratio : This ratio is a rough measure of the

productivity of a company's fixed assets (property, plant and equipment or PP&E)

with respect to generating sales. For most companies, their investment in fixed

assets represents the single largest component of their total assets. This annual

turnover ratio is designed to reflect a company's efficiency in managing these

significant assets. Simply the higher the yearly turnover rate, the better.

It represents a multiplicity of management decisions on capital expenditures.


Observation

The fixed asset turnover ratio went up gradually from 1.04 in the year 2000-01 to

2.06 in the year 2006-07 but due to capitalization in the year 2007-08 it fell to

0.66.

Total Assets Turnover Ratio : This ratio is also known as the investment

turnover ratio. It is based on the relationship between the cost of goods sold and

assets/ investments of a firm as reflected in its earning power. Depending upon

the different concepts of assets employed, there are many variants of this ratio.


Observation :

As it is a manufacturing industry it has a higher composition of fixed assets .The

total asset turnover ratio is consistently below 1 because the company is a job

worker. However the trend shows that this ratio has been rising because of

increase in sales from 0.72 in year 2000-01 to 0.96 in year 2004-05 .


Profitability Ratios

Profit margin analysis uses the percentage calculation to provide a comprehensive

measure of a company's profitability on a historical basis (3-5 years) and in

comparison to peer companies and industry benchmarks.

Basically, it is the amount of profit (at the gross, operating, pretax or net

income level) generated by the company as a percent of the sales generated. The

objective of margin analysis is to detect consistency or positive/negative trends in

a company's earnings. Positive profit margin analysis translates into positive

investment quality. To a large degree, it is the quality, and growth, of a company's

earnings that drive its stock price.

EBIDTA : A company's cost of sales, or cost of goods sold, represents the

expense related to labour, raw materials and manufacturing overhead involved in

its production process. This expense is deducted from the company's net

sales/revenue, which results in a company's first level of profit, or gross profit.

The gross profit margin is used to analyze how efficiently a company is using its

raw materials, labour and manufacturing-related fixed assets to generate profits.

A higher margin percentage is a favorable profit indicator.


Observation

The gross profit margin is consistently high. We can see that in year 2006-07 it

went up to 41.94% then reduced to 18.12% in 2008-09.

Net Profit Margin : Often referred to simply as a company's profit margin,

the so-called bottom line is the most often mentioned when discussing a

company's profitability. While undeniably an important number, investors can

easily see from a complete profit margin analysis that there are several income

and expense operating elements in an income statement that determine a net

profit margin. It behooves investors to take a comprehensive look at a company's

profit margins on a systematic basis.


Observation

The net profit margin rose considerably from 15.82% in the year 2000-01 to

25.62% in 2006-07 but is decreased in the year 2008-09. The trend however

shows a consistent net margin since 2003-04.

Return On Equity : This ratio indicates how profitable a company is by

comparing its net income to its average shareholders' equity. The return on

equity ratio (ROE) measures how much the shareholders earned for their

investment in the company. The higher the ratio percentage, the more efficient

management is in utilizing its equity base and the better return is to investors.


Widely used by investors, the ROE ratio is an important measure of a

company's earnings performance. The ROE tells common shareholders how

effectively their money is being employed. Peer company, industry and overall

market comparisons are appropriate; however, it should be recognized that there

are variations in ROEs among some types of businesses.


Observation

HV Transmission Limited has done well in terms of return on equity which shows

that in year 2000-01 it was -27.54% but in year 2007-08 it has risen to 33.74, in

turn decreasing to 12.91 in 2008-09%.

Return On Investment : In finance, rate of return (ROR), also known as

return on investment (ROI), rate of profit or sometimes just return, is the ratio of

money gained or lost (whether realized or unrealized) on an investment relative

to the amount of money invested. The amount of money gained or lost may be

referred to as interest, profit/loss, gain/loss, or net income/loss. The money

invested may be referred to as the asset, capital, principal, or the cost basis of the

investment. ROI is usually expressed as a percentage rather than a fraction.


Return on investment is a very popular metric because of its versatility and

simplicity. That is, if an investment does not have a positive ROI, or if there are

other opportunities with a higher ROI, then the investment should be not be

undertaken.


Observation

The return on investment had been quiet encouraging where as it has been

inconsistent . It is fluctuating every year. A more sustainable and consistent

figures are something which the management should look forward to achieve.

It ranges from -5.15% in year 2000-01 to 9.27% in year 2008-09.

Earnings Per Share -EPS : 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.

Calculated as:


When calculating, it is more accurate to use a weighted average number of shares

outstanding over the reporting term, because the number of shares outstanding

can change over time. However, data sources sometimes simplify the calculation

by using the number of shares outstanding at the end of the period.

Earnings per share is generally considered to be the single most important

variable in determining a share's price. It is also a major component used to

calculate the price-to-earnings valuation ratio.


Observation

The earning per share has gone up considerably which is a very good news for the

share holders . From 0 in year 2000-01 it has climbed to 11.86 in year 2007-08

with a decrease to 4.86 in the year 2008 – 09.


WORKING CAPITAL

Working capital, also known as net working capital, is a financial metric which

represents operating liquidity available to a business. Along with fixed assets such

as plant and equipment, working capital is considered a part of operating capital.

It is calculated as current assets minus current liabilities. If current assets are less

than current liabilities, an entity has a working capital deficiency, also called a

working capital deficit.

A company can be endowed with assets and profitability but short of

liquidity if its assets cannot readily be converted into cash. Positive working

capital is required to ensure that a firm is able to continue its operations and that

it has sufficient funds to satisfy both maturing short-term debt and upcoming

operational expenses. The management of working capital involves managing

inventories, accounts receivable and payable and cash.

An increase in working capital indicates that the business has either

increased current assets (that is received cash, or other current assets) or has

decreased current liabilities, for example has paid off some short-term creditors.

Gross Working Capital : Total current assets.

Net Working Capital : Current assets -Current liabilities.

Net operating working capital (NOWC) : Operating CA – Operating CL =

(Cash + Inv. + A/R) – (Accruals + A/P)


FACTORS TO CONSIDER

Accounts receivable management

Inventory management

Diversification of operations

Type of business

Grain merchandising practices

Prepayment activity

Leverage

Expansion plans

PRINCIPLES OF WORKING CAPITAL

There are four principle of working capital management. They are being depicted

as below :

(i) Principle of Risk Variation: -The goal of WC management is to establish a

suitable trade between profitability and risk. Risk here refers to a firm's ability to

honor its obligation as and when they become due for payments. Larger

investment in current assets will lead to dependence. Short term borrowings

increases liquidity, reduces risk and thereby decreases the opportunity for gain or

loss On the other hand the reserve situation will increase risk and profitability And

reduce liquidity thus there is direct relationship between risk and profitability and

inverse relationship between liquidity and risk.


(ii) Principle of Cost Capital: -The various sources of raising WC finance have

different cost of capital and the degree of risk involved. Generally higher the cost

lower the risk, Lower the risk higher the cost. A sound WC management should

always try to achieve the balance between these two.

(iii) Principle of Equity Position: -This principle is considered with planning the

total investment in current assets. As per this principle the amount of WC

investment in each component should be adequately justified by a firms equity

position. Every rupee contributed current assets should contribute to the net

worth of the firm The level of current assets may be measured with the help of

two ratios. They are:

Current assets as a percentage of total assets.

Current assets as a percentage of total sales.

(iv) Principle of Maturity Payment: -This principle is concerned with planning

the source of finance for WC. As per this principle a firm should make every effort

to relate maturities of its flow of internally generated funds in other words it

should plan its cash inflow in such a way that it could easily cover its cash out

flows or else it will fail to meet its obligation in time.

NEED FOR WORKING CAPITAL

For earning profit and continue production activity, the firm has to invest enough

funds in Current Assets in generating sales. Current Assets are needed because

sometimes sales do not convert into cash instantaneously and it includes an

operating cycle.


ESTIMATING WORKING CAPITAL NEEDS

Working Capital needs can be estimated by three different methods, which have

been successfully applied in practice.

They are follows:

1. Current Assets Holding Period: To estimate Working Capital requirements

on the basis of average holding period of Current Assets and relating them to

costs based on the company's experience in the previous years. This method is

based on the operating cycle concept.

2. Ratio of Sales: To estimate Working Capital requirements as a ratio of sales

on assumption that Current Assets change with sales.

3. Ratio of fixed Investment: To estimate Working Capital requirements as a

percentage of fixed investment.

CRITERIA FOR EVALUATION OF WORKING

CAPITAL MANAGEMENT.

Working capital can be considered in 2 ways.

One, When working capital is viewed as the difference between current

assets and current liabilities, the basic objective of working capital appears to be

one of providing adequate cover to meet the current obligations of a company as

and when they become due. This approach lays greater emphasis on the liquidity

aspect of working capital.

Second, When working capital is looked upon as the amount held in

different forms of current assets to provide adequate support to the smooth

functioning of the normal business operations of a company the objective

becomes one of deciding the tradeoff between liquidity and profitability.


WORKING CAPITAL MANAGEMENT

Decisions relating to working capital and short term financing are referred to as

working capital management. These involve managing the relationship between a

firm's short-term assets and its short-term liabilities. The goal of working capital

management is to ensure that the firm is able to continue its operations and that

it has sufficient cash flow to satisfy both maturing short-term debt and upcoming

operational expenses.

Implementing an effective working capital management system is an

excellent way for many companies to improve their earnings. The two main

aspects of working capital management are ratio analysis and management of

individual components of working capital.

A few key performance ratios of a working capital management system are

the working capital ratio, inventory turnover and the collection ratio. Ratio

analysis will lead management to identify areas of focus such as inventory

management, cash management, accounts receivable and payable management.

MANAGEMENT OF WORKING CAPITAL

Guided by the above criteria, management will use a combination of policies and

techniques for the management of working capital. These policies aim at

managing the current assets (generally cash and cash equivalents, inventories and

debtors) and the short term financing, such that cash flows and returns are

acceptable.

Cash Management : Identify the cash balance which allows for the

business to meet day to day expenses, but reduces cash holding costs.

Inventory Management : Identify the level of inventory which allows

for uninterrupted production but reduces the investment in raw materials -

and minimizes reordering costs -and hence increases cash flow; see Supply

chain management; Just In Time (JIT); Economic order quantity (EOQ);

Economic production quantity.


Debtors Management : Identify the appropriate credit policy, i.e. credit

terms which will attract customers, such that any impact on cash flows and

the cash conversion cycle will be offset by increased revenue and hence

Return on Capital (or vice versa); see Discounts and allowances.

Short Term Financing: Identify the appropriate source of financing,

given the cash conversion cycle: the inventory is ideally financed by credit

granted by the supplier; however, it may be necessary to utilize a bank loan

(or overdraft), or to "convert debtors to cash" through "factoring".


GROSS WORKING CAPITAL

The firm's investment in current assets (such as cash and marketable securities,

receivables, and inventory).

Gross Working Capital refers to the firm's investment in Current Assets.

Current Assets are the assets, which can be converted into cash within an

accounting year or operating cycle. It includes cash, short-term securities, debtors

(account receivables or book debts), bills receivables and stock (inventory).

The concept of Gross Working Capital focuses attention on two aspects of

Current Assets' management. They are:

a) Way of optimizing investment in Current Assets.

b) Way of financing current assets.

Gross Working Capital = Total Current Assets of the company during the financial

year.


Observation

The gross working capital of the firm decreased initially but since 2003 it has been

increasing considerably. The gross working capital for the financial year 2008-09 is

Rs. 3620.46 lakhs.


NET WORKING CAPITAL

Net Working Capital, is defined as Current Assets minus Current Liabilities. Current

assets include stocks, debtors, cash & equivalents and other current assets. Current

liabilities include all the short-term borrowings.

Net Working Capital refers to the difference between Current Assets and

Current Liabilities are those claims of outsiders, which are expected to mature for

payment within an accounting year. It includes creditors or accounts payables, bills

payables and outstanding expenses. Net Working Copulate can be positive or

negative. A positive Net Working Capital will arise when Courtney Assets exceed

Current Liabilities and vice versa.

Concept of Net Working Capital

This is a qualitative concept. It indicates the liquidity position of and suggests the

extent to which working Capital needs may be financed by permanent sources of

funds. Current Assets should be optimally more than Courtney Liabilities. It also

covers the point of right combination of long term and short-term funds for

financing court Assents. For every firm a particular amount of net Working Capital in

permanent. Therefore it can be financed with long-term funds.

The net working capital metric is directly related to the current ratio. If you

look at the calculation of the current ratio, you see that you use the same balance

sheet data to calculate net working capital.

Net Working Capital = Total Current Assets – Total

Current Liabilities


Observation

The net working capital of the firm has been negative throughout since its inception.

There has been various changes in the net working capital of the firm. However, the

current liabilities of HVTL have always been greater than the current assets.

CONCLUSION

From the ratio analysis of the firm we come to know about the profitability of the

firm. Leverage ratios indicate the composition of long term debts and its impact on

overall financial position of the firm. Liquidity ratios give idea maintenance of liquid

assets in the company. From the analysis of the working capital and its components

of HVTL, we found that the company follows aggressive policy of managing liquidity .

The company is earning huge profits and is in good financial health.

HVTL despite having a negative net working capital, the company is in sound

financial health. This indicates the managerial efficiency of the company. The

company does not have unnecessary funds tied up in the form cash or any current

assets increasing the liquidity and thus decreasing the profitability of the company.

As there is a tradeoff between profitability and liquidity the firm maintains current

assets up to the level necessary for the smooth functioning of the business.

On the current liabilities side, there are various non cash provisions for

employees of the company. Sundry creditors are managed by keeping a close check

on the deferral period. The profitability ratio shows that the organization is making

good profits and paying dividend worth Rs.5 per share. Which proves HVTL’s

credibility.


RECOMMENDATIONS

The revenue from the sale of products and other income for the year 2008-09 is

Rs.14294.06 lakhs which has decreased in comparison to the previous year which

was Rs.19229.42 lakhs.

The company paid 2459.90 lakhs as the dividend which has increased in

comparison to the previous year, which was Rs 701.97 lakhs.

The relationship between HVTL and Tata Motors is that of a job worker. The gear

boxes are produced in accordance with the production schedule received from

Tata Motors. Whatever is produced is dispatched to Tata Motors immediately.

The gross working capital of the firm decreased initially but since 2003 it has been

increasing considerably. The gross working capital for the financial year 2008-09 is

Rs. 3620.46 lakhs.

The net working capital of the firm has been negative throughout since its

inception. There has been various changes in the net working capital of the firm.

However, the current liabilities of HVTL have always been greater than the

current assets.

Ideally the current ratio of 2:1 is considered satisfactory. But, HVTL has a current

ratio ranging between .71 to .58 this indicates that the current assets of the firm

are less than the current liabilities. This is because the firm has always maintained

a negative net working capital. Its current liabilities have always been greater

than current assets.

HVTL has been able to save Rs. 281 lakhs in the financial year 2008-09 by direct

material cost reduction.

Profit after tax has reduced by 58.27% for the financial year 2008-09 in

comparison to the previous year PAT due to global recession affecting customer’s

demand.

29800904 a project on ratio analysis of financial statements working capital management at hvtl tata...

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