MANAC-1 Group Assignment

BM 2013-15 Section A

GROUP 3

ABHAVE SHARMA (B13001) GIRISH DESHPANDE (B13025)

KETAN LUKHI (B13031) RAMAN SINGH (B13044) SUMIT TANEJA (B13056)

VAIBHAV CHOPRA (B13059) VISHAP RANA (B13061)

Balance Sheet

EQUITY AND LIABILITIES As of

31st March 2013 31st March 2012

(in INR crores)

Shareholders Funds

Share Capital 4,131 4,131

Reserves and Surplus 36,894 35,681

Non-Current Liabilities

Long-Term Borrowings 13,486 11,587

Deferred Tax Liabilities (Net) 1,729 1,644

Other Long Term Liabilities 1,271 1,346

Long-Term Provisions 4,204 3,525

Current Liabilities

Short-Term Borrowings 8,015 4,511

Trade Payables 3,322 3,220

Other Current Liabilities 8,655 8,396

Short-Term Provisions 2,513 2,297

TOTAL 84,218 76,337

ASSETS As of

31st March 2013 31st March 2012

(in INR crores)

Non-Current Assets

Fixed Assets

Tangible Assets 15,235 15,748

Intangible Assets 1,543 1,410

Capital Work-in-Progress 35,891 28,049

Non-Current Investments 718 685

Long-Term Loans and Advances 3,165 2,614

Other Non-Current Assets 51 78

Current Assets

Inventories 16,008 13,742

Trade Receivables 4,424 4,749

Cash and Bank Balances 3,850 6,416

Short-Term Loans and Advances 991 785

Other Current Assets 2,343 2,061

TOTAL 84,218 76,337

Profit and Loss Statement

in INR crores in INR crores in INR crores

Revenue from Operations 49,987 51,029

Less : Excise Duty 5,389 44,598 4,694 46,335

Other Income 964 1,629

Total Revenue 45,563 47,965

Expenses

Cost of Materials Consumed 21,198 23,021

Purchase of Stock in Trade 3 5

Changes in Inventories of Finished Goods (2,016) 1,369

Work in Progress and Stock in Trade

Employee Benefits Expense 8,637 7,932

Finance Costs 748 678

Depreciation and Amortisation Expense 1,403 1,567

Other Expenses 12,161 42,134 10,707 42,541

3,428 5,423

Add/Less(-): Adjustments pertaining to Earlier Years 42 (11)

Profit before Tax and Exceptional Items 3,470 5,413

Less: Exceptional Items

Foreign Exchange Loss (+)/ Gain(-) 229 467

Exchange Variations treated as Interest Cost - 306

Write back of entry tax liability - 229 511 262

Profit before Tax 3,241 5,151

Less : Tax Expense

Current Tax 1,058 1,501

Deferred Tax 12 113

Earlier Years (0) 1,070 (6) 1,608

Profit after Tax 2,170 3,543Amount transferred on amalgamation of MEL with the

Company

Balance of Profit and Loss Account as on 1st April, 2010 - 123

Profit after tax for the financial year 2010-11 - 28

Less:

Unrealised Profit on closing stock of erstwhile MEL

held by the Company - 9

Amount Transferred to General Reserve - 3

Dividend on new shares issued - 0

Amount available for appropriation 2,170 3,682

Earnings per Share

Profit after Tax 2,170 3,543

Average Number of Equity Shares (mm) 4,131 4,131

Basic and Diluted Earnings per Share (INR) 5.25 8.58

Year ended 31st March 2013 Year ended 31st March 2012

Cash Flow Statement

Year ended 31st March 2013 Year ended 31st March 2012 Year ended 31st March 2011

in INR crores in INR crores in INR crores

Cash flow from Operating Activities

Net Profit before taxation 3,241 5,151

Add / ( Less ) Adjustments for :

Depreciation 1,406 1,574

Interest and Finance Charges 748 678

Bad debts written-off 0 1

Provision for Others 1,086 79

Profit on sale of Fixed Assets (25) (20)

Interest Income (826) (1,464)

Dividend Income (59) (57)

Operating cash flow before working capital change 5,570 5,940

Adjustments for :

(Increase) in Inventories (2,266) (2,440)

(Increase) / Decrease in Sundry Debtors 330 (632)

(Increase) in Loans and Advances (704) (452)

Increase in Current liabilities 732 260

(Increase) in Other Current Assets (269) (179)

Cash generated from Operations 3,391 2,498

Direct Taxes Paid (987) (1,456)

Net Cash from Operating Activities 2,404 1,042

Cash flow from Investing Activities

Purchase of Fixed Assets (9,120) (9,398)

Proceeds from sale of Fixed Assets 39 38

Loans to Other Companies 2 6

Decrease in Term Deposits with Banks 2,512 10,733

Purchase/Sale of Investments (net) (33) (1)

Interest received 836 1,890

Dividend received 59 57

Net Cash from / ( used in ) Investing Activities (5,705) 3,326

Cash flow from Financing Activities

Proceeds from Issue of Share Capital - 0

Increase in Reserve & Surplus 4 159

Increase/( Decrease ) in Borrowings (net) 5,143 (3,086)

Interest and Finance Charges Paid (748) (620)

Dividend Paid (991) (991)

Tax on Dividend (161) (161)

Net Cash from / ( used in ) Financing Activities 3,248 (4,699)

Net Increase in Cash & Cash Equivalents (A+B+C) (53) (332)

Cash & Cash Equivalents (Opening) 330 662

Cash & Cash Equivalents (Closing) 277 330

Important Information Extracted from Annual Report

SAIL is India's largest steel producing company. With a turnover of Rs. 49,986 crore, the company is among the seven Maharatnas of the country. SAIL's relentless drive to fast-track its modernization & expansion plan (MEP), resulted in commissioning of projects worth 5500 crore in 2012-13, which is the highest for a year since inception. Notwithstanding the challenging market conditions in 2012-13 arising from demand stagnation, SAIL produced 13.4 million tonnes (MT) of crude steel by operating at 103% of its capacity, marking an improvement of 1% over CPLY.

As per the companys Annual Report, 2012-13 following were the accounting policies adopted:

Basis of Accounting The financial statements are prepared under the historical cost convention on accrual basis of accounting, in accordance with the generally accepted accounting principles in India

Fixed Assets Mining Rights are treated as Intangible Assets and all related costs thereof are amortized on the basis of annual production to the total estimated mineable reserves.

Depreciation Depreciation is provided on straight-line method at the rates specified in Schedule XIV to the Companies Act, 1956. However, where the historical cost of a depreciable asset undergoes a change, the depreciation on the revised unamortized depreciable amount is provided over the residual useful life of the asset.

Inventories Raw materials, stores & spares and finished/semi-finished products (including process scrap) are valued at lower of cost and net realizable value of the respective plants/units. In case of identified obsolete/surplus/non-moving items, necessary provision is made and charged to revenue.

Investments Long-term investments (including investments in subsidiary companies and joint ventures) are carried at cost, after providing for diminution (other than temporary) in value. Current investments are carried at lower of cost and market value.

Revenue Recognition Sales include excise duty and are net of rebates and price concessions. Sales are recognized at the time of dispatch of materials to the buyers including the cases where delivery documents are endorsed in favour of the buyers.

Deferred Tax The deferred tax on timing differences between book profit and taxable profit for the year is accounted for applying the tax rates and laws that have been enacted or substantively enacted as on the balance sheet date.

Information Extracted from Auditors Report

The most important information contained in Auditors report is that the Companys financial

statements are awarded Qualified Report.

Basis for Qualified Opinion:

According to Auditors, the Company has not provided for following matters:

Entry tax amounting to 81.64 crore (current year 17.62 crore) in the state of Uttar Pradesh

Entry tax of 888.46 crore (current year 163.83 crore) in the state of Chhatisgarh and 170.32

crore (current year 39.20 crore ) in the state of Odisha

Income tax demand of 87.62 crore

Claims of 217.40 crore (current year 88.80 crore) by DVC for supply of Power

The impact of above items has resulted in overstatement of profit for the current year by 397.07

crore, cumulative Profit by 1445.44 crore and understatement of Liability by 1445.44 crore.

There were some other matters with which auditors have objections. Auditors drew the attention of

management towards following points:

During the year, the accounting policy regarding amortisation of Mining Rights has been

revised from the lease period to annual production vis-a-vis total estimated mineable

reserves. As a result, the profit for the year is higher by 214.14 crore. But no explanation is

given as to why the method was changed and this change was not reflected in the policy

employed.

The auditors were unable to comment on the adequacy of provision of 611.03 crore (including

549.95 crore provided for during the year) for pending finalisation of fresh agreement with

non-executives in respect of wage revision due from 1st January, 2012.

The reason being management has not provided any explanation on the estimation of this

revise wage provisions.

In view of the assumptions provided by the Company relating to the salary escalation rates,

auditors were unable to comment on the adequacy of provision for retirement employee

benefits.

The reason being the complete explanation is not given for the provision of retirement

employee benefits. For example, direct estimation of 1230.01 crore for post-retirement

medical benefits and 117.43 crore for post-retirement settlement benefit have been provided

with no evident explanation of estimation.

During the development of financial statements, consultancy fee in respect of deferred capital

schemes amounting to 107.17 crore and non-capitalisation of assets valued at 981.83 were

included in Capital Work in Progress.

But in reality, the consultation is to be implemented in near future and some capital schemes

have not been capitalized due to lack of sustained production and hence, according to

auditors, these should have not been reported under Capital Work in Progress.

Rourkela Steel Plant of the Company has proposed to the Government Odisha for an out of

court settlement of the matter relating to levy of water tax under the provisions of Odisha

Irrigation Act, 1959. If the settlement is accepted, the Company may have to pay an amount

which shall be mutually agreed with the State Government of Odisha. According to auditors,

the amount to be paid has not been estimated and reported in contingent liabilities.

Auditors also have objection with the NRV of assets which are retired from active use.

Management says:

Assets retired from active use and waiting for disposal amounting to 30.50 crore has been

shown under " Tangible Fixed Assets", the net realizable value of which in the opinion of the

management will not be less than the amount shown and does not require any provision.

Specific Strength Areas of SAIL

The Indian steel industry is poised for a robust growth over the medium term. There would be

opportunities provided by a rapidly expanding domestic market particularly infrastructure sector. SAIL

is at the completion stage of its ongoing modernization and expansion plan. The commissioning of

new state-of-the-art facilities will enable SAIL to enhance its market share.

The company is currently implementing the capacity expansion plan to enhance its hot metal

production from the level of 14.3 million tonnes during the last financial year to 23.5 million tonnes

after expansion in a phased manner. This is visible in the balance sheet of SAIL, where the capital work

in progress has been consistently increasing from 29.0% of the total assets at the end of 31st March

2011 to 42.6% of the total assets at the end of 31st March 2013.

While the additional capacity is surely going to help SAIL in capturing the market share once the

condition of economy improves in medium term, the good thing about SAIL is its relatively low debt

to equity ratio as compared to its peers. SAILs D/E stands at 0.5, which means the company has

significant room to borrow loans, in order to pursue its expansion plans. The total loans as of 31st

March 2013 stood at INR 21,501cr, as compared to a total equity of INR 39,579cr.

The financing costs have not shot up significantly for the last 3 financial years, increasing from 1.1% of

the total revenues in FY 2010-11 to 1.6% of the total revenues in FY 2012-13. The relatively lesser

encumbered balance sheet of SAIL gives it the ability to expand, while staying well within the upper

D/E boundary.

Although the net profits after tax (PAT) have taken a severe hit since the last 3 financial years, owing

mainly to subdued sales, the cash reality of the company has not aggravated badly. The cash generated

from operations (CGFO) have plunged at an annual CAGR of 11.9% since FY 2010-11, as compared to

a 39.9% fall (annual CAGR) in the PAT since FY 2010-11.

In fact the CGFO has increased by 35.8% in FY 2012-13 as compared to FY 2011-12 (the fall in net profit

is 49.9% on year on year basis). The CGFO certainly tells us that the company is in a better position in

terms of cash generating ability.

SAIL has one of the better interest coverage ratios in the industry, although the interest coverage ratio

has deteriorated in the last 3 financial years due to the suppressed sales. In FY 2012-13 the interest

coverage ratio for SAIL was 5.6 (this was 9.0 in FY 2011-12 and 15.9 in FY 2010-11) as compared to 5.5

for Tata Steel, 2.7 for JSW and 6.3 for JSPL. In the financial years 2011-12 and 2010-11, SAIL had the

highest interest coverage ratios. It is only in FY 2012-13, SAIL ranks second after JSPL on the coverage

ratio.

SAIL also has one of the better current ratios as compared to its peers (1.2 at the end FY 2012-13). The

same holds at the end of FY 2011-12 and FY 2010-11. Although the ratio is still lesser than the ideal

2.0 number, the better than peers current ratio is mainly due to high level of inventories, which have

grown from 14.9% of the total assets at the end of FY 2010-11 to 19.0% of the total assets at the end

of FY 2011-12.

Specific Areas of Weaknesses of SAIL

The company has a plethora of problems, a few specific to the company and a few because of the

overall economic slowdown.

1) High inventory velocity/inventory holding days:

SAIL had an inventory velocity 136.0 days in FY 2012-13, which is highest among its peers. This

is in stark contrast to Tata Steel whose inventory velocity is almost one-third of that of SAIL.

The same holds true for JSW, whereas for JSPL this ratio is about half of that of SAIL.

Additionally, this ratio has been deteriorating since FY 2010-11 (it was 108 days for FY 2010-

11). This indicates that a lot of capital is tied up in the idle inventories, which is taking a hit on

SAILs turnover ratios as well.

2) Poor quick ratio:

SAIL has a dangerous level of quick ratio, which was 0.5 for FY ending 2012-13. Moreover this

ratio has continuously declined since FY 2012-13, which grows more concerns about the

liquidity crunch, the company may be facing.

3) Low profitability ratios:

SAIL has performed poorly on almost every profitability ratio as compared to its peers.

Moreover the profitability ratios have devolved in the last 3 years as well. E.g. the ROE has

jumped down from 13.2% in FY 2010-11 to a dismal 4.5% in FY 2012-13.

The same holds true from profit margin which has plunged to 3.9% in FY 2012-13 from 10.9%

in FY 2010-11. Similarly, the operating profit margins, gross profit margins have also taken a

downturn.

4) Low turnover ratios:

Due to subdued sales, the turnover ratios have worsened in the last three years. The fixed

asset turnover has dipped to 0.8 in FY 2012-13 from 1.1 in FY 2010-13. As mentioned earlier

in the strengths section, the company is aggressively expanding, and a lot of fixed assets are

actually work-in-capital assets, this can be a major source of low FA turnover ratio, apart

from stagnant sales.

However, once the economy ticks-up and with expanded capacities, these turnover ratios are

bound to improve. Similarly the capital turnover ratio has decreased from 1.0 to 0.9 on similar

grounds (the company has taken significant loans for the expansion process, thus increasing

the capital employed, but the effect of which on sales is yet to come).

5) Z score:

The Z- score of SAIL is 1.63. Since this is significantly less than 1.81, this suggests that there

exists a good chance (almost certain according to Altman's observation) that SAIL may go

bankrupt in near future.

Remedial Measures Suggested by the Group

On a performance front, the debtors velocity and inventory velocity for SAIL are 36.7 days and 136.0

days respectively which are quite worrisome numbers as compared to those of competitors.

Groups Suggestions:

To reduce debtors velocity and inventory velocity. To reduce inventory velocity, SAIL can

reduce stores & spares inventory and offer discount on finished goods along with reduction

in debtors velocity by offering them discounts to reduce the blocking of capital.

Clearing of finished goods stock can also help increase the fixed asset turnover ratio and

capital turnover ratio which have been continuously decreasing since FY 2010-11.

Talking about profitability ratios, the ratios are less promising as compared to that of competitors

which may be due to the blocking of finished goods inventory. On the expenses front, employee

benefits expenses have been continuously rising with 9% YoY in FY 2012-13 but total sales decreased

in 2012-13 as compared to 2011-12 which can be major concern for the company.

Groups Suggestion:

Suggestion mentioned above can also help improve the profitability ratios as it would help

increase the sales. On the expenses front, management can look at the reasons for

continuously rising expenses benefits and can take necessary steps to check the expenses.

Modernization:

On a positive note, Debt/Equity ratio of SAIL is 0.54 which is also very low as compared to

some of its competitors. SAIL can leverage this opportunity and can go for more long term

debt which can be used to expedite the modernization.

In solvency ratios, Quick ratio is also severely affected. Quick ratio of SAIL is 0.5 which is also very low

as compared to that of competitors. Due to this company may end up in severe liquidity crunch.

Groups Suggestions:

The suggestion one mentioned above can also help alleviate the liquidity crunch the company

currently is facing.

Current liquidity crunch can also be alleviated by taking short term debt. The reason being D/E

ratio is very low which can be leverage to increase the debt.

The current Return on Total Assets (RoTA) for sales is 2.15%. DuPont Analysis suggest that decreasing

the current assets, which effectively means lowering the inventory levels, can improve the asset

utilization and hence sales turnover. Similarly putting a curb on the expenses, especially on the

employee benefit expenses, would certainly help SAIL increase its profit (as mentioned earlier the

employee benefit expenses form a major part in the total operating expenses).

ANNEXURE - 1 Financial Ratio Calculations

Ratio Calculations for SAIL (FY13) (All figures are in crore)

a) PROFITABILITY RATIOS

ROE/RONW = PAT/(Share Capital + Reserves)

= 1,773/(35,449 + 4,131)

= 4.5%

Gross Profit Margin = Gross Profit/Sales

= (Sales - COGS)/Sales

= (45,563 - 39,923)/39,923

= 12.4%

EBITDA Margin = EBITDA/Sales

= 5,621/45,663

= 12.3%

EBIT Margin = EBIT/Sales

= (EBITDA - D&A)/Sales

= (5,621 - 1,403)/45,663

= 9.3%

Profit Margin = PAT/Sales

= 1,773/45,663

= 3.9%

EBIT/Total Assets = 4,218/84,218

= 5.0%

Name of Ratio SAIL Tata Steel JSPL JSW SAIL Tata Steel JSPL JSW SAIL Tata Steel JSPL JSW

ROE 4.5% 9.2% 19.5% 9.0% 8.9% 12.8% 23.8% 8.8% 13.2% 14.2% 21.9% 12.1%

RONW 4.5% 9.2% 19.5% 9.0% 8.9% 12.8% 23.8% 8.8% 13.2% 14.2% 21.9% 12.1%

Gross Profit Margin 12.4% 24.8% 24.0% 12.2% 17.2% 32.1% 31.4% 12.1% 23.2% 34.2% 27.8% 14.1%

EBITDA Margin 12.3% 24.3% 23.7% 12.1% 16.0% 31.6% 30.5% 12.0% 20.2% 33.8% 27.1% 14.0%

EBIT Margin 9.3% 29.1% 30.6% 17.8% 12.7% 35.5% 38.6% 17.4% 16.8% 38.1% 34.8% 20.1%

Profit Margin 3.9% 12.9% 15.7% 5.0% 7.4% 19.5% 21.0% 5.0% 10.9% 23.2% 19.6% 8.6%

EBIT/Total Assets 5.0% NA NA NA 8.0% NA NA NA 9.9% NA NA NA

Proprietary Ratio 1.1 NA NA NA 0.9 NA NA NA 0.9 NA NA NA

Quick Ratio 0.5 0.6 0.9 0.7 0.8 0.5 1.0 0.5 1.0 1.5 0.7 0.5

Current Ratio 1.2 0.9 0.7 0.9 1.5 0.8 0.8 0.8 1.5 1.8 0.7 0.8

Debt Equity Ratio 0.5 0.5 1.3 0.9 0.4 0.5 1.4 0.7 0.5 0.6 1.2 0.7

Fixed Asset Turnover 0.8 1.0 0.9 0.9 1.0 1.5 0.8 0.9 1.1 1.3 0.8 0.8

Capital Turnover ratio 0.9 NA NA NA 0.9 NA NA NA 1.0 NA NA NA

Debtors velocity1 36.7 8.1 22.6 16.6 33.8 7.2 26.0 12.5 31.1 5.4 25.2 11.1

Inventory velocity1 136.0 45.3 75.6 45.1 115.1 38.8 62.8 45.8 107.9 37.1 45.3 51.4

Interest Coverage 5.6 5.5 6.3 2.7 9.0 5.9 7.9 3.4 15.9 6.1 7.9 4.4

FY13 FY12 FY11

b) SOLVENCY RATIOS

Proprietary Ratio = Fixed Assets/Capital Employed

= 5,602/53,065

= 1.07

Quick Ratio = (Current Assets - Inventories)/(Current Liabilities)

= 11,608/22,505

= 0.52

Current Ratio = Current Assets/Current Liabilities

= 27,616/22,504

= 1.15

Debt Equity Ratio = Debt/Equity

= (Short Term Loan + Long Term Loan)/Net Worth

= 21,501/39,579

= 0.54

c) TURNOVER RATIOS

Fixed Asset Turnover = Sales/Fixed Assets

= 45,563/56,602

= 0.80

Capital Turnover ratio = Sales/Capital Employed

= 45,563/53,005

= 0.86 d) PERFORMANCE INDICATORS Debtor velocity = Avg. Debtors/Sales * 365

= 4,586/45,563 *365

= 36.74

Inventory velocity = Avg. Inventory/Sales

= 14,875/45,563 *365

= 136.00

e) COVERAGE RATIO

Interest Coverage = EBIT/Finance Costs

= 4218/748

= 5.64

DuPont Analysis of Return on Total Assets:

Calculation of Z-score:

X1 = working capital / total assets =5,112/84,218 = 0.06

X2 = cumulative retained earnings / total assets = 35,449/84,218 = 0.42

X3 = EBIT / total assets = 4,218/84,218 = 0.05

X4 = market value of equity / total book value of liabilities = 19,661/44,639 = 0.44

X5 = sales / total assets = 45,563/84,218 = 0.54

Z = 1.2X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + X5 = 1.63

+

-

-

Return on total Assets

PAT/TA = 2.1%

PAT/Sales

3.9%

PAT 1773

Sales

45,563

GP

5,640 Other Expenses

3,867

Sales

45,563

COGS

39,923

Sales/TA

54.1%

Sales

45,563

TA

84,218

CA

27,616

FA

56,602