summer project report 2

8/2/2019 Summer Project Report 2

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SUMMER PROJECT REPORT ON

ANALYSIS OF FINANCIAL STATEMENTS OF COMPANIES INS&P CNX Nifty, ALSO CALLED NIFTY 50

In Partial Fulfillment of Award of

Post Graduate Diploma in Business Management

By

(SEEMANT TYAGI)

Under the guidance of

(Prof. A.V.K Murthy)

PGDM (BM)

Entrepreneurship and Management Processes International

New Delhi 74

July 2011

ENTREPRENEURSHIP AND MANAGEMENT PROCESSES


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CERTIFICATE

This is to certify that Mr. SEEMANT TYAGI has worked under mysupervision on topic titledFINANCIAL ANALYSIS OF COMPANIES INNIFTY 50, a project, which was undertaken at CORPORATEPARTNERS for a period of 2 months.

During the period I found his work satisfactory.

Col. ArunDhongde Faculty

Dean & Mentor Prof. AVK Murthy

PGDM(BM) PGDM(BM)

EMPI Business School EMPI Business School


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DECLARATION

I, SEEMANT TYAGI here by declare that the project report entitledANALYSIS OF FINANCIAL STATEMENTS OF COMPANIES IN S&PCNX Nifty, ALSO CALLED NIFTY 50 is based on my own work andmy indebtedness to other work/ publications, if any have been dulyacknowledged at the relevant place.

PLACE: NEW DELHI

DATE:

SEEMANT TYAGI


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ACKNOWLEDGMENT

This project would not have been possible without the kind supportand help of many individuals. I would like to extend my sincerethanks to all of them.

I am highly indebted to our training head, Mr. PrakashSumani, fortheir guidance and constant supervision as well as for providingnecessary information regarding the project & also for their supportin completing the project.

I would like to express my gratitude towards other members of

CORPORATE PARTNERS for their kind co-operation andencouragement.

My thanks and appreciations also go to Sudhanshu, who is myfriend and my colleague in developing the project. Whenever Ineeded any kind of help regarding the project he was always therefor me.

I would also like to thank Prof. A.V.K Murthy, our faculty instituteguide, for their kind support and guidance. Whenever we neededany kind of help he was always there for us.

And last but not the least, I would like to thank Mr. Rishi Mehrafor giving me this opportunity to be a part of such a goodorganization. It was really an honor to work with CORPORATEPARTNERS.


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PREFACE

I know that this project is for the development and enhancement of

the knowledge in this particular field. It is not possible to make a

mark in todays competitive era only with theoretical knowledge

when industries are developing at global level, practical knowledge

of administration and management of business is very important.

Hence, practical study is of great importance to MBA students.

With a view to expand the boundaries of thinking, I have undergone

3th trimester summer project at CORPORATE PARTNERS. I have

made a deliberate to collect the required information and fulfill

project objective.


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SYNOPSIS

The assigned project was focused on the detailed financial analysisof 50 companies of NSE (National Stock Exchange), which are there

in S&P CNX Nifty, informally called Nifty 50, for the last 5-6 years.

The analysis was done using the annual reports and the official

financial statements released by the company. Mr.

SudhanshuMathur was my colleague in the project. We both divided

the 50 companies as per the industries. The fifty companies are

divided in 24 sectors, so I worked on the companies in first 12

sectors and Mr. Mathur worked on the companies in the other 12

sectors.

The analysis contains following components:

1.) Year wise percentage comparison

2.) Making common size statement

3.) CAGR (compounded annual growth rate) of different heads in

the financial statements

4.) Liquidity ratios

5.) Profitability ratios

6.) Turnover ratios

In this report first of all we will be introduced to the history of

indian economy, then well be introduced with the organization. We

will read about the background of the organization, its history, its

present profile etc. Also we will be introduced to the project, well

talk about the objective of the project etc.


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The next chapter of the report would give an Executive Summary of

the report. It will have the important points of the report.

Then in the next chapter of the report we will see the methodologyof the research, well talk about all the steps well be required to

take, well see the collection of data from various sources, well see

what all ratios are for.

Then finally, we will see the conclusion, which would contain the

uses of this research, and also the limitations of this research.


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TABLE OF CONTENTS

Sr.No. Tittle Page No.

(1)

(1.1)

(1.2)

(1.3)

(1.4)

INTRODUCTION

Indian economy and its financial system

Background of the Organization

Introduction to the study

Objective of the Project

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24

2 EXECUTIVE SUMMERY 25

3 METHODOLOGY 26

5 CONCLUSION 31

6 CHARTS AND TABLES 33


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1.1The Indian Economy -- A Brief History

At independence from the British in 1947, India inherited one of theworlds poorest economies (the manufacturing sector accounted foronly onetenth of the national product), but also one with arguablythe best formal financial markets in the developing world, with fourfunctioning stock exchanges (the oldest one predating the TokyoStock Exchange) and clearly defined rules governing listing, tradingand settlements; a well-developed equity culture if only among theurban rich; a banking system with clear lending norms and recovery

procedures; and better corporate laws than most other erstwhilecolonies. The 1956 Indian Companies Act, as well as othercorporate laws and laws protecting the investors rights, were builton this foundation.After independence, a decades-long turn towards socialism put inplace a regime and culture of licensing, protection and widespreadred-tape breeding corruption. In 1990-91 India faced a severebalance of payments crisis ushering in an era of reforms comprisingderegulation, liberalization of the external sector and partialprivatization of some of the state sector enterprises. For about

three decades after independence, India grew at an average rate of3.5% (infamously labeled the Hindu rate of growth) and thenaccelerated to an average of about 5.6% since the 1980s. Thegrowth surge actually started in the mid-1970s except for adisastrous single year, 1979-80. As we have seen in Table 1.1, theannual GDP growth rate (based on inflation adjusted, constantprices) of 5.9% during 1990-2005 is the second highest among theworlds largest economies, behind only Chinas 10.1%.In 2004,52% of Indias GDP was generated in the services sector, whilemanufacturing (agriculture) produced 26% (22%) of GDP.


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1.2Indian Economy and Financial Markets since

liberalization

The Domestic Economy:

There is hardly a facet of economic life in India that has not beenradically altered since the launch of economic reforms in the early90s. The twin forces of globalization and the deregulation havebreathed a new life to private business and the long-protectedindustries in India are now faced with both the challenge of foreign

competition as well as the opportunities of world markets. Thegrowth rate has continued the higher trajectory started in 1980 andthe GDP has nearly doubled in constant prices (see figure 1.1).The end of the License Raj has removed major obstacles from thepath of new investment and capacity creation. The effect is clearlyvisible in figure 1.2 that shows the ratio of capital formation in theprivate sector to that in the public sector for a decade precedingliberalization and for the period following it. The unmistakableascent in the ratio following liberalization points to the unshackledprivate sectors march towards attaining the commanding heights

of the economy. In terms of price stability, the average rate ofinflation since liberalization has stayed close to the preceding halfdecade except in the last few years when inflation has declined tosignificantly lower levels (see figure 1.3)

Perhaps the biggest structural change in Indias macro-economy,apart from the rise in the growth rate, is the steep decline in theinterest rates. As figure 1.4 shows, interest rates have fallen toalmost half in the period following the reforms, bringing down thecorporate cost of capital significantly and increasing the

competitiveness of Indian companies in the global marketplace.

The External Sector and the Outside World:

Along with deregulation, globalization has played a key role intransforming the Indian economy in the past dozen years. A quickmeasure of the rise in Indias integration with the world economy isa standard gauge of openness the importance of foreign trade inthe national income. Figure 1.5 shows the unmistakable rise in theshare of imports and exports in Indias GDP since 1990-91. In just

over a decade since liberalization, the share of foreign trade inIndias GDP had increased by over 50%. While imports increased


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steadily and continued to exceed exports, the rise in the latter hasbeen almost proportional as well. The export pessimism thatmarked Indias foreign trade policy truly appears to be a thing ofthe past.

While trade deficits have continued after liberalization, foreigninvestment in India, both portfolio flows as well as FDI, (and morerecently in the form of external commercial borrowing (ECBs) byIndian firms) have been substantial. Figure 1.6 shows the flow offoreign investment to India and decomposes it into FDI andportfolio investment. Both kinds of flows have shown remarkablegrowth rates with comparable average levels over the years.However the portfolio flows have been much more volatile ascompared to FDI flows. This raises the familiar concerns over hotmoney flows into the country with portfolio flows.

As for FDI, perhaps much of the potential still lays untapped. Astudy by Morgan Stanley holds bureaucracy, poor infrastructure,rigid labor laws and an unfavorable tax structure in India asresponsible for this poor relative performance. Nevertheless thisdifference should be viewed more as indicative of future growthopportunities in FDI inflows provided India properly carries out itssecond generation reforms and should not obscure Indiassignificant achievement in attracting foreign investment in the yearssince liberalization.

As a result of substantial capital inflows, the foreign exchangereserves situation for India has improved beyond the wildestimagination of any pre-liberalization policymaker. Today theReserve Bank has a foreign exchange reserve exceeding twohundred billion US dollars, a situation unthinkable at the beginningof liberalization when India barely had reserves to cover a fewweeks of imports. Figure 1.7 shows the evolution of Indias foreignexchange reserve position since liberalization.

The Indian rupee has largely stabilized against major world

currencies, over the period. The economic reforms era began with asharp devaluation of the rupee. As liberalization lifted controls onthe rupee in the trade account, there were considerable concernsabout its value. However, propped up largely by inflows of foreigninvestment the floating rupee stabilized in the late 90s and hasappreciated somewhat against the US dollar in recent months. Infact, it is fair to say that the rupee is currently considerablyundervalued against the dollar as its value is managed by the RBI.Figure 1.8 shows the variation in the external value of the rupee inthe post-reforms period.


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A lot has changed in the world beyond Indias borders during theseyears. Japan, the second largest economy in the world, hasexperienced a deep and long recession over much of the period.The Asian Crisis, one of the most widespread of all financial andcurrency crises ever, devastated South-East Asia and Korea in

1997. Continental Europe has entered into a monetary unioncreating the Euro that now rivals the US dollar in importance as aworld currency. Several economies like Russia, Argentina andTurkey have witnessed financial crises. The internet bubble tookstock markets in the US and several other countries to dizzyingheights before crashing back down. More recently, US sub-primemarket woes have sparked global sell-offs.

India has appeared largely unscathed from the Asian crisis. Mostobservers attribute this insulation to the capital controls that

continue in India. Nevertheless, Indian financial markets haveprogressively become more attuned to international market forces.The reaction of Indian markets to the recent sub-prime meltdownbears testimony to the level of financial integration between Indiaand the rest of the world.


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1.3The Financial Sector

Despite the history of Indias stock exchanges and the large numberof listed firms, the size and role in terms of allocating resources ofthe markets are dominated by those of the banking sector, similarto many other emerging economies. The equity markets were notimportant as a source of funding for the non-state sector until asrecently as the early 1980s. The ratio of Indias marketcapitalization to GDP rose from about 3.5% in the early 1980s toover 59 % in 2005, which ranks 40th among 106 countries (Table

1.2) while the size of the (private) corporate bond market is small.On the other hand, from Table 1.2, total bank deposits (of over$527 billion dollars) are equivalent to 52 % of GDP in 2005, andconstitute three-quarters of the countrys total financial assets. Theefficiency of the banking sector, measured by the concentration andoverhead costs, is above the world average.

In a series of seminal papers beginning in the late 1990s, La Porta,Lopez de Silanes, Shleifer and Vishny (LLSV) have empiricallydemonstrated the effects that the investor protection embedded in

the legal system of a country has on the development and nature offinancial systems in the country. Broadly speaking, they posit thatcommon-law countries provide better investor protection than civillaw countries leading to better financial and systemic outcomesfor the former including a greater fraction of external finance, betterdeveloped financial markets and more dispersed shareholding inthese countries as compared to the civil law countries.Consequently, the LLSV averages of financial system indicatorsacross different legal system groups serve as a benchmark againstwhich an individual countrys financial system can be compared.

In Table 1.3 we compare Indias financial system (2003 figures) tothose of the LLSV-sample countries (LLSV, 1997a, 1998), usingmeasures from Levine (2002). In terms of the size (bank privatecredit over GDP), Indias banking sector is much smaller than the(value-weighted) average of LLSV sample countries, even thoughits efficiency (overhead cost as fraction of total banking assets)compares favorably to most countries. The size of Indias stockmarket, measured by the total market capitalization as fraction ofGDP, is actually slightly larger than that of the banking sector,although this figure is still below the LLSV average. However, in

terms of the floating supply of the market, or the tradable fractionof the total market capitalization, Indias stock market is only half of


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its banking sector.

Structure activity and Structure size measure whether afinancial system is dominated by the market or banks. Indiasactivity (size) figure is below (above) even the average of English

origin countries, suggesting that India has a market-dominatedsystem; but this is mainly due to the small amount of bank privatecredit (relative to GDP) rather than the size of the stock market. Interms of relative efficiency (Structure efficiency) of the market vs.banks, Indias banks are much more efficient than the market (dueto the low overhead cost), and this dominance of banks overmarket is stronger in India than for the average level of LLSVcountries. Finally, in terms of the development of the financialsystem, including both banks and markets, we find that Indiasoverall financial market size (Finance activity and Finance size)

is much smaller than the LLSV-sample average level. Overall, basedon the above evidence, we can conclude that both Indias stockmarket and banking sector are small relative to thesize of itseconomy, and the financial system is dominated by an efficient (lowoverhead cost) but significantly under-utilized (in terms of lendingto non-state sectors) banking sector.

However, the situation has changed considerably in recent years:Since the middle of 2003 through to the third quarter of 2007,Indian stock prices have appreciated rapidly. In fact, as shown in

Figure 1, the rise of the Indian equity market in this period allowedinvestors to earn a higher return (buy and hold return) frominvesting in the Bombay Stock Exchange, or BSEs SENSEX Indexthan from investing in the S&P 500 Index and other indices in theU.K., and Japan during the period. Only China did better. Manycredit the continuing reforms and more or less steady growth aswell as increasing foreign direct and portfolio investment in thecountry for this explosion in share values.

Table 1.4 compares the two major Indian exchanges, the Bombay

Stock Exchange (BSE), and the much more recent, National StockExchange, (NSE)) vis--vis other major exchanges in the world. Atthe end of 2005, BSE was the sixteenth largest stock market in theworld in terms of market capitalization, while NSE rankedeighteenth. Table 1.4 also shows that trading in the BSE is one ofthe most concentrated among the largest exchanges in the world,with the top 5% of companies (in terms of market capitalization)accounting for over 72% of all trades, but the (share) turnovervelocity of BSE (35.4% for the year) is much lower than that ofexchanges with similar concentration ratios. Figure 1.9 shows that

Indian markets outperformed most major global marketshandsomely during 1992-2006 period.


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In 2004-05, non-government Indian companies raised $2.7 billionfrom the market through the issuance of common stocks, and $378million by selling bonds/debentures (no preferred shares). Despitethe size of new issues, Indias financial markets, relative to the sizeof its economy and population, are much smaller than thosein many

other countries. Table 1.5 presents a comparison of externalmarkets (stock and bonds) in India and different country groups (bylegal origin) using measures from LLSV (1997a). Figure 1.10 plotsthe size and depth of a countrys external markets vs. the degree ofprotection of investors based on the data used in Table 1.5. Thehorizontal axis measures overall investor protection (protectionprovided by the law, rule of law, and government corruption) ineach country, while the vertical axis measures the (relative) sizeand efficiency of that countrys external markets. Most countrieswith the English common-law origin (French civil-law origin) lie in

the top-right region (bottom-left region) of the graph. India islocated in the south-eastern region of the graph with relativelystrong legal protection (in particular, protection provided by law)but relatively small financial markets.

The Financial Sector

Along with the rest of the economy and perhaps even more thanthe rest, financial markets in India have witnessed a fundamentaltransformation in the years since liberalization. The going has not

been smooth all along but the overall effects have been largelypositive.Over the decades, Indias banking sector has grown steadily in size(in terms of total deposits) at an average annual growth rate of18%. There are about 100 commercial banks in operation with 30of them state owned, 30 private sector banks and the rest 40foreign banks. Still dominated by state-owned banks (they accountfor over 80% of deposits and assets), the years since liberalizationhave seen the emergence of new private sector banks as well as theentry of several new foreign banks. This has resulted in a much

lower concentration ratio in India than in other emerging economies(Demirg-Kunt and Levine 2001). Competition has clearlyincreased with the Herfindahl index (a measure of concentration)for advances and assets dropping by over 28% and about 20%respectively between 1991-1992 and 2000-2001 (Koeva 2003).Within a decade of its formation, a private bank, the ICICI Bank hasbecome the secondlargest in India. Compared to most Asiancountries the Indian banking system has done better inmanaging its NPL problem. The healthy status of the Indianbanking system is in part due to its high standards in selecting

borrowers (in fact, many firms complained about the stringentstandards and lack of sufficient funding), though there is some


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concern about ever-greening of loans to avoid being categorizedas NPLs. In terms of profitability, Indian banks have also performedwell compared to the banking sector in other Asian economies, asthe returns to bank assets and equity in Table 1.6 convey.Private banks are today increasingly displacing nationalized banks

from their positions of pre-eminence. Though the nationalized StateBank of India (SBI) remains the largest bank in the country by far,new private banks like ICICI Bank, Axis Bank and HDFC Bank haveemerged as important players in the retail banking sector. Thoughspawned by government-backed financial institutions in each case,they are profit-driven professional enterprises.

The proportion of non-performing assets (NPAs) in the loanportfolios of the banks is one of the best indicators of the health ofthe banking sector, which, in turn, is central to the economic health

of the nation. Figure 1.11 shows the distribution of NPAs in thedifferent segments of the Indian banking sector for the last fewyears. Clearly the foreign banks have the healthiest portfolios andthe nationalized banks the worst, but the downward trend acrossthe board is indeed a positive feature. Also, while there is still roomfor improvement, the overall ratios are far from alarmingparticularly when compared to some other Asian countries.While the banking sector has undergone several changes, equitymarkets have experienced tumultuous times as well. There is nodoubt that the post-reforms era has witnessed considerably higher

average stock market returns in general as compared to before.Figure 1.12 clearly shows the take-off in BSE National Index andBSE Market Capitalization beginning with the reforms.Since the beginning of the reforms, equity culture has spreadacross the country to an extent more than ever before. This trend isclearly visible in figure 1.13 which shows the ratio of BSE marketcapitalization to the GDP. Although GDP itself has risen faster thanbefore, the long-term growth in equity markets has beensignificantly higher.

The rise in stock prices (and the associated drop in cost of equity)has been accompanied by a boom in the amounts raised throughnew issues both stocks as well as debentures beginning with thereforms and continuing at a high level for over half a decade (figure1.14).

The ride has not been smooth all along though. At least two majorbubbles have rocked the Indian stock markets since liberalization.The first, coinciding with the initial reforms, raised questions aboutthe reliability of the equity market institutions. A joint parliamentary

committee investigation and major media attention notwithstandinganother crisis hit the bourses in 1998 and yet again in 2001. Clearly


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several institutional problems have played an important role inthese recurring crises and they are being fixed in a reactive ratherthan pro-active manner. Appropriate monitoring of the boursesremains a thorny issue and foul play, a feature that is far fromabsent even in developed countries, is, unfortunately, still common

in India. Consequently, every steep rise in stock values todayinstills foreboding in some minds about a possible reversal.Nevertheless, institutions have doubtless improved and becomemore transparent over the period. The time-honored badla systemof rolling settlements is now gone and derivatives have firmlyestablished themselves on the Indian scene.

Indeed the introduction and rapid growth of equity derivatives havebeen one of the defining changes in the Indian financial sector sinceliberalization. Notwithstanding considerable resistance from

traditional brokers in Indian exchanges, futures and options tradingbegan in India at the turn of the century. Figure 1.15 shows therapid growth in the turnover in the NSE derivatives market brokendown into different instrument-types. Evidently futures both onindividual stocks as well as index futures have been more popularthan options, but the overall growth in less than half a decade hasbeen phenomenal indeed. Tradable interest rate futures have madetheir appearance as well but their trading volume has beennegligible and sporadic. Nevertheless, the fixed-income derivativessection has witnessed considerable growth as well with Interest

Rate Swaps and Forward Rate Agreements being frequently used ininter-bank transactions as well as for hedging of corporate risks.Similarly currency swaps, forward contracts and currency optionsare being increasingly used by Indian companies to hedge currencyrisk.

Finally the market for corporate control has seen a surge of activityin India in recent years. Figures 1.16 shows the evolution ofmergers and acquisitions involving Indian firms while table 1.7 liststhe industries with maximum action. Foreign private equity has

been a major player in this area with inflows of over $2.2 billion in2006, the largest in any Asian country.


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Background of the organization

Present Profile:Corporate Partners is an integrated financial services firm, offeringa wide range of services to a wide range of clientele that includesMutual Funds , BPOs, KPOs, Management Institutions,Corporations, Financial institutions, and Retail investors.

Lets take a look at what all does CORPORATE PARTNERS do.

1.)Training: CORPORATE PARTNERS is in Financial Modellingthrough Microsoft Excel, Fundamental Analysis & equityresearch and Derivative & Risk Management. It is also inTechnical Analysis, and Internship for CFA and MBA. Apart

from all this there are many other training provided by thecompany like Debt & Management Marketing, Forex,Commodity, Personnel, Financial Planning, NCFM, CustomizedFinancial Training etc.

2.)Research: CORPORATE PARTNERS is also in research. Forexample, it has a project called Companies Valuation. In thisresearch project we try to asses what would be the value of acompany after a particular time period.

3.)Services: There are various services provided by thecompany, like Portfolio Advisory, Buy a Portfolio, Personal

Financial Planning, Algorithm Trades, Financial ModelDesigning, Financial Model Auditing etc.


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Values of the Companies:

The values of integrity, teamwork, innovation, performance andpartnership shape the corporate vision and drive the company toachieve its goals.

The trainers bring knowledge, experience and diversity to bear incompanys every endeavor. Their talent and passion has poweredthe company to the pre-eminent position the company occupy. Theworkshops of the company are well known for their high qualitycontent backed by companys unique and entertaining style of

delivery.

CORPORATE PARTNERS is the 1st Practicing CFA (CharteredFinancial Analyst) Firm with core competency in the field ofFinancial Training, Equity Research, Portfolio Advisory, PersonalFinancial Planning, Financial Model Designing and Auditing.


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SOME OF THE RESPECTED CLIENTS OF

CORPORATE PARTNERS


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INTRODUCTION OF THE STUDY

Introduction to Financial Analysis:

Financial statement analysis involves analyzing the firms financialstatements to extract information that can facilitate decision-making. For example, an analysis of the financial statement canreveal whether the firm will be able to meet its long-term debtcommitment, whether the firm is financially distressed, whether thecompany is using its physical assets efficiently, whether the firmhas an optimal financing mix, whether the firm is generatingadequate return for its shareholders, whether the firm can sustain

its competitive advantage etc; While the information used ishistorical, the intent is clearly to arrive at recommendations andforecasts for the future rather than provide a picture of the past.

The performance of a firm can be assessed by computing key ratiosand analyzing: (a) How is the firm performing relative to theindustry? (b) How is the firm performing relative to the leadingfirms in their industry? (c) How does the current year performancecompare to the previous year(s)? (d) What are the variables drivingthe key ratios? (e) What are the linkages among the ratios? (f)

What do the ratios reveal about the future prospects of the firm forvarious stakeholders such as shareholders, bondholders,employees, customers etc.? Merely presenting a series of graphsand figures will be a futile exercise. We need to put the informationin a proper context by clearly identifying the purpose of our analysisand identifying the key data driving our analysis.

Financial analysis is performed by both internal management andexternal groups. Firms would perform such an analysis in order toevaluate their overall current performance, identify

problem/opportunity areas, develop budgets and implementstrategies for the future. External groups (such as investors,regulators, lenders, suppliers, customers) also perform financialanalysis in deciding whether to invest in a particular firm, whetherto extend credit etc. There are several rating agencies (such asMoodys, Standard &Poors) that routinely perform financial analysisof firms in order to arrive at a composite rating.


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Objective of the Project:

As we all know that CORPORATE PARTNERS is a training and

research company, all the interns were given projects related tofinancial research. The projects were like DERIVATIVE ANALYSIS,INDEX, PORTFOLIYO MANAGEMENT, VALUATION OF STOCKS etc.The project I was given was to financial analysis of companies. Butthe question was which companies to analyse. So our mentor cameup with companies in NIFTY 50 index.

Thus the OBJECTIVE of the Project was:

TO ANALYSE FINANCIAL STATEMENTS OF COMPANIES IN

S&P CNX Nifty, ALSO CALLED NIFTY 50

As we all know, NIFTY is a benchmark index for companies in NSE.There are 50 companies in the NIFTY 50 index. These 50 companiesare divided in 24 sectors. My friend SudhanshuMathur, and I bothworking on this project. I had 20 companies and he had 30companies to analyse.

So this was the objective of the project which in the 2 months wetried to obtain.


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EXECUTIVE SUMMARYThis section summarizes a the whole report in such a way that youcan rapidly become acquainted with a large body of the reportwithout having to read it all. It contains a brief statement of theproblem or proposal covered in the report.As we all know that the objective of this project is to financiallyanalyse the 50 companies in NIFTY 50. So the job would start bycollecting the financial statements of these companies. Then wewould try to analyse various heads in the balance sheet and profitand loss statement.

Then well scan all of the statements to look for large movements inspecific items from one year to the next. For example, didrevenues have a big jump, or a big fall, from one particular year tothe next? Did total or fixed assets grow or fall? If you findanything that looks very suspicious, research the information youhave about the company to find out why. For example, did thecompany purchase a new division, or sell off part of its operations,that year? This would help us knowing the dependability of various

heads. For example, weather the sales depends mainly on the rawmaterial or some other component.

Then well calculate financial ratios in various categories, for eachyear. Some of the important categories of ratios are given below. Liquidity ratios Leverage (or debt) ratios Profitability ratios Efficiency ratios Value ratios

Try to find the trends in the ratios from year to year. Are theygoing up or down? Is that favorable or unfavorable? This shouldtrigger further questions in your mind, and help you to look for theunderlying reasons. Review all of the data that you havegenerated. You will probably find that there is a mix of positive andnegative results.


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METHODOLOGY

These are basic steps we used when evaluating company cases.Following things should be understood.

This is not meant to be an exhaustive list; there areother steps that can be followed to get deeper into themeaning of the numbers.

The numbers only provide indicators to trigger furtherquestions in your mind.

Financial indicators vary from industry to industry; theratios can only be interpreted when compared andcontrasted with other companies in that industry. Forexample, financial indicators are (and should be) differentamong financial institutions, manufacturing companies,companies that provide services, and technology andcomputer information and services companies.

Financial analysis is something of an art. Experiencedmanagers, investors and analysts develop a data bank of

information over time, and after doing many suchanalyses, that they bring to bear every time they review acompany. This is not something which can be done just in2 months. But we can still get an overall view of it.

Step 1. Acquired the financial statements of all the 20companies for several years(at least for last 5 years). We foundthese financial statements from a database called CAPITAL LINE,which was there in CORPORATE PARTNERS. We also downloadedannual reports of these companies for several years.

Step 2. Scaned all of the statements to look for largemovements in specific items from one year to the next. Forexample, did revenues have a big jump, or a big fall, from oneparticular year to the next? Did total or fixed assets grow orfall? After finding anything that looks very suspicious, weresearched the information we had about the company to find outwhy. For example, did the company purchase a new division, orsell off part of its operations, that year?

Step 3. Reviewed auditors reports of companies from theannual reports.


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Step 4. Examined the balance sheet. Looked for large changesin the overall components of the company's assets, liabilities orequity. For example, have fixed assets grown rapidly in one or twoyears, due to acquisitions or new facilities? Has the proportion of

debt grown rapidly, to reflect a new financing strategy? In casethere was something very suspicious, we researched theinformation about the company to find out why.

Step 5. Examined the income statement. Looked for trends overtime.

Are the revenues and profits growing over time? Are they movingin a smooth and consistent fashion, or erratically up anddown? Investors value predictability, and prefer more consistent

movements to large swings.

For each of the key expense components on the income statement,calculated it as a percentage of sales for each year. For example,calculated the percent of cost of goods sold over sales, general andadministrative expenses over sales, and research and developmentover sales. Looked for favorable or unfavorable trends. Forexample, rising G&A expenses as a percent of sales could meanlavish spending. Also, determined whether the spending trendssupport the companys strategies. For example, increasedemphasis on new products and innovation will probably be reflectedby an increased proportion of spending on research anddevelopment.

Step 6. Calculated the financial ratios in each of the followingcategories.

1.) Liquidity Ratio: Liquid assets are those that can be convertedinto cash quickly. The short-term liquidity ratios show the firmsability to meet its short-term obligations. Thus a higher ratio (#1and #2) would indicate a greater liquidity and lower risk for short-term lenders. The Rules of Thumb for acceptable values are:Current Ratio (2:1), Quick Ratio (1:1).

While high liquidity means that the company will not default on itsshort-term obligations, one should keep in mind that by retainingassets as cash, valuable investment opportunities may belost. Obviously, cash by itself does not generate any return. Only ifit is invested will we get future return.

1. Current Ratio = Total Current Assets / Total Current Liabilities


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2. Quick Ratio = (Total Current Assets - Inventories) / TotalCurrent Liabilities

In the quick ratio, we subtract inventories from total current assets,since they are the least liquid among the current assets

2.) Leverage Ratio/Debt Ratio: Debt ratios show the extent towhich a firm is relying on debt to finance its investments andoperations, and how well it can manage the debt obligation, i.e.repayment of principal and periodic interest. If the company isunable to pay its debt, it will be forced into bankruptcy. On thepositive side, use of debt is beneficial as it provides tax benefitsto the firm, and allows it to exploit business opportunities and

grow.

Note that total debt includes short-term debt (bank advances + thecurrent portion of long-term debt) and long-term debt (bonds,leases, notes payable).

1. Leverage Ratios

1a. Debt to Equity Ratio = Total Debt / Total Equity

This shows the firms degree of leverage, or its reliance on externaldebt for financing.

1b. Debt to Assets Ratio = Total Debt / Total assets

Some analysts prefer to use this ratio, which also shows thecompanys reliance on external sources for financing its assets.

In general, with either of the above ratios, the lower the ratio, themore conservative (and probably safer) the company is. However,if a company is not using debt, it may be foregoing investment andgrowth opportunities. This is a question that can be answered onlyby further company and industry research.

A frequently cited rule of thumb for manufacturing and other non-financial industries is that companies not finance more than 50% oftheir capital through external debt.

2. Interest Coverage (or Times Interest Earned) Ratio = EarningsBefore Interest and Taxes / Annual Interest Expense

This shows the firms ability to cover fixed interest charges (on bothshort-term and long-term debt) with current earnings. The margin


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of safety that is acceptable varies within and across industries, andalso depends on the earnings history of a firm (especially theconsistency of earnings from period to period and year to year).

3.) Profitability Ratio: Profitability is a relative term. It is hard to

say what percentage of profits represents a profitable firm, asprofits depend on such factors as the position of the company andits products on the competitive life cycle (for example profits will belower in the initial years when investment is high), on competitiveconditions in the industry, and on borrowing costs.

For decision-making, we are concerned only with the present valueof expected future profits. Past or current profits are importantonly as they help us to identify likely future profits, by identifyinghistorical and forecasted trends of profits and sales.

We want to know whether profits are generally on the rise; whethersales stable or rising; how the profits compare to the industryaverage; whether the market share of the company is rising, stableor falling; and other things that indicate the likely future profitabilityof the firm.

1. Gross Profit Margin=Gross profit/Sales

2. Net Profit Margin = Profit after taxes / Sales

3. Return on Assets (ROA) = Profit after taxes / Total Assets

4. Return on Equity (ROE) = Profit after taxes / ShareholdersEquity (book value)

4.) Turnover Ratio: These ratios reflect how well the firms assetsare being managed.

The inventory ratios shows how fast the inventory is being producedand sold.

1. Inventory Turnover = Cost of Goods Sold / Average Inventory

This ratio shows how quickly the inventory is being turned over (orsold) to generate sales. A higher ratio implies the firm is moreefficient in managing inventories by minimizing the investment ininventories. Thus a ratio of 12 would mean that the inventory turnsover 12 times, or the average inventory is sold in a month.

2. Fixed Assets Turnover = Sales / Fixed Assets


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This ratio shows how much sales the firm is generating for everydollar of investment in fixed assets. The higher the ratio, the betterthe firm is performing.


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CONCLUSION

The financial analysis can be used:

1. To evaluate performance, compared to previous years and tocompetitors and the industry

2. To set benchmarks or standards for performance

3. To highlight areas that need to be improved, or areas that offerthe most promising future potential

4. To enable external parties, such as investors or lenders, toassess the creditworthiness and profitability of the firm

Limitations:

1. There is considerable subjectivity involved, as there is nocorrect number for the various ratios. Further, it is hard to reacha definite conclusion when some of the ratios are favorable andsome are unfavorable.

2. Ratios may not be strictly comparable for different firms due to avariety of factors such as different accounting practices or differentfiscal year periods. Furthermore, if a firm is engaged in diverse

product lines, it may be difficult to identify the industry category towhich the firm belongs. Also, just because a specific ratio is betterthan the average does not necessarily mean that the company isdoing well; it is quite possible rest of the industry is doing verypoorly.

3. Ratios are based on financial statements that reflect the pastand not the future. Unless the ratios are stable, it may be difficultto make reasonable projections about future trends. Furthermore,financial statements such as the balance sheet indicate the pictureat one point in time, and thus may not be representative of longerperiods.


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4. Financial statements provide an assessment of the costs and notvalue. For example, fixed assets are usually shown on the balancesheet as the cost of the assets less their accumulated depreciation,which may not reflect the actual current market value of thoseassets.

5. Financial statements do not include all items. For example, it ishard to put a value on human capital (such as managementexpertise). And recent accounting scandals have brought light tothe extent of financing that may occur off the balance sheet.

6. Accounting standards and practices vary among countries, andthus hamper meaningful global comparisons.


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Charts and Tables


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Thank You

summer project report 2

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