sweta srei final.pdf

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Chapter 1- Introduction

1.1 Problem statement :

With the recession being witnessed in the Indian economy since the past 3-4 years, the

banking sector has been one of the worst hit sectors of the economy. Due to stagnancy of the

infrastructure and mining activities in the country, all the major infrastructure firms have

been facing acute liquidity stress. This, coupled with other factors like high inflation rates,

has led to higher interest rates in the Indian economy, have led to many of the infrastructure

projects becoming unviable. On the other hand, policy and procedural delays from the

government like giving clearances, handing over of land due to acquisition problems etc have

led to majority of the projects witnessing huge time and cost overruns.

On this backdrop, the liquidity stress of the infrastructure companies have led to high level of

delinquencies in the banking sector. Rising NPA Levels in the banking sector, both for the

public and private sectors and in the NBFCs have necessitated stricter credit norms and close

monitoring of the accounts. The focus of the banking sector currently is on recovery of the

dues which have turned delinquent, along with strict credit policies to arrest further

deterioration of the existing portfolio. SEFL, being a NBFC which is directly associated with

the infrastructure sector, currently has been witnessing these problems too.

1.2 Review of related literature:

I study various newspapers and various articles related to the NBFCs current situation in the

market and some of the reviewed are as following:

Infrastructure and manufacturing sector plays a greater role in providing growth to an

economy. Future of any economy depends on the growth of its infrastructure and

manufacturing development.

Union Budget 2015: Jaitley brings cheer for banks and NBFCs

March1, 2015

While presenting the union budget Arun Jaitley finance Minister announced that now NBFCs

(Non Banking Financial Companies) which are registered with the RBI, to be allowed to use

reconstruction and securitisation of Financial Assets and enforcement of security interest.

According to the president of Kotak Mahindra Bank this plan would make recovery of loans

smoother for NBFC and benefit most of the larger player like L&T Finance, Shriram

Transport Finance.

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Jan 2, 2015

According to the article on Jan2,2015 of F.Business RBI asked Non-Banking Financial

Company to continue carrying out on-going due diligence with their clients and closely

examine transaction to ensure their consistency, business and risk profile and source of funds.

And also Full KYC exercise will be required to be done at least every 2 years for high risk

individuals and entities.

Non-banking financial companies (NBFCs) have seen considerable business model shift over

last decade because of regulatory environment and market dynamics. In the early 2000s, the

NBFC sector in India was facing following problems:

1) High cost of funds

2) Slow industrial growth

3) Stiff competition with NBFCs as well as with banking sector

4) Small balance sheet size resulting in high cost of fund and low asset profile

5) Non-performing assets Majority of NBFCs were not able to face the pressure created on

and were wiped out. However, since FY2001-2002, there has been significant improvement

in the business model of existing NBFCs with improvement in overall business environment.

NBFCs have been able to expand their resource profile by diversifying the funding avenues.

1.3 Rationale of the problem: NBFC industry had witnessed substantial growth over the

years post liberalisation era and with the advent of Basel norms in India, but in the current

economic scenario, some of the problems being witnessed by the industry are given below.

The list is not exhaustive and different NBFCs will have their own individual strengths and

weaknesses and concerns, but there are some general problems being witnessed by the entire

industry as given below:

Increased level of delinquencies and NPAs in the banking sector owing to

liquidity stress and slow infrastructure activities witnessed in the economy.

Introduction of banking licenses to new players in the economy liken Bandhan

Financial Services to cater to a greater section of the society and to channelize

funds in the banking sector.

Consolidation being witnessed in the banking sector with some big players

allowed to takeover smaller players, like the recent takeover of ING Vyasa Bank

by Kotak Mahindra Financial Services.

Along with new players, the industry has witnessed introduction of various

innovative products such as used vehicles financing, small personal loans, three

wheeler financing, asset management. Sector wise emphasis also being initiated

with increase in rural finance and lower exposure to the real estate players.

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Economy is expected to move in a positive direction with strong emphasis

being given on the infrastructure sector by the current government. Liquidity

Stress also being expected to ease out in the future with the RBI expected to

be on course to initiate interest rate cuts following lower inflation rates.

1.4 Methodology: Methodology refers to the essential part of the study and process of

collecting information and arranging it in terms of the relevant issues of the study. It is

designed in a way so that it correspondent to achieve the objective of the study.

Since the research is for industry analysis and it is structured for NBFCS. The research uses secondary data for analysis and interpretation.

The following steps have been undertaken for the project:

A list of companies listed in the Bombay Stock Exchange / National Stock Exchange, who are in the infrastructure sector had been identified (List attached as Annexure).

The annual reports were obtained from the www.bseindia.com, www.nseindia.com, www.moneycontrol.com etc for FY 14, FY 13 and FY 11.

Ratio analysis is being carried on these companies and relevant data are being separately stored, where subsequent analysis will be carried on using different excel

and statistical tools.

Types of investigation

Descriptive Analysis: Descriptive analysis provides simple summaries about the sample and

the measures. Descriptive is used when researcher wants to describe specific behaviour as it

occurs in the environment. In this report the study follow the behaviour pattern of companies

on the basis of ratios analysis regarding the liquidity stress. There is three parts of Descriptive

analysis

1. Observation Method

2. Case Studies

3. Survey method

This project fall in category of the case studies as well as observation method of descriptive

method thus it is descriptive research method.

Sample Design:

The sample design for this project report is Probability convenience sampling because as

for our research we have selected annual reports of 47 companies and according to my report

this research gives equal chances to every companies financials of being selected.

Sampling Plan:

Sampling unit: the companies will be stratified and segmented according to the categories of

ratios.

Sampling size: this report is based on the survey of 47 companies listed in BSE.

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1.5 Scope of the study:

The scope of the project is, analyzing financial statement using Ratios which indicates the liquidity stress of companies and to review of financial strength of the companies.

Ratios are useful tools for evaluating the performance of the manufacturing and

infrastructure companies.

Importance of the project:

This project will help the finance student as the learning device.

This project will help us to understand the liquidity performance of the manufacturing and infrastructure companies.

The project would also be an effective tool for credit policies of the companies.

This will show how companies will maintain their particular liquidity position.

1.6 limitation of the study:

There were some limitations faced to prepare this report that are.

There is not huge guideline about liquidity management of the NBFCs

I didnt get sufficient Information about the order book of many companies.

Couldnt collect annual report of many companies. Due to lack of availability.

Distribution of order book was not mention properly in the annual reports of many companies.

Since the profile of the clients of SREI Equipment Finance ltd is huge, it was not possible to visit clients office and cross verify the data available on the internet.

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Chapter 2

Details of the organization

Introduction

SREI Infrastructure Finance Limited has been a pioneer in infrastructure financing in India,

steadily contributing towards infrastructure development, and a better tomorrow. SREI

Equipment Finance Private Limited is the 50-50 joint venture between BNP Paribas and

SREI Infrastructure limited.

BNP PARIBAS

BNP Paribas S.A is a global banking group, headquartered in Paris with its second global

headquarters in London. In October 2010, BNP Paribas was ranked by Bloomberg and

Forbes as the largest bank and largest company in the world by assets with over US$3.1

trillion. It was formed through the merger of Banque Nationale de Paris (BNP) and Paribas in

2000.

BNP Paribas has one of the highest credit ratings in its peer group with the long term debt of

the group currently ranked AA-by S&P, Aa3 by Moodys and A+ by Fitch. The firm is a

universal bank split into three strategic business units: retail Banking, Corporate &

investment banking and investment solutions

BNP Paribass four domestic markets are France, Italy, Belgium and Luxembourg. It also has

significant retail operations in the United States, Poland, Turkey Ukraine and North Africa, as

well as large scale investment banking operations in New York, London, Hong Kong, and

Singapore.

SREI INFRASTRUCTURE PVT LTD: SREI is a non banking financial institution,

which began its journey in the year, 1989, from Kolkata and gradually established pan India

presence with a network of 34 offices. SREI includes infrastructure project finance, Advisory

and development, infrastructure equipment finance, venture capital and capital market.

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SREI EQUIPMENT FINANCE PRIVATE LIMITED

SREI Equipment finance Private limited is the 50-50 joint venture between BNP Paribas and

SREI infrastructure limited. It is a leader in the infrastructure and construction equipment

financing over 30% market share and empowered over small, medium and large contractors

in infrastructure space. Its the NON-BANKINNG FINANCIAL INSTITUTION which

provides loan to the manufacturers for manufacturing the various equipments used in the

infrastructure and construction sector.

According to the RBI, NBFCs are classified into three categories-

AFC ( Asset Finance Company)

Investment Company

Loan company

SEFL belongs to the asset finance company category of NBFCs as it provide loans for the

infrastructure and construction through leasing and loans.

It provides loans to the small and medium scale enterprises (SME). The company is present

in three key segments-

Infrastructure Equipment Finance

Infrastructure Project Finance

Renewable Energy Equipment Finance

Infrastructure Equipment Finance: In this segment company provide leasing and hire

purchase of infrastructure, construction equipment and machinery to various construction

companies and also to the SMEs (small and medium scale enterprises) engaged in civil and

mechanical construction. Some the instrument which company finance include-

Dozers

Heavy Dumpers

Surface Miners

Cranes

Compressors

Compactors

Backhoe Loaders

Motor Graders

Mechanical and sensor pavers

Tool Carriers

Road Building Equipment

Excavators

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Infrastructure Project Finance: The project finance segment provides holistic financial

solutions for infrastructure projects. It provides Debt, Equity and Mezzanine capital, also

together advisory services team of SIFL. This segment covers small and medium sized road,

power, ports and urban infrastructure project that require financing over 5-10 year period in

the range of Rs 10m-50m.

Renewable Energy Equipment Finance: SREI is the first Indian company to finance

Renewable energy equipments, which is high growth segment in India

The Organization

COMPANY PROFILE

LOCATION: Y-10, Block EP sector- V, Salt Lake City Kolkata-700091

ESTABLISHED IN: 1985

WEEKLY HOLIDAY: Sunday

CHAIRMAN: Hemant Kanoria

VICE CHAIRMAN: Sunil Kanoria

VISION OF THE COMPANY: Vision of the company is to be the most inspiring global

holistic Infrastructure institution.

MISSION OF THE COMPANY: Company mission is to be an Indian multinational

company that provides Innovative integrated Infrastructure solution.

CORE VALUES: Companys core value depends on these points.

Customer Partnership: Core value of the company includes customer

engagement, affection and understanding of the customer, creating a

mutually profitable partnership with the customer.

Respect for People: SREI believes in power of people. SREI provide

an inspiring work environment to its employees to encourage the

initiative of its employees and to recognize their work excellence.

Integrity: Companys actions are guided by principles of highest

standards of moral values and we are committed to ethical practices.

Passion for Excellence: In driving us to be innovative, solutions-

focused, and impactful.

Professional Entrepreneurship: To overcome obstacles and

complexities with professional expertise with the experience.

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Boards of Directors are:

Chief Mentor, Independent Director- Salil K. Gupta

Chairman & Managing Director- Hemant Kanoria

Vice Chairman- Sunil Kanoria

Independent Dirctor- T.C.A Ranganathan

Milestone of SREI:

1989 SREI started its operations and identified as infrastructure as the

core sector.

1992 listed in all major stock exchange.

2005 1st NBFI to be listed on the London Stock Exchange

2012- Received Certificate of Registration for Mutual Fund

(Infrastructure Debt Fund) from SEBI.

2014-Received certificate of authorisation from RBI to set up, own and

operate white Label ATMs.

Products of organization: SREI offer a range of financial products for Construction &

Mining, Technology and Healthcare equipment including

Loans / hypothecation for new equipment.

Loans / hypothecation against existing equipment

Loans / hypothecation for procuring used equipment

Operating leases for equipment, with both fixed and open residual values

Loans and leases for imported equipment and cross border transactions

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Organization Structure: SREI follow a hierarchical organizational structure with the

director at the top in the hierarchy followed by the managing and executive director. The

organizational structure of SREI is as follow-

Board of Directors

Managing Director

Risk & Credit Head

Zonal Head

Manager

FI & Credit Team

Collection &

Legal head

Manager

Collection & Legal Team

Chief Financial Officer

Operation, Accounts

&Financial Head

Operation, Accounts &

Financial Manager

Operations,Acconts &

Finance Team

Executive Director

Admin,HR & IT

Manager

Admin,HR & IT Team

Business Heads

Cluster Head

Branch Manger

Team Leader

Executive

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HUMAN RESOURCES DEVELOPMENT

In order to achieve companys own goal SREI offer their people platform of

An entrepreneurial environment where people can pursue their dreams.

Company give opportunities to its employee to develop leadership and

functional capabilities.

It also provides its people to growth opportunities to expand leadership

capabilities.

CULTURE OF Organization: Work culture in SREI is employee friendly.

SREI is a successful organization which believes in the power of people. SREI is

an employee-centric company and owe their success and position to their work

culture, which is driven by the performance of their employees.

EQUAL Opportunity Employer: SREI provide equal opportunities to growth

to all their employee .Decision are taken on account of merit, qualification and

individual capabilities. A debate competition event was organised in SREI

during my SIP period in which there was an active participation from the

employees and each one of them given a fair chance to showcase their viewpoint.

REWARDS & RECOGNITION: In organization it is very important for employees to get recognized and get awarded for his/her work performance.

Every year SREI appreciate performance of its employees through award and

certification.

COMPETITOR ANALYSIS

Major Competitors of the firm

HDFC

ICICI

Tata capital

Magma Fin corp Ltd

Sriram Finance

Mahindra &Mahindra Financial Services ltd

All the nationalised banks.

ICICI: ICICI is the major competitor of SREI .It offers products such as investments, mutual

funds, life insurance, Car Loan, Home Loan and etc. It is second largest bank in India by

assets and market capitalization. It has total assets of Rs.6461.29 billion .

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SHRIRAM FINANCE: Shriram Transport Finance Company Limited (STFC) is the largest

asset financing NBFC of country. It is best NBFC in case ASSET BACKED LENDING.

They provide loan for heavy duty truck, Light duty truck, Passenger vehicle, Farm equipment

and etc. Shriram Transport offers financing options for the purchase of both new and used

vehicles to the segment.

HDFC: HDFC is one of the best banks of India which provide loans. HDFC provide personal

loan, business loan, Home loan, Car loan, two wheeler loan, gold loan, loan against assets,

educational loan, rural loans. It is the fifth largest bank of India which provide loan for asset.

MAGMA FIN CORP LTD: Magma Fincorp limited was established in 1989 and the

capacity of asset manages is RS 160 billion. It has 235 branches in india. It also provide car

loan, tractor loans , SME loans, Construction equipment, Commercial vehicles loans, Auto

loans, used vehicles loans and housing financing.

TATA CAPITAL: TATA CAPITAL undertakes the financing of construction equipment

and also financing of used equipment. Tata capital has 10% market share in the segment of

financing of the manufacturing equipment. It also provide lending facility for the different

segment like roads, railways, irrigation, power and warehousing.

Here I have taken the data from Money control to compare the stocks of SREI with its

competitors. From this table we can observed and analyze the difference value of competitors

of SREI.

Name Last Price Market Cap.

(Rs. cr.)

Sales

Turnover

Net Profit Total

Assets

Bajaj

Finance 5,249.60 28,155.06 5,381.80 897.87 19,941.40

Shriram

Trans 888.90 20,167.61 8,636.95 1,237.81 33,971.19

Sundaram

Fin 1,607.00 17,857.28 2,254.66 454.14 11,690.43

M&M

Financial 275.90 15,692.23 5,536.06 831.78 23,241.69

Manappuram

Fin 28.25 2,376.41 1,975.73 270.73 9,159.19

Magma

Fincorp 87.70 2,076.32 2,018.77 149.07 8,807.87

SREI Infra 36.60 1,841.30 1,894.20 90.93 15,637.56

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Analysis of Industry

SREI is an NBFC company. NBFC is a company according to the rule of RBI which should

be registered under the companies act, 1956.Business of NBFCs is providing loans and

advances, acquisition of shares/stocks/bonds/debentures but as per the rule of RBI it does not

include any institution whose principle business is agriculture or industrial activity. NBFCs

started in India in very small scale in 1960 but by providing fast lending services it started

attracting large number of customers. NBFCs provide banking services such as lending but it

do not hold banking license.

NBFCs rely on the following sources of funding.

1. Owned Funds

2. Bank Financing

3. Capital Market Instruments

4. Commercial Paper

5. Inter-Corporate Deposits

6. External Commercial Borrowing

Classification of NBFCs: According to the nature of their major activity of deposit taking

and Non deposit taking NBFCs can be classified into the following category.

Equipment leasing Companies.

Hire-purchase Finance Company.

Housing Finance Company.

Investments Companies.

Loan companies.

Mutual fund Benefit companies.

Chit fund companies.

Residuary company.

Difference between the BANK and NBFCs

NBFC cannot accept demand deposits.

NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.

NBFCs cannot issue Demand Draft like banks.

Banks are incorporated under banking companies act, NBFCs is incorporated under company act 1956.

NBFCs offer higher rate of interest on deposits and charge higher rate of interest on loans.

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CURRENT SCENARIO: The government has again started the process of allowing the

better- managed non-banking finance companies to graduate to full-fledged bank. In the

last Union Budget, the finance minister had announced that RBI is considering giving

additional banking licences to private sector players, including NBFCs.

The RBI announced a new framework for NBFCs that is raising the minimum net owned

funds limit while capping deposit acceptance. According to this framework now NBFCs

have to maintain minimum net fund owned of Rs 1 crore by end march 2016, and raise

it to Rs 2 crore by end march 2017 from the current level of Rs 25 lakh. And also RBI

announced that existing asset financing NBFCs which are unrated have to get themselves

rated by march31, 2016 otherwise they will not be allowed to renew existing and accept

fresh deposits. It is positive move in the terms of risk because many NBFCs raise money

from people known to them but it is very risky for those investors who are investing in

such unrated or poorly rated NBFCs.

According to the report of UNION BUDGET 2015-2016

With the growing importance of NBFCs as financial intermediaries, new categories like

NBFC-Factors, NBFC-IDFs, NBFC-MFIs, are being introduced by regulatory. At the end

of the year 2013-14 sector grew at the rate of 13.1%. The sector has been dynamically

evolving over period of time and has been witnessing constant regulatory changes.

RBI came out several important changes in the sector-

The guidelines for restructuring of loans by NBFC- the restructuring norms

of NBFCs have been aligned with that of the banks.

The framework of revitalising distressed assets in the economy.

Now announcement of SARFAESI (Securitisation and Reconstruction of Financial

Assets and Enforcement of security Interest) will help the NBFCs to solve the

problem related to the NPA (Non performing assets).

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Organization Business Profile

Chief Executive Officer: Devendra Kumar Vyas

Resource Mobilisation: Prakash Chand Patni (Head)

Chief Financial Officer: C R Sudarshanam

Chief Technology Officer: Sundar Raj Vijaynagar

Business Head- Debnil Chakarvarty (East and south Zone)

Business Head- V V Ramana (North, Central and East Zone)

Marketing Head-Raja Singh

Operation Head-Shiv Kumar

Human Resource Head-J K Dwivedi

Chief Internal Audit: Debashis Ghosh

SREIS Agenda is to build better tomorrow by providing financing solution. SREIs

promotion idea is Together we make tomorrow happen that mean together we can create

a better future for our next generation. SREI is a holistic company, it provide three type of

services.

1-Fund based

2-Fee based

3-Strategic Investment

1-Fund Based: In fund based financing SREI provide leasing and hire purchase of

infrastructure, construction equipment and machinery to various construction companies and

SMEs engaged in civil and mechanical construction. Some of the equipment financed by

SREI are

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I. Infrastructure Equipment Finance

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II.Project Finance: The project finance division provides holistic financial solutions for

infrastructure projects. It provide Debt, Equity and Mezzanine capital, also together with the

advisory service teams of SIFL it provide comprehensive solution including Debt

Syndication, Private Equity & M&A advisory.

SREI extend finacial assistence to:

Power

Renewable Energy

Roads

Hospitals

Bridges

Highways

2-Fee Based: Under Fee based SREI provide different services to its customer.

I. Project Advisory: SREIprovide comprehensive knowledge of the

infrastructure business and empowering development agencies in both the

private and public sector to lay the foundations for a better tomorrow.

Project Advisory arm offers a range of services which include:

1.Project Conceptualisation

2.Project Structuring

3.Project Monitoring

4.Fund Mobilisation

5.Advisory Services for government and private agencies.

II. Project Development: SREI have enriched infrastructure project

development capabilitites by leveraging intellectual capital and expertise built over two

decades of presence in the sector.SREIs Financier-cum advisor approach and ability to offer a

holistic package of fund Non-Fund based services provide our partnering sponsors the

advantage of managing the entire project cycle under one Umbrella.

III. Investment Banking: SREI is one of the leading marchent bankers in

India to provide a wide gamut services from IPos, Delisting, Buy Back, Open Offers, NCD,

Debt syndication and M&A advisory.

1.Capital Markets

2.Private Equity and M&A

3.Debt Syndication

IV. Alternative Investment Funds: SREI have come a long way since starting

operations by financing construction equipment. The company have decided to offer services

in the equity space to complete the value chain for the clients.

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V. Insurance Broking: SREI insurance Broking is one of the leading insurance

broking companies of india that facilitates insurance services for corporates and

individuals.SREI follow two step procedure to provide holistic support to their clients.

1.Initial Study

Evaluation of Clients risk profile, based on the study of

business environment.

Reccomandation of the most cost effective, integrated

insurance package perfectly matched with the risk profile.

Audit and evaluation of insurance procedures and

practices.

2.Post study

Desing the most cost effective insurance coverage

Provide continuous review, taking into account the

changing business environment.

3-Strategic based: Under the strategic services SREI provide

I . Telecom Infrastructure: SREI provide Viom network, a joint venture

between tata teleservices and Quippo-a srei group enterprise,is the pioneer in the shared

passive Telecom Infrastructure industry in India.

II. Transportation: SREI has made an indelible impression as one of the

leading providers of PPP business in the road sector in India.

III. Rentals: Quippo is the countrys largest infrastruture equipment rental

brand. SREI service the high growth verticals of construction, oil and gas energy.

IV. Rural IT Infrastructure: SREI is committed to creating a public- private

partnership to bright the urban rural digital divide in India.

V. SEZ and Industrial Parks: SREI ventured into the industrial park space

in the year 2008-2009 acknowleging the growing significance of the industrial sector in

accelerating Indias economic growth.

Organisation is engaged in developing three SEZs and industrial parks:

Near Navi Mumbai, Maharastra,-SEZ and industrial park

Near Kharagpur, West Bengal-Industrial park

Nanguneri, Tamil nadu- SEZ and Industrial park

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SWOT ANALYSIS

Swot analysis is a strategic planning method used to evaluate the STRENGHS,

WEAKNESS, OPPORTUNITIES and THREATS involve in a project or in a business

venture. It involves specifying the objective of the business venture or project and identifying

the internal and external factors that are favourable and unfavourable to achieve that

objective. To come to this SWOT conclusion, first we need to do a situational analysis.

Situational analysis means knowing about everything that can impact the victory.

It include INTERNAL METHOD uses data and information from within the business. It

includes efficiency productivity, Costs Strength and weakness.

The EXTERNAL METHOD uses data and information from outside the business. It includes

Competitors, the market and Opportunities and Threats.

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SWOT Analysis of the Firm

Strength - Largest NBFC in the country in CME financing. - Strong national presence. - Tie-ups with various established manufacturers and

vendors.

- Highly process oriented with strong fundamentals and business ethics.

Weakness - The source of funding for SREI is limited to wholesale funding , securitization and equity insurance. A spike in

interest rates could hamper its margin in case of its

inability to pass on the hike to its customers.

Opportunity - Different types of trade fairs like. EXCON, BAUMA 2011, SAHAJ-E-VILLAGE are the huge opportunities

and platform for the company to grow and attract its

customers.

- Expansion in product lines like financing of agricultural equipments, equipments in IT and Medical sectors etc.

Threats - Competition from the banks and other equipment financiers.

- Regulatory risks associated with RBI policies on NBFCs.

Concepts/Models used in the study:

Potters Five Forces Model

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THREAT OF NEW ENTRANTS-

As it was the first NBFI (NON-Banking Financial Institution) which provide loans to the firm

for the manufacturing of the products, it was easy to enter into the market, but sustaining the

same position as it was 10 years before is a difficult task.

Unlike NBFIs, banks have also get access to low-cost deposits, due to widespread operations

in the form of retail deposits and thus can lend at competitive rates. It is also a threat for

SREI.

BARGANING POWER OF CUSTOMER: The bargaining power of the customer

is also described as the market of output: the ability of customer to put the firm under

pressure, which also affects the customers sensitivity to price change, also when the buyers

purchase in large quantities then buyers can use their purchasing power as leverage to bargain

for price reduction. This condition is particularly high in case of SREI EQUIPMENT

FINANCE PRIVATE LIMITED- large number of players is in this segment which is a threat

for this firm.

THREAT OF SUBSITUTES: The existence of the scheme outside the realm of the

common product increases the propensity of the customers to switch to the alternatives. The

main issue is the similarity of the schemes which forces the customers to think once which

scheme to opt for.

COMPETITIVE RIVALRY WITHIN THE INDUSTRY: The Company has to

face many challenges as its competitors are also using same policies to attract the customers,

and moreover now banks are also providing loans to the firm for manufacturing of the

equipments.

BARGANING POWER OF SUPPLIERS: The company raised fund from FDs,

SBA, Convertible bonds, refinance from NHB and others so low power of bargaining.

Conclusion

RBI is announcing new facilities for NBFCS.

Demand for NBFCs has been increased and it is contributing large amount in

economy.

Threat between banks and NBFCS is increasing.

Announcement of SARFAESI help for NBFCs in union budget in the matter of

increasing NPA limit is helpful for NBFCs.

Though the NBFCs services have enhanced, introduction of new services are being

rendered to the customer of NBFC, and also the customer and NBFCs relationship

will affect the capital market.

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CHAPTER-3

RELEVANT LITERATURE REVIEW

In the recent time of financial crises, liquidity stress took centre stage. Due to the Increasing

Problem in liquidity, Regulators are emphasizing on NBFCs to follow a proper liquidity risk

management policy and to avoid the risk related to liquidity follow the stress testing method.

This report is based on the liquidity risk concept and liquidity analysis with the help of ratios.

According to the study of the report of TATA CONSULTANCY SERVICES related to

liquidity I came to know that process of Liquidity stress testing framework.

The life cycle of liquidity crisis is:

Liquidity risk life cycle shows the process in which liquidity risk management should be

made and risk management follow the step to avoid the liquidity problem in the organization.

Liquidity stress testing strategy focus on the following points:

-Identifying the factors which are indicating risk and affecting assets and liabilities of the

organization.

-Design the scenario to avoid the liquidity problem.

-And identify the future scenario to fight with the liquidity stress.

As my report is based on the key financial ratio of infrastructure companies I reviewed SREIs

technique of analyzing infrastructure companies position. At the very first level an analyst

analyze the category of Infrastructure companies

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Infrastructure: Involved in construction of roads, power, and railways

Real Estate: Involved in construction of residential and commercial etc

Industrial construction: involved in construction of steel plants, textile

Then the next step is analyzing the following:

Order Book: Order book contains the information of order received by the business. Order

book is record of size and future growth of the company. Through order book we can analyze

or identify in which segment company is involved and which are the project which will create

revenue in future for the company. Order book is record of the work in hand.

Raw Materials: Analyzing the raw material cost is the second step in which we analyze the

cost occurred in purchasing raw material for production. At the time of calculation of

profitability margin of the company an analyst always consider or exclude the cost of raw

material. We consider opening raw material as well as closing raw material for calculating

the cost of raw material. In this report I have calculated the raw material days of all 47

countries to identify which company is successful in managing their raw material days and

which company is taking more time in converting their raw material into finished product.

Formula of calculating raw material days which I have used is:

= Average raw material *365 days

Cost of goods sold

Secured Loan: In this report I have calculated the different types of loan of all the 47

companies. Under the head of secured loan I have identified the different loan categories.

Secured loan include the following.

Term loans

Lease HP loans

Working Capital(CC/OD, short term loans)

Mobilisation advances.

Debentures

1. Term: In our business line, clients normally take term loans for a period of 5-6

years from PSU banks against plant and machineries/ project finance( for real estate

companies).

Important things to note:

Commencement date of loan

Moratorium provided: normally 6 months to 1 year

Repayment structure: monthly/quarterly/Half yearly/annually.

2. Lease/ HP loans: Hire Purchase in our business refers to hiring of an asset for a time period and the person taking the asset on hire purchase requires possession of

the asset and the right to use it.

23

3. Working Capital loan: A loan whose purpose is to finance everyday operations of

a company. It include the following:

Cash credit

Overdraft( OD limit-sometimes shown under current liabilities)

Bills Discounting

Packing Credit

Letter of credits (LC facility-include only fund based-do not include non

fund based facilities.

Short term loans

4. Mobilisation advance: Mobilisation advances are secured against bank guarantees/

performance guarantees, hence though no physical asset backed by the same, the

nature of advance is still secured.

Important Points:

Mobilisation advances are project specific.

Mobilisation advances are generally 5%-10% of the total contract works

High interest bearing mobilisation advances indicate high interest payments

and hence PAT becomes low.

5. Debentures: These are in the nature raise funds from outside investors.

Optionally convertible debenture: These are debentures which carry the

option of conversion to equity within a specified period of time.

Compulsory Convertible debenture: These debentures have necessarily to

be converted to equity within specified period-normally within 3-5 years at a

predetermined price of equity and share premium.

Non Convertible debentures: These debentures cannot be converted to

equity at any point of time.

This is the sample of secured loan of SREIs client Ahluwalia Contracts Private Limited

Secured Loans 42,727.42 47,132.14 46,912.75

Term loan from

Bank/FI 4,503.05 6,298.11 4,780.81

Lease/HP 2.58 219.15 399.84

Working Capital 17,944.96 20,130.45 19,649.19

Debentures 0.00 0.00 0.00

Others (Mob.

Advances) 20,276.83 20,484.43 22,082.91

24

Assessing the problem is the main part of this report. As I have done research on the basis of

ratios so a brief description about

the ratios are below:

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.

Financial ratios are calculated from one or more pieces of information from a company's

financial statements. For example, the "gross margin" is the gross profit from operations

divided by the total sales or revenues of a company, expressed in percentage terms. In

isolation, a financial ratio is a useless piece of information. In context, however, a financial

ratio can give a financial analyst an excellent picture of a company's situation and the trends

that are developing.

A ratio gains utility by comparison to other data and standards. Taking our example, a gross

profit margin for a company of 25% is meaningless by itself. If we know that this company's

competitors have profit margins of 10%, we know that it is more profitable than its industry

peers which are quite favourable. If we also know that the historical trend is upwards, for

example has been increasing steadily for the last few years, this would also be a favorable

sign that management is implementing effective business policies and strategies.

Financial ratio analysis groups the ratios into categories which tell us about different facets of

a company's finances and operations. An overview of some of the categories of ratios is given

below.

capital structure.

situation or solvency.

company is in its operations and use of assets.

and capital employed.

cash flow and pay it financial obligations.

25

LIMITATIONS OF RATIOS

1. Accounting Information

Different Accounting Policies The choices of accounting policies may distort

intercompany comparisons. Example IAS 16 allows valuation of assets to be based on either

revalue amount or at depreciated historical cost. The business may opt not to revalue its asset

because by doing so the depreciation charge is going to be high and will result in lower profit.

Creative accounting The businesses apply creative accounting in trying to show the better

financial performance or position which can be misleading to the users of financial

accounting. Like the IAS 16 mentioned above, requires that if an asset is revalued and there is

a revaluation deficit, it has to be charged as an expense in income statement, but if it results

in revaluation surplus the surplus should be credited to revaluation reserve. So in order to

improve on its profitability level the company may select in its revaluation program to

revalue only those assets which will result in revaluation surplus leaving those with

revaluation deficits still at depreciated historical cost.

2. Information problems

Ratios are not definitive measures

Ratios need to be interpreted carefully. They can provide clues to the companys performance

or financial situation. But on their own, they cannot show whether performance is good or

bad. Ratios require some quantitative information for an informed analysis to be made.

Outdated information in financial statement

The figures in a set of accounts are likely to be at least several months out of date, and so

might not give a proper indication of the companys current financial position.

Historical costs not suitable for decision making IASB Conceptual framework

recommends businesses to use historical cost of accounting. Where historical cost convention

is used, asset valuations in the balance sheet could be misleading. Ratios based on this

information will not be very useful for decision making.

Identification of the Gap or Need of study

The main aim of undertaking this study is to accomplish the following objective.

To study the issues and challenges in the NBFCs related with their liquidity stress.

To identify the current status of companies.

To predict the future situation of companies for appraising credit.

To understand the debt level in companies financial. To understand changing trends

of ratios in the companies which are facing high debt level

26

Chapter -4

Data Collection and analysis

Sampling Plan:

Sampling unit: the companies will be stratified and segmented according to the categories of

ratios

Data Collection Method:

The following steps have been undertaken for the project:

Primary data collection: A list of companies listed in the Bombay Stock Exchange / National Stock Exchange, who

are in the infrastructure sector had been identified (List attached as Annexure).

Secondary data collection:

The annual reports were obtained from the www.bseindia.com, www.nseindia.com,

www.moneycontrol.com etc for FY 14, FY 13 and FY 11.

Ratio analysis is being carried on these companies and relevant data are being separately

stored, where subsequent analysis will be carried on using different excel and statistical tools.

Presentation and processing of the data for analysis:

NAME OF THE GROUP

Ahluwalia Contracts Private Limited No of clients completed 1

Rs. Lacs Rs. Lacs Rs. Lacs

Year : 2013-14 2012-13 2011-12

Period : 12 months 12 months 12 months

Audited Audited Audited

Consolidated

Gross Income from Main Operations 1,43,086.71 1,44,585.11

Operating expenses 1,46,260.81 1,42,497.81

Operating Profit (PBIDT) 0.00 -3,174.10 2,087.30

Less: Interest 3,708.13 3,095.23

Less: Deprecation 4,047.62 4,745.25

Gross Profit from Main Operations 0.00 -10,929.85 -5,753.18

Add: Other Income 3,804.52 918.37

Net Profit Before Tax 0.00 -7,125.33 -4,834.81

Deduct : Taxes 6.00 -191.97

Deduct : Minority Interest

Net Profit after tax 0.00 -7,131.33 -4,642.84

Equity Capital 1255.25 1255.25

Reserves and Surplus 19,182.27 26,315.27

Tangible Net worth 0.00 20,437.52 27,570.52

Minority Interest

Secured Loans 0.00 47,132.05 46,912.75

Term loan from Bank/FI 6,298.09 4,780.81

Lease/HP 219.08 399.84

Working Capital 20,130.45 19,649.19

Debentures 0.00 0.00

Others (Mob. Advances) 20,484.43 22,082.91

Unsecured Loans 0.00 752.14 0.00

Promoters /Directors 752.14 0

27

From Others (mostly banks) 0.00 0.00

Sundry Debtors 0.00 36,035.32 39,615.12

O/s less than 6 months 21,571.92 27,654.29

O/s 6 months & above 14,463.40 11,960.83

Fixed Assets 0.00 20,177.07 22,716.68

Tangible assets 15,769.29 19,315.95

Intangible assets 88.30 79.94

Capital WIP 160.01 3,182.79

Intangible assets under development 4,021.47 0.00

Goodwill on consolidation 138.00 138.00

WORKING CAPITAL DATA

Cuurent Assets

Current Investment 0 200

Inventories 16720.62 22208.27

Trade recevibales 42130.61 45310.19

Cash and bank balance 8618.47 4941.01

Short term loans and advance 2894.44 2779.52

Other curerent asset 351.1 383.86

Others

Total 0 70715.24 75822.85

Current Liabilties

Short Term Borrowings 20882.59 19649.19

Trade payables 30685.95 33768.28

Other current liabilties 27637.28 30551.69

Provisions 55.62 60.63

Others

Total 0 79261.44 84029.79

Ratios : 2013-14 2012-13 2011-12

Growth In Turnover

Performance / profitability Ratios

Growth in EBIDTA margin

Growth in PAT Margin

EBIDTA %

PBT %

PAT %

ROCE (%)

Interest Coverage ratio

Coverage Ratios

DER

Long term Debt / Equity Ratio

Networth

Total Debt

Gross Cash Accruals

Cash Ratios + Working Capital Ratios

Term Liabilties/ cash accruals

Increase in (debtors + WIP/ Inventories) / Cash Accruals

Debtor days

Raw Material Days

WIP Days

Creditor days

Operating cycle (days)

Current ratio

Quick ratio

Order Book/ Turnover Book Order/ Turnover ratio

28

This is the attachment of excel sheet to show the recording process of 47 companies for

analysis of their financial and analysis of their ratios. I have taken the data of 2012, 2013 and

2014 to interpret the trend of financial of companies as well as trend of ratios in three

consecutive years.

Conclusion

Conclusion of this ratio analysis of we come to know about the financial condition of the companies.

With the data collection process we come to know about the different segments in which companies order books are distributed.

This research helped me to understand about the companies project segments

29

Chapter-5

Choice of data analysis technique Financial analysis is the process of determining the operating and financial characteristics of

a firm from accounting data and financial statement. The goal of such analysis is to determine

efficiency and performance of the firm management, as reflected in the financial records and

reports. Its main aim is to measure the firm's liquidity, profitability and other indications that

business is conducted in a rational and orderly way. Here ratio analysis is taken as the

primary tool for examining financial position of manufacturing and infrastructure companies.

There are two views points in receiving and evaluating financial data:

EXTERNAL ANALYSIS

This is performed by outsiders to the firm such as creditors, stock holders, or investments

analysis. It makes use of existing financial statements and involves a limited access to

confidential information on a firm.

INTERNAL ANALYSIS

Financial statement contains a wealth of information which, if properly analyzed and

interpreted, can provide valuable insights in to firms performance and position. Financial

statement analysis may be done for a variety of purpose, which may range from simple

analysis of the short term liquidity position of the firm to comprehensive assessment of the

strengths and weaknesses of the firm in various areas. The principle tool for financial

statement analysis is Financial Ratio Analysis. A ratio is an arithmetical relationship between

two figures. Financial ratio analysis is a study of ratios between various items or groups of

items. Financial ratios have been classified as follows:

TYPES OF FINANCIAL RATIOS

LIQUIDITY RATIOS

ACTIVITY RATIOS

LEVERAGE RATIOS

PROFITABILITY RATIOS

30

LIQUIDITY RATIOS

Liquidity refers to the ability of the firm to meet its obligations in the short run, usually one

year. Liquidity ratios are generally based on the relationship between current assets and

current liabilities (the sources for meeting short-term obligations).

My research is based on the liquidity ratios like- Current ratio

-Quick ratio

-Cash ratios

LEVERAGE RATIOS

Financial leverage refers to the use of debt finance. While debt capital is a cheaper source of

finance, it is also a riskier source of finance. Leverage ratios helps in assessing the risk

arising from the use of debt capital.

I have done research on the basis of leverage ratios: - Debt ratio

-Debt to equity ratio

ACTIVITY RATIOS

They are also called Turnover ratios or Asset management ratios. They measures how

efficiently the assets are employed by the firm. These ratios are based on the relationship

between the level of activity and the level of various assets.

31

Activity ratio in this reports are: - Debtors Days

-Inventory Days

PROFITABILITY RATIOS

Profitability reflects the final result of business operations. There are two types of

profitability ratio. Profit margin ratios and rate of return ratios. A profit margin ratio shows

the relationships between profit and sales. Rate of return reflects the relationship between

profit and investment.

Profitability ratios are: - Profit after tax ratio

-Earnings before interest and taxes.

Ratios : Trends and Interpretation

Out of the 65 companies who are listed and which are in the infrastructure domain, analysis

has been carried on 47 entities at the consolidated level. The remaining 19 companies were

rejected on the basis of non availability of information and their scale of activities which were minimal and hence unable to contribute any significant changes to the overall analysis.

The 47 companies identified for our analysis are as below:

Ahluwalia Contracts Private

Limited Noida Toll Bridge

Ashoka Buildcon Reliance Ind Infra Ltd

Atlanta Limited Patel engg

IRB InfrastructureDevelopersLtd Madhucon

B L Kashyap and Sons GMR

ITD Cementation India Limited C&C

J Kumar Infraprojects Limited MBL Infra

Supreme Infra India Limited IL&FS

Engineers International Limited GammonIndia

ERA INFRA Unitech

Garnet Construction Limited Gammon Infrasructure

Jaypee Infra RPP Infra

JMC Projects Limited IVRCL

KNR Construction Limited Lanco

SPML Prakash Limited

GPT infraproject Limited Pratibha

UNITY INFRAPROJECT Jai Hind

Valecha JaiPrakash associates

Punj Lloyd Mukund Ltd

CCCL Infra NCC

CHD developers Limited Sadbhav

Gayatri Projects Limited Simplex Infra

32

PBA Infrastructure Limited Simplex Project

Ramky Infra

Performance / profitability ratios:

Turnover:

Turnover growth FY13 FY 14

Above 20% 14 7

10%-20% 7 8

5%-10% 5 6

0%-5% 4 4

Positive Growth 30 25

-5%-0% 5 6

-10% - -5% 2 4

-20% - -10% 5 5

Below 20% 5 7

Negative Growth 17 22

Grand Total 47 47

Table 1. Turnover growth

Interpretation:

Turnover, or the top-line of a company indicate the overall scale of operations undertaken by

the entity. As per the table above, 30 out of 47 companies registered a positive growth, while

the rest registered a de-growth in FY13 compared to its previous fiscal. In FY 14, only 25 of

the 47 companies registered growth in top-line, while 22 remained stagnant or witnessed

negative growth. While the number of companies which had shown 0%-10% growth 10%

growth fell from 21 to 15 during this period. The above analysis clearly indicates that the

companies had entered into a phase of stagnation or declining scale of operations.

0 10 20 30 40

Above 20%

5%-10%

Positive Growth

-0.05

Below 20%

FY 14

FY13

33

EBDITA:

EBDITA (no of

clients) FY12 FY 13 FY 14

Negative

1 3

Positive 47 46 44

Grand Total 47 47 47

Table 2: EBIDTA Profile (Nos of clients)

Table 3: EBIDTA Range (Nos of clients)

Interpretation:

EBDITA (Earnings before Depreciation, Interest, taxes and Amortization) is indicator of

companies operational efficiency. While there were no companies which were booking operational losses in Fy12, the number of companies increased to 1 in FY 13 and further to 3

in FY 14.

The EBDITA Range table indicates that the number of clients which were above 15% were

around 21 in FY 13, which fell to 17 in FY14. The overall table indicates that during this

period, there has been a general trend of the companies falling to their immediate lower

range.

EBDITA range FY 12 FY13 FY14

Above 25% 9 10 10

20%-25% 2 3 4

15%-20% 8 8 3

10%-15% 14 13 16

5% -10% 11 5 5

0%-5% 3 7 6

Negative

1 3


34

Profit After Tax:

PAT FY12 FY 13 FY 14

Negative 12 11 18

Positive 35 36 29


Table 4: PAT Profile (Nos of clients)

Table 5: PAT Range (Nos of clients)

Interpretation:

PAT ratios indicate the remaining profit after all costs of production, administration, and

financing have been deducted from sales and income taxes recognized. In our analysis we

found that in the year of 2012 there were 12 companies whose PAT which drastically

increased to 18 by 2104, an increase by 50%. The EBDIAT margins, as shown in the

previous section, had remained more or less stable, while the PAT margins have tumbled.

This clearly indicates that during this period, while many of the companies were maintaining

their technical and administrative costs, it was on account of higher depreciation and higher

interest outgo, owing to higher debt availed by these companies, which led to the companies

profits margins shrinking and booking net losses.

Cash profits:

Cash profits FY 12 FY 13 FY 14

Negative 3 8 12

Positive 44 39 35


Table 6: Cash Profits Range (Nos of clients)

Interpretation:

Cash profits of a company, which is one of the main components which is studied by the

NBFCs before advancing credit, gains significance due to the fact that the debt of the

companies are actually repaid out of cash generated. Hence, Cash vis-avis the term liabilities

is one of the major ratios studied by the NBFCs for arriving at a credit decision. In FY13,

only 3 companies were having cash losses, which gradually increased to 12 by FY14. With

reduced PAT margins and 18 companies in FY14 who booked losses as shown in the table

above, only 6 companies were able to make cash profits owing to depreciation, which is a

non-cash expenditure.

PAT % FY 12 FY13 FY14

0-5% 19 25 17

10% -15% - - 2

5%-10% 10 6 6

Above 15% 6 5 4

Negative 12 11 18


35

Interest Coverage Ratio:

ICR FY12 FY 13 FY 14

Above 2 13 9 7

1.5- 2 10 8 6

1-1.5 9 8 5

Less Than 1 14 21 28

NA 1 1 1


Table 7: ICR Range (Nos of clients)

Interpretation:

Interest coverage ratios indicate that how easily a company can pay interest on outstanding

debt. An interest coverage ratio below 1 indicates that company is not generating sufficient

revenues to satisfy interest expenses. We have set the range to see how many companies fall

in the given range so that we can analyse that which company have good capacity to pay of

its interest on outstanding debt. As per our calculation we can see in the year of 2012, 13

companies are falling in the range of above 2 but the in the year of 2013 and 2014 the number

of companies which are falling in the range of 2 are decreasing to 9 then 7.

Debt Equity Ratio:

Table 8: DER Range (Nos of clients)

Interpretation:

DEBT EQUITY RATIO is financial liquidity ratio that compares a companys total debt to

total equity. It shows the percentage of company financing that come from creditors and

investors. A higher debt to equity ratio indicates that more creditor financing is used than

investor financing. As per our analysis in the year of 2012, 36 companies had positive debt to

equity ratio that mean they were using debt money more than investor financing. But in the

year of 2013 and 2014 number of companies which have positive debt to equity ratio has

decreased to 32 and then 27.

DER FY12 FY 13 FY 14

0-0.5 7 6 5

0.5- 1 4 4 5

1-1.5 4 3 3

1.5-2 11 5 7

2-3 10 14 7

Total 36 32 27

3-5 7 6 11

5-7 2 5 3

Above 7 2 4 6

Total 11 15 20


36

In the year of 2012 number of companies which have negative debt to equity ratio was 11 but

in the year of 2013 it was increased to 15 and in the year of 2014 it become 20. That simply

indicates that more and more companies are facing negative debt to equity ratio profile.

Long Term Debt/ Tangible Net Worth:

Row

Labels FY 12

FY 13 FY 14

0.5- 1 12 10 10

0-0.5 12 13 11

1.5-2 3 4 4

1-1.5 8 5 4

2-3 3 4 5

3-5 6 6 4

5-7 1 1 5

Above 7 2 4 4

GranTotal 47 47 47

Table 9: LTD/TNW Range (Nos of clients)

Interpretation:

Long term debt to tangible net worth ratio is a derivative of the debt to equity ratio. Normally

equity represent s both tangible and intangible assets. In this report we can see that in the year

of 2012 there were 12 companies whose long term debt to equity ratio was in the range of 0.5

to 1 but in the year of 2013 and 2014 number of companies decreased to 10 and we can also

see that in 2012 only 2 companies were in the range of more than 7, in the year of 2013 and

2014 there were $ companies which are in the range of 7. Higher the ratio, greater the

companies leverage. Higher value of ratio is indication of risky firm.

Total Liabilities/ Cash accruals:

Table 10: TOTAL LIABILITIES/CASH ACCRUALS Range (Nos of clients)

Total liabilities/Cash accruals FY 14 FY13 FY 12

0.5- 1 1 3 2

0-0.5 15 10 6

1.5-2 2 3 2

1-1.5 3 1 0

2-3 1 0 3

3-5 2 1 6

5-7 1 3 3

Above 7 22 26 25


37

Interpretation:

The total liabilities to cash accruals ratio indicates the level of cash accruals from the

companys operation in relation to its total outstanding debt. In this report we can see that in

the year of 2014 there was only 1 company which is in the range of 0.5 to 1 but in the year of

2013 and 2012 number of companies were 3 and 2. We have set the range to see how many

companies fall in the given range.

Debtor days:

Row Labels FY 12 FY 13 FY 14

Less than 3 months 18 22 24

3 months to 6 months 20 18 16


9 months- 12 months 2 1 1

greater than 1 year 2 3 4


Table 11: DEBTOR DAYS Range (Nos of clients)

Interpretation:

DEBTOR DAYS is the average number of days required for a company to receive payment

from its customers for invoice issued to them. The lower the number of debtor days, the

better and high figure indicates inefficiency and potential bad debts.

As per our calculation in the year of 2012 there was 18 companies whose debtor collection

period was less than 3 month, in the year of 2013 there was 22 companies whose debtors

collection period was less than three month and in the year of 2014, there was 24 companies

whose debtors collection period was less than three month.

Method of calculating Debtors days = AVG debtors/net sales* 365 days

38

Raw Materials:



3 months to 6

months 4 5 7

6 months to 9

months 1 1 1


Table 12: RAW MATERIAL Range (Nos of clients)

Interpretation:

Raw material days of a company indicate the time it takes for the company to convert its raw

material into finished product. Generally low figure indicate good sign of sales.

Method of calculating Raw material days are: - Average Raw Material/ Cost of good solid

*365

Here we can see that in the year of 2012, 42 companies were converting their raw material

into finished product in less than 3 month but trend is decreasing in the year of 2013 & 14. In

2013, 41 companies were converting their raw material into finished product and in the year

of 2014 only 39 companies were converting their raw material in three months.

We can also see that in the year of 2012 there was only 1 company which is converting its

raw material into finished product in 6 month to 9 month and the trend was same in 2013 &

2014.

WIP days:


Less than 3 momths 25 25 24






Table 13: WIP DAYS Range (Nos of clients)

Interpretation:

Work in progress days indicate the time it takes for the company to convert its all materials

and partly finished products that are at various stage of the production process into finished

product.

As per our calculation we can see that In the year of 2012 &13 there was 25 companies

whose WIP Days were less than three month that mean they are able to convert their

unfinished product into finished product in less than three month period and there was 24

companies in the year of 2014 whose WIP days were less than three month.

39

Creditor days:





Greater than1 year

1 1


Table 14: CREDITORS DAYS Range (Nos of clients)

Interpretation:

The creditor day estimates the average time it takes a business to settle its debts with trade

suppliers. The ratio is a useful indicator when it comes to assessing the liquidity position of

the business.

Creditor Days:- Trade payables/ cost of sales* 365

As per our calculation in the year of 2012 & 2013 there was 28 companies whose creditors

days were less than 3 month that mean they were paying their dues in less than three month

but in the year of 2014 there was 25 companies whose creditors days were less than 3 month.

Operating Cycle days:

Row Labels FY12 FY 13 FY 14







Table 15: Operating Cycle days Range (Nos of clients)

0 2 4 6 8 10 12 14 16 18

Less than 3 months

3 months to 6 months

6 months to 9 months

9 months- 12 months

greater than 1 year

FY 14

FY 13

FY12

40

Interpretation: The operating cycle is the average period of time required for a business to

make an initial outlay of cash to produce cash to produce goods, sell the goods, and receive

cash from customers in exchange for the goods. Here in this table we can see that in the year

of 2012 and 2013 there was 17 companies whose operating cycle days were in the range of

less than 3 month and in the year of 2014 three were 14 companies range which are in range

of less than 3 month that mean these companies are able to maintain their total operating

cycle period of business within three months. If the company is in the range of less than three

month period that mean company is successful in maintaining its inventory days with sales

days. According to this table we can also observe that there were some companies whose

operating days are more than 1 year like we can see that in the year of 2012 and 2013 there

was & companies whose operating cycle days were more than 1 year.

Formula of calculating operating cycle:

Operating cycle days=Debtors days+ Inventory days-Creditor days

IDW/ Cash:

Row Labels FY 13 FY 14

0% - 25% 8 4

25% - 50% - 1

50% - 75% 2 1

75% - 100%

1

cash accrual negative 8 12

More than 100% 18 15

Reduction in IDW 11 13

Grand Total 47 47

Table 16: IDW/CASH Range (Nos of clients)

Interpretation: IDW/Cash ratio indicates the effectiveness of business in utilizing its

working capital blocked in debtors. It also indicates the frequency of conversion of

receivables into cash in a given financial year. This ratio comments on the liquidity of

receivables of the business. In the year of 2013 there was * companies which were in the

range of 0 % to 25% and in the year of 2014 there was 4 companies which were in the range

of 0% to 25%.

41

Current ratio:


1 - 1.33 times 11 11 13

1.33 - 1.5 times 3 5 3

1.5 - 2 times 7 5 4

Greater Than 2times 1 1 2

Less than Unity 25 25 25


Table 17: Current Ratio Range (Nos of clients)

Interpretation:

The current ratio is the measure of whether a company has enough short term assets to cover

its short term debt. A ratio of greater than one means that the company has more current asset

than current claims. It indicates the liquidity of the company. Higher the ratio, the better the

financial position of the company.

We have set the range to see how many companies fall in the given range and how many

companies have good liquidity position.

As per our calculation most of the company fall in the range of less than unity. That mean

their current ratio is less than 1. If the current ratio is less than 1 it shows critical liquidity

problems because it mean total liabilities exceed total current asset. In the year 2012, 2013 &

2014, 25 companies are in the range of less than unity. That indicates their current liabilities

exceed total current assets.

0 5 10 15 20 25

1 - 1.33 times

1.33 - 1.5 times

1.5 - 2 times

Greater Than 2times

Less than Unity

FY 14

FY 13

FY 12

42

Findings and Remarks

CORRELATION ANALYSIS:

With a view to analyze how different financial parameters affected the debt servicing ability

of these infrastructure companies, the four major indicators, indicating the debt servicing

ability of a company had been identified as below:

1. EBDITA (%):

This ratio, as shown earlier, depicts the operational efficiency of a company. This

ratio is relatively less affected by the level of debt levels of a company, as this not

take into account interest expenses. The rationale of taking this ratio is to identify

whether the operational efficiencies of the companies have shown any relation to the

other activities of the companies.

2. Cash :

One of the most important factors NBFCs look into to determine the financial health

of a company is its cash generation level.

3. Term Liabilities/ Cash:

This ratio gives an indicate on of how many years would it take to repay the existing

term liabilities of a company and is a strong indicator of whether the company has

adequate cash levels to service the existing and proposed debt.

4. Interest Coverage Ratio:

Finally, this ratio indicates whether the company will default in its obligations,

including interest.

Correlation of these financial parameters have been plotted against 4 factors year on year

and presented in the table below. These 4 factors are:

A) Debt Equity ratio:

B) Debtor days:

C) Credit days:

D) Current ratio:

43

FY 13-14 FY 12-13 FY 11-12 E

DB

ITA

(%)

DER -0.14 -0.14 -0.12

Debtor days 0.02 -0.23 0.17

Creditor days -0.38 -0.45 -0.23

Current ratio 0.06 -0.09 -0.09

Remarks:

The creditor days have the largest negative and consistent correlation with the EBDIAT

margins. This indicates that as the credit cycle of these companies have increased, the

EBDITA margins have decreased or vice/ versa. The negative co-relation was even more

evident during FY 13 and FY14 compared to the other factors. This clearly indicates

that with deteriorating creditors structure, the operational efficiencies of the companies have suffered.

Cash

DER -0.28 0.08 -0.03

Debtor days -0.13 -0.23 -0.16

Creditor days -0.27 -0.24 -0.13

Current ratio 0.07 -0.02 -0.01

Remarks:

The cash generation level of the companies has shown the most consistent relation, albeit

negative, with the creditors cycle amongst all other factors. Higher the creditor days, lower have been cash generation levels of these companies during the period under

review.

Ter

m

liab

ilit

ies/

cash

DER 0.19 0.44 -0.03

Debtor days -0.02 0.01 0.06

Creditor days 0.14 -0.01 0.08

Current ratio -0.09 -0.03 -0.21

Remarks:

The term liabilities/ cash generation ratio did not show any significant relationship with

any of the factors, however, even amongst them, the creditor days had the highest

positive relationship. A longer credit days was an indicator of deteriorating TL/ cash

ratio.

Inte

rest

Cover

age

rati

o

DER -0.25 0.01 -0.21

Debtor days -0.14 -0.11 -0.08

Creditor days -0.49 -0.35 -0.18

Current ratio 0.24 0.51 0.34

Remarks:

The creditor days, once again, had the highest negative relationship amongst all the

factors. During this period, longer the credit days, lower had been the interest coverage

ratio.

44

Inference: Amongst all the factors which could have shown or indicated the debt

servicing ability of the companies, the creditors cycle had been the most consistent and

effective indicator of the state of affairs of the company.

As per our calculation of ratios and correlation we can observe that most of the

companies are facing the problem of liquidity stress. But there are some

companies which are successful in maintain their profit margin from 2012 to

2014. The name of that companies which are the able to maintain their position

are:

1.MBL INFRA

2.ATLANTA LIMITED

3.UNITECH

4.IRB INFRA DEVELOPERS LIMITED.

5.GAMMON INFRASTRUCTURE

6.ITD CEMENTATION

7.CHD DEVELOPERS

8.J KUMAR INFRA

9.GMR

10.KNR

These are the 10 companies out of 47 companies of infrastructure and manufacturing

companies which are in able to maintain their liquidity position in the market. After

analyzing the performance of these companies and after the observation of their past data of

year 2012,2013 and 2014 we can say that providing loan to these companies is easy and less

risky for the organization.

There are also some companies which are facing the liquidity stress and are not able

to maintain their liquidity stress after my calculation of ratios I come to know about these

companies and according to my observation lending money to these companies could be the

high risk for the organization.

1.GAMMON INDIA

2.CCCL INFRA

3.RAMKY INFRA

4.ERA INFRA

5.LANCO

6.GAYETRI PROJECT

7.GARNET CONSTRUCTION LIMITED

These are the companies which are very in very liquidity risk. Lending or providing credit to

these companies can be very risky for the organization. By observing their past performance I

come to know that these companies are high debt and are not able to come out from there

debt burden and also these companies are approaching for CDR that is corporate debt

restructuring to the banks to restructure the period of their loans.

45

Chapter-6

Recommendation:

In view of the above mentioned analysis, it is imperative to give more importance to the

overall working capital ratios, particularly the creditors cycle, as it had been the most

effective indicator for judging the debt servicing ability of the companies. In view of the

above, it is recommended to undertake and give more importance on the following factors

relating to the creditors as listed below:

I. Creditors aging:

Like debtors aging indicating the time frame, it is important to know the key creditors

of a company and their aging. Companies with high creditors aging ultimately renders

and affects the operational efficiency of the company and may render the company

strained of liquidity. Companies with fast rotating creditors are always preferred.

II. Nature of the Creditors:

It is of prime importance to judge the nature of the creditors, i.e. whether the creditors

are for daily procurement of raw materials, or whether they are for capital

expenditure. Long cycle for capital expenditure indicates strains in the overall

liquidity in the system.

III. Quality of the creditors:

Though not always readily available, the quality of the creditors gives an indication

of the quality maintained by the client for their products.

IV. Profitability Analysis:

Profitability analysis of companies should contain the information of the cash flow

coming from anew project.

V. Analysis of Current scenario:

As per our calculation we can see most of the companies are facing the problem of

liquidity stress. So before providing credit to that company it is necessary to check the

environment status of that company.

46

VI. Risk analysis:

As per our calculation we can see that most of the companies have liquidity stress

problem so providing loan to that company is risk for the organization. Company

should apply the risk measurement tools for the safe lending.

VII. Past performance of the companies:

As we can see that most of the manufacturing and infrastructure companies are in

deteriorate stage. Analysis of past performance will help to forecast companies future

performance.

VIII. There is need to access to market information about the companies.

47

Chapter-7

Learning Outcomes

Two month of training, developed a comprehensive understanding of how financial statement

of companies are observed. The various annual reports and the mentor guidance on various

observation tools made this comprehensive study more understandable.

Learned how to read annual reports of companies.

Learned how to use the information through those reports accurately and discover the skill to make that information for effective decision making.

Used various financial ratios to analyse trends and making a comparative study.

The best part of this internship is that I come to know how to relate the situation of the company with its current scenario.

Learned the work culture and also how to meet deadlines on time.

Exposure of the credit appraisal, earned various terminologies used in the finance

This two month training gave me the exposure of work culture of corporation. How

the theoretical knowledge is applied in real world. It is very important to know how

general concepts of finance is important to analyse the information.

Limitation of the project

There were some limitations faced to prepare this report.

1. The training time was for 2 month only in which it was not possible to cover all the important points related to the project.

2. The method of collection of data was through the annual reports of the client so the study is based on the theoretical data only.

3. Ratio and correlation techniques were used in this report which is not sufficient to analyse such a big project.

4. Order book of companies was not mentioned in their annual report so it was difficult to understand their order size.

5. Due to the continuous change in the rules and regulations of the RBI for the NBFC companies it was not possible to connect all the practical scenario

6. It was difficult to understand the trend of the companies due to frequent changes in their financials.

7. With the help of the ratios we cannot predict future of the company.

48

Scope for the further work

There could have been some further scope in the area of credit lending to companies which

are facing liquidity stress problem. The Indian non-banking and banking system has been

seen structural improvements during the last few years, including improved solvency and

better risk management systems. Increasing complexities of the lending business and growing

competition among NBFCs reinforces the need for the stronger risk and credit assessment

policy for the companies in liquidity risk.

A well developed and implemented credit appraisal to the companies which are debt will

result in

Growth of the NBFCS

Growth of the manufacturing and infrastructure sector

Help the company to reduce their NPA and improve the quality of their

asset.

49

Conclusion

If properly analyzed and interpreted, financial statements can provide valuable insight into a

firms performance. Analysis of financial statements is of interest to lenders (short term as

well as long term). I have studied the annual reports of 47 manufacturing and infrastructure

companies.

The working capital cycle of a company, particularly the creditors, indicated stress related to

servicing of debt of the infrastructure companies during the period FY 12- FY14.

1. Operating cycle of the company, which may decline owing to high creditor days, may

not always indicate adequate liquidity in the system. Sometimes the creditors are high

owing to non payment, as had been the case of most of the infrastructure companies,

it is safe to assume that the companies do not have adequate liquidity to pay off their

immediate dues. With funds in the form of debtors being stuck up and realisation of

the same coming into question, along with the fact that the banks are unwilling to

renew WC Limits and profits drying up, no other sources of funds are available to pay

off the creditors.

2. Apart from other ratios, a deeper analysis of the creditors is a must to understand the

overall liquidity present within the system.

50

Bibliography

Annual report of the companies 2012,2013 and 2014

www.bseindia.com,

www.nseindia.com,

www.moneycontrol.com etc for FY 14, FY 13 and FY 11.

http://www.srei.com/

51

Appendices

sweta srei final.pdf

Documents