A PROJECT REPORT ON AN ANALYSIS & COMPARATIVE STUDY OF FINANCIAL STATEMENTS

FOR KALYANI STEELS LTD., PUNE

SUBMITTED TO UNIVERSITY OF PUNE IN PARTIAL FULFILMENT OF TWO YEARS FULL TIME COURSE MASTERS IN BUSINESS ADMINISTRATION(MBA)

SUBMITTED BY KETAN P. SHETTI (BATCH 2005-07)

VISHWAKARMA INSTITUTE OF MANAGEMENT, PUNE-48

To Whomsoever It May Concern

This is to certify that Mr. Shetti Ketan Prakash is a bonafide student of Vishwakarma Institute of Management, Pune. He has successfully carried out his summer project titled AN ANALYSIS AND COMPARATIVE STUDY OF FINANCIAL STATEMENTS at Kalyani Steels Ltd, Pune. in the partial fulfillment of Masters in Business Administration course of University of Pune (2005-2007).

He has worked under our guidance and directions. His work is found to be good and complete in all respects. During the period we found him hard working, sincere and loyal. We wish him all the best for his future.

Prof Mahesh Halale. (Project Guide)

Dr Sharad L. Joshi. (Director)

ACKNOWLEDGEMENT
It gives me great pleasure to express my gratitude towards all the individuals who have directly or indirectly helped me in completing this project. First of all I am extremely grateful to Mr. Anant Bhave, Vice President (Accounts and Finance Project), Kalyani Steels Ltd, for providing me integrating project in finance for sixty days. I would like to express my sincere gratitude to my company guide Mr. Rajiv Toye, Associate Vice President (Accounts and Finance), Kalyani Steels Ltd for his invaluable guidance during the project period which helped me in completing the project successfully. I also extent my special thanks to Mr. Anand Shirsat (Asst Personnel Manager), Kalyani Steels Ltd.

I wish to express my sincere thanks to our Director Dr. Sharad Joshi and my project guide Prof Mahesh Halale for providing me valuable guidance & inputs which helped me to complete this project in true sense.

I also extend my thanks to all the staff of Finance department of Kalyani Steels Ltd. for their support, which helped me a lot in completing the project.

Lastly my ingenious thanks to all my colleagues and friends for their kind cooperation and help.

Ketan Shetti (MBA-II)

CONTENTS
Sr. No. Topic Page No.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

EXECUTIVE SUMMARY OBJECTIVE AND SCOPE OF PROJECT COMPANY PROFILE THEORETICAL BACKGROUND RESEARCH METHODOLOGY RATIO ANALYSIS AND PRESENTATION CONCLUSION BIBLIOGRAPHY ANNEXURE 1 ANNEXURE 2

1 2 3 14 26 27 46 47 48 49

EXECUTIVE SUMMARY

This project named An Analysis and Comparative Study of Financial Statements was carried out at Kalyani Steels Ltd to analyze and understand financial feasibility of the company in terms of liquidity, turnover, solvency, profitability etc. by using Ratio Analysis technique.

I chose to do this project at Kalyani Steels Ltd because it is a leading manufacturer of Carbon and Alloy steels and an important constituent of the over $ 1.2 billion Pune based Kalyani group. The company was established way back in 1973 mainly to cater to in-house requirements of forging quality steels. Over the years the Kalyani Steels Ltd is upgrading its technology and infrastructure to justify its mission statement, Better Steel Through Better Technology .

The Ratio Analysis technique is the process of identifying the financial strength and weakness of the firm by properly establishing relationship between the items of the balance-sheet and the profit and loss account because the figures recorded in the financial statements are absolutely incapable of revealing the soundness or otherwise of a Company s financial position or performance. Thus the technique of Ratio Analysis has been used which is supposed to be powerful tool for financial statements.

In Ratio Analysis technique a ratio is used as a benchmark for evaluating the financial position and the performance of the firm.

OBJECTIVES

1. To obtain a true insight into financial position of the company. 2. To make comparative study of financial statements of different years. 3. To draw the correct picture of the financial operations of the company in terms of liquidity, solvency, turnover, profitability etc. 4. To find out the reasons for unsatisfactory results.

COMPANY PROFILE

The Kalyani Group is one of the leading Industrial Houses in India, having core businesses in Steel and Steel based products, Forgings and Automotive Components. The Group s Annual Turnover is over USD 1.5 billion and has joint ventures with some of the world leaders such as Meritor, USA, Carpenter Technology Corporation, USA, Hayes Lemmerz, Germany, Faw Corporation, China etc. Bharat Forge Limited, the flagship company of the group is the 2nd largest forging company in the world and the largest domestic player with a share of 80% in axle components and engine components.

Bharat Forge Ltd., the flagship company of the US $ 1.5 billion Kalyani Group, is a 'Full Service Supplier' of engine & chassis components. It is the largest exporter of auto components from India and leading chassis component manufacturer in the world.

With manufacturing facilities spread over 9 locations and 6 countries - two in India, three in Germany, one in Sweden, one in Scotland, one in North America and one in China, the company manufactures a wide range of safety and critical components for passenger cars, commercial vehicles and diesel engines. The company also manufactures specialized components for the railway, construction equipment, oil & gas and other industries. It is capable of producing large volume parts in both steel and aluminium.

Bharat Forge has built up a strong capability in design and engineering, including a full fledged product testing and validation facility, which gives Bharat Forge a Full Service Supply Capability - from product conceptualization to designing to manufacturing and product testing & validation

Apart from Bharat Forge Ltd., the other major companies in the group are Kalyani Steels, Kalyani Carpenter Special Steels, Kalyani Lemmerz, Automotive Axles, Kalyani Thermal Systems, BFL Utilities, Kalyani Net Ventures, Epicenter and Synise Technologies. The Kalyani Group's vertical integration, with upstream steel making and downstream machining coupled with international competitiveness at every step, benefits our customers in terms of : World Class Technology High Quality Partnership Apart from Kalyani Steels, the 2000 cr. Pune based Kalyani Group encompasses Bharat Forge - The flagship company of the group was established in 1961. It is the largest forging company in Asia and one of the three largest and most technologically advanced commercial forge shops in the world. Bharat Forge manufactures a wide range of forgings and machined components for automotives, diesel engines, railways, earthmoving, cement, sugar, steel, coal, ship building and oilfield industries. Kalyani Brakes Ltd. - Established in 1982, when the automative revolution in India was about to take-off, Kalyani Brakes Ltd.(KBX) is today, a leading manufacturer of brakes in the country. Kalyani Brakes is a joint venture between Robert Bosch, Germany- a Fortune 500 company, and world leader in brake systems, Nippon Air Brake Co. Ltd. of Japan and the Kalyani Group. Kalyani Lemmerz Ltd. - The Kalyani Group had promoted Kalyani Wheels as a part of its diversification plan. At that time they had a collaboration with Lemmerz Werke, Germany. Subsequently, Lemmerz Werke became a joint venture partner and the new company was christened as Kalyani Lemmerz Ltd.(KLL). The company manufactures wheel rims for utility vehicles, light and heavy commercial workers and tractors.

Kalyani Sharp India Ltd. - Was established in 1986 as a joint venture between Sharp Corporation, Japan and the Kalyani Group. It is a leading manufacturer and exporter of consumer electronic items from India. Kalyani Thermal Systems Ltd. - Established in 1979, this company specializes in design, construction and installation of custom engineered Industrial Heat Processing Systems. To stay apace with the latest technology, the company has a technical tie-up with Flinn & Dreffein Engineering Co., USA

Mr. B. N. Kalyani Chairman, Kalyani Group

The corporate philosophy of the Chairman of the Kalyani Group, Mr. B.N. Kalyani is, "To use our specialized skills and innovative technology to contribute to the welfare of the society. It is our intention to grow with our employees and to aid and encourage them to participate in our goals in order that they realize their full potential. Our prosperity is linked to the prosperity of our customers".

Kalyani Steels Ltd. was established in 1973, to fulfill the in-house requirements of forging quality steel of the Kalyani Group. It's corporate office is in Pune. Over the years, Kalyani Steels has been continuously upgrading its technology and infrastructure. The first such technology update was implemented through a technology tie-up with AICHI Steels of Japan.

Although the forging industry in India is the primary market for the company's products, manufacturers of various components for commercial vehicles, two-wheelers, diesel engines, bearings, tractors, turbines, railways and seamless tubes (oil sector) also form a substantial part of the company's clientele.

In 1997, the Kalyani Group entered into product sharing with Mukund Ltd. to set up a new plant in the Hospet-Bellary region of Karnataka state.

At present the products for the KSL are manufactured at its Hospet plant which employs a new facility using less power intensive mini-blast furnace route, provided by Tata Korf-Korf Technology of Brazil. In 1999, the KSL plant in Pune was hived off to KCSSL (Kalyani Carpenter Special Steels Ltd.).

Kalyani Steels commissions its first 7.5 MW Captive Power Plant The plant to generate power equivalent to # 52 million units per annum m

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The plant has been commissioned at Hospet and will generate power equivalent to approximately 52 Million units per annum.

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PRODUCTS

The various products of Kalyani Steels Ltd. include :

PRODUCTS GRADES (As per Indian & Various International Standards) : CARBON AND ALLOY STEELS (Automobile sectors) 1. Carbon Steels A. Forging B. Boilers C. Auto 2 wheeler Cars Tractors D. Seamless tube E. Exports Transmission 2. Low Alloys A. Forging B. Auto 2 wheeler 4 wheeler C. Seamless tube 3. High Alloys A. Forging B. Auto Heavy engineering SPRING STEELS BALL BEARING STEELS

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ANY OTHER SPECIAL GRADES OF STEEL AS PER CUSTOMER'S REQUIREMENTS Primary Aluminium smelters cathode/Anode steel bars.

SIZE RANGE

AS CAST PRODUCTS

BILLETS : 120 x 120 mm, 160 x 160 mm & 180 x 180 mm Squares BLOOMS : 240 x 280 mm, 280 x 320 mm Rectangle ROUNDS : 160, 200, 220 mm Dia Rounds

AS ROLLED PRODUCTS

ROUNDS : 83, 85, 100, 105, 110, 125, 130 mm RCS : 75, 95, 100, 115, 120, 125, 140, 160 mm ANY OTHER SIZE MUTUALLY AGREED.

STEELS GRADES CATEGORY PLAIN CARBON STEEL AISI/SAE 1010 1015 1025 1035 DIN CK10 CK15 CK25 CK35 B.S. EN2A EN32B EN3B EN8,EN8A JIS S10C S15C S25C S35C

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1045 1055 1065 CARBON- Mn STEEL SEMI FREE CUTTING STEEL CHROME+MANGENSE STEEL CHROME+NICKEL STEEL LOW CARBON CHROME+NICKEL MOLY STEEL 8620 4320 3120 1137,1141 1541 1541

CK45 CF53 C60 28Mn6 40Mn4

EN43B EN9 EN43D EN15

S45C S55C S58C SMn420H SMn433H

EN15AM 16MnCr5 20MnCr5 15CrNi6 EN352

SMn443H,SUM41 SCR415,SUM420

En353,EN354 17CrNiMO6 EN36C,EN 361,362,363

SNCM420H

5130 CHROME STEEL 5140 CHROME+ MOLY STEEL 4130 4135 4140 MEDIUM CARBON CHROME+NICKEL+MOLY STEEL BEARING STEEL SAE52100 SAE5160 4340

34Cr4 41Cr4 25CrMO4 34CrMO4 42CrMO4

EN18A,EN18C

SCR435 SCR440

EN19C

SCM440H SCM435,SCM420

--

EN24

SNCM431,SNCM439 SNCM447 SUJ1,SUJ2 etc SUP6,SUP9,SUP11

100Cr6 --

En31 EN45A

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SIZES : As Cast : 120 X 120, 160 X 160 , 240 X 280 mm : 160 mm dia,200 mm dia. ,220 mm dia. As Rolled Rounds As Rolled Rounded Corner Squares (RCS) : 80,83,90,100,105,110,125,130 dia. : 75 ,90,95,100,115,125,140,160& 180 mm RCS

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KALYANI STEELS LTD FACILITIES:

EQUIPMENT TECHNOLOGY QUALITY BENEFITS

1. MINI BLAST FURNACE (2 Nos. x 250 Cu.M)

KORF TECHNOLOGIA - Lower Tramp Elements SIDERURGICA LTDA., Brazil - Consistent input to EOF

2. ENERGY OPTIMISING FURNACE

KORF TECHNOLOGIA - Lower Gas Levels(N2) SIDERURGICA LTDA., Brazil - Predictable Tapping Chemistry

3. LADLE REFINING

ASEA BROWN

- Chemical Homogeneity - Narrow Hardenability Band - Finer & more consistent Grain size

FURNACE WITH CORED BOVERI, WIRE INJECTION (2 No. x 40/45 MT) Sweden

4. VACUUM DESAGGING (1 No. x 40/45 MT) Vacuum of 1 m bar in 3 minutes

ALD VACUUM TECHNOLOGY Germany

- Low O2, H2, N2 levels - Lower Inclusions - Improved Chemical Homogeneity

5. CONTINUOUS CASTING TECHINT,

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- 1 No. x 2 Strand Bloom/Round - Bloom Caster capable of Casting Blooms & Rounds 10/18 M radius - 1 No. x 3 Strand Billet Caster -9/16 M radius - Fully Shrouded Casting - Combi Electro Magnetic Stirrer (Mould & Strand)

(Pomini Group) Italy

- Low pick up of N2, O2 - Reduced level of segregation & more equiaxed grains

- Automatic Mould Level Control

- Avoids entrapment of Mould Flux resulting in lower macro inclusions

- T-Shape Tundish

- Reduction in inclusions due to improved floatation

6. BLOOM / INGOT

BENDOTTI

- Top & Bottom fired More uniform temperature

REHEATING FURNACE Italy 35 T/Hr Pusher Type, Oil Fired

7. ROLLING MILL 750mm 2-High Blooming Mill

DANIELI Italy

- Strict dimensional tolerances

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THEORITICAL BACKGROUND
MEANING OF RATIO: A ratio is a simple arithmetical expression of the relationship of one number to another. According to Accountants Handbook by Wixon Kell and Bedford, a ratio is an expression of the quantitative relationship between two numbers . In short it can be defined as the indicated quotient of two mathematical expressions. The ratios can be expressed in 1) Percentages 2) fraction and 3) Proportion of numbers.

MEANING OF RATIO ANALYSIS: Ratio Analysis is a technique of analysis and interpretation of financial statements. it is defined as the systematic use of ratios to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performances and current financial condition can be determined. There are a number of ratios which can be calculated from the information given in the financial statements, but the analysts has to select the appropriate date and calculate only a few appropriate ratios from the same keeping in mind the objectives of analysis.

The following four steps involved in the ratio analysis: -

1. Selection of relevant data from financial statements depending upon financial analysis. 2. Calculation of appropriate ratios. 3. Comparison of the calculated ratios of the same firm in the past or the ratios developed from projected financial statements to the ratios of some other firms or the comparison with ratios of the industry to which firm belonged. 4. Interpretation of ratios.

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INTERPRETATION OF RATIOS: -

The interpretation of ratios is an important factor. Though calculation of ratios is also important but it is only a clerical task whereas interpretation needs skill, intelligence and foresightedness. The impacts of factors such as price level changes, change in accounting policies, window dressing etc should be kept in mind when attempting to interpret ratios. The interpretation of ratios can be made in following ways: -

1. Intra firm comparison: - Here the ratios of one organization may be compared with the ratios of the same organization for the various years either the previous years or the future years. 2. Inter firm comparison: - The ratios of one organization may be compared with the ratios of the other organization in the same industry and such comparison will be meaningful as the various organization, in the same industry may be facing similar kinds of financial problems. 3. The ratios of an organization may be compared with some standards, which may be supposed to be the thumb-rule for the evaluation of the performance.

CLASIFICATION OF RATIOS: The ratios may be classified under various ways, which may use various criterions to do the same. However for the convenience purpose, the ratios are classified under following groups.

1. Liquidity group 2. Turnover group 3. Profitability group 4. Solvency group and 5. Miscellaneous group

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LIQUIDITY GROUP: The ratios computed under this group indicate the short-term position of the organization and also indicate the efficiency with which the working capital is being used. Commercial banks and short-term creditors may be basically interested in the ratios falling under this group. Two most important ratios may be calculated under this group.

1) Current Assets: It is calculate as, Current Assets Current Liabilities

Current ratio indicates the backing available to current liabilities in the form of current assets. In other words, higher current ratio indicates that there are sufficient assets available with the organization, which can be converted in the form of cash. A current ratio of 2:1 is supposed to be standard and ideal.

2) Liquid Ratio or Acid Test Ratio: It is calculated as, Liquid Assets Liquid Liabilities

Here liquid assets include all assets except inventory and p/p exps and liquid liabilities except overdraft or cash credit or o/s exps. Liquid ratio indicates the backing available to liquid liabilities in the form of liquid assets. The term liquid assets indicate the assets, which can be converted in the form of cash without any reduction in the value. Almost immediately whereas the term liquid liabilities which are required to be paid almost immediately. In other words, a higher liquid ratio indicates that there are sufficient assets available with the organization, which can be converted in the form of cash almost immediately to pay off those liabilities, which are to be paid off almost immediately. As such higher the liquid ratio better will be the situation. A liquid ratio of 1:1 is supposed to be standard and ideal.

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TURNOVER GROUP:

Ratios computed under this group indicate the efficiency of the organization to use the various kinds of assets by converting them in the form of sales. Under this group the following classification of ratios are made.

1) Fixed Assets Turnover Ratio: It is calculated as, Net Sales Fixed Assets

A high fixed assets turnover ratio indicates the capability of the organization to achieve maximum sales with the minimum investment in fixed assets. It indicates that the fixed assets are turned over in the form of sales more number of times.

2) Current Assets Turnover Ratio: It is calculated as, Net Sales Current Assets

A high current assets turnover ratio indicates the capability of the organization to achieve maximum sales with the maximum investment in current assets. It indicates that the current assets are turned over in the form of sales more number of times.

3) Working Capital Turnover Ratio: It is calculated as, Net Sales Working Capital

A high working capital turnover ratio indicates the capability of the organization to achieve maximum sales with the minimum investment in the working capital. It indicates that working capital is turned over in the form of sales more number of times.

4) Inventory or Stock Turnover Ratio: -

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It is calculated as,

Cost of Goods Sold Avg. Inventory

A high inventory turnover ratio indicates that maximum sales turnover is achieved with the minimum investment in inventory. As such as a general rule, high inventory turnover ratio is desirable.

5) Debtors Turnover Ratio: It is calculated as, Net Credit Sales Closing Sundry Debtors

This ratio indicates the speed at which the sundry debtors are converted in the form of cash. However the intention is not correctly achieved by making the calculation in this way. As such this ratio is normally supported by the calculation period, which is calculated as below.

a) Calculation of Daily Sales: It is calculated as, Net Credit Sales No of Working Days

b) Calculation of Collection Period: It is calculated as, Closing Sundry Debtors Daily Sales

The average collection period as computed above should be compared with the normal credit period extended to the customers. If the average collection period is more than the normal credit period allowed to the customers, it may indicate over investment in debtors which may be the result of over extension of credit period, liberalization of credit term, ineffective collection procedure and so on.

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6) Capital Turnover Ratio: It is calculated as, Sales Capital Employed

This ratio indicates the efficiency of the organization with which the capital employed is being utilized. A high capital turnover ratio indicates the capability of the organization to achieve maximum sales with minimum amount of capital employed. As such higher the capital turnover better will be the situation.

SOLVENCY GROUP

Ratios computed under this group indicate the long-term financial prospects of the company. The shareholders debenture holders and other lenders of long-term finance/ term loan may be basically under this group. Following ratios may be computed under this group.

1) Debt-equity Ratio: It is calculated as, External Liabilities . Shareholders Fund

Debt-equity ratio indicates the state of shareholders or owners in the organization vis--vis that of the creditors. It indicates the cushion available to the creditors on liquidation of the organization. A high debt-equity ratio may indicate that financial status of the creditors is more than that of the owners. A very high debt-equity ratio may make the proportion of investment in the organization a risky one. On the other hand a very low debt equity rate may mean that the borrowing capacity of the organization is being underutilized.

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2) Proprietary Ratio: It is calculated as, Total Assets Owners Fund

This ratio indicates the extent to which the owner s funds are sunk in different kinds of assets. If the owner s fund exceeds fixed assets, it indicates that a part owners fund invested in the current assets also and if owners fund are less than fixed assets it indicates that the creditors finance a part of fixed assets either by long term or short term.

3) Capital Employed Ratio: It is calculated as, Fixed Assets *100 Capital Employed

This ratio indicates the extent to which the long-term funds are sunk in fixed assets.

4) Interest Coverage Ratio: It is calculated as, PBIT Interest Charges

This ratio indicates protection available to the lenders of long-term capital in the form of funds available to pay the interest charges i.e. profits. Normally a high ratio will desirable but too high a ratio may indicate underutilization of the borrowing capacity of the organization whereas too low a ratio may indicate excessive long-term borrowings or inefficient operation.

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PROFITABILITY GROUP

1) Gross Profit Ratio: It is calculated as, Gross Profit *100 Net Sales

The gross profit ratio indicates the relation between production cost and sales and efficiency with which the goods are produced or purchased. A high gross profit ratio may indicate that the organization is able to produce or purchase at a relatively lower cost.

2) Net Profit Ratio: It is calculated as, Net Profit after Taxes *100 Net Sales

The net profit ratio indicates that portion of sales available to the owners after the consideration of all types of expenses and costs either operating or nonoperating or normal or abnormal. A high net profit ratio indicates higher profitability of the business.

3) Operating Ratio: It is calculated as, Mfg COGS + operating exps*100 Net Sales This ratio indicates the percentage of net sales, which is absorbed by the operating cost. A high operating ratio indicates that only a small margin of sales is available to meet the expenses in the form of interest, dividend and operating exps. As such low operating ratio will always be desirable.

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OVERALL PROFITABILITY GROUP

1) Return on Assets: It is calculated as, Net Profit *100 Assets Return on assets measures the profitability of the investment in a firm. As such higher return on assets will always be preferred. However Return on assets does not indicate the profitability of various sources of funds, which finance total assets.

2) Return on Capital Employed: It is calculated as, Net Profit after taxes+Int on Long Term Loans*100 Capital Employed Return on capital employed measure4s the profitability of the capital employed in the business. A high return on capital employed indicates a better and profitable use of long-term funds of owners and creditors. As such a high return on capital employed is preferred.

3) Return on Shareholders Funds: It is calculated as, Net Profit after Taxes*100 Total Shareholders Funds This ratio indicates the profitability of a firm in relation to the fund supplied by the shareholders

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MISCELLANEOUS GROUP

1) Capital Gearing Ratio: It is calculated as, Fixed income-bearing securities Equity Capital A high capital-gearing ratio indicates that in the capital structure, fixed income bearing securities are more in comparison to the equity capital in that case the Company is said to be highly geared. On the other hand, if fixed income-bearing securities are less as compared to equity capital the company is said to be lowly geared.

2) Earning Per Share: It is calculated as, Net Profit after tax and dividend Number of equity shares o/s It is widely used ratio to measure the profit available to the equity shareholders on a per share basis. As such increasing Earning Per Share may indicate the increasing trend of current profits per equity share.

3) Dividend Payout Ratio: It is calculated as, Dividend Per Share *100 Earning Per Share It measures the relationship between the earnings belonging to the equity shareholders and the amount finally paid to them by way of dividend. It indicates the policy of management to pay cash dividend.

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ADVANTAGES OF RATIOS

1. Ratios simplify the comprehension of financial statements. They tell the whole story as a heap of financial data is condensed in them. They indicate the changes in the financial condition of the business. 2. They act as an index of the efficiency of enterprise. As such they serve as an instrument of management control. It is an instrument for diagnosis of the financial health of an enterprise. The efficiency of the various individual units similarly situated can be judged through inter-firm comparisons. 3. The ratio analysis can be if invaluable aid to management in the discharge of its basic functions of forecasting, planning, co-ordination, communication and control. A study of the trend of strategic ratio may help the management in this respect. Past ratios indicate trends in cost, sales, profit and other relevant facts. 4. The ratio analysis provides data for inter-firm comparison or intra-firm comparison. Comparison cannot be made with absolute figures. Net profit of one firm cannot be compared with the net profit of the other firm. But the percentages of net profits can be compared to evaluate the performance. Similarly performance and efficiency of different departments in the same firm can be compared with the help of ratios. 5. Investment decisions can at times be based on the conditions revealed by certain ratios. 6. They make it possible to estimate the other figure when one figure is known.

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LIMITITIONS OF RATIO ANALYSIS

Though ratio analysis technique has got number of advantages, it attracts equal number of disadvantages too. Some of important advantages are as follows:

1) The ratios of the other organization May not be readily available. 2) Different accounting policies may be followed by the constituent organization in the industry. 3) The constituent organization in the same industry may vary from each other in terms of age, location, extent of automation, quality of management and so on 4) The technique of ratio analysis may prove to be inadequate in some situation if there is difference of opinions regarding the interpretation of certain items while computing certain ratios. 5) As the ratios are computed on the basis of financial statements, the basic limitation, which is applicable to the financial statements, is equally applicable in case of the technique of ratio analysis also.

Thus the ratio analysis points out the financial condition of business whether it is very strong, good, questionable or poor and enables the management to take necessary steps.

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RESEARCH METHODOLOGY
1) DATA COLLECTION

a) Primary Data: Primary data related to the project was collected from the discussion and interaction with the senior employees and executives in the organization from Accounts and Finance department.

b) Secondary Data: Secondary data was collected from the documents, which were in printed forms like annual reports, pamphlets, reference books based on Financial Management and through websites.

METHODOLOGY FOR ANALYSIS

The methodology opted for carrying out project was by way of collection of data from the company s annual reports for the past three years i.e. from 2003-2004 to 2005-2006, for the calculation of ratios. The theory related to ratios was gathered from various financial management books, which served the purpose of calculation and analysis of ratios. Further based on the above statements ratios related to liquidity, turnover, solvency, profitability and over profitability groups and miscellaneous groups have been calculated and interpreted in an intra firm comparison method. Similarly the ratios have been presented in graphical format to have clear understanding of it during three financial years and changes in it.

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RATIO ANALYSIS

LIQUIDITY GROUP 1) Current Ratio: Formula Current Assets/Current Liabilities 2003-2004 1.45 2004-2005 1.56 2005-2006 1.82

Current Ratio
2 1.5 1 0.5 0 2003-2004 2004-2005 Financial year 2005-2006 1.45 1.56 1.82

Significance: This ratio is calculated for knowing short term solvency of the organization. This ratio indicates the solvency of the business i.e. ability to meet the liabilities of the business as and when they fall due. The Current Assets are the sources from which the current liabilities are to be met. Certain authorities have suggested that in order to ensure solvency of a concern current assets should be twice the current liabilities and therefore this ratio is known as 2:1 ratio . However it depends upon

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the nature of industry. The standard Current Ratio applicable to the Indian industries is 1.33:1. Here the Current Ratio of Kalyani Steels Ltd indicates that it has got sufficient assets to pay off short term liabilities as and when they fall due. The company has maintained its short term solvency through out the years and it is improving its short term solvency status which is appreciable.

2) Acid Test Ratio: -

Formula Liquid Assets/Liquid Liabilities

2003-2004 1.17

2004-2005 1.24

2005-2006 1.35

Acid Test Ratio

1.4 1.35 1.3 1.25 1.2 1.15 1.1 1.05 2003-2004 2004-2005 Financial Years 2005-2006 1.17 1.24 1.35

Significance: -

This ratio serves as a realistic guide to the short term solvency of the company. It is a measure of the extent to which liquid resources are immediately available to meet current obligation. In so far as it eliminates inventories as part of

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current ratio, this is a more rigorous test of liquidity than the Current Asset Ratio and when used in conjunction with it, gives a better picture of the firms ability to meet its short term debts out of its short term assets. An Acid Test Ratio of 1:1 is considered to be ideal and standard. Here the Acid Ratios of Kalyani Steels Ltd through out the years considered indicates that it has adequate assets which can be converted in the form of cash almost immediately to pay off those liabilities which are to be paid off immediately. It must be remembered that the company is improving its Acid Test Ratio year by year at a constant rate which is appreciable as such higher the liquid ratio better the situation

TURNOVER GROUP

1) Fixed Assets Turnover Group: Formula Net Sales/Fixed Assets 2003-2004 2.65 2004-2005 4.31 2005-2006 3.12

Fixed Asset Turnover Ratio

5 4 3.12 3 2 1 0 2003-2004 2004-2005 Financial Years 2005-2006 2.65 4.31

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Significance:-

This ratio measures the efficiency in the utilization of fixed assets. This ratio indicates whether the fixed assets are being fully utilized. It is an important measure of the efficient and profit earning capacity of the business. Normally standard ratio is taken as five times. The financial year 2003-04 had not so good fixed asset turnover ratio. The financial year 2004-05 had an appreciable fixed assets turnover ratio indicating fixed assets are turned over more number of times. This was due to around 72% growth in sales. This shows better asset management policy as compared to the past year. The same ratio came down to 3.12 times in the financial year 2005-06 due to fall in sales by around 31.48%.

2) Working Capital Turnover Ratio: Formula Net Sales/Working Capital 2003-2004 8.63 2004-2005 8.48 2005-2006 3.33

Working Capital Turnover Ratio

10 8 6 4 2 0 2003-2004 2004-2005 Financial Years 2005-2006 3.33 8.63 8.48

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Significance: -

This ratio signifies achievement of maximum sales with less investment in working capital. As such higher the ratio better will be the situation. The financial year 2003-04 and 2004-05 saw excellent ratio as the company was able to achieve maximum sales with less investment in working capital which shows better working capital management policy. It must be remembered that working capital ratio has been increasing through out the years but the financial year 2005-06 failed to maintain the past records due to fall in sales by 31.48%. The year 2005-06 had heavy investments in working capital which shows rise in activity.

3) Current Asset Turnover Ratio: Formula Net Sales/Current Assets 2003-2004 2.69 2004-2005 3.08 2005-2006 1.5

Capital Asset Turnover Ratio

3.5 3 2.5 2 1.5 1 0.5 0 2003-2004 2004-2005 Financial Years 2005-2006 1.5 2.69 3.08

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Significance: -

This ratio indicates capability of the organization in efficient use of current assets. This ratio indicates whether current assets are fully utilized. It indicates the sales generated per rupee of investment in current assets. The financial year 2004-05 had good current asset turnover ratio because it had excellent sales in that year. It must remembered that investments in current assets are increasing year by year at constant rate but the company failed to register growth in sales and its sales fell down by 31.48%.

4) Capital Turnover Ratio: -

Formula Sales/Capital Employed

2003-2004 1.52

2004-2005 2.25

2005-2006 1.29

Capital Turnover Ratio

2.5 2 1.52 1.5 1 0.5 0 2003-2004 2004-2005 Financial Years 2005-2006 1.29 2.25

Significance: -

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This ratio indicates whether capital employed is turned over in the form of sales more number of times. As such higher the capital turnover better will be situation. The financial year 2004-05 had acceptable ratio because it had better sales as compared to other two years. Due to addition or purchase of fixed assets and heavy investments in working capital due to rise in activity, the capital turnover ratio for 2005-06 came down as compared previous years.

5) Inventory Turnover Ratio: -

Formula Net Sales/Average Inventory

2003-2004 13.99

2004-2005 1.82

2005-2006 7.45

Inventory Turnover Ratio

16 14 12 10 8 6 4 2 0 2003-2004 1.82 13.99

7.45

2004-2005 Financial Years

2005-2006

Significance: -

It is an indication of the velocity with which merchandize moves through the business. This is a test of inventory to discover possible trouble in the form of overstocking or overvaluation.

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A low inventory turnover may reflect dull business, overinvestment in inventory or accumulation of absolute and unsaleable goods. A high inventory turnover indicates relatively lower amount of working capital locked in inventories. The financial year 2003-04 had excellent inventory turnover ratio locking up smaller part of funds in inventory. The company had low inventory turnover ratio for the year 2004-05 thus indicating over investment in inventory but it has improved in the financial year 2006 indicating less investment in inventory.

SOLVENCY GROUP

1) Debt-Equity Ratio: -

Formula External Liabilities/Shareholders Fund

2003-2004 1.24

2004-2005 1.39

2005-2006 1.07

Debt-Equity Ratio
1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2003-2004 2004-2005 Financial Years 2005-2006 1.39 1.24 1.07

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Significance: -

It is a measure of financial strength of a concern. Lower the ratio greater the security available to the creditors. A satisfactory current ratio and ample working capital may not always be a guarantee against insolvency if the total liabilities are inordinately large. The purpose of this ratio is to derive an idea of the amount of capital supplied be the owners and of assets cushion available to creditors on liquidation. Generally 1:2 ratio is acceptable, but the ratio of at least 1:1 is desirable as banks even do accept this. The greater the interest of the owners as compared with that of the creditors, the more satisfactory is the financial structure of the business because in such a situation the management is less handicapped by interest charges and debt repayment requirements. A company having a stable profit can afford to operate on a relatively high debt-equity ratio; whereas in the case of a company having an unstable profit, a high debt-equity ratio reflects a speculative situation. Too much reliance on external equities may indicate undercapitalization, whereas too much reliance on internal equities may lead to over-capitalization. All the financial years considered has debt-equity ratio more than 1:1, which is appreciable and acceptable indicating equal amount of interest of the owners as compared with that of creditors.

2) Proprietary Ratio: -

Formula Total Assets*100/Owners Fund

2003-2004 61.38%

2004-2005 51%

2005-2006 56.93%

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Propriotary Ratio
70 60 Percentage 50 40 30 20 10 0 2003-2004 2004-2005 Financial Years 2005-2006 61.38 51

56.93

Significance: -

This ratio is normally a test of strength of credit-worthiness of the concern. To the extent the percentage of liability increase or the percentage of capital dwindles, the credit strength of the concern deteriorates. A high proprietary ratio is however a frequently indicative of over-capitalization and an exercise investment in fixed assets. A low proprietary ratio on the other hand is a symptom of undercapitalization and an excessive use of creditors funds to finance the business. The financial year 2003-04 had good proprietary ratio as it indicates assets are financed to the extent of 69% by the owners funds and the balance is financed by the outsiders. The year 2004-05 had fall in proprietary ratio but in the year 2005-06 the company has improved due to rise in reserve and surplus due to appreciable profits in the last financial year.

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3) Capital Employed Ratio:Formula Fixed Assets*100/Capital Employed 2003-2004 57.54% 2004-2005 52.27% 2005-2006 41.39%

Capital Employed Ratio

70 60 Percentage 50 40 30 20 10 0 2003-2004 2004-2005 Financial Ratio 2005-2006 57.54 52.27 41.39

Significance: -

Normally a proprietor should provide all the funds required to purchase fixed assets. If the capital employed ratio exceeds 100%, it indicates that the company has used short-term funds for acquiring fixed assets, which policy is not desirable. When the amount of proprietor funds exceeds the value of fixed assets i.e when the percentage is less that 100, a part of the net working capital is supplied by the shareholders, provided that there are no other non-current assets. Though it is not possible to lay down a rigid standard as regards the percentage of capital which should be invested in fixed assets in each industry there always is a maxim which should not be exceeded so that the harmony among the fixed assets, debtors and stock is not disturbed. The ratio should generally be 65%.

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It should be remembered that all of the financial years studied had cap employed ratio below 65% which also suggest that the company had equally funded for working capital for current assets through long term funds which has been accepted principle of financial management.

PROFITABILITY RATIOS

1) Gross Profit Ratio: Formula Gross Profit*100/Sales 2003-2004 24.41% 2004-2005 27% 2005-2006 36.06%

Gross Profit Ratio

40 35 Percentage 30 25 20 15 10 5 0 2003-2004 2004-2005 Financial Years 2005-2006 24.41 27 36.06

Significance: -

This ratio indicates the degree to which selling prices of goods per unit may decline without resulting in losses on operations for the firm.

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A high gross profit ratio as compared with that of the other firm in the same industry implied that the firm in question produces its products at lower cost. It is a sign of good management. A low gross profit ratio may indicate unfavorable purchasing and make-up policies, the inability of management to develop sales volume, theft, damage, bad maintenance, market reduction in selling prices not accompanied by proportionate decrease in the cost of goods etc. The company is growing at a constant rate as far as gross profit is concerned which is appreciable indicating efficiency in production of goods at relatively lower costs.

2) Net Profit Ratio: -

Formula Net Profit(after taxes)*100/Sales

2003-2004 2.38%

2004-2005 4.98%

2005-2006 17.07%

Net Profit Ratio

18 16 14 12 10 8 6 4 2 0 17.07

Percentage

4.98 2.38

2003-2004

2004-2005 Financial Years

2005-2006

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Significance: This ratio differs from the ratio of operating profits to net sales in as much as it is calculated after adding non-operating incomes, like interest, dividends on investments etc to operating profits and deducting non-operating expenses such as loss on sale of old assets, provisions for legal damage etc. from such profits. The ratio is widely used as a measure of over-all profitability and is very useful to the proprietors. Reading along with the operating ratio it gives an idea of the efficiency as well as profitability of the business to a limited extent. The company has improved its net profits by 6.17 times in the year 2005-06 from the 2003-04 which is appreciable which shows considerable proportion of net sales to the owners and shareholders after all costs, charges and expenses including income tax, have been deducted.

OVER PROFITABILITY GROUP 1) Return on Assets: -

Formula Net Profit*100/Assets

2003-2004 3.19%

2004-2005 8.95%

2005-2006 17.33%

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Return on Asset Ratio

20 15 10 5 0 2003-2004 2004-2005 Financial Years 2005-2006 3.19 8.95 17.33

Significance:-

enterprise. It shows how efficiently management has used the funds provided be the creditors and the owners. It can be referred that the financial year 2003-04 had not so good ratio because of high operating expenses. However the company is improving year by year at a constant rate. The financial year 2005-06 had 17.33% as returns on its various resources which is appreciable.

2) Return on Capital Employed: Formula PAT+Int*100/Capital Employed 2003-2004 3.65% 2004-2005 13.70% 2005-2006 23.86%

Percentage

The ratio is a measure of the return on the total resources of the business

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Return on Capital Employed

30 25 Percentage 20 15 10 5 0 2003-2004 2004-2005 Financial years 2005-2006 3.65 13.7 23.86

Significance: -

Return on capital employed measures the profitability of the capital employed in the business. A high business return on capital employed indicates better and profitable use of long term funds of owners and creditors. As such a high return capital employed will always be preferred. The company has rising trend of return on capital employed indicating efficient use of funds of the creditors and owners by the management which is appreciable.

3) Return on Shareholders Fund: -

Formula PAT*100/Total Shareholders Funds

2003-2004 5.20%

2004-2005 17.54%

2005-2006 14.22%

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Return on shareholders Fund

20 15 10 5.2 5 0 2003-2004 2004-2005 Financial Years 2005-2006 17.54 14.22

Significance:-

is a measure of the profitableness of an enterprise. The realization of a satisfactory net income is the major objective is being achieved. The financial year 2003-04 had low returns on shareholders fund as compared to next financial years. However the management of the company is improving in utilizing the resources of the owner in efficient way.

MISCELLANEOUS GROUP

1) Capital Gearing Ratio: -

Formula Eq Cap+Res&Sur/Pref Share&Loan Cap

Percentage

The ratio shows how well the firm used the resources of the owner. This ratio

2003-2004 3.52

2004-2005 3.29

2005-2006 2.04

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Capital Gearing Ratio

4 3.5 3 2.5 2 1.5 1 0.5 0 2003-2004 2004-2005 Financial Years 2005-2006 3.52 3.29

2.04

Significance: -

The ratio is a means of analysis of the capital structure. If the proportion of preference shares and loan capital is high, or where the proportion of ordinary share capital is low, capital is said to be highly geared and reverse is the position in low gearing. Low gearing indicates that the equity share capital is not paid an adequate return because the profits are swallowed up by the high charges in the form of interest and dividends. Capital gearing signifies the process of maintaining a desired and appropriate gear ratio in an enterprise. When inflationary conditions are expected, high gearing is to be employed and in the period marked by trade depression, low gearing should be employed. Here the company is geared which indicates that it attempts to employ fixed income bearing securities in the capital structure with an intention to increase the earnings of the shareholders.

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NOTES FORMING PART OF THE PROJECT REPORT

1. Debtors for sale of assets has not been considered which has been duly mentioned in the schedules. 2. While considering long term loans for capital gearing ratio interest accrued on loans has not been considered. 3. While considering net sales, returns from sales has been deducted from gross sales. 4. Gross profit is calculated by deducting manufacturing expenses from Net Sales.

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CONCLUSION
The company has strong short term liquidity position as both the liquidity ratios are favorable and appreciable which concludes that company has got sufficient assets to pay off short term debts as and when they fall due. The company had excellent turnover of various assets in the year 2004-2005 as the sales rose by 72% indicating better assets management policy. The assets were efficiently employed to generate maximum sales. However for the year 2005-2006 the turnover ratios suffered because of fall in sales by 31.48% and also there was rise in activity as compared to past years. For inventory turnover the year 2004-2005 was crucial as it had minimum investment in different inventories avoiding thus blockage of funds. The company has strong solvency position as all the solvency ratios are favorable. Debt-equity ratio is favorable indicating equal share of owners and creditors. The working capital ratio indicates the company has funded for working capital through long term funds which represents accepted finance policy. The proprietary ratio indicates around 60% of assets are financed by owners fund which indicates reasonable creditworthiness to the company. The company has got excellent gross profit ratio and the trend is rising which is appreciable indicating efficiency in production cost. The net profit for the year 2005-2006 is excellent and it is 6.17 times past year indicating reduction in operating expenses and large proportion of net sales available to the shareholders of company. The company has excellent overall profitability ratios indicating effective use of funds provided be shareholders and creditors. According to the capital gearing ratio the company is geared by including fixed income bearing securities with an intention to increase the income of shareholders.

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BIBLIOGRAPHY

Following books were referred for carrying out the project: -

Financial Management Financial Management Financial Management Management Accounting

M Y Khan/ P K Jain I M Pandey S M Inamdar M G Patkar

Annual Reports from 2003-2004 to 2004-2005 of Kalyani Steels Ltd

Following websites were referred: www.kalyanisteels.com www.bharatforge.com www.google.com

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PROFIT & LOSS ACCOUNT FOR THE LAST 3 YEARS

2005-2006 INCOME Sales, Gross Less: Excise Duty Net Sales Power Generated, Captively Consumed Operating income Divestment of interest: Profit on sale of long term inv Other Income 315272877 29169325 6072570778 EXPENDITURE Materials consumed & Mfg Exps Employees emoluments Other exps Interest Int. differentials on restructuring of loans Depn & Write Offs Profit for the Year Less: Trial Rum income net of exp PBT Prov for Taxation Current Tax Deferred Tax FBT PAT 118300000 223432003 1600000 343332003 1010174852 3782570647 170870364 537406659 46227488 7546482590 2107705856 5438776734 200262113 89089729 5728128576

2004-2005

2003-2004

9230188514 1602250358 7627938156 21778011 56243793 7705959960

5325946924 738809546 4587137378

57733225

4644870603

9934647 7715894607

70991291 4715861894

6302132759 110773625 382713027 76587048

3787655900 92360079 320722030 126198161 57464408

181608637

4718683795 1353886983 380128 1353506855

194931431

7067137890 648756717 3571647 645185070

152545583

4536946161 178915733

178915733

48725000 266372520 215097520 430087550

11250000 48004325 59254325 119661408

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CONSOLIDATED BALANCE SHEET FOR THE LAST 3 YEARS

2005-2006 1] Sources of Funds 1) Shareholders Funds a) Capital b) Reserve and Surplus 2) Loan Funds a) Secured Loans b) Unsecured Loans 3) Deferred Tax Adjustments a) Deferred Tax Liabilities b) Deferred Tax Assets Total 2] Application of Funds 1) Fixed Assets a) Gross Block b) less: Depreciation c) Net Block d) Capital WIP Exp to date 2) Investments 3) Current Assets, Loans & advances a) Inventories b) Sundry Debtors c) Cash and bank Balance d) Other Current Assets e) Loans and Advances 999684728 1103840173 85432259 62037142 1737634738 3988629040 Less: Current Liabilities & Provisions a) Liabilities b) Provisions Net Current Assets Total 1833921502 323728010 2157649512 1830979528 4734748069 95838867 1991837284 911931257 2893972992 997974575 1895998417 849696020 105969319 955665339 420909667 2896814903 3317724570

2004-2005

2003-2004

420909667 2031416703 1317598093 85981060 1403579153 2452326370

420909667 1876415780 1395860045 105116584 1500976629 22973254447

463700909 2342749 461358160 4734748069

471447205 233521048 237926157 4093831680

541940259 470386622 71553637 3869855713

2816968999 817594121 1999374878 104672254 2104047132 807969286

2508709521 623522746 1885186775 404231664 2289418439 810719920

587317212 1328572775 81082914 55771123 914667776 2967411800

358171941 906932119 161689106 39659941 579889270 2046342377

1627367457 158229081 1785596538 1181815262 4093831680

1244441874 32183149 1276625023 769717345 3869855713

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