Professional Documents
Culture Documents
AT
RASTRIYA ISPAT NIGAM LIMITED
VISAKHAPATNAM
Sri.K.SANYASI RAO
ASST. GENERAL MANAGER (F&A)
Visakhapatnam Steel Plant
Visakhapatnam
Project Guide
: 17-01-2011
K.SANYASI RAO
ASST. GENERAL
MANAGER (F&A)
RASTRIYA ISPAT NIGAM LIMITED
Visakhapatnam Steel Plant
DECLARATION
Master of Business
Place: VISAKHAPATNAM
Date: 17-01-2011
ACKNOWLEDGEMENT
The satisfaction that accompanies the successful completion
of any task would be incomplete with out mentioning people who made it
possible and whose encouragement and constant guidance crowned my
effort with success. I wish to express my deep sense of gratitude to
Dr P SRINIVAS RAO, DIRECTOR,
VARAHA LAKSHMI
CHAPTER 1
GENERAL INTRODUCTION
The end products of the business transactions are the Financial Statements
comprising the position statement or Balance Sheet and the Income Statement or
Profit and Loss Account. Financial statements are the basics for the decision making
by the Management and as well as all other Stakeholder who are interested in the
affairs of the firm such as investors, creditors , customers ,suppliers , financial
institutions , employees ,potential investors , govt., and the general public.
In this project an attempt is made to know the financial performance of
RASHTRIYA ISPAT NIGAM LIMITED, VISAKHAPATNAM STEEL PLANT
through Ratio Analysis.
Primary Data
2.
Secondary Data
1. Primary Data:
It is the information collected directly with out any references. In this study it
is gathered through interviews with concerned officers and staff, either individually or
collectively, sum of the information has been verified or supplemented with personal
observation conducting personal interviews with the concerned officers of Finance
Department of Visakhapatnam Steel Plant.
2. Secondary Data:
The Secondary Data was collected from already published sources such as,
Pamphlets of Annual Reports, Returns and Internal Records, reference from Text
Books and Journals relating to Financial Management. The data collection includes:
(a)
(b)
CHAPTER-II
1.1
S No
1.
Year
1830
Growth
Osier Marshall heather constructed the first manufacturing
2.
3.
1874
1899
4.
5.
6.
7.
1906
1911
1918
1940-1950
Steel Plant
Formation of TISCO
TISCO started production
TISCO was founded
Formation of My sore Iron and Steel initiated at
1951-1956
Bhadravathi in Karnataka.
First Five-Year Plan - The Hindustan Steel Limited (HSL)
8.
10
9.
1956-1961
expansion programmed.
Second Five-Year Plan - A bold decision was taken up to
increase the ingot steel output in India to 6 million tones
per year and its production at Roukema, Bhilai and
1961-1966
11.
12.
1964
1966-1969
13.
1969-1974
10.
1974-1979
15.
1979-1980
16.
1980-1985
17.
1985-1991
tons.
Seventh Five-Year Plan Expansion works at Bhilai and
Bokaro Steel Plant completed. Progress of Visakhapatnam
Steel Plant picked up and the nationalized concept has been
introduced to commission the plant with 30 MT liquid steel
18.
1992-1997
capacities by 1990.
Eight Five-Year Plans The Visakhapatnam Steel Plant
was commissioned in 1992. The cost of plant has become
around 8755 cores. Visakhapatnam Steel Plant started the
11
1997-2002
duly engaged.
Ninth Five-Year Plant Restructuring of Visakhapatnam
Steel Plant and other public sector undertakings.
20
2002-2007
(1951 to 1956):
No new steel plant came up, as the first plan was mainly agriculture oriented.
However, IISCO was allowed to expand form 1MT/year to 2 MT/year of ingots, and
from 0.5 MT/year to 1.0 MT/year of steel.
During this period, additional steel producing capacity was added and a
decision was taken to increase the ingot steel output in India to 6 million tons per
year. The three one million ton steel plant one each at Rourkela, Bhilai and Durgapur
12
were completed during this period. They started production during the end of this
plan.
Location
Sundargarh, Orissa
Durgapur, M.P.
Burdwan, W.B.
Collaboration
Germany
U.S.S.R
UK
Production (Tons)
720,000
770,000
800,000
In addition to the above BSP and DSP each were having the capacity to
produce 300,000 tons of pig iron for sale.
During this period, the three steel plants under HSL, TISCO, and IISCO were
expanded as shown below. However, these could be completed only by 1968 1969.
The ambling expansion program taken up during the Third Five-Year Plan
could not be completed during that period. All the expansion programs were actively
executed during this period
13
initially with a capacity of 2 MT/year of ingots. Steel authority of India Ltd., was also
formed during this period on 2nd Jan 1973. Central Research and Development
Organization was set up in June, 1973 to tackle the research and development
problems of Iron and Steel Industry.
integrated steel plant at Vizag took a definite shape. By the end of fifth five-year plan
the total installed capacity from six integrated plants was 10.6 MT/year.
Annual plans 1979 to 1980: various plans named above were reviewed and the
progress on different plants consolidated. Soviet Union has agreed to help in setting
up the Vizag steel plant.
Almost all the units in the expansion work of Bhilai and Bokaro to 4 MT
completed. Progress of Vizag Steel Plant picked up and the rationalized concept has
been introduced to commission the plant with 3 MT liquid steel capacities by 1990.
All units of Vizag Steel Plant were commissioned by July, 1992. Government
of India has given permission to set up Mini Steel Plants in Private Sectors.
Global Scenario:
As per IISI
In March 2005 World Crude Steel output was 92.8MT when compared to
March 2004 (87.2 MT), the change in percentage was 6.5%.
China remained the worlds largest Crude Steel producer in 2005 also
(27.5MT) followed by Japan (9.6MT) and USA (8.1MT). India occupied the
8th position (8.8MT)
USA remained the largest importer of semi-finished and finished steel
products in 2002 followed by China and Germany.
the global steel scenario have been:
Under the auspices of the OECD (Organization for Economic Co-operation &
Development) the negotiations among the major steel producing countries for a Steel
Subsidy Agreement (SSA) held in 2003 with the objective to agree on a complete
negotiating text for the SSA by the middle of 2004. It also set subsidies for the Steel
Industry of a ceiling of 0.5% of the value of production to be used exclusively for
Research & Development.
The global economy witnessed a gradual recovery from late 2003 onwards.
China has become one of the major factors currently driving the world
economy.
15
With the economic liberalization that was initiated in 1992, Indian Steel
Industry has to accept the inevitable i.e. to appreciate the implications of low import
duty rated, face foreign competition and some how improve its strengths and
competitive edge to produce good quality products at lower prices and learn to
survive in the market place. Following liberalization, the steel Industry is well set on
the path of globalization. The dynamics of the World Steel Industry has a close
relation with Indian steel Industry. Presently in India, Steel products are being
produced from four different sources viz.,
Integrated Steel Plants
16
Integrated Steel Plants have larger capacity and produce Steel from basic raw
materials and the other three categories mentioned are characterized by low
investment and low break-even point.
18
STEEL:
The liberalization of industrial policy and other initiatives taken by the
Government have given a definite impetus for entry, participation and growth of the
private sector in the steel industry.
modernized/expanded, a large number of new/green field steel plants have also come
up in different parts of the country based on modern, cost effective, state of-the-art
technologies.
At present, total (crude) steel making capacity is over 34 million tons and
India, the 8th largest producer of steel in the world, has to its credit, the capability to
produce a variety of grades and that too, of international quality standards. As per the
ratings of the prestigious World Steel Dynamics, Indian HR products are classified
in the Tier II category quality products- a major reason behind their acceptance in the
world market. EU, Japan has qualified for the top slot, while countries like South
Korea, USA share the same class as India.
In pig iron also, the growth has been substantial. Prior to 1991, there was only
one unit in the secondary sector. Post liberalization, the AIFIs has sanctioned 21 new
projects with a total capacity of approx 3.9 million tones. Of these, 16 units have
already been commissioned. The production of millions in 2002-0n ton3. During the
year 2003-04, the production of Pig Iron was 5.221 million tones.
Market Scenario:
19
Efforts are being made to boost demand particularly in rural areas and
also to increase exports.
Production:
21
Duty Entitlement Pass Book Scheme (DEPB) also facilitates exports. The
Government has temporarily suspended the DEPB on iron & Steel &
ferroalloys w.e.f 27th March 2004 as a measure to increase Iron & Steel
availability in the domestic market.
Customs Duty:
The peak rate of Custom Duty has been reducing sharply during the
last 5 years.
January2004 the peak rate was reduced from 25% to 20%. In 2004 the
Customs Duty on carbon steel items and pig iron was further reduced
to 5%.
Excise Duty:
The Government has taken a number of steps to ensure the availability of iron
and steel items which inter-alias includes reduction in Excise Duty by 16% with
addition to Educational Cess 2% on 16%.
22
DF LEVY:
This was a levy started for funding modernization, expansion and
development of steel sector. The fund, inter-alias, supports:
1) Capital expenditure for modernization, rehabilitation,
renewal & replacement of Integrated Steel
diversification,
plants.
23
CHAPTER-III
COMPANY PROFILE
The Government of India has decided to set up an integrated Steel Plant at
Visakhapatnam to meet the growing domestic needs of steel. Visakhapatnam Steel
Plant was the effect of the persistent demands and mass movements. It is another step
towards increasing the countrys steel production.
24
The decision of the Government to set up an integrated steel plant was laid
down by the then Prime Minister Smt. Indira Gandhi. The Prime Minister laid the
foundation stone on 20th January 1971.
The consultant, M/s M N Dastur & Co (Pvt) Ltd. submitted a techno-economic
feasibility report in February 1972, and detailed project report for the plant, with an
annual capacity of 3.4 million tones of liquid steel.
The Government of India and USSR signed an agreement on 12 th June 1979
for the co-operation in setting up 3.4 million tones integrated Steel Plant. The project
was estimated to cost to Rs.3, 897.28 crores based on prices as on 4 th Quarter of
1981.However, on completion of the construction and commissioning of the whole
Plant in 1992, the cost escalated to Rs.8, 755 crores based on prices as on 2 nd Quarter
of 1994.
Unlike other integrated Steel Plants in India, Visakhapatnam Steel Plant is one
of the most modern steel plants in the country. The plant was dedicated to the nation
on 1st August 1992 by the then Prime Minister, Sri.P.V.Narasimha Rao.
New technology, large-scale computerization and automation etc, are
incorporated in the Plant at the international levels and attain such labour productivity,
the organizational manpower has been rationalized. The manpower in the VSP has
been limited to17, 500 employees. The plant has the capacity of producing 3.0 million
tones of liquid steel and 2.656 million tones of saleable steel.
It has set up two major Blast Furnaces, the Godavari and the Krishna, which
are the envy of any modern steel making complex.
The economy of a nation depends on core sector industries like iron and steel.
Steel is the basic input for construction, machines building and transport industries.
Keeping in view the importance of steel the following integrated steel plant with
foreign collaborations was constructed in the public sector in the post independence
era.
25
ORGANIZATION CHART
Director
(Finance)
Director
(Commercial)
ED
(Finance)
Company
Secretary
ED (MM)
DGM
(M&HS) I/C
Addl. GM
(Mktg)
GM (P&A)
Addl. GM
(Mktg)
- Services
& Exports
AGM
(Int. Audit)
Director
(Operations)
Director
(Personnel)
Addl. GM
(P&IR)
DGM (Trg)
DGM (HRD)
DGM (Legal
Affairs)
GM
(Works)
Addl. GM
(QATD)
Addl. GM
(Audio &
Telco)
Addl. GM
(Services)
Addl. GM
(Steel)
Addl. GM
(C, S & C)
Director
(Vigilance)
ED
(Maint.)
GM
(Maint.)
Addl. GM
(CR&RM)
DGM
(System)
GM
(D&E)&
I/C PECS
VISION:
To be a continuously growing world-class company.
We shall:
Harness our growth potential and sustain profitable growth.
Deliver high quality and cost competitive products and be the first choice of
customers.
26
Addl. GM
(Vig.)
ACM
(Cordon)
Mission:
To attain 16
Core Values:
Commitment
Customer satisfaction
Continuous improvement
Concern of environment
Creativity and innovation.
27
improvement to the Bessemer process, lining the converter with a basic material to
remove phosphorus. Another was the Siemens-Martin process of open hearth
steelmaking which like the Gilchrist-Thomas process complemented, rather than
replaced, the original Bessemer process.
These were rendered obsolete by the Linz-Donawitz process of basic oxygen
steel making, developed in the 1950s, and other oxygen steelmaking processes. One
third of world's steel is currently produced in China. Arcelor-Mittal is however the
production. White-hot steel pouring out of an electric arc furnace.
Blast furnaces have been used for two millennia to produce pig iron, a crucial
step in the steel production process, from iron ore by combining fuel, charcoal, and
POLICY
air. Modern methods use coke instead HRD
of charcoal,
which has proven to be a great deal
focus
more efficient and is crediting with contributing to the British Industrial Revolution.
Once the iron is refined, converters are used to create steel from the iron. During the
late 19th and early 20th century there were many widely used methods such as the
Identifyingprocess.
competence
needs
Bessemer process and the Siemens-Martin
However,
basic oxygen
steelmaking, in which pure oxygen is fed to the furnace to limit impurities, has
generally replaced these older systems. Electric arc furnaces are a common method of
reprocessing scrap metal to create new steel. They can also be used for converting pig
iron to steel, but they use a great deal of electricity (about 440 kWh per metric ton),
and are thus generally only economical when there is a plentiful supply of cheap
electricity.
higher responsibility
29
HUMAN RESOURCES
HRD PHILOSOPHY IN VISAKHAPATNAM STEEL PLANT
Employees of the organization are greatest and most valuable resources.
Whole on the one hand, HRD should appropriately harness the employee
potential for the attainment of the company objectives, the company on the
other, as its corporate responsibility, should create an enabling climate where
in human talent gets the best opportunity for self expression, all round
development and fulfillment.
People are more than mere resources and therefore it will be the companys
sincere endeavor to treat people with all the respect and that is warranted when
employees are seen as more mere instrumentalities.
HRD as a management function will be given a place of strategic priority,
along with function like production, maintenance, materials on finance in the
overall scheme of management action in the company.
HRD does not refer to training alone, nor it is just a new name for training. In
RINL/VSP HRD refers to creative and innovative initiatives in several
management functions for the development and growth of employees
HRD should eventually be a core philosophy of all management actions and
should not remain merely a departmental / sectional activity.
All functional and divisional heads responsible for various activities of the
company will imbibe the HRD spirit and suitability integrate HRD into their
plans, decisions and actions
30
31
Visakhapatnam Steel Plant (Vizag Steel) is an ISO 9001, ISO 14001, and
OHSAS 18001, certified public sector organization in India. It is the only steel plant
in India, had all the three certificates. This paper reviews key aspects like hazard
identification and risk assessment(HIRA) carried out in 50 departments for physical,
chemical and Biological hazards, risk control measures taken, dissemination of
occupational risk management information to 17,000 workforce as a part of OHSAS
18001 certification process. We summarize the role of occupational health services
department in hazard identification, risk assessment and risk control at various
working environments with an emphasis on continual improvement and occupational
risk management.
Objectives:
Expand plant capacity to 6.3mT by 2008-09 with the mission to expand
further in subsequent phases as per the corporate plan
Sustain gross margin to turnover ration > 25%
Be amongst top five lowest steel producers in the world by 2009-10
Achieve higher levels of customer satisfaction than competitors
Be recognized as an excellent business organization by 2008-09
Instill right attitude amongst employees and facilitate them to excel in their
professional, personal and social life.
Quality Policy:
Employees of Visakhapatnam Steel Plant are committed to supply their customers
quality products and services. To accomplish this Visakhapatnam Steel Plant will:
Manufacture products as per specification and standards agreed with the
customer.
32
33
First integrated steel plant to receive ISO 9002 certification for all its products.
Bailadilla, M.P
Jaggayyapeta, A.P
UAE
Dubai
Madharam, A.P
Chipuripalli, A.P
Talcher, Orissa
Australia
Yeluru canal, Andhra Pradesh
Captive power plant
Gidi/Swang/Rajarappa/Kargil
Major Units:
DEPARTMENTS
ANNUAL CAP.
(000T)
COKE OVERNS
2,261
SINTER PLANT
5,256
BLAST FURNACE
3,400
area each
2 Furnaces of 3200 cu m volume each
3 LD Converters each of 150 Cum.
3,000
LMMM
WRM
MMSM
Height
2 Sinter machines of 312 Sqm grate
casters
4 Stand finishing Mill
2 x 10 Stand finishing Mill
6 Stand finishing Mill
710
850
850
Statistical Information:
MANPOWER PROFILE GROWTH PATTERNS
34
YEAR
EXECUTIVES
NON-EXECUTIVES
31-3-1997
2617
14570
31-3-1998
2617
14572
31-3-1999
2617
14087
31-3-2000
2683
13593
31-3-2001
4027
13104
31-3-2002
4203
12823
31-3-2003
4308
12586
31-3-2004
4533
12222
31-3-2005
4512
12101
31-3-2006
4629
11932
31-3-2007
4674
11727
31-3-2008
4967
11449
31-3-2009
5218
12007
31-3-2010
5263
12567
35
-14.34%
Diploma
-10.33%
Grad/PG
-11.65%
Literates
-24.33%
ITI
-39.35%
36
-82.03%
Projects
-2.10%
Mines
-2.14%
Others
-13.72%
AWARDS:
1.
ISO 9002 for SMS and all the down stream units a unique distinction in
the steel industry.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
ISPAT Suraksha Puraskar (1st prize) for largest accident free period 1991-94.
12.
PM Trophy for the year 2002-03 as the Best Integrated Steel Plant
13.
14.
15.
16.
17.
18.
19.
20.
Voluntary involvement of
health
care,
people
care,
peripheral
development,
cultural
38
CHAPTER-IV
knowing financial weakness of the firm to take suitable corrective actions. The future
plans of the firm should be laid down in view of the firms financial strengths and
weaknesses. Thus, financial analysis is the starting point for making plans, before
using any sophisticated forecasting and planning procedures. Understanding the past
is a pre-requisite for anticipating the future.
40
The term ratio refers to the numerical or quantitative relationship between two
items/variables. This relationship can be expressed as:
1. Percentages, say, Net Profits are 25% of Sales (assuming Net Profit of
Rs.25,000 and Sales of Rs.1,00,000),
2. Fraction (Net profit is 1/4th of Sales) and
3. Proportion of numbers (the relationship between Net profits and Sales is 1:4).
These alternative methods of expressing items, which are related to each other,
are, for purpose of financial analysis, referred to as ratio analysis. It should be noted
that computing the ratios does not add any information already inherent in the above
figures of profits and sales. What the ratios do is that they reveal the relationship in a
more meaningful way so as to enable us to draw conclusions from them.
The
rationale of ratio analysis lies in the fact that it makes related information comparable.
A single figure by itself has no meaning but when expressed in terms of a related
figure, it yields significant inferences. For instance, the fact that the Net profits of a
firm amount to, say Rs. Ten Lakhs throws no light on its adequacy or otherwise. The
figure of Net profit has to be considered in relation to other variables. How does it
stand in relation to sales? If, therefore, Net profits are shown in terms of their
relationship with items such as Sales, Assets, Capital employed, Equity capital and so
on, meaningful conclusions can be drawn regarding their adequacy.
To carry the above example further, assuming the capital employed to be Rs.50
lakh and Rs.100 lakh, the Net profit are 20% and 10% each respectively. Ratio
analysis, thus, as a quantitative tool, enables analysts to draw quantitative answers to
questions such as; are the Net profits adequate? Are the assets being used efficiently?
Is the firm solvent? Can the firm meet its current obligations and so on?
41
1.
Liquidity position:With the help of ratio analysis conclusions can be drawn regarding the
liquidity position of a firm.
satisfactory if it is able to meet its current obligations when they become due.
A firm can be said to have the ability to meet its short-term liabilities if it has
sufficient liquid funds to pay the interest on its short-maturing debt usually
within a year as well as to repay the principal. This ability is reflected in the
liquidity ratio of a firm. The liquidity ratios are particularly useful in credit
analysis by banks and other suppliers of short-term loans. Common liquidity
ratios include The Current ratio, Quick ratio and The operating Cash flow
ratio.
2.
Long-term solvency:Ratio analysis is equally useful for assessing the long-term financial viability
of a firm. This aspect of the financial position of a borrower is of concern to
the long-term creditors, security analysts and the present and potential owners
of a business. The long-term solvency is measured by the leverage/capital
structure and profitability ratios, which focus on earning power and operating
efficiency. Ratio analysis reveals the strength and weaknesses of a firm in this
respect. The leverage ratios, for instance, will indicate whether a firm has a
reasonable proportion of various sources of finance or if it is heavily loaded
42
3. Operating Efficiency:Another dimension of the usefulness of the ratio analysis, relevant from the
view point of management, is that it throws light on the degree of efficiency in
the management and utilization of its assets.
4.
Overall Profitability:Unlike the outside parties, which are interested in one aspect of financial
position of a firm, the management is constantly concerned about the over-all
profitability of the enterprise. That is, they are concerned about the ability of
the firm to meet its short-term as well as long-term obligations to its creditors,
to ensure a reasonable return to its owners and secure optimum utilization of
the assets of the firm. This is possible if an integrated view is taken and all the
ratios are considered together.
5.
Inter-firm Comparison:Ratio analysis not only throws light on the financial position of a firm but also
serves as a stepping stone to remedial measures. This is made possible due to
inter-firm comparison and comparison with industry averages. A single figure
of a particular ratio is meaningless unless it is related to some standard or
norm. One of the popular techniques is to compare the ratios of a firm with
the industry average. An inter-firm comparison would demonstrate the firms
position vis--vis its competitors.
6.
Trend Analysis:-
43
Ratio analysis enables a firm to take the time dimension into account. In other
words, whether the financial position of a firm is improving or deteriorating
over the years. This is made possible by the use of trend analysis. The
significance of a trend analysis of ratios lies in the fact that the analysis can
know the direction of movement, i.e., whether the movement is favorable or
unfavorable. For example, the ratio may be low as compared to the norm but
the trend may be upward. On the other hand, though the present level may be
satisfactory but the trend may be a declining one.
Ratio Analysis-Limitations:
Ratio Analysis is a widely used tool of financial analysis. Yet, it suffers from
various limitations. The operational implication of this is that while using ratios, the
conclusions should not be taken on their face value. Some of the limitations, which
characterize ratio analysis, are
i.
Difficulty in comparison.
ii.
iii.
Conceptual Diversity
i.
Difficulty in comparison:One serious limitation of ratio analysis arises out of the difficulty associated
with there comparability.
44
Capitalization of lease;
ii.
Impact of Inflation:The second major limitation of the ratio analysis is associated with price level
changes. This is a weakness of the traditional financial statements, which are
based on historical cost.
iii.
Conceptual Diversity: The factor that influences the usefulness of ratios is that there is difference of
opinion regarding the various concepts used to compute the ratios. There is
always room for diversity of opinion as to what constitutes shareholder`s
equity, debt, assets, profit and so on.
Finally, ratios are only a post-mortem analysis of what has happened
between two balance sheet dates. For one thing the position in the interim
period is not revealed by ratio analysis. Moreover, they give no clue about the
future.
In brief, ratio analysis suffers from some serious limitations. The
analysis should not be carried away by its over simplified nature, easy
computation with high degree of precision. The reliability and significance
attached to ratios will largely depend upon the quality of data on which they
45
are based. They are as good as the data itself, nevertheless, they are an
important tool of financial analysis.
Ratio Analysis-Conclusion:
Calculating a large number of ratios without determining their need in the present
context may confuse the things instead of solving them. Only those ratios should be
selected which can throw proper light on the matter to be discussed.
Unless otherwise the ratios calculated are compared with certain standards one
will not be reach at conclusions. These standards may be a rule of thumb as in
current ratio (2:1), may be industry standards, may be projected ratios etc.
46
The comparison of calculated ratios with the standards will help the analyst in
forming his opinion about financial situation of the concern.
The ratios are only the tools of analysis but their interpretation will depend
upon the caliber and competence of the analyst. He should be familiar with
various financial statements and the significance of changes etc.
A wrong interpretation may create havoc for the concern since wrong
conclusions may lead to wrong decisions. The utility of ratios is linked with
expertise of the analyst.
The ratios are only guidelines for the analyst; he should not base his decisions
entirely on them. He should study any other relevant information, situation in
the concern, general economic environment etc., before reaching final
conclusions.
The study of ratios in isolation may not always prove useful.
The
interpretation should use the ratios as guide and may try to solicit any other relevant
information which helps is reaching a correct decision.
Ratio Analysis-Types:
Several ratios, calculated from the accounting data, can be grouped into
various classes according to financial activity or function to be evaluated. As stated
earlier, the parties interested in financial analysis are short-term and long-term
creditors, owners and management. Short-term creditors` main interest is in the
liquidity position or the short-term solvency of the firm. Long-term creditors`, on the
other hand, are more interested in the long-term solvency and profitability of the firm.
Similarly, owners concentrate on the firms profitability and financial condition.
Management is interested in evaluating every aspect of the firms performance. They
have to protect the interests of all parties and see that the firm grows profitably. In
view of the requirements of the various users of ratios, we may classify them into the
following four important categories:
47
LIQUIDITY RATIOS
LEVERAGE RATIOS
ACTIVITY RATIOS
PROFITABILITY RATIOS
LIQUIDITY RATIOS:
It is extremely essential for a firm to be able to meet its obligations as they
become due. Liquidity ratios measure the firms ability to meet current obligations.
In fact, analysis of liquidity needs the preparation of cash budgets and cash
and Fund Flow statements; but liquidity ratios, by establishing a relationship between
cash and other current assets to current obligations provided a quick measure of
liquidity. A firm should ensure that it does not suffer from lack of liquidity, and also
that it does not have excess liquidity. The failure of a company to meet its obligations
due to lack of sufficient liquidity, will result in a poor creditworthiness, loss of
creditors` confidence, or even in legal tangles resulting in the closure of the company.
A very high degree of liquidity is also bad; idle assets earn nothing. The firms funds
will be unnecessarily tied up in current assets. Therefore, it is necessary to strike a
proper balance between high liquidity and lack of liquidity. The most common ratios,
which indicate the extent of liquidity or lack of it, are:
1. CURRENT RATIO
2. QUICK RATIO
3. CASH RATIO
1.
CURRENT RATIO:
The current ratio is calculated by dividing current assets by current liabilities.
48
Current assets
Current Ratio
=
Current liabilities
Current assets include cash and those assets, which can be converted into cash
within a year, such as Marketable Securities, Debtors and Inventories.
Prepaid
expenses are also include in current assets as they represent the payments that will not
be made by the firm in future. Current Liabilities include Creditors, Bill payable,
Accrued expenses, Short-term bank loan, and Income Tax Liability and Long-term
debt maturing in the current year.
The current ratio is a measure of the firms` short-term solvency. The higher
the current ratio, the larger is the amount of rupees available per Rupee of current
liability, the more is the firms` ability to meet current obligations and the greater is the
safety of funds of short-term creditors.
2.
QUICK RATIO:
The Quick ratio is calculated by dividing quick assets by quick liabilities.
Quick assets
Quick Ratio =
Quick liabilities
Quick assets or Liquid assets mean those assets which are immediately
convertible into cash without much loss. All current assets except prepaid expenses
and inventories are categorized in liquid assets.
liabilities, which are payable within a short period. Normally, Bank overdraft and
Cash credit facility, if they become permanent mode of financing are in quick
liabilities.
49
3.
CASH RATIO:
The cash ratio is calculated by dividing cash + marketable securities by current
liabilities
Cash Ratio
Since cash is most liquid asset, a financial analyst may examine cash ratio and
its equivalent to current liabilities. Trade investment or marketable securities are
equivalent of cash; therefore, they may be included in the computation of cash ratio.
LEVERAGE RATIOS:
The short-term creditors like bankers and suppliers of raw material are more
concerned with the firms` current debt-paying ability. On the other hand, long-term
creditors like debenture holders, financial institutions etc., are more concerned with
the firms` long-term financial strength. In fact, a firm should have strong short-as
well as long-term financial position. To judge the long-term financial position of the
firm, financial leverage, or Capital structure, ratios are calculated.
These ratios
indicate mix of funds provided by owners and lenders. As a general rule, there should
be an approximate mix of debt and owners equity in financing the firms` assets.
The manner in which assets are financed has a number of implications. First,
between debt and equity, debt is more risky from the firms` point of view. The firm
has a legal obligation to pay interest on debt holders, irrespective of the profits made
or losses incurred by the firm. If the firm fails to debt holders in time, they can take
legal action against it to get payment and in extreme cases, can force the firm into
liquidation.
Secondly, use of debt is advantageous for shareholders in two ways:
a. They can retain control of the firm with a limited stake and
50
b. Their earnings will be magnified, when the firm earns a rate of return on the
total capital employed higher than the interest rate on the borrowing funds.
The process of magnifying the shareholders return through the use of debt is
called financial leverage or financial gearing or trading on equity.
Leverage ratios may be calculated from the balance sheet to determine the
proportion of debt in total financing. Many variations of these ratios exist; but all
these ratios indicate the same thing-the extent to which the firm has relied on debt in
financing assets. Leverage ratios are also computed from the profit and loss items by
determining the extent to which operating profits are sufficient to cover the fixed
charges.
=
EQUITY
PROPRIETARY RATIO:
This ratio states relationship between share capital and total assets.
Proprietors equity represents equity share capital, preference share capital and
reserves and surplus. The latter ratio is also called capital employed to total assets.
EQUITY SHARE CAPITAL
Proprietary Ratio =
TOTAL TANGIBLE ASSETS
51
PROPRIETORS EQUITY
(OR)
TOTAL TANGIBLE ASSETS
EBIT
--------------------------------INTEREST CHARGES
ACTIVITY RATIOS:
52
Funds creditors and owners are invested in various assets to generate sales and
profits. The better the management of assets, the larger the amount of sales. Activity
ratios are employed to evaluate the efficiency with which the firm managers and
utilizes its assets. These ratios are also called Turnover Ratios because they indicate
the speed with which assets are being converted or turned over into sales. Activity
ratios, thus, involve a relationship between sales and assets.
A proper balance
between sales and assets generally reflects that assets are managed well. Several
activity ratios can be calculated to judge the effectiveness of asset utilization.
(accounts receivables) are created in the firms` accounts. The debtors are expected to
53
be converted into cash over a short period and, therefore, are included in current
assets. The liquidity position of the firm depends on the quality of debtors to a greater
extent. Debtors turnover ratio indicates the velocity of debt collection of a firm. Un
simple wards it indicates the number of times average debtors are turned over during a
year.
Credit Sales
Debtors Turnover Ratio =
Sales
Fixed Assets Turnover Ratio =
Net fixed assets
54
PROFITABILITY RATIOS:
A company should earn profits to Survive and Grow over a long period of
time. Profits are essential, but it would be wrong to assume that every action initiated
by management of a company should be aimed at maximizing profits, irrespective of
social consequences.
Profit is the difference between revenues and expenses over a period of time (usually
a year). Profit is the ultimate Output of a company, and it will have no future if it
fails to make sufficient profits. Therefore, the financial manager should continuously
evaluate to the efficiency of the company in term of profits. The profitability ratios
are calculated to measure the operating efficiency of the company.
Besides
management of the company, creditors and owners are also interested in the
profitability of the firm. Creditors want to get interest and repayment of principle
regularly. Owners want to get a required rate of return on their investment. This is
possible only when the company earns enough profits.
55
1.
1.
2.
CASH MARGIN
3.
OPERATING MARGIN
4.
ii.
iii.
56
iv.
The analysis of these factors will reveal to the management that how a
depressed gross profit margin can be improved.
A low gross profit margin may reflect higher cost of goods sold due to the
firms` inability to purchase raw materials at favorable terms, inefficient utilization of
plant and machinery, resulting in higher cost of production. The ratio will also be low
due to fall in prices in the market, or market reduction in selling price by the firm in
an attempt to obtain large sales volume, the cost of goods sold remaining unchanged.
The financial manager must be able to detect the causes of a falling gross margin and
initiate action to improve the situation.
Sales Cost of goods sold
(Or)
Gross profit
Gross Profit Margin Ratio =
Sales
measure of the firms` ability to turn each rupee sales into net profit. If the net margin
is inadequate, the firm will fail to achieve satisfactory return on shareholder`s funds.
This ratio also indicates the firms` capacity to withstand in adverse economic
conditions. A firm with a high net margin ratio would be in an advantageous position
to survive in the case of falling selling prices, rising costs of production or declining
demand for the product. It would really be difficult for a low net margin firm to
withstand these adversities. Similarly, a firm higher net profit margin can make better
57
use of favorable condition, such as rising selling prices; fall in costs of production or
increasing demand for the product. Such a firm will be able to accelerate its profits at
a faster rate than a firm with a low net profit margin will.
An analyst will be able to interpret the firms profitability more meaningfully
if he/she evaluates both the ratios-gross margin and net margin-jointly. To illustrate, if
the gross profit margin has increased over years, but the net profit margin has either
remained constant or declined, or has not increased as fast as the gross margin, this
implies that the operating expenses relative to sales have been increasing.
The
increasing expenses should be identified and controlled. Gross profit margin may
decline due to fall in sales price or increase in the cost of production.
Profit after Tax
Net Profit Margin Ratio =
Sales
X 100
Sales
58
Before Interests and Taxes. The purpose of computing this ratio is to find out the
overall operational efficiency of the business concern.
Operating profit
X100
Sales
RETURN ON INVESTMENT:
The term investment refers to Total Assets. The funds employed in Net assets
are known as Capital Employed. Net assets equal net fixed assets plus current assets
minus Current liabilities excluding Bank loans. Alternatively, Capital employed in
equal to Net worth plus total debt.
The conventional approach of calculating return on investment (ROI) is to
divide PAT by Investment.
59
Where ROTA and RONA respectively Return on Total assets and Return on
Net assets.
RETURN ON CAPITAL:
The ROCE is the second type of ROI. The term capital employed refers to
long-term funds supplied by the creditors and owners of the fund. It can be computed
60
X 100
Average Total Capital Employed
X 100
Gross Block
NET PROFIT is profit before Tax. Gross Block means Gross fixed assets i.e., Fixed
assets before deducting depreciation.
61
CHAPTER-V
62
Liquidity ratios:
Current assets
Current ratio= ------------------------------------------Current liabilities
2005-06
2006-07
2007-08
2008-09
2009-
Inventory
Sundry debtors
Cash & bank
Other Assets
Loans & advances
Current assets
Current liabilities
Current ratios
1216.45
165.65
5621.70
184.36
1063.84
8252.00
1587.86
5.20
1203.24
216.80
7194.68
314.48
1518.90
10448.10
2104.30
4.97
1761.15
93.41
7699.11
292.43
1958.49
11804.60
3191.62
3.70
3215.28
191.27
6624.17
258.91
1569.69
11859.32
4181.32
2.84
10
2451.52
181.18
5415.54
137.40
1365.02
9550.66
4307.84
2.21
INTEPRETATION:
The current ratio during the study period that is from 2005- 2006 to 20092010, it has been observe that ,in the year 2005 to 2006 it is very high that
is 5.20.
The current ratio has been decreasing, but the company is able to maintain
higher current ratio than that of ideal ratio.
63
As the current ratio is higher than the ideal current ratio, the liquidity
position is said to be good.
LIQUID/QUICK RATIO:
Liquid assets
Liquid ratio = --------------------------Current liabilities
2005-06
165.65
5621.70
184.36
1063.84
7035.55
1587.86
4.43
2006-07
216.80
7194.68
314.48
1518.90
9244.86
2104.30
4.39
2007-08
93.41
7699.11
292.43
1958.49
10043.44
3191.62
3.14
2008-09
191.27
6624.17
258.91
1569.69
8644.04
4181.32
2.06
2009-10
181.18
5415.54
137.40
1365.02
7099.14
4307.84
1.65
INTERPRETATION:
It has been observed that the quick ratio of VSP is high compared with
ideal ratio.
64
As the quick ratio during the period of study is higher than that of then
ideal ratio, the liquidity position is very good.
2005-06
2006-07
2007-08
2008-09
2009-10
5621.70
7194.68
7699.11
6624.17
5415.54
Absolute Assets
Current liabilities
5621.70
1587.86
7194.68
2104.30
7699.11
3191.62
6624.17
4181.32
5415.54
4307.84
ABSOLUTE
LIQUID RATIO
3.5
3.42
2.41
1.58
1.26
INTERPRETATION:
65
The absolute liquid/ cash ratio of VSP is more than the ideal ratio. It means
the company is enjoying high liquidity and secured position.
LEVERAGE RATIO:
Outsiders funds
Debt Equity Ratio =---------------------------------------Shareholders funds
2005-06
173.87
369.44
543.31
8173.7
2006-07
604.45
312.51
916.96
9538.2
2007-08
332.78
107.95
440.73
11481.04
2008-09
907.72
100.04
1007.76
12419.91
2009-10
407.28
825.27
1233.55
12885.00
funds
Debt equity
0.13
0.19
0.08
0.16
0.19
ratio
INTERPRETATION:
Company is less dependent on outsiders funds.
Its capital base is high and strong.
66
It can be concluded that the company is maintaining less percent of debt in its
capital structure.
2005-06
1920.57
31.06
61.83
2006-07
2270.76
48.42
46.90
67
2007-08
3026.93
31.57
95.88
2008-09
2114.06
88.14
23.99
2009-10
1325.20
19.76
67.06
INTERPRETATION:
Companys Interest Coverage Ratio is very high and extraordinarily
satisfactory.
It indicates that greater ability of the firm to handle fixed charges.
High interest coverage ratio does not indicate unutilized debt capacity in case
of
RINL, since the company is having its own funds.
PROPRIETARY RATIO:
2005-06
7827.31
1051.99
78%
2006-07
7827.31
12835.8
74%
68
2007-08
7827.32
15276.51
75%
2008-09
7827.32
17733.43
79%
2009-10
7827.31
18523.21
42%
INTERPRETATION:
Proprietary ratio is a test of long term financial position.
Except for the year 2009-10, all other years showing higher ratio, this
indicates sound long term financial position.
It is also indicating the sufficient use is being made of equity to finance the
business.
SOLVENCY RATIO:
Total Liabilities of outsiders
Solvency ratio =------------------------------------------Total assets
(Rs. In Crores)
PARTICULARS
Secured loans
Unsecured loans
Total liabilities to
2005-06
173.87
369.44
543.31
2006-07
604.45
312.51
916.96
2007-08
332.08
107.95
440.73
2008-09
907.72
100.04
1007.76
2009-10
407.28
825.27
650.58
outsiders
Total assets
Solvency ratio
10511.00
5.1%
12835.8
7.1%
15276.51
2.8%
17733.43
5.68%
18522.96
3.51%
INTERPRETATION:
Solvency ratio of VSP ltd during the year 2006-07 is high as compared to other years.
It solvency ratio is stable for last three years. It indicates the the solvency position of
VSP ltd is more satisfactory.
70
(Rs. in crores)
Particulars
2005-06
2006-07
2007-08
2008-09
2009-10
Secured loans
173.87
604.45
332.78
907.72
407.28
Unsecured loans
Funded debt(A)
Total Funds (B)
Total capitalization
369.44
543.31
8173.70
6.60%
321.51
916.96
9538.20
9.60%
107.95
440.73
11481.04
3.80%
100.04
1007.76
12419.91
8%
825.27
1232.55
12885
9.50%
(A/B)
INTERPRETATION:
71
ACTIVITY RATIO:
INVENTORY TURNOVER RATIO:
NET SALES
Inventory Turnover Ratio =----------------------------AVG INVENTORY
(Rs. in crores)
PARTICULARS
2005-06
2006-07
2007-08
2008-09
2009-
Net sales
7305.71
7932.66
9088.37
9128.38
10
9809.15
Avg inventory
1236.99
1210.80
1482.20
1622.14
2833.40
Inventory Turnover
5.91
6.55
6.13
5.62
3.46
Ratio
Times
Times
Times
Times
Times
72
INTERPRETATION:
The Inventory Turn Over Ratio during the year 2009-10 was 3.46
Normally higher the ratio indicates the better inventory management.
Higher ratio also indicates that the company is not able to met the customers
demand properly.
(Rs. in crores)
Particulars
2005-06
2006-07
2007-08
73
2008-09
2009-10
No. of working
days
Inventory
turnover ratio
Inventory
conversion
period
365
365
365
365
365
5.91
6.55
6.13
6.85
7.24
62 days
56 days
60 days
53 days
50 days
INTERPRETATION:
The inventory conversion period during 2009-2010 is 50 days. It means that
the inventory has been disposed off or sold on an average of once in every 50
days.
2006-07
7932.66
2007-08
9088.37
2008-09
9128.38
2009-10
9809.15
191.54
155.105
142.34
186.23
74
debtor turn
over ratio
68 times
41 times
59 times
64 times
53 times
INTERPRETATION:
The debtor turnover ratio for the year 2009-10 is 54
(Rs. in crores)
PARTICULARS
2005-06
2006-07
2007-08
2008-09
2009-10
No of working days
365
365
365
365
365
75
Debtors turnover
ratio
Avg.collection
period
60.97
41.48
58.59
55.68
67.12
5 days
9 days
6 days
6 days
5 days
INTERPRETATION:
The avg collection period during the year 2009-10, is 5 days: it represents the
avg. no of days for which the firm has to wait before its receivables are
converted into cash.
During the period of study it has been observed that debt collection period
varies from 5 to 9 days
However, the avg. collection period during different periods is quite low. It
indicates the better quality of debtors and the efficiency of the debt collection
department.
Net sales
Working capital turnover ratio = ------------------------------------------------Working capital
76
(Rs. in crores)
PARTICULARS
a.net sales
2005-06
7305.71
2006-07
7932.66
2007-08
9088.37
2008-09
9128.38
2009-10
9809.15
b. net working
capital
Working capital
turnover ratio(a/b)
6664.14
8343.8
8612.97
7678.00
5242.82
1.10
0.95
1.05
1.18
1.87
times
times
times
times
times
INTERPRETATION:
The working capital turnover ratio during the year 2009-10 i 1.87 times. It
shows that only 1.05 of net current assets are used to generate 1 rupee of sales.
The higher working capital ratio indicates that the efficient utilization of
working capital.
77
PROFITABILITY RATIOS:
GROSS PROFIT RATIO:
Gross profit
Gross profit ratio = ---------------------------------*100
Net sales
TABLE SHOWING YEAR WISE GROSS PROFIT RATIO
(Rs. in crores)
PARTICULARS
2005-06
2006-07
2007-08
2008-09
2009-10
a. gross profit
b. net sales
1921.00
7314.00
2271.00
7933.00
3027.00
9088.00
2115.00
9128.00
1326.00
9809.00
Gross profit
ratio(a/b)
26.30%
28.70%
33.30%
23.20%
13.60%
INTERPRETATION:
It has been observed that the gross profit ratio is in increasing tread upto 200708 and it is decreasing from 2008-09
78
Sales are in increasing trend but the profit ratio is decreasing. It is due to
increased cost of production.
(Rs. in crores)
PARTICULARS
Operating profit
Net Sales
Operating profit
ratio
2005-06
2011.21
7314.00
2006-07
2339.21
7933.00
2007-08
3325.19
9088.00
2008-09
4988.12
9128.00
2009-10
2450.50
9809.00
27.50%
29.50%
36.60%
54.70%
25.00%
INTERPRETATION:
Company recorded higher operating profit during 2008-09 and in other years,
it is more or less recorded same trends.
It is indicates, the companys operational efficiency.
79
(Rs. in crores)
PARTICULARS
2005-06
2006-07
2007-08
2008-09
2009-10
A.net profit
1252.37
1363.43
1942.74
1335.57
796.67
B. net sales
Net profit ratio(A/B)
7305.71
17.14%
7932.66
17.18%
9088.37
21%
9128.38
14.63%
9809.15
8.12%
INTERPRETATION:
Net profit is in decline position from 2008-09 in comparative with 2007-08.
Main attributable reason for the declining the profit is overall global meltdown
Even in adverse market conditions, the company is able to earn net profits.
80
(Rs. in crores)
PARTICULARS
A.net profit
B.share holders
funds
Return on
investment(A/B)
2005-06
1252.37
8173.7
2006-07
1363.43
9538.2
2007-08
1942.74
11481.04
2008-09
1335.57
12419.91
2009-10
796.10
12885
15.32%
14.29%
16.92%
10.75%
6.18%
INTERPRETATION:
Highest return on investment was recorded in 2007-08.
81
It has been observed that the ROI is fluctuating from year to year.
More reserves and surplus funds have been diverted to expansion activities
(Rs. in crores)
PARTICULARS
2005-06
2006-07
2007-08
2008-09
2009-10
A.net profit
B.equity share
capital
Return on equity
capital
1252.37
4890.00
1363.43
4890.00
1942.74
4890.00
1335.57
4890.00
796.67
4890.00
25.61
27.88
39.73
27.31
16.29
INTERPRETATION:
Equity share capital is constant in in all the year whereas net profit is
fluctuating.
82
Even though the return on equity capital is in decreasing position, the rate of
return in comparison with the marketing conditions is very satisfactory.
Global market conditions, increasing in operating costs, decrease in net profits
are the main reasons for the recording of low ratio.
2005-06
2006-07
2007-08
2008-09
2009-10
Earning available to
equity shareholders
1252.37
1363.43
1942.74
1095.00
556.89
4.89
4.89
4.89
4.89
4.89
256.12
278.83
397.30
223.93
113.89
INTERPRETATION:
The earnings per share is declining year by year.
The least rate of return is 11.40%
83
Since the company is in expansion activity, the future earnings per share will
increase.
(Rs. in crores)
PARTICULARS
A.net profit
B.capital employed
(incl. term deposits)
Return on capital
employed
2005-06
1252.37
8493.00
2006-07
1363.43
9427.00
2007-08
1942.74
9935.00
2008-09
1335.57
7892.00
2009-10
796.67
5476.00
14.80%
14.50%
19.55%
17.00%
14.60%
INTERPRETATION:
Even though the return on capital employed is declining, but it is satisfactory,
considering the present market conditions and from the security point of view.
84
CHAPTER-VI
85
SUMMARY:
Visakhapatnam Steel Plant was founded on 20th Jan 71 but became fully
operational on 1st Aug 92. VSP is the first shore based integrated steel plant with
new technology, large scale computerization and automation. The organizational
manpower has been rationalized to operate it at international levels of efficiency and
to attain international labor productivity.
The production, commercial and financial performance has been improving
with the passage of years. The financial analysis of VSP by the use of various
techniques i.e. Ratio, Cash flow analysis shows that:
1)
2)
3)
4)
5)
6)
7)
8)
86
SUGGESTIONS
The following suggestions will improve the financial position of the VSP.
PRODUCTION
1)
2)
3)
FINANCE
1)
PERSONNEL:
1)
2)
3)
87
4)
MARKETING
1)
2)
3)
4)
5)
88
BIBLIOGRAPHY
BOOKS:
1. Financial Management: Theory & Practice (4th Edition)
Eugene F. Brigham and Michael C. Gerhardt
WEBSITES
http://vizagsteel.com
http://www.indiansteel.com
http://www.bee-india.nic.in.com
http://www.answer.com
89