TABLE OF CONTENTS

THE RISK ASSESSMENT MODEL ............................................................................................................ 3

MODEL DESIGN .................................................................................................................................... 3
MODEL USAGE ..................................................................................................................................... 5
MODEL ARCHITECTURE ....................................................................................................................... 6
OVERALL RISK MEASURED ON AN TEN POINT SCALE ............................................................................ 6
INDUSTRY RISK EVALUATION .................................................................................................. 7
Factor scoring ........................................................................................................................................ 7
1. Demand-supply gap...................................................................................................................... 7
2. Government policies..................................................................................................................... 8
3. Extent of Competition................................................................................................................... 9
4. Input Related Risks....................................................................................................................... 9
5. ROCE (Return on capital employed)......................................................................................... 10
6. OPBDIT/Operating Income ....................................................................................................... 11
7. Variability of operating margins ............................................................................................... 11
8. Growth in operating margins..................................................................................................... 12

INTERNAL BUSINESS RISK EVALUATION ............................................................................. 13

Market Position factors ...................................................................................................................... 13
1. Access to Patents.......................................................................................................................... 13
2. Brand equity ................................................................................................................................ 13
3. Consistency in quality ................................................................................................................ 15
4. Customisation of product/Product design................................................................................ 16
5. Distribution set up...................................................................................................................... 18
6. Diversity of markets ................................................................................................................... 19
7. Financial ability to withstand price competition ..................................................................... 21
8. Long term contracts/assured offtake:......................................................................................... 22
9. Product range/mix: ...................................................................................................................... 23
10. Support service facilities/ After Sales Service.......................................................................... 24
11. Project management skills ......................................................................................................... 26
12. Size related pricing advantages ................................................................................................. 26
13. Replacement markets.................................................................................................................. 27
14. Deficit region - cement ............................................................................................................... 27
15. Consolidation of markets - cement............................................................................................ 27
16. Other promotional ventures....................................................................................................... 27
17. Value addition - software ........................................................................................................... 27
Operating Efficiency Factors ................................................................................................................... 27
1. Availability of raw materials ..................................................................................................... 27
2. Multi location advantages .......................................................................................................... 29
3. Adherence to environmental regulation ................................................................................... 29
4. Capacity Utilisation .................................................................................................................... 30
5. Cost effective technology ........................................................................................................... 31
6. Employee cost: ............................................................................................................................. 31
7. Efficient raw material usage (yield) .......................................................................................... 32
8. Energy cost................................................................................................................................... 33
9. Extent of Integration ................................................................................................................... 33
10. Management of input price volatility ....................................................................................... 35
11. Selling costs ................................................................................................................................. 35
12. Vulnerability to event risks ....................................................................................................... 36
13. Bargaining power with suppliers .............................................................................................. 36
14. Proximity to customers ............................................................................................................... 36
15. Employee attrition rate ............................................................................................................... 36

FINANCIAL RISK......................................................................................................................... 37

Interest Coverage......................................................................................................................... 37
Return on Capital Employed...................................................................................................... 37
Operating Margins...................................................................................................................... 37


Operating income/ Short term borrowings............................................................................... 37

Current ratio ................................................................................................................................ 37

DSCR............................................................................................................................................ 37

Total outside liabilities/Total networth .................................................................................... 37

Free cash flow from operations/Total Debt .............................................................................. 37

FINANCIAL FLEXIBILITY...................................................................................................................... 41

MANAGEMENT RISK EVALUATION ....................................................................................... 43

Track record factors ................................................................................................................................. 43
1. Business and Financial Policy:................................................................................................... 43
2. Relevant experience in the industry.......................................................................................... 44
3. Board composition ...................................................................................................................... 44
Credibility................................................................................................................................................. 44
Payment Record ....................................................................................................................................... 45
Other factors............................................................................................................................................... 45
1. Group support: ............................................................................................................................ 45
2. Management proactiveness........................................................................................................ 45
3. Strategic initiatives ..................................................................................................................... 46

The Risk Assessment Model

The Risk Assessment Model (RAM) is a software based credit decision support
system and is an integral part of MYCRAs credit management advisory service
for banks, financial institutions and large size corporates. This service aims at
enhancing the efficiency & effectiveness of all credit related functions. It helps an
organisation in assessing the credit quality of borrowers. RAM is based on
MYCRAs methodology for credit risk assessment.
Model Design

RAM in its basic form is designed to assess credit risk in a structured and
comprehensive manner. This form is suitably adapted and modified to meet the
specific needs of an organisation depending on the dominant borrower segments
and typical information availability.

EXTERNAL RISK

INTERNAL RISK
BUSINESS RISK
COMPANY

INDUSTRY RISK

GRADE
MANAGEMENT RISK
FINANCIAL RISK

CONSTRUCTION
RISK

PROJECT RISK

POST IMPLEM ENTATION

RISK

OVERALL RISK ASSESSMENT

RAM helps isolate risk elements using a top-down approach. The overall risk is
assessed through a three staged process.
STAGE I : The risk of the company is broken down into risk categories.
STAGE II : The risk categories are broken down into risk parameters.

STAGE III : The risk parameters are broken down into risk factors.

RAM operates on the principle of systematically and logically breaking down

risks associated in lending to a corporate entity. This approach facilitates
objectivity in assessment of inherently subjective aspects.

R is k G r a d in g

R is k c a te g o rie s

B u s in e s s R is k

R is k p a ra m e te rs

M a rk et
p o s itio n

R is k f a c to rs

B r a n d e q u ity

F in a n c ia l R is k

O p e r a tin g
e ffic ie n c y

D is tr ib u tio n
set u p

Model Usage

The user is required to score the company on risk factors only (which are
automatically built up stage by stage into the final grading). From the users
viewpoint, the aggregation of risk is a three stage process:

Stage I

The user scores each risk factor on a six point scale *

Stage II

The risk factors are aggregated to arrive at the grading for each
parameter

Stage III

The scores for risk parameters are further aggregated to arrive at

a grading for a risk category. Finally the overall grading* is a
result of the aggregation of the different risk category scores

O fficer
F actor 1

F actor n-1

Factor 3

Factor 2

Param eter 1
grading

Param eter i
grading

Category 1
grading

C ategory i
grading

Factor n

P aram eter N
grading

C ategory 4
grading

C redit Risk grad in g

In order to ensure applicability across sectors, the model provides for a certain
degree of flexibility in the selection of relevant parameters and associated
weights. The architecture of the model is designed in such a manner as to
prevent dilution of the weightages and impact of critical factors. The number of

factors should be restricted to the critical few to prevent dilution of their effect in
the overall risk assessment.
* scale gradation may vary depending on the borrowers profile
Model Architecture

OVERALL RISK RATING

W8

W9
Financial Risk

Business Risk

W3

W4

W5

W7

W6

Matrix
Internal Business

Industry Risk

Management

Past

Future

Financial

Risk

Financials

Financials

Flexibility

W..

Wn

Risk

W1

W2

Wi

W..

FACTORS

Overall Risk measured on an ten point scale

Grade

Grade I

Degree of safety with

regard to servicing
Debt obligations
Very High

Grade II

High

Grade III

Adequate

Grade IV

Average

Grade V

Below Average

Comments

The fundamentally strong debt servicing capacity of such

companies is most unlikely to be adversely affected by changes in
circumstances.
Adverse business conditions are unlikely to affect debt servicing
capacity. Such companies differ in safety from those in Grade I only
marginally.
Changes in circumstances are more likely to affect debt servicing
capacity than for higher grades.
Debt servicing capacity could weaken in view of changing
circumstances
While such companies are less susceptible to default than those in
lower grades, uncertainties faced by them could adversely affect
debt servicing capacity.

Grade VI

Inadequate

Grade VII

Low

Grade VIII

High Risk

Grade IX

Substantial Risk

Grade X

Default

Uncertainties faced by issuer could lead to inadequate capacity to

make timely debt repayments
Debt servicing capacity is highly vulnerable to adverse changes in
circumstances.
Adverse business or economic conditions are likely to lead to lack of
ability or willingness to service debt obligations.
Timely payment of debt would continue only if favourable
circumstances continue
Debt servicing capacity is in default and returns from this may be
realised only on reorganisation or liquidation

Companies under the same grade are of similar but not identical creditworthiness.
This is because the number of rating categories is limited and hence cannot reflect small differences in the
degree of risks.

INDUSTRY RISK EVALUATION

Industry risk assessment focuses on the overall industry of which the company being analysed is
a constituent firm. Company specific factors are not covered at this stage.
The factors considered under industry risk are
Qualitative factors
Quantitative factors*
Demand supply gap
Return on capital employed
Government policy
Operating margins
Extent of competition
Variability of operating margins
Input related risks
Slope of operating margin trendline
* The quantitative factors are calculated and evaluated for the industry as a whole
Factor scoring
Indicative benchmarks are provided below for scoring of factors under Industry Risk. The benchmarks
presented are illustrative guidelines for scoring an industry, rather than an exhaustive set of factors to be
necessarily satisfied for appropriate categorisation.
1. Demand-supply gap
Demand Supply gap would critically determine the volumes, realisations and consequently the
profitability of companies operating in an industry. The attractiveness of an industry for fresh
capital investments would depend upon the anticipated demand supply equation. Industries
wherein demand is expected to exceed available supply over a 3 year horizon would score highly
on this parameter. The global supply demand equation is factored in for industries that are
globally integrated. The outlook on demand-supply position would largely be a function of

Expected demand growth

Shifts in consumption pattern resulting in replacement demand and product substitution
Present installed capacities and commissioning of new capacities which would determine the
supply pattern in an industry.

6 (Excellent)

5 (Good)

3&4 1(Average)

2 (Below average)

1 (Poor)

Extremely
favourable
demand
supply
gap.
Current
production
well
below
the
estimated demand
for
product.
Demand
supply
gap
likely
to
remain insulated
from recessionary
trends.
Growth
potential
in
foreseeable future
is high.

Past growth rates

relatively
high
and
stable.
Positive demandsupply
gap
scenario.
Relatively
insulated
from
economic
recession.
Favourable
growth rate likely
to continue in the
medium
term.
However,
product
offtake
not
as
easily
assured as higher
grades.

Industry
characterised
by
derived demand strong
linkages
with
overall
economic growth.
Marginal demand
supply gap/ slight
overcapacity
situation likely to
restrict
medium
term
growth,
despite
positive
long term growth
prospects.

Serious
oversupply
situation
in
industry.
Production levels
have
been
stagnant/declinin
g for an extended
period. Installed
capacities likely
to
remain
in
excess
of
estimated
demand over the
medium
term.
Reversal
in
oversupply
situation
in
medium term is
unlikely.

Product
is
outdated,
with
demand showing
a
clearly
declining trend.
Industry likely to
die out within a
few years.

2. Government policies
This parameter involves taking a view on whether government policy over a 3 year time horizon
would affect the industry in a favourable or unfavourable manner. The impact of government
policies with respect to tariff barriers, both quantitative (import duties) and qualitative (quotas,
other restrictions like sanctions), excise duty, taxes, domestic price control, incentives for new
investments, incentives for exports, legislation for pollution control measures, laws with respect
to foreign exchange on various industries need to be examined. Industries with favourable
government policies would score high on this parameter.
6 (Excellent)

5 (Good)

3&4 (Average)

Policy
is
highly
favourable
and
unambiguous, with
certain
minimum
return being made
available
to
the
industry. Favourable
government policy
likely to continue in
the
foreseeable
future.

Despite absence
of
assured
returns,
other
measures
taken
by
the
government such
as
protective
import
tariffs/
incentives
favourably
influence
the
industrys
profitability.

The
existing
government
policies are not
significantly
favourable/
unfavourable
for
the
industry.
Profitability is not
particularly
influenced
by
existing/ foreseen
regulatory
measures.

2 (Below
average)
Government
policy has a
significantly
negative
influence, in the
form of high
excise burden,
inverted import
duty structure,
unviable price
regulation, etc.

1 (Poor)
Government
policy
towards
industry
is
extremely
unfavourable e.g.
Order for closure
of all units in a
polluting
industry by a
specified date.

Scores 3 & 4 represent average performance for the given factor, however score of 4 to be given for
average performance with a positive outlook (slightly higher than average performance), while score of 3 to
be given to average performance with negative outlook (slightly lower than average performance)

3.

Extent of Competition

The level of competition in an industry has implications on future profitability of players in an

industry. The existing demand supply scenario, outlook on growth, and the number of players
operating in an industry critically determine the extent of competition. The number of players
operating in an industry would in turn depend on entry barriers in an industry. Existence of
government regulations regarding licensing requirements, level of returns, heavy capital
investment requirements, distribution network, technology, patents, brand equity could be
significant entry barriers for prospective entrants to an industry.
The industry could be exposed to competition from the unorganised sector, as well as imports.
The increasing linkage with the global economy in a declining import duty regime exposes
domestic companies to competition from imports. The unorganised sector poses significant
competition in industries with low entry barriers. Extent of competition in an industry could be
reflected by trends in realisations and expenditure on sales promotion. Industries with high level
of competition would score low on this parameter.
6 (Excellent)

5 (Good)

3&4 (Average)

2 (Below average)

1 (Poor)

The industry has a

monopoly structure,
with the prospect of
new entrants in the
medium term being
unlikely.

Industry
is
characterised by a
few large players
accounting for the
bulk of market
share.
Capital
investment
involved is likely
to
discourage
significant
increase
in
competition in the
medium
term.
Absence
of
serious
threat
from imports.

Industry has a
fairly fragmented
structure. Moderate
entry barriers in the
form
of
technology/ capital
investment.
Fair
extent of value
addition
restricts
easy access to the
unorganised sector.
/ Significant threat
from imports.

Highly
fragmented
industry.
Processes are very
easily replicable
leading
to
presence of large,
cost-competitive
unorganised
sector/
Significantly
lower cost of
imports
render
domestic
producers
unviable.

Extremely
competitive
industry, with a
near absence of
entry barriers,
in the form of
investment/
technology etc.
No player is
capable
of
building
a
significant
market share in
the
industry.
Majority
of
players in the
industry
are
loss making.

4.

Input Related Risks

This parameter would involve taking a view on availability of raw material and volatility in the
prices of raw material. The volatility in prices would affect the earnings stability, depending
upon the ability of the industry to pass on increase in raw material prices to the end users. The
industries characterised by high value addition would be less susceptible to the volatility in raw
material prices. The extent of value addition is reflected by the percentage of raw material cost in
the overall cost structure of the product. Industries with limited availability of raw material,
highly volatile prices of raw material or low value addition would score low on this parameter.

6 (Excellent)

5 (Good)

3&4 (Average)

2 (Below average)

1 (Poor)

Players across the

industry have access
to
an
assured
medium to long
term
supply
of
inputs
at
stable
prices.

Key raw material

inputs for the
industry
are
available
in
abundance.
Absence
of
significant year to
year variations in
availability of raw
material.
Volatility in raw
material prices is
low.

Profitability
is
significantly
dependent on raw
material
prices,
which are relatively
volatile.
Availability
of
quality
raw
materials is subject
to
natural
uncertainties, etc./
Fair
degree
of
dependence
on
imported
raw
material, leading to
exposure to forex
risk.

High
raw
material cost with
highly
volatile
input
prices.
Uncertainties
associated
with
availability of raw
materials/
volatility
in
prices/
can
significantly
affect profitability
of players across
the industry.

Availability of
raw materials
highly
uncertain. High
volatility
in
input
prices
within a short
time
period.
Absence of any
foreseeable
trend in raw
material price
movements/
availability.

5. ROCE (Return on capital employed)

= Profit before interest and tax (PBIT)/ Average capital employed
Where capital employed = (Capital + Reserves + Short term debt + Long term debt
Revaluation reserves Capital work in progress)
Average capital employed = (Capital employed at the beginning of year + Capital
employed at the end of year)/ 2
ROCE is scored as a weighted average of the last three years. e.g. if the ROCE is as given
below:
1997-98
1998-99
1999-2000
ROCE
15
16
17
(3*17+2*16+1*15)/6
15
12
17
(3*17+2*12+1*15)/6
15
14
13
13
ROCE

Score

Less than 10%

10.0% to 12%

1.5

12.0% to 14%

2.25

14.0% to 18%

18.0% to 20%

3.75

20.0% to 24%

4.5

24.0% to 28%

5.25

Above 28.0%

10

6.

OPBDIT/Operating Income

= Operating profit before depreciation, interest and taxes/Operating Income

7.

This ratio is scored as a weighted average of the last three years. e.g if the ratio is as
given below:
1997-98
1998-99
1999-2000
OPBDIT/Op Income
15
16
17
(3*17+2*16+1*15)/6
15
16
15
(3*15+2*16+1*15)/6
15
14
13
13
Operating Margin

Score

Less than 5%

-5% to 5%

1.5

5% to 10%

2.25

10% to 15%

15% to 20%

3.75

20% to 25%

4.5

25% to 30%

5.25

Above 30%

Variability of operating margins

= standard deviation of operating margin errors over a seven year period/average error over a
seven year period

The same is illustrated by the following table

TABLE 1
OPBDIT Agg.
turnover

Operating
Margins

FY 1994

10

100

10.00%

FY 1995

15

100

15.00%

FY 1996

14

100

14.00%

FY 1997

17

100

17.00%

FY 1998

16

100

16.00%

11

The above table presents a growing operating margin. However the growth does not follow a
straight line but instead is volatile. The following table captures the volatility of the operating
margins.
Table 2
error
Column 1 Column 2
1

11.6%

-1.60%

13.0%

2.00%

14.4%

-0.40%

15.8%

1.20%

17.2%
IOTA

-1.20%
11%

The above table presents the predicted y-co-ordinates assuming a straight line. The error column
is the difference of the predicted and the actual values. IOTA (volatility) is then defined as:
Standard deviation of error terms/ average value of error terms

8.

Variability

Score

Less than .05

0.05 to 0.08

5.50

0.08 to 0.1

4.75

0.1 to 0.15

0.15 to 0.2

3.25

0.2 to 0.27

2.50

0.27 to 0.35

1.75

Above 0.35

Growth in operating margins

Score
Less than (0.05)
(0.05) to (0.03)

1
1.5

(0.03) to 0

0 to .0025

2.75

0.0025 to .005

3.5

0.005 to .0075

4.25

12

0.0075 to .01

Above 0.01

INTERNAL BUSINESS RISK EVALUATION

Market Position factors
1. Access to Patents
This parameter reflects the rights with a company to manufacture/ market patented products
resulting in stronger market position. The access to patents would assume particular significance
in industries requiring high investment in research and development.
Examples of Relevant Industries : Pharmaceuticals

With the proposed policy of introducing product patents in the country, introduction of new
products by domestic pharma companies would depend on access to patented products.
Pharmaceuticals
Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below Average)
1
(Poor)

Attributes
Indian subsidiary of an international
pharma major with unlimited access to patent protected products
developed by the parent.
Marketing/ licensing arrangement with international pharma major for sale
of patented products.
Access to patents limited to a few products covered by process patents.
Sales comprised largely of off patent products. No access to patented
products through JVs etc.
Sales comprised exclusively of off patent drugs

2. Brand equity
This parameter measures the protection against erosion of market share enjoyed by the company,
owing to brand strengths. Brand equity may be international, national or localised. Brand equity
assumes significant importance in evaluating sustainability of market position, especially in
industries with a high value addition.
Examples of Relevant Industries : Consumer durables, Readymade garments, fast moving
consumer goods, Pharmaceuticals, Automobiles

In consumer durable and ready made garments industry, the ability of the company to build
a strong brand image is critical for sustenance of its market position.
Loyalty of medical fraternity to certain brands is a key feature of the pharmaceutical
formulation business. Large brands which are well entrenched in the respective therapeutic
segments considerably strengthen the companys business position and render a certain
degree of stability to the company sales.
Marks

Attributes

13

6
(Excellent)
5
(Good)
3&4
(Average)

Presence of extremely strong bestselling international brands in portfolio.

Companys sales driven by branded products.
Large proportion of branded products in overall sales. Brands are either easily
recognisable international brands or strong domestic brands.
Company has built brands which enjoy fair degree of recall among customers.
However, ability to invest in brand building is limited and brand equity is
restricted to a particular geographical region/ customer profile.
Presence of one or two weak brands with very low customer recall.
Brand recognition expected to decline in a scenario of proliferating brands.
Popularity of brands restricted to one or two states.
Portfolio consisting entirely of unbranded products.

2
(Below
average)
1
(Poor)
a) Consumer Durables
Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below average)
1
(Poor)

Attributes
Extremely strong international brand in consumer electronics. Brand is
associated with the highest international quality standards.
Among the strongest domestic brands in consumer electronics, strong
international brand. Brand has a strong quality image. Proven to have high
brand recall based on marketing surveys.
Fairly strong regional brand with an established market presence in
consumer durables. However, brand extension across varied product lines/
regions remains to be demonstrated.
Small scale/ state level manufacturer of domestic appliances with a weak
brand name. Ability to invest in further brand building is severely restricted.
Assembler of unbranded items in the grey market for consumer electronics.
Manufacturer of unbranded radios, etc

b) Fast Moving Consumer Goods

Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below average)
1
(Poor)
c)

Attributes
MNC with globally leading brands in portfolio. Presence of heavy promotion
budgets. Success in introducing, and popularising global brands brands.
MNC with strong brands, but yet to establish favourable brand recognition
in the country/Strong domestic brand enjoying wide recognition in domestic
markets. Possesses ability to withstand MNC competition.
Local brands enjoying popularity in certain geographical pockets. Limited
ability to incur promotional expenditure for brand building purposes.
Low brand recall. Brand name provides ample scope for ambiguity and could
be associated with other products e.g.. Branded soap produced by
unorganised sector.
Seller of unbranded consumer items such as table salt.

Pharmaceuticals
Marks
6
(Excellent)
5

Attributes
Large proportion of well known brands in companys portfolio. Numerous
brands figure in top 250 as per market audit. Companys brands enjoy high
degree of loyalty with the medical fraternity.
Brands with high recognition form a moderate proportion of sales portfolio.

14

(Good)
3&4
(Average)
2
(Below average)
1
(Poor)

Companys focus is on branded sales to the retail trade. Enjoys moderate

loyalty among medical practitioners.
Recognition of brands is limited, with most being me-too brands in their
respective product categories. Medical fraternity is not known to be have
particular affinity for these brands.
Producer of bulk drugs, largely sold to formulators/ in unbranded form to
institutions. Very small proportion of branded drugs in sales portfolio.
Drugs sold entirely in unbranded form.

3. Consistency in quality
A companys ability to maintain the quality of products contributes to its market standing,
through repeat sales. The consistency in quality assumes importance particularly for service
oriented companies, and manufacture of high value products. The quality of product for a service
related industry could also be related with the execution of assignments within the stipulated
terms of the contract. The different certifications by independent reputed agencies be reflective of
quality levels achieved by the company.
Examples of Relevant Industries: Hotels, Consultancy,, Software, Engineering, Cotton Yarn

In software industry, the ability of the company to provide quality software would result in
high proportion of repeat business and better client profile
In yarn (cotton or synthetic) spinning industry, the ability to provide consistent count/
denier yarn would critically determine the market position of the company
The level of service standards achieved in the hotel industry would determine the extent of
repeat business in the form of higher occupancy rates.

Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below
average)
1
(Poor)

Attributes
Exposure to quality conscious clientele. High proportion of repeat business. Presence
in international markets, and certification of quality by international organisations.
Exposure to some quality conscious clients in global as well as local markets.
Progress in improving quality levels. Possess certification for quality, though not to
same extent as above.
Demonstration of acceptable quality levels on a consistent basis. Not known to have
significantly deviated from generally accepted quality norms in the industry.
Quality known to be suspect/erratic. Product unlikely to be purchased by a quality
conscious customer. Frequent product rejection.
Track record beset with serious quality related problems. Inability to improve quality
perceived as detrimental to growth prospects.

a) Computer software
Marks
6
(Excellent)
5 (Good)

Attributes
Company has an impressive client list for onshore and offshore software services.
Consistent execution of projects in timely manner. Has obtained the highest level of
quality certification, e.g. SEI CMM Level 5.
Growth in exports of software services to quality conscious clientele. Generally
timely in execution of projects. Recognition from reputed certifying agency, but yet
to reach highest quality levels.

15

3&4
(Average)
2
Below
average)
1
(Poor)

Exposure to some quality conscious local/international customers. Quality

perception not comparable to the reputed software companies. Quality certification
not to the same extent as higher graded companies.
Inability to garner significant repeat sales. Quality/delivery schedule known to have
dissatisfied customers. Absence of significant quality certification.
Numerous instances of unsatisfactory performance of software products. No known
initiatives to redress customer complaints.

b) Engineering
Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below
average)
1
(Poor)

Supplier of equipment to leaders in respective industry segments. Track record of

complex engineering projects. Globally superior quality levels, with international
certification of quality.
Client profile of highly quality conscious customers. Certification of quality
standards has been received. However, yet to be globally competitive in some
aspects of quality.
Supplier of items of fairly good quality, e.g. Compressors to the lower end of the
market. However, yet to reach levels of quality attained by higher rated companies.
Supplier of small castings and forgings to an auto ancillary manufacturer. Several
instances of quality related complaints from buyers in the past.
Order book position has been significantly affected, owing to serious drawbacks in
quality for items supplied in the past.

4. Customisation of product/Product design

This parameter reflects the ability of a firm to modify existing products, or develop new products
based on a specific customer need or changing preferences in an industry. The product design
would assume particular significance in industries with specific customer design requirements,
and short product life cycles.
Examples of Relevant Industries : Computer software, Engineering, Pharmaceuticals,
Automobiles

Availability of customisation capability for suppliers of precision engineering equipment

such as machine tools, contributes to building brand loyalty with the customer base
The ability of a software company to make transition into new areas such as the Internet and
intranet, e-commerce, and develop updated versions of products to cope with the rapidly
changing technology would critically determine its market position.
In pharmaceuticals, the ability to develop new therapies/ molecules is a key determinant of a
companys competitive position. Newer therapies typically command a premium over older
therapies and witness high growth rates, often at the expense of older therapies.
Marks
6
(Excellent)
5
(Good)

Attributes
Demonstrated track record of ushering in change in the industry through
introduction of new products. Product introduction record is the best in the
industry. Company involved in continuous product innovation.
Emphasis on R&D and improving product design. Demonstrated ability to
innovate and improve, though the success of such initiatives would not be
on the same scale as higher grades.

16

3&4
(Average)
2
(Below average)
1
(Poor)

No noticeable emphasis on R&D activity/product design. Product profile

has barely changed over the last few years. Standardized products
manufactured from easily replicated processes.
Absence of R&D facilities/ significant product design skills. Portfolio
marked by an absence of technology intensive products.
Absence of manufacturing facilities. Involved in trading of products
manufactured by external parties.

a) Computer software
Marks
6
(Excellent)

5
(Good)

3&4
(Average)
2
(Below average)
1
(Poor)

Attributes
Demonstrated ability to design products at a frequent rate, including some
for global markets. Services have been adapted to various scales of
operations, across different user industries. Development abilities
distinguish the company from competition.
Ability to design software products, though less prolific than above
category. Software services have been customised across a moderate range
of user industries. Customisation/design ability is regarded as a strength of
the company.
No specific focus in terms of developing software capabilities. The
company executes fairly simple projects, which do not call for above
average technical capabilities.
Lack of experience in project execution. Software services provided are of
an elementary nature, e.g. data processing facilities, etc. Services can be
replicated with minimal training.
Absence of any software development capabilities. Vendor of software
developed by other parties.

Pharmaceuticals
Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below average)
1
(Poor)

Attributes
Typically has access to an MNC with considerable strength in research and
development. New products contribute significantly to overall turnover.
Introduction of new products at frequent rate.
Demonstrated track record of introducing products. Frequency of
introductions lower than above companies. Ability to capitalise on current
process patent regime and sell the latest products at competitive price.
Company has not demonstrated consistent strengths in process
development, despite presence of R&D facilities. Proportion of newly
developed drugs is sales mix is small.
Company exclusively
produces traditional drugs such as first or second generation antibiotics.
Absence of basic R&D facilities.
Absence of manufacturing facilities, or access to new products

b) Engineering
Marks
6
(Excellent)

Attributes
Machine tools company with high level of engineering skills enabling
highly customised machines for buyers across industries. Track record of

17

5
(Good)
3&4
(Average)
2
(Below average)
1
(Poor)

introduction of tools of varying cutting speeds, hardness, etc.

Ability to customise products across various applications. However, rate of
product introduction and proportion of special tools to standard tools lower
than that of leaders.
Absence of product introduction, though existing product is fairly
technology intensive. Restricted to narrow product applications, such as
specific material handling equipment, over long periods.
Supplier of traditional, relatively simple standard product, such as low
precision bearings. Adherence to relatively primitive technology.
Absence of manufacturing facilities. Involved only in marketing of others
products.

5. Distribution set up
This parameter assesses the geographical spread and quality of a companys outbound logistics
system. Presence of a wide distribution network affords access to a wide customer base, thereby
enabling growth and higher market penetration. Further, existence of a strong
dealer/distribution network erects significant entry barriers to potential competition.
Distribution strengths assume primary significance in industries characterised by retail sales.
Examples of Relevant Industires: Fast moving consumer goods, Readymade garments,
Computer hardware, Pharmaceuticals, Automobiles

Cement companies having an established distribution network are advantageously placed,

since ability to access interior regions is an important determinant of market position.
Sales of the FMCG sector being retail in nature, the presence of a widespread distribution
system assumes critical importance in attainment of volumes.

Marks
6
(Excellent)

5
(Good)
3&4
(Average)
2
(Below
average)
1
(Poor)

Attributes
Most extensive distribution network in the industry, with coverage across urban
and rural areas in the country. Presence of distribution outlets not restricted to
certain geographical areas. In addition to geographical coverage, number of
distribution outlets is among the highest in the industry.
Extensive distribution network, across most geographical areas in the country.
However number of outlets serviced is significantly lower than that for the industry
leaders.
While the network is moderately extensive, distribution is not known as a strength
of the company. Number of geographical areas not covered by the company is
significant.
The company lacks a significant distribution network. Selling is restricted to the
vicinity of the manufacturing plant. Lack of distribution network perceived as an
impediment to growth prospects.
Company lacks even the most basic distribution infrastructure. Customers are
required to purchase the product at the plant itself.

a) Two wheelers
Marks
6
(Excellent)

Attributes
Geographical coverage across all regions in the country. Within each state, the
companys products are available in cities, towns and rural areas. The level of
availability of spares and support service at the distribution outlets is high.

18

5
(Good)
3&4
(Average)
2
(Below
average)
1
(Poor)

Geographical coverage of distribution outlets across most states. Density of outlets

not high in certain pockets, but high in cities and major towns. Distribution network
is backed by high availability of spares and support.
Distribution network is extensive in a few states, and not significant in others. The
company is backed by moderate availability of spares and support, but only in a
few states.
Two wheelers can be bought only in the state of origin, or in neighbouring states.
Distribution reach is extremely limited. Non availability of spares and service
facilities is a common complaint.
The company has distribution outlets only in the town of origin.

b) Fast Moving Consumer Goods

Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below
average)
1
(Poor)
c)

Attributes
Presence across all states. Number of retail outlets is the highest in the country, with
coverage in all rural and urban areas. Distribution is considered a primary strength
of the company.
Soap manufacturer with extensive coverage of states. However, number of outlets
is significantly lower than the industry leader. Strong distribution network in urban
areas, but relatively weak in rural areas.
Regional soft drink manufacturer with good coverage and large number of outlets
in area of operations. Product is characterised by poor availability in other regions.
Small scale soaps manufacturer with reach limited to a few towns and villages.
Product is unavailable even in neighbouring states.
Soaps manufacturer with product availability limited to town of origin.

Computer hardware

Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below
average)
1
(Poor)

Attributes
Dealer network spanning major cities and towns across the country. Dealers are
capable of going beyond selling to offering maintenance and networking services
of a high order. Distribution network is considered the best in the industry.
Dealer network covers most major cities and towns. Substantial proportion of
value added resellers in dealer network. Ability to offer support facilities
restricted to metros.
Regional hardware vendor. Coverage of dealer network substantially lower than
industry leaders. Ability to offer support services in region of operations is
strong.
Hardware vendor with operations restricted to a single state. Product availability
and ability to offer support services is restricted to a single state.
Low end computer hardware operator with activities in the nature of reselling,
providing support in single town.

6. Diversity of markets
This parameter assesses the presence of companies in different market segments where the
market segmentation could be based on geographical diversity, presence of export, and
diversified customer base (including access to replacement markets) across different end user

19

industries. This addresses the companys ability to mitigate market specific demand risks and
partially offsets recession in a particular end-user segment. Diversity of markets assumes
primarily significance in industries with regional demand-supply imbalances and high volatility
in demand in the end user segments.
Examples of Relevant Industries : Auto ancillaries, Cottton Yarn, Cement, Computer Software,
Engineering

In auto ancillary industry, the sales to the OEM segment is characterised by low margins and
cyclical demand patterns which are partially offset by presence of company in replacement
market characterised by high margin and stable demand pattern
In cement industry which has regional demand supply imbalances, the presence of a
company in more than one region would result in better ability to absorb the downturn.
Marks
6
(Excellent)

Attributes
Sales are distributed evenly across a wide range of user industries/ product usage
high in OEM as well as replacement markets/ large proportion of export sales
diversified across geographical destinations.

5
(Good)
3&4
(Average)

Customer profile across industries/ across different segments within an industry.

Substantial proportion of sales comprises exports.
Exports concentrated in a small geographical destination. Few large customers
within an industry segment account for bulk of sales/ Absence of vibrant
replacement market.
Sales is entirely dependent on two to three customers. No access to exports/
replacement market.

2
(Below
average)
1
(Poor)

Sales are to single customer.

a) Cotton yarn
Marks
6
(Excellent)
5
(Good)

3&4
(Average)
2
(Below
average)
1
(Poor)

Attributes
Exports form major part of companys turnover, with strong presence in domestic
market. Exports across quota, non quota markets. Not dependent on any single
large client. Tie-ups with international trading organisations for export.
Company has a strong presence in exports market. Exports, to both quota and
non quota countries form significant part of turnover. However, diversity of
export markets lower than above companies. Domestic sales spread across
numerous buyers.
Exports form a moderate proportion of sales, but diversity of markets limited
largely to a few non quota destinations. Domestic sales are spread across
numerous buyers.
Exports is not a focus area for the company. Cotton yarn sold largely in the
domestic market. Sales significantly dependent on two to three weaving units.
Cotton yarn sold only to a single weaving unit.

b) Auto ancillaries

20

Marks
6
(Excellent)

5
(Good)
3&4
(Average)
2
(Below
average)
1
(Poor)
c)

Attributes
Supplier of components to OEM customers across commercial vehicles, passenger
cars and two wheelers. Strong relationships developed with customers. Presence
in export markets. Vibrant replacement markets account for a substantial
proportion of sales.
Supplier of components to a diverse customer list, though not across as many user
segments as above company. Products have a replacement market in addition to
OEM sales. Company has established a presence in a few export markets.
Supplies ancillary equipment to buyers across commercial vehicles sector. Single
buyer does not constitute a major proportion of sales. Products lack significant
replacement market.
Dependent on one or two automobile OEMs. No replacement market for
products. Lack of presence in exports market.
Components sold to a single OEM.

Pharmaceuticals
Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below
average)
1
(Poor)

Attributes
Strong market presence in India, as well as several other countries. High
proportion of exports to developed countries. Exports consist of high proportion
of formulations. Within India, sales largely to retail trade.
Exports, spread across various countries, form a moderate portion of the
companys sales. Domestic sales are mainly in retail trade and not dependent on a
few institutional buyers.
Minimal export presence/ Presence in export markets, but concentrated in one or
two countries in East Europe, Asia.
Domestic sales largely retail in nature, not dependent on single institution.
Highly dependent on sales to one or two institutions in domestic/exports market.

Supplier of drugs to a single institution.

7. Financial ability to withstand price competition

This would indicate the ability to reduce prices in order to protect market share, which would
typically stem from the companys access to considerable financial resources. A companys
market position could be bolstered by the support of a financially strong promoter group,
enabling it to sustain losses or a poor financial position till such time that the product becomes
viable in the marketplace on a standalone basis.
Examples of Relevant Industries : Computer hardware, Automobiles, Fast Moving Consumer
Goods
Marks
6
(Excellent)

Attributes
Subsidiary of an extremely strong global corporate. Losses on account of market
competition can be expected to be comfortably funded by the parent. The parent
has a well known track record of supporting subsidiaries, or has expressed such
intent in the form of public statements.
Business house with large networth, enjoying sound financial position. Expected

21

(Good)
3&4
(Average)
2
(Below
average)
1
(Poor)

to cope with price competition, though not with the same comfort as higher
graded companies.
Medium sized corporate. No support from financially strong local/global entities.
Ability to sustain price competition would be limited.
Small corporate with very limited access to resources. Expected to fare poorly in a
scenario of price wars.
Small corporate, expected to be severely affected by price wars in the form of
immediate losses and closure of units.

a) Fast Moving Consumer Goods

Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below
average)
1
(Poor)

Attributes
Indian subsidiary of a world leader in soft drinks. The parent has global scale
operations, and possesses great financial strength.
Soaps manufacturing company, belonging to a large, financially sound group.
However, ability to sustain price competition would be limited in comparison to
strong MNC soap manufacturer.
Well established soap company, but not part of a major business group. Limited
access to financial resources.
Relatively new, small sized domestic soaps manufacturing company. Ability to
cope with price competition is expected to be low.
Very small soaps company. Complete absence of financial support from external
agencies, in addition to poor inherent financial strength.

b) Automobiles
Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below
average)
1
(Poor)

Attributes
Subsidiary of a financially strong global giant in passenger cars. Size of Indian
operations currently small in relation to global revenues.
Large domestic car manufacturer in sound financial position. Demonstrated
ability to withstand price cuts by competitors/ initiated price cuts in past.
Medium sized car manufacturer, independent of any business group. Small size in
relation to above entities, with limited access to financial resources.
Small company, with track record in market yet to be established. Not affiliated to
a strong business group.
Small car manufacturing company with intrinsically weak financial position.

8. Long term contracts/assured offtake:

This parameter factors in the available benefits if any, arising from the nature of sales agreement
with the buyer. Measures such as long term supply contracts as well as understanding on
assured offtake bestow stable demand pattern and thereby greater earnings stability. Long term
sales contracts assume significance in an increasingly competitive market scenario, particularly
for suppliers of raw materials and product intermediates.

In auto ancillary industry, the long term sales contracts of players with the OEM results in
assured off-takes, providing a measure of stability to the cash flows of such companies.

22

Attributes
6 (Excellent)

5 (Good)

Presence of long term contract with reputed company for an assured offtake of
output e.g.. Cotton yarn, compressors, etc. Such a contract covers major proportion
of the companys sales.
Presence of long term contract with a reputed company for an assured offtake of
output. However, such a contract does not constitute a major proportion of the
companys sales.

9. Product range/mix:
A wide product portfolio based on nature of offering and price, mitigates risks due to demand
slowdown or competition. Product range is assessed on breadth (variety of products) as well as
depth (variants of a single product). High value added products in the product mix partially
insulate the margins of the company from any change in the prices of raw material.
Examples of Relevant Industries : Consumer Durables, Auto Ancillaries, Pharamaceuticals,
Cotton Textiles, Software, Automobiles, Fast Moving Consumer Goods

In consumer durables, manufacturing multiple products such as TVs, audio products and
washing machines optimises marketing and distribution strengths, provides a more
dispersed reach and offers scope for cross subsidisation across products.
A company in cotton textile industry with high proportion of specialty yarns, high count
yarns, and higher value added dyed yarns is partially insulated from high volatility in cotton
prices.
The presence of the company in a software industry across various stages of the value chain
from body shopping to product development strengthens market position.
In the commercial vehicle industry, ability of a company to provide a variety of
transportation solutions across different load levels helps build strong brand loyalty with the
customer.

Marks
6
(Excellent)

5
(Good)
3&4
(Average)
2
(Below average)
1
(Poor)

Attributes
Presence in all major product segments in the industry.
Product diversity of such companies would necessarily be the best in the
industry. Company is expected to remain at the forefront owing to capability to
introduce new products.
Presence in majority of the product segments in the industry/Presence in
limited range of relatively high margin products.
Presence in more than one product category, but clearly not comparable to the
product range of industry leaders.
Single/two product company .
Presence in only a single, minor product segment.

23

a) Consumer durables
Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below average)
1
(Poor)

Attributes
Significant presence in Colour and B&W television, audio and video systems,
refrigerators, washing machines and other home appliances.
Presence in not all, but a large proportion of above segments, e.g. Audio and
video systems, televisions, and select home appliances.
Presence in only two to three product segments. Further, depth i.e. no of
variants within each segment is limited.
Company with a very limited line of products E.g. A black and white TV
manufacturer with two models.
Company manufacturing a single model of mixies.

b) Drugs and Pharmaceuticals

Marks
6
(Excellent)

Attributes
Predominantly a formulations producer, with presence across a wide range of
therapeutic segments, particularly in areas of high growth, such as
cardiovascular drugs.
Wide therapeutic coverage, with major proportion of sales being formulations.
However, products are in relatively lower growth segments.
Slight preponderance of bulk drugs in portfolio. Therapeutic coverage limited
to few segments, in low to moderate growth areas / Manufacturer of
formulations in a few low growth therapeutic segments, e.g. antibiotics.
Manufacturer of only bulk drugs. Presence of three to four bulk drugs in
portfolio.
Manufacturer of a single, commonly available bulk drug.

5
(Good)
3&4
(Average)
2
(Below average)
1
(Poor)
c)

Auto ancillaries

Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below verage)
1
(Poor)

Attributes
Presence in multiple high margin product categories e.g. axles, fuel injection
pumps, pistons and valves .
Presence limited to two or three high margin product categories. E.g. Fuel
injection equipment/pistons of multiple models.
Presence in two to three products, with moderate value addition.
Supplier of one or two varieties of low value added components.
Single component with minimal value addition.

10. Support service facilities/ After Sales Service

This factor addresses the ability to provide after sales support services to its customer base.
Support service facilities assume significance particularly in industries manufacturing durable
products. The availability of support service facilities is partially dependent on a wide
distribution network.

24

Examples of relevant Industries : Consumer Durables, Office Equipment, Computer

Hardware, Automobiles, Tractors

In consumer durables, the support offered in terms of service networks and availability of
spares critically determine the sustenance of companys market position and brand equity.
In the automobiles industry, existence of a wide service setup enables the company to ensure
a geographically diversified client profile which is instrumental in expansion of volumes.
Marks
6
(Excellent)

5
(Good)
3&4
(Average)
2
(Below
average)
1
(Poor)

Attributes
Distribution backed by a widespread after sales service network. Coverage and
quality of sales support offered by the company regarded as best in the industry.
For such companies, the reaction time for extending support facilities, such as
repairs, etc. would be the lowest in the industry.
The support facilities are clearly above average, and are a significant strength to
the companys operations. However, service facilities are inadequate in certain
geographical areas of the market.
Limited emphasis on after sales service. Availability of support facilities is
restricted to few areas. The strength of service network is not a distinguishing
feature from competition.
The company is severely lacking in after sales support facilities. Growth
opportunities are perceived to be restricted on account of absence of support
infrastructure.
Absence of any meaningful support facilities. Companys involvement with the
customer ends at the point of initial purchase.

a) Consumer durables
Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below
average)
1
(Poor)

Attributes
Personnel for after sales service easily accessible across regions for all products.
Warranty periods clearly specified in sales contract. Spare parts such as motors,
gaskets for electronic mixers etc. are easily available.
After sales support is highly regarded, and growing in coverage. However, for
certain products, the availability of spares and coverage of service facilities is yet
to equal that of the industry leaders.
Lack of focus on support service as a distinct area of strength. Occasional
difficulties in sourcing of spare parts. Coverage of support facilities is limited to a
few states.
A television manufacturer offering after sales support only in one or two metros,
leading to frequent difficulties in spare part sourcing.
A television/audio electronics manufacturer with unavailability of spare parts/
not offering any after sales service.

b) Automobiles
Marks
6
(Excellent)

Attributes
Two/wheeler/commercial vehicle/car company with widespread availability of
spare parts and ability to meet the servicing demands of consumers across urban,
semi-urban and rural areas. Regular training programmes for disseminating
service skills.
Existing distribution network generally provides service of good quality.

25

(Good)

3&4
(Average)
2
(Below
average)
1
(Poor)

However, there is non uniformity in quality of service/ availability of spare parts

across geographies, which places the company at a small disadvantage to higher
grades.
The coverage of service facilities and availability of spares is restricted to few
areas. The company clearly lags the more proactive competition in terms of
offering service facilities.
Absence of an acceptable level of support service infrastructure and spares
availability, except in one or two metros.
Spare parts of the company are not available, and the company offers no after
sales service.

11. Project management skills

This factor is mainly used for construction and erection industries or even software projects
where the deliverables stretch over a period of time. The ability to deliver on time and manage
the big projects with their inherent complexities would help in improving the market position of
the companies catering to this segment.
Examples of relevant industries: Construction and erection industries, software projects
Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below average)
1
(Poor)

Attributes
Projects are completed on time and there are no cost overruns in any of the
projects
More often than not, the projects get completed on time but there are instances
of slight overruns
In case of complex projects, the company has erred in some cases
There are many instances where the company has not been able to deliver on
time
The company has overrun on all its projects

12. Size related pricing advantages

This factor looks at the economies of scale enjoyed by the producer and how it translates into
ability to price lower than competition, thus enabling the entity to garner a higher market share.
Price competition is intense especially in industries wherein brands are not as important. In such
industries, ability to price low based on size, plays a very important role.
Examples of relevant industries: Cement, steel, auto ancillaries, petrochemical
Marks
Attributes
6
Large size of the company gives it the opportunity to be the price maker
(Excellent)
5
Company is easily able to price lower or at par with the competitors due to its
(Good)
large size
3&4
In case of price competition, the company is just about able to match with its
(Average)
competitors owing to its average size
2
Due to small size, the company is unable to compete on price with its competitors
(Below
who are much larger and price aggressively
average)
1
Company is always losing out on market due to its high price as compared to

26

(Poor)

other companies who price aggressively owing to their size

13.
Replacement markets
A well developed replacement market is favourable for industries like auto ancillaries.
Companies enjoying a good standing in replacement market would ensure sales even if offtake
by OEM is under pressure.
Examples of relevant industries: Auto ancillaries, equipment manufacturing, engineering
goods
Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below
average)
1
(Poor)

Attributes
The company has excellent reach and reputation in replacement markets. A
significant part of its sales come from these markets.
Regular offtake from replacement markets help in maintaining companys
turnover
The company is present in only some regions and there is lack of focus on part of
the company to attract clientale in replacement markets
Nominal presence of the company in replacement markets. No distribution
channel
No presence in the replacement markets. Turnover comprises only OEM sales

Some of the other factors that are considered under market position and which are specific to a
particular industry are as follows:
14.
Deficit region - cement
15.
Consolidation of markets - cement
16.
Other promotional ventures
17.
Value addition - software

Operating Efficiency Factors

1. Availability of raw materials
Availability of raw materials at competitive price is critical, mainly for industries with low value
addition. Companies enjoying diverse sources of supply of an abundant raw material, would be
relatively insulated from raw material price fluctuations. The location of a company near the
source of raw material in case of high inward freight costs and assured supply of quality raw
material at stable prices would determine the competitive position of the company.
Examples of Relevant Industries : Aluminum, Cotton Textiles, Sugar, Steel, Paper

For integrated Aluminium producers, access to low cost supply of bauxite and other key raw
materials like caustic soda and calcined petroleum coke is critical. For downstream
Aluminium manufacturers, access to sufficient supply of high quality and low cost primary
Aluminium is essential to achieve a competitive cost position.
In the cement industry, the proximity to limestone reserves determines its cost of inward
transportation. In addition, the sufficiency of limestone is critical for stable production.
In the sugar industry, the location with respect to cane availability and procurement,
significantly influences the companys operating efficiency. Further, the companys
relationship with the farmers also plays a critical role in determining cane availability.

27

Marks
6
(Excellent)

5
(Good)

3&4
(Average)
2
(Below
average)
1
(Poor)

Attributes
Presence of assured/ abundant supply of important raw materials of good quality.
Company proactively takes steps to ensure uninterrupted supply of raw materials
on a continuous basis. Benefits of raw material procurement clearly distinguish the
company from competition.
Raw material procurement is considered a strength of the company, with key raw
materials being easily available from neighbouring areas. Shortage of raw materials
has not been known to affect companys operations. However, future availability of
a key raw material is subject to more uncertainty than for above companies.
Company does not possess any particular raw material sourcing strengths. The non
availability of a particular raw material has been known to impede the companys
operations in the past.
Poor availability of a key material places the company at a severe disadvantage
with respect to competition. Companys operations have been repeatedly hindered
by raw material shortages.
Inability to produce for an extended period of time owing to non availability of raw
materials.

a) Aluminium
Marks
6
(Excellent)

5
(Good)
3&4
(Average)

2
(Below
average)
1
(Poor)
b)

Attributes
Integrated aluminium manufacturer with access to abundant supplies of high
quality bauxite, and diversified supply base for soda, calcined petroleum coke,
cryolite, aluminium fluoride and coal tar pitch. Large bauxite reserves with low
annual depletion rates.
Aluminium producer with access to large bauxite reserves. Easy availability of
other raw materials. However, not as comfortably placed as above category with
regard to proximity to bauxite/ore quality/depletion rates of reserves.
Access to a fairly steady supply of bauxite. However the company has not
developed alternate sources for supply of other key raw materials such as caustic
soda. Raw material shortages have been known to affect output of aluminium in the
past.
Company is plagued by serious shortages of key inputs for primary aluminium
production. Instances of depressed production due to raw material shortages.
Bauxite reserves nearing exhaustion, mining rights yet to be acquired.
Aluminium plant has been shut for an extended period owing to lack of raw
material.

Cotton yarn

Marks
6
(Excellent)

5
(Good)

3&4

Attributes
Proximity to cotton growing area. Company purchases cotton in bulk at the
commencement of year, yet has the liquidity to purchase cotton in retail market
when price is favourable. Highly experience in cotton textile business. Regarded as
best in industry with regard to cotton procurement.
Cotton procurement skill marginally lower than above category. Relationship with
suppliers/ cotton marketing federations strong, but not as well established as above
companies. Cash rich nature enables immediate purchase of cotton during
favourable price movements.
Cotton procurement is not regarded as a strength. While experienced in the

28

(Average)
2
(Below
average)
1
(Poor)
c)

Cement

Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below
average)
1
(Poor)
2.

business, non availability of cash could restrict flexibility to source cotton as and
when desired.
Insufficient expertise in judging price movements in the market, leading to inability
to have optimal stocking. Availability of cash to make spot buying decisions
extremely restricted.
Spinning operations have been halted owing to lack of cotton supply.

Attributes
Proximity to abundant limestone reserves, with long expected life/ Long term
supply of limestone assured by Government. Proximity to coast enabling imports
of high quality coal.
Proximity to abundant limestone reserves of good quality. However expected life of
reserves is lower than that for the above category. Proximity to coast enabling
imports of quality coal.
Proximity to limestone reserves, however mediocre limestone quality/low residual
life of reserves. Not situated in proximity to the coast.
Not situated in proximity to limestone reserves, rendering inward transportation
costs prohibitive/
Erratic limestone supply has affected manufacturing operations in the past.
Manufacturing operations have been stopped owing to lack of availability of a key
raw material.

Multi location advantages

3. Adherence to environmental regulation

This is a significant parameter for polluting industries, such as metallurgical and chemical related
industries, and assumes significance in the context of increasing judicial activism on environment
related issues.
Examples of Relevant Industries : Dyes & Chemicals

The pollution control measures employed by a chemical manufacturer assumes importance

in the backdrop of increasing resistance against products that are not eco-friendly.
Marks
6
(Excellent)

5
(Good)
3&4
(Average)
2

Attributes
HIGHLY PROACTIVE ON ENVIRONMENTAL ISSUES. EFFLUENT
NORMS ARE WELL WITHIN PERMISSIBLE LEVELS. COMPANY HAS
CARRIED OUT AN ENVIRONMENT AUDIT/IMPACT ASSESSMENT.
RECEIVED CERTIFICATION SUCH AS ISO 14001 ON THE ADEQUACY
OF POLLUTION CONTROL PROCEDURES.
High awareness of environmental concerns. Company has carried out an
Environment Impact Assessment. Effluent norms largely meet requirements.
Areas of shortcoming, if any, are expected to be addressed shortly.
Awareness of need for pollution control exists, but absence of active steps to
minimise pollution. Company cannot be said to be proactive in tackling
environmental issues.
Operations of a highly polluting nature. Company has faced frequent protests

29

(Below
average)
1
(poor)

related to environmental issues. Likely to face judicial action/enquiries if

pollution control methods do not improve.
Company has been ordered to discontinue production till such time that the
effluents meet norms laid down by the Pollution Control Board.

4. Capacity Utilisation
This parameter evaluates the ability of the company to achieve high capacity utilisation to enable
distribution of the fixed costs over a higher volume. Capacity utilisation may not be very relevant
in the case of companies involved in a high degree of customisation, as well as trading
companies. While economic size capacities provide the company with the ability to attain cost
competitiveness, capacity utilisation determines the actual translation of available benefits. Low
and fluctuating capacity utilisation may indicate weaknesses in stability of operations or
operational bottlenecks.
Examples of Relevant Industries : Fertilisers, Steel, Automobiles, Synthetic Textiles,
Chemicals

In the fertilisers industry, especially urea manufacture, capacity utilisation has a major role in
determining the relative profitability levels. Availability of feedstock, plant vintage and
technology would be the determinants of capacity utilisation.
In the consumer durables industry, since volume led growth largely dictates both business
and financial strategies, companies with high capacity utilisation would be favourably
placed. Sub optimal capacity utilisation could be on account of imbalances in the assembly or
production line.

30

Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below Average)
1
(Poor)

Attributes
Full utilisation of existing capacities on a consistent basis.
Capacity utilisation generally close to maximum levels.

Moderate levels of capacity utilisation. Full capacity levels unachievable on

account of operational bottlenecks.
Low capacity utilisation. Process plagued by material /power shortage /old
technology/ imbalance in equipment.
Largely unutilised capacities.

5. Cost effective technology

The use of innovative technology in certain industries leads to a leaner cost structure. Firms using
such technology are able to price their products cheaper than competitors, thereby gaining a
competitive advantage. Such technologies are typically patented and not available to all the firms
in the industry.
Examples of Relevant Industries : Process of Industries such as Caustic Soda and
Petrochemicals

In the caustic soda industry, use of the superior membrane technology leads to better yields
resulting in cost savings.
In synthetic textiles, while older plants have come up using the batch process, new plants are
being set up with the superior poly-condensation process, resulting in operating cost savings
for the latter.
Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below Average)
1
(Poor)

Attributes
Use of most modern advanced technology, leading to operating costs being
significantly lower than the industry norms, e.g.. Use of membrane cell
technology in caustic soda industry.
Use of modern technology, leading to operating cost savings in relation to
industry norms e.g.. Use of mercury cell technology for caustic soda
production.
Use of fairly modern technology, with operating costs in line with average
industry levels.
Use of archaic technology, leading to operating costs being significantly
higher than industry norms, e.g.. Chemical process for caustic manufacture.
Use of highly outdated technology leading to abnormally high operating
costs.

6. Employee cost:
This factor is relevant in labour intensive industries where employee expenses forms a significant
proportion of the overall cost structure. A cost structure characterised by high employee cost
restricts ability to withstand a downturn, particularly in view of the contentious nature of
downsizing related issues. Measures such as cost per employee, sales per employee, etc. yield
insights into a firms employee productivity upon comparison with other firms within the
industry. It is also pertinent to examine the extent to which the labour costs are fixed versus

31

variable. This indicates the ability of the company to withstand a downturn by curtailing labour
related costs.
Examples of Relevant Industries : Steel, Engineering, Textiles, Hotels, Consultancy, Software,
Pharmaceuticals

Service sector industries such as banking, hotels, consultancy, software etc. have high
employee costs. Higher employee productivity leading to a reduction in employee costs
yields a competitive advantage for companies in these industries.
Given the labour intensiveness of the Indian economy, employee cost is also relevant across
manufacturing industries such as Castings & Forgings, Steel, and textiles.
Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below Average)
1
(Poor)

Attributes
Employee cost (as a percentage of operating income) is well below industry
norms. Such companies have demonstrated an ability to maintain employee
costs at low levels.
Employee cost has consistently been lower than industry average levels.
Company perceived to be advantageously placed owing to low employee
costs.
Employee costs are in line with average levels in the industry.
Employee costs are well above average industry norms. Absence of
noticeable declining trend in employee costs.
Employee cost is extremely high in comparison to competitors.

7. Efficient raw material usage (yield)

Efficiency in raw material usage assumes importance in industries wherein raw material forms a
substantial proportion of the overall cost structure, such as commodities and agro based
products.
Examples of Relevant Industries : Aluminum, Steel, Paper, Sugar

A primary aluminium manufacturers efficiency is reflected in specific parameters such as

bauxite consumption/per tonne of alumina, and alumina consumption per tonne of
aluminium.
Crushing efficiency of sugar mills, measured in terms of percent of juice recovery, is
indicative of the sophistication of crushing technology, as well as quality of cane.

Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below Average)
1

Attributes
Raw material yields have consistently been well above the industry norms.
Such levels are achieved only by the industrys most efficient producers.
Raw material yields are marginally higher than the industry average.
Companys consumption parameters have been steady/ improving.
Raw material yield does not distinguish the company from competitors.
Yields have generally been in line with industry averages.
Raw material yield is significantly lower than industry average, on account
of plant vintage, outdated technology etc. Absence of indication of
improvement in consumption parameters.
Abnormally low raw material yields.

32

(Poor)

8. Energy cost
Energy cost is of critical importance in power intensive industries. Savings in the energy cost
either as a result of lower tariffs or captive generation facilities would result in a competitive
advantage for the company. Energy cost advantages can also arise from stability of operations
and superior technology.
Examples of Relevant Industries : Steel, Aluminum. Cement, Fertilisers

Aluminium manufacturing being a highly power intensive process, companies with captive
power sources are better placed than others as these have sustained access to cheap power.
Modern cement plants using more energy efficient processes like vertical grinding mills tend
to have lower power requirement than older plants.
Sources and tariffs of power available, fluctuation and frequency of power cuts, investments
to reduce consumption levels, and investment to reduce consumption levels would influence
the ability of a steel company to curtail energy costs.
Marks
6 (Excellent)

5
(Good)
3&4
(Average)
2
(Below
Average)
1
(Poor)

Attributes
Power and fuel cost (as a percentage of operating income) is well below industry
norms. Such companies have successfully stabilised cheaper sources of power/
more efficient processes. .
Power and fuel cost has consistently been lower than average industry levels.
Company perceived to be an energy efficient producer.
Power and fuel costs are in line with industry averages.
Power and fuel costs are well above the industry norms. Absence of noticeable
declining trend in employee costs.
Power and fuel costs are extremely high in relation to competitors.

9. Extent of Integration
The effect of extent of integration would be determined by whether an industry experiences price
cyclicalities or volume cyclicalities. The high level of integration in an industry with volume
cyclicality would put higher pressure on the cost structure during times of recession and would
benefit in times of high growth. A company in an industry with price cyclicality could benefit
from integration if it is able to manufacture the intermediate at a price cheaper than prevailing
market prices. However, in the event of adverse price movements in its inputs or outputs, the
company stands exposed to adverse market circumstances. Extent of integration would also
determine the companys assured access to critical inputs. This parameter assumes significance
primarily in commodity based industries that are impacted by business cycles, and industries
that require assured access to high quality inputs.
Examples of Relevant Industries : Petrochemicals, Synthetic textiles, Tea, Steel

In petrochemical industries, a higher degree of integration helps the company to take

advantage of timing differences in cyclic patterns of various up-stream/ down-stream
product prices. In addition, higher vertical integration can improve a companys cost

33

structure by allowing it to maintain higher than average operating rates in periods of low
demand.
Companies manufacturing pharmaceutical formulations derive benefits from a high level of
backward integration in the form of higher operating margins, greater pricing flexibility vis a
vis smaller players and greater control on quality standards.
Marks
6
(Excellent)
5
(Good)
3&4
(Average)

2
(Below average)
1
(Poor)

Attributes
Highest level of integration for all products. Operations span primary
material sourcing, various stages of processing of intermediates, and final
sale.
High level of integration of products. Only raw material in crudest form is
sourced externally, and activities commence from processing of lowest level
of intermediate.
Raw material is itself a processed intermediate. Company undertakes further
processing to manufacture final product/ supplier of intermediates to
downstream manufacturers.
Company is a pure assembler/packer of supplied materials.
Traders of items manufactured by other parties.

a) Synthetic fibres
Marks
6
(Excellent)
5
(Good)
3&4 (Average)
2
(Below average)
1
(Poor)

Attributes
Presence in all links of the value chain, commencing from manufacture of
paraxylene (PX) to manufacture of PFY/PSF.
Begins manufacturing at the PTA/DMT stage. Forward integration into the
manufacture of PSF/PFY.
Basic raw material is polyester chips. These undergo processing for the
production of PSF/PFY.
Company is involved only in the texturising of bought out synthetic fibres.
Trading of synthetic fibres.

b) Tea
Marks
6
(Excellent)
5
(Good)
3&4
(Average)
2
(Below average)
1
(Poor)

Attributes
Fully integrated operations comprising multilocational captive tea
plantations, manufacturing facilities, blending and packaging facilities, selling
infrastructure.
High level of integration in the manufacturing process, with captive
plantations, processing, packaging and selling facilities. Multilocationality/
extent of inhouse tea production lower than above category.
Supplier of processed tea leaves to blenders/ Blenders of processed tea
leaves, with major proportion of tea leaves not being grown inhouse.
Packaging of blended teas purchased from external parties/
Plantations without significant processing facilities.
Trading of tea, with no value addition.

34

10. Management of input price volatility

The ability to successfully manage fluctuations in input prices assumes importance in industries
characterised by cyclicality in input prices. Input price management is critically determined on
the companys relationship with suppliers, and stocking policies. Indigenisation assumes
relevance as a tool to manage input price volatility in industries with significant import content.
A companys ability to substitute imported components with domestically available material
would insulate it from foreign exchange risks and unfavourable movements in import tariffs.
Examples of Relevant Industries : Cotton textile, Engineering, Consumer Durables

Development of strong relationships with marketing federations, effective stocking policies

in cotton yarn industry and liquidity help partially mitigate risks of price volatility.
In the consumer durable industry, critical components that constitute the large proportion of
the raw material cost are still largely imported. Higher level of indigenisation would
insulates a company from foreign exchange rate fluctuations.
Marks

Attributes

6 (Excellent)

Raw material cost as a percentage of sales has been stable or declining over the last
few years. Company has achieved complete indigenisation of inputs.
Raw material cost has been largely stable over the last few years. Proportion of
imported raw materials is either low or adequately hedged by export sales.
Raw material cost has been fluctuating in line with industry trends over the last few
years.
Import content, if present, is largely hedged by companys export sales.
Raw material costs exhibit abnormal fluctuations over the last few years. /
Company with a high import content selling products in the local market.

5
(Good)
3&4
(Average)
2
(Below
Average)
1
(Poor)

Highly fluctuating and increasing raw material costs over the last few years.
Operating losses in the past due to input price fluctuation.

11. Selling costs

Selling costs are significant in industries wherein the product is bulky in nature and demand
centres are localised. For example cement and steel need to be transported over long distances
and freight forms a significant component of the selling cost. Proximity to the market place
ensures lower freight costs. Innovative mechanisms to transport such products result in cost
savings lending a competitive edge to the company.
Examples of Relevant Industries : Steel, Cement, Fast Moving Consumer goods

A leading cement company pioneered the concept of transporting cement by sea as

compared to the traditional land route resulting in significant selling cost reduction.
In steel, the extent to which a producer has an outward freight cost advantage to service key
markets is significant given the high weight to value ratio of steel products.

35

Marks

Attributes

6
(Excellent)

Selling (primarily outbound freight) costs, as a percentage of operating income is

well below industry norms. Such companies are able to capitalise on availability
of cheaper modes of transportation/ multilocational advantages.
Selling costs have consistently been marginally than average industry levels.

5
(Good)
3&4
(Average)
2
(Below
Average)
1
(Poor)

Selling costs are in line with industry averages.

Selling costs are well above the accepted industry norms. Absence of noticeable
declining trend in employee costs.
Selling costs are extremely high in relation to competitors.

12. Vulnerability to event risks

The operations of companies in earthquake and flood prone areas are vulnerable to significant
event risk, which may be mitigated to an extent by the presence of multilocational plants.
Marks
2
(Below
average)
1
(poor)

Attributes
Companys main plant is located in an area highly prone to earthquakes/floods.
However, risk is mitigated to an extent by presence of plant(s) in alternate
locations.
Companys lone plant is located in an area highly prone to earthquakes/ other
event risks.

Some other factors that have been considered are mentioned below. While these parameters may not be
relevant for a large majority of companies, they have been included in the library to cater to specific cases
where they be of special significance.
13. Bargaining power with suppliers
14. Proximity to customers
15. Employee attrition rate

36

FINANCIAL RISK
Financial Risk is evaluated through a combination of the following ratios (both past & projected):

Interest Coverage

Return on Capital Employed

Operating Margins

Operating income/ Short term borrowings

Current ratio

DSCR

Total outside liabilities/Total networth

Free cash flow from operations/Total Debt

1.

Interest Coverage = Profit before interest, depreciation and tax (PBDIT)/Interest and Finance
Charges
Interest coverage is considered only for the latest year.
Int_cover

2.

Score

Below 1

1 to 1.5

1.5

1.5 to 2

2.25

2 to 2.5

2.5 to3

3.75

3 to 3.75

4.5

3.75 to 7

5.25

Above 7

ROCE (Return on capital employed) = Profit before interest and tax (PBIT)/ Average capital
employed

Where capital employed = (Capital + Reserves + Short term debt + Long term debt
Revaluation reserves Capital work in progress)
Average capital employed = (Capital employed at the beginning of year + Capital
empoyed at the end of year)/ 2

37

ROCE is scored as a weighted average of the least three years. e.g if the ROCE is as
given below:
1997-98
1998-99
1999-2000
ROCE
15
16
17
(3*17+2*16+1*15)/6
15
12
17
(3*15+2*16+1*15)/6
15
14
13
13
ROCE

3.

Score

Less than 10%

10.0% to 12%

1.5

12.0% to 14%

2.25

14.0% to 18%

18.0% to 20%

3.75

20.0% to 24%

4.5

24.0% to 28%

5.25

Above 28.0%

OPBDIT/Operating Income = Operating profit before depreciation, interest and

taxes/Operating Income

This ratio is scored as a weighted average of the least three years. e.g if the ratio is as
given below:
1997-98
1998-99
1999-2000
OPBDIT/Op Income
15
16
17
(3*17+2*16+1*15)/6
15
16
15
(3*15+2*16+1*15)/6
15
14
13
13
Operating Margin

Score

Less than (5)

-5% to 5%

1.5

5% to 10%

2.25

10% to 15%

15% to 20%

3.75

20% to 25%

4.5

25% to 30%

5.25

38

Above 30%

4.

Operating income/ Short term borrowings = Operating Income / Short term borrowings
(Operating Income / Short term borrowings is calculated as a weighted average for the
last three years)

5.

Op. Inc. to short term borr.

Score

Below 1.0

1 to 2

1.5

2 to 3

2.25

3 to 4

4 to 5

3.75

5 to 6

4.5

6 to 7

5.25

Above 7

Current Ratio = (Cash & Bankbalances + total receivables + inventories + current assets
related to operations + other current assets) / Working capital loans from banks + other short
term loans + current liabilities and provisions
(Current ratio is calculated only for the latest year.)
Current Ratio

6.

Score

Below 1.07

1.07 to 1.13

1.5

1.13 to 1.19

2.25

1.19 to 1.25

1.25 to 1.30

3.75

1.30 to 1.40

4.5

1.40 to 1.50

5.25

Above 1.50

Debt Service Coverage Ratio (DSCR) = (PBDIT Tax)/ (Repayment of long term loans +
Interest on long term and short term loans )

39

(DSCR is taken only for the latest year)

7.

DSCR

Score

Below 1

1 to 1.25

1.5

1.25 to 1.5

2.25

1.5 to 1.75

1.75 to 2.25

3.75

2.25 to 2.75

4.5

2.75 to 3.00

5.25

Above 3

Total outside liabilitiest/ Total Networth = (Long term loans + other short term loans + wc
loans from banks + current liabilities and provisions)/ Equity share capital + reserves
revaluation reserve loss brought forward intangible assets)
(TOL/TNW is taken only for the latest year)

Total debt/Total Net Worth

Score

0 to 0.66

0.66 to 0.99

5.25

0.99 to 1.33

4.5

1.33 to 1.66

3.75

1.66 to 1.99

1.99 to 2.33

2.25

2.33 to 2.66

1.5

Above 2.66

40

8.

Free cash flow from operations /Total Debt = Cash flow available after adjusting for working
capital changes/ Total Debt
(Free cash flow from operations /Total Debt is calculated as an average for the last three
years)
Free cashflow from operations
to total debt
Below -1.0

Score

-1.0 to - 0.15

1.5

-0.15 to 0

2.25

0 to 0.15

0.15 to 0.25

3.75

0.25 to 0.35

4.5

0.35 to 0.50

5.25

0.50 and above

FINANCIAL FLEXIBILITY
Financial Flexibility attempts to evaluate the ability of a company to comfortably raise funds to
meet its future requiements (both planned as well as unplanned). Financial Flexibility is a
qualitative factor and depends largely on the following four fundamental factors:
1.
2.
3.
4.

Gearing
Unutilised bank limits
Reputation of the company in the financial markets (track record, market perception)
Support of parent and other group companies

Each of the above-mentioned factors are evaluated independently in the context of projected fund
requirements and also the comfort available in case of a contingency. The overall Financial
Flexibility is then a combination of the independent evaluations. i.e
Financial Flexibility = F(Bank Limits, Gearing, Market reputation, Parent Support)
For example consider a company having a projected net funds requirement of Rs. 200 crore under
an ideal scenario. The same, under a worst case scenario is say Rs. 300 crore (based on price
fluctuation of a capital asset proposed to be purchased). The company would then be evaluated
on:
the ability to comfortably raise Rs. 200 crore in an ideal scenario
the ability to raise the requisite amount in the worst case scenario
additional comfort in the event of a financial distress

41

MyCRA uses subjective judgement for evaluation of Financial Flexibility of corporates. However,
for the purpose of operating the credit risk model, the following table presents broad benchmarks
for the evaluation of financial flexibility.
Grade
6

Bank Limits Significant

unitilised
bank limits

Gearing
Extremely
low
gearing (less than
0.5)

Grade 5

Bank Limits Adequate

unitilised
bank limits

Gearing - Low
gearing (0.5 to 1.0)

Grade
3&4

Bank Limits Moderate

unitilised
bank limit

Gearing

Moderate gearing
(1.0 to 1.5)

Market
reputation

Satisfactory
market
reputation
Would be able to raise
adequate capital from the
market

Grade
2

Bank Limits Insufficient

unitilised
bank limit
Bank Limits Bank
limit
unavailable

Gearing - High
gearing (1.5 to 2.0)

Market reputation - Poor

market reputation. Unlikely
to be able raise capital from
the market
Market reputation - Very
poor market reputation
Would be unable to raise
capital from the market.

Grade 1

Gearing - Very high

gearing (above 2.0)

Market
reputation

Extremely good market

reputation
Highest ability to raise funds
from the market.
Market reputation - Good
market reputation
Would be able to raise
sufficient funds from the
capital market.

Parent Support - 100%

MNC subsidiary.
Demonstrated
track
record of support
Parent
Support
Majority ownership by
MNC (above 51%)
100% ownership by large
domestic
parent.
Demonstrated
track
record of support
Parent
Support
Minority stake by MNC
(26-49%)
Majority owned by large
domestic parent (above
51%). Track record not
demonstrated
but
implicit.
Parent Support - No
financial support from
parent
Parent Support - No
financial support from
parent
Demonstrated
track
record of no support
from parent

42

MANAGEMENT RISK EVALUATION

MYCRA evaluates the following factors while assessing the management of a company:

goals, philosophies & strategies

track record
experience
commitment
integrity of personnel
credibility
adequacy of planning and control systems

The Risk Assessment Model contains a Management Risk module, with the following four
parameters:
Track record
Credibility
Payment Record
Other factors

Track record factors

1. Business and Financial Policy:
The managements conservatism is judged based on past business and financial policies. These
are indicative of possible future strategies, and would have a bearing on future debt bearing
levels. A track record characterised by large expansions in relation to existing size, is indicative of
a relatively high appetite for risk, as the managements competence level vis a vis the expanded
scale of operations is yet to be proven. Further, a large onetime expansion is more likely to strain
the cash flows of existing operations. Business and financial policies can be said to be particularly
risk prone in specific instances where such growth in the past is funded through borrowings
rather than capital infusion/internal accruals. However, such large expansions would be viewed
less unfavourably if they are related to the companys existing operations.

6 (Excellent)

5 (Good)

3&4 (Average)

2 (Below average)

Extremely
conservative
management.
Company has a low,
stable
debt:equity
ratio. Diversifications,
if any, are in related
areas, and have been
implemented in a
phasewise manner, so
as to avoid strain on

Conservative
management.
Absence of
aggressive debt
funded
expansion, large
expansions into
unrelated areas.
Stable/declining
trend in
debt:equity ratio.

Propensity to
undertake
expansions
significant in
relation to
existing size.
Moderate to high
leveraging. Fairly
conservative with
respect to
investment of

Past record of
reckless
expansion/diversifi
cation High
gearing, tendency
to increase
further./
Propensity to
undertake
substantial risk eg.
Unhedged forex

1 (Poor)
Management
is highly risk
prone.
Consistently
undertakes
substantial
risks in the
form of debt
funded
expansion in
unrelated

43

existing
cashflows.
Company avoids high
risk investments such
as ICDs to weak
companies, etc.

Avoidance of
high risk
investments.

short term
surpluses.

Loans, etc.

areas, high
risk
investments,
etc.

2. Relevant experience in the industry

A management with greater experience in the industry places a company in an advantageous
position vis a vis the competition. Familiarity with the operating environment is expected to
enable better decision making.
6 (Excellent)
5 (Good)

3&4 (Average)

2 (Below
average)
1 (Poor)

Top management is vastly experienced in the industry. Senior management

personnel are considered as among the most knowledgeable in the industry.
Top management has put in several years in the industry. Senior management
comprises highly experienced personnel.
Top management, while fairly experienced, has not put in sufficient years to
witness a number of business cycles in industry/ Top management has a balance
of highly experienced and inexperienced personnel. .
Start up with promoters having a few years of industry experience.
Startup company with promoters having no prior experience in the
Industry.

3. Board composition
A professional Board with representation from all segments of the industry places a company in
an advantageous position vis a vis a family managed Board.
6 (Excellent)
5 (Good)

3&4 (Average)
2 (Below
average)
1 (Poor)

The Board comprises influential and knowledgeable people from the industry
who can benefit the company through their contacts and experience
Company is benefited from the experience of its Board members who come from
various segments of the industry
Board is a combination of both professional and family members
Board is not as influential or knowledgeable as other companies who have
professionals on their Board
Board comprises only family members

Credibility
1. Ability to meet sales projections
This factor assesses the ability of the company to achieve the set targets. A company that is able
to meet it sales projections depicts the effectiveness with which plans have been achieved.
2. Ability to meet profit projections
This factor should be analysed under various scenarios. The fact that the company achieved its
targets under difficult market conditions would place them higher than companies who achieved
their profit targets in reasonably easy conditions

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Payment Record
1. Payment record
This factor would aim to look at previous payment record of the company to banks, its
depositors, bondholders, creditors etc.
Other factors
1. Group support:
This factor assesses the availability of support to a company owing to its parentage/ membership
of a strong group. The credit quality of the subsidiary of a strong parent is expected to derive
substantial support in times of stress. Companies which may be stressed by the need to bail out
weak group companies would obtain a low score on this factor.
6 (Excellent)

5 (Good)

3&4 (Average)

2 (Below average)

1 (Poor)

Company is part of
an extremely strong
group with global
presence. The parent
company is
financially sound,
has a majority
shareholding in the
company. The
company is of
strategic importance
to the parent, and
would definitely
derive support in
times of financial
stress.

Company is the
subsidiary of a
strong
global/domestic
company. The
parent has a
majority
shareholding in the
company, and is
likely to provide
support in times of
stress.

Company is part of a
group which
comprises some
weak entities. In the
past, company has
been known to
extend support to
weaker group
concerns and can be
expected to do so in
future as well.

Company is
involved in
numerous group
transactions,
which include
providing
support to weaker
group concerns.
The liquidity
position of this
company has
been affected
owing to large
extent of intragroup dealings.

Diversion of
funds to
unprofitable
group concerns
is a rampant
feature. The
degree of
support to
group
companies has
serious
implications on
the liquidity
position of the
company.

2. Management proactiveness
This factor assesses the ability of management to take initiative in order to drive organisational
change. Management that have taken the lead in ushering in change through image improving
measures, enhanced disclosure norms, etc. would score highly on this factor.
6 (Excellent)
Highly proactive
management track
record is marked by
pioneering efforts
such as improving
consumer
awareness,
environmental
campaigns, better
accounting practices,
etc.

5 (Good)
Management is
active in taking
fresh initiatives.
However, the
emphasis on
driving positive
change through
new measures is
somewhat lower
than the above
grades.

3&4 (Average)
Management can
be categorised as
reactive rather than
proactive. While
initiatives have
been taken up,
these have been as
a reaction to steps
initiated by others
rather than a result
of independent
change.

2 (Below
average)
High resistance
to change. The
companys
practices have
been stagnant
for a long period
of time.
Management
more inclined to
remain with
status quo than
initiate change .

1 (Poor)
Management is
extremely change
resistant. Absence
of open mind
towards change.
Absence of
management
proactiveness
perceived as
major threat to
companys future
prospects.

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3. Strategic initiatives
This factor assesses the companys ability to successful implement its strategies. Companies
which have successfully executed major/complex projects, or demonstrated an ability to manage
strategic alliances, etc. would score highly on this factor.

6 (Excellent)

5 (Good)

3&4 (Average)

Company has an
excellent track
record in project
execution, including
complex
diversification
projects. Companys
initiatives to
improve business
prospects through
various strategic
measures have been
highly successful.

Company has high

success rate in
project execution.
Other strategic
initiatives such as
innovative
distribution
schemes, alliances,
and VRS etc. have
met with
considerable
success.

Company has not

distinguished itself
by successfully
implementing major
strategic changes.
Changes have
generally been
incremental in
nature, and met with
moderate success.

2 (Below
average)
Strategic
initiatives
undertaken by
the company
have failed on
account of
inaccurate
market
estimation,
inadequate
planning etc.

1 (Poor)
The company
has an
extremely poor
record of
implementing
strategic
initiatives.
Management
ability is limited
to the extent
where major
initiatives
undertaken may
be expected to
fail.

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