A PROJECT ON

“FINANCIAL ANALYSIS AND REVIEW”
FOR

“KIRLOSKAR OIL ENGINES LIMITED”

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

RUCHI. S. BHAVSAR
(MBA 2008-10)

RAJARSHI SHAHU COLLEGE OF ENGINEERING PUNE

1

INDEX
SR. NO. 1. 2. CONTENTS PAGE NO. 3 4

ACKNOWLEDGEMENT CERTIFICATE OF ATTENDENCE BY COMPANY CERTIFICATE BY INSTITUTE PROJECT PROFILE COMPANY PROFILE RESEARCH STUDY CONCLUSION AND RECOMMENDATIONS LIMITATION ANNEXURE BIBILIOGRAPHY

3. 4. 5. 6. 7.

5 6 15 23 103

8. 9. 10.

104 105 108

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CHAPTER 1 - ACKNOWLEGEMENT I hereby take the opportunity to express my gratitude towards those who have made great contribution in completion of this project work. I feel immense pleasure to thanks to the Chief Financial Officer Mr. Parande, to the Senior General Manager Corporate Finance Mr. C. L. Bapat, Mr. A. S. Deshpande the General Manager who were kind and helped me in providing necessary information and guidance from time to time. Mr. Malvadkar the Associate Vice President who has given me the opportunity to work with Kirloskar Oil Engines Limited as project trainee. I am immensely thankful to my external project guide Mr. Mahesh. M. Joshi the Deputy Manager and internal project guide Prof. Ramesh Mehta who has been a constant source of inspiration. Both have keen interest and encouraging guidance, which leads to completion of this project in time, is hard to express in words. I offer my sincere thanks to Mr. V. D. Gutte Manager Corporate Finance, Mr. Limaye Manager Corporate Finance, Mr. Jawalkar Deputy Manager and the whole Corporate Finance Staff who spared their valuable time and was always available for guidance in spite of their busy schedule. I am thankful to Mr. Saurab Jain Manager Cost and works department, Mr. Mohanty Manager Human Resource, Miss Disha Sharma the section coordinator and the entire human resource team for reposing faith and support in the endeavor to carry out the project. In the end, I would like to express my gratitude towards the respondents, who selflessly adjusted their schedules to accommodate me in the scheme of things. This project would not have been successful without their valuable help. I also express my sincere thanks to all those who contributed in bringing this project into its current physical form.

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CHAPTER 2 - CERTIFICATE OF ATTENDENCE

This is to certify Miss Ruchi Bhavsar has completed Summer Training Program titled, “Financial Analysis and Review”. In our Orgnisation ‘Kirloskar Oil Engines Limited’ Khadki, Pune. Under the guidance of Mr. Mahesh M. Joshi (Deputy Manager- Corporate Finance) from 18th May 2009 to 17th July 2009. She has duly acknowledged all the sources of references used in this report. This report is based on the Master In Business Administration (M.B.A) program of University Of Pune.

For Kirloskar Oil Engines Ltd

Mahesh M. Joshi Deputy Manager – Corporate Finance

4

CERTIFICATE BY INSTITUTE

5

CHAPTER - 4

PROJECT PROFILE
-INTRODUCTION OF -SUBJECT -OBJECTIVE -DATA ANALYSIS -RESEARCH -METHODOLOGY
6

-HYPOTHESIS

INTRODUCTION OF SUBJECT
Finance is defined as the art and science of managing money. The major areas of finance are:  Financial services  Financial management While financial services is concerned with the design and delivery of advice and financial products to individuals, businesses and governments within the areas of banking and related institutions, personal financial planning, investments, real estate, insurance and so on, financial management is concerned with the duties of financial managers in the business firm. Financial managers actively manage the financial affairs of any type of business, namely, financial and non-financial, private and public, large and small, profit seeking and not-for-profit. They perform such varied tasks as budgeting, financial forecasting, cash management, credit administration, investment analysis, funds management and so on. Financial Analysis and Review:Financial Analysis and Review involves the application of analytical tools and techniques to the financial data to get information that is useful in decision making. The foundation of any good analysis is a thorough understanding of the objectives to be achieved and the uses to which it is going to be put. Such understanding leads to economy of effort as well as to a useful and most relevant focus on the points that need to be clarified and the estimates and projections that are required. Financial analysis is oriented towards the achievement of definite objectives. There are three types of users to whom the financial analysis could be useful. They are short-term lenders, long-term lenders and finally stockholders. The process of financial analysis can described in various ways, depending on the objectives to be obtained. Financial analysis can be used as a preliminary screening tool in the selection of stocks in the secondary market. It can be used as a forecasting tool of future financial conditions and results. It may be used as a process of evaluation and diagnosis of managerial, operating and other problem areas. Financial analysis reduces reliance on intuition, guesses and thus narrows the areas of uncertainty that is present in all decision
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making process. Financial analysis does not lessen the need for judgment but rather establishes a sound and systematic basis for its rational application. Sources of financial information:The financial data needed in the financial analysis come from many sources. The primary source is the data provided by the firm itself in its annual report and required disclosure. The annual report comprise of the income statement, the balance-sheet and the statement of cash flows, as well as footnotes to those statements. Besides this, information such as the market price of securities of publicly traded corporations can be found in financial press and the electronic media daily. The financial press also provides information on stock price indices for industries and for the market as a whole. Financial statement:Every financial manager is involved in financial decision making and financial planning in order to take right decision at right time, he should be equipped with sufficient past and present information about the firm and its operations and how it is changing overtime. Much of this information that is used by financial manager to take various decisions and to plan for the future is derived from the financial statements. A financial statement is the compilation of data, which is logically and consistently organized according to accounting principles. Its purpose is to convey an understanding of some financial aspects of a business firm. It may show a position at a moment in time, as in the case of balance-sheet, or may reveal a series of activities over a given period of time, as in the case of an income statement. Financial statements are the major means through which firms present their financial situation to creditors, stock-holders and general public. The majority of firms include extensive financial statements in their annual reports, which are distributed widely Financial analysis involves the use of various financial statements. These statements do several things. First, the balance sheet summarizes the assets, liabilities and owners equity of a business at moment in time, usually the end of a year or a quarter. Next the income statement summarizes the revenues and expenses of the firm over a period of time while balance sheet represents a snapshot of the firm s financial position at a moment in time. Financial management is planning and controlling of financial resources of a firm with a specific objective. Since, financial management as a separate discipline is of recent origin, it is still in a developing stage. It is very crucial for an organization to manage its funds effectively and efficiently. Financial management has assumed greater importance today as the financial strategies required to survive in the competitive environment have become very important. In the financial markets also new instruments and concepts are coming and one must say that a finance manager of today is operating in a more complex environment. A study of theories and concepts of financial management has therefore become a part of paramount importance for academics as well as for practitioners but there are many concepts and theories about which controversies exist as no unanimous opinion is reached as yet.

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IMPACT OF OTHER DISCIPLINES ON FINANCE IN DIGRAMATIC FORM:-

9

OBJECTIVE
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- To study Financial Statements like income and expenses and balance sheet - To obtain a true insight into financial position of the company. - To make comparative study of financial statements of different years. - To study various ratios to determine the relationship of different factors which have impact on the financial position of the company. - To identify the financial strengths and weakness of the company - To find out the reasons for unsatisfactory results. - Evaluating company s performance relating to Financial Statement Analysis. - To analyze the Cash Flow Statement, and know the cash management of the company. - To analyze the Fund Flow Statement, and to know how the funds are managed by the company - To analyze the working Capital Management, to know how company manages the cash for day to day requirement, inventory, debtors, creditors etc.

RESEARCH METHODOLOGY
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Research: Introduction
Research is a purposive investigation of hypothetical propositions. Research as a process involves defining and redefining problems, hypothesis formulation, organizing and evaluating data, deriving deductions, inferences and conclusion, after careful testing.

Research: Definition
“Research concerns itself with obtaining information empirical observation that can used to systematically develop logically related propositions so as to attempt to establish casual relationship among variables.”

-Black and Champion Steps in Research Methodology: Step 1: To decide Objective of the study
  Study the constituents and the concept of Financial Analysis and Review. Analyze and interpret Financial Position of the Kirloskar Oil Engines Ltd.

Step 2: To decide Research Design
 What is Research Design?

 Research Design is a logical and systematic planning and directing of piece of research. Research design attempts to integrate various aspects of research study. Such as what, where, when, how, etc. It is a plan structure and strategy of investigation.

Research Design used for project: Descriptive Research:

Descriptive study determines the frequency of occurrence of phenomenon of interest or of its association with something. Descriptive study narrates facts or characteristics. Descriptive study often helps the researcher to do a lot of spade work and act as launch pads of further researchers. Descript studies usually employ the principle of sampling as they attempt to make certain generalizations. They also provide valuable information for policy formulation (Annual Reports).

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Characteristics:
 They are well structured.
13

 

The approach cannot be changed every now and then. Primary data is collected.

-

Exploratory Research:

Exploratory design aims at discovering more about various dimensions of the research problem and associated aspects. The first level of exploratory research aims at discovery of significant variables involved in the situation. The second level focuses on relationship among variables.

Characteristics:
   Focus is to discover ideas. Based on secondary data. Researcher has to change his focus depending on the availability of new ideas.

Step 3: To determine Sources of Data
What are Sources of Data? A data source is used to carry out or research or to collect fresh data for obtaining results. There are two sources of data:  Primary Data  Secondary Data

Primary Data: Data that is collected for the specific purpose at hand is Primary Data. Characteristics:
      It is expensive mode of data collection. Lot of time is spent. It gives accurate results if sample is efficiently selected. Data used is original in nature. Observation Method Questionnaire Method

Primary data sources used in this project:

Secondary Data: Data that has been collected earlier for some purpose other than the purpose for
present study.

Characteristics:
 It is economical as the cost of collecting original data is saved.  Time involved is comparatively less than primary data. Secondary data sources used in this project:  Books  Journals  Website of Company

Step 4: To design Data Collection Forms
There are three types of modes to collect data:  Observatory Method  Survey Method  Questionnaire Method
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As far as my data collection method is concerned used ‘Observational Method’ initially and survey method was used for the study of project.

Step 5: To determine Sampling Design
Sampling is the process of obtaining information about an entire population by examining only part of it. The items selected constitute what is technically called as Sample. Their selection process or technique is called as Sample Design. Survey conducted on the basis of sample is Sample Survey.

Step 6: To organize and conduct field survey
The survey was done with the help of non-structured questionnaire, by interviewing the Corporate Manager to get the feedback.

Step 7: To Process and Analyze collected data
The study and access of the Financial Position of the company as well as the procedure of the Treasury Management process data collected by survey.

Step 8: To prepare Research Report
The culmination of the entire research process is “Research Report.”

Definition:
“To convey to the interested persons the whole result of the study in sufficient detail and so arranged as to enable each reader to comprehend the data and to determine for himself the validity of conclusions.:

-American Marketing Society.
The research report has been prepared according to the report writing principles. I have tried my best to maintain the objectivity, coherence and clarity in the presentation of the ideas. The essence of good report is that it effectively communicates its research findings.

HYPOTHESIS
Hypothesis testing refers to as ‘Statistical Decision-Making.’ Hypothesis is a tentative solution or answer to the research problem, which the researcher has to test based on the available body of knowledge, or on knowledge that can be known. A hypothesis may be defined as a proposition or a set of propositions set forth as an explanation for the occurrence of some specific groups of phenomenon either asserted merely as a provisional conjecture to guide some investigation or accepted as highly probable in the light of established facts.

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CHAPTER - 5

COMPANY PROFILE
- HISTORY - ABOUT KIRLOSKAR OIL ENGINES LIMITED - INTRODUCTION - BOARD OF DIRECTORS - ORGANISATION CHART
16

HISTORY

The Founder and the First Factory Village

The Kirloskar story starts with Laxmanrao Kirloskar, the founder. A man who believed that, understanding of one's environment and reality was essential to the manufacture of path-breaking industrial implements. From this steadfast belief was born the iron plough, the first Kirloskar product. Originally intended as an essential aid to agriculture, the plough soon became an icon of reform and revolution. In January 1910, when the Kirloskar were being ousted from Belgaum to make room for a new suburb, they found themselves in dire need of a place to live and work. Sensing this need, the Raja of the princely state of Aundh, who admired and respected Laxmanrao Kirloskar, offered the latter all the land he needed in Aundh state. Two months later, Laxmanrao Kirloskar set foot on 32 acres of barren land strewn with cacti and infested with cobras. Driven by his faith in human ability, Laxmanrao banded together 25 workers and
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A highlight of the early history of the group is Kirloskarwadi, India's first industrial township. A model factoryvillage created by Laxmanrao and his band of dedicated workers.

their families and succeeded in transforming the barren expanse into his dream village. Ramuanna, Laxmanrao's brother, planned and administered the township, Shamburao Jambhekar an allround healing man, K.K.Kulkarni, an unsuccessful student, became a manager, treasurer and odd jobs man, Mangeshrao Rege was the clerk and chief accountant, Anantrao Phalnikar, a school drop-out flowered into an imaginative engineer. Such was our founder's faith in the human being that, Tukaram Ramoshi and Pirya Mang, both convicted dacoits, became the trusted guards of Kirloskarwadi

The First Kirloskar Group Company

Kirloskar Brothers Limited (KBL) - the first Kirloskar venture at Kirloskarwadi was to become the base for all of the Kirloskar Group's subsequent enterprises. It began as the only Indian company with its own standard products - the fodder cutter and the iron plough, which competed with the British products.

ABOUT Kirloskar Oil Engines Limited

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Late.Mr.Shantanurao Kirloskar established, Kirloskar Oil Engines Limited in 1946 with the object of carrying on the business of manufacturing and selling of all types of combustion engines. The Khadki (Pune) plant is situated on 55 acres of land and was inaugurated on 25 April 1949, production commenced immediately thereafter.

Initially production was restricted to small diesel engines having agricultural and industrial applications. Over the period of time Company developed medium and large engines, bimetal bearings, strip and bushes. The year 1954-55 was the beginning of the new era of rapid growth. Central Government of India banned import of small engines in the country. Consequently demand for KOEL’s engines picked up. The Company began exporting to Germany, Middle East and Far Eastern Countries.

In 1954 Company started manufacturing bearings primarily for the captive use in stationary engines. Over a period of time, the Company also developed bearings for automotive engines. With the development in agriculture and irrigation under the five year plans the demand for Company’s engines soared rapidly. To cope up with increasing demand, Company launched first phase of expansion in 1958. In 1985-86 Letters Of Intent for manufacture of pipe handling tools was converted into Industrial License. Company also launched material handling components. In 1992-93 Letter Of Intent was received for manufacture of Camshafts and Crankshaft for automotive applications.

In 1989-90 Company undertook a scheme for modernization of plan at Pune and Ahmednagar. During 1990-91 Company undertook packing of Gas Turbines for Industrial Power Generation markets in 1MW-10MW range in association with Solar Turbines Inc. U.S.A. In early 1993 KOEL purchased the products know how and selected manufacturing line from IFA an East German Company. In late 1993 Company secured ISO-9001 certificate in the first go. Company has also acquired the ISO-14001 EMS i.e. Environment Management System.

INTRODUCTION Kirloskar Oil Engines Limited (KOEL) operates in different business segments of a wide range of diesel engines, auto components etc. There are currently 12 such segments known as Strategic Business Units. The SBUs have manufacturing facilities located at different parts of the country and they deal with a large number of customers spread across the country and overseas. Business Groups SEBG: Small Engine Business Group MEBG: Medium Engine Business Group LEBG: Large Engine Business Group
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ACBG: Auto Component Business Group SBUs are independent profit centers and they generate their surplus funds from their operations. These SBUs also borrow from the Corporate Finance Department (CFD) from time to time if the need arises. As per Corporate Policy the surplus funds can be invested by CFD only and not by SBUs directly. Besides, surplus funds of SBUs, CFD also generate funds from funds management or other financial activities. Investment of surplus funds by CFD is an important activity having significant bearing on overall financial performance and profitability of KOEL. Therefore, timely consolidation of available funds, their management, accounting and controls ensuring investment in best available avenues commensurate with risk and liquidity considerations is crucial to ensure optimum returns at acceptable level of risk and maturity.

VISION
“We will become a major Global Player in off–highway engines and power generation businesses by offering winning combinations of Quality, Cost and Delivery through innovation and unmatched service. We will be amongst the Top Five engine companies of the world. While pursuing the above, we will continue to enhance the value of engine bearing and valves business.”

BOARD OF DIRECRORS Mr. Atul C. Kirloskar Director : Chairman & Managing

Mr. Sanjay C. Kirloskar

: Vice Chairman

Mr. Gautam A. Kulkarni : Joint Managing Director

Mr. Rahul C. Kirloskar

: Director (Exports)
20

Mr. D. R. Swar Services) 2007]

: Director (Corporate [Ceased w.e.f. 19 April

Mr. R. R. Deshpande

: Executive Director

Mr. Vikram S. Kirloskar Mr. U. V. Rao Mr. H. M. Kothari Dr. N. A. Kalyani 2007] Mr. P. G . Pawar Mr. V. K. Bajhal Mr. R. Srinivasan Dr. Naushad Forbes Mr. A.N. Alawani Mr. M Lakshminarayan Mr. Nihal Kulkarni Mr. Sanjay D. Parande (w.e.f. 21 January 2009) (w.e.f. 24 April 2009) (w.e.f. 24 April 2009) : Chief financial officer
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[ceases w.e.f 23 April

Ms Aditi Chirmule M/s. Dalal & Shah Bankers

: Company secretary : Auditors : State Bank of India, Bank of Maharashtra, HDFC Bank Ltd, ICICI Bank Ltd, HSBC Ltd

Registrar Register office khadki

: Link Intime India Private Ltd : Laxmanrao kirloskar road, Pune - 411003

Location of factories : Pune, Ahnednagar, Nasik, Kagal,Phursungi (upto 15th April 2009), Rajkot, Silvass

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ORGANISATION CHART

CHIEF FINANCIAL OFFICER

TREASURE R

CONTROL LER

CASH MANAG ERRRR

CREDIT MANAGE R

FINANCI AL ACCOUN TS MANAGE R

COST ACCOU NTS MANAG ER

CAPITAL BUDGETIN G MANAGER

FUND RAISING MANAGE R

TAX MANAGE R

DATA MANAGE R

PORTFOL IO MANAGE R

23 INTERNAL AUDITOR

CHAPTER - 6

RESEARCH STUDY
- RATIO ANALYSIS - DU-PONT ANALYSIS - LEVERAGES - FUNDS FLOW STATEMENT - CASH FLOW STATEMENT - COST OF CPITAL
24

- WORKING CAPITAL - RECEIVABLES MANAGEMENT - COST-SHEET - BREAK-EVEN ANALYSIS

RATIO ANALYSIS

Ratio analysis is widely used-tool of financial analysis. It can be used to compare the risk and return relationship of firms of different sizes. It is defined as the systematic use of ratio to interpret the financial statements so that the strength and weakness of the firm as well as its historical performance and current financial condition can be determined. Trend ratios involve a comparison of the ratios of a firm over time, that is, present ratios are compared with past ratios for the same firm. The comparison of the profitability of a firm, say, year 1 through 5 is an illustration of a trend ratio. Trend ratios indicate the direction of change in the performance-improvement, deterioration or constancy over the years. Ratio analysis is the process of determining and interpretation mathematical relationship based on financial statement. The comparison of financial ratios against the norms established helps to diagnosis the financial condition and arrive at conclusions. The comparison of financial ratios is done against the following: Standard set  Historical figures  Inter-firm analysis (head hunting)

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Ratio analysis is considered as a powerful tool of financial analysis through which economic and financial position of the business can be fully X-rayed. They provide a coordinated frame of reference for judging financial performance. They convey the entire story of the ‘financial adventure’ of the enterprise. They comprehend and simplify a heap of financial data through one particular figure which conveys the complete meaning. They focus on the specific relationship in the financial statements. Basis of comparison: Ratios are relative figures reflecting the relationship between variables. This enables the analysis to draw conclusion regarding financial operations. The use of ratio as a tool of financial analysis involves their comparison, for a single ratio, like absolute figures, fails to reveal the true position. For example, P /E ratio (price/earnings ratio for a particular script) should be compared over a period of time to get a true picture of company performance. Thus comparisons with related facts is the basis of ratio analysis In ratio analysis, four types of comparisons are involved.     Trend Ratio Inter firm comparisons Comparisons of items within a single year s financial statement of a firm. Comparisons with standard or plans

Uses of ratio analysis:-

 It helps to understand the efficiency and performance of the firm as a whole.  Its main purpose is to gain insights into the operating and financial problems confronting the firm.  It helps to identify the trouble or potential trouble spots of the firm. This would impel the management to investigate those areas more thoroughly.  It helps to pinpoint relationship that is not obvious from the financial statements.  It helps to highlight the factors responsible for the present state of financial statements.

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 It helps the shareholders in evaluating the firm’s activities and policies that affect the profitability, liquidity and ultimately the market price of the shares  It helps to examine the adequacy of funds, the solvency of the firm and its ability to meet the financial obligations as and when they become due.  It is very useful in inter-firm and intra-firm analysis.  A trend can be established by calculating ratios for number of years.

Limitations of ratio analysis: There may be a difference between the inventory methods followed by various firms or different method in the same firm.  Firms follow various methods of depreciation.  There may be a difference between the capital structures of the firms.  Window dressing, which means artificially improving the financial statements is another major drawback  Inflationary factors are not taken into consideration. Thus when the past performance is analyzed, the figures may have become outdated.

Classification of ratios:-

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 LIQUIDITY RATIOS:The importance of adequate liquidity is the ability of a firm to meet current or short term obligations when they become due for payment can hardly be overstressed. Liquidity is the prerequisite for the survival of the firm. A proper balance between the two contradictory requirements, that is, liquidity and profitability, is required for efficient financial management. Liquidity ratios indicate the financial strength or solvency of a firm.

 PROFITABILTY RATIOS:The creditors, shareholders and management are eager to measure its efficiency and financial soundness. The shareholders invest their funds in the expectation of reasonable returns. The profitability ratios can be determined on the basis of either sales or investments

 ACTIVITY RATIOS:Activity ratios are concerned with measuring the efficiency in asset management. The efficiency with which the assets are used would be reflected in the speed and rapidity with which the assets are converted into sales. The greater the rate of conversion, the more efficient is the utilization of assets, other things being equal.

 MARKET VALUE RATIOS:28

Market Value ratios are those ratios which are measured by using market value of the shares. This ratio is calculated to know the returns the shareholders as compared to the amount invested in market value of the shares.

 CAPITAL STRUCUTRE:The long term lenders would judge the soundness of a firm on the basis of the long term financial strength measured in terms of its ability to pay the interest regularly as well as repay the installment of the principal on due dates. The long term solvency is examined by the capital structure ratio

These ratios are further divided into:-

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LIQUIDITY RATIOS:1.>

CURRENT RATIO :-----------------------------

CURRENT ASSETS CURRENT RATIO = CURRENT 30

LIABILITIES

Rs. In millions

YEAR CURRENT ASSETS CURRENT LIABILITIES RATIO

2005 3923234 2949585 1.33

2006 5264473 4234316 1.24

2007 6615365 5370163 1.23

2008 7455319 6452601 1.16

2009 6819921 4860721 1.40

CurrentRatio
1.5 1 O I T A R 0.5 0 2005 2006 2007 YEAR 2008 2009

Current Ratio

INFERENCE:This ratio indicates the solvency of the company. It shows the proportion of current assets to current liabilities. Normally, it is expected that current ratio should be 2: 1, which indicates that current assets should be twice as compared to current liabilities. As the current ratio is less than the ideal ratio hence, it is advisable to the company to increase its current ratio to be in a favorable position.

2.>

ACID TEST RATIO :QUICK ASSETS ACID TEST RATIO = ---------------------------QUICK LIABILITIES 31

Rs. In millions

YEAR QUICK ASSETS QUICK LIABILITIES RATIOS

2005 3057112 2949585 1.04

2006 4155109 4234316 0.98

2007 5131782 5370163 0.96

2008 5514869 6452601 0.85

2009 558112 3 4860721 1.15

INFERENCE:This ratio indicates the proportion of quick assets to quick liabilities. The ideal Acid Test Ratio should be 1:1 which means that the quick assets should be equal to quick liabilities. In 2005 the ratio was more or less favorable but in other years it should be increased to be in a favorable condition to pay current liabilities.

2.>

PROPREITORY RATIOS :-

TOTAL ASSETS PROPREITORY RATIO= -----------------------------------PROPREITORY FUNDS

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Rs. In millions

YEAR TOTAL ASSETS PROPREITORY FUNDS RATIO

2005 915425 4 562075 5 1.63

2006 1218556 0 7183745 1.70

2007 15111223 8513490 1.77

2008 19327629 9149913 2.11

2009 18268538 9600845 1.90

INFERENCE:This ratio indicates the proportion of proprietors funds used for financing the total assets. Ideally 2/3rd of assets should be financed through proprietors’ funds while balance should be financed through borrowed funds. In 2005 and 2006 the ratio is favorable but in 2007 and 2008 the ratio is quite high hence the firm is not using external funds adequately.

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3.>

CURRENT ASSETS TO FIXED ASSETS :CURRENT ASSETS CURRENT ASSETS TO FIXED ASSETS = ----------------------------FIXED ASSETS
Rs. In millions

YEAR CURRENT ASSETS FIXED ASSETS RATIO

2005 392323 4 144687 2 2.71

2006 526447 3 192220 5 2.74

2007 661536 5 332199 0 1.99

2008 745531 9 710896 3 1.05

2009 6819921 672978 5 1.01

INFERENCE:This ratio indicates the proportion of current assets to fixed assets. Current assets are held for short-term purpose while fixed assets are held for long-term purpose. In 2005, 2006, 2007 and 2008 current assets are more than fixed assets.

 PROFITABILITY RATIOS :34

1.>

GROSS PROFIT RATIO :100

GROSS PROFIT GROSS PROFIT RATIO = ------------------------ x NET SALES

Rs. In millions

YEAR GROSS PROFIT NET SALES RATIOS

2005
2250792

2006
489464 9

2007
6395092

2008
7454893

2009 7002799 22732435 30.81%

12618856
17.84%

1530712 6 31.98%

20694761
30.90%

23723049
31.42%

INFERENCE:This ratio shows the margin left after meeting the purchase and manufacturing costs. It measures the efficiency of production as well as pricing. A high gross profit ratio means a high margin for covering other expenses like administrative, selling and distribution expenses. In 2005 gross profit is less which increased in 2006 and again came slight downward in 2007 and 2008 which should be increased.

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2.>

NET PROFIT RATIO:NET PROFIT NET PROFIT RATIO = -------------------- x 100 NET SALES
Rs. In millions

YEAR NET PROFIT NET SALES RATIO

2005 173894 6 126188 56 13.78 %

2006 2005874 15307126 13.10 %

2007 1784090 20694761 8.62 %

2008 1189516 23723049 5.014 %

2009 1158930

22732435
5.10%

INFERENCE:This ratio shows the earnings left for share-holders as percentage of net sales. It measures the overall efficiency of all the functions of business firm like production, administrative, selling, financing, pricing, tax management etc. Higher the ratio the better it is because it gives an idea of overall efficiency of the firm. As we see the trend in this ratio it is decreased from 2005 to 2008 which is not favorable for the company and should be increased.

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3.>

OPERATING NET PROFIT RATIO :OPERATING NET

PROFIT OPERATING NET PROFIT RATIO = ------------------------------------- x 100 SALES

Rs. In millions

YEAR OPERATING NET PROFIT SALES RATIO

2005 1583778 12618856 12.55%

2006 2226493 15307126 14.55%

2007 2872265 20694761 13.88%

2008 3176463 23723049 13.39%

2009 3089805 22732435 13.59%

INFERENCE:This ratio establishes the relationship between the net sales and the operating net profit. Operating net profit is the profit arising out of business operations only. Higher the ratio the better it is because it gives an idea of overall efficiency of the firm. In 2006 the ratio is highest but in 2005, 2007 and 2008 it should be increased to increase the profitability.

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4.>

OPERATING RATIO:COST OF GOODS

SOLD+OPERATING EXPENSES OPERATING RATIO = ------------------------------------------------------------------ x 100 NET SALES
Rs. In millions

YEAR COST OF GOODS SOLD OPERATING EXPENSES NET SALES RATIO

2005 8213011 373483 12618856 68.04%

2006 9994581 417896 15307126 68.02%

2007 13792882 506787 20694761 69.10%

2008 15739044 529112 23723049 68.58%

2009 15294648 434988

22732435
69.19%

INFERENCE:This ratio indicates the proportion of cost of goods sold and operating expenses to net sales. The higher the ratio lower margin is left for operating profit hence the ratio should be low. In the above chart the expenses more than 60% which reduces the profitability hence it should be reduced.

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5.>

RETURN ON CAPITAL EMPLOYED:EBIT RETURN ON CAPITAL EMPLOYED = ----------------------------- x 100 CAPITAL EMPLOYED
Rs. In millions

YEAR EBIT CAPITAL EMPLOYE D RATIO

2005 1086153 6137998

2006 1582121 7853752

2007 2314853 9576638

2008 2071130 12578828

2009 2116026 13090696

17.70%

20.14%

24.17%

16.47%

16.16%

INFERENCE:This ratio indicates the percentage of earnings before interest and tax to total capital employed. This ratio is considered to be very important because it reflects the overall efficiency with which capital is used. This ratio is highest in 2007 as compared to 2005, 2006 and 2008.
NOTE: EBIT - EARNINGS BEFORE INTEREST & TAXES.

39

6.>

RETURN ON EQUITY :-

SHARE-HOLDERS EARNINGS RETURN ON EQUITY = --------------------------------------------- x 100 EQUITY SHARE-HOLDERS FUNDS
Rs. In millions

YEAR OWNERS EARNINGS EQUITY SHARE HOLDERS FUNDS RATIO

2005 1738946 5620755 30.94%

2006 2005874 7183745 27.92%

2007 1784090 8513490 20.96%

2008 1189516 9149913 13.%

2009 1158930 9600845 12.07%

INFERENCE:This ratio indicates the productivity of the owned funds employed in the firm. It shows the percentage of net profit available for share-holders. In the above chart it shows a downward trend which is not favorable for company and share-holders as it decreases the earnings of share-holders. Hence it should be increased.

40

7.> RETURN ON TOTAL ASSETS:AFTER TAX RETURN ON TOTAL ASSETS = -------------------------------------- x 100

NET PROFIT

TOTAL ASSETS

Rs. In millions

YEAR NPAT TOTAL ASSETS RATIO

2005 1738946 9154254 18.99%

2006 2005874 12185560 16.46%

2007 1784090 15111223 11.81%

2008 1189506 19327629 6.15%

2009 1158930
18268538

6.34%

INFERENCE:Returns on assets crudely reflect how well the firm uses its assets in total. The higher the ratio is favorable as it indicates that the firm is utilizing its assets profitably. In the above chart the ratio is decreasing which is not favorable for the company hence it should be increased.

41

8.>

RETURN ON NETWORTH:NET PROFIT AFTER TAX RETURN ON NETWORTH = -----------------------------------NET WORTH
Rs. In millions

YEAR NPAT NET WORTH RATIO

2005 1738946 5620755 30.94%

2006 2005874 7183745 27.92%

2007 1784090 8513490 20.96%

2008 1189506 9149913 13%

2009 1158930 9600845 12.07%

INFERENCE:This ratio indicates the productivity of the owned funds employed in the firm. It shows the percentage of net profit after tax available for share-holders which also includes the net worth of the company. In the above chart it shows a downward trend which is not favorable for company and share-holders as it decreases the earnings of share-holders. Hence it should be increased.

42

9.>

EARNINGS PER SHARE:OWNERS EARNINGS EARNINGS PER SHARE = ----------------------------------NO. OF EQUITY SHARES
Rs. In millions

YEAR OWNERS EARNINGS NO. OF EQUITY SHARES RATIO

2005 1738946000 97086190 17.91

2006 2005874000 97086500 20.66

2007 1778324000 194173000 9.16

2008 1189516000 194173000 6.13

2009 1158930000 194173000 5.97

INFERENCE:This ratio is an important indicator of performance of the company. It indicates the amount of profit available for distribution amongst the equity shareholders. This ratio should be higher as return to increases. Market price of the company’s shares is directly proportional to earnings per share of the company. In the above chart it shows a downward trend hence it should be increased.

1.>

DIVIDEND PER SHARE:43

PROPOSED DIVIDEND DIVIDEND PER SHARE = ----------------------------------NO. OF EQUITY SHARE
Rs. In millions

YEAR PROPOSED DIVIDEND NO. OF EQUITY SHARES RATIO

2005 242717000 97086500 2.5

2006 388346000 97086500 4

2007 388346000 194173000 2

2008 38834600 0 19417300 0 2

2009 194173000 194173000 1

INFERENCE:This ratio indicates the dividend declared per share. This ratio should high as it indicates the returns to the shareholders. In the above chart dividend per share is highest in 2006 as compared to 2005, 2007 and 2008.

44

1.>

DIVIDEND PAYOUT RATIO :DIVIDEND PER SHARE DIVIDEND PAYOUT RATIO = -------------------------------------- x 100 EARNINGS PER SHARE
Rs. In millions

YEAR DIVIDEND PER SHARE EARNINGS PER SHARE RATIO

2005 2.5 17.91 13.96%

2006 4 20.66 19.36%

2007 2 9.16 21.83%

2008 2 6.13 32.63%

2009 1 5.97 16.75%

INFERENCE:Dividend payout ratio indicates the percentage of profit distributed as dividend to the shareholders. A higher ratio indicates that the company is following a liberal policy regarding the dividend while lower ratio indicates a conservative approach of the management towards the dividend. The higher the ratio more will be the investment. In the above chart it shows an upward trend hence it is favorable for the company.

 MARKET VALUE RATIOS:45

2.>

PRICE EARNINGS RATIO :MARKET PRICE PER EQUITY SHARE PRICE EARNINGS RATIO = -----------------------------------------------------EARNINGS PER SHARE
Rs. In millions

YEAR MARKET PRICE EARNINGS PER SHARE RATIO

2005 146 17.91 8.15

2006 154 20.66 7.45

2007 166 9.16 18.12

2008 200 6.13 32.63

2009 122.80 5.97 16.75%

INFERENCE:This ratio highlights the relationship between the market price of shares and current earnings per share. Companies with ample opportunities for growth generally have high price earnings ratio. In the above chart it shows an upward trend hence it is favorable for the company.

3.>

EARNINGS YIELD RATIO:46

EARNINGS PER SHARE EARNINGS YIELD RATIO = ----------------------------------MARKET PRICE PER SHARE
Rs. In millions

YEAR EARNINGS PER SHARE MARKET PRICE PER SHARE RATIO

2005 17.91 146 0.12

2006 20.66 154 0.13

2007 9.16 166 0.055

2008 6.13 200 0.031

2009 5.97 122.80 0.049

INFERENCE:This is the capitalization rate at which the stock market capitalizes the value of current earnings. The yield is expressed in terms of the market price of the share. It serves as a guiding ratio for the intended investors.

4.>

DIVIDEND YIELD RATIO:-

47

DIVIDEND PER SHARE DIVIDEND YIELD RATIO = -------------------------------------------- x 100 MARKET PRICE PER SHARE
Rs. In millions

YEAR DIVIDEND PER SHARE MARKET PRICE PER SHARE RATIO

2005 2.5 146 1.71%

2006 4 154 2.60%

2007 2 166 1.25%

2008 2 200 1%

2009 1 122.80 0.81%

INFERENCE:This ratio compares the dividend per share to market price of the share. This ratio is a very important for investors who purchase their shares in open market; they will evaluate their returns against investment done i.e. the market price paid by them. The higher the ratio more will be the investments. In the above chart it is advisable to increase the ratio.

 ACTIVITY RATIO:1.> WORKING

CAPITAL TURNOVER RATIO:48

NET SALES WORKING CAPITAL TURNOVER RATIO = --------------------------------------NET WORKING CAPITAL
Rs. In millions

YEAR NET SALES NET WORKING CAPITAL RATIO

2005 12618856 973649 12.96

2006 15307126 1030157 14.86

2007 20694761 1245202 16.62

2008 23723049 1002718 23.66

2009 22732435 1959200 11.60

INFERENCE:This ratio compares the net sales with the net working capital of the business firm. This ratio indicates number of times working capital is turned around a particular period. The higher the ratio, the better is utilization of the working capital and also indication of lower working capital. However a very high ratio is a sign of over trading and a firm may face shortage of working capital. In the above chart it shows an upward trend hence it is favorable for the firm.
NOTE: - NET WORKING CAPITAL=CURRENT ASSETS – CURRENT LIABILITIES

2.>

DEBTORS TURNOVER RATIO:49

CREDIT SALES DEBTORS TURNOVER RATIO = ----------------------------------------AVERAGE ACCOUNTS RECEIVABLE
Rs. In millions

YEAR CREDIT SALES AVERAGE DEBTORS RATIO

2005 12618856 2040498 6.18

2006 15307126 2641021 5.80

2007 20694761 3488407.5 5.93

2008 23723049 3728544 6.36

2009 22732435 2924316 7.77

NOTE: AVERAGE ACCOUNTS RECEIVABLE = OPENING DEBTORS, BILLS RECEIVABLE + CLOSING DEBTORS, BILLS RECEIVABLE 2

DEBTORS COLLECTION PERIOD:12MONTHS DEBTORS COLLECTION PERIOD = ------------------------------------DEBTORS TURNOVER RATIO 50

Rs. In millions

YEAR MONTHS DEBTORS TURNOVER RATIO DEBTORS COLLECTION PERIOD

2005 12 6.18 1.94

2006 12 5.80 2.06

2007 12 5.93 2.02

2008 12 6.36 1.89

2009 12 7.77 1.54

INFERENCE:This ratio indicates the efficiency of the firm in collecting its receivables from its customers to whom the firm has sold on credit. It also indicates how quickly the debtors are turned into cash. The higher the ratio lower is the collection period, on the other and lower the ratio higher will be the collection period. In the above charts the debtors turnover ratio should be increased to reduce the collection period.

3.>

CREDITORS TURNOVER RATIO: -

CREDIT

PURCHASES CREDITORS TURNOVER RATIO = -------------------------------------------AVERAGE ACCOUNTS PAYABLE 51

Rs. In millions

YEAR CREDIT PURCHASES AVERAGE CREDITORS RATIO

2005 9994581 1608077.5 6.22

2006 8213011 2017569.5 4.07

2007 13792882 2714362.5 5.08

2008 15739044 3521925 4.47

2009 15294648 2454362 6.23

NOTE: AVERAGE ACCOUNTS PAYABLE = OPENING CREDITORS, BILLS PAYABLE +CLOSING CREDITORS, BILLS PAYABLE 2

CREDITORS PAYMENT PERIOD:12MONTHS CREDITORS PAYMENT PERIOD = -------------------------------------------CREDITORS TURNOVER RATIO 52

Rs. In millions

YEAR MONTHS CREDITORS TURNOVER RATIO CREDITORS PAYMENT PERIOD

2005 12 6.22 1.93

2006 12 4.07 2.95

2007 12 5.08 2.36

2008 12 4.47 2.68

2009 12 6.23 1.93

INFERENCE:The Creditors Turnover Ratio indicates the credit period allowed by the creditors to the firm. A high turnover ratio indicates that the payment to the creditors is quite prompt but it also implies that the firm is not taking full advantage of the credit allowed by the creditors. A lower ratio indicates that there is not much promptness in payment made to creditors and needs to be improved. In the above charts creditors turnover ratio and creditors payment period is favorable for the firm.

4.>

INVENTORY TURNOVER RATIO :COST OF

GOODS SOLD INVENTORY TURNOVER RATIO = ----------------------------------INVENTORY AVERAGE 53

NOTE: AVERAGE INVENTORY = OPENING INVENTORY + CLOSING INVENTORY --------------------------------------------------------------------2
Rs. In millions

YEAR COST OF GOODS SOLD AVERAGE INVENTORY RATIO

2005 9994581 803576 12.44

2006 8213011 987743 8.31

2007 13792882 1296473.5 10.64

2008 15739044 1712016.5 9.19

2009 15294648 1238798 12.35

INVENTORY HOLDING PERIOD:12MONTHS INVENTORY HOLDING PERIOD = -----------------------------------------INVENTORY TURNOVER RATIO

54

Rs. In millions

YEAR MONTHS IVENTORY TURNOVER RATIO INVENTORY HOLDING PERIOD

2005 12 12.44 0.96

2006 12 8.31 1.44

2007 12 10.64 1.13

2008 12 9.19 1.31

2009 12 12.35 0.97

INFERENCE:This ratio establishes the relationship between the cost of goods sold during a given period and the average amount of inventory held during that period. The higher ratio is better as it shows the rapid turnover of stock and consequently shorter holding period, on the other hand if the ratio is lower indicate that the stock is slow moving and there is longer holding period. In the above chart inventory turnover ratio is showing a downward trend, hence it should be increased to reduce the holding period.

5.>

FIXED ASSETS TURNOVER RATIO:-

NET

SALES FIXED ASSETS TURNOVER RATIO = ----------------------------FIXED ASSETS 55 NET

Rs. In millions

YEAR NET SALES NET FIXED ASSETS RATIO

2005 12618856 1446872 8.72

2006 15307126 1922205 7.96

2007 20694761 3321990 6.23

2008 23723049 7108963 3.34

2009 22732435 6729785 3.38

NOTE: - NET FIXED ASSETS= COST OF ASSETS – DEPRECIATION

INFERENCE:This ratio indicates the amount of sales realized per rupee of investment in fixed assets. This ratio is more important in manufacturing concerns, as it indicates the utilization of fixed assets. The higher the ratio higher will be the amount of sales generated per rupee of investment in fixed assets. In the above chart it is advisable to the firm to increase the ratio, which will result in higher amount of turnover.

5.>

SALES TO CAPITAL EMPLOYED :56 CAPITAL

NET SALES SALES TO CAPITAL EMPLOYED = ------------------------------EMPLOYED

Rs. In millions

YEAR NET SALES CAPITAL EMPLOYED RATIO

2005 12618856 6137998 2.05

2006 15307126 7853752 1.95

2007 20694761 9576638 2.16

2008 23723049 12578828 1.89

2009 22732435 13090696 1.74

INFERENCE:It indicates the frequency with which sales are generated in relation to capital employed. Higher the ratio, the better it is as it will indicate better utilization of capital employed, which will result in higher amount of turnover. In the above chart the ratio should be increased.
NOTE: -NET SALES= TOTAL SALES – RETURN INWARD CAPITAL EMPLOYED = SHARE HOLDERS FUNDS + LONG TERM LIABILITY

6.>

TOTAL ASSETS TURNOVER RATIO:57

SALES TOTAL ASSETS TURNOVER RATIO = -------------------TOTAL ASSETS
Rs. In millions

YEAR SALES TOTAL ASSETS RATIO

2005 12618856 9154254 1.38

2006 15307126 12185560 1.26

2007 20694761 15111223 1.37

2008 23723049 19327629 1.23

2009 22732435
18268538

1.24

INFERENCE:This ratio indicates the amount of sales realized per rupee of investment in total assets. This ratio is more important in manufacturing concerns, as it indicates the utilization of total assets. The higher the ratio higher will be the amount of sales generated per rupee of investment in assets. In the above chart it is advisable to the firm to increase the ratio, which will result in higher amount of turnover.

CAPITAL STRUCTURE RATIOS:58

1.>

CAPITAL GEARING RATIO:FIXED CHARGES

BEARING SECURITIES CAPITAL GEARING RATIO = ----------------------------------------------------EQUITY SHAREHOLDERS FUNDS
Rs. In millions

YEAR INTEREST EQUITY SHAREHOLDERS FUNDS RATIO

2005 69802 5620755 0.012

2006 97367 7183745 0.013

2007 144024 8513490 0.016

2008 197054 9149913 0.021

2009 375953 9600845 0.039

INFERENCE:This ratio indicates the proportion between fixed charge bearing securities and equity capital. A firm raises finance through owned funds and borrowed funds. A firm will be considered to be highly geared, if the major portion of total capital is raised through fixed charges bearing securities. In the above chart the ratio should be increased.

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2.>

DEBT-EQUITY RATIO:LONG-TERM DEBT DEBT-EQUITY RATIO = --------------------------------SHARE-HOLDERS FUNDS
Rs. In millions

YEAR LONG-TERM DEBT SHARE-HOLDERS FUNDS RATIOS

2005 517243 5620755 0.09

2006 670007 718374 5 0.09

2007 1063148 8513490 0.12

2008 3428915 9149913 0.37

2009 348985 1 960084 5 0.36

INFERENCE:This ratio indicates the proportion of borrowed funds to proprietor’s funds. Ideally this ratio should be 2:1 which means that the debt should be twice the owned capital, if it is less than 2:1 will indicate that firm is not taking any risk. As Debt Equity Ratio is less than the ideal ratio hence it is advisable to increase this ratio to be in a more favorable position.
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3.>

INTEREST COVERAGE RATIO :EARNINGS BEFORE

INTEREST & TAXES INTEREST COVERAGE RATIO = --------------------------------------------------EARNINGS BEFORE TAXES
Rs. In millions

YEAR EBIT INTEREST RATIO

2005 2082580 69802 29.84

2006 2557062 97367 26.26

2007 2539044 144024 17.63

2008 2071130 197054 10.51

2009
2116026

375953 5.63

INFERENCE:This ratio measures how ably the firm can meet its interest obligations. It describes how well and how easily the firm can service its debt. The higher the ratio the better is the ability of the firm to discharge its interest expense. In the above chart it shows a downward trend, hence should be improved.
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DU-PONT ANALYSIS
A method of performance measurement that was started by the DuPont Corporation of USA in the 1920s, and has been used by them ever since. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher Return on Investment (ROI). It is system of financial analysis, which has received very good recognition and acceptance world-wide. DuPont analysis helps locate the part of the business that is underperforming. DuPont analysis tells us that ROE is affected by three things: Operating efficiency, this is measured by profit margin.
 Asset use efficiency, which is measured by total asset turnover.  Financial leverage, which is measured by the equity multiplier.

The higher the result the higher will be the return on equity. Du-Pont analysis divides a particular ratio into components and studies the effect of each and every component on the ratio. Comparative analysis gives an idea where a firm stands across the industry and studies the financial trends over a period of time.

FORMULA:RETURN ON EQUITY = NET PROFIT MARGIN x ASSETS TURNOVER RATIO x EQUITY MULTIPLIER

ASSETS EQUITY MULTIPLIER = -------------------------------EQUITY SHAREHOLDERS

RETURN ON ASSETS = NET PROFIT MARGIN (RATIO) x TOTAL ASSETS TURNOVER RATIO

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NET PROFIT NET PROFIT RATIO = -------------------NET SALES

SALES TOTAL ASSETS TURNOVER RATIO = --------------------TOTAL ASSETS

COMPARATIVE ANALYSIS OF RETURN ON ASSETS (INVESTEMENT)
Rs. In millions

PARTICULARS NET PROFIT RATIO TOTAL ASSETS TURNOVER RATIO RETURN ON ASSETS

2005 13.78 % 1.38

2006 13.10 % 1.26

2007 8.62 % 1.37

2008 5.01% 1.23

2009
5.10%

1.24

19

17

12

6

6

COMPARATIVE ANALYSIS OF RETURN ON EQUITY:Rs. In millions

PARTICULARS NET PROFIT RATIO TOTAL ASSETS TURNOVER RATIO EQUITY MULTIPLIER RETURN ON

2005 13.78 % 1.38 1.63 40

2006 13.10 % 1.26 1.70 28

2007 8.62 % 1.37 1.78 21

2008 5.014 % 1.23 2.11 13

2009
5.10%

1.24 1.90 12
63

EQUITY

DU-PONT ANALYSIS TREE DIAGRAM FOR RETURN ON ASSETS (INVESTEMENT):-

64

DU-PONT ANALYSIS TREE DIAGRAM FOR RETURN ON EQUITY:-

INFERERNCE:In Du-Pont Analysis the higher the result the higher will be the return on equity. In the above calculation it shows a downward trend of returns in both the cases in
65

Return on Assets and Return on Equity which is not favorable for the company. Hence it is advised to firm to increase the sales and the surplus on sales.

LEVERAGES
Leverage represents a power or an influence of one financial variable over the other related financial variable. Leverages are classified into three categories namely, Operating Leverage, Financial Leverage and Combined Leverage. Generally, it is said that one leverage should be low accompanied by the other high leverage. If operating leverage is on lower side, financial leverage can be kept on higher side by employing more debt in the capital structure.
There are three types of leverages they are as follows:-

OPERATING LEVERAGE: The Operating Leverage measures the change in the earnings before interest and tax as a result of change in sales. This leverage is because of fixed cost in the cost structure. A higher operating leverage indicates that the proportion of fixed cost is higher, but at the same time it cannot be overlooked that if sales decrease, the earnings before interest and tax will decrease at higher rate. Therefore operating leverage is said to be a double edged weapon.
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FINANCIAL LEVERAGE:The Financial Leverage measures the percentage change in earnings before tax as a result of changes in earnings before interest and tax. Financial Leverage will be higher if the difference between earnings before interest and tax and earnings before tax is higher. This difference will be higher if amount of interest is high. Therefore it indicates the proportion of debt in capital structure is high or low. The financial leverage helps to identify the financial risk.

COMBINED LEVERAGE:The Combined Leverage expresses the relationship between contribution and the taxable income. It helps in finding out the resulting percentage change in taxable income on account of percentage change in sales
FORMULA:-

CONTRIBUTION OPERATING LEVERAGE = -------------------------------------------------EARNINGS BEFORE INTERST AND TAX EARNINGS BEFORE INTERST AND TAX FINANCIAL LEVERAGE = ----------------------------------------------------EARNINGS BEFORE TAX

CONTRIBUTION EARNINGS BEFORE INTERST AND TAX COMBINED LEVERAGE = ------------------------------------------ x ----------------------------------------------EARNINGS BEFORE INTERST AND TAX EARNINGS BEFORE TAX

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COMPARATIVE STATEMENT OF LEVERAGES
INCOME STATEMENT
Rs. In millions

PARTICULARS 2005
SALES LESS: VARIABLE COST CONTRIBUTION LESS : FIXED COST EARNINGS BEFORE INTEREST AND TAX LESS: INTERST EARNINGS BEFORE TAX LESS: TAX EARNINGS AFTER TAX 12618856 10245906.4 2 2372949.58 1886486.73 486462.9

2006
15307126 12782121.2 5 2525004.75 1957684.39 567320.4

2007
20694761 17644122.2 2 3050638.78 2363709.70 686929.1

2008
23723049 20028459.8 3 3694589.17 2860917.86 833671.3

2009
22732435 18444347.28 4288087.72 2523012.95 1765074.77

69802 416660.9 273832 142828.9

97367 469953.4 453821 16132.4

144024 542905.1 510930 31975.1

197054 636617.3 600560 36057.3

375953 1389121.77 646508 742613.77

LEVERAGES
Rs. In millions

PARTICULARS 2005
OPERATING LEVERAGE FINANCIAL LEVERAGE COMBINED LEVERAGE 4.88 1.17 5.70

2006
4.45 1.21 5.37

2007
4.44 1.27 5.62

2008
4.43 1.31 5.80

2009
2.43 1.27 3.09

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INFERENCE: Operating Leverage:In the above calculation operating leverage is very high and shows a downward trend but it is still not favorable as fixed cost is very high. Hence it is advised to reduce operating leverage to some extent. Financial Leverage:In the above calculation of financial leverage it has shown an upward trend but it is still favorable for the firm. Combined Leverage:In the above calculation combined leverage is very high and shows an upward trend which is not favorable for the firm hence, should be reduced to some extent.

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FUNDS FLOW ANALYSIS
DEFINITION:R. A. FOILKE – “A statement of sources and application of funds is a technical device designed to analyse the changes in the financial condition of a business enterprise between dates.” ANTHONY R.N. – “The fund flow analysis describes the sources from which additional funds are derived and the use to which these funds were put.” MEANING:For the success of any business enterprise, it is but essential that there must be a regular and smooth flow of funds for efficient conduct of all business operations. Therefore, a statement showing the flow of funds is prepared to summarise for a given period the resources made available to finance the activities of an enterprise and the uses to which such resources have been put to. This statement helps in measuring and assessing the financial soundness of the business at a particular date. It comprises of two important words ‘fund’ and 'flow’. The concept of funds flow refers to the changes in working capital through the sale and purchase of fixed assets, issue of shares and debentures of floating of long term loans and their redemption and their reflection in the increase or decrease of current assets and current liabilities. Funds flow statement analysis helps to examine the liquidity position, its effect on current and future profitability and generation of funds in the organization. Lack of liquidity would not only threaten the short term solvency of the organization but also the long-term survival of the concern. SPECIMEN OF FUND FLOW STATEMENT SOURCES OF FUNDS Issue of shares Issue of debentures Funds from operation Sale of fixed assets Long term loan taken Short term loan taken Income from investments Sale of investments Decrease in working capital Commission received Compensation received Damage received in legal action Total APPLICATION OF FUNDS Repayment of loans Redemption of debentures Redemption of preference shares Purchase of fixed assets Payment of dividends Payment of tax Increase in working capital Operating loss Loss by embezzlement Cost in legal action

Total

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COMPARATIVE FUNDS FLOW STATEMENT FOR FIVE YEARS:Rs. In millions

PARTICULARS

2005

2006

2007

2008

2009

 SOURCES OF FUNDS
SHARE CAPITAL LOAN TAKEN (SECURED) LOAN TAKEN (UNSECURED) DEFFERED TAX LIABILITY INVESTMENT SOLD FUNDS FROM OPERATION TOTAL NIL 233899 NIL 17190 NIL 2219886 2470975 NIL 153428 NIL 30821 NIL 2398315 2582564 NIL 325898 67243 66930 NIL 1377042 1837113 194173 2433488 NIL 131778 410521 1517509 4687469 450932 61655 NIL 20921 44515 1813475 2391498

 APPLICATION OF FUNDS
LOAN REPAID (SECURED) LOAN REPAID (UNSECURED) FIXED ASSETS PURCHASED CAPITAL W.I.P INVESTMENT PURCHASED GRATUITY PAID COMPENSATED ABSENCES PENSION & OTHER RETIREMENT BENEFITS WARRANTY CLAIMS PAID TAX PAID DIVIDEND PAID TAX PAID ON DIVIDEND NET INCREASE IN WORKING CAPITAL NIL 13870 351100 60562 1769824 20348 145645 NIL NIL NIL 97087 12439 100 NIL 664 618753 99687 1214734 25045 169316 13610 122813 NIL 145630 20425 151887 NIL NIL 471294 344329 174986 10244 177529 12590 170449 NIL 194173 27233 254286 NIL 67721 3908061 76532 NIL 41129 189588 8578 164991 NIL 194173 33000 3696 NIL 719 88740 467918 NIL 63664 306672 75134 204996 NIL 194173 33000 956482

TOTAL

2470975 258256 4

1837113

4687469 2391498

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INFERENCE:Funds flow statement is the report on the movement of funds explaining how and from where the funds have been generated during the year and the uses to which the funds have been applied during the year. In other words, it is a technical device designed to highlight the changes that have occurred in assets and liabilities between two balance-sheet dates. It identifies the changes that have taken place and brings out their impact on the liquid resources of the business.  CHANGES IN WORKING CAPITAL:In funds flow statement net increase in working capital is shown on application side, while net decrease in working capital is shown on the sources side. Any increase in current assets result in increase of working capital, while increase in current liabilities result in decrease in working capital. In the above funds flow statement working capital is showing an upward trend which means increase in current assets which is favorable for the firm, but the stock-out or shortage situation must be avoided.

 FUNDS FROM OPERATION:In calculating funds from operation, non-business expenses like dividend paid, taxes paid etc. or non cash expenses like depreciation are added back in the net profits. Similarly, non-cash as well as non-business expenses are deducted from net profits. In the above statement of funds flow, funds from operation has shown a decreasing trend which is not favorable for the firm as its core business profits are declining hence it is advisable to increase funds from operation.

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CASH FLOW ANALYSIS

Cash Flow Statement is a statement which indicates sources of cash inflows and transactions of cash outflows of a firm during an accounting period. The activities which generate cash inflows are known as sources of cash and activities which cause cash outflows are known as uses or application of cash. It is appropriately termed as “Where Got Where Gone Statement” The Institute of Chartered Accountants of India (ICAI) issued Accounting Standard-3 (AS-3) relating to the preparation of cash flow statement for accounting period commencing on or after April 1, 2000 for enterprise which: Have turnover of more than Rs 50 crore.  Is listed in stock exchange (in India or outside India).  Are in the process of listing their equity or debt securities as evidenced by the board of directors’ resolution in this regard. Cash happens to be the most liquid of all the current assets. It is this liquid asset which constitutes the medium of exchange. Every financial transaction has an ultimate effect on cash at some time or the other. A large cash holding reduces profitability. Similarly, inadequate cash holdings would have effect on liquidity and therefore on profitability. Cash flow statement analysis can therefore be helpful in the examining the cash effect of financial transactions. It reveals the complete story of cash movements. It helps to know the reasons for low cash balance inspite of high profits and high cash balance inspite of low profits. It also helps to understand at what point of time during the period there was idle cash or excessive cash holdings or inadequate cash. Appropriate steps can therefore be ensured to correct such situations.

Objectives of cash flow statement: To identify the causes of increase or decrease in the cash position of the firm during the specific period.  To understand the cash generated on account of business operations during the year.

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 To understand the cash impact on the current assets and current liabilities during the year.  To understand the investment and financing pattern followed during the year.  To ensure necessary action for maintenance of adequate liquidity.  To help in the projection of future cash flows.

Uses of cash flow statement: Payment of dividend in cash.  Repayment of borrowings.  Redemption of preference shares in cash.  Purchase of fixed assets.  Acquisition of other current assets as securities.  Payment to creditors.  Adapt to changing circumstances and opportunities.  Assessing the ability of the company.  Enhances comparability.  To know how much cash is generated from business.  To know the liquidity position.

There are two methods of cash flow:-

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COMPARATIVE CASH FLOW STATEMENT
Rs. In millions

75

PARTICULARS Profit before tax ADD:DEPRECIATION LEASEHOLD LAND WRITTEN OFF LOSS ON ASSETS SOLD, DEMOLISHED,DISCARDED & SCRAPPED LOSS ON SALE OF INVESTMENT WRITTEN DOWN OF OBSOLETE & NON-MOVING COMPONENT BAD DEBTS & IRRECOVERABLE BALANCES WRITTEN OFF PROVISIONS FOR DOUBTFUL DEBTS & ADVANCES INTEREST PAID VRS COMPENSATION PAID Total LESS:PROFIT ON SALE OF UNDERTAKING PROFIT ON SALE OF INVESTMENT PROFIT ON SALE OF MUTUAL FUNDS SURPLUS ON SALE OF ASSETS INTEREST RECEIVED DEBITS(EXPENSES)PERTAINING TO EARLIER YEARS SUNDRY CREDIT BALANCES APPROPRIATED PROVISIONS NO LONGER REQUIRED WRITTEN BACK DIVIDEND RECEIVED LEASE EQUILASITION Total OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES ADJUSTMENTS FOR:TRADE & OTHER RECEIVABLES INVENTORIES TRADE PAYABLES CASH GENERATED FROM OPERATIONS VRS COMPENSATION PAID NET CASH GENERATED FROM OPERATIONS DIRECT TAXES NET CASH FLOW FROM OPERATING ACTIVITIES

2005 2012778

2006 2459695

2007 2395020

2008 1874076

2009
180543 8

266465 44 1796 NIL 18885 30708 -10706 31636 2083 348798 NIL 1133176 1760 5417 12942 377 3552 18398 191266 19426 1386314 975262 -384504 -143976 426492 -101988 873274 -2083 871191

279720 44 1300 NIL 7288 38919 20968 59076 767 408082 NIL 974941 1703 32087 15355 192 8654 45989 257190 -11754 1324357 1543420 -1053007 -250530 1274168 -29369 1514051 -767 1513284

318070 44 6993 NIL 7490 -115 9176 89367 325 431350 3329 190899 6980 128783 10742 66 8953 68690 422672 -87417 783660 2042710 -888410 -437128 1308694 -16844 2025866 -325 2025541

437188 1372 7797 NIL 103583 15318 53331 128603 14648 761840 NIL NIL 30812 28216 5732 NIL 8000 45977 126283 NIL 245020 2390896 -276924 -560450 978007 140633 2531529 -14648 2516881

802727 1357 8161 1098 69055 65547 44982 316924 32761 1342612 65365 NIL 4417 7371 1884 NIL 25799 42775 126520 NIL 274131 2873919 -134553 511392 -1963511 -1586672 1287247 -32761 1254486

-248135 623056

-430047 1083237

-648580 1376961

-473780 2043101

-597665 76 656821

INFERENCE:The profit before tax has shown an upward trend but has declined in 2008. In the above calculation the operating profit has shown an upward trend but after deducting working capital changes the profit has declined, hence working capital should be managed efficiently. The operating profit and non-operating profit has shown a upward trend due to which even if the there is loss from activities the cash balance has shown a upward trend which is not favorable for the firm, hence, it is recommended to reduce the losses from activities and increase the profits.

COST OF CAPITAL
The term cost of capital is defined as the rate of return on investment projects necessary to maintain the market price of the firm’s stock unchanged. It represents the rate of return which the company must earn to pay to suppliers of capital to justify their use. It is the discount rate which is used to discount the estimated future cash inflows so as to determine their net present value. Thus, the cost of capital of the firm is the rate of return required by the investors who furnish the capital. This constitutes the required rate of return of the firm because if that rate of return was not achieved, investors would not be willing to invest the capital required. In essence, management acts as an agent of the investors in selecting capital investment projects that the investors in the firm are willing to finance. This willingness, in turn, is a function of expected return to be received by the investors as compensation for foregoing the use of the invested funds and for bearing the risk that
77

those returns will not materialize. In the cost of capital is the rate of return the firm must achieve on its aggregate investments for the market value of its securities to remain the same. The cost of capital can also be referred to as borrowing rate which the combined cost of capital is arrived at after averaging the costs of each source of funds employed by the firm. The cost of capital can also be described as opportunity cost which refers to the rate of return which the company would have earned had it invested the funds elsewhere. The cost of capital is a technical term that may be defined in several ways, such as: Minimum required return on investments (ROI).  Cut off rate for capital expenditure.  Targeted return on investments (ROI).  Financial standard.
 The different costs of capital of different sources are as follow:-

COMPARATIVE STATEMENT OF COST OF CAPITAL COST OF DEBT:-

INTEREST COST OF DEBT = ----------------- x 100 TOTAL DEBT

78

Rs. In millions

YEAR INTEREST RATE INTEREST TOTAL DEBT COST OF DEBT

2005 6.8% 35172.52 517243 6.80%

2006 6.8% 45560.48 670007 6.80%

2007 12.85% 136614.52 1063148 12.85

2008 13.55% 464617.98 3428915 13.55

2009 14.65% 511263.17 3489851 14.65

COST OF EQUITY:DIVIDEND PER SHARE COST OF EQUITY = ---------------------------- x 100 + GROWTH RATE MARKET PRICE

Rs. In millions

YEAR DIVIDEND PER SHARE MARKET PRICE GROWTH RATE COST OF EQUITY

2005 2.5 382.25 0.20 0.85

2006 4 300 0.68 2.01

2007 2 200 0.20 1.2

2008 2 103.50 0.93 2.86

2009 1 51 0.03 1.99

Weighted average cost of capital:Rs. In millions

PARTICULAR S EQUITY CAPITAL DEBT CAPITAL TOTAL

2005

2006

2007

2008

2009

5620755 517243 6137998

7183745 670007 7853752

8513490 1063148 9576638

9149913 3428915 12578828

9600845 3489851 13090696
79

SPECIFIC COST OF EQUITY SPECIFIC COST OF DEBT TOTAL CAPITAL STRUCTURE WEIGHT OF EQUITY CAPITAL STRUCTURE WEIGHT OF DEBT TOTAL WEIGHTED AVERAGE COST OF EQUITY WEIGHTED AVERAGE COST OF DEBT TOTAL (WEIGHTED AVERAGE COST OF CAPITAL) WEIGHTED AVERAGE COST OF CAPITAL PERCENT

0.85 0.068

2.01 0.068

1.2 0.1285

2.86 0.1355

1.99 0.1465

0.918 0.92

2.078 0.91

1.3285 0.89

2.9955 0.73

2.1365 0.73

0.084

0.085

0.11

0.27

0.27

1.004 0.78

0.995 1.83

1 1.07

1 2.09

1 1.45

0.0057

0.0058

0.014

0.037

0.039

0.7857

1.8358

1.084

2.127

1.49

78.57

183.58

108.4

212.7

149

INFERENCE:Cost of capital is the cost of raising funds through different sources. It is also known as a rate of return that firm must earn on its investments so that the expectations of
80

the investors are satisfied. This return is calculated on the basis of cost of raising funds from different sources for financing the investments of the firm. In the above table the weighted average cost of equity shares and of debt is calculated for five years. The Weighted Average Cost is showing an upward trend, which means that the cost is rising and returns are decreasing hence measures should be taken to reduce the cost of capital.

WORKING CAPITAL MANAGEMENT:Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the
81

interrelationship that exist between them. The goal of working capital management is to manage the firm’s current assets and liabilities in such a way that a satisfactory level of working capital is maintained. This is so because if the firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent and may even be forced into bankruptcy. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety. Each of the current assets must be managed efficiently in order to maintain the liquidity of the firm while not keeping too high level of any one of them. Each of short term sources of financing must be continuously managed to ensure that they are obtained and used in the best possible way. The interaction between the current assets and current liabilities is therefore, the main theme of the theory of working management. Working capital is the amount of financing required to sustain optimal balances of the firm’s working capital assets. Working capital represents that portion of capital which circulates from one form to another in the ordinary conduct of business. This idea embraces the recurring transition from cash to inventories to receivables to cash that forms the conventional chain of business operation. Working assets are those assets that will turnover or release cash within a relatively short period of time; they include inventory, accounts receivable, liquid assets etc. Current Assets are those assets that should be converted into cash within a year. A portion of the current assets is financed by current liabilities i.e. sundry creditors, bills payable, outstanding liabilities, etc. Current Liabilities are those obligations which are due within a year. Marketable securities are considered as a part of working capital as they are a substitute for cash, similarly, the inclusion of prepaid expenses may be justified because they represent services owed to the company that are used in carrying out activities, thereby obviating the need for cash outlays. Gross working capital is the total of current assets. Net working capital is the current assets less current liabilities. In other words, net working capital is that portion of current assets financed by long-term debt and equity sources. The concept of working capital is built on three important elements: Financing working capital assets i.e. current assets.  The amount of cash tied up in working assets.
 The speed with which these assets are converted into cash

The task of the finance manager in managing working capital efficiently is to ensure sufficient liquidity in the operations of the enterprise. The liquidity of a business firm is measured by its ability to satisfy short-term obligations as they become due. The three basic measures of the firm’s overall liquidity are:

82

WORKING CAPITAL CYCLE:-

EQUITY & LOANS

CASH

PAYABL ES

RECEIVAB LES

OVERHEA DS INVENT ORY

SALES

OPERATING CYCLE FOR MANUFACTURING FIRM:83

Work -inProgress

Raw Materials Stock Wages & overheads Trade Creditors

Finish Goods Stock

Selling Expenses

Sales

CAS H

Trade Debtors

Taxation

Shareholders

Fixed Assets

Loan Creditors

Lease Payments

COMPARATIVE WORKING CAPITAL STATEMENT
Rs. In millions

84

SR. NO. A

PARTICULARS CURRENT ASSETS LOANS & ADVANCES INVENTORIES STORES & SPARES STORES IN TRADE -RAW MATERIAL -OBSOLUTE MATERIAL -WIP -FINISHED GOODS MATERIAL IN TRANSIT MATERIAL IN BONDED WAREHOUSE SUNDRY DEBTORS O/S FOR A PERIOD OF 6MONTHS GOOD DOUBTFUL LESS : -PROVISIONS OTHERS RECEIVABLES DOUBTFUL LESS:- PROVISION CASH & BANK BALANCE CASH ON HAND BANK BALANCE :-SCHEDULED BANK CURRENT ACCOUNT FIXED DEPOSIT INTEREST ACCRUED -NON-SCHEDULED CURRENT A/C

2005 3923234

2006 5264473

2007 6615365

2008 7455319

2009 6819921

I a b

866122 35277 424705 1434 157410 175866 17064 54366

1109364 39225 607095 10694 205446 192977 7340 46587

1483583 40967 911035 2450 256820 215919 33122 23273

1940450 97758 1000106 3683 382175 352144 70663 33921

1238798 101016 745159 3249 137969 194287 57118 NIL

c d

II a b c d e f III a b

2197738 189661 120476 -120476 2008077 3094 -3094 66926 495 61505 6926 NIL NIL 275001 30395 99171 NIL

3084304 207319 102386 -102386 2876985 3094 -3094 176389 1027 129304 46058 NIL NIL 206511 12607 87417 NIL

3892511 176392 102871 -102871 3716119 3094 -3094 413024 680 353889 70 2 NIL 54763 31997 NIL NIL

3564577 37968 177149 -177149 3526609 3094 -3094 615993 566 243823 57902 553 371532 61765 33322 NIL NIL

2924316 115952 171325 -171325 2808364 3094 -3094 791132 334 790437 70 2 289 212219 19408 NIL 145993
85

IV a b c

OTHER C.A. INCOME RECEIVABLE LEASE AJUSTMENT INCENTIVE

d e V a b c

RECEIVABLES EXPORT INCENTIVE LEASE RENTALS LOANS & ADVANCES AMOUNT RECOVERABLE FROM SUBSIDIARY DEPOSITS ADVANCES RECOVERABLE -GOOD -DOUBTFUL -LESS:- PROVISIONS SALES TAX REFUNDED SUNDRY DEPOSITS BALANCE WITH COLLECTORATE OF CENTRAL EXCISE & CUSTOMS TAX PAID IN ADVAMCE LESS:-PROVISION

45435 100000 517447 NIL NIL 264257 81020 -81020 NIL 74233 45679

36487 70000 687905 NIL NIL 307151 42858 -42858 NIL 88982 151329

22766 NIL 771484 NIL NIL 303598 83378 -83378 NIL 85718 142845

28443 NIL 1272534 NIL NIL 745362 67839 -67839 164453 76310 239693

46818 NIL 1653456 1949 600000 321252 118645 -118645 282602 71986 192414

D d e

f

1117419 -984142

1547585 -1407142 4234316 3642098 2384321 63528 10896 152 71 NIL NIL 101386 10718 592218

2196165 -1956842 5370163 4738704 3044404 67309 11501 152 71 NIL NIL 459333 15253 631459

2669945 -2458776 6452601 5574962 3999446 72805 14026 152 71 NIL NIL 640554 21541 877639

3267610 -3084363 4860721 3938647 2454362 67200 14019 152 71 20 480825 385707 18192 922074
86

B I a b c d e f g h i III

CURRENT 2949585 LIABILITIES & PROVISIONS LIABILITIES 2452746 SUNDRY CREDITORS 1650818 SUNDRY DEPOSITS UNCLAIMED DIVIDENDS UNCLAIMED REDEEMED PREF SHARES UNCLAIMED DEBENTURES INVESTORS EDUCATION PROTECTION FUND DERIVATIVE LIABILITY ADVANCE FROM CUSTOMER INTEREST ACCURED PROVISION 60339 6378 153 106 NIL NIL 74865 5382 496839

a b c d e f g

PROVISIONS FOR GRATUITY PROVISIONS FOR LEAVE ENCASHMENT PROVISIONS FOR LONG SERVICE PROVISIONS FOR WARRANTY CLAIMS PROVISIONS FOR TAXATION LESS:- TAX PAID PROPOSED DIVIDEND PROVISION FOR TAX ON DIVIDEND

25045 169316 13610 122813 984142 -984142 145630 20425

10244 177529 12590 170449 1407142 -1407142 194173 27233

41129 189588 8578 164991 1956842 -1956842 194173 33000

63664 306672 75134 204996 2458776 -2458776 194173 33000

60686 309164 84209 240842 3084363 -3084363 194173 33000

WORKING CAPITAL = CURRENT ASSETS LOANS & ADVANCES – CURRENT LIABILITIES & PROVISIONS

WORKING CAPITAL CALCULATION
Rs. In millions

SR.NO. 1. 2. 3.

PARTICULARS CURRENT ASSETS LOANS & ADVANCES CURRENT LIABILITIES & PROVISIONS WORKING CAPITAL

2005 3923234 2949585 973649

2006 5264473 4234316 1030157

2007 6615365 5370163 1245202

2008 7455319 6452601 1002718

2009 6819921 4860721 1959200

WORKING CAPITAL CYCLE OF 2005

87

RAW WIP MATERIAL CONVERSION CONVERSION PERIOD PERIOD 3 DAYS 4 DAYS

FINISHED RECEIVABLES PAYABLE NUMBER GOODS CONVERSION DEFFERAL OF ROLES CONVERSION PERIOD PERIOD TAKEN PERIOD 4 DAYS 58 DAYS 58 DAYS 13 ROLES

WORKING CAPITAL CYCLE OF 2006
88

RAW WIP MATERIAL CONVERSION CONVERSION PERIOD PERIOD 4 6

FINISHED RECEIVABLES PAYABLE NUMBER GOODS CONVERSION DEFFERAL OF ROLES CONVERSION PERIOD PERIOD TAKEN PERIOD 6 62 89 15 ROLES

WORKING CAPITAL CYCLE OF 2007
89

RAW WIP MATERIAL CONVERSION CONVERSION PERIOD PERIOD 3 5

FINISHED RECEIVABLES PAYABLE NUMBER GOODS CONVERSION DEFFERAL OF ROLES CONVERSION PERIOD PERIOD TAKEN PERIOD 5 61 122 17 ROLES

90

WORKING CAPITAL CYCLE OF 2008

RAW WIP MATERIAL CONVERSION CONVERSION PERIOD PERIOD 3 6

FINISHED RECEIVABLES PAYABLE NUMBER GOODS CONVERSION DEFFERAL OF ROLES CONVERSION PERIOD PERIOD TAKEN PERIOD 6 58 71 24 ROLES

91

WORKING CAPITAL CYCLE OF 2009

RAW WIP MATERIAL CONVERSION CONVERSION PERIOD PERIOD 3 DAYS 4 DAYS

FINISHED RECEIVABLES PAYABLE GOODS CONVERSION DEFFERAL CONVERSION PERIOD PERIOD PERIOD 4 DAYS 46.2 DAYS 57.9 DAYS

NUMBER OF ROLES TAKEN 12 ROLES

92

INFERENCE:Working capital represents that portion of capital which circulates from one form to another in the ordinary conduct of business. Current assets are those assets which should be converted into cash within a year. Current liabilities are those obligations which are due within a year. Gross working capital is total of current assets whereas net working capital is the current assets less current liabilities. In the above table working capital has shown an upward trend till the year 2007 but in 2008 it has declined, which is not favorable for the firm hence it is recommended to increase the working capital.

93

RECEIVABLES MANAGEMENT

The substantial portion of current assets is in the form of ‘TRADE DEBTORS’. Though this portion may vary from industry to industry and also from firm to firm basis, it is estimated that 25% of the current assets are in the form of debtors. This amount blocked in debtors if not controlled properly the firm may face shortage of working capital and it may result in the firm being caught in the debt trap. The management of trade debtors, which is also called as ‘Credit Management’ thus becomes of paramount importance for management. The basic principle of managing the trade debtors is trade off between liquidity and profitability or in other words it is striking balance between too liberal credit and too conservative credit policy. Accounts receivable is a key component to working capital management and the focus of credit policy. Credit policy involves decision as to what should be the credit terms, how much credit should be allowed at a time, which customers should qualify for credit and how the receivables should be collected, managed and controlled within the set parameters to ensure smooth circulation of working capital. Credit sales are similar to a dangerous double edged sword, which can cut both favorably or unfavorably depending upon its use. On one hand, extending credit enhances sales by attracting customers that may otherwise be lost if credit is not available. On the other hand, loose or reckless control over accounts receivable result in scarce cash tied up in slow paying accounts, unnecessary losses from bad debts and the need for additional financing. Hence it poses a crucial problem since any of these unfavorable outcomes can spell financial disaster for the firm, if no proper and adequate control is exercised on accounts receivables. Accounts receivables are considered as assets because each receivable represents ownership of a valuable claim on the customer’s net worth in the event of default. When the credit sale takes place it deprives the firm of the liquidity necessary to replace the resources used in creating that sale. It is only when the receivable is actually collected that this assets releases cash and the firm is able to recoup its investment. Origin of trade debtors:If we peep into the transactions of sale of any business organization, whether in manufacturing sector or in service sector, we will realize that sales are basically of two types. The first is cash sales where is settled then and there only. In other words, goods or services are sold and the cash is recovered on the spot. Thus there is no risk as the transaction is over then and there only.

94

Formula:Credit sales Debtors Turnover Ratio = --------------------------------Average accounts receivable 12 months Debtors Collection Period = ---------------------------------Debtors turnover ratio

COMPARATIVE STATEMENT OF RECEIVABLES MANAGEMENT
Rs. In millions

SR. NO. 1.> 2.> 3.> 4.> 5.>

PARTICULARS 2005 SALES Less: VARIABLE COSTS Less: FIXED COSTS Less: BAD DEBTS Less: COST OF INVESTMENTS RETURN ON INVESTMENTS TOTAL COSTS (2+3+4+5) PROFIT/LOSS (1-6) 12618856 10245906.42 1886486.73 30708 133495.59 6.8% 12296596.74 322259.26

2006 15307126 12782121.25 1957684.39 38919 172811.51 6.8% 14951536.15 355589.85

2007 20694761 17644122.22 2363709.70 9176 433559.26 12.85% 20450567.18 244193.82

2008 23723049 20028459.83 2860917.86 15318 487658.91 13.55% 23392354.6 330694.4

2009 22732435 18444347.28 2523012.95 65547 398924.45 14.65% 21431831.68 1300604

6.> 7.>

95

INFERENCE:In the above calculation variable cost and fixed cost are showing an upward trend which is not favorable for the company, hence, it should be kept in control. The bad debts and cost of investments should be reduced down to increase the profits. The return on investment is showing an upward trend; hence it is favorable for the firm. As the sales have shown an increasing trend and even the profits are increasing hence it is a favorable position for the firm.

96

COST-SHEET
COST:The Institute of Cost and Management Accountants London, has defined the term as, “the amount of expenditure, actual or notional, incurred on or attributable to a given thing.” COSTING:According to “The Institute of Cost and Management Accountants” London, “costing is the technique and process of ascertaining costs” Costing consist of rules and principles of ascertaining of cost of a product or service. For determining the total cost of production a statement showing the various elements of cost is prepared. This statement is called as a “statement of cost” or “costsheet”. Cost-Sheet is a statement, which provides for the assembly of the detailed cost of a cost centre or cost unit. It is a statement showing the details of the total cost of job, operation or order. It brings out the composition of total cost in a logical order, under proper classification and sub-divisions. The period covered by the cost-sheet may be a week, a month or so. Separate columns are provided to show the total cost and cost per unit. In case of multiple products a separate cost sheet may be prepared for each product. There are two main types of cost: -

97

Variable cost:Variable cost is the aggregate of direct material, direct labour and direct expenses and variable overheads (i.e. prime cost + variable overheads), variable cost in total is termed as a ‘Marginal Cost’ it is deduct from sales and contribution is ascertained.“Variable cost is in operating expenses, or a group of operating expenses that vary directly and in proportion to the level of activity, viz. sales or production. Examples are materials consumed, direct labour, power, sales, commission, utilities, freight, packaging etc. Fixed Cost: Fixed cost means total of all fixed overheads. But it is important to note that in India, where  Most of the labour force is on daily wages.  Most of labour costs consist of Dearness allowance (DA)  ‘Retrenchment’ & ‘Lay-off’ is not possible in the ordinary course of business. Labors cost is also sometimes treated as fixed and included in fixed cost. Treatment of the fixed cost in marginal costing is very peculiar ‘Fixed Cost’ are also known as ‘time cost’, ‘period Cost’, ‘capacity cost’, ‘stand-by-cost’, or ‘constant cost’. Fixed Costs are not concerned with the output level. They are rather period costs. During the given period, they are required to be incurred irrespective of the fact, whether the output is produced or not. Therefore fixed costs are written-off to a marginal cost profit & loss account. They are not included in cost of goods sold, neither in closing stock. At the end of the period, contribution (i.e. difference between sales & marginal cost) is credited to marginal costing profit & loss account to which fixed cost are debited. The contribution first recoups fixed cost and then earns profit. If fixed cost is more than contribution, then there is a loss.
98

PURPOSE OF COST-SHEET: It gives the break up of total cost under different elements.  It shows total cost as well as cost per unit.  It helps comparison with previous years.  It facilitates preparation of tenders or quotation.  It enables the management to fix up selling price.  It helps reduction in cost and control cost. DIVISION OF COST: PRIME COST: - It comprises of all direct materials, direct labour, direct

expenses.
 WORKS COST: - It is also known as factory cost or cost of manufacture. It is

the cost of manufacturing an article. It includes prime cost and factory overheads.
 COST of PRODUCTION: - It represents factory cost plus administrative

overheads.
 TOTAL COST: - It represents cost of production plus selling and distribution

overheads.

COMPOSITION OF SELLING PRICE:-

PROFI T

SELLIN G 99 PRICE

SELLING &
DISTRIBUTI ON

OVERHEA DS

OFFICE OVERHE ADS FACTOR Y OVERHE ADS DIRECT EXPEN SES

DIRECT LABOU R

PRIME COST

FACTO RY COST

COST OF PRODU C-TION

TOTAL COST

DIRECT MATERI ALS

100

COMPARATIVE STATEMENT OF COST-SHEET
Rs. In millions

PARTICULARS MATERIAL CONSUMED DIRECT WAGES PRIME COST FACTORY OVERHEADS UTILITIES CONSUMABLE STORES DEPRECIATION REPAIRS AND MAINTENANCE OTHER WORKS OVERHEADS RESEARCH AND DEVELOPMENT QUALITY CONTROL INTEREST AND FINANCIAL CHARGES WORK- IN PROGRESS ADD: OPENING LESS: CLOSING LESS: SALE OF SCRAP WORKS COST

2005 58725883.43 3828418.36 62554301.79

2006 2231966622.7 2 111529407.89 2343496030.6 1

2007 1374625247.4 5 54255241.26 1428880488.7 1

2008 1599087871 51328152.32 1650416023

2009 450447165.4 21971469.8 472418635.2

1151519.09 514727.8 1617316.77 717877.63 5264978.3 96964540 914311.25 442446.76

36341873.75 14956477.65 50203922.41 21688965.97 NIL 45106528.74 27058520.01 15971328.44

16392176.84 7293564.67 23000981.73 10282038.63 79258980.06 17333279.36 12968422.74 97871242.69

19371209.87 6846787.23 26027571.67 10225409.21 78881095.12 19189920.53 12853043.58 11841756.6

7251861.81 2945174.55 9992377.98 4299663.18 35332581.9 9488176.95 5344553.5 2772220.44

1608877.96 1045583.24 564684.93 170140629.2

1045583.24 -8701980.6 -21461710.43 2525705539.7 9

2647815.12 -10682171.08 -12542181.83 1672704637.6 4

10682171.08 -8424895.45 15376198.23 1822533895

8424895.45 -715638.54 -4331322.2 553223180.3

ADMINISTRATIVE OVERHEADS SALARIES AND 26752.26 WAGES OTHER ADMIN 60809.68 EXPENSES OFFICE AND 3040508.23 EQUIPMENT

1248869.94 2838765.23 109755479.13

478256.26 1087108.59 58003115.52

530678.21 1206267.21 81376929.55

263733.6 599484.19 19050787.39
101

CHARGES COST OF PRODUCTION FINISHED GOODS ADD: OPENING LESS: CLOSING COST OF GOODS SOLD SELLING AND DISTRIBUTION OVERHEADS PACKING COST SALARIES AND WAGES FREIGHT AND TRANSPORT COMMISSION TO SELLING AGENT ADVERTISING EXPENSES ROYALTY ON SALES WARRANTY EXPENSES FREE SUPPLY OTHER OVERHEADS TOTAL COST PROFIT SALE 173268699.4 2639548654.0 9 1732273118.0 1 1905647770 573137185.4

71892.67 -292911.45 173633503.5

292911.45 -927807.55 2638913757.9 9

927807.55 -747872.98 1732453052.5 8

747872.98 -338773.38 1906056869

338773.38 -433607.72 573042351.1

1637818.23 404049.93 1179703.06 176648.42 105056.7 293600.94 1378104.17 139733.77 525655.38 179473874.1 1243938212 6 1261885600 0

41040966.89 14585289.64 42584615.79 2453530.15 3792309.55 10598330.57 49746569.59 16104032.42 18974971.84 2838794374.4 3 12468331626 15307126000

23256931.95 7707972.73 22504939.24 18903055.02 2004143.85 5600961.31 26030889.55 5065605.13 10027813.57 1853555364.9 3 18841205635 20694761000

29832463.27 10814094.17 31573870.44 48571429.15 2811764.02 7858009.53 36520642.48 8772125.45 14068773.23 2096880041 2162616895 9 2372304900 0

2256354.29 2531639 NIL NIL 658249.44 1839603.31 1507009.46 1431545.78 3293577.3 586560329.7

22732435

INFERENCE:In the above table the prime costs, works costs, cost of production and total cost are showing an upward trend, sales also in an increasing trend but the cost should be kept in control. There is good scope for cost reduction which will ultimately increase the profits.

102

BREAK-EVEN ANALYSIS

The term Break-Even Analysis is interpreted in two senses namely narrow sense and broad sense. In its narrow sense, it refers to find out break-even point that is a “point of no profit no loss”. In broad sense, it is an analysis used to determine the probable profit or loss at any level of operation. Break-Even Analysis is method of studying the relationship among sales revenue, variable cost and fixed cost to determine the level of operation at which all the costs are equal to its sales revenue and it is no profit no loss situation. This is an important technique used in profit planning and managerial decision-making. Margin of safety is the difference between the actual sales and the break-even sales this gap has to be increased to be in a favorable situation. Profit Volume Ratio is ratio of contribution to sales. A break-even analysis is concerned with the study of revenues and costs in relation to sales volume and, particularly, the determination of that volume of sales at which the firm’s revenue and total will be exactly equal (or net income is equal to zero). Thus, the break-even point may be defined as a point at which the firm’s total revenues are exactly equal to total costs, yielding zero income. The “no profit, no loss” point is a break-even point or a point at which losses cease and profits begin. The organizations study break-even analysis to know how far they are from the break-even point which can be calculated by Margin of Safety. The excess of actual sales revenue over the break-even sales revenue is known as margin of safety. When the margin of safety is divided by the actual sales, the margin of safety ratio is obtained. The Margin of Safety Ratio indicates the percentage by which he actual sales may be reduced before they fall the break-even sales volume. It is important that there should be a reasonable margin of safety, lest a reduced level of activity should prove disastrous. The higher the Margin of Safety Ratio, the better it is from the point of view of the company as it indicates that a “sizeable” sales volume can fall before the breakeven point is reached. This measure acquires special significance in depression or recession.

FORMULA:-

CONTRIBUTION = SALES – VARIABLE COST

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CONTRIBUTION PROFIT VOLUME RATIO = ---------------------- x 100 SALES

FIXED COST BEP (SALES) = ------------------------------PROFIT VOLUME RATIO

MARGIN OF SAFETY =ACTUAL SALES – BREAKEVEN SALES

BREAK-EVEN ANALYSIS CHART

104

COMPARATIVE STATEMENT OF BREAK-EVEN ANALYSIS
Rs. In millions

YEAR SALES VARIABLE COST CONTRIBUTION FIXED COST PROFIT P/V RATIO BEP (SALES) MARGIN OF SAFETY

2005 12618856 10245906.4 2 2372949.58 1886486.73 486102.85 18.80% 10036418.7 8 2582437.22

2006 15307126 12782121.2 5 2525004.75 1957684.39 567320.36 16.50% 11864753.8 8 3442372.12

2007 20694761 17644122.2 2 3050638.78 2363709.70 686929.08 14.74% 16036022.3 9 4658738.61

2008 23723049 20028459.8 3 3694589.17 2860917.86 833671.31 15.57% 18374552.7 3 5348496.27

2009
22732435 18444347.28 4288087.72 2523012.95 1765074.77

18.86% 13377587.22 9354847.78

INFERENCE:In the above table the sales, contribution, profit and margin of safety has shown an upward trend which is favorable trend. And the variable cost, fixed cost should be reduced to increase contribution and profits. For this, the company has to increase sales and reduce or control the costs. The profit volume ratio (P/V Ratio) is showing a downward trend hence, it should be increased as it shows the contribution through sales volume hence sales show increasing but still contribution is less due to high cost. Hence, cost should be controlled and sales should be increased.

105

CHAPTER 7 - CONCLUSION AND

RECOMMENDATIONS
 The business environment of the company is reasonably good. The company s track record is always oriented towards profitable growth and with strong fundamentals.  As major portion of working capital is invested in sundry debtors, company has to adopt factoring services so that cash realization will be faster.  Company should take corrective actions to write off or sell off the inventory, which is of no use and occupies unnecessary space.  Action on priority basis should be taken against pending jobs for more than three months. Smooth functioning will release locked up capital and improve the cash flow.  Other factory capital deals with the expenditure that is done on assets of less value, building and other direct assets. Capital consumption on this head is in company s own hands hence more importance can be given to this head. The capital should be used effectively with the improvement in manufacturing activity and minimizing cost.  Acquisition of new assets of heavy costs should be done with proper capital budgeting supported by payback period.

106

CHAPTER 8 - LIMITATIONS
The analysis in all the research programmers’ and conclusion are extremely crucial. Therefore, earnest of efforts were made to extract the true information and present them in a comprehensive manner, yet the findings are tied up within the following boundaries:  As our project is based on the data recorded by the company, we face the limitation of extracting that particular data because our access is limited for the sake of confidential information of the company.  The grouping of different items in the balance sheet also created hindrances, as it is very difficult to identify which item is clubbed with which head. But thanks to finance personal who made it easy to understand these clubbing.  Findings of the study are based on the assumptions that the respondents have given the correct information.  The research is limited to the period of five years, i.e. 2004-2005, 2005-2006, 2006-2007, 2007-2008 and 2008-2009.

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CHAPTER 9 - ANNEXURE
PROFIT AND LOSS ACCOUNT
Rs. In millions

PARTICULARS INCOME SALES less :- EXCISE DUTY NET SALES

2008-09

2007-08

2006-07

2005-06

2004-05

22732435 1632717 21099718

2372304 9 2158648 2156440 1 552341 162827 2227956 9

2069476 1 1864956 1882980 5 554080 440394 1982427 9

1530712 6 1353769 1395335 7 484468 274248 1471207 3

12618856 1132871 11485985

OPERATING INCOME FINANCIAL INCOME

848532 132821 22081071

368204 205968 12060157

EXPENDITURE MATERIAL CONSUMED MANUFACTURING EXPENSES EMPLOYEE COST SELLING&ADMINISTRATIVE EXPENSES DEPRECIATION& AMORTISATION INTEREST &FINANCE

15294648 434988 1373839 2063696 804084 375953 20347208 6210 20340998

1573904 4 529112 1392991 2231967 438560 197054 2052872 8 123235 2040549 3 1874076 NIL 1874076

1379288 2 506787 1053055 1871835 318114 144024 1768669 7 33247 1765345 0 2170829 224191 2395020

9994581 417896 894318 1544976 279764 97367 1322890 2 1583 1322731 9 1484754 974941 2459695
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8213011 373483 893287 1231146 266509 69802 11047238 3432 11043806

less:-EXPENSES CAPITALISED

PROFIT BEFORE EXCEPTIONAL ITEMS&TAXATION EXECEPTIONAL INCOME PROFIT BEFORE TAXATION

1740073 65365 1805438

1016351 996427 2012778

PROVISION FOR TAXATION CURRENT TAX DEFFERED TAX FRINGE BENEFIT

605087 20921 20500 646508 1158930

482900 182626 19034 684560 1189506

525000 66930 19000 610930 1784090

400000 30821 23000 453821 2005874

256642 17190 nil 273832 1738946

PROFIT FOR THE YEAR AFTER TAXATION PRIOR PERIOD ADJUSTMENTS : EXPENSES TAXATION , NET AS PER LAST ACCOUNT LESS:TRANSFFERED TO GENERAL RESERVES INTERIM DIVIDEND TAX ON INTERIM DIVIDEND PROPOSED DIVIDEND TAX ON PROPOSED DIVIDEND BALANCE CARRIED TO BALANCE SHEET

NIL NIL NIL 1479540 2638470 750000 NIL NIL 194173 33000 977173 1661297

NIL NIL 1494370 2683886 750000 194173 33000 194173 33000 1204346 1479540

66 5700 -5766 1164625 2942949 1000000 194173 27233 194173 33000 1448579 1494370

192 -120 -72 1601635 3607437 2000000 194173 27233 194173 27233 2442812 1164625

377 -449 72 388447 2127465 250000 97087 12688 1456360 20425 525830 1601635

BALANCE-SHEET
Rs. In millions

PARTICULARS

31-3-09

31-3-08

31-3-07

31-3-06

31-03-05

SOURCES OF FUNDS SHARE HOLDERS FUNDS SHARE CAPITAL RESERVES & SURPLUS LOAN FUNDS SECURED LOANS UNSECURED LOANS DEFFERED TAX ADJUSTMENT DEFFERED TAX LIABILITY

388346 9212499 9600845 3489391 460 3489851 602435

388346 8761567 9149913 3427736 1179 3428915 523119

194173 8319317 8513490 994248 68900 1063148 291207

194173 6989572 7183745 668350 1657 670007 225240

194173 5426582 5620755 514922 2321 517243 214524
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DEFFERED TAX ASSETS TOTAL

285314 317121 13407817

226919 296200 1287502 8

126785 164422 9741060

127748 97492 7951244

147853 66671 6204669

APPLICATION OF FUNDS FIXED ASSETS GROSS BLOCK LESS : - DEPRECIATION NET BLOCK CAPITAL WIP INCL. CAPITAL ADVANCES INVESTMENT CURRENT ASSETS LOANS & ADVANCES INVENTORIES SUNDRY DEBTORS CASH & BALANCES OTHER CURRENT ASSETS LOANS & ADVANCES

9923904 3375495 6548409 181376 6729785 4718832

9213189 2753520 6459669 649294 7108963 4763347

5305128 2555900 2749228 572762 3321990 5173868

4833834 3140062 1693772 228433 1922205 4998882

4215081 2896955 1318126 128746 1446872 3784148

1238798 2924316 791132 212219 1653456 6819921 LESS :- CURRENT LIABILITIES & PROVISIONS LIABILITIES 3938647 PROVISIONS 922074 4860721 NET CURRENT ASSETS 1959200 TOTAL 13407817

1940450 3564577 615993 61765 1272534 7455319

1483583 3892511 413024 54763 771484 6615365

1109364 3084304 176389 206511 687905 5264473

866122 2197738 66926 275001 517447 3923234

5574962 877639 6452601 1002718 1287502 8

4738704 631549 5370163 1245202 9741060

3642098 592218 4234316 1030157 7951244

2452746 496839 2949585 973649 6204669

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CHAPTER 10 - BIBLIOGRAPHY

FINANCIAL MANAGEMENT by M.Y. KHAN AND P.K. JAIN, TATA MC-GRAW HILL PUBLICATIONS.  FINANCE MANAGEMENT by I.M. PANDEY, VIKAS PUBLICATIONS.  FUNDAMENTALS OF FINANCIAL MANAGEMENT by Dr. S.N. MAHESHWARI, SULTAN CHAND PUBLICATIONS  FINANCIAL MANAGEMENT by A.P. RAO.  FINANCIAL MANAGEMENT by PRASANNA CHANDRA.  FINANCIAL MANAGEMENT by SATISH INAMDAR.  FINANCIAL MANAGEMENT by SATISH SHAH.  WEBSITE OF KIRLOSKAR www.kirloskaroilengineslinited.com

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