Study material on Company Analysis

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Study material on Company Analysis

Internship Study material

COMPANY ANALYSIS

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Study material on Company Analysis

About Us
We are a world class business consulting and research organisation focusing on analysis and research of Economies, Industries and Companies. Solutions and services offered by the company span the entire value chain of information, analysis and research. Cygnus Business Consulting & Research is a knowledge services organisation that offers business solutions to a number of leading corporates, banks, industries and trade associations, consulates, consultants and educational institutes both in India and abroad. We have built competencies in consulting and business research. A comprehensive suite of business intelligence products serve as a foundation for customised research and consulting projects. We cover a range of manufacturing and services industries. Cygnus in Latin means “Swan” a heavenly bird known for its purity and swiftness. True to our name, we at Cygnus lay a lot of stress on purity, authenticity and speed. We have our knowledge centre in Hyderabad, India. We have a talented and motivated team of over 70 professionally qualified and experienced employees who are strongly committed to upholding the highest standards of research integrity and cutting edge analysis. We leverage the industry domain experience of the team along with the deep knowledge and skills in finance and business research across various sectors and sub-sectors, to produce an insightful analysis and research. At Cygnus, we understand that quality, time and cost are of fundamental importance when delivering business information. With over two decades of experience in the field of analysis and research, we come with a rich heritage of domain expertise, world-class service delivery, state-of-the-art technology, quality processes and highly skilled manpower. Cygnus acts as a knowledge partner to associations like CII, FICCI, PHARMEXCIL and many such affiliations. Cygnus has over 500 customers from India, Canada, Germany, Singapore, UK and US, dealing in many industries. Our clients in India include Abbott, Amity, British Deputy High Commission, Dr. Reddy’s Labs, Grasim, HPCL, Kodak, Monsanto, Maruti Suzuki, Nicholas, NITIE, Pfizer, PWC, SBH, SBI, TCS, Wockhardt to name a few.

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Study material on Company Analysis

CONTENTS
About Us ....................................................................................................................................................... 3 Why Company Analysis? ....................................................................................................................... 6 Approach of P&L account ................................................................................................................... 6 Template of Company Analysis......................................................................................................... 10 1.0 Preamble ............................................................................................................................................... 10 2.0 Background ........................................................................................................................................... 10 3.0 Products and Services ............................................................................................................................ 11 4.0 Business Model....................................................................................................................................... 13 4.1 Value Proposition............................................................................................................................... 14 4.2. Target Customer................................................................................................................................ 14 4.3 Distribution Channel .......................................................................................................................... 14 4.4 Promotion .......................................................................................................................................... 15 4.5 Revenue Streams ................................................................................................................................ 15 4.6 Core Capabilities................................................................................................................................. 15 4.7 Value Configuration ........................................................................................................................... 15 4.8 Partner Network................................................................................................................................. 16 4.9 Cost Structure..................................................................................................................................... 16 5.0 Business Analysis.................................................................................................................................... 19 5.1. Segmental Analysis ............................................................................................................................ 19 5.2 Competition ....................................................................................................................................... 19 5.3. Issues and Challenges ........................................................................................................................ 20 6.0 Operational Performance ....................................................................................................................... 21 6.1 Sales and Sales growth ........................................................................................................................ 21 6.2 Segmental Sales Analysis..................................................................................................................... 22 6.3 PBDIT and OPM............................................................................................................................... 23 6.4. Segmental PBIT and OPM ................................................................................................................ 23 6.5 Cost Structure..................................................................................................................................... 24 7. Operating Metrics ................................................................................................................................... 25 7.1. Automobiles ...................................................................................................................................... 25 7.2. Banking ............................................................................................................................................. 26
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Study material on Company Analysis 7.3. Cement.............................................................................................................................................. 29 7.4 Steel.................................................................................................................................................... 32 7.5 Retail .................................................................................................................................................. 33 7.6 Telecom ............................................................................................................................................. 34 7.7. Hospitality ......................................................................................................................................... 35 7.8. Construction...................................................................................................................................... 36 7.9. ITSS .................................................................................................................................................. 36 7.10 Aviation............................................................................................................................................ 39 7.11. Power .............................................................................................................................................. 40 7.12. Oil and Gas ..................................................................................................................................... 41 7.13. Pharma ............................................................................................................................................ 42 7.14. Health care ...................................................................................................................................... 43 7.15. Shipping .......................................................................................................................................... 43 7.16. Roadways......................................................................................................................................... 45 8. Financial Performance ............................................................................................................................ 46 8.1. Net Profit Growth: ............................................................................................................................ 46 8.2 Debt to equity ratio ............................................................................................................................ 46 8.3 Return on Capital Employed (ROCE): ............................................................................................... 47 8.4. Return of Equity................................................................................................................................ 47 8.5. Cash flow analysis.............................................................................................................................. 48 9. Capital market Performance................................................................................................................... 49 10. Recent Strategies .................................................................................................................................. 50 11. Outlook ................................................................................................................................................. 51 12. Approach to Segmental analysis........................................................................................................... 51 13. Abbreviations ........................................................................................................................................ 55 14. Ratio Analysis ........................................................................................................................................ 57

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Study material on Company Analysis

Why Company Analysis?
After understanding the linkages between Economy and Industry Analysis, detailed company analysis gives us more clarity about the company. We need to select a single company in already selected industry which is being allotted by Cygnus. Understanding business model will help us how the company generates revenue and how much it converts into profit. The analysis focuses on understanding of operating, financial and capital market performance of the company for the last 6 quarters. Cygnus company looks at various strategies adopted by company in expanding the top line and bottom line and how they are defending the environment outside. These strategies will have major impact on the future top-line and bottom-line. Assignment for Interns The interns need to prepare a full fledged report on company analysis from the respective industry. The intern shall follow the template given below. While carrying out analysis intern needs to follow some of the guidelines and instructions while preparing the report.

Approach of P&L account
Before understanding the company template, we must understand about the Profit & Loss Account which is given below. Profit & Loss Account/Income Statement Gross Revenue/Sales Less: Less: Excise Duty Net Sales / Income from Operations Operating Expenditure Raw Materials* Cost of Power Purchased* Freight & Handling Expenses Staff Cost Other Expenditure EBITDA/PBDIT Less: Add: Less: Add/Less: Less: Less: Add/Less: Depreciation EBIT/PBIT Other Income Interest Paid/Financial Charges Profit Before Tax/Profit Before Exceptional Items Exceptional Items Profit (+)/ Loss (-) from Ordinary Activities before Tax Tax Reported Net Profit (+)/ Loss (-) Dividend Paid to the Share Holders Extraordinary Items Adjusted PAT Transferred to Reserve & Surplus Account
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XXXX XXX XXXX XXXX XXX XXX XXX XXX XXX XXXX XXX XXXX XXX XXX XXXX XXX XXXX XXX XXXX XXX XXX XXXX 6

Study material on Company Analysis *All these are not applicable for service industries like Banking, Telecom, ITSS, ITES, Retail and Insurance. From P&L account we can measure how much a company is efficient and effective. Efficiency of a company is measured by calculating operating profit margin (OPM/PBDIT margin/EBDITA margin) for all sectors and effectiveness is measured by net profit margin (NPM/PAT Margin). Analyst/intern shall analyze company from profitability point of view also through return on capital employed and return of equity. Explanation of 3 important ratios of the company: 1. Operating Profit margin (OPM/ PBDIT margin/EBDITA margin): OPM = PBDITA or EBDITA / Net sales *100 Operating profit margin is calculated by taking operating profit or PBDIT or EBDITA in numerator and dividing by net sales multiplied by 100. The ratio is used to measure company’s operating efficiency. The ratio will give understanding to analyst/intern how much profit is left over after meeting internal obligation to meet external obligation. The margin is of high importance for creditors of the company as margin shows them how much operating profit can cover interest cost which is paid to creditors. It also measures the returns to company from the core business of the company. While calculating OPM, we don’t consider other income as a part of operating income, as it is not a part of core business. Comparing with same companies While comparing companies let’s say for e.g.: ACC has PBDIT Margin 32% for JFM09 compared to 28.2% for JFM08. It gives a clear indication that company has taken cost cutting measures which has led to increase in OPM. This also clearly indicates that sales growth is higher than expense growth as a result of OPM increases. Comparing 2 different companies While comparing two different companies in the same industry, we know that the company of higher OPM is more efficient than the one of lower OPM. For eg., ACC’s OPM is 32% for JFM09 compared with Ultratech Cement’s OPM of 28.2%; it indicates that ACC is more efficient than the latter. Applicability: OPM/ PBDIT margin/EBDITA margin is applicable to all industries except for banks Net Interest margin = OPM in banks
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Study material on Company Analysis All banks in India have different P&L a/c format compared to that given by the companies act, 1956. Since banks business is all about lending/ borrowing and receive/ pay interest to lenders/depositors, top line has mainly 3 incomes – interest income, investment income and other income. Bank receives Interest income from lending, income from investment from investing in GSecs and other income through commission, exchange, Brokerage, Profit on sale on investment, Profit on exchange transaction, Miscellaneous income, Profit on revaluation of asset and Profit on sale of asset. Just like in other industries there is OPM, in banks there is net interest margin (NIM). NIM is the difference between interest earned and interest expended expressed as a percentage over the total assets. The higher the NIM, the better it is for the bank. A negative NIM denotes that the bank’s interest expense is higher than its interest income. In most cases, interest earned is higher than interest expended. 2. Net Profit Growth: It is calculated by following formulae (Applicable to all companies): (Net profit of Current quarter or year – Net profit of previous quarter or year) / Net profit of previous quarter or year * 100 The net profit growth when compared with YoY or QoQ basis or compared with sales growth or operating profit growth it is due to following reasons • • • Prudent financial management policies Better operational efficiency High sales growth

The net profit growth is applicable to all industries and can be used for comparing two companies in same industry. This profit growth plays very important role for companies. PAT margin = Net profit or PAT/Net Sales * 100 (Applicable only to banks) Net profit margin is calculated by finding the net profit as a percentage of the revenue. Net Profit Margin = Net Profit (after taxes) x 100% Revenu The ratio measures how much effective the business and performance of overall businesses of the company. The NPM is very important as far as stakeholders are concerned, because the higher the PAT margin the higher probability of dividends for stake holders. There are 3 factors that affect

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Study material on Company Analysis NPM; the factors are high PBDIT growth, external expenditure like Depreciation, Interest and Tax, and high growth in other income. While calculating NPM we consider other income too, because while analysing NPM the company as whole is considered and not only its core business. 3. Return on Capital Employed (ROCE): ROCE is calculated as Earning Before Interest and Tax (EBIT) to Capital Employed (Total Shareholders fund plus Long Term Debt) ROCE = Net Profit x 100 Capital Employed The ratio measures the efficiency and profitability of the capital investment. ROCE should always be higher than company’s borrowing rate, otherwise any increase in borrowings will reduce shareholder’s earnings.

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Study material on Company Analysis

Template of Company Analysis
1.0 Preamble
Preamble justifies why the analyst selects a particular company in the industry. It is just a reason for selecting the particular company in the industry. There should be at least one trigger point to select the particular company, for e.g. Mergers & Acquisition or Government Regulations. The analyst shall take any trigger point and select the company. Preamble will give the logic for selecting the particular company that has come in the news in past 1-3 months. Sentence Limit - Here, the sentence limit will be approx five to six lines in a single paragraph. Sources – All business news papers, Business magazines and company press releases etc. Font size – Garamond 11 and Format – Paragraph
Promoter 33.29%
Source: BSE india, Cygnus.

Share Holding Pattern - ABC ltd Dec 2008

Institution 47.71%

Body Corporate 0.97% Other 18.03% Individual s 17.90% Others 0.13%

2.0 Background
In back ground the analyst shall give information with regard to year of incorporation of the company followed by name of the promoters, major plants and capacity (for manufacturing companies), Location of headquarters (only city) (for all companies), and lines of the business. Sentence Limit - Sentence limit will be approx five to six lines in a single paragraph. Please don’t use bullet points and don’t give the address of company. Sources – All business news papers, Business magazines Company website, Annual report, Investors presentation and Red herring prospectus etc. Font size – Garamond 11 Format – Paragraph

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Study material on Company Analysis Chart – Pie chart (Ht – 2.5 inches and width 3.5 inches)
Text-box 1 Example of manufacturing company – Tata Power Incorporated in 1913, Tata power is India’s largest private power generator company. It has pioneered power generation in the country and it belongs to country biggest industrial house Tata group. Tata power is having close to 2700 MW as its annual installed capacity with power stations located at Trombay in Mumbai, Jojobera in Jamshedpur and Belgaum in Karnataka. The Hydro stations are located in Raigad district in Maharashtra and the Wind Farm in Ahmednagar. The company gets revenue from 2 segments, one is from power generation and distribution and second one is others which include electronic equipment, project consultancy. Example of Service Company- Taj Hotels Established in 1903, Taj Hotels Resorts and Palaces is one of Asia's largest and finest group of hotels, comprising 65 hotels in 45 locations across India with an additional 15 international hotels in the Maldives, Malaysia, Australia, UK, USA, Bhutan, Sri Lanka, Africa and the Middle East. From world-renowned landmarks to modern business hotels, idyllic beach resorts to authentic Rajput palaces, each Taj hotel offers an unrivalled fusion of warm Indian hospitality, worldclass service and modern luxury. The Taj, a symbol of Indian hospitality, has recently completed the centenary of its landmark hotel, The Taj Mahal Palace and Tower, Mumbai. Taj Hotels Resorts and Palaces is part of the Tata Group, India's premier business house.

3.0 Products and Services
The analyst needs to mention about the products and services the company offers in the market (all companies). If company has lots of products (FMCG or Chemicals), in this case find out the highest weightage products (% of revenue) and mention the major products. Format – Table format Sources – All business news papers, Business magazines and company press releases etc. Font size – Garamond 11 Example of manufacturing Indica Vista, Indica V2, Indica V2 Turbo, Indica V2 Xeta, Indica V2Dicor Passenger Cars Indigo XL, Indigo, Indigo Marina, Indigo CS Nano, Fiat Cars Utility Vehicles Trucks Safari Dicor, Sumo Grande, Sumo, Xenon XT Medium & Heavy Commercial Vehicles (Tata Novus)

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Study material on Company Analysis Example of manufacturing Intermediate Commercial Vehicles Light commercial Vehicles (TL 4*4) Small commercial Vehicles Commercial Passenger Carriers Defence Vehicles Buses, Winger, Magic -

Example of Services Name of service/Product Details It involves defining, designing and building applications tailored to meet t Application Development business requirement. It is based on industry standard process quality framewo (CMMI, CMM etc.) Application Maintenance services help to get the best out of existing Application Maintenance applications. The services cover offshore ability analysis, maintenance analysis, a maintenance and enhancement. Business Process Management(BPM) BPM enables enterprises to align their business requirements with infrastructure. It defines, automates, and control business activities as a whole th incorporates people, processes and systems. Consulting service is a blended offering of high quality Business consulting ons Consulting services and package implementation with impeccable Technology implementation offsite. Implementing package su as oracle e Business suite, for client typically involves Business blue printing, g analysis, configuration, testing, and package roll-out. IT infrastructure management service provides different options to customers lik Infrastructure Management conceptualisation and design, on going support and services, the technology platform, implementation support and variety of projects to support entire infrastructure.

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Study material on Company Analysis Example of Services Name of service/Product Product Engineering Services Details These services involve research and development, product development, value analysis/value engineering, analysis and optimisation, testing and automation, maintenance and support, product re-engineering among other services. System integration service uses a sensible approach to build well integrated IT System integration infrastructure system that addresses critical business needs. Services include program management, technology consulting, solution architecture and management among other services. Testing Services Include three services - Performance Testing, Test Automation and Testing cente of Excellence. Finacle is a universal banking solution product offered by the company. It is use Products for financial solutions in areas like core banking, eBanking, mobile banking, treasury, credit risk management etc.

4.0 Business Model
The understanding of any company comes from understanding its business model. Understanding business model helps in analysing the factors that affect the company. It gives a clear picture as to which factor has huge influence on the topline and bottom line. Further understanding business model helps us in doing forecasting company’s financial statements and value the company. There are in fact 9 different parts of business model of a company and has been discussed in details below. The business model can be bifurcated into the following: 1) Value Proposition 2) Target Customer 3) Distribution Channel 4) Promotion 5) Revenue Streams 6) Core Capabilities 7) Value Configuration 8) Partnership Network 9) Cost Structure
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Study material on Company Analysis 4.1 Value Proposition

To stay in the cut-throat competition, company produces different products & services to cater their different customers. The analyst/intern has to mention about the products or services names and details about it. To be more precise, Value Proposition will define what the different kinds of products a company is producing to cater its different set of customers. 4.2. Target Customer It is a very true that every company has its target customer. Companies around the globe are producing different products for their different segment of customers. The analyst/intern needs to find out whether company targets niche customers like Daimler Chrysler, Only industry specific or middle class population, students, business executives, corporates, self employed and professionals. The target customer can also be classified as per rural/urban population or domestic/international. 4.3 Distribution Channel Once the company’s products/services are identified and target customers are identified, it’s important to analyse how company bridges the gap. The company bridges the gap between itself and customers through its distribution channel. There are different forms of distribution channels like agents, dealers, franchisees, internets and own outlets. Distribution channels are very much important for any organisation for its growth. In some cases, distribution channel plays two important roles, one as a selling point and another as after sales services point. Through this, the organisation will be in direct contact with their customers.

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Study material on Company Analysis 4.4 Promotion To retain, maintain and increase its market share company needs to promote its brands, products and services in the market. It is important for any organisation to retain old customers as they do mouth-to-mouth advertising and promote company’s product. Sometimes companies directly engage themselves in promotion, tie-ups or engage 3rd party in promoting. The promotion is done through various means like giving discounts, gift vouchers, bonus, prizes, sponsoring, ad campaigns and pamphlets. 4.5 Revenue Streams Revenue streams is a method of earning money and a way to collect it from those who buy product/service. In other words, the mode through which company receives revenue is known as revenue streams. Traditionally companies had only one single core business, but later on they got familiar with diversification and risk management and started receiving other forms of revenue. Till now what has been discussed is the front end part of business model. Front end means external activities of company which is visible through naked eyes. In the back end part, which is not visible contains the technology, processes, technical tie-up and business partners. 4.6 Core Capabilities Core Capabilities can be defined as the core strength of any manufacturing concern, which comprises of heavy machineries, plants, infrastructure, number of vehicles (roadways) number of towers (telecom) branches (banks), equipments (construction equipments), IT (area and offices).The company’s core capabilities will give understanding how much capacity company can scale up. In case sudden surge in business can company is able to tap the market. Company has different plants (Mfg. Cos.) as well as facilities from where they provide services or do production. This defines the kind of infrastructure what the company has to convert the raw materials into final products. Eventually, this core capability defines any companies strong positioning in the entire value chain of the industry. Higher the core capabilities the more will be the profitability. 4.7 Value Configuration A company’s infrastructure doesn’t generate value unless some technology deployed into the same. It is the value configuration that transforms inputs to output. The company’s technology adds value to inputs and transforms raw materials into finished products.
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Study material on Company Analysis 4.8 Partner Network Partnership network plays a major role in the explicit performance of any company. This partnership network can either be in initial process of the manufacturing or final process, where the final product reaches to the customer. As defined earlier, apart from company which other players are depending upon apart from the company. The partners can be raw material suppliers, technology support providers, transport vendors, food contractors, real estate developers, warehousing agencies are partners in business model. 4.9 Cost Structure Cost structure is one of the important parameters for the analyst while doing the analysis of any company. Cost structure differs for all companies even though they belong to one industry. In Automobile industry for example, if the analyst takes Tata Motors and Maruti Udyog Limitd, he will find their percentage of fuel cost differ. As per the Indian Accounting Standards, if any cost as a percentage of sales is more than 10%, company is liable to show such expenditure differently. Analyst has to take care of such costs. Style and Font Size – Garamond 11 Format – Each point shall be discussed in separate paragraphs along with sub heads. Chart – pie chart

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Study material on Company Analysis

Example of business model – Services

Value Proposition:
Company defines, designs, and deliver technology enabled business solutions to companies established across the globe. Company aims at adding value to client’s business by providing strategic differentiation and operational superiority through various technological solutions. Company follows the Global Delivery Model (GDM) to ensure distribution of its products and services in timely and cost effective manner.

Target Customers:

Considering the company’s global footprint and its ability and experience to serve

clients spread across different segments, company is in a position to target various IT deals. However companies belonging to sectors like BFSI, Telecom, Construction and Retail still remain its primary target as these are technology dependent sectors. Also deal size in these sectors tends to be big and spread over multi-years, providing enough clarity about future revenue stream.

Distribution Channel: Company’s Global Delivery Model (GDM) approach enables it to stay in touch
with its customers through out the execution of project. GDM gives 24 hours execution capabilities across multiple time zones. Through its consulting groups and Software Engineering and Technological Labs (SETLabs), company research and engineer new solutions tailored for its client and their industries. Also it uses its end-to-end technological based solutions to extend the network of its relationship both with existing clients as well as new clients.

Customer Retention: Through its project management methodology, company ensures timely, consistent
and accurate delivery of superior quality solutions to maintain high level of client satisfaction. Its ability to serve entire software life cycle and strong domain expertise helps it to gain increased business from its existing client. As a result, company has a history of client retention and derives a significant proportion of revenue from repeat clients.

Revenue Stream: Company gets it revenue directly from its clients on the basis of type of contract entered
into. Arrangements with customers for software development and related service are either on fixed-price, fixedtimeframe or on a time-and-material basis.

Core Capabilities:

The core strength of company is its highly skilled and well trained professionals.

Company provides specialised technical and domain training to its employees. At its Mysore campus it has capacity of around 33,500 trainees. Company has 15 Global Development Centers (GDC) and 28 marketing offices located across the world... Further it has five subsidiaries in five different countries. It has also established Software Engineering and Technological Labs (SETLabs) in India. SETLabs leverages emerging technologies for
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Study material on Company Analysis

improving engineering effectiveness and developing client-focused business solutions. Finacle, its universal banking solution powers 109 banks across 60 countries. It is considered among the leaders in global evaluation of retail core banking solutions.Company currently has two patents granted by US Patent and Trademark office. An aggregate of 151 applications are pending in US Patent and Trademark office and Indian Patent office.

Value Configuration: SET Labs conducted 12 Innovation Workshops with customers from the US
and Australia, to identify research collaboration possibilities. SET Labs collaborated with leading national and international universities such as the Indian Institute of Information Technology, Hyderabad, Purdue University, University of Southern California, and Queensland University of Technology. Researchers from BT Group PLC and SETLabs will also collaborate on research and innovation. A Memorandum of Understanding (MoU) has been signed to this effect.

Partners Network:

Some of the partners getting business from the company are transport service

provider, hotels, Airlines companies and canteen service providers. Company also entered in partnership with global business firms and institutions to innovate and provide latest technological business solutions. Some of the recent partnerships company entered in to are: 1. Alliance with Microsoft focusing on Supply Chain visibility and collaboration. 2. The University of Cambridge and Infosys has signed an agreement to undertake research in engineering, management and business, architecture and pharma.

Cost structure: The major element of overall cost is salary expenses (72.7% of total expenses) under
different departments like software development and maintenance, selling and marketing and administration. Company has taken various cost management measures like; increase in offshore efforts(76.9% vs 76% QoQ), try to increase utilization rates(74.5% vs 73.7% QoQ), slow down in hirings (Net hiring in JFM09 2772 Vs OND08 5927), low number of trainees (7709 Vs 8119 QoQ), cutting in support activities.

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Study material on Company Analysis

5.0 Business Analysis
5.1. Segmental Analysis With they becoming more risk averse,
D2 13% D1 77% D3 9% D4 1%
Source: Company Annual report

Segmental Analysis - Business Analysis-200809

companies are operating in more than one business segment. The intern/analyst needs to analyse the business which the company gives more concentration. The analysis shall be on annual yearly basis. (Refer segment analysis in detail in
chapter 12)

Style and Font Size – Garamond 11 Format –Separate paragraphs along with sub heads Chart – Pie chart (Ht – 2.5 inches and width 3.5 inches) 5.2 Competition

The market share of the company should plot in the pie chart at right hand side. In competition, intern/ analyst shall keep in mind the companies, which have been selected. The analysis shall include the stand of the company in terms of competition. The strategies planned by the company shall be able to face and withstand the competition. For calculating market share, different companies are given below. Company Automobiles Power Steel Cement Oil & Gas Telecom Banking Retail Measurement No. of Units Sold Mega Watts. (MW) Installed Capacity Units in million tonnes (Installed Capacity) Units in million tonnes (Installed Capacity) Units in million tonnes (Installed Capacity) Units - No. of Subscribers Deposits Floor Area

All other cases Herfindahl Index

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Study material on Company Analysis Style and Font Size – Garamond 11 Format –Separate paragraphs along with sub head Chart – Pie chart (Ht – 2.5 inches and width 3.5 inches) 5.3. Issues and Challenges Any company operating in any part of value chain of industry will have to face some Issues and Challenges. The issues and challenges can be either internal or external. The internal issues can be strike, lower capacity utilisation, wastage of resource, idling plants, unutilised office space, leadership, attrition. The external factors can be Prices of raw material, exchange rates, increase of tax levied by the government on the final product, supply contracts, regulations, lack of reserves, Market penetration, change in customer preference and Pricing of the product. Here, all the paragraphs should have sub headings. Sources– Annual report, Investor Presentation, Profit & loss account, BSE India and press releases etc. More focus should be on analysis part. Style and Font Size of Sub head – Garamond 11 bold Style and Font Size of content – Garamond 11 Format – Each point shall be discussed in separate paragraphs along with sub head.

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Study material on Company Analysis

6.0 Operational Performance
In operational performance, analyst/intern needs to have a full understanding about the operations of company’s business. The analyst/intern needs to measure company’s operational aspects and analyse the performance. The analyst/intern shall find out the reasons for fluctuations in operational performance. In operational performance, analyst/intern needs to analyse – 1) Sales and sales growth 2) Segmental sales analysis 3) Operating profit and operating profit margin 4) Segmental operating profit 5) Cost Structure 6) Operating metrics

6.1 Sales and Sales growth
4000

Sales and Sales Growth

12 10 8 6 4 2 0 ‐2 ‐4 %

In order to analyse operations of company, analyst/intern should take last
Rs Mn

3500 3000 2500 2000 1500 1000 500 0 JAS07 OND07 JFM08 AMJ08 JAS08 OND08
Net Sa l es (LHS)
Source: BSE Website

6 quarter sales and sales growth. The focus of analysis must be on latest quarter analysing (JFM09 VS and reasons thereon. For IT/Biotech/Telecom, OND08) analysis as

analyst/intern must do sequential QoQ industry is more dependent upon Innovation and creativity. The rest of all

Growth (RHS)

other sectors will have YoY (AMJ09 Vs AMJ08) growth analysis. In case of IPO for last two years, we will consider performance on yearly basis (past three years). In the report, the analyst/student must mention the reasons for cause in increase in sales. The reasons can be capacity addition, rise in realisation in case commodities and power industry, new clients in case of ITSS, New products launches in case of Automobiles and pharma, New subscribers additions and launch of new services in Telecom, and Launch of drugs in case of Pharma cos. If analyst/intern mentions that sales have increased by rise capacity, then specify which plant’s capacity has increased. The analyst/intern shall develop an in depth understanding about the company and its business.

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Study material on Company Analysis Style and Font Size of Sub head – Garamond 11 bold Style and Font Size of content – Garamond 11 Data source - For data of companies plz refer to BSE India, NSE, SEBI or company website. PLz take only stand alone results and all units to be in Rs. million. Starting sentences - During the quarter ended June/Sept/ March/December 2009, company’s sales witnessed Dip/growth of …% to Rs …….. million compared to CPLY/previous quarter. The strong growth / dip was due to ……….(plz give reasons).

6.2 Segmental Sales Analysis In case company has more than one segments then analyst/intern shall analyse the revenue from segment wise on YoY basis (JFM09 vs. JFM08) for cyclical companies (other than IT, Telecom and Biotech) and for non cyclical companies, it shall be on QoQ basis (JFM09 vs. OND08). In case of IPO during last two years, analyst/intern will consider performance on yearly

1800 1600 1400 1200 Rs m 1000 800 600 400 200 0 D1

Segmental analysis and growth

20.00 15.00 10.00 5.00 0.00 ‐5.00 ‐10.00 ‐15.00 ‐20.00 ‐25.00 ‐30.00 %

D2

D3 YoY Growth(RHS)

D4

Sales (LHS)
Source: BSE India

basis (past three years). In operational performance the focus is on growth not % share in revenue. It is not compulsory that segment that leads in terms of revenue will have a higher growth. Analyst/Intern should find and analyse the reason of the strong growth of sales (segment wise). Style and Font Size of Sub head – Garamond 11 bold Style and Font Size of content – Garamond 11 Data source - For companies data please refer to BSE India, NSE, SEBI or company website. Please take only stand alone results and all units to be in Rs. million. Starting sentences - During the quarter ended June/Sept/ March/December 2008/09, overall company’s sales growth came … division compared to CPLY/previous quarter. The growth in the division was on account of… The other divisions also performed well which added company’s top line growth. Of the all divisions one division witnessed dip due to …
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Study material on Company Analysis 6.3 PBDIT and OPM In case of PBDIT and OPM,

2900 2800

Operating and OPM

60.00 55.00

analyst/intern shall analyse last 6 quarters and find out the margin. In analyzing, analyst/intern has to define which factor plays the major role for the changes in the OPM on either side. Is it because of increase in sales or fall in the operational expenditures or vice versa? The reasons for fluctuation in OPM can be due to – High capacity utilisation, Captive power plants, VRS, high training cost, high raw

2700 2600 Rs ,m n 2500 45.00 40.00 35.00 2100 2000 JAS07 OND07 JFM08
PBDIT(LHS)

50.00 %

2400 2300 2200

30.00 AMJ08
OPM (RHS)

JAS08

OND08

Source: BSE India, Cygnus

material cost, high transportation / logistics cost, rise in salary levels, high advt cost, shut down plants due to floods, strike etc. Style and Font Size of Sub head – Garamond 11 bold Style and Font Size of content – Garamond 11 Data source - For data of companies plz refer to BSE India, NSE, SEBI or company website. Please take only stand alone results and all units to be in Rs. million. Starting sentences - The company for the quarter ended June/September/December/March 2007/8 has witnessed dip/rise in the margins compared to CPLY / QoQ. This is due to the fact that ………………..

While calculating OPM please remove other income from total income and calculate the OPM.
6.4. Segmental PBIT and OPM
1000

Segmental Analysis

60 50 30 20 10 0 % 40

It is ritual that company that reports operating profit and capital employed. The analysis should focus on the segment that generates high operating margins. It is not necessary that the segment that generates highest sales may not always have the highest
Rs mn

800 600 400 200 0 Cement
Source; BSE India

segments sales should report segmental

Sponge iron

VSF
Margins(RHS)

Textiles

PBDIT(LHS)

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Study material on Company Analysis margins. The analyst/intern should be able to understand and draw conclusions, which segment among the various segments generates maximum margin for the company. The segment that generates highest margins is cash cow for the company. All the lenders to the company are interested on the segment that generates maximum margin. Style and Font Size of Sub head – Garamond 11 bold Style and Font Size of content – Garamond 11 Data source - For data of companies please refer to BSE India, NSE, SEBI or company website. Please take only stand alone results and all units to be in Rs. m. Starting sentences ‐ The company for the quarter ended June/September/December/March 2007/8 has highest margins in …….segment. This is due to the fact that ……………….. 6.5 Cost Structure In cost structure analyst/intern should analyse the trend of cost components of the company as percentage of sales. The comparison shall YoY for cyclical industries and QoQ for non-cyclical industries. The reasons for fluctuation in cost components can be high capacity utilisation, captive power plants, VRS, high training cost, high raw material cost, high
100 90 80 70 60 50 40 30 20 10 0 OND07
Ra w ma teria ls Sta ff cos t Energy Sell ing Exp Other

Cost Structure as % of Sales

OND08
Interes t Depriciation Ta x

Source: BSE India, Cygnus

transportation/logistics cost, rise in salary levels, high advt. cost, shut down plants due to floods, strike, capital expenditure, high costly debt taken for expansion, converting debt into FCCE, corporate debt restructuring scheme, strong financial policies and better tax management. Style and Font Size of Sub head – Garamond 11 bold Style and Font Size of content – Garamond 11 Data source - For data of the companies please refer to BSE India, NSE, SEBI or company website and take only stand alone results also all units to be in Rs in m. Starting sentences ‐ The company for the quarter ended June/September/December/March 2007/08 has witnessed dip/rise in the cost components on CPLY/QoQ basis. This is due to the fact that ………………..

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Study material on Company Analysis

7. Operating Metrics
Operating metrics is a type of metrics used for measuring companies in terms of efficiency. Normally, if anyone wants to measure companies, all look at the financial figures. However, analyst/intern shall look beyond the financial figures in measuring efficiency of the company. Operating metrics is not applicable for all industries; it depends upon data availability and disclosure of company. There will be no common ratio for all the industries and operating metrics differ depending upon the industries.

7.1. Automobiles

In automobile industry, analyst/intern should analyse the following: i) Segmental Monthly unit sales of automobiles and YoY growth ii) Revenue per vehicle iii) PBDIT per vehicle In monthly sales segment, analyst/intern will come to know the seasonality of sales of auto units. In India, especially passenger car, 2-wheeler sales are high during second half of the year because of major festivals. During the time of schools and colleges re-open, the demand of Light commercial vehicle and 2-wheeler bikes rises. Indian automobile companies sell different models at different prices and at different places; analyst/intern will not get the data of price of models across the country. The best metrics would be revenue per vehicle and PBDIT per vehicle. Analysis of Revenue per vehicle = Revenue of the company (Rs in m) / Total vehicle sold (units) In case, revenue per vehicle rises when compared with YoY basis and growth of the revenue is higher than growth of the auto unit sold, it means that the company has increased the prices and it decreases if vice-versa happens. The company will decrease the prices of automobile by giving huge discounts and passing on the decrease in taxes.
1500000 1249342.2 1200000 900000 600000 300000 Rs 0 OND07
Source: ALL

Trend of Revenue per vehicle

949160.03

OND08

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Study material on Company Analysis Analysis of PBDIT per vehicle = PBDIT of company (Rs in m) / Total vehicle produced (units) In case, PBDIT per vehicle rises when compared with YoY basis and growth of PBDIT is higher than growth of auto produced, it means that the company have opted for huge cost cutting as well as rise. If production units are more or less same and simultaneously there is no change in cost structure of the company, it means that the company has increased the prices and it decreases if vice-versa happens. In case, while analyzing Mahindra and Mahindra and Eicher take only automotive division sales and automobile operating profit only.
36.00

110000 105000 100000 95000 90000 Rs 85000 80000 75000

Trend of PBDIT per vehicle
103781.05

87254.416

OND07
Source: ALL
Trend of SBI bank NIM (%)

OND08

7.2. Banking i) Net interest margin (6 quarters)

35.00

34.00

33.00

In banking industry, net interest margin is
32.00

one of most important indicators. The net
31.00

interest rate margin is the difference between the interest earned by the bank from lending and interest expended by the bank on borrowings as a percentage of earnings assets of the bank. The difference between interest expended and earned is the interest spread of the bank. The higher the NIM, the better is for the bank. A negative NIM denotes the bank interest expense higher than interest income. In most of the cases, interest earned is higher than interest expended. NIM and “spread” are the two key parameters that give an indication of a bank’s operational efficiency. As a concept, NIM and spread are very similar, but there is a subtle difference between the two. While NIM is arrived at by dividing a bank’s net interest income by its average interest-earning assets, spread is the margin between the yield on assets and the cost of liabilities, or the difference between interest income and interest expense as a percentage of assets. NIM can be higher or lower than the net interest spread. Analysis of NIM – If NIM rises, it means that the bank has increased the lending rates or borrowing rate has gone down. The rise in lending rates of bank will increase due to rise in the cost of deposit rates,
30.00 JAS07 OND07 JFM08 AMJ08 JAS08 OND08

Source: BSE India, Cygnus

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Study material on Company Analysis rise in CRR, repo rates and SLR by RBI. The borrowing rate will go down if the banks cost of deposit decreases. ii) NPA (6 quarters)
80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 JAS07 OND07 JFM08 AMJ08
Source: BSE India, Cygnus

In Indian banking industry, NPA is defined as an advance for which interest or repayment of principal or both remain out standing for a period of more than two quarters. The level of NPA acts as an indicator by showing the bankers’ credit risks and efficiency of allocation of resource. The RBI has classified NPA under 4 categories - standard, sub standard asset, doubtful and loss assets. The current

Trend of SBI bank NPA

JAS08 OND08

economic slowdown, coupled with the impact of global recessionary trends on liquidity, has raised concerns of rising NPAs (non-performing assets) in the Indian banking industry. The issue of NPA drags on the balance sheet of banks assuming no change in business environment till March 2010. Recently, RBI has argued all Indian banks to restructure the loans and rescheduling the principal repayment date, or even reducing interest rates help to revive the borrower’s cash flows. iii) C/D ratio (6 quarters)
0.8 0.78 0.76 0.74 0.72 0.7 0.68 0.66 0.64 2005-06 2006-07 2007-08
Source: BSE India, Cygnus

Credit deposit ratio (C/D) is an important indicator for the bank as it indicates the credit given by bank to industry and how much the bank has parked in government securities. The major business of bank is lending and borrowing and C/D ratios helps in analysing how much business bank is able to get its maximum revenue from core business and non core business (Treasury). Higher the C/D ratio mean

C/D Ratio

higher will be the interest income. Lower C/D ratio and still banks are able to post profits then it means profits came from non core business of banks like other income and treasury income.

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Study material on Company Analysis iv) Business per Employee (3 years)
SBI Bank - Business and Profit per employees 50 40 30 20 10 0 2005-06 2006-07 2007-08 Profit per employee

In banks, analyst/intern should measure employee productivity through business per employee. In this, he/she has to measure the company’s capacity to generate total revenue (total income) from all the departments. v) Profit per Employee (3 years)

In banks, it is very important to measure the value addition of each employee is adding to the company. This can be analysed through the metric profit per employee. In profit per employee analyst/intern should be able to measure the overall total profit from all employees in the departments. vi) Profitability per branches (6 quarters) All branches are the cost centres of banks as they have to maintain the assets and employees. Today, the trend is banks want to be branchless office and offer more value added services. vii) Capital Adequacy Ratio (3 years)
90 95

Business Per employees

Profitability per branches 1.9 1.85 1.8 1.75 1.7 1.65 1.6 2005-06 2006-07 2007-08 Profitability per branches

Capacity Utilization

85 % 80

According to BASEL II norms, the capital adequacy ratio is required 12% of overall capital. In case, banks maintain excess of CAR over 12%, then the bank has too much of idle capital which was neither used for lending nor investment.

75 OND07
Source: BSE India, Company Website

OND08

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Study material on Company Analysis viii) CASA deposit as percentage of total deposit In the Banking industry, the impact of any hike or cut in loan rates is felt immediately as a bank’s entire loan book is re-priced, but that’s not the case with deposits as the new rates are applicable only when the existing deposits mature or new deposits flow in. Indeed, CASA (Current Account and Savings Account) plays an important role in lowering the cost of deposits. The “CA” of CASA, or current account, is primarily meant for companies, public enterprises and entrepreneurs who have numerous banking transactions daily. Such accounts are cheque-operated and a customer can deposit or withdraw any amount of money in any number of times. The cost of CASA will go up from April 2010 when banks will have to pay interest on the daily balance in SAs, which means banks will have to pay 3.5% on savings deposits instead of the 2.8% which they are paying now. 7.3. Cement In cement/steel industry, being one of the core industries, some of the operating ratios are more or less common, so, analyst/intern shall analyse the following operating ratios: i) Capacity utilisation CPLY (Corresponding Period Last Year) ii) Realisation per tonne CPLY iii) Energy cost per tonne CPLY iv) PBDIT per tonne CPLY v) Employee per tonne CPLY i) Capacity utilisation on YoY basis - measures the company’s leveraged existing capacity. In order to calculate the capacity utilisation, the analyst/intern should take the actual production in the year and divide by annual installed capacity. To calculate the capacity utilisation for the quarter ended, he/she need to divide the quarterly production by the quarterly installed capacity. To arrive at quarterly installed capacity divide annual installed capacity by 4. For ex: In 2008, ACC has annual installed capacity of 25 million tonnes and for a quarter maximum it can produce is 6.25 million tonnes. First analyst/intern shall find out the actual production, let suppose ACC produced 4.5 million tonnes during AMJ09, then capacity utilisation for AMJ09 = (4.5/6.25)*100 i.e., 72%. The company shall leverage its assets for the maximum to add value to the company. The better the capacity utilisation the higher will be the margins i.e., company could produce more without an additional capital expenditure. In weak macro environment or negative inflation or higher competitive environment, companies will not able to hike prices, but still can maintain higher margins with higher capacity utilisation. In case, there is a decline in capacity utilisation then the reasons can be slowdown in demand, plant shut down for maintenance, strike floods and natural calamity. (Applicable to cement/steel/any commodity)
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Study material on Company Analysis ii) Realisation per tonne - means how much the company could realise by selling of one unit in the market. In order to find out the realisation per ton, the analyst/intern shall divide net sales (Rs in m) by sales in volume (m tonnes). In weak macro environment or negative inflation or higher competitive environment, realisation per ton will fall. But in case, strong macro environment or positive inflation or supply is less

3850 3800 3750 Rs per ton 3700 3650 3600 3550 3500 3450

Realization per ton

OND07
Source: BSE India, Company Website

OND08

than the demand or costlier inputs, companies would hike prices of output. Growth rate in sales would be higher in case it is due to higher realisation than through rise in volumes. In case the realisation in international markets higher than the domestic market, Indian companies would prefer to sell their product in international markets due to higher realisation. It has happened in case of cement industry during 2007-08 and 2008-09, cement companies were selling more in international markets due to better realisation and they made huge profits. As a result, supply of cement in domestic markets dipped but demand was higher; it resulted to prices went up in domestic markets. (Applicable to cement/steel/any commodity)
Rs per ton 860 840 820 Energy Cost per ton

iii) Energy cost per tonne (CPLY) For any commodity industry like cement or steel or aluminium manufacturing, energy/power; cost is one of the major components. In order to measure the efficiency of company, the analyst/intern should find out the company’s spending in terms of energy per unit of

800 780 760 740 720 700 OND07 OND08

Source: BSE India, Company Website

production. For capital-intensive industries, energy requirement is very high. In order to de-risk the inefficient power supply from the government, many companies have started with captive power plants. Today, when the government gives high priority to the power industry in terms of coal allocation, capital-intensive industries are importing coal from international market to meet the power requirement. The lesser energy per unit would be helpful to get the better margins of the company. (Applicable to cement/steel/any commodity)

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Study material on Company Analysis iv) PBDIT per tonne (CPLY) In commodity industries like cement/steel,
Rs per ton

3000 2500 2000 1500 1000 500

Trend of PBDIT per ton

analysis of operating per unit is one of most important metric.. Due to high intensity of manufacturing activity, operating profit per unit will give a clear picture about the efficiency of companies. While comparing two companies, the company which is having highest PBDIT per tonne is better in terms of efficiency. It could be due to various reasons like keeping operating cost

OND07
Source: BSE India, Company Website

OND08

at the minimum, highest capacity utilisation, buy semi-finished products from others and covert it into finished product and rise in sales. To arrive at PBDIT per tonne, the analyst/intern need to take PBDIT divided by production. The reason for taking production is to calculate profit from operations per tonne.. (Applicable to cement/steel/any commodity)
Em ployee Production

v) Employee per tonne (CPLY) – In order to analyst/intern can have a look at production / employee. The higher the ratio means better productive the employee. However, the challenge is that while taking number of employees, nonproduction employees are also be considered. Further, many manufacturing companies take casual labourers who in fact take part in
Production/employees

28.21 28.2 28.19 28.18 28.17 28.16 28.15 28.14 28.13 28.12 AMJ08 AMJ09

measure how much productive employees are

Source: BSE India, Company Website

production but they do not account in number of employees. In India most of companies give standalone number of employees. It is most challenging to obtain the data of actual number of employees who are in production, non-production and casual labourers. (Applicable to cement/steel / any commodity)

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Study material on Company Analysis 7.4 Steel In steel industry, the analyst/intern should analyse the following ratios: i) ii) iii) iv) v) vi) vii) Capacity utilisation CPLY Realization per tonne CPLY Energy cost per tonne CPLY PBDIT per tonne CPLY Employee per tonne CPLY Blast furnace productivity and coke rate Energy consumption

Points i) to v) have already been explained in the cement sector. The same is applicable to this sector.
vi) Blast furnace productivity and coke rate: This is measured in terms of tonnes of hot metal produced per cubic meter of blast furnace volume, per day (T/cubic met/day). The Blast furnace operation demands the highest quality of raw materials, operation, and operators. Coke is the most important raw material fed into the blast furnace in terms of its effect on blast furnace operation and hot metal quality. A high quality coke should be able to support a smooth descent of the blast furnace burden with as little degradation as possible while providing the lowest amount of impurities, highest thermal energy and highest metal reduction, for the flow of gaseous and molten products. Introduction of
Kcal/Tcs 8.4 8.2 8 7.8 7.6 7.4 7.2 7 AMJ08
Source: BSE India, Company Website
kg/THM 606 604 602 600 598 596 594 592 590 AMJ08 AMJ09

Coke rate

Trend of blast furnace productivity

high quality coke to a blast furnace will result in lower coke rate, higher productivity and lower hot metal cost. The coke rate measures in kgs of BF Coke consumed per tonne of Hot Metal produced in the Blast Furnace (Kg/Ton Hot metal).

AMJ09

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Study material on Company Analysis vii) Energy consumption: The energy consumption for steel plant is measured in Gcal/TCS (Giga calorie per tonne of crude steel). This is measured in Giga Calorie (i.e. 1000 million calorie) per tonne of Crude Steel produced (Gcal/TCS). The lesser Giga/TCS is lesser energy consumption, lower cost and higher margins. The higher energy consumption increases the steel production cost. 7.5 Retail In retail, there are three following metrics: i) Revenue per sq ft iii) Conversion ratio i) Revenue per sq ft: In retail industry revenue per sq ft is one of the most important operating metrics. For retail companies, if the revenue per sq ft shows the increasing trend, the company will get more revenues. The revenue per
Net Sales per sq.ft( in mn)

Net Sales per sq.ft
2500 2000 1500 1000 500 0 JAS07 OND07 JFM08 AMJ08 JAS08 OND08 Net Sales per sq.ft
Source: BSE India, Company Website

ii) Number of foot-falls

sq ft will rise during festival seasons, new product launches, reopen of schools and colleges, marriage seasons, unique offering or on auspicious days. In order to measure it, the analyst/intern shall take net sales and divided by area in sq ft. ii) Number of foot-falls: In retail industry in order to get higher revenue per sq ft, it is important to have more number of foot falls. There are some factors like events or discount or stock clearance sales though footfall increases but there will not be any rise in revenue per sq ft. It also gives an understanding that there is a strong
Source: annual reports

Customer Entry
Customer Entry( in mn) 200 150 100 50 0 2005-06 2006-07 Customer Entry 2007-08

growth in window-shopping, but there will not be corresponding growth in the revenues. If the foot falls rise on continuous basis then the mall is able attract and retain more consumers. iii) Conversion ratio: The most challenging task of any retail company is convert number of footfalls into actual customer. The conversion is possible through better marketing, new offers, new products,

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Study material on Company Analysis and innovative ways to attract customers like giving prizes and conducting games. The company strategy should be how to convert the number of footfalls into sales. Number of footfalls will give probable customers it is up to the company what strategy it uses to convert probable customers into actual customers. 7.6 Telecom
350 ARPU & ARPU Growth
ARPU Growth

In the telecom industry, there are the following
Per Sub.

300 250 200 150 100 50 0
JAS07 AMJ07 JFM08 OND07 AMJ08 JAS08 OND08

metrics, which has to be analysed: i) ii) iii) iv) i) Average revenue per user Average revenue per minute Minutes of Usage Subscribers base Average Revenue Per User/subscriber (ARPU): In the telecom industry, the most

0.04 0.02 0 -0.02 -0.04 % -0.06 -0.08 -0.1 -0.12

Source: BSE India, Company Website

important indicator is revenue per user. Under the normal conditions, it will show the falling trend with falling tariffs and falling mobile handset prices. If ARPU shows the negative growth rate, the company will not make any change in tariffs but the company is able to attract more subscribers. In order to calculate ARPU, the analyst/intern shall take net revenue from

Formula of ARPU Net Revenue (Rs mn) No of subscribers (mn)

telecom business of the company and divided by number of subscribers. The trend of metric has to be observed on quarterly basis. ARPU is a measurement used primarily by customer communications and networking companies and it is the total revenue divided by the number of subscribers. ARPU measures the amount of revenue brought in by a single subscriber per month. Measuring revenues of per customer, or per unit basis products are generating revenues. ARPU is also very useful when it can be compared to other user-specific metrics. ii) Average revenue per minute: Measure of the overall level of revenue achieved by an operator for each minute carried on its network.
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Per Sub. 450 400 350 300 250 200 150 100 50 0 JAS07 MOU & MOU Growth 25 20 15 10 % 5 0 -5 -10 OND08

can help to explain how good specific

AMJ08

OND07

MOU

JFM08

GROWTH(RHS)

Source: BSE India, Company Website

JAS08

34

Study material on Company Analysis iii) Minutes of usage: A metric used to compute billing and/or statistics for telephone calls or other network use. It measures network. iv) Subscriber base: The main indicator for telecom industry is the subscriber base. This indicator measures the market share of the company and level of competition. Subscriber base depends upon the scheme offers and tariffs, which the company charges from its subscribers. 7.7. Hospitality In the hotel industry, the following metrics are used: i) Occupancy rate ii) Average room rate iii) RevPAR Occupancy rate- Room’s occupied / Total number of rooms efficient utilisation of its
40 35 30 25 20 15 10 5 0
Subscriber Base &Subscriber Base Growth

18 17 16 15 14 % 13 12 11 10

P er S ub.

JAS07

OND07

AMJ08

JAS08

JFM08

Subscriber Base Growth (RHS) Source: BSE India, Company Website

i) Occupancy rate: Occupancy rate indicates that percentage of rooms occupied in the total rooms available in a hotel. The metric will also give the understanding that the percentage of tourists or travellers attracted by the hotels. It will give another indicator that how much effort company is putting in marketing its brand. ii) Average Room Rent (ARR): It implies the company’s charges for letting out the room. ARR fluctuates from season to season and one city to another city. Since, hotel business is linked to travel and tourism, international/domestic tourist arrivals are higher in second half due to Christmas and other festivals. Domestic travel will be very high in quarter-ended April-May-June due to summer vacations. Further, the inflows of travel will be different during different seasons, so, ARR fluctuates during the quarters. Apart from tourist travellers, business travellers who come for business purpose and people come to participate in events need accomodation. iii) Revenue Per Available Room (RevPAR): It indicates the average room, which is calculated by multiplying a hotel's average daily room rate (ADR) by its occupancy rate. It may also be calculated by dividing a hotel's total guestroom revenue by the room count and the number of days in the period being measured. RevPAR does
© Cygnus Business Consulting & Research Pvt Ltd. 2009

ARR- Income from letting out rooms / Total number of rooms

RevPAR- ADR * occupancy rate

OND08

35

Study material on Company Analysis not take into account of revenue from other hotel services, such as restaurants, spas, golf courses, marinas, casinos, etc. 7.8. Construction i. Order book position last 6 quarters – In the construction industry, revenue depends upon number of orders to be executed in the quarter or year. If the order book position becomes higher then it is easier for the company to sustain in terms of revenue. The order book position depends upon the company’s capacity and expertise to execute projects in deadline and projected cost. The factor that influences the order book position are capacity expansion in manufacturing industries, government thrust to complete infrastructure projects just before the general elections and company’s capacity to execute. ii. Order book inflow last 6 quarters: Order book inflow is nothing but the difference between order book positions of two different periods. It shows the incremental order received by the company. Normally the order inflow will be very high in 3rd and 4th quarters as there will be less of rains and construction activity will be in full swing. iii. Sales to order book position last 6 quarters: Sales to order book position ratio will give an understanding the ability of the company’s pending orders to convert it into revenue. In construction, the revenue model follow ‘S’ curve as in the initial stages, when the project starts, the construction company will get less amount but gradually when the project is nearing to completion, it receives the full amount. 7.9. ITSS i. Business per employee last 6

quarters: In ITSS, the analyst/intern should measure employee productivity through business per employee. In this industry, the number of employees has direct correlation with business. If business per employee increases on QoQ basis, the same number of employees are able to generate more business. It also gives one more
Source: HCL

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Study material on Company Analysis understanding that employees are more productive. If business per employee increases on QoQ basis, but the number of employee rate falls, it implies that unproductive employees have been laid off. Style and Font Size of Sub head – Garamond 11 bold Style and Font Size of content – Garamond 11 Data source - For data of the companies, please refer to BSE India, investor presentation, press release or company website. Starting sentences – During the quarter ended June/September/December/March 2009 has witnessed dip/rise in business per employee on YoY/QoQ basis. This is due to the fact that ……………….. ii. Profit per employee last 6 quarters: It is very important to measure the value addition of each employee which is adding to the entire company. In Profit per employee - Net Profit / Number of employees Business per employee Total income from software/ Total number of employees

profit per employee, the analyst/intern should be able to measure the overall profit from all the employees in the departments. In case, profit per employees is increasing from the previous quarters, it indicates that the employees are more productive. Employees are able to generate more value by keeping least cost and increase the business per employee. In case business per employee is decreasing but profit per employee is rising, it means company has gone for cost cutting or strong rise in other income due to foreign exchange profits or company has huge tax refunds. Style and Font Size of Sub head – Garamond 11 bold Style and Font Size of content – Garamond 11 Data source - For data of companies, please refer to BSE India, investor presentation, press release or company website. Starting sentences – During the
Rs 400000 350000 300000 250000 200000 150000 100000 50000 0

Segmental analysis of TC S

June/September/December/March 2009 has witnessed dip/rise in profit per employee on YoY/QoQ basis. This iii. is due to the fact that ……………….. Vertical wise revenue in last QoQ: IT companies cater to IT requirements of different industries called verticals.

Hi-tech Life Sciences & Healthcare Travel & Hospitality

Telecom Retail & Distribution Manufacturing

BFSI

LHS:Reveuve for quarter Ended June 09

Source: TCS

© Cygnus Business Consulting & Research Pvt Ltd. 2009

Energy & Utilities Media&Entertainm ent Others

RHS:Growth rate%

%

quarter

ended

20 15 10 5 0 5 10 15

37

Study material on Company Analysis In software, major verticals are BFSI, Retail, Manufacturing, Logistics, Healthcare, Telecom and others. For Indian IT companies, BFSI is major vertical but due to the current slowdown in global economy, it is witnessing a slowdown. The analyst/intern has to measure the QoQ growth and YoY growth of each vertical stating the reasons for growth. Style and Font Size of Sub head – Garamond 11 bold Style and Font Size of content – Garamond 11 Data source - For data of company’s please refer to BSE India, investor presentation, press release or company website. Starting sentences – BFSI/Telecom/Media/Manufacturing/Retail witnessed growth/dip during the quarter ended June/September/December/March 2009 on YoY/QoQ basis. This is due to the fact that ……………….. iv. Offshore and Onshore revenue last 6 quarters: IT companies have facilities in offshore and on-shore. Most of the time, the company does work on on-shore or off-shore at client site. India's offshore outsourcing business has been affected this year by the economic downturn, as its
Source: BSE

customers in key markets like the US have deferred decisions on new projects. US customers are attempting to bring down prices, and some of them are introducing benefit sharing programs that will typically reduce the outsourcer's revenue from a contract. Also as outsourcers do more of the work offshore in India than on-shore at client sites, revenue from that work will fall.
Rs in cr 4000 3500 3000 2500 2000 1500 1000 500 0 Development Engineering & Enterprise Consulting Business Application Solutions Industrial Process Global S EG M ENT W IS E REV ENUE

Q u a r te r e n d e d Ma r 0 9

Q u a r te r e n d e d Ju n e 0 9

Source:TCS

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Study material on Company Analysis v. Segment wise revenue QoQ and YoY - IT companies offers different IT services like application development, ERP, Consulting, data integration to its customers. India is known for cheap cost of application development. The segment will give analysis which services have major growth. vi. Geography wise revenue QoQ and YoY - As most of IT Companies are doing outsourcing business it is also better to look for revenue generation from geography point of view too. Since US and Europe account for 60% of overall IT exports from India it is better to analyze under geography wise revenue stream. The analysis will also give clear understanding about exposure of company to different currencies. vii. Client’s concentration on QoQ and YoY- In IT industry, major part of business comes from bigger clients and it is economical to depend upon bigger clients rather than smaller clients. The more the number of bigger clients, much diversified would be the business model and therefore lesser risk. The intern/analyst need to analyse whether the company has economies of scale in getting more business from existing clients or getting more business from new clients. It is more risk for a company incase it depends upon one client. Contracts - The Indian software industry uses two different models for revenue recognition. The first is the Time and Material (T&M) Contracts model in which customer are billed on the basis of hours worked by the employees of supplier software companies. Hourly rates are agreed on by both parties and are applied to the total hours worked to arrive at the revenue that is to be recognised. The second is the Fixed Price Project Model (FPP), in which the total contract price is agreed by both the parties. Billing may be done either at the end or over the period of the contract on the basis of the agreed milestone for billing. 7.10 Aviation i) ii) Aircraft utilisation - Represents the average number of block hours operated per day per aircraft for the total aircraft fleet. Available Seat Kilometers, or ASKM - Represents the aircraft seating capacity multiplied by the number of kilometres the seats are flown.
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Source: HCL

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Study material on Company Analysis iii) iv) v) vi) vii) viii) ix) x) xi) 7.11. Power i) Forced outage – The shutdown of a generating unit, transmission line, or other facility for emergency reasons or a condition in which the generating equipment is Breakeven load factor - Represents the Passenger Load Factor that will result in Net Passenger Revenues being equal to Total Expenses less cargo and Non-operating Revenues. Cargo tonnage - The total cargo carried on an aircraft expressed in metric tonnes. Cost per ASKM - Represents total cost less cargo revenue net of commissions, excess baggage, other income and non-operating revenue including interest income, divided by the ASKMs. Flight Hours - Refers to the time elapsed from the moment the wheels of an aircraft leave the ground on a take-off until the wheels of an aircraft next touch the ground. Revenue Passenger Kilometers, or RPKM - Represents the number of kilometres flown by revenue passengers. Revenue passengers - Represents the total number of fare paying passengers flown on all flight segments (excludes passengers redeeming their frequent flyer miles). Revenue per ASKM - Net Passenger Revenue divided by ASKMs. Revenue per RPKM - Net Passenger Revenue divided by RPKMs. Yield - Passenger Revenue earned per kilometer flown.

Plant load factor formula Total MWh generated in period x 100 / Maximum Load (MWe) x period (hours)

unavailable for load due to unanticipated breakdown. Forced outage rates are used when calculating the overall reliability of an energy delivery system. The unplanned outage requires the plant to be taken out of service immediately or before the next planned outage. ii) Plant load factor YoY basis- Every unit that generates power has been given a load factor, which the unit has to maintain. Indirectly plant load factor measures the capacity utilisation of unit. Higher PLF and higher utilisation of unit indicates better efficiency. Generally gas based plant has higher PLF than coal based plant. It is because in gas-based plant nothing is left out compared to ash in coal-based plant.
%

Trend of Plant load factor
81 80 79 78 77 76 75 74 73 72 71 AMJ08 JAS08 OND08 JFM09 AMJ09

Source: BSE India, Company Website

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Study material on Company Analysis 7.12. Oil and Gas i. Gross refining margins last 6 quarters (Down stream) – In crude oil refining industry, gross refining margins (GRM)
US$/bbl

Trend of Gross Refining Margins
16 14 12 10 8 6 4 2 0 AMJ08 JAS08 OND08 JFM09 AMJ09

measures the difference sale price of crude products and purchase price of crude oil. GRM is difference between selling price of refined crude and purchase price of raw crude oil. The refining margin is thus the difference

Source: BSE India, Company Website

between the total value of petroleum products produced by the oil refinery and the price of the input i.e. crude oil. GRM is measured in US$ per barrel and India has highest GRM due to fourth largest refining capacity in the world. GRM will give an understanding how much money is left out to meet the expenses of the company. It is applicable for downstream companies in oil and gas industry. GRMs (in US$ per barrel) can be defined as the difference between the costs of raw material (majorly crude) and weighted average prices of petroleum products. Given the fact that GRMs of the refining business depends on the weighted average prices of petroleum products, there is a need to understand the pricing mechanism of the petroleum products followed by the Indian refineries. Assume that a refinery processed 1 barrel of crude and derives output in the form of 28 gallon of diesel and 14 gallons of other products (say petrol and heating oil). Assuming the crude prices are US$65 and price of diesel (Refinery gate prices) are US$ 2.0/gallon, while the weighted average prices of other products are US$1.4/gallon. Then the GRMs are = (28* 2.0 + 1.4*14) - 65 US$10.6 per barrel ii. Reserve/production ratio in last 3 years (Upstream) – In order to measure the life of upstream company it is better to measure the production/reserve ratio. The ratio will help in analysing the life of a company in years. If ratio shows down trend then it is due to non-addition of new reserves in the company. As reserves are depleted there is more oil being
1.65 1.6 1.55 1.5 1.45 1.4 1.35 1.3 2006-07 2007-08 2008-09

Reserve / Production ratio

Source: BSE India, Company Website

extracted, this ratio is called as depletion ratio. The upstream company on one hand shall have higher extraction and on the other hand, shall have longer life. The upstream shall be able to manage both production and adding new reserves. This will ensure not only efficiency but also better future of the
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Study material on Company Analysis company. The ratio will give an understanding of how much oil is being produced from existing reserves. In case there is more production it means there is higher demand. This ratio is used by companies and government agencies in forecasting the future availability of a resource to determine project life, future income, employment, etc, and to determine whether more exploration must be undertaken to ensure continued supply of the resource. Annual production of a resource can usually be calculated to quite an accurate number. However, reserve quantities can only be estimated to varying degrees of accuracy, depending on the availability of
R atio

Formula for Reserve Production ratio Amount of known resource) / (Amount used per year)

Reserve Replacement Ratio
2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4

information and the methods used to evaluate them. iii. Reserve replacement ratio in last 3 years (Upstream) - One measure of oil company performance is the "reserves replacement

0.2 0 2006-07 2007-08 2008-09

Source: BSE India, Company Website

ratio" (RRR), the ratio of new reserves to oil produced, which ideally should be greater than 1. Reserve replacement is calculated by summing the total reserves added over a five-year period. The ratio is calculated by dividing replacement by production over the same period. Proved reserves replacement ratio is a performance measure that is calculated using proved oil-equivalent reserves additions divided by oil-equivalent production. Both proved reserves additions and production include amounts applicable to equity companies. 7.13. Pharma
12

Dr Reddy R&D Expenses as % of Sales

i.

R&D Expenditure as % of sales – In pharma industry sustenance of revenue companies on research and development to develop new drugs. This amount on R&D as % of sales indicates the amount of new drugs being developed. The companies that operate in formulation generally spend
%

11 10 9 8 7 6 JFM08 AMJ08 JAS08 OND08 JFM09 AMJ09

depends upon the amount spend by the

Source: BSE India, Company Website

more when compared to bulk drugs and generics segments. Hence, in India most of the pharma companies are in bulk drugs and generics that spend less in R&D activities.
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Study material on Company Analysis ii. Drugs in pipeline – Generally to develop drugs or formulation, it takes 12-13 years. Companies develop multiple drugs that can be launched once approval is received from regulatory authorities. In case of generics, company will be sole producer of drug for 180 days and in case of formulation, company will be sole producer till expiry of patent rights. iii. Drugs waiting for approval from USFDA – The companies need approval from US Food and Drug Administration to launch drugs. FDA gives approval for not only drugs but also for plants. The process is lengthy and lot of regulatory parameters has to be met to get approval. Higher number of drugs waiting for approval means higher expected revenue in future. iv. Number of filings ANDA/DMF – Abbreviated New Drug Approval (ANDA) is an application for the US drug approval for an existing licensed medication. An applicant may manufacture and market the generic drug product to provide a safe, effective, low cost alternative to the American public. A Drug Master File (DMF) is a submission to the Food and Drug Administration (FDA) that may be used to provide confidential detailed information about facilities, processes, or articles used in the manufacturing, processing, packaging, and storing of one or more human drugs. 7.14. Health care i. Revenue per bed – The efficiency of a hospital can be analysed by its revenue per bed. The major factor that influences revenue per bed is length of stay in the hospital. The average length of stay has a significant impact on the profitability of a hospital since a major portion of revenues are generated in the first few days of admission and therefore decreasing the average length of stay can help increase the turnover per bed and also the revenue per occupied bed per day. ii. Occupancy rate – Hospitals, like hotels, have perishable inventory and optimising its utilisation would be the most important measure to increase profitability. The hospital business is extremely capital intensive and involves long gestation periods. Hospitals Occupancy rate – Beds occupied /No. of beds available Revenue per bed – Total revenue /Total number of beds

have traditionally relied on "word-of-mouth" publicity and have grown as a doctor driven practice rather than service orientation with brand identity for the corporate. 7.15. Shipping i. Bunker cost – Bunker fuel is used as fuel oil in ships. The price fluctuation in bunker has an impact on the profitability of shipping companies. The lower the bunker price, the higher would be the profits of shipping company. Bunker price is residue from refining crude so the price of crude and
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Study material on Company Analysis bunker are positively correlated. If the oil price increases, the bunker cost and baltic index also increases. ii. Revenue per ship/Vessel – To analyse a shipping company with a fleet of ships, a better indicator would be measuring revenue per ship. Basically the ship owner has 3 types of revenue like voyage charter, time charter and bare boat charter. Indian shipping companies which are engaged in transportation of heavy bulk commodities and tankers. It is better to analyze the extent ships are utilised to generate the revenue. iii. Revenue per tonne – The capacity of the ships which are utilised can be measured by the metric revenue per tonne. To calculate the ratio analyst/intern shall take gross registered tonne and not DWT (Dead Weight Tonne) as DWT includes weight of entire ship. The revenue ships gain depends upon 2 factors––by maximising utilisation of capacity and charges. iv. DWT – It measures the weight that a ship can carry safely or is carrying. It is the sum of the weights of cargo, fuel, fresh water, ballast water, provisions, passengers and crew. The term is often used to specify a ship's maximum permissible deadweight when the ship is fully loaded. Revenue per ship – Overall revenue /total no of ships

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Study material on Company Analysis 7.16. Roadways i. Revenue per vehicle – To analyse a roadway company with a fleet of vehicles, a better indicator would be measuring revenue per vehicle. Indian roadways companies which are engaged in transportation of agriculture commodities, heavy bulk commodities, oil tankers and chemical tankers. It is better to analyse the extent vehicles are utilised to generate the revenue. The Roadway Company’s efficiency can be assessed by using the fleet and in case vehicles are kept empty then the revenue per vehicle will fall. Hence it becomes necessary for the company to see that it has higher revenue per vehicle by utilising the assets to its maximum. There are two factors that affect revenue per vehicle–– one is carrying capacity and other is freight charges. In India vehicles cannot be overloaded, so revenues can be enhanced through increasing rentals, using of hub and spoke model and no idling of trucks. Judgement of Supreme Court on overloading of trucks In a significant judgement on November 9, 2005, the Supreme Court has quashed the issuance of Gold Card/Tokens by the State Governments permitting overloading of trucks in excess of prescribed weight limit. The Court has mandated that the trucks found on roads carrying illegal excess load will have to offload the cargo crossing the legal weight limit. This judgement is expected to have multiple impact on various stakeholders in the trucking and automobile industry.

ii.

Revenue per km per vehicle – In roadways, revenue per km per vehicle is very important metric for measuring the efficiency. The metric depends upon the distance covered and tariff charged on the vehicle for transportation. In case vehicle runs empty then revenue per km per vehicle will come down which will affect the top-line of the company.

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Study material on Company Analysis

8. Financial Performance
In financial performance, analyst/intern needs to analyse the following: 8.1. Net Profit Growth: It is calculated by the formula given below: (Net profit of current quarter or year – Net profit of previous quarter or year)/Net profit of previous quarter or year multiplied by 100 The net profit growth, on YoY basis or QoQ basis, when compared with sales growth or operating profit growth analyst/intern can conclude that growth in net profit was higher due to following reasons • • • • • • • Prudent financial management policies Better operational efficiency High operating profit sales
Rs m n 300

PAT and PAT growth rate

6

250

5

200

4

Better asset utilisation Better tax planning Corporate debt restructuring scheme High growth in other income

100

%

growth

150

3

2

50

1

0 OND06 JFM07 AMJ07
OND08(LHS)

0 JAS07
NPM (RHS)

OND07

JFM08

The growth is applicable to all

Source: BSE India, Company Website

industries and can be used for comparing two companies in the same industry. Net profit margin is an important financial indicator but has limitations due to inclusion of other income. Period – last 6 quarters YoY or QoQ Chart – Column and line chart Style and Font Size – Garamond 11 Format – One single paragraph along with sub head 8.2 Debt to equity ratio The analysis of long-term debt to equity ratio will give the inference of leverage of company. The share holders will be always be happier i presence of debt holder because of tax shield. Indian companies have a D/E ratio of 2:1. The presence of debt in the capital structure reveals cost of capital also. In India there

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Study material on Company Analysis are companies without debt like Infosys but in the companies like Pantaloons, Shopper Stop and Vishal, debt is more than net worth. Period – last 3 years Chart –Line chart Style and Font Size – Garamond 11 Format –One single paragraph along with sub head 8.3 Return on Capital Employed (ROCE): ROCE is calculated as Earning Before Interest and Tax (EBIT) to Capital Employed (Total Shareholders fund plus Long Term Debt). The ratio measures the efficiency and profitability of the capital investment. ROCE should always be higher than the company’s borrowing rate otherwise it reduces the shareholder’s earnings. Period – last 3 years Chart –Line chart Style and Font Size – Garamond 11 Format – One single paragraph along with sub head. 8.4. Return of Equity It is the amount a of net
% 25.5 25 24.5 24 23.5 23 22.5 22 21.5 21 20.5 2006-07 2007-08 2008-09

1.4 1.2 1 0.8 0.6 0.4 0.2 0 2005‐06

Trend of D/E ratio

2006‐07

2007‐08

Source: BSE India, Company Website

33.5 33 32.5 32 31.5 31 30 29.5 29 28.5 2005‐06 % 30.5

Trend of ROCE

2006‐07

2007‐08

Source: BSE India, Company Website
Trend of ROE

income returned as

percentage of

shareholders equity. Return on equity measures the profitability, a company generates with the money invested by the

Source: BSE India, Company Website

shareholders. A higher ROE indicates the efficiency of a company in using its equity.
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Study material on Company Analysis 8.5. Cash flow analysis Cash flow is determined by three components: core operations, investing and financing. The analyst/interns need to analyse the component which is generating maximum cash to company. Measuring the cash inflows and outflows caused by core business operations, the operations component of cash flow reflects cash generated from a company's products or services. Changes in equipment, assets or investments relate to cash from investments. Usually cash changes from investing are a "cash out" item, because cash is used to buy new equipment, buildings or short-term assets such as marketable securities. However, when a company divests of an asset, the transaction is considered "cash in" for calculating cash from investments. Changes in cash from financing are "cash in" when capital is raised, and "cash out" when dividends are paid. Thus, if a company issues a bond to the public, the company receives cash financing; however, when interest is paid to bondholders, the company is reducing its cash.

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Study material on Company Analysis

9. Capital market Performance
In capital market performance,
120 100 80 60 40 20 0 16-May 24 APR 1 APR S to c k S ensex 17-Oct 9-Jun 24-Sep 19-Jan 11-Aug 10-Feb 30 JUN 10-Nov 26 Dec 27-Mar 21 JUl 2 Sep 3 Dec 4-Mar

analyst/intern has to compare share price of company in BSE/NSE with BSE Sensex/Nifty/Industry index. They need to construct relative market performance for share price and Sensex/Nifty/Industry index. While consider constructing both relative prices market should and

Re la tiv e S to c k M a rke t Pe rfo rm a n c e

performance,

analyst/intern share

Source: BSE India, Cygnus Research

Sensex/Nifty/Industry index as 100. In second step, they should find out the return from first day share price Sensex/Nifty/Industry index and add 100. Then the analyst/intern shall make the first observation as constant and finds out the return of each day compared to the first day. They need to take share price and Sensex/Nifty/Industry index together and plot a line chart. The analyst/intern has to analyse the reasons for deviations between the movement of share price and Sensex/Nifty/Industry index. In case, movement of share price and Sensex/Nifty/Industry index move in same direction then both are positively correlated. The reasons for difference between share price and Sensex/Nifty/Industry index could be: • • • • • • • • Corporate results Increasing capacity Launching new product New markets Regulations Technology Capacity utilisation Reduction in cost

Period – Daily share prices and Sensex/Nifty/Industry index Chart – line chart Style and Font Size – Garamond 11 Format – One single paragraph along with sub head

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Study material on Company Analysis Applicability of industry index – Oil and gas, Steel (Metals), Pharma (HC), Healthcare, ITSS (Tech), Telecom, Consumer durables, Power and Realty.

10. Recent Strategies
Strategies has very important role to play as it gearing up to face the competition in industry in the future. In recent strategies, analyst/intern shall discuss growth drivers and value drivers. Growth drivers are the factors that affect the top-line whereas value drivers affect the bottom-line. Some of the growth drivers are – • • • • • • • • Increasing capacity (All commodities and manufacturing) Launching new product (Automobiles, FMCG, Pharma, Textiles)/service (Banking, Insurance, ITSS, Telecom) New markets (Pharma, ITSS, Telecom) Increasing the price/realization (all commodities) Increase in number of branches/ATM (banking) Subscribers (telecom) Order book (Construction) FDA approvals New ANDA filing, R&D expenses – Pharma

Value drivers – The steps taken by companies to reduce the cost, either operational or administration, enhance efficiency are value drivers. They are: • • • • • • • • • • • Capacity utilisation – leveraging assets to the best (All mfg) Reduction travel cost, printing cost, marketing and administrative expenses (ITSS, banks) Reduction in staff cost/layoff – Only fixed component no variable salary Production in SEZ or tax free zones – automobiles Better investment opportunities apart from core business Change in depreciation methodology, inventory valuation and asset revaluation Taking positions or hedging in commodity/currency markets for raw materials and foreign currency Cheaper raw materials – Cement (Fly ash , slag) Deploying captive power plants – Cement/Steel/Textiles/Chemicals Change in Technology CRAMS/CTO/CRO – Pharma

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Study material on Company Analysis Each of the strategy has to be separately discussed Style and Font Size – Garamond 11 Format – Every point shall have small paragraph along with sub head

11. Outlook
In outlook, analyst/intern should analyse forward-looking statements, which have major impact on company’s future top-line, operating margins and bottom-line. The analyst/intern need to look for the following points: • • • Economy Scenario – Expected growth in economy, future direction/trend of indicators/triggers that affects company. Industry Scenario – Expected change in industry in terms of demand and supply, regulations, competition, prices, new products and technology. Company – The points covered above affects the growth in top-line, direction/trend of operating margins and impact on bottom-line of the company. Style and Font Size – Garamond 11 Format – Each point shall be discussed in separate paragraphs along with sub head.

12. Approach to Segmental analysis
In the wake of globalisation, today most of companies across the world are not only focusing in single/domestic market but also in other/international markets. When company has some of its revenue arising out from other segments/geography it becomes mandatory for company to disclose the same to shareholders. According to Cygnus, there are four types of companies, from disclosure point of view. 1. Single Business(Segment), Single location (Geography) 2. Single Business(Segment), Multiple location (Geography) 3. Multiple Business (Segment), Single location (Geography) 4. Multiple Business (Segment), Multiple location (Geography)

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Study material on Company Analysis 1. Single Business (Segment), Single location (Geography) The analyst/intern should carry out analysis limiting to respective business or geography. The analyst/intern should understand the business model, operating metrics and others that have already been covered. 2. Multiple Business (Segment), Single location (Geography) In the second category, analyst/intern should prepare the following table for better understanding: Analysis of Segment Division 1 Sales YoY Growth QoQ Growth % Share of Sales PBIT YoY Growth QoQ Growth % Share of PBIT Margin Capital employed YoY Growth % Share of Capital employed ROCE XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Division 2 XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Division 3 XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Division 4 XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Total XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX

In any disclosures made by company whether it is segment or geography, there are three metrics; they are segment revenue (sales), segment results (PBIT) and Capital employed. While analysing sales analyst/intern should look into YoY growth for Non IT/Telecom/biotech and QoQ growth for IT/Telecom/biotech. Apart from growth, analyst/intern should find out the contribution of each

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Study material on Company Analysis segment to sales of company. The analyst/intern should go beyond the numbers to analyse the reasons for fluctuation of numbers. While analysing PBIT (Segment results), analyst/intern needs to look at YoY growth for Non IT/Telecom/biotech and QoQ growth for IT/Telecom/biotech. Apart from growth, analyst/intern should find out the contribution of each segment and operating margin to overall PBIT of company. It is not compulsory that the geography/region that contributing highest in PBIT and growth have highest margin. This would help analyst/intern to know the geography/region, which is a major source of income. The analyst/intern should go beyond the numbers to analyse the reasons for fluctuation in numbers. While analysing capital employed, analyst/intern should look at YoY growth for Non IT/Telecom/biotech and QoQ growth for IT/Telecom/biotech. Apart from growth, analyst/intern should find out the contribution of each segment to overall capital employed of company. The analyst/intern should go beyond the numbers to analyse the reasons for fluctuation in numbers. For eg: In Grasim industries, there are five business segments like Cement, Textiles, Chemicals, Sponge iron and Viscose stable fibre. In Kesoram industries there are 3 business segments tyres, cement, chemicals and rayon. In most of the banking companies 3 major segments are interest income, treasury and others; and in some of the private sector banks wholesale, retail and others. In telecom companies segments are on the basis of technology like GSM and CDMA and on the basis of post or pre-paid connection. In IT companies there are different segments like from geography point of view(Americas, Europe, Asia Pac), verticals point of view (BFSI, Healthcare, Telecom, Retail, manufacturing), services wise (application development, ERP, data support, consulting and BPO), contracts (Time and Material and Fixed Price Project Model) and business from clients (existing and new). 3. Single Business (Segment), multiple locations (Geography) Analysis of Geography/region Asia Americas Sales YoY Growth QoQ Growth XXX XXX XXX Europe XXX XXX XXX MEA XXX XXX XXX Pacific XXX XXX XXX Total XXX XXX XXX

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Study material on Company Analysis Analysis of Geography/region Asia Americas % Share of Sales PBIT YoY Growth QoQ Growth % Share of PBIT Margin Capital employed YoY Growth % Share of Capital employed ROCE XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Europe XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX MEA XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Pacific XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Total XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX

While analysing sales, analyst/intern needs to look at YoY growth for Non IT/Telecom/biotech and QoQ growth for IT/Telecom/biotech. Apart from growth, they should find out the contribution of each geography/region to sales of the company. It is not compulsory that the geography/region contributing highest sales have the highest growth. The analyst/intern should go beyond the numbers to analyse the reasons for fluctuation in numbers. While analysing PBIT (Segment results), analyst/intern needs to look at YoY growth for Non IT/Telecom/biotech and QoQ growth for IT/Telecom/biotech. Apart from growth, analyst/intern should find out the contribution and operating margin of each geography/region to overall PBIT of company. It is not compulsory that the geography/region that contributing highest in PBIT and growth have highest margin. This would help analyst/intern to know the geography/region, which is a major source of income. The analyst/intern should go beyond the numbers to analyse the reasons for fluctuation in numbers.

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Study material on Company Analysis While analysing capital employed, analyst/intern should look at YoY growth for Non IT/Telecom/biotech and QoQ growth for IT/Telecom/biotech. Apart from growth analyst/intern should find the contribution of each segment to overall capital employed of company. The analyst/intern should go beyond the numbers to analyse the reasons for fluctuation of numbers. 4. Multiple Business (Segment), Multiple location (Geography) To analyse fourth category companies, analyst/intern should consider companies having multiple segments and locations. The two approaches under Multiple Business (Segment) and Multiple location (geography) category are: a. Geography/Region segment wise analysis

b. Segment wise Geography/Region analysis a) Geography/Region segment wise analysis – There is a need to look at segmental revenue of companies from region wise or geography wise. For eg: If a company has segments in 4 regions––Americas, Europe, Africa and Middle East and Asia Pacific. The analyst/intern should assess not only the business done in hardware and software but also the growth opportunities these regions. b) Segment wise Geography/Region analysis – There is a need to look at segmental revenue of companies from segment wise or division wise. For eg: If a company has 2 divisions in hardware and software. The analyst/intern should assess the business done in hardware and growth opportunities in these regions.

13. Abbreviations
Sl no 1 2 3 Abbreviations EBDITA/PBDITA OPM JFM* AMJ* Full form Earnings/Profit Before Depreciation, Interest and Amortization also called operating profit Operating Profit Margins January - February - March April - May - June

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Study material on Company Analysis JAS* OND* 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 IT YoY QoQ CRAMS CTO CRO SEZ ANDA FDA SLR BSE NSE SEBI NPA CPLY July - August - September October - November - December Information Technology Year on Year (YoY) eg: JAS09 VS JAS08 Quarter on Quarter (JAS09 VS AMJ09) Contract Research and Manufacturing Services Clinical Trials Outsourcing Contract Research Outsourcing Special Economic Zone Abbreviated New Drug Application Food and Drug Administration Act Statutory Liquidity Ratio Bombay Stock Exchange National Stock Exchange Securities Exchange Board of India Non Performing Assets Corresponding Period Last Year

* In India accounting year starts from April to March. When comparing the quarters of companies it becomes difficult as some companies follow accounting year and some follow calendar year. It leads to more confusion for readers/clients so it is better to use the initial letter of each month.

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Study material on Company Analysis

14. Ratio Analysis
A. LIQUIDITY RATIOS - Short Term Solvency
Ratio 1. Current Ratio Formula Current Liabilities Numerator + Cash & Bank + Denominator + Outstanding Expenses (for Significance/Indicator Ability to repay short-term commitments promptly. (Short-term Solvency) Ideal Ratio is 2:1. High Ratio indicates assets.

Current Assets/ Inventories + Debtors Sundry Creditors (for goods) Receivables/Accruals services) + Short terms Loans + Short Term Loans + Marketable Investments &Advances (Cr.) + Provision for taxation + Proposed or Unclaimed Dividend

+ Bank Overdraft/Cash Credit existence of idle current

2. Quick Ratio or Acid test ratio 3. Absolute Cash Ratio

Quick Assets/

Current Assets Less: Prepaid Expenses

Current Liabilities Less: Bank Overdraft Less: Cash Credit Sundry Creditors (for goods) + Outstanding Expenses (for services) + Short Term Loans & Advances (Cr.) + Bank Overdraft/Cash Credit + Provision for taxation + Proposed or Unclaimed Dividend

Ability

to

meet

Quick Liabilities Less: Inventories

immediate liabilities. Ideal Ratio is 1.33:1 Availability of cash to meet short-term commitments.

(Cash+ Marketable Securities)/ Current Liabilities

Cash in Hand + Balance at Bank (Dr.) + Marketable Securities & short term investments

4. Interval Measure Quick Assets/ Per Day

Current Assets Less: Prepaid Expenses

Total Cash Expenses/365 Cash Expenses = Total Expenses less Depreciation and write offs.

Ability to meet regular cash expenses.

Cash Expenses Less: Inventories

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Study material on Company Analysis B. CAPITAL STRUCTURE RATIOS - Indicator of Financing Techniques & long-term solvency
1. Equity to Total Funds Ratio Shareholder's Funds/ Equity Share Capital Total Long Term funds Indicates Long-Term Solvency; Total Funds +Preference Share employed in business = mode of financing; extent of own Capital + Reserves Debt+Equity. & Surplus Less: Accumulated Losses 2. Debt Equity Debt/Equity Ratio Long-Term Borrowed Funds, i.e. Debentures, Long-Term Loans from institutions 3. Capital Gearing Ratio Fixed Charge Bearing Preference Share Capital/Equity Shareholder's Funds Capital + Debentures Equity Share Capital +Preference Share Capital + Reserves & Surplus Less: Accumulated losses, if any Equity Share Capital + Reserves & Surplus Less: Accumulated Shows proportion of fixed charge (dividend or interest) bearing capital to equity funds; the extent of advantage or leverage enjoyed by equity shareholders. 4. Fixed Asset Fixed Assets/ to Long-Term Long-Term Funds Fund Ratio Net Fixed Assets i.e. Long-Term Funds = Gross Block Shareholder's funds (as in B2) _ 5. Proprietary Ratio (See Note below) Proprietary Funds/ Total Assets Equity Share Capital Net Fixed Assets Capital Less: Accumulated losses Note: Proprietary Funds for B-5 can be computed through two ways from the Balance Sheet: Liability Route: [Equity Share Capital + Preference Share Capital + Reserves & Surplus] Less: Accumulated losses Assets Route: [Net Fixed Assets + Net Working Capital] Less: Long Term Liabilities. (Only tangible assets will Shows proportion of fixed assets (long-term assets) financed by financing approach followed by the firm i.e. conservative, matching or aggressive; Ideal Ratio is less than one. Shows extent of owner's funds + Preference Share + Total Current Assets utilised in financing assets. +Reserves &Surplus be included.) Indicates the relationship between debt & equity; Ideal ratio is 2:1. funds used in operations.

+ Long-Term LoansLosses

Less: Depreciation funds (as in B1) + Debt long-term funds. Indicates the

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Study material on Company Analysis
C. COVERAGE RATIOS – ABILITY TO SERVE FIXED LIABILITIES Debt Service Ratio Earnings for Debt Coverage Service/ Net Profit after taxation Interest on Debt Add: Taxation Funds Add: Non-cash operating expenses(e.g. depreciation and amortizations) Add: Non-operating adjustments (e.g. loss on sale of fixed assets) 2. Interest Coverage Earnings before Ratio Interest & Tax/ Interest Earnings before Interest Interest on Debt Fund Indicates ability to meet and Taxes =Sales Less Variable and Fixed Costs (excluding interest) (or) EAT + Taxation + Interest 3. Preference Dividend Coverage Ratio D. TURNOVER/ACTIVITY/PERFORMANCE RATIOS 1. Capital Turnover Sales/ Ratio Capital Employed Sales net of returns See Note 1 below: Ability to generate sales per rupee of long-term investment. The higher the turnover ratio, the better it is. 2. Fixed Asset Turnover Ratio 3. Working Capital Turnover/ Turnover Ratio Net Working Capital Sales net of returns Current Assets Less Current Liabilities Ability to generate sales per rupee of Working Capital. Turnover/ Fixed Assets Sales net of returns Net Fixed Assets Ability to generate sales per rupee of Fixed Asset Earnings after Tax/ Earnings after Tax = Dividend on Preference Share Capital Preference Dividend EAT interest obligations of the current year. Should generally be greater than I. Indicates ability to pay dividend on preference share capital. Add: Instalment of Debt (principal repaid) Indicates extent of current earnings available for meeting commitments and outflow towards interest and instalment; Ideal ratio must be between 2 to 3 times.

(Interest + Instalment) Add: Interest on Debt

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Study material on Company Analysis
4. Finished Goods Cost of Goods Sold/ For Manufacturers: or Stock Turnover Average Stock Ratio Opening Stock Less: Closing Stock For Traders: Opening Stock + Purchases Less: Closing Stock 5. WIP Turnover Ratio 6. Raw Material Turnover Ratio 7. Debtors Turnover Ratio Factory Cost/ Average Stock of WIP Cost of Material Stock of RM Credit Sales/ Average Accounts Receivable /Consumed Average +Purchases Less: Closing Stock Credit Sales net of returns Accounts Receivable= Debtors +B/R Average Accounts Receivable = (Opening bal. + Closing bal.)/2 8. Creditors Turnover Ratio Credit Purchases/ Average Accounts Payable Credit Purchases net of Accounts Payable returns, if any =Creditors + B/P Average Accounts Payable = (Opening bal. + Closing bal )/2 Note 1: Assets Route: Net Fixed Assets - Net working Capital Liability Row: Equity Share Capital + Preference Share Capital + Reserves & Surplus + Debentures and Long Term Loans Less Accumulated Losses Less Non-Trade Investments Note 2: Turnover ratios can also be computed in terms of days as 365 / TO Ratio, e.g. No. of days average stock is held = 365 / Stock Turnover Ratio. Indicates velocity of debt payment. Stock)/2 Materials +Wages + (Opening WIP + Closing Indicates the WIP movement/production cycle. Opening Stock of RM (Opening Stock + Closing Indicates how fast raw materials are used in production. Indicates speed of collection of credit sales. Production Overheads WIP)/2 (Opening Stock + Closing Indicates how fast Stock)/2 (Maximum Stock + Minimum Stock)/ 2 inventory is used/sold. A high turnover ratio generally indicates fast moving material while low ratio may mean dead or excessive stock.

+ Cost of Production or

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Study material on Company Analysis
E. PROFITABILITY RATIOS BASED ON SALES 1. Gross Gross Profit Sales Gross Profit as per Trading Account 2.Operating profit Operating Profit/ ratio Sales Sales Less cost of sales Sales net of returns (or) Net Profit Add: Non-operating expenses Less: Nonoperating incomes 3. Net Profit Ratio Net Profit/ Sales 4.Contribution Sales Contribution/ Ratio Sales Sales Less Variable Costs Sales net of returns Net Profit Sales net of returns Indicator of overall profitability. Indicator profitability called PV Ratio) PROFITABILITY RATIOS – OWNER'S VIEW POINT 1. Return on Investment Capital Employed (ROCE) Total Earnings/ Total Capital Profits after taxes Add: Taxation Add: Interest Add: Non-trading expenses Less: Non-operating incomes like rents, interest and dividends Assets Route: Net Fixed Assets like patents, but not fictitious assets like not written off) +Net working capital Liability Route : Equity Share Capital + Preference Share Capital + Reserves R Surplus +Debentures and Long Term Loans Less: Accumulated Losses Less: Non-Trade Investments Overall profitability of the business for the capital return on the total capital employed. Comparison of interest of debt leads to financial leverage. If ROCE > Interest Rate, use of debt funds is justified. of in Indicator of Operating Performance of business. Sales net of returns Indicator of Basic Profitability Profit Ratio

Marginal Costing (also

(ROI) or Return on Employed

(including intangible assets employed; indicates the

miscellaneous expenditure ROCE with rate of

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Study material on Company Analysis
2. Return on Equity Earnings after Taxes/ Profit After Taxes ROE Net Worth Net Fixed Assets + Net Working Capital (long term) 3. Earnings Per Share EPS [PAT - Preference Dividend]/ Number of Equity Shares 4. Dividend Per Share DPS Dividends/ Number of Equity Shares (ROA) Average Total Assets Profits distributed to Equity Share Capital Equity Shareholders Face Value per share Amount of Profits distributed per share Net Income per rupee of Tangible Assets or Fixed average fixed assets. Assets, i.e. IA of Opening and Closing Balance Profit After Taxes Less: Preference Dividend Equity Share Capital Face Value per share Return or income per share, whether or not distributed as dividends. Profitability of Equity Funds invested in the

Less: External Liabilities business.

5. Return on Assets Net Profit after taxes/ Net Profit after taxes Average Total Assets or

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