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CHAPTER-I

INTRODUCTION

INTRODUCTION
The financial systems provided a summarized view of the
financial position and operation of the firm. The focus of financial analysis is
the process of identifying the financial strengths and weakness of firm the
properly establishing relationship between the items of the balance sheet
and profit and loss account.
Ratio analysis is a widely used to powerful tool financial
analysis. It is defined as the systematic use of ratio to interpret there
financial statements so that the strengths and weakness of the firm, its
historical performance and current condition can be determined. Ratio is
defined as the relationship between two or more figures. The accounting
figures reported in the financial statements do not provided meaningful
information unless it is related to some other relevant information.
To evaluate a firms financial condition and performance the
financial analyst need to perform checkups on various aspects of the firms
financial health. We calculate ratios to get a comparison and to make a
qualitative judgment about the firms financial performance.
The ratio analysis involves comparison for a useful interpretation
of the financial statements single ratio in itself does not indicate favorable or
the unfavorable conditions, it should not compared with some standards of
comparison,
Past ratio i.e. ratios of some selected firms, especially the most
progressive and successful competitor, at the same point in time. Industry
ratio i.e. ratios of the industry to which the firm belongs. Projected ratios i.e.
ratios developed using the projected, or Performa, financial statements of
the same firm.
The importance of ratio analysis lies in the fact that it presents
facts on a comparative basis and lays the drawing of inferences regarding

the performance of a firm. Ratio analysis is helpful in assessing the


performance of a firm.

The liquidity position firm would be explained with the help of ratio
analysis basing on conclusion of the ratio analysis a firm can side to have
ability to meet its short term liability ratios are particularly useful in credit
analysis by banks and other suppliers of short term loans.
Ratio analysis is equally useful for assessing the long term
financial validity of the firm. The long term solvency is measured by
leverage/ capital structure and profitability ratios, which focus on earning
power and operating efficiency. Ratio analysis reveals the strengths and
weakness of a firm in the aspect of sources of finance and adequate returns
to its owners consistent.
Ratio analysis is much helps financial forecasting and planning. It
acts as guide for future because it calculates number of years of work.
Meaningful conclusions can be drawn for future from these ratios.

THEROTICAL FRAME WORK


The traditional financial statements comprising the balance sheet and
the profit and loss account are proving the information related to the
financial operation of the firm.

They provide some extremely useful

information that mirrors the financial position on a particular date in terms


of the structure of assets, liabilities and owners equity and so on. The profit
and loss account shows the results of operations during a certain period of
time in terms of the revenues obtained and the cost incurred during the
year. Therefore, much can be learnt about a firm from a careful examination
of its financial statements. Users of financial statements can get further

insight about financial strengths and weaknesses of the firm if they properly
analyze information reported in these statements. Management should be
particularly interested in knowing financial weakness of the firm to take
suitable corrective actions. The future plans of the firm should be laid down
in view of the firms financial strengths and weaknesses.

Thus, financial

analysis is the starting point for making plans, before using any
sophisticated forecasting and planning procedures. Understanding the past
is a pre-requisite for anticipating the future.

Ration analysis is a widely used tool of financial analysis. It is used


to interpret the financial statements so that the strengths and weaknesses
of the firm as well as its historical performance and current financial
condition can be determined. A ratio is defined as the indicated quotient of
two mathematical expressions and as the the relationship between two or
more things.

It is a benchmark for evaluating the financial position and


performance of a firm.

The term ratio refers to the numerical or quantitative relationship


between two items/variables. This relationship can be expressed as:
1 Percentages, say, Net Profits are 25% of Sales (assuming Net Profit of
Rs25,000 and Sales of Rs.1,00,000),
2 Fraction (Net profit is 1/4th of Sales) and
3 Proportion of numbers (the relationship between Net profits and Sales
is 1:4).

These alternative methods of expressing items, which are related to


each other, are, for purpose of financial analysis, referred to as ratio
analysis. It should be noted that computing the ratios does not add any
information already inherent in the above figures of profits and sales. What
the ratios do is that they reveal the relationship in a more meaningful way
so as to enable us to draw conclusions from them. The rationale of ratio
analysis lies in the fact that it makes related information comparable.

single figure by itself has no meaning but when expressed in terms of a


related figure, it yields significant inferences. For instance, the fact that the
Net profits of a firm amount to, say Rs. Ten Lakhs throws no light on its
adequacy or otherwise. The figure of Net profit has to be considered in
relation to other variables.

How does it stand in relation to sales?

If,

therefore, Net profits are shown in terms of their relationship with items
such as Sales, Assets, Capital employed, Equity capital and so on,
meaningful conclusions can be drawn regarding their adequacy.
To carry the above example further, assuming the capital employed to be
Rs.50 lakh and Rs.100 lakh, the Net profit are 20% and 10% each
respectively. Ratio analysis, thus, as a quantitative tool, enables analysts to
draw quantitative answers to questions such as; are the Net profits
adequate? Are the assets being used efficiently? Is the firm solvent? Can
the firm meet its current obligations and so on?

Ratio Analysis - Importance:


As a tool of financial management, ratios are of crucial significance. The
importance of ratio analysis lies in the fact that presents facts on a
comparative basis and enables the drawing inference regarding the
performance of a firm.

Ratio analysis is relevant in assessing the

performance of a firm in respect to the following aspects.


1. Liquidity position
2. Long-term solvency
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3. Operational efficiency
4. Overall profitability
5. Inter-firm comparison, and
6. Trend analysis

1.

Liquidity position:With the help of ratio analysis conclusions can be drawn regarding the
liquidity position of a firm. The liquidity position of a firm would be
satisfactory if it is able to meet its current obligations when they
become due. A firm can be said to have the ability to meet its shortterm liabilities if it has sufficient liquid funds to pay the interest on its
short-maturing debt usually within a year as well as to repay the
principal. This ability is reflected in the liquidity ratio of a firm. The
liquidity ratios are particularly useful in credit analysis by banks and
other suppliers of short-term loans. Common liquidity ratios include
The Current ratio, Quick ratio and The operating Cash flow ratio.

2.

Long-term solvency:Ratio analysis is equally useful for assessing the long-term financial
viability of a firm. This aspect of the financial position of a borrower is
of concern to the long-term creditors, security analysts and the
present and potential owners of a business. The long-term solvency is
measured by the leverage/capital structure and profitability ratios,
which focus on earning power and operating efficiency. Ratio analysis
reveals the strength and weaknesses of a firm in this respect.

The

leverage ratios, for instance, will indicate whether a firm has a


reasonable proportion of various sources of finance or if it is heavily
loaded proportion of various sources of finance or if it is heavily
loaded with debt in which case its solvency is exposed to serious

strain. Similarly the various profitability ratios would reveal whether


or not the firm is able to offer adequate return to its consistent with
the risk involved. It includes Debt-equity ratio, Cash coverage ratio ,
The times interest earned ratio etc.

3. Operating Efficiency:Another dimension of the usefulness of the ratio analysis, relevant


from the view point of management, is that it throws light on the
degree of efficiency in the management and utilization of its assets.
The various activity ratios measure this kind of operational efficiency.

4.

Overall Profitability:Unlike the outside parties, which are interested in one aspect of
financial position of a firm, the management is constantly concerned
about the over-all profitability of the enterprise.

That is, they are

concerned about the ability of the firm to meet its short-term as well
as long-term obligations to its creditors, to ensure a reasonable return
to its owners and secure optimum utilization of the assets of the firm.
This is possible if an integrated view is taken and all the ratios are
considered together.

5.

Inter-firm Comparison:Ratio analysis not only throws light on the financial position of a firm
but also serves as a stepping stone to remedial measures.

This is

made possible due to inter-firm comparison and comparison with


industry averages. A single figure of a particular ratio is meaningless
unless it is related to some standard or norm.

One of the popular

techniques is to compare the ratios of a firm with the industry

average.

An inter-firm comparison would demonstrate the firms

position vis--vis its competitors.

6.

Trend Analysis:Ratio analysis enables a firm to take the time dimension into account.
In other words, whether the financial position of a firm is improving or
deteriorating over the years. This is made possible by the use of trend
analysis. The significance of a trend analysis of ratios lies in the fact
that the analysis can know the direction of movement, i.e., whether
the movement is favorable or unfavorable. For example, the ratio may
be low as compared to the norm but the trend may be upward. On
the other hand, though the present level may be satisfactory but the
trend may be a declining one.

Ratio Analysis-Limitations:
Ratio Analysis is a widely used tool of financial analysis.

Yet, it

suffers from various limitations. The operational implication of this is that


while using ratios, the conclusions should not be taken on their face value.
Some of the limitations, which characterize ratio analysis, are
i

Difficulty in comparison.

ii

Impact of Inflation, and

iii

Conceptual Diversity

i.

Difficulty in comparison:One serious limitation of ratio analysis arises out of the difficulty
associated with there comparability. One technique that is employed
is inter-firm comparison. But such comparison is vitiated by different
procedures adopted by various firms.

Differences in basis of inventory valuation (e.g.:-

last in first

out, average cost and cost);

Different depreciation methods (i.e. straight line Vs. written


down basis);

Estimated working life of assets, particularly of plant and


equipment;

Amortization

of

deferred

revenue

expenditure

such

as

preliminary expenditure and discount on issue of shares;

Capitalization of lease;

Treatment of extraordinary items of income and expenditure;


and so on.

Secondly, apart from different accounting procedures, companies may


have

different

accounting

procedures,

implying

differences

in

the

composition of assets, particularly current assets. For these reasons, the


ratios of two firms may not be strictly comparable.

ii.

Impact of Inflation:The second major limitation of the ratio analysis is associated with
price level changes.

This is a weakness of the traditional financial

statements, which are based on historical cost. An implication of this


feature of the financial statements as regards ratio analysis is that

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assets acquired at different periods are, in effect, shown at different


prices in the balance sheet, as they are not adjusted for changes in
the price level.

As a result, ratio analysis will not be strictly

comparable.

iii.

Conceptual Diversity: The factor that influences the usefulness of ratios is that there is
difference of opinion regarding the various concepts used to compute
the ratios. There is always room for diversity of opinion as to what
constitutes shareholder`s equity, debt, assets, profit and so on.

Finally, ratios are only a post-mortem analysis of what has


happened between two balance sheet dates.

For one thing the

position in the interim period is not revealed by ratio analysis.


Moreover, they give no clue about the future.

In brief, ratio analysis suffers from some serious limitations.


The analysis should not be carried away by its over simplified nature,
easy computation with high degree of precision. The reliability and
significance attached to ratios will largely depend upon the quality of
data on which they are based. They are as good as the data itself,
nevertheless, they are an important tool of financial analysis.

Ratio Analysis-Guidelines to use:


The calculation of ratios may not be a difficult task but their use is
not easy.

The information on which these are based, the constraints of

financial statements, objectives for using them, the caliber of the analyst,
etc, are important factors, which influence the use of ratios.

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Following guidelines/factors may be kept in mind in interpreting various


ratios.

The reliability of ratio is linked to the accuracy of information in


financial statements. Before calculating ratios one should see whether
proper concepts and conventions are used for preparing financial
statements of not.

The purpose of the user is also important for the analysis of ratios. A
creditor, a banker, an investor, a shareholder, all has different objects
for studying ratios.

The purpose (or) object for which ratios are

required to be studied should always be kept in mind for studying


various ratios.

Different objects may require the study of different

ratios.

Another precaution in ratio analysis is the proper selection of


appropriate ratios.

The ratios should match the purpose for which

these are required.

Ratio Analysis-Conclusion:
Calculating a large number of ratios without determining their need in the
present context may confuse the things instead of solving them. Only those
ratios should be selected which can throw proper light on the matter to be
discussed.

Unless otherwise the ratios calculated are compared with certain


standards one will not be reach at conclusions. These standards may

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be a rule of thumb as in current ratio (2:1), may be industry


standards, may be projected ratios etc. The comparison of calculated
ratios with the standards will help the analyst in forming his opinion
about financial situation of the concern.

The ratios are only the tools of analysis but their interpretation will
depend upon the caliber and competence of the analyst. He should be
familiar with various financial statements and the significance of
changes etc.

A wrong interpretation may create havoc for the concern since wrong
conclusions may lead to wrong decisions. The utility of ratios is linked
with expertise of the analyst.

The ratios are only guidelines for the analyst; he should not base his
decisions entirely on them.

He should study any other relevant

information, situation in the concern, general economic environment


etc., before reaching final conclusions.

Ratio Analysis-Types:
Several ratios, calculated from the accounting data, can be grouped
into various classes according to financial activity or function to be
evaluated. As stated earlier, the parties interested in financial analysis are
short-term and long-term creditors, owners and management. Short-term
creditors` main interest is in the liquidity position or the short-term solvency
of the firm. Long-term creditors`, on the other hand, are more interested in
the long-term solvency and profitability of the firm.
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Similarly, owners

concentrate on the firms profitability and financial condition. Management


is interested in evaluating every aspect of the firms performance. They have
to protect the interests of all parties and see that the firm grows profitably.
In view of the requirements of the various users of ratios, we may classify
them into the following four important categories:
LIQUIDITY RATIOS
LEVERAGE RATIOS
ACTIVITY RATIOS
PROFITABILITY RATIOS

LIQUIDITY RATIOS:
It is extremely essential for a firm to be able to meet its obligations as
they become due. Liquidity ratios measure the firms ability to meet current
obligations.
In fact, analysis of liquidity needs the preparation of cash budgets and cash
and Fund Flow statements; but liquidity ratios, by establishing a
relationship between cash and other current assets to current obligations
provided a quick measure of liquidity. A firm should ensure that it does not
suffer from lack of liquidity, and also that it does not have excess liquidity.
The failure of a company to meet its obligations due to lack of sufficient
liquidity, will result in a poor creditworthiness, loss of creditors` confidence,
or even in legal tangles resulting in the closure of the company.
1

CURRENT RATIO

QUICK RATIO

CASH RATIO
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1.

CURRENT RATIO:

The current ratio is calculated by dividing current assets by current


liabilities.
Current assets
Current Ratio

=
Current liabilities

Current assets include cash and those assets, which can be converted
into cash within a year, such as Marketable Securities, Debtors and
Inventories.

Prepaid expenses are also include in current assets as they

represent the payments that will not be made by the firm in future. Current
Liabilities include Creditors, Bill payable, Accrued expenses, Short-term
bank loan, and Income Tax Liability and Long-term debt maturing in the
current year.

The current ratio is a measure of the firms` short-term solvency. The


higher the current ratio, the larger is the amount of rupees available per
Rupee of current liability, the more is the firms` ability to meet current
obligations and the greater is the safety of funds of short-term creditors.

2.

QUICK RATIO:

The Quick ratio is calculated by dividing quick assets by quick


liabilities.
Quick assets
Quick Ratio =

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Quick liabilities
Quick assets or Liquid assets mean those assets which are
immediately convertible into cash without much loss.

All current assets

except prepaid expenses and inventories are categorized in liquid assets.


Quick liabilities means those liabilities, which are payable within a short
period.

Normally, Bank overdraft and Cash credit facility, if they become

permanent mode of financing are in quick liabilities.

3.

CASH RATIO:

The cash ratio is calculated by dividing cash + marketable securities


by current liabilities
Cash Ratio =

Cash + Marketable Securities


Current liabilities

Since cash is most liquid asset, a financial analyst may examine cash
ratio and its equivalent to current liabilities.

Trade investment or

marketable securities are equivalent of cash; therefore, they may be included


in the computation of cash ratio.

LEVERAGE RATIOS:
The short-term creditors like bankers and suppliers of raw material
are more concerned with the firms` current debt-paying ability.

On the

other hand, long-term creditors like debenture holders, financial institutions


etc., are more concerned with the firms` long-term financial strength.

In

fact, a firm should have strong short-as well as long-term financial position.
To judge the long-term financial position of the firm, financial leverage, or
Capital structure, ratios are calculated. These ratios indicate mix of funds

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provided by owners and lenders.

As a general rule, there should be an

approximate mix of debt and owners equity in financing the firms` assets.
The manner in which assets are financed has a number of
implications. First, between debt and equity, debt is more risky from the
firms` point of view. The firm has a legal obligation to pay interest on debt
holders, irrespective of the profits made or losses incurred by the firm. If
the firm fails to debt holders in time, they can take legal action against it to
get payment and in extreme cases, can force the firm into liquidation.

Leverage ratios may be calculated from the balance sheet to determine


the proportion of debt in total financing.

Many variations of these ratios

exist; but all these ratios indicate the same thing-the extent to which the
firm has relied on debt in financing assets.

Leverage ratios are also

computed from the profit and loss items by determining the extent to which
operating profits are sufficient to cover the fixed charges.

DEBT EQUITY RATIO:


The relationship describing the lender contribution for each rupee of
the owners contribution is called

DEBT-EQUITY RATIO. DEBT EQUITY

RATIO is directly computed by the following formula.


DEBT
Debt-Equity Ratio

=
EQUITY

PROPRIETARY RATIO:
This ratio states relationship between share capital and total assets.
Proprietors equity represents equity share capital, preference share capital
and reserves and surplus. The latter ratio is also called capital employed to
total assets.

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EQUITY SHARE CAPITAL


Proprietary Ratio =
TOTAL TANGIBLE ASSETS
PROPRIETORS EQUITY
(OR)
TOTAL TANGIBLE ASSETS

NTEREST COVERAGE RATIO:


This ratio indicates the extent to which earnings can decline without
resultant financial hardship to the firm because of its inability to meet
annual interest cost. For example, coverage of 5 times means that a fall in
earnings unto (1/5

th

) level would be tolerable, as earnings to

Interest Coverage Ratio

EBIT
--------------------------------INTEREST CHARGES

FIXED ASSETS TO NET WORTH:


This ratio indicates the extent to which Equity capital is invested in
the net fixed assets. It is expressed as follows:
FIXED ASSETS
Fixed Assets To Net Worth =
NET WORTH
Net Worth is represented by Equity Share Capital plus Reserves and
Surpluses. If the fixed assets are more than the Net Worth, difficulties may
arise, as the depreciation will reduce profit. This also means that creditors
have contributed to fixed assets. The higher this ratio, the less will be the
protection to creditors.

If this ratio is too high, the firm may find itself

handicapped, as too much capital is tied up in fixed assets but not


circulating.

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ACTIVITY RATIOS:
Funds creditors and owners are invested in various assets to generate
sales and profits.

The better the management of assets, the larger the

amount of sales. Activity ratios are employed to evaluate the efficiency with
which the firm managers and utilizes its assets. These ratios are also called
Turnover Ratios because they indicate the speed with which assets are being
converted or turned over into sales.

Activity ratios, thus, involve a

relationship between sales and assets. A proper balance between sales and
assets generally reflects that assets are managed well. Several activity ratios
can be calculated to judge the effectiveness of asset utilization.

INVENTORY TURNOVER RATIO:


Inventory turnover ratio indicates the efficiency of the firm in
producing and selling its products. It is calculated by dividing the cost of
goods sold by the average inventory.
Cost of goods sold
Inventory Turnover Ratio =
Average inventory

DEBTORS TURNOVER RATIO:


A firm sells goods for cash and credit. Credit is used marketing tool
by a number of companies. When the firm extends credits to its customers,
debtors (accounts receivables) are created in the firms` accounts.

The

debtors are expected to be converted into cash over a short period and,
therefore, are included in current assets. The liquidity position of the firm
depends on the quality of debtors to a greater extent. Debtors turnover ratio
indicates the velocity of debt collection of a firm. Un simple wards it
indicates the number of times average debtors are turned over during a year.

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Credit Sales
Debtors Turnover Ratio =

-------------------------------Avg. Accounts Receivable

FIXED ASSETS TURNOVER RATIO:


The fixed assets turnover ratio measures the efficiency with which the
firm is utilizing its investments in fixed assets, such as land, building, plant
and machinery, furniture, etc.

It also indicates the adequacy of sales in

relation to the investment in fixed assets. The fixed assets turnover ratio is
sales divided by net fixed assets. The firm assets turnover ratio should be
compared with past and future ratios and also with ratio of similar firms
and the industry average.

The high fixed assets turnover ratio indicates

efficient utilization of fixed assets in generating sales, while low ratio


indicates inefficient management and utilization of fixed assets.
Sales
Fixed Assets Turnover Ratio =
Net fixed assets

WORKING CAPITAL TURNOVER RATIO:


Working capital turnover ratio indicates the velocity of the utilization
of net working capital. This ratio indicates the number of times the working
capital is turned over in the course of a year.

This ratio measures the

efficiency with which the working capital is being used by a firm. A higher
ratio indicates efficient utilization of working capital and low ratio indicates
otherwise.

But a very high working capital turnover ratio is not a good

situation for any firm and hence care must be taken while interpreting the
ratio. Making of comparative and Trend Analysis can at best use this ratio

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for different firms in the same industry and for various periods. This can be
calculated as follows:
Sales

Working Capital Turnover Ratio =

Net Working Capital


Net Working Capital = Current Assets - Current Liabilities
(Excluding short-term bank
Borrowings)

PROFITABILITY RATIOS:
A company should earn profits to Survive and Grow over a long period
of time. Profits are essential, but it would be wrong to assume that every
action initiated by management of a company should be aimed at
maximizing profits, irrespective of social consequences.
Profit is the difference between revenues and expenses over a period of time
(usually a year). Profit is the ultimate Output of a company, and it will
have no future if it fails to make sufficient profits. Therefore, the financial
manager should continuously evaluate to the efficiency of the company in
term of profits.

The profitability ratios are calculated to measure the

operating efficiency of the company. Besides management of the company,


creditors and owners are also interested in the profitability of the firm.
Creditors want to get interest and repayment of principle regularly. Owners
want to get a required rate of return on their investment. This is possible
only when the company earns enough profits.

PROFITABILITY IN RELATION TO SALES


PROFITABILITY IN RELATION TO INVESTMENT

PROFITABILITY RATIOS IN RELATION TO SALES


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1 GROSS PROFIT MARGIN


2 CASH MARGIN
3 OPERATING MARGIN
4 NET PROFIT RATIO
1.

GROSS PROFIT MARGIN:


Gross profit margin reflects the efficiency with which the
management produces each unit of product. This ratio indicates the
average spread between the cost of goods sold and the sales revenue.

This shows profits relative to sales after the deduction of production


costs, and indicates the relation between Production costs and selling price.
A high gross profit margin relative to the industry average implies that the
firm is able to produce at relatively lower cost.
A high gross profit margin ratio is a sign of good management. A gross
margin ratio may increase due to any of the following factors.
i

Higher sales prices, cost of goods sold remaining constant,

ii

Lower cost of goods sold, sales prices remaining constant,

iii

A combination of variations in sales prices and costs, the margin


widening, and

iv

Increases in the proportionate volume of higher margin items.


A low gross profit margin may reflect higher cost of goods sold due to

the firms` inability to purchase raw materials at favorable terms, inefficient


utilization of plant and machinery, resulting in higher cost of production.

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The ratio will also be low due to fall in prices in the market, or market
reduction in selling price by the firm in an attempt to obtain large sales
volume, the cost of goods sold remaining unchanged.

Sales Cost of goods sold


(or)
Gross profit

Gross Profit Margin Ratio =

Sales

Net Profit Margin Ratio:


Net profit is obtained when operation expenses, interest and taxes are
subtracted from the gross profit.
If the non-operating income figure is substantial, it may be excluded
from PAT to see profitability arising directly from sales. Net profit margin
ratio establishes a relationship between net profit and sales and indicated
managements efficiency in manufacturing, administering and selling the
products. This ratio is the overall measure of the firms` ability to turn each
rupee sales into net profit. If the net margin is inadequate, the firm will fail
to achieve satisfactory return on shareholders funds.
This ratio also indicates the firms` capacity to withstand in adverse
economic conditions. A firm with a high net margin ratio would be in an
advantageous position to survive in the case of falling selling prices, rising
costs of production or declining demand for the product. It would really be
difficult for a low net margin firm to withstand these adversities.
Profit after Tax
Net Profit Margin Ratio =

Sales

CASH MARGIN RATIO:

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Cash profit excludes depreciation. It means Net profit after interests


and taxes but before depreciation.

This ratio indicates the relationship

between the profit, which accrues in cash and sales.

Greater percentage

indicates better position and Vice-Versa as it shows the correct profit earned
by the firm.
This ratio is expressed as cash profit to sales.
Cash Margin Ratio =

Cash profit

X 100

Sales

OPERATING MARGIN RATIO:


Operating margin ratio is also known as Operating Net profit ratio. It is the
ratio of operating profit to sales.

This ratio establishes the relationship

between the total cost incurred and sales. Operating profit is the Net profit
after depreciation but Before Interests and Taxes. The purpose of computing
this ratio is to find out the overall operational efficiency of the business
concern
This ratio is expressed as operating profit to sales.
OPERATING MARGIN RATIO =

Operating profit

X100

Sales

PROFITABILITY RATIOS IN RELATION TO INVESTMENT:


1 RETURN ON INVESTMENT
2 RETURN ON NET WORTH
3 RETURN ON CAPITAL
4 RETURN ON GROSS BLOCK

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RETURN ON INVESTMENT:
The term investment refers to Total Assets. The funds employed in Net
assets are known as Capital Employed.

Net assets equal net fixed assets

plus current assets minus Current liabilities excluding Bank loans.


Alternatively, Capital employed in equal to Net worth plus total debt.
The conventional approach of calculating return on investment (ROI)
is to divide PAT by Investment. Investment represents pool of funds supplied
by shareholders and lenders, while PAT represents residual income of
shareholders; therefore, it is conceptually unsound to use PAT in the
calculation of ROI.

Also, as discussed earlier, PAT is affected by capital

structure
EBIT (1-T)
ROI (or) ROTA =
Total Assets

EBIT (1-T)
ROI (or) RONA =
NET Assets

RETURN ON NET WORTH:


NET Worth is also known proprietors Net Capital Employed.

The

Return should be calculated with reference to profits belonging to


shareholders, and therefore, profit shall be Net profit after interest and tax.
The profit for this purpose will include even non-trading profit. This is given
as follows:
Net profit after interest & tax
RETURN ON NET WORTH = ---------------------------------------*100

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Shareholders funds

RETURN ON CAPITAL:
The ROCE is the second type of ROI. The term capital employed refers to
long-term funds supplied by the creditors and owners of the fund. It can be
computed in two ways. First, it is equal to non-current liabilities (long-term
liabilities) plus owners equity. Alternatively, it is equivalent to Net Working
Capital plus Fixed Assets. Thus, the Capital Employed provides a basis to
test the profitability related to the sources of long-term funds. A comparison
of this ratio with similar firms, with the industry average and overtime
would provide sufficient insight into how efficiency the long-term funds of
owners and creditors are being used.

The higher the ratio, the more

efficient is the use of Capital Employed.

NET PROFIT AFTER TAX/EBIT


ROCE =

X 100
Average Total Capital Employed

RETURN ON GROSS BLOCK:


This ratio establishes a relationship between net profit and gross fixed
assets. This ratio emphasizes the profit on investment in Fixed Assets. This
ratio is expressed as follows:
Net profit
RETURN ON GROSS BLOCK =

100

Gross Block
NET PROFIT is profit before Tax. Gross Block means Gross fixed assets i.e.,
Fixed assets before deducting depreciation.

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NEED FOR THE STUDY


The need for the study involves following points:
The basic view of the traditional financial statements comprising the

profit and loss account and balance sheet


They do not give the information regarding the financial operation of
the firm.
The firm financial statements provide a summarized view of the
financial position and operation.
Much can be learnt about a firm from a careful examination of the
firm financial statement as invaluable performance.
Management should be particularly intersected in knowing the
financial strengths of the firm.
They can be able to spot the financial statement of the firm to take
suitable corrective actions.
The financial analysis is the starting point for making plans before
using sophisticated forecasting planning procedures,

27

OBJECTIVES OF THE STUDY:


The main objective of the study is to apply theoretical concepts to the
practical situations of RINL so as to compare and correlate the actual
achievements with a theoretical conclusion.
The main objectives of the study are:

To know the extent to which RINL/VSP is efficiently utilizing its


sources to its operations.

To understand the capital structure of the RINL/VSP through


calculating of leverage ratios and the importance of Budget and
Budgetary control.

To know the profitability of the RINL/VSP through calculation of


profitability ratios and know whether there is influence of budgets in
profit making or not.
To give appropriate suggestions to the best performance of the
organization.
Expand plant capacity of 6.3MT by 2011 2012 with the mission to
expand further in subsequent phases as per the corporate plan.
Revamp existing blast furnaces to make them energy efficient to
contemporary levels and in the process increase their capacity by
1.0MT, thus total hot metal capacity to 7.5MT.

28

Be among top five lowest cost liquid steel producers in the world.
Achieve higher levels of customer satisfaction than competitors.
Vibrant work culture in the organization
Be proactive in conserving environment, maintaining high levels of safety
and addressing social concern

METHODOLOGY OF THE STUDY:


Methodology is a systematic procedure of collecting information in
order to analyze and verify a phenomenon. The collection of information is
from two principle sources. They are:

1.

Primary Data

2.

Secondary Data

1. Primary Data:

It is the information collected directly with out any references. In this


study, it is gathered through interviews with concerned officers and staff,
individually or collectively, sum of the information has been verified or
supplemented with personal observation conducting personal interviews
with the concerned officers of Finance Department of Visakhapatnam Steel
Plant.

2. Secondary Data:

29

The Secondary Data was collected from already published sources


such as, Pamphlets of Annual Reports, Returns and Internal Records,
reference from Text Books and Journals relating to Financial Management.
The data collection includes:
(a)

Collection

of

required

data

from

Annual

Reports

of

Visakhapatnam Steel Plant.


(b)

Reference from Text Books and Journals relating to Financial


Management.

FRAME WORK OF THE STUDY


The project report is organized in five chapters.

The first chapter of the study contains introduction of Ratio


Analysis objectives of the study, methodology of the study,
limitations of the study.

The second chapter includes the profile of the INDUSTRY


The third chapter gives the profile of the STEEL PLANT
The fourth chapter gives about the financial performance of the
company.
The last chapter concludes the study with the summery finding
and some suggestive for better performances.

LIMITATIONS OF THE STUDY:


Though the project is completed successfully, a few limitations may be
there.

30

Since the procedure and polices of the company will not


allow to disclose some confidential financial information, the
project has to be completed with the available data given to
us.

The study is carried basing on the information and


documents provided by the organization and based on the
interaction with the various employees of the respective
departments.

Analysis is limited to the results of RINL/VSP and not


compared to industry standards / results.
Data in some of the ratios has been directly taken from the
prepared reports of RINL due to non-disclosure of input data
due to confidentiality.

31

CHAPTER-II
INDUSTRY PROFILE

PARTICULARS OF ORGANIZATION:
a) Name of the company

b) Company identification
number(cin)

RashtriyaIspat Nigam Limited

U27109AP1982GOI003404

32

c) Date of incorporation

18th February 1982

d) Mode of incorporation

Incorporated as a government company


a under the provisions of the companies
act 1956.

e) Administrative ministry

Ministry of steel Govt of India

f) Present status

A government company with in the


meaning
of
section-617
of
the
companies act, 1956.

g) Share capital

1) Authorised
Equity share capital

Rs 4890 crores

Preference share capital :

Rs 3110 crores

Total

Rs 8000 crores

Rs 7827.32 crores

The entire share capital is held by


president of India.

2) Subscribed, issued& paid


Up capital

h) Present share holding

i) Address of registered office :

RashtriyaIspat Nigam Limited


Visakhapatnam Steel Plant
Administrative Building
Visakhapatnam-530031
Website:www.vizagsteel.com

33

INDUSTRY PROFILE
DEVELOPMENT OF STEEL INDUSTRY IN INDIA:
Japan remained the largest exporter of semi-finished and finished
steel products in 2002 followed by Russia and Ukraine.
Other significant recent developments in The Development of Steel
Industry in India should be viewed in conjunction with the type and system
of Government that has been ruling the country. However, its production in
significant quantity started only after 1900. The growth of steel industry
can be studied by dividing the period into pre and post independence era.
By 1950, the total installed capacity of ingot steel production was 1.5 million
tons per year. In a short span of about 3 decades or so the capacity was
increased 11 folds to about 16 MT by the 90s.

LOCATION:
The plant is located on the coast of Bay of Bengal, 16 kms to the
south west of the Visakhapatnam port. It lies between the northern
boundaries of the National Highway No.5 from Madras to Calcutta and 7
kms to the south-west of Howrah Madras Railway line.

BACK GROUND:
To meet the growing domestic needs of Steel, Government of
India signed an agreement with erstwhile USSR in 1979 for co-operation is
setting up 3.4 Mt integrated steel plant at Visakhapatnam. The project was
obtaining the higher levels of operational efficiency and labour productively
over maximum output from the equipment already installed, planned for
procurement, achieving what was envisaged earlier. Under the rationalized

34

concept, 3.0million tones of liquid steel is to be produced in estimated to


cost Rs.3897.28 crores, based on prices as on 4th quarter of 1981. But
during the implementation of Visakhapatnam, it has beenobserved that the
project cost, mainly dues to price escalation and upper provisions in DPT
estimates

In view of this and critical find situation, alternatives for implementation of


Visakhapatnam steel plant rationalization of approved concept were studied
in 1986. The rationalization has been from the point of view of a year and
the project estimated to cost Rs.5822.17 crores based on as fourth quarter
of 1987. Finally, the overall cost of the project worked to 8200 crores as per
the revised rationalized detailed project report.

The major steel and related companies in India are:


1. Bharat Refractories Limited.
2. Hindustan Steel Works Construction Limited.
3. Jindal Steel and Power Limited
4. Kudremukh Iron Ore Company Limited
5. ManganeseOre (India) limited.
6. Metal Scrap Trade Corporation Limited.
7. Metallurgical and Engineering Consultants India Limited.
8. National Mineral Development Corporation (NMDC)
9. RashtriyaIspat Nigam Limited.
10. Sponge Iron India Limited.
11. Steel Authority India Limited.
35

12. Tata Iron And steel Company.


13. Bhilai steel plant
14. Bokaro steel plant(SAIL),Jharkhand
15. JSW steel limited,Bellary, Karnataka.
16. Rourkela steel plant,Rourkela,Orissa

36

PRODUCT MIX:
Visakhapatnam steel plant products angles, channels, bars, wire rods
and billets for re-rolling. The plant also produces pig iron & 1.44 MT of granulated
slag, besides normal by- products from the coke oven and Coal Chemical Plant.

37

Growth of Steel Industry:


The growth in a chronological order is depicted below:
S No
1.

Year
1830

Osier

Marshall

manufacturing
2.
3.
4.
5.
6.
7.
8.

1874
1899

Growth
heather constructed
plant

at

port-motor

the
in

first

Madras

Presidency.
James Erskin founded the Bengal Frame Works.
Jamshedji TATA initiated the scheme for

an

1906
1911
1918
1940-1950

integrated Steel Plant


Formation of TISCO
TISCO started production
TISCO was founded
Formation of My sore Iron and Steel initiated at

1951-1956

Bhadravathi in Karnataka.
First Five-Year Plan - The Hindustan Steel Limited
(HSL) was born in the year 1954 with decision of
setting up three plants each with 1 million tones
ingot

9.

1956-1961

steel

per

year

at

Rourkela,

Bhilai,

and

Durgapur. TISCO started its expansion programmed.


Second Five-Year Plan - A bold decision was taken up
to increase the ingot steel output in India to 6 million
tones per year and its production at Roukema, Bhilai

10.
11.
12.
13.

1961-1966

and Durgapur Steel Plant started.


Third Five-Year Plan During the plan the three

1964
1966-1969

Steel Plants under HSL & TISCO were expanded.


Bokaro Steel Plant came into existence
Recession Period Till the expansion programs were

1969-1974

actively existed during this period


Fourth Five-Year Plan Salem Steel Plant started.
Licenses were given for setting up of many Mini Steel
Plants and re-rolling mills Government of India.
Plants in south are each in Visakhapatnam and

38

Karnataka. SAIL was formed during this period on


14.

1974-1979

24th January 1973.


Fifth Five-Year Plan The idea of setting up the fifth
integrated Steel Plant, the first re-based plant at
Visakhapatnam took a definite shape. At the end of
the Fifth Five-Year Plan the total installed capacity
from six integrated plants was up to 10.6 million

15.
16.

1979-1980

tons.
Annual Plan - The Erstwhile Soviet Union agreed to

1980-1985

help in setting up the Visakhapatnam Steel Plant.


Sixth Five-Year Plan Work on Visakhapatnam Steel
Plant started with a big bang and top priority was
accorded

to

start

the

plant.

Schemes

for

modernization of Bhilai Steel Plant, Rourkela Steel


Plant,

Durgapur

steel

plant

and

TISCO

were

initiated. Capacity at the end of Sixth Five-Year Plan


18.

1992-1997

from six integrated plants stood 11.50 million tons.


Eight Five-Year Plans The Visakhapatnam Steel
Plant was commissioned in 1992. The cost of plant
has become around 8755 cores.

Visakhapatnam

Steel Plant started the production and modernization


19

1997-2002

20

2002-2007

of other steel plants is also duly engaged.


Ninth Five-Year Plant Restructuring of
Visakhapatnam Steel Plant and other public sector
undertaking
Tenth Five-Year Plan Steel industry registers a
growth of 9.9%.Visakhapatnam steel plant has high

21

2007-2012

regime targets and achieved the best of them.


Eleventh five year plan-cost of schemes/project
original approved by government of india is 9,569.18
crores. IPO is a part of government divestment plan
to raise 30,000 crores during financial year through
39

stake sales

First Five-Year Plan(1951 to 1956):


No new steel plant came up, as the first plan was mainly agriculture
oriented.

However, IISCO was allowed to expand form 1MT/year to 2

MT/year of ingots, and from 0.5 MT/year to 1.0 MT/year of steel. And, the
First Five-Year Plan contemplated a new Steel Plant to be erected in Public
Sector.
Thus the Hindustan Steel Limited (HSL) was born on 19 th Jan 1954 with the
decision of setting up three steel plants each with one million tons ingot
steel per year at Rourkela, Bhilai and Durgapur.

Though TISCO and IISCO

were scheduled to expand, TISCO started its expansion program.

Second five-year plan (1956 to 1961):


During this period, additional steel producing capacity was added and a
decision was taken to increase the ingot steel output in India to 6 million
tons per year. The three one million ton steel plant one each at Rourkela,
Bhilai and Durgapur were completed during this period.

They started

production during the end of this plan.

The salient features are given below:


Plant Capacity

Location

Collaboration

Production
(Tons)

RSP

Sundargarh, Orissa

Germany

720,000

BSP

Durgapur, M.P.

U.S.S.R

770,000

DSP

Burdwan, W.B.

UK

800,000

In addition to the above BSP and DSP each were having the capacity to
produce 300,000 tons of pig iron for sale

Third five-year plan (1961 to 1966):

40

During this period, the three steel plants under HSL, TISCO, and
IISCO were expanded as shown below. However, these could be completed
only by 1968 1969.

Recession Period (1966 1969):


The ambling expansion program taken up during the Third Five-Year
Plan could not be completed during that period. All the expansion programs
were actively executed during this period

Fourth Five-Year Plan (1969 1974):


Balancing facilities were incorporated in all the steel plants. Salem
Steel Plant work was taken up during this period. Licenses were given for
setting up of many Mini Steel Plants and Rolling Mills.

Government

accepted the idea of setting up two more Steel Plants in the South one at
Visakhapatnam and other at Hospet in Karnataka.

Both of them were

envisaged to produce plain low Carbon Steel Products initially with a


capacity of 2 MT/year of ingots.

Steel authority of India Ltd., was also

formed during this period on 2nd Jan 1973.

Central Research and

Development Organization was set up in June, 1973 to tackle the research


and development problems of Iron and Steel Industry.

Fifth Five-Year Plan (1974 to 1979):


Work on Salem project progressed well. Bokaro with 1.7 MT capacities
started in Feb 1978. The expansions of Bhilai Steel Plant form 2.5 MT to 4
MT and Bokaro from 1.7 MT to 4.0 MT picked up momentum. The idea of
setting up the 5th integrated steel plant at Vizag took a definite shape. By
the end of fifth five-year plan the total installed capacity from six integrated
plants was 10.6 MT/year.

41

Annual plans 1979 to 1980: various plans named above were reviewed and
the progress on different plants consolidated. Soviet Union has agreed to
help in setting up the Vizag steel plant.

Sixth Five-Year Plan (1980 1985):


Work in expansion of Bhilai and Bokaro Plant was progressed. Bokaro's
intermediate stage of 2.5 MT completed. Many of the units were
commissioned e.g. a) Salem steel plant was commissioned b) on 31.9.81
work on Vizag Steel Plant started with a bang and c) top priority was
accorded to modernize the plant at TISCO. Schemes for modernization of
BSP, RSP, DSP, and IISCO were initiated at the end of sixth five-year plan.
The capacity from six integrated steel plants stood at 11.56 MT.

Seventh Five-Year Plan (1985 to 1991):


Almost all the units in the expansion work of Bhilai and Bokaro to 4
MT completed. Progress of Vizag Steel Plant picked up and the rationalized
concept has been introduced to commission the plant with 3 MT liquid steel
capacities by 1990.

Eighth Five-Year Plan (1992 to 1997):


All units of Vizag Steel Plant were commissioned by July, 1992.
Government of India has given permission to set up Mini Steel Plants in
Private Sectors

Ninth Five-Year Plan (1997 to 2002):

42

National

Development

Council

under

Central

Government

has

deposited Rs. 859.200 corers in ninth five year plan that targets an overall
6.5% growth gross domestic production and will necessitate a 7% growth in
the remaining years of plan.

Tenth Five-Year Plan (2002 to 2007):


Steel industry registers the growth of 9.9 % Visakhapatnam steel plant high
regime targets achieved the best of them.

Eleventh Five-Year Plan (2007 to 2012):


Cost of schemes/project original approved by Government of India is Rs.9,
569.18 crores

Global Scenario:
As per IISI
In March 2005 World Crude Steel output was 92.8MT when compared
to March 2004 (87.2 MT), the change in percentage was 6.5%.
China remained the worlds largest Crude Steel producer in 2005 also
(27.5MT) followed by Japan (9.6MT) and USA (8.1MT). India occupied
the 8th position (8.8MT)
USA remained the largest importer of semi-finished and finished steel
products in 2002 followed by China and Germany.
the global steel scenario have been:
Under the auspices of the OECD (Organization for Economic Cooperation &Devel) the negotiations among the major steel producing
countries for a Steel Subsidy Agreement (SSA) held in 2003 with the
objective to agree on a complete negotiating text for the SSA by the middle of
2004. It also set subsidies for the Steel Industry of a ceiling of 0.5% of the
value of production to be used exclusively for Research & Development.

43

The global economy witnessed a gradual recovery from late 2003


onwards. China has become one of the major factors currently driving
the world economy.

As a result of these economic developments IISI has projected an


increase by 6.2% or 53 million metric tones in 2004 in the global
consumption of finished steel products. IISI has split the growth into
two separate areas, China and the Rest of the World (ROW). Steel
consumption in China has been estimated to increase by 13.1% or 31
met in 2004.

USA has repealed the safeguard measures on import of steel as a


result of a ruling, by a WTO Dispute Resolution Panel, which held
these measures to be illegal under the WTO regime.

Present Scenario of Indian Steel Industry:


India is uniquely placed to become a very large producer and consumer of
finished steel products in the world. Substantial reserves of high grade iron
ore, low wage rates, technical and managerial skills of a high order have all
enabled India to gain this stature, by becoming 10 th largest producer of steel
in the world. Unfortunately for the Indian steel industry, the price and
distribution controls to which it was subjected till about economic
liberalization process began in the early 1990s did not permit the large
integrated steel plants to modernize their steel manufacturing facilities or to
upgrade their technologies to the state of art levels from time to time.
With the economic liberalization that was initiated in 1992, Indian Steel
Industry has to accept the inevitable i.e. to appreciate the implications of
low import duty rated, face foreign competition and some how improve its
strengths and competitive edge to produce good quality products at lower
prices and learn to survive in the market place. Following liberalization, the

44

steel Industry is well set on the path of globalization. The dynamics of the
World Steel Industry has a close relation with Indian steel Industry.
Presently in India, Steel products are being produced from four different
sources viz,
Integrated Steel Plants
Mini Steel Plants
Re-rolling Mills
Alloy & Special Steel Plants
Integrated Steel Plants have larger capacity and produce Steel from
basic raw materials and the other three categories mentioned are
characterized by low investment and low break-even point.

Characteristics of Integrated Steel Plants:


They have large capacities.
Highly capital intensive.
They have long gestation period.
Labour intensive.
They would have all facilities including raw materials resources, water
supply, power supply, testing and inspection facilities, township
facilities, medical, educational and recreational etc.

Inter dependency of all the processing units on the proceeding and


succeeding units in the path of materials flow

A potential source for earning foreign exchange through exports.

45

They serve as centers for the development of ancillary industries.


They are major consumer of refractory material
Exim Policy (2002-2007):
To facilitate sustained growth in exports to attain a share of 1% of
global merchandise trade.
To stimulate sustained economic growth by providing access to
essential raw materials, intermediates, components, consumables and
capital goods required for augmenting production and providing
services.
To enhance the technological strength and efficiency of Indian
agriculture, industry and services, thereby improving their competitive
strength while generating new employment opportunities, and to
encourage the attainment of internationally accepted standards of
quality.

The New Industrial Policy Regime:


The New Industrial policy has opened up the iron and steel sector for
private investment by
(a) Removing it from the list of industries reserved for public sector
(b) Exempting it from compulsory licensing.
Imports of foreign technology as well as foreign direct investment are
freely permitted up to certain limits under an automatic route. Ministry of
Steel plays the role of facilitator, providing broad directions and assistance to
new and existing steel plants, in the liberalized scenario.

The Growth Profile:


STEEL:
46

The liberalization of industrial policy and other initiatives taken by the


Government have given a definite impetus for entry, participation and
growth of the private sector in the steel industry. While the existing units
are being modernized/expanded, a large number of new/green field steel
plants have also come up in different parts of the country based on modern,
cost effective, state of-the-art technologies.
At present, total (crude) steel making capacity is over 34 million tons
and India, the 8th largest producer of steel in the world, has to its credit, the
capability to produce a variety of grades and that too, of international
quality standards.

As per the ratings of the prestigious World Steel

Dynamics, Indian HR products are classified in the Tier II category quality


products- a major reason behind their acceptance in the world market. EU,
Japan has qualified for the top slot, while countries like South Korea, USA
share the same class as India.
In pig iron also, the growth has been substantial. Prior to 1991, there
was only one unit in the secondary sector. Post liberalization, the AIFIs has
sanctioned 21 new projects with a total capacity of approx 3.9 million tones.
Of these, 16 units have already been commissioned.

The production of

million tones in 2002-03. During the year 2003-04, the production of Pig
Iron was 5.221 million tones.

Market Scenario:

After liberalization, with huge scale addition to steel making capacity.

Apparent consumption of steel increased from 14.84 million tons in


1991-92 to 30.265 million tons in 2003-04.

The production of steel in 2003-04 is 36.193 million tons as against


33.67 million tons in 2002-03 thereby registering 7.5% growth.

The demand of steel has been firmed up both at home as well as


internationally.
47

The year 2004-05 was a remarkable one for the steel industry with the
world crude steel production crossing the one billion mark for the first
time in the history of the steel industry. The world GDP growth about
4% lends supports to the expectations the steel market is all set for
strong revival after prolonged period of depression. The Indian economy
also become robust with annual growth rates of 7-8% this will provide a
major boost the steel industry manufacturing sector, the Indian steel
industry all set for northward movement.

PRODUCTION:
Steel industry was de-licensed and decontrolled in 1991 and 1992
respectively.

India is the 8th largest producer of steel in the world.


In 2003-04, finished steel production was 36.193 million tones.
Pig iron production in 2003-04 was 5.221 million tons.
Sponge iron production was 8.085 million tons during 2003-2004.
The annual growth rate of crude steel production in 2002-2003 was
8% and in 2003-2004 was 6%. Last 4 years production performance
is as under:-

Demand Availability Projection:


Demand- Availability of iron and steel in the country is projected by
Ministry of Steel annually.
Gaps in Availability are met mostly through imports.

48

Interface with consumers by way of Steel Consumer Council exists,


which is conducted on regular basis.
Interface helps in redressing availability problems, complaints related
to quality.

Pricing & Distribution


Price regulation of iron & steel was abolished on 16.1.1992.
Distribution controls on iron & steel removed except 5 priority sectors,
viz. Defence, Railways, Small Scale Industries Corporations, Exporters
of Engineering Goods and North Eastern region.

Allocation to priority sectors is made by Ministry of Steel.


Government has no control over prices of Iron & Steel.
Open market prices are generally on rise.
Price increases of late have taken place mostly in long products than
flat products.

Imports of Iron & Steel:


Iron & Steel are freely importable as per the extant policy.
India has been annually importing around 2.05 Million Tones of Steel.
Import duty on several raw materials used by the steel sector like noncoking coal, met coke and nickel has been reduced to 5%.
duty on coking coal has been reduced to Nil

49

Import

Exports of Iron & Steel:


Iron & Steel are freely exportable and India is a net exporter of steel.
Advance Licensing Scheme allows duty free import of raw materials for
exports.
Duty Entitlement Pass Book Scheme (DEPB) also facilitates exports.
The Government has temporarily suspended the DEPB on iron & Steel
& ferroalloys w.e.f 27th March 2004 as a measure to increase Iron &
Steel availability in the domestic market.
Steel Exporters Forum has been set up to boost steel exports.
An Anti Dumping Directorate has been set up under the Ministry of
Commerce with adequate power to fight trade actions while remaining
within the WTO framework.

50

Customs Duty:
The peak rate of Custom Duty has been reducing sharply during the
last 5 years.

In the interim budget for 2004-05, announced in

January2004 the peak rate was reduced from 25% to 20%. In 2004
the Customs Duty on carbon steel items and pig iron was further
reduced to 5%.

The custom duty on scrap was nil.


Import duty on coking coal has been reduced to nil, and on
metallurgical coke reduced to 5%.

Excise Duty:
The Government has taken a number of steps to ensure the
availability of iron and steel items which inter-alias includes reduction in
Excise Duty by 16% with addition to Educational Cess 2% on 16%.

Levies on Iron & Steel:


DF LEVY:
This was a levy started for funding modernization, expansion and
development of steel sector. The fund, inter-alias, supports:
1) Capital

expenditure

diversification,

renewal

for
&

modernization,
replacement

of

rehabilitation,
Integrated

Steel

plants.
2) Research & Development
3) Rebates to SSI Corporations
4) Expenditure on ERU of JPC

SDF levy was abolished on 21.4.94

Cabinet decided that corpus could be recycled for loans to Main


producers
51

Interest on loans to Main Producers is set aside for promotion of


R&D on steel etc.

Chapter-III
COMPANY PROFILE

52

COMPANY PROFILE
The Government of India has decided to set up an integrated Steel
Plant at Visakhapatnam to meet the growing domestic needs of steel.
Visakhapatnam Steel Plant was the effect of the persistent demands and
mass movements. It is another step towards increasing the countrys steel
production.

The decision of the Government to set up an integrated steel plant was


laid down by the then Prime Minister Smt. India Gandhi.
Minister laid the foundation stone on 20th January 1971.

53

The Prime

The consultant, M/s M N Dastur& Co (Pvt) Ltd. submitted a technoeconomic feasibility report in February 1972, and detailed project report for
the plant, with an annual capacity of 3.4 million tones of liquid steel.

The Government of India and USSR signed an agreement on 12 th June


1979 for the co-operation in setting up 3.4 million tones integrated Steel
Plant. The project was estimated to cost to Rs.3, 897.28 crores based on
prices as on 4th Quarter of 1981.However, on completion of the construction
and commissioning of the whole Plant in 1992, the cost escalated to Rs.8,
755 crores based on prices as on 2nd Quarter of 1994.

Unlike other integrated Steel Plants in India, Visakhapatnam Steel


Plant is one of the most modern steel plants in the country. The plant was
dedicated to the nation on 1st August 1992 by the then Prime Minister,
Sri.P.V.NarasimhaRao.

New technology, large-scale computerization and automation etc, are


incorporated in the Plant at the international levels and attain such labor
productivity, the organizational manpower has been rationalized. The
manpower in the VSP has been limited to17, 500 employees. The plant has
the capacity of producing 3.0 million tones of liquid steel and 2.656 million
tones of saleable steel.

It has set up two major Blast Furnaces, the Godavari and the Krishna,
which are the envy of any modern steel making complex.

The economy of a nation depends on core sector industries like iron


and steel. Steel is the basic input for construction, machines building and

54

transport industries. Keeping in view the importance of steel the following


integrated steel plant with foreign collaborations was constructed in the
public sector in the post independence era.

ORGANIZATION CHART

CHAIRMAN CUM MANAGING DIRECTOR

Director
(Finance)

Director
(Commercial)
ED (MM)

ED
(Financ
e)
Company
Secretary
AGM
(Int.
Audit)

Addl. GM
(Mktg)
Addl. GM
(Mktg)
Services
&

Director
(Operation
s)

Director
(Personnel)
DGM
(M&HS) I/C
GM (P&A)
Addl. GM
(P&IR)
DGM (Trg)
DGM
(HRD)
DGM
(Legal
Affairs)

GM
(Works)

Director
(Vigilanc
e)

ED
(Maint.)

Addl. GM
(QATD)
Addl. GM
(Audio &
Telco)

Addl. GM
(Services
)
Addl. GM
(Steel)
Addl. GM
(C, S &
C)

GM
(Maint.)

Addl. GM
(CR&RM)
DGM
(System)
GM
(D&E)&
I/C PECS

FUNCTIONS OF VARIOUS DEPARTMENTS OF RINL/VSP


55

Addl. GM
(Vig.)

ACM
(Cordon
)

VISION:
To be a continuously growing world-class company.
We shall:
Harness our growth potential and sustain profitable growth.
Deliver high quality and cost competitive products and be the first choice

of customers.
Create an inspiring work environment to unleash the creative energy of

people.
Achieve excellence in enterprise management.
Be a respected corporate citizen, ensure clean and green environment

and develop vibrant communities around.


RINL plans Rs 1,000-cr jetty near its Vizag plant
Steel-maker RashtriyaIspat

Nigam (RINL)

plans to set up a Rs

1,000-crore jetty for captive use along the Vizag coast to reduce cost and
reliance on the nearby Gangavaram Port.

Mission:
To attain 16 million tone liquid steel capacity through technological
up -gradation, operational efficiency and expansion, to produce steel at
international standards of cost and quality, and to meet the aspirations of
the stakeholders.

Core Values:

Commitment
Customer satisfaction
56

Continuous improvement
Concern of environment
Creativity and innovation

BRIEF IDEA ABOUT STEEL MAKING PROCESS


The modern era in steel making began with the introduction of Henry
Bessemer's &Bessemer process in the late 1850s. This enabled steel to be
produced in large quantities cheaply, so that Mild Steel is now used for most
purposes for which wrought iron was formerly used. This was only the first
of a number of methods of steel production. The Gilchrist-Thomas process
(or basic Bessemer process) was an improvement to the Bessemer process,
lining the converter with a basic material to remove phosphorus. Another
was the Siemens-Martin process of open hearth steelmaking which like the
Gilchrist-Thomas process complemented, rather than replaced, the original
Bessemer process.

These were rendered obsolete by the Linz-Donawitz process of basic


oxygen steel making, developed in the 1950s, and other oxygen steelmaking
processes. One third of world's steel is currently produced in China. ArcelorMittal is however the production. White-hot steel pouring out of an electric
arc furnace.

Blast furnaces have been used for two millennia to produce pig iron, a
crucial step in the steel production process, from iron ore by combining fuel,
57

charcoal, and air. Modern methods use coke instead of charcoal, which has
proven to be a great deal more efficient and is crediting with contributing to
the British Industrial Revolution. Once the iron is refined, converters are
used to create steel from the iron. During the late 19th and early 20th
century there were many widely used methods such as the Bessemer
process

and

the

Siemens-Martin

process.

However,

basic

oxygen

steelmaking, in which pure oxygen is fed to the furnace to limit impurities,


has generally replaced these older systems. Electric arc furnaces are a
common method of reprocessing scrap metal to create new steel. They can
also be used for converting pig iron to steel, but they use a great deal of
electricity (about 440 kWh perHRD
metric ton), and are thus generally only

focu
POLICY

economical when there is a plentiful supply


of cheap electricity.
s

Identifying competence
needs

Providing training
inputs
Monitoring training
effectiveness
Creating learning
environment
Facilitating Self
Development,
innovativeness&self
expression

Enabling employees to
assume
higher 58
responsibility

HUMAN RESOURCES
HRD PHILOSOPHY IN VISAKHAPATNAM STEEL PLANT

Employees of the organization are greatest and most valuable


resources.
Whole on the one hand, HRD should appropriately harness the
employee potential for the attainment of the company objectives, the
company on the other, as its corporate responsibility, should create an
enabling climate where in human talent gets the best opportunity for
self expression, all round development and fulfillment.
People are more than mere resources and therefore it will be the
companys sincere endeavor to treat people with all the respect and
that

is

warranted

when

employees

are

seen

as

more

mere

instrumentalities.
HRD as a management function will be given a place of strategic
priority, along with function like production, maintenance, materials
on finance in the overall scheme of management action in the
company.
HRD does not refer to training alone, nor it is just a new name for
training.

In RINL/VSP HRD refers to creative and innovative

59

initiatives in several management functions for the development and


growth of employees
HRD should eventually be a core philosophy of all management
actions and should not remain merely a departmental / sectional
activity.
All functional and divisional heads responsible for various activities of
the company will imbibe the HRD spirit and suitability integrate HRD
into their plans, decisions and actions

HRD Objectives of Visakhapatnam Steel Plant:

To provide initially a suitable match between employee competence


level and companys work requirements

To foster an appropriate climate and culture which nurtures employee


competence and adequate motivational levels for the application of
their abilities to assigned jobs/roles with required commitment.

To enable employees seek greater identification with the company by


fusing management decisions and actions with the requisite care,
concern and developmental approach.

To initially enable the employees and the organization achieve its


mission and objectives and business goals through HRD.

OHSAS- 18001 Certification:


60

It is widely recognized that the work itself and the work environment are
factors are paramount importance for health and well-being of the working
and general population. Most industrial jobs are inherently associate with
certain working conditions which are inimical to health and workers exposed
to them sooner or later succumb to their adverse influence unless
adequately protected. The principles of occupational risk management may
be the same in developed and developing countries. However, there can be a
wide diversity in practice. A major trend in the regulation of industrial risks
to human health and the environment is the provision of relevant
information to all stakeholders and risk bearers. The British Standard
Institute (BSI): Occupational Health and Safety Assessment Series (OHSAS)
specification provide theoretical insights to enable an organization to control
its

occupational

health

and

safety

(OH&S)

risks

and

improve

its

performance.

Visakhapatnam Steel Plant (Vizag Steel) is an ISO 9001, ISO 14001,


and OHSAS 18001, certified public sector organization in India. It is the
only steel plant in India, had all the three certificates. This paper reviews
key aspects like hazard identification and risk assessment(HIRA) carried out
in 50 departments for physical, chemical and Biological hazards, risk
control measures taken, dissemination of occupational risk management
information to 17,000 workforce as a part of OHSAS 18001 certification
process. We summarize the role of occupational health services department
in hazard identification, risk assessment and risk control at various working
environments with an emphasis on continual improvement and occupational
risk management.

Objectives:

61

Expand plant capacity to 6.3Mt by 2011-12 with the mission to expand

further insubsequent phases as per Corporate Plan


Revamping existing Blast Furnaces to make them energy efficient to

contemporary levelsand in the process increase their capacity by 1 Mt,


thus total hot metal capacity to 7.5 Mt
Be amongst top five lowest cost liquid steel producers in the world
Achieve higher levels of customer satisfaction
Vibrant work culture in the organization
Be proactive in conserving environment, maintaining high levels of safety

& addressingsocial concerns

Quality Policy:

Employees of Visakhapatnam Steel Plant are committed to supply their


customers

quality

products

and

services.

To

accomplish

this

Visakhapatnam Steel Plant will:

Manufacture products as per specification and standards agreed with


the customer.

Follow clearly documented procedures for achieving expected quality


standard of products and services.

Technological Highlights of VSP:

62

First shore based integrated steel plant.


Selective crushing with pneumatic separation of coal blend.
Seven Meter tall Coke Ovens.
Dry Quenching of hot coke and production of steam and power from
hot inert gases.
Base-mix yard for the Sinter Plant.
3200 cu. m Blast Furnace having belled-less top equipment with
conveyor charging.
Granulation of 100% molten slag at the Cast House.
B.F. top pressure recovery turbine for power generation.
Desulphurization facilities for pre-treatment of hot metal.
Sub lance measurement of dynamic blowing control with computer.
100% continuous casting of liquid steel.
High capacity, high speed, computer controlled multi-line mills.
Use of on-line heat treatment Temp core processes for reinforcement
bars.
Use of No twist rolling and controlled cooling Stelmore of wire rods.
Incorporation of peripheral yard for incoming and outgoing materials.
First integrated steel plant to receive ISO 9002 certification for all its
products.

63

Major sources of Raw Materials:

RAW MATIRIAL

SOURCE

IronOre Lumps &Fines

Bailadilla, AP

BF Lime Stone

Jaggayyapeta, AP

SMS Lime Stone

UAE

BF Dolomite

Madharam, AP

SMS Dolomite

Madharam, AP

ManganeseOre

Chipurupalli, AP

Boiler Coal

Talcher, Orissa

Coking Coal

Australia

Medium Cocking Coal


(MCC)

Gide/Swung/Rajarappa/Argali

64

MAJOR UNITS:

DEPARTMEN
T

ANNUAL CAPACITY
(000 T)

Coke Ovens

2,261

Sinter Plant

5,256

Blast
Furnace

3,400

Steel Melt
Shop

3,000

LMM

710

WRM

850

UNITS(3.0 MT Stage)
4 Batteries of 67 Ovens
& 7 Mtrs. Height
2 Sinter Machines of
312 Sq. Mtr. Grate area
each
2 Furnaces of 3200 Cu.
Mtr. Volume each
3 LD Converters each of
133 Cu. Mtr. Volume
and six 4 Strand bloom
casters
4 Stand finishing Mill
2*10 Stand finishing
Mill

65

MMSM mmsm

6 Stand finishing Mill

MAIN PRODUCTS OF VSP


STEEL
PRODUCTS

BY PRODUCTS

Angles

Nut Coke

Granulated Slag

Billets

Coke Dust

Lime Fines

Channels

Coal Tar

Ammonium
Sulphate

Beams

Anthracene Oil

Squares

HP Naphthalene

Flats

Benzene

Rounds

Toluene

66

Re bars

Zylene

Wire Rods

Wash Oil

VSP TECHNOLOGY:state of-the-art


7 meter tall coke oven batteries with coke
dyquenching.biggest blast furnaces in the country
Bell-less top charging system in blast furnace
100% continuous casting of liquid steel
100% slag granulation at the bf cast house
Suppressed combustion-Ld gas recovery system
tempcore and stelmor cooling process in LMMM &
WRM respectively
Extensive waste heat recovery systems
Comprehensive pollution control measures

Statistical Information:
MANPOWER PROFILE GROWTH PATTERNS
YEAR

EXECUTIVES

NON-EXECUTIVES

31-3-1997

2617

14570

31-3-1998

2617

14572

31-3-1999

2617

14087

31-3-2000

2683

13593

31-3-2001

4027

13104

31-3-2002

4203

12823

67

31-3-2003

4308

12586

31-3-2004

4533

12222

31-3-2005

4512

12101

31-3-2006

4629

11932

31-3-2007

4674

11727

31-3-2008

4967

11449

31-3-2009

5218

12007

31-3-2010

5263

12567

5207

12622

31.03.2011
31.03.2012

MAN POWER PROFILE

68

16000
14000

31-3-1997

31-3-1998

31-3-1999

31-3-2000

31-3-2002

31-3-2003

31-3-2004

31-3-2006

31-3-2007

3/31/2008

12000
10000

31-3-2001

8000
6000
31-3-2005
4000
2000
3/31/2009
0

3/31/2010

EXECUTIVES

NON-EXECUTIVES

Error: Reference source not foundQualification Profile as on


31.03.2012:
Engineering -15.34%
Diploma

-11.33%

Grad/PG

-11.25%

Literates

-24.33%

ITI

-40.35%

DIVISION-WISE

MAN

POWER:
Works

-82.03%

69

Projects

-2.10%

Mines

-2.14%

Others

-13.72%

SOME OF THE IMPORTANT AWARDS RECIVED BY VSP ARE


INDICATED BELOW:

AWARD
Gold award for outstanding achievement in
training excellence by Genentech Foundation, New
Delhi
Strategic leadership award for CMD of RINL by
Asia Pacific Human Resource Management
Congress, New Delhi.
Global Human Resource Development Award of
International federation of training and
Development Organisation, London
UdyogRatan Award for CMD of RINL by National
Industrial conclave-2010, Ranchi.
Great Places to Work Award by Great Places to
Work Institute and Economic Times, Mumbai.
Town Official Language Implementation
Committee Award, Visakhapatnam.
INISSAN AWARD
Won Certificate of Merit of Best HR Practices by
NIPM
Bagged the first steel minsters trophy for the year
2006-07
Adjudged Energy Efficient Unit award by
Confederation of Indian Industry Godrej Green
Business Centre at the 10th National award.

70

YEAR
2012

2012

2012

2011
2011
2011
2011
2010
2010
2010

AWARD

YEAR

Employee involvement & Process improvements:


The imagination and creativity of employees have always been key
success factors for:
the company. Employees of RINL have always been at the forefront in
contributing ideas for process improvements. Voluntary involvement of
employees in 4251 quality circles projects is a testimony of the interest
exhibited by employees in process improvements.

Safety & Health:


Safety and health of employees has always been the prime concern in the
plant and all efforts have been made to leverage upon the safety
initiatives to maximize employee morale and satisfaction.

These

initiatives have yielded positive results with a 13.33% reduction in


reportable accidents when compared to year 2007-08.

Corporate Social Responsibility:


RINL

continues

Responsibility

to

(CSR).

contribute
CSR

in

the

activities

area
in

of

RINL

Corporate
focus

Social

mainly

on

Environmental care, education, community health care, people care,


peripheral development, cultural efflorescence, activities as a responsible
corporate citizen and help during natural calamities.

71

Chapter IV
72

Data Analysis & Interpretation

DATA ANALYSIA &


INTERPRETATION
Ratio analysis in VSP/RINL
Liquidity ratios:

73

Current assets
Current ratio=

------------------------------------------Current liabilities

TABLE SHOWS YEAR WISE CURRENT RATIO


(Rs. In Crores)
Particulars

2005-

2006-07

Inventory

06
1216.4

Sundry

5
165.65

216.80

93.41

debtors
Cash & bank

5621.7

7194.68

7699.11

Other Assets

0
184.36

314.48

Loans &

1063.8

1518.90

advances
Current

4
8252.0 10448.10

11804.6

assets
Current

0
1587.8

0
3191.62

liabilities
Current

6
5.20

1203.24

2104.30

2007-08

2008-09 2009-

2010-

1761.15

10
11
3215.28 2451.5 3254.7
191.27

2
181.18

1
330.61

6624.17

5415.5

1998.8

292.43

258.91

4
137.40

9
75.96

1958.49

1569.69

1365.0

1965.0

11859.32

2
9550.6

4
7625.2

4181.32

6
4307.8

1
4607.4

2.84

4
2.21

9
1.65

4.97

3.70

ratios

INTERPRETATION

The current ratio during the study period that is from 2005-2012,it has
been observed that the ratio in highest in the year 2007-2008 it is very high
that is 3.70. Though the current ratio has been decreasing from 3.70 to
1.17in 2007-08 to 2011-2012. On the last two years the CR is below the
ideal ratio of 2:1. The companys liquidity position is not satisfactory.

74

CURRENTRATIO
4
3.5
3
2.5

RATIO

2
1.5
1
0.5
0
2007-08

2008-09

2009-10

2010-11

75

2011-12

LIQUID/QUICK RATIO:
Liquid assets
Liquid ratio = --------------------------Current liabilities

TABLE SHOWING YEAR WISE LIQUID RATIOS


(Rs in Crores)

Particulars

2005-

2006-

2007-08

2008-

2009-

2010-

06
07
165.65
216.80 93.41
5621.70 7194.68 7699.11
184.36
314.48 292.43
1063.84 1518.90 1958.49
7035.55 9244.86 10043.4

09
10
11
191.27
181.18
330.61
6624.17 5415.54 1998.89
258.91
137.40
75.96
1569.69 1365.02 1965.04
8644.04 7099.14 4370.5

4
Current liabilities 1587.86 2104.30 3191.62
Liquid ratio
4.43
4.39
3.14

4181.32 4307.84 4607.49

Sundry debtors
Cash & bank
Other assets
Loans & advances
Liquid assets

2.06

1.65

0.95

INTERPRETATION
The Quick Ratio for the year 2011-2012 was 0.70. That is for every one
rupee of Quick liabilities the firm is holding Rs0.70 of Quick Assets. The
quick ratio has gradually decreased from 3.14 to 0.70 from 2007-08 to
2011-12. As the Quick Ratio during the last two years of the study is lower
than that of than ideal ratio 1:1, the liquidity position of the company is not
satisfactory.

76

QUICK RATIO
3.5
3
2.5
RATIO

2
1.5
1
0.5
0
2007-08

2008-09

2009-10

2010-11

77

2011-12

ABSOLUTE LIQUID/ CASH RATIO:

ABSOLUTE ASSETS
Absolute Liquid/ cash ratio: -------------------------------------CURRENT LIABILITIES

Particulars

2005-

2006-

2007-

2008-

2009-

2010-

Cash & bank

06
5621.70

07
7194.68

08
7699.11

09
6624.17

10
5415.54

11
1998.8

Absolute Assets
Current
liabilities

5621.70
1587.86

7194.68
2104.30

7699.11
3191.62

6624.17
4181.32

5415.54
4307.84

ABSOLUTE
3.5
3.42
2.41
1.58
1.26
LIQUID RATIO
TABLE SHOWING YEAR WISE ABSOLUTE LIQUID RATIO

9
1998.8
4607.4
9
9
0.43

(Rs. in crores)

INTERPRETATION
The Cash Ratio for the year 2011-12 was 0.28 That is, for every one rupee
of current liabilities the firm is holding 0.28 cash in its current assets . The
current ratio has gradually decreased from 2.41 to 0.28 from 2007-08 to
2011-12. The absolute liquidity /cash ratio of VSP is less than to the ideal
ratio1:2 for the last two years that the company do not have unsequenced
liquidity position.

78

CASH RATIO
3
2.5
2

RATIO

1.5
1
0.5
0
2007-08

2008-09

2009-10

2010-11

79

2011-12

LEVERAGE RATIO:
Outsiders funds
Debt Equity Ratio =---------------------------------------Shareholders funds

TABLE SHOWING YEAR WISE DEBT EQUITY RATIO


(Rs. in crores)
particulars

2005-

2006-

2007-

2008-

2009-

2010-

Secured

06
173.87

07
604.45

08
332.78

09
907.72

10
407.28

11
274.89

loans
Unsecured

369.44

312.51

107.95

100.04

825.27

861.87

loans
Outsiders

543.31

916.96

440.73

1007.7

1233.5

1136.7

9538.2

11481.

6
12419.

5
12885.

6
13228

0.19

04
0.08

91
0.16

00
0.19

0.17

funds
Shareholders'
funds
Debt equity

8173.7
0.13

ratio

INTERPRETATION
The Debt Equity Ratio for the year 2011-12 was 0.19. It is clear that , debt
equity ratio of VSPs lenders have contributed fewer funds that owners have.
The debt equity ratio has increased from 0.08 to 0.19 from 2007-08 to 20092010, decreased from 0.19 in 2009-10to 2010-11 and it has increased from
0.17 to 0.19 in 2010-11 to 2011-12. Its capital base in high and strong. This
shows that the firm is able to decrease its interest burden by clearing its
debt.

80

DEBT EQUITY RATIO


0.2
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0

RATIO

2007-08

2008-09

2009-10

2010-11

81

2011-12

INTEREST COVERAGE RATIO:

EBIT
Interest coverage ratio=--------------------------------------FIXED INTEREST

TABLE SHOWING YEAR WISE INTEREST COVERAGE RATIO


(Rs. in crores)
PARTICULARS

EBIT
Fixed interest
Interest Coverage

2005-

2006-

2007-

2008-

2009-

2010-

06
07
1920.57 2270.76

08
3026.9

09
2114.0

10
1325.2

11
1146.2

31.06
61.83

3
31.57
95.88

6
88.14
23.99

0
77.55
17.09

1
164.55
6.97

48.42
46.90

Ratio

82

83

INTEREST COVERAGE RATIO


120
100
80

INTEREST COVERAGE
RATIO

60
40
20
0

PROPRIETARY RATIO:
Shareholders' funds
Proprietary ratio=----------------------------------------Total assets

TABLE SHOWING THAT YEAR WISE PROPRIETARY RATIO


(Rs.in Crores)

84

PARTICULARS

2005-

2006-

2007-08 2008-

2009-

2010-

Share holders'

06
7827.3

07
7827.3

7827.32

09
7827.3

10
7827.3

11
7827.3

funds
Total assets

1
1051.9

1
12835.

15276.5

2
17733.

1
18523.

1
19053.

Proprietary

9
78%

8
74%

1
75%

43
79%

21
42%

44
41%

Ratio

The Proprietary Ratio for the year 2011-12 was 0.64. This relation decrease
share holders contribution for each rupee of the total net assets. The ratio
reflects that the shareholders contribution to the total net assets.This
shows that the firm has increased its contribute to the assets . That is in
2007-08 it was 75% in 2008-09 it was 79%. Later it improved in the year
2008-09. The Proprietary for almost all the year is in decreasing trend euept
the last years.

85

PROPRIETARY RATIO
0.9
0.8
0.7
0.6

PROPRIETARY RATIO

0.5
0.4
0.3
0.2
0.1
0
2007-08 2008-09 2009-10 2010-11 2011-12

86

SOLVENCY RATIO:
Total Liabilities of outsiders
Solvency ratio =------------------------------------------Total assets

TABLE SHOWING YEAR WISE SOLVENCY RATIO:


(Rs. In Crores)
PARTICULARS
Secured loans
Unsecured loans
Total liabilities

2005-06
173.87
369.44
543.31

2006-07
604.45
312.51
916.96

2007-08
332.08
107.95
440.73

2008-09
907.72
100.04
1007.76

2009-10
387.28
845.27
1232.55

2010-11
274.89
861.87
1136.76

to outsiders
Total assets
Solvency ratio

10511.00

12835.8

15276.51

17733.43

18523.21

19053.43

5.1%

7.1%

2.8%

5.68%

6.65%

5.96%

INTERPRETATION
The Solvency Ratio for the year 2011-12 was 11.79%. The ratio was
increased from 2.8% to 11.97% from the years 2007-08 to 2011-12. The
solvency of ratio VSP ltd during the year 2011-12. Is high compared to other
years. The Solvency ratio was stable for last three years. It indicate the
solvency position of VSP ltd is more satisfactory.

87

SOLVENCY RATIO
0.12
0.1
0.08

SOLVENCY RATIO

0.06
0.04
0.02
0
2007-08 2008-09 2009-10 2010-11 2011-12

88

FUNDED DEBT TO TOTAL CAPITALIZATION:

FUNDED DEBT
Funded Debt To Total Capitalization =----------------------------------TOTAL CAPITALIZATION
TABLE SHOWING YEAR-WISE FUNDED DEBT TO TOTAL
CAPITALIZATION RATIO(Rs. in crores)
Particulars

2005-

2006-

2007-

2008-

2009-

2010-

Secured loans

06
173.87

07
604.45

08
332.78

09
907.72

10
387.28

11
274.89

Unsecured

369.44

321.51

107.95

100.04

845.27

861.87

loans
Funded debt(A)

543.31

916.96

440.73

1007.76

1232.5

1136.7
6
13229
8.50%

Total Funds

8173.7

9538.2

11481.0

12419.9

5
12885

(B)
Total

0
6.60%

0
9.60%

4
3.80%

1
8%

9.50%

capitalization
(A/B)
INTERPRETATION
The Funded Debt to Total Capitalization Ratio for the year 2011-12 was
18.80. The ratio was increased from 3.80% to 18.80% from the years 200708 to2011-12. The funded debt to total capitalization ratio VSP ltd during
the year 2011-12 is high as compared to other years of the study. There is
enough scope for the company to raise long term loans from outsiders.

89

ACTIVITY RATIO:

INVENTORY TURNOVER RATIO:

NET SALES
Inventory Turnover Ratio =----------------------------AVG INVENTORY

TABLE SHOWING YEAR WISE INVENTORY TURNOVER RATIO


90

(Rs. in crores)
PARTICULARS

2005-

2006-

Net sales

06
7305.

2007-

2008-

2009-

2010-

07
08
7932.6 9088.3

09
9128.3

10
9809.1

11
10471.

Avg inventory

71
1236.

6
7
1210.8 1482.2

8
1622.1

5
2833.4

18
2353.1

Inventory

99
5.91

0
6.55

4
5.62

0
3.46

15
3.67

0
6.13

INTERPRETATION
The Inventory Turnover Ratio for the year 20011-12 was 3.89 times. That is,
the firm is able to convert its inventory for nearly 4 times with in a year.
Normally higher, the ratio indicates the better inventory management. The
ratio has decreased from 6.13 times to 3.89 times in the year of 2007-08 to
2011-12.

91

INVENTORY TURNOVER RATIO


7
6
5

INVENTORY
TURNOVER RATIO

4
3
2
1
0
2007-08 2008-09 2009-10 2010-11 2011-12

INVENTORY CONVERSION PERIOD:


No of working days
Inventory Conversion Period =-----------------------------------Inventory turnover ratio

TABLE SHOWING YEAR WISE INVENTORY CONVERSION PERIOD

92

(Rs. in crores)
Particulars

2005-06

2006-07

No. of
working days

365

Inventory
turnover ratio
Inventory
conversion
period

200708

200809

200910

201011

365

365

365

365

365

5.91

6.55

6.13

5.62

3.46

3.67

62 days

56 days

60 days

65 days

50 days

99 days

INTERPRETATION
The Inventory Conversion period during 2011-12 was 94 days. It means that
the inventory has been disposed off or sold on an average of once in every 94
days. This period has increased in 60 days to 99 days in the years 2007-08
to 2010-11 and decreasing to the 94 days in the year 2011-12.

93

INVENTORY CONVERSION PERIOD (IN DAYS)


120
100
80

INVENTORY CONVERSION
PERIOD (IN DAYS)

60
40
20
0
2007-08

2008-09

2009-10

2010-11

94

2011-12

DEBTORS TURN OVER RATIO

Net credit annual sales


Debtors Turn Over Ratio = -----------------------------------Average trade debtors

TABLE SHOWING YEAR WISE DEBTORS TURN OVER RATIO


(Rs. in crores)

Particular 200506
A. net
7305.7
sales
1
b. average
trade
107.48
debtors
debtor
turn over 68
ratio
times

2006-07 2007-08 2008-09 200910


7932.66 9088.37 9128.38 9809.1
5

2010-11

191.54

155.105

142.34

186.23

255.90

41 times

59 times

64 times

53
times

41 times

10471.1
8

INTERPRETATION
The Debtors Turnover Ratio for the year 2011-12 was 39.98 times. That is,
firm is able to convert credit sales into cash. The Debtors Turnover Ratio
was fluctuating all the years. i.e,59 times in 2007-08,64times in 200809,53times in 2009-10,41 times in 2010-11, 40 times in 2011-12.

95

DEBTORS TURNOVER RATIO (in times)


70
60
50
40

DEBTORS TURNOVER
RATIO (in times)

30
20
10
0

96

AVERAGE COLLECTION PERIOD:

No of Working Days
Average Collection Period = -------------------------------------------Debtors turnover ratio

TABLE SHOWING YEAR WISE AVERAGE COLLECTION PERIOD

(Rs. in crores)
PARTICULARS
No of working
days
Debtors
turnover ratio
Avg.collection
period

200506
365

200607
365

200708
365

200809
365

200910
365

201011
365

60.97

41.48

58.59

64.13

52.67

40.90

5 days

9 days

6 days

6 days

7 days

9 days

INTERPRETATION
The Average Collection period Ratio during the year 2011-12 was 9.12
days . This shows that the debt form the debtors is collected very soon.

97

AVERAGE COLLECTION PRIOD (in days)


10
9
8
7
6
5
4
3
2
1
0

AVERAGE COLLECTION
PRIOD (in days)

98

WORKING CAPITAL TURNOVER RATIO:

Net sales
Working capital turnover ratio = ------------------------------------------------Working capital
TABLE SHOWING YEAR WISE WORKING CAPITAL TURNOVER RATIO

(Rs. in crores)
PARTICULARS
a.net sales
b. net working
capital
Working capital
turnover
ratio(a/b)

200607
7932.6
6
8343.8

2007-08 2008-09

0.95
times

200910
9809.1
5
5242.8
2

2010-11

9088.37

9128.38

10471.1
8
3017.72

8612.97

7678.00

1.05

1.18

1.87

3.47

times

times

times

times

INTERPRETATION
The Working Capital Turnover Ratio during the year 2011-12 was 10.42
times. It shows that the ratio has increased from 1.18 to 10.42 in the year
of 2007-08 to 2011-12.

99

WORKING CAPITAL TURNOVER RATIO (in times)


12
10
8
6
4

WORKING CAPITAL
TURNOVER RATIO (in
times)

2
0

100

PROFITABILITY RATIOS:
GROSS PROFIT RATIO:

Gross profit
Gross profit ratio = ---------------------------------*100
Net sales

TABLE SHOWING YEAR WISE GROSS PROFIT RATIO

(Rs. in crores)
PARTICULAR
S
a. gross profit

2005-06

b. net sales

7314.00

1921.00

200607
2271.0
0
7933.0
0

2007-08 200809
3027.00 2115.0
0
9088.00 9128.0
0

200910
1326.0
0
9809.0
0

201011
1147
10471.
18

Gross profit
26.30%
28.70% 33.30%
23.20% 13.60% 10.95%
ratio(a/b)
INTERPRETATION
The Gross Profit margin reflects the efficiency with which management
produces each unit of product. The Gross Profit Ratio for the year 2011-12
was 19.47%. It has been observed that the gross profit ratio is in increasing
tread up to 33.30% in the year of 2007-08 and it is decreasing from 19.47%
in the year 2011-12 sales are increasing trend but profit ratio is decreasing .
It is due to increased cost of production.

101

102

GROSS PROFIT RATION (in persentage)


35
30
25
GROSS PROFIT RATION (in
persentage)

20
15
10
5
0
2007-08

2008-09

2009-10

2010-11

103

2011-12

OPERATING PROFIT RATIO:

Operating profit
Operating profit ratio = ----------------------------------------*100
Sales

TABLE SHOWING YEAR WISE OPERATING PROFIT RATIO

(Rs. in crores)
PARTICULARS
Operating profit
Net Sales
Operating
profit ratio

200506
2011.2
1
7314.0
0

2006-07 2007-08 200809


2339.21 3325.19 4988.1
2
7933.00 9088.00 9128.0
0

27.50
%

29.50%

36.60%

104

200910
2450.5
0
9809.0
0

201011
2776.3
2
10471.
18

54.70% 25.00% 27.00%

OPERATING PROFIT RATIO


60.00%
50.00%
40.00%

OPERATING PROFIT
RATIO

30.00%
20.00%
10.00%
0.00%

105

NET PROFIT RATIO:

Net profit
Net profit ratio = ----------------------------------------*100
Sales

TABLE SHOWING YEAR WISE NET PROFIT RATIO

(Rs. in crores)

PARTICULARS
A.net profit
B. net sales
Net profit
ratio(A/B)

200506
1252.3
7
7305.7
1
17.14%

200607
1363.4
3
7932.6
6
17.18%

2007-08 200809
1942.74 1335.5
7
9088.37 9128.3
8
21%
14.63%

200910
796.67

201011
658

9809.1
5
8.12%

10471.
18
6.28%

INTERPRETATION
The Net Profit Ratio during the year 2011-12 was 5.67%. The Net Profit ratio
is in decline position from 21% to 5.67% in the year of 2011-12 in
comparative with 2007-08. Main attributable reason for the declining the
profit is overall global meltdown. Even in adverse market conditions. The
company is able to earn net profits.

106

107

NET PROFIT RATIO


25%
20%
15%

NET PROFIT RATIO

10%
5%
0%
2007-08 2008-09 2009-10 2010-11 2011-12

108

PROFITABILITY RATIOS BASED ON INVESTMENT:

RETURN ON SHAREHOLDERS INVESTMENT:

Net Profit (After Interest & Tax)


RO I= ----------------------------------------------------x 100
Share Holders Funds

TABLE SHOWING YEAR WISE RATIOS BASED ON INVESTMENT

(Rs. in crores)
PARTICULAR
S
A.net profit

200506
1252.37

200708
1942.74

8173.7

200607
1363.4
3
9538.2

B.share
holders funds
Return on
investment(

200910
796.10

201011
658.49

11481.0
4

200809
1335.5
7
12419.
91

12885

13229.
22

15.32%

14.29

16.92%

10.75

6.18%

4.97%

INTERPRETATION
The Profitability Ratio Based On Investment for the year 2011-12 was
5.5%.The highest return on Investment was recorded in 2007-08. The table
shows the ratio has decreased from 16.92% to 5.50% in the year of 2007-08
to 2011-12. It has been observed that the ROI is fluctuating from year to
year. More reserves and surplus funds have been diverted to expansion
activities.

109

RETURN ON SHAREHOLDERS INVESTMENT


70.00%
60.00%
50.00%

RETURN ON
SHAREHOLDERS
INVESTMENT

40.00%
30.00%
20.00%
10.00%
0.00%

110

RETURN ON EQUITY CAPITAL:

Net profit (after interest & tax)


Return on equity capital = -------------------------------------------Equity capital

TABLE SHOWING YEAR WISE RETURN ON EQUITY CAPITAL

(Rs. in crores)

PARTICULAR
S
A.net profit

200506
1252.3
7
4890.0
0
25.61

200607
1363.4
3
4890.0
0
27.88

200708
1942.74

200809
1335.5
7
4890.0
0
27.31

200910
796.67

201011
658.49

B.equity share
4890.00
4890.0 4890.0
capital
0
0
Return on
39.73
16.29
13.46
equity capital
INTERPRETATION
The Return On Equity Capital Ratio for the year 2011-12 was 9.72. This
shows the earning capacity of the equity share capital by the earning
capacity of the equity share capital by the firm . The ratio has been
decreased from year after year. i.e, from 39.73 to 9.72 in the year 2007-08 to
2011-12.

111

RETURN ON EQUITY CAPITAL


45
40
35
30

RETURN ON EQUITY
CAPITAL

25
20
15
10
5
0
2007-08 2008-09 2009-10 2010-11 2011-12

112

EARNING PER SHARE:

Earning Per Share =

Earning available to equity share holders


-----------------------------------------------No. of equity shares

TABLE SHOWING YEAR WISE EARNING PER SHARE


(Rs. in crores)
PARTICULARS
Earning
available to
equity
shareholders
No. of equity
shares (in crs)
Earning per
share

200506
1252.3
7

200607
1363.4
3

200708
1942.7
4

2008-09 200910
1095.00 556.89

201011
658.49

4.89

4.89

4.89

4.89

4.89

4.89

397.30

223.93

113.89

85.79

256.12 278.83

113

114

EARNING PER SHARE


450
400
350
300
250
200
150
100
50
0

EARNING PER SHAR

RETURN ON CAPITAL EMPLOYED:

Net profit
Return on capital employed = ----------------------------------------Capital employed

TABLE SHOWING YEAR WISE RETURN ON CAPITAL EMPLOYED

(Rs. in crores)

115

PARTICULARS
A.net profit
B.capital
employed
(incl.
term
deposits)
Return
on
capital
employed

2005-06
1252.37
8493.00

2006-07
1363.43
9427.00

2007-08
1942.74
9935.00

2008-09 2009-10
1335.57 796.67
7892.00 5476.00

14.80%

14.50%

19.55%

17.00%

14.60%

INTERPRETATION
The Return on Capital Employed for the year 2011-12 was 11%. This shows
the earning capacity of the capital employed by the firm. That is, the firm
is able to generate profit for the capital employed by the firm. Even though
the return on capital employed is declining from the ratio 19.55% to 7.46%
in the year 2007-08 to 2010-11 and increasing the ratio from 7.46% to 11%
in the year 2010-11 to 2011-12, but it is satisfactory, considering the
present market conditions and from the security point of view.

116

RETURN ON CAPITAL EMPLOYED


25.00%
20.00%
15.00%

RETURN ON CAPITAL
EMPLOYED

10.00%
5.00%
0.00%

117

Chapter-V
Findings & Suggestions

118

SUMMARY
The Visakhapatnam Steel Plant is the most modern integrated steel
plant. It is the only shore- based plant in India for producing 3 million
tones of steel from India. Visakhapatnam Steel plant produces a variety of
products using the fastest technology available. Visakhapatnam Steel Plant
has only the technology but also the knowledge of its customer needs. The
RINL has also established a dealer network to effectively serve the growing
demand for Vizag Steel.
Financial management is that managerial activity, which is concerned
with the planning and controlling of the firms financial resources, its
activities, and the mix of debt and equity which is nothing but its Capital
Structure. The financial manager must strive to obtain the best financing
mix or the optimum Capital structure for his or her firm.
The analysis of financial statements is, thus, an important aid to
financial analysis. Users of financial statements can get further insight
about financial strengths and weaknesses of the firm if they properly
analyze information reported in these statements. The future plans of the
firm should be laid down in view of the firms financial strengths and
weaknesses.
Ratio analysis is a widely used tool of financial analysis. Ratio is used
as a bench mark for evaluating the financial position and performance of a
firm. As a tool of financial management, ratios or of crucial significance.
Ratio analysis is relevant in assessing the performance of a firm in respect
to the fallowing aspects
Liquidity Position

119

Long-term Solvency
Operational efficiency
Overall profitability
Inter-firm comparison, and
Trend analysis

FINDINGS
The Share holder fund comparing share capital and reserve
& surpluses was rising year after year from Rs11481.04 in
2008 to Rs 13659.29 in 2012. i.e., 18.97 percent rise with
the difference of Rs 2178.25 from 2008-2012.
The long term that (load fund) comprising secured and
unsecured loan is rising year after year from Rs 440.73 in
2008 to Rs 2575.14 in 2012 i.e., 484.28 percent rise with
the difference of Rs 2134.41 from 2008-2012.

120

The current liability comprising liabilities and provisions


was rising year after year from Rs 3191.62 in 2008 to Rs
7221.61 in 2012. I.e. 126.26 percent rise with the difference
of Rs 4029.99 from 2008-2012.

The total current assets was rising year after year from Rs
11804.60 in 2008 to Rs 8492.11 in 2010. i.e., -28.06
percent rise with the difference of Rs -3312.49 from 20082012.

The current ratio of VSP is showing a declining trend . It


decreased from 3.70 in 2007-2008 to 1.17 in 2011-2012
which is below that ideal norm of 2:1. It denotes poor
liquidity position of the firm.

Quick ratio also decrease from a highest of 3.14 in 20072008 to 0.70 in 2011-2012. Which is below the standard
norm 1:1 indicating high levels inventories.

It is found that Debt Equity ratio of VSP has increased


0.08:1 in 2007-2008 to 0.19:1 in 2011-2012. It denotes that
the company is using less amount long term that debt when
compared to own capital. A standard of 1:1 is said to be
acceptable.

Working Capital turnover ratio has improved from 1.05 in


2007-2008 to 10.42 in 2011-2012 due to an increase in
sales follow by declined in the net capital assets.

121

Inventory turnover ratio decreased from 6.13 in 2007-2008


to 3.89 in 2011-2012. It indicates piling up of inventory
stock.

Debtors turnover ratio has good during the period of study.


It was abnormally high 64.13 in 2008-2009 due to less
debtors outstanding with high sales. It came down to 39.98
in 2011-2012 with average collection period 4 days.

SUGGESTIONS

122

It is suggested that the operating expenses should be


reduced to Improve the overall profitability of the firm.

It is advisable that the current assets ratio must be


increased to improve the current ratio to its standard level.

It is advisable that the net working capital is to be


maintained properly in order to run the firm smoothly
effectively. Because operating efficiency is basically based
on net working capital.

The company should maintain an ideal debt equity ratio


viz 1:2 to take advantage of financial leverage.

Inventory turnover is decrease. The company should be


inventory control techniques like ABC, EOQ, JIT, for
effective inventory management.
Since Quick ratio for the last two years it is less than the
ideal ratio 1:1. It is strongly suggested to increase
liquid/quick assets.

123

Conclusion:
The Visakhapatnam Steel Plant has been dedicated to nation in 1992
and it is one of the major steel plants in the Asia and having much
more capital investment. We know that the Visakhapatnam Steel Plant
as a large organization might have long gestation period and while
establishing the Visakhapatnam Steel Plant so much of lands were
taken from the local people and provided the jobs to them in VSP
thought they may not skillful. But the top management of VSP conducts
so many training and development programs to improve their
performance, not only this but also frequent technological changes due
to the above factors in the initial stage. The VSP incurred some losses
but with the remedial measures taken by the top management the past
scenario was changed and the organization was stepped towards the
profits and recorded 449.66 crores as a profit for the year 2002.
However the top management must take care to improve the profitability
and must try to reduce / remove the accumulated losses, which is
important for the wealth of the organization.

124

BIBLIOGRAPHY

BOOKS:

1. Financial Management: Theory & Practice (4 th Edition)


Eugene F. Brigham and Michael C. Gerhardt

2. Elements of Management Accounting


Leslie Chadwick

3. Principles of Corporate Finance (7th Edition)

125

Richard Berkley Stewart Myers

4. Accounting & Finance for Managers


Barry J. Cooper

WEBSITES
http://vizagsteel.com
http://www.indiansteel.com
http://www.bee-india.nic.in.com
http://www.answer.c

126

PROJECT SYNOPSIS
Name of the Student

: B.SIVA NAGA MANI

Batch

: 2012-2014

Reg .No

: 112282802084
127

Project Company
STEEL

: VISAKHAPATNAM

PLANTLTD
Project Place

: VISAKHAPATNAM

Project Duration

: TWO MONTHS

Project Title
FINANCIAL

: A STUDY ON

PERFORMANCE

Signature of the Project Guide


of the Department

Signature of the Head

Smt. G.GRACE M.B.A


M.B.A.,Ph.D

Dr.R.Pardhasaradhi,,

Assistant Professor
Professor

Associate

128