Raymond Limited (Primary Focus: Annual Report 2014-15)

1) Proofs of fundamental concepts of accounting, from Raymond Ltd. Report

Concept Proof
 Tangible assets owned (38).
Property Rights
 Properties taken and given out on leases (60).
 “The company” is referred throughout reports and not
Business Entity individuals.
 Directors/owners personnel earn fixed salary(15,16)
 Non-current assets(38)
Going Concern
 Long term leases(60)
 Monetary equivalent of-
Monetary Expression In
o Assets and inventory(38)
Accounts
o Material consumed, employee(39)
Matching Concept  Inflow/ outflow divided into various financial years(40)
 Revenue recognized but payment not received(38,Asset – 2)
Realization Concept
 Details of trade receivables(53)
 Values given for FY 2014 and 2015 with same
Consistency between
parameters(38,39)
accounting periods
 10 year data comparison(104)
Diversity among
 Multiple subsidiary companies(9 – III)
independent entities
Conservatism  Lower valuation of inventories(73–VI)
Dependability of Data  Through Board as well as Audit Committee(6)
Through Internal Control
 Facts mentioned with “When compared to the size” phrase
Materiality
(36–1b, 2b, 3c)
 Tentative reporting dates(29)
Timeliness
 Details of last three general body meetings(28)

2) Stakeholders and Useful Information

Stakeholders
Information How it is useful
(Examples)
Financial performance(2), dividend history(30),
Shareholders To decide to buy/sell
share price patterns(32), growth rate,
(J.K. Investors) shares
profits(104)
Inflow and outflow of financial activities(40), To validate financial
Fund
shareholdings in various subsidiary activities, to analyse
managers/Analysts
companies(9), statement of profit/loss(39), returns, for further
(M.Shivkumar, CFO)
Investments(48) investment activities

Customer Quality/quantity improvements(27), accolades

Comfort, ease of use
(General Public) for design, gender sensitivity(11) etc.

Supplier and
Income generation ability,
Creditors Profit/loss statement(39), balance sheet(38)
liquidity, debt
(JK Investors)

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 To check Compliance with
Government Auditing and Procedures(6), Penalties &
Laws and Taxes, Market
(Policies) Offences(16), Company Laws(18), Taxes(39)
Regulation
Top Management Remuneration(15,16), Statement of
Decision Making
(Directors, CXO’s) Accounts(38,39,40)
Work Incentives and
Workers & Unions Employee Benefits (61-63)
Motivation
Public CSR, Environment Regulations & Human
Sustainable Development
(ILDCs) Resources(7,18,19)
Lenders Indebtedness(14), Long Term
Growth, Credit Worthiness
(HDFC, IDBI) Loans(42,43,44,48), Short Term Loans(53)

1. Summarized Balance Sheet Report – Raymond Ltd.

Contributed
Year Assets Liabilities Accumulated Retained Earnings
Capital
2014-15 4668.04 = 3054.16 + 133.90 + 1479.98
2013-14 4442.35 2905.68 131.93 1404.74
*all figures in ₹ Crores

Summary Points:
 Raymond has recorded approx. 5% increase in Assets, Liabilities and Equity in the fiscal 2015 over fiscal 2014.
 The company is following a steady growth pattern. A 4.81% year on year growth in Profits was recorded.
 The Minority Interest in the company has reduced by 2.8%.
 In contributed Capital we included the Share Capital and Minority Interest. Under IFRS, the Minority Interest (non-
controlling interest) is reported in the Equity section of the consolidated balance sheet.
 The Balance Sheet Equation holds true for both financial periods.
 Accumulated Retained Earnings = Revenue - Expenses - Dividends.

2. Five Biggest Items classified under Assets, Liabilities and Owner’s Equity

TOP 5 ASSETS Details (₹ Crore) (%) Comments

Trade Receivables Unsecured/outstanding, period < 6 months 764.30 16.37 - Company has high faith in the
market. Exhibited by High Credit
Tangible Asset – A Plant & Equipment 655.90 14.05 Sales. Top Asset is a Current
Asset. Liquid in nature.
Inventories – A Stock in Trade 374.98 8.03 - Assets are concentrated
Inventories – B Finished goods 320.28 6.86 among the Top 5. These Assets
together account for 51% of the
Tangible Asset – B Buildings 265.58 5.69 total asset value.

TOP 5 LIABILITIES Details (₹ Crore) (%) Comments

Long term Borrowings Secured Term loans from banks 547.70 17.93 - Company Goodwill is strong in the
market, indicated by the fact that
Long term Borrowings Unsecured Debentures 310.00 10.15 Non-Current Liabilities are a large
Short term borrowings Secured working capital loans repayable on demand 308.36 10.09 part of Total Liabilities.
- This data can be used to decide the
Short term borrowings Unsecured by issue of commercial papers 205.00 6.71 liquidity and solvency of the firm
including its ability to repay short
Other long term liabilities Deposits from dealers and Agents 129.40 4.23 and long-term debt.
TOP 5 SHAREHOLDERS Details (₹ Crore) (%) Comments
J K Investors (Bombay Ltd) 16826419 Shares Owned 1682.64 27.41 J.K Group and its subsidiaries
LIC 4079297 Shares Owned 407.93 6.65 are the majority shareholders
giving the owner and his family
J. K. Helene Curtis Ltd 3399208 Shares Owned 339.92 5.54 complete control over
J.K. Investo Trade India Ltd 2588025 Shares Owned 258.80 4.22 Raymond.
J.K. Sports Foundation 792395 Shares Owned 79.24 1.29

1. Revenues – Expenses - Dividends = Net Income (Net Increase in Owner’s Equity)

Net Income/ Retained

Year Revenues - Expenses - Dividends = Earnings

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 2014-15 5427.79 5314.95 12.34 100.49
2013-14 4620.62 4513 6.31 101.31
* all figures in Rs.Crores

 Profitability of Raymond Ltd has marginally decreased in FY 2015. Operating Profit for FY 2015 is Rs.159.71
Crores and Operating Profit for FY 2014 is Rs.160 Crores.
 Total Profit (Net Income + Dividends) for FY 2015 (Rs.112.81 Crores) is higher than that of FY 2014 (107.63)
because of a one time loss sustained in FY 2014 (Impairment of Gas based Captive Power Plant).
 Dividends are not included in P/L Statement and have been taken from the Cash Flow Statement.
 Dividends paid in FY 2015 is almost double that of FY 2014. Net Income is 1.85% of Revenues in FY 2015
and 2.19% of Revenues in FY 2014.

2. TOP 5 Revenues , Expenses / Dividends

TOP 5 REVENUES Details / Examples (₹ Crore) (%) Comments

Manufactured Goods Sale Fabrics, Garments, Designer Wear 3275.33 60.34

Stock in Trade Goods kept in hand for the purpose of trade 1461.21 26.92 - Raymond Ltd is highly
dependent on its
manufactured goods since
Export Incentives Monetary/Tax Incentives from government 45.39 0.83 they make up the bulk of the
revenue.
Job Services Processing/Tailoring of Cloth 40.18 0.74 - Stock in Trade Value is quite
high.

Processed Waste Sale Efficient use of waste materials 39.32 0.72

TOP 5 EXPENSES/DIVIDENDS Details (₹ Crore) (%) Comments

Cost of Materials Consumed Raw Materials Consumed 1358.44 25.55 - Compared to FY 2014
(12.5%), the proportion of
Purchases of Finished goods that support Stock in Trade purchases has
Purchase of Stock-In-Trade 1070.93 20.14
production gone up in FY 2015 (20.14%).
Manufacturing & Operating
Overhead Costs 845.86 15.91 - Total Employee Benefits
Costs
have increased from FY 2014
Employee Benefits Salaries, Wages, PFs and other welfare expenses 662.70 12.46 hinting at growth of the
Employee Base.

Finance Costs Loan Processing, Interest Fees and 200.39 3.77 - Dividends are a percentage
of the Total Profit for the
Dividends Paid to Shareholders from Total Profit of Year 12.34 10.9% year (Rs.112.81 Crores).

1. List of clearly visible non-Cash Items in the Profit & Loss Statement of Raymond Ltd

Amount
Sno Details Comment(s)
(Rs.Crores)

- It is only a monetary figure by which Assets are

decreasing in value
-Used to offset expense over a period instead of at
Depreciation and once.
1 161.88
Amortization Expenses
-Multiple ways of calculation of Depreciation exist
and the amounts vary during the intermediate
stage

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 - It is being adjusted in subsequent accounting
2 Deferred Tax 19.69
periods
-Anticipated bad debts against our Accounts
Receivables

3 Provision for doubtful debts 6.83

- It will be only actually written off with complete
certainty only if unpaid for a fixed duration

- Based on Market Conditions, Current value is

Provision for Dimunition of estimated to decrease and provision is made.
4 0.39
Long Term Investments

-Conservatism Principle is being applied here.

- Calculated based on Depreciated Value of a Fixed

5 Net Loss on Sale of Assets 0.67
Asset

-Payments expected to be received from doubtful

7 Provision Written Back 0.64
debtors/ proposed bad debtors

Provision No Longer
8 12.19 Old Provisions Written Back
Required
- Will convert into cash item only when company
9 Minority Interest 6.77
sells its minority stake

1.a. Key Components in Share Capital of Raymond Ltd

Key Component Rs. in Crores Comments

2015 2014
Authorized share 100 100 There has been no change in the issued Share Capital. The
capital owners are not interested in diluting their equity.
Issued, subscribed 61.38 61.38 Required Capital is being raised through Short Term and
and paid up capital Long Term Borrowings (Secured and Unsecured Loans).
Unissued share 38.62 38.62
capital Only one class of equity shares are issues on which one
vote per share voting rights are provided.

The company is stable and is in the mature phase of its life

(Established in 1925).

b. There have been no changes in the past two years in the Share Capital Portion of the Balance Sheet. So we have
shown the entries that may have taken place during the Initial Public Offering by Raymond Ltd. (Assuming all the
capital was paid up by First Call)
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Journal Entries (I.P.O.)

Share Application and Allotment (Dr) Rs.24.55 Crores

Share Capital (Cr.) Rs.24.55 Crores

Being amount due on Application and Allotment of 6,13,80,854 Equity Shares at Rs. 10 Par Value, Application and
Allotment Charge = Rs.4/Share.

Bank Account (Dr) Rs.24.55 Crores

Share Application and Allotment (Cr.) Rs.24.55Crores

Being Amount received on allotment of 6,13,80,854 Shares.

Share Call (Dr.) Rs.36.83 Crores

Share Capital (Cr.) Rs.36.83 Crores

Being Amount due on call on 6,13,80,854 Equity Shares at Rs. 6/Share.

Bank Account (Dr.) Rs.36.83 Crores

Share Call (Cr.) Rs.36.83 Crores

Being Pending Amount Received on 6,13,80,854 Equity Shares.

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2. Five Biggest Items I Revenues and Surplus

2015 2014
Item Type Proportion Proportion Comment
Amount Amount
18% increase in Capital
Reserves in 2015 as compared
Capital
Capital 27.37 1.8% 23.15 1.6% to 2014 due to increase in
Reserves shares of equity holding in
subsidiary.
Capital has been raised by
Debentures
issuing debentures. D.R.R. has
Redemption Capital 70 4.7% 45 3.2%
grown by 55% in 2015 as
Reserves compared to 2014.
Investments in J.K. Files
Retained Indonesia and J.K. Investo Trade
Earnings in Revenue 98.68 6.7% 94.95 6.8% have resulted in returns of
Associates Rs.2.68 Crores and Rs.12.73
Crores respectively in 2015.
In 2015, Raymond is paying off
Securities
Debentures worth Rs.11.06
Premium Capital 130.64 8.8% 142.05 10.1%
Crores and hence the account
Account value has reduced.
General Reserves are used to
offset potential future losses. In
General this case, there has been a
Capital 868.13 58.7% 849.38 60.5%
Reserves transfer from Debenture
Redemption Reserves to this
account.

Please note that all numbers are in Crores except the ratios.
For ratios that involve items from balance sheet and income statement, the balance sheet item value is
computed to be the average of the starting and ending value for that period, to match the income statement
value which is for a period, as against balance sheet values which are for specific point in time. 2013
balance sheet has been taken to arrive at 2014 numbers if required to average.

i) Short Term Solvency Ratios for Raymond Ltd

Item 2015 2014

Average Daily Expenses 13.82 11.53
Cash Cover 7.60 5.16

Current Asset Cover 191.89 212.14

Current Liabilities Cover 129.49 142.94

Comments: Since the coverage ratios are all high, Raymond is in a position to fulfil its obligations to
lenders. There has been little change in the financial position of the company as indicated by similar
coverage values for 2014 and 2015.

Average Daily Expenses = (COGS + Operating Expense + Tax – Depreciation) / 365

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Current Assets Cover = Current Assets / Average Daily Expenses

Cash Cover = Cash / Average Daily Expenses

Current Liabilities Cover= Current Liabilities / Average Daily Expenses

ii) Long Term Solvency Ratios

Item 2015 2014

Times Interest Covered 1.87 1.72
PBT 159.75 124.61
Interest Expense 183.28 173.37
EBIT 343.03 297.98
Gearing Ratio 3.029 3.030
Long Term Liability 4668.05 4442.35
Owner’s Equity 1541.36 1466.12
Comments: Since gearing ratio is > 1, the company is not lender friendly. Since Times interest covered
ratio is > 1.5, company can meet its interest expense.
Times Interest Covered = EBIT / Interest Expense
Gearing = Long Term Liability / Capital Employed (OE)
iii) Dupont Analysis

Item 2015 2014

Dupont 0.072 0.074
Net Income/Sales 0.02099 0.02343
Sales/Total Assets 1.151348 1.034079
Total Assets/ Average Net Worth 2.963327 3.034506

Comments: Since the biggest ratio is Total Assets / Average Net Worth (2.96), the company is playing
financial leverage game.

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. Please write about the Inventory Valuation policy for your allocated company.

Cost of Materials Consumed 2015 2014

Opening Stock 116.84 114.12
Add: On JV becoming Subsidiary 0 8.02
Purchase 1128.16 1070.79
TOTAL INVENTORY 1245 1192.93
Sales 1.17 1.88
Closing Stock 117.35 116.84
TOTAL 1126.48 1074.21
*All Values in Rs. Crores

i) Cost comprise of all cost incurred in bringing the inventories to their present condition and location.

ii) Inventory Valuation used is:

a. Specific Identification for items like Textile Fibres (Different Types of Raw Materials)
b. Average Cost is made for other items.
c. Due allowance is estimated for defective and obsolete items, wherever necessary, based on past experience.
d. Goods in transit are stated at Cost
e. Inventories are stated at Cost or Net Realizable Value, whichever is lower.

c. Please write about the Depreciation policy for your allocated company. … Please do not cross 200 words

Depreciation and Amortization Expense 2015 2014

In Rs. Crores 161.87 195.78

a. Straight Line Method is used for Depreciation of Factory Buildings, Plant, Machinery, Aircraft, Electrical
Installations and Equipment’s.

b. Written Down Value Method is used for Other Assets.

c. In case of Pre-owned assets, the useful life is estimated on a case to case basis.

d. Cost of Software Capitalized is amortized over a period of three years.

e. Cost of technical know-how (patents etc.) is amortized over a period of six years.

f. Cost of Leasehold land is amortized over the period of lease.

I. What were the major sources of cash during the last two years?

Inflows 2015 2014

Sale of Current Investments 70.87 34.49
Interest Received 27.98 13.56
Proceeds from Long Term Loan 141.66 529.03

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II. What were the major uses of cash during the last two years?

Outflows 2015 2014

Repayment of Borrowings 239.15 418.39

Acquisition of Fixed Assets 230.63 127.58

Finance Charges (Net) 213.19 193.61

III. Was cash flow from operations greater than or less than net income? Explain in detail the major reasons for
the differences in these two figures.

Item 2015 2014

Operating Cash Flow 380.05 191.79
Net Income 112.81 107.63

Reasons:

 Non-Cash Expenses are a large part of the Net Income (Income Statement).
 Inventory is being bought on Credit. (Increase in Trade Payables reflected in Cash Flow Statement)
 Finance Costs are on the higher side.
 Large number of fixed assets and thus depreciation is very high.

IV. Was the firm able to generate enough cash from operations to pay for all of its expenditures?

 Considering the year 2015, Cash from Investing and Financing Activities are both Negative. This
shows that the entire cash is being generated from Operations.
 As the company is making healthy profits, the overall income is greater than the expenditures
incurred.
 The business is in a mature stage of its lifecycle.
 Cash from Operations = Rs.445.48 Crores

V. Did the cash flow from operations cover both the capital expenditures and the firm’s dividend payments, if
any?
A. If it did, how did the firm invest excess cash?
2015: Cash from Operations = Rs.445.48 Crores
Capital Expenditures: 40.87 Crores
Dividends: 12.34 Crores
Total = 53.21 Crores | Excess Cash Available = 392.27 Crores
Investment of excess Cash:
a. Investments in Minority Interest
b. Long Term Borrowings have come down substantially. These loans may have been paid back using the
surplus cash.
c. Investments in Tangible Assets
d. Cash has been parked in the Company Bank Account.

VI. Were the working capital (current asset and current liability) accounts other than cash primarily sources of
cash or uses of cash?

Current Assets = Rs.2578.06

Current Liabilities = Rs.1930.86
Working Capital = Rs.647.2
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 Clearly, Working Capital is a source of cash. Current Assets are much more than the Current Liabilities
(Excluding Cash and Bank Balances.

VII. What other major items affected cash flows?

Cash Inflows 2015 2014

Proceeds from Other Borrowings 74.97 0

Sale of Fixed Assets 6.82 9.97

Sale of Non-Current Assets 5.48 17.91
Cash Outflows
Purchase of Other Long Term 26.13 4.5
Investments

Tax on Dividend 1.97 1

Repayment of Other Borrowings 0 28.43

VIII. Display over these two years (for the selected company), the trends in

Comments in Trends
2015 2014
Net Income 112.81 107.63 Net Income has increased marginally. The company is at a
mature stage of growth.
Cash Flow From 380.05 191.79 Cash Flow from Operations has almost doubled from last
Operations year. The Operating Activities are driving the growth of the
company
Capital Expenditures 1470.18 1430.31 Capital Expenditure is more or less constant. Again, this is a
measure of the stability of the company in the industry.
Dividends 12.34 6.31 Dividends have doubled. The company is confident about its
position in the market and is rewarding its shareholders.
This will increase the goodwill of the company in the minds
of the stakeholders as well.
Loans
Proceeds (Income) 1570.8 1663.35
Repayment (Interest) 183.28 173.37
Net Borrowing 1387.52 1489.98 Net borrowing has decreased from 2014 to 2015. Raymond
has paid back some of its loans from the Improving
Operating Cash Flows.
Working Capital 776.45 948.6 Working Capital Account has decreased by 18%. Current
Accounts Assets vs Current Liabilities

Page 10 of 24
 IX. Based on the evidence in the Statement of Cash Flow alone, what is your assessment of the financial strength
of the business? Why?

Assessment For FY 2015

 PBT = Rs.159.74 Crores

 CFO = Rs.445.48 Crores
 Capital Expenditure = Rs.230.63 Crores
 Depreciation = Rs.161.87 Crores
 Dividends Paid = Rs.12.34 Crores
 Secured Loans = Rs. 547.7 Crores
 Unsecured Loans = Rs. 40 Crores
 Debentures = Rs.310 Crores

Important Ratios:
a. CFO/Maturing Debts = Rs.445.48/53.5 = 8.32
Maturing Debts = Term of Repayments (Notes to Consolidated Financial Statements)
Company is in a good position to pay of its maturing debts from the Operating Cash Flow itself.
b. (Cash flow+Interest+Tax)/Interest = Rs.(445.48+183.2+9.64)/183.2 = 3.48
Company is in a good position to keep paying its interests on its debts.

So we can conclude that

i) CFO > CAPEX
ii) CFO > CAPEX + DIVIDENDS
iii) CAPEX > DEPRECIATION

Raymond appears to be in a strong position as far as financial strength is considered because of below two
reasons.
1. Consider cash generating power ratio which gives company’s ability to generate cash purely from
operations compared to total cash inflow. This value is 36.9%. This indicates that Raymond can generate
cash from operations alone.
2. Consider External financing index ratio = CFF/CFO = -1.34. –ve indicates that Raymond is able to pay back
debt. Net cash from financing is negative.
3. There was no inflow from financing and investing activities suggesting that Raymond is highly dependent
on operating activities.

Considering the above points, we give the company a bankruptcy rating of 7.5 on a scale of 10.

x. Do you observe any errors in the Cash Flow Statement of your company – compared to our discussions on the
same (including the new IFRS suggested norms)

. Interesting Items in the Annual Report of Raymond Ltd.

ITEM 2015 2014 Comment

MAT CREDIT (2277.08) (198.50) There is a substantial amount of MAT Credit (Utilised-
Net) in FY 2015
DEFERRED TAX 1968.96 (506.10) At the same time, Deferred Tax is being paid up in FY
2015.

Equity Shares 6138.08 6138.08 No Dividends paid for the year in spite of huge profits.

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 Raymond Ltd has only one class of Equity Shares
having a par value of Rs.10 per share.

Currency Fluctuation 2025.32 2206.90 Within Reserves and Surplus, a separate item is
Reserve
maintained for Currency Fluctuation – Currency
Fluctuation Reserve to provide for currency
fluctuations and hence, rise and fall of foreign
reserves.

cash flows from i nvesting and fina ncing a ctivities shoul d be re ported gros s by maj or class of cash re ceipts a nd maj or clas s of cash payme nts except for the follow cases, w hich may be rep orted on a net basis : [IAS 7.2 2-2 4]

Page 12 of 24
 Torrent Power (Primary Focus: Annual Report 2014-15)
Note: All citations of page# and section name are from the Annual Report of Torrent Power for the FY’13-14

Q1. Concepts of Accounting:

1. Property Rights: Page 24; Composite Scheme of Amalgamation first paragraph last line.
2. Business Entity: Page 42; Point C: Details of remuneration paid to the Directors
3. Going Concern: Page 68; Point 2 on future repayment obligations under long term borrowings
4. Money Measurement: Page 55; point (iv)
5. Matching: Page 59; Profit and loss statement for the year ended 31st March, 2014
6. Realization: Page 64; Note 1.11 of revenue recognition
7. Consistency: Page 62; Last line of Note 1.1
8. Diversity among Independent Entities: Page 117; Point 40
9. Conservatism: Page 65; Note 1.16
10. Dependability of Data: Page 62; Note 1.1(company perspective); Page 89 Auditor’s Responsibility (auditor
perspective).
11. Materiality: Page 62; Note 1.4 on intangible assets.
12. Timeliness: Page 21; Directors’ Report, 1st Paragraph

Q2. Sample name of each category of stakeholders:

Sl. Category Sample Name Useful information
1 Associates AEC Cements Non Current Investments because the Company has
leased a portion of its land to AEC Cements &
Constructions Limited.
2 Subsidiaries & Torrent Energy Investments, Share Capital since these indicates
Holding Limited(Subsidiary) percentage ownerships of subsidiaries by the
Company Torrent Private holding company and also the equity shares and
Limited(Holding Company) valuations of these.

3 Enterprises TPL (Surat) Gratuity Trust Profit and Loss statement to see if company is
controlled by doing profitable business.
the Company
4 Key Sudhir Mehta (Executive Salaries, dividends payout, PF, gratuity which also
Management Committee) directly affect their family and relatives.
Personnel, Anita Mehta
Unions & their
relatives
5 Government BJP Income tax, donations to different political parties.
6 Public CSR activities to the society
7 Franchisee Maharashtra State Balance sheet because that includes goodwill which
Electricity Distribution will benefit their brand image.
Company

Summarized balance sheet equation.

Upon analysis, when compared to 2013 the revenues in 2014 were higher by Rs. 547 crores. However the profit after tax was less compared to last year due to
increase in expenses, the major being the increase in electrical energy purchase(approx. Rs. 630 crores). Also the increase in liabilities was proportionately higher
compared to the increase in assets in these two years by which we can deduce that the company is expanding.

Q2. Five biggest items in the Balance Sheet:

Balance Sheet Value (Rs. in Crore as Proportion of Total Assets (or) Value (Rs. in Crore as Proportion of Total Assets (or) Change in value
Items on 31st March 2013) Total Equity & Liability (in %) on 31st March 2014) Total Equity & Liability (in %) (Rs. in Crores)
Tangible Assets 7262.76 53.07% 9283.98 60.70% 2021.22
Reserves & 5617.84 41.05% 5704.11 37.30% 86.27
Surplus

Page 13 of 24
 Long Term 4492.58 32.83% 5593.71 36.57% 1101.13
Borrowings
Non-Current 1389.13 10.15% 2114.34 13.82% 725.21
Investments
Cash & Bank 1096.37 8.01% 1527.04 9.98% 430.67
Balance

We can infer that the Assets & Liabilities are increasing proportionately in the FY 2014 when compared to FY 2013. The Tangible Asset increased by 7.63 percentage
points, however the reserves and surplus decreased by 3.75 pp. It is also observed that though the long term borrowing increased by 3.74pp, the unsecured loans have
come down. The focus is more on borrowings from financial institutions & banks for expanding their business as can be seen in the increase in the Investment.

Q1. Summarized income statement equation.

Retained Earnings = Revenue – Expenses – Dividends – Tax = Profit after Tax

As per the consolidated profit and loss statement as given on page #59 of the Annual Report.
Year Revenue (Rs. in Expenses (Rs. in Dividends (Rs. Tax (Rs. in Retained Profit After Tax Retained
Crore) Crore) in Crore) Crore) Earnings (Rs. (Rs. in Crore) Earnings as a
in Crore) percentage of
Revenue (%)
2013 8269.97 7647.23 0 237.78 384.96 = 384.96 4.65
2014 8817.46 8571.02 0 151.60 94.84 = 94.84 1.08

Upon analysis, when compared to 2013 the revenues in 2014 were higher by Rs. 547 crores. However the profit after tax was less compared to last year
due to increase in expenses. We can also see that Retained Earnings as a percentage of Revenue has dropped sharply by a quantum of 3.57 pp from the last
year. Also there are no dividends being paid to the shareholders which shows that the company is expanding.

Q2. Five biggest items as a part of the income and expenses/dividends:

INCOME Value (Rs. in Crore as Proportion of Total Value (Rs. in Crore as Proportion of Total Change in value
on 31st March 2013) Revenue (%) on 31st March 2014) Revenue (%) (Rs. in Crores)
Revenue from power supply 7970.06 95.28 8520.94 95.4 550.88
Interest Income from 59.09 0.71 119.22 1.33 60.13
Deposits
Profit on sale of current 31.86 0.38 65.98 0.74 34.12
investments
Miscellaneous (Revenue 66.69 0.80 53.88 0.60 -12.81
from Operational Income)
Miscellaneous Income 32.52 0.39 48.58 0.54 16.06
(Revenue from Other
Income)

EXPENSES Value (Rs. in Crore as Proportion of Total Value (Rs. in Crore as Proportion of Total Change in value
on 31st March 2013) Expenses (in %) on 31st March 2014) Expenses (in %) (Rs. in Crores)
Electrical Energy 3584.65 46.34 4217.76 48.72 633.07
Purchased
Operation & Other 3035.42 39.24 2908.62 33.60 -126.80
Expenses
Finance Cost 437.8 5.66 704.62 8.14 266.82
Depreciation & 427.19 5.52 554.37 6.40 127.18
amortization expenses
Employee benefit 250.19 3.23 271.47 3.14 21.28
expense

We can infer that the Expenses are increasing at a higher proportion when compared to Incomes from core operations; in the FY 2014 when compared to FY
2013. This also depicts the fact that total profit over the 2 years is on a decreasing trend. Operations and other expenses have decreased which is also
reflected in the lowering of miscellaneous operational income. About 95% of the total income for Torrent power is from its core operation of power supply.
The focus is more on borrowings from financial institutions & banks for expanding their business as can be seen in the increase in the Finance Cost.

1. Identify the list of clearly visible non-Cash Items in the Profit & Loss Statement of your Allocated Company’s
Annual Report. Please add your quick comments

Page 14 of 24
 From the Profit and Loss statement (Pg 64) of Torrent Power, the only visible non cash item is Depreciation and
Amortization expense.

- Though the company’s assets do lose value over time (hence the need to record depreciation), the company
does not actually write a check to “Depreciation.” It is just an accounting entry to reflect the reduction in the
value of the company’s assets and does not deal with exchange of cash, hence it is a non cash item.

- Also, the choice of amortization impacts the accounting numbers for your expense and income, but it does
not alter the fact that the actual cash was paid out on day one. Since amortization does not affect cash, it is a
non cash item.

- Therefore, Depreciation and Amortization expense(net) = Rs. 534.52 crore = 6.2% of Total Expenses
However, if we look at the balance sheet, we can clearly see an increase in

1. Trade payables,
2. Inventory and,
3. Trade Receivables.
These would also account for non-cash items in profit and loss statement, when expanded completely.

Items Value Percentage Proposition

Depreciation and Amortization Rs. 534.52 crore 6.2% of Total Expense
expense(net)
Increase in trade payables Rs. 45.15 crore 0.527% of Total Expense
Increase in Inventory Rs 40.12 crore 0.455% of Total Revenue
Increase in trade receivables Rs. 52.70 crore 0.598% of Total Revenue

Q1a. The key components in the Share Capital portion for the last two years from the Torrent Power annual report

As per information given in the statement of share capital in the Torrent Power annual report @page 71

Key components of share capital Value (Rs. in Crore as Value (Rs. in Crore as Comments
on 31st March 2014) on 31st March 2013)
Authorized share capital 2000 2000 No change in authorized share capital
Issued, subscribed and paid up capital 472.45 472.45 23.62% of the Authorized Capital Issued. All the issued
capital is paid up.
Equity Shares 472.45 472.45
Preference Shares 0 0 No Preference Shares Issued by the company. The capital
raised by the existing Stocks and Bond are sufficient.

Major Equity Shareholder(s) % holding in the Comments

company
Torrent Private Limited 53.43% Majority of stake (53%) held by Torrent Power to retain
Gujarat State Investment Limited 9.92% ownership, management Control and prevent dilution of
voting rights.
Life Insurance Corporation of India 9.17%

. Any Changes in the Share capital portion in the last year: No. The Company has sufficient liquidity ratio and is sustaining itself on the positive reserves and surplu
Hence, is not generating any inflow from financing activities.

Q2. Five biggest items of the Reserves & Surplus (along with their proportions – for example, identify the capital reserves revenue reserves of the company)

Amount (in Cr. Rs) 2013 Amount (in Cr. Rs) 2014
Reserves & Surplus 5617.84 5704.11
Five biggest Reserves & Surplus items:

Reserves Components Value (Rs. in % of Total Value (Rs. in % of Total Comments

Crore as on 31st Reserves & Crore as on 31st Reserves &
March 2014) Surplus March 2013) Surplus

Page 15 of 24
 Service Line 555.00 9.87924184 459.93 8.063133 Around 10% of the total reserves are in capital
Contributors reserves. These are reserved for long-term capital
Capital Reserves Grant in Aid under 37.86 0.6739245 40.57 0.711242 investment projects or any other large and
Accelerated Power anticipated expense(s) that will be incurred in the
Development and future. This type of reserve fund is set aside to ensure
Reform Programme that the company has adequate funding to at least
(ARDRP) partially finance the project.
Total 592.86 10.5531663 500.5 8.774375

Debenture Debenture 47.62 0.84765675 23.81 0.417418 Less than 1% of the total reserves are in this reserve.
Redemption Redemption Reserve Indian companies issuing debentures are required to
Reserve create a redemption service to protect investors
against default.
Contingency Reserve 121.68 2.16595702 91.83 1.6098921. Around 3% of the total reserves are parked in this
category. Statutory reserves are the amount of liquid
Tariff and dividend 0 0 11.59 0.203187 assets that firms must hold in order to remain solvent
control reserve and attain partial protection against a substantial
Statutory investment loss. Holding reserves reduces the risk of
Reserve insurance.
Special Reserve 78.07 1.38968002 78.07 1.368662

Total 199.75 3.55563704 181.49 3.181741

General Reserves 3479.80 61.9419563 3479.80 61.00513 Majority (88.7%) of the Reserves & Surplus are parked
under general reserves & surplus from P&L. These are
Surplus in the 1504.80 26.7860957 1462.41 25.63783 retained earnings from the company’s profit. As can
statement of profit be seen, the company’s majority of the Reserves
Other Reserves and loss comes from its retained earnings.

Total 4984.6 88.728052 4942.21 86.64296

Short term Solvency Ratios:

Average Daily Expense = (Cost of Goods Sold + Operating Expense + Tax – Depreciation)/ 365
Cash Cover for Daily Expense = (Cash/ Average Daily Expense)
Current Asset Cover for Daily Expense = (Current Asset/Average Daily Expense)
Current Liability Cover for Daily Expense = (Current Liability/Average Daily Expense)
Table 1: Expenses Particulars
Particulars 2014 (Rs. in Crore) % of total 2013 (Rs. in % of total
expense Crore) expense
Expenses
Electrical energy purchased 4,186.12 48.84 3,552.89 46.46
Employee benefits expense 270.33 3.15 249.00 3.26
Operation and other expenses 2,902.87 33.87 3,028.93 39.61
Finance costs 677.18 7.90 408.48 5.34
Depreciation and amortization expense 563.92 6.58 432.04 5.64
Less: (Transfer from service line contribution, APDRP grant and (29.40) (0.34) (24.11) (0.31)
others) ------------------ --------- ---------------- -------------
Depreciation and amortization expense (net) 534.52 6.24 407.93 5.33
Total expenses (1) 8571.02 100 7,647.23 100

Table 2: Tax Particulars

Particulars 2014 (Rs. in Crore) % of total 2013 (Rs. in % of total
expense Crore) expense
Tax
Current tax 33.50 22.10 126.15 53.05
Deferred tax 124.62 82.20 111.17 46.75
Short / (excess) provision of current tax for earlier years (6.52) (4.3) 0.46 0.20
Total Tax (2) 151.60 100 237.78 100

Table 3: Cash Flow Statement

Particulars 2014 (Rs. in 2013 (Rs. in
Crore) Crore)
Cash Flow
Operating Activities:
Page 16 of 24
 Net profit before tax 246.44 622.74
Operating profit before working capital changes 1,249.10 1,356.26
Cash generated from operations 1,287.70 1,667.18
Taxes paid (18.51) (154.14)
Net cash flow from operating activities 1,269.19 1,513.04
Investing Activities:
Net cash used in investing activities (1,229.77) (2,288.47)
Financial activities
Net cash generated from financing activities 540.17 696.15
Net (decrease) / increase in cash and cash equivalents 579.59 (79.28)
Cash and cash equivalents as at beginning of the year 717.88 797.16
Total Cash and cash equivalents as at end of the year (3) 1,297.47 717.88

Table 4: Current Asset Particulars

Particulars 2014 (Rs. in % of Total Current 2013 (Rs. in % of Total
Crore) Assets Crore) Current Assets
Current Asset
Current investments 497.54 13.30 323.70 11.41
Inventories 283.40 7.57 244.28 8.61
Trade receivables 783.59 20.95 730.89 25.77
Cash and bank balances 1,527.04 40.82 1,096.37 38.65
Short-term loans and advances 204.65 5.47 214.83 7.57
Other current assets 444.74 11.89 226.31 7.98
Total Current Asset (4) 3,740.96 100 2,836.38 100

Table 5: Current Liabilities Particulars

Particulars 2014 (Rs. in % of Total Current 2013 (Rs. in % of Total
Crore) Assets Crore) Current Assets
Current Liabilities
Short-term borrowings - - - -
Trade payables 633.09 37.26 587.95 33.72
Other current liabilities 1,021.83 60.13 1,015.43 58.24
Short-term provisions 44.32 2.61 140.18 8.04
Total Current Liabilities (5) 1,699.24 100 1,743.56 100

Solutions:

S. Particulars In 2014 In 2013 % change in 2014 over

No. 2013
1. Average Daily Expense 23.897 21.603 9.60
= (Cost of Goods Sold + Operating Expense + Tax – Depreciation)/ 365 (Rs. in (Rs. in
= (1+2)/365 Crore) Crore)
2. Cash Cover for Daily Expense 54.294 33.231 38.79
= (Total Cash and cash equivalents as at end of the year / Average Daily
Expense)
3. Current Asset Cover for Daily Expense 156.545 131.296 16.13
= (Current Asset/Average Daily Expense)
4. Current Liability Cover for Daily Expense 71.107 80.709 (13.50)
= (Current Liability/Average Daily Expense)

Inferences:
1. Torrent Power is in the power sector and hence it needs high cash liquidity to run its day to day operations. This is visible from the
average daily expense of 23.897 crores in 2014 which has increased by around 9.6% when compared to 2013.
2. Torrent Power’s Cash Cover Ratio is very strong at 54.29 in 2014 , and has increased substantially by 38.79% over 2013 when it was
pegged at 33.23

Page 17 of 24
 3. Torrent Power’s Current Asset Cover seems high at 156.545 in 2014 but Cash & Bank Balances forms a large part of current asset.
Excluding Cash & Bank Balances the current asset cover would reduce to 92.644; a decline of 40.82 %. This indicates that the
company might be looking for expansion opportunities. Also the Current Asset Cover has increased by 16.13 % over 1 year.
4. Torrent Power’s Current Liability Cover is also substantial at 71.1 in 2014 but has seen a decline of 13.50% over 1 year. This can be
attributed to the fact that Current Liability has decreased by 2.54% over the past 1 year.

Q2b. Times Interest Covered= EBIT/Interest Expense

EBIT= Total Revenue - Total Expenses + Interest Expense
Interest Expense=Finance Cost

All figures in rupee crore

Financial Total EBIT(% of Total Total Expense Interest Expense(% of Times Interest
Year Revenue revenue) Total expense) Covered(ratio)
2012-13 8,269.97 1031.22(12.47) 7,647.23 408.48(5.34) 2.52
2013-14 8,817.46 923.62(10.47) 8,571.02 677.18(7.90) 1.36

We find that interest expense has gone up since the company has increased its term loans for financing its operating expenses. Although
revenue from operations and other income have increased, EBIT has dropped as a percentage of total revenue from last year which is mainly
because higher finance cost and higher COGS (electrical energy purchased). Interest coverage ratio has dropped over the past year and
expenses have also increased which clearly indicates that the company is trying to expand its operations.

Gearing Ratio= Long term Liabilities/Capital Employed

Long Term Liabilities= Loans due more than one year
Capital Employed= Share Capital + Retained Earnings + Long Term Liabilities

All figures in rupee crore

Financial Share Capital(% of Total Retained Earnings(% of Long Term Liabilities (% Capital Gearing
Year shareholders’ Equity) Total shareholders’ Equity) of Total Liabilities) Employed Ratio(%)
2012-13 472.45(7.65) 5,617.84(92.35) 5,851.30(81.36) 11941.59 49.00
2013-14 472.45(7.76) 5,704.11(92.24) 7,418.47(77.04) 13595.03 54.57

Gering ratio has increased over the past year that means the proportion of finance that is provided by debt relative to the finance provided by
equity has increased as is seen by the increase in long term liabilities in absolute value. A high gearing ratio might seem risky but since the
company is growing fast (as visible in revenue increase) it is acceptable at this early stage.

Q2 c.
Important Definitions:
Net Profit Margin = Net Income/Sales
Total Assets Turnover = Sales/Total Assets
Equity Multiplier = Total Assets/Net Worth
Return on Investment (ROE) = Net Income/Net Worth
Hence, ROE = (Net Income/Sales) * (Sales/Total Assets) * (Total Assets/Net Worth)
 ROE = Net Profit Margin * Total Assets Turnover * Equity Multiplier

For the year Ended on 31st March, 31st March, Inferences derived:
2014 2013  The Net Profit Margin ratio has decreased by 53.38%. This
Net Income(Profit After 274.86 629.51 seems to have happened due to increase in company’s direct cost and
Tax) in Rs. Crore operating expenses.
Sales in Million Units(MUs) 13,246 14,009  The asset utilization has also decreased by 14.58%. The problem
Total assets in Rs. Crore 19,126.61 17,278.42 here is that the increase in the total assets is not translated into
Average Net Worth in Rs. 6,205.31 6,103.00 increase in sales.
Crore  The equity multiplier has increased by 8.87%. This is basically
Net Profit Margin (Rs. 0.02075 0.04494 financial leverage, i.e. the enhancements in returns to the equity
Crore/MUs) holder as a result of borrowings.
Total Assets Turnover 0.69254 0.81078  The Return on equity has resultantly dropped by 57.06%
(MUs/ Rs. Crore)
Equity Multiplier 3.08230 2.83114
Return on Equity(ROE) 0.04429 0.10314

Soln. 2-b: Inventory Valuation Policy of Torrent Power:

Page 18 of 24
Inventories of stores, spare parts, coal, fuel and loose tools are valued at weighted average cost and net realizable value whichever
is lower.

(a) The inventories were physically verified during the year by the Management at reasonable intervals.
(b) The procedures of physical verification of inventories followed by the Management were reasonable and adequate in
relation to the size of the Company and the nature of its business.
(c) In accordance to the information and explanations given, the Company has maintained proper records of its inventories and
no material discrepancies were noticed on physical verification.

Inventories:
As on 31st March 2014 As on 31st March 2013
(Rs. in Crore) (Rs. in Crore)
Coal, oil, stores and spares 282.97 243.88
Loose tools 0.43 0.40
Total 283.40 244.28

Change in inventory in 2014 over 2013 = Rs. 39.12 Crore

% Change in inventory over the previous year = 16.01% increase

Certified Emission Reduction (CERs) Inventory:

As on 31st March 2014 As on 31st March 2013
(in INR) (in INR)
No. of CERs Inventory 27,65,014 18,89,635

Change in CER inventory in 2014 over 2013 = Rs. 8,75,379 /-

% Change in CER inventory over the previous year = 46.32% increase

Inventories of CERs are valued at cost or market price whichever is lower.

Soln 2c : Depreciation policy for Torrent Power

Depreciation has been shown after reducing the proportion of the amount of depreciation provided on assets created against the
service line contribution, APDRP grant received and others.

Fixed assets pertaining to AMGEN, Ahmedabad Distribution, and Surat Distribution, depreciation is provided on straight line
method at the rates as per CERC regulations as applicable in the year of addition.

Assets pertaining to Agra, Bhiwandi and Kanpur Distribution Circles are depreciated on straight line method as per the Distribution
Franchise Agreement rates:

Transformers, Switch Gears 7.84%

Meters 12.77%
Distribution Systems - Overhead 7.84%
- Underground 5.27%
Others 7.84%
Vehicles 33.40%
Electrical Equipment 12.77%
Page 19 of 24
Assets pertaining to SUGEN and SUGEN 40, depreciation is provided on straight line method considering the rates as provided in
Appendix III of the CERC (Terms and Conditions of Tariff) Regulations, 2009.

Assets pertaining to Windmill (Jamnagar), depreciation is provided on straight line method at the rates mentioned in CERC Order
issued on ‘Determination of the tariff for procurement of power by distribution licensees from Wind Energy Generators and other
commercial issues .

Leasehold land is amortized over the lease period. Computer software costs are amortised over its useful life which is estimated
at 3 years.

CASH FLOW STATEMENT INFERENCES

i) What were the major sources of cash during the last 2 years?

S. No. Sources FY 2014 FY 2013 % change in

(Amount in Rs.) (Amount in Rs.) 2014 over 2013
1. Proceeds from long-term borrowings 1,665.93 2,370.98 (29.74%)
2. Net Cash Flow from Operations (CFO) 1269.19 1513.04 (16.11%)
a. (Adjustments) Increase in other current assets 218.71 N.A. N.A.
b. (Adjustments) Interest income 133.44 74.59 + 78.90%
c. (Adjustments) Trade Receivables 68.39 90.60 (24.51%)
3. Net Cash Flow from Financial Activities 540.17 696.1 (22.40%)
4. Net increase in cash and cash equivalents 579.59 (79.28) N.A.
5. Cash and cash equivalents as at beginning of the year 717.88 797.16 ----------
6. Cash and cash equivalents as at end of the year 1,297.47 717.88 ----------
Note: N.A. here is Not Applicable since the particular for the appropriate financial year is not a source but a use of
Cash.

There was a huge Cash inflow (sources) from the Proceeds from long-term borrowings in FY 2013 and few from Service line
contribution & Interest received. In FY 2014 as well majority of the Cash inflow (sources) is from Proceeds from long-term
borrowings and Increase in other current assets. One prominent thing to be noticed is:

a. “Increase in other current assets” is a new sources of Cash in FY2014

b. Net Cash Flow has increased by Rs. 658.87 crore over the last year.

ii) What were the major use of cash during the last 2 years?

S. No. Sources FY 2014 FY 2013 % change in

(Amount in Rs.) (Amount in Rs.) 2002 over 2001
1. Net cash used in investing activities 1,229.77 2,288.47 (46.26%)
2. Purchase of fixed assets including capital work-in- 717.61 1,313.41 (45.36%)
progress (CAPEX)
3. Investment in subsidiaries 724.20 344.97 + 109.93%
4. Finance cost paid 667.83 404.46 + 65.12%
5. Repayment of long-term borrowings 465.42 1,166.99 (60.12%)
6. Dividend paid (including corporate dividend tax) 110.37 191.38 (42.33%)
7. Increase in other long-term liabilities 343.07 282.35 + 21.51%
8. Finance cost 677.18 408.48 + 65.78%
9. Investments in bank deposits (having maturity more 26.61 700.37 (96.20%)
than three months)

Page 20 of 24
There was a huge Cash outflow (uses) from the Interest Adjustments in FY2014 and FY2013 in the form of the following

1. Payments of Capital Creditors.

2. Purchase of fixed assets including capital work-in-progress
3. Investment in subsidiaries
4. Finance Cost Paid
5. Increase in other long-term liabilities

As can be seen, the Cash was heavily used in FY ’13 & ’14 in investing activities much of which was in CAPEX spending. Also,
expenses on Investment in subsidiaries have increased by 109.93% over past 1 year. Finance Cost has also increased by 65.78%.
One prominent thing to be noticed is CAPEX Expenditure, Investments in bank deposits, Repayment of long-term borrowings
and Dividends paid have decreased substantially over the last year.

Q2 iii) For the year ended 31st March 2014 cash flow from operating activities (1269.19 cr) were much greater than
that of net profit (246.44 cr) of Torrent Powers. In terms of absolute value, net power is 19.42% of cash flow from
operating activities. This was since that Torrent Power was a large business in the power generation sector it has lots
of fixed assets which has high depreciation expense. Also since the company is under expansion mode it has several
long term secured loans which has high interest expenses thus again raising the cost from operating activities. The
details are given below:

All values in Rs. Crore(as per cash flow report of the year ended 31st Mar 2014 in page 60 of Torrent Power)

Net Profit (% of Depreciation (% Finance Cost(% Increase in (long term) Cash generated
Operating Cash of Operating of Operating liabilities (% of from Operations
Flow) Cash Flow) Cash Flow) Operating Cash Flow)

246.44 (19.42%) 534.52 (42.11%) 677.18 (53.36%) 343.07 (27.03%) 1,269.19

iv) We see that expenses were greater than the net cash flow from operating activities. Hence the firm was not able
to generate enough cash from operations to pay for all of its expenditures. The details are given below:

All values in Rs. Crore(as per cash flow report of the year ended 31st Mar 2014 in page 60 of Torrent Power)

Major Expenses Amount % of Operating Cash flow from

Cash Flow Operations

Loss on sale of fixed assets 14.52 0.01

Finance cost 677.18 53.36 1,269.19

Taxes paid 18.51 1.46

Purchase of fixed assets including 717.61 56.54

capital work-in-progress

Page 21 of 24
 Purchase of non-current 1.01 56.54
investments

Total 1427.82

2b v) For Torrent Power, the dividends paid are 110.37 crores and capital expenditure is 1442.82 crores. The net cash
flow from operations after tax is 1,269.19 crores. Hence the fund from long term borrowings of the amount 1,665.93
crores is used to finance this.

2b vi) The working capital items are primarily uses of cash. These items are :

Short-term provisions -13.29 crores

Other current liabilities -16.53 crores

Trade receivables -68.39 crores

Inventories -39.12 crores

Current assets -218.71 crore

2b vii)

Page 22 of 24
 Major Sources Secured Loans 407 millions Secured Loans 172
Share Capital and premium 32 Operations 131
Share Capital and Premium 10
Major Uses Capex 437 Capex 327
Purchase of Investments 40 Purchase of Investments 26
Interest 21 Interest 20 `
Operations (18) Dividends 29
Dividend 16
CFO compared to Net Income CFO < 0 , CFO < Net Income CFO > 0 , CFO > Net Income
CFO is up due to CFO is up due to
Depreciation 39 Depreciation 36
A/P up 114 A/P up 36
Working Capital Loan 19 A/R down 36
However , Working Capital Finance88
Inventory Up 190 However ,
Loans and Advances up 34 Inventory Up 77
A/R up 24 Loans and Advances up 50
Taxes up 13
CFO > Capex? No No
Capex? Depreciation Capex (437) > Dep (39) Capex (327) > Dep (36)
CFO > Capex + Dividend No No
Source of cash Secured Loans Secured Loans
Other Major Items affecting Increase in Cash Balance 2 Increase in Cash Balance 5
Cash Flows
Trends

Income Decreased , positive 32 Decreased , positive 79

CFO Decreased , Negative 18 Decreased , Positive 131
Capex Increasing 437 Increasing 327
Dividends Down 14 Steady (29)
Net Borrowing Net Borrower Net Borrower
Working Capital Current Assets Source , CL Use A/R and A/P Source
of Cash Inventories & Advances - Use
Other Major Items affecting Increase in Cash Balance 2 Increase in Cash Balance 5
Cash Flows

Q2 viii

Page 23 of 24
Parameter Year ended Year ended Percent Comments
30th 31st March, change
September, 2001
2002
Net income (in Rs. Lakhs) 598.59 184.39 224.63% The increase in the net income can be
increase attributed to increase in revenues or decrease in
expenses or both.
Cash flow from operations (in 84.25 56.98 47.86% The decrease in cash flow from operations can
Rs. Lakhs) increase be attributed to change in working capital and
change in cash generated from operations
Capital Expenditures (in Rs. 116.67 47.56 145.14% The investment in purchase of fixed assets has
Lakhs) increase increased by 145.14% hence the increase in
CAPEX is 145.14%
Dividends (in Rs. Lakhs) 0 0 0% No dividends paid
Net Borrowing (in Rs. Lakhs) 201.31 0.254 Drastic Due to increase in unsecured loans significantly
increase
Working Capital accounts (in Rs. 50.86 121.53 58.15% Due to change in working capital finance
Lakhs) decrease
Q2 ix

The firm has made negative cash outflows in the FY 2010 , however it is aggressive on CAPAEX . The Major source of
funding still remains Secured loans which depict the confidence of the lenders. Also, Shareholders have consistently
invested. The change in cash flow seems to be cyclical in nature and hence the company cannot be written off based
on this performance. We have already seen a turnaround in FY 2000-2001. Based on the above arguments, the
bankruptcy rating of 6 is relevant.

Interesting Observation about Torrent Power:

An interesting thing we noticed about our annual company report of Torrent Power was that it has amortized the
leased land as mentioned in Pg 63 of our its annual report. Normally land is thought of as a fixed asset having
unlimited life span. Technically leased land is not mentioned directly in AS10. However, under IFRS implementation
of Indian GAAP, this topic can be treated differently. Since Torrent Power has secured a long term lease of the land,
it is considered as a capital outflow where benefits are accrued over a long period. Hence it makes sense to amortize
it over this term.

Torrent Power puzzling observation:

The practice followed by Torrent Power in capitalization of interest as well as of other tangible assets and writing
off the same interest through depreciation over the life of asset is questionable.
As a proof of the previous claimed statement please refer to pg 97. of the given annual report under the subheading
taxation and also the same as provided in page 64.
“Deferred tax asset, on account of unabsorbed depreciation and carry forward losses are recognized only if there is
virtual certainty supported by convincing evidences that there will be sufficient future taxable income available to
realize the assets and on account of other asset is recognized and carried forward only to the extent that there is a
reasonable certainty that sufficient future taxable income will be available against which such assets can be
realized.”

The major question is should the value of an asset be dependent on the source of its finance?

Page 24 of 24