Overall Industry Expectation of ratios

The overall industry expectation for current and quick ratios should ideally be between 1 -
1.5 to cover all its short-term liabilities as the industry is capital intensive and faces
operating risks such as natural hazards, changes in global shipping practices, competitions
from other modes for cargo movements and technology. Hence, ideally the liquidity ratios
for the Ports industry should be in the range of 1 -1.5 to mitigate against any such operating
risks.

Analysis of Current and Quick ratios of Adani Ports and Special Economic
Zone Ltd. And Gujarat Pipavav Port Ltd.

Adani Ports and Special Economic Zone Ltd.

8.00

7.00 3.44

6.00

5.002.48

4.00
1.73 3.56
3.00 1.58
1.43
2.56 1.34
2.00 0.89 1.82
1.38 1.51 1.59
1.00 0.91
0.00
2014 2015 2016 2017 2018 2019 2020
Year

Current ratio Quick ratio

Adani Ports and Special Economic Zone Ltd.

Overall, for the period of 2014-2020, the company has done well in managing its liquidity position as
evident from its cash and quick ratios. Apart from a downward blip in 2016, where both the ratios
fell below 1, the company has maintained its cash and quick ratios above 1 which is sufficient to
cover its short-term liabilities. In 2020, the current and quick ratios are above 1.50 which signifies
that the company is in a comfortable position as far as its liquidity position is concerned. For the
period of 2014 to 2020, there is no constant trend as it first trended downward and then witnessed a
spike in 2018 followed by a drop again. This could be due to increase in receivables, debtors or cash.
The drop in the ratios in 2019 could be due to increased investments in ports and logistics business.

Gujarat Pipavav Port Ltd.

7.00
3.12
6.00

5.00
2.32
2.18
4.002.02
Axis Title

3.00 1.47 3.15

1.34
2.24 2.35
2.002.11
1.39 1.52
1.00

0.00
2015 2016 2017 2018 2019 2020
Year

Current Ratio Quick Ratio

Gujarat Pipavav Port Ltd

Overall, for the period of 2014-2020, the company has done well in managing its liquidity position
which is visible from its current and quick ratios. After witness a fall in 2016, the ratios have witness
and increasing trend. The company’s liquidity position is strong and sufficient to cover its short-term
liabilities.

In 2020, both the current and quick ratios are above 3. While this suggests that the liquidity position
of the company is strong, it also can be interpreted as underutilisation of funds or that the funds are
sitting idle due to lack of investment opportunities.

Intercompany Analysis

The trend of liquidity ratios has been different for both the companies from the period of 2014-2020
as while Adani Ports did not have any specific trend, the ratios of Gujarat Pipavav Port Ltd witnessed
a steady increase. A strong liquidity position is always good for any company but if it is more than
the desirable level, it may signify that the company is struggling to find new avenues to invest, which
can hamper the growth of the company. Adani Ports is the largest private sector port developer and
operator and has been strategically acquiring stake in ports and logistic firms to solidify its position
in the market and further its growth. In case of Gujarat Pipavav, it looks like the company is not
finding new opportunities to invest and this its liquidity and thus liquidity ratios are trending
upwards over the years. The sales of Gujarat Pipavav have also remained stagnant for the period of
2015-20 which suggests that the company is struggling to find new opportunities to grow its
business further.
Solvency Ratio
Solvency ratios are an important component of the process of financial analysis as it helps in
determining how efficiently a company can manage its debt obligations and whether it has sufficient
cash/assets to repay its debt obligations. The solvency ratios are used by lenders and investors to
ascertain the solvency condition of a business. For our analysis, we are focussing on the following
three solvency ratios.

 Debt-Equity ratio
 Proprietary ratio
 Interest Coverage ratio

1. Debt-Equity ratio
It is used to measure a company’s debt position with respect to its equity capital and is a key
financial ratio used for estimating a company’s financial position. It is also used as a measure
to ascertain a company’s ability to repay its debt obligations. A low debt-equity ratio
indicates that a business is stable with low debt while a higher ratio may cast doubts on the
business’s long-term stability with respect to its higher debt. It is calculated as:

Debt-Equity Ratio = Long term borrowings + Short term borrowings/ Shareholder’s funds

Although the optimal Debt-Equity(D/E) ratio varies by industry, general consensus says that
it should not be more than 2. For capital intensive industries like Ports sector, it generally
stays above 1.

For Adani Ports, the D/E ratio has been constantly increasing from 2014 and reached 1.38 in
2020 from 0.89 in 2014. This can be attributed to the fact that Adani Ports has been
constantly acquiring stake in ports and logistics chains and is using debt funding for the
same.

In case of Gujarat Pipavav, the D/E is very low as the company is nearly debt free. This can
be attributed to the fact they are managing their finances well and have not required debt
funding to fund their operations. On the other hand, their growth has also remained
stagnant and they have not found newer avenues of growth for the company and hence
 they’ve not required debt funding for any new operations. Their sales have also remained
stagnant.

DEBT-EQUITY RATIO
1.60

1.40

1.20

1.00

0.80

0.60

0.40

0.20

0.00
2014 2015 2016 2017 2018 2019 2020

Adani Ports Gujarat Pipavav

2. Proprietary Ratio
The proprietary ratio is used to calculate and evaluate the capital structure of a firm. It
defines the relationship between the proprietor’s fund and the total assets of the firm. It is
calculated as
Proprietary ratio = Shareholders’ funds/ Total Assets

A high ratio indicates greater and strong financial position of a company and provides
greater security to lenders. A low ratio would mean that the company is heavily dependent
on external debt/ sources of funds to manage and run its operations.

For Adani Ports, the ratio has been in the range of 40-50%. The company has been
constantly expanding and is taking advantage of dent financing to manage its operations. As
 long as the company’s operations are sound and it is able to service its debt obligations, the
financial structure remains stable and the company can continue taking advantage of debt in
its capital structure.

For Gujarat Pipavav, the ratio is very high and has stayed above 85 since 2015. While the
capital structure appears stable and sound as the ratio is high, it can also be the case that
the company may not be taking advantage of debt funding for its operations to magnify its
earning and it is not a good sign for the shareholders. In Gujarat Pipavav’s case, the company
is struggling to find new growth avenues and its growth has remained stagnant. Hence it
doesn’t require debt funding.

PROPRIETARY RATIO
100.00

90.00

80.00

70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00
2014 2015 2016 2017 2018 2019 2020

Adani Ports Gujarat Pipavav

3. Interest Coverage Ratio

This is ratio is used to analyse the company’s ability to pay interest on its debt obligations. It
is also called time-interest-ratio and its used by lenders to estimate the risks of funding a
company. Although the optimal ratio varies from industry to industry, a higher ratio is
considered safe and better. It is calculated as:

Interest Coverage Ratio = Profits before Interest and Taxes/ Finance Cost
 For Adani Ports, the interest coverage ratio has been falling over the past three years as its
finance costs have been constantly increasing and the operating earnings have not been
increasing proportionately. The increase borrowings can be attributed to the fact that Adani
Port has been expanding its operations and has been borrowing more to fund the same. A
falling coverage ratio also poses a threat to its ability to repay its debt obligations, which in
turn can affect its credit rating and borrowing capacity.

For Gujarat Pipavav, the coverage ratio has been very high for the past few years as its
finance cost has been negligible as compared to its operating earnings. The firm has little to
no debt and hence the finance cost is extremely low.

INTEREST COVERAGE RATIO

2500.00 2350.38

2000.00

1500.00

1046.48 1068.77 1051.00

1000.00

500.00

60.52
3.63 3.6819.18 3.56 2.96 3.45 2.26 1.61
0.00
2014 2015 2016 2017 2018 2019 2020

Adani Ports Gujarat Pipavav

Profitability Ratios
The profitability ratios are used to measure the financial performance of a business and
these ratios help in determining how well a firm does in term of profitability. The higher
these ratios are, the better it is for the firm.

1. Net Profit Margin

It is used to analyse a company’s ability to generate profits. It is a strong indicator of a
business’s profitability. The higher the ratio, the better it is for the company. However, the
quality of this ratio should be assessed on the basis of the fact whether it includes
extraordinary gains or losses as they’re not recurring in nature and thus impact the quality of
the ratio. Hence, it should be seen along with the operating profit margin ratio to assess the
true quality of this ratio. It is calculated as
Net Profit Margin = (Profit after Tax/Revenues from operations) * 100

2. Operating Profit Margin

This profitability ratio helps in ascertaining the efficiency of a company’s core business
operations and thus, the operational profitability. Like net profit margin, the higher the ratio,
the better it is for the firm as it is able to achieve higher profitability from its business model.
It is calculated as

Operating Profit Margin = (Operating profit/revenue from operations) * 100

3. Cash Profit Margin

This profitability ratio indicates the efficiency in the day to day operations of a company. The
higher the ratio, the better it is for the firm as it signifies that the core operations of the
firms are driving the profitability and not some other income component. It is calculated as

Cash Profit Margin = (Cash Flow from Operations/Revenue from Operations) * 100

Analysis -
 In the case of Adani Ports, for the period of 2014 – 2020, the net profit margin has
fluctuated in the range of 36.86% to 64.18% for 2014-2020. Thus, there is no particular trend
in the ratio but it has remained strong. Similarly, both the operating profit margin and cash
profit margin ratios have been strong which indicate the strength in the core operations of
the business and also the quality of earnings. The finance cost has been rising for the
company due to increased borrowings which is impacting the net profit margin as evident
from the fall in the ratio after 2017.

For Gujarat Pipavav, all the three profitability ratios have been steady and the operating
profit margins and cash profit margins indicate the robustness of the company’s operating
activities. However, the company has been struggling to grow which is evident from its
stagnant sales and low debt and finance cost. It has a healthy dividend pay-out and high
dividend yield which signals that the company is returning the profits to its shareholders as it
isn’t able to find any new investment opportunities.

Overall, both the companies are doing well on profitability and solvency as far as the
numbers are concerned. But Adani Ports has been able to expand its operations using a
good mix of debt in its capital structure to fund its expansion and increase value for
shareholders while taking care of its finance costs and solvency. Gujarat Pipavav, on the
other hand, has been struggling to grow and hence has low debt and finance costs.

Profi tability rati os

80.00

70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00
NPM – Net Profit Margin, OPM – Operating Profit Margin, CPM – Cash Profit Margin

Sources: Annual reports of the two companies