Analysis of Bata India Ltd.

after using Comparative, Common-size, and

Trend techniques

Pranaam Dr. Jeet Shah!

Name of the Student Woxsen ID Contribution

Dimple Manogna. S WSBY161826339 Depreciation
Thummala Vineeth WOUMBA2037617 Inventory – Raw Material
Digvijay Yallampati WSBY161774883 Inventory – WIP
Rushi Abheeshai Modugu WSBY161826643 Fixed Assets
Siva Sai Kumar Kanagala WSBY161806254 Trade Receivables
Sasidhar Achari WSBY161836388 Expenses
Vamshi Krishna Garpelly WSBY161774477 Income and Profit
Lakshmi Saraswathi Gajulapalli WSBY161652949 Trade Payables
Rithika Nagpal WOUMBA2048486 Lease Liability
Geethika Alapati WSBY161744143 Cash Flows
Bharadwaj Bhushan. P WOUMBA2048616 Income and Profit
Sri Venkata Sumanth. P WSBY161652876 Ratio Analysis

Group-2 has come up with the conclusions which are portrayed below. We take
the ability to express our overall conclusion on the financial statements after using
techniques of Comparative, Common size and Trend on Balance Sheet, Profit and
Loss and Cash flow statements. More emphasis was given on the major effects in
elements in financial statements like Assets, Liabilities, Income, Expense drawing
information from the results of three techniques that are in the excel file.

Assets

 Fixed Assets and Depreciation –

(i) The company’s investment in PPE has increased by 7 % on an average and
the sales of the company showed almost same percentage of increase.
(ii) The Company showed an abnormal increase in the depreciation expense
in the year 2020 which is about 365 % when compared to previous year 2019.
The cash flow statement did not show any significant change in cash outflow
corroborative to this increased depreciation in 2020 when compared to 2019.
The major reasons for this are in the following (iii) and (iv).
 (iii) The company has changed from Ind AS 17 to Ind AS 116 which removes
the difference between financial lease and operating lease. Therefore, the
company is now required to recognize the assets and associated lease
liability which were taken on operating lease in the previous years (2019) in its
own balance sheet and start recognizing the depreciation on its own. Therefore,
previous operating lease rent is now occupied by depreciation and interest
expense on Right to use assets and lease liability, respectively.
(iv) Besides the above, the company had made an explicit statement that the
company is changing the useful lives as per the expected pattern of usage
which is lower than that is required under statute. This also contributed to
increasing depreciation over the remaining years of useful life in both tangible
and intangible assets.
(v) The Depreciation to Sales ratio or Depreciation expense ratio calculated
for PPE is

Particulars 2016-17 2017-18 2018-19 2019-20

Depreciation on PPE 646.03 600.45 633.67 629.72
Lease Rent 3563.73 3622.3 3793.39 504.17
Depreciation on Right-to-use - - - 2314.62
assets
Amortization of Intangibles 4.02 3.76 6.49 13.31
Total expense for the use of 4213.78 4226.51 4433.55 3461.82
assets (A)
Revenue (B) 24,972.41 26,363.18 29,284.44 30,534.51
Depreciation Expense ratio 16.87 % 16.03% 15.13% 11.33 %
(A/B)

Each Rs.100 value of sales was generated by expending lesser and lesser
amounts of Long-term Assets year on year. The cost of using the Long-term
Asset is reducing year on year to produce Rs.100 value of sales. This shows the
increasing efficiency and productivity of the assets.
We included the Operating Lease rent in the initial years as it is the expense
relating to PPE in that years to generate the revenue while it is replaced by
depreciation due to the transition to Ind AS 116.
 Net Current Assets –
 The Working Capital is not able to generate cash inflows. Because of this, on
an average, the company’s cash flow before the working capital changes is
eaten away by Rs 13.79, in common size analysis, which is a negative sign. We
analyzed the inventory, trade receivables and trade payables in the following
paragraphs which are important components of Working capital.

(A) Inventory of Raw Material (RM), WIP and Finished Goods

From the common size cash flow statements, on an average the inventory
accumulation has eaten away 13.3 rupees of the average cash flows before working
capital changes over the given years. We are expressing our view without considering
the industry norms, if any, for the maintenance of inventory.

However, the company has controlled the inventory accumulation in 2020 when
compared to the previous years.

(i) The company’s raw material consumption pattern is as follows

TABLE – I

Particulars 2016-17 (In Rs.) 17-18 (In Rs.) 18-19 (In Rs.) 19-20(In Rs.)
Opening Raw 3,163.43 2,934.27 2,990.6 2,754.45
material (RM)+
Purchases made (A)
RM consumed (B) 2,914.18 2,695.23 2,807.22 2,569.59
Percentage of RM 92.12 % 91.85 % 93.86 % 93.28 %
consumed (B/A)
Though not by a higher variation, in the initial years, the company’s raw
material consumption pattern is showing that the company has purchased more raw
material than that is required to meet the demand which the company has controlled in
2019 and 2020. The increasing consumption percentage shows the company’s
improved planning in purchasing the raw materials as per the demand. However, it
could have managed even better. Years 2017-18 and 19-20 show decrease in the
consumption percentage of total available RM. The average increase per year in
 percentage of consumption is still low and budgetary planning must be implemented
more effectively.

Analysis of Work-in-progress (WIP)

TABLE - II

Particulars 2016-17 (In Rs.) 17-18 (In Rs.) 18-19 (In Rs.) 19-20 (In Rs.)
WIP (op) (A) 292.28 127.89 107.88 83.32
WIP (cl) (B) 127.89 107.88 83.32 87.1
WIP into FG
164.39 20.01 24.56 (3.78)
(C = A - B)
% of Opening
WIP converted 56.24 % 15.64 % 22.76 % (4.54 %)
into FG (C/A)

Purchase pattern of RM

TABLE -III

Particulars 2016-17 17-18 18-19 19-20

RM purchased 2976.27 2685.02 2751.02 2571.61
Decrease in
percentage of - (9.78 %) (2.45 %) (6.52 %)
purchase of RM

Though the company is reducing the purchase of RM, it must further cut it
down. The necessity to reduce the purchase of RM is shown by the conclusion of
TABLE-II which shows the decreasing percentage of opening WIP that is being
converted into FG in the above TABLE-II. When there is a gap in converting WIP
into FG, company must plan accordingly, the purchase of raw materials to suit the
situation. Even though the company has decreased the purchase of RM by 6.52 % in
the last year, the closing WIP is more than the opening WIP which shows that the
company has blocked some amount in WIP in the 2019-20.

(B) Trade Receivables

 On an average the trade receivables have eaten away 0.55 rupees of the average
cash flows, in common size analysis, before working capital changes over the given
years. The company controlled the piling up of receivables when compared to
previous years. The company has improvement in movement of debtors. Decrease in
Debtor days shows that the company is gradually becoming efficient in collecting the
receivables on time. The company has not given breakup for other miscellaneous
expenses which might include the details of bad debts which is a factor for reducing
the average debtors. Therefore, our comment on this is subject to this limitation.
However, its performance must still be improved to cover up the average deficit of
0.55 rupees

The debtor days is as follows –

TABLE - IV

Particulars 2016-17 17-18 18-19 19-20

Sales (A) 24,972.41 26,363.18 29,284.44 30,534.51
Average accounts
671.48 778.90 769.64 632.64
receivable (B)
Debtor days 9.81 days 10.78 days 9.59 days 7.56 days
(B/A) * 365 days

(C) Trade Payables

On an average the trade payables have added 10 rupees to the average cash
flows, in common size analysis, before working capital changes over the given years.
The company’s trade payables have been decreasing over the years which show the
company’s ability to repay the creditors on time. Creditor days calculation is as
follows –

TABLE - V

Particulars 2016-17 17-18 18-19 19-20

 RM Consumed 2,914.18 2,695.23 2,807.22 2,569.59
Purchase after giving the effect of
8,614.62 9,263.33 10,036.04 10,393.47
increase or decrease of inventory
COGS (A) 11,528.8 11,958.56 12,843.26 12,963.06
Trade Payables (B) 5,111.86 5,829.73 6,158.9 5,032.32
Creditor days (B/A) * 365 162 178 175 142
Debtor days 9.81 days 10.78 days 9.59 days 7.56 days
Difference between creditor and
152 days 167 days 165 days 135 days
debtor days

Increase in creditor days show the company’s ability to negotiate for the more
credit days and company can grab the deal. The increased gap between the creditor
and debtor days also gives the company more time to invest the money received from
Debtors.

Trend Analysis of trade payables shows that the value of increase over 2017
was positive which shows that they appraise the company’s ability to meet the short-
term obligations. The current ratio is as follows –

Particulars 16-17 17-18 18-19 19-20

Total Current Assets (A) 13,495.75 15,475.82 18,374.67 19,996
Total Current Liabilities (B) 4,933.45 5,602.2 6,295.85 8,005.09
Current Ratio (A / B) 2.74 2.76 2.92 2.50
The company is maintaining good current ratio and increasing it year on year.
However, current liability in 2020 has current portion of lease liability which has
dragged down the current ratio.

 Non-Current Liability
(I) Lease liability – The Company, as per Ind AS 116, must recognize the
lease liability which made the liabilities side heavier in 2020. The company is
paying the lease rent to use some Long-term assets till now. It has opted for
‘Off Balance Sheet’ technique till now. But this transition gives the burden of
recognizing the expense of interest on the lease liability.
Usually company is going for operating lease to lower the burden of
asset and liability on their financial statements. They try to lever a large amount
 of PPE on relatively small amount of lease rents. But Bata has got the
obligation now.
This reduces the lease rent expenses in the financial statements but
increases the depreciation on the recognized asset and interest on the lease
liability recognized. In totality, net figure is the burden on the company.

 Expenses
(i) The company has successfully reduced the cost of raw material consumption
year on year by an average of -3.9 %. The control in purchase of raw materials
has reduced the burden. The analysis on piling up of inventory balances has
been given in the above paragraph of inventory
(ii) Employee Benefit Expenses (EBE): The analysis on contribution of
Employee benefit expenses to revenue from operations can be from the
following ratio.

TABLE – VI

Particulars 16-17 17-18 18-19 19-20

Revenue from operations (A) 24,972.41 26,363.18 29,284.44 30,534.51
Expenses before Employee Benefit
Expenses (EBE) 20,159.48 20,517.7 21,876.39 22,607.96
(Expenses - EBE) (B)
Profit before EBE Expense (C) =
4,812.93 5,845.48 7,408.05 7,926.55
(A – B)
Employee Benefit Expenses (D) 2,726.95 2,953.78 3,310.83 3,764.22
Profit before considering EBE,
generated for everyone rupee of 1.76 1.98 2.24 2.11
EBE (C/D)
 In the above calculation, it is evident that the company can generate an
increasing profit before paying one rupee to the employee. Therefore, profit
before paying employee benefits are increasing. By being paid one rupee,
employees of the company can generate increasing trend of profits which is a
good sign.
(iii) Finance costs - The two major heads under this were the financial
instruments cost and the others. The company has not given the further
bifurcation on ‘Others’. Excluding the finance cost of lease liability, the
company’s finance costs are as follows –

TABLE - VII

Particulars 16-17 17-18 18-19 19-20

Finance cost (A) 40.34 27.92 13.79 12.55
Trade Payables to others –
1,039.71 1,037.42 1,002.4 -
Noncurrent portion
Average balance of the above
1,034.21 1,038.56 1,019.91 501.2
trade payables (B)
% of interest on the above 3.9 % 2.6 % 1.35 % 2.5 %

The non-current portion of trade payables to others are taken here.

Finance costs are becoming low. Besides, this the company has positive
operating cashflows which attracts the new loans with lower interest rates.
The above pattern enables the company to get the funds in the future at
lower costs which enables the company to continue the business with less cost
of money. The above pattern shows the company’s timely meeting of
obligation and financers judgement. This helps in increasing the profitability of
the company.
The Debt Service Coverage Ratio (DSCR) calculation is as follows –

TABLE - VIII

Particulars 2016-17 17-18 18-19 19-20

PAT 1587.48 2235.78 3296.6 3269.15
Finance costs 40.34 41.98 35.46 1177.41
 Depreciation 650.05 604.21 640.16 2957.65
Straight lining of
39.1 18.64 (11.48) 0
lease rentals
Loss on sale of
62.65 16.7 20.53 31.3
Fixed assets
Total (A) 2379.62 2917.31 3981.27 7435.51
Finance costs (B) 40.34 41.98 35.46 1177.41
Debt Service
Coverage ratio 58.99 69.49 112.27 6.32
(A/B)

The company can serve its debt with sufficient numerator (Almost equivalent
to cash) that is on an average 61.77 times more than the finance cost. The sufficiency
is improving year on year.

The drastic fall in the last year is due to the increase in the finance cost due to
increase in the lease liability because of transition.

 Income and Profits – The effect of transition in 2020 is as follows –

Particulars Amount
Increase in Depreciation (A) (2,314.62)
Increase in finance cost (B) (1153.95)
Decrease in lease rent (C) 3289.21
Net increase in expense 2020 because of
(179.36)
transition

This is the major factor in 2020 for decrease in profit when compared to 2019. Return
on Assets ratio is as follows –

TABLE - IX

Particulars 2016-17 17-18 18-19 19-20

Profit before tax (A) 2,522.44 3,400.14 4,782.65 4,850.77
Finance costs (B) 40.34 41.98 35.46 1177.41
EBIT (A+B) 2,562.78 3,442.12 4,818.11 6,028.18
Taxes (C) 748.27 1,164.36 1,486.05 1,581.62
EBIT – Taxes (A+B-C) --- I 1,814.51 2,277.76 3,332.06 4,446.56
Total assets at the beginning (E) 19,225.97 21,448.66 24,786.35
Total assets at the closing (F) 21,448.66 24,786.35 37,349.41
Average assets (E+F)/2 --- II 20,337.315 23,117.505 31,067.88
Return on Assets (I/II) 11.20 % 14.41 % 14.31 %

 General observations on Cashflows –

(i)The company after getting the cash from operating activities, it is making
investments in bank deposits having maturity of more than 3 months. This
reduces the cash and cash equivalents which is resulting in negative final figure
in the cash flow from investing activities and contributes to the overall negative
figure at the end.

The pattern is as follows –

Particulars 17-18 18-19 19-20

Total available cash after operating activities (A) 45.79 72.05 119.53
Total amount invested in bank deposits having
22.01 51.46 34.41
maturity of more than 3 months (B)
Percentage of cash flow invested in Bank Deposits
48 % 71 % 29 %
(B/A)

(ii) Due to the transition, there was an effect on cash flows in 2020 that is not
there in the previous years. In previous years, there were lease rentals in ‘Other
Expenses’ which had resulted in cash outflows. They were replaced by
Depreciation in the current year. This has almost same effect on the statement
of Profit and Loss account as both are expenses and both reduces the profit. But
the depreciation is a non-cash expenditure, and no outflow of cash is there but
in lease rentals there was outflow of cash while the lease rentals in previous
years were cash expenditure.
This brings a change in the cash from operating activities before
working capital changes. Adding back this heavy depreciation has caused big
raise in the cash from operating activities before working capital changes.
 (iii) Analysis on Operating Cash flows

Particulars 17-18 18-19 19-20

Net Profit 100 100 100
Operating profit before Working capital changes (A) 106.57 100.58 172.06
Result from Changes in Working Capital (B) -29.15 2.59 -14.81
Percentage of cash added to or eaten away from the
-27.35 2.57 -8.60
cash from Working capital changes

The company’s working capital changes, on an average has eaten away 10.91
% of the total operating profit before working capital changes.