Name : Mohammed Nayeem Roll No-EMBA201917

Exam : CORPORATE CREDIT ANALYSIS

PART A :
2 ) Swot Analysis of the company Supreme Petrochem Limited
Strengths :
SPL has over 50% market share in the polystyrene segment and capacity of 2,72,000
tons in polystyrene and 72000 tons in EPS. The market position will be strengthened by
the ongoing capacity expansion of 80000 tons for polystyrene and 30000 tons for EPS
and healthy demand from end user industries particularly after the second largest player
in India shutdown its plant.
SPL has established relationships with customers and suppliers, given its presence of
over two decades. The company imports styrene from multiple suppliers in the Middle
East and Singapore and gets healthy credit because of its long-term relationships with
the suppliers.
Strong financial risk profile :
Healthy networth and nil debt and strong debt protection metrics keep financial risk
profile strong. Networth was at Rs 672 crore as on March 31, 2020, backed by steady
growth in cash accrual. The company has been debt-free since six years. Expected net
cash accrual of Rs 140-200 crore annually will be adequate to meet working capital
requirement and planned capital expenditure of Rs 250 crore in fiscals 2021 and 2022.
SPL will remain debt-free over the medium term. The company completed a share
buyback of Rs 62 crore in fiscal 2021 and announced equity reduction of Rs 57 crore for
fiscal 2022.
Diversified revenue profile :

SPL has a diversified revenue profile, with domestic sales accounting for around 60% of
revenue in fiscal 2020, followed by exports at 14% and traded goods at 25%. The
company offers a variety of Styrenics, including polystyrene (around 50% of revenue),
EPS (around 17%), specialty polymers and compounds (SPC; around 5%), and extruded
polystyrene (XPS; around 1%). SPL has customer base for polystyrene and EPS
products in over 100 countries. It generates around 25% of revenue from trading in raw
material styrene monomer, which has deficient supply in India and is used in
manufacturing polymers. SPL enjoys a cost advantage due to bulk procurement of
styrene monomer. The company will continue to benefit from healthy domestic demand
and capacity addition.

Weakness:
Susceptibility of operating margin to volatility in raw material prices
SPL is susceptible to volatility in the price of styrene which depends on crude oil
prices and demand-supply dynamics. Operating margin fluctuated between 3% and
10% in the past five years, due to fluctuating styrene price leading to volatility in the
spread between styrene and polystyrene prices. As SPL carries raw material inventory
of about a month, the volatility in input prices impacts the working capital
management. Operating profitability is expected to be healthy at 17% in fiscal 2021,
supported by higher capacity utilisation and favourable spread between styrene and
polystyrene prices, but will remain vulnerable to the raw material price.

Opportunities :

Companies with current TTM PE ratio less than 3 years , 5years and 10 year PE.
Rising in delivery percentage compare to previous day.
Undervalued growth stocks.
Stock with low PE(PE<=10).

Liquidity : Strong
Liquidity is strong with nil long-term debt. Hence, annual cash accrual of Rs 140-200
crore is available for meeting capex and working capital requirement. Moderate capex
of Rs 250 crore in fiscals 2021 and 2022 is likely to be funded through internal accrual.
Dividend payout is expected to be moderate at 40-50% of net profit. Bank line of Rs
1200 crore, including fund and non-fund based limits, was moderately utilised at 57%
on average during the 12 months through March 2021. SPL is expected to have
healthy cash and bank balance of Rs 500 crore plus as on March 31, 2021. On a
steady state basis, SPL is expected to maintain cash and equivalent of Rs 350-400
crore.

Threats :

Rating Sensitivity factors

Upward factors:

 Sustained revenue growth of 15% (and/or 5% or more volume growth) and

steady operating margin of 8-10%
 Efficient working capital management and sustenance of strong financial
risk profile
Downward factors:

 Steep decline in revenue with operating profitability below 5% on a

sustained basis

 Sizeable stretch in the working capital cycle

 Weakening of capital structure because of large debt-funded capex or
acquisition resulting in weakening of debt protection metrics
Increasing trend in Non-core income.
3 ) CASH INFLOWS AND OUTFLOWS :

Cash and cash eqivalent comprise cash at banks on hand and shortterm deposits with
an original maturity of three months or less. Which are subject to insignificant risk of
change in value. For the purpose of statement of cash flows , cash and cash eqivalents
consist of cash short term deposits as defined above. Net of bank outstanding bank
over drafts and short term highly liquid investments that are readily convertible to
unknown amounts of cash and which are subject to insignificant risk of changes in
value as they are considered as an integral part of the company’s cash management.

Cash flows are reported by indirect method where by profit for the period is adjusted for
the effects of the transactions of non-cash nature any deferrals of past or future
operating cash receipts or payments and item of income or expenses associated with
investing or financing cash flow. The cash flows from operating, investing and financing
activities
of the company are segregated.

Dividend escrow account balances deposits with banks as margin money for
guarantees issued by the banks deposits kept as security deposits for statutory
authorities are accounted as bank balances other than cash and cash equivalent.

Part B :

A ) Full use of bank overdraft throughout the year :

Overdraft is a financial instrument in which the money can be withdrawn from the
current or savings account, even if the account balance goes below zero. It is a type of
extension of monetary limit offered by banks and that money is said to be ‘overdrawn’.
An authorized overdraft limit is assigned for each customer depending on their
relationship with the bank. The customer can withdraw money up to the assigned limit.
Banks do charge interest rates on the money withdrawn in form of overdraft.

The interest rate on overdraft facilities offered by private and public sector banks shall
vary from lender to lender and depends on the required overdraft amount, repayment
tenure, and relationship with the respective bank or financial institution.

Overdraft is a significantly useful feature provided by the banks, as it offers aid to

businesses in terms of cash flow to meet their working capital expenditure. Businesses
often have to wait for the payments from their clients and this results in delayed
payments from their side as well. With the support of overdraft in their current
accounts, businesses can sign cheques for their clients beyond the available funds in
their accounts. This prevents cheque dishonor and maintains the reputation of the
business, as well.

However, this facility is not offered to everyone. Only the customers having a good
reputation in terms of repayment habits and good credit score are eligible for this
facility. Moreover, the overdraft facility requires a certain annual fee, and customers
have the right to discontinue the service whenever they want.

Below mentioned are the pros and

cons of an Overdraft facility:

Pros
Helps in managing the cash flow of
business
Fulfills urgent cash crunch
requirements
Interest is paid only on the utilized
amount
Can be withdrawn at short notice
No collateral required by banks
Cons
Higher interest rate
Offered only to bank account holders
The sanctioned limit depends upon the
applicant’s financials
Short-term borrowing – revises every year
Not suitable for long-term finance

B ) Operating cashflow much lower than declared profit :

Cash flow before any investment or financing activities. If a company cannot generate
adequate operating cash flow, it may need to rely on outside funding to meet its
financial obligations.

Cash flow from operations is the cash version of net income. Net income figures
include non cash costs such as depreciation and excludes other cash expenditures,
such as purchases of plants or equipment.

Cash flow adjusts the income figures to a cash basis. Cash flow from operations is
cash flow after adjusting for operating differences such as depreciation, but before
adjusting for investments (such as purchases of plants or equipment) or financing. This
information is taken directly from the cash-flow statement of the company's most-recent
annual report.

Example: A media company posts net income of only $73 million. Its cash flow from
operations, on the other hand, is $1.4 billion. (The reason: Big depreciation and
amortization charges weigh down net income, but since they really aren't cash outlays,
these changes have no effect on cash flow.) The company is a much healthier
company than its net income would lead you to believe.

Many investors focus on cash flow from operations instead of net income because
there's less room for management to manipulate, or accounting rules to distort, cash
flow.

If net income is much larger than cash flow from operations, it's a signal that the
company's earnings quality-the usefulness of earnings-is questionable.

If cash flow from operations exceeds net income, on the other hand, the company may
be much healthier than its net income suggests. That's why many investors, when they
try to value a stock, will use the price/cash-flow ratio the share price divided by cash
flow from operations per share-instead of the P/E ratio.

C ) Large contingent liabilities :

A contingent liability is a potential liability that may occur in the future, such as pending
lawsuits or honoring product warranties. If the liability is likely to occur and the amount
can be reasonably estimated, the liability should be recorded in the accounting records
of a firm.
 
Three conditions are required for a contingent liability to exist: (1) there is a potential
future payment to an outside party or the impairment of an asset that resulted from an
existing condition; (2) there is uncertainty about the amount for the future payment or
impairment; and (3) the outcome will be resolved by 
 
Qualifying contingent liabilities are recorded as an expense on the income statement
and a liability on the balance sheet. If the contingent loss is remote, meaning it has less
than a 50% chance of occurring, the liability should not be reflected on the balance
sheet.
 
Disclose the existence of a contingent liability in the notes accompanying the financial
statements if the liability is reasonably possible but not probable, or if the liability is
probable, but you cannot estimate the amount.
 
Knowledge of both contingencies and commitments is extremely important to users of
financial statements because they represent the encumbrance of potentially material
amounts of resources during future periods, and thus affect the future cash flows
available to creditors and investors.

D ) Huge Increase in working capital without corresponding increase in sales.

A company's working capital ratio can be too high in that an excessively high ratio
might indicate operational inefficiency. A high ratio can mean a company is leaving a
large amount of assets sit idle, instead of investing those assets to grow and expand its
business.
 
A company's cash flow affects its amount of working capital. If revenue declines and
the company experiences negative cash flow as a result, it will draw down its working
capital. Investing in increased production may also result in a decrease in working
capital.
 
The higher a company's working capital is, the more efficiently it functions. ...
Extremely high net working capital may also mean the company is overly invested in
inventory, or that it's slow to collect on debts, which may indicate waning sales and/or
operational inefficiencies.
 
Some of the ways that working capital can be increased include: Earning additional
profits. Issuing common stock or preferred stock for cash. Borrowing money on a long-
term basis.
 
4 Main Components of Working Capital
·         Trade Receivables. It is also known as account receivables and is represented
as current liabilities in balance sheet.
·         Inventory.
·         Cash and Bank Balances.
·         Trade Payables.

It is always observed that unexpected increase in the working capital transactions

without any favourable factors to the industry for increase in turnover, may create
strong possibility of diverting excess fund of working capital limit to another business or
self motive.

A working capital ratio below 1.0 is unfavorable, as it indicates the company's current
assets are not sufficient to cover near-term obligations. A working capital ratio
somewhere between 1.2 and 2.0 is commonly considered a positive indication of
adequate liquidity and good overall financial health. However, a ratio higher than 2.0
may be interpreted negatively. An excessively high ratio suggests the company is
letting excess cash and other assets just sit idle, rather than actively investing its
available capital in expanding business. This indicates poor financial management and
lost business opportunities.

PART A )
1.Ans :

1. The cost of material consumed in 2019-20 was 1640 Cr whereas in the financial
year 2020-21 the cost of materials consumed was 1597 Cr. the difference is
just 43 Cr, This is very much evident from the sale figure which raised to 3178
Cr in 2020-21 from 2713 Cr in 2019-20.
2.  The company was able to purchase more raw materials and produce more
quantum of good at a reduced price. This has single handedly raised the
profitability of the company in the financial year 2020-21.
3. The company was also able to considerably reduce the inventories from 13 Cr to
6 Cr in the year 2020-21. This also represents demand for their finished
products in the market.
4. Even though the revenue of the company increased considerably, the other
overheads like employee cost, depreciation and other expenses didn’t go up
much and that also helped to increase the profitability in the financial year
2020-21.
5. The raw materials used for making polystyrene are petroleum, the average
global oil price was considerably low during the financial year 2020-21. This
 resulted in the low raw material price and renewed demand.
6.  Its higher revenue in the domestic market is primarily supported by a fire
accident in the second largest polystyrene maker, thus reducing the capacity of
the competitor. With less competition, more demand and low raw material
price, the company was able to give a good result