1.

Asset intensity – ROCE

Year 2017 2018 2019

Fixed asset
intensity ( For 1 Rs
revenue how
much fixed asset
used ) 3.162325 3.93287 4.071575

Fixed asset intensity

4.5
4.07
3.93
4
3.5
3.16
3
2.5
2
1.5
1
0.5
0
2017 2018 2019

2. Operating Profit Trend

Year 2017 2018 2019

Operating
Profit ( In Cr ) 240.00 255.00 272.00
3. Cash flow trend / Net Op Cash flow trend discrepancy / Why Investing CF is high ?
Year 2017 2018 2019

Operating CF ( In Cr ) 114.00 280.00 145.00

Year 2017 2018 2019

Investing CF ( In Cr ) 36.00 -97.00 38.00

Year 2017 2018 2019

Financing CF (In Cr ) -148.00 -162.00 -174.00

Year 2017 2018 2019

Net CF (in Cr) 2.00 20.00 10.00

Year 2017 2018 2019

Dividends 147.11 161.65 161.92

Year 2017 2018 2019

Reserves / Surplus 876.00 916.00 920.00

Company has been paying healthy dividends over the years without affecting its Reserves /
Surplus thereby indicating strong confidence in its operations and business

4. Accounts Payable trend

Year 2017 2018 2019

Accounts Payable (In Cr) 220.00 273.00 324.00

5. Working Capital trend

Year 2017 2018 2019

Working
Capital
(In Cr) 207.00 154.00 150.00

Working Capital (In Cr)

250.00

207.00
200.00

154.00 150.00
150.00

100.00

50.00

0.00
2017 2018 2019

Reduction in WC implies that CG is able to release more funds into free cash flows thereby
indicating greater efficiency of operations by using current assets and efficient payment of
current liabilities
6. Advances from customers
Year 2017 2018 2019

Advances from
customers 17.00 7.00 11.00

Good cash advances from customers indicates customer trustability in terms of ability of
company to deliver on its future expectations.
 7. Peers CF analysis
Operating CF (In Cr) Investing CF (In Cr) Financing CF(In Cr) Net CF(In Cr) Dividends(In Cr)

Year 2017 2018 2019 Year 2017 2018 2019 Year 2017 2018 2019 Year 2017 2018 2019 Year 2017 2018 2019
Cummins Cummins Cummins Cummins Cummins
India 748.00 632.00 553.00 India -483.00 -134.00 15.00 India -226.00 -470.00 -525.00 India 39.00 28.00 43.00 India 466.00 464.00 568.00

Year 2017 2018 2019 Year 2017 2018 2019 Year 2017 2018 2019 Year 2017 2018 2019 Year 2017 2018 2019
Kirloskar Kirloskar Kirloskar Kirloskar Kirloskar
Oil 171 136 192 Oil -190.00 7.00 -38.00 Oil 2.00 -96.00 -153.00 Oil -16.00 48.00 1.00 Oil 0.00 108.00 72.00

Year 2017 2018 2019 Year 2017 2018 2019 Year 2017 2018 2019 Year 2017 2018 2019 Year 2017 2018 2019
Swaraj Swaraj Swaraj Swaraj Swaraj
Engines 82.00 89.00 69.00 Engines -32.00 47.00 4.00 Engines -49.00 -136.00 -73.00 Engines 1.00 1.00 0.00 Engines 49.11 63.99 72.79

Year 2017 2018 2019 Year 2017 2018 2019 Year 2017 2018 2019 Year 2017 2018 2019 Year 2017 2018 2019
Greaves Greaves Greaves Greaves Greaves
Cotton 114 280 145 Cotton 36.00 -97.00 38.00 Cotton -148.00 -162.00 -174.00 Cotton 2.00 20.00 10.00 Cotton 147.11 161.65 161.92
8. Investment of Peers
 Net Investments in Fixed Assets = Fixed
Purchased - Fixed Sold

Year 2017 2018 2019

Cummins
India -232.00 -92.00 -274.00

Year 2017 2018 2019

Kirloskar
Oil -57 -110 -53

Year 2017 2018 2019

Swaraj
Engines -6.00 -22.00 -33.00

Year 2017 2018 2019

Greaves
Cotton 0 -1 -73

Here negative values implies negative cash flow i.e. investment outflow into investing into assets

Summary

1. CG is mainly into the business of producing small powered engines in 2 verticals: automotive &
non-automotive segment. Automotive includes commercial / passenger mobility. Non-
automotive includes marine, construction, farm applications. They mainly manufacture is
diesel powered engines however also producing petrol, CNG engines also. They are also into
the power generation business with diesel powered gensets, farm equipment, after market
sales service business. They have recently ventured into the mobility space with the acquisition
of “Ampere” brand focusing on 2W & 3W segments. Primary markets are India, SE Asia, Africa,
major developing nations in the east, MiddleEast and Europe. The reason our group has
 choosen

2. Chairman message – Gives a brief overview about company and its core operations and its
operational performance considering the business as a going concern.

Corporate information – Gives information about the chief executive officers, bankers,
auditors, registrar office and locations of corporate offices / factories

Info about board of directors – Gives the information about the qualifications and expertise
of the board of directors and their bifurcation as independent and non-independent
directors. This bifurcation also gives an idea about the neutral and possible prejudiced
perspectives of the board of directors about the company

Financial highlights – Gives information about the financial information about the key
financial performance indicators for the past 10 years

Management discussion and analysis - Analysis of the company performance in light of the
economic conditions and business environment for the past financial year.

Director’s report - Compares the financial performance of the company visa vis last two
years and various disclosures regarding dividend payments, promotor and key shareholders
shareholding pattern, remuneration of key directors and other state of affairs of the
company

Corporate governance report – Brief discussion of the best management practices and
compliance of law which shows adherence to ethical standards of effective management
and distribution of wealth to all stakeholders

Business responsibility report – Breakup of the various operating segments of the business
and disclosure of business principles to which the company adheres for the benefit of
company stakeholders.

Standalone financial statements- Includes four components, in the following order, Balance
Sheet, Profit & Loss statement, Statement of Changes in Equity, Cash Flow Statements. In
addition to above statements, various schedules are also attached to provide clear
understanding of the various line items of the financial statements.

Information on subsidiary companies- Provides financial statements of the partly owned /

wholly owned subsidiaries of the company and their performance in brief.

Consolidated financial statements- This gives complete financial information about the
company in discussion and its subsidiaries in total which gives clear picture about the
profitability of the company as a whole.

Accounting practices and principles employed- Gives various accounting practices and
standards adhered to the company for the realisation of revenues and expenses.
3. Generally, there are four different categories of stakeholders who are interested in analysing
the annual reports of a company. They are as follows: -

Capital Markets

Investors – Includes retail and institutional investors such as equity fund managers,
investment bankers and LBO’s.
Lenders – Includes bankers, bond markets, bond fund managers

Product Markets

Competitors – To benchmark their performance visa vis the company under similar
operating business conditions and environments
Customers – To understand the products / services provided by the company and to verify
the going concern ability of the company in future

Input Markets

Managers – To analyse the influence of managers on the key performance indicators of the
company in the current financial year
Employees – Employee unions study the annual company reports to negotiate for wage
hikes, lend additional support to company during bad times and ability of the company as a
going concern status
Suppliers – Analyses the raw materials/ finished goods that can be supplied to the company
profitability and also financial position of the company as regards to payment of bills for
goods / services supplied.

Government regulators

These are the government regulators which ensure adherence to proper accounting and
business standards for enabling true and transparent disclosures of the company financial
and business performance. Eg. SEBI, RBI, CBDT, MCA

Ref: Pg 3, Intorduction, Financial Accounting: A Managerial Perspective, Narayanswamy

4. The main sources of revenue for CG is from sales of engines for automotive and non-
automotive sector. Other sources of revenue include sale of gensets, farm equipment’s and
retail and after sales services. There is as such no segregation of income as per the different
streams of revenue. There is only segregation for revenue from operations and other income.
 Income recognition policies:

On sales of goods, income is recognised as and when the good delivered is taken under
customer control or company doesn’t retain any managerial involvement on the goods sold
and the economic transaction can be measured / estimated reliably.

With respect to services provided, the revenue is recognised when it is performed as per
contract terms. Since most of the service provided are of short term nature, full service
revenue recognition is done.

For dividend and interest income, the income is recognised in the financial year when the
dividend and interest get declared / becomes due and the financial impact of the transactions
can be reliably measured / recorded.

5. Major chunk of expenses is due to Material cost. Over the last 3 years i.e. from 2017 to 2019, it
has stayed fairly constant between 59% and 61%
On comparative analysis of Cummins India, the Material Cost as % of Total Income over last 3
years has fairly remained constant between 54% and 55%.
On comparative analysis of Kirloskar Oil, the Material Cost as % of Total Income over last 3
years has fairly remained constant between 56% and 58%.
On the basis of above analysis, it can be inferred that Cotton Greaves has remained
competitive visa vis its competitors on the basis of material cost and also no major cost
pressures have been affecting the industry.

6. The following 3 strategies can be used for increasing the revenue / reducing the cost from the
perspective of a mid level executive:-
1. Backward integration of raw materials can be explored so as to create new product mix
which can be sold to competitors like Kirloskar Oil, Cummins India etc. This would result in
significant increase in revenue at the same time internal use of raw materials will greatly
reduce raw material cost.
2. For procurement of raw materials from foreign suppliers, new indigenous vendors can be
developed thereby significantly reducing transport / customs / material cost.
3. For reducing electricity, power costs, staggered operation i.e. running plant at night instead
of standard 9 to 5 can significantly reduce Other Cost overhead.
7. Based on the Annual Report 2019, the total Non current assets for FY 2019-20 was 683.31 Cr
and total current assets was 716.86 Cr. Hence the Non-current to Current Asset ratio is 95%
thereby implying four different possibilities: -
1. Since the company has a legacy of 162 years, it has already invested a fair number of
investments in fixed asset and after depreciation, the book value of the fixed assets has
decreased considerably. The company is now using the inherent cash to fund its operations
i.e. high current assets and not investing in further fixed assets.
2. The investments in fixed assets over the years have turned productive and has been
generating enough cash for operation and current costs are only allocated to purchase of
raw materials, cash balance, inventories thereby having higher current assets than
noncurrent assets.
3. Company is investing in fixed assets but not into capital intensive domains
4. Since material cost forms high proportion of expenses, company predominantly invests in
current assets to maintain ongoing operations rather than investing in new fixed assets
8. The following accounting policies of Cotton Greaves have been discussed in detail below:-
1. Depreciation of fixed assets
Depreciation of fixed assets is done as per the straight line method while the leased land is
amortised over the period of the lease. Any leased building improvements is also
depreciated again on the basis of the remaining lease period. The residual value of the
fixed asset is set at 5% of cost value. The useful life of other fixed assets is as below:-
1. Building – 30 years
2. Plant & Equipment – 15 years
3. Office equipment – 5 years
4. Furniture and Fixtures – 10 years
5. Vehicles – 8 years
2. Provisions
The provisions are considered when any present liability is recognised and not only the
cost value but also the uncertainty and risks associated with it is accounted for in the
provisions.
On recovery of the provisions made, the same is recognised as an accounts receivable if
considerable confidence of recovery is present.
3. Inventories
Inventories are calculated at weighted average cost or net realisable value, whichever is
lower (Exhibiting conservatism principle)

9. The trend of the income and PAT over last 3 years is as shown below:

1 2 3
Revenue 1,634 1,792 2,015
10% 12%

PAT 181 202 165

12% -18%

Even though the Income has grown over the last 3 years, the PAT even though increasing in
the first year, reduced during 2018-19. While the growth in revenue can be attributed to
 the revenue from acquisition of new business, the reduction in PAT is due to the provisions
made due to exceptional expenses i.e. provision made on fixed deposit placed in IL&FS.

10. Based on the trend data, the Net Balance Sheet Assets has increased over the last 3 years as
follows:

BS
1,25 1,34 1,45
Assets/Liabilit
0 6 4
y

On deeper analysis, the increase in assets/liability is due to higher trade receivables (i.e. 253 Cr
 372 Cr ) / higher trade liabilities ( i.e. 273 Cr  374 Cr ) which can be attributed towards
purchase of “Ampere” electric brand and its subsequent addition of its own assets / liabilities
to CG balance sheet and construction of additional production facility in TamilNadu, thereby
increasing fixed assets.