1.

REI Agro Ltd

REI Agro Ltd. was established in 1994 to set up an integrated plant to process basmati rice.
The company sells the products under different brands like Kasturi, Real Magic, Mr. Miller,
Hungama, Hansraj and Rain Drop. During the first week of May 2010, Mr. Kamath,
Managing Director of a mid-size investment bank, is considering an investment of Rs. 20 cr.
in non-convertible debenture at an interest rate of 12% offered by REI Agro Ltd. The attraction
of the offer is about getting an upfront incentive of 10%, which makes the effective return 15%.
Mr. Kamath has also invested in the equity of the company three years back and the investment
is doing well. He looked into the credit rating report of Brickwork Rating that he got along
with the offer document. Excerpts from the document are given below:
Strong Revenue Growth: REI has registered a strong growth in revenues with a CAGR of
~40% during FY2006–FY10. The company has steadily grown its exports as well from
Rs.1481 million in FY07 to Rs.9988 million in FY09. REI’s cost effective procurement enables
it to maintain its EBIDTA margins at healthy levels in the range of 18–18.3%. In FY10, due to
the crisis in the Middle East, the company undertook only cash sales in the region, to ensure
sales realizations. This lowered its exports to the region. Going forward, expanding its reach
in the domestic market while gradually increasing its exports will remain REI’s key focus.
High Working Capital Requirements: REI has very high working capital requirement. REI
production has increased steadily over the years from 194 MT in FY03 to 430MT in FY09.
With the increase in scale of operations, the working capital requirement has also increased.
The company matures rice up to 14 months to get better quality rice and higher realizations
due to lower breakage. Inventory days have increased from 382 days in FY07 to 421 days in
FY09. This increases the inventory carrying cost. Correspondingly working capital
requirements and interest costs are also significantly higher. Interest cover declined to 1.34x in
FY2009 from 1.79x in FY08; however, it has improved to an estimated 1.69x in FY2010.
Working capital loans comprise over 85% of its total debt as on March 31, 2009.
Moderate Financial Profile: REI has a moderate capital structure with significantly high
gearing at 5.3 times as on March 31, 2009. EBITDA margins are healthy at about 18.2%;
however, high interest costs coupled with export duty imposed by the Government of India
have affected net profit margins in 2009. REI’s profitability margins were also average at
5.94% and 2.49% in FY08 and FY09 respectively. In November 2009, REI raised USD 105
million by way of issue of 1,05,000 FCCB’s. Further, the company is also proposing a rights
issue (shareholder approval pending). Improvement in gearing levels and interest cover will be
key to the company’s growth. The possible equity infusion through the proposed rights issue
and conversion of FCCB’s (previous FCCB issued in 2005 was fully converted before
maturity) could ease gearing levels, going forward.
Rating Outlook: India, being the largest global producer of basmati rice, has a very good
growth potential with increase in domestic as well as overseas demand. The removal of export
duty and reduction in minimum export price for basmati rice will further boost the export
market. REI is an established player in the fragmented basmati rice industry and a leading
processor of basmati rice in the world. The company controls about 22% share of the basmati
rice industry in India making it a significant player among the larger basmati rice companies
in the world and has a very good procurement network. REI, with a healthy operating margin
of 18.2% and a reasonable net profit margin of 2.5%, is set to grow in the coming years. High
working capital requirement continues to remain a necessity for the basmati rice industry.
While the government policy towards the basmati rice industry remains uncertain, the field still
offers opportunities for the company to grow.
Mr. Kamath asked his daughter who just completed her management program from an overseas
business school and joined him in the company, to compile the company’s financial data and
analyze it. After compiling the data, she started analyzing the financial performance of the
company.
Summary of financial position of REI Agro Ltd.

Mar 06 Mar 07 Mar 08 Mar 09 Mar 10

1,083.6 1,732.0 2,446.2 3,692.6
Sales 957.84 3 5 5 8
Operating profit (PBDIT) 150.66 199.35 320.99 450.05 616.43
Depreciation 9.28 15.56 19.91 21.29 21.39
Interest 39.05 77.74 177.78 333.44 353.20
Profit before tax 102.33 106.05 123.30 95.32 241.84

Shareholders’ fund 325.93 462.15 545.28 602.22 901.54

1,291.3 2,316.0 2,974.8 4,476.7
Loan (short-term and long-term) 753.25 0 4 4 1
Fixed assets (Net) 251.09 300.13 362.72 348.66 332.91
Inventory 596.09 927.62 1652.28 2310.08 3240.09
Sundry debtors 238.52 455.80 449.07 589.16 836.05
Current liabilities 38.91 42.01 41.13 164.93 72.89
Cash flow from operating activities −180.60 −446.32 −720.90 −293.22 −764.09
Stock price (as on March 31 of the year) 13.71 53.44 45.53 31.75 27.25

She finds everything impressive about the company. However, she is a bit disturbed on two
items. The first one is related to the level of debt, which is almost equal to five times more
than shareholders’ fund. Her second concern is that cash flow from operating activities was
negative in all five years. She was in a dilemma on whether to go by the profitability of the
company or cash flow statement while recommending to her father whether to subscribe to the
non-convertible debenture or not.
Required
(a) What are the possible reasons for the company posting negative cash flow from
operations while showing a healthy profit?
(b) Do you think credit rating agencies should look into the cash flow statement more
carefully while awarding the credit rating?
(c) What is your recommendation to Mr. Kamath for investing in the NCD?
2. Tata Motors Ltd
The year 2014-15 is not a good year for Tata Motors. It incurred a loss of Rs. 4739 cr. Explain
the impact of the loss on the balance sheet? How the loss is funded by the company?

Tata Motors Ltd 2015 2014 Tata Motors Ltd 2015 2014

EQUITIES AND LIABILITIES ASSETS

SHAREHOLDER'S FUNDS NON-CURRENT ASSETS

Equity Share Capital 644 644 Tangible Assets 12261 12134
Revaluation Reserves 23 23 Intangible Assets 3523 3107
Reserves and Surplus 14196 18510 Capital Work-In-Progress 1350 1717
Intangible Assets Under
4691 4638
Development
Total Shareholders’
14863 19177 Fixed Assets 21824 21596
Funds
NON-CURRENT LIABILITIES

Long Term Borrowings 12319 9746 Non-Current Investments 16967 18358

Deferred Tax Liabilities Long Term Loans and
0 43 2404 2918
[Net] Advances
Other Long Term
287 1155 Other Non-Current Assets 176 124
Liabilities
Long Term Provisions 2104 815
Non-Current Liabilities 14710 11760 Non-Current Assets 41370 42995

CURRENT LIABILITIES CURRENT ASSETS

Short Term Borrowings 7762 4769 Current Investments 20 101
Trade Payables 8853 9672 Inventories 4802 3863
Other Current Liabilities 3143 2463 Trade Receivables 1114 1217
Short Term Provisions 613 1893 Cash and Cash Equivalents 945 226
Short Term Loans and
Current Liabilities 20371 18798 1574 1224
Advances
Other Current Assets 117 109
Current Assets (Total) 8573 6739
Capital and Liabilities 49943 49734 Total Assets 49943 49734