Analysis of Financial

Statements
Semester II
Session 6
AFS Viva – 50 marks

10th April 2010

3:30 pm thru 6:30 pm
Horizontal merger takes place when two or more corporate firms
dealing in similar line of activity combine together. Elimination or
reduction in competition, putting end to price-cutting, economies
of scale in production, R&D, are often cited motives underlying
such merger

The formation of Brook Bond Lipton India Ltd. through the merger of
Lipton India and Brook Bond

HORIZONTAL MERGER
Company Analysis

Way ahead …
 Kick off point…
• Complete name of the Company

• BSE / NSE Code # (in case of listed companies)

• Registered Office, Administrative Office & other relevant (Factory,

Service Centers) coordinates

• Area of business of the Company

• Core and Other Business of the Company’

 Background
• Sector Overview
• Industry Overview
• Contribution to National Income thru the Sector / Industry
– This is important, since the contribution % determines benefits that a government
can offer to the sector – eg. Sec 10A (Income Tax)
• Growth rate of the industry
– Growth rate can be used as a benchmark to compare performance of the
Company
• Geographic reach of the sector – Is the business location specific ?
• Role of Government / Semi Government body in the industry ?
• Is the sector ‘regulated’ ? If yes, which Government body is
responsible for liberalization or tightening of norms ?
• International governing body / trade block (eg. OPEC). – Identify
the strong player / country
 Company Focus
• Vision & Mission of the Company
• Long term & Short Term Goals of the Company
• Image of the Company / How the Company is perceived by a –
investor / market / industry
• Bonding between Company & Promoter / Promoter Group
• Reliance & Ambani
• Infosys & N.R. Narayan Murty
• Microsoft & Bill Gates
This bonding might not always be beneficial for the business

• Attitude of management to move to the ‘next level’

• Professional Management Vs Family Run
 Company Structure - HR
• Composition of Board of Directors
• Organization Structure – Vertical, Horizontal, Matrix
• Age of employment
– # of years with the company
• Sourcing of new talent – internal, referrals, external (lateral),
campus
• Employment hazards – exposure to risk
• Presence of Employee / Trade union
• Applicability of trade / labour laws
• Background check for new hire at management levels
• Employee benefits
 Product / Service
• Categorizing the product as – Necessity or Luxury

• What is the product / service – Articulate the product (s) / service

(s) offered by the Company

• Target market for the product / service

• Positioning the product / service on the ‘value chain’

• Pricing decision – basis of determining price

• Product / Service – Potential risk in functioning / fulfillment

• Substitute and Complimentary product

BCG Matrix
 Marketing
• Market Location – Market Size – Market Potential
• Share of the Company in total market
• Marketing policy of the Company (market skimming, penetration
etc.)
• Growth strategy of the Company

Forrester Wave Diagram

 Financial Statements
• Key ratios – dependant on :
– Industry
– Nature of business
• Ratio of fixed to variable expenses
• Rechargeable expenses in total cost
• Working capital cycle
• Exposure to ForEx fluctuation risk – tools used to mitigate the risk
• Revenue Model - Cost Plus, Profit Model
• Cash flow statement
• Fixed Asset accounting, procurement & retirement policy
• Age of debtors,
• Volume of idle funds
• ROI%
 Tax Exposure
• Any pending assessment for the Company ?
• Any order passed against the Company in I.T. Tribunal / Appeal /
Court
• Whether Company forms a ‘PE’ for another non-resident
Company ?
• Application of Transfer Pricing to the Company

• Application of Service Tax / VAT / Excise / Customs

• Any default by the company is complying with any one or all of the
above acts
• Who is Officer in default ?
 Stock Exchange Data
• Last 52 weeks trading data – High & Low, Trading Volumes
• Reason for the dip in share price
• Effect on market price of share to adverse sentiment in the market,
about the Company / Industry / Sector
• FII/OCB/FI – investment behavior (buy / sell)
 Future outlook
• Pipeline projects
• Repetitive customs / rate of repetition
• Rate of conversion of prospect to customer
• Marketing & Sales strategy
• Long term growth plan
• Competitive strategy
• Growth Strategy – Organic / Inorganic
• Expansion plan – Forward integration / Backward integration /
Lateral / Diagonal movement
Porter’s Five Force Model
Questions / Comments ?

Rohit Bhagwat
Cell : 99308-96787
rohit.bhagwat@gmail.com