Frcc l&t Group 2003 Border

7/30/2019 Frcc l&t Group 2003 Border

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1. Analyze the trend of operating expenses as a proportion of

sales for the current year and previous year and explain its

impact on your earnings after tax?

SOLUTIONOperating expenses include the following:

Particulars ( in Crores) C.Y. 2012 () P.Y. 2011 ()Raw Materials 26,368.23 21,729.15Power & Fuel Cost 779.77 477.79Employee Cost 6,873.06 3,801.95Other Manufacturing Expenses 15,171.36 13,712.05Selling and Administration Expenses 3,886.83 2,861.86Miscellaneous Expenses 1,316.48 1,595.15

Less: Pre-operative ExpensesCapitalised

27.96 75.61

Total Expenditure

Sales

54,367.77

64,313.11

44,102.34

51,819.81

Operating Expenses

Operating Expense as a percentage of sales =

X100Sales

Operating Expense as a percentage of sales for 2012 = 84.54%

Operating Expense as a percentage of sales for 2011 = 85.11%

ANALYSIS

The operating expenses, when compared to the amount of Sales, it is very

high. The company has to take steps in order to control its expenses or it

will result in decreasing profits. Further, it may result in losses for thecompany which is not a good sign. Though the operating expense ratio

has been on a higher side, the companys profit after tax has increased

which is shown in the table below due to increased amount of sales.

EARNINGS AFTER TAX

Particulars ( in Crores) C.Y. 2012 () P.Y. 2011 ()Earnings After Tax 4,690.96 4,455.15


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2. What are your inferences from the segment reporting of

your company? Name any two areas where you would like to

see improvement?

SOLUTIONThe major segments of L & T Ltd. are as follows:

Turnkey projects

Construction

Engineered products & services

Power projects

Electrical & Electronic products & systems

IT & Engineering services

Machinery & Industrial products

Financial Services

Railway Projects

Ship Building

ENGINEERING, CONSTRUCTION & CONTRACTS DIVISION

Engineering, Construction & Contracts Division (ECCD) undertakes

engineering, design and construction of infrastructure, buildings, factories,

water supply and metallurgical & material handling projects covering civil,

mechanical, electrical and instrumentation engineering disciplines.

Supported by a proven track record of over sixty-seven years, covering all

types of buildings, industrial sectors and infrastructure development, the

Division undertakes lump sum turnkey construction with single-source

responsibility. The Division has to its credit many prestigious landmarkconstructions in the country.

ENGINEERING & CONSTRUCTION (HYDROCARBON)

DIVISION

Engineering & Construction Division designs, engineers and executes

world-class projects for the hydrocarbon sector with single-point

responsibility from front-end design through detailed engineering,

modular fabrication, procurement, project management, construction and

installation, to commissioning. Strategic alliances with world leaders


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enable the Division to access advanced know-how and deliver projects

that meet stringent Health, Safety & Environment, quality requirements

and time schedules. The Division has a good track record of executing

large size and complex projects on turnkey basis in Oil & Gas, Petroleum

Refining, Petrochemicals, Fertilisers and Water Technology sectors.Division's major capabilities include in-house engineering, R & D centers,

engineering joint ventures with reputed international companies, offshore

installation capabilities, world class fabrication facilities, experienced &

competent project execution team and safe work culture.

EPC POWER DIVISION

The 2010-2011 has seen the emergence of EPC Power Division as a

credible player in the power sector. This is gratifying as the success of EPC

Power is critical to the Company's performance. Definitive steps havebeen taken by the Division, whereby, the Company will be providing

equipment and services encompassing nearly 75% to 85% in value terms

of a thermal power plant. On January 11, 2011, the Company dedicated its

Boiler and Steam Turbine Generator manufacturing facilities at Hazira,

Gujarat to the nation. The facilities have been set at an investment of

nearly Rs. 2000 crore, to usher in a new era of super critical technology

equipment in Indian power plants. The year also saw substantial progress

in setting up the facilities for manufacture of Power Auxiliaries at Hazira.

The high pressure piping fabrication facility was commissioned andproduction has commenced in March 2011.

HEAVY ENGINEERING DIVISION

Larsen & Toubro manufactures and supplies custom-designed, engineered

critical equipment & systems to core sector industries like Fertilizer,

Refinery, Petrochemical, Chemical, Oil & Gas, Thermal & Nuclear Power,

Aerospace and Equipment & Systems for Defence applications. The

division has manufacturing & fabrication facilities at Mumbai, Hazira,

Baroda and Visakhapatnam. A Strategic Systems Complex for integrationand testing of weapon systems, sensors and engineering systems is

located at Talegaon in Maharashtra. A Precision Manufacturing Facility has

been set up at Coimbatore in Tamil Nadu to cater to the needs of precision

machined / manufactured components & assemblies.

SHIP BUILDING DIVISION

The division has its ship building facility operational at Hazira in Gujarat.

Construction of a new modern Shipyard is in progress at Katupalli in

Tamilnadu. The new yard will focus on construction and repairs/refits ofDefence and Specialized Commercial Vessels. The shipyard management


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is focusing on establishing proper systems and processes to increase the

operational efficiencies and reduce cycle time to meet customer

expectations on quality and delivery. There have been sustained efforts to

tie-up with major global shipyards for technology transfer.

ELECTRICAL & ELECTRONICS DIVISION

The division has Electrical & Automation and Medical Equipment &

Systems businesses. While the former manufactures switchgear

components and a host of electrical and automation products, the latter is

a strategic business unit offering world class and state-of-the-art medical

equipment to the medical fraternity. The Electrical & Automation has five

manufacturing facilities in India and six overseas facilities located in the

Gulf region, south-east Asia and the Asia Pacific. During 2010-2011,

Medical Business saw increased acceptance for its Patient Monitors by

renowned hospitals in the country. This business also upgraded the

technology base for 'Pulse Oximetry' module and 'Non-Invasive Blood

Pressure' module.

MACHINERY & INDUSTRIAL PRODUCTS DIVISION

The division has maintained its leadership position in the Construction and

Mining Equipment, exploiting opportunities in the market. Machinery &Industrial Products Division (MIPD) comprises three Strategic Business

Groups - Construction & Mining Machinery (CM), Industrial Machinery (IM)

and Industrial Products (IP). CM markets and renders support for

Construction & Mining Equipment and comprises the Construction &

Mining marketing unit, Service centers for Earthmoving Machines. Its

manufacturing JV facility for Earthmoving Machinery is located at

Bangalore and the facility for undercarriage systems of its Subsidiary is at

Talegaon.

IT & INTEGRATED ENGINEERING SERVICES

Integrated Engineering Services (IES) provides leading-edge engineering

solutions to multiple industry sectors covering automotive, aerospace,

consumer electronics, consumer packaged goods, marine, medical

devices, off-highway equipment, railways, pharmaceuticals, oil & gas,

utilities and industrial products. It has global headquarter at Vadodara,

Gujarat and operates from dedicated off-shore engineering centers at

Vadodara, Mysore, Mumbai, Chennai and Bangalore in tandem with onsite

teams to cater to engineering requirements of global clients, many of


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them are Fortune 500 Companies. It has more than 4,000 dedicated

associates to deliver high-quality engineering and design solutions.

FINANCIAL SERVICES

L&T has a strong financial services division providing a range of servicesmost of which are falling under the listed holding company of L&T

Financial Holdings Ltd. The portfolio of the division comprises of

Equipment finance, Infrastructure Finance, General Insurance, Mutual

Fund, Portfolio Management Services etc.

The company has concentrated on all its subsidiaries equally.

Improvements have been made & are being made day by day in order to

increase its profitability. So, there is none which has to be concentrated

upon specifically for improvement.

3. The companys working capital position is comfortable and

is in line with the conventional rules. Do you agree? Explain

SOLUTIONWorking capital represents operating liquidity available to a business,

organization or other entity, including governmental entity. Net working

capital is calculated as current assets minus current liabilities.

Net Working Capital = Current Assets Current Liabilities

Particulars ( in Crores) C.Y. 2012 () P.Y. 2011 ()Working Capital 10,748.15 26,348.16

1. Basis of accounting

The Company maintains its accounts on accrual basis following the

historical cost convention in accordance with generally accepted

accounting principles [GAAP] except for the revaluation of certain fixed

assets in compliance with the provisions of the Companies Act, 1956 and

the Accounting Standards as specified in the Companies (Accounting

Standards) Rules, 2006 prescribed by the central government. Further,

the guidance notes / announcements issued by the Institute of Chartered

Accountants of India (ICAI) are also considered, wherever applicable

except to the extent where compliance with other statutory promulgations


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viz. SEBI guidelines override the same requiring a different treatment. The

preparation of financial statements in conformity with GAAP requires that

the management of the Company makes estimates and assumptions that

affect the reported amounts of income and expenses of the period, the

reported balances of assets and liabilities and the disclosures relating tocontingent liabilities as of the date of the financial statements. Examples

of such estimates include the useful lives of tangible and intangible fixed

assets, allowance for doubtful debts/advances, future obligations in

respect of retirement benefit plans, etc. Difference, if any, between the

actual results and estimates is recognized in the period in which the

results are known.

2. Presentation of financial statements

The Balance Sheet and the Statement of Profit and Loss are prepared andpresented in the format prescribed in the Schedule VI to the Companies

Act, 1956 (the Act). The Cash Flow Statement has been prepared and

presented as per the requirements of Accounting Standard (AS) 3 Cash

Flow Statements. The disclosure requirements with respect to items in

the Balance Sheet and Statement of Profit and Loss, as prescribed in the

Schedule VI to the Act, are presented by way of notes forming part of

accounts along with the other notes required to be disclosed under the

notified Accounting Standards and the Listing Agreement. Amounts in the

financial statements are presented in Indian Rupees in crore [1 crore = 10

million] rounded off to two decimal places in line with the requirements of

Schedule VI. Per share data are presented in Indian Rupees to two

decimals places.

3. Revenue recognition

Revenue is recognized based on nature of activity when consideration can

be reasonably measured and there exists reasonable certainty of its

recovery.

4. Your Chairman has indicated the strategy and your

companys outlook for the future. Discuss these areas in the

light of the inflationary conditions in our country.

SOLUTION

FUTURE OUTLOOK:

Some segments within these sectors holding out promise of growth in

FY13 are:


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INFRASTRUCTURE

a) Roads the program of road building continues and in FY13, NHAI is

likely to bid over 8,000 km of road contracts, some through construction

awards and the majority through BOT concessions.

b Metro and Mono Rail a number of Tier-1 and Tier-2 cities have kick-

started projects to implement metro and / or mono rail systems, since this

has proven to be one of the best solutions for decongesting urban traffic.

c Railways Business With the Dedicated Freight Corridor taking shape,

large opportunities are expected to materialise commencing FY13. Indian

Railways is also augmenting and upgrading its network, which gives rise

to business potential in this area.

d Water Projects Standard water management facilities (bulktransmission, water treatment, effluent treatment, etc.) as well as

advanced water solutions such as Desalination and Reverse Osmosis

plants provide good opportunity for growth. Apart from domestic markets,

your Company expects good prospects in Qatar, Saudi Arabia, UAE and

Oman by offering total water solutions.

e Urban Infrastructure Strong drivers such as population density, high

nominal GDP growth, high domestic savings and increasing aspiration

levels are driving an urban transformation. This is opening up

opportunities in areas of residential housing, commercial office space,

hotels, hospitals, educational institutions and shopping complexes in Tier

1, 2 & 3 cities.

f Airports The Aviation industry seems to be poised for sustained

growth with increasing trends of both passenger and cargo traffic,

annually. Opportunities are opening up with expansion plans of many non-

metro airports in India and internationally in the Middle East, Asia, Africa

and South East Asia.

g International Markets Your Company is targeting the Middle East

and other Asian markets for infrastructure business in areas such as

Airports, Roads, Bridges, Water Treatment and Power Transmission.

HEAVY ENGINEERING

The Company is one of the worlds leading manufacturers of the

technology-intensive custom-built equipment and expects to continue its

growth in process equipment in FY13. Although the unfortunate

Fukushima nuclear incident in Japan has reduced the pace of growth inthis sector, your Company is targeting international prospects such as


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Spent Fuel storage equipment and decommissioning of Generation II

plants. The defence sector shows good promise in the medium to long

term - both in land and marine business segments. The DefenceOffset

Programme and recent Government initiatives for encouraging private

sector for partnering with Defence Public Sector Undertakings provide arange of opportunities.

HYDROCARBON

Indias efforts to achieve minimum energy security can only be successful

through investment in development of upstream assets. While capex

spends on downstream facilities creation is likely to remain modest for

some time, investment in deep sea projects and new pipeline networks

are likely generate opportunity. Fertiliser capex is likely to revive in FY13

and should provide promising business opportunities. Your Companysthrust on international markets has yielded results, with several

prestigious international project orders during the year. In addition to GCC

markets, your Company is targeting select opportunities in new

geographies like South East Asia, Australia, Africa & CIS through local

country presence, strategic partnerships, etc.

THERMAL POWER

While power is one of the largest bottlenecks to economic growth,

investment decisions to set up fresh capacity for coal and gas fired powerplants remain uncertain due to constraints of coal / gas, land, water,

environment clearance and long term finance. While boiler and turbine

manufacturing capacities are likely to be well utilised for the current year,

improved order inflow is critical for a robust FY14. The Company, however,

is geared to leverage its capabilities in the power sector both in India and

nearby countries.

POWER TRANSMISSION & DISTRIBUTION

Your Company has demonstrated an impressive order book growth inFY12 both in domestic and international markets, backed by strong EPC,

fabrication, testing and execution capabilities. The increased investments

in India by government undertakings and strengthening of transmission

grids in GCC countries provide significant business opportunities for power

transmission and distribution business.

METALLURGICAL & MATERIAL HANDLING

The short term outlook in this area remains challenging due to

complexities of present mining policies, delays in land acquisition and


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environmental clearances. The demand, however, for metals in the

medium tolong term is expected to grow, driven by capex plans by

Integrated Steel Players, increased consumption and investments in

infrastructure. Material handling prospects are also looking up in areas of

power, mining, steel and ports.

ELECTRICAL & AUTOMATION

Although sluggish offtake from industrial sectors led to muted overall

growth in FY12, agriculture and buildings sectors are providing growth

opportunities to this business. Business is focusing on forging ahead with

world class contemporary products, and has filed 162 patent applications

in FY12. The Electrical & Automation business can expect an upward

momentum when the general economy improves.

MACHINERY & INDUSTRIAL PRODUCTS

Machinery & Industrial Products business has been affected by general

slowdown, deceleration in industrial activity, and restrictions on mining. In

Industrial Products, valves maintained the positive trend in FY12,

registering a healthy growth in order inflow and sales. Sustained oil & gas

project activities in the Middle East, North Africa and Australia provide

good opportunities. The Construction Machinery Business successfully

sustained the performance of the preceding year in a market which

witnessed intense competition. The Business Unit has maintained itsleadership position in the premium market segment and strengthened its

position with new offerings in Large Size Mining Equipment.

INFORMATION TECHNOLOGY & INTEGRATED

ENGINEERING SERVICES

L&T Infotech, a wholly owned subsidiary, grew at 30% Y-o-Y on a

consolidated basis with over 90% of its revenues from overseas clients.

Profit after Tax grew by 33% in spite of withdrawal of STPI Tax benefits in

FY12 through tax policy change. L&T Infotech has taken several initiatives

for operational excellence, tapping new markets and forging strategic

alliances to provide solutions in upcoming technologies. Integrated

Engineering Services, an SBU within L&T and a provider of engineering

services, is a global operator with 94% of its business from overseas. It

has shown a robust growth of 64% in the revenues during the current

fiscal, despite economic slowdown in USA, Europe, etc. With growing

clientele, the business is poised for encouraging growth over the next few

years.

FINANCIAL SERVICES


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L&T Finance Holdings Ltd. made its debut in Equity Capital Markets in

FY12 through a maiden IPO which received overwhelming response from

investors. The business continued its growth momentum during FY12 with

a 42% growth in its consolidated Total Income and a growth of 16% in

Profits after Tax. The Loans and advances extended by the FinancialServices Companies have grown by 39% and stands at ` 25,442 Cr at end-

FY12. The Financial Services group is now a broad-based, diversified

Financial Services provider and is benefiting from a solid growth platform.

DEVELOPMENTAL PROJECTS

Your company has built a significant portfolio of assets coveringconcessions, mainly in roads, ports, power generation and Metro rail. The

majority of projects are in various stages of completion. While returns on

developmental projects are typically back-ended, your Company would be

seeking to unlock value through churning of mature assets within the

portfolio and through equity partnership.

EFFECT OF INFLATION

Inflation has become a chronic problem whose effects permeate the entire

construction industry. Owners are not only paying for the increased costsof facilities and capital but also for premiums on construction prices

because of the uncertainties of inflation and its side effects. Contractors

are faced with severe uncertainty in bidding and financing work on

projects. Productivity is affected because contractors cannot accurately

forecast long-term returns on their investments and are required to divert

necessary capital to meet resource costs. Owners and contractors must

plan for these effects and attempt to reduce the risks entailed. In

particular, the proper assignment of economic risks in contracting should

reduce costs in the long term, although this would entail considerablechange in construction industry operations.

Rising inflation, interest rates, or construction costs could reduce the

demand for the companys services. In addition, it bears the risk of rising

inflation with respect to those contracts that are fixed-price and may be at

risk to the effects of rising inflation with respect to those contracts that

are guaranteed maximum-price. Therefore, increases in inflation, interest

rates or construction costs could have a material adverse effect on the

business, financial condition, and results of operations.


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5. Name any three highlights of Management discussion

analysis and your opinion about the same.

SOLUTION

GLOBAL ECONOMIC CONDITION

The world economy continues to face challenges on the road to sustained

recovery. Advanced Economies that seemed to be shaping well at the

start of 2011 lost steam towards the fag-end of the year and this

uncertainty is clouding the prospects for global growth during 2012. The

growth momentum was impacted as the protracted debt crisis in the euro

area and fiscal fragilities dampened business and consumer confidence.

The economic crisis and its ramifications have accelerated the shift of

economic power from the developed to the emerging nations and exposed

a fragile world with limited capacity to respond to systemic risks. The

consequence has been volatile and low growth which is likely to stay for

some time to come. Near term, the growth prospects for 2012-2013

remain uncertain, with growth petering out in the euro area and

moderating in the emerging markets, while a better-than expected

recovery is shaping up in the US. The baseline scenario suggests that

global growth may continue to be low in 2012, with a recession in the euro

area as the region makes the much needed fiscal adjustment. Meanwhile,

the resource rich Middle East and North Africa (MENA) region has been

facing significant internal challenges and geopolitical risks. In addition,there is the risk of large potential pill overs to the region from Europe. The

year 2011-2012 was abetted by the continuing global volatility and

challenges. These uncertainties led to widespread risk aversion and

adversely affected capital flows to new projects. The competition for

limited opportunities, led to socio-political tensions, increasing

protectionism, reassessment of regulation and more importantly,

heightened competition for scarce natural resources.

BUSINESS CHALLENGES:


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Order prospects of the Company especially from Power, Infrastructure,

Defence, Fertiliser, Water and Railways in India largely depend upon the

policy direction and availability of resources to finance large projects. In

spite of large demand for power, projects for setting up of new power

plants are not gaining momentum due to fuel shortage, delays inobtaining environmental clearances, issues associated with land

acquisition and competition from Chinese equipment manufacturers.

Political stability, good governance and speedy decision making hold the

key for achieving growth in the order inflow. The businesses of the

Company are also focusing on harnessing international prospects, mainly

from the Middle East region in 2012-2013. The forays into international

markets would mean dealing with many challenges such as stiff

competition from multinational players, regulatory requirements of local

sourcing etc. Margins would remain under pressure during 2012-2013 with

inflationary conditions and continuing competition from domestic and

international players. The volatility in commodity prices and foreign

currency exchange rates are expected to pose challenges to the operating

margins. Conditions of tight liquidity and elevated interest rates are

expected to prevail in 2012-2013. The working capital levels unless

managed well are likely to trend higher.

HUMAN RESOURCE DEVELOPMENT:

Talent management, leadership development and succession planning arethe major focus areas for the Company. The individual business units have

been focusing on acquiring and retaining the talent with requisite

competencies. Specific high impact programmes are being conducted for

leadership development. The Company has invested in setting up various

in-house training and development centres. L&T-Project Management

Institute in Baroda is accredited by PMI of USA. The Company runs

Construction Skill Training Institutes (CSTI) in association with the Ministry

of Rural Development, GOI and some of the State Governments at 7

locations across India for imparting vocational training to rural youth on

skills such as masonry, carpentry, plumbing etc.

6. Explain the salient features of the companys taxation as

brought out by the note on accounts.

SOLUTIONTax on income for the current period is determined on the basis of taxable

income and tax credits computed in accordance with the provisions of the

Income Tax Act 1961, and based on the expected outcome ofassessments/appeals. Deferred tax is recognised on timing differences


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between the income accounted in financial statements and the taxable

income for the year, and quantified using the tax rates and laws enacted

or substantively enacted as on the Balance Sheet date. Deferred tax

assets relating to unabsorbed depreciation/business losses /losses under

the head capital gains are recognised and carried forward to the extentthere is virtual certainty that sufficient future taxable income will be

available against which such deferred tax assets can be realised. Other

deferred tax assets are recognised and carried forward to the extent that

there is a reasonable certainty that sufficient future taxable income will be

available against which such deferred tax assets can be realised.

7. Analyze the short term and long term solvency of the

company using the key ratios. Also link the long termsolvency ratios to capital structure and EPS.

SOLUTION

ANALYSIS OF LONG TERM ASSETS & LIABILITIES

Analysis of long term liabilities includes the assessment of long term

solvency ratios which includes

Debt Equity Ratio

Debt to Total Assets Ratio

Proprietary Ratio

LONG TERM SOLVENCY RATIOS (LEVERAGE RATIOS)

Long term solvency ratio conveys a firms ability to meet the interest/

costs and repayment schedule of its long-term obligations. It helps the

creditors to know the capacity of a business concern to pay debt in the

future.

DEBT EQUITY RATIO

Debt Equity ratio measures the relationship of long term debt to

shareholders funds.

Long term debt

Debt Equity ratio =

Shareholders funds


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DEBT EQUITY RATIOS FROM 2008 2012

2012 2011 2010 2009 2008

1.23 1.49 1.17 1.46 1.14

ANALYSIS

A debt equity ratio of 1.23:1 in 2012 means that for every 1 of Equity,the company has a debt of1.23, from the above information it can be

understood that among the 5 years, of information taken, Debt Equity

Ratio is highest in the year 2011.

A high debt - equity ratio means that a company is aggressive in financing

its growth with debt. If a lot of debt is used to finance increased

operations (high debt to equity), the company could potentially generate

more earnings than it would have without this outside financing. If this

were to increase earnings by a greater amount than the debt cost

(interest), then the shareholders benefit as more earnings are being

spread among the same amount of shareholders. The debt/equity ratio

also depends on the industry in which the company operates.

In general, if the company is in debt more than 40-50%, the company

needs to look at its financial statements more carefully and compare itself

to other companies in the industry as it may be in financial difficulty.

If the ratio has risen dramatically over time, then any company needs to

take a closer look at its borrowing practices and why it has need for more

debt financing.


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LONG TERM DEBT TO TOTAL ASSETS RATIO

A measurement representing the percentage of a firm's assets that are

financed with loans and financial obligations lasting more than one year.

Long term debt to total assets ratio = Long term Debt

Total Assets

LONG TERM DEBT TO TOTAL ASSETS RATIO FROM 2008

2012:

2012 2011 2010 2009 20080.50 0.59 0.53 0.58 0.51

ANALYSIS

A long term debt to total assets ratio of 0.5:1 in 2012 means that every

1 of Total asset is financed by 0.5 of long term debt. It is evident from

the above information that the firms highest long term debt to total

assets ratio was in the year 2011 and the lowest was in 2012.

This ratio provides a general measure of the financial position of a

company, including its ability to meet financial requirements foroutstanding loans. A decrease in this ratio would suggest that the


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company is progressively becoming less dependent on debt to grow their

business.

A fluctuation in this ratio indicates that there are frequent changes in the

composition of long term debt & total assets in the business over the

years.

PROPRIETARY RATIO

This is a variant of debt equity ratio. It measures the relationship between

Net worth and total assets.

Proprietary Ratio = Net worth

Total Assets

PROPRIETARY RATIO FROM 2008 2012

2012 2011 2010 2009 2008

40% 40% 45% 39% 45%

ANALYSIS

A proprietary ratio of 40% in 2012 indicates that 60% of the funds have

been supplied by outside creditors. The proprietary ratio is highest in the

years 2010 & 2008 (45%) indicating that 55% of the funds has been

generated from outside creditors.


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If this ratio is high, it indicates that a company has a sufficient amount of

equity to support the functions of the business, and probably has room in

its financial structure to take on additional debt, if necessary. Conversely,

a low ratio indicates that the business may be making use of too much

debt or trade payables rather than equity, to support operations (whichmay place the company at a risk of bankruptcy).

SHORT TERM SOLVENCY

CURRENT RATIO

The ratio measures the company's ability to pay back its short-term

liabilities (debt and payables) with its short-term assets (cash, inventory,

receivables).

Current Ratio = Current Assets

Current Liabilities

CURRENT RATIO FOR 2008 2012:

2012 2011 2010 2009 2008

1.23 1.86 1.77 1.67 1.64


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ANALYSIS

The Current Ratio is 1.23:1 in 2012 which is below the ideal ratio of 2:1.

The company has maintained a constant current ratio around 1.64 to 1.86

through the years 2008 to 2011.

For the lenders, current ratio is very helpful for them to determine

whether a company has a sufficient level of liquidity to pay liabilities. They

would prefer a high current ratio since it reduces their risk.

For the shareholders, current ratio is also important to them to discover

the weakness in the financial position of a business. They would prefer a

lower current ratio so that more of the companys assets can be used for

growing business.

Investors should look at the trend of the current ratio of the company,types of current assets the company has and how quickly these can be

converted into cash to meet companys current liabilities.

Every industry has its own norms of current ratio. Acceptable current

ratios vary from industry to industry and are generally between 1.5 and 3

for healthy businesses. If a company's current ratio is in this range, then it

generally indicates good short-term financial strength. If current liabilities

exceed current assets (the current ratio is below 1), then the company

may have problems meeting its short-term obligations. If the current ratio

is too high, then the company may not be efficiently using its current

assets or its short-term financing facilities. This may also indicate

problems in working capital management.

LIQUID RATIO/ QUICK RATIO/ ACID TEST RATIO

Quick ratio establishes a relationship between quick assets and quick

liability. An asset is liquid if it can be converted into cash immediately or

reasonably soon without a loss of value.

Liquid Ratio = Liquid Assets

Current Liabilities

LIQUID RATIOS FOR 2008 2012

2012 2011 2010 2009 2008

0.52 0.59 0.68 0.66 0.62


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ANALYSIS

Generally, a quick ratio of 1:1 is considered to represent a satisfactory

current financial condition. It is 0.52:1 in the year 2012 representing that

for every 1 of Current Liability, there is 0.52 of quick assets.

Liquid ratio is more rigorous test of liquidity than the current ratio because

it eliminates inventories and prepaid expenses as a part of current assets.

Usually a high liquid ratio indicates that the firm is liquid and has the

ability to meet its current or liquid liabilities in time and on the other hand

a low liquidity ratio represents that the firm's liquidity position is not good.

Although liquidity ratio is more rigorous test of liquidity than the current

ratio, yet it should be used cautiously. A liquid ratio of 1:1 does not

necessarily mean satisfactory liquidity position of the firm if all the debtors

cannot be realized and cash is needed immediately to meet the currentobligations. In the same manner, a low liquid ratio does not necessarily

mean a bad liquidity position as inventories are not absolutely non-liquid.

Hence, a firm having a high liquidity ratio may not have a satisfactory

liquidity position if it has slow-paying debtors. On the other hand, a firm

having a low liquid ratio may have a good liquidity position if it has a fast

moving inventories.


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ABSOLUTE LIQUID RATIO

Absolute Liquidity ratio is also known as Super Quick ratio or Cash Position

Ratio. This ratio establishes a relationship between absolute liquid assets

and current liabilities.

Absolute Liquid Ratio = Absolute Liquid assets

Current Liabilities

ABSOLUTE LIQUID RATIOS FOR 2008 2012

2012 2011 2010 2009 2008

0.07 0.12 0.14 0.07 0.10

ANALYSIS

As compared to the standard ratio of 0.5:1, the companys absolute liquid

ratio is very less i.e. 0.07:1 in 2012 & in 2009. The firms liquidity position

has to be improved.

This ratio is used to examine absolute liquid position of the firm. If this

ratio is 0.5:1 it indicates that the firm has enough cash to pay to its

creditors. Secondly it also shows that firm is not paying attention towards

credit purchases and avoids the use of short term loan from the banks.


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EARNINGS PER SHARE

The portion of a company's profit allocated to each outstanding share of

common stock. Earnings per share serves as an indicator of a company's

profitability.

Earnings per Share = Profit after Tax/ No. of Equity shares

EARNINGS PER SHARE FROM 2008 2012

2012 2011 2010 2009 2008

74.11 70.96 88.46 62.92 76.93

/

ANALYSIS

The EPS is highest in 2010. This shows that the equity shareholders are

getting higher returns from the company. This also encourages more

investors to invest in the company. Since EPS is unstable over the years, it

is very difficult for the investors to predict the amount of investment they

can make in the company which may discourage the investors to invest.


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LONG TERM CAPITAL STRUCTURE EPS

The capital structure has increased over the years because of the

following reasons

Proceeds from Issue of shares (incl. share premium)

Proceeds from 0ther Long Term Borrowings

This results in fluctuations in EPS as along with the capital structure the

profits after taxes also fluctuate. Also the interest paid on debentures will

reduce the earnings available to equity shareholders thereby having a

direct impact on EPS.


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8. Using the information from the cash flow statement, explain

how investing activity is supported by financing and

operating activity. Are you happy with this form of funding?

Give reasons.

SOLUTION

ANALYSIS OF CASH FLOW STATEMENT

2012 2011 2010 2009 2008

Operating Activities -6340.73 -1615.61 2117.84 495.96 -1239.22

Investing Activities -5864.18 -5928.72 -5025.34 -5076.89 -6615.34

Finaning Activities 12081.61 7868.18 4770.05 4479.19 7697.32

-10000

-5000

0

5000

10000

15000

Cash Flows from various activities

Operating Activities

Investing Activities

Finaning Activities

Operating Activities shows how much cash comes from sales of the

company's goods and services, less the amount of cash needed to make

and sell those goods and services. Investors tend to prefer companies that

produce a net positive cash flow from operating activities. High growth

companies, tend to show negative cash flow from operations in their

formative years. At the same time, changes in cash flow from operations

typically offer a preview of changes in net future income. Normally it's a

good sign when it goes up. If net income is much higher than cash flow,

the company may be speeding or slowing its booking of income or costs.


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Cash flows from Operating activities is negative for few years and positive

for few years whereas the Financing activities are positive throughout all

the 5 years. The Investing activities are also negative in nature. It is

evident from the graph & table that the funds from Financing activities are

used to finance the Operating & Investing activities.The Depreciation has increased over the years due to investment of funds

in purchase of fixed assets. There is also repayment of short-term loan &

advances 2010 onwards. The trade payables are high due to large

purchases throughout the years. This means that the company has

outstanding dues to pay. There is also presence of high amount of trade

receivables which means that the company is ought to receive payment

from its buyers. It is highest in 2012. The proposed dividend is set aside

along all the years in order to make the payment in the next financial

year. The company has also sold a part of its assets in all the years. Thecompany may have incurred a profit or loss on doing so. Here, as the

figures are negative, the company has incurred a loss on sale of assets

may be due to non-performing assets. Similarly, the company has also

sold its investments and it might have occurred a profit or loss on sale of

investments.

Investing activities largely reflects the amount of cash the company has

spent on capital expenditures, such as new equipment or anything else

that needed to keep the business going. It also includes acquisitions of

other businesses and monetary investments such as money market funds.

Larsen & Toubro Ltd. has purchased a large amount of fixed assets in all

the respective years. Purchase of fixed asset & investments are major

contributors to cash outflows in investing activities, this means in simple

words that the negative figure in investing activities is due to the

purchase of fixed assets & investments. Also, the sale of fixed assets has

taken place in all the years but this sale is less when compared to the

purchases. Sale of fixed assets has led to a profit or loss from sale as

mentioned in the operating activities above. Sale of investments iscomparatively more to sale of fixed assets thereby substantiating the fact

that profit or loss from investments is much higher than profit or loss from

sale of fixed assets. The company has also received interest and dividend

from its investments in all the years.

Financing activities describes the goings-on of cash associated with

outside financing activities. Typical sources of cash inflow would be cash

raised by selling stock and bonds or by bank borrowings. Likewise, paying

back a bank loan would be of a cash out-flow, as would dividend payments

and common stock repurchases.


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The company has issued shares during all the 5 years leading to proceeds

from issue of shares. Also, it has receipts from other long term borrowings

from outsiders. The company has also paid off its long term borrowings to

an extent. The other payments made by the company are dividends and

interest.L & Ts financing activities finances its investing and operating activities.

This shows that the financing receipts are used and not operating income

and investing receipts to finance its operations. This shows that the

receipts from investments are very low which might be due to continuous

depreciation of the assets and investments which results in a decrease in

the sale value of these assets and investments.

9. The operational and financial highlights give a clear

direction to the companys growth outlook. Discuss this in the

light of the macro- economic conditions in India and across the

globe.

SOLUTION

1. POLITICAL FACTORS

(i) SEZ Act to Boost infrastructural Development

SEZ is the new destination for real investor. Currently 150 SEZs

are approved out of 85 SEZs are in the IT/ITES area and the 10-

15 SEZs in the electronics area. 130 SEZs are developed by real

estate developers which constitute of about 50% of the total SEZ

area.

(ii) FDI Liberalization to Augment Industry Growth:

Recent amendments by the government have made accessibility

to the required capital much easier. Opening of FDI in

construction and allowing developers to raise capital in

international market has led to development of larger projects

benchmarked against international standard.

(iii) REITs(Real Estate investment trusts) to Positively affect

real Estate Business


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The proposed introduction of REMF (Real Estate Mutual Fund) and

REIT will boost real estate investment from the small investors

point of view. This will allow small investors to enter real estate

market with the contribution as less than Rs 10,000. The concept

of REIT is on the verge of entering India and would be structuredas company dedicated to owing and in most cases operating

income producing real estate such apartments, shopping centers,

offices & warehouses.

2. ECONOMIC FACTORS

(i) Growth in Construction Activity Stimulating GDP Growth:

India is witnessing tremendous growth & expansion of

construction activities and construction is largest component of

GDP. It has been growing at a rate over 10% in the past few

years when GDP growth is around 8%. Within construction; sector

such as roads, railways, housing and power have been keen

drivers.

(ii) Rate Hikes Unlikely to Slow down Growth:

It has been analyzed that the residential prices has been

increased by about 15-20% on average in the last one year.

There has been strong growth in demand supported by rising

disposable incomes, low interest rates, and fiscal incentives on

both interest and principal payment and increasing urbanization.

3. SOCIAL FACTORS

(i) Shifting Consumption Pattern to Fuel industry Growth

The consumption pattern of Indian households is undergoing a

gradual, but steady change. Increased exposure to western

lifestyle has altered the consumption pattern of Indian people.


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(ii) Rising Urbanization to Boost Industrial Growth:

Urban infrastructure consist of drinking water, sanitation, sewage

systems, electricity and gas distribution, urban transport, primaryhealth services, and environmental regulation. Many of these

services are in the nature of local public goods with the benefits

from improved urban infrastructure. The urban population in

India will grow by 85 million over the next 10years.

(iii) Green Building in India:

The green building movement has gained tremendous

momentum during 3 to 4 years, ever since the Green Business

center embarked on achieving the prestigious LEED rating for

their own center at Hyderabad. The Platinum rating for green

building has sensitized the stakeholders of construction industry.

There is tremendous potential for construction of green building

in India.

4. TECHNOLOGICAL FACTORS

(i) Low Technology Adoption to Hinder Growth:

The poor state of technology adopted by the construction sector

adversely affects its performance. Upgrading of technology is

required both in the manufacturing of construction material and

in construction activities. As a large number of construction

materials are manufactured in the unorganized sector, effective

monitoring and regulation of the production of these material to

ensure proper quality become difficult. Use of low grade

technology in the construction sector lead to low value addition

and low productivity, apart from poor or substandard quality of

construction and time overruns in projects.

(ii) Construction As Per Indian Requirements:

The construction needs to be done as per Indian standards andrequirements which will demand considerable changes from the


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international requirements. The Infrastructure requirements of

India are much different as the population spread, increasing

urbanization, increasing slums, the small space for roads, the

water problems are more.

(iii) Ready-Mix-Concrete being Experienced With:

The Ready mix concrete business in India is in its infancy. For

example, 70% of cement produced in a developed country like

Japan is used ready mix concrete business there. Here in India,

Ready Mix concrete business uses around 2% of total cement

production. The increasing use of ready mix not only saves time

but also improves quality.

5. ENVIORMENTAL FACTORS

Technological solutions helps in integrating the supply chain,

hence reduce losses and increase profitability

With the entry of global companies into the Indian market,

advanced technologies, are used in engineering &

Construction.

With the development or evolution of infrastructure sector,

many of the MNC enter into Indian market

Environmental situation affect the infrastructure sector.

Infrastructure such as roads and bridges affect the many

sector such as automobile sector etc.

LEGAL FACTORS

Ensure a balanced transition to open trade at minimal risk to the

Indian economy and local industry.

Indian government infrastructure policy aimed at promoting an

integrated, phased and conductive growth of the Indian

infrastructure sector.


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Confirms the governments intention on harmonizing the regulatory

standards with the rest of the world

Establish an international hub for engineering & construction

companies so that new technology can be used

Legal provisions relating to safety measures

Frcc l&t Group 2003 Border

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Transcript of Frcc l&t Group 2003 Border