Ispat Industries -Financial Ratio Analysis (Jigar Patel)

“FINANCIAL ANALYSIS & INTERPRETATION OF ISPAT INDUSTRIES LIMITED”

EXECUTIVE SUMMARY

The project aims at studying and understanding the business environment and

knowledge of Iron and Steel Industry as a whole and Ispat Industries Limited in

particular. It is of utmost importance to keep an eye on short as well as long term

performance of the organization. Keeping in view the financial performance, various

business strategies are formulated, communicated, implemented and monitored in an

organization. Performance of the business organization is affected by several factors,

some of which may be general to the industry and some may be specific to the

organization. There are several issues pertaining to iron and steel industry such as

raw material availability, logistics, etc. which highly impact the business. There is one

way to know the financial position of the company by financial analysis of the

company. Financial analysis is the process of identifying the financial strengths and

weaknesses of the firm by property establishing relationships between the item of the

balance sheet and the profit and loss account.

Ratios are highly important profit tools in financial analysis that help financial analysts

implement plans that improve profitability, liquidity, financial structure, leverage, and

turnover. Although ratios report mostly on past performances, they can be predictive

too, and provide lead indications of potential problem areas.

REPORT SUBMITTED BY: JIGAR PATEL ~ 1 ~


Scope of the study :

When the project report is prepared it includes all the aspects of projects like

company’s product and its market, manufacturing process, operational viability, its

financial projection and various ratios. This helps the management to understand

whether the project is practically possible or not. Ratio analysis gives the idea about

the profitability of the project.

Project report gives projected financial statements and on basis of that ratios are

calculated. Ratio analysis helps in judging the operational efficiency of the

management’s ability to repay short and long term loans, doing inter-firm comparison

and to assess the future growth of the company. The ratio analysis of the company is

done before investing or providing credit to the company. This is the reason of

selecting the project.

Objectives of the study :

Ratio analysis is done for the following purposes:

1) To study the financial position of the company.

2) To analyze the financial stability and overall performance of ISPAT

INDUSTRIES LIMITED in general.

3) To analyze the profitability and solvency position of the unit with the existing

tools of financial analysis.

4) To study the changes in the assets, liabilities structure of the company during

the period of study.



Research Methodology :

The global as well as Indian scenario of the Iron and Steel Industries has been

studied for better understanding of the scenario. The manufacturing plant of Ispat

Industries Limited has been visited and the important processes and operations have

been studied and understood. The annual reports of the company have been studied

along with the crucial financial statements like Income Statement, Balance Sheet and

Profit & Loss Account are being analyzed for further insights.

Data Collection : Secondary data is used for the research study.

Time Frame : The project duration is within a span of 2 months.



ISPAT INDUSTRIES LIMITED

INTRODUCTION :

Ispat Industries Limited (IIL) is one of the leading integrated steel makers and the

largest private sector producer of hot rolled coils in India. Set up as Nippon Denro

Ispat Limited in May 1984 by founding Chairman Mr. M L Mittal, IIL has steadily

grown into Rs 9,400-crore Company, assuming its position as flagship of the reputed

Ispat Group. A corporate powerhouse which operates in iron, steel, mining, energy

and infrastructure, the Group today figures among the top 20 business houses in the

country.

Headquartered at Mumbai, IIL employs a total of 3000 people and is the leader in the

national specialist steel market. The company's core competency is the production of

high quality steel, for which it employs cutting edge technologies and stringent quality

standards. It produces world-class sponge iron, galvanized sheets and cold rolled

coils, in addition to hot rolled coils, through its two state-of-the art integrated steel

plants, located at Dolvi and Kalmeshwar in the state of Maharashtra.

The sprawling 1,200 acres Dolvi complex houses the 3 million tonne per annum hot

rolled coils plant, that combines the latest technologies - the Conarc process for steel

making and the Compact Strip Process (CSP) – introduced for the first time in Asia.



The complex also has a 1.6 million tonne per annum sponge iron (DRI) plant, which

was commissioned in 1994 as the world's largest and most efficient gas-based single

mega module plant. Moreover, the Dolvi complex is home to a 2 million tonne blast

furnace and also boasts a mechanised multi-functional jetty situated nearby, that

facilitates the automation of raw material handling. A new 2.24 million tonnes per

annum sinter plant; a 1260 tonnes per day oxygen and a new electric arc furnace

have also been commissioned at IIL Dolvi.

Ispat is the only steel maker in India and among a few in the world to have total

flexibility in choice of steel making route, be it the conventional blast furnace route or

the electric arc furnace route. Its dual technology allows Ispat the freedom to choose

its raw material feed, be it pig iron, sponge iron, iron ore, scrap or any combination of

various feeds. It also has total flexibility in choosing its energy source, be it electricity,

coal or gas.

The Kalmeshwar complex houses Ispat's 0.4 million tonnes cold rolling complex,

which also includes the galvanized plain/ galvanized corrugated (GP/GC) lines and

India's first colour coating mill.



ABOUT KALMESHWAR PLANT

Ispat Industries Limited's integrated steel plant at Kalmeshwar in the state of

Maharashtra, India, uses some of the finest steel manufacturing technology to

produce galvanized sheets and products, apart from cold rolled coils. The

Kalmeshwar complex houses a total of three advanced plants - a 0.325 million

tonnes Galvanized Plain/Galvanized Corrugated plant, a 0.33 million tonne Cold

Rolled Coils plant and a 60,000 tonne Colour Coated Sheets plant.

CAPACITY / CAPABILITIES :

The capacity of the plant is dependent on the gauges of products produced. The

capacity, as cited by the unit at certain select gauges, is around 0.33 million tonnes

per annum (MTPA). To reach its corporate objective of 1 MTPA, the Kalmeshwar unit

is undertaking various initiatives for enhancement of production.

MANUFACTURING FACILITIES :

Cold Rolling Mill

Galvanizing Line

Colour Coating Line



A) Cold Rolling Mill :

Ispat Industries Limited's highly advanced cold rolling mill at Kalmeshwar was set up

in 1988, in technical collaboration with Hitachi of Japan, to manufacture cold rolled

carbon steel strips in a wide range of thickness and width. The mill has a capacity of

0.325 million tonnes per annum (MTPA) and comprises various processing units as

mentioned below:

1) Continuous Pickling Line :

The hot rolled coil, which is the basic raw material, is passed through the Continuous

Pickling Line (CPL) to remove the oxides or scales from the strip surface, thereby

enabling further reduction of thickness to the desired level in the Cold Rolling Mill

(CRM). This processing is necessary since rust is formed on the surface of the coils

at room temperature, whereas scales are formed at a high temperature during rolling

in the hot strip mill.

The installed production capacity of the CPL is 3.56 million tonnes per annum

(MTPA).

2) Cold Rolling Mill Operation :

There are two types of Cold Rolling Mill (CRM) operations - 6 Hi CRM and 4 Hi CRM.

Pickled hot rolled coils of higher gauges are reduced to the necessary thinner gauges

by being processed through the mills. In 6 Hi CRM, the reduction achieved is upto

0.13 mm ultra thin gauge, whereas 4 Hi CRM can reduce the thickness upto 0.25



mm. The computer-controlled rolling process ensures closure thickness tolerances

and perfectly flat strips.

The installed production capacity of the 6 Hi mill is 2,30,856 MT per annum and that

of the 4 Hi mill is 43,502 MTPA.

3) Electrolytic Cleaning Line :

The Electrolytic Cleaning Line (ECL) is necessary in case the material is rolled with a

high percentage of oil while reduction in the mills. An oil-free base material is

essential for the production of bright and corrosion resistant steel. Sodium

orthosilicate is used as a cleaning agent in ECL. Tension is given according to

thickness and width, based on customer requirements.

The installed production capacity of the line is 86,102 MTPA.

4) Batch Annealing Furnace :

The process of annealing of cold rolled coils is carried out to obtain the desired

properties in the finished coils. For this, the material is heated to a pre-determined

temperature in a protective atmosphere and soaked for a specified time, before it is

cooled to room temperature.

It is necessary to maintain optimum conditions in respect of the annealing

atmosphere, annealing cycle, sealing and purging in order to obtain a finished

product with a bright surface, the desired micro structure and uniform properties

throughout the coil. SD is used for heating the surface. Nitrogen, obtained from the

PSA Unit, is purged inside the inner cover.



The installed production capacity of the line is 75,881 MTPA.

5) Skin Pass Mill :

In this process, the cold rolled annealed strips are given the desired surface finish.

This improves the flatness and suppresses the yield point elongation. Anti-rust oil is

used on the strip surface as protection from rust.

The installed production capacity of the Skin Pass Mill is 82,319 MTPA.

6) Cold Roll Slitter :

In the Cold Roll Slitter, coils are slitted by length and side trims are removed to obtain

a uniform width throughout the coil, as per customer requirements. The installed

production capacity of the cold roll slitting line is 96,006 MTPA.

7) Cut-To-Length Line :

In Cut-To-Length Line (CTL), slitted coils are sheared to the desired length as per

customer requirements. There are a total of four CTL lines in operation. The installed

production capacity of all CTLs is 83,289 MTPA.

B) Galvanizing Line :

Ispat Industries Limited pioneered the manufacture of thin, medium and thick gauge

galvanized steel sheets in India. The company currently has four galvanizing lines at

the Kalmeshwar unit, with a total installed production capacity of over 0.325 million

tones per annum.



The unit is accredited with QS-9000 and ISO-14000 certifications and is equipped

with computerised quality checks at every stage, including an x-ray thickness gauge

and other contemporary systems.

A noteworthy feature of the galvanizing unit at Kalmeshwar is its self-sufficiency in

raw material - cold rolled (CR) coils, which facilitates versatility in its product range.

Until the last quarter of 1988, CR coils were imported, as is still done by other

galvanizers. However, Ispat planned its backward integration in the form of a Cold

Rolling Mill to ensure its own raw material for the Galvanizing Line. The company's

computer controlled 6-hi reversible combination Cold Rolling Mill began production in

1988.

Quality control at the galvanizing unit is aided by up-to-date laboratories, both

chemical and physical, that ensure tests of inputs and process results. In fact, quality

control begins right from the selection of raw material and goes through the entire

operation, ending finally with the rigorous testing of the finished products.

C) Colour Coating Line :

In 1988, Ispat Industries Limited installed a Colour Coating Line at Kalmeshwar - the

first of its kind in India - for the manufacture of pre-painted colour steel sheets. The

Colour Coating Line has a capacity of 60,000 tonnes per annum.

Galvanized coils constitute the raw material for the colour coating process. The

Colour Coating Line incorporates surface preparation, service coating, heating,

cooling, prime coating, top coating/printing and guard film application. Pro-gold

treatment is applied for better adhesion of paint, with a substrate corrosion resistant.



A drier is provided to dry the surface and attain a temperature between 100 to 120

degrees C.

In the service coating process, paint is applied by a paint coating machine. The

ovens for baking temperature depend on line speed and thickness of coil. A controller

is provided to squeeze the water and control the sheet at centre position. Thereafter,

prime coating and top coating/printing are carried out by the paint coating machine.

Finally, guard film (sticking polythene) is applied to safeguard against scratches and

other surface defects.

MANUFACTURING PROCESS :

The CR coils which serve as raw materials are transferred directly from the Cold

Rolling Mill to the Continuous Galvanizing Lines. The coils then pass through various

processes to remove defects.

As the galvanizing line is a continuous line, the coils are passed through a looper.

Continuous annealing takes place in an in-line annealing furnace. This cleans the

coils and helps achieve the desired hardness. The temperature of the strip in this pre-

heating oxidising furnace is between 460 oC to 480 oC.

After this, the coils are passed through a zinc pot where zinc coating is carried out

using a technologically advanced hot-dip process. Zinc and antimony of the highest

purity are used for coating the sheets. This operation is performed under precise

temperature conditions, with the bath temperature maintained within a range 440 oC

to 460 oC.



Due care is taken for pretreatment of the substrate on which the zinc coating takes

place, as this increases the life and performance of the galvanized sheets. The

percentage of aluminium, antimony and tin in the batch is 2 to 3 per cent, 0.35 to 0.45

% and 0.3 to 0.4% respectively.

The zinc-coated coils are then passed through a chromate solution to safeguard the

coils against white rusting and other atmospheric reactions. The chromic acid

concentration is 20 to 25 gm/ltr, and the temperature is kept at 40oC to 45oC. Lastly,

the coils are passed through a Tension Leveller to improve the shape of the product

and ensure perfect flatness.

ACHIEVEMENTS :

36 out of 40 departments have remained accident-free.

50 per cent reduction in accidents as compared to 2001-02.

Accident rate reduced to 1.21 from 3.43 (2001-2002).

Second lowest in accident indices as compared to similar industries in India

(Steel and Power sector).



VALUES :

We respect the skills and integrity of professionals.

We empower those who belong to us.

We work in tandem with our environment.

We listen to our stakeholders, be they customers or communities.

We build value for all our shareholders and the society we coexist with.

VISION :

To be an organization that continuously achieves economic value by optimizing

resources through operational excellence powered by technology innovation for

creating customer delight.

MISSION :

To be amongst the world’s most admired new generation steel companies: in our

products, in the manner in which we service our clients, in our work ethics, and in our

culture of societal integration.

BUSINESS WITH ISPAT INDUSTRIES LIMITED :

Enter into the lucrative e-Trading world of ISPAT.

E-Auction

Customer Portal

Vendor Portal


http://124.30.45.38:7777/IspatFinal/


RATIO ANALYSIS

MEANING :

Ratio Analysis is among the best tool available to analyze the financial performance

of a company. It allows inter – company & intra – company comparison & analysis.

Ratios also provide a bird’s eye view of the financial condition of the company.

Our study of accounting so far has been restricted to recording of business

transactions on books of accounts, preparing a trial balance to check the arithmetical

accuracy of accounts & preparing profit & loss account & a balance sheet with a view

to ascertaining trading result of a specified period & financial position of the business

on a specified date respectively. The functions of the accountant do not end at this

stage. He should be able to analyze & interpret the figures as disclosed by this

statement to gauge accurately the financial health of the enterprise.

It is defined as the systematic use of ratio to interpret the financial statements so that

the strengths & weaknesses of a firm as well as its historical performance & current

financial condition can be determined. The term ratio refers to the numerical or

quantitative relationship between two items/variables.



TYPES OF FINANCIAL RATIO :

1. Liquidity Ratios

2. Leverage Ratios

3. Profitability Ratios

4. Activity Ratios

A) Liquidity Ratios :

Liquidity refers to the ability of a firm to meet its short-term (usually up to 1

year) obligations. Higher liquidity levels indicate that we can easily meet our

current obligations. We can use several types of ratios to monitor liquidity.

These are as follows:

1. Current Ratio

2. Quick Ratio

3. Cash Ratio

B) Financial Leverage (debt) Ratios :



Leverage Ratios measure the use of debt and equity for financing of assets.

These ratios are discussed below:

1. Debt to equity ratio

2. Debt to Total Assets Ratio

3. Interest Coverage Ratio

C) Profitability Ratios :

These ratios help measure the profitability of a firm. A firm, which generates a

substantial amount of profits per rupee of sales, can comfortably meet its

operating expenses and provide more returns to its shareholders. The

relationship between profit and sales is measured by profitability ratios. These

ratios are discussed below:

1. Gross Profit Margin

2. Net Profit Margin

3. Return on Investment / Assets

4. Return on Equity / Net Worth

5. Earning Per Share

6. Price Earning Ratio

D) Activity Ratios :



Activity Ratios measure the ability of assets to generate revenues or earnings.

This ratio tells us how efficiently a company utilizes its assets for generating

sales. These ratios are discussed below:

1. Inventory Turnover Ratio

2. Inventory Turnover in Days

3. Fixed Assets Turnover

4. Debtors Turnover Ratio

5. Collection Period

OBJECTIVES



The objects behind selection of the subject are as follows:

To know the financial position and determine long term and short-term

solvency of the company.

To analyze the financial stability and liabilities structure of the company

during the study period.

To analyze the profitability and solvency position of the unit with the

existing tools of financial analysis.

To know how many times the inventory and debtors are easily converted

into cash.

.

RESEARCH METHODOLOGY



INTRODUCTION:

Research is the process of a systematic and in-depth study or search of any

particular topic, subject or area of investigation, backed by the collection,

complication, presentation and interpretation of relevant details or data. It is a careful

search or enquiry into any subject matter, which is an endeavor to discover to find out

valuable facts, which would be useful for further application or utilization. It may

develop a hypothesis and test it. It may also establish relationships between

variables and identity the means for problem solving.

Research wants to make familiar, how his research work is associated with the below

mentioned elements: -

1. Selection of Subject:

The selection of a subject for research is a commitment of one’s time and efforts in a

particular direction. There should not be any haste in deciding on the topic, nor in

defining any scope.

2. Selection of Title of Dissertation:



Keeping in view the nature and object behind the selection of subject under research,

this dissertation is title as “Financial Analysis & Interpretation of Ispat Industries

Limited.”

3. Selection of Time Period:

The three year period is chosen for the study of the above subject. The period starts

from financial accounting year 2006 to financial accounting year 2008.

4. Collection of Data:

The data required and necessary for the research study may be obtained from the

following means:

(i) Documentary i.e. published and unpublished.

(ii) Interview and

(iii) Questionnaire

The data for the research study may be classified into two groups: -

(i) Documentary source:

(a) Data is collected from quantitative and theoretical form documentary source of the

company, which includes published and unpublished matter both. This documentary

source is the secondary data. Data has also collected from published audited annual



reports of the company and unpublished data from the books and other related

papers of the company.

(b) Websites of the company and also other business websites.

(c) Also taken help from the guide.

(ii) Interview and Questionnaire:

Research is based on secondary data only.

5. Reliability of Data:

The data collected for the research work is quite reliable and authentic. This is

because the data has been collected from audited annual reports of the company.

6. Analysis of Data:

The data collected for the research purpose is analyzed by ratio analysis. This tool

for the research work will serve the best to the title of the research study.

7. Reporting:

In this study the structure analysis is adopted for analyzing the financial statement of

the company.



RATIO ANALYSIS & INTERPRETATION

A) LIQUIDITY RATIOS :

1. CURRENT RATIO :

The current ratio shows how a firm is able to cover its current liabilities with its

current assets. It shows the liquidity of the company. The industry norm for

current ratio is 2:1 which means that the current assets of the firm are 2 times

that of the current liabilities.

Current Ratio = Current Assets

Current Liabilities

(Rs. in crores)

20062296.25

2244.25

=1.02

20072807.71

2165.75

=1.30

20082874.79

2727.01

=1.05

INTERPRETATION :

According to Industry norm, it is below the standard. The ratio shows that Ispat

Industries Limited has not managed to create a good combination of the current

assets and liabilities to make it financially sound and liquid enough to cover its

liabilities. This implies that there is possibility of insolvency problem. There is

however a substantial fall in the year 2008 as compares to the year 2007.



2. ACID TEST OR QUICK RATIO :

The Acid Test Ratio or Quick Ratio measures our ability to meet current

obligations based on the most liquid assets. In other words, this ratio shows how

a firm is able to cover its current liabilities with the most liquid of its assets

excluding the inventories which are not so easily converted into cash. A quick

ratio of 1:1 is considered to be satisfactory.

Quick Ratio = Current Assets - Inventories

Current Liabilities

(Rs. in crores)

INTERPRETATION :

Here quick ratio in FY 2007 is more as compared to FY 2006 but falls gradually in FY

2008.

This can be due to the fact that current liabilities have risen in year 2008 but the

severity can also be attributed to the high levels of inventory held by the enterprise.

Liquid ratio of Company is not favorable because the quick assets of the company

are less than the quick liabilities. This indicates that the company does not have

ability to meet its immediate obligations promptly.


20062296.25 (-) 985.61

2244.25

=0.58

20072807.71 (-) 1056.19

2165.75

=0.81

20082874.79 (-) 1368.38

2727.01

=0.55


3. CASH RATIO :

This ratio considers only the absolute liquidity available with the firm. The cash

and bank balance are no doubt, the most liquid assets and the marketable

securities are also considered as highly liquid assets. In order to have an idea of

immediate/super liquidity, therefore, the cash + bank balance + marketable

securities are compared with the current liabilities.

Cash Ratio = Cash + Marketable Securities

Current Liabilities

(Rs. in crores)

2006 128.86

2244.25

=0.06

2007 327.65

2165.75

=0.15

2008 92.52

2727.01

=0.03

INTERPRETATION :

The cash ratio is below the satisfactory level throughout the study period. This shows

that the company has not enough cash to fulfill their current liabilities.



B) LEVERAGE RATIOS :

1. DEBT TO EQUITY RATIO :

Debt to Equity ratio compares the funds provided by creditors to the funds

provided by shareholders. As more debt is used, the Debt to Equity Ratio will

increase. This is calculated as under:

Debt - Equity Ratio = Total Debt

Total Equity (Net Worth)

(Rs. in crores)

2006 8261.09

3148.32

=2.62%

2007 8315.50

4047.82

=2.05%

2008 7225.04

3947.61

=1.83%

INTERPRETATION :

In FY 2006 & 07 it is higher than the standard norm but it is low in FY 2008. This

declining trend over the year is usually considered as a positive sign reflecting on

increasing cash accrual and debt repayment. In general, the lower the debt-equity

ratio, the higher the degree of protection enjoyed by the creditors.



2. DEBT RATIO :

The Debt Ratio measures the level of debt in relation to our investment in assets.

The Debt Ratio tells us the percent of funds provided by creditors and to what

extent our assets protect us from creditors. The lower this proportion the better it

is. As less funds would be mature for payment in short run and funds can suitably

be capitalized.

Debt Ratio = Total Debt

Debt + Equity 0r (Capital Employed)

(Rs. in crores)

2006 8261.09

11409.41

=0.72%

2007 8315.50

12363.32

=0.67%

2008 7225.04

11172.65

=0.65%

INTERPRETATION :

Ispat Industries Limited exhibits a downward overall trend with the ratio is low in

2008. This would indicate that company has sufficient assets to cover our debt load.

Creditors and management favour a low Debt Ratio.



3. INTEREST COVERAGE RATIO :

Interest coverage ratio shows how much revenue is being earned in relation to its

finance cost. It may be observed that EBIT is the operating profit of the firm,

therefore, the interest coverage measures as to how many times the interest

liability of the firm is covered with the operating profits of the firm.

Interest Coverage Ratio = Earning Before Interest & Tax

Interest

(Rs. in crores)

2006 (240.02)

956.83

=(0.25)

2007 1000.95

997.58

=1.01

2008 964.87

849.25

=1.14

INTERPRETATION :

Ispat Industries Limited was not able to cover this cost in FY 2006 due to the loss

occurred but it is gaining its position in FY 2008 which is better sign for the company

and for the lender. For the company, the profitability of committing default is reduced

and for the lenders, the company is considered to be less risky.



C) PROFITABILITY RATIOS :

1. GROSS PROFIT RATIO :

The gross profit margin gives an estimate of the revenues earned by the entity

considering the direct cause incurred while earning them. The gross profit ratio

reflects the efficiency with which the firm produces/purchases the goods

Gross Profit Ratio = Gross Profit x 100

Sales

(Rs. in crores)

2006 (546.45) x 100

4958.74

=(11.02)%

2007 595.93 x 100

7486.57

=7.96%

2008 620.17 x 100

8214.14

=7.55%

INTERPRETATION:

The company shows a negative decline in FY 2006 but has shown a growth in FY

2007. In FY 2008, it is again declining and that did not leave Ispat Industries Limited

unaffected.

Here, it can be seen that the gross profit is going higher & sales is also going higher,

but ratio is going down so company have to think about minimize the sales price, for

maximize the gross profit ratio.



2. NET PROFIT RATIO :

This ratio shows the net contributions made by every 1 rupee of sales to the

owner funds. The Net Profit Ratio reflects the ability to control costs and make a

return on sales. Management is interested in having high profit margins. So, the

Net Profit Ratio shows the firm’s capacity to face the adverse economic

situations.

Net Profit Ratio = Net Profit x 100

Sales

(Rs. in crores)

2006 (812.67) x 100

4958.74

=(16.39)%

2007 (9.53) x 100

7486.57

=(0.13)%

2008 34.80 x 100

8284.14

=0.42%

INTERPRETATION :

In FY 2006 - 07, it shows net loss which indicates that there is no improvement in the

operational efficiency of the business. However in FY 2008 it has come out from its

worst period and shows a growth in net profit by 4.23%.

This indicates that company’s profit margin is increasing and the management is

overcoming its adverse economic situations.



3. EARNING PER SHARE (EPS) :

Growth in earning is often monitored with Earning per share (EPS). The EPS

expresses the earnings of a company on a “per share” basis. A high EPS in

comparison to other competing firms is desirable. Generally 10-20 times of EPS

are considered as a justified market price of a share. The EPS is calculated as:

Earning Per Share = Total Earnings (PAT)

Total No. of Equity Shares

(Rs. in crores)

2006 (812.67)

1222442218

=Rs. (6.65)

2007 (9.53)

1222442218

=Rs.(0.078)

2008 34.80

1222442218

=Rs. 0.285

INTERPRETATION :

The EPS of the company is low in FY 06-07 but shows positive sign in FY 08. This

increase is due to the increase in net profit as compared to number of equity shares.

The Earning per share in FY 08 is 0.285 means shareholder is earning Rs. 0.285 for

each share of Rs. 10/- they owned.



4. RETURN ON INVESTMENT :

The ROI measures the profitability of the firm in terms of assets employed in the

firm. Usually the profit of the firm is measured in terms of the net profit after tax

and the assets are measured in terms of total assets or total tangible assets or

total fixed assets. The ROI shows as to how much is the profit earned by the firm

per rupee of assets used.

Return on Investment = Earning Before Interest & Tax x 100

(ROI) Net Assets

(Rs. in crores)

2006 (1196.85) x 100

11409.41

=(10.5)%

2007 3.37 x 100

12363.32

=1.02%

2008 115.62 x 100

11172.62

=1.03%

INTERPRETATION :

This ratio has shown decrease in FY 06 but increase from FY 07 - 08. This shows

that the company has purchased new assets or the profit is decreasing as compared

to sales.



5. RETURN ON EQUITY / NET WORTH :

The return from the point of view of equity shareholders may be calculated by

comparing the net profit less preference dividend with their total contribution in

the firm. The ROE indicates as to how well the funds of the owner have been

used by the firm. It also examines whether the firm has been able to earn

satisfactory return for the owners or not.

Return on Equity/ = Earning After Tax x 100

Net Worth Equity (Net Worth)

(Rs. in crores)

2006 (812.67) x 100

3148.32

=(25.81)%

2007 (9.53) x 100

4047.82

=(0.24)%

2008 34.80 x 100

3947.61

=0.88%

INTERPRETATION :

This ratio has shown increase from FY 06 - 08 where the ratio plunges of 0.88%. This

shows a positive sign which reflects the productivity of the ownership (risk) capital

employed in the firm.



6. PRICE TO EARNINGS RATIO (P/E RATIO) :

The relationship of the price of the stock in the relation to EPS is expressed as

the Price to Earnings Ratio or P/E Ratio. Investors often refer to the P/E Ratio as

a rough indicator of value for a company. The P/E Ratio is calculated as follows:

Price to Earning Ratio = Market Value per Share

Earning Per Share

(Rs. in crores)

2006 15

(7.93)

=Rs. (1.89)

2007 13.34

(0.81)

=Rs.(16.46)

2008 33.58

0.285

=Rs.117.82

INTERPRETATION :

This ratio is very low in FY 2006-08 i.e. it is negative which implies that investors view

the company’s future as poor and thus, the price the company sells for is relatively

low when compared to its earnings.

But in FY 2008, this ratio is high which implies that investors are becoming optimistic

(bullish) about the future of the company since the price (which reflects market value)

is selling for well above current earnings.

D) ACTIVITY RATIOS :



1. INVENTORY TURNOVER RATIO :

Inventory Turnover measures how many times the inventory turned during the

year. Higher turnover rates are desirable. This ratio is similar to Debtors Turnover

Ratio.

Inventory Turnover Ratio = Sales

Average Inventory

(Rs. in crores)

2006 4958.74

985.61

=5.03

2007 7486.57

1056.19

=7.09

2008 8284.14

1368.38

=6.05

INTERPRETATION :

Ispat Industries Limited has been able to significantly mobilize inventory through the

year. This implies that management does not hold onto excess inventories and

inventories are highly marketable.

2. DAYS IN INVENTORY :



A day in Inventory is the average number of days inventory is held before a sale.

A low number of inventory days are desirable.

Inventory Turnover in Days / = No. of days in the year

Days of Holding Inventory Inventory Turnover

(Rs. in crores)

2006365

5.03

=75

days

2007365

7.09

=51

days

2008365

6.05

=60

days

INTERPRETATION :

Ispat Industries Limited has been able to do so quite efficiently, as the increase to

high levels throughout the years show.

This ratio shows decline which implies that management is able to sell existing

inventory stocks.

3. FIXED ASSETS TURNOVER RATIO :



This Ratio shows how well the fixed assets are being utilized. In computing Fixed

Assets Turnover Ratio, the fixed assets are generally taken at written-down value

at the end of the year. However, there is to rigidity about it. It may be taken at

original cost or at present market value depending on the object of the

comparison. In fact, the ratio will have automatic improvements if the written-

down value is used.

Fixed Assets Turnover Ratio = Sales

Fixed Assets

(Rs. in crores)

2006 4958.74

9517.28

=0.52

2007 7486.57

9878.01

=0.76

2008 8284.14

9314.26

=0.89

INTERPRETATION :

This ratio in general is satisfactory & increasing every year. This increase is due to

the replacement of an asset at an increased price or due to the purchase of an

additional asset intended to increase production capacity. In FY 06 the ratio is low

due to increase in sales of fixed assets. The latter transaction might be expected to

result in increased sales whereas the former would more probably be reflected in

reduced operating costs.

4. DEBTORS TURNOVER RATIO :



Debtors Turnover Ratio measures the ability to convert the receivables over into

cash. In case the firm sells goods on credit, the realization of sells revenue is

delayed and the receivables (both debtors and/or bills) are created. The cash is

realized from these receivables at later stage. The speed with which these

receivables are collected affects the liquidity position of the firm.

Debtors Turnover Ratio = Sales

Average Debtors

(Rs. in crores)

2006 4958.74

594.13

=8.35

2007 7486.57

645.02

=11.61

2008 8284.14

579.83

=14.29

INTERPRETATION :

This ratio is increases from FY 06 - 08. This shows that the company’s fund is not

blocked for a long time in debtors. The company has been efficient in converting

debtors into cash.

5. COLLECTION PERIOD :



Collection period indicates the duration of the credit cycle of the debtors. It is the

average length of time required to collect our receivables. A low number of days

are desirable. It is calculated as follows:

Collection Period = No. of days in the year

Debtors Turnover

(Rs. in crores)

2006365

8.35

=44

days

2007365

11.61

=31

days

2008365

14.29

=26

days

INTERPRETATION :

From the above ratios, it can be said that from FY 2006 – 08, Ispat Industries Limited

has been able to receive their payment in a very short span of time. This is a positive

sign for the company as they are able to use the amount in purchasing the raw

materials as well as for the day to day activities.

The operating cycle of the debtors is short. In other words the debts collection period

is short which result into less chance of bad debts.

INDUSTRIAL RATIOS V/S COMPANY RATIOS



RATIOSINDUSTRIAL

RATIOS

COMPANY RATIOS

2006 2007 2008

Current Ratio 2 : 1 1.02 : 1 1.30 : 1 1.05 : 1

Quick Ratio 1 : 1 0.58 : 1 0.81 : 1 0.55 : 1

Debt-Equity

Ratio2 : 1 2.62 : 1 2.05 : 1 1.83 : 1

OVERALL ANALYSIS OF RATIOS



No. RATIOS 2006 2007 2008

(A) LIQUIDITY RATIOS :

1 Current Ratio 1.02 : 1 1.30 : 1 1.05 : 1

2 Quick Ratio 0.58 : 1 0.81 : 1 0.55 : 1

3 Cash Ratio 0.06 : 1 0.15 : 1 0.03 : 1

(B) LEVERAGE RATIOS :

1 Debt - Equity Ratio 2.62 : 1 2.05 : 1 1.83 : 1

2 Debt Ratio 0.72 0.67 0.65

3 Interest Coverage Ratio (0.25) 1.01 1.14

(C) PROFITABILITY RATIOS :

1 Gross Profit Ratio (11.02)% 7.96% 7.55%

2 Net Profit Ratio (16.39)% (0.13)% 0.42%

3 Earning Per Share Rs. (6.65) Rs. (0.078) Rs. 0.285

4 Return on Investment (10.5)% 1.02% 1.03%

5 Return on Equity (25.81)% (0.24)% 0.88%

6 Price Earning Ratio Rs. (1.89) Rs. (16.46) Rs. 117.82

(D) ACTIVITY RATIOS :

1 Inventory Turnover Ratio 5.03 7.09 6.05

2 Days in Inventory 75 days 51 days 60 days

3 Fixed Assets Turnover Ratio 0.52 0.76 0.89

4 Debtors Turnover Ratio 8.35 11.61 14.29

5 Collection Period 44 days 31 days 26 days

CASE STUDY



HOW A LOSS MAKING FIRM BECOME A PROFIT MAKING

FIRM

Ispat Industries has recorded a loss after tax of Rs 9.53 crore in the quarter

ended December 31, 2007 but make a profit in the quarter ended December

31, 2008.

EXPANSION AND NEW PROJECTS :

In line with its vision for the future, IIL is expanding its HRC capacity to 3.6

million. With investments of over $ 2 billion, IIL is the seventh largest Indian

private sector company in terms of fixed assets. With this view, it is proposed

to undertake creation of certain additional cost-saving and capacity-enhancing

capital projects as under:

1) 1 million tonnes per annum Coke Oven plant at Dolvi by mid 2009 . The

facility would reduce the risk of restricted coke availability, ensure consistency

in coke quality and also reduce the cost substantially.

2) 4.5 million tonnes per annum Pellet Plant at Vishakhapatnam by third

quarter of 2009. The facility shall not only reduce the risk of availability of

pellets but would also ensure consistent quality in addition to cost savings.

3) Enhancement of the existing Hot Rolled Coil plant capacity from 3.0

million tonnes to 3.6 million tonnes per annum along with auxiliary



facilities, enhancing capacity of existing Sponge Iron and Sinter Plants and

addition of a Blast Furnace by third quarter of 2008.

4) The installation of an additional Blast Furnace would provide adequate

quantities of Hot Metal to meet the enhanced requirements of the HRC Plant.

The company also proposes to enhance its Sinter plant and Sponge Iron plant

capacities to 2.5 million tonnes per annum and 1.80 million tonnes per annum,

respectively.

5) These projects will have an impact of Rs 600 crore to Rs 1000 crore from

2010 onwards. The financial tie-up for the Captive Power Plant (combined

capacity 110 mw) of Ispat Energy Ltd has been achieved. Project activities

have commenced and it is expected to be operational by early 2009.

Ispat is increasing the capacity of its existing hot rolled coil plant from three

million tonnes to 3.6 million tonne, with an additional blast furnace with an

annual capacity of 1.25 million tonnes.

To cope with the shortage of natural gas, the company has tied up with the

state-owned Oil and Natural Gas Corp, and would source gas from Bombay

High that would meet 30 percent of its requirement.

Ispat Industries is set to pick up 40 per cent stake in iron ore and coking coal

mining companies in Brazil, Columbia and Mozambique through the joint

venture route. The Brazilian mines have iron ore reserves of 300-500 million

tonnes, while the Columbia and Mozambique mines have coking coal deposits

in the range of 60-70 million tonne.



Apart from mining assets, Ispat would invest Rs 3,200 crore for setting up a

coke plant, pellet plant and power plant. The projects would be completed in

two years. The company has achieved financial closure for Rs 800 crore

power plant.

PLAN OF ACTION :

The company's internal mechanism is robust enough to adjust strategies to meet

its diverse market challenges. The strategies are:

1. Increase vertical integration by reducing dependence on third parties for supplies

of key raw materials.

2. Reduce exposure to volatility in prices of raw materials and risks of shortages by

producing pellets and coke.

3. Acquiring mining and prospecting leases for iron-ore, non-coking, coking coal

and fluxes.

4. Develop value added grades of steel through continuous research and

developmental activities.

5. Install and operate a dedicated power plant to meet energy needs and ensure

availability of cost-effective power supply.

6. Enhance operational efficiencies at all stages of production, by using advanced

technologies and processes and implementing best practices through knowledge

integration programme.

CONCLUSION



After analyzing and interpreting the whole financial statement of Ispat Industries

Limited for three years starting from 2005-06 to 2007-08 and on the basis of annual

reports, the researcher have arrived at inferences which are shown at the end of

analysis.

On the basis of inferences the researcher has arrived on final conclusions. They are

as follows:

A) Liquidity Position:

The Liquidity position of the company is not good during the year. It can be

judged by the unsatisfactory result of Current Ratio, Quick Ratio and Cash Ratio

during the period, when these ratios are not less than the ideal ratios. The

Current Ratio is lower than the ideal ratio. It shows the company does not have

the ability to meet its current requirements.

In overall the liquidity position of the company is not satisfactory which shows

the management is not efficient in utilizing current assets in the business.

B) Leverage Position:



The Leverage position of the company is good in long term position of the

company due to higher Interest Coverage Ratio and Debt to Equity Ratio;

whereas it is also good in short term position as Debt Ratio shows the

decreasing trend.

C) Profitability Position:

The Gross Profit of the company is declining, which has affected the profitability

of the company. Beside this ratio, the overall profitability of the company is

satisfactory during the study period, which is the positive sign for the company.

The profitability has also affected due to low Earning per Share, which indicates

that the shareholders are not gaining much out of every share they own.

Therefore the overall financial position of the company is good, on the basis of

determinants of ratio analysis i.e. Liquidity, Leverage, Activity and Profitability

Ratios. The financial position of the company can be said sound in short term

and long term, which indicates that there may be no financial crisis in future.

D) Activity Position:

The business activity of the company is efficient and effective during the period,

which is beneficial to the Liquidity, Leverage and Profitability Position of the

company. The increasing Inventory Turnover Ratio and Assets Turnover Ratio

highlights the overall effective and efficiency of the business activities and



management in making productive utilization of the assets and capital of the

company so that there is better profitability during the period.

The Debtor’s Turnover Ratio as well as collection period is also increasing

which shows that the company is efficient in converting debtors into cash and

able to use the cash in purchasing raw materials.



LIMITATIONS

The analysis and interpretation are based on secondary data contained in the

published annual reports of ISPAT INDUSTRIES LIMITED for the study period.

Due to the limited time available at the disposable of the researcher, the study

has been confined for a period of 3 years (FY 2006-2008).

Ratio itself will not completely show the company’s good or bad financial

position.

Inter firm comparison was not possible due to the non availability of

competitors data.

The study of financial performance can be only a means to know about the

financial condition of the company and cannot show a thorough picture of the

activities of the company.



RECOMMENDATION

After analysis & interpretation of the financial statements of Larsen & Toubro

Limited, the following are the suggestions for the betterment of the company:

It is emphasized here that one has to keep in mind; there will be always scope for

future development in any concern and in any department.

1. Liquidity Position:

The company should try to improve its Current Ratio, as some margin is required to

protect the interest of the creditors and to provide cushion to the firm in adverse

circumstances. It should try to maintain its current assets by proper inventory

management because even a slight decline in the value of current assets will

adversely affects its ability to meet its working requirements and therefore, from the

viewpoint of creditors, it is more risky venture. The company could raise funds by the

source of banks etc.

2. Leverage Position:

The company should minimize external financing to lower the interest burden which

will help to enhance the shareholders ability to earn and will lower the risk for them.



3. Profitability Position:

The management needs to increase in its production line, expansion capacity and

more exports, which push the bottom line and in turn shows a positive sign in the

growth of the company.

Another area where the management needs to draw its attention as far as working

capital management is concerned is to manage its debtors. Although the company

demands an open letter of credit from all its customers, the credit policy needs to be

tightened especially with the increase number of plants, which would lead to the

substantial amount of investment in debtors.

The company should try to improve its Earning Per Share which enables the existing

and new investors to invest more so that liquidity will be increases.

The company should also try to improve its P/E Ratio, so that investors are very

optimistic about the future of the company since the price, which reflects market

value, is selling for well above current earnings.

4. Activity Position:



The company should try to maintain its Inventory Turnover Ratio and Debtors

Turnover Ratio so that business activity will run efficiently and effectively as inventory

and debtors are converting into cash in less time.

BIBLIOGRAPHY

REFERENCE BOOKS :

A) FINANCIAL MANAGEMENT BY : R.P.RUSTAGI

(Theory, Concepts & problems)

B) FINANCIAL MANAGEMENT BY : M.Y. KHAN AND P. K. JAIN

(Text and problems)

C) ANALYSIS OF FINANCIAL STATEMENT BY : VIVEK SHARMA

ANAUAL REPORTS OF ISPAT INDUSTRIES LIMITED :

2005-2006

2006-2007

2007-2008

WEBSIDES :

www.ispatind.com

www.wikipedia.com



www.zeromillion.com.business/financial

PROFIT & LOSS ACCOUNT



BALANCE SHEET


(Rs. In crores)2008 2007 2006

INCOMESales (Gross) 9401.67 8378.44 5580.02Less: Excise Duty 1117.53 891.87 621.28Sales (Net) 8284.14 7486.57 4958.74Other Income 426.86 115.63 51.99TOTAL (A) 8711.00 7602.20 5010.73EXPENDITUREDecrease/(Increase) in stocks 159.16 (28.13) (84.68)Excise Duty & Cess on stocks (0.97) (2.07) 11.15Raw Material Consumed 4535.83 3711.93 2910.12Purchase of Finished Goods 10.71 58.58 --Personnel Cost 202.60 165.34 131.55Manufacturing , Selling & Distribution and Administrative Expenses

2200.68 2071.77 1711.18

Interest & Finance Charges 849.25 997.58 956.83

Depreciation 723.06 724.54 594.05Less: Transferred from Revaluation Reserve 84.94 100.71 22.62

638.12 623.83 571.43TOTAL (B) 8595.38 7598.83 6207.58Profit/Loss Before Tax (A-B) 115.62 3.37 (1196.85)Less:Provision for Wealth Tax 0.04 0.03 0.03Deferred Tax Charge 77.04 9.87 388.67Fringe Benefit Tax 3.74 3.00 4.46Profit/Loss After Tax 34.80 (9.53) 812.67Add: Debenture Redemption Reserve written back

25.35 12.10 --

Less: Loss brought forward from Previous Year

1106.15 1098.51 214.47

Less: Adjustment towards additional Employee Benefit Liability

-- 10.21 (500.31)

Loss Carried To Balance Sheet (1046.00) (1106.15) (1098.51)Basic and Diluted Earning per Share (Rs.)

(0.36) (0.81) (7.93)


(Rs. In crores)2008 2007 2006

SOURCES OF FUNDS1. Shareholders’ Fund Share Capital 2294.03 2288.74 2288.7 Reserves and Surplus 1653.58 1759.08 859.62

3947.61 4047.82 3148.322. Loan Funds Secured 6940.05 7849.07 8241.06 Unsecured 284.99 466.43 20.03

7225.04 8315.5 8261.09 TOTAL 11172.7 12363.3 11409.4APPLICATION OF FUNDS1. Fixed Assets Gross Block 13167.9 13067.4 11455.7 Less: Depreciation 3961.93 3244.04 2554.27 Net Block 9206.01 9823.33 8901.44 Capital Work-in-Progress 108.25 54.68 398.19 Pre-operative & Trial Run

Expenses0 0 9517.28

9314.26 9878.01 113.322. Investment 118.04 113.59 628.33. Deferred Tax Asset (Net) 546.57 623.61 628.304. Current Assets, Loans &

Advances Inventories 1368.38 1056.19 985.61 Sundry Debtors 579.83 645.02 594.13 Cash & Bank Balances 92.52 327.65 128.86 Loans, Advances & Deposits 834.06 778.85 587.65

2874.79 2807.7 2296.25 Less: Current Liabilities &

Provisions Current liabilities 2693.67 2136.94 2231.83 Provisions 33.34 28.81 12.42

2727.01 2165.75 2244.25 Net Current Assets 147.78 641.96 525. P & L A/C Debit balance 1046 1106.15 1098.51 TOTAL 11172.7 12363.3 11409.4


Ispat Industries -Financial Ratio Analysis (Jigar Patel)

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Transcript of Ispat Industries -Financial Ratio Analysis (Jigar Patel)