Journal of International · “operating performance” of investment. The word “profitability”...

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Dr. Kari Jabbour, Ph.D

Curriculum Developer,

American College of Technology,

Missouri, USA.

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ABB Australia Pvt. Ltd., Australia.

Dr. S.K. Singh

Chief Scientist

Advanced Materials Technology Department

Institute of Minerals & Materials Technology

Bhubaneswar, India

PROF.Dr. Sharath Babu,LLM Ph.D

Dean. Faculty Of Law,

Karnatak University Dharwad,

Karnataka, India

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Kashmir, India

Dr.Bhumika Talwar, BDS

Research Officer

State Institute of Health & Family Welfare

Jaipur, India

Dr. Tej Pratap Mall Ph.D

Head, Postgraduate Department of Botany,

Kisan P.G. College, Bahraich, India.

Dr. Arup Kanti Konar, Ph.D

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Memorial College,

SKB University, Jhalda,Purulia,

West Bengal. India

Dr. S.Raja Ph.D

Research Associate,

Madras Research Center of CMFR ,

Indian Council of Agricultural Research,

Chennai, India

Dr. Vijay Pithadia, Ph.D,

Director - Sri Aurobindo Institute of Management

Rajkot, India.

Er. R. Bhuvanewari Devi M.Tech, MCIHT

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Ramboll, Abu Dhabi, UAE

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Department of Ecology, Taxonomy and Nature Conservation

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Central Research Institute for Dryland Agriculture (CRIDA)

Hyderabad, A.P, India

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Head - Department of Anatomy,

Bidar Institute of Medical Sciences,

Karnataka, India.

DR ASIFA NAZIR, M.B.B.S, MD

Assistant Professor Dept of Microbiology

Government Medical College, Srinagar, India.

Dr.AmitaPuri, Ph.D

Officiating Principal

Army Inst. Of Education

New Delhi, India

Dr. Shobana Nelasco Ph.D

Associate Professor,

Fellow of Indian Council of Social Science

Research (On Deputation},

Department of Economics,

Bharathidasan University, Trichirappalli. India

M. Suresh Kumar, PHD

Assistant Manager,

Godrej Security Solution,

India.

Dr.T.Chandrasekarayya,Ph.D

Assistant Professor,

Dept Of Population Studies & Social Work,

S.V.University, Tirupati, India.

JIARM VOLUME 1 ISSUE 3 (APRIL 2013) ISSN : 2320 – 5083

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PROFITABILITY AND GROWTH OF THE LANCO INDUSTRIES LIMITED

IN CHITTOOR DISTRICT OF ANDHRAPRADESH

DR. P. GURAVAIAH*, M.com, Ph.D, NET, AP-SET

*Academic consultant, Department of Commerce, S.V. University, Andra Pradesh, India

ABSTRACT

Profitability is the ability of a business enterprise to make profits. The analysis

of profitability involves the computation of profit ratios, based either on operating

profit or net profit or both in relation to capital employed, share holder’s investment,

sales and components of operating costs. Profitability management is concerned with

planning and controlling those factors which influence profits. Profit plan is a

comprehensive plan covering all areas in business management. Profit planning and

control involve use of certain tools of analysis like profitability ratios which enable

the management to compare figures in order to derive meaningful conclusions. Profit

in an understanding is the result of the interaction of cost, selling price and volume of

production and sales.

Hence, the need for studying profitability in various industries in India, whose

number has been on the increase and bound to be so for many more years to come.

As Iron and Steel and Cement industries which are spread out all over the country, are

all construction–based, their vital importance to the nation’s economy and their role in

rural and urban development needs no emphasis. Sound financial Management for

their successful working is naturally as important as it is for all other industries.

However, these industries encounter certain problems of Financial Management

peculiar to them. For an empirical investigation from the point of view of

performance, term of fixed assets, inventories, cash management and profitability

the Iron and Cement factories set up by Lanco Industries Ltd, at Rachaguneeri

village, Srikalahasti Mandal, in Chittoor District of Andhra Pradesh .

KEYWORDS: Ability, Profitability, Break-Even Point, Net Profit, Gross Profit,

Rural, Urban.


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INTRODUCTION

The term ‘profitability’ is made of two words “profit” and “ability”. The word profit

has been used in number of ways. Its meaning differs according to the use and

purpose of the figure. From accounting point of view, profit is the total expenses are

deducted from the total revenue for a given period. The term “ability” reflects the

power of the enterprise to earn profit. It is also used to refer to the “earning power” or

“operating performance” of investment. The word “profitability” may be defined as

“the ability of a given investment to earn a return from its use”. If an enterprise fails

to make profits, the capital invested by it is eroded and if this situation prolongs, the

enterprise ultimately ceases to exist. Profitability means the profit making capacity of

the enterprise. The state of profitability is a variable thing like the temperature and

humidity of a day.

OBJECTIVE OF THE STUDY

The present study to evaluate profitability and growth of Lanco Industries Ltd,

GROWTH AND PROFILE OF THE LANCO INDUSTRIES LIMITED

The establishment of Lanco Industries, Ltd, near at Rachgunneri village in Sri

Kalahashi Mandal an industrially backward areas, was made possible by a major

policy decision of the Government of India in 1991, as a part of its Economic

liberalization policy. Generally such large scale industries as Iron and Steel, and

Cement are established in places which have the advantage of being close to places or

areas rich in the raw materials for their manufacture. The area where Lanco

Industries, Ltd. Is located does not have this advantage at all. The bulk of the raw

material necessary for the manufacture of Iron and Cement have to be imported, and

brought from considerable distances and at considerable costs. It should be regarded

as an achievement that Lanco Industries, Ltd., has survived despite several risks,

odds, fierce competition, and fluctuation, and remained a profitable enterprise.

Starting with the manufacture of Pig iron it further has expanded its activities to

include Cement and DI pipes.

Lanco Industries, Ltd., was incorporated under the name Lanco Ferro, Ltd., on

1st November, 1991 under the companies Act, 1956, and obtained Certificate of

Commencement of Business on 8th May, 1992 from the Registrar of Companies,


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Government of Andhra Pradesh, Hyderabad. It was first promoted by L.Rajagopal,

L.Madhusudan Rao, G.Bhashara Rao and associates. Subsequently Asian Finance and

Investment Corporation (AIFC) and Andhra Pradesh Industrial Development

Corporation (APIDC) also contributed towards the capital of the company, A couple

of years later on 6th July, 1994, the name of the group of companies was changed to

Lanco Industries, Ltd., and certificate obtained from the Registrar of Companies,

Hyderabad. The Lanco Group first set up a Mini Blast Furnace (MBF) in 1994, at

Rachagunneri village with an installed capacity of 90,000 TPA to manufacture Pig

iron and molten metal. Pig iron is increasingly need in the manufacture of iron

castings which are used in a host of industries such as automobile, white goods and

engineering industries. The objective of setting up the MBF was two-fold sand to

supply slag for the production of Portland cement. This variety of cement with a high

proportion of slag is used as a binder in the construction of industry all over the

world. Moreover it non-substitutable. Its growth is linked with the growth of the

economy and the construction sector. Such products as Pig iron and Cement are

integral to the economic property of a nation, and industrialization as it grows

stronger in our country accelerates the taking off of iron castings and cement.

Lanco Industries set up in 1996 a Portland slag Cement (PSC) plant of 70,000

tpa capacity equipped with the necessary machinery on a 21 acre stretches of land

adjacent to its Pig iron plat at Rachagunneir village in Sri Kalahast, Mandal. The

company already had a 11 KVA transmission line for its Pig iron plant. Now to meet

the Demand of power for the Cement plant it commissioned 2.5 MW gas-fired power

plant using the blast furnace gas from the Pig iron plant. As the requirements of water

for process and other general uses are heavy, the company sunk bore wells at its site

and built a reservoir with a capacity to hold the requirements of water for a whole

month.

The raw materials required for the Iron and Cement plants of the company and

wherefrom they are obtained are briefly noted here. The raw materials for the Pig iron

plant are Iron ore, metallurgical Coke, Dolomite Manganese and Duazite. Iron ore is

sourced from the Bellary region in Karnataka which is about 400 km away from the

plant and coke has to be imported from China and Japan. The other additives are

source from proximate mines. The chief raw material for the manufacture of Cement

is Limestone, which is obtained from the Company’s captive mines in Khazipet and


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Tippalur, 160 km away from the plant. As a result transport costs of raw materials

have necessarily been heavy and going up. Further, a lot of raw material gets wasted

while loading and unloading. This inevitably affects adversely the Company’s

earnings. But the Company has been trying to make up this loss by other means.

The most significant transformation in Lanco industries took place when in

March 2002 Electro steel castings, Ltd. India’s leading manufacturer of DI pipes,

entered into a strategic alliance with the Lanco group by acquiring 46.43 percent state

in Lanco Industries and 48.49 per cent state in Lanco kalahasti castings, Ltd., Electro

steel’s participation in LKLC was crucial for the survival of Lanco. It possessed

technological expertise to manufacturer DI pipes and was competent solve the

technical problem of the two companies by providing technological support.

Secondly, it infused fresh fund into Lanco by way of equity, participation and

remodeled the financial structure, thus reducing considerably interest costs. Further

Electro steels strategic participation in Lanco strengthened the vendors’ confidence

in its, and it could thinks of expanding it activities.

In 2003 the capacity of the Mini Blast furnace was increased from 90,000 TPA

to 1,50,000 TPA, and that of DI pipes from 60,000 TPA, to 90,000 TPA at a capital

out lay of approximately Rs. 35 crores. In the same year Kalahasti castings got

merged with Lanco Industries with effect from April 1, to take advantage of the close

synergy in the business mould of the two companies and in view of their close

dependence on each other. For, a large part of the Pig Iron in liquid form was being

consumed by LKCL in the manufacture of DI pipes. These pipes are generally

preferred for water supply, sewerage, and transmission applications. The superiority

of DI pipes lies in their ability to provide trouble-free service against increasing traffic

load and much longer life when compared to other kinds of pipes. Considering the

ever increasing urbanization in the country and active shortage of adequate water

infrastructure, which has become a national priority, the demand situation for DI pipes

is positive. In the southern state in particular, which have been facing water shortage,

many water supply projects are on the annul, generating large requirements of DI

pipes. However the level of competition from manufactures at home and abroad,

particularly from china, is gradually increasing. This fact has to be reckoned will by

Lanco and appropriate steps have to be taken.


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The company is taking various steps to streamline production, increase

capacity, reduce costs and promote efficiency it has now a stable base for sourcing

Iron ore and has plans to reduce dependence on imported coke and increase the

capacity of the Mini Blast Furnace. Its endeavour has been to move forward to

achieve operational excellence and value addition for the stake holders through

operational synergy, higher capacity utilistion, backward interpretation, coke

reduction, and continual improvement in shop floor operation.

PROFITABILITY

Profit planning is a systematic and formalised approach of determining the

effect of management plans upon the company’s profitability9. A well organised profit

planning programme will help maintaining a level of profit which will ensure the

continuation of the business and fulfillment of other responsibilities. Certainly, profit

growth coupled with a high level of profit and the ability to maintain reasonable

profits help towards, (i) ensuring the shareholders to receive adequate dividends (ii)

preserving the asset worth of the business, (iii) generating out of profits a sufficient

cash flow to provide capital for expansion, and (iv) providing funds for research and

development of new and improved products to replace existing products before they

go into decline. Therefore, profit planning and control resembles comprehensive,

budgeting or managerial budgeting.

Profitability is analyzed through the computation of ratios. In computing profit

two issues are to be considered as given below:

1. What shall be the basis of profitability? and

2. How is profitability measured?

Profitability can be measured either on the basis of operating profit or net

profit. It may be said that operating profit reflects on profits of the main business for

which the enterprise was launched and offers the most reliable measure for a long-tem

perspective. In other words, net profit reflects net operating and non-operating

income. It helps the analyst with the most reliable measure of profitability from a

short-term point of view.


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However the figure net profit may assume any of the following forms:

1. Net Profit before interest and taxes (NPBIT),

2. Net Profit before tax but after interest (NPBT),

3. Net Profit after tax (NPAT)

TOOLS OF PROFIT PLANNING AND CONTROL

Profit planning and control involves certain tools of analysis, like ratios and

break-even analysis. Profitability ratios enable the management to compare figures in

order to derive meaningful conclusions. They help diagnosing the situation and

measuring their performance.

Profit in an undertaking is the result of the interaction of cost, selling price,

volume of production and sales. Break-even analysis is the technique through which

this interrelationship is analyzed. If output is increased gradually from zero unit to a

point of output, cost and revenue will be equal. The point where the cost of products

and revenue from the products are equal, there is neither profit nor loss to the

undertaking.

Profit of an undertaking can be influenced by changes in (a) fixed cost, (b)

variable cost (c) price, and (d) volume of sales. Among them fixed cost, variable cost

and volume of sales can be influenced by an undertaking but price cannot be easily

influenced under competitive conditions. To maximise profits, the undertaking has to

control fixed costs, variable costs and volume of sales.

Break-even-analysis helps in determining

a) minimum level of operations required to avoid losses,

b) volume of sales to be undertaken to achieve a profit target,

c) the effect to changes in price, changes in fixed costs in volume of sales on

profit, and

d) the proportion of sales mix to maximize profits.


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Profit margin in Lanco Industries Limited

S.No. Year Profit After Tax

[Rs. in Lakhs]

Total Sales Rs.

[Rs.in lakhs]

Percentage

1. 2009 -2010 4202.63 82384.79 5.10

2. 2010- 2011 5793.97 75015.37 7.72

3. 2011 – 2012 (-395.23 ) 71051.85 (0.55)

Source : Annual reports of Lanco Industries Limited.

The above table shows the profit margin of Lanco Industries during the study

period in 2009- 2010 it was 5.10 per cent. In 2010-11 It was 7.72 per cent. In 2011 -

2012. It was (-0.55) per cent in losses. The above analysis shows clearly that the

profit margin of the industry was not satisfactory.

Percentage of gross profit to sales in Lanco Industries Limited

S.No. Year Gross profit

(Rs. in Lakhs)

Sales

(Rs. in Lakhs)

Percentage

1. 2009 – 2010 8797.63 82384.79 10.67

2. 2010 -2011 5584.52 75015.37 7.44

3. 2011 -2012 (-416.79) 71051.85 (0.58)

Source : Annual reports of Lanco Industries Limited

GROSS OPERATING PROFIT TO SALES

The Financial results of a manufacturing unit can be observed by computing

the ratio between gross operating profit and sales. Gross operating profit can be

found out by subtracting cost of goods sold from net sales.

Table shows the percentage of gross profit to sales of Lanco Industries during

the study period. The percentage fluctuated. It was higher in 2009-2010. and 2010 -

2011, it decreased to 7.44 percent and 2011 -2012 going to lossof (0.58) percent


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Table Percentage of net profit to sales in Lanco Industries Limited

S.No. Year Net Profit

(Rs. in Lakhs)

Sales

(Rs. in Lakhs)

Net profit

Percentage

1. 2009 -2010 7755.76 82384.79 9.41

2. 2010 -2011 5801.49 75015.37 7.73

3. 2011 – 2012 (-416.79) 71051.85 (0.58)


PERCENTAGE OF NET PROFIT TO SALES

Net profit is the excess of operating and non-operating income over

expenditure. It depends upon the extent of fixed and variable overheads. The

percentage of net profit to sales in Lanco Industries Limited during the study period

is presented in Table 7.6. The percentage was highest in the year 2009-2010 (9.41)

and was loss in the year 2011 -2012 (0.58) the Industry sustained losses in net profit.

The main reason for the losses was the heavy interest payments on term loans and

payments of taxes to the Government and decrease of rupee value.

Net profit / loss in Lanco Industries Limited

S.No. Year Net profit / loss

(Rs. in Lakhs )

Percentage to Total

1. 2009 – 2010 7755.76 55.50

2. 2010 -2011 5801.49 41.51

3. 2011 -2012 (-416.79) (-2.98)

Total 13974.04 100


Table shows the Net profit / loss of Lanco Industries Ltd, during the study

period. In the year 2009 -2010 the net profit was 55.50 percent during 2010 - 2011, it

came down sharply to 41.51 percent and in 2011- 2012 it fell further very drastically

loss to -2.98 percent,


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Net profit / loss in Lanco Industries Limited

55.5

41.51

-2.98

-10

0

10

20

30

40

50

60

2009 – 2010 2010 -2011 2011 -2012

Year

Prof

it / L

oss

2009 – 2010 2010 -2011 2011 -2012

CONCLUSION

The profitability analysis shows that the industry to start with earned profits

rather unevenly between 2009 -2010 and 2010 -2011 thereafter, during the next year

sustained losses rather heavily the losses were due to over expenditure and decreased

the value of rupee due to global crises

1. The analysis of net operating profit to sales of Lanco Industries has revealed

the efficiency of its Iron and Cement factories in controlling its operating

expenses i.e. selling and administrative expenses. It is found that it has

incurred net operating losses to sales. The reason for it was higher operating

expenses which reduced the Sextant of net operating profit and subsequently

reduced the percentage of net operating profit to sales.

2. Lanco industries should maintain the return on capital employed in Lanco

Industry by adopting measures like increasing the recovery rate, increasing the

capacity utilization and improving the procurement of qualitative raw

materials etc in the coming years.

3. While its factories reached good gross profit level, the net profit was very low

because the net operations profit level was poor. This deficiency can be

rectified by reducing the interest burden which is an abnormal item of

expenditure in the profit and loss account.

Lanco industries should adopt an effective profit planning and control system.

Every year, it should estimate in advance the minimum operation level

through break-even analysis and fix the raw material price on the basis of the


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estimated cost of production and the price of iron and cement and the by-

products.

The company should adopt cost technique in order to bring down the

manufacturing, selling and administrative costs. Further it should strengthen its

Finance and Cost Accounting departments to collect, analyse and interpret the

information of all the financial transactions and thereby identify the strengths and

weaknesses of the industry.

Lanco industries must investment considerably on research and development for

the improvement its technology to realize higher rate of recovery from the raw

materials. In these days of unprecedentedly rapid technological advancement in all

areas, no industry can offered to log behind and be complacent updating its

technology and trying to be a few peaces ahead of other competing industries in

these regard has become an imperative. At its peril, it ignores this fact. The

suggestions offered above for improving without additional expenditure. They call

for efficiency, competence, and aleterness. Lanco Industries , Ltd which has

managed to survive and do well enough in profit earnings and protect its

stakeholders, can better its performance even more, if its finance are better

managed as the present analytical study has demonstrated, by showing where the

gaps and deficiencies in the company’s profitability performance lie.

REFERENCES:- 1 Annual Reports of lanco Industries limited .

2 www.lanco industries .com

3 T.S.McAlpine, “Profit Planning and Control,” London : Business

Book Ltd., 1969, p.108.

4 Fred R. Gardner, “Management and Control”, New York, McGraw, Hill Book Company, Inc.,

1995, P.1.

5 S.R.Wilson, and John O. Tomb, “Improving Profits through Integrated Planning and Control”.

Englewood Cliffs, N.J. Printice Hall Inc., 1968, pp.4-6.

6 Thomas S. Dudjek, “ Profile for Profitability,” New York; John Wiley & Sons 1972, p.3. 7 Joseph F Brandley, “ Administrative Financial Mgmtt”, New York: Braves & Noble, 1964 p. 104

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