ACKNOWLEDGEMENT This project has given me a perfect opportunity to see and know how the concepts of finance are applied in the Industry. The project has been a big learning experience for me and I would like to express my gratitude towards all the people who have guided me throughout, and without whose guidance and support this project would not have been completed successfully. I would also like to express my deepest gratitude and sincere regards to Mr. Ajay Joshi, Vice President (Finance & Accounts) for allowing me to undergo my internship in Hindalco Industries Limited, Renukoot.
It was great to have the opportunity to work under the guidance of Mr. Vimal Raheja, Deputy Manager (Finance & Accounts), Hindalco Industries Limited. I would like to extend my thanks to him for helping me carry out the project and for his valuable feedback. Above all, the kind of support and help that my institute and faculty guide Ms. Nahid Parveen extended during the project was invaluable. Without her help this project would not have been completed. To sum up, my experience with HIL has been a valuable one.
The value addition was enormous and the impact, long lasting. I thank everyone once again. TABLE OF CONTENTS Ch. No. TopicPage No. 1Executive Summary5 2Group Overview6-7 3Industry Profile8-12 4Company ProfileOProduction profileOProduct profile13-27 5Introduction To Project28-30 6Objectives Of The Study31 7Literature Review32-33 8Research Methodology34-35 9Financial Highlights36-37 10List Of Ratios38-68 11Inter Company Analysis69-77 12Growth Equilibrium78-79 13Multi DiscriminantAnalysis80-81 14Conclusions82 15Recommendations83 16Limitations 84 7Bibliography85-86 CHAPTER – 1 EXECUTIVE SUMMARY The purpose of this project is to analyse the financial position of Hindalco Industries Ltd. and compare it with domestic competitor i. e. Nalco for the FY 2007-08. To analyse the financial position of a firm one of the method is Ratio Analysis, which uses data from the balance sheet and income statement to produce values that have easily interpreted financial meaning. There are different financial ratios that have proven useful for assessing financial condition of the company.
Results showed that Hindalco is more profitable than Nalco in the FY 2007-08 but due to increase in cost of sales the profit margin decreases. Also the liquidity position of the Hindalco is better and all ratios are ideal as compared to Nalco. Hindalco provides better return to its shareholders and are having more equity than debt. Therefore, the company remains in the safety range and is maintaining a balance. Also, Hindalco provides higher security to lenders for extending long-term loans to the business.
Company has proved itself strong on all parameters like market valuation, liquidity, solvency, but fails on the aspects of turnover. The company rate of turnover is less as comparison to Nalco, this tells that company lacks ground on production frontier. On the whole we can say that Hindalco is very strong player in the Aluminium industry and is having tremendous potential for growth. CHAPTER – 2 GROUP OVERVIEW The Aditya Birla Group, a US $29. 2 billion corporation, is in the league of Fortune 500. It is anchored by an extraordinary force of 130,000 employees, belonging to 30 different nationalities.
In India, the Group has been adjudged “The Best Employer in India and among the top 20 in Asia” by the Hewitt-Economic Times and Wall Street Journal Study 2007. Over 50 per cent of its revenues flow from its overseas operations. The Group operates in 25 countries — India, UK, Germany, Hungary, Brazil, Italy, France, Luxembourg, Switzerland, Australia, USA, Canada, Egypt, China, Thailand, Laos, Indonesia, Philippines, Dubai, Singapore, Myanmar, Bangladesh, Vietnam, Malaysia and Korea. Globally the Aditya Birla Group is:
OA metals powerhouse, among the world’s most cost-efficient aluminium and copper producers. Hindalco-Novelis is the largest aluminium rolling company. It is one of the three biggest producers of primary aluminium in Asia, with the largest single location copper smelter. ONo. 1 in viscose staple fibre. OThe fourth largest producer of insulators. OThe fourth largest producer of carbon black. OThe 11th largest cement producer globally, the seventh largest in Asia and the second largest in India. OAmong the world’s top 15 BPO companies and among India’s top four.
OAmong the best energy efficient fertilizer plants. In India the Aditya Birla Group is: OA premier branded garments player. OThe second largest player in viscose filament yarn. OThe second largest in the chlor-alkali sector. OAmong the top five mobile telephony companies. OA leading player in life insurance and asset management. OAmong the top three supermarket chains in the retail business. THE ADITYA BIRLA GROUP LOGO The name “Aditya Birla” evokes all that is positive in business and in life. It exemplifies integrity, quality, performance, perfection and above all character.
The group logo is the symbolic reflection of these traits. It is the cornerstone of their corporate identity. It helps them leverage the unique Aditya Birla brand and endows them with a distinctive visual image. Depicted in vibrant, earthy colours, it is very arresting and shows the sun rising over two circles. An inner circle symbolizing the internal universe of the Aditya Birla Group, an outer circle symbolizing the external universe, and a dynamic meeting of rays converging and diverging between the two. Their corporate logo thus serves as an umbrella for the Group.
It signals the common values and beliefs that guide their behaviour in all our entrepreneurial activities. It embeds a sense of pride, unity and belonging in all of our 130,000 colleagues spanning 25 countries and 30 nationalities across the globe. CHAPTER – 3 INDUSTRY PROFILE Aluminium Industry- An Overview Aluminum is a lightweight, silver-white, metallic element that makes up approximately 7 per cent of the earth’s crust. It weighs about one third as much as steel (7480- 8000 Kg/ cubic metre) or copper (8930 Kg/cubic metre).
Aluminium is malleable, ductile, easily casted and has excellent corrosion resistance and durability. It is mined in the form of bauxite ore and exists primarily in combination with oxygen as alumina. India has nearly 10 per cent of the world’s bauxite reserves and a growing aluminum sector that leverages this. Demand in the domestic market is expected to grow by 8-10 per cent. By 2020, India is expected to have an installed aluminum capacity of 1. 7 to 2 million tons per annum. India has bauxite reserve base of 1. 44 bt and reserves of 0. 7 bt. With production of 13 mt in 2006, India accounted for around 7. 3% of global bauxite production. India’s production of aluminium aggregated 1. 11 mt in 2006, accounting for 3. 3% of global production. Global aluminium production has grown at 7%: Per capita consumption of aluminum is closely related to Gross Domestic Product (GDP) of a country. The consumption of aluminum in developed countries with high GDP values is quite high compared to the consumption in developing countries. The global aluminum production grew at a CAGR of 7. per cent, while the consumption increased at a CAGR of 5. 89 per cent during 2003-06. The market size for aluminum globally is US$ 96. 56 billion. Europe and North America, are the biggest players in the aluminum segment, with 35 per cent and 22 per cent of global market share respectively. Aluminum consumption is 30 kgs in the US and Europe, 15 kgs in Japan, 10 kgs in Taiwan and 3 kgs in China. Indian Aluminium Industry Aluminium Industries in India is one of the leading industries in the Indian economy.
The growth of the aluminum Metal industry in India would be sustained by the diversification and exploration of new horizons for the industry. India has huge deposits of natural resources in form of minerals like copper, chromite, iron ore, manganese, bauxite, gold, etc. The Indian aluminum industry falls under the category of non-iron based which include the production of copper, tin, brass, lead, zinc, aluminum, and manganese. The main operations of the Indian aluminum industry are mining of ores, refining of the ore, casting, alloying, sheet, and rolling into foils.
At present, Hindalco and Nalco are one of the most economical in the production of aluminum in the world. For the sustenance of the growth the aluminum industry in India has to develop research and development units to assist the production and improve on the quality measures to keep a stringent quality control. The Indian aluminum Metal Industries sector in the previous decade experienced substantial success among the other industries. The Indian aluminum industry is developing fast and the advancement in its technologies is boosting the growth even faster.
The utilization of both international and domestic resources was significant in the rapid development of this industry, which has made the Indian aluminum industry prominent among the investors. This industry has a bright future as it can become one of the largest players in the global aluminum market as in India the consumption is fairly low, the industry may use the surplus production to cater the international need for aluminum which is used all over the world for several applications such as aircraft manufacturing, automobile manufacturing, utensils, etc. The companies under the Indian aluminum industry
OHINDALCO (Hindustan Aluminium Co. Ltd) OINDAL (Indian Aluminum Co Ltd) ONALCO (National Aluminum Co Ltd) OBALCO (Bharat Aluminum Co Ltd) OMALCO (Madras Aluminum Co Ltd) Salient features of Indian Aluminium Industry OHighly concentrated industry with only five primary plants in the country. OControlled by two private groups and one public sector unit. OBayer-Hall-Heroult technology used by all producers. OElectricity, coal and furnace oil are primary energy inputs. OAll plants have their own captive power units for cheaper and un-interrupted power supply.
OEnergy cost is 40% of manufacturing cost for metal and 30% for rolled products. OPlants have set internal target of 1 – 2% reduction in specific energy consumption in the next 5 – 8 years. OEnergy management is a critical focus in all the plants. OEach plant has an Energy Management Cell. OEnergy targets are based on best energy figures achieved in their sector / region and by the plant itself in the past. OGenerally, government policies were rated as conducive to energy management. O‘Task Force’ formed by BEE in this sector to work as catalyst in promoting energy efficiency.
OHigh cost of technology is the main barrier in achieving high energy efficiency. Quantitative Details vRaw Material and Product Type: Bauxite and calcined petroleum coke are primary raw materials for this industry. However, alumina is raw materials for smelters and aluminium metal is raw material for fabrication units. vFuel Usage: Coal, Furnace oil and electricity are primary energy inputs in aluminium production. Coal is primarily used to generate steam, which is used in the process while fuel oil is mainly used in Calcination of alumina and various furnaces in fabrication plants.
Electricity is the major energy input in aluminium production and is considered to be prime factor in determining economics of aluminium production. Hence, all primary metal producers have installed their own captive power plants to supply cheaper and uninterrupted power for their use. Majority of electricity consumed in this industry is supplied by their captive power plants. vTechnology Status: Invented over 100 years ago, Bayer-Hall-Heroult is the only available commercial technology, even today, for the production of aluminium. Alumina is the basic raw material for the production of aluminium metal through electrolytic process.
The production of alumina obtained from bauxite, a mineral containing upto 60% in the form of mono/tribhydrate is carried out through the Bayer route, which is an extractive hydro-metallurgical process. Consumption of Aluminum: The consumption of aluminium in India of 0. 7 kg per person in 2005 is very low in keeping with the countries low GDP. However the low per capita consumption of aluminum in India is in fact an opportunity for growth in aluminium consumption against the back drop of fast growing economic conditions in India. However, aluminum consumption has increased 12. 6% in 2006 to around 1. 8mt. Consumption is estimated to have increased to a 5 year CAGR of 12. 9%. Secondary aluminium demand also shot up to 0. 6 MT last year. Sector-wise Aluminum Consumption: Aluminium, is used in various sectors, such as, transportation, packaging, building / construction and electricity. However, the usage pattern differs significantly for Indian and rest of the world. Globally, the automotive, packaging and the construction sectors are the major end users of aluminium, while in India the power sector consumes most followed by automotive and housing sectors. Sector-wise Consumption Break-up Electrical –58% ·Transport-21% ·Construction -8% ·Packaging – 5% ·Industrial machinery – 4% ·Consumer durables – 4% CHAPTER – 4 COMPANY PROFILE HINDALCO OVERVIEW Hindalco was set up in collaboration with Kaiser Aluminium and Chemicals Corporation, USA in a record time of 18 months in 1958. The plant started its commercial production in the year in 1962 with a capacity of 20000 per annum at Renukoot. The Renukoot operation encompasses the entire gamut of operations from bauxite mining, alumina refining, aluminium smelting to downstream rolling, extrusions, foil and alloy wheels.
Hindalco Industries Limited, the metals flagship company of the Aditya Birla Group, is an industry leader in aluminium and copper. A metals powerhouse with a consolidated turnover of Rs. 600,128 million (US$ 15 billion), Hindalco is the world’s largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia. Its copper smelter is the world’s largest custom smelter at a single location. The Company has grown manifold and is managed by Board of Directors with Shri Kumar Mangalam Birla as the Chairman of the Board of Directors.
Day to day affairs of the Company are managed by the professional executives headed by Shri D. K. Kohli as the Chief Operating Officer (COO) of Aluminium and Power (Renukoot, U. P). The Company has its sales and distribution network that covers all over India and includes fives sales officers located in Mumbai, New Delhi, Bangalore, Chennai and Renukoot. The company’s commitment to quality and service along with its extensive infrastructure has made Hindalco a prime source for best-selling brands HINDALCO TODAY
Hindalco is the world’s largest aluminium rolling company with the acquisition of Novelis. In 2007, the acquisition of Novelis Inc. a world leader in aluminium rolling and can recycling marked a significant milestone in the history of the aluminium industry in India. With Novelis under its fold Hindalco ranks among the global top five aluminium majors, as an integrated producer with low cost alumina and aluminium facilities combined with high-end rolling capabilities and a global footprint in 12 countries outside India.
Its combined turnover of US$ 15 billion, places it in the Fortune 500 league The combined volume of sales of flat rolled products in the world market is about 3 million tonnes and the market share is more than 20 per cent. Hindalco is the largest manufacturer of the entire range of flat rolled products in India. It enjoys nearly 60 per cent of market share and its rolled products are widely used in various segments such as packaging, transportation, building and construction, electrical, defence and general engineering applications.
Using state-of-the-art equipment and a strong research and development set-up, supported by dedicated and motivated employees and the Oracle ERP system, ensures efficiency and product quality. Wagstaff Air Slip™ slab casting technology is used to ensure consistent quality and surface finish of stock feed, which in turn ensures quality, finished products. Ever last, a Hindalco brand for aluminium-roofing sheets, offers ideal and economical solutions for all roofing and cladding needs. Hindalco also offers colors-coated and tiled roofing profiles. VISION
To be a premium metals major, global in size and reach, with a passion for excellence. MISSION To relentlessly pursue the creation of superior shareholder value by exceeding customer expectations profitably, unleashing employee potential and being a responsible corporate citizen adhering to our values. VALUES OIntegrity OCommitment OPassion OSeamlessness OSpeed STRATEGY OEfficiency Focus: – To be one of the lowest cost producer globally. OEffectiveness Focus: – To continue to remain the market leader domestically. OGrowth Focus: – To pursue value adding growth opportunities in aluminium.
Hindalco’s business Hindalco in India enjoys a leadership position in aluminium and copper. The company’s aluminium units across the country encompass the entire gamut of operations from bauxite mining, alumina refining, aluminium smelting to downstream rolling, extrusions, foils and alloy wheels, along with captive power plants and coal mines. The Birla Copper unit produces copper cathodes, continuous cast copper rods along with other by-products, including gold, silver and DAP fertilizers. Aluminium Aluminium has turned out to be the wonder metal of the industrialized world.
No other single metal can do so many jobs, so well and so economically. Aluminium growth rate is the highest amongst the major basic metal today. Hindalco ranks as the largest aluminium producer in India, where more than 58% sales is in value added product and has more than 40% in total market share. The Company’s fully integrated aluminium operation consists of the mining of bauxite, conversion of bauxite into alumina, production of primary Aluminium from alumina by electrolysis. Hindalco’s integrated operations and operational efficiency have enabled the Company to be one of the world’s lowest cost producers of Aluminium.
Hindalco was among the first few alloy wheels companies to have obtained the ISO/TS 16949 certification to meet the stringent standard of the automobile industry. In India, Hindalco enjoys a leadership position in speciality aluminas, primary aluminium and downstream products. Apart from being a dominant player in the domestic market, Hindalco’s products are well accepted in international markets. Exports account for more than 30 per cent of total sales. Copper Birla Copper, a unit of Hindalco is located at Dahej in Gujarat.
The unit has the unique distinction of being the largest copper smelter in the world at a single location with 500,000 tpa capacity with multiple world class technologies. The facilities comprise copper smelters, precious metals, fertilisers, sulfuric acid, captive power plants, utilities and a captive jetty. Hindalco’s Birla copper is a renowned producer of copper cathodes and continuous cast copper rods since its inception, with ISO-9001:2000 (Quality Management systems), ISO-14001:2004 (Environmental Management System) OHSAS-18001:2007 (Occupational Health and Safety Management Systems) accreditations.
Research & Development Hindalco has two R centres, Belgaum Research and Development Centre (BRDC) located at Belgaum in Karnataka and Taloja Research and Development Centre (TRDC) at Taloja in Maharashtra. BRDC, earlier known as Smelter Chemicals R Centre, is operating in the field of alumina while TRDC, previously known as Oil and Lube Laboratory, is operating in the field of oil and lube and aluminium related metallurgical services. Both these R centres were established in March 1979 and have been engaged in evelopmental work and analytical services for the last 26 years. These R centres offer analytical services and customized product applications that fine-tune manufacturing operations and improve environmental systems and processes. In 2002, Hindalco received the National Award for R efforts in processing industries by the Government of India’s Department of Scientific and Industrial Research (DSIR) for technical work done by the two centres and the R&D departments at Belur rolling and Alupuram extrusion plants.
Both BRDC and TRDC are ISO 9001:2000 certified, and TRDC has also been accredited in accordance with the standard ISO/IES 170251999: by the National Accreditation Board for Testing and Calibration Laboratories (NABL). MILESTONE 2007Successful acquisition of Novelis, making Hindalco the largest in aluminium rolling and among the global top five metals majors, with a presence in 11 countries outside India. Acquisition of Alcan’s 45 per cent equity stake in the Utkal Alumina project, thereby making Hindalco the 100 per cent project owner. 2006Hindalco announces 10:1 stock split. Each share with face value of Rs. 0 per share split into 10 shares of Re 1 each. Hindalco completes largest Rights issue in the history of Indian capital markets with total size of Rs. 22,266 million. Joint venture with Almex USA for manufacture of high strength aluminium alloys for applications in aerospace, sporting goods and surface transport industries. 2005All businesses of Indal, except for the Kollur Foil Plant in Andhra Pradesh, merged with Hindalco Industries Limited. 2003Hindalco acquires Nifty Copper Mine in March 2003 through Aditya Birla Minerals Ltd. (ABML, formerly Birla Minerals Resources Pty. Ltd. ).
Brownfield expansion of aluminium smelter at Renukoot to 345,000 tpa. 2002The amalgamation of Indo Gulf Corporation Limited’s copper business, Birla Copper, with Hindalco with effect from 1st April 2002. 2001Hindalco enters ‘The Asia Top 25’ list of the CFO Asia Annual Report Survey, the only Indian company in 2001. 2000Acquisition of controlling stake in Indian Aluminium Company Limited (Indal) with 74. 6 per cent equity holding. 1999Aluminium alloy wheels production commenced at Silvassa. Brownfield expansion of metal capacity at Renukoot to 242,000 tpa. 1998Foil plant at Silvassa goes on stream.
Hindalco attains ISO 14001 EMS certification. 1967Commissioning of Renusagar power plant – a strategic and farsighted move. 1965Downstream capacities commissioned (rolling and extrusion mills at Renukoot) 1962Commencement of production at Renukoot (Uttar Pradesh) with an initial capacity of 20,000 mtpa of aluminium metal and 40,000 mtpa of alumina. 1958Incorporation of Hindalco Industries Limited. FACTS FILE Aluminium OWorld’s largest aluminium rolling company. OOne of the biggest producers of primary aluminium in Asia. OMarket share of 48 per cent. OOne of the lowest-cost producers of aluminium in the world.
OOver 58 per cent of sales in value-added products. OFully integrated aluminium plant at Renukoot, UP. OAluminium wheels plant at Silvassa, in Dadra & Nagar Haveli. OFoil plants at Silvassa and Kalwa. Foil unit of Indal at Kollur. OISO 9001:2000 and 14001 certified. OAlumina refining capacity of 1,160,000 tpa going up to 1,500,000 tpa. OAluminium metal producing capacity of 445,000 tpa. OCaptive power generation of 1087. 2 mw. Copper OIndia’s largest copper smelting and refining plant at Dahej, Gujarat, with two copper mines in Australia. ODomestic market leader with 45 per cent market share.
OSmelting and refining capacity 500,000 tpa, the largest single location smelter in the world. OCaptive jetty (Dahej Harbour & Infrastructure Limited, a wholly owned subsidiary). OISO 9001,14001 and OSHAS 18001 certified. ORegistered on London Metal Exchange as Grade A Copper Brand. OCertified as a Star Trading House. PRODUCTION PROFILE The aluminium production process can be categorized into upstream and downstream activities. The upstream process involves mining and refining of Bauxite to Alumina, while the downstream process involves smelting, casting and fabrication.
HINDALCO is amongst the best plants in producing the world class Aluminium at the lowest cost in India. The production of Aluminium is done in different stages. Normally the stage consists of conversion of bauxite to alumina. Then alumina is converted into Aluminium. The refineries at Hindalco are well established and cost worthy. They are very efficient and wastage is very low. Hindalco refines bauxites primarily obtained from captive mines, to extract alumina, which is smelted into alumina ingots and are called billets. Hindalco smelts its entire production of alumina into aluminium and does not engage in alumina trade.
Production of Aluminium can be categorized into two stages: – OFrom Bauxite to Alumina OFrom Alumina to Aluminium PRODUCTION CAPACITIES DivisionCapacity & Location Alumina700,000 tpa (Renukoot) 350,000 tpa (Belgaum) 180,000 tpa (Muri) Aluminium375,000 tpa (Renukoot) 143,000 tpa (Hirakud) Extrusions33,000tpa (Renukoot) 13,000 tpa (Alupuram) Flat rolled products100,000 tpa (Renukoot) 57,000 tpa (Belur) 50,000 tpa (Taloja) 30,000 tpa (Mouda) Redraw rods75,000 tpa (Renukoot) Foil and packing30,000 tpa (Silvassa) 6,000 tpa (Kalwa) 4,000 tpa (Kollur) Wheels300,000 pcs (Silvassa) Captive power742 mw (Renusagar) 78 mw (Renukoot) 68 mw (Hirakud) Copper cathodes500,000 tpa (Dahej) Continuous cast copper rods120,000 tpa (Dahej) Sulphuric acid1,470,000 tpa (Dahej) Phosphoric acid180,000 tpa (Dahej) DAP and complexes400,000 tpa (Dahej) Gold26 mt (Dahej) Silver200 mt (Dahej) Power135 mw (Dahej) PRODUCT PROFILE Hindalco is a leading domestic player in two metals business segments – Aluminium and Copper. The aluminium division’s product range includes alumina chemicals, primary aluminium ingots, billets, wire rods, rolled products, extrusions, foils and alloy wheels. The company has a significant market share in all the segments in which it operates.
It enjoys a domestic market share of 42 per cent in primary aluminium, 63 per cent in rolled products, 20 per cent in extrusions, 44 per cent in foils and 31 per cent in wheels. As a step towards expanding the market for value-added products and services, Hindalco has launched several brands in recent years, which include Aura for alloy wheels, Freshwrapp for kitchen foil and Everlast for roofing sheets. Our exclusive showroom, The Aluminium Gallery, seeks to promote Hindalco products to its customers. It is a platform for the company to showcase quality products to a quality audience in an appropriate ambience.
The exhibits include products like windows, doors, furniture, ladder, roofing sheets and ceiling and cladding panels. Hindalco’s products are well received not only in the domestic market, but also in the international market. The company’s metal is accepted for delivery under the high grade aluminium contract on the LONDON METAL EXCHANGE (LME). The company exports about 17 per cent of its total sales volume of aluminium. The company’s alumina chemical business is a leader in manufacturing and marketing of speciality alumina and alumina hydrate products in the country.
It has a major market share in the country. These speciality products find wide usage in diversified industries including water treatment chemicals, refractories, ceramics, cryolite, glass, fillers and plastics, conveyor belts and cables, among others. The company also exports these alumina chemicals to over 30 countries covering North America, western Europe and the Asian region. Birla Copper, Hindalco’s copper division at Dahej in Gujarat, enjoys a leadership position in India, having built over 40 per cent of the domestic market share within three years of its commissioning.
It has also made successful forays into the export markets of the Middle East, Southeast Asia, China, Korea and Taiwan. The copper plant produces world-class copper cathodes, continuous cast copper rods and precious metals. Sulphuric acid, phosphoric acid, di-ammonium phosphate, other phosphatic fertilisers and phospho-gypsum are also produced at this plant. ALUMINIUM PRODUCTS Key Products & BrandsLocationsCountry AluminaRenukoot (Uttar Pradesh)Belgaum (Karnataka)Muri (Jharkhand)India AluminiumRenukootHirakud (Orissa) ExtrusionsRenukootAlupuram (Kerala)
Flat rolled productsRenukootBelur (West Bengal)Taloja (Maharashtra) Mouda (Maharashtra) Redraw rodsRenukoot Foil and packingKalwa (Maharashtra)Silvassa (Dadra and Nagar Haveli)Kollur (Andhra Pradesh) WheelsSilvassa Foil rollingKollur COPPER PRODUCTS Key Products & BrandsLocationsCountry Copper cathodesDahej (Gujarat)India Continuous cast copper rods Sulphuric acid Phosphoric acid Gold (Birla Gold) Silver (Birla Silver) DAP and complexes (Birla Balwan) Copper cathodesNifty minesAustralia Copper in concentrateNifty minesAustralia PowerNifty minesAustralia Copper concentrateMt.
Gordon minesAustralia INTRODUCTION TO PROJECT FINANCIAL ANALYSIS OF HINDALCO INDUSTRIES LIMITED Vs. NALCO CHAPTER – 5 INTRODUCTION Financial analysis forms an important part of business analysis, which is preceded by accounting analysis, followed by prospective analysis. Financial analysis involves how analytical tools and techniques such as Ratios, Cash Flow measures can be used to evaluate the operating, financing and investment performance of a business enterprise with a focus on effectiveness and efficiency in the conduct of business affairs by the management.
Financial analysis based on publicly available financial statements is seriously handicapped by the quality and quantity of information disclosed. The disclosed financial information reveals less than it conceals. Therefore it is the experience and expertise of the financial analyst that comes to his/her aid in carrying out sound, systematic, scientific, and logical analysis to permit informed decision making by the user of that information. Financial analysis can also be carried out by comparing balance sheet and profit & loss account over a period of time either by preparing a common size statement or comparative statement.
Analysis of Financial Statements is a systematic process of the critical examination of the financial information contained in the financial statements in order to understand and make decisions regarding the operations of the firm. Financial Statement Analysis is largely a study of relationships among the various financial factors in a business, as disclosed by a single set of statements and a study of trends of these factors, as shown in a series of statements. Financial Analysis can be of Inter-firm analysis or Intra-firm analysis. But, in this project we are basically concerned with the Inter-firm Analysis i. e. omparison of two or more business firm. We are analyzing and comparing financial variables of Hindalco with that of Nalco to determine the competitive position of the both. Purposes of Financial Analysis: OJudging the Earning Capacity or Profitability. O Judging the Managerial Efficiency. OJudging the Short-Term & Long-Term Solvency. OInter-Firm Comparison. OMaking Forecast and Preparing Budgets. CHAPTER – 6 OBJECTIVES OF THE STUDY In the light of the above mentioned facts the present study aims: OTo analyze the financial ratios of Hindalco Industries Ltd. and its comparison with National Aluminium Company (NALCO).
OTo analyze the financial report of Hindalco Industries Ltd. for the financial year 2007-08. OTo give an overview report of financial condition of HINDALCO & NALCO. OTo learn the financial system of Hindalco Industries Ltd. CHAPTER – 7 LITERATURE REVIEW The study done by Timo Salmi and Teppo Martikainen (1994) provides a critical review of the theoretical and empirical basis of four central areas of financial ratio analysis. The research areas reviewed are the functional form of the financial ratios, distributional characteristics of financial ratios, classification of financial ratios, and the estimation of the nternal rate of return from financial statements. It is observed that it is typical of financial ratio analysis research that there are several unexpectedly distinct lines with research traditions of their own. A common feature of all the areas of financial ratio analysis research seems to be that while significant regularities can be observed, they are not necessarily stable across the different ratios, industries, and time periods. Study conducted by Credit Research Foundation reveals that financial statement analysis is a judgmental process.
One of the primary objectives is identification of major changes in trends, and relationships and the investigation of the reasons underlying those changes. The judgment process can be improved by experience and the use of analytical tools. Probably the most widely used financial analysis technique is ratio analysis, the analysis of relationships between two or more line items on the financial statement. Financial ratios are usually expressed in percentage or times. A ratio can be computed from any pair of numbers.
Given the large quantity of variables included in financial statements, a very long list of meaningful ratios can be derived. A standard list of ratios or standard computation of them does not exist. The following ratio presentation includes ratios that are most often used when evaluating the credit worthiness of a customer. Ratio analysis becomes a very personal or company driven procedure. Analysts are drawn to and use the ones they are comfortable with and understand. Study done by Edward Altman , Young Ho Eom , Dong Won Kim is an attempt to construct and test a distress classification model for Korean companies.
Utilizing a sample of 34 distressed firms from the most recent 1990-1993 period and a matched (by industry and year) sample of non-failed firms, we observe the classification accuracy of two models. Both models utilize measures of firm size, asset turnover, solvency and leverage with one model available for testing only on publicly traded companies and one model is applicable to all public and private entities. We observe excellent classification accuracy based on data from the first two years prior to distress. And, although the accuracy drops off after t-2, the models still rovide effective early warnings of distress in many cases. The results of this study are of particular relevance in the current financial market scenario of increased deregulation and greater individual financial institution decisions making. According to Jei Sun , Hui Li financial distress early warning is important for business bankruptcy prevention, and various quantitative prediction methods based on financial ratios have been proposed. However, little attention has been paid to the important role of experts’ experiential knowledge and non-financial information.
From this point of view, the article puts forward a group decision-making approach based on experts’ knowledge and all kinds of financial or non-financial information to diagnose business financial distress. Based on the risk factors of enterprise financial distress, a qualitative attribute set and its scoring criteria are designed. A method integrating linguistic label and interval value is adopted for decision makers to express their preference on attributes, and a multi-expert negotiation mechanism is designed for weighting attributes.
Diagnosis on business financial distress is made through the grey evaluation method, which also tries to find out the potential risks that may cause financial distress. Case study of a real world company is carried out to validate the proposed financial distress early warning method based on group decision making. CHAPTER – 8 RESEARCH METHODOLOGY GENERAL METHODOLOGY Research Methodology used here is purely exploratory. It is used when one is seeking insight into the general nature of the problem, possible decision alternatives and relevant variables that need to be considered.
The research methodology is highly flexible, unstructured & informal in nature undertaken to gain background information. The procedure followed in the study consist of following steps: 1) The research includes figurative and diagrammatic interpretation for easy comparison. 2) Understanding of aluminium industry in global and domestic scenario. 3) Analysis of Government policy towards aluminium industry. 4) Financial Performance Analysis that includes: a)Inter company analysis to make comparative analysis of HINDALCO with NALCO. )Determination of growth equilibrium of HINDALCO to find internal liquidity to fund its current position. c)Multiple discriminant analysis to evaluate the likely position of bankruptcy of HINDALCO. SAMPLING PLAN There has been no sampling plan as such as the study involve understanding the various processes and analyzing them. The study involved the detailed analysis of the secondary data collected from various source and therefore no sample size and plan has been considered. SOURCES OF DATA
Data has been collected from primary as well as from secondary sources. PRIMARY DATA SOURCES: Primary data sources include information gathered through interview and discussions with the head and employees of various departments. SECONDARY DATA SOURCES: Below mentioned are secondary data sources used in present study- vAnnual report of Hindalco Industries Ltd. vAnnual report of NALCO. vInternal circulation booklets. vCompany Website (details of website have been mentioned in the bibliography). ANALYSIS OF DATA For the analysis of data, Excel sheet is used.
Simple tables are prepared for the purpose of comparison and help of graphs is also taken for making the interpretation easier. CHAPTER – 9 FINANCIAL HIGHLIGHTS (2007-08) (Amt. in Millions) PARTICULARS HINDALCO NALCO PROFITABILITY:NET SALESCOST OF SALES & OPERATING EXPENSESOPERATING REVENUEOPERATING PROFITDEPRECIATIONOTHER NON OPERATING INCOMEINTEREST & FINANCE CHARGESGROSS PROFIT (PBT)TAX FOR CURRENT YEARTAX FOR EARLIER YEARSNET PROFIT192010157999——34011587849292806302567053(5407)2860949890282201460231302850441020246708500(150)16320 PARTICULARSHINDALCONALCO
FINANCIAL POSITION:GROSS FIXED CAPITALDEPRECIATION & IMPAIRMENTNET FIXED ASSETSINVESTMENTSNET CURRENT ASSETSCAPITAL EMPLOYEDLOAN FUNDSDEFERRED TAX LIABILITYNET WORTHNET WORTH REPRESENTED BY:SHARE CAPITALSHARE WARRANTSRESERVE & SURPLUS1372834799189292141080405092708818328613237114720560605866011503500094810——6070 17435888740 122613951717376440——82300 17435888740 CHAPTER – 10 LIST OF RATIOS §LIQUIDITY RATIO §LEVERAGE RATIO §ACTIVITY RATIO §PROFITABILITY RATIO LIQUIDITY RATIOS 1. Current Ratio = Current Assets / Current Liabilities 2. Quick Ratio = Quick Assets / Current Liabilities 3.
Cash Ratio = (Cash + Marketable Securities) / Current Liabilities 4. Net Working Capital Ratio = Net Working Capital / Net Assets LEVERAGE RATIOS 1. Debt Ratio = Total Debt / (Total Debt + Net Worth) 2. Debt-Equity Ratio = Total Debt / Net Worth 3. Total Assets To Debt Ratio = Total Assets / Long-term Debt 4. Proprietary Ratio = Shareholders fund / Total Assets 5. Interest Coverage Ratio = EBDIT / Interest ACTIVITY RATIOS 1. Inventory Turnover Ratio = Cost Of Goods Sold / Average Stock 2. Debtors Turnover Ratio = Net Credit Sales / Average Accounts Receivables 3. Creditors Turnover Ratio = Net Credit Purchases / Average Payable 4.
Total Assets Turnover Ratio = Net Sales / Total Assets 5. Net Assets Turnover = Net Sales / Net Assets 6. Working Capital Turnover Ratio = Net Sales / Net Working Capital PROFITABILITY RATIOS 1. Gross Profit Ratio = (Gross Profit / Net Sales) * 100 2. Operating Profit Ratio = (Operating Profit / Net Sales) * 100 3. Net Profit Ratio = (Net Profit / Net Sales) * 100 4. Operating Expense Ratio = (Operating Expenses / Net Sales) * 100 5. Return on Capital Employed = (PBDIT / Capital Employed) * 100 6. Return on Equity = (PAT / Net Worth) * 100 EXPLAINATION LIQUIDITY RATIOS Liquidity ratio measures the short-term solvency, i. . the firm’s ability to pay its current dues. It is extremely essential for a firm to be able to meet its obligations as they become due. A firm should ensure that it does not suffer from lack of liquidity, and also that it does not have excess liquidity. The failure of a company to meet its obligations due to lack of sufficient liquidity, will result in poor credit worthiness, loss of creditors’ confidence or in the closure of the company. A very high degree of liquidity is also bad; idle assets earn nothing. The firm’s funds will be unnecessarily tied up in current assets.
Therefore, it is necessary to strike a proper balance between high liquidity and lack of liquidity. TYPES The different types of liquidity ratios are as follows: – 1). CURRENT RATIO Current ratio is a relationship of current assets to current liabilities and is computed to assess the short-term financial position of the enterprise. It means current ratio is an indicator of the enterprise’s ability to meet its short-term obligations. Current assets are the assets that are either in the form of cash or cash equivalents or can be converted into cash within a very short time and current liabilities are the liabilities repayable in the short time.
It is generally accepted that current assets should be two times the current liabilities, and then only will realization from the current assets be sufficient to pay the current liabilities in time and enable the enterprise to meet the other day-to-day expenses. OBJECTIVES & SIGNIFICANCE The objective of calculating the current ratio is to assess the ability of the enterprise to meet its short-term liability promptly. It is used to assess the short-term solvency of the business. A low ratio indicates that the enterprises may not be able to meet its current liabilities on time and inadequate working capital.
On the other hand a high ratio indicates funds are not used efficiently and are lying idle. It indicates poor investment policies of the management. 2). QUICK RATIO Quick ratio is a relationship of liquid assets with current liabilities and is computed to assess the short-term liquidity of the enterprise in its correct form. Quick assets are the assets, which are either in the form of cash or cash equivalents or can be converted into cash within a very short period. Quick assets include cash, B/R, marketable securities and debtors (excluding bad and doubtful debt).
A quick ratio of 1:1 is usually considered favorable, since for every rupee of current liabilities, there is a rupee of liquid assets. OBJECTIVES & SIGNIFICANCE The objective of computing quick ratio is to assess the short-term solvency of the enterprise. This ratio is an indicator of short-term debt paying capacity of enterprise and thus, is a better indicator of liquidity. This ratio is very important for banks and financial institutions but not for manufacturing concerns. The comparison of current ratio with liquidity ratio would indicate the degree of inventory held.
A high liquidity ratio compared to current ratio may indicate understocking while a low liquidity ratio indicates overstocking. 3). CASH RATIO Since cash is most liquid assets, a financial analyst may examine cash ratio and its equivalent to current liabilities. Trade investments or marketable securities are equivalent of cash; therefore, they may be included in computation of cash ratios. 4). NET WORKING CAPITAL RATIO The difference between the current assets and current liabilities excluding short-term bank borrowings is called Net Working Capital or Net Current Assets.
It is sometimes used as a measure of a firm’s liquidity. It is considered that, between two firms, the one having the larger NWC has the greater ability to meet its current obligations. This is not necessary so; the measure of liquidity is a relationship, rather the difference between current assets and current liabilities. NWC, however, measures the firm’s potential reservoir of funds. LEVERAGE RATIOS (SOLVENCY) The process of magnifying the shareholder’s return through the use of debt is called Financial Leverage or Financial Gearing. The term solvency implies ability of an enterprise to meet its long-term indebtedness.
A firm should have short as well as long term financial position. To judge the long-term financial position of the firm, financial leverage or solvency ratios are calculated. These ratios indicate mix of funds provided by owners and lenders. As a general rule there should be an appropriate mix of debt and owners equity in financing the firm’s assets. TYPES The different types of leverage ratios are as follows: – 1). DEBT RATIO Debt ratios may be used to analyze the long–term solvency of a firm. The firm may be interested in knowing the proportion of the interest-bearing debt (also called funded debt) in the capital structure.
This ratio may be computed by dividing total debt by capital employed or net assets. Total debt will include short and long term borrowings from financial institutions, debentures/ bonds, banks borrowings and any other interest-bearing loan. Capital employed will include total debt and net worth. 2). DEBT EQUITY RATIO The debt equity ratio is computed to ascertain soundness of the long-term financial position of the firm. This ratio expresses a relationship between debt (external equities) and the equity (internal equities). Debt means long-term loans, i. e. debentures, loans from financial institutions.
Equity means shareholder’s funds, i. e. preference share capital, equity share capital, reserves less losses and fictitious assets like preliminary expenses. A higher ratio indicates a risky financial position while a lower ratio indicates safer financial position. Debt-Equity ratio is acceptable if it is 2:1, which means debt can be twice the equity. OBJECTIVES & SIGNIFICANCE The objective of this ratio is to arrive at an idea of the amount of capital supplied to the enterprise by the proprietors and of assets cover available to its creditors on its liquidation.
This ratio is sufficient to assess the soundness of long-term financial position. It also indicates the extent to which the firm depends upon outsiders for its existence. 3). TOTAL ASSETS TO DEBT RATIO Total Asset To Debt Ratio establishes relationship between total assets and total long-term debts. Total asset includes fixed as well as current assets. Whereas Long-term debts refers to debts that will mature after one year. It includes debentures, bonds, and loans from financial institutions. This ratio is usually expressed as a pure ratio in the form of 2:1 OBJECTIVES & SIGNIFICANCE
The objective of computing this ratio is to measures the safety margin available to the providers of long-term debts. It measures the extent to which debt is covered by the assets. A higher ratio represents higher security to lenders for extending long-term loans to the business. On the other hand, a low ratio represents a risky financial position as it means that the business depends heavily on outside loans for its existence. In other words, investment by the proprietors is low. 4). PROPRIETARY RATIO Proprietary ratio establishes the relationship between proprietor’s funds and total assets.
Proprietor’s funds means share capital plus reserves & surplus, both of capital and revenue nature. This ratio shows the extent to which the shareholders own the business. Higher the ratio, the better it is for all concerned. OBJECTIVES & SIGNIFICANCE Proprietary ratio highlights the general financial position of the enterprise. A higher ratio indicates adequate safety for creditors. But a very high ratio indicates improper mix of proprietor’s funds and loans funds, which results in lower Return on Investment. A low ratio, on the other hand, indicates inadequate or low safety covers for the creditors. ). INTEREST COVERAGE RATIO The interest coverage ratio is used to test the firm’s debt-servicing capacity. It shows the number of times the interest charges are covered by funds that are ordinarily for their payment. A higher ratio is desirable; but too high a ratio indicates that a firm is very conservative in using debt, and that it is not using credit to the best advantages of shareholders. A lower ratio indicates excessive use of debt, or inefficient operations. The limitation of the interest coverage ratio is that it does not consider repayment of loan. ACTIVITY RATIOS
Activity ratio, also termed as Performance or Turnover ratios, judge how well the facilities at the disposal of the enterprises are being utilized. In other words, these ratios measure the effectiveness with which a concern uses resources at its disposal. The result is expressed in integers rather than percentage. These ratios are usually calculated on the basis of sales or cost of sales. Higher turnover ratio means, better use of capital or resources, which in turn, means better profitability ratio. TYPES The different types of activity ratios are as follows: – 1). INVENTORY TURNOVER RATIO
Inventory Turnover Ratio establishes relationship between the cost of goods sold during a given period and the average amount of inventory carried during that period. It indicates whether the investments in stock have been efficiently used or not. An industry in which Inventory Turnover Ratio is high usually works on a comparatively low margin of profit. The ratio shows better performance if it increases, since it means that the investment in stocks is leading to higher sales. OBJECTIVES & SIGNIFICANCE The objectives of computing Inventory Turnover Ratio is to ascertain whether investment in stock has been judicious or not i. . that only the required amount is invested in stock. A high ratio indicates that more sales are being produced by a unit of investment in stocks. A very high Inventory Turnover Ratio indicates over trading and it may leads to working capital shortage. A low Inventory Turnover may reflect inefficient use of investments, over-investments in stock, accumulation of stock at the end of the period in anticipation of higher prices or unsaleable goods, etc. 2). DEBTORS TURNOVER RATIO Debtors Turnover Ratio establishes the relationship between net credit sales and average debtors of a year.
While calculating debtors turnover ratio, it is important to remember that doubtful debt are not deducted from total debtors, since here the purpose is to calculate the numbers of days for which sales are tied up in debtors and not the realizable value of debtors. OBJECTIVES & SIGNIFICANCE This ratio indicates how quickly debtors are converted into cash and thus indicates the efficiency of the staff entrusted with collection of the amounts due from debtors. A high ratio is better since it would indicate that debts are being collected more promptly. A standard ratio should be set up for measuring the efficiency.
A ratio lower than the standard would indicates inefficiency in collection and more investments in debtors than required. 3). CREDITORS TURNOVER RATIO Creditors Turnover Ratio shows the relationship between net credit purchases and total payable or average payable, whereas average payment period or creditors velocity signifies the credit period enjoyed by the enterprise in paying creditors. The creditors and bills payable both are reckoned as total payable. OBJECTIVES & SIGNIFICANCE A high turnover ratio or shorter payment period shows the availability of less credit or early payment.
A high ratio also indicates that enterprise is not availing the full credit period. This boosts up the credit worthiness of the firm. Thus, the lower the ratio, the better is the liquidity position of the firm and the higher the ratio, the lesser is the liquidity position of the firm. 4). TOTAL ASSETS TURNOVER Total assets turnover ratio shows the firm’s ability in generating sales from all financial resources committed to total assets. Some analysts like to compute this ratio in addition to or instead of the net assets turnover. Total assets include net fixed assets, investments and current assets. ). NET ASSETS TURNOVER Net Assets include net fixed assets and net current assets. Since net assets equal capital employed, net assets turnover may also be called capital employed turnover. A firm’s ability to produce a large volume of sales for a given amount of net assets is the most important aspect of its operating performance. The net assets in the denominator of the ratio include fixed assets net of depreciation. Thus old assets with depreciated values may create a misleading impression of high turnover without any improvement in sales. 6). WORKING CAPITAL TURNOVER RATIO
Working Capital Turnover Ratio establishes the relationship between working capital and sales. It indicates the number of times a unit invested in working capital produces sales. This ratio indicates whether the working capital has been effectively utilized or not. This ratio is better than the stock turnover ratio, since it shows the efficiency or inefficiency in the use of the entire working capital and not merely a part of it. OBJECTIVES & SIGNIFICANCE It’s objective is to ascertain whether or not working capital has been effectively utilized in making sales. Higher the ratio, the better it is.
But, a very high ratio may indicates overtrading – the working capital being inadequate for the scale of operations. PROFITABILITY RATIOS The operating efficiency of a firm and its ability to ensure adequate returns to its shareholders depends ultimately on the profit earned by the company. Profit as compared to the capital employed indicates profitability of the enterprise. Thus, profitability is of utmost importance for a concern as it reflects the final results of business operations. The profitability ratio answers the following questions: – i. Does the company earn adequate profit? i. What rate of returns does it represent? iii. What is the rate of returns for various segments of the firm? iv. What is the rate of returns for its shareholders? TYPES The different types of profitability ratios are as follows: – 1). GROSS PROFIT MARGIN The gross profit margin reflects the efficiency with which management produces each unit of products. This ratio indicates the average spread between the cost of good sold and the sales revenue. A high gross profit margin relative to the industry average implies that the firm is able to produce at relatively lower cost.
A gross margin ratio may increase due to any of the following factors: §Higher sales prices, cost of goods sold remaining constant. §Lower cost of goods sold, sales prices remaining constant. §A combination of variation in sales prices and cost, the margin widening §An increase in the proportionate volume of higher margin items. A low gross profit margin may reflects higher cost of good sold due to the firms inability to purchase raw materials at favorable terms, over-investment & inefficient utilization of plants & machinery.
OBJECTIVES & SIGNIFICANCE Gross profit ratio is a reliable guide to the adequacy of selling prices and efficiency of trading activities. The ratio is compared to earlier year’s ratios or with ratios of other firms. The firms should follow the same accounting system and practices. Higher the gross profit ratio, the better it is. The objectives of working gross profit ratio are: 1. To determine the selling price so that there is adequate gross profit to cover the operating expenses, fixed charges, dividends and building up reserves. 2.
To determine, how much the selling price per unit may decline without resulting in losses on operations of the firms. 3. Gross profit ratio, when compared to earlier years, if significantly different is a reason for management to investigate the change. 2). OPERATING PROFIT MARGIN As the name suggest operating profit margin determine the profit obtained entirely from the operation of the firm i. e. how efficiently the company utilizes its resources to generate the revenue. The variability of the operating profit margin over time is a prime indicator of business risk of the firm. ). NET PROFIT MARGIN Net profit margin ratio establishes a relationship between net profit and sales and indicates management’s efficiency in manufacturing, administering and selling the products. This ratio also indicates the firm’s capacity to withstand adverse economic conditions. A firm with a high net margin ratio would be in an advantageous position to survive in the face of falling selling prices, rising cost of production or declining for a product. It would really be difficult for a low net margin firm to withstand these adversities. OBJECTIVES & SIGNIFICANCE
The net profit margin is an indicator of overall efficiency of the business. Higher the net profit ratio betters the business. This ratio helps in determining the operational efficiency of the business. An increase in the ratio over the previous period shows improvement in the operational efficiency and decline means otherwise. A comparison with the industry standard is also an indicator of the efficiency of the business. 4). OPERATING EXPENSES RATIO The operating expense ratio explains the changes in the profit margin (EBIT to sales) ratio. This ratio is computed to establish relationship between operating costs and net sales.
This ratio is a yardstick of operating efficiency, but it should be used cautiously. It is affected by a number of factors, such as external factors, internal factors, employees and managerial efficiency. A higher operating expense ratio is unfavorable since it will leave a small amount of operating income to meet interest, dividends, etc. OBJECTIVES & SIGNIFICANCE 1. To determine whether the cost content has increased or decreased in the figure of sales, when compared. 2. To determine which element of the cost has gone up. 5). RETURN ON CAPITAL EMPLOYED
Return on capital employed ratio establishes the relationship of profit (profit means profit before depreciation, interest & tax) with capital employed. The net result of operations of a business is either profit or loss. The sources i. e. funds used by the business to earn this (P/L) are proprietor’s, funds and loans. The overall performance of the enterprise can be judged by this ratio when compared with the previous period to judged improvement in performance. OBJECTIVES & SIGNIFICANCE ROCE judges the overall performance of the enterprise. It measures how efficiently the sources entrusted to the business are used.
It is a fair measure of the profitability of any concern with the result that the performance of different industry may be compared. To judge whether the ratio is satisfactory or not, it should be compared with its own past ratios or with the ratio of similar enterprises in the industry with the industry average. 6). RETURN ON EQUITY Return on Equity indicates how well the firm has used the resources of owners. The earnings of satisfactory returns are the most desirable objectives of a business. The ratio of net profit to owners’ equity reflects the extent to which this objective has been accomplished.
This ratio is of great interest to the present as well as the prospective shareholders and also of great concern to management, which has the responsibility of maximizing the owners’ welfare. OBJECTIVES & SIGNIFICANCE Common or ordinary shareholders are entitled to the residual profits. The rate of dividend is not fixed; the earnings may be distributed to shareholders or retained in the business. Nevertheless, the net profit after taxes represent their returns. A return on shareholders equity is calculated to see the profitability of owners’ investments.
The shareholders equity or net worth will include paid-up share capital, share premium and reserves and surplus less accumulated losses. CHAPTER – 11 INTER COMPANY ANALYSIS LIQUIDITY RATIO RATIOSHINDALCONALCO CURRENT RATIO2. 063. 27 QUICK RATIO0. 722. 83 CASH RATIO0. 042. 28 NET WORKING CAPITAL RATIO0. 150. 37 INTERPRETATION: §Current ratio of HINDALCO is less than NALCO during the FY 2007-08, which indicates that the short-term solvency of HINDALCO is better than NALCO. Funds are used more efficiently in HINDALCO and it shows good investment policies.
Therefore, HINDALCO will meet its current liabilities in time as compared to NALCO. §Quick ratio of HINDALCO do not have enough liquidity to meet the short term contingencies as it has quick ratio of 0. 72, whereas NALCO with ratio of 2. 83 shows its inefficiency to properly utilize the short term resources and make proper use of it’s liquidity. §Cash ratio of NALCO is higher than HINDALCO that indicates that more funds (cash) are lying idle with the company. §Net Working Capital ratio of NALCO is more than HINDALCO that shows NALCO has greater ability to meet its current obligations. LEVERAGE RATIO
RATIOSHINDALCONALCO DEBT RATIO0. 32NA DEBT EQUITY RATIO0. 48NA TOTAL ASSETS TO DEBT RATIO3. 71NA PROPRIETARY RATIO0. 560. 81 INTEREST COVERAGE RATIO13. 88NA INTERPRETATION: §Debt and Debt Equity ratio of HINDALCO shows that company is having more equity than debt in its capital structure that is a good sign for the company. Therefore, the company remains in the safety range and is maintaining a balance. §Total Assets To Debt ratio of HINDALCO is 3. 71, which represents higher security to lenders for extending long-term loans to the business. The business do not depends heavily on outside loans for its existence. Proprietary Ratio of NALCO is somewhat better than HINDALCO, which represents adequate safety for the creditors. It further indicates proper mix of proprietor’s funds and loans funds, which results in better Return on Investment. §High Interest Coverage ratio of HINDALCO creates safety in the minds of outside investors and increase goodwill of the company. The higher the ratio, greater is the company’s ability to pay the dues to its creditors. ACTIVITY RATIO RATIOSHINDALCONALCO INVENTORY TURNOVER RATIO7. 0219. 43 DEBTORS TURNOVER RATIO12. 2781. 79 CREDITORS TURNOVER RATIO6. 392. 32 TOTAL ASSETS TURNOVER RATIO0. 620. 5 NET ASSETS TURNOVER RATIO0. 710. 53 WORKING CAPITAL TURNOVER RATIO3. 90. 81 INTERPRETATION: §Inventory Turnover ratio of NALCO is better than HINDALCO which shows NALCO has balanced amount of inventory to support it’s production while HINDALCO has large amount of inventory led with them. A high ratio of NALCO also indicates that a unit of investment in stocks is producing more sales. §NALCO have better Debtor Turnover ratio as compared to HINDALCO. It implies that in NALCO, debts are being collected more promptly whereas in HINDALCO there is more investments in debtors than required and inefficiency in collection. Creditor Turnover ratio of NALCO shows better liquidity position while HINDALCO ratio indicates that enterprise is not availing the full credit period. §Assets Turnover ratio of HINDALCO is more than NALCO, which implies that the management policy of HINDALCO regarding the assets is better than NALCO and assets are used efficiently. §Working Capital ratio of HINDALCO is better than NALCO, which further implies that working capital of HINDALCO has been effectively utilized in making sales. PROFITABILITY RATIO RATIOSHINDALCO (%)NALCO (%) GROSS PROFIT RATIO15. 7549. 5 OPERATING PROFIT RATIO17. 7146. 36 NET PROFIT RATIO14. 9032. 71 OPERATING EXPENSES RATIO82. 2856. 56 RETURN ON CAPITAL EMPLOYED12. 2126. 04 RETURN ON EQUITY16. 4118. 39 INTERPRETATION: §Gross Profit ratio of HINDALCO is relatively less in comparison to NALCO, which implies that cost of production was higher than NALCO and company utilized the money for various acquisitions during the financial FY 2007-08. §Operating Profit ratio of HINDALCO is less than NALCO which indicates that the operating expenses of HINDALCO were more leading to less operating profit. Net Profit ratio of NALCO is more than HINDALCO, which shows the operational efficiency of NALCO is better. This result indicates that management ability of HINDALCO to operate the business is not quite better. §Return On Capital employed of NALCO is better than HINDALCO which show that NALCO is utilizing its’ capital employed in an efficient manner and giving a good return. §The Return On Equity of HINDALCO & NALCO is quite similar and satisfactory. Giving a return of more than 15% to shareholders, company is making a good eye catcher to the investors. CHAPTER – 12
GROWTH EQUILIBRIUM Growth to a company is like medicine is to patient – benefit up to a certain level, but dangerous and possible fatal when that level is exceeded. There is need for balance between profits, assets and growth. Any imbalance between these factors will impact strongly on cash flow. Given the opportunities and corresponding danger, particularly in time of high inflation, it is wise to consider whether there is some way in which we can specify for a company what level of growth it can safely absorb. T