Mahesh Final

A PROJECT REPORT ON “RATIO ANALYSIS, INVENTORY MANAGEMENT RECEIVABLES AND PAYABLES”

ESSAR STEEL LTD., HAZIRA, SURAT (GUJARAT)

UNDER THE GUIDANCE OF “DINESH MANGAL” (HEAD OF CORPORATE ACCOUNT)

PREPARED BY:MAHESH KUMAR JAJU INSTITUTE FOR TECHNOLOGY & MANAGEMENT (ITM). WARANGAL. ANDHRA PRADESH.

DECLARATION I, Mahesh Kumar Jaju pursuing PGDM in institute for technology and management, Warangal hereby declare that the project work entitled “RATIO ANALYSIS, INVENTORY MANAGEMENT, RECEIVABLES AND PAYABLES” in ESSAR STEEL HAZIRA, Surat in partial fulfillment of the requirements for the award of the degree of “Post graduate diploma in management” is a bonafied work done by me under the guidance of Dinesh Mangal (Head of corporate account). To the best of my knowledge, the work reported there is doesn’t form part of any thesis or work on the basis of which a degree or award was conferred on an earlier occasion.

(Mahesh Kumar Jaju)

ITM, Warangal

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CERTIFICATE This is to certified that Mr. Mahesh Kumar Jaju has satisfactory completed his project entitled “ RATIO ANALYSIS, INVENTORY MANAGEMENT, RECEIVABLE AND PAYABLES” . Based on the declaration made by the candidate and my association as a guide for carrying out this work, I recommend this project report for the evaluation as a part of PGDM programme.

Place: __________ Date: __________

(Name of guide)

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PREFACE India, our country has been developing since its liberalization and has never looked back. Now it is heading towards the no1 economy in the world. A few more days to be seen after which India will be counted in “Developed Country” rather than a Developing country. These all are possible due to improvement and development in infrastructure i.e. Industries. A strong management is mandatory to lead the firm to success. Management students handle 3 things: Man, Money and Market. Theoretically These are taught, but a practical experience is necessary. This project is purely a bridge which links between the theoretical concepts and its application in practical.

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ACKNOWLEDGEMENT “SUCCESS IS NOT A DESTINATION THAT YOU EVER REACH SUCCESS IS THE QUALITY OF YOUR JOURNEY”

I would like to express my sincere feeling to all those who have guided and taken kind interest to see that the project allotted to me is useful to business and industry. I have great pleasure in expressing my deep sense of gratitude to my institute, Institute for Technology and Management, Warangal and Essar steel ltd, surat for giving me an opportunity to carry out my summer training as a part of PGDM Program. I am hereby thankful to: Mr. Dinesh Mangal (head of corporate account) Major Ashok (vice president store) Mr. Manish kalantri (internal audit) Mr. T.L.Benarji for allowing me to join as a summer trainee for eight weeks in their esteemed organization, Essar steel ltd. I have tried my level best to make this summer training successful. I would like to thank all my professors and my project guide prof.Mr Ravinder Gudikandula for encouraging and guiding me in this project.

MAHESH KUMAR JAJU PGDM STUDENT ITM, WARANGAL (A.P)

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INDEX SL NO. 1 2 3 4 5 6 7 8 9 10 11 12

TOPIC Introduction Steel scenario Company profile Objective of study Research methodology Ratio analysis Comparison of ratio Inventory management Receivables management Payables management Limitations Bibliography

PAGE NO. 7 8 12 22 23 24 46 58 70 77 80 81

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Introduction After preparation of the financial statement one may be interested in knowing the position of an enterprise from different points of view. This can be done by analyzing the financial statements with the help of different tools of analysis such as ratio analysis, funds flow analysis, cash flow analysis, comparative statement analysis, etc. in this process, a meaningful relationship is established between two or more accounting figures for comparison. I have learn about the analysis of ratio analysis. Inventories are assets of the firm and require investment and hence involve the commitment of firm’s resources. The inventories need not be viewed as an idle asset rather these are an integral part of firm’s operations. But the question usually is as to how much inventories be maintained by a firm? If the inventories are too big, they become a strain on the resources, however, if they are too small, the firm may lose the sales. Therefore, the firm must have an optimum level of inventories. Inventory keeps changing, but the level may remain the same. The basic financial problem is to determine the proper level of investment in the inventories and to decide how much inventory must be acquired during each period to maintain that level. The receivables are assets as it represents a claim of the firm against its customers, expected to be realized in near future. Since a credit sale assumes a sizable proportion of total sales in any firm, the receivable management becomes an area of attention. Every firm has to set of credit terms and policies under which goods are sold on credit, and every policy has a cost and benefit associated with it. When we are managing a growing company, we have to watch expenses carefully. Don't be lulled into complacency by seeing sales increase. Any time and any place we see expenses growing faster than sales, examine your costs carefully to find places to cut or control them.

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Steel scenario

World Steel Industry – Top ELEVEN 2

8

European union 198 mt

9

5

Germany

Russia

45.8 mT

68.5 mT

1

Ukraine 37.1 mT

China 500.5 mT

3

11 Japan 118.70 mT

Italy 30.6 mT USA 91.4 mT

S. Korea 53.6mT

4

7 Brazil

6

33.7 mT

10

Global crude steel Production: 1233.1 million tonnes (mT)

Indian Potential for Steel Huge Potential for Demand • High GDP growth rate of 7% • 1 billion population • Low per capita steel consumption of 33kg (World av. 181 kg)

Skilled Human Resources

Growth factors for India

Abundant Iron Ore Reserves 23 billion tonnes

Government Policy • Stable currency • Easing of regulations • Strong Banking & judicial system

• Encouraging trade relations with ASEAN and other countries • Infrastructure building • Exploring new Energy resources

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National Steel Policy-2005 •

Approved by Government of India in September 2005 Milion Tonnes Steel Production

Imports

Exports

Consumption

2004-05

38

2

4

36

2019-20

110

6

26

90

Major Emphasis: •Critical Input Raw Materials: Iron Ore and Coking Coal •Infrastructure facilities like Roads, Railways and Ports. Focus: •Human Resources •Technology • Research and Development •Market outlook on prices of steel •Environmental Concerns.

Raw Materials Requirement Critical inputs for Steel Production –Iron Ore –Coking Coal Projected Requirement of Critical inputs

Million Tonnes

Iron Ore

Coking Coal

Non Coking Coal

2019-20

190

70

26

2004-05

54

27

13

New Additions through BF Route (60%), Electric Arc Furnace (33%), others (7%)

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Iron Ore - Reserve Availability Iron Ore Reserves

Million Tonnes

9000 8000 7000 6000 5000 3985 4000 3000 2000 1000 0

8897

4014

803

Jh Or ark iss a ha nd

  

3254

2651

Ch Ka Go ha rn ata an ttis ka ga rh

Ot he rs

Total Reserves – about 23 BT (P) Haemetite (11.43 BT) and Magnetite (10.68 BT). High grade haemetite (65%) only 14% of total reserves.

Iron Ore Scenario Present Capacity

(Million Tonnes)

ORGANISATION / STATE

PRODUCTION CAPACITY

NMDC Bailadila (11A,11B,11C), Donimalai, Kumarswamy

22

SAIL Kiriburu,Meghahatuburu,Bolani, Barsua,Rajhara,Dalli,Gua,Kalta

25

TISCO Noamundi,Joda

10

GOA

30

Karnataka,Orissa,Jharkhand

58

Total

145

10

Iron ore - Future Perspective New Capacities by 2011-12 Sl.No.

Area

Mine

Expected Capacity (mT/annum)

1.

Chhattisgarh

Bailadila-10&11A

7.0

2.

Chhattisgarh

Bailadila-11B

7.0

3.

Chhattisgarh

Rowghat

14.0

4.

Jharkhand

Chiria

10.0

5.

Orissa

Daitari

3.0

6.

Orissa

Sundergarh

10.0

7.

BellaryHospet

Kumarswami

7.0

8.

BellaryHospet

Ramandrug

10.0

9.

AndhraPradesh

Ongole Magnetite

3.0

Total

71 MT

Total expected capacity in 2011-12 =215MT(approx.)

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COMPANY PROFILE Essar Steel is a global producer of steel with a footprint covering India, Canada, USA, and Asia. It is a fully integrated flat carbon steel manufacturer-from iron ore to ready-to-market products. Its products find wide acceptance in highly discerning consumer sectors, such as automotive, white goods, construction, engineering and shipbuilding. It is India’s largest exporter of flat steel products and aims to reach 25 MTPA capacities. Essar is an integrated steel producer, with operations all along the value chain. Essar Steel produces some of the world's best steel at its state-of-the-art steel complex in Hazira, Gujarat. It is also India's largest exporter of flat products, sending half of its production abroad, mainly to the highly demanding markets of the West, and the growth markets of South East Asia and the Middle East. Essar ensures excellent customer service through a modern distribution network. No wonder we are India's largest exporter of flat products, selling almost onethird of our production to the highly demanding US and European markets, and to the growing markets of South East Asia and the Middle East. A number of major client companies have approved our steel for their use, including Caterpillar, Hyundai, Swaraj Mazda, the Konkan Railway and Maruti Suzuki. Essar Steel is among the 25 percentile of lowest cost producers world-wide and has acquired extensive quality accreditations. Our lean team gives us one of the highest productivities and lowest manpower costs among steel plants internationally. Bailadilla ore benefication plant At Bailadilla, where some of the world's richest and finest ore is available, Essar has set up a beneficiation plant of 8 million tonnes per annum (MTPA) capacity, which ensures the highest quality iron ore. The iron ore slurry is pumped through a 267 km. pipeline (the second 12

longest in the world) to the pellet plant, yielding advantages of quality, cost and real time inventory management. Visakhapatnam Plant

Pelletisation

The slurry is received at our Pellet plant at Visakhapatnam, which has a capacity of 8 MTPA, providing vital raw material for the steel plant at Hazira.

Hazira Steel Complex Our steel complex at Hazira, Gujarat, houses a 5.0 MTPA sponge iron plant, the world's largest gas-based HBI producer. The plant provides raw materials for our state-of-the-art 3.0 MTPA hot rolled coil (HRC) plant, the first and largest of India's new generation steel mills. This plant, fed with inputs from three electric arc furnaces and three casters, increasing its capacity to 4.6 MTPA. The complex's sophisticated infrastructure includes independent water supply and power, oxygen and lime plants, a township and a captive port capable of handling up to 8 MTPA of cargo with modern handling equipment like barges and floating cranes. Cold Rolling Complex At the other end of the value chain, the Company's downstream facilities include a 1.2 MTPA Cold Rolling Complex, adds further muscle to our steel making facilities. The complex comprises two pickling lines of 1.4 MTPA capacity, a reversing mill and a 1.2 MTPA Tandem Mill, two Galvanizing lines of 0.5 MTPA, Batch Annealing Furnace of 0.5 MTPA, a Skin Pass Mill of 1.0 MTPA , Cold Rolling 13

and Tandem mills and a Galvanizing plant. This enables Essar Steel to get into the genre of products that are tailor-made for automotive, white goods, shipbuilding, agriculture and construction industries - segments that were the exclusive domain of a few international manufacturers.

P.T. Essar Indonesia - Our cold rolling complex in Indonesia P T Essar is Indonesia's largest private sector flat products company, with a domestic market share of 35% and a history of process and product innovation. After a major expansion drive, its CR capacity has been enhanced to 400,000 TPA and its newly set up galvanising capacity is 1,50,000 TPA. Customer-driven excellence Customer delight drives everything we do at Essar Steel. To allow customers to consistently choose the best, we became the first Indian company to brand flat products, under the name '24-carat steel' with a full range including hot and cold rolled coils, galvanized sheets and plates. From order booking to delivery, our information technology systems are integrated between processes and with suppliers and customers. Our major customers can simply go online to place orders or check details like their order status, dispatch details, accounts and due payments. Our Systems Applications & Products (SAP R/3) installation is India's biggest and has been judged the bestimplemented Indian SAP site by SAP AG Germany. Product overview 1) Hot rolled products a) coils b) plates c) sheets d) Shot Blasted and Primed 14

2) Cold rolled products 3) Galvanized products Hot Rolled Coils Essar Steel is the largest steel producer in western India, with a current capacity of 4.6 MTPA at Hazira, Gujarat, and plans to increase this to 9 MTPA. The Indian operations also include an 8 MTPA beneficiation plant at Bailadilla, Chattisgarh, and an 8 MTPA pellet complex at Visakhapatnam. The complex also houses the steel plant. and the 1.4 MTPA cold rolling complex. The steel complex has a complete infrastructure setup, including a captive port, lime plant and oxygen plant. The dedicated infrastructure of Hazira Complex includes an independent water supply, power, lime & oxygen plant, a township and a captive port that can handle up to 6 MTPA of cargo, with modern handling equipment including barges and floating cranes. Cold Rolling Complex Essar Steel adds substantial value to its world-class hot rolled coils through a sophisticated Cold Rolling complex for further processing. The complex includes two flying shear lines of capacity 0.2 MTPA each, and two slitting lines of capacity 0.2 MTPA each, catering to the market of plates and sheets. Essar is also the only Indian steel maker with a 1.2 MTPA hot skin pass mill, from Clecim, the leading manufacturer from France. The mill allows it to enhance the steel's surface quality to match international standards. Its "service centre" concept, unique in India, reduces 15

multiple handling costs for customers because it allows Essar Steel's plates and sheets to be used directly by the end-user. Essar Steel produces highly customised value-added products catering to a variety of product segments and is India’s largest exporter of flat products, selling close to half of its production to the highly demanding US and European markets, and to the growing markets of South East Asia and the Middle East. The company’s products conform to quality specifications of international quality certification agencies, like ABS, API, TUV Rhine Land and Lloyd’s Register. Essar Steel is the first Indian steel company to receive an ISO 14001 certification for environment management practices. Essar Steel Algoma Inc. Established in 1901, Essar Steel Algoma Inc. is an integrated steel producer based in Sault Ste. Marie, Ontario, Canada. Formerly operating as Algoma Steel, it was acquired in June 2007 by Essar Steel Holdings Ltd (a wholly owned subsidiary of Essar Global Ltd). Capacity: Essar Steel Algoma’s current production capacity is 2.4 million tonnes per annum (MTPA). Work on expanding capacity to 4 MTPA is underway. Facilities: Essar Steel Algoma is a fully integrated steelmaking operation that features a flexible manufacturing process and produces a mix of hot and cold rolled sheet and plate. Algoma’s cornerstone asset, the Direct Strip Production Complex (DSPC) is the newest continuous, thin slab caster in North America, positioning Algoma as a leading supplier of high strength, light gauge steel. In addition, Algoma’s heat-treat plate facility provides a full range of quality steel grades for abrasion resistant, ballistic and other specialty plate applications. Other key mills at the plant include a slabcaster, a 106-inch strip mill (one of the widest in North America), a 166-inch plate mill, a cold mill, a just-in-time blanking facility and a welded shapes and profiles division.

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Strengths: High-end, custom-made products, as well as proximity to the demand-driven North American market and Fortune 500 customers make Essar Steel Algoma a significant element of Essar’s global expansion plans. History The Essar Group was founded in 1969 by brothers Shri Shashi Ruia and Shri Ravi Ruia. The Ruia family’s origins are in Rajasthan. Sometime in the 19th century, it moved to Mumbai and set up its own business. In 1956, Shri Nandkishore Ruia, father to Shri Shashi and Ravi Ruia, moved to Chennai, capital of the south Indian state of Tamil Nadu, to begin independent business activities. He mentored his two sons in the intricacies of business. When Shri Nandkishore Ruia passed away in 1969, the brothers laid the foundation of the Group. The Essar Group began its operations with the construction of an outer breakwater in Chennai port. It quickly moved to capitalise on every emerging business opportunity, becoming India’s first private company to buy a tanker in 1976. The Group also invested in a diverse shipping fleet and oil rigs, when the Government of India opened up the shipping and drilling businesses to private players in the 1980s. Then, in the 1990s, Essar began its steelmaking business by setting up India’s first sponge iron plant in Hazira, a coastal town in the western Indian state of Gujarat. The Group went on to build a pellet plant in Visakhapatnam and eventually a fully integrated steel plant in Hazira. Through the 1990s, with the gradual liberalisation of the Indian economy, Essar seized every opportunity that came its way. It diversified its shipping fleet, started oil & gas exploration and production, laid the foundation of its oil refinery at Vadinar, Gujarat, and set up a power plant near the steel complex in Hazira. The Construction business helped the Group build most of its business assets. Essar also entered the GSM telephony business, establishing India’s first mobile phone service in Delhi (branded Essar Cellphone) with Swiss PTT as the joint venture partner. The 21st century for the Essar Group has been all about consolidating and growing the businesses, with M&As, new revenue streams and strategic geographical expansion.

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Vision We will be a respected global entrepreneur, through the power of Positive Action.

Mission We are committed to innovative growth, through our personal passion, reinforced by a professional mindset, creating value for all those we touch.

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Management Team Shashi Ruia, chairman, essar global ltd, is a first generation entrepreneur industrialist. Mr ruia began his career in the family business in1965 under the guidance of his father, the late nand kishore ruia, Along with his brother ravi . Mr ruia is on several international bodies and industry associations. He was on the managing committee of federation of Indian chambers of commerce and industry (FICCI), an apex body of India’s trade and business associations. He has also been the chairman of the prestigious indo-us joint business council and is a former president of Indian national shi powners association (INSA). Ravi Ruia, Vice Chairman, Essar Global Limited, belongs to the generation of industrialists, who have played a significant role in leading India’s industrial renaissance. An engineer by training, his entrepreneurial abilities have enabled the Essar Group to become one of theleading names in global industry, Essar employs more than 50,000 people across offices in Asia, Africa, Europe and the Americas. Mr Ravi Ruia has been the mastermind behind the Group’s globalisation plans, including new ventures in Trinidad & Tobago, Vietnam and the Middle East, as well as the recent acquisitions of Algoma Steel (now called Essar Steel Algoma), Canada, and Minnesota Steel, USA (now called Essar Steel Minnesota).

Prashant Ruia is the Promoter Director and Group Chief Executive of Essar Global Limited. He has been involved with the Group’s operation and management since 1985.Prashant Ruia is on the Board of the International Iron and Steel Institute. He is also a member of Confederation Indian Industry (CII) National Committee on Steel & Non Ferrous Metals and Chairman of CII National Committee on Hydro carbon and Petroleum. Mr. Ruia is also on the Board of Trade of the Ministry of Commerce and Industry, 19

Government of India. He is also a member of the Young Presidents’ Organisation, Mumbai Chapter. Anshuman Ruia is a Director on the Board of major companies of Essar Global Limited. Essar Global Limited is a diversified business corporation operating in the manufacturing and services sectors of Steel, Energy, Power, Communications,Shi pping Ports & Logistics, Construction and Mining & Minerals. Essar has an asset base of USD 14.5 billion and employs more than 50,000 people across offices in Asia, Africa, Europe and the Americas. He currently oversees Essar’s Shipping Ports & Logistics, Telecom & BPO,and Power businesses. He is responsible for the expansion and diversification of the Power business into new, renewable energy sources and its entry into the transmission and distribution segment. Mr Ruia is also involved in new business ventures of the Group in India and overseas. Scion of the Ruia family, Smiti Kanodia, promoter director, received her bachelor’s degree in Finance & Marketing from New York University’s Stern School of Business. Ms Kanodia worked as a Mergers & Acquisitions analyst in the telecommunications sector at Lehman Brothers in New York, after which she pursued a postgraduate degree in publishing at the London College of Printing. Ms Kanodia is involved in providing strategic direction to HR branding and communication initiatives at the Essar Group. Rewant Ruia is the youngest member of the family of the Promoter Directors of Essar Global Limited. He began his career in the Essar Group with a short training stint in the Steel and Oil businesses. His responsibilities include managing the aviation division and protocol functions for the Group. He is part of the management think tank for new business development opportunities in Steel, Petroleum and Petrochemicals, and the pursuit of global opportunities in all the businesses.

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Mr Ruia completed his schooling from the Hackley School, New York, in 1999,and holds a degree in Business Management from Bentley College, Boston, USA. He has a keen interest in music and sports.

Management Team - Steel Business Mr. J Mehra Mr. Vikram Amin Mr. Alain Davezac Mr. Dilip Oommen Mr. Armando Plastino Mr. K B Trivedi Mr. V Madhusudan Mr. R K Zaroo Mr. M K Sampath Mr. H S Sethi Mr. Mahadev Iyer Mr. Kalyan Ghosh Mr. Praneet Mehrish Mr. Anil Agarwal Mr. P C Panda Mr. Suresh Tanwar Mr. Suneel Aradhye

Chief Executive Officer – Steel Business Director, Sales & Marketing EVP - Strategy & Business Development Chief Executive Officer - Essar Steel (India) Chief Executive Officer - Essar Steel Algoma President Director & CEO - PT Essar Indonesia President & CEO - Essar Steel Minnesota Director – Project Development Chief Executive Officer - Pellet Projects (India) Director – Projects (Orissa) Chief Financial Officer Sr. Vice President & Head – Supply Chain Management Sr. Vice President & Head – Human Resources Sr. Vice President & Head - Procurement Sr. Vice President & Head - Legal Vice President & Head – Health Safety & Environment Chief Information Officer

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OBJECTIVES OF THE STUDY

 To study the ratio with other steel companies.  To study the ways of monitoring receivables and analyze the trend of debtors.

 To study the spare management.  To study the payable management.

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RESEARCH METHODOLOGY Data collection – Data was collected through one source i.e. Secondary sources. It included: 1. Company’s Annual report. 2. Past records maintained by company. 3. Interaction with personnel.

DATA ANALYSIS:1. Tabulation. 2. Graphs. 3. Diagrams. 4. Ratio analysis.

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PROJECT REPORT ON RATIO ANALYSIS TYPE OF RATIO 1) 2) 3) 4)

Profitability Ratio Performance Ratio Liquidity Ratio Solvency Ratio

1) Profitability Ratio a) Gross profit ratio b) Net profit ratio c) Operating profit ratio d) Operating ratio e) Return on capital employed f) Return on equity g) Earnings per share

2) Performance Ratio a) Capital turnover ratio b) Fixed asset turnover ratio c) working capital turnover ratio d) stock turnover ratio e) debtors turnover ratio f) debt collection period

3) Liquidity Ratio a) Current ratio b) Liquid ratio

4) Solvency ratio a) Debt equity ratio b) Debt to total fund ratio c) Fixed asset ratio d) Proprietary ratio e) Interest coverage ratio

1) Profitability Ratio a) Gross profit ratio-- Gross Profit Ratio shows the relationship between Gross Profit of the concern and its Net Sales. Gross Profit Ratio can be calculated in the following manner:

Gross profit Gross profit ratio = ------------------ * 100 Net sale Where Gross Profit = Net Sales – Cost of Goods Sold Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock And Net Sales = Total Sales – Sales Return Objective and Significance: Gross Profit Ratio provides guidelines to the concern whether it is earning sufficient profit to cover administration and marketing expenses and is able to cover its fixed expenses. The gross profit ratio of current year is compared to previous years’ ratios or it is compared with the ratios of the other concerns. The minor change in the ratio 24

from year to year may be ignored but in case there is big change, it must be investigated. This investigation will be helpful to know about any departure from the standard mark-up and would indicate losses on account of theft, damage, bad stock system, bad sales policies and other such reasons. It gives a good indication of financial health. Without an adequate gross margin, a company will be unable to pay its operating and other expenses. Firm that have a high gross profit margin are more liquid and thus have more cash flow to spend on research and development expenses. 07-08 Gross profit = Net income from operation -- 10743.32 Material consumed

06-07 8194.35

--

-6750.84

-5747.74

Increase/decrease in stock --

-168.72

+872.66

Manufacturing & asset main--

-859.39

-746.04

2964.37

2573.23

Gross profit

=

2573.23

2964.37

Gross profit (06-07) = -------------- * 100 = 31.40%

(07-08) = ------------- * 100 = 27.59%

8194.35

10743.32

Gross profit ratio analysis – gross profit for the year 07-08 is more as compare to 06-07. Even net turnover of 07-08 is more as compare to 06-07. But gross profit to turnover ratio of 07-08 is decline which is not good sign for the company & more over gross profit should not be much fluctuates. It shows 3.81% point difference. It may be because of recession, company may reduce the prices of their product in order to increase the demand of their product. As a result turnover is increases but the margin which the company was earlier getting it is reduced. Suggestion for improvement – gross profit can be increase if the company efficiently utilize its resources and try to produce better quality of product and maximize its output with low input. Because major direct expenditure is on material so that must be efficiently utilize. Company should give more emphasis on enhancing its productivity and even try to get better return on that.

b) Net profit ratio-- Net Profit Ratio shows the relationship between Net Profit of the concern and Its Net Sales. Net profit Net profit ratio = --------------- * 100 Net sales 25

Where Net Profit = Gross Profit – operating expenses – Non Operating Expenses + Non Operating Incomes. And Net Sales = Total Sales – Sales Return Objective and Significance: In order to work out overall efficiency of the concern Net Profit ratio is calculated. This ratio is helpful to determine the operational ability of the concern. While comparing the ratio to previous years’ ratios, the increment shows the efficiency of the concern. Net profit includes all the factors that influence profitability whether under management control or not. The higher the ratio, the more effective a company is at cost control. 436.49

428.62

Net profit ratio (06-07) = -------------- * 100 = 5.33%

(07-08) = -------------* 100 = 3.99%

8194.35

10743.32

Net profit ratio analysis -- Net profit for the year 07-08 is less as compare to 06-07. But turnover is just the reverse. So decrease in net profit ratio indicates that the efficiency of the company decrease. As the ratio decrease the less effective a company is at cost control. Suggestion for improvement – the company have to put major control on all expenses. Reductions in expenses result in more profit. As a result the net profit ratio shows increment.

c) Operating profit ratio-- Operating Profit means profit earned by the concern from its business operation and not from the other sources. While calculating the net profit of the concern all incomes either they are not part of the business operation like Rent from tenants, Interest on Investment etc. are added and all non-operating expenses are deducted. So, while calculating operating profits these all are ignored and the concern comes to know about its business income from its business operations.

Operating profit Operating profit ratio = ----------------------------- * 100 Net sales Where Operating Profit = Gross Profit – Operating Expenses or Operating Profit = Net Profit + Non Operating Expenses – Non Operating Incomes and Net Sales = Total Sales – Sales Return Objective and Significance: Operating Profit Ratio indicates the earning capacity of the concern on the basis of its business operations and not from earning from the other sources. It shows whether the business is able to stand in the market or not. Operating profit ratio measure a company’s operating efficiency with its successful cost control. The higher the 26

ratio, the better the company is. A higher operating profit ratio means that a company has lower fixed cost and a better gross margin or increasing sales faster than costs.

07-08

06-07

2964.37

2573.23

Personnel expenses--

-225.80

-152.80

Administrative expen--

-215.98

-146.14

Selling & distribution-- -214.50

-338.26

2308.09

1936.03

Operating profit = Gross profit --

1936.03 Operating profit ratio (06-07) = ------------------- * 100 = 23.63% 8194.35 2308.09 (07-08) = ------------------* 100 = 21.48% 10743.32 Operating profit ratio analysis – operating profit for the year 07-08 is more as compare to 06-07 but operating profit ratio is decrease by 2.15% point which is not good sign for the company. The higher the ratio, the better the company is. Here the net turnover is increase by 31.11% but the operating profit is increase by 19.22% so that why operating profit ratio is decrease. Suggestion for improvement – the company has to control its operating expenses. Because less operating expenses will result in more net profit and more net profit will create wealth of company and its shareholder’s. A higher operating profit put the company to stand in the market. This ratio can be improved by effective utilization of asset that is investment of company.

d) Operating cost ratio- Operating Ratio matches the operating cost to the net sales of the business.

Operating cost Operating cost ratio = -------------------- * 100 Net sales 27

Where Operating Cost = Cost of goods sold + Operating Expenses Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock Operating Expenses = Selling and Distribution Expenses, Office and Administration Expenses, Repair and Maintenance.

Objective and Significance: Operating Ratio is calculated in order to calculate the operating efficiency of the concern. As this ratio indicates about the percentage of operating cost to the net sales, so it is better for a concern to have this ratio in less percentage. The less percentage of cost means higher margin to earn profit. Operating cost ratios are often used by production managers to monitor trends and identify problems. If a significant change occurs, the problem must be identified as either internal (such as operations) or external (such as economic conditions). Since investors and other outsiders don't have access to operating information, operating ratios are rarely used outside the organization.

06-07

07-08

8194.35

10743.32

-2573.23

-2964.37

5621.12

7778.95

Operating expenses = personnel expenses--

152.80

225.80

Administrative exp--

146.14

215.98

Selling & distribution -- 338.26

214.50

637.20

656.28

Cost of goods sold = Net sale -Gross profit--

Operating cost = cost of goods sold + operating expenses Operating cost (06-07) = 5621.12 + 637.20 = 6258.32 Operating cost (07-08) = 7778.95 + 656.28 = 8435.23 6258.32 Operating cost ratio (06-07) = ------------------ * 100 = 76.37% 8194.35 8435.23 Operating cost ratio (07-08) = ----------------- * 100 = 78.52% 10743.32 28

Operating cost ratio analysis -- Operating ratio for the year 07-08 is higher than 06-07. Decrease in operating cost ratio represents good sign for the company because the less percentage of cost means higher margin to earn profit. But here in the year 07-08 operating expenses is increase more than the turnover as a result the operating cost ratio increases. Suggestion for improvement – The Company has to put close look on all operational expenses and try to control all these expenses where ever it is possible. A continuous increase in operating cost ratio is not good sign for the company as it is going to reduce it operating profit and net profit.

e) Return on Investment or Return on Capital Employed: This ratio shows the relationship between the profit earned before interest and tax and the capital employed to earn such profit. Net profit before interest, tax & dividend Return on capital employed = ---------------------------------------------------- * 100 Capital employed Where Capital Employed = Share Capital (Equity + Preference) + Reserves and Surplus + Long-term Loans – Fictitious Assets or Capital Employed = Fixed Assets + Current Assets – Current Liabilities Objective and Significance: Return on capital employed measures the profit, which a firm earns on investing a unit of capital. The profit being the net result of all operations, the return on capital expresses all efficiencies and inefficiencies of a business. This ratio has a great importance to the shareholders and investors and also to management. To shareholders it indicates how much their capital is earning and to the management as to how efficiently it has been working. This ratio influences the market price of the shares. The higher the ratio, the better it is. 07-08 Capital employed = share capital (equity + preference) -- 1184.08

06-07 1387.00

Reserve and surplus

-- +3447.25

+3080.95

Secured loan

-- +5383.11

+6533.32

Long term advance

--

Net profit before interest & tax --

+144.56

+166.42

10159

11167.69

1557.78

1324.21

29

1324.21 Return on capital employed (06-07) = ----------------- * 100 = 11.86% 11167.69 1557.78 Return on capital employed (07-08) = ------------ * 100 = 15.33% 10159 Return on capital employed analysis – Return on capital employed for the year 07-08 is more than 06-07. Increase in return on capital employed is good sign for the investors and to the management. To shareholders it indicates how much their capital is earning and to the management as to how efficiently it has been working. Suggestion for further improvement -- The Company has to increase its net profit and company has to reduce borrowing by paying through the internal accruals.

f) Return on Equity: Return on equity is also known as return on shareholders’ investment. The ratio establishes relationship between profit available to equity shareholders with equity shareholders’ funds.

Net profit after interest, tax & preference dividend Return on equity = ----------------------------------------------------------------------------- * 100 Equity share holder’s funds Where Equity Shareholders’ Funds = Equity Share Capital + Reserves and Surplus – Fictitious Assets Objective and Significance:    

Return on Equity judges the profitability from the point of view of equity shareholders. This ratio has great interest to equity shareholders. The return on equity measures the profitability of equity funds invested in the firm. The investors favor the company with higher ROE. 07-08

06-07

Equity share holder’s fund = equity share capital --

1140.48

1140.48

Reserve & surplus --

+3447.25

+3080.95

4587.73

4221.43 30

Net profit after interest, tax & preference dividend =

423.28

431.15

431.15 Return on equity (06-07) = ------------- * 100 = 10.21% 4221.43 423.28 Return on equity (07-08) = ------------- * 100 = 9.23% 4587.73 Return on equity analysis – return on equity for the year 07-08 is less as compare to 06-07. It is less by .98% point. ROE is referred to as Stockholder's return on investment, it tells the rate that shareholders are earning on their shares. So higher the rate represent the better return on investment which result in increase the shareholder’s wealth. Suggestion for improvement -- If new shares are issued then use the weighted average of the number of shares throughout the year. The company should try to increase net profit.

g) Earnings per Share: Earnings per share is calculated by dividing the net profit (after interest, tax and preference dividend) by the number of equity shares.

Net profit after interest, tax & preference dividend Earnings per share = ------------------------------------------------------------------No. of equity share Objective and Significance: Earning per share helps in determining the market price of the equity share of the company. It also helps to know whether the company is able to use its equity share capital effectively with compare to other companies. It also tells about the capacity of the company to pay dividends to its equity shareholders. The higher the earnings per share, the higher each share should be worth. The earnings per share growth rate indicate the amount of growth for investors. 07-08 No. of equity share --

1,139,810,888

Net profit after interest, tax & p.dividend-- Rs 4232800000

06-07 985,041,908 Rs 4,311,500,000

31

4,311,500,000 Earnings per share (06-07) = ------------------- = Rs 4.38 985,041,908

4,232,800,000 Earnings per share (07-08) = --------------------- = Rs 3.71 1,139,810,888 Earnings per share analysis -- earnings per share (EPS) is one of the most important measure of a company’s strength. Obviously, the higher this number, the more money the company is making. But in the year 07-08 earnings per share is decrease by .67 paisa. This is not good sign for the company even for shareholders. Suggestion for improvement – earning per share can be improve by increasing the net profit.

2) Performance Ratio a) Capital turnover ratio-- Capital turnover ratio establishes a relationship between net sales and capital employed. The ratio indicates the times by which the capital employed is used to generate sales.

Net sales Capital turnover ratio = -----------------------------Capital employed Where Net Sales = Sales – Sales Return Capital Employed = Share Capital (Equity + Preference) + Reserves and Surplus + Longterm Loans – Fictitious Assets. Objective and Significance: The objective of capital turnover ratio is to calculate how efficiently the utilization of assets in the business is being used and how many times the capital is turned into sales. Higher the ratio, better the efficiency of utilization of capital and it would lead to higher profitability.

32

Net sales = sales -Excise duty --

Capital employed --

07-08

06-07

11910.66

9000.46

-1167.34

-806.11

10743.32

8194.35

10159.00

11167.69

8194.35

10743.32

Capital turnover ratio (06-07) = -------------- = .73

(07-08) = --------------- = 1.06

11167.69

10159.00

Capital turnover ratio analysis – capital turnover ratio for the year 07-08 is more as compare to 06-07 which is good sign for the company. As in the 07-08, 1.06 times the capital is turn into sales. Higher the ratio, better the efficiency of utilization of capital and it would lead to higher profitability. Suggestion for improvement – capital turnover ratio can be increase if we increase the turnover by utilizing the best of available capital. We have to maximize the no. if times.

b) Fixed Assets Turnover Ratio: Fixed assets turnover ratio establishes a relationship between net sales and net fixed assets. This ratio indicates how well the fixed assets are being utilized.

Net sales Fixed asset turnover ratio = ----------------------Net fixed asset Objective and Significance: This ratio expresses the number to times the fixed assets are being turned over in a stated period. It measures the efficiency with which fixed assets are employed. A high ratio means a high rate of efficiency of utilization of fixed asset and low ratio means improper use of the assets.

Net fixed asset = Net sales =

07-08

06-07

9849.01

9997.37

10743.32

8194.35

33

8194.35

10743.32

Fixed asset turnover ratio (06-07) = -------------- = .82

(07-08) = -------------- = 1.09

9997.37

9849.01

Fixed asset turnover ratio analysis – fixed asset turnover ratio for the year 07-08 is more as compare to 06-07 which is good sign for the company. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. Suggestion for improvement – fixed asset should be efficiently utilized up to its maximum capacity. Idle fixed asset should be dispose so that the amount which is realize from that can be used in the operation.

c) Working Capital Turnover Ratio: Working capital turnover ratio establishes a relationship between net sales and working capital. This ratio measures the efficiency of utilization of working capital. Net sales Working capital turnover ratio = --------------------------Net working capital Where Net Working Capital = Current Assets – Current Liabilities Objective and Significance: This ratio indicates the number of times the utilization of working capital in the process of doing business. The higher is the ratio, the lower is the investment in working capital and the greater are the profits. However, a very high turnover indicates a sign of over-trading and puts the firm in financial difficulties. The working capital turnover ratio measures the efficiency with which the working capital is being used by a firm. A high ratio indicates efficient utilization of working capital. A low working capital turnover ratio indicates that the working capital has not been used efficiently. 07-08

06-07

557.98

908.58

= 10743.32

8194.35

Net working capital = Net sales

8194.35 Working capital turnover ratio (06-07) = ------------- = 9.02 908.58

10743.32 (07-08) = ---------------- = 19.25 557.98 34

Working capital turnover ratio analysis – working capital turnover ratio for the year 07-08 is more as compare to 06-07. This shows that the working capital is efficiently utilized. It is increase by 10.23% point. Suggestion for improvement – working capital is based on various aspects like debtor’s collection should be favorable and inventory turnover ratio, this shows that more frequently the stocks are sold.

d) Stock Turnover Ratio: Stock turnover ratio is a ratio between cost of goods sold and average stock. This ratio is also known as stock velocity or inventory turnover ratio. Cost of goods sold Stock turnover ratio = -------------------------------Average stock Where Average Stock = [Opening Stock + Closing Stock]/2 Cost of Goods Sold = Net sales – gross profit Objective and Significance: Stock is a most important component of working capital. This ratio provides guidelines to the management while framing stock policy. It measures how fast the stock is moving through the firm and generating sales. It helps to maintain a proper amount of stock to fulfill the requirements of the concern. A proper inventory turnover makes the business to earn a reasonable margin of profit.

06-07 Cost of goods sold = Net sale --

07-08

8194.35

10743.32

Gross profit-- -2573.23

-2964.37

5621.12

7778.95

Average stock (06-07) = [341.78+528.84+332.16+1204.82]/2 = 1203.80 Average stock (07-08) = [528.84+295.74+1204.82+1036.10]/2 = 1532.75

5621.12 Stock turnover ratio (06-07) = -------------- = 4.67 1203.80

7778.95 (07-08) = --------------- = 5.075 1532.75 35

Stock turnover ratio analysis – stock turnover ratio for the year 07-08 is more than 06-07. As it is increase it is good sign for the company. This shows that more frequently the stocks are sold; the lesser amount of money is required to finance the inventory. Suggestion for improvement -- A low inventory turnover ratio indicates an inefficient management of inventory. A low inventory turnover implies over-investment in inventories, dull business, poor quality of goods, stock accumulation, accumulation of obsolete and slow moving goods and low profits as compared to total investment. So in order to increase this ratio company has to improve the entire thing in positive way. The inventory turnover ratio is also an index of profitability, where a high ratio signifies more profit; a low ratio signifies low profit.

E) Debtors’ Turnover Ratio: Debtors turnover ratio indicates the relation between net credit sales and average accounts receivables of the year. Net credit sales Debtors turnover ratio = ---------------------------------------------Average account receivables Where Average Accounts Receivables = [Opening Debtors and B/R + Closing Debtors and B/R]/2 Credit Sales = Total Sales – Cash Sales Objective and Significance: This ratio indicates the efficiency of the concern to collect the amount due from debtors. It determines the efficiency with which the trade debtors are managed. Higher the ratio, better it is as it proves that the debts are being collected very quickly. Debtors’ turnover ratio indicates the number of times the debtors are turned over a year. The higher the value of debtors’ turnover the more efficient is the management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. 06-07

07-08

Net credit sales =

8194.35

10743.32

Average accounts receivables =

543.50

453.62

8194.35 Debtors turnover ratio (06-07) = ------------- = 15.077 543.50

10743.32 (07-08) = ---------------- = 23.68 453.62

Debtor’s turnover ratio analysis – Debtors’ turnover ratio for the year 07-08 is more than 06-07 which is good sign for company. For the year 07-08 the debtors are efficiently manage as compare to 06-07. As increase in ratio shows that debtors are more liquid. Even we can say that liquidity of the debtors is increase. 36

f) Debt Collection Period: Debt collection period is the period over which the debtors are collected on an average basis. It indicates the rapidity or slowness with which the money is collected from debtors.

365 days Debt collection period = ---------------------------------Debtor’s turnover ratio Objective and Significance: This ratio measures the quality of debtors. This ratio indicates how quickly and efficiently the debts are collected. The shorter the period the better it is and longer the period more the chances of bad debts. Although no standard period is prescribed anywhere, it depends on the nature of the industry.

Debtors turnover ratio =

06-07

07-08

15.077

23.68

365

365

Debt collection period (06-07) = ----------- = 24 days

(07-08) = ----------- = 16days

15.077

23.68

Debt collection period analysis – debt collection period for the year 07-08 is less as compare to 06-07. This is quite good for the company. Company efficiency is increase in collecting the debts. A short collection period implies prompt payment by debtors. As per the ratio the no. of days is reduce by 8 days. Suggestion for improvement – the company has to sale the goods to those debtors who are making the payment very frequently.

3) Liquidity Ratio a) Current Ratio -- Current ratio is calculated in order to work out firm’s ability to pay off its short-term liabilities. This ratio is also called working capital ratio. This ratio explains the relationship between current assets and current liabilities of a business. Where current assets are those assets which are either in the form of cash or easily convertible into cash within a year. Similarly, liabilities, which are to be paid within an accounting year, are called current liabilities. Current asset Current ratio = ----------------------Current liability 37

Current Assets include Cash in hand, Cash at Bank, Sundry Debtors, Bills Receivable, Stock of Goods, Short-term Investments, Prepaid Expenses, Accrued Incomes etc. Current Liabilities include Sundry Creditors, Bills Payable, Bank Overdraft, Outstanding Expenses etc. Objective and Significance: Current ratio shows the short-term financial position of the business. This ratio measures the ability of the business to pay its current liabilities. The ideal current ratio is supposed to be 2:1 i.e. current assets must be twice the current liabilities. In case, this ratio is less than 2:1, the short-term financial position is not supposed to be very sound and in case, it is more than 2:1, it indicates idleness of working capital. Firms having less than 2 : 1 ratio may be having a better liquidity than even firms having more than 2 : 1 ratio. This is because of the reason that current ratio measures the quantity of the current assets and not the quality of the current assets. If a firm's current assets include debtors which are not recoverable or stocks which are slow-moving or obsolete, the current ratio may be high but it does not represent a good liquidity position. 06-07

07-08

Current asset =

4397.41

3935.19

Current liability =

3488.83

3377.21

4397.41 Current ratio (06-07) = -------------- = 1.26 3488.83

3935.19 (07-08) = --------------- = 1.165 3377.21

Current ratio analysis – current ratio for the year 07-08 is less as compare to 06-07 this is because current asset is decrease more than current liabilities. A generally acceptable current ratio is 2 to 1. But whether or not a specific ratio is satisfactory depends on the nature of the business and the characteristics of its current assets and liabilities. The minimum acceptable current ratio is obviously 1:1. Suggestion for improvement –    

Paying some debts. Increasing your current assets from loans or other borrowings with a maturity of more than one year. Converting non-current assets into current assets. Increasing your current assets from new equity contributions.

38

Limitation of current asset ratio – 1. It is crude ratio because it measures only the quantity and not the quality of the current assets. 2. Even if the ratio is favorable, the firm may be in financial trouble, because of more stock and work in process which is not easily convertible into cash, and, therefore firm may have less cash to pay off current liabilities. 3. Valuation of current assets and window dressing is another problem. An equal increase in both current assets and current liabilities would decrease the ratio and similarly equal decrease in current assets and current liabilities would increase current ratio.

b) Liquid Ratio: Liquid ratio shows short-term solvency of a business in a true manner. It is also called acid-test ratio and quick ratio. It is calculated in order to know how quickly current liabilities can be paid with the help of quick assets. Quick assets mean those assets, which are quickly convertible into cash. Liquid asset Liquid ratio = ------------------------Current liability Where liquid assets include Cash in hand, Cash at Bank, Sundry Debtors, Bills Receivable, Short-term Investments etc. In other words, all current assets are liquid assets except stock and prepaid expenses. Current liabilities include Sundry Creditors, Bills Payable, Bank Overdraft, Outstanding Expenses etc.

Objective and Significance: Liquid ratio is calculated to work out the liquidity of a business. This ratio measures the ability of the business to pay its current liabilities in a real way. The ideal liquid ratio is supposed to be 1:1 i.e. liquid assets must be equal to the current liabilities. In case, this ratio is less than 1:1, it shows a very weak short-term financial position and in case, it is more than 1:1, it shows a better short-term financial position.

Liquid asset (06-07) = current asset- inventory- prepaid expenses 4397.41- 2328.77 = 2068.64 Liquid asset (07-08) = 3935.19- 2108.11 = 1827.08 (06-07)

(07-08)

Current liability = 3488.83

3377.21 39

2068.64

1827.08

Liquid ratio (06-07) = --------------- = .593

(07-08) = ---------------- = .54

3488.83

3377.21

Liquid ratio analysis – liquid ratio for the year 07-08 is less as compare to 06-07 even liquid ratio of 06-07 is not good. It should be 1or more than that and for the year 07-08 it is further less so financial position is not good. The liquid ratio is decrease because liquid asset is decrease more than current liabilities. Current asset is decrease by 241.56 crores where as current liability is decrease by 111.62 crores. Suggestion for improvement – As 1:1 standard should not be used blindly. A liquid ratio of 1:1 does not necEssarily mean satisfactory liquidity position of the firm if all the debtors cannot be realized and cash is needed immediately to meet the current obligations. A firm having a high liquidity ratio may not have a satisfactory liquidity position if it has slowpaying debtors. On the other hand, a firm having a low liquid ratio may have a good liquidity position if it has fast moving inventories.

4) Solvency ratio— a) Debt equity ratio-- Debt equity ratio shows the relationship between long-term debts and shareholders funds’. It is also known as ‘External-Internal’ equity ratio.

Debt Debt equity ratio = ---------------Equity Where Debt includes Debentures, Mortgage Loan, Bank Loan, Public Deposits, Loan from financial institution etc. Equity (Shareholders’ Funds) = Share Capital (Equity + Preference) + Reserves and Surplus – Fictitious Assets Objective and Significance: This ratio is a measure of owner’s stock in the business. Proprietors are always keen to have more funds from borrowings because: (i) Their stake in the business is reduced and subsequently their risk too (ii) Interest on loans or borrowings is a deductible expenditure while computing taxable profits. Dividend on shares is not so allowed by Income Tax Authorities. The owners want to do the business with maximum of outsider's funds in order to take lesser risk of their investment and to increase their earnings (per share) by paying a lower fixed rate of interest to outsiders. The outsider creditors) on the other hand, want that shareholders (owners) should invest and risk their share of proportionate investments. A ratio of 2:1 is 40

usually considered to be satisfactory ratio although there cannot be rule of thumb or standard norm for all types of businesses. 06-07 Debt -- secured loan

–

07-08

6533.32

5383.11

Long term advance --

+166.42

+144.56

Unsecured loan --

+409.92

+733.47

7109.66

6261.14

Equity share holder’s fund = equity share capital --

1387.00

1184.08

Reserve & surplus --

+3080.95

+3447.25

4467.95

4631.33

7109.66 Debt equity ratio (06-07) = ------------- = 1.59

6261.14 (07-08) = --------------- = 1.35

4467.95

4631.33

Debt equity ratio analysis – Debt equity ratio of both the year is not satisfactory because standard debt equity ratio is 2:1. Here it gives clear picture that company’s share capital is decreasing where as reserve and surplus is increasing. It means that reserve & surplus is increasing at a high rate as compare to the rate at which share capital is decreasing so that’s why the overall figure in the year 07-08 is increasing. Suggestion for improvement – company should raise its fund by the combination of both equity and debt and try to maintain 2:1 ratio that is debt equity ratio.

b) Debt to Total Funds Ratio: This ratio gives same indication as the debt-equity ratio as this is a variation of debt-equity ratio. This ratio is also known as solvency ratio. This is a ratio between long-term debt and total long-term funds. Debt Debt to total fund ratio = -------------------Total fund Where Debt (long term loans) includes Debentures, Mortgage Loan, Bank Loan, Public Deposits, Loan from financial institution etc. 41

Total Funds = Equity + Debt Equity (Shareholders’ Funds) = Share Capital (Equity + Preference) + Reserves and Surplus – Fictitious Assets Objective and Significance: Debt to Total Funds Ratios shows the proportion of long-term funds, which have been raised by way of loans. This ratio measures the long-term financial position and soundness of long-term financial policies. In India debt to total funds ratio of 2:3 or 0.67 is considered satisfactory. A higher proportion is not considered good and treated an indicator of risky long-term financial position of the business. It indicates that the business depends too much upon outsiders’ loans. 06-07

07-08

Equity share holder’s fund = equity share capital --

1387.00

1184.08

Reserve & surplus --

+3080.95

+3447.25

4467.95

4631.33

6533.32

5383.11

+166.42

+144.56

6699.74

5527.67

Debt (long term) = secured loan

–

Long term advance --

Total fund= equity + debt --

11167.69

6699.74 Debt to total fund ratio (06-07) = --------------- = .60 11167.69

10159

5527.67 (07-08) = -------------- = .54 10159

Debt to total fund ratio analysis – debt to total fund ratio is for the both year is quite satisfactory. A higher proportion is not considered good and treated an indicator of risky long-term financial position of the business. Suggestion for improvement – as company current debt to total fund ratio is satisfactory so in order to maintain this company has to maintain a proper balance between debt and equity.

c) Fixed Assets Ratio: Fixed Assets Ratio establishes the relationship of Fixed Assets to Long-term Funds.

42

Long term funds Fixed asset ratio = --------------------------Net fixed asset Where Long-term Funds = Share Capital (Equity + Preference) + Reserves and Surplus + Long-term Loans – Fictitious Assets Net Fixed Assets means Fixed Assets at cost less depreciation. It will also include trade investments. Objective and Significance: This ratio indicates as to what extent fixed assets are financed out of long-term funds. It is well established that fixed assets should be financed only out of long-term funds. This ratio workout the proportion of investment of funds from the point of view of long-term financial soundness. This ratio should be equal to 1. If the ratio is less than 1, it means the firm has adopted the impudent policy of using short-term funds for acquiring fixed assets. On the other hand, a very high ratio would indicate that long-term funds are being used for short-term purposes, i.e. for financing working capital. 06-07 Long term funds = share capital --

07-08

1387.00

1184.08

Reserve & surplus -- +3080.95

+3447.25

Long term loans -- + 6533.32

+5383.11

11001.27

10014.44

9997.37

9849.01

Net fixed asset--

11001.27 Fixed asset ratio (06-07) = ------------------ = 1.10 9997.37

10014.44 (07-08) = ---------------- = 1.02 9849.01

Fixed asset ratio analysis -- fixed asset ratio for the 07-08 is less as compare to 06-07. Even it good sign for the company that fixed ratio for the year 07-08 is very close 1 which is standard. This shows that fixed asset is financed out of long term fund. Suggestion for improvement – In order to maintain this ratio the company has to increase its long term fund equal to its fixed asset. 43

d) Proprietary Ratio: Proprietary Ratio establishes the relationship between proprietors’ funds and total tangible assets. This ratio is also termed as ‘Net Worth to Total Assets’ or ‘Equity-Assets Ratio’.

Proprietary funds Proprietary ratio = -----------------------------Total assets Where Proprietors’ Funds = Shareholders’ Funds = Share Capital (Equity + Preference) + Reserves and Surplus – Fictitious Assets Total Assets include only Fixed Assets and Current Assets. Any intangible assets without any market value and fictitious assets are not included. Objective and Significance: This ratio indicates the general financial position of the business concern. This ratio has a particular importance for the creditors who can ascertain the proportion of shareholder’s funds in the total assets of the business. Higher the ratio, greater the satisfaction for creditors of all types.

06-07

07-08

Equity share holder’s fund = equity share capital --

1387.00

1184.08

+Reserve & surplus --

+3080.95

+3447.25

4467.95

4631.33

9997.37

9849.01

+ 4397.41

+3935.19

14394.78

13784.20

Total asset = fixed asset -+ Current asset --

4467.95 Proprietary ratio (06-07) = ----------------- = .31 14394.78

4631.33 (07-08) = ----------------- = .34 13784.20

Proprietary ratio analysis – proprietary ratio for the year 07-08 is more than the 06-07. As the ratio is increase it is good sign for company. Higher the ratio better is the long-term solvency position of the company. A low proprietary ratio will include greater risk to the creditors. 44

Suggestion for improvement – Idle fixed asset should be dispose so that the amount which is realize from that can be used in the operation.

e) Interest Coverage Ratio: Interest Coverage Ratio is a ratio between ‘net profit before interest and tax’ and ‘interest on long-term loans’. This ratio is also termed as ‘Debt Service Ratio’. Net profit before interest and tax Interest coverage ratio = -------------------------------------------------Interest on long term loans Objective and Significance: This ratio expresses the satisfaction to the lenders of the concern whether the business will be able to earn sufficient profits to pay interest on longterm loans. This ratio indicates that how many times the profit covers the interest. It measures the margin of safety for the lenders. The higher the number, more secure the lender is in respect of periodical interest.

Net profit before interest & tax -Interest on long term loan --

06-07

07-08

1324.21

1557.78

563.62

609.89

1324.21 Interest coverage ratio (06-07) = --------------- = 2.34 563.62

1557.78 (07-08) = ---------------- = 2.55 609.89

Interest coverage ratio analysis -- Interest coverage ratio for the year 07-08 is quite more than 06-07. Which is quite good sign for the company. For the 07-08, 2.55 times interests are covered by the profits. The weakness of the ratio may create some problems to the financial manager in raising funds from debt sources. Suggestion for improvement – loan should be taken at reasonable rate. Interest should be paid at fixed exchange rate. The exchange rate should be settle at the time of taking loan.

45

Comparison of Essar steel ratio with other steel companies GROSS PROFIT RATIO

NAME OF COMPANY

2003-04

2004-05

2005-06

2006-07

2007-08

ESSAR STEEL

12.6

25.49

16.42

31.4

27.59

JINDAL STEEL

22.15

29.44

21.12

26.99

23.43

TATA STEEL

26.63

36.41

33.76

34.91

37.7

Gross profit ratio interpretation – 1) Gross profit ratio of Tata steel is increasing from the last 3 years. 2) Where as Essar and Jindal steel ratio shows upward and downward movement which means the ratio of both the company is not stable. 3) Gross profit should not be much fluctuates. 4) Tata steel has maintained a trend from last 4 years. Suggestion for improvement – gross profit can be increase if the company efficiently utilize its raw material and try to produce better quality of product and maximize its output with low input. Because major direct expenditure is on material so that must be efficiently utilize. Company should give more emphasis on enhancing its productivity and even try to get better return on that. 46

NET PROFIT RATIO NAME OF COMPANY

2003-04

2004-05

2005-06

2006-07

2007-08

ESSAR STEEL

1.61

9.67

8.54

5.33

3.99

JINDAL STEEL

16.05

13

14.14

14.98

14.92

16

23.72

22.78

23.53

23.43

TATA STEEL

Net profit ratio interpretation – 1) Net profit ratio of Tata steel is best as compare to Jindal and Essar steel. 2) Net profit ratio of Jindal steel is better as compare to Essar steel. 3) Both Jindal and Tata steel have maintained a good trend as it shown in the graph from the last four year. 4) Essar steel net profit ratio is decline from last three years. This is not good sign for the company. As the ratio decrease the less effective a company is at cost control. 5) This ratio is helpful to determine the operational ability of the concern. While comparing the ratio to previous years’ ratios, the increment shows the efficiency of the concern. 6) Gross profit of Essar steel is increasing where as its net profit is decreasing which means company’s indirect expenses is increasing. Suggestion for improvement – the company have to put major control on all expenses. Reductions in expenses result in more profit. As a result the net profit ratio shows increment. 47

OPERATING PROFIT RATIO NAMEOF COMPANY ESSAR STEEL JINDAL STEEL TATA STEEL

2003-04 23.49 31.69 32.47

2004-05 31.96 34.83 41.1

2005-06 24.23 27.79 38.88

2006-07 23.63 32.79 39.61

2007-08 21.48 29.46 41.94

Operating profit ratio interpretation – 1) Operating profit ratio of Essar steel is decreasing from the last 3 years 2) Tata steel has maintained a incremental trend from last 3 years. 3) Jindal steel ratio shows upward and downward movement. 4) Operating profit ratio measure a company’s operating efficiency with its successful cost control. The higher the ratio, the better the company is. So here the graph shows that Tata steel has better control over cost. Suggestion for improvement – the company has to control its operating expenses. Because less operating expenses will result in more net profit and more net profit will create wealth of company and its shareholder’s. A higher operating profit put the company to stand in the market.

48

RETURN ON CAPITAL EMPLOYED

NAME OF COMPANY ESSAR STEEL JINDAL STEEL TATA STEEL

2003-04 2004-05 2005-06 2006-07 2007-08 8.41 26.28 10.37 11.86 15.33 11.67 29 15.47 23.6 19.22 39.43 56.78 43.93 28.11 17.16

Return on capital employed – 1) Return on capital employed of Essar steel is continuously increasing from last 3 years which is good sign for the company. 2) Where as Tata steel ratio is decreasing from last 3 years. 3) Jindal steel shows upward and downward trend. 4) Efficiency of Tata steel is decreasing where as Essar steel is increasing from last 3 years. 5) The higher the ratio, the better it is. Suggestion for further improvement -- The Company has to increase its net profit and company has to reduce borrowing by paying through the internal accruals. The company has to maintain its increasing trends.

49

EARNING PER SHARE

NAME OF COMPANY

2003-04

2004-05

2005-06

2006-07

2007-08

ESSAR STEEL

1.33

14.22

12.33

4.38

3.71

JINDAL STEEL

0.79

63

26.17

70.85

86.07

51.88

62.17

62.57

73.87

60.58

TATA STEEL

Earnings per share interpretation – 1) Earnings per share of Jindal are increasing from last 3 years. 2) Where as earning per share of Essar steel is decreasing from last 3 years. 3) Tata steel & Essar steel earning per share for the year 07-08 is decrease as compare to 0607 but Tata steel EPS is decrease by 18% where as Essar is decrease by 15.30%. 4) This shows that Tata and Essar have not effectively utilized their equity share capital for the year 07-08. 5) Worth of share of Essar is continuously decreasing. Suggestion for improvement – earning per share can be improve by increasing the net profit. Company is not able to use efficiently its equity share capital as compare to other companies. 50

FIXED ASSET TURNOVER RATIO

NAME OF COMPANY

2003-04

2004-05

2005-06

2006-07

2007-08

ESSAR STEEL

0.54

0.87

0.59

0.82

1.09

JINDAL STEEL

0.52

0.88

0.72

0.81

0.81

TATA STEEL

0.85

1.11

0.98

1.09

1.2

Fixed asset turnover ratio interpretation – 1) Fixed asset turnover ratio of all the company is increasing from last 3 years. It is good sign for the company. 2) The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments. 3) A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. Suggestion for improvement – fixed asset should be efficiently utilized up to its maximum capacity. Idle fixed asset should be dispose so that the amount which is realize from that can be used in the operation.

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INVENTORY TURNOVER RATIO

NAME OF COMPANY ESSAR STEEL JINDAL STEEL TATA STEEL

2003-04 8.73 15.75 12.91

2004-05 11.33 11.21 10.42

2005-06 6.96 8.55 9.89

2006-07 4.67 11.04 10.81

2007-08 5.08 9.26 10.84

Inventory turnover ratio interpretation – 1) Inventory turnover ratio of all these companies shows ups and downs. There is no trend. 2) But from last 2 years Essar steel ratio is just around 50% of Jindal and Tata steel. 3) From last 3 years all the companies have maintained its trends.

Suggestion for improvement -- A low inventory turnover ratio indicates an inefficient management of inventory. A low inventory turnover implies over-investment in inventories, dull business, poor quality of goods, stock accumulation, accumulation of obsolete and slow moving goods and low profits as compared to total investment. So in order to increase this ratio companies have to improve the entire thing in positive way. The inventory turnover ratio is also an index of profitability, where a high ratio signifies more profit; a low ratio signifies low profit.

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LIQUID RATIO NAME OF COMPANY

2003-04

2004-05

2005-06

2006-07

2007-08

ESSAR STEEL

0.61

0.83

0.89

0.59

0.54

JINDAL STEEL

0.79

0.6

0.59

0.43

0.27

TATA STEEL

0.39

0.33

0.29

1.37

3.52

Liquid ratio interpretation – 1) Liquid ratio of all these company is not good because the ideal liquid ratio is supposed to be 1:1. This is not there from the year 03-04 to 05-06. 2) Jindal steel liquidity ratio is continuously decline which is not good sign for that company. 3) Tata short term financial position is very good in the year 07-08 which shows their liquid asset is around 3.5 times current liability. And it is increasing from last 2 years 4) short term financial position of Jindal and Essar is not good. Suggestion for improvement – As 1:1 standard should not be used blindly. A liquid ratio of 1:1 does not necEssarily mean satisfactory liquidity position of the firm if all the debtors cannot be realized and cash is needed immediately to meet the current obligations. A firm having a high liquidity ratio may not have a satisfactory liquidity position if it has slowpaying debtors. On the other hand, a firm having a low liquid ratio may have a good liquidity position if it has fast moving inventories.

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CURRENT RATIO

NAME OF COMPANY

2003-04

2004-05

2005-06

2006-07

2007-08

ESSAR STEEL

1.61

2.09

1.97

1.26

1.17

JINDAL STEEL

1.45

0.98

0.89

0.76

0.58

TATA STEEL

0.68

0.71

0.72

1.77

3.92

Current ratio interpretation – 1) current ratio of Tata steel is continuously increasing from the year 03-04 to 07-08. 2) Essar steel current ratio is continuously decreasing from last 3 years which is not good sign for the company. This shows that company’s ability to pay current liability is decreasing. 3) Jindal steel current ratio is decreasing continuously from the year 04-05 to 07-08. This shows that company’s ability to pay current liability is decreasing. 4) Tata steel current ratio for the year 07-08 is around 4 which is also not good because it shows the idleness of working capital. 5) The minimum acceptable ratio is 1:1, Essar steel current ratio for all the year is acceptable as it is more then 1. Suggestion for improvement –    

Paying some debts. Increasing your current assets from loans or other borrowings with a maturity of more than one year. Converting non-current assets into current assets. Increasing your current assets from new equity contributions. 54

DEBT EQUITY RATIO NAME OF COMPANY

2003-04

2004-05

2005-06

2006-07

2007-08

ESSAR STEEL

7.69

3.96

4.55

1.5

1.19

JINDAL STEEL

3.73

1.3

0.96

0.78

1.01

TATA STEEL

0.72

0.37

0.25

0.67

1.07

Debt equity ratio interpretation – 1) Debt equity ratio of Essar steel is very high in from the year 03-04 to 05-06 which shows the their debt is very high as compare to equity in these years but general acceptable ratio is 2:1 but there is no rule of thumb or stand norm for the business. 2) In the year 07-08 these company debt equity ratio is near to standard norm which is acceptable. 3) Essar steel debt equity ratio is decreasing from last 3 year and but now company has to increase its debt to meet the standard norms. Suggestion for improvement – company should raise its fund by the combination of both equity and debt and try to maintain 2:1 ratio that is debt equity ratio.

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PROPRITORS RATIO

NAME OF COMPANY ESSAR STEEL JINDAL STEEL TATA STEEL

2003-04 11.12 19.4 57.24

2004-05 18.27 41.09 72.04

2005-06 15.18 48.23 79.49

2006-07 31.03 54.31 59.12

2007-08 33.6 48.53 48.15

Proprietor’s ratio interpretation – 1) Higher the ratio better is the long-term solvency position of the company. 2) A low proprietary ratio will include greater risk to the creditors. 3) Jindal steel proprietors ratio shows increasing trend. 4) From the last 3 years Essar steel ratio is increasing which good sign for company but whereas Tata steel ratio is decreasing which is not good sign for that company.

Suggestion for improvement – Idle fixed asset should be dispose so that the amount which is realize from that can be used in the operation.

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INTEREST COVERAGE RATIO

NAME OF COMPANY ESSAR STEEL JINDAL STEEL TATA STEEL

2003-04 2004-05 2005-06 2006-07 2007-08 1.87 2.73 3.3 2.34 2.55 3.21 3.72 4.65 5.67 5.88 11.29 18.89 26.42 21.07 6.94

Interest coverage ratio interpretation -1) Essar steel has maintained its trend, they have to improve it means so increase the ratio. 2) Jindal steel has maintained its increasing trend which is good sign for the company. 3) Tata steel ratio from last 2 years it is decreasing which is not good sign for company it shows that company efficiency is decrease.

Suggestion for improvement – loan should be taken at reasonable rate. Interest should be paid at fixed exchange rate. The exchange rate should be settle at the time of taking loan.

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INVENTORY MANAGEMENT TEAM MEMBERS OF STOREDEPARTMENT MAJOR ASHOK (vice president)

AMRISH CHATURVEDI (head of department)

ISSUE SECTION

1) VARSHA PATEL 2) NIRAV BHAGAT 3) ARVIND PATEL 4) RAKESH PATEL 5) TAJESH CHUDASHMA

RECEIPT SECTION

1) SATISH SIR 2) RAJIV JHA

INVENTORY MANAGEMEN T 1) HITESH RAVAL 2) TEJAS PATEL

CODIFICATION 1) SARJANMAHIDA

GOODS RECEIPT 1) SEEMA MEHTA

SPARE MANAGEMENT AT STORE DEPARTMENT Spare is most important part of any kind of machinery or for production plant. Spare maintain the capacity of machinery. Non availability of any spare in right time result in reduction in the performance of machinery or some time it may stop production result in huge loss to company , so proper management of spare is also require. INVENTORY PROCEDURE IN ESSAR STEEL 1) In bond delivery number 2) Receipt section 3) Spare quality check 4) Goods receipt note 5) Issue of spares 6) Rejection of spares 7) Codification 8) Spare control technique 58

1) In bond delivery number—it is the number is allocated at gate when spare reach at gate. The authorized person see all the document which is presented by driver like challen, invoice etc. there he also see the no. of items order and no. of item are there in invoice. Through SAP system. After that he put seal on document and write the vehicle number and other thing and put I.D no. that is called In bond number. After getting in bond no. then vehicle is allow to enter. There at gate the authority ask the user that you want the spare now then if user say yes then they directly send the vehicle to concern department but if user say no then they are sent to central store for unload . in case user want some spare then in that case also vehicle send to central store not send to user for part delivery because to reduce the time and traffic. 2) Receipt section—once the driver get the in bond no. it go to central store. There he shows the document to receipt authority. There he check the seal and ID no. & spare is physical check .But some time spare is in wood box so to open at that time is not possible so it is check in no. or box then gate pass is given to driver. If some time same vehicle is use to transport finish goods then it has to go to gate for clearance and user send a mail for that vehicle then that vehicle is allowed to particular location. 3) Spare quality check (321) — after the physical verification they inform the user that your spare is reach at store. Then user comes to central store and he sees the spare and its quality. If it according to right quality then he put (321) spare quality is check and accepted. If he put (122) then spare is not according to right quality and rejected. so when he reject the spare that spare is keep away from other accepted spare. After 321 G.R.N is prepared and spare is taken into store and keep them in a particular location. 4) Goods receipt note— goods receipt note is note prepare when user give (321) quality check clearance. GRN shows that we have received this much of quantity of item. Once the GRN is done then the spare is keep into store at its defining location. 5) Issue of spare— Essar steel has various departments. Various spare which is requires to various department most are available at one place that is at central store. User checks through system all the spare which is of his department. If it is there in store he through reservation slip put the order. If the require quantity is available then MRS is created and he send the reservation slip with concern person to collect the spare. Through MRS the store person know what spare the user want so they take out the spare keep that spare at issue location so that the spare can be easily handover when concern person come for spare. This is all in case of urgent. If it is not urgent then spare is send to concern department some other day as far as possible. When spare is send to concern department at that time issue note is given to security and they put control no. then after issue person collect the issue reservation slip and put spare document no. and post the transaction and file the issue requisition note. If in case required quantity cannot be covered by issue in that case they issue all quantity but they send the available and rest t they send when spare available at store. 59

User through system he check all the item what kind of all spare of his department is there in store. In case suppose the required quantity of spare is not at store in that case he order the spare through reservation slip. Spare as per available reserve to him and rest quantity PR is automatically prepare through SAP system. That PR is release by store as well as user department head. Once PR is release then purchase department place order for purchase of that particular spare. 6) Rejection of spare – when user is called for quality check at that time user specify that spare is rejected and through system he reject the spare (122). When he reject the spare. the rejection department as well as purchase department automatically get mail that concern item no. and the reason of rejection. The purchase department send mail to vendor that due to this reason spare is rejected . if the vendor says I correct the spare then they keep that otherwise the vendor says ok return the spars . As per PO terms& condition of spare is mentioned and as per that spare is rejected . once the purchase department allow for rejection then rejection department work start. Some time if purchase department not give any response in that case rejection department give comment for quick response to that. Rejection authority verify that whether excisable or non excisable . if it excisable then excise duty is paid or not if paid then he order the excise department that concern spare no. is rejected so refund the excise duty. So after the excise duty clearance then spare is rejected and send from store to vendor. 7) Codification – user through system check that require spare is there in store of his department or not. If it is not their then through KADMS install software in system he send the request. First of all they check that the data user is given is correct or not . means all the technical term are corrects or not . if it not correct then through comment option they give message to user to make change and save that. Codification section verify all the thing in the detail, item name and other all the technical particles of the items whether the spare which the user want for that code is existing or not. If there is no existing code then they save that and new code for spare is automatically created. Once the code is created the user automatically get the code for his request spare. It is very much important process because if a spare don’t have any code that spare cannot come to plant . on the basis of code all the thing are run. Code represents the spare part. There should not be any duplication because company spends lot of money on maintaining, the duplication of code occupies the unnecessary space but company wants to save spare. Space available is limited. If it is full then company have to install new server and other thing which require huge expenses.

60

SPARE CONTROL TECHNIQUE 1) LEVEL SETTING 2) XYZ ANALYSIS 3) VED ANALYSIS 4) FNSD ANALYSIS 5) JUST IN TIME. 6) PERPETUAL INVENTORY SYSTEM 1) LEVEL SETTING A) ANNUAL BASE B) SINGLE USER THEN USER DECIDE C) MORE THEN ONE USER THEN STORE DEPTT DECIDE Store department set the level of general store item which is order by them. In that case they look the annual base consumption and as per base they set the level while setting the level they see consumption +VED as well as no. of transaction and FNSD analysis after considering all they set the level. Once the reorder, maximum level is set. When the quantity goes below reorder level, automatically the PR is release to purchase department for purchase of that item. The quantity in PR is difference between the maximum level and no. of quantity goes below reorder level. When the user is single for particular item then he decides when to order and same procedure follows. 2) XYZ ANALYSIS – It is like ABC system where the quantity is categories into XYZ so it is called XYZ analysis. Manufacturing organization find it useful to divide material into three categories for the purpose of exercising selective control on materials. An analysis of the material costs will show that a smaller percentage of items of materials in the stores may contribute to a large percentage of the value of consumption and on the other hand, a large percentage of items may represent a smaller percentage of the value of item consumed. Between these two extremes will fall those items the percentage number of which is more or less equal to their value of consumption. Items falling in the first category are treated as ‘X’ items, of the second category as ‘Y’ items and item of the third category are taken as ‘Z’ items; such an analysis of material is known as XYZ analysis. It is also further categories as per each unit value so that item which is having higher value cannot be left out. 3) VED ANALYSIS – VED analysis is generally done by user because he knows very well that which spare is what for the plant. So he assigns the VED for the spare which is under him or of his department. Vital, essential and desirable – analysis is used primarily for control of spare parts. The spare parts can be divided into three categories- vital, essential & desirable -keeping in view the criticality to production. The spares, the stock out of which even for a short time will stop production for quite some time and where the cost of stock out is very high, are known as vital spares. The spares, the absence of which can’t be tolerated for more than a few hours a day and the cost of lost production is highand which are essential for the production to continue are known as essential spares. The 61

desirables spares are those spares which are needed but their absence for even a week or so will not lead to stoppage of production. 4) FNSD ANALYSIS – F Stand for fast moving. The store department decides FNS, D is deciding by user. As per company policy like if a spare is transaction is done in a year that is fast moving and 1to 3 years in between it is normal moving and more than 3 year it is slow moving. So the store department gives the slow moving spare list to user on the basis of that slow moving list user decide which is dead items. Once he declare the dead item that item are declared as absolute. that spare is listed in essar site any plant want that spare then that is given to them otherwise it is send to secondary sale department for sale of spare which is declared as dead. 5) JUST IN TIME – keeping in view the enormous carrying cost of inventory in the stores and godowns, manufacturers & merchandisers are asking for more frequent deliveries with shorter purchase order lead time from their suppliers. Now-a-days organizations are becoming more and more interested in getting potential gains from making smaller and more frequent purchase order. In other words they are becoming interested in just in time purchasing system, just in time purchasing is the purchase of material or goods in such a way that delivery of purchase items is assured before their use or demand. 6) PERPETUAL INVENTORY SYSTEM – perpetual inventory as “ a system of records maintained by the controlling department which reflects the physical movement of stocks and their current balance. To ensure the accuracy of perpetual inventory records, physical verification of stores is made by a program of continuous stock taking. It is possible that the balance of stock shown in system may differ from the actual balance of stock as ascertained by physical verification. METHOD OF ISSUE OF SPARE  FIFO  LIFO

1) FIFO – Under this method material is first issued from the earliest consignment on hand and priced at the cost at which that consignment was placed in the stores. In other wards materials received first are issue first. This method is most suitable in times of falling prices because the issue price of material to jobs or works order will be high while the cost of replacement of material will be low. But in case of rising prices this method is not suitable because the issue price of material to production will be low while the cost of replacement of material will be high. 2) LIFO -- as against the first in first out method the issues under this method are priced in the reverse order of purchase that is the price of the latest available consignment is taken. this method is sometimes know as the replacement cost method because material are issued at current cost to jobs or work orders except when purchase were made long ago. This method is suitable in times of rising prices because material will be issued from the latest consignment at a price which is closely related to the current price levels. 62

Replenishment system – in this system, ordering quantity is not fixed but goes on changing at every time of order. There is a fixed ordering time when stock are reviewed and level orders are placed for a varying quantity which is equal to the maximum level minus stock in hand on the fixed date of review. In this system, maximum stock level is fixed beyond which the stock is not expected to exceed. This system is useful where there are fluctuations in the pattern of consumption, where as fixed order quantity system is useful when there is stability in the pattern of consumption.

SPGS (07-08) VALUE ARE IN CRORES MONTHS APR (07-08) MAY JUN JULY AUG SEP OCT NOV DEC JAN FEB MAR TOTAL

OPENING STOCK RECEIPT CONSUMPTION CLOSING STOCK 217.26 37.73 33.46 221.53 221.53 35 31.53 225 225 33.74 31.77 226.97 226.97 37.89 36.31 228.55 228.55 37.67 23.47 242.75 242.75 30.08 22.75 250.08 250.08 33.07 30.16 252.99 252.99 28.87 23.33 258.53 258.53 30.45 26.55 262.43 262.43 40.95 30.38 273 273 30 34.08 268.92 268.92 28.37 36.1 261.19 403.82 359.89

Spare and general store item – Here the table shows that average consumption of spare around 30 crores and receipt is around 34 crores. The company have to 63

continuously review various analysis to control its spares. The company have to do physical verification once in a quarter.

PRCM(07-08) VALUES ARE IN CRORES MONTHS APR (07-08) MAY JUN JULY AUG SEP OCT NOV DEC JAN FEB MAR TOTAL

OPENING STOCK RECEIPT CONSUMPTION CLOSING STOCK 180.48 53.95 70.03 164.4 164.4 76.03 85.73 154.7 154.7 83.74 75.81 162.63 162.63 63.33 77.7 148.26 148.26 71.95 71.72 148.49 148.49 67.1 69.92 145.67 145.67 85.05 78.87 151.85 151.85 71.85 57.03 166.67 166.67 91.07 73.26 184.48 184.48 81.79 53.66 212.61 212.61 80.63 70.87 222.37 222.37 69.22 91.59 200 895.71 876.19

Production and consumable – the average receipt is around 75 crores material and where as average consumption of material is around 73 crores. But there closing stock is 200 crores which mean there is huge block of material. So management has to put close look on these materials and try to overcome it. 64

As average consumption is around 73 crores that means they have 2.5 months stock which means either they have more blockage of material or some material they have to keep its stock for safety.

PROJECT (07-08) VALUES ARE IN CRORES MONTHS APR (07-08) MAY JUN JULY AUG SEP OCT NOV DEC JAN FEB MAR TOTAL

OPENING STOCK 41.53 45.94 43.64 43.23 56.82 58.62 47.47 44.75 46.19 45.38 42.22 39.87

CLOSING RECEIPT CONSUMPTION STOCK 16.4 11.99 45.94 19.02 21.32 43.64 10.41 10.82 43.23 16.61 3.02 56.82 7.58 5.78 58.62 12.37 23.52 47.47 17.19 19.91 44.75 65.48 64.04 46.19 15.26 16.07 45.38 5 8.16 42.22 2.61 4.96 39.87 13.06 16.2 36.73 200.99 205.79

Project interpretation – They have good procurement strategy they purchase as and when it is require. But they have continuously maintained 40 crores 65

CAPEX item so either they maintain it or else some items are their which is not movable so that lead to blocking of worth.

SPGS (08-09) VALUES ARE IN CRORES OPENING CLOSING MONTHS STOCK RECEIPT CONSUMPTION STOCK APR 0828.16 11.92 277.43 09 261.19 MAY 277.43 30.57 37.88 270.12 JUN 270.12 35.96 36.03 270.05 JULY 270.05 28 28.32 269.73 AUG 269.73 27.4 26.27 270.86 SEP 270.86 40.5 37.23 274.13 OCT 274.13 28.4 32.02 270.51 NOV 270.51 17.5 14.43 273.58 DEC 273.58 15.55 15.32 273.81 JAN 273.81 26.87 19.93 280.75 FEB 280.75 22.41 16.81 286.35 MAR 286.35 10.94 19.88 264.98 296.04 TOTAL 312.26

Spare and general store item interpretation -- Here the table shows that average consumption of spare around 25 crores and receipt is around 26 crores. The receipt and consumption is decrease from last year even closing stock is 66

increase .The company have to continuously review various analysis to control its spares. The company have to do physical verification once in a quarter.

PRCM (08-09) VALUES ARE IN CRORES MONTHS OPENING STOCK RECEIPT CONSUMPTION CLOSING STOCK APR 08-09 200 114.33 87.16 227.17 MAY 227.17 151.1 98.32 279.95 JUN 279.95 89.77 80.04 289.68 JULY 289.68 76.22 88.92 276.98 AUG 276.98 81.52 89.19 269.31 SEP 269.31 89.96 94.38 264.89 OCT 264.89 77.76 91.09 251.56 NOV 251.56 95.38 70.17 276.77 DEC 276.77 37.63 68.75 245.65 JAN 245.65 73.78 98.69 220.74 FEB 220.74 54.09 69.77 205.06 MAR 205.06 36.04 78.16 162.94 977.58 1014.64 TOTAL

Production and consumable interpretation – the average receipt is around 81 crores material and where as average consumption of material is around 85 crores. But there closing stock is 162.94 crores which mean still there is huge block of material. 67

Companies last year closing stock is 200 crores but this year it is reduce which is good sign for company and they are try to reduce it .

PROJECT (08-09) VALUES ARE IN CRORES MONTHS APR 08-09 MAY JUN JULY AUG SEP OCT NOV DEC JAN FEB MAR TOTAL

OPENING STOCK 38.7 39.1 43.71 47.49 55.17 78.31 78.22 56.54 58.69 59.43 59.1 64.02

CLOSING RECEIPT CONSUMPTION STOCK 3.39 2.99 39.1 9.62 5.01 43.71 11.22 7.44 47.49 20.51 12.83 55.17 30.59 7.45 78.31 11.03 11.12 78.22 76.74 98.42 56.54 12.88 10.73 58.69 3.37 2.63 59.43 3.36 3.69 59.1 9.56 4.64 64.02 5.96 6.3 55.53 198.23 173.25

Project interpretation – In this year stock is increase as compare to last year. CAPEX items are order as and when it is require and it is over once when it is consume so management have to find out the reason why CAPEX item stock is increasing. It is good that they have good purchasing strategy and they can 68

available the material when it is require then why there is a need of keep such huge stock.

69

RECEIVABLES MANAGEMENT DEBTORS -- It is used to define as debt owed to the firm by customers arising from sale of goods and services in the ordinary course of business. A firm grants trade credit to maintain its sales from the hands of the competitors and at the same time to attract the potential customers to purchase its products at favorable terms. Trade credit arises only when the firm sells its products to the customers but does not receive cash immediately. Debtors are created out of trade credit and which are collected in future. RECEIVABLES MANAGEMENT -- It refers to the decisions a business makes regarding its overall credit and collection policies and the evaluation of the individual credit applicants. It is both an asset and problem for the firm. It is an asset because it is the promise of a future cash flow and a problem because of the need to obtain financing while waiting for the future cash flow. Marginal benefits and costs associated with changes in credit standards, credit terms, collection period are analyzed to formulate an optional credit policy.

CREDIT SALES -- Credit sale is sells of goods or services without immediate cash. The amount is realized in future according to the deal.

Credit sale has three characteristics as: 1) It involves an element of risk as in credit sales, payment is yet to be received. 2) It is based on economic value i.e. to the buyer the economic value in goods or services passes immediately at the time of the sale but the seller expects an equivalent value to be received later on. 3) It implies futurity i.e. the buyer will pay the amount in future.

Credit sales as a marketing tool Firms use credit sale as a marketing tool. Basically firms do credit sale to create a good market share. Through credit sale they retain their old customers beside that they also attract new customers with good credit policy. In some case firms give credit due to relationship with dealers and traders. And sometimes due to cut throat competition in market a firm is forced to carry on a good credit policy.

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Sales pattern in Essar steel 1) Letter of credit. 2) Bank guarantee. 3) Credit sales. 4) Advance sales. 1) Letter of credit -- A Letter of Credit is a payment term generally used for sales transactions. It is basically a mechanism, which allows importers/buyers to offer secure terms of payment to exporters/sellers in which a bank (or more than one bank) gets involved. The technical term for Letter of credit is 'Documentary Credit'. At the very outset one must understand is that Letters of credit deal in documents, not goods. The idea in an international trade transaction is to shift the risk. Thus a L/C (as it is commonly referred to) is a payment undertaking given by a bank to the seller and is issued on behalf of the applicant i.e. the buyer. The Buyer is the Applicant and the Seller is the Beneficiary. The Bank that issues the L/C is referred to as the Issuing Bank which is generally in the country of the Buyer. The Bank that Advises the L/C to the Seller is called the Advising Bank which is generally in the country of the Seller. The specified bank makes the payment upon the successful presentation of the required documents by the seller within the specified time frame.

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How Does the Letter of Credit Process Work? 

The seller (known in the Letter of Credit as the "Beneficiary") advises the buyer (known in the Letter of Credit as the "Applicant") that the purchase order is acceptable. The Beneficiary also sends the Applicant a copy of their "Letter of Credit Guidelines" to ensure that the credit is opened properly and will not require any costly amendments.



A Letter of Credit Application is completed by the Applicant and is submitted to their Bank (aka, the Opening Bank).



The Letter of Credit is issued and sent by the Opening Bank to an Advising Bank in the country of the Beneficiary. The main role of an advising bank is to check the authenticity of the Letter of Credit before it is advised to the Beneficiary.



The Advising Bank then sends a copy of the Letter of Credit to the Beneficiary, either electronically, by fax, or by mail.

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The Beneficiary must now carefully review the requirements of the Letter of Credit to ensure it has been issued per the agreed terms. The Beneficiary should make sure that they can comply with all stipulations, such as shipping terms, documentary requirements, shipping and/or expiration dates and packing and marking conditions.



If the Letter of Credit has terms that are not per the agreement, the Beneficiary should request an amendment to the Letter of Credit. This request is made directly to the Applicant, who then instructs the Opening Bank to amend the Letter of Credit.

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Once the Letter of Credit is in order and the shipment is ready for export, the Beneficiary ships the goods to the freight forwarder.

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The seller (or third party, such as L/C Solutions) can now begin preparation of documentation required under the Letter of Credit terms.

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After goods have shipped, the transport document is acquired by the Beneficiary (or L/C Solutions), is checked for accuracy, matched up with other created documentation, and presented to the Negotiating Bank. (The Negotiating Bank may or may not be the same as the Advising Bank, depending on the requirements of the Letter of Credit and the wishes of the Beneficiary.)

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The Negotiating Bank checks over the documentation and advises any problems they may find with the paperwork. They then either issue 72

payment to the Beneficiary, or forward the documents to the Opening Bank for payment, depending on the terms of the Letter of Credit.

2) Bank guarantee -- A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. Parties to the contract of guarantee — 1) Applicant – the principal debtor-person at whose request the guarantee is being executed. 2) The beneficiary – person to whom the guarantee is being given and who can enforce it. 3) the guarantor – the person who undertakes to discharge the obligation of the applicant in case of his default. Necessity for bank guarantee (B.G) Applicant (A) and beneficiary (B) have a business contract. This is the primary contract. ‘B’ can ask for a monetary deposit as a cover. ‘A’ is not willing to block his money. So, ‘A’ approaches his bank with a request to issue a B.G in favor of ‘B’. Thus arises, the need for a bank guarantee. 3) Credit sales -- Sales made to customers during the current period for which cash was not received at the time of sales. 4) Advance sales – advance sales means payment is received either whole or part of it before the sale occurs. Debtors’ Turnover Ratio: Debtors turnover ratio indicates the relation between net credit sales and average accounts receivables of the year. Net credit sales Debtors turnover ratio = ---------------------------------------------Average account receivables Where Average Accounts Receivables = [Opening Debtors and B/R + Closing Debtors and B/R]/2 Credit Sales = Total Sales – Cash Sales Objective and Significance: This ratio indicates the efficiency of the concern to collect the amount due from debtors. It determines the efficiency with which the trade debtors are managed. Higher the ratio, better it is as it proves that the debts are being collected very 73

quickly. Debtors’ turnover ratio indicates the number of times the debtors are turned over a year. The higher the value of debtors’ turnover the more efficient is the management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors.

06-07

07-08

Net credit sales =

8194.35

10743.32

Average accounts receivables =

543.50

453.62

8194.35

10743.32

Debtors turnover ratio (06-07) = ------------- = 15.077

(07-08) = ---------------- = 23.68

543.50

453.62

Debtor’s turnover ratio analysis – Debtors’ turnover ratio for the year 07-08 is more than 06-07 which is good sign for company. For the year 07-08 the debtors are efficiently manage as compare to 06-07. As increase in ratio shows that debtors are more liquid. Even we can say that liquidity of the debtors is increase.

f) Debt Collection Period: Debt collection period is the period over which the debtors are collected on an average basis. It indicates the rapidity or slowness with which the money is collected from debtors. 365 days Debt collection period = ---------------------------------Debtor’s turnover ratio Objective and Significance: This ratio measures the quality of debtors. This ratio indicates how quickly and efficiently the debts are collected. The shorter the period the better it is and longer the period more the chances of bad debts. Although no standard period is prescribed anywhere, it depends on the nature of the industry.

Debtors turnover ratio =

06-07

07-08

15.077

23.68

365 Debt collection period (06-07) = ----------- = 24 days 15.077

365 (07-08) = ----------- = 16days 23.68 74

Debt collection period analysis – debt collection period for the year 07-08 is less as compare to 06-07. This is quite good for the company. Company efficiency is increase in collecting the debts. A short collection period implies prompt payment by debtors. As per the ratio the no. of days is reduce by 8 days. Suggestion for improvement – the company has to sale the goods to those debtors who are making the payment very frequently.

Procedure in Essar steel 1) LETTER OF CREDIT – significant portion of sales, both domestic as well as exports for Essar steel are through the letter of credit route. Letter of credit are forwarded by sales directly to the SSC for validation and acceptance, for the material to be dispatch post confirmation by SSC, L/C’s are updated in first , thereby allowing logistics to create delivery order for dispatch of goods. 2) CREDIT SALES (bank guarantee & premium customer) – credit sales is made to customer under bank guarantee and to premium customers without any guarantee. 3) BOE GENERATION PROCESS FLOW – bill of exchange is generated in case an invoice is to discounted. BOE is prepared using an in-house SAP program. Debit note raised for the interest details mentioned in L/C is also mentioned in this sub-process. 4) BOE DISCOUNTING PROCESS FLOW – As per current policy in Essar steel, all the letter of credit are discounted. In case of non L/C invoices, decision for bill discounting is taken on a case to case basis. BOE is generated in case an invoice is to be discounted. Once a BOE is generated the same along with supporting documents are forwarded by the SSC to the bank for discounting. In case of BOE is against acceptance, documents are forwarded to the bank post acceptance by the customer. If on the due date, customer defaults in making payment to the bank, bank intimates the SSC & the amount in default is recovered. 5) CASH SALES THROUGH RTGS – sale department will intimate SSC about the amount received from customer through RTGS. SSC verifies the amount received with the online statement and accounts for the same in customers account. Receipt of payment is simultaneously confirmed back to sales. Basis the confirmation received, activities for dispatch will be initiated. 6) CASH SALES THROUGH CHEQUE – in case the payment through cheque, sales department send daily MIS giving detail of the cheques banked during the day to SSC. SSC reconciles the daily collections with CMP (cash 75

management product) report from the bank and intimates sales about deficiencies, if any. Accounting for cheques happens on the basis of cheques deposit date, except in case of customers with previous cheque bounce record. For such doubtful customers accounting happens on realization of the cheque. 7) Sale return – sales department will initiate the return process and SSC will release the R.O in SAP subsequent to verification of supporting documents. Final settlement with customer whether by way of payment or on account adjustment is also performed by SSC. 8) Quarterly provision for credit note – it is to record provision for those mou(s) where the condition are almost fulfilled but not completely fulfilled, on a quarterly basis a reminder is forwarded to sales to forwarded the details to those mou(s) along with the caL/Culation for which provision is required to be provided in the books. Basis the information received from the sales a quarterly provision is created at the quarter end and the same is reversed at the beginning of the next quarter. 9) Debit credit note process – debit/credit notes are raised subsequently to sale for price increase on the goods sold, for discount on sale or on account of sales return and any other cause that result in increase in the financial liability or benefit to the parties to the contract. Sales will initiate the credit/debit note, SSC will release the same in SAP ensuring adequate approval was obtained. Further subsequent settlement of amount is also done by SSC. 10) Supplementary invoices – supplementary invoices are prepared if the additional price to be recovered involves excise duty. Supplementary invoices are raised in case of excise duty charged to customer was at lower rate, or it can be as a result of review of existing rate of excise duty. 11) Exposure monitoring – it is use to change in the credit limit for a particular customer and transferring of the credit limit between units of the same customer. At present, for customers having multiple locations, different codes and credit limit are being maintained in SAP and therefore the need for this process. This sub process elaborates the activities involved in transferring credit limit from one location to another location for the same customer. Customer operating from multiple locations is provided with a blanket credit limit. The blanket credit limit is divided into different locations. Many a times it is observed that, for some location there is some unutilized credit limit and for some location the credit limit is exhausted to utilized the unused. 76

Payables management 1) Invoice Processing & Posting PO Based Domestic including Capex The invoices relating to purchase of raw materials, production consumables, stores & spares and for all other purchases (Including capex items) are received at respective units. The physical receipt of goods also takes place at respective unit/warehouse. GRN (Goods Received Note) is prepared at Unit level by the stores. All invoices relating to purchase of raw materials, production consumables, stores & spares and for all other purchases (Including capex items) are scanned at nominated location and are electronically forwarded to SSC through a workflow. The scanned invoices are processed at SSC to facilitate accounting and payment. A 3-way match/ 2-way match, as applicable of PO, GRN and Invoice is carried out for all invoices relating to purchase of raw materials, production consumables, stores & spares and for all other purchases (Including capex items).

2) Invoice processing & posting – Non PO Based Non PO invoices are generally received for payment for services and non production items. Non PO invoice is received by the respective user department who availed the service / goods. The user department has to ensure that the company policy permits procuring such goods/services without a PO. Respective User department approves the Invoice and forwards to nominated location for scanning. Scanned Invoices are electronically forwarded to SSC through a workflow to facilitate accounting and payment. The Shared Service will check for the necessary certifications from the user department, and supporting from vendor as proof of goods delivered or service rendered before processing the invoice. .3) Invoice processing & posting Imports without CHA On arrival of goods at the port the customs department prepares a bill of entry on the basis of advance documents received from supplier. Procurement team authorizes the BOE & advance documents received and forwards to nominated location for scanning. Scanned documents are electronically forwarded to SSC through a workflow to facilitate accounting and payment. SSC prepares & process the delivery cost invoice on basis of these documents to facilitate the payment of custom duty, port charges, etc. This document details the flow of transactions involved in receiving the advance documents from supplier / BOE from customs, scanning of advance documents / BOE to SSC, verification of required information by SSC, preparation & posting of delivery cost invoices to facilitate payments. Starting point of this sub process is receipt of Advance documents from supplier and the end point is posting of delivery cost invoice in SAP.

4) Invoice processing & posting Imports through CHA (clearing house agent) On arrival of goods at the Port, CHA sends an import checklist to local accounts. Local accounts validates checklist and forwards to nominated location for scanning. Scanned

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documents are electronically forwarded to SSC through a workflow to facilitate processing of delivery cost invoice. Subsequently, customs department prepares a bill of entry on the basis of advance documents received from supplier. Procurement team authorizes the BOE & advance documents received and forwards to nominated location for scanning. Scanned documents are electronically forwarded to SSC through a workflow to facilitate accounting and payment.

5) Debit Notes & Credit Notes This document details the flow of transactions involved in periodic and transactional processing of debit notes / credit notes with respect to their preparation, approval and posting. Periodical processing of debit notes/ credit notes will be done by SSC as per agreed base data available in SAP and defined methodology. The statement will be prepared by SSC and approved by local unit before issuing and accounting debit notes / credit notes. In case of debit notes / credit notes based on certain event or transaction, statement will be prepared and approved by local unit and sent to SSC for issuance and accounting.

6) Employee Expense Reimbursement The document covers two variants for this process. One variant shows steps involved where the expense statement is submitted and processed manually. The second variant shows steps where the employee fills up expense statement in the online system which is integrated with the SAP travel management module. This document does not cover the process of travel planning whereby the employee enters requests for booking of tickets and advance.

7) Balance Confirmation & Vendor Account Reconciliation This document details the flow of transactions involved in extracting the vendor balances, follow with vendor and reconciling of differences. Starting point of the sub process is extraction of vendor balances and end on reconciling the difference, if any, found during balance confirmation.

8) Month End Activities This document details the flow of transactions involved in generating GR/IR list, Open PO list, Invoices pending processing, follow with vendor / local accounts department for their resolution and processing of pending invoices. Starting point in the sub process is generation of Open GR/IR, PO & Outstanding Invoice report and the end point is clearance of each line item by processing of invoice / cancellation in SAP.

9) Advance processing for vendor This document details the flow of transactions involved in receiving down payment request, processing of the same by SSC for payment & removal of DPR posting block in SAP to facilitate payment. Starting point in the sub process is receipt of down payment request and end point is removal of DPR posting block in SAP. 78

10) Vendor Ageing & Write-back This document details the flow of transactions involved in generation of vendor ageing report, ageing analysis, approval for write back & processing write back in SAP. Starting point in the sub process is generation of vendor ageing report and end point is processing write back in SAP.

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LIMITATIONS 1) Since the procedure and policies of the company will not allow disclosing confidential financial information, the project has to be completed with the available data given to us. 2) There was no scope for providing information about the current financial year (08-09) as the financial statements for the current year were not released by the time, the project was completed. 3) The study is carried basing on the information and documents provided by the organization and based on the interaction with the various employees of the respective departments. 4) The period of study of 8weeks is not enough to conduct depth study.

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BIBLIOGRAPHY BOOKS JAIN AND NARANG (COST ACCOUNTING) I.M.PANDEY (FINANCIAL MANAGEMENT) JAIN AND NARANG (FINANCIAL ACCOUNTING)

REPORTS ESSAR STEEL JINDAL STEEL TATA STEEL

WEB SITES www.essar.com www.investopedia.com www.wikipedia.com

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