TABLE OF CONTENTS

THE RISK ASSESSMENT MODEL ............................................................................................................ 3 MODEL DESIGN .................................................................................................................................... 3 MODEL USAGE ..................................................................................................................................... 5 MODEL ARCHITECTURE ....................................................................................................................... 6 OVERALL RISK MEASURED ON AN TEN POINT SCALE ............................................................................ 6 INDUSTRY RISK EVALUATION .................................................................................................. 7
Factor scoring ........................................................................................................................................ 7 1. Demand-supply gap...................................................................................................................... 7 2. Government policies..................................................................................................................... 8 3. Extent of Competition................................................................................................................... 9 4. Input Related Risks....................................................................................................................... 9 5. ROCE (Return on capital employed)......................................................................................... 10 6. OPBDIT/Operating Income ....................................................................................................... 11 7. Variability of operating margins ............................................................................................... 11 8. Growth in operating margins..................................................................................................... 12

INTERNAL BUSINESS RISK EVALUATION ............................................................................. 13

Market Position factors ...................................................................................................................... 13 1. Access to Patents.......................................................................................................................... 13 2. Brand equity ................................................................................................................................ 13 3. Consistency in quality ................................................................................................................ 15 4. Customisation of product/Product design................................................................................ 16 5. Distribution set up...................................................................................................................... 18 6. Diversity of markets ................................................................................................................... 19 7. Financial ability to withstand price competition ..................................................................... 21 8. Long term contracts/assured offtake:......................................................................................... 22 9. Product range/mix: ...................................................................................................................... 23 10. Support service facilities/ After Sales Service.......................................................................... 24 11. Project management skills ......................................................................................................... 26 12. Size related pricing advantages ................................................................................................. 26 13. Replacement markets.................................................................................................................. 27 14. Deficit region - cement ............................................................................................................... 27 15. Consolidation of markets - cement............................................................................................ 27 16. Other promotional ventures....................................................................................................... 27 17. Value addition - software ........................................................................................................... 27 Operating Efficiency Factors ................................................................................................................... 27 1. Availability of raw materials ..................................................................................................... 27 2. Multi location advantages .......................................................................................................... 29 3. Adherence to environmental regulation ................................................................................... 29 4. Capacity Utilisation .................................................................................................................... 30 5. Cost effective technology ........................................................................................................... 31 6. Employee cost: ............................................................................................................................. 31 7. Efficient raw material usage (yield) .......................................................................................... 32 8. Energy cost................................................................................................................................... 33 9. Extent of Integration ................................................................................................................... 33 10. Management of input price volatility ....................................................................................... 35 11. Selling costs ................................................................................................................................. 35 12. Vulnerability to event risks ....................................................................................................... 36 13. Bargaining power with suppliers .............................................................................................. 36 14. Proximity to customers ............................................................................................................... 36 15. Employee attrition rate ............................................................................................................... 36

FINANCIAL RISK......................................................................................................................... 37
Interest Coverage......................................................................................................................... 37 Return on Capital Employed...................................................................................................... 37 Operating Margins...................................................................................................................... 37

 Operating income/ Short term borrowings............................................................................... 37 Current ratio ................................................................................................................................ 37 DSCR............................................................................................................................................ 37 Total outside liabilities/Total networth .................................................................................... 37 Free cash flow from operations/Total Debt .............................................................................. 37 FINANCIAL FLEXIBILITY...................................................................................................................... 41

MANAGEMENT RISK EVALUATION ....................................................................................... 43

Track record factors ................................................................................................................................. 43 1. Business and Financial Policy:................................................................................................... 43 2. Relevant experience in the industry.......................................................................................... 44 3. Board composition ...................................................................................................................... 44 Credibility................................................................................................................................................. 44 Payment Record ....................................................................................................................................... 45 Other factors............................................................................................................................................... 45 1. Group support: ............................................................................................................................ 45 2. Management proactiveness........................................................................................................ 45 3. Strategic initiatives ..................................................................................................................... 46

The Risk Assessment Model

The Risk Assessment Model (RAM) is a software based credit decision support system and is an integral part of MYCRAs credit management advisory service for banks, financial institutions and large size corporates. This service aims at enhancing the efficiency & effectiveness of all credit related functions. It helps an organisation in assessing the credit quality of borrowers. RAM is based on MYCRAs methodology for credit risk assessment.
Model Design

RAM in its basic form is designed to assess credit risk in a structured and comprehensive manner. This form is suitably adapted and modified to meet the specific needs of an organisation depending on the dominant borrower segments and typical information availability.

EXTERNAL RISK

INTERNAL RISK
BUSINESS RISK COMPANY

INDUSTRY RISK

GRADE MANAGEMENT RISK FINANCIAL RISK

CONSTRUCTION RISK

PROJECT RISK

POST IMPLEM ENTATION RISK

OVERALL RISK ASSESSMENT

RAM helps isolate risk elements using a top-down approach. The overall risk is assessed through a three staged process.
STAGE I : The risk of the company is broken down into risk categories. STAGE II : The risk categories are broken down into risk parameters.

STAGE III : The risk parameters are broken down into risk factors.

RAM operates on the principle of systematically and logically breaking down risks associated in lending to a corporate entity. This approach facilitates objectivity in assessment of inherently subjective aspects.

R is k G r a d in g

R is k c a te g o rie s

B u s in e s s R is k

F in a n c ia l R is k

R is k p a ra m e te rs

M a rk et p o s itio n

O p e r a tin g e ffic ie n c y

R is k f a c to rs

B r a n d e q u ity

D is tr ib u tio n set u p

Model Usage

The user is required to score the company on risk factors only (which are automatically built up stage by stage into the final grading). From the users viewpoint, the aggregation of risk is a three stage process:

Stage I

The user scores each risk factor on a six point scale *

Stage II

The risk factors are aggregated to arrive at the grading for each parameter

Stage III

The scores for risk parameters are further aggregated to arrive at a grading for a risk category. Finally the overall grading* is a result of the aggregation of the different risk category scores

O fficer F actor 1 Factor 2 Factor 3 F actor n-1 Factor n

Param eter 1 grading

Param eter i grading

P aram eter N grading

Category 1 grading

C ategory i grading

C ategory 4 grading

C redit Risk grad in g In order to ensure applicability across sectors, the model provides for a certain degree of flexibility in the selection of relevant parameters and associated weights. The architecture of the model is designed in such a manner as to prevent dilution of the weightages and impact of critical factors. The number of

factors should be restricted to the critical few to prevent dilution of their effect in the overall risk assessment. * scale gradation may vary depending on the borrowers profile
Model Architecture

OVERALL RISK RATING

W8
Business Risk

W9
Financial Risk

W3
Matrix Internal Business Risk Industry Risk

W4

W5

W6
Future Financials

W7

Management Risk

Past Financials

Financial Flexibility

W1

W2

Wi

W..

W..

Wn

FACTORS

Overall Risk measured on an ten point scale

Grade Degree of safety with regard to servicing Debt obligations Very High Comments

Grade I

Grade II

High

Grade III Grade IV Grade V

Adequate Average Below Average

The fundamentally strong debt servicing capacity of such companies is most unlikely to be adversely affected by changes in circumstances. Adverse business conditions are unlikely to affect debt servicing capacity. Such companies differ in safety from those in Grade I only marginally. Changes in circumstances are more likely to affect debt servicing capacity than for higher grades. Debt servicing capacity could weaken in view of changing circumstances While such companies are less susceptible to default than those in lower grades, uncertainties faced by them could adversely affect debt servicing capacity.

Grade VI Grade VII Grade VIII Grade IX Grade X

Inadequate Low High Risk Substantial Risk Default

Uncertainties faced by issuer could lead to inadequate capacity to make timely debt repayments Debt servicing capacity is highly vulnerable to adverse changes in circumstances. Adverse business or economic conditions are likely to lead to lack of ability or willingness to service debt obligations. Timely payment of debt would continue only if favourable circumstances continue Debt servicing capacity is in default and returns from this may be realised only on reorganisation or liquidation

Companies under the same grade are of similar but not identical creditworthiness. This is because the number of rating categories is limited and hence cannot reflect small differences in the degree of risks.

INDUSTRY RISK EVALUATION Industry risk assessment focuses on the overall industry of which the company being analysed is a constituent firm. Company specific factors are not covered at this stage. The factors considered under industry risk are Qualitative factors Quantitative factors* Demand supply gap Return on capital employed Government policy Operating margins Extent of competition Variability of operating margins Input related risks Slope of operating margin trendline * The quantitative factors are calculated and evaluated for the industry as a whole Factor scoring Indicative benchmarks are provided below for scoring of factors under Industry Risk. The benchmarks presented are illustrative guidelines for scoring an industry, rather than an exhaustive set of factors to be necessarily satisfied for appropriate categorisation. 1. Demand-supply gap Demand Supply gap would critically determine the volumes, realisations and consequently the profitability of companies operating in an industry. The attractiveness of an industry for fresh capital investments would depend upon the anticipated demand supply equation. Industries wherein demand is expected to exceed available supply over a 3 year horizon would score highly on this parameter. The global supply demand equation is factored in for industries that are globally integrated. The outlook on demand-supply position would largely be a function of Expected demand growth Shifts in consumption pattern resulting in replacement demand and product substitution Present installed capacities and commissioning of new capacities which would determine the supply pattern in an industry.

6 (Excellent) Extremely favourable demand supply gap. Current production well below the estimated demand for product. Demand supply gap likely to remain insulated from recessionary trends. Growth potential in foreseeable future is high.

5 (Good) Past growth rates relatively high and stable. Positive demandsupply gap scenario. Relatively insulated from economic recession. Favourable growth rate likely to continue in the medium term. However, product offtake not as easily assured as higher grades.

3&4 1(Average) Industry characterised by derived demand strong linkages with overall economic growth. Marginal demand supply gap/ slight overcapacity situation likely to restrict medium term growth, despite positive long term growth prospects.

2 (Below average) Serious oversupply situation in industry. Production levels have been stagnant/declinin g for an extended period. Installed capacities likely to remain in excess of estimated demand over the medium term. Reversal in oversupply situation in medium term is unlikely.

1 (Poor) Product is outdated, with demand showing a clearly declining trend. Industry likely to die out within a few years.

2. Government policies This parameter involves taking a view on whether government policy over a 3 year time horizon would affect the industry in a favourable or unfavourable manner. The impact of government policies with respect to tariff barriers, both quantitative (import duties) and qualitative (quotas, other restrictions like sanctions), excise duty, taxes, domestic price control, incentives for new investments, incentives for exports, legislation for pollution control measures, laws with respect to foreign exchange on various industries need to be examined. Industries with favourable government policies would score high on this parameter. 6 (Excellent) Policy is highly favourable and unambiguous, with certain minimum return being made available to the industry. Favourable government policy likely to continue in the foreseeable future. 5 (Good) Despite absence of assured returns, other measures taken by the government such as protective import tariffs/ incentives favourably influence the industrys profitability. 3&4 (Average) The existing government policies are not significantly favourable/ unfavourable for the industry. Profitability is not particularly influenced by existing/ foreseen regulatory measures. 2 (Below average) Government policy has a significantly negative influence, in the form of high excise burden, inverted import duty structure, unviable price regulation, etc. 1 (Poor) Government policy towards industry is extremely unfavourable e.g. Order for closure of all units in a polluting industry by a specified date.

Scores 3 & 4 represent average performance for the given factor, however score of 4 to be given for average performance with a positive outlook (slightly higher than average performance), while score of 3 to be given to average performance with negative outlook (slightly lower than average performance)

3.

Extent of Competition

The level of competition in an industry has implications on future profitability of players in an industry. The existing demand supply scenario, outlook on growth, and the number of players operating in an industry critically determine the extent of competition. The number of players operating in an industry would in turn depend on entry barriers in an industry. Existence of government regulations regarding licensing requirements, level of returns, heavy capital investment requirements, distribution network, technology, patents, brand equity could be significant entry barriers for prospective entrants to an industry. The industry could be exposed to competition from the unorganised sector, as well as imports. The increasing linkage with the global economy in a declining import duty regime exposes domestic companies to competition from imports. The unorganised sector poses significant competition in industries with low entry barriers. Extent of competition in an industry could be reflected by trends in realisations and expenditure on sales promotion. Industries with high level of competition would score low on this parameter. 6 (Excellent) The industry has a monopoly structure, with the prospect of new entrants in the medium term being unlikely. 5 (Good) Industry is characterised by a few large players accounting for the bulk of market share. Capital investment involved is likely to discourage significant increase in competition in the medium term. Absence of serious threat from imports. 3&4 (Average) Industry has a fairly fragmented structure. Moderate entry barriers in the form of technology/ capital investment. Fair extent of value addition restricts easy access to the unorganised sector. / Significant threat from imports. 2 (Below average) Highly fragmented industry. Processes are very easily replicable leading to presence of large, cost-competitive unorganised sector/ Significantly lower cost of imports render domestic producers unviable. 1 (Poor) Extremely competitive industry, with a near absence of entry barriers, in the form of investment/ technology etc. No player is capable of building a significant market share in the industry. Majority of players in the industry are loss making.

4.

Input Related Risks

This parameter would involve taking a view on availability of raw material and volatility in the prices of raw material. The volatility in prices would affect the earnings stability, depending upon the ability of the industry to pass on increase in raw material prices to the end users. The industries characterised by high value addition would be less susceptible to the volatility in raw material prices. The extent of value addition is reflected by the percentage of raw material cost in the overall cost structure of the product. Industries with limited availability of raw material, highly volatile prices of raw material or low value addition would score low on this parameter.

6 (Excellent)

5 (Good)

3&4 (Average)

2 (Below average)

1 (Poor)

Players across the industry have access to an assured medium to long term supply of inputs at stable prices.

Key raw material inputs for the industry are available in abundance. Absence of significant year to year variations in availability of raw material. Volatility in raw material prices is low.

Profitability is significantly dependent on raw material prices, which are relatively volatile. Availability of quality raw materials is subject to natural uncertainties, etc./ Fair degree of dependence on imported raw material, leading to exposure to forex risk.

High raw material cost with highly volatile input prices. Uncertainties associated with availability of raw materials/ volatility in prices/ can significantly affect profitability of players across the industry.

Availability of raw materials highly uncertain. High volatility in input prices within a short time period. Absence of any foreseeable trend in raw material price movements/ availability.

5. ROCE (Return on capital employed) = Profit before interest and tax (PBIT)/ Average capital employed Where capital employed = (Capital + Reserves + Short term debt + Long term debt Revaluation reserves Capital work in progress) Average capital employed = (Capital employed at the beginning of year + Capital employed at the end of year)/ 2 ROCE is scored as a weighted average of the last three years. e.g. if the ROCE is as given below: 1997-98 1998-99 1999-2000 ROCE 15 16 17 (3*17+2*16+1*15)/6 15 12 17 (3*17+2*12+1*15)/6 15 14 13 13 ROCE Less than 10% 10.0% to 12% 12.0% to 14% 14.0% to 18% 18.0% to 20% 20.0% to 24% 24.0% to 28% Above 28.0% Score 1 1.5 2.25 3 3.75 4.5 5.25 6

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6.

OPBDIT/Operating Income

= Operating profit before depreciation, interest and taxes/Operating Income This ratio is scored as a weighted average of the last three years. e.g if the ratio is as given below: 1997-98 1998-99 1999-2000 OPBDIT/Op Income 15 16 17 (3*17+2*16+1*15)/6 15 16 15 (3*15+2*16+1*15)/6 15 14 13 13 Operating Margin Less than 5% -5% to 5% 5% to 10% 10% to 15% 15% to 20% 20% to 25% 25% to 30% Above 30% 7. Variability of operating margins Score 1 1.5 2.25 3 3.75 4.5 5.25 6

= standard deviation of operating margin errors over a seven year period/average error over a seven year period

The same is illustrated by the following table TABLE 1 OPBDIT Agg. turnover FY 1994 FY 1995 FY 1996 FY 1997 FY 1998 10 15 14 17 16 100 100 100 100 100 Operating Margins 10.00% 15.00% 14.00% 17.00% 16.00%

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The above table presents a growing operating margin. However the growth does not follow a straight line but instead is volatile. The following table captures the volatility of the operating margins. Table 2 error Column 1 Column 2 1 2 3 4 5 11.6% 13.0% 14.4% 15.8% 17.2% IOTA -1.60% 2.00% -0.40% 1.20% -1.20% 11%

The above table presents the predicted y-co-ordinates assuming a straight line. The error column is the difference of the predicted and the actual values. IOTA (volatility) is then defined as: Standard deviation of error terms/ average value of error terms Variability Less than .05 0.05 to 0.08 0.08 to 0.1 0.1 to 0.15 0.15 to 0.2 0.2 to 0.27 0.27 to 0.35 Above 0.35 Score 6 5.50 4.75 4 3.25 2.50 1.75 1

8.

Growth in operating margins Score Less than (0.05) (0.05) to (0.03) (0.03) to 0 0 to .0025 0.0025 to .005 0.005 to .0075 1 1.5 2 2.75 3.5 4.25

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0.0075 to .01 Above 0.01

5 6

INTERNAL BUSINESS RISK EVALUATION Market Position factors 1. Access to Patents This parameter reflects the rights with a company to manufacture/ market patented products resulting in stronger market position. The access to patents would assume particular significance in industries requiring high investment in research and development. Examples of Relevant Industries : Pharmaceuticals With the proposed policy of introducing product patents in the country, introduction of new products by domestic pharma companies would depend on access to patented products. Pharmaceuticals Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below Average) 1 (Poor) Attributes Indian subsidiary of an international pharma major with unlimited access to patent protected products developed by the parent. Marketing/ licensing arrangement with international pharma major for sale of patented products. Access to patents limited to a few products covered by process patents. Sales comprised largely of off patent products. No access to patented products through JVs etc. Sales comprised exclusively of off patent drugs

2. Brand equity This parameter measures the protection against erosion of market share enjoyed by the company, owing to brand strengths. Brand equity may be international, national or localised. Brand equity assumes significant importance in evaluating sustainability of market position, especially in industries with a high value addition. Examples of Relevant Industries : Consumer durables, Readymade garments, fast moving consumer goods, Pharmaceuticals, Automobiles In consumer durable and ready made garments industry, the ability of the company to build a strong brand image is critical for sustenance of its market position. Loyalty of medical fraternity to certain brands is a key feature of the pharmaceutical formulation business. Large brands which are well entrenched in the respective therapeutic segments considerably strengthen the companys business position and render a certain degree of stability to the company sales. Marks Attributes

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6 (Excellent) 5 (Good) 3&4 (Average)

2 (Below average) 1 (Poor) a) Consumer Durables Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor)

Presence of extremely strong bestselling international brands in portfolio. Companys sales driven by branded products. Large proportion of branded products in overall sales. Brands are either easily recognisable international brands or strong domestic brands. Company has built brands which enjoy fair degree of recall among customers. However, ability to invest in brand building is limited and brand equity is restricted to a particular geographical region/ customer profile. Presence of one or two weak brands with very low customer recall. Brand recognition expected to decline in a scenario of proliferating brands. Popularity of brands restricted to one or two states. Portfolio consisting entirely of unbranded products.

Attributes Extremely strong international brand in consumer electronics. Brand is associated with the highest international quality standards. Among the strongest domestic brands in consumer electronics, strong international brand. Brand has a strong quality image. Proven to have high brand recall based on marketing surveys. Fairly strong regional brand with an established market presence in consumer durables. However, brand extension across varied product lines/ regions remains to be demonstrated. Small scale/ state level manufacturer of domestic appliances with a weak brand name. Ability to invest in further brand building is severely restricted. Assembler of unbranded items in the grey market for consumer electronics. Manufacturer of unbranded radios, etc

b) Fast Moving Consumer Goods Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor) c) Pharmaceuticals Marks 6 (Excellent) 5 Attributes Large proportion of well known brands in companys portfolio. Numerous brands figure in top 250 as per market audit. Companys brands enjoy high degree of loyalty with the medical fraternity. Brands with high recognition form a moderate proportion of sales portfolio. Attributes MNC with globally leading brands in portfolio. Presence of heavy promotion budgets. Success in introducing, and popularising global brands brands. MNC with strong brands, but yet to establish favourable brand recognition in the country/Strong domestic brand enjoying wide recognition in domestic markets. Possesses ability to withstand MNC competition. Local brands enjoying popularity in certain geographical pockets. Limited ability to incur promotional expenditure for brand building purposes. Low brand recall. Brand name provides ample scope for ambiguity and could be associated with other products e.g.. Branded soap produced by unorganised sector. Seller of unbranded consumer items such as table salt.

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(Good) 3&4 (Average) 2 (Below average) 1 (Poor)

Companys focus is on branded sales to the retail trade. Enjoys moderate loyalty among medical practitioners. Recognition of brands is limited, with most being me-too brands in their respective product categories. Medical fraternity is not known to be have particular affinity for these brands. Producer of bulk drugs, largely sold to formulators/ in unbranded form to institutions. Very small proportion of branded drugs in sales portfolio. Drugs sold entirely in unbranded form.

3. Consistency in quality A companys ability to maintain the quality of products contributes to its market standing, through repeat sales. The consistency in quality assumes importance particularly for service oriented companies, and manufacture of high value products. The quality of product for a service related industry could also be related with the execution of assignments within the stipulated terms of the contract. The different certifications by independent reputed agencies be reflective of quality levels achieved by the company. Examples of Relevant Industries: Hotels, Consultancy,, Software, Engineering, Cotton Yarn In software industry, the ability of the company to provide quality software would result in high proportion of repeat business and better client profile In yarn (cotton or synthetic) spinning industry, the ability to provide consistent count/ denier yarn would critically determine the market position of the company The level of service standards achieved in the hotel industry would determine the extent of repeat business in the form of higher occupancy rates. Attributes Exposure to quality conscious clientele. High proportion of repeat business. Presence in international markets, and certification of quality by international organisations. Exposure to some quality conscious clients in global as well as local markets. Progress in improving quality levels. Possess certification for quality, though not to same extent as above. Demonstration of acceptable quality levels on a consistent basis. Not known to have significantly deviated from generally accepted quality norms in the industry. Quality known to be suspect/erratic. Product unlikely to be purchased by a quality conscious customer. Frequent product rejection. Track record beset with serious quality related problems. Inability to improve quality perceived as detrimental to growth prospects.

Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor)

a) Computer software Marks 6 (Excellent) 5 (Good) Attributes Company has an impressive client list for onshore and offshore software services. Consistent execution of projects in timely manner. Has obtained the highest level of quality certification, e.g. SEI CMM Level 5. Growth in exports of software services to quality conscious clientele. Generally timely in execution of projects. Recognition from reputed certifying agency, but yet to reach highest quality levels.

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3&4 (Average) 2 Below average) 1 (Poor)

Exposure to some quality conscious local/international customers. Quality perception not comparable to the reputed software companies. Quality certification not to the same extent as higher graded companies. Inability to garner significant repeat sales. Quality/delivery schedule known to have dissatisfied customers. Absence of significant quality certification. Numerous instances of unsatisfactory performance of software products. No known initiatives to redress customer complaints.

b) Engineering Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor)

Supplier of equipment to leaders in respective industry segments. Track record of complex engineering projects. Globally superior quality levels, with international certification of quality. Client profile of highly quality conscious customers. Certification of quality standards has been received. However, yet to be globally competitive in some aspects of quality. Supplier of items of fairly good quality, e.g. Compressors to the lower end of the market. However, yet to reach levels of quality attained by higher rated companies. Supplier of small castings and forgings to an auto ancillary manufacturer. Several instances of quality related complaints from buyers in the past. Order book position has been significantly affected, owing to serious drawbacks in quality for items supplied in the past.

4. Customisation of product/Product design This parameter reflects the ability of a firm to modify existing products, or develop new products based on a specific customer need or changing preferences in an industry. The product design would assume particular significance in industries with specific customer design requirements, and short product life cycles. Examples of Relevant Industries : Computer software, Engineering, Pharmaceuticals, Automobiles Availability of customisation capability for suppliers of precision engineering equipment such as machine tools, contributes to building brand loyalty with the customer base The ability of a software company to make transition into new areas such as the Internet and intranet, e-commerce, and develop updated versions of products to cope with the rapidly changing technology would critically determine its market position. In pharmaceuticals, the ability to develop new therapies/ molecules is a key determinant of a companys competitive position. Newer therapies typically command a premium over older therapies and witness high growth rates, often at the expense of older therapies. Marks 6 (Excellent) 5 (Good) Attributes Demonstrated track record of ushering in change in the industry through introduction of new products. Product introduction record is the best in the industry. Company involved in continuous product innovation. Emphasis on R&D and improving product design. Demonstrated ability to innovate and improve, though the success of such initiatives would not be on the same scale as higher grades.

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3&4 (Average) 2 (Below average) 1 (Poor)

No noticeable emphasis on R&D activity/product design. Product profile has barely changed over the last few years. Standardized products manufactured from easily replicated processes. Absence of R&D facilities/ significant product design skills. Portfolio marked by an absence of technology intensive products. Absence of manufacturing facilities. Involved in trading of products manufactured by external parties.

a) Computer software Marks 6 (Excellent) Attributes Demonstrated ability to design products at a frequent rate, including some for global markets. Services have been adapted to various scales of operations, across different user industries. Development abilities distinguish the company from competition. Ability to design software products, though less prolific than above category. Software services have been customised across a moderate range of user industries. Customisation/design ability is regarded as a strength of the company. No specific focus in terms of developing software capabilities. The company executes fairly simple projects, which do not call for above average technical capabilities. Lack of experience in project execution. Software services provided are of an elementary nature, e.g. data processing facilities, etc. Services can be replicated with minimal training. Absence of any software development capabilities. Vendor of software developed by other parties.

5 (Good)

3&4 (Average) 2 (Below average) 1 (Poor) Pharmaceuticals Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor) b) Engineering Marks 6 (Excellent)

Attributes Typically has access to an MNC with considerable strength in research and development. New products contribute significantly to overall turnover. Introduction of new products at frequent rate. Demonstrated track record of introducing products. Frequency of introductions lower than above companies. Ability to capitalise on current process patent regime and sell the latest products at competitive price. Company has not demonstrated consistent strengths in process development, despite presence of R&D facilities. Proportion of newly developed drugs is sales mix is small. Company exclusively produces traditional drugs such as first or second generation antibiotics. Absence of basic R&D facilities. Absence of manufacturing facilities, or access to new products

Attributes Machine tools company with high level of engineering skills enabling highly customised machines for buyers across industries. Track record of

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5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor)

introduction of tools of varying cutting speeds, hardness, etc. Ability to customise products across various applications. However, rate of product introduction and proportion of special tools to standard tools lower than that of leaders. Absence of product introduction, though existing product is fairly technology intensive. Restricted to narrow product applications, such as specific material handling equipment, over long periods. Supplier of traditional, relatively simple standard product, such as low precision bearings. Adherence to relatively primitive technology. Absence of manufacturing facilities. Involved only in marketing of others products.

5. Distribution set up This parameter assesses the geographical spread and quality of a companys outbound logistics system. Presence of a wide distribution network affords access to a wide customer base, thereby enabling growth and higher market penetration. Further, existence of a strong dealer/distribution network erects significant entry barriers to potential competition. Distribution strengths assume primary significance in industries characterised by retail sales. Examples of Relevant Industires: Fast moving consumer goods, Readymade garments, Computer hardware, Pharmaceuticals, Automobiles Cement companies having an established distribution network are advantageously placed, since ability to access interior regions is an important determinant of market position. Sales of the FMCG sector being retail in nature, the presence of a widespread distribution system assumes critical importance in attainment of volumes.

Marks 6 (Excellent)

5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor)

Attributes Most extensive distribution network in the industry, with coverage across urban and rural areas in the country. Presence of distribution outlets not restricted to certain geographical areas. In addition to geographical coverage, number of distribution outlets is among the highest in the industry. Extensive distribution network, across most geographical areas in the country. However number of outlets serviced is significantly lower than that for the industry leaders. While the network is moderately extensive, distribution is not known as a strength of the company. Number of geographical areas not covered by the company is significant. The company lacks a significant distribution network. Selling is restricted to the vicinity of the manufacturing plant. Lack of distribution network perceived as an impediment to growth prospects. Company lacks even the most basic distribution infrastructure. Customers are required to purchase the product at the plant itself.

a) Two wheelers Marks 6 (Excellent) Attributes Geographical coverage across all regions in the country. Within each state, the companys products are available in cities, towns and rural areas. The level of availability of spares and support service at the distribution outlets is high.

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5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor)

Geographical coverage of distribution outlets across most states. Density of outlets not high in certain pockets, but high in cities and major towns. Distribution network is backed by high availability of spares and support. Distribution network is extensive in a few states, and not significant in others. The company is backed by moderate availability of spares and support, but only in a few states. Two wheelers can be bought only in the state of origin, or in neighbouring states. Distribution reach is extremely limited. Non availability of spares and service facilities is a common complaint. The company has distribution outlets only in the town of origin.

b) Fast Moving Consumer Goods Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor) c) Attributes Presence across all states. Number of retail outlets is the highest in the country, with coverage in all rural and urban areas. Distribution is considered a primary strength of the company. Soap manufacturer with extensive coverage of states. However, number of outlets is significantly lower than the industry leader. Strong distribution network in urban areas, but relatively weak in rural areas. Regional soft drink manufacturer with good coverage and large number of outlets in area of operations. Product is characterised by poor availability in other regions. Small scale soaps manufacturer with reach limited to a few towns and villages. Product is unavailable even in neighbouring states. Soaps manufacturer with product availability limited to town of origin.

Computer hardware Attributes Dealer network spanning major cities and towns across the country. Dealers are capable of going beyond selling to offering maintenance and networking services of a high order. Distribution network is considered the best in the industry. Dealer network covers most major cities and towns. Substantial proportion of value added resellers in dealer network. Ability to offer support facilities restricted to metros. Regional hardware vendor. Coverage of dealer network substantially lower than industry leaders. Ability to offer support services in region of operations is strong. Hardware vendor with operations restricted to a single state. Product availability and ability to offer support services is restricted to a single state. Low end computer hardware operator with activities in the nature of reselling, providing support in single town.

Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor)

6. Diversity of markets This parameter assesses the presence of companies in different market segments where the market segmentation could be based on geographical diversity, presence of export, and diversified customer base (including access to replacement markets) across different end user

19

industries. This addresses the companys ability to mitigate market specific demand risks and partially offsets recession in a particular end-user segment. Diversity of markets assumes primarily significance in industries with regional demand-supply imbalances and high volatility in demand in the end user segments. Examples of Relevant Industries : Auto ancillaries, Cottton Yarn, Cement, Computer Software, Engineering In auto ancillary industry, the sales to the OEM segment is characterised by low margins and cyclical demand patterns which are partially offset by presence of company in replacement market characterised by high margin and stable demand pattern In cement industry which has regional demand supply imbalances, the presence of a company in more than one region would result in better ability to absorb the downturn. Marks 6 (Excellent) Attributes Sales are distributed evenly across a wide range of user industries/ product usage high in OEM as well as replacement markets/ large proportion of export sales diversified across geographical destinations. Customer profile across industries/ across different segments within an industry. Substantial proportion of sales comprises exports. Exports concentrated in a small geographical destination. Few large customers within an industry segment account for bulk of sales/ Absence of vibrant replacement market. Sales is entirely dependent on two to three customers. No access to exports/ replacement market. Sales are to single customer.

5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor) a) Cotton yarn Marks 6 (Excellent) 5 (Good)

3&4 (Average) 2 (Below average) 1 (Poor)

Attributes Exports form major part of companys turnover, with strong presence in domestic market. Exports across quota, non quota markets. Not dependent on any single large client. Tie-ups with international trading organisations for export. Company has a strong presence in exports market. Exports, to both quota and non quota countries form significant part of turnover. However, diversity of export markets lower than above companies. Domestic sales spread across numerous buyers. Exports form a moderate proportion of sales, but diversity of markets limited largely to a few non quota destinations. Domestic sales are spread across numerous buyers. Exports is not a focus area for the company. Cotton yarn sold largely in the domestic market. Sales significantly dependent on two to three weaving units. Cotton yarn sold only to a single weaving unit.

b) Auto ancillaries

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Marks 6 (Excellent)

5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor) c)

Attributes Supplier of components to OEM customers across commercial vehicles, passenger cars and two wheelers. Strong relationships developed with customers. Presence in export markets. Vibrant replacement markets account for a substantial proportion of sales. Supplier of components to a diverse customer list, though not across as many user segments as above company. Products have a replacement market in addition to OEM sales. Company has established a presence in a few export markets. Supplies ancillary equipment to buyers across commercial vehicles sector. Single buyer does not constitute a major proportion of sales. Products lack significant replacement market. Dependent on one or two automobile OEMs. No replacement market for products. Lack of presence in exports market. Components sold to a single OEM.

Pharmaceuticals Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor) Attributes Strong market presence in India, as well as several other countries. High proportion of exports to developed countries. Exports consist of high proportion of formulations. Within India, sales largely to retail trade. Exports, spread across various countries, form a moderate portion of the companys sales. Domestic sales are mainly in retail trade and not dependent on a few institutional buyers. Minimal export presence/ Presence in export markets, but concentrated in one or two countries in East Europe, Asia. Domestic sales largely retail in nature, not dependent on single institution. Highly dependent on sales to one or two institutions in domestic/exports market.

Supplier of drugs to a single institution.

7. Financial ability to withstand price competition This would indicate the ability to reduce prices in order to protect market share, which would typically stem from the companys access to considerable financial resources. A companys market position could be bolstered by the support of a financially strong promoter group, enabling it to sustain losses or a poor financial position till such time that the product becomes viable in the marketplace on a standalone basis. Examples of Relevant Industries : Computer hardware, Automobiles, Fast Moving Consumer Goods Marks 6 (Excellent) Attributes Subsidiary of an extremely strong global corporate. Losses on account of market competition can be expected to be comfortably funded by the parent. The parent has a well known track record of supporting subsidiaries, or has expressed such intent in the form of public statements. Business house with large networth, enjoying sound financial position. Expected

21

(Good) 3&4 (Average) 2 (Below average) 1 (Poor)

to cope with price competition, though not with the same comfort as higher graded companies. Medium sized corporate. No support from financially strong local/global entities. Ability to sustain price competition would be limited. Small corporate with very limited access to resources. Expected to fare poorly in a scenario of price wars. Small corporate, expected to be severely affected by price wars in the form of immediate losses and closure of units.

a) Fast Moving Consumer Goods Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor) b) Automobiles Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor) Attributes Subsidiary of a financially strong global giant in passenger cars. Size of Indian operations currently small in relation to global revenues. Large domestic car manufacturer in sound financial position. Demonstrated ability to withstand price cuts by competitors/ initiated price cuts in past. Medium sized car manufacturer, independent of any business group. Small size in relation to above entities, with limited access to financial resources. Small company, with track record in market yet to be established. Not affiliated to a strong business group. Small car manufacturing company with intrinsically weak financial position. Attributes Indian subsidiary of a world leader in soft drinks. The parent has global scale operations, and possesses great financial strength. Soaps manufacturing company, belonging to a large, financially sound group. However, ability to sustain price competition would be limited in comparison to strong MNC soap manufacturer. Well established soap company, but not part of a major business group. Limited access to financial resources. Relatively new, small sized domestic soaps manufacturing company. Ability to cope with price competition is expected to be low. Very small soaps company. Complete absence of financial support from external agencies, in addition to poor inherent financial strength.

8. Long term contracts/assured offtake: This parameter factors in the available benefits if any, arising from the nature of sales agreement with the buyer. Measures such as long term supply contracts as well as understanding on assured offtake bestow stable demand pattern and thereby greater earnings stability. Long term sales contracts assume significance in an increasingly competitive market scenario, particularly for suppliers of raw materials and product intermediates. In auto ancillary industry, the long term sales contracts of players with the OEM results in assured off-takes, providing a measure of stability to the cash flows of such companies.

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Attributes 6 (Excellent) Presence of long term contract with reputed company for an assured offtake of output e.g.. Cotton yarn, compressors, etc. Such a contract covers major proportion of the companys sales. Presence of long term contract with a reputed company for an assured offtake of output. However, such a contract does not constitute a major proportion of the companys sales.

5 (Good)

9. Product range/mix: A wide product portfolio based on nature of offering and price, mitigates risks due to demand slowdown or competition. Product range is assessed on breadth (variety of products) as well as depth (variants of a single product). High value added products in the product mix partially insulate the margins of the company from any change in the prices of raw material. Examples of Relevant Industries : Consumer Durables, Auto Ancillaries, Pharamaceuticals, Cotton Textiles, Software, Automobiles, Fast Moving Consumer Goods In consumer durables, manufacturing multiple products such as TVs, audio products and washing machines optimises marketing and distribution strengths, provides a more dispersed reach and offers scope for cross subsidisation across products. A company in cotton textile industry with high proportion of specialty yarns, high count yarns, and higher value added dyed yarns is partially insulated from high volatility in cotton prices. The presence of the company in a software industry across various stages of the value chain from body shopping to product development strengthens market position. In the commercial vehicle industry, ability of a company to provide a variety of transportation solutions across different load levels helps build strong brand loyalty with the customer.

Marks 6 (Excellent)

5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor)

Attributes Presence in all major product segments in the industry. Product diversity of such companies would necessarily be the best in the industry. Company is expected to remain at the forefront owing to capability to introduce new products. Presence in majority of the product segments in the industry/Presence in limited range of relatively high margin products. Presence in more than one product category, but clearly not comparable to the product range of industry leaders. Single/two product company . Presence in only a single, minor product segment.

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a) Consumer durables Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor) Attributes Significant presence in Colour and B&W television, audio and video systems, refrigerators, washing machines and other home appliances. Presence in not all, but a large proportion of above segments, e.g. Audio and video systems, televisions, and select home appliances. Presence in only two to three product segments. Further, depth i.e. no of variants within each segment is limited. Company with a very limited line of products E.g. A black and white TV manufacturer with two models. Company manufacturing a single model of mixies.

b) Drugs and Pharmaceuticals Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor) c) Auto ancillaries Attributes Presence in multiple high margin product categories e.g. axles, fuel injection pumps, pistons and valves . Presence limited to two or three high margin product categories. E.g. Fuel injection equipment/pistons of multiple models. Presence in two to three products, with moderate value addition. Supplier of one or two varieties of low value added components. Single component with minimal value addition. Attributes Predominantly a formulations producer, with presence across a wide range of therapeutic segments, particularly in areas of high growth, such as cardiovascular drugs. Wide therapeutic coverage, with major proportion of sales being formulations. However, products are in relatively lower growth segments. Slight preponderance of bulk drugs in portfolio. Therapeutic coverage limited to few segments, in low to moderate growth areas / Manufacturer of formulations in a few low growth therapeutic segments, e.g. antibiotics. Manufacturer of only bulk drugs. Presence of three to four bulk drugs in portfolio. Manufacturer of a single, commonly available bulk drug.

Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below verage) 1 (Poor)

10. Support service facilities/ After Sales Service This factor addresses the ability to provide after sales support services to its customer base. Support service facilities assume significance particularly in industries manufacturing durable products. The availability of support service facilities is partially dependent on a wide distribution network.

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Examples of relevant Industries : Consumer Durables, Office Equipment, Computer Hardware, Automobiles, Tractors In consumer durables, the support offered in terms of service networks and availability of spares critically determine the sustenance of companys market position and brand equity. In the automobiles industry, existence of a wide service setup enables the company to ensure a geographically diversified client profile which is instrumental in expansion of volumes. Marks 6 (Excellent) Attributes Distribution backed by a widespread after sales service network. Coverage and quality of sales support offered by the company regarded as best in the industry. For such companies, the reaction time for extending support facilities, such as repairs, etc. would be the lowest in the industry. The support facilities are clearly above average, and are a significant strength to the companys operations. However, service facilities are inadequate in certain geographical areas of the market. Limited emphasis on after sales service. Availability of support facilities is restricted to few areas. The strength of service network is not a distinguishing feature from competition. The company is severely lacking in after sales support facilities. Growth opportunities are perceived to be restricted on account of absence of support infrastructure. Absence of any meaningful support facilities. Companys involvement with the customer ends at the point of initial purchase.

5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor)

a) Consumer durables Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor) b) Automobiles Marks 6 (Excellent) Attributes Two/wheeler/commercial vehicle/car company with widespread availability of spare parts and ability to meet the servicing demands of consumers across urban, semi-urban and rural areas. Regular training programmes for disseminating service skills. Existing distribution network generally provides service of good quality. Attributes Personnel for after sales service easily accessible across regions for all products. Warranty periods clearly specified in sales contract. Spare parts such as motors, gaskets for electronic mixers etc. are easily available. After sales support is highly regarded, and growing in coverage. However, for certain products, the availability of spares and coverage of service facilities is yet to equal that of the industry leaders. Lack of focus on support service as a distinct area of strength. Occasional difficulties in sourcing of spare parts. Coverage of support facilities is limited to a few states. A television manufacturer offering after sales support only in one or two metros, leading to frequent difficulties in spare part sourcing. A television/audio electronics manufacturer with unavailability of spare parts/ not offering any after sales service.

25

(Good)

3&4 (Average) 2 (Below average) 1 (Poor)

However, there is non uniformity in quality of service/ availability of spare parts across geographies, which places the company at a small disadvantage to higher grades. The coverage of service facilities and availability of spares is restricted to few areas. The company clearly lags the more proactive competition in terms of offering service facilities. Absence of an acceptable level of support service infrastructure and spares availability, except in one or two metros. Spare parts of the company are not available, and the company offers no after sales service.

11. Project management skills This factor is mainly used for construction and erection industries or even software projects where the deliverables stretch over a period of time. The ability to deliver on time and manage the big projects with their inherent complexities would help in improving the market position of the companies catering to this segment. Examples of relevant industries: Construction and erection industries, software projects Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor) Attributes Projects are completed on time and there are no cost overruns in any of the projects More often than not, the projects get completed on time but there are instances of slight overruns In case of complex projects, the company has erred in some cases There are many instances where the company has not been able to deliver on time The company has overrun on all its projects

12. Size related pricing advantages This factor looks at the economies of scale enjoyed by the producer and how it translates into ability to price lower than competition, thus enabling the entity to garner a higher market share. Price competition is intense especially in industries wherein brands are not as important. In such industries, ability to price low based on size, plays a very important role. Examples of relevant industries: Cement, steel, auto ancillaries, petrochemical Marks Attributes 6 Large size of the company gives it the opportunity to be the price maker (Excellent) 5 Company is easily able to price lower or at par with the competitors due to its (Good) large size 3&4 In case of price competition, the company is just about able to match with its (Average) competitors owing to its average size 2 Due to small size, the company is unable to compete on price with its competitors (Below who are much larger and price aggressively average) 1 Company is always losing out on market due to its high price as compared to

26

(Poor)

other companies who price aggressively owing to their size

13. Replacement markets A well developed replacement market is favourable for industries like auto ancillaries. Companies enjoying a good standing in replacement market would ensure sales even if offtake by OEM is under pressure. Examples of relevant industries: Auto ancillaries, equipment manufacturing, engineering goods Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor) Attributes The company has excellent reach and reputation in replacement markets. A significant part of its sales come from these markets. Regular offtake from replacement markets help in maintaining companys turnover The company is present in only some regions and there is lack of focus on part of the company to attract clientale in replacement markets Nominal presence of the company in replacement markets. No distribution channel No presence in the replacement markets. Turnover comprises only OEM sales

Some of the other factors that are considered under market position and which are specific to a particular industry are as follows: 14. Deficit region - cement 15. Consolidation of markets - cement 16. Other promotional ventures 17. Value addition - software

Operating Efficiency Factors

1. Availability of raw materials Availability of raw materials at competitive price is critical, mainly for industries with low value addition. Companies enjoying diverse sources of supply of an abundant raw material, would be relatively insulated from raw material price fluctuations. The location of a company near the source of raw material in case of high inward freight costs and assured supply of quality raw material at stable prices would determine the competitive position of the company. Examples of Relevant Industries : Aluminum, Cotton Textiles, Sugar, Steel, Paper For integrated Aluminium producers, access to low cost supply of bauxite and other key raw materials like caustic soda and calcined petroleum coke is critical. For downstream Aluminium manufacturers, access to sufficient supply of high quality and low cost primary Aluminium is essential to achieve a competitive cost position. In the cement industry, the proximity to limestone reserves determines its cost of inward transportation. In addition, the sufficiency of limestone is critical for stable production. In the sugar industry, the location with respect to cane availability and procurement, significantly influences the companys operating efficiency. Further, the companys relationship with the farmers also plays a critical role in determining cane availability.

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Marks 6 (Excellent)

5 (Good)

3&4 (Average) 2 (Below average) 1 (Poor)

Attributes Presence of assured/ abundant supply of important raw materials of good quality. Company proactively takes steps to ensure uninterrupted supply of raw materials on a continuous basis. Benefits of raw material procurement clearly distinguish the company from competition. Raw material procurement is considered a strength of the company, with key raw materials being easily available from neighbouring areas. Shortage of raw materials has not been known to affect companys operations. However, future availability of a key raw material is subject to more uncertainty than for above companies. Company does not possess any particular raw material sourcing strengths. The non availability of a particular raw material has been known to impede the companys operations in the past. Poor availability of a key material places the company at a severe disadvantage with respect to competition. Companys operations have been repeatedly hindered by raw material shortages. Inability to produce for an extended period of time owing to non availability of raw materials.

a) Aluminium Marks 6 (Excellent) Attributes Integrated aluminium manufacturer with access to abundant supplies of high quality bauxite, and diversified supply base for soda, calcined petroleum coke, cryolite, aluminium fluoride and coal tar pitch. Large bauxite reserves with low annual depletion rates. Aluminium producer with access to large bauxite reserves. Easy availability of other raw materials. However, not as comfortably placed as above category with regard to proximity to bauxite/ore quality/depletion rates of reserves. Access to a fairly steady supply of bauxite. However the company has not developed alternate sources for supply of other key raw materials such as caustic soda. Raw material shortages have been known to affect output of aluminium in the past. Company is plagued by serious shortages of key inputs for primary aluminium production. Instances of depressed production due to raw material shortages. Bauxite reserves nearing exhaustion, mining rights yet to be acquired. Aluminium plant has been shut for an extended period owing to lack of raw material.

5 (Good) 3&4 (Average)

2 (Below average) 1 (Poor) b)

Cotton yarn Attributes Proximity to cotton growing area. Company purchases cotton in bulk at the commencement of year, yet has the liquidity to purchase cotton in retail market when price is favourable. Highly experience in cotton textile business. Regarded as best in industry with regard to cotton procurement. Cotton procurement skill marginally lower than above category. Relationship with suppliers/ cotton marketing federations strong, but not as well established as above companies. Cash rich nature enables immediate purchase of cotton during favourable price movements. Cotton procurement is not regarded as a strength. While experienced in the

Marks 6 (Excellent)

5 (Good)

3&4

28

(Average) 2 (Below average) 1 (Poor) c) Cement

business, non availability of cash could restrict flexibility to source cotton as and when desired. Insufficient expertise in judging price movements in the market, leading to inability to have optimal stocking. Availability of cash to make spot buying decisions extremely restricted. Spinning operations have been halted owing to lack of cotton supply.

Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor) 2.

Attributes Proximity to abundant limestone reserves, with long expected life/ Long term supply of limestone assured by Government. Proximity to coast enabling imports of high quality coal. Proximity to abundant limestone reserves of good quality. However expected life of reserves is lower than that for the above category. Proximity to coast enabling imports of quality coal. Proximity to limestone reserves, however mediocre limestone quality/low residual life of reserves. Not situated in proximity to the coast. Not situated in proximity to limestone reserves, rendering inward transportation costs prohibitive/ Erratic limestone supply has affected manufacturing operations in the past. Manufacturing operations have been stopped owing to lack of availability of a key raw material.

Multi location advantages

3. Adherence to environmental regulation This is a significant parameter for polluting industries, such as metallurgical and chemical related industries, and assumes significance in the context of increasing judicial activism on environment related issues. Examples of Relevant Industries : Dyes & Chemicals The pollution control measures employed by a chemical manufacturer assumes importance in the backdrop of increasing resistance against products that are not eco-friendly. Marks 6 (Excellent) Attributes HIGHLY PROACTIVE ON ENVIRONMENTAL ISSUES. EFFLUENT NORMS ARE WELL WITHIN PERMISSIBLE LEVELS. COMPANY HAS CARRIED OUT AN ENVIRONMENT AUDIT/IMPACT ASSESSMENT. RECEIVED CERTIFICATION SUCH AS ISO 14001 ON THE ADEQUACY OF POLLUTION CONTROL PROCEDURES. High awareness of environmental concerns. Company has carried out an Environment Impact Assessment. Effluent norms largely meet requirements. Areas of shortcoming, if any, are expected to be addressed shortly. Awareness of need for pollution control exists, but absence of active steps to minimise pollution. Company cannot be said to be proactive in tackling environmental issues. Operations of a highly polluting nature. Company has faced frequent protests

5 (Good) 3&4 (Average) 2

29

(Below average) 1 (poor)

related to environmental issues. Likely to face judicial action/enquiries if pollution control methods do not improve. Company has been ordered to discontinue production till such time that the effluents meet norms laid down by the Pollution Control Board.

4. Capacity Utilisation This parameter evaluates the ability of the company to achieve high capacity utilisation to enable distribution of the fixed costs over a higher volume. Capacity utilisation may not be very relevant in the case of companies involved in a high degree of customisation, as well as trading companies. While economic size capacities provide the company with the ability to attain cost competitiveness, capacity utilisation determines the actual translation of available benefits. Low and fluctuating capacity utilisation may indicate weaknesses in stability of operations or operational bottlenecks. Examples of Relevant Industries : Fertilisers, Steel, Automobiles, Synthetic Textiles, Chemicals In the fertilisers industry, especially urea manufacture, capacity utilisation has a major role in determining the relative profitability levels. Availability of feedstock, plant vintage and technology would be the determinants of capacity utilisation. In the consumer durables industry, since volume led growth largely dictates both business and financial strategies, companies with high capacity utilisation would be favourably placed. Sub optimal capacity utilisation could be on account of imbalances in the assembly or production line.

30

Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below Average) 1 (Poor)

Attributes Full utilisation of existing capacities on a consistent basis. Capacity utilisation generally close to maximum levels.

Moderate levels of capacity utilisation. Full capacity levels unachievable on account of operational bottlenecks. Low capacity utilisation. Process plagued by material /power shortage /old technology/ imbalance in equipment. Largely unutilised capacities.

5. Cost effective technology The use of innovative technology in certain industries leads to a leaner cost structure. Firms using such technology are able to price their products cheaper than competitors, thereby gaining a competitive advantage. Such technologies are typically patented and not available to all the firms in the industry. Examples of Relevant Industries : Process of Industries such as Caustic Soda and Petrochemicals In the caustic soda industry, use of the superior membrane technology leads to better yields resulting in cost savings. In synthetic textiles, while older plants have come up using the batch process, new plants are being set up with the superior poly-condensation process, resulting in operating cost savings for the latter. Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below Average) 1 (Poor) Attributes Use of most modern advanced technology, leading to operating costs being significantly lower than the industry norms, e.g.. Use of membrane cell technology in caustic soda industry. Use of modern technology, leading to operating cost savings in relation to industry norms e.g.. Use of mercury cell technology for caustic soda production. Use of fairly modern technology, with operating costs in line with average industry levels. Use of archaic technology, leading to operating costs being significantly higher than industry norms, e.g.. Chemical process for caustic manufacture. Use of highly outdated technology leading to abnormally high operating costs.

6. Employee cost: This factor is relevant in labour intensive industries where employee expenses forms a significant proportion of the overall cost structure. A cost structure characterised by high employee cost restricts ability to withstand a downturn, particularly in view of the contentious nature of downsizing related issues. Measures such as cost per employee, sales per employee, etc. yield insights into a firms employee productivity upon comparison with other firms within the industry. It is also pertinent to examine the extent to which the labour costs are fixed versus

31

variable. This indicates the ability of the company to withstand a downturn by curtailing labour related costs. Examples of Relevant Industries : Steel, Engineering, Textiles, Hotels, Consultancy, Software, Pharmaceuticals Service sector industries such as banking, hotels, consultancy, software etc. have high employee costs. Higher employee productivity leading to a reduction in employee costs yields a competitive advantage for companies in these industries. Given the labour intensiveness of the Indian economy, employee cost is also relevant across manufacturing industries such as Castings & Forgings, Steel, and textiles. Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below Average) 1 (Poor) Attributes Employee cost (as a percentage of operating income) is well below industry norms. Such companies have demonstrated an ability to maintain employee costs at low levels. Employee cost has consistently been lower than industry average levels. Company perceived to be advantageously placed owing to low employee costs. Employee costs are in line with average levels in the industry. Employee costs are well above average industry norms. Absence of noticeable declining trend in employee costs. Employee cost is extremely high in comparison to competitors.

7. Efficient raw material usage (yield) Efficiency in raw material usage assumes importance in industries wherein raw material forms a substantial proportion of the overall cost structure, such as commodities and agro based products. Examples of Relevant Industries : Aluminum, Steel, Paper, Sugar A primary aluminium manufacturers efficiency is reflected in specific parameters such as bauxite consumption/per tonne of alumina, and alumina consumption per tonne of aluminium. Crushing efficiency of sugar mills, measured in terms of percent of juice recovery, is indicative of the sophistication of crushing technology, as well as quality of cane.

Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below Average) 1

Attributes Raw material yields have consistently been well above the industry norms. Such levels are achieved only by the industrys most efficient producers. Raw material yields are marginally higher than the industry average. Companys consumption parameters have been steady/ improving. Raw material yield does not distinguish the company from competitors. Yields have generally been in line with industry averages. Raw material yield is significantly lower than industry average, on account of plant vintage, outdated technology etc. Absence of indication of improvement in consumption parameters. Abnormally low raw material yields.

32

(Poor)

8. Energy cost Energy cost is of critical importance in power intensive industries. Savings in the energy cost either as a result of lower tariffs or captive generation facilities would result in a competitive advantage for the company. Energy cost advantages can also arise from stability of operations and superior technology. Examples of Relevant Industries : Steel, Aluminum. Cement, Fertilisers Aluminium manufacturing being a highly power intensive process, companies with captive power sources are better placed than others as these have sustained access to cheap power. Modern cement plants using more energy efficient processes like vertical grinding mills tend to have lower power requirement than older plants. Sources and tariffs of power available, fluctuation and frequency of power cuts, investments to reduce consumption levels, and investment to reduce consumption levels would influence the ability of a steel company to curtail energy costs. Marks 6 (Excellent) Attributes Power and fuel cost (as a percentage of operating income) is well below industry norms. Such companies have successfully stabilised cheaper sources of power/ more efficient processes. . Power and fuel cost has consistently been lower than average industry levels. Company perceived to be an energy efficient producer. Power and fuel costs are in line with industry averages. Power and fuel costs are well above the industry norms. Absence of noticeable declining trend in employee costs. Power and fuel costs are extremely high in relation to competitors.

5 (Good) 3&4 (Average) 2 (Below Average) 1 (Poor)

9. Extent of Integration The effect of extent of integration would be determined by whether an industry experiences price cyclicalities or volume cyclicalities. The high level of integration in an industry with volume cyclicality would put higher pressure on the cost structure during times of recession and would benefit in times of high growth. A company in an industry with price cyclicality could benefit from integration if it is able to manufacture the intermediate at a price cheaper than prevailing market prices. However, in the event of adverse price movements in its inputs or outputs, the company stands exposed to adverse market circumstances. Extent of integration would also determine the companys assured access to critical inputs. This parameter assumes significance primarily in commodity based industries that are impacted by business cycles, and industries that require assured access to high quality inputs. Examples of Relevant Industries : Petrochemicals, Synthetic textiles, Tea, Steel In petrochemical industries, a higher degree of integration helps the company to take advantage of timing differences in cyclic patterns of various up-stream/ down-stream product prices. In addition, higher vertical integration can improve a companys cost

33

structure by allowing it to maintain higher than average operating rates in periods of low demand. Companies manufacturing pharmaceutical formulations derive benefits from a high level of backward integration in the form of higher operating margins, greater pricing flexibility vis a vis smaller players and greater control on quality standards. Marks 6 (Excellent) 5 (Good) 3&4 (Average) Attributes Highest level of integration for all products. Operations span primary material sourcing, various stages of processing of intermediates, and final sale. High level of integration of products. Only raw material in crudest form is sourced externally, and activities commence from processing of lowest level of intermediate. Raw material is itself a processed intermediate. Company undertakes further processing to manufacture final product/ supplier of intermediates to downstream manufacturers. Company is a pure assembler/packer of supplied materials. Traders of items manufactured by other parties.

2 (Below average) 1 (Poor) a) Synthetic fibres Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor)

Attributes Presence in all links of the value chain, commencing from manufacture of paraxylene (PX) to manufacture of PFY/PSF. Begins manufacturing at the PTA/DMT stage. Forward integration into the manufacture of PSF/PFY. Basic raw material is polyester chips. These undergo processing for the production of PSF/PFY. Company is involved only in the texturising of bought out synthetic fibres. Trading of synthetic fibres.

b) Tea Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below average) 1 (Poor) Attributes Fully integrated operations comprising multilocational captive tea plantations, manufacturing facilities, blending and packaging facilities, selling infrastructure. High level of integration in the manufacturing process, with captive plantations, processing, packaging and selling facilities. Multilocationality/ extent of inhouse tea production lower than above category. Supplier of processed tea leaves to blenders/ Blenders of processed tea leaves, with major proportion of tea leaves not being grown inhouse. Packaging of blended teas purchased from external parties/ Plantations without significant processing facilities. Trading of tea, with no value addition.

34

10. Management of input price volatility The ability to successfully manage fluctuations in input prices assumes importance in industries characterised by cyclicality in input prices. Input price management is critically determined on the companys relationship with suppliers, and stocking policies. Indigenisation assumes relevance as a tool to manage input price volatility in industries with significant import content. A companys ability to substitute imported components with domestically available material would insulate it from foreign exchange risks and unfavourable movements in import tariffs. Examples of Relevant Industries : Cotton textile, Engineering, Consumer Durables Development of strong relationships with marketing federations, effective stocking policies in cotton yarn industry and liquidity help partially mitigate risks of price volatility. In the consumer durable industry, critical components that constitute the large proportion of the raw material cost are still largely imported. Higher level of indigenisation would insulates a company from foreign exchange rate fluctuations. Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below Average) 1 (Poor) Attributes Raw material cost as a percentage of sales has been stable or declining over the last few years. Company has achieved complete indigenisation of inputs. Raw material cost has been largely stable over the last few years. Proportion of imported raw materials is either low or adequately hedged by export sales. Raw material cost has been fluctuating in line with industry trends over the last few years. Import content, if present, is largely hedged by companys export sales. Raw material costs exhibit abnormal fluctuations over the last few years. / Company with a high import content selling products in the local market. Highly fluctuating and increasing raw material costs over the last few years. Operating losses in the past due to input price fluctuation.

11. Selling costs Selling costs are significant in industries wherein the product is bulky in nature and demand centres are localised. For example cement and steel need to be transported over long distances and freight forms a significant component of the selling cost. Proximity to the market place ensures lower freight costs. Innovative mechanisms to transport such products result in cost savings lending a competitive edge to the company. Examples of Relevant Industries : Steel, Cement, Fast Moving Consumer goods A leading cement company pioneered the concept of transporting cement by sea as compared to the traditional land route resulting in significant selling cost reduction. In steel, the extent to which a producer has an outward freight cost advantage to service key markets is significant given the high weight to value ratio of steel products.

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Marks 6 (Excellent) 5 (Good) 3&4 (Average) 2 (Below Average) 1 (Poor)

Attributes Selling (primarily outbound freight) costs, as a percentage of operating income is well below industry norms. Such companies are able to capitalise on availability of cheaper modes of transportation/ multilocational advantages. Selling costs have consistently been marginally than average industry levels. Selling costs are in line with industry averages. Selling costs are well above the accepted industry norms. Absence of noticeable declining trend in employee costs. Selling costs are extremely high in relation to competitors.

12. Vulnerability to event risks The operations of companies in earthquake and flood prone areas are vulnerable to significant event risk, which may be mitigated to an extent by the presence of multilocational plants. Marks 2 (Below average) 1 (poor) Attributes Companys main plant is located in an area highly prone to earthquakes/floods. However, risk is mitigated to an extent by presence of plant(s) in alternate locations. Companys lone plant is located in an area highly prone to earthquakes/ other event risks.

Some other factors that have been considered are mentioned below. While these parameters may not be relevant for a large majority of companies, they have been included in the library to cater to specific cases where they be of special significance. 13. Bargaining power with suppliers 14. Proximity to customers 15. Employee attrition rate

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FINANCIAL RISK Financial Risk is evaluated through a combination of the following ratios (both past & projected): 1. Interest Coverage Return on Capital Employed Operating Margins Operating income/ Short term borrowings Current ratio DSCR Total outside liabilities/Total networth Free cash flow from operations/Total Debt Interest Coverage = Profit before interest, depreciation and tax (PBDIT)/Interest and Finance Charges Interest coverage is considered only for the latest year. Int_cover Below 1 1 to 1.5 1.5 to 2 2 to 2.5 2.5 to3 3 to 3.75 3.75 to 7 Above 7 Score 1 1.5 2.25 3 3.75 4.5 5.25 6

2.

ROCE (Return on capital employed) = Profit before interest and tax (PBIT)/ Average capital employed Where capital employed = (Capital + Reserves + Short term debt + Long term debt Revaluation reserves Capital work in progress) Average capital employed = (Capital employed at the beginning of year + Capital empoyed at the end of year)/ 2

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ROCE is scored as a weighted average of the least three years. e.g if the ROCE is as given below: 1997-98 1998-99 1999-2000 ROCE 15 16 17 (3*17+2*16+1*15)/6 15 12 17 (3*15+2*16+1*15)/6 15 14 13 13 ROCE Less than 10% 10.0% to 12% 12.0% to 14% 14.0% to 18% 18.0% to 20% 20.0% to 24% 24.0% to 28% Above 28.0% Score 1 1.5 2.25 3 3.75 4.5 5.25 6

3.

OPBDIT/Operating Income = Operating profit before depreciation, interest and taxes/Operating Income This ratio is scored as a weighted average of the least three years. e.g if the ratio is as given below: 1997-98 1998-99 1999-2000 OPBDIT/Op Income 15 16 17 (3*17+2*16+1*15)/6 15 16 15 (3*15+2*16+1*15)/6 15 14 13 13 Operating Margin Less than (5) -5% to 5% 5% to 10% 10% to 15% 15% to 20% 20% to 25% 25% to 30% Score 1 1.5 2.25 3 3.75 4.5 5.25

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Above 30%

4.

Operating income/ Short term borrowings = Operating Income / Short term borrowings (Operating Income / Short term borrowings is calculated as a weighted average for the last three years) Op. Inc. to short term borr. Below 1.0 1 to 2 2 to 3 3 to 4 4 to 5 5 to 6 6 to 7 Above 7 Score 1 1.5 2.25 3 3.75 4.5 5.25 6

5.

Current Ratio = (Cash & Bankbalances + total receivables + inventories + current assets related to operations + other current assets) / Working capital loans from banks + other short term loans + current liabilities and provisions (Current ratio is calculated only for the latest year.) Current Ratio Below 1.07 1.07 to 1.13 1.13 to 1.19 1.19 to 1.25 1.25 to 1.30 1.30 to 1.40 1.40 to 1.50 Above 1.50 Score 1 1.5 2.25 3 3.75 4.5 5.25 6

6.

Debt Service Coverage Ratio (DSCR) = (PBDIT Tax)/ (Repayment of long term loans + Interest on long term and short term loans )

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(DSCR is taken only for the latest year)

DSCR Below 1 1 to 1.25 1.25 to 1.5 1.5 to 1.75 1.75 to 2.25 2.25 to 2.75 2.75 to 3.00 Above 3

Score 1 1.5 2.25 3 3.75 4.5 5.25 6

7.

Total outside liabilitiest/ Total Networth = (Long term loans + other short term loans + wc loans from banks + current liabilities and provisions)/ Equity share capital + reserves revaluation reserve loss brought forward intangible assets) (TOL/TNW is taken only for the latest year)

Total debt/Total Net Worth 0 to 0.66 0.66 to 0.99 0.99 to 1.33 1.33 to 1.66 1.66 to 1.99 1.99 to 2.33 2.33 to 2.66 Above 2.66

Score 6 5.25 4.5 3.75 3 2.25 1.5 1

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8.

Free cash flow from operations /Total Debt = Cash flow available after adjusting for working capital changes/ Total Debt (Free cash flow from operations /Total Debt is calculated as an average for the last three years) Free cashflow from operations to total debt Below -1.0 -1.0 to - 0.15 -0.15 to 0 0 to 0.15 0.15 to 0.25 0.25 to 0.35 0.35 to 0.50 0.50 and above Score 1 1.5 2.25 3 3.75 4.5 5.25 6

FINANCIAL FLEXIBILITY Financial Flexibility attempts to evaluate the ability of a company to comfortably raise funds to meet its future requiements (both planned as well as unplanned). Financial Flexibility is a qualitative factor and depends largely on the following four fundamental factors: 1. 2. 3. 4. Gearing Unutilised bank limits Reputation of the company in the financial markets (track record, market perception) Support of parent and other group companies

Each of the above-mentioned factors are evaluated independently in the context of projected fund requirements and also the comfort available in case of a contingency. The overall Financial Flexibility is then a combination of the independent evaluations. i.e Financial Flexibility = F(Bank Limits, Gearing, Market reputation, Parent Support) For example consider a company having a projected net funds requirement of Rs. 200 crore under an ideal scenario. The same, under a worst case scenario is say Rs. 300 crore (based on price fluctuation of a capital asset proposed to be purchased). The company would then be evaluated on: the ability to comfortably raise Rs. 200 crore in an ideal scenario the ability to raise the requisite amount in the worst case scenario additional comfort in the event of a financial distress

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MyCRA uses subjective judgement for evaluation of Financial Flexibility of corporates. However, for the purpose of operating the credit risk model, the following table presents broad benchmarks for the evaluation of financial flexibility. Grade 6 Bank Limits Significant unitilised bank limits Bank Limits Adequate unitilised bank limits Gearing Extremely low gearing (less than 0.5) Gearing - Low gearing (0.5 to 1.0) Market reputation Extremely good market reputation Highest ability to raise funds from the market. Market reputation - Good market reputation Would be able to raise sufficient funds from the capital market. Parent Support - 100% MNC subsidiary. Demonstrated track record of support Parent Support Majority ownership by MNC (above 51%) 100% ownership by large domestic parent. Demonstrated track record of support Parent Support Minority stake by MNC (26-49%) Majority owned by large domestic parent (above 51%). Track record not demonstrated but implicit. Parent Support - No financial support from parent Parent Support - No financial support from parent Demonstrated track record of no support from parent

Grade 5

Grade 3&4

Bank Limits Moderate unitilised bank limit

Gearing Moderate gearing (1.0 to 1.5)

Market reputation Satisfactory market reputation Would be able to raise adequate capital from the market

Grade 2

Grade 1

Bank Limits Insufficient unitilised bank limit Bank Limits Bank limit unavailable

Gearing - High gearing (1.5 to 2.0)

Gearing - Very high gearing (above 2.0)

Market reputation - Poor market reputation. Unlikely to be able raise capital from the market Market reputation - Very poor market reputation Would be unable to raise capital from the market.

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MANAGEMENT RISK EVALUATION MYCRA evaluates the following factors while assessing the management of a company: goals, philosophies & strategies track record experience commitment integrity of personnel credibility adequacy of planning and control systems

The Risk Assessment Model contains a Management Risk module, with the following four parameters: Track record Credibility Payment Record Other factors

Track record factors

1. Business and Financial Policy: The managements conservatism is judged based on past business and financial policies. These are indicative of possible future strategies, and would have a bearing on future debt bearing levels. A track record characterised by large expansions in relation to existing size, is indicative of a relatively high appetite for risk, as the managements competence level vis a vis the expanded scale of operations is yet to be proven. Further, a large onetime expansion is more likely to strain the cash flows of existing operations. Business and financial policies can be said to be particularly risk prone in specific instances where such growth in the past is funded through borrowings rather than capital infusion/internal accruals. However, such large expansions would be viewed less unfavourably if they are related to the companys existing operations.

6 (Excellent) Extremely conservative management. Company has a low, stable debt:equity ratio. Diversifications, if any, are in related areas, and have been implemented in a phasewise manner, so as to avoid strain on

5 (Good) Conservative management. Absence of aggressive debt funded expansion, large expansions into unrelated areas. Stable/declining trend in debt:equity ratio.

3&4 (Average) Propensity to undertake expansions significant in relation to existing size. Moderate to high leveraging. Fairly conservative with respect to investment of

2 (Below average) Past record of reckless expansion/diversifi cation High gearing, tendency to increase further./ Propensity to undertake substantial risk eg. Unhedged forex

1 (Poor) Management is highly risk prone. Consistently undertakes substantial risks in the form of debt funded expansion in unrelated

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existing cashflows. Company avoids high risk investments such as ICDs to weak companies, etc.

Avoidance of high risk investments.

short term surpluses.

Loans, etc.

areas, high risk investments, etc.

2. Relevant experience in the industry A management with greater experience in the industry places a company in an advantageous position vis a vis the competition. Familiarity with the operating environment is expected to enable better decision making. 6 (Excellent) 5 (Good) Top management is vastly experienced in the industry. Senior management personnel are considered as among the most knowledgeable in the industry. Top management has put in several years in the industry. Senior management comprises highly experienced personnel. Top management, while fairly experienced, has not put in sufficient years to witness a number of business cycles in industry/ Top management has a balance of highly experienced and inexperienced personnel. . Start up with promoters having a few years of industry experience. Startup company with promoters having no prior experience in the Industry.

3&4 (Average)

2 (Below average) 1 (Poor)

3. Board composition A professional Board with representation from all segments of the industry places a company in an advantageous position vis a vis a family managed Board. 6 (Excellent) 5 (Good) The Board comprises influential and knowledgeable people from the industry who can benefit the company through their contacts and experience Company is benefited from the experience of its Board members who come from various segments of the industry Board is a combination of both professional and family members Board is not as influential or knowledgeable as other companies who have professionals on their Board Board comprises only family members

3&4 (Average) 2 (Below average) 1 (Poor)

Credibility
1. Ability to meet sales projections This factor assesses the ability of the company to achieve the set targets. A company that is able to meet it sales projections depicts the effectiveness with which plans have been achieved. 2. Ability to meet profit projections This factor should be analysed under various scenarios. The fact that the company achieved its targets under difficult market conditions would place them higher than companies who achieved their profit targets in reasonably easy conditions

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Payment Record
1. Payment record This factor would aim to look at previous payment record of the company to banks, its depositors, bondholders, creditors etc. Other factors 1. Group support: This factor assesses the availability of support to a company owing to its parentage/ membership of a strong group. The credit quality of the subsidiary of a strong parent is expected to derive substantial support in times of stress. Companies which may be stressed by the need to bail out weak group companies would obtain a low score on this factor. 6 (Excellent) Company is part of an extremely strong group with global presence. The parent company is financially sound, has a majority shareholding in the company. The company is of strategic importance to the parent, and would definitely derive support in times of financial stress. 5 (Good) Company is the subsidiary of a strong global/domestic company. The parent has a majority shareholding in the company, and is likely to provide support in times of stress. 3&4 (Average) Company is part of a group which comprises some weak entities. In the past, company has been known to extend support to weaker group concerns and can be expected to do so in future as well. 2 (Below average) Company is involved in numerous group transactions, which include providing support to weaker group concerns. The liquidity position of this company has been affected owing to large extent of intragroup dealings. 1 (Poor) Diversion of funds to unprofitable group concerns is a rampant feature. The degree of support to group companies has serious implications on the liquidity position of the company.

2. Management proactiveness This factor assesses the ability of management to take initiative in order to drive organisational change. Management that have taken the lead in ushering in change through image improving measures, enhanced disclosure norms, etc. would score highly on this factor. 6 (Excellent) Highly proactive management track record is marked by pioneering efforts such as improving consumer awareness, environmental campaigns, better accounting practices, etc. 5 (Good) Management is active in taking fresh initiatives. However, the emphasis on driving positive change through new measures is somewhat lower than the above grades. 3&4 (Average) Management can be categorised as reactive rather than proactive. While initiatives have been taken up, these have been as a reaction to steps initiated by others rather than a result of independent change. 2 (Below average) High resistance to change. The companys practices have been stagnant for a long period of time. Management more inclined to remain with status quo than initiate change . 1 (Poor) Management is extremely change resistant. Absence of open mind towards change. Absence of management proactiveness perceived as major threat to companys future prospects.

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3. Strategic initiatives This factor assesses the companys ability to successful implement its strategies. Companies which have successfully executed major/complex projects, or demonstrated an ability to manage strategic alliances, etc. would score highly on this factor.

6 (Excellent) Company has an excellent track record in project execution, including complex diversification projects. Companys initiatives to improve business prospects through various strategic measures have been highly successful.

5 (Good) Company has high success rate in project execution. Other strategic initiatives such as innovative distribution schemes, alliances, and VRS etc. have met with considerable success.

3&4 (Average) Company has not distinguished itself by successfully implementing major strategic changes. Changes have generally been incremental in nature, and met with moderate success.

2 (Below average) Strategic initiatives undertaken by the company have failed on account of inaccurate market estimation, inadequate planning etc.

1 (Poor) The company has an extremely poor record of implementing strategic initiatives. Management ability is limited to the extent where major initiatives undertaken may be expected to fail.

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