PROJECT REPORT FINANCIAL ANALYSIS OF RELIANCE COMMUNICATIONS LTD.

UNDER THE EXPERT GUIDANCE OF:

Dr. ARCHANA SINGH FACULTY DSM, DTU

SUBMITTED BY: 1. 2. 3. 4. SACHIN CHAWLA SAUMYA SHARMA SHUBHAM GUPTA SIMRAN KAUR
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CERTIFICATE

This is to certify that SACHIN CHAWLA, SAUMYA SHARMA, SHUBHAM GUPTA and SIMRAN KAUR; students of Delhi School of Management have completed a project on Financial Analysis of Reliance Communications Limited under the guidance of Prof. Archana Singh using financial accounting & accounting standards and have submitted a satisfactory report of the project. The contents of this Project work, in full or in parts, have neither been taken from any other source nor have been submitted to any other Institute or University. We wish them success in the future.

Prof. Archana Singh DSM, DTU

Prof. S.K Garg H.O.D, DSM, DTU

DECLARATION

We SACHIN CHAWLA, SAUMYA SHARMA, SHUBHAM GUPTA and SIMRAN KAUR; students of Delhi School of Management would like to state that we have developed a project report on Financial Analysis of Reliance Communications Limited under the guidance of Prof. Archana Singh using financial accounting & accounting standards and have submitted a satisfactory report of the project. The contents of this Project work, in full or in parts, have neither been taken from any other source nor have been submitted to any other Institute or University.

SACHIN CHAWLA SAUMYA SHARMA SHUBHAM GUPTA SIMRAN KAUR

2K11/MBA/45 2K11/MBA/46 2K11/MBA/48 2K11/MBA/49

BATCH 2011-13 DELHI SCHOOL OF MANAGEMENT DELHI TECHNOLOGICAL UNIVERSITY

ACKNOWLEDGEMENT

It is a great pleasure that we are presenting this project on Financial Analysis of Reliance Communications Ltd. We gratefully acknowledge our profound indebtedness towards our esteemed guide Prof. Archana Singh, DSM, DTU for her invaluable guidance, excellent supervision and constant encouragement during the entire duration of the project work. This project would never have been possible without her guidance and supervision. We also express our sincere thanks to Prof. S.K. Garg, Head of Department, Delhi School of Management, DTU for providing us the best possible help. We are also thankful to all the faculty members of Delhi School of Management, Delhi Technological University, Delhi. And last but not the least we are heartily thankful to fellow students and batch mates of Delhi School of Management for their support and encouragement throughout our work.

SACHIN CHAWLA SAUMYA SHARMA SHUBHAM GUPTA SIMRAN KAUR

2K11/MBA/45 2K11/MBA/46 2K11/MBA/48 2K11/MBA/49

BATCH 2011-13 DELHI SCHOOL OF MANAGEMENT DELHI TECHNOLOGICAL UNIVERSITY

Contents OBJECTVE OF STUDY.7 EXECUTIVE SUMMARY8 CHAPTER 1 - INTRODUCTION ........................................................................................................ 9

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8

Indian Telecom Sector...10 Indian Telecommunications at a glance.12 About Reliance Communications13 Mission: Excellence in Communication Arena14 Reliance Communications Business Mix.15 Highlights - at a glance on consolidated basis16 Corporate Information...17 SWOT Analysis..18

CHAPTER 2 - FINANCIAL STATEMENTS...20

2.1 Understanding Annual Reports......20 2.2 Basis of Preparation of Financial Statements....22 2.3 Balance Sheet of RCOM....23 2.4 Profit & Loss Account of Rcom..24

CHAPTER 3 - RATIO ANALYSIS...26 LIQUIDITY & SOLVENCY RATIOS: o CURRENT RATIO....27 o QUICK RATIO....27 o DEBT EQUITY RATIO.28 o LONG TERM DEBT EQUITY RATIO..29 o INTEREST COVERAGE..30 TURNOVER / EFFICIENCY RATIO o ASSETS TURNOVER RATIO31 o DEBTORS TURNOVER RATIO..32 PROFITABILITY RATIO BASED ON SALES: o GROSS PROFIT MARGIN RATIO33 o OPERATING PROFIT MARGIN33
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o NET PROFIT MARGIN..34 BASED ON CAPITAL EMPLOYED: o RETURN ON NET WORTH.32 o RETURN ON CAPITAL EMPOYED.33 o RETURN ON ASSET...36 VALUATION o EARNINGS PER SHARE (EPS) ..37 o DIVIDENDS PAYOUT RATIO NET PROFIT.37 o DIVIDENDS PAYOUT RATIO CASH PROFIT.38

CHAPTER 4 - CASH FLOW STATEMENT ...39 4.1 CASH FLOW ANALYSIS...39

CHAPTER 5 - CONCLUSION ..40

OBJECTIVE OF STUDY

The main objective of this study is to carry on brief study on Analysis of four year balance sheet of Reliance Communications Ltd. through comparative balance sheet in Comparative Statement through this we are able to get the difference of various assets and liabilities of the Reliance Communications Limited. Other objectives of this project are as follows: To identify the various assets amount of the BSNL with respect to Annual Reports of the Reliance Communications Ltd. Comparative study of four year Annual reports.

EXECUTIVE SUMMARY
This project is based on Balance Sheet and Profit & Loss accounts of the Reliance Communications Limited. It is done to find out whether the RCOM are improving our capital structure or not.

Further, in this Project

Chapter 1 includes the Introduction of the sector and Company wherein we told about the Objectives of the study and profile of the Reliance Communications Limited. Chapter 2 includes the Financial Statements and basis of preparation of Financial Report wherein we have discussed the Policy of Accounting and Finance Policy of RCOM.

Chapter 3 includes the Ratio Analysis wherein the Ratios of four consecutive years are analyzed.

Chapter 4 includes the Cash flow Analysis wherein the Cash flow Statements from 2008-2011 of RCOM are analyzed, throwing light on the inflow and outflow of cash.

Chapter 5 represents the conclusion based on the annual report.

CHAPTER 1 INTRODUCTION

Reliance Communications Ltd. (commonly called RCOM) is an Indian broadband and telecommunications company headquartered in Navi Mumbai, India. RCOM is the world's 16th largest mobile phone operator with over 144 million subscribers. Established on 2004, a subsidiary of the Reliance Group. The company has five segments: Wireless segment includes wireless operations of the company; broadband segment includes broadband operations of the company; Global segment include national long distance and international long distance operations of the company and the wholesale operations of its subsidiaries; Investment segment includes investment activities of the Group companies, and Other segment is consists of the customer care activities and direct-to-home (DTH) activities.

Industry Founded Founder(s) Headquarters Products

Telecommunications

2004 Dhirubai Ambani

Navi Mumbai, Maharashtra, India Fixed-line and mobile telephony, broadband and fixed-line internet services, digital television, IT and network services

1.1

Indian Telecom Sector

Introduction The telecom services have been recognized the world-over as an important tool for socioeconomic development for a nation. It is one of the prime support services needed for rapid growth and modernization of various sectors of the economy. Indian telecommunication sector has undergone a major process of transformation through significant policy reforms, particularly beginning with the announcement of NTP 1994 and was subsequently re-emphasized and carried forward under NTP 1999. Driven by various policy initiatives, the Indian telecom sector witnessed a complete transformation in the last decade. It has achieved a phenomenal growth during the last few years and is poised to take a big leap in the future also. Status of Telecom Sector The Indian Telecommunications network with 621 million connections (as on March 2010) is the third largest in the world. The sector is growing at a speed of 45% during the recent years. This rapid growth is possible due to various proactive and positive decisions of the Government and contribution of both by the public and the private sectors. The rapid strides in the telecom sector have been facilitated by liberal policies of the Government that provides easy market access for telecom equipment and a fair regulatory framework for offering telecom services to the Indian consumers at affordable prices. Presently, all the telecom services have been opened for private participation. The Government has taken following main initiatives for the growth of the Telecom Sector: Liberalization The process of liberalization in the country began in the right earnest with the announcement of the New Economic Policy in July 1991. Telecom equipment manufacturing was delicensed in 1991 and value added services were declared open to the private sector in 1992, following which radio paging, cellular mobile and other value added services were opened gradually to the private sector. This has resulted in large number of manufacturing units been set up in the country. As a result most of the equipment used in telecom area is being manufactured within the country. A major breakthrough was the clear enunciation of the governments intention of liberalizing the telecom sector in the National Telecom Policy resolution of 13th May 1994.

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National Telecom Policy (NTP) 1994

In 1994, the Government announced the National Telecom Policy which defined certain important objectives, including availability of telephone on demand, provision of world class services at reasonable prices, improving Indias competitiveness in global market and promoting exports, attractive FDI and stimulating domestic investment, ensuring Indias emergence as major manufacturing / export base of telecom equipment and universal availability of basic telecom services to all villages. It also announced a series of specific targets to be achieved by 1997.

Telecom Regulatory Authority of India (TRAI)

The entry of private service providers brought with it the inevitable need for independent regulation. The Telecom Regulatory Authority of India (TRAI) was, thus, established with effect from 20th February 1997 by an Act of Parliament, called the Telecom Regulatory Authority of India Act, 1997, to regulate telecom services, including fixation/revision of tariffs for telecom services which were earlier vested in the Central Government. TRAIs mission is to create and nurture conditions for growth of telecommunications in the country in manner and at a pace, which will enable India to play a leading role in emerging global information society. One of the main objectives of TRAI is to provide a fair and transparent policy environment, which promotes a level playing field and facilitates fair competition. In pursuance of above objective TRAI has issued from time to time a large number of regulations, orders and directives to deal with issues coming before it and provided the required direction to the evolution of Indian telecom market from a Government owned monopoly to a multi operator multi service open competitive market. The directions, orders and regulations issued cover a wide range of subjects including tariff, interconnection and quality of service as well as governance of the Authority. The TRAI Act was amended by an ordinance, effective from 24 January 2000, establishing a Telecommunications Dispute Settlement and Appellate Tribunal (TDSAT) to take over the adjudicatory and disputes functions from TRAI. TDSAT was set up to adjudicate any dispute between a licensor and a licensee, between two or more service providers, between a service provider and a group of consumers, and to hear and dispose of appeals against any direction, decision or order of TRAI.

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1.2

Indian Telecommunications at a glance

(As on 31st March 2010)

Rank in world in network size 3rd Tele density (per hundred populations) 52.74 Telephone connection (In millions) Fixed 36.95 Mobile 548.32 Total 621.28 Village Public Telephones inhabited 5,69,385 (Out of 5,93,601 uncovered villages) Foreign Direct Investment (in 4070 millions) (from April 2000 till March 2010) Licenses issued Basic 2 CMTS 38 UAS 241 Infrastructure Provider I 219 ISP (Internet) 371 National Long distance 29 International Long Distance 24

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1.3

About Reliance Communications

Reliance Communications Limited is the flagship Company of Reliance Group, one of the leading business houses in India. Reliance Communications is Indias foremost and truly integrated telecommunications service provider. The Company, with a customer base of 142 million as on March 31, 2011 including over 2.5 million individual overseas retail customers, ranks among the Top 4 Telecom companies in the world by number of customers in a single country. Reliance Communications corporate clientele includes over 35,000 Indian and multinational corporations including small and medium enterprises and over 800 global, regional and domestic carriers. Reliance Communications has established a pan-India, next generation, integrated (wireless and wireline), convergent (voice, data and video) digital network that is capable of supporting bestof-class services spanning the entire communications value chain, covering over 24,000 towns and 600,000 villages. Reliance Communications owns and operates the worlds largest next generation IP enabled connectivity infrastructure, comprising over 2,77,000 kilometers of fibre optic cable systems in India, USA, Europe, Middle East and the Asia Pacific region.

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1.4

Mission: Excellence in Communication Arena

To attain global best practices and become a world-class communication service provider guided by its purpose to move towards greater degree of sophistication and maturity. To work with vigour, dedication and innovation to achieve excellence in service, quality, reliability, safety and customer care as the ultimate goal. To earn the trust and confidence of all stakeholders, exceeding their expectations and make the Company a respected household name. To consistently achieve high growth with the highest levels of productivity. To be a technology driven, efficient and financially sound organisation. To contribute towards community development and nation building. To be a responsible corporate citizen nurturing human values and concern for society, the environment and above all, the people. To promote a work culture that fosters individual growth, team spirit and creativity to overcome challenges and attain goals. To encourage ideas, talent and value systems. To uphold the guiding principles of trust, integrity and transparency in all aspects of interactions and dealings.

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1.5

RELIANCE COMMUNICATIONS BUSINESS MIX

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1.6

Highlights - at a glance on consolidated basis

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1.7

CORPORATE INFORMATION

Board of Directors Shri Anil Dhirubhai Ambani - Chairman Prof. J. Ramachandran Shri S. P. Talwar Shri Deepak Shourie Shri A. K. Purwar

Company Secretary and Manager Shri Hasit Shukla (upto 31.05.2011) Shri Prakash Shenoy (w.e.f. 01.06.2011)

Auditors M/s. Chaturvedi & Shah M/s. B S R & Co.

Registered Office H Block, 1st Floor Dhirubhai Ambani Knowledge City Navi Mumbai 400 710 Maharashtra, India

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1.8

SWOT ANALYSIS

SWOT Analysis company profile is the essential source for top-level company data and information. Reliance Communications Limited - SWOT Analysis examines the companys key business structure and operations, history and products, and provides summary analysis of its key revenue lines and strategy. Reliance Communications (RCOM or the company) is an integrated communications service provider in India. The company is part of the Reliance Anil Dhirubhai Ambani Group. RCOM serves consumer, enterprise and carrier customers. It operates a full spectrum of wireless, wireline, and long distance, voice, data, video and internet communication services. It also offers direct-to-home (DTH) TV services under the brand, Big TV. The company also participates in submarine cable network infrastructure, and owns, operates and develops telecom infrastructure, such as wireless communications sites and towers. The company primarily operates in India, where it is headquartered in Mumbai and employs 30,974 people. The company recorded revenues of INR206,850.5 million ($4,366.6 million) during the financial year ended March 2010 (FY2010), a decrease of 0.3% over 2009. The operating profit of the company was INR40,365 million ($852.1 million) in FY2010, a decrease of 30.6% over 2009.. Its net profit was INR46,550 million ($982.7 million) in FY2010, a decrease of 23% over 2009.

Strengths Mobile Communications Arm of a Large, Well-Funded, Well-Connected and Ambitious Indian Conglomerate Economies of Scale From Large Subscriber Base Expertise in a Business Model That Allows It to Maintain High Profitability From Lower-Yielding Subscribers Weaknesses Cost Structure Disadvantage With Subscribers Spread Across Two Different Mobile Networks Low ARPU Compared With Competitors Weakness in Rural Markets Brand Positioning Limited Availability of Value-Added Services

Opportunities Aggressive Move Into the Rural Market Use Upcoming Mobile Number Portability as "Launching Pad" to Grab Market Share of Higher ARPU Users and Ramp Up Focus on Data Revenue
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Overseas Investments Lease Spare Capacity on Its CDMA Network to Mobile Virtual Network Operators

Threats Quicker Than Expected Slowing of Growth in the Indian Marketplace Mobile Number Portability Risks Accelerating Churn of Subscribers From CDMA to GSM New Competitors
(2) PROBLEM BEING

FACED

Lack of communication between retailers and distributor Lack of proper distribution channel Competitors

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CHAPTER 2 - FINANCIAL STATEMENTS

The financial statements have been prepared in compliance with the requirements of the Companies Act, 1956, and Generally Accepted Accounting Principles (GAAP) in India. The Groups consolidated financial statements have been prepared in compliance with the standard AS 21 on Consolidation of Accounts and presented in a separate section of the Annual Report. The Management Discussion and Analysis on Financial performance relates to consolidated Financial statements of the Company and its subsidiaries.

2.1

UNDERSTANDING ANNUAL REPORTS

Investment capital is always moving between different markets, industries, and nations. Thegoal of accounting information is to provide economic decision makers with useful information, according to Williams, Haka, Bettner, and Carcello (2006, p. 670). Users of financial statements determine market and financial trends within a company and in the external business environment through the use of financial statements. Different users use financial statements differently and address different needs, such as data providing investors on whether they should buy or sell certain companies stocks. In the examination of HCLT annual reports for 2005 to 2009, the researcher needs to use general tools of analysis, such as ratios, financial leverage, examine the cost of capital and other financial incentives for the company. Financial analysis can be classified into four categories: 1. External Analysis: It is conducted by those persons who do not have access to the detailed record of the enterprise and therefore have to depend on published accounts and directors and auditors reports. Such type of analysis is performed by investors, government agencies and research scholars. 2. Internal Analysis: It is conducted by the management for the reason that the management wishes to know the financial position and operational efficiency of the organization. The important feature of this analysis is that as the management has access to all information relating to the organization so the analysis is more detailed, extensive and correct. 3. Horizontal Analysis: This analysis is made to review and analyse financial statements for a number of years and are, therefore, based on financial data taken for those years. It is time series analysis. It is useful for long-term trend analysis and planning. 4. Vertical Analysis: This analysis is made to review and analyse the financial statements of one year only. Such analysis is called Static analysis as it is frequently used for referring to ratios developed for one date or for one accounting period. Such an analysis is useful in comparing the performance of several companies of the same type or divisions or departments of one enterprise.

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Techniques A financial analyst can adopt the following tools and techniques for analysis of the financial statements: 1. Comparative Financial Statements: These are statements in which figures for two or more periods are placed side by side along with change in figures in absolute and percentage terms to facilitate comparison. Both profit and loss account and balance sheet are prepared in the form of comparative financial statements. 2. Common-Size Financial Statement: These statements express figures of a financial statement and percentage of a common base. In the profit and loss account the sale figure is assumed to be 100 and all figures are expressed as a percentage of sales. Similarly the balance sheet the total of assets or liabilities is taken as 100 and all the figures are expressed as percentage of total. 3. Trend Percentages: They are immensely helpful in making comparative study of the financial statements for several years. The method of calculating trend percentages involves the calculation of percentage relationship that each item bears to the same item in the base year. A year, usually the earlier year is taken as base year. Each item of base year is taken as 100 and on that basis the percentages for each of the items of each of the years are calculated. 4. Ratio Analysis: This expresses the relationship between two accounting figures taken from financial statements of an accounting period in the form of a ratio. 5. Funds Flow Statement: They show changes in working capital position. It shows the source and uses of the working capital. 6. Cash Flow Statement: They show changes in cash position from one accounting period to another. It defines the sources from which cash was received and the purpose for which it was used.

Limitations: Analysis of financial statements helps the interested parties to ascertain the strength and weakness of the enterprise, but at the same time it suffers from certain limitations. Since financial analysis is based on Financial Statements thus the limitations of Financial Statements are carried on to Financial Analysis, thus limitations of financial analysis is same as financial statements.

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2.2

Basis of Preparation of Financial Statements

The Financial Statements are prepared under historical cost convention and fair valuation under scheme approved by the High Court, in accordance with the generally accepted accounting principles (GAAP) in India and provisions of the Companies Act, 1956 read with the Companies (Accounting Standards) Rules, 2006 (Accounting Standard Rules) as well as applicable pronouncements of the Institute of Chartered Accountants of India (the ICAI).

A) Depreciation/ Amortisation Policy (i) Depreciation on Fixed Assets is provided on Straight Line Method at the rates and in the manner prescribed in Schedule XIV to the Companies Act, 1956 except in case of the following assets which are depreciated as given below. (a) Telecom Electronic Equipments - 18 years (b) Furniture, Fixtures and Office Equipments - 10 years (c) Customer Premises Equipments - 3 years (d) Vehicles - 5 years (e) Ducts and Cables - 18 years

(ii) Leasehold Land is depreciated over the period of the lease term.

(iii) Intangible assets, namely Telecom Licenses and Brand Licence are amortised equally over the period of Licenses. IRC and Software are amortised from the date of acquisition or commencement of commercial services, whichever is later. The life of amortisation of the intangible assets are as follows. (a) Telecom Licenses - 12.5 to 20 years (b) Brand License - 10 years (c) Indefeasible Right of Connectivity - 15, 20 years (d) Software - 5 years (iv) Depreciation on additions is calculated pro rata from the following month of addition.

B) Inventories of Stores and Spares Inventories of stores and spares are accounted for at cost, determined on weighted average basis or net realisable value, whichever is less.
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2.3

BALANCE SHEET OF RCOM

BALANCE SHEET IN RS. CRORE

Mar '11 12 mths Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities 1,032.01 1,032.01 0.00 0.00 47,112.47 0.00 48,144.48 15,226.02 16,226.72 31,452.74 79,597.22 Mar '11 12 mths Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)

Mar '10 12 mths 1,032.01 1,032.01 0.00 0.00 49,466.88 0.00 50,498.89 3,000.00 21,478.28 24,478.28 74,977.17 Mar '10 12 mths

Mar '09 12 mths 1,032.01 1,032.01 0.00 0.00 50,658.31 0.00 51,690.32 3,000.00 27,903.61 30,903.61 82,593.93 Mar '09 12 mths

Mar '08 12 mths 1,032.01 1,032.01 0.00 0.00 23,808.02 0.00 24,840.03 950.00 19,336.43 20,286.43 45,126.46 Mar '08 12 mths

40,904.17 12,063.27 28,840.90 9,907.66 32,102.13 306.11 1,969.25 3,813.21 6,088.57 13,065.25 0.00 19,153.82 0.00 7,551.94 2,855.35 10,407.29 8,746.53 0.00 79,597.22 1,958.61 233.26

39,838.17 9,225.69 30,612.48 1,683.52 31,898.60 298.34 1,738.63 81.92 2,118.89 17,886.79 0.26 20,005.94 0.00 5,836.53 3,386.84 9,223.37 10,782.57 0.00 74,977.17 3,274.83 244.66

37,941.15 6,533.38 31,407.77 3,643.86 31,364.75 253.14 1,482.22 534.89 2,270.25 23,272.50 0.26 25,543.01 0.00 5,774.74 3,590.72 9,365.46 16,177.55 0.00 82,593.93 6,555.82 250.43

21,576.32 4,688.69 16,887.63 7,117.56 13,844.14 201.22 1,093.21 192.65 1,487.08 17,028.20 0.01 18,515.29 0.00 7,214.31 4,023.85 11,238.16 7,277.13 0.00 45,126.46 4,392.73 120.35

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2.4

PROFIT & LOSS ACCOUNT OF RCOM

PROFIT & LOSS IN RS. CRORE

Mar '11 12 mths Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses 12,129.77 0.00 12,129.77 484.25 0.00 12,614.02

Mar '10 12 mths 13,554.60 0.00 13,554.60 2,455.17 0.00 16,009.77

Mar '09 12 mths 15,086.66 0.00 15,086.66 4,148.13 0.00 19,234.79

Mar '08 12 mths 14,792.05 0.00 14,792.05 520.53 0.00 15,312.58

64.92 159.79 608.07 9,102.95 0.00 1,772.15 0.00 11,707.88 Mar '11 12 mths

50.39 144.27 672.39 7,850.49 1,974.73 668.90 0.00 11,361.17 Mar '10 12 mths 2,193.43 4,648.60 1,253.84 3,394.76 1,511.24 0.00 1,883.52 0.00 1,883.52 1,404.59 478.93 11,310.78 0.00 175.44 29.14 20,640.27

29.95 138.32 754.56 5,837.25 2,197.84 898.81 0.00 9,856.73 Mar '09 12 mths 5,229.93 9,378.06 1,153.24 8,224.82 1,933.51 0.00 6,291.31 0.00 6,291.31 1,488.64 4,802.67 9,826.78 0.00 165.12 28.06 20,640.27

15.15 91.76 858.65 4,052.45 2,622.58 978.17 0.00 8,618.76 Mar '08 12 mths 6,173.29 6,693.82 870.05 5,823.77 1,843.66 0.00 3,980.11 0.00 3,980.11 1,393.66 2,586.45 8,603.61 0.00 154.80 26.31 20,640.27
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Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs)

421.89 906.14 178.11 728.03 2,855.62 0.00 -2,127.59 1,369.60 -757.99 0.00 -757.99 11,642.96 0.00 103.20 17.14 20,640.27

Earnings Per Share (Rs) Equity Dividend (%) Book Value (Rs)

-3.67 10.00 233.26

2.32 17.00 244.66

23.27 16.00 250.43

12.53 15.00 120.35

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CHAPTER 3 - RATIO ANALYSIS

Companies use calculations between different sets of data on the annual report to determine the short-term financial health and long-term financial health of the firm. Ratios also provide the changes in a company caused by internal and external factors often not displayed in individual financial statement information, such as the cost of goods sold. A ratio is a simple mathematical expression of the relationship of one item to another. ADVANTAGES: Financial ratios are essentially concerned with the identification of significant accounting data relationships, which give the decision-maker insights into the financial performance of a company. The advantages of ratio analysis can be summarized as follows: Ratios facilitate conducting trend analysis, which is important for decision making and forecasting. Ratio analysis helps in the assessment of the liquidity, operating efficiency, profitability and solvency of a firm. Ratio analysis provides a basis for both intra-firm as well as inter-firm comparisons. The comparison of actual ratios with base year ratios or standard ratios helps the management analyze the financial performance of the firm. LIMITATIONS: Ratio analysis has its limitations. These limitations are described below: A ratio in isolation is of little help. It should be compared with the base year ratio or standard ratio, the computation of which is difficult as it involves the selection of a base year and the determination of standards. Inter-firm comparison may not be useful unless the firms compared are of the same size and age, and employ similar production methods and accounting practices. Even within a company, comparisons can be distorted by changes in the price level. Ratios provide only quantitative information, not qualitative information. Ratios are calculated on the basis of past financial statements. They do not indicate Future trends and they do not consider economic conditions CONCLUSION: Ratio analysis has a major significance in analysing the financial performance of a company over a period of time. Decisions affecting product prices, per unit costs, volume or efficiency have an impact on the profit margin or turnover ratios of a company. Similarly, decisions affecting the amount and ratio of debt or equity used have an effect on the financial structure and overall cost of capital of a company. Understanding the inter-relationships among the various ratios, such as turnover ratios and leverage and profitability ratios, helps managers invest in areas where the risk adjusted return is maximum. In spite of its limitations, ratio analysis can provide useful and reliable information if relevant data is used for analysis.
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RATIO ANALYSIS

LIQUIDITY & SOLVENCY RATIOS: 1. CURRENT RATIO: Current ratio is a liquidity ratio that shows companys ability to clear short-term obligations. Company is not doing well as the ratio is decreasing over the years i.e. the financial health of company is decreasing since 2009.

YEAR CURRENT RATIO

2008 1.65

2009 2.72

2010 2.17

2011 1.84

Current Ratio
3 2.5 2 1.5 1 0.5 0 2008 2009 2010 current ratio

2011

2. QUICK RATIO:

Quick Ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Even the quick ratio has been decreasing therefore companys position is not as good as it was in 2009. YEAR QUICK RATIO 2008 1.63 2009 2.70 2010 2.14 2011 1.81

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Quick ratio
3 2.5 2 1.5 1 0.5 0 2008 2009 2010 2011 Quick ratio

3. DEBT EQUITY RATIO: Debt Equity Ratio is a measure of a company's financial leverage calculated by dividing its total liability by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. It has declined in 2010 which means that company is financing its growth with little debt. In the year 2011, the debt ratio increased again. YEAR DER 2008 0.82 2009 0.60 2010 0.48 2011 0.65

DEBT EQUITY RATIO

0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2008 2009 2010 2011 DEBT EQUITY RATIO

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4. LONG TERM DEBT EQUITY RATIO It is a ratio that indicates what proportion of debt a company has relative to its assets. Low ratio here means company has low debts when compared to its assets.

YEAR LTDER

2008 0.48

2009 0.44

2010 0.38

2011 .45

LT DER
0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2008 2009 2010 2011

LT DER

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5. INTEREST COVERAGE: The interest coverage ratio is used to determine how easily a company can pay interest expenses on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable, which is the current scenario from 2010 onwards. YEAR INTEREST COVERAGE 2008 5.01 2009 4.12 2010 1.36 2011 1.16

INTEREST COVERAGE
6 5 4 3 2 1 0 2008 2009 2010 2011 INTEREST COVERAGE

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 TURNOVER/ EFFICENCY RATIO:

6. ASSET TURN OVER RATIO: The asset turnover ratio measures a company's ability to generate net sales from asset investments - specifically property, plant and equipment - net of depreciation .Since it has been decreasing over the years it means that company is becoming less effective in using investments in assets to generate revenue.

YEAR ATR

2008 0.77

2009 0.76

2010 0.63

2011 0.30

ASSET TURN OVER RATIO

0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2008 2009 2010 2011 ASSET TURN OVER RATIO

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7. DEBTORS TURNOVER RATIO: YEAR DTR 2008 15.61 2009 11.72 2010 8.42 2011 7.18

DEBTORS TURNOVER RATIO

16 14 12 10 8 6 4 2 0 2008 2009 2010 2011 DEBTORS TURNOVER RATIO

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 PROFITABILITY RATIO: BASED ON SALES: 1. GROSS PROFIT MARGIN RATIO: It is a financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings. Higher the margin better it is, but the companys Gross profit margin has been decreasing rapidly since 2009 which is affecting the health of the company.

YEAR GPMR

2008 29.26

2009 21.84

2010 5.03

2011 0.87

GROSS PROFIT MARGIN RATIO

30 25 20 15 10 5 0 2008 2009 2010 2011 GROSS PROFIT MARGIN RATIO

2. OPERATING PROFIT MARGIN: Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. Higher the margin, better it is for company but RCLs margin has been decreasing every year. YEAR OPM 2008 41.73 2009 34.66 2010 16.18 2011 12.85
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OPERATING PROFIT MARGIN

45 40 35 30 25 20 15 10 5 0 2008 2009 2010 2011

OPERATING PROFIT MARGIN

3. NET PROFIT MARGIN: It tells about how effective company in controlling cost is. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss. In 2011, RCL suffered losses as its net profit margin is negative. YEAR NPM 2008 17.45 2009 30.47 2010 3.33 2011 -6.00

NET PROFIT MARGIN

35 30 25 20 15 10 5 0 -5 -10 2008 2009 2010 2011 NET PROFIT MARGIN

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 BASED ON CAPITAL EMPLOYED: 1. RONW( RETURN ON NET WORTH): RONW has been steadily decreasing here. It is a basic ratio that tells a shareholder what he is getting out of his investment in the company. Here it shows that companys efficiency and quality of its management has been decreasing steadily. YEAR RONW 2008 10.41 2009 9.29 2010 0.94 2011 -1.57

RONW
12 10 8 6 4 2 0 -2 2008 2009 2010 2011 RONW

2. ROCE ( RETURN ON CAPITAL EMPOYED): It indicates the efficiency and profitability of a company's capital investments. Return on Capital Employed ratio also indicates whether the company is earning sufficient revenues and profits in order to make the best use of its capital assets. It is expressed in the form of a percentage, and the higher the percentage, the better.

YEAR ROCE

2008 9.65

2009 4.80

2010 1.97

2011 1.03

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ROCE
10 9 8 7 6 5 4 3 2 1 0 2008 2009 2010 2011

ROCE

3. RETURN ON ASSET: The return on assets (ROA) ratio illustrates how well management is employing the company's total assets to make a profit. The higher the return, the more efficient management is in utilizing its asset base YEAR ROA 2008 120.35 2009 250.43 2010 244.66 2011 233.26

RETURN ON ASSET
300 250 200 150 100 50 0 2008 2009 2010 2011 RETURN ON ASSET

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 VALUATION: EPS (EARNINGS PER SHARE): It tells how much profit was generated on a per share basis. Earnings per share has decreased over the years i.e. companys growth in earnings has plummeted down over the years. YEAR EPS 2008 12.53 2009 11.40 2010 2.32 2011 -3.67

EPS
14 12 10 8 6 4 2 0 -2 -4 2008 2009 2010 2011 EPS

DIVIDENDS PAYOUT RATIO NET PROFIT: YEAR DPR NET PROFIT 2008 7.00 2009 4.02 2010 42.71 2011 --

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DPRNP
45 40 35 30 25 20 15 10 5 0 2008 2009 2010 2011 DPRNP

DIVIDENDS PAYOUT RATIO CASH PROFIT YEAR DPR CASH PROFIT 2008 14.38 2009 2.86 2010 10.27 2011 5.73

DPRCP
16 14 12 10 8 6 4 2 0 2008 2009 2010 2011 DPRCP

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CHAPTER 4 - CASH FLOW STATEMENT OF RCOM

CASH FLOW IN RS. CRORE

Mar '11 12 mths Net Profit Before Tax Net Cash From Operating Activities Net Cash (used in)/from Investing Activities Net Cash (used in)/from Financing Activities Net (decrease)/increase In Cash and Cash Equivalents Opening Cash & Cash Equivalents Closing Cash & Cash Equivalents -859.51 725.56 -2800.94 5807.12 3731.74 81.47 3813.21

Mar '10 12 mths 619.47 1043.88 4339.32 -5868.66 -485.46 567.64 82.18

Mar '09 12 mths 4815.07 1884.87 -7650.54 6405.25 639.58 205.57 845.15

Mar '08 12 mths 2604.09 2982.80 -11263.87 6234.75 -2046.32 2240.40 192.66

4.1

CASH FLOW ANALYSIS

The PBT decreased drastically from March 2009 to March 2011. The cash flow from operating activities also decreased in 2011 as in comparison to 2009. The net cash used in investment activities was much more in 2010 as compared to rest of the years taken in sample. The net cash used in financing activities was reduced too much in the financial year 2010.

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CHAPTER 5 - CONCLUSION
Among the top telecom players, especially in the listed space, Reliance Communications (RCom) leads the way in underperformance. First, it was the global slowdown in 2008, then the hyper tariff war happened in 2009 and finally, huge payouts and piled up debt as a result of 3G license payout as well as continuing capex in 2010 posed severe challenges. Apart from eroding realisations and average revenues per user (ARPU), the company also grapples with stiff interest outgo on its debt, thus affecting margins. Despite offering both GSM and CDMA services, its ARPU has continuously slid and is the lowest among peers. RCom had three years of anaemic growth in revenues and witnessed a steep decline in profitability.

The overhang of the 2G investigations too is not helping matters for the stock. The bid to sell its tower arm (Reliance Infratel) to GTL Infrastructure, which was subsequently called off was not taken too kindly by the markets. In the near-term, in order to reduce its net debt of over Rs 32,000 crore, the sale or an IPO of Reliance Infratel seem to be the best bet to shore up cash and reduce the interest burden of RCom. The failed deal with GTL Infrastructure saw the tower business of RCom commanding an enterprise value of Rs 50,000 crore. The company has recently reduced the pace of subscriber additions and has also hiked tariffs, as it strives to improving realisations. So we conlclude its not wise to invest in RCom, prima facie with statistical data to prove our theory.
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