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FINANCIAL STATEMENTS:
Accounting process involved recording, classifying and summarizing
various business transactions. The aim of maintaining various records is to
determine profitability of the enterprise from operation of the business and also
to find out is financial position. Financial statements are reports, presented
periodically and reflect the financial results of operations of an enterprise in a
particular accounting period more frequently a year. The financial statement is
an organized collection of data according to logical and consistent accounting
procedures. Its purpose is to convey the financial results of a business firm.
DEFINITION
According to John N. Myer The financial statements provide a summary of
the accounts of a business enterprise, the balance sheet reflecting the assets,
liabilities, and capital as on a certain date and the income statement showing the
results of operations during a certain period.
The term financial statement generally refers to following basic statements:
1. The Income Statement.
2. The Balance Sheet.
3. Statement of Retained earnings.
4. Statement of Changes in Financial position.
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1. Income Statement:
The Income statement (also termed as profit and loss account) is
generally considered to be the most useful of all financial statements. It
explains the income earned during the balance sheet period. The nature of
the income, which is the focus of the income statement, can be well
understood if a business is taken as an organization that uses inputs to
produce output.
2. Balance Sheet:
It is a statement of financial position of a business at a specified
moment of time. It represents all assets owned by the business at a particular
moment of time and the claims of the owners and outsiders against those
assets at that time. The important distinction between an income statement
and balance sheet is that an income statement is prepared for a period while
balance sheet is prepared on a particular date.
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3. Statement of Retained Earnings:
The term retained earnings means the accumulated excess earnings
over losses and dividends. The balance shown by the income statement is
transferred to the balance sheet through this statement after making
necessary appropriations. It is fundamentally a display of things that have
caused changes to the balance of retained earnings in the balance sheet at the
end of the period of balance sheet.
4. Statement of changes in Financial position:
The Balance sheet shows the financial condition of the business at a
particular moment of time while the income statement discloses the results
of operations of business over a period of time. For a better understanding of
the affairs of the business, it is essential to identify the movement of working
capital or cash in the statement of changes in financial position.
1. Recorded Facts:
The term Recorded facts refer to the data taken out from the
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accounting records . The records are maintained on the basis of actual cost
data. The figures of various accounts such as cash in hand, cash at bank, bill
receivables, etc are taken as perfect figure recorded in the accounting books.
The recorded facts are not based on replacement cost. the financial
statements do not show current financial condition of concern.
2. Accounting Conversions:
Certain accounting converters are followed while preparing financial
statements. The conversion of valuing inventory at cost or market price,
whichever is lower, is followed. The valuing of assets is done at cost less
depreciation principle for balance sheet purposes, so that the statements are
comparable, simple and realistic.
3. Postulates:
The accountants make certain assumption while making accounting
records. One of these assumptions is that the enterprise is treated as a going
concern. The other assumption to this postulate is that the concern is to be
liquidated. So the assets are shown ongoing concern basis. Another
important assumption is to assume that the value of money will remain same
in different periods.
4. Personal Judgments:
Even though certain standard accounting conversions are followed in
preparing financial statement but still personal judgment of the accountant
plays an important part.
2. Attractive:
The financial statements should be prepared in such a way that
important information is underlined so that it attracts the eye of the reader.
3. Comparability:
The results of financial analysis should be comparable. The financial
statements should be presented in such a way that they can be compared to
the previous years statements.
4. Brief:
If possible, the financial statements must be prepared in brief. The
reader will be able to form an idea about the figures.
1. Management:
The financial statements are useful for assessing the efficiency of
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different cost centers. The management is able to decide the course of action
to be adopted in future.
2. Creditors:
The trade creditors are to be paid in a short period. The CRS will be
interested in current solvency of the concerns. The calculations of current
ratio and liquid ratio will enable the creditors to assess the current financial
position of the concerns in relation to their debts.
3. Investors:
The investors include both short-term and long term investors. They
are interested in the security of the principal amounts of loan and regular
payments by the concern. The investors will not only analyze the parent
financial position but will also study the future prospectus and expansion
plans of the concern.
4. Government:
The financial statements are used to assess tax liability of business
enterprises. The Government studies economic situation of the country from
these statements. These statements enable the government to find out
whether business is following various rules and regulations or not.
5. Trade Associations:
These associations provide service and protection to the members. They
may analyze the financial statements for the purpose of providing facilities
to these members. They may develop standard ratios and design uniform
system of accounts.
6. Stock Exchange:
The stock exchange deals in purchase and sale of securities of different
companies. The financial statements enable the stock broker to judge the
financial position of different concerns. The fixation of prices for securities
etc. is also based on the statements
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OBJECTIVES OF THE STUDY
To study the funds flow position of the company from financial reports
and to analyze performance of Visakhapatnam steel plant.
For comparing the actual position with standards to ensure that the
management takes appropriate steps, if there is any deviation.
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RESEARCH METHODOLOGY
1. Primary data
2. Secondary data
1. Primary data:
It is the information collected directly without any reference. The data
required for accomplishment of this project has been collected mainly by
conducting interviews, with concerned officers and staff either individually
(or) collectively and some of the information had been verified (or)
supplemented by personal observation method.
2. Secondary data:
The secondary data is the data, which is already available. The
secondary data has been obtained from annual reports, internal records, in-
house magazines, journals, Books and websites.
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DATA SOURCES
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LIMITATIONS OF THE STUDY
The Major limitation is the short time span available for the study.
respective departments.
Data is available up to the financial year 2013-14 only and the data for the
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INDUSTRY PROFILE
INTRODUCTION
The Government of India has decided to set up an integrated steel plant at
Visakhapatnam to meet the growing domestic demand for steel. Prime Minister
Mrs. Indira Gandhi laid down the foundation stone on 20 th January 1971.
The Government of India and VSP signed an agreement on 12th June
1979 for the co-operation in setting up 3.4 MT integrated steel plant. The
project was estimated to cost to Rs. 8,394.28 Crores based on prices as on 4 th
Quarter of 1981. However, on completion of the construction & commissioning
of the whole plant in 1992, the cost escalated to Rs. 8,500 Crores based on
prices as on 2nd Quarter of 1994. The plant was dedicated to the nation on 1 st
August 1992 by the then Prime Minister, Mr. P. V. Narasimha Rao.
The man power in the VSP has been limited to 17,500 employees. The
plant has the capacity of producing 3.0 MT of liquid steel & 2.656 MT of
saleable steel. It has set up two major Blast Furnaces, the Godavari, & the
Krishna, which are the envy of any modern steel making complex.
PROFILE
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Steel comprises one of the most important inputs in all sectors of
economy. Steel is the basic input for automobiles; construction; machine
building; fabrication and transportation industries. Keeping this in view the
Government of India constituted Visakhapatnam Steel Plant in 1982 with the
collaboration of Russia. Its process is to produce a range of steel products. It is a
subsidiary of Rastriya Ispat Nigam Limited.
Unlike other integrated Steel Plants in India, Visakhapatnam Steel Plant
(VSP) is one of the most modern steel plants in the country. New Technology,
Large-Scale Computerization and Automation etc, are incorporated in Plant.
To operate the Plant at International levels and attain such labor
productivity, the organizational manpower has been rationalized. Because of
high level of technology existing throughout the plant, the company has a very
good manufacturing capability to meet the needs of various customers.
VSP has come a long way before becoming debt-free company in
October 2003 (for the first time since its inception in 1992). VSP is now poised
at 4th position among Indian steel majors (Ranked no. 69 among global steel
makers) after passing through a turbulent phase& crisis that had threatened its
very existence. VSP has wiped out its accumulated losses completely by 2005-
06.
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5. 1911 TISCO started production
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the plant with 30 MT liquid steel capacities by 1990.
By 1950 the total installed capacity for ingot steel production was 1.5
million tons per year. In 1830 James Heath constructed the first manufacturing
plant at port Nova in Madras Presidency. But it was a financial failure.
In 1874 James Erskine founded the Bengal Iron works. It was passed on
to M/s. Hoare Hiller and Co. in 1882 and to M/s. Martinand Co. in 1885. In
1899 Jamshedji Tata initiated the scheme for an integrated steel plant. In 1906
Sakhi in Bihar was chosen as the site for the Tata Iron and Steel Company.
The same place is known as Jamshedpur. In 1918 initially Indian Iron and
Steel Company was founded and the Bengal Iron and Steel Company was
merged with it in 1920. TISCO produced steel in 1939. Between 1940-50
formation of major Iron and Steel at Bhadravti in Karnataka owing to the
pioneering effort of Shri.Visveswarayya in 1936 it started manufacturing steel
and after 1945 adopted electric reduction of Iron ore. It has also started
manufacturing Ferro alloys and special steel.
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POST- INDEPENDENCE PERIOD:
After the Independence the Government has taken steps to improve the
Steel Industry from the following Five-Year Plans.
First Five year plan (1951-1956)
No new steel plant came up. The Hindustan Steel Limited was born in the
year 1954 with the decision of setting up 3 plants each with one million
tonnes of steel per year at Rourkela, Bhopal and Durgapur, TISCO started
its expansion program.
Second Five year plan (1956-1961)
A bold decision was taken up to increase the ingot steel output in India to
6 million tonnes per year and the production at Rourkela, Bhilai and
Durgapur steel plant started. Rourkela steel plant was established with
the collaboration of West Germany, Bhilai steel plant with USSR and
Durgapur steel plant with Britain.
Third Five year plan (1961-1966)
During the plan, the 3 steel plants under Hindustan Steel Limited
(Rourkela, Bhilai and Durgapur) Plants were expanded. In January 1964,
Bokaro Steel Plant came into existence.
Fourth Five year plan (1969-1974)
Salem Steel Plant started. Government of India gave permission for
setting up Steel Plant in south at Visakhapatnam. Steel Authority of India
Limited was formed during this period on 24th January 1973.
Fifth Five Year Plan (1974-1979)
The idea of setting up the 5th integrated Steel Plant, the Ore-based plant at
VSP Visakhapatnam took a definite shape. At the end of the fifth five-
year plan, the total installed capacity from 6 integrated plants was 10.6
million tonnes.
Annual plan (1979-1980)
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The erstwhile Soviet Union agreed to help in setting up of the
Visakhapatnam Steel Plant.
Sixth Five year plan (1980-1985)
The construction activities were started at Visakhapatnam Steel Plant
with a big bang and top priority was accorded to start the plant. Schemes
for modernization of Bhilai Steel Plant, Rourkela Steel Plant, Durgapur
Steel Plant and Tata Iron and Steel Company were initiated. Capacity at
the end of sixth five year plan from 6 integrated plants stood 11.5 million
tonnes.
Seventh five year plan (1986-1991)
Expansion work at Bhilai and Bokaro Steel Plant was completed.
Progress of Visakhapatnam Steel Plant picked up and the rationalized
concept has been introduced to commission the plant with 3 million ton
capacity by 1990.
Eighth Five year plan (1992-1997)
The Visakhapatnam Steel Plant was commissioned in 1992. The plant
started its production and its cost became around Rs.8, 755 cores.
Modernization of other steel plants was also duly envisaged.
Ninth Five year plan (1997-2002)
Visakhapatnam steel plant had foreseen a 7% growth during the entire
plan period.
Tenth Five Year Plan (2002-2007)
Steel industry registers the growth of 9.9 % Visakhapatnam steel plant
high regime targets achieved the best of them.
Eleventh Five Year Plan (2007-2012)
Steel industry is trying to achieve its vision and mission by 2010 or entire
plan during this period.
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INDUSTRY CLASSIFICATION:
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under strain even during 2014 due to further addition in capacity and remains an
area of concern for the steel sector. The growth in2014 up to august has been 2
% against 1.2% in 2013.Indian economy and Indian steel industry are not
insulated from the global developments and they are going through one of the
most challenging phases.
PRODUCTION
The countrys steel output grew to 6.54 MT in September 2013 from 6.24
MT during the same month in 2012.
Steel industry was delicensed and decontrolled in 1991 & 1992
respectively.
Today, India is the 4th largest crude steel producer of steel in the world.
Production for sale of Pig Iron in 2011-12, was 5.78mt.
India is currently the fourth largest crude steel producer in the world,
according to the Ministry of Steel, Government of India, and it is likely to
become the second largest steel producer by 2016, according to the Ernst and
Young Global Steel: 2010 trends, 2011 outlook report ("E&Y"). Unlike China,
where there is significant excess steelmaking capacity, (Chinese crude steel
capacity is expected to be 840.0 Mt in 2012, which would be 22% in excess of
the expected 688.0 Mt of consumption), India remains a net importer of steel,
which should allow for more growth in steelmaking capacity for domestic
Indian steel companies. Indian crude steel production increased by a CAGR of
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10.5% from 27.3 Mt in 2001 to 66.8 Mt in 2010, according to the WSA. In
2011, production increased by 5.7%. Production is expected to further increase
by 15.3% in 2012 and by 13.4% in 2013, according to E&Y.
India is about to enter the first year of the Twelfth "Five Year Plan"
which aims at "faster, sustainable and more inclusive growth." Also aforesaid
objectives of the Union Budget 2012-13 are likely to stimulate consumption of
steel in 2012-13.
Demand in India has been driven by the expanding oil and gas and
power sectors and spending on infrastructural facilities, coupled with growth in
the housing, consumer durables and automobile sectors. Apparent steel
consumption in India is projected to grow by 6.9% in 2012 and 9.4% in 2013
after recording a growth of 4.3% in 2011, according to the WSA.
Among end-user sectors, the infrastructure and industrial construction
sectors accounted for around one-third of total steel consumption in India in
2010-11, followed by the pipes and tubes industry, which accounted for 10% of
total steel consumption and the automobile sector, which accounted for 12% of
total steel consumption in the same period, according to CRISIL Research.
Furthermore, according to Ernst & Young 2010, an additional US$1
trillion of investment is expected to be made in the construction and
infrastructure sectors during the 2012-17 period. Most infrastructure projects
consume large amounts of long steel products, and hence there should be a
corresponding increase in long steel demand.
Indian steel producers have a number of competitive advantages, the
most important of which is an abundant supply of iron ore resources and surplus
iron ore production, predominantly in the east of India. India is the world's
fourth-largest iron ore producer, with sufficient iron ore reserves to meet
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expected demand. Of particular interest is Orissa State, which contains 25% of
India's iron ore reserves and 20% of India's coal reserves, according to
Corporate Catalyst India.
Thus, even though iron ore prices have been steadily increasing
towards the end of 2011, domestic Indian steel companies, with their
access to excess iron ore, have not faced similar increases in raw material
prices as those companies outside of India. Another advantage India has
is its unexplored rural market, which has been fairly unexposed to the
varied uses of steel. Steps are being taken by companies to penetrate this
market, including our Company's setting up of its district level dealership
and rural dealership schemes.
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COMPANY PROFILE
INTRODUCTION:
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The product profile of the plant comprises of wire rods, rounds,
reinforcement bars (rebars), angles, channels, beams, squares, pillets and
blooms. The product profile also includes basic grade pig iron, granulated slag,
coal chemicals and other by-products. The plant also exports power to AP
Transco from its captive power plant.
The steel plant has many technological features, which are unique
amongst the steel plants in the country. The company is a pioneer in introducing
many new technologies in the country.
The production of TMT rebars by tempcore process is a shining example
in this respect. Because of high level of technology existing throughout the
plant, the company has a very good manufacturing capability to meet the needs
of various customers.
Human resource initiatives at RINL are closely linked to the corporate
strategy of the organization. It has exemplary industrial relations where the
entire work force (both executives and non-executives) works as a well-knit
team for the progress of the company. Participative management, by involving
cross-section of the employees, in development of the policy and strategy is
actively implemented in the company.
LOCATION:
The Plant is located on the coast of Bay of Bengal, 16 kms to the
Southwest of the Visakhapatnam Port.
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MAJOR SOURCES OF RAW MATERIALS:
RAW MATERIALS
SUPPLIER OF RAW
SL.NO.
MATERIALS
Squares HP Naphthalene
Flats Benzene
Rounds Toluene
Re-bars Zylene
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VISION
To be a continuously growing world-class company, we shall
Harness our growth potential and sustain profitable growth
Deliver high quality and cost competitive products and be the first
choice of customers
Create an inspiring work environment to unleash the creative energy of
people
Achieve excellence in enterprise management
Be a respected corporate citizen, ensure clean and green environment
and develop vibrant communities around us.
MISSION
OBJECTIVES
Expand Plant capacity to 6.3 Mt. by 2014 with the mission to expand
further in subsequent phases as per the corporate plan.
Revamp existing Blast Furnaces to make them energy efficient to
contemporary levels and in the process increase their capacity by 1.0
Mt, thus total hot metal capacity to 7.5 Mt.
Be amongst top five lowest cost steel producers in the world.
Achieve higher levels of customer satisfaction.
Vibrant work culture in the organization.
Be proactive in conserving environment, maintaining high levels of
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PERFORMANCE OF RINL AT A GLANCE
PRODUCTION PERFORMANCE:
Labor Productivity
Year Hot Metal Liquid Steel Saleable Steel
(Tonnes/man year)
INTERPRETATION:
The Hot metal during the year 2006-2007 is very high and in the year
2013-14 it is low.
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The Liquid steel during the year 2006-2007 is very high and in the year
2013-14 it is low.
The Saleable steel during the year 2007-2008 is high and in the year
2013-14 it is low.
The Labor productivity is almost decreasing in all years.
COMMERCIAL PERFORMANCE:
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INTERPRETATION:
FINANCIAL PERFORMANCE:
Visakhapatnam Steel Plant had to bear the burns of huge project cost
right from its day of inception. This has affected the companys balance sheet
due to very high interest burden. The company, inspite of making operating
profits every year had to report net loss during all financial years. This on the
other hand has resulted in making Visakhapatnam Steel Plant to take great care
in planning the financial resources.
The Financial Performance of Visakhapatnam Steel Plant for the past five years
is as follows:
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2012-2013 1167 1110 751
INTERPRETATION:
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Vigilance Study Circle Vigilance
ICC Corporate Governance and For performance on Sustainability and 2013
Sustainability Vision Award 2013 Corporate Governance
CII-ITC Sustainability Award 2012 - For performance on Sustainability 2013
Strong commitment
Awards at ICQCC12, Malaysia -3 star For implementation of QC projects 2012
(Top Most Category) for 3 QC Teams
Vishwakarma Awards - Innovative suggestions for higher 2012
VishwakarmaRashtriyaPuraskar (VRP) efficiency, productivity & process
for 17 employees improvements
Awards at INSSAN -2012 - 1st place in For implementation of Suggestions 2012
the Excellence in Suggestion Scheme
& 3 Merit prizes
QCFI Award-2012 - Best Public Sector For promoting Quality Concepts 2012
Organization
National Vigilance Excellence Award by For eminent professionals in the field of 2012
Vigilance Study Circle (VSC) Vigilance
CIO-100 Award For excellence in IT & Special Award 2012
under the category Networking Pioneer
Indira Gandhi Rajbhasha Shield - First For effective implementation of Official 2012
prize Language Hindi
Water Efficient Unit Award from CII For excellence in Water Management 2012
IPE CSR Corporate Governance Award- For best practices in CSR 2012
2012
Green Rating Award by Centre for For Environmental Performance 2012
Science and Environment under Green
Rating Project 3 Leaves Rating (Best
in Indian Steel Industry)
Gold Award - Greentech National HR Outstanding achievement in Training arena 2012
Award by Greentech Foundation
Green Manufacturing Excellence Award Recognition for best Green Manufacturing 2012
by Frost & Sullivans Overall Leaders practices
Great Places to Work Award By Great For inspiring Trust among its Employees, 2011
Places to work Institute and Economic for instilling Pride in them and creating an
Times 2011 environment in the work place that
promotes camaraderie
First Prize - IIM Sustainability Award- Overall performance 2011
2011 by Indian Institute of Metals
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Excellent and Distinguished awards Recognition for Quality Circle teams by 2011
at the International Convention on Union of Japanese Scientists and Engineers
Quality Control Circles (ICQCC11) (JUSE).
held at Yokohama, Japan.
Excellent Energy Efficient Unit Award Recognition for Excellence in Energy 2011
of Confederation of Indian Industry by Management
CII
First in MOU Rating for 2009-10 among Excellent MOU rating among all PSUs 2011
the PSEs under MOS under Ministry of Steel (MOS) for the year
2009-10
IspatRajbhasha Shield (First time) by For remarkable work in progressive use 2011
Department of Official Language, and implementation of Official Language
Ministry of Home Affairs, GOI for the year 2008-09
International Convention on Quality Seven Quality Circle (QC) teams and 2010
Concept Circles (ICQCC) by ICQCC Four 5S teams bagged Gold Medals.
Awards at CCQC-2010 by CCQC Teams from VSP bagged 20 Gold, 7 Silver 2010
and 2 Bronze Medals at the 10th Chapter
Convention of Quality Circle (CCQC)
Forum of India
IspatSurakshaPuraskar Award -2009 by 2 IspatSurakshaPuraskars 2009 for 2010
JCSSI achieving no fatal accident consecutively
during 2007 & 2008 by Rolling Mills Zone
and SMS& CCD Zone
NIPM certificate of Merit by NIPM Best HR Practices 2010
UdyogRatan Award by Delhi Telugu For significant contribution in preservation 2010
Academy and promotion of Indian Culture and for
taking key initiatives towards CSR.
1st Steel Minister's Trophy for the year VSPs excellent Overall performance 2010
2006-07
'Best Management Practices' Award by In recognition of VSPs performance in the 2010
Govt. of AP areas of Production, Productivity, Labor
Practices, Industrial Relations and
Corporate Social Responsibility
5S "Strong Commitment" Award by CII for 5 S Excellence 2010
ViswakarmaRashtriyaPuraskar Awards, National level awards instituted by 2010
6th time in a row Ministry of Labor, Govt. of India for the
workmen in industries. Recognition for the
innovative suggestions resulting in higher
efficiency, productivity, quality, safety &
working conditions, house-keeping and
import substitution at enterprise level.
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"Excellent Water Efficient Unit" award for Excellence in Water Management- 2010
by CII 2010 at National level
Global HR Excellence award by World "Change Agent & Leadership Award" in 2010
HRD Congress Global HR Excellence Awards 2010-11
given by World HRD Congress at Mumbai
Gold Award for Outstanding VSP has established World Class Training 2010
Achievement in Training Excellence by infrastructure since inception and
Greentech Foundation, New Delhi continuously improved training facilities
Global Human Resource Development In recognition of outstanding performance 2010
Award of International Federation of in setting up of high standards in HRD and
Training and Development focus on initiatives that would motivate
Organization, London and Empower employees to do their best
Town Official Language Implementation For its exemplary Performance in 2010
Committee Award, Visakhapatnam Implementation of Official language
INSSAN AWARD VSP won this Quiz successively for 3 years 2009
in a row (2007, 2008 & 2009) achieving
HAT-TRICK which is a National Record.
Bagged third prize in Public Relations In the Event Management category at the 2009
National Awards-2009 31st All India Public Relations conference
held in Chandigarh
Bagged the First Steel Ministers Trophy For being the best integrated steel plant in 2009
for the year 2006-07 the country (Runner Up)
Won the TATA-Crucible Corporate For the best performance in the inter 2009
Quiz. corporate business quiz, TATA-Crucible
Corporate Quiz
Vishwakarma RashtriyaPuraskar For the best suggestions 2009
Awards for the performance year 2007
5TH Time in a row.
RINL ranked No.2 globally for the Global survey by Steel guru for the most 2009
popularity of website among the global popular website among steel makers all
steel makers. over the world
The Best Place to work for- 2009 Award given by The Economic Times- 2009
Great Place to Work Institute was won by
VSP in June
ISPAT RAJYA BHASHA TROPHY For popularising the usage of Hindi. 2009
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FINANCIAL STATEMENT ANALYSIS
INTRODUCTION
Financial statements are prepared primarily for decision making. They play
a dominate role in setting the frame work of managerial decisions.
Financial analysis is the process of identifying the financial strength and
weakness of the firm by properly establishing between the items of the balance
sheet and profit and loss account. There are various methods or techniques used
in analysis financial statements such as comparative statements, trend analysis,
common size statements, schedule of changes in working capital, funds flow
and cash flow analysis Cost Volume Profit Analysis and Ratio Analysis.
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TYPES OF FINANCIAL ANALYSIS:
Financial analysis can be classified in to different categories depending up on:
A. On the basis of material used.
B. On the basis of modules used.
1. EXTERNAL ANALYSIS:
This analysis is done by those who are outsiders for the business.
These persons mainly depend up on the published financial statements. Their
analysis serves only a limited purpose.
2. INTERNAL ANALYSIS:
This analysis is done by persons who have access to the books of
account and at other information related to the business. Such analysis can
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be done by executives and employees of the organization. The analysis is
done depending up on the objective to be achieved through this analysis.
B] ON THE BASIS OF MODULES USED:
According to this financial analysis can also be of two types:
1. Horizontal analysis
2. Vertical analysis
1. HORIZONTAL ANALYSIS:
In case of this type of analysis, financial statements for a number of
years are reviewed and analyzed. The current years figures are compared
with the standard or base year. The analysis statement usually contains
figures for two or more year and the change are shown regarding each item
from the base year usually in the form of percentage. Since this type of
analysis is based on the data from year to year rather than on date, it is also
termed as Dynamic Analysis.
2. VERTICAL ANALYSIS:
In case of this type of analysis a study is made of the quantitative
relationship of various items in the financial statement on a particular date.
Since this analysis depends on the data for one period, this is not very
conducive to a proper analysis of the companys financial position. It is also
called static analysis as it is frequently used for referring to ratio developed
on one date or for one accounting period.
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PROCEDURE OF FINANCIAL STATEMENT ANALYSIS:-
1. Selection
2. Classification
3. Interpretation
4. Cost-Volume-Profit analysis
5. Ratio analysis.
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1. COMPARATIVE FINANCIAL STATEMENTS:
The statements which have been designed in a way so as to provide
time perspective to the consideration of various elements of financial
position embodied in such statements with figures for two or more period
side by side to facilitate comparison. Both the income statement and balance
sheet can be prepared in the form of comparative financial statements.
The comparative financial statements contain the following items.
1. Absolute figures as given in the final accounts.
2. Absolute figures expressed in terms of percentages.
3. Increase or decrease in absolute figures in terms of money value.
4. Increase or decrease in terms of percentages.
5. Comparison expressed in ratios.
6. Percentages of totals.
Comparative Financial Statements includes the following two statements i.e.
a) Comparative Balance sheet, and
b) Comparative Income statements.
a) COMPARATIVE BALANCE SHEET:
The balance sheet prepared on a particular date reveals the financial
position of the concern on the date. To study the trends of business over a
period of time; comparative balance sheet reveals the cause for changes in
the financial position on account of various transactions. The comparative
study throws light on financial policies adopted by the management.
The comparative balance sheet consists of two columns for the original
data. A third column used to show increase or decrease in various items. A
fourth column containing the percentage of share of a each variable out of
the total value.
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GUIDELINES FOR INTERPRETATION OF BALANCE SHEET:
1. The short term financial position can be studied by comparing the
working capital of both years.
6. Fixed assets must be compared with long term loans and capital. If the
increase in fixed assets is more than the increase in long term loans and
capital, it means fixed assets are financed from the working capital which
is not good in the long term.
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a) COMMON SIZE BALANCE SHEET:
Statement in which balance sheet items are expressed as the ratio of
each asset to total assets and the ratio of each liability is expressed as a ratio
of total liabilities is called common size balance sheet. The common size
balance sheet is a horizontal analysis. The comparison of figures in different
periods is not useful becomes total figure may be affected by a number of
factors. It is not possible to establish standard norms for various assets.
The trends of year to year may not give proper results.
3. TREND ANALYSIS:
Trend analysis is an important and useful technique of financial
analysis. It involves computation of index numbers of the moments of the
various financial items in the financial statements for a number of periods. It
enables to know the changes in the financial position and the operational
efficiency between the period chosen.
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Through trend analysis the analysis can give his opinion as to whether
favorable or unfavorable tendencies are reflected by the accounting date.
The comparative and common size balance sheets suffer from a major
limitation i.e., absence of basic standard to indicate whether the proportion
of an item is normal or analysis values are calculated for each item in
isolation but conclusions are to be drawn by studying the related items also.
4. COST-VOLUME-PROFIT ANALYSIS:
Cost Volume Profit analysis is an important tool of profit planning.
It studies the relationship between cost, volume of production, sales and
42
profit. It is not strictly a technique used for analysis of financial statements.
However, it is an important tool for the management for decision making.
Since the data is provided both cost and financial records. It tells the volume
of account of variation in output, selling price and cost, and finally, the
quantity to be produced and sold to reach the target profit level.
5. RATIO ANALYSIS:
Financial analysis depends to a very large extent on the use of ratios
though there are other equally important tools of such analysis. Thus, a
direct examination of the magnitude of two related items is somewhat
enlightening but the comparison is greatly facilitated by expressing the
relationship as a ratio.
Ratio analysis of business enterprises is done to ascertain the capacity
of the firm to meet its future financial obligation or expectations. Present and
past data are used for the purpose and necessary extrapolations are made to
provide an indication of future performance. Alexander Walt, who criticized
the bankers for their lopsided decisions regarding the grant of credit on
current ratios alone, made the presentation of an elaborate system of ratio
analysis as early as in the year 1919.
RATIO:
Ratio is an expression of the quantitative relationship that exists between
the two numbers. The ratio is defined as the indicated quotient of two
mathematical expressions the ratio should be determined between related
accounting variables to be meaningful and effective.
1. Liquidity position
2. Long-term solvency
3. Operational efficiency
4. Overall profitability
5. Inter-firm comparison, and
RATIO ANALYSIS-LIMITATIONS:
Ratio Analysis is a widely used tool of financial analysis. Yet, it suffers
from various limitations. The operational implication of this is that while using
ratios, the conclusions should not be taken on their face value. Some of the
limitations, which characterize ratio analysis, are
i. Difficulty in comparison.
ii. Impact of Inflation, and
iii. Conceptual Diversity
RATIO ANALYSIS-TYPES:
Several ratios, calculated from the accounting data, can be grouped into
various classes according to financial activity or function to be evaluated. As
stated earlier, the parties interested in financial analysis are short-term and long-
term creditors, owners and management. Short-term creditors` main interest is
in the liquidity position or the short-term solvency of the firm. Long-term
creditors`, on the other hand, are more interested in the long-term solvency and
profitability of the firm. Similarly, owners concentrate on the firms
profitability and financial condition. Management is interested in evaluating
every aspect of the firms performance. They have to protect the interests of all
44
parties and see that the firm grows profitably. In view of the requirements of
the various users of ratios, we may classify them into the following four
important categories:
LIQUIDITY RATIOS
LEVERAGE RATIOS
ACTIVITY RATIOS
PROFITABILITY RATIOS
A) LIQUIDITY RATIOS:
It is extremely essential for a firm to be able to meet its obligations as
they become due. Liquidity ratios measure the firms ability to meet current
obligations.
In fact, analysis of liquidity needs the preparation of cash budgets and
cash and Fund Flow statements; but liquidity ratios, by establishing a
relationship between cash and other current assets to current obligations
provided a quick measure of liquidity. A firm should ensure that it does not
suffer from lack of liquidity, and also that it does not have excess liquidity. The
failure of a company to meet its obligations due to lack of sufficient liquidity,
will result in a poor creditworthiness, loss of creditors` confidence, or even in
legal tangles resulting in the closure of the company. A very high degree of
liquidity is also bad; idle assets earn nothing. The firms funds will be
unnecessarily tied up in current assets. Therefore, it is necessary to strike a
proper balance between high liquidity and lack of liquidity. The most common
ratios, which indicate the extent of liquidity or lack of it, are:
45
1. CURRENT RATIO:
The current ratio is calculated by dividing current assets by current
liabilities.
Current assets include cash and those assets, which can be converted into
cash within a year, such as Marketable Securities, Debtors and Inventories.
Prepaid expenses are also including in current assets as they represent the
payments that will not be made by the firm in future. Current Liabilities include
Creditors, Bill payable, Accrued expenses, Short-term bank loan, and Income
Tax Liability and Long-term debt maturing in the current year.
The current ratio is a measure of the firms` short-term solvency. The
higher the current ratio, the larger is the amount of rupees available per Rupee
of current liability, the more is the firms` ability to meet current obligations and
the greater is the safety of funds of short-term creditors.
2. QUICK RATIO:
The Quick ratio is calculated by dividing quick assets by quick liabilities.
Quick assets or Liquid assets mean those assets which are immediately
convertible into cash without much loss. All current assets except prepaid
expenses and inventories are categorized in liquid assets. Quick liabilities
means those liabilities, which are payable within a short period. Normally,
Bank overdraft and Cash credit facility, if they become permanent mode of
46
financing are in quick liabilities.
As this ratio concentrates on cash, marketable securities and receivables
in relation to current obligation, it provides a more penetrating measure of
liquidity than current ratio.
B) LEVERAGE RATIOS:
The short-term creditors like bankers and suppliers of raw material are
more concerned with the firms` current debt-paying ability. On the other hand,
long-term creditors like debenture holders, financial institutions etc., are more
concerned with the firms` long-term financial strength. In fact, a firm should
have strong short-as well as long-term financial position. To judge the long-
term financial position of the firm, financial leverage, or Capital structure, ratios
are calculated. These ratios indicate mix of funds provided by owners and
lenders. As a general rule, there should be an approximate mix of debt and
owners equity in financing the firms` assets.
The manner in which assets are financed has a number of implications.
First, between debt and equity, debt is more risky from the firms` point of view.
The firm has a legal obligation to pay interest on debt holders, irrespective of
the profits made or losses incurred by the firm. If the firm fails to debt holders
in time, they can take legal action against it to get payment and in extreme
cases, can force the firm into liquidation.
Secondly, use of debt is advantageous for shareholders in two ways:
a. They can retain control of the firm with a limited stake and
b. Their earnings will be magnified, when the firm earns a rate of return on
the total capital employed higher than the interest rate on the borrowing
funds. The process of magnifying the shareholders return through the use
of debt is called financial leverage or financial gearing or trading on
equity.
47
Leverage ratios may be calculated from the balance sheet to determine the
proportion of debt in total financing. Many variations of these ratios exist; but
all these ratios indicate the same thing-the extent to which the firm has relied on
debt in financing assets. Leverage ratios are also computed from the profit and
loss items by determining the extent to which operating profits are sufficient to
cover the fixed charges.
2. PROPRIETARY RATIO:
This ratio states relationship between share capital and total assets.
Proprietors equity represents equity share capital, preference share capital and
reserves and surplus. The latter ratio is also called capital employed to total
assets.
48
C) ACTIVITY RATIOS:
Funds creditors and owners are invested in various assets to generate
sales and profits. Better the management of assets, larger the amount of sales.
Activity ratios are employed to evaluate the efficiency with which the firm
managers and utilizes its assets. These ratios are also called Turnover Ratios
because they indicate the speed with which assets are being converted or turned
over into sales. Activity ratios, thus, involve a relationship between sales and
assets. A proper balance between sales and assets generally reflects that assets
are managed well. Several activity ratios can be calculated to judge the
effectiveness of asset utilization.
49
2. FIXED ASSETS TURNOVER RATIO:
The fixed assets turnover ratio measures the efficiency with which the
firm is utilizing its investments in fixed assets, such as land, building, plant and
machinery, furniture, etc. It also indicates the adequacy of sales in relation to
the investment in fixed assets. The fixed assets turnover ratio is sales divided
by net fixed assets. The firm assets turnover ratio should be compared with past
and future ratios and also with ratio of similar firms and the industry average.
The high fixed assets turnover ratio indicates efficient utilization of fixed assets
in generating sales, while low ratio indicates inefficient management and
utilization of fixed assets.
This ratio indicates the extent to which the debts have been collected in
time. The debt collection period indicates the average debt collection period.
This ratio is a good indicator to the lenders of the firm, because it explains to
them whether their borrower is collecting from its debt in time. An increase in
this period indicates blockage of funds in debtors.
50
D) PROFITABILITY RATIOS:
A company should earn profits to Survive and Grow over a long period
of time. Profits are essential, but it would be wrong to assume that every action
initiated by management of a company should be aimed at maximizing profits,
irrespective of social consequences.
Profit is the difference between revenues and expenses over a period of
time (usually a year). Profit is the ultimate Output of a company, and it will
have no future if it fails to make sufficient profits. Therefore, the financial
manager should continuously evaluate to the efficiency of the company in term
of profits. The profitability ratios are calculated to measure the operating
efficiency of the company. Besides management of the company, creditors and
owners are also interested in the profitability of the firm. Creditors want to get
interest and repayment of principle regularly. Owners want to get a required
rate of return on their investment. This is possible only when the company earns
enough profits.
Generally two major types of profitability ratios are calculated.
51
PROFITABILITY RATIOS IN RELATION TO SALES:
52
b) NET PROFIT MARGIN RATIO:
Net profit is obtained when operation expenses, interest and taxes are
subtracted from the gross profit.
If the non-operating income figure is substantial, it may be excluded from
PAT to see profitability arising directly from sales. Net profit margin ratio
establishes a relationship between net profit and sales and indicated
managements efficiency in manufacturing, administering and selling the
products. This ratio is the overall measure of the firms` ability to turn each
rupee sales into net profit. If the net margin is inadequate, the firm will fail to
achieve satisfactory return on shareholder`s funds.
This ratio also indicates the firms` capacity to withstand in adverse
economic conditions. A firm with a high net margin ratio would be in an
advantageous position to survive in the case of falling selling prices, rising costs
of production or declining demand for the product. It would really be difficult
for a low net margin firm to withstand these adversities. Similarly, a firm higher
net profit margin can make better use of favorable condition, such as rising
selling prices; fall in costs of production or increasing demand for the product.
Such a firm will be able to accelerate its profits at a faster rate than a firm with a
low net profit margin will.
An analyst will be able to interpret the firms profitability more
meaningfully if he/she evaluates both the ratios-gross margin and net margin-
jointly. To illustrate, if the gross profit margin has increased over years, but the
net profit margin has either remained constant or declined, or has not increased
as fast as the gross margin, this implies that the operating expenses relative to
53
sales have been increasing. The increasing expenses should be identified and
controlled. Gross profit margin may decline due to fall in sales price or increase
in the cost of production.
a) RETURN ON INVESTMENT:
The term investment refers to Total Assets. The funds employed in Net
assets are known as Capital Employed. Net assets equal net fixed assets plus
current assets minus Current liabilities excluding Bank loans. Alternatively,
Capital employed in equal to Net worth plus total debt.
The conventional approach of calculating return on investment (ROI) is
to divide PAT by Investment. Investment represents pool of funds supplied by
shareholders and lenders, while PAT represents residual income of
shareholders; therefore, it is conceptually unsound to use PAT in the calculation
of ROI. Also, as discussed earlier, PAT is affected by capital structure. It is,
therefore more appropriate to use one of the following measures of ROI for
comparing the operating efficiency of firms.
54
Where ROTA and RONA respectively Return on Total assets and Return on
Net assets.
b) RETURN ON CAPITAL:
The ROCE is the second type of ROI. The term capital employed refers
to long-term funds supplied by the creditors and owners of the fund. It can be
computed in two ways. First, it is equal to non-current liabilities (long-term
liabilities) plus owners equity. Alternatively, it is equivalent to Net Working
Capital plus Fixed Assets. Thus, the Capital Employed provides a basis to test
the profitability related to the sources of long-term funds. A comparison of this
ratio with similar firms, with the industry average and overtime would provide
sufficient insight into how efficiency the long-term funds of owners and
creditors are being used. The higher the ratio, the more efficient is the use of
Capital Employed.
56
THERE ARE 4 STEPS INVOLVED IN PREPARATION OF FUNDS
FLOW STATEMENT:
6. Analysis is only means and not an end in itself. The analyst has to make
interpretation and draw has own conclusion. Different people may
interpret the same analysis in different ways.
57
PROCEDURE OF CASH MANAGEMENT:
58
In the same way when RINL have deficit balance of cash, again we invite
the tender and select the bank which bank codes less interest rate. In this way
RINL manage the cash very effectively.
Settlement (RTGS) at those RINLs locations once RBI enables and the
d) The Bank shall allow for a temporary overdraft in case of mismatch i.e.,
if the payments of the day are more than the receipts, the short fall shall
e) The Overdraft allowed by the Bank and the charges payable for returned
f) The bank will submit MIS report on daily basis to the respective RINL
59
fortnightly basis and summary report daily and fortnightly to Head
month as per the agreed rates with a report of it being sent to Head
Quarters.
Management efforts over the few years have been to inculcate cash
consciousness through constant emphasis on working capital, mainly inventory
and book debtors. In all these, it is to be kept in mind that VSP is a multi
product undertaking, were management decisions affecting working capital are
taken at managerial level.
60
PAYABLES MANAGEMENT:
In RINL all payments are effected through the cast section of fianc
department in the head quarters. Cast sections monitor the cash position on a
daily bases and prioritize the payments. Cash section prepares cash report every
morning and checks with the banks for cash balance. Based on the balance
available in the banks and priority of payments, cheques are issued to the
parties. Payments are prioritized so as to optimize the cost. Prioritization is done
based on the financial implication of non-payment of the due amount.
61
Table No 5.1 Balance Sheets of VSP Ltd. from 2011-12 to
Share Holders
Fund
Reserve &
6130.50 5931.97 5401.90 5057.68 4592.59
surplus
(A) 12477.32 13659.29 13229.22 12885.00 12419.91
Loan Funds
Unsecured
3072.22 1572.74 861.87 825.27 100.04
Loans
(B) 4900.00 2575.14 1136.76 1232.55 1007.76
Current
liabilities
62
BALANCE SHEET AS AT 31st MARCH, 2015 AND 31st MARCH, 2014
As at As at
Particulars
31st March 2015 31st March 2014
Equity and liabilities
Non-current liabilities
Current Liabilities
Assets
Non-current assets
Tangible assets
Intangible assets
Capital work-in progress
Current assets
63
Inventories 3828.60 3403.11
31st March 31st March 31st March 31st March 31st March
Particulars 2015 2014 2013 2012 2011
Fixed Assets
Capital work-in-
9965.24 10596.08 9536.71 7506.90 4652.00
progress
64
Cash & Bank
1625.02 2068.34 1998.89 5415.54 6624.17
Balance
Miscellaneous
Expenditure(D)
Profit & Loss
Account(E)
Total (A+B+C) 24652.52 23050.55 19053.44 18523.21 17733.48
Increase/ Increase/
2009-10 2010-11
Decrease Decrease
Particulars Rs. In Crs. Rs. In Crs.
Rs. In Crs. Percentage
ASSETS:
Cash & Bank Balance 6624.17 5415.54 -1208.63 -18.24
Sundry Debtors 191.27 181.18 -10.09 -5.27
Inventories (Stock) 3215.28 2451.52 -763.76 -23.75
Loans & Advances 1569.69 1365.02 -204.67 -13.03
Other Current Assets 258.91 137.4 -121.51 -46.93
Miscellaneous Expenditure
Profit & Loss Account
Investments 0.05 0.25 +0.2 +4.00
Fixed Assets 5874.11 8972.30 +3098.19 +52.74
Total Assets 17733.48 18523.21 +789.73 +4.45
LIABILITIES
Current Liabilities 2560.79 2871.95 +311.16 +12.15
Provisions 1620.53 1435.89 -184.64 -11.39
Secured Loans 907.72 407.28 -500.44 -55.13
Unsecured Loans 100.04 825.27 +725.23 +724.94
65
Deferred Tax Liability 124.49 97.82 -26.67 -21.42
Decrease in net sales realization of rs.1417crs over the last year NSR.
Decrease in raw material price of rs.734crs over last year, increase in employee
remuneration& benefits of rs.224crs over last year: increase in production
volume of
Rs.339crs over last year.
COMPARATIVE BALANCE SHEET OF VSP LTD FOR THE YEARS 2011-12 and
2012-13
Increase/De Increase/
2011-12 2012-13
Particulars crease Decrease
Rs. in Crs. Rs. in Crs.
Rs. in Crs. Percentage
ASSETS:
Cash & Bank Balance 5415.54 1998.89 -3416.65 -63.08
66
Secured Loans 387.32 274.89 -112.39 -29.02
Unsecured Loans 845.23 861.87 +16.64 +1.96
Deferred Tax Liability 97.82 79.97 -17.85 -18.24
Reserves & Surplus 5057.68 5401.90 +344.22 +6.80
Share Capital 7827.32 7827.32 -0.05 -0.0006
Total Liabilities 18523.21 19053.44 +530.23 +2.86
Increase in turnover of rs.882crs over the last year sales turn over.
Increase in net sales realization of rs.719crs over the last year NSR.
Decrease of gross margin of rs.190crs over last year.
Increase in raw materials consumption expenditure of rs.1653crs due to
increase in raw material prices. Over last year.
COMPARATIVE BALANCE SHEET OF VSP LTD FOR THE YEARS 2013-14 and
2014-15
Increase/ Increase/
2013-14 2014-15
Particulars Decrease Decrease
Rs. in Crs. Rs. in Crs.
Rs. in Crs. Percentage
ASSETS
Cash & Bank Balance 2068.34 1625.02 +443.32 +21.43
Miscellaneous Expenditure
67
Total Assets 21504.84 24652.60 -3147.76 -14.64
LIABILITIES
Government policies
Imposition of power restrictions and control measures by government of A.P
68
Other reasons
a) Increase in iron ore and MCC prices
69
REASONS FOR INCREASE / DECREASE IN PROFITABLITY 2012-2013.
Decrease in turnover of Rs.909 crs over the last year sales turnover due to
Sluggish market conditions and fall in NSR
Major capitalization of expansion units with gross block value of Rs.1859 crs
and consequential depreciation of Rs.35 crs
Increase in efficiency
COMPARATIVE PROFIT & LOSS A/C OF VSP LTD. FOR THE YEARS
2013-14 and 2014-15
EXPENDITURE
70
HIGHLIGHTS:
71
COMMON SIZE ANALYSIS
Miscellaneous
Expenditure
Profit & Loss
Account
Investments 614.80 2.85 897.44 3.64
72
Common size balance sheet of 2013-2014 and 2014-2015in %
INTERPRETATION:
The fixed assets for the period of 2013-14 is 12397.93 & 2014-15 is 13777.25
where the percentage is 57.65 & 55.88
The total assets and total liabilities for the period of 2013-14 is 21504.84 &
2014-15 is 24652.52 where the percentage is 100
The liabilities for the period 2013-14 is 4119.26 & 2014-15 is 6458.12 where
the percentage is 19.15 & 26.15
73
Table No 5.2.1 COMMON SIZE BALANCE SHEET OF 2012-13 AND 2011-12
74
Common size balance sheet of 2012-13 AND 2011-12in %
INTERPRETATION:
The fixed assets for the period of 2011-12 are 8972.30 & 2012-13 is 11066.63 it has
been increased to10.77%.
The Total assets for the period of 2011-12 18523.21 & 2012-13 is 19053.44 i.e.,
100%.
The current liabilities for the period 2011-12 2871.95& 2012-13 are 3279.43 this has
been increased to1.66%.
75
Table NO 5.2.2 COMMON SIZE BALANCE SHEET OF 2009-10 AND 2010-11
Sundry Debtors
181.18 0.97 191.27 0.01
Inventories
2451.52 13.23 3215.28 18.13
Loans & Advances 1365.02 7.36 1569.69 8.85
Other Current Assets 137.4 0.741 2587.91 1.46
Miscellaneous
Expenditure
LIABILITIES
76
Common size balance sheet of 2009-10 AND 2010-11in %
INTERPRETATION:
The fixed assets for the period of 2009-10 is 5874.11 & 2010-11 is 8972.30 it has
been increased to 12%
The Total assets for the period of 2009-10 is 17733.48 & 2010-11 is18523.21 i.e., is
100%
The current liabilities for the period 2009-10 is 2560.79 & 2010-11 is 2871.95 this
has been increased by 1.2%
77
Table No 5.2.2: COMMON SIZE BALANCE SHEET OF 2009-10 AND 2008-09
Miscellaneous
Expenditure
78
Common size balance sheet of 2009-10 AND 2008-09in %
INTERPRETATION:
The fixed assets for the period of 2008-09is 3471.87 & 2009-10 is 5874.11 it has been
increased &%
The Total assets for the period of 2008-09is 15276.51 & 2009-10 is17733.48 there
is an increase of 2456.97
The current liabilities for the period 2008-09 is 1610.15 & 2009-10 is 2560.79i.e.,14
this has been increased to 4%
79
CASH FLOW STATEMENT for 2010-11& 2011-12.
Rs .in (Crs)
PARTICULARS 2011-12 2010-11
A. Cash flow from operating activities:
1. Net profit / (loss) before taxation 1247.65 2026.59
Add / (less) Adjustments for:
2. Depreciation 277.17 240.78
3. Interest finance charges 77.55 87.47
4. Provisions (107.14) (371.37)
5. Unrealized foreign exchange (Gain)/Loss (11.21) 47.85
6 (profit)/loss on sale of fixed assets (1.02) (0.47)
7. Finished goods consumed for capital jobs (94.90) (8087)
8. Interest income (534.71) (787.21)
Operating profit before working capital changes 853.39 1162.77
Adjustments for:
9. (Increase) / (Decrease) in inventories 763.76 (1454.13)
10. (Increase) / (Decrease) in sundry debtors 10.09 (97.86)
11. Decrease in loans & advances 204.67 388.80
12. Increase in Liabilities 281.99 382.23
13. Cash generated from operating activities 2113.90 (716.04)
14. Less: Income tax paid including fringe benefit tax 1622.90 334.23
Net cash from / (used in) operating activities
B. Cash flow to investing activity:
15. Purchase of fixed assets (3276.58) (2038.63)
16. Investments (0.20) 0.00
17. Proceeds from sale of fixed assets 35.28 2.29
18. Interest received 656.22 820.73
Net cash from / (used in) investing activity (2585.28) (1215.61)
C. Cash flow to financing activity:
19. Proceeds from / (Repayment of) secured loans (500.44) 574.94
20. Proceeds from / (Repayment of) unsecured loans 725.23 (7.91)
21. Interest and Finance charges (74.22) (92.13)
22. Dividend paid (339.18) 0.00
23. Dividend tax paid (57.64) 0.00
Net cash from / (used in) Financing activity (246.25) 474.90
Net Increase / (decrease) in cash & cash equivalents (1208.63) (1074.94)
(A+B+C)
24. Opening balance of cash & cash equivalents 6624.17 7699.11
25. Closing balance of cash & cash equivalents 5415.54 6624.17
INTERPRETATION:
80
CASH FLOW STATEMENT FOR 2012-13AND 2011-12
Rs. In crs
PARTICULARS 2012-13 2011-12
A. Cash flow from operating activities
1. Net profit / (Loss) before taxation 981.66 1247.65
Add / (Less) Adjustments for: 981.66 1247.65
2. Depreciation 268.61 277.17
3. Interest and Finance charges 164.55 77.55
4. Provisions 62.57 (107.14)
5. Unrealized foreign exchange (Gain) / (Loss) (5.30) (11.21)
6. (Profit) / (Loss) on sale of fixed assets (3.26) (1.02)
7. Finished goods consumed for capital jobs (6.65) (94.90)
8. Interest on income (347.54) (534.71)
Operating profit before working capital changes 1114.64 853.39
Adjustment for:
9. (Increase) / (Decrease) in Inventories (803.19) 763.76
10. (Increase) / (Decrease) in sundry debtors (149.43) 10.09
11. Decrease in Loans & Advances (600.02) 204.67
12. Increase in Liabilities 505.45 281.99
Cash generated from operating activities: 67.45 2113.90
13. Less: Income Tax paid including Fringe benefit Tax 486.26 491
Net cash from / (used in) operating activities (418.81) 1622.90
B. Cash flow to investing activity
14. Purchase of Fixed assets (2455.98) (3276.58)
15. Investments (361.35) (0.20)
16. Proceeds from sale of Fixed assets 3.55 35.28
17. Interest received 408.98 656.22
Net cash from / (used in) investing activity (2404.80) (2585.28)
C. Cash flow to Financing Activity
18. Proceeds from / (Repayment of) Secured Loans (112.43) (500.44)
19. Proceeds from / (Repayment of) Unsecured Loans 16.64 725.23
20. Interest and Finance charges (165.58) (75.22)
21. Dividend paid (285.29) (339.18)
22. Dividends tax paid (47.38) (57.64)
Net cash from / (used in) Financing Activity (593.04) (246.25)
Net increase / (Decrease) in Cash & Cash equivalents (3416.65) (1208.63)
(A+B+C)
Opening balance of Cash & Cash equivalents 5415.54 6624.17
Closing Balance of Cash & Cash equivalents 1998.89 5415.54
2011-12:
81
negative growth is observed in loan & advances and other current assets. The
net effect of the above changes has brought about the decreased working capital.
2012-13:
INTERPRETATION:
2013-14
There is a significant decrease in net working capital, over last 3 years. The
noticeable decrease in net working capital is due to decrease in current assets.
2014-15
In 2013-14 there was an decrease in inventories, current assets as compared to
the previous year.
Interest received from the investments also placed an important quantum of
inflow.
Net profit decreased as compared to previous year.
83
Capital Employed 9935 8869 5476 5813 7963
Net Worth 11481 12420 12885 13659 12477
Gross Block 8901 9006 9474 10394 12588
Depreciation 7516 7750 8009 8607 8799
Net Block 1385 1256 1465 1787 3790
Inventory 1761 3215 2452 3403 3829
C)PROFITABILITY
AND OTHER
RATIOS
(i) Percentage Of
Gross Profit to Sales 29.00 20.30 12.50 9.0 6.5
Net Profit to Sales 18.60 12.80 7.50 5.2 2.6
Gross Profit to Net Worth 16.90 10.80 6.20 9.5 7.1
Net Profit to Net Worth 19.60 15.00 14.50 2.8
5.5
Gross Profit to Capital 38.70 27.00 16.90 22.4 11.1
Employed
Net Profit to Capital 16.90 30.90 23.10 12.9 4.4
Employed
Gross Profit to Share 105.00 117.40 194.20 16.8 14.0
Capital
Inventory to Sales 10.23 4.65 8.23 23.5 28.2
(ii) Ratio Of
Current Assets to Current 3.60 2.84 2.20 1.2 1.0
Liabilities
Quick Assets to Current 3.10 2.10 1.60 0.7 0.6
Liabilities
Sales to Capital
Employed 2.50 1.50 1.54 2.5 1.7
INTERPRETATION:
Profit position was in upward trend from 2009-10 and after that it is in
down ward trend. This is mainly due to:
84
Decrease in Sales volume
Increase in cost of production
The same fact is revealing in the ratio analysis also
I) LIQUIDITY RATIOS:
CURRENT RATIO:
TOTAL
CURRENT 11859.32 9550.66 7625.21 8492.11 9977.75
ASSETS
85
Provisions 1620.53 1435.89 1336.06 390.19 737.94
TOTAL
4181.32 4307.84 4607.49 7221.61 10184.67
LIABILITIES
Current Ratio
3
2.5
1.5
Current Ratio
0.5
0
2010-11 2011-12 2012-13 2013-14
INTERPRETATION:
1. As we can see over the years the current ratio has been in a declining trend.
The reasons and justifications are given below:
The inventory maintained compared to production is almost the same
over the period of observation.
There is a gradual increase in the sundry debtors but in the financial
year 14-15 we can see a sharp rise in them due to high credit sales in
that year.
Cash at bank has decreased due to redemption of preferential shares.
Other assets are almost the same value.
86
There is an increase in Loans & Advances due to the Forward
Contracts receivables and increased advances to the suppliers to
counter the variations in the market (both Forex and Raw Material).
Liabilities increased due to increased number of forward contract
payables so as to nullify the effect of Forex fluctuations.
Even though the current ratio is not ideal in this study period, the companys
liquidity position is good because of high value of cash which is sufficient to
provide for the immediate provisions which are regular in nature.
LIQUID/QUICK RATIO:
87
Provisions 1620.53 1435.89 1336.06
LIQUID
4181.32 4307.84 4607.49 7221.61 10184.67
LIABILITIES
INTERPRETATION:
When compared with the current ratio, we can see that the inventories make
almost 50 % of the current assets which is justified as it is a continuous process
manufacturing plant
Also due to expansion plans there is a huge dip in the cash maintained by the
company which reduces the value of the total current assets
When we compare the Inventory with the Trade Payables, it is evident that the
purchases are being made on cash basis and less on credit basis
88
If we compare the Trade Payables with the Sundry Debtors, it is evident that
there is more to receive than to pay by the company
Even though the Quick Ratio is less than the ideal value and has a declining
trend, as explained the expansionary activities resulted in such trend but the liquidity
position of the company is good to pay back the immediate liabilities.
1495.23 861.87
Unsecured loans 100.04 845.23 861.87 148.21 347.58
(Others) (Others)
89
Total Equity 12419.91 12885 13229.22 13659.29 12477.32
INTERPRETATION:
Even though there is a slight increase in the ratio over the study period the value of the
ratio is very less which signifies the fact that the company is debt free. There are two
factors for the ratio to be small
The company mostly depends on short term borrowings to meet its capital
needs
The high value of equity also makes the ratio very low
90
INTEREST COVERAGE RATIO:
Interest
Coverage 24.16 17.09 6.96 17.09 6.96
Ratio
91
INTERPRETATION:
As we can see the Interest Coverage Ratio for the company is decreasing on
yearly basis but still it is in the acceptable range. The reasons for the decline
are explained below
The companys capital investment has increased due to expansionary plans.
The capital was raised from short term borrowings which increased the interest
rates over the years which resulted in decreased ratio.
The profit of the company has also been reducing due to increase in raw
materials in the market
These two factors resulted in decrease of the numerator as well as the
denominator of the formula resulting in the decrease of the ratio however it is
an acceptable value and shows the company is performing well
92
PROPRIETARY RATIO:
Share holders
12419.91 12885.00 13229.22 13659.29 12477.32
funds
Proprietary
70.03% 69.56% 69.43% 63.52% 50.61%
Ratio
93
INTERPRETATION:
The Proprietary ratio shows how its proprietors have financed its assets.
The ratio indicates long-term solvency position of the company.
It decreases from 70% in the year 2009-10 to 51% in the year 2014-15.
The shareholders fund occupied 50% on total assets. It indicates that the
proprietary ratio of VSP is not at good position.
But the decrease in the Propriety Ratio is due to the redemption of
shareholder capital.
The remaining 50% of the capital is being funded through outside
sources, which indicates that the outsiders hold on the company is
increasing in all the years in consideration.
94
DEBT TO TOTAL FUNDS RATIO:
1495.23 861.87
100.04
Unsecured loans 845.23 861.87 148.21 347.58
(Others) (Others)
TOTAL
13427.67 14117.55 14365.98 16234.43 13961.66
FUNDS
Debt to Total
7.5% 8.73% 7.91% 15.86% 10.63%
Funds Ratio
95
INTERPRETATION:
96
TABLE SHOWING YEAR-WISE INVENTORY TURNOVER RATIO
(Rs.in. crores)
Inventory 5.62
6.53 times 6.71 times 3.98 times 3.35 times
Turnover Ratio Times
97
INTERPRETATION:
The Inventory Turnover Ratio during the year 2010-11 was 5.62
The ratio shows that there is an increase in the year 2010-11 which meets the
customers demand and further there is a slight decrease in the year 2014-15
which also satisfies the demands of the customers.
Normally higher the ratio indicates the better stock management.
The decrease in inventory ratio for the year 2014-15 is mainly due to the fact
that net sales have drop for the year and coupled with a slight increase in
inventory. Although the decrease in net sales although is a worrying factor but
this should not be viewed in isolation because the decrease in sales has
occurred throughout the country across all the major steel plants. Higher ratio
also indicates that the company is able to meet the customers demand properly.
98
DEBTORS TURNOVER RATIO:
Average trade
191.27 181.18 330.61 378.88 718.40
Debtors
Debtors
48times 54 times 32 times 35 times 17 times
turnover Ratio
99
INTERPRETATION:
The Debtors turnover ratio for the year 2014-15 is 17 times which is a drastic drop
compared to the previous years
This is due to drop in net sales for the year 2014-15 and a drastic increase in
average trade debtors
This could point to the fact that the company has been trying to improve its sales
by extending the credit sales
It can be concluded that the management isnt better position in converting
Debtors into cash
100
AVERAGE COLLECTION PERIOD:
Average trade
191.27 181.18 330.61 378.88 718.40
debtors
DEBTORS TURN
47.72 54.14 31.67 35 times 17 times
OVER RATIO
AVG.COLLECTIO
7.6days 6.7 days 11.52 days 10.4 days 21.5 days
NPERIOD
101
INTERPRETATION:
The average collection period during the year 2014-15 is 21.5 days it represents
the number of days for which the firm has to wait before its receivables are
converted into cash.
During the period of study it has been observed that debt collection period
varies from 6 to 21.5 days.
This is due to drop in net sales and a drastic increase in average trade debtors
for the year 2014-15.
This could point to the fact that the company has been trying to improve its
sales by extending the credit sales.
However, the Average collection period during different periods is quite low. It
indicates the better quality of debtors and the efficiency of the debt collection
department
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WORKING CAPITAL TURNOVER RATIO:
Net working
7678.00 5242.82 3017.72 1270.5 -206.92
capital
Working
capital 1.35 2.02 3.81 2.02 (58.5283)
turnover Times times Times times
Ratio
103
INTERPRETATION:
The aim of this ratio is that it indicates the velocity of its utilization of working
capital.
104
IV) PROFITABILITY RATIOS:
2115.00
Gross profit 850.99 837.80 1301 886
Gross profit
23.17% 8.6% 8.01% 9.83% 7.32%
Ratio
105
INTERPRETATION:
It has been observed that the Gross profit ratio is in decreasing trend from
2010-11 to 2012-13 and it is increasing in 2013-2014 then in 2014-15 there is a
further slight decrease.
Net sales are in increasing trend from 2013-2014 whereas the Gross profit ratio
is decreasing from 2012-13. It is due to increased cost of production i.e., the
increasing cause raw materials coupled with an expansion of production has
further increase of the raw materials cost.
106
NET PROFIT RATIO:
Net profit
12.82% 7.49% 5.71 % 5.68% 2.91 %
Ratio
107
INTERPRETATION:
108
V) PROFITABILITY RATIOS IN RELATION TO INVESTMENT:
Return on
10.75% 6.18% 4.97% 5.49% 2.83%
Investment
109
INTERPRETATION:
110
RETURN ON EQUITY CAPITAL:
Equity share
7827.32 7827.32 7827.32 7727.32 6346.82
capital
Return on Equity
25.89% 15.9% 12.5% 16.14% 15.46%
capital
111
INTERPRETATION:
Equity share capital is constant from 2010-11 to 2011-12 whereas net profit is
fluctuating.
Even though the Return on Equity capital is in decreasing position, the Rate of
Return in comparison with the marketing conditions is very satisfactory.
Global market conditions, increase in operating costs, decrease in net profits
are the main reasons for recording of low ratio.
112
EARNING PER SHARE:
(Rs. In crores)
Earnings available to
Equity Shareholders 1095.00 556.89 419.51 617.00 684.00
(AFTER DIVIDEND)
EARNING PER
223.92 113.89 85.78 126.18 139.88
SHARE(RS)
113
INTERPRETATION:
The Earnings per share are in declining trend from 2010-11 to 2011-12 it
increases from 2013-14 to 2014-15
The least Rate of Return is 11.40%
This is due to the constant payment of dividends
10% to the equity shareholders which paid from PAT
7% payment to preference shareholders from preference shareholder
contribution
Since the company is in expansion activity, the future earnings per share will
increase.
114
RETURN ON CAPITAL EMPLOYED:
(Rs. In crores)
Capital Employed
13552.16 14215.37 14445.95 14283.23 14467.85
(TOTAL ASSETS-C.L)
Return on Capital
9.85% 5.60% 4.55% 8.74% 6.79%
Employed
115
INTERPRETATION:
This ratio indicates firms ability of generating profit per rupee of capital
employed. This ratio is decreasing gradually from 9.85% in 2010-11 to 6.79%
in 2014-15. The reason may be that its net profit and Capital Employed are
decreasing. So steps should be taken in this ratio
116
SUMMARY
Other highlights
2014-15
a) During the year the company redeemed preference share capital
amounting to Rs.1400crs which has led to liquidation of bank
deposits/increased working capital borrowings due to which the interest
income has come down and interest expenditure has gone up.
b) During the year an amount of Rs.1300crs was spent on expansion
activities.
c) Depreciation in rupee against dollar impacted reduction in raw material
prices adversely by Rs.425crs as compared to previous year.
d) Power restrictions imposed by Government has led to reduction in
production of saleable steel.
2012-13
The drop in profit levels with reference to previous year is primarily due
to increase in cost of major raw materials(iron ore 55% and coal 22%),reduction
in interest income from fixed deposits due to utilization of funds in the
117
expansion projects, other capital schemes and working capital needs of the
company.
2011-12
a) The increase in profit levels with respect to previous year is primarily due
to higher sales realization achieved and higher sales volume in steel and
pig iron.
FINDINGS
118
SUGGESTIONS
Steel industry performance is looking like sine curve. It always has up and
down curves. During the period of inflation and recession steel sales also
decreased very high.
The company is getting all its funds i.e. day zero (0) when the rates are
compared; the company is investing surplus funds at 8-8.5% & paying at
3-5% to get the funds on zero (0). The spread should be maintained
during the time of expansion also.
Unlikely any other steel company VSP is not having its own sources of
raw material i.e. coal mine. These are very basic needs as the company
always depends on its suppliers for its raw materials. Had the company
utilized its 2-3% half % of its working capital limit for acquisition of
mines purchasing of mines, etc. It could have been a favorable situation
RINL may finance expansion project by the long term loans as they
would be cheaper instead of using internal generation/Accounting rules.
119
BIBLIOGRAPHY
Limited
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