Final Project

Project Report on

(METRO TYRES LIMITED)

Submitted in Partial fulfillment of the requirements for the award of

Bachelor of Business Administration

(BBA)

By

UJWAL TARNEJA

BHARATI VIDYAPEETH UNIVERSITY

INSTITUTE OF MANAGEMENT & RESEARCH NEW DELHI

A-4, Paschim Vihar, Rohtak Road, New Delhi-110063

To whom so ever it may concern

This is to certify that the project on industrial exposure entitled “FINANCIAL ANALYSIS” is an original piece

of work done by “UJWAL TARNEJA” in the partial fulfillment of the requirement for the award of the Degree

of “BBA” from “BVU, SDE, Academic Study Center: BVIMR New Delhi” under my guidance & direction.

To the best of my knowledge data & information presented by him/her in the project has not been submitted

earlier.

Name of the Faculty (Internal Guide)

Contents

Preface Acknowledgement Director Certificate Project guide certificate Company certificate

Chapter 1: IntroductionChapter 2: Industry profileChapter 3: Company profileChapter 4: Research methodologyChapter 5: Data presentation and analysisChapter 6: FindingChapter 7: Conclusions and suggestion

Annexure

Bibliography

Preface

A management professional should not only be well versed with the principles and theories of management but

should also be capable of applying the theories and principles studied successfully in the practical life.

Considering the practical aspect of the theoretical knowledge to be the supreme importance, Summer Training

forms an integral part of the business management curriculum.

I pursued my summer internship at ‘METRO TYRES LIMITED’ and completed my projects. I am

submitting the report as a partial fulfillment for the Award of degree of Master of Business Administration.

I hope that the project report will communicate the actual quality of the experience gained with subtlety and

precision which is unapproachable by any other means.

UJWAL TARNEJA

ACKNOWLEDGEMENT

This report took a long time and effort on my part. But, inspite of all the hard work put in by me,

this report would not have been possible without the help of certain people, whom I wish to convey

my thanks.

I express my gratitude towards Mr.ASHUTOSH GAUR(Colg guide) and Mr.JITENDRA KUMAR

TARNEJAl(company guide), who has given me an opportunity to make this project.

At the very outset, I would also like to express my gratitude to all the people associated, without whose active

support & constant guidance, this project would not have been a success.

UJWAL TANREJA

INTRODUCTION

Manufacturer & Exporters of Bicycle Tyres, Tubes and Chains

From humble beggining in 1968, Metro Tyres made steady progress to establish itself as a market leader for bicycle tyres and tubes in India.With steadily increasing production of quality products, the Company ventured into overseas market and developed a niche for itself in the international market. The Company also kept itself abreast with latest technologies and developed Nylon tyres and Butyl tubes with its own R&D efforts. The Company has diversified into the field of home appliances such as  electric fans, electric irons, sewing machines, etc. under the brand name "ORTEM" .  The customer being foremost in our mind, for ease of foreign buyers, the Company has established a full fledged "Export Division" located at New Delhi. The Export Division has the capability for entertaining and servicing enquiries not only for the Company products, but also for non-company commodities and engineering goods. Metro's most precious assets is its professionally trained and dedicated personnel.

CYCLE DIVISION

Tyres Tubes Chains

AUTO

DIVISION

Motor cycle Scooter Three wheeler Hand cart Jeep

READY RECKONERSIZE RIM TYPE TREADS

AVAILABLECONSTRUCTION OPTIONS LOADABILITY  

    COTTON NYLON PER 20' FCL  

28x1.75 - M-170   YES   8,500 

28x1.1/2 HB/SS M-100 M-650

  YES YES 11,000 

28x1.5/8x1.3/8 SS M-200   YES   11,000 

28x1.5/8x1.1/4 SSM-200

M-225   YES   11,000 

28x1.5/8x1.1/8 SS M-200 M-225

  YES   11,000 

28x1.5/8x1  - M-750   YES   11,000 

27x1.1/4 SS M-105   YES   11,000 

26x1.3/8 SS M-100   YES   11,000 

26x1.1/2 SS M-100   YES   11,000 

26x1.1/2x1.5/8 SSM-160

M-170   YES   11,000 

26x1.1/2x2 SS M-190 M-250 M-400

  YES   8,500

26x2x1.3/4 SSM-190

M-700   YES   8,500 

26x2.125 HBM-120

M-400   YES YES 8,500 

26x2.10 / 26x2 -M-120

M-400   YES   8,500 

26x1.95 HB M-120 M-400 M-500 M-550 M-650

  YES YES 8,500 

26x1.95 HB M-1000     YES 8,500 

26x1.90 HB M-550 M-600 M-650

  YES YES 8,500 

26x1.75 HB M-150   YES YES 9,000 

24x1.1/2 SS M-100   YES   11,000 

24x1.3/8 - M-100   YES   11,000 

24x2.125 HB M-400   YES   8,500 

24x1.90 HB M-650   YES YES 9,000 

24x1.75 - M-550   YES YES 11,000 

20x2.125 HB M-110 M-300 M-400 M-650

  YES YES 11,000 

20x2x1.3/4 - M-400   YES   11,000 

20x1.90 HB M-550 M-650

  YES YES 11,000 

20x1.75 HB M-160 M-300 M-400

  YES YES 11,000 

20x1.3/8 - M-100   YES   11,000 

18x1.75 HB M-300   YES   11,000 

16x2.125 HBM-300

M-400   YES YES 11,000 

16x1.90 - M-550   YES YES 11,000 

16x1.75 HB M-160 M-300 M-400

  YES YES 11,000 

14x1.75 HB M-300   YES   11,000 

14x1.3/8x1.5/8 - M-550   YES   11,000 

12.1/2x2.1/4 HB M-170 M-300

  YES   11,000 

Standard Packing: 50 tyres / sets of tyres & tubes will be packed in a bundle wrapped with H.D.P.E. sheet.

Tread Patterns

M-100 M-105 M-110 M-120

M-130 M-150 M-160 M-170

M-190 M-200 M-225 M-250       

M-300 M-350 M-400 M-450       

M-500 M-550 M-600 M-650

TUBES ARE MOULDED FROM EITHER OF THE FOLLOWING MATERIALS:  

NATURAL RUBBER   BUTYL RUBBER  PACKING OPTIONS       LOADABILITY

PER  20' FCL

Each tube in polybag; 100 pcs in master bag.       60,000 pcs  

Each tube in polybag; 100 pcs in master carton.       50,000 pcs  

Each tube in Metro box; 100 pcs in master carton.       45,000 pcs  

(2nd & 3rd methods entail extra charges)          

The valve types available

BICYCLE TUBE DUNLOP VALVE

BICYCLE TUBE AMERICAN VALVE

Sleek 2.75-18 6PR Jet Speed 3.00-19 6PR Jet Speed 3.25-16 6PR

Steel Force 3.50-8 4PR Steel Force 3.50-10 4PR

Power 16*4 8PR

Jeep 6.00-16 8PR

Kisan 7.00-19 10PR Heavy Duty 7.00-19 10PR ADV 7.00-19 10PR

Metro Heavy Duty ADV 5.00-19 Metro Heavy Duty ADV 8.00-19 Metro Heavy Duty ADV 6.00-19

Metro Heavy Duty ADV 6.00-20

Field king 6.00-16 10PR Yield king 6.00-16 10PR Shaktiman 6.00-16 10PR

High Yield 6.00-16 8PR T-90 6.00-16 8PR Farmer 6.00-16 10PR

Jai Kisan 6.00-16 10PR Shaktiman 5.50-16 10PRField King Extra Heavy Duty 6.00-

16

Power Trailor 6.00-12 6PR

TR 13.6.28  TR 12.4.28 

SWOT ANALYSIS

SWOT ANALYSIS

Strengths

1. Wide product offering at different interest rates.

2. Large distribution network

Weakness

1. Lack of advertisement activites,

2. Focus only on middle class.

3. Limited products

Opportunity

1. Rise of Indian middle class and small cities.

2. A booming economy

Threats

1. Many players fighting for the same cake

2. Entry of new players

METRO TYRES LIMITEDMetro House, 134/4, 135/5 Zamrudpur, Kailash Colony,  New Delhi -110 048  Phone : 91-11-6219097/98   Fax No.: 00-91-11-6215113Email for exports : [email protected] for other enquiries : [email protected] contact the above office for :

Further information on Auto Division ::-   Export enquiries for cycle tyres to USA, EUROPE, CANADA, AUSTRALIA, JAPAN ::- All domestic enquiries ::-

All raw material supplies ::-  .Works ::-

METRO TYRES LIMITED, FACTORY & HEAD OFFICE B-27 Focal Point, Ludhiana - 141 010 (INDIA)  Phone: 91-161-2671111 - 18,   Fax: 91-161-2671119  Email :[email protected]

...For export enquiries for cycle tyres except USA, EUROPE, CANADA, AUSTRALIA, JAPAN ::-

METRO TYRES LIMITED, EXPORT DIVISION 602 Siddhartha Building, 96 Nehru Place, New Delhi - 110 019 (INDIA)   Phone: 91-11-26447353, 26463522, 26234478   Fax: 91-11-26447381   Email:[email protected].

TYRE

INDUSTRIES

The report elucidates facts about the Indian Tyre Industry, supplemented by latest statistical data and comprehensive analysis.

Emphasis is laid on the following key subject matters to accomplish the report

The characteristics of the industry (raw material intensity, cyclicality, competition, wide distribution network, capital intensity, low bargaining power, branding, technology requirements, margins and duty structure) and its demand drivers (vehicle production & population, regulatory norms, retreading of tyres etc.).

Category-wise tyre production and market-wise tyre offtake analysis for the period FY 03-07.

Market competition and category-wise market share of players. Change in category-wise market share of players in FY07 vis-a vie FY06.

Cost Analysis (raw material, power & fuel, employee and selling expense) of the top players with specific focus on raw material costs.

Category-wise tonnage offtake growth projection for the tyre industry for a fi ve year horizon (FY 07-12) along with SWOT analysis of the industry.

Financial profi le, international forays, expansion plans of the top fi ve players along with the details of corporate actions by other global and local players in India.

The Indian Tyre Industry produced 736 lakh units of tyres (11 lakh tonnes) garnering Rs. 19,000 crores in FY 07. MRF Ltd. was the market leader (22% market share) followed closely by Apollo Tyres Ltd. (21%). The other major players were JK Tyre & Industries Ltd (18%) and Ceat Ltd. (13%). The industry tonnage production registered a 5 year CAGR of 9.69% between FY 02-07¬.

Truck & Bus tyre category (accounting for 57% of the tonnage production) recorded a 5 year CAGR of 7.85% (a rate slower than that of the industry) while Light Commercial Vehicle (LCV), Motorcycle and Car tyre categories grew at 15%, 16% and 14% respectively (at rates faster than that of the industry). Off the road (OTR) tyres (customized tyres which fetch a higher margin compared to other tyres) category is growing at a fast pace. The OTR tyre category registered a 5 year CAGR of over 20% in the last five years. Most of the top players are increasing their capacity for the production of OTR tyres so as to improve their product mix, for e.g. CEAT Ltd. is increasing its OTR capacity at its Nasik plant from 60,000 to 1,00,000 tyres by end 2008, JK Tyre & Industries is expanding its OTR capacity from 25,000 tyres to 42,000 tyres by end 2008, even smaller player like Falcon tyres is making its foray into the OTR category.

The exports from the country clocked a CAGR of 13% in unit terms and 18% in value terms in the period FY 02¬07. Most of these tyres that are exported are of cross ply design. With radialisation catching up in some of these markets, the manufacturers will need to graduate to radial tyres so as to protect their share in the export market. Radialisation of tyres is still minimal in India. Only the car tyre market has moved to radial tyres (95%) but in all other categories cross ply tyres are still preferred. Poor road conditions, overloading in trucks, higher initial cost of radial tyres and poor awareness levels in tyre users are the main reasons for the non transition of the domestic market to radial tyres. However, going ahead, radialisation in truck & bus tyres may increase due to government’s focus on infrastructure development.

CARE Research expects the tyre industry to register a tonnage growth of 9¬10% in the next five years (FY 07¬12). The truck & bus and LCV tyre category are expected to register a CAGR of 8% and 14% respectively (FY 07¬12).  

The report elucidates facts about the Indian Tyre Industry, supplemented by latest statistical data and comprehensive analysis.Emphasis is laid on the following key subject matters to accomplish the report.The characteristics of the industry (raw material intensity, cyclicality, competition, wide distribution network, capital intensity, low bargaining power, branding, technology requirements, margins and duty structure) and its demand drivers (vehicle production & population, regulatory norms, retreading of tyres etc.).Category-wise tyre production and market-wise tyre offtake analysis for the period FY 03-07.Market competition and category-wise market share of players. Change in category-wise market share of players in FY07 vis-a vie FY06.Cost Analysis (raw material, power & fuel, employee and selling expense) of the top players with specific focus on raw material costs.Category-wise tonnage offtake growth projection for the tyre industry for a fi ve year horizon (FY 07-12) along with SWOT analysis of the industry.Financial profi le, international forays, expansion plans of the top fi ve players along with the details of corporate actions by other global and local players in India.

The Indian Tyre Industry produced 736 lakh units of tyres (11 lakh tonnes) garnering Rs. 19,000 crores in FY 07. MRF Ltd. was the market leader (22% market share) followed closely by Apollo Tyres Ltd. (21%). The other major players were JK Tyre & Industries Ltd (18%) and Ceat Ltd. (13%). The industry tonnage production registered a 5 year CAGR of 9.69% between FY 02-07¬.

Truck & Bus tyre category (accounting for 57% of the tonnage production) recorded a 5 year CAGR of 7.85% (a rate slower than that of the industry) while Light Commercial Vehicle

(LCV), Motorcycle and Car tyre categories grew at 15%, 16% and 14% respectively (at rates faster than that of the industry). Off the road (OTR) tyres (customized tyres which fetch a higher margin compared to other tyres) category is growing at a fast pace. The OTR tyre category registered a 5 year CAGR of over 20% in the last five years. Most of the top players are increasing their capacity for the production of OTR tyres so as to improve their product mix, for e.g. CEAT Ltd. is increasing its OTR capacity at its Nasik plant from 60,000 to 1,00,000 tyres by end 2008, JK Tyre & Industries is expanding its OTR capacity from 25,000 tyres to 42,000 tyres by end 2008, even smaller player like Falcon tyres is making its foray into the OTR category.

The exports from the country clocked a CAGR of 13% in unit terms and 18% in value terms in the period FY 02¬07. Most of these tyres that are exported are of cross ply design. With radialisation catching up in some of these markets, the manufacturers will need to graduate to radial tyres so as to protect their share in the export market. Radialisation of tyres is still minimal in India. Only the car tyre market has moved to radial tyres (95%) but in all other categories cross ply tyres are still preferred. Poor road conditions, overloading in trucks, higher initial cost of radial tyres and poor awareness levels in tyre users are the main reasons for the non transition of the domestic market to radial tyres. However, going ahead, radialisation in truck & bus tyres may increase due to government’s focus on infrastructure development. 

Research expects the tyre industry to register a tonnage growth of 9¬10% in the next five years (FY 07¬12). The truck & bus and LCV tyre category are expected to register a CAGR of 8% and 14% respectively (FY 07¬12).

 Background

The origin of the Indian Tyre Industry dates back to 1926 when Dunlop Rubber Limited set up the first tyre company in West Bengal. MRF followed suit in 1946. Since then, the Indian tyre industry has grown rapidly.

Transportation industry and tyre industry go hand in hand as the two are interdependent. Transportation industry has experienced 10% growth rate year after year with an absolute level of 870 billion ton freight. With an extensive road network of 3.2 million km, road accounts for over 85% of all freight movement in India.

Market Characteristics

Demand

The demand for tyres can be classified in terms of:  ▪  Type: Bus and Truck; Scooter; Motorcycle; Passenger Car; Tractor▪ Market: OEM; Replacement; Export

Environment Analysis - Porter's Model

Entry Barriers: High

The entry barriers are high for the tyre industry. It is a highly capital intensive industry. A plant with an annual capacity of 1.5 million cross-ply tyres costs between Rs. 4,000 and Rs. 5,000 million. A similiar plant producing radial tyres costs Rs. 8,000 million.

Inter Firm Rivalry: Low

The tyre industry in India is fairly concentrated, with the top eight companies accounting for more than 80% of the total production of tyres.

Bargaining Power of the Buyers: High

The OEMs have total control over prices. In fact, the OEMs faced with declining profitability have also reduced the number of component suppliers to make the supply chain more efficient.

Bargaining Power of the Suppliers: High

The tyre industry consumes nearly 50% of the natural rubber produced in the country. The price of natural rubber is controlled by Rubber Control Board and the domestic prices of natural rubber have registered a significant increase in recent times.

Threat of Substitutes: Low but Increasing

During the FY2002, over 1,10,000 passenger car tyres were imported. This constitutes over 2% of total radial passenger car tyre production in the country. However, with the reduction of peak custom duty, the import of tyres is likely to increase.

 Tyres by Type

The Indian tyre industry produces the complete range of tyres required by the Indian automotive industry, except for aero tyres and some specialised tyres. Domestic manufacturers produce tyres for trucks, buses, passenger cars, jeeps, light trucks, tractors (front, rear and trailer),

animal drawn vehicles, scooters, motorcycles, mopeds, bicycles and off-the-road vehicles and special defence vehicles.

The scenario in India stands in sharp contrast to that in the world tyre market, where car tyres (including light trucks) have the major share (88%) by volume followed by truck tyres (12%). In India, however, passenger car tyres have a mere 17% share of the overall tyre market (as of

FY2003). 

 Compiled by INGRES  Truck and Bus Tyres

The truck and bus tyre segment accounted for 19% of tyres produced in India in FY2003. Every truck/bus manufactured generates a demand for seven tyres (six regular and one spare) as against three in the case of two-wheelers and five for passenger cars. In addition, the price of a truck tyre is significantly higher than that of a passenger car tyre (roughly 10 times) or a motorcycle tyre. Thus the demand multiple emanating from the commercial vehicle segment is highest in value terms.

Given the regular use and heavy wear and tear of truck and bus tyres, the demand from the replacement market in this segment worked out to 68% of the total demand for truck and bus tyres in FY2003; the OEM demand accounted for around 9% the same year. With the Indian manufacturers of cross-ply tyres focusing on the export market, this segment accounts for around 22% of the demand for truck and bus tyres.

Passenger Car Tyres

The passenger car tyre segment accounted for 17% of all tyres produced in India in FY2003. With passenger car production witnessing a growth of 12% in FY2003 over the previous year, OEM demand accounted for about 33% of the total sales that year. The replacement market accounted for around 63% of the total sales of passenger car tyres in FY2003. Exports accounted for 4% of the total passenger car tyre demand in FY2003. With the stock of cars increasing, replacement demand is likely to continue.

Motorcycle Tyres

Motorcycles accounted for 76% of two-wheelers sold in the domestic market in FY2003. Motorcycle tyres constitute the largest segment of the domestic tyre industry (29% of total tyre demand in FY2003). The replacement market accounted for around 49.8% of the total motorcycle tyres sold in FY 2003, while OEM demand accounted for around 50%.

Scooter Tyres

Scooters were the dominant segment in the Indian two-wheeler industry till FY1998, accounting for around 42% of domestic two-wheeler sales. However, the introduction of new motorcycle models has seen the share of scooters declining to 19% of domestic two-wheeler sales in FY2003. The OEM segment accounted for around 34% of the total sales in the scooter tyre segment in FY2003, with the rest being accounted for by the replacement market.

Tyre Demand by Markets 

 Vehicle Manufacturers or OEMs

The demand from the OEM segment is a derived one and directly correlated to the level of automotive production. The OEMs demand varies significantly across categories from between

8% for truck and bus tyres to over 50% for some other segments like, jeeps and mopeds.

Replacement Market

The replacement market, including State transport undertakings and Government buying, accounted for around 59% of the total tyre demand in FY2003. The demand in the replacement market depends on the vehicle population, the level of economic activity, life of the products

transported, kilometreage per vehicle, the price of the tyres and the quality of the existing road

infrastructure. Additionally, the replacement market, which offers better margins, is extremely competitive. The replacement market is dominated by the truck and buses segment, which

accounted for 22% of all tyre sales in the replacement market in FY2003.The large size of the replacement in turn is determined by the interplay of various factors as discussed below:

  ▪  The replacement demand may be lower because of longer replacement intervals and lower

business mileage if the economic activity slows down. ▪  Replacement demand in India is higher because of a low vehicle scrappage rate.▪ Poor road conditions by lowering the life of tyres, have a positive impact on replacement

demand. ▪  Stricter enforcement of the MV Act, which seeks to prevent overloading of vehicles, will

result in an increase in the life of tyres and thus impact replacement demand negatively.▪ Applying a new tread or "re-treading" can extend the life of the tyre at a significantly lower

cost, thereby lowering replacement demand. In India, re-treading finds greater acceptance in the commercial segment.

 ▪  Radialisation of tyres is likely to result in lower replacement demand. While car radialisation in the country has reached a level of 65%, truck and bus radialisation stands at just 2-10%. Poor road and support infrastructure as well as traditional vehicle designs act as a barrier to

radialisation in the commercial vehicle segment. Radial technology for trucks and buses would help increase operating efficiencies by delivering better mileage and minimising wear and tear. According to ATMA, even if only 25% of the truck and bus segment is radialised,

the savings in fuel costs would be around Rs. 7,500 million.▪ Introduction of tubeless tyres in the passenger car segment is also likely to affect replacement

demand adversely.▪ Introduction of eco-friendly radial tyres such as hyper-bonding silica technology in the

passenger car segment may affect replacement demand adversely.  Exports

In the light of the prevailing domestic market situation, most of the tyre manufacturers have taken to exports to reduce inventory build-ups. In FY2003, Indian tyre exports stood at Rs. 10.8 billion (10% of the total industry) in value terms and 3.1 million in unit terms (6.5% of total production). Indian companies have currently entered into sourcing agreements (for tyres) with neighbouring countries. For instance, Ceat and J K Tyres have sourcing agreements with tyre producers in Sri Lanka and China. This is likely to have a positive impact on tyre exports from India.

Market Players

Some of the major players in the Indian tyre industry are MRF, Ceat, JK Industries, Apollo

Tyres, Bridgestone India, Goodyear India, Falcon Tyres and TVS Srichakra. The tyre industry in India is fairly concentrated, with the sample of eight companies (as in the text) accounting for 82% of production in FY2002. Besides, not all companies have a diversified product portfolio.

Key Issues

High tax usage

The high tax content on tyres can be gauged from the fact that the percentage of total tax to the tax excluded price for various categories of tyres is - 44% for Truck Tyre; 41% for Passenger Car Radial Tyre, 35% for Tractor Rear Tyre and 76% for Truck Tyre Tube.

Increase in raw material costs

Apart from being capital intensive, the tyre industry is highly raw material intensive. Any change in the prices of raw materials affects the profitability of tyre companies. The raw materials used in the manufacture of tyres are rubber and petroleum derivatives like nylon tyre cord, carbon black, styrene butadiene rubber and poly butadiene rubber. The most important raw material is rubber-natural and synthetic. Natural rubber (NR), with 29% weightage in the cost of raw materials used by tyre industry, is the highest cost item. Annual consumption of NR by tyre industry is 3.50 lakh tonnes, valued at Rs. 14 billion. Over 85% of NR consumed' by the industry is procured domestically. 15% is imported.

In the 2003-04 fiscal, as against the Minimum Statutory Price of Rs. 32.0 per kg, the ruling domestic price of NR had been over Rs. 50 per kg. This is higher than the world rubber prices. However, this does not entail the tyre industry players to import as a number of restrictions are imposed on the import of NR. NR can be imported only through two ports-Kolkata & Visakhapatnam. The customs duty on import of natural rubber is 20%, with 10% under Bangkok Agreement. However, this is not relevant, as NR is not cultivated in South Korea, Bangladesh & China (signatories under the Bangkok Agreement). Hence, NR can be sourced only from Sri Lanka (under the Indo-Sri Lanka Agreement), which is of bad quality. Thus, the options of rubber import are restricted and the manufacturers have to rely on the domestic market for procuring rubber.

Import of tyres

During the FY2002, over 1,10,000 passenger car tyres were imported. Although this constitutes a small percentage (1.5%) of total passenger car tyre production in the country, since total imports are of radial passenger car tyres, the percentage is higher when compared against domestic production of radial passenger car tyres. A large percentage of imports are from South

Korea at a concessional rate of customs duty (i.e. 15%) under the Bangkok Agreement - as against 20% normal rate of customs duty.

Even though the Government has imposed a restraint on the import of used tyres into India, occasionally there are reports of import of such tyres in a clandestine manner, sometimes as new tyre at low value, since there is no restriction on import of new tyres or as tyres under the "others" category. Many countries such as Japan, Bangladesh, Pakistan, Philippines, Thailand, Kenya, South Korea, etc. have either put a complete ban on import of used tyres or have placed stringent conditions on such imports.

Tyre Exports

The product focus of tyre exports from India has been Traditional Truck Tyres. Globally this segment of tyre export is shrinking due to greater acceptance of radial tyres. Over the years, China has emerged as a major exporter in bias tyre category. Additionally, export of Indian tyres to select countries is subjected to non-tariff barriers (NTBs) by way of standards, tests, etc. Export of cheaper tyres from China to major tyre importing markets, like US, is adversely affecting Indian tyre exports to these markets. India's share in exports to these countries (especially USA) is progressively declining. If the trend is not reversed, Indian tyre industry will find it extremely difficult to regain its erstwhile position in these markets. Low rate of interest, cheaper electricity tariff, hidden subsidies by the Chinese Government, better infrastructure facilities and lower transaction costs are factors favourable to Chinese tyre industry.

Trends in Production, Consumption, Price & Capacity Utilisation

The total tyre produced in the country was 51.58 million units in FY2003 - a 19% growth rate over FY2002.

CAGR of tyre production (in %)

FY 1993-2003

9%FY 1993-1998 7%

FY 1999-2003 9%

FY 2002-2003 19%

Compiled by INGRES

 Currently, the size of the Indian tyre industry is estimated at Rs. 128 billion (0.5% of Indian GDP), as of FY2003. The total installed capacity of the Indian tyre industry is around 60.5 mn units, and the capacity utilisation is around 85%. The capacity utilisation improved in FY2003 following improved demand from the automotive segment (75% in FY2001). Additionally, in FY2003, the price realisation of tyre manufacturers also registered an increase by 8%, as against a 0.6% increase in FY2002.

Demand Supply Gap

The demand for tyres is either in the domestic market or in the export market. As far as domestic demand is concerned, the OEM and the replacement segments are likely to witness strong growth given the current performance of the automotive sector. Given the strong linkages of tyre industry with automotives, its demand is likely to be strong over the short to medium term. As for the export demand for tyres, the outlook is positive, even though some downsides remain.

As regards supply of tyres, currently, the major players are in the process of expanding their capacities, in anticipation of uptrend in sales. For instance, Apollo Tyres has set up a joint venture with Michelin for manufacture and sale of bus and truck radials. JK is expanding its Mysore truck and bus radial facility along with eyeing acquisitions of smaller units. Ceat has increased its offtake by 3 times from Pirelli. However, a characteristic of the Indian tyre industry is that most of the tyre manufacturers in the past had increased capacities in anticipation of a surge in demand, but when it did not materialise, they reduced their addition to capacities. Thus, the demand-supply gap is likely to be an important issue for the Indian tyre industry over the short to medium term.

Review of Performance

Overall Performance

The operating margin of the representative sample of tyre companies improved during FY2003. However, the net profit margin of the tyre companies even though improved, was still at 3%.

Performance in FY2004

The tyre industry continues to be driven by good demand growth, propelled by sustained uptrend in demand and sales of automobiles in general, and commercial vehicles and passenger cars in particular. However, this does not get translated into improved margins for the industry, as it is witnessing sustained rise in prices of raw materials like natural rubber. Additionally, the

customs duty on imports has been brought down from 25% to 20% and Special Additional Duty of 4% has been dispensed with.

Outlook

The level of economic activity, performance of domestic automotive industry, and the faring of the transport sector directly influence the performance of the tyre industry in India. With the replacement segment dominating the overall tyre demand in India, the industry remains inherently vulnerable to economic cycles. While radialisation has become the norm in the passenger car segment, in the bus and truck tyre segment, its acceptance is still limited. Bus and truck radialisation could emerge in the long term as the quality of roads improves and the restrictions on overloading are better enforced. The practice of re-treading, which is gaining increasing acceptance, could pose a challenge to replacement demand in the medium term. The ability of the re-treading sector to capture potential replacement demand would depend on the awareness among customers (of the benefits of retreading) and also the quality of retreading done. Given the low levels of penetration of two-wheelers and passenger cars in the country, OEM demand is likely to increase, which in turn would push up replacement demand with a lag.

The prospects of tyre exports from India appear healthy, following efforts by Indian companies to increasingly enter into outsourcing agreements with tyre producers in Southeast Asia, Eastern Europe and Latin America. Overall, tyre manufacturers are likely to tap the export market in an effort to boost sales. The increasing exports of bus and truck tyres (crossply variety) from India to developing countries is because of the fact that developing countries are unable to source them from developed countries as these are no more produced there. Tyre imports are unlikely to pose a threat to the domestic industry, given that domestic prices are lower than international tyre prices.

In the domestic market, tyre manufacturers are expected to increasingly focus on expanding their dealership networks & explore possibilities of tie-ups among themselves to penetrate the growing customer base. They are also likely to pursue innovative measures (such as "dial-a-tyre service and road shows) to improve customer awareness.

The consolidation of the Indian tyre industry is likely to continue in the coming years through mergers among existing players. The industry is likely to expand through a combination of organic and inorganic growth. While organic growth would come from raising efficiency levels, inorganic growth would be achieved through alliances and M&As.

Tyre industry

The tyre industry has witnessed a CAGR of 8.3% over the last decade mainly fuelled by the strong growth in the domestic auto industry. Though the replacement market has driven the industry growth for long time, the OEM market has seen a robust growth over the last couple of years.

The industry is highly capital intensive, as it requires around Rs4bn to setup a radial tyre plant with a capacity of 1.5mn tyres and around Rs1.5-2bn for a crossply tyre plant of a capacity to manufacture 1.5mn tyres.

The profitability of the industry has high correlation with the prices of key raw materials such as rubber and crude oil as they account for more than 70% of the total costs. The raw material to sales ratio in the industry is around 65%.

The industry has high entry barriers because of its capital intensive nature and low operating margins. With demand increasing at a steady pace, the industry is expected to go through a consolidation phase.

The industry is dominated by four players viz MRF, Apollo Tyres, JK Industries and Ceat and enjoys more than 70% of the total market share.

The fortunes of the industry are linked to the trend in the domestic auto industry, retreading, trend in road transportation and spending on road infrastructure.

The companies have lined up further expansion plans to meet the increasing demand.

Report on Indian Tyre IndustryThe report elucidates facts about the Indian Tyre Industry, supplemented by latest statistical data and comprehensive analysis.Emphasis is laid on the following key subject matters to accomplish the report.

FOR IMMEDIATE RELEASE

PRLog (Press Release) – Jun 26, 2008 – Indian Tyre Industry

The report elucidates facts about the Indian Tyre Industry, supplemented by latest statistical data and comprehensive analysis.Emphasis is laid on the following key subject matters to accomplish the report.The characteristics of the industry (raw material intensity, cyclicality, competition, wide distribution network, capital intensity, low bargaining power, branding, technology requirements, margins and duty structure) and its demand drivers (vehicle production & population, regulatory norms, retreading of tyres etc.).Category-wise tyre production and market-wise tyre offtake analysis for the period FY 03-07.Market competition and category-wise market share of players. Change in category-wise market share of players in FY07 vis-a vie FY06.Cost Analysis (raw material, power & fuel, employee and selling expense) of the top players with specific focus on raw material costs.Category-wise tonnage offtake growth projection for the tyre industry for a fi ve year horizon (FY 07-12) along with SWOT analysis of the industry.Financial profi le, international forays, expansion plans of the top fi ve players along with the details of corporate actions by other global and local players in India. The Indian Tyre Industry produced 736 lakh units of tyres (11 lakh tonnes) garnering Rs. 19,000 crores in FY 07. MRF Ltd. was the market leader (22% market share) followed closely by Apollo Tyres Ltd. (21%). The other major players were JK Tyre & Industries Ltd (18%) and Ceat Ltd. (13%). The industry tonnage production registered a 5 year CAGR of 9.69% between FY 02-07¬.

Truck & Bus tyre category (accounting for 57% of the tonnage production) recorded a 5 year CAGR of 7.85% (a rate slower than that of the industry) while Light Commercial Vehicle (LCV), Motorcycle and Car tyre categories grew at 15%, 16% and 14% respectively (at rates faster than that of the industry). Off the road (OTR) tyres (customized tyres which fetch a higher margin compared to other tyres) category is growing at a fast pace. The OTR tyre category registered a 5 year CAGR of over 20% in the last five years. Most of the top players are increasing their capacity for the production of OTR tyres so as to improve their product mix, for e.g. CEAT Ltd. is increasing its OTR capacity at its Nasik plant from 60,000 to 1,00,000 tyres by end 2008, JK Tyre & Industries is expanding its OTR capacity from 25,000 tyres to 42,000 tyres by end 2008, even smaller player like Falcon tyres is making its foray into the OTR category.

The exports from the country clocked a CAGR of 13% in unit terms and 18% in value terms in the period FY 02¬07. Most of these tyres that are exported are of cross ply design. With radialisation catching up in some of these markets, the manufacturers will need to graduate to radial tyres so as to protect their share in the export market. Radialisation of tyres is still minimal in India. Only the car tyre market has moved to radial tyres (95%) but in all other categories cross ply tyres are still preferred. Poor road conditions, overloading in trucks, higher initial cost of radial tyres and poor awareness levels in tyre users are the main reasons for the

non transition of the domestic market to radial tyres. However, going ahead, radialisation in truck & bus tyres may increase due to government’s focus on infrastructure development. 

Research expects the tyre industry to register a tonnage growth of 9¬10% in the next five years (FY 07¬12). The truck & bus and LCV tyre category are expected to register a CAGR of 8% and 14% respectively (FY 07¬12).

The Indian Tyre Industry is Expected to Register a Growth of 9-10% in the Next 5 YearsBusiness Wire, June 4, 2008 E-mail Print Link DUBLIN, Ireland -- Research and Markets (http://www.researchandmarkets.com/reports/c93693) has announced the addition of "Indian Tyre Industry 2008" to their offering.

Indian Tyre Industry to Register a Growth of 9-10% in the Next 5 Years

The Indian Tyre Industry produced 736 lakh units of tyres (11 lakh tonnes) garnering Rs. 19000 crores in FY07. MRF Ltd. was the market leader (22% market share) followed closely by Apollo Tyres Ltd. (21%). The other major players were JK Tyre & Industries (18%) and Ceat Ltd.(13%).

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The Indian tyre industry is characterized by its raw material intensity (raw material costs account for approximately 70% of operating income), capital intensity, cyclicality, fierce competition among the top players, low bargaining power and resulting low margins. The top players are now focusing on branding their products and strengthening their distribution network so as to increase their market share.

The industry derives its demand from the automobile Industry. While OEM market offtake is dependent on the new vehicle sales, replacement market demand depends on the total population of vehicles on road, road conditions, vehicle scrapping rules, overloading norms for trucks, average life of tyres and prevalence of tyre retreading.

The main category of tyres produced in the country is that of Truck & Bus tyres. These tyres accounted for 57% of the total tyre tonnage production in FY07 followed by LCV tyres which accounted for 9% of the total tyre tonnage production. Approximately 53% of the total tyre tonnage offtake was by the replacement market, 31% by OEM and 15% by the export market in FY07.

The industry tonnage production registered a 5 year CAGR of 9.69% between FY 02-07. The largest category of Truck & Bus tyres recorded a 5 year CAGR of 7.85% (slower than the industry) while Light Commercial Vehicle (LCV), motorcycle and car tyre categories grew at 15%, 16% and 14% respectively (faster than the industry). Off the road (OTR) tyre category (customized tyres) which fetch a higher margin compared to other tyre categories, is the fastest growing category. The OTR tyre category has registered a 5 year CAGR of over 20% in the last five years. Most of the top players are increasing their capacity for the production of OTR tyres so as to improve their product mix, this being a high margin product.

The exports from the country clocked a CAGR of 13% in unit terms and 18% in value terms in the period FY 02-07. Most of these tyres that are exported are of cross ply design. With radialisation catching up in some of these markets, the Indian manufacturers will need to graduate to production and export of radial tyres so as to protect their share in the export market.

Radialisation of tyres is still minimal in India. Only the car tyre market has moved to radial tyres (95%) but in all other categories, cross ply tyres are still preferred. Poor road conditions, overloading in trucks, higher cost of radial tyres and poor awareness of the tyre users are the main reasons for the non transition of the domestic market to radial tyres. However, going ahead radialisation in truck & bus tyres may increase due to government's focus on infrastructure development.

RESEARCH

METHODOLOGY

RESEARCH METHODOLOGY

Research Methodology refers to the framework or plan according to which the researcher has to carry out his

activity.

Research can be defined as a "systematized effort to gain new knowledge."

Marketing Research is a systematic and objective process of identifying and formulates the marketing

problems; Setting research objectives and methods for collecting, editing" coding, tabulating,

evaluating, analyzing, interpreting and presenting the various information does it 985 data in order to

find justified solutions for these problems.

Research Methodology is the procedure for conducting the research. It is a way to systematically solve

the problem. It may be understood as a science of studying how research is done scientifically. In it we

study the various steps that are generally adopted by a researcher In studying his research problem along

with the logic behind them. If the researcher wants to claim objectivity of His research and wishes to

establish a truth and gain wide /* aceptability than lot of attention has to be devoted to the procedure and

methodology of the research.

Market research involves the following steps:

Step 1: Define the problem and research objectives.

Step 2: Developing the research plan

Selection method

Questionnaire method

Sampling method

Contact method

Step 3: Collect the information

Step 4: Analyze the information.

Step 5: Present the findings.

Step 1: Define the research objective

After discussing with the external project guide the topic for the project was selected as:

“Financial analysis of Metro Tyres ltd.”

Step 2: Developing the research plan

Questionnaire method

Marketing researchers have the best instrument in collecting primary data i.e. a questionnaire to collect the

data and to establish the view of the people from all the sectors of the society.

Questionnaires are designed to elicit information that meets the studies requirements.

Questions should be:

o clear

o easy to understand

o directed towards meeting an objective.

Need to define objectives before designing the questionnaire. Must maintain impartiality and be very

careful with personal data. Four basic types of questions are:

o Open ended

o Dichotomous

o Multiple choice.

o Scaled (lickert)

The questionnaire designed for this project contains open-ended questions. All the questions are clearly

defined. The questions are framed keeping in mind the objective of research and kind of information

required .Sampling method

To select representative units from a total population.

A population "universe", all elements, units or individuals that are of interest to researchers for a specific

study. IE all registered voters for an election.

Sampling procedures are used in studying the likelihood of events based on assumptions about the future.

o Random sampling, equal chance for each member of the population

o Stratified sampling, population divided into groups re: a common characteristic, random sample

each group

o Area sampling, as above using areas

o Quota sampling, judgmental, sampling error cannot be measured statistically, mainly used in

exploratory studies to develop a hypotheses, non-probablistic.

Random sampling is selected as the sampling method for this project.

Selection Method

o Mail-wide area, limited funds, need incentive to return the questionnaire Mail panels, consumer

purchase diaries. Must include a cover letter to explain survey!!

o Telephone-speed, immediate reaction is negative, WATS, computer assisted telephone

interviewing.

o Personal interviews-flexibilty, increased information, non-response can be explored. Most

favored method among those surveyed. Can be conducted in shopping malls.

o In home (door-to-door) interview, get more information but it is costly and getting harder to

accomplish.

o Mall intercepts-interview a % of people passing a certain point. Almost half of major consumer

goods and services orgs. use this technique as a major expenditure. Can use demonstration,

gauge visual reactions. Regarding social behavior, mall surveys get a more honest response than

telephone surveys. There is a bias toward those that spend a lot of time in malls. Need to weight

for this. On site computer interviewing, respondents complete self administered questionnaires

conducted in shopping malls. Questions can be adaptive depending on the responses.

o Focus groups-observe group interaction when members are exposed to an idea or concept,

informal, less structured. Consumer attitudes, behaviors, lifestyles, needs and desires can be

explored in a flexible and creative manner. Questions are open ended. Cadillac used this method

to determine that they should be promoting safety features.

A sample of 200 people was taken and judgement was done to select the right prospects to secure accurate

information. The sample consisted of people like businessman, doctors, pvt. Company employees.

Contact/Observation method

Record overt behavior, note physical conditions and events. Can be combined with interviews, i.e. get

demographic variables.

Mechanical observation devices, IE cameras, eye movement recorders, scanner technology, Nielsen

techniques for media.

Observation avoids the central problem of survey methods, motivating respondents to state their true feelings

or opinions. If this is the only method, then there is no data indicating the causal relationships.

Step 3: Collection of information

The information of the project was gathered in 2 forms:

Primary data

In primary data collection, you collect the data yourself using methods such as interviews and questionnaires.

The key point here is that the data you collect is unique to you and your research and, until you publish, no one

else has access to it.

There are many methods of collecting primary data and the main methods include:

questionnaires

interviews

focus group interviews

observation

case-studies

diaries

critical incidents

portfolios.

Secondary data

Secondary data - collected by others to be "re-used" by the researcher

What Form Does Secondary Data Take?

o Qualitative Sources

o Sources for Qualitative Research:

Biographies - subjective interpretation involved

Diaries - more spontaneous, less distorted by memory lapses

Memoirs - benefit/problem of hindsight

Letters - reveal interactions

Newspapers - public interest & opinion

Novels & Literature In General Handbooks, Policy Statements, Planning Documents,

Reports, Historical & Official Documents (Hansard, Royal Commission reports)

o Quantitative Sources

Published Statistics:

National Government Sources

Local Government Sources

Other Sources

Non-Published / Electronic Sources

Data Archives eg the Data Archive At Essex

On-Line Access To National Computing Centres

International Sources on Internet & Web

For this project the secondary sources used are:

Journals

Company product brouchers

Internet

Market Research Design

Research : Descriptive type

Data Source : Primary & secondary

Research approach : Survey method

Research instrument : Questionnaire

Type of questions : Closed ended

Sample sizes : 100 samples

Mode of collecting data : Respondents to be

collection : chosen randomly.

In my project I have used SECONDARY DATA

RESEARCH DESIGN

A research design is simply a framework for the study that is used as a guide for collecting and analyzing the

data. Decision regarding what, where when, how much, by what means concerning an inquiry or a research

study constitutes a research design. This framework ensures collection and analysis of data in a manner that

aims to combine relevance to the research purpose with economy in procedure. In fact, the research design is

the conceptual structure within which research is conducted. It constitutes the blue print for collection,

measurement analyses of data. Research design depends on the purpose of study. Research purpose may be

grouped into four categories:

a) EXPLORATORY RESEARCH: It is also termed as formulate research. The main purpose of such

research is to gain familiarity with a phenomenon or discovery of ideas and insights.

b) DESCRIPTIVE RESEARCH: These are studies, which are concerned with describing the

characteristics of a particular individual, situation or a group.

c) DIAGNOSTIC RESEARCH STUDIES: These studies determine the frequency with which something

occurs or with which it is associated with something else.

d) HYPOTHESIS TESTING RESEARCH STUDIES: These are concerned with testing a hypothesis of

a causal relationship between variables.

TYPE OF RESEARCH

SAMPLE DESIGN

All items in any field of study constitute the UNIVERSE. In any study it is almost impossible to

examine the entire universe. The only alternative that is best, suitable and economical is to resort to sample.

'This is absolute for present study. The basic principle, which is followed is that the sample chosen should be

representative of the entire universe to be studied.

A SAMPLE DESIGN is a definite plan for obtaining a sample from a given population. It refers to

the technique or the procedure the researchers would adopt in selecting items for the sample. Sample design

may as well lay down the number of items to be included in the sample i.e. the size of sample and also the

sampling units. Sampling units implies the unit of sample considered and the unit of inquiry

There are different types of sample designs based on two factors viz., REPRES.ENTATION BASIS and,

the ELEMENT SELECTION TECHNIQUE.

On the REPRESENTATION BASIS, the sample may be PROBABILITY SAMPLING or it may be

NON PROBABILITY SAMPLING.

Probability sampling is based on random selection and in this every element in the universe has an equal

chance of being selection in sample.

Non-Probability is non-random sampling and it does not afford any basis for estimating the probability

that each item in the population has of being included in the sample.

On ELEMENT SELECTION BASIS, the sample may be either RESTRICTED or UNRESTRICTED.

Unrestricted sampling is based when each sample element is drawn individually from the population at

large, then the sample so drawn is known as 'unrestricted sampling'.

Restricted sampling includes all other forms of sampling like quota, judgmental, stratified sampling etc.

TYPE OF SAMPLE

In the PRESENT STUDY non-probability sampling technique was applied, where samples are selected

RANDOMLY BASED ON CONVENIENCE AND JUDGEMENTAL.

SAMPLE SIZE

A sample of 50 Dealers was selected.

TECHNIQUES USED IN THE RESEARCH

Various techniques were used for making and studying the report. These

are: -

Ø Ratio analysis

Ø Profitability ratio

Ø Long-term solvency ratio

Ø Short-term solvency ratio

Ø Turnover ratio

Objective: Assesement of METRO TYRES Ltd in order to come out with the potential areas for improvement and suggest the recommendations for the same.

Data collection process design: Collecting the Dealer list of metro tyres Ltd. for the regions of Delhi and Gurgaon from the Asst. Managers in the Corporate Sales Dept. Selecting the dealers to whom the goods were send from last six months

and the data was compared

FINANCIAL ANALYSIS

INTRODUCTION

o Financial analysis is the process of determining the significant operating and financial characteristics of

a firm from accounting data and financial statements

o The goal of such analysis is to determine the efficiency and performance of the firm’s management, as

reflected in the financial records and reports.

o The analyst attempts to measure the firm’s liquidity, profitability and other indication that business is

conducted in a rational and orderly way.

o If a firm does not achieve financial norms for its industry or relationships among data that seem

reasonable, the analysts note the deviations. The burden of explaining the apparent problems may then

be placed upon management.

Managers, shareholders, creditors, tax authorities and other interested groups seek answers to the following

important questions about the firm:

# What is the financial position of the firm at a given point of time?

# How did the firm perform financially over a given period of time?

The firm itself and outside providers of capital — creditors and investors — all undertake financial statement

analysis. The type of analysis varies according to the specific interests of the party involved. Trade creditors

(suppliers owed money for goods and services) are primarily interested in the liquidity of the firm. Their claims

are short term, and the ability of the firm to quickly pay these claims is best judged by the analysis of the firm’s

liquidity. The long term lenders on the other hand accordingly are more interested in the cash flow ability of the

firm to service debt over a long period of time. They evaluate this ability by analyzing the capital structure of

the firm, the major sources and uses of funds, the firm’s profitability over the time, and projections of future

profitability. Investors in a company’s common stock are principally concerned with present and expected

future earnings as well as with the stability of these earnings about a trend line. As a result, investors usually

focus on analyzing the profitability of the firm. They would also be concerned with the firm’s financial

condition insofar as it affects the ability of the firm to pay dividends continuously.

All the cases described so far have involved suppliers of capital. Therefore, the analysis has taken an

external point of view. Internally, management also employs financial analysis for the purpose of internal

control and to better provide what capital suppliers seek in financial condition and performance from the

firm. From an internal control standpoint, management needs to undertake financial analysis in order to

plan and control effectively

FINANCIAL STATEMENTS

Financial analysis involves the use of various financial statements. A financial statement is a collection of data

organised according to logical and consistent accounting procedures. Its purpose is to convey an understanding

of some financial aspects of a business firm. It may show a position at a moment in time, as in the case of

Balance Sheet (A summary of firm’s financial position on a given date that shows total assets = total liabilities

+ owner’s equity ), or may reveal a series of activities over a given period of time; as in the case of an Income

Statement ( A summary of the firm’s revenues and expenses, over a specified period ending with net income or

loss for the period ), or may show the sources and uses of funds, as in the case of Fund Flow Statement (A

summary of a firm’s changes in financial position from one period to another).The Income statement, the

statement or retained earnings and the statement of changes of financial position report what has actually

happened to earnings during a specified period. The balance sheet presents a summary of financial position of

the company at a given point of time. The statement of retained earnings reconciles income earned during the

year and any dividends distributed with the change in retained earnings between the start and end of financial

year under study. The statement of changes in financial position provides a summary of funds flowing during

the period of financial statements.

BALANCE SHEET

The balance sheet is the first of the three major financial statements. The balance sheet shows the assets,

liabilities and the equity for the firm as of the last day of the accounting period. In effect, it matches

resources (assets) with sources (liabilities and equity). It is commonly presented in two columns that illustrate

the relationship between assets and the sources of these assets. The assets or resources of the firm are

displayed in the right hand column and the sources of these assets in the left hand column.

INCOME STATEMENT

The income statement, is a report of the firm’s activities during a given accounting period. Firms often

publish income statements showing the results of each quarter, each half year and the full accounting year.

It shows the revenues and expenses of the firm, the effect of interest and taxes, and the net income for the

period. It may be called by other titles, such as the profit-and-loss statement or the statement of earnings. It is

an accounting device designed to show stockholders and creditors whether the firm is making money. It can

also be used as a tool to identify the factors that affect the degree of profitability

FLOW OF FUNDS STATEMENTS

A third important financial statement is the flow-of-funds or sources-of- funds statement. This statement

shows the movement of funds into the form’s current asset account from external sources such as

stockholders, creditors and customers. It also shows the movement of funds to meet the firm’s obligations,

retire stock or pay dividends. The movements are shown for a specific period of time, normally the same time

period as the firm’s income statement. The financial manager makes decisions to ensure that the firm has

sufficient funds to meet financial obligations when they are due and to take advantage of financial

opportunities. To help the analyst appraise these decisions (made over a period of time), we need to study the

firm’s “flow of funds”.

RATIO ANALYSIS-A TOOL

Ratio analysis is a very powerful analytical tool for measuring performance of an organization. The ratio

analysis concentrates on the inter-relationship among the figures appearing in the aforementioned four financial

statements. The ratio analysis helps the management to analyze the past performance of the firm and to make

further projections. Ratio analysis allows interested parties like shareholders, investors, creditors, Govt. and

analyst to make an evaluation of certain aspects of a firm’s performance.

Ratio analysis is a process of comparison of one figure against another, which make a ratio, and the

appraisal of the ratios to make proper analysis about the strengths and weaknesses of the firm’s operations.

The calculation of ratios is a relatively easy and simple task but only the skilled analyst can make the proper

analysis and interpretation of the ratios. While interpreting the financial information, the analyst has to be

careful in limitations imposed by the accounting concepts and methods of valuation. Information of non-

financial nature will also be taken into consideration before a meaningful analysis is made.

Ratio analysis is extremely helpful in providing valuable insight into a company’s financial picture. Ratios

normally pinpoint a business strengths and weakness in two ways:

1. Ratios provide an easy way to compare today’s performance with past.

2. Ratio depict the areas in which a particular business is competitively advantaged or disadvantaged

through comparing ratios to those of other businesses of the same size within the same industry.

TYPES OF RATIOS

CLASSIFICATION OR TYPES OF RATIOS

The following classification is based on the financial statements on which ratios are calculated. Thus these are:

Balance Sheet Ratios.

Current Ratio

Liquid Ratio

Proprietary Ratio

Debt Equity Ratio

Stock Working Capital Ratio

Profit and loss A/C Ratios

Gross Profit Ratio

Operating Profit Ratio

Net Profit Ratio

Combined or balance sheet and profit and loss ratio

Capital-turnover ratio

Fixed-assets turnover ratio

Net working capital-turnover ratio

Stock-working capital ratio

Return on investment

Return on equity

However, the above basis of classification is found to be too crude and unsuitable because analysis of balance

sheet and income statement cannot be done in isolation. Therefore they are studied together in order to

determine profitability and solvency of the business.

In order that ratio serves a tool of financial analysis, they are now classified into four important categories.

Liquidity ratios

Solvency/Financial/Leverage ratios

Activity ratios

Profitability ratios

LIQUIDITY RATIOS-AN ANALYSIS FOR SHORT TERM CREDITORS

Liquidity ratios measures the firm’ abilty to meet current obligations. These are of 2 types:

1) CURRENT RATIO :

The current ratio is calculated by dividing current assets by current liabilities.

CURRENT ASSETS= CURRENT ASSETS

CURRENT LIABILITIES

In a business, a 2:1 ratio is treated a satisfactory relationships.

2)Acid test ratio or quick ratio or liquid ratio:

Quick ratio establishes a relationship between quick, or liquid, assts and current liabilities.

Quick ratio= Total current assets-(stock in trade+prepaid expenses)

Current Liabilites

A ratio of 1:1 is considered favourable since for every rupee of current liabilities there is a rupee of quick assets.

SOLVENCY RATIO- AN ANALYSIS FOR LONG-TERM CREDITORS

Solvency ratios indicate ability of the company to meet its interest cost and repayment schedules associated

with its long term indebtedness.

1)Debt-Equity Ratio:

Debt equity ratio expresses the relationship of long term liability to net worth.

DEBT-EQUITY RATIO = Long term liabilities

Equity (or net worth)

The normally accepated debt-equity ratio is 2:1.

2)Interest-coverage ratio

The interest coverage ratio or debt services ratio indicate how much interest charges are covered by operating

profits by operating profits available to pay its interest charges.

INTEREST COVERAGE RATIO= Net income before charging interest and income tax

Periodic interest on long term debts

A higher ratio is desiarable.

3)Debt to total funds ratio

This ratio compares the total liabilities to total assets.

DEBT TO TOTAL FUNDS RATIO=Total liabilites

Total assets

The ratio indicates the percentage of assets financed through borrowings.

ACTIVITY RATIOS-AN ANALYSIS FOR MEASURING THE MOVEMENT OF ASSETS.

Activity ratio signifies the effective utilisation of a concern of its available resources. These are es follows:

1) CAPITAL TURNOVER RATIO

This ratio measures the effectiveness with which a firm uses financial resources at its disposal.

CAPITAL TURNOVER RATIO=Net sales (or) cost of sales (or) cost of goods sold

Capital employed or owners equity

A low ratio may signify that the capital is lying idle or there is a fall in sales revenue.A high ratio indicates that

either the business firm is overtrading to an extent that its financial health is in risk or danger or there is

manipulation in the figures.

2)FIXED ASSETS TURNOVER RATIO

This ratio indicates the firm’s efficiency of utilising fixed assets.

FIXED ASSETS TURNOVER RATIO=Net sales

Fixed assets less depreciation

Higher the ratio, better it is because it indicates higher efficiency, i.e., every rupee invested in fixed assets

generates higher sales.

3)NET WORKING CAPITAL TURNOVER RATIO

This ratio computes the requirement of working capital for an expected increase in sales.

NET WORKING CAPITAL TURNOVER RATIO=Net credit sales

Average debtors

A high ratio indicates efficient use of working capital and quick turnover of these current assets.

4)STOCK TURNOVER RATIO

This ratio signifies the number of times on an average,the inventory or stock turnover or sold during the period.

It shows how the goods are kept in stores before being sold.

STOCK TURNOVER RATIO=Cost of goods sold

Average stock held during the year

A higher stock turnover ratio is desirable because it leads to higher liquidity. It indicates efficient sales

performance.

A low stock turnover ratio indicates that goods are not sell quickly and remains in the godown for a long time.

This will lead to excessive blocking up of working capital in inventories. Moreover, slower stock turnover will

reduce liquidity.

4)DEBTORS TURNOVER RATIO

This ratio establishes the relationshipof receivables to net credit sales. It indicates the number of times debtors

turnover each year.

DEBTORS TURNOVER RATIO=Net credit sales

Average debtors

(Debtors + Bills Receivables)

Generally higher the value of debtors, the more efficient is the management of credit.

PROFITABILITY RATIOS-THESE RATIOS ARE CALCULATED TO ANALYSE THE FINANCIAL

RESULTS OF BUSINESS OPERATIONS FOR THE SAME FIRM OVER SEVERAL YEARSOR OF

THE SIMILAR FIRMS FOR THE SAME FIRM OR SEVERAL YEARS. THESE ARE:

1) GROSS PROFIT RATIO

The gross profit ratio is also called the average markup ratio. This ratio expresses relationship between gross

profit and net sales. This ratio indicates the degree to which income per unit may decline without resulting in

losses from operations to the firm. It also helps in ascertaining whether the average percentage of mark up on

the funds is maintained. It is calculated by comparing the gross profit of the firm with the net sales as follows:

GP Ratio= Gross profit x 100

Net sales

Gross profit = Gross income – Interest and other charges.

1)OPERATING PROFIT RATIO

The operating refers to the pure operating profit of the firm i.e. the profit generated by the operation of the firm

and hence is calculated before considering any financial charge (such as interest payment), non operating

income/ loss and tax liability etc. the operating profit is also termed as the Earning Before Interest and Tax

(EBIT). The Operating Profit ratio may be calculated as follows:

Operating Profit Ratio = Operating cost x 100

. Net Sales

So, the Operating cost = Gross income – Interest and other charges – Staff expenses – Other expenses –

Depreciation

3)NET PROFIT RATIO

The NP ratio establishes the relationship between the net profit (after tax) of the firm and the net sales. The NP

ratio measures the efficiency of the management in generating additional revenue over and above the total cost

of operations. The NP ratio shows the overall efficiency in manufacturing, administrative, selling and

distributing the product.

It may be calculated as follows:

NP ratio = Profit (after tax) x 100

Net sales

4)RETURN ON ASSETS (ROA)

The ROA measures the profitability of the firm in terms of assets employed in the firm. The ROA is calculated

by establishing the relationship between the profits and the assets employed to earn that profit. Usually the

profit of the firm is measured in terms of the net profit after tax and the assets are measured in terms of total

assets or total tangible assets or total fixed assets. Conceptually, the ROA may be measured as follows:

ROA = Net profit after taxes x 100

Total assets

4)RETURN ON INVESTMENT (ROI)

The profitability of the firm can also be analyzed from the point of view of total funds employed in the firm.

The term funds employed or the capital employed refers to the total long-term sources of funds.

Capital employed = shareholders funds plus long-term debts.

Alternatively, capital employed = fixed assets plus + working capital.

The ROI may be calculated as follows:

ROI = Net profit before interest and taxes x 100

Capital employed

RETURN ON EQUITY (ROE)

The ROE examines profitability from the perspective of equity investors by relating profits available for the

equity shareholders with the book value of equity investment. The return from the point of view of equity

shareholders may be calculated by comparing the net profit less preference dividend with their total contribution

in the firm

ROE = Net Profit after tax x 100

Total shareholders fund

PROFITABILITY RATIO

In a business enterprise, profitability is the most important part for a financial institution notwithstanding it is

pre eminently a service oriented industry. It is fundamental truth that revenue must exceed expenditure incurred

in the process of earning that revenue. Profit provides cushion to the financial institution to support its credit

risks and withstand any unforeseeable developments. A profitable financing organization has sufficient

resources in its command to finance its growth and diversification programmes in future.

Profitability ratios are measured with reference to sales, capital employed, total assets employed, shareholders

funds etc. the major profitability rates are as follows:

Gross profit margin

Operating profit ratio

Net profit margin

Return on assets

Return on investment

Return on equity

Earning per share.

Dividend per share

Dividend payout ratio

FINDINGS

GROSS PROFIT RATIO

The gross profit ratio is also called the average markup ratio. This ratio expresses relationship between gross

profit and net sales. This ratio indicates the degree to which income per unit may decline without resulting in

losses from operations to the firm. It also helps in ascertaining whether the average percentage of mark up on

the funds is maintained. It is calculated by comparing the gross profit of the firm with the net sales as follows:

GP Ratio= Gross profit x 100

Net sales

Gross profit = Gross income – Interest and other charges.

GP RATIO - 2007 ( Current Year)

= 50.13 x 100

718.43

= 6.97%

GP RATIP – 2006 (Previous Year)

= 40.85 x 100

320.67

= 12.73%

Hence, gross profit of year 2007 is better then 2006.

GP RATIO

NET PROFIT RATIO

The NP ratio establishes the relationship between the net profit (after tax) of the firm and the net sales. The NP

ratio measures the efficiency of the management in generating additional revenue over and above the total cost

of operations. The NP ratio shows the overall efficiency in manufacturing, administrative, selling and

distributing the product.

It may be calculated as follows:

NP ratio = Profit (after tax) x 100

Net sales

Net Profit – 2007 (Current Year)

= 131.90 X 1 00 718.43

= 18.35%

Net Profit – 2006 (Previous Year)

= 40.56 X 100 320.67

= 12.64%

Hence, Net profit of year 2006 is better then 2007

NET PROFIT RATIO

RETURN ON ASSETS (ROA)

The ROA measures the profitability of the firm in terms of assets employed in the firm. The ROA is calculated

by establishing the relationship between the profits and the assets employed to earn that profit. Usually the

profit of the firm is measured in terms of the net profit after tax and the assets are measured in terms of total

assets or total tangible assets or total fixed assets. Conceptually, the ROA may be measured as follows:

ROA = Net profit after taxes x 100 Total assets

ROA – 2007 (Current Year)= 131.90 X 100 1172.73

= 11.24%

ROA – 2006 (Previous Year)

= 40.56 X 100 241.79

= 16.77%

Hence, ROA of the year 2007 is better then 2006.

RETURN ON ASSETS

RETURN ON INVESTMENT (ROI)

The profitability of the firm can also be analyzed from the point of view of total funds employed in the firm.

The term funds employed or the capital employed refers to the total long-term sources of funds.

Capital employed = shareholders funds plus long-term debts.

Alternatively, capital employed = fixed assets plus + working capital.

The ROI may be calculated as follows:

ROI = Net profit before interest and taxes x 100 Capital employed

ROI – 2007 (Current Year)

= 197.63 X 100 17.25

= 1145.68%

ROI – 2006 (Previous Year)

= 58.17 X 100 7.30

= 7.96%

Hence, ROI of the year 2007 is better then 2006

RETURN ON INVESTMENT

RETURN ON EQUITY (ROE)

The ROE examines profitability from the perspective of equity investors by relating profits available for the

equity shareholders with the book value of equity investment. The return from the point of view of equity

shareholders may be calculated by comparing the net profit less preference dividend with their total contribution

in the firm

ROE = Net Profit after tax x 100 Total shareholders fund

ROE – 2007 (Current Year)

= 131.90 x 100 931.91

= 14.15%

ROE – 2006 (Previous Year)

= 40.56 X 100 141.94

= 28.57%

Hence, the ROE of year 2006 is better then Year 2007

RETURN ON EQUITY

CONCLUSIONS & SUGGESTIONS

FINANCIAL PERFORMANCE (1 ST APRIL,2006 TO 31 ST MARCH,2007)

a) SHARE CAPITAL

As on march 31st 2007, paid up equity share capital of the company stood at rs 28,37,52,750/-(i.e. 5,67,50,550 equity share Capital of rs 5/- each, fully paid up). However, consequently upon the issue and allotment of bonus Equity share on 04.05.2007 in the ratio of 1:1 in terms of approval of members received on 19.03.2007 by voting through postal ballot, the paid up capital of the company inceased from rs. 28,37,52,750/- to Rs. 56,75,05,500/-(i.e. 11,35,01,100 equity shares of Rs 5/- each, fully paid up).

b) RESERVE & SURPLUS

An amount of rs 7500 lacs has been transferred to General Reserve out of the Net Profit for the year ended 31.03.2007 as compared to the Rs 3000 lacs in the previous year.

c) LOANS

Secured loans stood at rs 23361.37 lacs as compared to rs. 8930.98 lacs in the previous year. This includes an amount of rs 5000 lacs raised by issue of 819659 no. of Zero Coupon Secured Redeemable optionally Convertible Debentures(“ROCD”) of Rs 100/- each

Unsecured loans stood at Rs 720.91 lacs as compared to rs 1054.46 lacs in the previous year.

d) CURRENT ASSETS

Inventories: During the year, Inventory level has increased by Rs 18821.83 lacs i.e from Rs 30639.53 lacs to Rs 13270.19 lacs.

Sundary Debtors: There is also an increase in Subdary Debtors of rs 7167.21 lacs i.e from Rs 6039-98 lacs to rs 13207.19 lacs.

Loans & Advances: During the year, the loans and advances also increases by Rs 60519.86 lacs i.e. from Rs 30844.72 lacs to Rs 91364.58 lacs.

Current Liabilities: Current Liability stood at Rs 63532.75 lacs as compared to Rs 49500.91 lacs in the previous year.

e) NET CURRENT ASSETS

During the year, the net current of the company have increased by rs 92492.75 lacs i.e from Rs 20486.94 lacs as compared to Rs 112979.69 lacs.

f) INTEREST

During financial 2006-07, company has paid an amount of rs 1942.41 as interest as compared to rs 1203.68 lacs in the previous year.

g) STAFF EXPENSES

During the year, the staff cost of he company stood at rs 2255.96 lacs as compared to rs 952.08 lacs in the previous year. This includes Eployees Stock Option Compensation Expenses of rs 45.97 lacs pursuance to grant of 1,16,700 Option on 26.10.2006 in terms of the approval of the members received on 02.05.2006.

h) DEPRICIATION

During financial 2006-07, depreciation increased from rs 213.14 lacs to rs 310.64 lacs

ANNEXURES

Profit & Loss A/C Of Metro Tyres Ltd

PARTICULARS 2007 2006

Sales Turnover 718.43 320.67Other Income 47.72 34.51Stock adjustments -6.59 3.73Total Income 759.56 258.91Raw Material 0.12 1.04Excise Duty 0.00 0.00Power & Fuel Cost 0.49 0.29Other manufacturing Expenses 469.46 241.86Employee Cost 17.25 7.30Selling & Administration Expenses 43.75 12.85Miscellaneous Expenses 6.45 21.56Less: Preoperative Expenditure Capitalised

0.00 0.00

Profit before interest, Depreciation & Tax

222.04 74.01

Interest & Financial Charges 21.30 13.71Profit Befire Depreciation & Tax 200.74 60.30Depreciation 3.11 2.13Profit before Tax 197.63 58.17Tax 65.73 17.61Profit after Tax 131.90 40.56Adjustment below Net Profit 0.00 0.00P & L Balance brought forward 23.46 16.89Appropriations 86.49 33.99P & L Balance carried down 68.87 23.46Equity Dividend 9.93 3.50Preference Dividend 0.00 0.00Corporate Dividend Tax 1.56 0.49Equity Dividend (%) 25.00 20.00

Earning Per Share (Rs) 22.96 22.90Book Value 163.31 78.11Extraordinary Items 0.01 -10.14

Balance sheet of METRO TYRES LTD.

PARTICULARS 2007 2006

Share Capital 28.38 17.50Reserve & Surplus 903.53 124.44Total Shareholders Fund 931.91 141.94Secured Loans 191.81 89.31Unsecured Loans 49.01 10.54Total Debt 240.82 99.85Total Liabilities 1,172.73 241.79Gross Block 50.13 40.85Less: Accum Depreciation 19.86 15.81Net Block 30.27 25.04Capital Work In process 0.00 0.00Investments 11.22 9.03Inventories 494.61 306.39Sundry debtors 132.07 60.40Cash and Bank Balance 224.79 24.64Loans and Advances 915.40 311.30Current Liabilities 614.95 475.17Provisions 20.68 19.84Net Current Assets 1,131.24 207.72Miscellaneous Expenses not w/o 0.00 0.00Total Assets 1,172.73 241.79Contigent Liabilities 196.47 110.48

BIBLOGRAPHY

BIBLOGRAPHY

WEBSITES:

www.wikipedia.com

www.yahoo.com

www.google.com

Metro tyres ltd.

BOOKS REFFERED:

Financial Management by I.M.Pandey

Cost accounting by S.N. Maheshwari