Finance - Working Capital - Escort Project

CONTENTS

INTRODUCTION

PROFILE

FINDINGS OF THE STUDY

PROJECTIONS

RESEARCH METHODOLOGY

LIMITATIONS

CONCLUSIONS

RECOMMENDATIONS

REFERENCES

Objectives

Year wise comparative study of the Escorts Mahle Limited in terms of

variation in its Profitabili ty, operational efficiency, l iquidity and solvency

during the years 2003, 2004, 2005, and 2006.

Comparative analysis of profitability, operational efficiency liquidity

and solvency of Escorts Mahle and Goetze India with other Industry

players.

Making financial projections of Escorts Mahle for the next two years.

The main aim of the research is to derive out the suggestions and

conditions, which favors the lowering of cost and improving the

profitabili ty of the company.

INTRODUCTIONINTRODUCTION

Auto- Ancillary Industry

The auto ancillary sector in India was stagnant till the 'people's car' Maruti appeared

on the Indian roads. Prior to this the sector was supplying components to the likes of Telco,

Bajaj, HM, Premiere Automobiles and M&M. Today, the Indian automotive component

industry manufactures a broad range of parts required by various domestic and Multinational

automobile manufacturers. The auto ancillary industry has moved with the trend and

modernised its manufacturing plants and techniques. Most of the multinational auto

manufacturers who have set up shops in India outsource their component requirements from

within India. Import dependence is low, approximately 13% of domestic demand, and usually

restricted to items requiring special steels and materials or precision engineering (gearboxes

for instance).

The auto ancillary sector is dotted with small to medium sized firms with most having

small capacities. However, two or three top firms controlling 80-90% of the market dominate

certain segments. A lot of these firms have entered into joint ventures with foreign firms in

order to tap the technology and enter the global markets. The Indian firms are able to

compete globally due to cost competitiveness.

MARKET STRUCTURE

The Automotive Component Manufactures Association (ACMA) classifies the auto ancillary

industry into the following product segments:

Engine and engine parts: Pistons, piston rings, piston pins, gaskets, carburetors, fuel

injection pumps, etc.

Drive transmission and steering parts: Transmission gears, steering gears, crown wheels

and pinions, axles, wheels, etc.

Suspension and braking parts: Leaf springs, shock absorbers, brake assemblies, etc.

Electricals: Spark plugs, starter motors, generators, distributors, voltage regulators, flywheel

magnetos, ignition coils, etc.

Equipment: Dashboard instruments, headlights, horns, wipers, etc.

Others: Fan belts, sheet metal parts, plastic mouldings, etc.

Auto component manufactures supply to two kinds of buyers – original equipment

(OE) manufacturers and the replacement market. At present the replacement market forms

around 65% of demand. The relative importance of the OE and replacement markets varies

across products depending upon the factors like life of auto component, quality and materials

used in auto component, average age of vehicle etc. For eg, in case of spark plugs the

replacement demand is close to 80%. On the other hand, radiators, shock absorbers and

carburetors account for a replacement market demand of less than 40%. OEMs account for

approximately 25% of the demand and exports account for the balance 10%. Sales of auto

components are carried out through dealer network of components, authorized vehicle dealers

and retailers.

Replacement market: The margins are slightly higher in the replacement market, though the

success depends on the established brand name and distribution network. The small scale

players score over the bigger names in this segment because of excise duty exemptions and

lower overheads.

OEM Market: Demand from the OEM market is dependent on the demand for new vehicles.

This market is characterized by requirements of high quality, tight delivery schedules and

lower margins. OEM’s have also come to realize the importance of vendor development.

With players like Telco and Ashok Leyland reducing the amount of vertical integration, it

will be important for them to build long-term relationships with ancillaries helping them with

quality improvement and technology absorption.

Export: The recession in the domestic automobile market during FY91 and FY92 induced

companies to develop the export markets. Since then this sector has grown.

Auto ancillary players have been hit hard by a slowdown in the automobile segment for the

past two years. Units, particularly belonging to the small-scale sector have faced the brunt of

rising costs and lower capacity utilization.

A Industry Look

CAPACITY IN ATUTOMATIVE INDUSTRY

PISTONS

Total 21,367,000

Auto Piston Mfg. Co, Ltd. Amritsar 500,000

Abilities India Pistons & Rings Ltd., Ghaziabad 900,000

Escorts Ltd., New Delhi 7,827,000

India Pistons Ltd. Chennai 3,000,000

Menon Pistons Ltd. Kolhapur 2,400,000

Shriram Pistons & Rings Ltd., New Delhi 3,200,000

Samkrg Pistons Ltd., Hyderabad 3,000,000

Total 21,367,000

PISTON PINS

Total 22,057,000

Auto Pistons Mfg. Co. Ltd., Amritsar 450,000

Escorts Ltd., New Delhi 8,047,000

India Pistons Ltd., Chennai 3,000,000

Maco Pvt. Ltd., New Delhi 3,600,000

Maini Precision Products Pvt. Ltd.,

Bangalore*

N.A.

Menon Pistons Ltd., Kolhapur 360,000



Sri Ramdas Motor Transport Ltd. New Delhi 400,000

Total 22,057,000

PISTON RINGS

Total 125,982,000

Auto Piston Mfg. Co. Ltd., Amritsar 3,600,000

Abilities India Pistons & Rings Ltd.,

Ghaziabad

400,000

Goetze (India) Ltd., New Delhi 48,312,000

India Pistons Ltd., Chennai 15,000,000

I.P. Rings Ltd., Chennai 4,500,000

Menon Pistons Ltd., Kolhapur 6,000,000

Perfect Circle Victor Ltd., Nasik 21,000,000

Precision Castings & Components, Delhi 1,800,000



Supercircle Pvt. Ltd., New Delhi* 4,000,000

Total 125,982,000

PROFILEPROFILE

ESCORTS GROUP

The Escorts Group was created by Yudi and Hari Nanada. They started it as agency

house in 1994. Today it ranks among top 10 industrial giants. It has more than eight

specialized marketing divisions, vast network of sales and outlets in the country and has

representation in the overseas market.

The Escorts Group, with modern manufacturing facilities and an extensive

marketing network, is among the large Indian Corporations operating in the diverse fields of

agri-machinery, bi-wheelers, construction and material handling equipment, automotive and

railway ancillaries, telecommunication and financial services.

The group has restructured itself to meet the challenges of a newly liberalized Indian

economy with a view to further consolidate its market shares in the domestic market, while

targeting transnational business through an aggressive programme of joint venture and

strategic alliances with global majors, buttressed by radical modernization of its

manufacturing facilities.

The Company’s automotive and railway ancillary business groups are shifting gears

to cope with the challenges of the future. Escorts Ltd. is hiving off its piston and pin

operations into a joint venture with Mahle of Germany. Goetz India Ltd., a group company

and the largest manufacturer of piston rings has signed a accord with its joint venture partner

T & N, U K to manufacture aluminium radiator and power metal components for the Indian

and overseas automotive industries.

The future of Escorts is a bold appreciation of the challenges that lies ahead in an

open market economy. Vision 2005 is driving the company towards the opening years of a

new century with an uncompromising stress on quality and enhancement of investor value.

The core belief is that a company can grow to new heights based on a creditable track record

and a vision that is not daunted by competition but thrives on it.

ESCORTS

Escorts Limited had been manufacturing Pistons under a Technical Collaboration

Agreement with M/s Mahle GmbH, Germany. A plant had first been set up in Patiala in 1960.

This alongwith the piston ring facility of Goetze (India) limited enabled Escorts to become

the largest producer of piston assemblies in the country. A second plant was set up at

Bangalore at 1977 and over the years Escorts established a commanding position as an OE

supplier, where its main customers includes TELCO, Ashok Leyland, Bajaj Auto, Indian

Railways, Defence Establishment, TVS Kirloskar, Mahindra, Maruti Udyog etc. It also built

up a strong presence in the Replacement Market, where it developed an extensive dealer

network.

Mahle GmbH are world leaders in Pistons, with manufacturing facilities spread

throughout the Globe. Group Turnover is DM 3800 million.

In 1996 Escorts entered into a Joint Venture Agreement with M/s Mahle GmbH, in

which both partners had a 50% share. On 1st October 1996, Escorts Mahle Limited (the joint

venture Company) acquired the pistons business of Escorts Ltd as a going concern. It also

acquired the Piston business of Goetze (India) Limited at Patiala, which was being carried out

under a technical licence from Mahle. This acquisition was funded by the issue of equity

share capital of Rs 15 crores, issued at a premium of Rs 30 crores, and 14% Cumulative

Redeemable Preference Shares amounting to Rs 52.50 crores.

Its main competitors are India Pistons and Sriram Pistons.

The Management of the company is headed by an eminent Board of Directors headed

by Mr. Anil Nanda as Chairman. Other members of the Board of Directors are as follows:

Mr. B R Kapoor - Executive Director

Mr. H Henning - Director Technical

Mr. N Nanda

Dr. Ing. Klaus J Henke

Dr. Rudolf Paulik

Mr. Joern Weipert

Escorts Mahle Limited is the largest manufacturer of Piston assembly in the country

with a capacity of 7 million Pistons per annum. It holds the highest market share in the

country. Be it the original equipment manufacturer or after-market, Escorts Mahle piston

assembly is the first choice of every discerning customer.

Escorts Mahle has the wide range of Piston assemblies varying from a 39mm-moped

piston to 300mm pistons for Diesel Locomotive engines covering 2 wheelers, cars, Jeeps,

Light Commercial Vehicles, Heavy Commercial vehicles & Locomotive engines.

It maintains the technological leadership through continuous R&D and is the first

company to introduce many original piston designs in the country. Ring Carrier Piston for

trucks, Strut type design for Light commercial vehicles, Thin Walled Piston design for high

performance Passenger cars, Thin groove piston for low emission BI-wheeler engines,

Pistons with cast in cooling coil & Steel crown piston are the important design among the

many designs developed.

It also exports Pistons to many countries like SAARC region, South East Asia,

Middle East, Africa, Europe, North & South America.

STRENGTHSSTRENGTHS

1. Promoter Pedigree - The Company is an associate of Escorts one of the India's

leading producers of industrial, automotive and other products and services for

professional and personal use.

2. Access to the latest technology and Benefits of the R&D activities undertaken by the

Escorts Group.

3. Its production capacity, making it the largest producer in the industry as well as

market leader in India.

4. Access to the international market

WEAKNESSWEAKNESS

1. The Company has been making losses since commencement of operations in 2004.

2. The losses of the Company have eroded more than 50% of Net worth of the

Company.

FINDINGSFINDINGSOF THE STUDYOF THE STUDY

Profitability RatiosProfitability Ratios

The Profitability ratios measure the profitability or the operational efficiency of the firm.

Gross Profit RatioGross Profit Ratio

This ratio shows the relationship of sales with the direct costs such as purchases,

manufacturing cost, etc. and, thus, is important.

It is calculated as:

Gross Profit Ratio = Gross Profit x 100

Net Sales

Appendix 7 reveals the Gross Profit ratio for EML in the last four years. For the year

2005, it has declined to 41.36 from 48.01 of the year 2005. The reason is the rise in the

expenses. All the expenses; material, labour, factory, administration and selling &

distribution expenses has raised over the last year. This is definitely not an ideal situational.

In the present scenario operational efficiency is the key to success.

Appendix 8 shows the Gross Profit Ratio for EML and GIL, together and other

players in the industry. For EML and GIL it is 49.27 for the year 2005 while the major

players like SAMKRG and Shriram have managed to have quite higher Gross Profit Ratio of

55.91 and 48.64 respectively.

This is not a very encouraging sign in the present scenario when the market is getting

more and more competitive and price sensitive.

A Look… at Escorts Ltd.

A Look …at the Industry

Operating RatioOperating Ratio

Operating Ratio is the test of the operational efficiency of the business. It shows the

percentage of sales that is absorbed by the cost of sales and operating expenses. In simple

words, it measures the extent of cost incurred for making the sale.


Operating ratio = All operating cost and expenses x 100

Net Sales

Appendix 7 reveals the EML’s year wise condition and states that operating ratio is

103.23 for the year 2005 which is much greater then that of the year 2005. It was 92.43 in

2005. In 2005 it is all time high since last four years. Such a situation is not encouraging. All

the expenses have raised and demands attention. This is one of reasons why the company is

making losses.

Appendix 8 shows the picture of the whole industry. Very evident from the graph that

EML and GIL, as together are lagging in this field from its major competitors. Its operating

ratio is 94.06 which is much higher as compared to SAMKRG, which is just 68.57. It is 77.67

and 89.86 for the Shriram and IPL respectively for the year 2005. This raises the question that

why it is so high for our organization when other players are managed to maintain at lower

levels. Though, when compared to that of the previous year operating ratio has raised for

every player in the industry.

This is alarming situation for our organization.

A Look … at Escorts Ltd.



A Look… at the Industry

Return on InvestmentReturn on Investment

ROI judges the overall performance of the concern. It measures how efficiently the

sources entrusted to the business are being used. The purpose is to ascertain how much

income the use of Rs 100 of capital generates.


ROI = Profit before interest, Tax and Dividend x 100

Capital Employed

The company is making losses since last three years. Appendix 7 shows that ROI was

0.54 in the year 2003 and after that it remains negative for three consecutive years. It was –

5.75 for 2004, -4.91 for 2005 and –22.59 for the year 2005. This is not at encouraging rather

much alarming for the management.

Appendix 8 reveals the position of the whole industry. Shriram has managed to have

ROI of 17.32, which is highest among all the players while for EML and GIL together it is –

5.75 which least in the industry. Apart from our organization, IPL also has negative ROI,

which is –3.08 for the year 2005. Shriram is the only player in the industry who has achieved

the higher ROI then that of the previous year otherwise for all other players ROI has

declined. EML & GIL together and IPL travel from positive ROI to negative, which is not an

ideal situation.

Negative ROI is seeking the immediate attention of the management.


A Look … at the Industry

Expense ratiosExpense ratios

Expense ratios are calculated to ascertain relationship that exits between operating

expenses and volume of sales. It indicates the portion of sales which is consumed by various

operating expenses. Thus such an analysis will through good light on the levels of efficiency

prevailing in different aspects of the work.

Material Cost to Sales RatioMaterial Cost to Sales Ratio:

This ratio indicates the efficiency with regard to material cost.


Material Cost to Sales Ratio = Direct Material Cost x 100

Net Sales

Appendix 7 shows that the material costs to its sales have reached to 40.34 times for

the year 2005. It is all time high since last 4 years which is not a healthy sign. It was 34.24

in2003 and has risen year after year.

Appendix 8 shows the condition of the whole industry, every player in the industry

have seen the rise in this ratio as compared with that of previous year. Shriram have managed

this ratio at 24.56 which is best in the industry while IPL has 35.63 for the year 2005 which is

worst among the industry players. For EML and GIL, together it is 31.1 for 2005.

This shows that management should pay immediate attention in case of EML because

in present scenario is the key to success.

A Look … at Escorts


Labour Cost to Sales Ratio: Labour Cost to Sales Ratio:

This ratio indicates the efficiency in the personnel cost incurred by the organisation.


Labour Cost to Sales Ratio = Direct Labour Cost x 100

Net Sales

Appendix 7 shows the year wise in house condition of EML. It reveals that this ratio

was 23.04 for the year 2003 which rose 28.49 in the year 2005. This is not an ideal situation

for the organisation. This is one of the most important problems for EML.

Appendix 8 puts light and raises certain question for the management of EML and

GIL as this ration is 27.54 which is worst in the industry. SAMKRG has just 13.38 which is

almost half of that of EML. Others players like Shriram and IPL too have much lower labour

cost to sales ratio. It is just 15.36 and 18.7 for Shriram and IPL respectively for the year 2005.

These figures are not at all satisfactory rather these are alarming in the present time.

Management needs to take immediate action in this regard.



Factory Expenses to Sales Ratio: Factory Expenses to Sales Ratio:

This ratio puts light on the efficiency in regard of other manufacturing and factory

expenses.

It is calculated as :

Factory Expenses to Sales Ratio = Factory Expenses x 100

Net Sales

Appendix 7 shows that EML is moving on the right track in this aspect as this ratio

declined from 25.01 (2003) to 18.28 in the year 2005.

Appendix 8 revels that EML and GIL, together has the best ratio in the industry whish

is just 18.97 while it is 27.96 for Shriram, 22.55 for SAMKRG and 0.22 for IPL. Thus

Shriram’s ratio is worst in the field while that of EML and GIL is best. Apart from Shriram

all the players in the industry have seen the rise as compared to that of previous year.

These figures are satisfactory rather encouraging.



Administration Expenses to Sales ratio:Administration Expenses to Sales ratio:

This ratio shows the efficiency with regard to office and administration expenses.


Administration expenses to sales ratio = Administration Expenses x 100

Net Sales

Appendix 7 shows that this ratio has remained almost stagnant over the period of time

for EML. It was 10.7 for 2003 and 10.3 for the year 2005, though the year 2005 was

exemplary in itself as this ratio was 8.56 in that year.

Appendix 8 shows that SAMKRG is best in the industry in this regard with the ratio

of 7.53 times while IPL is worst with 15.3 times for the year 2005. EML and GIL, together

has the ratio of 11.64 times for the year 2005. None of the company has neither improved

much nor loosed much in this regard.

The figure for EML doesn’t seem satisfactory when compared to SAMKRG.



Selling and Distribution Expenses to Sales ratio:Selling and Distribution Expenses to Sales ratio:

This ratio shows the efficiency with regard to selling and distribution expenses.


Selling& Distribution expenses to sales = Selling& Distribution Exp. x 100

Net Sales

Appendix 7 shows that EML has seen a constant rise in its selling & distribution

expenses. It was 1.49 in 2003, 3.19 in 2004, 4.94 in 2005 and 7.46 in 2005. This is an attempt

to maintain the present market share and capture new market, which doesn’t seem to be

justified.

Appendix 8 shows that this ratio is maximum for EML and GIL, together. It is 4.16

for the year 2005 while its minimum for Shriram which equals to 2.85. For SAMKRG it is

3.56 for 2005.

These figures are alarming and need a constant check.



Fixed Asset Turnover:Fixed Asset Turnover:

This ratio shows how well the fixed assets are being utilized. It indicates whether the

investment in fixed assets has been judicious or not. In manufacturing concern, the ratio is

important and appropriate since sales are produced not only by the use of working capital but

also by the capital invested in fixed assets.

The ratio is calculated as:

Fixed Asset turnover Ratio = Sales .

Fixed Assets

Appendix 7 shows the year wise in-house condition of Escorts Mahle Ltd.. In last four

years the company has not been able to cross the figure of 1 for its fixed asset turnover. This

is not a satisfactory situation. Rather the turnover has declined over a period of time. It was

0.79 for the year 2003 and is 0.75 for the year 2005. It was 0.64 and 0.67 for the years2004

and 2005 respectively.

Appendix 8 shows that condition in the whole industry is not very encouraging. Apart

IPL none of the company has been able to have a turnover of even one. IPL has the highest

turnover of 1.1 for the year 2005 while EML and GIL as together has the worst turnover in

the industry. It is just 0.33 for the year 2005. It has declined as compared to the previous year

as turnover was 0.56 for the year 2005. The turnover for the Shriram and SAMKRG are 0.77

and 0.43 respectively.

The situation with this regard is not encouraging. Management needs to pay attention

in this field and should find immediate solution.



Net Working Capital Turnover Ratio:Net Working Capital Turnover Ratio:

This ratio indicates the number of times a unit invested in Working Capital produces

sale. In other words, this ratio indicates the efficiency or otherwise in the utilization of short-

term funds in making the sales.


Net Working Capital Turnover Ratio = Sales .

Net Working Capital

Appendix 7 shows that since last four EML has the highest Net Working Capital

Turnover in the year 2005. EML has the turnover of 21.75 in the year 2005, which is much

higher than that of year 2005 which was just 5.78. It was 4.16 and 5.26 for 2003 & 2004

respectively.

Despite the fall, turnover of the EML and GIL seems to be satisfactory in comparison

to the other Industry players, as it was 4.34 in 2005 and the turnover of Shriram was 4.47

which was highest among all in the industry. IPL has the turnover of 3.63 in 2005. SAMKRG

has small turnovers of 2.86 which is least in the industry. Apart from Sriram turnover for all

the players has declined as compared to previous year.

Industry wise turnover is satisfactory for EML and GIL, together while EML alone

has shown a tremendous performance.



RESEARCHRESEARCH

METHODOLOGYMETHODOLOGY

Research Design

The following analysis explores the financial performance of the company Escorts

Mahle Ltd. vis-à-vis the Industry. The comparison has been made against the competitors

India Pistons Ltd., SAMKRG Pistons And Rings Ltd. and Shriram Pistons on the grounds of

Profitability ratios, Activity ratios, liquidity ratios and some other key ratios. The combined

ratios of EML and GIL are taken for the comparison because they together cover the entire

range of products which other players manufacture individually. This gives the better basis

for comparison. The comparisons do reveal its strength and / or weakness with other leading

Industry players of the market.

The year wise comparison of Escorts Mahle Ltd. has been made which reveals

whether the entity is moving in the right direction with the greater pace or not. The

comparison has been made for the year 2003,2004, 2005 and 2005.

Projections are made for the next two years, that shows that the direction and pace of

growth.

Data Collection Method

The data of the two entities, Escorts Mahle Ltd. and Goetze Ltd. and the other

companies in the Industry like Shriram Pistons, India Pistons etc. have been collected through

the Annual Reports.

Some ratios and Industry related data have collected through Prowess Database –

CMIE and some finance related internet sites.

Finished Goods Turnover:Finished Goods Turnover:

This ratio is the test of efficient utilization. It measures the number of times inventories

are sold and replaced during the year by comparing the cost of goods sold with the stock

carried.

When a company carries stock, a portion of its capital is looked up. Higher ratio indicates

that activities are maintained with the help of the smaller stock and that there are fewer

changes of stock containing obsolete, unsaleable or over valued items.


Finished Goods Turnover = Cost of Goods sold

Finished Goods

where Cost of goods sold is

Cost of goods sold = Opening stock + Purchases + Direct expenses –

Closing stock.

Direct Expenses includes Salary & wages, Fright & Distribution costs, excise duty,

manufacturing expenses.

EML has the turnover of 25.12 in the year 2005, which was 18.95 in 2005, but

figures prior to this period were more impressing as turnover was 36.42 in2004. So, company

has seen a decline in turnover as compared to 2003 and 2004.

EML and GIL, taken together has a stock turnover of 16.14 times for the year 2005.

Shriram Pistons has the maximum turnover of 21.6 while IPL has least turnover of just 10.53

for the year 2005.



Debtors Turnover Ratio (DTR)Debtors Turnover Ratio (DTR)

This ratio show the efficiency achieved in using the funds invested in debtors. A

higher DTR implies quicker collection of debtors and also enables the Company to transact a

larger volume of business without corresponding increase in the investment in debtors.


Debtors turnover Ratio = Total Sales .

A/Cs Receivables

The term A/Cs Receivable includes “ Trade Debtors” and “ Bills Receivable”.

Appendix 7 shows that DTR declined for the year 2005 as it reached 8.89 from 13.83

(2005). The turnover rose for the years 2004 from that of 2003 and further rose for the year

2005. It was 11.23 for 2003, 12.34 for 2004 which reached to 13.83 in 2005.

If seen with relation to the number of holding days, EML holds it for 41.06 days

which is much higher as compared to 26.38 days which was in 2005. The is offering credit of

45 days for OE market and 7 days with CD for local customers and 10 days with CD for

outstation customer in the Retail market. It is 30 days for both local and out station customers

without CD. So, 26.38 days seems absolutely fine, which was in 2005 but 41.06 is quite high,

which was in 2005.

Amongst all Companies in the industry, EML and GIL, together has the best and

highest DTR that is 10.89, though it has declined as compared to previous year which was

14.95. This shows we follow the best policy. SAMKRG has the worst turnover among all the

companies of the industry. DTR of IPL and Shriram were 9.66 and 9.33 times respectively.

If seen with relation to the number of holding days, we hold it for 33.52 days as

compared to 24.41 days of that of previous year whereas SAMKRG is holding for 44.93 days

in 2005. IPL and Shriram are holding for about 38 and 39 days respectively in 2005.

So, we are the best with regard to our credit policy and its collections policy.



Liquidity AnalysisLiquidity Analysis

Current Ratio Current Ratio

This ratio is a basic measure of judging the ability of the company to pay off its

current obligations out of its short-term resources. The higher the CR, the larger is the

amount available per rupee of short-term obligation and accordingly, the greater is the feeling

of security. Although sometimes it is said that a CR of 1.33:1 is ideal, but there is no rigidity

about it.

It is calculated as :-

Current Ratio = Current Assets

Current Liabilities

Appendix 7 reveals the year wise conditions and states the current ratio for the EML.

It has 1.11 for 2005 which was 1.83 on 2005. This ratio has declined in comparison from

prior years, as it was 2.37 in 2003. Though CR has declined but company is well in position

to meet in obligations and at the same time, not carrying ideal cash.

It is observed from Appendix 8 that E.M.L and G.I.L, taken together has C.R of 1.69

for the year 2005 as compared to 3.35 & 2.22 of SAMKRG and I.P.L the major competitors

in the industry. This shows the company’s efficiency in current asset management. The

company is better off the competitors. Thus the average C.R of E.M.L. and G.I.L is not to be

taken as alarming.

Quick Ratio Quick Ratio

This ratio is an indicator of short-term solvency of the firm. It is a stricter test of

liquidity than the C.R as illiquid portion of the current assets has been eliminated. It gives no

consideration to inventory, which may be slow moving. Q.R places more emphasis on

immediate conversion of assets into cash than does the C.R.. Rule of the thumb is 1:1 for the

Q.R.

This is calculated as:

Quick Ratio = Liquid assets

Current liabilities

Liquid assets include cash, bills receivable, marketable securities, and debtors, etc excluding

stock prepaid expenses. Liquid assets are those which are either in the form of cash or cash

equivalents or can be converted in the cash very shortly.

Appendix 7 reveals the condition and states the quick ratio for the E.M.L as it

has 0.71 in 2005while Q.R. was 1.4 in the year 2003. The constant decline over the period of

three years was good as it was 1 in the year 2005 but further decline in 2005 is not a good

signal. Heavy dependence on sundry creditors, acceptances and bank overdraft has increased

the current liabilities to a great extent

Appendix 8 reveals that Q.R. for E.M.L. and G.I.L. was 1.43 as compared to even

2.26 for SAMKRG. While the other two competitors have lower Q.R. of 1.18 and 1.39 for

I.P.L. and Shriram respectively for the year 2005. The reason behind the higher Q.R. is that

the Q.R. for G.I.L. is over 2, which is not an ideal one.

So, the Q.R. for G.I.L. is not satisfactory.

PROJECTIONSPROJECTIONS

PROJECTED P & L ACCOUNTPROJECTED P & L ACCOUNT

2005-20062005-2006 2005-20062005-2006

IncomeIncome

Gross Sales 19572.10 19427.72

Less: Excise 2693.31 2679.69

Net Sales 16878.79 16748.03

Other Income 628.33 616.36

Total Income 17507.12 17364.39

ExpenditureExpenditure

Material, Manufacturing & Operating

R.Material & Components 5642.78 5214.09

Ring & Lines Purchased 1005.67 799.02

Stores & Spare 1462.94 1332.03

Repairs to Building 51.21 10.60

Repairs to machinery 227.18 135.00

Power & Fuel 1168.19 1106.32

Lease & Rent 41.13 39.04

Royalty 266.55 264.62

Total 9865.65 8900.72

Gross Margin 7641.47 8463.67

Personnel 4961.68 4484.53

Incentive Bonus 335.69 374.31

VRS written off 315.81 679.76

Admn. Expenses 1022.33 897.87

Selling Expenses 1454.36 1477.66

Profit (448.40) 549.54

(before Depreciation & Interest)

Depreciation 1106.86 1111.27

Profit before Interest (1555.26) (561.73)

(Rs in Lacs)

2005-20062005-2006 2005-20062005-2006

IncomeIncome

Net Sales 100% 100%

Other Income 3.72% 3.68%

Total Income 103.72% 103.68%

EXPENDITUREEXPENDITURE

Material, Manufacturing & Operating

Raw Material & Components 33.43% 31.13%

Ring & Lines Purchased 5.96% 4.71%

Stores & Spare 8.67% 7.95%

Repairs to Building 0.30% 0.06%

Repairs to machinery 1.35% 0.81%

Power & Fuel 6.92% 6.61%

Lease & Rent 0.24% 0.23%

Royalty 1.58% 1.58%

Total 58.45% 53.14%

Gross Margin 45.27% 50.54%

Personnel 29.40% 26.78%

Incentive Bonus 1.99% 2.23%

VRS written off 1.87% 4.06%

Admn. Expenses 6.06% 5.36%

Selling Expenses 8.62% 3.28%

Profit -2.66% 3.28%

(before Depreciation & Interest)

Depreciation 6.56% 6.64%

Profit before Interest -9.21% -3.35%

CONCLUSIONSCONCLUSIONS

There is an economic slowdown all around the world. The market is turning to more

price intensive competition. In such a situation, decline in profits, lowering of turnover is not

a surprise for any industry. Same is the case with auto ancillary industry. The largest

manufacturer of the pistons and rings in the industry, Escorts Mahle is passing through tough

times. Losses for three consecutive years have made the condition so bad that it raises some

doubts on the company’s ability to continue as a going concern in the minds of some people.

Definitely, its time for management to plan again and move on the right track. Company

should frame a “vision” that would help it to be in its prosperous days again.

Company has best debtor turnover, which shows its efficient credit management.

Gross Profit Ratio, though has declined from previous year but still is satisfactory as

compared to Industry norms. So, is the case with Net Working Capital Turnover. All this

shows the efficiency of the management however; due to some limitations company has not

been able to have good figures in some areas. Despite of fact that EML and GIL are the

market leaders and carries a good brand image both in the OEM and RM, company is making

losses and losses have accumulated to 580 million. It has negative ROI (-5.75) in the year

2005. Its Operating Ratio is worst in the industry. The reason is its high expenses. Its Labour

to Sales Ratio (27.5) is double of SAMKRG’s (13.58). High Labour cost is one of its major

problems. For which it has introduced VRS, in which around 1000 employees were asked to

leave the organisation. Material and administration cost have raised the operating cost for the

company. Its Selling and Distribution Expenses is highest among the players in the industry,

reason is the aggressive sales promotion to capture the maximum market share. In this price

sensitive Indian Market, EML has failed to offer its products at competitive rates due to its

higher operating cost.

The other factor that needs immediate attention is the lower fixed asset turnover. The

fixed assets are not being utilized to its full. So, better product mix, increase in the market

share by innovative sales and improving realization is the need of time. Company is operating

at around 70% of its capacity but is making loss. Therefore, disposing of assets to pay off its

debt is need of time.

Higher interest rates both for short term and long term is another matter of concern. In

present scenario when banks are offering at down to earth rates, company has failed to avail

that due to its lower creditworthiness. Debt service coverage ratio for EML is –6.44 and for

EML and GIL as together is –1.51 and therefore the company has defaulted in the repayment

of a loan. This is an alarming situation and needs immediate attention.

Management needs to pay attention to these some issues and it needs to encash the

company’s strength of the company like production capacity, its brand image, its market

share and like to be back in bright days.

RECOMMENDATIONSRECOMMENDATIONS

RECOMMENDATION

At the working level and the middle management levels, costs and profits

have not been considered important. These subjects have not been in the

consciousness of the individual. Reasons being, in large organizations the task of

an individual is so remote from the overall objectives of the top management that

the cost and profit impact of his actions or decisions is difficult to see. But in

today’s times when operational efficiency can be the key to success, cost reduction

program is must for the organization like Escort Mahle. On the basic values of a

cost reduction program, then lies in its ability to develop cost consciousness and

cost sensitivity in every employee.

COST REDUCTION PROGRAM CRITERIACOST REDUCTION PROGRAM CRITERIA

1. Top Management Sponsorship

“ The cost reduction program should be established by top management and

have the emphasis, attention, and administration of senior officials.”

Cost reduction must be viewed as the normal responsibility of every

supervisor and manager, from first-line supervision to the very top. The cost

reduction program must be integrated into the total organization objectives.

Performance in the program must be reviewed periodically at all levels of

the management and compared with the established goals. Responsibility for

administering the program needs to be defined clearly.

2. Comprehensive Scope

“The program should provide continuing emphasis on the cost reduction

throughout the entire organization and, to the extent feasible, among

principal subcontractors and suppliers.”

This may be achieved by the establishment of goals for all units of the

organization, down to a fairly low level.

3. Organization Structure

“Specific organizational elements and individuals in the organization should

be given formal responsibility for cost reduction program management and

coordination.”

4. Goals or Objectives

“The cost reduction program will include the establishment of goals or

objectives by the contractors in the form best suited to the organizational

structure and methods of operations.”

5. Rules and Procedures

“Organization should establish rules and procedures for documenting ad

reporting progress in the cost reduction program. These rules and procedures

should be based on the organization ‘s internal management practices and

should include definitions of savings, computational methods and formats,

techniques of documenting and reporting.”

6. Validation of Savings

“The contractor should have an effective internal system to validate reported

savings.”

7. Employee Motivation

“Positive efforts to promote cost conscious attitudes on the part of all

employees and the encouragement and recognition of ideas resulting there-

from should be an internal part of the program.” For example, a Memo

that asks for one cost reduction idea from member of supervision within

a specified time will have most dramatic results.

Individual recognition is always an effective motivator. A common

device is a commendation certificate, with a copy in this employment

record, to each employee who suggests a cost reduction that is implemented.

Not so common is to include cost effectiveness as one parameter to be

measured on a supervisory review form.

8. Idea Interchange

“There should be an effective program for the interchange of cost reduction

ideas throughout the organisation.”

COST REDUCTION PROGRAMS AT PLANTSCOST REDUCTION PROGRAMS AT PLANTS

Some reduction programs at the plant level are the need of time. Proper

implementation of such programs can make the difference in the cost levels of the

organization. Some are:

Employee Suggestion Program

“A formal program for soliciting, investigating and installing cost

reduction and improvement ideas from employees.” Employee suggestion

programs are common throughout industry and some departments of

government. Some organizations have had employee suggestion programs

for many years, thus attesting to their conviction that such programs are

worthwhile.

Management Improvement

“A formal, documented program consisting of specific items should

be established at the beginning of each year by management for the purpose

of improving operations, controls or organization. A means of focusing high

level attention and establishing timetables for improvement through

operations and organizational analysis, systems and procedures refinement,

performance data utilization, management by exception and techniques and

like.” Implementation of management improvements will result in

substantial monetary savings, better-coordinated management effort,

improved organization alignment, and management control tools. Included

in management is “Operation Underbrush”, a special program designed

to eliminate unnecessary costs in paperwork and procedures and improve

communications. There is also the reports and records management, which

controls the number of types of report and their distribution.

Work Simplification

The techniques of industrial engineering are closely interrelated, but

the most interesting principal features of work simplification are those that

enable a clear view of what is happening.

Zero Defects

This program is largely motivational, designed to improve quality and

generate in employees greater pride in workmanship. This program may not

appear to be directly related to cost reduction. However, it is obvious that if

quality is improved and rejection rates reduced, cost reduction will

inevitably occur. Therefore, in any organization with both a zero defects

program and a cost reduction program conscious attention should be applied

to their interrelationship. Sometimes the ground rules of the two programs

conflict.

NEW CONCEPTSNEW CONCEPTS

Some new concepts are earning popularity in the corporate world these days. These

could be the good source to cut cost, to make the system more efficient and speedy.

Variable Pay to PerformanceVariable Pay to Performance

A widely accepted tool in today’s time of intense competition, is offering

Variable Pay Packages to the employees. Many organizations are now

opting for this program. Even the old economy companies like L&T, SAIL,

etc. have started using this program. Originally this program is generated for

motivating the employees to perform better but today it is also used to cut

cost. In this program, a part of the salary is made variable, say 30%, which

depends on the performance of the employees. At lower level, organization

may set targets; at middle level to top level, standards need to defined. This

program demands complete transparency and healthy communication within

the organization. Such a move not only motivates the employees to perform

better but also helps the organization to identify poor performers.

Paperless OrganizationPaperless Organization

In this age of technology, the word paperless doesn’t surprise anybody. But

when it comes to implementation many people doesn’t take a lead. This is

because of some limitations of the system and the nature of business.

Despite of the fact that Escorts Mahle is well technically versed but still, to

large extent paperwork can be avoided. This not only reduces the cost but

also makes the system speedy and saves the invaluable time of the staff.

Business Process OutsourcingBusiness Process Outsourcing

Outsourcing is another new but widely accepted concept in today’s time.

This not helps to cut cost but also helps to concentrate on important works

rather than everything. Rational judgment of what should be outsourced to

whom the job is to be given should be taken.

FactoringFactoring

Since, the receivable management is a specialized type of activity involving

a lot of time and efforts, therefore, some firms do avail the services of

specialist organizations engaged in this business, known as factoring firms.

In this relationship, financial firm purchases the receivables of the firm in

the business of selling goods. Thus, factoring is a tool to release the working

capital tied up in credit, for more profitable uses and relieves the

management from collections job so they can concentrate on other important

activities. Though Escorts Mahle is efficiently handling its debtor but the

scope for perfection always remains. Therefore, Factoring can be a better

option for the organisation.

Limitations

The following analysis has been made on the basis of data collected through

Companies Annual reports. Such financial statements are sometimes modified and

don’t present the real situation. So, reliability of the data is the major limitation of the

analysis.

Menon Pistons Ltd. is not included in the study due to non-availability of the data.

Though Menon Pistons to have a respectable share in the market and therefore should

be included in the comparative study.

Non-access to some internal financial data limits me to have better insight to the

business. So, it limits to have in-depth analysis in certain areas.

Analysis of Data

For analyzing data the technique of ratio analysis, simple mathematical tools like

percentages, averages etc. have been used. Graphical presentation is made to highlight the

important issues.

REFRENCES REFRENCES

BIBLIOGRAPHY

BOOKS

Financial Management by R.P.Rustagi (Galgotia Publishing Company)

Analysis of Financial Statement by T.S.Grehwal (Sultan Chand & Sons)

Techniques of Financial Analysis: A Guide to value Creation

SITES

www.acmainfo.com

www.automeet.com

www.escortsmahle.com

www.goetzeindia.net

www.shriramindia.com

www.samkrgpistonsandrings.com

www.indiainfoline.com

www.bolnet.com

www.financialexpress.com

www.equityreasearch.com

www.corporatefinance.com

www.cfonet.com

http://www.cfonet.com/

http://www.corporatefinance.com/

http://www.equityreasearch.com/

http://www.financialexpress.com/

http://www.bolnet.com/

http://www.indiainfoline.com/

http://www.samkrgpistonsandrings.com/

http://www.shriramindia.com/

http://www.goetzeindia.net/

http://www.escortsmahle.com/

http://www.automeet.com/

http://www.acmainfo.com/

Finance - Working Capital - Escort Project

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