kuldeep havelles

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A Summer Project Study Submitted in Partial

Fulfillment for the Requirement of Two Year

Post Graduate Diploma in Management

(Full Time)

BY:MOHIT SHARMA

STUDENT

OF

JAIPUR NATIONAL UNIVERSITY

PROJECT GUIDE:MR. RAJESH GOYAL

(VP COMMERCIAL)

MR.RK KAJLA(DGM HR.)

DR.VK YADAV(MANAGER HR.)

2



TABLE OF CONTENT

Acknowledgement

Preface

Executive Summary

Objective of Study

Key Findings in Project

No. Topic Page No.

1. Chapter 1- Overview of Havells India

LTD.

1. History 9

2. Recognition In Media 13

3. Manufacturing Plants 15

4. Research And Development 165. Sylvania Acquisition 16

2. Chapter 2 – Introduction

1. Introduction- Financial Statement

Analysis

18

2. Techniques of Analysis of Financial

Statements

• Comparative Financial Analysis 19

• Common Size Statements 20• Trend Percentage Analysis 20

• Ratio Analysis 21

3. Chapter 3 – Ratio Analysis

3



1. Liquidity Ratio 33

2. Activity Ratio 40

3. Leverage Ratio 52

4. Profitability Ratio 63

5. Du Pont Analysis 86

ACKNOWLEDGEMENT

One of the most pleasant aspects of writing an acknowledgement is the

opportunity to thank all those who have contributed to it. Unfortunately,the list of expression of gratitude – no matter how extensive – is alwaysincomplete and inadequate. This acknowledgement is no exception.

I express my sincerest gratitude and thanks to hon’ble Mr. RAJESH

MEHROTRA (Director, JNU, JAIPUR) for whose kindness I had the

precious opportunity of attaining Research report. Under his brilliant

untiring guidance I could complete my Research report successfully

within time. His meticulous attention and invaluable suggestions have

helped me in simplifying the problem involved in the work.

.I would also like to thank all the employees at HAVELLS INDIALIMITED, who helped me at every step during my training period.

At last, I would thank to all my family, friends and my colleagues atHAVELLS for making valuable suggestions and giving me all sorts of help at the different stages for the preparation of this report.

4



MOHIT SHARMA

(PGDM)

PREFACE

Let me have the privilege to explain the interesting and knowledgeable

journey during my summer internship in Havells India Ltd.

Summer project is one of the essential part towards the partialfulfillment of the requirement of two year full time PGDM programme.In this line, I had an opportunity to convert my theoretical knowledge tomy very first practical corporate exposure.

This project was undertaken to study vital aspect of Ratio Analysis as Ifind this topic very interesting. The project is divided into variouschapters which give a clear picture of what my project is all about, rightfrom the introduction of the company to analysis &findings. For thefulfillment of the project I went through company’s annual reports, itsdifferent manufacturing units data, had conversations with my mentor and other employees of the company.

After that a good amount of research has gone in writing down thereasonand certain important aspects from the last quarter (Q4 2007-08) inaccordance with the ratio analysis and the overall study of the

company . This has helped in bringing out important points regardingthe recent improvements in certain ratios and overall consolidatedresults with SYLVANIA.

5



I hope everyone enjoy my project and find the approach interesting. Ihad a great deal of fun doing my research and learning about conceptualand practical things about a company’s financial position. I hope it willadd value to Havells and has also helped me in understanding andapplying the theoretical knowledge which I have gained in my first year of PGDM studies.

MOHIT SHARMA(PGDM)

EXECUTIVE SUMMARY

QRG Group is one of the fastest growing Electrical and Power Distribution Equipment Company in the country, manufacturing

products ranging from Building Circuit Protection, Industrial &Domestic Switchgear, Cables & Wires, Energy Meters, Fans, CFLs,Luminaries, Bath Fittings and Modular Switches.

The group comprises of 4 companies – Havells India Ltd. (the flagshipcompany), Standard Electricals, Sylvania and TTL. With 21 state-of-the-art manufacturing plants, 91 branch offices and a strong backing of over 8000 professionals across globe, the group has achieved rapidsuccess in the past few years.

This report consists of five chapters.

Chapter 1 gives the overview of Havells. This part of report covers the

history of Havells, Havells products for customers, manufacturing plants and research and development.

Chapter 2 introduces the reader to Financial Statement analysis and itsrelevance

Chapter 3 covers the analysis of financial statement using Ratio.

6



Chapter 4 consists of Quick Reference for investors, creditors and firmsitself.

Chapter 5 consist of Balance Sheet, Profit and Loss A/c and WorkingCapital tables for Havells for last 5 years.

OBJECTIVES OF THE STUDY OBJECTIV

The basic objective of studying the ratios of the company is toknow the financial position of the company.

To know the borrowings of the company as well as the

liquidity position of the company.

To study the current assets and current liabilities so as toknow whether the shareholders could invest in Havells India Ltdor not.

To study the profits of the business and net sales of the business and to know the stock reserve for sales of the business.

To know the solvency of the business and the capacity to giveinterest to the long term loan lenders (debenture holders) anddividend to the share holders.

To study the balance of cash and credit in the organization.

7



Study of Q4 FY08 results and highlight important changes indifferent ratios with respect to Q4 FY07

KEY RATIOS WHICH IMPROVED THIS FY2008

• CURRENT RATIO

• CASH RATIO

• QUICK RATIO

• DEBTORS TURNOVER RATIO

• DEBTORS DAYS

• WORKING CAPITAL TURNOVER RATIO

• DEBT EQUITY RATIO

• FUNDED DEBT TO TOTAL CAPITALISATION

• EQUITY RATIO

• RATIO OF CURRENT ASSETS TO PROPRIETOR FUNDS

• EXPENSE RATIO

• NET PROFIT RATIO

• CASH PROFIT RATIO

• INTEREST COVERAGE RATIO

• EARNING PER SHARE

8



• DIVIDEND PER SHARE

• EARNING YIELD

• ALTMAN Z SCORE

CHAPTER 1

OVERVIEW OF HAVELLS INDIA LTD

COMPANY BACKGROUND AND GROWTH

QRG Group , a billion-dollar-plus organization which ranks among thetop electric product companies in the world and is a major domestic andglobal player in the production and sales of an impressive range of electrical products ranging from electric cable to sophisticated

switchgears to lighting systems and fans. Havells is acknowledged as amanufacturer & supplier of the widest range of quality low voltageelectrical equipment, has achieved rapid success in the past few years,and has become a name synonymous with excellence and expertise inthe electrical industry.

9



Driven by a philosophy of dreaming big, empowering team members, aculture based on transparency, honesty, a high focus on ethical valuesand entrepreneurship at every level, the Havells of today is literally adream come true - a world class company which is one of most admiredorganizations in India. With a number of strategic alliances in place,QRG Group has shown phenomenal growth rate with the help of various

joint ventures, acquisitions, mergers and takeovers. The group, cateringto the needs of residential and industrial market globally, has elevenmanufacturing units in India. Following on its philosophy of "think big",the group's product basket offers end-to-end electrical solutions. Thecompany manufactures a wide range of high quality electrical productssuitable for domestic and industrial use.

The group has recorded a turnover of Rs. 1681 crores in the previousfinancial year and is poised for another quantum growth with

projections suggesting a 50% increase over previous year. While the

industry has been growing at a pace of 20% CAGR, QRG Enterpriseshas been marching faster at a compounded annual growth rate of 35% inthe past decade

VISION

To be a globally recognized corporation that provides best electrical &lighting solutions, delivered by best-in-class people.

MISSION

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To achieve our vision through fairness, business ethics, global reach,technological expertise, building long term relationships with all our associates, customers, partners, and employees.

VALUES

Customer DelightA commitment to surpassing our Customer expectations.

Leadership by ExampleA commitment to set standards in our

business and transactions based on mutual trust.

Integrity and TransparencyA commitment to be ethical, sincere andopen in our dealings.

Pursuit of Excellence

A commitment to strive relentlessly,

to constantly improve ourselves, our teams, our services and products so as

to become the best in class.

11



Havells India Ltd, a billion-dollar-plus organization, and one of the

largest & India's fastest growing electrical and power distributionequipment company, manufacturing products ranging from BuildingCircuit Protection, Industrial & Domestic Switchgear, Cables & Wires,Energy Meters, Fans, CFL Lamps, Luminaries for Domestic,Commercial & Industrial application and Modular Switches.

Havells owns some of the prestigious global brands like Crabtree*,Sylvania, Concord, Luminance, Claude, and Sylvania: Linolite, SLILighting & Zenith.

With 91 branches / representative offices and over 8000 professionalsspread over 50 countries across the globe, the group has achieved rapidsuccess in the past few years. Its 20 state-of-the-art manufacturing

plants spread over India, Europe; Latin America & Africa churns out

globally acclaimed products like Switchgear, Luminaries, and CFLs etc.Havells India Ltd is a name synonymous with excellence and expertisein the electrical industry. Its 20000 strong global distribution network isalways ready to service its clients.

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The company has acquired a number of International certifications, like

CSA, KEMA, CB, CE, ASTA, CPA, SEMKO, SIRIUM (Malaysia),SPRING (Singapore), TSE (Turkey), SNI (Indonesia) and EDD(Bahrain) for various products. Today Havells and its brands haveemerged as the preferred choice for a discerning range of individual andindustrial consumers both in India and abroad.

The essence of its success lies in the expertise of a fine team of professionals, strong relationship with associates, the ability to adaptquickly, efficiently and ably supported with the vision to think ahead.

SHAREHOLDING PATTERN

The shareholding pattern after taking into consideration the conversionof warrants issued to Warburg Pincus.

The promoters holding will be 60% with Warburg Pincus as the maininvestor holding 11%.

13Indian

Public

9%

Mutual

Funds

4%

FIIs

16%

Warburg

Pincus

11%

Promoters

60%



HAVELLS PRODUCTS RANGE

ELECTRICAL:

• Circuit Protection Devices

• Power Cables & Wires

• Fans

•

Lighting• CFL’S

• Wiring Accessories

• Power Capacitors

• Meters

• Motors

OTHERS:

Bath Fittings & Accessories

INFRASTRUCTURE

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• 27 Sales Office• 1000+ Sales Professionals• 24 Stock Points for Pan India Presence

• Exclusive Vertical- Open Format Store Chain

INTERNATIONAL CERTIFICATION

• Largest numbers of International Certifications.

• Only Indian Company to get “Kema Keur” Certifications.

• Only Company in India to get “S” Mark for Fans.

• All plants are ISO-9000 Certified.

SALES GROWTH

HAVELLS INDIA LTD.(All figures in crores)

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MANUFACTURING PLANTS

Powerful trends are shaping up industry for the 21st century. Because of rapid spread of advanced technologies, complexity of work is increasing- almost daily. With the state of the art equipments and manufacturingfacilities, QRG group is helping to boost safety in workplaces from thefactory to the offices, domestic buildings to commercial plazas. All themanufacturing units are ably supervised and controlled by technocratsand industry specialists.

The group has well managed, well-equipped tool rooms with machineslike CCV Line, CNC Machines, EDM Wire Cut, Spark Erosion

Machines, Lathes and Surface Grinders.

Our strategic alliances with some of the leading technology corporationsin the world of electrical engineering, ensure constant access to thelatest developments in the international markets, which are then adaptedto the tough tropical conditions.

Our manufacturing units are fully equipped with the latest and mostsophisticated facilities in India. And in the hands of our highly qualifiedtechnical experts, this results in some of the most advanced product

development in the country.

All our manufacturing plants are ISO: 2000 certified. We are in the process of attaining ISO: 14001 for all the plants. The first one to getthis certification is TTL, the meter manufacturing plant.

Among top10 MCB Manufacturers in the world with 2 plants Largest manufacturer of CFLs in India with installed capacity

of 2.5 million units per month

Largest Integrated Fan factory in India with capacity of 2,00,000 fans per month

Wires & Cables capacity being augmented to 150 croreS per month

16



RESEARCH AND DEVELOPMENT

Innovation is the hallmark of every vital development at QRG. Newideas, inventions deepen scientific knowledge and give its work force anew impetus towards technical progress.

QRG technological strengths and its endeavor towards continuousresearch & development have allowed it to fulfill its responsibilities

towards its customers. The responsibility of providing its customers the best products and zero defect services to enable them to be comfortableand secure in usage of electricity.

Havells has recently invested 20 million dollars in a new center for research and innovation. This centre has been set-up at the company'sH.O. premises in Noida.

The task of this centre is to provide the theoretical & experimentalfoundations for all segments of electrical engineering. The centre

closely cooperates with the various departments to provide the best andthe latest in terms of technology and design. The Group has also decidedto dedicate 2% of its turnover towards R&D.

GETTING BIGGER: SYLVANIA AQUISITION

Through acquisition of SLI Sylvania, the company got a strong global presence in over 40 countries. During The third Quarter of financial year 07, Havells India through its wholly subsidiary, Havells Netherlands,acquired 100% control in Frankfurt – based SLI Sylvania , which is aleading global designer and provider of the lighting systems for lampsand Fixtures.Havells India has acquired SLI Sylvania's lighting business for $300million (about Rs1, 350 crore). This makes it the biggest overseas

17



takeover by an Indian electrical equipment manufacturer until date. Theall-cash deal was funded through a mix of debt and internal accruals.The subsidiary also raises a debt of $265 million from Barclays Bank tofund the deal.

CHAPTER 2

INTRODUCTION

ANALYSIS OF FINANCIAL STATEMENTS (AFS)

AFS refers to the process of the critical examination of the financialinformation contained in the financial statements in order to understandand make decisions regarding the operations of the firm. The AFS is astudy of the relationship among various financial facts as given in a setof financial statements. The basic financial statements i.e., the BS andthe IS contain a whole lot of historical data. The complex figures asgiven in these financial statements are broken up into simple andvaluables elements and significance relationships are established

between the elements of the same statements or different financialstatements. This process of dissection, establishing relationships andinterpretation thereof to understand the working and financial positionof affirm is called the AFS. Thus, AFS is the process of establishing and

identifying the weaknesses and strength of the firm. It is indicative of two aspects of a firm i.e., the profitability and the financial position andthe objectives of the AFS.

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OBJECTIVES OF AFS

Broadly, the objective of the AFS is to understand the informationcontained in financial statements with a view to know the weaknesses

and strength of the firm and to make a forecast about the future prospects of the firm and thereby enabling the financial analyst to takedifferent decisions regarding the operation of the firm. The objectives of the AFS can be identified as:

a) To assess the present profitability and operating efficiency of the

firm as a whole as well as for its different departments. b) To find out the relative importance of different components of thefinancial position of the firm.

c) To identify the reasons for change in the profitability position of the firm, and

d) To assess the short term as well as the long-term liquidity positionof the firm.

TECHNIQUES/TOOLS OF THE AFS

AFS can be undertaken by different persons and for different purposes,therefore, the methodology adopted for the AFS may be varying fromone situation to another. However, the following are some of thecommon techniques of the AFS:

a) Comparative financial statements. b) Common- size financial statements.c) Trend percentage analysis, andd) Ratio analysis

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COMPARITIVE FINANCIAL STATEMENTS

(CFS)

In CFS, two or more BS and/or the IS of a firm are presented

simultaneously in columnar form. The financial data for two or moreyears are placed and presented in adjacent columns and thereby thefinancial data is provided a times perspective in order to facilitate

periodic comparison. In CFS, the BS and the IS for number of years are presented in condensed form for years to years comparison and toexhibit the magnitude and direction of changes.

The preparation of the CFS is based on the premise that a statementcovering a number of years is more meaningful and significance than

for a single year and that the financial statements for one periodrepresent only one phase of the long and continuous history of the firm.

Now-a-days, most of the

published annual reports of the companies provide important statisticalinformation about the company in condensed from for the last so manyyears. The presentation of such data enhances the usefulness of thesereports and brings out more clearly the nature and trends of changesaffecting the profitability and financial position of the firm.

Therefore, the CFS helps a financial analyst in horizontal analysis of thefirm and in establishing operating and positional trend of the firm. TheCFS may be prepared to show:

• The absolute amount of different items in monetary terms

• The amount of periodic changes in monetary terms

• The percentages of periodic changes to reveal the proportionatechanges.

The CFS can be prepared for both the BS and IS.

COMMON SIZE STATEMENT (CSS)

20



The CSS represents the relationship of different items of a financialstatement with some common item by expressing each item as a

percentage of the common item. In common size balance sheet, each of the balance sheets is stated as percentage of net sales. The percentagesfor different items are computed by dividing the absolute amount of thatitem by common base (i.e., the balance sheet total or the net sales as thecase may be) and then multiplying by 100. The percentages socalculated can be easily compared with the corresponding percentagesin some other period. Thus, the CSS is useful not only in intra-firmcomparisons over a series of different year but also in making inter-firmcomparisons for the same year or for several years.

TREND PERCENTAGE ANALYSIS (TPA)

The TPA is a technique of studying several financial statements over aseries of years. In TPA, the trend percentage are calculated for each item

by taking the figure of that item for some base year as 100. Therefore,the trend percentage is percentage relationship, which each item of different years bears to the same item in the base year. Any year can betaken as base year, but generally, the initial year is taken as the baseyear. Therefore, each item of base year is taken as 100 and the sameitem for other years is expressed as a percentage of the base year.

RATIO ANALYSIS

A ratio is a quantity that denotes the proportional amount or magnitudeof one quantity relative to another.Ratio Analysis is the most commonly used analysis to judge thefinancial strength of a company. Many entities like research houses,investment bankers, financial institutions and investors make use of thisanalysis to judge the financial strength of any company.

Fundamental Analysis has a very broad scope. One aspect looks at thegeneral (qualitative) factors of a company. The other side considerstangible and measurable factors (quantitative). This means crunchingand analyzing numbers from the financial statements. If used in

21

http://en.wikipedia.org/wiki/Quantity

http://en.wikipedia.org/wiki/Proportional_(mathematics)

http://en.wikipedia.org/wiki/Quantity

http://en.wikipedia.org/wiki/Proportional_(mathematics)



conjunction with other methods, quantitative analysis can produceexcellent results.Ratio analysis is not just comparing different numbers from the balancesheet, income statement, and cash flow statement. It is comparing thenumber against previous years, other companies, the industry, or eventhe economy in general. Ratios look at the relationships betweenindividual values and relate them to how a company has performed inthe past, and might perform in the future.

Financial ratios are calculated from one or more pieces of informationfrom a company's financial statements. For example, the "gross margin"is the gross profit from operations divided by the total sales or revenuesof a company, expressed in percentage terms. In isolation, a financialratio is a useless piece of information. In context, however, a financial

ratio can give a financial analyst an excellent picture of a company'ssituation and the trends that are developing.

A ratio gains utility by comparison to other data and standards. Takingour example, a gross profit margin for a company of 25% ismeaningless by itself. If we know that this company's competitors have

profit margins of 10%, we know that it is more profitable than itsindustry peers are, which is quite favorable.

22



CHAPTER 3

RATIO ANALYSIS

FINANCIAL RATIO ANALYSIS

Financial ratio analysis involves the calculation and comparison of ratios which are derived from the information given in the company'sfinancial statements. The historical trends of these ratios can be used tomake inferences about a company's financial condition, its operationsand its investment.

23



Financial ratio analysis groups the ratios into categories that tell usabout the different facets of a company's financial state of affairs. Someof the categories of ratios are described below:

• Leverage Ratios, which show the extent that debt, is used in acompany's capital structure.

• Liquidity Ratios, which give a picture of a company's short-termfinancial situation or solvency.

• Operational Ratios, which use turnover measures to show howefficient a company is in its operations and use of assets.

• Profitability Ratios, which use margin analysis and show thereturn on sales and capital employed.

• Solvency Ratios, which give a picture of a company's ability to

generate cash flow and pay it financial obligations.

CLASSIFICATION OF RATIOS

The use of ratio analysis is not confined to financial manager only.There are different parties interested in the ratio analyses for knowingthe financial position of a firm for different purposes. In vies of varioususers of ratios, there are many types of ratio which can be calculatedfrom the information given in the financial statements. The particular

purpose of the user determines the particular ratios that might be used

for financial analysis. Similarly, the interests of the owners and themanagement also differ. The shareholders are generally interested in the

profitability or dividend position of a firm while management requiresinformation on almost all the financial aspects of the firm to enable it to

protect the interests of all parties.

24



RATIOS

(A) (B)

(C)TRADITIONAL FUNCTIONAL CLASSIFICATION

SIGNIFICANCE RATIOS

CLASSIFILCATION OR OR

OR

STATEMENT RATIOS CLASSIFICATION ACCORDING TO RATIOS

ACCORDING

TESTS IMPORTANCE

1. BALANCE SHEET RATIOS 1.LIQUIDITY RAT IOS

1.PRIMARY RATIOS

2.LEVERAGE RATIOS

2.SECONDARY 2.PROFIT AND LOSS A/C

RATIOS 3. ACTIVITY RATIOS

4. PROFITABILITY

3. COMPOSITE/MIXED RATIOS

(A)TRADITIONAL CLASSIFICATION OR STATEMNT

RATIOSTraditional classification or classification according to statement, from which

these ratios are calculated, is as follows.

TRADITIONAL CLASSIFICATION OR STATEMENT RATIOS

BALANCE SHEET RATIOS PROFIT AND LOSS A/C RATIOS

COMPOSITE/MIXED

2. LIQUID RATIO (ACID TEST 2.OPERATING RATIO 2. DEBTORS

TURNOVER

OR QUICK RATIO) 3. OPERATING PROFIT RATIO 3. PAYABLE

TURNOVER RATI0

3. ABSOLUTE LIQUIDITY RATIO 4.NET PROFIT RATIO

25



4. DEBT EQUITY RATIO 5.EXPENSE 1. CURRENT RATIO

1.GROSS PROFIT RATIO 1. STOCK TURNOVER RATIO

RATIO

5. PROPRIETORY RATIO 6.INTEREST COVERAGE RATIO 4. RETURN ON EQUITY

5. RETURN ON

6. ASSETS-PROPRIETORSHIP SHAREHOLDERS

FUNDS

RATIO 6. RETURN ON CAPITAL

7. CAPITAL INVENTORY TO CAPITAL EMPLOYED

WORKING CAPITAL RATIO

7. CAPITAL TURNOVER

8. RATIO OF CURRENT 8. WORKING CAPITAL

ASSETS TO FIXED ASSETS TURNOVER

RATIO.

EXPLAINATION

1. BALANCE SHEET OR POSITION STATEMENT RATIOS:

Balance sheet ratios deal with the relationship between the two balance sheet items. Both its items must however, pertain to thesame balance sheet.

2. PROFIT AND LOSS A/C OR REVENUE/INCOMESTATEMENT RATIOS: These ratios however deal with therelationship between two profit and loss A/C items. Both theitems must however belong to the same profit and loss A/C.

3. COMPOSITE/MIXED RATIOS OR INTER STATEMNT

RATIOS: These ratios exhibit the relation between a profit andloss A/C of income statement item and a balance sheet item.

(B) FUNCTIONAL CLASSIFICATION OR CLASSIFICAITON ACCORDING TO TESTS

In view of the financial management or according to the tests satisfied,various ratios have been classified as below:

26



FUNCTIONAL CLASSIFICATION IN VIEW OF FINANCIAL MANAGEMENT OR

CLASSIFICATION ACCORDING TO TESTS

LIQUIDITY RATIOS LONGTERM SOLVENCY AND ACTIVITY RATIOS

PROFITABILITY RATIOS LEVERAGE RATIOS

(a)1. CURRENT RATIO FINANCIAL OPERATING 1.INVENTORY TURNOVER (a)IN

RELATION TO

SALE

2. LIQUID RATIO (ACID COMPOSITE RATIO 1.GROSS

PROFIT

TEST OR QUICK RATIOS 1.DEBT EQITY RATIO 2.DEBTORS TURNOVER RATIO

3. ABSOLUTE LIQUID 2.DEBT TO TOTAL CAPITAL 3.FIXED ASSET TURNOVER

2.OPERATING RATIO

OR CASH RATIO 3.INTEREST COVERAGE 4.TOTAL ASSET TURNOVER

3.OPERATING PROFIT

4. INTERNAL MEASURE 4.CASH FLOW/DEBT RATIO RATIO

5. CAPITAL GEARING 5.WORKING CAPITAL 4.NETPROFIT RATIO

(b)1. DEBTORS TURNOVER TURNOVER RATIO 5.EXPENSE

RATIO

RATIO 6.PAYABLE TURNOVER (b)IN

RELATION TO

2. CREDITOR TURNOVER RATIO

INVESTMENTS

RATIO 7.CAPITAL EMPLOYED 1. RETURN

ON

3. INVENTORY TURNOVER TURNOVER

INVESTMENTS

RATIO 2. RETURN

ON

CAPITA

L

3. RETURN

ON EQITYCAPITA

L

4. RETURN

ON TOTAL

RESOUR

CES

5.

EARNING PER

SHARE

6. PRICE

EARNING

RATIO

27



EXPLAINATION

1. LIQUIDITY RATIOS: There are ratios, which measure the

short-term solvency or financial position of a firm. These ratiosare calculated to comment upon the short term paying capacity of a concern or the firm ability to meet its current obligations.

2. LONG TERM SOLVENCY AND LEVERAGE RATIOS:

Long-term solvency ratios convey a firm’s ability to meet theinterest cots and repayments schedules of its long termobligations.

3. ACTIVITY RATIOS: Activity ratios are calculated to measurethe efficiency with which the resources of a firm have beenemployed. These ratios are also called turnover ratios because

they indicate the speed with which assets are being turned over into sales.

4. PROFITABILITY RATIOS: These ratio measures the results of business operations or overall performance and effectiveness of the firm. There are two type of profitability ratios 1.in relation tosales 2.in relation to investments

(C) CLASSIFICATION ACCORDING TO

SIGNIFICANCE OR IMPORTANCE

The ratios have also been classified according to their significance or importance. Some ratios are more important then others and the firmmay classify them al primary and secondary ratios. The British Instituteof management has recommended the classification of the ratiosaccording to importance for inter firm comparison. For inter-firmcomparisons the ratios may be classified as Primary and Secondaryratios. The primary ratios is one of which is of the prime importance to aconcern; thus return on the capital is employed is named as primaryratio. The other ratios, which support the other ratios, are calledsecondary ratios.

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INTERPRETATIONS THEORY OF THE RATIOS

The interpretations of the ratios are an important factor. Thoughcalculation of the ratios is important but it is only a clerical task whereas

interpretation needs skill, intelligence and foresightedness. The inherentlimitations of the ratio analysis should be kept in mind whileinterpreting them. The impact of the factors such as price level changes,change in accounting policies, window dressing etc., should be also bekept in mind when attempting to interpret ratios. The interpretation of the ratios can be made in the following ways.

1. SINGLE ABSOLUTE RATIOS : the single ratios can be studiedin relation to certain rules of thumb, which are based upon well-

proven conventions.

2. GROUP OF RATIOS : Ratios may be interpreted by calculating agroup of related ratios. A single ratios supported by a group of related ratios become more understandable and meaningful.

3. HISTORICAL COMPARISION : one of the earliest and most popular ways of evaluating the performance of the firm is to compareits present ratios with the past ratios called comparison overtime.

4. PROJECT RATIOS : Ratios can be also calculated for futurestandards based upon the projected or perform financial statements.These future ratios may be taken as standard for comparison and theratios calculated on actual financial statements can be compared withthe standard ratios to find out variances.

5. INTER FIRM COMPARISION : Ratios of one firm can also becalculated with the ratios of the other selected firm in the sameindustry at the same point of time. This kind of comparison helps in

evaluating relative financial position and performance of the firm.

GUIDELINES OR PRECUATIONS FOR THE USE OF

RATIOS

29



The calculation of the ratios may not be a difficult task but their use isnot easy. The information on which these are based, the constraints of the financial statements, objective for using them, the caliber of theanalyst, etc. are the important factors which influence the use of ratios.Following are the guidelines for interpreting ratios.

1. ACCURACY OF THE FINANCIAL STATEMENTS : Thereliability of the ratios are linked with the data available in thefinancial statements. Before calculating the ratios one should seewhether the proper conventions have been used for preparingfinancial statements or not.

2. OBJECTIVE OF THE PURPOSE OF ANALYSIS : The typeof ratios to be calculated will depend upon the purpose for which

these are required. If the purpose is to study the financial positionthen the ratios of current assets and liabilities will be studied. The

purpose of “user” is important for the analysis of ratios.

3. SELECTION OF RATIOS: another precaution in ratio analysisis the proper selection of appropriate ratios. The ratios shouldmatch the purpose for which these are required.

4. USE OF STANDARDS : The ratios will give an indication of financial position only when discussed with the reference tocertain standards. Unless otherwise these ratios are comparedwith certain standards one will not be able to reach atconclusions.

5. CALIBER OF THE ANALYST: The ratios are only the tools of the analysis and their interpretation will depend upon the caliber and competence of the analyst. He should be familiar with thevarious financial statements and significant changes etc.

6. RATIOS PROVIDE ONSY A BASE: The ratios are onlyguidelines for there analyst, he should not base his decisionsentirely on them. He should study any other relevant information,situation in concern, other economic environment.

30



USE AND SIGNIFICANCE OF RATIO ANALYSIS

The ratio analysis is one of the most powerful tools of financial analysis.It is used as a device to analyze and interpret the financial health of enterprise. Just like the doctor examines the patient by recording his

body temperature, blood pressure, and etc. before making his conclusion

regarding the illness and before giving his treatment.The use of ratios is not confined to financial managers only but there aredifferent parties also which are interested in the ratio analysis for knowing the financial position of a firm for different purposes likesupplier of goods on credit, financial institutions, invertors, shareholdersetc. With the use of ratio analysis one can measure the financialcondition of a firm and can point our whether the condition is strong,good, poor etc. Applications of the ratio analysis are:

MANAGERIAL USES OF RATIO ANALYSIS

1. HELPS IN DECISION MAKING : Financial statementsare prepared primarily for decision-making. Ratio analysishelps in making decisions from the information provided inthese financial statements.

2. HELPS IN FINANCIAL FORECASTING AND

PLANNING: Ration analysis is of much help in financialforecasting and planning. Planning is looking ahead and theratios calculated for a number of years work as a guide for the future. Meaningful conclusions can be drawn fromthese ratios.

31



3. HELPS IN COMMUNICATING : The financial strengthsand weakness of the firm are communicated in a more easyand understandable manner by the use of these ratios. Theratios help in communication and enhance the value of thefinancial statements.

4. HELPS IN COORDINATION : Ratios even help incoordination, which is of utmost importance in effective

business management. Better communication of efficiencyand weakness of an enterprise results on better coordinationin the enterprise.

5. HELPS IN CONTROL: Ratio analysis even helps in

making effective control of the business. Standard ratioscan be based upon Performa of financial statements andvariance or deviations, if any, helps in comparing the actualwith the standards so as to take a corrective action at theright time.

6. OTHER USES : There are so many other uses of the ratioanalysis. It is an essential part of the budgetary control andstandard costing. Ratios are of immense importance in theanalyses and interpretation of financial statements as they

bring the strength or weakness of the firm

UTILITY TO SHARE HOLDERS AND INVESTORS

The investor in the company will like to assess the financial position of the concern where he is going to invest. Firstly the

investor will try to assess the value of fixed assets and the loansraised against them. The investor will feel satisfied only if theconcern has sufficient amount of assets. Long-term solvency ratioswill help him in assessing the financial position of the concern.Profitability ratios, on the other hand, will be useful to determine

32



profitability position. Ratio analysis will be useful to the investor inmaking up his mind whether present financial position of the concernwarrants further investment or not.

UTILITY TO THE CREDITORS

The creditors or the suppliers extend short-term credit to theconcern. They are interested to know whether financial position of the concern warrants their payments at a specified time or not. Theconcern pays short-term creditors out of its current assets. If thecurrent assets are quiet sufficient to meet current liabilities then thecreditor will not hesitate in extending credit facilities. Current and

acid test ratios will give an idea about their current financial positionof the concern.

UTILITY TO THE EMPLOYEES

The employees are also interested in the financial position

of the concern especially profitability. Their wage increase andamount of fringe benefits are related to the volume of profitsearned by the concern. The employees make use of informationavailable in the financial statements. Various profitability ratiosrelating to gross profit, operating, net profit, etc., enable the

33



employees to put forward their viewpoint for the increase of wages and other benefits.

UTILITY TO GOVERNMENT

Government is interested to know the overall strength of theindustry. Various financial statements published by industrial unitsare used to calculate ratios for determining short-term. Long-termand overall financial position of concerns. Profitability indexes canalso be prepared with the help of ratios. Government may base itsfuture policies on the bases of industrial information available fromvarious units. The ratios may be used as indicators of overall

financial strength of public as well as private sector. In the absenceof the reliable economic information, government plans and policiesmay not prove successful.

TAX AUDIT REQUIREMENTS

The Finance Act, 1984, inserted section 44 AB in the Income TaxAct. Under this section every assessed engaged in any business andhaving turnover or gross receipts exceeding Rs. 40 lakh is required toget the accounts audited by a charted accountant and submit the taxaudit report before the due date for filing the return of income under section 139(1). In case of a professional, a similar report is required if the gross receipts exceeds Rs. 10 lacks. Clause 32 of the income TaxAct t\requires that the following accounting ratios should be given:

1. Gross Profit/turnover

2. Net Profit/turnover 3. Stock-in-trade/turnover 4. Materials consumed/Finished Goods Produced

34



LIMITATIONS OF THE RATIO ANALYSIS

LIMITED USE OF A SINGLE RATIO: A single ratio, usually,does not convey much of a sense. To make a better interpretationa number of ratios have to be calculated which is likely to confusethe analyst than help him in making any meaningful conclusion.

LACK OF ADEQUATE STANDARDS : There are no well-accepted standards or rules of thumb for all ratios, which canaccept as norms. It renders interpretation of the ratios difficult.

INHERENT LIMITATIONS OF ACCOUNTING : like

financial statements, ratios also suffer from the inherent weaknessof accounting records such as their historical nature.

CHANGES OF ACCOUNTING PROCEDRURE : Changes inaccounting procedure by a firm often makes ratio analysismisleading e.g. Changes in the valuation of inventories.

WINDOW DRESSING : Financial statements can easily bewindow dressed to present a better picture of its financial and

profitability position to outsiders. Hence one has to be verycareful from making a decisions from ratios calculated from suchfinancial statements.

PERSONAL BIAS: Ratios are only a means to financial analysisand not an end in itself. Ratios have to be interpreted and different

people may interpret the same ratios in different ways.

UNCOMPARABLE: Not only industries differ in their nature but also the firms of the similar business widely differ in their

size and accounting procedures etc., It makes the comparison of ratios difficult and misleading. Moreover, comparisons are madedifficult due to differences in definitions of various financialterms used in the ratio analysis.

35



ABSOLUTE FIGURES DISTORTIVE : Ratios devoid of absolute figures may prove distractive, as ratio analysis is

primarily a quantitative analysis and not qualitative analysis.

PRICE LEVEL CHANGES : While making ratio analysis, noconsideration is made to the changes in price levels and thismakes the interpretation of the ratios invalid.

RATIOS NO SUBSTITUTE : Ratio analysis is merely a tool of financial statements. Hence, ratios become useless if separatedfrom the statements from which they are computed.

1. LIQUIDITY RATIOS

The liquidity refers to the maintenance of cash, bank balance and thoseassets, which are easily convertible in cash in order to meet theliabilities as and when arising. The liquidity ratios study the firm’sshort-term solvency and its ability to pay off the liabilities. The liquidityratios are also called the Balance Sheet ratios. The Liquidity Ratiosmeasures the ability of the firm to meet its liabilities. The greater theamount of current assets relative to current liabilities, the safer the firmwould be, other things being equal. The quick ratio imposes a toughmeasure of liquidity. It removes the inventory from its calculations toidentify how much money the firm can generate from its current assetsto pay current liability without relying on the inventories.

The liquidity ratios, however, suffer from the following limitations,which must be considered by an analyst:

36



a) The value of current assets can be manipulated by changing theAccounting policies e.g., method of valuation of inventories or

marketableSecurities etc.

b) The figure of current liabilities on the balance sheet can also beManipulated by postponing the payment of the liabilities by a few

daysBeyond the balance sheet date.

c) The liquidity position depicted by the liquidity ratios is essentiallystatic

in nature i.e., on the balance sheet date only. It may happen that thefirm

might have faced severe difficulties in paying the liabilities

throughoutthe year and the liquidity position might have improved only at the

endof the year. So, the liquidity ratios calculated on the basis of the year

endfigure will not disclose this fact. Similarly, two specific current

liabilitiesi.e., provision for tax and proposed dividends appear only on the lastWorking day. Hence, the liquidity ratios are unnecessarily affected

byThese current liabilities which were not there throughout the year.

a) CURRENT RATIO

Current ratio may be defined as the relationship between current assetsand current liabilities. This ratio is also known as working capital

ratio, is a measure of general liquidity and is most widely used to makethe analysis of the short-term position or liquidity of a firm. It is

37



calculated by dividing the total of current assets by total of the currentliabilities.

CURRENT RATIO = __CURRENT ASSETS__

CURRENT LIABILITIES

Two basic components of this ratio are current assets and currentliabilities. Current assets include cash and those assets, which can be

easily converted into cash within a short period generally, one year,such as marketable securities, bills receivable, sundry debtors etc.Current liabilities are those obligations which are payable within ashort period of generally one year and include outstanding expenses,

bills payable, sundry creditors, accrued expenses, dividend payable

etc.

PRACTICAL CALCULATION OF CURRENT RATIO

FOR HAVELLS

38



TABLE

YEAR 2004 2005 2006 2007 2008

CURRENT

ASSETS

(IN LACS) 19,437 30,386 37,158 36,615 64,029

CURRENT

LIABILITIES

(IN LACS) 7,839 13,112 23,261 28,169 47,405

CURRENT

RATIO

2.50 2.31 1.60 1.30 1.3

GRAPH

(REFERRING THE CURRENT RATIO TABLE FOR HAVELLS

INDIA LTD.)

39



2.52.31

1.6

1.31.3

0

0.5

1

1.5

2

2.5

3

CURRE

RATIO

COMMENT

The current ratio is at 1.3, which is quite satisfactory value, thus

Havells is in a good position and can repay all its current liabilities

out of its current assets. However, 1.3 in 2008 signifies that Havells

after paying its current liabilities still has 30% of the amount

equivalent to current liability of the company for further use. The

fall in current ratio during last five year is a result of CHANNELFINANCING, which was initiated by the company in year 2005.

b)QUICK OR ACID TEST OR LIQUID RATIO

40



Quick Ratio, also known as Acid Test or Liquid Ratio is more rigoroustest of liquidity than the current ratio. The term ‘liquidity’ refers to theability of a firm to pay its short-term obligations as and when they

become due. The two determinants of current ratio, as a measure of liquidity are current assets and current liabilities. Current assets includeinventories and prepaid expenses, which are not easily convertible intocash within a short period. Current assets include inventories and

prepaid expenses, which are not easily convertible into cash within ashort period. Quick ratio may be defined as the relationship betweenquick/liquid assets and current or liquid liabilities. An asset is said to beliquid if it can be converted into cash within a short period without lossof value. In that sense, cash in hand and cash art bank are most liquid

assets. The other assets, which can be included in the liquid assets andsundry debtors, marketable securities and short-term or temporaryinvestments. Inventories cannot be termed to be liquid asset becausethey cannot be converted into cash immediately without a sufficient lossof value. In the same manner, prepaid expense is also excluded from thelist of quick/liquid assets because they are not expected to be convertedinto cash. The quick ratio can be calculated by dividing the total of thequick assets by total current liabilities.

QUICK RATIO = QUICK OR LIQUID ASSETS

QUICK/LIQUID LIABILITIES

41



PRACTICAL CALCULATION OF QUICK RATIO FOR

HAVELLS INDIA LTD.

TABLE

YEAR 2004 2005 2006 2007 2008

LIQUID

ASSETS

(IN LACS) 13,824 19,779 18,097 12,665 21,001

LIQUID

LIABILITIES(IN LACS) 7,839 13,112 23,261 28,169 47,405

LIQUID

RATIO1.76 1.51 0.77 0.45 0.44

42



GRAPH

(REFERRING THE QUICK RATIO TABLE FOR

HAVELLS INDIA LTD.)

1.76

1.51

0.77

0.45 0.44

0

0.5

1

1.5

2

2004 2005 2006 2007 2008

QUICK RATIO

COMMENT

There is a fall in the Quick Ratio during the last 5 years , which has

satisfactory value of 0.77 in year 2006 but the value hasdecreased further in year 2007 and 2008 thus, Havells must

increase its Quick ratio in order to maintain its liquidity to

pay its short term obligations . However, the value of QR

indicates the extent to which a company can pay its current

liabilities without relying on the sale of inventory, which is

quite stable for Havells.

43



C) ABSOLUTE LIQUID RATIO OR CASHRATIO

Although receivables, debtors and bills receivables are generally moreliquid than inventories, yet there may be doubts regarding their realization into cash immediately or in time. Hence, some authorities areof the opinion that the absolute liquid ratio should also be calculatedtogether with current ratio and acid test ratio so as to exclude evenreceivables from the current assets and find our the absolute liquid

assets. Absolute liquid assets include cash in hand and at bank andmarketable securities or temporary investments. The acceptable normfor this ratio is 50% or 0.5:1 or 1:2 i.e. Re. 1 worth absolute liquid assetsare considered are considered adequate to pay Rs. 2 worth currentliabilities in time as the creditors are not expected to demand cash at thesame time and then cash may also be realized from debtors andinventories. Thus

ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETSCURRENT LIABILITIES

ABSOLUTE LIQUID ASSETS = CASH AND BANK + SHORT TERM

SECURITIES

44





GRAPH

(REFERRING THE CASH RATIO TABLE FOR

HAVELLS INDIA LTD.)

0.32

0.24

0.18

0.320.29

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

2004 2005 2006 2007 2008

CASH RATIO

COMMENTSThe Cash Ratio for Havells is very satisfactory as it indicates that

the firm will be able to meet its liabilities as the creditors are not

expected to demand cash at the same time and then cash may be

realized from debtors and inventories.

46



EFFICIENCY/ACTIVITY RATIOS

Funds are invested in various assets in business to make sales and earn profits. The efficiency with which asserts are managed directly affectthe volume of sales. The better the management of assets, the larger isthe amount of sales and the profits. Activity ratios measure theefficiency or effectiveness with which a firm manages its resources or assets. These ratios are also called turnover ratios because they indicatethe speed rate at which the funds invested in inventories are convertedinto sale. Depending upon the purpose a number of turnover ratios can

be calculated as debtor’s turnover, capital turnover, etc.

There are 4 types of current assets movement or efficiency ratios:

I. CREDITORS/PAYABLES TURNOVER RATIO.

II. INVENTORY OR STOCK TURNOVER RATIO.

III. DEBTORS/RECEIVIBLES TURNOVER RATIO.

IV. WORKING CAPITAL TURNOVER RATIO.

-

I. CREDITORS/PAYABLES TURNOVER RATIO

In the course of business operations, a firm has to make credit purchasesand incur short-term liabilities. A supplier of goods i.e. creditor is

47



naturally interested in finding out how much time the firm is likely totake in repaying its trade creditors. The analysis for creditor’s turnover is basically the same as of debtor’s turnover ratio except that in place of average daily sales, average daily purchases are taken as the other component of the ratio; creditor’s turnover ratio can be calculated as:

CREDITORS TURNOVER

RATIO = NET CREDIT ANNUAL PURCHASES

AVERAGE TRADE CREDITORS

If the information about the credit purchases is not available, the figureof total purchases may be taken as the numerator and the trade creditors

include sundry creditors and bills payable. If opening and closing balances of the creditors are not known, the creditors are turned over inrelation to purchase. Generally, higher the creditor’s velocity better it isor otherwise lower the creditor’s velocity less favorable are the results.

PRACTICAL CALCULATION OF CREDITORS

TURNOVER RATIO FOR HAVELLS INDIA LTD.

TABLE YEAR

2004 2005 2006 2007 2008

NET CREDIT

ANNUAL

PURCHASES

( IN LACS) 20,311 33,274 58,213 95,603 1,31,149AVERAGE

TRADE

CREDITORS

( IN LACS) 3,733 6,835 12,321 16,920 26,703

48



CREDITORS

TURNOVER

RATIO 5.44 4.87 4.72 5.65 4.91

GRAPH

(REFERRING THE CREDITORS TURNOVER RATIO TABLE

FOR HAVELLS INDIA LTD.)

5.44

4.87

4.72

5.65

4.91

4.2

4.4

4.6

4.8

5

5.2

5.4

5.6

5.8

2004 2005 2006 2007 2008

CREDITO

TURNOVE

Therefore, “Average Payment Period” is:

APP = __365____

49



P/T RATIO

TABLE FOR APP

(IN

DAYS)

YEAR 2004 2005 2006 2007 2007

PAYABLETURNOVER

RATIO 5.44 4.87 4.72 5.65 4.91

AVERAGE

PAYABLE

PERIOD 67 DAYS 75 DAYS 77 DAYS 64 DAYS 74 DAYS

50



GRAPH

(REFERRING THE AVERAGE PAYABLE PERIOD TABLE


6775 77

64

74

0

10

2030

40

50

60

70

80

90

2004 2005 2006 2007 2008

AVERAGE

PAYABLE

PERIOD (DAY

COMMENT

The payable period is quite stable and Havells paid back its

creditors within 74 days in year 2008. Thus, this shows the Havells

has good position in the eye of its creditors. The maximum APP was

77 days in year 2006.

51



II INVENTORY/STOCK TURNOVER

RATIO

Every firm has to maintain a certain level on inventory for finishedgoods so as to be able to meet the requirements of the business. But thelevel of inventory should neither be too high nor too low. It is harmfulto hold more inventories for the following reasons.

(a)It unnecessarily blocks capital which can otherwise be profitabilityused somewhere else.

(b)Over stocking will require more godown space, so more rent

will be paid.(c)There are chances of obsolescence of stocks. Consumers will

prefer goods of latest design, etc.(d)Slow disposal of stocks means slow delivery of cash also whichwill adversely affect liquidity.(e)There are chances of deterioration in quality if the stocks areheld for more periods.

Inventory turnover ratio also known as stock velocity is normallycalculated as sales/average inventory. It would indicate whether inventory has been efficiently used or not. The purpose is to see whether only the required minimum funds have been locked up in inventory.Inventory turnover ratio (I.T.R.) indicates the number of times the stock has been turn over during the period and evaluates the efficiency withwhich a firm is able to manage the inventory.

PRACTICAL CALCUALTION OF INVENTORY


INVENTORY TURNOVER RATIO = _COST OF GOODS SOLD

AVERAGE INVENTORY AT COST

52



TABLE

YEAR 2004 2005 2006 2007 2008

COST OFGOODS

SOLD

( IN LACS) 24,906 39,751 68,737 1,08,550 1,51,792

AVERAGE

INVENTORY

AT COST

(IN LACS) 4,567 10,917 14,834 21,506 33,489

INVENTORY

TURNOVER RATIO 5.45 3.64 4.63 5.05 4.53

GRAPH

(REFERRING THE INVENTORY TURNOVER TABLE FOR

HAVELLS INDIA LTD.)

53

5.45

3.64

4.635.05

4.53

0

1

2

3

4

5

6

2004 2005 2006 2007 2008

STOCK

TURNOVE



`So, “Days Of Inventory Holding” = 365/ I/T RATIO

TABLE FOR DIH

(IN

DAYS)

YEAR 2004 2005 2006 2007 2008

INVENTORY

TURNOVER

RATIO 5.45 3.64 4.63 5.05 4.53

DIH

67 DAYS 100 DAYS 79 DAYS 72 DAYS 81 DAYS

GRAPH

(REFERRING THE DAYS OF INVENTORY HOLDING TABLE


54



67

100

79

72

81

0

20

40

60

80

100

120

2004 2005 2006 2007 2008

DAYS OFINVENTORYHOLDIND (DAY

COMMENT

The Days of Inventory Holding for Havells is satisfactory as it

depend on the type of industry one is into. As the products of the

firm are customer oriented and erratic demand ,inventory has to be

well maintained. Thus Company is able to rotate its inventory into

sales in 81 days. As the company bears cost of holding, Havells need

to improve on its inventory turnover ratio.

II. DEBTORS TURNOVER RATIO

A concern may sell goods on cash as well credit. Credit is one of themost important elements of sales promotion. The volume of sales can be

increased by following a liberal credit policy. But the effect of a liberalcredit policy may result in tying up substantial funds of a firm in theform of trade debtors (or receivables i.e. debtors plus bills receivables).Trade debtors are expected to be converted into cash within a short

period and are included in current assets. Hence the liquidity position of

55



a concern to pay its short-term obligations in time depends upon thequality of its trade debtors. Debtor’s turnover ratio indicates the velocity of debt collection of firm.In simple words, it indicates the number of times average debtors(receivables) are turned over during a year, thus:

DEBTORS TURNOVER = NET CREDIT ANNUAL SALE

AVERAGE TRADE DEBTORS

TRADE DEBTORS = SUNDRY DEBTORS+BILLS RECEIVIBLES AND

ACCOUNTS RECEIVIBLES

PRACTICAL CALCULATION ON DEBTORS


TABLE

YEAR

2004 2005 2006 2007 2008

NET CREDIT

ANNUAL

SALES

(IN LACS) 41,922 66,538 1,11,513 1,68,105 2,23,117

AVERAGE

TRADEDEBTORS

(IN LACS) 10,024 13,821 14,589 7,956 4,851

56



DEBTORS

TURNOVER

RATIO 4.18 4.81 7.64 21.12 46

GRAPH

(REFERRING THE DEBTORS TURNOVER TABLE FOR

HAVELLS INDIA LTD)

4.18 4.817.64

21.12

46

0

10

20

30

40

50

2004 2005 2006 2007 2008

DEBTORS TURNOVERRATIO

So, “AVERAGE COLLECTION PERIOD” (ACP) are

ACP = 365 / Accounts Receivable Turnover

TABLE FOR ACP (IN DAYS)

YEAR 2004 2005 2006 2007 2008

DEBTORS

TURNOVER

RATIO 4.18 4.81 7.64 21.12 46

57



AVERAGE

COLLECTION

PERIOD 87 DAYS 75 DAYS 48 DAYS 17 DAYS 8 DAYS

GRAPH

(REFERRING THE AVERAGE COLLECTION PERIOD TABLE

FOR HAVELLS INDIA LTD)

87

75

48

178

0

10

20

30

40

5060

70

80

90

100

2004 2005 2006 2007 2008

AVERAGE

COLLECTIOPERIOD (DA

COMMENT

The Average Collection Period for Havells in year 2008 is 8 days,

which means company is able to recover all its credit within 8 days.

This graph shows that there has been a fall in debtor’s days, which

show the very strong position of Havells. This decrease happened

due to “Channel Financing” which company initiated in year 2005.

WORKING CAPITAL TURNOVER RATIO

58



Working capital of a concern is directly related to sales, the currentassets like debtors, bills receivables, cash, and stock, etc. changewith the increase or decrease in sales. The working capital istaken as:

WORKING CAPITAL = CURRENT ASSETS - CURRENTLIABILITIES

Working capital turnover ratio indicates the velocity of the utilization of net working capital. This ratio indicates the number of times the

working capital is turned over in the course of a year. The ratiomeasures the efficiency with which the working capital is being used bythe firm. The higher ratio indicated the efficient utilization of theworking capital and low ration indicated otherwise. But a very high

working capital turnover ratio is not good situation for any firm andhence care must be taken while interpreting the ratio. Making of comparative and trend analysis can use the ratio for different firms inthe same industry and for various periods. The ratio can be calculatedas:

PRACTICAL CALCULATION ON WORKING

CAPITAL TURNOVER RATIO FOR HAVELLS INDIA

LTD.

TABLE

Working capital turnover ratio = Cost of Sales_____

Average working capital

59



YEAR 2004 2005 2006 2007 2008

COST OF

SALES(IN LACS) 24,906 39,751 68,737 1,08,550 1,51,792

AVERAGE

WORKING

CAPITAL

(IN LACS) 10,527 14,436 15,585 11,171 12,536

WORKING

CAPITAL

TURNOVER

RATIO 2.37times 2.75 times 4.41 times 9.72 times 12.10 times

GRAPH

(REFERRING THE WORKING CAPITAL TURNOVER TABLE


2.37 2.75

4.41

9.72

12.1

0

2

4

6

8

10

12

14

2004 2005 2006 2007 2008

WORKING CAPITAL

TURNOVER

COMMENT

This ratio indicates the number of times the working capital is

turned over in the course of a year. The ratio measures the

60



efficiency with which the working capital is being used by the firm.

The higher ratio indicated the efficient utilization of the working

capital and low ratio indicated otherwise. Since there is a rise in the

ratio which indicates the efficient utilization of the WC in Havells

India Ltd. The WC turnover is 12 in year 2008, which means one

working capital is turned in each month.

3. LEVERAGE RATIOS

The term solvency refers to the ability of a concern to meet its long-termobligations. The long-term in debtness of a firm includes debentures

holders, financial institutions providing medium and long-term loansand other creditors selling goods on installment bases. The long-termcreditors of a firm are primarily interested in knowing the firms abilityto pay regularly interested on long term borrowings, repayment of the

principal amount at the maturity and the security of their loans.Accordingly, long-term solvency ratios indicate a firm’s ability to meetthe fixed interest and costs and repayments schedules associated with itslong-term borrowings. The following ratios serve the purpose of determining the solvency of the concern.

I. DEBT-EQUITY RATIO

II. FUNDED DEBT TO TOTAL CAPITALISATION RATIO

III. PROPRIETORY RATIO OR EQUITY RATIO

IV. FIXED ASSETS TO NET WORTH OR PROPRIETORS

FUNDS RATIO

V. RATIO OF CURRENT ASSETS TO PROPRIETOR’S FUNDS

VI. DEBT SERVICE RATIO OR INTEREST COVERAGE RATIO

61



I. DEBT EQUITY RATIO

Debt equity ratio is also known as External internal equity ratio iscalculated to measure the relative claims of outsiders and the owners

against the firm’s assets. These ratio indicate the relationship betweenthe external equities or the outsider’s funds and the internal equities or the shareholders funds, thus:

DEBT-EQUITY RATIO = OUTSIDERS FUNDS

SHARE HOLDERS FUNDS

The two basic components of the ratio are outsider’s funds, i.e..,

external equities and shareholders funds, i.e. internal equities. Theoutsider’s funds include all debts/liabilities to outsiders. Theshareholders funds consist of equity share capital, preference sharecapital, capital reserves, revenue for contingencies, sinking funds etc.

PRACTICAL CALCULATION OF DEBT-EQUITYRATIO FOR HAVELLS INDIA LTD.

TABLE YEAR

2004 2005 2006 2007 2008

TOTAL

DEBT(IN LACS) 10,177 4,642 10,984 5,605 3,580

62



TOTAL

EQUITY

(IN LACS) 5,936 8,661 17,600 26,243 64,903

DEBTEQUITY

RATIO 1.71 0.53 0.62 0.21 0.055

GRAPH

(REFERRING THE DEBT EQUTY RATIO TABLE FOR

HAVELLS INDIA LTD.)

1.71

0.530.62

0.21

0.0550

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2004 2005 2006 2007 2008

DEBT EQUI

RATIO

COMMENT

There is fall in Debt Equity Ratio of the company which shows

company is not raising capital from debt, instead they have raised

money from sources like private equity and channel financing. Theimproved debt equity ratio shows that company has grown stronger

.Such smaller value has been achieved due to $110M received from

PE firm ‘Warburg Pincus’.

63



II. FUNDED DEBT TO TOTAL

CAPITALISATION RATIO

The ratio establishes a link between the long-term funds rose from

outsiders’ and total long-term funds available in the business. The twowords used in this ratio are

1. Funded debt2. Total capitalization

Funded debt is a part of total capitalization, which is financed byoutsiders. However, there is no ‘rule of thumb’ but still the lesser thereliance on outsiders the better it will be. If this ratio is smaller, better itwill be, up to 50% or 55% this ratio may be to tolerable and not beyond.

PRACTICAL CALCULATION OF FUNDED DEBT TO

TOTAL CAPITALISATION RATIO FOR HAVELLSINDIA LTD.

TABLE

FUNDED DEBT TO TOTAL = FUNDED DEBT__ CAPITALISATION TOTAL CAPITALISATION

64



YEAR 2004 2005 2006 2007 2008

FUNDED DEBT

(IN LACS)10,177 17,422 10,984 5,605 3,580

TOTAL

CAPITALISATION

(IN LACS) 16,113 26,084 28,585 31,849 68,483

FUNDED DEBT

RATIO0.63 0.66 0.38 0.18 0.05

GRAPH

(REFERRING THE TABLE OF FUNDED DEBT RATIO FOR

HAVELLS INDIA LTD.)

0.63 0.66

0.38

0.18

0.05

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2004 2005 2006 2007 2008

FUNDEDDEBT RATIO

COMMENT

65



This ratio shows that Havells has raised its 5 percent of total funds

from secured and unsecured debt which shows company has

leverage itself from other sources and the improve funded debt ratio

indicates Havells growth.

III. PROPRIETORY RATIO OR EQUITY RATIO

The variant to the debt-equity ratio is the proprietary, which is alsoknown as Equity Ratio or shareholders to total equities ratio or net

worth to total assets ratio. The ratio establishes the relationship betweenshareholders funds to total assets of the firm. The ratio of proprietor’sfunds to total funds is an important ratio for determining long-termsolvency of a firm. The components of this ratio are shareholders fundsor proprietor’s funds and total assets. The shareholders funds are equity

share capital, preference share capital, undistributed profits, reservesand surpluses. Out of this amount,Accumulated losses should be deducted. The total assets on the other hand denote total resources of the concern. The ratio can be calculatedas under:

EQUITY RATIO = SHAREHOLDERS FUNDS

TOTAL ASSETS

PRACTICAL CALCULATION OF EQUITY OR

PROPRIETORY RATIO FOR HAVELLS INDIA LTD

TABLE YEAR

2004 2005 2006 2007 2008SHAREHOLDER

FUNDS

(IN LACS) 5,936 8,661 17,600 26,243 64,903

66



TOTAL ASSETS

(IN LACS)24,068 39,620 52,478 60,841 1,02,554

EQUITY RATIO

0.24 0.21 0.34 0.43 0.63

GRAPH

REFERRING THE EQUITY RATIO TABLE FOR HAVELLS

INDIA

COMMENT

The ratio establishes the relationship between shareholders funds to

total assets of the firm. This graph establishes the increase in

shareholding funds as compare to the total assets of the company,which shows the value of firm in the eye of investors, has increased.

IV. FIXED ASSETS TO NET WORTH RATIO

67

0.24 0.21

0.340.43

0.63

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2004 2005 2006 2007 2008

EQUITY RATIO

..



The ratio establishes the relationship between fixed assets andshareholders funds, i.e., share capital plus reserves & surpluses andretained earnings. The ratio can be calculated as follows:

FIXED ASSET TO NET WORTH RATIO = FIXED ASSETSSHAREHOLDERS FUNDS

The ratio of the fixed assets to net worth indicates the extent to whichshareholders funds are sunk into the fixed assets. Generally, the

purchase of fixed assets should be financed by shareholders equityincluding reserves, surpluses and retained earnings.

PRACTICAL CALCULATION OF FIXED ASSET TO

NET WORTH RATIO FOR HAVELLS INDIA LTDTABLE

YEAR 2004 2005 2006 2007 2008

FIXED ASSET

(IN LACS) 4,631 9,233 15,319 24,225 38,525

SHAREHOLDERS

FUNDS

(IN LACS) 5,936 8,661 17,600 26,243 64,903

FIXED ASSET TO

NETWORTH

RATIO 0.78 1.06 0.87 0.92 0.60

GRAPH

(REFERRING THE FIXED ASSET TO NET WORTH RATIO)

68



0.78

1.06

0.870.92

0.6

0

0.2

0.4

0.6

0.8

1

1.2

2004 2005 2006 2007 2008

FIXED ASSET TO

NET WORTH RATIO

COMMENT

This Ratio estimates the shareholders funds sunk into the fixed

assets. Generally, the purchase of fixed assets should be financed by

shareholders equity including reserves, surpluses and retained

earnings. There is a fall in the ratio, but still large part of

shareholder funds are used for fixed assets.

V. CURRENT ASSETS TO PROPRIETORY’S

FUNDS

The ratio indicates the extent to which proprietor’s funds are invested incurrent assets. There is no ‘rule of thumb’ for this ratio and depending

upon the nature of the business there may be different ratios for differentfirms.The ratio is calculated by dividing the total of current assets by theamount of shareholders funds.

69



RATIO OF CURRENT ASSETS TO = CURRENT ASSETS

PROPRIETORY’S FUNDS SHAREHOLDERS FUNDS

PRACTICAL CALCULATION OF RATIO OF

CURRENT ASSETS TO PROPRIETORY FUNDS FOR HAVELLS INDIA LTD.

TABLE YEAR

2004 2005 2006 2007 2008

CURRENT

ASSETS(IN LACS) 19,437 30,387 37,159 36,616 64,029

SHAREHOLDERS

FUNDS

(IN LACS) 5,936 8,661 17,600 26,243 64,903

CURRENT

ASSETS TO

NETWORTH

RATIO 3.27 3.51 2.11 1.40 0.98

GRAPH

(REFERRING THE TABLE OF CURRENT ASSETS TO

PROPRIETORY FUNDS FOR HAVELLS INDIA LTD.)

70



VI. DEBT SERVICE RATIO OR INTEREST

COVERAGE RATIO

Net income to debt service ratio or simple debt service ratio is used to

test the debt servicing capacity of a firm. The ratio is also known asinterest coverage ratio or coverage ratio or fixed charges cover or timesinterest earned. This ratio is calculated by dividing the net profit beforeinterest and taxes by fixed interest charges:

INTEREST COVERAGE RATIO = __EBIDT_______

FIXED INTEREST CHARGES

PRACTICAL CALCULATION OF INTEREST

COVERAGE RATIO FOR HAVELLS INDIA LTD.

TABLE

YEAR

2004 2005 2006 2007 2008

EBIDT

(IN LACS) 4,472 6,083 10,304 14,643 19,996

FIXED

INTEREST

CHARGES

(IN LACS) 1,197 1,351 1,801 1,615 2,065

DEBT SERVICE

RATIO3.74 4.50 5.72 9.06 9.68

71



GRAPH

(REFERRING THE DEBT SERVICE TABLE FOR HAVELLS

INDIA LTD.)

3.744.5

5.72

9.069.68

0

2

4

6

8

10

12

2004 2005 2006 2007 2008

DEBT SERVICE

RATIO

COMMENT

It means that the operating profits of the firm are 9.68 times that of

its interest liability. The higher the IC Ratio, better it is both for the

firm and for the leaders. Thus increase in this ratio shows the

probability of committing default has been reduced thus firm has

become less risky.

4. PROFITABILITY RATIOS

The primary objective of the business undertaking is to earn profit.Profit earning is considered essential for the survival of the business. Inthe works of Lord Keynes, “Profit is the engine that drives the business

72



enterprise”. A business needs profits not only for its existence but alsofor expansion and diversification. The investors want an adequate returnon their investments, workers want higher wages, creditors want higher security for their interest and loan and so on. A business enterprise candischarge its obligations to the various segments of the society onlythrough earning of profits. Profits are thus a useful measure of overallefficiency of a business. Profits to the management are the test of efficiency and a measurement of control; to owners, a measure of worthof their investment to the creditors etc. Generally, the profitability ratiosare calculated either in the relation of their sales or in relation toinvestment. The various profitability ratios are discussed.

1. PROFITABILITY RATIO BASED ON SALES OF THE FIRM

a) PROFIT MARGIN RATIO

I. GROSS PROFIT RATIO

II. OPERATING PROFIT RATIO

III. NET PROFIT RATIO

IV. CASH PROFIT RATIO

b) EXPENSE RATIO

2. PROFITABILITY RATIO BASED ON INVESTMENTS

a) RETURN ON ASSETS (ROA)

b) RETURN ON CAPITAL EMPLOYED (RCE)

3. PROFITABILITY ANALYSIS FROM THE POINT OF VIEW

OF

OWNERS

a) RETURN ON EQUITY (ROE)

73



b) EARNING PER SHARE (EPS)

c) DIVIDEND PER SHARE (DPS)

d) DIVIDEND PAYOUT RATIO (DP RATIO)

PROFIT MARGIN RATIO: The Profit Margin refers to the

profit contributed by per rupee of sales revenue and therefore, the profitmargin ratio measure the relationship between the profit and the sales.Different profit margins are:

I. GROSS PROFIT RATIO

Gross profit ratio measures the relationship of gross profit to netsales and is usually represented as percentage. Thus, it is calculated

by dividing the gross profit by sales

GROSS PROFIT = NET SALES – COST OF GOODS SOLD

NET SALES = GROSS SALES – EXISE DUTY

PRACTICAL CALCULATION OF GROSS PROFIT

RATIO FOR HAVELLS INDIA LTD

TABLE

GROSS PROFIT RATIO = GROSS PROFIT X 100

NET SALES

74



YEAR

2004 2005 2006 2007 2008

GROSSPROFI

T

(IN

LACS) 11,388 18,445 31,631 46,170 53,694

NET SALES

(IN LACS)

36,294 58,196 1,00,368 1,54,721 2,05,486

GROSS

PROFIT

RATIO (%) 31.37 31.69 31.5 29.84 26.13

GRAPH

(REFERRING GROSS PROFIT FOR HAVELLS INDIA LTD)

31.37% 31.69% 31.50%29.84%

26.13%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

2004 2005 2006 2007 2008

GROSS PROFIT

RATIO (%)

75



COMMENT

Gross profit has decreased due to acquisition of Sylvania which has

lower margins. Efforts are required to get sustainable growth inSylvania.

(II)OPERATING PROFIT RATIO

The operating profit 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 , non- operating income and tax

liability etc. The operating profit ratio will be less than GP ratio asindirect expenses such as general and administrative expenses, sellingexpenses and depreciation charge, etc. are deducted from gross profit toarrive at the operating profits. It helps to identify the corrective

measures to improve the profitability.

OPERATING PROFIT RATIO = OPERATING PROFIT X 100

NET SALES

PRACTICAL CALCULATION OF OPERATINGPROFIT RATIO FOR HAVELLS INDIA LTD.

TABLE

YEAR

2004 2005 2006 2007 2008

OPERATING

PROFIT(IN LACS) 4,472 6,083 10,304 14,643 19,996

NET SALES

(IN LACS)

36,294 58,196 1,00,368 1,54,721 2,05,486

76



OPERATING

PROFIT

RATIO(%) 12.32 10.45 10.27 9.46 9.73

GRAPH

(REFERRING TO THE TABLE OF OPERATING RATIO FOR

HAVELLS INDIA LTD.)

12.32

10.45 10.27 9.46 9.73

0

2

4

6

8

10

12

14

2004 2005 2006 2007 2008

OPERATINGPROFIT RATI(%)

COMMENT

This ratio has been well maintained and has improved

because companies have nearly equivalent operating profits

on net sales. Company has well hedged against the

fluctuation in raw material prices which have soared up.

(II)NET PROFIT RATIO

Net profit ratio establishes a relationship between net profit and salesand indicates the efficiency of the management in manufacturing,

77



selling, administration and other activities of the firm. This ratio is theoverall measure of firm’s profitability and is calculated.

NET PROFIT RATIO = NET PROFIT AFTER TAX X 100

NET SALES

PRACTICAL CALCULATION OF NET PROFIT RATIO

FOR HAVELLS INDIA LTD.

TABLE

YEAR

2004 2005 2006 2007 2008

NET PROFIT

AFTER TAX

(IN LACS) 2,096 3,053 6,321 10,215 14,354

NET SALES

(IN LACS)

36,294 58,196 1,00,368 1,54,721 2,05,486

NET PROFIT

RATIO(%)5.78 5.25 6.30 6.60 7.00

GRAPH

(REFERRING TO THE TABLE OF NET PROFIT RATIO FOR

HAVELLS INDIA LTD.)

78



5.785.25

6.36.6

7

0

1

2

34

5

6

7

8

2004 2005 2006 2007 2008

NET PROFIT

RATIO (%)

COMMENT

The net profit ratio is an indicator of the proportionate increase in

net profit over sales. The above graph shows the increase in net

profit ratio during the last 5 years.

II. NET PROFIT RATIO

Net profit ratio establishes a relationship between net profit and salesand indicates the efficiency of the management in manufacturing,selling, administration and other activities of the firm. This ratio is theoverall measure of firm’s profitability and is calculated.

NET PROFIT RATIO = NET PROFIT AFTER TAX X 100

NET SALES

79



PRACTICAL CALCULATION OF NET PROFIT RATIO

FOR HAVELLS INDIA LTD.

TABLE

YEAR

2004 2005 2006 2007 2008

NET PROFIT

AFTER TAX

(IN LACS) 2,096 3,053 6,321 10,215 14,354

NET SALES

(IN LACS)

36,294 58,196 1,00,368 1,54,721 2,05,486

NET PROFIT

RATIO(%)5.78 5.25 6.30 6.60 7.00

GRAPH

(REFERRING TO THE TABLE OF NET PROFIT RATIO FOR

HAVELLS INDIA LTD.)

5.785.25

6.36.6

7

0

1

2

3

4

5

6

7

8

2004 2005 2006 2007 2008

NET PROFIT RATIO

(%)

80



COMMENT

The net profit ratio is an indicator of the proportionate increase in

net profit over sales. The above graph shows the increase in net

profit ratio during the last 5 years.

b) EXPENSES RATIO

Expenses ratio indicate the relationship on various expenses to net sales.The operating ratio reveals the average total variations in expenses. Butsome of the expenses may be increasing while some may be falling.Hence expense ratios are calculated by dividing each item of expensesor groups of expenses with the net sales to analyses the causes of

variation of the operating ratio. The ratio can be calculated for eachindividual expense ratio, selling expense ratio, material consumed ratio,etc. The lower the ratio the greater is the profitability and higher theratio, lower is the profitability. While interpreting the ratio, it must beremembered that for a fixed expense like rent, the ratio will fall if thesales increase and for a variable expense, the ratio in proportion to salesshall remain nearly the same.

EXPENSE RATIO = TOTAL EXPENSES X 100

NET SALES

TOTAL EXPENSES = COST OF GOODS SOLD +ADMINISTRATIVE AND

OFFICE EXPENSE +SELLING AND DISTRIBUTION EXPENSE + NON

OPERATING EXPENSE

81



PRACTICAL CALCULATION OF EXPENSE RATIO

FOR HAVELLS INDIA LTD

TABLE

YEAR 2004 2005 2006 2007 2008

TOTALEXPENSE

(IN LACS) 34,043 54,210 92,871 1,42,236 1,89,009

NET SALES

(IN LACS)

36,294 58,196 1,00,368 1,54,721 2,05,486

EXPENSE

RATIO (%)93.80 93.20 92.50 92.00 92.00

GRAPH

(REFERRING THE TABLE OF EXPENSE RATIO FOR

HAVELLS INDIA LTD)

82



93.80%

93.20%

92.50%

92% 92%

91.00%

91.50%

92.00%

92.50%

93.00%

93.50%

94.00%

2004 2005 2006 2007 2008

EXPENSES RATIO (%)

COMMENT

There is a fall in the Expense Ratio during last 5 years, which shows

Havells profitability has improved and it has grown stronger. Since,

lower the ratio the greater is the profitability.

2. PROFITABILITY RATIO BASED ON

INVESTMENTS:

A financial analyst can employ another set of financial ratios to find outhow efficiently the firm is using its assets because the profitability of afirm can also be analyzed with reference to assets employed to earn areturn. Normally, the more the assets employed, greater should be the

profits and vice-a-versa. The following are two important such profitability ratios.

83



a) RETURN ON ASSETS (ROA)

The ROA measures the profitability of the firm in terms of assetsemployed 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 term of total assets or totaltangible assets or fixed assets. The ROA measures the overall efficiencyof the management in generating profits at given level of assets at itsdisposal. The ROA essentially relate the profit to the size of the firm.

ROA = NET PROFIT AFTER TAXES X 100

AVERAGE TOTAL ASSETS

The ROA essentially relate the profits to the size of the firm (which ismeasured in terms of assets). If a firm increases the size but isunable to increase its profits proportionately, then the ROA willdecrease.

In such a case, increasing the size of the assets i.e., the size of the firm

will not by itself advance the financial welfare of the owners. The ROAof a particular firm should be compared with industry average as theamount of assets required depends upon the nature and characteristics of the industry.

84



PRACTICAL CALCULATION ON RETURN ONASSETS RATIO FOR HAVELLS INDIA LTD

TABLE

YEAR

2004 2005 2006 2007 2008

NET PROFIT

AFTER TAX(IN LACS) 2,096 3,052 6,320 10,215 14,354

AVERAGE

TOTAL ASSETS

(IN LACS) 24,068 39,620 52,479 60,841 1,02,554

ROA (%)

8.7 7.7 12.04 16.79 14.00

85



GRAPH

(REFERRING TO THE TABLE OF RETURN ON ASSETS FOR

HAVELLS INDIA LTD.)

8.70%

7.70%

12.04%

16.79%

14.00%

0.00%

2.00%

4.00%

6.00%8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

2004 2005 2006 2007 2008

RETURN ON

ASSETS (%)

COMMENT

The ROA measures the overall efficiency of the management in

generating profits given a given level of assets at its disposal. The

value of the Ratio is quite satisfactory for the company; it was

highest in year 2007. However, there a fall in the ratio which need to

be improved.

b) RETURN ON CAPITAL EMPLOYED (ROCE)

The profitability of the firm can also be analyzed from the point of viewof the total funds employed in the firm. The term funds employed or thecapital employed refers to the total long-term sources of the funds. Itmeans that the capital employed comprises of the shareholders funds

86



plus long-term debts. Alternatively, it can also be defined as fixed assets plus net working capital.

ROCE = EBIT X 100

AVERAGE CAPITAL EMPLOYED

PRACTICAL CALCULATION OF RETURN ON

CAPITAL EMPLOYED FOR HAVELLS INDIA

LTD.

TABLE

YEAR

2004 2005 2006 2007 2008

EBIT

(IN LACS) 4,472 6,083 10,304 14,643 19,996

AVERAGE

CAPITALEMPLOYED

(IN LACS) 16,114 26,084 28,585 31,849 68,483

ROCE (%)

27.75 23.32 36.05 46.00 29.19

GRAPH

(REFERRING ABOVE TABLE OF RETURN ON CAPITALEMPLOYED FOR HAVELLS INDIA LTD.)

87



27.75%

23.32%

36.05%

46.00%

29.19%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

2004 2005 2006 2007 2008

RETURN ON

CAPITAL

EMPLOYED (%)

COMMENT

Since the average capital employed has nearly doubled this

year this ratio is sure to get a hit. But this will improve

sooner as the acquisition of Sylvania is now complete and

will not severly affect Havells in years to come

3. PROFITABILITY ANALYSIS FROM THE

POINT OF VIEW OF OWNERS

The profit of the firm belongs to the owners who have invested their funds in the form of equity share capital or retained earnings. Therefore,the profits of affirm should be analyzed from the point of view of theowners also. In fact, the net profit after tax (PAT) belongs to theshareholders. In case, the firm has preference share capital also then the

amount available to equity shareholders is PAT less preferencedividend. This profit belongs to them, irrespective of the fact whether itis distributed now in the form of dividends or retained in the firm for reinvestment purpose. These reinvested profits will ultimately results ingrowing profits in the future. The profitability of a firm can be analyzed

88



from the point of view of owner’s funds in different perspective asfollows:

a) RETURN ON EQUITY (ROE)

The ROE examines profitability from the perspective of the equityinvestors by relating profits available for the equity shareholders withthe book value of the 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 thecompany.

ROE = PAT- PREFERENCE DIVIDEND X 100

EQUITY SHAREHOLDERS FUNDS

The ROE indicates as to how well the funds of the owner have beenused by the firm. It also examine whether the firm has been ableto earn satisfactory return for owners or not. Therefore, theowners/shareholders of the firm would probably be mostinterested in the ROE analyses.

PRACTICAL CALCULATION OF RETURN ONEQUITY FOR HAVELLS INDIA LTD.

TABLE

YEAR

2004 2005 2006 2007 2008

PAT

(IN LACS) 2,096 3,052 6,320 10,215 14,354

EQUITY

SHAREHOLDERS

FUNDS

(IN LACS) 5,937 8,662 17,600 26,244 64,903

89



ROE (%)

35.30 35.23 35.90 38.92 22.11

GRAPH(REFERRING ABOVE TABLE OF RETURN ON EQUITY FOR

HAVELLS INDIA LTD)

35.30% 35.23% 35.90%38.92%

22.11%

0.00%

5.00%10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

2004 2005 2006 2007 2008

RETURN

ON EQUITY

(%)

COMMENT

The ROE also dropped with the same reason of equity participationfrom Warburg Pincus. Without taking in consideration the money

received from Warburg Pincus the ROE would be 36.9%.

b) EARNING PER SARE (EPS)

The ROE measures the profitability in terms of total funds and explainthe return as a percentage of the funds. The profitability of a firm can

also be measured in terms of number of equity shares. This is known asEPS, which is derived by dividing the PAT by the number of equityshare so,

90



EPS = PAT________ NO OF EQUITY SHARES

During the interpretation of the EPS we should consider two things:

a) If the firm has issued bonus shares in the particular year then thenumber standing equity shares at the end of the year will increase andconsequentlyThe EPS for that year will be affected. Therefore, the EPS for that year will

be affected. Therefore, EPS for that year should be adjusted by time

series analysis.

b) The increase in EPS over the year does not necessarily refer to theincrease in profitability. Over the years, it might have retained the

profits because of which the total funds have increase. The percentageearnings (ROE) even if constant with still result in greater absoluteamount of PAT, which is divided by constant number of equity shares,will indicate an increasing EPS. This increase in EPS is erroneous in thesense that the real earnings (ROE) have not increased.

PRACTICAL CALCULATION OF EARNING PER

SHARE FOR HAVELLS INDIA LTD

TABLE

YEAR

2004 2005 2006 2007 2008

PAT(IN LACS) 2,096 3,052 6,320 10,215 14,354

NO OF EQUITY

SHARES 11,591,15

4 11,591,154

26,050,41

1

53,758,40

6

55,205,8

8

91



EPS (IN RS)

18.08 26.34 24.26 19.002 26.00

GRAPH

(REFERRING TABLE OF EARNING PER SHARE FOR

HAVELLS INDIA LTD)

18.08

12.69

24.26

19.002

26

0

5

10

15

20

25

30

2004 2005 2006 2007 2008

EARNING

PER SHARE

(IN RS.)

COMMENT

There is a rise in the EPS, which shows the company has grown

stronger in terms of returns available to the shareholders of the

company.

C) DIVIDEND PER SHARE (DPS)

Sometimes the equity shareholders may not be interested in the EPS butin the return which they are actually receiving from the firm in the formof dividends. The amount of profits distributed to shareholders per shareis known as DPS .

92



DPS = TOTAL PROFITS DISTRIBUTED

NO OF EQUITY SHARES

PRACTICAL CALCULATION OF DIVIDEND PER SHARE FOR HAVELLS INDIA LTD

TABLE

FACE VALUE PER SHARE: RS.5

YEAR

2004 2005 2006 2007 2008

DISTRIBUTEDPROFITS

(IN LACS) 231 290 672 1,344 1,448

NO OF EQUITY

SHARES 11,591,15

4 11,591,154

26,050,41

1

53,758,40

6

57,918,4

6

DPS (IN RS.)

2.00 2.5 2.57 2.5 2.5

GRAPH

(REFERRING ABOVE TABLE OF EARNING PER SHARE FOR

HAVELLS INDIA LTD.)

93



2

2.5 2.5 2.5 2.5

0

0.5

1

1.5

2

2.5

3

2004 2005 2006 2007 2008

DIVIDEND

PER SHARE

(IN RS.)

COMMENT

The dividend per share given by the company in year 2008 is 2.5,

which is the actual return available to the shareholders from the

firm. Thus, firm has maintained its DPS.

d) DIVIDEND PAYOUT RATIO (DP RATIO)

The DP Ratio is the ratio between the DPS and the EPS of the firm i.e.,it refers to the proportion of the EPS which has been distributed by thecompany as dividend.

DP RATIO = DIVIDEND PER SHARE X100

EARNING PER SHARE

PRACTICAL CALCULATION OF DIVIDEND PAYOUTRATIO FOR HAVELLS INDIA LTD.

TABLE

94



YEAR

2004 2005 2006 2007 2008

DPS (IN RS.) 2.00 2.5 2.57 2.5 2.62

EPS (IN RS.)

18.08 26.34 24.26 19.002 26.00

DP RATIO

(%)9.04 9.5 10.59 13.16 10.07

GRAPH(REFERRING ABOVE TABLE OF DP RATIO FOR HAVELLS

INDIA LTD)

9.04%9.50%

10.59%

13.16%

10.07%

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

2004 2005 2006 2007 2008

DIVIDEND

PAYOUT

RATIO (%)

COMMENTThus firm has distributed 10% of its PAT as dividend among its

shareholders. It may be noted that the DPS and DP ratio both

95



depends upon the statutory provisions relating to the compulsory

appropriation of profits.

PRICE EARNING RATIO (PE RATIO)

This is the ratio, which establishes the relationship between the EPS andthe market price of a share. The PE Ratio indicates the expectations of the equity investors about the earnings of the firm. The investors arereflected in the market price of the share and therefore the PE ratio givesan idea of investor’s perception of the EPS. The PE ratio is one of themost widely used measures of financial analysis in practice. Companieshaving high and growth prospectus have higher PE ratio as compared tono-growth or slow growth firms.

PE RATIO = MARKET PRICE PER SHARE

EARNING PER SHARE

PRACTICAL CALCULATION OF DIVIDEND PAYOUT

RATIO FOR HAVELLS INDIA LTD.

TABLE

YEAR

2004 2005 2006 2007 2008

MARKET

PRICE PER

SHARE

(IN RS.) 27 66 272 436 462

EARNING

PER SHARE(IN RS.) 18.08 26.34 24.26 19.002 26.00

PE RATIO

1.5 2.5 11.21 22.94 18.00

96



GRAPH

(REFERRING ABOVE TABLE OF PE RATIO FOR HAVELLS

INDIA LTD.)

1.5 2.5

11.21

22.94

18

0

5

10

15

20

25

2004 2005 2006 2007 2008

PRICE

EARNINGRATIO

COMMENT

Thus, a high PE Ratio may indicate 1) that the share has a low risk

and therefore the investors are content with low prospective return

or 2) the investors expect high dividend growth and are ready to

pay a higher price for the share at present. The above ratio seems to

decrease in year 2008 as compare to 2008 which shows investors

expectation from equity shares in Havells has decreased.

b) YIELD

The Yield is defined as the rate of return on the amount invested. Withreference to the equity shares, the yield may be defined as the rate of return on the market price of equity shares. In order to find out the yieldof an equity share, the market price may be compared with the EPS or the DPS to find out the earnings yield or dividend yield respectively as

follows:

EARNING YIELD = EARNING PER SHARE

MARKET PRICE PER SHARE

97



PRACTICAL CALCULATION OF EARNING YIELD

RATIO FOR HAVELLS INDIA LTD.

TABLE

YEAR

2004 2005 2006 2007 2008

EARNING PER

SHARE (IN RS.) 18.08 26.34 24.26 19.002 26.00

MARKET

PRICE PER SHARE (IN RS.) 27 66 272 436 462

EARNING

YIELD 0.66 0.40 .089 .0436 0.056

GRAPH

(REFERRING ABOVE TABLE OF EARNING YIELD RATIO


0.66

0.4

0.0890.0436 0.056

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2004 2005 2006 2007 2008

EARNING

YIELD

98



COMMENT

Reason for these huge differences is because of the split and

issue of bonus shares from time to time which thus do not

show the real yield that a investor could obtain. It is based

on the 31 March ,2008 and has major fluctuations before

and after henceforth.

PROFILE OF PROFITABILITY OF A FIRM

“DU PONT ANALYSIS”

The overall profitability of a firm comprises of two elements. These are:

a) The profit margin on sales i.e., how much the firm is earning on everyrupee of sale made. The NP Ratio also shows this profit margin.

b) The turnover of the firm i.e., the total activities undertaken by thefirm.

These two factors interact and collectively determine the profitability of the firm. In other words, these two factors when combined together determine the earning power of a firm. Moreover, the profit margin isdetermined by the relationship between selling price, cost structure andthe expenses. Each of these items has an effect on the profit margin of the firm. On the other hand, the turnover of the firm depends on the totalcomposition of total assets and their relationship with the sales of thefirm. This can be presented as follows:

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EARNING POWER = PROFIT MARGIN X ASSETS TURNOVER

= PAT X SALES__

SALES TOTAL ASSETS

= __ PAT________

TOTAL ASSETS

This Ratio is also known as the Return On Investment.

The above analysis of profitability is known as DU PONT ANALYSIS,as it was developed by the DU PONT CORPORATION of the US. Thisanalysis brings together the profit margin with assets turnover andshows that the profitability depends not only on the profit margin butalso on how efficiently the firm has used its assets to generate sales.


INVESTMENT RATIO FOR HAVELLS INDIA

LTD.

TABLE

YEAR

2004 2005 2006 2007 2008

PAT

(IN LACS) 2,096 3,052 6,320 10,215 14,354

TOTAL ASSETS(IN LACS)24,385 39,937 52,796 61,188 1,19,033

RETURN ON

INVESTMENT0.086 0.076 0.119 0.166 0.12

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The above analysis can further be extended to identify the Return onShareholders’ Funds. The Return on Shareholders’ Funds depends uponthe use of the debt in the financing of total assets or the leverage effect.

RETURN ON

SHAREHOLDERSFUNDS = RETURN ON INVESTMENT X 100

% ASSETS FINANCED BY SHAREHOLDERS

= PAT X TOTAL ASSETS

SH FUNDS TOTAL ASSETS

= PAT X TOTAL ASSETS

TOTAL ASSETS SH FUNDS

= ROA X EQUITY MULTIPIER

= ROA X (1 + DEBT EQUITY RATIO)


SHAREHOLDERS FUNDS RATIO FOR HAVELLS

INDIA LTD.

TABLE

YEAR

2004 2005 2006 2007 2008

ROA (%)8.7 7.7 12.04 16.79 14.00

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EQUITY

MULTIPLIER 2.71 1.53 1.62 1.21 1.055

RETURN ON

SHAREHOLDER S FUNDS (%) 23.57 11.78 19.51 20.32 14.77

GRAPH

(REFERRING ABOVE TABLE OF RETURN ON

SHAREHOLDERS FUNDS FOR HAVELLS INDIA LTD.)

23.57%

11.78%

19.51% 20.32%

14.77%

0

0.05

0.1

0.15

0.2

0.25

2004 2005 2006 2007 2008

RETURN ON

SHAREHOLDERS

FUNDS (%)

COMMENT

Due to equity participation of Warburg Pincus debt equity ratio hasdecreased to such an extent that its has effected Return on Shareholdersfunds to a great extent. Moreover decrease in value of ROAis also oneof the major reasons.

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CHAPTER 4

QUICK REFERNCE

QUICK REFERENCE FOR INVESTORS

S.NO. RATIO 2007 2008

1 EPS 19.002 26

2 ROE 38.92% 22.11%

3 ROCE 46% 29.19%

4 DEBT-EQUITY 0.21 0.055

5 DEBTORS DAYS 17 DAYS 8 DAYS

6 INTEREST COVERAGE RATIO 9.06 9.68

7 NET PROFIT RATIO 6.6% 7%

8 FINANCE EXPENSE RATIO 92% 92%

QUICK REFERENCE FOR CREDITORS

S.NO. RATIO 2007 2008

1 QUICK RATIO 0.45 0.44

2 CURRENT RATIO 1.3 1.3

3 AVERAGE PAYABLE PERIOD 64 DAYS 74 DAYS

4 INTEREST COVERAGE RATIO 9.06 times 9.68 times

5 CASH RATIO 0.32 0.29

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QUICK REFERENCE FOR THE OWNERS AND STAKEHOLDERS

S.NO. RATIO 2007 2008

1 DEBT EQUITY 0.21 0.055

2 EXPENSE RATIO 92% 92%

3 FIXED ASSET TO NET WORTH

RATIO

0.92 0.60

4 STOCK TURNOVER RATIO 72 81

5 RETURN ON EQUITY 38.92% 22.11%

6 RETURN ON TOTAL ASSETS 16.79% 14%

7 WORKING CAPITAL

TURNOVER RATIO

9.68 TIMES 12.01TIMES

8 NET PROFIT RATIO 6.6% 7%

Note:

1. The above-included ratios are of utmost importance, but stakeholder

must look on all the ratios, which is on vigil as per investors, creditors

and others, so that it could take decisions to satisfy all of them.

2. Note: These ratios have been calculated assuming the working capital

loans to be part of the Long-term loans.

CONCLUSION

HAVELLS INDIA Ltd has been able to maintain optimal cost positioning. Despite price drops in various products, the company has been able to maintain and grow its market share to make strong margins

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in market, contributing to the strong financial position of the company.The company was able to meet its entire requirements for capitalexpenditures and higher level of working capital commitment withhigher volume of operations and from its operating cash flows. As wellas company has acquired Sylvania group in year 2007-2008 whichfurther has improved the goodwill of the company. The ratio analysis of HAVELLS shows that company has grown stronger and finer in all therespects.

KEY FINDING IN THE PROJECT

KEY RATIOS WHICH IMPROVED THIS FY2008

1) CURRENT RATIO2) CASH RATIO3) QUICK RATIO4) DEBTORS TURNOVER RATIO5) DEBTORS DAYS6) WORKING CAPITAL TURNOVER RATIO

7) DEBT EQUITY RATIO8) FUNDED DEBT TO TOTAL CAPITALISATION9) RATIO OF CURRENT ASSETS TO PROPRIETOR FUNDS10) EXPENSE RATIO11) NET PROFIT RATIO12) CASH PROFIT RATIO13) INTEREST COVERAGE RATIO14) EARNING PER SHARE15) DIVIDEND PER SHARE16) EARNING YIELD

KEY RATIOS NEEDED TO BE IMPROVED FOR FY2009

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1) AVERAGE PAYMENT PERIOD – The days of payment to

creditors is very high so Havells should try to reduce payable

period.

2) DAYS OF HOLDING INVENTORY- The days of holdinginventory is very high which need to be taken care.

3) RETURN ON EQUITY – The ROE dropped down due to

infusion of capital through private equity “Warburg Pincus”. This

ratio needed to be maintained.

4) RETURN ON CAPITAL EMPLOYED – The ROCE also

dropped down due to the same reason of private equity. However,this ratio is needed to be taken care during FY2009.

5) RETURN ON ASSETS – The ROA should be taken care for the

firm. The ROA measures the overall efficiency of the

management in generating profits at given level of assets at its

disposal.

6) RETURN ON INVESTMENT – The return on the investment

made is less for FY2008 as compare to FY2007, thus this ratio

should be improved.

7) EQUITY RATIO – Since ratio of shareholders’ funds to total

assets is an important ratio for determining long-term solvency of

a firm, due to increased participation of PE firm, this should

surely be brought down.

ANALYSIS OF Q4(2007-08) Consolidated Results

• The maiden International Acquisition of Sylvania has taken

Havells into US$ 1 billion club, with Consolidated Net Revenue

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for the financial year 2007-08 reaching Rs.50,022 mn ($1.25 bn).

1US$ = INR 40

• Indian business grown by 33% to Rs. 20,549 mn. International

business grown by 7.6% with Net Revenue of Rs. 29,473 mn in

FY08.

• Strong Brand positioning with more Media Advertising.

•Consolidated Profit Before Tax close to INR 2 billion amountingto Rs. 1,987 mn for the financial year 2007-08.

• Consolidated Net Profit amounted to Rs. 1,610 mn Theconsolidated operating profitability is lesser than the Havellsstand alone profitability. Since Sylvania has lesser margins ascompare to Havells India. The efforts are directed to getsustainable and profitable growth in Sylvania.

• ROCE and RONW on the same way is lower on consolidated basis. The financing has been completed with the partreplacement of debt by equity dilution. The equity participationwas done in the month of November so have not much impacted

kuldeep havelles

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