INDEX Sr.N o. Particulars Page no. 1. Executive Summary 1 2. HOC Profile 2 3. Research Methodology 9 4. Literature Study 12 5. Project Work 1.1 Balance sheet 1.2 Profit and loss statement 1.3 Highlights 1.4 Calculations and interpretation of ratios VII 6. Findings & Analysis XXII 1
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INDEX
Sr.No. Particulars Page no.
1. Executive Summary 1
2. HOC Profile 2
3. Research Methodology 9
4. Literature Study 12
5.
Project Work
1.1 Balance sheet
1.2 Profit and loss statement
1.3 Highlights
1.4 Calculations and interpretation of ratios
VII
6. Findings & Analysis XXII
7 Conclusion XXII
8. Reference Section XXVII
1
A PROJECT REPORT
ON
“RATIO ANALYSIS
OF
HOC LTD”
2
1.0EXECUTIVE SUMMARY:
Finance, like blood in the human body, gives vitality and strength to a business
enterprise; and the Financial Management is a system, like the blood circulatory system, of the
human being, which is concerned with procurement of funds at low cost and their effective
utilization in the business. The steady and healthy circulation of finance throughout the
business is the basis of solvency. Finance is described as science of money and involves the
process of conversion of accumulated funds to productive use. The essence of the effective
Financial Management is that the finance so converted should generate an income higher than
the cost of procuring such finance by utilizing the same in the best possible way. Otherwise,
the enterprise would become sick and gradually would proceed to the close or winding up.
The finance manager, therefore, must keep in view the needs of funds both short and long
term and ensure that they do not keep too many funds blocked in inventories, book debts, cash
etc.
Ratio analysis plays vital role for taking appropriate business decisions particularly at a time
when market is highly competitive.
The major consideration in taking a Ratio Analysis decision is to evaluate its returns as
compared to its investment. Ratio Analysis helps in identifying the financial strengths
and weakness of the company, in evaluating company’s performance relating to
Financial Statement Analysis, to know the liquidity position of the company,
Project also contains overall study and analysis of company’s financial position.
3
2.0 HOC PROFILE
Hindustan Organic Chemicals Limited (HOCL) was set up by the government in
1960 with the objective of attaining self-reliance in basic organic chemical needs .In fact this
was first attempt for manufacture of basic chemicals and to reduce country’s dependence on
import of vital organic chemicals.HOC started as a small chemical unit. But today has
acquired the status of multi-unit company with two fast growing units and one subsidiary
unit.
At present more than 500 units based on HOC’s products have been set up all over the
country which have not only succeeded in meeting the goal of self sufficiency but also entered
the international markets earning precious foreign exchange by exporting chemicals, dyes, dye
intermediate and drugs.
Main manufacturing units of HOC comprises of:
The Nitro aromatic complex at Rasayani in Raigad district (Maharashtra.)
The Phenol complex at Kochi (Kerala)
Polytetraflouroethylene (PTFE) Complex (Subsidary) at Rudraram, Hyderabad
(Andhra Pradesh).
4
HOC provides the basic organic chemicals essential for vital industries.
The main products manufactured by HOC are Phenol, Acetone, Nitrobenzene,
Acetanilide, Formaldehyde, Aniline, and Nitrotoluenes. The raw materials used by HOC
are Benzene, Toluene, LPG, Methanol, Naphtha and Sulphur, majority of which come
from petroleum refineries and petrochemicals complexes.
HOC provides the basic organic chemicals essential for vital industries like
resins and laminates, dyes and dye intermediates, drugs and pharmaceutical, rubber
chemicals, paints, pesticides and others, touching virtually every facet of everyday life.
It also provides the versatile engineering plastic polytetraflouroethylene (PTFE)
through its subsidiary.
MISSION:
To be a dynamic chemical market leader committed to quality and customer
satisfaction. Our mission is also to be prime representative of India in global chemical
business.
GROWTH STRATEGY:
The fast changing working environment and the need for not only sustaining but also
accelerating the growth process, dictated the long term perspective in planning coupled with
flexibility to make strategic decisions. Organizations are expected to be resilient enough to
respond to the emerging challenges. Hence, the company concentrates on the core business of
Nitro aromatics and Phenol/ Acetone and certain Phenol based down stream products.
5
Major business and investment thrust to be in the areas of core competency.
Value addition in the area of manufacture.
Continuous restructuring and reengineering in order to achieve:
i) Reduction in cost of production
ii) Increase market share and margins
iii) Higher level of efficiencies and productivity
and ratio. Therefore we can say there are different ratios for different groups, these groups
with the ratio that suits them is listed below :
1. Investors: These are people who already have shares in the business or they are willing to
be part of it. So they need to determine whether they should buy shares in the business, hold
on to the shares they already have or sell the shares they already own. They also want to
assess the ability of the business to pay dividends. As a result the Return on Capital
Employed Ratio is the one for this group.
2. Lenders: This group consists of people who have given loans to the company so they want
to be sure that their loans and also the interests will be paid and on the due time. Gearing
Ratios will suit this group.
3. Managers: Managers might need segmental and total information to see how they fit into
the overall picture of the company which they are ruling. And Profitability Ratios can show
them what they need to know.
4. Employees: The employees are always concerned about the ability of the business to
provide remuneration, retirement benefits and employment opportunities for them, therefore
these information must be find out from the stability and profitability of their employers who
are responsible to provide the employees their need. Return on Capital Employed Ratio is
the measurement that can help them.
5. Suppliers and other trade creditors: Businesses supplying goods and materials to other
businesses will definitely read their accounts to see that they don't have problems, after all,
any supplier wants to know if his customers are going to pay them back and they will study
the Liquidity Ratio of the companies.
6. Customers: Customers are interested to know the Profitability Ratio of the business with
which they are going to have a long term involvement and are dependent on the continuance
of presence of that.
7. Governments and their agencies: They are concerned with the allocation of resources
and, the activities of businesses. To regulate the activities of them, determine taxation policies
and as the basis for national income and similar statistics, they calculate the Profitability
Ratio of businesses.
39
8. Local community: Financial statements may assist the public by providing information
about the trends and recent developments in the prosperity of the business and the range of its
activities as they affect their area so they are interested in lots of ratios.
9. Financial analysts: They need to know various matters, for example, the accounting
concepts employed for inventories, depreciation, bad debts and so on .therefore they are
interested in possibly all the ratios.
10. Researchers: Researchers' demands cover a very wide range of lines of enquiry ranging
from detailed statistical analysis of the income statement and balance sheet data extending
over many years to the qualitative analysis of the wording of the statements depending on
their nature of research.
40
5.0 DATA ANALYSIS
5.1 BALANCE SHEET AS AT 31 ST MARCH, 2011
(Rs. In lacs)
PARTICULARS Year ended
March 2011
Year ended
March 2010
I.SOURCES OF FUNDS
1. SHAREHOLDERS’ FUNDS :
a) Share Capital
b) Reserves and Surplus
2. LOAN FUNDS :
a) Secured Loans
b) Unsecured Loans
TOTAL
II. APPLICATION OF FUNDS
1. FIXED ASSETS :
a) Gross Block
b) Less : Depreciation / Amortisation
c) Net Block
d) Capital work-in-progress (CWIP)
33726.96
6577.50
40304.46
3095.05
19020.37
22079.42
62383.88
71501.38
53830.64
17670.74
3298.88
20969.62
33727.36
6478.23
40205.59
7028.15
18333.84
25361.99
65567.58
70579.12
51378.48
19200.64
3068.97
22269.61
41
2. INVESTMENTS
3. CURRENT ASSETS, LOANS AND
ADVANCES :
a) Inventories
b) Sundry Debtors
c) Cash and Bank Balances
d)Other current assets
e) Loans and Advances
4. CURRENT LIABILITIES AND
PROVISIONS :
a) Current Liabilities
b) Provisions
Net Current Assets
5.MISSCLANEOUS EXPENDITURE
Profit and Loss Account
1106.00
11031.75
5141.03
3105.99
548.35
7440.46
27252.58
11438.59
6783.35
18221.94
9030.64
-
31277.62
62383.88
1106.00
7626.19
4723.71
2894.84
622.42
7279.93
23147.09
9653.45
5150.88
14804.33
8342.76
-
33849.21
65567.58
42
5.2 PROFIT AND LOSS A/C FOR YEAR ENDED 31 ST MARCH
2010-2011
(Rs. In lacs)
Particulars Year ended
March 2011
Year ended
March 2010
INCOME:
Sales(gross)
Less. Excise on sales
Net sales
Other income
Profit on sale of asset
Increase/(decrease)in stock-in-trade
TOTAL
EXPENDITURE:
Materials consumed
Excise duty
Employees Remuneration and Benefits
Manufacturing, Administrative and
Selling Expenses
Interest
Depreciation
Provisions
Loss on sale/disposal of Asset
Profit/(Loss)for the year before Tax
73803.91
7067.88
66736.03
1006.79
3.45
3041.77
70788.04
39213.21
167.97
12002.85
11856.12
2088.35
2517.74
2411.46
68.03
68158.73
52071.24
4207.83
47863.41
1745.59
0.98
(212.72)
49397.26
31489.89
165.13
9037.86
12020.43
2323.10
2652.28
139.89
0.63
57829.21
43
Less: Provision for taxation
Less: Provision for Fringe Benefit Tax
Less: Fringe Benefit Tax-previous
year
Profit /(loss) after Tax
Less: Reserve/provision no longer
required,Prior period & extra ordinary
items
Profit /(loss) after Tax & Adjustment
Add: Opening balance of profit and
loss account
Add: Transferred from General
Reserve
Add: Transferred from Bond
Redemption reserve no longer
required
Balance carried to Balance Sheet
Earnings per share
2629.31
-
-
-
2629.31
57.72
2571.59
(33849.2)
-
-
(31277.62)
3.83
(8431.95)
-
-
-
(8431.95)
(124.16)
(8307.79)
(26591.42)
-
1050.00
(33849.21)
(12.35)
44
5.3 Highlights for the year 2010-2011
PRODUCTION
During the year under review the company was able to generate the Net profit of Rs. 25.72 crores during the year, while the net loss during the previous year was Rs 83.08 crores.As regards the unit wise performance, the net profit of Kochi unit was Rs.130.08 crores which was much higher as compared to the previous year’s profit of Rs.14.74 crores. The Rasayani unit recorded a net loss of Rs. 104.37 crores as compared with the previous year’s loss of Rs. 97.82 crores.
OPERATIONS :
During the year under report, company’s Kochi unit, achieved a sales turnover of 84082 MTs valuing Rs.58120.81 lacs as against 72172 MTs valuing Rs. 38032.63 lacs of the previous year. With the production of 234684 MTs (main products) during the year 2010-11 as against the production of 221249 MTs (main products) in 2009-10, company could achieve an overall capacity utilization of 58% during the year company has recorded the sale of 129021.09 MTs during the year (last year 125512.48 MTs) valuing Rs.64142.59 lacs (last year Rs.45940.24 lacs).
The high labour cost and high incidence of cost on closed plants at Rasayani unit are the major concerns. Company has continued its cost cutting measures to counter these problems and in order to be competitive and improve performance and profitability. During the year, Rasayani unit could achieve only 67798 MTs (main products) of production as against 83520 MTs production (main products) of the previous year. The capacity utilization for the year 2010-11 was 27%.
HOC continued to enjoy support from all its valuable customers during the year 2010-11 due to excellent quality of its products manufactured at Kochi and Rasayani. It has achieved sales turnover of Rs.667.36 Crores (net of excise duty) as against Rs. 478.63 crores (net of excise duty) of the previous year. The sales volume during year 2010-11 was 1,45,173.65 MTs against 1,43,747.48 MTs for the year 2009-10, registering an increase in sales realization for the year amounting to Rs. 188.73 crores as compared to previous year’s sales of Rs. 478.63 crores
45
5.4 Calculation and Interpretation of Ratios
PROFITABILITY RATIOS:-
5.4.1 RETURN ON CAPITAL EMPLOYED:-
NPBT
Return on Investment: - X 100
Capital Employed
Year 2010-11 2009-10 2008-09 2007-08NPBT 2,629.31 -8,431.51 -2,573.51 1,566.93Capital
Employed48,222.20 30,612.37 36,714.73 35,385.68
Return on Investment
5.45% -27.54% -7.01% 4.43%
It indicates that company used its assets economically and made aprofit for the financial year
2010-11 over the previous year’s loss.It also indicate that management has utilised its
resources in proper manner. The return on capital employed of 5.45% indicates that net return
of Rs.5.45 is earned on a capital employed of Rs. 100.
5.4.2 GROSS PROFIT MARGIN RATIO:-
Gross Profit Margin Ratio= Gross Profit Margin X 100
Net Sales
Year 2010-11 2009-10 2008-09 2007-2008Sales 66,736.03 47,864.41 54,653.7 57,142.84Cost of Goods Sold 42,254.98 31,702.61 37,683.5 40,626.2Gross Grofit Margin 24,481.05 16,161.8 16,970.2 16,516.64
Gross profit margin=sales - cost of goods sold
46
Year 2010-11 2009-10 2008-09 2007-08Gross Profit Margin Ratio 24,481.05 16,161.8 16,970.2 16,516.64
Net Sales 66,736.03 47,864.41 54,653.7 57,142.84Gross Profit Margin Ratio
36.68% 33.77% 31.05% 28.90%
The gross profit ratio in 2010-11 is 36.68% which was 33.77% in 2009-10. In 2010-11 Gross
profit ratio has increased by 8.62% than its previous year its because of cost of sales is less in
this year. This indicates that the company’s profitability position is good.
Year 2010-11 2009-10 2008-09 2007-08No. of days 365 365 365 365Debtors Turnover
12.98106216 10.13258858 14.06241155 8.670486306
Debtor Collection Ratio(days)
28.117884 36.02238432 25.95571881 42.09683138
Debtor’s turnover ratio is alternative known as “Accounts Receivable Turnover Ratio”. This
ratio measures the collectibility of debtors and other Accounts receivable it means the rate at
which the trade debts are being collected. Debtor turn over ratio in year 2010-11 is 28 times
which less as compared to previous year. Therefore company’ efficiency of collecting debt
has been increased compared to earlier year.
5.4.16 STOCK-WORKING CAPITAL RATIO:-
Closing Stock
STOCK-WORKING CAPITAL RATIO=
Working Capital
Year 2010-11 2009-10 2008-09 2007-08Closing Stock 6708.96 3764.92 3977.64 1767.1Working Capital
9030.64 8364.76 12037 9221.84
Stock-Working Capital Ratio
0.742910801 0.450093009 0.330451109 0.191621195
Stock-working capital ratio for the year 2010-11 is 0 .74 which is less as compared to
previous .This ratio shows that extend of funds blocked in stock. Closing stock is more in
2010-11 so it indicates that fund blocked in stock is more. Also there is increase in working
capital because of increase in cash.
53
5.5 Graphs:
Sales turnover Chart No. 5.5.1
(sources: Profit and loss statement of HOC LTD)
Sales turnover chart shows that the company sales turnover has increased in year 2010-11.It
has achieved sales turnover of Rs.667.36 Crores as against Rs. 478.63 crores the previous
year. The sales volume during year 2010-11 was 1,45,173.65 MTs against 1,43,747.48 MTs
for the year 2009-10, registering an increase in sales realization for the year amounting to Rs.
188.73 crores as compared to previous year’s sales of Rs. 478.63 crores.
Production chart No.5.5.2
54
(sources: Annual report of HOC LTD)The chart shows that the company production is more in 2010-11 as compared to previous year2009-10. Company could achieve overall capacity utilization of 58% during the year.
Financial performance chart No.5.5.3
(sources: Profit and loss statement of HOC LTD)
55
Net profit after tax has increased in year 2010-11. In 2010-11 net profit is much more as
compared to previous year. It’s becauseof company’s cochi unit has permormed very well and
has brought in profit of Rs130 crores. It shows that company’s profitability position is good.
Distribution of each rupee earned chart No.5.5.4
(sources: Profit and loss statement of HOC LTD)
Company has huge investment in employees remuneration and benefits;
manufacturing,administrating and selling expenses;depriciation etc.
56
6.0 FINDINGS AND CONCLUSION
6.1 Findings
Tall organization structure: The organization structure being tall and the culture
being bureaucratic, the communication has become slow. Multitired responsibility and
authority has made the decision making process slow. This has put serious limitation
on the organization response time to the changes in external environment, in particular
competition.
High cost of production: The machinery & plants of the organization are old and
requires repair and maintenance expenditure. Due to this overhead cost increases and
production cost also increases. The other companies are able to maintain their
overhead costs such as maintenance, water, fuel, electricity etc and are able to produce
at low cost. Due to high cost of production the demand of the product has declined
considerably as compared to previous years.
Old depreciated plant: Most of the plants are old and depreciated, it require high
maintenance cost. Some of the plants are idle due to various reasons. Some plants are
idle due to lack of raw materials. Company has to prepared proper budgets for heavy
investment for modernization of plants.
High manpower cost: Although companies’ manpower is skilled but they are over
employed, it results in increase in the operating cost of the company.
57
External factors: External factors like government policies, fluctuation in external
environment reflects the company’s financial performance, changing demand pattern,
technologies, increasing competition due to globalization etc. affect the company’s
performance adversely. The companies’ technology is one which affects the
performance of the company drastically.
Strategic considerations like increasing company’s competitiveness, reducing
company’s dependence on external agencies etc.
Engineering and Technical viability.
Financial viability.
Seeking the support and involvement of all levels of management.
Fundamentally, the format serves as nothing more than a convenient way to record
budget figures. It does not encourage or require that the managers developing these
figures consider and analyze the various factors that are relevant to the development of
truly meaningful budget figures.
58
6.2 Conclusion
In the finance department each section should have its separate latest PC’s with
laser printers, so they can complete their work faster.
New software programs like ERP, Tally, SAP, etc should be implemented which can
make finance work easier and faster.
Tall organization structure: The company should also give due consideration to
organization structure. Organization structure plays very essential role in the
communication of employees. HR manager must form proper policies for the
organization. Proper budgeting must be done in the tall organization to overcome the
future hurdles. The responsibility should be properly disseminated to person in tall
organization structure.
Reduced cost of production: Production cost must be reduced so that company can
gain due advantage. This can be done only by using proper tools, equipments and
technology required for production of products. High cost of production is mainly due
to overhead costs (power, maintenance, fuel and water) which the management must
think and plan properly to reduce the costs.
Manpower cost: HR manager must plan properly and form proper policies so that the
competent employees can be retained in the organization. The HR manager must form
personnel budget so that future cost can be estimated.
Other external and internal factors: The companies management needs to give due
consideration to external and internal factors and chalk out appropriate solution to the
problems.
There should be proper mechanism to recognize and assess the impact on financial
and operational performance of changes in the level of activity.
59
Clear and Realistic goals: Budgeting is a means to achieve goals and objectives.
Budgeting will not succeed if the goals to be achieved are not clear; budget
implementation will not be systematic. The financial manager or the budget director,
therefore, must ensure that objectives and goals have been properly laid down. The
enterprise objectives and budget goals to be accomplished through budgeting should
be reasonable and realistic; they should be capable of attainment. Budgets goals
should not set at too high or low a level. Goals set at a very high level are impossible
to attain and as a result, have depressing effect on the employee’s morale. Once the
employees know that they are unrealistic and unattainable they do not put any serious
efforts to achieve them.
Creation of Responsibility centres: A small firm can be managed by an individual
or a small group of individual. But the activities of a large firm cannot be supervised
by an individual. For effective control of all activities a large firm is divided into
meaningful segments, departments or divisions. Responsibility centre is a sub unit of
an organization under the control of a manager who has the responsibility for the
activities of that responsibility centre. For planning and control purposes
responsibility centres must generally classified into cost centre, profit centre, and
investment centre.
Full Participation: Full participation of managers and their subordinates at all level
should be sought in developing the budgeting system. The participation should be
meaningful and real. If employees have effectively participated in developing the
budget goals and targets, they will make special efforts to see that the budgeting
process succeeds.
60
Flexibility: The budgeting system should be flexible enough to take advantage of all
opportunities that arise from time to time. Inflexibility impairs the initiative and
freedom of managers and subordinates in making decision. HOCL must administered
flexible budgeting system due to which managers will feel free and relaxed in
implementing the budget.
Top management support: A budgeting system will be an utter failure if it is not
initiated and supported by top management. Top management must: (i) understand the
nature and characteristic of budgeting; (ii) Support the programs in its entire
ramification; (iii) Be willing to devote the effort required to make it operative. The
support of top management for the budgeting system implies that it is confident about
its capability to plan the future course of action and run the enterprise successfully.
HOCL has to do this for effective budgeting as effective budgeting results in good
management.
Reduction of Scrap: To reduce the cost HOCL must reduce the scrap. As the control
of scrap or defective work is a matter of great importance in a manufacturing
organization. That is why many manufacturing organizations have a high powered
committee that periodically makes a careful examination of the cause of each item of
scrap produced by an organization.
7.0 REFERENCE SECTION
61
A] Bibliography
Annual Report 2008-2009, 2009-2010,2010-11 of HOC Ltd..