A STUDY ON RATIO ANALYSIS

AT
RASTRIYA ISPAT NIGAM LIMITED
VISAKHAPATNAM

A Project report submitted in partial fulfillment of the requirements for

the award of
`

MASTER OF BUSINESS ADMINISTRATION

By

EMANY VSNV CHANDRA

Regd.No. 096G1E0010
Under the esteemed guidance of

Sri.K.SANYASI RAO
ASST. GENERAL MANAGER (F&A)
Visakhapatnam Steel Plant
Visakhapatnam

Project Guide

VARAHA LAKSHMI NARASIMHA SWAMY

EDUCATIONAL TRUST GROUP OF INSTITUTIONS,
NARAVA
2009-11

CERTIFICATE OF PROJECT GUIDE

IN
1
 RASTRIYA ISPAT NIGAM LIMITED

This is to certify that EMANY VSNV CHANDRA the project

report entitled a study on RATIO ANALYSIS in RASTRIYA ISPAT
NIGAM LIMITED is a bonafide work done and submitted in partial
fulfillment of the requirement for the award of Master of Business
Administration by Regd. No. 096G1E0010 under my guidance &
supervision during the period 06-12-2010 to 15-01-2011.

Station: Visakhapatnam
Date : 17-01-2011

K.SANYASI RAO
ASST. GENERAL
MANAGER (F&A)
RASTRIYA ISPAT NIGAM LIMITED
Visakhapatnam Steel Plant

2
 DECLARATION

I, EMANY VSNV CHANDRA here by solemnly declare that the

project report entitled a study on the Ratio Analysis. Submitted by me is
a bonifide work done and it is not submitted to any other university or
published anytime before. This project work is in partial fulfillment of
the requirements for the award of the Master of Business
Administration from VARAHA LAKSHMI NARASIMHA SWAMY
EDUCATIONAL TRUST GROUP OF INSTITUTIONS, NARAVA.

Place: VISAKHAPATNAM
Date: 17-01-2011

EMANY VSNV CHANDRA

3
 ACKNOWLEDGEMENT

The satisfaction that accompanies the successful completion

of any task would be incomplete with out mentioning people who made it
possible and whose encouragement and constant guidance crowned my
effort with success. I wish to express my deep sense of gratitude to
Dr P SRINIVAS RAO, DIRECTOR, VARAHA LAKSHMI
NARASIMHA SWAMY EDUCATIONAL TRUST’S GROUP OF
INSTITUTIONS for permitting me to do the project.

I am grateful to external project guide SRI K.SANYASI RAO

and I am also thankful to SRI G.TRINADHA RAO, DEPUTY
MANAGER, HRD & PROJECT WORKS in VISHAKAPATNAM
STEEL PLANT for his co-operation and in providing the information of
the company needed by me.

I especially thank all those who have helped me directly or

indirectly. I express my profound thanks to my affectionate parents for
their constant encouragement throughout my educational career.

(EMANY VSNV CHANDRA)

4
CHAPTER 1

5
 GENERAL INTRODUCTION

The end products of the business transactions are the Financial Statements
comprising the position statement or Balance Sheet and the Income Statement or
Profit and Loss Account. Financial statements are the basics for the decision making
by the Management and as well as all other Stakeholder who are interested in the
affairs of the firm such as investors, creditors , customers ,suppliers , financial
institutions , employees ,potential investors , govt., and the general public.

In this project an attempt is made to know the financial performance of

RASHTRIYA ISPAT NIGAM LIMITED, VISAKHAPATNAM STEEL PLANT
through Ratio Analysis.

OBJECTIVES OF THE STUDY:

The main objective of the study is to apply theoretical concepts to the practical
situations of RINL so as to compare and correlate the actual achievements with a
theoretical conclusion.
The main objectives of the study are:

 To know the extent to which RINL/VSP is efficiently utilizing its sources to

its operations.

 To study the efficiency of overall operations.

 To analyze the financial position of the RINL/VSP.

 To understand the capital structure of the RINL/VSP through calculating of

leverage ratios.

 To know the profitability of the RINL/VSP through calculation of profitability

ratios.

 To give appropriate suggestions to the best performance of the organization.

6
METHODOLOGY OF THE STUDY:

Methodology is a systematic procedure of collecting information in order to

analyze and verify a phenomenon. The collection of information is from two
principle sources. They are:
1. Primary Data
2. Secondary Data

1. Primary Data:
It is the information collected directly with out any references. In this study it
is gathered through interviews with concerned officers and staff, either individually or
collectively, sum of the information has been verified or supplemented with personal
observation conducting personal interviews with the concerned officers of Finance
Department of Visakhapatnam Steel Plant.

2. Secondary Data:
The Secondary Data was collected from already published sources such as,
Pamphlets of Annual Reports, Returns and Internal Records, reference from Text
Books and Journals relating to Financial Management. The data collection includes:
(a) Collection of required data from Annual Reports of Visakhapatnam
Steel Plant.
(b) Reference from Text Books and Journals relating to Financial
Management.

7
LIMITATIONS OF THE STUDY:

Though the project is completed successfully a few limitations may be there.

 Since the procedure and polices of the company will not
allow to disclose some confidential financial information, the
project has to be completed with the available data given to us.

 The study is carried basing on the information and

documents provided by the organization and based on the
interaction with the various employees of the respective
departments.

 Analysis is limited to the results of RINL/VSP and not

compared to industry standards / results.

 Data in some of the ratios has been directly taken from

the prepared reports of RINL due to non-disclosure of input data
due to confidentiality.

8
CHAPTER-II

9
DEVELOPMENT OF STEEL INDUSTRY IN INDIA:

 Japan remained the largest exporter of semi-finished and finished steel

products in 2002 followed by Russia and Ukraine.

Other significant recent developments in The Development of Steel Industry

in India should be viewed in conjunction with the type and system of Government that
has been ruling the country. However, its production in significant quantity started
only after 1900. The growth of steel industry can be studied by dividing the period
into pre and post independence era. By 1950, the total installed capacity of ingot steel
production was 1.5 million tons per year. In a short span of about 3 decades or so the
capacity was increased 11 folds to about 16 MT by the 90’s.

1.1 Growth of Steel Industry:

The growth in a chronological order is depicted below:

S No Year Growth
1. 1830 Osier Marshall heather constructed the first manufacturing
plant at port-motor in Madras Presidency.
2. 1874 James Erskin founded the Bengal Frame Works.
3. 1899 Jamshedji TATA initiated the scheme for an integrated
Steel Plant
4. 1906 Formation of TISCO
5. 1911 TISCO started production
6. 1918 TISCO was founded
7. 1940-1950 Formation of My sore Iron and Steel initiated at
Bhadravathi in Karnataka.
8. 1951-1956 First Five-Year Plan - The Hindustan Steel Limited (HSL)
was born in the year 1954 with decision of setting up three
plants each with 1 million tones ingot steel per year at

10
 Rourkela, Bhilai, and Durgapur. TISCO started its
expansion programmed.
9. 1956-1961 Second Five-Year Plan - A bold decision was taken up to
increase the ingot steel output in India to 6 million tones
per year and its production at Roukema, Bhilai and
Durgapur Steel Plant started.
10. 1961-1966 Third Five-Year Plan – During the plan the three Steel
Plants under HSL & TISCO were expanded.
11. 1964 Bokaro Steel Plant came into existence
12. 1966-1969 Recession Period – Till the expansion programs were
actively existed during this period
13. 1969-1974 Fourth Five-Year Plan – Salem Steel Plant started.
Licenses were given for setting up of many Mini Steel
Plants and re-rolling mills Government of India. Plants in
south are each in Visakhapatnam and Karnataka. SAIL
was formed during this period on 24th January 1973.
14. 1974-1979 Fifth Five-Year Plan – The idea of setting up the fifth
integrated Steel Plant, the first re-based plant at
Visakhapatnam took a definite shape. At the end of the
Fifth Five-Year Plan the total installed capacity from six
integrated plants was up to 10.6 million tons.
15. 1979-1980 Annual Plan - The Erstwhile Soviet Union agreed to help
in setting up the Visakhapatnam Steel Plant.
16. 1980-1985 Sixth Five-Year Plan – Work on Visakhapatnam Steel
Plant started with a big bang and top priority was accorded
to start the plant. Schemes for modernization of Bhilai
Steel Plant, Rourkela Steel Plant, Durgapur steel plant and
TISCO were initiated. Capacity at the end of Sixth Five-
Year Plan from six integrated plants stood 11.50 million
tons.
17. 1985-1991 Seventh Five-Year Plan – Expansion works at Bhilai and
Bokaro Steel Plant completed. Progress of Visakhapatnam
Steel Plant picked up and the nationalized concept has been
introduced to commission the plant with 30 MT liquid steel
capacities by 1990.
18. 1992-1997 Eight Five-Year Plans – The Visakhapatnam Steel Plant
was commissioned in 1992. The cost of plant has become

11
 around 8755 cores. Visakhapatnam Steel Plant started the
production and modernization of other steel plants is also
duly engaged.
19. 1997-2002 Ninth Five-Year Plant – Restructuring of Visakhapatnam
Steel Plant and other public sector undertakings.

20 2002-2007 Tenth Five-Year Plan –Steel industry registers a growth of

9.9%.Visakhapatnam steel plant has high regime targets
and achieved the best of them.

First Five-Year Plan (1951 to 1956):

No new steel plant came up, as the first plan was mainly agriculture oriented.
However, IISCO was allowed to expand form 1MT/year to 2 MT/year of ingots, and
from 0.5 MT/year to 1.0 MT/year of steel. And, the First Five-Year Plan
contemplated a new Steel Plant to be erected in Public Sector.

Thus the Hindustan Steel Limited (HSL) was born on 19 th Jan 1954 with the
decision of setting up three steel plants each with one million tons ingot steel per year
at Rourkela, Bhilai and Durgapur. Though TISCO and IISCO were scheduled to
expand, TISCO started its expansion program.

Second five-year plan (1956 to 1961):

During this period, additional steel producing capacity was added and a
decision was taken to increase the ingot steel output in India to 6 million tons per
year. The three one million ton steel plant one each at Rourkela, Bhilai and Durgapur

12
were completed during this period. They started production during the end of this
plan.

The salient features are given below:

Plant Capacity Location Collaboration Production (Tons)

RSP Sundargarh, Orissa Germany 720,000
BSP Durgapur, M.P. U.S.S.R 770,000
DSP Burdwan, W.B. UK 800,000

In addition to the above BSP and DSP each were having the capacity to
produce 300,000 tons of pig iron for sale.

Third five-year plan (1961 to 1966):

During this period, the three steel plants under HSL, TISCO, and IISCO were
expanded as shown below. However, these could be completed only by 1968 – 1969.

Recession Period (1966 – 1969):

The ambling expansion program taken up during the Third Five-Year Plan
could not be completed during that period. All the expansion programs were actively
executed during this period

Fourth Five-Year Plan (1969 – 1974):

Balancing facilities were incorporated in all the steel plants. Salem Steel Plant
work was taken up during this period. Licenses were given for setting up of many
Mini Steel Plants and Rolling Mills. Government accepted the idea of setting up two
more Steel Plants in the South one at Visakhapatnam and other at Hospet in
Karnataka. Both of them were envisaged to produce plain low Carbon Steel Products

13
initially with a capacity of 2 MT/year of ingots. Steel authority of India Ltd., was also
formed during this period on 2nd Jan 1973. Central Research and Development
Organization was set up in June, 1973 to tackle the research and development
problems of Iron and Steel Industry.

Fifth Five-Year Plan (1974 to 1979):

Work on Salem project progressed well. Bokaro with 1.7 MT capacities

started in Feb 1978. The expansions of Bhilai Steel Plant form 2.5 MT to 4 MT and
Bokaro from 1.7 MT to 4.0 MT picked up momentum. The idea of setting up the 5 th
integrated steel plant at Vizag took a definite shape. By the end of fifth five-year plan
the total installed capacity from six integrated plants was 10.6 MT/year.

Annual plans 1979 to 1980: various plans named above were reviewed and the
progress on different plants consolidated. Soviet – Union has agreed to help in setting
up the Vizag steel plant.

Sixth Five-Year Plan (1980 – 1985):

Work in expansion of Bhilai and Bokaro Plant was progressed. Bokaro's

intermediate stage of 2.5 MT completed. Many of the units were commissioned e.g. a)
Salem steel plant was commissioned b) on 31.9.81 work on Vizag Steel Plant started
with a bang and c) top priority was accorded to modernize the plant at TISCO.
Schemes for modernization of BSP, RSP, DSP, and IISCO were initiated at the end of
sixth five-year plan. The capacity from six integrated steel plants stood at 11.56 MT.

Seventh Five-Year Plan (1985 to 1991):

Almost all the units in the expansion work of Bhilai and Bokaro to 4 MT
completed. Progress of Vizag Steel Plant picked up and the rationalized concept has
been introduced to commission the plant with 3 MT liquid steel capacities by 1990.

Eighth Five-Year Plan (1992 to 1997):

14
 All units of Vizag Steel Plant were commissioned by July, 1992. Government
of India has given permission to set up Mini Steel Plants in Private Sectors.

Ninth Five-Year Plan (1998 to 2002):

National Development Council under Central Government has deposited Rs.

859.200 corers in ninth five year plan that targets an overall 6.5% growth gross
domestic production and will necessitate a 7% growth in the remaining years of plan.

Global Scenario:

As per IISI
 In March 2005 World Crude Steel output was 92.8MT when compared to
March 2004 (87.2 MT), the change in percentage was 6.5%.
 China remained the world’s largest Crude Steel producer in 2005 also
(27.5MT) followed by Japan (9.6MT) and USA (8.1MT). India occupied the
8th position (8.8MT)

 USA remained the largest importer of semi-finished and finished steel

products in 2002 followed by China and Germany.
 the global steel scenario have been:
Under the auspices of the OECD (Organization for Economic Co-operation &
Development) the negotiations among the major steel producing countries for a Steel
Subsidy Agreement (SSA) held in 2003 with the objective to agree on a complete
negotiating text for the SSA by the middle of 2004. It also set subsidies for the Steel
Industry of a ceiling of 0.5% of the value of production to be used exclusively for
Research & Development.

 The global economy witnessed a gradual recovery from late 2003 onwards.
China has become one of the major factors currently driving the world
economy.

15
  As a result of these economic developments IISI has projected an increase by
6.2% or 53 million metric tones in 2004 in the global consumption of finished
steel products. IISI has split the growth into two separate areas, China and the
Rest of the World (ROW). Steel consumption in China has been estimated to
increase by 13.1% or 31 met in 2004.

 USA has repealed the safeguard measures on import of steel as a result of a

ruling, by a WTO Dispute Resolution Panel, which held these measures to be
illegal under the WTO regime.

Present Scenario of Indian Steel Industry:

India is uniquely placed to become a very large producer and consumer of

finished steel products in the world. Substantial reserves of high grade iron ore, low
wage rates, technical and managerial skills of a high order have all enabled India to
gain this stature, by becoming 10th largest producer of steel in the world.
Unfortunately for the Indian steel industry, the price and distribution controls to
which it was subjected till about economic liberalization process began in the early
1990’s did not permit the large integrated steel plants to modernize their steel
manufacturing facilities or to upgrade their technologies to the state of art levels from
time to time.

With the economic liberalization that was initiated in 1992, Indian Steel
Industry has to accept the inevitable i.e. to appreciate the implications of low import
duty rated, face foreign competition and some how improve its strengths and
competitive edge to produce good quality products at lower prices and learn to
survive in the market place. Following liberalization, the steel Industry is well set on
the path of globalization. The dynamics of the World Steel Industry has a close
relation with Indian steel Industry. Presently in India, Steel products are being
produced from four different sources viz.,

16
  Integrated Steel Plants

 Mini Steel Plants

 Re-rolling Mills

 Alloy & Special Steel Plants

Integrated Steel Plants have larger capacity and produce Steel from basic raw
materials and the other three categories mentioned are characterized by low
investment and low break-even point.

Characteristics of Integrated Steel Plants:

 They have large capacities.

 Highly capital intensive.

 They have long gestation period.

 Labour intensive.

 They would have all facilities including raw materials resources, water supply,

power supply, testing and inspection facilities, township facilities, medical,

educational and recreational etc.

 Inter dependency of all the processing units on the proceeding and succeeding

units in the path of materials flow.

 A potential source for earning foreign exchange through exports.

 They serve as centers for the development of ancillary industries.

 They are major consumer of refractory materials.

The integrated Steel Plants in India are:

 Rourkela Steel Plant

17
  Bhilai Steel Plant

 Bokaro Steel Plant

 Durgapur Steel Plant

 Indian Iron and Steel Company (IISCO)

 Tata Iron and Steel Company (TISCO)

 Visakhapatnam Steel Plant (VSP)

Exim Policy (2002-2007):

 To facilitate sustained growth in exports to attain a share of 1% of global

merchandise trade.

 To stimulate sustained economic growth by providing access to essential raw

materials, intermediates, components, consumables and capital goods required
for augmenting production and providing services.

 To enhance the technological strength and efficiency of Indian agriculture,

industry and services, thereby improving their competitive strength while
generating new employment opportunities, and to encourage the attainment of
internationally accepted standards of quality.

 To provide consumers with good quality goods and services at internationally

competitive prices while at the same creating a level playing field for the
domestic producers
The New Industrial Policy Regime:

The New Industrial policy has opened up the iron and steel sector for private
investment by

(a) Removing it from the list of industries reserved for public sector and

(b) Exempting it from compulsory licensing.

18
 Imports of foreign technology as well as foreign direct investment are freely
permitted up to certain limits under an automatic route. Ministry of Steel plays the
role of facilitator, providing broad directions and assistance to new and existing steel
plants, in the liberalized scenario.

The Growth Profile:

STEEL:

The liberalization of industrial policy and other initiatives taken by the

Government have given a definite impetus for entry, participation and growth of the
private sector in the steel industry. While the existing units are being
modernized/expanded, a large number of new/green field steel plants have also come
up in different parts of the country based on modern, cost effective, state of-the-art
technologies.

At present, total (crude) steel making capacity is over 34 million tons and
India, the 8th largest producer of steel in the world, has to its credit, the capability to
produce a variety of grades and that too, of international quality standards. As per the
ratings of the prestigious “World Steel Dynamics”, Indian HR products are classified
in the Tier II category quality products- a major reason behind their acceptance in the
world market. EU, Japan has qualified for the top slot, while countries like South
Korea, USA share the same class as India.

In pig iron also, the growth has been substantial. Prior to 1991, there was only
one unit in the secondary sector. Post liberalization, the AIFIs has sanctioned 21 new
projects with a total capacity of approx 3.9 million tones. Of these, 16 units have
already been commissioned. The production of millions in 2002-0n ton3. During the
year 2003-04, the production of Pig Iron was 5.221 million tones.

19
Market Scenario:

• After liberalization, with huge scale addition to steel making capacity.

• Apparent consumption of steel increased from 14.84 million tons in

1991-92 to 30.265 million tons in 2003-04.

• The production of steel in 2003-04 is 36.193 million tons as against

33.67 million tons in 2002-03 thereby registering 7.5% growth.

• The demand of steel has been firmed up both at home as well as

internationally.

• Efforts are being made to boost demand particularly in rural areas and
also to increase exports.

Production:

• Steel industry was de-licensed and decontrolled in 1991 and 1992

respectively.

• India is the 8th largest producer of steel in the world.

• In 2003-04, finished steel production was 36.193 million tones.

• Pig iron production in 2003-04 was 5.221 million tons.

• Sponge iron production was 8.085 million tons during 2003-2004.

• The annual growth rate of crude steel production in 2002-2003 was 8%

and in 2003-2004 was 6%. Last 4 years production performance is as

under:-

Demand – Availability Projection:

20
  Demand- Availability of iron and steel in the country is projected by Ministry

of Steel annually.

 Gaps in Availability are met mostly through imports.

 Interface with consumers by way of Steel Consumer Council exists, which is

conducted on regular basis.

 Interface helps in redressing availability problems, complaints related to

quality.

Pricing & Distribution

 Price regulation of iron & steel was abolished on 16.1.1992.

 Distribution controls on iron & steel removed except 5 priority sectors, viz.

Defence, Railways, Small Scale Industries Corporations, Exporters of

Engineering Goods and North Eastern region.

 Allocation to priority sectors is made by Ministry of Steel.

 Government has no control over prices of Iron & Steel.

 Open market prices are generally on rise.

 Price increases of late have taken place mostly in long products than flat

products.

Imports of Iron & Steel:

 Iron & Steel are freely importable as per the extant policy.

 India has been annually importing around 2.05 Million Tones of Steel.

21
  Import duty on several raw materials used by the steel sector like non-coking

coal, met coke and nickel has been reduced to 5%. Import duty on coking coal

has been reduced to ‘Nil’.

Exports of Iron & Steel:

 Iron & Steel are freely exportable and India is a net exporter of steel.
 Advance Licensing Scheme allows duty free import of raw materials for
exports.
 Duty Entitlement Pass Book Scheme (DEPB) also facilitates exports. The
Government has temporarily suspended the DEPB on iron & Steel &
ferroalloys w.e.f 27th March 2004 as a measure to increase Iron & Steel
availability in the domestic market.
 Steel Exporter’s Forum has been set up to boost steel exports.
 An Anti Dumping Directorate has been set up under the Ministry of
Commerce with adequate power to fight trade actions while remaining within
the WTO framework.

Customs Duty:

• The peak rate of Custom Duty has been reducing sharply during the
last 5 years. In the interim budget for 2004-05, announced in
January’2004 the peak rate was reduced from 25% to 20%. In 2004 the
Customs Duty on carbon steel items and pig iron was further reduced
to 5%.
• The custom duty on scrap was nil.
• Import duty on coking coal has been reduced to ‘nil’, and on
metallurgical coke reduced to 5%.

Excise Duty:

22
 The Government has taken a number of steps to ensure the availability of iron
and steel items which inter-alias includes reduction in Excise Duty by 16% with
addition to Educational Cess 2% on 16%.

Levies on Iron & Steel:

DF LEVY:

This was a levy started for funding modernization, expansion and

development of steel sector. The fund, inter-alias, supports:

1) Capital expenditure for modernization, rehabilitation, diversification,

renewal & replacement of Integrated Steel plants.
2) Research & Development
3) Rebates to SSI Corporations
4) Expenditure on ERU of JPC
• SDF levy was abolished on 21.4.94
• Cabinet decided that corpus could be recycled for loans to Main
producers
• Interest on loans to Main Producers is set aside for promotion of R&D
on steel etc.
• An Empowered Committee has been set up to guide the R&D effort in
this sector.

23
 CHAPTER-III

COMPANY PROFILE

The Government of India has decided to set up an integrated Steel Plant at

Visakhapatnam to meet the growing domestic needs of steel. Visakhapatnam Steel

24
Plant was the effect of the persistent demands and mass movements. It is another step
towards increasing the country’s steel production.

The decision of the Government to set up an integrated steel plant was laid
down by the then Prime Minister Smt. Indira Gandhi. The Prime Minister laid the
foundation stone on 20th January 1971.

The consultant, M/s M N Dastur & Co (Pvt) Ltd. submitted a techno-

economic feasibility report in February 1972, and detailed project report for the plant,
with an annual capacity of 3.4 million tones of liquid steel.

The Government of India and USSR signed an agreement on 12th June 1979
for the co-operation in setting up 3.4 million tones integrated Steel Plant. The project
was estimated to cost to Rs.3, 897.28 crores based on prices as on 4th Quarter of
1981.However, on completion of the construction and commissioning of the whole
Plant in 1992, the cost escalated to Rs.8, 755 crores based on prices as on 2nd Quarter
of 1994.

Unlike other integrated Steel Plants in India, Visakhapatnam Steel Plant is one
of the most modern steel plants in the country. The plant was dedicated to the nation
on 1st August 1992 by the then Prime Minister, Sri.P.V.Narasimha Rao.

New technology, large-scale computerization and automation etc, are

incorporated in the Plant at the international levels and attain such labour
productivity, the organizational manpower has been rationalized. The manpower in
the VSP has been limited to17, 500 employees. The plant has the capacity of
producing 3.0 million tones of liquid steel and 2.656 million tones of saleable steel.

It has set up two major Blast Furnaces, the Godavari and the Krishna, which
are the envy of any modern steel making complex.

The economy of a nation depends on core sector industries like iron and steel.
Steel is the basic input for construction, machines building and transport industries.
Keeping in view the importance of steel the following integrated steel plant with

25
 foreign collaborations was constructed in the public sector in the post independence
era.

ORGANIZATION CHART

CHAIRMAN CUM MANAGING DIRECTOR

Director Director Director Director Director

(Finance) (Commercial) (Personnel) (Operations) (Vigilance)
ED (MM) DGM GM ED
(M&HS) I/C (Works) (Maint.)
ED Addl. GM
(Finance) Addl. GM GM (P&A) (Vig.)
Addl. GM
(Mktg) Addl. GM (QATD)
Company (P&IR) GM
Secretary Addl. GM (Maint.) ACM
DGM (Trg) Addl. GM
(Mktg) (Cordon)
(Audio &
AGM - Services DGM (HRD)
Telco) Addl. GM
(Int. Audit) & Exports
DGM (Legal (CR&RM)
Affairs) Addl. GM
(Services) DGM
(System)
Addl. GM
(Steel) GM
(D&E)&
I/C PECS
Addl. GM
(C, S & C)

VISION:

To be a continuously growing world-class company.

We shall:
 Harness our growth potential and sustain profitable growth.

26
 Deliver high quality and cost competitive products and be the first choice of

customers.

 Create an inspiring work environment to unleash the creative energy of people.

 Achieve excellence in enterprise management.

 Be a respected corporate citizen, ensure clean and green environment and develop

vibrant communities around us.

Mission:
To attain 16 million tone liquid steel capacity through technological up
-gradation, operational efficiency and expansion, to produce steel at international
standards of cost and quality, and to meet the aspirations of the stakeholders.

Core Values:
 Commitment

 Customer satisfaction

 Continuous improvement

 Concern of environment

 Creativity and innovation.

BRIEF IDEA ABOUT STEEL MAKING PROCESS

The modern era in steel making began with the introduction of Henry
Bessemer's & Bessemer process in the late 1850’s. This enabled steel to be produced

27
in large quantities cheaply, so that Mild Steel is now used for most purposes for
which wrought iron was formerly used. This was only the first of a number of
methods of steel production. The Gilchrist-Thomas process (or basic Bessemer
process) was an improvement to the Bessemer process, lining the converter with a
basic material to remove phosphorus. Another was the Siemens-Martin process of
open hearth steelmaking which like the Gilchrist-Thomas process complemented,
rather than replaced, the original Bessemer process.

These were rendered obsolete by the Linz-Donawitz process of basic oxygen

steel making, developed in the 1950’s, and other oxygen steelmaking processes. One
third of world's steel is currently produced in China. Arcelor-Mittal is however the
production. White-hot steel pouring out of an electric arc furnace.
HRD POLICY
focus
Blast furnaces have been used for two millennia to produce pig iron, a crucial
step in the steel production process, from iron ore by combining fuel, charcoal, and
air. Modern methods use coke instead of charcoal, which has proven to be a great deal
more efficient and is crediting with Identifying
contributing tocompetence needs Revolution.
the British Industrial
Once the iron is refined, converters are used to create steel from the iron. During the
late 19th and early 20th century there were many widely used methods such as the
Bessemer process and the Siemens-Martin process. inputs
Providing training However, basic oxygen
steelmaking, in which pure oxygen is fed to the furnace to limit impurities, has
generally replaced these older systems. Electric arc furnaces are a common method of
reprocessing scrap metal to create new steel. They can also be used for converting pig
Monitoring training effectiveness
iron to steel, but they use a great deal of electricity (about 440 kWh per metric ton),
and are thus generally only economical when there is a plentiful supply of cheap
electricity.
Creating learning environment

Facilitating Self Development,

innovativeness & self expression

Enabling employees to assume

28
higher responsibility
29
 HUMAN RESOURCES

HRD PHILOSOPHY IN VISAKHAPATNAM STEEL PLANT

 Employees of the organization are greatest and most valuable resources.

 Whole on the one hand, HRD should appropriately harness the employee

potential for the attainment of the company objectives, the company on the

other, as its corporate responsibility, should create an enabling climate where

in human talent gets the best opportunity for self expression, all round

development and fulfillment.

 People are more than mere resources and therefore it will be the company’s

sincere endeavor to treat people with all the respect and that is warranted when

employees are seen as more mere instrumentalities.

 HRD as a management function will be given a place of strategic priority,

along with function like production, maintenance, materials on finance in the

overall scheme of management action in the company.

 HRD does not refer to training alone, nor it is just a new name for training. In

RINL/VSP HRD refers to creative and innovative initiatives in several

management functions for the development and growth of employees

 HRD should eventually be a core philosophy of all management actions and

should not remain merely a departmental / sectional activity.

 All functional and divisional heads responsible for various activities of the

company will imbibe the HRD spirit and suitability integrate HRD into their

plans, decisions and actions

30
HRD Objectives of Visakhapatnam Steel Plant:

 To provide initially a suitable match between employee competence level and

company’s work requirements

 To foster an appropriate climate and culture which nurtures employee

competence and adequate motivational levels for the application of their

abilities to assigned jobs/roles with required commitment.

 To enable employees seek greater identification with the company by fusing

management decisions and actions with the requisite care, concern and

developmental approach.

 To initially enable the employees and the organization achieve its mission and

objectives and business goals through HRD.

OHSAS- 18001 Certification:

It is widely recognized that the work itself and the work environment are
factors are paramount importance for health and well-being of the working and
general population. Most industrial jobs are inherently associate with certain working
conditions which are inimical to health and workers exposed to them sooner or later
succumb to their adverse influence unless adequately protected. The principles of
occupational risk management may be the same in developed and developing
countries. However, there can be a wide diversity in practice. A major trend in the
regulation of industrial risks to human health and the environment is the provision of
relevant information to all stakeholders and risk bearers. The British Standard
Institute (BSI): Occupational Health and Safety Assessment Series (OHSAS)
specification provide theoretical insights to enable an organization to control its
occupational health and safety (OH&S) risks and improve its performance.

31
 Visakhapatnam Steel Plant (Vizag Steel) is an ISO 9001, ISO 14001, and
OHSAS 18001, certified public sector organization in India. It is the only steel plant
in India, had all the three certificates. This paper reviews key aspects like hazard
identification and risk assessment(HIRA) carried out in 50 departments for physical,
chemical and Biological hazards, risk control measures taken, dissemination of
occupational risk management information to 17,000 workforce as a part of OHSAS
18001 certification process. We summarize the role of occupational health services
department in hazard identification, risk assessment and risk control at various
working environments with an emphasis on continual improvement and occupational
risk management.

Objectives:

 Expand plant capacity to 6.3mT by 2008-09 with the mission to expand

further in subsequent phases as per the corporate plan

 Sustain gross margin to turnover ration > 25%

 Be amongst top five lowest steel producers in the world by 2009-10

 Achieve higher levels of customer satisfaction than competitors

 Be recognized as an excellent business organization by 2008-09

 Instill right attitude amongst employees and facilitate them to excel in their

professional, personal and social life.

Quality Policy:

Employees of Visakhapatnam Steel Plant are committed to supply their customers’

quality products and services. To accomplish this Visakhapatnam Steel Plant will:
 Manufacture products as per specification and standards agreed with the

customer.

32
  Follow clearly documented procedures for achieving expected quality standard

of products and services.

 Continuously strive to improve quality of all material, processes and products.

 Maintain an enabling environment, which encourages actives involvement of

all employees to pursue continuous improvement of quality.

Technological Highlights of VSP:

 First shore based integrated steel plant.

 Selective crushing with pneumatic separation of coal blend.

 7 Meter tall Coke Ovens.

 Dry Quenching of hot coke and production of steam and power from hot inert

gases.

 Base-mix yard for the Sinter Plant.

 3200 cu. m Blast Furnace having belled-less top equipment with conveyor

charging.

 Granulation of 100% molten slag at the Cast House.

 B.F. top pressure recovery turbine for power generation.

 Desulphurization facilities for pre-treatment of hot metal.

 Sub lance measurement of dynamic blowing control with computer.

 100% continuous casting of liquid steel.

 High capacity, high speed, computer controlled multi-line mills.

 Use of on-line heat treatment “Temp core” processes for reinforcement bars.

 Use of No twist rolling and controlled cooling “Stelmore” of wire rods.

 Incorporation of peripheral yard for incoming and outgoing materials.

33
  First integrated steel plant to receive ISO 9002 certification for all its products.

Major sources of Raw Materials:

Iron Ore lumps & fines Bailadilla, M.P

BF Lime Stone Jaggayyapeta, A.P
SMS Lime Stone UAE
BF Dolomite Dubai
SMS Dolomite Madharam, A.P
Manganese Ore Chipuripalli, A.P
Boiler Coal Talcher, Orissa
Coking Coal Australia
Water supply Yeluru canal, Andhra Pradesh
Power supply Captive power plant

Medium cooking coal Gidi/Swang/Rajarappa/Kargil

Major Units:

ANNUAL CAP.
DEPARTMENTS UNITS (3.0 MT STAGE)
(‘000T)
3 Batteries each of 67 ovens & 7 Mts
COKE OVERNS 2,261
Height
2 Sinter machines of 312 Sqm grate
SINTER PLANT 5,256
area each
BLAST FURNACE 3,400 2 Furnaces of 3200 cu m volume each
3 LD Converters each of 150 Cum.
STEEL MELT SHOP 3,000 Volume and size 4 strand bloom
casters
LMMM 710 4 Stand finishing Mill
WRM 850 2 x 10 Stand finishing Mill
MMSM 850 6 Stand finishing Mill

Statistical Information:

MANPOWER PROFILE – GROWTH PATTERNS

34
 YEAR EXECUTIVES NON-EXECUTIVES
31-3-1997 2617 14570
31-3-1998 2617 14572

31-3-1999 2617 14087

31-3-2000 2683 13593
31-3-2001 4027 13104
31-3-2002 4203 12823
31-3-2003 4308 12586
31-3-2004 4533 12222
31-3-2005 4512 12101
31-3-2006 4629 11932
31-3-2007 4674 11727

31-3-2008 4967 11449

31-3-2009 5218 12007

31-3-2010 5263 12567

MAN POWER PROFILE

35
 16000 31-3-1997
14000 31-3-1998
31-3-1999
12000 31-3-2000
10000 31-3-2001
31-3-2002
8000
31-3-2003
6000 31-3-2004
4000 31-3-2005
31-3-2006
2000
31-3-2007
0 31/03/2008
EXECUTIVES NON- 31/03/2009
EXECUTIVES 31/03/2010

Error: Reference source not foundQualification Profile as on 31.03.2010:

 Engineering -14.34%
 Diploma -10.33% Engineering
Diploma

 Grad/PG -11.65% Graduation/PG

ITI
Literates
 Literates -24.33%

 ITI -39.35%

36
DIVISION-WISE MAN POWER:

 Works -82.03%
Works

 Projects -2.10% Projects

Mines
Others
Mines -2.14%
 Others -13.72%

AWARDS:

1. ISO 9002 for SMS and all the down stream units – a unique distinction in

the steel industry.

2. Indira Priya Darshini Vriksha Mitra award 1992-93, Nehru memorial

national award for pollution control 1992-93 & 1993-94.

3. EEPC export excellence award – 1994-95.

4. CII (Southern Region) energy conservation award – 1995-1996.

5. Continuously growing peacock (1st prize) national quality award – 1996.

6. Steel ministries trophy “Best safety performance – 1996.”

7. IIM national quality commitment award – 1997.

8. Gold star award for excellent performance in productivity.

9. Udyog excellence gold medal for excellence in steel plant.

10. Excellence award for out standing performance in productivity management,

quality and innovation.

11. ISPAT Suraksha Puraskar (1st prize) for largest accident free period 1991-94.

12. PM Trophy for the year 2002-03 as the Best Integrated Steel Plant

13. World quality commitment international star award in 2004

14. Cll-GBC National Award in 2005

37
15. Safety innovation award in 2006

16. Organizational excellence award in 2006

17. National Energy Conservation Award in 2006

18. Enterprise Excellence Award – 2007

19. Viswakarma Rashtriya Puraskar – 2007

20. Best Quality Circles implementing Organization Award -2007

Employee involvement & Process improvements:

The imagination and creativity of employees have always been key success
factors for the company. Employees of RINL have always been at the forefront in
contributing ideas for process improvements. Voluntary involvement of
employees in 4251 quality circles projects is a testimony of the interest exhibited
by employees in process improvements.

Safety & Health:

Safety and health of employees has always been the prime concern in the plant
and all efforts have been made to leverage upon the safety initiatives to maximize
employee morale and satisfaction. These initiatives have yielded positive results
with a 13.33% reduction in reportable accidents when compared to year 2007-08.

Corporate Social Responsibility:

RINL continues to contribute in the area of Corporate Social Responsibility

(CSR). CSR activities in RINL focus mainly on Environmental care, education,
community health care, people care, peripheral development, cultural
efflorescence, activities as a responsible corporate citizen and help during natural
calamities.

38
 CHAPTER-IV

Conceptual Frame Work

39
Financial Ratio Analysis

Introduction:

The traditional financial statements comprising the balance sheet and the profit
and loss account are proving the information related to the financial operation of the
firm. They provide some extremely useful information that mirrors the financial
position on a particular date in terms of the structure of assets, liabilities and owner’s
equity and so on. The profit and loss account shows the results of operations during a
certain period of time in terms of the revenues obtained and the cost incurred during
the year. Therefore, much can be learnt about a firm from a careful examination of its
financial statements. Users of financial statements can get further insight about
financial strengths and weaknesses of the firm if they properly analyze information
reported in these statements. Management should be particularly interested in
knowing financial weakness of the firm to take suitable corrective actions. The future
plans of the firm should be laid down in view of the firm’s financial strengths and
weaknesses. Thus, financial analysis is the starting point for making plans, before
using any sophisticated forecasting and planning procedures. Understanding the past
is a pre-requisite for anticipating the future.

Ratio Analysis - Introduction:

Ration analysis is a widely – used tool of financial analysis. It is used to

interpret the financial statements so that the strengths and weaknesses of the firm as
well as its historical performance and current financial condition can be determined.
A ratio is defined as “the indicated quotient of two mathematical expressions” and as
the “the relationship between two or more things”.

It is a benchmark for evaluating the financial position and performance of a

firm.

40
 The term ratio refers to the numerical or quantitative relationship between two
items/variables. This relationship can be expressed as:
1. Percentages, say, Net Profits are 25% of Sales (assuming Net Profit of

Rs.25,000 and Sales of Rs.1,00,000),

2. Fraction (Net profit is 1/4th of Sales) and

3. Proportion of numbers (the relationship between Net profits and Sales is 1:4).

These alternative methods of expressing items, which are related to each other,
are, for purpose of financial analysis, referred to as ratio analysis. It should be noted
that computing the ratios does not add any information already inherent in the above
figures of profits and sales. What the ratios do is that they reveal the relationship in a
more meaningful way so as to enable us to draw conclusions from them. The
rationale of ratio analysis lies in the fact that it makes related information comparable.
A single figure by itself has no meaning but when expressed in terms of a related
figure, it yields significant inferences. For instance, the fact that the Net profits of a
firm amount to, say Rs. Ten Lakhs throws no light on its adequacy or otherwise. The
figure of Net profit has to be considered in relation to other variables. How does it
stand in relation to sales? If, therefore, Net profits are shown in terms of their
relationship with items such as Sales, Assets, Capital employed, Equity capital and so
on, meaningful conclusions can be drawn regarding their adequacy.

To carry the above example further, assuming the capital employed to be Rs.50
lakh and Rs.100 lakh, the Net profit are 20% and 10% each respectively. Ratio
analysis, thus, as a quantitative tool, enables analysts to draw quantitative answers to
questions such as; are the Net profits adequate? Are the assets being used efficiently?
Is the firm solvent? Can the firm meet its current obligations and so on?

Ratio Analysis - Importance:

41
 As a tool of financial management, ratios are of crucial significance. The
importance of ratio analysis lies in the fact that presents facts on a comparative basis
and enables the drawing inference regarding the performance of a firm. Ratio
analysis is relevant in assessing the performance of a firm in respect to the following
aspects.
1. Liquidity position

2. Long-term solvency

3. Operational efficiency

4. Overall profitability

5. Inter-firm comparison, and

6. Trend analysis

1. Liquidity position:-
With the help of ratio analysis conclusions can be drawn regarding the
liquidity position of a firm. The liquidity position of a firm would be
satisfactory if it is able to meet its current obligations when they become due.
A firm can be said to have the ability to meet its short-term liabilities if it has
sufficient liquid funds to pay the interest on its short-maturing debt usually
within a year as well as to repay the principal. This ability is reflected in the
liquidity ratio of a firm. The liquidity ratios are particularly useful in credit
analysis by banks and other suppliers of short-term loans. Common liquidity
ratios include The Current ratio, Quick ratio and The operating Cash flow
ratio.

2. Long-term solvency:-
Ratio analysis is equally useful for assessing the long-term financial viability
of a firm. This aspect of the financial position of a borrower is of concern to
the long-term creditors, security analysts and the present and potential owners
of a business. The long-term solvency is measured by the leverage/capital
structure and profitability ratios, which focus on earning power and operating
efficiency. Ratio analysis reveals the strength and weaknesses of a firm in this
respect. The leverage ratios, for instance, will indicate whether a firm has a
reasonable proportion of various sources of finance or if it is heavily loaded

42
 proportion of various sources of finance or if it is heavily loaded with debt in
which case its solvency is exposed to serious strain. Similarly the various
profitability ratios would reveal whether or not the firm is able to offer
adequate return to its consistent with the risk involved. It includes Debt-equity
ratio, Cash coverage ratio, the times interest earned ratio etc.

3. Operating Efficiency:-
Another dimension of the usefulness of the ratio analysis, relevant from the
view point of management, is that it throws light on the degree of efficiency in
the management and utilization of its assets. The various activity ratios
measure this kind of operational efficiency.

4. Overall Profitability:-
Unlike the outside parties, which are interested in one aspect of financial
position of a firm, the management is constantly concerned about the over-all
profitability of the enterprise. That is, they are concerned about the ability of
the firm to meet its short-term as well as long-term obligations to its creditors,
to ensure a reasonable return to its owners and secure optimum utilization of
the assets of the firm. This is possible if an integrated view is taken and all the
ratios are considered together.

5. Inter-firm Comparison:-
Ratio analysis not only throws light on the financial position of a firm but also
serves as a stepping stone to remedial measures. This is made possible due to
inter-firm comparison and comparison with industry averages. A single figure
of a particular ratio is meaningless unless it is related to some standard or
norm. One of the popular techniques is to compare the ratios of a firm with
the industry average. An inter-firm comparison would demonstrate the firm’s
position vis-à-vis its competitors.

6. Trend Analysis:-

43
 Ratio analysis enables a firm to take the time dimension into account. In other
words, whether the financial position of a firm is improving or deteriorating
over the years. This is made possible by the use of trend analysis. The
significance of a trend analysis of ratios lies in the fact that the analysis can
know the direction of movement, i.e., whether the movement is favorable or
unfavorable. For example, the ratio may be low as compared to the norm but
the trend may be upward. On the other hand, though the present level may be
satisfactory but the trend may be a declining one.

Ratio Analysis-Limitations:
Ratio Analysis is a widely used tool of financial analysis. Yet, it suffers from
various limitations. The operational implication of this is that while using ratios, the
conclusions should not be taken on their face value. Some of the limitations, which
characterize ratio analysis, are

i. Difficulty in comparison.

ii. Impact of Inflation, and

iii. Conceptual Diversity

i. Difficulty in comparison:-
One serious limitation of ratio analysis arises out of the difficulty associated
with there comparability. One technique that is employed is inter-firm
comparison. But such comparison is vitiated by different procedures adopted
by various firms.
 Differences in basis of inventory valuation (e.g.:- last in first out,

average cost and cost);

 Different depreciation methods (i.e. straight line Vs. written down

basis);

 Estimated working life of assets, particularly of plant and equipment;

 Amortization of deferred revenue expenditure such as preliminary

expenditure and discount on issue of shares;

44
  Capitalization of lease;

 Treatment of extraordinary items of income and expenditure; and so

on.

Secondly, apart from different accounting procedures, companies may have

different accounting procedures, implying differences in the composition of assets,
particularly current assets. For these reasons, the ratios of two firms may not be
strictly comparable.

ii. Impact of Inflation:-

The second major limitation of the ratio analysis is associated with price level
changes. This is a weakness of the traditional financial statements, which are
based on historical cost. An implication of this feature of the financial
statements as regards ratio analysis is that assets acquired at different periods
are, in effect, shown at different prices in the balance sheet, as they are not
adjusted for changes in the price level. As a result, ratio analysis will not be
strictly comparable.

iii. Conceptual Diversity: -

The factor that influences the usefulness of ratios is that there is difference of
opinion regarding the various concepts used to compute the ratios. There is
always room for diversity of opinion as to what constitutes shareholder`s
equity, debt, assets, profit and so on.

Finally, ratios are only a post-mortem analysis of what has happened

between two balance sheet dates. For one thing the position in the interim
period is not revealed by ratio analysis. Moreover, they give no clue about the
future.

In brief, ratio analysis suffers from some serious limitations. The

analysis should not be carried away by its over simplified nature, easy
computation with high degree of precision. The reliability and significance
attached to ratios will largely depend upon the quality of data on which they

45
 are based. They are as good as the data itself, nevertheless, they are an
important tool of financial analysis.

Ratio Analysis-Guidelines to use:

The calculation of ratios may not be a difficult task but their use is not easy.
The information on which these are based, the constraints of financial statements,
objectives for using them, the caliber of the analyst, etc, are important factors, which
influence the use of ratios.

Following guidelines/factors may be kept in mind in interpreting various ratios.

 The reliability of ratio is linked to the accuracy of information in financial

statements. Before calculating ratios one should see whether proper concepts

and conventions are used for preparing financial statements of not.

 The purpose of the user is also important for the analysis of ratios. A creditor,

a banker, an investor, a shareholder, all has different objects for studying

ratios. The purpose (or) object for which ratios are required to be studied

should always be kept in mind for studying various ratios. Different objects

may require the study of different ratios.

 Another precaution in ratio analysis is the proper selection of appropriate

ratios. The ratios should match the purpose for which these are required.

Ratio Analysis-Conclusion:

Calculating a large number of ratios without determining their need in the present
context may confuse the things instead of solving them. Only those ratios should be
selected which can throw proper light on the matter to be discussed.

 Unless otherwise the ratios calculated are compared with certain standards one

will not be reach at conclusions. These standards may be a rule of thumb as in

current ratio (2:1), may be industry standards, may be projected ratios etc.

46
 The comparison of calculated ratios with the standards will help the analyst in

forming his opinion about financial situation of the concern.

 The ratios are only the tools of analysis but their interpretation will depend

upon the caliber and competence of the analyst. He should be familiar with

various financial statements and the significance of changes etc.

 A wrong interpretation may create havoc for the concern since wrong

conclusions may lead to wrong decisions. The utility of ratios is linked with

expertise of the analyst.

 The ratios are only guidelines for the analyst; he should not base his decisions

entirely on them. He should study any other relevant information, situation in

the concern, general economic environment etc., before reaching final

conclusions.

The study of ratios in isolation may not always prove useful. The
interpretation should use the ratios as guide and may try to solicit any other relevant
information which helps is reaching a correct decision.

Ratio Analysis-Types:
Several ratios, calculated from the accounting data, can be grouped into
various classes according to financial activity or function to be evaluated. As stated
earlier, the parties interested in financial analysis are short-term and long-term
creditors, owners and management. Short-term creditors` main interest is in the
liquidity position or the short-term solvency of the firm. Long-term creditors`, on the
other hand, are more interested in the long-term solvency and profitability of the firm.
Similarly, owners concentrate on the firm’s profitability and financial condition.
Management is interested in evaluating every aspect of the firm’s performance. They
have to protect the interests of all parties and see that the firm grows profitably. In
view of the requirements of the various users of ratios, we may classify them into the
following four important categories:

47
  LIQUIDITY RATIOS
 LEVERAGE RATIOS
 ACTIVITY RATIOS
 PROFITABILITY RATIOS

LIQUIDITY RATIOS:
It is extremely essential for a firm to be able to meet its obligations as they
become due. Liquidity ratios measure the firm’s ability to meet current obligations.

In fact, analysis of liquidity needs the preparation of cash budgets and cash
and Fund Flow statements; but liquidity ratios, by establishing a relationship between
cash and other current assets to current obligations provided a quick measure of
liquidity. A firm should ensure that it does not suffer from lack of liquidity, and also
that it does not have excess liquidity. The failure of a company to meet its obligations
due to lack of sufficient liquidity, will result in a poor creditworthiness, loss of
creditors` confidence, or even in legal tangles resulting in the closure of the company.
A very high degree of liquidity is also bad; idle assets earn nothing. The firm’s funds
will be unnecessarily tied up in current assets. Therefore, it is necessary to strike a
proper balance between high liquidity and lack of liquidity. The most common ratios,
which indicate the extent of liquidity or lack of it, are:

1. CURRENT RATIO

2. QUICK RATIO

3. CASH RATIO

1. CURRENT RATIO:

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

48
 Current assets
Current Ratio =
Current liabilities

Current assets include cash and those assets, which can be converted into cash
within a year, such as Marketable Securities, Debtors and Inventories. Prepaid
expenses are also include in current assets as they represent the payments that will not
be made by the firm in future. Current Liabilities include Creditors, Bill payable,
Accrued expenses, Short-term bank loan, and Income Tax Liability and Long-term
debt maturing in the current year.

The current ratio is a measure of the firms` short-term solvency. The higher
the current ratio, the larger is the amount of rupees available per Rupee of current
liability, the more is the firms` ability to meet current obligations and the greater is the
safety of funds of short-term creditors.

2. QUICK RATIO:

The Quick ratio is calculated by dividing quick assets by quick liabilities.

Quick assets
Quick Ratio =
Quick liabilities
Quick assets or Liquid assets mean those assets which are immediately
convertible into cash without much loss. All current assets except prepaid expenses
and inventories are categorized in liquid assets. Quick liabilities means those
liabilities, which are payable within a short period. Normally, Bank overdraft and
Cash credit facility, if they become permanent mode of financing are in quick
liabilities.

As this ratio concentrates on cash, marketable securities and receivables in

relation to current obligation, it provides a more penetrating measure of liquidity than
current ratio.

49
3. CASH RATIO:

The cash ratio is calculated by dividing cash + marketable securities by

current liabilities

Cash Ratio = Cash + Marketable Securities

Current liabilities
Since cash is most liquid asset, a financial analyst may examine cash ratio and
its equivalent to current liabilities. Trade investment or marketable securities are
equivalent of cash; therefore, they may be included in the computation of cash ratio.

LEVERAGE RATIOS:

The short-term creditors like bankers and suppliers of raw material are more
concerned with the firms` current debt-paying ability. On the other hand, long-term
creditors like debenture holders, financial institutions etc., are more concerned with
the firms` long-term financial strength. In fact, a firm should have strong short-as
well as long-term financial position. To judge the long-term financial position of the
firm, financial leverage, or Capital structure, ratios are calculated. These ratios
indicate mix of funds provided by owners and lenders. As a general rule, there should
be an approximate mix of debt and owner’s equity in financing the firms` assets.
The manner in which assets are financed has a number of implications. First,
between debt and equity, debt is more risky from the firms` point of view. The firm
has a legal obligation to pay interest on debt holders, irrespective of the profits made
or losses incurred by the firm. If the firm fails to debt holders in time, they can take
legal action against it to get payment and in extreme cases, can force the firm into
liquidation.

Secondly, use of debt is advantageous for shareholders in two ways:

a. They can retain control of the firm with a limited stake and

50
 b. Their earnings will be magnified, when the firm earns a rate of return on the

total capital employed higher than the interest rate on the borrowing funds.

The process of magnifying the shareholders return through the use of debt is

called “financial leverage” or “financial gearing” or “trading on equity”.

Leverage ratios may be calculated from the balance sheet to determine the
proportion of debt in total financing. Many variations of these ratios exist; but all
these ratios indicate the same thing-the extent to which the firm has relied on debt in
financing assets. Leverage ratios are also computed from the profit and loss items by
determining the extent to which operating profits are sufficient to cover the fixed
charges.

DEBT – EQUITY RATIO:

The relationship describing the lender contribution for each rupee of the
owner’s contribution is called DEBT-EQUITY RATIO. DEBT – EQUITY
RATIO is directly computed by the following formula.
DEBT
Debt-Equity Ratio =
EQUITY

PROPRIETARY RATIO:

This ratio states relationship between share capital and total assets.
Proprietor’s equity represents equity share capital, preference share capital and
reserves and surplus. The latter ratio is also called capital employed to total assets.
EQUITY SHARE CAPITAL
Proprietary Ratio =
TOTAL TANGIBLE ASSETS

51
 PROPRIETORS EQUITY
(OR)
TOTAL TANGIBLE ASSETS

INTEREST COVERAGE RATIO:

This ratio indicates the extent to which earnings can decline without resultant
financial hardship to the firm because of its inability to meet annual interest cost. For
example, coverage of 5 times means that a fall in earnings unto (1/5 th ) level would be
tolerable, as earnings to service interest on debt capital would be sufficiently
available. This ratio is measured ad follows:
EBIT
Interest Coverage Ratio = ---------------------------------
INTEREST CHARGES

FIXED ASSETS TO NET WORTH:

This ratio indicates the extent to which Equity capital is invested in the net
fixed assets. It is expressed as follows:

FIXED ASSETS
Fixed Assets To Net Worth =
NET WORTH
Net Worth is represented by Equity Share Capital plus Reserves and Surpluses. If the
fixed assets are more than the Net Worth, difficulties may arise, as the depreciation
will reduce profit. This also means that creditors have contributed to fixed assets.
The higher this ratio, the less will be the protection to creditors. If this ratio is too
high, the firm may find itself handicapped, as too much capital is tied up in fixed
assets but not circulating.

ACTIVITY RATIOS:

52
 Funds creditors and owners are invested in various assets to generate sales and
profits. The better the management of assets, the larger the amount of sales. Activity
ratios are employed to evaluate the efficiency with which the firm managers and
utilizes its assets. These ratios are also called Turnover Ratios because they indicate
the speed with which assets are being converted or turned over into sales. Activity
ratios, thus, involve a relationship between sales and assets. A proper balance
between sales and assets generally reflects that assets are managed well. Several
activity ratios can be calculated to judge the effectiveness of asset utilization.

INVENTORY TURNOVER RATIO:

Inventory turnover ratio indicates the efficiency of the firm in producing and
selling its products. It is calculated by dividing the cost of goods sold by the average
inventory.

The average inventory is the average of opening and closing balance of

inventory.

In a manufacturing company inventory of finished goods is used to calculate

inventory turnover.

Cost of goods sold

Inventory Turnover Ratio =
Average inventory

DEBTORS TURNOVER RATIO:

A firm sells goods for cash and credit. Credit is used marketing tool by a
number of companies. When the firm extends credits to its customers, debtors
(accounts receivables) are created in the firms` accounts. The debtors are expected to

53
be converted into cash over a short period and, therefore, are included in current
assets. The liquidity position of the firm depends on the quality of debtors to a greater
extent. Debtors turnover ratio indicates the velocity of debt collection of a firm. Un
simple wards it indicates the number of times average debtors are turned over during a
year.
Credit Sales

Debtors Turnover Ratio = --------------------------------

Avg. Accounts Receivable

FIXED ASSETS TURNOVER RATIO:

The fixed assets turnover ratio measures the efficiency with which the firm is
utilizing its investments in fixed assets, such as land, building, plant and machinery,
furniture, etc. It also indicates the adequacy of sales in relation to the investment in
fixed assets. The fixed assets turnover ratio is sales divided by net fixed assets. The
firm assets turnover ratio should be compared with past and future ratios and also with
ratio of similar firms and the industry average. The high fixed assets turnover ratio
indicates efficient utilization of fixed assets in generating sales, while low ratio
indicates inefficient management and utilization of fixed assets.

This ratio indicates the extent to which the debts have been collected in time.
The debt collection period indicates the average debt collection period. This ratio is a
good indicator to the lenders of the firm, because it explains to them whether their
borrower is collecting from its debt in time. An increase in this period indicates
blockage of funds in debtors.

Sales
Fixed Assets Turnover Ratio =
Net fixed assets

54
WORKING CAPITAL TURNOVER RATIO:

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. This ratio measures the efficiency with which the
working capital is being used by a firm. A higher ratio indicates efficient utilization
of working capital and low ratio indicates otherwise. But a very high working capital
turnover ratio is not a good situation for any firm and hence care must be taken while
interpreting the ratio. Making of comparative and Trend Analysis can at best use this
ratio for different firms in the same industry and for various periods. This can be
calculated as follows:
Sales
Working Capital Turnover Ratio =

Net Working Capital

Net Working Capital = Current Assets - Current Liabilities

(Excluding short-term bank
Borrowings)

PROFITABILITY RATIOS:

A company should earn profits to Survive and Grow over a long period of
time. Profits are essential, but it would be wrong to assume that every action initiated
by management of a company should be aimed at maximizing profits, irrespective of
social consequences.

Profit is the difference between revenues and expenses over a period of time (usually
a year). Profit is the ultimate “Output” of a company, and it will have no future if it
fails to make sufficient profits. Therefore, the financial manager should continuously
evaluate to the efficiency of the company in term of profits. The profitability ratios
are calculated to measure the operating efficiency of the company. Besides
management of the company, creditors and owners are also interested in the
profitability of the firm. Creditors want to get interest and repayment of principle
regularly. Owners want to get a required rate of return on their investment. This is
possible only when the company earns enough profits.

55
Generally two major types of profitability ratios are calculated.

 PROFITABILITY IN RELATION TO SALES

 PROFITABILITY IN RELATION TO INVESTMENT

PROFITABILITY RATIOS IN RELATION TO SALES

1. GROSS PROFIT MARGIN

2. CASH MARGIN

3. OPERATING MARGIN

4. NET PROFIT RATIO

1. GROSS PROFIT MARGIN:

Gross profit margin reflects the efficiency with which the management
produces each unit of product. This ratio indicates the average spread between
the cost of goods sold and the sales revenue.

This shows profits relative to sales after the deduction of production

costs, and indicates the relation between Production costs and selling price. A
high gross profit margin relative to the industry average implies that the firm
is able to produce at relatively lower cost.

A high gross profit margin ratio is a sign of good management. A gross

margin ratio may increase due to any of the following factors.

i. Higher sales prices, cost of goods sold remaining constant,

ii. Lower cost of goods sold, sales prices remaining constant,

iii. A combination of variations in sales prices and costs, the margin widening,

and

56
 iv. Increases in the proportionate volume of higher margin items.

The analysis of these factors will reveal to the management that how a
depressed gross profit margin can be improved.

A low gross profit margin may reflect higher cost of goods sold due to the
firms` inability to purchase raw materials at favorable terms, inefficient utilization of
plant and machinery, resulting in higher cost of production. The ratio will also be low
due to fall in prices in the market, or market reduction in selling price by the firm in
an attempt to obtain large sales volume, the cost of goods sold remaining unchanged.
The financial manager must be able to detect the causes of a falling gross margin and
initiate action to improve the situation.
Sales – Cost of goods sold
(Or)
Gross profit
Gross Profit Margin Ratio =
Sales

Net Profit Margin Ratio:

Net profit is obtained when operation expenses, interest and taxes are
subtracted from the gross profit.

If the non-operating income figure is substantial, it may be excluded from

PAT to see profitability arising directly from sales. Net profit margin ratio establishes
a relationship between net profit and sales and indicated management’s efficiency in
manufacturing, administering and selling the products. This ratio is the overall
measure of the firms` ability to turn each rupee sales into net profit. If the net margin
is inadequate, the firm will fail to achieve satisfactory return on shareholder`s funds.

This ratio also indicates the firms` capacity to withstand in adverse economic
conditions. A firm with a high net margin ratio would be in an advantageous position
to survive in the case of falling selling prices, rising costs of production or declining
demand for the product. It would really be difficult for a low net margin firm to
withstand these adversities. Similarly, a firm higher net profit margin can make better

57
use of favorable condition, such as rising selling prices; fall in costs of production or
increasing demand for the product. Such a firm will be able to accelerate its profits at
a faster rate than a firm with a low net profit margin will.

An analyst will be able to interpret the firm’s profitability more meaningfully

if he/she evaluates both the ratios-gross margin and net margin-jointly. To illustrate,
if the gross profit margin has increased over years, but the net profit margin has either
remained constant or declined, or has not increased as fast as the gross margin, this
implies that the operating expenses relative to sales have been increasing. The
increasing expenses should be identified and controlled. Gross profit margin may
decline due to fall in sales price or increase in the cost of production.
Profit after Tax

Net Profit Margin Ratio =

Sales

CASH MARGIN RATIO:

Cash profit excludes depreciation. It means Net profit after interests and taxes
but before depreciation. This ratio indicates the relationship between the profit, which
accrues in cash and sales. Greater percentage indicates better position and Vice-Versa
as it shows the correct profit earned by the firm.

This ratio is expressed as cash profit to sales.

Cash profit
Cash Margin Ratio = X 100
Sales

OPERATING MARGIN RATIO:

Operating margin ratio is also known as Operating Net profit ratio. It is the
ratio of operating profit to sales. This ratio establishes the relationship between the
total cost incurred and sales. Operating profit is the Net profit after depreciation but

58
Before Interests and Taxes. The purpose of computing this ratio is to find out the
overall operational efficiency of the business concern. It measures the const of
operations per rupee of sales.

This ratio is expressed as operating profit to sales.

OPERATING MARGIN RATIO = Operating profit X100

Sales

PROFITABILITY RATIOS IN RELATION TO INVESTMENT:

1. RETURN ON INVESTMENT

2. RETURN ON NET WORTH

3. RETURN ON CAPITAL

4. RETURN ON GROSS BLOCK

RETURN ON INVESTMENT:
The term investment refers to Total Assets. The funds employed in Net assets
are known as Capital Employed. Net assets equal net fixed assets plus current assets
minus Current liabilities excluding Bank loans. Alternatively, Capital employed in
equal to Net worth plus total debt.

The conventional approach of calculating return on investment (ROI) is to

divide PAT by Investment. Investment represents pool of funds supplied by
shareholders and lenders, while PAT represents residual income of shareholders;
therefore, it is conceptually unsound to use PAT in the calculation of ROI. Also, as
discussed earlier, PAT is affected by capital structure. It is, therefore more
appropriate to use one of the following measures of ROI for comparing the operating
efficiency of firms.

EBIT (1-T)

59
ROI (or) ROTA =
Total Assets

EBIT (1-T)
ROI (or) RONA =
NET Assets

Where ROTA and RONA respectively Return on Total assets and Return on
Net assets.

RONA is equivalent of Return on Capital Employed.

RETURN ON NET WORTH:

NET Worth is also known proprietors Net Capital Employed. The Return
should be calculated with reference to profits belonging to shareholders, and
therefore, profit shall be Net profit after interest and tax. The profit for this purpose
will include even non-trading profit. This is given as follows:

Net profit after interest & tax

RETURN ON NET WORTH = ---------------------------------------*100
Shareholders funds

RETURN ON CAPITAL:

The ROCE is the second type of ROI. The term capital employed refers to
long-term funds supplied by the creditors and owners of the fund. It can be computed

60
in two ways. First, it is equal to non-current liabilities (long-term liabilities) plus
owner’s equity. Alternatively, it is equivalent to Net Working Capital plus Fixed
Assets. Thus, the Capital Employed provides a basis to test the profitability related to
the sources of long-term funds. A comparison of this ratio with similar firms, with
the industry average and overtime would provide sufficient insight into how
efficiency the long-term funds of owners and creditors are being used. The higher the
ratio, the more efficient is the use of Capital Employed.
NET PROFIT AFTER TAX/EBIT
ROCE = X 100
Average Total Capital Employed

RETURN ON GROSS BLOCK:

This ratio establishes a relationship between net profit and gross fixed assets.
This ratio emphasizes the profit on investment in Fixed Assets. This ratio is
expressed as follows:

Net profit
RETURN ON GROSS BLOCK = X 100
Gross Block

NET PROFIT is profit before Tax. Gross Block means Gross fixed assets i.e., Fixed
assets before deducting depreciation.

61
 CHAPTER-V

DATA ANALYSIA & INTERPRETATION

Ratio analysis in VSP/RINL

62
Liquidity ratios:

Current assets
Current ratio= -------------------------------------------
Current liabilities

TABLE SHOWS YEAR WISE CURRENT RATIO

(Rs. In Crores)
Particulars 2005-06 2006-07 2007-08 2008-09 2009-
10
Inventory 1216.45 1203.24 1761.15 3215.28 2451.52
Sundry debtors 165.65 216.80 93.41 191.27 181.18
Cash & bank 5621.70 7194.68 7699.11 6624.17 5415.54
Other Assets 184.36 314.48 292.43 258.91 137.40
Loans & advances 1063.84 1518.90 1958.49 1569.69 1365.02
Current assets 8252.00 10448.10 11804.60 11859.32 9550.66
Current liabilities 1587.86 2104.30 3191.62 4181.32 4307.84
Current ratios 5.20 4.97 3.70 2.84 2.21

12000

10000

8000

6000 Current assets

Current liabilities
4000

2000

0 INTEPRETATION:
2005-06 2006-07 2007-08 2008-09 2009-10

 The current ratio during the study period that is from 2005- 2006 to 2009-
2010, it has been observe that ,in the year 2005 to 2006 it is very high that
is 5.20.

 The current ratio has been decreasing, but the company is able to maintain
higher current ratio than that of ideal ratio.

63
  As the current ratio is higher than the ideal current ratio, the liquidity
position is said to be good.

LIQUID/QUICK RATIO:

Liquid assets
Liquid ratio = ---------------------------
Current liabilities

TABLE SHOWING YEAR WISE LIQUID RATIOS

(Rs in Crores)

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Sundry debtors 165.65 216.80 93.41 191.27 181.18
Cash & bank 5621.70 7194.68 7699.11 6624.17 5415.54
Other assets 184.36 314.48 292.43 258.91 137.40
Loans & advances 1063.84 1518.90 1958.49 1569.69 1365.02
Liquid assets 7035.55 9244.86 10043.44 8644.04 7099.14
Current liabilities 1587.86 2104.30 3191.62 4181.32 4307.84
Liquid ratio 4.43 4.39 3.14 2.06 1.65
12000

10000

8000

6000 Liquid assets

Current liabilities
4000

2000

0
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:
 It has been observed that the quick ratio of VSP is high compared with
ideal ratio.

64
  As the quick ratio during the period of study is higher than that of then
ideal ratio, the liquidity position is very good.

ABSOLUTE LIQUID/ CASH RATIO:

ABSOLUTE ASSETS
Absolute liquid/ cash ratio: --------------------------------------
CURRENT LIABILITIES

TABLE SHOWING YEAR WISE ABSOLUTE LIQUID RATIO

(Rs. in crores)
Particulars 2005-06 2006-07 2007-08 2008-09 2009-10
Cash & bank 5621.70 7194.68 7699.11 6624.17 5415.54
Absolute Assets 5621.70 7194.68 7699.11 6624.17 5415.54
Current liabilities 1587.86 2104.30 3191.62 4181.32 4307.84
ABSOLUTE 3.5 3.42 2.41 1.58 1.26
LIQUID RATIO

8000
7000
Cash & bank
6000
5000 Absolute Assets
4000
3000 Current liabilities
2000
ABSOLUTE LIQUID
1000 RATIO
0
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION: Ideal Ratio 0:5:1

65
 The absolute liquid/ cash ratio of VSP is more than the ideal ratio. It means
the company is enjoying high liquidity and secured position.

LEVERAGE RATIO:

Outsider’s funds
Debt Equity Ratio =----------------------------------------
Shareholders’ funds

TABLE SHOWING YEAR WISE DEBT EQUITY RATIO

(Rs. in crores)
particulars 2005-06 2006-07 2007-08 2008-09 2009-10
Secured loans 173.87 604.45 332.78 907.72 407.28
Unsecured loans 369.44 312.51 107.95 100.04 825.27
Outsiders funds 543.31 916.96 440.73 1007.76 1233.55
Shareholders 8173.7 9538.2 11481.04 12419.91 12885.00
funds
Debt equity 0.13 0.19 0.08 0.16 0.19
ratio

14000
12000
10000
8000
Outsiders funds
6000 Shareholders funds
4000
2000
0
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:
 Company is less dependent on outsiders funds.

 Its capital base is high and strong.

66
  It can be concluded that the company is maintaining less percent of debt in its
capital structure.

INTEREST COVERAGE RATIO:

EBIT
Interest coverage ratio=---------------------------------------
FIXED INTEREST

TABLE SHOWING YEAR WISE INTEREST COVERAGE RATIO

(Rs. in crores)

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

EBIT 1920.57 2270.76 3026.93 2114.06 1325.20
Fixed interest 31.06 48.42 31.57 88.14 19.76
Interest Coverage Ratio 61.83 46.90 95.88 23.99 67.06

3500
3000
2500 EBIT
2000
Fixed interest rate
1500
1000 Interest Coverage
500 Ratio

0
2005-06 2006-07 2007-08 2008-09 2009-10

67
INTERPRETATION:

 Company’s Interest Coverage Ratio is very high and extraordinarily

satisfactory.
 It indicates that greater ability of the firm to handle fixed charges.
 High interest coverage ratio does not indicate unutilized debt capacity in case
of
RINL, since the company is having its own funds.

PROPRIETARY RATIO:

Share holders funds

Proprietary ratio=-----------------------------------------
Total assets

TABLE SHOWING THAT YEAR WISE PROPRIETARY RATIO

(Rs.in Crores)

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

Share holders funds 7827.31 7827.31 7827.32 7827.32 7827.31
Total assets 1051.99 12835.8 15276.51 17733.43 18523.21
Proprietary Ratio 78% 74% 75% 79% 42%

68
 20000

15000

Share holders funds

10000
Total asse ts
PROPRIETARY RATIO
5000

0
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:
 Proprietary ratio is a test of long term financial position.

 Except for the year 2009-10, all other years showing higher ratio, this
indicates sound long term financial position.
 It is also indicating the sufficient use is being made of equity to finance the
business.

SOLVENCY RATIO:
Total Liabilities of outsiders
Solvency ratio =-------------------------------------------
Total assets

TABLE SHOWING YEAR WISE SOLVENCY RATIO:

69
 (Rs. In Crores)

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

Secured loans 173.87 604.45 332.08 907.72 407.28
Unsecured loans 369.44 312.51 107.95 100.04 825.27
Total liabilities to 543.31 916.96 440.73 1007.76 650.58
outsiders
Total assets 10511.00 12835.8 15276.51 17733.43 18522.96
Solvency ratio 5.1% 7.1% 2.8% 5.68% 3.51%

20000

15000

10000 Total liabilities to outsiders

Total assets
5000

0
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:

 Solvency ratio of VSP ltd during the year 2006-07 is high as compared to other years.

 It solvency ratio is stable for last three years. It indicates the the solvency position of

VSP ltd is more satisfactory.

FUNDED DEBT TO TOTAL CAPITALIZATION:

FUNDED DEBT
Funded Debt To Total Capitalization =--------------------------------------
TOTAL CAPITALIZATION

70
TABLE SHOWING YEAR-WISE FUNDED DEBT TO TOTAL
CAPITALIZATION RATIO (Rs. in crores)

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Secured loans 173.87 604.45 332.78 907.72 407.28
Unsecured loans 369.44 321.51 107.95 100.04 825.27
Funded debt(A) 543.31 916.96 440.73 1007.76 1232.55
Total Funds (B) 8173.70 9538.20 11481.04 12419.91 12885
Total capitalization 6.60% 9.60% 3.80% 8% 9.50%
(A/B)

14000
Secured loans
12000
10000 Unsecured loans
8000
Funded debt(A)
6000
4000 Share holder funds (B)
2000
Total capitalization
0 (A+B)
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:

71
  During the year 2009-10, the funded debt to total capitalization is
9%.It is high as compared to other periods but in the real sense it is
quite low.
 There is enough scope for the company to raise long term loans from
outsiders.

ACTIVITY RATIO:

INVENTORY TURNOVER RATIO:

NET SALES
Inventory Turnover Ratio =-----------------------------
AVG INVENTORY

TABLE SHOWING YEAR WISE INVENTORY TURNOVER RATIO

(Rs. in crores)

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-

10
Net sales 7305.71 7932.66 9088.37 9128.38 9809.15
Avg inventory 1236.99 1210.80 1482.20 1622.14 2833.40

Inventory Turnover 5.91 6.55 6.13 5.62 3.46

Ratio Times Times Times Times Times

72
 10000

8000

6000
Net sales
4000 Avg inventory

2000

0
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:

 The Inventory Turn Over Ratio during the year 2009-10 was 3.46

 Normally higher the ratio indicates the better inventory management.

 Higher ratio also indicates that the company is not able to met the customers

demand properly.

INVENTORY CONVERSION PERIOD:

No of working days
Inventory Conversion Period =---------------------------------------------
Inventory turnover ratio

TABLE SHOWING YEAR WISE INVENTORY CONVERSION PERIOD

(Rs. in crores)
Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

73
No. of working
days 365 365 365 365 365
Inventory
turnover ratio 5.91 6.55 6.13 6.85 7.24
Inventory
conversion 62 days 56 days 60 days 53 days 50 days
period

400
300
200 No.of working days
100
No.of working days Inventory turnover ratio
0
2005- 2006- 2007- 2008- 2009-
06 07 08 09 10

INTERPRETATION:

 The inventory conversion period during 2009-2010 is 50 days. It means that

the inventory has been disposed off or sold on an average of once in every 50

days.

DEBTORS TURN OVER RATIO

Net credit annual sales

Debtors Turn Over Ratio = ------------------------------------
Average trade debtors

TABLE SHOWING YEAR WISE DEBTORS TURN OVER RATIO

(Rs. in crores)

Particular 2005-06 2006-07 2007-08 2008-09 2009-10

A. net sales 7305.71 7932.66 9088.37 9128.38 9809.15
b. average
trade debtors 107.48 191.54 155.105 142.34 186.23

74
 debtor turn
over ratio 68 times 41 times 59 times 64 times 53 times

12000

10000

8000 b. average trade

debtors
6000
A. net sales
4000

2000

0
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:

 The debtor turnover ratio for the year 2009-10 is 54

 It can be concluded that the management is efficient in converting the
debtors into cash

AVERAGE COLLECTION PERIOD:

No of Working Days

Average Collection Period = --------------------------------------------

Debtor’s turnover ratio

TABLE SHOWING YEAR WISE AVERAGE COLLECTION PERIOD

(Rs. in crores)

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

No of working days 365 365 365 365 365

75
Debtors turnover 60.97 41.48 58.59 55.68 67.12
ratio
Avg.collection 5 days 9 days 6 days 6 days 5 days
period

100%

80%

60% Debtors tournover ratio

40% No of working days

20%

0%
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:

 The avg collection period during the year 2009-10, is 5 days: it represents the
avg. no of days for which the firm has to wait before its receivables are
converted into cash.

 During the period of study it has been observed that debt collection period
varies from 5 to 9 days

 However, the avg. collection period during different periods is quite low. It
indicates the better quality of debtors and the efficiency of the debt collection
department.

WORKING CAPITAL TURNOVER RATIO:

Net sales
Working capital turnover ratio = -------------------------------------------------
Working capital

76
TABLE SHOWING YEAR WISE WORKING CAPITAL TURNOVER RATIO
(Rs. in crores)

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

a.net sales 7305.71 7932.66 9088.37 9128.38 9809.15
b. net working 6664.14 8343.8 8612.97 7678.00 5242.82
capital
Working capital 1.10 0.95 1.05 1.18 1.87
turnover ratio(a/b)
times times times times times

10000

5000 a.net sales

0 a.net sales b. net working capital
2005- 2006- 2007- 2008- 2009-
06 07 08 09 10

INTERPRETATION:

 The working capital turnover ratio during the year 2009-10 i 1.87 times. It

shows that only 1.05 of net current assets are used to generate 1 rupee of sales.

 The higher working capital ratio indicates that the efficient utilization of

working capital.

77
PROFITABILITY RATIOS:

GROSS PROFIT RATIO:

Gross profit
Gross profit ratio = ---------------------------------*100
Net sales

TABLE SHOWING YEAR WISE GROSS PROFIT RATIO

(Rs. in crores)

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

a. gross profit 1921.00 2271.00 3027.00 2115.00 1326.00
b. net sales 7314.00 7933.00 9088.00 9128.00 9809.00

Gross profit 26.30% 28.70% 33.30% 23.20%

13.60%
ratio(a/b)

12000
10000

8000
a.gross profit
6000
b. net sales
4000
2000
0
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:

 It has been observed that the gross profit ratio is in increasing tread upto 2007-

08 and it is decreasing from 2008-09

78
  Sales are in increasing trend but the profit ratio is decreasing. It is due to

increased cost of production.

OPERATING PROFIT RATIO:

Operating profit
Operating profit ratio = ----------------------------------------*100
Sales

TABLE SHOWING YEAR WISE OPERATING PROFIT RATIO

(Rs. in crores)

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

Operating profit 2011.21 2339.21 3325.19 4988.12 2450.50
Net Sales 7314.00 7933.00 9088.00 9128.00 9809.00
Operating profit
ratio 27.50% 29.50% 36.60% 54.70% 25.00%

10000

8000

6000 Operating profit

Sales
4000
Operating profit ratio
2000

0
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:

 Company recorded higher operating profit during 2008-09 and in other years,

it is more or less recorded same trends.

 It is indicates, the company’s operational efficiency.

79
NET PROFIT RATIO:

Net profit
Net profit ratio = ----------------------------------------*100
Sales

TABLE SHOWING YEAR WISE NET PROFIT RATIO

(Rs. in crores)

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

A.net profit 1252.37 1363.43 1942.74 1335.57 796.67

B. net sales 7305.71 7932.66 9088.37 9128.38 9809.15

Net profit ratio(A/B) 17.14% 17.18% 21% 14.63% 8.12%

12000

10000

8000
A.net profit
6000
B. net sales
4000

2000

0
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:

 Net profit is in decline position from 2008-09 in comparative with 2007-08.

 Main attributable reason for the declining the profit is overall global meltdown

 Even in adverse market conditions, the company is able to earn net profits.

80
PROFITABILITY RATIOS BASED ON INVESTMENT:

RETURN ON SHAREHOLDERS INVESTMENT:

Net Profit (After Interest & Tax)

RO I= ----------------------------------------------------x 100
Share Holders Funds

TABLE SHOWING YEAR WISE RATIOS BASED ON INVESTMENT

(Rs. in crores)

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

A.net profit 1252.37 1363.43 1942.74 1335.57 796.10
B.share holders 8173.7 9538.2 11481.04 12419.91 12885
funds
Return on
investment(A/B) 15.32% 14.29% 16.92% 10.75% 6.18%

14000
12000
10000
8000
Return on investment(A/B)
6000
B.share holders funds
4000
A.net sales
2000
0
2005- 2006- 2007- 2008- 2009-
06 07 08 09 10

INTERPRETATION:

 Highest return on investment was recorded in 2007-08.

81
  It has been observed that the ROI is fluctuating from year to year.

 More reserves and surplus funds have been diverted to expansion activities

RETURN ON EQUITY CAPITAL:

Net profit (after interest & tax)

Return on equity capital = --------------------------------------------
Equity capital

TABLE SHOWING YEAR WISE RETURN ON EQUITY CAPITAL

(Rs. in crores)

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

A.net profit 1252.37 1363.43 1942.74 1335.57 796.67

B.equity share 4890.00 4890.00 4890.00 4890.00 4890.00
capital
Return on equity 25.61 27.88 39.73 27.31 16.29
capital

100%

80%

60%
B.equity share capital
40% A.net profit

20%

0%
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:

 Equity share capital is constant in in all the year whereas net profit is
fluctuating.

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  Even though the return on equity capital is in decreasing position, the rate of
return in comparison with the marketing conditions is very satisfactory.
 Global market conditions, increasing in operating costs, decrease in net profits
are the main reasons for the recording of low ratio.

EARNING PER SHARE:

Earning available to equity share holders

Earning Per Share = ------------------------------------------------
No. of equity shares

TABLE SHOWING YEAR WISE EARNING PER SHARE

(Rs. in crores)

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

Earning available to 1252.37 1363.43 1942.74 1095.00 556.89
equity shareholders
No. of equity shares 4.89 4.89 4.89 4.89 4.89
(in crs)
Earning per share 256.12 278.83 397.30 223.93 113.89

2000 Earning available to equity

1500 shareholders
1000 No.of equity shares
500 Earning available to
0 equity shareholders Earning per share
2005- 2006- 2007- 2008- 2009-
06 07 08 09 10

INTERPRETATION:

 The earnings per share is declining year by year.

 The least rate of return is 11.40%

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  Since the company is in expansion activity, the future earnings per share will

increase.

RETURN ON CAPITAL EMPLOYED:

Net profit
Return on capital employed = -----------------------------------------
Capital employed

TABLE SHOWING YEAR WISE RETURN ON CAPITAL EMPLOYED

(Rs. in crores)

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

A.net profit 1252.37 1363.43 1942.74 1335.57 796.67
B.capital employed 8493.00 9427.00 9935.00 7892.00 5476.00
(incl. term deposits)
Return on capital
employed 14.80% 14.50% 19.55% 17.00% 14.60%

100%

80%

60% Retur on capital employed

B.capital employed
40%
A.net profit
20%

0%
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:

 Even though the return on capital employed is declining, but it is satisfactory,

considering the present market conditions and from the security point of view.

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CHAPTER-VI

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SUMMARY:

Visakhapatnam Steel Plant was founded on 20th Jan ’71 but became fully

operational on 1st Aug ’92. VSP is the first shore based integrated steel plant with

new technology, large scale computerization and automation. The organizational

manpower has been rationalized to operate it at international levels of efficiency and

to attain international labor productivity.

The production, commercial and financial performance has been improving

with the passage of years. The financial analysis of VSP by the use of various

techniques i.e. Ratio, Cash flow analysis shows that:

1) The liquidity position of the company is excellent.

2) The company is zero debt/low debit company.

3) The net worth of VSP is satisfactory

4) It is noted that the inventory level is increasing.

5) The profitability ratio is in decline state

6) Liquidity position of VSP is very good.

7) The company has accumulated funds which are available for

expanding business operations and expansion works.

8) Security to share holders is evisaged

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 SUGGESTIONS

The following suggestions will improve the financial position of the VSP.

PRODUCTION

1) Need for continuous up gradation of technology for improving the

processes.

2) Effort should be made at cost savings particularly in spares and energy

consumption.

3) Using the natural gas reserves of KG basin, Hot metal production

capacity can be enhanced with the present BF facility with negligible

investment.

FINANCE
1) Improving financial leverage ratio for better returns.

PERSONNEL:

1) Rationalization of existing man-power with effective training for future

expansion of the plant.

2) Improving efficiency through better HRD programs.

3) Providing better motivation.

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 4) Striving towards becoming the most chosen employer.

MARKETING

1) Continuously monitoring the indigenous sale, export sale ratio to

capture the best of markets.

2) Increasing the net realization by selling in the most profitable region.

3) Identifying new markets and new application of the company’s

product.

4) Improving realization by identifying value added products and

providing feedback to production department.

5) Value added products (high value items) are to be produced instead of

selling semi-finished products in order to increase profit margin.

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 BIBLIOGRAPHY

BOOKS:

1. Financial Management: Theory & Practice (4th Edition)

Eugene F. Brigham and Michael C. Gerhardt

2. Elements of Management Accounting

Leslie Chadwick

3. Principles of Corporate Finance (7th Edition)

Richard Berkley Stewart Myers

4. Accounting & Finance for Managers

Barry J. Cooper

WEBSITES

 http://vizagsteel.com

 http://www.indiansteel.com

 http://www.bee-india.nic.in.com

 http://www.answer.com

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