MANAC-1

Group Assignment
BM 2013-15 Section A

GROUP 3
ABHAVE SHARMA (B13001)
GIRISH DESHPANDE (B13025)
KETAN LUKHI (B13031)
RAMAN SINGH (B13044)
SUMIT TANEJA (B13056)
VAIBHAV CHOPRA (B13059)
VISHAP RANA (B13061)

Balance Sheet
EQUITY AND LIABILITIES

As of
st

31 March 2013 31st March 2012

(in INR crores)
Shareholders Funds
Share Capital
Reserves and Surplus

4,131
36,894

4,131
35,681

Non-Current Liabilities
Long-Term Borrowings
Deferred Tax Liabilities (Net)
Other Long Term Liabilities
Long-Term Provisions

13,486
1,729
1,271
4,204

11,587
1,644
1,346
3,525

Current Liabilities
Short-Term Borrowings
Trade Payables
Other Current Liabilities
Short-Term Provisions
TOTAL

8,015
3,322
8,655
2,513
84,218

4,511
3,220
8,396
2,297
76,337

ASSETS

As of
st

31 March 2013 31st March 2012

(in INR crores)
Non-Current Assets
Fixed Assets
Tangible Assets
Intangible Assets
Capital Work-in-Progress
Non-Current Investments
Long-Term Loans and Advances
Other Non-Current Assets
Current Assets
Inventories
Trade Receivables
Cash and Bank Balances
Short-Term Loans and Advances
Other Current Assets
TOTAL

15,235
1,543
35,891
718
3,165
51

15,748
1,410
28,049
685
2,614
78

16,008
4,424
3,850
991
2,343
84,218

13,742
4,749
6,416
785
2,061
76,337

Profit and Loss Statement

Year ended 31st March 2013
in INR crores
Revenue from Operations
Less : Excise Duty
Other Income
Total Revenue
Expenses
Cost of Materials Consumed
Purchase of Stock in Trade
Changes in Inventories of Finished Goods
Work in Progress and Stock in Trade
Employee Benefits Expense
Finance Costs
Depreciation and Amortisation Expense
Other Expenses
Add/Less(-): Adjustments pertaining to Earlier Years
Profit before Tax and Exceptional Items
Less: Exceptional Items
Foreign Exchange Loss (+)/ Gain(-)
Exchange Variations treated as Interest Cost
Write back of entry tax liability
Profit before Tax
Less : Tax Expense
Current Tax
Deferred Tax
Earlier Years
Profit
after
Tax
Amount
transferred
on amalgamation of MEL with the
Company
Balance of Profit and Loss Account as on 1st April, 2010
Profit after tax for the financial year 2010-11
Less:
Unrealised Profit on closing stock of erstwhile MEL
held by the Company
Amount Transferred to General Reserve
Dividend on new shares issued
Amount available for appropriation
Earnings per Share
Profit after Tax
Average Number of Equity Shares (mm)
Basic and Diluted Earnings per Share (INR)

49,987
5,389

44,598
964
45,563

Year ended 31st March 2012

in INR crores
51,029
4,694

21,198
3
(2,016)

23,021
5
1,369

8,637
748
1,403
12,161

7,932
678
1,567
10,707

229
-

1,058
12
(0)

42,134
3,428
42
3,470

229
3,241

1,070
2,170

467
306
511

1,501
113
(6)

46,335
1,629
47,965

42,541
5,423
(11)
5,413

262
5,151

1,608
3,543

123
28

2,170

9
3
0
3,682

2,170
4,131
5.25

3,543
4,131
8.58

Cash Flow Statement

Year ended 31st March 2013
in INR crores
Cash flow from Operating Activities
Net Profit before taxation
Add / ( Less ) Adjustments for :
Depreciation
Interest and Finance Charges
Bad debts written-off
Provision for Others
Profit on sale of Fixed Assets
Interest Income
Dividend Income
Operating cash flow before working capital change
Adjustments for :
(Increase) in Inventories
(Increase) / Decrease in Sundry Debtors
(Increase) in Loans and Advances
Increase in Current liabilities
(Increase) in Other Current Assets
Cash generated from Operations
Direct Taxes Paid
Net Cash from Operating Activities
Cash flow from Investing Activities
Purchase of Fixed Assets
Proceeds from sale of Fixed Assets
Loans to Other Companies
Decrease in Term Deposits with Banks
Purchase/Sale of Investments (net)
Interest received
Dividend received
Net Cash from / ( used in ) Investing Activities
Cash flow from Financing Activities
Proceeds from Issue of Share Capital
Increase in Reserve & Surplus
Increase/( Decrease ) in Borrowings (net)
Interest and Finance Charges Paid
Dividend Paid
Tax on Dividend
Net Cash from / ( used in ) Financing Activities
Net Increase in Cash & Cash Equivalents (A+B+C)
Cash & Cash Equivalents (Opening)
Cash & Cash Equivalents (Closing)

Year ended 31st March 2012

in INR crores

3,241

5,151

1,406
748
0
1,086
(25)
(826)
(59)
5,570

1,574
678
1
79
(20)
(1,464)
(57)
5,940

(2,266)
330
(704)
732
(269)
3,391
(987)
2,404

(2,440)
(632)
(452)
260
(179)
2,498
(1,456)
1,042

(9,120)
39
2
2,512
(33)
836
59
(5,705)

(9,398)
38
6
10,733
(1)
1,890
57
3,326

4
5,143
(748)
(991)
(161)
3,248
(53)
330
277

0
159
(3,086)
(620)
(991)
(161)
(4,699)
(332)
662
330

Year e

Important Information Extracted from Annual Report

SAIL is India's largest steel producing company. With a turnover of Rs. 49,986 crore, the company is
among the seven Maharatnas of the country. SAIL's relentless drive to fast-track its modernization &
expansion plan (MEP), resulted in commissioning of projects worth 5500 crore in 2012-13, which is
the highest for a year since inception. Notwithstanding the challenging market conditions in 2012-13
arising from demand stagnation, SAIL produced 13.4 million tonnes (MT) of crude steel by operating
at 103% of its capacity, marking an improvement of 1% over CPLY.
As per the companys Annual Report, 2012-13 following were the accounting policies adopted:
Basis of Accounting
The financial statements are prepared under the historical cost convention on accrual basis of
accounting, in accordance with the generally accepted accounting principles in India
Fixed Assets
Mining Rights are treated as Intangible Assets and all related costs thereof are amortized on the basis
of annual production to the total estimated mineable reserves.
Depreciation
Depreciation is provided on straight-line method at the rates specified in Schedule XIV to the
Companies Act, 1956. However, where the historical cost of a depreciable asset undergoes a change,
the depreciation on the revised unamortized depreciable amount is provided over the residual useful
life of the asset.
Inventories
Raw materials, stores & spares and finished/semi-finished products (including process scrap) are
valued at lower of cost and net realizable value of the respective plants/units. In case of identified
obsolete/surplus/non-moving items, necessary provision is made and charged to revenue.
Investments
Long-term investments (including investments in subsidiary companies and joint ventures) are carried
at cost, after providing for diminution (other than temporary) in value. Current investments are carried
at lower of cost and market value.
Revenue Recognition
Sales include excise duty and are net of rebates and price concessions. Sales are recognized at the
time of dispatch of materials to the buyers including the cases where delivery documents are endorsed
in favour of the buyers.
Deferred Tax
The deferred tax on timing differences between book profit and taxable profit for the year is
accounted for applying the tax rates and laws that have been enacted or substantively enacted as on
the balance sheet date.

Information Extracted from Auditors Report

The most important information contained in Auditors report is that the Companys financial
statements are awarded Qualified Report.

Basis for Qualified Opinion:

According to Auditors, the Company has not provided for following matters:
Entry tax amounting to 81.64 crore (current year 17.62 crore) in the state of Uttar Pradesh

Entry tax of 888.46 crore (current year 163.83 crore) in the state of Chhatisgarh and 170.32
crore (current year 39.20 crore ) in the state of Odisha
Income tax demand of 87.62 crore
Claims of 217.40 crore (current year 88.80 crore) by DVC for supply of Power

The impact of above items has resulted in overstatement of profit for the current year by 397.07
crore, cumulative Profit by 1445.44 crore and understatement of Liability by 1445.44 crore.
There were some other matters with which auditors have objections. Auditors drew the attention of
management towards following points:

During the year, the accounting policy regarding amortisation of Mining Rights has been
revised from the lease period to annual production vis-a-vis total estimated mineable
reserves. As a result, the profit for the year is higher by 214.14 crore. But no explanation is
given as to why the method was changed and this change was not reflected in the policy
employed.

The auditors were unable to comment on the adequacy of provision of 611.03 crore (including
549.95 crore provided for during the year) for pending finalisation of fresh agreement with
non-executives in respect of wage revision due from 1st January, 2012.
The reason being management has not provided any explanation on the estimation of this
revise wage provisions.

In view of the assumptions provided by the Company relating to the salary escalation rates,
auditors were unable to comment on the adequacy of provision for retirement employee
benefits.
The reason being the complete explanation is not given for the provision of retirement
employee benefits. For example, direct estimation of 1230.01 crore for post-retirement
medical benefits and 117.43 crore for post-retirement settlement benefit have been provided
with no evident explanation of estimation.

During the development of financial statements, consultancy fee in respect of deferred capital
schemes amounting to 107.17 crore and non-capitalisation of assets valued at 981.83 were
included in Capital Work in Progress.
But in reality, the consultation is to be implemented in near future and some capital schemes
have not been capitalized due to lack of sustained production and hence, according to
auditors, these should have not been reported under Capital Work in Progress.

Rourkela Steel Plant of the Company has proposed to the Government Odisha for an out of
court settlement of the matter relating to levy of water tax under the provisions of Odisha
Irrigation Act, 1959. If the settlement is accepted, the Company may have to pay an amount
which shall be mutually agreed with the State Government of Odisha. According to auditors,
the amount to be paid has not been estimated and reported in contingent liabilities.

Auditors also have objection with the NRV of assets which are retired from active use.
Management says:
Assets retired from active use and waiting for disposal amounting to 30.50 crore has been
shown under " Tangible Fixed Assets", the net realizable value of which in the opinion of the
management will not be less than the amount shown and does not require any provision.

Specific Strength Areas of SAIL

The Indian steel industry is poised for a robust growth over the medium term. There would be
opportunities provided by a rapidly expanding domestic market particularly infrastructure sector. SAIL
is at the completion stage of its ongoing modernization and expansion plan. The commissioning of
new state-of-the-art facilities will enable SAIL to enhance its market share.
The company is currently implementing the capacity expansion plan to enhance its hot metal
production from the level of 14.3 million tonnes during the last financial year to 23.5 million tonnes
after expansion in a phased manner. This is visible in the balance sheet of SAIL, where the capital work
in progress has been consistently increasing from 29.0% of the total assets at the end of 31 st March
2011 to 42.6% of the total assets at the end of 31st March 2013.
While the additional capacity is surely going to help SAIL in capturing the market share once the
condition of economy improves in medium term, the good thing about SAIL is its relatively low debt
to equity ratio as compared to its peers. SAILs D/E stands at 0.5, which means the company has
significant room to borrow loans, in order to pursue its expansion plans. The total loans as of 31 st
March 2013 stood at INR 21,501cr, as compared to a total equity of INR 39,579cr.
The financing costs have not shot up significantly for the last 3 financial years, increasing from 1.1% of
the total revenues in FY 2010-11 to 1.6% of the total revenues in FY 2012-13. The relatively lesser
encumbered balance sheet of SAIL gives it the ability to expand, while staying well within the upper
D/E boundary.
Although the net profits after tax (PAT) have taken a severe hit since the last 3 financial years, owing
mainly to subdued sales, the cash reality of the company has not aggravated badly. The cash generated
from operations (CGFO) have plunged at an annual CAGR of 11.9% since FY 2010-11, as compared to
a 39.9% fall (annual CAGR) in the PAT since FY 2010-11.
In fact the CGFO has increased by 35.8% in FY 2012-13 as compared to FY 2011-12 (the fall in net profit
is 49.9% on year on year basis). The CGFO certainly tells us that the company is in a better position in
terms of cash generating ability.
SAIL has one of the better interest coverage ratios in the industry, although the interest coverage ratio
has deteriorated in the last 3 financial years due to the suppressed sales. In FY 2012-13 the interest
coverage ratio for SAIL was 5.6 (this was 9.0 in FY 2011-12 and 15.9 in FY 2010-11) as compared to 5.5
for Tata Steel, 2.7 for JSW and 6.3 for JSPL. In the financial years 2011-12 and 2010-11, SAIL had the
highest interest coverage ratios. It is only in FY 2012-13, SAIL ranks second after JSPL on the coverage
ratio.
SAIL also has one of the better current ratios as compared to its peers (1.2 at the end FY 2012-13). The
same holds at the end of FY 2011-12 and FY 2010-11. Although the ratio is still lesser than the ideal
2.0 number, the better than peers current ratio is mainly due to high level of inventories, which have
grown from 14.9% of the total assets at the end of FY 2010-11 to 19.0% of the total assets at the end
of FY 2011-12.

Specific Areas of Weaknesses of SAIL

The company has a plethora of problems, a few specific to the company and a few because of the
overall economic slowdown.
1) High inventory velocity/inventory holding days:
SAIL had an inventory velocity 136.0 days in FY 2012-13, which is highest among its peers. This
is in stark contrast to Tata Steel whose inventory velocity is almost one-third of that of SAIL.
The same holds true for JSW, whereas for JSPL this ratio is about half of that of SAIL.
Additionally, this ratio has been deteriorating since FY 2010-11 (it was 108 days for FY 201011). This indicates that a lot of capital is tied up in the idle inventories, which is taking a hit on
SAILs turnover ratios as well.
2) Poor quick ratio:
SAIL has a dangerous level of quick ratio, which was 0.5 for FY ending 2012-13. Moreover this
ratio has continuously declined since FY 2012-13, which grows more concerns about the
liquidity crunch, the company may be facing.
3) Low profitability ratios:
SAIL has performed poorly on almost every profitability ratio as compared to its peers.
Moreover the profitability ratios have devolved in the last 3 years as well. E.g. the ROE has
jumped down from 13.2% in FY 2010-11 to a dismal 4.5% in FY 2012-13.
The same holds true from profit margin which has plunged to 3.9% in FY 2012-13 from 10.9%
in FY 2010-11. Similarly, the operating profit margins, gross profit margins have also taken a
downturn.
4) Low turnover ratios:
Due to subdued sales, the turnover ratios have worsened in the last three years. The fixed
asset turnover has dipped to 0.8 in FY 2012-13 from 1.1 in FY 2010-13. As mentioned earlier
in the strengths section, the company is aggressively expanding, and a lot of fixed assets are
actually work-in-capital assets, this can be a major source of low FA turnover ratio, apart
from stagnant sales.
However, once the economy ticks-up and with expanded capacities, these turnover ratios are
bound to improve. Similarly the capital turnover ratio has decreased from 1.0 to 0.9 on similar
grounds (the company has taken significant loans for the expansion process, thus increasing
the capital employed, but the effect of which on sales is yet to come).
5) Z score:
The Z- score of SAIL is 1.63. Since this is significantly less than 1.81, this suggests that there
exists a good chance (almost certain according to Altman's observation) that SAIL may go
bankrupt in near future.

Remedial Measures Suggested by the Group

On a performance front, the debtors velocity and inventory velocity for SAIL are 36.7 days and 136.0
days respectively which are quite worrisome numbers as compared to those of competitors.
Groups Suggestions:

To reduce debtors velocity and inventory velocity. To reduce inventory velocity, SAIL can
reduce stores & spares inventory and offer discount on finished goods along with reduction
in debtors velocity by offering them discounts to reduce the blocking of capital.
Clearing of finished goods stock can also help increase the fixed asset turnover ratio and
capital turnover ratio which have been continuously decreasing since FY 2010-11.

Talking about profitability ratios, the ratios are less promising as compared to that of competitors
which may be due to the blocking of finished goods inventory. On the expenses front, employee
benefits expenses have been continuously rising with 9% YoY in FY 2012-13 but total sales decreased
in 2012-13 as compared to 2011-12 which can be major concern for the company.
Groups Suggestion:

Suggestion mentioned above can also help improve the profitability ratios as it would help
increase the sales. On the expenses front, management can look at the reasons for
continuously rising expenses benefits and can take necessary steps to check the expenses.

Modernization:

On a positive note, Debt/Equity ratio of SAIL is 0.54 which is also very low as compared to
some of its competitors. SAIL can leverage this opportunity and can go for more long term
debt which can be used to expedite the modernization.

In solvency ratios, Quick ratio is also severely affected. Quick ratio of SAIL is 0.5 which is also very low
as compared to that of competitors. Due to this company may end up in severe liquidity crunch.
Groups Suggestions:

The suggestion one mentioned above can also help alleviate the liquidity crunch the company
currently is facing.
Current liquidity crunch can also be alleviated by taking short term debt. The reason being D/E
ratio is very low which can be leverage to increase the debt.

The current Return on Total Assets (RoTA) for sales is 2.15%. DuPont Analysis suggest that decreasing
the current assets, which effectively means lowering the inventory levels, can improve the asset
utilization and hence sales turnover. Similarly putting a curb on the expenses, especially on the
employee benefit expenses, would certainly help SAIL increase its profit (as mentioned earlier the
employee benefit expenses form a major part in the total operating expenses).

ANNEXURE - 1
Financial Ratio Calculations
FY13
Name of Ratio
ROE
RONW
Gross Profit Margin
EBITDA Margin
EBIT Margin
Profit Margin
EBIT/Total Assets
Proprietary Ratio
Quick Ratio
Current Ratio
Debt Equity Ratio
Fixed Asset Turnover
Capital Turnover ratio

FY12

FY11

Debtors velocity1

SAIL
4.5%
4.5%
12.4%
12.3%
9.3%
3.9%
5.0%
1.1
0.5
1.2
0.5
0.8
0.9
36.7

Tata Steel
9.2%
9.2%
24.8%
24.3%
29.1%
12.9%
NA
NA
0.6
0.9
0.5
1.0
NA
8.1

JSPL
19.5%
19.5%
24.0%
23.7%
30.6%
15.7%
NA
NA
0.9
0.7
1.3
0.9
NA
22.6

JSW
9.0%
9.0%
12.2%
12.1%
17.8%
5.0%
NA
NA
0.7
0.9
0.9
0.9
NA
16.6

SAIL
8.9%
8.9%
17.2%
16.0%
12.7%
7.4%
8.0%
0.9
0.8
1.5
0.4
1.0
0.9
33.8

Tata Steel
12.8%
12.8%
32.1%
31.6%
35.5%
19.5%
NA
NA
0.5
0.8
0.5
1.5
NA
7.2

JSPL
23.8%
23.8%
31.4%
30.5%
38.6%
21.0%
NA
NA
1.0
0.8
1.4
0.8
NA
26.0

JSW
8.8%
8.8%
12.1%
12.0%
17.4%
5.0%
NA
NA
0.5
0.8
0.7
0.9
NA
12.5

SAIL
13.2%
13.2%
23.2%
20.2%
16.8%
10.9%
9.9%
0.9
1.0
1.5
0.5
1.1
1.0
31.1

Tata Steel
14.2%
14.2%
34.2%
33.8%
38.1%
23.2%
NA
NA
1.5
1.8
0.6
1.3
NA
5.4

JSPL
21.9%
21.9%
27.8%
27.1%
34.8%
19.6%
NA
NA
0.7
0.7
1.2
0.8
NA
25.2

JSW
12.1%
12.1%
14.1%
14.0%
20.1%
8.6%
NA
NA
0.5
0.8
0.7
0.8
NA
11.1

Inventory velocity1
Interest Coverage

136.0
5.6

45.3
5.5

75.6
6.3

45.1
2.7

115.1
9.0

38.8
5.9

62.8
7.9

45.8
3.4

107.9
15.9

37.1
6.1

45.3
7.9

51.4
4.4

Ratio Calculations for SAIL (FY13)

(All figures are in crore)
a) PROFITABILITY RATIOS
ROE/RONW = PAT/(Share Capital + Reserves)
= 1,773/(35,449 + 4,131)
= 4.5%
Gross Profit Margin = Gross Profit/Sales
= (Sales - COGS)/Sales
= (45,563 - 39,923)/39,923
= 12.4%
EBITDA Margin = EBITDA/Sales
= 5,621/45,663
= 12.3%
EBIT Margin

= EBIT/Sales
= (EBITDA - D&A)/Sales
= (5,621 - 1,403)/45,663
= 9.3%

Profit Margin = PAT/Sales

= 1,773/45,663
= 3.9%
EBIT/Total Assets = 4,218/84,218
= 5.0%

b) SOLVENCY RATIOS
Proprietary Ratio = Fixed Assets/Capital Employed
= 5,602/53,065
= 1.07
Quick Ratio = (Current Assets - Inventories)/(Current Liabilities)
= 11,608/22,505
= 0.52
Current Ratio = Current Assets/Current Liabilities
= 27,616/22,504
= 1.15
Debt Equity Ratio = Debt/Equity
= (Short Term Loan + Long Term Loan)/Net Worth
= 21,501/39,579
= 0.54
c) TURNOVER RATIOS
Fixed Asset Turnover = Sales/Fixed Assets
= 45,563/56,602
= 0.80
Capital Turnover ratio = Sales/Capital Employed
= 45,563/53,005
= 0.86
d) PERFORMANCE INDICATORS
Debtor velocity = Avg. Debtors/Sales * 365
= 4,586/45,563 *365
= 36.74
Inventory velocity = Avg. Inventory/Sales
= 14,875/45,563 *365
= 136.00
e) COVERAGE RATIO
Interest Coverage = EBIT/Finance Costs
= 4218/748
= 5.64

DuPont Analysis of Return on Total Assets:

Return on total Assets

PAT/TA = 2.1%

PAT/Sales
3.9%
PAT
1773

GP
5,640

Sales
45,563

Sales/TA
54.1%

Sales
45,563

Sales
45,563

Other Expenses
3,867

COGS
39,923

Calculation of Z-score:
X1 = working capital / total assets =5,112/84,218 = 0.06
X2 = cumulative retained earnings / total assets = 35,449/84,218 = 0.42
X3 = EBIT / total assets = 4,218/84,218 = 0.05
X4 = market value of equity / total book value of liabilities = 19,661/44,639 = 0.44
X5 = sales / total assets = 45,563/84,218 = 0.54

Z = 1.2X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + X5 = 1.63

TA
84,218

FA
56,602

CA
27,616