FINANCE PROJECT REPORT

UNDER THE GUIDANCE OF

Prof. C.V. Kumar

Presented By (section B)
Name Enrollment No. Seat No.
Kriti Saxena 10BSPHH010342 66
Anish Gupta 10BSPHH010092 67
Neelam S. Mandowara 10BSPHH010444 68
Abheek Gupta 10BSPHH010005 69
Rayaz Ahmad 10BSPHH010618 70
Introduction
For our project we have taken Steel Industry and as we had to take two companies from this sector we
have taken Tata Steels and Shah Alloys, for the best performing company we have taken Tata Steels and
we have selected Shah Alloys as a company which is not performing that well for that we saw it P/E ratio,
net profit.

Ratio Analysis
Liquidity Ratios

RATIOS TATA STEEL SHAH ALLOYS LTD.

Current Ratio
2010 1.204958292 2.964007421
2009 1.075005931 2.448855034
2008 4.717948849 3.166499785
Quick Ratio
2010 0.862513012 1.790670554
2009 0.726624833 1.572151779
2008 4.385444761 2.088470891
Cash Ratio
2010 0.156499973 0.0567718
2009 0.159212685 0.013200227
2008 0.059358498 0.042983836
NWC to Total Asset Ratio
2010 0.033489901 0.482478872
2009 0.013118082 0.415898195
2008 0.642604241 0.396705038
Interval Measure
2010 22.61978082 2.125945205
2009 46.18849315 2.053945205
2008 36.94926027 3.045890411

Current ratio
A current ratio may have different meanings depending on the point of view of an analyst. It has a liquidating
meaning the ability to make all necessary payments today which give a measure of protection or cushion for lenders.
From the table we can see that Tata Steel has Rs 1.20 of Current Assets to meet Rs 1.00 of its Current Liability. Also
in 2009 and 2010 shah alloys ltd has better liquidity position than Tata Steel. Theoretically Shah alloys ltd looks a
better company in terms of liquidity than Tata steel but because of the brand reputation and creditor’s confidence in
Tata’s ability in paying off its liabilities, Tata steel had been doing extremely good in its business.

Quick ratio
Quick ratio is viewed as a sign of company's financial strength or weakness (higher number means stronger, lower
number means weaker).It is found to be a better measure of liquidity because it does not considers inventories for
calculation. If quick ratio is 3 it means that for every rupee of current liabilities there are three rupees of easily
convertible assets. From the table we can see that has Rs 1.79 of Quick Assets to meet Rs 1.00 of its Current
Liability. Also in 2009 and 2010 shah alloys ltd has better liquidity position than Tata Steel. But higher liquidity
does not mean that the company is performing better but it only shows that company has enough funds to meet its
current liabilities. As seen in the table above though the ratio of Shah Alloys is seem to be better but if we see the
volume of work we can see the difference.

Cash ratio
Cash Ratio is an indicator of company's short-term liquidity. It measures the ability to use its quick assets (cash and
cash equivalents and marketable securities) to pay its current liabilities. If Cash ratio is higher, company may keep
too much cash on hand or have a problem collecting its accounts receivable. A quick ratio higher than 1:1 indicates
that the business can meet its current financial obligations with the available quick funds on hand. From the table we
can see that Tata steel has excellent amount of cash to cover its current liabilities while Shah Alloys ltd has a lower
ratio as compared to Tata steel.

NWC to Total Asset Ratio

Net working capital to total asset ratio is sometimes used as a measure of a firm’s liquidity. It is considered that
between two firms the one having the larger NWC to TA, has the greater ability to meet its current obligations.
NWC to TA ratios of Tata steel in financial year 2008, 2009 and 2010 are 0.642604241, 0.013118082 and
0.033489901 while ratios of shah alloys ltd are 0.396705038, 0.415898195 and 0.482478872. This means that shah
alloys ltd has the greatest ability to pay its current obligations amongst the two and Tata steel the least.

Interval Measure
Interval measure relates liquid assets to average daily operating cash outflows. Interval measure indicates that a
company has sufficient liquid assets to finance its operations for a particular number of days. From the table we can
see that Tata steel is in a better position to finance its operations for more number of days than Shah alloys ltd can.
Interval measure of Tata steel is more than that of shah alloys ltd. This means that Tata steel is in the better position
to meet its average daily operating expenses while NIKE is in the worst position amongst the two.

Profitability Ratios
RATIOS TATA STEEL SHAH ALLOYS LTD.
Net Profit Margin
2010 0.284752484 -0.006837431
2009 0.28112415 -0.09040909
2008 0.284786386 -0.095273462
Return on asset
2010 0.119036903 -0.007073386
2009 0.133624328 -0.091883459
2008 0.162061927 -0.113563562
Return on equity
2010 0.119635225 11.45673877
2009 0.165078786 -1.034487368
2008 0.160204319 0.044608885

Net Profit Margin Ratio

Net Profit Margin establishes a relationship between net profit and sales and also indicates the level of
management’s efficiency in manufacturing, administering and selling of products. It is the overall measure of a
firm’s ability to make sales fully profitable. It is always favorable to have a higher Net Margin which directly
reflects the profitability of the company. Net profit margin of Tata steel in fin year 2010 is 0.28, which means it
makes 0.28 rupee on every Rs 1.00 sale. Shah alloys ltd’s NPM ratio for three years is negative which means that it
made losses in all those years.

Return on Assets (Average Total Assets)

The ratio measures the percentage of profits earned on assets employed and thus is a measure of efficiency of the
company in generating profits on its Assets. For example in 2010 Tata steel earned 11.9% on the assets employed.
Shah alloys ltd’s ROA in all years is negative because of negative profit.

Return on Equity
It indicates how well the firm has made use of the resources it has pumped in from its owners. It is considered to be
one of the most important ratios in financial analysis of any company. It also forms a matter of discussion in the
management and directors of the firm. Tata steel’s ROE for the year 2010 is 11.9% which means it earned 11.9%
return on the capital invested by its owners till date.

Efficiency Ratios
RATIOS TATA STEEL SHAH ALLOYS LTD.
Sales-to-asset ratio
2010 0.4180364 1.03451
2009 0.4753214 1.01631
2008 0.56906 1.28559
Days in inventory
2010 75.04804 88.95
2009 71.601422 72.5642
2008 76.1365 68.623
Inventory turnover ratio
2010 4.8635514 4.10343
2009 5.0976641 5.03003
2008 4.79402 5.31892
Average collection period
2010 7.8354517 26.2314
2009 8.8404326 26.0827
2008 1.01156 22.02
Receivables turnover ratio
2010 46.583147 9.41176
2009 9.4117576 13.9939
2008 33.4483 16.5759

Sales-to-asset ratio
The lower the total asset turnover ratio, as compared to historical data for the firm and industry data, the more
sluggish the firm's sales. From the table we can see that in year 2010 Tata steel had sales to asset ratio as 0.42 which
means that for every rupee 1 of total assets, sales generated is rupee 0.42. For both the companies this ratio has been
declining over the three years.

Days in inventory
The speed with which a company turns over its inventory is measured by the number of days that it takes for the
goods to be produced and sold. From the table we can see that, days in inventory for both the companies is more or
less same which means both of them are efficiently converting their inventory into finished products and them into
sales.

Inventory turnover ratio

Inventory turnover ratio measures the liquidity of a firm’s inventory. Higher the ratio, greater the efficiency of
inventory management. In the company Tata steel, we can see the 4.60% decline in the Inventory turn over ratio
from the year 2009 to 2010 and it was 4.86 for Tata steel in year 2010. This signifies that the company has
converted its inventory to sales 4.9 times during the year. Meanwhile, comparing both the company, we find that in
the year 2009-2010, shah alloys ltd has the best Inventory Management as its Inventory turnover Ratio is 4.103.

Average collection period

The average collection period measures how quickly customers pay their bills. The collection period for Tata steel
for all three years is much shorter than Shah Alloys ltd. Tata steel may have a conscious policy of having stringent
credit policy while selling to dealers.

Receivables turnover ratio This ratio indicates the efficiency of the concern to collect the amount due from
debtors. Higher the ratio, better it is as it proves that the debts are being collected very quickly. From the table we
can see that in year 2008 and 2010 Tata steel has larger ratios than Shah Alloys ltd, which says that Tata steel is
more efficient in collecting the amount due from debtors.

Market-Value Ratios
RATIOS TATA STEEL SHAH ALLOYS LTD.
P/E Ratio
2010 11.12253868 -0.838333922
2009 2.893258427 -0.188851514
2008 10.46896239 -0.697731755
Market to book value
2010 1.510120781 -1.074174582
2009 0.609233135 1.182547643
2008 2.320012049 0.647202317

P/E Ratio
From the table we can see that for all three years Tata steel has higher p/e ratio which tells us that it has better
growth prospects as we are comparing two companies of same industry.

Market to book value

Market-to-Book Ratio, is the ratio of the current share price to the book value per share. It measures how much a
company is worth at present, in comparison with the amount of capital invested by current and past shareholders into
it. From the table we can see that in year 2010 Tata steel did extremely good but it decreased in year 2009 and then
again it increased in year 2010.

Leverage Ratios
Debt Ratio
2010 0.4057675 1.05702
2009 0.4717247 0.97318
2008 0.39758 0.82992
Debt to Equity Ratio
2010 0.6828429 18.536
2009 0.8929525 36.281
2008 0.65998 4.87965
Times-Earned-Interest-Ratio
2010 6.0755929 0.35626
2009 7.2184693 -1.0489
2008 9.50454 -1.6681

Debt Ratio
The firm might be interested in knowing the proportion of the interest bearing debt in the capital structure. It is
calculated by dividing total debt by capital employed. This measure makes use of book values rather than market
values. From the table we can see that Shah Alloys ltd is debt-laden company, it has been using debt financing more
frequently than Tata steel although Tata steel has better paying capacity.

Debt to Equity Ratio

The relationship describing the lenders contribution for each rupee of the owner’s contribution is debt equity ratio. It
is computed by dividing total debt by net worth. The normally acceptable debt-equity ratio is 2:1, as seen from the
table debt to equity ratio of Tata steels is very low that means company believes in raising fund through equity and
that of Shah Alloys is very high which means that the company has higher liability in terms of interest payment to
the debt holders which is also not good for the company.

Times-Earned-Interest-Ratio
It is used to test the firm’s debt servicing capacity. This ratio shows how one unit of interest payment made to the
debt holders is dependent on the EBIT and higher the value better is the company performing in terms of debt
servicing. As seen from the table above Tata is better than Shah Alloys in terms of debt servicing.

Working Capital Management Analysis

WORKING CAPITAL (2009-2010) TATA STEEL SHAH ALLOYS LTD.

Raw Material Storage Period 78.358578 16.18023

Average Conversion or Work-in-Process Period 3.119422 10.2368
Finished Goods Storage Period 25.80883 38.67851
Average Collection Period 9.0041876 47.81254
Average Payment Period 314.9686 84.3256
Operating Cycle Period -198.6776 28.58254

For Tata steel it is very large which tells us that creditors has lot of confidence in the firm although we may interpret
it the other way but because NOC (Net operating cycle) is negative in case of Tata steel, which means this company
has been very fast in converting its inventory into sales and then into cash it also shows that there is no significant
time lags in the whole process. NOC for Shah alloys ltd is 29 days, which means this company took 29 days in
converting its inventory into sales and then into cash and it also shows that there are some time lags within the
various process.

Interpreting it differently we can say that the operating cycle concept indicates a company’s true liquidity. By
tracking the historical record of the operating cycle of a company and comparing it to its peer groups in the same
industry, it gives investors investment quality of a company. A short company operating cycle is preferable since a
company realizes its profits quickly and allows a company to quickly acquire cash that can be used for reinvestment.
A long business operating cycle means it takes longer time for a company to turn purchases into cash through sales.

This cycle is extremely important for retailers and similar businesses. This measure illustrates how quickly a
company can convert its products into cash through sales. The shorter the cycle, the less time capital is tied up in the
business process, and thus the better for the company's bottom line.
We have also calculated working capital management of both the companies for the year 2008-2009. After
comparison we see that there is not much significant difference in their operating cycle from the previous year.

Models for Dividend Policy

PRICE OF SHARE TATA STEEL SHAH ALLOYS LTD.

Walter Model 449.7628621 411.0668447

Gordon Model 760.5120254 -21.094
Note: calculation for Shah Alloys is based on year 2007 because the company is not giving any dividends since 2008.

Walter model Here r>ke for both the companies. As we know when return on investment is greater than cost of
equity capital, there is an inverse relation between the value of share and the pay-out ratio. Hence in this case
optimum dividend policy for a growth firm is zero dividend pay-out ratio but it is 15% for Tata steel and 5% for
Shah alloys other wise share price would have been higher.
Gordon Model is showing lot of variations as compared to Walter model and negative share price of Shah Alloys
has no significance as price cannot be negative. But because of assumptions made such as this model is fit for only
all equity financed firm and retention ratio being constant, the value of share price is showing big variation in both
the models. Here both the companies have also been financed by debt and the retention ratio is also not constant.

Leverage
LEVERAGE TATA STEEL SHAH ALLOYS LTD.
DOL
2010 9.10218383 -40.8419
2009 0.483 2.18
2008 1.85 8.53
DFL
2010 1.27 0.609288
2009 0.744 -0.118
2008 -0.027 1.9

Degree of operating leverage

Here DOL for Tata steel is 9.1, which means that if sales increases by 10% then EBIT will increase by 91.02%.
Therefore a large DOL indicates that small fluctuations in level of output or sales will produce large fluctuations in
the level of EBIT. We know that greater the DOL, the more sensitive is EBIT to a given change in unit sales, i.e.
large fluctuations in the level of EBIT. So DOL is measure of business risk of a firm. DOL for Shah alloys in 2010
is negative. It means its sales is less than the break-even sales for the company and fixed cost is high, which means
that at that cost sales should have been higher but the company is not doing well in terms of sales.
A manager can use the DOL to quickly estimate what impact various percentage changes in sales will have on
profits, without the necessity of preparing detailed income statements. From the table we can see that both Tata steel
and shah alloys are vulnerable to high fluctuations in their EBITs because of smaller change in sales

Degree of financial leverage- It examines the effect of change in EBIT of the company on the EPS of the company.
Here DFL for Tata steel is 1.27 which means that if EBIT changes by 1, EPS will change by 1.27 times and EPS for
Shah alloys ltd will change by 0.56 times. So of the two companies Tata steel is more financially leveraged. As the
company becomes more financially leveraged, it becomes riskier which means increased use of debt financing will
leas to increased financial risk like increased fluctuations in ROE and increase in the interest rate on debts. So we
can say that shah alloys is playing on safer side because the company is small and earning little profit.

Capital structure Analysis based on debt-equity ratio

CAPITAL STRUCTURE TATA STEEL SHAH ALLOYS LTD.

Asset Structure
2008 0.815442616 0.446431
2009 0.192472 0.507802
2010 0.195534 0.443074
Profitability
2008 0.194802029 -0.13731
2009 0.171184 -0.09814
2010 0.163111 0.01793
Growth Opportunities
2008 1.220957416 2.87E-05
2009 2.342497 -3.7E-05
2010 2.119063 -2.4E-05
Liquidity
2008 4.717948849 3.207796
2009 1.075006 2.472249
2010 1.204958 2.964007
Size of Firm
2008 10.72168177 6.63803
2009 10.95296 6.60165
2010 11.03813 6.6437
Uniqueness
2008 0.081505028 0.02435
2009 0.073433 0.01702
2010 0.081972 0.01891
Business Risk
2008 0.304326627 4.35445
2009 0.210864 17.8569
2010 0.197405 23.1527
NDTS
2008 0.018668655 -0.4231
2009 0.0091 -0.3788
2010 0.004845 -0.1715

Asset structure
Companies having a large portion of tangible assets that provide good collateral value to lenders experience less
financial distress costs. They can afford to have high debt equity ratios in their capital structure. Thus a positive
relation can be expected between debt ratio and asset structure having a large portion of fixed assets according to
trade-off theory. From the table we can see that for Tata steel in 2008 the proportion of fixed asset was larger as
compared to 2009 and 2010, while for Shah Alloys it has remained more or less same over the years.

Profitability
A profitable firm has the potential to absorb a large amount of interest payments and thus derive tax shield arising
out of a high debt ratio which is not the case with a less profitable firm. Thus a positive relation can be expected
between profitability and debt ratio according to trade-off theory. Profitability is taken to be the percentage of
operating profit before interest and tax to capital employed here. Tata steel’s PBIT was around 16% to 19% over the
years while for shah alloys it has been negative for 2008 and 2009.

Growth Opportunities
Firms with growth opportunities may find it difficult and costly to rely on debt for financing, as the degree of risk
may be high for growth oriented investments. Therefore, a negative relation is expected between growth and debt as
per trade off theory. Alternatively as per pecking order theory high growth firms have greater need for funds and are,
therefore, expected to borrow more. In this regard a positive relation is expected between debt and growth
opportunities at least for large mature firms. It has been good for Tata steel all through the years.

Size of the firm

The proportion of debt increases in the capital structure for larger firms and they are more diversified and therefore
there are less chances of their turning bankrupt. In this respect trade-off theory may suggest a positive relation
between debt and firm size. Size is taken to be the natural logarithm of total assets. This theory apply well for Tata
steel.

Uniqueness
Since both companies are manufacturing firms, so their S&D costs are expected to be high. Therefore, uniqueness is
expected to show a negative relation with debt under trade-off theory.

Business Risk
Financial prudence suggests that firms having high business risk in the form of variability in the operating profit
should not go for high financial risk in the form of high debt equity ratio. Both trade-off and pecking order theories
suggest a negative relation between business risk and debt equity ratio. Coefficient of variation in operating profit
has been very large for shah alloys which is in line with the theory.

Non-debt Tax Shields (NDTS)

The larger the quantum of non-debt tax shield the lesser will be the motivation of managers to go in for debt in their
capital structure. A negative relationship is expected under the trade-off theory between NDTS and debt ratios.
Pecking order theory considers tax benefits whether arising out of debt or non-debt sources as of secondary
importance and hence no relation is expected. NDTS has been quiet large for Tata steel over the years.

Liquidity
Firms that are maintaining their liquid resources are not essentially in the need of debt or borrowings from outside.
Therefore, a negative relation is expected between liquidity and debt. Alternatively, trade off theory suggests that a
firm should have high liquidity in order to servicing high debt. In 2009 & 2010 Shah alloys has been more liquid
than Tata steel, which is in line with trade-off theory and also they went for high debt over the years.

DU PONT ANALYSIS
Shah Alloys Ltd 2010

Tata Steel 2010

Analyzing return ratios in term of profit margin and turnover ratio is referred DU PONT Analysis, it helps to
understand how the return on assets is depended on net profit margin and average asset turnover, As seen from the
figures above the return on assets of Shah Alloys is negative and as seen from the flow above it as the net sales are
less than the total expense which makes the net profit negative and hence because of this the return on asset is
negative and not because of average asset turnover. So DU PONT analysis gives a clear vision of how the bottom of
pyramid affects the top.