CEAT TYRES LTD.

Anshul Agrawal PGDM-BD Roll No 5Gunjan Agarwal PGDM-BD Roll No 2

Anirudh Acharya PGDM-BD Roll No 1Manan Gandhi PGDM-BD Roll No Rajiv Ranjan PGDM-Retail Roll No

Ayush Jhawar PGDM-Retail Roll No

Submitted To

Prof Vandana Sohoni

Index

Company Snapshot 03

Part I – Analysis of Profitability 04

1.1Gross Profit Ratio1.2Operating Ratio1.3Net Profit Ratio1.4Return on Investment

Part II - Analysis of Solvency...............................................10

2.1 Debt to Equity2.2 Interest Coverage Ratio

Part III - Analysis of Liquidity 13

3.1 Current Ratio3.2 Quick Ratio3.3 Debtor Turnover Ratio3.4 Average Collection Period3.5 Inventory Turnover

Part IV – Analysis Of Earnings...................................................

4.1 EPS4.2 PE Ratio

Annexure ................................................................

Balance Sheet Ceat Tyres LimitedIncome Statement Ceat Tyres Limited

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Company Snapshot

CEAT Limited was established in the year 1958 and is one of the key players in the tyre industry in India. The Company, a part of the RPG conglomerate offers the widest range of tyres to leading Original Equipment Manufacturers (OEMs) across the world and is also one of the largest tyre makers for the replacement market in India. The Company has a strong presence in the domestic as well as theinternational markets.

Operations:CEAT produces over 7 million tyres a year and commands around 13% share of the Indian tyre market. The Company manufactures a wide range of tyres catering to all user segments. This includes tyres for heavy duty Trucks and Buses (T&B), Light Commercial Vehicles (LCVs), Earthmovers and Forklifts (specialty segment), Tractors, Trailers, Passenger Cars (PC), Motorcycles, Scooters and Autorickshaws. CEAT earns around 65% of its revenue from the T&B segment. The Company currently operates 2 plants in Maharashtra, one in Bhandup and the other in Nasik. It has a robust national network consisting of 34 regional offices and over 3,500 dealers among which approximately 100 are exclusive dealers running the CEAT Shoppe outlets for passenger cars segments and ~ 96 exclusive dealers running the CEAT HUBs for Truck & Bus Segments. These initiatives have helped bring the Company closer to its customers.Keeping pace with the demand for tyres in future, the Company is implementing a project at Halol, Gujarat with initial capacity of 90 MT per day with an outlay of approximately Rs. 500 crores. The plant is expected to be ready for commercial production during the financial year 2010-11.

Reach:CEAT’s solid brand equity has helped it to achieve a strong footprint in both the domestic and the international market. It has a presence in over 110 countries. The Company is also one of the top tyre exporter in the country with exports valued at Rs. 500 crores.

PART- I Analysis of Profitability

Profitability Ratios

To analyze the profitability of a company profitability ratios are used. These ratios measure the operating or income performance of a company. The goal of a business is to make a profit, so this type of ratio examines how well a company is meeting that goal. The commonly used ratios to evaluate profitability are:

Gross Profit ratio

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Operating Ratio Net Profit ratio Return on Investment

An income statement of last three years is attached below(in crores)

2007 2008 2009

Revenue

2160.01 2455.85 2571.95

Less COGS 1776.23 1889.24 2169.89 Gross Profit 383.78 566.61 402.06 Less Operating Expenses (Selling & Admin) 221.55 269.85 333.66 EBIDTA 162.23 296.76 68.4 Less Depriciation+Amortisation 31.06 32.99 25.62 EBIT (Operating Profit) 131.17 263.77 42.78 Less Interest 70.25 66.47 79.94 EBT 60.92 197.3 -37.16 Less Taxes 21.67 48.7 -21.05 PAT 39.25 148.6 -16.11

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2007 2008 2009

NET SALES 2160.01 2455.85 2571.95

GROSS PROFIT 383.78 566.61 402.06

PAT 39.25 148.6 -16.11

-250

250

750

1250

1750

2250

2750

NET SALES

GROSS PROFIT

PAT

1.1 Gross Profit Ratio (GP / Net Sales)*100

Gross Profit Ratio is ratio of Gross Profit earned by the company in comparison to the annual sales proceeds. It is the measure of crude profitability of the company since it excludes depreciation S&D expenses Taxes and Interest expenses borne by the company.

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Gross profit is also calculated as Sales-COGS

Particulars 2007 2008 2009Gross Profit 383.78 566.61 402.06Net Sales 2160.01 2455.85 2571.95GP Ratio 17.77% 23.07% 15.63%

2007 2008 20090.00%

5.00%

10.00%

15.00%

20.00%

25.00%

GP Ratio

GP Ratio

Interpretation:The analysis of Gross Profit indicates that company is inconsistent in maintaining in it’s gross profit margin. The Gross Profit Margin was 17.77% in 2007 which rose significantly in 2008 to 23.07%. However the company was not able to maintain it’s Gross Margin in 2009 and it declined to 15.63%.The main reason of decline in Gross Profit Margin in 2009 is significant increase in raw material prices (Natural Rubber) which shot up from 79/- per kg to 132/- per kg in March 2009

1.2 Operating Ratio (COGS1 + Operating Exp2)/Net sales *100This ratio establishes relationship between operating costs and net sales. It is the indicator of proportion that the operating cost bears to sales. This ratio includes costs of goods sold as well as Selling and Distribution expenses which have matching relationship with sales. An operating ratio ranging between 75% and 80% is generally considered as standard for manufacturing concerns.

Particulars 2007 2008 2009Operating Exp 2028.61 2192.08 2529.17Net Sales 2160.01 2455.85 2571.95Operating Ratio 93.9% 89.25% 98.36%

1 Opening Stock + Purchases + Direct Expenses + Manufacturing Expenses – Closing Stock2 Administrative Expenses + Selling & Distribution Expenses

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2007 2008 200984.00%

86.00%

88.00%

90.00%

92.00%

94.00%

96.00%

98.00%

100.00%

Operating Ratio

Operating Ratio

Interpretation:The operating costs increase significantly in 2009 which accounted for almost 99% of the sales made by the company. Owing to this steep rise in operating ratio, net profit of the company declined significantly to negative zone thereby generating losses.Even the company’s operating expenses are extremely high in comparison to range for 75-80% for manufacturing concerns for all three years.

1.3 Net Profit Ratio (N.P. / Net Sales)*100This ratio indicates overall efficiency of business. Net Profit is derived after deducting Operating expenses, finance charges (interest) and making adjustments for non operating incomes and expenses from Gross Profit. This ratio reveals the ratio of net profit to each sale. Commonly Net profit is referred to as PAT (profit after Tax) which is fundamental indicator of company’s profitability from investor’s and analyst’s point of view. Higher the Net Profit Ratio of company, greater will be the profitability for the company.

Particulars 2007 2008 2009Net Profit 39.25 148.6 -16.11Net Sales 2160.01 2455.85 2571.95NP Ratio 1.81% 6.02% -0.62%

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2007 2008 2009

-40

-20

0

20

40

60

80

100

120

140

160

PAT

PAT

Interpretation:Net Profit Ratio of company rose significantly in 2008 due to higher gross profit margin but it succumbed in 2009 to increase in raw material prices. The company made loss of 16 crores in 2009 and thereby bringing Net-profit margin to -0.62%.

Conclusion : Any Fluctuation in raw material prices bring significant change in profitability of Ceat since Natural Rubber costs nearly 65% of total sales made by company.

1.3 Return On InvestmentMaximisation of shareholders wealth is the ultimate objective of a company management. The net result of operations of a company is profit/loss. The company employs both shareholders and proprietors fund to attain this profit/loss. Therefore this ratio ascertains how much income the use of Rs 100 of capital generates. It is also called as Return on Capital Employed or Rate of Return and computed as follows

EBIT/Capital Employed3 – Fictitious Assets & Investments

Particulars 2007 2008 2009

EBIT 131.17 263.77 42.78

Capital Employed

905 1282 1332

ROI 14.47% 20.51% 3.21%

3 Share Capital (Pref+equity) + Reserves + Long Term Loans

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InterpretationThe company was generating decent return on investment till 2008 but it ROI stalled in 2009. An analysis of other indicators above revelas that owing to spurge in prices of raw material the company lost it’s momentum and ROI nosedived to 3.21% in 2009.

However company is expected to regain it’s ROI momentum as soon as prices of natural rubber will decline.

PART- II Analysis of Solvency

Solvency Ratios Solvency Ratios are the indicators of long term solvency of the company. They basically indicate how well company can meet its long term obligations. Therefore these indicators are measure of financial strength of company and ensure its long term survival. These ratios are particularly useful for financial institutions banks and other lenders to assess the credit worthiness of the company and the attendant financial default risk.

The common Solvency ratios are 1) Debt Equity Ratio2) Interest Coverage Ratio

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2.1 Debt Equity Ratio

This ratio measures the proportion of debt and capital (both preference & equity) in the capital structure of the company. In other words it measures the extent of assets financed through long term borrowings.

The formula for measuring Debt Equity Ratio is

Debt Equity Ratio = Long Term Debt / Total Net Worth

Particulars 2007 2008 2009Long Term Debt 492.25 477.65 645.14Net Worth 378.64 513.25 488.38DE Ratio 1.3:1 0.93:1 1.32:1

Interpretation :

An analysis of Debt Equity Ratio of past three years indicates that company was quick in discharging its obligation as soon as it earned profit. The Company Generated Profit of 148 crore in 2008 and in the same year the DE ratio declined from 1.3:1 to 0.92:1.Another important observation here is company equity share capital outstanding declined from 45 crores to 35 crores indicating that company used its profits in buying back shares outstanding thereby increasing the promoters stake.

Again as the situations worsened company resorted back to Debt to finance it’s debt mode to finance the assets. But Still the Debt Equity Ratio of Ceat Ltd is well below the accepted benchmark of 2:1.

2.2 Interest Coverage Ratio

This ratio indicates that weather the company is earning sufficient profit to pay back the interest charges. This ratio indicates how many times the profit covers the fixed interest. It measures the margin of safety for lenders. The higher the number, more secure the lender is in respect of his periodical interest income.

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This ratio is calculated by dividing earnings before interest & taxes (EBIT) by interest charges.

Particulars 2007 2008 2009EBIT 131.17 263.77 42.78Interest Charges

70.25 66.47 79.94

Interest Coverage Ratio

1.86 times 3.96 times 0.53 times

Interpretation

The company’s financial earning strength is not adequate in meeting its interest charges. However consistent losses may result in erosion of past profits (reserves) in meeting it’s debt servicing charges. The Interest coverage ratio fell below 1 times in 2009 indicating that company is not even earning enough profit to discharge current years interest burden.

This is alarming sign for investors indicating that company may default in future if it doesn’t earn profits soon.

PART- III Analysis of Liquidity

Liquidity Ratios:

The capacity of a company to discharge it’s suppliers and service providers and to meet its day to day expenses indicates its liquidity and ensures smooth continuity of operations, which in turn have a strong bearing on the long term survival of the company. The liquidity position of company is determined by analysing the structure of current assets and current liabilities, credit period allowed to customers, credit period availed from suppliers and inventory holding of the company.

Following are the major ratios which indicates liquidity position of company or short term solvency

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1) Current Ratio2) Quick Ratio3) Collection Period Allowed To Customers4) Suppliers Credit5) Inventory Turnover Ratio

3.1 Current Ratio:

This ratio measures the ability of a company to discharge it’s day to day bills or current liabilities as and when they fall due out of cash or near cash, or current assets that it posses.This ratio helps suppliers and institutions to understand the likely extent of short term default risk associated with the company.It is measured as current assets / current liabilities and resultant figure shows times current assets in excess of current liabilities

Particulars 2007 2008 2009Current Assets

581.16 772.14 819.07

Current Liabilities

524.94 553.69 506.86

Current Ratio 1.11 Times 1.39 Times 1.61 Times

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2007 2008 2009

Current Assets 581.16 772.14 819.07

Current Liabilities 524.94 553.69 506.86

50

150

250

350

450

550

650

750

850

Current AssetsCurrent Liabilities

The analysis of current ratio indicates that company is solvent in short term and current assets are 1.61 times of current liabilities in 2009 which is at par with industry standards.

3.2 Quick Ratio or Acid Test Ratio:

Liquid assets are those which can be converted into cash or cash equivalents within a very short span of time. It generally excludes inventories since they take longest time to convert in to cash and prepaid expenses since they can’t be converted into cash.The formula to calculate Quick Ratio is Quick Assets4 / Current Liabilities

Particulars 2007 2008 2009Quick Assets 359.78 430.91 599.65Current Liabilities

524.94 553.69 506.86

Quick Ratio 0.68 Times 0.78 Times 1.18 Times

Interpretation

The analysis of quick ratio shows an increasing trend in last three years. Quick Ratio has gradually increased over a period of time

4 Quick Assets = Current Assets – Inventories – Prepaid Expenses

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due to increase in current assets and as per 2009 the company is completely solvent in very short term.

It can meet its current obligation since it has sufficient cash or cash equivalents in 2009. Important Point worth noting is that despite of making a loss in 2009 company has sufficient liquidity to meet its obligations and can will not face any kind of cash crunch in near future.

3.3 Collection Period Allowed to Customers

(Debtors / Sales)*365Particulars 2007 2008 2009Debtors 263.17 307.91 318.71Sales 2160.01 2455.85 2571.95Collection Period

44 days 46 days 45 days

Interpretation

The company is following a fair credit policy and it is able to extend the credit period of 45 days on average.

3.4 Suppliers Credit

Particulars 2007 2008 2009Creditors5 489.64 528.27 489.05Sales 2160.01 2455.85 2571.95Suppliers Credit Period

82 days 78 days 69 days

InterpretationCompany enjoys on an average 76 days credit period from its suppliers. This shows company management is efficient in faster collection of debts and deferring the payments to suppliers therefore generating big chunk of internal working capital.

5 Figures taken from Annual Report of Ceat Tyres Ltd

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3.5 Inventory Turnover Ratio:

This ratio establishes relationship between the COGS during a given period and the average amount of inventory carried during that period. It indicates weather the stock has been efficiently used or not.Higher the ratio better it is since it indicates more sales are being produced by a rupee investment in stocks. A low stock Turnover reflects dull business , overinvestment in stock and accumulation of stock in anticipation of higher prices.

STR = COGS/ Avg.Inventory

Particulars 2007 2008 2009COGSAvg InventoriesSTR

PART- III Analysis of Earnings

4.1 Earnings Per Share (EPS)

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Earnings per share is generally considered to be the single most important variable in determining a share's price. It is the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share also serve as an indicator of a company's profitability.

The significance of EPS is obvious, as the viability of any business depends on the income it can generate. A money losing business will eventually go bankrupt, so the only way for long term survival is to make money. Earnings per share allow us to compare different companies’ power to make money. The higher the earnings per share with all else equal, the higher each share should be worth.

Calculating EPS

To calculate this ratio, simply divide the company’s net income  by the number of shares outstanding during the same period. If the number of shares out in the market has changed during that period (ex. a share buyback), a weighted average of the quantity of shares is used.

EPS = PAT / No of Shares Outstanding

Particulars 2007 2008 2009PAT (in lacs) 3924.85 14860.44 -1611.16No of Shares o/s

45656626 34242759 34242759

EPS 8.59 43.39 -4.71

Interpretation

The company’s earning power rose significantly in 2008 owing to net profit of 148 crores. However same growth couldn’t be continued and EPS Plunged to -4.71 in 2009.This shows that company is highly unstable in giving consistent returns on per share basis to investors. The company is unable to manage the fluctuations in raw material prices operating expenses and other areas of cost control.

However company’s management is showing faith in its business operations since shares were bought back from market in 2008 thereby skyrocketing the EPS valuations of

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company. Promoters stake was rose by 11413867 shares & throwing Comapany’s EPS to 43 in 2008.

4.2 Price Earnings Ratio (PE Ratio)

 Valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as :

 EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E. It is also sometimes known as "price multiple" or "earnings multiple".

In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects. 

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An alternative approach to calculate PE Ratio is Market price = EPS * PE Ratio

Therefore PE Ratio = Market Price / EPS

Therefore PE Ratio of Ceat = 154.3 / -4.71 = (32.76)

ANNEXURES

Balance Sheet : CEAT TYRES LTD

200903 200803 200703 SOURCES OF FUNDS : Share Capital 34.24 34.24 45.68 Reserves Total 454.14 479.01 332.96 Equity Share Warrants 0 0 0 Equity Application Money 0 0 0 Total Shareholders Funds 488.38 513.25 378.64 Secured Loans 398.12 265.39 275.76 Unsecured Loans 247.02 212.21 216.49 Total Debt 645.14 477.6 492.25

Total Liabilities 1133.52 990.85 870.89

APPLICATION OF FUNDS : Gross Block 1234.05 1214.33 1113.03 Less : Accumulated Depreciation 458.67 427.71 413.02 Less:Impairment of Assets 0 0 0 Net Block 775.38 786.62 700.01 Lease Adjustment 0 0 0 Capital Work in Progress 19.56 3.48 10.13 Producing Properties 0 0 0 Investments 42.67 9.6 127.81 Current Assets, Loans & Advances Inventories 219.42 341.23 221.38 Sundry Debtors 318.71 307.91 263.17 Cash and Bank 201.52 41.59 40.55 Loans and Advances 79.42 81.41 56.06 Total Current Assets 819.07 772.14 581.16 Less : Current Liabilities and Provisions Current Liabilities 489.06 528.27 489.65

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Provisions 17.8 25.42 35.29 Total Current Liabilities 506.86 553.69 524.94 Net Current Assets 312.21 218.45 56.22 Miscellaneous Expenses not written off 0 0 0 Deferred Tax Assets 12.41 3.05 10.04 Deferred Tax Liability 28.71 30.35 33.32 Net Deferred Tax -16.3 -27.3 -23.28

Total Assets 1133.52 990.85 870.89

Income Statement6

2007 2008 2009 INCOME : Sales Turnover 2390.61 2602.97 2758.43 Excise Duty 257.53 275.38 239.97 Net Sales 2133.08 2327.59 2518.46 Other Income 24.44 102.48 44.96 Stock Adjustments 2.49 25.78 8.53

Total Income 2160.01 2455.85 2571.95

EXPENDITURE : Raw Materials 1485.3 1554.21 1812.43 Power & Fuel Cost 73 80.16 90.54 Employee Cost 127.93 141.31 158.54 Other Manufacturing Expenses 90 113.56 108.38 Selling and Administration Expenses 210.85 258.32 322.14 Miscellaneous Expenses 10.7 11.53 11.52 Less: Pre-operative Expenses Capitalised 0 0 0

Total Expenditure 1997.78 2159.09 2503.55

Operating Profit 162.23 296.76 68.4 Interest 70.25 66.47 79.94 Gross Profit 91.98 230.29 -11.54 Depreciation 31.06 32.99 25.62 Profit Before Tax 60.92 197.3 -37.16 Tax 10 43 -11.78 Fringe Benefit tax 2.38 1.68 1.73 Deferred Tax 9.29 4.02 -11 Reported Net Profit 39.25 148.6 -16.11 Extraordinary Items -2.48 60.35 -0.31 Adjusted Net Profit 41.73 88.25 -15.8

6 Data Downloaded from Capitaline Plus Databse

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Adjst. below Net Profit 0 0 0 P & L Balance brought forward 27.34 41.98 124.55 Statutory Appropriations 0 0 0 Appropriations 24.61 66.03 0 P & L Balance carried down 41.98 124.55 108.44

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