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FINANCIAL ANALYSIS OF HINDALCO INDUSTREIS LIMITED, RENUSAGAR .ALIGARH MUSLIM UNIVERSITY

30 JULY 2010

FINANCIAL ANALYSIS OF

HINDALCO INDUSTRIES LIMITED

Submitted To: Mr. B.B. BhartiyaSubmitted by:ZEBA NAZ (09MBA56)

FINANCIAL ANALYSIS OF HINDALCO INDUSTRIES LIMITED

Foreword

It is my pleasure to write that the project study titled “ANALYSIS OF

WORKING CAPITAL MANAGEMENT AND BALANCE SHEET OF

HINDALCO INDUSTRIES” by ZEBA NAZ for the summer training

during her MBA course is a sincere attempt. I am sure that her

observations and suggestions will be quite handy and useful for the

company.

The report is very useful for any young trainee as relevant information

has been compiled at one place in a logical and comprehensive manner. I

am of the view that the trainees are hardworking, determined and

committed to their targets.

In the end I appreciate the efforts put by them for this work and wish

them a very bright future in the years to come.

(DY.GENERAL MANAGER FINANCE)

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Certificate

This is to certify that ZEBA NAZ, a bonafide students of Aligarh Muslim

University; Aligarh has undergone her summer internship at our

organization during the period dated __________ to __________ and has

completed the project study titled “ANALYSIS OF WORKING

CAPITAL MANAGEMENT AND BALANCE SHEET OF HINDALCO

INDUSTRIES”.

The work was carried out entirely by them and towards partial fulfillment

of the requirements for the award of the MBA Degree. During their stay in

the organization, their conduct has been __________________.

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ACKNOWLEDGMENT

It is a great sense of satisfaction and a matter of privilege for us to work at Hindalco

Industries limited.

I wish to express my heartiest thanks to Renusagar Power Division for providing me

the opportunity to undergo training in an esteemed organization under such a

proactive environment, Systematic work approach and target oriented task

management of this division provided us with the much desired training experience

needed for future management professional.

It is our pleasure to thank Mr. Nishant Kr. Gupta, A.G.M (TTMDC), and HIL, to

whom we owe a lot for giving me an opportunity to do our training in this

organization. I also owe a special thanks to Mr. Sumant Kumar, DY. Manager

(Management services), and HIL for following me to do this project under their

guidance.

Our heartfelt thanks to our guide Mr. B.B. Bhartiya who accepted me, as a project

trainee in his group and helping in the project with words of encouragement and has

shown full confidence in my abilities.

I am also heartily thankful to the entire staff member of TTMDC, Technical

services who always have been a source of inspiration for me.

EXECUTIVE SUMMARY

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The assigned project was focused on the detailed financial analysis of HINDALCO

for the period of 2007-08 to 2009-10. The analysis was done using the Annual

reports and the official financial statements released by the company. The analysis

contains following components:

a) Industry Analysis using Porter’s five forces

b) Swot analysis

c) Financial Statement Analysis:

Liquidity Ratios

Profitability Ratios

Solvency Ratios

Efficiency Ratios

Capital Market Ratios

Du-Pont Analysis

Trend Analysis

d) Peer group comparison

INTRODUCTION:Financial ratio analysis is an important topic and is covered in all mainstream corporate finance

textbooks. It is also a popular agenda item in investment club meetings. It is widely used to

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summarize the information in a company's financial statements in assessing its financial health. In

today's information technology world, real time financial data are readily available via the

Internet. Performing financial ratio analysis using publications, such as Robert Morris Associates’

Annual Statement Studies, Dun & Bradstreet’s Key Business Ratios, Moody’s Manuals, Standard

& Poor’s Corporation Records, Value Line Investment Survey, etc., is no longer efficient. Since

students and investors now have easy access to on-line databases, the assignments on financial

ratio analysis can be modified accordingly to enhance learning.

Since it is important to understand how the company's profitability, efficiency, and leverage are

linked in its financial performance, one is required to demonstrate and evaluate its Du Pont system

over time. Both the company's profitability (as measured in terms of profit margin) and efficiency

(as measured in terms of asset turnover) determine its ROA. This ROA, along with the company's

financial leverage (as measured in terms of its equity multiplier), contributes to its ROE. As the

company's use of leverage magnifies its ROE, students are required to examine ROE carefully.

The changes in the company's ROE are to be noted and explained through its profit margin, asset

turnover, and equity multiplier over time. The objective is to identify the company's strong area

that can be capitalized upon and/or its weak area that must be improved upon.

To explain the variation in the company's financial ratios over time, the industry comparative

analysis must be performed along with the trend analysis. To evaluate the company's financial

performance against its key competitors, the company-to- company comparison report is retrieved

from the following path. The class assignment presented herein is designed to demonstrate how

to assess a company's overall operations over time and its current financial standing in the

industry.

ALUMINIUM INDUSTRY IN INDIAAluminium Industries in India is one of the leading industries in the Indian economy. The growth

of the aluminum Metal industry in India would be sustained by the diversification and exploration

of new horizons for the industry. India has huge deposits of natural resources in form of minerals

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like copper, chromite, iron ore, manganese, bauxite, gold, etc. The India aluminum industry falls

under the category of non iron based which include the production of copper, tin, brass, lead, zinc,

aluminum, and manganese

Aluminium Industry in India is a highly concentrated industry with the top 5 companies

constituting the majority of the country's production. With the growing demand of aluminium in

India, the Indian aluminium industry is also growing at an enviable pace. In fact, the production of

aluminium in India is currently outpacing the demand.

Though India's per capita consumption of aluminium stands too low (under 1 kg) comparing to

the per capita consumptions of other countries like US & Europe (range from 25 to 30 kgs), Japan

(15 kgs), Taiwan (10 kgs) and China (3 kgs), the demand is growing gradually. In India, the

industries that require aluminium most include power (44%), consumer durables, transportation

(10-12%), construction (17%) and packaging etc.

The BackgroundThough the existence of Aluminium was first established in the year 1808, it took almost 46 years

to make its production commercially viable. The research work of several years resulted in

extracting the aluminium from the ore. Aluminium is third most available element in the earth

constituting almost 7.3% by mass. Currently it is also the second most used metal in the world

after steel. Due to the consistent growth of Indian economy at a rate of 8%, the demand for metals,

used for various sectors, is also on the higher side. As a result, the Indian aluminium industry is

also growing consistently. In FY09, the aluminium industry in India saw a growth of about 9%.

The production of aluminium started in India in 1938 when the Aluminium Corporation of India's

plant was commissioned. The plant which was set up with a financial and technical collaboration

with Alcan, Canada had a capacity of producing 2,500 ton per annum. Hindustan Aluminium

Corporation (Hindalco) was set up in UP in the year 1959; it had a capacity of producing 20,000

ton per annum. In 1965, a public sector enterprise Malco which had a capacity of 10,000 ton per

annum was commissioned; by 1987, National Aluminium Company (NALCO) was commissioned

to produce aluminium. It had a capacity of producing 0.218 million ton.

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During the 1970s, the government started regulating and controlling the Indian aluminium

industry. Restrictions in entry and price distribution controls were quite common in the Indian

aluminium sector. Aluminium Control Order was implemented where the aluminium producers

had to sell 50% of their products for electrical usages. However, in 1989, the order was removed

as the government decontrolling was revoked. With de-licensing of industry in 1991, the liberal

import of technologies and capital goods was started. The liberalization resulted in a growth rate

of 12% of the industry, comparing to the growth rate of 6% during the 1980.

Overview Aluminium Industry:India is world's fifth largest aluminium producer with an aluminium production competence of

around 2.7 million tonnes, accounting almost 5% of the total aluminium production in the world.

India is also a huge reservoir of Bauxite with a Bauxite reserve of 3 billion tones.

The productionIndia lies at the eighth position in the list of leading primary aluminium producers in the world.

India saw a significant growth in aluminium production in the past five years. In 2006-07, the

production target of aluminium in India laid by the Ministry of Mines, Government of India was

1,153 KT, which was augmented to 1,237 KT in the next year (2007-08). Due to the growing

demand from the construction, electrical, automobiles and packaging industry, the production of

aluminium also hiked up. In FY 09, the total aluminium production in India was around 1.35

tones.

The ConsumptionAfter a stagnant consumption of primary aluminium in India from the end of 1990s to 2002 (when

the consumptions were between 500 – 600 KT), it started rising sharply since 2002. The

consumption reached at 1,080 KT in 2006. The per capita consumption of aluminium in India

continues to remain abysmally low at under 1 kg as against nearly 25 to 30 kgs in the US and

Europe, 15 kgs in Japan, 10 kgs in Taiwan and 3 kgs in China. The key consumer industries in

India are power, transportation, consumer durables, packaging and construction. Of this, power is

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the biggest consumer (about 44% of total) followed by infrastructure (17%) and transportation

(about 10% to 12%). However, internationally, the pattern of consumption is in favour of

transportation, primarily due to large-scale aluminium consumption by the aviation space.

The Major Players The Indian aluminium industry is dominated by four or five companies that constitute the majority

of India's aluminium production. Following are the major players in the Indian aluminium

industry:

Hindustan Aluminium Company (HINDALCO)

National Aluminium Company (NALCO)

Bharat Aluminium Company (BALCO)

MALCO

INDAL

Hindalco Industries:

Set up in 1958, is under the Aditya Birla Group. Its businesses include the manufacture of Copper

and Aluminium and in both; the company is a leader in the industry. The Hindalco Industries Ltd's

market value is US$ 2.96 billion and it has around 13,675 employees.

The Company Hindalco Industries (commissioned in 1962) has its facility for Aluminium at

Renukoot in eastern U.P. Today, the company has grown to become India's biggest producer of

integrated Aluminium and ranks top in the global sector as the producer of low cost top quartile.

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The net operating and sales revenues of the Hindalco Industries Company had amounted to Rs

42,737 million in 2005-2006; while the next year it stood at Rs. 46,779 million.

The various Aluminium products manufactured by the Hindalco Industries are:

Primary Aluminium

Alumina Chemicals

Wire Rods

Rolled Products

Alloy Wheels

Foils

The various Copper products manufactured by the Hindalco Industries are:

Copper Cathodes

Precious Metals

Rods of Cast Copper

Hindalco Industries has an important market share in all the categories it operates. In the domestic

market, it enjoys a market share of 44% in Foils, 63% in Rolled Products, and 42% in Primary

Aluminium. The Copper division of the Hindalco Industries has a market share of around 40% in

the domestic market. This has been due to the fact that the company utilizes the best raw material

and the latest technology in the manufacture of its products. As a result, the products of the

Hindalco Industries Ltd are of the best quality.

The Hindalco Industries Company's products are exported in large quantities to Taiwan, Middle

East, Korea, and Southeast Asia. Hindalco Industries has become a leading company in India on

the basis of its quality of products. It is for this reason that its exports are also increasing.

Madras Aluminium:Madras Aluminium is a subsidiary of Vedanta Resources and was established in the year 1965.

The company is located in Salem city in Tamil Nadu where it has a large power plant. The

company conducts activities such as smelting, refining, mining, and so on.

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Products of Madras AluminiumMadras Aluminium Co. produces Ingots of E.C. and Alloy grade. The ingots vary in weight and

use a wide variety of chemicals such as magnesium, chromium, iron, aluminium, and copper.

Madras Aluminium Co. manufactures wire rods which serve as electrical conductors. These rods

involve a complex production procedure involving rolling as well as casting. The diameter of the

E.C. Grade rods measure 9.5 mm and the tensile strength varies between 9 to 14.5 kg per square

millimetre. The length of the rod can be extended by 22% and the electrical conductivity is 61%

whereas the coil weighs 1.80 to 2.20 MT. The alloy grade rods have a tensile strength that varies

from 13-16 kg per millimetre and the minimum electrical conductivity is 55%. The weight of the

coil is equal to the E.C. grade rods and can be lengthened by 12-16%. They also manufacture bus-

bars of varied sizes and cross sections. These bus-bars are used in industries dealing in energy

sources such as for the transfer of current.

National Aluminium Company Limited:

National Aluminium company Limited better known as NALCO was incorporated in 1981 as a

public sector enterprise under the Indian government. Since then, NALCO has grown to become

the largest integrated aluminium unit in Asia and is also one of the largest aluminium complexes

of the world.

Activities of NALCO include a plethora of aluminium and related procedures such as refining,

smelting, bauxite mining, casting, railway operations, port operations, and power generation. In

order to fulfil its vision of becoming a "company of global repute in the aluminium sector", and

driven by its mission of attaining business growth, competitive advantage, and the satisfaction of

customers and investors, NALCO has adopted some pioneering practices as well as state-of-the-

art technology in its manufacturing units that are spread across the country. It is due to the efforts

of NALCO that India has attained self-sufficiency in terms of aluminium and has also gone on to

excel in aluminium production standards.

NALCO's registered/corporate office is located in Bhubaneswar. The main bauxite mines under

NALCO are located in Panchpatmali. NALCO's alumina refinery is located at Damanjodi and its

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rolled production units, captive power plant, and aluminium smelter can be found at Angul.

NALCO also owns port facilities at Vishakhapatnam.

National Aluminium Company Limited is primarily engaged in the production of 5 types of

products: Aluminium metal (comprising of ingots, cast strips, billets, wire rods, sows, and allow

wire rods), Alumina and Hydrates (comprising of calcined alumina and alumina hydrate),

aluminium rolled products, Zeoilte-A, and special alumina chemicals.

NALCO has impressed customers and investors with continual growth over the years. In 2006,

NALCO produced 4,623,278 MT of bauxite and 358,734 MT of aluminium. The company's

export turnover for 2006-07 amounted to Rs. 2585 crore. Its gross sales were worth Rs. 6514 crore

and profits after tax were to the tune of Rs. 2381 crore.

National Aluminium Company Limited is headed by 5 directors -Mr. K.K. Mallick, Mr. P.K.

Routray, Mr. C.R.Pradhan, Mr. B.L. Bagra, and Mr. Joy Varghese. The National Aluminum

Company Limited has offices in New Delhi, Mumbai, Kolkata, Bangalore, Mumbai, Chennai,

Paradip, and Vishakhapatnam.

NALCO has also been a pioneer in corporate social responsibility (CSR) in the Indian public

sector. For example, when NALCO was being built in Damanjodi and Angul, it led to the

displacement of more than 600 families in 50 villages. For these families NALCO provided

employment to the respective nominees. NALCO has also spent as much as Rs. 100 crore for

championing various social causes and development activities. The company has also revamped

the infrastructure and other facilities in the nearby villages. NALCO has also prioritized

communication, drinking water, education, and healthcare for the villages adjoining its plants.

Successful operations of the company in terms of pisciculture and social forestry have led to the

increase of employment generation of income for local residents in areas where National

Aluminium Company Limited has a presence.

Sterlite Industries (India) Limited:

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Sterlite Industries (India) Limited is the principal subsidiary of Vedanta Resources Group. Its

chief products are Copper Cathodes and Copper Rods. The company also operates the largest

capacity of continuous Cast Copper Rod plants.

Sterlite Industries has laid great emphasis on customer relationship and quality assurance; using

the best technology, along with their social responsibility. Sterlite Industries certifications are ISO

9001(2000), ISO 14001(1996), and OHSAS 18001(1999).

Sterlite Limited has a domestic market share of 43 percent by volume in 2005-06. It has made

sales of Rs.67921 million during 2005-06 with CAGR of 28 percent. It has operations based on a

Sulphuric Acid Plant, a Copper Rods Plant, a Phosphoric Acid Plant, a Smelter, Refinery, and

various mines.

Some brief descriptions of Sterlite products are:

Copper products: Comprises two products; namely, Copper cathodes (produced using the

highly effective ISA electro-refining technology), and Continuous cast copper rods (manufactured

using the Propezi technology).

Chemical products: Include Phospho Gypsum, Hydro Fluo Silicic Acid, Sulphuric Acid,

Ferro Sand, Phosphoric Acids.

Precious metals: Copper concentrate, few traces of gold and silver in the products.

Sterlite Industries has contributed immensely to society and environmental areas. Some of its

efforts in this regard are solid waste and secured landfill, collection of primary gas emissions,

monitoring of air quality, education, sports, community, and health welfare. 13


Today, Sterlite Industries has a number of excelling frontiers credited to its name. Let us take a

glimpse into these as well:

First company in South India to go in for a secured land fill

First private sector smelter in India

First Copper Smelter in the world to be accredited with "Five Star" rating by British Safety

Council

Extensive use of TQM to efficiently maximize employee involvement

National Award in Excellence in Energy Management for the last six years in a row

Zero-effluent discharge systems integrated at every plant

Currently 11% of copper requirement met by captive mines

Sterlite Industries (India) Limited has thus, laid a profound impact in the manufacture of

copper based products; while at the same time moving towards the conservation of the

natural environment.

INDAL: Indal is the integrated aluminium extrusion manufacturers in south east Asia. In its over 30 year

journey to excellence, Indal has become one of the largest integrated aluminium extrusion

manufacturers in South East Asia region that delivers value in product quality and customer

service. Several advantages that our customers will be able to gain from us are competitive price,

quality control and excellent customer service.

Being an ISO 9001:2000 certified company and having semi-automatic production facilities,

Indal's aluminium extrusion and fabrication division ensures that production process adheres with

the international quality standard. We provide customer with the highest quality and precision

from product design stage to product delivery. We also perfected our service with surface

anodizing and paint coatings finishing facilities and on time delivery.

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BALCO : Bharat Aluminium Company Ltd. (BALCO) has been closely associated with the Indian

aluminium industry, playing a pivotal role in making aluminium a leading metal with myriad uses

ranging from household and industrial requirements to aerospace applications. BALCO is part

of Vedanta Resources, a London listed metals and mining major with Aluminium, Copper and

Zinc operations in UK, India and Australia.

GLOBAL ALUMINIUM INDUSTRYGlobal production of primary aluminium rose continuously from 32 million tonnes (MT) in 2005

to 38 MT in 2007, registering a CAGR of 9%. However, during 2008 the production remained

flattish at around 38 MT (2007 levels) on account of significant fall in demand in the second half

of the year due to the global credit crisis. This created a large amount of demand supply gap, thus

making the inventory levels at LME reach their multi year highs. China accounted for around 30%

of the total global aluminium production. Asia, once again showed the largest annual increase in

consumption of primary aluminium, driven largely by increased industrial consumption in China,

which has emerged as the largest aluminium consuming nation, accounting for 35% of global

primary aluminium consumption in 2008. As far as the global consumption goes, it declined by

around 3%YoY to 37 MT in 2008

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http://www.vedantaresources.com/


The Indian aluminium industry registered a growth of around 9% in FY09. Strong growth in

industrial, infrastructure, automobile, transportation and power sectors during the first half of the

fiscal were the key drivers for the demand. However, realizations for the fiscal fell significantly

on account of fall in LME prices due to the global credit crisis, thus causing a dent in margins. On

the other hand, the steep depreciation of Indian rupee against the US dollar impacted the industry

positively. The total aluminium production in the country stood at around 1.35 m tonnes in FY09.

Prospects

Overseas Demand Boosting Metal Prices - Demand in emerging markets like China and India,

coupled with drastically reduced inventories and lower output, have boosted US metal prices. US

Steel raised its prices three times between June and July 2009, while Alcoa boosted aluminium

prices by 6 percent since the first quarter, according to BusinessWeek.com. Industry observers

differ over whether prices will continue to rise, however. Some say US auto production is too

weak to sustain higher prices, while Chinese consumption may slow. Output has furthermore

stagnated despite higher prices, leaving metal makers still in search of profits.

Climate Bill Could Impact Steel Costs - A Congressional climate-change bill could add $1

billion to production costs for US steel producers by 2030. The Waxman- Markey bill calls for the

reduction of carbon emissions by 17 percent by 2020 and more than 80 percent by 2050. The

domestic steel industry accounts for about 9 percent of heavy emissions in the US heavy industry

sector. Steel earnings could drop by 2 to 5 percent as a result of the legislation, and could fall

further unless an offset penalty is imposed on imported steel, according to a recent Goldman

Sachs report.

Steel Imports Drop - US steel imports in June 2009 dropped to their lowest levels since 1975,

according to the American Iron and Steel Institute. Steel import permit applications declined 23

percent compared to May, with Japan, India, South Korea, and China submitting the largest

finished steel applications. Despite the falling applications, some industry observers are still

concerned over unfairly traded imports: steel imports boast a 28 percent market share, while

domestic production has slowed to 49 percent of capability.

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Globally, the demand for aluminium is projected to fall by around 7% in 2009 on account

of subdued conditions in the key user industries. However, China is projected to maintain

the consumption levels of 2008 mainly due to the fiscal stimulus package that is likely to

support its ailing economic growth. The revival in the demand for the metal is expected to

start from 2010 globally. As per Alcoa, world’s largest aluminium producer, the demand

for aluminium is projected to grow at around 6% CAGR till 2018 on account of newer

packaging applications and increased usage in automobiles, consumer durables,

construction and defence.

With key consuming industries forming part of the domestic core sector, the

Aluminium industry is sensitive to fluctuations in performance of the economy. Power,

infrastructure and transportation account for almost 3/4th of domestic aluminium

consumption. With the government focusing towards bringing back GDP growth rates of

above 8%, the key consuming industries are likely to lead the way, which could positively

impact aluminium consumption. Domestic demand growth is likely to remain robust over

a long term period.

A US$ 29 billion corporation, the Aditya Birla Group is in the League of Fortune 500. It is anchored by

an extraordinary force of 130,000 employees, belonging to 30 different nationalities. In the year 2009,

the Group was ranked among the top six great places for leaders in the Asia-Pacific region, in a study

conducted by Hewitt Associates, RBL Group and Fortune magazine. In India, the Group has been

adjudged the best employer in India and among the top 20 in Asia by the Hewitt-Economic Times and

Wall Street Journal Study 2007.

Over 60 per cent of the Group's revenues flow from its overseas operations. The Group operates in 25

countries – India, UK, Germany, Hungary, Brazil, Italy, France, Luxembourg, Switzerland, Australia,

USA, Canada, Egypt, China, Thailand, Laos, Indonesia, Philippines, Dubai, Singapore, Myanmar,

Bangladesh, Vietnam, Malaysia and Korea. The Aditya Birla Group is India’s second largest business

house with turnover of over 200 billion-asset base values at over Rs. 180 Billion and nearly 72,000

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http://www.adityabirla.com/the_group/Aditya%20Birla%20Group%20profile


employees all over the world. Over 75 units in India and overseas as well and international trading

operations

ABG is committed to the future of India, for over 50 years now.

Gross Revenue- Rs. 26,000 crores

Gross Assets - Rs. 25,700 crores

Shareholders - Rs. 6, 50, 000

Globally, the Aditya Birla Group is a metals powerhouse, among the world's most cost-efficient

aluminium and copper producers. Hindalco-Novelis is the largest aluminium rolling company. It

is one of the three biggest producers of primary aluminium in Asia, with the largest single location

copper smelter.

The fourth-largest producer of insulators

The fourth-largest producer of carbon black

The fifth-largest producer of acrylic fiber

The tenth-largest cement producer

Among the best energy-efficient fertiliser plants

In India:

Largest cement producer

Largest premium, branded apparel company

The second-largest producer of viscose filament yarn

The second-largest in the chlor-alkali sector

Among the top five cellular operators

Among top 10 Indian BPO companies by revenue size

Among the top five asset management and private sector life insurance companies

Among the top three supermarket chains in the retail business

Rock solid in fundamentals, the Aditya Birla Group nurtures a culture where success does not

come in the way of the need to keep learning afresh, to keep experimenting.

Group Vision:18

http://www.morestore.com/

http://www.birlasunlife.com/BirlaSunLife/Mutual_Fund/BSLAMC_MP/index.aspx

http://www.minacs.adityabirla.com/

http://www.ideacellular.com/

http://www.adityabirlanuvo.com/indianrayon/index.aspx

http://www.adityabirlanuvo.com/maduragarments/index.aspx

http://www.adityabirlanuvo.com/indogulf/index.aspx

http://www.birlacarbon.com/

http://www.adityabirlainsulators.com/

http://www.novelis.com/

http://www.hindalco.com/


To be a premium metals major, global in size and reach, excelling in everything we do, and

creating value for its stakeholders.

Group Mission: To relentlessly pursue the creation of superior shareholder value, by exceeding customer

expectation profitably, unleashing employee potential, while being a responsible corporate citizen,

adhering to our values.

Overview of Hindalco:

The Hindalco story dates back to the young Indian democracy of the 1950s. Ready to take a giant

leap, India was geared to make it big, especially in terms of innovation and industrialisation.

Hindalco embarked on its journey in 1958. Its first real contribution to the vision of an industrial

India occurred four years later, when the visionary — late Mr. G.D. Birla set up India's first

integrated aluminium facility at Renukoot, in the eastern fringe of Uttar Pradesh, India. It was

backed by a captive thermal power plant at Renusagar in 1967. Hindalco attained its leadership

position in the aluminium industry under the dynamic leadership of the late Mr. Aditya Vikram

Birla — a formidable force in the Indian industry.

And it was through the vision and guidance of Mr. Kumar Mangalam Birla, the Group Chairman

that the business segments of aluminium and copper areconsolidated to make Hindalco the non-

ferrous metals powerhouse it is today. This was achieved in part by expansion through mergers

and acquisitions with companies such as Indal and Birla Copper. Hindalco also secured copper

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http://www.hindalco.com/operations/manufacturing_locations.htm


reserves and amplified its operating base by acquiring the Australian Nifty and Mt. Gordon copper

mines.

Over the years, Hindalco has grown into the largest vertically integrated aluminium company in

the country and among the largest primary producers of aluminium in Asia. Its copper smelter is

today the world's largest custom smelter at a single location.

In 2007, the landmark acquisition of Novelis Inc., the world's largest aluminium rolling company,

placed Hindalco's footprint across the globe, securing it a rank amongst the top five global

aluminium majors and also placing it in the Fortune 500 league

Aluminium businessHindalco is Asia's largest integrated primary producer of aluminium and among the most cost-

efficient producers globally. Our aluminium units across India encompass the entire gamut of

operations, from bauxite mining, alumina refining, aluminium smelting to downstream rolling,

extrusions and recycling. In India, we enjoy a leadership position in aluminium and downstream

products. Our product range includes rolled products, extrusions, foils, primary aluminium ingots,

billets, wire rods and aluminium slabs.

Hindalco metal is accepted under the high-grade aluminium contract on the London Metal

Exchange (LME) as a registered brand. We have also been accorded the Star Trading House status

in India.

Hindalco’s integrated complex at Renukoot , in Uttar Pradesh, India, houses an alumina refinery,

an aluminium smelter and facilities for the production of semi fabricated products. Power is

sourced from our Renusagar power plant, located about 45 km from Renukoot.

The captive power plant located at Renusagar, Uttar Pradesh, with 10 power generating units, has

a current generation capacity of 742 MW. Excellent operational standards have ensured a

consistent plant load factor of over 90 per cent. The integrated complex at Renukoot also houses a

co-generation plant with a capacity of 37.5 MW. A new co-generation plant with a capacity of 41

MW has just been commissioned to meet the requirements of the enhanced post-expansion

capacities.

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Other facilities include an aluminium smelter at Hirakud (Odisha) with a captive power plant and

coal mine, alumina refineries at Muri (Jharkhand), and Belgaum (Karnataka), and rolling mills at

Belur (West Bengal), and Taloja, Mouda (Maharashtra), foil rolling at Kalwa (Maharashtra) and

Silvassa (Union Territory of Dadra and Nagar Haveli) and an extrusions plant at Alupuram

(Kerala).

A strong presence across the value chain and synergies in operations has given Hindalco a

dominant share of the domestic value-added products market. In India, the company enjoys a

leadership position in speciality aluminas and hydrates as well as in primary aluminium and

downstream semi-fabricated products.

Hindalco product range includes:

Ingots

Hindalco produces high-purity ingots through smelting. Alloy ingots of various grades are also

produced and mainly used for the production of castings in the auto industry and in electrical

applications. Both these products are re-melted and further processed into a large number of

products for various downstream applications.

Hindalco metal is accepted under the high-grade aluminium contract on the London Metal

Exchange (LME) as a registered brand.

Wire Rods

Hindalco manufactures wire rods in a continuous casting and rolling process. Electrical conductor

(EC) wire rods are used for the production of cables and ACSR and AAC conductors. Alloy wire

rods are used to produce AAA Cconductors.

Billets

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Hindalco's aluminium billets are produced by a state-of-the-art Wagstaff casting process using

Airslip technology. These are top-quality billets with a smooth finish. They are used mainly to

produce extrusions and forgings.

Foil and packaging Delivering 'never-before-tried' solutions to customers in India and across the

globe, Hindalco has the distinction of being India's premier supplier of foil and foil laminates —

plain, lacquered and printed. Our foil and packaging division operates out of three modern, well-

equipped plants located at Kalwa in Maharashtra, Silvassa in Dadra and Nagar Haveli and Kollur

in Andhra Pradesh, India. These well-equipped foil rolling and converting facilities provide a

veritable 'one-stop-shop' for packaging solutions. The plants also employ high-end technology and

professional expertise to develop visually appealing and functionally useful packaging.

RESEARCH METHODOLOGY : The methodology followed in this project involved the following Phases:

OBJECTIVES OF THE STUDY : To know about the current assets and current liabilities position of Hindalco Industries

Ltd.

To determine the ratios relating to the working capital.

To find out the Gross Working Capital position of Hindalco Industries Ltd.

To know about the net working capital position of Hindalco Industries Ltd.

RESEACH DESIGN: A research design specifies the methods and procedures for conducting survey. Research

design is the plan and structure of investigation so conceived as to obtain answer to

research questions. The plan is overall scheme of the research. Descriptive Research

Design has been adopted while doing the research.

DATA COLLECTION METHOD:

22


Data required for the project e.g. Balance Sheet, statement of Profit & Loss Account etc.

were collected from the annual reports of Hindalco period of 2008-09 and 2009-10.

Besides for Explanation of several issues, different articles, Internet data’s, books etc were

consulted. The data collected is a Secondary Data.

TYPE OF THE PROJECT:The project is descriptive and analytical in nature.

FINANCIAL ANALYSIS

Definition and Explanation of Financial Statement Analysis:

Financial statement analysis is defined as the process of identifying financial strengths and

weaknesses of the firm by properly establishing relationship between the items of the balance

sheet and the profit and loss account.

There are various methods or techniques that are used in analyzing financial statements, such as

comparative statements, schedule of changes in working capital, common size percentages, funds

analysis, trend analysis, and ratios analysis.

Financial statements are prepared to meet external reporting obligations and also for decision

making purposes. They play a dominant role in setting the framework of managerial decisions.

But the information provided in the financial statements is not an end in itself as no meaningful

conclusions can be drawn from these statements alone. However, the information provided in the

financial statements is of immense use in making decisions through analysis and interpretation of

financial statements.

Tools and Techniques of Financial Statement Analysis:

Following are the most important tools and techniques of financial statement analysis:

1. Horizontal and Vertical Analysis

2. Ratios Analysis

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1. Horizontal and Vertical Analysis:

Horizontal Analysis or Trend Analysis:

Comparison of two or more year's financial data is known as horizontal analysis, or trend

analysis. Horizontal analysis is facilitated by showing changes between years in both dollar and

percentage form.

Trend Percentage:

Horizontal analysis of financial statements can also be carried out by computing trend

percentages. Trend percentage states several years' financial data in terms of a base year. The

base year equals 100%, with all other years stated in some percentage of this base.

Vertical Analysis:

Vertical analysis is the procedure of preparing and presenting common size statements. Common

size statement is one that shows the items appearing on it in percentage form as well as in dollar

form. Each item is stated as a percentage of some total of which that item is a part. Key financial

changes and trends can be highlighted by the use of common size statements.

2. Ratios Analysis:

The ratios analysis is the most powerful tool of financial statement analysis. Ratios simply means

one number expressed in terms of another. A ratio is a statistical yardstick by means of which

relationship between two or various figures can be compared or measured. Ratios can be found

out by dividing one number by another number. Ratios show how one number is related to

another.

Profitability Ratios:

Profitability ratios measure the results of business operations or overall performance and

effectiveness of the firm. Some of the most popular profitability ratios are as under:

Gross profit ratio

Net profit ratio

24

http://www.accountingformanagement.com/vertical_analysis_full.htm

http://www.accountingformanagement.com/trend_percentages.htm


Operating ratio

Expense ratio

Return on shareholders’ investment or net worth

Return on equity capital

Return on capital employed (ROCE) Ratio

Dividend payout ratio

Earnings Per Share Ratio

Price earnings ratio

Liquidity Ratios:

Liquidity ratios measure the short term solvency of financial position of a firm. These ratios

are calculated to comment upon the short term paying capacity of a concern or the firm's

ability to meet its current obligations. Following are the most important liquidity ratios.

Current ratio

Liquid / Acid test / Quick ratio

Activity Ratios:

Activity ratios are calculated to measure the efficiency with which the resources of a firm

have been employed. These ratios are also called turnover ratios because they indicate the

speed with which assets are being turned over into sales. Following are the most important

activity ratios:

Inventory / Stock turnover ratio

Debtors / Receivables turnover ratio

Average collection period

Creditors / Payable turnover ratio

Working capital turnover ratio

Fixed assets turnover ratio

Over and under trading

Long Term Solvency or Leverage Ratios:

Long term solvency or leverage ratios convey a firm's ability to meet the interest costs and

payment schedules of its long term obligations. Following are some of the most important

long term solvency or leverage ratios.

Debt-to-equity ratio

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Proprietary or Equity ratio

Ratio of fixed assets to shareholders funds

Ratio of current assets to shareholders funds

Interest coverage ratio

Capital gearing ratio

Over and under capitalization

WORKING CAPITAL MANAGEMENTWorking Capital refers to the cash a business requires for day-to-day operations, or more

specifically, for financing the conversion of raw material into finished goods, which the company

sells for payment. Among the most important items of Working Capital are levels of inventory,

accounts receivable and accounts payable. Analysts look at these items for signs of a company’s

efficiency.

Funds are also needed for short-term purposes, for the purpose of raw materials, payment of

wages and other day-to-day expenses, etc. These funds are known as Working Capital. In simple

words, Working Capital refers to that part of the firm’s capital, which is required for financing

short- term or current assets such as cash, marketable securities, debtors and inventories.

Working Capital is a valuation metric that is calculated as current assets minus current liabilities.

Working capital is also known as Operating Capitals.

Working Capital is needed for the following purposes: For the purchase of raw material.

To incur day-to-day expenses and overhead costs such as fuel, power and office expenses,

etc.

To meet the selling costs as packing, advertising etc.

To provide credit facility to the customers.

To maintain the inventories of raw materials, work-in-progress, stores and spares and

finished stock.

To pay wages and salaries.

Steps involved in working capital management:

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Forecasting the Amount of Working Capital

Determining the Sources of Working

Objectives of Working Capital Management:

Deciding Optimum Level of Investment in various WC Assets.

Decide Optimal Mix of Short Term and Long Term Capital

Decide Appropriate means of Short Term Financing

WORKING CAPITAL MANAGEMENT:The working capital requirement of a firm depends, to a great extent upon the operating cycle of

the firm. The operating cycle may be defined as the time duration starting from the procurement

of goods or raw material and ending with the sales of realization. The length and nature of the

operating cycle may differ from one firm to another depending upon the size and nature of the

firm. In a trading concern, there is a series of activities starting from procurement of goods

(saleable goods) and ending with the realization of sales revenue (at the time of sale itself in the

case of cash sales and at the time of debtors realization in case of credit sales).similarly in case of

manufacturing concern, this series starts from the procurement of raw materials and ending with

the sales realization of finished goods. In both the cases, however, there is a time gap between the

happening of the first event and the happening of the last event. This time gap is called the

operating cycle.

Thus, the operating cycle of a firm consists of the time required for the completion of the

chronological sequences of some or all of the following:

1. Procurement of raw material and services.

2. Conversion of raw material into work-in-progress.

3. Conversion of work-in-progress into finished goods.

4. Sale of finished goods (cash or credit)

5. Conversion of receivable into cash.

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DUPONT ANALYSISA method of performance measurement that was started by the DuPont Corporation in the

1920s. With this method, assets are measured at their gross book value rather than at net book

value in order to produce a higher return on equity (ROE). It is also known as "DuPont

identity".

DuPont analysis tells us that ROE is affected by three things:

1) Operating efficiency, this is measured by profit margin.

2) Asset use efficiency, which is measured by total asset turnover.

3) Financial leverage, which is measured by the equity multiplier.

It is believed that measuring assets at gross book value removes the incentive to avoid investing in

new assets. New asset avoidance can occur as financial accounting depreciation methods

artificially produce lower ROEs in the initial years that an asset is placed into service. If ROE is

unsatisfactory, the DuPont analysis helps locate the part of the business that is underperforming.

The Du Pont identity breaks down Return on Equity (that is, the returns that investors receive

from the firm) into three distinct elements. This analysis enables the analyst to understand the

source of superior (or inferior) return by comparison with companies in similar industries (or

between industries).

The Du Pont identity, however, is less useful for some industries, such as investment banking, that

do not use certain concepts or for which the concepts are less meaningful. Variations may be used

in certain industries, as long as they also respect the underlying structure of the Du Pont identity.

Du Pont analysis relies upon the accounting identity, that is, a statement (formula) that is by

definition true.

28


ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) *

Equity Multiplier (Assets/Equity)

ANALYASIS & INTERPRETATION

29


SWOT analysis of Hindalco Industries Ltd

Strength & Opportunities

The standalone sales increased by 7% Rs. 19,536 cr for FY 10. The company has sustained

a better cost management in FY10.

In this FY10, Hindalco operated very much efficiently producing the highest metal ever

complemented by its substantial cost savings.

Hindalco has scaled up its Hirakud smelter and power expansion project to 360 KTPA

from the earlier planned 213 KTPA. The captive power plant for the project will be raised

to 967.5 mw as against the proposed 467.5 mtpa.

The copper business contributed Rs 12,575 cr in net sales, a rise of 13%. The EBIT for the

copper business soared three times to Rs 1,003 cr.

Aditya Birla Minerals, the Australian mining subsidiary of Hindalco, report net profit of

Rs 246 cr against a loss Rs 304 cr last year.

Hirakud’s Brownfield expansion is underway from 155 ktpa to 213 ktpa by 2012.

Hindalco is the largest aluminum producer in India with a market share of 45% and is the

only player that converts 67% of metal production into value added products like

aluminum foils & packaging material.

Hindalco has a copper smelting capacity of 500 kpta that is largest in Asia.

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The company has a future plan of tripling its aluminum production in next three years

through Brownfield and Greenfield expansions in India.

Weakness & Threats :

Copper business lost Rs. 750 cr as well on lower by-product credit.

Post repayment of bridge loan and low treasury corpus for acquisition of Novelis and

expansion plans led other income of the company too declined by Rs. 377 cr to Rs. 260 cr.

Hirakud’s Brownfield expansion from 155kpta to 213 kpta is pushed back by 8 months i.e.

in Q4FY12.

The company’s consolidated sales fell by 8% to Rs. 60, 722 cr due to weak global demand.

Utkal alumina 1.5 mtpa aluminum refinery’s commissioning has been pushed back to Q2

FY12 presents a major challenge in its domestic business front.

Commitment on Rs. 56b capex has been increased by 15pp to 81% taking its project cost

marginally higher to Rs. 400 mn. a worrying cash outflow for Hindalco industries.

Aluminum business, one of its core business revenue fell by 11% to Rs. 48,901 cr due to

lower LME and less demand in world markets and eroded its aluminum business profit by

around Rs. 750 cr.

In short term Hirakud’s expansion is seen in FY11 while most of its project are completing

in FY 12 & FY 14. Till then the company has a huge cash outflow to maintain.

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WORKING CAPITAL MANAGEMENT AT HINDALCO

In Hindalco working capital requirement is finance basically through following sources:

Internal funds

Short term securities and interest thereon

Bank loan

A. Internal Funds: An internal fund denotes the funds generated through operation of the firm i.e., through sales turnover. This is major source of financing working capital requirement of the firm.

B. Short-Term Securities: On account of uncertainties attached with generation of funds through sales, the company has invested in several short-term securities to meets its day-to-day requirements of funds. The maturity of these securities is from source of financing WCR.

Hindalco has Short-term Investment in:

1. Debenture of HPCL Unit of UTI, HDFC, ICICI, IDBI, Franklin Templeton Funds, Birla

Mutual Funds, GIC Mutual funds and Alliance Mutual Funds, DSP Merrill Lynch Mutual

Funds, Standard Chartered Mutual Funds, Zurich India Mutual Funds.

The total current investment of the company at the year ended 31.03.08 amount to Rs.

40,508.81 Lacs.

2. Besides above, the company has various credit arrangements with banks to finance the daily

WCR. These are of following types:

Cash credit

Purchase/ discounting of bills

Working capital term loan

Letter of credit

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I. Cash Credit:

The Company has cash credit facilities with various banks. The administrative of this is

done at the principal office at Renukoot. However, it’s Regional and Area offices are

authorized to utilize the cash credit facilities up to the limit described by the principal

office.

II. Purchase/ Discounting of Bills:The company also purchases and discounts the bills issued by its customers to meet the

daily requirements.

III. Working Capital Term Loan

IV. Letter of Credit

The company’s Export/ Import operations are done through LOC.

STATEMENT OF WORKING CAPITAL

Particulars 2007-08 2008-09 2009-10

(A) Current AssetsInventories 5097.91 4 ,070.14 5,921.41

Sundry Debtors 1565.02 1 ,201.22 1,311.87

Cash & Bank Balance 146.98 8 43.72 140.21

Other C.A. 62.3 5 1.78 53.43

Loan & advances 979.46 1 ,573.05 1,437.37

Total 7851.67 7 ,739.91 8,864.29

(B) Current LiabilitiesLiabilities 2894.78 1 ,868.91 5,426.93

Provisions 906.01 8 03.16 721.49

Total 3800.79 2 ,672.07 6,148.42

Working Capital 4050.88 5067.84 2715.87

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Increase/ (Decrease) W.C. - 1016.96 -2351.97

The above data shows that working capital is decreasing in comparison to last year’s which is not

good for the liquidity of the company. Current assets and current liabilities have increased by

14.52% and130.1 respectively in 2009-10. This means current asset is not adequate to meet

current liabilities as increase in current liability is more. Ideal current ratio is 2:1 but ratio for

2009-10 is 1.3:1. Company should try to manage its current liabilities.

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STATEMENT OF FINANCIAL ANALYSIS

STANDALONE FINANCIAL PERFORMANCE-FY10

Hindalco Industries LtdMar- 091 Year

Mar- 101 Year

ABSOLUTE CHANGE

PROPORTIONATE CHANGE

Total income 18856.3 19796.13 1316.63 7.2

Sales 18052.97 19408.02 1355.05 7.51

Other operating income 166.68 128.26 -38.42 23.05

Other income 636.65 259.85 -376.8 59.18

Total expenditure 15183.78 16586.36 1402.58 9.00

(Increase)/decrease in stock 520.58 -755.25 1275.83 245.1

Consumption of raw materials 10331.09 13225.68 2894.59 28.02

Purchase of traded goods 113.04 71.99 -41.05 36.31

Employees cost 818.58 877.75 59.17 7.23

Power and fuel 1897.57 1938 46.43 2.45

Other expenditure 1502.92 1228.19 -274.73 18.27

PBIDT 3 ,027.25 2,542.56 -484.69 16.01

Interest 3 36.93 278 -58.93 17.5

PBDT 2 ,690.32 2,264.56 -425.76 15.83

Depreciation 645.27 667.21 21.94 3.4

Tax 4 60.05 348.93 -111.12 24.15

PAT 2,230.27 1,915.63 -314.64 14.11

Net Worth 23754.74 27906.98 4152.24 17.47

Paid up Equity Shares (Face Value: Rs 1/- per share)

1 70.05 191.37 21.32 12.53

Reserves 23,584.69 27,715.61 4,130.92 17.51

Total Borrowing 8 ,324.29 6,356.90 -1967.39 23.63

Current liabilities & provisions 2 ,672.07 6,148.42 3,476.35 130.1

Total assets 36735.35 41762.51 5027.16 13.68

Fixed assets 9 ,276.60 11,437.61 2,161.01 23.29

Current assets, loans and advances 7,739.91 8,864.29 1124.38 14.521

Investment 9,148.84 21,480.83 2331.99 12.17

CONSOLIDATED FINANCIAL PERFORMANCE

PARTICULARS FY09 FY10 ABSOLUTE PROPORTINATE

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CHANGE CHANGENet Sales & Operational Revenues

65963 60722 -5231 -8

PBIDT 3661 10069 6408 175

PBT -605 6181 …. ….

PAT 484 3,925 711 484 3925 3441 711

EPS (Rs) 3.21 22.17 18.96 590

Net sales were lower mainly on account of lower Aluminum LME.

Profit for FY09 includes unrealized derivative loss of $519 mn while profit for FY10

includes unrealized derivative gain of $578 mn – pertaining to Novelis.

RATIO ANALYSIS OF HINDALCO

36


Financial ratios are a relatively easy way to get a basic understanding of the financial health of an

organisation. They range from the very simple to the complex, and the relevance of many of the

ratios depends on the nature of the organisation and therefore should only be compared with

similar companies.

1.PROFITABILITY RATIOS: Profitability Ratios are used to assess a business's ability to generate earnings as compared to its

expenses and other relevant costs incurred during a specific period of time.

Return on Total Assets (ROTA):

Ratio measuring the operating profitability of a firm, expressed as a percentage of the operating

assets. ROTA indicates a firm's ability to efficiently allocate and manage its resources but (unlike

'return on equity') ignores the firm's liabilities. It is calculated by

ROTA = (Income before interest and tax / Total Assets)*100

Particulars 2007-08 2008-09 2009-10

EBIT 2521.35 2381.98 1875.35

TOTAL ASSETS 30888.86 36735.35 41762.51

ROTA 8.16 6.48 4.49

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As per the above data it can be observed that ROTA is decreasing continuously as compared to

previous years. Investment in total assets has also increased. Revenue from aluminium has

decreased as compared to copper but net sales from aluminium has increased. Expenses in stock,

compensation of raw material, employees cost, power and fuel and depreciation including

impairment has increased continuously. It indicates company is not using it’s asset effectively to

generate funds.

Return on Capital Employed (ROCE):

A ratio that indicates the efficiency and profitability of a company's capital investments. ROCE

should always be higher than the rate at which the company borrows, otherwise any increase in

borrowing will reduce shareholders' earnings.

ROCE = (EBIT / Capital Employed)*100

Particulars 2007-08 2008-09 2009-10

EBIT 2521.35 2381.98 1875.35

Capital employed 17294.18 32082.61 34267.87

ROCE 14.62 7.42 5.47

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The future maintainable profits have not matched the pace with the increase in company’s capital

employed . Since capital employed comprises of shareholder’s fund, reserves and surplus and

loans, it has been observed that shareholder’s fund has increased a little but more amount is

transferred to reserves and surplus. Thus resulting in blocking funds.

Return on Equity (ROE):

The amount of net income returned as a percentage of shareholders equity. Return on equity

measures a corporation's profitability by revealing how much profit a company generates with the

money shareholders have invested.

ROE= {(PAT)/Net Worth}*100

Net Worth= Share Capital + General Reserves – Misc. Expenditure

Particulers 2007-08 2008-09 2009-10

PAT* 2859.38 2230.27 1,915.63

Net Worth 17294.18 23755.15 27906.98

ROE 16.4 9.4 6.8

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Due to decrease in financial leverage Net Worth of company has increased. Also the future

maintainable profit has not increased in the same proportion as the Net Worth of the company

thus ROE for the company has gone down.

2. MARGIN RATIOS:

40


It is the amount of profit (at the gross, operating, pre tax or net income level) generated by the

company as a percent of the sales generated. The objective of margin analysis is to detect

consistency or positive/negative trends in a company's earnings.

Positive profit margin analysis translates into positive investment quality. To a large degree, it is

the quality, and growth, of a company's earnings that drive its stock price.

Gross Margin Percentage (GMP):

A financial metric used to assess a firm's financial health by revealing the proportion of money

left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as

the source for paying additional expenses and future savings.

GMP = (GROSS PROFIT/SALES)*100

PARTICULARS 2007-08 2008-09 2009-10SALES 18909.08 18052.97 19,408.02GROSS PROFIT 3888.22 3606.08 3021.91GMP 20.56 19.97 15.57

In the above case a decline can be seen in the GP ratio which is due to the reason that increase in

sales has not resulted in an increase in GP which has gone down year after year and due to the

increase in cost of production.

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Operating Profit Margin (OPM):

A ratio used to measure a company's pricing strategy and operating efficiency. Operating margin

is a measurement of what proportion of a company's revenue is left over after paying for variable

costs of production such as wages, raw materials, etc. A healthy operating margin is required for a

company to be able to pay for its fixed costs, such as interest on debt.

Operating margin gives analysts an idea of how much a company makes (before interest and

taxes) on each dollar of sales. When looking at operating margin to determine the quality of a

company, it is best to look at the change in operating margin over time and to compare the

company's yearly or quarterly figures to those of its competitors. If a company's margin is

increasing, it is earning more per dollar of sales. The higher the margin, the better.

OPM = (OPERATING PROFIT/SALES)*100

PARTICULARS 2007-08 2008-09 2009-10

SALES 18909.08 18052.97 19,408.02

OPERATING PROFIT 2521.35 2223.92 2542.56

OPM 13.33 12.32 13.10

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As the ratio measures the quantum and extent of expenditure incurred in producing and selling the

goods. The operating profit margin has remained almost stable in 2009-10. The operating profit

has been able to match the increase in sales. It means the level of operating expenses have been

able to match the increase in sales. High operating profit margin shows that company is in good

state and has healthy margins. One of the primary reasons being that it is the market leader thus is

able to command its position in market.

Net Profit Margin (NPM):

A ratio of profitability calculated as net income divided by revenues, or net profits divided by

sales. It measures how much out of every dollar of sales a company actually keeps in earnings.

Profit margin is very useful when comparing companies in similar industries. A higher profit

margin indicates a more profitable company that has better control over its costs compared to its

competitors.

Looking at the earnings of a company often doesn't tell the entire story. Increased earnings are

good, but an increase does not mean that the profit margin of a company is improving. For

instance, if a company has costs that have increased at a greater rate than sales, it leads to a lower

profit margin. This is an indication that costs need to be under better control.

NPM = (PROFIT AFTER TAX/SALES)*100

PARTICULARS 2007-08 2008-09 2009-10

PAT 2859.38 2230.27 1,915.63

SALES 18909.08 18052.97 19,408.02

NPM 15.12 12.35 9.87

43


The reduction in Net profit margin primarily is due to high increase in interest paid during the

year. Also there is a reduction in the leverage of the company and decrease in profit of sales.

3. ACTIVITY RATIOS:

Accounting ratios are the techeniques that measure a firm's ability to convert different accounts

within their balance sheets into cash or sales. Companies will typically try to turn their production

into cash or sales as fast as possible because this will generally lead to higher revenues. Such

ratios are frequently used when performing fundamental analysis on different companies. The

asset turnover ratio and inventory turnover ratio are good examples of activity ratios.

Inventory Turnover Ratio (ITR):

A ratio showing how many times a company's inventory is sold and replaced over a period.

Although the first calculation is more frequently used, COGS (cost of goods sold) may be 44


substituted because sales are recorded at market value, while inventories are usually recorded at

cost. Also, average inventory may be used instead of the ending inventory level to minimize

seasonal factors.

This ratio should be compared against industry averages. A low turnover implies poor sales and,

therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. High

inventory levels are unhealthy because they represent an investment with a rate of return of zero.

ITR = Cost of Goods Sold (COGS) / Average Inventory

PARTICULARS 2007-08 2008-09 2009-10

COGS 15020.87 14446.89 16386.11

AVERAGE INVENTORY 4706.61 4584.03 4995.78

ITR(TIMES) 3.19 3.15 3.28

ITR has increased in 2009-10 which indicate over investment is done in stocks in comparison to

previous years.

Days of Inventory Holding:

This ratio calculates the no. of days, on an average, that elapse between finished goods production

and sale of goods or average number of days we held our inventory before a sale. A low number

45


of inventory days are desirable. A high number of days imply that management is unable to sell

existing inventory stocks.

INVENTORY HOLDING PERIOD- 360/INVENTORY TURNOVER

PARTICULARS 2007-08 2008-09 2009-10

ITR 3.19 3.15 3.28

IHP 112.85 114.28 109.78

There has been a rise in IHP ’09 which was not healthy as large stock has been kept due to less

sales but has gone down in2009-10.

Working Capital Turnover Ratio (WCTR):

A measurement comparing the depletion of working capital to the generation of sales over a given

period. This provides some useful information as to how effectively a company is using its

working capital to generate sales.

A company uses working capital (current assets - current liabilities) to fund operations and

purchase inventory. These operations and inventory are then converted into sales revenue for the

company. The working capital turnover ratio is used to analyze the relationship between the

money used to fund operations and the sales generated from these operations. In a general sense,

46


the higher the working capital turnover, the better because it means that the company is generating

a lot of sales compared to the money it uses to fund the sales.

WCTR = NET SALES/AVERAGE WORKING CAPITAL

PARTICULARS 2007-08 2008-09 2009-10NET SALES 18909.08 18052.97 19,408.02AVERAGE WORKING CAPITAL 2819.33 3283.11 3891.85

WCTR 6.71 5.49 4.98

The ratio is continously decreasing as working capital employed has increased every year but net

sales has not increased in proportion to working capital , thus decreasing the efficiency of working

capital.

Fixed Assets Turnover Ratio (FATR):

A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's

ability to generate net sales from fixed-asset investments – specifically property, plant and

47


equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the

company has been more effective in using the investment in fixed assets to generate revenues.

This ratio is often used as a measure in manufacturing industries, where major purchases are made

for PP&E to help increase output. When companies make these large purchases, prudent investors

watch this ratio in following years to see how effective the investment in the fixed assets was.

FATR = NET SALES/AVERAGE FIXED ASSETSPARTICULARS 2007-08 2008-09 2009-10

NET SALES 18909.08 18052.97 19,408.02

AVERAGE FIXED ASSETS 8656.18 9052.9 10357.11

FATR(TIMES) 2.18 1.99 1.87

The net sales has declined from 2007-08 but has risen in 2009-10 and fixed asset has increased

resulting in low FATR. Capacity in form of fixed assets has increased but FATR has reduced thus

showing that company is working at low Capacity utilization.

Total Assets Turnover Ratio (TATR):

48


The total asset turnover ratio measures the ability of a company to use its assets to generate sales.

The total asset turnover ratio considers all assets including fixed assets, like plant and equipment,

as well as inventory and accounts receivable.

TATR = NET SALES/AVERAGE TOTAL ASSETS

PARTICULARS 2007-08 2008-09 2009-10

NET SALES 18909.08 18052.97 19,408.02AVERAGE TOTAL ASSET 27914.41 33528.11 34563.80

TATR 0.68 0.54 0.56

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. This may indicate a problem with one or more of the asset

categories composing total assets - inventory, receivables, or fixed assets. The small business

owner should analyze the various asset classes to determine where the problem lies.

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4. CAPITAL STRUCTURE AND SOLVENCY RATIOS: One of many ratios used to measure a company's ability to meet long-term obligations. The

solvency ratio measures the size of a company's after-tax income, excluding non-cash depreciation

expenses, as compared to the firm's total debt obligations. It provides a measurement of how

likely a company will be to continue meeting its debt obligations Acceptable solvency ratios will

vary from industry to industry, but as a general rule of thumb, a solvency ratio of greater than

20% is considered financially healthy.

Generally speaking, the lower a company's solvency ratio, the greater the probability that the

company will default on its debt obligations

Debt-Equity Ratio:

A measure of a company's financial leverage calculated by dividing its total liabilities by

stockholders' equity. It indicates what proportion of equity and debt the company is using to

finance its assets. Sometimes only interest-bearing, long-term debt is used instead of total

liabilities in the calculation.

Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial

statements as well as companies'. A high debt/equity ratio generally means that a company has

been aggressive in financing its growth with debt. This can result in volatile earnings as a result of 50


the additional interest expense. If a lot of debt is used to finance increased operations (high debt to

equity), the company could potentially generate more earnings than it would have without this

outside financing. If this were to increase earnings by a greater amount than the debt cost

(interest), then the shareholders benefit as more earnings are being spread among the same amount

of shareholders. However, the cost of this debt financing may outweigh the return that the

company generates on the debt through investment and business activities and become too much

for the company to handle. This can lead to bankruptcy, which would leave shareholders with

nothing. The debt/equity ratio also depends on the industry in which the company operates. For

example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio

above 2, while personal computer companies have a debt/equity of under 0.5.

DEBT EQUITY RATIO = LONG TERM DEBT/NET WORTH

PARTICULARS 2007-08 2008-09 2009-10

LONG TERM DEBT 8328.58 8324.29 6356.9

NET WORTH 17294.18 23862.61 27910.97

D\E RATIO 0.48 0.35 0.22

The Debt Equity Ratio is very less and has reduced as compared to the previous year.Thus there is

in reduction in leverage of the company and most of the operations are financed through

shareholder’s equity.

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AssetsLevarage Ratio (ALR):

ASSET LEVERAGE RATIO = TOTAL ASSETS/NET WORTH

PARTICULARS 2007-08 2008-09 2009-10TOTAL ASSETS 30888.86 36735.35 41762.51NET WORTH 17294.18 23862.61 27910.97ALR 1.79 1.54 1.50

Low Asset Leverage ratio suggests that company is dependent more on the funds collected

through shareholder’s equity. Also the increase in total assets is less as compared to increase in

the Net Worth of the company thus there is a decrease in the ALR ratio from last years.

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Interest Coverage Ratio (ICR):

A ratio used to determine how easily a company can pay interest on outstanding debt. The interest

coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of

one period by the company's interest expenses of the same period: The lower the ratio, the more

the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or

lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below

1 indicates the company is not generating sufficient revenues to satisfy interest expenses.

INTEREST COVERAGE RATIO = EBIT/INTEREST

PARTICULARS 2007-08 2008-09 2009-10EBIDTA 3109.16 2223.92 2542.56INTEREST 280.63 336.93 278ICR 11.08 6.60 9.15

Interest coverage ratio is adequate to cover the interest expenses.

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5. LIQUIDITY RATIOS:

A class of financial metrics that is used to determine a company's ability to pay off its short-terms

debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that

the company possesses to cover short-term debts. Common liquidity ratios include the current

ratio, the quick ratio and the operating cash flow ratio. Different analysts consider different assets

to be relevant in calculating liquidity. Some analysts will calculate only the sum of cash and

equivalents divided by current liabilities because they feel that they are the most liquid assets, and

would be the most likely to be used to cover short-term debts in an emergency.

A company's ability to turn short-term assets into cash to cover debts is of the utmost importance

when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use

the liquidity ratios to determine whether a company will be able to continue as a going concern.

Current Ratio:

A liquidity ratio that measures a company's ability to pay short-term obligations. The ratio is

mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and

payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the

more capable the company is of paying its obligations. A ratio under 1 suggests that the company

would be unable to pay off its obligations if they came due at that point. While this shows the

company is not in good financial health, it does not necessarily mean that it will go bankrupt - as

there are many ways to access financing - but it is definitely not a good sign.

The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to

turn its product into cash. Companies that have trouble getting paid on their receivables or have

long inventory turnover can run into liquidity problems because they are unable to alleviate their

obligations. Because business operations differ in each industry, it is always more useful to

compare companies within the same industry.

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This ratio is similar to the acid-test ratio except that the acid-test ratio does not

include inventory and prepaid as assets that can be liquidated. The components of current ratio

(current assets and current liabilities) can be used to derive working capital (difference between

current assets and current liabilities). Working capital is frequently used to derive the working

capital ratio, which is working capital as a ratio of sales.

CURRENT RATIO = CURRENT ASSETS/CURRENT LIABILITIES

PARTICULARS 2007-08 2008-09 2009-10CURRENT ASSETS 7851.67 7 ,739.91 8,864.29CURRENT LIABILITIES 3800.79 2 ,672.07 6,148.42CURRENT RATIO 1.80 2.3 1.29

Current Ratio of the company is low w.r.t to industry standards which is 2:1. Current asset and

current liabilities both has increased as compared to previous years .

Liqudity Ratio (LR):

A stringent test that indicates whether a firm has enough short-term assets to cover its immediate

liabilities without selling inventory. The acid-test ratio is far more strenuous than the working

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capital ratio, primarily because the working capital ratio allows for the inclusion of inventory

assets.

Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at

with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital

ratio, it means current assets are highly dependent on inventory. Retail stores are examples of this

type of business.

LIQUID RATIO = LIQUID ASSETS/CURRENT LIABILITIES

PARTICULARS 2007-08 2008-09 2009-10LIQUID ASSETS 1774.3 2096.72 2942.89CURRENT LIABILITIES 3800.79 2 ,672.07 6,148.42LIQUID RATIO 0.46 0.78 0.48

The low value of the liquid ratio suggests that company’s current assets are highly dependent on

inventories, thus company may face difficulties in resolving short term liabilities.

DUPONT ANALYSIS OF HINDALCO

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The DuPont Model is a technique that can be used to analyze the profitability of a company using

traditional performance management tools. To enable this, the DuPont model integrates elements

of the Income Statement with those of the Balance Sheet.

The advantages of DuPont Analysis are as follows:

Simplicity

Can be easily linked to compensation schemes

Can be used to convince management about steps needed to professionalize purchasing

or sales function.

The limitations of DuPont Analysis are:

It is based on accounting numbers which are not reliable\

It does not include cost of capital

DUPONT ANALYSIS OF ROE (2009-10)

As per DuPont Analysis ROE depends on three things:

1. Operating Efficiency, measured by profit margin.

2. Asset use efficiency, measures by total asset turnover.

3. Financial leverage, measured by equity multiplier.

By this Approach

ROE= NPM * ATR*ALRDUPONT ANALYSIS 2008-09 2009-10

ROE 9.4 6.8NPM 12.35 9.87ATR 0.54 0.56ALR 1.54 1.50

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ROE is decreasing for the year 2009-10. The main reason being the net worth of the company has

increased and overall debt has reduced thus company is more dependent on the funds collected

through shareholder’s equity rather than loans and leverage funds.

6. CAPITAL MARKET RATIO

58


Capital market ratios relate the market price of a company’s earnings and dividends. Price-

earnings (PE) ratio, dividend, and price to book ratio are the most commonly used ratios that aid

investors and analysts in understanding the strength of a company in the capital market.

Price Earning (PE) Ratio:

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

The P/E is sometimes referred to as the "multiple", because it shows how much investors are

willing to pay per dollar of earnings. Calculated as:

Market value per share/Earnings per share (EPS)

PARTICULARS 2007-08 2008-09 2009-10

Price to cash earning (x)* - 8.67 14.44

* Stock price on 31st March

Price to Book (P|B) Ratio:

A ratio used to compare a stock's market value to its book value. It is calculated by dividing the

current closing price of the stock by the latest quarter's book value per share also known as the

59


"price-equity ratio”. A lower P/B ratio could mean that the stock is undervalued. However, it

could also mean that something is fundamentally wrong with the company. As with most ratios,

be aware that this varies by industry. This ratio also gives some idea of whether you're paying too

much for what would be left if the company went bankrupt immediately.

P/B Ratio = Stock Price/ (Total assets-Intangible Assets)

Earnings per Share (EPS):

The portion of a company's profit allocated to each outstanding share of common stock. Earnings

per share serve as an indicator of a company's profitability. Earnings per share are generally

considered to be the single most important variable in determining a share's price. It is also a

major component used to calculate the price- to- earnings valuation ratio. Two companies could

generate the same EPS number, but one could do so with less equity (investment) - that company

would be more efficient at using its capital to generate income and, all other things being equal

would be a "better" company.

EPS = PROFIT AFTER TAX (PAT) / AVERAGE OUTSTANDING SHARESPARTICULARS 2007-08 2008-09 2009-10

EPS 22.8 12.23 10.01

PEER GROUP COMPARISON

PEER GROUP COMPARISON

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10-Mar 10-Mar 10-Mar 10-Mar 10-Mar

PARTICULARS HINDALCO NALCOPAREKH

ALUMINIUMESS DEE

ALUMINIUMMALCO

SALES 19536.28 5,158.00 637.46 401.48 -

PAT 1,915.63 832.6 46.29 66.46 -

EQUITY 191.37 644.31 12.94 27.83 -

10-Mar 10-Mar 10-Mar 10-Mar 10-Mar

PARTICULARS KEY FINANCIAL RATIOS

OPM% 16.43 29.37 17.28 26.63 12.78

NPM% 9.81 16.14 7.26 16.55 8.77

RONW 1,001.01 129.22 14.85 16.54 16.81

EPS 10.82 12.92 35.77 23.88 4.08

CEPS 13.5 17.87 55.24 25.76 6.11

P/E - - - 21.63 -

CONCLUSION It can be observed that the Current Ratio of Hindalco is varied between 1.8 to

1.28, during the period from FY08 to FY10. It is evident that, on an average,

per one rupee of current liability, the company has been maintaining 1.28

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rupee of current assets as a cushion to meet the short- term liabilities usually,

a Current Ratio of 2:1 is considered to be the standard to indicate sound

liquidity position, and Hindalco should try to maintain it’s liquidity position.

Quick ratio 1:1 is considered satisfactory. In 2009-10 it is 0.66 which again

can be considered non satisfactory. It may not be able to meet its current

liabilities on time, which is not good sign for the enterprises.

The inventory turnover ratio shows how rapidly the inventory is turning into

receivables through sales. This ratio has been continuously increasing since

FY 2007-08. A high inventory turnover indicates the efficient management of

inventory because more frequently the stocks are sold. So we can say that

enterprises have a very good turnover ratio. Thus Hindalco has a very good

inventory management.

Working Capital Turnover Ratio indicates the efficiency of the firm in

Utilizing the working capital in the business. It varies between 6.71 times and

4.89 times. Company should focus on working capital management.

The current assets and liabilities are increasing year by year. It means the

company is investing in current assets and expending its business.

Gross Working Capital has increased heavily as compared to year 2007-08.if

we compare the Gross Working Capital of the years 2008-09 and 2009-10,

there is slightly difference. It denotes the total working capital or total

investment in current assets.

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Net Working Capital is fluctuating from very high to very low. The year

2009- 10 has lowest Net Working Capital as compared to earlier years. The

Net Working Capital measures the liquidity of the firm.

The year 2009-10 has lowest Net Working Capital as compared to earlier

years. The company must increase its NWC. The greater the margin, the

better will be the liquidity of the firm.

The company should maintain the low level of creditors because the company

can pay them easily whenever required.

The company has 2nd highest market capitalization after NALCO. The

Company should try to increase productivity and produce products at lower

rate.

The company should maintain a proper inventory management system, so the

unnecessary blockage of money can be avoided.

The company must have adequate cash and bank balance to face any

situations.

SUGGESTIONS & RECOMMENDATIONS

The year 2009-10 has lowest Net Working Capital as compared to earlier

years. The company must increase its NWC. The greater the margin, the

better will be the liquidity of the firm.

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The company should maintain the low level of creditors because the company

can pay them easily whenever required.

The company has 2nd highest market capitalization after NALCO. The

company should try to increase productivity and produce products at lower

rate.

The company should maintain a proper inventory management system, so the

unnecessary blockage of money can be avoided.

The company must have adequate cash and bank balance to face any

situations.

Annual report 2007-08 2008-09 2009-10

Websites referred

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www.hindalco.comwww.adityabirla.cowww.moneycontrol.com

65

http://www.moneycontrol.com/

http://www.adityabirla.co/

http://www.hindalco.com/

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