Dr. Ruchika Gahlot, International Journal of Research

Dr. Ruchika Gahlot, International Journal of Research in Engineering, IT and Social Sciences, ISSN 2250-0588, Impact Factor: 6.565, Volume 09 Issue 03, March 2019, Page 163-168 Financial Performance Analysis of Maharatna Companies

Dr. Ruchika Gahlot (Assistant Professor, Department of Business Administration, Maharaja Surajmal Institute, C-4, Janak Puri, New Delhi, India) Abstract: The financial performance analysis identifies the financial strengths and weaknesses of the firm by properly establishing relationships between the items of the balance sheet and profit and loss account. It often help in assessing firm's production and productivity performance, profitability performance, liquidity performance, working capital performance, fixed assets performance, fund flow performance and social performance. This study focuses on analyzing financial performance of 5 Maharatna companies namely Oil & Natural Gas Corporation Ltd., Coal India Ltd., NTPC Ltd., Steel Authority of India Ltd. and Bharat Heavy Electricals Ltd. by using liquidity, profitability, solvency and activity ratios of last 5 years. It is found that that NTPC and CIL are fastest growing companies due to their increasing efficiency. Keywords: Liquidity, Profitability, solvency, efficiency and Maharatna companies

I. INTRODUCTION Government of India owes more than 200 companies in various fields. These Companies are either owned by state Government or Central Government and are called PSUs. Certain public sector undertakings have been awarded additional financial autonomy. These companies are "public sector companies that have comparative advantages", giving them greater autonomy to compete in the global market so as to "support them in their drive to become global giants". Financial autonomy was initially awarded to nine PSUs as Navratna status in 1997. Originally, the term Navaratna meant a talisman composed of nine precious gems. Later, this term was adopted in the courts of Gupta emperor Vikramaditya and Mughal emperor Akbar, as the collective name for nine extraordinary courtiers at their respective courts. Maharatna Companies: Government created Maharatna Category in 2009 to empower these PSUs with greater financial sovereignty which enables them to expand their operations even on a global work of art.. The basic objective of setting Maharatna companies was to empower mega CPSEs to expand their operations and emerge as global giants or become Indian Multinational Companies (MNCs).At present, there are seven Maharatna companies- Bharat Heavy Electricals (BHEL), Coal India (CIL), GAIL (India), Indian Oil Corporation, NTPC, Oil and Natural Gas Corporation (ONGC) and Steel Authority of India (SAIL). Central Public Sector Enterprises (CPSEs) must fulfill following criteria for grant of Maharatna status. Having Navratna status  Average annual turnover of more than Rs. 25,000 crore, during last 3 years.  Average annual net worth of more than Rs. 15,000 crore, during last 3 years  Average annual net profit after tax of more than Rs. 5,000 crore, during last 3 years.  Should have significant global presence and international operations.  Listed on Indian stock exchange with minimum prescribed public shareholding limit under SEBI regulations. Financial Analysis Financial analysis is the process of evaluating businesses, projects, budgets and other finance-related entities to determine their performance and suitability. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid or profitable enough to warrant a monetary investment. Financial analysis may determine if a business will: Continue or discontinue its main operation or part of its business;  Make or purchase certain materials in the manufacture of its product;  Acquire or rent/lease certain machineries and equipment in the production of its goods; Issue stocks or negotiate for a bank loan to increase its working capital  Make decisions regarding investing or lending capital;  Make other decisions that allow management to make an informed selection on various alternatives in the conduct of its business. Financial analysts often assess the following elements of a firm:

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1. Profitability - its ability to earn income and sustain growth in both the short- and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations. 2. Solvency - its ability to pay its obligation to creditors and other third parties in the long-term. 3. Liquidity- its ability to maintain positive cash flow, while satisfying immediate obligations. 4. Activity - are financial analysis tools used to gauge the ability of a business to convert various asset, liability and capital accounts into cash or sales. The faster a business is able to convert its assets into cash or sales, the more efficient it runs. This study intends to analyze the profitability, liquidity, solvency position of the Maharatna Companies and to find most promising Maharatna Company.

II. LITERATURE REVIEW This research project will remain incomplete if various research studies conducted in the field of financial performance, public sector companies, profitability and capital structure are not taken into account. Following are few studies in this regard: Desai and Joshi (2005) analyzed the feasibility and the impact of mergers and acquisitions on the operating performance of the firm. Oil and Gas was sector which was studied for the research. The merger of acquiring firms i.e. IOCL and RIL were studied. RIL was only able to create high level of EPS for the shareholders and failed to succeed on other parameters post acquisition. It’s Return on Net Worth, Return on Capital Employed, Gross Margin, and Net Margin had reduced significantly post-merger. Similar results were also obtained for IOCL who was not able to prove its strength on the financial parameters chosen for the study. The EPS of IOCL went down by half post-merger. Bhunia et al. (2011) identified the financial strengths and weaknesses by covering two public sector drug & pharmaceutical enterprises listed on BSE. For study purpose, they have been selected twelve years from 1997-98 to 2008-09. They analyzed the data by using ratios, and statistical tools like A.M., S.D., C.V., linear multiple regression analysis and test of hypothesis t-test. They used SWOT analysis to overcome the weakness and grab the opportunities available in public sector drug & pharmaceutical enterprises in consideration of strengths and threats. They concluded that growth during last decade was noteworthy and market trend was growing at a faster rate. They suggested that the opportunities can be grabbed through the diversification of export basket in untouched foreign destinations. Goyal (2011) analyzed the financing pattern of two leading business enterprise in the heavy electrical sector with diverse nature of funds, viz. BHEL and L&T with regard to pecking order approach in their capital structures. A deliberate attempt has been made in choosing the companies, i.e. BHEL has been taken from public sector and L&T has been taken from private sector. The reason behind this is to appreciate the diverse financing practices of two units in the same sector. It was that BHEL was going for the pecking order dimension in its capital structure, whereas pecking order fails in case of L&T. Khanifar et al. (2012) discussed in his paper about factors affecting investor’s decision by performing fundamental analysis. In this research paper finding the true situation he has covered economy, industry and then firm. The population included in the study was broking firms at Tehram Stock exchange. His study showed that EPS, profit margin, P/E ratio, sales have highest importance in analysts’ decision followed by economy related factor and industry related factor.

III. RESEARCH METHODOLOGY This research is based on secondary data from the financial statements of the companies whose financial analysis is being done. Data of Financial statements of last 5 years has been collected from their respective websites and various ratios are computed. All ratios are tabulated to see the trend. Table 1 shows Maharatna companies considered for study: Table 1: Name of Maharatna Companies S. No. Name of Company Sector 1. Oil & Natural Gas Corporation Ltd. Petroleum and Natural Gas 2. Coal India Ltd. Coal Mining 3. NTPC Ltd. Power 4. Steel Authority Of India Ltd. Steel 5. Bharat Heavy Electricals Ltd. Engineering and Defence

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IV. DATA ANALYSIS This study uses Liquidity, leverage, profitability and activity ratios for evaluating the financial performance of companies. 1. Liquidity ratio It measures the ability of the firm to meet its current obligations. The most common ratio which indicates the extent of liquidity is current ratio. Table 2 reports the current ratio and it is found that CIL has been the most liquid company in last 5 years. However, liquidity of all companies started declining since 2016. Table 2: Current ratio S. No. COMPANY'S NAME 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 1. CIL 2.58:1 4.73:1 3.23:1 2.77:1 1.17:1 2. BHEL 2.04:1 2.19:1 2.18:1 2.13:1 1.94:1 3. NTPC 1.58:1 1.22:1 0.87:1 0.75:1 0.84:1 4. SAIL 0.95:1 0.83:1 0.63:1 0.55:1 0.68:1 5. ONGC 1.56:1 1.57:1 1.72:1 1.55:1 0.44:1

2. Leverage ratio long term creditors, like debenture holders, financial institutions etc., are more concerned with the firm’s long term financial strength. To judge the long term financial position of the firm, financial leverage or capital structure ratios are calculated. It uses Debt Equity and proprietary ratio. It describes the lender’s contribution for each rupee of the owner’s contribution. Table 3 reveals that ratio is approximately zero for CIL, BHEL and ONGC in last six years which implies negligible or no debt. While results of NTPC and SAIL shows increasing debt which may result in trading on equity. Table 3: Debt Equity Ratio S. No. COMPANY'S NAME 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 1. CIL 0 0 0 0 0 2. BHEL 0.05 0 0 0 0 3. NTPC 0.73 0.96 0.95 1.04 1.13 4. SAIL 0.57 0.65 0.84 1.08 1.18 5. ONGC 0 0 0 0 0.13 Table 4 shows results of proprietary ratio. A high proprietary ratio, therefore, indicates a strong financial position of the company and greater security for creditors. CIL has comparatively high ratio than other companies. A low ratio indicates that the company is already heavily depending on debts for its operations. A large portion of debts in the total capital may reduce creditors’ interest, increase interest expenses and also the risk of bankruptcy. SAIL and BHEL has low ratio which means they need to improve. NTPC and ONGC have moderate risk as their ratios are neither high nor low. This ratio is not necessarily a good indicator of long-term solvency, since it does not make use of any information on the income statement, which would indicate profitability or cash flows. Table 4: Proprietary Ratio S. No. COMPANY'S NAME 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 1. CIL 91.26 79.97 103.41 104.17 73.20 2. BHEL 10.47 4.16 -2.2 1.53 2.47 3. NTPC 12.78 12.6 11.79 9.75 10.16 4. SAIL 6.13 4.81 -10.25 -7.86 -1.34 5. ONGC 16.16 12.26 9.73 9.64 10.31

3. Profitability ratio The profitability ratios are calculated to measure the operating efficiency of the company. We should continuously evaluate the efficiency of its company in terms of profit. This study uses Gross Profit margin, Net Profit margin Operating Profit margin. Companies like ONGC and NTPC (table 5) have comparatively higher gross profit margin, this means they are doing good business. CIL has negative gross margin over the last 5 http://indusedu.org Page 165

This work is licensed under a Creative Commons Attribution 4.0 International License Dr. Ruchika Gahlot, International Journal of Research in Engineering, IT and Social Sciences, ISSN 2250-0588, Impact Factor: 6.565, Volume 09 Issue 03, March 2019, Page 163-168 years. SAIL and BHEL are suffering from decreasing gross profit margin. This means they need to do a lot of hard work in order improve their gross margin. Table 5: Gross Profit Margin S. No. COMPANY'S NAME 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 1. CIL -130.66 -63.78 -292.99 -217.59 -141.03 2. BHEL 9.04 3.38 -8.64 0.74 3.96 3. NTPC 18.84 14.52 17.94 19.62 17.45 4. SAIL 4.71 6.3 -13.57 -5.94 2.69 5. ONGC 39.38 38.73 27.26 24.14 26.5 Net margin measures how successful a company has been at the business of making a profit on sales. It is one of the most essential financial ratios. Net margin includes all the factors that influence profitability whether under management control or not. The higher the ratio, the more effective a company is at cost control. Compared with industry average, it tells investors how well the management and operations of a company are performing against its competitors. Table 6 report the net profit margin and it is found Net profit margin of CIL is very high as compared to other companies; this means they are effective in cost control. On the other hand, BHEL and SAIL has low or even negative ratio, so they are not effective in cost control and thus have to take steps to improve their net profit margin. NTPC and ONGC has moderate margin and can easily improve their net profit margin. Table 6: Net Profit Margin S. No. COMPANY'S NAME 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 1. CIL 4775.98 3457.16 10024.16 5001.75 2459.63 2. BHEL 8.84 4.7 -2.66 1.74 2.78 3. NTPC 15.23 14.04 15.2 11.99 12.39 4. SAIL 5.6 4.57 -10.29 -6.37 -0.83 5. ONGC 26.33 21.39 20.81 23.03 23.47 A higher operating margin is more favorable compared with a lower ratio because this shows that the company is making enough money from its ongoing operations to pay for its variable costs as well as its fixed costs. ONGC and NTPC (table 7) have a higher margin as compared to other companies. On the other hand companies like BHEL and SAIL (table 7) has very low operating profit margin, so they have to go a long way to improve their ratio in order to make enough money from their operations to support the business. CIL (table7) had negative margin consecutively for 5 years. Table 7: Operating Profit Margin S. No. COMPANY'S NAME 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 1. CIL -128.62 -61.92 -283.07 -211.54 -136.05 2. BHEL 11.55 6.95 -5.13 3.73 6.68 3. NTPC 24.54 21.22 25.24 27.19 25.96 4. SAIL 8.39 10.18 -7.42 0.08 8.02 5. ONGC 52.41 52.55 41.57 39.83 43.53 The return on capital employed ratio shows how much profit each dollar of employed capital generates. Obviously, a higher ratio would be more favorable because it means that more dollars of profits are generated by each dollar of capital employed. Investors are interested in the ratio to see how efficiently a company uses its capital employed as well as its long-term financing strategies. Companies' returns should always be high than the rate at which they are borrowing to fund the assets. If companies borrow at 10 percent and can only achieve a return of 5 percent, they are losing money. For a company, the ROCE trend over the years is also an important indicator of performance. In general, investors tend to favor companies with stable and rising ROCE numbers over companies where ROCE is volatile and bounces around from one year to the next. ROCE is especially useful when comparing the performance of companies in capital-intensive sectors such as utilities and telecoms. This is because unlike return on equity (ROE), which only analyzes profitability related to a company’s common equity, ROCE considers debt and other liabilities as well. This provides a better indication of financial performance for companies with significant debt. CIL is the only company to have ROCE above 100 for 2 consecutive years. . Now companies like ONGC have a ratio above 10 which is not too bad and they need to improve further. BHEL and NTPC have very low ratio and need to do a lot of hard work to gain a higher ratio. Whereas SAIL has negative ratio for 2 consecutive years, it has to go a long way to achieve higher ROCE. Also BHEL had negative ratio in the year 2015-16. This means their capital was not efficiently utilized. http://indusedu.org Page 166

Table 8: Return on Capital Employed S. No. COMPANY'S NAME 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 1. CIL 95.34 83.03 103.73 103.28 71.34 2. BHEL 14.43 6.56 -2.49 3.02 5.63 3. NTPC 7.11 6.17 5.94 8.3 7.57 4. SAIL 4.11 3.22 -6.52 -3.49 -0.86 5. ONGC 10.97 10.42 11.47 11.16 12.24

4. Activity ratio Activity ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios are also called turnover ratios because they indicate the speed with which assets are being converted or turnover into sales. This study uses fixed assets turnover, Debtors turnover and inventory turnover ratios as indicators. Table 9 shows that all Mahartna companies except BHEL has low fixed assets turnover ratio and it has to increase its fixed assets ratio by increasing sales or decreasing fixed assets. Table 9: Fixed Assets Turnover Ratio S. No. COMPANY'S NAME 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 1. CIL 0.87 1.07 0.28 0.85 1.04 2. BHEL 3.36 2.48 5.65 5.5 5.35 3. NTPC 0.62 0.57 0.73 0.7 0.59 4. SAIL 0.89 0.72 0.51 0.54 0.61 5. ONGC 0.78 0.73 0.71 0.59 0.53 The Debtors turnover ratio is an accounting measure used to quantify a company's effectiveness in collecting its receivables or money owed by clients. The ratio shows how well a company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or is paid. Table 10 depicts CIL is having highest debtors turnover ratio while BHEL is having lowest efficiency in collecting debts. Table 10: Debtors Turnover Ratio S. No. COMPANY'S NAME 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 1. CIL 56.03 44.19 32.65 31.13 37.89 2. BHEL 1.29 1.28 1.10 1.11 1.36 3. NTPC 10.62 9.96 9.24 11.42 13.61 4. SAIL 16.95 14.66 12.33 10.54 9.43 5. ONGC 11.93 13.05 8.16 7.62 11.18 As a general rule, the higher the inventory turnover ratio, the more efficient and profitable the firm. A high ratio means that the firm is holding a low level of average inventory in relation to sales. Holding inventory means money tied up in stock. This money is either borrowed and carries an interest charge, or is money that could have earned interest in a bank. Table 11 reveals ONGC and NTPC are having higher inventory turnover ratio as compared to others which is going to affect profitability of company. Table 11: Inventory Turnover Ratio S. No. COMPANY'S NAME 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 1. CIL 19.36 4.55 1.16 7.11 7.88 2. BHEL 4.64 4.03 2.87 3.08 3.99 3. NTPC 13.79 12.03 10.11 9.92 13.52 4. SAIL 3.47 3.17 2.99 2.88 3.45 5. ONGC 12.71 12.64 13.82 13.93 14.31

V. CONCLUSION It becomes very important for investors to analyze the financial performance of the companies before making any investments in them. Since Maharatna companies are basically PSUs which are offered more financial autonomy, so it is believed that these companies are safe to make investment. It is found that companies with more liquidity and less debt suffer from less profitability like CIL and BHEL while others are playing safe as they are able to take benefit of trading on equity. Due to low profitability, creditors do not consider these companies as safe. Only BHEL and CIL are efficiently utilizing resources. Overall study show that NTPC and CIL are fastest growing companies due to their increasing efficiency. http://indusedu.org Page 167

VI. REFERENCES [1] Dr. Jay Desai1, Nisarg A Joshi (2015), “A Study on Mergers & Acquisitions in Oil & Gas Sector in India and Their Impact on the Operating Performance and Shareholders’ Wealth”, JBME - Journal of Business Management and Economics, 3(12), December 2015. [2] Dr. Sandeep Goel (2011), “Capital Structure Analysis in Indian Heavy Industry the Pecking Order Dimension”, IJHRMR – International Journal of Human Resource Management and Research,1(2), December 2011 [3] Bhunia, A., Mukhuti, S., & Roy, G. (2011, MAY 25). Financial Performance Analysis-A Case Study. Current Research Journal of Social Sciences, 3(3), 269-275. [4] Goswami, S., & Sarkar, A. (2011, September). Analysis of Financial Performance of Tata Steel – A Case Study. Zenith International Journal of Multidisciplinary Research, 1(5), 161-174 [5] Khanifar, H., Jamshidi, N., & Mohammadinejad, M. (2012). Studying Affecting Factors on Analysts’ Decisions Regarding Share Analysis in Tehran Stock Exchange: A Fundamental Analysis Approach. European Journal of Economics, 44, 77-86. [6] Tariq Zafar, S. M., & Khalid, S. M. (2012, September). A Comparative Evaluation of Financial Performance and Market Value of Maruti and Tata Company. Bookman International Journal of Accounts, Economics & Business Management, 1(1), 7-16. [7] Singla, V. (2013). A comparative study of financial performance of SAIL and TATA Steel Ltd. International Journal of Reviews, Surveys and Research, 2(1), 1- 22.

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