Analysis of Working Capital Management

INTERIM REPORT ON

ANALYSIS OF WORKING CAPITAL MANAGEMENT

BY MD.YUNUS JAMAL

APOLLO TYRES LTD. Interim Report 2010

A INTERIM REPORT ON ANALYSIS OF WORKING CAPITAL MANAGEMENT

APOLLO TYRES LTD.

Submitted To: Company Guide: Mr. Mandeep Sisodia Faculty Guide: Prof. Monika Chopra

Submitted By: Name of the Author: Md. Yunus Jamal Enroll No. : 09BS0003037

ICFAI Business School, Pune Page 2 Interim Report 2010

Date of Submission: 19th April, 2010

Acknowledgement

There is always a sense of gratitude, which one express to others for the helpful and needy services they render during all phase of life. I too would like to express my gratitude towards all those who have been helpful in getting this mighty task of project report writing.

It gives me immense pleasure in thanking my company guide Mr. Mandeep Sisodia at Apollo Tyres who supervised me during the training and for giving me opportunity and all possible help to carry out the project work. Whatever the time and place was, he was always ready to guide me. Without his wholehearted support it would not have been possible for me to learn this project.

I would like to express my sincere thanks to my faculty guide Prof. Monika Chopra for providing inspiration and encouragement to make this training entire meaningful and purposeful.

MD.YUNUS JAMAL

IBS PUNE

09BS0003037

ICFAI Business School, Pune Page 4 Interim Report 2010 Table of Content

Preface...... 1 Abstract...... 2 Introduction...... 3 About Apollo Tyres Ltd...... 4 Tyre Industry Overview...... 5 Balance Sheet And Income Statement...... 6 Working Capital Management Defined...... 1 Operating Sheets...... 2 Operating Cycle Analysis...... 3 Ratio Calculation...... 4 Reference...... 5

Preface

Major changes in the economic climates and regulatory environment have seriously altered the conditions for Indian companies in recent years. Widening wings of globalization and increasing exposure to international markets have resulted in increasing competitions and relocation of production and distribution capacities. Furthermore, volatile exchange rate, increasing raw material prices have an impact on the cost and risk profile of the companies and thus on their financing structure.

Irrespective of whether it is a question of carrying out acquisition, financing further growth, averting imminent insolvency or simply ensuring that a company can continue to exist as a going concern, all of these factors require new or at least revised approaches for corporate financial management, professional financial management, which is helpful instrument for avoiding liquidity bottlenecks, helping for boosting returns and also facilitates a systematic control of financial risk.

With regard to developing alternatives financial arrangements, companies are increasingly focusing on their own resources. Efforts are directed toward optimizing the time span during which the working capital, defined as current assts minus current liability is tied up in the company. The attractiveness of working capital management is based on its two fold impact:

A reduction in the time span during which capital is tied up release liquidity and thus has a direct impact on the company’s financial position.However return on capital is also increased, balance sheet structures are optimized and company financials are improved. Working capital management thus opens up way for further forms of external finance ,for instance via capital market issues of equity and debt securities ,private equity in other words, forms of financing via financers who focus to a greater extent on balance sheet structures and the company financials.

Internal financing by way reducing the capital lock up within a company is by no means a new principle. However working capital objectives have so far always been regarded as subordinate to other objective such as sales and profitability. More advanced and far reaching solutions for the active management and monitoring of working capital are to be found only at small number of companies in India.

Abstract

The project aims to as certain how a large manufacturing unit (Apollo Tyres Ltd. in this case) managers its working capital requirements.

We have begun with understanding the concept of working capital in detail and tried to unearth the various term associated with working capital by looking into its various facets.

Next an attempt has been made to ascertain the importance of working capital for large manufacturing firm like Apollo Tyres.

Planning for working capital requirements becomes an important topic of study since it comprises of various activities like projecting working capital requirement, arranging short term financing, allocation of working capital, repayment of short term loans. So adequate time and space has been devoted to understand how Apollo Tyres Ltd. plans for its working capital requirements.

We have analyzed the short term financial health of the firm by looking at various ratios like current ratio, quick ratio and comparing them with firm’s performance in previous years and industry figures.

An analysis of operational efficiency of Apollo Tyres Ltd. has also been done with the help of various ratios like working capital turnover, inventory turnover ratio and comparing them with past performance and industry trends. Other tools like operating cycle has also been used to gauge efficiency of production function of Apollo Tyres Ltd. vis-à-vis its competitors.

Introduction

A firm raises debt from the market to set up new plant. The maturity period is 10 years during which it hopes to set up the plant, make it functional and also hopes to earn enough revenue from the operations to repay the debt back.

Another firm goes public, issue shares and make the general public the owners of the company, the company gets huge amounts of funds to invest in various ventures which will start to generate profits only after some years.

But do companies borrow money, or issue shares to pay for electricity for illuminating the factory or pay watchman’s salary or to buy fuel to keep the machines running? Or do companies keep financing of daily operations a separate function. Are the laborers paid through equity capital or through come other sources?

That’s the whole objective of this study –to find out how do companies finance their day to day operations. The capital or finance used to fund daily operation is known as working capital and our aim is to find out how Apollo Tyres Ltd. A giant in the Indian Tyre Industry manages funds to fuel its daily operations which take place across India at various locations.

Limitation and Scope of the study:

A) The study is limited to 3yeaars performance of the company from March 2006 to March 2009.

B) Most of the data used in the study have been taken from published Annual Reports and CMIE database only.

C) Rest of the data has been taken from unpublished internal reports and statement of the company.

Data and Methodology of the study:

The data of Apollo Tyres Ltd for year 31st March 2006-07 to 31st March 2008-09 used in this study have been taken from secondary sources, e.g published Annual Report of the company editing ,classification and tabulation of the financial data, which are colleted from the above mentioned sources, have been done as per the requirement of the study. For assessing the performance of the working capital positions, in this study the technique of the ratio analysis have been used. The collected data have been analyzed in different ways:

1. Analysis of liquidity ratio.

2. Analysis of liquidity position.

3. Analysis of operating cycle.

APOLLO TYRES LTD. VISION

“A significant player in the global tyre industry and a brand of choice, providing customer delight and continuously enhancing stockholder” VALUES

C - CARE FOR CUTOMER

R- RESPECT FOR ASSOCIATE

E- EXCELLENCE THROUGH TEAM WORK

A-ALWAYS LEARNING

T- TRUST MUTUALLY

E- EHTICAL VALUES

Apollo Tyres Ltd. (ATL) is India’s leading automobile tyre, tubes and flaps manufacturer, with operation in three continents and more than 70 destinations across the world. ATL is having production capacity of around 850 tonnes/day in the domestic market and 300 tonnes/day from international operations. The company is leading player in commercial vehicles segment.

INVESTMENT RATIONALE

ATL a tremendous leverage in the international tyre market and with technology skills of the Indian company would be integrated to the newly acquired plants to generate better operational efficiency and also improve production and productivity. Sourcing of raw materials like natural and synthetic rubber and chemicals could be made more efficient because of the acquisitions in the European arena and could result in better economies of scale for Apollo tyre.

To diversify its presence in global markets and to generate nearly 60% revenue from overseas market, ATL has undertaken overseas acquisitions. In May 2009 ATL has acquired Dutch tyre-maker Vredestein Banden BV for Rs 1,200-1, 500 Cr, this acquisition taken place with the mix of internal accruals and debt financing. Vredestein Banden BV a strong sales and marketing network besides a production unit in Enschede, Netherlands with capacity of 55 lakh tyres. It will give ATL access to the challenging European market. ATL's revenue will reflect as a result of this acquisition in upcoming quarter results.

To increase its presence in the radial tyres segment of commercial vehicles, ATL has also made an investment of about Rs 1,300 crore in Chennai for a Greenfield project, which is likely to be operational November this year.

Key Highlights

 Featured in the top 20 "Best Companies To Work For" in India, in a survey conducted by Business Today in partnership with Mercer Consulting and TNS.

 In the JD Power India original equipment Total Customer Satisfaction Index Report 2008, Apollo Tyres stood second at 816 points out of 1000

 The company's world-class, green field facility in Chennai, India will be operational soon. The plant will produce 'top of the line' Truck/Bus Radial Tyres & Ultra High Performance Passenger Car Radial Tyres.

 Apollo rides to Europe with the establishment of the European Technology Center at Russelsheim, Germany.

 Apollo was the only Indian company to be invited by Volkswagen AG to participate in the IZB exhibition in Wolfsburg, Germany. Volkswagen Polo, the best selling car model from Volkswagen, will now roll out on Apollo Tyres for its India launch.

 Integrating the global product portfolio by rebranding the "Dunlop" brand and rolling out new “Dunlop Zones” across South Africa.

 Awarded the Gold certificate for its manufacturing units in December, 2008, at the India Manufacturing Excellence Awards.

 Apollo Tyres Mission 2018 discovers hidden tennis talent across the country for the second batch in 2008.

INDUSTRY OVERVIEW

According to the top credit rating agency research, the tyre industry in India expected to grow at 6.81% in FY10 and at CAGR of 8.21% till FY13. The Truck and Bus T&B and Light Commercial Vehicle (LCV) tyre categories are expected to register a 5-year CAGR of 6.83% and 8.97%, respectively during this period.

INDUSTRY SIZE:-

Number of Players: 43

Tyre produced 42.35 million in FY 09 (8% more than last year)

Turnover of Indian Tyre Industry Rs. 22,500 Crore Tyre Production (Tonnage) 11.75 lakh M.T. Tyre Production – All Categories (Nos.) 821 Lakh Tyre Export from India (Value) : Rs. 3500 (est.) crore Number of tyre companies: 36 Industry Concentration 10 Large tyre companies account for over 95% of total tyre production. Radialisation Level - Current Passenger Car tyres: 98% (as a % of total tyre production) Light Commercial Vehicles: 18% Heavy Vehicles ( Truck & Bus ): 8%

MAJOR TYRE CONSUMERS:-

 Heavy & Light Commercial Vehicles:

Tata Motors, Ashok Leyland, Eicher, Tatra Udyog, Force Motor, Swaraj Mazda, Mahindra, Asia Motors, Kamaz-vectra.

 Farm Vehicles:

Mahindra, TAFE, New Holloan, Punjab Tractors.

 Passenger Vehicles:

Maruti Suzuki, Tata Motors, Mahindra, General Motors, Hyundai Motors, Skoda Auto, International Car & Motors, Volkswagen.

Raw Materials of Tyre Industry

Tyre Industry is highly raw-material intensive. Raw materials cost accounts for approx. 63% of tyre industry turnover and 70% of production cost Given below is the composition of raw-materials as a percentage (%) of Total Raw Material Cost.

Natural Rubber 42% Nylon Tyre Cord Fabric 18% Carbon Black 11% Rubber Chemicals 5% Butyl Rubber 4% PBR 5% SBR 5% Others 10%

58% of total Natural Rubber consumption is by the Tyre Sector balance by rubber based non-tyre industries. Total weight of raw-materials consumed by tyre industry – 13.76 Lakh M.T.Total Cost of Raw Materials consumed by tyre industry – Rs.14, 250 Crores Measures taken by the Government

 License required importing Truck Bus Radials (TBR) in Nov 2008.

 Excise duty cut by 4% in December '08 and 2% in February '09.

However, as the economy in general and automobile industry in specific slowed down in FY09, the tyre demand too came under pressure. In the first nine months of FY09, the industry managed a tonnage growth of only 2.19% against a growth of 7.38% in the same period last year. The T&B tyre category was the worst affected with the total off take of these tyres declining by 0.01% in the first nine months. Also in the face of global slowdown and stiff Chinese competition, the export market off take declined by 9.82% during this period.

ATTACHED BALANCE SHEETS AND INCOME STATEMENT OF  APOLLO TYRES.  MRF TYRES.  CEAT TYERS.

WORKING CAPITAL MANAGEMENT - DEFINED

CONCEPT OF WORKING CAPITAL

Working Capital Management is the process of planning and controlling the level and mix of current assets of the firm as well as financing these assets. Specifically, Working Capital Management requires financial managers to decide what quantities of cash, other liquid assets, accounts receivables and inventories the firm will hold at any point of time. WORKING CAPITAL (WC)

TYPESTYPES OFOF WORKINGWORKING CAPITALCAPITAL

ONON THETHE ONON THETHE BASISBASIS OFOF BASISBASIS OFOF PERIODICITPERIODICIT CONCEPTCONCEPT YY

GrossGross PermanentPermanent VariableVariable NetNet WorkingWorking WorkingWorking workingworking workingworking CapitalCapital CapitalCapital capitalcapital capitalcapital

Gross working capital refers to the firm’s investment in the current assets and includes cash, short term securities, debtors, bills receivables and inventories.

It is necessary to concentrate on the fact that the investment in the current assets should be neither excessive nor inadequate.

WC requirement of a firm keeps changing with the change in the business activity and hence the firm must be in a position to strike a balance between them. The financial manager should know where to source the funds from, in case the need arise and where to invest in case of excess funds.

Net working capital refers to the difference between the current assets and the current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year and include creditors, bills payable, bank overdraft and outstanding expenses.

When current assets exceed current liabilities it is called Positive WC and when current liabilities exceed current assets it is called Negative WC.

The Net WC being the difference between the current assets and current liabilities is a qualitative concept. It indicates:

 The liquidity position of the firm  Suggests the extent to which the WC needs may be financed by permanent sources of funds It is a normal practice to maintain a current ratio of 2:1. Also, the quality of current assets is to be considered while determining the current ratio. On the other hand a weak liquidity position poses a threat to the solvency of the company and implies that it is unsafe and unsound. The Net WC concept also covers the question of judicious mix of long term and short-term funds for financing the current assets. Permanent and variable working capital:

The minimum level of current assets required is referred to as permanent working capital and the extra working capital needed to adapt to changing production and sales activity is called temporary working capital.

The dangers of inadequate working capital are as follows:

1. It stagnates growth .It becomes difficult for the firms to undertake profitable projects for non-availability of the WC funds. 2. It becomes difficult to implement operating plans and achieve the firms profit targets 3. Operating inefficiencies creep in when it becomes difficult even to meet day-to-day commitments. 4. Fixed assets are not efficiently utilized. Thus the rate of return on investment slumps. 5. It renders the firm unable to avail attractive credit opportunities etc. 6. The firm loses its reputation when it is not in position to honor its short-term obligations. As a result the firm faces a tight credit terms.

ATTACHED OPERATING SHEETS OF  APOLLO TYRES  MRF TYRES  CEAT TYRES

OPERATING CYCLE CALCULATION AND ANALYSIS

1. RAW MATERIAL STORAGE PERIOD

Average stock of raw material

Average daily consumption of raw material

31/3/2009 25.22 31/3/2008 Raw material storage period has been declined from 33.28 31/3/2007 33.28 days (for year 2008) to 25.22 days (for year 34.9 0 20 40 2009) Days

The reason can be attributed to two factors.

A) Decreased stock of raw materials from 2174.76Mn to 1930.68Mn.

B) Increase in average daily consumption of raw material

From 65.34Mn to 76.57Mn.

Both indicate a rise in production level to support the optimistic sales.

PROJECTION FOR YEAR 2009

APOLLO TYRES MRF TYRES CEAT TYRES

Average stock of 1930.68 3677.9 1436.12 raw material Average daily 76.57 96.76 46.69 consumption of raw material Raw Material 25.22 38.01 30.76 Storage Period

Apollo tyres is maintaining the lowest Raw material storage period among the three compared here.This indicates optimistic production level infront of competitors and this show that company is moving towards efficient production function which ensure that raw materialis not kept idle for long time.

RAW MATERIAL STORAGE PERIOD

39.77 38.01 40 34.9 33.28 35 30.76 28.66 29.12 30 25.66 25.22 25 ATL 20 MRF 15 CEAT 10 5 0

Above figure show the raw material storage period for all three companies.We can analyze that how the number of raw material storage period is decreasing from year 2007 to year 2009. Apollo Tyres Ltd. is improving the raw material storage period as compared to MRF Tyres Ltd. and CEAT.

2. WIP CONVERSION PERIOD

WIP conversion period has declined from 3.43 days (for year2008) to 3.06 days (for year 2009). This has resulted in spite of an increase in average stock of WIP from Rs. 255.69Mn (in year2008)to Rs.265.08Mn (in year 2009). Colu mn2 31/3/2009 3.06 what has made conversion period to declined is the substantial rise 31/3/2008 3.43 in production levels and the resulting increased in average daily 31/3/2007 4.07 cost of production from Rs. 74.05Mn (in year 2008) to Rs. 0 2 4 6 86.52Mn (in year 2009). Days

APOLLO TYRES MRF TYRES CEAT TYRES Average stock of 265.08 1139.60 198.64 WIP Average daily cost 86.52 109.63 54.52 of production

WIP Conversion 3.06 10.40 3.64 Period

Figure show the WIP Conversion Period for all 12 three companies. We can analyze that how the 10.18 10.4 9.59 number of days of conversion period is decreasing 10 from year 2007 to year 2009. It means Apollo 8 Tyres Ltd. is improving the WIP Conversion ATL 6 4.62 4.69 period as compared to MRF Tyres Ltd. and CEAT. 4.07 3.64 MRF 3.43 3.06 WIP CONVERSION PERIOD 4 CEAT 2 3. FINISHED GOODS 0 STORAGE PERIOD 31/03/2007 31/3/2008 31/3/2009 As can be interpreted through the graph, the finished goods conversion ATL

31/3/20… 25.26 ICFAI Business School, Pune 31/3/20… Page 2229.08 31/3/20… 25.19 20 25 30 Days Interim Report 2010

Period has declined from 29.08 days (for year 2008) to the

25.26 days (for year 2009).

STOCK OF FINISHED GOODS (Unit No)

31st March,2008 31st March,2009 Automobile Tyres 869,6026 869,9334

Automobile Tubes 754,9427 729,8044

Automobile flaps 373,2544 371,3146

Pre-cured tread 126,329 148,861

Alloy wheels 617 2,216

The main reason for the decrease in the finished goods storage period is the

Slightly increase of average stock of finished goods by 2.5 % and average daily cost of sales is increased by 17.81%.

APOLLO TYRES MRF TYRES CEAT TYRES Average stock of 2455.94 3572.85 1168.44 finished goods Average daily cost 97.23 115.87 61.49 of sales

Finished Goods 25.26 30.83 19 Storage Period

FINISHED GOODS STORAGE PERIOD

35 31.72 30.32 30.83 29.08 30 25.19 25.26 25 19 20 18.74 15.48 APT 15 MRF 10 CEAT

Figure show the overall days of finished good storage period for all three companies in three years.

4. AVERAGE COLLECTION PERIOD

The Debtors / Receivable Turnover period when calculated in terms of days is known as Average Collection Period or Debtors Collection Period Ratio.

The average collection period for year 31st March, 2009 is 9.72 and it indicates that the firm has to wait for 9.72 days for receiving collection from debtors on account of credit sales.

ATL managed to decrease its payment collection period from 15.39 days (in March 2008) to 9.72 (in March 2009). It shows an improved effort on the part of the company to collect its due from debtors. ATL PROJECTION OVERVIEW

31/03/2009 9.72

31/03/2008 15.39

31/03/2007 18.29

0 5 10 15 20 DAYS

The company is way ahead of the competition when it comes to collecting dues from various debtors, the final impact is less dependences on working capital from external sources since the company is able to recover its dues or get the cash back into the system quickly to finance its various operations.

Average Sundry 1212.09 5809.85 3133.08 Debtors Average Daily 124.65 157.03 75.57 Credit Sales

Average 9.72 37.00 41.46 Collection Period

42.96 45 41.46 39.42 39.440.04 40 37 35 30 25 ATL 18.29 MRF 20 15.39 CEAT 15 9.72 10 5 0 31/3/2007 31/3/2008 31/3/2009

AVERAGE COLLECTION PERIOD OF TYRE INDUSTRY

This ratio measures the quality of debtors. A short collection period of Apollo tyres implies prompt payment by debtors. It reduces the chances of bad debts. While a longer collection period of MRF Tyres and CEAT Tyres implies too liberal and inefficient credit collection performance. It is difficult to provide a standard collection period of debtors.

5. AVERAGE PAYMENT PERIOD

Average payment period ratio gives the average credit period enjoyed from the creditors. The average payment period ratio represents the number of days by the firm to pay its creditors. A high creditors turnover ratio or a lower credit period ratio signifies that the creditors are being paid promptly. This situation enhances the credit worthiness of the company. However a very favorable ratio to this effect also shows that the business is not taking the full advantage of credit facilities allowed by the creditors.

80 77.77 76.7 70 69.01 59.31 C olu 60 58.04 mn2 51.12 31/3/2009 50 46.69 46.45 46.45 44.8 31/3/2008 40 AT L 59.31 31/3/2007 58.04 30 MR F 20 0 50 100 C E A Days 10 T 0 31/03/200731/3/2008 31/3/2009

Average payment period has been declined from 59.31 days (in year March, 2008) to 46.45 days (for year March, 2009). This speaks positively for the company as it creates a good image of ATL among creditors who lend to company. Considering that it working capital requirement has been consistently increasing, it should strive to bring down its payment period even further.

APOLLO TYRES MRF TYRES CEAT TYRES Average stock of 2455.94 3572.85 1168.44 finished goods Average daily cost 97.23 115.87 61.49 of sales

Finished Goods 25.26 30.83 19 Storage Period

OPERATING CYCLE

S Y A D

F 31/03/2009 16.81 O

E 31/03/2008 21.88 B M

U 31/03/2007 24.41 N 0 5 10 15 20 25 30 YEAR

So the operating cycle has been decrease from 21.88 days (for year March,2008) to 16.81days(for year March,2009) which indicates towards improvement as regard efficiency of various operations beginning from new material storage period to the point where final realization of cash sales taken place.

70 60 50 40 ATL 30 MRF 20 CEAT 10 0 31/03/2007 31/03/2008 31/02/2009

RATIO CALCULATION

1. CURRENT RATIO

Current ratio may be defined as the relationship between current assets and current liabilities. This ratio is also known as "working capital ratio". It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm.

PERFORMANCE BY APOLLO TYRES LTD

CURRENT 2009 2008 2007 AVERAGE RATIO

CURRENT 10407.01 11258.00 10346.30 ASSET

CURRENT 4601.22 5658.25 5422.01 LIABILTY

CURRENT 2.26 1.99 1.91 2.05 RATIO

Current ratio is calculated by dividing Current Asset to Current Liability. Current Asset means all those assets, which are convertible into cash within a year such as marketable security, debtors, stock, cash bank and prepaid expenses. Current liability included the obligation maturing within a year like creditors, bills payable, outstanding expenses, bank overdraft and income tax liability.

The current ratio is thus a measure of the firm’s short term solvency. It indicates the availability of the current assets in rupees for every one rupees of current liability. A ratio of greater than one means that the firm has more current assets than current claims against it. Idea current ratio is 2:1 under normal conditions.

The current ratio of the company in year from 31st march 2007 to 31st march 2009 is as follow:

2007-1.91 times 2008-1.99 times 2009- 2.26 times

With over all average of 2.05 during the study period.This ratio is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firms financial stability. It is also an index of technical solvency and an index of the strength of working capital.

An increase in the current ratio from March 2007 to March 2009 represents improvement in the liquidity position of the firm.

TYRE COMPANY OVERVIEW (FOR YEAR MARCH 2009)

MAJOR PLAYERS CURRENT RATIO

APOLLO TYRES LTD 2.26 MRF LTD 1.95

CEAT LTD 1.67

A relatively high current ratio of Apollo tyres Ltd is an indication that the firm is liquid and has the ability to pay its current obligations in time and when they become due. A relatively low current ratio of CEAT tyres represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time without facing difficulties.

BREAKUP OF CURRENT ASSET: APOLLO TYRES LTD

MARCH 2009 MARCH 2008 MARCH 2007

INVENTORY 4170.47 5132.91 4519.49 SUNDRY 872.84 1551.33 2030.55 DEBTORS CASH AND BANK 3405.98 2658.53 1720.02 BALANCE LOANS & 1952.69 1788.84 1937.10 ADVANCES CURRENT 10407.01 11258.00 10346.30 ASSET

COMPOSITION OF CURRENT ASSET: TYRE INDUSTRY

INVENTORY 4170 9842.80 2194.16 CURRENT 872.84 7019.00 3187.09 DEBTORS CASH 3405.98 1023.50 2015.18

The liquidity position of ATL is stronger as compared to MRF and CEAT Tyres. The cash component among current assts/gross working capital is 3.3 times MRF and 1.69 times CEAT tyres.

2. QUICK RATIO / LIQUIDITY RATIO

Liquid ratio is also termed as Liquidity Ratio / Acid Test Ratio / Quick Ratio. It is the ratio of liquid assets to current liabilities. The true liquidity refers to the ability of a firm to pay its short term obligations as and when they become due.

QUICK RATIO 2009 2008 2007 AVERAGE

CURRENT ASSET 10407.01 11258.00 10346.30

CURRENT LIABILTY 4601.22 5658.25 5422.01

INVENTORY 4170.47 5132.91 4519.49

(CA - INVENTORY) / CL 1.36 1.08 1.07 1.17

The quick ratio of the firm for the study period ranges in between 1.07:1 to 1.36:1. Normally 1:1 is considered to be the standard Quick Ratio. Quick assets are current assets minus inventory. It is very important to analyze the composition of quick assets. The quick ratio has been increased due to decrease in amount of current liability and inventory levels.

COMPOSITION OF QUICK ASSET: TYRE INDUSTRY

SUNDRY DEBTORS 13.99% 25.32% 35% CASH AND BANK BALANCE 54.61% 43.40% 30% LOANS & ADVANCES 31.31% 29.17% 33% OTHER CURRENT ASSETS 0.09% 2.11% 2%

Also the amount of cash and bank balance as a total % of quick assts has increased continues from March 2007 to March 2009. An ideal scenario would have been where amount of cash is maximum as a % of quick asset and also increase with each year.

TYRE COMPANY OVERVIEW

MAJOR PLAYERS QUICK RATIO

CEAT LTD 1.23

In terms of quick ratio, Apollo Tyres is at the top without any doubt but a look at the composition that makes up the quick assets present a difference picture.

COMPONENTS OF QUICK ASSET: TYRE INDUSTRY

APOLLO MRF TYRES CEAT TYRES TYRES

CURRENT DEBTORS 872.84 7019.00 3187.09 CASH 3405.98 1023.50 2015.18 LOANS & ADVANCES 1952.69 56.70 794.26

APT is cash richest in comparison to competitors. It has 69 % more cash balance than CEAT and 232% more than MRF which is positive sign for the company considering the amount of cash it requires to take care of its expansive manufacturing operations.

Even the lowest amount of debtors among the competitors is an encouraging sign for APT. It shows a tight credit policy and good collection effort on the part of the company.

Amount of loan given is also highest. It indicates a strong liquidity position and shows not only the company is in a position to take care of its own cash obligation but also strong enough to grant loans in the market.

So it can be concluded that the liquidity position of the AT is good in the tyres industry.

3. INVENTORY TURN OVER RATIO

Stock turn over ratio and inventory turn over ratio are the same. This ratio is relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period.

INVENTORY TURNOVER RATIO 2009 2008 2007

COST OF GOODS SOLD 35489.50 30067.03 27755.46

AVERAGE INVENTORY 4651.69 4826.20 4356.84

RATIO 7.63 6.23 6.37

It can be interpreted as measuring the speed with which the firm turns the inventory into sales. This ratio is expressed in terms of the number of days outstanding.

ATL inventory levels have decreased by 23% from last years and sales has been increased by 18 % justifying the decrease of inventory.

MAJOR PLAYERS INVENORY TURNOVER RATIO

APOLLO TYRES LTD 7.63 MRF TYERS LTD 5.04

CEAT TYRES LTD 8.01

The company’s inventory turnover ratio is 2nd best in the industry. A high inventory turnover/stock velocity of CEAT Tyres indicates efficient management of inventory because more frequently the stocks are sold; the lesser amount of money is required to finance the inventory

A low inventory turnover ratio of MRF tyres indicates an inefficient management of inventory and over- investment in inventories, stock accumulation, accumulation of obsolete and slow moving goods and low profits as compared to total investment.

4. DEBTORS TURNOVER RATIO

Debtors Turnover ratio or Accounts Receivable Turnover Ratio indicates the velocity of debt collection of a firm. It indicates the number of times average debtors (receivable) are turned over during a year.

QUICK RATIO 2009 2008 2007 AVERAGE

NET CREDIT SALES 40704.41 36939.27 32923.28

AVERAGE TRADE DEBTORS 1212.09 1790.94 1891.00

DEBTORS 33.58 20.63 17.41 23.87 TURNOVER RATIO

Finding:

Debtors/account receivable turnover ratio indicates number of times the accounts receivable amount is collected throughout the year or number of times the debtors are converted into cash.

A high accounts receivable turnover ratio indicates a tight credit policy and an efficient collection system.

A low or declining accounts receivable turnover ratio indicates a collection problem, part of which may be due to bad debts.

So the 3 year period under study shows a steady increase in debtors turnover ratio indicating an improve ability of the company to convert its debtors into cash.

MAJOR PLAYERS DEBTORS TURNOVER RATIO

CEAT LTD 8.02

The higher the value of debtors turnover of Apollo Tyres Ltd represent that the management of debtors are more efficient or more liquid the debtors are.

However a lower is not always bad as it entirely depends on the credit policy of the company to sustain in the market. More over it may be possible that the company is giving credit to their preferred credit worthiness.

5. WORKING CAPITAL TURNOVER RATIO

Working Capital Turnover Ratio indicates the velocity of the utilization of net working capital. Working capital ratio highlights the company’s ability to convert its working capital into sales

WC RATIO 2009 2008 2007 AVERAGE

COST OF SALES 35489.50 30067.03 27755.46

NET WORKING CAPITAL 5,805.79 5,599.75 4,924.29

WC TURNOVER 5.70

RATIO 6.11 5.37 5.64

The working capital turnover is used to analyze the relationship between the money used to fund operation and sales generated from these operations. A company uses working capital (current asset – current liability) to fund operation and purchase inventory are then converted into sales revenue for the company. The higher the working capital turnover, the better because it means that the company is generating higher sales compared to the money it used to fund the sales.

The working capital turnover ration of APT was lowest at 5.37 times in 2008, and it was highest in 2009 6.11 time So ATL is working towards better utilization of its working capital as is evident by its result in 2009.

COST OF SALES 35489.50 42293.60 22445.55 NET WORKING CAPITAL 5805.79 9680.00 3300.18 COST OF SALES / NET 6.11 4.37 6.80 WORKING CAPITAL

6. DAYS OF INVENTORY HOLDING RATIO

Days of inventory holding indicates for how many days the inventory is kept before it get converted into sales. So a lower ratio signifies a company’s strength to transform its inventory into sales quickly.

DAYS OF INVENTORY 2009 2008 2007 AVERAG HOLDING E

INVENTORY TURNOVER 7.63 6.23 6.37

365 / INVENTORY TURNOVER 47.84 58.59 57.9 54.77 TYR E COMPANY OVERVIEW

MAJOR PLAYERS INVENTORY HOLDING DAYS

CEAT LTD 45.6

The lower ratio of CEAT TYRE find its reason in the amount of sales that CEAT tyres has been able to generate with lower sales it was not required to keep a substantial amount to stock whereas both MRF and Apollo Tyre kept a higher inventory to support their respective higher sales targets.

Keeping all the things into account it can be said that despite maintain a higher inventory sales Apollo tyre was able to achieve a lower inventory conversion ratio which highlights its efficiency in its production processes.

OPENING INVENTORY 5132.91 6933.4 3410.6 COST OF GOODS SOLD 35489.50 42293.60 22445.55

CLOSING INVENTORY 4170.47 9842.8 2194.16 7. CASH RATIO

Cash ratio basically indicates how much of the current liability can be met through available cash. The higher the ratio the better it is for the company.

CASH 3405.98 2658.53 1720.02 CURRENT LIABLITY 4601.22 5658.25 5422.01 CASH RATIO 74% 47% 32%

The ratio simply goes to show how rich a company is in terms of cash , so tomorrow if need arises to pay of its current liability how much can a company manages with its own cash reserve without having to borrow from other sources. So a higher ratio obviously highlights a superior financial strength of a company to its peers in the industry.

MAJOR PLAYERS CASH RATIO (%)

APOLLO TYRES LTD 74% MRF LTD 10%

CEAT LTD 41%

The above ratio implies at 74% of the current liability of Apollo tyre can paid off through the available cash while it is just 10% for MRF and 41% for CEAT.

From the given data it can be easily interpreted Apollo tyre is in a much better position than MRF and CEAT to pay off its creditors using its cash balance.

On the basis of cash ratio it can be said that liquidity position of Apollo tyres is very strong.

8. CURRENT ASSET TURNOVER RATIO

Current asset turnover ratio shows the productivity of the company’s current asset. It can also be constructed as the sales that the firm is able to generate with a rupees invested in current asset.

MARCH 2009 MARCH 2008 MARCH 2007 AVERAGE

SALES 40704.4 36939.27 32923.28 CURRENT ASSET 10407.01 11258.00 10346.30 CA TURNOVER 3.91 3.28 3.18 3.45 RATIO

In ATL case, the ratio is 3.18 in 2007 and increased 3.91 in 2009; on average the company is able to generate sales of 3.45 from Rs.1 worth of current asset.

Since the proportionate increase in amount of sales is more than the amount of current asset, the ratio above simply means that the firm is able to generate higher return (sales) as compared to the invested made in current asset, but a more meaningful analysis can only be done when industry figure is kept beside Apollo tyres.

MAJOR PLAYERS RATIO

CEAT LTD 3.07

Apollo Tyres has the best Current Assets turnover ratio 3.91 which indicates that the company is able to best milk its current asset than other two players CEAT and MRF Tyres.

9. DAYS DEBTORS OUTSTANDING

MARCH 2009 MARCH 2008 MARCH

DEBORS TURNOVER 33.58 20.63 17.41 RATIO 365/DEBTOR 10.9 17.7 21.0 TURNOVER (DAYS)

Apollo tyres brought down the time to cover its due from its debtors in the last year .The ratio is similar to debtors turnover ratio which shows the number of times the year or number of time of debtors are converted into cash.

COMPOSITIONS OVERVIEW

SALES DEBTORS

APOLLO TYRE LTD 40704.41 872.84 MRF TYRE 50608.10 7019.00 CEAT TYRE 25136.93 3187.09

The ratio of ATL is far superior in comparison to CEAT and MRF which take substantial more time to recover their dues from their respective debtors.

One more fascinating aspect is that even through Apollo has the second highest sales figure manage with least amount of debtors.

MAJOR PLAYERS DAYS DEBOTORS OUTSTANDING

CEAT LTD 45.5

So their collection period is also working perfectly for them because it is seen generally an increase in sales leads to an increase in the amount of debtors which happens because relax their company policies which attract more number of buyers, they also makes it more attractive by increasing their credit period which shows a higher figure of debtor in the books of account.

10. GROSS PROFIT RATIO

Gross profit ratio (GP ratio) is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship between gross profit and sales.

SALES 40704.41 36939.27 32923.28 COST OF GOODS SOLD 35489.50 30067.03 27755.46 GROSS PROFIT RATIO 12.81 18.60 15.70

Gross profit ratio may be indicated to what extent the selling prices of goods per unit may be reduced without incurring losses on operations. It reflects efficiency with which a firm produces its products.

In case of Apollo Tyres Ltd Gross profit Ratio is declined from year 2008 to year 2009 by 45 %, previously it was improved from year 2007 to 2008 by 19 %.

MAJOR PLAYERS GROSS PROFIT RATIO (%)

APOLLO TYRES LTD 12.81% MRF LTD 16.43%

CEAT LTD 10.71%

The decrease in the gross profit ratio is due to the following factors.

 Decrease in the selling price of goods, without corresponding decrease in the cost of goods sold.  Increase in the cost of goods sold without any increase in selling price.

 Inability of management to improve sales volume, or omission of sales.

References

Websites

 www.atmaindia.org

 www.moneycontrol.com

Other Resources

 Annual Report of APOLLO Tyres Ltd and CEAT Tyres Ltd.

 Centre for Monitoring Indian Economy (CMIE) database software.

ICFAI Business School, Pune Page 46