Report Of Pratibha Industries Essay Example Pdf - Free Essay Example

The annual report of Pratibha Industries Ltd is analysed for years FY2007-2008 and FY2008-2009. The report attempts to analyse the financial health of the company from the point of view of an investor making an investment decision. The report compares the performance of PIL over the last three years by analysing the financial statements of the company. Also peer comparison has been done with three companies for a comprehensive view. The ratios are calculated based on the financial data available in the companys Annual Reports of FY07-08 and FY08-09.The competitor data has been taken from www.moneycontrol.com and the key ratios are calculated using the same method as ratios of PIL for accurate comparison. INTRODUCTION The financial statements provide information about the financial position of the firm. The detail of the analysis is useful in making some vital economic decisions. Pratibha Industries Ltd. (PIL) is a turnkey project contractor, engaged in constructing buildings and infrastructure development projects. It designs and constructs integrated water transmission (including treatment, re-cycling, storage and distribution projects), water treatment plants, elevated and underground reservoirs, mass housing including real estate projects, commercial complexes, pre-cast design and construction and road construction services. ABOUT THE COMPANY Company Background Pratibha Industries Limited (PIL) is the flagship company of Pratibha Group, incorporated in 1983. The company that started with manufacturing of SFRC manhole covers, frames and various other pre-cast products, has now positioned itself as a niche player in infrastructure space with expertise in water management and other urban infrastructure projects. Apart from having presence in lucrative water segment that accounts over 60% of the companys current order book, PIL has enlarged its presence into urban infrastructure projects like road construction, airport terminals, mass housing projects, commercial complexes, railway stations, tunneling projects and into other verticals of infrastructure development like EPC contracts in Oil and Gas distribution, thermal power plants and other large projects in construction space. Further the company has also backward integrated by setting up a pipes manufacturing facility for captive consumption as well as to tap the tremendous opportunities t hat lies in pipes segment. Significant Accounting policies The Financial Statements are prepared to comply in all material aspects with the applicable accounting principles in India, the accounting standards issued by the Institute of Chartered Accountants of India and the relevant provisions of The Companies Act, 1956. The Financial Statements of the Company and its subsidiary companies (which are not in the nature of joint ventures) have been consolidated on a line-by-line basis by adding together the book values of like items of assets, liabilities, income and expenses. The intra group balances and intra group transactions and un-realized profits or losses resulting from intra group transactions are fully eliminated. Investments in associate companies have been accounted for, by using equity method whereby investment is initially recorded at cost and the carrying amount is adjusted thereafter for post acquisition change in the Companys share of net assets of the associate. The Consolidated Financial Statements include the interest of the Company in JVCs, which has been accounted for using the proportionate consolidation method of accounting and reporting. For further details on the Accounting policies refer to Appendix 4. No change in accounting policy noticed in the annual report for the past 3 years. The Balance Sheet, Profit and Loss and Cash Flow Statements have been duly audited the year ending at 31st March every year. COMPANY FINANCIAL AND DATA ANALYISIS Note: All figures such as sales etc. are in Indian Rupee (Rs.) and in terms of 10 Million (1crore). Key Ratio Calculations: Growth Ratios: The growth percentage provides a brief snap shot of the companys status as compared to the previous year. Profitability Ratios: AÂÂ  class of financial metrics that are used to assess a businesss ability to generateÂÂ  earnings as compared toÂÂ  its expenses and other relevant costs incurred during a specific period of time. Comment on Profitability Ratios: Return on Capital Employed: It is the ratio of operating profit generated during a period and the average long-term capital invested in the business during the period. The ROCE has decreased in 2009 after an increase in 2008. The reason for decrease is mainly because secured loans rose by 69.7% and unsecured loans were again availed back in 2009. These loans were present in 2007 and settled in 2008. Return on Net worth: The return on net worth ratio has increased to 19.9% after a slight dip in 2008.The dip was largely due to 107 % increase in reserves and surplus during 2008. Gross, Operating and Net Profit Margin: All the three profit margins have been dropping year on year. In 2009 the profits drop can be mainly attributed to the increase in expenses. Though there is increase in all the expenses generally due to high commodity prices and inflation ; those a bit out of proportion are the Directors Remuneration which has increased about 250% and Legal fees and other professional charges by about 83%. In 2008 the drop in profit can be attributed to the raise in cost of work done which again can be traced to heavy purchases a steep rise of 249%. Turnover/Activity Ratios: Turnover ratios are used to measure how many times a companys inventory is replaced in a specific period of time. By dividing the cost of goods sold by average inventory we can calculate the turnover ratio. When the company is producing and selling its goods quickly then it is said to have a high turnover ratio. Comment on Turnover/Activity Ratios: Fixed Asset Turnover: This ratio has decreased to less than half of 2007 value. This is due to the substantial increase in the investment in plant and machinery as the company is in expansion. But it also shows that the company is not making use of its capital to the optimum. Debtor Turnover: This ratio has increased to 7.29 in 2008 and dropped to 5.71 in 2009 again. This is due to the drop in sundry debtors in 2008 and rise in 2009. Inventory Turnover: This ratio has dropped substantially due to the increase in inventory. Its due to increased work in progress in 2008. It increased again in 2009 due to decreased work in progress. But overall it implies poor sales by the company during the period. Liquidity Ratios: Liquidity ratios are concerned with the ability of the business to meet its short term financial obligations. Comment on Liquidity Ratios: Current ratio: The current ratio has fallen from 3.04 to 1.33 in 2008 and again increased to 1.89. The fall in 2008 was due to increased liabilities (274% rise) in the form of sundry creditors and advances deposits. Whereas In 2009 while the current assets increased; the liabilities actually decreased leading to a higher current ratio. The increase shows margin available will be more and chances of the firms meeting its commitments will also be more. But still a ratio of 2:1 is expected as ideal. Acid Test Ratio/Quick Ratio: The pattern of acid test ratio is very similar to the current ratio discussed above. The only difference being the inventory. In 2008 the work in progress was high which lead to a high inventory and low ratio while in 2009 the work in progress decreased which increased the ratio. The ratio is above 1 and hence indicates that the business is safe and would be able to pay short term liabilities from its liquid assets. Leverage Ratios: Leverage ratios are used to calculate theÂÂ  financial leverage of a company to get an idea of the companys methods of financingÂÂ  or to measure its ability to meet financial obligations. Comment on Leverage Ratios: Interest cover ratio: The Interest cover ratio measures the amount of operating profit available to cover interest payable. It has remained relatively stable over the three years in spite of increasing operating profit. This is due to the fact that the interest paid to the bank and interest on finance for vehicle and construction equipment has increased year on year. Still the interest cover is adequate for the period. Debt-Equity ratio: This ratio indicates what proportion of equity and debt the company is using to finance its assets. In 2008 this ratio had almost halved and then again rose by 1.5 times in 2009. As mentioned earlier it is due to the unsecured loans in 2007 which were paid back in 2008 and again availed back in 2009. But still it reflects a less dependence on debt, as the company is in a capital intensive sector, the financial needs have been fulfilled by issue of equity shares. Investment Ratios: These are mainly used by the investors to find out the performance of a business as an investment. The investors will be interested in the company making some good profit from the investment made. Dividend payout ratio: The dividend payout ratio is decreasing year on year. This is due to the fact that the company is paying a constant dividend in spite of increasing profits. The company can make use of major part of its profit for the future growth. Dividend yield ratio: It shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. The dividend yield ratio is varying with the market price as the dividend payout is constant at Rs.2 per share year on year. Earnings per share: The Earnings per share is increasing year on year which is a good sign. Its due to increasing profit every year. P/E Ratio: The PE ratio had peaked out in 2008 due to high price of the share. Due to 2009 recession the price of the share bottomed out and the P/E ratio was the lowest at 2.97 at 31st march 2009.This indicates that the stock was cheap on that day. Other Inferences: The company had a high exposure in Indian stock market through mutual funds. These mutual funds were amounting to RS.85.01 Crore. These were sold off for RS 3.42 crore which represents a loss of 95.97%. PEER COMPARISON The peer comparison has been done with Unity Infra (UI), Madhucon projects(MCN)and JMC Projects(JMC). Mostly the charts are self explanatory. PIL has shown good profitability as compared to peers with a high ROCE and RONW and a good operating profit margin. Liquidity ratios have come down from undesirably high levels to acceptable ones. The Interest cover is lower and debt to equity is higher than peers. Though the dividend payout is less the EPS of the company is fairly high .It can be said that overall the company is having good standing in comparison with its peers. MARKET PERCEPTION The current price and values as on 24/Dec/2009 are shown below. The markets have rebounced after the effects of recession and today the stock price is relatively higher than the year end 31st March 2009. The Analystcommunity/Broker view point has been attached in APPENDIX 5. For a detailed analysis the stock price chart has been attached in APPENDIX 6. OHLC(open high low close ) chart has ben chosen for 52 week period. The 52 week low was around 53.05 (due to FII outflow from indian markets in march ). All the stock prices were vey low at that point. The OHLC shows the markets open, previous close, todays high and low. The market is pretty range bound and not trending and so the stock price has witnessed a small fall. (Indian point of view). CONCLUSION The Financial Analysis helps us conclude that the company in spite of having some glitches has performed well , especially compared to the peers and the stock is not overvalued and hence has a good investment potential in the long term. Future Potential PIL has a robust order backlog of around Rs 2100 crore (nearly three times its trailing four quarter sales) as on date and the same is expected to grow to Rs 3500 crore by fiscal FY 2011, which provides strong revenue visibility. While maintaining its strong foothold in the water segments, PIL has diversified its business profile into urban infrastructure projects and other verticals of infrastructure development like EPC contracts in Oil and Gas distribution, thermal power plants and other large projects in construction space. This will insulate the company from any slowdown in any particular segment. The company has backward integrated by setting up HSAW pipe facility, which has strengthened its margin in water segment and also allowed an entry into a lucrative space of oil and gas EPC contracts. Pratibha Industries has sizable presence in Mumbai Metropolitan Region and is expanding aggressively in other states in order to diversify the state specific delays and risk. Risk Concerns Projects included in the order book of the company may be delayed or cancelled for various reasons, which will adversely affect the revenues and earnings of the company. As for PIL, most of its projects are running on schedule. However, one cannot ignore the inherent risks associated with the business. Fluctuation in raw material prices is another concern. A sharper-than expected increase in the prices of these raw materials could impact PILs Margins. Future order inflows might get affected due to the economic slowdown. Any slowdown in government implementation and awarding of contracts in water management and urban infrastructure, will impact companys earning. R D expenditures of total turnover was 1.9% 9. REFERENCES Ashok Leyland website https://www.ashokleyland.com BFA report available at https://chintan.agarwal.googlepages.com/BFA_Report_R9.pdf Performance report available at https://www.ashokleyland.com/performanceReport.jsp Business Line website https://www.thehindubusinessline.com Moneycontrol website https://www.moneycontrol.com ICICI direct website https://www.icicidirect.com Definitions for Profitability ratios available at: https://www.investopedia.com/terms/p/profitabilityratios.asp?viewed=1 Definitions for Turnover ratios available at https://www.investorwords.com/5832/turnover_ratio.html Definitions for Liquidity ratios available at https://www.advfn.com/Help/liquidity-ratio-112.html Definitions for Solvency ratios available at https://www.investopedia.com/terms/s/solvencyratio.asp Chadwick, Leslie (2002). Essential Finance and Accounting for Managers. Prentice Hall Dyson, J R., (1997). Accounting for Non- Accounting Students. Fourth edi tion, Pitman Publishing. APPENDICES Appendix 1 Appendix 2 Appendix 3 Appendix 4 Policy Comment Accounting Convention The financial statements have been prepared under the historical cost convention in accordance with the generally accepted accounting principles in India and the provisions of the Companies Act, 1956. The Company is following accrual basis of accounting on a going concern concept. Accounting policies are suitably disclosed as notes annexed to the Balance Sheet and Profit Loss Account. Fixed assets and depreciation/amortisation Fixed Assets are stated at cost of acquisition, including any attributable cost for bringing the asset to its working condition for its intended use, net of taxes and duties less accumulated depreciation and impairment loss and includes financing cost for period up to the date of readiness of use. Capital Work-in-Progress is stated at the amount expended up to the date of Balance Sheet including preoperative expenditure. Depreciation on fixed assets has been provided on Straight Line method at the rates and in the m anner prescribed in Schedule XIV to the Companies Act, 1956. As per ASI 2- Accounting For Machinery Spares, the machinery spares specific to a particular asset have been capitalized. Investments Current investments are carried at the lower of cost and quoted/fair value, computed category wise. Investments, intended to be held for more than a year, from the date of acquisition, are classified as long-term. they are stated at cost. Provision for diminution in the value of long-term investments is made only if such a decline is other than temporary. Inventories Cost of inventories comprise of all cost of purchase, cost of conversion and other cost incurred in bringing them to their respective present location and condition. Raw materials are valued at lower of cost or net realizable value. Foreign currency transactions All Monetary assets and liabilities are converted at the exchange rate prevailing on the last day of the year. All Monetary assets and liabilities are converted at the exchange rate prevailing on the last day of the year. Revenue recognition The Company follows the percentage completion method, on the basis of physical measurement of work actually completed at the balance sheet date, taking into account the contractual price and revision thereto by estimating total revenue and total cost till completion of the contract and the profit so determined has been accounted for proportionate to the percentage of the actual work done. Sales are accounted net of excise duty, Sales Tax, Discount, Returns and Rejections. Sales are recognized on dispatch of material from the factory of the company. Borrowing Costs: Borrowing costs that are attributable to the acquisition or construction of qualifying assets are capitalized as part of the cost of such assets. All other borrowings costs are expensed out. Contingent Liabilities: These are disclosed by way of notes on the Balance Sheet. Provision is made in the accounts in respect of those contingencies, which are likely to materialize into liabilities after the year end, till the finalization of accounts and have material effect on the position stated in the Balance Sheet. Segment Accounting Segment accounting policies are in line with the accounting policies of the Company. Segment revenue includes sales and other income directly identifiable with/ allocable to the segment including inter- segment revenue. Income which relates to the Company as a whole and not allocable to segments is included in Unallocable Corporate Income. Segment result includes margins on inter- segment transactions, which are reduced in arriving at the profit before tax of the Company. Segment assets and liabilities include those directly identifiable with the respective segments. Segment revenue resulting from transactions with other business segments is accounted on the basis of transfer price agreed between the segments. Such transfer prices a re either determined to yield a desired margin or agreed on a negotiated basis. Appendix 5 ANALYST COMMENTS BY GEOJIT BNP PARIBAS: Please be informed that the Pratibha Industries, a leading engineering and construction company, has been doing reasonably well. A company with annual turnover of Rs.805 crore in Financial Year 08 -09, earned net profit of Rs.45 crore in that year and the earnings per share (EPS) is Rs.26.80. For the six months ended September 09, net profit of the company is Rs.24 crore. which translates to an EPS of Rs.14.38 on a half yearly basis. Book value of the share as on March 09 balance sheet is Rs.134. At the current price (Rs.the price / book value ratio is 2.08. The figures as stated above indicate that the stock is not over valued and you may consider a buy. However, the sluggish trends in the construction and engineering industry in recent days due to the on going economic slowdown may check any strong upmove in the stock prices in the immediate term and it looks better to buy for the long term. Buying in small lots in different occasions would help you to accumulate t he stock cheap, if the price is falling.