Financial Analysis – Manufacturing/ Light Engineering Industry Ver /01/2013 GMITE7- Group 7

2 KEY TOPICS Industry, Companies, Background, and why we chose them? -1 min Summary of their B/S and P/L statements – 1-2 min Critical Ratios for both companies – 6-7 min Inference/Observations/Recommendations 3-4 min Any questions? 1-2 min 2

INDUSTRY, COMPANIES, BACKGROUND, AND WHY WE CHOSE THEM?

What comprises of Light Engineering Industry? Fosters industrial and economic growth by producing intermediate equipment/components for use in final products or infrastructure such as (a) power, (b) mining, (c) oil and gas, (d) consumer goods, (e) automotive and the (f) general manufacturing sector. Highly labor intensive, generates ample employment opportunities in the economy (skilled and semi-skilled labor) Sub sectors: Roller Bearing Industry, Welding Equipment, Medical and Surgical Instruments, Process Control Instruments, Steel Pipes and Tubes, Bicycle Industry, etc Examples: MRF, Apollo, Titan, Tube Investments, Havells, Crompton Greaves, ABB, V-Guard, etc What did we choose? Crompton Greaves (CG) Vs Tube Investments of India (TI)

Why did we choose them? Have different products, consumers, markets and nature of business (though in light engineering sector) Intention was to understand the nitty-gritty details of Annual Reports of two slightly different companies, and not take similar companies like MRF-Apollo or Crompton Greaves- Havells India. Standalone Reports : Focus only on light engineering part What do these companies do? Crompton GreavesTube Investments of India Key Businesses : Power Systems, Industrial Systems and Consumer Products Leader in energy infrastructure, power distribution equipment, green energy, locomotive equipment and solutions Significant player in consumer space Key Businesses : Cycle/ Components/ Electrical Scooters, Engineering, Metal formed Products. Key contributors of chains and other metal produces for automobile, process industry Leaders in bicycles, fitness equipment and eco-friendly electric bikes. Impetus on bicycles as mode of transport and leisure/fitness

SUMMARY OF THEIR B/S AND P/L STATEMENTS

Summary of B/S - Equity and Liabilities CG- Reserves and surplus increased by 3 % YOY and approx 15% more as compared with TI Non Current liabilities decreased by 3 % YOY Negligible short term borrowings, 25% out of 40% current liabilities are “Trade Payables” CG- Reserves and surplus increased by 3 % YOY and approx 15% more as compared with TI Non Current liabilities decreased by 3 % YOY Negligible short term borrowings, 25% out of 40% current liabilities are “Trade Payables” TI- Not many changes YOY. Non current liabilities 18 times that of CG Out of 40% current liabilities, 11% are short term borrowings and 21% are “Trade Payables” TI- Not many changes YOY. Non current liabilities 18 times that of CG Out of 40% current liabilities, 11% are short term borrowings and 21% are “Trade Payables”

Summary of B/S - Assets CG- Fixed assets decreased by 8% YOY Non Current investments increased by 3 % YOY Trade receivable is a heavy proportion of 38% (may be nature of business) CG- Fixed assets decreased by 8% YOY Non Current investments increased by 3 % YOY Trade receivable is a heavy proportion of 38% (may be nature of business) CG- Fixed assets remains same YOY and are 10% higher that CG Non Current investments decreased by 2 % YOY and are 3 times that of CG Trade receivable is almost constant at 17% and is almost half than CG CG- Fixed assets remains same YOY and are 10% higher that CG Non Current investments decreased by 2 % YOY and are 3 times that of CG Trade receivable is almost constant at 17% and is almost half than CG

Summary of P/L - Expenses CG- Over all expenses structure remained consistent YOY Raw material costs are more that 50% of overall expense OPEX is at 11-12% for CG CG- Over all expenses structure remained consistent YOY Raw material costs are more that 50% of overall expense OPEX is at 11-12% for CG CG- Over all expenses structure remained consistent YOY Raw material costs are more that 50% of overall expense, comparable to CG OPEX is at 21%, very high, almost double than CG CG- Over all expenses structure remained consistent YOY Raw material costs are more that 50% of overall expense, comparable to CG OPEX is at 21%, very high, almost double than CG

Summary of P/L – Income, Profits, Cash Flow Gross profit for CG is less but net profit is more, owing to high OPEX of TI TI’s Finance costs, though not comparable in over all scenario, are 5 times that of CG Cash or Cash Equivalents for CG is almost 4 times that of TI at end of FY12, though both companies have increased it substantially from FY11 Gross profit for CG is less but net profit is more, owing to high OPEX of TI TI’s Finance costs, though not comparable in over all scenario, are 5 times that of CG Cash or Cash Equivalents for CG is almost 4 times that of TI at end of FY12, though both companies have increased it substantially from FY11 Cash FlowCG FY12CG FY11TI FY12TI FY11 Net Cash from operating activities Net Cash from investing activities (-68)(-500)(-155)(164) Net Cash from financing activities (-152)(153)(-28)(92) Net Increase/Decrease 170(-397)725

CRITICAL RATIOS FOR BOTH COMPANIES

Review - Liquidity 12 CG TI Current Ratio Current Assets/ Current Liabilities Acid Test Ratio (Current Assets - Inventories)/ Current Liabilities Average Collection Period Average Receivables / Average Per day sales Inventory Holding Period Average Inventory / Avg Per day COS Overall CG’s liquidity position is better in comparison with TI. CG has invested in current assets [Mutual funds] CG has increased accounts receivable, hence higher current assets TI fares better than CG in average receivables area, which could be due to underlying nature of business. Supplier and customer payments terms are similar for CG TI is more into components for auto/process industries as well as consumer items like bicycles/fitness equipment, which are typically cash sales. CG is for long term infrastructure companies Retail business of CG is insignificant compared to TI CG has less debt but more cash, cash is possibly waiting for acquisitions?

Review - Turnover 13 CG(2012)CG(2011)TI(2012)TI(2011) A/C Receivables TO Ratio Net Sales/Net Accounts Receivables Inventory Turnover COGS/Inventory Accounts Payable TO Ratio Cost of Goods Sold/Accounts Payable Fixed Assets TO Net Sales/Fixed Assets Total Assets TO Net Sales / Total Assets Inventory Turnover is very good for CG implying better supply-chain, sales efforts and operations efficiency Days inventory holding is high for TI because CG stocks against pre orders as compared with consumer driven TI. TI’s A/C receivables turnover ratio is better, which could be due to more transactional nature of end users/consumers. CG’s customers are large corporates/Govt bodies for infrastructure with longer gestation period. CG’s Fixed Asset Turnover is high, in spite of comparable Total assets turnover between TI and CG CG has the ability to generate more revenue out of capital spending (asset utilization is higher) Though CG requires more current assets, accounts receivable, besides investments(Mutual funds), “cash and cash equivalents”(bank balances) is the major factor. This is also reflected in A/C Receivables TO ratio.

Review – Leverage Ratios 14 CG TI Debt Ratio Total Debt/Total Assets Debt Equity Ratio Long Term Debt/ Share holder’s equity Long Term Debt Equity Ratio Long Term Debt/ Share holder’s equity Interest coverage EBIT / Total interest DSCR [Debt Service Coverage Ratio] (PAT + Interest+ Tax)/(interest+loan repayment) Higher Debt and Debt-Equity Ratio for TI indicates higher borrowings for working capital requirement. DE ratio is also risky unless interest coverage ratio and DSCR are high, which is not the case for TI. Interest coverage and DSCR implies that TI will be always striving to source its operational costs which in turn has an effect on PAT Creditors will be willing to finance CG as compared to TI (Zero long term debt) TI uses most of its debts for its opex, which is not good position. They are just able to sustain day to day expenses

Review- Profitability 15 CG TI Gross Profit margin22.42% Gross Profit/Net Sales Net Profit Margin7.70% Net Profit/Net Sales Operating Profit Margin (%) 10.32% EBIT/Net Sales Operating Cash Profit Margin 8.93% EBITDA/Net Sales Return on assets8.54%6.27%9.69%10.98%PAT/Total Assets Return on Investment/Earning Power (No of times) 11.05%16.98%6.82%7.14%EBIT/total assets Return on Equity (%) PAT/share holder's funds Gross profit ratio is low for CG where as net profit ratio is high, indicating that TI has more op-ex and finance costs and overheads TI is generating more cash from operations, whereas overall expense is still high due to operational activities Lower operating cash profit margin for TI, because of heavy OPEX TI’s Return on Equity is mixed indication, which could be attributed to lesser proportion of share holder money and more of leverage money contributing to net profit as against ROE of CG.

INFERENCE/OBSERVATIONS/ RECOMMENDATIONS

Observations Creditor View Point CG’s liquidity position is very good and the resulting profit ratios, turn-over ratios CG’s leverage ratio is very good again, leaving it with enough potential/capacity to go for larger borrowing CG is poised for growth, which is lucrative for creditors Investor View Point At the outset the P-E and earnings per share may seem lucrative as an investor The recent leverage ratios and interest coverage maybe a risky proposition, besides the direct linkage to consumer linked industries/markets vs CG’s focus on infrastructure, green energy, which are focus areas of emerging markets Retail investor: Debt-Equity ratios is good for CG Institutional investor: High Cash balance and good asset turnover is advantageous for CG. As institutional investor, looks impressive on capitalizing current lower market price of CG and potential acquisitions owing to cash-balance Supplier View Point CG is better from supplier point of view: CG has better cash and less debt CG has more predictable inventory given the nature of business Good inventory turn over by CG tends to imply that CG maybe a better consumer/partner to work with on supply-chain part

Any Questions?

Review Objective: Performance, Position, Potential. As Creditors, we are interested in the liquidity review. Review points: 1.How well the company handles future demand for cash. 2.How the company has used past Borrowings 3.Current Capital structure 4.Past debt servicing i.e. whether source of repayment is operations or borrowing. As Investors, we are interested in future earning stream Review points 1.Performance record 2.Future potential expected return 3.Competitive position As Supplier, we are interested in liquidity ratios. [almost same objective as creditor] Review points 1.Cash reserves, ability to pay back for supplied material 2.Avg. number of days payables outstanding 3.Average Number of Days Receivables Outstanding

Some points: HeadCG FY12CG FY11TI FY12TI FY11 Income COGS Gross Profit Net Profit Gross profit for both companies is comparable in FY12, but Net profit of CG is more than 3 times TI. Why? 2.Finance costs of TI are 5 times that of CG 3.Cash or Cash Equivalents for CG is almost 4 times that of TI at end of FY12, though both companies have increased it substantially from FY11 4.Both companies use same method to account for depreciation.. -> Need more details? 5.Any other points?