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Major Project
A Report on Liquidated Damages due to late delivery and Financial Statement Analysis of Areva T & D India Ltd.
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Table of Contents
1.
Introduction 1.1 Areva, Worldwide 1.2 Areva T & D, Worldwide 1.3 Areva T & D, India 1.4 Areva T & D India Limited: Naini Works
2. Design of the study 2.1 Objective of the project 2.2 Research Methodology 2.3 Tools Used 3. Project 1: Liquidated Damages (LD) due to late delivery 3.1 LD: An Introduction 3.2 Data Interpretation and Analysis 3.3 Conclusion & Recommendations 3.4 Limitations of the study 4. Project 2: Financial Statements Analysis 4.1 FSA: An Introduction 4.2 Ratio Analysis 4.3 Stock Valuation Analysis
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4.4 Comparative Statements Analysis 4.5 Consolidated comparative analysis 4.6 Comparison of different Expenditure against Net Sales 4.7 Analysis of Expenditure and Operating Profit against Total Income 4.8 Finding and Conclusion 4.9 Limitations of the study
5. References
Chapter – 1 INTRODUCTION
1.1 Areva, Worldwide
Areva is a French public multinational industrial conglomerate that deals in energy, especially in nuclear power. The parent company is incorporated under French law as a société anonyme (public corporation). The French State owns more than 90%. Areva is just a name, inspired by Arevalo Abbey in Spain. The real name of the company is S.A. des Participations du Commissariat à l'Énergie Atomique. With manufacturing facilities in 43 countries and a sales network in more than 100, AREVA offers customers reliable technological solutions for CO2-free power generation and electricity transmission and distribution. Areva is the world leader in nuclear power and the only company to cover all industrial activities in this field. Areva’s 65,000 employees are committed to continuous improvement on a daily basis, making sustainable development the focal point of the group’s industrial strategy. AREVA’s businesses help meet the 21st century’s greatest challenges: making energy available to all, protecting the planet, and acting responsibly towards future generations. The company is engaged in nuclear power generation and transmission & distribution of electrical energy. It is the only company with a presence in each industrial activity linked to nuclear energy: mining, chemistry, enrichment, combustibles, services, engineering, nuclear propulsion and reactors, treatment, recycling, stabilization, and dismantling. It is the world leader in nuclear power and the only company to cover all industrial activities in this field. Areva 3
specializes in infrastructure construction projects for power, power transmission and distribution and railway transportation. AREVA, The Global specialist in energy & transport infrastructure is in the business of providing quality solutions & system design. AREVA is the government organization of France. It acquired the Transfer & Distribution division of ALSTOM, a private organization of France in 2004. It acquired the Naini division of Alstom in September 2005. The organization is World leader in energy business. It is No.1 in the entire nuclear cycle. It is No.3 in electricity transmission and distribution. MISSION: Innovate to contribute to ever cleaner, safer & economical Carbon dioxide free power generation & electricity transmission & distribution. STRATEGIC OBJECTIVE:  To achieve one-third of the world nuclear market & double digit operating margin.  To be one of the most profitable leaders in Transmission & Distribution
AREVA’s products and systems serve to transmit and distribute electricity, ensure the reliability, quality and safety of energy flows, as well as operate efficient networks through information management. AREVA is present at all stages of the supply power chain, from the generator to the large end-user, backed by a comprehensive services portfolio. As a solution provider, it brings together and optimize different disciplines, T&D businesses and third-party suppliers, to address your specific problems, however complex, and add value to your business. AREVA brings solutions that draw upon market segment expertise and are price-competitive. A global presence – AREVA is one of the world's leading T&D companies. It has over 25,000 employees located in more than 30 countries, with a dedicated sales force serving customers in over 100 countries. AREVA WAY The AREVA way represents AREVA core beliefs, values and aspirations. It illustrates a vision structure that guides the thoughts and actions of AREVA people in attaining the ultimate goal of becoming No.1 AREVA. It stipulates the way in which the goal is realized AREVA’s principles "Enable everyone to have access to ever cleaner, safer and cheaper energy" AREVA : THE WORLD MARKET LEADER AREVA ranked first worldwide in the front end of the nuclear cycle. The group is the world leader in the market for the “open” cycle and for the supply of storage systems in connection with the “closed” cycle. With a treatment capacity of 1,700 metric tons per year, AREVA group’s market share represents two-thirds of the worldwide market. AREA OF OPERATION Uranium mining WORLD POSITION 3rd 4 WORLD MARKET SHARE 20%
Conversion Services Nuclear Fuel T&D Nuclear power Reactors & Services Reprocessing Recycling Enrichment
1st 1st 3rd 1st 1st 1st 1st 1st Table: 1.1.1
25% 30% 9% 30% 30% 70% 80% 25%
ENERGY: The core business of AREVA OPERATIONS AREVA has four operation divisions: Nuclear Energy  Front End Division: Nuclear fuel fabrication from the uranium ore.  Reactors & Services Divisions: Design, construction and maintenance of nuclear Reactors.  Back–End Division: Spent fuel reprocessing and recycling operations, dismantling of decommissioned installations. Electricity Transmission and Distribution  T&D Division: Solutions for electricity transport.
FRONT END DIVISION The Front-End Division covers all nuclear operations leading up to actual electricity production. The Front-End Division's operations are organized around four business units: • Mining: prospecting, mining and concentration of uranium ore;
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• Chemistry: conversion of uranium ore Enrichment: enrichment of uranium hexafluoride; • Fuel: manufacture of nuclear power plant fuel.
into
uranium
hexafluoride;
BACK END DIVISION The Back-End Division's solutions and services enable its electricity provider customers to recycle 96% of its spent fuel after its use in nuclear power plants. The Back-End Division's operations respond to sustainable development issues arising out of nuclear energy production. Areva also offers intermediate storage solutions as well as logistics, engineering and services. The Back-End Division is made up of following five business units:
• Reprocessing and recycling: the separation of spent fuels into recyclable materials and final waste, recycling of those products as well as waste conditioning. • Logistics: design and manufacture design of casks, transport and storage of nuclear materials. • Cleanup: maintenance of installations, radiation protection, decontamination and dismantling of decommissioned installations, etc. • Engineering: engineering services contributing to the design and construction of installations for global nuclear operators, fabrication of mechanical systems for plant cleanup operations. REACTORS AND SERVICES DIVISION The Reactors & Services Division covers operations concerning the design and construction of nuclear reactors, including EPR (Evolutionary Power Reactor) type reactors. It is the world's leading supplier of equipment and services for nuclear energy. The group also supplies maintenance, modernization and capacity improvement services for existing reactors. The Reactors & Services Division is made up of 6 business units: • Plants: design, construction and startup of new reactors, and monitoring, renovation and optimization of existing reactors. • Equipment: manufacture of key components for nuclear power plants. • Nuclear services: reactor optimization services (inspection, maintenance, improvement, etc.).
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• Nuclear measurement: design and construction of systems and devices designed to measure radioactivity. • Consulting and information systems: IT services (information management, integration and consulting). • Areva TA: design, production and maintenance of nuclear reactors for the propulsion of submarines and aircraft carriers. TRANSMISSION AND DISTRIBUTION DIVISION Areva T&D has over 100 years of expertise and dedication in bringing power to people worldwide. It is one of the world's leading T&D companies. It has over 25,000 employees located in more than 30 countries, with dedicated sales force-serving customers in over 100 countries and has 67 industrial sites in this division. Transmission and Distribution: power transmission and distribution forms 1/3 of the Areva’s energy business.
1.2 Areva T&D, Worldwide
Areva T&D is a division of AREVA, world leader in the energy business. It is one of the top three global players in the transmission and distribution of energy. AREVA T&D offers solutions to bring electricity from the source onto the power network. It builds high- and medium-voltage substations and develop technologies to manage power grids worldwide. It is a full-fledged solution provider, offering safe, reliable and efficient power distribution. It has 68 industrial sites and a presence in more than 100 countries. It serves 30,000 customers in 160 countries. Areva focuses on the following: 1. A complete solution provider – As a world leader in the transmission and distribution of energy, we provide you with a complete range of innovative products, systems and services across the whole energy value chain: from generation to power consumption. 2. Peace of mind, wherever you are – Our single focus is the energy industry, and we play a major role in the evolving power transmission and distribution industry. 7
With 120 years of expertise and our persistent commitment to research and development, we bring more power to more people across the globe. 3. Your partner every step of the way – Whatever your geographical, environmental and timing needs, AREVA T&D provides an end-to-end solution, accompanying you through every step of your power supply project.
AREVA T&D's leading position in today's energy market follows over 125 years of pioneering innovation, technological expertise and an unwavering commitment to quality and customer service. From its initial creation in 1878 to its growing worldwide presence today, AREVA T&D has gone from strength to strength. Areva T&D is a transmission and distribution worldwide leader in instrument transformer, disconnectors, static power supplies, energy management systems, gas-insulated switchgear. The AREVA T&D division supplies products, systems and services for electricity transmission and distribution. They are used to regulate, switch, transform and dispatch electric current in current power networks connecting the power plant to the final user. AREVA T&D products and solutions play an essential role in electricity network reliability, quality and safety. The division’s customers are electric utilities as well as the oil, mining and metals, wind energy, paper and glass, transportation, and power engineering industries. Areva T&D is a division of AREVA, world leader in the energy business. It is one of the top three global players in the transmission and distribution of energy. The following figure shows Areva T & D’s operations.
AREVA T&D offers solutions to bring electricity from the source onto the power network. We build high- and medium-voltage substations and develop technologies to manage power grids worldwide. We are a full-fledged solution provider, offering safe, reliable and efficient power distribution. Annual business volume of Areva T&D is €4.3 billion. It has a unique sales force in over 100 countries for all your T&D needs. It has 72 industrial sites worldwide. It has 25,000 employees on five continents: AREVA T&D recruited one employee every 30 minutes in 2007. It serves 30,000 customers in over 100 countries. Sales revenue of Areva T&D in Europe: 42%, in Asia-Pacific: 24%, in Americas: 13%, in Africa and Middle East: 21%. Employees of Areva T&D in Europe: 55%, in Asia-Pacific: 28%, in Americas: 12%, in Africa and Middle East: 5%.
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1.3 Areva T&D, India
Areva T&D India Limited, is a subsidiary of AREVA, France. It came to India by acquiring the worldwide T & D sector of Alstom, France. Areva T&D India Limited, formerly known as Alstom Limited was originally incorporated as General Electric Company of India (GECI) in 1911. GECI was amalgamated with the English Electric Company of India (EEI) in Apr.'93, and the name was changed to GEC Alsthom India. The company was promoted by GEC Alsthom, Netherlands, which has interests in GEC Alsthom Triveni. The name of the company was changed from Alstom Ltd to Areva T&D India Ltd from 23rd September, 2005. BRINGING POWER TO MORE MARKETS WORLDWIDE AREVA T&D provides comprehensive electrical solutions for utilities and electro-intensive industries. Transmission - Products, turnkey systems and 9 Distribution – Equipment and
integrated services for network management and high-voltage substation operation. Power Generation - A complete portfolio of solutions to ensure grid connections and the inhouse electrical distribution of all types of power. Industries & Buildings Advanced, mediumvoltage solutions for electrical distribution of major industrial, commercial and public infrastructures. Oil & Gas - A range of intelligent, integrated solutions and project management for electrical distribution and control.
services for the development and enhancement of distribution networks. Railways - High-quality products, systems and dedicated services for electrical railway infrastructures.
Mining & Metal – Systems to meet the complex distribution needs of the mining and metals industry.
GROWTH HISTORY The company came out with a rights issue in Jul.'94 to fund the normal capital expenditure, and augment long-term sources of working capital. In 1982-83, it started manufacturing solid state generators and transformers, vacuum switches and electric motors in collaboration with GEC International Controls, UK and Electroimplex, Bulgaria. In 1984, collaboration agreements were signed with GEC Power Transformers, UK, and Raydne, UK, to manufacture medical electronic equipment. Another collaboration agreement was signed with GEC Machines, UK, to manufacture hydro-electric generators. The company has obtained ISO 9001 certification for cubicle gear engineered products, switchgear stock products, relays and control panels at Pallavaram works, Madras, and for fusegear stock products at Hosur works. Its T&D projects at Madras plans to get 10
certified to the latest version of ISO 9001 standard in the fiscal 2002. During 1999-2000, two collaboration agreement were entered with Alsthom T&D SA, France for the manufacture of 72.5 KV SF6 Circuit Breakers and 420 KV SF6 Circuit Breakers both operated by spring mechanism. The company has spun off the energy division into a joint venture with KoCoS Messtechnik of Germany. The new company, Alstom Energy Measurements & Systems Ltd, was incorporated in Feb.' 00 in Chennai. During August 2001 the 315 MVA 400 kV Transformer was commissioned successfully. The company has got the approval of High Court of Mumbai for it's scheme of amalgamation of ALSTOM Transport Ltd, ALSTOM Systems Ltd and ALSTOM Power Boilers Ltd with itself. During 2002-03 it has successfully tested new generation 145 kV circuit Breaker-Types GL312 as per IEC standards. It has also commissioned the 420 kV Circuit Breaker for the 4*500 MW Super thermal Power Plant at NTPC, Talcher. During 2004-05 the company has increased its installed capacity of Switchgear- All types and Transformers & reactors by 1880 Nos and 2300000 kVA respectively. With this expansion the total installed capacity of Switchgear- All types and Transformers & reactors has increased to 90510 Nos and 8500000 kVA respectively. During April 2005 Alstom Holdings SA and AREVA T&D SA (Jointly with Areva T&D Holdings SA) has reached an understanding for acquisition of up to 26464400 equity shares (66.35%) held by Alstom Holdings in the company for a consideration of Rs.806 Million. After the said acquisition the name of the company was changed from Alstom Ltd to Areva T&D India Ltd from October 2005. Further Alstom has sold its T&D business to AREVA. In January 2006 the company as decided to transfer its non T&D business (Meters & Motors) as a going concern to the company's subsidiary, Alstom Industrial Products Ltd for a consideration of Rs.413 million.
The National Presence
BRANCHES IN INDIA
AREVA T & D INDIA LIMITED has eight branches in India. PLACE Kolkata NO. OF BRANCHES 3 11
Chennai Bangalore Allahabad (naini) Pondichery
2 1 1 1 Table: 1.3.1      Table: 1.3.2 Crompton Greaves Indo Tech Transformers Volt amp Transformers Limited SCHNIDER SUNTEN
MAJOR COMPETITORS IN INDIA
      ABB BHEL Bharat Bijlee Emco Vijai electricals Siemens
MAJOR CUSTOMERS IN INDIA       Reliance Energy TATA (JUSCO) JINDAL group BECIL TISCO Indian Railway     
Table: 1.3.3 Areva T&D India Limited has eight branches in India. Three branches in Kolkata, two in Chennai, one each in Bangalore, Allahabad (Naini) and Pondicherry. Major competitors of Areva in India are ABB, BHEL, Bharat Bijlee, Emco, Vijai electrical, Siemens, Crompton Greaves, Indo Tech Transformers, Volt amp Transformers Limited, SCHNIDER, SUNTEN. Major customers of Areva in India are Reliance Energy, TATA (JUSCO), JINDAL group, BECIL, TISCO, Indian Railway.
Bhutan Power Popular Motors Corporations S. L. Enterprises PRAXAIR INDIA PVT. LTD. UPPCL
1.4 Areva T&D India Limited : Naini works
Naini unit of AREVA T & D INDIA LIMITED was established in 1957. It is located 12 kilometers from Allahabad in the state of Uttar Pradesh (about 600 kms from New Delhi and 800 kms from Calcutta). The unit is spread over a total area of 87276 meter square providing employment to 658 people. The unit has the certification of IMS. The unit is engaged in the production of power transformers, distribution transformers and MV product lines. It is the only unit in India producing the oil base transformers. The Naini unit of AREVA deals with the business of Transmission & Distribution only. As a whole this T&D forms about one third of the business of the AREVA on the global scale. In India the only unit of Areva manufacturing Transformers is in Naini. The unit is capable of 12
manufacturing and servicing transformers up to a voltage range of 400 KV class. At present Naini works has installed capacity to manufacture 4929 KVA power transformers annually. The transformer that is below 20 MVA are called Distribution Transformers. The Switch Gear business at Naini started in the year 1964. The company mainly deals in the manufacturing of medium voltage switchgears. The Naini unit is fully capable of designing, manufacturing, testing and commissioning of transformers of 315 MVA up to 400 KVA class.
Locational Choice - Why at Naini?  UP’ the large state with highest population & maximum urbanization in the country.  ‘Allahabad’ the Home Town of Nehru the most famous Prime Minister.  Post Independence ‘UP’ identified as the State with highest potential in Power Sector development.  ‘Naini’ the first organized industrial area planned in the country.  No transformer producer in the Northern Region.
Product History – Areva T & D India Limited (Naini Works)
       1957 1964 1985 1991 1996 1997 2004 : Established Transformer : Motor, Switchgear Added : Introduced Vac. Switchgear : Motor Operation Shifted : 400kv Transformer : Dist Transformer : Pss Introduced
Major Importing Countries from Naini Works      Zimbabwe Brazil China Myanmar Argentina      Columbia Croatia Greece Malawi Nepal      Australia Bangladesh Bhutan Uganda Vietnam
CERTIFICATION  ISO 9001 since 1997  ISO 14000 since 2005
At present Naini works has installed capacity to manufacture 4929 KVA power transformers annually. The transformer that is below 20 MVA are called Distribution Transformers. The Switch Gear business at Naini started in the year 1964. The company mainly deals in the manufacturing of medium voltage switchgears. The Naini unit is fully capable of designing, manufacturing, testing and commissioning of transformers of 315 MVA up to 400 KVA class. 13
WORKFORCE DEPT/EMPLOYEE TYPE PT DT SW CS TOTAL MGT 95 44 39 30 208 Table: 1.4.1 N–MGT 205 71 58 38 372 CONTRACT 43 11 24 0 78
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Chapter – 2: Design of the study
2.1 Objective of the Project
1. Study of Areva T & D India Ltd. Naini Works 2. To find out the liquidated damages incurred by the company 3. Analysis of liquidated damages due to late delivery 4. To provide recommendations to reduce the LD 5. Analysis of financial statements on the basis of liquidity, solvency and profitability
6. Comparative analysis of financial performance of company for the year of
2007 & 2006
2.2 Research Methodology
By the virtue of its basic assumption, the project was of analytical nature which mainly directed towards the numerical and strategic analysis of the given secondary data. The study is mainly done in three phases:1. Preliminary understanding of basic practical aspects of liquidated damages. 2. Data sorting and analysis. 3. Drawing conclusions and recommending suggestions. All the data are collected from the following secondary sources: 1. Purchase Order of customers 2. Sales data worksheets provided by the company 15
3. List of Customers for LD calculation provided by the company 4. Sales invoice provided by the company 5. Printed communications made between company & customers 6. Annual reports of Areva T & D India Ltd. for the year 2007 & 2006 7. Information available on the websites of Areva group
2.3 TOOLS USED
I had used following tools to get help in designing and conducting the study and for the preparation of project report. • • Microsoft Excel Microsoft Word
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Chapter – 3 Project 1: Liquidated Damages due to late delivery
3.1 LD: An Introduction
Liquidated damages (also referred to as liquidated and ascertained damages) are damages in which that the amount recoverable in the event of a specified breach (e.g., late performance) is agreed at the date of a contract. In such circumstances a liquidated damages provision will be included in the contract. When the parties to a contract agree to the payment of a certain sum as a fixed and agreed upon satisfaction for not doing certain things particularly mentioned in the agreement, the sum is called liquidated damages. The amount of money specified in a contract to be awarded in the event that the agreement is violated. The fixed amount which a party to an agreement promises to pay to the other, in case he shall not fulfill some primary or principal engagement into which he has entered by the same agreement. The damages will be considered as liquidated in the following cases: 1. When the damages are uncertain and not capable of being ascertained by any satisfactory or known rule - whether the uncertainty lies in the nature of the subject itself or in the particular circumstances of the case; 2. When, from the nature of the case and the tenor of the agreement, it is clear that the damages have been the subject of actual and fair calculation and adjustment between the parties. The purpose of inserting liquidated damages clause is only to ensure that the contractor shall execute the work with due diligence and in a workmanlike manner and strive to complete the whole work as given in the contract within the stipulated time. It must be remembered that the stipulation with regard to liquidated damages is not at all aimed to provide revenue to the employer. It is thus, desirable that recourse to imposition of 17
liquidated damages should be taken only in extreme cases. It must be understood that by realizing the amount of liquidated damages, the employer is not only reducing the working capacity of the contractor but is also running the risk of bringing the work to a complete halt. Many legal and financial complications can and do arise consequently. There may be an injunction from the Courts restraining the employer from proceeding with the work further pending' decision of the case. In addition, the risk of additional financial burden due to efflux of time has also to be borne in mind by the employer. The provisions of liquidated damages in Indian Law are given in sec. 73-75 of chapter 6 of Indian Contract Act, 1872. Invocation of liquidated damages clause should be taken recourse to by the employer only in such cases where there can be no two opinions that the contractor does not have the capacity to do the work- nor he will be able to complete the work within a reasonable time after the time stated in the contract expires. Any action taken in a hurry would land the employer in problem. Some amount of restraint in proceeding against the contractor must be exercised. The contractor may have genuine problems which he could not have foreseen with reasonable diligence at the time of entering into contract. If the employer takes into consideration the fact that it does not pay the contractor to delay execution of work, then he has to investigate as to why delay is occurring. The employer must endeavor to find solutions rather that saying that it is not his headache, since the aimed objective of the employer is to get the work completed rather than enter into any legal or financial complications.
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3.2 Data Interpretation and Analysis
Data Interpretation
For liquidated damages, following companies were given for calculation: 1. Abhishek Industries Limited 2. Asea Brown Boveri Limited 3. Bharat Heavy Electricals Limited 4. Chandigarh Distillers & Bottlers Limited 5. Department of Atomic Energy 6. DSCL – Ajabpur 7. Emami Paper Mills Limited 8. Essar Constructions (India) Limited 9. Essar Steel Limited 10.Gajambuja Cements 11.Gujarat Ambuja Cements Limited 12.Hindustan Petroleum Corporation Limited 13.Ispat Industries Limited 14.Jaiprakash Associates Limited 15.Jindal Stainless Limited 16.PowerGrid Corporation Limited 17.Rain Industries 18.Reliance Industries Limited 19.Reliance Jamnagar Infrastructure Limited 19
20.Reliance Petroleum Limited 21.SPS Steel & Power Limited 22.Tata Iron & Steel Company Limited 23.Tata Motors Limited 24.Thermax Limited 25.Welspun Gujarat Stahl Rohren Limited
LD charged by the companies
COMPANY Abhishek Industries Limited Asea Brown Boveri Limited Bharat Heavy Electricals Limited Chandigarh Distillers & Bottlers Limited Department of Atomic Energy DSCL – Ajabpur Emami Paper Mills Limited Essar Constructions (India) Limited Essar Steel Limited Gajambuja Cements Gujarat Ambuja Cements Limited Hindustan Petroleum Corporation Limited Ispat Industries Limited Jaiprakash Associates Limited Jindal Stainless Limited PowerGrid Corporation Limited Rain Industries Reliance Industries Limited Reliance Jamnagar Infrastructure LD CHARGES (Rs.) 0 36285.71 2836616 386000 0 0 537000 254867.9 149100 379419 751500 487900 83640 0 1356313 37100 995000 201000 3621429 20 Total Sales by Areva (Rs.) 28984000 1270000 120082030.20 7720000 210000 NA 10740000 9485000 2982000 7588373 15030000 4879000 2788000 9970000 27126266 645000 19900000 4020000 78000000
Limited Reliance Petroleum Limited SPS Steel & Power Limited Tata Iron & Steel Company Limited Tata Motors Limited Thermax Limited Welspun Gujarat Stahl Rohren Limited GRAND TOTAL
926357 0 129000 431786 0 320000 1,36,76,363 Table: 3.2.1
19800000 28900000 4300000 8477000 NA 6400000
Data Analysis
The data of those companies have been analyzed whose LD charges is not zero. 1. Asea Brown Boveri Limited
Fig: 3.2.1 21
LD Clause: 0.5% of total contract value as penalty or max up to 5 % of the contract value.
Payment Terms: 10% of ex works value of contract within 7 days of submission of ABG, 10% of ex-works value of contract within 10 days of submssion of drawing, 80% against LC with 60% of credit, with 10% of PBG.
2. Bharat Heavy Electricals Limited
Fig: 3.2.2 LD Clause: 0.5% per week of delay or part thereof on undelivered portion subject to ceiling of 5% on ex-works
value of undelivered portion. 0.5% of total contract price per week or part thereof subject to a max. of 10% excl.taxes,duties & freight.
Payment Terms: 10% payment against drawing submission along with 10% PBG.Balance 90% within 30 days from the date of despatch against original/copy of LR and other despatch documents presented directly to BHEL. 5% of the total basic price against submission and approval of all basic design documents.80% of basic price of material supplied,as per approved billing schedule alongwith applicable100% taxes and duties for the consignment shall be paid against despatch documents on pro rata basis.10% of basic price along with freight charges,insurance,octroi if any will bewill be released on pro rata basis after submission of MRC which is issued by the project site engineer after receipt of material and its physical verification at site.5% of the total basic price shall be released after submission of all final documents including as built drawings,O&M manuals etc.as applicable. 22
3. Chandigarh Distillers & Bottlers Limited
Fig: 3.2.3 LD Clause: LD @ 0.5% per week of delay shall be deducted subject to a max of 5% of contract price.
Payment Terms: 10% against advance payment will be released against submission of Advance Bank Guarantee as per CDBL format.The ABG will be valid till 30 days from the date of receipt of material at our site.20% against submission of drawings.60% against along with taxes and duties will be released against submission of proforma invoice.10% against performance bank guarantee as per CBDL format valid for 1 year from the date of commissioning or 18 months from the date of supply whichever is earlier.
4. Emami Paper Mills Limited
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Fig: 3.2.4 LD Clause: 0.5% of the total price per week of delay or part thereof subject to a maximum of 5% of the total price.
Payment Terms: 20% advance against submision of corporate guarantee.80% FOT despatching center price of this order.
5. Essar Constructions (India) Limited
Fig: 3.2.5 24
LD Clause: LD @ 0.5% of P.O.price for delay of each full week or part thereof,subject to a max of 5% of P.O.price for undelivered portion. Inspection date will be considered as the date for charging LD. Payment Terms: 10% against Proforma Invoice and submission of original ABG,90% with taxes and duties against proforma invoice and submission of PBG for 10% of order value. 20% as advance against submission of ABG,70% with taxes and duties against inspection & clearance by Essar at our works and balance 10% against submission of PBG.
6. Essar Steel Limited
Fig: 3.2.6 LD Clause: LD @ 0.5% per week beyond 10 weeks from drawing approval subject to a max of 5% of basic value. LD @ 0.5% of P.O.price for delay of each full week or part thereof,subject to a max of 5% of P.O.price for undelivered portion.
Payment Terms: 20% against final drawing approval and submission of original ABG,80% with taxes and duties against receipt of material at site and submission of necessary documents. 20% interest free advance along with the order,and balance 80% including 100% taxes and duties against Proforma Invoice before despatch. 25
7. Gajambuja Cements
Fig: 3.2.7 LD Clause: 0.5% of the total order value for weeks delay subject to a celling of 5% of the total order value.
Payment Terms: 10% of the basic order value as advance along with LOI & 5% on submission of approved drawings both after submission 15% advance Bank 26
Guarantee. 70% of the order value within 30 days on receipt of material at site.55 of the value within 30 days against submission of 6 sets of final approved drawngs.Balance 10% of the order value within 30 days of submission of Performance Bank Guarantee.
8. Gujarat Ambuja Cements Limited
Fig: 3.2.8 LD Clause: 0.5% of the total order value for weeks delay subject to a celling of 5% of the total order value. Payment Terms: 10% of the basic order value as advance along with LOI & 5% on submission of approved drawings both after submission 15% advance Bank Guarantee. 70% of the order value within 30 days on receipt of material at site.55 of the value within 30 days against submission of 6 sets of final approved drawngs.Balance 10% of the order value within 30 days of submission of Performance Bank Guarantee.
9. Hindustan Petroleum Corporation Limited
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Fig: 3.2.9 LD Clause: Price reduction by .5% of the total order value per week of delay or maximum of 5%.
Payment Terms: 10% on approval , 20% on receipt of material,55% payment within 30 days after receipt of material ,5% on receipt of material at site ,10% on submission of performance bank guarantee. 10% against approval, 70% against supply,20% against errection ,testing & commision.
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10.Ispat Industries Limited
Fig: 3.2.10 LD Clause: 0.5% of the total order value per week to a maximum of 3% of the total order value.
Payment Terms: 15% advance against Bank Gurantee, 75% alongwith taxes and duties against dispatch details, 10% against performance Bank Gurantee for 1 year after successful comissioning of transformer.
11.Jindal Stainless Limited
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Fig: 3.2.11 LD Clause: 0.5% per week maximum to 5% of the total order value, one week grace period.
Payment Terms: 10% of the contract price against bank guarantee, 10% of the contract price after approval of drawings, 70% of the contract price against despatch documents, 10% of the contract price against submision of performance bank guarantee.
12.PowerGrid Corporation Limited
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Fig: 3.2.12 LD Clause: LD @ 0.5% per week of delay shall be deducted subject to a max of 5% of contract price.
Payment Terms: 100% payment shall be debited within 30 days from the date of despatch.
13.Rain Industries
Fig: 3.2.13 LD Clause: Price reduction by 0.5% of the total order value per week of delay or maximum of 5%.
Payment terms: 10% as advance,15% on approval od data,65% of basic on dispatching.
14.Reliance Industries Limited
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Fig: 3.2.14 LD Clause: LD @ 0.5% of P.O.price for delay of each full week or part thereof,subject to a max of 5% of P.O.price for undelivered portion.
Payment Terms: 100% of order value on pro rata basis with full taxes and duties shall be paid within 30 days from the date of receipt of GOODS.
15.Reliance Jamnagar Infrastructure Limited
Fig: 3.2.15 32
LD Clause: LD @ 0.5%,max 5%
Payment Terms: 10% on drawing submission.90% within 30 days of receipt at site.
16.Reliance Petroleum Limited
Fig: 3.2.16 LD Clause: LD @ 0.5%, subject to a max of 5% of P.O. price.
Payment Terms: 10% on drawing submission.90% within 30 days of receipt at site.
17.Tata Iron & Steel Company Limited
33
Fig: 3.2.17 LD Clause: 0.5% per week of delay on complete machine. 0.5% per week and maximum 3% will be deducted from your pending/forthcoming bill.
Payment Terms: 20%of the quoted value against Bank Guarantee,70% on receipt of material,10% payment on complete installation & submission of Performance Bank. 100% within 30 days of sfty. recpt. Of material at site.
18.Tata Motors Limited
34
Fig: 3.2.18 LD Clause: 0.5% per week maximum to 6% of the order value.
Payment Terms: 20%of the quoted value against Bank Guarantee,70% on receipt of material,10% payment on complete installation & submission of Performance Bank.
35
19.Welspun Gujarat Stahl Rohren Limited
Fig: 3.2.19 LD Clause: 0.5% per week maximum to 5% of the order value.
Payment Terms: 20% of the total contract value against Bank Guarantee, 20% of the contract value against approval of drawings, 50% against after inspection prior to despatch documents, 10% against performance bank guarantee for defect liablity period.
Findings of the study
From the above observations, it is cleared that 1. Areva is paying full penalty i.e. 5% for 12 companies out of 19 companies (total sample taken). 2. For the rest 7 companies, LD is varying from 2%-5%. 3. Areva is paying LD of Rs. 1,36,76,363 for cost of Rs. 41,92,96,669 which is 3.26% of total basic price. 4. It means that Areva is loosing its profit by 3.26% (for sample companies only). 5. Sometimes LD was charged on undelivered part and sometimes it was charged on full purchase order value in spite of partial delivery. 36
6. For some companies like BHEL, Thermax, Abhishek, Gujarat ambuja, Reliance Jamnagar Infrastructure Limited, Jai Prakash Associates which are regular major customers, Areva is paying LD for most of the orders. 7. Many times customers has given full/ partial waivers from LD depending upon negotiations between Areva & customers. Like Abhishek Industries has given full waiver from LD. 8. Many times LD was charged on technical terms (LD @ Rs40,000/- per KW of additional losses) instead of delivery time. 9. Ceiling on LD which is generally 5% is playing an important role in recovery of payment.
Impact on various aspects
1. Profitability – Due to liquidated damage clause imposed by customers, Areva is losing a significant amount of profit which is around 3.26% (for sample companies only) of total cost of the product. 2. Turnover – In whole, LD is adversely affecting the turnover. From the data it is very clear that LD paid by Areva, is reducing the turnover of company by Rs. 1,36,76,363. 3. Market share – Due to late delivery of the products, customer may be interested to purchase the product from the competitors in its next purchase. In this way, company may lose its market share to its competitors. 4. Competitors – Competitors may take unfair advantage of this situation and may persuade the cutomers by offering them delivery at the right time. 5. Image – Image of the company may be hampered due to the late delivery. As if customer’s work gets suffered and he realizes any loss due to this, a negative image towards company may be created in the mind of the customer. 6. Reliability – Due to late delivery of the product, customer will rely less on the company for the future purchases as company is unable to supply the order within given time period. 7. Accounting problem – Due to late delivery company is not able to recover the cost of product in scheduled time period. There may be a case that LD is paid in the next financial year instead of current year and this will create problem in accounting work. 8. Tax Benefit – According to Income Tax Act 1956, contract losses (LD) is a deductible item from the profits of the company, so it is like a tax shield for the 37
company. In this way, if LD is paid in the next financial year, company will not able to take the advantage of tax shield in the current financial year. 9. Loss of Government Subsidy (If any) – Suppose government is providing subsidy for a fixed amount of turnover and due to late delivery company is not able to achieve the targeted turnover, then the company will not be able to take the advantage of the proposed subsidy. 10.Panic situation in the company – Late delivery may create mental agony in the mind of employees as they will be in pressure for dispatch of the material as soon as possible to reduce the LD as less as possible. 11.Loss in incentives (both monetary & non-monetary) – As company is losing significant amount due to LD, company may be less interested to give monetary (bonus etc.) & non-monetary (promotions etc.) incentives to employees. 12.Problems in production planning – Suppose company has to dispatch 10 items in a year and production planning has been done then late delivery of any item in the course of year will disturb the planning schedule. 13.Problems in inventory management – As late delivery causes mismanagement in production planning, it creates problems in procuring and handling inventory. 14.Compromise with quality – Most of the time technical specifications have tolerance. So in case of late deliveries company may be interested for lower limit specifications instead of high quality product. This way company will be compromising with quality to make the deliveries on time. 15.Extra effort by company to take further orders – Due to competitors’ offers to the customers (like delivery on time), marketing department have to make more efforts for future orders. 16.Buyer’s dominance – If company is not able to deliver the orders on time, then customer may take unfair advantage of the situation by imposing new set of LD clauses.
3.3 Conclusions and Recommendations
From the above study, it can be concluded that Areva is losing a large amount of profit due to liquidated damages for which the main reason is its limited plant capacity. As Areva has more customer orders beyond its plant capacity, it is not able to supply the product to its customers on time. Due to this drawback, customers may switchover to its competitors and allow them to take the advantage which may be a reason for reduction of revenue of Areva. The following steps are recommended to overcome the LD problem:-
38
1. Increase the plant capacity by proper planning like expansion of plant, increasing the workforce. 2. By motivating the workforce to achieve the target within the given time. 3. By negotiating with customers in a planned way. 4. It is also advisable to display the dispatch date of a particular transformer so that the workforce as well as management both is under pressure to complete the job within the given time. 5. By distributing the LD amount among the employees, if the product is delivered on time, which will create a zeal in the employees towards their job. 6. If the step 5 materialises, then it will be in favor of company as it will improve the image of the company among the competitors and employees will be more satisfied.
3.4 Limitations of the study
1. LD is calculated only for few customers, not for all customers of Areva. 2. Records of some companies were not available 3. While calculating LD, bill date is assumed as actual receiving date by customer as record of actual receiving date is not available. 4. Study was done only for distribution transformer department and not whole plant 5. Study was done only for 6 weeks 6. I was not allowed to visit the production unit
39
Chapter – 4 Project 2: Financial Statement Analysis
40
4.1 FSA: An Introduction
As we know, Financial Analysis is the process of identifying the financial strength and weakness of the firms by establishing proper relation between the items of balance sheets and the profit and loss account. As the analysis is done keeping in mind all the different aspect regarding trade creditors suppliers of debts, investors and management of the firms also. The report contents all the ratio analysis, be it Liquidity ratio, Leverage ratio, Activity ratio and Profitability ratio.
4.2 Ratio analysis
LIQUIDITY RATIO: This ratio is used to meet the obligation of the firms to meet it current obligation (liabilities).It also measures the firm’s strength to meet to its schedule to pay its short term debt. It measures the proportion of current asset the firm has against its current liabilities. The failure of company to meet its obligation due to lack of sufficient liquidity, will result in poor credit worthiness, loss of credit worthiness, loss of creditor’s confidence. A very high degree of liquidity is also bad because it leads to idle assets, which is a loss for the firms. Here the firms fund will unnecessary be blocked in the fund. There should be proper balance between current asset and current liability. Major ratios     under LIQUIDITY RATIO: Current ratio Quick ratio Cash ratio Net Working capital ratio
LEVERAGE RATIO: Leverage ratios are also called FINANCIAL RATIO or CAPITAL STRUCTURE RATIO. This ratios are having more importance for long term creditors like debenture holder, financial Institutions . These ratio indicate mix of funds provided by owners and lenders. The general rule is, there should be appropriate mix of debt or owners equity in financing the firm’s asset. Ways of asset financing The firms try to finance its asset by debt or equity or both. The firm has legal obligation to pay its interest on debt irrespective of the profit made or not. The share holders prefer debt for financing if borrowed fund is having interest rate less than the return on capital employed. The process of magnifying the shareholder return through the use of debt is called “FINANCIAL LEVERAGE “, ”FINANCIAL GEARING”, or “TRADING ON EQUITY”. 41
The high debt firm find it difficult to get the fund from the market as debt because of risk of nonpayment. The creditors treat the owners’ equity as the margin of safety. If the equity base is thin the creditors’ risk will be high. Thus the leverage ratio is used to measure the financial risk and firms ability of using debt to shareholder advantages. The firms that are going to lend other firms analysis these ratio to make it ensure whether they should lend this firm or not. Different ratios under this head are:  Debt ratio  Debt-equity ratio  Capital employed to net worth ratio  Other debt ratio  Coverage ratio ACTIVITY RATIO: Activity ratio are employed to evaluate the efficiency with which the firm manages and utilize its assets .These ratios are also called turn over ratio because these ratios indicate the speed with which asset are being converted or turned over into sales. Activity ratio represent relationship between sales and assets . Several activity ratios are used to judge the effectiveness of asset utilization. Different ratios under activity ratio are:  Inventory Turnover  Debtor’s turnover  Asset turnover  Working capital turnover PROFITABILITY RATIO: A ratio that explains the profitability of a company during a specific period of time. It explains how profitable a company is. These ratios can be compared during different financial years to see the overall performance of a company. The shareholders are very much concerned with these ratios. The gross and net profit margin ratios taken together provide an understanding of the firm’s cost and profit structure. It also helps identify the sources of the firm’s efficiency or inefficiency. Net profit margin ratio establishes the relation between net profit and sales and indicates management efficiency in manufacturing, administering and selling the product. This ratio indicates the firm’s ability to turn each rupee sales into net profit. The firm with inadequate net margin will fail to achieve satisfactory results on shareholders fund. Net profit margin ratio indicates firm’s capacity to withstand adverse economic condition. A firm with high net margin ratio would be in advantageous position to survive in the face of falling selling price, rising cost of production or declining demand for product. A firm with high profit margin can make better use the favorable condition such as rising selling price, falling cost of production or increasing demand for product. The profitability ratios 42
are used to measure the operating efficiency of the company. Management, creditors and shareholders all want the firm to get appropriate profit. Major ratios            under this head are: Gross profit margin Net profit margin Operating expense ratio Return on investment Return on equity Earning per share Dividend per share Dividend pay out ratio Dividend and earning yields Price/earning ratio Market value to book value ratio
TREND ANALYSIS Trend analysis is the direction of changes over a period of times. TREND ANALYSIS SALES EBIT PAT Current ASSET Current liability Net Asset Total Asset Net worth Dividend 2007 22171252 3752440 2162999 14591373 10661701 6505534 17167235 5493476 430387 Table: 4.2.1 2006 17644913 2248888 1370178 10193778 7807015 3868146 11675161 3834903 286925
AREVA RATIO CALCULATION :
ACTIVITY RATIO The inventory turnover ratio is calculated on the basis of gross sales figure. In the absence of figure of cost of goods sold .The inventory turnover is calculated more appropriately on the basis of cost of goods sold because it is cost of goods sold and inventory both are valued at cost and are comparable and in case of sales, it is market price and so not so much advisable for the calculation of inventory turnover. The reciprocal of inventory turnover gives average inventory holding in percentage terms. 43
Days of inventory holding is calculated by dividing days in year (360) to inventory turnover. Days of inventory holding (DIH) =360/Inventory turnover; RATIOS Inventory turnover No of day's inventory 2007 7.84 0.18 Table 4.2.2 The No of Days inventory of 2007 as has been calculated is around 46 and it has been decreased from around 74 in year 2006. This decrease in inventory turn over represents better management of inventory and now it can be said that the company is converting its inventory into cash more frequently. The percentage reduction in inventory block in number of days is around 38 Percent .This reduction shows that AREVA is now increasing its efficiency in converting inventory into sales. RATIO Inventory turnover COST OF GOODS SOLD/ INVENTORY 2007 7.84 Table 4.2.3 As it has been calculated as the inventory turnover ratio for the year 2007 is 7.84 where as in the year 2006 it was 4.84. As we know high inventory turnover indicate good inventory management. This increase in inventory turnover indicates that the inventory management in year 2007 has been better than that of year 2006. AREVA’s efficiency of managing inventory is increasing. Areva as it seems is not blocking too much of fund in their inventory which is remaining in the firm neither it seems to be stock out situation because inventory turnover is neither high nor low. DEBTOR’S (ACCOUNTS RECEIVABLES) TURNOVER: Debtor’s turnover indicate the number of times debtors turnover each year. Generally the higher the value of debtor turnover better is the management of credit. Since the information on credit sales is not given debtor’s turnover in this case is calculated on the basis of sales divided upon debtors. Debtor’s turnover=Sales/ Debtor’s RATIO Debtor's turnover 44 2007 1.95 2006 2.57 SALES/AVG. INVENTORY 2006 4.84 2006 4.84 0.18
Table 4.2.4 As it has been calculated the debtors turnover is 1.95 in year 2007 but in the year 2006 it was 2.57 . Debtors turnover is more appropriately used in calculating the Collection period. Average collection period is calculated by dividing 360 by debtors turnover. Average collection period represent the speed of debtor’s collection .The shorter the average collection period the better the debtor because collection is done very frequently. As it has been given in the annual report that the provision for doubt full debt has been decreased only in absolute figure but not in percentage figure of total sundry debtors. PARTICULARS 2007 Sundry debtors 10285529 Provision for doubtful debt 316535 Provision for doubtful debt 3.07% (in %) Table 4.2.4 COLLECTION PERIOD RATIO Collection period 2007 184.560 2006 139.82 1 2006 6236885 348674 5.59%
Table 4.2.5 The collection period for the year 2007 has been decreased and is representing the increasing inefficiency in the collection effort or the credit policy may bee too liberal so that even less credit worthy customer has also been taken in to account for credit sales . This decrease in collection period indicating that the company should look in the credit policy and tries to analyse it and if necessary it should be tightened to decrease the uncertainity of the collection from the debtors. ASSET TURNOVER: Net asset turnover ratio is also called capital employed turnover. RATIO Assets turnover 2007 3.084 Table 4.2.6 2006 4.151
Net asset turnover of 3.08 for the year 2007 represents that AREVA is producing Rs 3.08 of sales for per Rs of capital employed in the net asset. The Net asset turnover for the year 2006 has been 4.15 and it has decreased in the year 2007 indicating that the AREVA production for sales per Rs of Capital employed has been decreased. The percentage decreased in sales per Rs of capital employed has been 25.78 % (Percent) and the company should focus in the related matter why the efficiency of producing sales against per Rupees of capital employed is decreasing. 45
WORKING CAPITAL TURNOVER: Working capital turnover is calculated by dividing sales by net working capital. The reciprocal of working capital ratio indicate what the company needs as current asset for per rupees of sales. RATIO Working capital turnover Reciprocal of working capital turnover 2007 5.10 0.19 Table 4.2.7 The working capital turnover is decreasing from the year 2006 to the year 2007.This decrease indicates that for per rupees of working capital the the sales has been decreased. The Percentage decrease in sales is 24.07% against per Rs of working capital. The reciprocal of working capital turnover indicate for one rupee of sales the company needs .19 of working capital. And this gap is to be meet out by bank borrowing and long term sources of funds. Areva’s expense in working capital for sale of one rupees is increasing from year by year and it can be validated with the figure as has been calculated that in the year 2006 for one rupees of sale .14 rupees of working capital were required but for the year 2007 for every rupees of sale .19 rupees are required. The company should focus more on the efficient utilization of current asset due to its decreasing efficiency. 2006 6.72 0.14
PROFITABILITY RATIOS PROFITABILITY RATIO Gross margin Net margin ROI (Before tax) ROE EPS DPS PAYOUT Table 4.2.8 GROSS PROFIT MARGIN As the gross profit margin for the year 2007 is .15 that is 15%. It represent that the profit as a percentage of total sales is 15 %.For the year 2006 the gross profit margin is 0.11 and representing that profit as a percentage of total sale is 11%. The increase in gross profit margin percentage is representing that efficiency of management in producing each unit of product has increased. 46 2007 0.15 0.098 0.54 393.7 4 45.23 9 0.2 2006 0.11 0.078 0.53 357.2 9 28.65 6 0.21
The cost of goods sold in the year 2007 is 85% (100-15) of the sale but the same cost of goods as a percentage of sales in 2006 was 89% (100-11). This is also indicating that the company is now producing every unit of the product more efficiently. Reason for this better improvement of gross profit margin may be: 1. Higher sales price, cost of goods remaining constant 2. Lower cost of goods sold, sales price remaining constant 3. An increase in proportionate volume of higher profit margin
NET PROFIT MARGIN: It is calculated after taking into account profit after tax. The net profit margin has been increased from .078 in year 2006 to .098 in year 2007 and is indicating that the net profit (Profit after tax) as a percentage of total sales has been increased from previous year to this year. The net profit percentage against sale is around 9.8 % in the year 2007 but for the year 2006 it was around 7.8%. PRICE EARNING RATIO: As the price earning ratio on the evening of 26th jun was 27.2 and it is indicating that the investors are optimistic about the performance of this firm and they have confidence and they are willing to invest in AREVA. The P/E Ratio of the competing firm are diverse ranging from 11 to 35. TATA power’s P/E ratio in the evening at 26th June was 27.95. Company name AREVA T & D Reliance Infrastructure Ltd. TATA POWER CESC LTD NTPC LTD Reliance Infrastructure Ltd. Alstom Projects India Ltd. Jaiprakash Associates Torrent Power Ltd. Table 4.2.9 LIQUIDITY RATIO 200 7 1.3 7 1.1 1 P/E ratio 27.19 22.55 28.36 14.10 17.30 28.55 34.56 11.56 20.24
Liquidity ratio Current ratio Quick ratio 47
0.0 Cash ratio 2 Table 4.2.10 Liquidity Ratio measures the ability of the firms to meets its current obligation. Every company should a better mix of current asset and current obligations. The failure of company to meets its obligation due to lack of sufficient liquidity will result in a poor creditworthiness, loss of creditor’s creditworthiness , loss of creditor’s confidence .A very high liquidity may result in un necessary tie up of funds.
CURRENT RATIO: It measures the firm’s short-term solvency. It indicate the sufficiency of current asset in rupees for every one rupee of current liability. Current ratio of around 1.37 indicates that for every rupee in terms of current liability the firm has 1.37 rupees in the form of current asset. This also represents the margin of safety for creditors. The higher the current ratio the higher the margin of safety. The current ratio should be approximately 2 : 1 for a firm, the company should try to achieve it for better creditworthiness and to get easy availability of the firms. QUICK RATIO: Quick ratio of AREVA for the year 2007 is 1.11 and indicating better position of the firm. CASH RATIO: Cash ratio of AREVA for the year 2007 is 0.02 and indicating better position of the firm. LEVERAGE RATIO: Leverage ratio 2007 Total debt ratio 0.156 Debt equity ratio 0.184 Capital equity ratio 1.184 Table 4.2.11 2006 0.009 0.009 1.009
Total debt ratio is used to analyze the long term solvency of the firm. The debt ratio for the year 2007 indicates that the firm has financed 15.6% of net asset. It also indicates that the firm has 84.6 % provided shareholders fund for net asset. This can have two implications. Firstly the firm should has proper mix of debt and equity ,here from the shareholders point of view it seems that the firm has not gone for high borrowing in order to magnify the shareholders wealth by taking borrowing at relatively lower rate and making cost of capital relative cheaper than that of rate of expected return. In the year 2006 it has even less as only a fraction of net asset has been financed by the borrowings.
48
DEBT EQUITY RATIO: The relation between lender’s contributions for each rupee of owner’s contribution is called debt equity ratio. Debt equity ratio of areva has improved from the year 2006 to the year 2007. In the year 2006 it was 0.009 which has increased to .185 and for each rupee of contribution by owners the lenders fund has relatively increased and it indicates that AREVA is now leveraging its portfolio by including debt in its portfolio.
4.3 Stock Valuation Analysis
Areva T & D is registered at Bombay stock exchange in India. Stock market performance of AREVA at BSE India: Month Jun 2008 May 2008 Apr 2008 Mar 2006 Feb 2008 Jan 2008 Dec 2007 Nov 2007 Oct 2007 Sep 2007 July 2007 Jun 2008 Highest 1530 1710 1799 1960 1990 2645 2790 3280 2350 1897 1748 1530 Table: 4.3.1 Lowest 1200 1473 1371 1310 1615 1425 2197 2291 1704 1603 1421 1201
As in the table the performance of AREVA share in stock market has been represented. It is clearly evident from the above table that during the last one year the market price of AREVA has been very much fluctuating. Starting from the performance from the month June of 2007 at the rate of 1201 which has been lowest not only for that month but also in this whole year starting from Jun 2007 to may 2007 this share price of 1201 has been the lowest . The share market price of AREVA reached at the peak in the month of November and the rate of one share of AREVA was 3280 at a time. This has been the highest price of the market price of AREVA T&D India in the history of AREVA T&D India at BSE India.
49
Graphical Representation Performance of Areva shares on monthly basis
H ES IGH T
3500 3000 2500 2000 1500 1000 500 Aug-07 Nov-07 Dec-07 Apr-08 0 Jun-07 Jul-07 Sep-07 Oct-07 Feb-08 May-08 Mar-08 Jun-08 Jan-08 HIGHEST
Fig: 4.3.1
50
L OWES T
2500 2000 1500 1000 500 0
Ju n Ju -07 Aul-0 g 7 Se -07 p Oc -07 No t-0 7 Dev-07 c Ja -07 nFe 08 M b-0 ar 8 Ap -08 M r-0 ay 8 Ju -08 n08
LOWEST
Fig: 4.3.2
Comparative analysis of highest and lowest
3500 3000 2500 2000 1500 1000 500 Aug-07 Nov-07 Dec-07 Apr-08 0 Jun-07 Jul-07 Sep-07 Oct-07 Feb-08 May-08 Mar-08 Jun-08 Jan-08 HIGHEST LOWEST
Fig: 4.3.3 The market price of AREVA share at BSE and its highest and lowest price trend has been on almost the similar trend. 51
3500 3000 2500 2000 1500 1000 500 0 Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun07 07 07 07 07 07 07 08 08 08 08 08 08 HIGHEST LOW EST
Fig: 4.3.4 The price of share of AREVA in the secondary market has been reached above 2500 in three consequitive month beginning from November 2007 to January 2008. This indicates the how general mass has their confidence in AREVA T&D India. DIVIDEND DISTRIBUTION : Year 2008 2007 2006 2005 Month Feb Sep May May Table: 4.3.2
Dividend Distributed
100 90 80 70 60 50 40 30 20 10 0 2005 2006 Year 2007 2008
Dividend (in %) 90 60 18 30
Percentage(%)
Dividend Percentage
Fig: 4.3.5 52
Dividend that has been distributed to share holder as a percentage of book value of share price. It has a trend in huge increment in last three years.
4.4 Comparative Analysis
Comparative analysis of Balance Sheets (Rupees Thousands) Particulars SOURCES OF FUNDS Shareholders' Funds Share capital Reserves and surplus Loan Funds Unsecured loans APPLICATION OF FUNDS Fixed Assets Gross block Less: Accumulated depreciation Net block Capital work-in-progress (including Capital advances) Investments Deferred tax asset (Net) Current Assets, Loans and Advances Inventories Sundry debtors Cash and bank balances Loans and advances Less: Current Liabilities and Provisions Notes December 2007 478,208 5,015,268 5,493,476 1,012,058 1,012,058 6,505,534 3,587,014 1,879,933 1,707,081 586,183 6 13 7 8 9 10 11 53 2,293,264 34 282,564 2,729,115 10,285,529 230,191 1,346,538 14,591,373 December 2006 478,208 3,356,695 3,834,903 33,243 33,243 3,868,146 2,743,259 1,708,976 1,034,283 99,693 1,133,976 96,534 250,873 2,386,247 6,236,885 524,587 1,046,059 10,193,778 % change
2 3 4
0 49.41 43.25 2944.42 2944.42 68.18 30.76 10 65.05 487.99 102.23 (99.97) 12.63 14.37 64.92 (56.12) 28.72 43.14
5
Liabilities Provisions Net Current Assets
12
9,561,098 1,100,603 10,661,701 3,929,672 6,505,534 Table: 4.4.1
7,110,332 696,683 7,807,015 2,386,763 3,868,146
34.47 57.98 36.57 64.64 68.18
4.5 Comparative Analysis of Areva and its Competitors
DIVIDEND DISTRIBUTION DIVIDEND DISTRIBUTION (%) Year AREVA T&D CROMPTON ABB SIEMENS BHARAT BIJLEE DE NORA INDIA LTD 2005 30 55 70 45 90 50 2006 18 70 80 100 135 70 Table: 4.5.1 As it is evident from the figure that the AREVA T &D is distributing its dividend appropriately and it is on growing phase since 2006, though it is not highest dividend payers. It is also evident that all better performing companies dividend distribution is in growing phase and is expected to grow in the future also because power distribution sector is growing at rapid speed. GRAPHICAL REPRESENTATION 2007 60 70 100 190 250 69 2008 90 60 110 240 300 58
54
350 300 250 200 150 100 50 0
SIE M EN S BI JLE E T& D AB B CR OM PT ON AR EV A IN DI A LT D
2005 2006 2007 2008
BH AR AT
Fig: 4.5.1 By the diagram it is clear that AREVA as a company is averagely good in terms of distribution of dividend. The dividend distribution for AREVA might be good but due to better investment opportunity that are investing major part of there for future growth.
900 800 700 600 500 400 300 200 100 0
SI EM EN S BI JL EE T& D AB B CR OM PT ON AR EV A IN DI A LT D
DE NO RA
2008 2007 2006 2005
BH AR AT
Fig: 4.5.2 OPERATING MARGIN: COMPANY Operating Margin AREV A T&D 7.99 BHARA T BIJLI LTD. 18.01 DE NORA LTD 29.37 55 CROMPTO N GREAVES 10.07 SIEME NS 8.13 ABB 13.5 ALFA TRANSFORM ER 15.84
DE NO RA
(%) Gross Profit Margin (%) Net Profit Margin (%) Long Term Debt/ Equity Total Debt/ Equity Owner’s fund as a percentage of Total fund Fixed Asset Turnover Ratio Current Ratio Liquid Ratio Inventory Turnover Ratio 0.01 99.18 6.37 2.7 18.02 11.3 0.08 0.1 90.13 0.07 93.13 24.24 18.64 8.91 5.62 0.24 0.4 70.93 99.9 7.5 7.61
8 13.0 3 8.19 14.64 6.99 0.26 0.83 99.9 6 10.6 3 1.36 1.19 13.1 1 54.42
3.88 1.35 1.34 0.98
8.39 1.43 1.12 8.35
1.57 2.51 1.36 2.47
3.72 1.34 1.11 15.13
9.14 1.13 0.094 10.76
1.53 4 1.45 1.67
Table: 4.5.2 This graphical representation of the different ratio indicates and compares AREVA’s performance with other companies. OPERATING PROFIT MARGIN:
OperatigMarg in(% )
35 30 25 20 15 10 5 0
A BH REV AR A T &D AT DE NO BIJ RA LI L CR TD IN OM DI PT A ON LT BE GR D ST EA & VE CR OM S PT ON SIE M EN AL S FA TR A AN SF BB OR M OR
Operatig Margin(% )
Fig: 4.5.3 56
Operating profit margin as a percentage is highest for DE NORA India Ltd .AREVA as a company is not performing as better as other well performing company. In order to perform better and to be at they need to lower the cost of production or slight increase in selling cost may be beneficial. LIQUIDITY Losses due to late deliveries might be a cause that has force down the operating profit margin of the company.
Net Proft Marg in(% )
25 20 15 10 5 0
A BH REV AR A T &D AT DE NO BIJ RA LI L CR IN TD OM DI PT A LT ON BE GR D ST EA & V CR OM ES PT ON SIE M EN AL S FA TR AN A SF BB OR M OR
Net Proft Margin(% )
Fig: 4.5.4 The same case is also valid for NET PROFIT MARGIN. AREVA needs to analyze the reason in detail and they need to be at better stage of performance. CURRENT RATIO Current ratio for AREVA is relatively good than a large number of companies. But still BEST AND CROMPTON is performing better that AREV. By the given diagram and graphical representation it is clear that AREVA’s liquidity position is good and they credibility in terms of payment of short term loan is good. The loan giver institution would provide easy short term loan to AREVA.
57
L iquid Ratio
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0
AR EV BH A AR T& D AT DE BI JLI NO LT RA D CR IN OM DI A PT LT ON D BE GR ST EA & VE CR S OM PT O N SIE M EN S AL FA TR AB AN B SF OR M O R
Liquid Ratio
Fig: 4.5.5 Liquidity ratio for AREVA is also good as per industry. They are very efficient in payments of short term obligation.
InventoryTurnover Ratio
100 90 80 70 60 50 40 30 20 10 0
A BH RE AR VA T& DE A D NO T BI CR RA JLI OM IN LTD PT DIA L BE ON ST GR TD E & CR AVE OM S PT O SIE N M AL EN FA S TR AN A SF BB OR M OR
Inventory Turnover Ratio
Fig: 4.5.6 Inventory turn over for AREVA is not too worse and neither too good .AREVA needs to perform better and look into matters related to this so that inventory turns over can be better.
58
Due to relatively good inventory turn, the number of days it consumes to convert its inventory into sales decreased. AREVA though is good, a miles is to go in order to be a market leader in terms of converting inventory into sales. OWNERS FUND: In case of AREVA T&D, Owners funds as a percentage of total fund is relatively higher than other. As it is evident that owners fund in case of AREVA is approximately 90% for AREVA. Some other company is also having nearly the same but others are less than this. The higher percentage of owner fund represents better margin of safety for other investors who are investing their money or other lender lending long term loan to AREVA.
owner'sfund as apercentag of total e fund
120 100 80 60 40 20 0
A BH RE AR VA DE T& A D NO T B IJL IL CR RA OM IN TD DI P A BE TO L ST N G TD & R CR E... OM PT O SIE N M AL EN FA S TR AN AB SF B O. ..
owner's fund as apercentage of total fund
Fig: 4.5.7 FIXED ASSET TURNOVER: Fixed asset turnover is as per industry, for AREVA is has an average ratio. It is good, but not very good. Some companies are performing far better than AREVA.
59
F ixed Asset Turnover Ratio
12 10 8 6 4 2 0
A BH REV AR A T &D AT DE NO BIJ RA LI L CR OM IN TD PT DIA ON LT BE GR D ST EA & V CR OM ES PT O SIE N M EN AL FA S TR AN A SF BB OR M OR
Fixed Asset Turnover Ratio
Fig: 4.5.8
4.5 Consolidated comparative analysis
Consolidated comparative analysis is an analysis of performance of Areva in comparison to other company dealing in same industry. Here comparison has been done with reference to the data like EBIDTA, EBIT, EBT, PAT and analysis there on.
NET SALES NET SALES (in Cr)
9000 8000 7000 6000 5000 4000 3000 2000 1000 0 7726.81 5930.3114 3875.756 2006.3 562.387 555.346 727.78 913.87
RE VE S
IJ LE E
R
P
AR EV A
EN S
AB B
VO LT A
LO SK A
SI EM
B
BH AR AT
G
CR
O M
PT O
60
KI R
N
EM
CO
M
Fig: 4.5.1
TOTAL INCOME TOTAL INCOME (in Cr)
9000 8000 7000 6000 5000 4000 3000 2000 1000 0 7825.34 6001.3568 3945.387 2024.1 565.75 566.1035 733.74 913.98
RE VE S
IJ LE E
R
P
AR EV A
EN S
AB B
VO LT A
LO SK A
SI EM
B
BH AR AT
G
CR
O M
Earning Before Depreciation Interest and Tax
PT O
Fig: 4.5.2
61
KI R
N
EM
CO
M
EBDIT (in Cr)
900 800 700 600 500 400 300 200 100 0 795.6749 800.8 548.702 375.3 118.2168 128.6175 35.91 98.95
LO SK AR
RE VE S
IJ LE E
P
AR EV A
EN S
AB B
VO LT A
SI EM
B
G
T
BH AR A
CR
O M
Earning Before Interest and Tax EBIT (in Cr)
900 800 700 600 500 400 300 200 100 0 763.2692 751.57 508.046 352.2 114.29 125.4844 31.12 89.16
PT O
Fig: 4.5.3
LO SK AR
RE VE S
IJ LE E
P
KI R
N
AR EV A
EN S
AB B
VO LT A
SI EM
B
G
T
BH AR A
CR
O M
Earning before Tax/ Profit before Tax
62
PT O
Fig: 4.5.4
KI R
N
EM
CO
M
EM
CO
M
PBT (in Cr)
900 800 700 600 500 400 300 200 100 0 756.4569 795.88 480.932 343.2 111.6789 124.9807 27.28 65.13
LO SK AR
RE VE S
IJ LE E
P
AR EV A
EN S
AB B
VO LT A
SI EM
B
G
T
BH AR A
CR
O M
Profit after Tax PAT (in Cr)
600 500 400 300 200 100 0 491.669 518.2 309.202 216.3 73.2777 79.9042 23.68 34.37
PT O
Fig: 4.5.5
KI R
N
LO SK AR
RE VE S
IJ LE E
P
EM EM CO
AR EV A
EN S
AB B
VO LT A
SI EM
B
G
T
M
BH AR A
CR
O M
Fig: 4.5.6
PT O
63
KI R
N
CO
M
As it has been evident from these figure and graphical representation that AREVA is performing well but still they have to go a long way in order to get the top order position in Transmisson and distribution industry.
4.6 Comparison of different Expenditure against Net Sales
Percentage Expense in Raw Material & Finished Goods to Net Sales
100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 78.44 63.17 90.96 72.37 70.47 78.59
63.16
72.37
RE VE S
JL EE
R
P
AR EV A
EN S
AB B
VO LT A
LO SK A
SI EM
BI
G
T
BH AR A
CR
O M
PT O
64
KI R
N
EM
CO
M
Fig: 4.6.1
Percentage Expense in Employee & Other Expenditure to Net Sales
20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 19.03 15.41 16.41 12.47 8.30 4.93 15.27 10.60
LO SK AR
JL EE
RE VE S
P
AR EV A
EN S
AB B
VO LT A
SI EM
BI
G
T
BH AR A
CR
Gross Profit as a Percentage of Net Sales
25.00 20.00 15.00 10.00 5.00 0.00
LO SK AR JL EE RE VE S P AR EV A EN S AB B VO LT A EM CO M
O M
Fig: 4.6.2
PT O
18.71 13.42
21.02 14.16 10.36
23.16
KI R
N
10.83 4.93
EM
CO
M
Series1
SI EM
BI
G
T
BH AR A
CR
O M
PT O
Fig: 4.6.3
65
KI R
N
4.7 Analysis of Expenditure and Operating Profit against Total Income
AREVA
19%
Percentage expense in raw material& finished goods to Total Income (%) Percentage Employee cost & other expenditure to Total Income(%) 62% Gross profit margin to Total Income (%)
19%
Fig : 4.7.1
ABB
13% Percentage expense in raw material& finished goods to Total Income (%) Percentage Employee cost & other expenditure to Total Income(%) 72% Gross profit margin to Total Income (%)
15%
Fig : 4.7.2 66
BHARAT BIJLEE
21%
Percentage expense in raw material& finished goods to Total Income (%) Percentage Employee cost & other expenditure to Total Income(%) 63% Gross profit margin to Total Income (%)
16%
Fig : 4.7.3
SIEMENS
10% 12% Percentage expense in raw material& finished goods to Total Income (%) Percentage Employee cost & other expenditure to Total Income(%) Gross profit margin to Total Income (%) 78%
Fig : 4.7.4
67
CROMPTON
14% Percentage expense in raw material& finished goods to Total Income (%) 15% Percentage Employee cost & other expenditure to Total Income(%) 71% Gross profit margin to Total Income (%)
Fig : 4.7.5
VOLTAMP
23%
Percentage expense in raw material& finished goods to Total Income (%) Percentage Employee cost & other expenditure to Total Income(%) 69% Gross profit margin to Total Income (%)
8%
Fig : 4.7.6
68
KIRLOSKAR
5%
5% Percentage expense in raw material& finished goods to Total Income (%) Percentage Employee cost & other expenditure to Total Income(%) Gross profit margin to Total Income (%) 90%
Fig : 4.7.7
EMCO
11% 11% Percentage expense in raw material& finished goods to Total Income (%) Percentage Employee cost & other expenditure to Total Income(%) Gross profit margin to Total Income (%) 78%
Fig : 4.7.8
Consolidated Data for Different Companies
69
100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00
A AB B AR EV
Expenditure & Profit against Total Income
Percentage expense in raw material& fini goods to Total sale (%) Percentage Employee cost & other expenditure to Total sale(%) Gross profit margin to Total sale (%)
M M PT EN O S N G R EV ES VO LT AM KI P R LO SK AR
Fig : 4.7.9 70
E
JL E
BI
BH AR AT
4.8 Findings and Conclusion
On the basis of above analysis it can be concluded that 1) The current ratio of AREVA is 1.37, and it indicates relatively good position of liquidity. AREVA has more current asset than its short term liability. 2) The quick ratio of Areva which is 1.11 represents better position, though it can still be in better position. 3) Leverage ratio: AREVA has relatively less debt than equity. Most of its financing is with equity capital. Lender’s margin of safety in AREVA is good and they would be willing to lend AREVA. 4) TURNOVER RATIO: Conversion of inventory into sales is good in spite of being a heavy industry its conversion is fast. 5) AREVA is converting its inventory of finished goods into sales 7.44 times a year .The holding of inventory is 45.89 days.
C R
O
SI E
EM
C O
6) Debtor’s turnover of 1.95 represent relatively lower position and AREVA should manage their credit in efficient way. AREVA position in managing cash is improving year by year. 7) Working capital turnover of AREVA is 5.11, indicating that for every rupee of sales net asset requirement is relatively less. (Approximately 0.2 Rs) 8) PROFITABILITY RATIO: Gross profit margin of AREVA is 0.15 that is 15% Percentage. 9) Net profit margin for AREVA is 9.8%. 10) 11) 12) 13) Return on investment before tax for AREVA is 54% and indicates good Return on equity is quite high and it is around 393 in last year. This EPS of AREVA in last year was around 45 representing better earning per Dividend per share of AREVA for last year was 9 on the book value of 10Rs position in terms of return. indicates better management of the firm. share for shareholders. per share.
71