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DECLARATION I hereby declare that the project work entitled A Study on Financial Performance Analysis on Reliance Industries Limited,

Gadimoga submitted by me and is not submitted to any other university or published any time before. The project work is a partial fulfillment of the requirement for the award of Master of Business Administration.

Place: Kakinada Date:

CERTIFICATE This is to certify that the Project Work titled A Study on Financial Performance Analysis on Reliance Industries Limited, Gadimoga is a bona fide work carried out by Ms.Dhanushya Vadakattu, in partial fulfillment for the award of degree of Master of Business Administration has been done under my guidance and to the best of my knowledge it is the original work.

Place: Kakinada Date:

ACKNOWLEDGEMENT I express my sincere thanks to Mr. T.VISWANATH, Finance Dept. of KG D6, Reliance Industries Limited, Gadimogga, Tallrevu for his valuable guidance, suggestions and encouragement for fulfillment of my project. I also thank Human Resources Department, RILfor their guidance and constant supervision as well as for providing necessary information regarding the project and also for their support in completing the project. I would like to express my special gratitude and thanks to industry persons for giving me such attention and time. I express my heartfelt thanks to Dr. S.G. Rama Rao, Associate Professor, V.S. Lakshmi Engineering College for Women, Matlapalem for his suggestions and encouragement at every step to carry out this project. My thanks and appreciations also go to my classmates in developing the project and people who have willingly helped me out with their abilities.

CONTENTS

1.

INTRODUCTION 1.1 OVERVIEW TO OIL AND GAS INDUSTRY 1.1.1. GLOBAL SCENARIO 1.1.2. INDIAN SCENARIO 1.1.3. COMPANY PROFILE 1.1.4. PLAYERS IN INDUSRTY ALONG WITH MARKET SHARE COMPANY OVERVIEW 1.2.1. MISSION, VISION, UNIQUE BUSINESS MODEL 1.2.2. BUSINESS SEGMENT OF RIL 1.1.2.1 EXPLORATION AND PRODUCTION OF OIL 1.1.2.2 REFINING AND MARKETING OF PETROLEUM PRODUCTS 1.1.2.3 PETROCHEMICALS 1.2.3. ABOUT ORGANIZATION AND STRUCTURE OF RIL 1.2.4. GLOBAL AND INDIAN OPERATION MARKET SHARE OF RIL 1.2.5. PRODUCTS AND SERVICES OFFERED BY RIL

1.2

2. PROFILE OF RELIANCE INDUSTRIES LIMITED. 2.1. OBJECTIVES OF THE STUDY. 2.2 METHODOLOGY OF THE STUDY. 2.3. COVERAGE OF THE STUDY. 2.4. LIMITATIONS OF THE STUDY. 3. CONCEPTUAL FRAMEWORK 3.1 FINANCIAL ANALYSIS. 3.1.1 INTRODUCTION 3.1.2 TYPES OF FINANCIAL ANALYSIS. 3.1.3 STEPS IN FINANCIAL ANALYSIS. 3.1.4 TECHNIQUES OF FINANCIAL ANALYSIS. 3.1.5 LIMITATIONS OF FINANCIAL ANALYSIS. 3.2 RATIO ANALYSIS. 3.2.1 INTRODUCTION. 3.2.2 MEANING OF RATIOS. 3.2.3 NATURE OF RATIO ANALYSIS. 3.2.4 TYPES OF RATIOS. 3.2.5 GUIDELINES FOR USAGE OF RATIO ANALYSIS. 3.2.6 SIGNIFICANCE OF RATIO ANALYSIS. 3.2.7 LIMITATIONS OF RATIO ANALYSIS. 3.3 WORKING CAPITAL. 3.3.1 INTRODUCTION. 3.3.2 MEANING OF WORKING CAPITAL. 3.3.3 DEFINITIONS OF WORKING CAPITAL. 3.3.4 CONCEPTS OF WORKING CAPITAL.

3.3.5 3.3.6 3.3.7 3.3.8.

NEED OF WORKING CAPITAL. OPERATING CYCLE. DETERMINANTS OF WORKING CAPITAL. FORMAT OF WORKING CAPITAL CHANGES STATEMENT.

3.4 CASH FLOW ANALYSIS. 3.4.1 INTRODUCTION. 3.4.2 CASH FLOW STATEMENT. 3.4.3 FORMAT OF CASH FLOW STATEMENT. 3.4.4 LIMITATIONS OF CASH FLOW ANALYSIS. 4. ANALYSIS OF DATA OF RIL. 4.1 RATIO ANALYSIS. 4.2 CASH FLOW ANALYSIS. 4.3 CHANGES IN WORKING CAPITAL. 5. SUMMARY AND SUGGESTIONS 5.1 FINDINGS. 5.2 SUGGESTIONS. Bibliography Annexure

INTRODUCTION A proper financial evaluation is a must to analyze past performance of the organization and assess the present financial strength for making the better future plans as per the organizations goals and vision. The financial resources of organizations are always scarce and therefore, require proper planning and control in order to achieve the best out of funds available. The groups of people interested in financial analysis are short-term creditors, long-term creditors, stake holders and management. These groups use results of analysis to determine the financial characteristics of the organization in which they are interested. In general the following is the financial information of interest. o The financial condition and ability of the firm in meeting the current obligations. o The proportion in which the organization has used its long-term funds so as to maximize the returns. o The efficiency with which, the firm has utilized its assets in generating revenue. o The overall operating efficiency and performance. The financial information of companies consists of three basic financial statements viz: balance sheet, the trading and profit & loss account and the profit & loss appropriation account. These statements are very useful for evaluating the financial position and performance of a firm through various financial analysis techniques. The information given in basic financial statements is given as on a particular date. Therefore so as to understand the performance of the organization as a whole it is important that these financial statements are interpreted and analyzed in some comparable terms. The important tools in analyzing theses financial statements are: 1. Ratio analysis. 2. Cash Flow Statement. 3. Fund flow Statement. 4. Balance Sheet Analysis 5. Common size and Comparative Statements Ratio analysis helps to know the long term and short term solvency, Profitability and Turnover efficiency. Balance sheet and profit and loss account shows the overall performance as on a particular date.

Ratio helps to summarize large quantities of financial data and to make qualitative judgment about the firms financial performance like liquidity, Leverage, Turnover and Profitability. Ratios may be compared with its own past records and with industry standards for efficient management. So the ratio analysis reveals the relationship in a more meaningful way so as to enable one to draw conclusions from them. Comparative and Common size balance sheet analysis tools help in understanding the percentage change of Asset and Liability components, their proportion in Assets and Liabilities and the growth/fall of individual component trend over the past year. Working capital analysis helps in knowing about the sources from which the working capital was obtained and the purpose for which it was used, the firms ability in utilizing the Current Assets and Liabilities. Cash flow analysis summarizes the utilization of cash for various purposes and shows the position of cash. It also indicates the sources and application of cash and the actual cash profit earned during the financial period Thus one can understand that the financial analysis is the key to the successful business operations, and without proper understanding of financial performance, no business enterprise can utilize its full potential for growth and success. 1.1 OIL & GAS INDUSTRY OVERVIEW The use of oil shale for extraction of shale oil is more than 200 years old. An oil shale deposit at Autun, France, was exploited commercially as early as 1839. The Scottish oil shale industry began about 1859, the year that Colonel Drake drilled his pioneer well at Titusville. As many as 20 beds of oil shale were mined at different times. Mining continued during the 1800s and by 1881 oil shale production had reached one million metric tons per year. With the exception of the World War II years, between 1 and 4 million metric tons of oil shale were mined yearly in Scotland from 1881 to 1955 when production began to decline, then ceased in 1962. Canada produced some shale oil from deposits in New Brunswick and Ontario in the mid-1800s. In Sweden, the alum shale was retorted for hydrocarbons on a small scale in the late 1800s. Production continued through World War II but ceased in 1966 because of the availability of cheaper supplies of petroleum crude oil. With the introduction of the mass production of automobiles and trucks in the early 1900s, the supposed shortage of gasoline encouraged the exploitation of oil shale deposits for transportation fuels in the United States of America. Many companies were

formed to develop oil shale deposits of the Green River Formation in western United States, especially in Colorado. The US has an estimated 1.8 trillion barrels of oil trapped in shale, most of it concentrated in the Green River Formation, which covers northwest Colorado and parts o Utah and Wyoming. This estimate is more than all the proven reserves of crude oil in the world today. In the US, many licenses were issued in the 1970s for exploitation of shale oil. However, after several large-scale mine facilities were developed in the 1970s, the work gradually ceased and the last large-scale mining and retorting facility in western US which was operated by Unocal from 1980, closed down in the year 1991. Unocal produced 4.5 million barrels of oil from oil shale averaging 34 gallons of shale oil per ton of rock over the life of the project. 1.1.1 Global Oil Production and Consumption Oil Reserves Top 20 Nations (% of Global) Saudi Arabia has 261,700,000,000 barrels (bbl) of oil, fully 25% of the world's oil. The United States has 22,450,000,000 bbl.

Oil Production & Consumption, Top 20 Nations by Production (% of Global)

Here are the top 20 nations sorted by production, and their production and consumption figures. Saudi Arabia produces the most at 8,711,000.00 bbl per day, and the United States consumes the most at 19,650,000.00 bbl per day, a full 25% of the world's oil consumption.

Exports & Imports: Here's export and imports for all the nations listed in the CIA World Factbook, sorted alphabetically as having exports and imports. Conspicuously missing is the United States, but I can tell you that we consume 19,650,000.00 bbl per day, and produce 8,054,000.00, leaving a discrepancy of 11,596,000.00 bbl per day. This compares to the European Union, which produces 3,244,000.00 bbl per day and consumes 14,480,000.00 bbl per day for a discrepancy of 11,236,000.00 per day.

Natural Gas In the IEO2010 Reference case, natural gas consumption in non-OECD countries grows about three times as fast as in OECD countries. Non-OECD production increases account for 89 percent of the growth in world production from 2007 to 2035. Total natural gas consumption worldwide increases 44 percent in the IEO2010Reference case, from 108 trillion cubic feet in 2007 to 156 trillion cubic feet in 2035 (Figure 36). Demand for natural gas slowed in 2008 as the global economic recession began to affect world energy markets, and in 2009 world consumption of natural gas contracted by an estimated 1.1 percent. The impact of the recession on natural gas use was especially evident in the industrial sectorthe end-use sector with the highest level of natural gas consumption where demand for natural gas declined by an estimated 6 percent from 2008 to 2009. Natural gas remains a key energy source for industrial uses and for electricity generation throughout the projection. The industrial sector accounted for approximately 40 percent of total world natural gas use in 2007, and it maintains that share through

2035. Because natural gas produces less carbon dioxide when it is burned than does either coal or petroleum, governments implementing national or regional policies to reduce greenhouse gas emissions may encourage its use to displace other fossil fuels. In the electric power sector, for example, natural gas is often an attractive choice for new generating plants because of its relative fuel efficiency, low emissions, quick construction timelines, and low capital costs Liquefied natural gas (LNG) accounts for a growing share of world natural gas trade in the Reference case. World natural gas liquefaction capacity increases 2.4-fold, from about 8 trillion cubic feet in 2007 to 19 trillion cubic feet in 2035.

1.1.2 Indian Scenario Oil accounts for 31 per cent of Indias total energy consumption and there is unlikely to be any significant scaling down of dependence on these fuels in the next five to ten years.

Indias industrial output has risen sharply, registering an impressive 7.3 per cent growth in March 2011. The figures show that the Indian economy is keeping up the growth momentum of previous years. The factory output, as measured by the Index of Industrial Production (IIP), rose 7.3 per cent in March 2011, as compared to the corresponding period a year earlier. The IIP almost doubled the revised 3.7 per cent expansion registered in February 2011. The increase in the factory output signals a strong overall consumer demand. The new IIP numbers, with 2004-05 as the base year, will start coming from the next month. The current base year is 1993-94. Exports rose 34 per cent to record US$ 23.9 billion in April 2011, while imports were up 14.1 per cent to US$ 32.8 billion. Among others, passenger cars sales grew at 13.2 per cent in April 2011. In addition, the output of consumer durables expanded 12.3 per cent while that of non-durables rose 5.5 per cent. India will account for 10.8 per cent of Asia/Pacific regional oil demand by 2010, while providing 10.2 per cent of supply, as suggested by Business Monitor International in the India Oil and Gas Report. Currently, of the six core industries identified in India, the oil and gas sector has propelled the growth of Indian economy most and the Government is looking for more investors in the sector. India is currently worlds fifth biggest energy consumer and the need is continuously growing, according to KPMGs Oil and Natural Gas Overview 2010 India will account for 12.59 per cent of Asia Pacifics regional oil demand by 2014, according to the latest India Oil & Gas Report. Production According to the provisional production data released by the Ministry of Petroleum and Natural Gas, dated January 2011

Crude Oil production from the period April-January 2011 was 31.411 million metric tonne (MMT), as compared to the 28.072 MMT in the past corresponding period.

Natural Gas production during April-January 201 1 was 44030 million cubic metres, as compared to 38490.7 million cubic metres in the corresponding period in 2010.

From April-January 2011, 136.46 MMT of crude oil was refined, compared to 133.26 MMT in the corresponding period in 2010.

India will account for 12.59 per cent of Asia Pacifics regional oil demand by 2014, while providing 10.13 per cent of supply, according to the Business Monitor

Internationals India Oil and Gas Report Q4 2010. The regional oil production was estimated at 8.82mn barrels per day (b/d) in 2010 compared to 8.35mn b/d in 2001. The projected production for crude oil in 2010-11 is 37.96 (MMT), which is about 12.67 per cent higher than the actual crude oil production of 33.69 MMT during 2009-10. The projected production for natural gas (including coal bed methane or CBM) for 201011 is 53.59 Billion Cubic Meter (BCM), 12.8 per cent higher than the actual production of 47.51 BCM in 2009-10. Consumption: The consumption of petroleum products during 2009-10 were 138.196 MMT (including sales through private imports) an increase of 3.60 per cent over sales of 133.4 MMT during 2008-09, according to the Ministry of Petroleum. Indias current petroleum products consumption rate from April 2010 to February 2011 was 128.827 million tonnes (MT), as per the estimates of the Planning and Analysis Cell (PPAC). Diesel consumption in the country grew at 4 per cent annual rate to 4.96 MT in October 2010 while petrol sales were up 7.3 per cent at 1.21 MT. Jet fuel consumption was up 10 per cent at 434,100 tonnes. Overall fuel sales in the country were up one per cent at 11.647 MT in October 2010 against 11.538 MT in the same month in the previous year. Gas consumption is set to rise from an estimated 63 BCM in 2010 to 110 BCM, with domestic supply up from around 45 BCM in 2010 to at least 70 BCM by 2014. Gas: The gas transmission domain was dominated by Gas Authority of India Ltd (GAIL) till, in April 2009, the first natural gas production started from Krishna Godavari (KG) basin deepwater block by Reliance Gas Transportation Infrastructure Ltd. Currently, the natural gas production from the KG D6 block is about 60 million standard cubic metres per day (MMSCMD). The natural gas production from the block is expected to be in the range of 80-89 MMSCMD till March 2012.

Gas production is expected to rise from an estimated 45BCM in 2010 to a possible 95 BCM by 2019.Natural gas is expected to play a key role in Indias energy mix by 2025. The proportion of natural gas in the total energy mix has increased to 10 per cent in 2009 from 4 per cent in 1999. The same is expected to increase to 20 per cent in 2025. GAIL (India) Limited has set a target of transmitting 118.2 MMSCMD of natural gas from domestic sources and through liquefied natural gas (LNG) route during 2011-12

under the annual memorandum of understanding (MoU) signed with Ministry of Petroleum & Natural Gas for performance targets for the financial year 2011-12.For the FY 2011-12, the target for Gas Marketing is 85.5 MMSCMD and for production of 422TMT of Polymers (HDPE & LLDPE) and 1,350 TMT of Liquid Hydrocarbons. Indias Oil and Gas Industry has an interesting mix of Oil & Gas companies from the government and private sector. Except for some companies providing ancillary and drilling services, most of the companies are huge with billion dollar balance sheet and huge operations as is the case with the Oil and Gas Industry worldwide. Except for Reliance Industries, the upstream sector of oil and gas production and distribution is dominated by government owned companies which are heavily regulated. Despite attempts at liberalizing the APMC and the operations of the PSU Oil Companies, HPCL,BPCL and IOC run billions of dollars in losses as they are forced to sell oil and gas products at below their cost. 1. Reliance Industries - The Flagship Company of the Ambanis and Indias largest Private Company. Reliance Industries is also an Oil and Gas Giant. The

Company has seen very sharp growth in the last decade and is diversifying into Retail. With a market cap exceeding $30 billion it is Indias most valued company. The company is also one of the biggest exporters in India with one of the largest petrochemical and oil refining complexes in the world at Jamnager.It recently sold a stake in its valuable Godavari Basin to BP for a whopping $7.5 billion. Extremely cash rich with a horde of more than $15 billion, it has started on empire through ventures in Finance (DE Shaw), Communications (buying of wireless broadband spectrum), Shale Gas Buys in the USA, Hospitality (Buying up stakes in Hotel Companies). 2. ONGC Corp With a market cap of Rs. 235,000 crores ONGC ranks 3rd in Oil & Gas Exploration & Production (E&P) Industry globally .It cumulatively produced 803 Million Metric Tons of crude and 485 Billion Cubic Meters of Natural Gas from 111 fields. ONGCs wholly-owned subsidiary ONGC Videsh Ltd. (OVL) is the biggest Indian multinational, with 40 Oil & Gas projects in 15 countries. The company earned a revenue of approx Rs. 20,000 crores with net profit margin of 34% in Dec10.It holds largest share of hydrocarbon acreages in India & contributes over 79 per cent of Indians oil and gas production. Created a record

of sorts by turning Mangalore Refinery and Petrochemicals Limited (MRPL) around from being a stretcher case at BIFR to the BSE Top 30, within a year. 3. GAIL India GAIL (India) Limited, is Indias flagship Natural Gas company, integrating all aspects of the Natural Gas value chain right from exploration to marketing. It emphasizes on clean fuel industrialization, creating a quadrilateral of green energy corridors that connect major consumption centers in India with major gas fields, LNG terminals and other cross border gas sourcing points. With a market cap Rs. 58,000 crores GAIL is expanding its business to become a player in the International Market. . The revenue earned was 24,000 crores (2009-10) with a net profit margin of 11%.The business has achieved laying of Natural Gas high pressure trunk pipeline, LPG Gas Processing Units & Transmission pipeline network, oil and gas Exploration blocks, OFC network offering highly dependable bandwidth for telecom service providers etc. GAIL has been entrusted with the responsibility of reviving the LNG terminal at Dabhol as well as sourcing LNG.GAIL is one of the best performing stocks in the Energy Industry in India in the last couple of years.It is a well managed fast growing company in one of the best sectors in India with high competitive barriers. 4. Cairn India - With a market cap Rs. 66,000 crores, Cairn India is now one of the biggest private exploration and production companies currently operating in the region. A subsidiary of the British company Cairn,its growth has been nothing short of phenomenal after winning a bid to explore oil blocs in Rajasthan in the NELP. Cairn Indias strategy is to establish commercial reserves from strategic positions in order to create and deliver shareholder value. The company operates the largest producing oil field in the Indian private sector and has pioneered the use of cutting-edge technology to extend production life. The company has set up a Processing terminal in Barmer (Rajasthan) to process the crude from fields. A pipeline has also been constructed to transport the crude from Barmer to Bhogat in the Gujarat coast. The pipeline section from Barmer to Salaya is operational and sales have commenced to Essar, RIL and IOC.Cairn India has recently agreed to be taken over by London listed Indias largest Mining Group Vedantathough the approval is still awaited from the government of India.It is the second largest Oil and Gas private company listed on the Indian stock exchange. 5. BPCL BPCL is along with HPCL and IOCL, a major distributor of petroleum,cooking gas and diesel in the Indian market The Company has a market

capitalization of Rs.21,000 crores. On revenues of Rs. 36,000 crores with a net profit margin of 0.5%.The companys low margins and abysmal stock price performance is due to the government control which forces it to sell at below cost leading to huge losses and curtails capex for growth. Despite noises of liberalization, nothing has come about with increased global crude prices increasing the losses greatly. Bharat Petroleum produces a diverse range of

products, from petrochemicals and solvents to aircraft fuel and speciality lubricants and markets them to hundreds of industries and several international and domestic airlines. 6. Indian Oil Corporation Ltd (IOCL) The Company covers the entire hydrocarbon value chain from refining, pipeline transportation and marketing of petroleum products to exploration & production of crude oil & gas, marketing of natural gas, and petrochemicals. With a market capitalization of Rs. 75,000 crores, it is in the Fortune Global 500 listing, ranked at the 125th position in the year 2010. Indian Oil closed the year 2009-10 with a sales turnover of Rs. 271,074 crore and profits of Rs. 10,221 crore. Indian Oil and its subsidiary (CPCL) accounted for over 48% petroleum products market share, 34.8% national refining capacity and 71% downstream sector pipelines capacity in India. Indian Oil is currently investing Rs. 47,000 crore in a host of projects. The Indian Oil Group of companies owns and operates 10 of Indias 20 refineries with a combined refining capacity of 65.7 million metric tonnes per annum. Indian Oils cross-country network of crude oil and product pipelines, spanning 10,899 km and the largest in the country, meets the vital energy needs of the consumers in an efficient, economical and environment-friendly manner. Like IOCL it is also suffers from government mal-interference and not a good investment. 7. Hindustan Petroleum Corp. Ltd (HPCL One of the smaller of the major Oil and Gas PSUs with a market capitalization of Rs. 11,000 crores. The company owns and operates the largest Lube Refinery in the country producing Lube Base Oils of international standards, with a capacity of 335 TMT. This Lube Refinery accounts for over 40% of the Indias total Lube Base Oil produ ction. It has two major refineries producing a wide variety of petroleum fuels & specialties, one in Mumbai (West Coast) and the other in Vishakhapatnam, (East Coast). HPCLs vast marketing network consists of its zonal & regional offices facilitated by a supply & distribution infrastructure comprising terminals, pipeline networks,

aviation service stations, LPG bottling plants, inland relay depots & retail outlets, lube and LPG distributorships. HPCL accounts for about 20% of the market share and about 10% of the nations refining capacity. The revenue earned was around Rs.34,000 crores with a net profit margin of 0.6% in Dec10. 8. Oil India Ltd.- With a market capitalization of Rs. 31,000 crores, OIL is engaged in the business of exploration, development and production of crude oil and natural gas, transportation of crude oil and production of LPG. It became a wholly-owned Government of India enterprise in 1981. The revenue earned by the company was 2,400 crores & with a net profit margin of 36% in Dec 10. Very similar in profile to ONGC it presently produces over 3.2 million tons pa of crude oil, Natural Gas and over 50,000 Tones of LPG annually. Most of this emanates from its traditionally rich oil and gas fields concentrated in the Northeastern part of India and contribute to over 65% of total oil & gas produced in the region. It has emerged as a consistently profitable international company with exploration blocks as far as Libya and sub-Saharan Africa. 9. Petronet LNG Ltd. - It was formed as a Joint Venture by the Government of India to import LNG and set up LNG terminals in the country, it involves Indias leading oil and natural gas industry players. The promoters are GAIL, ONGC, IOCL & BPCL. The company has a Market cap Rs. 9,000 crores. The revenues earned in Dec10 was approximately Rs.3,600 crores with a net profit margin of 5%. Other companies which deserve a mention are Essar Oil,Essar Energ,Aban Offshore,Chennai Petroleum,Gujarat State Petroleum,Indraprastha Gas,Gujarat State Petronent LNG. India is largely dependent on coal and oil for its energy needs, and this dependency has been increasing over the years. So Projected Energy Consumption Mix in India (2030) Projected Energy Consumption Mix in India (2030) Product Oil Gas Coal Unit MTOE MTOE MTOE World 5775 4125 3597 India 435 224 816

1.2 COMPANY OVERVIEW Reliance Group The Reliance Group, founded by Late Dhirubhai H. Ambani (1932-2002), is India's largest private sector enterprise, with businesses in the energy and materials value chain. Group's annual revenues are in excess of US$ 58 billion. The flagship company, Reliance Industries Limited, is a Fortune Global 500 company and is the largest private sector company in India. Backward vertical integration has been the cornerstone of the evolution and growth of Reliance. Starting with textiles in the late seventies, Reliance pursued a strategy of backward vertical integration - in polyester, fibre intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and production - to be fully integrated along the materials and energy value chain. The Group's activities span exploration and production of oil and gas, petroleum refining and marketing, petrochemicals (polyester, fibre intermediates, plastics and chemicals), textiles, retail, infotel and special economic zones. Reliance enjoys global leadership in its businesses, being the largest polyester yarn and fibre producer in the world and among the top five to ten producers in the world in major petrochemical products. Awards & Recognition: Corporate Ranking & Ratings: RIL continues to be featured, for the sixth consecutive year, in the Fortune Global 500 list of the World's Largest Corporations, ranking for 2010 is as follows: RIL is ranked 68th in 2010, in the Financial Times' FT Global 500 list of the world's largest companies (up from previous year's 75th rank). RIL has been ranked at 20th position, on the basis of sales, in the ICIS Top 100 Chemicals Companies list. RIL is the only Indian company in the world's Top 20 chemical companies in the global ranking. RIL has also been named as the 8th biggest gainer in the list in terms of operating profits. RIL is the only Indian company to get a perfect score from CLSA Asia-Pacific Markets (CLSA) in a list of Asia's best companies in terms of CSR and termed the Company as the region's 'Corporate Good Guy'. In its 'Ethical Asia' 2010 report, CLSA has named RIL among its top picks for providing very good data and going well beyond required disclosure. RIL is rated as the 33rd 'Most Innovative Company in the World' in a survey

conducted by the US financial publication- Business Week in collaboration with the Boston Consulting Group (BCG). Further, in 2010, BCG has ranked RIL second amongst the world's 10 biggest, 'Sustainable Value Creators', companies for creating the most shareholder value for the period 2000 to 2009. E&P Division received the Petrotech-2010 Special Technical Award in the 'Project Management' category for completion of their Krishna Godavari Gas project aheadof schedule.

General Performance: Revenues equivalent to 2.9% of Indias GDP Reliance Industries Limited accounts for 12% of Indias total exports Reliance Industries Limited contributes to 6.5% of the Government of Indias indirect tax revenues Reliance is the largest producer of Polyester fiber and yarn Reliance is the 4th largest producer of Paraxylene and Purified Terephthalic Acid 6th largest producer of Mono Ethylene Glycol 7th largest producer of Polypropylene

2.2.1Mission, Vision of the company: Mission: Create value for all stakeholders Grow through innovation Lead in good governance practices Use sustainability to drive product development and enhance operational efficiencies Ensure energy security of the nation Foster rural prosperity

Vision: Through sustainable measures, create value for the nation, enhance quality of life across the entire socio-economic spectrum and help spearhead India as a global leader in the domains where we operate.

Value: The growth and success are based on the ten core values of Care, Citizenship, Fairness, Honesty, Integrity, Purposefulness, Respect, Responsibility, Safety and Trust. Unique Business Model:

2.2.2BUSINESS SEGMENTS OF RIL RIL is organized into three major business segments which include: 1. Exploration and Production of Oil and gas 2. Refining and Marketing of Petroleum products and 3. Petrochemicals. OIL to TEXTILES: Value from Integration:

2.2.2.1.Exploration and Production of Oil and gas India imports about two-thirds of its crude oil requirement. Exploration and production of oil and gas is critical for Indias energy security and economic growth. Reliances oil and gas exploration and production is therefore inexorably linked with the national imperative. Exploration and production, the initial link in the energy and

material value chain, remains a major growth area and Reliance envisions evolving as a global energy major.

Over the years the Exploration and Production has registered significant growth, primarily due to spiraling crude oil and gas prices. With growing demand and ever growing demand for energy, especially from developing countries, the focus is on energy security. India imports about two-thirds of its crude oil requirement. Exploration and production of oil and gas is critical for India's energy security and economic growth. The growing demand for crude oil and gas in the country and policy initiatives of Government of India towards increased E&P activities has given a great impetus to the Indian E&P industry raising hopes of increased exploration. The liberalization and Privatization policy of Government of India has witnessed many changes in Indian energy sector. Under the New Exploration Licensing Policy (NELP) of Government of India blocks have been acquired by various E&P companies for oil and gas exploration. RIL is the largest Oil and gas acreage holder among the Private sector companies in India with 34 domestic exploration blocks covering an area of about 331, 000 sq. kms. This is in addition to its interest in one exploration block each in Yemen and Oman. RIL is Indias first private sector company in the Exploration and Production (E&P) sector to have discovered large gas reserves. Strategy of RIL is aimed at further enhancing the level of vertical integration in its energy business and realizing value across the energy chain, while fulfilling important national priorities. In regard to

exploration acreage, RIL has 72% acreage in deep waters, 24% in shallow waters and 4% on land as shown in Table 1.

EXPLORATION BLOCKS OF RIL

1)Panna Mukta Tapti (PMT) Blocks:

The Panna-Mukta fields produced 9.3 MMBL of crude oil and 52.1 BCF of natural gas in FY-11 a decline of 31% and 25% respectively over the previous year. The lower volumes are on account of complete shutdown due to failure of the single point mooring system (SPM) and parting of anchor chains 4 and 5 to the SPM from July 20, 2010 to October 25, 2010.

Tapti fields produced 1.2 MMBL of condensate and 95.2 BCF of natural gas in FY-11 a decline of 22% and 13% respectively over the previous year. The decrease in production was due to a natural decline in the reserves. Drilling of 6 wells in Panna-L is expected to commence soon and oil production is expected in the later part of FY-12. Its reserves are estimated at 7.0 MMBL. The anticipated production from all 6 wells is approximately 3,000 BOPD 2) CBM Blocks RIL holds 3 CBM blocks in Sohagpur (East), Sohagpur (West) and Sonhat. So far, RIL has completed the following work in the Sohagpur (East) and Sohagpur (West) blocks: Over 40 core holes drilled, logged and tested for gas content, permeability and coal properties 31 wells air drilled and tested for productivity 75 hydraulic fracturing jobs done 5 cavitation completion wells and 2 sets of in-seam horizontal wells

The process for acquiring land for well sites, market assessment & infrastructure for evacuation and transportation of gas has commenced 3.Conventional E&P international blocks: RIL has 13 blocks in its international conventional portfolio, including 2 in Peru, 3 in Yemen (1 producing and 2 exploratory), 2 each in Oman, Kurdistan and Colombia, 1 each in East Timor and Australia; amounting to a total acreage of over 99,145 sq. km. Reliance Exploration & Production DMCC (REP DMCC) has farmed in Block 39 (Peru) with 10% participation interest and relinquished Block 155 (Peru) where REP DMCC had 28.30% participation interest. During the year, the following activity was undertaken as part of the exploratory campaign:

2D acquisition in Yemen (Blocks 34 and 37), Oman (Block 41) and Peru (Block 39). The total 2D acquisition was 1395 LKM. 3D acquisition of 800 and 400 sq.km. of 3D in Colombia Borojo North and South respectively. Drilled 3 exploratory wells, 1 each in East Timor, Rovi and Sarta. Drilling in Timor was met with limited results. The results following the drilling campaign in blocks Oman 18 and East Timor K have not been encouraging and accordingly, the expenditure incurred on these blocks

amounting to $177 million (Rs. 807 crore) has been fully provided for in the books of REP DMCC, a wholly-owned subsidiary of RIL. 2.2.2.2 Refining and Marketing of Petroleum Products Petroleum refining and retailing is the second link and intrinsic in Reliances drive for growth and global leadership in the core energy value chain. RIL operates among the most complex and energy efficient refineries in the world. This is also the third largest refinery in the world at any single location.The refinery is located at Jamnagar, Gujarat. RILs refinery is globally recognized as having a enviable track record in terms of health, safety and care for the environment. Reliance petroleum refinery, first in the private sector in India, has completed five years of operations. With the Jamnagar refinery Reliance significantly improving

domestic product availability and India has become a net exporter of petroleum products. Reliance is in the process of doubling the petroleum refinery at Jamnagar, which will make it the largest petroleum refinery in the world. Reliance refinery has been built using the worlds leading process technologies to produce a range of petroleum products including cooking gas, transport fuels and valuable petrochemical feedstocks.

2.2.2.3 Petrochemicals:

1) Polymers Reliance's philosophy of 'Growth is Life' has truly manifested itself in value creation opportunities for its myriad stakeholders, which include its valued customers. The focus on Growth has helped RIL grow as one of the world's largest producers of polymers. RILs current polymer production capacity of 3.5 million tonnes per annum of Polypropylene, Polyethylene and Polyvinyl Chloride would reach 4.4 million tonnes next year with further expansion plans subsequently underway. This growth has been achieved with state-of-the-art world scale projects and setting global benchmarks in product quality, standards and services. Reliance's sites at Hazira, Vadodara, Gandhar in Gujarat and Nagothane in Maharashtra are integrated with crackers. The Jamnagar site is integrated with the world class refinery, ensuring feedstock security at all the sites. At Reliance our constant endeavour is to provide products and services that meet global standards. Based on our extensive interaction with the industry, we offer a wide

range of grades for diverse applications across packaging, agriculture, automotive, housing, healthcare, water and gas transportation and consumer durables. Superior technologies, strong focus on R&D, latest IT-enabled services to support supply chain management and the end-to-end solutions offered across the value chain reinforce our commitment to customer satisfaction. 2) Polyester Reliance is the largest producer of polyester fibre and yarn in the world, with a capacity of 2,000 KTA. Reliance invests significant amounts on R&D in the polyester sector. Reliance Technology Center, Reliance Testing Centre and Reliance Fibre Application Centre constantly develop and introduce innovative products for the textile industry. Reliance enjoys a portfolio of about 120 global patents in the polyester domain. Reliance had acquired Trevira, a leading producer of branded polyester fibres in Europe. Trevira has manufacturing facilities at four locations - Bobingen and Guben (Germany), Silkborg (Denmark) and Quevaucamps (Belgium). In addition, it has a highly advanced R&D facility at Bobingen. 3) Other Petrochemicals Reliance's cracker at Hazira is one of the world's largest grassroots multi-feed cracker. The cracker can use a variety of feed stocks, including naphtha, natural gas liquids and other petroleum feed stocks. The cracker produces important raw materials for many of Reliance's key products, and plays a crucial position in the overall value-integration strategy. The Propylene and Ethylene produced from the cracker are used for the manufacture of Polypropylene, Polyethylene, Polyvinyl Chloride and Monoethylene Glycol at the Hazira complex. Benzene and Xylenes produced in the cracker are used for manufacturing LAB and Paraxylene at the Patalganga complex. The polymers, polyester and textile businesses of Reliance are fully integrated, from naphtha to fabrics and plastics. The cracker has eliminated Reliance's exposure to volatility in the international market vis-a-vis procurement of basic feedstocks, like ethylene and propylene, and contributed significantly to stability and enhancement, of margins, besides ensuring uninterrupted production.

The naphtha for the cracker is received at Reliance's primary feedstock supply system, the single-buoy mooring (SBM), off the coast of Hazira petrochemicals complex through subsea pipeline. Reliance's multi-feed cracker at Hazira is one of the world's largest green-field cracker plants. The cracker can use a variety of feedstocks, including naphtha, natural gas liquids and other petroleum feedstocks. Reliance is also India's largest manufacturer of Linear Alkyl Benzene (LAB) with a world-class 100 KTA plant at Patalganga in technical collaboration with UOP, USA, the product being marketed under the trade name RELAB. In the Aromatics products category, Reliance produces and markets Benzene, Toluene, Mixed- Xylene and Ortho-Xylene. Besides being the undisputed leader in the domestic sector, Reliance figures amongst the top 20 producers of Aromatics worldwide. In the Hydrocarbon Solvents product category, Reliance produces and markets Remax 1, Remax - 2, WashOil, Renine, Heavy Aromatics and Heavy Alkylate. 2.2.3About Organisation& Structure of the company: RIL gas marketing KG-D6 was the single largest source of domestic gas in the country for FY-11 and accounted for almost 35% of the total gas consumption in India. The gas from KG-D6 catered to demand from 57 customers in critical sectors like fertilizer, power, steel, petrochemicals and refineries. The gas from KG-D6 accounted for about 44% of the total domestic gas production paving the way for increased energy independence for the country. RIL's E&P business: KG-D6 KG-D6 gas fields completed 730 days of 100% uptime and zero-incident production. An average daily gas production from KG-D6 block for the year was 55.9 MMSCMD with a cumulative production of 1,257 BCF since inception, of which 720 BCF was produced in the current fiscal. An average oil production for the year from the block was 21,971 barrels per day with a cumulative production of 14 MMBL of oil and condensate since inception, of which 8 MMBL of oil and 1 MMBL of condensate was produced in the current fiscal. In the D1-D3 gas fields a total of 20 wells have been drilled, of which 18 are production wells. Of these, 2 wells have been drilled this fiscal. Six wells in the D26 field are under production. Of these, MA-2 which was earlier a gas injection well has been converted to a production well since April 2010.

An integrated development plan for all gas discoveries in KG-D6 is being conceptualized. This will encompass existing wells and other discoveries within the block to maximize capital efficiency and to accelerate monetization. Other domestic blocks The Company made six discoveries during the year which are as follows:

Well W1 in the KG-V-D3 block Well AF1, AJ1, AT1, AN1 and AR1 in on-land CB-10 block

The Company has also submitted initial proposal for commerciality to DGH for review and discussion for the following blocks:

Discovery D33 in GS-01 block Discoveries D39 and D41 in KG-V-D3 block Discovery D36 in KG-D4 block RIL has submitted an integrated appraisal programme for all discoveries in Part A

of CB-10 block. Further, RIL has been continuing with the appraisal activities for the other discoveries in KG-D6, KG-V-D3 and CB-10 blocks. Head Support and Services contains in detail structure as mentioned which explains KGD 6 Supply and Logistics department 2.2.4 Global and Indian Operations and Market share of the RIL KG D6 Indian gas market In India, gas constitutes around 10% of the current energy basket compared to the global average of 24% and hence presents a vast potential for growth. The demand for natural gas in India is expected to grow at a CAGR of 10% over the next five years and could soon be a significant player in the global gas market. RIL gas marketing KG-D6 was the single largest source of domestic gas in the country for FY-11 and accounted for almost 35% of the total gas consumption in India. The gas from KG-D6 catered to demand from 57 customers in critical sectors like fertilizer, power, steel, petrochemicals and refineries. The gas from KG-D6 accounted for about 44% of the total domestic gas production paving the way for increased energy independence for the country. Strategic alliance with BP for domestic upstream portfolio BP to partner in 23 E&P blocks in India Committed investments of over $ 3.4 billion through 3 JVs signed in shale gas business in USA service the gathering needs of the upstream JV 2 shale JVs now operational production commenced in Atlas and Pioneer JV with SIBUR for the setting up of a facility for producing 100,000 MT of butyl rubber in India RIL and D. E. Shaw group to form a JV to build a leading financial services business in India

Infotel an RILs subsidiary, emerged as a successful bidder in all the 22 circles of the auction for BWA spectrum 2.2.5 Products and Services offered by the company: Products & Brands The Company expanded into textiles in 1975. Since its initial public offering in 1977, the Company has expanded rapidly and integrated backwards into other industry sectors, most notably the production of petrochemicals and the refining of crude oil. The Company from time to time seeks to further diversify into other industries. The Company now has operations that span from the exploration and production of oil and gas to the manufacture of petroleum products, polyester products, polyester intermediates, plastics, polymer intermediates, chemicals and synthetic textiles and fabrics. The Company's major products and brands, from oil and gas to textiles are tightly integrated and benefit from synergies across the Company. Central to the Company's operations is its vertical backward integration strategy; raw materials such as PTA, MEG, ethylene, propylene and normal paraffin that were previously imported at a higher cost and subject to import duties are now sourced from within the Company. This has had a positive effect on the Company's operating margins and interest costs and decreased the Company's exposure to the cyclicality of markets and raw material prices. The Company believes that this strategy is also important in maintaining a domestic market leadership position in its major product lines and in providing a competitive advantage. The Company's operations can be classified into four segments namely: Petroleum Refining and Marketing business Petrochemicals business Oil and Gas Exploration & Production business Others

The Company has the largest refining capacity at any single location. The Company is: Largest producer of Polyester Fibre and Yarn 5th largest producer of Paraxylene (PX) 5th largest producer of Polypropylene (PP) 8th largest producer of Purified Terephthalic Acid (PTA) and Mono Ethylene Glycol (MEG)

Product Flow Chart Of RIL:

3.1. OBJECTIVES OF THE STUDY

The main objective of this study is to apply the financial analysis techniques like Ratio analysis, Cash flow analysis and working capital analysis, for studying and understanding the present financial performance of Reliance Industries Limited. This has been undertaken with the following objectives: To study the role of RIL in the Indian Industry with particular reference to Petroleum sector. To study and analyze the financial statements for understanding the profitability and financial health of RIL. To calculate and estimate the important financial ratios, To analyze the working capital and cash flow statements. To find out whether the organization is utilizing its monetary resources effectively. To find out whether the organization is utilizing its resources to meet the objective of the company i.e., maximizing the wealth of the shareholders. To offer suggestions for improvement, where ever necessary.

3.2 METHODOLOGY OF THE STUDY: Methodology adopted is collecting data required, through primary and secondary sources. Primary data is the data collected by the researcher and secondary data is the existing information collected for some other purpose and suitable for the present study also. Primary data is collected through discussions and personal interaction with various groups of officials and employees of RIL. Secondary data comprises of information obtained from annual reports, financial statements, in-house journals, reports, published research papers, business magazines, on line journals, web sites and other literature from libraries of RIL.

3.3 COVERAGE OF THE STUDY: The present study covers 3 years period from financial year 2008-09 to 2010-11 for the evaluation of financial position of Reliance Industries Limited. Overall position of the organization is studied at a glance with particular reference to Oil and Gas Business of the Organisation. 3.4 LIMITATIONS OF THE STUDY: The research has been under taken with almost accurate data but the following aspects can be termed as the limitations. Comparison of the performance of RIL with any other organization is not possible since, the financial statements of other organizations equal in financial outlay are not available. Owing to the fact that financial statements are prepared and compiled on the basis of historical costs, there is a market decline in the value of monitory unit and the resultant rise in prices. Though Ratio Analysis and other preferred analysis tools are powerful tools of financial analysis, these are also not exempted from various limitations, thus the same limitations will be carried forward to the entire work. Financial statements are essentially interim reports and therefore cannot be final because the actual gain/loss of a business cannot be determined in an ongoing business.

3.5. OBSERVATIONS & ANALYSIS: The objectives of the project should be adressed here. The observations and analysis are a very important aspect of the report. Analsing the primary or secondary data for the study is done here. In this the usage of statastical tools and representing the data using graphs is done. All tables and graphs should be numbered and an appropriate title to be given and the source from where you have taken to be mentioned.

CHAPTER 4 THEORITICAL FRAME WORK OF FINANCIAL ANALYSIS 4.1 FINANCIAL ANALYSIS 4.1.1 INTRODUCTION

The methodical classification of data given in financial statements, the process of identifying the financial strengths and weaknesses of firms by properly establishing relationships between the items of the financial statements like balance sheet and the Profit & Loss account is known as Financial Analysis. The data in the form of figures in financial statements communicate no meaning unless they are put in suitable form of consideration, based on the purpose of interpretation of the analysed data. Both the terms Analysis and Interpretation are complementary to each other and Interpretation requires Analysis, while Analysis is meaningless without Interpretation. According to MYRES, Financial Analysis is largely a study of the relationship among the various financial factors in a business as disclosed by a single set of statements and a study of the trend of these factors as shown in a series of statements.

4.1.2 Types of Financial Analysis Financial analysis can be classified into two categories depending on (i) (ii) the material used and the modus operandi of analysis.

(i)

On the basis of material used:

According to this basis financial analysis can be of two types External Analysis: The analysis done by external agencies like Investors, Credit agencies, Government agencies and other creditors, who have no access to the internal records of the business firms, except the published financial statements is called external analysis. Because of the statutory regulations regarding disclosure of information by business houses, the analysis by external analysts is also improving in recent years.

Internal Analysis: The analysis done by Executives, employees and permitted agencies of business houses, who have close access to the business records, is known as Internal Analysis. This is done normally, for a predefined purpose.

(ii) On the basis of modus operandi: According to this method, there are two types. Horizontal Analysis: In this case, financial statements for a number of years are reviewed and analysed. The current year figures are compared with the standard or base year. The analysis statement usually contains figures for two of more years and the changes are shown regarding each item from the base year usually in the form of percentages. Since, this is based on the data from year to year rather than on one date, this is also called as Dynamic Analysis and this gives a considerable insight into levels and areas of strength and weakness. Vertical Analysis: In this case, a study is made of the quantitative relationship of the various items in the financial statements on a particular date. This type of analysis is useful for Inter firm or Intra firm comparison of business performance. This is also called Static Analysis as it is frequently used for referring to ratios developed on one date or for one accounting period.

4.1.3 STEPS IN FINANCIAL ANALYSIS

The steps in Financial Analysis are (1) Methodical classification of the data in the considered financial statements, (2) Comparison of the various interconnected figures with each other by different Tools of Financial Analysis. The figures of the statements considered, should necessarily be arranged properly to have a meaningful analysis. Instead of the usual two column statements (T-form), statements are prepared in single (vertical) column form, indicating significant figures by adding or subtracting. This facilitates showing the figures of a number of firms or number of years side by side for comparison purposes.

4.1.4 TECHNIQUES OF FINANCIAL ANALYSIS

Analysts can adopt one or more of the following techniques / tools of financial analysis: Comparative Financial Statements. Common-size Financial Statements. Trend Percentages. Funds Flow Analysis. Cash Flow Analysis. CVP Analysis. Ratio Analysis. (1) Comparative Financial Statements: Statements, which have been designed in a way to provide time perspective to the consideration of various elements of financial position embodied in such statements, are called comparative financial statements. In these figures for two or more periods are placed side by side to facilitate comparison. Both the Income and Balance Sheet statements can be prepared in the form of Comparative financial statements. Comparative Income Statement: this will show the absolute figures for two or more periods, the absolute change from one period to another and if desired the change in terms of percentages. Since the figures for two or more periods are shown side by side, the reader can quickly ascertain whether transactions have increased or decreased etc. thus reading of data included in comparative income statements will be helpful in deriving meaningful conclusions. Comparative Balance Sheet: for comparing Assets and Liabilities and finding out the increase / decrease pattern, as on two or more different dates , this comparative study of Balance sheet is useful. While, a single Balance sheet emphasizes on present position, comparative Balance sheet on change. This type of Balance sheet analysis is useful in studying trends in enterprises. Because study of comparison on more than two periods is cumbersome, the technique of computation of trend percentages has become a tool of analysis.

(2) Common Size Financial Statements: Statements, in which figures reported are converted into percentages to some common base, are called Common Size Financial Statements. This statement shows the percentage of each item to the total in each period but not variations in respective items from period to period. These, when read horizontally, do not give information about the trend of individual items but, the trend of their relationship to total. These are useful for studying the comparative financial position of two or more businesses. To make them more useful and meaningful, it is necessary that the financial statements of all such companies should be prepared on the same pattern.

(3) Trend Percentages: For making a comparative study of the financial statements over several years, Trend percentages are much useful. This method involves the calculation of percentage relationship that each item bears to the same item in the base year. The earliest year is as the base year. Each item of the base year is taken as 100 and on that basis the percentages for each of the items of each of the years are calculated. These percentages can also be taken as index numbers showing relative changes in the financial data resulting with the passage of time. This method is a useful analytical tool for the managements since by substituting percentages for large amounts, the brevity and readability are achieved. These percentages are not calculated for all the items, but for some major items, since the purpose is to highlight important changes.

(4) Funds Flow Analysis: Funds flow analysis is an important tool in the analytical kit of financial analysts and financial managers. As the balance sheet reveals the financial status of firms at a particular point of time and does not sharply focus the major financial transactions which have been behind the Balance sheet. Funds flow analysis reveals the changes in working capital position. It tells about the sources from which the working capital was obtained and the purposes for which it was used. It brings out in open the changes which have taken place behind the Balance sheet. Working capital being the life-blood of the business, such an analysis is extremely useful.

(5) Cost-Volume-Profit Analysis: Cost-Volume-Profit analysis is an important tool of profit planning. It studies the relationship between cost, volume of production, sales and profit. It is not strictly a technique used for analysis of financial statements but, an important tool for the management for decision taking, since the data is provided by both cost and financial records. It tells the volume of sales at which the firm will achieve break-even, the effect on profit on account of variation in output, selling price and cost, and finally, the quantity to be produced and sold to reach the target profit level. (6) Ratio Analysis: This is the most important tool available to financial analysts for their work. A ratio shows the relationship in mathematical terms between two interrelated accounting figures. The figures have to be interrelated, because no useful purpose will be served if ratios are calculated between two figures of unrelated nature. Financial analysts calculate different accounting ratios for different purposes like Liquidity ratios, Leverage ratios, Profitability ratios and Turnover ratios etc.

4.1.5 Limitations of Financial Analysis:

Though financial analysis is a powerful mechanism that helps in ascertaining the strengths and weaknesses in the operations and financial positions of enterprises, it is also subject to certain limitations and these are because of the limitations of the financial statements themselves. The following are the few limitations:

I. Financial analysis is a means not end: The analysis should be used as a starting point and the conclusion should be drawn in isolation but keeping in view the overall picture and the prevailing economic and political situation. II. Financial analysis ignores price level changes: statements are normally prepared on the concept of historical costs. They do not reflect values in terms of current costs. Thus, the financial analysis based on such financial statements or accounting figures would not portray the effects of price level changes over the period.

III. Financial reports are Interim reports:

The profit shown by Profit and Loss account and the financial position as depicted by the Balance sheet is not exact. The exact position can be known only when the business is closed down. Again, the existences of contingent liabilities, deferred revenue expenditure make them more imprecise.

IV. Accounting concepts and conventions: Financial statements are prepared on the basis of certain accounting concepts and conventions. On account of this reason, the financial position as disclosed by these statements may not be realistic. On account of convention and conservatism the income statement may not disclose true income of the business since probable losses are considered while probable incomes are ignored.

V. Influence of Personal Judgment: Many items are left to the personal judgment of the accountant. The soundness of such judgment will necessarily depend upon the competence and integrity. However, the convention of consistency acts as a controlling factor on making indiscreet personal judgments.

VI. Discloses only Monetary Facts: Financial statements do not depict those facts which cannot be expressed in terms of money. For example, development of a team of loyal and efficient workers, enlightened management, the reputation and prestige of management with the public, are matters which are of considerable importance for the business, but they are nowhere depicted by financial statements.

4.2 RATIO ANALYSIS

4.2.1 INTRODUCTION: The Ratio Analysis is one of the most powerful tools of financial analysis. It is the process of establishing and interpreting various ratios (Quantitative relationship between figures and groups of figures). It is with the help of ratios, that the financial statements can be analysed more clearly and decisions made from such analysis.

4.2.2 MEANING:

A Ratio is a simple arithmetical expression of the relationship of one number to another. According to Accountants handbook by Lxen, Kell and Bedford, a ratio is an expression of the quantitative relationship between two numbers.

4.2.3 NATURE OF RATIO ANALYSIS: Ratio Analysis is a simple arithmetic expression of financial statements. It is the process of establishing and interpreting various ratios for helping in making certain decisions. However ratio analysis is not an end in itself. It is only a means of better understanding of financial strengths of a firm. Calculations of mere ratios dont serve any purpose, unless several appropriate ratios are analysed and interpreted. There are a number of ratios which can be calculated from the information given in the financial statements. Ratio Analysis is a process of identifying the financial strengths and weaknesses of the firm. This is accomplished through a comparison of the firms ratios over a period of time or through a comparison of the firms ratios with its nearest competitors and with the industry averages. This ratio analysis is of interest to both the management and outside parties like owners, creditors, investors and others like financial analysts and other players in the industry. In relation with ratio analysis the various interested groups and their interests are briefly discussed here. It is quite interesting to note that the interests of different groups differ widely. Trade creditors: There are interested in firms ability to meet their claims over a very short period of time. So the interest here is confined to the evaluation of the firms Liquidity position. Suppliers of Long term debt: These are concerned with the firms long-term solvency and survival. These are interested in firms profitability over time, its ability to generate cash enabling the meeting of interest payment and repayment of principal. Thus these are interested in the future solvency and profitability. Investors: These are concerned about the firms earnings and retain confidence with firms which show steady growth in the earnings. These are also interested in the firms financial structure to the extent it influences the firms earnings ability and risk. Management: In general Managements are interested in overall financial soundness. It stands to be their responsibility to see that the resources of the firm are used most effectively and efficiently, and that the firms financial condition is sound.

The ratio analysis involves comparison for a useful interpretation of the financial statements. A single ratio itself does not indicate any favorable or unfavorable condition. It should be compared with some standard. Standards of comparison may consist of Past ratios: ratios calculated from the past financial statements of the same firm. Projected ratios: ratios developed using the projected financial statements of the same firm. Competitors ratios: ratios of some selected firms, especially the most progressive and successful competitor, at the same point in time. Industry ratios: ratios of the industry to which the firm belongs.

4.2.4 TYPES OF RATIOS:

Groups of people interested in financial analysis are short and long-term creditors, owners and management. Short-term creditors are interested in short-term solvency or liquidity position. Long-term creditors are interested in the long-term solvency and profitability. Owners are interested in firms profitability and financial condition, where as management is interested in evaluating every aspect of the firms performance, as they have to protect the interests of all parties and firms growth and profitability. In view of this, the various ratios can be classified as Liquidity ratios: These measure the firms ability to meet current obligations. Leverage ratios: These show the proportions of debt and equity in financing the firms assets. Activity ratios: These reflect the firms efficiency in utilizing its assets. Profitability ratios: These measure overall performance and effectiveness of the firm. The above classification can be depicted by means of the following chart.

Accounting Ratios

Traditional P&L A/C Ratios Balance Sheet Ratios Composite Ratios Profitability Ratios

Functional Coverage Ratios Turnover Ratios Financial Ratios Liquidity Ratios Stability Ratios

4.2.4.1 LIQUIDITY RATIOS:

Basically the following ratios come under this category. i) Current Ratio Ratio iii) Cash Ratio iv) Net working capital Ratio.

ii) Quick

(i)Current ratio:

It is calculated by dividing current assets with current liabilities Current ratio = current Assets / Current Liabilities

Current assets include cash and those assets which can be converted into cash within a year or an operating cycle, such as marketable securities, debtors and inventories. Current liabilities include creditors, bills payable, accrued expenses, short term bank loan, income liability and long term debt maturing in current year. The current ratio is a measure of the firms short term solvency. It indicates the availability of current assets in rupees for every one rupee of current liability. The ratio of greater than one means that the firm has more current assets than current claims against them. As a conventional rule the current ratio of 2 to 1 or more is considered satisfactory.

(ii) Quick ratio:

This is the relation between quick or liquid assets and current liabilities. Quick ratio = (Current assets- inventories) / Current liabilities

An asset is liquid, if it can be converted into cash immediately or reasonably soon without loss of value. Cash is the most liquid asset. Other assets under quick assets are book debts, bills receivables, and marketable securities. Inventories require sometime for realizing into cash, hence it is subtracted from current assets to arrive at quick assets. Generally, a quick ratio of 1 to 1 is considered a satisfactory measure.

(iii) Cash Ratio:

This is a ratio between Cash and Marketable securities to Current liabilities. Cash Ratio = (Cash + Marketable Securities) / Current liabilities

Since cash is the most liquid asset, analysts may examine the ratio of cash and its equivalent to current liabilities. Trade investment or marketable securities are equivalent of cash. Therefore these are included for computation of cash ratio.

(iv) Net working capital Ratio:

Among the firms of comparison, firm having higher net working capital is believed to have greater liquidity. Here the difference between current assets and current liabilities excluding short-term borrowing is called net working capital (NWC) or net current assets (NCA). NWC ratio = Net working capital / Current Liabilities

4.2.4.2 LEVERAGE RATIOS: The short-term creditors are more interested in firms current debt-paying ability, and long-term creditors look for long-term financial strength. A firm should have both short-term and long-term financial position stronger. As a general rule, firms should have an appropriate mix of debt and owners equity in financing the firms assets. To judge the financial position through leverage ratios i) Total debt ratio ii) Debt-equity ratio iii) Capital-equity ratio

iv) Total liabilities ratio v) Interest coverage ratio are considered best.

(i) Total Debt ratio:

This may be computed by dividing total debt (TD) by capital employed (CE) or total net assets (NA). Total debt includes short and long-term borrowings and capital employed include total debt and net worth (NW). Total debt ratio = Total Debt / (Total debt + Net worth) = TD / (TD + NW) Because of the equality of capital employed and net assets, debt ratio can also be defined as

Debt ratio = Total Debt / Net assets = TD / NA

(ii) Debt-equity ratio: The relationship describing the lenders contribution for each rupee of the owners contribution is called Debt-equity ratio. Debt-equity ratio = Total Debt / Net worth = TD / NW

(iii) Equity ratio:

This is an alternative method of expressing the basic relationship between Debt and Equity. This ratio conveys how much funds are contributed together by lenders and owners for each rupee of the owners contribution. This is calculated from the ratio of capital employed or net assets to net worth. Equity ratio = CE / NW or Net Assets / Net Worth = NA /NW

(iv) Total liabilities ratio: Since current liabilities also exert pressure and cause obligations on the firm and restrict its activities, may be included on the ground that they are important determinants of the firms financial risk. With this opinion, to assess the proportion of total funds short-term and long-term, provided by outsiders to finance total assets, this ratio is calculated as follows.

Total liabilities to Total Assets=Total Assets / Total Liabilities=TA / TL

(v) Interest coverage ratio: This ratio indicates the firms ability to meet interest obligations. The interest coverage ratio or times interest earned is one of the most conventional coverage ratios used to test the firms debt servicing. This is computed by dividing earnings before interest and taxes by interest charges. Interest coverage = EBIT / Interest. A high value of Interest coverage ratio is desirable; but too high a ratio indicates that the firm is very conservative in using debt, and that it is not using credit to the best advantage of share holders. A lower value indicates excessive use of debt, or inefficient operations. The firm should make efforts to improve the operating efficiency, or to retire debt to have a comfortable coverage ratio. A high value of Debt ratios indicates that claims of creditors are greater than those of owners. A high level of debt introduces inflexibility in the firms operations due to the increasing interference and pressures from creditors. Heavy indebtedness leads to creditors pressures and constraints on the managements independent functioning and energies. Thus the firm gets entangled in a debt trap. A low value of debt ratios implies a greater claim of owners than creditors. For creditors also it is a satisfactory situation, since a high level of equity provides a larger margin of safety to them. But, the higher the debt ratios, the greater will be the shareholders earnings, when the cost of debt is lesser than the firms overall rate of return on investment. Thus there is a need to strike a proper balance between the use of debt and equity. The most appropriate debt-equity combination would involve a trade-off between return and risk.

4.2.4.3 ACTIVITY RATIOS: Activity ratios, also called as turnover ratios, indicate the speed with which assets are converted or turned over into sales. Thus these ratios involve a relationship between sales and assets. Funds of creditors and owners are invested in various assets to generate sales and profits. The better the management of assets, the larger the amount of sales. Hence Activity ratios are useful to evaluate the efficiency with which the firm manage and utilizes its assets. The various ratios, that come under this head are i) Inventory

turnover ratio ii) No of days inventory iii) Debtors turnover ratio iv) Collection period v) Assets turnover ratio vi) working capital turnover ratio.

(i) Inventory turnover ratio:

The inventory turnover shows, how rapidly the inventory is turning into receivable through sales. Generally a high value of inventory turnover is indicative of good inventory management; on the other hand, a low value implies excessive inventory levels than warranted by production and sales activities, or a slow-moving or obsolete inventory. In case of a high value, the level of inventory could be low, which may lead to frequent stock outs and production stoppage and in case of a low value, the level of inventory could be very high, leading to inventory pileup and blockage of working capital. Thus managements should decide the level of inventory required based on the basic inventory and production/business nature. This is calculated by dividing the cost of goods sold by the average of inventory. Inventory Turnover = Cost of goods sold / Average inventory. The average inventory is the average of opening balance and closing balances of inventory. (ii) No of days inventory:

This is calculated by dividing 360 with inventory turnover. No of days inventory = 360 / Inventory turnover

(iii) Debtors turnover ratio:

Firms sell goods for cash and credit as well. Credit is a marketing tool for most of the companies. Upon credit sales, firms create book debts in its accounts. These book debts are to be converted into cash over a short period, therefore are included in current assets. The liquidity position of the firm depends on the quality of the debtors to a great extent. Three ratios are applied to judge the quality or liquidity of debtors. Debtors turnover ratio = Credit sales / Average debtors.

Debtors turnover indicates the number of times debtors turnover each year. Generally, the higher the value of debtors turnover, the more efficient is the management of credit. Where opening and closing balances of debtors is not available, debtors turnover can be calculated by dividing total sales by the year-end balance of debtors.

(iv) Collection period:

The average number of days for which, book debts remain outstanding is called the average collection period (ACP). This is calculated by dividing 360 by debtors turnover. Average collection period = 360 / Debtors turnover or (Debtors / Sales) * 360 Where, sales are seasonal and growth is rapid, interpretation of this figure may be done with great care. This average collection period measures the quality of debtors since it indicates the speed of their collection. The shorter the period, the better the quality of debtors. On the other hand too a low collection period is not necessarily favorable. It may indicate a very restrictive credit and collection policy. The collection period ratio thus helps an analyst in two respects: In determining the collectibility of debtors and thus, the efficiency of collection efforts, and In ascertaining the firms comparative strength and advantage relative to its credit policy and performance vis--vis the competitors credit policies and performance.

(v) Assets Turnover:

Assets are used to generate sales. Therefore a firm should manage its assets efficiently to maximize sales. The relationship between sales and assets is called assets turnover. Various ratios under this head are a) Net assets turnover b) Total assets turnover c) Fixed and current assets turnover d) Working capital turnover.

(a) Net assets turnover ratio:

This is obtained by dividing Sales by Net assets. A firms ability to produce a large volume of sales for a given amount of net assets is the most important aspect of its operating performance. The net assets in the denominator of the ratio include fixed assets net of depreciation. Thus old assets with lower depreciated value may create a misleading impression of high turnover without any improvement in sales. In some analyses, intangible assets like goodwill, patents etc, are excluded while computing this ratio. Fictitious assets, accumulated losses or deferred expenditures may also be excluded for calculating the net assets turnover ratio. Net assets turnover ratio = Sales / Net assets

(b) Total assets turnover ratio: In addition to or instead of net assets turnover ratio, some times total assets turnover ratio is also preferred for analysis. This shows firms ability in generating sales from all financial resources committed to total assets. This is calculated by dividing Sales by Total Assets. Total assets turnover ratio = Sales / Total assets. Total assets include net fixed assets (NFA) and current assets (CA); TA = NFA + CA (c) Fixed and current assets turnover ratios: to know the efficiency of the fixed assets and current assets separately Fixed assets turnover = Sales / Net fixed assets Current assets turnover = Sales / Current assets d) Working capital turnover ratio: this ratio is useful to relate net current assets (or net working capital gap) to sales. This is computed by sales with net working capital. Working capital turnover ratio = Sales / Net working capital

4.2.4.4 PROFITABILITY RATIOS:

Business enterprises exist and survive to grow, earning profits over a long period. Profit is the difference between revenues and expenses over a period of time. Profit is the ultimate output of a company. Therefore financial managers should continuously evaluate the efficiency of its company in terms of profits. These ratios are calculated to measure the operating efficiency of the company. Management, creditors and owners are equally

interested in these ratios. Owners expect reasonable return on investment, creditors need interest and principal repayment in time and management will be interested in overall efficiency of the operations. This is possible through earning of good profits, thus evaluation of the profitability periodically is of paramount importance. Generally two major types of profitability ratios are calculated. These are Profitability in relation to sales Profitability in relation to investment. The following ratios are considered under profitability ratios: 1. Ratios in relation to sales (i) Gross Profit Margin Ratio (ii) Net Profit Margin Ratio. (iii) Operating Expenses Ratio. 2. Ratios in relation to investment (i) Return on Investment (ii) Return on Equity. 3. Earnings Per Share, Dividend per Share, P-E ratio and Dividend payout ratio.

(i) GROSS MARGIN RATIO:

The profitability ratio in relation to sales is called Gross Profit margin or Gross margin ratio. This is calculated by dividing Gross profit by Sales. Gross margin = Gross profit / Sales = (Sales Cost of goods sold) / Sales. This ratio reflects the efficiency with which managements produce each unit of production. A high value ratio is a sign of efficient management and policies. The ratio may increase due to any of the following factors. -- Higher sales prices, cost of goods sold remaining constant. -- Lower cost of goods sold, sales prices remaining constant. -- A combination of combinations in sales prices and costs. -- An increase in the proportionate volume of higher margin items. Analysis of these factors reveals the cause of changes in gross margin and ways to improve it. On the other hand a low gross margin reflects higher cost of goods sold due to the firms inability to purchase raw materials at favorable terms, inefficient utilization of plant and machinery, over investment in plant and machinery resulting in higher cost of production. The ratio may fall due to market fluctuations also.

(ii) Net Profit Margin:

The Net Profit Margin is calculated by dividing PAT by Sales. Net Profit Margin = PAT / Sales. Net profit is obtained by subtracting operating expenses, interest and taxes from Gross profit. Non-operating income is to be subtracted from Net profit, if the former is of substantial figure. This is an indication of managements ability to turn each rupee sales into net profit. This also indicates the firms capacity to withstand adverse economic conditions. Thus firms with high net margin ratios would be in advantageous position to survive in the face of falling selling prices, rising costs of production or declining demand for the product.

(iii) OPERATING EXPENSES RATIO:

This ratio explains the changes in the profit margin (EBIT to sales) ratio and is computed by dividing operating expenses with Sales. Operating Expenses Ratio = Operating Expenses / Sales. A higher operating expenses ratio is unfavorable since it will leave a small amount of operating income to meet interest, dividends etc,. The variations in the ratio may occur due to (a) changes in sales prices (b) changes in the demand for the product (c) changes in the administrative or selling expenses or (d) changes in the proportionate shares of sales of different products with varying gross margins. Thus the above and other related causes may strongly be studied for the inefficient net operating expenses ratio.

(iv) RETURN ON INVESTMENT: The conventional approach of calculating ROI is to divide PAT with investment. Investment refers to pool of funds supplied by shareholders and lenders, while PAT refers to residue income of shareholders. Different variants of ROI are in practice like RONA, ROTA. Since taxes are not controllable by managements, before tax measure of ROI is also used. Thus ROI = ROTA = EBIT / TA and ROI = RONA = EBIT / NA.

Instead of EBIT, EBDITA (Earnings Before Depreciation, Interest, Taxes and Amortisation) is also in practice. Here the term investment may refer to total assets or net assets and funds employed in net assets is known as capital employed.

(v) RETURN ON EQUITY: A return on shareholders equity is calculated to see the profitability of owners investment. This is calculated by dividing net profit after taxes by shareholders equity which is given by net worth. The net worth include paid up share capital, share premium and reserves and surplus less accumulated losses. Net worth can also be found by subtracting total liabilities from total assets. ROE = Profit After Taxes / Net worth ROE indicates how well the firm has used the resources of owners. This ratio is one of the most important relationships in financial analysis and of great interest to the present as well as the prospective shareholders and also of great concern to management. Comparison of this ratio among similar companies or industry average reveals the relative strength of the company under consideration.

(vi) EARNIGS PER SHARE: One more measure to measure the profitability of shareholders investment is to calculate EPS. This is calculated by dividing PAT by No of outstanding equity shares. A study of time series of EPS reveals the strength of management in earning capacity. As a profitability index, this is the valuable and widely used ratio. EPS = PAT / No of equity shares outstanding.

(vii) DIIDEND PER SHARE:

Dividend is the distributable part of net profit after taxes, making provision for reserves. This is calculated by dividing distributable part of PAT by No of outstanding shares. In general, the investing community is more interested in DPS rather than EPS DPS = DIVIDEND / No OF ORDINARY SHARES OUTSTANDING.

(viii) DIVIDEND PAY-OUT RATIO:

The Dividend Pay-out Ratio or Pay-out Ratio is Dividend Per Share divided by Earnings Per Share. Earnings not distributed to shareholders are retained in the business as Reserves. Thus retention ratio is 1-Payout ratio. Pay-out Ratio = DPS / EPS

(ix) PRICE EARNING RATIO: The price earnings ratio is widely used by the security analysts to value the firms performance as expected by investors. PE ratio for industries varies widely and reflect investors expectations about the growth in the firms earnings. This is calculated by dividing Market value per share by EPS. PE ratio = Market Value Per Share / EPS

4.2.5 GUIDELINES FOR USAGE OF RATIOS:

The calculation of ratios may not be difficult task but, their use is not that simple. The information on which they are based, the constraints financial statements, objective for using them, the caliber of the analyst are important factors that influence the use of ratios.

I. ACCURACY: The reliability of ratios is linked to the accuracy of information in the statements, from which the data is taken. Before calculating ratios one should see whether proper concepts and conventions have been used for preparing financial statements or not. Competent auditors should also proper audit these statements. II. OBJECTIVE: The type of ratios to be calculated depends upon the purpose for which these are required. If the purpose is to study current financial position, then ratios relating to current assets and current liabilities will be studied. III. SELECTION OF RATIOS: Another precaution in Ratio analysis is the proper selection of appropriate ratios. The ratios should match the purpose for which they are required. Calculation of large number of ratios without determining their need in the present context may confuse the things instead of solving them.

IV. USE OF STANDARDS: The ratios will give an indication of financial position only when discussed with reference to certain standards. Unless otherwise these ratios are compared with certain standards, one will not be able to reach at conclusions. V. CALIBER OF ANALYST: The ratios are only the tools of analysis and their interpretation will depend upon the caliber and competence of the analyst. He should be familiar with various financial statements and significance of accounting. VI. RATIOS PROVIDE A BASE: the ratios are only guidelines for the analysts. They should not base the decisions entirely on them, but consider relevant information, situation of concern and economic environment etc,.

4.2.6 SIGNIFICANCE OF RATIO ANALYSIS:

Ratio analysis, which is a power tool of financial analysis, is used as a device to analyse and interpret the financial health of enterprises. The following are the significances of ratio analysis.

I. MANAGERIAL USES: a. HELPS IN DECISION MAKING: Financial statements are prepared primarily for decision-making. But the information provided in the financial statements is not self sufficient itself and no meaningful conclusions can be drawn from these statements alone. b. HELPS IN FINANCIAL FORECASTING AND PLANNING: Ratio analysis is very much helpful in financial forecasting and planning. Planning is looking ahead and the ratios calculated for a number of years work as a guide for the future. c. HELPS IN COMMUNICATING: The financial strength and weakness of a firm are communicated in an easier and understandable manner through the ratios. d. HELPS IN COORDINATION: Ratios help in coordination, which is of utmost importance in effective business management. Better coordination improves efficiency and brings down bottlenecks in enterprises resulting in better productivity and success.

e. HELPS IN CONTROL: Ratio analysis helps in making effective control of the business. Standard ratios are based on proforma financial statements and variances or deviations. If

any are found by comparing with the standards as to take a corrective action at the right time.

II. OTHER USES: a. It is an essential part of the budgetary control and standard costing. Ratios are of immense importance in the analysis and interpretation of financial statements as they bring strength to financial procedures of a firm. b. They are of utility to share holders and investors. Investors like to assess the financial position of the concern, where he is going to invest. His first interest will be security of his investment and then the return in the form of dividend or interest. c. They are of utility to creditors. Creditors are interested to know whether the financial position of enterprise warrants the payment at the end of stipulated time. d. They are of utility to employees. These are interested in the financial position or the profitability of enterprise, as wage increase and incentives are generally linked with profits. e. They are of utility to government. Government is generally interested to know the overall strength of the enterprises. Various financial statements published by industrial units are used to calculate ratios for determining short-term and over all financial position of the houses. 4.2.7 LIMITATIONS: Difficulty in comparison: one serious limitation of ratio analysis arises out of the difficulty associated with the comparison to draw inferences. One technique that is employed is inter-firm comparison. But such comparisons are adopted by different procedures by various firms. Price level changes: Financial accounting as it is currently practiced in India and most other countries, does not take into account of change in price level. As a result, balance sheet figures are destroyed and profits are misreckoned. Hence financial statements analysis can be considerably vitiated. Window dressing: firms may resort to window dressing to project a favorable financial picture. For example, a firm may prepare its balance sheet at a point, when its inventory level is very low. As a result, it may appear that the firm may have a very comfortable liquidity position and a high turnover of inventories.

Accounting limitations: Ratio analysis is based on financial statements, which are themselves subject to severe limitations. Therefore any ratios, calculated on the basis of figures given in the financial statements also suffer from similar limitations.

Conceptual diversity: Another limitation that affects the usefulness of ratios is the difference of opinion regarding various accounting concepts used to compute the ratios. There is a diversity of opinions as to what constitutes shareholders, equity, debt, asset, profit and so on. These terms are understood and used differently by different firms or the same firm uses the terms in different senses at different times.

Ratio analysis conveys observation: Conclusions drawn from ratio analysis are the sure indications of bad or good management. They merely convey certain observations which need further investigations or otherwise wrong conclusions may be draw

4.3 WORKING CAPITAL

4.3.1 INTRODUCTION One of the most important areas in the day-to-day management of the firm is the management of working capital. Working capital management is the functional area of Finance that covers all the current accounts of the firm. It is concerned with management of the level of individual current assets as well as the management of total working capital. Procurement of Funds is firstly concerned with Financing working capital requirement and secondly with financing Fixed Assets.

4.3.2 MEANING: Working capital refers to the funds invested in Current Assets, i.e., investment in stock, sundry debtors, cash and other current assets. Current Assets are essential to use Fixed Assets profitably. For example, a machine cannot be used without raw material. The investment on the purchase of raw material is identified as working capital. It is obvious that a certain amount of funds is always tied up in raw material, inventories, work-in-process, finished products, consumable stores, sundry debtors and day-to-day cash requirements. However, the businessman also enjoys credit facilities from his suppliers who may supply raw material on credit. Similarly, a businessman may not require funds immediately for various expenses. For instance, the employees are paid only periodically. Therefore, a certain amount of funds is automatically available to

finance the current assets requirements. However, the requirements for current assets are usually greater than the amount of funds payable through current liabilities. In other words, the current assets are to be kept at a higher level than the current liabilities. Apart from investment in fixed assets, every enterprise has to arrange adequate funds to meet the day-to-day expenses, to keep the firm in working. So, truly speaking, working capital refers to the flow or ready funds necessary for working of enterprise.

4.3.3 DEFINITIONS OF WORKING CAPITAL According to MEAD MALLOT, working capital means current assets. According to HOAGLAND, working capital is that capital, which is not fixed. But the more common view of the working capital is the difference between the book value of the current assets and the current liabilities. According to NONNEVILLE, any acquisition of funds which increases the current assets, increases working capital also, for, they are one and the same. According to WESTON & BRICHAM, working capital refers to a firms investment of short-term assets cash, short-term securities, accounts receivable and inventories.

4.3.4 CONCEPT OF WORKING CAPITAL

There are two concepts of working capital, basically. They are i) Gross working capital concept, ii) Net working capital concept. The Gross working capital simply, called as working capital, refers to the firms investment in current assets. Current assets are the assets that can be converted into cash within an accounting year or an operating cycle, include, cash, short-term securities, debtors, bills receivables, and stock (inventories). The term Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year and include creditors, bills payable, bank overdraft and outstanding expenses. Net working capital can be positive or negative. A positive networking capital arise when current assets are in excess of current liabilities and a negative one occur when current liabilities are in excess of the current assets. The two concepts are not exclusive; rather have equal significance from management viewpoint. The Gross working capital concept focuses attention on two

aspects of current assets management, (a) Optimum investment in current assets and, (b) Financing of current assets. The consideration of the level of investment in current assets should avoid two danger points- excessive investment and inadequate investment, as it impairs firms profitability. Inadequate amount of working capital is a threat to the solvency of the firm, where as, excessive funds due to their idleness, earns nothing, leading to higher opportunity costs. It should be realized that the working capital needs of the firm may be fluctuating with changing business activity. This may cause excess or shortage of working capital frequently. The management should be prompt enough, to initiate an action and correct the imbalance. Another aspect of the gross working capital points to the need of arranging funds to finance current assets. Whenever a need for working capital funds arise due to the increasing level of business activity or for any other reason, the arrangement should be made quickly. Similarly, if sudden surplus funds arise, they should not be allowed to remain idle, but should be invested in short-term securities. Thus, the financial manager should have knowledge of the sources of working capital funds as well as the investment avenues, where the idle funds may be temporarily invested. The net working capital, being the difference of current assets and current liabilities, is a qualitative concept. It indicates (a) the liquidity position of the firm and (b) suggests the extent to which working capital needs may be financed by permanent sources of funds. Current assets should be sufficiently in excess of current liabilities to constitute a margin or buffer for maturing obligations with in the ordinary operating cycle of business. In order to protect their interests, the short-term creditors always like a company that maintain current assets twice that of the level of current liabilities. However the quality of the current assets should be considered in determining the level of current assets vis--vis current liabilities. A weak liquidity position poses threat to the solvency of the company and makes it unsafe and unsound. A negative working capital means a negative liquidity and is disastrous for the company. Excessive liquidity is bad. It may be due to mismanagement of current assets. Therefore, prompt and timely action should be taken by management to improve and correct the imbalance in the liquidity position of the firm. The networking capital concept also covers the question of judicious mix of longterm and short-term funds for financing current assets. For every firm, there is a

minimum amount of net working capital, which is permanent. Therefore a portion of the working capital should be financed with the permanent sources of funds, such as owners capital, debentures, long term debt, preference capital or retained earnings. Management must therefore, decide the extent to which current assets should be financed with equity capital and or borrowed funds. In summary, it may be emphasized that, gross and net concepts of working capital are two important facts of the working capital management. There is no precise way in determining the exact amount of gross of net working capital for every firm. The data and problems of each company should be analysed to determine the amount of working capital. There is no specific rule in which current assets should be financed. It is not feasible in practice to finance current assets by short-term sources only. Keeping in view the constraints of the individual case, a judicious mix of long-term and short-term finance, should be invested in current assets.

4.3.5 THE NEED FOR WORKING CAPITAL We hardly find a business firm, which does not require any amount of working capital; indeed, firms differ in their requirements of the working capital. We know that firms aim at maximizing the wealth of shareholders. In its attempt to maximize shareholders wealth, the firm should earn sufficient return from its operations. Earning a steady amount of profit requires successful sales activity. The firm has to invest enough funds in current assets for the success of the sales activity. Current assets are needed because; sales do not convert into cash instantaneously. There is always and operating cycle involved in the conversion of sales into cash.

4.3.6 OPERATING CYCLE: The duration of time required, in a manufacturing firm, to complete the following sequence of events is called the operating cycle. Conversion of cash into raw material. Conversion of raw materials into work-in-process. Conversion of work-in-process into finished goods. Conversion of finished goods into debtors and bills receivables through sales. Conversion of debtors and bills receivables into cash. The cycle repeats again and again and is as depicted below

Cash Raw Material

Debtors

Sales Finished Goods

Work in Progress

Operating cycle approach to working capital management

Raw Material Storage Period: 1. Annual consumption of raw materials, components etc., 2. Average daily consumption of raw materials, components etc., assuming an year of 360 days for convenience = (1) / 360 3. Average stock of raw materials, components etc. in work-in-process = (Opening stock + Closing stock) / 2 4. Raw material storage period = (3) / (2) = n1 days

Conversion Period: 1. Annual cost of production = Opening stock of work-in-process + Consumption of raw material etc, + Other manufacturing costs such as wages and salaries, power and fuel etc., + Depreciation Closing work in process. 2. Average daily cost of production = (1) / 360. 3. Average stock of finished goods = (Opening stock + Closing stock) / 2 4. Average conversion period = (3) / (2) = n2 days.

Finished Goods Storage Period: 1. Annual cost of sales = Opening stock of finished goods / cost of production + excise duty + selling and distribution costs + general administrative cost + financial costs closing stock of finished goods. 2. Average daily cost of sales = (1) / 360 3. Average stock of finished goods = (opening stock + closing stock) / 2

4. Finished goods storage period = (3) = n3 days.

Average Collection Period: 1. Annual credit sales of the company. 2. Average daily credit sales = (1) / 360. 3. Average balance of sundry debtors = (Opening balance + Closing balance) / 2 4. Average collection period = (3) / (2) = n4 days.

Average Payment Period: Annual credit purchases made by the company. 1. Average daily credit purchase = (1) / 360. 2. Average balance of sundry creditors = (Opening balance + Closing balance) / 2 3. Average payment period (1) / (2) = n5 days.

4.3.7 DETERMINENTS OF WORKING CAPITAL There is no set of rules formulated to determine the working capital requirements of the firms. A large number of factors influence the working capital needs of the firms. All factors are of different importance. Also, the importance of the factors changes over time. Therefore, analysis of the relevant factors should be made in order to determine the total investment in working capital. The following is the description of the various factors that generally influence the working capital requirements of the firm. Nature and size of the business. Manufacturing cycle. Business fluctuations Production policy. Firms credit policy. Availability of credit. Growth and expansion activities. Profit margin and profit appropriation. Price level changes.

4.3.8 WORKING CAPITAL MANAGEMENT A. Cash Management.

B. Receivables Management. C. Inventory management. A. Cash management: Cash management is one of the key areas of working capital management. Apart from the fact that it is the most liquid current asset, cash is the other major liquid asset, i.e., receivables and inventory get eventually converted into cash. The term cash with reference to cash management is used in two senses. In a narrow sense, it is used to cover currency and generally accepted equivalents of cash such as cheques, drafts and demand deposits in banks. This refers to the holding of cash, to meet routine cash requirements to finance the transaction which a firm carries on in the ordinary course of business. The cash balance held in reserve for such random and unforeseen fluctuations in cash flows are called as precautionary balances. In other words, precautionary motive of holding cash implies the need to hold cash to meet unpredictable obligations. Yet another motive to hold cash balances is to compensate banks for providing certain services and loans. Banks provide a variety of services to business firms, such as clearances of cheques, supply of credit information, transfer of funds etc., while for some of the services, banks charge a commission or fee. For others they seek indirect compensation. Usually clients are required to maintain a minimum balance of cash at the bank. B. Receivables management: The term receivables is defined as debt owed to the firm by customers arising from sale of goods or services in the ordinary course of business. When a firm makes an ordinary sale of goods or services and does not receive payment, the firm grants credit and creates accounts receivable, which would be collected in the future. Receivables management is also called as trade credit management. Thus, accounts receivable represent an extension of credit to customers, allowing them a reasonable period of time in which, payment is to be made for the goods they have received. The sale of goods on credit is an essential part of the modern competitive economic system. In fact, credit sales and therefore, receivables are treated as a marketing tool to aid the sales. The credit sales are generally made on open account in the sense that there are no formal acknowledgements of debt obligations through a financial instrument. As a marketing tool, they are intended to promote sales and there by profits.

However, extension of credit involves risk and cost. Management should weigh the benefits as well as cost to determine the goal of receivables management. Thus, the objective of receivables management is to promote sales and profits until that point, where, the return on investment in further funding of receivables is less than the cost of funds raised to finance that additional credit i.e., cost of capital.

C. Inventory management: The term inventory refers to the stockpile of the product; a firm offers for sale and the components that makeup the product. In other words, inventory is composed of assets that will be sold in future in the normal course of business operations. The assets which firms store as inventory in anticipation of need are 1) Raw material 2) Work-in-process or semi-finished goods and 3) Finished goods. The raw material inventory contains items that are purchased by the firm from others and are converted into finished goods through the manufacturing process. They are an important and essential input to the final product. The work-in-process inventory consists of items currently being used in the production process. They are normally partial or semi finished goods that are at various stages of production process in a multi-stage production process. Finished goods represent final or completed products, which are available for sale. The inventory of such goods consists of items that have been produced but are yet to be sold. Inventory, as a current asset, differs from other current assets, with a view that only financial management is not involved with this. Rather, all the financial areas of Finance, Marketing, Production, and Purchasing are involved. The views concerning the appropriate level of inventory would differ among the different functional areas. The job of the financial manager is to reconcile the conflicting viewpoints of the various functional areas regarding the appropriate inventory levels in order to fulfill the over all objective of maximizing the owners wealth. Thus, inventory management, like the management of other current assets should be related to the over all objective of the firm.

4.3.9 Proforma for working capital statement CHANGES IN WORKING CAPITAL OF RIL at 31st March 20XX-YY

Particulars A. CURRENT ASSETS 1.Inventories 2.Sundry Debtors 3.Cash and Bank balances 4.Other Current Assets 5.Loans and Advances 6.Interest Accrued 7.Deposits with Banks under site restoration fund scheme TOTAL CURRENT ASSETS B.CURRENT LIABILITIES 1.Sundry Creditors 2.Liability for Royalty/cess/ Sales Tax etc. 3.Deposits from Suppliers/ Contractors 4.Unclaimed Dividend 5.Interest Accrued but not due on loans 6.Other Liabilities 7.Provisions TOTAL LIABILITIES CURRENT

YEAR Previous

Current

(Rs.MILLIONS) WORKING CAPITAL Increase Decrease

NET WORKING CAPITAL (AB) Increase in working capital

CHAPTER 5 ANALYSIS OF DATA OF RIL

5.1 RATIO ANALYSIS

5.1.1 LIQUIDITY RATIOS: Current ratio, Quick ratio / Acid Test ratio and Cash ratio are considered under Liquidity ratio category. The data in tables and diagram form, in each section follows.

(1) Current Ratio: Current ratio, being the most widely used measure of general liquidity or short-term solvency of enterprises is the ratio of Current Assets and Current Liabilities. Current Ratio as projected by RIL in its Annual Reports is presented in Table: 4-1 and Figure 4.1 Current ratio: It is calculated by dividing current assets with current liabilities

Current ratio =

current Assets / Current Liabilities FIGURE 5.1


CURRENT RATIO

1.5 1.45 1.4 1.35 1.3 1.25 1.2 1.15 1.1 2008-09 2009-10 Percentage 2010-11

Current ratio has been constantly improving and the trend shows that the current ratio has increased from over 1.2% to 1.47% from 2008-09 to 2010-11. During the period of consideration, it is observed that the current ration has been showing an increasing trend and current assets have raised at 56% from 2008 to 2011 which is mainly due to increase in inventories, sundry debtors and cash & bank balances.

Year

TABLE 5.1

(Rs. In Crores)

CURRENT ASSETS, ADVANCES Current Assets Inventories Sundry Debtors Cash and Bank Balances Other Current Assets SUB TOTAL LOANS AND ADVANCES

LOANS

& 2008-09 20109.61 4844.97 22742.1 47.59 47744.27 11001.8 2009-10 34393.32 10082.92 13890.83 91.4 58458.47 10647.21 20010-11 38519.43 15695.19 30139.03 261.68 84615.33 13464.25

TOTAL CURRENT ASSETS, LOANS & ADVANCES CURRENT LIABILITIES AND PROVISIONS Current Liabilities Provisions TOTAL CURRENT LIABILITIES & PROVISIONS NET CURRENT ASSETS CURRENT RATIO Source: RIL Annual Reports

58746.07

69105.68

98079.58

35756.98 3115.03 38872.01 19874.06 2008-09 1.228242893

38890.57 3695.02 42585.59 26520.09 2009-10 1.372728897

52716.47 4730.26 57446.73 40632.85 2010-11 1.472935535

(2) QUICK RATIO Quick ratio or Acid test ratio is a measure of liquidity compared to Current ratio. A high level of quick ratio indicates the firms liquidity and ability to meet the current and liquid liabilities. The data follows in Table: 4.2 and Figure 4.2 During the period of consideration, it is observed that the quick ratio has been showing an increasing trend and quick assets have raised to 60% from2008 to 2011 which is mainly due to increase in inventories, and other current assets.

QUICK RATIO 1 0.8 YEAR 0.6 0.4 0.2 0 2008-09 2009-10 RATIO 2010-11
QUICK

FIGURE 5.2

Quick ratio =

(Current assets- inventories) / Current liabilities

TABLE 5.2 QUICK RATIO QUICK ASSETS Sundry Debtors Cash and Bank Balances Other Current Assets loans and advances SUB TOTAL CURRENT LIABILITIES Current Liabilities QUICK RATIO

(Rs. In Crores) 2008-09 2009-10 2010-2011

4844.97 22742.1 47.59 27634.66

10082.92 13890.83 91.4 24065.15

15695.43 30139.03 261.68 46096.14

35756.98 2008-09 0.772846588

38890.57 2009-10 0.618791393

52716.47 2010-11 0.874416288

5.1.2 LEVERAGE RATIO:

The current Debt paying capacity of firms is the concern of short-term creditors. In fact firms should have a strong short as well as long-term financial position. To judge the long-term financial position of firms, Leverage ratios are calculated. Here, in the present study related to RIL, leverage ratios of 1) Total Debt ratio 2) Debt-Equity ratio 3) Capital employed ratio and 4) Interest coverage ratio are calculated and presented in table and diagrammatic graph forms.

Total Debt Ratio: The total debt ratio is calculated by dividing total debt (TD) by capital employed (CE) or net assets (NA). Total debt include short and long-term borrowings, debentures/bonds, deferred payment arrangements for buying capital equipment, bank borrowings, public deposits and any other interest bearing loan. Capital employed includes total debt and net worth (NW). The data relevant is produced in Table5.3. During the period under consideration, it is observed that the Total Debt has increased by over 0.906% in comparision to the total assets which is over .829% , resulting in lower Total debt turnover ratio. Total debt ratio = Total Debt / (Total debt + Net worth) =TD / (TD + W)

TABLE 5.3

(Rs. In Crores) TOTAL DEBT RATIO

PARTICULARS Total Debt NetWorth Capital Employed(total debt+ net worth) Total Debt Ratio FIGURE 5.3
Total Debt Ratio 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2011-2010 2010-2009

2010-11 84106.19 154092.75 238198.94 2010-2011 0.353092209

2010-09 64605.52 141002.98 205608.5 2010-2009 0.314216192

2009-2008 76256.6 121256.54 197513.14 2009-2008 0.38608368

Total Debt Ratio

2009-2008

Figure 1 The trend of debt ratio shows that the company is decreasing the amount of debt which is around 0.38% to 0.35% from 2008 to 2011

(2) Debt Equity Ratio: This ratio describes lenders contribution for each rupee of owners contribution. The data pertaining to debt-equity ratio is presented in Table 5-4 and Figure 5.4 TABLE 5.4 (Rs. In Crores) Debt Equity Ratio PARTICULARS Total Debt NetWorth Total Debt Ratio Debt Equity Ratio 2011-10 84106.19 154092.75 2011-2010 0.545815361 2010-09 64605.52 141002.98 2010-2009 0.458185494 2009-08 76256.6 121256.54 2009-2008 0.628886491

The trend shows that the the lenders contribution for each rupee of owners contribution has been decreasing from 2008-09 to 2010-11. The percentage change has been from 62% to 54% . The percentage change in the lenders contrtibution was over 0.906% and that of the owners contribution was over 0.786%

FIGURE 5.4
Debt Equity Ratio 0.7 0.6 Percentage 0.5 0.4 0.3 0.2 0.1 0 2011-2010 2010-2009 Year 2009-2008
Debt Equity Ratio

Debt-equity ratio = Total Debt / Net worth = TD / NW

The trend shows that the ratio is around 0.62% in 2008-09 and fell to 0.54% in 2010-11, thus showing that the contribution of lenders is falling and the company is clearing off the debt, to become a debt-free company.

5.1.3 ACTIVITY RATIOS:

Ratios that study the activity or turnover of firms are called Activity ratios. These are calculated with respect to Sales and are employed to evaluate the efficiency with which firms manage and utilize their assets. These are also called turnover ratios as they indicate the speed with which assets are being converted or turned over into sales. Ratios named 1) Inventory turnover 2) Debtors turnover 3) Assets turnover and 4) working

capital turnover are calculated for the present study of financial performance analysis of RIL.

(1)Inventory Turnover Ratio: This indicates the efficiency of the firms in producing and selling its products. It is calculated by dividing the cost of goods sold by the average inventory. The data of relevance is presented in Table 5.5. Inventory Turnover = Cost of goods sold / Average inventory. Table 5.5 INVENTORY TURNOVER RATIO PARTICULARS 20112010 Cost of Goods sold present year inventory previous year inverntory Avg.Inventories 265810.6 38519.43 34393.32 36456.38 20112010 7.29 20102009 203739.7 34393.32 20109.61 27251.47 20102009 7.48 20082009 151335.5 20109.61 19126.14 19617.88 20092008 7.71

Inventory Turnover Ratio

Figure 5.5
Inventory Turnover Ratio 7.8 7.7 Rs.in Crores 7.6 7.5 7.4 7.3 7.2 7.1 7 2011-2010 2010-2009 Year 2009-2008

The trend shows that the ratio decreased continuously up to 2011. It indicates that RIL is turning its sales into inventory over 1.03 times a year in 2008-09 and touching around 7.48 and then over 1.05 times in 2010-11 and reached a level of 7.29 which is the lowest of the period of consideration. During the period under consideration, the percentage change in the cost of goods sold changes by 0.56% and the average inventory is at 0.53%. Due this the trend shows a fluctuating inventory turnover ratio.

(2)Debtors Turnover Ratio: Firms sell goods for cash and credit. Credit is used as a marketing tool by firms, thus through extending credit to customers, debtors (accounts receivables) are created. This ratio is calculated by dividing sales by average debtors. The data of relevance is presented in Table 5.6.

Debtors turnover ratio = Credit sales / Average debtors.

The trend shows that the Debtors turnover is Decreasing through out the period of consideration. With a highest of 27.73 in 2008-09 to least at 20.62 in 2010-11. TABLE 5.6 DEBTORS TURNOVER RATIO PARTICULARS 2008-2009 Net Sales Present Year Debtors Previous Year Debtors Aveg.Debtors Debtors Turnover 151335.54 4844.97 6068.3 5456.635 27.73 2008-2009 27.73 2009-2010 2010-2011 203739.7 10082.92 4844.97 7463.945 265810.6 15695.19 10082.92 12889.06

27.30 20.62 2010-2009 2011-2010 27.30 20.62

Debtors Turnover Ratio

FIGURE 5.6
Debtors Turnover 30 25 Percentage 20 15 10 5 0 2008-2009 2009-2010 Year 2010-2011

(3) Assets Turnover Ratio: Assets are used to generate sales, thus firms should manage their assets efficiently to maximize sales. The relationship between sales and assets is called Assets turnover. This

is calculated by dividing Sales by Net assets or Capital employed by enterprises. The data of relevance for Net assets turnover is depicted in Table 4.7. Table 5.7 ASSETS TURNOVER RATIO PARTICULARS Net Sales` Present Year Total Assets PreviousYear Total Assets Capital Employed 2000-01 151335.5 197653.5 140296.9 168975.2 2008-2009 0.90 2001-02 203739.7 206183.4 197653.5 201918.4 2009-2010 1.01 2002-03 265810.6 239002.51 206183.39 222592.95 2010-2011 1.19

Assets Turnover Ratio Figure 5.7

Assets Turnover Ratio 1.40 1.20 Percentage 1.00 0.80 0.60 0.40 0.20 0.00 2008-2009 2009-2010 2010-2011
Assets Turnover Ratio

Year

Net assets turnover ratio = Sales / Net assets

The trend shows that Net assets are turned over into sales at 0.09 times in 2000-09

and 1.19 times in 2010-11. Through out the period of consideration, the ratio exhibits a rising trend.

(4) Working Capital Turnover Ratio:

This is calculated by dividing Sales with Net current assets. The relevant data is provided in Table 5.8.

Working capital turnover ratio = Sales / Net working capital

Table 5.8 Working Capital Turnover Ratio

PARTICULARS 2008-2009 Net Sales Net working capital 151335.5 19875.48 2008-2009 7.61 2009-2010 203739.7 26521.45 2009-2010 7.68 2010-2011 265810.6 40634.21 2010-2011 6.54

Working capital Turnover Ratio Figure 5.8

Working capital Turnover Ratio 7.80 7.60 7.40 7.20 7.00 6.80 6.60 6.40 6.20 6.00 5.80 2008-2009 2009-2010 Year 2010-2011

The trend shows that the Net working capital turnover ratio is at 7.61 times in 2008-09 and at 6.54 times in 2010-11. The trend shows that Net working capital ratio has been increasing constantly over 49% in 3 Years which is mainly due to increase in inventories,

Percentage

sundry debtors and cash & bank balances. Whereas net sales also increases year wise there is comparative decrease of net working capital So it show a vast decline in 2010-11

5.1.4 PROFITABILITY RATIOS:

Profit is the ultimate output of a company, and as such the financial managers should continuously evaluate the efficiency of the company in terms of profits. These ratios are calculated to measure the operating efficiency of companies. In the present study 1) Gross margin ratio 2) Net margin ratio 3) ROI 4) ROE 5) EPS 6) DPS 7) Dividend payout ratio and 8) P-E ratios are calculated for RIL. These are as follows.

(1)

Gross Margin Ratio:

This is the first profitability ratio in relation to sales. This ratio reflects the efficiency with which management produces each unit of product. A high value of ratio is a sign of good management. This is calculated by dividing difference of sales and cost of goods sold i.e. EBITDA by sales. The relevant data is presented in Table 5.9.

Gross margin = Gross profit / Sales

Table 5.9

PARTICULARS 2009-2010 Gross profit/EBITDA(Operating Profit) Sales Gross Margin Ratio 41685.24 203739.7 2009-2010 0.20 2010-2011 40586.4 265,810.60 2010-2011 0.15 2011-2012

Figure5.9

Net Profit Margin

0.14 0.12 PERCENTAGE 0.10 0.08 0.06 0.04 0.02 0.00 2008-2009 2009-2010 YEAR 2010-2011

The trend shows that the Gross margin ratio is almost above 20% throughout the period of consideration. Though it is at the peak of 20% in 2003-04, RIL is able to maintain the gross margin at around 20%. The high level of gross margins could be either because of higher sales revenue, with constant operating expenses or constant sales revenue with lowered or efficient operations. In this case of RIL, the sales revenue data clearly indicates that the sales revenue also increased well.

(2) Net Profit Margin Ratio: The Net profit margin ratio is calculated by dividing PAT with sales. Net profit is obtained by subtracting operating expenses, interest and taxes from gross profits. Net profit margin ratio establishes a relationship between net profit and sales and indicates managements efficiency in manufacturing, administering and selling the products. This is the overall measure of the firms ability to turn each rupee sales into net profit. The relevant data is presented in Table 5-10 and Fig.5.10

TABLE: 5-10 Net PROFIT MARGIN

PARTICULARS 20082009 20092010 2010-2011

PAT (Net Profits After Minorities) Sales

Net Profit Margin Net Profit Margin = PAT / Sales. FIG: 5-10
Net Profit Margin 0.14 0.12 PERCENTAGE 0.10 0.08 0.06 0.04 0.02 0.00 2008-2009 2009-2010 YEAR

14968.72 151335.5 20082009 0.10

24503.14 203739.7 20092010 0.12

19293.68 265,810.60 2010-2011 0.07

2010-2011

The graph shows that the Net margin increased continuously over the period of consideration. It is at its peak in 2004-05 at 10%, indicating a strong earning potential. 3.Share Ownership Pattern Share holding pattern of RIL is as follows

Source: RIL Annual Report 2010-11

The above Share holding Pattern is also depicted in the Chart below. Shareholding Pattern Chart

Promoter andPromoter's Group Public Share Holdings Custodians &Depositary Receipts

Source: RIL Annual Report 2010-11

4.EPS History EPS pattern of RIL has been consistently growing as shown below 2010-11 Earnings Per Share 62.00 09-10 49.7 08-09 49.7 07-08 105.3

150 100
Earnings Per Share

50 0 2007-08 2008-09 2009-10 2010-11 5.Dividend History RILs dividend paying history has been constantly increasing and the company had paid 100% Dividend to shareholders during 2010-11(Rs. In Crore)

Equity Dividend% Dividend Payout

80 2385

70 2084

130 1897

130 1631

DIVIDENT PAID 150 100 50 0 2007-08 2008-09 2009-10 2010-11

Source: RIL Annual Report 2010-11

5.2 CHANGES IN WORKING CAPITAL Table 5-14 CHANGES IN WORKING CAPITAL OF RIL DURING 2008-09 Change in Working Capital From Consolidated B/S Particlars Current Assets Inventories Sundry Debtors Cash and Bank Balances Other Current Assets 47,744.27 58,746.07 29,741.22 11,001.80 21,747.65 51,488.87 35,756.98 3,115.03 23,417.51 3,449.18 Loans and Advances 20,109.61 4,844.97 22,742.10 47.59 19,126.14 6,068.30 4,474.16 72.62 31st March 2009 2008 Current Assets, Loans and Advances

Less: Current Liabilities and Provisions Current Liabilities Provisions

38,872.01 26,866.69 Net Current Assets 19,874.06 24,622.18

Current Assets: Inventories, Sundry Debtors, Cash and Bank balances, Other Current Assets and Loans & Advances posted an increase in working capital by Rs.725.72 Crores during 2009

Current Liabilities: During 2009, Sundry Creditors, Other current liabilities and Provisions all put together have increased the working capital by Rs.12005.32Crores. This led to an decrease in Net Working Capital by Rs. 4.748.12Crores during 200809.

CHANGES IN WORKING CAPITAL OF RIL DURING 2009-10 Table 5-15 Working capital Particular 31st March 2010 2009 Current Assets, Loans and Advances Current Assets Inventories 34,393.32 20,109.61 Sundry Debtors 10,082.92 4,844.97 Cash and Bank Balances 13,890.83 22,742.10 Other Current Assets 91.40 47.59 58,458.47 47,744.27 Loans and Advances 10,647.21 11,001.80 69,105.68 58,746.07 Less: Current Liabilities and Provisions Current Liabilities 38,890.57 Provisions 3,695.02 42,585.59 38,872.01 Net Working Capital 26,520.09 35,756.98 3,115.03 19,874.06

Current Assets: Inventories, Sundry Debtors, Cash and Bank balances, Other Current Assets and Loans & Advances posted an increase in working capital by

Rs.10359.61Crores during 2010

Current Liabilities: During 2010 Sundry Creditors, Other current liabilities and Provisions all put together have increased the working capital by Rs.3713Crores. This led to an Increase in Net Working Capital by Rs.6646Crores during 2009-10 Table 5-16 CHANGES IN WORKING CAPITAL OF RIL DURING 2010-11 Change in Working Capital Particular 31st March 2010 2011 Current Assets, Loans and Advances Current Assets Inventories 38,519.43 34,393.32 Sundry Debtors 15,695.19 10,082.92 Cash and Bank Balances 30,139.03 13,890.83 Other Current Assets261.68 91.40 84,615.3358,458.47 Loans and Advances 13,464.25 10,647.21 98,079.58 9,105.68 Less: Current Liabilities and Provisions Current Liabilities 52,716.47 38,890.57 Provisions4,730.26 3,695.02 57,446.7342,585.59 Net Current Assets 40,632.85 26,520.09

Current Assets: Inventories, Sundry Debtors, Cash and Bank balances, Other Current Assets and Loans & Advances posted an increase in working capital by

Rs.28973.9Crores during 2011 Current Liabilities: During 2011 Sundry Creditors, Other current liabilities and Provisions all put together have increased the working capital by Rs.14861.14Crores. This led to an Increase in Net Working Capital by Rs.14112.76Crores during 201011.

CHAPTER 6

6.1 Key Findings: Current ratio of the company shows a satisfactory sign. An ideal current ratio is 2:1. The company is showing 1.47 at current year. This ratio has been changed from 1.3 to 1.29 to 1.4 for the last three years of the study. Companys quick ratio for the last three years is showing a fluctuating trend. The standard norm fixed for quick ratio is 1:1. It shows that the companys liquidity position is satisfactory as it is well above the standard norms. But only in the year 2009-2010 it has been 0.76. The company had recovered very quickly in repaying its short term obligations in 2011 so it stands at 1.01 Net working capital ratio of the company indicates the efficiency of the firm to be able to pay its current obligations is satisfactory. Debt-Equity ratio for the year 2008-09 was 0.62, which decreased to 0.54 during 201011. Throughout the years of study debt equity ratio showed similar trend, i.e., lender's contribution is slightly less than the owner's contribution which means slight decrease in the use of long term debt. The average inventory turnover ratio is 7.29 in 2010-11. A inventory turnover ratio is 7.714 in 2008-09wchich shows decrease in trend. Inventory turnover ratio of 8 times is

considered to be ideal. Thus the management should improve this trend in the inventory management. The net profit ratio showed increasing trend for the first half of period under study and then decreased in the last half. The net profit margin got reduced because of the increase in administrative, selling expenses and other interest and finance charges during 2010-11. Trend analysis of current assets, fixed assets and sales show an increasing trend over year by year. The volume of current liabilities increased in the last year and that can be attributed to increasing trend of above factors like current and fixed assets. Prospective Business Plans in over all RIL RIL to acquire Bharti's stake in the Insurance JVs with AXA in India Reliance Industries makes Gas and Condensate Discovery in Cauvery-Palar Region in April 2011 Highest ever Revenue, PBDIT and Net ProfitRecord earnings in Petrochemical crude throughput and improved Refining Margins Strategic alliances in upstream oil & gas business in 2011 Reliance Industries Commences Implementation of Large Polyester Projects in India Set to consolidate its position as the world's largest polyester producer Reliance Industries and D. E. Shaw Group announce Joint Venture Reliance and IL&FS to Jointly Develop Model Economic Township at Jhajjar, Haryana Highest Ever Nine Months Revenue, PBDIT and Net Profit

Net Profit US$ 3.3 Billion For the Nine Months(March 2011) PBDIT Of US$ 6.8 Billion For the Nine Months(2010-2011) Petrochemicals Business Achieves Record Quarterly Performance,Strong Recovery in Refining Margins BP and reliance industries announce transformational partnership in IndiaReliance Industries Limited and BP to participate across the gas value chain in IndiaBP to take a 30 per cent stake in 23 oil and gas blocks.

Project Management E&P Division received the Petrotech-2010 Special Technical Award in the 'Project

Management' category for completion of their Krishna Godavari Gas project ahead of schedule. Financial Performance Strategic alliance with BP for domestic upstream portfolio BP to partner in 23 E&P blocks in India Committed investments of over $ 3.4 billion through 3 JVs signed in shale gas business in USA 40% JV with Atlas adds 5.3 TCFe of gas resource net to Reliance 45% JV with Pioneer adds 4.5 TCFe of gas & liquids resources net to Reliance 60% JV with Carrizo adds 2.0 TCFe of gas resource net to Reliance Additionally, Reliance and Pioneer formed a midstream JV that will service the gathering needs of the upstream JV 2 shale JVs now operational production commenced in Atlas and Pioneer JV with SIBUR for the setting up of a facility for producing 100,000 MT of butyl rubber in India RIL and D. E. Shaw group to form a JV to build a leading financial services business in India Infotel an RILs subsidiary, emerged as a successful bidder in all the 22 circles of the auction for BWA spectrum Highest ever revenues, PBDIT and net profit Turnover increased by 29% to ` 258,651 crore ($ 58.0 billion) PBDIT increased by 25% to ` 41,178 crore ($ 9.2 billion) Net profit increased by 25% to ` 20,286 crore ($ 4.5 billion) Cash profit increased by 24% to ` 34,530 crore ($ 7.7 billion) Highest ever petrochemicals segment EBIT Exports increased by 33% to ` 146,667 crore ($ 32.9 billion) Record crude throughput at 66.6 million tonnes strong recovery in GRM 6 discoveries notified to the DGH of which 5 were oil and 1 gas Reliance Holding USA, a subsidiary of RIL raised $ 1 billion 4.5% Guaranteed Senior Notes (due 2020) and $ 500 million, 6.25% Guaranteed Senior Notes (due 2040) Due to above business plans the financial ratios of the company would certainly improve and enhances value of market capitalization of the company. 6.2 Suggestions Considering the overall analysis of the company, the performance of the company as a whole has been outstanding and the company is moving towards realizing the goals of the organization with respect to maximizing the value of the shareholders and stakeholders. The following few suggestions are made in various areas for improved overall performance of RIL Ltd. 1.For inventory, in order to improve the position, RIL can reduce the level of stocks by resorting to phased production i.e. producing according to requirement and disposing off or recycling the unserviceable inventories though the business segments of RIL like

Oil and Gas and Petro chemicals etc requires huge stock holdings due to long lead times when compared to normal manufacturing companies. However, the low turnover of stock may also be due to problems with generation of sales. Inventory management is a great concern for RIL especially stores and spares. The purchase manager should take proper steps for procurement of inventories. 2. The company may take certain steps to improvise the working capital cycle. One way can bebetter management of inventories. 3.It is suggested to maintain a balance in capacities, synchronization of various inputsavailability of some materials or parts which are not easily available. 4. It should maintain inventory at an optimum level rather than a very optimistic level. 5. The procurement for materials requisition processing should be reduced so as to minimize the lead time. 7.Conclusion: The study involves practical and conceptual over view of decisions concerning current assets like cash and bank balance inventories, sundry debtors, loans and advances, other current assets and current liabilities like sundry creditors, securities and other deposits, other current liabilities and provisions of RIL. Was with the objective of maximizing the overall net profit of the share holder. And complete synchronization and coordination among the working capital components which shall contribute to optimum level of operations. Mismanagement of each or any of these components shall be detrimental to the objectives of efficient operation, profitability and maximization of overall value of the RIL. The working capital limits would be considered only after the project nearing completion and after ensuring control over the inventory. The inventory is a great concern for RIL and it need proper procurement and management. Cash flows which has the huge proceeds for Long term borrowings, less payments to long term borrowings in return which increases cash from financing activities. This study also attempts to find out the performance of the RIL and KG D6 working and different activities performed at the shore base as well as on shore and off shore. In this study, the general working of the cost allocation structure using SAP software is also explained in detailed as part of the internship study

8. REFERENCES: www.geohelp.net/world.html www.ril.com/html/aboutus/awards.html www.ril.com/html/investor/financials.html Reliance Industries Ltd. : BSE, NSE, Stock quotes, share market Drastic fall in Reliance KG-D6 gas output: DGH - Economic Times Directorate General of Hydrocarbons (DGH), Noida, India World energy consumption - Wikipedia, the free encyclopedia Global Oil Production and Consumption www.dghindia.org/SedimentaryBasins.aspx www.ibef.org Annual Report of RIL 2008-09 Annual Report of RIL 2009-10 Annual Report of RIL 2010-11 www.accountingformanagement.com Text Book Reference :Financial Management- Khan & Jain Text Book Reference :Financial Management- I M Pandey