CHAPTER – 1

INTRODUCTION: Indian Textile Industry

HISTORY OF TEXTILE

No one knows when exactly the spinning and weaving of textile began. It has been said that
people knew how to weave even 27000 years ago. This was even before humans were able to
domesticate animals. The oldest actual fragment of cloth found was in southern Turkey.

People used fibers found in nature and hand processes to make fibers into cloth. Even though
high technology was not available, skilled weavers created a wide variety of fabrics. Dyeing of
fabrics was done to satisfy the universal human need for beauty. Within time, more complex
social and political organization of people evolved. With the growth of cities and nations,
improvements in technology came into place and there was a substantial development in the
international trade, both of which involved textiles.

Chinese textile was considered to be the most significant in international trade. Historians have
claimed that silk from China has reached ancient Greece and Rome along a trade route called the
Silk Road in the latter part of the second century B.C. and Egypt in 1000 B.C. The Romans also
imported cotton from nearby Egypt and from India. Archeologists have found facilities for
dyeing and finishing cotton fabrics in settlements throughout the Roman world. During the
middle ages, the production and trading of the plant called ‘woad’, an important source of dye,
was a highly developed industry. During the fifteenth century, Trade Fairs in southern France
provided a place for the active exchange of wools from England and silks from the Middle East.
The economic activities surrounding these events gave rise to the first international banking
arrangements. Even the discovery of America was a result of the desire of Europeans to find a
faster route not only to the spices but also to the textiles of the Orient. Textile trade quickly took
root in America, as colonists sold native dyes such as indigo and cochineal to Europe and bought
cottons from India. Although advances were being made in the technology of textile production,
the manufacture of cloth in Western Europe in 1700 was still essentially a hand process. Yarns
were spun on a spinning wheel and fabrics were woven by hand-operated looms.

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A major reorganization of manufacturing of a variety of goods occurred during the latter half of
the 1700s in Western Europe. These changes, known as the ‘Industrial Revolution’, altered not
only technology, but also social, economic, and cultural life. The production of textiles was the
first area to undergo industrialization during the seventeenth and eighteenth centuries as the
result of an economic crisis. Good quality textile products, produced inexpensively in India and
the Far East, were gradually replacing European goods in the international market. In Britain, it
became imperative that some means be found to increase domestic production, to lower costs,
and to improve the quality of textiles. The solution was found in the substitution of machine or
nonhuman power for hand processes and human power.

Many important inventions, most importantly spinning machines, automatic looms, and the
cotton gin, improved the output and quality of fabrics. These inventions provided the
technological base for the industrialization of the textile industry. Each invention improved one
step of the process. For example, an improvement that increased the speed of spinning meant that
looms were needed that consumed yarn more rapidly. More rapid yarn production required
greater quantities of fiber. The growth of the textile industry was further hastened by the use of
machines that were driven first by waterpower, then by steam, and finally by electricity. The
textile industry was fully mechanized by the early part of the nineteenth century. The next major
developments in the field were to take place in the chemist’s laboratory. Experimentation with
the synthesis of dyestuffs in the laboratory rather than from natural plant materials led to the
development and use of synthetic dyes in the latter half of the nineteenth century. Other
experiments proved that certain natural materials could be dissolved in chemical solvents and re-
formed into fibrous form. By 1910, the first plant for manufacturing rayon had been established
in the United States.
The manufacture of rayon marked the beginning of the manufactured textile fibers industry.
Since that time, enormous advances have been made in the technology for every field in the
textile industry. Today, the textile industry utilizes a complex technology based on scientific
processes and vast economic organizations.

With the application of advanced technology to the textile field, textile use has expanded from
the traditional areas of clothing and home furnishings into the fields of construction, medicine,
aerospace, sporting goods, and industry. These applications have been made possible by the

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ability of textile scientists to utilize textile fibers, yarns, and fabrics for specific uses. At the same
time that textile technology is making strides in new directions, the fabrics that consumers buy
for clothing and household use also benefit from the development of new fibers, new methods of
yarn and fabric construction, and new finishes for existing fibers and fabrics.

Today, a huge international industrial complex encompasses the production of fiber, spinning of
yarns, fabrication of cloth, dyeing, finishing, printing, and manufacture of goods for purchase.
Consumers purchase many different products made of textiles. The story of the journey that
these products make as they progress from fiber to yarn to fabric to finished product is not just
the story of spinning yarns, weaving or knitting fabric, or constructing the end product. It is also
the story of a complex network of interrelated industries.

HISTORY OF INDIAN TEXTILE INDUSTRY

The history of textiles in India dates back to nearly five thousand years to the days of the
Harappan civilization. Evidences that India has been trading silk in return for spices from the 2nd
century have been found. This shows that textiles are an industry which has existed for centuries
in our country. Recently there has been a sizeable increase in the demand for Indian textiles in
the market. India is fast emerging as a competitor to China in textile exports. The Government of
India has also realized this fact and lowered the customs duty and reduced the restrictions on the
imported textile machinery. The intention of the government’s move is to enable the Indian
producers to compete in the world market with high quality products. The results of the
government’s move can be visible as Indian companies like Arvind Mills, Mafatlal, Grasim;
Reliance Industries have become prominent players in the world. The Indian textile industry is
the second largest in the world-second only to China. The other competing countries are Korea
and Taiwan. Indian Textile constitutes 35% of the total exports of our country.

The history of apparel and textiles in India dates back to the use of mordant dyes and printing
blocks around 3000 BC. The foundations of the India's textile trade with other countries started
as early as the second century BC. A hoard of block printed and resist-dyed fabrics, primarily of

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Gujarati origin, discovered in the tombs of Fostat, Egypt, are the proof of large scale Indian
export of cotton textiles to the Egypt in medieval periods.

During the 13th century, Indian silk was used as barter for spices from the western countries.
Towards the end of the 17th century, the British East India Company had begun exports of
Indian silks and several other cotton fabrics to other economies. These included the famous fine
Muslin cloth of Bengal, Orissa and Bihar. Painted and printed cottons or chintz was widely
practiced between India, Java, China and the Philippines, long before the arrival of the
Europeans.

India Textile Industry is one of the largest textile industries in the world. Today, Indian economy
is largely dependent on textile manufacturing and exports. India earns around 27% of the foreign
exchange from exports of textiles. Further, India Textile Industry contributes about 14% of the
total industrial production of India. Furthermore, its contribution to the gross domestic product of
India is around 3% and the numbers are steadily increasing. India Textile Industry involves
around 35 million workers directly and it accounts for 21% of the total employment generated in
the economy.

Strengths of Indian Textile Industry are as follows -

• Huge textile production capacity

• Efficient multi-fiber raw material manufacturing capacity

• Large pool of skilled and cheap work force

• Entrepreneurial skills

• Huge export potential

• Large domestic market

• Very low import content

• Flexible textile manufacturing systems

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Weaknesses of Indian Textile Industry are as follows -

• Increased global competition in the post 2005 trade regime under WTO

• Imports of cheap textiles from other Asian neighbors

• Use of outdated manufacturing technology

• Poor supply chain management

• Huge unorganized and decentralized sector

• High production cost with respect to other Asian competitor

GLOBAL SCENARIO

The textile and clothing trade is governed by the Multi-Fibre Agreement (MFA) which came into
force on January 1, 1974 replacing short-term and long-term arrangements of the 1960’s which
protected US textile producers from booming Japanese textiles exports. Later, it was extended to
other developing countries like India, Korea, Hong Kong, etc. which had acquired a comparative
advantage in textiles. Currently, India has bilateral arrangements under MFA with USA,
Canada, Australia, countries of the European Commission, etc. Under MFA, foreign trade is
subject to relatively high tariffs and export quotas restricting India’s penetration into these
markets. India was interested in the early phasing out of these quotas in the Uruguay Round of
Negotiations but this did not happen due to the reluctance of the developed countries like the US
and EC to open up their textile markets to Third World imports because of high labour costs.
With the removal of quotas, exports of textiles have now to cope with new challenges in the form
of growing non-tariff / non-trade barriers such as growing regionalization of trade between
blocks of nations, child labour, anti-dumping duties, etc.

Nevertheless, it must be realised that the picture is not all rosy. It is now being admitted
universally and even officially that the year 2005 AD is likely to present more of a challenge
than opportunity. If the industry does not pay attention to the very vital needs of modernisation,

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quality control, technology up gradation, etc. it is likely to be left behind. Already, its
comparative advantage of cheap labour is being nullified by the use of outmoded machinery.

With the dismantling of the MFA, it becomes imperative for the textile industry to take on
competitors like China, Pakistan, etc., which enjoy lower labour costs. In fact the seriousness of
the situation becomes even more apparent when it is realised that the non-quota exports have not

really risen dramatically over the past few years. The continued dominance of yarn in exports of
cotton, synthetics, and blends, is another cause for worry while exports of fabrics are not
growing. The lack of value added products in textile exports do not augur well for India in a
non-MFA world.

Textile exports alone earn almost 25 percent of foreign exchange for India yet its share in global
trade is dismal, having declined from 10.9 percent in 1955 to 3.23 percent in 1996. More
significantly, the share of China in world trade in textiles, in 1994, was 13.24 percent, up from
4.36 percent in 1980. Hong Kong, too, improved its share from 7.06 percent to 12.65 percent
over the same period. Growth rate, in US$ terms, of exports of textiles, including apparel, was
over 17 percent from 1993-94 to 1995-96. It declined to 10.5 percent in 1996-97 and to 5
percent in 1997-98. Another disconcerting aspect that reflects the declining international
competitiveness of Indian textile industry is the surge in imports in the last two years. Imports
grew by 12 percent in dollar terms in 1997-98, against an average of 5.8 percent for all imports
into India. Imports from China went up by 50 percent while those from Hong Kong jumped by
23 percent.

INDIAN TEXTILE INDUSTRY

The textile industry is the largest industry of modern India. It accounts for over 20 percent of
industrial production and is closely linked with the agricultural and rural economy. It is the
single largest employer in the industrial sector employing about 38 million people. If the
employment in allied sectors like ginning, agriculture, pressing, cotton trade, jute, etc. are added
then the total employment is estimated at 93 million. The net foreign exchange earnings in this
sector are one of the highest and, together with carpet and handicrafts, account for over 37
percent of total export earnings at over US $ 10 billion. Textiles, alone, account for about 25
percent of India’s total forex earnings.

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India’s textile industry since its beginning continues to be predominantly cotton based with about
65 percent of fabric consumption in the country being accounted for by cotton. The industry is
highly localized in Ahmedabad and Bombay in the western part of the country though other
centers exist including Kanpur, Calcutta, Indore, Coimbatore, and Sholapur.

The structure of the textile industry is extremely complex with the modern, sophisticated and
highly mechanized mill sector on the one hand and the hand spinning and hand weaving
(handloom) sector on the other. Between the two falls the small-scale power loom sector. The
latter two are together known as the decentralized sector. Over the years, the government has
granted a whole range of concessions to the non-mill sector as a result of which the share of the
decentralized sector has increased considerably in the total production. Of the two sub-sectors of
the decentralized sector, the power loom sector has shown the faster rate of growth. In the
production of fabrics the decentralized sector accounts for roughly 94 percent while the mill
sector has a share of only 6 percent.

Being an agro-based industry the production of raw material varies from year to year depending
on weather and rainfall conditions. Accordingly the price fluctuates too.

The Ministry of Textiles under the Government of India has taken some significant steps to
arrest these problems. It has framed "The National Textile Policy 2000" to address the aforesaid
issues. This policy aims at negating these problems and increasing the foreign exchange earnings
to the tune of US$ 50 billion by the year 2010. It includes rational road-maps for the
development and promotion of all the sectors involved directly or indirectly with the textile
industry of India. Further, the policy also envisages to bring the unorganized decentralized textile
sector (which accounts for 76% of textile production) at par with the organized mill sector.
Furthermore, the policy also aims at introducing modern and efficient manufacturing
machineries and techniques in the Indian textile sector

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INDUSTRY SUPPLY CHAIN

The apparel industry supply chain can be broadly categorized into six major components - raw
materials, textile plants, apparel plants, export chains, retail stores and customers.

Supply Chain of the Textile Industry

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CURRENT INDUSTRY SCENARIO:

Close to 14% of the industrial output and 30% of the export market share is contributed directly
by the Indian textile industry. Indian textile industry is also the largest industry when it comes to
employment that generates jobs not just within but also in various support industries like
agriculture. As per a recent survey the textile industry is going to contribute 12 million new jobs
in India by 2010 itself.

Indian textile industry is as old as the word textile itself. This industry holds a
significant position in India by providing the most basic need of Indians. Starting
from the procurement of raw materials to the final production stage of the actual
textile, the Indian textile industry works on an independent basis.

The final phase-out of the Multi-fiber Arrangement (MFA) and the system of quotas
that has governed the global trade in textiles and apparel for the last forty-two
years has significantly altered the institutional rules of trade in the textile and
clothing industry. With the elimination of all remaining quotas on apparel from
January 1 2005, the textile and clothing sector is now fully integrated into the
regulatory framework of the General Agreement on Tariffs and Trade

(GATT) of the World Trade Organization (WTO). Buyers are now free to source textile and
apparel in any amount from any country; suppliers are similarly free to export as much product
as they are able, subject only to a system of national tariffs. As global competition intensifies
under the new quota-free trading regime, countries are bracing for major changes in the structure
of sourcing and apparel supply worldwide. With the removal of the quotas, it was expected that
the developing countris, who have a major play in the textile industry will benefit themselves as
they have stable supply network, experience in networking, capacities for scaling up and the
ability to offer a full bundle of services. It was also expected that smaller countries, which
enjoyed the restriction on trade will fall out from the picture.

The textile sector has increased their investment in projects to upgrade their equipment amid
fierce market competition and to meet the growing demand for more textile products. Total
investment in the textile industry between 2004 and 2008 was around Rs.65,478 crore in India

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which is expected to reach Rs.1,50,600 crore by 2012. This enhanced investment would generate
17.37 million jobs-- 12.02 million direct and 5.35 million indirect—by 2012.

Investments in the textiles sector can be assessed on the basis of three factors:

• Plan schemes such as the Techno Up-gradation Funds Scheme (TUFS), Technology
Mission on Cotton, Apparel Parks, etc. Under the TUFS scheme, a total of Rs 916 billion has
been disbursed for technology up gradation. There are around 26 Apparel Parks in eight states in
India, with a total estimated investment of Rs 134 billion
• Industrial Entrepreneurship Memorandums implemented from 1992 to Aug 06,
amounting to Rs 263 billion
• Foreign Direct Investments inflows worth US$ 910 million have been received by the
textile industry between Aug 91 and May 06, which account for 1.29% of total FDI inflows in
the country.

Though significant investments are being made in the textiles segment, the bulk of them are in
the spinning and weaving segments. A cumulative total of US$ 6.67 billion in investment was

done in 2008. Of this, more than two-thirds is in the spinning and weaving segments, while only
25% is in processing and garment units

The elimination of global textile quotas is expected to drive garment production to China,
benefiting consumers in North America and Europe at the expense of developing nations where
apparel manufacturing has become a bridge to an industrial economy. Africa received record
high foreign direct investment (FDI) inflows in 2005 of US$31 billion, but this was mostly
concentrated in a few countries and industries. The textile sector has increased their investment
in projects to upgrade their equipment amid fierce market competition and to meet the growing
demand for more textile products.

The global fibre industry will continue to shift to the Asia/Pacific region, particularly China,
South Korea and Taiwan. Textile trade in the world is estimated to be around US$ 300 billion
currently. Industry experts predict that by 2014 the facilities in the west will close down and they
will source their textiles from more efficient areas of the world resulting in the trade volume of

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around US$ 800 billion. The Indian textile industry, which has accelerated to an annual growth
of 9-10 per cent, is expected to grow at a rate of 16 per cent in value terms and reach a level of
USD 115 billion by 2012. With 8.6% growth rate, Turkey also recorded a very strong average
annual growth rate of its textiles and clothing exports but from a much lower basis. It could
increase its exports from 8.6 to 17.6 billion US-Dollars. Pakistan exports amounted to 9.9 billion
US-Dollars in 2005 which translates into an average annual growth rate of 5.4%.

As of now, the general impression any individual would get about the Indian textile industry
leaders in the past few months is that it is in a major decline state. The following could be the
reasons that attribute to this decline.

• Global recession

• Less export orders due to reductions in inventories by global retail giants like Wal-Mart

• Rising price of raw materials like cottons

• Infrastructure bottlenecks such as power, particularly in Tamil Nadu

In the times of adversity, like what we are facing right now, it is an immediate task for all stake
holders to pause for a moment and take stock of the difficulties and chart plans for sustainability
and growth of the Indian textile industry.

With the opening of world markets and the abolition of textile quotas since 2005, there came a
negative situation as well. But, hindsight is always 20-20. Indian textile industry should have
focused on all major sectors right from fibre to fashion and planned for an organized growth
across the supply chain so as to compete with China and even countries such as Pakistan,
Vietnam and Thailand, which are also growing from the textile perspective. Instead, the industry
had put majority of its stock in the spinning sector. This is clearly evident in the utilization of
Technology Upgradation Fund Scheme effectively by the spinning sector. Although it is a
positive outcome, the industry did not focus on many other value adding segments such as
weaving and finishing. Indian powerloom sector, which enables value-addition is a highly
unorganized industry and needed major upgradation. As of now, the powerloom segment is also
picking up where in many of the unorganized powerlooms are becoming organized. Technical

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textiles sector is still in its infancy and a tangible growth will be highly visible by 2035 when the
growth in this sector will be exponential.

The weak links in the Indian conventional industry such as weaving and finishing have to be
strengthened. There must be consolidated efforts by Indian Textile Machinery Manufacturers
Association, end-users and the Government to undertake a major step and come-up with
alternatives to European Machinery, which the Indian weaving sector can afford. This should be
put into practice within the next five years, if dedicated efforts are undertaken with the financial
support for R & D by the Government through its various schemes. Technical textiles sector
must transform from a non crawling phase to at least a crawling industry in the next three years.
General awareness on nonwoven and technical sectors has been created with the recent marathon
training workshops and conferences such as, "Advances in Textiles, Nonwoven and Technical
Textiles", organized for the past five years in Coimbatore by Texas Tech University, USA and
those such as the Texcellance and IIT's Technical Textiles conferences. These have put India on
the international map in technical textiles. These conferences are of less use if they do not
translate into investments and new projects.

MAIN MANUFACTURERS OF INDIAN TEXTILE INDUSTRY:

GOKALDAS EXPORTS

Incorporated in 1979, based in Bangalore, it’s one of India's largest manufacturers and designer
of garments for men, women and children and caters to the needs of several international fashion
brands and retailers. Gokaldas Exports has been a major player in the readymade garment
industry across the globe.

In the present Indian fashion retailing, Gokaldas has grabbed a distinguished place for itself in
the form of "The Wearhouse" catering to the specific fashion needs of the people. The
Wearhouse has high profile outlets in Bangalore, Chennai, Hyderabad and Coimbatore.

An ISO 9001:2000 Certified Company has a capacity to produce and export 2.5 million garments
a month.

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The Group's products include coats, suits, jackets, parkas, windcheaters, ski wear; warm-ups,
surf wear, swim wear; trousers, shorts; casual wear shirts, ladies blouses and dresses for
customers in international market. It mainly operates in India but exports its products to
countries like the United States of America, Canada, Mexico, United Kingdom, Germany,
Austria, Spain, Italy, France, Netherlands, Middle East, South Africa, Japan, Denmark, Taiwan
and Hong Kong. A few of the manufacturing units are 100% export units with capabilities of
mass production. They have the license to import duty-free fabrics and accessories from all over
the world for re-export. It has over 48,000 employees who work in around 48 fully equipped,
modern, manufacturing factories.

ARVIND BRANDS

Arvind Mills Ltd. was incorporated in 1931 with share capital Rs.2525000 ($55000) in
Ahmedabad by the Lalbhai group. The Company's operations are divided into the Textile
Division, telecom division and garments division. We will be majorly concentrating on the
garments division. Products manufactured are dhoties, sarees, mulls, dorias, crepes, shirtings,
coatings, printed lawns & voiles cambrics, twills gabardine etc. Arvind Brands is part of the
Lalbhai Group, which holds licenses for leading international brands such as Arrow, Lee,
Wrangler, Gant and Tommy Hilfiger for retail and wholesale sales in the local market. Its
mainstream brands are Excalibur and Flying Machine.

In addition, it owns an array of casual sportswear and denim brands marketed in India, including
Flying Machine, Newport and Ruf & Tuf jeans and Excalibur shirts along with licensed
relationship with various international brands like Nautica, Jansport, Kipling, Hero by Wrangler,
Lee Riders and Tommy Hilfiger, and joint ventures with VF Corporation and Diesel.

But the company is facing severe competition from major brands like Louis Philippe, Park
Avenue and small brands like Trigger and Blackberrys.

It produces about 110 million meters of denim every year and the garment section is doing
extremely well because of the customer loyalty it enjoys. The demand for jeans, in particular, is
expected to rise, as manufacturing companies in the US have shut operations.

KOUTONS

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The winner of “ best retailer leadership award 2008” organized by retail congress, Mumbai,
Koutons Retail India Limited engages in the design, manufacture, and retail of men’s wear and
integrated apparel in India. It currently sells its apparel using the “Koutons” and “Charlie
Outlaw” brands. Mr. Kohli along with his brother in law Mr. Sawheny partnered to set up
Charlie's Creation.

In 1997 the Company diversified its business by introducing non-denim trousers in the existing
product range of denim apparel. The company has inaugurated its 89th family Store in
Hyderabad, which it claims to be its largest store in the country. Koutons India has an annual
finishing and manufacturing capacity of 22.92 million pieces and 12.36 million pieces of apparel,
respectively. The capacity utilization for the same was 41.21% and 21.99% respectively at the
end of FY2007.Koutons has 18 manufacturing/finishing units and 14 warehouses spread across
various locations in and around Gurgaon. The company's strategy is to have small, but more
stores. This helps to save costs and at the same increase reach of the company. The company has
a phenomenal growth record.

ZODIAC

Zodiac Clothing Company Ltd manufactures, exports and imports garments, textiles accessories
etc. Zodiac has been in the apparel business for a period of 50 years by now and is known for its
quality shirts. Zodiac, is today, the largest selling shirts & tie brand at Shopper's Stop according
to Brand Equity (The Economic Times) The Company started business in 1954 and export of
readymade garments to Europe started in early '60s, which included mainly ties and shirts. For
many decades, Zodiac has been synonymous with ties. The business of ties is a high fashion
business and Zodiac has taken this to new highs in India and across the globe. In fact, one can
say that in India Zodiac is generically associated with ties. Following Zodiac's huge success with
ties, the company entered the arena of men's accessories with Cuff links, Belts, Wallets and
Handkerchiefs.
In 1973, Zodiac had a stand-alone exclusive shirt shop in Hotel Taj in Mumbai. The company
then entered the domestic shirt segment in late '80s.It employs around 3500 people in 7
manufacturing units in 16 offices located in UK, US, Germany, UAE etc. Each manufacturing
unit is spread over 35000 sq.ft and has modern equipment to spread 60 yards of cloth at a time.
All the manufacturing units are same in design and layout. Quality is maintained throughout the

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40 stages of assembly line. All the units have their own power generating units in order to be
efficient. It has its own 80 exclusive outlets and around 2000 multibranded outlets. Its
continuously showing profit and has a consistently growing export business.
HOUSE OF PEARL
House of Pearl Fashions Limited is a multinational ready to wear apparel manufacturing
company. The company also provides supply chain solutions for the fashion industry globally
along with warehousing & distribution networks in the UK & US. It operates in 11 strategic
locations in six continents. It has two brands Kool hearts, DCC in the United States of America.
The brand Kool hearts focuses on the young fashion, where as the focus of DCC is more towards
the Missy segment

It basically deals with 3 streams which are manufacturing to Retailers, souring solutions for
retailers, Marketing, Distribution & Branding for Retailers. It takes care of the whole process
from design & development, manufacturing or sourcing till offering a range of pre retailing
services, warehousing to delivering at the door step on a call off basis. It manufactures a broad
range of products comprising of knits, woven, sweaters and bottoms in basic as well as complex
designs.

It has a good manufacturing capacity; the present in-house manufacturing capacity of the
company is twenty million pieces. Per annum spread over more than 725,000 sq feet of built up
area with efficiently designed layouts to ensure smooth flow of materials. The company is
planning to double the capacity by expanding the operations in Chennai, Bangladesh &
Indonesia. It intends to have a capacity of 30million pieces by the end of 2009.

The company adopts integrated marketing techniques and has merchandising teams in Canada,
Europe, HK, UK, and US, closely interacting with existing and potential customers at their
doorstep.

The Company shares were listed on the stock exchanges first time in Feb, 07. It recently went for
a joint venture with LERROS, a premium apparel brand from Germany.

HARIA EXPORTERS

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Haria Exports Ltd. is a leading garment exporter in the country for the last twenty four years. It is
a Star Trading Company and has won the golden status certificate in the year 1999. This
company occupies a unique place in the industry of the by its contribution to Industrial output,
employment generation and Foreign exchange earnings. Even though the textile industry has the

distinctive advantage in respect of raw material and skilled labor, the industry is suffering
from technology obsolescence which in turn affects the quality, productivity and cost
effectiveness. The high capital cost is impeding the process of Hi- Tech up gradation. Therefore,
the Government of India, Ministry of Textile has launched Technology Up gradation Fund
Scheme for Textiles & Jute Industries of Rs.25000.00 crores at a concessional rate of
interest of appx.5%. In order to compete with the outside world, the company is paying attention
to the application of technology, closely following up the fashion trends and improved product
quality. In order to be more cost efficient the company has acquired latest machinery which
ascertained exact material consumption depending upon the style and pattern. The Government
policies, interest rates, export incentives etc may also affect the overall performance of the
company, but even then the company is optimistic about its revenue and growth.

EVINIX

The company started in 1996 with the manufacture of headgears, baseball caps and high altitude
jackets, using cotton textile and leather, mainly for exports. The company was incorporated on
1st May 1996 as Evinix Fashion Accessories Private Limited under the Companies Act, 1956.

Mr. Sanjay Taneja, brother of Mr. Raujeev Taneja (the original promoter of the company) joined
the Company as a Promoter replacing Mrs.Anuradha Taneja, who disassociated herself from the
company. The name of the company was changed to Evinix Accessories Private Limited from
Evinix Xsesryz and a fresh Certificate of Incorporation dated 20th March 2003 was taken. In
March 2005, M/s Ambros Exports Private Limited took equity stake in the company.

The apparel category constitutes men and women’s shirts, trousers, skirts and tops, kidswear and
nightwear. Organic cotton wear for expecting mothers and infants is an additional strength. They
use Organic cotton and its products through its brand name “Othentix”- Authentic Sustainable
Textiles, lends a unique personality to each garment manufactured and supplied by Evinix.

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The company came out with a principle of Rapid Retail suggesting that every merchandise has a
limited shelf life at CUT stores; CUT is an acronym for Comfortable, Urban and Trendy. Evinix
is setting up CUT stores (averaging 4000-5000 sq feet) in fast urbanizing young Indian towns. It
recently launched the CUT youth style store in Rajkot. The Rapid Retail business concept

embraces the concept i.e. the exact time of awaited departure when the product will move out to
the next best price bracket.

PEARL GLOBAL

Pearl Global Limited was incorporated on 23rd October, 1979 under the name Pearl Agencies
Private Limited. The Company became a Deemed Public Company with effect from 1st July,
1991 The name of the Company was change to PEARL GLOBAL LIMITED (PGL) on 2nd
September, 1993 in terms of Section 21 of the Companies Act, 1956 as per fresh Certificate of
Incorporation issued by the Registrar of Companies, Delhi & Haryana. PGL manufactures, sells,
and exports ready to wear apparel in India. The company primarily produces garments in woven
and knitted fabrics. Its products include casual wear dresses, ladies’ blouses, and bottoms. The
company is based in Gurgaon, India. PGL is a subsidiary of House of Pearl Fashions Limited.

BANG OVERSEAS LTD

Bang Overseas limited’s principal activity is to manufacture and market textiles and apparels.
The Group's textile includes readymade garments, under garments and hosiery. It markets with a
brand name of Thomas Scott. The Group operates only in India. It was incorporated in the year
1992 and is presently providing fashion fabrics and meeting ready to wear requirements of the
customers in apparel, textile and Retail segment. The company started the business from trading
in textile and since 1998, they are conceptualizing and designing fashion fabrics and outsourcing
the manufacturing process of the same from countries like Turkey, Portugal, Mauritius and other
European Countries. In the same year, they launched our seasonal fabric collections in textile
under the name "Bodywaves", marketed through their own distribution channel to different
brands and retailers. They have ventured into ready-to-wear mens' segment in 2000 by
outsourcing manufacturing process and in turn selling to various international brands. They
launched ready-to-wear mens' garments under our brand name "Thomas Scott" in 2002. They

17
started their own first apparels manufacturing unit in Bangalore in the year 2005 in the name of
Reunion Clothing Company with an installed capacity of 350,000 pieces per annum and in the
year 2006 then they started the second manufacturing unit in the name of Formal Clothing
Company with an installed capacity of 360,000 pieces per annum. At present they have installed
capacity of 720,000 and 540,000 pieces per annum at their Reunion Clothing Company and
Formal Clothing Company. Their products are presently retailed through 157 point of sales
comprises of our own Retail outlets, Large format stores (LFS) like Shoppers' Stop, Pyramid,
Globus, the LOOT, SAGA and Multi Brand Outlets (MBO) spread all over India. They cater to
the demand of various other apparel manufacturer and brands also. They have centralized
warehousing and logistics centre at Kalher Village near Bhiwandi to facilitate our supply chain
management as well.

SWOT Analysis of textile industry

Strengths

♦ Removal of quota restrictions to give a major boost to the exports.

♦ Export target in textiles in 2010 at USD is 50 billion.

♦ Low per capita consumption of textiles in India as the world consumption is 6.8,
India only consume 2.8 of it. That’s why there is large scope of manufacturing
and exports.

♦ Availability of the cheap labour in India would help the development of the
textiles at the lower cost.

♦ Cost competition is not much in India as majority of Indian population is not

dependent on the big brands like Armani, United Colours of Beneton etc, so India
itself does not hold much competition with these brands.

18
 ♦ The large cotton production in India would lead to the development of the textile
mills in the better way, as India does not have to import the raw material from
outside.

♦ There are well established production bases for made ups export as well as for
domestic purpose.

Weakness

♦ The most serious problem of the industry is the lack of adequate processing
facilities; there is over-dependence on hand processors and traditional items.

♦ The Indian textile industry is fragmented. Most of the SMEs are tiny and cottage
type units without sufficient capital back-up.

♦ The government policies in India for the textile industries are traditional as they
are not upgraded like the up gradation of the policies for the IT industries.

♦ The quality of wider-width fabrics for meeting the export demand is lacking in
many respects, which is acting as a disadvantage to the growth of the industry.

♦ The technology used in the most of the textile mills is old enough that they can’t
be modified, but there have to be new machineries imported to give the edge in
technological advancements in this sector.

Opportunities

♦ As per available information, the market for processed cotton fabric will increase
in the European and other markets and, therefore, the powerloom industry may
benefit and expand substantially. Further the growth in the export segment will be
mainly from cotton made-ups and garments along with processed fabrics.

♦ Grey fabric export is continuing to grow and will show increasing trends.

19
 ♦ Value added products will have greater demand and, therefore, processing will
play an important role.

♦ India with traditional designs and craftsmanship can command a greater market
share for niche products in made-ups and garments.

♦ Indian companies need to focus on the product development and this could easily
be possible as there is the greater scope in the Indian Market.

♦ As the new generation is keen towards the western culture the training for
specially textiles could be provided to them and they could be encouraged to
develop the efficient sector of India.

♦ Increased use of computer aided designing to develop the designing capabilities

of the textile. Using new technologies and softwares ease the use of virtual design
on the computer and then choosing from various alternatives.

Threats

♦ Increased competition in the domestic market yield to the development of the

more SMEs which invest more to survive in the market.

♦ The working area of most of the industries in the textile industries is not hygienic
enough to give the workers more comfortable area to work in. so this condition
has to be improved.

♦ Need to revamp consumer consciousness

♦ Chinese goods are cheap as well as the machinery provided by them is also cheap.
So the threat for the export and designing is the Chinese Aggression over the
International market.

♦ Continuously quality improvement is needed to make sure that people would rely
on Indian goods not on the foreign goods.

20
♦ Traditional items like terry towels are manufactured in EOUs all over the country
with superior quality. This has been eroding the traditional markets for
powerloom and handloom products forcing them to go for product diversification.

CHAPTER – 2

INTRODUCTION: LNJ Group, Bhilwara

21
The LNJ Bhilwara Group is a diversified conglomerate with the global presence having interests
in Textiles, Graphite Electrodes, Sponge Iron, Power Generation, Power Consultancy Services,
IT Enabled Services and Financial Services. Headquarter in Noida.

The Group employs 20,000 people and 17 production units located strategically across the
country.Over the four decades long existence, the Group has come to be identified with quality
and technology. Seven of the Group’s companies have been awarded IS/ISO 9001: 2000
certification for their exemplary quality standards.The Group boasts of some well-known brands,
which includes Mayur Suitings, La Italia Readymade, Buddy Davis Leisure wears and Geoffrey
Hammonds Superfine Suiting.

The Group has successfully integrated its operations into today’s global economy, with export
earnings comprising over 44% of total revenue

The Group today is all geared up to rise up the challenges of the millennium

History

The LNJ Bhilwara Group has its origin in the year 1941, when its founder Chairman; and has
been working as Chairman (Emeritus).

Mr. LNJ after graduation with gold medal in 1945-shouldered major responsibilities of another
family-owned company called Indo Eastern Trading Company engaged in the export of jute
goods that turned out to be one of the 10th largest exporters of jute goods from India during
period 1950-51.

22
In 1953-54, Mr. LNJ started export of scrap and established a tin container factory in Rajasthan.
After a good dint in this discipline in the year 1959, Mr. LNJ got license for putting up a
medium-size textiles mill at Bhilwara, Rajasthan at a cost of Rs. 60 lakh. This venture, Rajasthan
Spinning & Weaving Mills Ltd (RSWM), the first textile mill of LNJ Bhilwara Group, proved to
be a big success. In the year 1968-69, RSWM manufactured India’s first polyester viscose
blended yarn and subsequently the Group diversified into various high-tech areas in
collaboration with world-renowned manufactures. This gave birth to Bhilwara Synthetic Ltd
(BSL) at Mandpam, Bhilwara, and Rajasthan in the year 1970 for manufacture of synthetic
fabrics which later diversified into worsted yarns and fabrics.

By 1973-74, the Group had established its identity among top industrial houses in the country.
During this period, a new spinning and weaving mill was set up at Gulabpura in Bhilwara district
of Rajasthan. Today, Bhilwara district is the largest suiting producer in India. Bhilwara Processor
Ltd (BPL) at Mandpam, Bhilwara was set up in 1975. It is the first process house of Rajasthan
with a processing capacity of 2.5 million of fabrics per month.

In 1973-74, the Group diversified into graphite and set up a graphite plant, Hindustan Electro
Graphite Ltd (now HEG Ltd) at Mandideep, Madhya Pradesh in collaboration with Pechiney of
France. Today HEG operates the largest graphite plant in South Asia.

Bhilwara Spinners Ltd (Bhilspin) at Bhilwara was initially a part of RSWM. In fact it was the
first unit to be set up in 1960. It was incorporated as a company in 1983 for the manufacture of
cotton, blended yarn and polyester sewing threads. In 1985, the Group set up its first knitwear
unit at Jammu in technical collaboration with Devanlay S.A. of France for the manufacture of T-
shirts, Polo shirts and men’s underwear.

The expansion of the Group continued and in 1989, LNJ Bhilwara Group set up 100% Export
Oriented Unit at Maral Sarovar, near Indore, Madhya Pradesh which is known as Maral Overseas
Ltd for manufacture of cotton knitted fabrics and cotton knitwear. Apart from textile, the Group
has ventured into high-tech areas like oil drilling, sponge, power generation and
telecommunication.

LNJ Bhilwara-Diversified Presence across Sector

23
Business Segments

i. Textiles: Textiles is the core business area of the Group contributing 80% of its turnover
and contributes 80% in terms of Group export turnover as well.

ii. Graphite: Graphite Electrodes which are mainly used by steel makers in electric arc
furnaces contribute 13% of the Group turnover and 20% of the export turnover.

24
 iii. Sponge Iron: Contributes roughly 3% of the turnover and is consumed only
domestically.

iv. Telecom: The Group has entered the field of Mobile Radio Turnking services with
license having been obtained for Bangalore, Hyderabad, Chennai, Ernakulam, Baroda,
Mumbai, Calcutta and Delhi. It also has a joint venture with Motorola.

v. Power: The Group has three Hydel Power Generation projects under implementation,
two in Himachal Pradesh and one in Madhya Pradesh. Also one gas-based power project
under implementation in Madhya Pradesh.

vi. Power Consultancy Services: Indo Canadian Consultancy Services Ltd (ICCS) is an
independent consultancy firm floated by LNJ Bhilwara Group and RSW International, a
Montreal-based Canadian Consultancy firm which undertakes engineering, consultancy
for hydro and other power projects

Group Companies Their Plants and Products

The various units of the different companies of the Group are:

Plant location Product Range

Rajasthan Spinning & Weaving Mills Ltd.

25
 1. Gulabpura Synthetic, Regenerated
Cellulosic, Blended Grey,
Dyed Yarn & Fabrics
2. Banswara Synthetic Regenerated
Cellulosic &Cotton
Blended Grey Yarn
3. Mandpam
Cotton Mélange Yarns

4. Rishabhdev Synthetic, Blended &

Grey Yarns
5. Bangalore Apparels
6. Mordi (Banswara) Process House

HEG Ltd.

7. Mandideep Graphite Electrodes

8. Durg Steel
9. Durg Waste Heat Recovery
Power.
10. Tawa Hydro Electric Power

Maral Overseas Ltd.

11. Maral Sarovar Graphite Electrodes

12. Jammu Cotton Knitted Fabrics,

Knitwear’s & Sweaters

13. Noida Knitwear’s

26
Malana Power Company Ltd.

14. Malana (Kullu) Hydro Electric Power

AD Hydro Power Ltd.

15. Allain-Duhangan, Manali Hydro Electric Power

Indo-Canadian Consultancy Services Ltd.

16. Noida Power Engineering

Services

17. Mandpam (Bhilwara) Yarns, Worsted &

Synthetic Fabrics,
Readymade and
Accessories

Bhilwara Melba De Witte Pvt. Ltd.

18. Mordi- Banswara Specialized Automotive

Fabrics & Furnishing
Fabrics

Bhilwara Spinners Ltd.

19. Bhilwara Synthetic Blended

Grey & Dyed Yarns

Bhilwara Processors Ltd.

27
 20. Mandpam (Bhilwara) Processing of Synthetic
& Worsted Fabrics,
Tops Fiber Dyeing

Bhilwara Scribe Pvt. Ltd.

21. Bhopal IT Enabled Services

Corporate Office

22. Noida (NCR –Delhi) Corporate and

Marketing Office

Regional/Marketing Offices:

23. Mumbai 24. Kolkata

25. Bangalore 26.Delhi

27. Ludhiana

Textile

Bhilwara Spinners Limited, is an integral part of the LNJ Bhilwara Group. The Group is a
multi-product conglomerate with a global presence and business interests spanning diverse
indstries like Textiles, Power Generation, Graphite Electrodes and IT enabled services.

Bhilwara Spinners, based at Bhilwara (Rajasthan), manufacturer of cotton, synthetic blended

yarns of various counts and blends. The present capacity of the unit is 18,496 spindles.

Based on the requirement of the market, Bhilwara Spinners diversified their product portfolio
and now producing various value added product mix like Polyester / Acrylic, mod acrylic
flame retardant yarn, Sewing thread, Slub yarn, Viscose Carpet Yarn, Linen Yarn etc. The
unit is also manufacturing products suitable for other uses like upholstery, tapestry, and
industrial fabrics.

28
Bhilwara Spinners Limited: Products

The company is manufacturing synthetic blended yarn in raw white and the range includes :
* 100% Polyester, Viscose, Acrylic, Polyester/Viscose blended,
* Polyester/Acrylic blended
* Polyster/Viscose blended
* Polyester/Linen blended
* Viscose/Linen blended
* High Twist / Super High Twist
* Slub/ Spun yarn
* Blended with Texturised, Special Application yarns for Carpet, Sewing Thread,
* Flame and Temperature Resistance yarn like Aramide, Modacrylic, Homo Acrylic, Poly
Sulphide yarn (PPA) .

DEPARTMENT DISTRIBUTION

The functional areas are classified in following three heads:

a) Technical : The areas under this head are –

1. Production

29
 2. Maintenance
3. Engineering
4. SQC and Research and Development

b) Commercial : The areas under this are –

1. Accounts
2. Commercial
3. Material and Stores
4. Purchase and Supplies
5. Management Information System

c) Personnel and Administration : The areas under this are –

1. Industrial Relations
2. HRD
3. Administration
4. Public Relations

BOARD OF DIRECTORS

Mr. A. K.Churiwal Chairman & Managing Director

Mr. Ravi Jhunjhunwala

Mr. Shekhar Agarwal

Mr. Salil Bhandari

30
 Mr. Shushil Kumar Churiwala

Mr. Sushil Jhunjhunwala

Mr. A.N.Choudhary

Mr. Nivedan Churiwal

KEY EXECUTIVE

Mr. M . C. Maheshwari

Mr. S. Sen Gupta

Mr. V B Arora

Mr. V. K .Gupta

Company Secretary

Mr. Praveen Jain

BANKERS

State Bank of India

The Bank of Rajasthan Ltd.

Oriental Bank of Commerce

Union Bank of India

IDBI Ban k Ltd

AUDITORS

31
 M/S A. L. Chechani & Co., Chartered Accountants, Bhilwara

REGISTERED OFFICE

26, Industrial Area, Bhilwara - 311 001, Rajasthan.

PLACES IN BSL LTD, MANDPAM , BHILWARA:

1. GUEST HOUSE

2. VICHLE STAND

3. SECURITY & EXCISE OFFICE

4. TIME OFFICE

5. MAIN OFFICE

6. STORES

7. PLANNING DEPARTMENT

8. SCRAP YARD

9. YARN STORAGE

10. YARN STORAGE

11. EXPORT BUILDING

12. TRANSFORMER

13. GENERATOR

14. SPINNING DEPART MENT

15. WARPING DEPARTMENT

32
16. WEAVING DEPARTEMENT

17. BOILER

18. TRAINING CENTRE

19. CAINTEEN

20. R&D & WARE HOUSE

21. COAL STORAGE

22. SECURITY BUILDING

23. MILL OUTLET SHOP

24. STAFF COLONY

25. HRD OFFICE

CHAPTER – 3

Introduction of Study

Finance is one of the most primary requisites of a business and the modern management
obviously depends largely on the efficient management of the finance.

Financial statements are prepared primarily for decision making. They play a dominant role in
setting the frame work of managerial decisions. The finance manager has to adhere to the five

33
R’s with regard to money. This right quantity of money for liquidity consideration of right
quality. Whether owned or borrowed funds. at the right time to preserve solvency from the right
sources and at the right cost of capital.

The term financial analysis is also known as ‘analysis and interpretation of financial statements’
refers to the process of determining financial strength and weakness of the firm by establishing
strategic relationship between the items of the Balance Sheet, Profit and Loss account and other
operative data.

The purpose of financial analysis is to diagnose the information contained in financial

statements so as to judge the profitability and financial soundness of the firm.

OBJECTIVES OF THE STUDY

 To study the financial position of the company.

 To analyse the financial stability and overall performance of BSL Pvt. Ltd. in general.
 To analyse and interpret the trends as revealed by various ratios of the company in
particular.
 To analyse the profitability and solvency position of the unit with the existing tools of
financial analysis.
 To study the changes in the assets, liabilities structure of the company during the period
of study.

IMPROTANCE OF THE STUDY

 By “FINANCIAL PERFORMANCE ANALYSIS OF BSL PVT. LTD.” we would be

able to get a fair picture of the financial position of BSL.
 By showing the financial performance to various lenders and creditors it is possible to get
credit in easy terms if good financial condition is maintained in the company with assets
outweighing the liabilities.
 Protecting the property of the business.
 Compliances with legal requirement,

34
LIMITATIONS OF THE STUDY

 The analysis and interpretation are based on secondary data contained in the published
annual reports of bsl for the study period.
 Due to the limited time available at the disposable of the researcher the study has been
confined for a short period of 45 days.
 Ratio itself will not completely show the company’s good or bad financial position.
 Inter firm comparison was not possible due to the non availability of competitors data.
 The study of financial performance can be only a means to know about the financial
condition of the company and cannot show a through picture of the activities of the
company.

RESEARCH METHODOLOGY

Title of the study

The title of the research is the “Financial analysis of BSL TEXTILE LTD”.

FINANCIAL ANALYSIS

2006- 2007- 2008-

PARTICULARS 2007 2008 2009
Turnover 182.09 178.99 188.17
Exports 102.14 103.37 110.44
PBIDT 16.8 13.91 22.53

35
Interest 8.45 12.81 12.64
Depreciation 7.58 9.96 9.64
Taxation 1.17 -2.31 0.2
PAT -0.4 -6.55 0.05
Gross Block 202.41 205.41 206.03
Less:Depreciation 106.35 115.91 124.4
Net Block 96.06 89.5 81.63
Net worth 46.68 40.12 40.17

TYPE OF RESEARCH DESIGN:

Preparation of the Research project is known as research design. It is a plan that specifies the
sources and types of inf. relevant to the research problem.
It is a strategy specifying which approach will be used for gathering and analyzing the data.

My project is based on exploratory research design.

1) Exploratory research design:

Exploratory research studies are also termed as formulate research studies.tha main purpose of
such studies is that of formulating a problem for more precise investigation or of developing the
working hypotheses from an operational point of view. The major emphasis in such studies is on
the discovery of ideas & insight.

It includes the following:

(i) The survey of concerning literature:

Hypothesis stated by earlier workers may be reviewed & their usefulness be evaluated as a basis
for further research. In this way the researcher should review and build upon the work done
already done by others, but in cases where hypotheses have not yet been formulated, his task is
to review the available material for deriving the relevant hypothesis from it.
In this regard, my objective was to evaluate the whole supplementary process. For this I
used secondary data.

36
 DATA COLLECTION

After designing and identifying the research problem and determining the specific information
required for solving the problem, the research task is to look for the type and sources of data that
may yield the desired results.

There are two methods of data collection:

• Primary data collection

• Secondary data collection

In the project I have used one of these.

The secondary data collection includes the various documents, files, journals and profile of the
company. The secondary data collected help in getting familiar to the work culture and various
previous trends prevailing in the company.

Method of data collection

The secondary data are those which have already been collected by someone else and which
have already been passed through the statistical process.

Secondary data:
• Published data – Templates, books, records and documents.

Instruments for data collection:

STATISTICAL TOOLS & TECHNIQUES

The statistical techniques like comparative balance sheet, common size balance sheet, fund
flow statement and Ratios have been in the study. These have been very useful in doing the
interpretation and analysis of the data collected through secondary sources.

Following steps have to be taken to obtain a correct result:-

37
1. try.As my stDefine Research problem clearly

2. Formulate Hypothesis

3. Develop Research design

4. Collect Data

5. Analysis of Data

6. Interpret and Report

These steps were not fully followed in this study as the research was not numerically inclined

and was not based on primary data.In this final project the topic is related to the Marketing

Research and analysis. The study of my research is descriptive and is related to the motorcycle

industry. This is the topic, which falls under market leadership, competition, strategies and other

policies of motorcycle Indusudy was more focused on the strategic position of the key players in

the industry, the data was collected primarily through secondary source.Though some dealers

and showrooms were informally visited, and some information were collected through an

unstructured interview.

FINDINGS

1. Companies is utilizing long term loans to finance fixed assets and investments but it has

started relying on own funds.

2. There is decrease in gross profit of the company due to increase in cost of goods sold but

there is increase in net profits due to decrease in non operating expense.

3. Debtors are also increasing which is not good sign for the company in long run.

4. Current liabilities are increasing by 20.61%. Whereas cash decreases very much by

68.14%.

RATIO ANALYSIS

38
 INTRODUCTION:

As observed a basic limitation of the traditional financial statement comprising the balance sheet
and the profit and loss account is that they do not give all the information related to the financial
operation of the firm. Nevertheless, they provide some extremely useful information to the extent
that the balance sheet mirrors the financial position on a particular date in terms of the profit
and loss account shows the results of operations during a certain period in terms of the
revenues obtained and the cost incurred during the year. Therefore, much can be learnt about a
firm from a careful examination of its financial statements as invaluable documents/performance
analysis. Users of financial statements can get further insight about financial strengths and
weakness of the firm if they properly analyze information reported in these statements.
Management should be particularly interested in knowing financial weakness of the firm to take
suitable corrective action. The plans of the firm should be laid down in view of the firm’s
financial strengths and weaknesses. Thus, financial analysis is the starting point for making
plans, before using any sophisticated forecasting and planning procedures. Understanding the
past is a pre-requisite for anticipating the future.

Ratio analysis is a widely –used tools of financial analysis. It is defined as the systematic use of
ration to interpret the financial statements so that the strengths and weaknesses of the firm as
well as its historical performance and current financial condition can be determined. Ratio
analysis is a powerful tool of financial analysis. A ratio is defined as the indicated quotient of
two mathematical expressions and as the relationship between two or more things.

CLASSIFICATION OF RATIOS:

The use of ratio analysis is not confined to financial manager only. They are different parties
interested in the ratio analysis for knowing the financial position of a firm for different purposes.
In view of various users of ratios, there many types, which can be calculated from the
information given in the financial statements. The particular purpose of the user determines the
particular ratios that might be used for financial analysis.

Ratios can be classified as follows.

Ratios

39
 Traditional Classification Functional classification

1. Balance Sheet Ratios 1. Liquidity ratios

2. Profit & Loss A/c ratios 2. Leverage ratios

3. Composite ratios 3. Activity ratios

4. Profitability ratios

INTERPRETATION OF THE RATIOS

Ratio analysis is one of the most powerful tools of financial analysis. It is used as a device to
analyze and interpret the financial health of enterprise. It is with help of ratios that the financial
statements can be analyzed more clearly and decisions made from such analysis. The use of ratios
is not confined to financial managers only. There are different parties interested in the ratio
analysis for knowing the financial position of a firm for different purposes. The supplier of goods
on credit, banks, financial institutions, investors, shareholders and management all make use of
ratio analysis as a tool in evaluating the financial position and performance of a firm for granting
credit, providing loans or making investments in the firm. With the use of ratio analysis, one can
measure the performance of the firm is improving or deteriorating. Thus, Ratios have wide
applications and are of immense use today.

Guidelines or precautions for use of ratio:

40
 1. Accuracy of financial statements: The ratios are calculated from the data available in
financial statements.Before calculating ratios one should see whether proper concepts and
conventions have been used for preparing financial statements or not.These statements
should also be properly audited by competent auditors.The precautions will establish the
reliability of data given in financial statements.
2. Objective or purpose of analysis: The type of ratios to be calculated will depend upon the
purpose for which these are required.The purpose or object for which rations are required
to be studied should always be kept in mind for studying various ratios. Different objects
may require the study of different ratios.
3. Selection of ratios: Another precaution in ratios analysis is the proper selection of
appropriate ratios.The ratios should match the purpose for which these are required.Only
these ratios should be selected which can throw proper light on the matter to be discussed.
4. Use of standards: The ratios will give on indications
5. Caliber of the analyst: The ratios are the only 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 the significance of changes etc.
6. Ratios provide only a base: The ratios are only guidelines for the analyst he should not base
his decision entirely on them. He should study any other relevant information, situation in the
concern, general economic environment etc. before reaching final conclusions.
Functional classification or classification according to tests

In view of financial management or according to tests satisfied, various ratios have been
classified as below:

1. Liquidity ratios: These are the ratios, which measure the short term solvency or financial
position of the firm and are calculated to comment upon the short term paying capacity of
concern or firm’s ability to meet its current obligations. The various liquidity ratios are: current
ratio, liquid ratio and absolute ratio.

2. Long term solvency and leverage ratios: Long term solvency ratios convey firms ability to
meet the interest cost and repayment schedule of its long term obligations, example debt equity
ratio and interest coverage ratio. Leverage ration show the proportions of debt and equity in
financing of the firm.

41
3. Activity ratios: Activity ratios are calculated to measure the efficiency with which the
resources of a firm have been employed.These ratios are also called turnover ratios because it
indicates the speed with which assets are being turned over in to sales example debtor turnover
ratio.

Classification according to significance or importance

The Ratios have also been classified according to their significance or importance. Some ratios
are more important than others and the firm may classify them as primary and secondary ratios.
The British Institute of management has recommended the classification of ratios according to
importance for inter firm comparisons. For inter firm comparisons, the ratios may be classified
as primary and secondary ratios. The primary ratio is one which is of prime importance to a
concern, thus return on capital employed is named as primary ratio. The other ratios which
support or explain the primary ratio are called secondary ratio, e.g. the relationship of operating
profit to sales or the relationship of sales to total assets of the firm.

Analysis Of Short-Term Financial Position

The short-term obligation of a firm can be met only when there are sufficient liquid assets. If a
firm fails to meet such current obligations, its goodwill in the market is likely to be affected
beyond repair. Moreover a very high degree of liquidity will tie funds in current assets.Therefore
it is necessary to have a proper balance in regard to liquidity of the firm. Two types of ratio are
calculated to measure short-term solvency of a firm.

I) LIQUIDITY RATIOS
II) EFFICIENCY RATIOS
III) SOLVENCY RATIOS
IV) PROFITABILITY RATIOS

I) LIQUIDITY RATIO

42
It refers to the ability of a concern to meet its current obligation as and when these become
due.The short-term obligations are met by realizing amounts from current, floating or circulating
assets. These should be convertible into cash for paying obligations of short – termnature nature.

The sufficiency or insufficiency of current assets should be assessed by comparing them with
short-term liabilities.If current assets can pay-off current liabilities,the liquidity position is
satisfactory. On the other hand, if current liabilities may not easily met out of current assets then
the liquidity position will be bad.

To measure liquidity of a firm, the following ratios can be calculated:

(i) Current ratio

(ii) Quick ratio
(iii)Absolute quick ratio

(i) CURRENT RATIO

It is also known as Working capital ratio. It is a measure of liquidity and used in making analysis
of short term financial position.

Current Ratio = Current Assets / Current Liabilities

43
 Current assets Current liabilities

3500000000
3000000000
(R
nt
m

s.
A

o
u

2500000000
2000000000
1500000000
1000000000
500000000
0
2008 2009
Years

FIGURE 1.1

Interpretation : It is decreasing in the year 2009 because current liabilities are increased this
year as compare to 2008. Overall this ratio is satisfactory as it is nearest to the thumb rule i.e. 2:1

(ii) LIQUID RATIO

44
 Liquid Ratio is more rigors test of liquidity than the current ratio. It is the ratio between
quick ratio & current liabilities.Quick ratio refers to all current assets except Inventory & prepaid
expenses.

Liquid Ratio = Liquid assets / Current Liabilities

Liquid assets = Current Assets- Prepaid Exp – Inventories

Year 2008 2009

Liquid assets 1929994111 2250727143

Current liabilities 1640425867 1978589143

Liquid Ratio 1.18 1.14

45
 Liquid assets Current liabilities

2500000000

2000000000
(R
nt
m

s.
A

o
u

1500000000

1000000000

500000000

0
2008 2009
Years

FIGURE 1.2

Interpretation: As seen from the analysis this ratio is almost same in both the years quite
satisfactory with a thumb rule i.e. 1.5: 1. Company’s current assets involved large amount of
debtors in it.

(iv) ABSOLUTE LIQUID RATIO

Cash is the most liquid ratio asset. Absolute liquid assets include Cash in hand, Cash at bank,
marketable securities or temporary investments.

Absolute Liquid Ratio = Absolute Liquid Assets / Current Liabilities

Absolute Liquid Assets = Cash + Bank + Marketable Securities

46
Year 2008 2009

Absolute Liquid assets 69481654 22134657

Current liabilities 1640425867 1978589143

Absolute Liquid Ratio 0.04 0.01

Absolute Liquid assets Current liabilities

2500000000

2000000000

1500000000

1000000000

500000000

0
2008 2009

FIGURE 3.1
Interpretation : Viewing the trend of the cash ratio of both the years it can be said that this ratio
is not satisfactory because cash and bank balance has been decreased very much in the year
2009 approx. 68%.

IV PROFITABILITY RATIOS

47
1. Gross Profit Ratio

Gross profit ratio measures the relationship of gross profit to net sales and is usually represented
as a percentage. Thus it is calculated by dividing the gross profit by sales.

Gross Profit Ratio = Gross Profit / Sales * 100

Gross Profit Ratio = Gross Profit / Sales * 100

Year 2008 2009

Gross Profit 1612956575 1575635349

Sales 11369337410 13308705116

Gross Profit Ratio 14.19 11.84

Gross Profit Ratio

20

15
ce
er

nt
P

g
a

10

0
2008 2009
Years

FIGURE 4.1
Interpretation: There has been decrease in the Gross Profit by 2.31% because the rate of
increase in sales is less than the rate of increase in cost of goods sold.

48
 2. Net Profit Ratio Net profit ratio established a relationship between net profit and
sales.This ratio is the overall measure of firms profitability and is calculated as:]

Net Profit Ratio = Net profit after tax / Net Sales *100

Year 2008 2009

Net profit after tax 664931302 1025585738

Net sales 11369337410 13308705116

Net Profit Ratio 5.84 7.71

Net Profit Ratio

10

8
ce
er

nt
P

g
a

0
2008 2009
Years

FIGURE 4.2

49
Interpretation : There has been decrease in the Gross Profit by 2.31% because the rate of
increase in sales is less than the rate of increase in cost of goods sold.The non- operating
expenses decrease by 86.43% so net profit increases.

3 .Return on Investment

Return on Investment = Profit Before interest and taxes / Total investment *100

Year 2008 2009

Profit Before interest and taxes 636173463 1211327797

Total investment 28515040014 3843437861

Return on Investment 22.31 31.52

Return on Investment

35
30
25
ce
er

nt
P

g
a

20
15
10
5
0
2008 2009
Years

FIGURE 4.3

Interpretation: The Company’s overall profitability is improving as return on

investment increases from 22.31% to 31.52%.

S.W.O.T ANALYSIS:-

50
STRENGTHS

 Hero Honda introduced first-stroke bike in the India market

 Hero Honda gives 1000 km/litre.
 Huge sale network (3500 Dealers)
 Better sale service

WEAKNESSES

 Suppose to be very sophisticated

 Not fit for rural India.

OPPORTUNITIES

 Hero Honda is the first manufacture to launch eco-friendly bikes with 4-stroke engines. They
have attained a strong good will and popularity in the industry and the consumers. Therefore,
it has huge potential to retain existing consumers and develop new market share.
 As Government policies are amended against pollution in metro cities, Hero Honda being 4-
stroke bike manufacture have great opportunities to explore its new innovations and
technologies.

THREATS

 Main Threats for Hero Honda are their competitors like: -

• Bajaj Auto
• TVS-Suzuki
• Escorts Yamaha

CONCLUSION

51
Financial analysis is a powerful mechanism of determining financial strength and weakness of a
firm. But the analysis is based on the information available in the financial statements.Thus the
financial analysis suffers from some serious inherent limitation of financial statements, which are
as follows:-

1. It is only a study of interim reports.

2. Financial analysis is based only upon monetary information & non- monetary
factors are ignored
3. It does not consider changes in price level.
4. As financial statements are prepared on the basis of a going concern; it does .
not given exact position.
5. Analysis is only a mean not an end in itself. The analyst has to make interpretation and
draw his own conclusion

SUGGESTIONS
52
1. The Company is enjoying a good current position. It should take steps to further improve
its position by repositioning the composition of current assets as large amount has been
block in debtors and inventories.
2. Large amounts of funds are blocked in debtors. Company should reduce its debtors so
that the blocked amount is properly utilized.
3. Inventory control is not proper. The Company has not defined the minimum and the
maximum stock level scientifically. Therefore there is blockage of funds. Moreover, the
safety stock level is also not defined. So the company should apply the proper Inventory
Control System so that there is no wastage of funds.

53
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