2009

Hindalco:
Financial Statement Analysis

Submitted to: Submitted By Sec A (Seat No.

61-66)
Dr. Vunyale Narender
Manish Mittal 09BSHYD0427

Neha Gupta 09BSHYD0498

Ritika Choraria 09BSHYD0671

Surbhi Nagpal 09BSHYD0890

12/25/2009
Kirti Sharma 09BSHYD0384
COMPANY OVERVIEW:

Hindalco was established in the year 1958, commissioned its first aluminum facility at Renukoot.
Hindalco is the flagship company of the Aditya Birla Group. Company is industry leader in
aluminum and copper. Hindalco is the world’s largest aluminum rolling company and one of the
biggest producers of primary aluminum in Asia. Its copper smelter is the world’s largest custom
smelter at a single location.
In 2007, the acquisition of Novelis Inc. a world leader in aluminum rolling and can recycling,
marked a significant milestone in the history of the aluminum industry in India. With Novelis
under Hindalco, Hindalco ranks among the top five aluminum majors, as an integrated producer
with low cost alumina and aluminum facilities combined with high-end rolling capabilities and
presence in 12 countries outside India.
Hindalco in India enjoys leadership position in aluminum and copper. The company `s aluminum
units across the country encompass the entire gamut of operations from bauxite mining ,
aluminum, smelting to downstream rolling, extrusion, foil and alloy wheel along with captive
power plant and coal mines.

FINANCIAL STATEMENT ANALYSIS

What is financial statement analysis?

Financial statement analysis is defined as the process of identifying financial strengths and
weaknesses of the firm by properly establishing relationship between the items of the balance
sheet and the profit and loss account.

How can the analysis be done?

There are various methods or techniques that are used in analyzing financial statements, such as
comparative statements, schedule of changes in working capital, common size percentages, funds
analysis, trend analysis, and ratios analysis.

Which method are we using for the analysis?

The method used by us would be the Ratio Analysis.

But why only ratio analysis?

The ratios analysis is the most powerful tool of financial statement analysis. Ratios simply mean
one number expressed in terms of another. A ratio is a statistical yardstick by means of which
relationship between two or various figures can be compared or measured. Ratios can be found
out by dividing one number by another number. Ratios show how one number is related to
another. Ratio analysis is an important and age-old technique of financial analysis. The following
are some of the advantages / Benefits of ratio analysis:

2|Page
 1. Simplifies financial statements: It simplifies the comprehension of financial statements.
Ratios tell the whole story of changes in the financial condition of the business

2. Facilitates inter-firm comparison: It provides data for inter-firm comparison. Ratios

highlight the factors associated with with successful and unsuccessful firm. They also
reveal strong firms and weak firms, overvalued and undervalued firms.

3. Helps in planning: It helps in planning and forecasting. Ratios can assist management,
in its basic functions of forecasting. Planning, co-ordination, control and
communications.

4. Makes inter-firm comparison possible: Ratios analysis also makes possible comparison
of the performance of different divisions of the firm. The ratios are helpful in deciding
about their efficiency or otherwise in the past and likely performance in the future.

5. Help in investment decisions: It helps in investment decisions in the case of investors

and lending decisions in the case of bankers etc.

What all ratios will be used to conduct an accurate analysis?

The ratios that we will be using in our analysis would be based on the functional
classification.

These ratios are

1. Liquidity ratios
2. Turnover or activity ratios
3. Leverage ratios or the long term solvency ratios
4. Profitability ratios

We will pick up each category of the ratios and hence proceed with the analysis of each
ratio as calculated for HINDALCO INDUSTRIES LIMITED.

3|Page
particulars unit Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
liquidity ratios

current ratio= current assets/current liability ratio 1.23 1.66 1.50 1.52 1.88
quick ratio= quick assets/current liability ratio 0.24 0.34 0.32 0.33 0.34
cash ratio=cash and bank balance/cuirrent liability ratio 0.03 0.06 0.04 0.03 0.05

Leverage ratios

total debt ratio=total debt/capital employed ratio 0.33 0.34 0.37 0.32 0.26
debt equity ratio= total debt/net worth ratio 0.50 0.51 0.59 0.48 0.35
Capital equity ratio=capital employed/net worth ratio 1.50 1.51 1.59 1.48 1.35
Interest coverage ratio= EBIDTA/interest ratio 14.91 12.50 18.07 13.69 10.76

Activity Ratios

inventory turnover ratio=COGS/ Average inventory times 3.05 2.73 3.38 3.37 3.33
no of days inventory=360/inventory turnover days 117.90 131.97 106.48 106.91 108.23
debtors turnover=net credit sales/average debtors times 12.10 11.16 13.30 12.46 13.13
asset turnover= sales/capital employed times 0.83 0.78 0.93 0.74 0.57
working capital turnover= sales/net working capital times 11.49 3.89 6.98 7.01 4.97

Profitability ratio

Gross margin= PBDIT/sales percentage 27% 25% 24% 20% 20%

Net margin=PAT/SALES percentage 14% 15% 14% 15% 12%
PAT TO EBIT RATIO=PAT/EBIT percentage 52% 59% 59% 74% 62%
ROI BEFORE TAX=EBIT/CAPITAL EMPLOYED percentage 22% 19% 22% 15% 11%
RETURN ON EQUITY= PAT/NET WORTH percentage 17% 17% 21% 16% 9%

OTHER RATIOS

EPS=PAT/NO.OF SHARE Rs. 143.28 14.28 22.12 23.31 13.11

DPS Rs. 185.56 216.84 177.34 226.89 229.58
PAYOUT=EPS/DPS ratio 0.77 0.07 0.12 0.10 0.06

4|Page
LIQUIDITY RATIOS

Q1 what are the implications of too little or too much liquidity?

Ans. If a company has inadequate liquidity will result in poor credit worthiness, loss of creditors
confidence and even legal tangles leading to closure of the company.

Too much liquidity means funds being unnecessarily tied up in assets and need for greater
working capital.

Q2 Is increasing current ratio a good symbol?

Ans. Yes the ideal current ratio is 2:1 and the ratio has increased from 1.23 to 1.88 which is a
good symbol.

Q3 Is the quick ratio appropriate?

Ans A quick ratio of 1:1 is ideal but it can be seen that the company is maintaining a quick ratio
of approximately 0.34 whish may be adequate according to industry standards.

Q4 Comment on the cash ratio of the company?

Ans. The cash ratio fluctuates between 3 to 5%.Hindalco is carrying enough cash and there is
nothing to be worried about because companies in India has reserve borrowing powers. Firms
have credit sanction limits and overdraft facilities and can easily borrow short term cash.

LEVERAGE RATIOS

A firm should have a strong short term as well as long term financial position. To judge the long
term financial position of the firm, financial leverage or capital structure ratios are calculated.
These ratios indicate the mix of funds provided by owners and lenders. As a general rule, there
should be an appropriate mix of debt and owner’s equity in financing the firm’s assets.

Q. Why should be there a proper mix of debt and equity?

1. Debt is more risky from the firm’s point of view. The firm has a legal obligation to pay
interest to debt holders, irrespective of the profits made or losses incurred by the firm. If
the firm fails to pay to debt holders in time, they can take legal action against it to get
payments and in extreme cases, can force the firm into liquidation.
2. If the cost of debt is higher than the firm’s overall rate of return, the shareholders will be
reduced.
3. Highly debt-burdened firms will find difficulty in raising funds from creditors and
owners in future.
4. Use of debt can be advantageous to shareholders as well:
i) They can retain control of the firm with a limited stake

5|Page
 ii) Their earning will be magnified, when the firm earns a rate of return on the capital
employed higher than the interest rate on the borrowed funds.

DEBT RATIO: Debt Ratio is a financial ratio that indicates the percentage of a company’s
assets is provided via debt. It is the ratio of total debt (the sum of current liabilities and long-term
liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as
'goodwill').

Debt Ratio = total debt / capital employed

Q. What does a debt ratio tells?

A. Debt ratio is a kind of solvency ratio. By this ratio firm or the shareholders will be able to
know the proportion of interest-bearing debt i.e. funded debt. Or in other words for a layman it
can be said that debt ratio indicates the percentage of company’s asset provided via debt.

Q. What is an ideal debt ratio?

A. Debt ratio should be compared with industry average or competitors’ ratio. Though a high
value indicates more risk as more portion of debt means greater liability. Aluminium sector is a
highly capital intensive in nature and have significant exposure to debt, managing interest costs
is of utmost importance. In such a case having a debt ratio of around 26% is pretty good. Also
the debt ratio has reduced from around0.33 to 0.26 which shows that the company has paid a
proportion of its debt.

DEBT TO EQUITY RATIO: The debt-to-equity ratio (D/E) is a financial ratio indicating the
relative proportion of equity and debt used to finance a company's assets. This ratio is also
known as Risk, Gearing or Leverage.

Debt to Equity = (Short term debt + long term debt) / (net worth)

Q. How is debt ratio and debt to equity ratio different?

A. Debt ratio indicates the percentage of debt in the total company’s assets, while debt to equity
ratio indicates relative proportion of debt and equity to finance company’s asset.

Q. Aluminium is a capital intensive sector and Hindalco is managing its funds majorly
through equity. Comment.

A. A low debt eqity means use of more equity than debt which means a large safety margin for
creditors since owners equity is considered as a margin of safety by creditors and wise versa.
Moreover, ideal debt equity ratio is 2:1, which is the maximum preferable, below this is
considered safe.

6|Page
Q Are there any risk in high interest coverage ratio?

The lower the ratio, the more the company is burdened by debt expense. When a company's
interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable.
An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to
satisfy interest expenses.So a high interest coverage ratio is good. The interest coverage ratio is
between 14.96 to 10.91 though the ratio has declined in the current year it is still very safe.

Q. Why is earnings before tax are used for calculating interest coverage ratio?

A. Since taxes are computed after interest, interest coverage is calculated in relation to before tax
earnings.

Q. Why is depreciation is taken into account for calculating interest coverage ratio?

A. Depricaition is a non-cash item. Therefore, funds equal to depreciation are also available to
pay interest charges.

Q. How is interest coverage ratio helpful for a firm?

A. This ratio expresses the satisfaction to the lenders of the concern whether the business will be
able to earn sufficeint profits to pay interest on long term loans. In other words, the interest
coverage ratio or the times- interest earned is used to test the firm’s debt-servicing capacity.
Leverage ratios are helpful but they fail to indicate the firm’s ability to meet interest (and other
fixed charges) obligations.

ACTIVITY RATIOS

Q Comment on the inventory turnover ratio?

Ans The inventory turnover ratio shows investment in stock. A high inventory turnover ratio
indicates more sales are being produced by a rupee of investments in stock. But a very high
inventory turnover ratio shows overtrading and may lead to working capital shortage. The
companys ratio is between 3.05 to 3.33 this implies the company is able to turn its inventory
approximately thrice a year.

Considering the type of good manufactured by the company that is alluminium the ratio is good
enough.

Q What does the no.of days of inventory imply?

Ans. The no. of days of inventory ratio indicates average inventory carrying period of the
company which is fluctuating between 106 to 117 days. The company has to carry the inventory
for a considerably long duration of time but since these are heavy metals it may be apt.

7|Page
Q what is debtor turnover ratio? What does it imply in Hindalco’s case?

The ratio shows ease of convergence of debtors to cash. A high debtor turnover ratio is
considered good. The company’s ratio is around 12 to 13 times a year and it implies that the
company is able to collect cash from debtors faster as the inventory turnover ratio is just around
3.

Q what do you mean by asset turnover ratio?

Ans The ratio indicates the sales generating capacity of the companies assets. It shows the sales
generated on capital employed.

PROFITABILITY RATIOS

These ratios are the ones that indicate the operational effieciency of a company.

Why are these ratios important?

These ratios indicate the firm’s profitability. A company in order to survive must incur profits
and grow over a period of time. Profits are necessary but they should not come at the cost of
employees are negative social consequences. Profits of a business indicate how well are the
resources used and also help to determine how do investors view the company. Profits are the
differences in the revenues and expenses over a period of time.

These ratios are also important to the creditors and the owners of the firm apart from the
management.

On what basis are these ratios calculated.?

These ratios are classified into:

1. Profitability in relation to sales

2. Profitability in relation to investment.

8|Page
 RETURN ON EQUITY

What is this ratio?

The return on equity ratio gives the return which a firm earns on the capital raised by shares
and stocks. Since shareholders are the owners of investment,it indicated the return on their
capital.

How is this ratio found out?

The returns of the shareholders or the rate of the dividend is not fixed, rather it is decided on
the business profits.it is the net profits after the taxes that indicates their returns.

Return on equity (ROE) = Profit after Taxes / net worth (equity)

How do we find out net worth?

Net worth is the shareholders equity which includes paid up share capital, shares premium, and
reserves and surplus less accumulated losses.net worth can also be found out by subtracting total
liabilities from total assets.

Comment on ROE of Hindalco?

Hindalco’s return on equity is good though it has reduced from 17% to 9% but this reduction
may be attributed to the global recession.

Other Ratios

Q Why has the payout decreased from 0.77 in 2005 to 0.06 in 2009?

There is a considerable decrease in the payout ratio because the company went in for a stock split
in the year ended 2005.

Q The EPS has reduced from 143 in 2005 to just Rs.14 in 2006.why?

Ans. The stock split in the year ended 2005 is the main cause of reduced EPS.

9|Page