IRACST- International Journal of Research in Management & Technology (IJRMT), ISSN: 2249-9563 Vol. 2, No.

1, 2012

FINANCIAL HEALTH OF NFCL A Z-MODEL APPROACH

Meherji Duvvuri Associate Professor Department of Management Studies BVC Institute of Technology and Science Amalapuram-533201 E.G.Dt. (A.P) INDIA. The Financial Statements indicate what happened during a particular year for which they concern. All the stakeholders are interested to know the financial position and thereby the strength of a company. Most of their concern is the success and solvency position of the company. Several tools were developed to diagnose the financial strength of a Company based on the Financial Statements. Ratio Analysis, Common Size Statements, Comparative Statement Analysis and Decision Theory etc., serve this purpose but they indicate the absolute results which are the parameters for the present position of the company. They failed to predict the future. The Z Model which is developed by Edward Altman, Professor in Finance at New York University predicts the future by measuring the financial health. In the present paper, an attempt has been made to measure the financial health of Nagarjuna Fertilizers and Chemicals Ltd., by using the Z-Model, based on the past 10 years Financial Statements. Limited, its wholly owned subsidiary with Registered Office at A/612, Dalamal Tower, 211, Nariman point, Mumbai-400021. Accordingly the name of the Company has been changed to Kakinada Fertilizers Limited with effect from August 1, 2011. The mile stones of the Nagarjuna Group: The Nagarjuna Group was founded by Shri K V K Raju with a modest investment of US$ 23 million in 1973. Today it is one of the premier industrial houses in India with an asset base of US$ 2.5 billion. 1974: The saga of this great business house.. The Nagarjuna Steels Limited was incorporated and commenced its production of steel, to start with in 1974. 1985: The Nagarjuna Fertilizers and Chemicals Limited was born with the focus on agriculture input aimed at plant nutrition. 1992: Later, it diversified into the Crop Protection Business with investments in Pesticide Formulations manufacturing followed by Technical Grade Manufacturing in the year 1994. 1994: Entered the Micro irrigation business field to solve the irrigation problems of farmers in water and energy scarce regions. 1995: Entered into the Energy sector. 1997: Entered into the petroleum sector by setting up Nagarjuna Oil Corporation Limited, thereby, consolidating its core activities. Today the Groups major operations cover Agri and Energy sectors.

Key Words: Financial Statements, Ratio Analysis, Financial Strength, Z- Model

The Nagarjuna Fertilizers and Chemicals Limited is a leading manufacturer and supplier of plant nutrients in India, under Nagarjuna group. The company commenced its operations in 1986-87, and had its asset base around Rs. 21 billion as on 2011. The NFCL is enjoying the status of the single largest private sector company in Southern India. The company is mainly engaged in Nutrition Solutions for macro and micro fertilizers and farm management services and micro irrigation solutions. The Company in terms of the Composite Scheme of Arrangement and Amalgamation of Nagarjuna Fertilizers and Chemicals Limited, Kakinada Fertilizers and Chemicals Limited, Ikisan Limited and Nagarjuna Oil Refinery Limited has merged into Kakinada Fertilizers

2011: Demerger of Oil business undertaking of NFCL into Nagarjuna Oil Refinery Limited and merger

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IRACST- International Journal of Research in Management & Technology (IJRMT), ISSN: 2249-9563 Vol. 2, No. 1, 2012

of residual NFCL (i.e. Fertilizer and Micro Irrigation bussiness) and Ikisan Limited into Kakinada Fertilizers Limited. After the merger of fertilizer/micro irrigation business of NFCL and Ikisan Limited into Kakinada Fertilizers Limited, NFCL and Ikisan Limited shall now stand dissolved all the activities of both the companies are being carried out by Kakinada Fertilizers Limited.

company is in risk. Krishna Chaitanya (2005) find the financial health of IDBI with the help of Altmans Z score and concluded that IDBI is not in the health zone. Through the calculation of Z Score V.Dheenadhyalan (2008) predicted the corporate future of steel authority of India Limited and concluded that the financial health of SAIL is good as the score is in raising trend. THE Z SCORE: The ratios are widely used financial tools for predicting the financial performance. The Liquidity Ratio measures the companys ability to meet the obligations in short runs, the Solvency Ratio measures the companys debt service capacity in the long run and Activity Ratios measures the companys ability to utilise assets in an efficient manner. The Z Score model also developed on the basis of various simple ratios by Edward Altman, Professor of Finance, Stern School of Business, New York University. The model uses the common financial information such as sales, working capital, EBIT, total assets etc., to derive five basic financial ratios. Edward Altman assigned a weight to each ratio and sum up to get the Z Score. The original Z score formula propounded by Edward Altman was as follows: Z = 0.012T1 +.014T2 + 0.033T3 + 0.006T4 + 0.999T5 Here, T1 = Working Capital / Total Assets. T2 = Retained Earning / Total Assets. T3 = Earnings before Interest and Taxes / Total

OBJECTIVE OF THE STUDY: 1. 2. To evaluate the financial efficiency and performance of the company. To forecast financial health of the company.

RESEARCH METHODOLOGY: The present study is based on secondary source of data which has been obtained from the web sites of the company and other web sites. The period of the study is 2001-2011. This study is conducted with the help of K.B.Mehtas Model, a modified version of Altmans model. LIMITATION OF THE STUDY 1. 2. The present study is completely relied on secondary source of data only. The study is confined to last 10 years.

REVIEW OF LITERATURE: Assets. The studies of William H. Beaver (1967) revealed that cash flow to total debt had maximum impact to predict the future. For his study, he chooses 79 successful and 79 unsuccessful business units to calculate various ratios such as cash flow to total debt, net income to total assets, total debt to total assets, networking capital to total assets and current assets to current liabilities. The present model was developed by Prof. Edward Altman (1968) by selecting five ratios out of twenty two ratios different ratios examined on 33 successful units and 33 bankrupt firms. L.C.Gupta (1979) some extend refined the model developed by William H. Beaver, with an objective of finding corporate sickness much earlier. A simple nonparametric test for measuring the relative differentiating power of the various financial ratios was used. Johah Aiyabei (2002) applied Z score model to examine the financial health of small business firms in Kenya and discussed the theoretical aspect of financially distressed firms based on a cyclical concept. Mansur A. Mulla (2002) examined the financial health of textile mills by using Z score model. Selvam, M. and others (2004) conducted a study on India Cement Ltd., to know the financial performance and through the results it was concluded that the

T4 = Market value of Equity / Book value of Total Liabilities. T5 = Sales / Total Assets. THE MODIFIED Z MODEL FOR INDIAN CONTEXT BY PROF. K.B.MEHATA: The Z model suitably modified by Prof. K.B.Mehata for the Indian context is as follows. Z = 0.717X1 + 0.845X2 + 3.107X3 + 0.42X4 + 0.995X5 X1 = Net Working Capital to Total Assets (Indicates the liquid assets in relation to the size of the Company) X2 = Retained Earning to Total Assets (Indicates profitability in relation to the size of the Company) X3 =Earnings Before Interest and Taxes to Total Assets (Indicates the operating efficiency apart from tax and leveraging factors) X4 = Book value of Equity to Book value of Total Here,

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Debts (Indicates the long term solvency of the Company) X5 = Net Sales to Total Assets (Indicates the sales generating capacity of the Company) According to the modified Z Score the following three situations arises,

1. 2. 3.

If Z score is < 1.2 then it falls in Bankruptcy Zone. Its failure is certain. If Z score is between 1.2 and 2.9 then it falls in Grey Zone. At this stage failure is uncertain to predict. If Z score is > 2.9 then it falls in Safe Zone. It indicates good financial health of a Company.

The financial figures required for the analysis of Z Score for Nagarjuna Fertilizers and Chemicals Limited are summarised as follows. Z SCORE ANALYSIS values of various components 20022003200420052006200703 04 05 06 07 08 219.26 3297.96 452.49 49.08 1844.70 1453.27 1454.35 202.46 3165.12 462.77 9.02 1771.48 1393.63 1816.33 317.86 3127.42 441.03 -8.71 1673.68 1453.73 2193.59

Particulars Working Capital 689.61 566.46 510.27 86.76 Total Assets 2815.33 2684.83 2523.01 3360.91 Retained Earnings 469.05 341.58 359.02 385.63 EBIT 20.68 -176.77 -19.14 61.32 Equity 885.66 841.46 858.90 1866.96 Book Debts 1929.67 1843.37 1664.12 1493.94 Net Sales 1064.78 752.22 1082.12 1270.85 The basic ratios without weights are tabulated as follows.

200102

200809 166.41 2937.69 481.97 47.28 1622.68 1315.01 2371.91

200910 -26.70 2560.12 524.40 110.83 1582.77 977.35 1988.65

201011 238.13 2968.34 591.99 196.72 1549.28 1419.06 3088.61

Particulars WC/TA (X1) RE/TA (X2) EBIT/TA (X3) EQUITY/BD ( X4) SALES/TA (X5)

200102 0.2449 0.1666 0.0073 0.4590 0.3782

200203 0.2110 0.1272 0.0658 0.4565 0.2802

CALCULATION OF RATIOS 2003- 2004- 2005- 200604 05 06 07 0.2022 0.1423 0.0076 0.5161 0.4289 0.0258 0.1147 0.0182 1.2497 0.3781 0.0665 0.1372 0.0149 1.2693 0.4410 0.0640 0.1462 0.0028 1.2711 0.5739

200708 0.1016 0.1410 0.0028 1.1513 0.7014

200809 0.0566 0.1641 0.0161 1.2340 0.8074

200910 0.0104 0.2048 0.0433 1.6195 0.7768

201011 0.0802 0.1994 0.0663 1.0918 1.0405

The figures which get the final Z score after multiplying with weights are summarised as follows. Z SCORE (RATIO*WEIGHT) Weights YEAR 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 0.717 X1 0.1756 0.1513 0.1450 0.0185 0.0477 0.0459 0.0729 0.0406 0.847 X2 0.1411 0.1078 0.1205 0.0972 0.1162 0.1238 0.1194 0.1390 3.107 X3 0.0228 -0.2046 -0.0236 0.0567 0.0462 0.0089 -0.0087 0.0500 0.42 X4 0.1928 0.1917 0.2168 0.5249 0.5331 0.5339 0.4835 0.5183 0.998 X5 0.3775 0.2796 0.4280 0.3774 0.4401 0.5727 0.7000 0.8058 Z SCORE 0.9098 0.5258 0.8868 1.0746 1.1833 1.2851 1.3672 1.5536

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2009-10 2010-11

-0.0075 0.0575

0.1735 0.1689

0.1345 0.2059

0.6802 0.4585

0.7752 1.0384

1.7559 1.9293

FINDINGS: NET WORKING CAPITAL TO TOTAL ASSETS The ratio of working capital to total assets shows the liquidity position of the company. The ratio of working capital to total assets is calculated in X1. It is clearly apparent from the table that the ratio ranges from -0.01 to 0.24. The high fluctuations in this ratio indicate poor working capital management of the company.
0.25 0.2 0.15 0.1 0.05 0 0.05 20 20 20 20 20 01 03 05 07 09 02 04 06 08 10 WC/TA(X1)
0.25 0.2 0.15 0.1 0.05
0.25 0.2 0 0.15

RE/TA(X2)

0.05

20 20 01 03 0.1 02 04
0

20 05 06

20 07 08

20 09 10

RE/TA(X2)

20 20 20 20 20 01 03 05 07 09 EARNING 02 04 06INTEREST BEFORE 08 10

& TAX TO TOTAL

ASSETS This ratio indicates the operating performance and productivity of the assets. This ratio varies from -0.06 to 0.06. During selected period the operating efficiency of the company is very low. It indicates the Companys inability to operate the fixed assets properly.
0.08 0.06 0.04 0.02 0 0.02 0.04 0.06 0.08 20 20 20 20 20 01 03 05 07 09 02 04 06 08 10

RETAINED EARNINGS TO TOTAL ASSETS The ratio of retained earnings to total assets indicates what the proportion of fixed assets financed by the retained earnings i.e. reserves. As retained earnings are free reserves and cheaper source of finance than debt. It is observed that 12-14% fixed assets are financed through the retained earnings. This shows weak position of the company because they are more relying on external sources of financing rather than internal sources. But, it is a healthy symptom that during the recent periods some improvement is in the ratio.

EBIT/TA(X3)

BOOK VALUE OF EQUITY TO BOOK VALUE OF TOTAL DEBTS This ratio shows the long term solvency of the company. A company has to pay Fixed interest as promised at the time of agreement on debt where dividend equity is varies based on the profits and directors discretionary powers. The leverage between equity and debt is utmost important of any company while financing its needs. The Company is relying more on equity rather than debt and slowly it is increasing the component of debt equal to equity.

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1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 20 20 20 20 20 01 03 05 07 09 02 04 06 08 10

EQUITY/BD(X4)

NET SALES TO TOTAL ASSETS The Sales are very important in measuring the overall performance of any company since all activities are directly or indirectly depends on the sales revenues. The higher the ratio of net sales to total assets indicates the better performance and vice versa. The following diagram clearly indicates how the company has been improved in utilisation capacity of assets.
1.2 1 0.8 0.6 0.4 0.2 0 20 20 20 20 20 01 03 05 07 09 02 04 06 08 10

SUGGESTIONS: 1. The working capital management of the company has to be improved. The negative working capital during the year 2009-10 indicates a little laxity of the management. If things allowed remain so, the company may not meet its short term obligations and it is a dangerous signal. Hence, the company requires adopting a proper technique for the management of its working capital. The company requires improvement of its operational efficiency keeping in view its long term perspective. The companys turnover is poor and also requires measures to improve the sales.

SALES/TA(X5)

2.

3.

CONCLUSION: Based on all the five ratios and the respective weightages the Z scores of the company to know the solvency position during the study period is shown in the following diagram. The Z score of NFCL based on modified Altmans model has been ranging from 0.53 to 1.93 during the period (i.e. 2001-02 to 2010-11) under study. It is a welcome feature that the company had successfully entered the grey area from bankruptcy area and has been moving towards safe zone. The investors who are interested in the fertilizer industry can confidently come forward to park their surplus funds in this company. REFERENCES 1. Altman (1968), Financial ratio, discriminant analysis and the prediction of corporate bankrupcy, Journal of Finance, 23(4): 589-609. Gupta L.C., Financial Ratios as forewarning indicators of corporate sicknessBombay ICICI 1979 quoted by Pandey I.M. op.cit, p.184. Jonah Aiyabei (2002), Financial Distress:Theory, Measurement and Consequence, The Eastern Africa Journal of Humanities and Sciences, Vol.1 no.1

2.

3.

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4.

Krishna Chaitanya V. (2005) , Measuring financial Distress of IDBI using Altman Z score model, The ICFAI journal of Bank Management, August, Vol.IV, No.3, pp.7-17. 5. Mansur A. Mulla (2002), Use of Z score Analysis for evaluation of Financial Health of Textile MillsA case Study, Abhigyan, Jan-March Vol.XIX, No.4 pp. 37-41. 6. Selvam M. Vanitha S. and Babu M. (2004), Study on financial health of cement industry-Z score analysis, The Management Accountant, July, Vol.39, No.7, pp.591-593. 7. http://www.moneycontrol.com 8. http://www.nagarjunagroup.com 9. V.Dheenadhyalan (2008), Financial Health of Steel Authority of India Limited: A Z-score Approach, Indian Journal of Accounting, Dec., Vol.XXXVI (I), pp. 48-52. 10. Y.V. Reddy and Annie Rodregues (2008), Measuring Financial healtgh- A Z-Score Analysis, The Accounting World, Sep-08,pp.20-29.

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