facs assigmnment

8/8/2019 FACS Assigmnment

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Submitted in fulfillment ofthe Post Moduleassignment for

Financial Analysis andControl Systems

by

Anthony Joseph Prakash

Student No.0661033


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Contents

1. Introduction 3

2. Introduction to Subros Ltd 42.1 Introduction 42.2 Manufacturing 42.3 Research and Development 52.4 Human Resources Management 5

2.5 Environment & Social Responsibility 5

3. Review of the year gone by3.1 Introduction 63.2 Quantities, Net Sales and PBT 6

3.2.1 Raw Material Cost reduction 83.2.2 Increase in Other Income

3.3 Dividend, EPS and Share Price

4. Application of Funds 11

4.1 Fixed and Tangible Assets 114.2 Current Assets. 12

4.2.1 Raw Material 124.2.2 Finished Goods 124.2.3 Sundry Debtors 124.2.4 Cash & Bank Balances 13

4.2.5 Loans and Advances 134.3 Current Liabilities 14

4.3.1 Sundry Creditors and Interest 134.3.2 Warranty Costs 134.3.3 Retirement benefits 14


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5. Cash Flow Statement 15

6. Five year Ratio Analysis 176.1 Introduction 176.2 Profitability Ratios 186.3 Efficiency Ratios 226.4 Liquidity Ratios 276.5 Investment Ratios 29

7. Conclusion 30

7.1 Investment Potential 307.2 The Road ahead 31

8. References 32

9. Bibliography 32


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1. Introduction

As a part of the Post Module Assignment, I have chosen to analyse the 2005-

2006 Annual Report of Subros Ltd. (hereafter called Subros), a leading car air

conditioner manufacturer in India. I have chosen a manufacturing company from

the automobile sector, because it is which is one of the fastest growing sectors in

India. The automobile sector growth in India is second only to IT and

Biotechnology boom. To top this the automobile sector is the largest employer

in the manufacturing sector in India.

Most of the global players like Toyota, General Motors, Ford and Honda have set

up manufacturing facilities in India. India is well on its way to becoming a major

global hub for automobiles and automobile components. The presence of global

players brings to the fore improved quality and manufacturing standards. Many

companies are well on their way to becoming world class manufacturing facilities.

The emerging scenario makes it all the more important to analyse the financial

health of companies in the automobile sector. It is also imperative that the Indian

Automobile companies meet up to world financial standards in terms of

profitability and financial ratios. In my analysis I have used the Annual Report of

Sona Koyo Steering systems, another automobile sector company for the sake of

comparison. Although both have varied products, the results thrown up are

interesting. In order to have an overview of the performance of Subros on the

global front, the Annual Report of Behr GmbH is used for comparison. Behr

GmbH is in the same business of manufacturing car air conditioners and the

comparison makes interesting reading.


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2. Introduction to Subros

2.1 Introduction

Subros is a leading car air conditioner manufacturer in India. Subros was

established in 1985 as a joint venture between the Suri Brothers, Denso

Corporation, Japan and Suzuki Motor Corporation, Japan.

The company has grown from a capacity of 15,000 AC units in 1985 comprising

of largely an assembly operation, into the largest and only integrated

manufacturing unit in India for Auto Air Conditioning systems. The company has

the capability to manufacture compressors, condensers, heat exchangers and allthe connecting elements that are required to complete the ACLoop.

Subros has three plants in Noida, Manesar and Pune. It also has a R&D center

and Tool room at Noida. The manufacturing capacity has grown to a level of

7,50,000 AC units per annum and there is a plan to go to a level of 1,000,000 per

annum by 2008.

2.2 Manufacturing

The companys manufacturing infrastructure is the best in the class with a lot of

focus on low cost automation. The company manufactures two main

components viz the Air conditioning system and the Fan motor assembly. It is

the only company in India, which has the infrastructure to manufacture all the

components in the A/c loop.


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2.3 Research and Development

Research & Development is high on Subross agenda. The focus on shorter

product development cycles has prompted investments in prototyping and

simulation softwares. State of the art validation and test centers give Subros a

competitive edge.

Also helping in shortening the lead times is a state of the art Tool Room involved

in the manufacture of jigs and fixtures.

2.4 Human Resources Management

Subros firmly believes that Employees are its greatest assets. Well structured

training programs and improvement programs like Quality circles, TPM and TQM

ensure Total Employee Involvement at all levels.

2.5 Environment and Social Responsibility

The Environment and Social Responsibility find special mention at Subros. The

company uses environment friendly refrigerant for its air conditioners and also

sponsors trees and green areas across major metros in India. Subros started a

school for children with special needs in 1990. Subros also sponsors treatment

for children suffering from cancer.


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3. Review of the year gone by

3.1 Introduction

Buoyed a growing economy and increasing levels of disposal income, the

Passenger car segment in India is seeing tremendous growth. According to

ACMA [1], the compounded annual growth rate of passenger car production in

the period 2000-2005 stands at 17% as compared to 8% in the previous five-year

period. ACMA [1] also states that the Auto component industry has achieved a

Compounded Annual Growth Rate of 20% in the 2000-2005 period as compared

to 9% in the previous five-year period. Although the year 2005-2006 saw agrowth of only 7.7 % in the passenger car segment as against a growth of 17.8 %

in 2004-2005, Subros has managed to grow significantly. This is evident from

the latest financials of the company.

3.2 Quantities, Net Sales and PBT

Figure 3.1: Comparison of quantities.

3.643.93

2.843.08

6.487.01

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

2005 2006

Quantityinlacs

A/c's

Blowers

Total

As shown in figure 3.1, number of units sold in 2005-2006 grew by 8.1 % to 7.01 lac

units. The Auto component Industry in this period grew by 7.7%.


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Figure 3.2: Net Sales and PBT (Profit Before Tax)

5906356490

350

289

0

10000

20000

30000

40000

50000

60000

70000

2005 2006

Rsinlacs

0

50

100

150

200

250

300

350

400

Rsinlacs

Net Sales Value

PBT

4%

20%

The net sales value dropped by 4%, as can be seen in figure 3.2, although the

Profit before Tax increased by 20% to Rs. 350 lacs. The drop in Net sales value

can be attributed to the sharp decline in Unit Sale Price** (Figure3.3). Pressure

from competition and market demands has forced Subros to bring about a 12%

reduction in the Unit Sale Price.

Figure 3.3: Unit Sale Price

8058.5

9114.7

7400.0

7600.0

7800.0

8000.08200.0

8400.0

8600.0

8800.0

9000.0

9200.0

2005 2006

ValueinRs

12%

Reduction

** Calculated by dividing the Net Sale value by the total number of units sold.


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Subros has nevertheless managed to maintain a growth of 20% in the PBT. This

is primarily due to two reasons.

a) Reduction in Raw Material cost.

b) Marginal increase in other income

3.2.1 Raw Material cost reduction

Figure 3.4: Unit Raw Material Cost

6991.7

5839.4

5200.0

5400.0

5600.0

5800.0

6000.0

6200.0

6400.0

6600.0

6800.0

7000.0

7200.0

2005 2006

ValueinRs

16%

Reduction

The unit raw material cost++ has reduced by 16 % in the last year (Figure 3.4).

This has been achieved by bringing down the import content of Raw Material.

The resulting reduction has helped Subros reduce its Raw Material Cost for the

year although the volumes have increased. It is apparent from figure 3.5 that an

aggressive indigenisation plan in is place at Subros. This is also mentioned in theDirectors Report (Page 7). Costs of imported components are high due to the

high import duties. This in turn results in high raw material costs. Therefore it is

very important that the localization content of raw material is steadily increased.

++ Calculated by dividing the raw material cost by the total number of units sold.


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Figure 3.5: Raw Material Percentage of Imports and Indigenous.

35

65

45

55

0%

20%

40%

60%

80%

100%

Percentage

2005 2006

Imported

Indigenous

Increase in

Indigenous

Raw Material

The reduction in Raw material cost is very important considering the fact that

prices of Aluminum, Copper and Steel have been increased over the last one

year. These three metals are widely used as Raw Material at Subros. The

average price of copper has gone up by 45 % in the last year and that of steel by

40%. Similarly Aluminum prices have increased by over 50% in the last year.

3.2. 2 Increase in other income

There is also a small but significant increase of 29% over the last year in Other

Income. This increase is mainly due to an increase in the interest income and

miscellaneous income as mentioned in Schedule H, page 43 of the Annual

report.

Also significant is the reduction in the Repairs and Maintenance expenses overthe last year by 17%. This is an indication that good TPM (Total Preventive

Maintenance) practices are in place at Subros.

All these factors in tandem have contributed to a 20% growth in PBT for the year

2005-2006.


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3.3 Dividend, EPS and share price

Subros has declared a dividend of Rs 41.99 per share. This is an increase of

17% over the last year. The dividend paid out this year is 35% on the paid-up

equity share capital as against 30% declared in the previous year. This is

mentioned in the Directors report on page 7 of the Annual Report. Earnings per

Share (EPS) have improved by 20%. Both have been shown in the graphical

form in figure 3.6. The share price has appreciated over 25 times over the

nominal value to a 2006-year ending price of Rs. 260 per share

Figure 3.6: Dividend and EPS (Earnings per Share)

20.22

16.89

35.99

41.99

15

16

17

18

19

20

21

2005 2006

ValueinRs

32

33

34

35

36

37

38

39

40

41

42

43

ValueinRs

EPS Dividend


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4. Application of Funds.

4.1 Fixed and Intangible AssetsThe opening of two new factories, one at Manesar and the other at Pune have

resulted in an increase in the fixed assets employed. Value of fixed assets has

gone up by 39% in 2005-2006. This additional investment will translate into an

increase in capacity from 5 lac units to 7.5 lac units, a 50% increase. It is likely

that with the same value of fixed assts the company looks to increase the

capacity to 10 lac units by 2008. The distribution of fixed assets invested in

2005-06 is shown in figure 4.1. Capital expenditure in R& D is also included in

the fixed assets as mentioned in the Accounting Policies. This expenditure may

not bring about tangible returns in terms of increase in turnover.

Figure 4.1:Distribution of fixed assets added in 2005-2006(Value of

Investment)

Land

2%

Vehicles

3%

Furniture &

Fixtures

2%

Building

4%

Plant and

Machinery

89%

Intangible assets increased by 25% over the last year. The investment was

made to purchase PLM software, used for better management of R&D

documents as indicated on page 11, in the annexure to Directors Report. The


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cost of the software is being amortised over a three year period as mentioned in

he Accounting policies. This investment will go up in the coming years since the

company looks to implement phase 2 and 3 of the PLM software. (Annexure to

Directors report, Page 11).

4.2 Current Assets

4.2.1 Raw Material

Current assets for the year 2005-2006 have reduced by 2%. One of the primary

reasons for this is the close control on the inventory. Inventory levels have come

down by 8% in spite of an increase in volume of sales. A major contribution to

the inventory control is the 23% reduction in Raw material stock. This could be

related to the fact that the import content of raw material has come down from 65

to 55 % in 2005-2006. In the case of imported raw material owing to long lead

times more material needs to be stocked.

4.2.2 Finished Goods

The finished goods stock has shown a decrease of 55% over last year. A majorreason for this could be the establishing of a new plant at Pune. The Pune plant

supplies primarily to Tata Motors also located at Pune. Having a plant close to

the customer helps overcome the need to stock finished goods since the lead-

time to deliver is reduced. Prior to the setting up of the Pune plant, supplies were

being made form the Noida plant. This meant finished goods remained in transit

for 6 days (Transit time between Noida and Pune by road). This is now

completely eliminated as supplies to Tata motors are made from the Pune Plant.

4.2.3 Sundry Debtors

Sundry debtors remain more or less at the same levels as last year. This is a

good achievement and has pushed the Debtors collection period from 16.8 to

17.5 days, a 4% increase. However since the value of sales is down by 4% from

last year the result may not have a major impact on cash flow.


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4.2.4 Cash & Bank balances

Cash and Bank balances have reduced by 9% over the last year. There is a

noticeable dip in the current account balances. This is good because the cash in

current accounts is idle money and does not generate any revenue.

4.2.5 Loans and Advances

Loans and advances have increased by 39%. Advances recoverable in cash or

in kind or for value to be received have contributed to this increase in a big way.

The reason for this could be advances paid to suppliers for procurement of

machinery and/or for tools and fixtures for the two new plants. Loans to

employees have also increased by a whopping 98% over the last year. This

could be because of the addition of new employees at Subross new plants or

could be an employees welfare scheme floated by the company to improve

morale.

4.3 Current Liabilities

4.3.1 Sundry creditors and Interest

Sundry creditors have reduced by 23% over the last year. Creditors collection

days have reduced by 20% from 35 to 28.1 days. This means that Subros is

paying its debtors earlier than the previous year.

Interest accrued on loans has increased by 99.7 % mainly due to the increased

borrowing to fund the two new plants.

4.3.2 Warranty Costs

What is worrying is that the provisions made for Warranty has increased by 38 %

from Rs 32.21 lacs to Rs 44.21 lacs. This means that the company is expecting

more warranty replacements as compared to last year. Subros needs to look

into this and ensure that quality concerns like warranty complaints/replacements

do not affect its image in the market and its equations with its customers. The


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accounting policies however state that the provision for warranty is based on

estimation and may be inaccurate.

4.3.3 Retirement Benefits

There is also a significant provision for employees retirement benefits, an

increase of 64% over the previous year. This is in line with Subross thinking that

people are its greatest strength. This effort will go a long way in improving

employee morale


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5. Cash Flow StatementAccording to Janet Walker [2], cash flow statements are fraught with difficultiesbecause cash flows are so volatile. Analyzing a cash flow statement three or

four months after it is published does not give an updated picture. However it

helps in getting a basic idea of where cash comes in from and where the outflow

is.

In the year 2005-06, the net cash generated from operations increased by 57%

over the previous year. A major contributor to this is the PBT, which has

increased by 20% over the previous year. Also small contribution from interest

earned has also made an impact on the net cash flow. This meant that Subros

has been able to finance its Direct taxes from the cash generated. The cash

generated is also sufficient to fund the dividend and the taxes on dividend. This

is a healthy sign as the company is self-sufficient as far as cash flow is

concerned.

Figure 5.1: Gearing Ratio

83.80

79.80

77.00

78.00

79.00

80.00

81.00

82.00

83.00

84.00

85.00

2005 2006

P

ercentage

5% Increase


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However to fund its ambitious expansion plans at its two new locations, the

company needed to borrow funds. An increase in 39% in the fixed assets has

necessitated this borrowing. The interest on this borrowing is likely to affect the

cash flow next year. Since the company is on a fast growth track and is

envisaging an increase of 32% in its turnover for the year 2006-2007, managing

the cash flow does not seem to be a problem.

Since the company is highly geared, (See figure 5.1) it is in the high-risk zone as

far as shareholders returns are concerned. According to Janet Walker [4],

changes in the sales can have dramatic changes in the returns earned by the

shareholders in highly geared companies. Great care must be taken by the

company to ensure that profit margins and sales do not fall.

Going by the Directors report (p8), Subros Ltd. has received a LOI from Mahindra

& Mahindra Limited for their new generation vehicles. Mahindra & Mahindra Ltd

has incidently tied up with Renault of France to produce passenger cars in India.

This is likely to increase sales for Subros Ltd., in the near future. Hence the high

gearing ratio may not be an immediate cause for concern.


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6. Five Year Ratio Analysis

6.1 Introduction

Ratios are a good way of analyzing the performance of a company through its

financial statements. Financial statements alone can be very deceptive and one

cannot judge a companys health only by going through them.

Janet Walker [5] states that the easiest way to approach the ratio analysis of a

company is to group them according to the particular aspect of business we are

attempting to monitor.

Further the ratios can be grouped into the following groups

a) Profitability

b) Efficiency

c) Liquidity

d) Investment

In order to get a complete picture of the performance of Subros, the ratios have

been compared with that of Behr GmbH and Sona Koyo Steering systems. Behr

GmbH is a global car air conditioner manufacturer and in the same business as

Subros. Sona Koyo on the other hand is an Indian auto component manufacturer

with operations in other countries as well. The comparison with Sona Koyo will help

bench mark Subros against an Indian company whose performance has been

commendable in the recent past. Although Sona Koyo is not a competitor to Subros

I feel that the comparison will serve as a benchmark.

The other competitors for Subros in India, i.e. Behr India, Sandan Vikas, Visteon and

Delphi are not public listed companies and hence their financial statements are notavailable for comparison.


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6.2 Profitability Ratios

Profitability ratios commonly analyzed are the ROCE (Return on Capital

Employed), Net Profit, Gross Profit and Mark Up ratio.

Although the Asset turnover ratio is an efficiency ratio, Janet Walker [6] states

that it is included in assessing profitability since it helps to explain variations in

ROCE.

Figure 6.1: Return on Capital Employed-2001 to 2006

2.5

4.5

5.7

11.411.5

10.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2001 2002 2003 2004 2005 2006

Source Data:Asian CERC IT Ltd.,[7]

Percentage

The Return on capital employed has steadily increased in the last five years.There is a slight dip in the year 2005-2006, as seen in figure 6.1, but that is

understandable, as the company has invested in two new factories, which are yet

to become fully operational.

Wendy McKenzie [8] states that in order to improve the ROCE, a company must

use its assets more effectively and generate more sales or improve its profit

margins.


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Janet Walker [9] says that in addition to the above cost reduction and reductions

in the amount of capital employed are factors that can improve ROCE.

Figure 6.2: Factors affecting return on capital (Adapted from Wendy

McKenzie [10])

From figure 6.2 we can see that ROCE depends on Net profit margin and asset

turnover. Both have to be improved in order to improve the ROCE.

Figure 6.3: Net Profit and Asset Turn over 2001 to 2006

4.4

3.4

2.9

1.8

1.4

0.8

2.7

3.5

3.3 3.33.1

3.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2001 2002 2003 2004 2005 2006

Source Data: Asian CERC IT Ltd[7]

Percentage

NP

ATO


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Figure 6.3 clearly shows that the net profit has been increasing over the years.

The dip in asset turn over ration has caused the reduction in ROCE in the year

2006. As explained before, this is because of the investments in the new

factories. Capital employed has increased by 26% in the year 2005-2006.

Hopefully in the year 2007 both the new factories of Subros will be operational

and the turnover will increase bringing about an improvement in the Asset turn

over ratio.

The Gross Profit ratio and the Mark Up ration have steadily improved over the

last 5 years. This is an indication that the volume of sales has increased and the

company is maintaining its margins of profit.

Finally comparing the ratios of Subros, Behr GmbH and Sona Koyo, it is clear

that the profitability ratios of Subros are better. The ROCE for Subros shows

less variability and a steady growth pattern. (As shown below in figure 6.4)

Figure 6.4: Comparison of ROCE-Subros, Behr GmbH and Sona Koyo

2.5

5.7

11.4

8.7

11.3 11.6

1.51 1.57

12.38

10.82

8.46

11.5

10.5

4.5

10

11.3

7.64

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Source Data: Asian CERC IT Ltd[7] & Behr Annual Report 2004-2005

Subros

Behr

Sona

Subros 2.5 4.5 5.7 10.5 11.5 11.4

Behr 8.7 11.3 11.6 11.3 10

Sona 1.51 1.57 7.64 12.38 10.82 8.46

2001 2002 2003 2004 2005 2006


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Figure 6.5: Comparison of Gross Profit Ratio-Subros, Behr GmbH & Sona

Koyo

7.5

4.0

11.58 11.6610.9

9.18.88.4

33.12.52.32

6.48

9.48

5.63

10.57

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Source Data: Asian CERC IT Ltd.[7] & Behr Annual Report 2004-2005

Subros

Behr

Sona

Subros 7.5 4.0 8.4 8.8 9.1 10.9

Behr 2 2.3 2.5 3.1 3

Sona 5.63 6.48 9.48 11.58 11.66 10.57

2001 2002 2003 2004 2005 2006

As far as Gross Profits (See figure 6.5) are concerned Behr GmbH is way below

Subros and Sona Koyo. This may not be a direct indication of the Behrs

financial health as it operates in the European and American markets where

profit margins are low. The Asian operations of Behr are currently very low in

volume. It would be interesting to check out the operations of Behr out of Asia.

However the company does not publish the statement of accounts for Asia

separately.

Sona Koya has a marginally better Gross Profit ratio than Subros in the 2002-

2005 period. For the year 2005-2006 the difference is negligible. It would be

incorrect to draw conclusion from this comparison. On the other hand it could

perhaps serve as a benchmark for Subros in the future.


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6.3 Efficiency Ratios.

Efficiency ratios can be classified as below:

a) Asset turn over ratio

b) Stock turn over ratio

c) Debtors collection ratio

d) Creditors collection ratio

Figure 6.6: Factors influencing Asset turn over ratio (Adapted from Wendy

McKenzie [11])

Figure 6.6 depicts the factors, which influence the asset turn over ratio. We know

from section 6.2 that the Asset turn over ratio had come down in the year 2005-

2006 resulting in a marginal decrease in ROCE. In this section we can further

drill down to the causes.


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Figure 6.7: Fixed asset turn over and Working capital ratio- 2001 to 2006

7.9

2.8

5.86.36.2

4.74.24.6

12.8

11.0

9.6

7.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2001 2002 2003 2004 2005 2006

Source Data: Asian CERC IT Ltd.[7]

FATR

WCTR

From figure 6.7 we can see that the fixed asset turn over ratio has dropped to 5.8

from 6.3 in the previous year. Similarly the working capital has increased from

11 to 12.8 for the corresponding period. Both these factors have affected the

Asset turn over ratio. Ideally the fixed asset turn over ratio should increase and

the working capital ratio should reduce. However Wendy McKenzie [12] cautions

that reducing the working capital can have solvency implications.

We can conclude from figure 6.8 that the stock turn over ratio has remained more

or less constant over the last three years. This is in spite of reducing the import

content of raw material from 65% to 55% in 2005-2006. The high stock of

finished goods could be a reason for this. The commissioning of the new plant at

Pune for supplies to Tata motors will hopefully reduce the finished goods stock in

the coming year and further reduce the stock turn over ratio.


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Figure 6.8: Stock turn over ratio

5.0

4.1

8.7

7.7

5.0 4.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2001 2002 2003 2004 2005 2006

Source Data:Asian CERC IT Ltd.[7]

Figure 6.9: Debtors and Creditors collection Period

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.045.0

50.0

2001 2002 2003 2004 2005 2006

Source Data:Asian CERC IT Ltd.[7]

Days

DCR

CCR

18.2 days

10.6 days


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A comparison of Debtor collection and Creditor collection period is made in figure

6.9 The average creditor collection days are more than the average debtor

collection days. This means that the company is collecting debts faster than it

pays its creditors. This is a good sign but the change in the year 2005-2006 is

cause for concern. The difference between the debtor collection days and the

creditor collection days is reducing. This is one of the reasons that has resulted

in the reduction of the Asset turn over ratio This can be a problem for Subros

because it is dependant on only two customers i.e. Maruti Udyog ltd., and Tata

Motors Ltd., for its cash inflow. A delay in payment from one customer can

cause problems. It is therefore advisable that Subros keeps its Creditor

collection days high to mitigate the risk of delay in payment from its customers

We can therefore summarize that reduction in fixed assets turnover ratio coupled

with the increase in debtor collection days and reduction in creditor payment

days has had an overall effect on the Asset turn over ratio.

Figure 6.10:Comparison of fixed asset ratio-Subros, Behr GmbH and Sona

Koyo

5.8

6.3

3.2

3.6

2.923.32

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2005 2006


Percentage

Subros

Behr

Sona

In comparison to Behr GmbH and Sona Koyo, the fixed assets turn over ratio for

Subros in better as seen in figure 6.10.


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Figure 6.11: Comparison of Debtor collection days-Subros, Behr GmbH and

Sona Koyo

16.8 17.5

58.8

53.2

11.5713.29

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2005 2006

Source Data: Asian CERC IT Ltd.[7] & Behr Annual Report 2004

2005

Days

Subros

Behr

Sona

Figure 6.11 shows that Sona Koyo is marginally better at collecting its

outstanding debts as compared to Subros. The high collection period for Behr

GmbH could be a regional trend since it operates in the European and American

markets.

Figure 6.12:Comparison of creditor collection days-Subros, Behr GmbH

and Sona Koyo

28.1

31.8

35.0

17.2

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2005 2006


Days

Subros

Behr

Sona


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Figure 6.12 shows that while Sona Koyo have done well in extending the creditor

collection days, Subros has been paying its creditors much faster than it did in

the previous year. Data for Behr GmbH is not available.

6.4 Liquidity ratios

In this section we will assess if the company can meet its short-term liabilities

without having to borrow money. The two ratios analyzed are:

a) Current ratio

b) Acid test

Figure 6.13: Acid test and Current ratio

1.49

2.26

1.171.34

1.65

1.94

0.900.680.620.64

0.720.87

0.00

0.50

1.00

1.50

2.00

2.50

2001 2002 2003 2004 2005 2006


CR

AT

The current ratio as we can see from figure 6.13 is increasing. This means that

the company can fund its liabilities, which fall due within one year. Although a

high Current ratio is desirable, care must be taken to ensure that the current ratio

does not increase to an extent where too much funds are locked up in stocks and

debtors.

The Acid test is increasing because of the reduction in current liabilities in 2005-

2006.


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Figure 6.14: Comparison of current ratio-Subros, Behr GmbH and Sona

Koyo

2.3

1.9

1.41.4

1.31.2

0.0

0.5

1.0

1.5

2.0

2.5

2005 2006


CR Subros

CR Behr

CR Sona

From figure 4.14 it is clear that Subros is most liquid of the three companies and

is hence in a better position to meet its short-term liabilities.

Figure 6.15: Comparison of Acid test ratio-Subros, Behr GmbH and Sona

Koyo

0.7

0.9

0.960.97

0.9

1.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2005 2006


AT Subros

AT Behr

AT Sona


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Sona Koyo and Behr are in a better position to meet their short-term liabilities

even without having to sell stock. Subros will have to liquidate its stock in order

to meet the short-term liabilities in case all creditors ask for immediate payment.

This is inferred from figure 6.15

6.5 Investment Ratios

Figure 6.16: Gearing Ratio

84.0

87.3

79.8

83.8

86.6

85.9

76.0

78.0

80.0

82.0

84.0

86.0

88.0

2001 2002 2003 2004 2005 2006


Percentage

Subros is a highly geared company as can be seen from figure 6.15. This increases

the potential risk to the investor. Janet Walker [12] opines that as company profits

drop, profit per share reduces faster in a highly geared company than in a low-

geared company. However in the case of Subros the fears of low profits can be a

rarity looking at the results in the last five years.


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7. Conclusion

7.1 Investment Potential

On reviewing the financials of Subros it is evident that the company is on a good

wicket. The share prices are steadily increasing. The share value at present has

appreciated by 25 times. On top of this the company is paying dividend every

year without fail. Dividends have been increasing by more than 15% every year

as seen in figure 7.1. The companys financial ratios are robust and can carry

the company through into the future.

Figure 7.1: Dividend from 2001 to 2006

15

35.99

41.99

10.89

13.2

0

5

10

15

20

25

30

35

40

45

2001 2002 2003 2004 2005 2006

ValueinRs


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7.2 The Road ahead

The road ahead for Subros is bright and prosperous. It has a strong technical

partner in Denso Corporation, Japan. A large pool of trained and skilled

personnel is one of its strengths. Subros has a reputation for quality in the local

market and is supported by a strong R & D team. According to Rishabh Bagaria

[13], Subros currently enjoys a 45% market share in the Indian Market.

It weakness seems to be that it is only supplying to two OEMs and sales

depends on the fortunes of these two OEMs. Subros also does not export

products to other countries. Subros needs to explore export possibilities to gain

a foothold in the global market. This will reduce its dependence on its existing

two customers.

Opportunities in the Indian passenger car segment are plenty. A very low

penetration of cars and Air conditioning systems, says Rishabh Bagaria [13], is a

great opportunity for Subros. The entry of Renault, Toyota and Volkswagen in

the passenger car segment will further bring opportunities.

Poor road conditions in India could be a deterrent to this growth story. Similarly

rising steel prices can put undue pressure on manufacturers. Rising interestrates of car loans can be a threat to sales.

Overall Subros can look forward to an exciting future where challenges will be

aplenty and so will be the opportunities. It remains to be seen how well the

company can cope up. Going by the trend so far, Subros has been committed to

improving shareholder value. My personal viewpoint is that for the shareholders

good times are ahead.


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8. References

[1] ACMA, Indian Automotive Component Industry, Engine of growth driving the

Indian Manufacturing Sector, Automotive Component Manufacturers Associationof India, [Online], http://www.acmainfo.com/ [Accessed 15 March 2007]

[2] Walker, Janet.2002. Accounting in a nutshell. New Delhi: Viva Books Pvt Ltd.:

p 122

[3] Deleted please ignore.

[4] Walker, Janet.2002. Accounting in a nutshell. New Delhi: Viva Books Pvt

Ltd.:p 111


p 89


p 91

[7] The Economic Times (2007) Stock market quotes and company Research,

[Online] Times Internet Limited, http://economictimes.indiatimes.com/[Accessed

20 March 2007]

[8] McKenzie, Wendy, 1998, Unlocking company reports and accounts. Great

Britain: Financial Times & Pitman: p391


p 92

[10] McKenzie, Wendy, 1998, Unlocking company reports and accounts. Great

Britain: Financial Times & Pitman: p393.figure21.2
http://economictimes.indiatimes.com/http://www.acmainfo.com/


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[11] McKenzie, Wendy, 1998, Unlocking company reports and accounts. Great Britain:

Financial Times & Pitman: p397.figure21.3

[12] McKenzie, Wendy, 1998, Unlocking company reports and accounts. Great Britain:

Financial Times & Pitman: p397.

[13] Bagaria, Rishabh. (2006). Subros Q2, [Online]. Pioneer intermediaries Pvt Ltd,

Error! Hyperlink reference not valid. [Accessed 24 March 2007].

10. Bibliography

1. Finance Sense - An Easy Guide for Non-Finance Executives by Prasanna

Chandra.

2. Accounting in a Nutshellby Janet Walker

3. Unlocking Company Reports & Accountsby Wendy McKenzie

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