Fundamaental Analysis of L&T

FUNDAMENTAL ANALYSIS OF LARSEN & TOUBRO LTD.

TABLE OF CONTENTS

CHAPTER| PARTICULARS| PAGE NO.|

1| INTRODUCTION , OBJECTIVES & METHODOLOGY| 2|

2| FUNDAMENTAL ANALYSIS / EQUITY RESEARCH| 4|

3| FACTORS,TERMINOLOGIES WITH RATIOS| 9|

| | |

4| INTRODUCTION OF LARSEN AND TOUBRO FOR VALUATION| 34|

5| PESTEL ANALYSIS, PORTER FIVE FORCES MODEL, SWOT ANALYSIS : L&T| 38| 6| LARSEN AND TOUBRO EQUITY VALUATION| 43|

7| INTERPRETATION/ ANALYSIS| 51|

8| CONCLUSION| 54|

9| LIMITATIONS FOR THE STUDY| 55|

10| BIBLIOGRAPHY| 56|

11| ANNEXURE: LARSEN & TOUBRO LTD: P&L STATEMENT & BALANCE SHEET| 57|

Chapter 1

INTRODUCTION, OBJECTIVES AND METHODOLOGY

A. Introduction:

The process of fundamental analysis involves examining the economic, financial & other qualitative as well as quantitative factors related to a security so as to determine its intrinsic value. While usually this method is used to evaluate the value of a company’s stock, it can also be used for any kind of security, like bonds or currency. Fundamental analysis is also known as quantitative analysis and involves delving into a company’s financial statements (such as profit and loss account and balance sheet) in order to study the various financial indicators (such as earnings, liabilities, revenues, expenses and assets).

Such an analysis is usually carried out by brokers, analysts, and savvy investors. The report “Fundamental Analysis Of Larsen & Toubro Ltd.” is aiming at understanding of Process of Equity research. Here example of Larsen and Toubro specifically taken for analysis as it is the top rated private sector infrastructure company in India. Also this company is known for its world class management style. Execution skill of this company is unmatched by any other private as well as government company in India. This report is an opportunity to understand the valuation aspects of diversified company like L&T. Also it will help us to understand how the corporate management as well as financial decisions are taken.

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B. Objectives:

The main objectives of the study are following:

* To understand the process of Fundamental Analysis / Equity research * To study the Larsen & Toubro Ltd for Valuation point of view * To know whether the analysed stock is under-priced or over-priced and to suggest whether to buy or to sell. C. Methodology:

The project is on equity where the equity share prices of the company is analyzed. The study is based on the past prices of the five years. The nature of data collection is highly based on the information available through secondary Data. D. Secondary Data Collection:

The main source of information is taken from annual reports of the companies and through related websites which has enabled in analyzing the equities. * Internet sources

* Annual Reports

* Text Books

* Capitaline website

Need for the study:

Valuation of the stocks is the first step towards intelligent investing. The knowledge of securities market, particularly of the equity markets, is essential to come to grips with the industry analysis and performance of the company through fundamental ratios. An investor attempts to determine the worth of their shares based on the fundamentals, real value of stock and some news from the media. Equity valuation is the most important and needed so as to know the competitiveness of company other companies and with industry benchmark. It’s also needed to predict the future prices of the company to know where the company stands which would help the investor to make better investing either for long term period or for short term period.

Chapter 2

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FUNDAMENTAL ANALYSIS / EQUITY RESEARCH

A. Introduction:

Fundamental Analysis is a study of equities or stocks for the purpose of investments.

Equities or common stock comprises a big chunk in any company’s capital and shareholders need to know whether to stay invested in the company or sale the shares and come out. As an individual, it is time consuming to do Fundamental Analysis – that is to study the company, its financial statements, products, management and take a decision about investment. Exactly for the same reason there are people working in research companies whose job is to do Fundamental Analysis and recommend companies for investment.

* Purpose of Fundamental Analysis:

Purpose of Fundamental Analysis is to study companies, analyze financials, and look at quantitative and qualitative aspects mainly for decision: Whether to invest or not.

* Process of Fundamental Analysis:

Fundamental Analysis process comprises of multiple steps.

1. Economic Analysis

2. Industry Analysis & Company Analysis

3. Financial Statement Analysis

4. Financial and Valuation Modeling

5. Report writing

6. Presentation or recommendation

* Skills required for Fundamental Analysis:

1. Excellent financial analysis and research skills

2. Global and business analysis knowledge

3. Presentation and writing capabilities

4. Correct judgment

* Application of Fundamental Analysis:

Fundamental Analysis is used in many areas. Primarily, the research is used for the following purposes: 1. Investment evaluation

2. In Mutual Fund industry

3. For M&A deals

4. Financial Publications

5. Charitable endowments

* Two approaches in fundamental analysis:

While carrying out fundamental analysis, investors can use any of the following approaches: 1. Top-down approach: In this approach, an analyst investigates both national and international economic indicators, like energy prices, GDP growth rates, inflation and interest rates. The analysis of total sales, price levels and foreign competition in a sector is also done in order to identify the best business in the sector. 2. Bottom-up approach: In this method, an analyst starts the search with specific businesses, irrespective of the industry or region.

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B. Detail Process of Fundamental Analysis / Equity Research:

1. Economic Analysis

Economic analysis is a process whereby the strengths and weaknesses of an economy are analyzed. Economic analysis is important in order to understand the exact condition of an economy.

Macroeconomics and Economic Analysis

Macroeconomics issues are important aspects of the economic analysis process. However, economic analysis can also be done at a microeconomic level. Macroeconomic analysis gives insight into the fundamentals of an economy – and the strengths and weaknesses of economies.

Macroeconomic analysis takes into account growth achieved by economy, or rather a sector of that economy. It tries to reveal reasons behind a particular economic phenomenon like growth or reversal of the economy.

Inflation and Economic Analysis

Many countries in the world are plagued by rising inflation. Economic analysis tells us why inflation has taken place. It also suggests ways in which the rate of inflation could be reduced, so that economic development could continue.

Economic Analysis and Government Policies

Government policies and plans that affect the economy have always been an important part of economic analysis. Since policies and plans adopted by a particular government are responsible for shaping an economy, they are always closely scrutinized by various processes of economic analysis.

Economic Ratings and Economic Analysis

Economic ratings are another important aspect of economic analysis, as it provides an accurate picture of how an economy is faring compared to others.

Economic Analysis and Comparison of Economic Policies It is a good way to analyze an economy by comparing its policies with those of other economies. This is all more applicable in the case of economies that are of similar types, for example developing economies.

World Economic Analysis

World economic analysis points out that each year more than 80 million people are added to population of world. This accelerates economic problems in global arena. This rise in population has led to severe problems like pollution, desertification, epidemics, underemployment and famine. There are numerous poorer areas in world, which are becoming even more marginalized from an economic point of view.

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Global economic condition also talks about making of Euro as common currency of most of countries of Western Europe from January 1999 as being a significant economic move. But at the same time Europe Financial crisis creating lot of pressure on other economies. Contribution to world economy GDP is different for different sectors.

Unemployment rate, as was found by global economic analysis, was found to be 20 percent, which combines unemployment and underemployment. In developed countries unemployment rate ranged from 4 percent -12 percent. Major export commodities in world include electrical machinery, mineral fuels, nuclear reactors, boilers, and parts, cars, trucks, and buses, scientific and precision instruments, plastics, iron and steel, organic chemicals, pharmaceutical products, diamonds, pearls, and precious stones.

2. Industry Analysis & company Analysis

As an equity research analyst, you need to analyze a particular industry, see the past trends, demand-supply mechanics and future outlook. You might work on industries like Oil and Gas, Metal, Information Technology, Automobile, Financial Services, Infrastructure, Pharmaceuticals and Consumer durables.

In some companies, there is a dedicated industry analyst who will work on the assigned industry and provide the analysis. However, as an analyst you should know the industry dynamics and hence it is important to know how to do industry analysis.

Steps :

1. Read the available industry reports and statistics, see whether it makes sense to dig deeper.

2. There are sub-parts in industries. For example, if you look at chemical industry, you will find sub-industries like Fertilizers, Pesticides, Paints and Varnishes, Organic chemicals. It is important to focus on the relevant industry. Also look at the different market segments in a particular industry.

2. Look at the demand-supply scenario for a particular product/ industry by studying the past trends and forecasting future outlook.

4. Study the competitive scenario: There is a framework of industry analysis. It is called “Porter’s five forces” model. Michael Porter, a famous strategist and author, first came up with this model. In this model, five parameters are analyzed to see the competitive landscape. They are a) Barriers to entry,

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b) Supplier Power,

c) Threat of substitutes,

d) Buyer power, and

e) Degree of rivalry

This model is used extensively while analyzing any industry.

5. Study and include recent developments, innovation in your industry analysis report.

6. Look at sector valuations and global comparative valuations.

7. The analysis should be specific to a particular industry and so it is important to focus and understand the industry dynamics.

8. Industry analysis should be in-depth and to-the-point. For example, if you are tracking aluminium industry, you should know per capita consumption in the country. In India, per capita consumption of aluminium is 1 kg, in US it is 25 to 20 kgs, in Japan it is 15 kgs, in Taiwan it is 10 kgs. Apart from the consumption, you should also know the production of aluminium worldwide.

The above steps are important and you, as an analyst, should follow them. The analysts in private equity, investments banks, equity research firms, investment research firms need this skill and if you know how to do industry analysis, you are ahead of 80% of the aspirants as this will not only impress your interviewer, but also add immense value to you and the company you are working for.

In company Analysis you have to see the following:

a. Company Management

b. Companies Growth potential

c. Relative performance of the company with reference to its competitors d. Companies market image and dynamism to adapt changes

3. Financial Statement Analysis

Financial statement analysis (or financial analysis) the process of understanding the risk and profitability of a firm (business, sub-business or project) through analysis of reported financial information, particularly annual and quarterly reports.

Financial statement analysis consists of 1) reformulating reported financial statements, 2) analysis and adjustments of measurement errors, and 2) financial ratio analysis on the basis of reformulated and adjusted financial statements. The two first steps are often dropped in practice, meaning that financial ratios are just calculated on the basis of the reported numbers, perhaps with some adjustments. Financial statement analysis is the foundation for evaluating and pricing credit risk and for doing fundamental company valuation.

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4. Financial and Valuation Modeling

When trying to figure out which valuation method to use to value a stock for the first time, most investors will quickly discover the overwhelming number of valuation techniques available to them today. There are the simple to use ones, such as the comparables method, and there are the more involved methods, such as the discounted cash flow model. Which one should you use? Unfortunately, there is no one method that is best suited for every situation. Each stock is different, and each industry sector has unique properties that may require varying valuation approaches. eg. Banking, Infrastructure, service industry valued separately due to different segment.

Two Categories of Valuation Models

Valuation methods typically fall into two main categories: absolute and relative valuation models. Absolute valuation models attempt to find the intrinsic or “true” value of an investment based only on fundamentals. Looking at fundamentals simply mean you would only focus on such things as dividends, cash flow and growth rate for a single company, and not worry about any other companies. Valuation models that fall into this category include the dividend discount model, discounted cash flow model, residual income models and asset-based models.

In contrast to absolute valuation models, relative valuation models operate by comparing the company in question to other similar companies. These methods generally involve calculating multiples or ratios, such as the price-to-earnings multiple, and comparing them to the multiples of other comparable firms. For instance, if the P/E of the firm you are trying to value is lower than the P/E multiple of a comparable firm, that company may be said to be relatively undervalued. Generally, this type of valuation is a lot easier and quicker to do than the absolute valuation methods, which is why many investors and analysts start their analysis with this method.

Approaches to Valuations:

* Discounted Cash Flows

Equity Valuation

Firm Valuation

Adjusted Present Value approach

* Relative Valuations

Fundamental Relative ratios

Comparable relative ratios

Cross section and time series comparisons

5. Report Writing:

Based upon the valuation method selection the report is prepared. All of the above discussed factors are already considered in doing the valuation exercise. The report is expected to be simple in understanding and giving all the factors without leading to any misinterpretation.

6. Presentation or recommendation:

Report should be put in the presentable format. Reports always referred by professionals as well as investors. So it should be aesthetically nice with relevant data wherever required. In the report, recommendations should be given. The recommendation should be decisive and not ambiguous.

Chapter 3

FACTORS & TERMINOLOGIES WITH RATIOS

3.1 Factors to know during Fundamental Analysis / Equity Research: i. Free Cash Flow:

Free cash flow measures how much money a company makes after deducting maintenance capex but before capex or expansion. This is important as it allows valuations of the existing business without harder to assess value of investment in expansion and new ventures. The latter may be worth more than the money that is being invested in them. How much more is hard to assess and valuing companies using their free cash flow sidesteps the question. This means that using free cash flow based valuation will undervalue the company which have particularly good opportunity to invest. It will also mean that it will overvalue the companies which are sufficiently badly run to make investment that destroy the shareholder value. The FCF is same as that dividend would be if a company decodes to pay out as much as it could in the dividends without either running down its operations or increasing its debt. FCF= Net Income+ Depreciation+ Deferred Taxes- Dividends Paid-Capital expenditures Element| Data Source|

EBIT x (1-Tax rate)| Current Income Statement|

+ Depreciation & Amortization| Current Income Statement| – Changes in Working Capital| Prior & Current Balance Sheets: Current Assets and Liability accounts| – Capital expenditure| Prior & Current Balance Sheets: Property, Plant and Equipment accounts| = Free Cash Flow| |

ii. Enterprise Value:

Enterprise value (EV), Total enterprise value (TEV), or Firm value (FV) is an economic measure reflecting the market value of a whole business. It is a sum of claims of all the security-holders: debt holders, preferred shareholders, minority interest, common equity holders, and others. Enterprise value is one of the fundamental metrics used in business valuation, financial modeling, accounting, portfolio analysis, etc. EV is more comprehensive than market capitalization (market cap), which only includes common equity. Enterprise value = common equity at market value+ preferred equity at market value + minority interest at market value, if any+ debt at market value + unfunded pension liabilities and other debt-deemed provisions – associate company at market value, if any – cash and cash-equivalents. * All the components particularly relevant in liquidation analysis, since using absolute priority in a bankruptcy all securities senior to the equity have par claims.

Generally, also, debt is less liquid than equity so that the “market price” may be significantly different from the price at which an entire debt issue could be purchased in the market. In valuing equities, this approach is more conservative. * Cash is subtracted because when it is paid out as a dividend after purchase, it reduces the net cost to a potential purchaser. Therefore, the business was only worth the reduced amount to start with. The same effect is accomplished when the cash is used to pay down debt. * Value of minority interest is added because it reflects the claim on assets consolidated into the firm in question. * Value of associate companies is subtracted because it reflects the claim on assets consolidated into other firms. * EV should also include such special components as unfunded pension liabilities, employee stock option, environmental provisions, abandonment provisions, and so on, for they also reflect claims on the company’s assets. * EV can be negative in certain cases—for example, when there is more cash in the company than the value of the other components of EV.

iii. Method of Inventory Accounting:

Companies can generally account for their inventories a number of different ways. The most common are First-in, First-out (FIFO), Last-in, First-out (LIFO), and weighted-average cost. LIFO is permitted under U.S. GAAP but is not permitted under IAS. The choice of inventory method affects both cost of sales and inventory carried on the balance sheet. In periods of rising prices of inventory items (determined on a company-by-company basis), last-in, first-out (LIFO) will result in a conservative reporting of earnings. First-in, first-out (FIFO,) on the other hand, would report higher earnings relative to LIFO. In periods of declining prices for inventory items, the opposite is true.

The inventory method a company uses affects its costs of goods sold, or COGS, which has an impact on its profitability ratios. The formula for COGS is beginning inventory plus purchases less ending inventory. A company using FIFO to value its inventory reports lower COGS, which increases its gross profit margin (sales less COGS) and its net income all else being equal. Higher net income means higher profit margin. A company using LIFO reports higher COGS, translating into lower gross profit, net income and profit margins. This means earnings per share (net income divided by equity shares outstanding) is higher using FIFO all else being equal. As in the case of profitability ratios, the inventory method a company uses affects its balance sheet as well.

FIFO companies report higher inventory in their current assets. This results in a higher current ratio (current assets divided by current liabilities).

In contrast, a company using LIFO reports lower ending inventory, producing a lower current ratio. In addition, shareholder’s equity is lower under the LIFO method versus FIFO because LIFO produces a lower asset base. Thus, assets minus liabilities produces a higher result under FIFO. Return on assets (net income divided by average assets) look better under LIFO than FIFO. Other balance sheet ratios to examine include return on equity (net income divided by average total assets), asset turnover (sales divided by total assets) and inventory turnover (COGS divided by average inventories).

Tax law allows a company to value its ending inventory using LIFO as it results in a lower tax liability even though it reports FIFO for financial reporting. However, a publicly-traded company must disclose a LIFO reserve. When added together with the LIFO valuation, the LIFO reserve produces the valuation of inventory under FIFO for analysis purposes. Investors should also take note that in times of rising prices, LIFO valuation produces a more accurate assessment of a company’s inventory. In such a case, inventories under FIFO may be obsolete and dated, which is not a true reflection of inventory costs

iv. Change in Depreciation Policy:

Types of Depreciation:

Straight Line Depreciation Method

Written Down Value Method

Effect:

Particulars| Straight Line| Accelerated (WDV)|

Depreciation Expenses| Lower| Higher|

Net Income| Higher| Lower|

Assets| Higher| Lower|

Equity | Higher| Lower|

ROA| Higher| Lower|

ROE| Higher| Lower|

Turnover Ratios| Lower| Higher|

Cash Flows| Same| Same|

Change in depreciation Policy of Jet Airways from WDV to SLM benefitted the company. Jet wrote back Rs.920 Cr into its P&L which helped the company to report profits during the quarter. It also helped Jet Airways to report higher networth. TCS the software major increased its depreciation policy in computers from 2 years to 4 years. As a result Q1FY09 PBT was higher by an estimated Rs 50 Cr. Subsequent years also this policy helped the company.

v. Operating and Financial Leases:

Finance Lease vs Operating Lease

A lease is a legal contract that gives the lessee a right to use the asset or product for a specified period of time which is often a large proportion of the useful life of the asset in return for a regular payment to the lessor, who happens to be the owner or manufacturer of the asset. A lease is a generic term that encompasses many types of leases in its fold. But in general, leases can be classified as broadly finance leases and operating leases. These are terms that are more useful for corporate customers, but one should be aware of such differences as leases are becoming increasingly popular these days. Finance Lease

Finance lease and operating lease are the most commonly heard leases in business world. They are similar in may respects though, there is a lot of difference in their structuring. In a finance lease, the lessor, who is the owner or manufacturer of the asset grants the rights of use that include risks and rewards to the lessee, who is the buyer of the asset. Risks include the technology becoming obsolete and those involving wear and tear as well as regular maintenance. In case of a finance lease, the lessee pays an amount that covers almost all the price of the asset and gets to use the asset for most of its useful life. This lease gives an option to the lessee to buy the asset at a greatly reduced price if he so desires after the end of the lease period. A strong feature of a finance lease is that it is not easily cancelled. If the lessee wishes to get the lease cancelled, he has to pay huge penalties. Operating Lease

This is a type of lease where lessor retains rights of ownership and even the risks and rewards lie with the lessor. Lessor pays for the maintenance of the asset during the lease period. Once lease has finished, the asset still has a good value left. This is because the lease period is for a minor part of the useful life of the asset. It differs from finance lease in that it is easily cancellable and is of shorter duration than a finance lease. One common example of an operating lease is installation and use of many computers in an office by a company. Here the user is not responsible for the maintenance of the computers neither is he worried about the systems becoming obsolete as all this is the responsibility of the lessor.

vi. Capitalization vs expensing:

Capitalize means cost as an asset on the balance sheet. These assets has future benefits. expenses are immediate and its future benefits are too uncertain or immaterial. E.g. WorldCom Case where $2.8B expenditure ‘line cost’ showed as capitalization. Management discretion in exercising these choices can significantly impact the financial statement and the ratios.

vii. ESOPS:

Employee stock options have an economic cost to shareholder and should be reflected in the earnings. Both US GAAP and IFRS now mandate expensing of options. Stock options are expenses at fair value or intrinsic value.

viii. Deferred tax:

When income and expenses are treated differently on financial statements then it arises on company’s tax return results as deferred tax assets or liabilities.

ix. Contingent Liabilities:

It is potential expenses for the company where outcome depend upon one or more future events. Contingency need to be disclosed in the notes of accounts.

3.2 TERMINOLOGIES WHICH MUST BE UNDERSTOOD FOR EQUITY RESEARCH:

A. FINANCE – FINANCIAL OVERVIEW

* Equity Paid Up

This datafield captures the net amount of paid up equity shares of a company that have been subscribed to, paid for and allotted by the company.

* Networth

For a company, total assets minus total liabilities. Net worth is an important determinant of the value of a company, considering it is composed primarily of all the money that has been invested since its inception, as well as the retained earnings for the duration of its operation. Net worth can be used to determine creditworthiness because it gives a snapshot of the company’s investment history. also called owner’s equity, shareholders’ equity, or net assets. in N/W : (Equity Paid Up + Total Reserves Excluding Revaluation Reserves)

* Capital Employed

The total amount of capital used for the acquisition of profits or The value of all the assets employed in a business. Or Fixed assets plus working capital. CE Equity Paid Up + Total Reserves Excluding Revaluation Reserves) + T. Debt.)

* Net Working Capital ( Incl. Def. Tax)

A measure of both a company’s efficiency and its short-term financial health. The working capital ratio is calculated as:(Current Assets – Current Liabilities)

* Value Of Output

(Net Sales + Change in Stock)

* Cost of Production

(Raw material cost + Power & fuel + Employee Cost + Director Remuneration + other operating expenes + Depreciation – closing stock of WIP + Opening stock of WIP +Insurance )

* Selling Cost

( Advertisement + Distribution Expenses+ Marketing Expenses + Commission expenses on sales + Other Selling Expenses)

* CP (Cash profit)

(PAT + Depreciation)

* CEPS (annualised) (Cash EPS, Unit in Rs.)

(Rep Net Profit – Div. tax + Dep.) / Equity Paid up*Face Value * EPS (annualised) (Unit in Rs.)

((Rep. Net Profit – Div. tax )/ Equity Paid up)*Face Value

* Dividend (annualised%)

(Equity Div. amt/Equity Pd up)*100

* Payout (%)

(Equity Div. Amt./(Adj. Profit after Tax-Div. Tax))*100

B. Key ratios:

* Debt-Equity Ratio

A measure of a company’s financial leverage calculated by dividing its total liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets. (Total debt / (share capital + reserves))

* Long Term Debt-Equity Ratio

A measure of a company’s financial leverage calculated by dividing its total long term liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets. (total debt – cash credit – commercial paper –bridge loans – short term loans to group

companies- short term loans to others – inter corporate deposits – working capital loans ) / (share capital +reserves)

* Current Ratio

A liquidity ratio that measures a company’s ability to pay short-term obligations. (total Inventory +sundry debtors + cash and bank balance+ loans and advances) / (total current liabilities + cash credit + commercial paper + bridge loans + short term loans to group companies + short term loans to others + inter corporate deposits + working capital loans)

* Turnover Ratios:

* Fixed Assets Ratio

Asset turnover measures a firm’s efficiency at using its assets in generating sales or revenue – the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. (Sales / (gross fixed assets excluding capital work in progress – revaluation reserve))

* Inventory Ratio

A ratio showing how many times a company’s inventory is sold and replaced over a period : (Sales / total inventory)

* Debtors Ratio

Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. (Sales / sundry debtors)

* Interest Cover Ratio

A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company’s earnings before interest and taxes EBIT) of one period by the company’s interest expenses of the same period: (adjusted net profit + tax + interest) / interest

* ROCE (%)

A fundamental financial performance measure. A percentage figure representing profit before interest against the money that is invested in the business. (profit before interest and tax, divided by capital employed, x 100 to produce percentage figure.) (adjusted net profit + tax + interest) / (sharecapital + reserve + total debt – miscelleanous exp. Not written off) * 100

* RONW (%)

(Adjusted net profit – preference dividend) / ( equity paid up + reserves ) * 100

* Debtors Velocity (Days)

Debtors / (Cost of Production / 365 days)

* Creditors Velocity (Days)

(Creditors / (Cost of Production + Selling Cos+closing stock of Finished Goods-opening stock of Finished Goods)*365 days)

* Assets Utilisation Ratio (times) :

* Value of Output/Total Assets

Value of Output/Average Total Assets) where Value of Output is : (Net Sales + Change in Stock) * Value of Output/Gross Block

(Value of Output/Average Gross Block) where Value of Output is : (Net Sales + Change in Stock) note : Balance Sheet figures are Avg. of Current and Previous Year, And P&L A/c figures are for current year only.

C. FINANCE – PROFIT AND LOSS

* Income :

* Sales Turnover

Sales turnover / Operating Income

Total income from operations. Turnover will also include job work, processing charges, income from other divisions, services provided.

* Job Work & Service Income

This refers to income generated by a company when it undertakes contractual manufacturing or processing of a product as per client’s specifications.

* Pool Account Adjustment

Pool Account Adjustment is a mechanism whereby oil companies are compensated for selling regulated petroleum products at government-administered prices. Under the Administered Price Mechanism (APM), prices of all major petroleum products are fixed by the Oil Coordination Committee. Companies are required to sell these products at government-administered prices. The shortfall between the estimated cost of production and the administered price is the subsidy provided by the government through the Oil Coordination Committee.

* Other Operating Divisions / Income

Income from other operational divisions of the company.

* Discount Received

Discount received by the company from diff. sources.

* Sales – Manufacturing

Income generated by companies from the sale of goods manufactured by them, their by-products, scrap, raw material and stores are included in industrial sales.

* Sales – Trading

Trading income refers to income generated from the activity of buying and selling of goods. Trading income, here, does not refer to income from trading in shares or other financial instruments. It is limited to trading in goods.

* Sales – Export

That part of income earned by way of exports out of the total sales made (irrespective of manufactured or traded goods).

* Internal Consumption

Includes inter-divisional transfers.

* Property Development

The part of income, generally applicable to construction companies.

* Own Film Production

Applicable only to companies producing and distributing films.

* Film Distribution

Applicable only to companies producing and distributing films.

* Co-Produced Films

Applicable only to companies producing and distributing films.

* Sale/Export of Film Software

Companies producing and distributing films. Income earned from export of films / software produced/co-produced/distributed by the company

* Sale of Film

Companies producing and distributing films. Income earned from sale of films / software produced/co-produced/distributed by the company.

* Foreign Exchange Earned

Income earned in foreign exchange , generally by Travel Agencies.

* Excise Duty

Excise duty is usually levied on all goods produced by a company. It is often levied even on goods that are produced for internal consumption by the company. If companies report excise duty on goods sold and those in stock separately, we add the two and report the total excise duty paid by the company.

* Net Sales

Net of Excise duty

* Other Income

Other Income usually means income from sources other than the main sources of income.

* Export Incentives

Export incentives are usually in the form of duty drawbacks, excise rebates, import licences, concession in import duty and tax exemptions under the Income Tax.

* Import Entitlements

Import entitlements are aids, granted by the Central Government under an Export Promotion Scheme.

* Dividend Income

Includes dividend received from subsidiaries, income from units of UTI / mutual funds.

* Interest Income

The term for reporting the interest earned on cash temporarily held in savings accounts, certificates of deposits, or other investments. Because the interest wasn’t part of the original investment, companies record it separately, as interest income.

* Interest on Application Money

Interest earned due to money received on issue of shares / debentures / bonds etc. and deposited in banks.

* Income from Bill Discounting

Banks and NBFCs purchase bills of exchange, promisory notes etc. from parties and make equivalent payments after deducting some amount from the face value of the bill as discounting charges. The discounting charges so deducted are referred to as bill discounting income of the banks and NBFCs. Bill discounting income may be from discounting of the original bills or from the bills already discounted.

* Stock Adjustments

Increase or decrease in stock of the company.

* Total Income

Total income is the sum of all kinds of incomes generated by an enterprise during an accounting period. Usually, company accounts present a break-up of the total income in terms of sales and ―other income‖ often, they provide detailed information on the various sources of income. Total income consists of:

Sales, Income from financial services, Other income, Prior period and extraordinary income, Change in stock of finished and semi-finished goods.

* Expenditure:

* Raw Materials

Includes raw material consumed and finished goods purchased. Raw Materials consist of :

Opening Stock of Raw Materials, Purchases of Raw Material, Purchase of Trading Goods Direct Expense on Purchase/Adjustment. Closing Stock of Raw Materials. Adjustment on amalgamation / trial runs

* Power & Fuel Cost

Power & Fuel Cost consist of :Power, Oil & Fuel. Electricity Expenses, Water Charges

* Employee Cost

Employee Cost consist of :

Salaries, Wages & Bonus, Contribution to funds, Staff Welfare Expenses, VRS compensation,, Gratuity Paid, Other Employee Cost

* Other Manufacturing Expenses

Other Manufacturing Expenses consist of :

Freight Inwards & Transport charges, Packing Materials, Job Work / Contract /Processing Charges, Drilling Operation Charges, Stores Consumed, Repairs, Repairs – Plant & machinery, Repairs – Building. Repairs –

Others. Technical fees paid, Wheeling charges payable, Project / Production Charges, Own Film Production Expense, Handling, Clearing Charges, Coupon Sales, Food, Beverages, License Fee / Operation Charges, Other Operating Expenses. Selling and Administration Expenses: The total amount spent on selling and distribution. It includes expenditure on marketing and distribution by the company, advertising etc.

* Discount paid

A discount is an amount or percentage of reduction in selling price of a product.

* Distribution Expenses

This is the expenditure the company incurs to distribute its products to consumers or intermediaries such as distributors, wholesalers or retailers.

* Other Selling Expenses

Includes warranty claims, guarantee charges etc

* Legal Expenses

Includes professional charges

* Communication Expenses

Communication expenses includes cost incurred by the company on telephone, telegram, postage, fax satellite and internet services.

* Travel Expenses

Expenses incurred by the company on travel. This includes domestic as well as foreign travel, by the directors, management or staff.

* R & D Expenses

This data-item captures the current expenses incurred and reported by the company on research and development. It does not include any capital expenditure on research and development.

* Miscellaneous Expenses

This data field will include all the expenses reported by the companies under the head ―miscellaneous expenses or ―other expenses

* Donations

Donations made by companies are reported in this datafield. These are not directly related to the day– to–day operations and are usually incurred for social causes.

* Bad Debts written off

Includes doubtful loans/ advances written off etc.

* Expenses Ammortised

Any expenditure incurred written off : eg preliminary expenses, VRS expense, share issue expenses etc.

* Interest

Interest paid on all kinds of borrowings is included in this data-field. It includes all short-term as well as all long-term borrowings of the company. It includes interest paid on borrowings, debentures and deposits and interest paid to directors. In the case of banks, it also includes interest paid on inter-bank borrowings. Often, companies report net interest payments. These are interest payments net of interest earnings. However, we report gross interest payments and make a separate entry for interest earnings on the income side. Ex. Debenture, Interest Fixed Interest, Interest on Deposits, Interest on External, Commercial Borrowings, Other Interest

* Financial Charges

Includes bank charges, bank commission/brokerage given under administrative expenses.

* Depreciation

As fixed assets, typically plant and machinery, get old, their value reduces because of wear and tear. This reduction in value needs to be reflected in the profit and loss account. Depreciation is the measure of this wear and tear of assets and it is charged as an expense in the profit and loss account. Consist of : Depreciation for the current year, Less : On Revalued Assets Lease Adjustment, Other Adjustment

* Extraordinary Items

Total / net prior year adjustments made by the company after arriving at net profit, Profit/(Loss) on Sale of Assets Profit/(Loss) on Sale of Investment. Income/(Expenses) of prior years, Gain / (loss) on foreign exchange transactions Depreciation written back/(Not provided) (Depreciation on Revaluation of Assets), VRS Adjustment Miscellaneous Income/Expense, Less : Tax on Extra Ordinary Income/Expense Less : Deferred Tax on Extra Ordinary Income/Exp.

Note : Tax are calculated for extraordinary items (tax rate : tax/pbt)

* Adjusted Net Profit

Adjusted for Extraordinary Items (calculated for information purpose)

* P & L Balance brought forward

Previous year profit brought forward by the company.

* Appropriations

The act of setting aside money for a specific purpose. A company appropriates funds in order to delegate cash for the necessities of its business operations. This may occur for any of the functions of a business, including setting aside funds for employee salaries, research and development, dividends and all other uses of cash. Ex. Appropriation to Capital Redemption Reserve, Appropriation to Debenture Redemption, Reserve Appropriation to General Reserve, Appropriation to Investment Allowance, Reserve Appropriation to Other Reserves, Prior Year Dividend Paid, Provision for Equity Dividend, Provision for Preference Dividend, Dividend Tax.

* Interim Dividend Paid

A dividend payment made before a company’s AGM and final financial

statements. This declared dividend usually accompanies the company’s interim financial statements.

* Dividend

A distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders.

* Preference Dividend

A dividend that is accrued and paid on a company’s preferred shares. In the event that a company is unable to pay all dividends, claims to preferred dividends take precedence over claims to dividends that are paid on common shares. * Earnings Per Share-Unit Curr

Earnings Per Share of the company to be calculated as follows : (Net Profit – Preference Dividend)/Equity Paid Up * Face value of equity * Earnings Per Share(Adj)-Unit Curr

Earnings Per Share adjusted for change in number of shares due to split or bonus issues. * Book Value-Unit Curr

Book Value of the company to be calculated as follows :

(Equity Paid up + Reserves (excluding revaluation reserves ) / Equity Paid up) * Face Value of equity share * Book Value(Adj)-Unit Curr

Book Value adjusted for change in number of shares due to split or bonus issues.

D. FINANCE – BALANCE SHEET

* Sources of Funds :

* Share Capital

Funds raised by issuing shares in return for cash or other considerations. The amount of share capital a company has can change over time because each time a business sells new shares to the public in exchange for cash, the amount of share capital will increase. Share capital can be composed of both common and preferred shares.

* Equity Authorised

Authorised equity shares is the maximum number of equity shares a company can

issue. The maximum limit includes shares to be issued against GDRs/ADRs, shares that would arise on conversion of convertible debt instruments; etc Equity shares carry voting rights and carry the right to share the profits in the company.

* Preference Capital Authorised

Authorised preference shares is the maximum number of preference shares a company can issue. Preferential shares carry a preferential right with respect to dividends and a preferential right to capital. They do not carry voting rights. Authorised preference shares are the maximum number of preference shares a company is authorised to issue.

* Unclassified Authorised

Companies have two types of shares viz. equity shares and preference shares. At times companies do not classify shares at the time of incorporation or at the time of increase in the capital. Such shares which have not been classified are known as Unclassified shares. The maximum number of such unclassified shares that the company can issue are captured in this datafield

* Equity Issued

This datafield captures the number of equity shares issued by the company.

* Equity Subscribed

When a company decides to issue equity shares, investors apply to the company to subscribe to these. The company then allots these shares to the investors. The shares that are alloted to the applicants are known as subscribed equity shares.

* Equity Called Up

Called up Share Capital is the total amount of issued capital for which the shareholders are required to pay.

* Equity Paid Up

This datafield captures the net amount of paid up equity shares of a company that have been subscribed to, paid for and allotted by the company.

* Preference Capital Paid Up

Convertible Preference Share Paid Up

Non-convertible Preference Share Paid UP

* Unclassified Shares Paid Up

Unclassified shares are those shares that are kept in abeyance/unsubscribed and may be converted into Equity or Preference shares as the directors deem fit before they are issued. Form 5 mentions conversion of Shares into stock and reversal of stock into shares but there is no mention of reclassification of unclassified shares into Equity or Preference shares.

* Capital Reserves

A type of account on company’s balance sheet that is reserved for long-term capital investment projects or any other large and anticipated expense(s) that will be incurred in the future. This type of reserve fund is set aside to ensure that the company has adequate funding to at least partially finance the project.

* General Reserves

It is a reserve created by transferring certain amount of undistributed profit for funding expansion, acquisition, paying dividends, discharging of liabilities, writing off extraordinary and/or contingent losses ,buyback and/or redemption of securities.

* Share Premium

Usually found on the balance sheet, this is the account to which the amount of money paid (or promised to be paid) by a shareholder for a share is credited to, only if the shareholder paid more than the cost of the share.

* Debenture Redemption Reserve

A provision that was added to the Indian Companies Act of 1956 during an amendment in the year 2000. The provision states that any Indian company that issues debentures must create a debenture redemption service to protect investors against the possibility of default by the company.

* Capital Redemption Reserve

Capital RedemptionRevere is an reserve created when a company buys it owns shares which reduces its share capital. This reserve is not distributable to shareholders and can be used to pay bonus shared issued.

* Debt Redemption Reserve

A provision that was added to the Indian Companies Act of 1956 during an amendment in the year 2000. The provision states that any Indian company that issues debentures must create a debenture redemption service to protect investors against the possibility of default by the company.

* Amalgamation Reserve

Amalgamation reserve means the expenses bear by Transferee company for amalgamation with Transferor company is treated as reserve, this reserve is called as amalgamation reserve.

* Exchange Fluctuation Reserve

To face the exchange rate fluctuation companies may keep this kind of reserves.

* Contingency Reserve

Contingency reserves are sums set aside to cover anticipated future liabilities or reductions in asset values. Types of Contingency Reserves : Contingencies include potentially uncollectible monies owed the company, potential obligations under product warranties or related to product defects, judgments from pending or threatened litigation and likely losses due to fires and other hazards

* Total Revaluation reserve

Revaluation Reserves = Fixed Asset Revaluation Reserve + Investment Revalulation Reserve + Other Revaluation Reserve.

* Total Shareholders Funds

A measure of the shareholders’ total interest in the company represented by

the total share capital plus reserves.

* Secured Loans

A secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally lent to the borrower,

* Convertible Debentures

A type of loan issued by a company that can be converted into stock by the holder and, under certain circumstances, the issuer of the bond. By adding the convertibility option the issuer pays a lower interest rate on the loan compared to if there was no option to convert. These instruments are used by companies to obtain the capital they need to grow or maintain the business. Debentures / Bonds is a certificate of debt which usually : represents a part of loan; bears interest; matuares on a stated future date. It may be with or without a charge on the assets of the company. Debentures do not have voting rights.

* Non Convertible Debentures

A debenture is basically an unsecured loan to a corporation. Often there is a provision to exchange this debt for corporate stock. Non-convertible debentures do not have this provision.

* Partly Convertible Debentures

A type of convertible debenture, part of which will be redeemed by the issuing company after a specified period of time and part of which is convertible into equity or preference shares at the end of the specified period. The ratio of conversion for the partially convertible debenture is decided by the issuer when the debenture is issued.

* Less : Debentures Calls in arrears

Calls outstanding to be paid by the shareholders.

* Term Loans

A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate. Term loans almost always mature between one and 10 years.

* Deferred Credit / Hire Purchase

Prepayment received from customers or tenants, and carried forward as a liability until the associated goods, services, or benefits are delivered. Also called deferred liability or deferred revenue.

* Hire Purchase

Hire purchase (HP) A method of buying goods in which the purchaser takes possession of them as soon as an initial installment of the price (a deposit) has been paid and obtains ownership of the goods when all the agreed number of subsequent installments have been paid. A hire-purchase agreement differs from a credit-sale agreement and sale by installments (or a deferred payment agreement) because in these transactions ownership passes when the contract is signed. It also differs from a contract of hire, because in this case ownership never passes.

* Bridge Loans

A short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short-term (up to one year) with relatively high interest rates and are backed by some form of collateral such as real estate or inventory.

* Cash Credit /Packing Credit / Bills Discounted

A short term cash loan to company.

* Unsecured Loans

Unsecured Loans refers to any type of loans or general obligation that is not collateralised by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation. In the event of the bankruptcy of the borrower,

the unsecured creditors will have a general claim on the assets of the borrower after the specific pledged assets have been assigned to the secured creditors, although the unsecured creditors will usually realize a smaller proportion of their claims than the secured creditors.

* Accrued Interest

A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, but not yet paid or received. Accrued interest occurs as a result of the difference in timing of cash flows and the measurement of these cash flows.

* Deferred Liabilities

Money that a company receives from a customer as prepayment for some good or service. A deferred liability is listed on a balance sheet as a liability until the good or service is delivered. This is because the company would have to return the money if it does not keep its end of the bargain as promised. A deferred liability is also called a deferred credit or deferred revenue.

* Commercial Paper

An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.

* Application of Funds :

* Gross Block

The total value of all of cost to acquire these depreciation. It is the assets that a company owns. Value is determined by the amount in assets, and it is not decreased to take into account the effects of Ex. Goodwill – Includes patents, trademark, and other intangible assets. Patent, Technical Know-how Leasehold Land Freehold, Land Railway Sidings Buildings, Ponds & Reservoirs, Water supply / tubewells, Plant and Machinery, Ships / Vessels, Electrical Installations / Fittings, Factory Equipments, Furniture and Fixtures, Office Equipments, Computers, Lab and R & D Equipment, Medical Equipment and Surgical Instrument, Vehicles Lab and R & D Equipment, Transmission and Distribution Equipment, Aircraft and Helicopters, Other Fixed Assets

* Less : Accumulated Depreciation

The Accumulated depreciation of an asset up to a single point in its life. Regardless of the method used to calculate it, the depreciation of an asset during a single period is added to the previous period’s accumulated depreciation to get the current accumulated depreciation.

* Less: Impairment of Assets

An asset is said to be impaired if its carrying cost is greater than its recoverable value. Carrying cost is the net cost of an asset as reflected in the balance sheet (i.e. gross fixed asset value less cumulative depreciation) and recoverable value of an asset is usually the higher of either the net selling price or its value derived from estimates of discounted future cash flows from the asset. Companies are required to follow ICAI’s AS-28 on impairment of assets.

* Net Block

Net block is the gross block less accumulated depreciation on assets. Net block is actually what the asset are worth to the company.

* Goodwill

Includes patents, trademark, and other intangible assets.

* PATENT

A patent is a set of exclusive rights granted by a state (national government) to an inventor or their assignee for a limited period of time in exchange for a public disclosure of an invention.

* Technical Know-how

Technical know-how is an intellectual property right which is nothing but the technical knowledge for carrying out any process and such knowledge is

available with some specific people who have the know-how patented.

* Leasehold Land

Leasehold is a form of property tenure where one party buys the right to occupy land or a building for a given length of time.

* Capital Work in Progress

Work that has not been completed but has already incurred a capital investment from the company.

* Capital Advances

Advances given by company for capital expenditure.

* Pre-operative Expenditure

Revenue expenses other than salaries and interest incurred before commercial production is called other pre-operative expenses. This datafield captures such pre-operative expenses incurred by the company and not charged to the profit and loss account.

* Other Capital Work in Progress

Other capital work in progress like building under construction, plant under installation etc.

* Producing Properties

Applicable to oil & oil product producing companies.

* Inventories

The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business’s assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company’s shareholders/owners.

* Sundry Debtors

Sundry Debtors is an entity from who amounts are due for goods sold or services rendered or in respect of contractual obligations. Also termed as debtor trade debtor, and account receivable.

* Cash and Bank

Balance with Bank, Term Deposit with Banks, Cash in hand / others

* Loans and Advances

Bills Receivable, Loans to Subsidiary, Loans to Group / Associate Companies, Loans to Others, Deposits with Government, Intercorporate Deposits, Deposits Others, Advance Tax Pre-paid expenses, Advances to suppliers, Advances for capital goods, Advances recoverable in cash or kind Less : Provision for Doubtful Advances, Interest Accrued on Investments, Application money pending allotment

* Sundry Creditors

Miscellaneous small or infrequent suppliers that are not assigned individual ledger accounts but are classified as a group. Ex. Creditors for Goods, Creditors for Capital Goods, Creditors for Finance, Creditors for Others

* Acceptances

A formal indication by a debtor of willingness to pay a time draft or bill of exchange.

* Application Money

Application Money The amount an investor is asked to pay with the application for new issues, usually less than the full value of the shares, the remainder being either fully or partly collected on actual allotment.

* Warrants Application Money

Company issued warrants (convertible in equity shares) Money The amount an investor is asked to pay with the application for new issues, usually less than the full value of the shares, the remainder being either fully or partly collected on actual allotment.

* Unclaimed Dividend

It refers to dividend payable to shareholders but have remained unpaid for a period of not less than 12 months * Interest Accrued But Not Due

A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, but not yet paid or received. Accrued interest occurs as a result of the difference in timing of cash flows and the measurement of these cash flows.

* Provisions

A provision takes into account an expected expense, showing it as a liability on the balance sheet. A company will create a provision in the current period when the likely liability becomes apparent, thus reducing the reported profit. Ex. Provision for Tax, Provision for Fringe Benefit Tax, Provision for Corporate Dividend Tax, Provision for Gratuity, Provision for Dividend, Provision for Contingencies, Provision for depreciation in investment, Other Provisions.

* Miscellaneous Expenses not written off

A company spends money on various things. If money spent is sizeable and can be given a name as per materiality concept, it can be shown separately. But if money spent on petty stuffs, they can be grouped and shown under Miscellaneous Expense. If the benefit of these expenses is receivable over a period of time, this amount can be written off in parts. The amount which is yet to be written off can be shown as “Misc Expenses not written off”. Ex. Discount on issue of shares, Discount on issue of Debentures, Preliminary Expenses, Deferred revenue expenses, Royalty/Liscense fees/ Technical Knowhow, Financial charges / Expenses not written off

* Deferred Tax Assets

* An asset on a company’s balance sheet that may be used to reduce any subsequent period’s income tax expense. Deferred tax assets can arise due to net loss carryovers, which are only recorded as assets if it is deemed more likely than not that the asset will be used in future fiscal periods.

* Deferred Tax Liability

* An account on a company’s balance sheet that is a result of temporary differences between the company’s accounting and tax carrying values, the anticipated and enacted income tax rate, and estimated taxes payable for the current year. This liability may or may not be realized during any given year, which makes the deferred status appropriate.

* Contingent Liabilities

* The possibility of an obligation to pay certain sums dependent on future events. Defined obligations by a company that must be met, but the probability of payment is minimal.

* Types of Contingency Reserves : Contingencies include potentially uncollectible monies owed the company, potential obligations under product warranties or related to product defects, judgments from pending or threatened litigation and likely losses due to fires and other hazards Examples:Claims not acknowledged as debt, Guarantees undertaken, Letter of Credit, Bills Discounted, Disputed Sales Tax, Disputed Income Tax, Disputed Excise Duty, Other Disputed Claims,Uncalled Liability on Shares,Others

E. FINANCE – INVESTMENTS

* Investments

* Companies often make investment in shares debentures, bonds, mutual funds, etc. The sum of all such investments outstanding at the end of the balance sheet date is captured in this datafield. There is one exception. Investments made by investment companies that are engaged entirely, or essentially, in the business of purchase and sale of securities for making profits from these are not included in this datafield. Investments of such companies is treated as stock in trade and not investments. Investments by all other companies is included in this datafield.

* Equity-Quoted

* This datafield captures the investments made by a company in the equity shares of other companies It includes such investments in group and non-group companies. These shares will be listed on the stock exchange.

* Equity-Unquoted

* This datafield captures the investments made by a company in the equity shares of other companies It includes such investments in group and non-group companies. These shares will not be listed or traded on the stock exchanges.

* Debenture-Quoted

* Investments made by companies in debt instruments e.i. debenture /bonds is reported in this datafield. These instruments will be listed on the stock exchange.

* Debenture-UnQuoted

* Investments made by companies in debt instruments e.i. debenture /bonds is reported in this datafield. These instruments will not be listed on the stock exchange.

* Sec.-Quoted

* Investments made by companies in debt instruments issued by the govt. Includes treasury bills, NSC, Indira Vikas Patra and other government securities is reported in this datafield. These instruments will be listed on the stock exchange.

* Sec.-UnQuoted

* Investments made by companies in debt instruments issued by the govt. Includes treasury bills, NSC, Indira Vikas Patra and other government securities is reported in this datafield. These instruments will not be listed on the stock exchange.

* Units-Quoted

* Investments made by a company in mutual funds is reported in this datafield. These mutual funds schemes will be listed on the stock exchange.

* Units-UnQuoted

* Investments made by a company in mutual funds is reported in this

datafield. These mutual funds schemes will not be listed on the stock exchange.

* Pref.-shares

* This datafield captures the investments made by a company in the preference shares of other companies, It includes such investments made in group and non-group companies. Includes quoted, unquoted and partly paid up preference shares.

F. SHARE PRICE – LATEST EQUITY

* Latest Equity(Subscribed)

* Latest Equity capital (subscribed) with adjustments if any (beween two financial year ends)

* Latest Reserve

* Latest Reserves with adjustments if any (beween two financial year ends)

* Latest EPS -Unit Curr.

* Earnings per share : (TTM Adjusted Net Profit / Latest Equity)*Latest Face Value

* Latest Bookvalue -Unit Curr.

* Book value is the accounting value of a firm.

(Latest Equity Capital + Latest Reserves)/Latest Equity Capital*Latest Face Value

* Stock Exchange

* Name of stock exchange where company is listed exm. BSE,NSE or regional stock exchanges.

* Latest Market Price–Unit Curr.

* Latest Quoted price of stock.

* Latest P/E Ratio

* (Current Market Price / Latest EPS (as calculated above))

* Latest P/BV

* (Current Market Price / Latest Book Value (as calculated above))

* Market Capitalisation

* Latest Market capitalisation of a stock (current market price*total number of outstanding shares).

* Dividend Yield -%

* A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows: * (Latest Year end Dividend Amount / Latest Market Cap.)

G. Key Ratios :

The key ratios considered are:

* Debt-Equity Ratio

* A measure of company’s financial leverage calculated by dividing its total liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets.

* (Total debt / (share capital + reserves))

* Long Term Debt-Equity Ratio

* A measure of a company’s financial leverage calculated by dividing its total long term liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets.

* (total debt – cash credit – commercial paper –bridge loans – short term loans to group companies- short term loans to others – inter corporate deposits – working capital loans ) / (share capital +reserves)

* Current Ratio

* A liquidity ratio that measures a company’s ability to pay short-term obligations.

(total Inventory +sundry debtors + cash and bank balance+ loans and advances) / (total

current liabiliites + cash credit + commercial paper + bridge loans + short term loans to group companies + short term loans to others + inter corporate deposits + working capital loans)

* Turnover Ratios :

* Fixed Assets

* Asset turnover measures a firm’s efficiency at using its assets in generating sales or revenue – the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover.

(Sales / (gross fixed assets excluding capital work in progress – revaluation reserve))

* Inventory

* A ratio showing how many times a company’s inventory is sold and replaced over a period : (Sales / total inventory)

* Debtors

* Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the

number of times average debtors (receivable) are turned over during a year.

(Sales / sundry debtors)

* Interest Cover Ratio

* A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company’s earnings before interest and taxes EBIT) of one period by the company’s interest expenses of the same period:

(adjusted net profit + tax + interest) / interest

* Profitability Ratios:

* PBIDTM (%)

(adjusted gross profit + interest / sales) * 100

* PBITM (%)

(adjusted gross profit + interest – depreciation / sales ) * 100

* PBDTM (%)

(adjusted gross profit / sales ) * 100

* CPM (%)

(adjusted net profit + depreciation) / sales * 100

* APATM (%)

(adjusted net profit / sales) * 100

* Return on Capital Emplyed (ROCE) (%)

(adjusted net profit + tax + interest) / (sharecapital + reserve + total debt – miscelleanous exp. Not written off) * 100

* Return on Net Worth (RONW) (%)

(Adjusted net profit – preference dividend) / ( equity paid up + reserves ) * 100

* Valuation Ratios :

* Price Earning (P/E)

A valuation ratio of a company’s current share price compared to its per-share earnings. (price / eps)

* Price to Book Value ( P/BV)

* A ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest book value per share.

(Networth / No. of shares)

* Price/Cash EPS (P/CEPS)

A valuation ratio of a company’s current share price compared to its per-share cash earnings. (price / ceps)

* EV/EBIDTA

* EV/EBITDA is a valuation multiple that is often used in parallel with, or as an alternative to, the P/E ratio. The term EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, Amortization. An advantage of

this multiple is that it is capital structure-neutral.Therefore, this multiple can be used for direct cross-companies application. Enterprise Value (EV) – Mcap +Debt – Cash & Bank Balance Enterprise Value (EV) for Banks – Mcap+Deposits+Borrowings – Cash & Money

* Market Cap/Sales

(Market cap / Gross Sales)

* Earnings per Share: The earning per share is equal to:

* EPS= Equity Earnings No. of outstanding shares

* Dividend payout ratio: The dividend payout ratio represents the proportion of the equity which is paid out as dividends. Its is defined as: * DPR= Equity Dividends Equity Earnings

* Dividend per share: The dividend per share is simply the dividend declared per share. The dividend is stated as a percentage of the paid up value per share.

Chapter 4

INTRODUCTION OF LARSEN AND TOUBRO FOR VALUATION

Larsen & Toubro Limited (L&T) is a technology, engineering, construction and manufacturing company. It is one of the largest and most respected companies in India’s private sector. Seven decades of a strong, customer-focused approach and the continuous quest for world-class quality have enabled it to attain and sustain leadership in all its major lines of business. L&T has an international presence, with a global spread of offices. It continues to grow its overseas manufacturing footprint, with facilities in China and the Gulf region. The company’s businesses are supported by a wide marketing and distribution network, and have established a reputation for strong customer support. L&T believes that progress must be achieved in harmony with the environment. A commitment to community welfare and environmental protection are an integral part of the corporate vision.

A. History of Larsen & Toubro Ltd.

The evolution of L&T into the country’s largest engineering and construction organization is among the most remarkable success stories in Indian industry. L&T was founded in Bombay(Mumbai) in 1928 by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro. Both of them were strongly committed to developing India’s engineering capabilities to meet the demands of industry. Beginning with the import of machinery from Europe, L&T rapidly took on engineering and construction assignments of increasing sophistication. Today, the company sets global engineering benchmarks in terms of scale and complexity. In 1928, the two friends decided to forgo the comforts of working in Europe, and started their own operation in India.

All they had was a dream and the courage to dare. Their first office in Mumbai (Bombay) was so small that only one of the partners could use the office ata time! In the early years, they represented Danish manufacturers of dairy equipment for a modest retainer. But with the start of the Second World War in 1929, imports were restricted, compelling them to start a small work-shop to undertake jobs and provide service facilities. Germany’s invasion of Denmark in 1940 stopped supplies of Danish products. This crisis forced the partners to stand on their own feet and innovate. They started manufacturing dairy equipment indigenously. These products proved to be a success, and L&T came to be recognised as a reliable fabricator with high standards. The war-time need to repair and refit ships offered L&T an opportunity, and led to the formation of a new company, Hilda Ltd., to handle these operations. L&T also started two repair and fabrication shops – the Company had begun to expand. Again, the sudden internment of German engineers (because of the War) who were to put up a soda ash plant for the Tata’s, gave L&T a chance to enter the field of installation – an area where their capability became well respected.

In 1944, ECC was incorporated. Around then, L&T decided to build a portfolio of foreign collaborations. By 1945, the Company represented British manufacturers of equipment used to manufacture products such as hydrogenated oils, biscuits, soaps and glass. By 1964, L&T had widened its capabilities to include some of the best technologies in the world. In the decade that followed, the company grew rapidly, and by 1972 had become one of the Top-25 Indian companies.

Today, L&T is one of India’s biggest and best known industrial organisations with a reputation for technological excellence, high quality of products and services, and strong customer orientation. It is also taking steps to grow its international presence. The L&T vision reflects the collective goal of the company. It was drafted through a large scale interactive process which engaged employees at every level, worldwide. L&T has a global presence. A thrust on international business over the years has seen overseas revenues growing steadily. The company has manufacturing facilities in India, China, Oman and Saudi Arabia. It has a global supply network with offices in 10 locations worldwide, including Houston, London, Milan, Shanghai, and Seoul. Customers include global majors in over 20 countries.

B. Achievements of L&T

* Built India’s first indigenous hydrocracker reactor.

* Built the world’s largest continuous catalyst regeneration reactor. * Built the world’s biggest fluid catalytic cracking regenerator. * Built the world’s longest product splitter.

* Built Asia’s highest viaduct – Panvalnadi for the Konkan Railway. * Built the world’s longest LPG pipeline.

* Built the world’s longest cross country conveyor.

C. Key Products of L&T:

* Turnkey projects

Hydrocarbon, Power, Cement and allied machineries, Engineering services, Railway projects, Construction, Construction services, Building products, Infrastructure concessions, Engineering services, International products * Engineered products and systems

Refinery, Oil and gas, Petrochemicals, Fertilizer, Coal gasification, Aerospace, Thermal power plant, Nuclear power plant, Defence, Cement * Electrical and electronic product and systems

Switchgears, Electrical solutions, Metering systems and relays, Medical equipment, Control and automation , Petroleum dispensers and systems ,

Tooling solutions. * I T and engineering services

IT services, Engineering services, Embedded systems.

* Machinery valves and industry consumables

* Financial services

* Infrastructure finance

* Equipment finance

* Shipbuilding

D. Key Competitors of L&T:

* IRB Infrastructure

* Nagarjuna Construction

* Gammon India

* Hindustan Construction

* Simplex

* BHEL

* Siemens

E. Trend in order Backlog:

F. Trend in Order Booking

G. Subsidiaries of L&T: The following table shows how the company diversified itself in many business verticals.

Investments in Key Subsidiaries (Rs crore)| FY10| FY11| FY12| Incremental Investments (FY12 – FY11)| Subsidiaries (Equity Commitment)| | | | |

EWAC Alloys| 0| 150| 150| 0|

L&T Finance Holdings| 1252.6| 1778.6| 1778.6| 0|

L&T General Insurance| 29| 200| 225| 125|

L&T IDPL Projects| 628.4| 1256.8| 2696.5| 1229.7|

L&T-MHI Boilers Private Limited| 0| 112.2| 112.2| 0| L&T-MHI Turbine Generators Private Limited| 0| 127.6| 127.6| 0| L&T Power Development| 181| 1220| 1262| 22|

L&T Power Ltd.| 152.5| 152.5| 152.5| 0|

L&T Sapura Shipping Pvt. Ltd.| 0| 95.1| 95.2| 0.2| L&T SSHF (NPCIL )| 111| 222| 222| 111|

L&T Infotech| 124.2| 124.2| 124.2| 0|

L&T International FZE| 1147.4| 1147.4| 1147.4| 0|

L&T Komatsu| 60| 60| 60| 0|

Chapter 5

PESTEL ANALYSIS,PORTER FIVE FORCES MODEL, SWOT ANALYSIS

Now here we do the Analysis of L&T with three different methods:

A. PESTEL Analysis

I. Political Factors:

(i) SEZ Act to Boost infrastructural Development:

SEZ is the new destination for real investor. Currently 150 SEZs are approved out of 85 SEZs are in the IT/ITES area and the 10-15 SEZs in the electronics area. 120 SEZs are developed by real estate developers which constitute of about 50% of the total SEZ area. IT SEZ should be developed and made operational within the period of six months from the date of notification. Thus, 120 approved SEZ would result in investment of US$ 12bn immediately. (ii) Cement Prices Reduced for State Infrastructure Projects: The continued thrust on the infrastructure development will provide impetus to the healthy growth in demand, protecting the bottom-line of cement companies to an extent. The expected reduction in the CENVAT and normal Freight rates on diesel and limestone will be marginally positive for some companies. (iii) FDI Liberalization to Augment Industry Growth: Recent amendments by the government have made accessibility to the required capital much easier. Opening of FDI in construction and allowing developers to raise capital in international market has led to development of larger projects benchmarked against international standard. (iv) REITs(Real Estate investment trusts) to Positively affect real Estate Business.

The proposed introduction of REMF(Real Estate Mutual Fund) and REIT will boost real estate investment from the small investors point of view. This will allow small investors to enter real estate market with the contribution as less than Rs10,000. The concept of REIT is on the verge of entering India and would be structured as company dedicated to owing and in most cases operating income producing real estate such apartments, shopping centres, offices & warehouses. (v) India’s New Manufacturing Policy aims to create 100 million jobs in 15 years; grow manufacturing about 2% faster than GDP so that its contribution to GDP can increase from 16% to 25%; and increase technological depth and value addition in India’s manufacturing to enable India to improve its trade balance which has been deteriorating with increases in imports (including large volumes of manufactured goods) exceeding exports. This will result in lot of new manufacturing facilities to set up.

II. ECONOMIC FACTORS:

(i) Growth in Construction Activity Stimulating GDP Growth: India is witnessing tremendous growth & expansion of construction activities and construction is largest component of GDP. It has been growing at a rate over 10% in the past few years when GDP growth is around 8%. Within construction; sector such as roads, railways, housing and power have been keen drivers. (ii) Rate Hikes Unlikely to Slow down Growth: It has been analysed that the residential prices has been increased by about 15-20% on average in the last one year. There has been strong growth in demand supported by rising disposable incomes, low interest rates, and fiscal incentives on both interest and principal payment and increasing urbanization.

III. SOCIAL FACTORS:

(i) Shifting Consumption Pattern to Fuel industry Growth The consumption pattern of Indian households is undergoing a gradual, but steady change. The share of food and beverages, which used to constitute almost 50% of household spend until 2002 is fall to 45% by FY08. We expect the share of discretionary items to consistently rise given the rising affordability and changing aspiration levels. Increased exposure to western lifestyle has altered the consumption pattern of Indian people.

(ii) Rising Urbanization to Boost Industrial Growth: Urban infrastructure consist of drinking water, sanitation, sewage systems, electricity and gas distribution, urban transport, primary health services, and environmental regulation. Many of these services are in the nature of local public goods with the benefits from improved urban infrastructure. The urban population in India will grow by 85 million over the next 10 years. (iii) Green Building in India:The green building movement has gained tremendous momentum during 2 to 4years, ever since the Green Business centre embarked on achieving the prestigious LEED rating for their own centre at Hyderabad. The Platinum rating for green building has sensitized the stakeholders of construction industry. There is tremendous potential for construction of green building in India. The estimated market potential for green building will be about $ 400 million in 2010.

IV. TECHNOLOGICAL FACTORS:

(i) Low Technology Adoption to Hinder Growth: The poor state of technology adopted by the construction sector adversely affects its performance. Upgrading of technology is required both in the manufacturing of construction material and in construction activities. As a large number of construction materials are manufactured in the unorganised sector, effective monitoring and regulation of the production of these material to ensure proper quality become difficult. Use of low grade technology in the construction sector lead to low value addition and low productivity, apart from poor or substandard quality of construction and time overruns in projects. (ii) Construction As Per Indian Requirements: The construction needs to be done as per Indian standards and requirements which will demand considerable changes from the international requirements. The Infrastructure requirements of India are much different as the population spread, increasing urbanization, increasing slums, the small space for roads, the water problems are more. (iii) Ready-Mix-Concrete being Experienced With: The Ready mix concrete business in India is in its infancy. For example, 70% of cement produced in a developed country like Japan is used ready mix concrete business there. Here in India, Ready Mix concrete business uses around 2% of total cement production. The increasing use of ready mix not only saves time but also improves quality.

V. ENVIRONMENTAL FACTORS:

* Technological solutions helps in integrating the supply chain, hence reduce losses and increase profitability * With the entry of global companies into the Indian market, advanced technologies, are used in engineering & Construction. * With the development or evolution of infrastructure sector, many of the MNC enter into Indian market * Environmental situation affect the infrastructure sector. * Infrastructure such as roads and bridges affect the many sector such as automobile sector etc.

VI. LEGAL FACTORS

* Ensure a balanced transition to open trade at minimal risk to the Indian economy and local industry. * Indian government infrastructure policy aimed at promoting an integrated, phased and conducive growth of the Indian infrastructure sector. * Confirms the government’s intention on harmonizing the regulatory standards with the rest of the world * Establish an international hub for engineering & construction companies so that new technology can be used. * Legal provisions relating to safety measures

A. PORTER FIVE FORCES MODEL:

1. Threat of New Entrants: Low threat of new entrant due to * Economies of scale

* Labour Intensity

* High Capital Requirement

* Lack of Knowledge and Experience

* Access to input

* Access to market

2. Supplier’s Bargaining Power:

High Bargaining power of supplier. Suppliers of construction materials are fragmented and are extremely critical for this industry since most of the construction work is outsourced. Proper supply chain management is a costly yet critical need. 3. Buyer’s Bargaining Power

The Bargaining power of buyer is low/moderate. Buyers in Engineering & construction sector have less choice due to limited number of players. The market forces haven’t empowered the buyers to a large extent. 4. Industry

Rivalry: The industry rivalry is high. This instinct of the industry is primarily driven by the technical capabilities acquired over years of gestation under the technical collaboration with international players and the completion of project ontime. 5. Substitute: There is no perfect substitute to this industry. It will be effected only when the country is fully developed than the company need to look forward towards the emerging economies.

B. SWOT ANALYSIS

i) Strengths

* Larsen and Toubro (L&T) is India’s largest engineering and construction company. * It has created international presence by operating supply network offices in 10 locations worldwide, including Houston, London, Milan, Shanghai and Seoul. * L&T has created a strong brand name by building world’s largest Tubular Reactor for a petrochemical plant and has also built world’s longest Product Splitter and longest LPG pipeline. * Larsen and Toubro’s order book has reported continuous growth. The company has a strong pipeline of projects in domestic as well as international markets, which is likely to ensure a steady revenue growth ii) Weaknesses

* In spite of having a diversified expertise, the revenues of the company are highly concentrated iii) Opportunities

* The company has acquired the switchgear business of TAMCO Corporate Holdings of Malaysia in April 2008.With TAMCO the company will be able to offer a comprehensive range of MV switchgear and become a significant player in the MV segment in India. Further L&T’s TAMCO switchgear acquired Henikwon coporations in July 2012. Henikwon is in LV & MV Busduct Manufaturer. * L&T has also entered into various joint ventures in the recent past. L&T has joint venture agreement with Tamil Nadu Industrial Development Corporation Limited, Mitsubishi Heavy Industries and A.A. Turki Contracting & Trading Corporation (ATCO) of the Kingdom of Saudi Arabia. * These joint ventures boost and strengthen the operational efficiency of the company, as well as provide it with avenues to generate additional revenues and also leverage its strong presence in order to exploit the growing capital goods and infrastructure industry * Growing Indian capital goods and infrastructure industry as the government has planned a series of measures to encourage private sector participation and increase spending on infrastructure. Capacities are being ramped up in Railways, Roads, Ports, Airports and Urban infrastructure to sustain the momentum of double digit growth in the industrial sector. iv) Threats

* Larsen & Toubro faces stiff competition in the international market with construction majors in the Middle East including ABB of Sweden and Bechtel of the US. Stiff competition could erode the company’s market share and reduce its profitability. * Engineering and construction companies such as Larsen & Toubro (L&T) are facing pressure on their earnings due to the high interest rates on working capital. L&T’s interest costs increased in the first six months of FY2012, which would impact its profit before tax (PBT).

Rising interest rates would put pressure on the margins of the company.

Chapter 6

LARSEN AND TOUBRO EQUITY VALUATION

Equity Valuation based on Discounted Cash Flow Model:

Step by step process for DCF

Step 1 – Enter historical financial information in the DCF valuation Enter historical information

Enter the historical information of the company you wish to value, this information can be found in an annual report. It depends on what company you wish to estimate value of. The CAGR (Compounded Annual Growth Rate) and the percentage numbers will be calculated automatically when you have entered all information. Below is a picture of the information you should fill in: (Values in Cr)| 2008| 2009| 2010| 2011| 2012| CAGR (08-12)| Total Income (Sales)| 26274.4| 35747.33| 38792.94| 45918.88| 55103.57| 20.34%| Growth rate| | 36.05%| 8.52%| 18.37%| 20.00%| |

Total Expenditure (Cost)| 22750.6| 30275.32| 31757.93| 38698.81|

47326.47| 20.10%| % Sales| 86.59%| 84.69%| 81.87%| 84.28%| 85.89%| | Operating Profit (EBITDA)| 3523.8| 5472.01| 7035.01| 7220.07| 7777.1| 21.89%| % Margin| 13.41%| 15.31%| 18.13%| 15.72%| 14.11%| | Depreciation| 195.94| 284.83| 383.65| 599.22| 699.46| 37.45%| Depr % Sales| 0.75%| 0.80%| 0.99%| 1.30%| 1.27%| | EBIT| 3327.86| 5187.18| 6651.36| 6620.85| 7077.64| 20.76%| Total Taxes| 980.82| 1227.84| 1638.17| 1943.58| 1853.83| | NOPAT| 2347.04| 3959.34| 5013.19| 4677.27| 5223.81| 22.14%| Net Cash Used in Investing Activities (Capex)| | 1198.15| 1377.24| 1152.63| 960.79| | | | 3.35%| 3.55%| 2.51%| 1.74%| |

Steps

1. Enter net sales, total costs, EBITDA, Depreciation & Amortization for each year, which will sum up to EBIT. 2. Enter taxes paid, in this example actual data used instead 30%, but it varies from country to country. 3. Enter Capex (Capital Expenditure) which is the annual investments for the company each year. This is normally specified in the Annual Report under Cash Flow Statement. If you cannot find the information in the Annual Report you can also take the difference from two years in tangible assets. For example, if the company had tangible assets of “100″ in year 2010 and ”110″ in 2011, the company spent “10″ on investments (CAPEX) during 2011. The historical information will be used to make “likely” forecasts of sales growth and EBITDA margins which will be performed in coming steps. Step 2 – Enter historical working capital

In step two we are entering historical information. This is needed in order to make good prediction of future working capital needed. The working capital is such an important and difficult input, which needs some extra attention. In the picture below we have the information you should supply in order to calculate the change in net working capital. Amount in Rs. Cr| 2008| 2009| 2010| 2011| 2012|

Total Income (Sales)| 26274.37| 35747.33| 38792.94| 45918.88| 55103.57| | | 36.05%| 8.52%| 18.37%| 20.00%|

Current Assets, Loans & Advances| | | | | |

Inventories| 4305.91| 5805.05| 7723.44| 1577.15| 1776.62| Sundry Debtors| 7365.01| 9903.13| 11158.4| 12427.6| 18729.8| Cash and Bank| 964.46| 775.29| 1431.87| 1729.55| 1778.12| Loans and Advances| 3771.4| 5840.92| 6081.6| 15957.5| 17002.9| Total Current Assets| 16406.78| 22324.4| 26395.3| 31691.8| 39287.5| % Sales| 62.44%| 62.45%| 68.04%| 69.02%| 71.30%|

Less : Current Liabilities and Provisions| | | | | | Current Liabilities| 11741.72| 14776.2| 19090.5| 26392.1| 31307| Provisions| 2035.42| 1942.63| 2186.04| 2002.1| 2112.04| Total Current Liabilities| 13777.14| 16718.8| 21276.5| 28394.2| 33419.1| | 52.44%| 46.77%| 54.85%| 61.84%| 60.65%|

Net Working Capital| 2629.64| 5605.61| 5118.75| 3297.59| 5868.38| | 10.01%| 15.68%| 13.20%| 7.18%| 10.65%|

Increase/Decrease in NWC| | 2975.97| -486.86| -1821.16| 2570.79| Unlevered Free Cash Flow(FCF)= Net Income+ Depreciation+ Deferred Taxes- Dividends Paid-Capital expenditures| | 6021.99| 3532.74| 2302.7| 7533.27| Steps

1. Enter Account receivables,

2. Inventory and

3. Prepaid expenses and other

4. This information will sum up to Total Current Assets

5. Enter Account payable,

6. Accrued Liabilities and

7. Other Current Liabilities

8. This will sum up Total Current Liabilities

9. The total Net Working Capital will now be calculated automatically in the model Step 3 – Make future projections

The projections in the DCF model have large impact on the valuation, therefore, this step is extremely important. We will now use the historical information as a base in order to make good and likely projections of the future. In the picture below we have the information which should supply. However read the instructions below the picture before you make your

assumptions and input. (Values in Cr)| 2008| 2009| 2010| 2011| 2012| CAGR (08-12)| 2013| 2014| 2015| 2016| 2017| Total Income (Sales)| 26274.4| 35747.33| 38792.94| 45918.88| 55103.57| 20.34%| 61716| 69121.9| 77416.5| 86706.5| 97111.3| Growth rate| | 36.05%| 8.52%| 18.37%| 20.00%| | 12.00%| 12.00%| 12.00%| 12.00%| 12.00%| Total Expenditure (Cost)| 22750.6| 30275.32| 31757.93| 38698.81| 47326.47| 20.10%| 52249.89| 58519.87| 65542.26| 73407.33| 82216.21| % Sales| 86.59%| 84.69%| 81.87%| 84.28%| 85.89%| | 84.66%| 84.66%| 84.66%| 84.66%| 84.66%| Operating Profit (EBITDA)| 3523.8| 5472.01| 7035.01| 7220.07| 7777.1| 21.89%| 9466.11| 10602.05| 11874.29| 13299.21| 14895.11| % Margin| 13.41%| 15.31%| 18.13%| 15.72%| 14.11%| | 15.34%| 15.34%| 15.34%| 15.34%| 15.34%| Depreciation| 195.94| 284.83| 383.65| 599.22| 699.46| 37.45%| 802.31| 898.58| 1006.42| 1127.18| 1262.45| Depr % Sales| 0.75%| 0.80%| 0.99%| 1.30%| 1.27%| | 1.30%| 1.30%| 1.30%| 1.30%| 1.30%| EBIT| 3327.86| 5187.18| 6651.36| 6620.85| 7077.64| 20.76%| 8663.81| 9703.46| 10867.88| 12172.02| 13632.67| Total Taxes| 980.82| 1227.84| 1638.17| 1943.58| 1853.83| | 2599.14| 2911.04| 3260.36| 3651.61| 4089.8| NOPAT| 2347.04| 3959.34| 5013.19| 4677.27| 5223.81| 22.14%| 6064.66| 6792.42| 7607.51| 8520.42| 9542.87| Net Cash Used in Investing Activities (Capex)| | 1198.15| 1377.24| 1152.63| 960.79| | 2160.06| 2419.27| 2709.58| 3034.73| 3398.90| | | 3.35%| 3.55%| 2.51%| 1.74%| | 3.50%| 3.50%| 3.50%| 3.50%| 3.50%| Steps

1. Make projections of future sales by looking at historical values – In this example the business has had an annual organic growth between 9% and 36% implying a CAGR of 20.34%. This is normally a good measure for future estimates. However, to be at safer side we use an annual growth of 12% in this example. 2. EBITDA margins – look at historical values. This company has had EBITDA margins in the range of 13.5 – 18% in the past few years. In our example we have chosen to use an approx average value of the historical information in the projection period, implying 15.34%. This number will determine EBITDA in the projection period. 3. Depreciation and amortization – look at historical depreciation in relation to sales and use an average from these year to use in the projection period. In this case, it was quite simple, we used 1.3% of sales. 4. Taxes – use either the historical tax level or the business tax applied in your region. We have used 30% in this example. 5. CAPEX – Determine capital expenditures that you believe the company will have in the future. This is quite difficult to estimate, therefore, use an average of the last five years in relation to sales. In our example the capex actually decreased between 2009 and 2012, which might be inappropriate. However, after viewing the discussions of the management on CNBC18 and reading the annual report of the company we decided to use 3.5% of sales Step 4 – Calculate Unlevered Free Cash Flow, DCF model

We shall now calculate the unlevered free cash flow, but first we need to make some assumptions regarding the working capital and estimate the needs in the projection period. Amount in Rs. Cr| 2008| 2009| 2010| 2011| 2012| CAGR| 2013| 2014| 2015| 2016| 2017| Total Income (Sales)| 26274.37| 35747.33| 38792.94| 45918.88| 55103.57| 20.34%| 61715.998| 69121.918| 77416.548| 86706.534| 97111.318| | | 36.05%| 8.52%| 18.37%| 20.00%| | 12.00%| 12.00%| 12.00%| 12.00%| 12.00%| Current Assets, Loans & Advances| | | | | | | | | | | | Inventories| 4305.91| 5805.05| 7723.44| 1577.15| 1776.62| | | | | | | Sundry Debtors| 7365.01| 9903.13| 11158.4| 12427.6| 18729.8| | | | | | | Cash and Bank| 964.46| 775.29| 1431.87| 1729.55| 1778.12| | | | | | | Loans and Advances| 3771.4| 5840.92| 6081.6| 15957.5| 17002.9| | | | | | | Total Current Assets| 16406.78| 22324.4| 26395.3| 31691.8| 39287.5| 3.99%| 41133.8| 46069.8| 51598.2| 57790| 64724.8| % Sales| 62.44%| 62.45%| 68.04%| 69.02%| 71.30%| | 66.65%| 66.65%| 66.65%| 66.65%| 66.65%| Less : Current Liabilities & Provisions| | | | | | | | | | | | Current Liabilities| 11741.72| 14776.2| 19090.5| 26392.1| 31307| | | | | | | Provisions| 2035.42| 1942.63| 2186.04| 2002.1| 2112.04| | | | | | | Total Current Liabilities| 13777.14| 16718.8| 21276.5| 28394.2| 33419.1| | 34133.2| 38229.2| 42816.7| 47954.7| 53709.3| | 52.44%| 46.77%| 54.85%| 61.84%| 60.65%| | 55.31%| 55.31%| 55.31%| 55.31%| 55.31%|

Net Working Capital| 2629.64| 5605.61| 5118.75| 3297.59| 5868.38| | 7000.53| 7840.6| 8781.47| 9835.24| 11015.5| | 10.01%| 15.68%| 13.20%| 7.18%| 10.65%| | 11.34%| 11.34%| 11.34%| 11.34%| 11.34%| Increase/Decrease in NWC| | 2975.97| -486.86| -1821.16| 2570.79| | 1132.15| 840.064| 940.872| 1053.78| 1180.23| Unlevered Free Cash Flow(FCF) | | 6021.99| 3532.74| 2302.7| 7533.27| | 5839.06| 6111.81| 6845.22| 7666.65| 8586.65|

Steps

1. Estimate total current assets in the projection period. Use the average during the past four years in relation to sales 2. Estimate total current Liabilities in the projection period. Use the average during the past four years in relation to sales 3. The net working capital will now be calculated automatically based on your above input 4. The difference (increase or decrease) between e.g. 2012 and 2011 will now be subtracted or added to the cash flow. A growing business will normally take on more working capital for each year, which will lower the free cash flow 5. The Free Cash Flow can now be calculated for every year in the projection period! Step 5 – Target Capital Structure and Beta

This section is for you who have access to a database such as Bloomberg, Reuters and capital line etc. If you do not have such access, you can type in: β= Covim/σ2m where Covim=Covarience of Market and Stock value

σ2m= variance of Market and β = Volatility

Step 6 – Determine WACC

The capital structure is given from the previous step and works as a base for determining WACC in the calculation below. WACC| Column1|

Debt to Equity Ratio| 0.38|

COST OF EQUITY| |

Risk free rate (Rf)| 8.00%|

Market Risk Premium| 7.00%|

Levered Beta| 1.509|

size of premium| |

| |

Cost of Equity| 18.56%|

COST OF DEBT| |

Cost of debt| 9.00%|

Taxes| 30.00%|

After Tax Cost of Debt| 6.30%|

| |

Final WACC| 13.91%|

Assumptions for WACC

1. Enter the risk free rate. This is the same rate as the 10-year treasury bond and can most likely be found on government’s website like www.rbi.org.in 2. Enter the market risk premium – this is used to adjust for specific company risk and should be 7.0% according Research firm report. 3. The Levered Beta is given from previous exercise

4. Now add a size premium according to Research report as well. We have used NIL% since analyzed company L&T is pretty large. 5. Now enter cost of debt, the rate which your company gets to borrow money at. If you are not sure, you can calculate the rate by dividing interest paid during the last financial year with total debt 6. Enter the tax-rate for the company’s current country – so that the tax-shield deduction can be calculated Step 7 – Present value of free cash flow

Next step is to calculate the present value of the generated cash flows in the projection period. Data| 2008| 2009| 2010| 2011| 2012| CAGR| 2013| 2014| 2015| 2016| 2017| Unlevered Free Cash Flow| | 6021.99| 3532.74| 2302.7| 7533.27| | 5839.06| 6111.81| 6845.22| 7666.65| 8586.65| Discount period| | | | | | | 0.5| 1.5| 2.5| 3.5| 4.5| Descount factor | | | | | | | 0.93695| 0.82253| 0.72207| 0.63389| 0.55648| PV of free cash flow| | | | | | | 5470.91| 5027.11| 4942.76| 4859.82| 4778.28| Steps

1. Make sure the WACC is correct according to step 6

2. The Discount Period is set according to the mid year method and could be leaved as is since the cash flow is evenly generated through the year

3. The Discount Factor is calculated with WACC and the chosen Discount Period 4. The present value of the free cash flow is now automatically generated. Step 8 – Calculate Terminal Value

The terminal value has the largest impact on the valuation and it is extremely important that this input is correct performed. Most values are already given as can be seen below:

Terminal Value| Sales Growth 12%|

Terminal Year FCF| 8586.646|

Perpetual Growth| 4%|

Terminal year Ebitda| 14895.11|

Term value| 90099.46|

Implied Exit Multiple| 6.05|

Disc Period| 5|

Discount Factor| 0.56|

PV of Terminal Value| 50138.34|

% of Enterprise Value| 66.66%|

Steps

1. Perpetuity growth rate is the rate at which the economy is expected to grow, this is normally 2.5% or 4%.We have taken this as 4% as our country is a emerging economy and expected to grow consistently at least few decades with comparatively healthy growth rate. 2. Make sure the implied exit multiple isn’t too high, since that probably means your assumptions are too aggressive in the terminal year. Another way of “judging” if this value is too high, is if you put it in the relation of the later calculated enterprise value. If the terminal value is more than 80% of the enterprise value, it is likely that something is wrong with your assumptions Step 9 – Enterprise Value

The DCF valuation is almost done, you have made all the inputs required and the enterprise value is already calculated. Now we will try to describe the results and make sensitivity analysis. Below are the results in our valuation example:

Terminal Value| Sales Growth 12%|

Terminal Year FCF| 8586.646|

Perpetual Growth| 4%|

Terminal year Ebitda| 14895.11|

Term value| 90099.46|

Implied Exit Multiple| 6.05|

Disc Period| 5|

Discount Factor| 0.56|

PV of Terminal Value| 50138.34|

% of Enterprise Value| 66.66%|

For Intrinsic Value| Column2|

PV of Future CF| 25078.89|

Enterprise Value| 75217.23|

Less Debt| 8266.78|

Add cash & Equivalent| 10279.56|

Implied Equity Value| 77230.01|

equity shares| 61.24|

Intrinsic Value of share| 1261.10|

Comments

In the results above you can see the enterprise value of the business and some multiples on the 2012 years estimated results. You should also enter debt, cash and outstanding shares to get additional information on your valuation. Step 10 – DCF Sensitivity Analysis

With this sensitivity analysis you can see how the valuation changes with different assumptions and changes in input. Example change in WACC, Risk free interest rate. macroeconomic condition etc. Terminal Value| S Gr 8%,P Gr 2%| S Gr 12%,P Gr 4%| S Gr 15%,P Gr 4%| Terminal Year FCF| 6855.29| 8586.65| 10092.75|

Perpetual Growth| 2.00%| 4.00%| 4.00%|

Terminal year Ebitda| 12418.59| 14895.11| 16999.76|

Term value| 58703.46| 90099.46| 105902.95|

Implied Exit Multiple| 4.73| 6.05| 6.23|

Disc Period| 5.00| 5.00| 5.00|

Discount Factor| 0.56| 0.56| 0.56|

PV of Terminal Value| 32667.17| 50138.34| 58932.63|

% of Enterprise Value| 60.16%| 66.66%| 67.86%|

For Intrinsic Value| Column2| Column2| Column2|

PV of Future CF| 21637.59| 25078.89| 27913.30|

Enterprise Value| 54304.76| 75217.23| 86845.93|

Less Debt| 8266.78| 8266.78| 8266.78|

Add cash & Equivalent| 10279.56| 10279.56| 10279.56| Implied Equity Value| 56317.54| 77230.01| 88858.71|

equity shares| 61.24| 61.24| 61.24|

Intrinsic Value of share| 919.62| 1261.10| 1450.99|

Comments:

To perform a sensitivity analysis like this, we should use the exact value of companies WACC, EBITDA %, and vary Perpetuity Growth and annual sales growth.

Valuation Range

It is now time to decide the valuation range for the company. In the above example valuation range can be achieved by changes in perpetual growth rate from 2% to 4% and sales growth rate from 8% to 15% which gives valuation range between approximately 920 – 1451!

Chapter 7

INTERPRETATION / ANALYSIS

Interpretation:

* If the actual price of the share in the market is more than intrinsic value (calculated price using models) of the stock then sell the share and if the Intrinsic value of share more than the Market value of the share then buy is recommended on the stock. * From the following table we can see that EPS of L&T expected to increase consistently. This will result in good market value in future. (Values in Cr)| 2008| 2009| 2010| 2011| 2012| CAGR (08-12)| 2013| 2014| 2015| 2016| 2017| Total Income (Sales)| 26274.4| 35747.33| 38792.94| 45918.88| 55103.57| 20.34%| 61716| 69121.9| 77416.5| 86706.5| 97111.3| Operating Profit

(EBITDA)| 3523.8| 5472.01| 7035.01| 7220.07| 7777.1| 21.89%| 9466.11| 10602| 11874.3| 13299.2| 14895.1| EBITDA (%)| 13.41%| 15.31%| 18.13%| 15.72%| 14.11%| | 15.34%| 15.34%| 15.34%| 15.34%| 15.34%| Net profit| 2058.13| 2631.41| 3299.06| 3549.33| 4321.7| | 6064.6638| 6792.4234| 7607.5142| 8520.4159| 9542.8659| NPM (%)| 7.83%| 7.36%| 8.50%| 7.73%| 7.84%| | 9.83%| 9.83%| 9.83%| 9.83%| 9.83%| EPS| 70.40| 44.93| 54.78| 58.30| 70.57| | 99.03| 110.91| 124.22| 139.13| 155.83| BV| 326.84| 212.73| 304.08| 358.81| 411.87| | 493.85| 592.22| 710.26| 851.91| 1021.89| DPS| 16.94| 10.50| 12.50| 14.50| 16.50| | 19.80| 23.76| 28.51| 34.21| 41.06| ROCE| 24.62%| 21.79%| 21.45%| 21.62%| 20.53%| | 23.81%| 22.46%| 21.18%| 19.96%| 18.81%| RONE| 21.54%| 21.12%| 18.33%| 16.25%| 17.13%| | 20.05%| 18.73%| 17.49%| 16.33%| 15.25%| * Even if the conservative sales growth company is expected to generate substantial ROCE and RONE which clearly indicates that standalone basis, company is doing extremely well. * Net profit margin of the company expected to increase due to better financial management. Further, though L&T is having lot of competition in the market but it has pricing power due to its timely execution capability. * Due to emerging market growth story still intact, L&T is expected to do very well not only in India but also abroad. This may result in expected sales growth much higher than our conservative estimation as shown above. * From the following graph which represents the latest market quote, it can be seen that the intrinsic value of the L&T is less than the prevailing market price at conservative growth expectations. But the same stock is a good buy if the prevailing market price decrease any point of time Larsen & Toubro One Year chart:

Source: www.Moneycontrol.com

* Evenif we compare the L&T with its competitor group companies, the L&T position is dominant in the market. Refer the table: Peer Group Comparison – Annual – (Top 7 – Sales) Peer Group Comparison – Annual – (Top 7 – Sales)

(in Cr.)| Larsen & Toubro (Cosolidated)| GMR Infra.| IL&FS Transport| Engineers India| BGR Energy Sys.| McNally Bharat| GVK Power

Infra.| LTP| 1711.4| 20.95| 186.25| 238.45| 269.85| 112.75| 13.04| Change %| 0.67| -0.95| -0.35| 0.06| 0.07| 0.85| -1.73| 52 W H/L DATE| 25-10-12/21-12-11| 17-02-12/31-08-12| 06-02-12/02-01-12| 07-02-12/19-12-11| 01-03-12/02-01-12| 09-02-12/19-12-11| 17-02-12/19-12-11| 52 W H/L| 1718.40/971.00| 34.40/17.60| 224.30/143.10| 288.50/195.00| 373.90/172.55| 128.00/79.75| 20.40/9.56| Yr| 201203| 201203| 201203| 201203| 201203| 201203| 201203| | | | | | | | |

Sales| 64313.11| 8473.03| 5605.62| 3723.44| 3450.5| 2643.18| 2491.83| PAT| 4690.96| -1058.84| 538.88| 643.87| 224.38| 66.27| -1.07| Equity| 122.48| 389.24| 194.27| 168.47| 72.16| 31.09| 157.92| OPM %| 17.62| 20.55| 28.77| 25.53| 15.13| 6.66| 29.83| NPM %| 7.29| -12.5| 9.61| 17.29| 6.5| 2.51| -0.04|

EPS| 73.92| 0| 27.73| 18.14| 29.96| 21.22| 0|

PE| 17.06| -11.4| 6.96| 13.29| 10.51| 4.09| -2568.05| P/BV| 2.73| 1.6| 1.36| 4.51| 2.11| 0.75| 0.75|

P/CEPS| 12.76| -98.08| 6.09| 12.9| 9.75| 2.92| 11.09| BV| 479.46| 19.37| 142.27| 56.35| 154.86| 116.76| 23.09|

Source:Capitaline

* Present premium this company is getting in share market is justified as the consolidated basis company valuations are more attractive. For this refer the Table: SOTP Valuation of for the L&T.

SOTP Valuation for L&T (Sum of Total Parts)

| | | | | | |

Company (Rs. per share) | Bull Case | % of total 1| Base Case| % of total 2| Bear Case| % of total 3| Base Business| 1523.4| 77.5| 1226.6| 80.5| 870.5| 80| L&T Finance Holdings| 112.5| 5.7| 87.5| 5.7| 65.6| 6| L&T Infotech | 106.8| 5.4| 74.7| 4.9| 58.1| 5.3| L&T Power Development | 39.6| 2| 18.6| 1.2| 12.4| 1.1| L&T MHI JV | 19.6| 1| 11.4| 0.7| 8.5| 0.8|

L&T IDPL | 118.7| 6| 79.1| 5.2| 55.4| 5.1|

Other E&C, MIP & E&E Subs | 43.9| 2.2| 25.9| 1.7| 17| 1.6| Total| 1964.5| 99.8| 1523.8| 99.9| 1087.5| 99.9|

Source:ICICIDirect.com research| | | | | | |

Chapter 8

Conclusion

Through the above analysis we can conclude that:

* Valuation of equity can be influenced by mainly following factors: Expected sales growth rate, WACC of the company, macroeconomic factors etc * Valuation of stock has many different approaches. Application of all the approaches in practical is difficult and thus their results could be different. * The challenges before L&T is to ramp up its ability to meet the ever increasing demand for creation of world class infrastructure at a fast pace. The biggest constraints in capacity buildings are seen to be shortage of skilled manpower at all levels and with all players of the industry. Labor reforms are expected to be implemented by the Government which may result in high availability of skilled manpower. Government thrust on implementation of new manufacturing policy will result in creation of many indusrial area and demand for the construction activities. * Infrastructure thrust by the government of India will create more opportunities for L&T. * Our View & Valuation

L&T delivered the results ahead of estimates. The company has demonstrated strong execution and is best placed among its peers to benefit from revival in industrial capex. However, considering recent run up in stock price we change our recommendation on the stock to “ACCUMULATE” from “BUY” with price target of Rs 1,261 for basic business ( based on Intrinsic Value).

However Sum of total Parts is very high i.e. 25% more than the basic business valuation which gives valuation of Rs.1524 at the moderate estimates.

* From this project report we have learnt the following:

How the fundamental analysis carried out?

How the Macro economical factors are favorable to companies like L&T? What are the factors should be considered for valuations?

Chapter 9

LIMITATIONS FOR THE STUDY

The study has certain limitations like

* The study was conducted only on one company of infrastructure: L&T. * The methods of valuation may differ a lot in practical from that what analysts adopt. * The values taken by financial analysts somehow differ from is taken or calculated. * Stock market and the prices of stock are driven by the sentiments of investors, any news from Govt and information from insider of the company. * Information on average normal growth rate of industry was not available. * I have used only DCF model for valuing the companies.

* Since there are too many economic indicators and extensive macroeconomic data, it can confuse novice investors. * The same set of information based on macroeconomic indicators may have varied effects on same currencies at different times. * It is useful only for long-term investments.

Chapter 10

Bibliography

* Books

* Investment Analysis and portfolio Management -By Prasanna Chandra * Valuations -By Damodaran

* Financial Management-By I.M.Pandey

* Websites:

* www.nseindia.com

* www.ivrcl.com

* www.jalindia.com

* http://www.oifc.in/sectors/infrastructure

* www.moneypore.com

* www.icicidirect.com

* www.specialinvestor.com

* Www.moneycontrol.com

* Capitaline software

* Reports:

Annual reports of the company L&T

Chapter 11

ANNEXURE

FINANCE – PROFIT AND LOSS – Larsen & Toubro Ltd (Curr: Rs in Cr.) As on 17/10/2012| |

Values in Cr| 201203 (12)| 201103 (12)| 201003 (12)| 200903 (12)| 200803 (12)| INCOME