Financial Analysis of Chlor-Alkali Industry

SML 401

[FINANCIAL ANALYSIS OF CHLOR-ALKALI INDUSTRY]

Term Paper

on

Submitted by:

Aakash Sharma

2009CH10051

Ajitesh Abhishek

2009CH10770

2

Content

1. Statement of the Problem…………………………………………………………3

2. Research Methodology………………….………………………………………...3

3. Industries Scenario………………………………………………………………..4

4. Company Profile…………………………………………………………………..6

5. Ratio Analysis and Interpretation………………………………………………....10

6. Du Pont Analysis………………………………………………………………….26

7. Recent Events and its Impact on Chlor-Alkali Sector….........................................28

8. Conclusion……………………………………………………………….………..31

9. Future Aspect………………………………………………………….…………..33

3

STATEMENT OF THE PROBLEM

The Chlor-Alkali industry occupies a very important position in the country. Being an important

sector of Chemical Industries, Chlor-Alkali Industry has a vital role to play in the manufacturing of

essential commodity for the entire population. Its progress and development is of great concern to

everyone.

Thus we have taken four big firms of this sector: 1. Aditya Birla Chemicals India Ltd. 2. Lords Chloro Alkali Ltd.

3. Sree Rayalaseema Alkali and Allied Chemicals 4. Gujarat Alkalies and Chemicals Ltd.

Hence an attempt of financial statement analysis has been undertaken in a view of that it may pave

way of prosperity.

OBJECTIVE OF THE STUDY:

1. PRIMARY OBJECTIVE:

The primary objective of the study is to analyze the financial performance of the chosen

sector and its important companies.

2. SECONDARY OBJECTIVES:

To estimate the earning capacity of the firm.

To analyze the financial statements of the company by using financial tools.

To evaluate the financial position of the company in terms of solvency, profitability,

activity, and earnings ratios.

To analyze the working capital changes.

To determine the debt capacity of the firm.

To know the progress of the firm.

To measure the efficiency of operations.

RESEARCH METHODOLOGY

RESEARCH DESIGN The research is exploratory in nature.

TYPES OF DATA The methodology used in the study involves the collection of primary data as well as secondary

data. Majority of the data was collected with the help of the annual reports provided by the

company.

SOURCE OF DATA Secondary data were obtained from the internal records of the company i.e., from the published

annual reports, website of the company, journals and magazines and also other books related to the

analysis of financial performance.

4

PERIOD OF STUDY A nine year period, from 2002 to 2011, has been taken for the study.

TOOLS OF DATA ANALYSIS Ratio analysis

Trend analysis

REPRESENTATION Tables, figures and chart are used for the representation of the data.

INDUSTRY SCENARIO

CHEMICAL INDUSTRIES Nowadays the world is full of competition. The chemical industries on whole have been growing at

a very high pace. They play a vital role in the production of many vital manufactured goods. The

industry provides a tremendous variety of materials to other manufacturers. They also produce

chemical products that benefits people directly.

Major products of these industries include detergents, drugs, fertilizers, food preservatives flavoring

and paper products etc. Major chemicals produced are basic chemicals used in many countries. It is

used to produce fertilizer and other chemicals. Other basic chemicals include chlorine, alkali like

lime and sodium hydroxide and these chemicals are used in plastics.

Production of chemicals has become increasingly concentrated in Multinational Corporations,

which have plants and offices in a number of countries. To reduce costs, most of the multinational

companies locate their factories in countries where raw materials and cheap skilled labour are

readily available. So many basic chemicals are produced in developing countries by units of

multinational firms. But chemicals requiring advanced production methods are mainly made in

industrialized countries.

Chlor-Alkali Industry Chlor-Alkali is one of the important sector of the Chemical Industries

World Scenario

Increased production of paper, aluminium, soaps, and detergents at the international level has led to

increased requirement of caustic soda. But the Green Peace movement is seeking the phasing out of

chlorine usage; especially the CFC compounds have resulted in closing down of some of the Chlor-

alkali industries in Europe and restricted production in other European and North American Plants.

With the drop in international production, the international price of caustic soda rose steadily. The

caustic soda which was selling for $50/tonne has grown up to $300/ton now. The international

markets operates in the context of demand and supply conditions prevailing from time to time, So

price of caustic soda became highly volatile. Predatory pricing has become common and drop in

import duty often led to steep drop in price of the chemical. Though demand for chlorine is growing

fast the demand for caustic soda is not so promising. Hence the units in the gulf and western

countries are selling caustic soda at a cheaper price.

5

Major Countries Producing Caustic Soda: U.S.A, France, China, Russia, Japan, Canada, Germany,

India.

INDIAN SCENARIO The Indian chemical industry is an integral part of the Indian economy, contributing around 6.7% to

the Indian GDP. It touches our lives in many different ways. Whether it is thermoplastic furniture

we use, or a synthetic garment we wear, or drug we consume. The industry is a vital part of the

agricultural and industrial development in India has key linkages with several other downstream

industries such as automotive, consumer durables, engineering, food processing, etc. The chemical

industry in India has the potential to grow around USD 100 billion by 2010 (according to KPMG’s

analysis based on a survey of the industry). This would imply an annual growth rate of 15.5%. For

the industry to achieve this size, specialty and knowledge chemical segments would need to grow

16.4 % (current growth rate is 7.9%) and 27 %( current growth rate is 12.3%) respectively. The

basic chemicals segment would need to sustain its current growth rate of 7.7% to match the profile

of the chemical industry in global markets.

At the industry level, the Indian Chemical industry is characterized by:

High domestic demand potential, as Indian markets develop and per capita consumption

level increase

High degree of fragmentation and small scale operations

Limited emphasis on exports due to domestic market focus and smaller scale of operation.

Low competitiveness as compared to other countries due to higher cost of power, import

duties, taxes and cost of capital.

Low focus on R&D despite initiatives to innovate processes to synthesis products cost

effectively.

In spite of the disadvantages, a few proactive Indian companies have created sizeable international

operations to become significant players in the global market place. The ability of chemical

companies in India to perform better than global companies has already been reflected by a

comparatively better performance of the Indian operations of some global companies. Operating

profit margins of these Indian subsidiaries range from 8 % to 13 % as compared to the global

operating margins range less than 1 % to 6%. Several chemical industries in medium and small

scale sectors have been forced to suspend operations due to their inability to adhere to the

environmental standards in view of their technological and investment constraints. While the

country has lost production capacity and economic opportunity to some extent due to such closures,

it appears that the country, by and large has not regretted about the closure of such units.

The chemical industries have now realized and have made environmental issues as an essential part

of activity in project design and they provide as much importance to environmental factors as they

do to marketing and financial aspects. It is necessary that the social activists should recognize this

positive mindset amongst the management of chemical industries and refrain from launching

negative and hate campaign.

Indian chemical industries have now have a great opportunity in the field of research and

development, in view of its large manpower of reasonably good talent and R&D facilities already

created and operating. With the WTO regime in force, Indian industries should be able to protect

their newly developed technologies and emerge competitive in the global market.

6

COMPANY PROFILE

Aditya Birla Chemicals (India) Ltd

Aditya Birla Chemicals India Ltd (formerly known as Bihar Caustic & Chemicals Ltd) is a unit of

Aditya Birla Group and one of the leading Chlor Alkali Company in India. The company is

engaged in Chlor Alkali Chemicals segment. Their products include caustic soda, liquid chlorine,

hydrochloric acid, sodium hypo chlorite, compressed hydrogen, aluminium chloride granular,

aluminium chloride powder, stable bleaching powder and electricity.

The company is having their manufacturing plant located at Palamau in Jharkahand. The

manufacturing process of the plant is latest energy efficient and environment friendly state-of-art

Membrane Cell Technology. They are having a state-of-art 30 MW Captive Power Plant to meet the

requirement of uninterrupted power supply.

History:

The Company was incorporated in the year 1976 as a joint venture between the Aditya Birla Group

and the Bihar State Industrial Development Corporation. In the year 1984, the company

commissioned the Palamau plant in Jharkhand with an initial caustic soda capacity of 33,000 TPA.

The company has since grown to become the leading caustic soda producer in the eastern region of

the country. In April 2011, the company acquired the Chloro Chemical Division of Kanoria

Chemicals and Industries for Rs 830 crore. The chemical division comprises manufacturing facility

for Chlor-alkalis, chlorine derivatives and water treatment at Renukoot in Uttar Pradesh and Salt

Works in Gujarat.

Future-Plans: The company plans to invest Rs 1,000 crore in two years for setting up Greenfield projects for

producing caustic soda of 150,000 TPA at Vilayat and another 75,000-90,000 TPA at Patalganaga

in Gujarat.

7

Lords Chloro Alkali Ltd

The products of the company include caustic soda, liquid chlorine, hydrochloric acid, bleach

liquor, bleaching powder, TCE and sodium hypo. The company sells its products to bulk

consumers. The company has a technical collaboration with Asahi Chemicals Japan, for know-how

of the membrane cell technology to manufacture caustic soda. The company exports to Nepal,

Bangladesh, South Africa, UK, Australia, etc.

Company has modernized the existing Mercury Cell Plant of 200 TPD into Membrane Cell Plant.

History

Lords Chloro Alkali Ltd. (LCAL) was incorporated in 1979, for producing and exporting a wide

range of chemicals, which commanded the market in North India. The Company was promoted by

Modi Industrial House including Modi Industries Ltd., Modi Rubber Ltd., Modi Spng. & Wvg.

Mills Ltd. & Modipon Ltd. It manufactures Caustic Soda, liquid chlorine, hydrochloric acid, and

stable bleaching powder.

The company is strategically located in the heart of North India where the demand is always more

than the supply. Modi Alkalies & Chemicals Ltd name has changed its name to Lords Chloro Alkali

Ltd and the same has been approved by the Shareholders of the Company as well as Central

Government with effect from October 01, 2003.

Future-Plans

The company is producing another DG set which is expected to be commenced very soon which

will take the production up to 70 MT.

8

Sree Rayalaseema Alkalies & Allied Chemicals Ltd

Sree Rayalaseema Alkali and Allied Chemicals, the flagship company of TGV Group, manufactures

caustic soda, liquid chlorine, hydrochloric acid, hydrogen and barium sulphate.

History

The company started commercial production in Aug.'88 with an initial installed capacity of 22,440

tpa of caustic soda. Presently the company has the capacity to produce 69500 TPA of caustic soda

The company uses Bipolar Membrane Cell Technology, the latest one in the world for the

manufacture of caustic soda and allied products. Since Chlor Alkali industry is power intensive the

company is taking necessary steps to increase its captive power generation. Initially it has installed

two D G sets with a total capacity of 12.4 MW for optimum utilization of installed capacity. The

company has also produces 3MW of power from its Wind power farm set up at a cost of Rs.11.20

part financed by IREDA to the tune of 8.37 Crore. The company has set up a power plant at Bellary

with a capacity to produce 37.8 MW of power for commercial. The Bellary plant started

commercial operation in Oct 2000.

Future-Plans

It has implemented its modernization and diversification of the castor oil derivative plant. It is

embarking on certain cost-effective and plant upgradation programmes like installing flaker facility

to convert the caustic soda lye to value-added flakes, which will also increase flexibilities in

production and storage. The company plans to set up a Rs 105-cr PVC plant in Kakinada with

financial assistance from IFCI and other financial institutions. The Company has diversified further

into the manufacture of Fatty Acids and other Derivatives not only from Castor oil but also from

other non-edible oil like Rice Bran Oil.

9

Gujarat Alkalies & Chemicals Ltd

Gujarat Alkalies and Chemicals Ltd is the single largest producer of Caustic Soda in India. The

company is a multi-product company manufacturing 26 products. The company manufactures

sodium cyanide, sodium ferrocyanide, chloromethanes, hydrochloric acid, caustic potash, potassium

carbonate, phosphoric acid (85%) and hydrogen peroxide. The company has two units located at

Vadodara (Baroda) and Dahej, both in the State of Gujarat.

The company is associated with various industries viz. Textiles, Pulp & Paper, Soaps &

Detergents, Alumina, Water Treatment, Petroleum, Fertilizers Pharmaceuticals, Agrochemicals,

Dyes & Dyes Intermediates, etc through their products. Also, they made their felt across the globe

even against stiff competition by exporting products to USA, Europe, Australia, Africa, Far &

Middle East Countries, China and South Asian Markets.

History:

Gujarat Alkalies and Chemicals Ltd was incorporated in the year 1973 in Gujarat and was

promoted by Gujarat Industrial Investment Corporation Ltd, a wholly owned company of Govt. of

Gujarat, as a core promoter. The company commenced their operations in the year 1976, with

37,425 MTPA capacity of caustic soda at their plant in Vadodara.

Future-Plans:

The company has the plan to commission the projects, namely Sulphate Removal System,

additional 100 TPD Flaker Unit, and additional 39 MW Wind Power Project in Kutch during the

financial year 2008-09. The company is having a plan to expand caustic soda plant at Dahej by 50

TPD through Debottlenecking. Also, some of the projects, namely 90 MW captive power project,

600 TPD caustic soda project, hydrazine project, hydrogen peroxide, polyols project are under

implementation.

10

RATIO ANALYSIS AND INTERPRETATION

DEBT-EQUITY RATIO

The relationship between borrowed funds and owners’ capital is a popular measure of the long-term

financial solvency of a firm. This relationship is shown by the debt-equity ratio. This ratio indicates

the relative proportion of debt and equity in financing the assets of a firm. An acceptable norm for

this ratio is considered 2:1. This ratio is computed by dividing the total by dividing the total debt of

the firm by its net worth.

0

1

2

3

4

5

2000 2002 2004 2006 2008 2010 2012

De

bt-

Equ

ity

Rat

io

Year

Aditya Birla Chemials(India) Limited

0

1

2

3

4

2000 2002 2004 2006 2008 2010 2012 De

bt-

Equ

ity

Rat

io

Year

Gujrat Alkalies & Chemicals Limited

-0.05

0

0.05

0.1

0.15

0.2

0.25

2000 2002 2004 2006 2008 2010 2012

De

bt-

Equ

ity

Rat

io

year


11

Interpretation:

An acceptable norm for this ratio is considered 2:1. A high ratio shows that the claims of creditors

are greater than those of owners. A very high ratio is unfavorable from the point of view of the

firm. A high debt company is able to borrow funds on very restrictive term and conditions. A low

debt-equity ratio implies a greater claim of owners than creditors. From the point of view of

creditors, it represents a satisfactory capital structure of the business. This ratio is on a decrease for

all the companies. So from creditor’s point of view, there is a satisfactory capital structure of the

business. In 2011, Debt-Equity ratio was highest for Sree Rayalaseema Alkali and Allied Chemicals

and lowest for Aditya Birla Chemials(India) Limited . All three except Sree Rayalaseema Alkali

and Allied Chemicals has ratio below sector average. While for Aditya Birla Chemials(India)

Limited and Gujrat Alkalies & Chemicals Limited ratio is always on decline but for Sree

Rayalaseema Alkali and Allied Chemicals its close to 3 in 2004 while it has been always low for

Lords Chloro Alkali Ltd . So Lords Chloro Alkali Ltd is not making full use of capital structure.

0

1

2

3

4

2000 2002 2004 2006 2008 2010 2012

De

bt-

Equ

ity

Rat

io

Year

Sree Rayalaseema Alkali and Allied Chemicals

0

1

2

3

4

2002 2004 2006 2008 2010 2012

Deb

t-Eq

uit

y R

atio

Year

Industry average for Chlor Alkali sector

12

CURRENT RATIO

Current Ratio is the most common ratio for measuring liquidity. It represents as :

Current ratio = Current Assets/ Current Liabilities

It is also called Working Capital Ratio. In a sound business, a current ratio of 2:1 is considered as

an ideal one. The current ratio of a firm measures its short –term solvency, i.e., its ability to meet

short-term obligations.

0

0.5

1

1.5

2

2000 2002 2004 2006 2008 2010 2012

Cu

rre

nt

Rat

io

Year

Aditya Birla Chemials(India) Limited

0

0.5

1

1.5

2000 2002 2004 2006 2008 2010 2012

Cu

rren

t R

atio

Year


0

0.5

1

1.5

2000 2002 2004 2006 2008 2010 2012

Cu

rren

t R

atio

year


13

Interpretation and Significance:

The current ratio of firm measures its short-term solvency, i.e, its ability to meet short-term

obligations. In a sound business, a current ratio of 2:1 is considered as an ideal one. It provides a

margin of safety to the creditors. It is an index of the firm’s financial stability. The current ratio

must not only be equal to current liabilities but should leave a comfortable margin of working

capital after paying of the current liabilities. A high ratio indicates sound solvency position and a

low ratio indicates inadequate working capital.

Aditya Birla Chemicals(India) Limited maintains current ratio of 1.8 which is quite high as

compared to sector average and its current ratio is also on increase which is good situation for

creditor. Sree Rayalaseema Alkali and Allied Chemicals has lowest current ratio, which is even

below sector average, indicating an inadequate working capital. Even its current ratio is also on

decrease. The main reason for the decrease in current ratio is that, the current liabilities of the

company are more than the current assets. The company should try to increase their current asset, so

that they can easily meet their short -term obligations. While Lords Chloro Alkali Ltd had very low

current ration around 2006 even below sector average at that time showing its inadequate working

0

0.5

1

1.5

2

2000 2002 2004 2006 2008 2010 2012

Cu

rren

t R

atio

year


0.8

0.85

0.9

0.95

1

2002 2004 2006 2008 2010 2012

Cu

rren

t R

atio

Year


14

capital that time but it has improved significantly with present current ratio above 1, which is more

than sector average. Sector average current ratio is also on rise but is still below 1. Gujrat Alkali has

maintained the ratio above industry average since 2006.

FIXED ASSETS TURNOVER RATIO

This ratio indicates the extent to which the investments in fixed assets contribute towards sales. On

being compared with the previous year, it indicates whether the investment in fixed assets has been

judicious or not. . It is calculated by using the following formula:

Sales or Cost of Goods Sold

Fixed Assets Turnover Ratio = ---------------------------------------------

Fixed Assets (less depreciation)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2000 2002 2004 2006 2008 2010 2012

Fixe

d A

sse

t R

atio

Year

Aditya Birla Chemicals(India) Limited

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2000 2002 2004 2006 2008 2010 2012

Fixe

d A

sset

Rat

io

Year


15

0

0.2

0.4

0.6

0.8

1

2000 2002 2004 2006 2008 2010 2012

Fixe

d A

sset

s R

atio

year


0

0.2

0.4

0.6

0.8

1

1.2

2000 2002 2004 2006 2008 2010 2012

Fixe

d A

sset

s R

atio

year


0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Fixe

d A

sset

s R

atio

Year


16

Interpretation:

Here for most of cases fixed asset ratio is less than 1. Thus sales is less than fixed asset. Also for

this sector, increase or decrease in fixed assets does not leads to increase or decrease in the sales.

For Lords Chloro Alkali Ltd, this ratio is on rise and in recent years is above industry average.

Investment in fixed asset has seemed most judicious for this company. But still its ratio is less than

1. For Aditya Birla Chemials(India) Limited and Gujrat Alkalies & Chemicals Limited its always

between 0.5 to 0.7, which is close to industry average but in recent times is slightly below it. For

Sree Rayalaseema Alkali and Allied Chemicals, ratio is above 1 in 2011 after its increase from

2010, while it had peak in the year of 2009 with ratio of 1.15 which is quite above industry average.

DEBTORS TURNOVER RATIO:

The purpose of this ratio is to discuss the credit collection power and policy of the firm. For this

ratio, a relationship is established between accounts receivables and net credit sales of the period.

0

5

10

15

20

2000 2002 2004 2006 2008 2010 2012

De

bto

rs R

atio

Year


0

1

2

3

4

5

6

7

8

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Deb

tors

Rat

io

Year


17

0

5

10

15

20

25

30

2000 2002 2004 2006 2008 2010 2012

Deb

tors

Rat

io

Year


0

2

4

6

8

10

12

14

16

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Deb

tors

Rat

io

Year


0

2

4

6

8

10

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Deb

tors

Rat

io

Year


18


Debtor’s turnover ratio indicates the efficiency of the staff entrusted with collection of book debts.

The higher the ratio is, the better it is as it would indicate that debts are being collected promptly.

Aditya Birla Chemicals(India) Limited has high ratio of about 15 in 2002 but it is ona decrease, but

then also still above industry average which shows its efficiency. For Gujrat Alkalies & Chemicals

Limited ratio is below sector average most of time since 2001 which shows the inefficiency of staff

entrusted with collection of book debts. Lords Chloro Alkali Ltd has a peak around 2006 with ratio

of 25 but its on decline in recent years but is still above sector average ratio. We can interpret that

company should improve their debt collection program so that the company gets more money for

use.

INVENTORY TURNOVER RATIO:

This ratio indicates whether investment in inventory is efficiently used or not. It, therefore,

explains whether investments in inventories are within proper limits or not. It also measures the

effectiveness of the firm’s sales efforts. The ratio is calculated as follows:

Inventory Turnover Ratio = (cost of goods sold)/ (Average stock)

Where, Cost of goods sold = Sales – Gross profit or

Cost of goods sold = (opening stock +purchases + direct expenses) - closing stock

Average stock = (opening stock + closing stock)/2

The inventory turnover ratio signifies the liquidity of the inventory. A high inventory turnover

ratio indicates brisk sales. The ratio is a measure to discover the possible trouble in the form of over

stocking. A low inventory turnover ratio results in blocking of funds in inventory. There is no

standard ratio for the inventory turnover.

Higher ratio indicates

Stock is sold out fast

Same volume of sales from less stock or more sales from same stocks

Too high ratio shows stock outs or over trading

Less working capital requirement

Lower ratio reveals Stock is sold at a slow speed

Same volume of sales from more stocks or less sales from same stocks

More working capital requirement

Too low ratios show obsolete stocks or under trading

19

0

2

4

6

8

10

12

14

16

2000 2002 2004 2006 2008 2010 2012

Inve

nto

ry R

atio

Year


0

5

10

15

20

2000 2002 2004 2006 2008 2010 2012

Inve

nto

ry R

atio

year


0

5

10

15

20

25

30

35

2000 2002 2004 2006 2008 2010 2012

Inve

nto

ry R

atio

Year


20


Businesses who carry inventory need to analyze their inventory balance on a regular basis. The inventory

turnover ratio provides information regarding the risk of potential shortages. A higher inventory turnover

ratio indicates a higher level of sales. As the company experiences higher sales, it runs the risk of selling out

of inventory before replacing it. Once can also say that higher the ratio, the more frequently the company

records sales.

All companies’ inventory ratios went down after FY 2006 due to the global economic meltdown leading to

decrement in sales.

Lord Chloro Alkali Ltd. Inventory ratio has been increasing since the starting period of examination with

some dips in between. This indicates the company’s sales have been increasing over given inventory over

time indicating the expansion & growth of the company. Since inventory ratio for the company has been

increasing and the sector’s is decreasing, it indicates that the company is growing at much faster rate than the

chlor-alkali sector.

Sree Rayalaseema Alkali and Allied Chemicals inventory ratio has been stable and high in the initial

period of observance. But after a while it decreased and now it is alternatively increasing and decreasing.

0

5

10

15

20

2000 2002 2004 2006 2008 2010 2012

Inve

nto

ory

Rat

io

Year


0

2

4

6

8

10

12

14

16

18

2002 2004 2006 2008 2010 2012

Inve

nto

ry R

atio

Ratio


21

This may be happening as the company initially had a high inventory ratio due to over selling. This meant

that the company was using its inventory to maxima as they were not able to meet the demand of the market.

Thus the over-selling lead to fall of company as when they were out of inventory people preferred their

competitors.

Aditya Birla Chemicals(India) Ltd. inventory ratios show that she was badly hit by the 2006-07 recession.

After absorbing the hit, it tried being stable but then again it is suffering from loss in sales.

Gujarat Alkalies and Chemicals Ltd inventory ratio shows that the Government owned giant was undergoing

sales loss since 2005 till the FY 2010. After that its inventory ratio increased meaning that the sales have

gone up for the company over the stocks.

Chlor-Alkali Sector Inventory ratio curve shows that there has been steady slow decrement in the inventory

ratio. This is because some of the big companies are undergoing huge losses, which are not fully covered by

the profit making companies.

Net Profit Ratio The net profit percentage is the ratio of after-tax profits to net sales. It reveals the remaining profit after all costs of production and administration has been deducted from sales, and income taxes recognized. As such, it is one of the best measures of the overall results of a firm, especially when combined with an evaluation of how well it is using its working capital.

0

0.05

0.1

0.15

0.2

0.25

0.3

0 2 4 6 8 10 12

Ne

t p

rofi

t ra

tio

year


http://www.accountingtools.com/profit-definition

http://www.accountingtools.com/definition-income-tax

http://www.accountingtools.com/definition-income-tax

http://www.accountingtools.com/dictionary-working-capital

22

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

2000 2002 2004 2006 2008 2010 2012

Ne

t p

rofi

t ra

tio

year

Gujarat Alkalies & Chemicals Ltd

-4

-3

-2

-1

0

1

2

2000 2002 2004 2006 2008 2010 2012

Ne

t p

rofi

t ra

tio

year


-0.02

-0.01

0

0.01

0.02

0.03

0.04

0.05

0.06

2000 2002 2004 2006 2008 2010 2012

Ne

t p

rofi

t ra

tio

year

Sree Rayalaseema Alkalies & Allied Chemicals Ltd

23

Interpretation:

For Aditya Birla Chemicals (India) Ltd net profit ratio is always positive and in recent years has increasing trend. It has never gone into loss in all the data available. For Gujarat Alkalies & Chemicals Ltd after loss in 2002 it has maintained a positive figure with highest net-profit ratio in 2006 but has decreasing trend after that. Lords Chloro Alkali Ltd has low net-profit ratio and has recovered from a loss recovered after 2008 but declined then after. Sree Rayalaseema Alkalies & Allied Chemicals Ltd is on decreasing trend in net-profit ratio in recent years while being is positive ,but has negative ratio in 2003 while has a peak ratio in year 2008.

RETURN ON CAPITAL EMPLOYED (ROCE(%))

This ratio is also known as return on investment. The primary objective of making investment in

any business is to obtain satisfactory return on capital invested. It indicates the return on capital

employed in the business and it can be used to show the efficiency of the business as a whole. The

higher the ratio, the more efficient use of capital employed.

Return on capital employed = (Net profit before interest, tax and dividend) / (Net capital

employed) *100

The term net capital employed refers to long-term funds supplied by the creditors and owners of the

firm. Alternately, it is equivalent to net working capital plus fixed assets.

Return on Capital Employed = Assets Turnover * Profit Margin

= (PBIT)/ (Capital Employed)*100

-12

-10

-8

-6

-4

-2

0

2

4

6

8

2000 2002 2004 2006 2008 2010 2012

RO

CE

(%)

Year


24

0

5

10

15

20

25

2000 2002 2004 2006 2008 2010 2012

RO

CE

(%)

year


0

5

10

15

20

25

30

35

2000 2002 2004 2006 2008 2010 2012

RO

CE

(%)

Year

Aditya Birla Chemicals

0

5

10

15

20

25

30

35

2000 2002 2004 2006 2008 2010 2012

RO

CE(

%)

Year

Gujrat Alkalies and Chemicals Ltd

25


Since profit is the overall objective of a business enterprise, this ratio is a barometer of the overall

performance of the enterprise. It measures how efficiently the capital employed in the business is

being used. In other words, it is also a measure how efficiently the capital employed in the business.

Even the performance of two dissimilar firms may be compared with the help of this ratio.

Furthermore, the ratio can be used to judge the borrowing policy of the enterprise.

Lord ChloroAlkali Ltd. has been undergoing huge changes in performance terms. Magnitude of the

ROCE is very low compared to other companies. From negative ROCE to a high positive value and

then again a sharp dip followed by a steep increase. Thus the company is not consistent in terms of

performance. Its efficiency is very low and it keeps on varying with time.

Sree Rayalaseema Alkali and Allied Chemicals has gone an increasing path in performance until

finding a tipping point of ROCE as 20 and then stabilizing. The company has been performing with

the moderate ROCE of 15 maintained for last two years. Its ROCE is higher than the sector’s.

Aditya Birla Chemicals(India) Ltd., even with some variations, has been working with a high

ROCE than the Chlor-Alkali Sector. But the latest trend in ROCE shows a decrement in the

performance of the company.

Gujarat Alkalies and Chemicals Ltd has worked to an epic 30% ROCE in 2005 but now is highly

under-performing in terms of utilization of capital employed for profit making. Being the biggest

player in the Chlor-Alkali Sector, its under-performance is directly visible in the sector’s decline.

The ROCE has stabilized in the last two year but at very low performance value.

0

5

10

15

20

25

2002 2004 2006 2008 2010 2012

RO

CE(

%)

Year


26

Du Pont Analysis

Dupont Model

ROE = (Profit margin)*(Asset turnover)*(Equity multiplier)

= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)

= (Net Profit/Equity)


Sample Calculation-

For FY 2011: Profit Margin = Net profit/Sales = 0.265

Asset Turnover=Sales/Net Assets = 0.69

Equity Multiplier=Net Assets/Equity= 1.07

Therefore ROE2011 = 0.265*0.69*1.07 = 19.55 (%)

Similarly Calculating, ROE (%) variation over years comes out to be:

Gujrat Alkalies and Chemicals Limited

Sample Calculation

For FY 2011: Profit Margin = Net profit/Sales = 0.080

Asset Turnover=Sales/Net Assets = 0.84

Equity Multiplier=Net Assets/Equity= 1.26

Therefore ROE2011 = 0.080* 0.84*1.26= 7.96 (%)

0

20

40

60

2000 2002 2004 2006 2008 2010 2012

RO

E(%

)

Year

Aditya Birla - ROE(%)

27

Similarly Calculating, ROE (%) variation over years comes out to be:

Lords Chloro Alkalies Ltd.

On Calculation, as done above, we found the ROE variation with time to be:


On Calculation, as done above, we found the ROE variation with time to be:

-20

-10

0

10

20

30

40

2000 2002 2004 2006 2008 2010 2012

RO

E(%

)

Year

Gujrat Alkalies - ROE(%)

-80

-60

-40

-20

0

20

2000 2002 2004 2006 2008 2010 2012

RO

E(%

)

Year

Lords Chloro - ROE(%)

-5

0

5

10

15

20

2000 2002 2004 2006 2008 2010 2012

RO

E(%

)

Year

Sree Rayalaseema Alkali - ROE(%)

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Recent events and its impact on Chlor-Alkali sector

Removal of customs duty on coal to benefit some players

Power constitutes to a major cost for Chlor alkali industry. In order to bring down the cost of

power, import duty on power plants and spares should be made nil from current 7.5%.The

government should allocate coal blocks to caustic soda and soda ash industry on a priority basis so

that the coal is available to the industry on a timely manner at a reasonable cost. Abolish customs

duty on FO currently at 5% to make power intensive Chlor Alkali industry competitive.

Government should allow duty free import of the spare parts. 95% of the Caustic Soda Industry

today is operating on Membrane Cell technology. While duty on new plants including membrane &

parts is 2.5% the spare parts of the existing plants are subject to customs duty of 10% + CVD +

ACVD. This makes the maintenance of the plants more expensive. Equal status in various free trade

agreements is not accorded to India. Exports of Caustic Soda and Soda Ash to Pakistan are still in

banned list whereas Pakistan is exporting these products to India. Expects reduction of Central

Sales Tax (CST) from 2% to 1%. Expects exemption of excise duty and sales tax on cement for

manufacture of flyash bricks by the coal-based power plant itself at its site. The Government should

further promote the chlorination of drinking water as a precautionary measure to check water-borne

diseases. The Government's local bodies should be insisted to chlorinate the water effectively. Such

a measure would help the Chlor-alkali industries for effective use of chlorine. Expects abolition of

restriction of 50% Cenvat availment on capital goods. At present the Cenvat credit rules restricts

manufacturer to avail only 50% of the credit in a financial year and the balance 50% is to be availed

in the subsequent financial year

Budget Impact

Exemption of custom duty on coal would help Chlor Alkali companies to lower their power cost

wherever they have captive power generation based on coal.Higher excise duty at 12% would have

only marginally negative impact, considering the fact that chlor alkali is an intermediate item, and

CENVAT credit would be available.

Global Melt Down

Due to the global melt down in year 2008 and dumping of material at low price, the caustic soda

sector in India was affected largely in terms of production and price realization. The average caustic

soda realization (Rs per tonne) that surged up 28% in FY2006, but the growth moderated to mere

7% in FY2006-07. Finally, the sector settled down for 4% fall in realizations in FY2007-08. But

with recovery in global markets, and relatively better demand, the sector recorded impressive 25%

rise in average realizations in FY 2008-09, but gave up most of the gains with 23% fall in

realization in FY 2009-10.

The Calendar Year 2010 had witnessed some improvement in the global economy but recovery in

the chlor-alkali industry remains slow. The international caustic prices during FY 2010-11 was

generally stable, however the prices have picked up since February 2011, The calamity in Japan had

resulted supply imbalance leading to further jump in price, since Japan is a net exporter of Caustic

Soda. The retail prices of caustic soda (Flakes) increased by about 22% to Rs 23.73 per kg in May

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2011 from Rs 19.5 per kg in the month of April 2010. On the other side the retail prices of caustic

soda (lye) surged by 39% to Rs 24.5 per kg in May 2011 from Rs 17.63 per kg in the month of

April 2010. Caustic Soda production increased by 3.5% (by 73898 tonnes) to 21.67 lakh tonne in

FY 2010-11. When we glance through the Year-on-Year (YoY) caustic soda production in the

country, it had increased by 3.25% in January 2011, 6.15% in February 2011 and 3.62% in March

2011. The Caustic Soda prices have been on upswing globally and it is expected that the first half of

2011-12 will witness buoyant Caustic Soda realizations. From second half of the FY there could be

softening of prices. On an overall basis, it is expected that the current fiscal would be better in terms

of product realizations and will see further improved capacity utilization levels. There are

indications that by 2013 United States would experience 23% decline in the net exports of Caustic

Soda. Exports from the Middle East are expected to increase by 2013 due to new chlor-alkali

capacity in Iran and Saudi Arabia, according to Merchant Research & Consulting Ltd. India is

embracing the new energy efficient and environmental friendly membrane cell technology,

currently its about 96% . Even the rest 4%, which is on Mercury Cell, are likely to be phased out

completely by 2012, as per Alkali Manufacturers Association of India. Aditya Birla Group is the

market leader in Indian chlor alkali sector, though company wise, Gujarat Alkalies & Chemicals

remains the market leader. GACL has 429000 Metric tonne (MT) of Caustic Soda and has about

18% share in the domestic Chlor-Alkali market in India. Moreover caustic soda business segment

alone constitutes around 60% of its sales and profit.

2005: Retain import duty at 20%

No major industry specific changes for chlor alkali industry. In view of the rise in global and

domestic demand, and surge in global and domestic prices, the players reported remarkable surge

in profits in the quarter ending March 2005. In the long term, players with captive power plant and

using membrane cell technology are better placed.

On the flipside, if the peak customs duty is brought down from 20%, it can lead to lower landed

cost for caustic soda, chlorine etc, which will force the domestic players to bring down the domestic

prices.

2003: Railway Budget

The reduction in soda ash freight charges, by 6.7% to Rs 57.88, benefitted producers like Tata

Chemicals, Gujarat Heavy Chemicals and Tuticorin alkali chemicals & fertilizers.

Future Outlook

Today the capacity of Caustic Soda & Soda Ash all over the world is increasing and these countries

are exporting Caustic Soda & Soda Ash to India. In India, the industry has to take the shelter of

Anti Dumping & Safeguard duty, which again is not helpful sometimes. However marginal benefit

for Chlor Alkali companies came in for exempt of custom duty on coal. Exemption of custom duty

on coal would help Chlor Alkali companies to lower their power cost wherever they have captive

power generation based on coal.

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Soda Ash with the Chemical Name Sodium Carbonate is a basic inorganic chemical and is used for

the production of detergents (42%), glass (23%), chemicals (17%), sodium silicate, pulp & paper

and water treatment. Total installed capacity in India is only 3 million MT with all the major

industry players located in the state of Gujarat due to the closeness and ready availability of the

main mother earth materials namely limestone and salt. It plays crucial role in meeting the daily

needs of the common man and also contributes significantly to the industrial and economic growth

of the nation. Soda ash is available in four standard forms as light, medium, dense and granular

according to the bulk density to suit various industrial requirements.

Soda ash accounts for 39% of total alkali chemical production of FY2011, which is the highest in

the segment, followed by caustic soda which accounts for 36%. The production of soda ash

increased by 12% to 22.98 lakh tonne in FY 2011. The last seven-year trend (from FY05 to FY11)

of soda ash production indicates that the production had dipped continuously in three years. i.e.

FY07 (by 10%) , FY08 (by 3%) and FY09 (by 0.82%). Thereafter it started to improve due to the

pick up in demand.

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CONCLUSION

The present business world is becoming more complex because of its dynamic nature. The chemical

industry provides an assured market for manufacture of pulp, textiles, soaps, and detergents,

pesticides, aluminum, petrochemicals, drugs& pharmaceuticals, oil refining, etc. The industry had

to be rejuvenated and diversified to produce chemicals viz. caustic soda lye and flakes, liquid

chlorine, hydrochloric acid and sodium hypochlorite.


Conclusion

For this company debt-equity ratio is on decline so creditor so favorable from point of view of creditor. But this in 2011 this company had this ratio even smaller than sector average so its not utilizing the capital structure to full extent. The current ratio of this industry is above sector average show a lot capability of this company to invest. It’s a good sign because of high current ratio and low debt-equity ratio this company can go for investment in asset base. But in recent times its fixed asset turnover ratio is below sector average so its better for this company to not go for asset base. For Aditya Birla Chemicals (India) Ltd net profit ratio is always positive but in recent years has decreasing trend. It has never gone into loss in all

the data available. Aditya Birla Chemials(India) Limited has Debt turnover ratio of about 15 in 2002 but its on decrease but is still above industry average which shows its efficiency which shows the efficiency of company in debt collection. Inventory ratios is quite close to sector average which is quite

good as they produce enough to meet demand so that ratio is not too high while gets sold quickly so that not

low. In the recent years company is working on ROCE better than sector average but is on decreasing trend.

Suggestions

Company should focus on increasing its fixed asset turnover as it has very low debt equity ratio and high

current ratio, it will not be difficult to shift fund to fixed assets. This will increase its fixed asset turnover,

which is low right now.


Conclusion

Debt equity ratio has been always low for Lords Chloro Alkali Ltd . So Lords Chloro Alkali Ltd is not making full use of capital structure. While Lords Chloro Alkali Ltd had very low current ratio around 2006 even below sector average at that time showing its inadequate working capital that time but it has improved significantly with present current ratio above 1, which is more than sector average . For Lords Chloro Alkali Ltd, fixed asset turnover ratio is on rise and in recent years is above industry average. Investment in fixed asset has seemed most judicious for this company. Lords Chloro Alkali Ltd has a peak around 2006 with ratio of 25 but its on decline in recent years but is still above sector average ratio. We can interpret that company should improve their debt collection program so that the company gets more money for use. Lord Chloro Alkali Ltd. Inventory ratio has been increasing since the starting period of examination with some dips in between. This indicates the company’s sales have been increasing over given inventory over time

32

indicating the expansion & growth of the company. Lord ChloroAlkali Ltd. has been undergoing huge changes in performance terms. Magnitude of the ROCE is very low compared to other companies. From negative ROCE to a high positive value and then again a sharp dip followed by a steep increase. Thus the company is not consistent in terms of performance . Lords Chloro Alkali Ltd has low net-profit ratio and has recovered from loss after 2008 but declined then after.

Suggestions

It need to increase its current ratio and inventory turnover ratio. Current ratio can be increased by investing in current asset.

Sree Rayalaseema Alkalies & Allied Chemicals Ltd Conclusions In 2011, Debt-Equity ratio was highest for Sree Rayalaseema Alkali and Allied Chemicals which shows event after decreasing trend in recent years it has so much debt part. Sree Rayalaseema Alkali and Allied Chemicals has lowest current ratio, which is even below sector average, indicating an inadequate working capital. Even its current ratio is also on decrease. The main reason for the decrease in current ratio is that, the current liabilities of the company are more than the current assets. The company should try to increase their current asset, so that they can easily meet their short -term obligations. For Sree Rayalaseema Alkali and Allied Chemicals,fixed asset turnover ratio is above 1 in 2011 after its increase from 2010, while it had peak in the year of 2009 with ratio of 1.15 which is quite above industry average. Debtors turnover ratio of this company is close to industry average . Sree Rayalaseema Alkali and Allied Chemicals inventory ratio has been stable and high in the initial period of observance. But after a while it decreased and now it is alternatively increasing and decreasing. This may be happening as the company initially had a high inventory ratio due to over selling. This meant that the company was using its inventory to maxima as they were not able to meet the demand of the market. Sree Rayalaseema Alkalies & Allied Chemicals Ltd is on decreasing trend in net-profit ratio in recent years while being is positive ,but has negative ratio in 2003 while has a peak ratio in year 2008. Sree Rayalaseema Alkali and Allied Chemicals has gone an increasing path in performance until finding a tipping point of ROCE as 20 and then stabilizing. The company has been performing with the moderate ROCE of 15 maintained for last two years.

Suggestions This Company need to increase its current ratio and increase its debtors turnover ratio which is just close to industry average.

Gujarat Alkalies & Chemicals Limited

Conclusion

Gujarat Alkali has maintained a low debt-equit ratio as compared to industry average which is also in decreasing trending which in favorable to the creditor. Its current ratio is close to industry

33

average which is good. Fixed asset turnover of Gujrat Alkalies & Chemicals Limited is always between 0.5 to 0.7, which is close to industry average but in recent times is slightly below it.This show company invest little in fixed asset but is also having low current asset. For Gujrat Alkalies & Chemicals Limited debtor turnover ratio is below sector average most of time since 2001 which shows the inefficiency of staff entrusted with collection of book debts. Gujarat Alkalies and Chemicals Ltd inventory ratio shows that the Government owned giant was undergoing sales loss since 2005 till the FY 2010. After that its inventory ratio increased meaning that the sales have gone up for the company over the stocks. . For Gujarat Alkalies & Chemicals Ltd after loss in 2002 it has maintained a positive figure with highest net-profit ratio in 2006 but has decreasing trend after that. Gujarat Alkalies and Chemicals Ltd has worked to an epic 30% ROCE in 2005 but now is highly under-performing in terms of utilization of capital employed for profit making. Being the biggest player in the Chlor-Alkali Sector, its under-performance is directly visible in the sector’s decline.

Suggestions

Company should work to increase its debt turnover ratio to have money for working capital management which needs increasing efficiency of staff.

Future Aspect

The capacity of the industry is under-utilized. However, with improvement in the GDP growth

rate, which is closely linked with the growth of the manufacturing sector the demand for the

Chloro-Alkali sector is continuously growing by 8-10%.

With the Government of India agreeing to lower import tariffs there will be an increased risk of

cheap imports and further erosion of realizations. In order to enable the industry to compete,

Government should allow modvat/cenvat of several duties, taxes, cess etc. levied both at the

Central and State levels on the inputs to reduce some of the burden, and also reduce duties on

coal and furnace oil required for power generation. The China Government has withdrawn the

benefit of VAT Taxes from the Export of Caustic, which may give better realization on the sale

of caustic soda in the domestic market.

There has been continuous pressure on ECU realizabons due to softening of Caustic Soda Prices

internationally and dumping resorted to by large low energy-cost manufacturers. The Chlorine

demand is likely to increase by 3%-4% against caustic soda demand by 8%-10% therefore, due to

mismatch in demand; the industries may regulate the production of caustic.

Regarding Publication We are highly interested in working further in order to get a publication.

Contact Details Aakash Sharma – 9911847325

Ajitesh Abhishek - 9891428224

Financial Analysis of Chlor-Alkali Industry

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