Case Study: Reliance Industries Limited - Funding and Growth Analysis (2011-2015)

This document analyzes Reliance Industries Limited's growth between March 2011 and March 2015, focusing on how the company funded its expansion.

Background

Reliance Industries experienced significant asset growth during this period, increasing from ₹2,84,719 crore to ₹3,97,785 crore. This represents an increase of ₹1,13,066 crore. The key question is: how did the company finance this growth?

Analysis Approach

We will analyze the changes in the company's balance sheet, focusing on the funding side (liabilities and equity). The primary sources of funding are:

• Shareholders' Funds (Internal Accruals): Represents retained earnings and equity contributions.
• Non-Current Liabilities (Long-Term Borrowings): Includes long-term loans and other long-term obligations.
• Current Liabilities: Short-term obligations to suppliers, lenders, and others.

By comparing the balance sheet figures for March 2011 and March 2015, we can determine the contribution of each funding source.

Funding Analysis

The following table summarizes the changes in funding sources (in ₹ crore):

Funding Source	March 2011	March 2015	Difference	Percentage of Total Funding
Shareholders' Funds	1,51,589	2,16,176	64,627	57%
Non-Current Liabilities	62,686	90,308	27,622	24% (Breakdown Below)
Long-Term Borrowings	51,124	76,227	25,103	22%
Deferred Tax Liabilities	N/A	N/A	1,115	1%
Long-Term Provisions	N/A	N/A	1,404	1%
Current Liabilities	70,484	91,301	20,817	18% (Breakdown Below)
Short-Term Borrowings	N/A	N/A	610	1%
Trade Payables (Suppliers Credit)	34,844	54,470	19,626	17%
Other Current Liabilities + Short Term Provisions	N/A	N/A	581	1%
Total Funding			1,13,066	100%

Key Observations on Funding:

• Internal Accruals (Shareholders' Funds): The primary source of funding (57%), indicating strong profitability and retention of earnings.
• Long-Term Borrowings: The second largest source (22%), suggesting reliance on debt financing for long-term investments.
• Suppliers' Credit (Trade Payables): Contributed 17%, indicating the company leveraged its relationships with suppliers for financing.
• Other Sources: Deferred tax liabilities, long-term provisions, short-term borrowings, and other current liabilities collectively contributed a smaller portion (around 4%).

Investment Analysis

The analysis also examined where the funds were invested, focusing on changes in assets:

• Non-Current Assets: Increased by ₹92,000 crore, indicating significant long-term investments. Key components include:
  • Capital Work in Progress: A substantial portion (approximately ₹65,000 crore) was allocated to ongoing construction projects, suggesting future expansion.
  • Investments in Subsidiaries: Around ₹50,000 crore was invested in subsidiary companies, reflecting Reliance's strategy of developing and then potentially merging subsidiaries.
• Current Assets: Increased by ₹20,275 crore, with the primary focus on:
  • Current Investments: Funds temporarily parked in financial instruments for short-term needs.
  • Inventories: A moderate increase of approximately ₹7,000 crore.
  • Receivables: Decreased, suggesting improved collection efficiency.

Overall Interpretation

• Reliance Industries primarily funded its growth through internal accruals (retained earnings), followed by long-term borrowings and suppliers' credit.
• The majority of the funds were invested in non-current assets, particularly capital work in progress and investments in subsidiaries, indicating a focus on long-term expansion.
• The reliance on suppliers' credit, while contributing significantly to funding, carries some risk, as it involves using short-term financing for long-term investments.

Case Study: Tata Motors - Funding of Losses (2014-2015)

This document analyzes how Tata Motors funded its losses during the financial year 2014-15.

Background

Tata Motors incurred a loss in 2014-15. Losses must be financed through various means, such as:

• Raising fresh equity.
• Taking on new debt (loans).
• Selling assets.

This analysis examines how Tata Motors addressed its losses using its balance sheets for 2014 and 2015.

Analysis Approach

By comparing the balance sheets for 2014 and 2015, we can identify changes in key accounts that indicate how the losses were funded. The primary focus is on changes in:

• Shareholders' Funds (Reserves and Surplus): A decrease indicates losses being absorbed.
• Non-Current Liabilities (Long-Term Borrowings): An increase suggests new debt financing.
• Current Liabilities (Short-Term Borrowings): An increase indicates reliance on short-term debt.
• Assets (Current and Non-Current): A decrease, especially in investments, suggests asset sales.

Analysis of Tata Motors' Balance Sheet Changes

Impact on Shareholders' Funds:

• Shareholders' Funds decreased from ₹19,177 crore in 2014 to ₹14,863 crore in 2015.
• Reserves and Surplus decreased from ₹18,510 crore to ₹14,196 crore.
• This represents a loss of approximately ₹4,314 crore (18510-14196), which is close to the reported loss of ₹4,739 crore. The difference is due to other minor changes in the shareholders’ fund.

Funding Sources:

• Non-Current Liabilities (Primarily Long-Term Borrowings): Increased by ₹2,950 crore (Long term borrowing increased from ₹9,746 to ₹12,319). This indicates the company raised long-term debt to partially cover the losses.
• Current Liabilities (Primarily Short-Term Borrowings): Increased by ₹1,573 crore (Net increase after considering changes in other current liabilities like Trade payables. Short term borrowing alone increased by ₹3000 crore from ₹4700 to ₹7700). This shows reliance on short-term debt.
• Sale of Non-Current Investments: Decreased by ₹1,625 crore (Non-current Investment decreased from ₹18,358 to ₹16,967). This indicates the company sold some investments to generate cash.

Total Funds Raised:

The total funds raised through these sources are ₹2,950 crore + ₹1,573 crore + ₹1,625 crore = ₹6,148 crore.

Application of Funds:

The company had a loss of ₹4,739 crore. The additional funds raised (₹6,148 crore) were used for:

• Funding the losses: ₹4,739 crore.
• Investment in Current Assets: ₹1,834 crore (Current Assets increased from ₹6,739 crore to ₹8,573 crore). A significant portion of this investment went into inventory, which increased by approximately ₹1,000 crore.

Reconciliation:

The funds raised (₹6,148 crore) exceed the reported loss (₹4,739 crore). The difference (₹1,409 crore) is accounted for by the net increase in current assets.

Conclusion

Tata Motors funded its losses in 2014-15 primarily through a combination of:

• Increased long-term and short-term borrowings.
• Sale of non-current investments.

The funds raised not only covered the losses but also financed additional investments in current assets, particularly inventory. This analysis demonstrates how comparing balance sheets over two periods can reveal how a company manages its finances during periods of losses and how it allocates its resources.

Case Study: Comparing Tata Steel and SAIL Balance Sheets (2014-2015)

This document compares the balance sheets of Tata Steel and SAIL (Steel Authority of India Limited) for 2014 and 2015 to identify similarities and differences between the two companies in the steel industry.

Background

Both Tata Steel and SAIL operate in the steel industry and are of comparable size in terms of operating revenue (approximately ₹45,000 crore and ₹41,000 crore, respectively). However, their balance sheets reveal significant differences in their financial structures and operating strategies.

Key Observations

Overall Size and Efficiency:

SAIL's total assets (around ₹99,000 crore) are significantly larger than Tata Steel's (around ₹67,000 crore). However, Tata Steel generates similar revenue with considerably fewer assets, suggesting greater asset utilization efficiency.

Funding Structure (Liabilities and Equity):

Item	Tata Steel 2014 (%)	Tata Steel 2015 (%)	SAIL 2014 (%)	SAIL 2015 (%)	Key Observations
Shareholders' Funds	46	51	46	43	Tata Steel strengthened its equity position, while SAIL's equity contribution decreased, possibly due to losses or other reasons.
Non-Current Liabilities	~24	~24	~23	~22	Both companies have similar percentages of non-current liabilities, with a slight decrease for SAIL.
Current Liabilities	29	24	30	34	Tata Steel reduced its reliance on current liabilities, while SAIL increased its dependence on them. This is a crucial difference.
Short Term Borrowing	~0	~0	~14	~14	Tata Steel uses almost no short term borrowing whereas SAIL relies heavily on it.
Trade Payables (Suppliers Credit)	~7	~7	~3	~3	Tata Steel is able to secure better credit terms from suppliers compared to SAIL.

Asset Structure:

Item	Tata Steel 2014 (%)	Tata Steel 2015 (%)	SAIL 2014 (%)	SAIL 2015 (%)	Key Observations
Tangible Assets	~67	~71	~65	~65	Both companies have significant investments in tangible assets. Tata Steel has increased its investment in tangible assets.
Capital Work in Progress	~29	~34	~36	~30	Tata Steel is in a phase of expansion (increasing capital work in progress), while SAIL seems to be completing projects (decreasing capital work in progress).
Current Assets	~18	~17	~28	~28	Tata Steel operates with significantly lower levels of current assets compared to SAIL, indicating greater efficiency in working capital management.
Inventories	~12	~12	~17	~17	Tata Steel maintains lower inventory levels relative to its size, suggesting more efficient inventory management.
Receivables	~2	~2	~6	~3	Tata Steel collects receivables faster than SAIL.

Key Differences and Similarities

• Asset Utilization: Tata Steel demonstrates higher asset utilization efficiency, generating similar revenue with fewer assets.
• Funding Strategy: Tata Steel relies more on shareholders' funds (internal accruals) and less on current liabilities (especially short-term borrowings) compared to SAIL. SAIL relies heavily on short term borrowing.
• Working Capital Management: Tata Steel exhibits more efficient working capital management, with lower levels of inventory and receivables.
• Capital Expenditure: Tata Steel is actively expanding its fixed assets (increasing capital work in progress), while SAIL appears to be consolidating its investments.
• Supplier Relationships: Tata Steel has stronger relationships with its suppliers, securing more favorable credit terms (higher trade payables).

Case Study: Comparing CEAT Limited and Apollo Tyres Income Statements (2013-2015)

This document compares the income statements of CEAT Limited and Apollo Tyres for the years 2013, 2014, and 2015 to analyze their performance and identify similarities and differences.

Background

Both CEAT Limited and Apollo Tyres are leading tire manufacturers. While Apollo Tyres is a larger company, both experienced revenue and profit growth between 2013 and 2015. This analysis aims to understand the drivers behind this growth.

Analysis Approach

The analysis involves:

1. Comparing Revenue and Profit Growth: Examining the absolute and percentage changes in revenue and profit.
2. Analyzing Cost Structure: Converting expenses to percentages of revenue to identify changes in cost management.
3. Relating Cost Changes to Profitability: Connecting changes in cost structure to changes in profit margins.

Key Observations

Revenue and Profit Growth:

• CEAT Limited: Revenue increased by approximately 15% (around ₹700 crore increase from ₹4,900 crore to ₹5,620 crore), while profit nearly tripled (from ₹106 crore to ₹298 crore).
• Apollo Tyres: Revenue increased by approximately 4.7% (around ₹400 crore increase from ₹8,500 crore to ₹8,900 crore), while profit more than doubled (from ₹312 crore to ₹645 crore).

This highlights that both companies experienced significant profit growth despite relatively modest revenue growth.

Cost Structure Analysis (as % of Revenue):

Item	CEAT 2013 (%)	CEAT 2014 (%)	CEAT 2015 (%)	Apollo Tyres 2013 (%)	Apollo Tyres 2014 (%)	Apollo Tyres 2015 (%)	Key Observations
Raw Material Cost	68	64	58	69	65	60	Both companies significantly reduced raw material costs as a percentage of revenue (by around 10%). This is a major driver of increased profitability.
Employee Expenses	~5	~5	~5	~5	~5	~5	Employee expenses remained relatively stable for both companies.
Finance Cost	~4	~3	~2	~3	~2	~2	Finance costs decreased for both companies, which could be due to lower borrowing or lower interest rates.
Depreciation/Amortization	~2	~2	~2	~3	~3	~3	Depreciation/Amortization remained relatively stable.
Other Expenses	17	18	21	17	18	16	While both companies saw some increase in other expenses, Apollo Tyres managed these expenses better than CEAT.
Total Expenses	96	92	92	94	93	91	Apollo Tyres consistently managed to keep their total expenses lower as a percentage of revenue compared to CEAT.
Tax Expenses	~2	~2	~3	~2	~2	~3	Tax expenses remained relatively stable.
Net Profit Margin	2	5	5	4	5	7	Both companies significantly improved their net profit margins. CEAT improved from 2% to 5%, while Apollo Tyres improved from 4% to 7%. This increase is a direct result of decreasing costs (especially raw materials) and increasing revenue.

Impact of Absolute Revenue Increase:

The substantial increase in absolute profit is a result of the combined effect of:

• Increased Net Profit Margin: Due to cost control, especially in raw materials.
• Increased Revenue Base: Applying the higher profit margin to a larger revenue base results in a significantly larger absolute profit.

Example (CEAT):

• 2013: ₹4,900 crore revenue * 2% margin = ₹98 crore profit
• 2015: ₹5,620 crore revenue * 5% margin = ₹281 crore profit (approx.)

A similar effect is observed for Apollo Tyres.

Summary of Key Findings

• Both CEAT and Apollo Tyres significantly improved their profitability between 2013 and 2015.
• The primary driver of this improved profitability was a reduction in raw material costs as a percentage of revenue.
• Apollo Tyres managed other expenses more effectively than CEAT.
• The combination of improved profit margins and increased revenue resulted in substantial increases in absolute profit for both companies.
• CEAT experienced a more significant revenue increase, contributing to its larger profit growth in absolute terms.

Case Study: REI Agro Limited - The Importance of Cash Flow Analysis

This case study examines REI Agro Limited, a former major trader of Basmati rice, to illustrate the importance of analyzing the cash flow statement alongside the income statement and balance sheet. The company's financial data from March 2006 to March 2010 initially paints a picture of rapid growth and increasing profitability. However, a closer look at the cash flow statement reveals a different story, ultimately foreshadowing the company's eventual collapse.

Initial Observations (2006-2010)

Deeper Analysis

The negative operating cash flow, coupled with rapidly increasing inventory levels, prompted further investigation.

• Inventory Analysis: Inventory as a percentage of sales increased dramatically from 62% in 2006 to 95% by 2009. This suggested the company was holding excessive inventory, which could indicate overvaluation.
• The Inventory Overvaluation Hypothesis: The case study presents a simple example to demonstrate how inflating inventory values can create artificial profits. By reducing the cost of goods sold (COGS) through inflated inventory, a company can report higher profits without corresponding cash inflows.
• Connecting the Dots: The negative operating cash flow, combined with the inflated inventory levels, strongly suggested that REI Agro was overvaluing its inventory to inflate profits. This manipulation masked the company's true financial condition.

The Aftermath (2011-2016)

Data from March 2011 to March 2016 revealed the consequences of this manipulation:

• Declining Performance: Sales growth slowed, and profits began to decline, eventually turning into substantial losses.
• Inventory Correction: In 2015, the company's inventory value drastically decreased (from ₹3,283 crore to ₹261 crore). This correction resulted in a massive loss of ₹5,494 crore, exposing the prior overvaluation.
• Company Collapse: By 2017, the company ceased operations.
• Stock Price Decline: The company's stock price, initially high, steadily declined, reflecting market concerns about the company's true financial health.

Key Takeaways

• Importance of Cash Flow Statement: This case highlights the crucial role of the cash flow statement in assessing the reliability of reported profits. While the income statement can be manipulated, the cash flow statement provides a more accurate picture of a company's cash generation and usage.
• Inventory Management: Rapidly increasing inventory levels, especially as a percentage of sales, should raise red flags. It can be a sign of overvaluation or declining sales.
• Adjusted Accrual Profit: Comparing adjusted accrual profit (PBDIT - Taxes - Other Income) with cash flow from operating activities can help identify potential manipulation. Significant discrepancies between the two warrant further scrutiny.
• Lender and Investor Due Diligence: Lenders and investors should not rely solely on the income statement. A thorough analysis of the cash flow statement and balance sheet is essential for making informed decisions.
• Market Signals: Declining stock prices despite reported profits can be a warning sign of underlying financial problems.