View
223
Download
0
Category
Preview:
Citation preview
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
1/173
FINANCIAL ANALYSIS AND COST REDUCTION
PROGRAM IN ICICI BANK LTD.
Dissertation submitted to thePADMASHREE DR.D.Y.PATIL UNIVERSITY
In partial fulfillment of the requirements for the award of the
Degree of
MASTERS IN BUSINESS ADMINISTRATION
Submitted by
MANISHA SHELAR
Roll No .MBA-COR-0801066
Research Guide
MS. RUPALI PATIL
Department of Business Management
Padmashree Dr. D.Y. Patil University
CBD Belapur, Navi Mumbai
MARCH 2010
1
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
2/173
FINANCIAL ANALYSIS AND COST REDUCTION
PROGRAM IN ICICI BANK LTD.
Dissertation submitted to thePADMASHREE DR.D.Y.PATIL UNIVERSITY
In partial fulfillment of the requirements for the award of
the Degree of
MASTERS IN BUSINESS ADMINISTRATION
Submitted by
MANISHA SHELAR
Roll No . MBA-COR-0801066
Rsearch Guide
MS. RUPALI PATIL
Department of Business Management
Padmashree Dr. D.Y. Patil University
CBD Belapur, Navi Mumbai
MARCH 2010
2
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
3/173
DECLARATION
I hereby declare that the dissertation FINANCIAL ANALYSIS
AND COST REDUCTION PROGRAM IN ICICI BANK LTD.
submitted for the MBA Degree at Padmashree Dr. D. Y. Patil
Universitys Department of Business Management is my original
work and the dissertation has not formed the basis for the
award of any degree, associate ship, fellowship or any other
similar titles.
Place: Mumbai
Date:
Signature of the
student
3
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
4/173
CERTIFICATE
This is to certify that the dissertation entitled FINANCIAL
ANALYSIS AND COST REDUCTION PROGRAM IN ICICI BANK
LTD. is the bonafide research work carried out by Ms. Manisha
Shelar student of MBA, at Padmashree Dr. D. Y. Patil University,
Department of Business Management during the year 200810,
in partial fulfillment of the requirements for the award of the
Masters in Business Management and that the dissertation has
not formed the basis for the award previously of any degree,diploma, associate ship, fellowship or any other title.
Ms. Rupali Patil
(Project Guide)
Dr. R. Gopal
(Director)
Department of Business Mgt,
Padmashree Dr. D.Y. Patil University
Place: Mumbai
Date:
4
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
5/173
ACKNOWLEDGEMENT
It gives me great pleasure in submitting this final project
report on FINANCIAL ANALYSIS AND COST REDUCTION
PROGRAM IN ICICI BANK LTD. I thank Ms. Rupali Patil for
guiding me throughout this project work and also for motivating
me in different ways. She has been a tremendous helping hand
in completing this difficult task. I am grateful for having an easy
or any time access to such knowledgeable and guiding spirit.
I feel there is ample scope of improvement upon the work of this
nature and shall be thankful if any suggestion is offered for its
improvement.
I would like to extent my deep sense of gratitude to
my family, friends and all whom guided and helped
me during completion of this report.
Place: Mumbai
Date:
Signature of the student
Chapter No. Content Page
5
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
6/173
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
7/173
8.3 History 728.4 Board of Directors 758.5 Why ICICI Bank Leads 76
8.6SUBSIDIARIES/JOINT VENTURE/
ASSOCIATES77
8.7 Awards in 2009 809. Data analysis and interpretation 83
9.1 Comparative Statement 849.2 Trend analysis 95
9.3 Ratio analysis 101
10. Cost Reduction Process10.1.1 Introduction 11310.1.2 Definition 11410.1.3 Cost control 11610.1.4 Technique of Cost Reduction 117
10.1.5Non-Conventional Approach for cost
reduction120
10.1.6 Cost Reduction Process 121
10.1.7Implementing Cost reduction
program121
10.1.8 Benefits of cost reduction 12310.1.9 Fish Bone Diagram for cost
reduction program124
10.1.10 Precautions in Implementations 12510.1.11 Advantages of Cost Reduction 126
10.1.12A few applications of cost reduction
strategies.127
10.2Cost Reduction Program in ICICI
Bank129
10.2.1Areas for cost reductions in ICICI
Bank Ltd.130
10.2.2 Cuts in ICICI Bank Ltd. 13110.2.3 Cost Reduction strategies of ICICI 132
7
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
8/173
bank ltd.11. Finding 13912 Suggestion 14213 Conclusion 144
14. Annexure 14715. Bibliography 155
8
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
9/173
A. List of Graphs
Graph No. Title Page no.
1 Trend of Profit & Loss a/c 92
2 Trend of Capital & Liability 97
3 Trend of Assets 98
4 Current Ratio 102
5 Liquid Ratio 104
6 Earning per share 106
7 Return on capital employed 108
8 Proprietary ratio 110
9 Areas of Making Cost Reduction 130
10 Cuts in ICICI Bank 131
9
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
10/173
B. List of Chart
CHART
NO.TITLE PAGE NO.
1. Classification of Financial Analysis 262. Classification of Rato 38
3. Cost Reduction Program Structure 1224. Benefits of Cost Reduction 1235. Fish Bone Diagram 124
10
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
11/173
C. List of Table
Table No. Title Page No.1. Background Of ICICI 742. Subsidiaries 783. Comparative Profit AND Loss a/c 844. Comparative Balance Sheet 875. Trend Analysis of Profit and Loss 906. Trend Analysis of Balance Sheet 95
7. Current Ratio 1018. Liquid Ratio 1039. Earning per share 10510. Return on capital employed 10711. Proprietary ratio 109
12.Differences between Cost Control &
Cost Reduction116
D. List of Abbreviations
11
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
12/173
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
13/173
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
14/173
financial statement helps in making the future decision and
strategies. Therefore, it is very necessary for every organization
whether it is a financial or manufacturing etc. to make financial
statement and to analysis it.
ICICI Bank was originally promoted in 1994 by ICICI Limited, an
Indian financial institution, and was its wholly owned subsidiary.
Income statements of the ICICI motors for years 99-00 to 05-06 are
the business mirrors, which reflect the financial position and
operating strength and weakness of the concern. Income statementanalysis which is done by using ratio analysis and trend analysis give
the true picture of the company. Cost reduction is the true medicine
for the revival of the company during the decline of the company
which is studied in this project. The big positive of the cost reduction
initiative goes beyond the statistics of money saved. The crisis
unified the company. Companies have emerged from this as phoenix
In order to understand and analysis Ratio I have used profit and loss
and balance sheet of both banks. The analysis showed variousaspect of bank regarding their financial system. Observation also
indicated most widely emphasized goal of the firm is to maximize the
value of the firm to its to meet the long term and short term
14
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
15/173
requirements. Funds are invariably required to carry on the various
activities of a business. on the basis of ratio analysis I have
suggested some issues which will helpful to bank regarding their
financial systems analysis of financial statements helped me to knowhow ration analysis helps the banker to know the financial position of
the business. Among the various tools for evaluating the financial
statements, ratio analysis is the most widely used tool, as it helps us
to measure the financial and operational performance of any
business.
In this project, the concepts of Cost reduction are used in such amanner that it can be made more effective, emphasizing more on the
role of management, explaining the factor behind success and failure
of such analysis within the organization, accentuating its application
in Banking Sector and also highlighting Cost reduction concept, cost
reduction process & strategies and so on. There is a case study on
Cost reduction programmers in ICICI Bank.
15
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
16/173
Chapter 2
Introduction
Every financial manager is involved in financial decision making and
financial planning in order to take right decision at right time, heshould be equipped with sufficient past and present information about
the firm and its operations and how it is changing overtime. Much of
this information that is used by financial manager to take various
16
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
17/173
decisions and to plan for the future is derived from the financial
statements. The project, is to analyze the financial statements and to
study different ratios over the period of 5 years to determine the
financial position of ICICI Bank.Financial analysis involves the use of various financial statements.
These statements do several things. First, the balance sheet
summarizes the assets, liabilities and owners equity of a business at
moment in time, usually the end of a year or a quarter. Next the
income statement summarizes the revenues and expenses of the
firm over a period of time while balance sheet represents a snapshotof the firm s financial position at a moment in time.
Financial management is planning and controlling of financial
resources of a firm with a specific objective. Since, financial
management as a separate discipline is of recent origin, it is still in a
developing stage. It is very crucial for an organization to manage its
funds effectively and efficiently. Financial management has assumed
greater importance today as the financial strategies required to
survive in the competitive environment have become very important.
In the financial markets also new instruments and concepts arecoming and one must say that a finance manager of today is
operating in a more complex environment. A study of theories and
concepts of financial management has therefore become a part of
17
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
18/173
paramount importance for academics as well as for practitioners but
there are many concepts and theories about which controversies
exist as no unanimous opinion is reached as yet. The project, further
aims at discussing and understanding the concepts of financialmanagement of ICICI Bank; the functions expect to be performed by
the financial management as well as the objectives of financial
managements.
18
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
19/173
Chapter 3
Objective of study
19
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
20/173
Objective of study
To Analysis ICICI Bank Financial Statement To understand the importance of financial statement analysis,
calculate the ratios, and also analyze them. To study the ICICI Bank financial position and market standing
through the ratio Analysis and cost reduction programmes Through the net profit ratio and other profitability ratio,
understand the profitability position of ICICI bank. Evaluating companys performance relating to Financial
Statement Analysis. To know the liquidity position of the company, with the help of
Current ratio. How the Cost Reduction process works.
20
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
21/173
Chapter 4
Research Methodology
21
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
22/173
Research methodology
Research Methodology is a systematic method of discovering newfacts or verifying old facts, their sequence, inter-relationship, casual
explanation and the natural laws which governs them.
It covers the systematic approach concerning generalization and the
formulation of the theory. Different stages involved in research
consists of enacting the problem, formulating a hypothesis, collecting
the facts or data, analyzing the facts and reaching certain conclusioneither in the form of solution towards the concerned problem or in
generalization for some theoretical formulation.
The main objective of the study is to determine and analyze the
financial position by two ways:
1. Primary Data: Ratio Calculation Graphical Representation Interviews with finance manager.
22
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
23/173
2. Secondary Data:
Secondary data consist of the information that already exists or
someone has collected it for specific purpose. This data was
collected by: The company profile was collected from website of
www.icicibank.com
www.icicidirect.com
Books related to Financial Management.
Reference to the various report, material, published by the
company.
23
http://www.icicibank.com/http://www.icicidirect.com/http://www.icicibank.com/http://www.icicidirect.com/8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
24/173
Chapter 5
Limitations of the study
24
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
25/173
Limitations of the study
The limitations of the study can be as follows in the process of
the research. Companies are being heisted to provide to right or valid data
which is mush important for study. Consumption Time frame
Primary data can be bias depending upon the individuals view Dynamic market economy and business opportunities Position of Indian economy in coming years
25
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
26/173
Chapter 6
Review of literature
Strategic and Financial Performance Implications of Global
Sourcing Strategy: A contingency Analysis
26
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
27/173
Using a contingency model of global sourcing strategy, this study
investigated the moderating effects of sourcing related factors on
the relationship between sourcing strategy and a products strategicand financial performance. The results lent some support to the
contingency model of global sourcing strategy in that product
innovation, process innovation and asset specificity were significant
moderator variables for financial, but not strategic , performance.
However, the results provided no support for bargaining power of
suppliers and transaction frequency as moderator variables. In other words, in achieving high financial performance for a product, whether
a particular sourcing strategy should be used for a particular product
depended on the levels of product innovation , process innovation
and asset specificity
Several unique financial characteristics differentiate a cooperative
from an investor-oriented firm (IOF). When evaluating the
cooperatives performance, comparing a cooperatives financial
position with an IOF can be misleading for those unfamiliar with these
characteristics. This report was written to help boards and managers
assess the financial performance of their cooperatives and to
familiarize potential creditors with the unique financial characteristics
and performance of cooperatives.
27
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
28/173
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
29/173
Environmental and Financial Performance Literature
We review the growing literature relating corporate environmental
performance to financial performance. We seek to identifyachievements and limitations of this literature and to highlight areas
for further research. Our primary interest is to assess the adequacy
of the literature in informing corporate managers how, when, and
where to make pro-environment investments that will pay off with
financial returns for long-term shareholders. To do so , we create a
conceptual framework that maps the influence of regulators, publichealth scientists , environmental advocates , consumers, employees,
and other interested parties upon corporate financial returns. Our
decision has relevance to all parties interested in influencing
corporate actions affect the environment .
29
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
30/173
Financial System Analysis: A Functional View by Mariko FUJII
(Research Center for Advanced Economic Engineering,
University of Tokyo)
The Financial system plays a fundamental role in the economic
system in facilitating the transfer of resources and provision of
settlement services, liquidity and price information, among others.
Under the recent economic situations where uncertainty of future
economic variables have more widely prevailed, the function to
provide tools for trading and sifting risks has increased its
importance. Depending on how such mechanism is provided,
economic welfare of the agents may differ substantially. Functional
approach to the financial systems is quite helpful to examine the role
of specific institutions and design of the financial system and to
evaluate them in the light of current economic developments. In this
note, the functions of financial systems are reviewed from the
viewpoints described above and the modern developments of financial institutions are considered for evaluation.
Banks and financial markets are two basic structures that consist of
the financial system, and they may be distinct in the way they
perform the financial functions. In recent years, financial markets
seem to have increased their relative weight in many economies
because they can deal with a wide variety of products to trade risks,
which have been made available by virtue of the advancement of
technologies, but also can aggregate opinions through the
decentralized decision-making processes. These characteristics of
financial markets, in comparison with banks, are inherent in market
30
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
31/173
mechanism itself, and may work well under rapidly changing and
rather uncertain economic conditions.
As a matter of course, banks and financial markets are both
essential to the economy and interacting each other. Some of relatively newly developed financing methods such as venture capital
and securitization could be regarded as resulting products of the
interactions of banks and financial markets.
It is important to understand under what conditions a particular
financial structure of institutions emerges. For this purpose, the
analysis to deal with banks and financial markets in a consolidatedframework is interesting and would be the direction of future
research.
31
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
32/173
Chapter 7
Introduction to Financial Analysis
32
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
33/173
7.1.1 Introduction:
A Financial Statement is a compilation of data, which is logically and
consistently organized according to accounting principles. Its purposeis to convey an understanding of some financial aspects of a
business firm. It shows a position at a movement in time, as in the
case of balance sheet, or reveals a series of activities over a given
period of time, as in the case of an income statement. Financial
statements are the major means through which firms present their
financial situation to stock holders, creditors and general public. Themajority of firms which include extensive financial statements in their
annual reports, which receive wide distribution.
Nature of financial statement Analysis:
Financial Statement Analysis consist of the application of analytical
tools and techniques to the data in financial statements in order to
derive from them measurements and relationships that are significant
and useful for decision making. The process of financial analysis can
be described in various ways, depending on the objectives to be
obtained. Financial analysis can be used as a preliminary screening
tool in the selection of stocks in the secondary market. It can be used
as a forecasting tool for future financial conditions and results. It maybe used as a process of evaluation and diagnosis of managerial,
operating or other problem areas. Above all, financial analysis
reduces reliance on intuition, guesses and thus narrows the areas of
33
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
34/173
uncertainty that is present in all decision making processes. Financial
analysis does not lesson the need for judgment but rather establishes
a sound and systematic basis for its rational application.
Sources of Financial Information:
The financial data needed in financial analysis come from many
sources. The primary source is the data provided by the firm itself in
its annual report and required disclosures. The annual report
comprises the income statement, the balance sheet, and thestatement of cash flows, as well as footnote to these statements.
Besides this information such as the market price of securities
publicly traded corporations can be found in the financial 20 press
and the electronic media daily. The financial press also provides
information to stock price indices for industries and for market as a
whole.
7.1.2 History of financial Analysis
34
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
35/173
Analysis of financial statements has had its greatest growth since
1990 s. A major impetus came from increasing need from increasing
need on the part of grantors of commercial credit such as bankers,financial institutions etc, to understand the condition of their
customer. At the same time businessman need to understand their
own conditions of their own enterprise in order to assure its survival
in stress of competition. Satisfaction of these needs has been
assisted by the continuous development of accounting as a science
and passing of income tax law in1993. This required preparation of balance sheets and income statements, as they are the basic
statements required for the income tax purpose. Thus a reasonably
reliable data from which typical financial ratios could be calculated
has become increasingly available. Between 1919 and 1929 four
men pioneered in development of financial ratios. These where
James bliss who published a book on this subject in 1923. Alexander
wall, head of Robert Morris associates and Raymond W Dunning,
published a work on this subject in 1928 and Roy Foulke, who made
some of the first detailed compilations and studies between 1925 and
1928.
35
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
36/173
Users of Accounting Information
The list of categories of readers and users of accounts includes the
following people and groups of people: Investors Lenders Managers of the organization Employees Suppliers and other trade creditors Customers Governments and their agencies Public Financial analysts Environmental groups Researchers: both academic and professional
7.1.3 Advantages of Financial Statement Analysis
36
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
37/173
There are various advantages of financial statements analysis. The
major benefit is that the investors get enough idea to decide about
the investments of their funds in the specific company. Secondly,
regulatory authorities like International Accounting Standards Boardcan ensure whether the company is following accounting standards
or not. Thirdly, financial statements analysis can help the government
agencies to analyze the taxation due to the company. Moreover,
company can analyze its own performance over the period of time
through financial statements analysis.
7.1.4 Limitations of Financial Statement Analysis:
Comparison of one company with another can provide valuable clues
about the financial health of an organization. Unfortunately,
differences in accounting methods between companies sometimes
make it difficult to compare the companies financial data. For
example if one firm values its inventories by LIFO method and
another firm by the average cost method, then direct comparison of
financial data such as inventory valuations and cost of goods sold
between the two firms may be misleading. Sometimes enough data
are presented in foot notes to the financial statements to restate data
to a comparable basis. Otherwise, the analyst should keep in mind
the lack of comparability of the data before drawing any definiteconclusion.
37
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
38/173
7.2 The Principal Tools of Analysis:
In the analysis of financial statements, the analyst can have a variety
of tools available from which he can choose the best suited to hisspecific purpose. The following are the important tools of analysis.
The Principles Tools/Techniques of Financial Analysis:
38
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
39/173
Figure 1 Classification of Financial Analysis
39
Tools of
Financial
Analysis
Trend
Analysis
Common size
statement
Comparative
Statement
Ratio
Analysis
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
40/173
7.2.1 Trend Analysis
An aspect of technical analysis that tries to predict the future
movement of a stock based on past data. Trend analysis is based on
the idea that what has happened in the past gives traders an idea of
what will happen in the future.
There are three main types of trends: short-, intermediate- and long-term. Trend Analysis Analysts make a trend analysis of performance
over the past five to ten years to get an overall picture. Trend
analysis is made in respect of sales, cost of sales, gross profit, net
profit (before tax), net profit (after tax), net worth, debt, dividend
policy, bonus and Rights issues, return on net worth, earnings per
share, etc.
7.2.2 Common Size Statements
Definition and Explanation of Vertical Analysis and Common Size
Statements: Vertical analysis is the procedure of preparing and
presenting common size statements.
Common size statement is one that shows the items appearing on itin percentage form as well as in dollar form. Each item is stated as a
percentage of some total of which that item is a part. Key financial
changes and trends can be highlighted by the use of common size
40
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
41/173
statements. Common size statements are particularly useful when
comparing data from different companies .
The information it contains in the selection, reclassification and
summarization of the data contained in profit and loss account and
balance sheet, it is no way replacement of either these statements.
To provide a comparative view of movement of funds by the
statement of changes in financial position is prepared for the period
covered by the profit and loss account as well as the correspondingprevious period.
7.2.3 Comparative Statement
Comparative statements are financial statements that cover a
different time frame, but are formatted in a manner that makes
comparing line items from one period to those of a differentperiod an easy process. This quality means that the comparative
statement is a financial statement that lends itself well to the
process of comparative analysis. Many companies make use of
standardized formats in accounting functions that make the
generation of a comparative statement quick and easy. The
benefits of a comparative statement are varied for a corporation .
Because of the uniform format of the statement , it is a simple
process to compare the gross sales of a given product or all products
of the company with the gross sales generated in a previous month,
quarter, or year. Comparing generated revenue from one period to a
41
http://www.wisegeek.com/what-are-financial-statements.htmhttp://www.wisegeek.com/what-is-a-financial-statement.htmhttp://www.wisegeek.com/what-is-a-corporation.htmhttp://www.wisegeek.com/what-are-financial-statements.htmhttp://www.wisegeek.com/what-is-a-financial-statement.htmhttp://www.wisegeek.com/what-is-a-corporation.htm8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
42/173
different period can add another dimension to analyzing the
effectiveness of the sales effort, as the process makes it possible to
identify trends such as a drop in revenue in spite of an increase in
units sold.
Along with being an excellent way to broaden the understanding of
the success of the sales effort, a comparative statement can also
help address changes in production costs. By comparing line items
that catalog the expense for raw materials in one quarter with another
quarter where the number of units produced is similar can make it
possible to spot trends in expense increases, and thus help isolate
the origin of those increases. This type of data can prove helpful to
allowing the company to find raw materials from another source
before the increased price for materials cuts into the overall
profitability of the company.
A comparative statement can be helpful for just about any
organization that has to deal with finances in some manner.
Even non-profit organizations can use the comparative
statement method to ascertain trends in annual fund raising
efforts. By making use of the comparative statement for the
most recent effort and comparing the figures with those of the
previous years event, it is possible to determine where
expenses increased or decreased, and provide some insight in
how to plan the following years event.
42
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
43/173
7.2.4 Ratio Analysis:
This is the important tool available to financial analyst for their work.An accounting ratio shows the relationship in mathematical terms
between two interrelated accounting figures. Fundamental Analysis
has a very broad scope. One aspect looks at the general (qualitative)
factors of a company. The other side considers tangible and
measurable factors (quantitative). This means crunching and
analyzing numbers from the financial statements. If used in
conjunction with other methods, quantitative analysis can produce
excellent results.
Ratio analysis isn't just comparing different numbers from the
balance sheet, income statement, and cash flow statement. It's
comparing the number against previous years, other companies, the
industry, or even the economy in general. Ratios look at the
relationships between individual values and relate them to how acompany has performed in the past, and might perform in the future.
A ratio is one figure express in terms of another figure. It is a
mathematical yardstick that measures the relationship two figures,
43
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
44/173
which are related to each other and mutually interdependent. Ratio is
express by dividing one figure by the other related figure. Thus a ratio
is an expression relating one number to another. It is simply the
quotient of two numbers.
7.2.4.1 MEANING OF RATIO ANALYSIS:
Ratio analysis is the method or process by which the relationship of
items or group of items in the financial statement are computed,determined and presented. Ratio analysis is an attempt to derive
quantitative measure or guides concerning the financial health and
profitability of business enterprises. Ratio analysis can be used both
in trend and static analysis. There are several ratios at the disposal of
an annalist but their group of ratio he would prefer depends on the
purpose and the objective of analysis.
While a detailed explanation of ratio analysis is beyond the scope of
this section, we will focus on a technique, which is easy to use. It can
provide you with a valuable investment analysis tool. This technique
is called cross-sectional analysis. Cross-sectional analysis compares
financial ratios of several companies from the same industry. Ratio
analysis can provide valuable information about a company's
financial health. A financial ratio measures a company's performancein a specific area. For example, you could use a ratio of a company's
debt to its equity to measure a company's leverage. By comparing
the leverage ratios of two companies, you can determine which
44
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
45/173
company uses greater debt in the conduct of its business. A
company whose leverage ratio is higher than a competitor's has more
debt per equity. You can use this information to make a judgment as
to which company is a better investment risk. However, you must becareful not to place too much importance on one ratio. You obtain a
better indication of the direction in which a company is moving when
several ratios are taken as a group.
7.2.4.2 OBJECTIVE OF RATIOS
Ratio is work out to analyze the following aspects of business
organization-
1. Solvency- Long term Short term Immediate
2. Stability
3. Profitability
4. Operational E) Credit standing
5. Structural analysis
6. Effective utilization of resources
7. Leverage or external financing
8. Standardize financial information for comparisons
9. Evaluate current operations efficiency
10. Compare performance with past performance
45
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
46/173
11. Compare performance against other firms or industry
standards.
12. Study the efficiency of operations efficiency
13. Study the risk of operations
7.2.4.3FORMS OF RATIO:
Since a ratio is a mathematical relationship between to or more
variables accounting figures, such relationship can be expressed in
different ways as follows
A] As a pure ratio:
For example the equity share capital of a company is Rs.
20,00,000 & the preference share capital is Rs. 5,00,000, the
ratio of equity share capital to preference share capital is
20,00,000: 5,00,000 or simply 4:1.
B] As a rate of times:
In the above case the equity share capital may also be
described as 4 times that of preference share capital. Similarly,
the cash sales of a firm are Rs. 12,00,000 & credit sales are
Rs. 30,00,000. so the ratio of credit sales to cash sales can be
described as 2.5 [30,00,000/12,00,000] or simply by saying thatthe credit sales are 2.5 times that of cash sales.
46
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
47/173
C] As a percentage:
In such a case, one item may be expressed as a percentage of
some other item.
For example, net sales of the firm are Rs.50,00,000 & the
amount of the gross profit is Rs. 10,00,000, then the grossprofit may be described as 20% of sales [ 10,00,000/50,00,000]
7.2.4.4 STEPS IN RATIO ANALYSIS
The ratio analysis requires two steps as follows:
1] Calculation of ratio
2]Comparing the ratio with some predetermined standards. The
standard ratio may be the past ratio of the same firm or industrys
average ratio or a projected ratio or the ratio of the most successful
firm in the industry. In interpreting the ratio of a particular firm, the
analyst cannot reach any fruitful conclusion unless the calculated
ratio is compared with some predetermined standard. Theimportance of a correct standard is oblivious as the conclusion is
going to be based on the standard itself.
47
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
48/173
7.2.4.5 TYPES OF COMPARISONS
The ratio can be compared in three different ways
1] Cross section analysis:
One of the way of comparing the ratio or ratios of the firm is tocompare them with the ratio or ratios of some other selected
firm in the same industry at the same point of time. So it
involves the comparison of two or more firms financial ratio at
the same point of time. The cross section analysis helps the
analyst to find out as to how a particular firm has performed in
relation to its competitors. The firms performance may be
compared with the performance of the leader in the industry in
order to uncover the major operational inefficiencies. The cross
section analysis is easy to be undertaken as most of the data
required for this may be available in financial statement of the
firm.
2] Time series analysis:
The analysis is called Time series analysis when the
performance of a firm is evaluated over a period of time. By
48
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
49/173
comparing the present performance of a firm with the
performance of the same firm over the last few years, an
assessment can be made about the trend in progress of the
firm, about the direction of progress of the firm. Time seriesanalysis helps to the firm to assess whether the firm is
approaching the long-term goals or not.
The Time series analysis looks for (1) important trends in financial
performance (2) shift in trend over the years (3) significant deviation if
any from the other set of data.
3] Combined analysis:
If the cross section & time analysis, both are combined together
to study the behavior & pattern of ratio, then meaningful &
comprehensive evaluation of the performance of the firm can
definitely be made. A trend of ratio of a firm compared with the
trend of the ratio of the standard firm can give good results. For
example, the ratio of operating expenses to net sales for firm
may be higher than the industry average however, over the
years it has been declining for the firm, whereas the industry
average has not shown any significant changes.
The combined analysis as depicted in the above diagram, whichclearly shows that the ratio of the firm is above the industry average,
but it is decreasing over the years & is approaching the industry
average.
49
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
50/173
7.2.4.6 PRE-REQUISITIES TO RATIO ANALYSIS
In order to use the ratio analysis as device to make purposeful
conclusions, there are certain pre-requisites, which must be taken
care of. It may be noted that these prerequisites are not conditionsfor calculations for meaningful conclusions. The accounting figures
are inactive in them & can be used for any ratio but meaningful &
correct interpretation & conclusion can be arrived at only if the
following points are well considered.
1) The dates of different financial statements from where data is
taken must be same.
2) If possible, only audited financial statements should be
considered, otherwise there must be sufficient evidence that the data
is correct.
3) Accounting policies followed by different firms must be same in
case of cross section analysis otherwise the results of the ratio
analysis would be distorted.
4) One ratio may not throw light on any performance of the firm.Therefore, a group of ratios must be preferred. This will be
conductive to counter checks.
50
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
51/173
5) Last but not least, the analyst must find out that the two figures
being used to calculate a ratio must be related to each other,
otherwise there is no purpose of calculating a ratio
7.2.4.7 CLASSIFICATION OF RATIO
51
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
52/173
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
53/173
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
54/173
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
55/173
3] Composite ratio:
These ratios indicate the relationship between two items, of which
one is found in the balance sheet & other in revenue statement.There are two types of composite ratiosa) Some composite ratios
study the relationship between the profits & the investments of the
concern. E.g. return on capital employed, return on proprietors fund,
return on equity capital etc.
Other composite ratios e.g. debtors turnover ratios, creditors turnover
ratios, dividend payout ratios, & debt service ratios
BASED ON FUNCTION:
Accounting ratios can also be classified according to their functions in
to liquidity ratios, leverage ratios, activity ratios, profitability ratios &
turnover ratios.
1] Liquidity ratios:
It shows the relationship between the current assets &
current liabilities of the concern e.g. liquid ratios & current
ratios. Liquidity refers to the ability of a firm to meet its short-term
(usually up to 1 year) obligations. The ratios, which indicate the
liquidity of a company, are Current ratio, Quick/Acid-Test ratio, andCash ratio. These ratios are discussed below
55
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
56/173
2] Leverage ratios:
It shows the relationship between proprietors funds & debts used in
financing the assets of the concern e.g. capital gearing ratios, debtequity ratios, & Proprietory ratios.
3] Activity ratios:
It shows relationship between the sales & the assets. It is also known
as Turnover ratios & productivity ratios e.g. stock turnover ratios,debtors turnover ratios.
4] Profitability ratios:
a) It shows the relationship between profits & sales e.g. operating
ratios, gross profit ratios, operating net profit ratios, expenses ratios
b) It shows the relationship between profit & investment e.g. return on
investment, return on equity capital.
5] Coverage ratios:
56
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
57/173
It shows the relationship between the profit on the one hand & the
claims of the outsiders to be paid out of such profit e.g. dividend
payout ratios & debt service ratios.
BASED ON USER:
1] Ratios for short-term creditors:
Current ratios liquid ratios stock working capital ratios etc.
2] Ratios for the shareholders:
Return on proprietors fund
return on equity capital etc.
57
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
58/173
LIQUIDITY RATIO: -
Liquidity refers to the ability of a firm to meet its short-term (usually
up to 1 year) obligations. The ratios, which indicate the liquidity of a
company, are Current ratio, Quick/Acid-Test ratio, and Cash ratio.
These ratios are discussed below
58
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
59/173
CURRENT RATIO
Meaning:
This ratio compares the current assests with the current liabilities. It
is also known as working capital ratio or solvency ratio. It is
expressed in the form of pure ratio.
E.g. 2:1
59
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
60/173
Formula :
Current Ratio = Current Assets / Current Liabilities
Significance:
The current assests of a firm represents those assets which can be,
in the ordinary course of business, converted into cash within a short
period time, normally not exceeding one year. The current liabilities
defined as liabilities which are short term maturing obligations to bemet, as originally contemplated, with in a year. Current ratio (CR) is
the ratio of total current assets (CA) to total current liabilities (CL).
Current assets include cash and bank balances; inventory of raw
materials, semifinished and finished goods; marketable securities;
debtors (net of provision for bad and doubtful debts); bills receivable;
and prepaid expenses.
Current liabilities consist of trade creditors, bills payable, bank credit,
provision for taxation, dividends payable and outstanding expenses.
This ratio measures the liquidity of the current assets and the ability
of a company to meet its short-term debt obligation. CR measures
the ability of the company to meet its CL, i.e., CA gets converted intocash in the operating cycle of the firm and provides the funds needed
to pay for CL. The higher the current ratio, the greater the short-term
solvency. This compares assets, which will become liquid within
60
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
61/173
approximately twelve months with liabilities, which will be due for
payment in the same period and is intended to indicate whether there
are sufficient short-term assets to meet the short- term liabilities.
Recommended current ratio is 2: 1. Any ratio below indicates that theentity may face liquidity problem but also Ratio over 2: 1 as above
indicates over trading, that is the entity is under utilizing its current
assets.
LIQUID RATIO:
Meaning:
Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio
compare the quick assets with the quick liabilities. It is expressed in
the form of pure ratio. E.g. 1:1. The term quick assets refer to current
assets, which can be converted into, cash immediately or at a short
notice without diminution of value.
Formula:
Liquid ratio = Quick Assets / Current Liabilities
Significance:
61
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
62/173
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
63/173
Formula:
Earning per share = NPAT / Number of equity share
Significance:
The higher EPS will attract more investors to acquire shares in the
company as it indicates that the business is more profitable enough
to pay the dividends in time. But remember not all profit earned is
going to be distributed as dividends the company also retains someprofits for the business
DIVIDEND PAYOUT RATIO:-
Meaning:
Dividend Pay-out Ratio shows the relationship between the dividend
paid to equity shareholders out of the profit available to the equity
shareholders.
Formula:
Dividend Pay out ratio = Dividend per share / Earning per share *100
63
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
64/173
Significance:
D/P ratio shows the percentage share of net profits after taxes and
after preference dividend has been paid to the preference equityholders.
CAPITAL GEARING RATIO:-
Meaning:
Gearing means the process of increasing the equity shareholders
return through the use of debt. Equity shareholders earn more when
the rate of the return on total capital is more than the rate of interest
on debts. This is also known as leverage or trading on equity. The
Capital-gearing ratio shows the relationship between two types of
capital viz: - equity capital & preference capital & long term
borrowings. It is expressed as a pure ratio.
Formula:
Capital gearing ratio = Preference capital+ secured loan /
Equity capital & reserve & surplus
64
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
65/173
Significance:
Capital gearing ratio indicates the proportion of debt &
equity in the financing of assets of a concern. If the amount of fixed cost bearing capital is more than the equity share capital
including reserves an undistributed profits), it will be called high
capital gearing and if it is less, it will be called low capital gearing.
The high gearing will be beneficial to equity shareholders when the
rate of interest/dividend payable on fixed cost bearing capital is lower
than the rate of return on investment in business.Thus, the main objective of using fixed cost bearing capital is to
maximize the profits available to equity shareholders.
PROFITABILITY
These ratios help measure the profitability of a firm. A firm, which
generates a substantial amount of profits per rupee of sales, can
comfortably meet its operating expenses and provide more returns to
its shareholders. The relationship between profit and sales is
measured by profitability ratios. There are two types of profitability
ratios: Gross Profit Margin and Net Profit Margin.
65
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
66/173
GROSS PROFIT RATIO:-
Meaning:
This ratio measures the relationship between gross profit and sales.
It is defined as the excess of the net sales over cost of goods sold or
excess of revenue over cost.
Formula:
Gross profit ratio = Gross profit / Net sales * 100
Significance:
This ratio shows the profit that remains after the
manufacturing costs have been met. It measures the
efficiency of production as well as pricing. This ratio helps to judge
how efficient the concern is I managing its production, purchase,
selling & inventory, how good its control is over the direct cost, how
productive the concern , how much amount is left to meet other
expenses & earn net profit.
66
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
67/173
NET PROFIT RATIO:-
Meaning:
Net Profit ratio indicates the relationship between the net profit & the
sales it is usually expressed in the form of a percentage.
Formula:
Net profit ratio = NPAT / Net sales * 100
Significance:
This ratio shows the net earnings (to be distributed to both equity and
preference shareholders) as a percentage of net sales. It measures
the overall efficiency of production, administration, selling, financing,
pricing and tax management. Jointly considered, the gross and net
profit margin ratios provide an understanding of the cost and profit
structure of a firm.
67
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
68/173
RETURN ON CAPITAL EMPLOYED:-
Meaning:
The profitability of the firm can also be analyzed from the point of
view of the total funds employed in the firm. The term fund employed
or the capital employed refers to the total long-term source of funds.
It means that the capital employed comprises of shareholder funds
plus long-term debts. Alternatively it can also be defined as fixedassets plus net working capital. Capital employed refers to the long-
term funds invested by the creditors and the owners of a firm. It is the
sum of long-term liabilities and owner's equity. ROCE indicates the
efficiency with which the long-term funds of a firm are utilized.
Formula:
Return on capital employed = NPAT / Capital employed * 100
Significance :
These ratios determine how quickly certain current assets can be
converted into cash. They are also called efficiency ratios or assetutilization ratios as they measure the efficiency of a firm in managing
assets. These ratios are based on the relationship between the level
68
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
69/173
of activity represented by sales or cost of goods sold and levels of
investment in various assets
FINANCIAL
These ratios determine how quickly certain current assets can be
converted into cash. They are also called efficiency ratios or asset
utilization ratios as they measure the efficiency of a firm in managing
assets. These ratios are based on the relationship between the level
of activity represented by sales or cost of goods sold and levels of
investment in various assets. The important turnover ratios aredebtors turnover ratio, average collection period, inventory/stock
turnover ratio, fixed assets turnover ratio, andtotal assets turnover
ratio. These are described below:
69
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
70/173
DEBTORS TURNOVER RATIO (DTO)
Meaning:
DTO is calculated by dividing the net credit sales by average debtors
outstanding during the year. It measures the liquidity of a firm's debts.
Net credit sales are the gross credit sales minus returns, if any, from
customers. Average debtors are the average of debtors at thebeginning and at the end of the year. This ratio shows how rapidly
debts are collected. The higher the DTO, the better it is for the
organization.
70
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
71/173
Formula:
Debtors turnover ratio = Credit sales / Average debtors
Significance:
This ratio indicates the speed with which the amount is collected from
debtors. The higher the ratio, the better it is, since it indicates that
amount from debtors is being collected more quickly. The morequickly the debtors pay, the less the risk from bad- debts, and so the
lower the expenses of collection and increase in the liquidity of the
firm.
By comparing the debtors turnover ratio of the current year with the
previous year, it may be assessed whether the sales policy of the
management is efficient or not.
Average collection period
This ratio indicates the time with in which the amount is collected
from debtors and bills receivables.
Formula:
Average collection period = debtors + bills receivable / credit
sales per day
71
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
72/173
Here, credit sales per day = net credit sales of the year / 365
Average collection period can also be calculated on the bases of debtors turnover ratio.
The Formula will be:
Average collection period = 12 months or 365 days / debtors
turnover ratio
Significance:
This ratio shows the time in which the customers are paying for credit
sales. A higher debt collection period is thus, an indicates of the
inefficiency and negligence on the part of management. On the other
hand, if there is decrease in debt collection period, it indicates prompt
payment by debtors which reduces the chance of bad debts.
INVENTORY OR STOCK TURNOVER RATIO (ITR)
Meaning:
ITR refers to the number of times the inventory is sold and replaced
during the accounting period.
72
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
73/173
Formula:
Stock Turnover Ratio = COGS / Average stock
Significance:
ITR reflects the efficiency of inventory management. The higher theratio, the more efficient is the management of inventories, and vice
versa. However, a high inventory turnover may also result from a low
level of inventory, which may lead to frequent stock outs and loss of
sales and customer goodwill. For calculating ITR, the average of
inventories at the beginning and the end of the year is taken. In
general, averages may be used when a flow figure (in this case, cost
of goods sold) is related to a stock figure (inventories).
FIXED ASSETS TURNOVER (FAT)
The FAT ratio measures the net sales per rupee of investment in
fixed assets.
Formula:
Fixed assets turnover = Net sales / Net fixed assets
73
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
74/173
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
75/173
Formula:
Proprietary ratio = Proprietary fund / Total fund
Significance:
This ratio should be 33% or more than that. In other words, the
proportion of shareholders funds to total funds should be 33% or
more.
A higher proprietary ratio is generally treated an indicator of soundfinancial position from long-term point of view, because it means that
the firm is less dependent on external sources of finance.
If the ratio is low it indicates that long-term loans are less secured
and they face the risk of losing their money.
STOCK WORKING CAPITAL RATIO:
Meaning:
This ratio shows the relationship between the closing stock & the
working capital. It helps to judge the quantum of inventories in
relation to the working capital of the business. The purpose of this
ratio is to show the extent to which working capital is blocked ininventories. The ratio highlights the predominance of stocks in the
current financial position of the company. It is expressed as a
percentage.
75
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
76/173
Formula:
Stock working capital ratio = Stock / Working Capital
Significance:
Stock working capital ratio is a liquidity ratio. It indicates the
composition & quality of the working capital. This ratio also helps to
study the solvency of a concern. It is a qualitative test of solvency. It
shows the extent of funds blocked in stock. If investment in stock ishigher it means that the amount of liquid assets is lower.
DEBT EQUITY RATIO:
MEANING:
Debt equity ratio is also called as leverage ratio. Leverage means the
process of the increasing the equity shareholders return through the
use of debt. Leverage is also known as gearing or trading on
equity. Debt equity ratio shows the margin of safety for long-term
creditors & the balance between debt & equity.
Formula:
Debt equity ratio = Total long-term debt / Total shareholders
fund
76
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
77/173
Significance:
This ratio is calculated to assess the ability of the firm to meet its long
term liabilities. Generally, debt equity ratio of is considered safe.If the debt equity ratio is more than that, it shows a rather risky
financial position from the long-term point of view, as it indicates that
more and more funds invested in the business are provided by long-
term lenders.
The lower this ratio, the better it is for long-term lenders because they
are more secure in that case. Lower than 2:1 debt equity ratioprovides sufficient protection to long-term lenders.
RETURN ON PROPRIETOR FUND:
Meaning:
Return on proprietors fund is also known as return on proprietors
equity or return on shareholders investment or investment ratio.
This ratio indicates the relationship between net profit earned & total
proprietors funds. Return on proprietors fund is a profitability ratio,
which the relationship between profit & investment by the proprietors
in the concern.
Its purpose is to measure the rate of return on the total fund made
available by the owners. This ratio helps to judge how efficient the
77
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
78/173
concern is in managing the owners fund at disposal. This ratio is of
practical importance to prospective investors & shareholders.
Formula:Return on proprietors fund = NPAT / Proprietors fund * 100
CREDITORS TURNOVER RATIO:
It is same as debtors turnover ratio. It shows the speed at which
payments are made to the supplier for purchase made from them. Itis a relation between net credit purchase and average creditors.
Formula :
Credit turnover ratio = Net credit purchase / Average creditors
Average age of accounts payable = Months in a year / Credit
turnover ratio
Significance:
Both the ratios indicate promptness in payment of creditor purchases.
Higher creditors turnover ratio or a lower credit period enjoyed
signifies that the creditors are being paid promptly. It enhances creditworthiness of the company. A very low ratio indicates that the
company is not taking full benefit of the credit period allowed by the
creditors.
78
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
79/173
6.2.4.8 Uses of Ratio analysis
To evaluate performance, compared to previous years and to
competitors and the industry To set benchmarks or standards for performance To highlight areas that need to be improved, or areas that offer
the most promising future potential To enable external parties, such as investors or lenders, to
assess the creditworthiness and profitability of the firm
6.2.4.9 Advantage of ratio analysis
Helpful in analysis of financial statements. Helpful in comparative study. Helpful in locating the weak spots of the business. Helpful in forecasting. Estimate about the trend of the business. Fixation of ideal standards.
Effective control. Study of financial soundness.
79
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
80/173
6.2.4.10 Limitations of Ratio analysis
There is considerable subjectivity involved, as there is no
correct number for the various ratios. Further, it is hard to
reach a definite conclusion when some of the ratios are
favorable and some are unfavorable. Ratios may not be strictly comparable for different firms due to
a variety of factors such as different accounting practices or different fiscal year periods. Furthermore, if a firm is engaged
in diverse product lines, it may be difficult to identify the
industry category to which the firm belongs. Also, just because
a specific ratio is better than the average does not necessarily
mean that the company is doing well; it is quite possible rest of
the industry is doing very poorly. Ratios are based on financial statements that reflect the past
and not the future. Unless the ratios are stable, it may be
difficult to make reasonable projections about future trends.
Furthermore, financial statements such as the balance sheet
indicate the picture at one point in time, and thus may not be
representative of longer periods. Financial statements provide an assessment of the costs and
not value . For example, fixed assets are usually shown on the
balance sheet as the cost of the assets less their accumulated
80
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
81/173
depreciation, which may not reflect the actual current market
value of those assets. Financial statements do not include all items. For example, it is
hard to put a value on human capital (such as managementexpertise). And recent accounting scandals have brought light
to the extent of financing that may occur off the balance sheet. Accounting standards and practices vary among countries, and
thus hamper meaningful global comparisons.
81
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
82/173
Chapter 8
Overview
8.1 Profile82
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
83/173
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
84/173
At April 4, 2005, ICICI Bank, with free float market capitalization of
about Rs. 308.00 billion (US$ 7.00 billion) ranked third amongst all
the companies listed on the Indian stock exchanges.
ICICI Bank was originally promoted in 1994 by ICICI Limited, an
Indian financial institution, and was its wholly-owned subsidiary.
ICICI's shareholding in ICICI Bank was reduced to 46% through a
public offering of shares in India in fiscal 1998, an equity offering in
the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank'sacquisition of Bank of Madura Limited in an all-stock amalgamation in
fiscal 2001, and secondary market sales by ICICI to institutional
investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at
the initiative of the World Bank, the Government of India and
representatives of Indian industry. The principal objective was to
create a development financial institution for providing medium-term
and long-term project financing to Indian businesses. In the 1990s,
ICICI transformed its business from a development financial
institution offering only project finance to a diversified financial
services group offering a wide variety of products and services, both
directly and through a number of subsidiaries and affiliates like ICICI
Bank. In 1999, ICICI become the first Indian company and the first
bank or financial institution from non-Japan Asia to be listed on theNYSE.
84
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
85/173
After consideration of various corporate structuring alternatives in the
context of the emerging competitive scenario in the Indian banking
industry, and the move towards universal banking, the managements
of ICICI and ICICI Bank formed the view that the merger of ICICI withICICI Bank would be the optimal strategic alternative for both entities,
and would create the optimal legal structure for the ICICI group's
universal banking strategy. The merger would enhance value for
ICICI shareholders through the merged entity's access to low-cost
deposits, greater opportunities for earning fee-based income and the
ability to participate in the payments system and provide transaction-banking services. The merger would enhance value for ICICI Bank
shareholders through a large capital base and scale of operations,
seamless access to ICICI's strong corporate relationships built up
over five decades, entry into new business segments, higher market
share in various business segments, particularly fee-based services,
and access to the vast talent pool of ICICI and its subsidiaries. In
October 2001, the Boards of Directors of ICICI and ICICI Bank
approved the merger of ICICI and two of its wholly-owned retail
finance subsidiaries, ICICI Personal Financial Services Limited and
ICICI Capital Services Limited, with ICICI Bank. The merger was
approved by shareholders of ICICI and ICICI Bank in January 2002,
by the High Court of Gujarat at Ahmedabad in March 2002, and by
the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI group's
financing and banking operations, both wholesale and retail, have
been integrated in a single entity.
85
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
86/173
8.2 Vision and Mission of ICICI Bank Ltd.
Vision of ICICI Bank:
Mission :
86
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
87/173
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
88/173
ICICI Bank was originally promoted in 1994 by ICICI Limited,
an Indian financial institution, and was its wholly owned subsidiary.
ICICI's shareholding in ICICI Bank was reduced to 46% through a
public offering of shares in India in fiscal 1998, an equity offering inthe form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's
acquisition of Bank of Madura Limited in an all-stock amalgamation
in fiscal 2001, and secondary market sales by ICICI to
institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed
in 1955 at the initiative of the World Bank, the Government of India
and representatives of Indian industry. The principal objectivewas to create a development financial institution for providing
medium-term and long-term project financing to Indian businesses.
In the 1990s, ICICI transformed its business from a
development financial institution offering only project finance to a
diversified financial services group offering a wide variety of products
and services, both directly and through a number of subsidiaries and
affiliates like ICICI Bank. In 1999, ICICI become the first Indian
company and the first bank or financial institution from non-Japan
Asia to be listed on the NYSE. After consideration of various
corporate structuring alternatives in the context of the emerging
competitive scenario in the Indian banking industry, and the
move towards universal banking, the managements of ICICI and
ICICI Bank formed the view that the merger of ICICI with ICICI Bankwould be the optimal strategic alternative for both entities, and
would create the optimal legal structure for the ICICI group's
universal banking strategy. The merger would enhance value for
88
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
89/173
ICICI shareholders through the merged entity's access to low-cost
deposits, greater opportunities for earning fee-based income and the
ability to participate in the payments system and provide transaction-
banking services. The merger would enhance value for ICICI Bankshareholders through a large capital base and scale of operations,
seamless access to ICICI's strong corporate relationships built up
over five decades, entry into new business segments, higher
market share in various business segments, particularly fee-
based services, and access to the vast talent pool of ICICI and
its subsidiaries. In October 2001, the Boards of Directors of ICICIand ICICI Bank approved the merger of ICICI and two of its wholly-
owned retail finance subsidiaries, ICICI Personal Financial Services
Limited and ICICI Capital Services Limited, with ICICI Bank. The
merger was approved by shareholders of ICICI and ICICI Bank
in January 2002, by the High Citst of Gujarat at Ahmedabad in
March 2002, and by the High Citst of Judicature at Mumbai and the
Reserve Bank of India in April 2002. Consequent to the merger, the
ICICI group's financing and
banking operations, both wholesale and retail, have been integrated
in a single entity. ICICI Bank has formulated a Code of Business
Conduct and Ethics for its directors and employees.
As on June 30, 2008 FY08
CMP: - 955.45 Target Price: - 1,710
89
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
90/173
90
Incorporation Year 1994Managing Director K. V. KamathRegistered Office Landmark, Race Course
Circle, Alakapuri,
Vadodra-390007,
GujratTelephone 91-265-2339923/25/27/28Fax 91-265-2339926Website www.icicibank.com
Face Value [Rs] 10BSE Code 532174BSE Group ANSE Code ICICIBANKBloomberg ICICIBC INReuters ICBK.BOISIN Demat INE090A01013
Market Lot 1Listing BSE, NSE, NYSEFinancial Year End 03Book Closure Month Jun/JulAGM Month Jul
http://www.icicibank.com/http://www.icicibank.com/8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
91/173
Table :1 Background Of ICICI
8.4 BOARD MEMBERS
Mr. N. Vaghul, Chairman Mr. Uday M. Chitale Mr. Sridar Iyengar Mr. Lakshmi N. Mittal Mr. Anupam Puri Mr. Vinod Rai Mr. Somesh R. Sathe Mr. M.K. Sharma
91
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
92/173
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
93/173
a widely dispersed retail credit portfolio. ICICI Bank has been able to
maintain the quality of its loan portfolio for a decent time period now.
8.6 SUBSIDIARIES/JOINT VENTURE/ ASSOCIATES
Domestic Subsidiaries
ICICI Brokerage Services Limited.
ICICI Distribution Finance Private Limited.
ICICI Home Finance Company Limited.
ICICI Investment Management Company Limited.
93
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
94/173
ICICI Trusteeship Services Limited.
Prudential ICICI Trust Limited.
94
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
95/173
Table 2: Subsidiaries
95
ICICI Venture Funds Management
Company Ltd.
Manages funds that provide
venture capital to start-up
companies and undertake private
equity investments.
ICICI Primary Dealership Ltd.
Engaged in equity underwriting,
brokerage and primary dealership
in government securities.
ICICI Securities Ltd.
Leading Investment Banking
Organization.
First Source Solutions Ltd.
Leading third party BPO service
provider.
ICICI Prudential Life InsuranceCompany Ltd.
Retail market share of about 28%
in new business by private sector
life insurance companies during
FY 2007.
ICICI Lombard General Insurance
Company Ltd.
Market share of about 34% in
gross written premium among the
private sector general insurance
companies during FY2007.
ICICI Prudential Asset
Management Company
Among the top two mutual funds
in India in terms of total funds
under management in the Indian
Mutual Fund Industry for FY07
with a market share of over 11%.
(Source: AMFI)
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
96/173
International Subsidiaries
ICICI Bank Canada.
ICICI Bank Eurasia Limited Liability Company.
ICICI International Limited.
ICICI Securities Holding Inc*.
ICICI Securities Inc*.
ICICI Bank UK Limited.
96
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
97/173
8.5 Awards in 2009
ICICI Bank
For the third year in a row ICICI Bank has won The Asset Triple A
Country Awards for Best Domestic Bank in India
ICICI Bank won the Most Admired Knowledge Enterprises (MAKE)India 2009 Award. ICICI Bank won the first place in "Maximizing
Enterprise Intellectual Capital" category, October 28, 2009
Ms Chanda Kochhar, MD and CEO was awarded with the Indian
Business Women Leadership Award at NDTV Profit Business
Leadership Awards , October 26, 2009.
ICICI Bank received two awards in CNBC Awaaz Consumer Awards;
one for the most preferred auto loan and the other for most preferred
credit Card, on September 30, 2009
Ms. Chanda Kochhar, Managing Director & CEO ranked in the top 20
of the World's 100 Most Powerful Women list compiled by Forbes,
August 2009
Financial Express at its FE India's Best Banks Awards, honoured Mr.
K.V. Kamath, Chairman with the Lifetime Achievement Award , July25, 2009
ICICI Bank won Asset Triple A Investment Awards for the Best
Derivative House, India. In addition ICICI Bank were Highly
97
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
98/173
commended , Local Currency Structured product, India for 1.5 year
ADR GDR linked Range Accrual Note., July 2009
ICICI bank won in three categories at World finance Banking awards
on June 16, 2009Best NRI Services bank
Excellence in Private Banking, APAC Region
Excellence in Remittance Business, APAC Region
ICICI Bank Mobile Banking was adjudged "Best Bank Award for
Initiatives in Mobile Payments and Banking" by IDRBT, on May 18,
2009 in Hyderabad.ICICI Bank's b2 branchfree banking was adjudged "Best E-Banking
Project Implementation Award 2008" by The Asian Banker, on May
11, 2009 at th e China World Hotel in Beijing.
ICICI Bank bags the "Best bank in SME financing (Private Sector)" at
the Dun & Bradstreet Banking awards 2009.
ICICI Bank NRI services wins the "Excellence in Business Model
Innovation Award" in the eighth Asian Banker Excellence in Retail
Financial Services Awards Programme.
ICICI Bank's Rural Micro Banking and Agri-Business Group wins
WOW Event & Experiential Marketing Award in two categories -
"Rural Marketing programme of the year" and "Small Budget On
Ground Promotion of the Year". These awards were given for Cattle
Loan 'Kamdhenu Campaign' and "Talkies on the move campaign'respectively.
98
http://www.b2.icicibank.com/http://www.b2.icicibank.com/8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
99/173
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
100/173
Chapter 9
Data analysis and interpretation
100
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
101/173
9.1.1 Comparative Profit AND Loss a/c
2008
Rs. cr
2009
Rs. cr
Increase
&
Decrease
%
Increase
&
DecreaseINCOMEOperating
Income39,467.92 38,250.39 (1,217.53) (3.08)
EXPENSESFinancial
Expenses23,484.24 22,725.93 (758.31) (3.23)
Personal
Expenses
2,078.90 1,971.70 (107.20) (5.16)
Selling
Expenses1,750.60 669.21 (1,081.39) (61.77)
Administrative
Expenses6,447.32 7,475.63 1,028.31 15.95
TOTAL
OPER.
EXPENSES
33,761.07 32,842.48 (918.59) (2.72)
OPERATING
PROFIT5,706.85 5,407.91 (298.94) (5.24)
Other
Recurring
Income
65.58 330.64 265.06 4.04
101
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
102/173
ADJUSTED
PBDIT5,772.43 5,738.55 (33.88) (0.59)
Provisions -509.77 -511.17 (1.40) 0.27Depreciation 578.35 678.60 100.25 17.33ADJUSTED
PBT5,703.85 5,571.13 (132.72) (2.33)
Taxes 1,611.73 1,830.51 218.78 13.57
ADJUSTED
PAT4,092.12 3,740.62 (351.50) (8.59)
Table 3 : Comparative Profit AND Loss a/c
Interpretation :
102
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
103/173
By analyzing the summarized profit & loss account of ICICI Bank, the
following trends are presented:
Operating profit decreased to 5.24% for 2008 to 2009
due to recession. which is less than as compared to
increased to Rs. 5,874 crore for 2007 from Rs. 3,888
crore for 2006
Profit after tax decreased to 8.59 for 2008 to 2009
Profit before tax decrease by 2.33% in 2009 from 2009.
its increased to Rs. 132.72Billion for 2008 from Rs.36.48 Billion for FY2007 which is also less than as
compared to increased to Rs. 3,648 crore for 2007 from
Rs. 3,097 crore for 2006.
Provisions and contingencies (excluding provision for
tax) increased to 0.27%.
Other Recurring Income of ICICI bank increased in 2009
by 4.04% from 2008.
103
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
104/173
9.1.2 COMPARATIVE Balance Sheet
2008
Rs. cr
2009
Rs. cr
Increase &
Decrease
% Increase&
DecreaseCAPITAL &
LIABILITIESOwned FundsEquity Share
Capital
1,112.68 1,113.29 0.61 0.05
Preferential
Share Capital350.00 350.00 0.00 0.00
Reserves &
Surplus45,357.53 48,419.73 3,062.20 6.75
Loan FundsDeposits 244,431.05 218,347.82 (26,083.23) (10.67)
Borrowings
made by thebank
65,648.43 67,323.69 1,675.26 2.55
TOTAL 356,899.69 335,554.53 (21,345.16) (5.98)ASSETSCash &
Balances with
RBI
29,377.53 17,536.33 (11,841.20) (40.31)
Money at call
and Short
Notice
8,663.60 12,430.23 3,766.63 43.48
Investments 111,454.34 103,058.31 (8,396.03) (7.53)Advances 215,060.94 208,090.41 (6,970.53) (3.24)
Fixed Assets
104
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
105/173
Gross Block 7,036.00 7,443.71 407.71 5.79Accumulated
Depreciation2,927.11 3,642.09 714.98 24.43
Net Block 4,108.89 3,801.62 (307.27) (7.48)Net Current
Assets31,129.77 34,384.06 3,254.29 10.45
TOTAL 356,899.69 335,554.53 (21,345.16) (5.98)
Table 4 : Comparative Balance Sheet
Interpretation :
By analyzing the balance sheet of ICICI Bank, the following
trends are presented:
105
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
106/173
Our total assets asset increased by 10.45% billion at year-end
fiscal 2009 from year-end fiscal 2008.It show that company had
purchase current asset within 2008-09. Decrease in cash balance with bank in 2009 is less than
in the previous year 2008. But decrease in investment in 2009 is also less than the
previous year. Increase in advances in 2008 from Rs 2256.16 Billion to
Rs1958.66 Billion in 2007.
Erstwhile ICICI borrowings is increasing in years 2009 but rate
of decreasing is less in 2008 i.e. 18% but in 2007 it is 31%.
Our equity share capital and reserves at year-end fiscal
2009 increased to Rs. 0.05 billion as compared to 2008
Total deposits increased by 6.0% to Rs. 2,444.31 billion
at year-end fiscal 2008 from Rs. 2,305.10 billion at year-end
fiscal 2007.
9.2.1 Trend Analysis of Profit and Loss with base year 2005
2005
Rs. cr
2006
Rs. cr
2007
Rs. cr
2008
Rs. cr
2009
Rs. cr
106
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
107/173
INCOMEOperating
Income100 147.98 240.39 333.40 323.11
EXPENSESFinancialExpenses
100 146.06 248.95 357.40 345.86
Personel
Expenses100 146.77 219.25 281.92 267.38
Selling
Expenses100 139.77 289.45 290.94 111.22
Administrati
veExpenses
100 218.47 396.27 516.48 598.86
TOTAL
OPER.
EXPENSES
100 155.57 269.30 368.64 358.61
OPERATIN
G PROFIT100 122.02 141.56 212.96 201.80
Other
Recurring
Income
100 103.92 68.94 14.62 73.73
ADJUSTED
PBDIT100 119.43 131.15 184.53 183.44
Provisions 100 263.72 -4898.84 -5927.56 -5943.84Depreciatio
n100 105.66 92.28 97.97 114.95
ADJUSTED
PBT100 122.15 157.33 225.51 220.26
Taxes 100 106.61 188.55 308.76 350.67ADJUSTED 100 126.19 149.21 203.86 186.35
107
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
108/173
PAT
Table 5 : Trend Analysis of Profit and Loss with base year 2005
108
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
109/173
Trend P/L A/c
0
50
100
150
200
250
300
350
400
2005 2006 2007 2008
year
OPERATING INCOME OPERATING PROFITADJUSTED PBDIT ADJUSTED PBTADJUSTED PAT
Figure 1 Trend of P/L
109
8/9/2019 Manisha Final Financial Analysis & Cost Reduction of ICICI
110/173
Interpretation :
1) TOTAL INCOME:-
The total income of the company is continuously increased from
100% to 333.40% in the last three years from 2005-06 to 2007-08
because of highly increase in the service revenue. The total income
is less increased because of decrease in the other income from
309.17 to 65.58.
2) EXPENSES:-
The operating expenses of the company is in
Recommended