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INTRODUCTION
1.1 Topic:
Managing the productivity of capital is one of the most challenging tasks of corporate
management. The essence lies in constantly reviewing how productively has the capital been
employed in business. Every business has to assess the amount of returns it generates from the
amount of capital invested in the business.
Capital is primarily in the form of fixed assets and working capital in the business and
can be financed through either owner’s equity or through external borrowings which may again
be short term or long term and can be secured or unsecured. The cost that business incurs on
funding its capital requirement depends on the nature and source of funding which affects bottom
line. Business needs to look at varieties of factors including the idleness of assets, if any, returns
it generates, etc. and highlight areas of improvement on regular basis. It is an effective way of
improving the productivity of capital. Analysis of productivity of capital can be an effective tool
for corporate financial management and enables appropriate planning and control.
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SCOPE
1.2 Scope of Study:
It would be helpful to identify the weak and strong areas of corporate financial
performance for taking requisite action in their respective areas.
It acts as a potent tool for corporate planning and control.
Lending and financial institutions, commercial and development banks can use this
approach to maintain a good track of the companies assisted by them.
Policy makers in the Government can use this approach to develop a deeper insight into
the corporate financial health for making suitable changes in policies concerning
corporate growth.
Credit rating agencies may find this approach useful for identifying and qualifying the
business and financial risks associated with the productivity of capital employed and
productivity of capital owned respectively.
Investors and individuals can gain an effective insight into corporate financial behavior
for investing their funds.
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OBJECTIVES AND LIMITATIONS
1.3(a) Objectives:
To understand the corporate financial behavior of the company.
To understand the fluctuations in the ratios and its effect on the financial position of the
company.
To derive a tool, which can be helpful for planning and control of the company.
To study different areas of Cost Control and Cost Reduction To observe and learn cost saving areas of the organization. To suggest few techniques to the management after analyzing the cost saving areas of the
organization. To increase our knowledge in depth and to convert our bookish knowledge into practical
knowledge.
1.3(b) Limitations:
Vast Topic: Considering the vast subject of the project, it was hardly possible to cover up all the detail analysis of the overall view of the cost reduction and cost control of the company.
Time Factor: The time of two months cannot cover up the entire topic of cost reduction and cost control details.
Limited Access to the Financial and Costing Numerical Data.
Study is being carried out for four years only.
NAME AND LOCATION OF THE COMPANY
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2.1(a) Registered Office:
Tata Chemicals Ltd.,
Bombay House,
24, Homi Mody Street,
Mumbai – 400 001
2.1(b) Corporate Office:
Tata Chemicals Ltd.,
Leela Business Park,
Andheri – Kurla Road,
Andheri (E),
Mumbai – 400 059
VISION – MISSION – VALUES
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2.2(a) Vision:
We shall be amongst premier chemical companies by:
Leveraging science to deliver new and innovative offerings.
Enhancing value to our customers.
Delivering superior returns to our shareholders.
Leading in corporate sustainability.
Nurturing innovation, learning through diversity and team work amongst employees.
2.2(b) Mission:
Serving society through science.
2.2(c) Values:
Integrity
Safety
Excellence
Care
Innovation
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PROFILE
2.3(a) Serving society through science:
Tata Chemicals Limited is a global company with interests in businesses that focus on LIFE:
Living, Industry and Farm Essentials. The story of the company is about harnessing the fruits of
science for goals that go beyond business.
This story began in Mithapur, Gujarat in western India with the creation of a plant that would
raise a wealth of marine chemicals from the ocean, with the potential to touch human lives in
many ways. From these humble beginnings a market-leading international business has been
created, with operations across four continents.
Through its living essentials portfolio the company has positively impacted the lives of millions
of Indians. Tata Chemicals is the pioneer and market leader in India’s branded Iodized salt
segment. With the introduction of an innovative, low-cost, nanotechnology-based water purifier,
it is providing affordable, safe drinking water to the masses.
Tata Chemicals is the world’s second largest producer of soda ash with manufacturing facilities
in Asia, Europe, Africa and North America. The company’s industry essentials product range
provides key ingredients to some of the world’s largest manufacturers of glass, detergents and
other industrial products.
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With its farm essentials portfolio the company has carved a niche in India as a crop nutrients
provider. It is a leading manufacturer of urea and phosphatic fertilizers and, through its
subsidiary, Rallis, has a strong position in the crop protection business.
The Tata Chemicals Innovation Centre is home to world-class R&D capabilities in the emerging
areas of nanotechnology and biotechnology. The company’s Centre for Agri-Solutions and
Technology provides advice on farming solutions and crop nutrition practices.
The company has also entered into a JV with Singapore’s Temasek Life Sciences Laboratory
(Joil) to develop jatropha seedlings to enable bio fuels capability. In line with its mission,
‘serving society through science’, the company is applying its expertise in sciences, to develop
high-tech and sustainable products.
2.3(b) Science for sustainability:
Tata Chemicals’ Mission, Vision and Values are deeply rooted in the principles of sustainability.
For the company, sustainability encompasses stakeholder engagement, environmental
stewardship, creating economic value, promoting human rights and building social capital. Tata
Chemicals supports the UN Global Compact and is committed to reporting its sustainability
performance in accordance with GRI guidelines. The company actively works towards
improving its eco-footprint with a policy of ‘avoid, reduce and reuse’. Resource optimization,
alternative sources of fuel and raw materials, and maximizing reuse and recycling are key drivers
in operations.
The company has been recognized for its clear commitments to sustainability and its good
environmental management practices.
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2.3(c) Community links:
In 1980, Tata Chemicals set up a non-governmental organization – Tata Chemicals Society for
Rural Development (TCSRD) – that works towards holistic community development, including
managing water, land and other natural resources, encouraging enterprise development, and
promoting health and education. TCSRD's activities have been recognized at a national level.
Tata Chemicals Europe (formerly Brunner Mond) is a major sponsor of the Lion Salt Works
Trust, a local heritage project in Cheshire, UK and of the Weaver Valley Initiative, part of the
path-breaking Mersey River cleanup campaign. In Kenya, Tata Chemicals Magadi supports local
health care facilities and works to provide education, water and employment opportunities.
Tata Chemicals is also involved in efforts to preserve the biodiversity of land along the Gujarat
coastline and the nesting sites of migratory birds. TCL and Wildlife Trust of India (WTI) have
signed an MoU for a conservation project that will create awareness and undertake research to
save the endangered species of whale shark that visits the coastal shores of Gujarat.
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BUSINESSES
Headquartered in Mumbai, India, Tata Chemicals is a global company with a range of business
interests focusing on three sectors — living essentials, industry essentials and farm essentials or
LIFE. The Tata Chemicals group is the world’s second-largest producer of soda ash with a
presence in India, Kenya, the UK and the US.
2.4(a) Tata Chemicals Magadi:
Formerly known as Magadi Soda Company, Tata Chemicals Magadi - a part of Tata Chemicals
since 2005 - occupies a significant place in the African economy. It is Africa's largest soda ash
manufacturer and one of Kenya's leading exporters. Established in 1911, Tata Chemicals Magadi
has been producing natural soda ash at Lake Magadi, Kenya, for a hundred years.
2.4(b) Tata Chemicals Europe:
Tata Chemicals Europe (formerly Brunner Mond) is one of Europe's leading producers of
sodium carbonate, salt and sodium bicarbonate and other products. Established in 1874, it
became a part of Tata Chemicals in 2005. The company is headquartered in Northwich, UK, and
has manufacturing operations in Cheshire. In 2011, Tata Chemicals Europe expanded its product
portfolio by acquiring British Salt, UK's leading manufacturer of pure dried vacuum salt
products.
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2.4(c) British Salt:
British Salt, UK's leading manufacturer of pure dried vacuum salt products, became a part of the
Tata Chemicals group in 2011. British Salt produces approximately half of the UK’s pure salt
used in applications ranging from food processing to chemicals production.
2.4(d) Tata Chemicals North America:
Established in 1884, Tata Chemicals North America is one of the world's leading producers of
high quality soda ash. Formerly known as General Chemical Industrial Products, it became a part
of Tata Chemicals in 2008. Tata Chemicals North America is headquartered in New Jersey with
manufacturing facilities at Green River, Wyoming, US.
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MILESTONES
2.5 Footsteps of Tata Chemicals Ltd.:
1927:
Kapil Ram Vakil sets up Okhamandal Salt Works.
On May 4, VT Krishnamachari, then dewan (administrator) of Baroda, lays foundation
stone.
1937:
Tatas approached to take over Okhamandal Salt Works.
1939:
Tata Chemicals Limited incorporated on January 23.
1942:
First unit of chemical works — a bromine plant — is completed. It is the only plant of its
kind in India.
1944:
Soda ash production starts in February.
Lease agreement signed between Baroda state and Tata Chemicals on March 16.
Tata Chemicals given rights to manufacture salt and marine minerals and to use
limestone and other raw materials within the Kathiawad region of the state.
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1946:.
Hospital and medical facilities set up in Mithapur.
1949:
Production of sodium bicarbonate starts.
1957:
Joint venture with Fison Pest Control to form Tata Fisons.
Subsequently merged with Rallis in 1972-73.
1957-58:
Major expansion programme launched to increase capacity of products.
1961-62:
Production of dense soda ash starts.
1962-63:
Net profit increases from Rs16.9 lakh to Rs79.7 lakh.
Significant breakthrough as technical staff succeed in using treated sea water in place of
fresh water.
1964:
Soda ash capacity touches 400 tonnes per day.
Expansion programme completed.
1968-69:
Proposal to export chemicals in association with Tata Exports.
1972-73:
Plant and machinery worth Rs414 lakh installed.
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1974:
Tata Energy Research Institute set up with an initial contribution of Rs1 crore. Aimed at
undertaking research and development of alternate forms of energy.
1977-78:
Shipping division started. MV Jagdev purchased from the Great Eastern Shipping
Company.
Wholly-owned investment subsidiary, Roshan Investments set up (name changed to
Varuna Investments Limited in 1978).
1979-80:
Develops new salt works.
Tata Chemicals Society for Rural Development established to improve quality of life in
Okhamandal villages.
1983:
Tata Salt, India's first iodised, vacuum evaporated, branded salt launched.
1988:
Starts mini toy train, Sabras Express, in Mithapur.
1992:
Tata Shudh' detergent launched.
1993:
New cement plant started in Mithapur.
1994:
Fertiliser plant at Babrala commissioned in 36 months, a world record for setting up a
fertiliser plant.
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2002:
Mithapur is awarded ISO-14001 certification.
The chemicals division at Mithapur is awarded the ISO-9001-2000 Migration certificate.
2003:
Tata Salt ranked No. 1 Food brand in Brand Equity Survey of India's most trusted brands.
Babrala fertiliser plant registered with British Safety Council.
New initiatives taken up to consolidate and drive growth in the core business.
Mithapur becomes the first industrial township to be awarded the ISO 14001 certificate.
The fertiliser plant gets ISO-14001 and OHSAS-18001 certification.
2004:
ISO 14001 certification for the Babrala Township for implementation of Environment
Management System. Certification audit conducted by KPMG, India.
Tata Chemicals set up the Innovation Centre to develop world-class R&D capability in
the emerging areas of nanotechnology and biotechnology at Pune.
2005:
First step towards internationalization. Tata Chemicals acquires an equal partnership in
Indo Maroc Phosphore SA (IMACID) along with Chambal Fertilisers and global
phosphate major, OCP of Morocco.
2006:
Tata Chemicals completes acquisition of UK-based Brunner Mond Group, one of the
world's leading manufacturer’s soda ash and associated alkaline products.
2008:
Tata Chemicals acquires US-based General Chemical Industrial Products (GCIP).
Becomes world’s second largest soda ash manufacturer.
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2009:
Tata Chemicals urea division achieves RC 14001 - 2005 Certification.
Tata Chemicals certified under SA 8000:2001 standard for the Mithapur, Babrala and
Haldia sites by RINA India.
Tata Chemicals launches ‘i-Shakti Cooking Soda’– refined sodium bicarbonate.
Tata Chemicals launches 'Tata Swach' water purifier.
2010:
Rallis India acquires majority stake in Metahelix Life Sciences.
Tata Chemicals acquires 100-per-cent stake in leading vacuum salt producer British Salt,
UK.
Tata Chemicals launches i-Shakti dals (pulses).
2011:
Tata Chemicals rebrands global subsidiaries - Tata Chemicals North America (General
Chemical Industrial Products), Tata Chemicals Magadi (Magadi Soda Company), Tata
Chemicals Europe (Brunner Mond and British Salt)
Acquires stake in EPM Mining Ventures, Canada
Signing of the pre-construction services agreement with Technip for the Gabon Fertiliser
Project
Africa's first premium ash plant opens at Tata Chemicals Magadi
2012:
Tata Salt launches its flavoured variants - 'Flavoritz'
India's first iodine plus iron fortified salt launched by Tata Chemicals
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PRODUCTS
Tata Chemicals aims to touch people’s lives in a way such that they can live better, eat better and
work better. Through its wide range of products that find use in industries such as
pharmaceuticals, food processing, food essentials, Tata Chemicals reaches out to millions of
people across the world. The high quality of chemicals and ingredients made at Tata Chemicals
go a long way in improving the lives of its people and that of the communities it operates out of.
Its products at its manufacturing facilities in India, Africa, the UK and the US.
Tata Chemicals classifies its products under three categories:
2.6(a) Living essentials:
Basic products for daily living, such as salt, sodium bicarbonate or baking soda products and
water-related products.
Consumer salt: Tata Salt, i-Shakti, Tata Salt Lite, Tata Salt Flavoritz and Tata Salt Plus.
Pulses: i-Shakti Dals
Water purifier: Tata Swach
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2.6(b) Industry essentials:
Products that form essential inputs to diverse industries across the glass, detergents, mining and
chemical processing sectors.
Soda Ash
Allied chemicals: Caustic soda, chlorine based products, bromine based products,
gypsum, sodium tripolyphosphate, phosphoric and sulphuric acids
Industrial Salt
Sodium Bicarbonate
Cement: Tata Shudh
2.6(c) Farm essentials:
Farm inputs needed to improve crop health and productivity, such as fertilizers, pesticides,
specialty nutrients, seeds and agri-services.
Fertilizers
Customized Fertilizers
Biofuels
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SERVICES
2.7(a) Farm Centres:
The Tata Kisan Sansar (TKS) is a network of nearly 600 farmer resource centres that caters to
more than 3.5 million farmers in 22000 villages in the northern and eastern part of India. The
centres are one-stop solution shops that provide farmers access to a wide range of agricultural
inputs such as vital fertilizers, seeds, and pesticides along with agricultural services such as soil
testing, crop advisory and foliar application services. New services being explored include
financial services and IT enabled market information.
2.7(b) Bespoke services:
The company offers customized salt to its customers. The technical department and laboratories
at Tata Chemicals are instrumental in tailoring product specifications to the customers' exacting
requirements. These services can range from vendor managed inventory to self-billing and
OB10.
The company also offers a host of other services from advice on transporting and discharging
their products to suggestions on silo selection and product applications.
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PLANTS
Around the World:
Tata Chemicals is the world’s second largest producer of soda ash. It has manufacturing facilities
in India, UK, the US and Kenya and a supply chain that can service the needs of customers
around the globe. The company's global capacity for soda ash is around 5.5 MTPA.
Tata Chemicals is a leading player in the consumer products and crop nutrition and agribusiness
segments. And its emphasis in every aspect of its business is to use science to improve the
everyday lives of ordinary people.
Our Manufacturing Facilities at:
India:
Mithapur, Gujarat
Babrala, Uttar Pradesh
Haldia, West Bengal
USA
UK:
Northwich
Middlewich
Kenya
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LIFE @ TATA CHEMICALS
2.9 Working with us: Grooming new leaders
Tata Chemicals believes in grooming business leaders for the present and the future. This belief
forms the basic philosophy behind the company's induction programme. The programme follows
a bottom-top approach that enables new entrants to our company to be trained in a structured
manner, giving them in-depth insights to the organization.
Employees are hired and groomed in batches, which leads to a creation of pool of management
talent having the same direction, and providing complementarities with similar skills, attitudes,
personalities and values. We believe that this pool will be the answer to any leadership challenge
across the organization.
At Tata Chemicals, we recruit candidates from various disciplines and take them into the system
in functions like sales and marketing, finance, HR, operations/SCM, corporate communication,
agri-business, etc. This is a dedicated process of selecting, training, grooming and inducting
fresh post-graduates that is designed to meet our present and future needs.
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AWARDS & RECOGNITIONS
2.10 A record of business excellence:
Tata Chemicals has been recognized by leading industry associations for its business excellence
practices and efforts to protect the environment, conserve energy and help in the integrated
development of rural communities.
2011-‘12:
Tata Chemicals received CNBC Asia's India Corporate Social Responsibility Award.
ABCI Awards: Gold in Photo Feature and Newsletter categories; Silver for New
Publication, Best Headline and Corporate Intranet categories.
Product of the Year - 2012 for Tata Swach water purifier.
Employer Branding Award, 2012 for 'Best HR Strategy in Line with Business Strategy.
Mother Teresa Award for Corporate Citizen 2011.
CII - ITC Sustainability Awards 2011.
2010-’11:
PRCI Awards: Gold for its online newsletter and silver accolades under various
categories for corporate website, Human Touch of Chemistry website and Manthan.
AIOE Industrial Relations Award 2009-10.
Business Leader of the Year 2011.
Tata Salt — Hall of Fame award at the Economic Times Brand Equity Survey 2010.
'Gold’ at the Asian Innovation Awards 2010 for Tata Swach.
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2009-‘10:
RC 14001 - 2005 Certification for TCL UREA division.
CNBC-TV18 CFO Awards for the Best Deal in the M&A Category. SA 2008 certification for Tata Chemicals. Tata Salt — Most Trusted Food Brand by Brand Equity Survey 2009, conducted by
Nielsen. TBEM Highest Delta Award. Bombay Chamber 'Good Corporate Citizen Award 2008-09'. Excellent Energy Efficient Unit Award 2009. CII-ITC Sustainability Award. Gujarat Safety Council Award for TCL, Mithapur. Tata Salt Superbrand Award. Indy Award for the Best Corporate Film. Best Website Debut Award in the Gold Category at the Indian Digital Media Awards for
www.humantouchofchemistry.com.
2008-‘09:
11 National Awards for Communications at the Association of Business Communicators of India 2008.
CII National Award for Excellence — Water Management '08. Best Supplier Award by HUL. The Asset Triple A Best Deal India Award. CNBC TV 18 - CFO award for Best Deal in M & A category. TCL Awarded the Business Superbrands Status.
2007-’08:
Nation's No 1 Food Brand, and No 3 Most Trusted Brand – Brand Equity ET Survey 2008.
Mithapur unit – 5 star rating by British Safety Council. TBEM JRD QV Award – TQMS 07-08. Manthan – Best Newsletter by Rotary Club of Cochin. Best Social responsibility award from Bombay Stock Exchange 2007. Dun & Bradstreet American Express Corporate Awards 2007. Tata Chemicals – Corporate Citizen of the Year award by Press Relation Council of
India.
Award for Excellence in the field of Industrial Relations by Federation of Gujarat
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Industries, 2007.2006-’07:
TCL wins Deal of the Year Award for BMGL acquisition from IMA. Babrala plant wins FAI Award for the Best Technical Innovation. Haldia plant wins FA I Award for Best Overall performing SSP Plant. Fertiliser SBU wins FAI Environment Protection Award. CII National Award for Excellence in Water Management 2007 for 'Most useful
presentation'. Chemical SBU wins International Asia Pacific Quality Award. First prize, Best Practice Exhibition from TQMS at Business Excellence Convention,
Phuket. 9 National Awards for Communications at the Association of Business Communicators
of India 2007 (8 Golds + 1 Bronze).2005:
Golden Peacock environment management award (Fertiliser SBU) World Environment Foundation June 2005.
Safety Gold Award for Babrala (chemical sector) Greentech Foundation, Delhi April 2005.
CFBP - Jamnalal Bajaj Uchit Vyavahar Puraskar Trophy Council for Fair Business Practices.
Tata Salt elected as 'Mera Brand', Consumer category, at World Awards. ICAI Award for Excellence in Financial Reporting by Institute of Chartered Accountants
of India.
2004:
Corporate Social Responsibility Communications — Print Media; First prize. (For TCL's
TCSRD Report) by Association of Business Communicators of India.
Digital Communications — Digital Media; First prize (For TCL's intranet and website). Excellence in Safety for Babrala by Fertiliser Association of India. Sword of Honour award for Babrala by British Safety Council, UK. Tata Salt named Superbrand in FMCG brands category. 5 Star rating for Mithapur by British Safety Council, UK. Excellence in National Gas Conservation for Babrala by GAIL (India).
2003:
Excellence in Natural Gas Conservation (Fertiliser Sector) by Gas Authority of India
Limited (GAIL).23 | P a g e
Rotating Shield, Certificate of Lowest DII and Certificate of Honour by Gujarat Safety
Council.
4th National Award for Energy Management from CII-Sohrabji Godrej Green Business
Centre.
Greentech Platinum Environment Excellence Award by Greentech Foundation, Delhi.
2002:
Best production performance award for single super-phosphate plant (SSP) from Fertiliser Association of India.
Golden Peacock environment management award by World Environment Foundation. Environment, agriculture and rural development award by Indian Merchants' Chamber. Tata Salt listed among the Top 20 brands globally by AC Nielsen's Winning Brands
Global Database.
2001:
Environment protection award by Fertiliser Association of India.
Best environmental and ecological implementation gold award by Green Land Society,
Hyderabad.
Environment, agriculture and rural development award from Indian Merchants' Chamber.
Jawaharlal Nehru memorial national award for pollution control and energy conservation.
Gujarat Safety Council award and certificate of honour by Gujarat Safety Council.
RESEARCH DESIGN AND METHODOLOGY
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Research in common parlance refers to a search for knowledge. One can also define research as a
systematic search for pertinent information on a specific topic. The word “Research” has been
derived from French word “Researcher”, means to search.
Francis Rummer defines Research as, “It is a careful inquiry or examination to discover new
information or relationship and to expand or verify existing knowledge.” Research is the solution
of the problem, whether created or already generated. When research is done, some new outcome
should also be obtained so that the problem (created or generated) can be solved.
3.1(a) Research Design:
Research Design is the conceptual structure within which research is conducted. It constitutes the
blueprint for collection, measurement and analysis of the data.
3.1(b) Research Process:
Before embarking on the details of research methodology and techniques, it seems appropriate to
present a brief overview of the research process. Research process consists of series of actions or
steps necessary to effectively carry out the research and the desired sequencing of these steps.
Following are the steps of a research process:
Formulating the research problem.
Extensive literature survey.
Development of working hypotheses.
Preparing the research design.
Determining the sample design.
Collecting the data.
Execution of the project.
Analysis of data.
Hypothesis testing.
Generalizations and Interpretations.
Preparation of the report or the thesis.25 | P a g e
3.1(b) Research Methodology:
Secondary Source of Data Collection:
Annual Reports:
Year 2008-‘09
Year 2009-‘10
Year 2010-‘11
Year 2011-‘12
Year 2012-‘13
Year 2013-‘14
Related Literature:
Literature of earlier research done for the year 2003-04 to 2005-06.
Literature of The Boston Consulting Group.
Literature of lecture delivered by S. C. Kuchhal, IFCI Professor of Management, IIM-
A.
CONCEPT
4.1 Technical Background:
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Managing the productivity of capital is the important and difficult task for the corporate
management. The first step towards it is to determine the main areas in which capital is actually
employed. The next step is to seek answer to the following questions: How much productive
work does the capital employed in various areas do? How does it get a return or contribute? How
can it be made to work not only “harder” but also “smarter”?
Fixed capital and working capital, while both capital, require different approaches in
managing productivity. Nothing is more wasteful in a fixed asset than time-not-worked.
Managing time-not-worked is an effective way to improve the productivity of capital for most
fixed (physical and human) assets.
Working capital needs to be measured and managed differently. Unlike fixed assets, it is
not “producing” capital but “supporting” capital. The question arises: What does it, and what
should it, support?
The management of productivity of capital has been engaging our attention during the
last few years. Most companies do not even have the data for the productivity of capital-and
without the same one cannot manage. Productivity of capital, correctly analyzed, can act as an
effective tool for corporate management to plan and control.
It may, however, be noted that productivity is by no means the exclusive preserve of executives
in the finance and accounting areas of a company, but the common and collective responsibility
of all the executives.
TOOLS FOR MEASURING PRODUCTIVITY OF CAPITAL
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4.2 How to Measure?
Several indices and ratios do exist to measure various aspects of productivity; however,
they serve limited purpose. The other problem on some aspects of productivity a company might
do well and on others not so well or even poorly. The question would then arise as to how to
evaluate its overall performance and how to compare its performance over a period of time.
In this study, I have tried to overcome these shortcomings and has derived a versatile tool
by which productivity in all aspects could be represented by a single number thereby facilitating
ease of understanding and comparison. Such an approach permits companies to be ranked and
compared and also allows computation of average performance in an industry or sector.
It was felt that six parameters being key areas of performance, could be measured by the
ten ratios indicated below. The agreement of opinion was that each ratio could be given equal
importance to avoid subjectivity.
The following are the parameters for managing productivity of capital:
A. Liquidity:
1. Current Assets to Current Liabilities
B. Operational Efficiency:
2. Gross Sales to Capital Employed
3. Contribution to Gross Sales
C. Profitability of Capital Employed:
4. Operating Profit to Capital Employed
5. Contribution to Operating Profit
D. Profitability to Capital Owned:
6. Net Profit to Net Worth
7. Earnings Before Interest and Tax to Profit Before Tax
E. Management of Earnings:
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8. Dividends to Share Capital
9. Retained Earnings to Net Profit
F. Market Appraisal:
10. Price to Earnings Per Share Ratio
The next step is to design a scale for each of these ratios and to assign weights to them.
The minimum weight on any ratio is zero and maximum is 5. There is no negative marking. Each
weight is to be multiplied by 2 so that there is a maximum of 10 marks for each ratio. The overall
index, therefore, provides for a total of 100 marks.
PARAMETERS IN DETAIL
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4.3 Detailed Description:
A. Liquidity:
1. Current Assets to Current Liabilities:
Company having long-term funds to finance hardcore component of working
capital get high score. Highest score has been awarded to company having current ratios
in the range of 1.5 – 1.8. Companies with current ratios below and beyond this range are
assumed as not having optimal financing of working capital.
B. Operational Efficiency:
2. Gross Sales to Capital Employed:
An improvement of this relationship requires concentrated efforts for maximizing
sales and minimizing capital employed on the other. Maximization of sales by charging
higher price is possible in a seller’s market, but not in a competitive environment where
increasing sales can be possible by fuller utilization of installed capacity for bringing
reduction in cost and price.
Minimization of capital employed stresses the need for better management of
capital expenditure programme and working capital which means least investment in
inventory, accounts receivable and other current assets. Any increase in capital employed
must be well covered by a higher increase in sales.
3. Contribution to Gross Sales:
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This ratio can be enhanced by reducing variable cost through exercising proper
control on raw material and other inputs, efficient management of purchase function,
proper product-mix with emphasis on allocation of production capacity on high
contribution product, research and development, value engineering, etc. Any
improvement in this ratio brings down the level of break-even point of sales for an
organization,
C. Profitability of Capital Employed:
This can be measured by two ratios:
4. Operating Profit to Capital Employed.
5. Contribution to Operating Profit.
It is also known as the margin of safety, emphasizes the need for an effective
control on fixed costs. The major fixed costs in a manufacturing enterprise are wages and
salaries, and depreciation. An effective cooperation of HRD function and capital
expenditure programme can help in keeping fixed costs under control. Any increase in
the fixed cost results in raising the level of operating leverage. Negligence in this area
exposes the undertaking to a high degree of business risk. Profitability of capital
employed thus becomes more sensitive to change in sales volume. Margin of safety
becomes thin. Corporate management has to ensure that capital employed works not only
“harder” and “smarter”, but also “safer”.
The operating leverage, which is the reciprocal of margin of safety should be as
low as possible by exercising an effective control on fixed cost. Low operating leverage
provides the desired stability to the profitability of an organization thereby strengthening
its capacity to face adverse business weather. The company having higher degree of
operating leverage would be more risky.
31 | P a g e
D. Profitability of Capital Owned:
This can be measured by two ratios:
6. Net Profit to Net Worth.
7. Profit before Int. & Tax to Profit before Tax.
The quantum of this ratio can be judged by examining the relationship of net
profit to net worth. Productivity of capital owned is based on an integration of
profitability of capital employed ratio.
Corporate management should keep track not only the quantum of profitability of
capital owned, but also its quality or sensitivity. For this purpose we have to use the
concept of financial leverage.
Financial leverage shows the ability of a company to take advantage of fixed
financial charges to magnify the effects of changes in earnings before interest and tax
(PBIT) on the earnings per share (EPS). It results from, the use of borrowed funds with
the fixed rate return. It can be computed by the ratio of earnings before interest and tax
(PBIT) to profits before tax (PBT). Corporate management may be interested in
maximizing net profit to net worth. But, any reckless increase in financial leverage would
effect the quality of the profitability of capital owned.
E. Management of Earnings:
Management of earnings can be analyzed by the following two ratios:
8. Dividend to Share Capital
9. Retained Earnings to Net Profit
Normally, shareholders in a company want to have a high percentage of dividend
to share capital. They have got liquidity preference. The companies which pay low rate of
dividend are ranked low by investing public. Corporate management, among other things,
has an obligation to meet this legitimate expectation of shareholders. But, at the same
time, management is under pressure to retain a high percentage of earnings after tax to
strengthen
32 | P a g e
the corporate financial position. As a matter of fact, the rate of corporate growth is
closely related to the amount of retained earnings. Management, therefore, remains under
continuous pressure of these two conflicting objectives posing a challenge to their
managerial skill. Companies declaring dividend at a high percentage to share capital have
been awarded high score. But companies paying high rate of dividend with a high pay-
out ratio are at a lower level.
F. Market Appraisal:
10. Market Price Per Share to Earnings Per Share:
For assessing the market rating of a company a commonly used tool is the ratio of
market price to earnings per share, popularly known as P/E ratio. We have taken the
market price of the share of the company at the end of the four months of their
accounting period. This time-lag has been provided with a view to allowing enough time
for the market to assimilate the reported corporate financial performance.
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COMPOSITE INDEX FOR MEASURING PRODCTIVITY OF CAPITAL
4.4 Basis for Allocation of Weights:
This is the second step for measuring the productivity of capital. In this step weights are assigned
to the ratios calculated. Weights are then multiplied by 2 so that there is maximum of 10 marks for each
ratio. The Weights would be assigned as per the guidelines given below:
Sr. No. Ratio Explanation Range Weight
1.
A. Liquidity:
1.Current Assets to
Current Liabilities
Current Ratio has been
calculated on RBI Guidelines.
Current Liabilities include Fixed
Deposits payable within 12
months plus bank overdrafts,
cash credit, etc. Advance taxes
paid and tax deducted at source
have been set off against
provision for taxation.
1.5 – 1.8
1.3 – 1.4
1.1 – 1.2
1.0 – 1.1
0.9 – 1.0
0.8 & less /
2.6 & Above
5
4
3
2
1
0
2.
B. Operational
Efficiency:
2. Gross Sales to
Capital Employed
Gross Sales include excise duty.
Capital Employed means Net
Fixed Assets plus Net Current
Assets plus Investments less
Revaluation Reserve.
More Than 3
2.5 – 3.0
2.0 – 2.4
1.5 – 1.9
1.0 – 1.4
Less Than 1
5
4
3
2
1
0
3.3. Contribution to
Sales
Contribution has been calculated
by deducting Excise Duty and
Variable Costs (including short-
term interest) from Gross Sales.
>/ 30
>/25 - <30
>/20 - <25
>/15 - <20
>/10 - <15
<10
5
4
3
2
1
0
4. C. Profitability of Operating Profit is Contribution >/ 30 5
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Capital Employed:
4.Operating Profit
to Capital
Employed
less Fixed Costs. E.g.: Salaries &
Wages, Depreciation, etc.
>/25 - <30
>/20 - <25
>/15 - <20
>/10 - <15
<10
4
3
2
1
0
5.5. Contribution to
Operating Profit
Level of Operating Leverage
(business risk) is indicated by
this ratio.
Less Than
1.5
1.5 – 2.4
2.5 – 3.4
3.5 – 4.4
4.5 – 5.4
5.5 & Above
5
4
3
2
1
0
6.
D. Profitability of
Capital Owned:
6. Net Profit to Net
Worth
Net Profit is Profit After Tax less
Preference Dividend. Net Worth
is Share Capital plus Reserves
less Revaluation Reserve (if
any).
>/ 25
>/20 - <25
>/15 - <20
>/10 - <15
>/5 - <10
<5
5
4
3
2
1
0
7.
7. Earnings Before
Int. & Tax to Profit
Before Tax
EBIT is Operating Profit plus
Other Income. PBT is arrived at
by deducting Long Term Interest
(on Debentures and long term
loans) from EBIT.
Less than 1.5
1.5 – 1.9
2.0 – 2.4
2.5 – 2.9
3.0 – 3.4
3.5 & Above
5
4
3
2
1
0
8.
E. Management
Earnings:
8. Dividends to
Share Capital
Return on equity share is shown
by this relationship which is
indicative of shareholders’
satisfaction.
>/ 50
>/40 - <50
>/30 - <40
>/20 - <30
>/10 - <20
<10
5
4
3
2
1
0
9. 9. Retained Retained Earnings is Net Profit >/80% 5
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Earnings to Net
Profit
less Dividend on Share Capital.
This relationship determines the
rate of corporate growth.
65% - 79%
50% - 64%
35% - 49%
20% - 34%
<20%
4
3
2
1
0
10.
F. Market Appraisal:
10. Market Price to
Earnings Per Share
Market Price has been taken 4
months after the balance sheet
date to allow the financial results
to be fully reflected. This ratio is
indicative of market verdict on
corporate performance and
management.
>/17
>/14 - <17
>/11 - <14
>/8 - <11
>/5 - <8
<5
5
4
3
2
1
0
DATA ANALYSIS AND INTERPRETATION
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5.1 Presentation, Analysis and Interpretation of the data:
A. LIQUIDITY:
1. Current Assets to Current Liabilities:
It should be in the range of 1.5 – 1.8
Table No.: 5.1.1
Particulars 2008-‘09 2009-‘10 2010-‘11 2011-‘12 2012-‘13Current Assets 3,218.80 2,182.76 2,500.99 3,980.16 4,817.57Current Liabilities 2,143.70 1,511.82 1,502.33 2,226.38 1,753.93Current Assets / Current Liabilities 1.50 1.44 1.66 1.79 2.75
Weights (Refer 4.3) 5 4 5 5 0
Figure No.: 5.1.1
2008-'09 2009-'10 2010-'11 2011-'12 2012-'130
0.5
1
1.5
2
2.5
3
1.50 1.44 1.66 1.79
2.75
Current Assets to Current Liabilities
Years
Rang
e
Interpretation:
Current Ratio in the year 2008-’09 / ’09-’10 was around 1.50 which shot up to above 2 in
the year 2012-’13.
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B. OPERATIONAL EFFIECIENCY:
2. Gross Sales to Capital Employed:
This ratio should be more than 3. On an average it should be around 2.0 to 3.4.
Table No.: 5.1.2
Particulars 2008-‘09 2009-‘10 2010-‘11 2011-‘12 2012-‘13Gross Sales 8,399.03 5,476.40 6,332.86 7,996.25 8,529.87Capital Employed 3,992.09 4,050.62 4,153.61 4,861.23 6,412.37Gross Sales / Capital Employed 2.10 1.35 1.52 1.64 1.33
Weights (Refer 4.3) 3 1 2 2 1
Figure No.: 5.1.2
2008-'09 2009-'10 2010-'11 2011-'12 2012-'13 -
0.50
1.00
1.50
2.00
2.50
2.10
1.35 1.52 1.64 1.33
Gross Sales to Capital Employed
Years
Rang
e
Interpretation:
Gross Sales to Capital Employed has come down gradually from year 2008-’09 to year 2012-’13.
Management has taken corrective steps to revive it effectively by improving overall
performance in budget for the year 2013-’14.
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3. Contribution to Gross Sales:
0.30 and above would be considered to be best and would be given highest
weightage.
Table No.: 5.1.3
Particulars 2008-‘09 2009-‘10 2010-‘11 2011-‘12 2012-‘13Contribution 1,757.00 1,394.00 1,490.00 1,791.00 2,500.00Gross Sales 8,399.03 5,476.40 6,332.86 7,996.25 8,529.87Contribution / Gross Sales 0.21 0.25 0.24 0.22 0.29Weights (Refer 4.3) 3 4 3 3 4
Figure No.: 5.1.3
2008-'09 2009-'10 2010-'11 2011-'12 2012-'13 -
0.05
0.10
0.15
0.20
0.25
0.30
0.21 0.25 0.24 0.22
0.29
Contribution to Gross Sales
Years
Rang
e
Interpretation:
Contribution remains in the range of 22% to 25% for standalone business, which would come down to 20% in budgeted year 2013-’14.
Operating profits should be improved through cost efficiencies, fixed cost reductions,
price increases, etc. wherever possible.
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C. PROFITABILITY TO CAPITAL EMPLOYED:
4. Operating Profit to Capital Employed:
On an average this ratio should be within the range of 0.20 to 0.30.
Table No.: 5.1.4
Particulars 2008-‘09 2009-‘10 2010-‘11 2011-‘12 2012-‘13Operating Profit 980.33 896.00 893.48 1,023.75 1,046.37Capital Employed 3,992.09 4,050.62 4,153.61 4,861.23 6,412.37Operating Profit / Capital Employed 0.25 0.22 0.22 0.21 0.16
Weights (Refer 4.3) 4 3 3 3 2
Figure No.: 5.1.4
2008-'09 2009-'10 2010-'11 2011-'12 2012-'13 -
0.05
0.10
0.15
0.20
0.25
0.25 0.22 0.22 0.21
0.16
Operating Profit to Capital Employed
Years
Rang
e
Interpretation:
Operating profit to capital employed has come down gradually.
Recent drop in the profit per unit of capital employed is due to excessive working capital
blocked in subsidies.
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5. Contribution to Operating Profit:
Operating Leverage should be less than 1.5.
Table No.: 5.1.5
Particulars 2008-‘09 2009-‘10 2010-‘11 2011-‘12 2012-‘13Contribution 1,757.00 1,394.00 1,490.00 1,791.00 2,500.00Operating Profit 980.33 896.00 893.48 1,023.75 1,046.37Contribution / Operating Profit 1.79 1.56 1.67 1.75 2.39
Weights (Refer 4.3) 4 4 4 4 4
Figure No.: 5.1.5
2008-'09 2009-'10 2010-'11 2011-'12 2012-'13 -
0.50
1.00
1.50
2.00
2.50
1.79 1.56 1.67 1.75
2.39
Contribution to Operating Profit
Years
Rang
e
Interpretation:
During the period under review, fixed costs have increased significantly during later part
of the years.
It has worsened the ratio; however, it can be improved by controlling fixed costs.
41 | P a g e
D. PROFITABILITY TO CAPITAL OWNED:
6. Profit After Tax to Net Worth:
Anything within the range of 0.15 to 0.25 would be good for the company.
Table No.: 5.1.6
Particulars 2008-‘09 2009-‘10 2010-‘11 2011-‘12 2012-‘13PAT 452.05 434.78 408.49 586.60 643.32Net Worth 3,859.30 4,282.96 4,740.68 5,017.23 5,307.32PAT / Net Worth 0.12 0.10 0.09 0.12 0.12Weights (Refer 4.3) 2 2 1 2 2
Figure No.: 5.1.6
2008-'09 2009-'10 2010-'11 2011-'12 2012-'13 -
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.12 0.10
0.09 0.12 0.12
Profit After Tax to Net Worth
Years
Rang
e
Interpretation:
PAT to Net Worth is almost constant throughout the trend period indicating constant rate of return on owners’ equity.
While company is able to sustain its earnings on owners’ equity, the need is to improve
overall PAT to Net Worth ratio.
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7. Profit Before Interest and Tax to Profit Before Tax:
This is the second parameter to calculate the profitability of capital owned. It
should be less than 1.5.
Table No.: 5.1.7
Particulars 2008-‘09 2009-‘10 2010-‘11 2011-‘12 2012-‘13PBIT 943.82 902.14 558.73 848.69 992.62PBT 660.27 588.13 558.70 764.35 825.37PBIT / PBT 1.43 1.53 1.00 1.11 1.20Weights (Refer 4.3) 5 4 5 5 5
Figure No.: 5.1.7
2008-'09 2009-'10 2010-'11 2011-'12 2012-'13 -
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.43 1.53
1.00 1.11 1.20
Profit Before Int. & Tax to Profit Before Tax
Years
Rang
e
Interpretation:
In the year 2010-’11 there was a subsequent fall in the ratio; however, it started
increasing then after.
The ratio is constantly at the score of 5 for the trend period.
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E. MANAGEMENT OF EARNINGS:
8. Dividend to Share Capital:
It shows the earnings of the shareholders. It should be greater than 0.50.
Table No.: 5.1.8
Particulars 2008-‘09 2009-‘10 2010-‘11 2011-‘12 2012-‘13Dividend 247.62 255.29 294.63 292.77 294.46Share Capital 235.23 243.32 254.82 254.82 254.82Dividend / Share Capital 1.05 1.05 1.16 1.15 1.16Weights (Refer 4.3) 5 5 5 5 5
Figure No.: 5.1.8
2008-'09 2009-'10 2010-'11 2011-'12 2012-'13 0.98 1.00 1.02 1.04 1.06 1.08 1.10 1.12 1.14 1.16
1.05 1.05
1.16 1.15 1.16
Dividend to Share Capital
Years
Rang
e
Interpretation:
From the year 2010-’11, the ratio is constant around 1.15.
The score on the scale is 5 continuously throughout the trend as the ratio is greater than
50%.
9. Retained Earnings to Net Profit:44 | P a g e
It is the ratio of amount of profit earned retained in the business. It should be in
the range of 0.50 to 0.79.
Table No.: 5.1.9
Particulars 2008-‘09 2009-‘10 2010-‘11 2011-‘12 2012-‘13Retained Earnings 204.43 179.49 113.86 293.83 348.86Net Profit 452.05 434.78 408.49 586.60 643.32Retained Earnings / Net Profit 0.45 0.41 0.28 0.50 0.54
Weights (Refer 4.3) 2 2 1 3 3
Figure No.: 5.1.9
2008-'09 2009-'10 2010-'11 2011-'12 2012-'13 -
0.10
0.20
0.30
0.40
0.50
0.60
0.45 0.41 0.28
0.50 0.54
Retained Earnings to Net Profit
Years
Rang
e
Interpretation:
Retained Earnings to Net Profit is scaling up indicating that the company is ploughing
back the higher proportion of profits to foster its future growth in recent years.
45 | P a g e
F. MARKET APPRAISAL:
10. Market Price Per Share to Earnings Per Share:
17.00 and above is the most ideal ratio of Market Price Per Share to Earnings Per
Share.
Table No.: 5.1.10
Particulars 2008-‘09 2009-‘10 2010-‘11 2011-‘12 2012-‘13Market Price per Share 140.00 325.00 340.00 335.00 322.00Earnings per Share 19.25 18.38 16.32 23.03 25.25MPS / EPS 7.27 17.68 20.83 14.55 12.75Weights (Refer 4.3) 1 5 5 4 3
Figure No.: 5.1.10
2008-'09 2009-'10 2010-'11 2011-'12 2012-'13 -
5.00
10.00
15.00
20.00
25.00
7.27
17.68 20.83
14.55 12.75
Market Price Per Share to Earnings Per Share
Years
Rang
e
Interpretation:
Price Earnings ratio has gradually declined, which indicates weak performance of
company’s shares on bourses.
5.2 SUMMARY OF OVERALL RATING OF TATA CHEMICALS LTD.
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Table No.: 5.2.1
Sr.
No.Particulars
Average Rating
(Refer 5.1 Tables)
Score
(Refer 4.2)
A) Liquidity:
1. Current Assets to Current Liabilities 3 7
B) Operational Efficiency:
2. Gross Sales to Capital Employed 2 4
3. Contribution to Gross Sales 3 7
C) Profitability of Capital Employed:
4. Operational Profit to Capital Employed 3 6
5. Contribution to Operational Profit 4 8
D) Profitability of Capital Owned:
6. Profit After Tax to Net Worth 2 4
7. Profit Before Int. & Tax to Profit Before Tax 5 10
E) Management of Earnings:
8. Dividend to Share Capital 5 10
9. Retained Earnings to Net Profit 2 5
F) Market Appraisal:
10. Market Price Per Share to Earnings Per Share 4 7
TOTAL OUT OF 100 67
FINDINGS
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6.1 What I found is…
1. It indicates that significant amount of company’s funds are blocked in working capital
(receivables and stocks). (Refer 5.1.1) (Refer Appendix)
2. Capital Employed is increasing more as compared to Gross Sales (Refer 5.1.2) (Refer
Appendix)
3. There is a significant increase in the year 2012-’13 (0.29) as compared to previous years.
It was in the range of 0.22 to 0.25 from 2008-’09 to 2011-’12.(Refer 5.1.3)
4. It remains constant in the range 0.22 to 0.25; however, it slashes down to 0.16 in the year
2012-’13. This is due to excess working capital blocked in subsidies. (Refer 5.1.4) (Refer
Appendix)
5. It indicates that fixed costs are not managed which has worsened the ratio year-by-year.
(Refer 5.1.5)
6. It shows stability on rate of return on owners’ equity. It has been constant in the range of
0.9 to 0.12. (Refer 5.1.6)
7. It is been stable throughout the trend period after a short slide down in the year 2010-’11.
(Refer 5.1.7)
8. From the year 2010-’11 there is stable rate of return on share capital. (Refer 5.1.8)
9. Company is ploughing back its profit in an increasing trend throughout the period. (Refer
5.1.9)
10. It indicates that company’s shares is performing weak on bourses. (Refer 5.1.10)
11. As the company is scoring 67 out of 100, it is considered that the company is managing
the productivity of capital wisely.(Refer 5.2.1)
SUGGESTIONS48 | P a g e
6.2 What I suggested...
1.) Working Capital: Current ratio is on a higher side. Realization from current assets may
help in improving liquidity position.
2.) Contribution to Gross Sales: Overall contribution may be improved through changing
product mix gradually and also keeping close watch on variable costs.
3.) Operating profit to Capital Employed: Operating profit can be improved by enhancing
margins through fixed costs optimization, changing product/customer mix etc.
4.) PAT to Net worth: This can be improved through repayment of debt out of internal cash
generations and improving overall operating performance.
CONCLUSION
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6.3 Conclusion:
This methodology can be used for evaluating all the companies listed on the Stock
Exchange, companies in a particular sector, companies belonging to a Business House, etc. The
overall performance of the corporate sector can be worked out for private, public, joint and
cooperative sectors with few adjustments.
Ideally a 3-year period-past year, current year and projected year—should be used for
evaluating productivity of capital.
I would welcome the views of readers on the Research Methodology as well as the
parameters, scales and weights employed in designing the index.
50 | P a g e
