FSA - Used in Class

1

FSA

Tools and Techniques

2

Why FSA?

Investors invest by future earnings Useful in reducing uncertainties about earnings growth

expectations Only an approximation of economic reality because of

Selective reporting of economic events by the accounting system Alternative accounting method and estimates

Features of an ideal financial statements Comparable among companies Consistent over time Fully reflecting the economic position of the firm

3

Why FSA?

Faced with uncertain bad news, accounting tends to enter it into the records

Faced with uncertain good news, tendency to ignore it Why demand for bad news..,

Creditors with no upside, but all the downside Investors believe bad news disclosed by management, but

skeptical of good news unless supported by objective evidence Management incentives affect believability of their disclosures

Greater degree of verification for gains than for losses

4

Why FSA?

Impact of differential application of accounting methods and estimates on financial statements

Financial reporting system.., Not perfect Economic events and accounting entries do not correspond

precisely Diverge across dimensions of..,

Timing – capital gain and losses, written down long-lived assets Recognition – accounting for discontinued operations Measurement

5

Issues in FSA

Non-comparability of financial statements Change in accounting policies Cross-border comparisons

Over aggregation Consolidated financial statement may conceal important

financial information about a diversified firm’s business activities

Lack of timeliness Stakeholders need more timely information

6

Managing FSA Issues in Inter Company Differences in Accounting Policy

Using cash-based accounting numbers for comparison

Using standardized database Using adjusted accrual-based data

7

Interpretation Problems when using Consolidated Financial Statements

Misleading debt commitment Misleading liquidity positions Recourse debt vs. non recourse debt by firms

in the group Different accounting policies among firms in

same group Position of profit distribution unclear

8

Inherent Issues of Financial StatementsEarnings Management Using Discretion Allowed Under GAAP

Taking a bath Pre-booking expenses during bad times

Creating hidden reserves Booking too many expenses during good times to avoid

showing expenses during bad times

Off-balance-sheet financing Undisclosed liabilities

Overstating financial performance Aggressive accounting practices and fraud

9

Inherent Issues of Financial StatementsGAAP Limitations

Value of R&D, goodwill, and other self-created intangible assets are not reported

Nobody stops a manager from providing estimates (legal liability)

No adjustments for inflation Inflation has been a big issue

Expected performance is not shown Except in cases of liabilities or losses through conservatism

Most assets stated at historical costs Consistent with conservatism, objectivity, and verifiability

10

Trend Analysis

Methods.., Percentage changes Index numbers

Cautious of.., Change in accounting policies over time Change in composition of group Bonus issues Rights issues Share splits Varying purchasing power of assets Varying growth in various business segments Varying dividend cover over years

11

Trend Analysis

Guidelines.., Choose a normal year with regard to business condition as base

year Focus only significant items of financial statements Should adjust financial statements for earlier periods for changes

in accounting policy, procedures and presentations

Issues in using this.., If the amount is negative in one of the years No amount for the base period Base period amount is abnormally small Item having a value in base period and none in next period

12

Common Size Analysis

Common size financial statements - compare companies of different sizes

Useful in understanding the internal makeup of financial statements

Fails to reflect the relatives sizes of companies under analysis

Vertical common size.., Compare companies of different sizes Redress many of distortions of inflation

13

ONGC – BS – Sources of Funds

(Rs in Crs) Mar 10 Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 Mar 03 Mar 02 Mar 01 Share Capital 2,138.89 2,138.89 2,138.89 2,138.89 1,425.93 1,425.93 1,425.93 1,425.93 1,425.93 1,425.93 Reserves Total 85,143.71 76,596.53 68,478.51 59,785.04 52,533.74 45,419.49 39,117.17 34,313.03 28,296.25 28,885.36 Equity Share Warrants 0 0 0 0 0 0 0 0 0 0 Equity Application Money 0 0 0 0 0 0 0 0 0 0 Total Shareholders Funds 87,282.60 78,735.42 70,617.40 61,923.93 53,959.67 46,845.42 40,543.10 35,738.96 29,722.18 30,311.29 Secured Loans 0 0 0 0 0 0 0 0 0 0 Unsecured Loans 16,405.65 16,035.70 12,482.71 15,109.07 12,722.61 9,916.22 11,407.79 800.23 3,510.84 4,479.74 Total Debt 16,405.65 16,035.70 12,482.71 15,109.07 12,722.61 9,916.22 11,407.79 800.23 3,510.84 4,479.74 Total Liabilities 103,688.25 94,771.12 83,100.11 77,033.00 66,682.28 56,761.64 51,950.89 36,539.19 33,233.02 34,791.03

14

ONGC – BS – VC - Sources of Funds

Mar 10 Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 Mar 03 Mar 02 Mar 01 Share Capital 2 2 3 3 2 3 3 4 4 4 Reserves Total 82 81 82 78 79 80 75 94 85 83 Equity Share Warrants 0 0 0 0 0 0 0 0 0 0 Equity Application Money 0 0 0 0 0 0 0 0 0 0 Total Shareholders Funds 84 83 85 80 81 83 78 98 89 87 Secured Loans 0 0 0 0 0 0 0 0 0 0 Unsecured Loans 16 17 15 20 19 17 22 2 11 13 Total Debt 16 17 15 20 19 17 22 2 11 13 Total Liabilities 100 100 100 100 100 100 100 100 100 100

15

ONGC – BS –Applications of Funds

(Rs in Crs) Mar 10 Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 Mar 03 Mar 02 Mar 01 Gross Block 71,553.78 61,355.61 57,463.78 52,038.07 47,882.35 42,983.85 41,007.63 39,033.67 37,364.75 35,769.80 Less : Accumulated Depreciation 55,900.09 51,032.99 46,942.72 43,181.81 40,024.36 37,128.55 35,339.16 33,640.84 31,763.95 29,880.51 Less:Impairment of Assets 5.18 -91.76 3.05 17.14 15.79 18.77 0 0 0 0 Net Block 15,648.51 10,414.38 10,518.01 8,839.12 7,842.20 5,836.53 5,668.47 5,392.83 5,600.80 5,889.29 Lease Adjustment 0 0 0 0 0 0 0 0 0 0 Capital Work in Progress 15,791.03 16,765.19 10,967.27 8,225.69 5,783.38 6,054.46 2,104.60 2,006.03 1,667.77 1,663.24 Investments 5,772.03 5,090.32 5,899.50 5,702.05 4,888.57 4,036.67 4,421.67 3,982.59 3,323.18 2,360.72 Current Assets, Loans & Advances Inventories 5,052.02 4,420.83 3,874.91 3,390.48 3,038.49 2,392.42 2,405.69 1,571.02 1,452.61 1,536.92 Sundry Debtors 3,058.64 4,083.80 4,360.37 2,759.44 3,704.28 3,729.31 2,317.80 3,935.93 2,251.38 1,733.79 Cash and Bank 18,231.04 19,096.21 22,417.65 19,280.80 8,812.82 9,466.86 8,741.65 6,109.02 5,545.53 2,054.55 Loans and Advances 27,803.07 27,359.28 19,574.48 54,214.51 48,660.20 36,959.92 28,170.24 27,270.92 19,924.18 17,061.52 Total Current Assets 54,144.77 54,960.12 50,227.41 79,645.23 64,215.79 52,548.51 41,635.38 38,886.89 29,173.70 22,386.78 Less : Current Liabilities and Provisions Current Liabilities 12,087.56 14,025.28 10,915.14 8,816.96 6,527.01 5,190.42 3,563.99 3,118.04 2,808.65 2,457.83 Provisions 7,785.85 7,439.97 7,087.40 40,121.91 31,115.19 24,572.09 16,094.28 22,945.07 15,278.32 11,506.01 Total Current Liabilities 19,873.41 21,465.25 18,002.54 48,938.87 37,642.20 29,762.51 19,658.27 26,063.11 18,086.97 13,963.84 Net Current Assets 34,271.36 33,494.87 32,224.87 30,706.36 26,573.59 22,786.00 21,977.11 12,823.78 11,086.73 8,422.94 Miscellaneous Expenses not written off 841.32 650.61 673.9 514.06 366.33 531.17 540.68 130.77 210.34 163.52 Deferred Tax Assets 6,238.76 6,036.78 4,197.00 4,496.27 3,633.63 2,614.80 2,591.37 927.88 745.69 0 Deferred Tax Liability 15,156.97 13,839.02 11,567.80 11,019.02 9,988.76 8,058.65 8,433.39 6,162.72 6,092.75 0 Net Deferred Tax -8,918.21 -7,802.24 -7,370.80 -6,522.75 -6,355.13 -5,443.85 -5,842.02 -5,234.84 -5,347.06 0 Total Assets 103,688.25 94,771.12 83,100.11 77,033.00 66,682.28 56,761.64 51,950.89 36,539.19 33,233.02 34,791.03

16

ONGC – BS – VC - Applications of Funds

Mar 10 Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 Mar 03 Mar 02 Mar 01 Gross Block 69 65 69 68 72 76 79 107 112 103 Less : Accumulated Depreciation 54 54 56 56 60 65 68 92 96 86 Less:Impairment of Assets 0 0 0 0 0 0 0 0 0 0 Net Block 15 11 13 11 12 10 11 15 17 17 Lease Adjustment 0 0 0 0 0 0 0 0 0 0 Capital Work in Progress 15 18 13 11 9 11 4 5 5 Investments 6 5 7 7 7 7 9 11 10 7 Current Assets, Loans & Advances 0 0 0 0 0 0 0 0 0 0 Inventories 5 5 5 4 5 4 5 4 4 4 Sundry Debtors 3 4 5 4 6 7 4 11 7 5 Cash and Bank 18 20 27 25 13 17 17 17 17 6 Loans and Advances 27 29 24 70 73 65 54 75 60 49 Total Current Assets 52 58 60 103 96 93 80 106 88 64 Less : Current Liabilities and Provisions0 0 0 0 0 0 0 0 0 0 Current Liabilities 12 15 13 11 10 9 7 9 8 7 Provisions 8 8 9 52 47 43 31 63 46 33 Total Current Liabilities 19 23 22 64 56 52 38 71 54 40 Net Current Assets 33 35 39 40 40 40 42 35 33 24 Miscellaneous Expenses not written off 1 1 1 1 1 1 1 0 1 0 Deferred Tax Assets 6 6 5 6 5 5 5 3 2 0 Deferred Tax Liability 15 15 14 14 15 14 16 17 18 0 Net Deferred Tax -9 -8 -9 -8 -10 -10 -11 -14 -16 0 Total Assets 100 100 100 100 100 100 100 100 100 100

17

ONGC – Cons BS – VC - Sources of Funds

Mar 10 Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 Mar 03 Share Capital 2 2 2 3 2 2 3 3 Reserves Total 78 77 82 77 76 77 71 81 Equity Share Warrants 0 0 0 0 0 0 0 0 Equity Application Money 0 0 0 0 0 0 0 0 Total Shareholders Funds 80 79 84 79 78 79 74 84 Minority Interest 1 1 1 1 1 1 1 1 Secured Loans 1 0 1 1 1 2 3 10 Unsecured Loans 18 20 14 19 20 18 22 4 Total Debt 19 20 15 20 21 20 25 15 Total Liabilities 100 100 100 100 100 100 100 100

18

ONGC – Cons BS –Applications of Funds

(Rs in Crs) Mar 10 Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 Mar 03 Gross Block 101,266.92 90,885.12 76,978.75 70,752.52 59,884.50 53,364.96 51,135.06 48,855.54 Less: Accumulated Depreciation 67,347.01 61,077.41 55,001.85 49,138.25 44,277.96 40,312.35 37,971.05 35,583.29 Net Block 33,919.91 29,807.71 21,976.90 21,614.27 15,606.54 13,052.61 13,164.01 13,272.25 Lease Adjustment 0 0 0 0 0 0 0 0 Capital Work in Progress 25,616.42 24,758.03 14,422.72 11,030.28 11,660.58 11,343.07 5,892.15 4,397.87 Investments 5,159.31 3,480.35 4,482.14 3,583.23 3,557.88 2,655.54 3,030.73 3,060.30 Current Assets, Loans & Advances Inventories 8,666.91 6,956.70 7,738.32 6,242.54 4,943.25 4,196.22 3,552.88 2,563.47 Sundry Debtors 7,142.35 7,181.35 7,046.94 4,816.74 4,427.14 4,709.09 2,931.05 4,284.26 Cash and Bank 22,384.22 22,595.55 25,055.85 20,675.60 9,105.67 10,221.53 9,648.11 6,481.57 Loans and Advances 12,799.78 14,395.34 8,133.23 42,778.55 39,250.87 28,372.28 19,718.40 21,449.79 Total Current Assets 50,993.26 51,128.94 47,974.34 74,513.43 57,726.93 47,499.12 35,850.44 34,779.09 Less : Current Liabilities and Provisions Current Liabilities 22,681.89 21,052.70 16,721.35 13,377.24 9,130.76 7,702.55 5,616.78 4,539.11 Provisions 7,942.67 7,600.57 7,231.10 40,594.06 31,279.70 24,765.33 16,116.52 22,963.93 Total Current Liabilities 30,624.56 28,653.27 23,952.45 53,971.30 40,410.46 32,467.88 21,733.30 27,503.04 Net Current Assets 20,368.70 22,475.67 24,021.89 20,542.13 17,316.47 15,031.24 14,117.14 7,276.05 Miscellaneous Expenses not written off 841.32 650.62 673.92 514.08 366.34 561.69 601.99 230.37 Deferred Tax Assets 7,444.48 7,182.72 5,379.12 5,370.27 4,831.92 3,863.89 4,506.83 2,767.56 Deferred Tax Liability 17,735.70 16,405.80 14,116.67 13,482.13 11,995.23 9,653.28 9,931.81 7,479.14 Net Deferred Tax -10,291.22 -9,223.08 -8,737.55 -8,111.86 -7,163.31 -5,789.39 -5,424.98 -4,711.58 Total Assets 126,775.76 117,339.10 93,108.38 84,329.08 72,592.71 61,394.78 56,051.86 42,574.57

19

ONGC – Cons BS – VC - Applications of Funds

Mar 10 Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 Mar 03 Gross Block 80 77 83 84 82 87 91 115 Less: Accumulated Depreciation 53 52 59 58 61 66 68 84 Net Block 27 25 24 26 21 21 23 31 Lease Adjustment 0 0 0 0 0 0 0 0 Capital Work in Progress 20 21 15 13 16 18 11 10 Investments 4 3 5 4 5 4 5 7 Current Assets, Loans & Advances 0 0 0 0 0 0 0 0 Inventories 7 6 8 7 7 7 6 6 Sundry Debtors 6 6 8 6 6 8 5 10 Cash and Bank 18 19 27 25 13 17 17 15 Loans and Advances 10 12 9 51 54 46 35 50 Total Current Assets 40 44 52 88 80 77 64 82 Less : Current Liabilities and Provisions 0 0 0 0 0 0 0 0 Current Liabilities 18 18 18 16 13 13 10 11 Provisions 6 6 8 48 43 40 29 54 Total Current Liabilities 24 24 26 64 56 53 39 65 Net Current Assets 16 19 26 24 24 24 25 17 Miscellaneous Expenses not written off 1 1 1 1 1 1 1 1 Deferred Tax Assets 6 6 6 6 7 6 8 7 Deferred Tax Liability 14 14 15 16 17 16 18 18 Net Deferred Tax -8 -8 -9 -10 -10 -9 -10 -11 Total Assets 100 100 100 100 100 100 100 100

20

ONGC – P&L – Income

(Rs in Crs) Mar 10(12) Mar 09(12) Mar 08(12) Mar 07(12) Mar 06(12) Mar 05(12) Mar 04(12) Mar 03(12) Mar 02(12) Sales Turnover 60,204.82 63,947.71 60,137.02 56,912.31 48,244.39 46,711.25 32,524.01 34,738.50 23,233.77 Excise Duty 241.04 378.75 288.72 276.73 268.69 339.83 436.36 490.39 322.38 Net Sales 59,963.78 63,568.96 59,848.30 56,635.58 47,975.70 46,371.42 32,087.65 34,248.11 22,911.39 Other Income 4,186.69 5,378.04 5,124.24 5,481.13 3,036.80 1,748.67 1,570.78 2,030.50 1,678.75 Stock Adjustments 118.04 81.1 114.11 -19.72 211.58 29.86 -11.15 21.14 0.22 Total Income 64,268.51 69,028.10 65,086.65 62,096.99 51,224.08 48,149.95 33,647.28 36,299.75 24,590.36

21

ONGC – P&L – VC - Income

Mar 10(12)

Mar 09(12)

Mar 08(12)

Mar 07(12)

Mar 06(12)

Mar 05(12)

Mar 04(12)

Mar 03(12)

Mar 02(12)

Mar 01(12)

Sales Turnover 94 93 92 92 94 97 97 96 94 95 Excise Duty 0 1 0 0 1 1 1 1 1 1 Net Sales 93 92 92 91 94 96 95 94 93 94 Other Income 7 8 8 9 6 4 5 6 7 6 Stock Adjustments 0 0 0 0 0 0 0 0 0 0 Total Income 100 100 100 100 100 100 100 100 100 100

22

ONGC – P&L - Expenses

(Rs in Crs) Mar 10(12) Mar 09(12) Mar 08(12) Mar 07(12) Mar 06(12) Mar 05(12) Mar 04(12) Mar 03(12) Mar 02(12) Raw Materials 290.53 9,014.99 6,909.37 6,119.03 3,585.65 5,101.32 0 0 0 Power & Fuel Cost 260.38 270.79 317.15 320.28 195.45 214.32 209.22 325.63 405.72 Employee Cost 5,268.50 4,065.62 4,344.89 3,702.08 2,778.14 2,449.64 2,389.76 987.04 682.98 Other Manufacturing Expenses 15,093.71 10,100.40 8,235.43 7,492.59 5,477.56 5,069.72 4,220.24 5,380.90 3,769.98 Selling and Administration Expenses 23,480.56 20,073.93 17,717.95 16,015.02 13,714.62 13,646.96 11,302.78 9,395.11 7,412.92 Miscellaneous Expenses 15,164.17 14,073.16 11,598.60 11,164.69 7,884.55 6,984.63 5,877.29 3,216.08 1,440.40 Less: Pre-operative Expenses Capitalised 21,505.43 14,111.88 10,726.71 8,015.85 6,498.35 5,565.21 4,613.76 0 0 Total Expenditure 38,052.42 43,487.01 38,396.68 36,797.84 27,137.62 27,901.38 19,385.53 19,304.76 13,712.00 Operating Profit 26,216.09 25,541.09 26,689.97 25,299.15 24,086.46 20,248.57 14,261.75 16,994.99 10,878.36 Interest 14.42 118.92 58.96 21.5 29.81 41.17 48.65 113.2 237.81 Gross Profit 26,201.67 25,422.17 26,631.01 25,277.65 24,056.65 20,207.40 14,213.10 16,881.79 10,640.55 Depreciation 1,220.07 1,443.43 1,398.41 1,609.43 2,222.62 543.55 605.66 759.45 786.53 Profit Before Tax 24,981.60 23,978.74 25,232.60 23,668.22 21,834.03 19,663.85 13,607.44 16,122.34 9,854.02 Tax 7,098.06 7,350.98 7,622.89 7,785.00 6,437.61 6,977.38 4,335.84 5,705.23 3,100.00 Fringe Benefit tax 0 70 60 53.33 54.35 0 0 0 0 Deferred Tax 1,115.98 431.44 848.06 186.97 911.29 -296.58 607.17 -112.21 556.15 Reported Net Profit 16,767.56 16,126.32 16,701.65 15,642.92 14,430.78 12,983.05 8,664.43 10,529.32 6,197.87 Extraordinary Items 0 42.91 0 315.05 427.67 0 12.37 -1.59 -4.19 Adjusted Net Profit 16,767.56 16,083.41 16,701.65 15,327.87 14,003.11 12,983.05 8,652.06 10,530.91 6,202.06 Adjst. below Net Profit 0 -0.02 0 0 0 0 0 0 0 P & L Balance brought forward 0.01 0.1 0.04 0.04 0.01 0.03 0.02 0.01 0.01 Statutory Appropriations 0 0 0 0 0 0 0 0 0 Appropriations 16,767.54 16,126.39 16,701.59 15,642.92 14,430.75 12,983.07 8,664.42 10,529.31 6,197.87 P & L Balance carried down 0.03 0.01 0.1 0.04 0.04 0.01 0.03 0.02 0.01 Dividend 7,058.28 6,844.39 6,844.39 6,630.51 6,416.71 5,703.74 3,422.24 4,277.80 1,996.31 Preference Dividend 0 0 0 0 0 0 0 0 0 Equity Dividend % 330 320 320 310 450 400 240 300 140 Earnings Per Share-Unit Curr 72.96 69.96 72.65 68.4 94.89 85.61 57.69 72.18 43.47 Earnings Per Share(Adj)-Unit Curr Book Value-Unit Curr 408.07 368.11 330.16 289.51 378.42 328.53 284.33 250.64 208.44

23

ONGC – P&L – VC – Expenses

Mar 10(12)

Mar 09(12)

Mar 08(12)

Mar 07(12)

Mar 06(12)

Mar 05(12)

Mar 04(12)

Mar 03(12)

Mar 02(12)

Mar 01(12)

Raw Materials 0 13 11 10 7 11 0 0 0 0 Power & Fuel Cost 0 0 0 1 0 0 1 1 2 2 Employee Cost 8 6 7 6 5 5 7 3 3 3 Other Manufacturing Expenses 23 15 13 12 11 11 13 15 15 17 Selling and Administration Expenses 37 29 27 26 27 28 34 26 30 28 Miscellaneous Expenses 24 20 18 18 15 15 17 9 6 7 Less: Pre-operative Expenses Capitalised 33 20 16 13 13 12 14 0 0 0 Total Expenditure 59 63 59 59 53 58 58 53 56 57 Operating Profit 41 37 41 41 47 42 42 47 44 43 Interest 0 0 0 0 0 0 0 0 1 2 Gross Profit 41 37 41 41 47 42 42 47 43 41 Depreciation 2 2 2 3 4 1 2 2 3 4 Profit Before Tax 39 35 39 38 43 41 40 44 40 37 Tax 11 11 12 13 13 14 13 16 13 16 Fringe Benefit tax 0 0 0 0 0 0 0 0 0 0 Deferred Tax 2 1 1 0 2 -1 2 0 2 0 Reported Net Profit 26 23 26 25 28 27 26 29 25 21 Extraordinary Items 0 0 0 1 1 0 0 0 0 0 Adjusted Net Profit 26 23 26 25 27 27 26 29 25 21 Adjst. below Net Profit 0 0 0 0 0 0 0 0 0 0 P & L Balance brought forward 0 0 0 0 0 0 0 0 0 0 Statutory Appropriations 0 0 0 0 0 0 0 0 0 0 Appropriations 26 23 26 25 28 27 26 29 25 21 P & L Balance carried down 0 0 0 0 0 0 0 0 0 0 Dividend 11 10 11 11 13 12 10 12 8 6 Preference Dividend 0 0 0 0 0 0 0 0 0 0

24

ONGC vs. PeerCommon Size – Sources of Funds

Industry Hind.Oil Explor. O N G C Oil India Tata PetrodyneShare Capital 3.16 7.44 2.06 1.74 24.72Reserves Total 71.45 55.36 82.12 97.99 75.28Equity Share Warrants 0 0 0 0 0Equity Application Money 0.09 0 0 0 0Total Shareholders Funds 74.7 62.8 84.18 99.73 100Secured Loans 4.87 4.72 0 0 0Unsecured Loans 20.43 32.48 15.82 0.27 0Total Debt 25.3 37.2 15.82 0.27 0Total Liabilities 100 100 100 100 100

25

ONGC vs. PeerCommon Size – Application of Funds

Industry Hind.Oil Explor. O N G C Oil India Tata PetrodyneGross Block 46.11 1.93 69.01 23.26 81.36Less : Accumulated Depreciation 32.23 1.23 53.91 15.47 64.25Less:Impairment of Assets 0 0 0 0 0Net Block 13.87 0.7 15.09 7.79 17.12Lease Adjustment 0 0 0 0 0Capital Work in Progress 14.49 3.73 15.23 2.38 12.62Investments 29.63 0.17 5.57 6.23 61.63Current Assets, Loans & AdvancesInventories 3.01 2.47 4.87 3.55 2.17Sundry Debtors 2.62 2.35 2.95 4.78 6.04Cash and Bank 14.17 4.56 17.58 61.89 6.4Loans and Advances 17.98 3.65 26.81 18.93 9.23Total Current Assets 37.77 13.02 52.22 89.16 23.84Less : Current Liabilities and ProvisionsCurrent Liabilities 9.15 3.87 11.66 13.07 3.35Provisions 4.91 4.83 7.51 10.88 13.53Total Current Liabilities 14.06 8.7 19.17 23.95 16.88Net Current Assets 23.71 4.32 33.05 65.2 6.96Miscellaneous Expenses not written off 0.45 0 0.81 0.13 0Deferred Tax Assets 3.75 7.75 6.02 0.87 4.98Deferred Tax Liability 9.09 7.45 14.62 8.27 3.31Net Deferred Tax -5.34 0.3 -8.6 -7.4 1.67Total Assets 100 100 100 100 100

26

ONGC vs. PeerCommon Size – Profit and Loss

IndustryHind.Oil Explor. O N G C Oil India

TataPetrodyne

INCOME :Sales Turnover 100 100 100 100 100Excise Duty 0.39 0 0.4 0.2 0Net Sales 99.61 100 99.6 99.8 100Other Income 7.27 23.36 6.95 13.45 8.57Stock Adjustments 0.14 3.55 0.2 -0.13 0.65Total Income 107.02 126.91 106.75 113.12 109.21EXPENDITURE :Raw Materials 4.25 0 0.48 0.07 0Power & Fuel Cost 0.5 0.61 0.43 0.65 0.65Employee Cost 8.38 5.63 8.75 15.22 2.09Other Manufacturing Expenses 23.21 9.79 25.07 19.58 58.32Selling and Administration Expenses 33.55 24.47 39 31.33 21.04Miscellaneous Expenses 21.25 0.53 25.19 7.24 1.01Less: Pre-operative Expenses Capitalised 28.47 0 35.72 12.97 0Total Expenditure 62.68 41.03 63.2 61.12 83.11Operating Profit 44.34 85.88 43.54 52 26.1Interest 1.5 5.74 0.02 0.05 0Gross Profit 42.84 80.14 43.52 51.95 26.1Depreciation 3.04 33.69 2.03 2.78 1.36Profit Before Tax 39.8 46.45 41.49 49.17 24.74Tax 11.57 0.26 11.79 14.69 23.88Fringe Benefit tax -0.01 0 0 0 0Deferred Tax 1.66 16.49 1.85 1.53 -9.45Reported Net Profit 26.58 29.69 27.85 32.95 10.32Extraordinary Items 0.01 0 0 0 0.86Adjusted Net Profit 26.58 29.69 27.85 32.95 9.45

27

ONGC - Bonus History

Year Ratio Book Value(Unit Curr) EPS(Unit Curr)2006 1:02 378.42 94.891995 3:01 477.54 58.11

28

ONGC - CFS

(Rs in Crs) 10-Mar 9-Mar 8-Mar 7-Mar 6-Mar 5-Mar 4-Mar 3-Mar 2-Mar 1-MarCash Flow SummaryCash and Cash Equivalents at Beginning of the year19096.21 22417.65 19280.79 8812.82 9466.86 8741.64 6109.01 8095.53 4810.53 5817.38Net Cash from Operating Activities 20388.01 22272.74 21676.23 22910.02 20367.09 15611 11991.68 12951.05 8146.73 7477.4Net Cash Used in Investing Activities -13237.1 -17459.91 -10388.03 -5046.97 -11943.15 -8450.59 -7563.71 -7725.97 -1831.38 -4244.69Net Cash Used in Financing Activities -8016.08 -8134.27 -8151.34 -7395.08 -9077.98 -6435.19 -1795.34 -7211.6 -3030.35 -4239.56Net Inc/(Dec) in Cash and Cash Equivalent -865.17 -3321.44 3136.86 10467.97 -654.04 725.22 2632.63 -1986.52 3285 -1006.85Cash and Cash Equivalents at End of the year18231.04 19096.21 22417.65 19280.79 8812.82 9466.86 8741.64 6109.01 8095.53 4810.53

29

ONGC – Cons CFS

(Rs in Crs) 10-Mar 9-Mar 8-Mar 7-Mar 6-Mar 5-Mar 4-Mar 3-MarCash and Cash Equivalents at Beginning of the year 22588.35 25048.68 20670.62 9101.35 10219.54 9645.45 6472.63 8270.00Net Cash from Operating Activities 28783.06 28997.68 29028.85 27790.20 21366.88 18044.42 14123.59 12948.92Net Cash Used in Investing Activities -21101.88 -28171.10 -16285.58 -8410.47 -13036.39 -10173.05 -6183.00 -6569.19Net Cash Used in Financing Activities -8272.72 -3289.22 -8365.23 -7814.83 -9448.68 -7297.28 -4791.31 -8177.45Net Inc/(Dec) in Cash and Cash Equivalent -591.54 -2462.64 4378.04 11564.90 -1118.19 574.09 3149.28 -1797.72Cash and Cash Equivalents at End of the year 21996.81 22586.04 25048.66 20666.25 9101.35 10219.54 9621.91 6472.28

30

ONGC Dividend History

Year End Dividend Dividend(%) Div Yield(%)2010 7058.28 330 32009 6844.39 320 4.12008 6844.39 320 3.262007 6630.51 310 3.532006 6416.71 450 5.152005 5703.74 400 6.82004 3422.24 240 4.282003 4277.8 300 12.652002 1996.31 140 7.682001 1568.53 110 12.452000 926.85 65 7.191999 784.27 55 6.971998 356.48 25 1.351997 285.19 20 1.451996 201.66 20 1.421995 68.74 20 01994 0 0 0

32

ONGC Shareholding Pattern

33

Top Ten Shareholders

34

ONGC Equity History

35

ONGC Dividend History

36

Profit Margin

Expressed as a percentage of sales Gross profit margin = (1-cost of goods sold) / sales

Difficult to calculate as COGS is difficult to get from financial statements Driven by marketing strategy

Depends on corporate strategy Operating profit margin..,

= Operating profit / Sales = EBIT / Sales = Gross profit margin – Operating expense / Sales

Pretax profit margin = EBIT /Sales Net profit margin = net profit / Sales Cash profit margin = PBDITA / Sales

37

Profit Margin

Operating ratio = Operating expense / Sales Also called expenses ratio Complementary o profit margin ratios

38

Profitability Ratios

Affects the company’s ability to obtain debt and equity financing liquidity position ability to grow

Ultimate test of management’s operating effectiveness

39


Ratios Formula Usage Standard Means of

Expression

Profit Margin NI ÷ NS Wide Industry

specificPercentage

Cash Return on Sales NCPOA ÷ NS1 Realistic Compare with profit margin

Percentage

Asset Turnover NS ÷ Avg. Assets Wide Industry

specificRate (times)

Return on Assets NI ÷ Avg. Assets Wide Industry

specificPercentage

Return on Common Stockholder’s Equity

(NI – PD) ÷ ACSE2 Wide DOF Percentage

1NCPOA = Net Cash Provided by Operating Activities2(NI-PD) ÷ ACSE = (Net Income-Preferred Dividend) ÷ Average common stockholders’ equity

40



Expression

Earnings Per Share NI ÷ WACSO1 Wide Intra comparison

Amount

Price-Earnings Ratio Price ÷ EPS wide Compare Peer & Industry

Proportion

Payout Ratio DPS/EPS Wide Percentage

1NI ÷ WACSO = Net Income ÷ Weighted Average Common Shares Outstanding

41

ROCE

= EBIT / Capital employed Fundamental measure of profitability of a company Indicator of management efficiency = Asset turnover x Net profit margin Factors affecting ROCE..,

Asset valuation policies Depreciation policies Revaluation policies Pricing policies Treatment of goodwill Treatment of expenses

Used by company as part of their strategic planning

42

ROCE

= EBIT / Average capital employed = NOPLAT / Average capital employed

NOPLAT = Net profit + LT interest x (1- tax rate)

Difficult to calculate ROCE accurately Does not provide better insight of overall

profitability and productivity of assets that ROA Analyst prefer to use ROA than ROCE

43

Return on Invested Capital (ROIC)

Also called return on total capital (ROTC) Excludes interest free credits and takes into

consideration total investment = NOPLAT / Average invested capital = EBIT / Invested capital Can be calculated with higher accuracy

44

ROA

Return on assets = NOPAT / Average net operating assets Equivalent to ROCE = Profit margin x Assets turnover

Profit margin = NOPAT / Operating revenues Assets turnover = Operating revenues / Average net operating

assets= EBIT / Average total assets

= NOPLAT / Average total assets NOPLAT = net operating profit less adjusted tax Marginal tax rate should be used to calculate the tax implication Tax expense = current tax + deferred tax

45

ROA

Total assets include interest free credits It is difficult to adjust implicit interest on interest

free credit in the denominator Accuracy is lower that that of ROIC

46

ROA

Factors affecting level of ROA Age of firm Age of industry Degree of competition Entry restriction levels

Factors affecting composition of ROA Production process and input mix

Capital intensive vs. labor intensive

Factors affecting variability of ROA Cyclically of demand Operating leverage of the firm

47

ROE

= Return on equity = Net profit attributable to ordinary (common

shareholder) / Average equity of ordinary (common) shareholder

= Return on net operating assets + gain (- loss) from net financial leverage

– Gain from net financial leverage = Spread x Net financial leverage effect

Spread = Return on net operating assets – Net borrowing cost Net financial leverage effect = Average net debt / Average

shareholders equity– Net debt = Financial liabilities – Financial assets

48

ROE

Positive spread = ROA > NBC Better to analyze sensitivity of ROE to different levels

of ROA ROE and ROA are highly correlated Can be increased by..,

Improving operating performance Improve margin Improve assets turnover

Reducing net borrowing costs Increasing net financial leverage

49

ROE

= Return on net operating assets + [(NOPAT / Average net assets) – (NFE / Average net debt)] x Net financial leverage

= [Profit margin x Assets turnover] + [Spread x Net financial leverage]

= ROA x Gain on net financial leverage ROA = Profit margin x Assets turnover

50

Operating ROE

= EBIT/ Shareholders’ funds Consider redeemable preference shares as

quasi - debt = Financial leverage multiplier x ROCE

Financial leverage multiplier = Capital employed / Shareholders’ funds

ROCE = Asset turnover x Net profit margin

51

Return on Ordinary Shareholders’ Equity (ROOE)

= (Net profit – Preference dividend) / Average ordinary shareholders’ equity

Preference dividend should be deducted even of the company did not pay the preference dividend in the year of consideration

52

Terminology

Is a measure of cash profit Cash from operating activities = Cash profit

adjusted for change in amount of working capital and change in income tax liability

NOPLAT = Net profit + Interest x (1-tax rate) NOPLAT = net operating profit less adjusted tax

53

Dividend Cover

= EPS / DPS = (EAT – Preference dividends) / Dividends on

ordinary shares

54

Assets Turnover

Types of assets turnover.., Receivables turnover Inventory turnover Fixed assets turnover

Net operating assets turnover = Receivables turnover x Inventory turnover x (Tangible) Fixed assets turnover

55

Receivables Turnover

= Revenue from credit sales / Average accounts receivable

Receivables turnover ratio = Sales / Average trade receivables

Average number days receivables outstanding = 365 / Receivables turnover

56

Inventory Turnover

= Cost of sales or sales revenue / Average inventories Average inventory holding period = (Closing inventory /

Cost of sale) x 365 Average no. of days inventory in stock = 365 / Inventory

turnover RM turnover ratio = Cost of materials consumed / Average

raw material stock WIP turnover ratio = Cost of production / Average WIP

stock Finished goods turnover ratio = Cost of goods sold /

Average finished goods stock

57

Payables Turnover

= Credit purchases of goods and services / Average accounts payable

= AP turnover ratio = Purchases / Average AP Average no. of days payable outstanding = 365

/ AP turnover

58

Fixed Assets Turnover

= Sales revenue / Average tangible fixed assets

59

Working Capital Turnover Ratio

= Sales / Average working capital

60

Current Ratio

= CA / CL ST obligations covered by cash and trading assets Affected by sector norms Increase in current ration may be because of..,

Build up of inventory Permanent expansion of business Operating losses Inefficient control over working capital Adverse litigation Adverse trading conditions

61

Quick Ratio

= Cash, securities and AR / CL Also called acid test ratio, liquidity ratio = (CA – Inventory) / CL = (CA – Inventories – Prepaid expenses) / CL = (CA – Inventories – Prepaid expenses) / (CL

– Bank OD)

62

Cash Ratio

= (Cash + Marketable securities) / CL Cash flow from operations ratio = CFO / CL

63

Defensive Interval

= (Cash+ Marketable securities + AR / Projected operating outlays) x 365

Shows how long company can fund operations from existing cash and near-cash resources

Presents the worst case scenario Period (no. of days) for which the company will be able to maintain the

current level of operation with its present cash resources Not in common use by analysts Also called cash burn ratio Estimates how much time the companies has until it must have a

working business model No. of days the company can survive with the cash it shas raised from

its investors

64

Risk RatiosLiquidity and Solvency

Short-Term Liquidity Ratios Current Ratio Quick Ratio A/R Turnover = Sales/(Average A/R)

Days Receivable Outstanding = 365/(A/R T) A/P Turnover = Purchases/(Average Accounts Payable)

Days Payable Outstanding = 365/(A/P Turnover) Inventory Turnover = COGS/(Average Inventory)

Long-Term Solvency Ratios Long-Term Debt Ratio = (LT Debt)/(LT Debt and S.H.E.) Debt/Equity Ratio = (LT Debt)/(S.H.E.) Liabilities Assets Ratio = (Total L)/(Total A) CFO to Total Liabilities = CFO/(Average Total Liabilities)

65

Risk RatiosLiquidity and Solvency

Long-Term Solvency Ratios Interest coverage ratio = (Net Income + Interest Expense + Income Tax

Expense) / Interest Expense Interest coverage ratio using cash flows = (CFO + Cash Payments for

Interest + Cash Payments for Income Taxes)/(Cash Payments for Interest)

= Liabilities/(Book Value of Equity) = Liabilities/(Market Value of Equity) = (Liabilities + Equity)/Equity

66

Liquidity Ratios

Measures Enterprise‘s Short-term ability to pay its maturing obligations Ability to meet unexpected needs for cash

Users Bankers Suppliers Other short-term creditors

67

Liquidity Ratios


Expression

Current ratio CA ÷ CL Wide Industry

specificProportion

Acid-test ratio LA ÷ CL1 Wide Industry

specificProportion

Current cash debt

coverage ratio

NCPOA ÷ Avg. CL2 Realistic Industry

specificProportion

Receivables turnover NCS ÷ ANR3 Wide Coll. Period

< Cr. periodRate (times)

Inventory turnover CGS ÷ Avg. Inv.4 Wide Industry


1LA = CA – Inventory – Prepaid expenses2NCPOA = Net Cash Provided by Operating Activities3NCS÷ANR = Net Credit Sales ÷ Average Net Receivables4CGS ÷Avg. Inv. = Cost of Goods Sold ÷ Average Inventory

68

Debt Equity Ratio

= Net debt / Shareholders equity (of group) Also called..,

Financial leverage ratios Gearing ratios

69

Debt to Capitalization Ratio

= New debt at MV / Shareholders equity at MV

70

Financial Leverage Multiplier

= Capital employed / Shareholders’ funds

71

Gearing Ratios

= (Total liabilities – Current liabilities) / Capital employed

72

Times Interest Earned

= PBIT / (Interest expense + Capitalized interest)

73

Net Debt to OCF Ratio

= Net debt / Operating cash flow Shows how long it will take firm to pay off debt

at current rate of cash flow generation

74

Earnings Variability of a Firm

Factors influencing earnings variability.., Sensitivity of firm’s revenues to economic cycle Firm’s cost structure = operating leverage

75

Solvency Ratios

Affects the company’s Ability of the company to survive over a long period of time Ability to repay the face value of debt at maturity

76

Solvency RatiosRatios Formula Usage Standard Means of

Expression

Debt to Total

Assets Ratio

TD ÷ TA Wide Industry

specificPercentage

Times Interest

Earned

IBIT ÷ Interest Expenses

Wide Industry


Cash Debt

Coverage Ratio

NCPOA ÷ ATL1 Wide Industry


1NCPOA ÷ ATL = Net Cash Provided by Operating Activities ÷ Average Total Liabilities

77

Operating Leverage

= Contribution margin ratio / Return on sales = Contribution / Operating income Measure of OLE is not constant across all

levels of activity Percentage change in income = OLE x

Percentage change in sales

78

Financial Leverage

= Operating income / Net profit before tax = EBIT / EBT FLE is also not constant across all levels of

activity Percentage change in EBT = FLE x

Percentage in change of operating income

79

Total Leverage Effect

= OLE x FLE = Contribution / EBT Not constant across all levels of activity

Operating Leverage

Relative portions of fixed versus variable costs in the firm’s total cost structure

Greater operating leverage (a larger fixed cost portion) makes the operating earnings of a firm more volatile than sales

– During slow periods, operating profits will decline by a larger percentage than sales

– During expansionary periods, operating profits will increase by a larger percentage than sales

81

ONGC – Key Financial Ratios

10-Mar 9-Mar 8-Mar 7-Mar 6-Mar 5-Mar 4-Mar 3-Mar 2-Mar 1-MarDebt-Equity Ratio 0.2 0.19 0.21 0.24 0.22 0.24 0.16 0.07 0.13 0.2Long Term Debt-Equity Ratio 0.2 0.19 0.21 0.24 0.22 0.22 0.13 0.07 0.13 0.2Current Ratio 1.73 1.78 1.55 1.41 1.44 1.45 1.34 1.24 1.37 1.61Turnover RatiosFixed Assets 0.58 0.69 0.71 0.72 0.68 0.72 0.54 0.63 0.44 0.46Inventory 12.71 15.42 16.55 17.7 17.77 19.47 16.36 22.98 15.54 15.24Debtors 16.86 15.15 16.89 17.61 12.98 15.45 10.4 11.23 11.66 13.67Interest Cover Ratio 1,733.43 202.64 428.96 1,101.85 733.44 478.63 280.7 143.42 42.44 24.09PBIDTM (%) 43.54 39.94 44.38 44.45 49.93 43.35 43.85 48.92 46.82 44.89PBITM (%) 41.52 37.68 42.06 41.62 45.32 42.18 41.99 46.74 43.44 40.41PBDTM (%) 43.52 39.75 44.28 44.42 49.86 43.26 43.7 48.6 45.8 43.21CPM (%) 29.88 27.48 30.1 30.31 34.52 28.96 28.5 32.5 30.06 26.6

ROCE (%) 25.38 27.3 31.82 33.17 35.68 36.61 31.1 46.77 29.84 27.91RONW (%) 20.2 21.59 25.2 27 28.63 29.71 22.72 32.17 20.65 18.31

82

ONGC – Valuation Ratios

10-Mar 9-Mar 8-Mar 7-Mar 6-Mar 5-Mar 4-Mar 3-Mar 2-Mar 1-MarPrice Earning (P/E) 15.06 11.14 13.51 12.84 13.8 10.31 14.57 4.93 6.29 3.73Price to Book Value ( P/BV) 2.69 2.12 2.97 3.03 3.46 2.69 2.96 1.42 1.31 0.62Price/Cash EPS (P/CEPS) 13.96 10.16 12.39 11.57 11.85 9.87 13.57 4.59 5.58 3.08EV/EBIDTA 8.89 6.41 7.49 7.26 7.91 6.24 8.59 2.67 3.4 2.01Market Cap/Sales 3.9 2.61 3.49 3.3 3.87 2.69 3.68 1.46 1.68 0.8

83

Importance of Shareholder Value Analysis

Take over are based on undervalues assets Accounting measures are unrelated to share

value Wider reporting of return to shareholders Wider adoption and endorsement Linking executive rewards to shareholders’

returns

84

Value Drivers for Shareholder Value Creation

Sales growth Operating margin Fixed capital investment Working capital investment Cash taxes Planning period Cost of capital

85

Market Value Added (MVA)

MVA = total market value – invested capital Valuation of all future annual EVAs

86

Economic Value Added (EVA)

Wealth a company creates each year = net income from operations – cost of capital needed to generate

net income = NOPAT – R X CE

R = required yield Substantial part of LT movement in share price is explained by

development of EVA Very good method of performance measurement and monitoring

of decisions Also called Alpha NV Annual increase in EVA is seen as created value than absolute

level

87

Economic Value Added (EVA)

Achieving increasing in EVA.., Increasing NOPAT Reducing WACC Improving utilization of capital employed Appraising geographic and product segment information Cost reduction programs Appraising acquisitions Divestments Improving utilization of capital employed

88

Shareholder Value

= IRR on an investment from dividend stream and realizable value of investment at date of disposal

Analysis of Growth Potential

Firm’s growth potential is defined as:

Called the sustainable growth rate. It assumes a constant debt to equity ratio.

equity on returnrate retentiong

taxes after Income Operating

declared dividends-1rate retention

90

ROI

Net Income as % of Sales

Investment Turnover

Net Income Sales Sales Investment÷

Shareowners’ Equity

Borrowings

Total liabilitiesNon borrowed

liabilities

÷

X

+

-

91

Return on Total Assets

Net Profit as % of Sales

Turnover

Net Profit Sales

SalesCOGS,

Other taxes, and Expenses

Sales Total Assets

Long-term Assets

Current Assets

InventoryAccounts

Receivable

Cash and Market

Securities+

+

÷÷

+

-

x

92

Dupont Analysis

Pretax Profit SalesReturn on Assets = (1 - tax rate)

Sales Assets

Key measure of management’s operating performanceLower the tax rate higher the net income and higher the ROA

Equation focuses on…Factors that can influence company’s rate of return on assetsWays to measure changes in certain assets accountsActual return and assets experience during the periodImpact the net income to sales ratio of a falling tax rate

93

ONGC Dupont

10-Mar 9-Mar 8-Mar 7-Mar 6-Mar 5-Mar 4-Mar 3-Mar 2-Mar 1-Mar PBIDT/Sales(%) 43.54 39.94 44.38 44.45 49.93 43.35 43.85 48.92 46.82 44.89 Sales/Net Assets 0.59 0.68 0.73 0.74 0.73 0.83 0.63 0.95 0.7 0.68 PBDIT/Net Assets 0.25 0.27 0.32 0.33 0.36 0.36 0.28 0.47 0.33 0.31 PAT/PBIDT(%) 63.96 63.14 62.58 61.83 59.91 64.12 60.75 61.96 56.97 49.27 Net Assets/Net Worth 1.18 1.2 1.17 1.24 1.23 1.2 1.27 1.02 1.11 1.14 ROE(%) 20.2 21.59 25.2 27 28.63 29.71 22.72 32.17 20.65 18.31

94

Oracle vs. Peers (2005)Dupont Analysis…

Total Assets Sales Net IncomeROE =

Shareholders's Equity Total Assets Sales

IBM

HP

Oracle

SAP

ROE = 3.195 0.862 0.871 = 23.99%

ROE = 2.080 1.211 0.028 = 7.05%

ROE = 1.934 0.4954 0.2351 = 22.53%

ROE = 1.567 0.939 0.176 = 25.90%

95

Cycle in Equity IssueMMFSL

Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007 Mar 2008 Networth 203.26 251.73 405.58 732.79 778.24 1314.27 Authorised equity capital 75 75 75 90 90 110 Issued equity capital 60.62 60.62 70.16 86 86 96.9 Subscribed equity capital 60.62 60.62 70.16 83.31 84.02 95.29 Paid-up equity capital 60.62 60.62 70.16 83.31 84.02 95.29 Paid-up preference capital 0 0 50 50 0 0 PBIT Net of P&E/Avg Networth 82.34 84.83 78.74 65.59 67.53 68.04 PAT Net of P&E/Avg Networth 19.11 25.55 24.3 18.59 16.31 16.26 PAT/Avg Networth 23.65 29.72 25.04 19.02 17.59 16.92 PBIT Net of P&E/Avg Capital Employed 17.11 13.82 11.66 10.56 10.63 12.56Net Worth / Total Liabilities 13.26 12.25 13 14.56 12.37 18.7Total borrowings / Total Liabilities 72.43 76.51 78.88 77.47 78.52 72.1

96

ROE Driven Business

NIM margin.., FY03: 12.8% FY07: 9.2% FY08: 11.3%

ROE FY03: 23.2% FY07: 18.2% FY08: 16.9%

ROA FY03: 3.5% FY07: 2.4% FY08: 2.7%

97

MMFSL’s Performance RatiosFY06 FY07 FY08

Yield on assets 14.8% 15.1% 18.6%

Cost of funds 6.3% 6.6% 8.6%

Interest spread 8.5% 8.4% 7.2%

Net income margins 9.2% 9.2% 10.4%

ROA 2.7% 2.4% 2.7%

ROE 20.9% 18.2% 16.9%

Equity / TA 13.6% 12.4%

Loans / Assets 83.8% 89.8%

Cost / Income 35.3% 37.6% 32.7%

Cost / Assets 3.3% 3.5%

Net Interest Margin: 11.3%

98

Key Financial RatiosSBI

2007-08 2008-09Return on average assets (%) 0.99% 0.94%Return on equity (%) 17.93% 16.30%Operating expenses to total income (%)56.64% 52.65%Basic EPS (Rs.) 168.61 172.68Diluted EPS (Rs.) 168.45 172.68Capital Adequacy (Basel I) 13.49% 12.90%Tier I 8.95% 8.21%Tier II 4.54% 4.69%Capital Adequacy (Basel II) 14.17%Tier I 9.03%Tier II 5.14%Net NPAs to Net Advances 1.43% 1.49%

99

FY06 FY07 Weight Growth (%)Net external revenues (Rs. Mn) 131,578 182,949 100% 39.04%Automotive 53,441 64,904 35% 21.45%Farm equipment 34,711 43,602 24% 25.61%IT services 14,067 31,426 17% 123.40%Financial services (MMFL) 5,890 8,467 5% 43.75%Steel processing & trading 7,265 7,877 4% 8.42%Infrastructure 1,798 1,338 1% -25.58%Hospitality 1,527 2,347 1% 53.70%Systech 6,126 16,991 9% 177.36%Others 6,753 5,997 3% -11.20%

MMFSL in the Group

100

FY06 FY07 Weight Growth (%)PBIT (Rs. Mn) 15,945 23,730 100% 48.82%Automotive 5,410 6,560 28% 21.26%Farm equipment 3,140 5,031 21% 60.22%IT services 2,617 6,862 29% 162.21%Financial services (MMFL) 1,642 2,076 9% 26.43%Steel processing & trading 480 493 2% 2.71%Infrastructure 187 96 0% -48.66%Hospitality 320 639 3% 99.69%Systech 988 1,667 7% 68.72%Others 1,161 306 1% -73.64%

MMFSL in the Group

101

FY06 FY07 Growth (%)PBIT margin 12% 13% 7.04%Automotive 10% 10% -0.16%Farm equipment 9% 12% 27.55%IT services 19% 22% 17.37%Financial services (MMFL) 28% 25% -12.05%Steel processing & trading 7% 6% -5.27%Infrastructure 10% 7% -31.01%Hospitality 21% 27% 29.92%Systech 16% 10% -39.17%Others 17% 5% -70.32%

MMFSL in the Group

102

Bankruptcy Prediction

Ratios include.., Profitability = ROA Size = Total assets excluding intangibles Liquidity = Current ratio Cumulative profitability = Retained profits / Total assets Capitalization = Market value of equity / Market value of

total capital (five years average data) Earnings stabilty = SD of ROA (ten years data)

103

Z-Score Analysis

Evaluated corporate stability Predict potential instances of corporate failures Provides a single score to describe combination of a

no. of key characteristics of a company Scores is evaluated against identified bench marks

104

Altman’s Z-Score

Proposed by Altman (1968) Z = 0.012X1 + 0.014X2 + 0.033X3 + 0.006X4 + 0.999X5

X1 = Working capital / Total assets

X2 = Retained earnings / Total Assets

X3 = EBIT / Total assets

X4 = Market capitalization / Book value of debt

X5 = Sales / Total assets

Bench marks.., Companies scoring >3.0: unlikely to fail (considered safe) Companies scoring <1.8: likely to fail (considered unsafe)

Predictable up to two to three years before the event

105

Taffler’s Z-Score

Unpublished model Z = C0 + C1X1 + C2X2 + C3X3 + C4X4

X1 = PBT / Current assets (53%) X2 = CA / CL (13%) X3 = CL / Total assets (18%) X4 = No credit interval = length of time which the company can

continue to finance its operations using its own assets with no revenue inflows (16%)

Bench marks.., Companies scoring >0.2: unlikely to fail (considered safe) Companies scoring <0.2: likely to fail (considered unsafe)

106

Performance Analysis Score (PAS)

Adapted Z-score Evaluates company performance relative to

other companies in the industry Ranks all company z-scores in percentile terms Measures relative performance on a scale of 0

to 100 Can be analyzed over time to know fall in Z-

score percentiles

107

A- Scores

Concentrates on non-financial signs o failures Financial difficulties are the direct results of management defects and errors which

have existed in the company for many years Defects center on management structure..,

Decision making and ability Accounting systems Failure response to change

Mistakes on.., Very high leverage Overtrading Failure of the company’s main project

Symptoms.., Poor ratios Poor z-scores Creative accounting Delay in investment decisions Market share drops

108

A- Scores

Different scores are allotted to each defect, mistake and symptoms

Score is compared with benchmark values

109

Qualitative Factors to be Used by Financial Statement Users

Obscuring changes in earnings trend Hiding the failure to achieve analyst forecasts Changing a reported loss to income or vice versa Obscuring changes in significant business segments Increasing management compensation Affecting compliance with..,

Regulatory requirement Loan covenants Other contracts

Concealing unlawful acts

110

Looking Beyond the Numbers

Are the company’s revenues tied to one key customer? To what extent are the company’s revenues tied to one key

product? To what extent does the company rely on a single supplier? What percentage of the company’s business is generated

overseas? What is the competition? Does the company invest heavily in R&D? What is the legal and regulatory environment in which it operates?

Financial Statement Analysis vs. Efficient Capital Markets

A general description of an efficient market is one in which, on average, asset prices immediately reflect changes in underlying economic variables (i.e., market participants are smart/rational)

– Most (but not all) people/investors believe in some degree of market efficiency

By nature, the financial statement package contains historical information. So …

Financial Statement Analysis vs. Efficient Capital Markets, cont.

If capital markets are believed to be efficient, why analyze a set of publicly available documents about a firm (that, by their very nature, contain “stale” information)?

Possible answers.., Someone must perform the analysis in order for the market to

initially react to the information contained in the financial statements

Markets might be efficient on average in the aggregate but temporarily inefficient at the individual firm level.

Financial Statement Analysis vs. Efficient Capital Markets

Possible answers.., Financial statements may potentially be biased views (even in

accordance with GAAP) of a firm’s performance if managers have incentives to make them so

Quality of Earnings may actually be poor even if the firm reports profits

There are other needs for financial statement analysis aside from investing in publicly traded common stocks (bank lending, credit analysis, etc.)

114

ONGCKey Financial Ratios

Industry 10-Mar 9-Mar 8-Mar 7-Mar 6-Mar 5-Mar 4-Mar 3-Mar 2-Mar 1-MarDebt-Equity Ratio 0.45 0.2 0.19 0.21 0.24 0.22 0.24 0.16 0.07 0.13 0.2Long Term Debt-Equity Ratio 0.22 0.2 0.19 0.21 0.24 0.22 0.22 0.13 0.07 0.13 0.2Current Ratio 1.2 1.73 1.78 1.55 1.41 1.44 1.45 1.34 1.24 1.37 1.61Turnover RatiosFixed Assets 1.04 0.58 0.69 0.71 0.72 0.68 0.72 0.54 0.63 0.44 0.46Inventory 18.08 12.71 15.42 16.55 17.7 17.77 19.47 16.36 22.98 15.54 15.24Debtors 11.44 16.86 15.15 16.89 17.61 12.98 15.45 10.4 11.23 11.66 13.67Interest Cover Ratio 179.38 1,733.43 202.64 428.96 1,101.85 733.44 478.63 280.7 143.42 42.44 24.09PBIDTM (%) 50.59 43.54 39.94 44.38 44.45 49.93 43.35 43.85 48.92 46.82 44.89PBITM (%) 45.57 41.52 37.68 42.06 41.62 45.32 42.18 41.99 46.74 43.44 40.41PBDTM (%) 50.33 43.52 39.75 44.28 44.42 49.86 43.26 43.7 48.6 45.8 43.21CPM (%) 35.12 29.88 27.48 30.1 30.31 34.52 28.96 28.5 32.5 30.06 26.6ROCE (%) 30.72 25.38 27.3 31.82 33.17 35.68 36.61 31.1 46.77 29.84 27.91RONW (%) 29.32 20.2 21.59 25.2 27 28.63 29.71 22.72 32.17 20.65 18.31 http://www.capitaline.com

115

Industry Key RatiosOil Exploration and Allied Services

Year Latest 2009 2008 2007 2006 2005 2004 2003 2002 2001No.Of Companies 15 13 13 16 18 14 15 15 15 14

Debt-Equity Ratio 0.45 0.32 0.31 0.31 0.36 0.44 0.34 0.2 0.17 0.2Long Term Debt-Equity Ratio 0.22 0.14 0.17 0.16 0.18 0.21 0.13 0.08 0.14 0.2Current Ratio 1.2 1.32 1.25 1.2 1.22 1.22 1.15 1.14 1.37 1.67

Fixed Assets 1.04 0.71 0.77 0.75 0.73 1.1 0.81 0.89 0.63 0.7 Inventory 18.08 15.98 18.02 17.91 18.26 19.75 16.3 21.82 14.91 15.5 Debtors 11.44 13.02 14.53 15.25 11.52 12.9 9.07 9.71 9.86 12.52Interest Cover Ratio 179.38 26.14 28.32 234.19 205.04 217.18 115.5 93.59 35.64 22.3PBIDTM (%) 50.59 43.33 44.27 44.7 49.79 43.67 45.76 48.92 46.9 44.22PBITM (%) 45.57 39.98 40.19 41.05 44.98 42.06 43.12 46.59 43.33 39.86PBDTM (%) 50.33 41.8 42.85 44.52 49.57 43.48 45.38 48.42 45.68 42.43CPM (%) 35.12 28.73 29.51 30.78 34.49 29.25 30.15 32.74 30.36 26.71APATM (%) 30.1 25.38 25.43 27.13 29.68 27.64 27.51 30.41 26.79 22.35ROCE (%) 30.72 22.36 25.25 21.95 26.14 31.48 27.43 40.07 28.03 27.94RONW (%) 29.32 18.74 20.93 19.01 23.42 29.49 23.3 31.31 20.13 18.7 http://www.capitaline.com

Key Ratios

Turnover Ratios

116

ONGC vs. Peer

Aggregate Hind.Oil Explor.Oil India O N G C Tata PetrodyneKey RatiosDebt-Equity Ratio 0.45 0.36 0 0.2 0Long Term Debt-Equity Ratio 0.22 0.36 0 0.2 0Current Ratio 1.2 1.18 2.43 1.73 1.03

Turnover RatiosFixed Assets 1.04 0.16 1.24 0.58 0.3Inventory 18.08 2.56 15.1 12.71 11.29Debtors 11.44 4.5 14.88 16.86 4.6Interest Cover Ratio 179.38 9.09 1,068.14 1,733.43 0PBIDTM (%) 50.59 85.88 52 43.54 26.1PBITM (%) 45.57 52.19 49.22 41.52 24.74PBDTM (%) 50.33 80.14 51.95 43.52 26.1CPM (%) 35.12 63.39 35.74 29.88 11.67APATM (%) 30.1 29.69 32.95 27.85 10.32ROCE (%) 30.72 4.96 33.65 25.38 6.02RONW (%) 29.32 3.85 22.6 20.2 2.51

117

Documents

FSA - Used in Class