FINANCIAL ACCOUNTING FOR MANAGERS

TERM PROJECT On Berger paints

(2011-12 & 2012-13)

SUBMITTED BYUTSAV DUBEY (2013311) SOUVIK SAHA (2013290)

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CONTENTS

INTRODUCTION Company history and milestone Company background RATIO ANALYSIS Return on investment ratio Activity/ turnover ratio Liquidity ratio Solvency ratio Profitability ratio QUESTION AND ANSWERS REFRENCES 3 4 6 7 8 9 10 10 11 17

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Introduction
Company History and Milestone
The name Berger or Lewis Berger is today synonymous with colour worldwide. But actually the origin of the name dates back to over two & a half centuries in England in 1760, when a young colour chemist named Lewis Berger, started manufacturing in Europe, 'Prussian blue' using a secret process that every designer and householder coveted. Mr. Berger perfected this process & art of the blue colour, which was the colour of most military uniform of that time. Enriched by the imagination of Lewis Berger, the unending quest for creation and innovation in the world of colour & paints still continues. The history of Berger Paints India Limited as a company started in 1923 as Hadfield's (India) Limited which was a small colonial venture producing ready- mixed stiff paints, varnishes and distempers setup on a 2 acres of land in one of India's first industrial towns close to Kolkata in Howrah, Bengal. Subsequently in 1947, British Paints (Holdings) Limited, an international consortium of paint manufacturing companies bought over Hadfield's (India) Limited and thus the name changed to British Paints (India) Ltd. The gentleman who took over, as its first managing director was Mr. Alexender Vernon Niblet, an Englishman who was later on followed by Mr. Alfred Godwin in 1962. Further in the year 1965, the share capital of British Paints (Holdings) Limited was acquired by Celanese Corporation, USA and the controlling interest of British Paints (India) Ltd was acquired by CELEURO NV, Holland, a Celanese subsidiary. Subsequently in 1969, the Celanese Corporation sold its Indian interests to Berger, Jenson & Nicholson, U.K. Then onwards the company British Paints (India) Ltd became a member of the worldwide BERGER group having its operations across oceans in numerous geographies and this marked the beginning of Lewis Berger's legacy in India which the company would later take forward to enviable heights. From 1973 the company entered into one of its dynamic phases of business with introduction of new generation products in the industrial, marine and decorative segments under the able leadership of it first Indian Managing Director Mr. Dongargaokar Madhukar. Year 1976 was another turning point in the history of the company when the foreign holding in the company was diluted to below 40% by sale of a portion of the shares to the UB Group controlled by Mr Vittal Mallya. The reins of the company were taken over by Mr. Biji K

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Kurien as its Chief Executive & Managing Director in the year 1980. Finally in the year 1983, the British Paints (India) Limited, changed its name to Berger Paints India Limited. The entire 80s & 90s saw the lunch of many new products from company's stable such as premium emulsions and high quality acrylic distempers. The COLOUR BANK tinting system was launched through which the consumer could select from a range of over 5000 shades. Again the fortunes of the company changed hands in 1991 with UB Group's stake in the company bought over by the Delhi based Dhingra brothers, Mr K.S.Dhingra & Mr G.S.Dhingra and their associates of the UK Paints Group. Presently Dhingras' control a majority stake of almost 73% in Berger Paints India Limited, which is a professionally managed organization, headquartered in Kolkata, with the stewardship resting since 1994 until 2012 with the Managing Director Mr Subir Bose. The current managing director of Berger Paints India Ltd is Mr. Abhijit Roy.

Company Background
Established in 17th December, 1923, the company then known as Hadfiled's (India) Limited; was a small paint company based in Kolkata having its only manufacturing facility at Howrah, West Bengal to produce ready mixed stiff paints, varnishes and distempers. Postindependence, towards the end of 1947, British Paints (Holdings) Limited, U.K acquired Hadfield's (India) Limited and thus British Paints (India) Limited was incorporated. From a production capacity of 150 tonnes and sales turnover of around Rs. 25 lakhs in 1947, the company has come a long way to become at one point of time; a part of the worldwide BERGER group in 1983 and thereby acquiring its present name Berger Paints India Limited to having subsequently gone through further ups & downs as well as ownership changes to gain its present status wherein the majority stake is with Delhi based Dhingra brothers and business revenue more than Rs 2400 crs. Today Berger Paints India Limited, having solely used and developed the name and trademark BERGER and all its variants in India, is a household name in paint. With Head Office in Kolkata the company manufactures and markets a range of decorative & industrial paint products under various product brands and has it operations spread throughout the length & breath of the country; with seven manufacturing facilities in India and more than 85 depots, several regional & area offices, besides four facilities overseas. It has a workforce of over 2500 employees and a countrywide distribution network of 15000 plus dealers.

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Berger Paints has clearly demonstrated its commitment to Indian consumers for over 88 years, by offering its varied range of high performing quality products backed by highest level of customer service. Company's high ethical standards in business dealings and its ongoing efforts in community welfare make Berger Paints India Limited a responsible corporate citizen. While the company's decorative and Industrial paints continue to gain an increasing market share, Berger as an organization has managed to achieve sustainable competitive advantage through innovations in all spear of business, desire to excel and by creating a winning culture & abiding faith in its values & philosophy among all its stakeholders. With Berger Paints we can now see your imagination of colour unfurl in front of your eyes and watch your home come alive, telling a thousand tales. Transform our home with the POWER OF IMAGINATION.

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Ratio analysis
A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis. There are many ratios that can be calculated from the financial statements pertaining to a company's performance, activity, financing and liquidity.

Types of ratios 1 Return on investment ratio a Return on asset b Return on invested capital c Return on net worth 2 Activity / Turnover ratio a b c d f g h
Total activity turnover ratio Invested capital turnover ratio Average collection period Inventory turnover ratio Working capital turnover ratio Days inventory Average credit period

2012-2013

2011-2012

12.87% 12.95% 209.80

13.22% 20.44% 117.39

1.675 2.9838 39.17 5.238 7.995 70.5996 544.372

1.72 3.068 41.840 5.56 6.53 65.64 717.08

3 Liquidity ratio a Current ratio b Acid test ratio 4 Solvency test ratio a Debt equity ratio b Debt to total equity capital c Interest coverage ratio 5 Profitability ratio a Gross profit ratio b Net profit ratio c Operating profit ratio
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1.458 .969

1.633 1.097

.029 .028 13.92

.025 .025 12.77

30.06% 6.937% 9.69%

27.91% 6.663% 9.32%

Return on investment ratio

Return on asset: An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. In the above table ROA has fallen from 13.22% to 12.87% means that management is little bit less efficient in using its assets to generate earning.

Return on invested capital: The return on invested capital measure gives a sense
of how well a company is using its money to generate returns. Comparing a company's return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively. In the above table ROAC has fallen from 20.44% to 12.55% reveals that the companys capital was not used effectively.

Return on net worth: it is used to measure the companys profitability. it reveals

how much profit the company generates with the money that the equity share holder has invested. RONW in above table has increased from 117.39 to 209.80 which reveals that companys profitability has increased.

25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Return on asset 13.22% 12.87% 12.95%

20.44% 2011-2012 2012-2013

Return on invested capital

250 209.8 200 150 100 50 0 Return on net worth

117.39

2011-2012 2012-2013

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Activity/Turnover ratio
Total activity turnover ratio: Companies will typically try to turn their production into cash or sales as fast as possible because this will generally lead to higher revenues. Such ratios are frequently used when performing fundamental analysis on different companies. Total activity turnover ratio as fallen 1.72 to 1.675 reveals that the company this year was little bit less efficient to turn their production to cash and sales.

Invested capital turnover ratio: A ratio of how effectively a publicly-traded

company manages the capital invested in it to produce revenues, there is a slight decrease in the ratio from 3.06 to 2.98 A high ratio indicates that the company is using its capital well, while a low ratio indicates the opposite. It is also called equity turnover.

Average collection period: Due to the size of transactions, most businesses allow
customers to purchase goods or services via credit, but one of the problems with extending credit does not know when the customer will make cash payments.in the above table it has fallen from 41.840 to 39.17. Therefore, possessing a lower average collection period is seen as optimal, because this means that it does not take a company very long to turn its receivables into cash.

Inventory turnover ratio: A ratio showing how many times a company's inventory
is sold and replaced over a period. It has fallen from 5.56 to 5.238. A low turnover is usually a bad sign because products tend to deteriorate as they sit in a warehouse.

Working capital turnover ratio: The working capital turnover ratio is used to
analyse the relationship between the money used to fund operations and the sales generated from these operations. In the above table working capital turnover ratio has increased from 6.53 to 7.995 the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales.

Days inventory: Days in inventory (DII) is an efficiency ratio that measures the
average number of days the company holds its inventory before selling it. In the above table it has increased from 65.64 to 70.59 so the company is taking a little bit longer than the previous figure to turn its inventory in to cash it is holding for larger time

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9 8 7 6 5 4 3 2 1 0

7.995 6.53 5.56 5.238 3.0682.9838 1.72 1.675 2011-2012 2012-2013

Total activity turnover ratio

Invested capital turnover ratio

Inventory turnover ratio

Working capital turnover ratio

80 70 60 50 40 30 20 10 0

65.64 41.84

70.59

39.71

2011-2012 2012-2013

Average collection period

Days inventory

Liquidity ratio
Current ratio: A liquidity ratio that measures a company's ability to pay short-term
obligations. In the above table current ratio of bereger paints has fallen from 1.633 to 1.4583 The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point.

Acid test ratio: A stringent indicator that determines whether a firm has enough
short-term assets to cover its immediate liabilities without selling inventory. In the above table acid test ratio has fallen from 1.0971 to .969 Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital ratio, it means current assets are highly dependent on inventory.
2 1.633 1.5 1 0.5 0 Current ratio Acid test ratio 1.458 1.097 0.969 2011-2012 2012-2013

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Solvency ratio
Debt equity ratio: A measure of a company's financial leverage calculated by
dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. The debt equity ratio has increased from 2.58% to 2.90% A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.

Debt to total invested capital: Companies can finance their operations through
either debt or equity. The debt-to-capital ratio gives users an idea of a company's financial structure, or how it is financing its operations, along with some insight into its financial strength. There is a slight increase from 2.586% to 2.87% The higher the debt-to-capital ratio, the more debt the company has compared to its equity. This tells investors whether a company is more prone to using debt financing or equity financing.

Interest coverage ratio: A ratio used to determine how easily a company can pay
interest on outstanding debt. The ratio has increased from 12.77% to 13.92% means that the company is very healthy in regard of paying its debt. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable.
16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Debt equity ratio Debt to total invested capital Interest coverage ratio 2.58% 2.90% 2.59% 2.87% 2011-2012 2012-2013 12.77% 13.92%

Profitability ratio
Gross profit ratio: It is not an exact estimate of the company's pricing strategy but it does give a good indication of financial health. A company's gross profit margin should be stable. It should not fluctuate much from one period to another, unless the industry it is in has been undergoing drastic changes which will affect the costs of goods sold or pricing policies. This year companys gross profit ratio is 30.06%. Around 33% gross margin means products are marked up 50% and so on.

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 Net profit ratio: net profits to revenues for a company or business segment typically expressed as a percentage that shows how much of each dollar earned by the company is translated into profits. There is a slight increase in the net profit ratio 6.663%to 6.93% it varies from company to company.

Operating profit ratio:

This measure is helpful to management, providing insight into how much profit is being produced per rupee of sales. There is a slight increase from 9.32% to 9.69% An increasing OPR indicates the company is

growing more efficient, while a decreasing OPR could signal looming financial troubles.

35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 27.91%

30.06%

2011-2012 6.66% 6.93% 9.69% 9.32% 2012-2013

gross profit ratio

net profit ratio

operating profit ratio

Question that report answers

1. What are the main Revenue Generating Activities (Main Business) of the company?
The main revenue generating activity of the company is selling of paints, varnishes and enamels. The company manufactures and markets a range of decorative & industrial paint products under various product brands and has its operations spread throughout the length & breath of the country. The company's decorative and Industrial paints continue to gain an increasing market share in the country. In the previous year, the Company had introduced a bouquet of new products in the decorative segment. These included Weather coat All guard Premium Plus exterior emulsion with water repelling silicon, Weather Coat Kool n Seal with two way advantages of sealing the terrace cracks and cooling the interiors, and Breathe Easy the low VOC, low emission emulsion and enamel paints. All these products were received with enthusiasm in the market. This year too, these will continue to attract time and attention of the Company such that the products are deeply entrenched into the markets.

2. What are the major Growth Drivers for the products of the Company?
Higher disposable incomes to drive demand for Decorative Paints The average Indian consumer, backed by higher incomes & purchasing power has become more conscious about aesthetics and quality of living. This is also helped by the spread of audio-visual media, internet and communication facilities and will translate into a robust demand for decorative paints. Moreover, housing construction, urbanization and

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Affordable housing have helped boost sales in the decorative segment. Faster growth in rural areas The demand for paints in rural towns has witnessed a Faster growth as compared to urban areas. Rising disposables incomes and a preference for a higher standard of living have changed the spending habits in rural areas. Consumers have slowly shifted from lime wash or unpainted homes to entry level paint products. However rural towns still have a huge untapped potential. Robust growth in Real Estate Sector to drive demand for decorative paints The demand For real estate is expected to grow at a Compound Annual Growth Rate (CAGR) of 19% between 2010 and 2014. Out of this, Tier 1 metropolitan cities are projected to account for about 40%. Apart from housing, demand for space from sectors like education, healthcare etc is also slated to rise. This will translate into a robust demand for paints in future Economic recovery in Industrial & Infrastructural sector Economic growth in Sectors Like construction, automobile, manufacturing which require industrial paints drive the demand for Industrial paints. These sectors are dependent on overall economic growth of the nation. Strong industrial activity backed by government spending can drive the demand for industrial paints.

3 What are the areas which are being covered by the Company in its Accounting Policies? Specify the Accounting Policy being followed for Depreciation, Inventory Valuation and Basis for Preparation of Accounts?
The areas being covered by the company in its accounting policies are as follows:1. Accounting convention 2. Current and Non-current classification 3. Fixed assets and Depreciation/Amortization 4. Government grants 5. Investments 6. Inventories 7. Foreign currency translation 8. Sales 9. Other income 10. Employee benefit 11. Borrowing costs 12. Taxation 13. Employee stock option scheme 14. Research and development The accounting policy being followed for: Depreciation- Depreciation is provided on a straight line method as follows : (A) In respect of assets other than motor vehicles and computers: In respect of additions before 1.7.87 on the basis of specified period determined at the time of acquisition at the rates Inter alia under the Income Tax Act, 1961 and Rules framed thereunder, and In respect of additions on or after 1.7.87 in accordance with the provisions of Schedule XIV of the Companies Act, 1956.

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(B) In respect of following assets, depreciation are at rates which are higher than the rates specified in Schedule XIVo Motor Vehicles - 15% o Computers - 25% o Tinting Machines - based on estimated useful life varying from 60 months to 100 months. Inventory valuation- Finished goods inventories are stated at the lower of cost or estimated net realisable value. Costs comprise costs of purchase and production overheads. Other inventories are also valued at lower of cost or net realisable value. Provision is made for damaged, defective or obsolete stocks where necessary. Cost of all inventories is determined according to weighted average method of valuation. Basis of preparation of accounts: The financial statements are prepared to comply in all material aspects with all the applicable accounting principles in India, the applicable accounting standards notified u/s 211 (3C) [Companies (Accounting Standards) Rules, 2006], as amended and other relevant provisions of the Companies Act, 1956.

4 How will you predict the Financial Health of the company if you are a : Shareholders(Present & Potential) Managers (Efficiency) Lenders(Short Term & Long Term)
Following parties are generally interested around a concern, for different reasons as follows: in Ratio Analysis, in and

Shareholders: Interested in the rate of return on capital, that is, Gross Profit (GP) Ratio, Net Profit Ratio and Earnings per Share (EPS), which are again sub-divided as: (i) Primary EPS; (ii) Diluted EPS; (iii) Dividends per Share (DPS); etc. Management: Interested in profitability, efficiency, production, capacity utilization, etc.i.e., in Stock Turnover Ratio, Turnover to Capital Employed, Turnover to Fixed Assets, etc. Bankers/Lenders: Interested in solvency, liquidity and interest cover, i.e., in Current Ratio, Liquid Ratio, Interest Coverage Ratio, etc. So, if i am a shareholder I will hold the share of the company because there is a least fluctuation in the gross profit ratio on a yearly basis and is around 33% that is considered as a ideal one even there is a increase in the net profit ratio. In such situation, a manager must take steps in order to improve the efficiency of the production and various operating activities because Total activity turnover ratio, Inventory turnover ratio, Invested capital turnover ratio are showing downward trend in comparison to that of the last year and the company is not using its capital efficiently in turning its production to cash and sales.

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Lender can predict the company on a trustworthy platform because there is an increase in the current ratio (under liquidity ratio head) and is able to pay off its obligations at a point of time even the interest coverage ratio of the company is much higher which means the company is very healthy in regard of paying its debt.

5. Comment on the cash flows from Operating Activities, Financing Activities and Investing Activities. During the period of study, whether these cash flows have improved or otherwise. Provide the reasons for same?
Cash flows are reported using the indirect method, whereby profit / (loss) before extraordinary items and tax is adjusted for the effects of transactions of non-cash nature and any deferrals or accruals of past or future cash receipts or payments. The cash flows from operating, investing and financing activities of the Company are segregated based on the available information. Cash flows from Operating Activities : Cash flows from Operating Activities is the cash a company brings in from the ongoing, regular business activities The net cash flow from operating activity is positive i.e., there is cash outflow from operating activity of amount Rs.119.92 crores in the year 2011-12 which increased to cash outflow of Rs.176.62 crores in the year 2012-13. Cash flows from Investing Activities: Cash flow from investing activity reports the aggregate change in a company's cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries, and changes resulting from amounts spent on investments in capital assets such as plant and equipment. The net cash flow from investing activity is negative i.e., there is cash outflow from investing activity of amount Rs.67.06crores in the year 2011-12 which increased to cash outflow of Rs.197.55 crores in the year 2012-13 Cash flows from Financing Activities: Cash flows from Financing Activities flows measures the flow of cash between a firm and its owners and creditors. The net cash flow from financing activity has increased from Rs. .62 crores in the year 2011-12 to Rs.62.18 crores in the year 2012-13.

7. Read the MDA. List the issues covered in MDA. Each issue should be accompanied with a brief note of not more than 30 words.

Paint industry structure and development: Paint industry is growing at a faster pace which is fueled by higher income levels of people across urban and rural segments, growing popularity of branded paints with better quality and longer durability and the desire of people to remodel and embellish existing dwelling units,

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expansion of the distribution network resulted in the exploration of the new market. Focus and outlook for 2013-2014: The Company is focusing on developing its premium emulsion category which has witnessed significance growth in the last few years. Moreover, through product innovation, it is trying to capture market opportunities for technically superior products in the decorative paints segment. In the forthcoming year, the Company will try and bring newer varieties in various categories such as wood coatings, primers, distempers, interior finishes and texture coatings to cater to the market demand and address the carefully identified needs of the customers. IN the Industrial Category, comprising more than 20% of the Companys business, your Company believes that there is enough scope in uncharted areas and unexplored customers. With enhanced and sustained quality of products, your Company has commenced its efforts to get into these markets. Projects: 1. The first phase of the modern and automated water based paint plant at Hindupur in Andhra Pradesh is expected to be completed by the early second half of 2013 .
Once fully completed, the capacity of the plant will be 3,20,000 MT/per annum for water based paints and1,00,000 MT/per annum for emulsions, used as intermediates in the production of these paints. 2. The Company has also initiated work on a separate unit at Hindupur for its British Paints Division which will further augment capacity by 30,000 MT of paints and 6,000 MT of resins per annum.

3. The Company reports that the first phase of expansion of the water based plant at
Rishra from 18,000 MT/per annum to 40,000 MT/per annum, with fully automatic filling line and robotic palletisation system, has been completed in September, 2012 .

Risk and concern: 1. The biggest slice of the total costs of any paint industry is composed of raw materials
prices. In case of the Company, these are largely dependent on global commodity prices, their demand and availability and prices of crude which impact the costs of solvent, plastics and quite a few other chemicals. Any adverse fluctuation in these prices may affect the profitability of the Company. In the year 2012-13 and earlier, the paint industry had to bear the brunt of higher landed costs of raw materials in spite of lower basic prices in some cases, because of higher Rupee : Dollar exchange rates. Unabated falling Rupee value, unless addressed quickly, will affect the industry. 2. The current indirect tax system in India, which creates an impediment for supply chain and distribution, has emerged as a key action area for the Government. In this regard, the Company hopes that the Government will implement the two-layer GST soon to simplify the current value-added-tax (VAT) system. 3. Availability of talent with right skill set will be a key concern for the industries. In the paint industry, this also extends to availability of trained consultants and applicators since much of the success of painting a wall depends on right application techniques

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Internal control system and there adequacy

The Company has a well-established internal control system, commensurate with its size and spread, with defined guidelines on compliance. This helps the Company to operate its factories, offices and depots with a reasonable degree of comfort. The system incorporates continuous monitoring, routine reporting, checks and balances, purchase policies, authorization and delegation procedures, audits including compliance audits and system reviews, which are periodically reviewed by the Audit Committee

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REFRENCES

http://www.bergerpaints.com/id/127/Annual-Reports http://www.investopedia.com/
http://www.scribd.com/

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