Introduction

Established in 1976,Appolo Tyres Ltd. is Indias leading

tyres manufacturer with operation in three continents and headquarter at Gurgaon . Key people of the firm are Onkar S Kanwar as CMD and Neeraj R S Kanwar as JMD and COO. Traded in India on the Bombay, National and Kochi Stock Exchanges, with 61% of shares held by the public, government entities, banks and financial institutions Manpower: Over 10,000 employees based across India, Southern Africa and Europe
Product portfolio: The entire range of passenger car,

SUV, MUV, light truck, truck-bus, agriculture,industrial and off-the-road tyres; retreading material, retreaded

 Key markets of operation: India is the largest

market accounting for nearly 70% of revenues. Exports reach 70+ countries from the three domestic markets of India, Europe and South Africa Turnover: FY09 Rs 49.8 billion / US$ 1.1 billion / Euro 754 million (March 31, 2009, exchange rates)

Financial Statement Analysis

(2004-2009)

On Proper analysis and interpretation, financial statements can provide valuable insights into a firms performance. There are four basic ways of analysing financial statements Ratio analysis Comparative analysis Common size statement analysis Du Pont analysis.

1. RATIO ANALYSIS
Broadly financial ratios are categorised into five categories

Liquidity ratios Leverage ratios Turnover ratios Profitability ratios Valuation ratios

1. Liquidity Ratio : Liquidity refers to the ability of a firm to meet current/short-term obligations when they become due for payment . It is generally based on current assets and current liabilities.
i) Current Ratio : it is defined as Current Assets
.

Current Liabilities

Higher the ratio better is the liquidity position of the firm.

Current ratio

2.5

1.5 Current ratio 1

0.5

0
2004 2005 2006 2007 2008 2009

Comment: From the graph it is clear that firm is able to meet

current obligations and the safety of funds of short term creditors is good

ii) Acid Test Ratio (Quick Ratio) : defined as Quick Assets . Current Liabilities Quick assets refer to those which can be converted to cash immediately or at a short notice without diminition of value. Quick Assets are CA excluding inventories,WIP,and pre-paid expenses.

Quick Ratio 1.2 1 0.8 0.6 0.4 0.2

Quick Ratio

0
2004 2005 2006 2007 2008 2009

Comment: From the graph we can say that firms quick ratio

was beat in 2005 and then it declined to 0.6 in 2008 but recovered to 0.7 in 2009.

2. Leverage Ratios (Capital Structure) :

The first type of leverage ratio is based on the relationship between borrowed funds & owners capital. These ratios are computed from balance sheets, Such as Debt-equity ratio Debt-asset ratio Equity-asset ratio

Debt-Equity Ratio : it shows the relative contributions of creditors and owners. It is defined as D / E ratio = Debt Equity It is the ratio of the amount invested by outsiders to the amount invested by the owners of business. Lower the ratio higher will be the margin of safety for creditors. A high debt-equity ratio will lead to inflexibility in the operation of the firm and frequent interference will be there from creditors side. But shareholders will be benefited with high debt-equity ratio
i)

Debt-Equity Ratio 1.4 1.2 1

0.8
0.6 0.4 0.2

Debt-Equity Ratio

0
2004 2005 2006 2007 2008 2009

Comments: Since the ratio is around 0.8 the long term

lenders are more secure which is good for long term position of the firm.

ii) Debt-Asset Ratio : it measures the extent to which borrowed funds support the firms assets. It is defined as Debt Assets
. .

Debt Asset Ratio 0.4 0.35 0.3 0.25 0.2 0.15 0.1

Debt Asset Ratio

0.05 0
2004 2005 2006 2007 2008 2009

Comment: Debt-assset ratio of the firm is around 0.25 which

indicates use of lower debt in financing the assets which means a larger safety margin for lender.

iii) Equity-Asset Ratio : it measures the extent to which owners funds support the firms assets. It isdefined as
Equity-Asset Ratio= Equity Assets
Here equity means equity capital of the firm (i.e.,

net worth).

Equity-Asset Ratio
0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 Equity-Asset Ratio

0
2004 2005 2006 2007 2008 2009

Comment: The equity-asset ratio is very less so the firm is

more dependent on external sources of finance and it is a dangerous signal for long term leaders as it indicates a lower level of safety available to them.

 The second category of leverage ratios are

coverage ratios. These ratios are computed from information available in the profit and loss account. These are important because, in the ordinary course of business,the claims of creditors are not met out of the sale proceeds of the permanent assets. The coverage ratio measure the relationship between what is normally available from operations of the firm and the claims of the outsiders.

 Important coverage ratios are

i) Interest Coverage Ratio : it is also known as

time interest earned ratio. It is defined as EBIT (Earning before interest and taxes) Interest

This ratio measures the debt servicing capacity of

a firm.

Interest Coverage Ratio 7 6 5

4
3 2 1

Interest Coverage Ratio

0
2004 2005 2006 2007 2008 2009

Comment: In the year 2008 the ratio is satisfactory which

implies assured payment of interest to them but for other years ratio is low and it is a danger signal that firm is using excessive debt

3. Turnover / Activity / Asset Management Ratio:

It measures how efficiently the assets are

employed by the firm. These ratios are also called as efficiency ratios. The efficiency of assets would be reflected in the speed with which it is converted into sales. The greater is the rate of turnover, the efficient is the utilization / management.

 i) Inventory (Stock) Turnover Ratio : it

measures how fast the inventory is moving through the firm and generating sales. It is defined as COGS Average inventory
Cost of goods sold may be obtained by deducting

gross profit from net sales. Average inventory may be calculated as - average of opening stocks of a year ; or (opening stock + closing stock) / 2

Inventory Turnover Ratio

9 8 7 6 5 4 3 2 1 Inventory Turnover Ratio

0
2004 2005 2006 2007 2008 2009

Comment: Higher the ratio better it is as it indicates that

stock is selling quickly. However this was the case in the year 2004 only. After that the ratio is declining.

 ii) Debtors (Receivables) Turnover Ratio : it

shows how many times accounts receivables (debtors) turn over during the year. It is defined as Net Credit Sales Average accounts receivables (i.e., Av. debtors + Av. B/R)
. .

The denominators can be calculated as in the

case of inventory turnover ratio.

Debtors Turnover Ratio 14 12 10

8
6 4 2 Debtors Turnover Ratio

0
2004 2005 2006 2007 2008 2009

Comment: From the graph it is clear that the firm has a

higher debtors turnover ratio in the subsequent years which is good for the firm as it indicates that amount from debtors is being collected more quickly.

 iii) Average Collection Period : this is another

way of measuring the liquidity of a firms debtor. It represents the number days worth of credit sales that is locked in debtors (a/c receivables). It is defined as
.

Average debtors . Average daily credit sales Months (days) in a year Debtors turnover

OR

Normally, higher the ratio better is the credit

management policy of the firm.

Average Collection Period(in days) 45

40
35 30 25 Average Collection Period(in days)

20
15 10 5

0
2004 2005 2006 2007 2008 2009

Comment: From the graph it is clear that the credit

management policy of the firm has been good over the years.

4. Profitabilty ratios: i) Profit margin ratios: It measures the relationship between profit and sales. Different types of profit margin ratios are: a) Gross Profit Margin Ratio: gross profit means difference between net sales and cost of goods sold. It is defined as Gross Profit Net Sales
This ratio shows the margin left after meeting manufacturing

cost . It measures efficiency of production as well as pricing. Higher the ratio, better is the condition.

Gross Profit Ratio(in %) 60

50
40 30 20 10 Gross Profit Ratio

0
2004 2005 2006 2007 2008 2009

Comment: Gross profit margin ratio of the firm is around 40%

which indicates good management, low cost of production and higher sales.

b) Net Profit Margin Ratio : it measures the relationship between net profit and sales of the firm. It can be measured in two ways Operating profit ratio = EBIT Sales Net profit ratio = EAT Sales
This ratio shows the earnings left for shareholders (both equity and

preference) as a percentage of net sales.

It measures the overall efficiency of the production, administration,

selling, financing, pricing and tax management.

Higher the ratio, better for owners.

Net profit margin ratio(in %) 10

9 8 7 6

5
4 3 2 1

Operating Profit Ratio Net Profit Ratio

0
2004 2005 2006 2007 2008 2009

Comment: We can see that the net profit margin ratio is fairly

good it would ensure adequate return to the owners as well as enable a firm to withstand adverse economic conditions when selling price is declining ,cost of production is rising and demand of product is falling.

ii) Rate of return ratios : It reflects the relationship between profit and investment. The important ratios are

a) Return on total asset (ROTA): also called as return on investment (ROI). Defined as Net profit after taxes (PAT / EAT) Average total asset
It shows how efficiently the asset of the firm is utilized. Higher the ratio, better utilization of asset will be.

ROTA( in %)
10 9 8

7
6 5 4 3 2 1

ROTA( in %)

0
2004 2005 2006 2007 2008 2009

Comment: As from graph ROTA is high implies the net

earnings of owners and intrest for creditors is high which indicate strong financial position of the company.

b) Return on capital employed (ROCE) : similar to ROTA except in one respect. Here profits are related to total capital employed. Defined as
Net profit after tax (EAT) Av. total capital employed OR
[

EAT + Interest Av. total capital employed

.

Capital employed is equal to long term liabilities + owners

equity. OR it is equal to net working capital + fixed assets.

Higher the ratio, more efficient is the use of capital employed.

ROCE( in %)
20 18 16 14 12 10 8 6 4 2 ROCE( in %)

0
2004 2005 2006 2007 2008 2009

Comment: Good value of ROCE implies efficient use of

capital employed.

c) Earning power ratio: it measures operating profitability. It is defined as

Profit before interest and taxes Average total assets

Earning power ratio

10 9 8

7
6 5 4 3 2 1

Earning power ratio

0
2004 2005 2006 2007 2008 2009

Index Analysis :
In index analysis, the items in comparative financial statements(balance sheets and income statements) are expressed as an index relative to the base year. All items in the base year naturally assume a value of 100.

INDEX ANALYSIS

Liabilities
Net worth reserves and surplus total borrowings current liabilities and provisions deferred tax liability total liabilities

2004

2005

2006

2007

2008

2009

100 99.83226 105.2947 153.3075 195.632 224.1501 100 99.82085 105.6548 155.5014 200.2714 230.4521 100 129.0453 177.9763 198.1206 154.4078 211.3713

100 86.39497 129.6276 226.9617 239.4863 224.4303 100 108.8622 116.7694 202.0025 203.2656 221.6266 100 104.084 132.252 189.987 198.2292 220.4519

Assets gross fixed assets net fixed assets

2004

2005

2006

2007

2008

2009

100

117.8724

126.183

186.6214

188.2925

235.2732

100

116.6882

121.3308

181.2553

174.5562

225.4332

investments deferred tax assets current assets total assets

100

19.32059

3.043171

38.28733

36.73036

33.68719

100

101.8018

381.982

1198.198

1007.658

975.6757

100 100

94.20742 104.084

143.9649 132.252

198.1923 189.9907

220.7464 198.2292

217.4909 220.4519

Common Size Statement Analysis

In common size analysis, the items in the balance

sheet are expressed as percentage of total assets and the items in the income statement are expressed as percentage of total sales.

COMMON SIZE ANALYSIS

Liabilities Net worth reserves and surplus total borrowings current liabilities and provisions deferred tax liability total liabilities 2004 15.95496 14.93901 11.1667 2005 15.40224 14.41983 13.93427 2006 13.0892 12.29765 15.48452 2007 13.22637 12.56138 11.96288 2008 15.7135 15.06184 8.68023 2009 16.10502 15.50349 10.62913

12.80218 2.580416 42.55673 100

10.69521 2.716339 42.83211 100

12.92982 2.347629 43.85118 100

15.7115 2.818562 43.71931 100

15.43483 2.640527 42.46908 100

12.93874 2.575362 42.24826 100

Assets

2004

2005

2006

2007

2008

2009

gross fixed assets net fixed assets

investments deferred tax assets current assets total assets

25.52693 17.56341 0.327783 0.051499 19.2747 37.25567 100

27.95491 19.04071 0.058837 0.048708 16.87019 36.02664 100

24.63579 16.29848 0.007629 0.150455 21.22323 37.68441 100

25.17913 16.82598 0.066332 0.326142 20.19088 37.41154 100

24.55287 15.66083 0.061501 0.265082 21.73461 37.7251 100

26.77383 17.65087 0.049226 0.223997 18.68822 36.61386 100

SWOT Analysis

Strengths: Continued market leadership in the dominant industry segment of truck and bus tyres Global presence with the acquisition of Apollo Tyres South Africa (Pvt) Ltd. (Formerly known as Dunlop Tyres International (Pvt) Ltd.) Extensive distribution network in India and South Africa Strongbrand recall in a price sensitive Indian market Responsive to changes in market conditions and product profiles Globalquality standards, international process and system certifications

 High usage of information technology systems to hasten the flow of information and leverage opportunities across 140 locations in India Dynamic and progressive leadership, willing to implement change Globalsourcing of raw materials

Weakness: No presence in two and three-wheeler segments Capital-intensive business :A business is capital-intensive if it requires heavy capital investment in buying assets relative to the level of sales or profits that those assets can generate.

Opportunities: Leadership position in the commercial vehicle segment will enable the Company to leverage new and related business opportunities New product segments like Truck/Bus Radial (TBR), Off The Road tyres (OTR), retreading and allied automotive services Growth in overseas markets like Europe

Threats: Imports from neighbouring countries at competitive prices Raw material price volatility ( frequent changes in price of raw materials).