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Analysing Financial Statements

Introduction to Analyzing Financial Statements

There are various methods and techniques to perform Financial Statement Analysis. However, the most common methods of financial statement analysis include the following:

Horizontal Analysis:

A horizontal analysis is a comparison of financial statements with that of two or more previous years and its elements. Horizontal analysis allows investors and analysts to see what has been driving a company’s financial performance over a number of years, as well as to spot trends and growth patterns such as seasonality. It enables analysts to assess relative changes in different line items over time, and project them into the future. By looking at the income statement, balance sheet, and cash flow statement over time, one can create a complete picture of operational results, and see what has been driving a company’s performance and whether it is operating efficiently and profitably. It can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This comparison provides analysts with insight into the aspects that could contribute significantly to the financial position or profitability of the organization.

Vertical Analysis:

Vertical analysis is a method of analyzing financial statements that list each line item as a percentage of a base figure within the statement. One line item of the statement always shows the base figure at 100%, with each of the other items representing a percentage of the base figure. For example, each line of an income statement represents a percentage of Revenues, while each line of a balance sheet represents a percentage of Total Assets & Liabilities. One can use vertical analysis on an income statement, balance sheet or cash flow statement to understand the proportions of each line item to the whole, understand key trends that occur over time, compare multiple companies of varying sizes or compare a company’s financial statements to averages within their industry.

Ratio analysis:

Ratio analysis refers to the analysis of various pieces of financial information in the financial statements of a business which are mainly used external analysts to determine various aspects of a business. Generally, ratios are typically not used in isolation but rather in combination with other ratios. This data can also compare a company’s financial position with industry averages while measuring how a company stacks up against others within the same sector. Following are the uses of Ratio Analysis:

  • Comparisons: One of the uses of ratio analysis is to compare a company’s financial performance to similar firms in the industry to understand the company’s position in the market. Obtaining financial ratios for known competitors and comparing it to the company’s ratios can help management identify market gaps and examine its competitive advantages, strengths, and weaknesses. The management can then use the information to formulate decisions that aim to improve the company’s position in the market.
  • Trend line: Companies can also use ratios to see if there is a trend in financial performance. Established companies collect data from the financial statements over a large number of reporting periods. The trend obtained can be used to predict the direction of future financial performance, and also identify any expected financial turbulence that would not be possible to predict using ratios for a single reporting period.
  • Operational efficiency: The management of a company can also use financial ratio analysis to determine the degree of efficiency in the management of assets and liabilities. Inefficient use of assets such as motor vehicles, land, and building results in unnecessary expenses that ought to be eliminated. Financial ratios can also help to determine if the financial resources are over- or under-utilized.

There are four different ways to represent Financial ratios given their nature:

  • Simple or Pure – A simple ratio is shown as a quotient, example – 3:1
  • Percentage – This type of representation is done in form of a percentage, example 30%
  • Turnover Rate or Times – Accounting ratio expressed in form of rate or times, example 3 times.
  • Fraction – It is when a ratio is expressed in a fraction, example 2/3 or 0.67

Types of Ratios:

  • Liquidity Ratios:This type of ratio helps in measuring the ability of a company to take care of its short-term debt obligations. A higher liquidity ratio represents that the company is highly rich in cash. The types of liquidity ratios are:
    • Current RatioThe current ratio is the ratio between the current assets and current liabilities of a company. The current ratio is used to indicate the liquidity of an organization in being able to meet its debt obligations in the upcoming twelve months. A higher current ratio will indicate that the organization is highly capable of repaying its short-term debt obligations. Numerically, it is represented as:

      Current Ratio = Current Assets/Current Liabilities

    • Quick RatioThe quick ratio is used to ascertain information pertaining to the capability of a company in paying off its current liabilities on an immediate basis. Numerically, it is represented as:

      Quick Ratio = (Cash and Cash Equivalents + Marketable Securities + Accounts Receivables)/Current Liabilities

  • Profitability Ratios:This type of ratio helps in measuring the ability of a company in earning sufficient profits. The types of profitability ratios are:
  • Gross Profit Ratios:Gross profit ratios are calculated to represent the operating profits of an organization after making necessary adjustments pertaining to the COGS or cost of goods sold. Numerically, it is represented as:

    Gross Profit Ratio = (Gross Profit/Net Sales) * 100

  • Operating Profit Ratio:Operating profit ratio is used to determine the soundness of an organization and its financial ability to repay all the short term and long-term debt obligations. Numerically, it is represented as:

    Operating Profit Ratio = (Earnings Before Interest and Taxes/Net Sales) * 100

  • Net Profit Ratio:Net profit ratios are calculated to determine the overall profitability of an organization after reducing both cash and non-cash expenditures. Numerically, it is represented as:

    Net Profit Ratio = (Net Profit/Net Sales) * 100

  • Return on Equity (ROE): Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders’ equity.

    ROE = Net Profit/Shareholder’s Equity

  • Return on Capital Employed (ROCE): Return on capital employed is used to determine the profitability of an organization with respect to the capital that is invested in the business. Numerically, it is represented as:

    ROCE = Earnings Before Interest and Taxes/Capital Employed

  • Solvency Ratios:Solvency ratios can be defined as a type of ratio that is used to evaluate whether a company is solvent and well capable of paying off its debt obligations or not. The types of solvency ratios are:
    • Debt Equity Ratio:The debt-equity ratio can be defined as a ratio between total debt and shareholders fund. The debt-equity ratio is used to calculate the leverage of an organization. An ideal debt-equity ratio for an organization is 2:1. Numerically, it is represented as:

      Debt Equity Ratio = Total Debts/Shareholders Fund

    • Interest Coverage Ratio:The interest coverage ratio is used to determine the solvency of an organization in the nearing time as well as how many times the profits earned by that very organization were capable of absorbing its interest-related expenses. Numerically, it is represented as:

      Interest Coverage Ratio = Earnings Before Interest and Taxes/Interest Expense

  • Turnover Ratios: Turnover ratios are used to determine how efficiently the financial assets and liabilities of an organization have been used for the purpose of generating revenues. The types of turnover ratios are:
    • Fixed Assets Turnover Ratios:Fixed assets turnover ratio is used to determine the efficiency of an organization in utilizing its fixed assets for the purpose of generating revenues.Numerically, it is represented as:

      Fixed Assets Turnover Ratio = Net Sales/Average Fixed Assets

    • Inventory Turnover Ratio:Inventory turnover ratio is used to determine the speed of a company in converting its inventories into sales. Numerically, it is represented as:

      Inventory Turnover Ratio = Cost of Goods Sold/Average Inventories

    • Receivable Turnover Ratio:Receivable turnover ratio is used to determine the efficiency of an organization in collecting or realizing its account receivables.Numerically, it is represented as:

      Receivables Turnover Ratio = Net Credit Sales/Average Receivable

ABOUT PROBE

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • The Probe42 platform has been extensively used by Banks and Corporates
  • Our Customers have found value in using Probe42.in to enable their decisions involving identifying prospects, sales preparation, credit and competitor analysis, etc.
  • Please reach out to us if you need information on ANY of the ~ 1,369,000 corporates in India

DISCLAIMER

Copyright© Probe Information Services Private Limited. This article is intended solely for the addressed recipient and any dissemination, distribution, or copying of this will require permission from Probe. Probe has relied on estimates, analytics, and other public sources of information in preparing this report and is not liable for any damages in connection with the use of the information.

Understanding Financial Statements

Financial Statements of a Company

Financial statements are reports prepared by a company’s management to present the financial performance and position at a point in time. A general-purpose set of financial statements usually includes a Profit and Loss Statement, a Balance Sheet and a Statement of cash flows. Financial statements are the main source of financial information for most decision makers. That is why financial accounting and reporting places such a high emphasis on the accuracy, reliability, and relevance of the information on these financial statements. Companies can be evaluated on the basis of past, current, and projected performance. The particular importance of financial statements and its analysis comprise the following:

  • Management:The complexities and the size of the business make it necessary for the management to have up to date, accurate and detailed information of the business and the financial position. The financial statements help the management in understanding the performance of the company in comparison to the other businesses and the sector. Providing management with accurate information enables them to form proper policies for the companies and take correct decisions. The performance of management is ranked by these statements, the performance of these statements helps management justify their work to all the parties involved in the business
  • Shareholders: Shareholders are the owners of the business but do not take part in making decisions and day to day activities. However, these results are shared with the shareholders as quarter and annual updates. These statements enable the shareholders to understand how the company has been performing. It also allows them to judge the present and future performance. Financial statements are the most important source of information for current and prospective investors.
  • Creditors and the Lenders: Factors like liquidity, debt, profitability is all judged by the essential metrics in the financial statements. Creditors and Lenders are mostly concerned about the company’s debt and liquidity position. Analyzing these statements help them decide if they want to continue providing goods and se and determine the future course of action.
  • Government and Regulatory Authorities: The government and regulatory authorities use these financial statements for taxation and regulatory purposes. Also, these financial statements help authorities assess the business performance of these companies in various sectors to assess the economy’s performance as well.

Profit & Loss Statement

Statement of profit and loss captures the Revenues and expenses a company has incurred from both Operating and Non-Operating activities over a specific period of time, usually a month, quarter or a given financial year. It is also called Income Statement, and captures the basic elements of the following equation:

Profits = Revenues – Costs

P&L statements are additive in nature (unlike Balance Sheets). The revenues/costs/profits for a financial year is equal to the sum of revenues/costs/profits for all the quarters within the financial year. This statement is based on the accrual method of accounting i.e. revenues and expenses are recognized as and when they are incurred (movement of cash is immaterial). To better understand, consider the following example:

A businessman Ramesh procures computer parts from his supplier Ganesh, assembles them into computers and sells them to a customer Suresh every month. As per terms of the contract, Suresh pays Ramesh on a quarterly basis and Ramesh pays Ganesh once Suresh has made payments (Quarterly) i.e. all the payments are settled at the end of every quarter. In the Cash method of accounting, all the revenues/costs/profits would be recorded at the end of the quarter, when all the payments take place. But in the Accrual method of Accounting (generally followed practice), all the revenues/costs/profits would be recorded as and when incurred.

Major heads within a P&L statement:

All P&L statements typically follow the same format whereby first revenues are described followed by expenses

  • Net Revenue/Net Sales: Net Revenues or Net Sales are the sales made by the company in a given accounting period after accounting for returns or warranty replacements/ trade discounts. Typically, this includes revenues from main line of business.
  • Cost of Goods Sold (COGS)/Cost of Sales: Cost of goods sold (COGS) refers to the direct costs of producing the goods sold or services provided by a company. This amount includes the cost of the materials and labor directly used to create the good or provide the service. It excludes indirect expenses, such as distribution costs and sales force costs.
  • Gross Profit: Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. It is derived by reducing COGS from Net Sales. It helps investors realize the production efficiency of the company.
  • Other Income: This head typically includes income from ancillary activities of the company or one-time profits that may be incurred due to income from interest, dividends, miscellaneous sales, rents, royalties, and gains from the sale of capital assets etc.
  • Operating and Direct Expenses: This represents expenses beyond procurement of goods such as Selling Expenses (Commissions given to agents selling products), Packaging Costs, Transport Costs, etc. These expenses are directly attributable to the cost of goods being sold or the services being provided.
  • General and Administrative Expenses (G&A): General and administrative expenses are incurred in the day-to-day operations of a business and may not be directly tied to a specific function or department within the company. These include overheads such as Office Rent, Electricity, Water Charges, Maintenance Charges, Municipal Charges, Rent, Facilities for employees such as Tea, Coffee, etc.
  • Employee Benefit Expenses: Employee benefits are defined as a form of compensation paid by employers to its employees. Employee benefits come in many forms and are an important part of the overall compensation package offered to employees. It includes expenses incurred for wages, bonuses and retirement benefits of company employees.
  • Other Expenses: Other expenses are those expenses that non-operating in nature that does not have any relation with the main business operations and include expenses like impairment and restructuring costs, etc. It is a line item to record any unexpected losses unrelated to the normal course of business. It could include a loss from the disposal of equipment.
  • Operating Profit/Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA): Operating Profit is the profit from a company’s core business operations excluding deductions of interest, Depreciation & Amortization expenses, and taxes.

Mathematically,EBITDA is calculated by adding Other Income to Gross Profit and deducting Operating, Direct, G&A, Employee, Other expenses. EBITDA is a measure that helps analysts understand the profitability of a company from core activities of the business.

  • Depreciation and Amortization: Amortization and depreciation are two methods of calculating the value for business assets over time. Amortization is the practice of spreading an intangible asset’s cost over that asset’s useful life. Depreciation is the expensing of a fixed asset over its useful life. These expenses typically represent the charge of using assets of the company such as Plant & Machinery, Furniture and fixtures, equipment, etc.
  • Profits/Earnings before Interest and Taxes (EBIT): Mathematically, EBITDA + Non-operating Income – Depreciation and amortization expense = PBIT. PBIT measures the profit a company generates from its operations. By ignoring taxes and interest expense, PBIT focuses solely on a company’s ability to generate earnings from operations, ignoring variables such as the tax burden and capital structure. EBIT removes the benefits from the tax cut out of the analysis. PBIT is helpful when investors are comparing two companies in the same industry but with different capital structure and tax rates.
  • Interest Expenses: This includes Interest expense incurred on bank loans, credit facilities, etc. Since non-payment of interest can result in serious consequences for a company or even leading to liquidation of assets, investors analyse the Interest paying capacity of the company by looking at the current interest expenses of the organization.
  • Profit/Earnings Before Taxes (PBT): Profit before tax is a measure of a company’s profitability that looks at the profits made before any tax is paid. It matches all the company’s expenses, which include operating and interest expenses, against its revenues but excludes the payment of income tax. It helps investors analyse whether company is profitable as a whole. PBT is helpful when investors are comparing two companies in the same industry but with different tax rates.
  • Taxes: This represents taxes levied by the government on profits of the company. This does not include indirect taxes levied by government such as GST.
  • Profit After Tax (PAT): Profit after tax or a gain after tax is essentially the amount of money that remains with the taxpayer after all the necessary deductions have been made. It is like a barometer that tells you how much profit a business has really earned. Calculated by deducting taxes from PBT.

Balance Sheet

A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure. It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.

In simple words, the Balance Sheet adheres to the following equation:

Total Assets = Total Liabilities + Shareholders’ Equity

Major heads within a Balance Sheet:

Total Assets: Assets are resources that are owned by the company both legally and economically. There are two main classes of assets. They are current and noncurrent assets.

  • Non-Current Assets – Noncurrent assets are a company’s long-term investments that have a useful life of more than one year. Noncurrent assets cannot be converted to cash easily. They are required for the long-term needs of a business and include things like land and heavy equipment. Noncurrent assets are reported on the balance sheet at the price a company paid for them, which is adjusted for depreciation and amortization and is subject to being re-evaluated whenever the market price decreases compared to the book price. It may also include land, property, trademarks, long term investments etc. Classifications as follows:
    • Property, plant and equipment: Property, plant, and equipment assets are also called fixed assets, which have a useful life assigned to them, which means they have a set number of years the assets will have economic value to the company. Fixed assets also have a salvage value, which is the value remaining at the end of the asset’s life. Fixed assets undergo depreciation, which divides the cost of fixed assets, expensing them over their useful lives. Depreciation also helps spread the asset’s cost out over a number of years allowing the company to earn revenue from the asset.
    • Intangible assets: Intangible assets are assets that are not physical in nature but hold monetary value. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets.
    • Non-Current Investments: Long-term investments hold a section on the asset’s side of a company’s balance sheet that represents the company’s investments that a company intends to hold for more than a year, including stocks, bonds, Mutual Funds, Long-term Advances, Investments in other subsidiaries etc.
  • Current Assets – Current assets are considered short-term assets because they generally are convertible to cash within a firm’s fiscal year, and are the resources that a company needs to run its day-to-day operations and pay its current expenses. Current assets are generally reported on the balance sheet at their current or market price. It may include cash and cash equivalents, inventory, accounts receivables etc.

Total Liabilities – Liabilities are obligations of a company which they owe to other businesses or individuals and the owners of the company. Liabilities are shown classifying them into:

  • Owner’s Equity – Owner’s equity is the obligation of the business to its owners. The term owners’ equity is mostly used in the balance sheet of sole proprietorship and partnership form of business. In a company’s balance sheet, the term “owner’s equity” is often replaced by the term “shareholder’s equity” or “shareholder’s fund”. Equity is important because it represents the value of an investor’s stake in a company, represented by their proportion of the company’s shares. These equity ownership benefits promote shareholder’s ongoing interest in the company. Shareholder’s equity can be either negative or positive. If positive, the company has enough assets to cover its liabilities. If negative, the company’s liabilities exceed its assets; if prolonged, this is considered as balance sheet insolvency. Typically, investors view companies with negative shareholder equity as risky or unsafe investments.
  • Non-Current Liabilities – The liabilities which are payable after one year from the date of the balance sheet or after an operating cycle whichever is longer are called long-term liabilities. Noncurrent liabilities generally arise due to availing of long-term funding for the business. Apart from funding of day to day operations, businesses also need to raise funds for various capital expenses from time to time. These include acquisition of fixed assets and property. These capital expenses are generally funded through non-current liabilities such as bank loans, public deposits, long term notes payable, lease, pension, and gratuity fund, etc.
  • Current Liabilities – Liabilities payable within a short period of quickly changeable are called current liabilities. The liabilities which are payable within the next year from the date of the balance sheet or within an operating cycle whichever is longer are called current liabilities. Current liabilities are typically settled using current assets, which are assets that are used up within one year. They include Accounts payable, notes payable, expense payable, dividend payable, unearned revenue, bank loan, interest payable etc.

Cash Flow Statement

Major heads within a Cashflow Statement:

Cash flow statement shows inflow and outflow of cash and cash equivalents from various activities of a company during a specific period under three main heads:

  • Operating Activities – Operating activities are the activities that comprise of the primary or the main activities of an enterprise during an accounting period. These are the principal revenue generating activities of the enterprise. For example – for a garment manufacturing company, operating activities include procurement of raw material, sale of garments, incurrence of manufacturing expenses, etc.
    Cash inflows from operating activities shall include cash receipts by sale of goods, from fees, royalties etc.
    Cash outflow from operating activities shall include cash payments to suppliers for goods and services and payments of income tax etc.
  • Investing Activities – Cash flow from investing activities includes the movement in cash flows owing to the purchase and sale of assets. It relates to purchase and sale of long-term assets or fixed assets such as machinery, furniture, land and building, etc.
    Cash inflows from investing activities shall include cash receipts from disposal of assets, dividend receipts from investments etc.
    Cash outflow from investing activities shall include cash payments to acquire fixed assets or shares, cash advances to third parties (other than by way of operating activities) etc.
  • Financing Activities – Financing activities are activities that result in changes in the size and composition of the owners’ capital and borrowings of the enterprise. It includes financing activities related to long-term funds or capital of an enterprise. For example – cash proceeds from issue of equity shares, debentures, raising long-term loans, repayment of bank loans, etc.
    Cash inflows from financing activities shall include cash proceeds from issuing shares, debentures, short-term or long-term borrowings etc.
    Cash outflow from financing activities shall include cash repayments of borrowed amounts, dividend on equity and preference capital etc.

ABOUT PROBE

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • The Probe42 platform has been extensively used by Banks and Corporates
  • Our Customers have found value in using Probe42.in to enable their decisions involving identifying prospects, sales preparation, credit and competitor analysis, etc.
  • Please reach out to us if you need information on ANY of the ~ 1,369,000 corporates in India

DISCLAIMER

Copyright© Probe Information Services Private Limited. This article is intended solely for the addressed recipient and any dissemination, distribution, or copying of this will require permission from Probe. Probe has relied on estimates, analytics, and other public sources of information in preparing this report and is not liable for any damages in connection with the use of the information.

The Probe Newsletter August 2020

Universe of Registered Companies

  • As of Jul-20, there are 12,33,767 active companies in India.
  • 3,08,312 active companies were incorporated in India between Jan-18 to Jul-20.
  • Presently, there are 52,087 active companies in Hyderabad city.
  • The chart does not include LLPs.

Company Classification

  • As of Jul-20, there are 19,396 Not for Profit Co.in India.
  • Currently, there are 1,992 Govt Co.in the country.
  • 90.0% of the companies were registered as a Private Limited Co.

Probe New Company and LLP Incorporations Index

  • The Probe New Company and LLP Incorporations (PNCLI) Index was constructed using Dec-00 as the base year.
  • In Jul-20, index value stood at 466 with 1,16,309 companies and LLPs incorporated in the last 1 year.
  • In the last 12 months 30,504 LLPs were incorporated in India.

New Company Incorporations

  • During the month of Jul-20, 16,487 companies were incorporated in India of which 16,170 were private and 317 were public.
  • New company incorporation witnessed a growth by 50.5% when compared to Jun-20.
  • 14.1% of new incorporated companies were registered under trading business.

Company Incorporations – State-wise data

  • In Uttar Pradesh 1,806 companies were incorporated in Jul-20.
  • 7.8% new companies were incorporated in the Karnataka state.
  • In Jul-20, 69 companies were incorporated with the paid up capital of more than Rs 1 cr.

LLP Incorporations State-wise data

  • During the month of Jul-20, 4,319 LLPs were incorporated.
  • 256 LLPs were incorporated in Telangana which constituted 5.9% of total LLP incorporation.
  • 133 LLPs were incorporated under the agriculture business.

Nationwide Spread

  • Presently, there are 12,33,767 active companies in India.
  • West Bengal with 1,27,076 stood at the 3rd position in terms of active companies which constituted 10.3% of the total active companies.
  • 18,826 companies in Kolkata had paid up capital between Rs 1 – 5 lac.

Statewide Spread – Bihar

  • 42.7% of the active companies in Bihar were registered in the state capital – Patna.
  • 12,458 companies in Bihar had paid up capital of upto Rs 1 lac.
  • In Muzaffarpur, 1,192 companies were registered which accounted 4.3% of total active companies in the state.

Paid Up Capital

  • 14,926 companies had paid up capital between Rs 5 – 10 cr.
  • As of Jul-20, 2,281 companies in Mumbai city had paid up capital of more than Rs 25 cr.
  • 3.2% active companies had paid up capital between Rs 2 – 5 cr.
  • Currently, 30,619 companies in Kolkata had paid up capital of upto Rs 1 lac.
  • There are 39,299 companies in India with paid up capital between Rs 2 – 5 cr.
  • 10.8% of total active companies had paid capital between Rs 5 –15 lac.

Directorship Overview

  • As of Jul-20 there are 20,58,065 active directors in India.
  • Presently, there are 58,811 active foreign directors in the country.
  • Delhi has 2,29,166 active directors which constituted 11.1% of total active directors.
The Probe Newsletter July 2020
number of companies incorporated

Universe of Registered Companies

  • Currently, there are 12,17,127 active companies in India.
  • In the last 6 months 47,922 active companies were registered in India.
  • As of June-20, there are 68,404 active companies in Odisha.
  • The chart does not include LLPs.
Company Information

Company Classification

  • Currently, there are 60,458 public companies in
  • Presently, there are 29,251 OPC (One Person Company) in the country.
  • There are 737 Guarantee and Association companies in India.
probe information

Probe New Company and LLP Incorporations Index

  • The Probe New Company and LLP Incorporations (PNCLI) Index was constructed using Dec-00 as the base year.
  • Index value stood at the 445 with 1,40,113 entity registered in the last 12 months.
  • 12,610 LLPs were incorporated in the last 6 months.
New Company Incorporations

New Company Incorporations

  • In Jun-20, 10,954 companies were registered of which 10,739 were private and 215 were public.
  • 2,360 companies in Jun-20 were registered under manufacturing business.
  • In Jun-20, 932 companies were registered under ROC Bengaluru.
Number of Company Incorporations

Company Incorporations – State-wise data

  • 742 companies were registered in the state of Telangana which accounted 6.8% of total company registration in the month.
  • In Gujarat 542 companies were incorporated in Jun-20.
  • 8,827 companies registered had paid up capital up to Rs 1 lac.
Number of LLP Incorporatios

LLP Incorporations State-wise data

  • In Jun-20, 2,273 LLP were incorporated in India.
  • In Gujarat state, 220 LLPs were incorporated which constituted 9.7% of total LLP incorporation.
  • In Jun-20 497 LLP were incorporated under the trading business.
Nationwide Spread

Nationwide Spread

  • Currently, there are 12,17,277 active companies in India.
  • As of Jun-20, there are 38,728 active companies in Rajasthan of which 20,022 incorporated in Jaipur.
  • Karnataka with 80,613 stood at the 5th place in terms of total number of active companies.
Statewide Spread

Statewide Spread – Madhya Pradesh

  • 742 companies were registered in the state of Telangana which accounted 6.8% of total company registration in the month.
  • In Gujarat 542 companies were incorporated in Jun-20.
  • 8,827 companies registered had paid up capital up to Rs 1 lac.
Paid Up Capital

Paid Up Capital

  • 22,334 companies had paid capital more than Rs 10 cr.
  • In Assam state 2,243 companies had paid up capital of up to Rs 1 lac which constituted 30.5% of total companies in the state.
  • 14.2% companies had paid up capital between Rs 1 – 5 lac.
  • Currently, 30,619 companies in Kolkata had paid up capital of upto Rs 1 lac.
  • There are 39,299 companies in India with paid up capital between Rs 2 – 5 cr.
  • 10.8% of total active companies had paid capital between Rs 5 –15 lac.
Dictatorship overview

Directorship Overview

  • Presently, in India there are 20,02,590 active directors.
  • Uttar Pradesh has 1,91,345 active directors which constituted 9.6% of total directors in India.
  • Currently, there are 57,960 active foreign directors in India.
About Probe
A Note on Cement Industry – 2

India is the second-largest cement producer in the world with the installed capacity of 509 MTPA and accounts for over 8.0% of the global installed capacity. A total of 210 large cement plants together account for 410 MT of installed capacity in the country, while 350 mini cement plants make up the rest. Of the total 210 large cement plants in India, 77 are located in the states of Andhra Pradesh, Rajasthan, and Tamil Nadu. Of the total capacity, 98.0% lies with the private sector and the rest with the public sector. Cement production in India increased from 230 MT in 2011-12 to 337 MT in 2018-19.

The majority of the Indian cement industry constitutes domestic companies, however, the Indian cement industry has some multinational giants including Holcim and Lafarge, which have an interest in companies such as ACC, Ambuja Cement, and Lafarge Birla Cement. The top 20 companies account for around 70.0% of the total production.

Consolidation

During the period FY2016-20, a total of 60 MTPA capacity got acquired by bigger players which led to regional capacity consolidation.

  • In FY2016, Birla Corp acquired Reliance Cement’s 5.5 MTPA capacity in the central region.
  • In FY2017, Nuvoco Vistas (earlier Nirma Cement) acquired Lafarge Cements’ 10 MTPA capacity spread across east and north.
  • In FY2018, UltraTech acquired JP Associate’s 21 MTPA capacity spread across north, central, and south regions.
  • In FY2019, UltraTech further acquired 14 MTPA capacity from Century Textiles (spread across central, east, and west markets).
  • In the same year, UltraTech also acquired Binani Cement’s 6 MTPA in the north.
  • In FY2020, Dalmia acquired Murli Industries’ 3 MTPA in Maharashtra.
  • Further as per media release dated Feb 06, 2020, the Kolkata-based diversified conglomerate EMAMI Ltd announced that it has entered into a binding agreement with Nuvoco Vistas Corp, part of the Nirma group, for divesting its 100.0% equity stake in Emami Cement for an enterprise value of Rs 5,500 cr. The transaction is subject to the customary approvals including from the Competition Commission and is expected to be consummated in the next 3-4 months.

 Cement Demand:

Cement demand in the country is largely contributed by housing sector-where Urban housing segment contributes 25-26%, Rural housing contributes 28-30% and Government projects like Low-cost housing under PMAY schemes contribute another 11-12%.   infrastructure segments like roads, railways, metros, ports apart from other structure development like bridges, dams, and irrigation contribute 22-24%. Over the last few quarters, cement demand in the country has grown at a healthy rate mainly led by strong demand from government-related projects like infrastructure and low-cost housing under PMAY schemes.

cement demand breakup - India

For marketing cement, India is divided into five regions and a few companies dominate across markets:

Regional Capacity

Cement-Demand-Supply as a Whole

Cement production after touching a peak of 337.3 MT in FY2019, stood at 327 MT in FY2020.

Performance in FY2020 (Apr-Mar,2020)

After a strong FY2019 (14% volume growth), the Indian cement industry started FY2020 on a muted note. Between Jun and Oct 2019, demand declined by 2.0% YoY due to

  1. Muted government spending after the general elections in Apr-May 2019.
  2. Change of governments in demand intensive states like Madhya Pradesh, Rajasthan, Andhra Pradesh, Karnataka, and Maharashtra.
  3. Prolonged monsoon.

However, the industry was showing initial signs of recovery since Nov 2019 and reported a 6.0% YoY increase in production over the Nov 2018 to Feb 2019 period (even after higher base; 10% growth in the preceding period of 2017-18). But the nationwide lockdown in the last 10 days of Mar 2020 impacted the cement volumes. Cement production declined by 25.0% in the month of Mar 2020.

Overall, FY2020 was a weak year in terms of demand with overall cement demand contracting by 1.0%.

 

  • Pricing trends: Strong utilization in the north/central/Gujarat markets (NCG) has kept cement prices robust vs those in the south/east/Maharashtra markets (SEM). During FY2020, prices in the NCG region rose more than 10.0% YoY. However, in the south, prices remained almost flat against a modest increase in the East. Demand contraction in the southern region in FY2020 and heightened competition in the Eastern region has been driving the sharp divergence in realization trends.
  • Operating expenditure: The cement industry benefitted from fall in pet coke and diesel prices during 2019 which has led to a reduction in input and freight cost for the cement industry. Thus, in spite of the slight rise in unitary fixed costs on account of lower utilization, unitary opex fell YoY, boosting margins.
  • Power & Fuel Cost: Average pet coke prices declined from USD 91/Ton in Q4FY19 to USD 68/ton in Q4FY20. This coupled with various cost control initiatives are undertaken by cement companies in the form of installation of WHRS (Waste Heat Recovery Systems) and other alternate sources like the use of lignite have led to a decline in power and fuel cost.
  • Freight Cost: Road transport comprises of 65-75% of the freight mix for all the major cement manufacturers in India. After a sharp decline in diesel prices recently, most of the cement companies saw a sharp decline in Freight costs in the last few quarters. Also, the applicability of higher axle load carriage capacity norms has positively impacted the freight cost for most of the cement companies. However, the crude prices have recovered from low of US$ 19.56/ per barrel in Apr 2020 to US$ 39.27/per barrel.crude price in USA
  • Margins: Higher realizations and moderation in OPEX expenditure led to firming up of operating margins of the cement industry to decade high of Rs 1,000/MT.Q4FY2020 (Jan-Mar,2020) update:
    1. Since Nov-2019, demand for cement started improving, however, in Mar-2020, due to nationwide lockdown due to Covid-19 the volumes of the cement industry declined. Cement volumes declined around 10.0% in Q4FY2020. As per a research report, the industry sells significant volumes in the last 10 days of the financial year.
    2. Net Sales Realization (NSR): During Q4FY2020, due to an increase in demand the industry increased the prices by 3.0%. Region-wise, West price was up 6.0% QoQ, South/East was up 3.0% QoQ and North/Central is up 2.0% QoQ.
    3. Cost: Variable cost including fuel and freight remained soft on account of crude witnessing sharp correction.
    4. Margins: Better realizations on account of an increase in prices coupled with a decline in variable cost led to healthy margins in Q4FY2020.

    Q1FY2021 so far:

    Cement Demand: Cement production in the month of April 2020 decreased by 86.0% YoY led by nationwide lockdown for the first 19 days of Apr 2020. Industry resumed factory operations from Apr 20, 2020 post gradual lifting of lockdown. During May, cement companies witnessed increased capacity utilization to 60-65.0% as against 35-40.0% at the start of the month. Capacity utilization further improved in the month of June 2020. The sharp increase was due to the pent-up demand before monsoon slows down the construction activity.

    Demand recovery is expected to be gradual till monsoon ends in Sep-2020. Further, from the demand side, rural housing which constitutes around 30.0% is expected to pick up faster on account of good rabi crop and labor availability. However, there is no clarity in urban housing demand due to an increase in Covid-19 cases in some of the urban cities which have led to partial shutdown of the cities once again.

    Prices: Prices on a pan India basis increased by 10.0% MoM in May-2020 with a steep rise of 16.0% MoM in the southern and eastern regions. Cement prices across other regions increased by 5-7.0%. Further, prices increased by 0.8% MoM in Jun-2020. The rise in prices is attributable to limited supply led by restrictions on labor, logistics, and factory operations.

    Margins: Low diesel and coke prices and firm realizations may boost the margins to some extent. However, higher per ton fixed cost due to lower volumes might negate the benefits of lower variable cost.

    Road Ahead

    The eastern states of India are likely to be the newer and virgin markets for cement companies and could contribute to their bottom line in the future. In the next 10 years, India could become the main exporter of clinker and grey cement to the Middle East, Africa, and other developing nations of the world. Cement plants near the ports, for instance, the plants in Gujarat and Visakhapatnam, will have an added advantage for exports and will logistically be well armed to face stiff competition from cement plants in the interior of the country. India’s cement production capacity is expected to reach 550 MT by 2025.

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