on Rallis India Limited
Rallis India, a Tata Group firm, has been around for more than 150 years. The business makes agrochemicals and is involved in the entire value chain of agricultural inputs, from seeds to organic plant growth nutrients. Rallis also provides contract manufacturing services to multinational organisations.
(A) Analysis of Profit and Loss Statement (P&L)
i) Sales Growth:
The first criterion to examine is a companies previous sales growth. Companies with a high-demand product or service have typically seen rapid sales growth in the past.
Rallies India ltd increased its sales from 1282 crores in FY2012 to 2470 crores in FY2020, a compound annual growth rate (CAGR) of around 8% year on year.
Companies that have risen at least at the rate of
inflation or greater in the past should be preferred by investors. Its worth
noting that extremely high growth rates, such as 50% or more, are unsustainable
in the long run.
Profitability can be measured using two key metrics:
Operating Profit Margin (OPM) and Net Profit Margin (NPM).
OPM is the portion of sales income that remains
after deducting the costs of producing those sales, such as raw material costs,
employee costs, sales and marketing costs, power and fuel costs, and so on.
Operating profit excludes expenses such as fixed asset depreciation, interest,
and taxation. In addition, when calculating operating profit, we exclude
NPM is the net profit left over after a company has
paid its interest, taxes, and depreciation. Net profit is the final remnant
after all expenses have been met, and it is available to the company for
reinvestment or distribution to shareholders as a dividend.
An investors goal is to find companies that have a
high level of profitability that they have been able to maintain in the past.
Companies with high profit margins can weather tough times while still making
money for their shareholders.
Let us examine Rallies Ltds profitability. (Please keep in mind
that some calculations in the table below may be off due to rounding off.)
We can see that Rallies India Ltd.’s Operating
Profit Margin (OPM) is on average 15% from FY2012 to 2021. Similarly, the
companys Net Profit Margin (NPM) has averaged 10% over the years.
An investor must prefer companies with reliable or
improving profit margins to those with declining or fluctuating profit margins,
as the latter may see profits in some years and losses in others.
A company with good accounting and corporate governance
standards would want to pay all legitimate government taxes. The corporate tax
rate in India is 30% plus surcharge for Indian companies and 40% plus surcharge
for foreign companies. There are numerous tax incentive schemes for various companies/industries/states,
etc., that provide numerous tax-saving avenues that businesses use to reduce
tax expenses. Nonetheless, unusually low tax payments should raise red flags
and should be investigated.
Let us look at Rallies India Ltd.’s tax payment
We can see that the company has paid most of its taxes at the corporate tax rate. Because of a change in Indias corporate tax rate in FY2020-21, the tax pay-out ratio has decreased.
Tax payments at the corporate tax rate is a positive sign. If an investor notices that a companys tax pay-out ratio is lower or higher than the standard corporate tax rate, she should thoroughly read the companys annual report to determine the reasons for the different tax rate. A lower tax pay-out ratio is frequently associated with the following factors:
· Tax breaks are available to the company as a result of its operations in SEZs, etc.
The government offers export incentives.
Tax-free earning, such as interest earned on the companys investments in tax-free bonds.
Earning taxed at a lower rate, such as short-term capital gains on investments such as stocks and equity mutual funds, and so on.
As a result, an investor should thoroughly examine the annual report to determine the reasons for a lower tax pay-out ratio. Companies have disclosed a tax pay-out reconciliation table in the annual report in
recent years as a result of the application of Indian Accounting Standards
(IndAS), which reconciles the differences between the standard corporate tax rate and the companys actual tax pay-out ratio in the profit and loss statement. This table is very useful for understanding any differences in company tax pay-out ratios.
iv) Interest coverage:
Interest coverage determines whether the companys
operating profits are sufficient to pay interest to lenders on funds borrowed from them. It is quantified by the Interest Coverage Ratio, which compares operating profit to interest expense:
Operating Profit / Interest Expense = Interest Coverage Ratio
An investor should look for companies with at least
a 3 interest coverage ratio. It implies that they make at least a 3 in
operating profit while incurring a 1 in interest expense. A higher interest ratio provides a cushion during bad economic times, and the company will be able to service its debt even during bad times.
Let take a look at Rallies Ltd.’s interest coverage.
We can see that Rallies ltd has kept an average
interest coverage ratio (C) of 24 over the last ten years. In recent years, the
interest coverage ratio has surpassed 50 percent.
A high interest coverage ratio for any company
indicates that the company will be able to service its debt even in difficult
(B) Analysis of
Balance Sheet (B/S)
i) Debt to Equity
ratio (D/E, Leverage):
The D/E ratio assesses the composition of the funds
used to acquire a companys assets. The assets of the company are used to
produce goods and services that generate sales revenue for the company. The D/E
ratio indicates how much of the companys total funds are its own (shareholder
funds) and how much is borrowed from other lenders. A D/E of one indicates that
half of the funds are brought in by shareholders and the other half is borrowed
We prefer companies with very little debt. During difficult
times when the company may not be able to make good profits, the lender will
ask for their money, and the company may be forced to sell distressed assets to
repay the lenders. If the company is unable to find buyers willing to pay a
sufficient amount of money, it may go bankrupt. As a result, investors should
favour companies with a low debt-to-equity ratio.
Let us examine Rallies Ltd.’s debt to equity ratio over time.
We can see that Rallies ltd has kept a debt to
equity (D/E) ratio less than one in almost every year. The D/E ratio has
decreased over time, from.26 in FY2012 to 0.04 in FY2021.
ii) Current Ratio(CR):
The current ratio (CR) of a company is calculated as
the ratio of its current assets to its current liabilities.
Current Assets / Current
Liabilities = Current Ration
Current assets (CA) are assets that will be consumed within the
next year. They include inventory that is consumed and sold as a finished
product within a year, cash and similar investments held by the company to meet
day-to-day requirements, money due from customers (account receivables or
debtors), and loans given to various parties that are expected to be repaid within
Current liabilities (CL) are payables due within the
next year as well as short-term provisions.
A current ratio greater than one indicates that the companys CA
exceeds its CL and that the company would be able to pay off its short-term
liabilities with the money it receives from current assets.
Let us examine Rallis India Ltds current ratio (CR) over time.
(Please keep in mind that some calculations may result in a mismatch due to
Rallis India Ltd. has kept its current assets
greater than its current liabilities in almost all years, which is a very
healthy sign. Investors should seek companies with a current ratio of 1.25 or
(C) Analysis of Cash
Flow Statement (CF)
This section contains information about the cash generated by a
companys operations during the previous fiscal year (cash flow from operations
or CFO). This chapter also includes information on cash used to make
investments or cash received from selling investments (cash-flow from investing
activities or CFI) and cash borrowed from or repaid to financial institutions
during the previous year (cash-flow from financing activities or CFF).
An investor should concentrate on companies that
generate a sufficient amount of cash flow from operations to cover their
investment (CFI) and debt repayment needs (CFF). If an investor can find a
company that generates so much cash that, after deducting CFI and CFF, it still
has a surplus, she will have struck gold.
Let us examine Rallis India Ltds cash flow statement over time.
Positive values indicate cash inflow, while negative values indicate cash
outflow. (Please keep in mind that some calculations may result in a mismatch
due to rounding off.)
Rallis India Ltd. has been generating a significant
amount of cash from operations (CFO) year after year. CFO has increased
significantly over the last decade, rising from 94 billion in FY2012 to 217
billion in FY2021.
We can see that Rallis India Ltd has been expanding
its manufacturing capacities over the last decade, as evidenced by the negative
cash flow from investing (CFI). However, almost all of the funds for investment
in the plant and machinery have come from its operations. This is because the
companys cash inflow has consistently been greater than its cash outflow under
As a result, an investor can see that the surplus
CFO left over after accounting for the CFI outflow has been used by the company
to pay dividends to its shareholders as well as repay its debt. Furthermore,
Rallis India Ltd. has consistently paid a dividend of more than 20% of earnings
over the last decade.
(D) Parameters based
on a combination of B/S, P&L, and CF
Previously, we used ratios and growth rates based
solely on figures from B/S, P&L, or CF. We did not use any of the
ratios/parameters that use figures in these three financial statements.
A comparison of B/S, P&L, and CF is required
because it provides a sanctity check on the numbers reported by any company. It
will also provide additional insights into the companys financial position and
i) P&L and B/S
Some of the indicators of a companys operational
efficiency use a combination of P&L and B/S, such as:
Inventory turnover ratio,
Payables turnover and
Asset turnover ratio etc.
These variables are the next level of analysis that
an investor should perform once she is familiar with the parameters discussed
Even so, one analysis that compares P&L to CF is
required for each investor to perform on each company she is researching. It
compares cumulative net profit (profit after tax, PAT) over the last few years
to cumulative CFO over the same time period.
ii) Cumulative PAT
vs. Cumulative CFO:
A business that offers a product today may not
receive payment right away. It is, however, legitimately eligible to receive
it. As a result, accounting standards allow it to include this sale and its
profit in the profit and loss statement. The money received from the buyer, on
the other hand, will be reflected in CFO only when the money is actually
received from the buyer. As a result, when we compare PAT and CFO for any
given year, they will differ. However, cumulative PAT and CFO should be similar
If cumulative PAT is similar to CFO, it indicates
that the company can collect its profits in cash from its buyers. If the CFO is
significantly lower than the PAT, it means that the company, while legally
entitled to the money from the buyer, is unable to collect it, or the profits
are fictitious. In either case, the investor should steer clear of such a firm.
Let us compare Rallis India Ltd.’s cumulative PAT
and CFO over time.
Rallis India Ltd. reported net profits of 1704
crores during FY2012-2021 and cash flow from operations of 1798 crores. This is
a good sign for any business.
Financial Analysis Synopsis
The financial analysis entails delving into three key components
of the yearly report and thoroughly assessing them. The following are the three
& Loss statement (P&L)
Flow statement (CF)
Before you get the impression that financial
analysis entails a lot of arithmetic and complicated computations, let me
assure you that financial analysis is just a study of two things:
Ratios & Growth Rates
As we learn more about financial analysis, well
discover that it requires reviewing annual reports, noting down some key
figures, and analysing various ratios of these figures and their growth rates
To further simplify things, readers will be pleased
to learn that an investor no longer needs to look at the financial information
in the companys annual report and input them into a data analysis software
like Microsoft Excel (excel). The investor can utilise free internet tools to
obtain pre-packaged data files comprising financial details of companies, which
he or she can then use in Excel to conduct a thorough examination. www.stocksemoji.com is one such free
resource offered to Indian equity market investors.
We learned about financial analysis of a company in
detail in the current article in the series "Selecting Top Stocks to
Buy." The parameters discussed above are critical and should be sufficient
for any retail investors basic due diligence. As we all know, there is no end
to analysis, and analysts spend years analysing companies. There are hundreds
of other ratios that can be used to gain additional insight into a companys
Even so, I believe that if a retail investor can
analyse the eight parameters discussed above and, more importantly, understand
the trend of these parameters over the life of the company, she will be able to
easily select financially sound stocks from among thousands of options. She
would also be able to avoid financially risky companies and save a significant
amount of time that would otherwise have been spent researching such risky
companies. Here is a summary of the eight financial parameters:
growth: Aim for high and sustainable growth of more than 15% per year. A growth
rate of more than 50% is unsustainable in the long run.
Seek high and long-term OPM and NPM. We prefer companies with an NPM of more
pay-out ratio: Unless the company qualifies for specific tax breaks, the tax
rate should be close to the general corporate tax rate.
for companies with an interest coverage ratio greater than three.
to equity ratio: Look for companies that have little or no debt. D/E 0.5 is
for companies with a current ratio (CR) greater than 1.25.
flow: A positive CFO is required. Its ideal if CFO matches CFI and CFF
PAT vs. CFO: Look for companies with similar cumulative PAT and CFO over the
last ten years.
Many times in the past, managements/companies attempted
to use shortcuts to show good financial performance in reported numbers when
the actual business on the ground was not doing well. These incidents have
occurred all over the world, whether it was Enron in the United States or
Satyam in India. Every investor should be aware of the tricks employed by such
managements and conduct financial analysis to determine whether the performance
displayed is genuine or fabricated. The above paragraph will assist readers in
learning about common shortcuts used by businesses to dress up their financial
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