Chapter Five

CHAPTER FIVE
COMPARATIVE ANALYSIS OF DURGAPUR STEEL PLANT WITH

OTHER INTEGRATED STEEL PLANTS OF SAIL
The following Chapter is divided into two sub- sections, namely- Part A & Part B.
Part A deals with the Financial Statement Analysis of Durgapur Steel Plant,
wherein various ratios of the Steel Plant are analyzed and interpreted for the
financial years 2005-06 to 2008-09. Part B of the chapter is concerned with
Comparative Financial Statement Analysis of four Integrated Steel Plants, namely
–Durgapur, Bhilai, Bokaro & Rourkela Steel Plants for the years 2005-06 to 2008-
09. This implies that this sub- division serves to contrast the financial performance
of Durgapur Steel Plant with other Integrated Steel Plants under SAIL.
Part A
Financial Statement Analysis of Durgapur Steel Plant- an Integrated Steel

Plant of SAIL
The ratios of Durgapur Steel Plant over a period of 4 years from 2005-06 to 2008-
09 are hereby calculated and analyzed. The ratio analysis of this section is done
with respect to liquidity, capital structure, profitability & activity ratios wherein a
comprehensive idea of the liquidity position & the profitability of the company
can be obtained:
I. LIQUIDITY RATIOS: These ratios measure the ability of the firm to meet
short term obligations & also reflect the short- term financial strength of the firm.
It basically denotes the efficiency in the usage of short term funds.
i. Net Working Capital: It represents the excess of Current Assets over Current
Liabilities. Hence, it serves as a measure of the position of the company with
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respect to its liquidity. It is mandatory for the Company to maintain sufficient
net working capital to cope up with short term claims.
Table 5.1
Net Working Capital of DSP for years 2005-06 to 2008-09 (in Rs. Crores)
Particulars
2005-06 2006-07 2007-08 2008-09
Current Assets, Loans & Advances:
(i) Inventories 539.23 691.51 761.97 1111.04
(ii) Sundry Debtors 8.78 10.88 17.43 36.33
(iii) Cash & Bank Balance 12.28 13.58 15.64 16.46
(iv) Interest Recievable/ Accrued 1.07 0.74 0.57 0.43
(v) Loans & Advances 77.73 91.54 119.34 120.57
Total Current Assets 639.09 808.25 914.95 1284.83
Current Liabilities:
(i) Sundry Creditors 182.69 236.79 227.21 251.75
(ii) Advances 26.17 23.27 27.68 22.6
(iii) Security Deposits 22.8 25.42 30.75 51.1
(iv) Other liabilities 130.25 143.15 186.7 166.28
Total Current Liabilities 361.91 428.63 472.34 491.73
NET WORKING CAPITAL 277.18 379.62 442.61 793.1

Source: Plant Accounts of SAIL, year 2005-06 & 2008-09.
From the table 5.1, it is evident that the Current Assets were in excess of Current
Liabilities by Rs. 277.18 crores in 2005-06, Rs. 379.62 crores in 2006-07, Rs.
442.61 crores in 2006-07-08 & Rs. 793.1 crores in 2007-08-09 respectively. The
liquidity hence increased by Rs. 102.44 crores for the financial year 2006-07 in
contrast to that in the previous financial year 2005-06 & further the liquidity
position of the company improved by Rs. 62.99 crores in 2007-08 as compared to
that in 2006-07. The highest increase in the Net Working Capital was observed in
the financial 2008-09 in contrast to the previous financial year 2007-08, the value
being at Rs. 350.49 crores.
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Source: Generated from table 5.1
Net Working Capital of DSP for years 2005-06 to 2008-09
Chart 5(i)
Initially, the liquidity of Durgapur Steel Plant decreased in 2006-07-08 when
compared to the situation in the previous year, that is, 2005-06-07. Later on, in the
financial year 2007-08-09, the Net Working Capital showed a considerable rise in
contrast to that in 2006-07-08. It depends on SAIL’s policies whether it would
prefer a high level of liquidity in the system.
ii. Current Ratio: It measures the extent of Current assets available to finance the
Current Liabilities. The short- term solvency of the firm is also revealed through
Current Ratio since the firm has to liquidate its assets to meet its liabilities and it
is the current assets that can be easily liquidated to yield ready cash.
Table 5.2
Current Ratio of DSP for years 2005-06 to 2008-09
Particulars 2005-06 2006-07 2007-08 2008-09
Current Assets 639.09 808.25 914.95 1284.83
Current Liabilities 361.91 428.63 472.34 491.73
Current Ratio 1.77 1.89 1.94 2.61
Source: Plant Accounts of SAIL, year 2006-07& 2008-09
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Table 5.2 depicts the continuous rise in Current Ratio over the years 2005-06 to
2008-09, wherein it was close to the ideal situation, (i.e. 2:1) in 2007-08 the signal
of excessive liquidity in the Company is shown by the ratio 2.61 in 2008-09 over
& above the ideal case by 0.61 units.
As is further evident from the table, the increase in Current Ratio was due to the
increase in the value of Current Assets over the years from 2005-06 to 2008-09. It
is to be noted that though the Current Liabilities also showed an increase in the
aforementioned years, their increase was not recorded up to that of the rise in
current assets. In other words, the increase in current assets was greater than the
rise in the value of current liabilities over the aforementioned years which were
responsible for the increase in Current ratio from 2005-06 to 2008-09.

Current Ratio of DSP for years 2005-06 to 2008-09
Chart 5(ii)
From Chart 5.iii, it is evident that Current Ratio registered an increasing trend
from the year 2005-06 to 2008-09. The year 2005-06 depicts a Current Ratio of
1.77 which implies that for every Re. 1 of Current Liabilities, Rs. 1.77 of Current
Liabilities are available. However, a major propotion of the Current Assets was
Inventories, i.e. out of Rs. 639.09 crores of Current Assets, Rs. 539.23 crores of
Inventories are present or Inventories form 84.37% of Current Assets. However,
these Inventories are not easily convertible into cash in the immmediate short run,
so the ability of the Company to cope with its Current Liabilities is questionable.
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Similarly, the Current Ratio of 2006-07 was at 1.89, which is more close to the
ideal Current Ratio of 2:1, however, in this case also, the share of Inventories in
Current Assets formed 85.56% of Current Liabilities ( Inventories= Rs. 691.51
crores while Current Assets = Rs. 808.25 crores). Also, the near ideal ratio of 1.94
in 2007-08, also shows a significant propotion (83.28% or Rs.761.97 crores of
Current Assets at Rs. 914.95 crores denotes Inventories). The same pattern is
observed in the year 2008-09. Though, the Current Ratio signals excess liquidity
in the system at 2.61, yet Inventories form 86.47% of Current Assets ( Rs.
1111.04 crores of Currrent Assets at Rs. 1284.83 crores).
Hence, in all the four years under consideration, Inventories form almost 85% of
Current Assets, hence the viability of Current Assets to yield liquid cash for
meeting immediate obligations is debatable. This implies that a high Current Ratio
wil be significant if it is backed by an idealistic (i.e. 1:1) Quick ratio as well.
iii. Quick Ratio- This ratio serves as a more rigorous test of the efficiency of the
firm to cope up with short term obligations, by the use of quick assets. Quick
Assets are current assets which can be converted to cash immediately or at a short
notice without dimunition in value.
Table 5.3
Quick Ratio of DSP for years 2005-06 to 2008-09
Particulars 2005-06 2006-07 2007-08 2008-09
Quick Assets 99.86 116.74 152.98 173.79
Quick Ratio 0.28 0.27 0.32 0.35
Source: Plant Accounts of SAIL, year 2006-07 & 2008-09
The Quick Ratio rose during the period from 0.28, 0.27 & 0.32 in the years 2005-
06, 2006-07 and 2007-08, with the highest being at 0.35 in 2008-09. However,
this was never close to the ideal situation of 1:1. This is because of the low values
of Quick Assets in contrast to the values of Current Liabilities, which implies that
the Quick Assets are insufficient to cover short term liabilities.
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Table 5.3 shows an increase in the value of Quick ratio due to the increase in
Quick Assets which compensates the rise in the value of current liabilities,
however as was mentioned in the preceding paragraph that the rise in the value of
Quick Assets is not adequate enough to cope up with the increase in the current
liabilities, since in all the four years under study the Quick Ratio falls below the
ideal ratio of 1:1.

Quick Ratio of DSP for years 2005-06 to 2008-09
Chart 5(iii)
As was mentioned in the case of Current Ratio, in every year under consideration
from 2005-06 to 2008-09, Inventories form a considerable part of Current Assets,
namely, 84.37%, 85.56%, 83.28% and 86.47% respectively during the years 2005-
06, 2006-07, 2007-08 & 2008-09. So, once the item ‘Inventories’ was deducted
from Current Liabilities to arrive at the Quick Ratio (Prepaid Expenses of
Durgapur Steel Plant= Rs 0), the Quick Assets can hardly cover the Current
Liabilities i.e. they are not capable to generate liquid cash. The highest value for
Quick Ratio was recorded during the year 2008-09 at 0.35, which is barely close
to the ideal Quick Ratio of 1:1.
This indicates that the Company does not have enough of Quick Assets to cope up
with immediate obligations. Also, the large amount of Inventories implies that the
Company is following very strict Inventory Control Policy which accounts of
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significant portion of Raw Materials, Work- in-Progress and Finished Goods lying
unused. This would increase the holding cost as well. Also, the Company runs the
additional risk of having to dispose of its Finished Goods which is held as
Inventories at a much lower price as the time for which the goods are kept as
Inventories increases. The Company should consider the revision of its Inventory
Control Policy & must allow greater mobilisation of its Inventories to generate
products which could help improve its total sales & hence generate revenue for
the Company. Further, the holding cost of the Company can also be brought down
once the mobilisation of Inventories is assured.
iv. Super Quick Ratio- Out of the aforementioned liquidity ratios, Super Quick
Ratio acts the most rigorous test of the capability of the firm to meet Current
Liabilities through the inclusion of Super Quick Assets namely, Cash, Bank &
Marketable Securities in the evaluation of liquidity.
Table 5.4
Super Quick Ratio of DSP from 2005-06 to 2008-09
Particulars 2005-06 2006-07 2007-08 2008-09
Super Quick Assets 12.28 13.58 15.64 16.46
Super Quick Ratio 0.0339 0.0317 0.0331 0.0335
As can be viewed from Table 5.3, the Super Quick Ratio of Durgapur Steel Plant
remained at the same level i.e. 0.03, with minor variations in its value like 0.0339,
0.0317, 0.0331 & 0.0335 in the years 2005-06, 2006-07, 2007-08 & 2008-09
respectively. However, these values are far below the ideal condition of 0.5:1. The
reason for this trend is quite evident from the aforementioned table since the
values of Super Quick Assets of DSP, which consist of Cash & Bank account (the
value of marketable securities of the Plant is zero for all the years under purview),
is hardly sufficient to cover the Current Liabilities.
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Super Quick Ratio of DSP for years 2005-06 to 2008-09
Chart 5(iv)
The Super Liquid Ratio is a measure of the actual debt- paying capacity of the
Company. The Super Quick Ratio of DSP registered close to 0.03, with a dip at
2005-06-07. However, these values do not come close to the ideal Ratio of 0.5:1.
The reason for this trend is due to the fact that Company has very low Cash &
Bank Balances and zero Marketable Securities for all years from 2005-06 to 2008-
09. It can be concluded that the Company has very limited ability to meet very
short- term claims.
II. CAPITAL STRUCTURE RATIO- The Capital Structure Ratios are the
financial ratios that depict the long- term solvency or those which assures the
long- term lenders with respect to the (i) periodic payment of interest during the
period of the loan & the (ii) repayment of principal on maturity or on pre-
determined instalments at the due dates.
(i) Interest Coverage Ratio: It is a measure of the debt- servicing capacity of the
Company. It measures how many times the earnings can cover the interest payable
to the debt- capital contributors.
Table 5.5
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Interest Coverage Ratio of DSP from 2005-06 to 2008-09
Particulars 2005-06 2006-07 2007-08 2008-09
Profit Before Tax 260.93 623.76 1008.61 754.25
Interest on debt capital 50.31 15.47 27.73 29.39
EBIT 311.24 639.23 1036.34 783.64
Interest Coverage Ratio 6.19 41.32 37.37 26.66
From Table 5.5, it is clear that the extent by which the debt- capital contributors
were safe was initially low in 2005-06 at 6.19 in contrast to the succeeding years,
the values of this ratio being at 41.32, 37.37 & 26.66 respectively at 2006-07,
2007-08 & 2008-09.

Interest Coverage Ratio of DSP for years 2005-06 to 2008-09
Chart 5(v)
The Interest Coverage Ratio of DSP recorded an increase from its value at 2005-
06 to that in 2006-07, further the ratio showed a decreasing trend from 2006-07
onwards. The high ratios of 41.32, 37.37 & 26.66 in years 2006-07, 2007-08 &
2008-09 respectively could also imply under- usage of debt capacity since the
earnings are much higher than the fixed charges on debt capital.
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III. PROFITABILITY RATIOS- These ratios measure the operating efficiency
of the firm with regards to its ability to ensure adequate returns to its owners or
shareholders. These ratios enable the measurement of the extent of adequacy of
returns to cover operating expenses of the firm.
i) Net Profit Margin: It measures the ability of sales to provide for compensation
to owners since it a ratio between Profit after Tax and Sales. The Net Profit
Margin is indicative of the management’s ability to operate the business with
sufficient success not only to recover from revenues of the period, the cost of
merchandise or services, the expenses of operating the business (including
depreciation) & the cost of the borrowed funds, but also leaves a margin of
reasonable compensation to the owners for providing their capital at risk.
Table 5.6
Net Profit Margin of DSP from 2005-06 to 2008-09
Particulars 2005-06 2006-07 2007-08 2008-09
Profit after Tax 260.93 623.76 1008.61 754.25
Sales 3277.62 3757.61 4629.49 5533.01
Net Profit Margin 7.96 16.60 21.79 13.63
The Net Profit Margin increased steadily from 7.96 in 2005-06 to 16.6 in 2006-07
& finally to 21.79 in 2007-08, however the ratio decreased to 13.63 in 2008-09.
The table further reveals that the increase in the value of the Net Profit Margin
during the initial three years was due to the rise in the Profit after Tax, even
though the Sales recorded an increase. However, during 2008-09, the Sales
showed an increase, but the net profit margin registered a decrease, which implies
that the expenses were higher during this year, due to which the margin allocated
to the owners out of the profits were comparatively lesser in contrast to that
available during 2007-08.
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Net Profit Margin of DSP for years 2005-06 to 2008-09
Chart 5(vi)
It can be inferred from the Graph 5.vi that initially though the Net Profit Margin
was low at 7.96, it later on reached a level of 21.79 in 2007-08, however, there
was decline in this level to 13.63 in 2008-09. The high ratio in 2007-08 shows that
during this particular year, the owners were ensured with higher amount of returns
when compared to the situation during other years in the period under
consideration.
A high Net Profit Margin not only ensures adequate returns to the owners but also
shows that the Company has greater capacity to withstand adverse economic
conditions, for example the case when the selling price is falling, or the cost of
production is rising & the demand for the product is on the fall.
ii) Operating Profit Ratio: This ratio provides a measure of the ability of sales to
generate operating profits. It indicates the amount of operating profit earned for
each rupee of sales. It also measures the adequacy of profits to cover operating
expenses.
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Table 5.7
Operating Profit Ratio of DSP from 2005-06 to 2008-09
Particulars 2005-06 2006-07 2007-08 2008-09
EBIT 311.24 639.23 1036.34 783.64
Sales 3277.62 3757.61 4629.49 5533.01
Operating Profit Ratio 9.50 17.01 22.39 14.16
The Operating Profit Ratio initially registered an increase in the first three years
from 9.5 in 2005-06, to 17.01 in 2006-07, & 22.39 in 2007-08; however, in 2008-
09, it decreased by 8.23 units when compared to its value in 2007-08.
The table further shows that the initial rise in the value of the operating profit ratio
from 2005-06 to 2007-08 is due to the rise in the value of EBIT even though the
Sales record an increase. In 2008-09, the operating profit ratio shows a drop due to
the decrease in the value of EBIT as compared to that in the previous year which
is not sufficient for the increase in Sales.

Operating Profit Ratio of DSP for years 2005-06 to 2008-09
Chart 5(vii)
The Operating Profit Ratio recorded an increase during the initial three years from
2005-06 to 2007-08, finally registering a drop in 2008-09. Since, Operating Profit
Ratio indicates the amount of operating profit earned on each rupee of sales, the
ability of the Company to generate operating profits from every rupee of sales was
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the highest in 2007-08, which is a positive trend from the purview of Company.
However, the ratio declined in 2008-09 in contrast to that in 2007-08 due to the
increase in Sales & decline in sales in contrast to the previous year i.e. 2007-08.
iii. Raw Materials Consumed- Expenses Ratio: Expenses ratio measures the
ability of sales to provide for meeting various expenses, which include COGS,
Administrative Expenses, Selling & Distribution Expenses and Raw Materials
Consumed. In this case, Expenses Ratio is calculated with respect to Raw
Materials Consumed.
Table 5.8
Raw Materials Consumed- Expenses Ratio of DSP from 2005-06 to 2008-09
Particulars 2005-06 2006-07 2007-08 2008-09
Raw materials consumed 1523.41 1668.75 1856.61 2680.22
Sales 3277.62 3757.61 4629.49 5533.01
Raw Materials Consumed-
Expenses Ratio 46.48 44.41 40.10 48.44
In the initial three years from 2005-06 to 2007-08, the Raw Materials Consumed-
Expenses Ratio decreased from 46.48 in 2005-06, to 44.41 in 2006-07, then to
40.1 in 2007-08. However, in 2008-09, there was an increase in the ratio from
40.1 in 2007-08 to 48.44 in 2008-09.
The table further reveals that the decrease in the raw materials consumed ratio was
due to the fact that though the extent of raw materials consumed increased, the
sales also increased to a greater extent to compensate for the rise in the raw
materials consumed. However, in the year 2008-09, the ratio increased in contrast
to that in the previous year i.e. 2007-08, since though the raw materials consumed
increased, the Sales failed to increase in proportion to the rise in the raw materials
consumed.
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Raw Materials Consumed of DSP for years 2005-06 to 2008-09
Chart 5(viii)
During the year 2005-06, the Raw Materials Consumed- Expenses ratio was high
i.e. 46.48% of Sales as compared to the values in 2006-07 & 2007-08. This
implies that only 53.32% of Sales was available to meet other Operating Expenses
as well as Financial Expenses like interest, tax & dividends so on.
Since the Raw Materials Consumed Expenses ratio declined for the years 2006-07
& 2007-08 with the values being at 44.41% & 40.1% of the respective sales of the
aforementioned years. This implies that the extent of contribution of sales
towards meeting other operating expenses (i.e. those excluding Raw Materials
Consumed) & financial liabilities like interest, tax, dividends increased as
compared to the allocations for the year 2005-06. The propotion of Sales
dedicated to cope up other operating expenses & financial expenses were at
55.59% & 59.9% of the respective sales of the years 2006-07 & 2007-08.
However, since the Raw Materials Consumed- Expenses Ratio increased during
the year 2008-09 with its value being at 48.44% of Sales of 2008-09, i.e. the
allocation of Sales for the year 2008-09 dedicated for meeting other operating
expenses & financial expenses decreased during the year 2008-09 compared to the
contribution of sales towards meeting the aforementioned expenses during the
year 2007-08.
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iv) Return on Assets: It measures the profits generated on the assets employed in
the business or in other words it measures the productivity of assets.
Table 5.9
Return on Assets of DSP from 2005-06 to 2008-09
Particulars 2005-06 2006-07 2007-08 2008-09
Profit after Tax 260.93 623.76 1008.61 754.25
Average Total Assets 3662.15 3654.83 3583.4 3795.55
Return on Assets 7.13 17.07 28.15 19.87
The Return on Assets showed an increase from the years 2005-06 to 2007-08, the
values being at 7.13%, 17.07% & 28.15% of the total Assets employed for the
years 2005-06, 2006-07 & 2007-08 respectively. The ratio however showed a
decrease during the year 2008-09, its value being at 19.87% of the Total Assets
employed for the year 2008-09.

Return on Assets of DSP for years 2005-06 to 2008-09
Chart 5(ix)
In the year 2005-06, 7.125 of Total Assets are generating profits after tax i.e.
ultimately the extent of Total Assets that are available as earnings to the owners
after payment of fixed charges to the debt- capital contributors in the form of
interest as well as the payment of corporate tax. The productivity of the total
assets employed in the business is the lowest in the year 2005-06 as compared to
the other years in the period under study, i.e. 2006-07, 2007-08 & 2008-09.
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The extent of productive utilization of assets ultimately generating profits for the
owners increased from the years 2005-06 to 2007-08 as there was increase in the
Profit after tax while there was a decline in the total assets employed in the
business i.e. Re.1 of Total Assets could generate higher extent of earnings to the
owners of the company. However, a decline in the Profit after tax & higher
amount of Total Assets employed in the business contributed to the decline in the
Return on Assets. This implies that in 2008-09, Re.1 of total assets was put into
the process of production to yield only a lower level of profits compared to the
previous year i.e. 2007-08.
IV. ACTIVITY RATIOS- These reflect the efficiency in the management of

assets which is given by the speed with which assets are converted to sales.
i) Fixed Assets Turnover: This ratio measures the relation between Fixed Assets
and Sales i.e the number of times Fixed Assets are converted to Sales in a year.
Table 5.10
Fixed Assets Turnover of DSP from 2005-06 to 2008-09
Particulars 2005-06 2006-07 2007-08 2008-09
Sales 3277.62 3757.61 4629.49 5533.01
Net Fixed Assets 3662.15 3654.83 3583.4 3795.55
Fixed Assets Turnover Ratio 0.89 1.03 1.29 1.46
The Fixed Assets Turnover Ratio of Durgapur Steel Plant shows an increasing
trend from 2005-06 to 2008-09, wherein the values of the ratio were at 0.89, 1.03,
1.29 & 1.46 respectively during the years 2005-06, 2006-07, 2007-08 & 2008-09.
The Fixed Assets Turnover Ratio shows a consistent rise over the four years under
consideration due to higher pace of conversion of Fixed Assets to Sales. So, as the
Fixed Assets of the company rises there is increased generation of Sales as well,
which results in a consistent increase in the Fixed Assets Turnover Ratio.
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Fixed Assets Turnover Ratio of DSP for years 2005-06
to 2008-09
Chart 5(x)
The Fixed Assets are converted to sales respectively 0.89, 1.03, 1.29 & 1.46 times
in the years 2005-06, 2006-07, 2007-08 & 2008-09. The speed of conversion of
fixed assets is highest in the year 2008-09, which reflects better use of fixed assets
in the process of production. It is also observed that there has been a steady rise in
the mobilization of fixed assets in production. The Company should seek to
optimize its Fixed Assets Ratio i.e. it must neither be low since it implies idle
capacity of the Fixed Assets, nor should the ratio be too high since a high ratio
would imply overtrading in Fixed Assets.
ii) Inventory Turnover Ratio: It measures the relation between stock levels &
Sales or COGS as the case maybe. In the present situation, Sales is considered for
comparison with Inventory to arrive at the Inventory Turnover Ratio. The
Inventory Turnover Ratio measures the number of times the inventory is
converted to sales in a year, or in other words, it evaluates the efficiency in the
usage of inventory.
Table 5.11
Inventory Turnover of DSP from 2005-06 to 2008-09
Particulars 2005-06 2006-07 2007-08 2008-09
Sales 3277.62 3757.61 4629.49 5533.01
Average Inventory 539.23 691.51 761.97 1111.04
Inventory Turnover Ratio 6.08 5.43 6.08 4.98
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There was a decline in Inventory Turnover Ratio from 2005-06 to 2006-07, the
values being 6.08 & 5.43 in 2005-06 & 2006-07 respectively. The ratio further
recorded an increase from 5.43 in 2006-07 to 6.08 in 2007-08, synonymous to its
position in 2005-06. There was further decline in its value from that in 2007-08 to
4.98 in 2008-09.

Inventory Turnover Ratio of DSP for years 2005-06 to 2008-09
Chart 5(xi)
Since, the Inventory Turnover ratio reflects the number of times the Inventory is
converted to sales, the efficiency in the utilization of inventory declined initially
from 2005-06 to 2006-07, later on from 2006-07 to 2007-08, the usage of the
capacity of inventory increased, due to far greater increase in Sales in contrast the
net increase in inventories during the transition from 2006-07 to 2007-08. The
reverse phenomenon was observed in the year 2008-09 as compared to the case in
2007-08, as there was decrease in Inventory Turnover Ratio.
The management must ensure that an optimum Inventory Turnover Ratio is

maintained since it implies that less funds are blocked as inventory, faster
production as well as faster sales are ensured.
iii) Creditors Turnover Ratio: It measures the relation between trade creditors &
net credit purchases. This ratio measures the number of times payables, namely
Creditors and Bills Payable are converted to cash in a year, or in other words
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creditors turnover ratio seeks to assess the number of times the firm makes
payment to creditors in a financial year.
Table 5.12
Creditors Turnover of DSP from 2005-06 to 2008-09
Particulars 2005-06 2006-07 2007-08 2008-09
Opening inventory of Raw Materials 79.83 126.18 123.41 74.67
Closing inventory of Raw materials 126.18 123.41 74.67 231.81
Raw Materials Consumed 1523.41 1668.75 1856.61 2680.22
Purchases of Raw Materials 1569.76 1665.98 1807.87 2837.36
Credit Purchases 1255.81 1332.78 1446.30 2269.89
Creditors + Bills Payable 182.69 236.79 227.21 251.75
Creditors Turnover Ratio 6.87 5.63 6.37 9.02
Source: Plant Accounts of SAIL for years 2006-07 & 2008-09
Notes: i. Purchases = Closing Inventory of Raw Materials+ Raw Materials
Consumed – Opening Inventory of Raw Materials
ii. Credit Purchases form 80% of the Net Purchases of Raw Materials
In this case, the net credit purchase of raw materials is calculated by calculated
considering Opening & Closing Stocks of Raw Materials as well as the amount of
raw materials consumed. Also, it has been assumed that Credit Purchase of Raw
Materials forms 80% of Net Purchases of Raw Materials. The Creditors Turnover
initially decreased from 6.87 in 2005-06 to 5.63 in 2006-07, later on it increased
from 5.63 in 2006-07 to 6.37 in 2007-08 further to 9.02 in 2008-09.

Creditors Turnover Ratio of DSP for years 2005-06 to 2008-09
Chart 5(xii)
The Company has a moderate level of Creditors turnover ratio (for its raw
materials) with its values being close to 6 from 2005-06 to 2007-08, while there
76
was a slight increase in its value in 2008-09, the ratio during that year being at
9.02. This implies better credit management of the Company.
iv) Average Payment Period: It measures the time period allowed to debtors to
make payment or the time in days (in this case), payment is made to creditors.
Table 5.13
Average payment Period of DSP from 2005-06 to 2008-09
Particulars 2005-06 2006-07 2007-08 2008-09
Creditors Turnover Ratio 6.87 5.63 6.37 9.02
Average Payment Period 53.10 64.85 57.34 40.48
The Average Payment Period increased from 53.1 days in 2005-06 to 64.85 days
in 2006-07, further the ratio declined from 2006-07 onwards finally the ratio
assumed the value of 40.48 days in 2008-09.

Average Payment Period of DSP for years 2005-06 to 2008-09
Chart 5(xiii)
Intially, though the Average Payment Ratio showed a increase from 53.1 days in
2005-06 to 64.85 days in 2006-07, which depicted a relatively better state of
affairs from the point of view of the Company, however there was decline in the
ratio in the remining 2 years, the values being at 57.34 & 40.48 days in 2007-08 &
2008-09 respectively. This implies faster repayment of credit over the last two
years.
Part B
Comparative Financial Analysis of Durgapur Steel Plant, Bhilai Steel Plant,
Bokaro Steel plant & Rourkela Steel Plant over the years 2005-06 to 2008-09:
77
The Financial Statements of the aforementioned Steel Plants are analyzed &
interpreted by using the technique of ratio analysis. The profiability and liquidity
aspects of the Integrated Steel Plants under SAIL are viewed through the relevant
calculations which is as follows:
I. LIQUIDITY RATIOS
i. Net Working Capital
Table 5.14
Net Working Capital of the four Steel Plants from 2005-06 to 2008-09
Name of the Plant 2005-06 2006-07 2007-08 2008-09
Durgapur Steel Plant 277.18 379.62 442.61 793.1
Bhilai Steel Plant 877.97 913.77 956.56 1665.47
Rourkela Steel Plant 465.67 584.82 850.64 656.53
Bokaro Steel Plant 977.05 1015.58 811.32 1245.66
Source: Based on calculation of the Plant Accounts of SAIL, year 2006-07&
2008-09.

Net Working Capital of the four Steel Plants for years
2005-06 to 2008-09
Chart 5(xiv)
Net Working Capital of Rourkela Steel Plant reflects the ideal situation wherein it
remains nearly constant. As can be seen from the chart 5.xiv, there was an
increase in Net Working Capital of Bhilai Steel Plant by an amount of 708.91
crores in the year 2008-09 to compared to the previous financial year 2007-08,
though there were notable increase in the value of NWC in the preceeding three
years. It implies that the propotion of liquid assets of the Plant which were capable
78
of meeting contingent liabilties. The remaining Steel Plants too show fairly good
increase in their Net Working Capital, except in the case of Rourkela and Bokaro
Steel Plants which recorded a decline in their values of Net Working Capital in the
year 2008-09 compared to 2007-08 for Rourkela Steel Plant as well as decrease
for year 2007-08 compared to 2006-07 for Bokaro Steel Plant
However, an inherent technical loophole is that a large amount of Net Working

Capital indicates excess liquidity in the company, which creates the need to
siphon off excess liquidity in the system. Hence, though Bhilai Steel Plant has
high Net Working Capital for the year 2008-09, it should ideally adopt a
precautionary stance & should consider having a equal propotion of Fixed Assets
& Current Assets, since the long- term stability of the Company would be ensured
through Fixed Assets that can be channelized to the process of production &
ensure regular flow of income to the Company in the long term perspective as
well. Hence, the companies can seek a moderate increase or level Net Working
Capital.
II. CAPITAL STRUCTURE RATIO

i. Interest Coverage Ratio
Table 5.15
Interest Coverage Ratio of the four Steel Plants from 2005-06 to 2008-09
Name of the Plant 2005-06 2006-07 2007-08 2008-09
Source: Based on calculation of the Plant Accounts of SAIL, year 2006-07

& 2008-09
79
Interest Coverage Ratio of the four Integrated Steel Plants from
2005-06 to 2008-09
Chart 5(xv)
The Interest Coverage ratio of Bhilai Steel Plant increased largely to around 300
times at 2006-07, however, though such ratio ensures capability of profits before
payment of tax to satiate the contractual debt- obligations, yet it may imply under
or un- utilized debt capital. The Chart 5.15 further indicates that Bhilai Steel Plant
was able to significantly lower the ratio to around 70s in 2008-09, yet further
moderation in the utilization of debt is needed.
The Interest Coverage Ratio of Durgapur Steel Plant has hovered around moderate
rates of 30s & 40s. it basically depends on the Plant’s Financial policy whether
they prefer ensuring high level of profits to finance debt. The Company must also
consider utilizing the under- utilized debt- capital as well.
III. PROFITABILITY RATIOS

iii) Net Profit Margin
Table 5.16
Net Profit Margin of the four Steel Plants from 2005-06 to 2008-09
Name of the Plant 2005-06 2006-07 2007-08 2008-09
& 2008-09
80
Net Profit Margin of the four Steel Plants for years
2005-06 to 2008-09
Chart 5(xvi)
In the Chart 5.xvi, Bhilai Steel Plant has high Net Profit Margin of around 40%
for the years 2006-07 & 2007-08, which implies that the revenue generated from
Sales is sufficient to ensure sufficient returns equity capital contributors.
For the other three Plants, though initially the Net Profit Margin shows an
increasing trend, however,the Ratio dips to a level of around 13, and the drop in
its value is more drastic in the case of Bokaro Steel Plant. It implies that for the
year 2008-09, the sales are not sufficient to meet the needs of the equity capital
contributors.
IV. ACTIVITY RATIOS

i. Fixed Assets Turnover
Table 5.17
Fixed Assets Turnover of the four Steel Plants from 2005-06 to 2008-09
Name of the Plant 2005-06 2006-07 2007-08 2008-09
& 2008-09
81
Fixed Assets Turnover Ratio of the four Steel Plants for years
2005-06 to 2008-09
Chart 5(xvii)
Bokaro Steel Plant shows a higher rate of conversion of Fixed Assets to generate
sales as compared to the remaining Steel Plants under purview, however it must
be borne in mind that very high ratio means overtrading in assets. Hence, it
depends on the policy of SAIL whether it prefers the Fixed Assets Turnover ratio
of around 3, as in the case of Bokaro Steel Plant to be ideal or that of the
intermediate stance as reflected by the ratios of Bhilai & Rourkela Steel Plants,
whose Fixed Assets Turnover Ratio lies between those of Durgapur and Bokaro
Steel Plants.
Durgapur Steel Plant shows the lowest Fixed Assets Turnover Ratio which
indicates idle capacity of the assets or in other words the under- utilization of the
Fixed Assets. The Company should seek to ensure that the utilization of the Fixed
Assets is at the same par with respect to other Integrated Steel Plants under SAIL.
82

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CHAPTER FIVE

COMPARATIVE ANALYSIS OF DURGAPUR STEEL PLANT WITH

Financial Statement Analysis of Durgapur Steel Plant- an Integrated Steel

NET WORKING CAPITAL 277.18 379.62 442.61 793.1

Source: Generated from table 5.2

Source: Generated from table 5.3

Source: Generated from table 5.5

Source: Generated from table 5.7

Source: Generated from table 5.9

IV. ACTIVITY RATIOS- These reflect the efficiency in the management of

Source: Generated from table 5.11

The management must ensure that an optimum Inventory Turnover Ratio is

Source: Generated from table 5.12

Source: Generated from table 5.13

Source: Generated from table 5.14

However, an inherent technical loophole is that a large amount of Net Working

II. CAPITAL STRUCTURE RATIO

Source: Based on calculation of the Plant Accounts of SAIL, year 2006-07

III. PROFITABILITY RATIOS

IV. ACTIVITY RATIOS

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