A

PROJECT REPORT
ON

“STUDY OF MSIL INVESTMENTS PHILOSOPHY AND COMPARISON WITH THAT OF

VARIOUS LARGE CORPORATES INVESTMENT STRUCTURE| AVENUES AVAILABLE
IN INDIAN MARKET FOR CORPORATE INVESTORS FOR SURPLUS FUND PARKING|
CREDIT QUALITY ANALYSIS OF MSIL’S INVESTMENT PORTFOLIO”

FOR

“MARUTI SUZUKI INDIA LTD.”

SUBMITTED TO
INSTITUTE OF MANAGEMENT STUDIES & RESEARCH
IN PARTIAL FULFILMENT OF THE REQUIREMENT OF THE AWARD FOR THE DEGREE
OF
MASTER OF BUSINESS ADMINISTRATION

UNDER
MAHARSHI DAYANAND UNIVERSITY ROHTAK

SUBMITTED BY:

SAHIL DESWAL
ROLL NO.:
REGN NO.:1818220099

INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

MAHARSHI DAYANAND UNIVERSITY, ROHTAK(2018-2020)
1
2
 AUTHORISATION

This is to certify that Mr. Sahil Deswal, Roll No: has completed her summer internship at
Maruti Suzuki India Limited, Gurgaon and has submitted a report entitled “1. Study of MSIL
investments Philosophy and comparison with that of various large corporates investment
structure 2. Avenues available in Indian market for corporate investors for surplus fund
parking 3. Credit Quality Analysis of MSIL’s Investment portfolio in Maruti Suzuki India
Limited” towards the partial fulfillment of the requirement of MBA HONOURS program of
IMSAR, MDU ROHTAK (2018-2020).

3
 ACKNOWLEDGEMENT

A summer internship project is a golden opportunity for learning and self-development. I consider
myself very lucky and honored to have so many wonderful people lead me through in the completion
of this project.

My grateful thanks to Maruti Suzuki India limited which has given me the opportunity to do summer
internship.

My special thanks to Mr. Vijay Pareek sir, who in spite of being extraordinarily busy with his
duties, took time out to hear me , given me the project and guided me to keep me on the correct path.
A humble ‘thank you sir’.

I am very much thankful to my mentor Ms. Ayushi Agrawal ma’am, for her support and guidance on
the project, being so busy with her work she still find out time for guiding and discussing my work.

Thanks everyone who is involved in this project directly or indirectly and help me with the
knowledge, this couldn’t have been completed without your help.

SAHIL DESWAL

MBA (HONS.) 2018-2020

INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

MDU, ROHTAK

4
 Table of content

Particulars Page number

Executive Summary 6
Introduction 7-8
About MSIL 9-10
INVESTMENT PHILOSOPHY OF MSIL 11-16
MSIL financial position 11-14
Comparison of MSIL, Mahindra, Tata Motors 15
Conclusion on investment philosophy of MSIL 15-16

AVENUE OF INVESTMENT IN INDIA 17-43

Government securities 18-20
Shares 20-23
Commercial paper, corporate deposit & Debentures 23-27
Bonds 28-29
Fixed Deposits 29-31
Mutual Funds 31-35
Real Estates 35-38
Commodities 38-40
Tax analysis 40-43

Credit Analysis of Investments 44-73

Introduction 45-46
Financial risk 47
Financial Ratios 48-51
Non-Financial risk 52-53
NBFC-PFC Limited 54-59
Peer Financial Ratios Comparison 59
BANK- HDFC Limited 60-64
Peer financial Ratio comparison 64
CONGLOMERATE-Reliance Industries Limited 65-70
Peer Financial Ratio comparison 70-71
Annexures 72
References 73

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 EXECUTIVE SUMMARY

I, SAHIL DESWAL, student of IMSAR MDU ROHTAK (batch 2018-20) have carried out the
projects
“1. Study of MSIL investments Philosophy and comparison with that of various large
corporates investment structure 2. Avenues available in Indian market for corporate investors
for surplus fund parking 3. Credit Quality Analysis of MSIL’s Investment portfolio in Maruti
Suzuki India Limited” as part of my Summer Internship Program (SIP).
Maruti Suzuki India Ltd was incorporated on February 24, 1981 with the name Maruti Udyog Ltd.
The company was formed as a government company, with Suzuki as a minor partner, to make a
people's car for middle class India. Over the years, the company's product range has widened,
ownership has changed hands and the customer has evolved.

Maruti Suzuki India Ltd (formerly Maruti Udyog Ltd) is India's largest passenger car company,
accounting for over 50 per cent of the domestic car market. The company offers full range of cars
from entry level Maruti Alto to stylish hatchback Ritz, A-star, Swift, Wagon R, Estillo and sedans
DZire, SX4 and Sports Utility vehicle Grand Vitara. The company is a subsidiary of Suzuki Motor
Corporation of Japan. The Japanese car major held 56.21% stake in Maruti Suzuki as on 31
December 2017

They have four plants, three located at Palam Gurgaon Road, Gurgaon, Haryana and one located at
Manesar Industrial Town, Gurgaon, Haryana.

➢ To study the investment pattern of the largest passenger car manufacturer in Indian market.
➢ To compare it’s investment philosophy with other corporates
➢ To understand the fund and liquidity management by the MSIL
➢ To study the various investment avenues where corporate houses invest in
➢ To study tax implication of investment avenue
➢ To study the market growth of those avenues
➢ Reviewing the performance of a company over the past periods.
➢ Assessing the current position & operational efficiency.
➢ Predicting growth & profitability prospects.
➢ Loan Decision by Financial Institutions and Banks.

6
 INTRODUCTION

A. Study of Investment philosophy of MSIL and comparing it with various

corporates
Objective of the project

➢ To study the investment pattern of the largest passenger car manufacturer in Indian market.
➢ To compare it’s investment philosophy with other corporates
➢ To understand the fund and liquidity management by the MSIL

Scope the project

➢ To understand investment avenues of Maruti Suzuki

➢ Liquidity management of MSIL
➢ Studying mutual fund as a product

B. Investment avenues of large corporate in India

Investment Avenues are the segment of financial markets where the business houses or an
individual can park his/her surplus fund to gain short, medium and long term gains to run the
business smoothly and always remains capital sufficient and also most important to maintain
liquidity to meet the operating cost.

Objective of project

➢ To study the various investment avenues where corporate houses invest in

➢ To study tax implication of investment avenue
➢ To study the market growth of those avenues

Scope of project
➢ To study various financial product and its effect on market
➢ To determine the best option available in the market for investment
➢ To compare the different avenues.

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C. Credit Analysis of investment of MSIL
Credit analysis is a type of analysis an investor or bond portfolio manager performs on
companies or other debt issuing entities to measure the entity's ability to meet its debt
obligations.

Objective of project

➢ Reviewing the performance of a company over the past periods.

➢ Assessing the current position & operational efficiency.
➢ Predicting growth & profitability prospects.
➢ Loan Decision by Financial Institutions and Banks.

8
About MSIL

Maruti Suzuki India limited

Maruti Suzuki India Ltd was incorporated on February 24, 1981 with the name Maruti Udyog Ltd.
The company was formed as a government company, with Suzuki as a minor partner, to make a
people's car for middle class India. Over the years, the company's product range has widened,
ownership has changed hands and the customer has evolved.

Maruti Suzuki India Ltd (formerly Maruti Udyog Ltd) is India's largest passenger car company,
accounting for over 50 per cent of the domestic car market. The company offers full range of cars
from entry level Maruti Alto to stylish hatchback Ritz, A-star, Swift, Wagon R, Estillo and sedans
DZire, SX4 and Sports Utility vehicle Grand Vitara. The company is a subsidiary of Suzuki Motor
Corporation of Japan. The Japanese car major held 56.21% stake in Maruti Suzuki as on 31
December 2017

They have four plants, three located at Palam Gurgaon Road, Gurgaon, Haryana and one located at
Manesar Industrial Town, Gurgaon, Haryana.

The company has nine subsidiary companies, namely Maruti Insurance Business Agency Ltd,
Maruti Insurance Distribution Services Ltd, Maruti Insurance Agency Solutions Ltd, Maruti
Insurance Agency Network Ltd, Maruti Insurance Agency Services Ltd, Maruti Insurance
Agency Logistics Ltd, True Value Solutions Ltd, Maruti Insurance Broker Ltd and J J Impex
(Delhi) Pvt Ltd.

In October 2, 1982, the company signed the license and joint venture agreement with Suzuki Motor
Corporation, Japan. In the year 1983, the company started their productions and launched Maruti 800.
In the year 1984, they introduced Maruti Omni and during the next year, they launched Maruti Gypsy
in the market. In the year 1987, the company forayed into the foreign market by exporting first lot of
500 cars to Hungary. In the year 1990, the company launched India's first three-boxcar, Sedan. In the
year 1992, Suzuki Motor Corporation, Japan increased their stake in the company to 50%. In the year
1993, they introduced the Maruti Zen and in the next year they launched Maruti Esteem in the
market.

In the year 1995, the company commenced their second plant. In the year 1999, the third plant with
new press, paint and assembly shops became operational. In the year 2000, the company launched
Maruti Alto in the market.

In the year 2002, Suzuki Motor Corporation increased their stake in the company to 54.2%. In
January 2002, the company introduced 10 finance companies (8 + 2JVs) in Mumbai. Also, they found
one new business segment, Maruti True Value for sales, purchase and trade of pre-owned cars in
India. In the year 2005, the company launched the first world strategic model from Suzuki Motor

9
Corporation 'the SWIFT' in India. In the year 2006, they launched WagonR Duo with LPG and also
the New Zen Estillo.

Present scenario of auto sector companies in India and its sales and growth is stated below

Rank Name of Automobile CY2018 CY2017 %Growth

Companies No of Vehicles No of Vehicles Sold (YOY)
Sold
1 Maruti Suzuki India 17,31450 16,02,522 8.05
2 Hyundai Motor India 5,50,002 5,27,319 4.30
3 Mahindra & Mahindra 2,49,301 2,42,386 2.85
4 Tata Motors 2,37,217 1,91,107 24.13
5 Honda Cars India 1,74,859 1,78,755 -2.18

6 TOYOTAKIRLOSKAR 1,51,480 1,39,566 8.54

7 Ford India 97,804 88,184 10.91

8 Renault India 82368 1,12,489 -26.78

9 Nissan Motor India 41586 53,390 -22.11
10 Volkswagen India 37018 47,749 -22.47
Market share of passenger vehicles (2018)

Pass
enger vehicles market share 2018 (source article in The Hindu)

10
 Investment philosophy
Of
Maruti Suzuki
India Limited

Investment philosophies are one of the defining characteristics of people or firms that manage money.
Most investors who achieve long-term success develop and refine their investment philosophies over
time and do not frequently switch between philosophies as market conditions change.

An investment philosophy is a set of beliefs and principles that guide an investor's decision-making
process. Some popular investment philosophies include:

11
 • Value investing which involves seeking stocks that an investor believes are currently
underpriced by the market and whose prices the investor expects will eventually rise
significantly.
• Fundamentals investing which relies on identifying companies with strong earnings
prospects.
• Growth investing in which investors buy shares of companies whose products or services hold
the potential to generate strong earnings growth and higher stock prices in the future.
• Socially- responsible investing which focuses on investing in companies whose practices align
with an investor's values as they pertain to the company's impact on society and the
environment.
Technical investing which relies on the examination of past market data to uncover hallmark visual
patterns in trading activity on which to base buy and sell decisions.

About MSIL financial position

Maruti Suzuki is a cash surplus company, it has investment surplus of Rs ~ 350 Bln at the end of the
financial year 2017-18 (as per company’s BS). So it effects its investment pattern. To understand the
investment pattern of the Maruti Suzuki India limited we have to go through the investment column
of the balance sheet. From the Balance sheet we could easily find the way Maruti invest in current
and non-current assets. How MSIL maintains the liquidity and earn profits by investing the surplus.

From MSIL balance sheet

Particulars 31.03.2018
(Rs in Mlns)
Non-current
Investments in equity instruments
-Subsidiary companies 77
-Associate companies 1,082
-joint venture companies 152
-others 10,771
Investment in debt mutual funds 328,647
340,729
Current
Investment in debt mutual fund 12,173
Total investment 352,902

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Investment in subsidiaries

Break-up of investment in subsidiaries (carrying amount at cost)

As at 31.03.2018

Particulars Number Amount

Unquoted investment(fully paid up)
J.J Impex (Delhi) pvt. ltd (face value of Rs 10 each)
4,476,250 76
True Value Solutions limited(face value of Rs 10 each)
50,000 1
Total 77
Investment in Associates

Break-up of investment in associates (carrying amount at cost)

Particulars Number Amount

Quoted investment (fully paid up)
Bharat Seats Limited (Face value of Rs 2 each) 4,650,000 5
Jay Bharat Maruti Limited (Face value of Rs 5 each) 6,340,000 16
Machino Plastics Limited (Face value of Rs 10 each) 941,700 5
Total aggregate quoted investment (A) 26
Aggregate market value of quoted investment 3,376
Unquoted investment (fully paid up)
Caparo Maruti Limited (Face value of Rs 10 each) 2,500,000 25
Hanon Climate Systems India Private Limited (Face value of 518,700 52
Rs 100 each)
Krishna Maruti Limited (Face value of Rs 10 each) 670,000 7
SKH Metals Limited (Face value of Rs 10 each) 2,645,000 49
Nippon Thermostat (India) Limited (Face value of Rs 10 125,000 1
each)
Mark Exhaust Systems Limited (Face value of Rs 10 each) 4,437,465 57
Bellsonica Auto Components India Pvt. Ltd (Face value of 3,540,000 354
Rs 100 each)
FMI Automotive Components Private Limited (Face value of 44,100,000 441
Rs 10 each)
Manesar Steel Processing India Private Limited (Face value 6,840,000 68
of Rs 10 each)
Maruti Insurance Broking Private Limited (Face value of Rs 231,175 2
10 each)
Total aggregate unquoted investment (B) 1,056
Total investments carrying value (A) + (B) 1,082

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Investment in Joint Ventures

Break-up of investment in joint ventures (carrying amount at cost)

Particulars Number Amount

Unquoted investment (fully paid up)
Plastic Omnium Auto Inergy Manufacturing India Private
Limited (Face value of Rs 10 each) 6,656,000 67
Magneti Marelli Powertrain India Limited (Face value of `
10 each) 8,550,000 85
Total aggregate unquoted investment 152

Other equity instruments Investment in equity instruments at fair value through other
comprehensive income

Particulars Number Amount

Quoted investment (fully paid up)
Asahi India Glass Limited (Face value of Rs 1 each) 26,995,200 8,975
Sona Koyo Steering Systems Limited (Face value of Rs 1 13,800,000 1,359
each)
Total aggregate quoted investment (i) 10,334
Unquoted investment (fully paid up)
Denso India Private Limited (Face value of Rs 10 each) 2,862,758 436
Total aggregate unquoted investment (ii) 436
Investment in equity shares of Section 8 Company
International Automobile Centre of Excellence (Face value 100,000 1
of Rs 10 each)
Investment in equity shares of Section 8 Company (iii) 1
Investment in other equity instruments [i+ii+iii] 10,771

Investment in debt mutual funds

Non- current investment in debt mutual funds 328,647
Current investment in debt mutual funds 12,173

14
Comparison of investment of MSIL with other automobile
companies(all the amount is in million rupees)
Particular Maruti Suzuki Mahindra Tata motors

Non –current 340,729 163,642.4 3,101.9

-Quoted equity 10,529 84,952.7(41%) ------
-Unquoted equity 1,644 78,689.7 3,101.9
Current 12,173 39,374.9 18,208.7
-Quoted 12,173 2,802.6 3,038.4
-Unquoted ------ 7,752.3 15,170.3
*mutual fund 340,820(97%) 25,494.5(12%) 15,170.3(85%)
Total investment 352,902 205,829.7 21,310.6

Mahindra mostly invest in equity whereas Maruti Suzuki and Tata motors invest majorly in
Mutual funds. About 97% of total investment of Maruti Suzuki is in mutual fund whereas
Mahindra invested only 12 percent in mutual fund and Tata motors Invested 85% in mutual
fund.

Conclusion of Investment Philosophy of Maruti Suzuki India limited (MSIL)

Total investment of MSIL = 352,902 million Rupee

Investment in debt Mutual fund =340,820 million Rupee

Percentage investment DMF =96.57%

Out of total of 352,902 million rupees 97% i.e. 340,820 million rupees is invested in debt mutual
fund.

Different types of debt mutual funds

• Liquid funds or Money market funds

These funds are also income funds and their aim is to provide easy liquidity, preservation of
capital and moderate income. These schemes in safer short- term instruments such as treasury
bills, certificates of deposits, commercial paper and inter-bank call money,
• Ultra-short term funds(liquid plus funds)
• Floating rate funds
• Short term and medium term
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 • Income fund
• Dynamic bond fund
• Gilt fund
• Open end and close end fund

Distribution of amount and its percentage investment by MSIL in different types of mutual funds is
tabled below:

From the above information we conclude that MSIL maximum investment is in short term fund of
different companies. About 41% of the total Mutual fund investment is in short term funds. After
short term it has a good amount of investment in fixed maturity plan (FMP), income plus, ultra-small
term plan, medium term plan, etc.

MSIL investment plan is mainly focused on the maintaining liquidity throughout the year i.e. good
amount of investment in short term, long term and medium term fund.

MSIL is a cash abundant company and good financial management team which help in proper
investment and maintaining the proper liquidity and investing in debt mutual fund.

16
Available Investment
Avenues in
India for
Corporate investors

17
From the study of investment pattern of large corporate in India (SBI, RELIANCE INDUSTRY,
INFOSYS, MARUTI SUZUKI, TCS and GODREJ, MAHINDRA, TATA MOTORS), comes to
a conclusion about the avenues of investment in India.

The major avenues of investment are:

1. Government securities (T-Bills & G Secs)

2. Shares (Equity Shares & Preference shares)
3. Commercial Papers , Corporate Deposits &Debentures
4. Bonds
5. Fixed deposits
6. Mutual Funds
7. Real estate
8. Commodities

1. Government-Securities

Government securities, popularly known as G-Secs, are issued by Reserve Bank of India (RBI) on
behalf of the central or state governments. These securities are absolutely risk-free and guaranteed by
the government.

Recently, BSE announced that they are going to launch ‘BSE-Direct’, a trading platform for retail
investors from December 3, 2018 onwards. The National Stock Exchange has launched a mobile
application and web-based platform—NSE goBID (Government Bond Investment Destination).

Understanding government security market

The bond market in India consists of mainly two categories—corporate bonds and government bonds.
The government bonds are issued by RBI on behalf of the government of India in order to finance the
fiscal deficit. Government issues both short and long-term bonds. Short-term bonds come with a

18
maturity of less than one year which is popularly known as Treasury Bills (T-bills) whereas long-term
instruments come with a maturity of one year or more and are called government bonds or dated
securities. Interest on the government bonds are payable either annually or semi-annually.

KEY TAKEAWAYS

➢ Government securities come with a promise of the full repayment of invested principal at
maturity of the security.
➢ Government securities often pay periodic coupon or interest payments.
➢ Government securities are considered conservative investments with a low-risk since they have
the backing of the government that issued them.
➢ However, these securities may pay a lower rate of interest than corporate bonds.

Some examples of securities

Security code Security name Coupon rate Issue date Maturity

date
400104 10.70 % GOI BOND2020 10.70 22.04.2000 22.04.2020

400114 11.60 % GOI BOND2020 11.60 27.12.2000 27.12.2020

400119 10.25 % GOI BOND 2021 10.25 30.05.2001 30.05.2021

400121 10.03 % GOI BOND 2019 10.03 09.08.2001 09.08.2019

400123 10.18 % GOI BOND 2026 10.18 11.09.2001 11.09.2026

400134 8.35 % GOI BOND 2022 08.35 14.05.2002 14.05.2022

400145 7.95 % GOI BOND 2032 07.95 28.08.2002 28.08.2032

In the year 2016 RBI deputy governor H R Khan had made a series of recommendations
regarding domestic debt market including changes in regulations, policies, market
infrastructure and innovation. Most of the recommendations are implemented.

19
 Their impacts are:

➢ In terms of liquidity, average daily trading almost doubled in the past five years, with the
exception of certificate of deposits, where it is declined due to lower power supply.
➢ Growth was fueled by a declining interest rate cycle and demonetization, which led to liquidity
surfeits.
➢ Between march 2016 and 2018, corporate bond outstanding increased at 1.36%
➢ At less than a fifth of its dollar 2.4 trillion GDP, India’s corporate bond hardly registers on the
global radar
➢ Structurally, the debt market remains firmly skewed toward government securities.

Tax Treatment of Government Securities.

Particulars Rate of Return Tax Treatment

Government security Return rate on government Most of the government securities
securities varies from security to are tax free and some are
security. deductible under income tax act
or wealth tax act.

2. SHARE

In financial market, a share is a unit used as mutual funds, limited partnerships, and real owner of
shares in the corporation/company is a shareholder (stockholder) of the corporation. A share is an
indivisible unit of capital, expressing the ownership relationship between the company and the
shareholder. The denominated value of a share is its face value, and the total of the face value of
issued shares represent the capital of a company, which may not reflect the market value of those
shares.

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The income received from the ownership of shares is a dividend. The process of purchasing and
selling shares often involves going through a stockbroker as a middleman. There are different types
of shares such as equity shares, preference shares, bonus shares, right shares, employee’s stock option
plans and sweat equity share.

(Picture from article in economics times)

(40- Year journey (rupees 100 to 40,000) of share market)

21
Sensex growth Trajectory over the years

(Annual return in percentage)

If Rs 1 lakh invested in Sensex stock in year 1979, it would be worth Rs 4 crore today. It means
a huge return of 39900 times.

Tax- Treatment of shares

Share Share holders Company

Price varies according to the Dividends are tax free up to Dividends distribution tax at
market. 10 lakhs. 12.5%.

Tax treatment of dividends varies between tax jurisdictions. For instance, in India, dividends are tax
free in the hands of the shareholder up to Rs 10 lakh, but the company paying the dividend has to pay

22
dividend distribution tax at 12.5%. There is also the concept of a deemed dividend, which is not tax
free. Further, Indian tax laws include provisions to stop dividend stripping.

Dividend stripping is the practice of buying shares a short period before a dividend is declared,
called cum-dividend, and then selling them when they go ex- dividend, when the previous owner is
entitled to the dividend. On the day the company trades ex-dividend, theoretically the share price
drops by the amount of the dividend. However, the experience is that quality companies tend to
recover the value of the dividend within a matter of weeks, at which time they trade normally.

This may be done either by an ordinary investor as an investment strategy, or by a company's owners
or associates as a tax avoidance strategy.

3. Commercial paper, Corporate Deposit & Debentures

i) Commercial Paper

An introduction of Commercial Paper in Indian money market is an innovation in the financial

system of India. Prior to injection of Commercial Paper in Indian money market i.e. before 1990, the
corporate companies had to depend upon the crude and traditional method of borrowing working
capital from the commercial banks by pledging the inventory of raw materials as Collateral security.
It involved more loss of time for the borrowing companies in availing the short-term funds for day-to-
day production activities. The commercial paper has become effective instrument for these corporate
companies to avail the short-term funds from the money market within shortest possible time limit by
avoiding the hassles of direct negotiation with the commercial banks for availing the short-term loans

The issuers of Commercial papers in Indian money market are broadly classified into:

• Leasing and Finance Companies

• Manufacturing companies
• Financial institutions

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During the decade of 2000-01 to 2010-11, Leasing and finance companies had the average share of
70% of total issue of Commercial papers; while Manufacturing companies and financial institutions
had the average share of 15% each.

Types of Commercial Paper

There are four types of commercial paper:

1. Draft
2. Cheque
3. Notes
4. Certificate of deposits

Drafts
A draft is an unconditional written order by one person (the drawer) directing another person (the
drawee) to pay a certain sum of money on demand or at a definite time to a named third person (the
payee) or to bearer. The draft is one of the two basic types of commercial paper; the other is the note.
As indicated by its definition, the draft is a three-party transaction.
Parties to a Draft

The drawer is one who directs a person or an entity, usually a bank, to pay a sum of money stated in
an instrument—for example, a person who makes a draft or writes a check. The drawer prepares a
document (a form, usually)—the draft—ordering the drawee to remit a stated sum of money to the
payee. The drawee is the person or entity that a draft is directed to and that is ordered to pay the
amount stated on it. The most common drawee is a bank.

Cheque

A second type of commercial paper is the common bank check, a special form of draft. Section 3-
104(2) (b) of the UCC defines a cheque as “a draft drawn on a bank and payable on
demand.” Postdating a cheque (putting in a future date) does not invalidate it or change its character
as payable on demand. Postdating simply changes the first time at which the payee may demand
payment. Cheque are, of course, usually written on paper forms, but a cheque can be written on
anything—a door, a shirt, a rock—though certainly the would-be holder is not obligated to accept it.

24
Like drafts, checks may be accepted by the drawee bank. Bank acceptance of a cheque is
called certification; the check is said to be certified by stamping the word “certified” on the face of
the cheque. When the check is certified, the bank guarantees that it will honor the cheque when
presented. It can offer this guarantee because it removes from the drawer’s account the face amount
of the cheque and holds it for payment. The payee may demand payment from the bank but not from
the drawer or any prior endorser of the cheque.

Notes

A note—often called a promissory note—is a written promise to pay a specified sum of money on
demand or at a definite time. There are two parties to a note: the maker (promisor), and the payee
(promisee). The maker might execute a promissory note in return for a money loan from a bank or
other financial institution or in return for the opportunity to make a purchase on credit.

Certificates of Deposit

A fourth type of commercial paper is the certificate of deposit, commonly called a CD. The CD is a
written acknowledgment by a bank that it has received money and agrees to repay it at a time
specified in the certificate. The first negotiable CD was issued in 1961 by First National City Bank of
New York (now Citibank); it was designed to compete for corporate cash that companies were
investing in Treasury notes and other funds. Because CDs are negotiable, they can be traded easily if
the holder wants cash, though their price fluctuates with the market.

ii) Corporate Fixed Deposits

Company fixed deposit (corporate FD) is a term deposit which is held over fixed period at fixed rate
of interest. Company Fixed Deposits are offered by Financial and Non- Banking Financial
Companies (NBFCs). The maturities of various company fixed deposits can range from a few months
to few years.

The deposits placed by investors with companies for a fixed term carrying a prescribed rate of interest
are called company fixed deposit. Deposits thus mobilized are governed by the companies Act under
Section 58A. These deposits are unsecured i.e., if the company defaults, the investor cannot sell the
document to recover his capital, thus making them a risky investment option.
25
Some examples of the companies are: Bajaj Finance Ltd, Dewan Housing Finance Limited
(DHFL), Housing Development Finance Corporation Limited (HDFC), LIC housing Finance,
Mahindra Finance Ltd etc.

Tax treatment and Rate of return

Particulars
Company Fixed Deposit
Rate of return Tax Treatment
Rate of return is high as Corporate Fixed Deposits end
compared to bank FD and to deduct the TDS if the
deposited for a period of 6 annual interest exceeds Rs
months to 3 years. 5000. There is no capital
gains tax on these deposits.

iii) Debentures

In corporate finance, a debenture is a medium to long-term debt instrument used by large companies
to borrow money, at a fixed rate of interest. The legal term "debenture" originally referred to a
document that either creates a debt or acknowledges it, but in some countries the term is now used
interchangeably with bond, loan stock or note.

A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is
liable to pay a specified amount with interest and although the money raised by the debentures
becomes a part of the company's capital structure, it does not become share capital. Senior
debentures get paid before subordinate debentures, and there are varying rates of risk and payoff for
these categories.

Debentures are generally freely transferable by the debenture holder. Debenture holders have no
rights to vote in the company's general meetings of shareholders, but they may have separate
meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them
is a charge against profit in the company's financial statements.

Debentures gave rise to the idea of the rich "clipping their coupons", which means that a bondholder
will present their "coupon" to the bank and receive a payment each quarter (or in whatever period is
specified in the agreement).

26
There are also other features that minimize risk, such as a "sinking fund", which means that the
debtor must pay some of the value of the bond after a specified period of time. This decreases risk
for the creditors, as a hedge against inflation, bankruptcy, or other risk factors. A sinking fund makes
the bond less risky, and therefore gives it a smaller "coupon" (or interest payment). There are also
options for "convertibility", which means a creditor may turn their bonds into equity in the company
if it does well.

Companies also reserve the right to call their bonds, which mean they can call it sooner than the
maturity date. Often there is a clause in the contract that allows this; for example, if a bond issuer
wishes to rebuy a 30-year bond at the 25th year, they must pay a premium. If a bond is called, it
means that less interest is paid out.

Failure to pay a bond effectively means bankruptcy. Bondholders who have not received their interest
can throw an offending company into bankruptcy, or seize its assets if that is stipulated in the
contrary.

Types of Debentures

• Redeemable and Irredeemable (Perpetual) Debentures.

• Convertible and Non-Convertible Debentures.
• Fully and Partly Convertible Debentures.
• Secured (Mortgage) and Unsecured (Naked) Debentures.
• First Mortgaged and Second Mortgaged Debentures.
• Registered Unregistered Debentures (Bearer) Debenture.

Tax treatment on Debenture

Debentures Rate Of Return Tax

Rate of return from Income from debentures
debentures depends upon the comes under the slab of
market situation of debenture income from other sources
issuing enterprises. and clubbed in the income of
the bond holder and taxed as
per tax slab rate.

27
4. BONDS

Bonds are debt securities in which an investor purchases a bond from a government or a
corporation and holds that bond until it comes due. At that time, the issuer of the bond will pay the
interest earned by the bond 4in full. In India, there are several types of bonds available to investors,
including ones that are only sold privately and a tax-savings bond that releases the investor of a tax
burden.
Types of bond in India:

Public Sector Undertaking Bonds

If you’re looking for a medium- to long-term investment in the Indian bond market, a Public Sector
Undertaking bond can be a good choice. PSUs are issued and backed by the government of India,
but they’re usually sold on a private basis. In other words, the Indian government targets investors
themselves and offers the bonds to these investors at fixed rates. An investment banker usually
serves as a middleman in this situation.

Corporate Bonds
These are more traditional bond instruments, which are offered by private corporations in India for
terms that can last up to 15 years. Unlike the government bonds mentioned earlier, anyone can
purchase a corporate bond. However, there is a higher risk of default and that can depend upon the
corporation backing the bond, market conditions, the company’s industry and its investment rating.
But the risk comes with a higher return on the investment.

Financial Institutions and Banks

Bonds issued by financial institutions and banks in India are a vibrant financial instrument and
make up most of the bond market in that country. The reasons are simple. Bonds issued by financial
institutions and banks are regulated well and come with good bond ratings. Large-scale investors
are some of the most important investors in this category.

Emerging Markets Bonds

Emerging markets bonds, issued by the Indian government, are issued abroad as hard currency to
raise capital for economic development in third-world countries. What’s different about these bonds
is that they are usually issued in U.S. dollars or the euro, which can make them more attractive to
investors in those countries. Also making these EM bonds attractive is the interest rate, which while
28
high is typically paid by the issuer. The risk comes in that countries like India have a lower credit
rating and the success of the bonds is tied to the success of the country’s economic development.

Tax-Savings Bonds
At one time, the Indian government issued special bonds that allowed its citizens to be either
partially or fully released from paying taxes. Unfortunately, sales of these bonds ended in early
2018.
Bonds can be taxed at three stages, in the first stage (investment), while earning the interest and at
earning the maturity or on receiving the last the last return. Based on taxes exempted or applied in
these stages, the bond are easily classified as tax-free or tax saving.

Tax treatment of bond

Bonds Tax Rate Of Return
7.75%GOI savings bond Interest is taxable but later Return @10 percent
on exempt from wealth tax
under wealth tax act, 1957
Sovereign gold bond Tax is exempt Fixed rate of return at 2.5%
Capital gain bond by NHAI Tax is exempt when fund is Fixed rate of return at 5.25
and REC invested within six months % which is paid annually.
of the date of sale.
Indian railways finance These are of two series 10 Rate of return up to 8%.
corporation year and 15 years and are tax
free bonds..

5. Fixed Deposit

Fixed deposit is a financial instrument provided by the banks or NBFC which provide investors a
higher rate of interest than a regular saving account, until the given maturity date. It may or may not
require the creation of a separate account. For a fixed deposit is that money cannot be withdrawn
from FD as compared to recurring deposit or a demand deposit before maturity. The tenure of fixed
deposit may vary from 7 days to 1.5 years and it can be as high as 10 years. The interest rate varies

29
from 4 to 8 percent. These investments are safer as it is covered by DICGC (deposit insurance and
credit Guarantee Corporation).

Fixed deposit for long has been a venue of investment in India who do not trust I the capital markets.
It is very simple process, you deposit money for a fixed term in a bank and after that tenure is over
bank will repays the amount with the interest on it. It is regarded as one of the safest investments.

Benefits of fixed deposits

• They are safest investment instruments, and offer greater stability

• Return of fixed deposit is fixed and there is no risk of loss of principal
• Option is available to opt periodic interest payouts, to help you manage your monthly
expenses
• There is no effect of market fluctuations on our fixed deposits, which ensures greater safety of
your invested capital
• You can benefit from higher interest rate offered by company fixed deposit.

Return and tax treatment of fixed deposits in India

Rate of return Tax analysis

Return and tax treatment Rate of return is different for If interest is more than
of fixed deposits in India.
different institutions. Rupees 10,000 than it is
Nowadays it ranges from 4% taxed according to tax slab of
to 9.5%. the individual. Generally tax
is deducted at source.

In case of corporate fixed

deposits the TDS limit on
interest earned is caped at
INR 5,000.

30
6. Mutual Funds

Mutual funds are an investment tool that pools money from several investors and invests it in
company stocks, bonds, government instruments, etc. in order to generate a profit for investors. This
profit may be paid out as dividends to investors (dividend plans) or reinvested by the fund for capital
appreciation (growth plan), There are many different types of mutual funds based on various
characteristic differences. Most mutual funds try to diversify their investments into as many different
companies and industries as possible, and some invest in only specific industries and sectors of the
economy. Some funds aim for high-risk-high-reward strategies, while some opt for low-risk-regular-
income strategies. There’s a huge variety of funds to choose from, and a large number of Asset
Management Companies (AMCs)/fund houses that offer excellent schemes for all types of investors.
Some banks and financial distributors also sell mutual funds.

The most basic way in which mutual funds operate is explained below:
1. An asset management company (AMC)/fund house identifies a potential earning possibility in the
market and calculates the risk and potential reward involved in this particular investment.

2. The AMC studies other related investment opportunities that could boost the value of - or ensure
the success of - the main opportunity.

3. The fund manager working for the AMC picks and chooses different investments in order to
balance out the risk and total earning potential - balancing the right high risk-high reward equities
with high safety-relatively consistent income securities.

4. All the details about the fund including risk factors are well documented and presented to the
industry body SEBI for regulatory approval and to the public for consideration.

5. The fund scheme is made available to the public, who then buy into the fund by purchasing fund
units. The more fund units are purchased, the larger the investment, and thus the greater the
proportion of potential income.

6. The investments are made and, depending on the fund’s structure, the fund will either be passively
or actively managed by a fund manager.

7. Under the dividend option, declared dividends are proportionally distributed amongst investors.
Under the growth option, dividends are reinvested for capital appreciation.

31
8. At the end of the fund’s tenure, capital gains are paid out to the investors.

Types of mutual fund in India can be broadly categorizes into three categories:
a. Asset class
b. Objective
c. Structure

a. Types of mutual fund based on Asset class

Equity fund
These are invested in equity stock or share of the companies. They provide a higher result, that’s the
reason they are considered high- risk funds.

Debt fund
These funds are invested in the debt like government bonds, company debentures, and fixed income
assets. As they provide fixed return, so they are considered safe investment instrument.

Money Market Fund

These instruments are invested in liquid instruments, such as CPs, T-Bills, etc. They are considered
quite safe investment option, as you get an immediate yet moderate rate of return.

Hybrid or Balanced fund

This type of fund invested in liquid instruments of different asset classes. There are times when the
proportion of debt is lower than equity; it could be another way around as well.

Sector specific funds

These are mutual funds that invest in a specific sector. These can be sectors like infrastructure,
banking, mining, etc. or specific segments like mid-cap, small-cap or large-cap segments. They are
suitable for investors having a high risk appetite and have the potential to give high returns.

32
Index fund
Index funds are ideal for investors who want to invest in equity mutual funds but at the same time
don't want to depend on the fund manager. An index mutual fund follows the same strategy as the
index it is based on. For example, if an index fund follows the BSE Index as the replicating index and
if it has a 20% weightage in let's say Stock A, then the index fund will also invest 20% of its assets in
Stock A.
Index funds promise returns in line with the index they mirror. Further, they also limit the loss to the
proportional loss of the index they follows, making them suitable for investors with a medium risk
appetite.

Tax saving funds

These funds offer tax benefits to investors. They invest in equities and are also called Equity Linked
Saving Schemes (ELSS). These type of schemes have a 3 year lock-in period. The investments in the
scheme are eligible for tax deduction u/s 80C of the Income-Tax Act, 1961.
Funds of fund

These funds invest in other funds. Similar to balanced funds, they try to make asset allocation and
diversification easier for the investor. The MER for fund-of-funds tend to be higher than stand-alone
mutual funds.

b. Types of mutual fund based on objective class

Open-ended funds

In an open-ended mutual fund, an investor can invest or enter and redeem or exit at any point of time.
It does not have a fixed maturity period.

Close-ended funds

Close-ended mutual funds have a fixed maturity date. An investor can only invest or enter in these
types of schemes during the initial period known as the New Fund Offer or NFO period. His/her
investment will automatically be redeemed on the maturity date. They are listed on stock exchange(s).

33
c. Types of mutual fund based on investment objectives

Money market funds or liquid funds

These funds invest in short-term debt instruments, looking to give a reasonable return to investors
over a short period of time. These funds are suitable for investors with a low risk appetite who are
looking at parking their surplus funds over a short-term. These are an alternative to putting money in
a savings bank account.

Fixed income or debt mutual funds

These funds invest a majority of the money in debt - fixed income i.e. fixed coupon bearing
instruments like government securities, bonds, debentures, etc. They have a low-risk-low-return
outlook and are ideal for investors with a low risk appetite looking at generating a steady income.
However, they are subject to credit risk.

Balanced funds

As the name suggests, these are mutual fund schemes that divide their investments between equity
and debt. The allocation may keep changing based on market risks. They are more suitable for
investors who are looking at a combination of moderate returns with comparatively low risk.

Gilt funds

These funds invest only in government securities. They are preferred by investors who are risk averse
and want no credit risk associated with their investment. However, they are subject to high interest
rate risk.

34
66

7. Real estate

Real estate is the property, land, buildings, air rights above the land and underground rights below the
land. The term real estate means real, or physical, property. It’s from the Latin word rex, meaning
“royal,” since kings used to own all land in their kingdoms.

There four types of real estate

Residential real estate

It includes both new construction and resale homes. The most common category is single-family
homes. There are also condominiums, co-ops, townhouses, duplexes, triple-deckers, high-value
homes, multi-generational and vacation homes.

35
Commercial real estate

It includes shopping centers and strip malls, medical and educational buildings, hotels and offices.
Apartment buildings are often considered commercial, even though they are used for residences.
That's because they are owned to produce income.

Industrial real estate

It includes manufacturing buildings and property, as well as warehouses. The buildings can be used
for production, storage and some buildings that distribute goods are considered commercial real
estate. The classification is important because the zoning, construction and sales are handled
differently.

Land

It includes vacant land, working farms and ranches. The subcategories within vacant land
include undeveloped, early development or reuse, subdivision and site assembly.

Real Estate Investing

Everyone who buys or sells a home engages in real estate investing. That means you must consider
several factors. Will the house rise in value while you live in it? If you get a mortgage, how will
future interest rates and taxes affect you?

Many people do so well with investing in their homes they want to buy and sell homes as a business.
There are many ways to do that. First, you can flip a house. That's where you buy a house to improve
then sell it. Many people own several homes and rent them out. Others use Airbnb as a convenient
way to rent out all or part of their homes. You can rent vacation homes using VRBO or Home Away.

Average 20 years return in the commercial real estate slightly outperforms S&P 500 index,
running at around 9.5%. Residential and diversified real estate investments do a bit better,
averaging 10.6%. Real estate investment trust (REITS) performs best with an annual average
return at of 11.8%.

36
Issue Previous law (2017) Tax Cuts and Jobs Act

A business where the pass- 39.6 percent + 3.8 29.6 percent (37 percent marginal rate
through deduction would percent net investment with 20 percent reduction of pass-
apply income tax through income*) + 3.8 percent net
investment income tax

A business where the pass- 39.6 percent + 3.8 37 percent + 3.8 percent net
through deduction would not percent net investment investment income tax
apply (excluding self- income tax
employment tax)

Bonus depreciation 50 percent deduction 100 percent for certain assets

allowed for most
original use assets
besides buildings

Highest marginal capital gain 20 percent + 3.8 percent 20 percent + 3.8 percent net
tax rate on real estate sale net investment income investment income tax
income tax

Carried interest (for 20 percent + 3.8 percent 20 percent + 3.8 percent net
distributive items of long-term net investment income investment income tax (potential 3-
capital gain) tax (1-year hold year hold would be required)
required)

Corporate tax rate on all real 35 percent 21 percent (starting in 2018)

estate related income

REIT ordinary dividend 39.6 percent + 3.8 29.6 percent (37 percent marginal rate
income percent net investment with 20 percent reduction of pass-
income tax through REIT income) + 3.8 percent
net investment income tax

37
REIT and corporate net 100 percent (90 percent 80 percent and indefinite carryforward
operating losses (NOL) for AMT) (no carrybacks allowed); corporate
carryforwards AMT repealed

8. Commodity Trading

Gold and Oil: Investors access about 50 major commodity market worldwide with purely financial
transactions increasing outnumbering physical trades in which goods are delivered. Future Contract is
the oldest ways of investing in the commodities. Futures are secured by physical assets. Commodity
markets can include physical trading and derivatives trading using spot prices, Forwards, Futures,
and Options on futures.

A financial derivative is a financial instrument whose value is derived from a commodity termed as
underlie. Derivatives are either exchange traded or Over- the- Counter (OTC).

Important: Commodities can be an important way to diversify a portfolio beyond traditional

securities – either for long term or as a place to park cash during unusually volatile or bearish stock
markets, as commodities traditionally moves I opposite to stocks.

Types of Investment Commodities

Today, tradable commodities fall into the following four categories:

• Metals (such as gold, silver, platinum and copper).

• Energy ( such as crude oil, heating oil, natural gas and gasoline)
• Livestock and Meat( including lean hogs, pork bellies, live cattle, and feeder cattle)
• Agricultural (including corn, soya beans, wheat, rice, cocoa, coffee, cotton and sugar).

Volatile or bearish stock markets typically find scared investors scrambling to transfer money to
precious metals such as gold, which has historically been viewed as a reliable, dependable, metal with

38
conveyable value. Precious metals can also be used as a head hedge against high inflation or periods
of currency devaluation.

Using futures to invest in commodities

A popular way to invest in commodities is through future contract, which is an agreement to buy and
sell a specific quantity of a commodity at a set price at a later time.

Two types of investors participate in the futures market

a) Commercial or institutional users of the commodities

b) Speculators

Who uses Future Contracts?

Manufacturer and service providers use Future as part of their budgeting process to normalize
expenses and to reduce cash flow related headaches.

These Headers may use commodity market to take a position that will reduce the risk of financial loss
due to a change in price. The airline sector is an example of a large industry that must secure massive
amounts of fuels at a stable price for planning purposes. Because of this need, airline companies
engage in hedging. Via futures Contracts, airlines purchase fuel at fixed rates (for a period of time) to
avoid the market volatility of crude oil and gasoline, which would make their Financial statements
more volatile and riskier for investors.

The second group is made of speculators who hope to profit from changes in the price of the Future
contract. Speculators typically close out their positions before the contract is due and never take
actual delivery of the commodity (e.g. grain, oil, etc.) itself.

39
Tax and rate of return

Commodity Rate of return Tax analysis

Commodity Exchange
Volatile Income from commodities are
Depends upon market net taxed at 60% long-term
demand and supply.
capital gains and 40% short
term capital gains are taxed at
your ordinary tax rate, which
depends upon your adjusted
income.

Growth and Tax Analysis of different Investments.

Avenues Growth Rate or Tax analysis

Return Rate

Government Return rate on Most of the government securities are tax free and
security government some are deductible under income tax act or wealth
securities varies tax act.
from security to
security.
Shares Share market is Short term capital gain is taxed at 15% and losses
very volatile, it are set off if not in one year carried forward to 8
depends upon consecutive years.
several factors but
Long term capital gains are taxable at the rate of
in total share
10%.Before 2018 long term loss were dead loss but
market is growing
in the budget of 2018 provisions to carry forward
at a fast rate.
losses were made in the capital loss segment.
Average growth

40
 rate in last 10
years is 10.5%.
Right now it is
growing at a rate
of 18%. (from ET
data)
Debentures Rate of return Income from debentures comes under the slab of
from debentures income from other sources and clubbed in the
depends upon the income of the bond holder and taxed as per tax slab
financial position rate.
of the enterprise.
Bonds 7.75%GOI bond Interest is taxable but later on exempt from wealth
return @10%. tax under wealth tax act, 1957 or deducted from
income under deductions under section 80(c).
Sovereign gold
bond return
rate@2.5%

NHAI &REC
capital bond rate
@ 5.25%

Indian railway
finance
corporation rate @
8%.

Commodity Volatile Income from commodities are Taxed at 60% long-

term capital gains and 40% short term-term capital
Depends upon
gains. Long term capital gains are capped at 15%
market demand
and short-term gains are taxed at your ordinary tax
and supply.
rate, which depends on your adjusted income.

41
Fixed Deposit Interest ranges If interest is more than Rupees 10,000 than itis taxed
from 4 to according to tax slab of the individual. Generally tax
9.5percent is deducted at source.
depending upon
bank and NBFC in In case of corporate fixed deposits the TDS limit on
which fund is interest earned is caped at INR 5,000.
invested.
Mutual funds Mutual funds are Types 0-1year 1-3 years 3-…..
volatile. It varies of fund
from fund to fund Equity 15%tax as 10%tax 10%tax
and are according applicable applicable if applicable if
to the market gains are gains are
demand and more than 1 more than 1
supply. lakh lakh
Debt Taxed as Taxed as per 20% tax
It is a general
per income income tax applicable
concept that in
tax slab slab with benefit
long term
of
investment there is
indexation
a return of
minimum 20%.
Real estate Average 20 years
return in the
Corporates taxed on all real estate income at the rate
commercial real
21%. (Budget 2018)
estate outperforms
S&P 500 index,
running at around
9.5%. Residential
and diversified
real estate
investments do a
bit better,

42
 averaging 10.6%.
Real estate
investment trust
(REITS) performs
best with an
annual average
return at 11.8%.
Commercial Return on According to section 149A of income tax act 1961
paper investment in commercial paper and COD is treated as discount
commercial paper allowed not as ‘interest paid’. So commercial paper
is the difference is a non-tax instrument.
between discount
value and face
value.

43
 ANALYSIS OF
CREDIT QUALITY
OF
MSIL INVESTMENTS

44
What is credit analysis of investments?

Credit analysis is a type of analysis an investor or bond portfolio manager performs on companies or
other debt issuing entities to measure the entity’s ability to meet its debt obligations. The credit
analysis seeks to identify the appropriate level of default risk associated with investment in that
particular entity.

To judge a company’s ability to pay its debt, banks, Bond investors, and analyst conduct Credit
analysis on the company using financial ratios, cash flow analysis, trend analysis, and financial
projections an analyst can evaluate a firm’s ability to pay its obligations.

A review of credit score and any collaterals is also used to calculate the creditworthiness of a
business.
Credit analysis is also used to estimate whether the credit rating of a bond issuer is about to change.
By identifying companies that are about to experience a change in debt rating, the investor or
manager can speculate on that change and possibly make a profit.

Five C’s of credit analysis

1. Character
2. Capacity
3. Capital
4. Collateral
5. Conditions
These five c’s character, capacity, capital, collateral, conditions helps the analysts in defining
the credit worthiness of the firm and market value of the firm, ability to return and make
profit, capital infusion, what and how much collateral it have to establish financial guarantees
and present market conditions i.e. market is suitable for the growth of the business,
government policy is in support of the business.

45
Below is the list of some companies where MSIL fund is parked
S. No. Name of the Company Type of company
1 Power Finance Corporation Ltd. PFI
2 Rural Electrification Corporation Ltd. PFI
3 LIC Housing Finance Ltd. NBFC
4 India bulls Housing Finance Ltd. NBFC
5 Indian Railway Finance Corporation Ltd. NBFC
6 Bajaj Finance Ltd. NBFC
7 Mahindra & Mahindra Financial services Ltd. NBFC
8 HDB Financial Services Ltd. NBFC
9 Kotak Mahindra prime Ltd. NBFC
10 Shriram Transport Finance Co. Ltd. NBFC
11 National Bank for Agriculture & Rural Development Banking
12 AXIS Bank Ltd. Banking
13 Small Industrial Development Bank of India Banking
14 HDFC Bank Ltd. Banking
15 IndusInd Bank Ltd. Banking
16 Reliance Jio Infocomm Ltd. Telecommunications
17 Housing Development Finance Corporation Ltd. Financial Institution
18 Reliance Industries Ltd. Conglomerate
19 Tata Sons Ltd. Conglomerate
20 ONGC petro-addition Ltd. Petrochemicals

46
Out of the above companies credit analysis of below three companies is selected for credit
analysis.
1. Power Finance Corporation Limited
2. HDFC bank
3. Reliance Industries Limited

Before investing in any company investors deeply study two types of risk.
a). Financial
b). Non-Financial

a) Financial risk can be of three types

-credit risk
-liquidity risk
-operational risk
Financial Risk is a type of danger that can result in loss of capital to the interested parties.
• Financial risk generally relates to the odds of losing money.
• The financial risk most commonly referred to is the possibility that a company cash flow will
prove inadequate to meet its obligations.
• It is a risk when company is not able to meet its short term financial demands. It simply means
liquidity risk in which marketability of an investment and whether it can be bought or sold
quickly to meet debt obligations.

To study the financial risk of a company analyst study different types of financial ratios and compare
these ratios with the industries having the same profile and then draws a conclusion about the
financial position, strength and weakness of the company.

47
Key Financial Ratios used in the credit analysis of the company

1. Gross Non-Performing Asset

2. Net Non-Performing Asset
3. Capital to Risk Weighted asset Ratio (CRAR)
4. Net Interest Margin (NIM)
5. Return on Asset (ROA)
6. Debt to Equity Ratio (D/E)
7. Return on Equity (ROE)
8. Debt Service Coverage Ratio (DSCR)
9. Total outside liability/Tangible Net worth (TOL/TNW)
10. Interest coverage Ratio (ICR)
11. Current Ratio

Explanations of key Ratios

1. Gross NPA is the total amount of outstanding NPAs in the borrower account, excluding the interest
receivable. In simple word we may say that GNPA is the sum of all the unpaid loans which are
classified as Non-Performing loans.

2. Net Non-Performing assets refer to the sum of the non-performing loans less provision for bad and
doubtful debts. Credit Institutions provides a precautionary amount to cover the unpaid debts.

Net NPA = Gross NPA-(Balance in Interest Suspense Account + DICGC/ECGC claims received
and held pending adjustments+ part payments received and kept in suspense account + Total
provision held)

3. Capital to risk weighted asset ratio (CRAR): CRAR or CAR (capital adequacy ratio) is the
measurement of a bank’s available capital expressed as a percentage of Banks risk- weighted credit
exposure. CRAR is used to protect depositors and promote the stability and efficiency of financial
system around the world.

48
 CAR = Tier 1 Capital + Tier 2 Capital
Risk weighted assets

TEIR 1 Capital = (paid up capital+ statutory reserves + disclose free reserve)-(equity investments in
subsidiary + intangible assets + current and brought forward losses)
TEIR 2 Capital = Undisclosed Reserve + General loss Reserve +Hybrid debt capital instruments and
subordinated debts.
According to Basel three norms CAR > 8%

4. Net interest Margin (NIM): Net Interest Margins is a ratio that measures how successful a firm is at
investing its funds in comparison to its expenses on the same investments. A negative value indicates
that the firm has not made an optimal investment decision because interest expenses exceed the
amount of returns generated by investment.

NIM = Interest earned – interest paid

Average Invested Assets

5. Return on Asset (ROA): ROA is an indicator of how profitable a company is relative to its total
assets. ROA is best used when comparing similar companies or a company to its previous
performance.

Return on Asset = Net Income

Avg. total assets
6. Debt to equity Ratio (D/E): Debt to equity Ratio is a financial Ratio indicating relative proportion
of entity’s equity and debt used to finance and debt used to finance an entity’s assets. This ratio is
also known as financial leverage. Optimal debt to equity ratio is considered 1. i.e. Liability =
Equity.
If there is an Increase in D/E ratio it simply means that company is financed by creditors rather than
from its own operation which may be a dangerous trend.

49
 Debt/equity = Total Liability
Total equity

7. Return on Equity: Return on asset is a measure of the financial performance of a company

calculated by dividing net income by shareholders equity or Net asset or Assets – liabilities. ROEs
between 15 to 20% are considered good.

ROE = Net Interest

Equity

8. Debt Service Coverage Ratio (DSCR): In corporate Finance DSCR is a measurement of cash flow
available to pay the current debt obligations. The ratio states net operating income as a multiple of
debt obligations due within a year, including interest, principal, sinking fund and lease payments.

DSCR = Net operating income

Total debt Liability

9. Total outside liability / Tangible net worth (TOL/TNW): It is a measure of a company’s financial
leverage calculated by dividing the total liabilities of the company by total net worth of the business.
Total liability is the sum of all the liability of the business and total net worth is the sum of share
capital and surplus reserve of the company.

In rating exercise, businesses with a TOL/TNW ratio of less than 1score the maximum amount
of point while a TOL/TNW ratio of more than 3 awarded no points. For most businesses, it
would be good to have an average TOL/TNW ratio in the range 1-2.

50
10. Interest Coverage Ratio (ICR): ICR is a debt Ratio and profitability Ratio used to determine how
easily a company can pay interest on its outstanding debts.
It is also profit before Depreciation, Interest and Tax/ Interest expenses.

PBDIT/INT of less than 1 would imply the business would have trouble honoring It’s interest
payments on time, whereas higher of more than 2 are considered comfortable for lenders.
PBDIT/INT higher than 8 is given maximum points and a ratio lower than 1 is given no points
in credit rating models.

ICR = PBDIT
INT

11. Current Ratio: It is the calculation of business liquidity calculated by dividing the total assets of
the business by total liabilities. This ratio is a great indicator of a business ability to repay its short
term obligations as they become due over the next 12 months.

A current Ratio of more than 1.5 implies the business has adequate cash flow over the next 12
months to meet the demands, while a current ratio of less than 1 would imply that the business
may have cash flow problem. For most businesses, it would be good to have a current ratio in
the range of > 1.35-1.20.

Current liability = Total Assets

Total liability

51
b) Non- Financial
i. Management risk
ii. Business and industry risk
It is clear that investors realize that it’s important for an investment to analyses the Non –financial
factors. Investors can’t always be sure of a company by only poring over financial statements and
different ratios.
The two Non-financial factors for credit analysis are:

i. Management Risk
Strong management is the backbone of any successful company. Theoretically management of a
publicly traded company is in charge of creating value for shareholders. Thus management should
have business smarts to run a company in the interest of the owners.
Then how can we determine the quality of the management? Is stock price always a reflection of
good management?

Some important points to determine the quality of management

➢ Numbers of directors and independent directors
What is the number are directors and independent directors? What is the Profile of independent
Directors? Is any Independent director is from peer companies?
These questions determine the nature of management. If the independent director is having a good
profile then it is considered that the data provided by the company is relevant and the Risk associated
with investment is less because it is associated with the Director.

➢ Length of tenure of CEO

One of the good indicators is the Tenure of CEO and top Management has been serving the company.
Most of the Indian companies have a long serving CEO. TATAs, Reliance, Infosys, Wipro etc.

➢ Strategy and goal

Does the company have a mission statement? How concise is the Mission statement?
A good mission statement creates goal for management, employees, stockholders, and even partners.

52
 ➢ Insider buying and stock buyback
If insiders are buying shares in their own companies, it’s usually they know something that other
investors do not know. Insiders buying stock regularly show investor that managers are willing to put
their money where their mouth is. The key here is to pay attention to how long the management
hold’s share.
The same is the case for Buyback; it will likely tell you that a buybacks is a logical use of company’s
resources. A buyback increases shareholder value if the company is truly undervalued.

ii. Business and Industry Risk

Business and Industry risk referred to the basic viability of a business- the question is whether a
company is able to produce sufficient sales and generate sufficient revenues to cover its operational
expenses and turn a profit.
It can be further stated as two types of risk
▪ Systematic risk
Systematic Risk is a general level of risk associated with any business enterprise such as fluctuating
economic, Political situation and stability, market conditions. Systematic Risk is an inherent
business risk and beyond the control, so thing can be done is to anticipate the situation and react
accordingly to it.

▪ Unsystematic risk
Unsystematic risk refers to the risks related to the specific business in which a company is engaged.
A company can reduce level of unsystematic risk through good management decisions regarding
costs, expenses, investment and marketing.

On the basis of above criteria let perform the credit analysis of different types of companies
where Maruti investments are parked.

53
NBFC – NON BANKING FINANCIAL COMPANY

NBFC are financial institutions that offer various banking services but do not have a banking license.
Generally, these institutions are not allowed to take traditional demand deposit- readily available
funds, such as those in checking or savings accounts –from the public. This limitation keeps them
outside the scope of conventional oversight from federal and state financial regulators.

NBFCs can offer banking services such as loans and credit facilities, currency exchange, retirement
planning, money markets, underwriting, and merger activities.

This classification technically encompasses a wide range of companies offering bank-like financing
and investing Services. Examples of NBFC includes insurance companies, money market Funds,
asset managers, hedge funds, private equity firms, mobile payment systems, micro-lenders and peer-
to-peer lenders.

❖ Power Finance Corporation Limited

About the company

PFC was set up by government of India in the year 1986 as a specialized development financial
Institution to fund projects in the domestic power sector. The GoI held a 61.48% stake in the
company as on December 31, 2018. PFC provides loans for a range of power-sector activities
including generation, distribution, transmission, and plant renovation and maintenance. It finances
state sector entities including generating and distribution companies as well as IPPs. PFC is also the
nodal agency for the development of 15 UMPP (Ultra Mega Power Plant) in the country.

54
Key financial Indicators

Particulars 2016 2017 2018

Gross NPA 3.15% 12.50% 9.57%
Net NPA 2.55% 10.55% 7.39%
Profit after tax 6,113 2,126 5,855
Net Worth 35,766 36,470 39,861
Total assets 2,46,637 2,58,344 2,86,465
CRAR 20.27% 19.28% 19.99
Tier 1 17.07% 16.20% 16.98
Debt/equity 5.61 5.55 5.76
Return on Net worth 17.89% 5.89% 15.34%
ROCE 2.93% 9.96% 10.75%
Return on Asset 2.50% 0.86% 2.02%
Current ratio 1.22 1.31 0.95
Interest Coverage Ratio 1.55 1.31 1.48
Net interest Margins 3.09% 4.46% 3.22%

a. Understanding the Key Financial Ratios

NPA: Growth in NPA is an alarming concern for the NBFC. According to the report published in
RBI, there is an overall growth of 6% in NPA in the financial year 2017-18. PFC NPA 9.57% (P.Y-
12.50%) is alarming but on the same time showing some recovery from the previous year and most
probably NPA amount is recovered sooner or later.

Return on assets:

The return on assets ratio or ROA measures how efficiently a company can manage its assets to
produce profits during a period. The return on assets ratio, often called the return on total assets, is a
profitability ratio that measures the net income produced by total assets during a period by comparing
net income to the average total assets. PFC return on asset is showing an upward trend. Overall avg.

55
of ROA in power and infrastructure finance industry is below 2% and PFC is performing well with
return on assets at 2.02%.

ROCE (Return on capital employed):

Return on Capital Employed (ROCE) is a measure of a business’s profitability and efficiency of

capital employed. ROCE is calculated by dividing profit before depreciation, interest and tax
(PBDIT) by total capital employed. Capital employed is total assets minus the total current liabilities.
In any case, the ROCE of company must be higher than its borrowing cost; otherwise it indicates that
the company is degenerating shareholder value. It is good for businesses to have a ROCE in the range
of >15% – 5%.PFC ROCE is 10.75%.

Current Ratio

Current ratio is a measure of businesses liquidity calculated by dividing the total current assets of the
business by total liabilities. This ratio is a great indicator of a business’s ability to repay its short-term
obligations as they become due over the next 12 months. A current ratio of more than 1.5 implies the
business has adequate cash flows over the next 12 months to meet the demands, while a current ratio
of less than 1 would imply that the business might have cash flow problems. PFC current ratio is
0.95, it simply means that there is slightly less cash flow to meet its short term liability.

Debt/Equity

Debt-to-equity ratio is the key financial ratio and is used as a standard for judging a company's
financial standing. It is also a measure of a company's ability to repay its obligations. When
examining the health of a company, it is critical to pay attention to the debt/equity ratio. If the ratio is
increasing, the company is being financed by creditors rather than from its own financial sources
which may be a dangerous trend. Lenders and investors usually prefer low debt-to-equity ratios
because their interests are better protected in the event of a business decline. A good debt to equity

56
ratio is around 1 to 1.5. However, the ideal debt to equity ratio will vary depending on the industry
because some industries use more debt financing than others. PFC D/E ratio is 5.76.

Debt/equity ratio of financial institution average is 5.

Credit challenges

Moderation of the capitalisation level on acquisition of REC –

While the capitalisation level of PFC was characterized by comfortable Tier I capital of 15.95% and
CRAR of 18.95% as of December 31, 2018, the cushion will stand reduced with Tier I capital likely
to fall to about 11.5% as of March 31, 2019, though it will remain above the regulatory threshold of
10%.

Additionally, the consolidated leverage for PFC would also increase from current gearing level of
about 6 times to about 7.5 times in the near term. Thus, the need for external capital could go up for
PFC, despite the good internal capital generation, to maintain prudent capitalisation and adequate
cushion over and above the regulatory requirement.

Liquidity position

PFC’s Asset Liability Maturity (ALM) profile remains adequate with sufficient unutilised bank lines
to manage mismatches in ALM buckets up to one year. The company typically has cumulative
negative mismatch (2.6% of the total assets as of December 31, 2018) in the buckets up to one year
given the relatively long tenure of its assets. Nevertheless, healthy financial flexibility supported by
the sovereign ownership and availability of sufficient unutilised bank lines provide comfort.

Adequate profitability profile

PFC’s yield moderated to 9.83% in 9MFY2019 from 9.91% and 10.91% in FY2018 and FY2017,
respectively, on account of a decline in systemic interest rates. The cost of funds, however, witnessed
a lower decline, leading to a decline in spreads. Consequently, net interest margins (NIMs) stood at
2.98% in 9M FY2019 compared to 3.22% and 3.94% in FY2018 and FY2017 respectively.
Nevertheless, the company’s profitability remains adequate with return on assets of 2.20% and return
on equity of 15.86% in 9M FY2019.

57
b. Non-financial Risk

i. Management risk

Experienced management and operational team

PFC has an experienced management team with the senior team having an experience of more than
30 years in power financing. Shri Rajeev Sharma is the CMD of PFC. Prior to PFC he was CMD of
REC under his dynamic leadership REC reached a greater height in excellence by doubling the
revenue and the profits in the last five years. He was Business Toady’s choice of the ‘Best CEO’.
The company’s well laid-out credit appraisal and monitoring systems have enabled it to establish
itself as a preferred lender with dominant position in the power sector financing.

ii. Business and industry risk

Majority ownership by GoI and strategic importance given the role played in implementing
various GoI schemes:

Being a nodal agency for implementing various GoI schemes aimed at developing the country’s
power sector (such as UMPPs and IPDS), PFC remains strategically important to the GOI for
achieving its objective of augmenting power capacity across the country. Further, the GoI remains a
majority shareholder in the company, with a stake of 61.48% as of December 31, 2018, and has
representation on the company’s board. Given the government support, PFC has been able to raise
funds at competitive rates.

Significantly Concentrated Exposures

The risk is further heightened as PFC is exempt from the concentration norms applicable to non-
banking finance companies, and thus has significantly concentrated exposures. PFC’s independent
power producer (IPP) portfolio remains impacted by concerns regarding fuel availability, disputed

58
and competitive power sale tariffs, absence of power purchase agreements (PPAs), environmental
clearance and land acquisition issues.

Comparative study with peers 2017-18 (amount in Rs crore) according to money controls.

Financial ratios Power REC Credit IDFC IFCI

finance Access
group
Net profit 5844.11 4689.46 124.64 589.65 -1,005
Return on net worth/ 14.68% 13.09% 8.72% 1.52% -21.03%
equity
ROCE 10.64% 10.24% 18.19% 1.51% 1.22%
ROA 2.04 1.88% 2.38% 1.51% -3.60%
Debt/Equity 4.98 4.69 1.04 9.29 3.40
Current ratio 0.95 0.74 1.62 0.91 1.09
ICR 1.48% 1.50% -- 1.19% 0.18%

Conclusion
Ratios clearly states that PFC performance is better than other NBFC operating
In the power Finance.

59
BANKING SERVICES
A bank is a financial institution licensed to receive deposits and make loans. Bank may also provide
financial services, such as wealth management, currency exchange and safe deposit boxes. Banks
plays the most important role in the economic development of a nation. It is the banks that maintain
cash flow and fund flow in the economy. Banks are regulated by Reserve Bank in India.

❖ HDFC BANK LIMITED

About the Company

The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an
'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as
part of RBI's liberalization of the Indian Banking Industry in 1994. The bank was incorporated in
August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC
Bank is promoted by HDFC Ltd. which has 25.60% stake as on March 31, 2018. Currently, HDFC
Bank Ltd. (HBL) is the largest private sector bank in India. As on March 31, 2018, the bank’s total
balance sheet size stood at Rs.10, 63,934 crore.

Key financial Ratios

2016 2017 2018
Total Income 70,973 81,602 95,462
Profit After Tax 12,296 14,550 17,487
Gross NPA 0.94% 1.05% 1.30%
Net NPA 0.28% 0.33% 0.40%
Capital Adequacy Ratio 15.53% 14.60% 14.82%
Net Interest Margin 4.20% 4.30% 4.30%
ROCE 18% 18% 18.2%
Operating profit/total asset 0.21% 0.26% 0.21%
Net Interest Income 27,591 33,139 40,095

Debt/Equity 8.25 8.02 8.58

60
a. Detailed description of the key financial ratio

Strong market position complemented by wide-spread domestic franchise

As on March 31, 2018, the bank had a network of 4,787 branches in 2,691 cities [P.Y.: 4,715
branches in 2,657 cities]. It had 12,635 ATMs as on March 31, 2018 [P.Y.: 12,260]. The Bank has
three overseas branches in Bahrain, Hong Kong, Dubai International Finance Centre and three
representative offices in Abu Dhabi, Dubai and Nairobi.

Healthy capitalisation levels

The bank continues to maintain healthy capitalisation levels. HBL reported Capital Adequacy Ratio
(CAR) of 14.82% (Tier I CAR: 13.25%) (Under Basel III) as on March 31, 2018 as against CAR of
14.60% (Tier I CAR: 12.80%) as on March 31, 2017.

Strong funding profile with robust CASA franchise

The bank continues to have a strong funding profile with healthy and stable Current Account Savings
Account (CASA) mix over the years. As on March 31, 2018, the proportion of CASA deposits stood
at 43.50% [P.Y.: 48.00%] which continues to be one of the highest in the banking sector. Robust and
consistent CASA franchise has enabled the bank to maintain healthy margins.

Consistent track record of financial performance

The bank’s balance sheet has grown at a CAGR (compound annual growth rate) of 22.51% between
March 31, 2016 and March 31, 2018. During FY18, the bank’s advances grew at 18.71% while its
deposits grew at 22.55% which was higher than overall industry growth (for both advances &
deposits).The bank is very well diversified in retail and wholesale banking with a 57:43 mix of retail
and wholesale assets.

61
During FY18, stable growth in business helped HBL’s net interest income grow by 20.99%. (P.Y.:
20.10%). The bank has had a consistent track record of high net interest margins (NIM) supported by
high proportion of low cost CASA base. HBL’s NIM for FY18 was at 4.16% as compared to
4.22% for FY17. The bank reported Profit After Tax (PAT) of Rs.17,487 crore on total income of
Rs.95,462 crore during FY18 as compared to PAT of Rs. 14,550 crore on total income of Rs.
81,602 crore during FY17. HBL’s ROTA stood at 1.81% for FY18 as compared to 1.85% for FY17.

Comfortable asset quality metrics

HBL’s asset quality has remained comfortable over the years and continues to be one of the best in
the industry. As on March 31 2018, the bank reported Gross NPA Ratio of 1.30% [P.Y.: 1.05%] and
Net NPA Ratio of 0.40% [P.Y.: 0.33%]. The net NPA to Net worth ratio stood at 2.53% [P.Y.:
2.12%] as on Mar.31, 2018.

b. Non-financial Risk

i. Management Risk

Resourceful promoter group and experienced management

Currently, HDFC Bank Ltd. (HBL) is the largest private sector bank in India.

The promoters are resourceful and the management, represented by the Board of Directors comprises
eminent personalities with vast experience in their respective fields. Some of the Board members are:

Shyamala Gopinath (Chairperson)

She is the chairman of the bank. Prior to this she served as the deputy governor in the RBI for 7 years.
She was effectively involved in the managing the crisis of Balance of Payment in the year 1991.

Aditya Puri

He is the managing director of HDFC bank. He assumed this position in year 1994. Puri is the longest
serving head of any private bank in the country. India Today ranked him 24 th in the 50 most powerful
Indians. Aditya Puri name is itself a level of trust in the management.

MD Ranganath
62
HDFC bank and board approved MD Ranganath as independent director of

HDFC bank. Prior to that he was Chief Financial officer at Infosys.

ii. Business and Industry Risk.

HDFC Bank Ltd (HBL) is the largest private sector bank in India with total assets of Rs.10, 63,934
crore as on March 31, 2018. Further, in terms of overall financial performance and asset quality
metrics, HBL has been one of the most consistent players in the banking sector. This strong market
share is complemented by its expanding pan-India domestic franchise.

Robust demand

Increase in working population and growing disposable income will raise demand of banking and
related services. Rural banking is also expected to increase in the future. We can see that some App
based payment phone pay, google pay and Paytm is already on its peak.

Innovation in the services

Mobile banking, internet banking and various extensions of facilities at the ATM stations will
improve the operational efficiency.

The digital payments system in India has evolved the most among 25 countries with India’s
Immediate Payment Services (IMPS) being the only system at level 5 in the Faster Payments
Innovation Index.

Market Size

In financial year 2007-2018, total lending increased at a CAGR of 10.94% and total deposits increase
at a CGAR of 11.66%. India’s retail credit market is the fourth largest in the emerging countries. It
increased to US$ 281 billion on December 2017 from US$ 181 billion on December 2014.

Policy support

The Industry has healthy regulatory support oversight along with credible Monitory policy by the
reserve bank of India.

63
 The government is planning to inject Rs 42000 crore in the public sector bank which will have its
effect on overall banking Industry. Also the number of accounts opened under PMJDY reached 333.8
million as on November 28, 2018.

Road Ahead

Enhanced spending on infrastructure, speedy implementation of projects and speedy implementation

of projects and continuation of reform projects are expected to provide further impetus to growth.

All these factors suggest that India’s banking sector is also poised for robust growth as the rapidly
growing business would turn to banks for their credit needs.

Peer comparison of different financial ratio (amount in Rs crore)

HDFC Bank AXIS Bank ICICI Bank

Gross NPA 1.30% 6.77% 8.84%
Net NPA 0.40% 3.44% 4.77%
PAT 17,486.75 276 6777.42
Capital Adequacy Ratio 14.82% 16.57% 18.42%
CASA 43.50% 54% 51.7%
ROA 1.81% 0.04% 0.82%
NIM 3.76% 2.88% 3.23%
Net Interest Income 40,094.86 18,618 23,026
Financial Charges Coverage R 1.84 1.60 1.80

Conclusion
The financial and non-financial factors clearly states that HDFC is a good investment
destination and it is performing much better than any of its peer.

64
CONGLOMERATE
A conglomerate is a combination of multiple business entities operating in entirely different
industries under one corporate group, usually involving a parent company and many subsidiaries.
Often a conglomerate is a multi-industry company. Conglomerates are often large and multinational.

❖ RELIANCE INDUSTRY LIMITED

About the company

Reliance Industries Limited (RIL) is India's largest private sector enterprise. Starting with textiles in
the late seventies, the company has pursued a strategy of backward vertical integration - in polyester,
fiber intermediates, plastics, other petrochemicals, petroleum refining and oil and gas exploration and
production – thereby making it a highly integrated player with its presence across the energy value
chain. RIL enjoys global leadership in most of its businesses, being the largest polyester yarn and
fiber producer in the world and among the top five to ten producers of major petrochemical products
in the world. Through its subsidiary companies, RIL is also involved in diversified businesses
spanning retail, oil marketing and telecom.

KEY FINANCIAL RATIOS (amount in Rs crore)

2016 2017 2018

Turnover 2,93,298 3,30,180 4,30,731
Profit After Tax 25,171 29,901 36,075
TOL/TNW 0.39 0.4 0.5
Return on net worth/ 12.89% 11.37% 12.29%
equity
Return On Asset 4.96% 4.19% 4.41%
Debt/Equity 0.72 0.70 0.62
Current Ratio 0.69 0.62 0.59

65
 ROCE 7.18% 9.22% 11.42%
Quick Ratio 0.44 0.42 0.39
NET DEBT/OPBDIT 2.2 2.6 2.2

a. Understanding the key financial ratios

Profit after tax: profit after tax is increasing at the rate of about 20% year-on-year. It indicates that
company is doing well.

TOL/TNW: TOL/TNW is a measure of a company’s financial leverage calculated by dividing the

total liabilities of the company by the total net worth of the business. This ratio gives an accurate
picture of the businesses reliance on debt. A low TOL/TNW ratio of, 0.39, 0.4, 0.5 in the year 2016,
2017, and 2018 respectively signifies good levels of promoter’s stake in the business. It simply means
the business is less risky for the investors.

Return on assets:

Current ratio of less than 1 would imply that the business might have cash flow problems. RIL
current Ratio is 0.59 which indicates the business might have cash flow problems.

Debt/Equity

Debt-to-equity ratio is the key financial ratio and is used as a standard for judging a company's
financial standing. It is also a measure of a company's ability to repay its obligations. When
examining the health of a company, it is critical to pay attention to the debt/equity ratio. If the ratio is
increasing, the company is being financed by creditors rather than from its own financial sources
which may be a dangerous trend. Lenders and investors usually prefer low debt-to-equity ratios
because their interests are better protected in the event of a business decline. A good debt to equity
ratio is around 1 to 1.5. However, the ideal debt to equity ratio will vary depending on the industry
because some industries use more debt financing than others. RIL D/E ratio is 0.62 which is great
from investment point of view.

66
Quick ratio

In finance, the quick ratio, also known as the acid-test ratio is a type of liquidity ratio which
measures the ability of a company to use its near cash or quick assets to extinguish or retire
its current liabilities immediately. Quick assets include those current assets that presumably can be
quickly converted to cash at close to their book values. It is the ratio between quickly available or
liquid assets and current liabilities.

A normal liquid ratio is considered to be 1:1. A company with a quick ratio of less than 1 cannot
currently fully pay back its current liabilities. RIL has a low quick Ratio of 0.39.

Interest coverage ratio

The interest coverage ratio measures a company's ability to handle its outstanding debt. It is one of a
number of debt ratios that can be used to evaluate a company's financial condition. A good interest
coverage ratio is considered important by both market analysts and investors, since a company cannot
grow—and may not even be able to survive—unless it can pay the interest on its
existing obligations to creditors. RIL has Interest Coverage Ratio of 7.13 which is good but it is
showing a downward trend. Earlier it was 11.43.

NET DEBT/OPBDIT

The net debt-to-EBITDA ratio is a debt ratio that shows how many years it would take for a company
to pay back its debt if net debt and EBITDA are held constant. If a company has more cash than debt,
the ratio can be negative. The net debt-to-EBITDA ratio is popular with analysts because it takes into
account a company's ability to decrease its debt. Ratios higher than 4 or 5 typically set off alarm bells
because this indicates that a company is less likely to be able to handle its debt burden, and thus is
less likely to be able to take on the additional debt required to grow the business.

b. Non-financial risks

67
i. Management risk

Resourceful promoter group and experienced management:

RIL is the flagship company of the Reliance group - the largest private sector enterprise in India. The
promoters are resourceful and the management, represented by the Board of Directors comprises
eminent personalities with vast experience in their respective fields. The company has 8 independent
directors of different fields. The top management team, including Mr. Mukesh Ambani, has
significant knowledge in the field of petrochemicals and oil & gas along with a proven track record of
successfully implementing large scale complex projects. Some key personalities and independent
directors in the board of RIL are:

Mukesh Dhirubhai Ambani (born 19 April 1957) is an Indian businessman, the chairman, managing
director, and largest shareholder of Reliance Industries Limited (RIL), a Fortune Global 500 company
and India's most valuable company by its market value. Ambani was ranked 38 and has consistently
held the title of India's richest person on Forbes magazine's list for the past ten years. He is the only
Indian businessman on Forbes’ list of the world's most powerful people. As of January 2018, Mukesh
Ambani was ranked by Forbes as the 18th-wealthiest person in the world. He surpassed Jack Ma,
executive chairman of Alibaba Group, to become Asia's richest person with a net worth of $44.3
billion in July 2018. He is also the wealthiest person in the world outside North America and
Europe. As of 2015, Ambani ranked fifth among India's philanthropists, according to China’s Hurun
Research Institute. He was appointed as a Director of Bank of America and became the first non-
American to be on its board.

Mr. Yogendra P. Trivedi is a practicing senior advocate at the supreme court of India. He worked as
the director of the central bank of India and Dena Bank. He has been the president of the Indian
Merchant’s Chambers, and currently a Member of managing committee. He was also in the managing
committee of ASSOCHAM and International Chambers of Commerce.

Mr. Raminder Singh Gujral is a retired Finance secretary, GoI. Earlier he held the post of secretary
revenue, secretary expenditure, Secretary Ministry of Road, Transport and Highway. He was the
chairman of NHAI. Also, he had been director general of Foreign Trade.

Raghunath Anant Mashelkar, also known as Ramesh Mashelkar, is an Indian chemical engineer
and a former Director General of the Council of Scientific and Industrial Research. He is a Padma
Vibhushan, Padma Bhushan, Padma Shri awarded person for his contributions.

68
Arundhati Bhattacharya is a retired Indian banker and former Chairman of the State Bank of India.
She is the first woman to be the Chairman of State Bank of India. In 2016, she was listed as the 25th
most powerful woman in the world by Forbes. Etc.

These names are enough to tell that management is in good hands.

ii. Business and industry risk

Dominant leadership position in the petrochemical segment:

RIL maintained its leadership position in various product segments of domestic pet-chem market. It is
second largest producer of polyester fiber/ yarn and Para xylene (PX) globally. RIL is also amongst
the top ten global manufacturers of products such as polypropylene (PP), mono ethylene glycol
(MEG), purified terephthalic acid (PTA) etc. in the world

Strong financial risk profile characterized by robust capital structure and liquidity profile:

RIL has consistently maintained healthy capital structure with a gearing level of less than 1 time. The
company also exhibits a very strong liquidity profile with total cash and equivalents including
liquid/marketable investments of Rs. 77,933 crore as on December 31, 2018. During FY18, the total
consolidated revenue increased by 22.82%. This was on account of higher realization for refining and
pet-chem products as well as strong growth in retail and digital services businesses.

Keys issues with reliance

Uncertainty in KG-D6 gas production ramp-up:

Gas output from RIL’s KG-D6 basin continued to decline in FY18 mainly on account of geological
complexity, natural decline in the fields and higher than envisaged water ingress. The average
production of natural gas reduced to 5.3 MMSCMD in FY18 from 7.8 MMSCMD in FY17. The
declining output from KG-D6 basin may affect RIL’s return on investments in the E&P segment in
the medium term, although the revenues from this segment form a small part of the total revenue on a
consolidated level.

Risks associated with generation of optimal returns from the large investments in the telecom
sector.

69
Peer comparison on the basis on information from money control (in Rs. Crore)

Reliance IOC BPCL HPCL

Net profit 36,075.00 22,189.45 9,008.63 7,218.29
Market cap 7,97,963.01 1,39,329.55 75,750.31 42,461.32
ROCE 11.80% 24.86% 21.70% 24.77%
ROA 5.44% 7.60% 7.90% 7.32%
Debt/Equity 0.31 0.50 0.67 0.82
Current ratio 0.65 0.76 0.82 0.78
ICR 7.13% 9.80% 11.87% 15.22%

Conclusion

Comparison of conglomerate with a single business performing company is a difficult task and is not
justified.

From above data and ratio we could easily say that overall performance of this petroleum sector is
excellent in India. These companies are mostly involved Petroleum, Natural gas, Lubricants,
Petrochemicals. The demand for petroleum is on lower side due to industry global situations but
others demand is on higher side.

Reliance industry is working in the field of

-Petroleum
-Natural Gas
-Petrochemical
-Textile
-Retail
-Telecommunications
-Media

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In every business reliance is among the top three business leader. Jio infocomm which is launched for
spreading communication business for RIL has nowadays over 30 million subscriber. Big market
player such has idea, airtel; Vodafone is very much worried about the growth of JIO.

Mukesh Ambani is the richest person in the country and one of the trusted businessmen in India. He
is carrying the legacy of Dhirubhai Ambani. All the non- financial factors support the investment in
RIL. So in my point of view RIL is a great investment avenue as there is great probability of good
return and trust of Ambani’s legacy.

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ANNEXURES

• Employees Competancy Level

• Brochures

• Employment Form

• Questionnaire

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REFERANCES
▪ https://www.marutisuzuki.com
▪ https://www.marutisuzuki.com/corporate/investors
▪ https://www.crisil.com
▪ https://www.icra.com
▪ https://www.care.com
▪ https://www.hdfcbank.com
▪ https://www.icicibank.com
▪ https://www.axisbank.com
▪ https://www.mahindra.com
▪ https://www.tatamotors.com
▪ https://www.pfcindia.com
▪ https://m.moneycontrol.com>India
▪ https://www.recindia.nic.in/home
▪ https://www.economictimes.indiatimes.com/
▪ https://www.investopedia.com/
▪ https://www.icra.in/Rating/Index?Rating Type=CR
▪ https://www.iocl.com/download/AnnualReport2017-18.pdf
▪ https://www.crisil.in/Rational/index
▪ https://www.incometaxindia.gov.in/
▪ https://www.icra.in/Rational/index
▪ https://www.bharatpetroleum.com/bharat-petroleum-for/.../annual-reports.aspx
▪ https://hindustanpetroleum.com/66th%AGM.pdf
▪ https://www.care.in/rational/index

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