how to read annual report
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The date on which valuations are
based and investment opinion w as
formed along with the company
code
Analyst rating on the stock that
corresponds to a specific
investment outlook as explained
in rating rationale.
Know about the company's
background, including top
management and correspondence
details
Identify how much promoters and
institutional interest is there in the
company
A brief snapshot of the company's
size and of market returns
generated along with benchmark
indices return during a specified
period.
Graph showing how the stock has
performed compared to benchmark
indices over a period of time. It
throws insight into stock's return
potential relative to broader market
indices.
Looking for declining forward
P/E as it indicates company's
future growth as forecasted
earning would be higher than
current earnings.
EV/EBIDTA ratio determines the
value of a company. A lower
ratio indicates that the company
may be undervalued.
Improving ROCE/ ROE ratios
indicate the efficiency and
profitability of a company's
capital investments.
Look for consistent and
rising EPS growth.
This box gives the analyst's
estimate of target price of the
stock, the time horizon it would
take to reach and the appreciation
in percentage term during that
period from current price levels.
Key factors that we feel would
drive the anticipated future growth
in revenue & profitability.
HOW TO READ THIS REPORT
Know key financial trends and how
the company measures up on
different valuation parameters for
fair value estimates based on
current and estimated future
growth.
The valuation section of provides
our justification for a stock using a
variety of valuation techniques.
DEMOCO
PY
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MAKING SENSE OF THE NUMBERS
(Rs crore)
FY08E FY07E FY06ESales 603.32 440.29 311.99
% Growth 37.03% 41.12% 26.65%
Operating Profit 137.55 89.15 54.72
% Growth 54.29% 62.93% 25.96%
Other Income 3.72 2.79 1.98
Depreciation 7.51 8.34 9.26
EBIT 133.76 83.60 47.44
% Growth 60.00% 76.24% 29.96%
Interest 14.44 12.40 10.82
Profit Before Tax (PBT) 119.32 71.20 36.62
% Growth 67.60% 94.42% 47.25%
Taxation 22.67 13.53 6.96
Tax as % of PBT 19.00% 19.00% 19.00%
Net Profit 96.65 57.67 29.66
% Growth 67.6% 94.4% 45.3%
Shares O/S 3.35 3.35 3.35
EPS (Rs) 28.85 17.21 8.85
Profit and Loss Account
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(Rs crore)
FY08E FY07E FY06E
Source of Funds
Share Capital 49.44 49.44 49.44
Reserves & Surplus 236.84 140.19 82.52
Secured Loans 106.31 92.76 82.17
Unsecured Loans 229.32 229.32 229.32
Total 626.14 515.93 447.67
Appl icat ion of Funds
Net Block 76.52 84.04 92.38
Capital Work-in-progress 0.00 0.00 0.00
Investments 0.01 0.01 0.01
Inventory- Other 65.32 49.18 35.93
Cash 416.51 332.68 282.55
Loans & Advances 7.42 7.42 7.42
Less Current Liabilities & Prov. 88.81 66.84 48.80
Trade Receivables 147.00 107.28 76.02
Total 626.73 516.52 448.26
Balance Sheet
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Total expenses should be seen inrelation to revenue trends for previous
years and quarters, as it impact theoverall profit which is aviable to
shareholderes.
All things being equal, companies withhigher sales growth rates are generallymore preferable than those with slower
revenue growth rates.
Check for variations in non-operatingexpenses including interests,
depreiciation and taxes as these decidethe final profit which is available to
shareholders
Net profit growth is a very importantparameter to look into, however EPS
growth is even more important ascompanies with expanding equity base
may show restrictive EPS growth.
A Profit and Loss Account or an Income Statement represents how much money a company has made from selling its product/service during a specified time period (i.e. month, quarter, year, etc.), how much money it spent for selling and m aking those product/services and the money it actually earned during that period.
When we look for variations in abalance sheet from year-to-year, one
can detect the companys growthpotential and value. It shows us how
profits are used to finance thecompany's operations, and if the
company has enough cash for growth.
Leverage (long-term debt/total networth), represents how assets arefinanced by the company, that is,
whether by debt or retained earnings. Ifa company has a high amount of
leverage, or debt, then its earnings pershare (EPS) would be highly sensitive
and volatile depending upon thebusiness growth or de-growth.
Balance Sheet is a snapshot of a company's financial condition at a single point in time (often the end of a fiscal year) and givesinvestors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.
Another important ratio is the currentratio (current assets/current liabilit ies),
that shows the ability of the company topay its short-term obligations. When
compared with industry average, alower ratio may indicate possible
liquidity problems..................................................................................................................................................
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(Rs crore)
FY08E FY07E FY06EProfit after Tax 96.65 57.67 29.66
Dividend Paid 0.00 0.00 0.00
Depn 7.51 8.34 9.26
Cashflow before WC Changes 104.17 66.01 38.92
Net Increase in Current Liab. 21.97 18.04 10.08
Net Increase in Current Assets 55.86 44.51 -2.09
Cashflow from operations 70.28 39.54 51.09
Purchase of Fixed Assets 0.00 0.00 -0.02
(Increase)/Decrease in Invt. 0.00 0.00 0.00
Cashflow from investing 0.00 0.00 -0.02
Increase/(Decrease) in Debt 13.56 10.59 221.74
Cashflow from financing 13.56 10.59 221.74
Op balance of cash 332.68 282.55 9.70
Closing balance of cash 416.51 332.68 282.55
Cash Flow Stat ement
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FY08E FY07E FY06E
EPS 28.57 16.93 8.57
Book Value Per Share 57.91 38.36 26.69
Enterprise Value 414.92 485.20 524.74
EV/Sales 0.69 1.10 1.68
EV/EBIDTA 3.02 5.44 9.59
Market Cap/Sales 0.82 1.13 1.59
Price/Book Value 2.56 3.86 5.54
Operating Margin (%) 22.80 20.25 17.54
Net Profit Margin (%) 15.92 13.02 9.45
RONW 33.43 29.91 21.76
ROCE 21.36 16.20 10.60
Debt/Equity 1.17 1.70 2.36
Current Ratio 7.16 7.43 8.24
Quick Ratio 6.43 6.69 7.50
Fixed Assets Turnover Ratio 7.88 5.24 3.38
Debtors Turnover Ratio 4.10 4.10 4.10
Inventory Turnover Ratio 9.24 8.95 8.68
Ratios
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Cash flow from operating activities shows thecash used or generated from normal operations.It shows the ability of the company to generate
positive on a sustained basis.
Cash flows from investing activities representall the cash used or provided for the
purchase/sale of income-producing assetssuch as fixed asset etc.
Cash flows from financing activities reflect theflow of cash between a firm and its owners
and creditors. An increase in cash in thissection could mean the company taking loanor issuing fresh equity to fund expansion etc.which would have a bearing on the earnings
per share of the company.
Negative or declining free cash flow indicatesthat the Company needs to issue shares, cut
costs, or borrow money to continue whereasa company with positive or increasing free
cash flow will be able to pay dividends, fundgrowth without raising more funds.
Cash Flow Statement shows the money flowing into a business from sales, borrowings etc. and the amount of money flowing out ofa business through paying for wages, rent, interest owing, paying back loans, buying raw materials etc. If the cash flowing into abusiness does not meet the cash flowing out, then the company would be unable to meet its debts and other obligations and couldbe forced to close down.
Investment ratios are important for investorsas they are good reference points for
ascertaining the value of a company shares.
Ratio Analysis helps us comparing a company against industry benchmarks along with its past performance and is a good way togauge what is "normal" and what is "abnormal" with the company.
Profitability ratios measure the ability of thebusiness to make a profit and tell us how
much profit, on average, business has earnedper rupee of turnover. Look at the trend from
one period to another and check for anyimprovements or deterioration
Liquidity ratios measure the company's capacityto pay its debts. These ratios are often used by
creditors to determine the ability of the businessto repay loans and are indicator of the
businesses' vulnerability to risk.
Efficiency ratios indicates the number of timessales had been generated by the availablecapital employed (CE). An increase in the
asset turnover in the current year over that ofthe previous year indicates efficient utilization
of assets which is expected to lead to anincrease in profitability.
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Assets
The resources owned by a company that is expected to provide
benefits to its business. Total assets are shown in Rupees crores
and represent the last day of the specified report ing period.
Asset Turnover
This figure represents how many dollars in revenue a company
has generated per dollar of assets. It is calculated by dividing total
revenues for the period by total assets for the same period. In
comparison, the industry average and S&P 500 are shown for the
most recent fiscal year. Asset turnover can give an indication of
how efficient a company is. A high asset turnover, which
expresses how many times a company sells-or turns over-its
assets in a year is a sign of high efficiency.Balance Sheet
Balance sheet represents how much a company owns (equivalent
to its assets), how much it owes (equivalent to its liabilities) and
the difference between the two i.e. equity, which is part owned
by shareholders.
Book Value
Book value is also known as equity or net worth which is the same
as total assets minus total liabilities. Book value per share is net
worth divided by shares outstanding and shows how much of
equity is represented by each share of stockCapital Expenditure
Capital expenditure is the money invested by the company in the
future growth of its business and includes land, plant, equipments,
intellectual property rights etc.
Cash Flow
Cash Flow shows the movement of cash in and out o f a business
from day-to-day operations and other indirect effects, such as
capital expenditure, tax and dividend payments etc. Cash flow
adjusts the income figures to a cash basis after including operating
differences such as depreciation, but before adjusting forinvestments (such as purchases of plants or equipment) or
financing.
Current Assets
Current assets include cash and anything that is expected to be
converted into cash within twelve months of the balance sheet
date. Current assets when used in comparison with current
liabilities is a good measure of company's short term liquidity.
Current Liabilit ies
Current liabilit ies are liabilities which the company expects to pay
within twelve months of the balance sheet date on account oftrade creditors, dividend etc. Current liabilities when used in
comparison with current assets is a good measure of company's
short term liquidity.
USERS GUIDE
Current Ratio
Current ration is equal to current assets divided by current liabilities
and is a measure of company's liquidity of a business, i.e. its abilityto meet its short-term obligations. Also referred to as the Liquidity
Ratio.
Debt to equity ratio
Debt/equity ratio equals company's total debt (including short term
and long term obligations) divided by shareholders equity (also
known as networth). This ratio indicates the amount of liabilities
the business has for every rupee of shareholders' equity. This
ratio is a good indicator of a business's capacity to repay its creditors
and is considered very important by most term lenders.
Depreciat ionDepreciation is a non cash charge taken against company's profit
for the deterioration of its asset value over its useful life
Div idend
Portion of profits that a company distributes to its shareholders.
Dividend payout ratio indicates percentage of the earnings paid to
shareholders in cash.
Dividend Yield %
The dividends per share of the company over the trailing one-
year period as a percentage of the current stock price
Earnings per share (EPS)
EPS is the amount of profit a company earns from its continuing
operations in a given year divided by the average number of shares
outstanding.
EBIDTA
EBIDTA (Earnings before interest depreciation and amortization)
is calculated by looking at earnings before the deduction of interest,
tax, depreciation amortization expenses. EBIDTA is useful in
analysis companies that have large amounts of fixed assets which
are subject to heavy depreciation charges (such as manufacturing
companies) or in the case where a company has a large amount ofacquired intangible assets on its books and is thus subject to large
amortization charges (such as a company that has purchased a
brand or a company that has recently made a large acquisition).
Enterprise Value (EV)
EV is a measure of what the market believes a company's ongoing
operations are worth. Enterprise value is equal to (company's
market capitalization + debt - cash and cash equivalents). EV is of
significant importance to both individual investors and potential
acquirers considering a takeover of the company.
EV/ EBITDA
EV/EBITDA is the enterprise value of a company divided by
earnings before interest tax depreciation and amortisation. EV/
EBITDA has an edge over P/E ratio as it is unaffected by company's
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financing structure as it compares the value of the business, free
of debt to earnings before interest. If a business has debt, a buyer
of that business clearly needs to take that debt into account in
valuing the business, which the EV reflects.
Forw ard P/ EA stock's current price div ided by the EPS estimate for the next
fiscal year. This ratio indicates how cheap or expensive a stock is
as compared to forward earnings estimates. The lower the forward
P/E, the cheaper the stock.
Intangible assets
Intangible assets as distinguished from tangible assets includes
items like goodwill, trademark, or patent and do not have any
physical existence
Free Reserves
Free reserves are profits retained by a company in its books and isavailable for d istribution to shareholders. These reserves do not
include capital redempt ion reserve, or asset revaluation reserve.
Leverage
Leverage is company's long-term debt in relation to equity in its
capital structure. The larger the long-term debt, the higher the
leverage.
Leveraged Company
A company which has higher proportion of debt in its capital
structure.
Market Capit alization
Market capitalization represents the total market value of the
company at the current price, of the total number of equity shares
issued by a company.
Net Profit
The final profit of a company, after all deductions including interest,
depreciation and taxes. It is also knows as the bot tom line.
Net profit margin
Net profit m argin is a measure of a company's profitability and
efficiency and is calculated by dividing net profits by sales.
P/ E Rati o (or Price-Earnings Rati o)
Market price per share divided by the firm 's earnings per share. It
is the most commonly used valuation tool and shows how much
investors are willing to pay for a rupee earned by the company.
PEG Ratio
PEG ratio is arrived by dividing forward P/E of a stock by its
projected EPS growth. PEG ratio represents how much the
investors are paying for company's growth.
Price/ Book Ratio
Price/Book Ratio compares a stock's market value to the value oftotal assets less total liabilit ies (book). It is also called market-to-
book and still is a popular tool and measures tangible assets of the
company.
Quick Ratio
The quick ratio is defined as current assets minus inventories and
then divided by current liabilities. It measures the liquidity of a
company and indicates whether the company can meet its
obligations from the current assets. It is also known as the acidtest ratio.
Return on Equity (ROE) or Return on Networth (RONW)
Return on equity is an important financial ratio & indicates how
well the company firm has used reinvested earnings to generate
additional earnings.
Return on Assets (ROA)
Return on Assets is equal to the net income divided by assets and
indicates how much profit a company generates on its total assets.
Unlike ROE, ROA does not get impacted by the firm taking in
more debt.
Return on capital employed (ROCE)
ROCE is a fundamental financial performance measure and is
arrived by dividing profit before interest against the money that is
invested in the business. (profit before interest and tax/capital
employed x 100) which indicates how much profit the company
is generating at the operating level.
Revenue Growth
Revenue growth represents the rate of revenue growth over the
trailing one-year period and gives a good picture of the rate at
which companies have been able to expand their businesses.
Retained Earnings
Retained earnings are part of a company's earnings which is not
distributed as dividends but held back and accumulated for its
growth.
Share
A share is one unit of ownership of a company.
Shareholders' funds
A measure of the shareholders' total interest in the company
represented by the total share capital plus reserves.
Tangible Assets
Tangible assets are assets that have a physical existence, like
cash, gold, real estate, machinery, etc.
Total Revenue
Revenue is a measure of how much money a company has brought
in within a given period. It is used in the context of revenue figures
for previous years and quarters and is a common w ay to measure
the size of a company.
Yield
Yield is arrived at by dividing the annual dividend per share by the
current stock price and displayed as a percentage.
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How should I use the detailed company reports for my investments?
The detailed company report is an ideal product for a long-term investor who is looking for decent returns over the next six to 18 months.
How do you select t he company and how are the recommendations made?The detailed company reports are prepared by analysts who are specialists in that particular sector and who have deep understanding of
the sector dynamics, business fundamentals, industry trends, etc. Every report is made only after meeting the management of the
company and understanding the future prospects. Detailed forecasting of the profit and loss and balance sheet is done subsequently to
give a fair picture of the future of the company to the investors.
What should I do if t he stock is above the recommended price?
You can buy the stock even if the stock has moved up by 10-15% after recommendation. An investor should look at the upside potential
from his entry price considering the target price. For example if the recommended price is Rs 100 and the target price is Rs 150 and the
current market price is Rs 115, one can still enter the stock for an upside potential of Rs 35.
When should I book profits?
Ideally one should w ait for the target price to be achieved. However, if you are satisfied with the profits you may exit the stock.
The recommended stock has not moved up for quite some time. What should I do?We come up with updates every quarter and you should look for any change in recommendation. If for some reason the performance fails
to live up to the expectation we may revise the rating and advise an appropriate action in the stock.
What happens if the stock falls below the recommended price?
Typically there will be few cases when the stock will fall below the recommended price. As the stock is for the long-term one should hold
on to the stock. However, due to some unforeseen circumstances the stock falls below the recommended price we would communicate
the next action in the updates.
What should I understand from the Profit and Loss Account, and Balance Sheet numbers?
See page 2.
How much money should I invest in one stock?
One should not invest more than 5-10% of the total investible surplus in one stock. For example if you have Rs 100,000 to inves t, not
more than Rs 5000-Rs 10,000 should be invested in the stock.
FAQs ABOUT DETAILED COMPANY REPORTS
Harendra Kumar Head - Research and Content harendra.kumar@icicidirect.com
ICICIdirect Research Desk
ICICI Brokerage Services Limited,
2nd Floor, Stanrose House,
Appasaheb M arathe Road,
Prabhadevi, Mumbai - 400 025
research@icicidirect.com
PH/15/12/06
Discla imer
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IBSL shall have no liability for any loss or injury caused either in whole or in part by acts, omissions or conditions beyond its control in procuring,compiling, delivering information or any omissions, errors or inaccuracies in the information or delays, interruptions in delivery of the informationor any decision made, action taken or damage caused in reliance upon the information furnished herein.
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