6 is 1 Ivy Publishing 9816B007 ANANDAM MANUFACTURING COMPANY: ANALYSIS OF FINANCIAL STATEMENTS the c dood to a mes and other Vinay Goyal and Surat Kumar Mewa y to provide Austrate the effective or ineffective handling of a managerial situation. The authors may have n g information to protect confidential This publication may not be r e d photocopied dig or other produced permission of the copyright holder Reproduction of this materials not covered under Orgon. To s e proto reproduce material contact University, London, Ontario, Canada, NEGON: 519.661.3208 ) cases@veca s by any means thout the by any reproduction s u s School Wester .com Version 2018-04-06 Copyright 2016, Richard Ivey School of Business Foundation In July 2015, Anand Agarwal, owner of the Anandam Manufacturing Company (Anandam), approached the local bank for additional funding of 850 million to meet the growing requirements of his garment manufacturing company. After a fourfold increase in revenue from 2 million to 8 million in three years and a phenomenal increase in profit after taxes (PAT) from 20.364 million to 70.84 million during the same period, Agarwal confidently discussed the financial needs of his company In a lengthy and healthy discussion with the bank manager. Agarwal explained the development of his company and the dynamics and growth opportunities of the garment and textile market in India. Agarwal proudly presented the performance of his company to the bank manager, which he believed was excellent in a highly competitive industry environment. The han manager handed over the financial records of Anandam, including an income statement and balance sheet (see Exhibits 1 and 2). to his loan officer and ensured Agarwal that once the documents were processed and analyzed, he would get back to him in the coming weck. He instructed the loan officer o process the loan application submitted by Agarwal as soon as possible and inform him about the decision taken by the bank INDIAN GARMENT MANUFACTURING SECTOR India was the second-largest producer of garments in the world. The textile sector in India contributed 24 per cent of the world's spindle capacity and 8 per cent of the global rotor capacity. By 2021, this industry was expected to grow in size to US$223 billion. An ample availability of raw materials and a skilled workforce had helped the country become a lucrative centre for the world garment industry The Indian textile sector contributed 4 per cent to the gross domestic product of the country. 14 percent of India's industrial production came from this industry and 27 per cent of its foreign exchange inflows INR - Indian rupee:US$1 754.03 as of July 31, 2015 All dollar amounts on US dollars Corporate Catalyst India Pvt L. A Brel Report on Textile Industry www . ndustr i a per 2 2015 11. 2015 Page 2 98168007 came from the Indian textile sector. More than 45 million people were directly or indirectly employed in the garment industry. Demand for garments in the domestic market, as well as in the international market had strengthened the growth prospects of the textile sector. In 2014, cloth production in the Indian textile mill segment grew by 6 per cent, and the production of man-made fibre increased by 4 percent. It was anticipated that the textile and garment manufacturing segment was set for strong robust growth, which was also supported by data. The industry average of key ratios also illustrates that the financial performance of companies in the textile segment are reasonably constant and stable (see Exhibit) In the past three years, the textile market in India had registered growth of approximately 14.58 per cent In FY2013/14, the Indian garment industry attracted foreign direct investment worth S1 billion, and a textile industry expert had anticipated that the exports of garments from India would reach S60 billion in the next three years. This would be supported by increased labour costs in China aprovements in demand from the United States, and improvement in the quality of products manufactured in India. An approximate 12 per cent higher growth over 2012-13 was achieved in 2013-14 in the expert of textile products in India, which touched the encouraging figure of $35.4 billion. The United States had been the primary market for Indian garment exporters. CHALLENGES FACED BY THE INDIAN TEXTILE INDUSTRY The Indian textile industry faced many challenges, including: a dearth of trained employees, a shortage of energy and simultaneously increasing costs of energy high transportation costs, ambiguous and obsolete labour laws outdated technology and reluctanee by industries to implement new technologies, and a lack of economies of scale. correla s co ANANDAM MANUFACTURING COMPANY Established in 2012. Anandam was in the business of garment manufacturing specializing in formal party dresses for girls up to 12 years of age. Agarwal, a qualified textile engineer who had worked for almost 12 years in a local garment manufacturing company, had left his job to open this small manufacturing unit, together with some of the skilled labourers he had known for many years. He was aware that competition was stiff in the sector, as both small-scale units and large-scale manufacturing units were present up to 12 years of acturing company had known Agarwal felt that there was a dearth of good quality dresses in the market. He was confident that if he provided innovative and modem garments to customers at reasonable prices, a sizable share of the market still not penetrated by large companies could be captured. He was also aware that opportunities were growing in this segment. India Brand Equity Foundation Textiles and are 15 August 2015 Apr 1 2016 www.belong download Textes and Apparel August 2015 Alessandra M andland Ravi Srivastava Labour Regimes in the Indian Gao Sector London UK Cance for Development Policy and Research SOAS. University of London October 2015 March 31, 2016 www. publicationsreporte106027 Corporate Catalyst india Pvt Ltd. op. 10 Page 3 98168007 Agarwal was familiar with the complete process of garment manufacturing, so he had no great difficulty starting the enterprise. With limited capital of 1.2 million, he opened for business in April 2012 at his residential premises, half of which he had converted into a small factory. The installation of machines and the procurement of raw materials were not challenging tasks for him, and he was able to arrange for all the resources required for manufacturing without encountering any obstacles. The only problem he faced was getting a stylish designer who could help him in designing new, modem dress styles for children. He felt that his exposure to design was inadequate therefore, he recruited Ragini lyer, a young fashion designer who had taken a course in fashion designing With the commitment of Ragini, a team of dedicated, skilled labourers, and the experience and expertise of Agarwal, the manufacturing unit suddenly started getting orders in numbers beyond its expectations The fresh and new creative designs, good-quality fabrics, and fine finishing details spurred demand for the dresses, and the business started to grow. FINANCIAL SITUATION OF ANANDAM Financial liquidity and funding problems started increasing with the growth of the business. Agarwal began to face funding problems due to: the working capital required for regular purchases of raw materials, excessive credit periods granted to customers. a shortage of funds for purchasing new machines required for manufacturing, and insufficient factory space. In 2012, when he started the business, Agarwal incorporated the company as a private limited company where he and his wife were the only shareholders, they had shares of 12 million. He borrowed funds during that year in the form of mortgage loan and used the bomowed funds for both the short-term and long-term requirements of the husiness. The total amount borrowed by the company during 2012 was 80.736 million (taken against the mortgage of his assets, which had a value of 1.9 million). As the business expanded in subsequent years and the asset requirements increased, he continued to borrow money from the bank. In the second year, the loan from the mortgage was 1.236 million in the third year, it was 2.5 million. Agarwal had little difficulty in procuring the mortgage loan, as the mortgaged value of his assets was quite high, and he also provided collateral security this residential house) to the bank. With positive cash flows from operations, interest serving on the loans was also not much of a problem. Agarwal was not particulady cognizant of the financial nuances of long-term or short-term louns, so he simply continued to withdraw money and to use the funds wherever the need was felt A part-time accountant maintained the financial records of Anandam The accountant kept daily accounting records, including vouching, cash maintenance, receipts, and payments for the company, and prepared monthly, quarterly, and annual financial statements as per statutory requirements. His financial statements were audited by a professional accountant. The business was generating profits after all the expenses and interest payments, so Agarwal was happy and always felt like a sucessful entrepreneur FUTURE PROSPECTS Analysts believed that the domestic and export demand would lead the Indian Textile and garment sector to the S220 billion mark by 2020. An increase in consumerism and disposable income was causing the Page 4 9816B007 retail sector to undergo rapid growth. Many national and international players were entering the Indian textile market. A compound annual growth rate of more than 13 per cent was expected in the apparel segment over the next 10-year period The various drivers that enabled the growth of the textile sector in the Indian market were the following: Increases in per capita income and demographic distribution A shift among the youth towards branded products and changes in the lifestyle of the general population Superior quality products Favourable trade policies. Increased opportunities for exports. Increases in cloth production due to demand in the local market. Growth in the retail sector due to increases in the consumerism and disposable income of the population The government of India being determined to provide training for approximately 2.7 million people in their integrated skill development scheme. This scheme, as per the 2012-17 ve year plan, would cover subsectors of the textile industry, including apparel, handlooms, jute, scriculture, and handicrafts." PROPOSAL TO THE BANK: CURRENT SCENARIO Agarwal urgently needed the loan to meet the cash and investment requirements of the business. He submitted a detailed proposal and project report to the bank, along with the financial statements of previous years As the business expanded and the number of clients increased, his financial problems had also increased Agarwal's credibility in the market was good, so he had no problem procuring the necessary raw materials, but he faced a problem when trying to collect money from his customers because he had no structured system for keeping track of extensions of credit periode. He had also begun to observe stock piling up in his factory, as the orders were either not dispatched or the customers delayed delivery. His machines were also getting old, and he felt that the time had come to replace them with new ones that were modem and more efficient. The factory space was not sufficient, and a larger location was essential New skilled labourers and some additional staff members were also required to support his expansion plans All in all, Agarwal faced a severe need for additional financing of 50 million at a minimum to continue with smooth operations and to expand his business Eagerly awaiting the decision of the bank, which he was anticipating would be favourable, Agarwal satin his office and envisaged taking Anandam to new heights. The Planning Commission was set up by a resolution of the government of India in March 1950 in pursuance of the declared objectives of the government to promote a rapid rise in the standard of living of the people by efficiency exploring the resources of the country, increasing production and offering opportunities to for employment in the service of the community. The Planning Commission was charged with the responsity of making an assessment of sources of the county augmenting deficient sources formulating plans for the most active and balanced on f u rces and determining priorities. The new Modi government in India announced the formation of the NITI Aayog na t ion for Transforming India by S on of the Plan Commission S t ory Pang Canon November 2014 accessed February 3, 2016. planningcommission.nic.in about history index.php?aboutboudy. 98168307 EXHIBIT 1: INCOME STATEMENT, APRIL 1 TO MARCH 31 (IN THOUSANDS) 2012-13 2013-14 2014-15 200 480 4320 4 800 2832 1.968 800 7200 8.000 4 800 3.200 1 240 Credit Total sales Cost of goods sold Gross profit Operating expenses General, administration, and selling expenses Depreciation Interest expenses (on borrowings) Profit before tax PBT) Tax 30% Profit after tax (PAT) 450 1.000 100 660 400 158 960 288 672 340 1200 360 156 364 840 Source: Company's audited financial statement EXHIBIT 2: BALANCE SHEET (IN THOUSANDS) 2012-13 2013-14 2014-15 Assets 1,900 4.700 Fixed assets (net of depreciation) Current assets Cash and cash equivalents Accounts receivable Inventories 2.500 100 1,500 1.500 40 300 320 106 2,100 2.250 2.560 5,600 Total Equity & Liabilities 9.156 1.600 1,036 Equity share capital (shares of 10 each) Reserve & surplus Long-term borrowings Current liabilities Total 1.236 2.000 1876 2 500 2.780 1.728 5.600 Source Company's audited francial statement Page 6 9B16B007 EXHIBIT 3: INDUSTRY AVERAGE OF KEY RATIOS Ratio Sector Average 2.30:1 Current ratio 1.20:1 Acid test ratio (quick ratio) Receivable turnover ratio 7 times Receivable days 52 days Inventory turnover ratio 4.85 times Inventory days 75 days 24% Long-term debt to total debt Debt-to-equity ratio Gross profit ratio 35% 40% Net profit ratio 18% Return on equity Return on total assets 2 Total asset turnover ratio Fixed asset turnover ratio Current asset turnover ratio Interest coverage ratio (times interest earned) Working capital turnover ratio Return on fixed assets 10 8 24% Source: Computed by the authors using the Prowess database from https//prowess cmie.com CMIE, accessed March 22, 2016, Case: Anandam Manufacturing Company: Analysis of Financial Statements 1. Prepare and analyze the common size statement of the company 2. Compute and analyze the trend analysis of the company. 3. Compute the ratios and compare them with the industry's ratios; would you, as a loan officer, grant a loan to the company? 4. What areas of improvement would you suggest for the future? 6 is 1 Ivy Publishing 9816B007 ANANDAM MANUFACTURING COMPANY: ANALYSIS OF FINANCIAL STATEMENTS the c dood to a mes and other Vinay Goyal and Surat Kumar Mewa y to provide Austrate the effective or ineffective handling of a managerial situation. The authors may have n g information to protect confidential This publication may not be r e d photocopied dig or other produced permission of the copyright holder Reproduction of this materials not covered under Orgon. To s e proto reproduce material contact University, London, Ontario, Canada, NEGON: 519.661.3208 ) cases@veca s by any means thout the by any reproduction s u s School Wester .com Version 2018-04-06 Copyright 2016, Richard Ivey School of Business Foundation In July 2015, Anand Agarwal, owner of the Anandam Manufacturing Company (Anandam), approached the local bank for additional funding of 850 million to meet the growing requirements of his garment manufacturing company. After a fourfold increase in revenue from 2 million to 8 million in three years and a phenomenal increase in profit after taxes (PAT) from 20.364 million to 70.84 million during the same period, Agarwal confidently discussed the financial needs of his company In a lengthy and healthy discussion with the bank manager. Agarwal explained the development of his company and the dynamics and growth opportunities of the garment and textile market in India. Agarwal proudly presented the performance of his company to the bank manager, which he believed was excellent in a highly competitive industry environment. The han manager handed over the financial records of Anandam, including an income statement and balance sheet (see Exhibits 1 and 2). to his loan officer and ensured Agarwal that once the documents were processed and analyzed, he would get back to him in the coming weck. He instructed the loan officer o process the loan application submitted by Agarwal as soon as possible and inform him about the decision taken by the bank INDIAN GARMENT MANUFACTURING SECTOR India was the second-largest producer of garments in the world. The textile sector in India contributed 24 per cent of the world's spindle capacity and 8 per cent of the global rotor capacity. By 2021, this industry was expected to grow in size to US$223 billion. An ample availability of raw materials and a skilled workforce had helped the country become a lucrative centre for the world garment industry The Indian textile sector contributed 4 per cent to the gross domestic product of the country. 14 percent of India's industrial production came from this industry and 27 per cent of its foreign exchange inflows INR - Indian rupee:US$1 754.03 as of July 31, 2015 All dollar amounts on US dollars Corporate Catalyst India Pvt L. A Brel Report on Textile Industry www . ndustr i a per 2 2015 11. 2015 Page 2 98168007 came from the Indian textile sector. More than 45 million people were directly or indirectly employed in the garment industry. Demand for garments in the domestic market, as well as in the international market had strengthened the growth prospects of the textile sector. In 2014, cloth production in the Indian textile mill segment grew by 6 per cent, and the production of man-made fibre increased by 4 percent. It was anticipated that the textile and garment manufacturing segment was set for strong robust growth, which was also supported by data. The industry average of key ratios also illustrates that the financial performance of companies in the textile segment are reasonably constant and stable (see Exhibit) In the past three years, the textile market in India had registered growth of approximately 14.58 per cent In FY2013/14, the Indian garment industry attracted foreign direct investment worth S1 billion, and a textile industry expert had anticipated that the exports of garments from India would reach S60 billion in the next three years. This would be supported by increased labour costs in China aprovements in demand from the United States, and improvement in the quality of products manufactured in India. An approximate 12 per cent higher growth over 2012-13 was achieved in 2013-14 in the expert of textile products in India, which touched the encouraging figure of $35.4 billion. The United States had been the primary market for Indian garment exporters. CHALLENGES FACED BY THE INDIAN TEXTILE INDUSTRY The Indian textile industry faced many challenges, including: a dearth of trained employees, a shortage of energy and simultaneously increasing costs of energy high transportation costs, ambiguous and obsolete labour laws outdated technology and reluctanee by industries to implement new technologies, and a lack of economies of scale. correla s co ANANDAM MANUFACTURING COMPANY Established in 2012. Anandam was in the business of garment manufacturing specializing in formal party dresses for girls up to 12 years of age. Agarwal, a qualified textile engineer who had worked for almost 12 years in a local garment manufacturing company, had left his job to open this small manufacturing unit, together with some of the skilled labourers he had known for many years. He was aware that competition was stiff in the sector, as both small-scale units and large-scale manufacturing units were present up to 12 years of acturing company had known Agarwal felt that there was a dearth of good quality dresses in the market. He was confident that if he provided innovative and modem garments to customers at reasonable prices, a sizable share of the market still not penetrated by large companies could be captured. He was also aware that opportunities were growing in this segment. India Brand Equity Foundation Textiles and are 15 August 2015 Apr 1 2016 www.belong download Textes and Apparel August 2015 Alessandra M andland Ravi Srivastava Labour Regimes in the Indian Gao Sector London UK Cance for Development Policy and Research SOAS. University of London October 2015 March 31, 2016 www. publicationsreporte106027 Corporate Catalyst india Pvt Ltd. op. 10 Page 3 98168007 Agarwal was familiar with the complete process of garment manufacturing, so he had no great difficulty starting the enterprise. With limited capital of 1.2 million, he opened for business in April 2012 at his residential premises, half of which he had converted into a small factory. The installation of machines and the procurement of raw materials were not challenging tasks for him, and he was able to arrange for all the resources required for manufacturing without encountering any obstacles. The only problem he faced was getting a stylish designer who could help him in designing new, modem dress styles for children. He felt that his exposure to design was inadequate therefore, he recruited Ragini lyer, a young fashion designer who had taken a course in fashion designing With the commitment of Ragini, a team of dedicated, skilled labourers, and the experience and expertise of Agarwal, the manufacturing unit suddenly started getting orders in numbers beyond its expectations The fresh and new creative designs, good-quality fabrics, and fine finishing details spurred demand for the dresses, and the business started to grow. FINANCIAL SITUATION OF ANANDAM Financial liquidity and funding problems started increasing with the growth of the business. Agarwal began to face funding problems due to: the working capital required for regular purchases of raw materials, excessive credit periods granted to customers. a shortage of funds for purchasing new machines required for manufacturing, and insufficient factory space. In 2012, when he started the business, Agarwal incorporated the company as a private limited company where he and his wife were the only shareholders, they had shares of 12 million. He borrowed funds during that year in the form of mortgage loan and used the bomowed funds for both the short-term and long-term requirements of the husiness. The total amount borrowed by the company during 2012 was 80.736 million (taken against the mortgage of his assets, which had a value of 1.9 million). As the business expanded in subsequent years and the asset requirements increased, he continued to borrow money from the bank. In the second year, the loan from the mortgage was 1.236 million in the third year, it was 2.5 million. Agarwal had little difficulty in procuring the mortgage loan, as the mortgaged value of his assets was quite high, and he also provided collateral security this residential house) to the bank. With positive cash flows from operations, interest serving on the loans was also not much of a problem. Agarwal was not particulady cognizant of the financial nuances of long-term or short-term louns, so he simply continued to withdraw money and to use the funds wherever the need was felt A part-time accountant maintained the financial records of Anandam The accountant kept daily accounting records, including vouching, cash maintenance, receipts, and payments for the company, and prepared monthly, quarterly, and annual financial statements as per statutory requirements. His financial statements were audited by a professional accountant. The business was generating profits after all the expenses and interest payments, so Agarwal was happy and always felt like a sucessful entrepreneur FUTURE PROSPECTS Analysts believed that the domestic and export demand would lead the Indian Textile and garment sector to the S220 billion mark by 2020. An increase in consumerism and disposable income was causing the Page 4 9816B007 retail sector to undergo rapid growth. Many national and international players were entering the Indian textile market. A compound annual growth rate of more than 13 per cent was expected in the apparel segment over the next 10-year period The various drivers that enabled the growth of the textile sector in the Indian market were the following: Increases in per capita income and demographic distribution A shift among the youth towards branded products and changes in the lifestyle of the general population Superior quality products Favourable trade policies. Increased opportunities for exports. Increases in cloth production due to demand in the local market. Growth in the retail sector due to increases in the consumerism and disposable income of the population The government of India being determined to provide training for approximately 2.7 million people in their integrated skill development scheme. This scheme, as per the 2012-17 ve year plan, would cover subsectors of the textile industry, including apparel, handlooms, jute, scriculture, and handicrafts." PROPOSAL TO THE BANK: CURRENT SCENARIO Agarwal urgently needed the loan to meet the cash and investment requirements of the business. He submitted a detailed proposal and project report to the bank, along with the financial statements of previous years As the business expanded and the number of clients increased, his financial problems had also increased Agarwal's credibility in the market was good, so he had no problem procuring the necessary raw materials, but he faced a problem when trying to collect money from his customers because he had no structured system for keeping track of extensions of credit periode. He had also begun to observe stock piling up in his factory, as the orders were either not dispatched or the customers delayed delivery. His machines were also getting old, and he felt that the time had come to replace them with new ones that were modem and more efficient. The factory space was not sufficient, and a larger location was essential New skilled labourers and some additional staff members were also required to support his expansion plans All in all, Agarwal faced a severe need for additional financing of 50 million at a minimum to continue with smooth operations and to expand his business Eagerly awaiting the decision of the bank, which he was anticipating would be favourable, Agarwal satin his office and envisaged taking Anandam to new heights. The Planning Commission was set up by a resolution of the government of India in March 1950 in pursuance of the declared objectives of the government to promote a rapid rise in the standard of living of the people by efficiency exploring the resources of the country, increasing production and offering opportunities to for employment in the service of the community. The Planning Commission was charged with the responsity of making an assessment of sources of the county augmenting deficient sources formulating plans for the most active and balanced on f u rces and determining priorities. The new Modi government in India announced the formation of the NITI Aayog na t ion for Transforming India by S on of the Plan Commission S t ory Pang Canon November 2014 accessed February 3, 2016. planningcommission.nic.in about history index.php?aboutboudy. 98168307 EXHIBIT 1: INCOME STATEMENT, APRIL 1 TO MARCH 31 (IN THOUSANDS) 2012-13 2013-14 2014-15 200 480 4320 4 800 2832 1.968 800 7200 8.000 4 800 3.200 1 240 Credit Total sales Cost of goods sold Gross profit Operating expenses General, administration, and selling expenses Depreciation Interest expenses (on borrowings) Profit before tax PBT) Tax 30% Profit after tax (PAT) 450 1.000 100 660 400 158 960 288 672 340 1200 360 156 364 840 Source: Company's audited financial statement EXHIBIT 2: BALANCE SHEET (IN THOUSANDS) 2012-13 2013-14 2014-15 Assets 1,900 4.700 Fixed assets (net of depreciation) Current assets Cash and cash equivalents Accounts receivable Inventories 2.500 100 1,500 1.500 40 300 320 106 2,100 2.250 2.560 5,600 Total Equity & Liabilities 9.156 1.600 1,036 Equity share capital (shares of 10 each) Reserve & surplus Long-term borrowings Current liabilities Total 1.236 2.000 1876 2 500 2.780 1.728 5.600 Source Company's audited francial statement Page 6 9B16B007 EXHIBIT 3: INDUSTRY AVERAGE OF KEY RATIOS Ratio Sector Average 2.30:1 Current ratio 1.20:1 Acid test ratio (quick ratio) Receivable turnover ratio 7 times Receivable days 52 days Inventory turnover ratio 4.85 times Inventory days 75 days 24% Long-term debt to total debt Debt-to-equity ratio Gross profit ratio 35% 40% Net profit ratio 18% Return on equity Return on total assets 2 Total asset turnover ratio Fixed asset turnover ratio Current asset turnover ratio Interest coverage ratio (times interest earned) Working capital turnover ratio Return on fixed assets 10 8 24% Source: Computed by the authors using the Prowess database from https//prowess cmie.com CMIE, accessed March 22, 2016, Case: Anandam Manufacturing Company: Analysis of Financial Statements 1. Prepare and analyze the common size statement of the company 2. Compute and analyze the trend analysis of the company. 3. Compute the ratios and compare them with the industry's ratios; would you, as a loan officer, grant a loan to the company? 4. What areas of improvement would you suggest for the future