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FINANCIAL PERFORMANCE ANALYSIS OF SUGAR INDUSTRY WITH SPECIAL REFERENCE TO BANNARI AMMAN SUGAR LTD

ABSTRACT

Indian sugar industry is the 2nd largest agro-industry with approximately 50 million sugarcane farmers and a large number of agricultural labourers (7.5% of the rural population) involved in sugarcane cultivation and ancillary activities. The agro based sugar mills play an important role in the economic growth of rural areas with the sole aim to generate large scale direct employment. The sugar industry covers around 7.5% of the total rural population, and provides employment to 5 lakh rural people. About 4.5 crore farmers are engaged in sugarcane cultivation in India. Sugar mills (cooperative, private, and public) have been instrumental in initiating a number of entrepreneurial activities in rural India. The increasing demand for sugar depends on the competence of sugar companies in meeting the demand. This necessitated a study with regards to the performance of the Indian sugar companies in perspective of their profitability and growth to cater to the demand. An attempt has been made by the researcher to evaluate the financial performance Analysis of Sugar Industry to understand how management of finance plays a crucial role in the growth.

Keywords: Short- Term & Long Term Solvency Ratios, Liquidity, Profitability Ratios.

INTRODUCTION

Indian sugar industry is the 2nd largest agro-industry with approximately 50 million sugarcane farmers and a large number of agricultural laborers (7.5% of the rural population) involved in sugarcane cultivation and ancillary activities. The agro based sugar mills play an important role in the economic growth of rural areas with the sole aim to generate large scale direct employment. Apart from that, a lot of indirect employment to rural population is also provided. Tamil Nadu sugar industry is responsible for about 10% of the total sugar production in India. Majority of the sugar units in Tamil Nadu lies with the cooperative sector, with some private player's also gathering momentum. The sugar industry in Tamil Nadu has come out as a tool for economic translation and the government had, therefore decided to set up nine new sugar mills in the state. The new mills have been set up following the guidelines and they will function as integrated sugar complexes. The Company was incorporated on 1st December in Tamil Nadu.  Bannari Amman Sugars (BAS) is engaged in the manufacture of white crystal sugars, industrial alcohol and granite exports. The company has two sugar factories, in Tamil Nadu and Karnataka. The distilleries unit is also situated in Tamil Nadu. The Bannari Amman Sugar Ltd has five units. The sugar cane crushing capacity in all the five units of Bannari Amman Sugars Limited is now 20100 of Cane Crush per day TCD from the initial capacity of 1250 TCD of its first Sugar Unit.

STATEMENT OF THE PROBLEM

The ability of an organization to analyze its financial position is essential for improving its competitive position in the market place. Through a careful analysis of its financial performance, the organization can identify opportunities to improve performance of the department, unit or organizational level. Keeping this background in view, an, attempt has been made by the researcher to evaluate the “Financial performance Analysis of Sugar Industry with special reference to Bannari Amman Sugar Ltd” to understand how management of finance plays a crucial role in the growth.

OBJECTIVES OF THE STUDY

The specific objectives of the study are:

 To analyse the performance of sugar industry in India and Tamil Nadu.

 To measure, the short term financial feasibility of Bannari Amman Sugar Ltd.

 To evaluate, the long term financial feasibility of the company.

 To identify the factors that influences the profitability status of Bannari Amman Sugar Ltd.

METHODOLOGY

   The sample selected for this study is Bannari Amman Sugar Ltd in Tamil Nadu. The study covers five years period 2012-2013 to 2015-2016. The study was based on secondary data.  The major sources of data were collected from the annual reports of Bannari Amman Sugar Ltd different journals and websites. Various articles published in various journals and business magazines were also used for the study. This paper used the descriptive ratio analysis to measure, describe and analyse the financial performance of Bannari Amman Sugar Ltd based on financial statements during the period 2012–13 to 2015–16.

TOOLS FOR ANALYSIS

Financial health of selected company, with reference to liquidity, leverage, activity and profitability was indentified with ‘z' score.  This method gained wide acceptance from auditors, management accountants, courts and database systems used for evaluation.  The ‘z' score examines liquidity, profitability and leverage which are integrated into a single composite score.  This concept is both simple and intuitive.  It was originally developed on a sample of manufacturing companies.  The model uses common financial information such as ‘sales revenue' and ‘total assets' to derive five basic financial ratios.  Each ratio is assigned a weight and summed together to produce the ‘z' score.  Based on the Multi Discriminates Analysis (MDA), the model predicts a company's financial health based on a discriminate function of the firm.

REVIEW OF LITERATURE

Hanchinmani S.N. (1996) has done the financial analysis of co-operative sugar factories in Belgaum district of Karnataka with a sample size of one unit. The annual reports and manufacturing reports from 1990-1994 were used as secondary data. The main objectives were to assess the financial position of cooperative sugar factory under study and to evaluate the financial operations and performances with the help of financial ratios. The study revealed that there were disproportionate relationship between different financial variables and standards; the co-operative sugar factory had a week financial base, more dependent on bank loan; and the professional management yet to step in co-operative sugar factory. V.A. Patil (2002) analyzed the problem of seasonal workers working in selected sugar factories during the period 1997 to 2001. The main objectives of the study were to assess the degree of job satisfaction of the seasonal workers; to analyze the demographical statues of the seasonal workers. The study revealed that the majority (66%) of the seasonal workers were young and were in between 20 years to 30 years; 32 percent were working in manufacturing section; 27 percent in engineering department; 17 percent in agriculture; 57 percent of them had more than 10 years experience; the degree of job satisfaction was 79 percent; and 81 percent told job was not boring. Daxa Gohil (2005) examined the transaction cost vis-a-vis financial performance of sugar industry in India. The study was based on secondary data of the private sugar mills working in India during the period form 2000-01 to 2002-03 with a sample size of 44 private sector sugar mills. The main objectives behind the study were to examine the role of transformation vis-à-vis transaction cost in economic and financial performance (was tested based on regression model) of the Indian private sugar industry; and to bring out the policy implication of transaction cost approach for future development of sugar industry. In order to examine the relationship across the financial variables the parameters used were: (i) Return on Total Assets (RTA-Y 1) and Return on Total Sales (RTS-Y2). The author's concluding remark was that the financial variables related to transformation costs and transaction costs (in advertising, marketing and bad debts) and transaction costs based on sugar production were statistically highly significant. Hence, the transaction costs influencing the financial performance at greater extent. Basavraj S. Benni (2005) studied the physical and financial performance of twelve co-operative sugar factories during 2001-02 with the help of Ratio Analysis and Multivariate Econometric Technique Method. The study revealed that the physical and financial performance indicators influenced the total performance of sugar co-operative factories and concluded with a remark that in the total sugar production cost, cane conversion cost was greater than the cane cost. Sheeba Kapil's (2007) paper is to review and analyze the current financial health of the Indian Public Sector Commercial Banks in the light of banking reforms and predict the future and scope of the same. The viability of the 27 public sector banks has been analyzed on the basis of offsite supervisory exam model i.e., CAMEL Model (c for capital adequacy, A for Asset quality, E for Earnings and L for Liquidity). These four components of each bank have been analyzed and rated on a scale to judge the composite rating of the same. After years of economic and banking reforms, the Indian Banking sector has still miles to go. Low Profitability, Liquidity, and capital adequacy and high none performing assets will definitely make the majority of Indian banks bad bargain in near future. Singla (2008) examines that how financial management plays a crucial role industrialists growth of banking. It is concerned with examining the profitability position of the selected sixteen banks of banker index for a period of six years (2001-06). The study reveals that the profitability position was reasonable during the period of study when compared with the previous reasonable during the period of study when compared with the previous year's Strong capital position and balance sheet place. Banks are in better position to deal with and absorb the economic constant over a period of time.

DATA ANALYSIS AND INTERPRETATION

The financial analysis of the company is given under four heads namely, short- term solvency ratios, long-term solvency ratios, profitability ratios and efficiency ratios.

Short- Term Solvency Ratios

Liquidity ratios measure the firm's ability to meet current obligations, as and when they fall due. A firm should ensure that it does not suffer from lack of liquidity and also does not have excess liquidity. In the absence of adequate liquidity, the firm would not be able to pay creditors on the due date. If the firm maintains more liquidity, it will not experience any difficulty in making payments.

SHORT- TERM SOLVENCY RATIOS

Year Current Ratio Quick Ratio

2012 1.29 0.25

2013 1.46 0.25

2014 1.31 0.11

2015 1.27 0.15

2016 1.35 0.25

Mean 1.336 0.202

SD 0.075365775 0.067230945

CV 5.641150803 33.28264617

Source: Computed from Annual Reports

From the above table it can be noted that the ratio is below the conventional standard norm of 2:1 in all the years under study of the Bannari Amman Sugar's Limited.  Hence, the performance of the Bannari Amman Sugar's Limited in term of current ratio is not satisfactory during the study period.  The current ratio of Bannari Amman Sugar's Limited has shown a fluctuating trend.  Decrease and fluctuating trend in current ratio of all the selected company represents less improvement in liquidity position of the firm. it can be found that the quick ratio of Bannari Amman Sugar's Limited for the year 2012-2016 is below the standard norm of 1:1.  This indicates that the firm has faced an acute liquidity crisis during this period.

Profitability Ratios

Profitability ratios measure the profitability of a firm's business operations. These ratios may be related to sales (e.g. Gross profit ratio) or investments (e.g., Return on assets or Return capital employed). The profitability of a fertilizer industry can easily be measured by its profitability ratios. Profitability ratios are the most important and appropriate indicators for the evaluation of the financial performance.

Year Gross Profit Ratio Net Profit Ratio Operating Profit Ratio Expenses Ratio Return on Equity Return on Capital Employed

2012 39.62 8.95 9.53 91.13 12.96 11.54

2013 40.66 10.66 13.05 87.38 15.12 15.98

2014 73.29 4.4 4.94 95.45 3 2.46

2015 39.43 0.77 0.03 102.84 0.1 0.02

2016 34.66 2.21 2.08 99.56 3.45 1.8

Mean 45.532 5.398 5.926 95.272 6.926 6.36

SD 15.68940311 4.268579389 5.344785309 6.227621536 6.664103841 6.992424472

CV 34.45797046 79.07705426 90.19212469 6.536675557 96.21865205 109.943781

PROFITABILITY RATIOS

Source: Computed from Annual Reports

Gross profit ratio of the sample company is presented in above table.  As it could be observed the gross profit ratio of the sample company is highest in the year 2014. However the company has satisfactory level of gross profits and on average basis. Net profit ratio of the sample company shows that among the study period 2013 sustained the highest net profit ratio followed by 2012.  It shows a decreasing trend after 2014. The operating profit ratio of Bannari Amman Sugar Limited showed average progress. The lowest (0.03) was observed in the year 2014 – 15 and the highest ratio (13.05) was evidenced in the year 2013.  It indicates the less operating efficiency of the company. The company can control the expenses after having found the ratios and comparing them with the ratios of the past years.  The effects on profitability of the firm are measured on the basis of the trend of the ratios for some years.  If there is an increasing trend, the reasons therefore should be treated out to control the expenses. It is found form the table above that the ROE shows a fluctuating trend during the study period.  It indicates that the firm better utilizes the owners funds during 2013 compared to other years. ROCE trend of Bannari Amman Sugar Limited shows fluctuating ROCE trend over the study period.  A declining ROCE may point to loss of competitive advantage.

Efficiency or Turnover Ratios

Activity Ratio is also called turnover ratios or asset utilization ratio or efficiency ratios. It is concerned with measuring the efficiency with which asset is managed. It refers to the speed and rapidity with which assets are converted into sales. The greater is the rate of turnover or conversion, the more efficient is the utilization or management of the asset.

 EFFICIENCY OR TURNOVER RATIOS

Year Inventory Turnover Ratio Debtors Turnover Ratio Creditors Turnover Ratio Return on Assets

2012 1.93 7.99 11.6 7.19

2013 1.76 7.53 13.93 10.16

2014 0.55 6.35 9.21 1.4

2015 0.77 4.37 10.09 0.0141

2016 1.14 9.24 14.18 1.058

Mean 1.23 7.096 11.802 3.96442

SD 0.602702 1.842004343 2.2289841 4.455842601

CV 49.00018 25.9583476 18.886494 1.123958259

Source: Computed from Annual Reports

The table above shows a fluctuating trend of inventory turnover ratio of the company during the entire study period.  A relatively low inventory turnover ratio indicates ineffective inventory managements (that is carrying too large inventory) and poor sales or carrying out of date inventory to avoid writing off inventory losses against income. There is a decreasing trend of receivables turnover ratio for the year 2012 – 2015 and it increasing during the year 2016.  The higher value of average receivable turnover is during 2012 indicates that the company is more efficient in management of debtors.  Similarly, low average receivable turnover ratio that shows it has less liquid receivables.It can be noted that the average payable turnover ratio shows fluctuating trend during the study period.  This high ratio indicates that the company is getting less credit from suppliers.  Low payable turnover ratio signifies that if enjoys move credit and able to get extra liquidity. The above table depicts that the ratio of ROA is decreasing from the year 2012 – 2015 and it increases during the year 2016.  It shows there is a low operating efficiency in the firm during the declining trend.

Long Term Solvency Ratios

The long-term financial soundness of any business can be judged by its long-term creditors by testing its ability to pay interest charges regularly and its ability to repay the principal as per schedule.Thus long-term financial soundness (or solvency) of any business is examined by calculating ratios popularly, known as leverage of capital structure ratios. These ratios help us the interpreting repay long-term debt

LONG TERM SOLVENCY RATIOS

Year Debt Equity Ratio Proprietary Ratio

2012 0.52 1.19

2013 0.44 1.41

2014 1.07 1.51

2015 1.24 1.04

2016 1.51 0.81

Mean 0.956 1.192

SD 0.462849868 0.281815543

CV 0.484152581 0.236422435

   

     Source: Computed from Annual Reports

Debt Equity Ratio indicates the extent to which debt financing has been used in business. The debt – equity ratio of the sample company indicates that it is a favourable situation for the firm. The proprietary is shows a fluctuating trend during the study period which indicates that the creditors do not have greater risks about the payment of their debt.

‘T' DISTRIBUTION

H0: There is no association between efficiency and profitability ratios.

H1: There is association between efficiency and profitability ratios.

RELATIONSHIP DEGREE OF FREEDOM LEVEL OF SIGNIFICANT TABLE VALUE CALCULATED VALUE REMARKS

Pearson's correlation between inventory turnover ratio and return on capital employed 3 5% 3.182 5.499 Not significant

Pearson's correlation between operating profit ratio and debtors

turnover ratio 3 5% 3.182 .7058 significant

This is a strong positive correlation, which means that high X variable scores go with high Y variable scores. Although technically a positive correlation, the relationship between your variables is weak as per Pearson's correlation coefficient. Efficiency and profitability ratios of Bannari Amman Sugars Limited is not significant for inventory turnover ratio and return on capital employed as the ‘t' distribution is greater than the critical value of ‘t' distribution at 5% level of significance. Hence, there is association between turnover and profitability ratios. Efficiency and profitability ratios of Bannari Amman Sugars Limited is significant for operating ratio and debtors turnover ratio as the ‘t' distribution is less than the critical value of ‘t' distribution at 5% level of significance. Hence, efficiency ratio is showing a significant impact on profitability ratios.

   H0: The hypothesis is, there is no association between liquidity and profitability ratios.

   H1: The hypothesis is, there is association between liquidity and profitability ratios.

RELATIONSHIP DEGREE OF FREEDOM LEVEL OF SIGNIFICANT TABLE VALUE CALCULATED VALUE REMARKS

Pearson's correlation between quick ratio and return on capital employed 3 5% 3.182 1.394 Not significant

This is a moderate positive correlation, which means there is a tendency for high X variable scores go with high Y variable scores. liquidity and profitability ratios of Bannari Amman Sugars Limited is not significant for quick ratio and return on capital employed as the ‘t' distribution is greater than the critical value of ‘t' distribution at 5% level of significance. Hence, there is association between liquidity and profitability ratios.

ALTMAN ‘Z' SCORE MODEL

Altman introduced the Altman ‘Z' score model a technique designed to predict corporate bankruptcy. Over the past forty years, many academics and practitioners have used the ‘Z' score to test under a wide range of industries and economic environments. At the same time many new methodologies were fact forth that challenged the ‘Z' score as the premier indicator of corporate distress. Indeed the Altman ‘Z' score has stood the test of time while undergoing the rigor of academic scrutiny and has secured its place in corporate finance history. The ‘Z' score analysis focuses on fundamental financial attributes. It is an internationally recognized method, with wide universal acceptance along with frequent use by investors, lenders and analysts.

Z = 0.717 WC / TA + 0.847 RE / TA + 3.107 EBIT / TA +

    0.420 BV / TL + 0.998 SALES / TA

‘Z' SCORE VALUES

Years 2012 2013 2014 2015 2016

Z Score 1.76 1.97 .97 .99 1.08

Source: Computed by the researcher   

A firm is considered to be in ‘Safe Zone' (with future success or

non – bankrupt) if Z > 2.99, ‘Grey' (unpredictable future status) zone if

Z > 1.23 and < 2.99 and in ‘Distress' zone (with future failure or bankrupt) when Z < = 1.23. The ‘Z' scores are based on the revised Altman's ‘Z' score model mentioned above for Banari Amman Sugar Limited as presented in Table. In general, the lower the score, the higher the chance of bankruptcy. For example, a Z-Score above 3.0 indicates financial soundness; below 1.8 suggests a high likelihood of bankruptcy. The ‘Z' score values of Sample Company during the period under review have been depicted in above Table. It shows the ‘Z' score value is within 1.8 to 2.7.  Therefore the company is financially safe at present.

SUGGESTIONS

 It is suggested that there is a need for Sugar industry to adopt better market strategy, by reducing cost and revising selling prices to enhance the value of turnover so as to go ahead in the era of competitions.

 The profitability can be increased by controlling cost or increasing sales.

 To strengthen the financial efficiency, long-term funds have to be used to finance core current assets and a part of temporary current assets. It is better if the company can reduce the over sized short- term loans and advances eliminates the risk arranging finance regularly

 Inventory is the most crucial asset for a manufacturing organisation. Particularly with reference to inventory turnover ratio, the cost of materials in the company  is the major component in production cost and its share is increasing .The managerial efficiency to keep an optimum level of asset lies in maintaining an adequate ratio of assets to turnover

 A systematic, prompt and regular flow of information and its analysis is important for improving productivity, efficiency and profitability. A suitable management information system needs to be evolved which will take care of the data requirement of administrative officers for internal management and control. Appropriate organisational arrangements should be made for the successful implementation of management information system in the company.

 The policy of borrowed financing in the company is not proper. So, the company should use wisely the borrowed funds and should try to reduce the fixed charges burden gradually by decreasing borrowed funds and by enhancing in owners fund.

 To raise the rate of return on capital employed, the company should try to increase the production so as to get economies of large-scale production.

 In order to increase the profitability of the company, it is suggested to control the cost of goods sold and operating expenses. The management should try to adopt cost reduction techniques in their company to get over this critical situation.

 The firm should aim for a targeted sustainable growth for a stable stay in the market.

 To achieve this end, strategies should be evolved to mobilize funds' from the market to finance the additional capacity. The levered position should result in accelerated growth in sales through expanded production capacity resulting immediate cost reduction, high margin of profit, high interest coverage from profits and ultimately increased in the reinvestment capacity.

CONCLUSIONS

Finance is lifeblood of any business, the overall success of any business depends to a major extend on efficient effective management of funds. The present study point out the overall financial position of selected sugar industry is satisfactory, but there is a need for improvement in certain factors. The major portion of the current assets is in the firm of inventory. The investment in current assets should consider liquidity, profitability and solvency. The select sugar industry should also try to maintain adequate quantum of liquidity all the times by keeping considerable portion of current assets. It is very important to trade off between the liquidity and profitability by properly arranging the needed funds at right time, period and source. Financial statement analysis is just a tool to access a company's performance. The efficiency of a firm depends upon the working operations of the concern. Profit earning is considered essential for survival of the business. The financial positions of the selected sugar company are satisfactory. Hence, it can be concluded that the financial ratio of Bannari Amman Sugars Limited have played a vital role in determining the financial performance of the management.  On the whole, if the concerned authorities would earnestly endeavour to manage their respective financial opportunities more effectively along with other management techniques, the performance and the profitability of the companies would scale newer heights in the years to come.

References

• Annual Reports of the selected paper company, 2012-13 to 2015-16.

• KHAN, M.Y, and JAIN P.K., Management Accounting, Tata McGraw – hill Publishing Company Limited, New Delhi (Second Edition).

• SHARMA, R.K and SHASHI, K. GUPTA, Management Accounting Principles and Practice, Kalyani Publishers, Seventh Edition (1996).

• DHEENADHAYALAN, V. (2008), Financial health of authority of India limited: A ‘z' score approach, Indian journal of accounting, Vol. XXXVIX, No. 1, December, pp.48 – 52.

• RAIYANI, T.R. and BHATASNA, R.B. (2011), A study on financial helath of automobile industry in India : A ‘z' score approach, Indian journal of finance, vol. 12, no. 5, January, pp. 9 -12.

• REDDY, Y.V. and ANNIE DEDREQUES, (2008), Measuring financial health – A ‘z' score analysis, the accounting world, Vol. VIII, No. IX, September, pp. 20 – 21.

• REDDY, Y.V. and ANNIE DEDREQUES, (2008), Measuring financial health – A ‘z' score analysis, the accounting world, The ICFAI university, Vol. VIII, Issue IX, September, pp. 20-24.

• VENKAT JANARDHAN RAO and DURGA PRASAD, (2009), ‘Z' score analysis, A tool to predict financial health, the management accountant, vol. 44, no. 8, August, pp. 608-610.

• ABUZAR, M.D. and ELJELLY (2004), Liquidity – Profitability Tradeoff : An empirical investigation in an emerging markets, International journal of commerce and management, Vol. 14(3), pp. 48.61.

• AHMED ALIF KARIM ALMOZARI (2009), Analysing profitability ratios of the Jordanian phosphate mines company (2001 – 2007) journal of accounting and faineance, vol. 23(1), pp. 268 – 276.

• http://www.indian sugar's industry.com

• http://www.money control.com

• http://www.bannariamman sugarltd.com

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