1

Indian Railway Catering and

Tourism Corporation (IRCTC)

Comparative Financial Analysis of Annual Report

“COMPARITIVE FINANCIAL ANALYSIS

OF

ANNUAL REPORT”

IN

(A Government of India Enterprise-Mini Ratna)

SUBMITTED IN PARTIAL FULFILLMENT

OF THE REQUIREMENT OF

MBA PROGRAM

Submitted to: Submitted by:

Dr. Harash Purohit Mani Maheshwari

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FMS-WISDOM (Finance)

ACKNOWLEDGEMENT

The successful completion of the project would have been far from reality without mentioning the

people who made an indelible impression while making the project.

All the very outset thanks to IRCTC for instructing me and giving me an opportunity to work for

them. I am especially thankful to Mr. M P Mall, Group General Manager (Finance) IRCTC

who made it possible for me to do summer training in Indian Railway Tourism and Corporation

Ltd. and Mr. Pankaj Malhotra, Additional General Manager (Finance) IRCTC and Megha

Arora Executive (Finance) who have guided me to understand the intricacies of company’s

financial operations. Without their support, it would not have been possible for me to complete my

summer training successfully.

I am indebted to Prof. Siddharth Shastri, Dean (FMS WISDOM), Banasthali University for

his affectionate guidance and continuous encouragement.

It has also been my proud privilege and good fortune to work on this study under the guidance of

Dr. Harsh Purohit, (FMS WISDOM), Banasthali University, Rajasthan. His thoughtful

comments and conceptual insights into the subject kept me from floundering in my quest. Despite

his busy schedule he spared valuable moments for reviewing and rectifying this work.

I also extend my thanks to various departmental heads for the co-operation and help extended to

me during the preparation of the project.

In the end I would like to thank the Almighty God and my Parents, who blessed me and supported

me every time I required.

Mani Maheshwari

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TABLE OF CONTENTS

SERIAL NO. TITLE Page no.

1. INTRODUCTION 5-16

COMPANY PROFILE 6-14

TITLE OF PROJECT 15

SIGNIFICANCE OF TOPIC 15

OBJECTIVE OF TRAINING 16

2. RESEARCH METHODOLOGY 17-20

STEPS OF REPORT GENERATION 18

TYPE OF STUDY 19

TYPE OF DATA AND DATA COLLECTION 19-20

DATA ANALYSIS TECNIQUES 20

LIMITATIONS OF STUDY 20

3. INTRODUCTION TO TOPIC 21-31

4. COMPARITIVE FINANCIAL ANALYSIS 32-47

5. CONCLUSION 48-49

6. REFRENCES

7. ANNEXURES

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5

COMPANY PROFILE

BACKGROUND

Indian Railway Catering and Tourism Corporation Ltd. (IRCTC) is a Public Sector Enterprise

under Ministry of Railways.   IRCTC was incorporated on 27th September, 1999 as an extended

arm of the Indian Railways to upgrade, professionalize and manage the catering and hospitality

services at stations, on trains and other locations and to promote domestic and international

tourism through development of budget hotels, special tour packages, information & commercial

publicity and global reservation systems.

While discharging its mandate, the Company has made a significant mark in its passenger-services

oriented business lines like setting up of Food Plazas on Railway premises, ‘Railneer', Rail Tour

Packages and ‘Internet Ticketing' bringing great deal of professionalism into the operations. In

addition to above, IRCTC is managing on Board Catering Services in Rajdhani / Shatabdi /

Duronto   and Mail / Express Trains and Static Catering Units such as Refreshment Rooms,

AVMs, Book Stalls, Milk Stalls, Ice Cream Stalls, Petha & Peda Stalls etc. across the Indian

Railway Network

ORGANIZATION STRUCTURE

Corporate Office of IRCTC is situated at New Delhi , which is headed by the Managing Director.

Managing Director is being assisted by three Directors, Director(Catering Services),

Director(Tourism & Marketing) and Director(Finance) and nine Group General Managers.  

For smooth operations of the business across all over the country, five Zonal Offices are working

at Delhi , Kolkata, Mumbai, Chennai & Secunderabad.   South Zone Office is headed by Regional

Director and all other Zonal Offices are headed by Group General Managers.   All Group General

Managers have vast experience of working in IndianRailways. These Zonal Offices are assisted by

ten Regional Offices at Lucknow , Chandigarh , Jaipur, Bhubneshwar, Guwahati, Patna , Bhopal ,

Ahemedabad, Bangalore and Ernakulam, which are headed by Chief Regional Managers /

Regional Managers

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MANPOWER7

At present IRCTC has 4453 employees (as on 31st December, 2009) on its roll. The employees

comprise of IRCTC Direct Employees, Deemed Deputation absorbees, Deemed Deputationists,

deputationists and fixed term employees.   For bringing professionalism in the work culture,

IRCTC has recruited professionals in different field like HR, Tourism, Catering and Finance,

through direct recruitment or campus recruitment.  

FINANCIAL PERFORMANCE

During the year 2008-09, the Corporation achieved a total income of Rs. 618.77 Crores as

compared to Rs. 527.66 Crores in 2007-08 thereby registering a growth of 17.30 %.   The increase

was achieved in spite of the fact that bed roll and cleaning business has been transferred back to

Railways.   The major increase in the income in the year 2008-09 over previous year was achieved

due to licensee catering (from Rs. 289.20 Crores to Rs. 341.02 Crores), quantum jump in internet

ticketing (from Rs. 39.18 Crores to Rs.74.81 Crores) and tourism activities (from Rs. 9.72 Crores

to Rs. 27.94 Crores).

The income of licence catering increased on account of higher number of units put on tender,

efficient tendering system and increase in licence fee from static units. Quantum jump in internet

ticketing was witnessed due to good marketing efforts, upgraded infrastructure and improved

customer care. The growth in tourism business was achieved due to IRCTC's foray into

educational tour business, tour package business take over of Bharat Darshan trains by IRCTC.  

A net profit of Rs. 46.50 Crores was earned during 2008-09 as compared to Rs. 20.75 Crores in

2007-08 due to enhanced revenue and control on expenditure. An amount of Rs.30.00 Crore has

been provided as Haulage Charges as was provided during the previous year. As at 31 st March

2009, the Reserves and Surplus of the Corporation stood at Rs.94.46 Crore. The Net Worth went

up from Rs. 78.85 Crore during the previous year to Rs.114.46 Crore during the year under review

CONTRIBUTION TO REVENUES OF RAILWAYS:

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During the year the Corporation contributed a sum of Rs.76.26 crore to the revenues of Indian

Railways as against a sum of Rs. 62.76 Crore during the previous year. Contribution to the

Revenues of Railways comprises Haulage Charges, Concession fee, License fee, User Charges and

Dividend. The sharing of revenues with the various Zonal Railways has been made in terms of

Memorandum of Understanding dated 17 th January, 2007 . In addition to the above, tickets worth

Rs.3888.82 Crore were booked during the year as against Rs.1705.03 Crore during the previous

year.

MAIN BUSINESS ACTIVITIES

IRCTC's main business activities are :

(i) On Board Catering Services and Static catering units on the Indian Railway Network:

Hospitality Services covers on board catering services in the trains, catering services at stations

through stalls, food plazas/fast food units & Automatic Vending Machines commissioned at A, B

& C class of Railway stations.

IRCTC is managing currently 19 Rajdhani, 13 Shatabdi, 16 Jan Shatabdi, 6 Duronto Express , 9

Garib Raths, 205 Mail/Express trains and 118 trains have train side vending facility. The graphical

representation of various types of trains is depicted below:

IRCTC has currently 53 Food Plazas, 13 Fast Food units and 1 Quick Service Food Kiosks, 677

Automated Vending Machine , 2950 Stalls, 3291 Trolleys & Khomchas , 698 Book Stalls, 249

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Milk Stall & 7918 Static units spread over 1008 no. of Special A, A, B & C Category of Stations

over Indian Railways network.

(ii)  Manufacturing Packaged Drinking Water for Indian Railway Passengers:

  

Two plants of Railneer packaged drinking water are operating at Nangloi ( Delhi ) and Danapur

( Bihar ).The capacity of the plants was increased from 5,500 cartons per day to 8,500 cartons per

day during March, 2009 for Nangloi Plant and during December, 2009 of Danapur Plant.  

New Rail Neer plants: For Southern Region, Rail Neer Plant of 15,000 cartons per day is being set

up at Palur near Chennai. Tender has been awarded and physical work for setting up building is in

advance stage. For Western region, architect and plant consultants have been appointed for Rail

Neer plant at Ambernath near Mumbai. The rated capacity of the plant is 25,000 cartons per day.

(iii) Managing the Departmental Catering units, taken over from Indian Railways:

Four Rajdhani trains and four mail/express trains were operational as on 31.3.09. Patna Rajdhani

train was taken over under departmental operation from August 2008.   Total 518 stalls and 419

trolleys were under departmental operation during the year.

(iv) Quality Control and Complaint Redressal System

  

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To maintain quality of services onboard trains, IRCTC has set up control rooms at New

Delhi , Mumbai, Kolkata, Chennai and Secunderabad.

Food Safety Audit

Complaint Management System

On-line Complaint Management System has been introduced to facilitate the passengers for

lodging their online complaint by logging on our website at www.irctc.com   .

Expansion of passenger ticketing and PRS network through Internet / modern technology

based ticketing.

Managing all India Railway Enquiry Call Centre,

.Running of Special Train,   Special Charters / Coach and promotion of Value added tours,

Budget Hotel

Luxury Tourist Train

AWARDS CONFERRED ON IRCTC RECENTLY

National award for E-Governance Best Citizen Centric application for the year   2007-08

“National Award for E-Governance, 2007-08” jointly by Department of IT, Govt. of India

and Govt. of Haryana.

National Tourism Award for Travel Portal – Railtourismindia.com in Feb 2008.

EMPI Indian Express IT Innovation Award for excellent work in Citizen Centric Services –

2008 - 2009.

Madhya Pradesh State Tourism Award for Most Innovative Tourism Packages in Mass

Facilitation category by Govt. of Madhya Pradesh.

National Tourism Award and Award of Excellence by Ministry of Tourism, Govt. of India

for the Buddhist Circuit Special Train in     Feb'09.

CNBC Awaaz – Special Commendation for redefining Indian Railways Award – 2009

PC Quest – Most Innovative Project Award 2009

D.L.Shah Economic on Quality National Award from Quality Council of India on 19th

February, 2010.

VISSION

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"To be a respected world class corporation and the leader in Indian Railways Catering &

Tourism business in quality, productivity, profitability and customer satisfaction.”

We build lasting relationships with customers based on trust and mutual benefit.

We uphold highest ethical standards in conduct of our business.

We create and nurture a culture that supports flexibility, learning and is proactive to

change.

We chart a challenging career for employees with opportunities for advancement and

rewards.

To maintain leading position in internet ticketing, e-commerce and technology for

customers interface for railway passengers/ customers.

We value the opportunity and responsibility to make a meaningful difference in people's

lives.

To provide high quality package drinking water (Railneer).

To adopt strong Corporate Governance practices.

To work towards creation of additional infrastructure on Railway or non-railway

premises in their mandated line of business with a view to improve the Gross Block.

MISSION

To be the leader for providing high quality catering, tourism and travel related services on the

Indian Railways primarily and also outside the Railways in the country.

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OBJECTIVES

To be a significant player in the hospitality business for both Indian Railway  

and non-    Indian Railway related services.

To promote railway tourism across the country for all segments of Rail Passengers.

To provide single window solution to its customers including train travel, hotel

accommodation, road transfers, hospitality, catering etc.

To promote private sector participation and expertise to improve quality of products and

services for all segments of Railway Passengers across all price bands.

To imbibe strong customer friendly, professional and ethical work culture.

To maintain leading position in internet ticketing, e-commerce and technology for

customers interface for railway passengers/ customers.

To develop budget hotels on Railway and non- Railway land.

To provide high quality package drinking water (Railneer).

To adopt strong Corporate Governance practices.

To work towards creation of additional infrastructure on Railway or non-railway

premises in their mandated line of business with a view to improve the Gross Block.

FUTURE PLANS

Some of the initiatives planned for tourism, catering activities and Internet Ticketing are as under :

 Catering :

Strategic tie ups : IRCTC is working towards tie ups in the areas of mobile catering, Rail

Neer and product formation.  

Static Units:   Streamlining of procurement process, standardization of services and

automation in base kitchens is the focus area in     major static units.

New Rail Neer Plants :   For Southern Region, Rail Neer plant is being set up at Pulur near

Chennai.   Tender has been awarded and     physical work for setting up building is in

advance stage.   For Western region, architect and plant consultants have been appointed

for     Rail Neer plant at Ambernath near Mumbai.

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Modular Stalls :   Replacement of all catering stalls with uniform design of modular stalls is

proposed to be undertaken and M/s Jindal     Steel is working on a prototype which will

give longer life and aesthetic look.

Cell Kitchens/Base Kitchens : Plans are to set up another 100 licensee cell kitchens.

Food Plazas/Fast Food Units/Quick Service Food Kiosks : More than 20 food plazas, 20

Fast Food Units and 5 QSFK are in advance     stage of planning.

Food Courts :   IRCTC is planning to develop food courts at stations with contemporary

interior designs.

Tourism :

Launching of a Luxury Tourist Train with pan India itineraries.

Thrust of Educational Tour on All India basis.

Further development of rail tour package business

Strategic tie-ups for promoting tourism

Comprehensive travel services to foreign tourists booking tickets on IRCTC website.  

Internet Ticketing

Modernization of IT infrastructure.

Setting up of disaster recovery site.

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TITLE OF PROJECT

Comparative financial analysis of Annual Report of India Railway Catering and Tourism

Corporation Ltd. (IRCTC)

SIGNIFICANCE OF TOPIC

As it is known that a short-term creditor will be interested in the current financial position of the

firm, while a long term creditor will pay more attention to the solvency of the firm. The long term

creditor will also be interested in the profitability of the firm. The equity shareholders are generally

concerned with their return and may bother about the firm’s financial condition only when their

earnings are depressed.

In fact it has to be realized that the short term and long term financial position and profitability of

the firm are tested in every kind of financial analysis, but the emphasis would differ. Some ratios

are more important in one kind of analysis than others. If a short term creditor analyze only the

current position and find it satisfactory, he/she cannot be certain about the safety of his/her claim if

the firm’s long term financial position or profitability is unfavorable.

The satisfactory current position would become adverse in future if the current resources are

consumed by the unfavorable long term financial condition. Similarly, the good long term financial

position is no guarantee for the long term creditors’ claim if the current position or profitability of

the firm is bad.

A way of tracing the periodic changes in the financial performance of a company is to prepare a

comparative financial statement which will contain items at least for two periods but to depict the

true picture I have taken the data of three financial years from 2006-07 to 2008-09.

An investigation of the comparative financial statements helps to highlight the significant facts and

points out the items which need further analysis. In the financial analysis the direction of changes

over the period of years is of crucial importance. Trend analysis of ratios indicates the direction of

change. This kind of analysis is particularly applicable to the items of profit & loss account.

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OBJECTIVE OF TRAINING

The objective of the study was to gain a clear understanding of the “Financial operations of

IRCTC” and subsequently assess the financial stance of the corporation. The other inherent

objectives, which were accomplished in the due course of fulfilling the primary motive, were

detailed study of corporation’s profile, analysis of firm’s financial statements with the help of

various ratios like liquidity, profitability, turnover and leverage ratios, its financial dealings with

the bank, its vendors and the customers, etc. While the information used is historical, the intent is

clearly to arrive at recommendations and forecasts for the future rather than provide a “picture of

the past”.

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STEPS OF REPORT GENERATION

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TYPE OF STUDY

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The type of study used in the research is analytical in nature i.e. the research in which the

researcher has to use facts or information already available and analyze these to make a critical

evaluation of the material. In this research too facts and information already available in the form

of Annual reports, Articles, Journals, etc. are critically analyzed.

TYPES OF DATA AND DATA COLLECTION

There can be two sources for collecting data for the research:

Primary Sources

Secondary Sources

Primary Sources:

The data for the research can be collected directly through some form of interaction between the

researcher and the people or organization concerned, using such methods as interviews, focus

groups, surveys and participant observation. Such sources are called the primary sources.

The primary sources used in the study are:

1. Discussions with the management officers.

2. Interviews with the concerned offices.

Secondary sources:

Sometimes the researcher uses data which has already been collected for other purposes – in other

words, he or she is going to use an existing source rather than directly interacting with people.

Such sources of data include Government reports, annual reports, journals, etc and are known as

secondary sources of data.

The secondary sources used for the study are:

Annual Report of the “IRCTC” for the year 2008-2009

Annual Report of the “IRCTC” for the year 2007-2008

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Annual Report of the “IRCTC” for the year 2007-2006

Records of the company

Internet websites

Books on Financial Management

DATA ANALYSIS TECNIQUE

After collecting data from secondary sources it is being analyzed using Ratio analysis. Different

kinds of ratios are being used like:

Profitability ratio

Liquidity ratio

Leverage ratio

Turnover ratio

LIMITATIONS OF STUDY

The financial data collected may be biased and subjected to different interpretations by the

users.

The data for the current financial year 2009-2010 of IRCTC was not available as the annual

report 2009-10 is not published.

Study is confined only to finance department of companies, so it does not give picture about

the working of other departments like marketing, operations.

The research will be valid only for the limited period of time, due to fast growth of the Indian

economy and fast change in the norms.

Limited time period was a major constraint of this study.

Confidential information is not available.

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FINANCE

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Finance is a branch of economics that deals with the management of funds, financial resources and

other assets. In broader terms, finance is raising or investing money either as equity or debt.

Finance is a wide-ranging term which includes funding, investments, trading and risk management

(through various types of insurance policies).

Finance: Financial Assets

Finance involves investment of funds in financial assets, such as stocks, bonds, mutual funds and

private equities for income generation. Financial institutions like banks play a major role in

funding these financial assts. Investment in financial assets is generally extensive so it must be

protected by risk management and risk transference organizations like insurance companies.

Finance: Types

Personal finance focuses on the extent of funds that are required by a person or a family. This

further includes protection from mishap, transfer of assets through inheritance and the impact of

tax policy on personal finance. Personal finance also includes financial planning and access to

credit.

Corporate finance: This type of finance uses the principles of finance to help corporate raise

funding and to help investors earn good returns from meeting those funding needs, usually with the

help of corporate bankers or financiers. The objective of corporate finance is to maximize the

valuation of financial assets, while striking a balance between the risks and profitability potential

of the assets. Corporate finance takes into account the valuation of financial assets primarily for tax

assessments and business analysis. Corporate houses focus on making either long-term capital

investments or managing working capital for the short term. It also involves finding short- and

long-term funding for corporations. While short-term funding can be obtained from banks’ line of

credit, funds for the long term can be acquired by issuing equity or bonds.

For investors who want updates and advice on any financial matters such as savings, investment,

retirement planning, portfolio management and asset management, it is best to seek financial

advice from a trustworthy financial advisor.

FINANCIAL MANAGEMENT

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Financial management entails planning for the future of a person or a business enterprise to ensure

a positive cash flow. It includes the administration and maintenance of financial assets. Besides,

financial management covers the process of identifying and managing risks.

The primary concern of financial management is the assessment rather than the techniques of

financial quantification. A financial manager looks at the available data to judge the performance

of enterprises. Managerial finance is an interdisciplinary approach that borrows from both

managerial accounting and corporate finance.

Some experts refer to financial management as the science of money management. The primary

usage of this term is in the world of financing business activities. However, financial management

is important at all levels of human existence because every entity needs to look after its finances.

Financial Management: Levels

Broadly speaking, the process of financial management takes place at two levels. At the individual

level, financial management involves tailoring expenses according to the financial resources of an

individual. Individuals with surplus cash or access to funding invest their money to make up for

the impact of taxation and inflation. Else, they spend it on discretionary items. They need to be

able to take the financial decisions that are intended to benefit them in the long run and help them

achieve their financial goals.

From an organizational point of view, the process of financial management is associated with

financial planning and financial control. Financial planning seeks to quantify various financial

resources available and plan the size and timing of expenditures. Financial control refers to

monitoring cash flow. Inflow is the amount of money coming into a particular company, while

outflow is a record of the expenditure being made by the company. Managing this movement of

funds in relation to the budget is essential for a business.

At the corporate level, the main aim of the process of managing finances is to achieve the various

goals a company sets at a given point of time. Businesses also seek to generate substantial amounts

of profits, following a particular set of financial processes.23

Financial managers aim to boost the levels of resources at their disposal. Besides, they control the

functioning on money put in by external investors. Providing investors with sufficient amount of

returns on their investments is one of the goals that every company tries to achieve. Efficient

financial management ensures that this becomes possible.

FINANCIAL ANALYSIS

Financial statement analysis involves analyzing the firm’s financial statements to extract

information that can facilitate decision-making.  Financial analysis is performed by both internal

management and external groups. Firms would perform such an analysis in order to evaluate their

overall current performance, identify problem/opportunity areas, develop budgets and implement

strategies for the future. External groups (such as investors, regulators, lenders, suppliers,

customers) also perform financial analysis in deciding whether to invest in a particular firm,

whether to extend credit etc.

BASIC STEPS

For the financial analysis of a company, the basic steps which should be followed are described in

brief as under:

Step 1: Acquire the company’s financial statements for several years. These may be found in a

recent annual report; auditor’s report; or from other secondary sources. As a minimum, get the

following statements, for at least 3 to 5 years:

Balance sheets

Income statements

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Shareholders equity statements

Cash flow statements

Step 2: Quickly scan all of the statements to look for large movements in specific items from one

year to the next. For example, did revenues have a big jump, or a big fall, from one particular year

to the next? Did total or fixed assets grow or fall? If anything looks very suspicious, research the

information that has been collected about the company to find out why. For example, did the

company purchase a new division, or sell off part of its operations, that year?

Step 3: Review the notes accompanying the financial statements for additional information that

may be significant for the analysis.

Step 4:  Examine the balance sheet.  Look for large changes in the overall components of the

company's assets, liabilities or equity. For example, have fixed assets grown rapidly in one or two

years, due to acquisitions or new facilities? Has the proportion of debt grown rapidly, to reflect a

new financing strategy? If there is anything that looks very suspicious, research the information

available about the company to find out why.

Step 5: Examine the income statement. Look for trends over time. Calculate and graph the

growth of the following entries over the past several years.

Revenues (sales)

Net income (profit, earnings)

Are the revenues and profits growing over time? Are they moving in a smooth and consistent

fashion, or erratically up and down? Investors value predictability, and prefer more consistent

movements to large swings.

For each of the key expense components on the income statement, calculate it as a percentage of

sales for each year. For example, calculate the percent of cost of goods sold over sales, general

and administrative expenses over sales, and research and development over sales.  Look for

favorable or unfavorable trends. For example, rising G&A expenses as a percent of sales could

25

mean lavish spending.  Also, determine whether the spending trends support the company’s

strategies. For example, increased emphasis on new products and innovation will probably be

reflected by an increased proportion of spending on research and development.  

Look for non-recurring or non-operating items.  These are "unusual" expenses not directly related

to ongoing operations.  However, some companies have such items on almost an annual basis. 

How do these reflect on the earnings quality?

Step 6: Examine the shareholder's equity statement. Has the company issued new shares, or

bought some back? Has the retained earnings account been growing or shrinking? Why? Are the

signals about company’s long-term strategy here?

Step 7:  Examine the cash flow statement, which gives information about the cash inflows and

outflows from operations, financing, and investing.  

While the income statement provides information about both cash and non-cash items, the cash

flow statement attempts to reconstruct that information to make it clear how cash is obtained and

used by the business, since that is what investors and creditors really care about.

.

Step 8: Calculate financial ratios in each of the following categories, for each year. The formulas

found in the textbook or other materials from finance and accounting courses may be used.  Some

of the useful ratios that must be included in the study are enumerated as below:

Liquidity ratios

Leverage (or debt) ratios

Profitability ratios

Efficiency ratios

Value ratios

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Graph the ratios over time, to find the trends in the ratios from year to year. Are they going up or

down? Is that favorable or unfavorable? This may trigger further questions in mind, and help to

look for the underlying reasons.

Step 9: Obtain data for the company’s key competitors, and data about the industry.

For competitor companies, collect the data and calculate the ratios in the same way as was carried

out for the company being studied. Compare the ratios for the competitors and the industry to the

company being studied. Is the company favorable in comparison? Is sufficient information

available to determine why or why not? If not, further research needs to be carried out.  

Step 10: Review the market data available about the company’s stock price, and the price to

earnings (P/E) ratio.

Try to research and understand the movements in the stock price and P/E over time. Determine in

mind whether the stock market is reacting favorably to the company’s results and its strategies for

doing business in the future.

Review the evaluations of stock market analysts. These may be found at any brokerage site.

Step 11:  Review the dividend payout.  Graph the payout over several years.  Determine whether

the company’s dividend policies are supporting their strategies. For example, if the company is

attempting to grow, are they retaining and reinvesting their earnings rather than distributing them

to investors through dividends?  Based on the research into the industry, does the company has

sufficient opportunities for profitable reinvestment and growth, or should they be distributing more

to the owners in the form of dividends?  Viewed another way, could something be learnt about the

company’s long-term strategies from the way they pay dividends?

Step 12: Review all of the data that has been generated.

FINANCIAL RATIO ANALYSIS

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Financial ratios are a popular way to analyze the financial statements of a firm. It interprets the

financial statements so that the strengths and weakness of a firm a well as its historical

performance and current financial condition can be determined.

A ratio is an effective representation of the relationship between two numbers.

For e.g. - Ratio of A: B = 1.5:1 ==> A is 1.5 times B.

The logical reason behind the use of ratio analysis lies in the fact that it makes related data and

figures comparable and easy to correlate. Ratio analysis is a diagnostic tool that helps to identify

problem areas and opportunities within a company. Further is a discussion on how to measure and

interpret some key ratios.

IMPORTANCE OF FINANCIAL RATIO ANALYSIS

The financial ratios in accounting and financial management analysis are important as they enable

the management to test the profitability, financial position (liquidity and solvency) and operating

efficiency of the enterprise. Thus, ratios play an important role in decision making operations and

facilitate the management to take effective and profitable decisive steps.

A ratio by itself may have no meaning but when compared to other indicative data, it may lead to

fairly useful analysis of the given data and reveal trends being followed. Hence, a given ratio is

compared to:

Ratios from previous years for internal trends

Ratios of other firms in the same industry for external trends. 

Ratios of other items within the same firm

Ratios set up as standards

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The most frequently used ratios by Financial Analysts provide insights into a firm's

Liquidity

Degree of financial leverage or debt

Profitability

Efficiency

Value

LIQUIDITY RATIOS

Liquid assets are those assets that can be converted into cash quickly. The short-term liquidity

ratios show the firm’s ability to meet short-term obligations.

The liquidity position of a firm would be satisfactory it is able to meet its current obligations when

they become due. Thus a higher ratio would indicate a greater liquidity and lower risk for short-

term lenders.

While high liquidity means that the company will not default on its short-term obligations, note

that by retaining assets as cash, valuable investment opportunities might be lost. Obviously, Cash

by itself does not generate any return only if it is invested will we get future return. The liquidity

ratios are particularly useful in credit analysis by banks and other suppliers of short-term loans.

LEVERAGE RATIO

This ratio is used to calculate the financial leverage of a company to get an idea of the company's

methods of financing or to measure its ability to meet financial obligations. There are several

different ratios, but the main factors looked at include debt, equity, assets and interest expenses.

INVENTORY RATIO

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These ratios reflect how well the firm’s assets are being managed. The inventory ratios shows how

fast the inventory is being produced and sold.

PROFITABILITY RATIOS

Profitability is a relative term.  It is hard to say what percentage of profits represents a profitable

firm, as profits depend on such factors as the position of the company and its products on the

competitive life cycle (for example profits will be lower in the initial years when investment is

high), on competitive conditions in the industry, and on borrowing costs.

For decision-making, we are concerned only with the present value of expected future profits. Past

or current profits are important only as they help us to identify likely future profits, by identifying

historical and forecasted trends of profits and sales. 

USES OF RATIO ANALYSIS

1.  To evaluate performance, compared to previous years and to competitors and the industry

2.  To set benchmarks or standards for performance

3.  To highlight areas that need to be improved, or areas that offer the most promising future

potential

4.  To enable external parties, such as investors or lenders, to assess the creditworthiness and

profitability of the firm

LIMITATIONS OF RATIO ANALYSIS

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1.  There is considerable subjectivity involved, as there is no “correct” number for the various

ratios. Further, it is hard to reach a definite conclusion when some of the ratios are favorable and

some are unfavorable. 

2.  Ratios may not be strictly comparable for different firms due to a variety of factors such as

different accounting practices or different fiscal year periods. Furthermore, if a firm is engaged in

diverse product lines, it may be difficult to identify the industry category to which the firm

belongs. Also, just because a specific ratio is better than the average does not necessarily mean

that the company is doing well; it is quite possible rest of the industry is doing very poorly. 

3.  Ratios are based on financial statements that reflect the past and not the future. Unless the

ratios are stable, it may be difficult to make reasonable projections about future trends.

Furthermore, financial statements such as the balance sheet indicate the picture at “one point” in

time, and thus may not be representative of longer periods. 

4.  Financial statements provide an assessment of the costs and not value. For example, fixed

assets are usually shown on the balance sheet as the cost of the assets less their accumulated

depreciation, which may not reflect the actual current market value of those assets.  

5.  Financial statements do not include all items. For example, it is hard to put a value on human

capital (such as management expertise).  And recent accounting scandals have brought light to the

extent of financing that may occur off the balance sheet.

6.  Accounting standards and practices vary among countries, and thus hamper meaningful global

comparisons.

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32

By considering the following ratios, analysis of corporation’s financial position can be done.

1. Liquidity ratios

Current ratio

Quick ratio

Cash ratio

Net working Capital ratio

2. Capital structure/leverage ratios

Debt-Equity ratio

3. Inventory ratios

Inventory turnover ratio

Total assets turnover ratio

4. Profitability ratios

Gross profit margin

Net profit margin

Return on net worth

Earning per share

Dividend per share

Dividend payout ratio

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1. LIQUIDITY RATIOS

CURRENT RATIO

The current ratio is a measure of the firm’s short term solvency. It indicates the availability of

current assets in rupees for every one rupee of current liability.

The current ratio of 2 is to 1 is considered to be the ideal ratio, that is, the current assets held by a

company must be at least twice the current liabilities that the company is required to fulfill.

Current Ratio = Current Assets/Current Liabilities

YEAR CURRENT RATIO

2006-07 0.95

2007-08 0.99

2008-09 1.01

It is shown in the above data that current ratio of IRCTC over the years is satisfactory. It may be interpreted to be sufficiently liquid.

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QUICK RATIO

Quick ratio establishes a relationship between liquid assets and current liabilities. An asset is liquid

if it can be converted into cash immediately without a loss of value.

Generally a quick ratio of 1:1 is considered to represent a satisfactory current financial condition. It

is an important index of the firm’s liquidity.

Quick Ratio = (Current Assets-Inventories) /Current Liabilities

YEAR QUICK RATIO

2006-07 0.92

2007-08 0.97

2008-09 1.00

In case of quick ratio, if a company doesn’t sell its inventories and it has to pay all its current

liabilities, it may find it difficult to meet its obligations if it doesn’t have sufficient amount of other

current assets which can be easily converted into cash during one accounting period. Here the

satisfactory quick ratio of approx. 1:1 over the years shows that even if all sales revenues

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disappear, the firm can meet its current obligations with the readily convertible ‘quick funds’ on

hand.

Cash Ratio

Cash ratio establishes a relationship between cash & cash equivalent securities and the current

liabilities. It can be computed by dividing the sum of cash and marketable securities by current

liabilities as follows:

Cash ratio= (Cash+ Marketable securities) / Current liabilities.

YEAR CASH RATIO

2006-07 0.56

2007-08 0.41

2008-09 0.48

Cash ratio of approximately 50% is satisfactory. There is nothing to be worried about the lack of cash.

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Net Working Capital Ratio

The net working capital represents the excesses of current Assets over Current liabilities. Net

Working Capital measures the form's potential reservoir of funds. It can be related to Net assets.

Net Working Capital Ratio = Net Working capital / Net Assets.

Net Working Capital=Current Assets-Current Liabilities

Net Assets=Fixed Assets + Net Current Assets

YEAR NET WORKING CAPITAL RATIO

2006-07 -0.22

2007-08 -0.03

2008-09 0.03

Firm having the large NWC has great ability to meet its current obligations. NWC ratio of IRCTC

has increased over the years but it is not satisfactory.

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2. LEVERAGE RATIO

DEBT EQUITY RATIO

Debt equity ratio is a measure of a company's financial leverage calculated by dividing its

debt by stockholders' equity. It indicates what proportion of equity and debt the company is using

to finance its assets. A high debt/equity ratio generally means that a company has been aggressive

in financing its growth with debt.

Debt Equity Ratio = Total Debt/ Equity (Net Worth)

YEAR DEBT EQUITY RATIO

2006-07 4.21

S2007-08 4.10

2008-09 3.34

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3. INVENTORY RATIO

INVENTORY TURNOVER RATIO

Inventory turnover indicates the efficiency of the firm in producing and selling its product. It

shows how rapidly the inventory is turning into receivable through sales. Generally a high

inventory turnover is indicative of good inventory management.

Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory

(In times)

YEAR INVENTORY TURNOVER RATIO

2006-07 13.86

2007-08 17.08

2008-09 13.82

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A high inventory turnover is the indication of good inventory management. As from the above data

it is clearly shown that the entire corporation has high inventory turnover over the years which

shows how rapidly the inventory is turning into receivables through sales.

Days of inventory holdings

DIH = 360/inventory turnover

It means for how many days a company holds its inventory.

(In days)

YEAR DIH

2006-07 26

2007-08 21

2008-09 26

Average inventory holding period has been around 26 days.

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Total Assets Turnover Ratio

Total Assets Turnover = Sales / Average Total Assets  

This ratio shows how much sales the firm is generating for every rupee of investment in assets. The higher

the ratio, the better the firm is performing.

YEAR TOTAL ASSETS TURNOVER RATIO

2006-07 1.56

2007-08 1.47

2008-09 1.41

A high asset turnover is the indication of good assets management. As from the above data it can

be seen that ratio is decreasing over successive years which is not good sign of managing financial

resources. As the turnover ratio shows the firm’s ability in generating sales from all financial

resources committed to total assets. The total asset turnover of 1.56 times in FY 2006-07 implies

that IRCTC generates a sale of Rs 1.56 for 1 rupee investment in fixed and current assets together

which is 1.41 in FY 2008-09.

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4. PROFITABILITY RATIOS

GROSS PROFIT MARGIN

The gross profit margin reflects the efficiency with which management produces each unit of

product. This ratio indicates the average spread between the cost of goods sold and the sales

revenue. A high gross profit margin ratio is a good sign of good management.

Gross profit margin = gross profit / sales

(In %)

YEAR GROSS PROFIT MARGIN

2006-07 14.4

2007-08 13.2

2008-09 18.2

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NET PROFIT MARGIN

Net profit margin ratio establishes a relationship between net profit and sales and indicates

management’s efficiency in manufacturing, administering and selling the products. This is the

overall measure of firm’s ability to turn each rupee sales into net profit. It also indicates the

firm’s capacity to withstand adverse economic conditions.

Net Profit Margin = Profit after Tax/Sales

(In %)

YEAR NET PROFIT MARGIN

2006-07 4.6

2007-08 3.9

2008-09 7.5

Profitability ratios of IRCTC are satisfactory over the years.

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RETURN ON NET WORTH

Return on net worth indicates how well the firm has used the resources of owners. The earning of a

satisfactory return is the most desirable objective of a business. This ratio is of great interest to the

present as well as the perspective shareholders and also of great concern to management, which

has the responsibility of maximizing the owners’ welfare.

Return on Net Worth = Profit after Tax/Net Worth

YEAR RETURN ON NET WORTH

2006-07 32.13

2007-08 26.31

2008-09 40.63

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EARNING PER SHARE

EPS measures the profitability of shareholders. EPS calculations made over years indicate whether

or not the firm’s earning power on per share basis has changed over that period. EPS is calculated

by dividing the profit after taxes by the total number of ordinary shares outstanding. It simply

shows the profitability of the firm on a per share basis; it does not reflect how much is paid as

dividend and how much is retained in the business.

Earning Per Share = Profit after Tax/Number of Share Outstanding

YEAR EARNING PER SHARE

2006-07 10.11

2007-08 10.37

2008-09 23.25

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As the PAT has increased over the years therefore the firms earning power on per share basis has also increased

DIVIDEND PER SHARE

This indicates the dividend paid for each share. Shareholders would, naturally like to receive the

maximum possible dividends from a company, consistent with its profits and need for retained

earnings. It is the earning distributed to ordinary shareholders divided by the number of shares

outstanding.

Dividend per Share = Earning Paid to Shareholders as Dividends/Number of Ordinary

Shares Outstanding

YEAR DIVIDEND PER SHARE

2006-07 2.00

2007-08 2.07

2008-09 4.65

Dividend distributed has increased over the years as EPS has increased.

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DIVIDEND PAYOUT RATIO

This ratio indicates what proportion of its earnings a company is paying as dividend. Different

companies follow different dividend policies. If the need for plough back of profits is high, the

pay-out ratio may be kept low, otherwise, a more liberal pay-out policy is adopted. It identifies the

percentage of earnings (net income) per common share allocated to paying cash dividends to

shareholders. The dividend payout ratio is an indicator of how well earnings support the dividend

payment.

Dividend Payout Ratio = DPS/EPS

YEAR DIVIDEND PAYOUT RATIO

2006-07 0.2

2007-08 0.2

2008-09 0.2

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Payout ratio remained constant over years because there is equal increase in DPS relative to EPS.

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IRCTC is a unique organization in itself which provides On Board Catering and Static Catering

units on the Indian railway network along with Luxury Tourist Trains.

The comparative financial analysis of company shows that during the year 2008-09, the

Corporation achieved a total income of Rs. 618.77 Crores as compared to Rs.527.66 Crores in

2007-08 thereby registering a growth of 17.3 %. Growth registered from 2006-07 to 2007-08 was

21.7%. The expenditure has been controlled and it has been reduced to 88 % of the total income as

compared to 93 % in the previous year. With the result, there is quantum jump in the net profit of

the Company which has been increased from Rs. 20.75 Crores in 2007-08 to Rs. 46.50 Crores in

2008-09, thereby registering a growth of 124 % which was just 2.57% from year ending 2006-07

to year 2007-08. The earnings on an equity share of Rs. 10 work out to Rs. 23.25 per share.

It reveals that the company’s performance over the years has been continuously improving. The

firm is operating profitably yet the improvement should be done in working capital management.

49

50

Books:

Grewal, T.S (2007), Analysis of Financial Statement, New Delhi: Sultan Chand and Sons.

Pandey, I.M (2009), financial management, New Delhi: Vikas Publishing House Pvt. Ltd.

Accounts:

Annual Reports of IRCTC for 3 financial year starting year from 2006-07 to 2008-09.

Web Sites:

http://www.irctc.com/displayServlet

http://www.irctc.com/Company_Profile.html

http://www.irctc.com/Vission.htm

http://www.irctc.com/annual_report.html

http://www.irctc.com/Organization%20Chart/album/slides/Org_structur.html

http://www.irctc.com/objective.htm

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52

INDIAN RAILWAY CATERING AND TOURISM CORPORATION LTD.

Balance Sheet as at 31st March 2009(Rupees in Lac)

As at 31st March 2009 As at 31st March 2008

Schedule Amount Amount Amount Amount

Sources of FundsShareholders’ FundsShare Capital I 2,000.00 2,000.00

Reserves and Surplus II 9,445.81 5,884.92Deferred Tax Liability (net) 186.70 258.97(Refer Note 21 in Schedule XXV)

TOTAL 11,632.51 8,143.89

Application of FundsFixed Assets III

Gross Block 7,636.09 6,137.97Less: Depreciation 3,423.5 4 2,438.02 Net Block 4,212.55 3,699.95Add : Capital Work in Progress 995.84 5,208.39 90.58 3,790.53

Investments IV 250.20 0.20Current Assets, Loans and advances

Interest accrued on Investments V 0.12 0.10Inventories VI 519.19 573.19Sundry Debtors VII 23,972.02 19,206.69Cash and Bank Balances VIII 13,732.94 11,677.32Other Current Assets IX 448.04 651.52Loans & Advances X 13,348.30 8,554.20

52,020.61 40,663.02Less: Current Liabilities andprovisions XI

Current Liabilities 38,334.64 32,389.69Provisions 7,512.0 5 3,920.17

45,846.69 36,309.86Net Current Assets 6,173.92 4,353.16

Miscellaneous Expenditure to theextent not written off or adjusted - -

TOTAL 11,632.51 8,143.89

Significant Accounting Policies andNotes to the Accounts XXV Schedules I to XXV form an integral part of accounts

As per our report of even date attached

For S P Marwaha & Co. for and on behalf of Board of DirectorsChartered Accountants

Sd/- Sd/- Sd/- Sd/-M L Jotwani Rakesh Kumar Tandon V R Gupta Rakesh Gogia

Partner Managing Director Director (Finance) Company Secretary

Place : New DelhiDated : 26th August, 2009

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54

INDIAN RAILWAY CATERING AND TOURISM CORPORATION LTD.

Profit and Loss Account

For the year ended 31st March 2009 (Rupees in Lac)

ScheduleFor the Year

endedFor the Year

endedAmount Amount

IncomeSales XII 14,954.29 17,039.85Income from Internet Ticketing & Call Centre

XIII 7,480.56 3,918.32Income from Licencee Catering Services XIV 34,102.21 28,920.30Income from Tourism XV 2,793.58 972.38Interest Income on FDRs and TDRs (Gross)

1,159.93 1,060.48(TDS Rs.212.41 lac (Previous Year Rs.159.14)Other Income XVI 1,386.11 855.06

A 61,876.68 52,766.39 ExpenditureMaterials Consumed XVII 9,424.86 9,817.76(Increase) / Decrease in Finished Goods XVIII 4.85 39.00Expenses of Licencee Catering Services XIX 23,000.65 19,957.25Expenses of Tourism XX 2,510.38 916.95Manufacturing & Direct Expenses XXI 2,484.47 2,687.39Human Resource Cost XXII 12,117.96 11,513.36Administrative, Selling & Distribution Expenses

XXIII 4,125.13 3,680.31Miscellaneous Expenses Written off - -Depreciation III 1,010.36 828.16

B 54,678.66

49,440.18

Adjustments pertaining to earlier years C XXIV (186.58)

28.69

Profit before tax (A - B-C)

7,384.60

3,297.52

Less :Provision for Income Tax 2,741.9

11,100.00

Provision for Fringe Benefit Tax 64.85 50.00Deferred Tax (Refer Note 21 in Schedule XXV) (72.27

)72.61

Profit after taxation 4,650.11

2,074.91Profit brought forward 893.2

2903.84

Profit Available for appropriation 5,543.3 2,978.75

APPROPRIATIONSDividend - Interim 400.0

0200.00

- Final 531.00 215.00Tax on Dividend 158.2

270.53

Transfer to General Reserve 3,500.00

1,600.00Profit Carried to Reserve & Surplus (Balance Sheet) 954.1

1893.22

Earning per share (Face Value of Rs. 10 per share)Basic ( in Rs. ) 23.25 10.37Diluted ( in Rs. ) 23.25 10.37Significant Accounting Policies and Notes to the Accounts

XXVSchedules I to XXV form an integral part of accountsAs per our report of even date attached

For S P Marwaha & Co. for and on behalf of Board of DirectorsChartered Accountants

Sd/- Sd/- Sd/- Sd/-M L Jotwani Rakesh Kumar Tandon V R Gupta

Rakesh GogiaPartner Managing Director Director (Finance) Company Secretary

Place : New DelhiDated : 26th August, 2009