1.

OBJECTIVES OF THE STUDY

Objective provides a frame work for optimum decision making. The various objectives of

studies are as follows:-

1) To know the financial position of the organization.

2) To know the management decision making policy.

3) To get the information about earning potential of this enterprise.

4) To know the capability of payment of interest or dividend analysis.

5) To know the trends of business, which helps us in as ascertaining whether the business is

progressive or not.

6) To find out the shortcoming of business.

7) The important objective of analysis is to make the comparative study with other firms.

8) To know the real worth of an enterprise.

2. MTNL- AN OVERVIEW

MTNL was set up on 1st April 1986 by the Government of India to upgrade the quality of

telecom services, expend the telecom network, and introduce new services and to raise

revenue for telecom development needs of India’s key metros- Delhi, the political capital and

Mumbai, the business capital of India. . In the past 23 years, the company has taken rapid

strides to emerge as India's leading and one of Asia's largest telecom operating companies.

Besides having a strong financial base, MTNL has achieved a customer base of 8.06 million

as on 31st March 2009.

The company has also been the forefront of technology induction by converting 100% of its

telephone exchange network into the state-of-art-digital mode. The government of India

currently holds 56.25% stake in the company. In the year 2003-04, the company's focus

would be not only consolidating the gains but also to focus on new areas of enterprise such as

joint ventures for projects outside India, entering into national long distance operation,

widening the cellular and CDMA-based WLL customer base, setting up internet and allied

services on an all India basis. While the market for fixed wire line phones is stagnating,

MTNL faces intense competition from the private players—Bharti, Hutchison and Idea

Cellular, Reliance Infocomm—in mobile services.

2
The major offerings of the company includes public call offices, global system for mobile

communications (GSM) cellular services, fixed-line access, integrated services digital

network (ISDN) services, mobile and fixed wireless services, code division multiple access

(CDMA) technology. In addition, it also offers call centers, internet, broadband, under the

brand names such as Dolphin, Garuda, Mtnlmail, Trump and Tri Band. The company

operations are located in India, Nepal and Mauritius. It is headquartered at New Delhi, India

and employs around 47,422 people.

The company provides welfare activities and benefits include: subsidized canteen facility,

holiday homes, crèches, recreation and community centers, housing and medical facilities,

schooling, grant of scholarships and group insurance for the employees.

CORPORATE OBJECTIVE

• To expand customer base and services

• To provide latest technology and services to the customers at affordable prices.

• To achieve the highest level of customer satisfaction and delight

• To diversify in other areas for providing telecom services at national and international

levels

• To provide convergence of Telecom, Information Technology and related services

• To improve productivity by training and redeployment of man-power.

• To work for social benefits.

3
VISION

• Become a total solution provider company and to provide world-class telecom

services at affordable prices.

• Become a global telecom company and to find a place in the ‘Fortune 500’

companies.

• Enter into expend new services via, long distance, cellular mobile, W-CDMA,

Internet /broadband and ‘IN’ – services and development of telecom software.

• Become the largest provider of private networks and lines.

• Venture into other areas in India and abroad on the strength of our core competency.

MISSION

To remain market leader in providing world class Telecom and IT related services at

affordable prices and to become a global player.

S.W.O.T. Analysis of MTNL

STRENGTHS

 No real Competition in core activity in the immediate future.

 Highest market share in Delhi in terms of no. of landline connections.

 Strong and talented workforce of 54000+.

 High on cash.

 Covers remotest corners of Delhi and Mumbai.

4
 3G services.

WEAKNESS

 Poor Customer Services

o Poor quality of services and complaint handling.

o Tedious customer application processing.

o Erratic and faulty billing.

o Unfriendly payment facilities.

 Slow on implementation.

 Poor marketing.

 Poor system maintenance

 Poor employee motivation

OPPORTUNITIES

 Limited mobility market.

 Booming telecom sector.

 Per capita income is increasing.

 Staff strength.

THREATS

 New private players.

 Increasing foreign investments.

5
 Increasing no. of surrenders on landline connections.

 Downward trend in tariffs.

FINANCE

10.91
12
The above bar chart shows the capital investment made by MTNL from the year 1988 to

2008.

MTNL has a strong financial base and has shown consistent improvement in performance

over the years. MTNL has achieved a customer base of 8.06 million.

10
MTNL possesses an impressive financial profile comprising Reserves and Surplus amounting

to Rs.112913.58 million and Fixed Assets worth Rs.78421.73 million as on 31.03.2008

corresponding figures for 31.03.2007 were Rs.109992.96 million and Rs.76094.53 million

respectively.

8
6
n
MTNL was listed at the New York Stock Exchange on 6.11.2008.

The company’s equities are considered as an excellent buy globally by Foreign Institutional

Investors, All-India Financial Institutions, Research Analysts, and Merchant Bankers etc.

Shareholding and Dividend

MTNL.s paid up Capital is Rs.6300 millions and the Govt. of India currently holds 56.25%

stake in the company. The company has been consistently paying dividend on the paid up

share capital of Rs.6300 millions for last many years. Final dividend of 40%(including 30%

interim dividend) is declared for the financial year 2007-08.

Capital Expenditure

The capital expenditure during 2007-08 was Rs 6.92 billion as against Rs.9.98 billion in

2006-07 and the capital expenditure for both the years was fully met by internal resources.

Assets have risen from Rs.9.79 billion in the year 1988-89 to Rs. 146.99 billion in the year

2007-08.

JOINT VENTURES

United Telecom Limited (UTL)

MTNL has formed a Joint Venture company in Nepal by the name of United Telecom Ltd.

(UTL) in collaboration with Telecom Consultants India Limited (TCIL), Videsh Sanchar

Nigam Limited (VSNL) and NVPL (Nepal Ventures Pvt. Ltd., a Nepalese Company) The

Company is operational since 10th October, 2001 for providing WLL based basic services in

7
Nepal. In Nepal against the switching capacity of 50K, 21K telephone connections are

working.

Mahanagar Telephone Mauritius Limited (MTML)

MTNL has set up its 100% subsidiary .Mahanagar Telephone Mauritius Limited. (MTML) in

Mauritius, for providing basic, mobile and international long distance services as 2nd.

Operator in Mauritius. Necessary licenses have been obtained in January 2004. MTML has

already started its ILD & CDMA based basic services in Mauritius. In Mauritius against the

switching capacity of 50K, 8K telephone connections are working.

MTNL-STPI IT Services Limited

MTNL-STPI IT Services Ltd. is a 50:50 Joint Venture between Software Technology Parks

of India (STPI) and Mahanagar Telephone Nigam Limited, (MTNL). The JV formed in 2006

combines the STPI.s rich experience as an ISP and MTNL track record of being India’s

leading telecom operating company to offer niche portal services to the Indian community.

The JV was formed to realize one of the 10-point agenda of MoC&IT, which are of extreme

importance to India for bringing about an all round economic development. The JV aims to

provide exclusive data center services, messaging services, business application services to

the identified sectors of economic activity and thereby also popularizing the .in domain in the

networked community across the world.

Millenium Telecom Limited (MTL)

8
MTNL has restructured Millenium Telecom Ltd. (MTL) as a Joint Venture company of

MTNL and BSNL with 51% and 49% equity participation respectively. The company will

now be entering into new business stream of international long distance operations and will

be executing a project of submarine cable system, both east and west from India.

9
3. INTRODUCTION OF THE PROJECT

Finance is the life blood and nerve center of the business. As circulation of blood is essential

in the human body for maintain life, finance is a very essential to smooth running of the

business. In present time financial managers are instrumental to a company’s success. Where

as once the financial manager was charged only with such routine taken as keeping records,

preparing financial reports, managing the company’s financial case position and occasionally

in other activities. Now-a-days a financial manager is supposed to perform the following

function as:-

• Financial forecasting and planning.

• Acquisition of funds

• Investment of funds

• Helping in valuation decisions

• Maintaining proper liquidity

In relation to the company’s overall valuation, all of this demands a broad outlook on an alert

creativity that will influence almost all facts of the enterprise. As the importance finance is

growing up in twenty first century, we cannot afford to ignore it.

10
3.1 FINANCIAL STATEMENTS ANALYSIS

Financial statement presents a mass of complex data in absolute monetary terms and revel

little about the liquidity, solvency and profitability of the business. In financial analysis, the

data given in financial statement is classified into simple groups and a comparison of various

groups is made with one another to pin-point the stung points and weaknesses of a business.

Financial Statement analysis is largely a study of relationship among the financial factors in

a business by using single setup statements, and a study of trend of these factors as shown in

a series of statements.

The term financial statements include:

1. Analysis: Classification of data given in financial Statements in order to present in a

simplified manner.

2. Interpretation of Financial Statements: Explaining the meaning and significance of

data so simplified.

3.2 Significance of the study

Now the day analysis of financial statements has become of general interest various parties

are interested in the financial statements of a business due to various reasons. By analyzing

the financial statements each party can as retain whether his interest is safe or not.

11
The significance of the financial statements analysis for different parties is as follow:-

Significance to management:- The management can measure the effectiveness of the own

polices and decisions, determine the advisability of adopting new policies, procedures and

document to owners, the result of their managerial efforts.

Significance to investors:- With the help of financial analysis investors and share holders of

the business can know about the earning capacity and the safety to their investments in the

business.

Significance for creditors:- Financial analysis tells them whether companies have sufficient

assets and funds to pay off its creditors.

Significance for government: - Government can judge, the basis of analysis of financial

statements, which industry is progressing on the desired lines and which industry need the

financial help.

Significance to financial institution:- With the help of financial statement analysis financial

institution can know the profit earning capacity of the business and its long term solvency.

Significance to employees:- Analysis of financial statements helps the employees in

determining the true profit of the business enterprise.

12
4. RESEARCH METHODOLOGY

The first step was to analyze the financial statements and records of the company thoroughly.

Through my analysis of the past trends the financial statement had been condensed into

various heads which helped me in computing the data and calculating the ratios.

It was carefully examined and studied how various ratios are calculated and what is the

significance of each ratio. On the basis of the knowledge gained, the important ratios for

MTNL were calculated. The figures thus, extracted on calculating the ratios depicted a clear

picture of the company’s solvency, liquidity, returns, etc. These ratios were thoroughly

analyzed and finally the results were interpreted.

4.1 RESEARCH DESIGN

Research Design is the first and foremost step in Methodology adopted and undertaking

research study. It is the overall plan for the collection and analysis data in the research

project. Thus it is an organized, systematic, approach to be formulation implementation and

control of research project.

In fact a well planned and well balanced research design guards against collection of

irrelevant data and achieves the result in the best possible way.

4.2 NATURE AND SOURCES OF DATA

The main purpose or objective of this study is to undertake the financial appraisal of MTNL,

To attain this objective, time series and cross section data are collected on the basis of

universe. The basic sources of data are as under:-

13
1) Annual reports of MTNL which are recast and presented in a condensed form. The

statement showing total costs under various heads have also been prepared.

2) Some information has been collected through formal as well as informal discussion with

various department heads.

Data are bricks with which the researcher has to make a house. While the quality of research

finding depend on the data. The adequacy of appropriate data in turn depends upon proper

method of data collection. A number of methods are at the disposal of the researcher of

which one has to select the most appropriate one for visualizing the research objectives.

Thus he has to see the method adopted is compatible with the resources and research study.

a) PRIMARY DATA: Data which are collected fresh and for the first time and thus happens

to be original in character. Primary data are gathered for specific purposes.

b) SECONDARY DATA: Data that are collected from primary data i.e. they are already

exist somewhere. For the purpose of our study we collected both the data.

14
5.0 RATIO ANALYSIS

It is an analytical technique of interpreting financial statements. These are the quantitative

relationships between two figures for their comparative analysis.

Ratios simplify and summarize a long array of accounting data to provide useful information

regarding the liquidity, solvency, perfectibility etc.

Advantages of Ratio Analysis:-

It helps the reader in giving tongue to the heaps of figures given in financial statements.

1) It is helpful in analysis of financial statements.

2) It is helpful in simplification of accounting data.

3) It is helpful in comparative study.

4) It is helpful in locating the weak spots of the business.

5) It gives estimates about the trend of the business.

6) It discloses the liquidity, solvency and profitability of an enterprise.

7) It indicates the financial soundness of the business.

Classification of Ratios:-

A. Liquidity Ratios

B. Activity Ratios

C. Leverage or Capital structure Ratios

D. Profitability Ratios

15
A. Liquidity Ratio:

“Liquidity” refers to the ability of the firm to meet its current liabilities. It is also called short

term solvency ratio. This ratio establishes the relationship between cash and other current

assets to current obligations which provide a quick measure of liquidity. It is very necessary

to strike a proper balance between high liquidity and lack of liquidity.

It includes

• Current ratio

• Liquid / Acid test / Quick ratio

B. Activity or Turnover Ratio:-

Funds of creditors and owners are invested into various assets to generate sales and profits.

The better the management of assets the larger the amount of sales. Turnover ratios are

employed to evaluate the efficiency with which the firm manages and utilizes its assets. They

indicate the speed with which assets are being converted into sales. This ratio involves a

relationship between sales and assets. A proper balance between sales and assets generally

reflects that assets are managed well. Several turnover ratios can be calculated to judge the

effectiveness of asset utilization.

It includes

• Inventory/Stock turnover ratio

• Debtors/Receivables turnover ratio

• Average collection period

• Creditors/Payable turnover ratio

16
 • Working capital turnover ratio

• Fixed assets turnover ratio

• Over and under trading

C. Leverage or Capital Structure Ratios

The short term creditors like bankers and suppliers of raw material are more concerned with

the firm’s current debt paying ability. On the other hand long term creditors like debenture

holders, financial institutions etc are more concerned with the firms long term financial

strength. Infact a firm should have a strong short as well as long term financial position. To

judge the long term financial position of the firm financial leverage are calculated. These

ratios indicate mix of funds provided by owners and lenders. As a general rule there should

be an appropriate mix of debt and owners equity in financing the firm’s assets.

It includes

a) Debt Equity Ratio

b) Debt to total funds

c) Proprietary Ratio

d) Fixed Assets to proprietor’s Fund

e) Interest Coverage ratio.

17
D. Profitability Ratios:

It tells:

i. Is the firm earning adequate profits?

ii. What is the rate of gross profit & net profit on sales?

iii. What is the rate of return on capital employed in the firm?

iv. What is the rate of return on proprietor’s funds?

v. What is the earning per share?

It includes

• Gross profit ratio

• Net profit ratio

• Operating ratio

• Expense ratio

• Return on shareholders investment or net worth

• Return on equity capital

• Return on capital employed (ROCE) ratio

• Dividend yield ratio

• Dividend payout ratio

• Earnings Per Share Ratio

18
Limitation of Ratio Analysis:

Ratio analysis is a very important tool of financial analysis, the ratio analysis suffers from a

number of limitations that are:

• Ratios are calculated on the basis of data given in profit & loss A/c and Balance

Sheet. Therefore they will be only as current the accounting data in which they are

based.

• If the different firm adopt different accounting policies then the comparisons it is not

possible among them.

• Ratio analysis becomes effective due to change in price level.

• The analyst should not merely rely on a simple ratio.

• Same companies in order to cover up their bad financial position in cost to window

dressing i.e. showing better position then they really has.

• Ratios are affected by personal ability and biasness.

• Ratio above is not adequate for proper conclusion.

19
6.0 ANALYSIS & INTERPRETATIONS

1. Current Ratio

Formulae

Current Ratio = Current Assets

Current liabilities

Current assets include cash and those assets which can be easily converted into cash within a

short period of time, generally, one year, such as marketable securities or readily realizable

investments, bills receivables, sundry debtors, inventories, work in progress, prepaid

expenses.

Current liabilities are those obligations which are payable within a short period of tie

generally one year and include outstanding expenses, bills payable, sundry creditors, bank

overdraft, accrued expenses, short term advances, income tax payable, dividend payable, etc.

Years 2004 2005 2006 2007 2008

Current assets 139278 146958.9 133520.2 141996.8 141616.5
Current liabilities 101094.9 106712.1 91308.46 97810.11 97551.22
Ratio 1.377695 1.377153 1.462299 1.45176 1.451715
All the figures are in million

20
 Current Ratio

1.48
1.46
1.44
1.42
Ratios

1.4 Current Ratio

1.38
1.36
1.34
1.32
2004 2005 2006 2007 2008
Years

Comment

This ratio is used to assess the short term financial position of the business. In

other words it is an indicator of the firm’s ability to meet its short term obligations. A

relatively high current ratio is an indication that the firm is liquid and has the ability to pay its

current obligations in time and when they become due. On the other hand, a relatively low

current ratio represents that the liquidity position of the firm is not good and the firm shall

not be able to pay its current liabilities in time without facing difficulties. An ideal current

ratio should be 2:1. But in none of the years the company has achieved this ratio, it has

always remained below this ratio, so this indicates that the short term financial position of the

company is unsatisfactory and the company is not in a position to pay its current liabilities in

time.

21
2. Liquid Ratio

Formulae

Liquid Ratio = Liquid assets

Current liabilities

Liquid assets mean current assets minus inventories (stock) and prepaid expenses.

Current liabilities are those obligations which are payable within a short period of tie

generally one year and include outstanding expenses, bills payable, sundry creditors, bank

overdraft, accrued expenses, short term advances, income tax payable, dividend payable, etc.

Years 2004 2005 2006 2007 2008

Liquid assets 138390.1 145092.9 132142.1 139744.6 140009.5
Current liabilities 101094.9 106712.1 91308.46 97810.11 97551.22
Ratio 1.368913 1.359667 1.447205 1.428733 1.435241
All the figures are in million

Liquid Ratio

1.46
1.44
1.42
1.4
Ratios

1.38 Liquid Ratio

1.36
1.34
1.32
1.3
2004 2005 2006 2007 2008
Years

Comment

22
The liquid ratio is very useful in measuring the liquidity position of a firm. It measures the

firm's capacity to pay off current obligations immediately and is more rigorous test of

liquidity than the current ratio. It is used as a complementary ratio to the current ratio. Liquid

ratio is more rigorous test of liquidity than the current ratio because it eliminates inventories

and prepaid expenses as a part of current assets. Usually a high liquid ratio an indication that

the firm is liquid and has the ability to meet its current or liquid liabilities in time and on the

other hand a low liquidity ratio represents that the firm's liquidity position is not good. An

ideal liquid ratio is 1:1. In all the years the company has shown a higher liquid ratio, which is

a very good indication of short term financial position of a company.

3. Debtors Turnover Ratio

23
 Formulae

Debtors turnover ratio = Sales

Average Debtors

The average debtor is calculated by adding the debtors in the beginning and at the end of the

year and dividing it by two.

Years 2004 2005 2006 2007 2008

Sales 63695.99 55820.7 55609.85 49093.18 47225.17
Avg. debtors 14782.22 17056.78 15865.71 12794.06 9534.995
Ratio 4.308961 3.272641 3.505034 3.837187 4.952826
All the figures are in million

Debtors Turnover Ratio

4
Ratios

3 Debtors Turnover Ratio

0
2004 2005 2006 2007 2008
Years

Comment

This ratio indicates the number of times debtors turnover each year. The higher the values of

debtor’s turnover the more efficient is the management of credit. Higher ratios indicate that

24
debts are being collected more quickly. Prompt collections of debts will release funds which

may then be put to some other use. Similarly, low debtors turnover ratio implies inefficient

management of debtors. This ratio was 4.30 times in 2004 which decreased to 3.27 in 2005

but after that it increased year after year and reached to 4.95 times in 2008 which is better for

the company as now debts are being collected more quickly by the company.

4. Inventory Turnover Ratio

Formulae

Inventory Turnover Ratio = Cost of goods sold

Average inventory

25
Cost of goods sold means sales minus gross profit.

Average inventory is calculated by adding the stock in the beginning and at the end of the

year and dividing it by two.

Years 2004 2005 2006 2007 2008

Cost of goods sold 37431.47 32929.61 37684.92 47881.54 34353.07
Avg. inventory 1192.755 1376.96 1622.1 1795.47 1909.915
Ratio 31.38236 23.91472 23.23218 26.66797 17.9867
All the figures are in million

Inventory turnover ratio

35
30
25
20
Ratio

Inventory turnover ratio

15
10
5
0
2004 2005 2006 2007 2008
Years

Comment

This ratio indicates whether stock has been efficiently used or not. The purpose of this ratio

is to check up whether only the required minimum amount has been invested in stock. High

ratio indicates efficient management of inventory because more frequently the stocks are

sold, the lesser amount of money is required to finance the inventory. A low inventory

turnover ratio indicates an inefficient management of inventory. A low inventory turnover

26
implies over-investment in inventories, dull business, poor quality of goods, stock

accumulation, accumulation of obsolete and slow moving goods and low profits as compared

to total investment. Now, in 2004 this ratio was 31.38 times then it decreased to 23.9 times in

2005 then it remains almost constant in 2006 then it increased in 2007 but decreased in 2008

as this ratio declined continuously which shows that the speed with which the stock is turned

into sales is declining, expect in 2007.

5. Asset Turnover Ratio

Formulae

Asset Turnover Ratio = Sales

Capital employed

Capital Employed = Fixed assets + Investments + Working capital

27
Years 2004 2005 2006 2007 2008
Sales 63695.99 55820.7 55609.85 49093.18 47225.17
Capital employed 108910.9 115178.3 117341.5 209158 122487
Ratio 0.584845 0.484646 0.473914 0.234718 0.385552
All the figures are in million

Asset Turnover Ratio

0.7
0.6
0.5
0.4
Ratios

Asset Turnover Ratio

0.3
0.2
0.1
0
2004 2005 2006 2007 2008
Years

Comment

This ratio measures the efficiency and profit earning capacity of the concern. Higher the

ratio, greater is the intensive utilization of fixed assets. Lower ratio means under-utilization

of fixed assets. This ratio is been declining continuously year after year from 2004 to 2007

which means, that fixed assets are not efficiently utilized but in 2008 there is little increase in

the ratio which shows MTNL is now using their assets efficiently.

28
6. Working Capital Turnover Ratio

Formulae

Working Capital Turnover Ratio = Sales

Working capital

Working capital means current assets minus current liabilities.

Years 2004 2005 2006 2007 2008

Sales 63695.99 55820.7 55609.85 49093.18 47225.17
Working capital 38183.09 40246.82 42211.83 44186.71 44065.31
Ratio 1.668173 1.386959 1.3174 1.111039 1.071709

29
 All the figures are in million

Working Capital Turnover Ratio

1.8
1.6
1.4
1.2
Ratios

1 Working Capital Turnover

0.8 Ratio
0.6
0.4
0.2
0
2004 2005 2006 2007 2008
Years

Comment

The working capital turnover ratio measures the efficiency with which the working capital is

being used by a firm. A high ratio indicates efficient utilization of working capital and vice

versa. As we can see from the table that working capital is continuously decreasing from 1.66

times to 1.07 times in years 2004 to 2008 which indicates that the working capital has not

been efficiently utilized. In other words firm is not effective in using their short term funds.

30
7. Proprietary Ratio

Formulae

Proprietary ratio = Shareholder’s Fund

Total Assets

Shareholder's funds or net worth include equity share capital, (preference share capital) and

all reserves and surplus belonging to shareholders.

Total assets include fixed assets and current assets.

Years 2004 2005 2006 2007 2008

Shareholders fund 108910.9 115178.3 118484 122497.8 124078.7
Total assets 210005.8 221859.4 208650 218051.9 220038.3
Ratio 0.518609 0.51915 0.56786 0.561783 0.563896

31
 All the figures are in million

Proprietary Ratio

0.58
0.57
0.56
0.55
Ratios

0.54
Proprietary Ratio
0.53
0.52
0.51
0.5
0.49
2004 2005 2006 2007 2008
Years

Comment

This ratio throws light on the general financial position of the company. Higher the ratio or

the share of shareholders in the total capital of the company better is the long-term solvency

position of the company. A low proprietary ratio will include greater risk to the creditors. A

ratio below 50% may be alarming for the creditors since they may have to loose in the event

of company’s liquidation but this ratio is more than 50% in all the years which means it

provides safety to the creditors.

32
8. Fixed Asset To Proprietary Fund Ratio

Formulae

Fixed Asset To Proprietary Fund Ratio = Fixed Assets

Proprietor’s Fund

Proprietor fund include equity share capital, (preference share capital) and all reserves and

surplus belonging to shareholders.

Years 2004 2005 2006 2007 2008

Fixed assets 70727.76 74931.51 75129.7 76094.53 78421.73
Proprietor fund 108910.9 115178.3 118484 122497.8 124078.7
Ratio 0.64941 0.65057 0.634091 0.621191 0.632032
All the figures are in million

33
 Fixed Assets To Proprietary Fund Ratio

0.655
0.65
0.645
0.64
0.635
Ratio

Fixed Assets To Proprietary

0.63
Fund Ratio
0.625
0.62
0.615
0.61
0.605
2004 2005 2006 2007 2008
Years

Comment

The purpose of this ratio is to indicate the percentage of the owner's funds invested in fixed

assets. Generally, the purchase of fixed assets should be financed by shareholder's equity

including reserves, surpluses and retained earnings. If the ratio is less than 100%, it implies

that owners’ funds are more than fixed assets and a part of the working capital is provide by

the shareholders. When the ratio is more than the 100%, it implies that owners funds are not

sufficient to finance the fixed assets and the firm has to depend upon outsiders to finance the

fixed assets. This ratio by 60 to 65 percent is considered to be a satisfactory and if we saw in

the table the ratio lies between 60 to 65 percent in all the years.

34
9. Fixed Asset Ratio

Formulae

Fixed Asset Ratio = Shareholders fund + long term loans

Net fixed assets

Shareholder's funds or net worth include equity share capital, (preference share capital) and

all reserves and surplus belonging to shareholders.

Years 2004 2005 2006 2007 2008

Shareholders fund + long term 108910. 115178. 122497.

loans 9 3 118484 8 124078.7

70727.7 74931.5 75129. 76094.5

Net fixed assets 6 1 7 3 78421.73

1.53711 1.5770

Ratio 1.53986 5 6 1.60981 1.582198

All the figures are in million

35
 Fixed Asset Ratio

1.62

1.6

1.58
Ratios

1.56 Fixed Asset Ratio

1.54

1.52

1.5
2004 2005 2006 2007 2008
Years

Comment

This ratio is important to ascertain the proper investments of funds from the point of view of

long term financial soundness. It is also another aspect of long term financial policy. This

ratio indicates as to what extent fixed assets are financed out of long term solvency. The ideal

ratio should be more than 1, which is there in all the years. This means the firm has invested

their funds properly from the point of view of long term financial soundness.

36
10. Net Margin

Formulae

Net margin = Net Profit

Sales

Net profit means net income after payment of interest and income tax.

Years 2004 2005 2006 2007 2008

Net profit 11504.78 9389.79 5802.92 6817.36 5868.91
SALES 63695.99 55820.7 55609.85 49093.18 47225.17
Ratio 0.18062 0.168213 0.104351 0.138866 0.124275
All the figures are in million

37
 Net Margin

0.2
0.18
0.16
0.14
0.12
Ratios

0.1 Net Margin

0.08
0.06
0.04
0.02
0
2004 2005 2006 2007 2008
Years

Comment

Net margin is used to measure the overall profitability and hence it is very useful to

proprietors. The ratio is very useful as if the net margin is not sufficient, the firm shall not be

able to achieve a satisfactory return on its investment. This ratio also indicates the firm's

capacity to face adverse economic conditions such as price competition, low demand, etc.

Obviously, higher the ratio the better is the profitability. In 2004 this ratio was 18.06% then

it decreased to 16.82% in 2005 then it declined again in 2006 to 10.43% but there is slight

increase in 2007 but it decreased again in 2008. A decline in this ratio indicates decline in the

overall efficiency and profitability of the business.

38
11. Gross Margin

Formulae

Gross Margin = Gross profit or EBIT

Sales

Years 2004 2005 2006 2007 2008

EBIT 17205.71 12514.79 6957.94 7946.94 6344.31
SALES 63695.99 55820.7 55609.85 49093.18 47225.17
Ratio 0.270122 0.224196 0.125121 0.161875 0.134342
All the figures are in million

39
 Gross Margin

0.3

0.25

0.2
Ratios

0.15 Gross Margin

0.1

0.05

0
2004 2005 2006 2007 2008
Years

Comment

Gross margin may be indicated to what extent the selling prices of goods per unit may be

reduced without incurring losses on operations. It reflects efficiency with which a firm

produces its products. As the gross margin is found by deducting cost of goods sold from net

sales, higher the gross margin better it is. There is no standard gross margin for evaluation.

However, the gross margin earned should be sufficient to recover all operating expenses and

to build up reserves after paying all fixed interest charges and dividends. Gross margin is

decreasing which is serious matter for the company as it is used to determine the selling price

so that there is adequate gross profit to cover the operating expenses, fixed charges etc of the

company.

40
12. Operating Expense Ratio

Formulae

Operating expense ratio = Operating Expenses

Sales

Operating expenses includes property taxes, property management fees, insurance, wages,

utilities, repairs and maintenance, supplies, advertising, attorney fees, accounting fees, trash

removal, pest control, etc.

Years 2004 2005 2006 2007 2008

Operating expenses 9749.57 10228.34 11579.15 9462.86 11222.19
Sales 63695.99 55820.7 55609.85 49093.18 47225.17
Ratio 0.153064 0.183236 0.208221 0.192753 0.237632

41
 All the figures are in million

Operating Expense Ratio

0.25

0.2

0.15
Ratios

Operating Expense Ratio

0.1

0.05

0
2004 2005 2006 2007 2008
Years

Comment

The Operating Expense Ratio is usually viewed as a measurement of management

efficiency. This is because management usually has greater control over operating expenses

than they do over revenues. The operating expense ratio is an indicator of how efficiently a

property is being managed. The lower the operating expense ratio, the greater the profit for

the investor or investors. As we can see in the above table this ratio is increasing from

15.30% (2004) to 20.82%(2006) & then it falls in 2007 but again increase in 2008 which is

unfavorable for the firm since it will leave a small amount of operating income to meet

interests, dividend etc.

42
13. Return On Equity

Formulae:

Return on equity = Net Profit

Net worth

Net profit means net income after payment of interest and income tax.

Net worth includes equity share capital, (preference share capital) and all reserves and

surplus belonging to shareholders.

Years 2004 2005 2006 2007 2008

Net profit 11504.78 9389.79 5802.92 6817.36 5868.91
Net worth 108910.9 115178.3 118484 122497.8 124078.7
Ratio 0.105635 0.081524 0.048976 0.055653 0.0473
All the figures are in million

43
 Return On Equity

0.12

0.1

0.08
Ratios

0.06 Return On Equity

0.04

0.02

0
2004 2005 2006 2007 2008
Years

Comment

This ratio is one of the most important ratios used for measuring the overall efficiency of a

firm. As the primary objective of business is to maximize its earnings, this ratio indicates the

extent to which this primary objective of businesses being achieved. This ratio is of great

importance to the present and prospective shareholders as well as the management of the

company. As the ratio reveals how well the resources of the firm are being used, higher the

ratio, better are the results. The inter firm comparison of this ratio determines whether the

investments in the firm are attractive or not as the investors would like to invest only where

the return is higher. In 2004 this ratio was 10.5% then it decreased to 8.15% in 2005 than it

decreased to 4.89% in 2006 but then it increased slightly to 5.56% in 2007 and again

decreased to 4.73 in 2008, So we can say that the return on shareholders funds is decreasing

year by year.

44
14. Return on Investment

Formulae

Return on Investment = EBIT

Capital Employed

Capital Employed = Fixed assets + Investments + Working capital

Years 2004 2005 2006 2007 2008

EBIT 17205.71 12514.79 6957.94 7946.94 6344.31
Capital employed 108910.9 115178.3 117341.5 209158 122487
Ratio 0.15798 0.108656 0.059296 0.037995 0.051796
All the figures are in million

45
 Return On Investment

0.18
0.16
0.14
0.12
Ratios

0.1
Return On Investment
0.08
0.06
0.04
0.02
0
2004 2005 2006 2007 2008
Years

Comment

The ROI (return on investment) means how much profit or cost saving is realized. The

overall ROI for an enterprise is sometimes used as a way to grade how well a company is

managed. This ratio helps in judging performance efficiency of dissimilar industries. This

ratio measures how effectively the sources entrusted to the business are being used. This ratio

is decreasing year after year which shows the earning power of the net assets of the business

is decreasing.

46
15. Earning per share

Formulae

Earning Per Share = Net Profit

Number of Shares

Net profit means net income after payment of interest and income tax.

Years 2004 2005 2006 2007 2008

Net profit 11504.78 9389.79 5802.92 6817.36 5868.91
No. of shares 630 630 630 630 630
Ratio 18.26156 14.90443 9.210984 10.82121 9.31573
All the figures are in million

47
 Earning Per Share

20
18
16
14
12
Ratios

10 Earning Per Share

8
6
4
2
0
2004 2005 2006 2007 2008
Years

Comment

The earnings per share is a good measure of profitability and when compared with EPS of

similar companies, it gives a view of the comparative earnings or earnings power of the firm.

EPS ratio calculated for a number of years indicates whether or not the earning power of the

company has increased. EPS shows the profitability of the firm on per share basis. In 2004

EPS was Rs.18.26 then it decreased to Rs.14.90 in 2005 then it again decreased to Rs.9.21 in

2006 but then it increased to Rs.10.82 in 2007 and then decreased to 9.31 in 2008, So we can

say that EPS is declining year by year.

48
16. Dividend Per Share

Formulae

Dividend per Share = Dividend

Numbers of shares

Years 2004 2005 2006 2007 2008

Dividend 2835 2835 2520 2520 2520
No. of shares 630 630 630 630 630
Ratio 4.5 4.5 4 4 4
All the figures are in million

49
 Dividend Per Share

4.6
4.5
4.4
4.3
Ratios

4.2
Dividend Per Share
4.1
4
3.9
3.8
3.7
2004 2005 2006 2007 2008
Years

Comment

The net profits after taxes belong to shareholders. But the income which they really receive is

the amount of earnings distributed as cash dividends. Therefore a large number of present

and potential investors may be interested in DPS. DPS remained constant at Rs.4.5 from

2004 to 2005 but it declined to Rs.4 from 2006 to 2008. So we can say that DPS earned by

the shareholders in these years has not varied much.

50
17. Payout Ratio

Formulae

Payout Ratio = Dividend per Share

Earning per Share

Years 2004 2005 2006 2007 2008

DPS 4.5 4.5 4 4 4
EPS 18.26 14.9 9.21 10.82 9.32
Ratio 0.24644 0.302013 0.434311 0.369686 0.429185
All the figures are in million

51
 Payout Ratio

0.5
0.45
0.4
0.35
0.3
Ratios

0.25 Payout Ratio

0.2
0.15
0.1
0.05
0
2004 2005 2006 2007 2008
Years

Comment

The payout ratio is the indicators of the amount of earnings that have been ploughed back in

the business. The lower the payout ratio, the higher will be the amount of earnings ploughed

back in the business and vice versa. A lower payout ratio means a stronger financial position

of the company. The payout ratio also indicates how well earnings support the dividend

payments, the lower the ratio, the more secure the dividend because smaller dividends are

easier to pay out than larger dividends. The payout ratio between 40-60% is considered

satisfactory as it allows a good portion of the profits to be paid to the shareholder as well as

allowing for some of the profits to be plowed back into the company to create more internal

growth. In year 2004-2005 this ratio was less than 40% but now it is more than 40% which is

a good sign.

52
18. Price Earning Ratio

Formulae

Price earning ratio = Market Value of Share

Earning Per Share

Years 2004 2005 2006 2007 2008

Market value of share 10 10 10 10 10
EPS 18.26 14.9 9.21 10.82 9.32
Ratio 0.547645 0.671141 1.085776 0.924214 1.072961
All the figures are in million

53
 Price Earning Ratio

1.2

0.8
Ratios

0.6 Price Earning Ratio

0.4

0.2

0
2004 2005 2006 2007 2008
Years

Comment

The ratio is calculated to make an estimate of appreciation in the value of a share of a

company and is widely used by investors to decide whether or not to buy shares in a

particular company at a particular market price. Generally, higher the price earning ratio the

better it is. If the P/E ratio falls, the management should look into the causes that have

resulted into the fall of this ratio. If we saw MTNL share value is increasing year after year

as its ratio is increasing since from 2004 to 2008.

54
19. Dividend Yield Ratio

Formulae

Dividend yield ratio = Dividend Per Share

Market Value of Share

Years 2004 2005 2006 2007 2008

DPS 4.5 4.5 4 4 4
Market value of share 10 10 10 10 10
Ratio 0.45 0.45 0.4 0.4 0.4
All the figures are in million

55
 Dividend Yield Ratio

0.46
0.45
0.44
0.43
0.42
Dividend Yield Ratio
0.41
0.4
0.39
0.38
0.37
2004 2005 2006 2007 2008

Comment

Share holders are real owners of a company and they are interested in real sense in the

earnings distributed and paid to them as dividend. This ratio helps as intending investor

knows the effective return he is going to get on the proposed investment. As this ratio

remains same in 2004 to 2005 at 45 percent but there is a decline in this ratio to 40 percent in

2006 but then again it remains constant till 2008 which means the return which the investors

get on his investment has not varied much.

56
7. Findings

• According to the industry standards current ratio of the company remains low every

year which shows the company is not in a position to pay its current liabilities in time.

• MTNL is maintaining a high liquid ratio which is a very good indication of short term

financial position of a company.

• Debtors turnover ratio increasing which is better for the company as now debts are

being collected more quickly by the company.

• Stock turnover ratio is declining continuously decline which shows that the speed

with which the stock is turned into sales is declining.

57
• Assets turnover ratio is low which means there is under-utilization of fixed assets in

MTNL.

• Working capital turnover ratio is decreasing which indicates that the working capital

has not been efficiently utilized.

• Proprietary ratio is more than 50% in all the years which means it provides safety to

the creditors.

• Fixed Asset To Proprietary Fund Ratio lies between 60-65% which is considered to

be a satisfactory according to company standards.

• Fixed Asset Ratio shows that the firm has invested their funds properly.

• Net margin indicates decline in the overall efficiency and profitability of the business.

• Gross margin is decreasing which is serious matter for the company.

• Operating expense ratio is increasing which is unfavorable for the firm since it will

leave a small amount of operating income to meet interests, dividends etc.

• Return on equity shows return on shareholders fund is decreasing year by year.

• ROI is decreasing year after year which shows the earning power of the net assets of

the business is decreasing.

• Earning per share is declining year by year.

• Dividend per share shows that dividend earned by the shareholders in these years has

not varied much.

• Price earning ratio MTNL share value is increasing year after year as its ratio is

increasing.

• Dividend yield ratio shows the return which the investors get on his investment has

not varied much.

58
8. Conclusions

• Being a government undertaking MTNL’ has proved its efficiency over the years and has

emerged as a market leader inspite of the stiff competition from private players and

a bundle full of government restrictions and regulations.

• It is ranked as a “NAV RATAN” company by the Government of India. It is

continuously increasing its operations and coming out with new products to meet the

consumer needs.

• MTNL is good profits making firm and its efficiency is increasing over the years.

59
• In MTNL there is strong need of an effective Management Information System (MIS),

which could help improving its current position. An effective MIS is demanded from

an organization.

• Due to competition it is becoming increasingly difficult to increase profits.

• The image of the company as against its competitors may be hampering the growth of its

profit.

• Spending on long terms and fixed assets which help in revenue generation is low.

9. Suggestions

• MTNL as it was operating few years back is now in a different world of competition.

There are so many good players which are eating its market share slowly. There is only

one way to gain or even retain it current market which is to be more innovative.

• It is the right time to cut down the employees force by giving them voluntary retirement

or by any other method and give chance to young guns.

60
• MTNL in a world, where its competitors are announcing new schemes everyday, has to

come out of the image of a government undertaking. It should move according to the

need of the hour.

• In order to increase profits MTNL should consider cost cutting especially as it spends

1/3rd of its earnings on its employees and 1/5th on the Administration expenses.

• MTNL should fasten up its collection from its customers. It has come out with some

good schemes like Advance payment of Bill and it is offering 5% interest on the advance

deposited with it by the customers.

• It needs few more schemes which could motivate the customers to pay early or even in

time.

• It is recommended that MTNL should try to change its image in the market from that of

Public sector undertaking to that of an efficient company.

• MTNL should increase the amount of spending on its long term and fixed assets which

will help it in providing better services thereby increasing its market share.

10. Bibliography

Printed literature

• Annual general reports of MTNL

• Function specification of WFMS

• Book of financial management by I M Pandey ninth edition

61
• Book of financial statements by Ashwinpaul C. Sondhi third edition

Websites

• www.mtnl.net.in

• www.trai.gov.in

• www.bol.nei.in

• www.nseindia.com

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