CHAPTER – 1

INTRODUCTION

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1 INTRODUCTION

The financial statement provides the basic data for financial performance analysis. The
financial statements provide a summarized view of the financial position and operations of a
firm. Financial analysis (also referred to as financial statement analysis or accounting analysis)
refers to an assessment of the viability, stability and profitability of a business. The analyst first
identifies the information relevant to the decision under consideration from the total information
contained in the financial statements. Therefore, much can be learnt about a firm from a careful
examination of its financial statements as invaluable documents and performance reports.

The analysis of financial statements is an important aid to financial analysis. They

provide information on how the firm has performed in the past and what is its current financial
position. Financial analysis is the process of identifying the financial strengths and weakness of
the firm from the available accounting data and financial statements. The analysis is done by
establishing relationship between the different items of financial statements.

The focus of financial analysis is on key figures in the financial statements and the
significant relationship that exists between them. The analysis of financial statements is a process
of evaluating relationship between component parts of financial statements to obtain a better
understanding of the firm’s position and performance.

The first task of financial analyst is to select the information relevant to the decision
under consideration from the total information contained in the financial statement. The second
step involved in financial analysis is to arrange the information in a way to highlight significant
relationships. The final step is interpretation and drawing of inferences and conclusions. In brief,
financial analysis is the process of selection, relation, and evaluation.

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1.1 INDUSTRIAL PROFILE

1.1.1 NON-BANKING FINANCIAL COMPANIES (NBFCS)

Non-bank financial companies (NBFCs) are financial institutions that provide

banking services without meeting the legal definition of a bank, i.e. one that does not hold a
banking license. Operations are, regardless of this, still exercised under bank regulation.

According to Reserve Bank Amendment of Act 1997, A Non-Banding Financial Company

(NBFCs) means,

 A financial institution which is a company

 A non-banking institution which is a company which has its principal business receiving
of deposits under any scheme of arrangement or in any other manner or lending in any
manner

The non-banking financial sector in India has tremendous growth in recent years. NBFCs’
attracted a large number of small investors since the rate of return on deposits with them was
relatively high. NBFCs are quite flexible sectors like equipment leasing, hire-purchase, housing
finance, consumer finance and so on, where gaps between the demand and supply of funds have
been high. The growth in number of NBFCs was facilitated by the case of entry, limited fixed
assets and absence of any need to hold inventories.

1.1.2 CURRENT SCENARIO OF NBFCS

The base of today’s feebleness of Non-Banking Finance Companies can perhaps be

traced back to early nineties. The buoyant capital market, in the first flush liberalization
welcomed every issue with huge premiums and massive over subscription. This was the signal
for several unscrupulous promoters to set up high profile finance companies and raise money
from both the capital markets and through public deposits.

The Reserve Bank of India for its past, progressively relaxed its regulatory hold over
the industry and made it possible for the companies with little financial strength and even fewer
scrupulous to raise large amounts of money from an unsuspecting public. Hardly anyone knew
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or questioned how these moneys were deployed. Soon afterward, the stock market scam broke
claiming its first victim from the non-banking finance companies sector. With the capital market
in disarray, it was no longer possible for continue of fund flow, from investors who had burnt
their fingers in the stock markets. It was thus convenient fresh deposits. In July1996, the RBI,
perhaps the most sweeping changes in the non-banking finance companies regulation, virtually
pulled out all the stock, enabling companies to raise deposits with minimum number and more
significantly, removed the ceiling on interest rate.

At the point, when the government was faced with grim situation and responding to the
plea of the industry, the government set up a special task force headed by Mr. C.M. Vasudev to
recommend the steps for the orderly growth of finance companies while keeping investor
protection as its key priority. The committee in its final report recognized the important role
played by these companies and warned against the tendencies to tar all the companies with the
same brush. The silent recommendations of the Vasudev committee were

 Review of minimum capital requirement of Rs. 25lakhs for registration purposes

 Higher capital adequacy ratio for non-banking finance companies seeking public deposits
without credit rating
 Preview of prudential norms with ceiling for exposure to real estate and capital markets
 Differential ceiling on public deposit acceptance for companies with and without credit
ratings
 A separate instrument to regulate and supervise non-banking finance companies.

1.1.3 ADVANTAGE OF NBFCs

1. Lower transaction costs

2. Higher rate of interest on deposits compared to banks
3. Quick financial decision caking
4. Customer orientation
5. Prompt provision of services

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1.1.4 RBI GUIDELINES FOR NBFCs

The nineties witnessed a dramatic increase in the number of NBFCs and it was thought
necessary to have a regulatory framework for NBFCs. RBI came out with set of guidelines for
NBFCs specifically aimed at protecting the depositors.

To encourage the NBFCs that is running on sound business principals, on July 24th
1996, NBFCs were divided into two classes,

i. Equipment leasing and hire purchase (finance company)

ii. Loan and investment companies

1.1.5 CATEGORIES OF NBFCs

i. Loan Companies
ii. Investment Companies
iii. Hire Purchase Companies
iv. Equipment Leasing Companies
v. Mutual Benefits Finance Companies
vi. Housing Finance Companies

Equipment leasing company – Any company, which is a financial institution, carrying on its
principal business. The activities of leasing of equipment of the financing of such activity.

1. Hire purchase finance company – A company, which is a financial institution, carrying

on its principal business, hire purchase transaction.

2. Investment Company – A company, which deals with acquisition of securities.

3. Loan Company – A company, which is a financial institution and carries on its principal
business of providing finance by any activities other than its own.

4. Mutual benefit finance company – A company, which is a financial institution. This is

notified by the central government under section 620 (a) of The Companies Act 1956.

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1.2 COMPANY PROFILE

Sundaram Finance Limited was incorporated in 1954 and has grown into one of the
most trusted financial services group in India and a part of TV Sundaram Iyengar and Sons group
of companies, one of India’s largest industrial conglomerates and diversified industrial
conglomerate with principal base in Chennai and Madurai. Almost all the companies in the
group are privately held. The company was started with a paid-up capital of Rs.2Lakhs and
later went public in 1972.

1.2.1 FOUNDER OF THE COMPANY

The Company was founded by Sri. T. S. Santhanam. He has a rich experience in the
automobile and road transport sector for nearly six decades. He was the founder, Director and
First managing director of Sundaram Finance Limited and has served on various committees
constituted by the Central Government and Reserve Bank of India on various aspects relating to
growth and development of the Road Transport and Non-Banking Financial Companies.

The company has been rated as ‘MAA’ by the ICRA signifying the highest number of
deposits. The Company mobilizes its funds from driver sources at competitive rates thus
achieving a reduction in overall cost of funds. The company gets its funds from the main sources
namely,

 Deposits
 Bank/Industrial Finance
 Debentures
 Commercial Papers

1.2.2 THE MAIN ACTIVITIES OF SUNDARAM FINANCE LIMITED

 Deposits
 Hire Purchasing
 Leasing

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1.2.3 FIVE PILLARS OF SUNDARAM FINANCE LIMITED

1. Faith
2. Depositor’s confidence
3. Institutional trust
4. Investor safety
5. Employee loyalty

1.2.4 CORPORATE PHILOSOPHY OF THE COMPANY

 Truth and fairness guide the management of finance

 Customer satisfaction through excellent service and reliability
 Prudence and conservation in finance operations
 Truth, honesty and efficiency in all dealings
 Professional management with high standards of integrity
 Full compliance with law and regulations.

1.2.5 OBJECTIVES OF THE COMPANY

Sundaram Finance was initiated with the sole objective of financing commercial
vehicles and passenger cars. Within a span of 55 years they have spread their wings to every
exposable area in the Non-banking finance sector. Sundaram Finance – Where Truth, Fairness
and Transparency guide the management of finance.

1.2.6 VALUES

A set of values have governed their growth over the years. Among them are transparent
in their business practices, dedicated customer service fair, efficient and safe financial policies.

1.2.7 STRENGTH

 Support of the group companies.

 Involvement of the directors on major policy matters.
 High employee morale.
 Good initial system for operation and control.
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  Efficiency and sophisticated software system for decision support system.
 Investor’s trust and faith in the company.
 Easy financing schemes for all cars – new and second hand cars.
 Simple documentation, quick processing and speedy approval.
 Customized schemes, personalized service.
 Direct dealing between customer and company.
 No hidden costs.
 Tailor – made products to suit individual requirements.

1.2.8 SUBSIDARIES / GROUPS

 Sundaram Finance
 Sundaram BNP Paribas Asset Management
 Sundaram BNP Paribas Home Finance Limited
 Royal Sundaram Alliance Insurance
 Sundaram InfoTech Solutions
 Sundaram Business Services
 Sundaram Finance Distribution Limited
 Infrieght Logistics Solutions Limited

1.2.9 AWARDS RECEIVED

 ‘Certificate of Commendation’ award by the Government of India under the scheme of

“Good Tax Payers”.

 “Second Best Tax Payer” in the category of Private Sector Company for Assessment
Year 1994-95 in Tamil Nadu Region, from the Income Tax Department, Tamil Nadu.

 ‘Rolling Trophy’ by Rotary Club of Madras South West for Best Employer-Employee
Relationship for the year 1995-96.

 “Best Tax Payer” in the category of Private Sector Company for Assessment Year 1995-
96 in Tamil Nadu Region, from the Income Tax Department, Tamil Nadu.

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 “Automan Award” to Shri T S Santhanam, Chairman, from Motor India in 1998.

 “Pioneering Service Award” to Shri T S Santhanam Chairman, from Chennai Good

Transport Association.

 “Sarige Ratna Award” to Shri T S Santhanam, Chairman, from the Bangalore City
Lorry Transporting Agents’ Association (Regd).

 “Most Valued Customer Award” to Shri T S Santhanam Chairman, from the State
Bank of India.

 “The Best Financier of the New Millennium 2000” to Shri. G K Raman, Managing
Director, from the All India Motor Transport Congress.

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10
NEED, OBJECTIVES AND SCOPE OF THE STUDY

2.1 NEED FOR THE STUDY

The Financial Statements are mirror which reflects the financial position and strengths or
weakness of the concern. The Non- Banking Financial Company has been witnessed intense
competition from domestic banks and international banks. Every business needs to view the
financial performance analysis.

The study on effectiveness of operational and financial performance of Sundaram finance

limited is conducted to measure the overall performance of company. The financial analysis
strengths the firms to make their best use, and to be able to spot out financial weakness of the
firm to state suitable corrective actions.

This study aims at analyzing the overall financial performance of the company by using
various financial tools like Comparative Analysis, common size statement analysis, Ratio
Analysis, and Cash Flow Analysis.

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2.2 OBJECTIVES OF THE STUDY

2.2.1 PRIMARY OBJECTIVE:

o To study the financial performance analysis of Sundaram Finance Limited,

Chennai.

2.2.2 SECONDARY OBJECTIVES:

o To compare and analyze the financial statements for the past three financial years
(2008,2009 and 2010)

o To know the profitability, liquidity and solvency position of Sundaram finance

limited.

o To compare and interpret financial statements of the Sundaram Finance Limited

with comparative and common-size statement analysis.

o To forecast the annual growth rate of income of the company with the help of
regression analysis.

o To provide suggestions for improving the overall finance performance of the

company.

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2.3 SCOPE OF THE STUDY

The study is based on the accounting information of the SUNDARAM FINANCE

LIMITED, CHENNAI. The study covers the period of 2008-2010 for analyzing the financial
statement such as income statements and balance sheet.

The scope of the study involves the various factors that affect the financial efficiency
of the company. To increase the profit and sales growth of the company. This study finds out the
operational efficiency of the organization and allocation of resources to improve the efficiency of
the organization.

The data of the past three years are taken into account for the study. The performance
is compared within those periods. This study finds out the areas where Sundaram Finance Ltd
can improve to increase the efficiency of its assets and funds employed.

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CHAPTER – 3
LITERATURE
REVIEW

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3 LITERATURE REVIEW

3.1 REVIEW OF LITERATURE

Literature Review was done by referring previous studies, articles and books to know
the areas of study and analyze the gap or study not done so far. There are various studies were
conducted relating to operational performance of the company from which most relevant
literatures were reviewed.

Kennedy and Muller (1999), has explained that “The analysis and interpretation of financial
statements are an attempt to determine the significance and meaning of financial statements data
so that the forecast may be made of the prospects for future earnings, ability to pay interest and
debt maturines (both current and long term) and profitability and sound dividend policy.”

T.S.Reddy and Y. Hari Prasad Reddy (2009), have stated that “The statement disclosing status
of investments is known as balance sheet and the statement showing the result is known as profit
and loss account”

Peeler J. Patsula (2006), he define that a sound business analysis tells others a lot about good
sense and understanding of the difficulties that a company will face. We have to make sure that
people know exactly how we arrived to the final financial positions. We have to show the
calculation but we have to avoid anything that is too mathematical. A business performance
analysis indicates the further growth and the expansion. It gives a physiological advantage to the
employees and also a planning advantage.

I.M.Pandey (2007), had stated that the financial statements contain information about the
financial consequences and sources and uses of financial resources, one should be able to say
whether the financial condition of a firm is good or bad; whether it is improving or deteriorating.
One can relate the financial variables given in financial statements in a meaningful way which
will suggest the actions which one may have to initiate to improve the firm’s financial condition.

Chidambaram Rameshkumar & Dr. N. Anbumani (2006), he argue that Ratio Analysis
enables the business owner/manager to spot trends in a business and to compare its performance

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and condition with the average performance of similar businesses in the same
industry. To do this compare your ratios with the average of businesses similar to yours and
compare your own ratios for several successive years, watching especially for any unfavorable
trends that may be starting. Ratio analysis may provide the all-important early warning
indications that allow you to solve your business problems before your business is destroyed by
them.

Jae K.Shim & Joel G.Siegel (1999), had explained that the financial statement of an enterprise
present the raw data of its assets, liabilities and equities in the balance sheet and its revenue and
expenses in the income statement. Without subjecting these to data analysis, many fallacious
conclusions might be drawn concerning the financial condition of the enterprise. Financial
statement analysis is undertaken by creditors, investors and other financial statement users in
order to determine the credit worthiness and earning potential of an entity.

Susan Ward (2008), emphasis that financial analysis using ratios between key values help
investors cope with the massive amount of numbers in company financial statements. For
example, they can compute the percentage of net profit a company is generating on the funds it
has deployed. All other things remaining the same, a company that earns a higher percentage of
profit compared to other companies is a better investment option.

M Y Khan & P K Jain (2011), have explained that the Financial statements provide a
summarized view of the financial position and operations of a firm. Therefore, much can be
learnt about a firm from a careful examination of its financial statements as invaluable
documents / performance reports. The analysis of financial statements is, thus, an important aid
to financial analysis.

Elizabeth Duncan and Elliott (2004), had stated that the paper in the title of efficiency,
customer service and financing performance among Australian financial institutions showed that
all financial performance measures as interest margin, return on assets, and capital adequacy are
positively correlated with customer service quality scores.

Jonas Elmerraji (2005), tries to say that ratios can be an invaluable tool for making an
investment decision. Even so, many new investors would rather leave their decisions to fate than

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try to deal with the intimidation of financial ratios. The truth is that ratios aren't that intimidating,
even if you don't have a degree in business or finance. Using ratios to make informed decisions
about an investment makes a lot of sense, once you know how use them.

Carlos Correia (2007), had explained that any analysis of the firm, whether by management,
investors, or other interested parties, must include an examination of the company’s financial
data. The most obvious and readily available source of this information is the firm’s annual
report. The financial statements shall, in conformity with generally accepted accounting practice,
fairly present the state of the affairs of the company and the results of operations for the financial
year.

Greninger et al.(1996), identified and refined financial ratios using a Delphi study in the areas
of liquidity, savings, asset allocation, inflation protection, tax burden, housing expenses and,
insolvency. Based on the Delphi findings, they proposed a profile of financial well-being for the
typical family and individual.

Rachchh Minaxi A (2011), have suggested that the financial statement analysis involves
analyzing the financial statements to extract information that can facilitate decision making. It is
the process of evaluating the relationship between component parts of the financial statements to
obtain a better understanding of an entity’s position and performance.

Salmi, T. and T. Martikainen (1994), in his "A review of the theoretical and empirical basis of
financial ratio analysis", has suggested that A systematic framework of financial statement
analysis along with the observed separate research trends might be useful for furthering the
development of research. If the research results in financial ratio analysis are to be useful for the
decision makers, the results must be theoretically consistent and empirically generalizable.

John J.Wild, K.R.Subramanyam & Robert F.Halsey (2006), have said that the financial
statement analysis is the application of analytical tools and techniques to general-purpose
financial statements and related data to derive estimates and inferences useful in business
analysis. Financial statement analysis reduces reliance on hunches, guesses, and intuition for
business decisions. It decreases the uncertainty of business analysis.

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