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1. Introduction to Financial Accounting Session 15 Prof Ankur Mehra, PhD Monsoon 2023 Semester Office: B – 220F E: [email protected] School of Management & Entrepreneurship Shiv Nadar IoE

2. Announcement Class on 14 November 2023 will be held Online. No Class will be held on 7 th and 9 th November 2023. The combined session will be held as per the following schedule: Wednesday – 25 Oct 2023 – 6:30 PM to 8:00 PM Monday – 30 Oct 2023 - 6:30 PM to 8:00 PM Attendance will only be given to those attending the class Regular Tutorial Classes will be held every Wednesday. Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University 2

3. Agenda Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University 3 Financial Statement Analysis for Relaxo Footwear Understanding Economy wide-factors Industry Factors Company Factors Understanding a Company’s Strategy Leading Indicators & Identifying Competitors Financial Statement– Trend Analysis & Common-size Statement Du Pont Analysis – Profitability Ratio, Efficiency Ratio, and Liquidity/Solvency Ratio Interpreting ratios and other analytical considerations

4. Company Strategy Business Strategies - Distribution Relaxo ltd. has a large distribution channel, and it sells its products without buying land or lease/rent expenses (relatively to its competitors like Bata, Shree Leathers, Liberty Shoes etc). Pan-India distribution by catering to 65,000+ retailers through 650+ distributors and 389 exclusive brand stores Most revenue comes from North India(50%) and East India (18%), with South India (13%) and West India (18%) underpenetrated Exports to 30 countries Revenue Mix Distributor – 80% Exclusive Brand Outlets (COCO + FOFO) – 8% E-commerce – 8% (fastest growing segment) Exports – 4% It has a very strong e-presence through www.relaxofootwear.com and through major ecommerce companies Amazon, Flipkart, Myntra , etc Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University 4

5. Company Strategy Competitive Landscape & Future Goals Threat from large unorganized sector (up to 65%) and brand duplicity Competition from Paragon, Bata, Liberty, Shree Leathers, Khadims and other organized players Competition from China can hinder export-led growth Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University 5

6. Financial Statements Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University Income Statement (in INR Crore) FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY2022 FY 2023 Total Revenue 1644.76 1945.51 2305.06 2419.53 2381.92 2676.99 2801 - Raw Materials 720.67 896.63 1130.13 1092.86 959.13 1389 1256 - Power & Fuel Cost 47.63 54.00 70.88 76.47 73.47 87 91 - Employee Cost 177.04 214.08 258.66 293.99 301.39 334.69 343 - Selling & Administrative Expenses 257.42 277.29 296.98 277.93 224.79 266 310 - Operating & Other expenses 197.48 196.96 209.04 257.81 303.27 158 422 = EBITDA 244.52 306.55 339.37 420.47 519.87 441 356 - Depreciation/Amortization 51.46 54.34 62.41 109.42 110.02 113.54 125 = PBIT 193.06 252.21 276.96 311.05 409.85 327 231 - Interest & Other Items 15.03 8.59 8.98 19.34 18.69 17 21 = PBT 178.03 243.62 267.98 291.71 391.16 310.6 210 - Taxes & Other Items 58.08 82.55 92.54 65.46 99.60 77.92 55 = Net Income 119.95 161.07 175.44 226.25 291.56 232.68 154 EPS' (in INR) 4.99 6.70 7.18 9.12 11.74 9.53 6.21 DPS' (in INR) 0.50 0.75 0.90 1.25 2.50 2.5 2.5 Relaxo’s revenue grew at a compounded annual growth rate (CAGR) of 12 per cent over the last one decade (from FY12 to FY22) and reported PAT growth at a CAGR of 19.2 per cent over the period of FY12 to FY22. 6

7. Financial Statements Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University Balance Sheet (In INR in Crores) 2017 2018 2019 2020 2021 2022 2023 ASSETS Non-Current Assets   Property, Plant and Equipment 541.71 606.25 810.62 983.90 1017.28 1103.84 1220 Intangible Assets 62.00 56.00 49.00 43.00 39.00 32.38 18 Loans 14.56 16.20 17.09 18.49 15.43 42.51 24 Other Non-Current Assets 6.00 10.00 8.00 4.00 24.00 16.82 37 Total Non-Current Assets 624.27 688.45 884.71 1049.39 1095.71 1195.55 1301 Current Assets       Inventories 290.21 313.93 382.43 447.74 422.14 673.25 563 Investments 123.18 0.50 0.00 172.08 337.98 169.27 259 Trade Receivables 3.51 173.45 222.57 2.55 181.46 250.79 270 Cash and Cash Equivalents 0.14 4.00 1.88 1.54 9.00 12.5 15 Other Current Assets 29.00 70.00 119.00 167.00 130.00 80.19 84 Total Current Assets 446.04 561.88 725.88 792.00 1080.58 1186 1193 Total Assets 1070.31 1250.33 1610.59 1841.39 2176.29 2382.59 2494 Number of manufacturing plants increased from 4 in 2010 to 8 in 2020. 7

8. Financial Statements Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University EQUITY AND LIABILITIES (In INR in Crores) 2017 2018 2019 2020 2021 2022 2023 Equity Equity Share Capital 12 12 12 25 25 24.89 24.89 Other Equity 594 749 1093 1248 1548 1735.23 1829 Total Equity 606 761 1105 1272 1572 1760.12 1855 Liabilities Non-Current Liabilities Borrowings 71 40 Other Liabilities 33 34 43 155 154 161.45 169 Total Non-Current Liabilities 104 74 43 155 154 161.45 169 Current Liabilities Borrowings 61 86 87 19 20 Trade Payables 126 175 172 184 223 221.74 256 Other Financial Liabilities 99 93 114 101 135 94.76 90 Other Current Liabilities 74 61 89 110 92 124.5 124 Total Current liabilities 360 415 462 413 449 461 470 Total Equity and Liabilities 1070 1250 1611 1841 2176 2382.59 2494 Relaxo Footwear has continuously repaid its debt and had bought it down to zero. 8

9. Financial Statements Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University Relaxo ltd Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23 Cash flow from Operating Activities           Profit Before Tax 178.00 243.62 267.98 291.71 391.16 310 210 Net Cash Generated from Operating Activities 180.20 154.25 123.47 318.90 513.12 56 400 Net Cash Flow (used in) Investing Activities -89.44 -108.37 -56.47 -115.67 -453.18 14 -258 Net Cash Flow (used in) Financing Activities -89.49 -46.27 -68.24 -202.56 -56.15 -69 -138 Net Increase / (Decrease) in Cash and Cash Equivalents 3.81 3.51 3.12 0.67 3.81 0.76 3.17 Relaxo Footwear uses its cash flow from operations to reinvest it in the business and set-up new manufacturing plants to scale up 9

10. Leading Indicators Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University Leading indicators are quantitative measures used for tracking, assessing and comparing performance of companies across the industry that are neither reported as part of the financial statements, nor can be derived from any information directly available on the financial statements. Different industry can have a different set of leading indicators. For example Average Revenue Per User for Telecom Number of Vehicles sold for Automobiles Capacity Utilization for Airline Average Order Value for Zomato Number of active users for PayTM 10

11. Leading Indicators Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University Number of SKUs – 10,000+ Number of Retailers – 65,000+ retailers served through 680+ distributors Exclusive Brand Stores ( CoCo & FoCo ) – 389 Number of manufacturing plant – 8 Capacity Utilization = 65% Total Capacity – 10 lakhs pairs / day or 36.5 Cr / year Number of pairs sold – 17.1 Cr (FY 2023) Average Realization Per Pair (from distributor) = INR 161 Average Sales Price per pair = INR 2801 Cr / 17.1 Cr 11

12. Horizontal Analysis   T o determine increase or decrease t hat has taken place. Comp u tes changes from the previous year to the current year in both absolute amounts and percentages ( Th e bas e y ear is the fi r s t y ear c onside r ed) Com m only applied to the balance sheet and income statement. A m ou n t of Ch a nge since base year = Current Y ear Amount – Base Y ear Amount

13. Horizontal Analysis ( Cont..) INCOME STATEMENT (in Rs Crore) 2022 2021 Change in Amount Percentage Change Revenue From Operations 121641 100472 21169 21.07% EXPENSES Operating And Direct Expenses 22740 13756 8984 65.31% Employee Benefit Expenses 63896 55541 8355 15.04% Depreciation And Amortisation Expenses 3476 3267 209 6.40% Operating Profit 31529 27908 3621 12.97% Other Income 2295 2201 94 4.27% Other Expenses 3424 3286 138 4.20% Profit/Loss Before Finance Cost and Tax 30400 26823 3577 13.34% Finance Costs 200 195 5 2.56% Profit/Loss Before Tax 30200 26628 3572 13.41% Total Tax Expenses 7964 7205 759 10.53% Profit/Loss For The Period 22146 19423 2723 14.02%

14. Trend Analysis A type of horizontal analysis in which percentage changes are calculated for several successive years instead of for just two years Uses an index number to show changes in related items over a period of time Important because it may point to basic changes in the nature of a business Current Results in relation to Base year:  

15. Trend Analysis Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University Income Statement (in INR Crore) FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Total Revenue 100 118 140 147 145 163 170 - Raw Materials 100 124 157 152 133 169 174 - Power & Fuel Cost 100 113 149 161 154 168 191 - Employee Cost 100 121 146 166 170 189 194 - Selling & Administrative Expenses 100 108 115 108 87 100 120 - Operating & Other expenses 100 100 106 131 154 176 214 = EBITDA 100 125 139 172 213 180 146 - Depreciation/Amortization 100 106 121 213 214 221 243 = PBIT or Operating Income 100 131 143 161 212 169 120 - Interest & Other Items 100 57 60 129 124 102 140 = PBT 100 137 151 164 220 174 118 - Taxes & Other Items 100 142 159 113 171 134 95 = Net Income 100 134 146 189 243 194 128 Relaxo has no control over its raw material costs as they are commoditized, but it can reduce its selling, administrative, and general expenses by taking advantage of economies of scale. However, inflationary pressure has led to lower profits. 15

16. Trend Analysis Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University Balance Sheet (In INR in Crores) 2017 2018 2019 2020 2021 2022 2023 Property, Plant and Equipment 100 112 150 182 188 204 225 Intangible Assets 100 90 79 69 63 52 29 Loans 100 111 117 127 106 292 165 Other Non-Current Assets 100 167 133 67 400 280 617 Total Non-Current Assets 100 110 142 168 176 192 208 Inventories 100 108 132 154 145 232 194 Investments 100 140 274 137 210 Trade Receivables 100 4942 6341 73 5170 7145 7692 Cash and Cash Equivalents 100 2857 1343 1100 6429 8929 10714 Other Current Assets 100 241 410 576 448 277 290 Total Current Assets 100 126 163 178 242 266 267 Total Assets 100 117 150 172 203 223 233 EQUITY AND LIABILITIES Equity Share Capital 100 100 103 207 207 207 207 Other Equity 100 126 184 210 260 292 308 Total Equity 100 126 182 210 259 290 306 Borrowings 100 56 Other Liabilities 100 103 133 474 470 493 516 Total Non-Current Liabilities 100 71 42 150 149 156 163 Borrowings 100 141 143 31 33 Trade Payables 100 139 137 146 177 176 204 Other Financial Liabilities 100 93 115 102 135 95 91 Other Current Liabilities 100 82 120 149 124 168 168 Total Current liabilities 100 115 128 115 125 128 131 Total Equity and Liabilities 100 117 151 172 203 223 233 16

17. Vertical Analysis Sho w s ho w the di f f e r e n t c omp o ne n ts o f a financia l s t a t eme n t r el a t e t o a t o t al figu r e in the st a t eme n t Exp r esses each financia l s t a t eme n t i t em as a pe r ce n t o f a base amou n t C ommonly applied t o the b a lance she e t and t h e in c om e s t a t eme n t O n the balance she e t, s e t t o t al a ss e ts o r (T L + SE ) t o 100 O n the in c om e s t a t eme n t, s e t ne t sale s t o 100 Th e r esulting s t a t eme n t, e xp r essed e n ti r ely in pe r ce nt a g es is c al l ed a commo n - si z e sta t eme n t Us e fu l f o r c omp a ring Th e impor t ance o f specifi c c omp o ne n ts in the ope r a tion o f a business Ch a n g es in the c omp o ne n ts f r om on e y ear t o the n e xt Compa nies of di f f e r e n t si z es and c ompa nies r eporting in di f f e r e n t cur r encies. Financial Reporting & Analysis | Term I | MBA | Shiv Nadar University

18. Common Size Statement Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University Income Statement (in INR Crore) FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Total Revenue 100% 100% 100% 100% 100% 100% 100% - Raw Materials 44% 46% 49% 45% 40% 45% 45% - Power & Fuel Cost 3% 3% 3% 3% 3% 3% 3% - Employee Cost 11% 11% 11% 12% 13% 13% 12% - Selling & Administrative Expenses 16% 14% 13% 11% 9% 10% 11% - Operating & Other expenses 12% 10% 9% 11% 13% 13% 15% = EBITDA 15% 16% 15% 17% 22% 16% 13% - Depreciation/Amortization 3% 3% 3% 5% 5% 4% 4% = PBIT 12% 13% 12% 13% 17% 12% 8% - Interest & Other Items 1% 0% 0% 1% 1% 1% 1% = PBT 11% 13% 12% 12% 16% 12% 7% - Taxes & Other Items 4% 4% 4% 3% 4% 3% 2% = Net Income 7% 8% 8% 9% 12% 9% 5% Relaxo has no control over its raw material costs as they are commoditized, but it can reduce its selling, administrative, and general expenses by taking advantage of scale. However, recent inflationary pressures have led to a contraction in margin . 18

19. Common Size Statement Introduction to Financial Accounting | Monsoon 2023 Semester | Shiv Nadar University Balance Sheet (In INR in Crores) 2017 2018 2019 2020 2021 2022 2023 ASSETS Property, Plant and Equipment 51% 48% 50% 53% 47% 46% 49% Intangible Assets 6% 4% 3% 2% 2% 1% 1% Loans 1% 1% 1% 1% 1% 2% 1% Other Non-Current Assets 1% 1% 0% 0% 1% 1% 1% Total Non-Current Assets 58% 55% 55% 57% 50% 50% 52% Inventories 27% 25% 24% 24% 19% 28% 23% Investments 12% 0% 0% 9% 16% 7% 10% Trade Receivables 0% 14% 14% 0% 8% 11% 11% Cash and Cash Equivalents 0% 0% 0% 0% 0% 1% 1% Other Current Assets 3% 6% 7% 9% 6% 3% 3% Total Current Assets 42% 45% 45% 43% 50% 50% 48% Total Assets 100% 100% 100% 100% 100% 100% 100% EQUITY AND LIABILITIES Equity Share Capital 1% 1% 1% 1% 1% 1% 1% Other Equity 56% 60% 68% 68% 71% 73% 73% Total Equity 57% 61% 69% 69% 72% 74% 74% Borrowings 7% 3% 0% 0% 0% 0% 0% Other Liabilities 3% 3% 3% 8% 7% 7% 7% Total Non-Current Liabilities 10% 6% 3% 8% 7% 7% 7% Borrowings 6% 7% 5% 1% 0% 1% 0% Trade Payables 12% 14% 11% 10% 10% 9% 10% Other Financial Liabilities 9% 7% 7% 5% 6% 4% 4% Other Current Liabilities 7% 5% 6% 6% 4% 5% 5% Total Current liabilities 34% 33% 29% 22% 21% 19% 19% Total Equity and Liabilities 100% 100% 100% 100% 100% 100% 100% 19

20. Thank You “Do you know what you are? You are a manuscript of a divine letter. You are a mirror reflecting a noble face. This universe is not outside of you. Look inside yourself; everything that you want, you are already that.” ― Rumi