A STUDY ON THE LEVERAGE ANALYSIS AT COIRFED,ALAPPUZHA

PROJECT REPORT

Submitted to

SCHOOL OF MANAGEMENT AND BUSINESS STUDIES

MAHATMA GANDHI UNIVERSITY

In partial fulfilment of the requirements for the award of

MASTER OF BUSINESS ADMINISTRATION (2019-2021)

Submitted by

DIVYA MOHAN B (121923)

SCHOOL OF MANAGEMENT AND BUSINESS STUDIES

MAHATMA GANDHI UNIVERSITY, PRIYADARSHINI HILL P.O

KOTTAYAM, KERALA – 686560

July 2021

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 SCHOOL OF MANAGEMENT AND BUSINESS STUDIES

MAHATMA GANDHI UNIVERSITY, PRIYADARSHINI HILL P.O

KOTTAYAM, KERALA – 686560

CERTIFICATE

This is to certify that the work entitled “A STUDY ON THE LEVERAGE ANALYSIS AT
COIRFED,ALAPPUZHA” is a bonafide work done by DIVYA MOHAN B under the
guidance of Dr. SAJIMON ABRAHAM and submitted in partial fulfilment of the
requirements of the award of the degree of Master of Business Administration of Mahatma
Gandhi University, Kottayam, Kerala.

Place: Priyadarshini Hills Dr. E. SULAIMAN

Date: Professor and Head of the Department

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 SCHOOL OF MANAGEMENT AND BUSINESS STUDIES

MAHATMA GANDHI UNIVERSITY, PRIYADARSHINI HILL P.O

KOTTAYAM, KERALA – 686560

CERTIFICATE

This is to certify that the work entitled “A STUDY ON THE LEVERAGE ANALYSIS AT
COIRFED,ALAPPUZHA” is a bonafide work done by DIVYA MOHAN B under my
guidance and submitted in partial fulfilment of the requirements of the award of the degree of
MASTER OF BUSINESS ADMINISTRATION OF MAHATMA GANDHI
UNIVERSITY, Kottayam, Kerala.

Place: Priyadarshini Hills Dr. SAJIMON ABRAHAM

Date: Professer,SMBS

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 DECLARATION

I, DIVYA MOHAN B, hereby declare that the project entitled “A STUDY ON THE
LEVERAGE ANALYSIS AT COIRFED,ALAPPUZHA” submitted in partial fulfilment of
the requirements for the award of the Degree of Master of Business Administration in
Mahatma Gandhi University, is a bonafide record of project report work carried out under the
supervision and guidance of DR.SAJIMON ABRAHAM, Professor, School of Management
and Business Studies, Mahatma Gandhi University, Kottayam. It is my original work and all
the information, facts and figures in this report are based on my own experience.

Place: Priyadarshini Hills DIVYA MOHAN B

Date:

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 ACKNOWLEDGEMENT

Any project is never an individual effort. It is a contributory effort of many hands, hearts and
brains. I sincerely feel that the credit of this project couldn’t be narrowed to an individual, all
the entire work is the outcome of integrated effort of all those concerned with it.

I am very grateful to the Almighty God who led me in the right way to complete my work
successfully.

I would like to thank our Head of the Department, Dr. E. Sulaiman, School of Management
and Business Studies, for providing an opportunity the project and his encouragement
throughout the study.

I would like to convey my sincere thanks to my faculty guide Dr. Sajimon Abraham, School
of Management and Business Studies for providing guidance, suggestion and encouragement
from the beginning to the completion of my work.

Finally, I would like to express my sincere thanks and gratitude to my parents and other faculty
members of School of Management and Business Studies and all my well-wishers who have
provided all necessary support to make this project a success.

DIVYA MOHAN B

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 TITLE OF THE CONTENTS

CHAPTER NO. CONTENT PAGE NO.

1.1 INTRODUCTION 10

1.2 Definition 11

1.3 Statement of the problem 11

1.4 Objectives of the Study 11-12

1 1.5 Relevence of the study 12-13

1.6 Importance of the Study 13

1.7 Scope of the study 13

1.8 Research Methedology 13

1.8.1 Research Design 13
1.8.2 Source of Data 14
1.8.3 Tools of Analysis 14-15

1.9 Limitations of the study 15

1.10 About the Industry 15

1.10.1 Practices in kerala ,India and 16-20
Abroad

1.11 Company Profile 21

1.11.1 History 21
1.11.2 Functioning 21
1.11.3 vision and mission 21
1.11.4 Objectives 22
1.11.5 Departments 22
1.11.6 Coirfed Units 22
1.11.7 Management 23
1.11.8 Working Pattern 23
1.11.9 Working Capital 23
1.11.10 Location 23

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 1.11.11 Product Profile 23-25
1.12 Chapterisation 26

2 LITERATURE REVIEW 27-32

3 THEORETICAL FRAMEWORK 33
3.1 Concept of leverage 34
3.2 Meaning of leverage 34
3.3 Types of leverage 34-41

4 ISSUES AND CHALLENGES AND 42-57

ILLUSTRATION OF COMPANIES

5 RATIO ANALYSIS AND 58-86

INTERPRETATION

6 FINDINGS,SUGGESTIONS AND 87-90

CONCLUSION

BIBLIOGRAPHY 91-93

APPENDIX

LIST OF TABLES

Table No. Table Title Page No.

5.1.1.1 Calculation of Debt Equity Ratio 59

5.1.2.1 Calculation of Proprietary Ratio 61

5.1.3.1 Calculation of Debt to Assets Ratio 63

5.1.4.1 Calculation of Capital Gearing Ratio 65

5.1.5.1 Calculation of Debt to Capital Ratio 67

5.1.6.1 Calculation of Asset to Equity Ratio 69

5.1.7.1 Calculation of Net Profit Ratio 71

5.1.8.1 Calculation of Operating Profit Ratio 73

5.2.1.1 Calculation of Financial Leverage 75

5.2.2.1 Calculation of Operating Leverage 77

5.2.3.1 Calculation of Combined Leverage 79

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 5.3.1.1 Calculating correlation between Dept and Operating 81
Leverage

5.3.2.1 Calculating Correlation between Fixed Cost and 82

Financial Leverage

5.3.2.2 Calculating correlation between Fixed asset and 84

Combined Leverage

5.3.3.1 Calculating Correlation between current Asset and 85

Combined Leverage

LIST OF CHARTS

Chart No. Title of Charts Page No.

5.1.1.2 Chart showing Dept equity ratio 60

5.1.2.2 Chart showing Proprietary ratio 62

5.1.3.2 Chart showing Dept to asset ratio 64

5.1.4.2 Chart showing Capital gearing ratio 66

5.1.5.2 Chart showing Dept to capital ratio 68

5.1.6.2 Chart showing Asset to equity ratio 70

5.1.7.2 Chart showing Net profit ratio 72

5.1.8.2 Chart showing Operating profit ratio 74

5.2.1.2 Chart showing Financial leverage 76

5.2.2.2 Chart showing Operating leverage 78

5.2.3.2 Chart showing Combined leverage 80

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 CHAPTER-1

INTRODUCTION

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 A STUDY ON LEVERAGE ANALYSIS AT COIRFED, ALAPPUZHA

1.1 INTRODUCTION

Finance is regarded as the lifeblood of every business enterprise. Finance is defined as the
procurement of funds and effective utilization of funds. Funds can be obtained through owners
fund and debt financing. A firm that has debt in its capital structure is termed as levered firm and
that has no debt is called unlevered firm. In other words, leverage is the employment of fixed assets
or funds for which a firm has to meet fixed costs or fixed rate of interest obligation—irrespective of
the level of activities attained, or the level of operating profit earned.

Leverage occurs in varying degrees. The higher the degree of leverage, the higher is the risk
involved in meeting fixed payment obligations i.e., operating fixed costs and cost of debt capital.
But, at the same time, higher risk profile increases the possibility of higher rate of return to the
shareholders. This is true because if debt financing is used rather than equity financing then the
owner's equity is not diluted by issuing more shares of stock. Borrowing in order to expand or
invest is called leverage because the goal is to amplify the loan into a greater value for the firm or
investors.

The project is entitled as “A STUDY ON LEVERAGE ANALYSIS AT COIRFED,

ALAPPUZHA” was undertaken as a part of the MBA curriculum and the primary objective of the
study is to analyze the leverage position of the company. Coirfed is established in the year 1979 as
the apex federation of primary coir co-operatives functioning in the state, engaged in the
manufacture of coir and coir products. It is one of the premier organizations of the coir industry.
Coirfed is entrusted with the task of procuring and marketing the products of the 700 odd coir co-
operatives affiliated to it. This study helps to know about the debt-equity mix in the capital
structure of the company, how the leverage analysis helps to measure the financial risk of the
company etc.
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1.2 DEFINITION

Leverage plays an important role in the capital structure of a firm. Hence leverage analysis
helps the company to understand the importance of debt element in its capital structure. The
employment of an asset or source of funds for which the firm has to pay a fixed cost or fixed return
is called leverage. Various authors have defined leverage in different ways.

According to James C. Van Home, ‘Leverage refers to the use of fixed cost in an attempt to
increase (or lever up) profitability’.

Ezra Solomon defined leverage as ‘the ratio of net returns on shareholders equity and the net
rate of return on total capitalization’

According to S. C. Kuchhal, the term leverage ‘is used to describe a firm’s ability to use fixed
cost bearing assets or funds to magnify the return to its owners’

Thus leverage implies the use of fixed cost in an attempt to increase profitability. It can be
defined as; leverage is the responsiveness of firm’s return to fluctuations in revenue and operating
income, and the ability of a firm to magnify the influence resulting in higher return.

1.3 STATEMENT OF THE PROBLEM

The project work entitled “A STUDY ON LEVERAGE ANALYSIS AT COIRFED,

ALAPPUZHA” is conducted to describe the ability of the firm to use fixed cost assets or funds to
increase the return to its shareholders.
Leverage is the key decision area in the financial management of a company. It plays an
important role in the capital structure decision of a firm. Leverage analysis helps the company to
understand the importance of debt element in its capital structure. This study makes an attempt to
analyse the leverage position of the company and check whether the leverage of the company is
balanced or not. If there anything imbalances in its leverage, the study helps to understand the
reasons for the imbalance and how it can be solved or overcome.

1.4 OBJECTIVES OF THE STUDY

 To analyze the financial performance of COIRFED ALAPUZHA.

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  To evaluate the relevance of present capital structure.

 To examine the Leverage analysis in COIRFED ALAPPUZHA

 To study the relationship between Leverage and profitability

1.5 RELEVENCE OF THE STUDY

Leverage refers to the use of fixed costs in an attempt to increase the profitability. Leverage
affects the level and variability of the firm's after tax earnings and hence, the firm's overall risk and
return. The study of leverage is relevent due to the following reasons.

1. Measurement of Operating Risk

Operating risk refers to the risk of the firm not being able to cover its fixed operating costs. Since
operating leverage depends on fixed operating costs, larger fixed operating costs indicates higher
degree of operating leverage and thus, higher operating risk of the firm. High operating leverage is
good when sales are rising but badly when they are falling.

2. Measurement of Financial Risk

Financial risk refers to the risk of the firm not being able to cover its fixed financial costs. Since
financial leverage depends on fixed financial cost, high fixed financial costs indicates higher degree
of operating leverage and thus, high financial risk. High financial leverage is good when operating
profit is rising and bad when it is falling.

3. Managing Risk
Relationship between operating leverage and financial leverage is multiplicative rather than
additive. Operating leverage and financial leverage can be combined in a number of different ways
to obtain a desirable degree of total leverage and level of total firm risk.

4. Designing Appropriate Capital Structure Mix

To design an appropriate capital structure mix or financial plan, the amount of EBIT under various
financial plans, should be related to earning per share. One widely used means of examining the
effect of leverage to analyze the relationship between EBIT and earning per share.

5. Increase Profitability

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Leverage is an effort or attempt by which a firm tries to show high result or more benefit by using
fixed costs assets and fixed return sources of capital. It insures maximum utilization of capital and
fixed assets in order to increase the profitability of a firm, it helps to know the reasons not having
more profit by a company.

1.6 IMPORTANCE OF THE STUDY

Leverage provides the following benefits for businesses:

 Leverage is an essential tool a company's management can use to make the best financing
and investment decisions.
 It provides a variety of financing sources by which the firm can achieve its target earnings.
 Leverage is also an important technique in investing as it helps companies set a threshold
for the expansion of business operations. For example, it can be used to recommend
restrictions on business expansion once projected return on additional investment is lower
than cost of debt.

1.7 SCOPE OF THE STUDY

The study mainly attempts to analyze the Leverage position of Kerala State Coir Marketing
Federation Ltd (Coirfed), Alappuzha. By performing the leverage analysis, insiders of the business
can have a view about the financial risk position of the firm. By keeping a track of previous 5 years
performance, the management can formulate suitable policies and strategies regarding their capital
structure. Leverage analysis helps the company to restructure their financial structure by stocks
lilts, bonus share, right share, private placement etc. and also it helps to analyze the need of debt
financing. The general public can consider the results of leverage analysis for their future
investment strategies.

1.8 RESEARCH METHODOLOGY

Research Methodology may be understood as all those methods and techniques that are
adopted for collecting information and data. It is a systematic way to solve the problems. The
present study was in an analytical manner, in this project, analysis is made on the basics of five
previous year’s financial statements.
1.8.1 RESEARCH DESIGN

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 A research design is the set of methods and procedures used in collecting and analysing
measures of the variables specified in the research problem. It is the basic framework, which
provides guidelines for the rest of the research process. The research design used in the project is
analytical nature. The procedure using, which researcher has to use facts or information already
available and analyse these to make a critical evaluation of the performance and application of
scientific methods for the analysis of information to arrive at a solution for a specific problem of
the concern.

1.8.2 SOURCE OF DATA

Data for the study is collected using secondary data. Secondary data are mainly collected from
the annual reports of the company. The annual reports include Profit and Loss account and Balance
Sheet.
Collection of secondary data:
 Annual reports
 Company website
 Other websites

1.8.3 TOOLS OF ANALYSIS

1. RATIO ANALYSIS
Ratio analysis is the analysis of financial statements with the help of ratios. It is defined as the
process of computing, determining and presenting the relationship of items and groups of items of
financial statements with the help of ratios and interpreting the results there from. It aims at making
use of quantitative information for decision making.
Here the ratios used for data analysis are:
 Debt Equity Ratio
 Proprietary Ratio
 Debt to Assets Ratio
 Capital Gearing Ratio
 Debt to Capital Ratio
 Asset to Equity Ratio
 Net Profit Ratio
 Operating Profit Ratio

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 2. LEVERAGES
Leverage refers to the use of fixed cost instruments to maximize the return potential for the
shareholders of the company. According to James C Horne, “Leverage is the employment of an
asset or source of funds for which the firm has to pay a fixed cost or fixed return”.
Leverages include:
 Financial Leverage
 Operating Leverage
 Combined Leverage

3.CORRELATION COEFFICIENT ANALYSIS

Correlation coefficient is used to find out the strength of relation or degeree or intensity of
relation between two variables. The value of correlation soefficient lies between one and two. If the
correlation coefficient value is 1, then two variables are having a pure positive correlation and if
correlation coefficient value is -1 then two variables are having negative correlation. If correlation
coefficient is 0, we can say no correlation exists between two variables.
In this study, correlation analysis is used for finding the correlation between debt and operating
leverage, fixed cost and financial leverage, fixed assets and combined leverage and current assets
and combined leverage. The formula for finding the correlation coefficient is
n ∑ xy−¿ )

√[n ∑ x 2−(∑ x )2] [n ∑ y 2−(∑ y )2]

1.9 LIMITATION OF THE STUDY

 Time constraint was the major limitation of the study.

 The study is mainly based on published secondary data and the study will show all the
limitations of secondary data.
 Confidentiality of information has led to the lack of availability of data.
 The main tool used for study is ratio analysis. Hence the limitation of ratio analysis may
affect the accuracy of study.
 The study is based upon only monitory information.

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1.10 ABOUT THE INDUSTRY

Coir or coconut fiber is a natural fibre extracted from the husk of coconut and used in
products such as floor mats, doormats, brushes and mattresses etc. Coir industry is of great
importance to coconut producing countries like India, Sri Lanka, Malaysia, Indonesia, Philippines
and Thailand etc. Currently, the global annual production of coir is 650000 tones. The coir industry
is one of the most traditional cottage industries in India. The coir industry forms major segment of
village and small industries sector in terms of production and employment. The industry is very
important in the national context because of the large volume of employment that it provides in
rural area to the economically weaker section of the population. Nearly 80 % of the coir workers in
the fiber extraction and spinning sectors are women.
The coir industry in India has its origin in Kerala, which is recognized as the home of Indian
Coir industry where the raw material is abundant. The last three decades however witnessed rapid
growth of the industry in states such as Tamil Nadu, Karnataka, Andra Pradesh, Orissa etc., where
the industry is mostly confined to extraction of fiber from raw coconut husk by mechanical
decortications with the determinant effort, encouragement and assistance provided by the
concerned state governments, central government and the efforts of the enterprising entrepreneurs
in these regions. Other coconut producing states also started efforts in bringing up the industry
taking it as a rural employment program with comparatively less capital investment. India is the
largest exporter of coir and coir products in the world market.
Indian coir industry has been fortunate in the form of the ever increasing awareness about eco-
production. The eco-friendly quality of coir will help it to hold its ground even as its battles
competition from synthetic fibers in today's developing world. The challenge now for industry is to
sustain/expand market for this versatile renewable resource, while maintaining its role as employer
for the rural poor. This may require producers to innovative production, improve product
consistency and in particular develop novel applications jointly with their customers in importing
countries.

1.10.1 PRACTICES IN KERALA ,INDIA AND ABROAD

PRACTICES IN KERALA

The coir industry is perhaps the largest industry in the coastal villages of Kerala. The State,
with its favourable eco+logical setting, abundant supply of coconut and skilled labour has provided
the conditions necessary for its growth and development. The industry attracts considerable
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budgetary support each year from the State and the Central Governments and is also a large earner
of revenue through export. In 2013-14, coir and coir products generated about 1630 crores worth of
foreign exchange. The process of production begins with de- husking, which is largely
concentrated in Kerala, as this State produces sufficient quantity of nuts (4,886 million nuts) in
2014-15. In addition to this, facilities like lakes and lagoons for retting the husk and the availability
of traditional expertise of the people in coir work also added to the phenomenal growth of the
industry in Kerala.
As of 2014-15, Kerala accounts for approximately 51.7 % (in terms of value) and about 84.8%
(in terms of volume) of total coir and coir products produced in India. The coir industry provides
employment to around 375,000 people. During 2015-16, the Government of Kerala announced
plans to establish 150 production units with financial assistance of USS 0.48 million under Coir
Udyami Yojana, 600 units with financial assistance of USS 49.76 thousand under Mahila Coir
Yojana and 5 units with financial assistance of USS 16.58 thousand under the Development of
Production Infrastructure scheme. During 2015-16 (April-October), a value export from the state
was recorded at USS 165.32 million. In the budget 2015- 16, the State Government announced
plans to invest USS 0.16 million for facilitating scholarships to the coir worker's children who
secure admission in professional courses
Under the Budget Scheme 2016-17, the government allocated a sum of USS 35.44 million for
the development of coir industry in the state. An additional subsidy of 10%, apart from the subsidy
given by Coir Board, will be provided by the state government to the new mechanized factories in
the production sector. Exports of curled coir, coir fibre, coir pith, coir rope, coir yarn, coir geo-
textile, handloom matting, power loom mats and rubberized coir from India increased in terms of
quantity and value over past years. Total outlay of USS 17.87 million was proposed under the
Annual Plan of 2016-17 for the development of coir industry in the state with implementation of 12
schemes through Coir Geo textiles Development Programme, Margin Money Loan to
Entrepreneurs, Production and Marketing Incentives (PMI), 8 Cluster Development Programme in
coir scctor, etc. Coir pith and coir fibre are the major contributors in the export of coir products
with more than 80 % share. China is the major customer base for India's coir products with 28.6 %
share in value and 39% share in volume.
As per budget 2017-18, defibering machines will be provided to coir co-operative societies at
90% subsidy, to self-help groups at 75 % subsidy and to individuals at 50 % subsidy. The state has
a target of opening 1000 husk processing mills in 2017-18. Under state budget 2019-2020, an
amount of Rs.142 crores is earmarked for coir industry. In addition to this, an amount of Rs.89
crores will be made available from NCDC loan for restructuring. During the mid-19th century, the

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state government started the scheme of cooperativisation in the coir industry. Since then the
government has been aiding the sectors with a helping hand for its growth by various means
including welfare measures for the employees and a lot of new schemes. The coir industry is
fighting for its revival and to survive for there is lot of competition from other industries dealing
with synthetic fibres both in domestic and international market.

PRACTICES IN INDIA

Indian coir industry is an important cottage industry contributing significantly to the economy of
the major coconut growing States and Union Territories, i.e., Kerala, Tamil Nadu, Andhra Pradesh,
Karnataka, Maharashtra, Goa, Orissa. Assam, Andaman & Nicobar, Lakshadweep, Pondicherry,
etc. Share of India in global production of coir is around 55% of world production. India is the
largest producer of coir in the world with a production of 650000 MT which comes to around 55 %
of world production of coir. India is followed by Sri Lanka and Vietnam in terms of production of
coir. About 5.5 lakhs persons get employment, mostly part time, in this industry. The exports from
this industry are around Rs. 70 crores. Coconut husk is the basic raw material for coir products.
Around 50 per cent of the available coir husk is used to produce coir products. Hence, there is
scope for growth of coir industry, During the Seventh Plan period, encouragement has been given
for expansion of home market through publicity and advertisement, product diversification,
adoption of new technology, research and development, training for artisans, including women and
social welfare measures for coir workers, most of whom are SC/ST and women.
The Eighth Plan programmes for coir industry aimed at increased utilisation of coconut husk for
production of coir fibre, growth of the domestic market, strengthening of research and development
to find out new uses of coir timbre especially in the areas of geo-fibre, fire retardant, cement and
gypsum polymer development, acquiring of new technology like PVC-tufted coir products,
encouragement to cooperativisation and providing social welfare, civic amenities and medical
facilities to coir workers. Emphasis would be laid on mechanization in a phased manner without
affecting employment to make Indian coir products competitive in the export market. Brown coir
fibre production would be encouraged by providing seed capital assistance. Modernization of coir
units has been envisaged by providing incentives for installation of modern equipments to make
coir industry more competitive in the export market. Special training programmes have been
formulated for women artisans. Improved modern treadle ratts would be provided to trained women
artisans to increase employment and earnings. Emphasis has been given on developing

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devices/equipment/machinery through R and D to reduce drudgery and to improve productivity of
coir workers. Development of improved variety of ratts and looms would help in improving the
production of coir yarn spinning, coir mats etc.
India accounts for more than two-thirds of the world production of coir and coir products. Kerala
is the home of Indian coir industry, particularly white fibre, accounting for 61% of coconut
production and over 85 % of coir products. Although India has a long coastline dotted with coconut
palms, growth of coir industry in other coastal states has been insignificant. Not more than 50 per
cent of the coconut husks is utilised in the coir industry, the remaining being used as fuel in rural
areas. Production in the cooperative fold is not more than 20 to 25 percent. The development
programmes so far undertaken aimed at revitalisation of coir cooperatives, improvement in quality
and products diversification. Efforts were also made for exploring wider export markets for coir
and coir products. Judged from the increase in production and employment, the progress has been
rather slow and exports in physical terms have remained mere or less static.
Coconut is produced in about 91 countries of the world. India produces 12685 million nuts and
occupies the third place after Indonesia and the Philippines. The Indian share in the world coconut
production is about 16.28% and 17.07 % in the area harvested. Annual production is about 216651
million nuts with an average of 10122 nuts per hectare. The high producing state is Kerala in terms
of area, followed by Tamil Nadu, Karnataka, Andhra Pradesh and Odisha. 539815 ton fibres are
being consumed in India. The market value of the consumed fibres is Rs 890.69 to Rs 1199.16
crores. The utilization of coir fibre stands at 28.41%. It has the potential to generate revenue of Rs
3135.54 to Rs 4221.44 crores per annum.

PRACTICES IN ABROAD

Coir is a natural fiber, which is extracted from the husk of the coconut. It is the fibrous material
found between the hard, internal shell and the outer coat of a coconut. Coir is native to the Asia
Pacific region, specifically India and Sri Lanka, where coconut is produced in a large quantity and
exported across the world. Currently, the global annual production of coir is 650000 tones. Mainly
the coastal region of India produces around 60% of the total world supply of white coir fiber,
whereas Sri Lanka produces around 36% of the total world brown fiber output. Over 50% of the
coir produced annually throughout the world is consumed in the developing countries. On the other
hand, coconuts are grown in more than 93 countries in the world and therefore there is considerable
scope to develop coir industry in further countries. Recently, countries such as Mexico, Indonesia,

19
Vietnam and certain Caribbean countries have started to supply coir to the global market on a large
scale.
By region, the coir market can be segmented into five distinctive regions, which includes North
America, Latin America, Europe, Asia Pacific, Middle East and Africa. Among these, Asia Pacific
is leading the coir market due to the highest production in India and Sri Lanka, followed by North
America and Europe. They exports coir to more than 72 countries all over the world. The major
market destination is the USA with about 37 % the European Union Countries with about 47 % and
the remaining countries of the world accounting for the rest of its coir exports.
Traditional uses for the resilient and durable coir fiber include rope and twine, brooms and
brushes, doormats, rugs, mattresses and other upholstery, often in the form of rubberized coir pads.
In the 1980s and 90s, global exports of coir fiber fell by almost, half, as Western consumers shifted
to synthetic foam and fibres. Then, since 1990, rapidly growing domestic demand in India more
than doubled global production benefiting exclusively the Indian coir industry. Finally, since 2001,
a rising Chinese demand for coir, an expanding market for coir- based erosion control products,
and the spread of coir pith as a peat moss substitute in horticulture has further pushed up global
production and prices.
Historically, Sri Lanka had been the world's largest exporter of various fiber grades, whereas
India exports largely value added products - yarn, mats, and rugs. While in 1990 about 80% of
global production was exported, growth of the Indian domestic market dropped that rate to below
40%. Global trade volume for coir fiber, value added products- yarn, mats, rugs and coir pith now
stands at about $140 million per year with India and Sri Lank respectively accounting for about $70
and $60 million of that amount. In Sri Lanka, coir related exports account for 6 % of agricultural
exports, over 1% of all exports and 0.35% of GDP. Moreover, coir milling and value addition,
mostly spinning and weaving, are important regional employers, particularly in rural Southern
India and coastal Sri Lanka. They give work to 500,000+ people, many of them are women
working part-time.
The growing demand for eco-friendly products in the market is where coir should fast step
in. It is a lightweight, soilless growing medium made from the fibers which are found between a
ripe coconut's shell and an outer surface. As it's a material that occurs in nature, it's completely
renewable and is therefore considered an excellent choice for environmental sustainability.
Research and development efforts are continuing to focus on the use of coir in geo textiles and
other new applications as the market show promising prospects. The coir market also has many
weaknesses and is facing real threats. It is under constant threat from other natural fibers and
synthetics. The key reasons which are restraining the market to grow are the negligence towards the

20
benefits of coir and its market. The market as a whole has not influenced government policies to
improve its chances for competitiveness. Government policy assumes coir is a byproduct of the
coconut industry, rather than an industry on its own. The government, for instance, has no long-
term plans for modernization loans and no minimum standards for exporters of coir products.

1.11 COMPANY PROFILE

Coir fed, based in the coir capital Alappuzha, is the apex federation of about 600 odd coir co-
operatives with a string of regional offices and a network of over 100 showrooms. Coir is hygienic,
bio-degradable, environment friendly and has excellent decorative properties. Being the largest
supplier of quality coir products, Coir fed plays an important role in finding markets and promoting
new business opportunities.

A wide range of products are exported to the highly quality conscious markets European Union,
the United States and so on. The professional workmanship, a team of designing and marketing
professionals and a full-fledged production unit helped the company to meet the varied demands of
all capacities.

1.11.1 HISTORY OF COIRFED

The Kerala State Co-operative Coir Marketing Federation Ltd was formed on 27 th October 1979
by amalgamating the four central coir marketing societies in Alappuzha, Kollam, Kozhikode and
Cochin. Business operations are being carried out through the four regional officers’ in Kerala and
100 showrooms spread all over India with head office at Alappuzha. It was registered as co-
operative society under the Kerala Co-operative Society Act 1969.

1.11.2 FUNCTIONING OF COIRFED

Government of Kerala promotes Coir fed and director board governs it since it is the apex
federation of primary societies. Coir fed is responsible for the procurement and marketing of coir
products produced by the primary societies. The purchase price of the product from the primary

21
societies is fixed on the basis of cost of production. There is no direct sale from the head office.
Coir fed set up 100 showrooms and four regional offices for the procurement, sales and marketing.
Out of these 100 showrooms 44 are own showrooms and 56 are agency showrooms.

1.11.3 VISION AND MISSION OF THE COMPANY

“Progressive economic development and sustainable employment generation in the coir sector
of Kerala through planned development of coir industry.”

“To acts as a facilitator for the promotion and sustainability of coir sector in the state.”

1.11.4 OBJECTIVES OF COIRFED

Coirfed is not a profit motive organization. This organization was formed with a motive to
uplift the people in the rural areas those who work in the coir industry. The main objectives of
Coirfed are:

 Raising the funds required for the business.

 It aims to provide an improvement in the lifestyle of the people in the rural areas by providing
employment in the organization.
 It is the moderate between the government and the primary societies.
 It makes the arrangement for the purchase of coir fibers, yarn and other coir products from the
affiliated societies.
 It aims at better employment opportunities, remuneration and living standards of coir workers.
 It acts as an agent of financial institution to distribute funds to the primary member’s societies.
 To conduct credit sales to government agencies, co-operative institutions and approved agents.
 Supervising the working societies affiliated to the federation.
 To developing, assisting and co-ordination to the activities of affiliated societies.
 Purchase and distribution of raw materials.

1.11.5 DEPARTMENTS OF COIRFED

An organization structure refers to the system through which the management works to
accomplish its objectives. According to L A Allen, departmentization is the means of deciding a

22
large and monolith organization based on the function. On the basis of function following are the
departments of the Coirfed:

1. Personnel Department
2. Finance Department
3. Marketing Department
4. Production Department
5. Electronic Data Processing (EDP) Department

1.11.6 COIRFED UNITS

 Rubberized Coir Product Unit ( RCP)

 Rubber Backing Unit (RB)
 Rubber Backed Car Mats, Tiles Unit (RBCM)
 De-fibering Unit
1.11.7 MANAGEMENT

The Board of Directors consists of 21 members including President, Vice President and
Director of coir development, Government nominees and elected members from primary co-
operative societies. The Board of Directors selects an executive committee of 7 members. It
consists of President, Vice President, Managing Directors and other members from board of
directors. The Board of Directors meets at least once in three months and executive committee
meets at least once in every month.

1.11.8 WORKING PATTERN

The Coir fed after its formation has taken up the tremendous responsibility of procuring the
entire products from the primary societies and marketing these products. The pricing committee
fixes the price of products based on the cost of production. The products are stocked in the Coir fed
go downs and distributed to various showrooms. The payments for the societies are made through
the regional offices / head office.

1.11.9 WORKING CAPITAL

The working capital consists of 98% share portion to Government of Kerala and 2% to the
primary societies. In addition, assistance from Government in the form of loans, subsidies
contribute to the functioning of Coir fed. The main institutions providing financial assistance are
NABARD, NCDC, Central Bank, Kerala State Co-operative Bank, District Co-operative Bank etc.
23
1.11.10 LOCATION OF COIRFED

Alappuzha district is known as the traditional home of coir industry in Kerala. Coir fed is
situated at the coir capital of Alappuzha, which is blessed with bounty of coconuts and inland
waterways. The ability of skilled labors, availability of raw materials and enviable of craftsmanship
had led to the shifting centers of coir products manufacturing to the coast of Alappuzha.

The area of operation is interstate and its head office is at Alappuzha. The administrative staffs
are working in the head office.

1.11.11 PRODUCT PROFILE

Coir fed is engaged in marketing of coir yarn, coir doormats, matting which is purchased from
primary societies and also in manufacturing and marketing of rubberized coir products like
mattresses, pillows, cushions etc. The coir product of Coir fed follows Coir Board Standard. To
ensure quality it has double inspection. That is internal inspection and final product inspection. The
most popular products are:

 COIR MATTING
Coir matting makes the ideal furnishing floors, stairs, corridors, wall panelling and ceiling
lines. The raw material for coir matting is coir fiber. The coir fiber is plenty in the state itself.
They are available in natural bleached and solid colours.

 COIR YARN
The largest supplier of quality coir yarn, Coir fed specializes in the finest varieties. The skilled
workers, using their traditional skill therapy make the best in anjengo, aratory, and vycome.

 COIR RUGS
Coir matting cuts to specified length and suitably finished are marketed a ‘COIR RUGS’. Coir rugs
can be natural palm colour of the fiber or in different shades in woven patterns or printed designs
are specifically produced for overseas market.

 CARPETS
Coir carpets are commonly known as ‘Alleppey carpets’. These are manufactured by the same
technique as that of mourzouks, but for the difference in thickness and number of the wrap stands.
Mourzouks and caranatic pile carpets intricate, geometric or floral designs can be woven on the
mourzouks, which are very dense and highly durable.

 COIR TILES
24
Coir tiles are innovative designs that give you looks of a tiled floor with the natural goodness of
coir. A wide range of coir patterns are available and mixed with a wide palette of colours and the
choice is virtually limitless.

 CAR MATS
To insulate the interior of vehicle from the noise, heat and pollution of its engine, there is no
alternative to coir mats. Cuts to fit the latest models; these car mats are extremely handy, and is
very easy to maintain in all climates, available with or without rubber backing.

 RUBBERIZED PRODUCTS
Rubberized coir is the wonder product born out of magical properties of two nature’s finest gift-
rubber and coir. The rubberized coir mattress is a remedy for ailing backs. The cushions which can
be folded are available in different varieties like coir cushions steel chair cushions etc.

 MATS
Coir mats is an exemplary comfort material accepted in the market for its functional utility and
fitness. The brushing qualities of coir door mats and their ability to keep the dirt away makes the
products a unique one. The traditional of fibers from the husk is a laboratories and time consuming
process after separating the nuts, the husks are processed by various retting techniques generally in
ponds of brackish water (3 – 6 months) or in back water or lagoons. This requires 10 – 12 months
of anaerobic ferment.Fiber mats (FM) are available in stencilled or inlaid designs and any number
of made to order designs. The elegant carnatic mats are combination of jute and coir.Green mats
(BC/VC) are made of coir rope. Reversible non-brush sinned mats made with coir braids, either in
single/double chain are another popular variety. On brush mesh mats are available in natural
bleached and multi- colour options.

 HAND MADE DOORMATS

One of the most popular and widely used of coir products, coir mats from Coir fed find itself in the
finest interiors. Economical and easy to maintain these masterpieces fit right in, whatever the place.
Coir mats are available in all shapes and sizes.

 PVC TUFTED MATS

The mats made by tufting fine spun coir yarn in Poly Vinyl Chlorides using sophisticated
machinery in rolls. These rolls are cut into different shapes and sizes and designs are printed. Coir
fed enjoys a near monopoly in fine spun coir yarn used in making this mats.

 COIR GEO TEXTILES

25
It is a natural coir fiber, spin into coir yarn. It is then woven into coir geo textiles. It holds in lace
prevents soil erosion. Coir geo textiles are biodegradable and are well suited to the world demand
for eco friendly product. Several field experiments have established the efficiency of geo textiles, a
soil erosion control slope stabilization and conservation. They are also used in road construction,
landscaping, desert control and variety of forestry users.

 COIR PITH
Extraction of fiber from coconut husks, the major industrial activity in the coconut growing parts of
the country. After the separation of fiber 70% husks remain waste pith. The accumulation of
premises of the coir industry has become a great problem. Most of the research efforts have been
concentrating to make it as a raw material for another industrial use

1.12 CHAPTERIZATION

Final project report includes the following chapters.

Chapter 1: Introduction

The first chapter of the project include introduction of the study, need and significance of
the study, statement of the problem, objectives of the study, scope of the study, research
methodology limitations of the study, industry profile, company profile and
chapterization.

Chapter 2: Literature review

The second chapter describes about review of literature. Literature review contains the
analysis of profitability study by different authors.

Chapter 3: Theoretical Framework

The third chapter describes theoretical frame work. Theoretical frame work includes
theoretical background of the study with a valid model.

Chapter 4: Issues and Challenges and Illustration of companies

The fourth chapter deals with issues and challenges and illustration of two companies.

26
Chapter 5: Ratio Analysis & Interpretation

The fifth chapter contains the logical presentation of the empirical results after
completing the data analysis.

Chapter 6: Findings, suggestions and conclusion

The sixth chapter includes broad observation made by the study against each objectives
specified, providing necessary suggestions, and the conclusion of the project.

CHAPTER-2
27
 LITERATURE REVIEW

REVIEW OF LITERATURE

A brief review of literature would be a lot of help to the researcher, reader and other scholars
in gaining an insight into the studies, which were made in areas related to the subject of this study.
The findings of some of the most important studies are briefly summarized

 Chen and Hammes (2007) analyzed the factors influencing firm leverage. The study has
used market capital ratio, book capital ratio and book debt ratio as measures of leverage.
They had used an unbalanced panel of seven countries, Canada, Denmark, Germany, Italy,
Sweden, the UK and the US. The study has found that firm size, profitability, tangibility
and market-to-book ratio have significant impact on the capital structure choices of firms.
Tangibility is positively related to leverage while profitability shows a negative significant
relation to leverage. Size of the firm is found to be positively and significantly related to
leverage. The impact of the market-to-book ratio varies in the book debt ratio model but
shows a negative and significant relation in the market leverage model for all countries
except Denmark which shows an insignificant parameter value.

 Jong, et al. (2008) examined the role of firm-specific determinants of corporate leverage
choice around the world using a sample of 42 countries divided equally between developed
and developing countries. They distinguish two types of effects: the direct effect on
28
 leverage and the indirect effect through the influence on firm-specific determinants of
corporate leverage. They found that the impact of several firm-specific factors like
tangibility, firm size, risk, growth and profitability on cross-country capital structure is
significant and consistent with the prediction of conventional capital structure theories. On
the other hand, they also observed that in each country one or more firm-specific factors are
not significantly related to leverage.

 Gil and Mathur (2011) with a purpose to find the factors that influence financial leverage
of Canadian firms used a sample of 166 Canadian firms listed on the Toronto Stock
Exchange for a period of 3 years i.e., from 2008-2010. The results show that financial
leverage of Canadian firms is influenced by the collateralized assets, profitability, effective
tax rate, firm size, growth opportunities, number of subsidiaries and industry dummy.

 Riaz and Afzal (2011) applied a “Leverage Model” in a poled cross-sectional framework to
236 individual firms from five large scale sectors i.e., textile, engineering, sugar, chemical
and cement for a period of eight years from 2001 to 2008 to investigate the role of firm’s
financial factors that might determine the capital structure. The study found that
profitability and growth in assets have significant negative association with debt ratios
whereas mixed results are observed for tangibility and size of the firm.

 Salem and Nasem (2011) analyzed the leverage and profitability of selected oil and gas
companies of Pakistan during 2004 to 2009 to understand the impact of leverage on
profitability and EPS. The study failed to support the hypothesized positive relationship
between financial leverage and both of the profit measures. Hence, the study found negative
relationship of leverage to profitability and earnings per share. The results also indicated
that high levered firms were less risky in both market based and accounting based
measured.

 Rafique (2011) investigated the effect of the profitability of the firm and its financial
leverage on the capital structure of the automobile sector companies in Pakistan. To proceed
with this, the capital structure of 11 listed firms has been analyzed by adopting an
econometric framework over a period of five years. Estimating regression analysis and
checking the relationship of the estimated model through Correlation Coefficient test, the
study concluded that profitability in strongly negatively related to capital structure and
positively to financial leverage but the correlation coefficient was insignificant.

29
 Khalid, Alkhatib (2012), aims in his study on the Determinants of Leverage of listed
companies to empirically investigate the determinants of leverage of listed companies. The
results show that for both industrial and services sectors; there were no statistical significant
relationship. When the two sectors were separated, the results for the industrial sector
revealed that liquidity and tangibly have significant relationship with leverage, whereas the
results for the services sector revealed that the growth rate, liquidity, and tangibility have
significant relationship with leverage.

 Khushbakht Tayyaba (2013) shows in his study "Leverage- An analysis and its impact on
profitability with reference to selected oil and gas companies in Pakistan” the relationship
between leverage and Earning Per Share (EPS) of this sector. It analyses how earning
capacity of this sector is affected by operating costs and financial charges. It also shows the
relationship between the Debt Equity ratio and EPS and how this sector does debt financing
efficiently. The selected sample is based on 25 oil and gas companies. Six year data from
the period of 2007 to 2012 is used for the purpose of analysis. He used Return on Asset,
Return on Equity, Return on Investment and Earning per Share as dependent variables and
Degree of Financial Leverage and Degree of Operating Leverage as independent variables.
After applying regression, correlation and descriptive analysis it is concluded that there is
no significant effect of DFL and DOL on ROA, ROE, ROI and EPS. It was supposed that
highly leveraged oil and gas companies have lower profitability.
 Priyanka Sharma, Ankit Saxena and Karishma Choudhary (2014) in the study
"Leverage analysis of Amul- Anand Milk Union Limited, Ahmadabad" a comparative study
and analysis of firms financial leverage, operating leverage and combined leverage has been
done of five years i.e. from 2007-08 to 2011-12. Operating Leverage of AMUL has
decreased from 2007 to 2012. In the year 2007-08 it was 4.44 whereas in 2011-12 it has
reduced and came down to 3.02. Since the ratio of fixed cost to variable cost is low, AMUL
has a low degree of operating leverage. In the year 2007 operating leverage was quite high
as compared to 2012 which implies a high fixed cost and low variable cost. Since the ratio
of fixed cost and variable cost was high the company was having a high degree of operating
leverage in comparison to 2012. Financial leverage has also shown a downward trend in last
five years. It was 2.76 in the year 2007-08 whereas in 2011-12 it has come down to 1.7. The
degree of combined leverage has reduced from 12.31 1in 2007-08 to 5.15 in 2011-12. A
low degree of combined leverage in AMUL shows the company is having low fixed cost
and is also a less risky firm. From the study it could be concluded that AMUL is a less
riskier firm as compared to its condition in 2007-08, as in 2007-08 its combined leverage
30
 was approximately 12.31 which was too risky for the firm but later on with a decrease in
firms operating leverage and financial leverage year by year it came down to 5.I5 which is a
good sign. Low degree of leverage leads to a low risk level to the company. The operating
leverage has come down from 4.44 in 2007-08 to 3.02 in 2011-12 which implies a low fixed
cost. The financial leverage has also shown a decrement which shows that interest expenses
has also decreased.

 Dr. M Ramana Kumar (2014), Leverage is the key decision area in financial management.
“An Empirical Study on the Relationship between Leverage and Profitability in Bata India
Limited” concentrates on leverage and its relationship between profitability in Bata India
Limited. In this, an attempt is made to analyze the performance of Bata India Limited, to
analyze the leverage analysis in Bata India and to study the relationship between leverage
and profitability in Bata India Limited. The exploratory research design is adopted in this
study which employs secondary data. The financial statements of Bata India Limited have
been collected over a period of 7 years (2005-06 to 2012-13). The data collected is analyzed
by the percentages, averages, ratios and Correlation analysis tools reveals that the research
evidence of the study indicates that, that degree of operating leverage is statistically
significant positive correlation with the ROI. It is observed that degree of financial leverage
is positively correlated with the ROI. It means that degree of financial leverage of Bata
India was not at optimum level. It is suggested to Bata to revise its capital structure which
should include the optimum blend of equity and borrowed funds so that it has positive
impact on Return on Investment. Moreover degree of combined leverage is positively
correlated with ROI of Bata India.

 Bindiya Soni and Jigna Trivedi (2014), in a research paper titled,” A Study on Leverage
Analysis and Profitability for Selected Paint Companies in India1” analyses the impact of
both financial leverage as well as operating leverage on the profitability (measured through
Earning Per Share “EPS”) of the selected paint companies of India. Five listed paint
companies of India were selected based upon the market capitalization for the research
purpose. The study investigates the impact of degree of financial leverage and degree of
operating leverage on EPS with the help of correlation analysis. Along with this analysis,
the paper also investigates the impact of debt-equity ratio on the EPS of the said firms to
see the impact of debt on the wealth of the firms. The findings suggest that financial
leverage had no significant relationship on profitability while operating leverage had
significant relationship on profitability with the exception of few.

31
 Bhatt Satyaki J (2015) in his study “Leverage Analysis of Aurobindo Pharma, Hyderabad
concentrates on leverage analysis in Aurobindo Pharma and also an attempt is made to
study the impact of leverage on Earning per share (EPS). The exploratory research design is
adopted in this study which employs secondary data. The financial statements of Aurobindo
Pharma have been collected over a period of 10 years (2004-05 to 2013-14). The data
collected is analyzed by the various tools. From the analysis of financial leverage, it is clear
that in most years the D/E ratio has been decreasing trends except in some years. On the
other hand in the financial leverage the trend is fluctuating. The level of combined leverage
shows mixed trend. It is observed that degree of financial leverage is positively correlated
with the ROI. It has been observed during the study that there is a negative correlation
between DOL and EPS, DFL and EPs, and DCL and EPS.

 Dr E B Khedkar (2015) discusses in his paper “A study on Leverage analysis and

Profitability for Dr. Reddy's Laboratory" the relationship between Financial Leverage and
Return of Investment, Operating Leverage and Return on Investment, and Combined
Leverage and Return on Investment, for Dr Reddy’s Laboratories, the pharmaceutical firm
having the highest sales turnover for the financial year 2013-14.The purpose of this paper is
also to understand the decisions made by Dr Reddy’s Laboratories with regards to its asset
utilization and Leverage management. This research paper thus analyzes the impact of these
decisions on the Shareholder’s earnings and the Earnings before Interest and Taxes.Ratio
analysis and correlation analysis has been deployed for meeting the objectives of the
present study. Current Ratio, Quick Ratio, Debt to Equity Ratio, Total Asset Turnover Ratio
and Return on Investment has been analyzed for understanding the financial performance of
Dr Reddy’s Laboratories. The study has been carried out during the period of the financial
period 2010 to 2014.

 Sanjay J. Bhayani and Butalal Ajmera in a research paper titled, “An Empirical Analysis
Of Financial Leverage, Earnings And Dividend: A Case Study Of Maruti Suzuki India
Ltd.6”, have studied the theoretical approaches and practical application of financial
leverage, earnings per share and dividend per share of Maruti Udyog Ltd. with data for the
period of 2001-02 to 2008-09. For the purpose of analysis, researcher has used ratio
techniques and to test hypothesis for correlation-coefficient has been used. The result of the
study indicates that there is a correlation between DFL and EPS and the difference is
insignificant where as result of correlation coefficient at 5% level of significance showed
that the diffidence is significant between DFL and DPS and EPS and DPS.

32
 Dr. K Bhagyalekshmi (2016) "Leverage Analysis in Selected Cement Companies in
India" is a study on the leverage analysis in terms of Degree of Operating Leverage,
Financial Leverage and Combined Leverage in three select cement companies namely,
ACC Ltd., J.K and Madras Cements Ltd. during the period of 10 years from 2003-04 to
2012-13. The paper concludes that, operating risk is highest in ACC, financial risk is
highest in Madras and ultimately total risk is slightly higher in J.K Cement Ltd than the
other two companies.

 Gautam Sen and Ravi Ranjan (2018) in his paper “Rapport between Leverage and
Profitability: A Study of TVS Motor Company" an attempt has been made to analyze the
impact of leverage on the profitability and performance of the company. For the purpose of
the study TVS Motor Co. has been selected and for analysis purposes the basic statistical
tools like Mean, SD, CV, CAGR, ANOVA(one way) have been used and in order to
measure the impact the OLS simple Linear regression model has been used, the study
covers a period of ten years from 2006 to 2016. Results suggested that the operating,
financial and combined leverage of the company does not play any major role in making
investment decisions of the company. And it was also found that the financial, operating
and combined leverage of the company has no significant impact on ROA and Risk
Adjusted ROA of the company.

33
 CHAPTER 3

THEORETICAL FRAMEWORK

34
3.THEORETICAL UNDERSTANDING OF THE SUBJECT

3.1 CONCEPT OF LEVERAGE

The term leverage indicates the ability of a firm to earn higher return by employing fixed
assets or debt. It shows the effects of the investment patterns or financing patterns adopted by the
firm. The employment of an asset or source of funds for which the firm has to pay a fixed cost or
interest has a considerable influence on the earnings available for equity shareholders.
The fixed cost or interest acts as the fulcrum and the leverage magnifies the influence. By
leveraging, a firm is able to magnify the returns to the shareholders by using fixed cost bearing
assets or funds. It depends on the financial planning where it is desired that a small change in
sales or EBIT will have a magnifying effect on EBIT or EPS respectively. It must however be
noted that higher the degree of leverage, higher is the risk as well as well as return to the owners.

3.2 MEANING OF LEVERAGE

Leverage means the ability to influence a system, or an environment, in a way that
multiplies the outcome of one's efforts without a corresponding increase in the consumption of
resources. In other words, leverage is the advantageous condition of having a relatively small
amount of cost yield a relatively high level of returns.The employment of an asset or source of
funds for which the firm has to pay a fixed cost or fixed return is called leverage.
Various authors have defined leverage in different ways.
 According to James C. Van Home, ‘Leverage refers to the use of fixed cost in an attempt
to increase (or lever up) profitability’.
 In the words of J. E. Walter, ‘Leverage may be defined as percentage return on equity
and the net rate of return on total capitalization’.
3.3 TYPES OF LEVERAGE

Leverage are three types:

(i) Operating leverage
(ii) Financial leverage and
(iii) Combined leverage

35
 1. OPERATING LEVERAGE

Operating leverage refers to the use of fixed operating costs such as depreciation,
insurance of assets, repairs and maintenance, property taxes etc. in the operations of a firm. But it
does not include interest on debt capital. Higher the proportion of fixed operating cost as
compared to variable cost, higher is the operating leverage, and vice versa.
Operating leverage may be defined as the “firm’s ability to use fixed operating cost to
magnify effects of changes in sales on its earnings before interest and taxes.”

In practice, a firm will have three types of cost viz:

(i) Variable cost that tends to vary in direct proportion to the change in the volume of activity,

(ii) Fixed costs which tend to remain fixed irrespective of variations in the volume of activity
within a relevant range and during a defined period of time,

(iii) Semi-variable or Semi-fixed costs which are partly fixed and partly variable. They can be
segregated into variable and fixed elements and included in the respective group of costs.

Operating leverage occurs when a firm incurs fixed costs which are to be recovered out of
sales revenue irrespective of the volume of business in a period. In a firm having fixed costs in
the total cost structure, a given change in sales will result in a disproportionate change in the
operating profit or EBIT of the firm.If there is no fixed cost in the total cost structure, then the
firm will not

have an operating leverage. In that case, the operating profit or EBIT varies in direct proportion
to the changes in sales volume.

Operating leverage is associated with operating risk or business risk. The higher the fixed
operating costs, the higher the firm’s operating leverage and its operating risk. Operating risk is

36
the degree of uncertainty that the firm has faced in meeting its fixed operating cost where there is
variability of EBIT.It arises when there is volatility in earnings of a firm due to changes in
demand, supply, economic environment, business conditions etc. The larger the magnitude of
operating leverage, the larger is the volume of sales required to cover all fixed costs.

Degree of Operating Leverage:

The earnings before interest and taxes (i.e., EBIT) changes with increase or decrease in the
sales volume. Operating leverage is used to measure the effect of variation in sales volume on
the level of EBIT.

The formula used to compute operating leverage is:

Contribution
Operating Leverage =
EBIT

A high degree of operating leverage is welcome when sales are rising i.e., favourable
market conditions, and it is undesirable when sales are falling. Because, higher degree of
operating leverage means a relatively high operating fixed cost for recovering which a larger
volume of sales is required.

The degree of operating leverage is also obtained by using the following formula:

Degree of operating leverage (DOL) = Percentage change in EBIT / Percentage Change in Units
Sold

The value of degree of operating leverage must be greater than 1. If the value is equal to 1 then
there is no operating leverage.

Importance of operating leverage

37
1. It gives an idea about the impact of changes in sales on the operating income of the firm.

2. High degree of operating leverage magnifies the effect on EBIT for a small change in the sales
volume.

3. High degree of operating leverage indicates increase in operating profit or EBIT.

4. High operating leverage results from the existence of a higher amount of fixed costs in the
total cost structure of a firm which makes the margin of safety low.

5. High operating leverage indicates higher amount of sales required to reach break-even point.

6. Higher fixed operating cost in the total cost structure of a firm promotes higher operating
leverage and its operating risk.

7. A lower operating leverage gives enough cushion to the firm by providing a high margin of
safety against variation in sales.

8. Proper analysis of operating leverage of a firm is useful to the finance manager.

2. FINANCIAL LEVERAGE

Financial leverage is primarily concerned with the financial activities which involve rising
of funds from the sources for which a firm has to bear fixed charges such as interest expenses,
loan fees etc. These sources include long-term debt (i.e., debentures, bonds etc.) and preference
share

capital. Long term debt capital carries a contractual fixed rate of interest and its payment is
obligatory irrespective of the fact whether the firm earns a profit or not.

38
 As debt providers have prior claim on income and assets of a firm over equity shareholders,
their rate of interest is generally lower than the expected return in equity shareholders. Further,
interest on debt capital is a tax deductible expense. These two facts lead to the magnification of
the rate of return on equity share capital and hence earnings per share. Thus, the effect of
changes in operating profits or EBIT on the earnings per share is shown by the financial
leverage.

According to Gitman financial leverage is “the ability of a firm to use fixed financial charges
to magnify the effects of changes in EBIT on firm’s earnings per share”. In other words,
financial leverage involves the use of funds obtained at a fixed cost in the hope of increasing the
return to the equity shareholders. Favourable or positive financial leverage occurs when a firm
earns more on the assets/ investment purchased with the funds, than the fixed cost of their use.
Unfavourable or negative leverage occurs when the firm does not earn as much as the funds cost.
Thus shareholders gain where the firm earns a higher rate of return and pays a lower rate of
return to the supplier of long-term funds. The difference between the earnings from the assets
and the fixed cost on the use of funds goes to the equity shareholders. Financial leverage is also,
therefore, called as ‘trading on equity’.

Financial leverage is associated with financial risk. Financial risk refers to risk of the firm
not being able to cover its fixed financial costs due to variation in EBIT. With the increase in
financial charges, the firm is also required to raise the level of EBIT necessary to meet financial
charges. If the firm cannot cover these financial payments it can be technically forced into
liquidation.

Degree of Financing Leverage

Financing leverage is a measure of changes in operating profit or EBIT on the levels of

earning per share.

It is computed as:

39
 Financial leverage = Percentage change in EPS / Percentage change in EBIT = Increase
in EPS / EPS / Increase in EBIT/EBIT

The financial leverage at any level of EBIT is called its degree. It is computed as ratio of
EBIT to the profit before tax (EBT).

Degree of Financial leverage (DFL) = EBIT / EBT

The value of degree of financial leverage must be greater than 1. If the value of degree of
financial leverage is 1, then there will be no financial leverage. The higher the proportion of debt
capital to the total capital employed by a firm, the higher is the degree of financial leverage and
vice versa.Again, the higher the degree of financial leverage, the greater is the financial risk
associated, and vice versa. Under favourable market conditions (when EBIT may increase) a
firm having high degree of financial leverage will be in a better position to increase the return on
equity or earning per share.

Importance of Financial Leverage

The financial leverage shows the effect of changes in EBIT on the earnings per share. So it
plays a vital role in financing decision of a firm with the objective of maximising the owner’s
wealth.
1.It helps the financial manager to design an optimum capital structure. The optimum capital
structure implies that combination of debt and equity at which overall cost of capital is minimum
and value of the firm is maximum.

2.It increases earning per share (EPS) as well as financial risk.

3.A high financial leverage indicates existence of high financial fixed costs and high financial
risk.

4.It helps to bring balance between financial risk and return in the capital structure.

40
6. It shows the excess on return on investment over the fixed cost on the use of the funds.

7.It is an important tool in the hands of the finance manager while determining the amount of
debt in the capital structure of the firm.

3. COMBINED LEVERAGE

Operating leverage shows the operating risk and is measured by the percentage change in
EBIT due to percentage change in sales. The financial leverage shows the financial risk and is
measured by the percentage change in EPS due to percentage change in EBIT.Both operating
and financial leverages are closely concerned with ascertaining the firm’s ability to cover fixed
costs or fixed rate of interest obligation, if we combine them, the result is total leverage and the
risk associated with combined leverage is known as total risk. It measures the effect of a
percentage change in sales on percentage change in EPS.

Degree of Combined Leverage

The combined leverage can be measured with the help of the following formula:

Combined Leverage = Operating leverage x Financial leverage

The combined leverage may be favourable or unfavourable. It will be favourable if sales

increase and unfavourable when sales decrease. This is because changes in sales will result in
more than proportional returns in the form of EPS. As a general rule, a firm having a high degree
of operating leverage should have low financial leverage by preferring equity financing, and vice
versa by preferring debt financing.

Importance of Combined Leverage

1.It indicates the effect that changes in sales will have on EPS.

41
2.It shows the combined effect of operating leverage and financial leverage.

3.A combination of high operating leverage and a high financial leverage is very risky situation
because the combined effect of the two leverages is a multiple of these two leverages.
4.A combination of high operating leverage and a low financial leverage indicates that the
management should be careful as the high risk involved in the former is balanced by the later.

5.A combination of low operating leverage and a high financial leverage gives a better situation
for maximising return and minimising risk factor, because keeping the operating leverage at low
rate full advantage of debt financing can be taken to maximise return. In this situation the firm
reaches its BEP at a low level of sales with minimum business risk.

42
 CHAPTER-4
ISSUES AND CHALLENGES AND ILLUSTRATION OF COMPANIES

43
4.1 ISSUES AND CHALLENGES

Coir industry in India originated in Kerala which holds the major cottage trade in
Kerala and this is recognised as the home of the coir enterprise within India. The
workforce is facing several problems in the work environment. The primary goal of the
research signified to understand the difficulties, solve the problems of genuine coir
workers and also examine whether people reach essential needs. The research held in the
decided region with a survey of specific questions to obtain data of a primary source
towards the direction of the researcher.The sampling was done to recognise the obstacles
regarding coir workers. Each interview was through the schedule.

4.1.1 PROBLEMS RELATED TO MECHANISATION

Mechanisation is a controversial as well as a 'sensitive subject in the coir industry as

it is having some strong social and political linkage. Earlier any type 01 mechanisation
was objected by labourers with their political backing due to tear of loss of employment.
But now situation has changed. For certain process, abourers are not willing to work and
hence shortage is felt. In this context, issues related to mechanisation of various processes
of coir work is analysed in two Qimensions, Viz; From the point view of coir societies
and From the point of coir workers.

4.1.2 PROBLEMS IN THE EXPORT MARKET

Even though wide prospects for coir and coir products are existing, several ifOblems
are impeding its growth in the export market. Lack of market monnation is a major
problem. The exporters of coir products are generally of ~Uand medium size. Their
knowledge about the target market is rather scanty. Ally a few exporters undertake travel

44
to have a first hand information about the 7dlket, identifying competing products and
their prices, monitor the trends in the ~dlket place and watch out for emerging
opportunities. Lack of market inteillgence is a principal problem being faced by the
export sector." There is no effectively represent the cause of the coir industry.

There is no right kind of repair and maintenance centre for repairing their tools
and equipments. The prevailing social thoughts and actions are not conducive for up-
scaling the production process and increasing the productivity. The skilled manpower is
not able to find regular employment opportunities in and around the cluster area. Most of
them being women is not able to explore distant opportunities for job. The coir industry
cluster is an 100% labor intensive cluster ▪ The units are always under severe raw
material as well as labour shortage. ▪ Electricity is the only energy source used by the
units in this cluster with daily power break down ranging between 1-2 hours.

Irregular employment is a major problem in this industry, which is one reason why
coir workers are keen to belong to a union. A typical entrepreneur is the small producer
who has a unit near the backwaters, with 20 to 30 looms . Such a unit usually functions
without registration and employs workers only when raw material is available. Typically,
there will be a shed where women do the spinning, while the men prepare the bales from
the rope. The exporters get to determine the price of coir and coir products. Exporters are
crucial players. Low costs of production in neighbouring States such as Tamil Nadu and
the use of acrylic fibre have depressed the earnings of the small-scale coir entrepreneur.
The decline of coconut production in the traditional coirproducing areas has increased the
scarcity of coconut husk and fibre and this has made Kerala depend on fibre imports from
Tamil Nadu

The production problems which are generally faced by the owners of the units are
raising the required finance, procuring the raw material, finding the skilled labour,
problem in power supply and problem of obsolescence and modernization. Taking into

45
account the general as well as the location-oriented problems prevailing in the industry, a
list of problems that are faced by the units is prepared and supplied to the owners of units
to seek their opinion. The problems which were so identified and ranked by them were
shortage of labour, inadequate supply of green husks, heavy machine maintenance
expenses, inadequate finance, erratic power supply, traditional methods of
production and problem of drying fibre during rainy seasons.

The revolutionary changes of Alappuzha in the production of value added items

could not tap the potential of Ambalappuzha area. Co-operatives, as a whole, depend
upon government support & strategies and they are unable to bring dynamism, vibrancy
and professionalism in their work.Co-operatives not able to operationalize any new
marketing channels and so remain with traditional market and approach. Its sole agency,
Coirfed is the only marketing channel available with them. As the young generation is
apathetic about the development from this sector, innovation is not coming in the sector.
The vast skilled human resource available in the cluster is not able put into productive
area. Productivity is low due to absence of automation/new technologies.

4.2 REMEDIES AND SUGGESTIONS

Production problems faced by small coir units were analysed and identified three
major problems namely inadequate finance, shortage of workers and inadequate supply of
green husks. Production problems faced by medium size coir units were analysed and
identified three major problems namely shortage of workers, inadequate supply of green
husks and heavy machine maintenance Expenses.

To facilitate the manufacturer, the government should come forwarded and stream
line the market structure In future there are more opportunitiesin international marketfor
value added products so that the coir board and related organization should come forward
uplift the industry. More financial assistances are expected for value added product
manufacturing process so the government has to take necessary steps to avail ease loan
procedure. Entrepreneur development program should arrange for entrepreneurs to make

46
use of updated technologies and quality enhancement in production. Coir board and
relevant bodies have to conduct research on production of value added products.

Shortage of Workers is the most significant production problem faced by both

small and medium size coir units of the study area. Hence, it is suggested that the state
government as well as the Coir Board may encourage the entrepreneurs to start
manufacturing value-added coir products like mats, rugs, maurzouks, carpets etc., which
will help them to earn more and enable them to pay attractive wages to their workers. If
attractive wages are paid, more workers will be attracted towards the coir units even
during the peak-agricultural seasons. Thereby, the major problem of shortage of workers
may be solved.

Inadequate Finance‖ is a major production problem faced by small coir units.

Hence, it is suggested that the government may encourage the Commercial banks, Co-
operative banks and other financial institutions to offer loan facilities at subsidised rates
of interest, especially to small coir units to meet out their working capital requirements
during peak seasons. It is also suggested that the Commercial banks, Co-operative banks
and financial institutions may conduct ―Coir Loan Melas‖ by considering their financial
difficulties in operating coir units. By doing so, the above said problem may be solved.

4.3 ILLUSTRATION OF TWO COMPANIES

4.3.1 NARSAPUR- CROCHET LACE

The products of this cluster are having very good demand especially in
garments. But the cluster is making traditional products like doilies and table mats which
neither get good price nor have good demand. With proper training of the artisans for
producing better quality standard products, making available appropriate designs and
developing international marketing networks the cluster can diversify into garments and
become global sourcing point for crochet lace garments in post quota era and in the
process increase the wages of the artisans. The activities in the cluster have been initiated
in 2004 by NISIET with the support of DSSCI.

47
Evolution of the Cluster

The crochet lace cluster of Narsapur is 168-yearold. It all started off when a
Scottish lady by name Macrea who came here on missionaries work in year 1844 and
taught the house wives the art of lace work by needles. Since that time the skill spread in
the district and women took up the activity as a hobby and pass time activity, which also
fetched them income. Most of the women do the lacing in there respective houses..
Traditionally the families have been making this product for generations. In some places
women gather at a common place in the village and work collectively. Narsapur is
located in East Godavari District of Andhra Pradesh. The cluster is spread in and around
Narsapur in various villages like port of DCSSI.

Sitarmpiuram, Palkol, Venkatrayapalem, Antarvedi, Royapeta, Mogaltur, etc. The

cluster is specialised in doing lace works like dollies, furnishings, garments, tablemats,
etc

The Cluster and its Major Stakeholders

There are around 2,00,000 women working in the cluster. Many of these women
are working through 12,000 women Self Help Groups (SHG) with a membership of 10 to
15 in each group. Most of them treat it as a part-time job than a full-time profession.
Around 50 SSI units procure the orders from the domestic buyers and export agents. A
few such units are also exporting directly, mainly catering to the lower end of the
markets. The SSI units operate with the support of liners (Line Supervisors). The liners
are hired by the units on job work basis. They go to the field and distribute yarn to the
lacers (the women workers) and explain them about the design pattern. Once woven, the
liners collect the finished product from the lacers and deliver it to the SSI units. The
liners are responsible for the maintenance of the quality of the product and maintain
delivery schedules. Besides there are around 50 cooperative societies of the women
workers who also market the products of artisans. The Society also fund the members in
times of need. Some women SHGs, market their products directly in exhibitions and at

48
times they also do job work for exporters. The turnover of the cluster is estimated around
Rs. 50 crores (USD 11.4 million). Eighty per cent of the products are exported. The
average income per week for a woman worker is around Rs.400/month whenever they
have work.

Government of Andhra Pradesh is also helping these women through various group
schemes. The Government of Andhra Pradesh has developed in association with Coir
Board & Development Commissioner (Handicrafts) a state of the art infrastructure
facility - Lace Park; for facilitating training and export marketing assistance to the SHGs
and Societies. The National Institute of Fashion Technology (NIFT) is closely associated
with the activities of Lace Park. There are around 6 to 10 dyers in the cluster who are
doing traditional dying. Some exporters are getting their material dying places like
Tirupur & Salem. All India Crochet Lace Exporters Association (AICLEA) is an
association of exporting (SSI) units formed around 70 years back. The association is
weak and inactive. Neither the president nor the secretary of the association is at present
in this trade. There is no association secretariat and the members meet as and when they
get any common problem. Some of the other important stakeholders are SISI, APBC
Welfare Corporation, AP Women Welfare Corporation, SBI, NSIC, Andhra Bank,
SIDBI, EPCH, etc.

Major Problems

Quality of product

At home, many a times weaving is done in a very casual way (e.g. cleanliness) and
the quality is sub-standard. Again due to the absence of proper dyeing and bleaching
facilities most of the products are made in white color (natural). The design pattern is age
old and the changes being made are only marginal. Market is not explored to the potential
as the units are only supplying to small part of the international market and because of
their poor quality reputed companies are still not their buyers. There is also not much of
exposure for the exporters for marketing of the product. There is also a huge unexplored

49
domestic market. The cluster is also not following the latest trends and designs in the
fashion world. Raw material costing: At times, the artisans, SSI units and the Societies
are not fully aware of the measurement of the threads. They are only focused on cost
factor. But the lace work depend on the length of the raw material, the more the length
more will be the number of pieces made. One kg Coimbatore thread is as big as 200
grams of Madhura Coats. Again, the raw material is supplied in spindles and it is then
given in small bundles to the weavers. This adds to the cost. The association is weak and
running in makeshift premises and all the office bearers work in isolation.

Vision for the Cluster

The vision the cluster was that the cluster should become globally competitive in
design, quality, marketing, and exports and increase the turnover to Rs.100 crores (USD
22 million) and in the process double the wages of women artisans.

Implementation Strategy

The strategy for implementation was to create a success story of joint action,
provide appropriate training and exposure and thereby diversify into high value products
and clientele and encourage consortia formation for capturing these new marketing
channels. Provision of support infrastructure was also planned.

Major Intervention

Strengthening of Association

• Created awareness on benefit of joint action through regular meetings.

• Submitted Memorandum to Govt. Of Andhra Pradesh for allotment of land to the

association for construction of association

• Association led delegation to Chief Minister of Andhra Pradesh for excluding the lace
trade from

Market Development

50
• Organised a workshop on export marketing

• Created awareness on participation in exhibitions for developing marketing networks

• Facilitated Participation in exhibitions through information dissemination • Organised

training on Crochet language

• Supplied latest design patterns

Quality Up-gradation

• In association with Textile Committee, Hyderabad, a seminar was conducted on

"Testing process and quality standards of yarn"

• Awareness seminar was organised on ISO Standard.

• Demonstration of Stain Removing machines by M/s Ramsons Viet

Costing

• Organised seminar on bookkeeping

Market Development

• Consortium of seven units formed and developed web site www.lacecon.org and
registered the web site with 45 search engines. Four units participated in DC(SSI)
supported exhibition in Switzerland and Birmingham through SISI, Hyderabad

• 5 units participated in Heimtextile exhibition, Frankfurt, Germany

• 8 units participated in EPCH Spring Trade Fair at Pragati Maiden, New Delhi

• Fab India, an Indian Arm of Fab Inc. Cincinnati, USA visited cluster for marketing tie-
ups. Prototypes developed by clusters as per designs and patterns

Quality Up gradation

• Units started testing their products at the Lab of Textile Committee, Hyderabad and are
sourcing products as per international standards.

51
• 10 units came forward for ISO 9000 implementation

• 20 Units purchased machines and started using it for stain removing purposes.

Some artisans are now earning up to Rs.650/- per month by lacing garments.

Future Direction

The programme is running into its second year. The following has been planned:

Strengthening of Association

Construction of own infrastructure for Association and install dyeing machines

for common purpose, as the cluster units are getting their products dyed at tirupur and

Karur Quality Improvement: Assessment audit for ISO certifications of SSI units for the
purpose of improving quality standards. Capacity Building: Two-weeks training
programme for women artisans on latest trends and fashions in crochet garments in
association with SES German consultant.

4.3.2 ALLEPPEY – COIR

Evolution of the Cluster

In the mid-nineteenth century, Europeans familiar with the woven products of jute
in Bengal travelled to Alleppey with local technicians and began manufacturing coir
ropes. This planted the seed for the coir cluster. Thereafter several Europeans came into
Alleppey and started producing coir ropes in large quantities. Smaller Indian firms took
birth as subcontractors to the larger firms. From 1857 till the 1930s the products
manufactured largely included ropes. Post-Independence, many Europeans handed over
operations to their Indian counterparts. The latter in turn encouraged subcontraction in
the light of the strong unionisation of labour in the region. As a result large-scale
factories declined and small units mushroomed in their place. The Coir Industry Act 1953
was enacted and the Government assumed a significant role in operations in the sector.
The State Government of Kerala also launched many developmental schemes. A

52
Minimum Export Price (MEP) as well as a Minimum Purchase Price (MPP) was enforced
in the 1960s and in 1976 respectively, to ensure that workers and subcontractors were
receiving adequate earnings. By the early 2000s, both MEP and MPP were removed and
market forces started determining prices. Mechanisation developed slowly, presumably,
as a result of the ‘strong labour pressure in the State’. Hence, unlike enterprises in other
southern states, today Alleppey does not have large modern factories. However, technical
advancements since the 1960s facilitated elimination of drudgery in certain processes and
led to the modernisation of looms. Since the 1980s semi-automatic looms were
introduced and simultaneously product diversification took place. Today, the cluster
manufactures and exports a wide range of products such as mats, mattings etcetera. Some
of the new applications of coir include `geo-textiles’ to make dykes and prevent soil
erosion, coir blends with other natural fibres and material for use as Venetian blinds, false
ceilings and partitions etc..

The Cluster and its Major Stakeholders

The principal stakeholders include the spinners, weavers and exporters. The cluster
has about 45,000 spinners and about 35,000 weavers (and also thousands of workers who
are involved in related enterprises involved in spooling, dyeing etc.) The spinners use
about 15,000 ratts (spinning machines). As on 2002 the total turnover of the cluster was
about Rs.1200 crores (USD 273 million) with an export turnover of about Rs 370 crores
(USD 84 million). Over 700 cooperative societies have been formed in the region. The
societies collect orders from exporters and distribute these amongst members. As these
societies are ‘firm’ on securing appropriate realisation to labour for members their labour
and production charges are sometimes not that attractive from the point of view of
exporters who may outsource manufacture to other units in the informal sector. The
performance of societies by and large is, therefore, not very encouraging. There are
several associations representing the interests of small-scale manufacturers in the cluster.
These include the Kerala State Small Scale Coir Manufacturers Federation (involving a
large number of small weavers and cooperative societies) and the Kerala State Cherukida

53
Manufacturers Association, amongst others. Besides, there are four exporters’
associations, with a total membership base of about 100 exporters. The associations of
both manufacturers and exporters have a critical mandate in terms of negotiation and
resolving disputes with input suppliers and workers. Technological developments are
either developed or standardised by the Central Coir Research Institute (CCRI). The Coir
Board, through various related bodies such as the CCRI, facilitates technology
upgradation, standardisation and dissemination. It also acts as a kind of Export Promotion
Council. The Directorate of Coir Development is involved in several developmental
activities such as facilitating up-gradation of skills and ‘raats’ (spinning machines)
establishment of defibreing (extraction of fibre from husk) units, etc. The Coir Workers
Welfare Board works on related areas and provides valuable services to workers in the
cluster in terms of facilitating insurance and other services. The cluster has several
commercial financial institutions, such as the SBI, in its midst.

Major Problems

The major problems identified included: · A large number of units based in

households-or in the highly sub-contracted cluster, suffered from an acute dearth of
formal institutional finance. · Technological issues in terms of adequate defibreing units,
effluent treatment plants for dyeing units as well as ‘motorisation’ of traditional raats as a
means to enhance productivity, were not fully developed. · Market development and
marketing: Inadequacies in the context of accessing a large number of buyers by small
exporters who constitute the majority of enterprises in this segment was also evident.
Relative dearth of market-led diversification initiatives were also identified. The
uniqueness of Alleppey products have not yet been adequately exploited in terms of
brand building initiatives, which means that the products are unprotected from possible
fakes manufactured in other regions.

Vision for the Cluster

54
 The cluster vision that progressively evolved was ‘The coir cluster of Alleppey will
become a globally preferred sub-contraction pocket for various coir fibre-related value
added products by the year 2005.

Implementation Strategy

The Coir Board and the EDII had pursued an initiative over a period of a few
months of evolving networks (for purchase, export and common facilities) along the
supply chain. In the same spirit, as finance was one of the major issues of the cluster, and
SBI being a financing institution per se, the implementation process started by financing
such small enterprise networks without collateral. Thereafter the ‘household’ units
(spinners) were organized into Consortia and SHGs for group financing. Having
delivered on this front, these networks were provided training, and empowered into
marketing and better input sourcing linkages. For marketing, the consortia of weavers
were networked with exporters as to offer volumes and thereby avoid the non-productive
middlemen. The empowered (household units) consortia (who may also be referred to as
SHGs) as also weavers were thereafter federated into associations.

Major Interventions

Financing of tiny units

It all started off with the Coir Board and the EDI evolving several networks of
manufacturers and exporters over a project. The SBI took the initiative of contributing
towards financing these small networks of mats as also matting manufacturers on a
Mutual Credit Guarantee Fund Scheme (MCGFS1 ) as also a ‘cash deposit based
advance’ mode. Such groups served as amongst the first institutionally financed input
purchase networks in the cluster. Thereafter hundreds of consortia evolved across
different segments along the supply chain. In total about 223 consortia comprising around
4,700 tiny and small ‘enterprises’ (spinners and weavers), were provided finance linkages
and were also catalysed to pursue various common business plans. The print media
served to help disseminate information, as did rounds of meetings with small enterprises.

55
This. led to a virtual exploitation of consortiums in the cluster that thereafter pursued
numerous joint activities

Infrastructure and technology upgradation

Most defibreing units were based in Tamil Nadu. Poor infrastructure in the region
in the context of defibreing mills had been contributing to higher cost of production,
which in turn made it difficult for the units to ward off competition. Under the Integrated
Infrastructure Upgradation Scheme (IIUS) several defibreing mills are being established.
This will give greater bargaining power to the product manufacturers and also exporting
SMEs in the cluster vis-à-vis suppliers of inputs outside. Common facilities evolved
included shearing and finishing, glueing and defibreing units. A small training institute to
facilitate the upgradation of raats has been established by the Women Spinners’
Association.

As part of technology upgradation initiatives amotorised spinning raat has been

conceived with the help of an international BDS provider - SES, which is yet to be
commercialised. Simple equipment for better sorting of coir fibre before spinning has
been designed. In the case of women spinners networked as consortia, incomes in terms
of per diem earnings increased by about 25 per cent by virtue of utilising upgraded raats
and also due to the procurement of inputs from their own working capital. The Board of
Director’s meeting under the IIUS held on September 2005 has offered support to set up
121 coir spinning units with motorised traditional raats.

Market development and marketing

The networks that were created for common sourcing were also encouraged to
participate in national and international trade fairs. Networks also attended the B2B
meets organised by the Kerala Bureau of Industrial Promotion (K-BIP) at Kochi, which
led to new market linkages for SMEs. The services of international BDS providers SES,
Germany, are also being used to facilitate relevant options.
56
 The Coir Board has tied up with institutions such as the Building Material
Technology Promotion Council (BMTPC) for low cost housing technologies using coir-
related inputs. The Board has also been exploring the use of natural dyes to increase the
ecofriendliness of coir home furnishings in association with IIT, as part of its constant
search for valueadded production.

Consolidated Results

About 223 consortia comprising around 4700 tiny and small ‘enterprises’
(spinners and weavers) were evolved and catalyse to pursue various common business
plans such as common cash purchase of inputs thereby facilitating operations even during
periods of raw material shortage, secure inputs in bulk and cash and thereby realise
discounts on procurement, some used a part for sourcing inputs and a part for securing
motorised traditional raats, etc. · For tiny women spinners, networked as consortia,
incomes in terms of per diem earnings increased by about 25 percent by virtue of utilising
upgraded raats as also procurement of inputs with own working capital (than remain as
jobbers). · State Bank of India provided credit linkages to 323 consortia amounting to
about Rs. 4.60 crores (USD 1 million) by way of a unique financial intervention in the
region. · 118 women consortia have been financed for husk collection in collaboration
with district panchayat for Rs. 59 lakhs (USD 134,000) by SBI. · Several interventions
were pursued in close collaboration with the Coir Board, the Department for Coir and
Industries Departments (Government of Kerala). Other institutions like SES, CII, NMCP,
KVIC have been networked with.

Sustainability of Interventions

The consortia has evolved into three associations, specific to each of the three
major production segments in the cluster, so as to pursue advocacy and also progressively
work on association strengthening activities. The Alappuzha Coir Cluster Development
57
society (ACCDS) serves as the apex implementing SPV with a Coir Board official
playing the role of Executive Director. A Cluster Development Coordination Committee
(CDCC) has been created for the smooth and efficient functioning of the cluster. Its
members include associations that have been evolved over interventions, the Coir Board,
KSIDC, Coir Department, SISI, SBI, SIDBI, etc. The CDCC is, however, at a relative
stage of infancy. Above all, the State Government (Coir Department and Coir Welfare
Board) is seriously pursuing the methodology and has already trained over 20 officers as
promoters of this cluster development programme.

Future Direction

In addition to strengthening the various associations that have evolved, various

initiatives are being progressively considered by cluster actors: Registration of Alleppey
coir products under the Geographical Indications (GI) Act: GI could be secured on the
basis of skill on the spinning front and weaving. Thereafter, common brand building
initiatives may be explored in terms of promotion of the Alleppey coir brand. Effective
implementation of the project under the IIUS: Effective implementation of the large
project under the IIUS scheme is accorded top priority as part of future interventions. In
addition various options to enhance competitiveness are being explored by stakeholders
in terms of bio-gas options to optimise power costs in delibering units amongst others.

58
 CHAPTER-5

RATIO ANALYSIS & INTERPRETATION

59
5.1 RATIO ANALYSIS

5.1.1 DEBT EQUITY RATIO

This ratio established the relationship between borrowed funds and owners capital. The
acceptable norm for this ratio is considered to be 2:1.

DEBT
Debt- Equity Ratio =
EQUITY

Debt = total outside liability

Equity = share capital (equity + preference) + Reserves and Surplus – Fictitious Assets

Calculation of Debt – Equity Ratio of Coirfed, Alappuzha

Table 5.1.1.1

Year Debt Equity Debt-Equity Ratio

2014-2015 1851860863 671129568.7 2.76

60
 2015-2016 2254732550 642621746.2 3.51

2016-2017 2552339376 620828967.8 4.11

2017-2018 3986534834 476457103.3 8.37

2018-2019 3971770224 406320641.8 9.77

Mean= 5.7

Debt – Equity Ratio of Coirfed, Alappuzha during the period of 2014-2019

Figure 5.1.1.2

Debt - Equity Ratio

12

10

61
0
2014-15 2015-16 2016-17 2017-18 2018-19

Debt- Equity Ratio

INTERPRETATION: The Debt Equity Ratio as an average for the last five years is 5.7. The
Debt Equity Ratio shows an increasing trend. It is ever high in the 2018-2019 (9.77) and the ratio
is ever low in the year 2014-2015 (2.76). While taking the last five years under study the ratio
moves up from 2.76 to 9.77.

5.1.2 PROPRIETARY RATIO

Proprietary Ratios relates to the shareholders fund to total assets. The acceptable norm of the
ratio is 1:3 (i.e., 0.33)

Proprietary Ratio =
Shareholders Funds
Total Assets

Shareholders fund = Share Capital (Equity + Preference) + Reserves and Surplus – Fictitious
Assets

Total Assets include all assets including goodwill (excluding fictitious assets)

Calculation of Proprietary Ratio of Coirfed, Alappuzha

Table 5.1.2.1

Year Shareholders’ Funds Total Assets Proprietary Ratio

2014-2015 671129568.7 2522990431.46 0.27

2015-2016 642621746.2 2897354296.27 0.22

2016-2017 620828967.8 3173168343.86 0.19

2017-2018 476457103.3 4462991934.67 0.11

62
 2018-2019 406320641.8 4378090865.41 0.09

Mean=0.338

Proprietary Ratio of Coirfed, Alappuzha during the period of 2014-2019

Figure 5.1.2.2

Proprietary Ratio
0.3

0.25

0.2

0.15

0.1

0.05

0
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

Proprietary ratio

63
INTERPRETATION: The Proprietary Ratio as an average in the last five years is 0.338.
Proprietary Ratio shows a decreasing trend. It is ever high in the year 2014-2015 (0.27) and ever
low in the year 2018-2019 (0.09).

5.1.3 DEBT TO ASSETS RATIO

This ratio normally refers to the proportion between total debts and total assets. Generally, a
ratio of 0.4 or lower is considered a good debt ratio.

Debt To Assets Ratio=

Total Debt
Total Assets

Calculation of Debt to Assets Ratio of Coirfed, Alappuzha

Table 5.1.3.1

Year Total Debt Total Assets Debt to Assets Ratio

2014-2015 1851860863 2522990431.46 0.73

2015-2016 2254732550 2897354296.27 0.77

2016-2017 2552339376 3173168343.86 0.80

2017-2018 3986534834 4462991934.67 0.89

64
 2018-2019 3971770224 4378090865.41 0.90

Mean = 0.818

Debt to Assets Ratio of Coirfed, Alappuzha during the period of 2014-2019

Figure 5.1.3.2

Debt to Assets Ratio

1

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

65
 INTERPRETATION: The Debt to Assets Ratio as an average in the last 5 years is 0.818.
Debt to Assets Ratio shows an increasing trend. It is ever low in the year 2014-2015 (0.73)
and ever high in the year 2018-2019 (0.90).

5.1.4 CAPITAL GEARING RATIO

This ratio normally refers to the proportion between non fixed income bearing securities and
fixed income bearing securities. If the ratio is high, the capital gearing is said to be high and if
the ratio is low, the gearing is said to be low.

Capital gearing ratio =

Equity Share Capital+ Reserves∧Surplus

¿ Interest Bearing Funds

Calculation of Capital Gearing Ratio of Coirfed, Alappuzha

Table 5.1.4.1

Year Equity Share Capital + Fixed Interest Capital Gearing

Reserve and Surplus Bearing Funds Ratio

2014-2015 671129568.7 394829934.60 1.69

2015-2016 642621746.2 417399992.40 1.54

2016-2017 620828967.8 417192190.72 1.48

66
 2017-2018 476457103.3 251990086.91 1.89

2018-2019 406320641.8 176369489.69 2.30

Mean = 1.78

Capital gearing ratio of Coirfed Alappuzha during the period of 2014-2019

Figure 5.1.4.2

Capital Gearing Ratio

2.5

1.5

0.5

0
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

Capital Gearing Ratio

67
INTERPRETATION: The Capital Gearing Ratio as an average in the last five years is 1.78.
Capital Gearing Ratio shows a fluctuating trend. It shows a decreasing trend from 2014 to 2017
and afterwards shows increasing trend. It is ever low in the year 2016-2017(1.48) and ever high
in the period 2018-2019 (2.30).

5.1.5 DEBT TO CAPITAL RATIO

A company’s Debt to Capital Ratio is the Ratio of its total debt to its total capital, its debt and
equity combined. A company with high debt to capital ratios may show weak financial strength.

Debt To Capital Ratio =

Total Debt
Total Debt +Total Equity

Calculation of Debt to Capital Ratio of Coirfed, Alappuzha

Table 5.1.5.1

Year Debt Total debt + total Debt to capital ratio

equity

2014-2015 1851860863 2522990431.7 0.73

68
 2015-2016 2254732550 2897354296.2 0.77

2016-2017 2552339376 3173168344 0.80

2017-2018 3986534834 4462991937 0.89

2018-2019 3971770224 4378090866 0.90

Mean = 0.818

Debt to Capital Ratio of Coirfed, Alappuzha during the period of 2014-2019

Figure 5.1.5.2

Debt to Capital Ratio

1

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

Debt to Capital Ratio

69
INTERPRETATION: The Debt to Capital Ratio shows an increasing trend. The average Debt
to Capital for the last five years is 0.818. It is ever low in the year 2014-2015 (0.73) and ever
high in the year 2018-2019 (0.90).

5.1.6 ASSET TO EQUITY RATIO

The asset to equity ratio reveals the proportion of an entity’s assets that has been funded by
shareholders. There is no ideal asset to equity ratio value but it is valuable in comparing to
similar businesses.

Total Assets
Asset To Equity Ratio =
Total Equity

Calculation of Assets to Equity Ratio of Coirfed, Alappuzha

Table 5.1.6.1

Year Total Assets Total Equity Asset to equity

ratio

2014-2015 2522990431.46 671129568.7 3.76

70
2015-2016 2897354296.27 642621746.2 4.50

2016-2017 3173168343.86 620828967.8 5.11

2017-2018 4462991934.67 476457103.3 9.36

2018-2019 4378090865.41 406320641.8 10.77

Mean = 6.7

Asset to Equity Ratio of Coirfed Alappuzha during the period of 2014-2019

Figure 5.1.6.2

Asset to Equity Ratio

12

10

0
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

Asset to equity ratio

71
INTERPRETATION: The Asset to Equity Ratio shows an increasing trend. The average of
Asset to Equity Ratio for the last five years is 6.7. It is ever low in the year 2014-2015 (3.76) and
ever high in the year 2018-2019 (10.77).

5.1.7 NET PROFIT RATIO

The Net Profit percentage is the ratio of after tax profits to net sales. It reveals the remaining
profit after all costs of production, administration, and financing have been deducted from sales.

¿ Net Profit
× 100
Sales

Calculation of Assets to Equity Ratio of Coirfed, Alappuzha

Table 5.1.7.1

Year Net Profit Sales Net Profit Ratio

2014-2015 19085159.61 621012267.51 3.07%

2015-2016 -20633182.51 629480520.52 -3.28%

2016-2017 -105896336.24 587730794.24 -18.02%

2017-2018 88082436.07 691093873.39 12.75%

72
2018-2019 18029948.38 1108582669.02 1.63%

Mean = -0.77

Net Profit Ratio of Coirfed Alappuzha during the period of 2014-2019

Figure 5.1.7.2

73
 Net Profit Ratio
15.00%

10.00%

5.00%

0.00%
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

-5.00%

-10.00%

-15.00%

-20.00%

Net Profit Ratio

INTERPRETATION: The Net Profit Ratio shows a highly fluctuating trend. The Net Profit
Ratio as an average for the last 5 years is -0.77. it is ever high in the year 2017-2018 (12.75%)
and ever low in the year 2015-2016 (-18.02%). In the year 2015-2016 and 2016-2017the
company has net loss as a result of this the net profit ratio shows a negative trend for the
concerned period. In the year 2017-2018 the net profit ratio increases to 12.75% and in the last
year the net profit ratio again goes downward.

5.1.8 OPERATING PROFIT RATIO

Operating profit ratio establishes a relationship between operating profit earned and net
revenue generated from operations.

¿ Operating Profit
× 100
Sales

74
 Calculation of Assets to Equity Ratio of Coirfed, Alappuzha

Table 5.1.8.1

Year Operating profit Sales Operating profit ratio

2014-2015 11989255.31 621012267.51 1.93%

2015-2016 -134904182.5 629480520.52 -21.43%

2016-2017 -205977133.8 587730794.24 -35.04%

2017-2018 79049825.99 691093873.39 11.44%

2018-2019 -25599561.88 1108582669.02 -2.31%

Mean = -9.08

Operating Profit Ratio of Coirfed Alappuzha during the period of 2014-2019

Figure 5.1.8.2

75
 Operating Profit Ratio
20.00%

10.00%

0.00%
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

-10.00%

-20.00%

-30.00%

-40.00%

Operating profit ratio

INTERPRETATION: The operating profit ratio as an average for the last 5 years is -9.08. the
ratio shows a fluctuating trend. It is ever high in the year 2017-2018 (11.44%) and ever low in
the year 2016-2017 (-35.04). in the year 2015-2016 and 2016-2017 the operating profit ratio
declines drastically. But in the year 2017-2018 the operating profit ratio increases from a huge
decline to a positive trend. Coming to the last year 2018-2019 the operating profit ratio again
goes downward.

76
5.2LEVERAGES

5.2.1 FINANCIAL LEVERAGE

EBIT
Financial Leverage =
EBT

Calculation of financial leverage

Table 5.2.1.1

Year EBIT EBT Financial Leverage

2014-2015 502168470.5 485455092.5 1.03

2015-2016 421435987.5 403583291.5 1.04

2016-2017 126012222.5 106682169.5 1.18

2017-2018 156936363.6 137606310.6 1.14

2018-2019 573052729.3 558915446.3 1.03

77
 Chart showing Financial Leverage of Coirfed, Alappuzha

Figure 5.2.1.2

Financial Leverage
1.2

1.15

1.1

1.05

0.95
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

INTERPRETATION: The financial leverage shows a fluctuating variation. It is ever high in the
year 2016-2017 (1.18 times) and it is ever low in the year 2014-2015 (1.03 times). In the year
2016-2017 the financial leverage is very high. It indicates the company uses more debt financing.
When coming to the last 2 years, the financial leverage again goes downward.

78
5.2.2 OPERATING LEVERAGE

Contribution
Operating Leverage =
EBIT

Calculation of operating leverage

Table 5.2.2.1

Year Contribution EBIT Operating Leverage

2014-2015 581074522.8 502168470.5 1.16

2015-2016 562176468.4 421435987.5 1.33

2016-2017 274894279.9 126012222.5 2.18

2017-2018 400543087.0 156936363.6 2.55

2018-2019 724230449.7 573052729.3 1.26

79
 Chart showing Operating Leverage of Coirfed, Alappuzha
Figure 5.2.2.2

Operating Leverage
3

2.5

1.5

0.5

0
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

Operating Leverage

INTERPRETATION: The operating leverage shows a fluctuating trend. It is ever high in the
year 2017-2018 (2.55 times) and ever low in the year 2014-2015 (1.16 times). From 2014-2015
to 2017-2018 the operating leverage shows an increasing trend but coming to the year, 2018-
2019, it is reduced to 1.26 times.

80
5.2.3 COMBINED LEVERAGE

Combined Leverage = Operating Leverage × Financial Leverage

Calculation of Combined Leverage

Table 5.2.3.1

Year Operating Leverage Financial Leverage Combined leverage

2014-2015 1.16 1.03 1.20

2015-2016 1.33 1.04 1.38

2016-2017 2.18 1.18 2.57

2017-2018 2.55 1.14 3.67

2018-2019 1.26 1.03 1.30

81
 Chart showing Combined Leverage of Coirfed, Alappuzha
Figure 5.2.3.2

Combined Leverage
4

3.5

2.5

1.5

0.5

0
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

Combined leverage

INTERPRETATION: The combined leverage shows a fluctuating trend. It is ever high in the
year 2017-2018(3.67 times) and ever low in the year 2014-2015(1.2 times). From 2014-2015 and

82
2017-2018 the combined leverage shows an increasing trend but when coming to the last year,
2018-2019, it is reduced to 1.3 times.

5.3 CORRELATION ANALYSIS

5.3.1 CORRELATION BETWEEN DEBT AND OPERATING LEVERAGE

Debt and Operating Leverage for Calculating Correlation

Table 5.3.1.1

DEBT (x) Operating leverage (y)

25229 1.16

28974 1.33

31732 2.18

44629 2.55

43781 1.26

(Source: Annual report of Coirfed from the period of 2014-2015 to 2018-2019)

Calculating correlation between debt and operating leverage

83
 X Y xXy x2 y2

25229 1.16 29265.64 636502441 1.3456

28974 1.33 38535.42 839492676 1.7689

31732 2.18 69175.76 1008824644 4.7524

44629 2.55 113803.95 1991747641 6.5025

43781 1.26 55164.06 1916775961 1.5876

∑x=174345 ∑y= 8.48 ∑xy= 305944.83 ∑x2 =5637793363 ∑y2= 15.957

Equation for finding correlation coefficient (r) is:

n∑ xy – (∑ x ∑ y )
r = √[ n ∑ x 2−( ∑ x ) 2][n ∑ y 2−(∑ y ) 2¿ ]¿

= 5 X 305944.83-(174345 X 8.48)

√[ 5 X 5637793363 – (174345)2] X ¿ ¿
=
0.138

INTERPRETATION: As per the above analysis, it is inferred that there is a positive correlation
between debt and operating leverage.Here, it is shows that the company’s financial performance
about debt and operating leverage is good.

5.3.2 CORRELATION BETWEEN FIXED COST AND FINANCIAL LEVERAGE

Fixed cost and financial leverage for calculating correlation

84
 Table 5.3.2.1

Fixed cost (x) Financial leverage (y)

789 1.03

1407 1.04

1488 1.18

1280 1.14

1511 1.03

(Source: Annual report of Coirfed from the period of 2014-2015 to 2018-2019)

Calculating correlation between fixed cost and financial leverage

X Y xXy X2 Y2

789 1.03 812.67 622521 1.06

1407 1.04 1463.38 1979649 1.08

1488 1.18 1755.84 2214144 1.39

1280 1.14 1459.2 1638400 1.29

1511 1.03 1556.33 2283121 1.06

∑ x=6475 ∑y= 5.42 ∑xy=7047.32 ∑x2= 8737835 ∑y2= 5.88

Equation for finding correlation coefficient (r) is:

85
 n∑ xy – (∑ x ∑ y )
r=
√[ n ∑ x 2−( ∑ x ) 2][n ∑ y 2−(∑ y ) 2¿ ]¿
5 X 7047.32−6475 X 5.42
r = √[ 5 X 8737835−( 6475 ) 2 ] [5 X 5.88 ( 5.42 ) 2]

r = 0.69

INTERPRETATION: As per the analysis it is inferred that there is positive correlation between
fixed cost and operating leverage. Here, it is shows that the company’s financial performance
about fixed cost and operating leverage is good.

5.3.3 CORRELATION BETWEEN FIXED ASSETS AND COMBINED LEVERAGE

Fixed assets and Combined Leverage for calculating correlation

Table 5.3.3.1

Fixed assets (x) Combined leverage (y)

239 1.20

368 1.38

496 2.57

612 3.67

679 1.30

(Source: Annual report of Coirfed from the period of 2014-2015 to 2018-2019)

Calculating correlation between Fixed Assets and Combined Leverage

X y xy x2 y2

86
 239 1.20 286.8 57121 1.44

368 1.38 507.84 135424 1.90

496 2.57 1274.72 246016 6.60

612 3.67 2246.04 374544 13.46

679 1.30 882.7 460141 1.69

∑x= 2394 ∑y= 10.12 ∑xy= 5198.1 ∑x2= 1274146 ∑y2= 25.09

Equation for finding correlation coefficient (r) is:

n ∑ xy – ( ∑ x ∑ y )
r=
√[n ∑ x 2−( ∑ x ) 2][n ∑ y 2−(∑ y ) 2¿ ]¿

r= {5 ×5198.1 – 2394 ×10.12} ÷√ [5× 127416−(2394) 2][5× 25.09 – (10.12) 2]

r= 0.45

INTERPRETATION: As per the analysis, it is inferred that there is positive correlation

between fixed assets and combined leverage. Here, it is shows that the company’s financial

performance about fixed asset and combined leverage is good.

5.3.4 CORRELATION BETWEEN CURRENT ASSET AND COMBINED LEVERAGE

Current Assets and Combined Leverage for calculating Correlation

Table 5.3.4.1

87
 Current Assets (x) Combined leverage (y)

5565 1.20

5711 1.38

3187 2.57

6845 3.67

4657 1.30

(Source: Annual report of Coirfed from the period of 2014-2015 to 2018-2019)

Calculating correlation between Current Assets and Combined Leverage

X Y xy x2 y2

5565 1.20 6678.00 30969225 1.44

5711 1.38 7881.18 32615521 1.90

3187 2.57 8190.59 10156969 6.60

6845 3.67 25121.15 46854025 13.46

4657 1.30 6054.1 21687649 1.69

∑x=256965 ∑y= 10.12 ∑xy= 53925.02 ∑x2=14228338 ∑y2= 25.09

88
Equation for finding correlation coefficient (r) is:

n ∑ xy – ( ∑ x ∑ y )
r=
√[n ∑ x 2−( ∑ x ) 2][n ∑ y 2−(∑ y ) 2¿ ]¿

r= [5×53925.02 – 25965 × 10.12] ÷ √ [5×142283389 – (25965)2] [5×25.09- (10.12)2]

r= 0.05

INTERPRETATION: As per the analysis, it is inferred that there is positive correlation

between current assets and combined leverage.Here, it is shows that the company’s financial

performance about current asset and combined leverage is good.

CHAPTER-6

89
 FINDINGS, SUGGESTIONS &
CONCLUSION

6.1 FINDINGS

 Firm’s capital structure is going to be leveraged.

 The firm’s assets are not mainly funded using shareholders money which is considered as
a constraint for the long term solvency of the company.
 The company owns more assets than the liabilities and can meet its obligations by selling
its assets if needed.
 The firm is not all fairly geared. Firm is unable to bear fixed interest obligations for a
long term basis.
 The debt levels are manageable and the firm is considered less risky to invest or loan to
given other factors are taken into consideration.
 The company has taken on substantial debt merely to remain its business.
 The overall profitability and operational efficiency of the firm is not satisfactory.

90
  Operating expense of the company is drastically increasing. Operating efficiency of the
firm is not in a good position to generate profit
 The firm is reducing its debt base and go for the equity shares. This is a negative sign
with respect to the market value of the firm.
 There is a reduction in fixed cost of the firm.
 There is positive correlation between debt and operating leverage. If the company
increases debt it will be positively contribute to the operating leverage and if the debt
decreases the operating leverage also decreases.
 There exists a positive correlation between fixed cost and operating leverage. Both the
variables move in the same direction. If fixed cost increases the financial leverage also
increases and if fixed cost decreases the financial leverage also decreases.
 There is positive correlation between fixed asset and combined leverage. When fixed
asset increases the combined leverage also increases and fixed asset decreases the
combined leverage also decreases.
 There is positive correlation between current assets and combined leverage. Current asset
is one among the important factor which will constitute the combined leverage. If current
asset increases the combined leverage also increases and if fixed asset decreases the
combined leverage also decreases.

6.2 SUGGESTIONS
 Too much dependence on the debt may increase the cost of capital as well as the risk of
equity shareholders. Thus the firm should limit the optimum debt-equity mix as soon as
possible.
 The company should categorise the assets into most useful, medium useful and less
useful and the shareholders fund must be used for funding the most useful assets and
outsiders fund should be used for funding medium useful and less useful assets.
 Pattern of investment should be restructured so that the company can efficiently utilise
the capital employed for generating profit.
 Fixed interest bearing securities or outsider's fund may be a reliable source only when the
firm having the capacity to pay off the interest obligations out of its profits. So either the

91
 company should reduce the outside source or enhance profit by reducing operating
expenses.
 Net profit ratio is the indication of the overall profitability of the firm. The company can
increase its net profit only by achieving operational efficiency. The operational efficiency
can be attained through the proper utilisation of assets and reducing the operating
expenses.
 The company can achieve operating profit only if they are able to reduce the operating
expenses. The operating expenses can be reduced by finding cheaper sources for the raw
materials needed to manufacture goods, leasing smaller factory space or reducing the
workforce, economic ordering quantity etc.
 Debt and fixed cost have direct impact on the net income of the company. Thus the
company has to make a proper balance between the debt as well as fixed cost to achieve
the operational efficiency.

6.3 CONCLUSION

The project study was undertaken as a part of the MBA curriculum and carried out at
Kerala State Cooperative Coir Marketing Federation Ltd (Coirfed), Alappuzha. The main
objective of conducting this study is to analyse the leverage position of the company for a period
of last 5 years. The data for the study is collected using secondary data. Secondary data are
mainly collected from the annual reports of the company. In this study the tools used for
analysing the data are ratio analysis, leverages, correlation analysis and trend analysis.

From the study it can be concluded that the company is highly leveraged even though the
company is not earning profit. The capital structure of the company is not much good because
the company makes large dependence on the debt rather than equity. The debt of the company is

92
increasing year which is more dangerous for the business as it adds to the financial risk faced by
the business. The increasing debt hinders the firm to meet its fixed interest obligations and also it
affects the overall profitability and efficiency of the firm. Thus the company need to make a
proper balance between debt and equity in the capital structure of the firm. The suggested
measures are taken into consideration it will help to increase the overall profitability and
efficiency of the firm.

93
 BIBLIOGRAPHY

BOOKS
1. C.R. Kothari (2014), Research Methodology Methods &Techniques, Vol3 (revised) New
Age International (P) Ltd, New Delhi.
2. Pandey, I.M (2009), Financial Management, Vikas Publication House Pvt. Ltd., New
Delhi
3. Maheswari, S.N (2008)., Financial Manegment, Sultan Chand and Sons Educational
Publishers, New Delhi
4. Chandra & Prasanna (2009), Financial Management, Tata McGraw Hill, New Delhi.

JOURNALS

94
1. Khalid, Alkhatib (2012), A Study on the Determinants of Leverage of listed companies.
International Journal of business and Social Sciences. Volume No. 3. Special issue-
December 2012
2. Khushbakht Tayyaba (2013), “Leverage”- An Analysis and its Impact on its Profitability
with Reference to Selected Oil and Gas Companies in Pakistan. International Journal of
business and management invention, ISSN (Online):2319-8028, volume 2, Issue7, July
2013
3. Priyanka Sharma, Ankit Saxena and Karishma Choudhary (2014), Leverage analysis of
Amul- Anand Milk Union Limited, Ahmadabad. International Monthly Refereed
Journal of Research in Management & Technology, ISSN- 2320-0073, Volume3,
February 2014
4. Dr. M Ramana Kumar (2014), An Empirical Study on the Relationship between
Leverage and Profitability in Bata India Limited. International Journal of Advanced
Reasearch in Computer Science and Management studies, ISSN:2321-7782 (Online),
volume 2, Issue 5, may 2014
5. Bhatt Satyaki J (2015), “Leverage Analysis of Aurobindo Pharma, Hyderabad. Paripes-
Indian Journal of Research ISSN:2250-1991 (Online), Volume 4, Issue 8, August 2015
6. Dr K Bhagyalakshmi (2016), “Leverage Analysis in select cement companies in India –
A study”. Paripex- Indian Journal of Research ISSN: 2250-1991 Volume 5, Issue 3,
March 2016
7. Gautam Sen and Ravi Ranjan (2019), “Rapport between Leverage and Profitability: A
Study of TVS Motor Company”. Journal of Finance and Accounting ISSN:2330-
7323(Online) Volume 6, No.2, May 11,2018
8. Bhayani, S.J.,(2006), ‘Financial Leverage and its Impact on Shareholders Return: A
study of Indian cement industry’, International Journal of Management science, 2(1),
July,pp.31-42
9. Bindiya Soni (2014), “A Study on Leverage Analysis and Profitability for selected paint
companies in India”: Quest Bi- Annual referred journal of Management & Research
Vol.4, Issue 1, December 2013,pp.3-13,ISSN;;0976-3317

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 10. Dr. E B Khedkar (2015), ‘A Study on Leverage analysis and profitability for Dr.
Reddy’s laboratory’. International journal of engineering and Social
Sciences.ISSN2249-9482, Volume 5, Issue 5, May 2015

REPORTS

 Annual Reports of Coirfed (2014-2015 to 2018-2019)

WEBSITES

 www.coirfed.kerala.gov.in
 www.google.com

OTHER REFERENCES

 Company profile
 Previous reports

96
APPENDIX

97
 BALANCE SHEET OF COIRFED AS ON 31-03-2015

Liabilities Amount Assets Amount

Share capital 650000000.00 Cash 289878432.52

Subscribed capital 388295000.00 Investments out 78095.28

of general funds

Paid up capital 387374911 Reserve funds 155704.63

Deposits 695.65 Staff security deposits 28140.24

Borrowings 394829934.60 Other investments 13484768.27

Statutory funds and 37360182.15 Agents and other 6000.00

reserves security

Other funds, reserves and 227311315.98 Telephone, 97367.38

provision
electricity deposits

Interest payable 26342.00 Grand and subsidies 370289.58

Grant and subsidies from 584206788.31 Special R F invested 516005.53

government

Staff security deposits 32265.24 Building fund invested 45596.63

Unclaimed dividend 8299.62 Trade risk fund 5736.60

invested

Establishment and 15038932.56 Common good 780.43

contingencies fund
invested

Agents security 250.00 Sinking fund invested 6636.88

Rebate payable 637.81 Head office 201539310.09

depo
adjustment

T C D A fund 28.30 Loans and advance to 7500.00

members

98
Ledger difference 6202.56 Amount objected audit 364941.81

Sales tax 29587.84 Bills receivable 771.42

Income tax payable 68416.00 Loss in distress 149701.25

purchase receivable

Adjusting heads- due by 876695641.84 Miscellaneous income 3601168.21

Receipts and other 32354.56

sales

BALANCE SHEET OF COIRFED AS ON 31-03-2016

Liabilities Amount Asse Amount

ts

Share capital 650000000.00 Cash

Subscribed capital 388295000.00 Investments out

of
general funds

Paid up capital 387396911.00 Reserve funds

Deposits 695.65 Staff security deposits

Borrowings 417399992.40 Other investments

Statutory funds and 275680017.69 Agents and

reserves other
security

Interest payable 26342.00 Telephone,

electricity deposits

Grant and subsidies from 593152547.31 Grand and subsidies

government

Staff security deposits 32265.24 Special R F invested

Unclaimed dividend 6290.62 Building fund invested

Establishment and 14305005.56 Trade risk

contingencies fund

99
 invested

Agents security 250.00 Common good

fund
invested

Rebate payable 637.81 Sinking fund invested

T C D A fund 28.30 Head office

depo
adjustment

Ledger difference 6202.56 Loans and advance to

members

Sales tax 3175.50 Amount objected audit

Income tax payable 24462.34 Bills receivable

Adjusting heads- due by 68416.00 Loss in

distress
purchase receivable

1208446997.29 Miscellaneous income

BALANCE SHEET OF COIRFED AS ON 31-03-2017

Liabilities Amount Asse Amount

ts

Share capital 650000000.00 Cash 248332163.31

Subscribed capital 388295000.00 Investments out 78690.75

of
general funds

Paid up capital 387397711.00 Reserve funds 155109.00

Deposits 635.65 Staff security deposits 28160.16

Borrowings 417102190.73 Other investments 3800626.27

Statutory funds and 9327592.35 Agents and 6000.00

reserves other
security

100
Interest payable 26342.00 Telephone, 97367.28

electricity deposits

Grant and subsidies 667609810.31 Grand and subsidies 370289.58

from government

Staff security deposits 32265.24 Special R F invested 55921555.00

Unclaimed dividend 8299.62 Building fund invested 45390.00

Establishment and 20948242.56 Trade risk 5736.50

contingencies fund
invested

Agents security 250.00 Common good 700.43

fund
invested

Rebate payable 637.81 Sinking fund invested 6635.00

T C D A fund 28.3 Head office 262045440.92

depo
adjustment

Ledger difference 11328.06 Loans and advance to 7500.00

members

Sales tax 24462.34 Amount objected audit 364941.61

Income tax payable 68476.00 Bills receivable 771.42

Adjusting heads- due by 1340520271.30 Loss in 149701.25

distress
purchase receivable

Miscellaneous income 90316308.21

Receipts and 32354.56

other sales
omission

Cash balance 6971.16

difference

Dispute of staff 28390.60

101
 Short delivery 16853.04
from railway

Movables 30934290.01

Other assets for W/O 17182192.96

valuation certificate

Immovables 13947778.77

Stock in trade 304991567.73

Adjusting heads due to 1271464171.25

Net loss brought from 923192061.39

P&L Account

3173168343.86
3173168343.86

BALANCE SHEET OF COIRFED AS ON 31-03-2018

Liabilities Amount Assets Amount

Share primaries 4366208.00 Cash in hand 3711367.06

Share government 382980203.00 Cash at bank 191252027.41

R F primaries 535.47 Investments 78095.28

Borrowings 251990086.91 Other investments 14717026.17

Short term loan 73101893.81 Other assets 4150722.54

Statutory funds and 1026256.26 Computer and 5487613.69

reserves accessories

Price fluctuation fund 28547734.36 Land and building 32069384.91

Special price 14487335.53 Plant and machinery 12349457.74

fluctuation fund

102
Other fund 222919345.22 Furniture and fittings 7927518.16

Grant and subsidies 558220869.31 Moulds and dies 308526.11

Other liabilities 14116759.11 Vehicle 2225107.00

Advance due by 2911232647.69 Office equipments 690046.03

Library 76048.55

Advance due to 2644418261.37

Dippo adjustments 233984657.75

Utilises 151904.42

Stock deficits 46347537.05

Closing stock 470610435.90

Net loss 792436197.54

4462991934.67 4462991934.67

BALANCE SHEET OF COIRFED AS ON 31-03-2019

Liabilities Amount Assets Amount

Share primaries 4284234.12 Cash in hand 7355572.34

Share government 382980203.00 Cash at bank 260528482.63

R F primaries 595.47 Investments 78095.28

Borrowings 176369489.69 Other investments 14717026.17

Short term loan 73101893.81 Other assets 4150722.54

Statutory funds and 1026256.26 Computer and 5565803.69

reserves accessories

Price fluctuation fund 28547734.36 Land and building 32069384.91

103
Special price 14487335.53 Plant and machinery 18023181.74
fluctuation fund

Other fund 222919345.22 Furniture and fittings 8793644.24

Grant and subsidies 558220869.31 Moulds and dies 308526.11

Other liabilities 14100232.11 Vehicle 2229457.00

Advance due by 2902052676.53 Office equipments 693796.02

Library 76048.55

Advance due to 2720919961.60

Dippo adjustments 290535167.75

Utilises 151904.42

Stock deficits 46331010.05

Closing stock 132578831.95

Net loss 832984248.42

4378090865.41 4378090865.41

104