Analysis of Profit and Loss Account (P&L) Statement in India

For the projected income statement of operations in India from 2006 to 2010, the net sales/income from operation increased from ₹120.81 million in 2006 to ₹306.55 million in 2010. Total expenditure also increased from ₹105.11 million in 2006 to ₹237.69 million in 2010. Profit before tax rose from ₹15.70 million in 2006 to ₹68.86 million in 2010, while profit after tax climbed from ₹10.04 million in 2006 to ₹49.80 million in 2010. The net profit also increased during the period under review.

Introduction
Welding is a technique for joining pieces of metals by using the process fusion through the
application of concentrated heat. The Process can be used to join the two metal items. Welding is
also the primary activity in most of the industries like manufacturing of construction equipment,
machine tools etc. The predominant method of welding is Arc welding, where a welding is done
with the power source generate electric current. The Arc welding then melts a filler metal to
create the bond between the two metal parts. The filler metal is in the form of a stick or wire
electrode, and the electrodes often a series of chemical coatings or shielding gases to protect the
welded metal from oxygen and nitrogen in the air and strengthen the bond.
Competition in India
India has become the attractive market for welding Industry. After the 1991 due to LPG
(Liberalization Privatization Globalization) India has on the pace of development. GDP of India
is growing faster after the 1991 result in becoming the one of the faster growing countries in the
world. Welding market of India covers the one third of the Asia`s market of welding. Industry
growth is ever high because the India is currently focused on construction and infrastructure
projects. The important feature of the Indian market is only the 56% of consumer of the welding
industry are large firms and remaining 44% are the small firms which try to imitate the new
design on the market and try to sale it as a sharp discounts. The Perfect competition of welding
Industry in the India enables the cut throat competition among the industrialists. The major firms
engage in the welding Industry in the India are Ador Ltd which enjoy the same return of capital
employed over the next few year due to economies of scale of operation. The Ador Ltd is also
planning to establish the one of its division in the government created tax free zone and by
concentrating the production at the smaller number of facilitator Ador Ltd has realized both the
economies of scale and the tax saving. Another competitor in India is the ESAB India which is
controlled by the Lincoln`s multinational competitor. ESAB India is building up its market by
acquisition and lower market share as compare to Ador Ltd. The third major competitor in India
is The EWAC Alloys Ltd is the joint venture between the Messer of German and L&T of India
in 50-50 ratio. After the major competitor there are certain small industrialist who includes the
division of certain global leader and the certain local private companies.
India`s Labor Market
India is the market of labor intensive technology rather than the Capital intensive technology.
The country is friendly to use of incentive pay for performance, although there are certain
notable regulation in place. The company established there is free to adopt piecework and
discretionary bonus without getting approval from the union and the government and without
incurring any future obligation, but in most cases the pay has to meet the minimum pay criteria.
The Payment of bonus Act ,1965 and The Employees `Provident Funds and Miscellaneous
Provision Act,1952 and The Payment of Gratuity Act,1972 are applicable on the Companies
Established in India. According to which the minimum bonus, payment for provident fund and
the gratuity is calculated for the employees of the company.

Assumptions
 It has been assumed that the company will be able to maintain the same margin on sales
as are earned by Ador Ltd in India.
 The market segment of the company will be gained by offering discounts to customers
and aggressive marketing policies.
 The company will take over the market segment equal to half of the customers currently
held by Ador Ltd and the reason of such assumption is that company offers the better
quality product from Ador Ltd at a price which is 15% lower of the price currently
offered by Ador. The lower price is possible since the company has its own researched
technology and no costs with respect to patents are required to be incurred.
 Sales in India will increase by 25% during initial year of operation, then showing an
increase of 32% in next year and 37% post it. Then due to increased competition and
corrective measures that Ador would take by developing its technology the growth rate
would slower down to 22% in fourth year.
 Tax rate has been assumed to be 30% in India for Income Taxes. But company will also
pay Excise Duty on Manufacturing activity equal to around 12.36% in India.
 The company will be allowed to take additional depreciation during the first year of
operations on the capital costs incurred by it. This would provide increased tax benefit to
the company in India.
 But staff cost in India would increase due to the reason that the company will pay joining
bonuses to the new staff and the salary to be offered to the staff will be higher as
compared to the competitors.
 Apart from India, the company’s growth in sales will decrease because of global increase
in competition.
 Selling, Distribution and Administrative Expenses will increase due to increased cost of
advertising expenses which will be incurred by company to survive the global
competition.
 Tax rate on global business has been assumed to be 25%.
Conclusion
Lincoln has the option to enter in the Indian market through acquisition, joint venture or by
building the new plant by its own in India. Since the current competitors are well versed and
quite established in their respective market segments it would be difficult for the company to
look for a proposed acquisition has the optimum costs. Further, hostile takeovers by the
companies are quite restrictive by the laws and strictly administered by Securities and Exchange
Board of India and the respective Stock Exchanges where the shared of Indian Companies are
traded. Apart from hostile takeovers it is really difficult and not optimum to go for any other
acquisition as the deal would cost too much as compared to a new investment being made.
Further since the company has been operating in the adjacent markets like China, the business
community at all the levels of Supply Chain are familiar with Lincoln’s product quality and
brand value. So it provides a benefit of reputation to our company to enter the market in a new
separate venture. Also from the projected financials (as shown in Exhibit) it is quite clear that
the company will be able to gain a good market share within few years from the day it enters into
doing business in India and needless to say the profitability of the investment is quite lucrative
for the company to make such a decision.

Exhibit-
Projected Income Statement of Global Business (Other Than India)
Particular 2006 2007 2008 2009 2010
Net Sales $ 1,917.60 $ 2,256.05 $ 2,606.19 $ 2,901.73 $ 3,179.14
Cost of Good Sold $ 1,369.80 $ 1,596.64 $ 1,825.44 $ 2,030.80 $ 2,218.65
Gross Profit $ 547.80 $ 659.42 $ 780.76 $ 870.94 $ 960.49
S G&A Expense $ 355.81 $ 488.35 $ 660.73 $ 761.50 $ 863.16
Operating Profit $ 191.99 $ 171.07 $ 120.02 $ 109.44 $ 97.34
Rationalization and Non-
Recurring items $ (3.00) $ (4.71) $ (5.42) $ - $ -
Other Income Net $ 7.26 $ 6.46 $ 7.75 $ 11.63 $ 11.05
EBIT $ 196.25 $ 172.82 $ 122.36 $ 121.07 $ 108.39
Interest Expense ,Net $ (4.29) $ (5.90) $ (5.01) $ (7.32) $ (3.95)
Pre -Tax Earning $ 191.96 $ 166.92 $ 117.34 $ 113.75 $ 104.43
Income Tax $ (47.99) $ (41.73) $ (29.34) $ (28.44) $ (26.11)
Accounting Change $ - $ - $ - $ - $ -
Net Income $ 143.97 $ 125.19 $ 88.01 $ 85.31 $ 78.33
Projected Income Statement of Operations in India
Particular 2006 2007 2008 2009 2010
Net Sales /Income from Operation 138.07 $ 172.59 $ 227.82 $ 312.11 $ 350.34
Less: Excise Duty $ 17.26 $ 21.57 $ 28.48 $ 39.01 $ 43.79
Net Sales /Income from
Operation $ 120.81 $ 151.01 $ 199.34 $ 273.09 $ 306.55
(Net of Excise Duty)
Total Expenditure
(Increase)/Decrease in Stock in
Trade $ (1.44) $ (1.80) $ (2.25) $ 1.91 $ 2.20
Consumption of Raw Material &
Packing Material $ 65.59 $ 82.38 $ 103.47 $ 135.55 $ 177.57

Staff Cost $ 12.75 $ 14.25 $ 17.67 $ 22.26 $ 28.38
Other Expenditure $ 22.42 $ 23.08 $ 24.08 $ 25.28 $ 26.67
Interest & Finance Charges $ (0.06) $ (0.07) $ 0.09 $ 0.11 $ 0.13
Depreciation $ 2.80 $ 3.04 $ 2.93 $ 2.83 $ 2.74
Additional Depreciation $ 3.05 $ 5.55 - - -
Total Expenditure $ 105.11 $ 126.43 $ 145.98 $ 187.94 $ 237.69
Profit Before Tax $ 15.70 $ 24.59 $ 53.35 $ 85.15 $ 68.86
Provision For Tax $ (4.71) $ (7.38) $ (16.01) $ (25.55) $ (20.66)
Deferred Tax Impact $ (0.45) $ (0.56) $ (0.49) $ (0.60) $ (0.37)
Fringe Benefit Tax $ (0.50) $ (0.56) $ (0.70) $ (0.88) $ (1.10)
Profit After Tax $ 10.04 $ 16.09 $ 36.16 $ 58.13 $ 46.73
Prior Period
Adjustment(Excess/short Tax
Provision) - - $ (0.89) $ (4.00) $ 3.07
Net Profit $ 10.04 $ 16.09 $ 35.27 $ 54.13 $ 49.80