Case Study: Vidhi Speciality
Vidhi Specialty Food Ingredients Limited is a leading manufacturer of Superior Synthetic and Natural Food Grade Colours. The company manufactures as well as trades these goods. As an analyst it would matter to us to see how these manufacturing, trading and overall profit margins for this business looks like across the year. Let’s apply what we learnt in previous Blog 117 - Decoding Inventory & COGS Line items.
To compute overall margins, we need to first compute Total Operating income from the footnotes/ Income statement. Let’s take an example of FY20, where we can see the Total Operating income to be INR 22461.58 Lakhs. Please note, this includes Operating revenue of INR 21,345.21 Lakhs (inclusive of Excise, since Excise duty figures aren't available separately in financial statements, we won't be able to net it out of revenues) and Other Operating revenue of INR 1116.37 Lakhs.
Now that we have this clarity on revenue figures, lets compute COGS. Overall COGS as we now know it, will be a total of three line items
Cost of Materials Consumed (Raw materials consumed)
Purchases
Change in WIP, FG & SIT
This amounts to a total of INR 13345.25 Lakhs. Thus, Gross profit = Total Operating Revenue - COGS
Gross Profit = 22461.58-13345.25 = 9116.33
Gross Profit Margin = Gross Profit/ Total Operating Revenue = 9116.33/22461.58 = 41% (Depicted below)
It's time we proceed to computing Manufacturing goods and Trading goods profit margins. Note, While computing Overall Gross profit margin, we will be taking a revenue figure of INR 22461.58 Lakhs, whereas while computing Manufacturing and Trading Gross profit margins, we will be referring to individual manufacturing and trading revenue figures (INR 18229.84 lakhs and INR 3115.37 Lakhs respectively).
Now that we have manufacturing revenue figures, To calculate Manufacturing gross profit margin, we need Manufacturing COGS which is computed as follows:
Manufactured COGS = Cost of Materials Consumed + Changes in WIP and FG = 10630.25+814.30-1130.07+748.46-603.08 = INR 10459.86 lakhs
Manufactured Profit Margin = (Manufacturing Revenue - Manufacturing COGS)/ Manufacturing Revenue = (18229.84-10459.86)/18229.84 = 42.6% = 43% (Depicted below)
Moving to Traded Goods margin, Traded goods Margin can be similarly calculated by taking Trading Revenue and Trading COGS.
Trading COGS = Purchases+Change in Stock in trade = 2703.56+652.67-470.84 = 2885.39
Trading Gross Profit Margin = (Trading Revenue - Trading COGS)/ Trading Revenue= (3115.37-2885.39)/3115.37 = 7%
After replicating the analysis in a time series fashion, we get an interesting set of outputs as below:
Here’s few interesting conclusions we can draw from the above heatmap analysis:
Overall Gross profit margins of the business seem to have improved a lot over the years from 25% to 41%
As one would expect, manufacturing goods carry higher profit margins as compared to Traded goods profit margins (due to outsourcing, the trading partner would be keeping major margins themselves)
What seems to be driving the overall profit margins of the business is increasing product mix of manufacturing goods i.e. higher profit margins as compared to traded goods.