Description
Financial Turn Around Of A. P. State Road Transport Corporation A Case Study
* Senior Consultant, M&E Specialist, State Coordinator, NABCONS, Hyderabad, Telangana
** Director, SKSD Women’s College, Tanuku, West Godavari District, Andhra Pradesh
FINANCIAL TURN AROUND OF A. P. STATE ROAD
TRANSPORT CORPORATION - A CASE STUDY
Bhanu Prakash Kovvali
*
and Chandra Prasad J.
**
Abstract: A journey from brink to back, strained to success, incurring losses to earning profits,
dealing with distress to prosperity is termed as Turnaround while Turnaround Strategy is a
corporate practice designed, devised and deals with the deterioration of financial health in
terms of increasing losses, lower Return on Capital Employed and continuous decrease in the
Value of Shareholders’ Wealth. The focus of the present paper is on Financial Turnaround of
the Corporate viz., Andhra Pradesh State Road Transport Corporation which is the oldest
Public Sector Transport Corporation with a wide network of service. An attempt has been
made to diagnose and evaluate the strategies especially financial in nature adopted by the A.P.
State Road Transport Corporation for its turning around during 2001-2011. A successful
turnaround depends on developing appropriate turnaround prescription and implementation
of effective turnaround plan. Hence, there is a focus on turnaround framework i.e., Retrenchment
(Cost Cutting), Repositioning (Revenue Increasing), and Reorganisation besides the impact
and incidence of Financial Strategies on the Corporate to revitalize, rehabilitate and bringing
back on the tracks of profit and prosperity.
Financial Strategies are aimed at improving liquidity, reducing investment and leverage and
controlling unproductive expenses. Financial Strategies adopted by A.P. State Road Transport
Corporation inter alia include controlling unproductive expenses, cutting of administrative
expenses especially overheads, reducing investment and leverage, sale of obsolete, infrequently
used assets, unprofitable divisions and subsidiaries to raise more equity. The results of the Chi-
Square Test, Freedman Test and Confirmatory Factor Analysis provide an insight about the
impact and incidence of Financial Strategies on Turnaround of the Corporate. The implication
of the study is that the Financial Turnaround Strategies adopted by A.P. State Road Transport
Corporation which have an influence on the process of Turnaround in a much wider context
keeping in view the healthy and holistic Corporate immune system to sustain long-term growth.
Key Words: 3Rs’, APSRTC, F-Test, CFA.
JEL Classification: R4, R49
EPILOGUE
The term ‘Turnaround’ has been defined as performance decline followed by
performance improvement (Schendel et al. 1976
1
; Robbins and Pearce, 1992
2
). A
I J A B E R, Vol. 13, No. 3, (2015): 1391-1408
1392 ? Bhanu Prakash Kovvali and Chandra Prasad J.
Corporate Turnaround as the recovery of a firm’s economic performance following
an existence-threatening decline (Pandit,2000
3
, Walshe, 2004
4
). Yet, Khandwalla
5
defines corporate decline as a loss situation and turnaround as equivalent to
reaching at least a break-even from a loss situation.Turnarounds cannot be sensibly
analysed without taking into account the context of the financialobligations and
related governance arrangements (Igor and Toms, 2006
6
, Kumar, 2003
7
). Slashing
labor costs, production costs, selling andadministrative expenses, R&D expenditure,
and financing costs is a common strategy used in the earlystages of corporate
turnarounds (Denis and Kruse, 2000
8
, Beixin et al., 2008
9
).However, Asset-reduction
strategies have been recommended for failingcompanies in order to improve cash
inflows (Hofer, 1980
10
, Hambrick and Scherrer, 1983
11
) which would help in meeting
the immediate cash obligations as well as forcreating more productive assets.
Andhra Pradesh State Road Transport Corporation (APSRTC) is a state owned
public utility service organization with a primary focus of serve the society by
providing efficient, economical and reliable transport facility
12
. APSRTC is an
organisation committed to the man on move and society at large and started service
in June, 1932 as a unit of Nizam State Railways and as Road Mechanical Transport
Services Division (NSR-RTD) with 27 buses, 166 employees and a capital outlay of
3.93 lakhs brings transportation to the door step of the villages of the State thereby
contributing to the overall development of the State. APSRTC has a largest fleet of
22,333 buses covering a route length of 77.48 lakhs km daily and a network of 778
bus stations and 1,881bus shelters, 1,15,317 human resource, 216 bus depots
operating 98 per cent its fleet and transports around 113.82 lakhs people daily as
on 31
st
August, 2014.
EMPIRICAL EVINCES
For a comprehensive kaleidoscope of the literature pertaining to corporate financial
turnaround some of the significant studies have been reviewed in brief for a
comprehension and also for identifying the research gap. An attempt has been
made to begin with developing theory and science in exploring financial corporate
turnaround strategies for the revival and rejuvenation of the corporate.
Martin Schmuck (2014)
13
empirically investigated the phenomenon of financial
distress and corporate turnaround on a sample of 194 publicly listed automotive
suppliers. The efficacy and efficiency of financial turnaround strategies is analysed
and devised a successful turnaround model for distressed corporate and compared
it with the strategies of non-distressed. Prakash K Bhanu (2014)
14
lucidly presents
the financial turnaround strategies adopted by APSRTC for its turning around.
The dimensions and strategies of financial turnaround prescribed, insights and
intricacies besides the action-orientation for corporate revival and rejuvenation
observed and suggested the Corporation to regain financial strength besides
increasing revenue, controlling costs, improving safety and service quality
Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1393
parameters which likely to have a positive impact on the financial performance of
the Corporation.John A. Pearce II (2007)
15
critically evaluated the financial profiles
of companies and advocated three-phase model of turnaround viz., (i) proposing
and assessing linkages between financial ratios; (ii) guiding the empirical analysis;
and(iii) leading to a statistical grouping of relevant financial ratios associated with
turnaround success. Finally, suggested that the success of a company’s turnaround
tactics can be guided by the financial ratios.Desh Gupta and MilindSatya (2006)
16
evaluated the factors that led to the financial turnaround of Indian Railways. The
insights on financial performance of Indian Railways reveal the financial strategies
play crucial role for turning around public sector complex sick organizations. The
Financial Turnaround of Indian Railways is a function of 3Rs’ viz., Retrenchment,
Repositioning and Reorganization besides environmental conditions and factors.
A $10 Billion Ford Turnaround (2004)
17
is a daunting task of steering the big blue
ship into profitable waters. The steps taken to control bleeding red ink inter alia
include: (i) reduce costs in everything i.e., Non-Value Added Costs, Non-Production
and Material Costs; (ii) divestment of non-core businesses that didn’t make sense;
(iii) enhanced Revenue Management through monitoring prices, tracking of
products and processes and (iv) keep making investments in future that made
financial sense was a part of Ford’s Turnaround Strategy. The Smooth Financial
Turnaround (2003)
18
of JCT, MM Thapar Group Flagship, provides insights about
the modus operandi of financial, business and operational restructuring. As part of
the entire recast, it utilized its 100 per cent capacity in order to cope with increasing
demand, and a debt recast proposal was approved by Financial Institutions to
address the issues of high interest cost and difficulty in technology absorption. In
addition to this, promoters chipped in Rs 80 crore in the form of equity and
convertible debt instruments and FIs converted debt of Rs 16 crore into equity.
This was followed by trimming down the staff strength from 9,000 to 7,000 after
the execution of Voluntary Retirement Schemes. All the turnaround efforts made
JCT a financially feasible, viable and prosperous.Henry A. Davis and William W.
Sihler (2002)
19
present financial turnarounds of twenty industries in every key
industry segment. They provided EWS (Early Warning Signals), in-depth case
summaries and found that the CFO played a vital role in turning the company
around. Finally, they offer practical guidance for recognizing the EWS of financial
disaster and taking effective action to avoid it. Sudi Sudarsanam and Jim Lai (2001)
20
examined potentially bankrupt UK firms and track their financial turnaround
strategies viz., (i) operational, (ii) asset, managerial and (iii) financial restructuring
for a period of three years from distress.They evinced that majority of non-recovery
firms than recovery firms financially restructure their operations, cut or omit
dividends and restructure their debts in each of the two post-distress years.
Nevertheless, non-recovery firms seem far less effective in strategy implementation
than their recovery counterparts. Whereas recovery firms adopt growth-oriented
and external-market focused strategies, non-recovery firms engage in fire-fighting
1394 ? Bhanu Prakash Kovvali and Chandra Prasad J.
strategies. Mathew J. Manimala (1991)
21
empirically examined the strategies
adopted by Indian Railways for its turning around and observed financial
performance measures gauged from four indicators viz., (i) operating ratio; (ii) net
surplus, (iii) dividend paid; and (iv) revenue to capital ratio. Finally, opined
financial strategies associated with turnaround are aimed at (a) improving the
liquidity position; (b) reducing investment and leverage and (c) controlling
unproductive costs. Robert D. Boyle and Harsha B. Desai (1990)
22
diagnosed nine
financial causes of business failure viz., (i) inadequate manage of cash and capital
requirements; (ii) failure to analyse financial statements; (iii) improper management
of accounts receivable; (iv) underutilization of assets; (v) declining profit margins;
(vi) lowering prices or offering discounts; (vii) large increase in debt; (viii)
maintaining excessive inventories; and (ix) over expenditure in the face of a large
influx of cash and suggested implementation of sound financial approach
i.e.,foolproof financial monitoring systems and controls is an imperative to achieve
growth and profitability.Richard Pascale and Thomas P. Rohlen (1983)
23
outline
financial turnaround dimension of Mazda Motors, Japan. They propounded three
stages of financial turnaround (i) Rescue Stage; (ii) Cost- Cutting Stage; and (iii)
Recovery Stage. Cutting of costs, boosting up of sales, trying to keep ahead of cash
flow, holding creditors in place are some of the turnaround efforts prescribed. As
a result, profits and dealer margins improved greatly and the suppliers themselves
gained from both increased sales to and shorter payment terms and finally retaining
the loyalty of suppliers and dealers.
DATA BASE AND METHODOLOGY
The study is based on primary as well as secondary data. Structured Questionnaire
is canvassed among Operational and Managerial Staff and is the basis for collection
of primary data. The secondary sources include Official Records, Annual Reports,
Performance and Review Reports of the Corporation supported by the Comptroller
& Auditor General (CAG) Commercial Reports, Published Articles from the
Standard Journals and the literature from Reputed Books, Unpublished
Dissertations.
Objectives of the Study
The main objective of the study is to diagnose and evaluate the financial strategies
adopted by the A.P. State Road Transport Corporation for its turning around. The
other peripheral objectives are:
1. to evaluate the financial position and performance of the A.P. State Road
Transport Corporation.
2. to examine the financial strategies adopted by A.P. State Road Transport
Corporation at different levels of operation.
Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1395
3. to suggest policy measures for effective and efficient functioning of A.P.
State Road Transport Corporation enable it to operate at a profitable level
by employing specified financial turnaround strategies.
Hypothesis of the Study
For the purpose of the present study it is hypothesized that
H
1
: Capital Structure Composition and Debt To Equity Ratio of A.P. State
Road Transport Corporation reflects Financial Position and Performance.
H
2
: The burden of debt drains into the profits of the A.P. State Road
TransportCorporation.
H
3
: Liquidity, Leverage, Investment and Turnover Reflections of the A.P.
StateRoad Transport Corporation stands as x-ray body of the Corporate.
H
4
: Financial Strategies have a significant positive relationship on
CorporateTurnaround.
Scope of the Study
Though the study is broadly christened as financial turnaround management of the
corporate, the focus is specifically on the financial strategies adopted with regard to
A.P. State Road Transport Corporation. The study covers the financial profile of the
entity, exclusively the turnaround strategies adopted, their fit and implementation
besides the turnaround strategies ought to be pursued and the sustainability, success
of the Corporation as a commercially viable entity in the regime of reforms.The feel,
perceptions and expectations of Operational and Managerial Staff are elicited and
analysed for presenting a comprehensive kaleidoscope of financial turnaround of
the Andhra Pradesh State Road Transport Corporation.
Period of the Study
The study covers a period of 10 years between 2001 and 2011 for all pertinent
analysis. For the purpose of financial analysis besides the presentation of
comprehensive profile of the Corporation the time period beyond the stated period
of the study is covered.
Sample Design
AP State Road Transport Corporation operates its buses under the administrative
control of 7 Zones viz., Greater Hyderabad (24 depots), Hyderabad (28 depots),
Karimnagar (37 depots), Vijayawada (32 depots), Vizianagaram (27 depots), Kadapa
(31 depots) and Nellore (31 depots) under the administrative control of 23 Regional
Managers. These zones are considered as strata for the selection of the sample of
the Operational Staff.
1396 ? Bhanu Prakash Kovvali and Chandra Prasad J.
In each of the zones 20 per cent (i.e., 42 depots) of the total (210 depots) depots
was selected for collection of primary data. The stratified proportionate random
sampling method is adopted for this study. The depots selected for the sample (42
depots) has connected to urban, semi-urban and mofussil services. This study is
confined to the 126 services (i.e., 42 depots multiplied by 3 aforecited services)
operated by APSRTC in all regions.
The Operational Staff is a blended mix of front-line operational force consisting
Bus Drivers and Conductors, Traffic Inspectors (TIs) etc., In selectingthe sample of
Operational Staff, purposive sampling method is adopted. The structured
questionnaire is canvassed among 1512 operational staff with a blended mix 756
conductors and drivers each and 42 Traffic Inspectors. From the survey, it is
observed that 16.6 per cent of the biased and unfilled subjects are rejected. Therefore,
the study considers 83.34 per cent of the subjects which comprising of 630
conductors and drivers each and 42 Traffic Inspectors which is found to be
satisfactory at 95 per cent level of significance.
Limitations of the Study
The study is designed schematically it is not without certain limitations. Some of
the limitations inter alia include:
• As the study is based upon primary as well as secondary data, the
secondary data sources vary widely in reporting. Difficulties are faced in
authenticating the data with a reference to the official records.
• As the A.P. State Level Public Sector Undertakings experienced delay in
annual account reporting updated information could not be obtained.
• In collecting the primary data, respondents bias do exist.
• The percentages and averages are rounded off to the nearest decimal point
thus lacking exactness.
RESULTS AND DISCUSSION
FINANCIAL POSITION AND PERFORMANCE OF APSRTC
The Financial Position and Performance of the A.P. State Road Transport
Corporation has been evaluated on the basis of capital structure composition
besides liquidity, leverage and turnover reflections of the Corporation. These
reflections focus on multi-dimensional financial performance scenario of the
Corporation during 2000-01 to 2010-11.
Capital Structure Composition and Debt - Equity Ratio of A.P. State Road
Transport Corporation
As it is evident from the above table 2, the paid-up capital reflects the static picture
(Rs. 201.27 Crores) with the composition of Rs.140.20 Crores from the State
Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1397
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1398 ? Bhanu Prakash Kovvali and Chandra Prasad J.
Government and Rs. 61.07 Crores from the Central Government and the
Corporation relies increasingly on debt-capital.
Debt drains into the Profitsof A.P. State Road Transport Corporation
Table 3 presents the ratio of debt to profits. During the period under reference,
except during the years 2007-08 and 2008-09 the Corporation incurred financial
losses and the burden of interest drains into the profits of the Corporation and
contribution to the losses over the years under review.
A Ratio Analytical Performance Focus
Liquidity Ratios of APSRTC Ltd.
Except during the year 2010-11, in no year under reference the Corporation recorded
the Current and Quick Ratio even equal to unity. Absolute Cash Ratio of 0.32 in
2000-01, though stood at 0.38 in 2004-05 phenomenally came down to stand at 0.01
in 2010-11.
Table 2
Capital Structure Composition and Debt - Equity Ratio of A.P. State Road Transport
Corporation During 2000- 01 To 2012-13.
(Rupees in Crores)
Year (s) Paid-Up Capital
State Central Total Loans Debt - Equity
Government Government Outstanding Ratio
2000-01 140.20 (69.65) 61.07 (30.34) 201.27 (100) 582.84 2.89
2001-02 140.20 (69.65) 61.07 (30.34) 201.27 (100) 754.07 3.74
2002-03 140.20 (69.65) 61.07 (30.34) 201.27 (100) 821.84 4.08
2003-04 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1040.98 5.17
2004-05 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1325.88 6.58
2005-06 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1156.99 5.25
2006-07 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1095.68 5.44
2007-08 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1299.73 6.45
2008-09 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1404.46 6.97
2009-10 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1410.21 7.00
2010-11 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1336.18 6.63
2011-12 140.20 (69.65) 61.07 (30.34) 201.27 (100) 2033.64 10.10
2012-13 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1679.54 8.34
CAGR 0 0 0 12.48 -
Note: Figures in Parentheses indicate Percentage To Respective Total. Source: 1. Annual Reports
Of APSRTC (2000-01 To 2013-14) 2. Comptroller and Auditor General (CAG) Reports
(2000-01 To 2013-14).
Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1399
Profitability Ratios of APSRTC Ltd.
Table 5 presents the Profitability Ratios of A.P. State Corporation during 2000-
01 to 2010-11. Gross Profit Ratio shows fluctuating trend and Net Profit Margin
could not cut an impressive picture of profitability over the years under the
review. Moreover, it drives home the observation that on the path of the
profitability the performance of the Corporation is at the low key and it could
not turn the corner. Operating Expenses Ratio indicates that there is an imperative
need for control of costs of the Corporation and Operating Profit Ratio, a yardstick
Table 3
Debt Drain and Burden on A.P. State Road Transport Corporation During
1999-2000 To 2012-13
(Rupees in Crores)
Year(s) Profit / (-) Loss Payments on Debts
(In terms of interest)
1999-2000 -151.85 45.09
(29.69)
2000-01 -209.95 63.15
(30.08)
2001-02 -272.07 86.91
(31.94)
2002-03 -181.67 97.34
(53.58)
2003-04 -42.02 105.21
(250.38)
2004-05 -224.86 102.95
(45.78)
2005-06 -42.78 73.15
(170.99)
2006-07 -111.82 76.13
(68.08)
2007-08 135.67 91.25
(67.26)
2008-09 110.78 116.87
(105.50)
2009-10 -514.55 114.63
(22.28)
2010-11 -317.37 145.80
(45.94)
2011-12 -585.30 271.84
(46.44)
2012-13 -80.71 368.61
(456.70)
Note: Figures in Parentheses indicate Percentage To Respective Total.Source: 1. Annual Reports
of APSRTC (2013-14). 2. Comptroller and Auditor General (CAG) Reports (2013-14).
1400 ? Bhanu Prakash Kovvali and Chandra Prasad J.
of operational efficiency, reveals that APSRTC could not convert revenue into
net operating profit.
Leverage Statusof APSRTC Ltd.
Capital Structure Ratios provide an insight into the extent to which non-equity
capital is used to finance the assets of the firm. The leverage ratio, as indicated by
the Debt-Equity ratio of A.P. State Road Transport Corporation during 2000-01 to
2010-11 is presented in Table 6.4. The ratio of debt to equity very much signifies
the structural strength of any organization financially.
Table 4
Liquidity Ratios of APSRTC Ltd., during 2000-01 To 2010-11
Liquidity Ratios (in per cent)
Year(s) Current Ratio Quick Ratio Cash Ratio
2000-01 0.76 0.57 0.32
2001-02 0.63 0.52 0.30
2002-03 0.53 0.43 0.29
2003-04 0.81 0.69 0.27
2004-05 0.75 0.65 0.38
2005-06 0.52 0.41 0.16
2006-07 0.56 0.49 0.07
2007-08 0.74 0.68 0.07
2008-09 0.94 0.88 0.07
2009-10 0.78 0.74 0.03
2010-11 1.04 1.01 0.01
Source: Compiled and Computed From Various Annual Reports Of APSRTC, (2000-11).
Table 5
Leverage Ratios of APSRTC during 2000-01 To 2010-11
Year Debt - Equity Ratio Times Interest Earned
(in per cent) Ratio (in times)
2000-01 1.03 0.14
2001-02 1.4 -0.53
2002-03 1.59 0.54
2003-04 2.16 1.59
2004-05 3.02 -2.18
2005-06 2.81 -0.51
2006-07 2.8 -1.46
2007-08 3.8 1.49
2008-09 4.63 0.95
2009-10 5.36 0
2010-11 6.63 0
Source: Compiled and Computed From Various Annual Reports Of APSRTC, (2000-11).
Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1401
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Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1403
Increasing Debt Burdenof APSRTC Ltd.
As it is evident from the Table 5, the debt equity ratio of 1.03 in the year 2000-01
increased to 4.63 in 2008-09 and further to 6.63 in 2010-11. It is also evident from
the table the times interest earned ratio of APSRTC experienced wide fluctuations
over the years under reference. The ratio of 0.14 times in 2000-01, though positively
stood at 1.59 in 2003-04, came down to -1.46 times in 2006-07 and finally stood at
dismal in 2009-10 and 2010-11.
Corporate Financial Strategies - A Conceptual Focus
Financial Turnaround Strategies play a vital role in turning around the complex
sick organizations. The objective of financial strategy in corporate turnaround is
to develop the financial strength of the business as an asset to enhance the
competitiveness of the business (Scherrer. F. 2003)
24
. Turnaround efforts will be
successful subject to the Going Concern Value of the business must be greater
than its Liquidation Value. Asset liquidity can be an important determinant of
corporate capital structures. Financial Ratios are reflections of financial strength
and stand as an x-ray body of the Corporate.
Organizations adopt several financial strategies such as reduction in the par
value of shares, obtaining loans at low rates of interest, postponement of maturity
of debts, and conversion of debt into equity (Kumar.A.2003)
25
. Robbins and Pearce
(1992)
26
have also observed that the choice of turnaround strategies is linked to the
company’s financial performance. The financial strategies for turnaround should
use more of asset reduction strategies rather than cost reduction (Howard, L. J.
2006)
27
.
Some of the Financial Turnaround Strategies inter alia will include: Financial
Restructuring with the approval of lenders is one of the dynamics of turnaround
management. Debt / Equity Swaps, infusing additional Equity, managing Net
Current Assets (Working Capital), Creditors and Debtors Agreements, Sale of
obsolete or unused assets, generating revenue, cost control and budgeting,
Refinancing i.e.,not only infuse additional funds in the form of loan or
equityfinance, but also changing the existing capital structure per se.
Financial Turnaround Strategies Adopted By A.P. State Road Transport
Corporation- A perceptional View
Table 8 indicates that as a result of an increase in standard deviation by 1 in the
latent variable i.e., financial strategies, there will be an increase in standard
deviation of the indicator FS4 by 0.898978. The standard deviations of other
indicators such as FS5, FS6 and FS3 would be increased by 0.891398, 0.710133
and 0.394344 respectively. It is also evident from the table, all indicators of latent
variable i.e., financial strategies have higher significance with their parameter
1404 ? Bhanu Prakash Kovvali and Chandra Prasad J.
estimates except for the indicator FS1. The results of the T-statistic reveal that
the path coefficients for the indicators are significant at 1 per cent level of
significance except for FS1. It can be inferred from the table the values of latent
variable FS4 followed by FS5 and FS6 which have significant impact on the process
of turnaround.
FINDINGS OF THE STUDY
The following are the observations emanated from the present study.
1. Liquidity position in terms of current ratio of the APSRTC is not
satisfactory,higher debt-equity ratio indicates the increasing burden of
debt and the trend of interest coverage is mostly on a negative note which
requires an analytical insight for improving the financial image of the
corporation.
2. Gross Profit Ratio shows fluctuating trend and Net Profit Margin could
not cut an impressive picture of profitability. Operating Expenses Ratio
indicates that there is an imperative need to control of costs of the
Corporation and Operating Profit Ratio, a yardstick of operational
efficiency, reveals that APSRTC could not convert revenue into net
operating profit.
3. Though the leverage contributes to the Wealth Maximization objective,
an increasing debt is a burden and increases the risk perception. The trend
of Interest Coverage is mostly on a negative note which requires an
analytical insight under review for improving the financial image of the
Corporation.
4. The efficiency of utilizing Total Assets of the Corporation has come down
over the years indicating an alarming decline in the Turnover of Total
Assets. There is a marginal improvement gradually in the efficiency of
Fixed Assets utilization over the years. The efficiency of the Corporation
in managing Current Assets has experienced an alarming downtrend
especially Working Capital of the Corporation recorded negative but with
a degree of difference in intensity. The turnover of Inventory is fairly high
and good which signifying an improved efficiency in managing the
inventory.
5. Debtors witnessed a dilution during the past five years and the ACP
further reflects there is a lag in collection period over the years. The delay
in collection of dues from the Government and Agencies stances the
dominant reason for the situation.
6. Higher Creditors’ Turnover Ratio is a good sign and it will decrease the
average payment period and Suppliers extended more liberal credit to
the Corporation over the years.
Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1405
7. The findings in relate to Financial Turnaround Strategies Adopted
by APSRTC vis-à-vis the level of agreement are presented in
Table 7. As evident from the table, raising of equity through Initial
Public Offer (IPO) or private equity or issue of debentures or debt financing
is the first prioritised strategy according to 24.70 per cent of the
respondents.
8. Sale of obsolete, infrequently used assets and unprofitable divisions of
the Corporation is the second priority of 19.40 per cent of the respondents.
Asset reduction and debt-reduction are two pillars of financial turnaround
as per the opinion of the 18 per cent of the respondents and third rated
strategy of the Operational Staff.
9. Implementation of aggressive cost and asset reduction techniques such
as slashing labor, selling and administrative and R&D expenditure is
fourth rated attribute as per the opinion of 16.90 per cent of the respondents
and control of unproductive expenses and financial restructuring which
leads to lean management is the fifth rated strategy according to 14.50 per
cent respondents.
10. Finance strategy is a common strategy which is used in the early stages of
corporate turnarounds. Finally, 14.20 per cent opine asset reduction
strategies for failing companies in order to improve cash inflows.
11. As per Friedman’s Rank Test, the first significant strategy is controlling
of unproductive expenses (3.68) of the Corporation, reduction of
investment and leverage (3.59), sale of obsolete, infrequently used assets,
and unprofitable divisions and subsidiaries (3.56) and reduction of
administrative overheads (3.50) are ranked the second, third and fourth
respectively. Funds raising through different means (3.47) and reduction
of asset base and leverages (3.20) are placed in the fifth and sixth
respectively.
12. The Chi-Square value of 67.215 with 5 degrees of freedom is high, and it
can be concluded that the respondents do not have equal levels of
satisfaction for all the turnaround strategies which are adopted by the
Corporation.
13. The proposed Structural Equation Model (SEM) reveals (Table-8), the six
variables considered as financial turnaround strategies under various sub-
dimensions satisfied the desired Cronbach’s Alpha coefficient of 0.6 which
is recommended for the attainment of internal consistency. The results of
Hotelling’s T- squared and F-value confirm that the means of the select
variables was significantly different among each other. This indicates that
there is no equivalence among all the items which are considered for the
present study.
1406 ? Bhanu Prakash Kovvali and Chandra Prasad J.
SUGGESTIONS
With a view to improve operational as well as financial performance of A.P.
State Road Transport Corporation, a number of measures have been suggested.
These measures would help to turnaround the Corporation and regain financial
strength besides increasing revenue, controlling costs, improving safety and service
quality parameters and likely to have a positive impact on the performance of the
Corporation. The pertinent suggestions include:
1. The APSRTC primarily concentrate on the objectives of positive cash flows
and profits for its survival, success and sustainability.
2. The strategic causes observed in turning around of APSRTC include
decrease in profit margins, increased wages, competition from private
operators, and managerial problems and among operating causes the
depressed price levels, recession, strikes and labour problems. Hence, it
is suggested the Corporation adopt strategic moves to overcome strategic
causes viz., vertical integration, diversification, divestment and changes
in structure of management. Besides, operational responses to meet
operational causes emphasis is on functional area and improvement in
efficiency ratios are significant. Successful turnarounds are result of simply
efficiency moves.
3. The Corporation should focus its attention on cost reduction strategies
such as reducing operational expenses, Bus / Staff Ratio (BSR), fleet
maintenance expenses, Cost Per Kilometer (CPK) etc.,
4. The Corporation should make cost-benefit analysis in respect of routes
operated into profitable and unprofitable so that it attains economic
feasibility and also hire more number of hired buses as the cost of operation
of buses is much lower than that of its own fleet.
5. The Government should provide adequate financial support so as to enable
the Corporation to pay off outstanding debts (at least 50 per cent of
outstanding loans), subsidize the Corporation either in the form of cash
subsidy or tax incentives which improves financial viability. In fact, it is
suggested that Government should establish a special institutional set up
for funding the Corporation.
6. Expenses on repair and maintenance can be curtailed by reducing the
number of over age buses besides and by hiring more buses.
7. Manpower should be rationalized by introducing Voluntary Retirement
Schemes (VRS) and by removing the imbalance in the category of drivers
and conductors.
8. Expenses on fuel may be controlled by improving habits of drivers through
regular training courses and by proper maintenance of fleet. Economy
Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1407
related incentives should be offered to the drivers and operational staff
economizing fuel.
CONCLUSION
Turnaround Management has been emerged as one of the critical and toughest
challenges of the Corporate in modern era. The following are the prospective areas
for further research viz.,Financial Dynamics in Turnaround Management - A Study
With Reference To APSRTC, Turnaround Management - Financial Strategies of
Corporate Turnaround - A Case Study, Financial Performance vis-à-vis Financial
Turnaround Strategies - A Study on State Road Transport Undertakings, Financial
Distress and Diagnosis - A Prescriptive Study on APSRTC etc., Devise and develop
strategies on the afore cited dimensions and establish relationship between the
gestalts of cause and strategy is the dire need of future research. There is also a
dire need of policy measures which would help to turnaround the Corporation
and regain financial strength besides increasing revenue, controlling costs and
likely to have a positive impact on the performance of the Corporation.
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1408 ? Bhanu Prakash Kovvali and Chandra Prasad J.
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doc_190211180.pdf
Financial Turn Around Of A. P. State Road Transport Corporation A Case Study
* Senior Consultant, M&E Specialist, State Coordinator, NABCONS, Hyderabad, Telangana
** Director, SKSD Women’s College, Tanuku, West Godavari District, Andhra Pradesh
FINANCIAL TURN AROUND OF A. P. STATE ROAD
TRANSPORT CORPORATION - A CASE STUDY
Bhanu Prakash Kovvali
*
and Chandra Prasad J.
**
Abstract: A journey from brink to back, strained to success, incurring losses to earning profits,
dealing with distress to prosperity is termed as Turnaround while Turnaround Strategy is a
corporate practice designed, devised and deals with the deterioration of financial health in
terms of increasing losses, lower Return on Capital Employed and continuous decrease in the
Value of Shareholders’ Wealth. The focus of the present paper is on Financial Turnaround of
the Corporate viz., Andhra Pradesh State Road Transport Corporation which is the oldest
Public Sector Transport Corporation with a wide network of service. An attempt has been
made to diagnose and evaluate the strategies especially financial in nature adopted by the A.P.
State Road Transport Corporation for its turning around during 2001-2011. A successful
turnaround depends on developing appropriate turnaround prescription and implementation
of effective turnaround plan. Hence, there is a focus on turnaround framework i.e., Retrenchment
(Cost Cutting), Repositioning (Revenue Increasing), and Reorganisation besides the impact
and incidence of Financial Strategies on the Corporate to revitalize, rehabilitate and bringing
back on the tracks of profit and prosperity.
Financial Strategies are aimed at improving liquidity, reducing investment and leverage and
controlling unproductive expenses. Financial Strategies adopted by A.P. State Road Transport
Corporation inter alia include controlling unproductive expenses, cutting of administrative
expenses especially overheads, reducing investment and leverage, sale of obsolete, infrequently
used assets, unprofitable divisions and subsidiaries to raise more equity. The results of the Chi-
Square Test, Freedman Test and Confirmatory Factor Analysis provide an insight about the
impact and incidence of Financial Strategies on Turnaround of the Corporate. The implication
of the study is that the Financial Turnaround Strategies adopted by A.P. State Road Transport
Corporation which have an influence on the process of Turnaround in a much wider context
keeping in view the healthy and holistic Corporate immune system to sustain long-term growth.
Key Words: 3Rs’, APSRTC, F-Test, CFA.
JEL Classification: R4, R49
EPILOGUE
The term ‘Turnaround’ has been defined as performance decline followed by
performance improvement (Schendel et al. 1976
1
; Robbins and Pearce, 1992
2
). A
I J A B E R, Vol. 13, No. 3, (2015): 1391-1408
1392 ? Bhanu Prakash Kovvali and Chandra Prasad J.
Corporate Turnaround as the recovery of a firm’s economic performance following
an existence-threatening decline (Pandit,2000
3
, Walshe, 2004
4
). Yet, Khandwalla
5
defines corporate decline as a loss situation and turnaround as equivalent to
reaching at least a break-even from a loss situation.Turnarounds cannot be sensibly
analysed without taking into account the context of the financialobligations and
related governance arrangements (Igor and Toms, 2006
6
, Kumar, 2003
7
). Slashing
labor costs, production costs, selling andadministrative expenses, R&D expenditure,
and financing costs is a common strategy used in the earlystages of corporate
turnarounds (Denis and Kruse, 2000
8
, Beixin et al., 2008
9
).However, Asset-reduction
strategies have been recommended for failingcompanies in order to improve cash
inflows (Hofer, 1980
10
, Hambrick and Scherrer, 1983
11
) which would help in meeting
the immediate cash obligations as well as forcreating more productive assets.
Andhra Pradesh State Road Transport Corporation (APSRTC) is a state owned
public utility service organization with a primary focus of serve the society by
providing efficient, economical and reliable transport facility
12
. APSRTC is an
organisation committed to the man on move and society at large and started service
in June, 1932 as a unit of Nizam State Railways and as Road Mechanical Transport
Services Division (NSR-RTD) with 27 buses, 166 employees and a capital outlay of
3.93 lakhs brings transportation to the door step of the villages of the State thereby
contributing to the overall development of the State. APSRTC has a largest fleet of
22,333 buses covering a route length of 77.48 lakhs km daily and a network of 778
bus stations and 1,881bus shelters, 1,15,317 human resource, 216 bus depots
operating 98 per cent its fleet and transports around 113.82 lakhs people daily as
on 31
st
August, 2014.
EMPIRICAL EVINCES
For a comprehensive kaleidoscope of the literature pertaining to corporate financial
turnaround some of the significant studies have been reviewed in brief for a
comprehension and also for identifying the research gap. An attempt has been
made to begin with developing theory and science in exploring financial corporate
turnaround strategies for the revival and rejuvenation of the corporate.
Martin Schmuck (2014)
13
empirically investigated the phenomenon of financial
distress and corporate turnaround on a sample of 194 publicly listed automotive
suppliers. The efficacy and efficiency of financial turnaround strategies is analysed
and devised a successful turnaround model for distressed corporate and compared
it with the strategies of non-distressed. Prakash K Bhanu (2014)
14
lucidly presents
the financial turnaround strategies adopted by APSRTC for its turning around.
The dimensions and strategies of financial turnaround prescribed, insights and
intricacies besides the action-orientation for corporate revival and rejuvenation
observed and suggested the Corporation to regain financial strength besides
increasing revenue, controlling costs, improving safety and service quality
Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1393
parameters which likely to have a positive impact on the financial performance of
the Corporation.John A. Pearce II (2007)
15
critically evaluated the financial profiles
of companies and advocated three-phase model of turnaround viz., (i) proposing
and assessing linkages between financial ratios; (ii) guiding the empirical analysis;
and(iii) leading to a statistical grouping of relevant financial ratios associated with
turnaround success. Finally, suggested that the success of a company’s turnaround
tactics can be guided by the financial ratios.Desh Gupta and MilindSatya (2006)
16
evaluated the factors that led to the financial turnaround of Indian Railways. The
insights on financial performance of Indian Railways reveal the financial strategies
play crucial role for turning around public sector complex sick organizations. The
Financial Turnaround of Indian Railways is a function of 3Rs’ viz., Retrenchment,
Repositioning and Reorganization besides environmental conditions and factors.
A $10 Billion Ford Turnaround (2004)
17
is a daunting task of steering the big blue
ship into profitable waters. The steps taken to control bleeding red ink inter alia
include: (i) reduce costs in everything i.e., Non-Value Added Costs, Non-Production
and Material Costs; (ii) divestment of non-core businesses that didn’t make sense;
(iii) enhanced Revenue Management through monitoring prices, tracking of
products and processes and (iv) keep making investments in future that made
financial sense was a part of Ford’s Turnaround Strategy. The Smooth Financial
Turnaround (2003)
18
of JCT, MM Thapar Group Flagship, provides insights about
the modus operandi of financial, business and operational restructuring. As part of
the entire recast, it utilized its 100 per cent capacity in order to cope with increasing
demand, and a debt recast proposal was approved by Financial Institutions to
address the issues of high interest cost and difficulty in technology absorption. In
addition to this, promoters chipped in Rs 80 crore in the form of equity and
convertible debt instruments and FIs converted debt of Rs 16 crore into equity.
This was followed by trimming down the staff strength from 9,000 to 7,000 after
the execution of Voluntary Retirement Schemes. All the turnaround efforts made
JCT a financially feasible, viable and prosperous.Henry A. Davis and William W.
Sihler (2002)
19
present financial turnarounds of twenty industries in every key
industry segment. They provided EWS (Early Warning Signals), in-depth case
summaries and found that the CFO played a vital role in turning the company
around. Finally, they offer practical guidance for recognizing the EWS of financial
disaster and taking effective action to avoid it. Sudi Sudarsanam and Jim Lai (2001)
20
examined potentially bankrupt UK firms and track their financial turnaround
strategies viz., (i) operational, (ii) asset, managerial and (iii) financial restructuring
for a period of three years from distress.They evinced that majority of non-recovery
firms than recovery firms financially restructure their operations, cut or omit
dividends and restructure their debts in each of the two post-distress years.
Nevertheless, non-recovery firms seem far less effective in strategy implementation
than their recovery counterparts. Whereas recovery firms adopt growth-oriented
and external-market focused strategies, non-recovery firms engage in fire-fighting
1394 ? Bhanu Prakash Kovvali and Chandra Prasad J.
strategies. Mathew J. Manimala (1991)
21
empirically examined the strategies
adopted by Indian Railways for its turning around and observed financial
performance measures gauged from four indicators viz., (i) operating ratio; (ii) net
surplus, (iii) dividend paid; and (iv) revenue to capital ratio. Finally, opined
financial strategies associated with turnaround are aimed at (a) improving the
liquidity position; (b) reducing investment and leverage and (c) controlling
unproductive costs. Robert D. Boyle and Harsha B. Desai (1990)
22
diagnosed nine
financial causes of business failure viz., (i) inadequate manage of cash and capital
requirements; (ii) failure to analyse financial statements; (iii) improper management
of accounts receivable; (iv) underutilization of assets; (v) declining profit margins;
(vi) lowering prices or offering discounts; (vii) large increase in debt; (viii)
maintaining excessive inventories; and (ix) over expenditure in the face of a large
influx of cash and suggested implementation of sound financial approach
i.e.,foolproof financial monitoring systems and controls is an imperative to achieve
growth and profitability.Richard Pascale and Thomas P. Rohlen (1983)
23
outline
financial turnaround dimension of Mazda Motors, Japan. They propounded three
stages of financial turnaround (i) Rescue Stage; (ii) Cost- Cutting Stage; and (iii)
Recovery Stage. Cutting of costs, boosting up of sales, trying to keep ahead of cash
flow, holding creditors in place are some of the turnaround efforts prescribed. As
a result, profits and dealer margins improved greatly and the suppliers themselves
gained from both increased sales to and shorter payment terms and finally retaining
the loyalty of suppliers and dealers.
DATA BASE AND METHODOLOGY
The study is based on primary as well as secondary data. Structured Questionnaire
is canvassed among Operational and Managerial Staff and is the basis for collection
of primary data. The secondary sources include Official Records, Annual Reports,
Performance and Review Reports of the Corporation supported by the Comptroller
& Auditor General (CAG) Commercial Reports, Published Articles from the
Standard Journals and the literature from Reputed Books, Unpublished
Dissertations.
Objectives of the Study
The main objective of the study is to diagnose and evaluate the financial strategies
adopted by the A.P. State Road Transport Corporation for its turning around. The
other peripheral objectives are:
1. to evaluate the financial position and performance of the A.P. State Road
Transport Corporation.
2. to examine the financial strategies adopted by A.P. State Road Transport
Corporation at different levels of operation.
Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1395
3. to suggest policy measures for effective and efficient functioning of A.P.
State Road Transport Corporation enable it to operate at a profitable level
by employing specified financial turnaround strategies.
Hypothesis of the Study
For the purpose of the present study it is hypothesized that
H
1
: Capital Structure Composition and Debt To Equity Ratio of A.P. State
Road Transport Corporation reflects Financial Position and Performance.
H
2
: The burden of debt drains into the profits of the A.P. State Road
TransportCorporation.
H
3
: Liquidity, Leverage, Investment and Turnover Reflections of the A.P.
StateRoad Transport Corporation stands as x-ray body of the Corporate.
H
4
: Financial Strategies have a significant positive relationship on
CorporateTurnaround.
Scope of the Study
Though the study is broadly christened as financial turnaround management of the
corporate, the focus is specifically on the financial strategies adopted with regard to
A.P. State Road Transport Corporation. The study covers the financial profile of the
entity, exclusively the turnaround strategies adopted, their fit and implementation
besides the turnaround strategies ought to be pursued and the sustainability, success
of the Corporation as a commercially viable entity in the regime of reforms.The feel,
perceptions and expectations of Operational and Managerial Staff are elicited and
analysed for presenting a comprehensive kaleidoscope of financial turnaround of
the Andhra Pradesh State Road Transport Corporation.
Period of the Study
The study covers a period of 10 years between 2001 and 2011 for all pertinent
analysis. For the purpose of financial analysis besides the presentation of
comprehensive profile of the Corporation the time period beyond the stated period
of the study is covered.
Sample Design
AP State Road Transport Corporation operates its buses under the administrative
control of 7 Zones viz., Greater Hyderabad (24 depots), Hyderabad (28 depots),
Karimnagar (37 depots), Vijayawada (32 depots), Vizianagaram (27 depots), Kadapa
(31 depots) and Nellore (31 depots) under the administrative control of 23 Regional
Managers. These zones are considered as strata for the selection of the sample of
the Operational Staff.
1396 ? Bhanu Prakash Kovvali and Chandra Prasad J.
In each of the zones 20 per cent (i.e., 42 depots) of the total (210 depots) depots
was selected for collection of primary data. The stratified proportionate random
sampling method is adopted for this study. The depots selected for the sample (42
depots) has connected to urban, semi-urban and mofussil services. This study is
confined to the 126 services (i.e., 42 depots multiplied by 3 aforecited services)
operated by APSRTC in all regions.
The Operational Staff is a blended mix of front-line operational force consisting
Bus Drivers and Conductors, Traffic Inspectors (TIs) etc., In selectingthe sample of
Operational Staff, purposive sampling method is adopted. The structured
questionnaire is canvassed among 1512 operational staff with a blended mix 756
conductors and drivers each and 42 Traffic Inspectors. From the survey, it is
observed that 16.6 per cent of the biased and unfilled subjects are rejected. Therefore,
the study considers 83.34 per cent of the subjects which comprising of 630
conductors and drivers each and 42 Traffic Inspectors which is found to be
satisfactory at 95 per cent level of significance.
Limitations of the Study
The study is designed schematically it is not without certain limitations. Some of
the limitations inter alia include:
• As the study is based upon primary as well as secondary data, the
secondary data sources vary widely in reporting. Difficulties are faced in
authenticating the data with a reference to the official records.
• As the A.P. State Level Public Sector Undertakings experienced delay in
annual account reporting updated information could not be obtained.
• In collecting the primary data, respondents bias do exist.
• The percentages and averages are rounded off to the nearest decimal point
thus lacking exactness.
RESULTS AND DISCUSSION
FINANCIAL POSITION AND PERFORMANCE OF APSRTC
The Financial Position and Performance of the A.P. State Road Transport
Corporation has been evaluated on the basis of capital structure composition
besides liquidity, leverage and turnover reflections of the Corporation. These
reflections focus on multi-dimensional financial performance scenario of the
Corporation during 2000-01 to 2010-11.
Capital Structure Composition and Debt - Equity Ratio of A.P. State Road
Transport Corporation
As it is evident from the above table 2, the paid-up capital reflects the static picture
(Rs. 201.27 Crores) with the composition of Rs.140.20 Crores from the State
Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1397
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1398 ? Bhanu Prakash Kovvali and Chandra Prasad J.
Government and Rs. 61.07 Crores from the Central Government and the
Corporation relies increasingly on debt-capital.
Debt drains into the Profitsof A.P. State Road Transport Corporation
Table 3 presents the ratio of debt to profits. During the period under reference,
except during the years 2007-08 and 2008-09 the Corporation incurred financial
losses and the burden of interest drains into the profits of the Corporation and
contribution to the losses over the years under review.
A Ratio Analytical Performance Focus
Liquidity Ratios of APSRTC Ltd.
Except during the year 2010-11, in no year under reference the Corporation recorded
the Current and Quick Ratio even equal to unity. Absolute Cash Ratio of 0.32 in
2000-01, though stood at 0.38 in 2004-05 phenomenally came down to stand at 0.01
in 2010-11.
Table 2
Capital Structure Composition and Debt - Equity Ratio of A.P. State Road Transport
Corporation During 2000- 01 To 2012-13.
(Rupees in Crores)
Year (s) Paid-Up Capital
State Central Total Loans Debt - Equity
Government Government Outstanding Ratio
2000-01 140.20 (69.65) 61.07 (30.34) 201.27 (100) 582.84 2.89
2001-02 140.20 (69.65) 61.07 (30.34) 201.27 (100) 754.07 3.74
2002-03 140.20 (69.65) 61.07 (30.34) 201.27 (100) 821.84 4.08
2003-04 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1040.98 5.17
2004-05 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1325.88 6.58
2005-06 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1156.99 5.25
2006-07 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1095.68 5.44
2007-08 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1299.73 6.45
2008-09 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1404.46 6.97
2009-10 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1410.21 7.00
2010-11 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1336.18 6.63
2011-12 140.20 (69.65) 61.07 (30.34) 201.27 (100) 2033.64 10.10
2012-13 140.20 (69.65) 61.07 (30.34) 201.27 (100) 1679.54 8.34
CAGR 0 0 0 12.48 -
Note: Figures in Parentheses indicate Percentage To Respective Total. Source: 1. Annual Reports
Of APSRTC (2000-01 To 2013-14) 2. Comptroller and Auditor General (CAG) Reports
(2000-01 To 2013-14).
Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1399
Profitability Ratios of APSRTC Ltd.
Table 5 presents the Profitability Ratios of A.P. State Corporation during 2000-
01 to 2010-11. Gross Profit Ratio shows fluctuating trend and Net Profit Margin
could not cut an impressive picture of profitability over the years under the
review. Moreover, it drives home the observation that on the path of the
profitability the performance of the Corporation is at the low key and it could
not turn the corner. Operating Expenses Ratio indicates that there is an imperative
need for control of costs of the Corporation and Operating Profit Ratio, a yardstick
Table 3
Debt Drain and Burden on A.P. State Road Transport Corporation During
1999-2000 To 2012-13
(Rupees in Crores)
Year(s) Profit / (-) Loss Payments on Debts
(In terms of interest)
1999-2000 -151.85 45.09
(29.69)
2000-01 -209.95 63.15
(30.08)
2001-02 -272.07 86.91
(31.94)
2002-03 -181.67 97.34
(53.58)
2003-04 -42.02 105.21
(250.38)
2004-05 -224.86 102.95
(45.78)
2005-06 -42.78 73.15
(170.99)
2006-07 -111.82 76.13
(68.08)
2007-08 135.67 91.25
(67.26)
2008-09 110.78 116.87
(105.50)
2009-10 -514.55 114.63
(22.28)
2010-11 -317.37 145.80
(45.94)
2011-12 -585.30 271.84
(46.44)
2012-13 -80.71 368.61
(456.70)
Note: Figures in Parentheses indicate Percentage To Respective Total.Source: 1. Annual Reports
of APSRTC (2013-14). 2. Comptroller and Auditor General (CAG) Reports (2013-14).
1400 ? Bhanu Prakash Kovvali and Chandra Prasad J.
of operational efficiency, reveals that APSRTC could not convert revenue into
net operating profit.
Leverage Statusof APSRTC Ltd.
Capital Structure Ratios provide an insight into the extent to which non-equity
capital is used to finance the assets of the firm. The leverage ratio, as indicated by
the Debt-Equity ratio of A.P. State Road Transport Corporation during 2000-01 to
2010-11 is presented in Table 6.4. The ratio of debt to equity very much signifies
the structural strength of any organization financially.
Table 4
Liquidity Ratios of APSRTC Ltd., during 2000-01 To 2010-11
Liquidity Ratios (in per cent)
Year(s) Current Ratio Quick Ratio Cash Ratio
2000-01 0.76 0.57 0.32
2001-02 0.63 0.52 0.30
2002-03 0.53 0.43 0.29
2003-04 0.81 0.69 0.27
2004-05 0.75 0.65 0.38
2005-06 0.52 0.41 0.16
2006-07 0.56 0.49 0.07
2007-08 0.74 0.68 0.07
2008-09 0.94 0.88 0.07
2009-10 0.78 0.74 0.03
2010-11 1.04 1.01 0.01
Source: Compiled and Computed From Various Annual Reports Of APSRTC, (2000-11).
Table 5
Leverage Ratios of APSRTC during 2000-01 To 2010-11
Year Debt - Equity Ratio Times Interest Earned
(in per cent) Ratio (in times)
2000-01 1.03 0.14
2001-02 1.4 -0.53
2002-03 1.59 0.54
2003-04 2.16 1.59
2004-05 3.02 -2.18
2005-06 2.81 -0.51
2006-07 2.8 -1.46
2007-08 3.8 1.49
2008-09 4.63 0.95
2009-10 5.36 0
2010-11 6.63 0
Source: Compiled and Computed From Various Annual Reports Of APSRTC, (2000-11).
Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1401
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Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1403
Increasing Debt Burdenof APSRTC Ltd.
As it is evident from the Table 5, the debt equity ratio of 1.03 in the year 2000-01
increased to 4.63 in 2008-09 and further to 6.63 in 2010-11. It is also evident from
the table the times interest earned ratio of APSRTC experienced wide fluctuations
over the years under reference. The ratio of 0.14 times in 2000-01, though positively
stood at 1.59 in 2003-04, came down to -1.46 times in 2006-07 and finally stood at
dismal in 2009-10 and 2010-11.
Corporate Financial Strategies - A Conceptual Focus
Financial Turnaround Strategies play a vital role in turning around the complex
sick organizations. The objective of financial strategy in corporate turnaround is
to develop the financial strength of the business as an asset to enhance the
competitiveness of the business (Scherrer. F. 2003)
24
. Turnaround efforts will be
successful subject to the Going Concern Value of the business must be greater
than its Liquidation Value. Asset liquidity can be an important determinant of
corporate capital structures. Financial Ratios are reflections of financial strength
and stand as an x-ray body of the Corporate.
Organizations adopt several financial strategies such as reduction in the par
value of shares, obtaining loans at low rates of interest, postponement of maturity
of debts, and conversion of debt into equity (Kumar.A.2003)
25
. Robbins and Pearce
(1992)
26
have also observed that the choice of turnaround strategies is linked to the
company’s financial performance. The financial strategies for turnaround should
use more of asset reduction strategies rather than cost reduction (Howard, L. J.
2006)
27
.
Some of the Financial Turnaround Strategies inter alia will include: Financial
Restructuring with the approval of lenders is one of the dynamics of turnaround
management. Debt / Equity Swaps, infusing additional Equity, managing Net
Current Assets (Working Capital), Creditors and Debtors Agreements, Sale of
obsolete or unused assets, generating revenue, cost control and budgeting,
Refinancing i.e.,not only infuse additional funds in the form of loan or
equityfinance, but also changing the existing capital structure per se.
Financial Turnaround Strategies Adopted By A.P. State Road Transport
Corporation- A perceptional View
Table 8 indicates that as a result of an increase in standard deviation by 1 in the
latent variable i.e., financial strategies, there will be an increase in standard
deviation of the indicator FS4 by 0.898978. The standard deviations of other
indicators such as FS5, FS6 and FS3 would be increased by 0.891398, 0.710133
and 0.394344 respectively. It is also evident from the table, all indicators of latent
variable i.e., financial strategies have higher significance with their parameter
1404 ? Bhanu Prakash Kovvali and Chandra Prasad J.
estimates except for the indicator FS1. The results of the T-statistic reveal that
the path coefficients for the indicators are significant at 1 per cent level of
significance except for FS1. It can be inferred from the table the values of latent
variable FS4 followed by FS5 and FS6 which have significant impact on the process
of turnaround.
FINDINGS OF THE STUDY
The following are the observations emanated from the present study.
1. Liquidity position in terms of current ratio of the APSRTC is not
satisfactory,higher debt-equity ratio indicates the increasing burden of
debt and the trend of interest coverage is mostly on a negative note which
requires an analytical insight for improving the financial image of the
corporation.
2. Gross Profit Ratio shows fluctuating trend and Net Profit Margin could
not cut an impressive picture of profitability. Operating Expenses Ratio
indicates that there is an imperative need to control of costs of the
Corporation and Operating Profit Ratio, a yardstick of operational
efficiency, reveals that APSRTC could not convert revenue into net
operating profit.
3. Though the leverage contributes to the Wealth Maximization objective,
an increasing debt is a burden and increases the risk perception. The trend
of Interest Coverage is mostly on a negative note which requires an
analytical insight under review for improving the financial image of the
Corporation.
4. The efficiency of utilizing Total Assets of the Corporation has come down
over the years indicating an alarming decline in the Turnover of Total
Assets. There is a marginal improvement gradually in the efficiency of
Fixed Assets utilization over the years. The efficiency of the Corporation
in managing Current Assets has experienced an alarming downtrend
especially Working Capital of the Corporation recorded negative but with
a degree of difference in intensity. The turnover of Inventory is fairly high
and good which signifying an improved efficiency in managing the
inventory.
5. Debtors witnessed a dilution during the past five years and the ACP
further reflects there is a lag in collection period over the years. The delay
in collection of dues from the Government and Agencies stances the
dominant reason for the situation.
6. Higher Creditors’ Turnover Ratio is a good sign and it will decrease the
average payment period and Suppliers extended more liberal credit to
the Corporation over the years.
Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1405
7. The findings in relate to Financial Turnaround Strategies Adopted
by APSRTC vis-à-vis the level of agreement are presented in
Table 7. As evident from the table, raising of equity through Initial
Public Offer (IPO) or private equity or issue of debentures or debt financing
is the first prioritised strategy according to 24.70 per cent of the
respondents.
8. Sale of obsolete, infrequently used assets and unprofitable divisions of
the Corporation is the second priority of 19.40 per cent of the respondents.
Asset reduction and debt-reduction are two pillars of financial turnaround
as per the opinion of the 18 per cent of the respondents and third rated
strategy of the Operational Staff.
9. Implementation of aggressive cost and asset reduction techniques such
as slashing labor, selling and administrative and R&D expenditure is
fourth rated attribute as per the opinion of 16.90 per cent of the respondents
and control of unproductive expenses and financial restructuring which
leads to lean management is the fifth rated strategy according to 14.50 per
cent respondents.
10. Finance strategy is a common strategy which is used in the early stages of
corporate turnarounds. Finally, 14.20 per cent opine asset reduction
strategies for failing companies in order to improve cash inflows.
11. As per Friedman’s Rank Test, the first significant strategy is controlling
of unproductive expenses (3.68) of the Corporation, reduction of
investment and leverage (3.59), sale of obsolete, infrequently used assets,
and unprofitable divisions and subsidiaries (3.56) and reduction of
administrative overheads (3.50) are ranked the second, third and fourth
respectively. Funds raising through different means (3.47) and reduction
of asset base and leverages (3.20) are placed in the fifth and sixth
respectively.
12. The Chi-Square value of 67.215 with 5 degrees of freedom is high, and it
can be concluded that the respondents do not have equal levels of
satisfaction for all the turnaround strategies which are adopted by the
Corporation.
13. The proposed Structural Equation Model (SEM) reveals (Table-8), the six
variables considered as financial turnaround strategies under various sub-
dimensions satisfied the desired Cronbach’s Alpha coefficient of 0.6 which
is recommended for the attainment of internal consistency. The results of
Hotelling’s T- squared and F-value confirm that the means of the select
variables was significantly different among each other. This indicates that
there is no equivalence among all the items which are considered for the
present study.
1406 ? Bhanu Prakash Kovvali and Chandra Prasad J.
SUGGESTIONS
With a view to improve operational as well as financial performance of A.P.
State Road Transport Corporation, a number of measures have been suggested.
These measures would help to turnaround the Corporation and regain financial
strength besides increasing revenue, controlling costs, improving safety and service
quality parameters and likely to have a positive impact on the performance of the
Corporation. The pertinent suggestions include:
1. The APSRTC primarily concentrate on the objectives of positive cash flows
and profits for its survival, success and sustainability.
2. The strategic causes observed in turning around of APSRTC include
decrease in profit margins, increased wages, competition from private
operators, and managerial problems and among operating causes the
depressed price levels, recession, strikes and labour problems. Hence, it
is suggested the Corporation adopt strategic moves to overcome strategic
causes viz., vertical integration, diversification, divestment and changes
in structure of management. Besides, operational responses to meet
operational causes emphasis is on functional area and improvement in
efficiency ratios are significant. Successful turnarounds are result of simply
efficiency moves.
3. The Corporation should focus its attention on cost reduction strategies
such as reducing operational expenses, Bus / Staff Ratio (BSR), fleet
maintenance expenses, Cost Per Kilometer (CPK) etc.,
4. The Corporation should make cost-benefit analysis in respect of routes
operated into profitable and unprofitable so that it attains economic
feasibility and also hire more number of hired buses as the cost of operation
of buses is much lower than that of its own fleet.
5. The Government should provide adequate financial support so as to enable
the Corporation to pay off outstanding debts (at least 50 per cent of
outstanding loans), subsidize the Corporation either in the form of cash
subsidy or tax incentives which improves financial viability. In fact, it is
suggested that Government should establish a special institutional set up
for funding the Corporation.
6. Expenses on repair and maintenance can be curtailed by reducing the
number of over age buses besides and by hiring more buses.
7. Manpower should be rationalized by introducing Voluntary Retirement
Schemes (VRS) and by removing the imbalance in the category of drivers
and conductors.
8. Expenses on fuel may be controlled by improving habits of drivers through
regular training courses and by proper maintenance of fleet. Economy
Financial Turn Around of A. P. State Road Transport Corporation – A Case Study ? 1407
related incentives should be offered to the drivers and operational staff
economizing fuel.
CONCLUSION
Turnaround Management has been emerged as one of the critical and toughest
challenges of the Corporate in modern era. The following are the prospective areas
for further research viz.,Financial Dynamics in Turnaround Management - A Study
With Reference To APSRTC, Turnaround Management - Financial Strategies of
Corporate Turnaround - A Case Study, Financial Performance vis-à-vis Financial
Turnaround Strategies - A Study on State Road Transport Undertakings, Financial
Distress and Diagnosis - A Prescriptive Study on APSRTC etc., Devise and develop
strategies on the afore cited dimensions and establish relationship between the
gestalts of cause and strategy is the dire need of future research. There is also a
dire need of policy measures which would help to turnaround the Corporation
and regain financial strength besides increasing revenue, controlling costs and
likely to have a positive impact on the performance of the Corporation.
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