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Why you should Care About it? Strategy is a plan of action designed to achieve a long-term or overall goal or objective. In the context of business, strategy refers to a company's overall plan for achieving success and creating value for its stakeholders. It involves making choices about how the company will allocate its resources, what markets it will compete in, and how it will differentiate itself from competitors. A good strategy typically involves identifying the company's strengths and weaknesses, analyzing the external environment and competition, and setting clear goals and objectives. It also involves developing a clear plan of action that outlines how the company will use its resources, capabilities, and competitive advantages to achieve its goals. Strategy can be based on various dimensions like quality, brand identification, specialization, cost position, pricing policy, vertical integration, technology leadership etc. Out of these dimensions, quality is a key dimension for building on differentiation strategy. But what is quality? On what dimensions does quality depend on are some of the questions we answer here. Quality refers to the degree of excellence or superiority of a product, service, or process. It is a measure of how well a product or service meets or exceeds customer expectations and requirements. Quality can be assessed in terms of various dimensions, including: Performance: How well the product or service performs its intended function. Reliability: The degree to which the product or service is consistent and dependable over time. Durability: The ability of the product or service to withstand wear and tear over time. Features: The additional features or benefits that the product or service provides beyond its basic function. Aesthetics: The appearance, design, and style of the product or service. Serviceability: The ease and speed with which the product or service can be repaired or maintained. Safety: The degree to which the product or service is safe for its intended use. Perceived Quality: The customer's subjective perception of the overall quality of the product or service, which can be influenced by factors such as brand image, reputation, and advertising. Here are some example on dimensions of quality for various products. Dimensions of product quality for luxury cars Luxury cars are designed to meet the highest standards of quality and performance. The dimensions of product quality for luxury cars include the following: 1. Design: Luxury cars are designed to be visually appealing and elegant, with attention paid to even the smallest details. The design should reflect the brand identity and offer a unique and distinctive look that sets it apart from other cars. 2. Performance: Luxury cars should offer exceptional performance, with a powerful and responsive engine, smooth handling, and excellent acceleration. The car should be able to reach high speeds effortlessly and offer a smooth and comfortable ride. 3. Comfort: Luxury cars should provide a comfortable and luxurious driving experience, with spacious and comfortable seating, adjustable seats and steering wheel, and advanced climate control systems that offer both heating and cooling options. 4. Safety: Luxury cars should offer the latest safety features to protect passengers, including advanced airbag systems, anti-lock brakes, traction control, and electronic stability control. Advanced driver assistance systems (ADAS) such as lane departure warning, collision avoidance systems, and blind-spot detection should also be included. 5. Technology: Luxury cars should offer advanced technology features such as touchscreens, infotainment systems, voice control, and a variety of connectivity options such as Bluetooth and Wi-Fi. The car should also have advanced navigation systems and a high-quality sound system. 6. Materials and craftsmanship: Luxury cars should be made with high-quality materials such as leather, wood, and metal, and should be crafted with exceptional attention to detail. The fit and finish should be impeccable, with no gaps or inconsistencies. 7. Brand reputation: Luxury cars should be associated with a brand reputation for quality, reliability, and exclusivity. The brand should have a history of producing high-quality cars that are known for their performance, design, and innovation. By focusing on these dimensions of product quality, luxury car manufacturers can produce cars that meet the high expectations of their customers, differentiate themselves from competitors, and maintain a strong brand reputation. Dimensions of product quality for ice creams The dimensions of product quality for ice creams can vary depending on the target market and the specific product offering, but some common dimensions include: 1. Flavor: Flavor is one of the most important dimensions of product quality for ice cream. A good quality ice cream should have a rich, creamy flavor that is consistent throughout the entire serving. 2. Texture: Texture is also important for ice cream quality, as it can affect the overall enjoyment of the product. A good quality ice cream should be smooth, creamy, and have a consistent texture that is free from ice crystals. 3. Ingredients: High-quality ingredients are essential for a good quality ice cream. The use of fresh, natural ingredients can enhance the flavor and texture of the ice cream, while artificial flavors and preservatives can detract from the overall quality. 4. Packaging: Packaging is an important dimension of product quality for ice cream, as it can affect the product's freshness and appearance. Good quality packaging should be sturdy, easy to open, and keep the ice cream from melting or forming ice crystals. 5. Nutritional Value: Consumers are increasingly concerned about the nutritional value of the products they consume, even when it comes to indulgences like ice cream. Good quality ice cream should have a reasonable calorie and fat content, and may also offer options for low-fat or sugar-free varieties. 6. Brand Reputation: The reputation of the ice cream brand can also be a dimension of product quality, as consumers often choose brands they trust or have positive experiences with. A brand with a strong reputation for quality and flavor can attract and retain loyal customers. By focusing on these dimensions of product quality, ice cream manufacturers can produce products that are appealing to consumers, meet their expectations, and stand out from competitors. We have all heard about dimensions of quality of products, but what about services. Well there are several and new one's can be added. Dimensions of service quality The dimensions of service quality are the key elements that define the quality of a service. There are several dimensions of service quality that have been identified in the research literature. Here are some of the most recognized dimensions of service quality: 1. Tangibles: This refers to the physical appearance and facilities of the service provider. Examples include the appearance of the service personnel, the equipment used to deliver the service, and the physical layout and cleanliness of the facilities. 2. Reliability: This refers to the ability of the service provider to perform the promised service dependably and accurately. It includes aspects such as promptness, consistency, and the ability to meet customer expectations. 3. Responsiveness: Responsiveness refers to the willingness and ability of the service provider to provide prompt and helpful service to its customers. This includes aspects such as the speed of service, the willingness to help, and the ability to answer questions and provide information. 4. Assurance: This refers to the knowledge and professionalism of the service personnel, and their ability to inspire trust and confidence in the customer. It includes aspects such as the expertise of the service personnel, their ability to communicate effectively, and the security and safety of the service environment. 5. Empathy: This refers to the ability of the service provider to understand and respond to the individual needs and preferences of each customer. This includes aspects such as the ability to personalize service, the willingness to listen and understand, and the ability to provide individualized attention. These dimensions of service quality are often used as a framework for assessing and improving the quality of services in various industries, such as healthcare, hospitality, and financial services. By focusing on these dimensions, service providers can identify areas where they need to improve their service quality and enhance the overall customer experience. Here are some example on dimensions of quality for various services. Dimensions of service quality for Oil and gas non-destructive inspection Here are some possible dimensions of service quality for oil and gas non-destructive inspection: 1. Technical competence: This refers to the knowledge and expertise of the inspection personnel in non-destructive testing (NDT) methods and techniques, as well as their ability to accurately interpret inspection results. 2. Equipment quality: This refers to the quality and reliability of the inspection equipment used, such as ultrasonic testing equipment, X-ray machines, and magnetic particle inspection tools. 3. Turnaround time: This refers to the speed and efficiency with which the inspection service is performed and the inspection results are delivered. Customers in the oil and gas industry often require fast turnaround times to minimize production downtime. 4. Safety: Safety is a critical aspect of inspection services in the oil and gas industry. Inspection personnel should follow industry safety guidelines and ensure that the inspection process does not pose any safety risks to workers or the environment. 5. Communication: Effective communication between the inspection service provider and the customer is essential for ensuring that the inspection service meets the customer's needs and expectations. This includes communication about the scope of the inspection, the inspection results, and any necessary follow-up actions. 6. Cost-effectiveness: Oil and gas companies are often cost-sensitive, and they seek inspection services that are both effective and cost-efficient. Service providers should strive to offer competitive pricing while maintaining high levels of service quality. 7. Flexibility: Flexibility refers to the ability of the inspection service provider to accommodate the unique needs and requirements of each customer. This includes the ability to customize inspection procedures and to adapt to changes in customer requirements or schedules. By focusing on these dimensions of service quality, oil and gas non-destructive inspection service providers can deliver high-quality, reliable, and cost-effective inspection services to their customers. Dimensions of service quality for automobiles The dimensions of service quality for automobiles are essential to ensure customer satisfaction and loyalty. Here are some possible dimensions of service quality for automobiles: 1. Timeliness: Customers expect prompt service when they bring their vehicles in for maintenance or repairs. Service providers must adhere to scheduled appointment times and minimize wait times for customers. 2. Technical Competence: Service providers should have the knowledge and expertise to accurately diagnose and repair issues with automobiles. This includes understanding the latest technologies, such as hybrid and electric vehicles. 3. Communication: Effective communication between the service provider and the customer is essential for ensuring that the customer's needs and expectations are met. This includes clear explanations of the service required, estimated repair times, and costs. 4. Convenience: Customers expect service providers to offer convenient services that fit into their busy schedules. This includes the availability of online scheduling, shuttle service, loaner vehicles, and convenient hours of operation. 5. Quality of Parts: Customers expect high-quality replacement parts and components to be used during repairs. Service providers should use OEM parts and provide a warranty for the parts and labor. 6. Facilities and Amenities: Customers expect comfortable waiting areas with amenities such as Wi-Fi, refreshments, and clean restrooms. 7. Price and Value: Customers expect fair pricing for the services provided. Service providers should be transparent with their pricing and provide value-added services such as regular maintenance packages and free inspections. By focusing on these dimensions of service quality for automobiles, service providers can build a loyal customer base, differentiate themselves from competitors, and enhance customer satisfaction. Dimensions of service quality of remotely operated vehicles The dimensions of service quality for remotely operated vehicles (ROVs) are essential to ensure customer satisfaction and loyalty. Here are some possible dimensions of service quality for ROVs: 1. Technical Competence: Service providers should have the knowledge and expertise to operate, maintain, and repair ROVs. This includes understanding the latest technologies, such as underwater sensors and imaging systems. 2. Reliability: Customers expect ROVs to be reliable and consistent in their performance, with minimal defects or failures. Service providers should ensure that ROVs are well-maintained and tested before use. 3. Communication: Effective communication between the service provider and the customer is essential for ensuring that the customer's needs and expectations are met. This includes clear explanations of the ROV's capabilities, limitations, and expected outcomes of the inspection or survey. 4. Timeliness: Customers expect prompt service when ROVs are required for inspection or survey. Service providers must adhere to scheduled appointment times and minimize wait times for customers. 5. Quality of Data: Customers expect high-quality data and images to be collected during ROV inspections and surveys. Service providers should use high-quality sensors and imaging systems and provide accurate and detailed reports of the data collected. 6. Safety: ROVs can be used in hazardous environments, and safety is a critical concern for both the customer and service provider. Service providers should adhere to strict safety protocols and provide adequate safety equipment. 7. Price and Value: Customers expect fair pricing for ROV services provided. Service providers should be transparent with their pricing and provide value-added services such as data analysis and report generation. By focusing on these dimensions of service quality for ROVs, service providers can build a loyal customer base, differentiate themselves from competitors, and enhance customer satisfaction. Dimensions of service quality for luxury cars The dimensions of service quality for luxury cars are essential to ensure customer satisfaction and loyalty. Here are some possible dimensions of service quality for luxury cars: 1. Personalization: Luxury car customers expect a personalized experience that reflects their unique tastes and preferences. Service providers should offer personalized services such as customized interior and exterior options, and concierge services that cater to the individual needs of the customer. 2. Technical Competence: Luxury car customers expect service providers to have the technical expertise to maintain and repair high-end luxury cars. This includes understanding the latest technologies and high-performance engines. 3. Communication: Effective communication between the service provider and the customer is essential for ensuring that the customer's needs and expectations are met. This includes clear explanations of the services required, estimated repair times, and costs. 4. Timeliness: Luxury car customers expect prompt service when they bring their vehicles in for maintenance or repairs. Service providers must adhere to scheduled appointment times and minimize wait times for customers. 5. Quality of Parts: Luxury car customers expect high-quality replacement parts and components to be used during repairs. Service providers should use OEM parts and provide a warranty for the parts and labor. 6. Facilities and Amenities: Luxury car customers expect comfortable waiting areas with amenities such as Wi-Fi, refreshments, and clean restrooms. Service providers should also offer complementary services such as car washes and detailing. 7. Price and Value: Luxury car customers expect premium pricing for the services provided. Service providers should provide transparent pricing and demonstrate the value of the services through the use of high-quality parts, personalized services, and exceptional customer service.

An attitude scale is a type of survey used to measure people's attitudes or opinions towards a particular topic or concept. It typically consists of a series of statements that are rated on a scale, ranging from strongly agree to strongly disagree. Attitude scales are used in a variety of fields, including psychology, marketing, and social sciences, to understand people's opinions and beliefs about different issues. They can be used to explore topics such as politics, social issues, consumer behavior, or environmental concerns. There are different types of attitude scales, such as the Likert scale, Thurstone scale, semantic differential scale, and the Guttman scale, each with its unique characteristics and methods of analysis. These scales vary in terms of the number of response options, the degree of agreement or disagreement, and the way the scale is constructed. To analyze the data from an attitude scale, the responses are typically tallied and averaged to create an overall score or mean score for each statement or question. The results are then analyzed to identify patterns and trends, such as the proportion of respondents who agree or disagree with a statement, and to draw conclusions about the attitudes and opinions of the respondents towards the topic being surveyed. Attitude scales can be a valuable tool for understanding people's opinions and beliefs about different issues. They can help researchers and practitioners identify areas of consensus or disagreement, track changes in attitudes over time, and develop strategies for addressing issues or influencing people's behavior. Likert Scale A Likert scale is a type of rating scale used in survey research to measure attitudes, beliefs, or opinions. It typically consists of a series of statements, with respondents asked to indicate their level of agreement or disagreement with each statement. The Likert scale is named after its inventor, psychologist Rensis Likert, who first described the technique in the 1930s. It has since become a widely used tool in social science research and market research. A typical Likert scale question might ask respondents to rate their agreement with a statement such as "I feel confident in my ability to succeed in my job" on a scale of 1 to 5, where 1 indicates strong disagreement and 5 indicates strong agreement. Respondents may also be offered a neutral option, such as "neither agree nor disagree." Likert scale data can be analyzed in various ways, including calculating means or medians for each item, examining the distribution of responses, and using statistical tests to assess the significance of differences between groups. It is important to note that Likert scales produce ordinal data, rather than interval or ratio data, which may affect the type of statistical analysis that can be performed on the data. Use of Likert scale in marketing The Likert scale is a popular research tool used in marketing to measure people's attitudes, opinions, and preferences towards products, services, and brands. The Likert scale can help marketers gain insights into consumer behavior and make informed decisions about marketing strategies. Here are some ways the Likert scale can be used in marketing research: 1. Measuring customer satisfaction: A Likert scale can be used to measure customer satisfaction with a product or service by asking respondents to rate their level of satisfaction on a scale from "very satisfied" to "very dissatisfied". Marketers can use this information to identify areas for improvement and to develop strategies to increase customer satisfaction. 2. Measuring brand perception: A Likert scale can be used to measure consumers' perceptions of a brand by asking them to rate various aspects of the brand, such as quality, reliability, and innovation. Marketers can use this information to identify areas of strength and weakness and to develop strategies to improve the brand's image. 3. Assessing purchase intent: A Likert scale can be used to measure consumers' likelihood to purchase a product or service by asking them to rate their purchase intent on a scale from "very likely" to "very unlikely". Marketers can use this information to identify potential customers and to develop strategies to increase sales. 4. Measuring advertising effectiveness: A Likert scale can be used to measure the effectiveness of advertising by asking respondents to rate their level of agreement with various statements about the ad, such as "the ad was memorable" or "the ad was persuasive". Marketers can use this information to optimize their advertising campaigns and to develop more effective messaging. Overall, the Likert scale is a versatile tool that can be used in a wide range of marketing research applications to gain insights into consumer behavior and attitudes. How to create Likert Scale Survey Questions? Creating Likert scale survey questions involves several steps. Below are some guidelines that can help you create effective Likert scale survey questions: 1. Determine the topic: Decide on the topic you want to explore with your survey. It could be about attitudes, opinions, beliefs, behaviors, or other topics. 2. Define the construct: Identify the specific construct or concept you want to measure with your Likert scale. For example, if you want to measure attitudes towards a particular brand, the construct could be brand attitude. 3. Develop the statement: Write a clear and concise statement that reflects the construct you want to measure. Make sure the statement is easily understandable by your target audience. 4. Choose the response scale: Select an appropriate response scale for your Likert scale question. Common response scales include 5-point or 7-point scales, with options ranging from "strongly agree" to "strongly disagree" or "very satisfied" to "very dissatisfied." 5. Use balanced response options: Ensure that the response options on your Likert scale are balanced and cover the entire range of possible responses. Avoid using neutral response options as they can lead to uninformative data. 6. Avoid double-barreled questions: Do not include more than one construct in your Likert scale question. This can confuse respondents and lead to unreliable data. 7. Pre-test the questions: Test your Likert scale questions with a sample of your target audience to ensure that they are easily understandable and do not cause confusion. Example of a Likert scale survey question: Topic: Attitudes towards recycling Construct: Recycling behavior Statement: I recycle regularly Response scale: 5-point scale ranging from "strongly agree" to "strongly disagree" Response options: Strongly agree, agree, neutral, disagree, strongly disagree By following these guidelines, you can create effective Likert scale survey questions that provide useful insights into your target audience's attitudes, opinions, beliefs, or behaviors. How to do Likert Scale Analysis? Likert scale analysis involves analyzing the data collected from a Likert scale survey to gain insights into the attitudes, beliefs, or opinions of the respondents. Here are some steps to follow when conducting a Likert scale analysis: 1. Clean and prepare data: Clean the data by removing any incomplete or invalid responses, and ensure that the data is in a format that can be analyzed using statistical software. 2. Calculate descriptive statistics: Calculate descriptive statistics such as the mean, median, and mode for each item on the Likert scale. This will help you understand the central tendency and dispersion of the responses. 3. Assess the reliability of scale: Use statistical tests such as Cronbach's alpha to assess the reliability of the Likert scale. This will help you determine whether the items on the scale are measuring the same construct consistently. 4. Conduct inferential statistics: Use inferential statistics such as t-tests or ANOVA to analyze differences between groups, such as gender or age, and to identify any significant relationships between the items on the Likert scale. 5. Visualize the data: Use graphs and charts to visualize the data and make it easier to interpret. For example, you could create a bar chart or pie chart to show the distribution of responses for each item on the Likert scale. 6. Interpret the results: Finally, interpret the results of your analysis and draw conclusions about the attitudes, beliefs, or opinions of the respondents. Consider the descriptive and inferential statistics, as well as any patterns or trends in the data. By following these steps, you can conduct a thorough and insightful analysis of the data collected from a Likert scale survey. It is important to note that Likert scale data is ordinal, meaning that the responses can be ranked, but not treated as continuous variables, and that appropriate statistical tests should be used when analyzing the data. Likert scale analysis As mentioned, Likert scale is a commonly used survey response scale that measures the degree of agreement or disagreement with a statement. Typically, a Likert scale ranges from 1 to 5 or 1 to 7, with 1 indicating strong disagreement and 5 or 7 indicating strong agreement. To analyze data from a Likert scale survey, the following steps can be taken: 1. Calculate the mean score: To calculate the mean score for each question, add up all of the responses for that question and divide by the number of respondents. For example, if 100 people responded to a question on a 5-point Likert scale and the total score was 400, the mean score would be 4.0. 2. Calculate the standard deviation: The standard deviation is a measure of the variability of the responses. A high standard deviation indicates that the responses are spread out over a wide range, while a low standard deviation indicates that the responses are clustered together. 3. Identify trends: Look for trends in the data. For example, if a large proportion of respondents strongly agree or strongly disagree with a statement, this may indicate that the statement is particularly important to them. 4. Compare results: Compare the results for different questions or groups of respondents to identify patterns and trends. This can help to identify areas where action may be needed. 5. Interpret the data: Once the data has been analyzed, it's important to interpret the results in the context of the survey objectives. What do the results tell you about the attitudes and opinions of your respondents? What actions can you take based on the results? Overall, the Likert scale is a useful tool for measuring attitudes and opinions, and can provide valuable insights for businesses and organizations. However, it's important to use the scale appropriately and to analyze the data carefully to ensure accurate and meaningful results. How to do Likert Scale Analysis for single question example? Here's an example of how to conduct a Likert scale analysis for a single question: Question: On a scale of 1 to 5, how satisfied are you with your current job? Response options: 1 - Very dissatisfied 2 - Somewhat dissatisfied 3 - Neutral 4 - Somewhat satisfied 5 - Very satisfied 1. Prepare data: Assume that you have collected 100 responses to this question and have cleaned the data. 2. Calculate descriptive statistics: Calculate the mean, median, and mode for the responses to the single Likert scale question. Assuming the following distribution of responses: 1 - Very dissatisfied - 5 responses 2 - Somewhat dissatisfied - 20 responses 3 - Neutral - 30 responses 4 - Somewhat satisfied - 35 responses 5 - Very satisfied - 10 responses Mean would be: (5 x 1 + 20 x 2 + 30 x 3 + 35 x 4 + 10 x 5) / 100 = 3.2 Median would be: 4 Mode would be: 4 3. Calculate distribution of responses: Calculate the frequency and proportion of responses to each option. 4. Visualize the data: Create a bar chart to visualize the distribution of responses 5. Interpret the results: Based on the analysis, the mean response indicates a moderate level of satisfaction with the job, while the median and mode indicate a higher level of satisfaction. The bar chart shows that the majority of respondents were somewhat satisfied or neutral, with a smaller percentage of respondents indicating higher or lower levels of satisfaction By following these steps, you can conduct a basic analysis of the data collected from a single Likert scale question. It's important to note that this analysis is limited in scope and may not provide a comprehensive understanding of the attitudes, beliefs, or opinions of the respondents. How to do Likert Scale Analysis for multiple question example? Here's an example of how to conduct a Likert scale analysis for multiple questions: 1. Question 1: On a scale of 1 to 5, how satisfied are you with quality of customer service you received? 2. Question 2: On a scale of 1 to 5, how satisfied are you with price of the product or service? 3. Question 3: On a scale of 1 to 5, how likely are you to recommend our product or service to others? Response options: 1 - Very dissatisfied 2 - Somewhat dissatisfied 3 - Neutral 4 - Somewhat satisfied 5 - Very satisfied The same process as mentioned above will be used here:: 1. Prepare the data for each question: Assume that you have collected 100 responses to these questions and have cleaned the data. 2. Calculate descriptive statistics for each question: Calculate the mean, median, and mode for the responses to each of the Likert scale questions. 3. Calculate distribution of responses for each question 4. Visualize the data: Create bar charts to visualize the distribution of responses for each question. 5. Conduct a factor analysis: Conduct a factor analysis to group questions into factors that measure similar constructs. This will help you identify underlying factors that influence employee satisfaction and identify areas for improvement. 6. Interpret the results: Finally, interpret the results of your analysis and draw conclusions about the attitudes, beliefs, or opinions of the respondents regarding employee satisfaction. Consider the descriptive statistics, the distribution of responses, and the factor analysis when interpreting the results. By following these steps, you can conduct a comprehensive analysis of the data collected from a Likert scale questionnaire on employee satisfaction. It's important to note that this analysis is just an example, and the steps may vary depending on the research question, the number of questions, and the sample size. Factor analysis Factor analysis is a statistical method used to identify underlying factors or dimensions that explain the correlations among a set of variables. In the context of Likert scale analysis for multiple question examples, factor analysis can be used to group together questions that measure similar constructs or dimensions of a larger concept. For example, let's say a survey was conducted to measure customer satisfaction with a particular restaurant. The survey includes several Likert scale questions, such as "The food was delicious," "The service was prompt and courteous," "The atmosphere was pleasant and welcoming," and so on. These questions can be seen as measuring different dimensions of the overall concept of customer satisfaction with the restaurant. Factor analysis can be used to group these questions together based on how they are related to one another. The goal is to identify a smaller set of underlying factors or dimensions that explain the correlations among the questions. For instance, the questions about the food, service, and atmosphere might be found to be highly correlated with each other, suggesting that they all measure a similar dimension of customer satisfaction. The factor analysis might then group these questions together into a single factor or dimension of customer satisfaction. Once the questions have been grouped together based on the results of the factor analysis, further analysis can be performed to examine the relationships between the factors and other variables of interest. For example, the factor analysis might reveal that the dimension of customer satisfaction related to the food is particularly important in predicting overall customer satisfaction with the restaurant. This information can then be used to prioritize areas for improvement in the restaurant, such as the quality of the food. Overall, factor analysis is a useful technique for identifying the underlying dimensions of a concept and grouping together questions that measure similar constructs. This can help to simplify the analysis of survey data and provide valuable insights into the factors that drive customer satisfaction, employee engagement, or other important outcomes. Another example of Factor Analysis for Likert scale multiple questions - customer service quality Let's say a survey was conducted to measure the quality of customer service provided by a company. The survey included several Likert scale questions such as "The staff was friendly and approachable," "The staff was knowledgeable and helpful," "The company resolved my issue quickly," and "I was satisfied with the service I received." These questions can be seen as measuring different dimensions of the overall concept of customer service quality. Factor analysis can be used to group these questions together based on how they are related to one another. The goal is to identify a smaller set of underlying factors or dimensions that explain the correlations among the questions. For instance, the questions about staff friendliness and approachability, staff knowledge and helpfulness, and satisfaction with service received might be found to be highly correlated with each other, suggesting that they all measure a similar dimension of customer service quality. The factor analysis might then group these questions together into a single factor or dimension of customer service quality. Once the questions have been grouped together based on the results of the factor analysis, further analysis can be performed to examine the relationships between the factors and other variables of interest. For example, the factor analysis might reveal that the dimension of customer service quality related to staff friendliness and approachability is particularly important in predicting overall customer satisfaction with the company. This information can then be used to prioritize areas for improvement in customer service, such as staff training in communication and interpersonal skills. Overall, factor analysis is a useful technique for identifying the underlying dimensions of a concept and grouping together questions that measure similar constructs. This can help to simplify the analysis of survey data and provide valuable insights into the factors that drive customer satisfaction and loyalty. Likert scale question for understanding dimensions of product quality for ice creams example analysis Assuming that a Likert scale survey was conducted with the following questions regarding the dimensions of product quality for ice creams: The flavor of the ice cream was rich and delicious. The texture of the ice cream was smooth and creamy. The ingredients used in the ice cream were of high quality. The packaging of the ice cream was attractive and appealing. The ice cream had a reasonable nutritional value. The brand of the ice cream has a reputation for high quality. The analysis of the survey data can be performed using statistical software or spreadsheet programs. The data collected can be summarized by calculating the mean, standard deviation, and frequency distribution of responses for each question. A higher mean score indicates a more positive response to the question, while a higher standard deviation indicates greater variability in the responses. For example, the survey data might reveal that customers rated the flavor of the ice cream most highly, with a mean score of 4.5 out of 5, while the nutritional value of the ice cream received a lower mean score of 3.5 out of 5. The analysis might also show that there was a higher level of agreement among respondents regarding the smoothness and creaminess of the texture of the ice cream, as indicated by a lower standard deviation in responses to that question. Likert analysis customer satisfaction survey for oil and gas inspection services A Likert analysis of a customer satisfaction survey for oil and gas inspection services can provide valuable insights into the opinions and attitudes of customers towards the services provided. Here's a general overview of the process: 1. Identify the survey questions: Start by identifying the survey questions that relate to customer satisfaction with the oil and gas inspection services. These questions should be designed to elicit responses on a 5-point Likert scale, with response options ranging from "strongly disagree" to "strongly agree". Example questions could include: I am satisfied with the quality of the inspection services provided. The inspection services were performed in a timely and efficient manner. The inspection team was knowledgeable and professional. I would recommend this inspection service to others. 2. Collect and analyze the data: Once the survey has been conducted and responses have been collected, analyze the data using a spreadsheet or statistical software. Calculate the mean score for each question by summing the scores for each response option and dividing by the number of respondents. 3. Interpret the results: Interpret the results of the analysis by examining the mean scores for each question. A mean score of 4 or higher indicates a high level of satisfaction, while a mean score of 2.5 or lower indicates a low level of satisfaction. It's also important to examine the standard deviation to understand the variability in responses. 4. Identify areas for improvement: Use the results of the analysis to identify areas for improvement in the inspection services provided. For example, if respondents consistently rate the timeliness of the inspections low, consider ways to improve efficiency, such as streamlining the inspection process or hiring additional staff. 5. Act: Once areas for improvement have been identified, take action to address them. Develop a plan to implement changes and monitor the results over time to ensure that customer satisfaction improves. By using a Likert analysis of a customer satisfaction survey for oil and gas inspection services, it is possible to gain insights into areas where the services can be improved and to take action to address customer concerns. To conduct a Likert analysis of a customer satisfaction survey for oil and gas inspection services, you would start by designing the survey questions using a Likert scale format. For example, you might ask respondents to rate their level of satisfaction with various aspects of the inspection services on a scale from 1 to 5, where 1 represents "very dissatisfied" and 5 represents "very satisfied". Some possible survey questions could be: How satisfied are you with the thoroughness of our inspection services? How satisfied are you with the responsiveness of our inspectors to your requests? How satisfied are you with the clarity and completeness of our inspection reports? How satisfied are you with the overall quality of our inspection services? After administering the survey and collecting the responses, you would calculate the mean score for each question. For instance, if 50 respondents rated the thoroughness of the inspection services with a score of 4 out of 5, the mean score would be (50 x 4) / 50 = 4.0. You would then examine the mean scores for each question to identify areas of strength and weakness in the inspection services. For example, if the mean score for the overall quality of the inspection services is 3.5, this may indicate a need for improvement in certain areas. On the other hand, if the mean score for the responsiveness of the inspectors is 4.5, this may suggest that this aspect of the inspection services is a strength. You may also want to calculate the standard deviation of the scores for each question to get a sense of the variability of responses. This can help you identify areas where there is more agreement or disagreement among respondents. Overall, a Likert analysis of a customer satisfaction survey for oil and gas inspection services can provide valuable insights into the strengths and weaknesses of the inspection services and help identify areas for improvement.

To understand the impact of new pricing guidelines on Oil and Gas producers, City Gas Distribution companies and customers of CNG and PNG (Domestic) we need to understand production, consumption scenarios, pipline infrastrcture, pricing regime followed in India before the announcement of new pricing guidelines and future price scenarios. India natural gas production and consumption scenario As per Petroleum Planning and Analysis Cell (PPAC) data, LNG consumption as a percentage of Total Consumption (Net Production + LNG imports) was 72% in 2011-12 and fell to 47% in 2019-2020 but has started to rise again as Net domestic production (Gross Production - Flaring) has started to fall. Trend of Natural Gas Consumption in India (including internal consumption) (MMSCM) *For 2022-23, data is available till February 2023 only Source: PPAC Trend of LNG share as percentage of Net Production and LNG Imports Source: PPAC In case of domestic production India gets its gas from nomination fields, Pre-NELP fields (Discovered and Exploration fields), NELP fields, Coal Bed Methane fields and discovered small fields. We produce natural gas from both onshore and offshore fields - Shallow water, Deepwater and Ultradeep water. To add to oil and gas reserves, India embarked on the Hydrocarbon Exploration and Licensing Policy (HELP) and Open Acreage Licensing Programme (OALP) Offshore Bid Round under it from July 1, 2017. Production of Natural Gas in India is falling since 2011. Production from Private and JV companies have been consistently falling with net production almost getting halfed in 2021-22 from 2011 levels. In fact it has fallen to almost one-fifths in 2018-2019 and 2019-2020 fiscal years. Trend of Natural Gas Production in India (MMSCM) Source: PPAC Trend of Natural Gas Production in India (MMSCM) - Onshore and Offshore Source: PPAC It can be observed net production from Mumbai High + Eastern Offshore has fallen continuously in last three year not only due to Covid-19 but also because of old and aging fields of ONGC which contributes 71% to India's production, and lack of investment by private players and gap in auctioning of oil and gas field between NELP and HELP policy. Gas infrastructure in India Source: PNGRB Pricing of Natural Gas in India In 2012, Government of India constituted a Committee on Gas Pricing under Chairmanship of Dr. C Rangarajan, the then Chairman of the Economic Advisory Council to Prime Minister to investigate the Production Sharing Contract mechanism to determine basis of formula for gas pricing from domestically produced oil and gas fields. Thereafter, the Government notified the "Domestic Natural Gas Pricing Guidelines", 2014 on January 10, 2014, setting out the formula for the price of domestically produced natural gas, based on the recommendations of the Committee. The notification was to be implemented with effect from April 1, 2014, but Election Commission deferred the notification of Gas Price till completion of 2014 general elections. On August 13, 2014, Ministry of Petroleum and Natural Gas constituted a committee to re-look into the pricing mechanism. As per the report of the committee, different pricing regimes were followed for natural gas produced in India which come from Nomination fields, Pre-NELP fields (Discovered and Exploration fields), NELP fields, Coal Bed Methane fields and discovered small fields. These price regimes followed in India were Administered Pricing Mechanism (APM) and Non-Administered Pricing Mechanism. Administrated Pricing Mechanism (APM) Gas produced from existing or nominated blocks of National Oil Companies (NOC) i.e. Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) were priced at APM rates. Government fixed the price at US$ 4.2 per mmbtu inclusive of royalty except the Northeast, where it was US$ 2.52 per mmbtu (60% of APM price elsewhere). The balance 40% was paid as subsidy to NOC's from government budget. The Committee noted" Owing to existing supply linkages and operational requirements, it would happen that customers entitled for APM gas physically get market priced gas and vice versa. It was decided to have a Gas Pool Account mechanism with inflows coming from sale of APM gas to consumers not entitled for APM gas at market price and outflow being for purchase of non-APM gas for supply to customers entitled for gas at APM price." Non-APM Gas produced by NOCs from Nominated Fields NGC and OIL were in principle free to charge a market-determined price for gas produced from new fields in their existing nominated blocks. Government issued guidelines for commercial utilization of non-APM gas produced by NOCs from such new fields in their nominated blocks in the four zones. These zones are: Western & Northern Zones (covering Maharashtra, Gujarat and other States covered by HVJ/DVPL viz Rajasthan, Madhya Pradesh, Uttar Pradesh, Haryana and Delhi) Southern Zone - KG Basin Southern Zone - Cauvery Basin North-East Identified onshore fields in Gujarat and Rajasthan Pre-NELP Gas Some of the blocks discovered by NOCs were auctioned under Production Sharing Contract (PSC) to private sector. These PSC were Panna-Mukta, Tapti (PMT) and Ravva. The entire gas was sold to GAIL as per the pricing formula specified in PSC. The price for these PSCs were discovered through limited tender and GAIL matched the highest price. In case of PMT gas fields, the price formula of gas was linked to international traded fuel oil basket with a floor and ceiling. Pricing under Small-sized discovered fields & Pre-NELP Exploratory Blocks Sale of gas from 24 small sized discovering fields and 28 pre-NELP blocks were based on market prices discovered through arm's length principle for private E&P companies in case if it is not sold to GAIL and for others pricing formula and prices did not need government's approval. New Exploration and Licensing Policy (NELP) Under the NELP Round I, gas pricing was based on arm's length prices through open bidding process but shall be approved by the govenment prior to sale to consumers. Gas pricing was formally approved only in case of Reliance's KG Basin in 2013-14. RIL submitted a proposal of price formula based on international crude prices with a floor and ceiling price and constant factor. The price formula finally approved by the Empowered Group of Ministers (EGoM) constituted on August 13, 2007was: Selling Price (US$ / mmbtu) = 2.5 + (Average Brent Price - 25)^0.15 with a ceiling of crude oil price of US$ 60 per barrel and a floor of US$ 25 per barrel. The price was based in Net Heating Value/NHV basis) at the delivery point at Kakinada. For other fields under NELP, the pricing was based on arm's length basis only after approval of price basis / formula by government. Pricing for Coal Bed Methane (CBM) blocks The sale and pricing of Natural gas from CBM Blocks is defined under Article 18 of CBM Contract. As per Article 18.1 of the Contract, the Contractor shall have freedom to sell CBM at arm's length prices in domestic market through open bidding process. Blocks offered under various regimes Summary of Gas Prices under different regimes in India in 2014 Source: Report of the Committee on Gas Pricing - 2014 New Domestic Natural Gas Pricing Guidelines, 2014 On October 1, 2014, Government of India notified "New Domestic Natural Gas Pricing Guidelines, 2014" vide Gazette notification No. 22011/3/2012-ONG.D.V. As per the guidelines, natural gas prices in India were fixed for 6 months period based on volume weighted prices prevailing at three international gas trading hubs viz Henry hubs in US, National Balancing Point in UK, Natural Gas Exchange (NGX) in Alberta, Canada and Russia. The formula to arrive at the price was based on volume weighted average prevailing at four natural gas hubs mentioned above. Hub prices were taken for the trailing 4 quarters, with a lag of one quarter. The first price was based on prices prevailing in the three hubs and Russia between July 1, 2013, and June 30, 2014, and prices would come in effect from November 1, 2014, and were valid till March 31, 2015. Thereafter, they were revised for the period April 1, 2015, to September 30, 2015, on the basis of prices prevalent between January 1, 2014, and December 31, 2014, with a lag of a quarter (January 1, 2015, to March 31, 2015) and so on. Wellhead Gas Price = Annual Consumption Volume US and Mexico * Average Priceat Henry Hub + Annual Consumption Volume in Canada * Average Alberta Hub + Annual Consumption Volume in Russia + Annual Consumption Volume in European Union* Average Price at National Balancing Point (UK) Divided by: Annual Consumption Volume US and Mexico + Annual Consumption Volume in Canada + Annual Consumption Volume in Russia + Annual Consumption Volume in European Union Less: US$ 0.50 / MMBtu towards transportation and treatment from each of three hubs and Russian Price Wellhead prices refer to price of gas receivable by producers of gas at contract area / lease area from buyer of gas. In case of on-land blocks, it is price receivable by producer in contract area. In case of offshore blocks, if the gas is processed and sold in the offshore contract area, the price receivable at offshore will be the wellhead price. If the gas is brought to landfall point for processing and is sold at landfall point, the facilities located in the landfall point will be considered part of the contract area and the price receivable at landfall point will be the wellhead price. The guidelines noted that in North Eastern Region (NER), 40% subsidy would continue to be available for gas supplied by ONGC/OIL. However, as private operators are also likely to start production of gas in NER, and would be operating in the same market, this subsidy would also be available to them to incentivize exploration and production. Price determined under these guidelines would be on GCV basis. The prices are based on Gross Calorific Value which is the quantity of heat produced by its combustion – at constant pressure and under “normal” (standard) conditions (i.e. to 0 degree Celsius and under a pressure of 1,013 mbar. After 2014, Government of India, from time-to-time, notified changes to prices of natural gas based on New Domestic Natural Gas Pricing Guidelines. Following are some of the recent notifications: Source: Ministry of Petroleum and Natural Gas India On April 6, 2023, Government of India announced new domestic natural price for the period of April 1, 2023, to April 7, 2023. Two notifications were announced are as follows: Source: Ministry of Petroleum and Natural Gas India As per notification made by PPAC vide No. PPAC/Gas Pricing/April, 2023, dated April 7, 2023, in accordance with Para 8 of the "New Domestic Natural Gas Pricing Guidelines, 2014, issued by MoPNG, Government of India vide letter No. O-22013/27/2012-ONG-D-V dated October 25, 2014, and in furtherance to PPAC Notification No. PPAC/Gas Pricing/April 2023-September, 2023 dated March 31, 2023 read with Para 3 of MoPNG;s Notification No. L-12015/1/2022-GP-II dated April 7, 20123, price of domestic natural gas for the period April 1, 2023 to April 7, 2023 was notified as US$ 9.16 per MMBtu on Gross Calorific Value (GCV) basis. As per another notification made by PPAC, with reference to MoPNG notification No. L-12015/1/2022-GP-II, APM price of domestic natural gas for the period April 8, 2023 to April 30, 2023 is notified as US$ 7.92 per MMBtu on GCV basis. Further in accordance with Para 4 of the said notfication the gas produced by ONGC/OIL under APM price mechanism from nomination fields will be subject to a ceiling of US$ 6.50 per MMBtu on GCV basis. However, Gas produced from new wells or well interventions in the nomination fields of ONGC & OIL, would be allowed a premium of 20% over the APM price. PIB press release mentions that new formula to calculate natural gas prices is for nomination fields of ONGC/OIL, New Exploration Licensing Policy (NELP) blocks and pre-NELP blocks, where Production Sharing Contract (PSC) provides for Government's approval of prices. According to the announcement, prices of natural gas shall be 10% of the monthly average of Indian Crude Basket and shall be notified on a monthly basis rather than 6 months as per earlier guidelines for these fields. Prices are appliable to gas produced by ONGC & OIL from their nomination blocks, which is priced under APM mechanism shall be subject to a floor and a ceiling. The floor is US$ 4 per MMBtu. Further, as per the announcement, there shall be no revision in the ceiling price for two years, after which the cap will increase by 25 cents per year. Further, as per MoPNG, Government of India, notification No.O -22013/27/2012-ONG-D-V (Vol-II) dated 21.03.2016 marketing including pricing freedom for gas being prodµced from discoveries in Deepwater and High Pressure-High Temperature areas, gas price ceiling for period 1st April, 2023 - 30th September, 2023 is notified as US$ 12.12/MMBTU on Gross Calorific Value (GCV) basis was allowed. Will new pricing guidelines help CGD companies? To anayse the impact of new pricing policies on CGD companies we need understand the sources of natural gas for these companies, their delivered prices, allocation of domestic gas to CGD companies, demand projections of natural gas and proproportion of cheap or high priced natural gas in the proportion to total supply as natural gas is key input cost for CGD companies. A. Allocation of Domestic Gas to CGD companies As per MoPNG, CGD companies are allocated natural gas via notification by MoPNG under "Guidelines for domestic gas supply to Compressed Natural Gas (CNG) and Piped Natural GAS (PNG) segments of City Gas DIstribution network" under MoPNG circular No: L-16016/3/2020-GP - I - Part (1). As per revised guidelines issued on February 3, 2014: GAIL would supply domestic gas to CGD entities for CNG and PNG (Domestic) at uniform base price. However, delivered price of domestic gas to individual CGD entities may vary on account of: a. Transportation Charges and b. Local taxes and duties Additional allocation/supply above average consumption of 6 months by CGD for CNG and PNG (Domestic) to supplied by pro rata cut of all customers except NELP of non-priority sectors decided by Central Government To protect interest of small customers i.e., those having allocation of domestic gas up to 50,000 Standard Cubic Meter per day (scmd), present level of supply, up to a maximum of 5000 scmd, shall be kept out of purview subject to operational imperatives. Present level of supply for this purpose would be actual average consumption in 6 months. To operationalize allocation/supply arrangements all concerned entities to facilitate gas swapping arrangements as per guidelines dated March 14, 2012, issued by MoPNG. While efforts are being done to meet 100% requirements of CGD entities but gap in consumption and allocation may be meet through RLNG. This methodology will be reviewed quarterly by MoPNG as per demand-supply scenario of natural gas. These guidelines are applicable to CGD entities in NE region (Assam Gas Company and TNGCL) This guideline was further amended on August 20, 2014. As per MoPNG circular the following was decided: Allocation exercise will be undertaken by GAIL after end of every six months. PPAC will within completion of 20 days of a half year submit average consumption by each CGD entity. Further to meet fluctuation in demand of CGD sector GAIL is authorized to supply additional 10% domestic gas over and above 100% requirement for CNG and PNG (Domestic) calculated as per last half yearly consumption. GAIL to divert domestic gas except NELP gas from non-priority sector by applying pro-rata cuts to meet CNG and PNG (Domestic) requirements. Pro rata cuts shall not be applied on supply up to a maximum of 5000 scmd to small consumers having allocation of domestic gas up to 50,000 scmd and 1.1 million Standard Cubic Meter per day (mmscmd) of APM gas allocated to TTZ. Gas shall be supplied at uniform base price to each CDG entity. Additional requirement of gas, if any, between two review periods over and above domestic gas supplied shall be sourced by individual CGD entities Only those CGD entities in their respective GA will be considered for allocation who have been allocated domestic gas as per MoPNG guidelines dated February 3, 2014. GAIL shall seek permission from MoPNG before making supply of domestic gas to any new CGD entity/GA of existing CGD entity Guidelines will be applicable till divertible gas from non-priority sector is available with GAIL and GAIL shall submit statement on cuts imposed on non-priority sector for meeting CNG and PNG(Domestic) segments These guidelines shall not be applicable to Tripura Natural Gas Company Limited (TNGCL) and Aavantika Gas Limited (AGL) in view of operational issues For the Northeast region, MoPNG issued “Guidelines for domestic gas supply for CNG and PNG (Domestic) segments of CGD networks in Northeast region” bearing Policy Guideline No. 01/2020-PNG/GP on September 28, 2020. 1. Existing guidelines of domestic gas allocation for CNG and PNG (domestic) usage in rest of country to be extended to Northeast Region 2. GAIL will make allocation to respective CGD and same would be supplied by ONGC/OIL for nearest technically feasible sources as per prevailing policies of the of government (Nomination fields, small fields etc.) 3. GAIL to maintain separate account for Northeast region 4. Such supplies will be made by applying pro-rat cuts on existing technical feasible consumers as per extant guidelines applicable for rest of India 5. Small consumers (mostly Tea Gardens) whose allocation is less than 50,000 scmd will be protected as applicable in rest of country 6. Gas supplied to CGD entities for new Gas will be without subsidy 7. Weighted Average price of Gas will be worked out by GAIL for all GAs of Northeast Region. 8. All other terms and conditions of the CGD gas allocation guidelines will remain same as applicable in rest of India On April 9, 2021, MoPNG came out with Policy Guidelines No. 1of 2021-PNG/GP for co-mingling of domestic gas for supply to CNG and PNG (Domestic) segments for registered CGD Networks. The following was decided: 1. The scheme of co-mingling of Compressed Biogas (CBG) generated progressively under the SATAT scheme meeting the technical standards with the natural gas in CGD network will be operationalized. 2. GAIL will finalize operational modalities for supply of CBG co-mingled with domestic gas at uniform base price across all CGD entities for CNG (T) and PNG (D) segment of CGD network. 3. The scheme envisages the share of co-mingled CBG in the total domestic gas supplied to CNG (T) and PNG (D) segment of CGD sector reach up to 10%. 4. The scheme will be reviewed after a period of three years or as and when the percentage of CBG in the overall mix of CNG(T)/PNG(D) in the CGD sector reaches 10% whichever is earlier. 5. All other conditions in the guidelines dated February 3, 2014, and August 20, 2014 (as amended) shall continue to apply subject to these guidelines. On October 1, 2018, a program called Sustainable Alternative Towards Affordable Transportation (SATAT) to establish an ecosystem for production of Compressed Biogas (CBG) from various waste/biomass sources in India was announced. As per guidelines notified on May 6, 2022 for supply of domestic gas to CGD companies for CNG and PNG, the following was decided: Revision of allocation for supply of pooled natural gas to CGD companies for CNG and PNG will be done on quarterly basis GAIL will supply pooled natural gas of 2.5% over and above 100% requirement for CNG and PNG for each Geographical Area (GA) in quarterly allocation period. The requirement will be calculated on basis of consumption in the previous quarter. Requirement of pooled gas be done for each GA seperetly. Supply by GAIL to new GAs, which are commissioned in a particular quarter, (consumption upto 6000 SCMD) over and above the 2.5% additional supply by GAIL. To meet the shortfall in availability of domestic gas for supplies of pooled natural gas, GAIL will source domestic High Pressure and High Temprature (HPHT) oil and gas fields at ceiling price/actual price whichever, is lower, as per prevaling guidelines for mixing with available APM and Non-APM gas. For any further requirement GAIL will sources Long term RLNG for mixing with avialable APM/Non-APM gas. GAIL may procure spot RLNG for mixing in the pool. Pooled natural gas including sources mentioned at 4 and 5 above will be supplied to CNG and PNG segments as per respective allocation at a uniform base price arrived at in cilsultation with PPAC. GAIL can charge marketing margin as per guidelines on supply of domestic pooled gas for CNG and PNG segment. No re-allocation or diversion of pooled natural gas allocated for supplies in a particular GA to a different GA for same authorized entity shall be allowed. In order to verify end use of pooled natural gas for CNG and PNG purpose CGD entities shall furnish provisional consumption figures on monthly basis within 7 days of end of calender month. CGD companies will be penalised 2.5% untill they are not able to submitt CA certificate. This methodology will be reviewd quarterly by MoPNG as per demand-supply scenario of natutal gas. As per revised guidelines issued on February 3, 2014, GAIL would supply domestic gas to CGD entities for CNG and PNG (Domestic) B. Sources of natural gas for CGD companies and their delivered prices As noted CGD companies are allocated domestic natural gas for their requirement to the extent: 100% of requirement based on consumption pattern submitted to PPAC by CDG companies Additional 10% over the requirement over and above 100% requirement Supply of pooled natural gas of 2.5% over and above 100% requirement based on consumption in the previous quater. GAIL to supply natural gas over and above the 2.5% additional supply to new GAs, which are commissioned in a particular quarter, (with consumption up to 6000 SCMD). To meet the shortfall in availability of domestic gas for supplies to be pooled. GAIL will source domestic High Pressure and High Temperature (HPHT) oil and gas fields at ceiling price/actual price whichever, is lower, as per prevailing guidelines for mixing with available APM and Non-APM gas. For any further requirement GAIL will sources long term RLNG for mixing with available APM/Non-APM gas. GAIL may procure spot RLNG for mixing in the pool Lets look at prices of natural gas from various sources after announced of new pricing guidelines and build-up of natural gas prices for CGD companies. Build-up of natural gas prices for CGD companies is as follows: Recent prices from CBM autions Recent prices LNG prices India has 5 operational LNG important terminals at Dahej, Hazira in Gujarat, Dabhol in Maharastra, Kochi in Kerela and Ennore in Tamil Nadu. India gets its LNG on long term contracts, short term and spot rates. According to recent news by Mint "Spot LNG prices have fallen to about $14-15 per metric million British thermal units (mmBtu) from average of over $45 per mmBtu in the fiscal second quarter, and average of slightly above $30 per mmBtu in the third quarter 2023" Nomination, Pre-NELP and NELP prices With the announcement of New Pricing guidelines APM prices will be capted at US$ 6.50 per MMBtu for two years (thereafter increase by 25 cents) decreasing from US$8.57 per MMBtu as per Gas Price Ceiling notification by MoPNG for the period October 2022 - March 31, 2023, announced September 30, 2022. Price for High Pressure/High Temprature fields like Reliance Industries for April 1-October 1, 2023 is at $12.1/mmbtu. However, for gas from new wells and well intervention in nomination blocks will be at a 20% permium over APM prices or US$ 7.8 per MMBtu. C. Demand projections After completion of 11th CGD round 96 percent of India's population is expected to be covered under CGD network this will result in boom in demand for natural gas in India. But with limited domestic supply LNG will play major role in supply of natural gas. D. Proportion of cheap or high priced natural gas in the proportion to total supply Gas produced from old fields make up of about two-thirds of all domestically produced gas in India. IGL and MGL source 80% and 85% respectively of its volumes from fields that are priced on APM prices. Similarly, Green Gas Limited sources approximately 25% volumes from these fields. With the falling supply of gas from old fields CGD companies will have to rely mostly on imported LNG. in 2021-22 almost 48% of CGD consumption was sourced from LNG Impact of New pricing guidelines on CGD companies With rising demand and falling supply from cheap domestic natural gas suppliers reliance on imported LNG will substantially increase. Recent fall in spot LNG prices from its peak of US$45 per MMBtu by US$ 14 to 15 per MMBtu, due to low winter demand in Europe, will help CGD players in the short term but not by much in reducing its input costs as supply from cheap sources decreases and LNG prices still being higher than even the domestically produced gas having peak price of US$ 12.1 per MMBtu from Deepwater/Ultradeepwater fields. Although allocation of natural gas to CGD players is assured by GAIL to not only meet existing demand but also additional demand, however, falling doemstic production does not help. Therefore, in the medium (5 Years) and long term (10 years) CGD companies will see margin pressures. Will new pricing guidelines help Natural Gas producers? To boast investment, pricing plays an important role. But before we analyse the impact of new pricing guidelines, it is important to mention here that the policy does not mention anything about small discovered fields, fields disovered under OLAP rounds and CBM. Therefore, we assume for the time being that gas from these sources will be based on open arms length bidding process. The recent announcement by the government will not help ONGC and OIL to boast production from old fields in the nomination blocks since the price will fall from current US$ 8.57 per MMBtu as per Gas Price Ceiling notification by MoPNG for the period October 2022 - March 31, 2023 to a ceiling of US$ 6.50 per MMBtu on GCV basis. But it will ceratinly help since gas produced from new wells or well interventions in the nomination fields of ONGC & OIL will have a premium of 20% over the APM price as per the new revised guidelines. For Pre-NELP, and NELP Policy blocks the price will be 10% of monthly average of Indian crude oil basket. The long term impact of new pricing guidelines on natural gas producers like NOCs ONGC/OIL and Private and JV players will depend on internatinal crude oil price projections and India's crude oil basket. Therefore, we shall first understand what Indian crude oil basket is made up off and then see how this will move in the future. India's crude oil baset is made up of Sour grade (Oman & Dubai Fateh Crude Oil average) and Sweet grade (Brent Dated) of Crude oil in the ratio 75.62 : 24.38. The historical average price trends is given in the figure below for reference. Historical Average India crude oil basket prices (US$ per Barrel) Source: PPAC Long term outlook (10 years) Brent prices As per EIA latest forecasts in the Annual Economic Outlook, 2023, real Brent crude prices, in its reference case, will rise steadly after falling to US$ 87.05 per barrel in 2025. The oil price is an exogenous variable assumption. In the AEO2023 High Oil Price case, the price of Brent crude oil, in 2022 dollars, reaches $190 per barrel (b) by 2050, compared with $101/b in the Reference case and $51/b in the Low Oil Price case says the report. The report os based on following assumptions: Source: https://www.eia.gov/outlooks/aeo/ Real Average Brent Prices Source: https://www.eia.gov/outlooks/aeo/ Based on this price projections both NOC and Private JV players will benefit in the long run and will boast investment in India. Sour grade (Oman & Dubai Fateh Crude Oil average) As far as Oman sour crude prices are concerned, there is fall in Annual Total Crude Oil and Condensate reserves accoring to Ministry of Energy and Minerals, Oman. Reserves have fallen drastically from 2013 levels. This will likely increase price of Oman sour crude oil prices in the long run assuming no additional reserves are added. Annual Total Crude Oil and Condensate Reserves Source: https://mem.gov.om/en-us/KPI/Annual-Production-Of-Crude-Oil-Condensate OPEC Reference Basket and selected crudes, US$/b Dubai is also likely to fall in medium term but will increase subsequently. Impact on Natural Gas producers Rising crude oil prices augur well for oil and gas producers in India as it will boast revenue in the long run but in the short run they will see fall in revenues. However, actual impact can be analysed only after understanding average production costs for each oil and gas asset. Will new pricing guidelines help consumers of CNG and PNG (Domestic)? Is there a good news for consumers. Yes, for the time being, with CGD companies reducing prices. India' big CGD companies like GAIL, IGL and MGL have reduced their prices for both CNG and PNG (Domestic) from their current prices on average by Rs. 7.28 per Kg for CNG and Rs. 5.76 per SCM. However, in the medium and long term these prices will rise again as supply from cheap domestic sources fall and LNG use to produce these products increase. But if you compare these with petrol and diesl prices the advantage will remain as CNG is still 60 and 30 percent cheaper relative to petrol and diesel prices on an average. For PNG (Domestic) the prices are relatively cheaper than LPG in certain cities while costlier in others depending on taxes and duties.

Define Earnings Before Interest, Taxes, Depreciation, and Amortization or EBITDA is a financial metric commonly used to evaluate a company's profitability before accounting for non-operating expenses and non-cash items such as interest, taxes, depreciation, and amortization. EBITDA is calculated by taking a company's Revenue and adding back depreciation and amortization expenses, as well as any interest and taxes that were deducted from the operating income. This gives investors and analysts a better idea of the company's actual cash flow and operational efficiency, as it excludes items that can be affected by accounting decisions or one-time events. EBITDA is often used as a valuation metric, particularly for companies with a lot of debt or significant capital expenditures, as it provides a clearer picture of a company's underlying financial performance. However, it's important to note that EBITDA does not get impacted by capital structure, which can have a significant impact on a company's financial health. What Formula? EBITDA = EBITDA / Net Revenue x 100% Adjusted EBITDA = Adjusted EBITDA / Net Revenue X 100% What Components? A. EBITDA and Adjusted EBITDA EBITDA = EBIT + Depreciation and Amortization EBITDA can be calculated using both Top-down approach and Bottom-up approach 1. Top-Down Approach EBITDA = Revenue Less: Cost of Goods Sold Less: Operating Expenses Special attention should be given to Depreciation, Amortization expenses and non-operating incomes and expenses, as companies hide these under Cost of Goods Sold and Operating expenses. Further, revenues should only income operating income. Though it is difficult to distinguish between operating and non-operating incomes and expenses, but care should be taken that these are not included in the calculation of EBITDA. To see what is operating and what is not operating, an analyst should refer to: a. Notes to Accounts b. Analysis provided in Management Discussion and Analysis section of annual reports c. Business Units and products and services provided by the firm in question Operating expenses Operating expenses depend on the nature of business the firm in question is providing. An illustrative list is provided here for reference. Or Adjusted EBITDA under Top-down approach 2. Bottom-up Approach – EBITDA To estimate EBITDA using the bottom-up approach, add all items that are subtracted to calculate operating income from Income (Loss) Before Tax and subtract all items that are added to calculate EBITDA from Income (Loss) Before Tax. After that, add depreciation & amortization. Intel Bottom-up Approach – Adjusted EBITDA Where can I find them - Financial Statement Linkages? Real Company Analysis - ConocoPhillips Let’s take the example of ConocoPhillips, a US Oil and Gas company engaged in Exploration & Production of Oil and Gas. The annual reports can be found at https://www.conocophillips.com/investor-relations/. In 2012 ConocoPhillips Spins Off its refining pipelines and chemicals division into a new company, Phillips66. As can be observed, ConocoPhillips does not report Operating Income or EBIT or EBITDA but Income (loss) Before Income Taxes. It can be calculated using a Top-down formula. EBITDA = Revenue – Cost of Goods sold - Operating costs. Further, the annual reports do not explicitly have Cost of Goods Sold (COGS) line item. Therefore, either we separately calculate COGS or include all costs under operating costs. To estimate COGS, we need to understand the core operations of the firm in question. However, the difficulty in doing that is some firms do not provide details of the costs of operations and mix them up with operating costs. Top-down Approach 1. Taxes other than income taxes 2. Accretion on discounted liabilities 3. Interest and debt expense 4. Other expenses 5. Foreign currency transactions gains (losses) Adjustment to revenue section If we see the revenue section of the annual report it includes equity in earnings of affiliates, gain on dispositions and other income (Loss). These must be removed from revenue calculation as they are not core operation incomes and gains. A brief description of these items is as below: a. Earnings of affiliates Companies have influential, but not a controlling equity interest in other firms (defined as ownership of 20% to 50%). They will account for income from their equity ownership as a proportional share of the investee’s earnings as “Equity in Affiliates” on their income statement using equity method. b. Gain on dispositions These are gains from disposal of oil and gas assets. The annual report for 2022 reports this as follows: “Gain on dispositions increased $591 million in 2022, primarily due to the recognition of a gain of $534 million from our Indonesia divestiture, the absence of a $179 million loss associated with the sale of noncore assets in our Other International segment and higher contingent payments in our Canada and Lower 48 segments than in 2021. These increases were partially offset by the absence of a $200 million gain for a FID bonus associated with our Australia-West divestiture recognized in the first quarter of 2021. See Note 3. c. Other income (Loss) These are market-to-market gains associated with ConocoPhillips’s Cenovus Energy (CVE) common shares. Again, annual report 2022 reports this as follows: Note 5—Investment in Cenovus Energy At December 31, 2021, we held 91 million common shares of Cenovus Energy (CVE), which approximated 4.5 percent of the issued and outstanding common shares of CVE. Those shares were carried on our balance sheet at fair value of $1.1 billion, based on NYSE closing price of $12.28 per share on the last day of trading for the period. During the first quarter of 2022, we sold our remaining 91 million shares, recognizing proceeds of $1.4 billion. “Other income (loss) decreased $699 million in 2022, primarily due to the absence of mark-to-market gains associated with our CVE common shares, which were fully divested in the first quarter of 2022. See Note 5. The decrease was partially offset by higher interest income earned due to rising rates and investments.” “In 2022, we completed the monetization of our investment in CVE common shares that we began in May 2021. By the end of the first quarter of 2022, we fully divested of our investment, recognizing proceeds of $1.4 billion and directing proceeds toward our existing share repurchase program. Since inception, we generated total proceeds of $2.5 billion. See Note 5. Other proceeds from dispositions received in the current year include our divestitures in Asia Pacific and Lower 48 segments for approximately $1.5 billion after customary adjustments and $500 million in contingent payments associated with prior divestitures. See Note 3” “Financial assets and liabilities reported at fair value on a recurring basis primarily include our investment in CVE common shares, our investments in debt securities classified as available for sale, and commodity derivatives” The key thing to note is that these incomes or expenses are not included in EBITDA calculation as these are non-operating expenses or incomes or expenses from financial activities. The calculation of EBITDA margins for ConocoPhillips are as follows: Bottom-up - EBITDA Both top-down or bottom-up will result in same EBITDA margins. How to interpret? EBITDA and Adjusted EBITDA is the mother of all metrics used by investors for valuation of a firm as it is used as a measure of cash generation also it is used to value companies using EBITDA multiples like EV/EBITDA margins. However, that is not the case. EBITDA margins helps us understand how much money a firm makes per dollar of sales after taking care of its cost of goods sold and operating costs. Further, it tells us how much money is left, after paying operating expenses, for paying off its financial expenses. Comparison Comparison can be done in the following ways: 1. Temporal Comparison, i.e. time series trend analysis 2. Comparison with Industry benchmark 3. Comparison with Industry Average or close peers / competitors Remember when we compare ratios against any average it shall be calculated with same formula otherwise it will result in erroneous comparison. 1. Trend Analysis As can be seen from our example, ConocoPhillips EBITDA margins have been consistently rising except for 2020. The key reason behind it is drastic fall of revenues from US$32,567 Million to US$18,784 Million. 2. Comparison with Industry Average or close Peers: But if we compare it with average (median) EBITDA Margin of close peers, we find ConocoPhillips has outperformed them by quite a margin. It is important to understand that when we compare ratio with peers/competitors, the selection of right peers/competitor is very important. Direct competitors which sell similar if not exactly same type of product or service, in terms of functionality and not form, shall only be compared. What Strategic Implications Firms that have EBITDA consistently above average industry or peers sustainable competitive advantage. If we take the numerator of the ROCE ratio which is EBIT and break it further, we see it dependent on Price, Volume of product sold or frequency of services rendered and cost of service. Firms that can charge premium price or have lower costs will consistently perform better in terms of ROCE compared to WACC.

Gross profit margin belongs to the profitability ratio used to understand margins a firm achieves before operating expenses level i.e. selling, general and administrative level or indirect costs and non-operating incomes and expenses level i.e. financial expenses and financial income and corporate taxes. What Formula? Gross Profit = Net revenues - Cost of Sales or Cost of goods sold, where Gross profit Margin = Gross Profit / Net Sales What Components? Net Revenue = Gross Sales - Return Formula 1 Cost of Goods sold = Opening Balance of Inventory (Raw Materials, Work in Progress and finished goods) + Purchases - Closing Balance of Inventory (Raw Materials, Work in Progress and finished goods), or Formula 2 Cost of Goods Sold = Raw materials costs + Direct Labor expenses + Other direct costs, or Formula 3 or Formula 4 Where can I find them - Financial Statement Linkages? Sometimes COGS is not directly available from the income statement. If that is the case, we can use notes to accounts to find the components given in inventory notes, or hidden in operating expenses, and use the formula 3 or above. Further, certain companies put COGS as operating expenses. Our real company analysis section uses a company that uses operating expenses and COGS. Real Company Analysis We take Team Inc. as an example to analyze Gross Margins. Team Inc. is a US based company in the Testing, Inspection and Certification industry. The annual reports of the same can be accessed from https://investor.teaminc.com/. It can be observed that Gross margin of Team Inc. has earned an average of 27% margin in last six years. How to interpret? Gross margin is an important metric for investors as it indicates how much money does a firm make after paying direct costs. Direct costs are cost that are directly related to production or delivery of services. It tells us that how much margin does the firm makes for every US$ 1 sales after paying off its direct costs. Comparison Comparison can be done in the following ways: Temporal comparison, i.e. time series trend analysis Comparison with Industry benchmark Comparison with Industry Average or close peers / competitors Remember when we compare ratios against any average it shall be calculated with same formula otherwise it will result in erroneous comparison. 1. Trend Analysis As can be seen from our example that Team Inc. has consistently performing with gross margin near to its 6-year average of 27% except for 2021. 2. Comparison with industry benchmarks: If an industry benchmark is available, then we can compare our ratio to it. Industry benchmark is dependent on type of industry. For example, 3. Comparison with Industry Average or close Peers: But if we compare it with average (median) gross margin of close peers, we find Team Inc. has not outperformed them. It is important to understand that when we compare ratios with peers the selection of right peers/competitor is very important. Direct competitors which sell similar if not exactly same type of product or service, in terms of functionality and not form, shall only be compared. What Strategic Implications Gross margin has several strategic implications. As we know that a firm achieves competitive advantage either through cost efficiency or differentiation, it is important to investigate by comparing gross margin of firm, in question with it peers in the industry. If we see that the firm in question has achieved high margin compared to its close peers we need to further investigate from where the competitive advantage is emanating from i.e. whether it is due to lower cost or high price the firm is able to charge from its customers due to differentiation. If we see that advantage is coming from lower costs, we need to also investigate how the firm in question is able to achieve lower costs. How to forecast? To forecast Gross Margins, we need to forecast revenues and costs. To forecast costs, we need to first list costs components that are used to produce goods or deliver services. Then we need to investigate what is driving that particular cost. For example, if the firm uses crude oil as raw material, then we can use crude oil prices to forecast costs. If a particular driver is not evident from investigation, then we can use trend analysis to forecast costs. To forecast revenue, we need to first see what product or services the firm is selling and average prices that are charged for it. We can use bottom-up approach to find prices and volume to forecast revenue. Based on customer segmentation, we can use pricing surveys to find average price and what price consumer is willing to pay for the product or service within each customer segment. We can also use top-down approach to forecast revenues. Top-down approach uses macro level data like GDP or private final consumption expenditure to forecast revenues.

Pakistan started it journey as a nation in 1947 with the partition of Pakistan from India. According to Cambridge University Press[1], Pakistan was carved out of the north-western and north-eastern parts of British India. The territories of Baluchistan, Northwest Frontier Province, Sind, and the western part of the Punjab constituted its west wing with an area of 365,529 square miles and an approximate population of 33 million. West Pakistan (now Pakistan), like most of west Asia, consisted of semi-arid plains and rugged mountains. About one-fifth of its land was cultivated. The distribution of population was highly uneven and was determined primarily by the availability of water. Despite low per capita income and traditional peasant agriculture, Pakistan with a population of 75 million was a sizeable economy. Pakistan's economy has undergone significant changes over the past several decades, with both positive and negative developments. Here's an overview of Pakistan's economy in the past, present, and future: Pre-2000 Developments In the early years after independence in 1947, Pakistan's economy was primarily based on agriculture. However, over time, the country began to industrialize, with a focus on textiles and other manufacturing industries. During the 1960s and 1970s, Pakistan saw rapid economic growth due to a series of reforms and increased foreign aid. However, this growth was not sustainable, and the country began to experience economic difficulties in the 1980s. The 1990s were a period of economic instability for Pakistan, with high inflation, a growing debt burden, and political instability. However, the country made significant progress in the early 2000s, with increased foreign investment, privatization of state-owned enterprises, and a focus on economic reforms. According to the World Bank, Pakistan's GDP in 1947 was estimated at USD 1.1 billion. Since then, the country has experienced periods of rapid growth, as well as economic downturns and periods of instability. In the 1960s and 1970s, Pakistan saw rapid economic growth, with an average GDP growth rate of over 6% per year. However, the 1980s and 1990s were marked by economic instability, with the country experiencing high inflation, political instability, and a growing debt burden. In the early 2000s, Pakistan made significant progress in implementing economic reforms and attracting foreign investment, leading to a period of steady economic growth. However, the country still faces significant challenges, including high poverty rates, a large trade deficit, and a lack of investment in key sectors such as education and infrastructure. Real Macroeconomic indicators - Pre-2000 Pakistan’s real GDP in the pre-2000 era show an average 5% growth rate, however, it was able to achieve growth rates above 5% most of the years with peak reaching in 1985 with growth of 8.7%. However, from 1996 the economy started performing below average growth rates. Agriculture’s contribution to GDP was steady at an average of 32 per cent during 1980 - 2000, while Industry averaged 21% as percentage of GDP. Services sector was major contributor in the share of GDP of Pakistan with an average contribution of 44%. The growth rate of services sector is higher than the growth rate of agriculture and industrial sector. The services sector grew very rapidly, from 1975 to 76 to 2009-10, growth rate of service sector is 5.46 %. Agriculture: Pre-2020 According to a report published in The Pakistan Development Review[2] written by M. Ghaffar Chaudhry and Ghulam Mustafa Chaudhry, during early Seventies the annual growth rate in agriculture plummeted to the historically lowest level of 0.78 percent. While crop production had a growth rate of 0.49 percent, output of rice, cotton and sugarcane fell persistently. Except for poultry, growth was equally disappointing in livestock sector. However, the agricultural growth revived in the second half of the Seventies and crop output and livestock registered respective growth rates of more than 4.0 and 3.0 percent. Since the 1980s, livestock and non-cereal crops emerged as the prime movers of agricultural growth. Against 3.28 percent annual growth rate of agriculture, growth of livestock exceeded 4.77 percent and that of cotton 6.71 percent. By contrast respective growth rates of crop sector and cereal crops were less than 2.63 and 2.0 percent. During the period of 1984-85 and 1989-90, the production of cotton and livestock witnessed a further acceleration and contributed to more rapid agricultural growth (4.57 percent) than in the previous period. Despite some recovery in wheat, the growth rates of sugarcane and rice remained very low. In the 1990s, the growth rates fell further to less than 4.0 and 3.0 percent per annum respectively between 1989-90 and 1994-95 and 1994-95 and 1996-97. The high growth rates of the sugarcane and livestock sectors had a positive, and a slower growth of cotton, rice and wheat a negative, effect on the overall agricultural growth in the 1990s. Industry: Pre-2020 According to Robert E Looney’s paper written 1994 in the Development Policy Review [3], “With regard to the sectoral contributions to growth in Pakistan, Burney (1986) found (over the period 1960-85) that the commodity-producing sectors (agriculture and manufacturing) accounted for than 40% of the growth in GDP, the major crops being the main source of the varying contribution of agriculture, while in the case of manufacturing, the large-scale sector's output accounted for more than 60% of the contribution. The Pakistan economy has gone through a number of major changes since 1985. In particular (but especially from 1988 onwards) progress has been especially strong in freeing the private sector from regulation and artificial price distortions. In addition, a complementary privatization program was launched with the aim of reducing the role of the public sector in manufacturing and services. As a side benefit, the program was seen as alleviating the government's financial and administrative burden and creating new opportunities for the private sector. While growth in large-scale manufacturing output has not accelerated in recent years (nor has its overall contribution to GDP growth increased), there is hope (particularly among official policymakers) that this activity is finally beginning to play the classic role of a leading sector. However, for manufacturing to be a true leading sector it must be shown that its expansion tends to create several direct linkages with other key sectors such as construction, agriculture and the like. Since these sectors also have numerous linkages with the rest of the economy, an increase in manufacturing would then set in motion a broad-based cumulative expansion of the economy.” According to another paper written by A. R. Kemal, Chief Economist, Ministry of Planning and Development, Planning and Development Division, Islamabad, in The Pakistan Development Review, “Pakistan’s manufacturing sector is at the crossroads. The import substitution industrial strategy which she has all along pursued did result in the growth rate of the manufacturing exceeding 8 percent upto the Eighties, but in recent years, not only the growth rate has slipped to around 3 percent, but major structural problems have also emerged in the industrial sector. Lack of diversification in the industrial output, limited exposure to competition, a distorted incentive structure, allocative, technical and inefficiencies, negligible growth in productivity, absence of R&D, lack of quality and standardized products, constrained employment growth, etc., have forced Pakistan to look for alternative strategies.” Pakistan GDP Source: World Bank Database Inflation and GDP Per Capital: Pre-2000 Pakistan has generally been high inflation economy during 1980 to 2000. From 1989 till 1998 Pakistan saw a double-digit inflation. But thereafter the inflation started abetting with the growth in GDP and remained below long-term average till end of 2000. At the same time it saw increase in Per Capita GDP from US$419 in 1980 to US$538 in 1990, a 29% increase, and further increased to US$ 630 in 2000 albeit at a slower rate of 17%. Source: World Bank Database Exports and Imports - Pre-2000 In terms of exports and imports, as percentage of GDP, which we call cash inflows and outflows show a healthy trend with the gap between inflows and outflows kept decreasing and was lowest between 1997-2000. The top exports of Pakistan were House Linens, Rice, Non-Knit Men's Suits, Knit Sweaters, and Non-Knit Women's Suits, exporting mostly to United States, China, Germany, United Kingdom, and United Arab Emirates. The top imports of Pakistan are Refined Petroleum, Petroleum Gas, Crude Petroleum, Palm Oil, and Vaccines, blood, antisera, toxins and cultures, importing mostly from China, United Arab Emirates, Qatar, Indonesia, and United States. Agriculture 2001 to 2021 According to Economic Survey of Pakistan 2021-2022, wheat is cultivated over 22 million acres and accounts for 7.8 percent of the value added in agriculture and 1.8 percent of GDP. During 2021-22, area sown decreased to 8,976 thousand hectares (2.1 percent) against last year’s of 9,168 thousand hectares. The production of wheat declined to 26.394 million tonnes (3.9 percent) compared to 27.464 million tonnes production in 2020-21. Wheat production declined due to decline in area sown, shortfall in irrigation water and drought conditions at sowing, less fertilizers offtake and heat wave in March/April, though the government has increased Minimum Support Price to Rs 2200/40 kg this year is aligned to the cost of production. This has made Pakistan dependent on Ukraine and Russia for its wheat consumption. Not only wheat but it also depends on imports of pulses and oilseeds on these countries. In 2020-21, imports from Russia and Ukraine contributed for 77.3 percent of total wheat imports, 19.3 percent of total pulses imports, and 10.4 percent of total oilseed imports into the country. According to World Bank[4], agriculture in Pakistan remains by far the biggest employer of labor and is an especially important sector from a social, livelihood and foreign exchange perspective. Pakistan’s population growth and rate of urbanization is pressurizing the agriculture sector not only to increase production, but also to respond to a changing and diversifying food consumption pattern. Despite considerable public spending with support from development partners, agriculture growth slowed down from an average of over 4% per year between 1970-2000 to below 3% thereafter. Poorly functioning agricultural markets with significant government intervention, and a pattern of public spending on agriculture characterized by inefficient and poorly targeted subsidies, discourage a move to a more water efficient, higher value agriculture. Agriculture growth 2001 to 2021 Source: World Bank Database Industry 2001 to 2021 Manufacturing sector contributed 12.4 % in GDP in 2021-22. Total industry contributed 18% in 2001. It increased to 22% by 2008 but since then averaged 19% during 2009-2021. Pakistan’s manufacturing is divided into three components: Large Scale Manufacturing (LSM), Small Scale Manufacturing (SSM) and Slaughtering. Establishments having ten or more employees are covered under LSM. Source: World Bank Database Services 2001 to 2021 According to a paper written by Henna Ahsan and Ayaz Ahmed of Pakistan Institute of Development Economics, Islamabad, titled “Contribution of Services Sector in the Economy of Pakistan”[5], the increasing growth rate of service sector was due to increasing growth in finance and insurance sector. As growth rate of finance and insurance sector is 6.8 percent during 1975-2010. The better performance is due to the pursuance of accommodative polices adopted by of State Bank of Pakistan. The growth rate of social and community sector has also been increasing which is recorded 6.5 percent during 1975-2010. The service sector has major contribution in value added and gross fixed capital formation (GFCF) in Pakistan. It further notes that a group that has experienced modest growth rate, in transport, storage and communication, wholesale and retail trade, ownership of dwelling, public administration and defense. Employment share in services sector is increasing, people are moving from agriculture sector to services sector. Service sector is also important sources of revenues as 26 percent of revenues are received from taxes compare with 1 percent from agriculture sector. Between 2005 to 2009 Pakistan’s real GDP took a nose-dive from peak of 9% in 2005 to almost negligible 0.4%. Yes, financial crisis of 2008 contributed to this fall, but the fall started in 2005 and financial crisis only exacerbated the fall. Figure below shows this trend. According to this paper, after 2009 even with a low base Pakistan economy grew by just 2.6% in 2010 and remained below long-term average of 5% till 2017 from 2010. In 2018 real GDP grew above the long-term average. In terms of Pakistan’s political and economic management history, fiscal year 2018-19 represents a break from the past. People of Pakistan voted into power a new party – Pakistan Tehreek-i-Insaaf (PTI) – mainly as it was seen to provide a transparent, more efficient government with a more egalitarian development agenda according to Pakistan’s economic survey for 2018-19. It notes that the new government inherited a weakened economy. The fiscal deficit was high; the current account deficit was at its highest level in country’s economic history; debt liabilities had risen to a level where servicing of the debt took a sizeable portion of the federal government’s budget; and foreign exchange reserves had depleted to a level that was insufficient to finance even two months of imports. This instability was a result of structural weaknesses in the economy which had remained unaddressed for decades. Insufficient policy action over the last two years aggravated the macroeconomic imbalances. It further notes that the new government took several policy actions to meet these challenges which included curtailing of non-essential imports, encourage remittances and with support from friendly countries reduced external vulnerabilities. Real GDP took a hit again and growth rate halved in 2019 and in 2020 due to covid growth turned negative. Source: World Bank Database Inflation and GDP Per Capita: 2001-2022 Inflation has severe bouts of inflation with inflation reaching 20% in 2009 but abetting to 10% in 2010 but remained above long-term average of 8% till 2014. From 2015 to 2019 it remained below long-term average but started increasing again in 2020 due to covid. In August 2022, Pakistan faced the most severe flood in the history of the country. According to a news report published by Scientific Reports[6], this caused agricultural losses in the most productive Indus plains aggravated the risk of food insecurity in the country. As part of the loss and damage (L&D) assessment methodologies, we developed an approach for evaluating crop-specific post-disaster production losses based on multi-sensor satellite data. An integrated assessment was performed using various indicators derived from pre- and post-flood images of Sentinel-1 (flood extent mapping), Sentinel-2 (crop cover), and GPM (rainfall intensity measurements) to evaluate crop-specific losses. The results showed that 2.5 million ha (18% of Sindh’s total area) was inundated out of which 1.1 million ha was cropland. The remainder of crop damage came from the extreme rainfall downpour, flash floods and management deficiencies. Thus approximately 57% (2.8 million ha) of the cropland was affected out of the 4.9 million ha of agricultural area in Sindh. The analysis indicated expected production losses of 88% (3.1 million bales), 80% (1.8 million tons), and 61% (10.5 million tons) for cotton, rice, and sugarcane. This ugly reality caused inflation to reach 12% in 2022. Source: https://www.nature.com/articles/s41598-023-30347-y#:~:text=In%20August%202022%2C%20one%20of,food%20insecurity%20in%20the%20country. Source: World Bank Database GDP Per Capita (Current US$) – 2001 to 2022 Pakistan has seen a steady rise in Per capita based on Purchasing-Power-Parity (PPP)" exchange rate basis. In 2001 per capita GDP was US$ 602 and increase to US$ 1123 in 2010 a whooping increase of 87%, however, if we compare 2010 figure with 2020 the increase slowed down to 23% and reached US$ 1377 in 2020 and further slowed down to 20% and reached US$1658 in 2022. Export and Imports – 2001 to 2021 The share of services in export has been increased from 17.68 percent to 20.77 percent in 2008-09 to 2009-10. Whereas the share of services in imports has been declined from 19.08 percent to 17.99 percent, which helped to decrease the trade deficit in 2009-10. Source:http://wits.worldbank.org/tradedata/monthlydata/en/country/PAK/year/2018/quarterly It can be seen that Pakistan imports show significant month -on-month increase while the exports have shown steady degrowth. According to World Bank, at HS 6-digit level, top five exports in 2020 were rice, bed linen of cotton, toilet linen and kitchen linen and ensembles of cotton. In terms of goods, in 2021, Pakistan was the world's biggest importer of Petroleum Oils, natural gas, palm oil, transmission apparatus, Tea, Hydraulic Turbines, Jute and Other Textile Fibers, and Metallic Yarn. Foreign Exchange Reserves: 2001-2021 Source: World Bank Database Post 2022 – Things start to get ugly Pakistan's economy faces several economic challenges, including high inflation, a large trade deficit, and a significant debt burden, high poverty rate, high levels of corruption, and a lack of investment in key sectors such as education and infrastructure. Inflation the killer blow Inflation is not going to abet anytime during the next two years i.e. 2023-24 with inflation remaining well above long term average of 8%. Source: IMF World Economic Review , October 2022 The government has implemented a series of economic reforms aimed at addressing these issues, including measures to increase tax revenue, reduce government spending, and improve the business environment. To address these issues, the government will need to continue implementing economic reforms and focus on building a more sustainable and diversified economy. Additionally, the country could benefit from increased regional trade and cooperation, particularly with neighboring countries such as India and China. Foreign Exchange Reserves 2022 and beyond Pakistan’s foreign exchange reserves which included gold reserves was at a healthy level of US$ 22812 Million at the end of 2021, also peak level since 1980, plummeted to just US$ 4343 million at end of 2022. Though they have doubles from that level at end of February 2023. The decline in foreign exchange is due to heavy external debt servicing and import financing. Source: World Bank Database Pakistan has been to IMF 23 times during the last 75 years bailouts. As of February 2020, according to IMF [7], “Pakistan: History of Lending Commitments” amount agreed by IMF for lending to Pakistan was to the tune of US$23.65 billion out of which Pakistan has already drawn US$ 14.83 billion. There were US$ 4.837 billion outstanding as on date. Source: IMF Note 4/The expiration date for outright disbursements (RFI and RCF) reflects the date the disbursement was drawn, or the date the disbursement expires, i.e., 60 days following the Board approval date. The expiration dates for arrangements under the GRA, PRGT, and RST reflect either the approved expiration date of the arrangement or the date the last disbursement takes place under the fully drawn arrangements. Countering Inflation in Pakistan Economic theory suggests inflation can be either demand pull or cost push. Now demand push inflation happens when total demand for goods and services exceed supply. Demand increase may come from government, increase in exports or businesses which puts upward pressure on prices, leading increase in inflation. To meet this demand additional labor is required leading to increase in employee costs and hence total cost to manufacture the products or services resulting in inflation. Further, higher income of households due to increase wages may result in high demand further causing high inflation. According to Forbes article Demand-Pull inflation is caused by: There are usually a few interrelated forces working in tandem that cause demand-pull inflation. These can include: 1. A strong economy. When the economy is booming and unemployment is low, consumers tend to earn more income and spend more money, which drives up levels of aggregate demand throughout an economy. 2. Supply shortfalls. Higher income and more spending drive growing demand, and companies respond by trying to increase supply to keep up. Waves of demand for raw materials, subcomponents and labor ripple through an economy, and it may take time for production to meet the demand. 3. A rapid increase in supply of money. One of the jobs of the Reserve Bank of a country is to monitor and influence supply of money. Occasionally, Reserve Bank will print money, though—during times of severe economic stress, for example—and this rapid increase in liquidity can drive higher demand for goods and services. Demand-pull inflation occurs when businesses can’t increase their supply to match demand. 4. Inflation expectations. The rate at which people expect prices to rise in the future is referred to as inflation expectations —actual inflation often follows a similar trajectory. If consumers expect inflation to rise soon, they may preemptively start buying more things now to avoid paying what they expect will be higher prices later. This can lead to a problem with supply, leading to demand-pull inflation. 5. Government policy. Fiscal policy responses to economic conditions—like providing a stimulus during an economic downturn or providing tax breaks for certain products—can also impact how much money people have to spend on goods and services or, in some cases, where they might decide to spend that extra money. Cost push inflation on other hand happens when production and supply of goods and services in the country falls. Fall in production and supply may happen due supply chain interruptions or disruption caused by natural disasters or currency fluctuations if major inputs are imported. High input prices or low availability of inputs caused by supply chain disruptions push up product and service prices accentuating inflation. What is causing inflation Pakistan? Pakistan imports key inputs from China, UAE, Indonesia, Saudi Arabia and USA which include petroleum, chemicals, plastic or rubber, capital goods, textile and clothing, raw materials and others like vegetables, food products. Pakistan Product Imports from China 2020 Pakistan Product Imports from United Arab Emirates 2020 Pakistan Product Imports from United States 2020 Pakistan Product Imports from Saudi Arabia 2020 Pakistan Product Imports from Indonesia 2020 Source: World Integrated Trade Solution As can been observed from figures above, Pakistan not only imports majority of raw materials and intermediate goods but also essential consumption goods like vegetables and food products it is getting into trouble since its currency has depreciated substantially, and exports have not increased in same proportion. Pakistani Rupee has been falling like nine-pins in recent years against major currencies like US dollar. From the figure below it is observed that the rupee fell from Rs. 184.78 on April 4, 2022, to Rs. 283.80 on April 1, 2023. If we compare it with figures 5 year ago on April 18, 2018, it was Rs. 115.45 which is even worse. Source: Google Will things improve on inflation front? According to news agency Reuters, Inflation Pakistan could average 33% in H12023, indicated by Moody’s economist [8], "Our view is that an IMF bailout alone isn't going to be enough to get the economy back on track. What the economy really needs is persistent and sound economic management," senior economist Katrina Ell said in an interview”. What is Pakistan doing to fight inflation and will it work? One of the weapons in central banks arsenal to curb inflation is increase in increase rates thereby limiting money supply. In recent times Pakistani central bank increased its key interest rates by 300 basis points to 20% in February 2023 which is the highest level since October 1996. This rate hike is come after Pakistan's consumer price index (CPI) jumped 31.5% in February 2023, year-on-year, due to surge in food, beverage and transportation prices of more than 45%. According to news report by Business Total[9], “Pakistan’s central bank – State Bank of Pakistan– is likely to hike interest rates further to 21 per cent in its upcoming policy review meeting in April. The rate hike will be aimed at arresting inflation levels in the cash-strapped country, said the Pakistani brokerage firm Arif Habib Limited (AHL). If it is materialized, this will be the biggest interest rate hike by the State Bank of Pakistan.” But will this work in Pakistan’s case. The answer is no. Pakistan economy has been facing severe structural problems. To the list the few: 1. High government involvement in economic activities 2. Large informal and unorganized industry sector 3. Product production and export limitation of cotton-based clothing 4. Lack of educational infrastructure 5. Low rate of savings 6. Neglect of Small and Medium enterprises 7. Too much army involvement in business, judiciary, policies 8. Non-existent institutional structure 9. Lack of incentives for exports 10. Import substitution policies [1] https://www.cambridge.org/core/books/abs/cambridge-economic-history-of-india/pakistan-economy-since-independence-194770/48DA8C90A0B4ADB18878DA788C957723 [2] https://core.ac.uk/download/pdf/7203089.pdf [3] https://core.ac.uk/download/pdf/36732867.pdf [4] https://www.worldbank.org/en/country/pakistan/brief/pakistan-agriculture-food-systems [5] https://file.pide.org.pk/pdfpideresearch/wp-0079-contribution-of-services-sector-in-the-economy-of-Pakistan.pdf [6]https://www.nature.com/articles/s41598-023-30347-y#:~:text=In%20August%202022%2C%20one%20of,food%20insecurity%20in%20the%20country. [7] https://www.imf.org/external/np/fin/tad/extarr2.aspx?memberKey1=760&date1key=2020-02-29 [8] https://www.reuters.com/world/asia-pacific/inflation-pakistan-could-average-33-h1-2023-says-moodys-economist-2023-02-15/ [9] https://www.businesstoday.in/latest/world/story/pakistan-set-for-another-rate-hike-by-100-bps-to-21-highest-ever-374040-2023-03-20

Define Return on equity (ROE) is a financial ratio that measures the amount of net income generated by a company in comparison to the amount of shareholder equity. ROE is calculated by dividing the net income by the average shareholder equity for a given period, usually expressed as a percentage. What Formula? ROE = (Net Income / Average Shareholder Equity) x 100% What Components? A. Net Income The net income used in numerator is Net income attributable to common shareholders or parent and not Net income attributable to Group which includes non-controlling interest Group Net Income for the year = Net income attributable to Common shareholders or Parent + Non-controlling Interest B. Shareholders Equity - Balance sheet Shareholders Equity Attributable to Parent = Shareholders attributable to group – Non-controlling Interest Where Shareholders Equity can be detailed as: Any other type of reserve shall be added. Where can I find them - Financial Statement Linkages? Real Company Analysis Let’s take example of Pidilite Industries Limited, Indian chemical company engaged in producing adhesives, sealants, waterproofing solutions and construction chemicals to arts & crafts, industrial resins, polymers. The annual reports can be found at https://pidilite.com/investors/financials/ How to Interpret? ROE is an important metric for investors as it indicates how effectively a company is generating profits from the equity invested by its shareholders. A high ROE suggests that the company is generating a strong return on investment for its shareholders, while a low ROE may indicate that the company is not generating sufficient profits to justify the investment made by shareholders. However, it's important to note that ROE can be affected by factors such as debt financing and capital structure, so it should be used in conjunction with other financial metrics when evaluating a company's overall financial health. Comparison can be done in the following ways: 1. Temporal Comparison i.e. time series trend analysis 2. Comparison with Industry benchmark 3. Comparison with Industry Average or close peers / competitors Remember when we compare ratios against any average it shall be calculated with same formula otherwise it will result in erroneous comparison. 1. Trend Analysis As can be seen from our example that Pidilite Industries Limited has consistently performing with ROE of above 20% except for 2021 with ROE falling to 19%. 2. Comparison with Industry Average or close Peers: But if we compare it with average (median) ROE of close peers, we find Pidilite Industries Limited has outperformed them by quite a margin as seen from table above. It is important to understand that when we compare ratio with peers/competitors the selection of right peers/competitor is very important. Direct competitors which sell similar if not exactly same type of product or service, in terms of functionality and not form, shall only be compared. What Strategic Implications Firms that have ROCE consistently above Weighted Average Cost of Capital (WACC) have sustainable competitive advantage. If we take the numerator of the ROCE ratio which is EBIT and break it further, we see it dependent on Price, Volume of product sold or frequency of services rendered and cost of service. Firms that can charge premium price or have lower costs will consistently perform better in terms of ROCE compared to WACC. How to Forecast? To forecast ROE we need to forecast Net Income, and Shareholders funds. Shareholders Funds To forecast shareholder’s funds we divided it into its key components: 1. Share Capital 2. Treasury Shares 3. Additional Paid-in Capital 4. Share Premium 5. Reserves 6. Retained Earnings 1. Share capital can be forecasted using straight line method. If you want to get complex, then use additional funding requirement schedule. We need to create and 3-statement model to create such a schedule. We need to assume about what Debt equity ratio to find additional share capital or debt. We can also use the optimal capital structure model to forecast it. 1. Treasury Shares: Treasury Shares are buy-back of shares by firms. To forecast it we can use either straight line method or look at for clues in annual reports Management Discussion & Analysis part where they discuss their plan for buy-back. But it more likely than not firms do not announce it in advance as it influences stock markets. 2. Additional Paid-in Capital: Additional Paid-in capital is additional capital raised by companies. This is similar to share capital we do not need to forecast this and use the share capital schedule. 3. Share Premium: If you have additional capital and assume to place at premium forecast, it using share capital requirement and premium that you will charge per share. Otherwise, use straight line forecast. 4. Reserves Reserves are divided into three types: a. General Reserve: Profits retained in business b. Specific Reserve: Like Debenture Redemption Reserve are type of reserve is maintained for a specific purpose c. Capital Reserves: Reserves created for specific purpose and can be used for that reason only Use straight line method to forecast reserves if details about specific purpose for which reserves were created not available. 5. Retained Earnings

Financial Valuation is both art and science. The science part is the historical data provided by annual reports and art is to estimate of what future holds. There are many different financial valuation methods that businesses and investors use to determine the value of a company or asset. Here are five commonly used methods: A. Discounted Cash Flow (DCF) Analysis: This method involves estimating the future cash flows of a company and then discounting those cash flows back to their present value using a discount rate. The present value of the cash flows is the estimated value of the company. Discounted Cash Flow (DCF) analysis is a method of valuing a company based on the present value of its expected future cash flows. The basic idea behind DCF analysis is that the value of a business is equal to the sum of the present values of all future cash flows expected to be generated by the business. To conduct a DCF analysis, an analyst must first estimate the future cash flows a company is expected to generate. These cash flows are then discounted back to their present value using a discount rate that reflects the time value of money and the risk associated with the investment. The discount rate used in the DCF analysis can be the company's weighted average cost of capital (WACC), which takes into account the cost of debt and equity financing. Alternatively, an analyst may use a higher discount rate to account for the additional risk associated with the investment. The result of the DCF analysis is the estimated intrinsic value of the company, which can be compared to its current market value to determine whether the company is overvalued or undervalued. DCF analysis is widely used in corporate finance and investment banking to evaluate the potential value of an investment or acquisition. B. Comparable Company Analysis (CCA): This method involves comparing a company to other similar companies in the same industry to determine its valuation. This is typically done by looking at metrics such as P/E ratios, revenue growth, and profit margins. Comparable Company Analysis (CCA) is a financial valuation method that compares a company's financial metrics, such as revenue, earnings, or EBITDA, to those of similar companies in the same industry or sector. This method is also known as a "comps analysis" or "peer group analysis." The goal of CCA is to determine the relative valuation of a company by comparing its financial performance to that of similar companies. This allows analysts and investors to assess the company's strengths and weaknesses and identify potential areas for improvement. To conduct a CCA, an analyst typically selects a group of similar companies and compares their financial metrics to those of the company being analyzed. These metrics may include revenue, earnings, profit margins, price-to-earnings ratio (P/E), or price-to-book ratio (P/B). Once the financial metrics of the comparable companies have been collected, the analyst calculates the average or median values for each metric and compares them to the corresponding values for the company being analyzed. If the company being analyzed has higher or lower financial metrics than the comparable companies, it may indicate that the company is overvalued or undervalued relative to its peers. CCA is widely used in investment banking, corporate finance, and equity research to determine the fair value of a company. It's important to note that CCA should not be the only method used to value a company, and analysts should also consider other factors such as the company's growth prospects, industry trends, and macroeconomic conditions. C. Asset-Based Valuation: This method involves valuing a company based on the value of its assets, including tangible assets such as property, plant, and equipment, as well as intangible assets such as intellectual property and brand equity. Asset-Based Valuation (ABV) is a method of determining the value of a company based on its assets and liabilities. This method is particularly useful for companies that have tangible assets, such as manufacturing companies, real estate firms, and mining companies. To conduct an ABV, an analyst begins by determining the value of the company's assets, which may include its land, buildings, equipment, inventory, and investments. The analyst then subtracts the value of the company's liabilities, such as debt, accounts payable, and other obligations. The resulting value is the company's net asset value (NAV). There are two main types of ABV: the going concern asset-based approach and the liquidation asset-based approach. The going concern asset-based approach assumes that the company will continue to operate as a going concern, and therefore, the value of the assets is based on their current market value. The liquidation asset-based approach assumes that the company will be liquidated, and the value of the assets is based on their liquidation value, which is typically lower than their market value. ABV can be used to determine the minimum value of a company in the event of a liquidation or bankruptcy. However, it may not be the most appropriate valuation method for companies that have significant intangible assets, such as intellectual property, brand recognition, or customer relationships. In summary, ABV is a useful method for valuing companies with tangible assets, and it can provide a conservative estimate of a company's value. However, it should be used in conjunction with other valuation methods and should be tailored to the specific circumstances of the company being analyzed. D. Economic Value Added (EVA) Analysis: This method involves calculating a company's net operating profit after tax (NOPAT) and subtracting the cost of capital to determine the company's economic value added. EVA is a measure of the company's profitability and can be used to assess its overall value. E. Dividend Discount Model (DDM): This method values a company's stock based on the present value of its expected future dividends The Dividend Discount Model (DDM) is a financial valuation method that calculates the present value of future dividends paid by a company. This model is based on the assumption that the value of a stock is equal to the sum of its future dividends, discounted back to their present value. To use the DDM, an analyst first estimates the future dividends that a company is expected to pay. This estimation can be based on the company's historical dividend payments, projected future earnings, or other factors. The analyst then applies a discount rate to the future dividends to account for the time value of money and the risk associated with the investment. The discount rate used in the DDM typically reflects the company's cost of equity, which is the expected rate of return that investors require to invest in the company's stock. This rate can be estimated using various methods, including the Capital Asset Pricing Model (CAPM) or the Dividend Growth Model. Once the future dividends and discount rate have been estimated, the analyst can calculate the present value of the expected dividends using the following formula: V = D / (1 + r) + D / (1 + r) ^ 2 + ... + D / (1 + r) ^ n where PV is the present value of the expected dividends, D is the expected dividend payment, r is the discount rate, and n is the number of periods in the future. The result of the DDM calculation is the intrinsic value of the stock, which can be compared to the current market price to determine whether the stock is undervalued or overvalued. It's important to note that the DDM is based on several assumptions, including the stability and predictability of future dividends, the discount rate used, and the accuracy of the earnings projections. Therefore, it should be used in conjunction with other valuation methods and should be tailored to the specific circumstances of the company being analyzed. F. Valuation multiples are ratios that are used to compare the value of a company to a relevant financial metric, such as earnings, revenue, or book value. These ratios are calculated by dividing the market value of the company by the financial metric being used. Valuation multiples can be useful in comparing companies within the same industry or sector and can help investors identify undervalued or overvalued stocks. Common valuation multiples include: 1. Price-to-Earnings (P/E) Ratio: This is the ratio of a company's current share price to its earnings per share (EPS) over the past 12 months. A higher P/E ratio indicates that investors are willing to pay more for each dollar of earnings, which may reflect higher growth prospects or a higher risk profile. 2. Price-to-Book (P/B) Ratio: This is the ratio of a company's current share price to its book value per share, which is the company's assets minus its liabilities. A lower P/B ratio may indicate that the company is undervalued relative to its assets. 3. Enterprise Value-to-Revenue (EV/R): This is the ratio of a company's enterprise value (which includes its market capitalization, debt, and preferred stock minus its cash and cash equivalents) to its revenue over the past 12 months. A lower EV/R ratio may indicate that the company is undervalued relative to its revenue. 4. Enterprise Value-to-EBITDA (EV/EBITDA): This is the ratio of a company's enterprise value to its earnings before interest, taxes, depreciation, and amortization (EBITDA) over the past 12 months. This ratio is often used in industries with high levels of capital expenditure, such as manufacturing or energy, and a lower ratio may indicate that the company is undervalued relative to its EBITDA. Valuation multiples can provide a quick and easy way to compare the relative value of companies within an industry or sector. However, it's important to note that these ratios are based on historical financial metrics and may not reflect future growth prospects or changes in the industry or macroeconomic conditions. Therefore, valuation multiples should be used in conjunction with other valuation methods and should be tailored to the specific circumstances of the company being analyzed.

What is ROCE and how is it calculated - The most comprehensive guide Need to Make strategic decisions - Use ROCE to guide you through Define Return on Capital Employed, abbreviated as ROCE, is ratio used to understand company’s capital efficiency, i.e. how efficient is the firm in generating profits from the capital it invests in the firm. What Formula? There are several formulas to calculate ROCE, and it depends on what one wants to use it for, what level of details are given and level of details required. Earnings before Interest and Tax/Capital Employed What Components? A. Capital Employed from Asset side of Balance sheet Capital employed = Total Assets – Current Liabilities, or Capital employed = Net Fixed Assets + Net Working Capital, where Net Fixed Assets = Gross PP&E + Additions – Disposals - Depreciation and Impairment B. Capital Employed from Liability side of Balance sheet Capital Employed = Shareholders Equity or funds + Total Debt or Net debt + Deferred Tax Liability Or, Net worth + Net Debt Or Add: If Lease is considered as Debt Where Shareholders Equity can be detailed as: Most comprehensive formula Notes 1. In case of US GAAP, remember: Add Operating Lease Liabilities and Current portion of Operating Lease to total Debt 2. Shareholders equity means Equity attributable to Parent i.e. do not add Non-controlling Interest Earnings Before Interest and Tax EBIT is what is presented in the annual report as Operating profit or EBIT = Adjusted EBIT, where adjusted EBIT calculated after removing one-time non-recurring and non-operating items of expense and income Always remember 1. Add back Non-recurring & one-time expenses, Unusual and Non-operating expenses Less Non-recurring & one-time expenses, Unusual and Non-operating incomes or gains Where can I find them - Financial Statement Linkages? Real Company Analysis - SGS Group Let’s take example, of SGS Group, a Swiss company engaged in Testing, Inspection and Certification business. We have taken numbers from annual reports from 2016 to 2022. The annual reports can be found at https://www.sgs.com/en/investor-relations Return on Capital Employed (CHF Million) Please feel free to pick your poison on which formula to use to calculate Capital Employed. The idea is simply to calculate total debt. EBIT ROCE = Adjusted EBIT / Capital Employed How to Interpret? As we can see from the example above, for every CHF 1 company employs it is able to earn operating profit on an average of 21 percent or in other words how much operating income is generated for each CHF 1. Also, important is comparison with some average or benchmark indicator. Comparison can be done in the following ways: 1. Temporal Comparison, i.e. time series trend analysis 2. Comparison with Industry benchmark 3. Comparison with Industry Average or close peers / competitors Remember when we compare ratios against any average it shall be calculated with same formula otherwise it will result in erroneous comparison. 1. Trend Analysis As can be seen from our example that SGS group has consistently performing with ROCE of above 20% except for 2020 with ROCE falling to 16% due to covid effect. 2. Comparison with Industry Average or close Peers: If you compare SGS group with its close peers like Intertek and Mistras it has faired better than Mistras but not with Intertek. Mistras ROCE Intertek ROCE Comparison with Close Peers But if we compare it with average ROCE of close peers, we find SGS Group has outperformed them by quite a margin, as seen from the table above. It is important to understand that when we compare ratio with peers/competitors, the selection of right peers/competitor is very important. Direct competitors which sell similar if not exactly same type of product or service, in terms of functionality and not form, shall only be compared. Also, when comparing peers’ careful consideration should be given about the share of fixed assets in total assets of the firm. For firms with high fixed asset as percentage of Total assets will have lower ROCE. What Strategic Implications Firms that have ROCE consistently above Weighted Average Cost of Capital (WACC) have sustainable competitive advantage. If we take the numerator of the ROCE ratio which is EBIT and break it further, we see it dependent on Price, Volume of product sold or frequency of services rendered and cost of service. Firms that can charge premium price or have lower costs will consistently perform better in terms of ROCE compared to WACC. How to forecast? To forecast ROCE we need to forecast Revenue, Operating Costs, Total Debt, and Shareholders funds. Shareholders funds are divided into key components for forecasting: 1. Share Capital 2. Treasury Shares 3. Additional Paid-in Capital 4. Share Premium 5. Reserves 6. Retained Earnings 1. Share capital can be forecasted using straight line method. If you want to get complex, then use additional funding requirement schedule. We need to create and 3-statement model to create such a schedule. We need to assume about what Debt equity ratio to find additional share capital or debt. We can also use the optimal capital structure model to forecast it. 2. Treasury Shares Treasury Shares is buy-back of shares by firms. To forecast it we can use either straight line method or look at for clues in annual reports Management Discussion & Analysis part where they discuss their plan for buy-back. But it more likely than not firms do not announce it in advance as it influences stock markets. 3. Additional Paid-in Capital Additional Paid-in capital is additional capital raised by companies. This is similar to share capital we do not need to forecast this and use the share capital schedule. 4. Share Premium If you have additional capital and assume to place at premium forecast, it using share capital requirement and premium that you will charge per share. Otherwise, use straight line forecast. 5. Reserves Reserves are divided into three types: a. General Reserve: Profits retained in business b. Specific Reserve: Like Debenture Redemption Reserve are type of reserve is maintained for a specific purpose c. Capital Reserves: Reserves created for specific purpose and can be used for that reason only Use straight line method to forecast reserves if details about specific purpose for which reserves were created not available. 6. Retained Earnings

Valuation is not just about numbers flashing across financial dashboards, but a story that follows strategy, economics, finance, financial standards, industry analysis, statistics, market research, and consumer behavior. So let's start the journey of the known and unknown about valuation, but first things first. Lets, go through the steps in valuation. This is divided into four sections: Market, Strategy, Forecasting and Finance and then connect each section to understand the Valuation numbers Market Connect Step 1: Characterize the company into an industry to which valuing company belongs Step 2: Understanding the industry characteristics - Porter Five forces Step 3: List and understand the business units into which the company that we value is divided Steps 4: Understand the consumer behavior from the market demand side for each business unit Step 5: List and analyze competitors in each business unit from the perspective of product and services, pricing, supply channels, promotion activities - The Marketing Mix Step 6: Create value and perception maps for each business unit Strategy Connect Step 1: At the corporate level, what strategy is the company following Step 2: At Business Level, what strategy is the company following and understand the elements of value it is propagating Step 3: Conduct Porter 5 forces analysis to understand the profitability of the company Step 4: Conduct competitor analysis to understand the competitive rivalry to understand the impact on revenues, costs and profitability Forecasting Connect Step 1: Forecast key financial parameters using regression or time series forecasting Step 2: Input forecasting output to forecast key financial parameters Finance Connect Step 1: Create basic layout of the valuation model Step 2: Input Historical data in the model - P&L, Balance Sheet, Cash flow statement and Schedules and notes Step 3: Understanding the accounting standards company follows to create financial numbers Step 4: Create Assumption sheet for forecasting financial statements and schedules Step 5: Input and Understand notes to accounts related to income statement, balance sheet, and cash flow statement to re-organize these statements Step 6: Re-organize income statement, balance sheet, and cash flow statement to estimate Net Profit After Tax (NOPAT) and Balance Sheet used for Discounted Cash Flows (DCF) calculation Step 7: Prepare Schedules to Accounts required to complete projected income statement, balance sheet and cash flow statement Step 8: Calculate Weighted Average Cost of Capital to discount Cash Flows Step 9: Estimate company value using Precedent Transactions and Comparable Trading Metrics Step 10: Collate Equity Research Analyst value estimates for the company Step 11: Determine value of a company using DCF methodology Step 12: Compare Valuation of company using different methods Photo Courtesy - Source: https://www.freepik.com/free-photos-vectors/business-valuation?log-in=google