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Pidilite Industries Ltd.

(Based on Starbucks case)

Submitted By:

Gunjan Nimje

2012130

Section ABC

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Pidilite Industries Ltd.

FINANCIAL ANALYSIS OF A BUSINESS STRATEGY

This note introduces and illustrates common ratios used in financial statement analysis. These measures include 3 types (i) Profitability Ratios (ii) Asset Management Ratios (iii) Financial Leverage Ratios. We also discuss DuPont Analysis of ROE. To illustrate how profitability, asset utilization and financial leverage come together to measure ability to generate returns to shareholders. This note uses financial results for fiscal 2011 to 2013 for Pidilite Industries ltd. To illustrate basic financial analysis including common size statements and ratio calculations, interpretations and linkages to business strategy.

BACKGROUND:

A consumer and specialties chemical company Pidilite Industries Limited (Pidilite) was incorporated on 28th July 1969. Pidilite is the market leader in adhesives and sealants, construction chemicals, hobby colors and polymer emulsions in India. Its brand name Fevicol has become synonymous with adhesives to millions in India and is ranked amongst the most trusted brands in India. The Company's product range includes Adhesives and Sealants, Construction and Paint Chemicals, Automotive Chemicals, Art Materials, Industrial Adhesives, Industrial and Textile Resins and Organic Pigments and Preparations. Pidilite was the first company in India, which started production of violet pigment in the year 1973. In 1984, the company's consumer product division was born and on 1989 entered into fevicryl acrylic colors transform fabric and multi-surface painting market. The Company made its maiden public offering of equity shares in the year 1993. During the year 1995, plants of the company in Mumbai and Vapi acquired an ISO 9001 certification. Also the plant at Mahad received an ISO 9002 certification in the same year. Fevicol, the premier brand of the company ranked among the Top 15 Indian brands by FE Brandwagon Year Book 1997. After two years, in 1999, Pidilite had acquired 'Ranipal', leading brand of optical whitener and subsequently acquired 'M-Seal', leading brand of epoxy compounds in the year of 2000. In the identical year of 2000 itself, Fevicol campaign won the Silver ABBY for the Campaign of the Century in India. The Company had launched Dr. Fixit range of Construction Chemicals in the year 2001 and had acquired 'Steelgrip', leading brand of PVC insulation tape in India during the year 2002. Pidilite had again acquired the Roff' brand of Construction Chemicals in the year of 2004. A wholly-owned subsidiary in Singapore, under the banner 'Pidilite International Pte Ltd was incorporated by the company in the year 2005 for its international operations, encompassing the acquisition of overseas companies and joint ventures. Also in the same year 2005, Pidilite had acquired Chemson Asia Pte Ltd, an existing Singapore-based in the business of manufacturing waterproof coating and emulsion paints, thereby adding to its existing, and rapidly-growing construction chemicals and paints range and the company had took over Jupiter Chemicals in Dubai. During the identical year of 2005, the company had incorporated a subsidiary, namely 'Pidilite Do Brasil Desenvolvimento De Negocios Ltd', in Sao Paulo, Brazil and 'Pidilite Middle East Limited', as an offshore company in the Jebel Ali Free Zone of Dubai. During the year 2006, Pidilite had acquired Tristar Colman brand and business, Tristar Fine Art, is a market leader in brushes for drawing and painting and Bamco Thailand, a Construction Chemical company. Also Pidilite had acquired the business and assets of Sargent Art Inc through a subsidiary Pidilite USA Inc, Delaware. The Company had established its R&D centre in Singapore under the banner 'Pidilite Innovation Centre Pte Ltd.' Pidilite had de-merged VAM manufacturing unit at Mahad of Vinyl Chemicals (India) Ltd into the company with effect from 1st April of the year 2007. During 2007-08, Fevicol 1K PUR and Fevicol Kwikgrab were

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introduced by the company to take care of special applications in building construction segment. Pidilite with its wholly-owned subsidiaries had acquired assets and business of branded sealants and adhesives from Hardcastle & Waud Manufacturing Co. Ltd and associates. The Company had acquired Bhimad Commercial Co. and Madhumala Traders by investing Rs 170,000 each in February of the year 2008. Fevicol has been ranked No. 1 in Household Care Segment in June 2008.

COMMON SIZE STATEMENTS

A helpful starting point for a financial analysis is a set of common size financial statement. A common size income statement expresses all income statement items as a percentage of total income, whereas a common size balance sheet expresses all balance sheet items as a percentage of total Assets. These statement allow us to develop a preliminary understanding of trends in revenue mix, cost structure and asset holding, along with how a business is funded.

The common size statement for income statement and balance sheet are presented in the exhibit attached with the document. According to the common size statement for income statement, Profit before Tax and Other income has increased over 2012-13. This suggests that company is on a growth path.

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FINANCIAL RATIOS

Financial ratios for Pidilite Industries Ltd.

PROFITABILITY MANAGEMENT RATIOS

A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.

GROSS MARGIN

A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations.

Revenue = sales

This number represents the proportion of each dollar of revenue that the company retains as gross profit. For example, if a company's gross margin for the most recent quarter was 35%, it would retain $0.35 from each dollar of revenue generated, to be put towards paying off selling, general and administrative expenses, interest expenses and distributions to shareholders. The levels of gross margin can vary drastically from one industry to another depending on the business. For example, software companies will generally have a much higher gross margin than a manufacturing firm.

OPERATING MARGIN

A ratio used to measure a company's pricing strategy and operating efficiency. Calculated as:

Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. Also known as "operating profit margin" or "net profit margin".

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Operating margin gives analysts an idea of how much a company makes (before interest and taxes) on each dollar of sales. When looking at operating margin to determine the quality of a company, it is best to look at the change in operating margin over time and to compare the company's yearly or quarterly figures to those of its competitors. If a company's margin is increasing, it is earning more per dollar of sales. The higher the margin, the better. For example, if a company has an operating margin of 12%, this means that it makes $0.12 (before interest and taxes) for every dollar of sales. Often, nonrecurring cash flows, such as cash paid out in a lawsuit settlement, are excluded from the operating margin calculation because they don't represent a company's true operating performance.

NET MARGIN

The ratio of net profits to revenues for a company or business segment - typically expressed as a percentage – that shows how much of each dollar earned by the company is translated into profits. Net margins can generally be calculated as:

Revenue = sales

Net margins will vary from company to company, and certain ranges can be expected from industry to industry, as similar business constraints exist in each distinct industry. A company like Wal-Mart has made fortunes for its shareholders while operating on net margins less than 5% annually, while at the other end of the spectrum some technology companies can run on net margins of 15-20% or greater.

Most publicly traded companies will report their net margins both quarterly (during earnings releases) and in their annual reports. Companies that are able to expand their net margins over time will generally be rewarded with share price growth, as it leads directly to higher levels of profitability.

PROFITABILITY : ACCOUNTING MARGINS

RATIO FORMULA 2012 2011 2010

Gross Profit

Margin (%) gross profit / sales 14.41 14.96 16.29 Operating Profit

Margin (%) operating profit / sales 19.33 19.88 21.42 Net Profit Margin

(%) net income / sales 9.13 13.45 14.26

Gross profit margin, operating profit margin and net profit margin, all are decreasing over a period from 2010 to current year. This suggests that company’s profit margin is under strong pressure. Sales are increasing but profit margin is decreasing.

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ASSET MANAGEMENT RATIOS

Asset management (turnover) ratios compare the assets of a company to its sales revenue. Asset management ratios indicate how successfully a company is utilizing its assets to generate revenues. Analysis of asset management ratios tells how efficiently and effectively a company is using its assets in the generation of revenues. They indicate the ability of a company to translate its assets into the sales. Asset management ratios are also known as asset turnover ratios and asset efficiency ratios.

Total Asset Turnover Ratio:

Asset turnover (total asset turnover) is a financial ratio that measures the efficiency of a company's use of its assets to product sales. It is a measure of how efficiently management is using the assets at its disposal to promote sales. The ratio helps to measure the productivity of a company's assets. Calculation (formula)

Asset turnover = Revenue / Average total assets

RETURN ON ASSETS (ROA):

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".

The formula for return on assets is:

ASSET MANAGEMENT RATIOS: OVERALL

RATIO FORMULA 2012 2011 2010

Return on Assets

(ROA) (%) net income / total assets 13.88 16.95 15.83 Total Assets

Turnover Ratio sales / total assets 1.52 1.26 1.11

ROA is decreasing but asset turnover ratio is increasing, which means company is not able to put its asset to the best use and thus generating less sales with the given level of asset.

FIXED ASSET TURNOVER

Fixed asset turnover ratio compares the sales revenue a company to its fixed assets. This ratio tells us how effectively and efficiently a company is using its fixed assets to generate revenues. This ratio indicates the productivity of fixed assets in generating revenues. If a company has a high fixed asset turnover ratio, it shows that the company is efficient at managing its fixed assets. Fixed assets are important because they usually represent the largest component of total assets.

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The formula for calculation of fixed asset turnover ratio is given below:

Fixed Asset Turnover Ratio = Sales Revenue / Total Fixed Assets

DEBTORS TURNOVER RATIO

An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.

Formula:

By maintaining accounts receivable, firms are indirectly extending interest-free loans to their clients. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient.

A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm.

DAY SALES IN ACCOUNTS RECEIVABLE:

A measure of the average number of days that a company takes to collect revenue after a sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money.

Days sales outstanding is calculated as:

INVENTORY TURNOVER

Inventory turnover is a measure of the number of times inventory is sold or used in a given time period such as one year. It is a good indicator of inventory quality (whether the inventory is obsolete or not), efficient buying practices, and inventory management. This ratio is important because gross profit is earned each time inventory is turned over. Also called stock turnover.

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Calculation (formula)

Inventory turnover is calculated by dividing the cost of goods sold by the average inventory level ((beginning inventory + ending inventory)/2):

Inventory turnover = Cost of goods sold / Average Inventory DAY COST OF SALES IN INVENTORIES:

A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory (including goods that are work in progress, if applicable) into sales. Generally, the lower (shorter) the DSI the better, but it is important to note that the average DSI varies from one industry to another. Here is how the DSI is calculated:

Also known as days inventory outstanding (DIO).

ASSET MANAGEMENT RATIOS : KEY ASSET CATEGORIES

RATIO FORMULA 2012 2011 2010

Fixed Assets Turnover Ratio

sales / net fixed asset 1.12 1.01 0.96

Debtors Turnover Ratio

sales / average debtors 46.25 52.79 40.04

Days sales in accounts receivables

365 / debtors turnover ratio 7.9 6.9 9.1

Inventory Turnover Ratio

COGS / average inventory 10.02 8.79 19.04

days cost of sales in inventories

inventories / COGS per day

36.4 41.5 19.2

DEBT MANAGEMENT RATIOS

Debt Management Ratios attempt to measure the firm's use of Financial Leverage and ability to avoid financial distress in the long run. These ratios are also known as Long-Term Solvency Ratios.

Debt is called Financial Leverage because the use of debt can improve returns to stockholders in good years and increase their losses in bad years. Debt generally represents a fixed cost of financing to a firm. Thus, if the firm can earn more on assets which are financed with debt than

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the cost of servicing the debt then these additional earnings will flow through to the stockholders. Moreover, our tax law favors debt as a source of financing since interest expense is tax deductible. With the use of debt also comes the possibility of financial distress and bankruptcy. The amount of debt that a firm can utilize is dictated to a great extent by the characteristics of the firm's industry. Firms which are in industries with volatile sales and cash flows cannot utilize debt to the same extent as firms in industries with stable sales and cash flows. Thus, the optimal mix of debt for a firm involves a tradeoff between the benefits of leverage and possibility of financial distress.

DEBT TO ASSET RATIO

A metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. Calculated by adding short-term and long-term debt and then dividing by the company's total assets.

EQUITY MULTIPLIER

A measure of financial leverage. Calculated as:

Total Assets / Total Stockholders' Equity

Like all debt management ratios, the equity multiplier is a way of examining how a company uses debt to finance its assets. Also known as the financial leverage ratio or leverage ratio.

In other words, this ratio shows a company's total assets per dollar of stockholders' equity. A higher equity multiplier indicates higher financial leverage, which means the company is relying more on debt to finance its assets.

DEBT MANAGEMENT RATIOS

RATIO FORMULA 2013 2012 2011

debt to total assets long - term debt / total assets - 4.01% 11.29% equity multiplier total assets / stockholders equity 1.46 1.7 1.75

DuPont Analysis of Return on Equity

A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE). It is also known as "DuPont identity". DuPont analysis tells us that ROE is affected by three things:

 Operating efficiency, which is measured by profit margin

 Asset use efficiency, which is measured by total asset turnover

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ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)

It is believed that measuring assets at gross book value removes the incentive to avoid investing in new assets. New asset avoidance can occur as financial accounting depreciation methods artificially produce lower ROEs in the initial years that an asset is placed into service. If ROE is unsatisfactory, the DuPont analysis helps locate the part of the business that is underperforming.

The DuPont Analysis is important determines what is driving a company's ROE; Profit margin shows the operating efficiency, asset turnover shows the asset use efficiency, and leverage factor shows how much leverage is being used.

The method goes beyond profit margin to understand how efficiently a company's assets generate sales or cash and how well a company uses debt to produce incremental returns.

Using these three factors, a DuPont analysis allows analysts to dissect a company, efficiently determine where the company is weak and strong and quickly know what areas of the business to look at (i.e., inventory management, debt structure, margins) for more answers. The measure is still broad, however, and is not a substitute for detailed analysis.

The DuPont analysis looks uses both the income statement as well as the balance sheet to perform the examination. As a result, major asset purchases, acquisitions, or other significant changes can distort the ROE calculation. Many analysts use average assets and shareholders' equity to mitigate this distortion, although that approach assumes the balance sheet changes occurred steadily over the course of the year, which may not be accurate either.

DUPONT ANALYSIS OF ROE

RATIO FORMULA 2013 2012 2011

Net Profit Margin

(%) net income / sales 9.13 13.45 14.26

Total Assets

Turnover Ratio sales / total assets 1.52 1.26 1.11 Return on Assets

(ROA) (%) net income / total assets 13.88 16.95 15.83 Asset to equity total assets / stockholders equity 1.0 1.1 1.1 Return on equity

(%) net income / stockholders equity 14.39% 18.99% 17.83%

SUMMARY

The financial statements of Pidilite Industries Ltd. are translated into common size statements so as to compare the current result with the previous years.

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Exhibit 1

Profit & Loss account of PIDILITE INDUSTRIES LTD. (in Rs. Cr.)

March 13 March 12 March 11

12 mths 12 mths 12 mths

Revenue from Operations (Gross) 35,485.99 29,746.81 25016.05

Less: Excise Duty 2,169.08 1,583.61 1345.83

Revenue from Operations (Net) 33,316.91 28,163.20 23670.22

Other Income 658.97 427.67 285.76

Total Income 33,975.88 28,590.87 23955.98

EXPENSES

Cost of Materials 16,966.67 14,637.41 11856.18 Purchase of Stock in Trade 1,561.21 1,316.06 1201.74 Change in inventories of Finished Goods, - - (585.40) Work-in-Progress and Stock in Trade

(392.45) (279.16) - Employee Benefits Expense 3,010.29 2,611.56 2264.61 Depreciation and Amortization Expense 532.41 479.26 443.87

Finance Cost 121.74 245.04 301.56

Other Expenses 6,039.76 5,013.24 4499.47

Total Expenses 27,839.63 24,023.41 19981.93

Profit before Exceptional Items and Tax 6,136.25 4,567.46 3974.05 (Add)/Less: Exceptional Items (net) (59.44) 126.29 -

Profit before Tax 6,195.69 4,441.17

Less: Tax Expenses

Current Tax 1,558.75 1,051.50 940.84

Deferred Tax 29.34 44.61 (5.70)

Total Tax expenses 1,588.09 1,096.11 935.14

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EXHIBIT 2

Consolidated Balance Sheet of PIDILITE INDUSTRIES LTD.(In Rs. Cr)

March '13 March '12 March '11-

12 mths (in rs.Cr) 12 mths (in rs.Cr) 12 mths (in rs.Cr)

Shareholder’s Fund

Share Capital 512.64 507.65 506.13

Reserves and Surplus 16811.73 13208.99 10889.13

Non-Current Liabilities

Long Term Borrowings - 922.97 2598.91

Differed tax Liability 483.62 454.27 409.66

Long-Term Provisions 142.87 101.38 86.72

Current Liabilities

Short Term Borrowings - - 27.70

Trade Payables 2071.37 1702.28 1428.90

Other Current Liabilities 3727.73 4928.64 2853.62 Short-Term Provisions 1634.30 1179.46 1193.49 7433.40 7810.38 5503.71 TOTAL 25384.26 23005.64 19994.26 ASSETS Non-Current Assets Fixed Assets Tangible Assets 5119.94 4717.13 4127.97 Intangible Assets 217.13 242.09 281.74 Capital Work-In-Progress 4087.09 3713.35 3267.72 9424.16 8672.57 7677.43 Non-Current Investments 2623.17 2418.83 2355.91

Long Term loans and

Advances 242.28 249.51 179.40

Other Non-Current Assets 1.37 8.84

12289.61 11342.28 10221.58

Current Assets

Current Investments 2846.29 909.16 1641.49

Inventories 4511.64 3963.04 3544.40

Trade Receivables 3667.63 3261.18 2865.91

Cash and Bank Balances 1368.24 2577.19 923.24 Short-Term Loans and Advances 594.08 859.87 756.84

Other Current Assets 106.77 92.92 40.80

13094.65 11663.36 9772.68

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Exhibit 3

COMMON SIZE INCOME STATEMENT (in Rs. Cr.) %

March 13 March 12 March 11 March 13 March 12 March 11

12 mths 12 mths 12 mths

Revenue from Operations (Gross)

35,485.99 29,746.81 25016.05 104.44 104.04 104.43 Less: Excise Duty 2,169.08 1,583.61 1345.83 6.38 5.54 5.62

Revenue from Operations (Net) 33,316.91 28,163.20 23670.22 98.06 98.50 98.81 Other Income 658.97 427.67 285.76 1.94 1.50 1.19 Total Income 33,975.88 28,590.87 23955.98 100.00 100.00 100.00 EXPENSES Cost of Materials 16,966.67 14,637.41 11856.18 49.94 51.20 49.49

Purchase of Stock in Trade 1,561.21 1,316.06 1201.74 4.60 4.60 5.02 Change in inventories of Finished Goods, - - (585.40) 0.00 0.00 -2.44 Work-in-Progress and Stock in Trade (392.45) (279.16) -1.16 -0.98 0.00

Employee Benefits Expense 3,010.29 2,611.56 2264.61 8.86 9.13 9.45

Depreciation and Amortization Expense 532.41 479.26 443.87 1.57 1.68 1.85 Finance Cost 121.74 245.04 301.56 0.36 0.86 1.26 Other Expenses 6,039.76 5,013.24 4499.47 17.78 17.53 18.78 Total Expenses 27,839.63 24,023.41 19981.93 81.94 84.02 83.41

Profit before Exceptional Items and Tax

6,136.25 4,567.46 3974.05 18.06 15.98 16.59 (Add)/Less: Exceptional

Items (net)

(59.44) 126.29 - -0.17 0.44 0.00

Profit before Tax 6,195.69 4,441.17 4030.65 18.24 15.53 16.82

Less: Tax Expenses

Current Tax 1,558.75 1,051.50 940.84 4.59 3.68 3.93

Deferred Tax 29.34 44.61 (5.70) 0.09 0.16 -0.02

Total Tax expenses 1,588.09 1,096.11 935.14 4.67 3.83 3.90

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Exhibit 4

COMMON SIZE BALANCE SHEET (in Rs. Cr.)

2013 2012 2011 2013 2012 2011

Shareholders Fund

Share Capital 512.64 507.65 506.13 2.02 2.21 2.53 Reserves and Surplus 16811.73 13208.99 10889.13 66.23 57.42 54.46

Non-Current Liablity

LT Borrowings - 922.97 2598.91 0.00 4.01 13.00 Differed tax Liability 483.62 454.27 409.66 1.91 1.97 2.05 Long-Term Provisions 142.87 101.38 86.72 0.56 0.44 0.43 Current Liabilities Short Term Borrowings - - 27.70 - - 0.14 Trade Payables 2071.37 1702.28 1428.90 8.16 7.40 7.15 Other Current Liabilities 3727.73 4928.64 2853.62 14.69 21.42 14.27 Short-Term Provisions 1634.30 1179.46 1193.49 6.44 5.13 5.97 7433.40 7810.38 5503.71 29.28 33.95 27.53 TOTAL 25384.26 23005.64 19994.26 100.00 100.00 100.00 ASSETS Non-Current Assets Fixed Assets Tangible Assets 5119.94 4717.13 4127.97 20.17 20.50 20.65 Intangible Assets 217.13 242.09 281.74 0.86 1.05 1.41 Capital Work-In-Progress 4087.09 3713.35 3267.72 16.10 16.14 16.34 9424.16 8672.57 7677.43 37.13 37.70 38.40 Non-Current Investments 2623.17 2418.83 2355.91 10.33 10.51 11.78

Long Term loans and Advances 242.28 249.51 179.40 0.95 1.08 0.90 Other Non-Current Assets - 1.37 8.84 0.00 0.01 0.04 12289.61 11342.28 10221.58 48.41 49.30 51.12 Current Assets 0.00 0.00 0.00 Current Investments 2846.29 909.16 1641.49 11.21 3.95 8.21 Inventories 4511.64 3963.04 3544.40 17.77 17.23 17.73 Trade Receivables 3667.63 3261.18 2865.91 14.45 14.18 14.33 Cash and Bank Bal. 1368.24 2577.19 923.24 5.39 11.20 4.62 Short-Term Loans and

Advances

594.08 859.87 756.84 2.34 3.74 3.79 Other Current Assets 106.77 92.92 40.80 0.42 0.40 0.20 13094.65 11663.36 9772.68 51.59 50.70 48.88

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REFERENCES

www.moneycontrol.com

http://www.pidilite.com/financials-reports.html

References

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