Download - mohd islam Final Report11.doc
-
7/31/2019 mohd islam Final Report11.doc
1/81
Letter of Authorization
The report is submitted as partial fulfillment of the requirement of MBA Program of JKPS
GURGOAN, which has been authorized by Prof. SANJAY RASTOGI.
1 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
2/81
ACKNOWLEDGEMENT
I am grateful to Maruti Suzuki India Limited for providing me the opportunity to undertake
Summer Internship Program at their organization. The SIP has been of great learning to me and
has allowed me to understand various things from a practical point of view.
I would like to express sincere gratitude towards Mr. Lalit Khilani, Deputy Manager Finance
and various Departmental heads, because without their help, guidance and encouragement this
report would not have been possible.
I would also like to thank my college mentor Prof. SANJAY RASTOGI for his continuous
support and guidance. Without him, the project would not have been a success.
My gratitude and appreciation extends to all my friends who have been directly orindirectly
being associated with the project for their support and encouragement.
Finally, I owe my deepest and most invaluable debt to my family as I would have never come
this far without their unconditional love and support.
(MOHAMMAD ISLAM)
2 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
3/81
TABLE OF CONTENT
ACKNOWLEDGEMENT .................................................................................2
CHAPTER 1: INTRODUCTION .....................................................................5
PURPOSEOFTHEPROJECT ............................................................................................................... 5LIMITATIONSOFTHE STUDY: ..........................................................................................................6METHODOLOGY: ...........................................................................................................................7
CHAPTER 2: ANALYSIS .................................................................................8
SWOT ANALYSIS
........................................................................................................................ 8INDUSTRY..................................................................................................................................17ABOUTTHE COMPANY: ................................................................................................................22
CHAPTER 3: PROJECT DESCRIPTION ....................................................28
ABOUTTHEPROJECT.................................................................................................................... 28TYPESOFBENCHMARKING............................................................................................................ 28TRENDANALYSISOF MARUTI SUZUKI INDIA LTD. FROM FY06 TO FY08 .........................................34TRENDANALYSISOF TATA MOTORS LTD. FROM FY06 TO FY08 ....................................................45TRENDANALYSISOF MAHINDRAAND MAHINDRA LTDFROM FY06 TO FY08 ...................................55INTERFIRM ANALYSIS ...............................................................................................................64
ECONOMIC VALUE ADDED........................................................................................................... 70CALCULATIONOF EVA .............................................................................................................72CFROI .....................................................................................................................................75
RECOMMENDATION ....................................................................................77
CONCLUSION: ................................................................................................78
REFERENCES: ................................................................................................79
3 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
4/81
ABSTRACT
A leader in the automobile sector with more than 50 % market share, Maruti Suzuki India
Limited was looking for ways to reduce its costs. With the number of players increasing and
the existing players aggressively coming up with new products the company needed to
benchmark itself with the other players in the market to look for ways to retain its market share
in the increasingly competitive market. The sharp increase in prices of inputs and the economic
slowdown has made it imperative for the companies to look for avenues for growth and ways to
reduce the various costs associated with the manufacturing of the products. For this it is
important to understand the financial structure of the competitors.
Hence Benchmarking of Maruti Suzuki with respect to that of Tata Motors Pvt. Ltd and
Mahindra and Mahindra Pvt. Ltd was undertaken.
For the above purpose the financial statements of all the companies were analyzed and then
reconciled as per the policies and procedures adopted at Maruti Suzuki. The next step involved
calculation of the various ratios to understand the short term liquidity, long term solvency, long
term profitability and cost associated with manufacturing of the products of different
companies. Both inter and intra firm analysis was undertaken and then comparison of Maruti
Suzuki with respect to the financial statements of other companies was done. . The analysis
would help to understand:
The financial soundness of the companies
The policies and accounting methods undertaken by them
The costs of various heads like manufacturing, selling and distribution
The reason for increase in the costs and comparison of the same with respect to its
competitors-whether the increasing in costs are due to huge imports undertaken by the
company, or is it due to increase in the input price of various parts
The position of the product of the company with that of its competitors
4 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
5/81
CHAPTER 1: Introduction
Purpose of the project
The project involves benchmarking Maruti Suzuki India Limited with respect to Tata Motors
Pvt. Ltd and Mahindra and Mahindra Pvt. Ltd. The project involves study of the financial
statements of the above mentioned companies and then reconciliation of the accounts of the
other companies as per the books of accounts of Maruti. It aims at inter firm and intra firm
comparison to help Maruti Suzuki to look for avenues to reduce costs and look for avenues toincrease its market share.
Primary Objective:
The main objective of the project is to help Maruti Suzuki to analyze itself with respect to its
competitors so as to help the company to produce cars in an effective, efficient and efficacious
manner. The project also would help the company to look for avenues to increase its market
share by understanding the product and the promotional strategies undertaken by itscompetitors.
Sub-Objective:
Finding out the various ratios to understand the financial soundness of the companies
with respect to the short term liquidity position, long term profitability, long term
solvency, interest coverage and the various cost ratios.
Calculate the Economic Value Added
Calculate the Cash Flow return on Investment
5 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
6/81
-
7/31/2019 mohd islam Final Report11.doc
7/81
-
7/31/2019 mohd islam Final Report11.doc
8/81
-
7/31/2019 mohd islam Final Report11.doc
9/81
-
7/31/2019 mohd islam Final Report11.doc
10/81
-
7/31/2019 mohd islam Final Report11.doc
11/81
-
7/31/2019 mohd islam Final Report11.doc
12/81
The rapid growth in cellular phone and cable and satellite television penetration in India in
recent years is fuelling the desire of a better lifestyle. These would acts as an enabler for the
automobile industry and help to cater to the new sectors of the economy.
International Business:
The automobile companies are expanding their product portfolio and increasing launching new
products to cater to the needs of both the domestic and the international market. This has
resulted in changing of policies of the companies and plans of making India as a hub for
exports. The companies are increasingly targeting new and untapped foreign countries.
Threats
Global Competition:
India is increasingly becoming a preferred destination for the global automotive players. The
global automotive manufactures present in India are enhancing their production capacities and
many new global players are entering the country in anticipation of burgeoning automotive
demand. To counter the threat of growing global competition, the companies are planning to
bridge the quality gap between its products and foreign offerings while maintaining its low costproduct development/sourcing advantage.
Fuel Prices:
The international crude prices moved as high in the range of US$ 70 to 144 per barrel but
stabilized in the range 0f US$ 50 to 60 per barrel. Hardening of fuel prices could adversely
affect impact domestic automotive sales.
Input Costs:
Prices of commodity items particularly steel, non-ferrous metals, rubber and engineering
plastics etc witnessed an upward movement, which was offset by the cost reduction initiatives
pursued by the various automobile companies. The increase in the prices of raw material has
lead to a sharp decline in the profit of the automobile companies.
Interest rates hardening and other inflationary trends:
12 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
13/81
-
7/31/2019 mohd islam Final Report11.doc
14/81
-
7/31/2019 mohd islam Final Report11.doc
15/81
-
7/31/2019 mohd islam Final Report11.doc
16/81
-
7/31/2019 mohd islam Final Report11.doc
17/81
-
7/31/2019 mohd islam Final Report11.doc
18/81
-
7/31/2019 mohd islam Final Report11.doc
19/81
schemes. For example there are no offers on Swift diesel and Dzire owing to the huge
demand for the product.
Bargaining power of suppliers
1. Strategic Suppliers: Steel is a major input in the automobile industry and the suppliers
are a few in number. Any revision of prices by these players may influence the
profitability of the manufacturers.
2. Substitute inputs: They are restricted to non-critical or additional components like
electronic gadgets and interior design components and thus the suppliers of the same
have a major influence on the decision making power.
3. Switching costs of suppliers: The cost of switching plays an important role in terms of
deciding the power of suppliers. If the switching cost is low, the suppliers have huge
influence in terms of decision making. MSIL being the largest manufacturer enjoys
considerable influence over its suppliers. 70 % of the suppliers are within the range of
100 m from the Gurgaon plant.
4. Competition between suppliers: The number of suppliers for the particular product also
influences the decision making power of the suppliers. If there are large numbers of
suppliers for a particular product, the manufacturer has a say in decisions.
Industry Competitors:
1. Number of Players: The number of firms operating in the market plays a major role in
the industry. If the degree of competition is high, then buyers have a say in decision
making.
2. Products and Price: The product range offered by the company and the target segment
chosen by the company influences the decision making power. Maruti Suzuki
manufactures 11 models catering to different segment The price and the features
associated with respect to the product influence the decision making. For example we
have the Wagon R competing with respect to the Santro Xing. Thus the buyers while
purchasing the product look for the substitutes available in the market and the segment
they are planning to purchase.
19 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
20/81
-
7/31/2019 mohd islam Final Report11.doc
21/81
21 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
22/81
-
7/31/2019 mohd islam Final Report11.doc
23/81
-
7/31/2019 mohd islam Final Report11.doc
24/81
THE 3 K
Kimerareta Koto Ga - What has been decided
Kihin Doro - as per standard
Kichin To Momoru - must be followed(Annual Report 2007-08)
Shareholders Structure:-
Suzuki Motor Corporation has 54 % stake in Maruti Suzuki India Limited. The rest of the
shares are held by financial institutions such as LIC, and the general public.
Board Of Directors:
Mr R.C. Bhargav Chairman
Mr. Shinzo Nakanishi - Managing Director
Snapshot of company`s performance:
Highest ever domestic sale in the year 2007-08 -711818 units
Highest ever export -53024 units
Highest ever Net sales in2007-08 - Rs 178603 million
Highest ever Net profit - Rs 17308 million
Models:
The company offers 11 models to cater to the needs of different customers. The various models
offered include:
Maruti 800 Omni Alto
Wagon R Swift Swift Dzire
Versa Sx4 Grand Vitara
Zen Estilo Gypsy
24 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
25/81
-
7/31/2019 mohd islam Final Report11.doc
26/81
Finance division
Maruti Suzuki India Limited has seven different departments under the fianc division to ease
the functionality of the finance department given the nature of complexity attached with respect
to the functions performed by the departments. The various departments under finance division
are:
Budget, Cost and Accounts Department (BAC)
Sales Accounting Department (SAC)
Vendor Payments and Excise Department (VPE)
Corporate Accounts and Reporting (CAR)
Direct Taxation (TAX)
Corporate Finance and Planning (CFP)
Internal Audit (IAU)
Finance Secretary (FNS)
26 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
27/81
-
7/31/2019 mohd islam Final Report11.doc
28/81
-
7/31/2019 mohd islam Final Report11.doc
29/81
-
7/31/2019 mohd islam Final Report11.doc
30/81
-
7/31/2019 mohd islam Final Report11.doc
31/81
-
7/31/2019 mohd islam Final Report11.doc
32/81
Tata Motors Ltd with Maruti Suzuki India Ltd
1. Income has been categorized as Sales, Income from Services and Dividend and
other income.
32 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
33/81
-
7/31/2019 mohd islam Final Report11.doc
34/81
-
7/31/2019 mohd islam Final Report11.doc
35/81
-
7/31/2019 mohd islam Final Report11.doc
36/81
Decrease in Finished Goods: There is 54 % decrease in Finished Goods from 4857 million
to 2247 million.
Increase in components and raw materials at factory: There is 107 % increase in
Components and raw materials at factory from 846 million to 1747 million.
Increase in Tools at Factory: There is 60 %increase in Tools at Factory from 86 million to
138 million.
From FY07-08, the Days in Inventory (DII) increased from 17 to 21.This is pertaining to
following factors:
Increase in Finished Goods: There is 141 % increase in Finished Goods from 2247 million
to 5408 million.
Increase in Components at factory: There is 26 % increase in Consumables at Factory from
1747 million to 2204 million.
Inference:
From FY06 to FY07, the inventory reduced due to discontinuation of several products. The old
Zen was discontinued .In the run up to launch of a new WagonR and WagonR Duo, the
company brought down the production and inventory of old WagonR. Also .Production of
Swift shifted out of Gurgaon plant to upcoming facility in Manesar. The company launched
the new Zen Estilo and Swift Diesel.
The increase in inventory from FY07 to FY08 is due to the new products launched and
increased capacity because of Manesar Plant. The company launched SX4, Swift Dzire andGrand Vitara. During the year, the Company discontinued production of Esteem, its entry
sedan launched in 1994.
3. Long Term Profitability
Ratios Analyzed: DuPont analysis
36 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
37/81
-
7/31/2019 mohd islam Final Report11.doc
38/81
Decrease in Equity Margin: From FY07 to FY08, the Equity Margin has decreased from
1.48 to 1.46.
Increase in Assets Turnover: From FY07 to FY08, the Assets turnover increased from
1.44 to 1.45. This increase is due to 22 % increase in Net Sales and 24 % increase in Net
Assets. The 24 % increase in Net Assets from 76522 to 94857 million is mainly due to
following reasons:
o Increase in Investments: There is 52 % increase in Investments from Rs 34092
to Rs 51807 million. The major change was in the long term unquoted mutual
funds. It increased by 130 % from Rs 1321 million to Rs 3037 million.
o Increase in Capital Work in Progress: There is 194 % increase in Capital Work
in Progress from Rs 2507 million to Rs. 7363 million.
Increase in PAT: The PAT increased by 31 % from 11834 to 15553 million.
Inference:
The profitability has decreased from FY06 to FY07 and increased from FY07 to FY08.This is
due to the decrease in Assets Turnover, as the asset base of company increased. The company
has been pursuing expansion initiatives to enhance its production capacities and improve the
products. The companys new plant at Manesar started operations in September 2006.All the
newly launched models namely Swift, SX4 and DZire.
The company is also setting up a new gasoline engine plant in its Gurgaon facilities. The new
engines produced will be more fuel efficient and help to serve a customer better. In recentyears, the Company has also undertaken a series of market initiatives, notably the expansion of
the sales network, offering the entire range of car-related services in a convenient and
transparent manner and implementing standards to improve customer service.
Thus with increase in assets, new product launches and attempts to improve the margins, the
profitability of company can increase in the coming years.
4. Long Term Solvency
38 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
39/81
-
7/31/2019 mohd islam Final Report11.doc
40/81
(Source:Annual Report)
From FY06- FY07, the Interest Coverage Ratio has decreased from 86 to 61.This change in
pertaining to the following reason:
Increase in Interest to be paid: From FY06 to FY07, the interest increased by 84 % from
Rs. 204 million to Rs. 376 million.
From FY07 to FY08, the Interest Coverage ratio decreased from 61 to 43.This is pertaining to
the following reason:
Increase in Interest: From FY07 to FY08, the interest increased by 58 % from Rs. 376
to Rs. 596 million.
Inference:
The companys debt has been increasing over the years. The increase is mainly observed in the
unsecured loan portion of the debt .Further, in FY07 and FY08 the unsecured loan has been in
the form of Foreign Currency or Export Credit.
The low debt ratio and high interest coverage ratio underscores the financial strengths of the
company. Thus the financial obligations can be timely fulfilled from the operating income.
The company has been awarded the highest financial credit rating of AAA/Stable (long term)
and P1+ (Short Term) on its bank facilities by CRISIL.
40 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
41/81
5. Margin Ratios:
Material Cost:
(Source:Annual Report)
From FY-6 to FY07, the Material cost margin decreased from 0.78 to 0.74.This is pertaining
to following major reasons:
Increase In Net Sales: From Fy06 to FY07, the net sales increased by 21 % from120034 million to 145922 million.
Increase in consumption of Raw Materials: From FY06 to FY07, there is only 14 %
increase in consumption of Raw Materials and Components from 88766 million to
101374 million.
Inference
41 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
42/81
-
7/31/2019 mohd islam Final Report11.doc
43/81
For FY07-FY08, the Manufacturing, administration and other expenses margin remained
almost constant. The increase in manufacturing expenses was mainly due to power and fuel
expenses, which increased by 51 % and increase in royalty by 35 %.
Selling, Distribution and other expenses to Sales
From FY06 to FY07,the Selling and Distribution expenses Margin has remained Constant at
0.03.Thus it can be noted that the increase in selling and distribution expenses have been in
accordance to the increase Net Sales for each year.
EBIT Margin and EBITDA Margin
From FY06 to FY07, the EBIT Margin has 0.15 to 0.16 and EBITDA Margin has increased
from 0.17 to 0.18.The increase has been mainly due to following reasons:
Increase in EBIT: The EBIT has increased by 30 % from 17704 million to 23,174
million. But the Expenses have increased by only 17 %.
Increase in Depreciation: The depreciation increased by 84 % from 204 million to 376
million.
From FY07 to FY08, the EBIT Margin decreased from 0.16 to 0.14 and EBITDA Margin has
remained constant at 0.18.The decrease in EBIT Margin is pertaining to the following factors:
Increase in Expenses: The EBIT increased by 10 %, even while Net Sales showed
growth of 22% .The expenses increased by 28 % due to increase in Consumption of
Raw Materials and 36 % increase in Manufacturing, Administration and other
expenses.
Increase in Depreciation: From FY07 to FY08, the depreciation increased by 109 %
from Rs. 2714 million to Rs 5682 million. Based on technical evaluations and
considering various market trends like shortening of product life cycles, the company
has revised the estimated useful life of certain Plant and Machinery from between 9-13
years, to between 8-11 years, of dies and figs from 5 years to 4 years and Electronic
Data Processing from 6 years to 3 years.
43 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
44/81
Inference:
The VA-VE initiatives (Value Analysis and Value Engineering) pursued aggressively by the
company in partnership with suppliers have helped the company reduced cost of making a car
without compromising on quality. The higher depreciation provision, is a move by the
Company to proactively align its financial accounting with shorter product lifecycles
anticipated in the future. Thus the company plans to upgrade its assets in the future to improve
the product according to market trend.
44 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
45/81
-
7/31/2019 mohd islam Final Report11.doc
46/81
-
7/31/2019 mohd islam Final Report11.doc
47/81
(Source: Annual report, Tata Motors Ltd)
Return on Equity:
From FY06 to FY07: The increase in ROE from 0.27 to 0.28 can be attributed to the following
reasons:
Increase in Assets turnover : From FY06 to FY07, the increase in from 2.27 to 2.36 is
pertaining to the following reasons:
o Increase in Net Sales: There is the 33 % increase in Net Sales from Rs. 2,
06,534 million to Rs. 2, 74,700 million.
o Increase in Net Assets: The Net Fixed Assets increased by 35 % from Rs 65363
million to Rs 88715 million. The increase in Net Fixed Assets is mainly due to
164% increase in Capital Work in Progress and 22% increase in Investments.
o Increase in Investments: Investments of the Company increased to Rs.24770
million in FY 2006-07 from Rs.2, 0151.5 million in FY 2005-06. The Company
made an investment of Rs.5500 million in the wholly owned subsidiary viz.
TML Financial Services Limited engaged in the vehicle financing operations.
47 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
48/81
Increase in Financial Leverage (FL): From FY06 to FY07, the Financial Leverage
increased from 1.64 to 1.7.This increase is attributed to the increase in Net Assets of the
company. The Shareholders Equity has increased due to 25 % increase in Reserves and
Surplus. The increase in Reserves and surplus of the firm can be attributed mainly to the46 % increase in the General Reserves of the company.
From FY07 to FY08: The decrease in ROE from 0.28 to 0.26 can be attributed to the
following reasons:
Decrease in Assets Turnover: From FY07 to FY08, the ROA has decreased from 2.36 to
1.9. This is due to following reasons:
o No major change in Net Sales: Net Sales has just increased 4 % from FY07 to
FY08.
o Increase in Assets: Net fixed Assets has increased 73 % from FY07 to
FY08.This is mainly due to 98 % increase in Investments and 101 % in Capital
Work in Progress. The capital work in progress includes the Product
development Cost Rs 17058.6 million and Advances for Capital Expenditure of
Rs. 6689.2 millions.o Increase in Investments: Investments increased to Rs. 4,910.27 millions in FY
2007-08 from Rs. 2,477.00 millions from FY07. During the year, the Company
continued to make additional long term and strategic investments. The Company
further invested Rs. 6000 million in its 100% subsidiary Tata Motors Finance
Limited to further strengthen the vehicle financing activities. The Company also
invested Rs. 6015.9 million in Fiat India Automobiles Private Limited for
manufacturing Fiat and Tata cars and Fiat power trains. The Company investedRs.1795 million in the rights issue of securities of Tata Steel Limited. The
amount invested in various mutual funds as at March 31, 2008 was Rs. 7907
million as against Rs. 519.9 million as at March 31, 2007 representing surplus
cash parked for future use.
Increase in Financial Leverage: The financial Leverage has increased from 1.7 to 1.92.This
can be mainly attributed to the following reasons:
48 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
49/81
-
7/31/2019 mohd islam Final Report11.doc
50/81
-
7/31/2019 mohd islam Final Report11.doc
51/81
-
7/31/2019 mohd islam Final Report11.doc
52/81
investments. The company has the strategy of capitalization of expenses (Expenditure and
interest) to reduce the effects of capital expenditure for three years .Expenditure Transferred to
Capital and other accounts has increase at average rate of 133 % from Rs. 3088 million
(FY06) to Rs. 11314 million (FY08).
4. Margin Ratios
Ratios Analyzed: Material cost to Sales ratio; Manufaturing, administration and other
expenses to Sales ratio; Selling and distribution expenses to Sales Ratio;Employee Cost to
Sales Ratio
(Source: Annual report, Tata Motors Ltd)
Material Cost Margin
52 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
53/81
-
7/31/2019 mohd islam Final Report11.doc
54/81
Provision and write off for sundry debtors, vehicle loans and advances: It increased by
169 % from 615 million to 1657 million.
From FY07 to FY08, the Manufacturing, administration and other expenses margin increasedfrom 0.09 to 0.1.This increase is mainly due to the following reasons:
Increase in Stores, spare part and Tools: It increased by 38 % from 5046 million to
7011 million.
Increase in Rent: It increased by 109 % from 199 million to 418.7 million.
Provision and write off for sundry debtor, vehicle loan and advances: It increased by
118 % from 1657 million to 3628.
Inference:
The EBIT margin has been decreasing constantly from FY06 to FY08.The expenses margin
ratio has also mainly shown increasing trend. The expenses of company have been on rise
because of external factors like increasing input prices and internal factors like increasing debt
and depreciation. Thus, over the years, the trend is negative with the increase in expenses and
lagging sales.
54 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
55/81
-
7/31/2019 mohd islam Final Report11.doc
56/81
From FY06-FY07,the current ratio increased from 1.34 to 1.41.The increase in Current Ratio
is pertaining to following factors:
Increase in Cash and Bank Balances: The cash and bank balance increased by 81 %
from Rs.7303 million to Rs. 13260 million.
Increase in Loans and Advances: There is 68 % increase in Loans and Advances from
Rs. 4988 million to Rs. 8394 million.This increase is due to 133 % increase in
Advances and loans to subsidiaries.
From FY07 to FY08, the current ratio decreased from 1.41 to 1.12.This decrease can be
explained by following changes :
Decrease in cash and bank balances: The cash and bank balances decreased by 35%
from Rs.13260 million to Rs 8612 million.
Inference:
The current ratio has been greater than 1 all throughout the years. But the liquidity position of
the company has improved from 2006 to 2007, but has decreased from 2007 to 2008.
Quick ratio has decreased to 0.79 from 1.07 from 2007 to 08.Thus company can face liquidity
crunch if the cash and bank balance is not improved. Further, other assets(plant and machinery
held for sale) has increased by 7800 %.
2. Long Term Solvency Position of the Firm
Ratios Analyzed: Debt Ratio, Debt Equity Ratio, Interest Coverage Ratio
56 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
57/81
-
7/31/2019 mohd islam Final Report11.doc
58/81
-
7/31/2019 mohd islam Final Report11.doc
59/81
-
7/31/2019 mohd islam Final Report11.doc
60/81
(Source:Annual Report)
Days in Inventory
From FY06 to FY07, the DII decreased from 40 33 .This increase is due to:
Decrease in Work in Progress: There is 19 % decrease in Work in Progress.
From FY07 to FY08, the DII increased from 33 to 36 days. This is due to:
Increase in Finished products produced and purchased for sale: There is 29 % increase
in finished products from Rs. 4483million to Rs. 5794 million
DSO has shown the similar nature.
From FY06 to FY07, the DSO has decreased from 29 to 26 days.This is due to followingreasons:
Increase in debtors (considered good): The sundry debtors outstanding over six months
have increased by 39 % from Rs. 613 million to Rs 858 million.
From FY07 to FY08, the DSO has increased from 26 to 33 days.
The increase for the year 2007 to 08 can be explained by:
Decrease in debtors outstanding over six months : There is decrease in debtors,
considered doubtful by 31 % from Rs 459 to Rs 316 million. Decrease in Provision for doubtful debt: The Provision for doubtful debt decreased by
37 % from Rs 523 million to Rs 428 million.
DPO has continuously improved over the years from 63 days in Fy06 to 73 in FY08.
Inference: From FY07 to FY08, the increase in DSO and DII be explained by the aggressive
credit policies of the company. The company has enhanced its operations overseas and has
marked increase in exports. The increase in debtors is mainly on account of increase in exports
60 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
61/81
growth in Companys Genset engines and logistic business. The increase in DII is due to
increase in inventory due to launch of new products and increased capacity
DPO has continuously improved over the years. This is due to improvement in its supply
chain by reducing dealer stocks and outstanding. The cash conversion cycle has shown
reduction over the years .showing that company is able to utilize every Re. 1 invested in the
Current Assets.
5. Margin Ratios
Ratios Analyzed: Material cost to Sales ratio; Manufacturing, administration and other
expenses to Sales ratio; Selling and distribution expenses to Sales Ratio; Employee Cost to
Sales Ratio
Selling and distribution margin
Selling and distribution expense has been increasing from 5.7 to 7.4 % of net sales.
For the year 2006-07, sales promotion and advertisement expense increased by half. The
Company entered the passenger car segment through another subsidiary Mahindra Renault
Pvt. Ltd (MRPL). Production of Logan mid-sized sedan commenced around the end of the
fiscal year 2006-07. Sales commenced from April 2007. A refreshed version of the Bolero was
launched in March 2007.
61 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
62/81
For the year 07-08, Discount allowed almost doubled. Further, freight outwards has been
increasing by 40 % (Year on year).This can be explained by the increase in exports.
Manufacturing, administration and other expenses margin
For the year 2006-07 the manufacturing expenses increased from 6.1 to 6.4 %.This has been
mainly due to excess of cost over current value investments (244 %)and provision for doubtful
debts(851%).For the year 2007-08,the manufacturing expenses increased from 6.4 % to 6.
7%.This has been due to increase in power and fuel (40 %), rent (72%) and amortization of
expenses (77%).
Employee Cost Margin
Personnel Cost to Sales has been increasing from 6.9 to 7.8 %. Increase in personnel cost in
absolute value is mainly due to increase in officers strength, annual increments and the impact
of wage settlements.
Material cost Margin
The Material Cost to Sales has decreased from 73.6 to 71.8 from 2006-07.this has been due to
decrease in the consumption of raw materials .This decrease is mainly due to
Efficiencies arising out of strategic sourcing and reengineering initiatives undertaken by the
company . Material cost is also impacted by product-mix changes.
From 2007-08, it has increased from 71.8 to 73.7 .There has been an increase in increase in
purchase of traded goods.
6. Long term Profitability
Ratios analyzed: DuPont Analysis: Return on Equity ,Assets turnover, Financial Leverage,
Profit Margin
62 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
63/81
-
7/31/2019 mohd islam Final Report11.doc
64/81
Inter firm Analysis
1. Short Term Liquidity
Current Ratio, Quick Ratio
Maruti Suzuki India Ltd maintained the highest current ratio and quick ratio in FY06 and
FY07.In FY08, Mahindra and Mahindra Ltd has the best current liquidity position among the
64 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
65/81
-
7/31/2019 mohd islam Final Report11.doc
66/81
Outstanding (DSO) among the three companies in FY06 and FY07. Maruti Suzuki India Ltd
and Mahindra and Mahindra Ltd have shown the similar trend over the three years i.e. the
decrease in DII from FY06 to FY07 and then increase from FY07 to FY08.Maruti Suzuki India
Ltd has maintained the lowest DII among the competitors over the years.
Thus the working Capital Position of the company has been the healthiest among its
competitors.
3. Long Term Solvency
Debt Ratio
MSIL has maintained a very low debt ratio with respect to its competitors. It can be observed
that the each of the three companies have shown increase in debt ratio over the years.
The company is the healthiest firm among its competitors over the years
66 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
67/81
4. Margin Ratio
Material Cost Margin
MSIL has the highest material cost margin among its competitors over the years. Mahindra and
Mahindra Ltd has the lowest material margin. This is because it indigenously uses indigenously
available raw materials.
Profit Margin
67 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
68/81
Mahindra and Mahindra Ltd has maintained the highest Profit Margin among its competitors.
Due to high material cost margin, the MSIL Profit Margin lags behind the Mahindra and
Mahindra Ltd. Tata Motors have maintained the lowest Profit Margin among its competitors.
5. Long Term Profitability
Return on Equity
Maruti Suzuki India Ltd has the lowest Return on Equity among its competitors over the years.
Mahindra and Mahindra Ltd has maintained the highest ROE among the competitors over the
years.
Earnings per Share
68 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
69/81
-
7/31/2019 mohd islam Final Report11.doc
70/81
Economic Value Added
The Economic Value Added (EVA) is a measure of surplus value created on an investment.
The return on capital (ROC) is assumed to be the true cash flow return on capital earned on
an investment. The cost of capital is defined as the weighted average of the costs of the
different financing instruments used to finance the investment.
EVA = (Return on Capital - Cost of Capital) (Capital Invested in Project)
Measuring Cost of Capital
The Cost of Capital is calculated as Weighted Average Cost of Capital.
WACC: Percentage of Debt in total Value of firm*Cost of Debt + Percentage of Equity in total
Value of firm*Cost of Equity
It has two components:
Cost of Equity: it is the opportunity cost for an investor and an implicit cost for the
company .This is the expected return of investors for a company. To find the cost of
equity, Risk and Return model is used.
Measuring Risk: The spread of the actual return around the expected return is
measured by the variance or standard deviation of the distribution. The greater the
deviation of the actual returns from the expected returns, the greater the variance. The
model to find the risk used is CAPM. i.e the Capital Asset Pricing Model.
Expected rate of return on asset = Risk free rate+ Beta of asset (Risk Premium for average risk
asset)
Risk free rate: It is the rate with no default risk. It is assumed as interest on Central
Government Dated Securities of year 2005-06.The risk free rate is taken as 7.34 %.
(Source: http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/80303.pdf)
Risk Premium: The risk premium is the extra return that would be demanded by the investors
for shifting the money from a riskless investment to an average risk investment.
Estimating risk premium: There are three ways of estimating the risk premium in the Capital
Asset Pricing Model, Survey Premium, Historical premium. In CAPM, the premium is
computed to be difference between average returns on stocks and average returns on risk free
securities over an extended period of history.
70 | P a g e
http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/80303.pdfhttp://rbidocs.rbi.org.in/rdocs/Publications/PDFs/80303.pdfhttp://rbidocs.rbi.org.in/rdocs/Publications/PDFs/80303.pdf -
7/31/2019 mohd islam Final Report11.doc
71/81
Time period used: Five years data has been taken from FY04 to FY08.
Market Return: The annual return on stock is taken as the Market Return. The arithmetic
average return measures the simple mean of the series of annual returns.
KE=Rf + beta(Rm- Rf)
Market Return: It is the average annual return. It is calculated from closing price of S&P
Nifty.
The daily return is calculated as
Daily Return = ln(Pi/Pi-1)
Pi: Closing of ith day
Pi-1: Closing of (i-1)th day
Average Daily Return is the arithmetic mean of the daily return.
Beta: The beta is estimated from the historical data. It can be calculated by dividing the
covariance of stock price with market by variance of the market. Thus from the calculation of
the above inputs the Expected Rate of Return or Cost of equity can be found out.
Cost of Debt: The cost of debt measures the current cost to firm of borrowing funds to finance
its assets. It reflects the default risk of the company i.e. the inability to pay off the obligations
of creditors. The most widely used measure of a firms default risk is its bond rating. It can be
estimated from the financial ratios. This rating is called synthetic rating. The interest coverage
ratio is used to assign the synthetic bond rating.
Estimating the Tax advantage: Interest is tax deductible and the resulting tax saving reduces
the cost of borrowing to firms. Thus after-tax cost of debt =Pre-tax cost of debt(1-Marginal tax
rate)
Cost of debt = Interest(1-t)/EBIT
71 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
72/81
-
7/31/2019 mohd islam Final Report11.doc
73/81
The Cost of Equity for Maruti Suzuki India Ltd is 28.43 %,Mahindra and Mahindra Ltd is
Figures in Rs.millions
Maruti
Mahindra and
Mahndra Ltd Tata Motors Ltd
FY0
6
FY0
7
FY0
8
FY0
6
FY0
7
FY0
8
FY0
6
FY0
7
FY0
8
Number ofOutstandingShares
289.00
289.00
289.00
233.00
238.00
239.00
382.00
385.00
385.00
Market Value ofEquity
239003.00
239003.00
239003.00
162412.65
162412.65
162412.65
2378
71.40
237871.40
237871.40
Market Value ofDebt
717.00
6308.00
9002.00
8833.82
16360.07
25870.60
29368.40
40091.40
62805.20
Percentage ofEquity 1.00 0.97 0.96 0.95 0.91 0.86 0.89 0.86 0.79Percentage ofDebt 0.00 0.03 0.04 0.05 0.09 0.14 0.11 0.14 0.21
cost of Equity 0.28 0.28 0.28 0.37 0.37 0.37 0.44 0.44 0.44Cost ofDebt(after tax) 0.18 0.04 0.04
Assumption:Tax rate is 35%.
WACC 0.28 0.28 0.28 0.35 0.33 0.32 0.39 0.37 0.35
Return onCapitalemployed 0.32 0.30 0.27 0.28 0.28 0.20 0.23 0.22 0.17
Total Capitalemployed
56022.00
76522.00
94857.00
39209.49
51911.53
69803.20
90823.30
116556.30
150896.90
EVA1832.
132030.
51
--657.0
5
-2631.
03
-2904.
10
-7995.
33
-14778.14
-17832.09
-26373.17
73 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
74/81
-
7/31/2019 mohd islam Final Report11.doc
75/81
CFROI
CFROI or Cash flow return on investment is one of the accounting indicators of value
creation. It clarifies how economic value is created in a firm and acts as a reliable guide to:
making investment decisions; taking key strategic decisions; and understanding economic
value. It shows how to judge and compare individual equities across markets and company
sectors. It has cutting edge theory and practice.
The CFROI is a measure of the cash flow return made on capital.
CFROI = (Adjusted EBIT (1-t) + Depreciation & Other Non-cash
Charges) / Capital Invested
Figures inMillions
MSIL M&M Tata Motors Ltd
FY0
6
FY0
7
FY0
8
FY
06
FY0
7
FY0
8 FY06
FY0
7
FY0
8
EBIT
17704.0
0
23174.0
0
25626.0
0917
2.34
13354.8
3
13373.2
023367.
5029429.90
30020.80
TAX RATE 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35DEPRECIATI
ON
2854.00
2714.00
5682.00
2000.05
2095.87
2386.60
5209.40
5862.90
6523.10
NET
WORKING
CAPITAL
Capital
Employed
55243.00
74847.00
93156.00
37922.53
51889.16
69371.30
84739.10
108788.90
141200.20
CFROI 0.26 0.24 0.24 0.21 0.21 0.16 0.24 0.23 0.18
75 | P a g e
http://www.vernimmen.com/html/glossary/definition_cash_flow.htmlhttp://www.vernimmen.com/html/glossary/definition_return.htmlhttp://www.vernimmen.com/html/glossary/definition_investment.htmlhttp://www.vernimmen.com/html/glossary/definition_value.htmlhttp://www.vernimmen.com/html/glossary/definition_cash_flow.htmlhttp://www.vernimmen.com/html/glossary/definition_return.htmlhttp://www.vernimmen.com/html/glossary/definition_investment.htmlhttp://www.vernimmen.com/html/glossary/definition_value.html -
7/31/2019 mohd islam Final Report11.doc
76/81
-
7/31/2019 mohd islam Final Report11.doc
77/81
Recommendation
1. The company cash and bank balance have reduced .In fact; the net decrease in cash flow
for the year has been in FY08.This has been due to increase in Purchase and investment
activities. This can be major threat to the financial health of the company. Thus, cash and
bank balance should be maintained.
2. The company has strong fundamentals with low debt equity ratio and high net operating
earnings. The company should leverage these factors to increase its debt. This will reduce
the cost of capital of the company and maintain the cash and bank balance. The company
can issue debentures convertible to equity shares like Mahindra and Mahindra Ltd or quasi
equity shares.
3. The material cost margin of the company remains highest among the industry. This is
because company imports raw materials and components. Thus company should use
indigenously produced raw materials and components.
4. The manufacturing expenses have manly increased because of increase in royalty. The
company can use try to develop new technologies in house to reduce the royalty cost.
77 | P a g e
-
7/31/2019 mohd islam Final Report11.doc
78/81
-
7/31/2019 mohd islam Final Report11.doc
79/81
-
7/31/2019 mohd islam Final Report11.doc
80/81
-
7/31/2019 mohd islam Final Report11.doc
81/81