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Indian Automobile Industry Financial Analysis

Financial Management - II Project
(Tata Motors, Mahindra & Mahindra Ltd. and Maruti Suzuki India Ltd.)

Amit Kumar (11BSPHH010090) Alisha Bajaj (11BSPHH010082) Amit Tiwari (11BSPHH010093) Chhavi Balana (11BSPHH010240) Keshav Rao (11BSPHH011203) Manu Rajput (11BSPHH011078) Nilanjan Majumdar (11BSPHH011133)

Submitted By:-

Table of Content
Introduction to Indian Automobile Industry Company Wise Analysis Maruti Suzuki India Ltd. Tata Motors Mahindra & Mahindra Ltd. Bibliography Appendix List

Domestic car sales up 24.4% in March

Mahindra sales up 22% in Jan
PTI February 1, 2011

Maruti sells 1mn cars in 10 months Tata Motors net jumps 102-fold
Mail Today Bureau November 10, 2010

The Indian automobile industry is riding high, like never before. They say that history has an eerie habit of repeating itself. As far as the automobile industry is concerned, the monumental returns and the off-thecharts growth rates reported in India recently bear testimony to this adage. The events that unfolded in Detroit years ago seem to be repeating themselves today, in India. For the automobile industry, future in India seems like an evergreen pasture! Overview of the Indian Automobile Industry Starting its journey from the day when the first car rolled on the streets of Mumbai in 1898, the Indian automobile industry has demonstrated a phenomenal growth to this day. Today, the Indian automobile industry presents a galaxy of varieties and models meeting all possible expectations and globally established industry standards. Some of the leading names echoing in the Indian automobile industry include Maruti Suzuki, Tata Motors, Mahindra and Mahindra, Hyundai Motors, Hero Honda and Hindustan Motors in addition to a number of others. During the early stages of its development, Indian automobile industry heavily depended on foreign technologies. However, over the years, the manufacturers in India have started using their own technology evolved in the native soil. The thriving market place in the country has attracted a number of automobile manufacturers including some of the reputed global leaders to set their foot in the soil looking forward to enhance their profile and prospects to new heights. Following a temporary setback on account of the global economic recession, the Indian automobile market has once again picked up a remarkable momentum witnessing a buoyant sale for the first time in its history in the month of September 2009. After the economic downturn and difficult market conditions in the automotive sector globally in 2008-09, during the year, economies across the world (with a few exceptions) showed signs of recovery and growth. The Indian economy bounced back quickly and strongly growing at 7.2% in 2009-10. The automotive sector in India started the year steadily, gathered momentum in different segments in the second half of the year and ended the year with a record growth and performance. The automobile sector of India is the seventh largest in the world. In a year, the country manufactures about 2.6 million cars making up an identifiable chunk in the worlds annual production of about 73 million cars in a year. The country is the largest manufacturer of motorcycles and the fifth largest producer of commercial vehicles. Industry experts have visualized an unbelievably huge increase in these figures over the immediate future. The figures published by the Asia Economic Institute indicate that the Indian automobile sector is set to emerge as the global leader by 2012. In the year 2009, India rose to be the fourth largest exporter of automobiles following Japan, South Korea and Thailand. Experts state that in the year 2050, India will top the car volumes of all the nations of the world with about 611 million cars running on its roads. Scope of this study Through this project we are attempting to study the capital financial aspects of 3 of the highly profitable Indian automotive companies. They are: Maruti Suzuki India Limited Tata Motors Limited Mahindra & Mahindra Limited

We have analyzed data including the long term and short term debts, debt-equity ratio, earnings per share, profit before tax etc. We have also graphically represented the data. For the study data for the last 5 years have been used (2006 2010). Data was gathered from the balance sheets, annual reports, chairmans report, profit & loss account etc. of the respective companies. We performed regression analysis between Dividend payout Ratio (DPR), as a Dependent Variable and Net Sales, PAT, Market Capitalization, Cash and Capital Expenditure as Independent Variable

Maruti Suzuki India Limited

Market Capitalisation: 36402.67 Cores Maruti Suzuki India Limited is a passenger car company. The company is engaged in the business of manufacturing, purchase and sale of motor vehicles and spare parts. The other activities of the company include facilitation of pre-owned car sales, fleet management and car financing. The company is a subsidiary of Suzuki Motor Corporation, Japan. The company has a portfolio of 13 brands and over 150 variants.

E a rning sP er S ha re
100 80 60 40 20 0 2006 2007 2008 2009 2010 41.16 54.07 59.91 42.18 86.45

Analysis The gross revenue of the Company for the year (2010 2011) was Rs. 301,198 million as against Rs. 214,538 million in the previous year showing growth of 40%. Sales of vehicles in the domestic market increased to 870,790 as compared to 722,144 in the previous year showing a growth of 21%. Exports of vehicles grew at an impressive rate of 111% from 70,023 to 147,575 in the current year. The overall growth was 29%.Earnings before depreciation, interest, tax and amortization (EBDITA) stood at Rs. 44,510 million against Rs. 24,333 million in the previous year. Profit before tax (PBT) stood at Rs. 35,925 million against Rs. 16,758 million in the previous year and profit after tax (PAT) stood at Rs. 24,976 million against Rs. 12,187 million in the previous year. The board recommends a dividend of Rs. 6.00 per equity share of Rs. 5.00 each for the year ended 31st March 2010 amountingtoRs.1733 million.
Private Coporate Bodies 6%

S hare H oldingPattern
Others 0%

General Public 3%

FII's 21%

Foreign Prom oters 56%

Maruti Suzuki, the leader in the passenger car segment has seen volatility in the mix of debt and equity capital of company over the last 5 years. Sales of the company have increased continuously during the last decade. Its effect can be seen from the rise in Profit before Interest and Tax Margin (PBT). There is a fall in PBT in the last year because of a rise in operating expense of the company. Most of the funding requirements of the company were done by the internal accruals which were created through continuous profits. Maruti Suzuki will maintain its strong business and financial risk profiles on the back of the healthy cash generation and good liquidity. The company is expected to sustain its dominant position in the domestic passenger car segment, given its large product portfolio. Marutis financial risk profile is an also expected to remain comfortable, with incremental capital expenditure being funded entirely through internal sources. Though the company has a history of dependence on the internal funds, it has capability of raising debt if required for funding. Seeing to its good debt equity, there is a chance for the company to acquire debt for funds required for investment opportunity. Interest coverage ratio is also to be paid on borrowed amount.

Banks and Fin. Institutes 14%

Dividend Policy:Coefficients Intercept 27.18954231 Net Sales -0.001111595 PAT 0.024125231 Market Capitalisation -0.00191163 Capital Expenses -0.000132206 Cash and Cash Equivalents 0.004445775 Standard Error 47.61340458 0.007579286 0.026073196 0.001451035 0.002844661 0.010836391 t Stat 0.571048 -0.14666 0.925289 -1.31743 -0.04648 0.410263 P-value 0.607942 0.8927 0.423063 0.279277 0.965852 0.709153

Here DPR has negative relationship with 3 of the 5 variables taken which are Net sales, Market Capitalization and Capital expenses and has positive relationship with rest two variables that are PAT and Cash available to the firm. But here we can see that the coefficients are very small and the factors are less significant. PAT is somewhat significant which changes DPR by .024% if changed by 1%. From the graph we can conclude that DPS for the company changes with EPS for it, as EPS raises DPS rises and vice-versa. Though the change in DPS is very minor and relatively if we see then it is almost constant, it follows EPS pattern. Over past 15 years, EPS has reduced at a CAGR of around 10%, and also the pay-out ratio remains almost constant between 5% and 10%. From 2000 to 2004, it first becomes zero and then touches highest value of around 40% and then again comes back to 8% level. Except for these 4 years, it remains constant for the rest of the years.

Tata Motors Limited

Market Capitalisation: 78185.92 Crores Tata Motors Ltd is a multinational automotive corporation headquartered in Mumbai, India. The Company continues to be amongst the top three players in the passenger vehicle market which has over 25 players. Tata Motors has products in the compact, midsize car and utility vehicle segments. The company is the world's fourth largest truck manufacturer, the world's second largest bus manufacturer, and employs 24,000 workers. Analysis The Company recorded a sale of 633,862 vehicles in 2009-10, a growth of 34% over previous year (472,885 vehicles) in the domestic market in India, representing a 25.5% share in the industry (improving from 24.4% share in the previous year).The Tata Motors Group turnover was Rs.95, 567 crores, a growth of 29% over previous year contributed mainly by market recovery, improved realization and successful launch of new products. Consolidated Profit before Tax was Rs.3, 523 crores (Loss of Rs.2, 129 crores in 2008-09) and Consolidated Profit for the year was Rs.2, 571 crores (Loss of Rs.2, 505 crores in 2008-09). The Profit before Tax of Rs.2, 830 crores and Profit after Tax of Rs.2, 240 crores also grew significantly over the previous year by 179.1% and 123.7% respectively. The borrowings of the Company as on March 31, 2010 stood at Rs.16, 625.91 crores (previous year Rs.13, 165.56 crores). The key highlights were: - In 2009-10, the Company raised Rs.4, 200 crores from the issue of Secured, Rated, Credit Enhanced, Listed,

2% Coupon Non-Convertible Debentures (NCDs) with premium on redemption and Rs.200 crores from the issue of 9.95% Secured NCDs.

In a challenging financial market environment, the Company successfully rolled over in May 2009, the bridge finance it had obtained for acquisition of the Jaguar Land Rover business for a period of 18 months, till December 2010. Subsequently, the Company was able to prepay this loan facility in October 2009 from certain divestments, improved cash generation from operations and also through fund raised, US$ 375 million from the issue of Global Depository Receipts and US$ 375 million from issue of Foreign Currency Convertible Notes. The Company will further consider suitable steps to de-leverage and hence de-risk the balance sheet from volatility and has also taken and will continue to implement suitable steps for raising long term resources to match the Companys fund requirement and to optimize its loan maturity profile. In the Last 5 years the debt equity ratio of Tata Motors is has remained around 0.8 which is near to the industry average of debt to equity. Company has been making huge amount of profits and thus have sufficient surplus and reserves for funding the requirements of the company. Major proportion of the liquidity requirement of the company is met internally with the accumulated reserves and surplus. With a good interest coverage ratio in last 4 years except for the year ended on March 2009, company has been able to raise the debt easily from the market. There has been significant rise in the debt during the year 2008 because of TATA-Jaguar dealers of the company was around 52 at the end of the year March 2008 when the Debt-to-equity ratio was 0.7. EPS has decreased during the last year because of fall in sales and also the equity capital has increased with the right issue. During last year company has also raised fund through issue of debentures. Company is not in a healthy position to raise debt from the company because currently the interest coverage ratio is less than 2 which means that company has higher proportion of its profit to be distributed as interest.

Dividend Policy:
Coefficients Intercept 54.15414003 Net Sales -0.002894046 PAT 0.020974534 Market Capitalisation -0.000367615 Capital Expenses -0.007132883 Cash and Cash Equivalents -0.002792638 Standard Error 20.79038896 0.003726561 0.039960898 0.002107089 0.013314882 0.022675438 t Stat 2.604768008 -0.776599613 0.524876444 -0.174465671 -0.535707584 -0.123156953 P-value 0.028514374 0.457318855 0.612351511 0.865361036 0.605144369 0.904689256

It can again be seen that the influence of Cash and cash Equivalents, Market Capitalization and Capital Expenditure is negative and is also very insignificant. And the Net Sales also impact negatively with a very minute coefficient of 0.002. There is a positive correlation between PAT and DPR, the coefficient of 0.02 implies that a 1% change in Pat would lead to 0.02% change in DPR, both negatively and positively.

TATA Motors
60 50 40 30 20 10 0 DPS EPS

For TATA Motors, if we look at EPS and DPS figures, from the graph we can get that the DPS follows EPS. If EPS increases, company increases the DPS offered to the shareholders. Though the increase is very small but still it is clearly visible. Moreover if the EPS falls then DPS also falls. We can see from the graph that there are very high fluctuations in the EPS for the company though over years it has after fluctuation come again to same level it was in 1995,with a minute fall at -1.41% CAGR. But as a consequence, dividend pay-out also shows very wide variations in the value over the years between 0% to around 110%. The average pay-out ratio for the company over the years has been around 38%. It can also be inferred that The Company pays same proportion of EPS as Dividends or it follows a Hybrid policy of fixed proportion as dividend with extra dividend in case of increasing profits.

DPR
120 100 80 60
40
DPR

20 0

Mahindra & Mahindra Limited

Market Capitalisation: 43195.89 crores Mahindra & Mahindra Limited is the flagship company of the Mahindra Group, a multinational conglomerate based in Mumbai, India. Mahindra & Mahindra is a major automobile manufacturer of utility vehicles, passenger cars, pickups, commercial vehicles, and two wheelers. Its tractors are sold on six continents it has acquired plants in China and the United Kingdom, and has three assembly plants in the USA. M&M has partnerships with international companies like Renault SA, France and International Truck and Engine Corporation, USA.

Analysis The Automotive Divisions of M&M have clocked one of their best performances reflecting in substantial growth in the net income of the Company by 40.7% to Rs.18, 801 crores in the year under review from Rs.13, 364 crores in the Financial Year 2009.The Profit for the year before Depreciation, Interest, Exceptional items and Taxation was Rs.3, 154.59 crores as against Rs. 1,362.9 crores in the previous year, an increase of 131.45%. Profit after tax was Rs.2, 087.75 crores as against Rs.836.78 crores in the previous year clocking an increase of 149.50%. The company recommended a dividend of Rs.8.75 per Ordinary (Equity) Share and also a Special Dividend of Rs.0.75 per Ordinary (Equity) Share aggregating Rs.9.50 per Ordinary (Equity) Share of the face value of Rs.5 each. M&M recorded total sales of 2, 36,759 vehicles and 45,360 three-wheelers as compared to 1, 61,882 vehicles and 44,806 three-wheelers in the previous year registering a growth of 46.3% and 1.2% in vehicles sales and three-wheeler sales respectively.

Even while financing its on-going modernisation and growth initiatives, it was ensured that the Company had abundant liquidity. It did not need to tap the capital market and in fact used its strong liquidity at its disposal to repay foreign currency loans aggregating USD 94.5 million without the need for refinancing. As was reported in the previous year's Director's Report, the Company had, in July, 2008, issued 9.25% p.a. Unsecured Fully and Compulsorily Convertible Debentures (FCD), each FCD having a face value of Rs. 745 and convertible into one Equity Share of Rs. 10 each in the Company at a price of Rs. 745 per Share. In January, 2010, in accordance with the terms of the issue, the FCDs were converted into Equity Shares of the Company and your Company allotted 93,95,974 Ordinary (Equity) Shares of Rs.10 each, adding Rs. 700 crores to its Net Worth. During the year under review, your Company allotted: 1) 10, 00,000 Ordinary (Equity) Shares of Rs.10 each to the Trustees of Mahindra & Mahindra Employees' Stock: Option Trust; and 2) 93, 95,974 Ordinary (Equity) Shares of Rs.10 each to Golboot Holdings Limited upon compulsory conversion of 93, 95,974 fully and Compulsorily Convertible; Debentures. M&M follows a prudent financial policy and aims to maintain optimum financial gearing at all times. The Company's total Debt to Equity Ratio was 0.37 as at 31st March, 2010. During the year, CRISIL reaffirmed its rating of AA and revised its rating outlook to AA/ Stable from AA/Negative for M&M's Long Term Facilities under Basel II. During the year, ICRA also reaffirmed its rating of LAA+ for the Company and also revised its rating outlook from LAA+/Negative to LAA+/Stable and CARE has maintained a Long Term Rating of CARE AA+.

Dividend Policy:Coefficients Intercept 16.04399974 Net Sales 0.014448566 PAT -0.214895432 Market Capitalisation 0.006718136 Cash and Cash Equivalents -0.013344862 Capital Expenditure 0.000790042 Standard Error 9.056412444 0.004348738 0.063807001 0.002596839 0.013078338 0.000726109 t Stat 1.771562 3.322473 -3.3679 2.587044 -1.02038 1.088048 P-value 0.110235 0.008905 0.008285 0.029355 0.334192 0.304851

Here out of the five factors that we have taken, PAT and cash available to the firm are the factors which are negatively related to DPR and other factors, net sales, market capitalization and capital expenditure are the parameters which are having positive relationship with DPR. Also among these five parameters, Net sales, PAT and Market capitalization are the significant factors which really impact the DPR and rest two factors are relatively less significant. By changing Net sales, PAT and Market capitalization by 1%,

change in DPR is .014%, -.21% and .006% respectively. Rest two factors are relatively less significant according to their p-values.

For this company, the dividend has been constant till the year 2003, after that from 2003 to 2009; it has grown a bit but that growth is also very small so relatively we can assume the company to be a constant dividend company. The EPS for the company increases gradually, except a downfall in the year 2000-01 due to global recession. Otherwise it shows increasing trend. Due to this relatively stable EPS, it also has stable DPR. It remains within a specified limit of 25% to 35% over the past 15 years except for two three years during 2000-01 in which global meltdown affects the world markets. During that period, DPR goes up to 55% from 30%. If we talk about EPS, in the past 15 years, it increases at a CAGR of around 3% and its average pay-out for 15 years comes out to be roughly 32%.

Bibliography
InFinancial Analytics http://www.infinancialsanalytics.com 2. Moneycontrol.com http://www.moneycontrol.com 3. Money.rediff.com http://money.rediff.com/ 4. Utvmoney.mangopeople.com http://utvmoney.mangopeople.com/ 5.Capitaline Databases 6. Business Today Magazine http://businesstoday.intoday.in/ 7. Investopedia.com http://www.investopedia.com/ 8.Prowess Client Application
1.

Appendix
Excel Files Used:1.Forecasting Mahindra & Mahindra

2.Forecasting Tata Motors 3.Forecasting Maruti Suzuki 4.Maruti Suzuki 5.Tata Motors 6.Mahindra & Mahindra 7.Indian Automobile Industry Analysis Other Files:1.Dividend Data Sheet (PDF Document)