Corporate Credit & Financial Analysis

Assignment
On
Rating of Tata Motors Limited using peer
rating used by CRISIL
Group: 4
Submitted By:
Name
Varddhaman Jain
Piyush Chandak
Kriti Jain
Pragati
Priyanka Mishra
Rishabh Chaddha
Sharon Tabita Edwin

Roll No.
2015126
2015208
2015216
2015225
2015229
2015234
2015300

EIC Analysis of Tata Motors

Economy Analysis:
India seems to have strong and stable pace in terms of economic growth in Fiscal 2016 as
observed in previous year. Moreover, there was improvement in macroeconomic factors
like inflation, deficit and current account balance. If we consider the whole price and
consumer price inflation, earlier one was seen to be in negative figures while the latter

also declined to almost half. But the concern revolves around weak growth in emerging
economies which has taken its toll on exports from India. Nevertheless, current account
deficits and trade have shown good figures due to relatively lower prices for crude which
is imported by India. Because of unfavourable weather condition especially less
monsoon, agriculture sector is not that good. Exchange ratio is of concern as rupee has
depreciated with respect to USD.
India's GDP for the year 2015 increased by 7.2% and 7.6% increase for 2016. Services
sector growth increased by about 9.2% in the year 2016 as compared to 10.3% previous
year. Index for industrial production (IIP) increased by approx 2.4% as compared to 2.8%
in 2015. Certain factors influence IIP growth which are mining sector, it observed 2.2%
increase in 2016 compared to 1.4% in Fiscal 2015, due to coal production increase. The
manufacturing sector was up by 2% and electricity services increased by 5.6%. ( Source:
Ministry of Statistics and Program implementation). The domestic auto industry also
grew during Fiscal 2016, driven by replacement demand and demand from the
construction sectors, concentrating on medium and heavy commercial vehicles.
The global macroeconomic scenario was uncertain and witnessed by weak growth of
world output. Reasons mentioned as :

Prices of commodities declined, thanks to crude oil price reduction.

Volatile exchange rates.
Turbulent financial markets (equity)

The automotive industry and the demand are influenced by economic conditions and rates
of economic growth, credit availability, disposable income, interest rates, tax policies,
safety regulations, fuel and commodity prices. Negative trends among any of these would
impact the regions in which the Company operates
Muted industrial growth in India along with high inflation and interest rates continue to
showcase risks to overall growth in the market. The automotive industry is cyclical and
economic slowdowns have affected the manufacturing sector in India. A further

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deterioration in key economic factors such as the growth rate, interest rates and inflation
and competitive rates adversely affect the automotive sales in India.
Although economic conditions vary from country to country, investors' reactions to
economic developments in one country adversely effects the securities of companies in
other countries. Financial instability anywhere in the world have a negative impact in the
Indian economy. A slower global economic recovery than the expected and also

significant financial disruption have adverse effect on the Company's cost of funding,
business, results of operations, condition financially and the trading price of the shares of
the company.
Industry Analysis:
The Indian automobile market is vast and hence could be sub-divided into several segments as,
two-wheelers like motorcycles, geared and ungeared scooters, mopeds, three wheelers,
commercial vehicles (light, medium and heavy), passenger cars, utility vehicles (UVs) and
tractors.
The demand is linked to the growth of economy and increase in income levels. Per capita
penetration for nine cars per thousand people is said to be lowest in the world
While this industry is highly capital intensive especially four wheelers. Though three-wheelers
and tractors face low entry barriers (technology) but four wheelers are technology intensive.
Brand cost, distribution network and spare parts availability lead to an increase in entry barrier.
Capital expenditure will increase because of the safety regulations as the Indian market is
shifting towards complying with global standards.
When compared to the global counterparts, both two-wheeler and four wheeler segments are less
fragmented. But now as many foreign majors have entered the Indian market, things are
changing. Hence, pricing power may diminish going forward.
Profitability increases by selling more units. As the number of units sold increases, average cost
of selling an incremental unit decreases. Because the industry has a high fixed cost component.

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Hence, the reason why operating efficiency through the increased localization of components and
maximizing output per employee becomes significant.

SUPPLY

DEMAND

ENTRY

BARGAINIG

BARGAININ

BARRIER

POWER

G POWER OF S

Excess

Cyclical,

S
High

capacity

seasonality

cost,

(India)

SUPPLIERS
CUSTOMERS
cap Low due to
Very high High

depends technology,

on

COMPETITOR

stiff

because

competition

availability of

eco distribution

of

options

growth & networks

per capita
income

From the sources, a total of 16 m two-wheelers were sold last year, a growth of a tepid 8% over
the last year. The slow growth because of tepid recovery in the Indian economy. Motorbikes
showed for 70% of the total two wheelers sold and grew by 2.5% YoY. The scooters segment
was the star of the two wheelers with a growth rate of 25% YoY. In the domestic market, 3wheeler segment were up 11% YoY mostly contributed by passenger carriers. Exports growth
rate was good and figured at 15% YoY.
FY15 was a strong year for M/HCVs segment because of increase in volume by 16%. Reasons
being reversal of mining bans, resumption of stalled infrastructure projects, improvement in
freight rates etc. LCVs, were however at the receiving end as volumes dropped by 12%. Thus,
overall volumes fell by 3% in CV industry.
Tractors gave a poor performance during the year. M&M, which is known to be a market leader
in tractors, observed for a revenue decline of 7% from its farm equipment division.
Volumes of passenger vehicles (PV) grew by 4%. To go in depth, passenger cars and utility
vehicles (UVs) grew by 5% each. Volumes of vans, however, declined by 10% YoY during the
year. But Maruti Suzuki remained the market leader in passenger vehicles sector. Volumes of
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vans for the company grew at a pace of 26% YoY even when industry volumes were declining.
But the companys cars and utility vehicles grew in double digits during the year.
Most of the companies observed good figures in operating margins because of various cost
rationalization measures undertaken as well as benign commodity prices.
Company Analysis:
TML is a multinational Indian automotive giant and founded in the year 1945. It is the worlds 5 th
largest manufacturing company. Some of its subsidiaries are Jaguar Land Rover, Daewoo,
Marcopolo and Chrysler. The total revenue as of March 2016 is 44502.74 Cr Rs and PAT =
234.23 Cr Rs. The current share price is Rs 503.65 as of 26 th Aug 2016. It has market cap of Rs
171023.44 Cr with a P/E 15.52 while the industry P/E is 106.92.
P/E

Dividends %

15.52

25

EPS

Enterprise

Beta

32.46

Value Cr
144771.22

1.43

The Net Sales was Rs Cr 42369.82 but the net profit observed in Dec 2015 was observed to be in
negatives. It was around -4738.95 Cr Rs. But this year it changed to positive figures. It was
figured out to be probably because Jaguar is now coming into profits.

Key Points about Tata Motors business:

Tata Motors has surfaced as an automobile company of global prestige, covering 129
countries across six continents. Through operations, R&D, a vigorous dealership network
and exports, they are among Indias largest MNCs.

From commercial vehicles to cars and from India-centric operations to global ambitions,
Tata Motors is entering or driving into new domain, shedding its image of a stodgy truck
maker in favour of an upmarket identity.
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 As part of its business expansion strategy, TMT Joint Stock Company signed a
Distribution Agreement ("DA"), Supply Agreement and Technology License Agreement
("TLA") with Tata Motors Ltd. India. The agreements will enable TMT to become the
official distributor of select Tata Motors commercial vehicles, as well as expand its
vehicle assembly business and distribution network in Vietnam.

Tata Motors confirms its commitment to long term R&D in UK with a multi-million
pound investment through its subsidiary, Tata Motors European Technical Centre at the
University of Warwick campus.

Tata Motors, has set its eyes on being among the top 3 global commercial vehicle makers
and reclaiming its no. 3 spot in the countrys car and sports utility vehicle market.

Tata Motors share in the Indian passenger vehicle market reduced to 4.6 % in 2015-16
from 13 % in 2011-12, as Maruti Suzuki strengthened their shares through sustained
launches.

Tata Motors announced a consolidated net profit decline of 57 % in the June 2016
quarter, as it was hit by foreign exchange losses and increased expenses. Net profit was
declined to Rs 2,260 crore from the Rs 5,254 crore in the same quarter a year before.

FINANCIAL RATIO ANALYSIS OF TATA MOTORS LTD

Credit Quality is rated based on these ratios:

Capital structure
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Interest Coverage ratio

Debt service coverage ratio

Net Worth, Return on Capital Employed (ROCE)

Current Ratio

These are not the only ratios the company take into consideration for rating.
Embedded is the financial ratios of Tata Motors Ltd. and its peer groups considered for rating
purpose.
Group 4_Tata Motors Ltd.xlsx

1) Debt Equity Ratio:

A companys capital structure reflects the extent of borrowed funds in the companys funding
mix. It is used to find out how much debt a company is using to finance its assets relative to the
amount represented in the shareholders equity. A higher debt equity ratio indicates that more of
credit financing (bonds, loans etc) is used than shareholders equity.
Tata Motors debt equity ratio is 0.81 which means that its assets are financed more
through equity rather than debt.
On debt equity ratio, Tata Motors is second among its peers behind Maruti Suzuki India
(0.046). So it should get a rating of A+ compared to Mahindra & Mahindra Ltd.
2) Interest Coverage Ratio:
This ratio is a debt ratio & profitability ratio which is used to determine whether the company is
able to pay interest expenses on outstanding debt. It is calculated by dividing the companys
Earnings before Interest & Taxes (EBIT) during a particular period by the amount a company
must pay as interest on its outstanding debts for the same period.
Companies with a higher ICR can absorb more adversity, and pay interest on times. Therefore,
by definition, they are less likely to default on their debts.
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Tata Motors Interest Coverage ratio is 0.956 which means that it has very low ability to pay
back its interest expenses as compared to its peers. The company is last among its peers with
the other two companies having a very high ability to pay back their interest on debt. In this
category, it is far below than Maruti Suzuki India Ltd. which has got BBB- and less than
Mahindra & Mahindra Ltd. which has got BBB-. So we can give a rating of B- to Tata Motors
Ltd in this category.
3) Net Profit Margin:
Net Profit margin is the percentage of revenue remaining after all the interest, taxes, costs &
dividend to preference shareholders have been paid in full. It is expressed as a percentage and
shows much of each dollar collected by a company as revenue translates into profit. It tells us
about the Bottom Line of the company.
Tata Motors scores the least among its peers on Net Profit Margin. It has a NPM of -1.716. This
shows that the company is actually losing money on its revenues as compared to its competitors.
It is less than Maruti Suzuki India Ltd. and Mahindra & Mahindra Ltd. which have got BBBrating. So CCC is a reasonable rating in this category for Tata Motors Ltd.
4) Return on Capital Employed:
It is a ratio that measures how efficiently a company can generate profits from its capital
employed. It is calculated by dividing operating profits with the capital employed. It shows us
how much profit each dollar of capital generates. A higher ratio is definitely more favorable
because it means more dollars of profits are generated by each dollar of capital employed.
Tata Motors has a ROCE of 3.716 which shows that it generates $3.716 of profit for each dollar
of capital employed.
The company scores the least among its peers (Maruti Suzuki India 13.218, Mahindra &
Mahindra 4.078). ROCE is least for Tata Motors Ltd. compared to its peers. So we can award a
rating of BB- in this category to Tata Motors Ltd.
5) Current Ratio:

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Current ratio is a liquidity ratio that measures a companys ability to pay off its short term
liabilities with its current assets. It is an important indicator of profitability since the short term
liabilities are immediately due the next year. An ideal current ratio is considered to be 2:1, which
means that current liabilities can be met through current assets without the need to sell inventory.
Tata Motors has a current ratio of 0.46 which means that the company is unable to meet its
short term obligations. The company scores the least among its peers (Mahindra & Mahindra
1.432, Maruti Suzuki 1.328). CIPLA has got a current ratio less than its peers. So its rating
should be BB in this category.

Weightage of these attributes:

So going by the importance of these attributes in deciding the overall rating, we give the ranking
for these attributes:
1. Interest Coverage ratio
2. Debt-Equity ratio
3. Net Worth
4. Net Profit Margin
5. Current Ratio
6. Return on Capital employed
The logic behind this will be that the more interest coverage ratio the better a firm is able to
repay its debt without getting default. But in case of Tata Motors Ltd., the interest coverage ratio
is low, this indicates that it has low ability to pay back its interest expenses as compared to its
peers. So we are giving a weightage of 0.20 for this ratio.
If debt-equity ratio is more, then there is a high possibility that the company may not be able to
pay the debt in economic downturn. Tata Motors debt equity ratio is 0.81 which means that its
assets are financed more through equity rather than debt. So we are giving a weightage of 0.25

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for this ratio and it is also one of the important parameters for judging the performance of the
company.
Net worth of a company determines the solvency in any defaulting situation. So we are
awarding it a weightage of 0.15.
Net Profit margin measures a banks ability to pay expenses and generate net income from
interest and noninterest income. It reflects effectiveness of expense management (cost control)
and service pricing policies. It also indicates whether a company is having a good competitive
advantage in selling its products with high margins and getting good profit from the operations.
So higher this profit, more robust the company is. So we are giving a weightage of 0.20.
Current ratio measures the solvency of a company in short term and how effective it is using its
current assets productively. This ratio determines whether the company is able to repay its debt
obligations timely or not. The current ratio of Tata Motors Ltd. is 0.46. So a ratio under 1
indicates that a companys liabilities are greater than its assets and the company would be unable
to pay off its obligations. While a current ratio below 1 shows that the company is not in good
financial

health,

it

does

not

necessarily

mean

that

it

will

go bankrupt.

So we are awarding this ratio a weightage of 0.10.

Return on Capital Employed is a financial ratio that measures a company's profitability and the
efficiency with which its capital is employed. The higher the ROCE, the better, because a higher
number means the company is using capital more efficiently. The ROCE of Tata Motors Ltd. is
low compared to its peers. So we are giving a weightage of 0.10.
Overall rating will be:
(0.20*B-) + (0.25*A+) + (0.15*AA+) + (0.20*CCC) + (0.10*BB) + (0.10*BB-)
CONCLUSION:
Going by this weightages, we can say that Tata Motors Ltd can be awarded BB+ rating with
a positive outlook.

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