Financial Ratio Analysis of

Tata Motors and Mahindra & Mahindra

Table of Contents

Definitions..................................................................................................................................4
Financial Highlights of Mahindra & Mahindra (2008-2009)..................................................10
Financial Highlights of Tata Motors (2008-2009)...................................................................12
Ratios of Mahindra & Mahindra and Tata Motors...................................................................14

Trend Analysis..........................................................................................................................15
Annexure I: Sample Calculation..............................................................................................30
Annexure II: Financial Statements of Mahindra & Mahindra (2008-2009)............................42
Annexure III: Financial Statements of Tata Motors (2008-2009)............................................44

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Definitions mid term

Profitability 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.

Some examples of profitability ratios are:

1. Net Profit Margin:

It is a ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures
how much out of every dollar of sales a company actually keeps in earnings. Net Profit margin is very useful when
comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better
control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20% profit margin, for
example, means the company has a net income of $0.20 for each dollar of sales.

2. Asset Turnover:

The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales by assets. Asset
turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. It
also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high
profit margins have low asset turnover.

3. Return on Capital Employed (ROCE):

It is a ratio that indicates the efficiency and profitability of a company's capital investments. It is calculated as EBIT
divided by total assets minus current liabilities. ROCE should always be higher than the rate at which the company
borrows; otherwise any increase in borrowing will reduce shareholders' earnings. A variation of this ratio is return on
average capital employed (ROACE), which takes the average of opening and closing capital employed for the time period.

Liquidity Ratios:

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They are financial metrics that are used to determine a company's ability to pay off its short-terms debts obligations and
generally, higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term
debts. Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio. Different
analysts consider different assets to be relevant in calculating liquidity. Some analysts will calculate only the sum of cash
and equivalents divided by current liabilities because they feel that they are the most liquid assets, and would be the most
likely to be used to cover short-term debts in an emergency. A company's ability to turn short-term assets into cash to cover
debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators
frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern.

4. Current Ratio:

It is a liquidity ratio that measures a company's ability to pay short-term obligations. It can be calculated as current assets
divided by current liabilities. The ratio is mainly used to give an idea of the company's ability to pay back its short-term
liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more
capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its
obligations if they came due at that point. While this shows the company is not in good financial health, it does not
necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.
The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash.
Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity
problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is
always more useful to compare companies within the same industry.

5. Acid Test Ratio:

It indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The
acid-test ratio is calculated by:

Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution.
Furthermore, if the acid-test ratio is much lower than the working capital ratio, it means current assets are highly dependent
on inventory. The term comes from the way gold miners would test whether their findings were real gold nuggets. Unlike
other metals, gold does not corrode in acid; if the nugget didn't dissolve when submerged in acid, it was said to have passed
the acid test. If a company's financial statements pass the figurative acid test, this indicates its financial integrity.

Efficiency Ratios:
These ratios look at the internal working of a firm. They measure the efficiency with which the business manages its assets
and liabilities. They are used to assess the extent to which assets and liabilities are well utilise and well managed.
Efficiency improvements should help increase profitability and cash flow.

6. Stock Turnover Ratio:

This measures the number of times in a year that a business sells and replenishes its stock. It is calculated by cost of sales
divided by average stock. Average stock is calculated by the sum of opening and closing stock divided by 2. The sales are
valued at cost. If the stock turnover ratio equals 3, it means that the firm has stocked up and then sold its goods 3 times over
during the year.

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7. Stock Turnover Period:

It tells us the average length of time the average item is held before being sold. It is calculated by stock divided by cost of
sales multiplied by 365 days.

8. Debtor Turnover Ratio:

Debtor turnover ratio is found out by dividing credit sales by average debtors. Debtors turnover indicates the number of
times debtors turnover each year. Generally the higher the value of debtors turnover, the more efficient is the management
of credit.

9. Debtor Turnover Period:

The average number of days for which debtors remain outstanding is called the Debtor Turnover Period. It is calculated
by the number of days in a year divided debtor turnover.

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 Financial Structure Ratios:
Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to
measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at including
debt, equity, assets and interest expenses.

0. Gearing Ratio:

A general term describing a financial ratio that compares some form of owner's equity (or capital) to borrowed funds.
Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's
funds versus creditor's funds. A company with high gearing (high leverage) is more vulnerable to downturns in the business
cycle because the company must continue to service its debt regardless of how bad sales are. A greater proportion of equity
provides a cushion and is seen as a measure of financial strength.

1. Interest Cover Ratio:

A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is
calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest
expenses of the same period. It is calculated by EBIT divided by interest expense.

The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or
lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is
not generating sufficient revenues to satisfy interest expenses.

Investment Ratios:
These ratios are used by potential investors when making investment decisions.

2. Return on Shareholders Fund (ROSF):

The Return on Shareholders Funds (ROSF) ratio has historically been used by industry investors as a measure of the profit
for the period which is available to the owners stake in a business. It is calculated as ((PAT & preference dividend) /
(Ordinary share capital + Reserves)).5

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 Investors & the industry will look at the relative size of the Return on Shareholders Funds ratio. This is because a high
ROSF percentage indicates that a company is profitable and has more profit available for shareholders. ROSF is a narrower
assessment of profitability (compared with ROCE) and therefore gives the investor a deeper insight into the profitability
that they are concerned with. It is always critical to take professional investment advice before making any investment
decisions.

3. Ordinary Dividend Cover:

Dividend Cover ratio, is calculated as the earnings per share-basic (EPS-basic) divided by the annual total dividend amount
per share. Dividend cover expresses a company's ability to pay ordinary dividends to shareholders out of profits earned. It
shows how many times the ordinary dividend is covered by the profit available and, for example, if a company pays out
one quarter of its profit as dividends, then the Dividend cover ratio is four. The calculation is the EPS-basic / annual
dividend per share (DPS).

4. Earnings per share (EPS):

It is the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share, serves as an
indicator of a company's profitability.

Earnings per share, is generally considered to be the single most important variable in determining a share's price. It is also
a major component used to calculate the price-to-earnings valuation ratio. An important aspect of EPS that's often ignored
is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the
same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using
its capital to generate income and, all other things being equal would be a "better" company. Investors also need to be
aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one
financial measure, but to use it in conjunction with statement analysis and other measures.

5. Price earnings ratio (P/E):

A valuation ratio of a company's current share price compared to its per-share earnings.

In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies
with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the
P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own
historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a
technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.

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The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of
earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to
pay $20 for $1 of current earnings.

It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on
this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms
of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings
number.Financial Highlights of Mahindra & Mahindra (2008-2009)

Income from Operations & Other Income:

The income from operations in the current year is lower mainly on account of the transfer of the Companys logistics
business to its wholly owned subsidiary from the beginning of the current year. Other income during FY-2009 at Rs.270.34
crores is more than double of Rs.130.37 crores earned in the previous year. This increase is on account of higher dividends
received from the subsidiaries, profit on sale of Swaraj Mazda shares and higher income from increased level of surplus
funds arising from the PTL merger.

Expenditure:

The total expenditure during the year as a percentage of Net sales / Income from Operations is 94.23% as compared to
90.44 % in the previous year.

Material Cost: For the year ended March 31, 2009, material cost as a percentage of net sales shows an increase over the
previous year mainly due to the significant increases in material costs in the first half of the current year, lower closing
inventory and lower income from operations due to the transfer of logistics business.

Personnel Cost as a percentage of sales has increased from 7.52 % to 7.83 %. This is mainly due to increase in officers
strength, annual increments and refinements in actuarial assumptions affecting calculation of gratuity.

Other Expenses as a percentage of net sales shows a decrease over the previous year as a percentage to net sales and
operating income mainly due to the freight cost reduction on transfer of logistics business. However, the expenses in
absolute terms are higher due to losses on account of forward cover cancellations arising from lower than planned
exports due to global recession and increase in professional fees on acquisitions, corporate branding, etc.

The depreciation for the year ended March 31, 2009 is at Rs. 291.51 crores as compared to Rs. 238.66 crores in the
previous year due to capitalization of the Xylo related assets and the increase in amortization of intangibles in the
current year.

The interest expense of Rs.45.26 crores (net of interest income of Rs.134.12 crores) for the year ended March 31, 2009
is higher than the interest expense of Rs.24.24 crores (net of interest income of Rs.87.59 crores) in the previous year
due to increased borrowings to meet the Companys capital expenditure and other growth plans.

The profit from Exceptional items during the year ended 31st March, 2009 is Rs.10.27 crores as against Rs.172.73
crores last year. The profit in the current year is on account of surplus on transfer of the Companys logistics business to
its wholly owned subsidiary. In the previous year, the profit was due to the gain from the valuation of certain shares

7
 received by the Company under two court approved merger schemes at the fair value of the shares parted with in
exchange for them.

The provision for current tax, fringe benefit tax and deferred tax for the year ended 31st March, 2009 as a percentage to
profit before tax is lower than the previous year, on account of a higher tax-free dividend income during the year and
increased profits in a new plant eligible for deduction under Section 80IC of the Income Tax Act, 1961.

Fixed Assets:

As at 31st March, 2009 the Gross Block of Fixed Assets and Capital Work in Progress was Rs. 5,540.62 crores as compared
to Rs. 4,202.58 crores as at 31st March, 2008. During the year, the Company incurred capital expenditure of Rs. 895.90
crores (previous year Rs. 754.27 crores). The major items of capital expenditure were on New Product Development,
Capacity Enhancement, and Research & Development. This included purchase of Intangible assets aggregating Rs.169.86
crores (previous year Rs.71.42 crores). The Gross Block for the year has also increased by Rs.308.71 crores on account of
the additions of Fixed Assets due to the merger of Punjab tractors Limited (PTL) with the Company.

Inventories:
March 31, 2009 March 31, 2008

Raw materials and bought out components as a % 4.46% 4.66%

of consumption

Finished goods as a % of gross sales 3.31% 4.68%

The reduction in inventory levels is due to focus on supply chain management and better planning and control.

Sundry Debtors:
Sundry debtors amount to Rs. 1,043.65 crores as at March 31, 2009, as compared with Rs. 1,004.88 crores as at March 31,
2008. Debtors as a percentage of gross sales and income from operations are 7.09% for the year ended March 31, 2009, as
compared to 7.67% for the previous year. The Company has been able to achieve this improvement in its debtors level due
to its proactive emphasis on collections.

Financial Highlights of Tata Motors (2008-2009)

Full year FY09 volumes declined by 13.5% causing Net Revenues to fall to Rs.256.6 Billion, a decline of 10.7%.
Average realisation grew 3.3% mainly due to pricing actions undertaken by the company during the year.

Material costs which were at significantly high levels over the past many quarters saw some respite in Q4 as the global
commodity prices showed signs of weakening. Additionally the cost reduction efforts of the company also enabled a cost
reduction of about Rs. 3196 million. Consequently raw material cost as percentage of net revenues was reduced to
72.6% in FY09.

In response to a weak market environment, Company tried to align the production in line with demand as best as it could
and also undertook other measures to contain overheads. Additionally the other expenses item was also benefited by the

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 lower production levels which reduced variable manufacturing and S&D costs. This is reflected in the lower other
expenses of Rs. 3326 million for the full year FY09.

Consequently, Operating Profit for FY09 stood at Rs 17.5 billion. Reported operating profit margins stood at 6.83% in
FY09 (FY08:10.2%).

During 2008, Company transferred technology to two subsidiary companies for Rs. 1694 million and realized a gain of
Rs. 300 million from transfer of activity relating to financing of Construction Equipment to Tata Capital Ltd which are
included in the Total Income from operations for the year ended March 31, 2008. Total Income from operations for the
year ended March 31, 2009 includes Rs. 1388 million towards transfer of technology to one of its subsidiary companies.
Adjusting for these items, operating margin stood at 6.13% in FY09 (FY08: 9.57%).

During the year ended March 31, 2009, the Company has divested its stake in Tata AutoComp Systems Ltd and Tata
Steel Ltd and sold its investments in Tata Tele Services Ltd. The resultant profits of Rs. 1138 million, Rs. 3585 million
and Rs. 478 million respectively are included in the other income.

Depreciation costs increased by 34% for the full year FY2009. This increase has been due to the increase in fixed assets
mainly due to the expansion of capacity at Uttaranchal for the production of Tata Ace and Magic and Pune plant for the
production of the Indica Vista and Indigo variants.

High interest rate environment for most part of the year along with increased debt resulted in an increase of interest cost
which stood at Rs.6737 million for FY09

Net Profit for FY09 stood at Rs.10.01 billion compared with Rs.20.29 billion in FY08.

As on March 31, 2009, the balance sheet size of the Company was Rs. 267.9 billion as compared to Rs 150.9 billion as
on 31st Mar09. Net of vehicle financing loans and receivables, which stood at Rs.20 billion, the Companys capital
employed, was Rs 248 billion.

As on 31st March09, 449.8 million ordinary shares (Face value Rs.10) and 64.2 million An ordinary shares (Face
valueRs.10) were outstanding on the balance sheet of Tata Motors. The increase in share capital from FY08 was on
account of the Rights Issue offer made by the Company.

The Gross total debt (inc. Foreign Currency Convertible Notes, FCCNs) stood Rs 131.6 billion as on 31tst March09.
The Companys Net Debt (Net of the surplus investible funds) stood at Rs 124 billion while the Companys net debt to
equity ratio stood at 0.99.Borrowings increased mainly to support Capex, Investments and increased working capital
requirements in a volume decline scenario.

As of yearend FY09, the total amount raised from the fixed deposit scheme to the public and shareholders stood at Rs.12
billion.

Up to Mar 31st 2009, 97.6% of the Zero coupon Convertible Notes (due 2009) have been converted into Ordinary
Shares / ADSs. There have been no conversions of the other FCCNs issued by the Company.

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Ratios of Mahindra & Mahindra and Tata Motors

Automotive Industry Mahindra Tata Motors

2007 2008 2009 2007 2008 2009
1 Profitability Ratios
14.93 13.24
a Net Profit Margin % % 8.55% 9.87% 9.08% 5.34%
b Asset Turnover 1.85 1.54 1.36 2.355 1.904 0.971
27.60 20.46 23.24 17.28
c Return on Capital Employed(ROCE) % % 11.61% % % 5.19%

2 Liquidity Ratios
a Current Ratio 1.41 1.13 1.06 1.360 0.974 0.894
b Acid Test Ratio 0.76 0.58 0.55 0.208 0.332 0.249

3 Efficiency Ratios
a Stock Turnover Ratio 14.03 14.19 15.32 17.273 16.075 16.418
b Debtors Turnover Ratio 14.38 12.67 12.35 36.744 30.048 19.108
c Stock Turnover Period 26.01 25.72 23.82 21.131 22.706 22.232
d Debtors Turnover Period 25.38 28.81 29.56 9.934 12.147 19.102

4 Financial Structure Ratios

31.41 36.99 43.51 36.85 44.48
a Gearing Ratio % % % % % 51.84%
b Interest Cover Ratio - 52.22 23.90 19.724 80.570 3.838

5 Investment Ratios
30.61 25.36 15.90 27.71 25.80
a Return on Shareholders' Funds (ROSF) % % % % % 8.17%
b Ordinary Dividend Cover 3.85 3.90 3.00 3.293 3.497 3.207
c Earnings Per Share (EPS) (Rs.) 45.68 46.15 30.70 49.387 52.474 19.440
d Price Earnings Ratio (P/E) (as on March 31) 15.66 15.07 12.48 13.55 11.88 9.27
Stock Price (in Rs.) at BSE (as on March 31) 715.30 695.65 383.20 669.25 623.45 180.30

(Please refer to Annexure I, II, III)

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Trend Analysis

Profitability Ratios

Net Profit Margin(NPM)

16%
14.93%

14%
13.24%
12%
9.87%
10%
8.55%
8% 9.08%
Net Profit Margin
6% 5.34%

4%

2%

0%
2006 - 07 2007 - 08 2008 - 09

Mahindra & Mahindra Tata Motors

Graph 1

The NPM trends for both the companies follow a similar downward trend over the three financial years. Tata shows a lower
NPM than M&M over the 3 years.

As we know, NPM = EBIT/ Net Sales.

To arrive at the EBIT value we have to deduct Cost of Goods sold and Depreciation from Net Sales. That is, EBIT = Net
Sales Expenditures Depreciation.

In case of Tata Motors the depreciation value is very large as compared to M&M. For Tata Motors the net sales reduced
over the period 07-08 to 08-09, due to reduced volumes. Simultaneously EBIT value reduced drastically during the same
period due to high depreciation; this lead to the drastic downward slope of the graph.

In case of Mahindra & Mahindra over the period 07-08 to 08-09 net sales went up by 17%. This explains downward
slope of Mahindra.

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 Asset Turnover
2.5
2.355

2.01.85
1.904

1.5
1.54 1.36
Asset Turnover
1.0 0.971

0.5

0.0
2006 - 07 2007 - 08 2008 - 09

Mahindra & Mahindra Tata Motors

Graph 2

The Asset Turnover trends for both the companies follow a similar downward trend over the three financial years. Tata
shows a higher AT over the first two years and then falls drastically in the third year.

As we know Asset Turnover = Net sales / Total Capital Employed (TCE)

In case of Tata Motors the net sales have declined between 07-08 and 08-09 while the TCE has increased by 73%. This
explains the drastic drop in the asset turnover of Tata Motors. The Total capital employed increased as loans taken
increased. These loans were used to fund the purchase of fixed assets and for investment purposes in subsidiary companies
(as per the cash flow statement). As explained earlier the net sales reduced because of lower sales volumes.

In case of Mahindra & Mahindra net sales are up year on year during these three fiscal years. But the Total Capital
Employed increased by a much larger extent. This explains the downward slope of the AT Curve for M&M. During this
period M&M used the increased capital to purchase fixed assets and investments (as per the cash flow statement).

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 Return on Capital Employed (ROCE)
30%
27.60%

23.24%
25%
20.46%
20%

17.28%
ROCE 15%
11.61%
10%

5%
5.19%

0%
2006 - 07 2007 - 08 2008 - 09

Mahindra & Mahindra Tata Motors

Graph 3

The ROCE trends for both the companies follow a similar downward trend over the three financial years. As we know,
ROCE = Net Profit Margin Asset Turnover.

Since both the companies had downward slopes for NPM and AT during the three fiscal years; the ROCE trends for both
the companies are downward sloping.

Liquidity Ratios

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 Current Ratio
1.60
1.41
1.36
1.40

1.20 1.13
1.06
0.97
1.00 0.89

Current Ratio 0.80

0.60

0.40

0.20

0.00
2006 - 07 2007 - 08 2008 - 09

Mahindra and Mahindra Tata Motors

Graph 4

The Current Ratio trends for both the companies follow a similar downward trend over the three financial years. As we
know Current Ratio = Current Assets/ Current Liabilities.

During these three fiscal years Tata motors current assets are gradually decreasing over the period while the current
liabilities are increasing over the same period. This explains the downward slope of the current ratio trend. Current
liabilities increased drastically (almost 38%) over the period 2006-07 to 2007-08 giving the graph a steep slope during this
period. This increase was due to an almost 90% increase in acceptances.

During the same period, Mahindra & Mahindras current liabilities (80%) have grown by a larger percentage as
compared to current assets (35%) for the given period. Current assets increased drastically due to increase in cash & bank
balances and loans & advances. Current liabilities increased drastically due to an increase in sundry creditors. The resultant
effect was that of a downward slope of the current ratio curve for M&M.

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 Acid Test Ratio
0.80
0.76
0.70
0.58
0.60 0.55

0.50

Acid Test Ratio 0.40 0.33

0.30 0.25
0.21
0.20

0.10

0.00
2006 - 07 2007 - 08 2008 - 09

Mahindra and Mahindra Tata Motors

Graph 5

The Acid Test Ratio trends for both the companies follow a different trend over the three financial years. As we know Acid
Test Ratio = (Cash + Sundry debtors) / Current liabilities

For Tata motors, cash position as on 31st March 2008 was higher than on 31st March 2007. This happened because mainly
because operating cash flows were very high during 2008. This explains the upward slope of the Acid Test Ratio trend for
Tata during the first two years. The cash position on 31 st December 2009 was lower as compared to 31 st March 2008. This
was because Tata made cash investments in its subsidiary companies and invested in fixed assets. Debtors have
continuously increased over the three years and so did the current liabilities. The net effect is that of a downward slope of
the trend during 2008-09.

For Mahindra & Mahindra cash position as on 31st March 2008 was lower than on 31 st March 2007. This was primarily
because M&M made large purchases of investments. The cash position as on 31 st March 2009 was higher than on 31 st
March 2008 because the cash generated from operations was higher than investment outflows. Sundry debtors continuously
increased during the three fiscal years and so did the current liabilities. The net effect is of a downward slope which is
steeper initially and then flattens out between the last two years.

Efficiency Ratios

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 Stock Turnover Ratio
20.00
17.27
18.00 16.08 16.42
15.32
16.00
14.00
14.03
12.00 14.19
10.00
8.00
Stock Turnover Ratio 6.00
4.00
2.00
0.00

Year

Mahindra & Mahindra Tata Motors

Graph 6

Stock Turnover Ratio = Cost of Sales/Average Stock

For TATA Motors, the cost of sales has increased from year 2007 to 2008. However the cost of sales has been lower for
year 2009 amongst the three years (For year 2009, the decrease is primarily due to less consumption of raw materials and
processing charges. The average stock has decreased but not proportionally to the decrease in cost of sales). Overall, the
stock turnover ratio has not varied considerably over the three years.

For Mahindra & Mahindra, the stock turnover ratio has increased marginally over the three years from 14.03 to 15.32.
The Cost of Sales has increased consistently for M&M during these years. Also, the average stock held by the company has
shown a steady increase. Therefore, there has been a marginal increase in the stock turnover ratio for M&M during these
years.

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 Debtors Turnover Ratio
40.00
36.74
35.00
30.05
30.00
25.00
20.00 19.11
14.38
Debtors Turnover Ratio 15.00
10.00 12.67 12.35
5.00
0.00

Year

Mahindra & Mahindra Tata Motors

Graph 7

Debtors Turnover Ratio = Credit Sales (or Net Sales)/Average debtors

For TATA Motors, the sundry debtors have doubled over the three years from about Rs 716.60 crores to Rs 1555.20 crores.
From the year 2007 to 2008, there has been increase in net sales but sizeable increase in unsecured sundry debtors has led
to decrease in Debtors turnover ratio. From the year 2008 to 2009, the net sales have dropped while the sundry debtors
have continued to increase leading to sharp decline in the Debtors turnover ratio. The sales volumes decreased by 15.2% y-
o-y to 265,373 units in FY09 as compared to 312,935 units in FY08 because of severe liquidity crunch and slowing
economy CV domestic sales. So, the cycle of converting credit into cash has become longer for Tata Motors in FY 2009 as
compared to FY 2007.

For Mahindra & Mahindra, the net sales and sundry debtors have increased steadily during the three years. Therefore,
there has not been any considerable deviation in Debtors Turnover ratio.

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 Stock Turnover Period
30.00
26.01 25.72
23.82
25.00 22.23

20.00 22.71
21.13
15.00

Stock Turnover Period 10.00

5.00

0.00

Year

Mahindra & Mahindra Tata Motors

Graph 8

Stock Turnover Period = 365 days/Stock Turnover Ratio

For TATA Motors, Stock Turnover Ratio decreases from FY 2007 to FY 2008 and then increases from FY 2008 to FY
2009 and therefore the stock turnover period has increased from FY 2007 to 2008 and decreased thereafter.

For Mahindra & Mahindra, Stock Turnover Ratio consistently decreases from FY 2007 to FY 2009; therefore the stock
turnover period has increased from FY 2007 to FY 2009.

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 Debtors Turnover Period
35.00
29.56
30.00

25.00 28.81
25.38
20.00

15.00 12.15 12.15

Debtors Turnover Period 10.00
9.93
5.00

0.00

Year

Mahindra & Mahindra Tata Motors

Graph 9

Debtors Turnover Period = 365 days/ Debtors Turnover ratio

For TATA Motors, Debtors Turnover Ratio decreases from FY 2007 to FY 2008 and further decreases marginally from FY
2008 to FY 2009, therefore the debtors turnover period has increased from FY 2007 to 2008 and remained constant
thereafter. This shows that the average number of days worth credit sales that is locked in debtors (accounts receivable) has
increased over these three years and the company is not able to convert credit into cash in an efficient manner in FY 2009
as compared to FY 2007.

For Mahindra & Mahindra, Debtors Turnover Ratio decreases from FY 2007 to FY 2009, therefore the debtors turnover
period has increased from FY 2007 to 2009.

Financial Structure Ratios

19
 Gearing Ratio
60%

51.84%
50% 44.48%
43.51%
36.85%
40%

36.99%
Gearing Ratio 30%
31.41%

20%

10%

0%
2006 - 07 2007 - 08 2008 - 09

Mahindra and Mahindra Tata Motors

Graph 10

The Gearing Ratio trends for both the companies follow a similar upward trend over the three financial years. As we know
Gearing ratio = Loans / (Loans + Shareholders funds).

For Tata Motors he loan amount over the three year period has more than trebled, whereas the shareholders funds have
only doubled. In effect the gearing ratio has increased. Unsecured Loans increased because of increase in commercial
papers, foreign currency convertible notes, increase in short term loans from banks, public and shareholders. Secured loans
increased because of increase in cash credit and overdrafts accounts.

For Mahindra & Mahindra over the three year period loans have more than doubled, whereas the shareholders funds
have only increased by 50%. So the gearing ratio has increased but not at the same rate as that of Tata.

20
 Interest Cover Ratio
90
80.570
80
70
60 52.22
50
Interest Cover Ratio 40
30
19.724 23.90
20
10
0.00 3.838
0
2006 - 07 2007 - 08 2008 - 09

Mahindra and Mahindra Tata Motors

Graph 11

The Interest cover ratio trends for both the companies follow a similar downward trend over the last two financial years. As
we know Interest cover ratio = PBIT/Interest.

Interest expenditure for Tata motors decreased and then increased. PBIT decreased slightly from 2006-07 to 2007-08, but
it fell drastically between 2007-08 & 2008-09. This explains the inverted V-shape of the graph.

For Mahindra & Mahindra during the last two years, PBIT decreased whereas interest expenditure increased by 100%.
This explains the sudden drop in M&Ms interest cover ratio. The interest expenditure increased on account of higher
interest payable for loans and debentures during 2008-09.

Investment Ratios

21
 Return on Shareholders' Funds
35.00%
30.61%
27.71%
30.00%
25.80%
25.36%
25.00%

20.00%
% ROSF 15.00% 15.90%

10.00%
8.17%
5.00%

0.00%
2006 - 07 2007 - 08 2008 - 09

Year

Mahindra and Mahindra Tata Motors

Graph 12

Both the companies showed a decreasing trend for Return on Shareholders Funds (ROSF) for the last three years.

For Tata Motors this ratio showed was relatively stable between a range of 25-28% in the years 2006-07 and 2007-08.
However in the financial year 2008-09 there was a steep decline in this ratio to 8.17%. The primary reason for this was a
decline of around 50% in the profit after tax figure (PAT) for the year 2008-09. The major contributors for decline in the
PAT figure was a decline of 10.7% in the Net Sales from 2007-08 to 2008-09 and also higher interest payments to service
their loans. The total shareholder funds also increased primarily on account of the Rights Issue offer made by the company.

Mahindra & Mahindra showed a continuous decline in this ratio over the past three years. It declined from 25.36% in
2007-08 to 15.9% in 2008-09. This was due to a decrease in PAT from Rs 1103 crores to Rs 837 crores. Also on account of
amalgamation of Punjab Tractors Limited (PTL) with the company, the company credited Investment Fluctuation Reserve
Account under the Reserves and Surplus by Rs. 677.00 crores. This being the excess of the value of the net assets of PTL
over the face value of shares allotted to the shareholders of PTL. ROSF also declined from 30.6% in 2006-07 to 25.36% in
2007-08 because the increase in PAT was not substantial enough as compared to the shareholders funds available to the
company. Mahindra and Mahindra had a comparatively higher ROSF for the given period than Tata Motors.

22
 Ordinary Dividend Cover
4.50
3.90
3.85
4.00
3.50
3.497
3.293 3.00
3.00 3.207
2.50
Ordinary Dividend Cover Ratio 2.00
1.50
1.00
0.50
0.00
2006 - 07

Year

Mahindra and Mahindra Tata Motors

Graph 13

This ratio has shown a similar trend for both the companies in the given period. The ordinary dividend cover increased
marginally for both companies from 2006-07 to 2007-08 and then marginally decreased in 2008-09.

In case of Tata Motors there is little variation in this ratio over the period of last three years. It increased from 3.3 in 2006-
07 to 3.5 in 2007-08 and then declined to 3.21 in 2008-09. This means that the post-tax earnings of Tata Motors are 3.2 to
3.5 times the dividend paid by the company. In other words, the dividends paid by the company are 28-32% of the post-tax
profit in the past three years.

For Mahindra & Mahindra also it increased marginally from 3.85 in 2006-07 to 3.90 in 2007-08 and then declined to
3.00 in 2008-09. Therefore the dividends paid by the company are 25-33% of the post-tax profits in the past three years.

23
 Earning per Share
60.00
52.474
49.387
50.0045.68 46.15

40.00
30.70
30.00
Rupees
20.00 19.440

10.00

0.00
2006 - 07 2007 - 08 2008 - 09

Year

Mahindra and Mahindra Tata Motors

Graph 14

Both the companies showed a significant dip in Earnings per Share (EPS) in 2008-09 as compared to 2007-08.

For Tata Motors the EPS declined from Rs 52.5 in 2007-08 to Rs 19.4 in 2008-09. This was due to a significant dip in
Profit after Tax (PAT) on account of decrease in turnover, due to slump in domestic and international markets. However, the
EPS had increased from Rs 49.38 in 2006-07 to Rs 52.5 in 2007-08 due to increase a 6.03% increase in PAT on account of
a lower tax provision owing to the increase in spend on Research and Development and income from capital gains, which is
subject to a lower tax rate.

In case of Mahindra & Mahindra the EPS declined from Rs 46.15 in 2007-08 to Rs 30.70 in 2008-09. This was due to a
decline in PAT from Rs 1103 crores in 2007-2008 to Rs 837 crores in 2008-09 which was on account of higher material
costs as % of sales, higher personnel cost as % of sales, higher depreciation due to capitalization of the Xylo related assets
and increase in amortization of intangibles and also higher interest costs due to increased borrowings to meet the
companys capital expenditure and other growth plans. Also, the number of shares increased from 38.55 crores in 200708 to
51.4 crores in 2008-09 on account of the rights issue offer made by the company. However, in the year 2007-08 there was a
marginal increase in EPS from Rs 45.68 in 2006-07 to Rs 46.15 in 2007-08 due to a higher post tax profit.

Mahindra & Mahindra had a comparatively higher EPS in 2008-09 than Tata Motors.

24
 Price-Earnings Ratio
35.00
13.55
30.00 11.88

25.00 9.27
20.00
15.66 15.07
P/E Ratio 15.00 12.48

10.00

5.00

0.00
2006 - 07 2007 - 08 2008 - 09

Year

Mahindra & Mahindra Tata Motors

Graph 15

Price-Earnings Ratio = Current Stock Price/Earnings per share (EPS)

A higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive
compared to one with lower P/E ratio.

For both the companies, Price-Earnings ratio (as on March 31) has decreased from the financial year 2006-07 to 2008-09.

Annexure I: Sample Calculation

Financial ratios using the Annual Report of Tata Motors (FY 2008 -2009)

Mere statistics/data presented in the different financial statements do not reveal the true picture of a financial position of a
firm. Properly analyzed and interpreted financial statements can provide valuable insights into a firms performance. One of
25
the tools to extract essential information (for investors) from these financial statements is ratio analysis. Financial ratios can
be broadly classified into

1. Profitability Ratios
2. Liquidity Ratios
3. Efficiency Ratios
4. Financial Structure Ratios
5. Investment Ratios

Here, we present the sample calculation of ratios from one of the annual reports (Financial year 2008-2009) of TATA
Motors. We have looked into the relevant schedules and notes provided in the annual report and tried to reason out the
validity of any component of an item in the financial statements to be included in the calculation of financial ratios.

Note: All the figures used in the computation of ratios are in Rs. Crores

Profitability Ratios

1. Net Profit Margin% [(Profit before Interest & Tax/Net Sales)*100]

From the profit and loss account for the year ended March 31, 2009 pg no 57

26
 Interest can be derived
from Note 4 of the
Schedule B of the
schedules forming part
of the balance sheet and
Profit & loss statement
in the annual report on
page 83.

Net Sales = 25660.79

Net Profit Margin =

[(Profit before Tax +
Interest)/ Net
Sales]*100
=
[(1013.76 +
357.22)/25660.79]*100
= 5.34
%

Net Profit Margin = 5.34 %

2. Asset Turnover (Net Sales/Total Assets)

As shown in the above ratio, the net sales of the company in the year 2008-09 are 25660.79. The total assets can be derived
from the balance sheet (as at March 31, 2009) in annual report pg no 56.

Asset Turnover = Net Sales/Total Assets

= 25660.79/26425.64
= 0.971

Asset Turnover = 0.97

27
3. Return on Capital Employed (ROCE = NPM * AT)

Return on Capital Employed is calculated as the ratio of profit before interest and tax to the sum of share capital, reserves
and long term debt. As per Du Pont Analysis, it is simply equal to the product of Net Profit Margin % and Asset Turnover.

Using Du Pont Analysis,

ROCE = Net Profit Margin % * Asset Turnover

= 5.34 % * 0.97
= 5.188 %

Return on Capital Employed = 5.19 %

Liquidity Ratios

4. Current Ratio (Current Assets/Current Liabilities)

From the balance sheet (as at March 31, 2009) in annual report pg no 56,
We have calculated the
current ratio as ratio of
the current assets, loans
& advances to current
liabilities and
provisions.

Current ratio = (Current

Assets, Loans &
Advances)/(Current
Liabilities &
Provisions)
= 9691.69/10835.51
= 0.8944

Current ratio = 0.89

28
5. Acid Test or Quick Ratio (Quick Assets/Current Liabilities)
From the balance sheet (as at March 31, 2009) in annual report pg no 56,

We have calculated the

acid ratio as the ratio of
quick assets (Sundry
Debtors, Cash and Bank
Balances) to the current
liabilities and
provisions. Quick Assets
are cash and other assets
which can or will be
converted into cash fairly soon.

Acid Test Ratio = (Sundry Debtors + Cash & Bank Balances)/ (Current Liabilities & Provisions)
= (1555.20 + 1141.82)/10835.51
= 0.2489

Acid Test (Quick) Ratio = 0.25

Efficiency Ratios
6. Stock Turnover Ratio (Cost of Sales/Average Stock)

Referring to the profit and loss account for the year ended March 31, 2009 pg no 57

Cost of sales does not

include general selling
and distribution
expenses; therefore we
look into the Schedule
B for profit and loss
account (manufacturing
& other expenses) on
page no 60 in the annual
report. We have
identified that the Cost
of Sales can have the
following four
components
Purchase of products for sale
Raw Materials and components
Processing Charges
Salaries, wages & bonus

29
 Cost of Sales = Cost on
(Purchase of products
for sale + Raw
Materials and
components +

Processing Charges +
Salaries wages &
Bonus)
= 2180.32 +
16218.62 + 810.60 +
1227.77
Cost of Sales =
20437.31
---------------------- (i)

Average Stock is
calculated by taking simple average of opening stock and closing stock. From the Schedule B for profit and loss account
(Changes in Stock-in-trade and Work-in-Progress) on page no 60 in the annual report, the average stock is calculated as
follows:

Average Stock = (Opening Stock + Closing Stock)/2

= (1363.86 + 1125.82)/2
Average Stock = 1244.84 ---------------------- (ii)

Therefore, Stock Turnover Ratio = Cost of Sales/Average Stock

= 20437.31/1244.84 [From (i) and (ii)]
= 16.418

Stock Turnover Ratio = 16.42

7. Stock Turnover Period (365 days/Stock Turnover Ratio)

Stock turnover period is the ratio of average stock to cost of sales per day. Alternatively, the stock turnover period can be
calculated using Stock Turnover Ratio as

Stock Turnover Period = 365 days/Stock Turnover Ratio

= 365/16.418
= 22.232 days

30
Stock Turnover Period = 22.23 days

8. Debtors Turnover Ratio (Credit Sales/Average Debtors)

As credit sales is not explicitly mentioned in the profit and account statement of the annual report, we are taking an
exception in using total net sales instead of credit sales in the calculation of this ratio.

Referring to the profit and loss account for the year ended March 31, 2009 pg no 57

Net Sales = 25660.79 --------------------------- (i)

Average Debtors is calculated by taking simple average of opening accounts receivables (sundry debtors for yr 2007-2008)
and closing accounts receivables (sundry debtors for yr 2008-2009).

From the balance sheet (as at March 31, 2009) in annual report pg no 56,

Average Debtors = (Opening Sundry Debtors + Closing Sundry Debtors)/2

= (1555.20 + 1130.73)/2
Average Debtors = 1342.965 ----------------- (ii)

Therefore, Debtors Turnover Ratio = Net Sales/Average Debtors

= 25660.79/1342.965 [From (i) and (ii)]
= 19.108

Debtors Turnover Ratio = 19.11

9. Debtors Turnover Period (365 days/Debtors Turnover Ratio)

Debtors turnover period is the ratio of average debtors to credit sales per day. Alternatively, the debtors turnover period
can be calculated using Debtors Turnover Ratio as

Debtors Turnover Period = 365 days/Debtors Turnover Ratio

= 365/19.108
= 19.102 days

Debtors Turnover Period = 19.10 days

31
Financial Structure Ratios

10. Gearing Ratio [(Loans + Preference Capital/Total Capital Employed)*100]

From the balance sheet (as at March 31, 2009) in annual report pg no 56,

After checking the Schedule 1 of the balance sheet in the annual report, we find that no preference shares were issued.
Therefore, the preference capital here is taken as zero.

Total Capital Employed is calculated by taking the sum of loan funds and shareholders funds.

Gearing ratio = [(Loans + Preference Capital)/Total Capital employed]*100

OR [(Loans fund + Preference Capital)/(Shareholders fund + Loans fund)]*100
= [(13165.56 + 0)/(12230.15 + 13165.56)]*100
= 51.84 %

Gearing ratio = 51.84 %

11. Interest Cover Ratio (Profit before interest and tax/Interest payable)

From the profit and loss account for the year ended March 31, 2009 pg no 57

32
Interest can be derived from Note 4 of the Schedule B of the schedules forming part of the balance sheet and Profit &
loss statement in the annual report on page 83.

Interest Cover Ratio = (Profit before Tax + Interest)/Interest

= (1013.76 + 357.22)/357.22
= 3.838

Interest Cover Ratio = 3.84

Investment Ratios
12. Return on Shareholders fund [{(PAT-Misc Exp-Preference Dividend)/(Ordinary Share Capital + Reserves)}
*100]
33
Return on Shareholders fund is calculated by taking percentage of profit after interest, tax and preference dividend to the
total Shareholders fund.
As Tata Motors has issued no preference shares in the financial year 2008-09, therefore the preference dividend is zero.
This can be validated by looking at Notes on Capital in the Schedule 1 of the balance sheet in the annual report.

From the profit and loss account for the year ended March 31, 2009 pg no 57

From the balance sheet (as at March 31, 2009) in annual report pg no 56,

Return on Shareholders fund (ROSF) = (Profit after interest, tax & Pref. Dividend/Shareholders
Fund)*100
Or [(PAT-Misc Exp-Preference Dividend)/(Ordinary Share
Capital + Reserves)]*100
= [(1001.26 2.02 0)/(514.05 + 11716.10)] * 100
= 8.17 %

Return on Shareholders fund (ROSF) = 8.17 %

13. Ordinary Dividend Cover (Profit after interest, tax & preference dividend/Ordinary Dividend for the year)
Referring to the profit and loss account for the year ended March 31, 2009 pg no 57

34
From the balance sheet (as at March 31, 2009) in annual report pg no 56,

Ordinary Dividend
Cover expresses a
company's ability to pay ordinary dividends to shareholders out of profits earned. It is calculated by taking the ratio of
profit after interest, tax & preference dividend to the dividend on ordinary shares given by the company in the given
financial year.
Ordinary Dividend Cover = PAT, tax & preference dividend/ Ordinary Dividend
= (PAT - Misc Exp - Preference Dividend)/Proposed dividend for the yr = (1001.26 2.02
0)/311.61 = 3.207
As Tata Motors has issued no preference shares in the financial year 2008-09, therefore the preference dividend is zero.
Ordinary Dividend Cover = 3.21

14. Earnings per Share (EPS) (Profit after interest, tax & preference dividend/Number of Ordinary Shares)

EPS is the portion of a company's profit allocated to each outstanding share of common stock. It is calculated for ordinary
shares; therefore it is ratio of profit after interest, tax and preference dividend to the number of ordinary shares outstanding.
From the profit and loss account for the year ended March 31, 2009 pg no 57

Preference Dividend is
zero.
From the balance sheet

(as at March 31, 2009) in annual report pg no 56,

Referring to the Schedule 1 from the schedules to the balance sheet on the page in the annual report

35
EPS = Profit after interest, tax & preference dividend/Number of Ordinary Shares
= (PAT - Misc Exp - Preference Dividend)/No. of ordinary shares
= (1001.36 2.02 0)/51.4008314 (in crores of shares)
= Rs 19.442

Earnings per Share (EPS) = Rs 19.44

15. Price Earnings Ratio (P/E ratio) (Market price of the share/EPS)
The P/E ratio (price-to-earnings ratio) of a stock is a measure of the price paid for a share relative to the annual net
income or profit earned by the firm per share. It is calculated by taking ratio of the market price of the share to the Earning
per share)

Example: Taking the stock market price of Tata Motors on March 31, 2009, we can calculate P/E ratio of the stock on that
date.

Stock Price of Tata Motors on March 31, 2009 = Rs 180.30 (data taken from BSE website)
Average EPS over the last 12 months (as calculated above) = Rs 19.4421

P/E Ratio = 180.30/19.442 = 9.274

P/E Ratio = 9.27

36
 Annexure II:
Financial

Statements
of Mahindra & Mahindra (2008-2009)

37
Annexure

III: Financial Statements of Tata Motors (2008-2009)

38