FAA Assignment Ist Trim, MBA-FT Core

Shresth Bharti A009 Analysis on Hero MotoCorp and TVS Motor Company

Ratio Analysis: Activity ratio analysis: Hero has a faster Inventory turnover as compared to TVS limited. There is a difference of 22 days between the two companies for inventory turnover. Moreover Hero is able to cover its accounts receivable at faster rate than TVS. Liquidity analysis: Hero has a shorter operating cycle. They are able to procure assets, process and sell their products faster. This helps in better cash flow in the business while a long operating cycle tends to harm profitability by
increasing borrowing requirements and interest expense. Current ratio for TVS is approx. 1.1 and Hero Motorcorps is 0.24. A high current ratio (>=1) implies that the company has good liquidity and will be able to pay off all its liabilities and will be stable. Higher the Quick ratio better is companys ability to meet short term obligations. Hero has a very low Current ratio(0.24) and Quick ratio(0.15). This implies that the company will not be able to meet its short term obligations on solvency. Both companies have a defensive interval period of nearly 22-23 days.

Solvency Ratios: Since TVS has got a high Debt to Equity ratio as compared to Hero, TVS must be financing its activities with a high debt. Again as Debt to capital ratio is more in case of TVS the company is also financing it through Equity. The times interest earned ratio for TVS is much lower than Honda and thus it is in a better position to return its debt .The capital expenditure ratio for TVS is much lower than Hero. Hence Hero is able to reinvest much more into the business to keep its operations going. The CFO to Debt ratio is again much higher for Honda thus it will be able to return its debt from using cash generated from operations.
ROE: Return on Equity of Hero is higher compared to TVS. Hero Motocorp develops a 60% profit on every dollar invested by shareholder. On the other hand, TVS is able to generate only 20% profits on the shareholders. Hero has a better return on equity, inventory turnover but they have very poor current ratio and quick ratio. Hero could face a very unstable business if it faces solvency.

Shresth Bharti

Management Discussion & Analysis Report TVS: In accordance with the growth of the two wheeler market in the past year which grew at 27% from 10.5 mn to 13.2 mn, TVS registered a growth of 32% in two wheeler sales. The scooter segment grew by 50%,moped segment grew at 23% and motorcycle grew at 31% .The company launched TVS Jive in the Executive segment, which forms 60% of the motorcycle category. During the year, the three wheeler sales increased from 14702 in 2009-10 to 39257 2010-11. The company grew at 23% whereas TVS grew by 29 %. Hero Motocorp Ltd The domestic two wheeler market grew at 26% with sales of 11.8 mn units as compared to last years 9.4mn.The domestic motorcycle market witnessed a growth of 23%. Scooter sales grew the fastest at 42% from 1.5mn to 2.2mn.Mopeds sales were up23% from 5.7lakh units to 7lakh units. Hero had a market share of 44.5% in the domestic two wheeler market with sales of 5.2 million. The Companys twowheeler sales improved by 17% from 4.6mn to 5.4mn units Analysis of Accounting Standards followed by TVS Motor Company and Hero MotoCorp TVS has clearly mentioned the method the scope of implementation of all Accounting Standards. Even the ones which do not apply to TVS or have become redundant have been mentioned. On the other hand, Hero MotoCorp has not disclosed the AS scope as clearly. Both the companies value the inventory (AS2) by a method which gives lower value. TVS uses Weighted-average Cost or Net Realizable Value depending on which gives a lower value. Hero uses different policies for different types of goods eg. Stores and spares at weighed average cost, in transit material at actual cost, work in progress at material cost plus labor, overheads and excise duty. Both the companies use Indirect Method to calculate cash flows. There has been no change in the accounting policy for both the companies. The depreciation policy of both companies is more-or-less similar, both employing Straight Line Method for most items. Assets uptoRs 5000 are fully depreciated in the same year. The policy employed for remaining items have also been mentioned fairly. TVS does not separately specify any R&D expenses whereas R&D costs for Hero are expensed under respective Bus. Both the companies recognize revenue as point of dispatch of finished goods. They value all the fixed assets are valued at cost including expenditure incurred in bringing them to usable condition less depreciation. Both companies account for deferred tax liabilities and assets recognized based on timing difference using the tax rates substantively enacted on the Balance Sheet date.

Shresth Bharti

By & Large Overall, Hero Motocorp seems to be a more stable company operationally due to lower inventory turnover ratio and almost nil debts. Hero needs to be careful and take corrective steps to improve its current and quick ratio. This could be as a result of the demerger with Honda. However, the annual report of TVS is more readable and precise.

Shresth Bharti