Financial Analysis of

BAJAJ AUTO LTD.

EXECUTIVE SUMMARY

Competing with Everyone from Everywhere for Everything, Bajaj has grown operations in 50 countries by creating a line of value-for-money bikes targeted to the different preferences of entry-level buyers with quality such that Kawasaki buys Bajaj products for some of its markets. Bajaj Auto is a major Indian automobile manufacturer. It is India's largest and the world's 4th largest two- and three-wheeler maker.

This report contains mainly two parts – General information about the company and main theme of the report that is financial analysis. The second part of this report contains financial analysis of BAJAJ which is based on the analysis of the various financial ratios calculated using the annual report of Bajaj Auto ltd.

It enables us to spot trends in your business and to compare your performance with the performance of similar businesses in the industry as well as over time. Financial analysis provides the all-important indicators of how business is running, which will help us to address business problems before they cause loss or threaten the survival of your operation.

We can conclude from the financial analysis that although Bajaj auto is operationally efficient, its profitability of Bajaj Auto has declined over the past three years due to increase in costs and decrease in sales etc.

The Problem Statement

We are a Financial Analyst for Fincon Investment Company and we have to prepare a financial report on Bajaj Auto ltd to determine its performance for the past three financial years using the financial statements. The company although is operationally efficient in terms of current and quick ratio, inventory , receivable and payables management etc, it suffers from declining profitability , especially for the shareholders.

COMAPNY OVERVIEW

Bajaj Auto Ltd is a major Indian automobile manufacturer for two wheelers and three wheelers. It is India's largest and the world's 4th largest two- and three-wheeler maker. It is a Pune basedcompany plants in Waluj near Aurangabad, Akurdi and Chakan, near Pune. Bajaj Auto makes scooters,

motorcycles and the auto rickshaw.The company is headed by Mr.Rahul Bajajwho isthe chairman of the company.

Bajaj auto came into existence on November 29, 1945 as M/s Bachraj Trading Corporation Private Limited. Its major business then was to sell imported two and three wheelers in India. In1959, it obtained license from the Government of India to manufacture two and three wheelers. Bajaj became a public company in 1960. A land mark was reached by the company in 1970 when it manufactured its 100000 unit. It became a generic product in the country as the country started to refer to the brand as Hamara Bajaj and soon it managed to produce and sell 100,000 vehicles in a single financial year. In 1985, the Waluj plant in Aurangabad starting producing. The most recent plant has been set up at Pantnagar in Uttarakand in April 2007 and would start producing soon. The commissioning of this plant was done in a record period of eleven months. The capital expenditure for this project is Rs.1.5 billion. The company has received the formal approval dated 17 April 2007 from the Department of Commerce, Ministry of Commerce and Industry, Government of India for the setting up of a Special Economic Zone at Waluj Industrial area in Aurangabad district. The plans for developing this zone are currently in progress. The company over the last decade has successfully changed its image from a scooter manufacturer to a motorcycle manufacturer, product range ranging from Scooterettes to Scootersto Motorcycles. Its real growth in numbers has come in the last 4 years after the successful introduction of Pulsar the new power bike for India.2

The products offered by Bajaj are Ungeared scooters, geared scooters, motorcycles ranging form100cc to 220cc. The company offers different motorcycles for different segments. Among three wheelers it offers 175cc LPG, CNG, Petrol and 416cc diesel vehicles. Bajaj has its presence in more than 30 countries across the world with significant presence in our neighbouring countries. Bajaj has won many awards for its most recent DTSi technology. BajajAuto Ltd. is the flagship company of Bajaj Group of Companies, which has a significant presence in key sectors of the Indian economy. A consistently high performer, it employs around1698 people and is one of the most respected companies in the country.

Analysis of capital structure

Capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. The capital structure is how a firm finances its overall operations and growth by using

different sources of funds. The following ratios are used to analyse the capital structure of Bajaj auto ltd.

INTEREST COVERAGE 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:

In the year 2011 the Interest Coverage Ratio is very high.It falls and reaches at 182.03. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is lower, its ability to meet interest expenses may be questionable. Here we can see a declining interest coverage ratio due to decreasing EBIT and hence an unfavourable situation for the firm to meet its debts.

DEBT EQUITY RATIO: A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

There is a decreasing trend in the debt equity ratio i.e the company is financing its operations by using shareholders funds. A ratio of 2:1 is seen as adequate. A high debt/equity ratio generally

means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense .In this case it is very low signifying that the company is not able to utilize the tax benefits that could have accrued due to the interest charges.

Analysis of operations

CURRENT RATIO: is an indicator of the firm’s commitment to meet its short term liabilities. It is calculated to establish a relationshipbetween current asset and current liabilities. it is also called as working capital ratio. Current Ratio = Current Assets / Current Liabilities. Generally the current assets should be least twice the current liabilities for a comfortable liquid positions, i.e. current ratio be 2:1 which is referred to as excepted standard of liquidity.

A current ratio of less than 1.0 indicates that a company does not have enough current assets to cover current liabilities. Most analysts expect a company to have a current ratio of at least 1.5. We can see that the current ratio has risen from .61 to .89 which is seen as a relatively favourable condition for the firm but since the absolute ratio is less than the optimal one, company might have severe problems in paying off its liabilities in case of any unforeseen sudden payments required.

QUICK RATIO: aka the quick assets ratio or the acid-test ratio - is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position.

Formula:

The quick ratio has risen from .47 to .74.Hence it can be concluded that the company was very liquid and has good cash reserves. Also since this ratio is close to 1, which is the ideal quick ratio for a firm, it would be able to pay off its creditors easily and this would go on to strengthen the market loyalty of the company which would enable them to easily raise funds through loans in times of crisis.

ASSET TURNOVER RATIO: The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in dollars by assets in dollars.

Formula:

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.

The asset turnover ratio has increased from 3.14 to 3.48 times which shows that the firm is utilizing all its assets - its asset base - efficiently to generate sales.

INVENTORY DAYS RATIO: A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory (including goods that are work in progress, if applicable) into sales. Generally, the lower (shorter) the DSI the better, but it is important to note

that the average DSI varies from one industry to another.

The inventory days ratio has remained more or less constant over the past three years. There is a declining trend as shown which shows that the company is able to turn its inventory quickly into cash which is also reflected in the increasing quick ratio.

RECEIVABLE DAYS RATIO: The efficiency of the company in managing its receivables is ascertained by the debtors turnover ratio. The ratio can be converted into an alternate measure called the number of days receivables. It expresses the number of days’ sales that is outstanding to be collected at the end of the accounting period.

There is a decrease in the receivable days ratio over the past three years which is considered as favourable due to the high importance of cash in running a business, it is in a company's best interest to collect outstanding receivables as quickly as possible. By quickly turning sales into cash, a company has the chance to put the cash to use again - ideally, to reinvest and make more sales.

PAYBLE DAYS RATIO: is an indicator of how long a company is taking to pay its trade creditors. It is a company's average payable period. Calculated as:

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The lower the ratio, the quicker the business pays its liabilities. It also shows the average payment terms granted to a company by its suppliers. The higher the ratio, the better credit terms a company gets from its suppliers. From a company’s prospective, this decrease in the ratio from 47.19 to 43.71 days is considered unfavourable as although the company is able to pay off its liabilities to the creditors quickly because of unfavourable credit terms.

Analysis of profitability

GROSS PROFIT MARGIN: measures the company's manufacturing and distribution efficiency during the production process. A high gross profit margin indicates that the company can make a reasonable profit, as long as it keeps the overhead cost in control. A low margin indicates that the business is unable to control its production cost.

Company should maintain its position in profitability. Year by year its decreasing, that’s not good for the company. From 20.03 % in 2010 to 18.39 % in 2012.This may be due to rising costs such as raw material, wages etc or a decrease in sale price etc. For increasing Gross Profit the company should increase the sales.

OPERATING PROFIT MARGIN: The profit earned from a firm's normal core business operations. This value does not include any profit earned from the firm's investments (such as earnings from firms in which the company has partial interest) and the effects of interest and taxes.

The decrease in operating profit ratio shows the decreasing operational efficiency of the business or less efficiency of the core business of the company which leads to decrease in operating profits. This may be the result of decline in sales revenue or increase in the direct costs of production/manufacturing.

CORE EBITDA MARGIN RATIO (%): measures the profitability of a company before charging for any non-operating expenses and depreciation and amortization. It calculates the cash operating margin of the company.

There has been a slight increase in the core ebitda margin from 17.99 in 2010 to 18.08 in 2012.

PAT MARGIN RATIO: The net profit margin is the final measure of profitability for a company. It is the margin left over for the shareholders’ after accounting for all the operating and non-operating expenses. For capital intensive industries, like Bajaj auto, the difference between cash operating margin and operating margin is likely to be higher as compared to trading and service organizations.

The Patmargin has been more or less constant over the past 3 years with a slight increase in 2011 and then a dip in 2012 as a resul of declining sales and rising non operating costs etc.

Return ratios

RETURN ON ASSETS: An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".

The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. 

On the investment on Assets company is making good return but as compared to 2011, the ROA for 2012 has declines considerably from 69% to 51% which could have been due to an increase in the total assets of the firm without much increase in net income.

RETURN ON EQUITY: The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity

The return on equity is also showing a declining trend, from 73 % in 2010 to 54 % in 2012, (with a slight increase in 2011 of 85%) due to decrease in profits. This decline is not considered favourable for the company since roe shows how much profit it is able to generate given the resources provided by its stockholders. Investors usually look for companies with returns on equity that are high and growing.

RETURN ON CAPITAL EMPLOYED RATIO: is considered to be the best measure of profitability in order to assess the overall performance of the business. It indicates how well the management has used the investment made by owners and creditors into the business. It is commonly used as a basis for various managerial decisions.Calculated as:

Baja Autos’ ROCE has increased from 64 % in 2010 to 71 % in 2012 , but as compared to 90% in 2011, the ROCE for 2012 is not satisfactory due to an increase in the capital employed without proportionate increase in the profit. Overall we can see a favourable ROCE ratio as the primary objective of business is to earn profit, higher the return on capital employed, the more efficient the firm is in using its funds.

Shareholders’value ratios

EARNINGS PER SHARE: 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.

Calculated as:

What EPS means is how much net profit one share of the company is producing. The higher this ratio is, the better, because the value of the share will increase. When the company publishes what proportion of its profits will be paid out as dividend to the stockholders, then the higher the EPS is the better, since than more dividends will be received after each shares owned.

The EPS has declined from 2010 to 2012 which is due to declining profits. Because of decreasing EPS may be the trust of the shareholder decrease.

DIVIDEND PER SHARE: Dividend Per Share is the amount of dividend that each shareholder receives per share after the company decides on how much profit to retain for further investments and contingencies and how much to distribute the shareholders’ as dividends. A high dividend per share shows the company’s ability to generate huge profits and also helps in increasing the investor confidence.

There is an increase in the dividend per share which is seen as a favourable condition from the shareholders’ point of view. This also signifies decreasing retained earnings of the firm.

Conclusion and Recommendations

The firms’ capital structure includes more of equity than debt as reflected in the debt-equity ratio of the firm which has seen a declining trend signifying that the company has paid off its debts in the last 3 years and now has a capacity to raise further debts to finance its operations and take the advantage of tax savings due to the interest charges. Also the firm is able to meet its interest obligations as shown by a high interest coverage ratio.

In terms of operational efficiency the company enjoys a favourable working capital position as it is able to meet its short term obligations as shown by increasing current and quick ratios. The number of days, inventory is held with the company as well as the payable and receivable days have decreased signifying a satisfactory cash conversion cycle of the firm.

The firms’ profitability in terms of the gross and operating profit margin has declined due to increasing manufacturing and operating costs as well as sluggish sales records. The company is able to generate return on its assets and capital employed but not enough returns are generated for the shareholders due to the decreasing ROE and a decreasing EPS because of decrease in profits. The firm thus needs to focus on its sales and costs, both operating and non -operating so as to increase it profits. Also the firm should finance its operations by borrowed funds so that it can take the advantage of tax savings.

APPENDIXBALANCE SHEET

Mar '12 Mar '11 Mar '10

12 mths 12 mths 12 mths

Sources Of Funds

Total Share Capital 289.37 289.37 144.68

Equity Share Capital 289.37 289.37 144.68

Share Application Money 0.00 0.00 0.00

Preference Share Capital 0.00 0.00 0.00

Reserves 5,751.70 4,620.85 2,783.66

Revaluation Reserves 0.00 0.00 0.00

Networth 6,041.07 4,910.22 2,928.34

Secured Loans 0.00 23.53 12.98

Unsecured Loans 97.48 301.62 1,325.60

Total Debt 97.48 325.15 1,338.58

Total Liabilities 6,138.55 5,235.37 4,266.92

Mar '12 Mar '11 Mar '10

12 mths 12 mths 12 mths

Application Of Funds

Gross Block 3,425.94 3,395.16 3,379.25

Less: Accum. Depreciation 1,914.33 1,912.45 1,899.66

Net Block 1,511.61 1,482.71 1,479.59

Capital Work in Progress 343.15 149.34 120.84

Investments 4,882.81 4,795.20 4,021.52

Inventories 678.53 547.28 446.21

Sundry Debtors 423.20 362.76 272.84

Cash and Bank Balance 446.49 155.45 100.20

Total Current Assets 1,548.22 1,065.49 819.25

Loans and Advances 1,744.82 3,891.66 2,291.29

Fixed Deposits 1,208.36 401.04 1.21

Total CA, Loans & Advances 4,501.40 5,358.19 3,111.75

Deffered Credit 0.00 0.00 0.00

Current Liabilities 2,925.53 2,624.35 2,218.06

Provisions 2,174.89 3,925.72 2,248.72

Total CL & Provisions 5,100.42 6,550.07 4,466.78

Net Current Assets -599.02 -1,191.88 -1,355.03

Miscellaneous Expenses 0.00 0.00 0.00

Total Assets 6,138.55 5,235.37 4,266.92

Contingent Liabilities 1,445.67 959.66 818.25

Book Value (Rs) 208.77 169.69 202.40

PROFIT AND LOSS ACCOUNT

Profit & Loss account of Bajaj Auto ------------------- in Rs. Cr. -------------------

Mar '12 Mar '11 Mar '10

12 mths 12 mths 12 mths

Income

Sales Turnover 20,475.74 17,386.51 12,420.95

Excise Duty 959.09 934.71 607.70

Net Sales 19,516.65 16,451.80 11,813.25

Other Income 413.66 1,176.00 22.50

Stock Adjustments 94.15 82.79 47.60

Total Income 20,024.46 17,710.59 11,883.35

Expenditure

Raw Materials 14,580.24 11,965.30 8,187.11

Power & Fuel Cost 101.85 86.61 70.35

Employee Cost 541.04 494.33 411.76

Other Manufacturing Expenses 73.76 61.77 57.54

Selling and Admin Expenses 364.06 517.27 407.61

Miscellaneous Expenses 263.37 168.53 221.94

Preoperative Exp Capitalised -49.43 -16.66 -15.67

Total Expenses 15,874.89 13,277.15 9,340.64

Mar '12 Mar '11 Mar '10

12 mths 12 mths 12 mths

Operating Profit 3,735.91 3,257.44 2,520.21

PBDIT 4,149.57 4,433.44 2,542.71

Interest 22.24 1.69 5.98

PBDT 4,127.33 4,431.75 2,536.73

Depreciation 145.62 122.84 136.45

Other Written Off 2.14 2.14 0.00

Profit Before Tax 3,979.57 4,306.77 2,400.28

Extra-ordinary items 46.60 46.77 26.87

PBT (Post Extra-ord Items) 4,026.17 4,353.54 2,427.15

Tax 1,022.12 1,011.02 710.12

Reported Net Profit 3,004.05 3,339.73 1,702.73

Total Value Addition 1,294.65 1,311.85 1,153.53

Preference Dividend 0.00 0.00 0.00

Equity Dividend 1,302.15 1,157.47 578.73

Corporate Dividend Tax 211.24 187.77 96.12

Per share data (annualised)

Shares in issue (lakhs) 2,893.67 2,893.67 1,446.84

Earning Per Share (Rs) 103.81 115.42 117.69

Equity Dividend (%) 450.00 400.00 400.00

Book Value (Rs) 208.77 169.69 202.40

BIBLIOGRAPHY :

http://www.moneycontrol.com/financials/bajajauto/profit-loss/BA10#BA10http://money.livemint.com/IID64/F200132/Financial/Ratios/Company.aspx