kalyani ratio trend

Letter of Authorization

“The report is submitted as partial fulfillment of the requirement of MBA Program of JKPS

GURGOAN, which has been authorized by Prof. SANJAY RASTOGI.”

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ACKNOWLEDGEMENT

I am grateful to Maruti Suzuki India Limited for providing me the opportunity to undertake

Summer Internship Program at their organization. The SIP has been of great learning to me

and has allowed me to understand various things from a practical point of view.

I would like to express sincere gratitude towards Mr. Lalit Khilani, Deputy Manager

Finance and various Departmental heads, because without their help, guidance and

encouragement this report would not have been possible.

I would also like to thank my college mentor Prof. SANJAY RASTOGI for his continuous

support and guidance. Without him, the project would not have been a success.

My gratitude and appreciation extends to all my friends who have been directly or indirectly

being associated with the project for their support and encouragement.

Finally, I owe my deepest and most invaluable debt to my family as I would have never come

this far without their unconditional love and support.

(MOHAMMAD ISLAM)

TABLE OF CONTENT

ACKNOWLEDGEMENT ................................................................................. 2

CHAPTER 1: INTRODUCTION ..................................................................... 5 PURPOSE OF THE PROJECT ...................................................................................................... 5 LIMITATIONS OF THE STUDY: ................................................................................................. 6

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METHODOLOGY: ..................................................................................................................... 7

CHAPTER 2: ANALYSIS ................................................................................. 8 SWOT ANALYSIS ................................................................................................................... 8 INDUSTRY ............................................................................................................................. 17 ABOUT THE COMPANY: ........................................................................................................ 21

CHAPTER 3: PROJECT DESCRIPTION .................................................... 27 ABOUT THE PROJECT ............................................................................................................ 27 TYPES OF BENCHMARKING ................................................................................................... 27 TREND ANALYSIS OF MARUTI SUZUKI INDIA LTD. FROM FY06 TO FY08 ........................... 32 TREND ANALYSIS OF TATA MOTORS LTD. FROM FY06 TO FY08 ....................................... 43 TREND ANALYSIS OF MAHINDRA AND MAHINDRA LTD FROM FY06 TO FY08 ................... 52 INTER FIRM ANALYSIS .......................................................................................................... 61 ECONOMIC VALUE ADDED ................................................................................................... 67 CALCULATION OF EVA ...................................................................................................... 69 CFROI .................................................................................................................................. 72

RECOMMENDATION .................................................................................... 74

CONCLUSION: ................................................................................................ 75

REFERENCES: ................................................................................................ 76

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ABSTRACT

A leader in the automobile sector with more than 50 % market share, Maruti Suzuki India

Limited was looking for ways to reduce its costs. With the number of players increasing and

the existing players aggressively coming up with new products the company needed to

benchmark itself with the other players in the market to look for ways to retain its market

share in the increasingly competitive market. The sharp increase in prices of inputs and the

economic slowdown has made it imperative for the companies to look for avenues for growth

and ways to reduce the various costs associated with the manufacturing of the products. For

this it is important to understand the financial structure of the competitors.

Hence Benchmarking of Maruti Suzuki with respect to that of Tata Motors Pvt. Ltd and

Mahindra and Mahindra Pvt. Ltd was undertaken.

For the above purpose the financial statements of all the companies were analyzed and then

reconciled as per the policies and procedures adopted at Maruti Suzuki. The next step

involved calculation of the various ratios to understand the short term liquidity, long term

solvency, long term profitability and cost associated with manufacturing of the products of

different companies. Both inter and intra firm analysis was undertaken and then comparison

of Maruti Suzuki with respect to the financial statements of other companies was done. .

The analysis would help to understand:

The financial soundness of the companies

The policies and accounting methods undertaken by them

The costs of various heads like manufacturing, selling and distribution

The reason for increase in the costs and comparison of the same with respect

to its competitors-whether the increasing in costs are due to huge imports

undertaken by the company, or is it due to increase in the input price of

various parts

The position of the product of the company with that of its competitors

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CHAPTER 1: Introduction

Purpose of the project

The project involves benchmarking Maruti Suzuki India Limited with respect to Tata Motors

Pvt. Ltd and Mahindra and Mahindra Pvt. Ltd. The project involves study of the financial

statements of the above mentioned companies and then reconciliation of the accounts of the

other companies as per the books of accounts of Maruti. It aims at inter firm and intra firm

comparison to help Maruti Suzuki to look for avenues to reduce costs and look for avenues to

increase its market share.

Primary Objective:

The main objective of the project is to help Maruti Suzuki to analyze itself with respect to its

competitors so as to help the company to produce cars in an effective, efficient and

efficacious manner. The project also would help the company to look for avenues to increase

its market share by understanding the product and the promotional strategies undertaken by

its competitors.

Sub-Objective:

Finding out the various ratios to understand the financial soundness of the

companies with respect to the short term liquidity position, long term

profitability, long term solvency, interest coverage and the various cost ratios.

Calculate the Economic Value Added

Calculate the Cash Flow return on Investment

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Limitations of the Study:

The limitations of the project are with respect to:

a. Availability of data: Some confidential information with respect to data are

not available to the trainees. Also the internal audit report is not shared with

the trainees and hence it can affect the interpretations of various results.

b. Time constraint: The second limitation is with respect to the availability of

time. The entire balance sheet of Maruti Suzuki India Limited and Mahindra

and Mahindra Limited is very difficult to be analyzed in 6 weeks.

c. Authenticity of data available from various sources: The various data available

of different companies in internet, journals and books are not authenticated by

the respective companies and hence it may affect the analysis and the

interpretation.

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Methodology:

The following would be the steps followed with respect to the data available from secondary

sources:

1. Understanding Process:

a. Reading annual reports and understanding the accounting policies

followed by the companies.

b. Conciliation of accounts (profit and loss and balance sheet) of Mahindra

and Mahindra and Tata Motors Pvt. Ltd with that of Maruti Suzuki India

Limited.

c. Economic Industry Company analysis

2. Statistical Analysis:

a. Calculation of various ratios - Profitability ratio, Liquidity ratio, Solvency

ratio, Working Capital ratio

b. Dou point analysis

c. Economic Value Added (EVA)

d. Cash Flow Return On Investment

e. Trend analysis of Maruti Suzuki India Limited, Mahindra and Mahindra

Limited, Tata Motors Pvt Ltd both intra-firm and inter firm.

3. Discussion/Consultation with mentor

4. Conclusion & Suggestions

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CHAPTER 2: Analysis

SWOT AnalysisThe SWOT analysis of the automotive sector is cited below:

Strengths

Growth drivers for the Indian automotive industry

There are several factors, which are expected to contribute to the growth in the automotive

industry. These are as follows:

Increasing Demand for Vehicles

This has been a result of the growth in income levels and easy availability of financing

options. Greater consumer awareness and closer linkages with the global auto trends, for

example, shorter life cycles of vehicles due to faster replacement, have led companies to

introduce contemporary products in the Indian market. The CAGR of 14.1 per cent achieved

by the domestic automotive industry between 2001-02 and 2006-07 makes India one of the

fastest growing markets in the world.

Stable Economic Policies Adopted by Successive Governments

The Indian Government has ensured continuity in reforms and policies in the country, which

has contributed to the overall economic growth, including the growth of the automotive

sector. In addition, the government has taken specific policy initiatives, such as lower excise

duties on smaller cars, etc to boost local demand. Implementation of VAT has positioned

India globally, as one of the leading low cost manufacturing sources. India is expected to

emerge as the manufacturing hub for small cars. It has already been recognized as a low cost

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source for components. Vehicles are also expected to gain much from the global trend in to

low cost countries.

Availability of Low Cost Skilled Manpower

The cost of quality manpower in India is one of the lowest in the world. In terms of

availability, India produces 400,000 Engineering graduates every year and it is estimated that

on an average roughly 7 million skilled workers enter the workforce every year.

High Quality Standards

The ‘Made in India’ brand is rapidly getting associated with quality. Already, nine Indian

component manufacturers have won the Deming Award for quality and most of the leading

component manufacturers are QS and ISO certified.

Proximity to Key Markets

Proximity to other growing Asian economies and emerging markets like Africa gives India a

strong advantage over other competing nations. Besides the freight cost of shipments from

India to Europe is cheaper as compared to freight costs of other competing countries like

Thailand.

Growth Forecasts as per Automotive Mission Plan

The size of the Indian automotive industry is expected to grow at a rate of 13 per cent per

annum over the next decade to reach around US$ 120-159 billion by 2016. In volume terms,

the market is expected to reach 31.96 million units by 2015. The total investments required to

support the growth are estimated at around US$ 35-40 billion. Two wheelers are expected to

lead the growth, with estimated sales of 27.8 million units by 2016. Sales of passenger

vehicles are expected to grow from the current 1.58 million vehicles to 2.65 million vehicles

by 2015.

(Source: Automotive Mission Plan)

Weakness:9 | P a g e

Indian Component Suppliers:

In the Indian automotive sector, the Indian component suppliers lack know-how in certain

specific areas. Additionally, component suppliers are small in size and they are a fragmented

lot.

Multi-national Component Suppliers:

Indian automobile manufacturers import a number of parts from multi-national component

suppliers. Owing to the fluctuation in the currency rates, the manufacturers have registered

huge loss in procurement of parts from these suppliers.

Opportunities:

Road development:

The ongoing road development program for improving connectivity between cities, villages

and ports through a network of highways, and interconnecting roads along with the 5846 Km

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of the Golden Quadrilateral road network connecting the four metros. This would benefit the

automobile industry as improved connectivity would increase the demand for the vehicles.

Car penetration in India:

As compared to the developed countries, the car penetration in India is low at 7 cars per 1000

persons. The outlook for passenger car sales remains positive due to growth in urbanization,

expansion of cities and launch of new models.

Increase in disposable income:

According to a recent survey by a global consulting firm, the average annual real household

disposable income in India is set to grow at a compounded annual growth rate (CAGR) of

5.3% from Rs 113000 in 2005 to RS 319000 in 2025. This growth in disposable income is

likely to further fuel the demand of passenger vehicles in coming years.

Growing consumer culture:

The rapid growth in cellular phone and cable and satellite television penetration in India in

recent years is fuelling the desire of a better lifestyle. These would acts as an enabler for the

automobile industry and help to cater to the new sectors of the economy.

International Business:

The automobile companies are expanding their product portfolio and increasing launching

new products to cater to the needs of both the domestic and the international market. This has

resulted in changing of policies of the companies and plans of making India as a hub for

exports. The companies are increasingly targeting new and untapped foreign countries.

Threats

Global Competition:

India is increasingly becoming a preferred destination for the global automotive players. The

global automotive manufactures present in India are enhancing their production capacities

and many new global players are entering the country in anticipation of burgeoning

automotive demand. To counter the threat of growing global competition, the companies are

planning to bridge the quality gap between its products and foreign offerings while

maintaining its low cost product development/sourcing advantage.

Fuel Prices:

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The international crude prices moved as high in the range of US$ 70 to 144 per barrel but

stabilized in the range 0f US$ 50 to 60 per barrel. Hardening of fuel prices could adversely

affect impact domestic automotive sales.

Input Costs:

Prices of commodity items particularly steel, non-ferrous metals, rubber and engineering

plastics etc witnessed an upward movement, which was offset by the cost reduction initiatives

pursued by the various automobile companies. The increase in the prices of raw material has

lead to a sharp decline in the profit of the automobile companies.

Interest rates hardening and other inflationary trends:

The hardening of interest rates and liquidity crunch in the system to crunch the inflation

which ones touched the double digit mark had an adverse impact on the automobile industry.

The growth in sales may be adversely impacted by increase in consumer interest rates and

further deterioration in the liquidity position. However with the economy showing signs of

improvement the Reserve Bank has taken several measures to reduce the liquidity crunch in

the economy.

Growing Consumer awareness:

Growing awareness amongst consumers is driving up expectations from automobile

companies in terms of providing world class features and technology for which adequate

price realization is not always possible.

Growth in Mass Transit System:

The domestic passenger vehicle demand could be impacted by the growth in road and rail

based mass transit system. Several initiatives have been taken with regard to the same. The

Delhi Government has started the Bus Rapid Transit (BRT) corridor project on the same

lines.

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Economic factors:

The Indian economy, after exhibiting strong growth during the second quarter of 2008-09,

has experienced moderation since, in the wake of the global economic slowdown. Industrial

growth decelerated sharply during April-November 2008-09 encompassing continued

slowdown in all the constituent sectors. The slowdown occurred in the use-based categories,

viz., the basic, capital and intermediate goods, while the growth in consumer goods

accelerated. The services sector too, which has been the prime growth engine over the years

was hit by the economic slowdown in India mainly in transport and communication,

automobile, trade, hotels and restaurants sub-sectors.. The Indian passenger vehicle market

which has grown at a CAGR of 14.8 % over the last six years to reach 1.5 million units in the

year 2007-08 was too hit by the slowdown in the economy. It registered a single digit growth

and performed its worst in the 2nd and 3rd quarter of FY 2008-09 registering a single digit

growth.

The various economic factors affecting the automobile sector are:

Gross Domestic Product (GDP):

The Indian economy continued to record robust growth in 2007-08, although marginally

lower than last year. According to the revised estimates released by the Central Statistical

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Organization in May 2008, the real GDP growth was placed at 9 % during 2007-08 as

compared to 9.6 % in 2006-07. The year 2008-09 saw the GDP falling due to the global

economic slowdown. The slowdown in the economy has affected the automobile industry

which registered a single digit growth.

Snapshot of the GDP of the country:

SECTOR 2000-01 to 2007-

08

2005-06 2006-07 2007-08

REAL 7.3 9.4 9.6 9.0

(Source: RBI)

Foreign Direct Investment:

India's favorable environment has attracted the attention of foreign investors. Capital inflows

have surged over the past two years in 2006 and 2007. In 2005, net capital inflows amounted

to $25 billion. By 2007 (January-September), they had more than doubled, to $66 billion. The

huge flow of FDI has acted as a boost to the automobile sector and has helped it to reach

double digit mark. However with economic recession the FDI flow in India has reduced.

Exchange Rates:

The strengthening of rupee acted as a boom for the Indian economy. With rupee appreciating

automobile players are planning to make India as a hub for the export of vehicles. This has

lead to huge investments by all major players like Maruti Suzuki, Hyundai, Honda with

respect to the same. However with the global economic slowdown the value of the rupee has

depreciated and it reached crossed the 50 mark and has made the companies to register huge

loss under the head “Accounting for derivatives”-on mark to market basis.

Increase in disposable income:

India is has the potential to emerge as the largest consumer markets in the world. According

to MGI report “The Bird of Gold: The rise of India’s Consumer Market”, May 2007, if

overall economic growth remains on a long-term path of 7 to 8 percent, as most economists

expect, then consumption will soar. It estimates real consumption will grow from 17 trillion

Indian rupees in 2007 to 70 trillion Indian rupees by 2025, a fourfold increase.

(Source: http://www.mckinsey.com/mgi/mginews/indiaconsumerevolution.asp )

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http://www.mckinsey.com/mgi/mginews/indiaconsumerevolution.asp

There are three major factors driving increased consumption are- income, population growth

and savings .The most important being rising incomes, which is estimated to account for 80

percent of total growth over the next two decades. The second driver will be population

growth, and will account for a further 16 percent of the overall rise in consumption.

Reduction in excise duty:

The Union Budget for 2006-07 resulted in reduction of in excise duty from 24 % to 16 %.

Further, General reduction in excise duty rates by 4% was made with effect from 7th

December 2008, the benefit of which was available till 31st March 2009. In Feb 2009.,it has

been extended beyond 31st March 2009.Also,There has been an excise cut has been 2 % for

Commercial vehicle.( Source-www.ibef.org) This stimulus brings down the input prices.

Thus it provides stimulus for the auto sector.

Intense Competition:

The growth of the Indian middle class along with the growth of the economy over the past

few years has attracted global auto majors to the Indian market. Moreover, India provides

trained manpower at competitive costs making India a favored global manufacturing hub.

The attractiveness of the Indian markets on one hand and the stagnation of the auto sector in

markets such as Europe, US and Japan on the other have resulted in shifting of new capacities

and flow of capital to the Indian automobile.

(Source: http://ibef.org/artdisplay.aspx?art_id=21983&cat_id=114&page=4 )

Easy Availability of finance:

With the loans on vehicle becoming easily available there has been a phenomenal growth in

the number of customers who purchase cars on loan. Almost 70% of the vehicles are sold are

through finance. Companies have also come up with exclusive tie ups to offer loan to its

customers at economical rates. For example Maruti Suzuki under its head Maruti Finance has

tied up exclusively with SBI, ICICI, HDFC to offer loan to its customers at economical rate

of interest.

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http://ibef.org/artdisplay.aspx?art_id=21983&cat_id=114&page=4

Industry Competitors

Bargaining power of Suppliers

Threat of Substitutes

Bargaining Power of

Buyers

Threat of new

entrants

Industry

Porter’s Five Forces Model

Michael Porter developed a framework that models an industry as being influenced by five

forces. The key factors that influence the performance of the industry cited below:-

Bargaining power of

buyers:

Buyers exert influence on

the suppliers pertaining to:

1. Cost of product to that of total product: The price of the product plays an important

role in the buying behavior of the customer. The ownership cost of the product, with

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respect to the total products available in the market plays an important role in the

buying decision of the customer.

2. Product Differentiation: The different products available at the market influence the

buying decision of the customer. The differentiation with respect to the features,

offers and services influence the buying decision of the customer. For example a

customer while deciding of a car in A2 segment looks into the different products

available like Wagon R, A star, i10 the features attached to it, warranty and other

services offered by the companies.

3. Buying switching costs: The switching cost associated with respect to the product

influence the buying decision of the customer. The ownership cost associated with the

different product influences the buying decision of the buyer.

4. Incentives: The discounts available on the various models influence the decision

making. Various schemes like free insurance, cash discount, loans at economical rate

of interest influence decision making in terms of purchase of car.

5. Size and concentration of buyers relative to the products: It also influences the

bargaining power of the buyers. If the demand for a product is high and the product is

in a waiting period, the buyer loses out in terms of the discounts or other promotional

schemes. For example there are no offers on Swift diesel and Dzire owing to the huge

demand for the product.

Bargaining power of suppliers

1. Strategic Suppliers: Steel is a major input in the automobile industry and the suppliers

are a few in number. Any revision of prices by these players may influence the

profitability of the manufacturers.

2. Substitute inputs: They are restricted to non-critical or additional components like

electronic gadgets and interior design components and thus the suppliers of the same

have a major influence on the decision making power.

3. Switching costs of suppliers: The cost of switching plays an important role in terms of

deciding the power of suppliers. If the switching cost is low, the suppliers have huge

influence in terms of decision making. MSIL being the largest manufacturer enjoys

considerable influence over its suppliers. 70 % of the suppliers are within the range of

100 m from the Gurgaon plant.

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4. Competition between suppliers: The number of suppliers for the particular product

also influences the decision making power of the suppliers. If there are large numbers

of suppliers for a particular product, the manufacturer has a say in decisions.

Industry Competitors:

1. Number of Players: The number of firms operating in the market plays a major role in

the industry. If the degree of competition is high, then buyers have a say in decision

making.

2. Products and Price: The product range offered by the company and the target segment

chosen by the company influences the decision making power. Maruti Suzuki

manufactures 11 models catering to different segment The price and the features

associated with respect to the product influence the decision making. For example we

have the Wagon R competing with respect to the Santro Xing. Thus the buyers while

purchasing the product look for the substitutes available in the market and the

segment they are planning to purchase.

3. Fixed and the variable cost base: The fixed and the variable cost base in terms of

research and development and other expenses also play a major role as companies try

to benchmark itself with respect to that of its competitors .

Threat of New Entrants

1. New Entrants: The new entrants and the future course of action of these entrants

influence the automobile sector. The new players willing to enter the Indian

automobile industry and the government policies with respect to it influences the

decision making power of the existing players. The new products launched by the

existing player also play a major role in decision making of other players in the

automobile sector.

2. High start up costs and economies of scale: The initial investment in terms of capital

requirement, the economic condition of the country influences the number of new

entrants. The other geographical factors with respect to location of the units, the

ancillaries industries required influence the decision making.

3. Industry trends: The industry trend influences and the other factors influences the

decision making in terms of the future investments to be made by the companies. The

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entry and exit cost associated with the automobile industry influences the decision

making.

4. Government and legal barriers: The policies with respect to the automobile sector, the

rules and regulation too influence the decision making of the automobile player. For

example the new automotive policy of 2010 has made manufacturers to come up with

new engines to meet the new emission norms

Threat of substitutes:

1. Number of substitutes: The number of substitutes influences the buying decision of

the customer. With the substitutes being high, the buyers have an influence the

decision making power.

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About the Company:

Maruti Suzuki India Limited (MSIL) a subsidiary of Suzuki Motor Corporation (SMC), Japan

was formed in 1981 through a joint venture between Government of India and Suzuki Motor

Corporation. The company started its production in the year 1983 and launched Maruti 800 in

1983 followed by Maruti Omni in the year 1984. Today more than half the numbers of cars

sold in India wear a Maruti Suzuki badge. As India's largest passenger car company, it

accounts for over 50 per cent sales in the domestic car market.

The company has a sales network of 600 outlets in 393 towns and cities, and provides

maintenance support to customers at 2628 workshops in over 1200 towns and cities. Since

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inception, it has produced and sold over 7.5 million vehicles, including almost 500,000 units

in Europe and other export markets.

The company has been rated first in customer satisfaction for nine years in a row in J D

Power's Surveys, and is India's Most Respected Automobile Company (As per survey

conducted by Business world, a reputed Indian Magazines). In an independent survey

conducted by Forbes.Com where they rated top 200 reputed companies on various parameters

such as reputation within the customer and employee fraternity, it stood 91st. In the

automobile section the company finished 7th in the survey.

(www.marutisuzuki.com)

Vision“The leader in the Indian Automobile Industry, creating Customer delight and Shareholders

Wealth: A Pride of India”

MSIL strives to achieve the following:

Modernization of Indian Automobile Industry

Production of fuel-efficient vehicles to conserve source resources

Production of large number o motor vehicles, which was necessary for economic

growth

Mission“To provide a wide range of modern, high quality fuel efficient vehicle in order to meet the

need of customer, both in domestic & export markets”

Core valuesThe core values are:

Customer obsession

Fast, flexible and first mover

Innovation and creativity

Networking and partnership

Openness and learning

(Annual Report 2007-08)

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http://www.marutisuzuki.com/

QUALITY TOOLS

The company uses certain quality tools to reduce wastage, material costs and to produce the

vehicles in an effective, efficient and efficacious manner. The company has been awarded the

following certificates:-

ISO:27001 Certificate by STQC directorate (Standardization, Testing & Quality

Certificate)

ISO 9001:- Both the plants at Gurgaon and Manesar are ISO 9001 certified

ISO 14001:2004:- The company has been awarded the certificate on reassessment by

AIB-Vincotte International Ltd, Brussels, Belgium(Annual Report 2007-08)

The various quality tools used at Maruti are:-

THE 5 – SSeiri - Proper Selection

Seiton - Arrangement

Seiso - Cleaning

Sheiketsu - Discipline


THE 3 – KKimerareta Koto Ga - What has been decided

Kihin Doro - as per standard

Kichin To Momoru - must be followed


Shareholders Structure:-

Suzuki Motor Corporation has 54 % stake in Maruti Suzuki India Limited. The rest of the

shares are held by financial institutions such as LIC, and the general public.

Board Of Directors:

Mr R.C. Bhargav – Chairman

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Mr. Shinzo Nakanishi - Managing Director

Snapshot of company`s performance:

Highest ever domestic sale in the year 2007-08 -711818 units

Highest ever export -53024 units

Highest ever Net sales in2007-08 - Rs 178603 million

Highest ever Net profit - Rs 17308 million

Models:

The company offers 11 models to cater to the needs of different customers. The various

models offered include:

Maruti 800 Omni Alto

Wagon R Swift Swift Dzire

Versa Sx4 Grand Vitara

Zen Estilo Gypsy

Services:The various services offered by the company include:

Maruti Insurance:

Maruti has tied up with National Insurance Company, Bajaj Allianz, New India Assurance

and Royal Sundaram to bring world class motor insurance experience for all Maruti

customers. Maruti Insurance ensures excellent customer service with utmost fairness and

transparency.

The advantages of Maruti Insurance are:

Near cash-less accident repairs

Seamless service across nation

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Hassle free, fair and transparent claim settlement

Quality repair at authorized dealer workshops

Dealer assisted towing facility

Easy transfer of no claim bonus

Instant policy issuance

86 customers out of 100 buying Maruti cars, choose Maruti Insurance.

Maruti Finance:

The company has tied up with various banks to offer loans to its customers to finance

vehicles. The important players include:

SBI

HDFC

IDBI

Mahindra Finance

Nearly 70% of car sales are through finance.

maruti Finance Department:

Finance division

Maruti Suzuki India Limited has seven different departments under the fiancé division to ease

the functionality of the finance department given the nature of complexity attached with

respect to the functions performed by the departments. The various departments under

finance division are:

Budget, Cost and Accounts Department (BAC)

Sales Accounting Department (SAC)

Vendor Payments and Excise Department (VPE)

Corporate Accounts and Reporting (CAR)

Direct Taxation (TAX)

Corporate Finance and Planning (CFP)

Internal Audit (IAU)

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Finance Secretary (FNS)

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Chapter 3: Project Description

About the projectThe project involves “benchmarking” Maruti Suzuki India limited with respect to Tata

Motors Pvt Ltd and Mahindra and Mahindra.

Benchmarking is the process of comparing the cost, cycle time, productivity, or quality of a

specific process or method to another that is widely considered to be an industry standard or

best practice. Essentially, benchmarking provides a snapshot of the performance of the

business and helps to understand where the company is in relation to a particular standard.

The term benchmarking was first used by cobblers to measure ones feet for shoes. They

would place the foot on a "bench" and mark to make the pattern for the shoes. Benchmarking

is most used to measure performance using a specific indicator (cost per unit of measure,

productivity per unit of measure, cycle time of x per unit of measure or defects per unit of

measure) resulting in a metric of performance that is then compared to others. Hence

Benchmarking can be defined as:- " A continuous, systematic process of evaluating and

comparing the capability of one organization with others normally recognized as industry

leaders, for insights for optimizing the organizations processes."

Types of benchmarking Process benchmarking - the initiating firm focuses its observation and investigation

of business processes with a goal of identifying and observing the best practices from

one or more benchmark firms. Activity analysis is required where the objective is to

benchmark cost and efficiency; increasingly applied to back-office processes where

outsourcing may be a consideration.

Financial benchmarking - performing a financial analysis and comparing the results

in an effort to assess your overall competitiveness

Performance benchmarking - allows the initiator firm to assess their competitive

position by comparing products and services with those of target firms.

Product benchmarking - the process of designing new products or upgrades to

current ones. This process can sometimes involve reverse engineering which is taking

apart competitors products to find strengths and weaknesses.

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Strategic benchmarking - involves observing how others compete. This type is

usually not industry specific meaning it is best to look at other industries.

Functional benchmarking - a company needs to focus its benchmarking on a single

function in order to improve the operation of that particular function. Complex

functions such as Human Resources, Finance and Accounting and Information and

Communication Technology are unlikely to be directly comparable in cost and

efficiency terms and may need to be disaggregated into processes to make valid

comparison.

In our project we are benchmarking Maruti with respect to:

Financial Statements

Product portfolio

Promotional Strategies

Consolidation of Accounts:

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Comparison is reasonable only if it is made between like items. This stage of project aims to

remake the accounts of Mahindra and Mahindra Ltd and Tata Motors Ltd according to

Maruti. A deep study and analysis of each item in the accounts of the three above mentioned

company was done. Thus, the changes made are reported as following:

Mahindra and Mahindra Ltd with Maruti Suzuki India Ltd

1. Income has been categorized as Sales, Income from Services and Dividend

and other income.

2. In Maruti Suzuki India Ltd, the item Dividend and other income includes

the interest received. So to consolidate Mahindra, interest Income has been

included (in Interest, Commitment and financial charge).

3. As in MSIL ,expenses has been classified as Consumption of Materials,

Purchase of traded goods, Consumption of Stores Manufacturing ,Selling

and distribution Expenses.

4. Consumption of raw materials include: Consumption of raw materials ,

Excise on Raw Materials

a. Consumption of raw Materials and bought out components

b. Purchase of Traded Goods: Purchase of Finished Products for sale

c. Consumption of Stores: Stores Consumed

d. Manufacturing ,administration and other expenses :

Tools Consumed

Power and Fuel

Rent including lease rentals

rates and taxes

Insurance

Repairs and maintenance:

28 | P a g e

- Building

- Machinery

- others

Miscellaneous Income

Amortization of expenses

Directors Fees

Donations and Contribution

Loss on Fixed Asset sold/scrapped/Written off

Provision for doubtful debts/advances (Net)

Provision for diminution in value of Long Time Investment (Net)

Selling and distribution Expenses includes following items:

o Advertisement

o Discount Allowed

o Commission on Sales/Contracts

o Freight outward

o Sales Promotion Expenses

29 | P a g e

Tata Motors Ltd with Maruti Suzuki India Ltd

1. Income has been categorized as Sales, Income from Services and Dividend and other income.

2. Manufacturing and administration expenses

Stores, spare parts and tools consumed

Repairs to buildings

Repairs to buildings, machinery etc

Power and fuel

Power and fuel

Rent

30 | P a g e

Rates and taxes

Insurance

Work operations and other expenses ,excluding Commision and brokerage in sales

Exchange Variation

3. Selling and distribution expenses

Publicity

Incentive/Incentive to Dealers

Commission and brokerage on sales(from Work operation cost)

Thus the consolidated accounts were prepared by analyzing the annual reports of the three

companies. Based on the above changes and the information provided, the annual accounts

were prepared for the three companies and for three years FY08, FY07 and FY06.

Trend analysis of Maruti Suzuki India Ltd. from FY06 to FY08

1. Short Term Liquidity Position

31 | P a g e

Ratios Analyzed: Current Ratio, Quick Ratio

(Source:Annual Report)

From FY06 to FY07, the Quick ratio decreased from 1.44 to 1.25.The current ratio

decreased from 1.89 to 1.53. This change is pertaining to following reasons:

Decrease in Inventory: The Inventory decreased by 20 % . %. The major reason for the

fall in inventory is due to fall in the finished goods. The loans and Advances decreased

by 75 %. From FY07 to FY08, the current ratio decreased from 1.53 to 1.1. There is

simultaneous decrease in quick ratio from 1.25 to 0.73 .This change is pertaining to the

following reason:

Decrease in cash and bank balances: The cash and bank balances decreased by 77 %.The

major reasons for decrease in cash and bank balance were due to increase in investing

activities from Rs. 24486 million in year 2006-07 to Rs. 30615 millions in the year FY08

and that of financing activities from Rs. 4300 millions to Rs.1323 millions in the year

FY08.

Inference

The current liquidity position of the company has shown downward trend from FY06 to

FY08.This is due to decrease in the current assets –Cash and Bank balances and Sundry

Debtors.

32 | P a g e

FY06 FY07 FY080.000.200.400.600.801.001.201.401.601.802.00

Maruti Suzuki India Ltd

Curr

ent R

atio

The ratio of cash and bank balances to the current liabilities has been decreasing from 0.71

(FY06) to 0.11(FY08). Also, the ratio of debtors to current Liabilities has shown downward

trend. This shows that the ability of the company to satisfy short-term financial obligations

immediately has been decreasing considerably.

2. Working capital

Ratios Analyzed: Days Sales Outstanding (DSO), Days in Inventory (DII)

(Source: Annual Report, Maruti Suzuki India Ltd)

From FY06 to FY07, the Days Sales Outstanding (DSO) decreased from 19 to 18.There is

14 % increase in Sundry Debtors. This is pertaining to 65 % increase in unsecured loan

(Considered good).

From FY07-08, the Days Sales Outstanding (DSO) decreased from 18 to 13.This is due to

16 % decrease in Unsecured Loan (Considered good) from 6709 million to 5109 million.

From FY06-07, the Days In Inventory (DII) decreased from 26 to 17.This is due to

Decrease in Finished Goods: There is 54 % decrease in Finished Goods from 4857

million to 2247 million.

Increase in components and raw materials at factory: There is 107 % increase in

Components and raw materials at factory from 846 million to 1747 million.

Increase in Tools at Factory: There is 60 %increase in Tools at Factory from 86 million

to 138 million.

From FY07-08, the Days in Inventory (DII) increased from 17 to 21.This is pertaining to

following factors:

33 | P a g e


0.005.00

10.0015.0020.0025.0030.00

FY06 FY07 FY08

Days SalesOutstandingDays inInventory

Increase in Finished Goods: There is 141 % increase in Finished Goods from 2247


Increase in Components at factory: There is 26 % increase in Consumables at Factory

from 1747 million to 2204 million.

Inference:

From FY06 to FY07, the inventory reduced due to discontinuation of several products. The

old Zen was discontinued .In the run up to launch of a new WagonR and WagonR Duo, the

company brought down the production and inventory of old WagonR. Also .Production of

Swift shifted out of Gurgaon plant to upcoming facility in Manesar. The company launched

the new Zen Estilo and Swift Diesel.

The increase in inventory from FY07 to FY08 is due to the new products launched and

increased capacity because of Manesar Plant. The company launched SX4, Swift Dzire and

Grand Vitara. During the year, the Company discontinued production of Esteem, its entry

sedan launched in 1994.

3. Long Term Profitability

Ratios Analyzed: DuPont analysis


34 | P a g e

FY06 FY07 FY080.0000

0.5000

1.0000

1.5000

2.0000

2.5000

3.0000

3.5000

Maruti Suzuki India Ltd Long

Ter

m P

rofit

abili

ty

From FY06 to FY07, the ROE increased by 0.21 to 0.23. This is mainly due to following

reasons:

Increase in Profit Margin: The PAT increased by 31 % from 11834 to 15553 million.

Assets Turnover: It decreased by 1.58 to 1.43.This is due to 37 % increase in Net Assets

from 56022 to 76522 million. This increase is pertaining to the following reasons:

o Increase in Capital Work In Progress: There is 173 % increase in Capital Work in

Progress from Rs 920 million to 2,507 million.

o Increase in Investments: There is 66 % increase in Investments. This is due to

investments in equity shares of Rs 1432 million. There is 67 % increase in

investments in mutual funds from 14398 million to Rs 24052 million.

Equity Margin: From FY06 to FY07, the Equity Margin has increased from 1.39 to

1.48. The Share Capital has remained constant. There is increase of 26 % in Reserves

and Surplus from Rs 53081 million to Rs 67094 million.

From FY07-FY08, the Return on Equity decreased by 0.22 to 0.20.This is due to:

Decrease in Profit Margin : The Profit Margin decreased from 0.10 to 0.096

Decrease in Equity Margin: From FY07 to FY08, the Equity Margin has

decreased from 1.48 to 1.46.

Increase in Assets Turnover: From FY07 to FY08, the Assets turnover increased

from 1.44 to 1.45. This increase is due to 22 % increase in Net Sales and 24 %

increase in Net Assets. The 24 % increase in Net Assets from 76522 to 94857

million is mainly due to following reasons:

o Increase in Investments: There is 52 % increase in Investments from Rs 34092

to Rs 51807 million. The major change was in the long term unquoted mutual

funds. It increased by 130 % from Rs 1321 million to Rs 3037 million.

o Increase in Capital Work in Progress: There is 194 % increase in Capital Work

in Progress from Rs 2507 million to Rs. 7363 million.

Increase in PAT: The PAT increased by 31 % from 11834 to 15553 million.

Inference:

35 | P a g e

The profitability has decreased from FY06 to FY07 and increased from FY07 to FY08.This

is due to the decrease in Assets Turnover, as the asset base of company increased. The

company has been pursuing expansion initiatives to enhance its production capacities and

improve the products. The company‘s new plant at Manesar started operations in September

2006.All the newly launched models namely Swift, SX4 and DZire.

The company is also setting up a new gasoline engine plant in its Gurgaon facilities. The

new engines produced will be more fuel efficient and help to serve a customer better. In

recent years, the Company has also undertaken a series of market initiatives, notably the

expansion of the sales network, offering the entire range of car-related services in a

convenient and transparent manner and implementing standards to improve customer

service.

Thus with increase in assets, new product launches and attempts to improve the margins, the

profitability of company can increase in the coming years.

4. Long Term Solvency

Ratios Analyzed: Debt Equity Ratio, Debt ratio, Interest Coverage Ratio


From FY06 to FY07, the debt ratio has increased from 0.01 to 0.08 .This increase in debt

ratio can be attributed to the following reasons:

36 | P a g e

FY06 FY07 FY080.00

0.02

0.04

0.06

0.08

0.10

0.12


Increase in Loan: There is 780 % increase from Rs. 717 million to Rs. 6308 million in

loan funds. The increase in loan is mainly due to borrowing of Rs. 5673 million of

Foreign Currency Loans.

From FY07-FY08, the debt-ratio increased from 0.08 to 0.1 .This is due to:

Increase in Unsecured Loan: There is 59 % increase in unsecured Loan from Rs. 5673

million to Rs. 9001 million. Also, the company borrowed Export Credit of Rs. 3999

million.

Interest Coverage Ratio

FY06 FY07 FY080.00

10.0020.0030.0040.0050.0060.0070.0080.0090.00

100.00


Inte

rest

Cov

erag

e ra

tio


From FY06- FY07, the Interest Coverage Ratio has decreased from 86 to 61.This change in

pertaining to the following reason:

Increase in Interest to be paid: From FY06 to FY07, the interest increased by 84 %

from Rs. 204 million to Rs. 376 million.

37 | P a g e

From FY07 to FY08, the Interest Coverage ratio decreased from 61 to 43.This is pertaining

to the following reason:

Increase in Interest: From FY07 to FY08, the interest increased by 58 % from Rs. 376

to Rs. 596 million.

Inference:

The company’s debt has been increasing over the years. The increase is mainly observed in

the unsecured loan portion of the debt .Further, in FY07 and FY08 the unsecured loan has

been in the form of Foreign Currency or Export Credit.

The low debt ratio and high interest coverage ratio underscores the financial strengths of the

company. Thus the financial obligations can be timely fulfilled from the operating income.

The company has been awarded the highest financial credit –rating of AAA/Stable (long

term) and P1+ (Short Term) on its bank facilities by CRISIL.

5. Margin Ratios:

Material Cost:

38 | P a g eFY06 FY07 FY08

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00


Mar

gin

Ratio

s


From FY-6 to FY07, the Material cost margin decreased from 0.78 to 0.74.This is pertaining

to following major reasons:

Increase In Net Sales: From Fy06 to FY07, the net sales increased by 21 % from

120034 million to 145922 million.

Increase in consumption of Raw Materials: From FY06 to FY07, there is only 14 %

increase in consumption of Raw Materials and Components from 88766 million to

101374 million.

Inference

The reduction in material cost is mainly on account of cost reduction through value

analysis/value engineering initiatives. A focused “cost down “strategy is adopted by the

company. This involves jointly setting up challenging cost reduction targets for existing

products. These efforts are supported by dedicated arm, Maruti Centre for Excellence, which

imparts training to suppliers and helps them upgrade quality, productivity and operational

efficiencies.

From FY07 to FY08, the material cost margin increased from 0.74 to 0.79.The major

reasons for this change are :

Increase in Consumption of Raw Materials and Components: The Consumption of

Raw Materials and components increased by 28 % from 101374 million to 130342

million.

Increase in Sales: The Net Sales increased by only 21 % from Rs. 145922 million to

Rs.178063 million.

Inference:

The uptrend in commodity prices, notably steel pushed the material cost.. The Company was

able to use a mix of measures to reduce cost, improve localization and enhance efficiency to

mitigate the impact.

39 | P a g e

Manufacturing, administration and other expenses to Sales

For FY06 to FY07, the Manufacturing, administration and other expenses margin increased

by 0.05 to 0.06.This is mainly due to increase in manufacturing expenses.

Increase in Expenses on Power & fuel: There is 70 % increase In Expenses on Power

& fuel from Rs 572 million to Rs 974 million.

Increase in Royalty: There was 44 % increase in Royalty from Rs 2544million to Rs

2673 million.

For FY07-FY08, the Manufacturing, administration and other expenses margin remained

almost constant. The increase in manufacturing expenses was mainly due to power and fuel

expenses, which increased by 51 % and increase in royalty by 35 %.

Selling, Distribution and other expenses to Sales

From FY06 to FY07,the Selling and Distribution expenses Margin has remained Constant at

0.03.Thus it can be noted that the increase in selling and distribution expenses have been in

accordance to the increase Net Sales for each year.

EBIT Margin and EBITDA Margin

From FY06 to FY07, the EBIT Margin has 0.15 to 0.16 and EBITDA Margin has increased

from 0.17 to 0.18.The increase has been mainly due to following reasons:

Increase in EBIT: The EBIT has increased by 30 % from 17704 million to 23,174

million. But the Expenses have increased by only 17 %.

Increase in Depreciation: The depreciation increased by 84 % from 204 million to

376 million.

From FY07 to FY08, the EBIT Margin decreased from 0.16 to 0.14 and EBITDA Margin

has remained constant at 0.18.The decrease in EBIT Margin is pertaining to the following

factors:

Increase in Expenses: The EBIT increased by 10 %, even while Net Sales showed

growth of 22% .The expenses increased by 28 % due to increase in Consumption of

Raw Materials and 36 % increase in Manufacturing, Administration and other

expenses.

40 | P a g e

Increase in Depreciation: From FY07 to FY08, the depreciation increased by 109 %

from Rs. 2714 million to Rs 5682 million. Based on technical evaluations and

considering various market trends like shortening of product life cycles, the company

has revised the estimated useful life of certain Plant and Machinery from between 9-

13 years, to between 8-11 years, of dies and figs from 5 years to 4 years and

Electronic Data Processing from 6 years to 3 years.

Inference:

The VA-VE initiatives (Value Analysis and Value Engineering) pursued aggressively by the

company in partnership with suppliers have helped the company reduced cost of making a

car without compromising on quality. The higher depreciation provision, is a move by the

Company to proactively align its financial accounting with shorter product lifecycles

anticipated in the future. Thus the company plans to upgrade its assets in the future to

improve the product according to market trend.

41 | P a g e

42 | P a g e

Trend analysis of Tata Motors Ltd. from FY06 to FY08

1. Short term Liquidity

Ratios analyzed: Current Ratio, Quick Ratio, Cash and Bank Balance/Current Liabilities,

Inventories/Current Liabilities, Debtors/Current Liabilities, Loans and Advances/Current

Liabilities

(Source:

Annual Report,

Tata Motors

Ltd)

Current

Ratio: From

FY06 to FY07,

the current

ratio decreased

marginally from 1.367 to 1.360 due to decrease of cash and bank balance by 26 % from Rs

11194 million to Rs. 8297 million.

In FY07 to FY08, the current ratio decreased from 1.36 to 0.97.This decrease is pertaining to

following reasons:

Decrease in Loans and Advances: From FY07 to FY08, there is 31 % decrease in

Loans and advances. This decrease in loans and advances is pertaining to the

o Decrease In vehicle loans: From FY07 to FY08, there has been 43 % decrease

in vehicle loans considered good and 23 % increase in vehicle loans

considered doubtful. Also Provision for doubtful loans has increased by 23 %.

o Decrease in Inter corporate deposits: From FY07 to FY08, the inter corporate

deposits have reduced by 51 %.

Increase in Cash and Bank Balance: It has shown an increase of 189 % from Rs 8267

million to Rs 23973 million.

Increase in Debtor: The Debtors increased by 44 % from Rs 7891 million to Rs 11307

million.

43 | P a g e

FY06 FY07 FY080.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Tata Motors Ltd

Curr

ent R

atio

Inference:

The current ratio and quick ratio has shown similar trends over the three years FY06 to

FY08.The current ratio has been decreasing from the year FY06 to FY08.This shows that

company does not possess good liquidity position from short term perspective.

Loans and advances has been the major contributor to the current assets of the company.

The ratio of Loans and advances to the Current Liabilities has been near 0.8 for FY06 and

FY07 and 0.4 for FY08. The decrease in Loans and advances has led to the decrease in

current ratio, in spite of the increase in debtors and cash balance.

The credit policies of the company have not been healthy as the vehicle loans considered

doubtful and the increase in provision for doubtful debts have been increasing. Thus, it can

be observed that the company is moving towards strategy of maintaining current assets in

each form, rather than concentrating on only loans and advances. In 2008, Rs. 20468 million

were realized from vehicle loans and hire purchase receivables. Thus increase in cash is

pertaining to the efforts of the company to realize cash from the loans and advances. Thus

this strategy of will reduce the vulnerabilities of maintaining liquidity in Loans and

Advances.

2. Long term Profitability

Ratios analyzed: DuPont Analysis: Return on Equity, Assets turnover, Financial Leverage,

Profit Margin

44 | P a g e

FY06 FY07 FY080.0000

0.5000

1.0000

1.5000

2.0000

2.5000

3.0000

3.5000

4.0000

4.5000

Tata Motors Ltd

Du P

ont A

naly

sis

(Source: Annual report, Tata Motors Ltd)

Return on Equity:

From FY06 to FY07: The increase in ROE from 0.27 to 0.28 can be attributed to the

following reasons:

Increase in Assets turnover : From FY06 to FY07, the increase in from 2.27

to 2.36 is pertaining to the following reasons:

o Increase in Net Sales: There is the 33 % increase in Net Sales from Rs. 2,

06,534 million to Rs. 2, 74,700 million.

o Increase in Net Assets: The Net Fixed Assets increased by 35 % from Rs

65363 million to Rs 88715 million. The increase in Net Fixed Assets is mainly

due to 164% increase in Capital Work in Progress and 22% increase in

Investments.

o Increase in Investments: Investments of the Company increased to Rs.24770

million in FY 2006-07 from Rs.2, 0151.5 million in FY 2005-06. The

Company made an investment of Rs.5500 million in the wholly owned

subsidiary viz. TML Financial Services Limited engaged in the vehicle

financing operations.

Increase in Financial Leverage (FL): From FY06 to FY07, the Financial

Leverage increased from 1.64 to 1.7.This increase is attributed to the increase

in Net Assets of the company. The Shareholder’s Equity has increased due to

25 % increase in Reserves and Surplus. The increase in Reserves and surplus

of the firm can be attributed mainly to the 46 % increase in the General

Reserves of the company.

From FY07 to FY08: The decrease in ROE from 0.28 to 0.26 can be attributed to the

following reasons:

Decrease in Assets Turnover: From FY07 to FY08, the ROA has decreased from

2.36 to 1.9. This is due to following reasons:

45 | P a g e

o No major change in Net Sales: Net Sales has just increased 4 % from

FY07 to FY08.

o Increase in Assets: Net fixed Assets has increased 73 % from FY07 to

FY08.This is mainly due to 98 % increase in Investments and 101 % in

Capital Work in Progress. The capital work in progress includes the

Product development Cost Rs 17058.6 million and Advances for

Capital Expenditure of Rs. 6689.2 millions.

o Increase in Investments: Investments increased to Rs. 4,910.27 millions in FY

2007-08 from Rs. 2,477.00 millions from FY07. During the year, the

Company continued to make additional long term and strategic investments.

The Company further invested Rs. 6000 million in its 100% subsidiary Tata

Motors Finance Limited to further strengthen the vehicle financing activities.

The Company also invested Rs. 6015.9 million in Fiat India Automobiles

Private Limited for manufacturing Fiat and Tata cars and Fiat power trains.

The Company invested Rs.1795 million in the rights issue of securities of Tata

Steel Limited. The amount invested in various mutual funds as at March 31,

2008 was Rs. 7907 million as against Rs. 519.9 million as at March 31, 2007

representing surplus cash parked for future use.

Increase in Financial Leverage: The financial Leverage has increased from 1.7 to

1.92.This can be mainly attributed to the following reasons:

Increase in Equity: The shareholder’s Equity has increased by 14 % from FY07

to FY08.This change is pertaining to the 14.9 % increase in Reserves and Surplus

.The change in Reserves and Surplus is due to 36 % increase in Profit and Loss

Account. There have been no transfers to Redemption Reserves of the company.

Inference:

The long term profitability has been almost constant, as Return on Equity (ROE) has

remained near 0.26.The Asset base of Company has been increasing in both fixed assets,

investments and capital work in progress. The increase in Capital work in Progress is largely

on account of additional capacity being set up for vehicle manufacturing facility, product

development expenditure for the ongoing new product development programs and

sustenance initiatives for the year.

46 | P a g e

Also, it can be

noted that the

company has

assets in the form

of leased assets

and intangible

assets. .

3. Long

Term

Solvency Position of the Firm

Ratios Analyzed: Debt Ratio, Debt Equity Ratio, Interest Coverage Ratio

(Source: Annual Report, Tata Motors Ltd)

Debt Ratio:

From FY06 to FY07, the debt ratio increased from 0.53 to 0.58.This can be attributed

mainly to the following reasons:

Increase in Secured Loan: From FY06 to FY07, it increased by 145 % from

Rs. 8227.6 million to Rs. 20220.4 million. This is mainly due to 1991 %

increase in Loans and Cash Credit and Overdraft accounts and 4312 million

loan from Buyers Line of Credit.

Increase in Unsecured Loan: From FY06 to FY07, it did not show major

change, only 6 % decrease from Rs. 21140 million to Rs. 19871 million. But

there 5338 % increase in Short Term loans from the banks.

From FY07 to FY08, the debt ratio increased from 0.58 to 0.8.This change is pertaining to

the following reasons:

47 | P a g e

FY06 FY07 FY080.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

Tata Motors Ltd

Debt

Rati

o

Increase in Secured Loan: From FY07 to FY08, it increased by 21 % from

Rs. 20220 million to Rs. 24619 millions. This can be attributed mainly to the

97 % increase in Loans from Buyers Line of Credit and 89 % decrease in

loans and Cash Credit and Overdraft Accounts.

Increase in Unsecured Loan: From FY07 to FY08, it increased by 92 % from

Rs. 19871 million from Rs. 38185 million. It is mainly due to 107 % increase

in FCCN/CARS from 17646 million to 36610 million and issues of

Commercial Papers of 1000 million in 2008.

Interest Coverage Ratio

(Source:

Annual report,

Tata Motors

Ltd)

For FY06 to

FY07, the

interest Coverage

ratio increased

from 8.41 to

6.64 . This can be attributed to the following reasons:

Increase in Interest: the interest to be paid has increased by 50 % from Rs. 2934.9 million to

Rs. 4428.6 million. The increase in interest cost was on account of significant increase in

Company’s vehicle financing business, capital expansion programme and significant

increases in interest rates during the year.

For FY07 to FY08, the Interest Coverage Ratio has increased from 6.64 to 7.05.The

reduction was mainly due to the following reasons:

No major change in Interest Payments: The interest decreased by 3 % from Rs. 4428

million to Rs. 4256 million. This decrease was mainly due to Interest Transferred to

Capital Account increased by 443 % from Rs 213.5 million to Rs.1159.5 million.

48 | P a g e

FY06 FY07 FY087.80

7.85

7.90

7.95

8.00

8.05

8.10

8.15

8.20

8.25

Tata Motors Ltd

Inte

rest

Cov

erag

e Ra

tio

Despite increase in interest rates and increase in capital expenditure, the reduction was

mainly on account of significant reduction in the Company’s vehicle financing portfolio (on

account of securitization), better working capital management, interest earnings and larger

capitalization of interest in line with the increase in capital expenditure.

Inference:

The company’s debt has been increasing continuously. This increase is attributed to

significant capital expenditure incurred by the Company on new products and programs and

strategic investments. The company has the strategy of capitalization of expenses

(Expenditure and interest) to reduce the effects of capital expenditure for three

years .Expenditure Transferred to Capital and other accounts has increase at average rate of

133 % from Rs. 3088 million (FY06) to Rs. 11314 million (FY08).

4. Margin Ratios

Ratios Analyzed: Material cost to Sales ratio; Manufaturing, administration and other

expenses to Sales ratio; Selling and distribution expenses to Sales Ratio;Employee Cost to

Sales Ratio

(Source:

Annual report,

Tata Motors

Ltd)

49 | P a g e

FY06 FY07 FY080.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Material cost MarginEmployee Cost MarginManufacturing,administration and other expensesSelling and Distribution ExpensesEBIT Margin

Material Cost Margin

From FY06 to FY07, the Material Cost has decreased from Rs 152909 million to 207793.4

million.This is mainly pertaining to following reasons:

Increase in consumption of raw materials: It increased by 34 % from 138908 million to

187395 million. This was largely a result of increase in prices of steel, aluminum, nickel,

copper and natural rubber.

Purchase of traded goods:It increased by 48 % from 10309 million to 15351 million.

Employee Remuneration Margin

From FY06-FY07,it has decreased from 0.06 to 0.05.This is due to the following reasons:

Employee Remuneration Cost:The employee remuneration Cost increased 19 %

from 11417 to 13680 million. The Company restructured the salaries of its

employees during the year to align the same to the industry standards.

Increase in flexible workforce: The Company also increased its flexible workforce to

achieve substantially higher production units. However, increase in productivity

helped the Company reduce its employee cost as a percentage of net turnovers to 5%

as compared to 6% in FY 2005-06.

From FY07-FY08, the employee cost to net Sales remained constant.

Increase in Employee Cost increased by 12.9% during the year to Rs. 1,5445.7

million from Rs. 1,368.09 million registered in the previous year mainly in line with

trends in industry and economy. The manpower increased marginally to 23,230 from

22,349 with increases also in flexible manpower.

Manufacturing, administration and other expenses margin

From FY06 to FY07, the ratio of Manufacturing, administration and other expenses to Sales

increased from 0.08 to 0.09.The change is pertaining to the following reasons:

Increase in Stores, Spare part and Tools consumed: It increased 36 % from 3691


Freight and Transportation Charges: It increased by 42 % from 3351 to 4790 million.

Provision and write off for sundry debtors, vehicle loans and advances: It increased

by 169 % from 615 million to 1657 million.

50 | P a g e

From FY07 to FY08, the Manufacturing, administration and other expenses margin

increased from 0.09 to 0.1.This increase is mainly due to the following reasons:

Increase in Stores, spare part and Tools: It increased by 38 % from 5046 million to

7011 million.

Increase in Rent: It increased by 109 % from 199 million to 418.7 million.

Provision and write off for sundry debtor, vehicle loan and advances: It increased by

118 % from 1657 million to 3628.

Inference:

The EBIT margin has been decreasing constantly from FY06 to FY08.The expenses margin

ratio has also mainly shown increasing trend. The expenses of company have been on rise

because of external factors like increasing input prices and internal factors like increasing

debt and depreciation. Thus, over the years, the trend is negative with the increase in

expenses and lagging sales.

51 | P a g e

Trend analysis of Mahindra and Mahindra Ltd from FY06 to FY08

1. Short term Liquidity

Ratios analyzed: Current Ratio, Quick Ratio, Cash and Bank Balance/Current Liabilities,

Inventories/Current Liabilities, Debtors/Current Liabilities, Loans and Advances/Current

Liabilities


52 | P a g e

FY06 FY07 FY080.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Mahindra and Mahindra Ltd

Curr

ent R

atio

From FY06-FY07,the current ratio increased from 1.34 to 1.41.The increase in Current

Ratio is pertaining to following factors:

Increase in Cash and Bank Balances: The cash and bank balance increased by

81 % from Rs.7303 million to Rs. 13260 million.

Increase in Loans and Advances: There is 68 % increase in Loans and

Advances from Rs. 4988 million to Rs. 8394 million.This increase is due to

133 % increase in Advances and loans to subsidiaries.

From FY07 to FY08, the current ratio decreased from 1.41 to 1.12.This decrease can be

explained by following changes :

Decrease in cash and bank balances: The cash and bank balances decreased

by 35% from Rs.13260 million to Rs 8612 million.

Inference:

The current ratio has been greater than 1 all throughout the years. But the liquidity position

of the company has improved from 2006 to 2007, but has decreased from 2007 to 2008.

Quick ratio has decreased to 0.79 from 1.07 from 2007 to 08.Thus company can face

liquidity crunch if the cash and bank balance is not improved. Further, other assets(plant and

machinery held for sale) has increased by 7800 %.

2. Long Term Solvency Position of the Firm

Ratios Analyzed:

Debt Ratio,

Debt Equity

Ratio, Interest

Coverage

Ratio

53 | P a g e

FY06 FY07 FY080.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70


Debt

Rati

o

From FY06-07,the debt ratio increased from 0.23 to 0.32.This change is due to following

factors:

Increase in Unsecured Loan: there is 129 % increase in unsecured loan.This is

maily due to following changes:

o Decrease in Secured Loan:There is 50 % decrease in Secured Laon.

This change is mainly due to decrease in Debentures/bonds:The

debentures /bonds were reduced by 91 % from Rs. 905 million to Rs

75 million.The company redeemed the long term debentures.

From 2007-08, the debt ratio increased from 0.46 to 0.59.This is due to following reasons:

Increase in secured loan: The secured loans increased by 478 % . The secured loan

increased mainly due to the increase in debentures/bonds and foreign currency loans

from banks. From 2006-07, there is increase in short term currency loans from banks

by 95 %. There is marked increase in zero coupon bonds. The Company had issued

during the year ended 31st March, 2007, Zero Coupon Foreign Currency Convertible

Bonds (Bonds 2011) aggregating US $ 200 million, at par.

54 | P a g e

Increase in unsecured loan: There was just 28 % increase in unsecured loan. In

unsecured loans, there was marked increase in short term loans from banks and

companies and foreign currency loans from banks.

Interest Coverage ratio:

For FY06 to FY07, it has increased from 34 to 67.

Increase in EBIT: This has been due to 45 % increase in EBIT from Rs.9172 million

to Rs. 13354 million.

Increase in Interest: There has been 26 % decrease in interest to be paid as

debentures were redeemed in 2007.

For FY07 to FY08, the interest coverage ratio has decreased from 67 to 15.This is mainly

due to:

Increase in Interest: There has not been significant increase in the EBIT, but the

interest to be paid has increased by 342 %, due to increased loan of the company.

Thus the investment plans has not converted into sales for the immediate year.

Inference:

55 | P a g e

FY06 FY07 FY080.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00


Inte

rest

Cov

erag

e Ra

tio

The debt ratio has been on increase. This shows the stake of owners in the company has been

decreasing .As the debt ratio has been still maintained around 0.5, it depicts sound financial

health of the company in the long run. The increase in debt can be explained by the reason to

finance its expansion plans. The company took several measures to improve the cost, expand

overseas operation and increase capacity. Over the last three years the Company introduced

its vehicles into many new geographies including Europe, Middle East, South America and

South-East Asia by adapting unique business models for each country. The Company is

planning to set up two greenfield plants (near Pune and Chennai) to meet future domestic

and export capacity requirements. Thus company aims has high expectation from the Indian

automotive sector and expand its market share in Indian and overseas market.

4. Working Capital

Ratios analyzed: Current ratio, DPO, DII, DSO, Quick ratio


56 | P a g e

FY06 FY07 FY080.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00


Wor

king

Cap

ital P

ositi

on

Days in Inventory

From FY06 to FY07, the DII decreased from 40 33 .This increase is due to:

Decrease in Work in Progress: There is 19 % decrease in Work in Progress.

From FY07 to FY08, the DII increased from 33 to 36 days. This is due to:

Increase in Finished products produced and purchased for sale: There is 29 %

increase in finished products from Rs. 4483million to Rs. 5794 million

DSO has shown the similar nature.

From FY06 to FY07, the DSO has decreased from 29 to 26 days.This is due to following

reasons:

Increase in debtors (considered good): The sundry debtors outstanding over six

months have increased by 39 % from Rs. 613 million to Rs 858 million.

From FY07 to FY08, the DSO has increased from 26 to 33 days.

The increase for the year 2007 to 08 can be explained by:

Decrease in debtors outstanding over six months : There is decrease in debtors,

considered doubtful by 31 % from Rs 459 to Rs 316 million.

Decrease in Provision for doubtful debt: The Provision for doubtful debt decreased

by 37 % from Rs 523 million to Rs 428 million.

DPO has continuously improved over the years from 63 days in Fy06 to 73 in FY08.

Inference: From FY07 to FY08, the increase in DSO and DII be explained by the

aggressive credit policies of the company. The company has enhanced its operations

overseas and has marked increase in exports. The increase in debtors is mainly on account of

increase in exports growth in Company’s Genset engines and logistic business. The increase

in DII is due to increase in inventory due to launch of new products and increased capacity

DPO has continuously improved over the years. This is due to improvement in its supply

chain by reducing dealer stocks and outstanding. The cash conversion cycle has shown

reduction over the years .showing that company is able to utilize every Re. 1 invested in the

Current Assets.

5. Margin Ratios

57 | P a g e

Ratios Analyzed: Material cost to Sales ratio; Manufacturing, administration and other

expenses to Sales ratio; Selling and distribution expenses to Sales Ratio; Employee Cost to

Sales Ratio

Selling and distribution margin

Selling and distribution expense has been increasing from 5.7 to 7.4 % of net sales.

For the year 2006-07, sales promotion and advertisement expense increased by half. The

Company entered the passenger car segment through another subsidiary Mahindra Renault

Pvt. Ltd (MRPL). Production of Logan mid-sized sedan commenced around the end of the

fiscal year 2006-07. Sales commenced from April 2007. A refreshed version of the Bolero

was launched in March 2007.

For the year 07-08, Discount allowed almost doubled. Further, freight outwards has been

increasing by 40 % (Year on year).This can be explained by the increase in exports.

Manufacturing, administration and other expenses margin

For the year 2006-07 the manufacturing expenses increased from 6.1 to 6.4 %.This has been

mainly due to excess of cost over current value investments (244 %)and provision for

doubtful debts(851%).For the year 2007-08,the manufacturing expenses increased from 6.4

% to 6. 7%.This has been due to increase in power and fuel (40 %), rent (72%) and

amortization of expenses (77%).

58 | P a g e

FY06 FY07 FY080.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80


Material cost MarginEmployee Cost MarginManufacturing,administration and other expensesSelling and Distribution Expenses

Mar

gin

Ratio

s

Employee Cost Margin

Personnel Cost to Sales has been increasing from 6.9 to 7.8 %. Increase in personnel cost in

absolute value is mainly due to increase in officers’ strength, annual increments and the

impact of wage settlements.

Material cost Margin

The Material Cost to Sales has decreased from 73.6 to 71.8 from 2006-07.this has been due

to decrease in the consumption of raw materials .This decrease is mainly due to

Efficiencies arising out of strategic sourcing and reengineering initiatives undertaken by the

company . Material cost is also impacted by product-mix changes.

From 2007-08, it has increased from 71.8 to 73.7 .There has been an increase in increase in

purchase of traded goods.

6. Long term Profitability

Ratios analyzed: DuPont Analysis: Return on Equity ,Assets turnover, Financial Leverage,

Profit Margin

The profit Margin has increased from 10% to 11% from 2006 to 2007 and decreased from

11 % from 10 %.But the Assets turnover has been decreasing through out the years. There

59 | P a g e

FY06 FY07 FY080.0000

0.5000

1.0000

1.5000

2.0000

2.5000


DuPo

nt A

naly

sis

has been marked increase in investments and capital work in progress. From FY06 to

FY07,The investments increased by 34 % and capital work in progress increased by 56

%.From the FY07 to FY08 ,the investment further increased by 88 % and capital work in

progress increased by 94 %.

Analyzing the investments, the company has decreased its investments in unquoted equities

of subsidiaries company from 1443 to 950 crore but has increased its equity shares in quoted

equities of subsidiaries company from 559 to 2701.the company has mainly invested in

mutual funds and certificate of deposits.

Financial Leverage: It has been increasing constantly from 2.05 to 2.35.this shows that the

assets are being financed by Equity. The number of ordinary equity share increased from

245.3 to 245.7 million from FY07 to FY08. This change was because of issue of ordinary

shares consequent to the Scheme of Amalgamation. The reserves and surplus has been

increasing due to the increase in profits. A hedging reserve account was created to report

earnings rising consequently on contracts that were designated and effective as hedges of

future cash flows.

Inter firm Analysis

1. Short Term Liquidity

Current Ratio, Quick Ratio

60 | P a g e

Maruti Suzuki India Ltd maintained the highest current ratio and quick ratio in FY06 and

FY07.In FY08, Mahindra and Mahindra Ltd has the best current liquidity position among the

three competitors. The liquidity position of both Maruti Suzuki India Ltd and Tata Motors

Ltd has shown a continuous decline over the years.

Recommendation:

The company should maintain healthy cash balance.

2. Working Capital Position

Days Sales Outstanding, Days in Inventory

61 | P a g e

FY06 FY07 FY080.000.200.400.600.801.001.201.401.601.802.00

Maruti Suzuki India LtdMahindra and Mahindra LtdTata Motors Ltd

Year

Curr

ent R

atio

FY06FY07

FY08

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60


Year

Qui

ck R

atio

Maruti Suzuki India Ltd has continuously improved its Days Sales Outstanding (DSO) and

achieved the minimum DSO in FY08.Tata Motors has maintained the lowest Days Sales

Outstanding (DSO) among the three companies in FY06 and FY07. Maruti Suzuki India Ltd

and Mahindra and Mahindra Ltd have shown the similar trend over the three years i.e. the

decrease in DII from FY06 to FY07 and then increase from FY07 to FY08.Maruti Suzuki

India Ltd has maintained the lowest DII among the competitors over the years.

Thus the working Capital Position of the company has been the healthiest among its

competitors.

3. Long Term Solvency

Debt Ratio

MSIL has maintained a very low debt ratio with respect to its competitors. It can be observed

that the each of the three companies have shown increase in debt ratio over the years.

The company is the healthiest firm among its competitors over the years

62 | P a g e

FY06FY07

FY08

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00


Year

Days

Sal

es O

utst

andi

ng (D

SO)

FY06 FY07 FY08

0.005.00

10.0015.0020.0025.0030.0035.0040.0045.00


Year

Days

in In

vent

ory(

DII)

4. Margin Ratio

Material Cost Margin

MSIL has the highest material cost margin among its competitors over the years. Mahindra

and Mahindra Ltd has the lowest material margin. This is because it indigenously uses

indigenously available raw materials.63 | P a g e

FY06FY07

FY08

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40


Year

Debt

Rati

o

FY06 FY07 FY080.68

0.70

0.72

0.74

0.76

0.78

0.80


Year

Mat

eria

l Cos

t Mar

gin

Profit Margin

Mahindra and Mahindra Ltd has maintained the highest Profit Margin among its competitors.

Due to high material cost margin, the MSIL Profit Margin lags behind the Mahindra and

Mahindra Ltd. Tata Motors have maintained the lowest Profit Margin among its competitors.

5. Long Term Profitability

Return on Equity

64 | P a g e

FY06 FY07 FY080.00

0.02

0.04

0.06

0.08

0.10

0.12


Year

Profi

t Mar

gin

FY06FY07

FY08

0.0000

0.0500

0.1000

0.1500

0.2000

0.2500

0.3000

0.3500


Year

Retu

rn o

n Eq

uity

Maruti Suzuki India Ltd has the lowest Return on Equity among its competitors over the

years. Mahindra and Mahindra Ltd has maintained the highest ROE among the competitors

over the years.

Earnings per Share

(EPS)

MSIL has maintained the highest EPS among its competitors over the three years. All the

three companies have shown continuous increase in EPS. Mahindra and Mahindra Ltd has

maintained the lowest the lowest EPS among its competitors over the three years.

65 | P a g e

FY06 FY07 FY080.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00


YEAR

Eear

ning

Per

Sha

re(E

PS)

Economic Value Added

The Economic Value Added (EVA) is a measure of surplus value created on an investment.

The return on capital (ROC) is assumed to be the “true” cash flow return on capital earned

on an investment. The cost of capital is defined as the weighted average of the costs of the

different financing instruments used to finance the investment.

EVA = (Return on Capital - Cost of Capital) (Capital Invested in Project)

Measuring Cost of Capital

The Cost of Capital is calculated as Weighted Average Cost of Capital.

WACC: Percentage of Debt in total Value of firm*Cost of Debt + Percentage of Equity in

total Value of firm*Cost of Equity

66 | P a g e

It has two components:

Cost of Equity: it is the opportunity cost for an investor and an implicit cost for the

company .This is the expected return of investors for a company. To find the cost of

equity, Risk and Return model is used.

Measuring Risk: The spread of the actual return around the expected return is

measured by the variance or standard deviation of the distribution. The greater the

deviation of the actual returns from the expected returns, the greater the variance.

The model to find the risk used is CAPM. i.e the Capital Asset Pricing Model.

Expected rate of return on asset = Risk free rate+ Beta of asset (Risk Premium for average

risk asset)

Risk free rate: It is the rate with no default risk. It is assumed as interest on Central

Government Dated Securities of year 2005-06.The risk free rate is taken as 7.34 %.

(Source: http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/80303.pdf )

Risk Premium: The risk premium is the extra return that would be demanded by the

investors for shifting the money from a riskless investment to an average risk investment.

Estimating risk premium: There are three ways of estimating the risk premium in the Capital

Asset Pricing Model, Survey Premium, Historical premium. In CAPM, the premium is

computed to be difference between average returns on stocks and average returns on risk

free securities over an extended period of history.

Time period used: Five years data has been taken from FY04 to FY08.

Market Return: The annual return on stock is taken as the Market Return. The arithmetic

average return measures the simple mean of the series of annual returns.

KE=Rf + beta(Rm- Rf)

Market Return: It is the average annual return. It is calculated from closing price of S&P

Nifty.

The daily return is calculated as

Daily Return = ln(Pi/Pi-1)

Pi: Closing of ith day

Pi-1: Closing of (i-1)th day

Average Daily Return is the arithmetic mean of the daily return.

67 | P a g e

http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/80303.pdf

Beta: The beta is estimated from the historical data. It can be calculated by dividing the

covariance of stock price with market by variance of the market. Thus from the calculation

of the above inputs the Expected Rate of Return or Cost of equity can be found out.

Cost of Debt: The cost of debt measures the current cost to firm of borrowing funds to

finance its assets. It reflects the default risk of the company i.e. the inability to pay off the

obligations of creditors. The most widely used measure of a firm’s default risk is its bond

rating. It can be estimated from the financial ratios. This rating is called synthetic rating. The

interest coverage ratio is used to assign the synthetic bond rating.

Estimating the Tax advantage: Interest is tax deductible and the resulting tax saving

reduces the cost of borrowing to firms. Thus after-tax cost of debt =Pre-tax cost of debt(1-

Marginal tax rate)

Cost of debt = Interest(1-t)/EBIT

Calculation of EVA

Return on Capital Employed: PBT/ (Capital +Reserves and Surplus+ Secured Loan+

Unsecured Loan)

Cost of Equity=Risk free Return+ beta (Expected Market Return- Risk free Return)

Cost of debt = Interest (1-t)/EBIT

Daily Return = ln(Pi /Pi-1)

Pi: Closing Value of Nifty for ith day

P i-1: Closing Value of Nifty for (i-1)th day

Results:

From 1st April ‘2003 to 31st March’2008, the average annual return is 36.64 %.

Average Daily ReturnAverage Annual Return Rf Rm-Rf

68 | P a g e

0.0012 0.3664 0.0734 0.2930

The Cost of Equity for Maruti Suzuki India Ltd is 28.43 %,Mahindra and Mahindra Ltd is

Figures in Rs .millions

MarutiMahindra and Mahndra Ltd Tata Motors Ltd

FY06

FY07

FY08

FY06

FY07

FY08

FY06

FY07

FY08

Number of Outstanding Shares

289.00

289.00

289.00

233.00

238.00

239.00

382.00

385.00

385.00

Market Value of Equity

239003.00

239003.00

239003.00

162412.65

162412.65

162412.65

237871.40

237871.40

237871.40

Market Value of Debt

717.00

6308.00

9002.00

8833.82

16360.07

25870.60

29368.40

40091.40

62805.20

Percentage of Equity 1.00 0.97 0.96 0.95 0.91 0.86 0.89 0.86 0.79Percentage of Debt 0.00 0.03 0.04 0.05 0.09 0.14 0.11 0.14 0.21cost of Equity 0.28 0.28 0.28 0.37 0.37 0.37 0.44 0.44 0.44Cost of 0.18 0.04 0.04

69 | P a g e

Debt(after tax)Assumption:Tax rate is 35 %.

WACC 0.28 0.28 0.28 0.35 0.33 0.32 0.39 0.37 0.35

Return on Capital employed 0.32 0.30 0.27 0.28 0.28 0.20 0.23 0.22 0.17

Total Capital employed

56022.00

76522.00

94857.00

39209.49

51911.53

69803.20

90823.30

116556.30

150896.90

EVA1832.

132030.

51

--657.0

5

-2631.

03

-2904.

10

-7995.

33

-14778.14

-17832.09

-26373.17

Inference:

The EVA for Maruti Suzuki India Ltd has increased from FY06 to FY07 and reduced from

FY07 to FY08.It has become negative for the year FY08.This is because of the increase in

Weighted Average Cost of Capital (WACC),due to increase in Cost of Equity.

For Mahindra and Mahindra Ltd and Tata Motors Ltd, the EVA has been negative and

decreasing for the three years from FY06 to FY08.This does not reflects the sound financial

health of the companies. This is due to increase in the cost of capital and decrease in Return

on Capital Employed.

Thus Maruti Suzuki India Ltd has the highest Economic Value Added for each year from

FY06 to FY08 among its competitors. Thus the capital employed to the firm adds the

maximum value surplus funds to the firm.

70 | P a g e

71 | P a g e

CFROI

CFROI or Cash flow return on investment is one of the accounting indicators of value

creation. It clarifies how economic value is created in a firm and acts as a reliable guide to:

making investment decisions; taking key strategic decisions; and understanding economic

value. It shows how to judge and compare individual equities across markets and company

sectors. It has cutting edge theory and practice.

The CFROI is a measure of the cash flow return made on capital.

CFROI = (Adjusted EBIT (1-t) + Depreciation & Other Non-cash

Charges) / Capital Invested

Figures in Millions

MSIL M&M Tata Motors LtdFY06

FY07

FY08

FY06

FY07

FY08 FY06

FY07

FY08

EBIT

17704.0

0

23174.0

0

25626.0

09172.34

13354.8

3

13373.2

023367.

5029429.90

30020.80

TAX RATE 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35DEPRECIATION

2854.00

2714.00

5682.00

2000.05

2095.87

2386.60

5209.40

5862.90

6523.10

NET WORKING CAPITAL

Capital Employed

55243.0

0

74847.0

0

93156.0

0

37922.5

3

51889.1

6

69371.3

084739.

10

108788.9

0

141200.2

0CFROI 0.26 0.24 0.24 0.21 0.21 0.16 0.24 0.23 0.18

Inference:

72 | P a g e

http://www.vernimmen.com/html/glossary/definition_value.html

http://www.vernimmen.com/html/glossary/definition_investment.html

http://www.vernimmen.com/html/glossary/definition_return.html

http://www.vernimmen.com/html/glossary/definition_cash_flow.html

For Maruti Suzuki India Ltd, the Cash flow Return on Investment (CFROI) has reduced from

FY06 to FY07 .It has remained constant at 0.24.

For CFROI has shown decline from three years from FY06 to FY08 for both M&M Ltd and

Tata Motors Ltd. This has been due to increase in Capital Employed for each year. Thus

Maruti Suzuki India Ltd has maintained the highest CFROI for each year.

Recommendation

73 | P a g e

1. The company cash and bank balance have reduced .In fact; the net decrease in cash flow

for the year has been in FY08.This has been due to increase in Purchase and investment

activities. This can be major threat to the financial health of the company. Thus, cash and

bank balance should be maintained.

2. The company has strong fundamentals with low debt –equity ratio and high net

operating earnings. The company should leverage these factors to increase its debt. This

will reduce the cost of capital of the company and maintain the cash and bank balance.

The company can issue debentures convertible to equity shares like Mahindra and

Mahindra Ltd or quasi equity shares.

3. The material cost margin of the company remains highest among the industry. This is

because company imports raw materials and components. Thus company should use

indigenously produced raw materials and components.

4. The manufacturing expenses have manly increased because of increase in royalty. The

company can use try to develop new technologies in house to reduce the royalty cost.

Conclusion:

74 | P a g e

The balance sheet of Maruti Suzuki was analyzed with that of Tata Motors and Mahindra &

Mahindra. It was found that the financial position of the Maruti Suzuki is sound which is

clearly indicated by the various ratios calculated the presence of zero debt in its balance sheet

and the huge amount of cash surplus that the company has at its disposal. The presence of

zero debt has helped the company in the recession stage.

The manufacturing cost for the company has risen sharply. The manufacturing cost is higher

when compared to that of Tata and Mahindra. The main reason for the rise in material cost

was due to import of the spare parts and the steep rise in the price of various inputs such as

steel. However the company has taken several steps to reduce the same like “One Gram One

Weight” asking its vendors to reduce the weight of the component so that the cost associated

with the same is controlled. Thus, benchmarking has helped the company to analyze the

various loopholes and to take measures with respect to the same.

75 | P a g e

References:

1) From books:

a) Maruti Suzuki Annual Report, 2007-08

b) M Y Khan and P K Jain. Financial management Text, Problems

and Cases. 5th edition, Tata McGraw Hill (TMH) publication

2) From Web Pages

a) Information regarding Economic Data of Industry

Available from:

(http://www.m c kinsey.com/mgi/mginews/indiaconsumerevolution.asp [Accessed

4th April 2009]

b) Information regarding Price cuts

Available from: ( http://ibef.org/artdisplay.aspx?art_id=21983&cat_id=114&page=4 )

[Accessed 4th April 2009]

c) Information regarding Intense competition

Available from: ( http://ibef.org/artdisplay.aspx?art_id=21983&cat_id=114&page=4 )

[Accessed 4th April 2009]

d) Growth forecast as per Automotive Mission Plan

Available from: http://www.ibef.org [Accessed on May 03, 2009]

e) GDP

Source: www.rbi.com [accessed on April 18, 2009]

f) Increase in disposable income

Available from: http://www.mckinsey.com/mgi/mginews/indianconsumersevolution.asp

[accessed on March 31, 2009]

g) Reduction in excise duty, intense competition

Available from: http://www.ibef.org/artdisplay.aspx?art_id=21983&cat_id=114&page=4

[accessed on May 03, 2009]

h) About Maruti Suzuki

76 | P a g e

http://www.ibef.org/artdisplay.aspx?art_id=21983&cat_id=114&page=4

http://www.mckinsey.com/mgi/mginews/indianconsumersevolution.asp

http://www.rbi.com/

http://www.ibef.org/



http://www.mckinsey.com/mgi/mginews/indiaconsumerevolution.asp

Available from: www.marutisuzuki.com [accessed on March 07, 2009]

i) About Tata Motors

Available from: www.tatamotors.com [accessed on March 07, 2009]

j) About Mahindra & Mahindra

Available from: www.mahindra.com [accessed on March 08, 2009]

k) Calcuation of EVA, CROI

Available from: http://www.ifimbschool.com/Download/Finance%20V.pdf [accessed on

April 21, 2009]

77 | P a g e

http://www.ifimbschool.com/Download/Finance%20V.pdf

http://www.mahindra.com/

http://www.tatamotors.com/

http://www.marutisuzuki.com/

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