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Comparative Analysis between M&M
and Tata MotorsGroup 9 Section B
Anirudh Singh 2011PGP547 Ankita Srivastava 2011PGP555 Bishakha Majumdar 2011FPM04
Mayank Kumar 2011PGP718 Rahul Gaur 2011PGP808
S. Shankar 2011PGP840 Vignesh K P 2011PGP935
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SUMMARY OF MANAGEMENT AND DIRECTOR S REPORTS
Mahindra & Mahindra Tata Motors
Net income of Rs. 23,803 crores (26.6% growth )P rofit increased from Rs. 2,088Cr to Rs. 2,662Cr. (27.51%
growth)
Net income of Rs. 52136 crores (35.5% growth )P rofit declined by Rs. 428.26 Cr to Rs. 1811.82 Cr
debt reduced by $977 million
Rise in raw material prices, rigorous cost restructuring withcost controls, process efficiencies and product innovations,R&D activities
Significant reduction in cost with improved operational efficiencies, R&Dactivities
new brand position, RiseStrategic position of ALTERNATIVE THINKINGforsustainibility
Commercial vehicles show impressive recovery after meltdownCustomer financing initiatives the TMF financed 160781 vehicles.
P lans for expanding markets & refreshing product portfolios(eg., Genio & W201)
P lans for global acquisitions, product development, new productintroductions and operational synergies
Dividend payout of Rs.802.64 crores P lanned payout of 44% of the unconsolidated profits
Cordial & harmonious industrial relations with focus onhealth & safetyCSR activities 1% of PAT pledged to CSR activities
Energy saving initiatives with numerous awards wonCordial industrial relations
Credit ratings improved to AA+ from AA (CRISIL)Credit ratings maintained at LAA+ (ICRA)
Credit ratings revised to A+ (CRISIL) & LA+ (ICRA) domesticCredit ratings revised to B (S& P ) & B3 (Moody s) foreign
Acquisitions: 18 subsidiaries acquired during the yearSold : ID-EE S.r.l. & Mahindra Solar One P rivate
Limited
Acquisitions : Trilix Srl., Turin (Italy), Tata P recision Industries, Tata DaewooCommercial Vehicle Company Limited.
Sold : IN CAT SAS, Jaguar Land Rover Mexico SA de CV
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CORPORATE GOVERNANCE ANALYSIS: Mahindra & Mahindra
M&M follows Clause 49 of the Listing Agreementrelating to Corporate Governance to determine itsCorporate Governance policies
CRISIL' has re-affirmed the highest level rating 'GVC Level 1' forGovernance and Value Creation for the fifth year in a row.
Board of Directors : 12 membersVC-MD & Executive Director : whole time directorsN on executive independent directors form majorityamong the directorsQualified & experienced in relevant fieldsRemuneration as per market trends
Shares listed on :Bombay Stock ExchangeN ational Stock ExchangeDemat InternationalGDRs, LuxembourgInternational Order Book (IOB) of the London Stock Exchange
10 Board Meetings, Annual General Meeting held in July2010
Well-defined Risk Management framework in place
Codes of Conduct:2 codes of Conduct for senior management & foremployees
comprehensive Code of Conduct for Prevention of Insider Trading
Accounting treatment done according to Accounting Standards laiddown by The Companies (Accounting Standards) Rules, 2006
Audit Committee comprised of independent directors 98.67% of the paid-up Equity Share Capital is held in a
dematerialised form with N ational Securities Depository Limited andCentral Depository Services (India) Limited
VOLUNTARY INITIATIVESResearch & Development Committee (R&DStrategic Investment CommitteeLoans & Investment Committee
Is in substantial compliance with the Corporate Governance -Voluntary Guidelines, 2009 by Government of India, Ministry of Corporate Affairs
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CORPORATE GOVERNANCE ANALYSIS: TATA MOTORS
TM follows Clause 49 of the Listing Agreement relatingto Corporate Governance to determine its CorporateGovernance policies
Accounting treatment done according to Accounting Standards laiddown by The Companies (Accounting Standards) Rules, 2006
Board of Directors : 13 membersN on-executive Chairman,11 non-executive directors7 independent directors form majority among thedirectorsQualified & experienced in relevant fieldsRemuneration as per industry benchmarks,
performance & macroeconomic view
Shares listed on :Bombay Stock ExchangeN ational Stock ExchangeN ew York Stock Exchange ( N YSE)Luxembourg Stock ExchangeInternational Order Book (IOB) of the London Stock Exchange
Annual General Meeting held in September, 2010 Other Committees:Investors' Grievance CommitteeCorporate Social Responsibility (CSR)Ethics and Compliance Committee
Codes of Conduct:Tata Code of Conduct for employees and whole timedirectorsCode of Conduct for N on-Executive DirectorsTata Code of Conduct for P revention of Insider Trading(the Code)
Audit Committee functions as per the Companies Act, 1956,listing requirements and US regulations applicable to the CompanyNo audit qualification in the financial statements
Tata Business Excellence Model is employed as a meansto drive excellence. The Balanced Scorecardmethodology is used for tracking progress
Whistle Blower Mechanism : The Company has adopted a Whistle-Blower P olicy
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TATA MOTORS VS M&M VS IN DUSTRY
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P erformance of business segments:TATA MOTORS
- 1,080,994 vehicles sold in 2010-11, growth of 24.2% and 58,089 exported- 24.3% share in the Indian industryCommercial Vehicles
458,828 vehicles sold in 2010-11, a 22.7% growth
61.8% share in Indian market
Sale of M & HCV s grew by 26.7% during this period, market share of 60.1%
Sale of LCV s grew by 19.9%, market share of 63.2%
319,712 vehicles sold in 2010-11 (highest ever, inclusive of Tata, JLR and Fiat)
13% share in Indian market
243,621 vehicles were sold by JLR ( growth of 25.6% over the previous year)
Passenger Vehicles
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MAHIN DRA &MAHIN DRA
289,333 vehicles and 64,740 3-wheelers sold during 2010-11 a growth of 22.2% and 42.7% respectively
MUV sales up by 7.5% at 230,110 vehicles (market leader 60.9%)
Farm division sales up by 22.3% at 214,325 units ( Domestic tractor sales 202,513 and 11,812 exported)
Improved farm division market share of 42%
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Dividend history for M&M and Tata motors
Dividends Declared -Mahindra and Mahindra Dividends Declared -Tata motors
EffectiveDate
DividendType
Dividend(%)
Remarks Effective Date Dividend TypeDividend
(%)
14/07/2011 Final 230%
Rs.10.50 per share(210%)Dividend
& Rs.1.00 per share(20%)SpecialDividend 19/07/2011 Final 200%
8/7/2010 Final 190%Rs.8.75 per share(175%)Dividend +
Rs.0.75 per share(15%)SpecialDividend
10/8/2010 Final 150%
9/7/2009 Final 100% 3/8/2009 Final 60%
3/7/2008 Final 115% 16/06/2008 Final 150%
5/7/2007 Final 40%25% Final Dividend + Special
Dividend 15%1/6/2007 Final 150%
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Rights and Bonus Issue
Rights issue M&M Tata Motors equity shareholder's position
A rights issue is an issue of new shares for cash to
existing shareholders in proportion to their existingholdings and therefore rightsissue is a way of raising new
cash from shareholders.
M&M has a rights ratioof 1 :5 ( one share for
every five shares held bythe eligible shareholders)
and shares would beissued at a price of Rs.305/- per share of facevalue of Rs. 10/- each
Tata motors has arights ratio of 1 :6
and shares would beissued at a face
value of Rs. 10 eachto the existing
equity shareholders
Equity shareholders react badly to firmscontinually making rights issues as they areforced either to take up their rights or sell
them. They may sell their shares in thecompany, driving down the market price.
Bonus Issue M&M Tata Motors equity shareholder's position
A Bonus issue is an offer of free additional shares toexisting shareholders to
increase the dividend payout. New shares are issued to
shareholders in proportion totheir holdings
Mahindra & MahindraLtd. follows a bonusshare ratio of 1 :1 (If a
bonus of 1:1 is issued,then ex-bonus share
price would adjust to Rs.50, which means that the
total market value willremain the same.)
Tata motors followsa bonus share ratio
of 3 :5
Bonus share increases the number of sharesoutstanding and reduces the earnings per
share (EPS)
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Stock split
In a stock split company's existing shares are divided into multiple shares.The number of shares outstanding increases by a specific multiple , and thestock price will be reduced since the number of shares outstanding hasincreased.
Stock splits are performed is that a company's share price has grown sohigh that to many investors, the shares are too expensive to buy.Stock splits help make shares more affordable to small investors and
provides greater marketability and liquidity in the market.
O ld Face value New Face value Record Date
M&M 10 5 30/03/2010
Tata motors 10 2 13/09/2011
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ESOP and WarrantsES OP M&M Tata Motors
equity shareholder'sposition
A n employee stock ownership plan (ESOP) is away in which employees of a company can own a shareof the company they work
for.
In 2011 the Company granted130,500 options to the employees
and/or directors of the Company or its subsidiary, granting them to
subscribe in aggregate up to 130,500equity shares of the face value of Rs.
10 each of the Company at theexercise price of Rs. 636 per share.
In Tata MotorsEmployee Stock Option
Scheme (ESOP),theoptions can be
converted into shareswith differential votingrights(DVRs) and a 5%
extra dividend isattached to DVRs.
Equity Shareholders benefit from an ESOP
because it creates amarket for their stock,and tax laws allow for the deferral of capital
gains of sales of stock toan ESOP
W arranty M&M Tata Motorsequity shareholder's
position
Warranty is a derivativesecurity that gives the
holder the right to purchasesecurities (usually equity)
from the issuer at a specific price within a certain time
frame
In 2010 Mahindra raised Rs 100crore by issuing warrants to
promoter group firm, Mahindra &Mahindra on preferential basis.
72,99,270 convertible warrants werealloted to Mahindra & Mahindra atRs 137 per piece, aggregating to Rs
100 crore.
Company issueswarrants to Tata
Companies with a rightto subscribe to oneordinary share per
warrant.
Warrants issued by acorporation as part of itscapitalization can dilute
the interest of prior shareholders.
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2011 2010 2009 2008 2007 2006
TIE (Tata)2.59 3.27 2.25 7.05 7.98 8.00
TIE (M&M)50.67 19.15 8.96 17.06 72.64 41.78
IndustryAverage 5.24 1.66 5.79 8.2 7.45 8.58
D/E Ratio(Tata) 2.52 3.18 1.77 1.96 0.99 1.02D/E Ratio(M&M) 1.92 1.83 2.51 3.31 2.31 3.03Industry
Average 1.05 0.91 0.66 0.55 0.57 0.53BEP (Tata)
4.71 8.02 5.33 12.61 15.01 14.42
BEP (M&M)93.60 23.76 11.68 18.74 66.65 38.15
CRITICAL RATIOS FOR CREDIT RATIN G
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TIE D/E Ratio BEP
CRITICAL RATIOS & CREDIT RATIN G
2007 2008 2009 2010 2011Tata (ST) AA+(ind) P1+ P1+ A1+Tata (LT) AA+(ind) AA+ AA+ AA+ AA+MnM(ST) AA+(ind) P1+ P1+ A1+MnM (LT) AA+(ind) AA+ AA+ AA+ AA+
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INFERENCE ON CREDIT R ATING
Both the companies are well reputed in the market with turnover of over $4 b illion.TIE, D/E and BEP for both T AT A and M&M has been a bove the industry average.
Therefore their c redit rating is generally good.
Re cession :Automo b ile industry is has a high positive co-relation with the GD P gro wth rate.Therefore during the re cession both the firms got hit in their performan ce.Therefore the short term c redit rating of both the firms is lowered during re cession
and the long-term has remained good.
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SINK IN G FUN D RESERVE
Sinking fund provision is really just a pool of money set aside by a corporation tohelp repay a bond issue service and to protect investors against the possibility of default by the company.MnM has low debt capital structure and hence the requirement for sinking fundreserve has been less.
Analysis :The sinking fund reserve of M&M is reducing drastically as M&M has the strategyof reducing its long debt standing
Year Mar 11 Mar 10 Mar 09 Mar 08
TataMotors
Debenture Redemption Reserve(Rs inCrs) 1,102.15 1,102.15 602.15 334.35
M&MDebenture Redemption Reserve(Rs inCrs) 42.86 78.57 47.62 18
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OWNERSHIP STRUCTURE OF THE FIRM DIFFERENT TYPES OF OWNERS AND THEIR EQUITY POSITIONS MAHINDRA & MAHINDRA
Foreign ( P romoter& Group)
0.11% Indian ( P romoter &Group)
9%
Total of P romoter9%
N on P romoter(Institution)
16%
N on P romoter ( N on-Institution)
7%
Total N on P romoter24%
Total P romoter & N onP romoter
33%
Custodians(AgainstDepository Receipts)
2%
Ownership pattern
N o. of shares: 613974839, no. of shareholders: 178292
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M&M TATA
DFL OP ERATIN G IN COME/N ETIN COME
1.76 2.73
DOL TOTALCON TRIBUTION /O P ERATIN GIN COME
2.01 3.87
DCL DFL*DOL 3.53 10.56
DEGREE OF LEVERAGE
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Analysis of Tax Rates
Statutory Income Tax Rate: the rate that isimposed on taxable income of corporations,which is equal to corporate receipts lessdeductions for labor costs, materials, anddepreciation of capital assets.In India, the rate is 33.9% for Indian Companiesand 42.33% for Foreign Companies.
Effective tax Rate: measures the taxes acorporation pays as a percentage of its economicprofit.
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Tax rates : A ComparisonTML 2011 TML 2010 TM Group
2011TM Group2010
M&M2011
M&M2010
P BT 2,196.52 2,829.54 10,437.17 3,522.64 3,519.61 2,846.75
Tax 384.70 589.46 1,216.38 1,005.75 857.51 759
Effective
tax rate %
17.51 20.83 11.65 28.55 24.36 26.66
StatutoryTax Rate %
33.9 33.9 33.9 33.9 33.9 33.9
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Tax Rates Analysis
For Tata Motors: Tax expenses decreased to 384.70 crores from 589.46 crores in2009-10. The effective tax rate for 2010-11 is 17.5% of PBT as compared to 20.8%for 2009-10. The reduction is due to increase in tax benefits during the year.
For Tata Motors Group: Tax expense has increased to 1,216.38 crores in 2010-11
from 1,005.75 crores in 2009-10 but as a % to P BT was 11.7% in 2010-11 ascompared to 28.6% in 2009-10. The reduction in tax expense is mainly due to set-off of past tax losses at
Jaguar Land Rover Benefits of R & D expenses at TML, which are eligible for weighted deduction.
For M&M: The provision for current tax and deferred tax for the year ended 31 stMarch, 2011 as a percentage to profit before tax is lower than the previous year,on account of higher tax free dividend income during the year and on account of increased weighted deduction available for research and developmentexpenditure in Financial Year 2011.
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M&M has not used much of deferred tax liabilities aswe can see that TML has 2023 as deferred taxes.Normally allo wed method of depre c iation for taxation is De c lining balan ce method at varying
rates and
is
availa
ble
for
a
full
year.
Both TML and Mahindra use S traight line method for a cc ounting purposes. The companies can avail this for getting tax benefits
M&M2011 M&M 2010 TML 2011 TML 2010
Deferred TaxAssets 173.61 182.17 685 791.5
Deferred TaxLiability 527.99 422.5 2,708.16 2,300.14
N et Deferred Tax -354.38 -240.33 -2,023.16 -1,508.64
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Financial flexibility for further borrowing andraising of equity
TML M&M
ROE N et Income/Equity 0.10 0.25D/E Total Liability / Total Asset 0.79 0.23TIE EBIT/Interest expense 2.59 50.67
EP S N et Income / OutstandingShares 25.51 43.29
Dividend YeildAnnual Dividend per share/price per share 200% 230%
The Debt/Equity ratio is around 80% for TML while only 23% for M&M. AsTML is already working on high leverage, it will be difficult for further
borrowing as compared to M&M.The TIE ratio is around 50 for M&M making it further more favorable forborrowing.The Dividend yield as well as the E P S is higher for M&M and thereforeraising money through equity is easier.M&M has a Z Score =5.4 which proves that the company is safe and Tata
motors with a Z of 2.77 can be assumed to be riskier in the long run.
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Cash Conversion Cycle2011 2010 2009 2008 2007
Inventory Conversion P eriod 51 57 47 42 40Receivables Conversion P eriod 21 24 18 19 17TOTAL 72 81 65 62 58 P ayables Conversion P eriod 98 104 84 77 57CASH CON VERSION P ERIOD -26 -23 -19 -15 1
TATA MOTORS LTD.
M&M
2011 2010 2009 2008 2007
Inventory Conversion P eriod 69 62 69 65 65Receivables Conversion P eriod 46 42 55 54 51TOTAL 115 105 124 118 115P ayables Conversion P eriod 97 92 93 80 87CASH CON VERSION P ERIOD 18 13 31 38 29
Strongimprovementsover the years
Favorablepresent position
Fairimprovementsover the years
Relativelyweaker position
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Deviations identified on Clause 49 compliances of SEBITATA MOTORS
P roceeds from Initial P ublic Offering(IP O)- N ot Disclosed
Clause 49 of the Listing Agreement specifies a maximum tenure of nine years forIndependent directors but management believes that they can exceed this tenure whichis a significant deviation.
Nusli N Wadia, Chairman of the Wadia Group, who joined the Tata Motors board as anIndependent director in 1997, is seeking reappointment.
Some Tata Group companies have been delisted on reasons of non-compliance with theclauses of Listing Agreement violation of SEBI takeover regulation, amalgamation,merger and winding-up. Examples are Tata Construction & Projects Ltd-on winding up of company, Tata Finance Ltd- on amalgamation with Tata Motors Ltd.
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Deviations identified on Clause 49 compliances of SEBIMAHIN DRA & MAHIN DRA
Term of office of N on ExecutiveDirector- N ot Disclosed
P roceeds from Initial P ublicOffering (I P O)- N ot Disclosed
Clause 49 of the Listing Agreement specifies a maximum tenure of nine years forIndependent directors but management believes that they can exceed this tenurewhich is a significant deviation.
M M Murugappan, (chairman of Carborundum Universal, Tube Investment of India, who joined in 1992) is seeking reappointment on the board of Mahindra & Mahindra .
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OFF BALAN CE SHEET ITEMS (OBS)
Purpose of OBS Reality of OBS
Transfer corporate risk. Hide liabilities and portray a healthyfinancial picture. (Example : Enron )
P rotect investors from the risk of newventures and investments done by theparent company.
Transfer of liabilities and henceimprove the credit worthiness of thefirm.
Access to alternative funding Transfer of risk even though the parentfirm is exposed to the risk and rewards.
Common off-balance sheet items:
Operating LeasesFinancial guaranteesBank Loan commitments
Contingent liabilitiesN otes Issuance SupportSecuritizationSynthetic LeasesSubsidiaries and spin-offs.Employee Benefit P lan ( P ension P lans)
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M&M OFF-BALAN CE SHEET ITEMS:
Operating Leases : M&M has a N et Block of Rs3385 Cr.
Lease holdings = Rs 33 Cr.
Group Companies: Subsidiaries 111Joint Ventures 7Associate Companies 14A significant increase of 45% in other investments in 2011 of Rs9325 Cr.
It includes a 77% increase in equity(quoted and unquoted) of Rs6568 Cr.The risk associated with these investments is not quantifiable easily.
Employee Benefit P lan: Discount Rate = 7.50 8.50% (Risk free interest rate 7.92%)Expected Return from investment = 7.12% (7.07% in 2010)Unfunded Gratuity P lans = Rs 1000 Cr.
Contingent Liabilities: Rs1896 Cr.Significant components : Excise Duty = Rs1212 CrGuarantees undertaken = Rs 316 Cr.
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Operating Leases : TATA has a Gross Block of Rs13417 Cr.
Lease holdings on Fixed Assets = Rs.255 Cr.
Group Companies: Subsidiaries 69Joint Ventures 2
Other Investments in 2011 of Rs22624 Cr.
Employee BenefitP
lan: Discount Rate = 6.75-8.50% (Risk free interest rate 7.92%)Expected Return from investment = 8.00% (8.00% in 2010)
Contingent Liabilities: Rs3370 Cr.Significant components : Sales Tax = Rs1003 Cr
Capital contracts remaining = Rs1857 Cr.
TATA OFF BALAN CE SHEET ITEMS
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ITEM TATA M&M
Operating Lease 2% of N et Assets 1% of N et Assets
Group Companies 1% YoY increase ininvestment.
45% YoY increase in investment.
Employee Benefit P lan N o revision in expected returnfrom 8%.
Increase in expected returns to7.12%
Income fromsecuritization
N egligible 25% YoY increase.
Other Income High YoY fluctuation. (100%decrease) Rs1203 Cr.
997 Cr.Sale of Investment = Rs 145Cr.Misc Income = Rs200 Cr.
COMPARISON
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Cash Flow Statement Analysis: M&M
OPERATING 2011 2010 2009 2008 2007
Cash Flow beforeExtraordinary Items
2,979.75 2,336.49 1,631.30 825.83 1,168.95
P roportion of N etIncome as CFs
87.58% 84.78% 158.97% 66.92% 88.85%
27% 43% 97% -29%
OPERATING >0135% increase in trade payables, 270% in inventoriesOver the years, increased role of trade payables, trade receivables and inventoriesManaged 158%(of net income) CF in 2009 by lowering receivables and holding
payables and inventory reductionINVESTING < 0Enhanced activity in purchase and sale of investmentsIncreased pace of investment in fixed assets
FINANCING< 0Trend of decreasing long term borrowings ( creating cash outflows)Increased outflows towards dividends
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Cash Flow Statement Analysis: TML
OPERATING 2011 2010 2009 2008 2007Cash Flow beforeExtraordinary Items
1505.56 6400.18 1284.48 6164.92 2208.85
P roportion of N etIncome as CFs
83.1% 285.71% 129.34% 304.57% 115.50%
-76% 394% -79% 179%
OPERATING >0High depreciation values and heavy cash inflows from interest create cash inflows
amounting to 100%-120% of net incomeHigh values of trade payables over the years, except 2011Able to create cash flows in multiples of net income
INVESTING < 0Heavy reduction in investment in fixed assets, investments and subsidiaries bringing
the cash outflow down by about 80%FINANCING> 0Trend of increasing short term borrowings ( creating cash outflows)Significant increase in outflows towards short term borrowings
Heavy decrease in Other long term borrowings in 2011 bringing the value lowerthan ast ears