Following India's growing openness, the arrival of new and existing models, easy availability of finance at relatively low rate of interest and price discounts offered by the dealers and manufacturers all have stirred the demand for vehicles and a strong growth of the Indian automobile industry. So I feel that it is a wise decision to make an investment in automobile sector.
I am planning to invest in Tata Motors Ltd as it is the largest commercial vehicle manufacturer in India and one of the top three players in the passenger vehicles segment. It was established in 1945 to manufacture steam locomotives and have a diverse product range now.
As a potential investor, I would like to analyse the financial performance of Tata motors before taking the final decision.
Mahindra & Mahindra Ltd, Maruti Suzuki India Ltd, Force motors Ltd, Eicher motors Ltd & Hindustan motors Ltd are the other major players in the Indian automobile industry. So as to set a benchmark to compare the performance of Tata motors Ltd with, I had to select a company from this peer group.
When comparing the sales turn over and net profit, Tata motors Ltd & Maruti Suzuki India Ltd are standing very close with figures of 35,593.05 & 2,240.08 for Tata motors Ltd and 29,623.01& 2,497.62 for Maruti Suzuki India Ltd. All the other automobile firms considered in the peer group has very low sales turn over and net profit, below 15,000.00 & 1000.00 respectively.
So I'm choosing Maruti Suzuki India Ltd as the benchmark firm, and is going to do the financial analysis of Tata motors in comparison with the performance of Maruti Suzuki India Ltd.
Common size Balance sheet
A common-size balance sheet is a balance sheet where every item in that has been restated to be a percentage of total assets. Typically common size balance sheets are presented in reference to total assets. This format allows the investor to compare the capital structure over time and across companies. In fact, creating such a presentation allows an investor to compare two companies even if they use different currencies, as both size and currency exchange issues are negated with the conversion to common size.
Knowing the accounting equation assets-liabilities=owner's equity, makes reading the common size balance sheet much easier. If you want to know if a company is thriving, the common size balance sheet makes for easy analysis when comparing one company to another. Table 1 shows the common size balance sheet for Tata motors Ltd & Maruti Suzuki India Ltd for the years 2007, 2008 and 2009.
Table 1 : Common Size Balance Sheets of Tata Motors &Maruti Suzuki India
Tata Motors
Maruti Suzuki India
Mar '07
Mar '08
Mar '09
Mar '07
Mar '08
Mar '09
Sources Of Funds
Total Share Capital
3.54%
2.73%
2.01%
1.93%
1.55%
1.44%
Equity Share Capital
3.54%
2.73%
2.01%
1.93%
1.55%
1.44%
Reserves
59.37%
52.61%
46.38%
89.64%
88.79%
91.60%
Revaluation Reserves
0.24%
0.18%
0.10%
0.00%
0.00%
0.00%
Net worth
63.15%
55.52%
48.49%
91.57%
90.34%
93.04%
Secured Loans
18.59%
17.44%
20.55%
0.85%
0.00%
0.00%
Unsecured Loans
18.27%
27.04%
30.96%
7.58%
9.66%
6.96%
Total Debt
36.85%
44.48%
51.51%
8.43%
9.66%
6.96%
Total Liabilities
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Mar '07
Mar '08
Mar '09
Mar '07
Mar '08
Mar '09
Application Of Funds
Gross Block
80.67%
76.71%
54.40%
82.12%
78.21%
86.83%
Less: Accum. Depreciation
44.99%
38.55%
24.49%
46.59%
42.82%
46.30%
Net Block
35.68%
38.15%
29.91%
35.54%
35.39%
40.53%
Capital Work in Progress
23.10%
35.87%
27.21%
3.19%
7.90%
8.58%
Investments
22.77%
34.78%
50.74%
45.55%
55.61%
31.59%
Inventories
22.99%
17.15%
8.72%
9.53%
11.14%
8.98%
Sundry Debtors
7.19%
8.01%
6.08%
9.99%
7.04%
9.15%
Cash and Bank Balance
4.92%
5.31%
2.50%
1.53%
3.48%
2.38%
Total Current Assets
35.10%
30.47%
17.31%
21.05%
21.66%
20.51%
Loans and Advances
57.07%
34.22%
23.12%
14.33%
12.59%
18.02%
Fixed Deposits
2.67%
11.67%
1.97%
17.48%
0.00%
16.93%
Total CA, Loans &Advances
94.85%
76.35%
42.40%
52.85%
34.25%
55.46%
Deferred Credit
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Current Liabilities
63.95%
71.11%
42.91%
30.58%
29.19%
32.37%
Provisions
12.54%
14.09%
7.34%
6.55%
3.97%
3.79%
Total CL &Provisions
76.49%
85.20%
50.26%
37.13%
33.15%
36.16%
Net Current Assets
18.36%
-8.84%
-7.86%
15.72%
1.10%
19.30%
Miscellaneous Expenses
0.09%
0.04%
0.01%
0.00%
0.00%
0.00%
Total Assets
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Common size Income statement
Common size income statement refers to an income statement in which each account is expressed as a percentage of the value of sales. This type of financial statement can be used to allow for easy analysis between companies or between time periods of a company.
Common size income statement analysis allows an analyst to determine how the various components of the income statement affect a company's profit. Table 2 shows the common size income statement for Tata motors Ltd & Maruti Suzuki India Ltd for the years 2007, 2008 and 2009.
Table 2 : Common Size Income Statement of Tata motors & Maruti Suzuki India
Tata Motors
Maruti suzuki India
Profit &Loss account
Profit &Loss account
Mar '07
Mar '08
Mar '09
Mar '07
Mar '08
Mar '09
Income
Sales Turnover
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Excise Duty
14.23%
13.15%
10.08%
14.70%
14.78%
11.34%
Net Sales
85.77%
86.85%
89.92%
85.30%
85.22%
88.66%
Other Income
3.58%
2.22%
3.23%
1.95%
2.33%
2.10%
Stock Adjustments
1.12%
-0.12%
-0.83%
-1.16%
1.59%
-1.53%
Total Income
90.47%
88.94%
92.31%
86.09%
89.14%
89.24%
Expenditure
Raw Materials
63.94%
63.07%
65.88%
62.58%
65.84%
68.36%
Power &Fuel Cost
1.05%
0.98%
1.07%
0.56%
0.69%
0.83%
Employee Cost
4.40%
4.66%
5.44%
1.66%
1.68%
2.01%
Other Manufacturing Expenses
2.81%
2.73%
3.04%
2.26%
2.47%
3.06%
Selling and Admin Expenses
4.84%
6.63%
5.79%
2.78%
2.46%
3.21%
Miscellaneous Expenses
3.38%
2.91%
5.04%
1.38%
1.36%
1.30%
Preoperative Exp Capitalised
-1.86%
-3.42%
-3.21%
-0.08%
-0.09%
-0.10%
Total Expenses
78.57%
77.58%
83.04%
71.14%
74.41%
78.68%
Operating Profit
8.32%
9.15%
6.04%
13.00%
12.40%
8.45%
PBDIT
11.90%
11.37%
9.27%
14.94%
14.73%
10.56%
Interest
1.47%
1.42%
2.47%
0.22%
0.28%
0.22%
PBDT
10.44%
9.94%
6.80%
14.73%
14.45%
10.34%
Depreciation
1.89%
1.97%
3.06%
1.56%
2.68%
3.02%
Other Written Off
0.27%
0.19%
0.18%
0.00%
0.00%
0.00%
Profit Before Tax
8.28%
7.78%
3.55%
13.16%
11.77%
7.32%
Extra-ordinary items
0.00%
0.00%
0.05%
0.19%
0.36%
0.16%
PBT (Post Extra-ord Items)
8.28%
7.78%
3.61%
13.36%
12.13%
7.48%
Tax
2.12%
1.65%
0.04%
4.06%
3.60%
1.95%
Reported Net Profit
6.15%
6.13%
3.51%
9.00%
8.16%
5.21%
Total Value Addition
14.63%
14.51%
17.16%
8.56%
8.57%
10.32%
Preference Dividend
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Equity Dividend
1.86%
1.75%
1.09%
0.75%
0.68%
0.43%
Corporate Dividend Tax
0.32%
0.25%
0.12%
0.13%
0.12%
0.07%
Per share data (annualised)
Shares in issue (lakhs)
12.40%
11.64%
18.01%
16.64%
13.63%
12.36%
Earning Per Share (Rs)
0.16%
0.16%
0.07%
0.31%
0.28%
0.18%
Equity Dividend (%)
0.48%
0.45%
0.21%
0.52%
0.47%
0.30%
Book Value (Rs)
0.57%
0.61%
0.84%
1.37%
1.37%
1.38%
Ratio Analysis
Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements. The level and historical trends of these ratios can be used to make inferences about a company's financial condition, its operations and attractiveness as an investment. Financial ratios are calculated from one or more pieces of information from a company's financial statements.
In isolation, a financial ratio is a useless piece of information. In context, however, a financial ratio can give a financial analyst an excellent picture of a company's situation and the trends that are developing.
Table 3 : Financial Ratios of Tata motors and Maruti Suzuki India
Key Financial Ratios of Tata Motors
Key Financial Ratios of Maruti Suzuki India
Mar'07
Mar'08
Mar'09
Mar'07
Mar'08
Mar'09
Profitability Ratios
Operating Profit Ratio (%)
9.7
10.53
6.71
14.88
14.12
9.18
Net Profit Ratio (%)
6.94
6.96
3.77
10.29
9.34
5.72
Return On Capital Employed (%)
25.82
18.96
6.41
30.65
26.18
17.37
Return On Net Worth (%)
27.96
25.98
8.09
22.79
20.56
13.04
Return on Assets
9.98
7.77
241.09
15.22
13.95
--
Liquidity And Solvency Ratios
Current Ratio
0.86
0.64
0.44
1.4
0.91
1.51
Quick Ratio
0.92
0.66
0.58
1.13
0.66
1.26
Debt Equity Ratio
0.59
0.8
1.06
0.09
0.11
0.07
Debt Coverage Ratios
Interest Cover
7.19
6.28
2.43
61.01
40.93
34.21
Management Efficiency Ratios
Debtors Turnover Ratio
35.6
30.08
19.11
21.12
25.76
26.33
Asset Turnover Ratio
3.08
2.69
1.88
2.41
2.48
2.38
Interpretations of the financial ratios
Profitability ratios
Profitability ratios represent the business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time.
Operating Profit Ratio
The Operating Profit Ratio illustrates how efficiently the firms are using business operations to generate profit. This ratio also shows the success rate of these firms. The formula for Operating Profit Margin is:
Operating Profit Margin = Earnings before Interest & Taxes / Net Sales * 100
The Operating profit ratio for Tata motors for the year 2007, 2008 and 2009 are 9.7 %, 10.53 % and 6.71 % respectively, and for Maruti Suzuki India the operating profit ratios are 14.88 %, 14.12 % and 9.18 % for the years 2007, 2008 and 2009.
The decrease in operating profit ratio in 2009 can be accounted to the decline in the operating profit from 3,030.52 in 2008 to1,723.10 in 2009. For Maruti Suzuki India also, operating profit has dropped from 2,628.70 in 2008 to 1,976.60 in 2009. The pattern shows that there was downfall in the automobile industry in the period 2008-2009.
Net Profit Ratio
Net Profit Ratio represents exactly how the managers and operations of a business are performing. Net Profit Ratio compares the net profit of a firm with total sales achieved. The formula for Net Profit Ratio is:
Net Profit Ratio = Net Profit / Net Sales * 100
The Net profit ratio of Tata Motors has been decreased from 6.94% in 2007 to 3.77% in 2009, because of the downfall in the operating profit. The same reason has caused the decline of Net profit ratio of Maruti Suzuki India to come down from 10.29 % in 2007 to 5.72 % in 2009. This dowfalls can be accounted to the decrease in the operating profit for the firms.
Return On Capital Employed
Return on Capital Employed (ROCE) is a measuring tool that measures the efficiency and profitability of capital investments undertaken by a company. Return on Capital Employed ratio also indicates whether the company is earning sufficient revenues and profits in order to make the best use of its capital assets. It is expressed in the form of a percentage, and the higher the percentage, the better.
The formula for Return on Capital Employed (ROCE) is:
ROCE = Operating Profit/ Shareholder's Equity
Tata Motors was having a good ROCE of 25.82 % in 2007, but has dropped to 6.41 % in 2009. For Maruti Suzuki India also, there is a downtrend in the ROCE from 30.65% in 2007 to 17.37% in 2009. This indicates that both these companies were not investor friendly in the time frame considered.
Return On Net worth
Return on Equity or Net Worth of a company measures the ability of the management of the company to generate adequate returns for the capital invested by the owners of the company. Generally a return of 10% would be desirable to provide dividends to owners and have funds for future growth of the company.
The formula for Return on Net Worth (RONW) is:
RONW = Net Profit / Net Worth * 100
RONW of Tata Motors have decreased from 27.96% in 2007 to 8.09% in 2009, where RONW of Maruti Suzuki India has decreased from 22.79% in 2007 to 13.04% in 2009.
Return On Total Assets
The Return on Assets of a company determines its ability to utilize the Assets employed in the company efficiently and effectively to earn a good return. The ratio measures the percentage of profits earned per dollar of Asset and thus is a measure of efficiency of the company in generating profits on its Assets.
The formula for Return on Total Assets (ROTA) is:
ROTA= (Net Profit / Total Assets) x 100
For Tata motors, ROTA has increased from 9.98 in 2007 to 241 in 2009. This implies that there was a decrease in the net asset of Tata Motors.
Liquidity and Solvency ratios
Current Ratio
The Current ratio is considered as a test of liquidity for a company. It expresses the 'working capital' relationship of current assets available to meet the company's current liabilities.
The formula for Current Ratio is:
Current Ratio = Total Current Assets/ Total Current Liabilities
Current ratio for Tata motors of gradually decreased from 0.86 in 2007 to 0.44 in 2009. For Maruti Suzuki India, it has increased from 1.4 in 2007 to 1.51 in 2009, even though it had dropped to 0.91 in 2008.
From the Current ratio, we can infer that Tata motors doesn't have sufficient funds to repay the current liabilities where as Maruti Suzuki India has surplus fund to cover its current liabilities.
Quick Ratio
Sometimes a company will be having a heavy inventory as part of its current assets, which might be obsolete or slow moving. So Current ratio may not be able to provide the exact situation of the company. Quick ratio is measured by eliminating inventory from current assets and then doing the liquidity test. The ratio is regarded as an acid test of liquidity for a company. It expresses the true 'working capital' relationship of its resources available to meet the company's current obligations.
The formula for Quick Ratio is:
Current Ratio = (Total Current Assets - Inventory)/ Total Current Liabilities
The Quick ratios for Tata motors were 0.92 in 2007, 0.66 in 2008 and 0.58in 2009 while the same for Maruti Suzuki India were 1.13in 2007, 0.66 in 2008 and 1.26 in 2009. From this data, it can be observed that Maruti Suzuki India had enough resources apart from the inventory to pay off its current liabilities. But Tata Motors is having a shortage in quick assets to settle the current liabilities.
Debt Equity Ratio
Debt to equity ratio is essentially a company's total liabilities divided by its stockholders' equity. It gives an indication of a company's proportionate use of debt and equity for financing its assets. If the liabilities exceed the net worth then in that case the creditors have more stake than the shareowners.
The formula for Debt Equity Ratio is:
Debt to Equity Ratio = Total Liabilities / Owners Equity or Net Worth
Tata motors were having a Debt equity ratio of 0.59 in 2007 which increased to 1.06 in 2009. For Maruti Suzuki India, the Debt equity ratios were 0.09 in 2007, 0.11 in 2008 and 0.07 in 2009. This means Tata motors has employed a higher amount of external funds for its operations, while Maruti Suzuki India has employed only a nominal amount of external fund.
Debt Coverage Ratios
Interest Coverage Ratio
The interest coverage ratio is a measure of the number of times a company could make the interest payments on its debt with its earnings before interest and taxes, also known as EBIT. The lower the interest coverage ratio, the higher the company's debt burden and the greater the possibility of bankruptcy.
The formula for Interest coverage ratio is:
Interest Coverage Ratio = PBIT/Interest
The Interest coverage ratio for Tata motors decreased gradually from 7.19 in 2007 to 2.43 in 2009. This is because of the reduction in profit and the increase in the borrowed capital. For Maruti Suzuki India also, Interest coverage ratio decreased from 61.01 in 2007 to 34.21 in 2009. This is mainly because of the drop in profit, as Maruti Suzuki India is not employing much borrowed capital for the operations.
Management Efficiency Ratios
Debtors turnover Ratio
Debtors turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year.
The formula for Debtors turnover ratio is:
Debtors turnover ratio = (Average Debtors/Sales) x 365 for days
The debtors turnover ratio for Tata motors decreased from 35.6 in 2007 to 19.11 in 2009, where the same for Maruti Suzuki India has increased from 21.12 in 2007 to 26.33 in 2009.
Asset turnover Ratio
The total asset turnover ratio measures the ability of a company to use its assets to generate sales. The total asset turnover ratio considers all assets including fixed assets, like plant and equipment, as well as inventory and accounts receivable.
The formula for the total asset turnover ratio is:
Asset Turnover Ratio = Net Sales/Total Assets
Asset turnover ratio of Tata motors had dropped from 3.08 in 2007 to 1.88 in 2009. For Maruti Suzuki India, it had been almost at a constant level with 2.41 in 2007, 2.48 in 2008 and 2.38 in 2009. From the asset turnover ratio, we can observe that the net sales for Tata motors were declining in the specified period and the firm was not able to use the assets optimally to generate sales.
Inference from the Analysis
From the outcomes of the ratio analysis, it can be seen that there was a general downtrend in the Indian automobile industry from the year 2007 to 2009, which may be accounted to Global recession that happened from 2008. Considering the profitability ratio, both Tata motors and Maruti Suzuki India had a fall in operating profit and there was a drop in returns from both the firms.
While considering the Liquidity ratios, Maruti Suzuki India is at a stronger position compared to Tata motors, because of their higher percentage of owner's capital in the total asset. Also the debt equity ratio is in the favour of Maruti Suzuki India as it has surplus current assets to settle the short term liabilities whereas Tata motors has a shortage in funds available to settle the current obligations.
Conclusion
From the financial analysis conducted,
