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Capital Structure Analysis of Indian Automobile Industry

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AcknowledgementA successful project is a combined effort of the teacher for guidance and inspiration and the project team. We wish to extend our sincere gratitude to Dr. Hamendra Kumar Porwal, for imparting in depth knowledge of Finance and providing us an opportunity to do a project work on Capital Structure of the Indian Automobile Industry . The support thus, helped us to develop a meaningful report. Also, we would like to convey our thanks to all the people who have been an integral part during the entire course of project completion and have extended a helping hand for the same.


ContentsSl. No 1 2 3 4 Topic Overview of the Indian Automobile Industry Scope of the Study What is meant by Capital Structure? Factors affecting Capital Structure?

Analysis5 6 7 8 9 10 11 Maruti Suzuki Tata Motors Mahindra & Mahindra Hero Honda Bajaj Auto Conclusion Bibliography


Domestic car sales up 24.4% in MarchPTI April 8, 2011

Mahindra sales up 22% in JanPTI February 1, 2011

Maruti sells 1mn cars in 10 monthsPTI January 27, 2011

Bajaj Auto net up 40% to Rs 667 crPTI January 19, 2011

Tata Motors net jumps 102-foldMail Today Bureau November 10, 2010

The Indian automobile industry is riding high, like never before. They say that history has an eerie habit of repeating itself. As far as the automobile industry is concerned, the monumental returns and the off-the-charts growth rates reported in India recently bear testimony to this adage. The events that unfolded in Detroit years ago seem to be repeating themselves today, in India. For the automobile industry, future in India seems like an evergreen pasture!

Overview of the Indian Automobile IndustryStarting its journey from the day when the first car rolled on the streets of Mumbai in 1898, the Indian automobile industry has demonstrated a phenomenal growth to this day. Today, the Indian automobile industry presents a galaxy of varieties and models meeting all possible expectations and globally established industry standards. Some of the leading names echoing in the Indian automobile industry include Maruti Suzuki, Tata Motors, Mahindra and Mahindra, Hyundai Motors, Hero Honda and Hindustan Motors in addition to a number of others. During the early stages of its development, Indian automobile industry heavily depended on foreign technologies. However, over the years, the manufacturers in India have started using their own technology evolved in the native soil. The thriving market place in the country has attracted a number of automobile manufacturers including some of the reputed global leaders to set their foot in the soil looking forward to enhance their profile and prospects to new heights. Following a temporary setback on account of the global economic recession, the Indian automobile market has


once again picked up a remarkable momentum witnessing a buoyant sale for the first time in its history in the month of September 2009. After the economic downturn and difficult market conditions in the automotive sector globally in 2008-09, during the year, economies across the world (with a few exceptions) showed signs of recovery and growth. The Indian economy bounced back quickly and strongly growing at 7.2% in 2009-10. The automotive sector in India started the year steadily, gathered momentum in different segments in the second half of the year and ended the year with a record growth and performance. The automobile sector of India is the seventh largest in the world. In a year, the country manufactures about 2.6 million cars making up an identifiable chunk in the world s annual production of about 73 million cars in a year. The country is the largest manufacturer of motorcycles and the fifth largest producer of commercial vehicles. Industry experts have visualized an unbelievably huge increase in these figures over the immediate future. The figures published by the Asia Economic Institute indicate that the Indian automobile sector is set to emerge as the global leader by 2012. In the year 2009, India rose to be the fourth largest exporter of automobiles following Japan, South Korea and Thailand. Experts state that in the year 2050, India will top the car volumes of all the nations of the world with about 611 million cars running on its roads.

Scope of this studyThrough this project we are attempting to study the capital structure of 5 of the highly profitable Indian automotive companies. They are:

Maruti Suzuki India Limited Tata Motors Limited Mahindra & Mahindra Limited Hero Honda Limited Bajaj Auto Limited

We have analysed data including the long term and short term debts, debt-equity ratio, earnings per share, profit before tax etc. We have also graphically represented the data. For the study data for the last 5 years have been used (2006 2010). Data was gathered from the balance sheets, annual reports, chairman s report, profit & loss account etc. of the respective companies. The scope of the study is limited to automobiles falling under the category of Two-wheelers (Bajaj Auto, Hero Honda), Three-wheelers (Bajaj Auto, M&M), Cars (Tata Motors, Maruti Suzuki, and M&M) and Commercial Vehicles (excluding Tractors) (Tata Motors, M&M).


What does Capital Structure mean?A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. For example, a firm that sells Rs. 20 billion in equity and Rs. 80 billion in debt is said to be 20% equity-financed and 80% debt-financed. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.

Factors Determining Capital Structurey

Trading on Equity- The word equity denotes the ownership of the company. Trading on equity means taking advantage of equity share capital to borrowed funds on reasonable basis. It refers to additional profits that equity shareholders earn because of issuance of debentures and preference shares. It is based on the thought that if the rate of dividend on preference capital and the rate of interest on borrowed capital is lower than the general rate of company s earnings, equity shareholders are at advantage which means a company should go for a judicious blend of preference shares, equity shares as well as debentures. Trading on equity becomes more important when expectations of shareholders are high.


Degree of control- In a company, it is the directors who are so called elected representatives of equity shareholders. These members have got maximum voting rights in a concern as compared to the preference shareholders and debenture holders. Preference shareholders have reasonably less voting rights while debenture holders have no voting rights. If the company s management policies are such that they want to retain their voting rights in their hands, the capital structure consists of debenture holders and loans rather than equity shares.


Flexibility of financial plan- In an enterprise, the capital structure should be such that there is both contractions as well as relaxation in plans. Debentures and loans can be refunded back as the time requires. While equity capital cannot be refunded at any point which provides rigidity to plans. Therefore, in order to make the capital structure possible, the company should go for issue of debentures and other loans.



Choice of investors- The company s policy generally is to have different categories of investors for securities. Therefore, a capital structure should give enough choice to all kind of investors to invest. Bold and adventurous investors generally go for equity shares and loans and debentures are generally raised keeping into mind conscious investors.


Capital market condition- In the lifetime of the company, the market price of the shares has got an important influence. During the depression period, the company s capital structure generally consists of debentures and loans. While in period of boons and inflation, the company s capital should consist of share capital generally equity shares.


Period of financing- When company wants to raise finance for short period, it goes for loans from banks and other institutions; while for long period it goes for issue of shares and debentures.


Cost of financing- In a capital structure, the company has to look to the factor of cost when securities are raised. It is seen that debentures at the time of profit earning of company prove to be a cheaper source of finance as compared to equity shares where equity shareholders demand an extra share in profits.


Stability of sales- An established business which has a growing market and high sales turnover, the company is in position to meet fixed commitments. Interest on debentures has to be paid regardless of profit. Therefore, when sales are high, thereby the profits are high and company is in better position to meet such fixed commitments like interest on debentures and dividends on preference shares. If company is having unstable sales, then the company is not in position to meet fixed obligations. So, equity capital proves to be safe in such cases.


Sizes of a company- Small size business firms capital structure generally consists of loans from banks and retained profits. While on the other hand, big companies having goodwill, stability and an established profit can easily go for issuance of shares and debentures as well as loans and borrowings from financial institutions. The bigger the size, the wider is