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FA Report- M&M

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  • Mrinalini Singh (1511337)

    Pramod Rangarajan (1511341)

    Punit P Parekh (1511345)

    Shiva Rohit (1511356)

    FINANCIAL ACCOUNTING

    PROJECT REPORT

    GROUP 8

  • Page 1 of 17

    INTRODUCTION

    Mahindra & Mahindra (M&M) was founded as a steel trading company in 1945. It entered the

    automotive manufacturing with the iconic Willys Jeep in 1947. Today, M&M is one of the largest

    vehicle manufacturers in India and the largest tractor manufacturer in the world. The Brand Trust

    Report, India Study 2014, ranks M&M as 10th most trusted brand in India. It was also ranked 21st in

    Fortune India 500 companies in 2011.

    BUSINESS SUMMARY

    Mahindra and Mahindra Limited (M&M) is an Indian multinational automobile manufacturing which is

    one of the largest vehicle manufacturers by production in India and the largest manufacturer of tractors

    across the world. Its mission is to create the distribution network by providing the dealers and

    customers the largest choice of unique world-class products and services. In terms of business divisions

    Mahindra and Mahindra is divided into Automotive Division, Farm Division, Finance Division, and

    Energy Division.

    Market Profile

    Since Mahindra and Mahindra is majorly involved in the automotive division, we shall be focusing on

    this industry primarily. The Indian auto industry is one of the largest in the world with an annual

    production of 21.48 million vehicles in FY 2013-14. The automobile industry accounts for 22 per cent

    of the country's manufacturing gross domestic product (GDP).

    Sales of commercial vehicles in India grew 5.3 per cent to 52,481 units in January 2015 from a year

    ago, according to Society of Indian Automobile Manufacturers (SIAM).To match production with

    demand, many auto makers have started to invest heavily in various segments in the industry in the last

    few months. The industry has attracted foreign direct investment (FDI) worth US$ 12,232.06 million

    during the period April 2000 to February 2015. India is probably the most competitive country in the

    world for the automotive industry and future prospects are quite bright.

    STRATEGY OF MAHINDRA & MAHINDRA

    Mahindra & Mahindra believes in the power of Resilience and wishes to achieve resilience through market leadership, strong financials, value creation, innovation, portfolio diversification and customer

    centricity. It has two main divisions- automotive division and farm division. Both these divisions are

    affected by economic environment as well as nature and the arrival of monsoons. The Passenger

    Vehicle industry showed signs of revival in 2015 but it has been patchy and car industry growth is

    largely driven by new launches. There is also a trend in Utility Vehicle segment to go for more

    compact UVs. Both PV and UV showed a decline in 2015 unlike commercial vehicles, which showed a

    gain in 2015. Spare part sales also witnessed growth for Mahindra & Mahindra. The key elements of

    automotive strategy include strengthening the product portfolio, refreshing and updating existing

    product, strengthening R&D and technology capabilities, overseas expansion and exploring alternative

    fuel technology.

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    The farm division had a sharp decline due to poor monsoon and unseasonal rains in 2015. The crop

    care solutions and distributions of seeds as well as power generation sector have shown growth.

    Mahindra Defense Systems Divisions, Mahindra Defense Naval systems and Mahindra Special

    Services group are no longer mentioned in Directors Report from 2014 onwards. For Farm division the strategy includes expanding the reach of its mechanization products so it can cater to a wider consumer

    base. In order to further this and develop products to address global opportunities in the tractor and

    agro-machinery space, in May 2015, Mahindra & Mahindra signed an agreement to acquire a 33%

    voting stake in Japan based Mitsubishi Agriculture Machinery Co. Ltd.

    ACCOUNTING ANALYSIS

    The FY 15 financial statements of M&M have been prepared in accordance with the Indian GAAP and

    are in compliance with the Accounting Standards specified in Section 133 of the Companies Act, 2013.

    However, up to FY 14, the financial statements were in compliance with Accounting Standards under

    the Companies Act, 1956 and the relevant provisions. This is the most important statutory change in

    accounting and reporting policy for M&M. Besides March 31st being the year end, the use of accrual

    basis of accounting and historical cost concept, the other important accounting policies are enlisted

    below:

    1. Depreciation:- For FY 15, it is calculated in Straight Line Method over the estimated useful life of the assets which are in accordance with the Schedule II of the Companies Act, 2013.

    However, for certain asset classes, the useful life is based on the Companys expected usage pattern supported by technical assessment. For instance, for buildings (roads) useful life is 15

    years while for vehicles it is 5years. On the contrary, up to FY 14, depreciation was calculated

    in Straight Line Method over their estimated useful lives or lives based on the rates mentioned

    in Schedule XIV of the Companies Act, 1956, whichever is higher. For instance, cars and

    vehicles were depreciated at 15% of the cost.

    2. Intangible Assets: - Intangible assets are amortised on a Straight Line Basis which reflects the consumption pattern of the assets economic benefits. For example, the expenditure incurred on technical knowhow and development expenditure is amortised over the estimated period of

    benefit not exceeding 6 years and 5 years respectively.

    3. Inventories: - All costs of purchase and conversion incurred in bringing the inventories to the present state and location are included in the amount of inventories. Raw materials, finished

    goods produced and purchased for sale, manufactured components and work-in-progress are

    carried at cost or net realisable value whichever is lower. The weighted average method is used

    in determining cost. On the other hand, stores, spare and tools are carried at cost.

    4. Revenue Recognition: - The revenue from sale of products and services including export benefits are recognised when the products are shipped or services rendered. Revenue form Operations includes the excise duty recovered on sales. Dividend from investments are recognised in the Profit and Loss Account when the right to receive the payment is established.

    5. ESOPs: - The Intrinsic Value Method is used to measure the compensation cost of Employee Stock Option Scheme. The intrinsic value (the excess of market price of the underlying equity

  • Page 3 of 17

    shares on the date of grant over the exercise price of the option) is recognised and amortised on

    a Straight Line Basis over the vesting period.

    6. Borrowing Costs: - Borrowing costs that are attributable to the construction or acquisition of qualifying assets are capitalised as part of the cost of those assets. Additionally, the expenses

    incurred in the raising of long term borrowings are amortised over the period of the borrowings.

    Any unamortised expenditure is fully written off in the year of buyback or repayment of

    borrowings.

    PROFITABILITY ANALYSIS

    Profitability ratios measure the degree of operating success of the company. Investors are very keen to

    learn about the ability of the company to earn revenues in the excess of its expenses.

    Profit Margin

    Profit margin measures the net profit earned from each rupee

    of revenue. Profit margin is calculated excluding the revenue

    from exceptional items, which gives us the more appropriate

    picture of how company is performing. We see that the

    profit margin for year 2015 stands at 7.50% as compared to

    9.05% in 2014. In the year 2014 there was increase in the

    profit margin and it grew from 7.95% to 9.05% owing to

    increase in the sales and net profit. Profit grew from Rs

    3262.2 crores to Rs 3732.56 crores.

    Asset Turnover Ratio

    This indicates whether the company is utilizing its assets

    efficiently or not. In 2015 the turnover ratio decreased from

    1.40 to 1.23, which is not a good sign for Mahindra and

    Mahindra. This decrease could be attributed to the fact that

    the total assets increased by higher value as compared to its

    sales. There was also an increase in Asset turnover ratio in

    2013 from 1.48 to 1.60.

    Return on Assets:

    It is a measure of profitability given the level of investment.

    It is good indicator of companys overall performance. However it decreased from 12.72% to 9.29% in 2015. It

    could attribute to the fact that there was decrease in overall

    profit of the company given that the total assets increased.

    This decline was mainly due to economic slowdown at the

    same time poor monsoons, which severely constrained the

    rural income and domestic demand.

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    Return on Equity

    Return on equity is a measure of profitability from the

    shareholders standpoint. It measures the efficiency of the use of shareholders funds. It decreased from 23.73% to 16.56 % owing to lower profits in 2015 and greater

    shareholder funds. However there was not much change in

    the ROE in 2013-14 and 2012-13 because of not much

    change in shareholder funds.

    Operating Profit Margin

    Since non-operating items are determined by factors that

    have little to do with efficiency of management of asset, so

    we consider only revenues from sale and cost of operations

    to calculate the operating profit margin. It decreased from

    7.24% to 6.10% in 2015 owing to decrease in Net Operating

    Profit on Assets after tax. Although it increased from 6.61 %

    to 7.24% in 2014.

    Operating Asset Turnover Ratio

    Operating assets includes those, which are used in normal

    operations, which is obtained by deducting current

    investment and term deposit in banks from total assets. It

    decreased from 1.55 in 2014 to 01.38 in 2015, which says

    company net sales from its operating asset decreased. There

    was also decrease in operating asset turn over from 1.76 in

    2013 to 1.55 in 2014, which is not a good sign for the

    company as sales are coming mostly from the operating

    assets. However there was increase in operating asset turn

    over from 1.63 in 2012 to 1.76 in 2013.

    SOLVENCY RATIOS

    Solvency analysis tells us how well a company can fulfill its financial obligations. Solvency is affected

    by the debts taken by the company for financing its assets / operations. In general, heavy debt reduces a

    companys solvency as debt is riskier compared to equity.

    Debt to Equity Ratio

    This ratio provides the relationship between capitals obtained

    from creditors to the amount obtained from shareholders.

    Although debts are advantageous as it is cheaper than equity,

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    excessive use of debts can be risky. This is because the company is legally obligated to pay back the

    interest and principal amounts. This ratio also indicates the scale of Financial Leverage. Higher ratios

    means higher leverage and higher leverage leads to higher risk for creditors. For M&M, Debt to Equity

    Ratio has been seen to decrease over the past four years. The ratio in 2014-15 was 0.15 compared to

    0.28 in 2012-11. This is a good sign for the company as many analysts consider a ratio of 0.3 or less to

    be healthy. This is because lower ratios show that the company has low debt and hence low risk. It is

    therefore less affected by changing interest rates and credit conditions.

    Liabilities to Equity Ratio

    This ratio is a variant of the above Debt to Equity Ratio. It

    gives the relationship between all liabilities to the

    shareholders equity. Just like the above ratio, as liabilities to equity ratio increases the risk to the creditors increases. For M&M, Liabilities to Equity Ratio has been seen to

    decrease over the past four years. The ratio in 2014-15 was

    0.76 compared to 1.04 in 2012-11.

    Interest Cover

    This ratio indicates the ability of a company to pay its current

    interest payment with the earnings made. In simple terms, it

    measures the safety margin a company keeps for paying interest

    during a given period. This margin is useful for the company in

    order to survive unpredictable financial crisis. It is the protection

    that available to the creditors.

    For M&M, Interest Cover has been steady around 25 over

    the last three years except for 2014, when it was 34.17. This

    shows that M&M can sufficiently cover its interest expense,

    which is a good indicator for the creditors.

    LIQUIDITY RATIOS

    These ratios mention the current position of the company in terms of meeting its current or short-term

    obligations.

    Current Ratio

    Current Ratio measures firms abilities to repay its current liabilities with its short-term assets. The current ratio for

    Mahindra & Mahindra is lower than recommended 2:1 and

    has seen a 12.40% decrease from 1.29 in 2014 to 1.13 in

    2015 due to 30% decrease in cash & bank balance as well as

    a decrease in inventory and short-term loans and advances.

    This may raise liquidity concerns but is not alarming as

    current ratios of competitors are also at a lower level.

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    Quick Ratio

    Quick ratio captures firms abilities to cover its current liabilities from liquid assets, assuming receivables to be liquid. Quick

    Ratio showed an increasing trend from 2012 to 2014 but had a

    11.34% decrease from 2014 to 2015. Although current liabilities

    have been increasing year on year, it can be observed that quick

    assets, calculated as current assets minus inventory, has

    decreased from 2014 to 2015 mainly due to 30% decrease in cash

    and bank balance as well as 18.26% decrease in short term loans

    and advances.

    Inventory Turnover Ratio

    Inventory turnover ratio is the number of times a companys inventories are turned into cash and higher turnover may point

    to better inventory management. It has been declining since

    2013 and has shown a 2.9% decline from 2014 to 2015. It has

    showed a decline in 2014-2015 due to 6.28% decrease in cost

    of materials consumed and 8.88% decrease in purchases of

    Stock-in trade while inventory has been steadily increasing.

    Major component of inventory is Finished Products Produced,

    comprising 40.05% of the inventory in 2015. The other large

    component is Raw materials and Bought- out Components

    comprising 30.69% of inventory. More than 8% of both these

    components is in transit but is included in the balance sheet

    inventory.

    Average Inventory Holding Period

    Average inventory holding period has been calculated as

    365/inventory turnover ratio. This has shown an increasing

    trend from 2013 with the holding period returning back to

    2013 levels in 2015 at 27.69 days.

    Receivable Turnover Ratio

    Receivable Turnover Ratio shows the ability of firm to collect

    dues from customers. It measures the firms efficiency in credit policy requirements and collection mechanisms and the number

    of times each year receivables are turned into cash. It has not

    shown a steady trend over these four years. Although the trade

  • Page 7 of 17

    receivables have increased steadily each year mainly due to increase in export sales, sales has

    fluctuated. There has been an encouraging 3.01% increase in RTO from 2014 to 2015.

    Receivables Collection Period

    Receivables collection period has decreased from its very

    high value in 2013, but has shown 11.71% increase from

    2014 to 2015, which is an improvement. It has been

    calculated as 365/inventory turnover ratio.

    Operating Cycle

    Operating cycle is the time between acquisition of assets for

    processing and their realization in cash. It is the time taken

    to convert inventories into cash (turn inventories to

    receivables to cash). Average operating cycle has increased

    from 2013 to 2014 but is still lower than the high value of

    63.38 in 2013. In 2015 it was approximately 51.44 days and

    has increased from 2014 due to increase in inventory

    holding period.

    CAPITAL MARKET RATIOS

    These ratios are indicators, which a stock analyst can use to gauge the prevailing market sentiment

    about the concerned company. They highlight how other investors value a company. The three major

    capital market ratios for Mahindra and Mahindra are discussed below. All of them have one factor in

    common; they are juxtaposing the current market price of the companys shares with an indicator of the companys potential to generate profits.

    Price-Earnings Ratio

    The PE multiple implies the cost to acquire a rupee of

    companys earnings. It is the ratio of market price of a share to the annual EPS. It is widely quoted by analysts as an indicator

    of the companys growth prospects. The PE ratio for Mahindra and Mahindra has been steadily increasing over the last 4 years.

    However, FY 15 witnessed the steepest increase (from 15.4

    times to 21.11 times). Up to FY 14, the percentage rise in stock

    price was greater than that of EPS. However, in FY 15, the rise

    in share price from Rs. 980.65 to Rs. 1187.15 (21.06% rise) was

    accompanied by a fall in EPS from Rs. 63.67 to Rs. 56.23

    (11.69% fall). The fall in EPS is attributable to 3.9% decline in

  • Page 8 of 17

    net sales and income from operations owing to decreasing tractor business volumes and automotive

    business volumes in FY 15.

    However, the automotive sector began to show signs of recovery towards the fag end of FY15. Hence,

    the steep rise in PE multiple, in spite of a fall in EPS, is an indication of future growth prospects.

    According to HDFCs Indian Automobile Industry overview FY15, Mahindra and Mahindra has potential growth prospects in FY16 owing to recovery in the automobile sector and because of new

    launches on both product and engine side.

    Dividend Yield

    Dividend yield is the ratio of dividend per share to market

    price per share. It represents the dividend earnings for

    shareholders as a percentage of the market price of shares.

    While the dividend per share for Mahindra and Mahindra

    has been about Rs. 12.88 (average), the market price of its

    shares has risen by about 75% over the 4 years under

    consideration. Evidently, the dividend yield is low and

    steadily decreasing. The dividend per share was lower by

    Re. 1 in FY 15 owing to a fall in net profit for the year.

    However, besides dividends, the return for shareholders also

    includes the change in stock price over the period (capital

    gain). The total return in a period is thus the ratio of the sum

    of appreciation in share value and dividend to the market

    price of the share. For Mahindra and Mahindra, the total

    return to shareholders has moved from negative territory in

    FY 12 to over 18% in FY 15. This is mainly because of stable

    dividend per share and steady appreciation in share prices.

    The market factored in the future growth prospects; hence the

    steep rise in share price in FY 15 improved the total return to

    shareholders.

    Price-to-book ratio

    Price-to-book ratio is a key indicator for investors to

    understand whether the stock of a company is underpriced or

    overpriced relative to the book value of a share. For M&M,

    the ratio has increased steadily albeit at a snails pace. Although there has not been any significant issue of equity

    share capital, the book value per share has risen from Rs.

    205.50 to Rs. 325.59 (a rise of 58.44%) as against a 75.08%

    rise in the market price of a share. The year-end market

    price is suggestive of the future growth prospects of the

    company, which are not matched by that years financial reports. The surge in market price coupled with tepid growth

    in book value per share led to a spike in the price-to-book

    ratio for FY 15.

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    CASH FLOW ANALYSIS

    (All figures are in Rs. Crores)

    2015 2014 2013 2012

    Profit before exceptional items and taxation 3833.17 4316.64 4356.47 3497.62

    Operating Profit before Working Capital changes 4435.81 4834.48 4863.03 3962.45

    NET CASH FROM OPERATING ACTIVITIES 3219.49 3727.64 4145.71 2734.95

    NET CASH USED IN INVESTING ACTIVITIES

    -

    2423.09

    -

    2407.08

    -

    2895.95

    -

    1885.33

    NET CASH USED IN FINANCING ACTIVITIES

    -

    1584.82 -823.93

    -

    1221.89 -306.15

    NET INCREASE/(DECREASE) IN CASH AND CASH

    EQUIVALENTS -788.42 496.63 27.87 543.47

    Capital Expenditure (Purchase of Fixed Assets)

    -

    2034.55

    -

    1704.30

    -

    1435.62

    -

    1374.69

    Free Cash Flow 1184.94 2023.34 2710.09 1360.26

    The above table summarizes the important figures from the Cash Flow Statement of Mahindra and

    Mahindra over the four years under consideration. The purchase and sale of current investments

    (mainly mutual funds) has been exceptionally high in all the four years. Additionally, cash flow from

    financing activities has been negative in all the four years because of greater loan repayments than new

    long-term borrowings (except in FY 12) and substantial dividend and interest payments. The Cash

    Flow statement is analyzed using the following ratios:-

    Earnings Quality

    The cash flow statement provides an important measure to

    ascertain the earnings quality of the company. However, it

    cannot be denied that the earnings represented by an

    increase in the companys cash position are the highest quality earnings. In the last two years, M&M earnings

    quality has deteriorated from operating cash flow being 95%

    of net income (in FY 13) to 84% of net income (in FY 15).

    The reasons are twofold. Firstly, the net income has declined

    in the last two years. While the automotive business

    witnessed a fall in volumes. Secondly, more money was

    blocked in trade receivables due to growth in volume of

    tractor sales in FY14 and increase in export sales in FY15.

    Besides, other income has been on the higher side due to

    higher dividend and interest income.

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    Free Cash Flow to Net Income

    Free cash flow is the difference between cash flow from

    operating activities and capital expenditure in plant, property

    and equipment (necessary for growth of business and

    maintenance of firms assets). Free cash flow thereby is an indicator of the firms ability to finance expansionary activities using internally generated funds. For comparison

    purposes, free cash flow is shown as a percentage of the net

    income (profit before exceptional items and tax). (3)

    Despite a fall in net income, the ratio has declined steeply in

    the last two years i.e free cash flow has fallen by a greater

    proportion than net income. This is because of increasing

    capital expenditure on New Product Development, Capacity

    Enhancement and Research and Development.

    Operating Cash Flow Ratio

    Operating Cash Flow Ratio is the ratio of cash flow from

    operating activities to current liabilities. It is a very

    important liquidity ratio from the cash flow statement. It

    indicates the firms ability to meet it short-term debt obligations from its operating cash flows. This ratio is a

    cause of concern for M&M. It is not only less than 1

    (suggesting that the company is not generating enough cash

    from operating activities to meet its current liabilities) but

    has declined substantially in the last two years.

    Besides a fall in the cash flow from operating activities in

    the last two years (because of a fall in net income and

    increase in trade receivables and other income), the current

    liabilities (especially trade payables) have been high and

    increasing. Although increase in trade payables generates

    cash for working capital, it also creates an obligation to pay

    in the near future.

    LEARNINGS

    As an investor I see that the purchase and sale of current investments (mainly mutual funds) has been

    exceptionally high in all the four years. The PE ratio for Mahindra and Mahindra has been steadily

    increasing over the last 4 years despite decline in net profit. I is possibly due to future growth of

    automotive sector and companys new launches. Although the growth perspectives seems good, company seems overpriced. The Accounting Policies must be carefully perused. Minor discrepancies in

    the policy may lead to major changes in the profits of the company.

  • Page 11 of 17

    Annexure 1

  • Page 12 of 17

    Annexure 2

  • Page 13 of 17

    Annexure 3

  • Page 14 of 17

    Annexure 4

  • Page 15 of 17

    References

    1. Earnings-quality-analysis-operating, thevalueatrisk.blogspot.in

    2. Free-cash-flow-alternate-bottom-line, thevalueatrisk.blogspot.in