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  • THESIS

    SUBMITTED TO THE

    UNIVERSITY OF LUCKNOW

    FOR THE DEGREE OF

    By

    FINANCIAL APPRAISAL OF AUTOMOBILEINDUSTRY IN INDIA

    (A CASE STUDY OF HONDA SIEL CARS INDIA LIMITED)

    Associate ProfessorCo-Supervisor

    Former Head & DeanSupervisor

    Doctor Of Philosophy In

    COMMERCE

    DEPARTMENT OF COMMERCE

    UNIVERSITY OF LUCKNOW

    LUCKNOW, U.P., INDIA

    2014

    Dr. Ram Milan Prof. R.K. Tripathi

    Nidhi Agarwal

  • CERTIFICATE

    We certify that Ms. Nidhi Agarwal has carried out the research work on the

    topic Financial Appraisal of Automobile Industry in India (A Case Study

    of Honda Siel Cars India Limited) under our supervision. As claimed by the

    researcher in her declaration, this thesis is her genuine and original research

    work confirming to the subject. She fulfills the conditions laid down in the

    relevant ordinances.

    (Prof. R.K. Tripathi) Former Head & Dean

    Supervisor

    (Dr. Ram Milan)

    Associate Professor

    Co-Supervisor

  • i

    DECLARATION

    The thesis entitled Financial Appraisal of Automobile Industry in India (A

    Case Study of Honda Siel Cars India Limited) is a genuine and original

    work submitted by me in fulfillment of the award of degree of Doctor of

    Philosophy in Commerce, University of Lucknow.

    I further declare that the above thesis has not been submitted to any other

    university or institute partially or wholly for the award of any other degree and

    the references and sources have been duly acknowledged.

    Date:

    Place: Lucknow

    (Nidhi Agarwal )

    (Department of Commerce)

    Lucknow University,

    Lucknow.

  • ii

    PREFACE

    One of the major industrial sectors in India is the automobile sector.

    Subsequent to the liberalization, the automobile sector has been aptly described

    as the sunrise sector of the Indian economy. This sector has witnessed

    tremendous growth during the last two decades. On the canvas of the Indian

    economy, automobile industry occupies a prominent place. Due to its deep

    forward and backward linkages with several key segments of the economy,

    automobile industry has a strong multiplier effect and is capable of being the

    driver of economic growth. A sound transportation system plays a pivotal role

    in the country's rapid economic and industrial development. The well-

    developed Indian automobile industry skillfully fulfils this catalytic role by

    producing a wide variety of vehicles- passenger cars, light, medium and heavy

    commercial vehicles, multi-utility vehicles such as jeeps, scooters,

    motorcycles, mopeds, three wheelers, tractors etc.

    It has been able to restructure itself, absorb newer technology, align itself to the

    global developments and realize its potential. This has significantly increased

    automobile industry's contribution to overall industrial growth in the country.

    Automobile Industry was delicensed in July 1991 with the announcement of

    the New Industrial Policy. The passenger car industry was, however,

    delicensed in 1993. With the gradual liberalization of the automobile sector

    since 1991, the number of manufacturing facilities in India has grown

    progressively. The economic contribution of the sector is significant. The

    industry contributes ~22% of India's manufacturing GDP and ~7% of

    India's overall GDP. The sector has also contributed to social development

    and benefited local communities. It is one of the leading employment

    providers in the country and has helped create nearly 19 million jobs

    through direct and indirect employment.

    The present study is undertaken to make the financial appraisal of automobile

    industry in India. The performance of Indian Automobile Industry is analysed

  • iii

    on the basis of production trend, sales trend, profitability analysis, financial

    structure, financial performance and assessment of financial health. An

    appraisal of performance is made from the accounting point of view to

    assess the effectiveness of plans, policies and objectives of the industry

    by measuring the efficiency of the automobile industry under study in various

    areas of operations. The ever increasing importance and role of automobile

    industry in t he economic growth of a country, particularly in the

    developing country like India have attracted several academicians,

    professional institutions, research and administrations to conduct diversified

    studies in this area.

    The study is divided into 7 chapters. Chapter-1 introduces the topic and

    presents the profile of automobile industry in India. This Chapter also includes

    statement of the problem, significance of the study, selection of automobile

    industry, objectives of research, hypothesis, research design and limitations of

    the study. Chapter-2 presents a brief review of related literatures on the subject.

    Chapter-3 presents the profile of the company selected for the study i.e. Honda

    Cars India Limited. Chapter-4 discusses the tools and techniques of financial

    appraisal. Chapter-5 deals with the financial appraisal of automobile industry in

    India covering production, sales and exports of various heads of vehicles.

    Chapter-6 primarily focuses on financial appraisal of Honda Cars India

    Limited. We shall also present the comparative financial appraisal of the three

    companies under study i.e. Honda Cars India Ltd., Maruti Suzuki India Ltd.

    and Tata Motors Ltd. Chapter-7 deals with conclusions and suggestions.

    Date (Nidhi Agarwal)

    Place

  • iv

    ACKNOWLEDGEMENT

    Writing this thesis would have been a lonely and isolating task without the

    love, support, patience and dedication of people who walked along with me on

    this journey. People who helped me will always hold a special place in my

    heart and I owe my sincere thanks to all of them.

    I wish to express my sincere thanks and deep sense of gratitude to my

    supervisor, Prof. R. K. Tripathi, Former Dean and Head, Department of

    Commerce, Lucknow University, who spared his valuable time and provided

    me encouragement and guidance for my research work. I am extremely grateful

    to my Co-supervisor, Dr. Ram Milan, Associate Professor, Department of

    Commerce, Lucknow University, for his encouragement and incessant help

    during the research work. My simple words of acknowledgement are not

    sufficient to express my gratitude to them for their intellectual guidance,

    gracious advice, whole hearted co-operation and constant inspiration. In spite

    of their busy schedule, they supervised my work and instilled confidence in me

    at each and every step.

    I also like to express my sincere thanks to Prof. Arvind Kumar, Head of

    Department of Commerce, Lucknow University and Prof. A. Chatterjee,

    Dean, Faculty of Commerce, Lucknow University, for their valuable guidance

    and support extended to me during the course of studies. I am also thankful to

    Prof. S.K. Shukla and all the teachers of the Department and Faculty of

    Commerce, Lucknow University for extending their kind help.

    I express my special gratitude to my family members, elders and youngers, for

    their blessings and moral support which was a constant source of inspiration to

    me. I express my special thanks to my parents Mr. Gyanesh Agarwal and

    Mrs. Kusum Agarwal, who consistently encouraged me to successfully carry

    out the study.

  • v

    I thankfully acknowledge the help and Cooperation extended by the library

    staff of different libraries for providing necessary library facilities for

    completion of this work. I am also thankful to all those who extended their

    support directly or indirectly for this study.

    Date (Nidhi Agarwal)

    Place

  • vi

    LIST OF CONTENTS

    CHAPTER Title Page

    No.

    Declaration

    Preface

    Acknowledgement

    List of Contents

    List of Tables

    List of Diagrams

    i

    ii-iii

    iv-v

    vi-vii

    viii-xi

    xii-xiv

    1

    Introduction

    1.1 Statement of the Problem

    1.2 Significance of the study

    1.3 Selection of Automobile Industry

    1.4 Objectives of Research

    1.5 Research Design

    1.6 Limitations of the Study

    1.7 Automobile Industry: its profile

    1.8 Classification of Indian Automobile

    Industry

    1.9 Major Automobile Companies in India

    1.10 Profile of Major Passenger Vehicles

    Companies

    1-72

    2 Review of Literature

    73-82

    3 Honda Siel Cars India Limited - Its Profile

    3.1 Hondas Global Vision

    3.2 Hondas Milestones

    3.3 Profile of Honda Siel Cars India Ltd.

    3.3.1 Product Range

    3.3.2 Awards and Accolades

    83-98

  • vii

    3.3.3 Future Prospects of the Company

    4 Financial Appraisal Techniques - An Overview

    4.1 Analysis and Interpretation of Financial

    Statements

    4.2 Types of Analysis and Interpretation

    4.3 Tools and Techniques of Financial Analysis

    4.4 Classification of Ratios

    4.5 Usefulness of Ratio Analysis

    4.6 Limitations of Ratio Analysis

    99-134

    5 Financial Appraisal of Automobile Industry in

    India

    5.1 Process of Financial Appraisal

    5.2 Importance and Usefulness of Financial

    Appraisal

    5.3 Financial Appraisal of Automobile Industry

    135-154

    6 Financial Appraisal of Honda Cars India Ltd. and

    other companies Analysis of Data.

    6.1 Liquidity Analysis

    6.2 Managerial Efficiency Analysis

    6.3 Leverage Analysis

    6.4 Profitability Analysis

    155-220

    7 Conclusions and Suggestions

    221-238

    Bibliography

    239-244

    Appendices 245-251

  • viii

    LIST OF TABLES

    Table

    No.

    Title Page

    No.

    1.1 Indian Automobiles Industry Domestic Sales Trends 20

    1.2 Indian Automobiles Industry Production Trends 20

    1.3 Indian Automobiles Industry Exports Trends 21

    1.4 Trend in Two Wheelers Sales and Growth 38

    1.5 Trend in Two Wheelers Market Share 38

    1.6 Indian Three Wheelers Industry Sales 43

    1.7 Trends in Market Share in the Domestic M & HCV Segment 47

    1.8 Trends in Market Share in the Domestic LCV Segment 47

    1.9 Trend in Domestic Commercial Vehicle Volumes and

    Growth Rates by Segments

    48

    1.10 Trend in Market Share of leading companies in the domestic

    Passenger Vehicles Market

    54

    1.11 Trend in Market Share in the Small Car Segment 55

    1.12 Trend in Market Share in Mid-Size Car Segment 55

    1.13 Trend in Market Share in Executive Car Segment 56

    1.14 Trend in Market Share in Luxury and Premium Car Segment 56

    1.15 Passenger Vehicles Sales Volumes trend 58

    1.16 Domestic Sales and Market Share of Passenger Vehicles

    Industry in 2011-12 and 2012-13

    59

    1.17 List of Top Automobile Companies in India in 2011 62

    5.1 Production Trends of Automobile Industry - Base Year

    2001-02 (100) Indexing

    142

    5.2 Domestic Sales Trend Base Year 2001-02 (100) Indexing 144

    5.3 Exports trend- Base Year 2001-02 (100) Indexing 145

    5.4 Analysis of Average Liquidity Ratios of Selected Companies 146

  • ix

    (April 2001 to March 2011)

    5.5 Analysis of Average Managerial Efficiency Ratios of

    Selected Companies (April 2001 to March 2011)

    148

    5.6 Analysis of Average Profitability Ratios of Selected

    Companies (April 2001 to March 2011)

    149

    5.7 Analysis of Average Leverage Ratios of Selected Companies

    (April 2001 to March 2011)

    150

    5.8 Assignment of Ranks to Selected Companies on the basis of

    their Average Performance (April 2001 to March 2011)

    52

    6.1 Current Ratio of the Companies from the Financial Year

    2007-08 to 2011-12

    157

    6.2 Liquid Ratio of the Companies from the Financial Year

    2007-08 to 2011-12

    159

    6.3 Absolute Liquidity Ratio of the Companies from the

    Financial Year 2007-08 to 2011-12

    161

    6.4 Inventory Turnover Ratio of the Companies from the

    Financial Year 2007-08 to 2011-12

    163

    6.5 Average age of Inventory Period of the Companies from the

    Financial Year 2007-08 to 2011-12

    166

    6.6 Debtors Turnover Ratio of the Companies from the

    Financial Year 2007-08 to 2011-12

    167

    6.7 Average Collection Period of the Companies from the

    Financial Year 2007-08 to 2011-12

    170

    6.8 Creditors Turnover Ratio of the Companies from the

    Financial Year 2007-08 to 2011-12

    172

    6.9 Average Payment Period of the Companies from the

    Financial Year 2007-08 to 2011-12

    174

    6.10 Working Capital Turnover Ratio of the Companies from the

    Financial Year 2007-08 to 2011-12

    175

    6.11 Fixed Assets Turnover Ratio of the Companies from the 177

  • x

    Financial Year 2007-08 to 2011-12

    6.12 Total Assets Turnover Ratio of the Companies from the

    Financial Year 2007-08 to 2011-12

    179

    6.13 Capital Gearing Ratio of the Companies from the Financial

    Year 2007-08 to 2011-12

    182

    6.14 Debt Equity Ratio of the Companies from the Financial Year

    2007-08 to 2011-12

    184

    6.15 Total Debt Ratio of the Companies from the Financial Year

    2007-08 to 2011-12

    186

    6.16 Proprietary Ratio of the Companies from the Financial Year

    2007-08 to 2011-12

    189

    6.17 Fixed Assets to Proprietors Funds Ratio of the Companies

    from the Financial Year 2007-08 to 2011-12

    191

    6.18 Current Assets to Proprietors Funds Ratio of the Companies

    from the Financial Year 2007-08 to 2011-12

    193

    6.19 Interest Coverage Ratio of the Companies from the Financial

    Year 2007-08 to 2011-12

    195

    6.20 Gross Profit Ratio of the Companies from the Financial Year

    2007-08 to 2011-12

    198

    6.21 Net Profit Ratio of the Companies from the Financial Year

    2007-08 to 2011-12

    200

    6.22 Operating Ratio of the Companies from the Financial Year

    2007-08 to 2011-12

    203

    6.23 Operating Profit Ratio of the Companies from the Financial

    Year 2007-08 to 2011-12

    205

    6.24 Direct Material Cost Ratio of the Companies from the

    Financial Year 2007-08 to 2011-12

    207

    6.25 Administrative Expenses Ratio of the Companies from the

    Financial Year 2007-08 to 2011-12

    209

    6.26 Selling and Distribution Expenses Ratio of the Companies 210

  • xi

    from the Financial Year 2007-08 to 2011-12

    6.27 Cost of Goods Sold Ratio of the Companies from the

    Financial Year 2007-08 to 2011-12

    212

    6.28 Return on Assets Ratio of the Companies from the Financial

    Year 2007-08 to 2011-12

    214

    6.29 Return on Investment Ratio of the Companies from the

    Financial Year 2007-08 to 2011-12

    216

    6.30 Return on Shareholders Funds Ratio of the Companies from

    the Financial Year 2007-08 to 2011-12

    219

    7.1 Average Liquidity, Managerial Efficiency, Leverage and

    Profitability Performance of Selected Companies (April

    2007 to March 2012)

    228

    7.2 Assignment of Ranks to Selected Companies on the basis of

    their Average Performance (April 2007 to March 2012)

    233

  • xii

    LIST OF DIAGRAMS

    Diagram

    No.

    Title Page

    No.

    1.1 Domestic Market Share of Automobiles for 2011-12 21

    1.2 Sales Development of Indian Automobile Industry 23

    1.3 Growth estimates and demand drivers of Indian

    Automobile Industry

    31

    1.4 Classification of Indian Automobile Industry 34

    1.5 Classification of Indian Two Wheelers Industry 35

    1.6 Trend in two wheelers segment volume mix (Domestic) 37

    1.7 Three Wheelers Industry Sales (Domestic vs. Exports) 41

    1.8 Market Shares of Three Wheelers Industry 42

    1.9 Market Share of Sub-Segments of Passenger Cars in

    2012-13

    52

    1.10 Passenger Car Volumes: Segment wise concentration 53

    1.11 Trend in Domestic Sales of Passenger Vehicles Industry 57

    1.12 Passenger Vehicles Majors Market Share in 2012-13 58

    5.1 Production Growth Trends of Automobile Industry 142

    6.1 Graph showing Current Ratio of the Companies from the

    Financial Year 2007-08 to 2011-12 (Times)

    157

    6.2 Graph showing Liquid Ratio of the Companies from the

    Financial Year 2007-08 to 2011-12 (Times)

    159

    6.3 Absolute Liquidity Ratio of the Companies from the

    Financial Year 2007-08 to 2011-12 (Times)

    161

    6.4 Graph showing Inventory Turnover Ratio of the

    Companies from the Financial Year 2007-08 to 2011-12

    (Times)

    164

    6.5 Graph showing Debtors Turnover Ratio of the

    Companies from the Financial Year 2007-08 to 2011-12

    (Times)

    165

  • xiii

    6.6 Graph showing Creditors Turnover Ratio of the

    Companies from the Financial Year 2007-08 to 2011-12

    (Times)

    172

    6.7 Graph showing Working Capital Turnover Ratio of the

    Companies from the Financial Year 2007-08 to 2011-12

    (Times)

    176

    6.8 Graph showing Fixed Assets Turnover Ratio of the

    Companies from the Financial Year 2007-08 to 2011-12

    (Times)

    178

    6.9 Graph showing Total Assets Turnover Ratio of the

    Companies from the Financial Year 2007-08 to 2011-12

    (Times)

    180

    6.10 Graph showing Capital Gearing Ratio of the Companies

    from the Financial Year 2007-08 to 2011-12 (Times)

    182

    6.11 Graph showing Debt Equity Ratio of the Companies from

    the Financial Year 2007-08 to 2011-12 (Times)

    185

    6.12 Graph showing Total Debt Ratio of the Companies from

    the Financial Year 2007-08 to 2011-12 (Times)

    187

    6.13 Graph showing Proprietary Ratio of the Companies from

    the Financial Year 2007-08 to 2011-12 (Times)

    189

    6.14 Graph showing Fixed Assets to Proprietors Funds Ratio

    of the Companies from the Financial Year 2007-08 to

    2011-12 (Times)

    191

    6.15 Graph showing Current Assets to Proprietors Funds

    Ratio of the Companies from the Financial Year 2007-08

    to 2011-12 (Times)

    193

    6.16 Graph showing Interest Coverage Ratio of the

    Companies from the Financial Year 2007-08 to 2011-12

    (Times)

    196

    6.17 Graph showing Gross Profit Ratio of the Companies from 198

  • xiv

    the Financial Year 2007-08 to 2011-12 (Percentage)

    6.18 Graph showing Net Profit Ratio of the Companies from

    the Financial Year 2007-08 to 2011-12 (Percentage)

    201

    6.19 Graph showing Operating Ratio of the Companies from

    the Financial Year 2007-08 to 2011-12 (Percentage)

    203

    6.20 Graph showing Operating Profit Ratio of the Companies

    from the Financial Year 2007-08 to 2011-12

    (Percentage)

    205

    6.21 Graph showing Return on Assets Ratio of the Companies

    from the Financial Year 2007-08 to 2011-12

    (Percentage)

    214

    6.22 Graph showing Return on Investment Ratio of the

    Companies from the Financial Year 2007-08 to 2011-12

    (Percentage)

    217

    6.23 Graph showing Return on Shareholders Funds Ratio of

    the Companies from the Financial Year 2007-08 to 2011-

    12 (Percentage)

    219

  • Chapter- 1

    Introduction

  • Chapter- 1 Introduction

    1

    Introduction

    Automobile industry is the key driver of any growing economy and plays a

    pivotal role in country's rapid economic and industrial development. It caters to

    the requirement of equipment for basic industries like steel, non-ferrous metals,

    fertilizers, refineries, petrochemicals, shipping, textiles, plastics, glass, rubber,

    capital equipments, logistics, paper, cement, sugar, etc. It facilitates the

    improvement in various infrastructure facilities like power, rail and road

    transport. Due to its deep forward and backward linkages with several key

    segments of the economy, the automobile industry is having a strong multiplier

    effect on the growth of a country and hence is capable of being the driver of

    economic growth. It plays a major catalytic role in developing transport sector

    in one hand and help industrial sector on the other to grow faster and thereby

    generate a significant employment opportunities. In India, automobile is one of

    the largest industries showing impressive growth over the years and has been

    significantly making increasing contribution to overall industrial development

    in the country. Automobile industry includes two wheelers, three wheelers,

    commercial vehicles and passenger vehicles. The Indian automobile industry

    has made rapid strides since delicensing and opening up of the sector in 1991.

    It has witnessed the entry of several new manufacturers with the state-of-art

    technology, thus replacing the monopoly of few manufacturers. There are 19

    manufacturers of passenger cars & multi utility vehicles, 16 manufacturers of

    commercial vehicles, 10 manufacturers of two wheelers and 7 manufactureres

    of three wheelers in India. The norms for foreign investment and import of

    technology have also been liberalised over the years for manufacture of

    vehicles. At present, 100% foreign direct investment (FDI) is permissible under

    the automatic route in this sector, including passenger car segment.

    Presently, India is the world's second largest manufacturer of two wheelers,

    fifth largest manufacturer of commercial vehicles and fourth largest

    manufacturer of tractors. It is the seventh largest passenger car market in Asia

  • Chapter- 1 Introduction

    2

    as well as a home to the largest motor cycle manufacturer. The installed

    capacity of four wheelers is 3.88 million units, two and three wheelers is 14.31

    million units. The Indian automobile industry has attained a turnover of USD

    56,259.57 million and provides direct employment to 1 million people and

    indirect employment to 18 million people in the country. The sector has shown

    great advances in terms of development, spread, absorption of newer

    technologies and flexibility in the wake of changing business scenario.

    The majority of India's car manufacturing industry is based around three

    clusters in the south, west and north. The southern cluster consisting of

    Chennai and Bangalore is the biggest with 35% of the revenue share. The

    western hub near Mumbai and Pune contributes to 33% of the market and the

    northern cluster around the National Capital Region contributes 32%. Chennai,

    is also referred to as the "Detroit of India" with the India operations of Ford,

    Hyundai, Renault, Mitsubishi, Nissan, BMW, Hindustan Motors, Daimler,

    Caparo, and PSA Peugeot Citron is about to begin their operations by 2014.

    Chennai accounts for 60% of the country's automotive exports.

    The Indian Automobile Industry manufactures over 20.4 million vehicles and

    exports about 2.9 million vehicles each year. The dominant products of the

    industry are two-wheelers with a market share of over 75% and passenger cars

    with a market share of about 16%. Commercial vehicles and three-wheelers

    share about 9% of the market between them. About 91% of the vehicles sold

    are used by households and only about 9% for commercial purposes. Tata

    Motors is leading the commercial vehicle segment with a market share of about

    58%. Maruti Suzuki is leading the passenger vehicle segment with a market

    share of 45%. Hyundai Motor India Limited and Mahindra and Mahindra are

    focusing expanding their footprint in the overseas market. Hero MotoCorp is

    occupying over 41% and sharing 25% of the two-wheeler market in India with

    Bajaj Auto. Bajaj Auto in itself is occupying about 58% of the three-wheeler

    market.

  • Chapter- 1 Introduction

    3

    The Indian Automobile Industry has flourished like never before in the recent

    years. This extraordinary growth that the Indian automobile industry has

    witnessed is a result of a major factor namely, the improvement in the living

    standard of the middle class and an increase in their disposable incomes.

    Moreover, the liberalization steps, such as, relaxation of the foreign exchange

    and equity regulations, reduction of tariffs on imports, and refining the banking

    policies initiated by the Government of India, have played an equally important

    role in bringing the Indian Automobile Industry to great heights. The increased

    demand for Indian automobiles has resulted in a large number of multinational

    automobile companies, especially from Japan, the U.S.A., and Europe, entering

    the Indian market and working in collaboration with the Indian firms. Also, the

    institutionalization of automobile finance has further paved the way to sustain a

    long term high growth for the industry.

    The rising competition and increasing global trade are the major factors in

    improving the global distribution system and has forced many auto-giants such

    as General Motors, Ford, Toyota, Honda, Volkswagen, and Daimler Chrysler,

    to shift their production bases in different developing countries which help

    them operate efficiently in a globally competitive marketplace. During the

    second half of the 1990s, the globalization of the automotive industry has

    greatly accelerated due to the construction of important overseas facilities and

    establishment of mergers between giant multinational automobile

    manufacturers. Over the years, it is being observed that India is emerging as a

    global automotive hub. India has growing potential market for automobiles due

    to rise in demand. As a result, more and more manufacturers are bringing in

    new forms of the existing product because diffusion of a new product depends

    upon demand statistics. Automobile manufacturers, particularly car

    manufacturers are attracting buyers with new model, shopping to tap growing

    demand for automobiles. Utility vehicles also post significant growth. Further,

    two and three wheeler industries, specially the motorcycle segments, have

  • Chapter- 1 Introduction

    4

    shown a steep jump, while the volume growth of all the players has recorded

    pretty good market share.

    1.1 STATEMENT OF THE PROBLEM

    In the fast changing economic scenario world over, the management of any

    company has to play a dynamic role in managing its finances. To make rational

    decisions in tune with the objectives of the firm, the management must analyze

    the funds needs, the financial status and profitability and the business risk of

    the company (Van Horne 2000).

    As there is an increasing competition from other global players, the

    management has to initiate appropriate steps to lower the cost of production

    and generation of additional revenues through cost competitiveness. For this

    purpose, certain production areas have been identified for cost reduction. The

    management can aim at increasing the profit through the following methods:

    a) Optimization of the product mix with a view to enhance the sales

    revenue and thus, the profitability of the company.

    b) Increased production of value added products.

    c) Continuous reduction of inventory levels of spare and raw materials.

    d) Implementation of expansion plans as per the fixed schedule with an eye

    on capturing the expanding market.

    e) Creating good reputation in customers by providing adequate sales

    network and enhancing after sales services.

    In the light of the above, proper analysis of the financial statements of the

    company is necessary to assess the financial health of the company, as it

    provides valuable insights into its financial performance. Financial appraisal

    provides a method for accessing the financial strengths and weakness of a

    company. There are two views of the financial strength of every organization

    based on the period of lending i.e., the short term and long term. Short term

    financial strength relates to the technical solvency of an organization in the

  • Chapter- 1 Introduction

    5

    near future, while the long term financial strength depends on the structure that

    has been imposed in financing more permanent asset requirements.

    To analyze the financial strength of Indian Automobile Industry we chose the

    topic of research study as Financial Appraisal of Automobile Industry in India

    (A case study of Honda Cars India Limited) and analyzed the financial

    performance of selected automobile companies namely Honda Cars India

    Limited with Maruti Suzuki India Limited and Tata Motors Limited by using

    appropriate financial appraisal techniques as well as comparing the financial

    strength thereof.

    1.2 SIGNIFICANCE OF THE STUDY

    Financial Appraisal is of special importance in industries and automobile

    industry is one of such industry. From the point of view of the socio-economic

    development of the country, automobile is significant enough in terms of

    investment and employment. The sales and profitability function in automobile

    industry differs from that of other industries.

    a) The study will be helpful in understanding the pattern and the structure

    of financial variables of selected company apart from identifying the

    financial relationship with other major automobile companies in India.

    b) The study will be helpful in checking current performance against

    predetermined standards contained in the plans and will be helpful in

    evaluation of standards.

    c) The study will be helpful in forming the policies of the management

    within the scheduled time and approve cost.

    d) The study will be helpful in ensuring maximum economy in

    expenditure.

    e) The study will be helpful to the management, the financiers the investors

    and the government at large, to take valuable decisions on their own.

  • Chapter- 1 Introduction

    6

    f) The study will be helpful to shareholders, investors and investment

    analysts to identify the determinants of financial appraisal of selected

    automobile industry.

    g) The study will also be helpful to academic researchers, researchers in

    securities, industries and companies by providing different perspectives.

    1.3 SELECTION OF AUTOMOBILE INDUSTRY

    Transport sector plays a key role in a countrys economic growth and

    development. Transportation throughout the world has made possible

    unprecedented level of mobility across the geographical boundaries. The

    mobility has given many people more options about where to live, and work

    than they had years ago. Similarly, mobility has broadened the access of

    business to new markets and more choices by increasing the available pool of

    resources. From the economic point of view, transportation is a vital factor for

    steady economic growth and development. The trade facilitated by

    transportation has been a growing component of national income in all

    countries. Studies show that the contribution of transportation in GDP has a

    positive impact. The structure of the economy also influences the transport

    system because consumer expenditure on transportation contributes to national

    economy. Transport sector is equally important for both industrialized and

    developing economies. Transport sector including water transport, aviation and

    surface transport are major players of Gross Domestic Product (GDP), which

    includes the value of all goods and services. Being the largest transport

    networking in the world, particularly in road transportation, automobile

    industry plays a significant role in the GDP of the country.

    Automobile industry is a major constituent of surface transport. Automobiles

    include passenger cars, commercial vehicles, two and three wheelers; India has

    growing market potential for automobiles due to rise in demand. As a result,

    more and more manufacturers are bringing in new forms of the existing product

    because diffusion of a new product depends upon demand statistics.

  • Chapter- 1 Introduction

    7

    Automobile manufacturers, particularly car manufacturers, are attracting

    buyers with new model, shopping to tap growing demand for automobiles.

    Utility vehicles also post significant growth. Further, two and three wheelers

    industries, specially the motor cycle segments, have shown a steep jump, while

    the volume growth of all the players has recorded pretty good market share.

    Therefore, automobile industry has been selected for this study in order to

    determine its financial appraisal during the study period.

    1.4 OBJECTIVES OF RESEARCH

    Main objective of present study is to carry out financial appraisal of

    Automobile Industry in India with special reference to Honda Cars India

    Limited. The following are the basic objectives of this study:

    a) To analyse and interpret the growth of automobile industry in India.

    b) To analyse the trends of production, capacity utilization, sales and

    market share of the selected automobile company i.e. Honda Cars

    India Ltd.

    c) To evaluate financial structure, financial performance and financial

    health of Honda cars India Ltd.

    d) To carry out profitability and efficiency analysis of Honda cars India

    Ltd.

    e) To analyse liquidity and long term solvency of Honda cars India Ltd.

    f) To carry out a comparative study of Honda cars India Ltd.with

    Maruti Suzuki India limited and Tata Motors limited regarding their

    financial performance.

    g) To suggest the measure for improvement in profitability, efficiency,

    liquidity and solvency.

    1.5 RESEARCH DESIGN

    Research design means a sketch or a drawing of a research projects structure.

    It comprises a series of prior pronouncements that, taken together, provide a

  • Chapter- 1 Introduction

    8

    roadmap for carrying out a research project. The research design of the present

    study is outlined here under.

    Keeping in view the scope of the study, it is decided to carry out in depth case

    study of Honda Cars India Limited from the financial year 2007-08 to 2011-12

    and for comparison, include Maruti Suzuki India Limited and Tata Motors

    Limited. The study is mainly based on secondary data. The major source of

    data analysed and interpreted in this study related to all those companies

    selected is collected from PROWESS database, which is the most reliable on

    the empowered corporate database of Centre for Monitoring Indian Economy

    (CMIE). The database provides financial statements, ratio analysis, fund flow,

    cash flow, product profiles, returns and risk on the stock market. The relevant

    secondary data have also been collected from annual reports of companies, bse

    stock exchange official directory, CMIE publications, annual survey of

    industry, business newspapers, reports on currency and finance, libraries of

    various research institutions, through internet etc.

    The financial analysis approach plays a vital role in the financial environment.

    To enjoy the benefit of financial analysis, we have collected, assembled and

    correlated the data, classified the data appropriately and condensed them into a

    related data series; stated the resultant information in a comprehensive form, in

    text and tables and analysed and interpreted the reported data. The financial

    appraisal techniques are applied in the study. It is well known that management

    is concerned with efficient performance, profitability and solvency. For this

    purpose it has to study certain specific ratios, because investors look upon

    certain ratios, which are concerned with an organizations performance

    appraisal. For the purpose of this study, we have used liquidity ratios, turnover

    ratios, profitability ratios and long term solvency ratios.

  • Chapter- 1 Introduction

    9

    1.6 LIMITATIONS OF THE STUDY

    However, there are some limitations of the study, which are generally inherent

    in all such studies conducted at human level. The most important among them

    are:

    a) The study is based on secondary data obtained from the published

    annual reports and as such its finding depends entirely on the accuracy

    of such data.

    b) Non-availability of some required financial data for the period of study

    has restricted the size of the sample. Therefore, the limitation of the

    small sample is also prevalent in this study.

    c) The present study is largely based on ratio analysis which has its own

    limitations.

    d) The analysis of financial statement of business enterprise gives

    diagnostic indicators. We being an outside, external analyst, obviously

    has no access to internal data. Therefore, inside view of the organization

    cannot be characterized in the study.

    e) The financial statement does not keep pace with the changing price

    level.

    However, all these limitations do not, in any way, affect the worth of this

    research work.

    1.7 AUTOMOBILE INDUSTRY: ITS PROFILE

    The Automotive Industry is globally one of the largest industries and a key

    sector of the economy. Owing to its deep forward and backward linkages, it has

    a strong multiplier effect and acts as one of the important drivers of economic

    growth. With the gradual liberalization of the automotive sector in India since

    1991, the number of manufacturing facilities has grown progressively. It

    produces a wide variety of vehicles: passenger cars, light, medium and heavy

    commercial vehicles, multi-utility vehicles such as jeeps, two wheelers such as

  • Chapter- 1 Introduction

    10

    scooters, motor-cycles and mopeds, three wheelers, tractors and other

    agricultural equipments etc. With a CAGR of over 15% during the last 5-7

    years, it is aptly described as the next sun rise sector of the Indian economy. In

    fact, in the last ten years, the volumes, exports and turnover have increased by

    3.8, 19.6 and 6 times respectively. . It has grown 14.4 percent over the past

    decade. With more than 35 automakers, the industry contributes 7 percent to

    Indias GDP and is responsible for 7 to 8 percent of Indias total employed

    population. The main automobile hubs in India are based at Chennai, Gurgaon,

    Manesar, Pune, Ahmedabad, Halol, Aurangabad, Kolkata, Noida and

    Bangalore. Chennai is the biggest hub accounting for 60% of Indian auto

    exports.

    The Indian automobile industry, comprising passenger cars, two-wheelers,

    three-wheelers and commercial vehicles, is the seventh-largest in the world

    with an annual production of 20.4 million vehicles, of which 2.9 million are

    exported. Two-wheelers dominate the Indian market; more than 75% of the

    vehicles sold are two wheelers. In the passenger car segment, India is mainly a

    small car market though mid size and big car sale is continuously rising in

    recent years. The major companies present in the automobiles market in India

    include Tata Motors Limited, Maruti Suzuki India Limited, Mahindra &

    Mahindra Limited, Ashok Leyland Limited, Hero MotoCorp Limited, Bajaj

    Auto Limited, Echier Motors Limited and Force Motors Limited. Tata Motors

    is Indias largest automobile company; the company manufactures commercial

    and passenger vehicles, and is the worlds fourth-largest truck manufacturer

    and the second-largest bus manufacturer. Maruti Suzuki is Indias largest

    passenger car company, accounting for 45% share of the Indian car market.

    Hero MotoCorp is the worlds largest two-wheeler manufacturing company in

    the world. Its market share in the Indian two-wheeler segment is 41%. Bajaj

    Auto is the worlds fourth-largest two-wheeler and three-wheeler manufacturer.

    Over the years, the Indian automobile industry has become quite resilient and

    despite the down turn witnessed due to economic slowdown during 2007-09, it

  • Chapter- 1 Introduction

    11

    was amongst the first few manufacturing sectors to recover and has registered

    impressive growth figures in the recent past. In fact the global recession of

    2007-09 has firmly shifted the centre of gravity of the automotive industry to

    the east. It is predicted that the future growth of automotive industry will

    primarily come from the emerging economies which include the BRIC nations

    viz. Brazil, Russia, India and China along with Thailand, Iran and Mexico.

    At present, there are 19 manufacturers of passenger vehicles, 16 manufacturers

    of commercial vehicles, 10 manufacturers of two wheelers and 7 manufacturers

    of three wheelers in India. In 2010-11, India surpassed France, UK and Italy to

    become the 6th largest vehicle manufacturer globally. Today, it is the largest

    manufacturer of tractors, second largest manufacturer of two wheelers, 5th

    largest manufacturer of commercial vehicles and the 7th largest passenger car

    market in Asia. During the financial year 2010-11, India exported 2.35 million

    vehicles to more than 40 countries which included 0.45 million passenger cars

    and 1.54 million two wheelers. Today, the automobile industry provides direct

    and indirect employment to 18.5 million people. In 2010-11, the turnover of the

    automobile industry was USD 53.1 billion. In 2010-11 the total global demand

    of passenger vehicles was 73 million units, of which the volume in India was 3

    million units (4%).

    Snippets of Indian Automobile Industry

    The first automobile in India rolled in 1897 in Bombay.

    India is being recognized as potential emerging auto market.

    Foreign players are adding to their investments in Indian auto industry.

    Within two-wheelers, motorcycles contribute 75% of the segment size.

    Unlike the USA, the Indian passenger vehicle market is dominated by

    cars (79%).

    Tata Motors dominates over 60% of the Indian commercial vehicle

    market.

    Largest three wheeler market in the world

    2nd largest two wheeler market in the world

  • Chapter- 1 Introduction

    12

    7th largest passenger car market in Asia & 10th Largest in the world

    4th largest tractor market in the world

    5th largest commercial vehicle market in the world

    5th largest bus & truck market in the world.

    1.7.1 EVOLUTION OF INDIAN AUTOMOBILE INDUSTRY

    The year 1898 saw the first car rolling out, on the streets of Mumbai. Since

    then Indian auto industry has witnessed a lot of change. A land of Premier

    Padminis, Ambassadors, scooters, temps, trucks and autos galore, India had not

    seen much of choice in vehicles. Only the affluent could think of owning a

    personal four-wheeler and the clichd image of a car followed by lots of

    children on a dusty road was actually true. While the automotive industry in

    India started developing in the 1940s, distinct growth rates started only in the

    1970s. Cars were considered ultra luxury products, manufacturing was strictly

    licensed, expansion was limited and there was a restrictive tariff structure.

    This was the pre-1980 era where the manufacturing of automobiles especially

    cars was subject to strict licensing, restrictive tariff structure and limited

    avenues for expansion. This period was marked by unfavorable government

    policies steep excise duties and sales tax, and high customs duty on import.

    There were only two major players in this period Hindustan Motors and

    Premier Automobiles Ltd. In 1983, the government of India entered into a joint

    venture with Suzuki to form Maruti Udyog. The advent of foreign technology

    collaboration came with the inception of Maruti Udyog in collaboration with

    Suzuki of Japan in the passenger car segment. Indian roads saw the launch of

    Maruti 800. It was still not very easy to own a car, first was affordability and

    next was a long waiting period.

    In the early 1990s, with liberalization, some more Japanese manufacturers

    entered the two-wheeler and the commercial vehicle segment in a collaborative

    arrangement. This period characterized joint ventures in India and the market

    started opening up. Automobile Industry was delicensed in July 1991 with the

  • Chapter- 1 Introduction

    13

    announcement of the New Industrial Policy. The passenger car industry was,

    however, delicensed in 1993. The abolition of the controls led to an avalanche

    of demand. The era of controls and protection came to an end. Curbs on

    capacity were done away with, decrease in customs and excise duties meant

    that a vehicles started getting affordable. The entry of foreign banks with

    attractive auto finance schemes helped garner a huge base of middle class

    population. However the market was still ruled by the sellers. The automobile

    sector in India went a metamorphosis as a result of these policies with a

    number of local players coming into prominence during this period. After the

    sector opened to foreign direct investments in 1996, global majors moved into

    the Indian market.

    Early 2000 however saw globalization of Indian auto industry. Several policy

    changes were introduced with focus on boosting the auto exports. A Core

    Group on Automotive Research and Development (CAR) was established in

    2003 for encouraging R&D activities. Foreign manufactures started looking at

    India for sourcing auto components. The buyers started ruling the market due

    to the availability of choices in the form of models, price points and brands. A

    vibrant economy meant an increase in the GDP and per capita income. These

    factors turned out to be significant contributors in pushing up the domestic

    demand. The vast geographic spread of India attracted foreign investments. For

    the commercial vehicles, the steady growth in Indian economy led to demand

    for trucks, tempos, buses etc. The IT and BPO culture that boosted exports and

    employment also pushed the sales of vehicles. Indian economy also witnessed

    rapid industrialization. Factories needed transport both for goods and for their

    employees. The retail boom in India saw malls, supermarket chains

    mushrooming all over the urban areas, pushed the demand for efficient logistics

    and that in turn increased the number of commercial vehicles.

    1.7.2 HISTORY OF THE WORLDS AUTOMOBILE INDUSTRY

    The automobile as we know, it was not invented in a single day by a single

    inventor. The history of the automobile reflects an evolution that took place

  • Chapter- 1 Introduction

    14

    worldwide. It is estimated that over 100,000 patents created the modern

    automobile. However, we can point to the many firsts that occurred along the

    way. Several Italians recorded designs for wind driven vehicles. The first was

    Guido da Vigevano in 1335. Vaturio designed a similar vehicle, which was also

    never built. The first vehicle to move under its own power for which there is a

    record was designed by Nicholas Joseph Cugnot and constructed by M. Brezin

    in 1769. The early steam powered vehicles were so heavy that they were only

    practical on a perfectly flat surface as strong as iron. A road thus made out of

    iron rails became the norm for the next hundred and twenty-five years. Many

    attempts were being made in England by the 1830's to develop a practical

    vehicle that didn't need rails. A Frenchman named Etienne Lenoir patented the

    first practical gas engine in Paris in 1860 and drove a car based on the design

    from Paris to Joinville in 1862.

    Siegfried Marcus, of Mecklenburg, built a car in 1868 and showed one at the

    Vienna Exhibition of 1873. His later car was called the Strassenwagen had

    about 3/4-horse power at 500 rpm. It ran on crude wooden wheels with iron

    rims and stopped by pressing wooden blocks against the iron rims, but it had a

    clutch, a differential and a magneto ignition. In 1885, Gottllieb Daimler's in

    Bad Cannstatt built the wooden motorcycle. Daimler's son Paul rode this

    motorcycle from Cannstatt to Unterturkheim and back on November 10, 1885.

    On 29th January 1886, Karl Benz was granted a patent on it and on 3rd July

    1886, he introduced the first automobile in the world to an astonished public.

    Also in August 1888, William Steinway, owner of Steinway & Sons piano

    factory, talked to Daimler about US manufacturing right and by September had

    a deal. By 1891 the Daimler Motor Company, owned by Steinway, was

    producing petrol engines for tramway cars, carriages, quadricycles, fire engines

    and boats in a plant in Hartford, CT. By 1890 Ransom E. Olds had built his

    second steam-powered car. One was sold to a buyer in India, but the ship it was

    on was lost at sea. Running by February, 1893 and ready for road trials by

    September, 1893 the car built by Charles and Frank Duryea, brothers, was the

  • Chapter- 1 Introduction

    15

    first gasoline powered car in America. The first run on public roads was made

    on September 21, 1893 in Springfield, MA. Henry Ford had an engine running

    by 1893 but it was 1896 before he built his first car. With the financial backing

    of the Mayor of Detroit, William C. Maybury and other wealthy Detroiters,

    Ford formed the Detroit Automobile Company in 1899.

    Eli Olds built first petrol-powered car. This car was running by 1896 but

    production of the Olds Motor Vehicle Company of Detroit did not begin until

    1899. After an early failure with luxury vehicles they established the first really

    successful production with the classic Curved Dash Oldsmobile. E. Olds was

    the first mass producer of gasoline-powered automobiles in the United States,

    even though Duryea was the first auto manufacturer with their 13 cars. The

    Rolls Royce Silver Ghost of 1906 was a six cylinder car that stayed in

    production until 1925. It represented the best engineering and technology

    available at the time and these cars still run smoothly and silently today. This

    period marked the end of the beginning of the automobile.

    1.7.3 HISTORY OF THE INDIAN AUTOMOBILE INDUSTRY

    About hundred years ago the first motorcar was imported and Import duty on

    vehicles was introduced. Indian Great Royal Road (Predecessor of the Grand

    Trunk Road) was conceived. First car brought in India by a princely ruler in

    1898. Simpson & Co established in 1840. They were the first to build a steam

    car and a steam bus, to attempt motorcar manufacture, to build and operate

    petrol driven passenger service and to import American Chassis in India.

    Railways first came to India in 1850's. In 1865 Col. Rookes Crompton

    introduced public transport wagons strapped to and pulled by imported steam

    road rollers called streamers. In 1919 at the end of the war, a large number of

    military vehicles came on the roads. 1942 Hindustan Motors Ltd incorporated

    and their first vehicle was made in 1950. In 1944 Premier Automobiles Ltd

    incorporated and in 1947 their first vehicle was produced. In 1947 the

    Government of Bombay accepted a scheme of Bajaj Auto to replace the cycle

  • Chapter- 1 Introduction

    16

    rickshaw by the auto and assembly started in a couple of years under a license

    from Piaggio. Automobile Products of India (API) and Enfield India had

    already commenced the manufacture of scooters, motorcycles, mopeds and

    autos from 1955. In 1956, Bajaj Tempo Ltd entered the Indian market with a

    program of manufacturing Commercial Vehicles, and Simpson for making

    engines. AIA&AIA (association of the component manufacturers) came into

    being in 1959 and Government approved Bajaj Auto Ltd's plans for domestic

    manufacture of Vespa scooters and granted permission to produce 6000 units

    annually.

    In sixties two and three wheeler segment established a foothold in the industry.

    Escorts and Ideal Jawa entered the field in the beginning of sixties. Association

    of Indian Automobile Manufacturers formally established in 1960. Between

    1955 and 1960 only API was producing Mopeds. During the first half of the

    sixties three companies namely Mopeds India Ltd (1965), SZUL Gwalior

    (1964) and Pearl Scooters Ltd (1962) entered the arena. During the decade of

    1970s there was not much change in the four-wheeler industry except the entry

    of Sipani Automobiles in the small car market. In the Two Wheeler Industry

    there were many entries during this decade. Scooter India established in 1972.

    In 1972 Kinetic Engineering entered the Industry with a licensed capacity of

    100,000 units per annum. Three other companies, namely, Kirloskar Ghatge

    Patil Auto Ltd, Indian Automotive Ltd and Sen & Pandit Engg products Ltd

    entered the market during 1971-75. They ultimately withdrew in early eighties.

    Unlike Motorcycle and Scooter segments the Mopeds segment grew rapidly. In

    the late seventies there were many entries in the Moped Industry.

    Since the 1980s, the Indian car Industry has seen a major resurgence with the

    opening up of Indian shores to foreign manufacturers and collaborators. First

    phase of liberalization announced and unfair practices of monopoly, oligopoly,

    etc slowly disappeared. It was beginning of Liberalization of the protectionism

    policies of the Government. Lots of new Foreign Collaborations came up in the

    eighties. Many companies went in for Japanese collaborations. Hindustan

  • Chapter- 1 Introduction

    17

    Motors Ltd. in collaboration with Isuzu of Japan introduced the Isuzu truck in

    early eighties. The Two Wheeler market increased since 1982, the Government

    had permitted foreign collaborations for the manufacturing of Two Wheelers

    up to 100 cc engine capacity. Foreign Equity up to 40% was also allowed. In

    1983 Maruti Udyog Ltd was started in collaboration with Suzuki, a Japanese

    firm. Other three Car manufacturers namely, Hindustan Motors Ltd., Premier

    Automobiles Ltd., Standard Motor Production of India Ltd. also introduced

    new models in the market. At the time there were five Passenger Car

    manufacturers in India - Maruti Udyog Ltd., Hindustan Motors Ltd., Premier

    Automobiles Ltd., Standard Motor Production of India Ltd., Sipani

    Automobiles. Ashok Leyland Ltd. and Telco were strong players in the

    Commercial Vehicles sector. In 1983-84 Bajaj Tempo Ltd. entered into

    collaboration with Daimler-Benz of Germany for manufacture of LCVs.

    Important policy changes like relaxation in MRTP and FERA, delicensing of

    some ancillary products, broad banding of the products, modifications in

    licensing policy, concessions to private sector (both Indian and Foreign) and

    foreign collaboration policy etc. resulted in higher growth / better performance

    of the industry than in the earlier decades.

    Beginning with mid-1991 the government of India has made some radical

    changes in polices bearing on trade, foreign investment, exchange rate,

    industry, fiscal affairs and so on. Mass Emission Norms were introduced for in

    1991 for Petrol Vehicles and in 1992 for Diesel Vehicles. In 1991 new

    Industrial Policy was announced. It was the death of the License Raj and the

    Automobile Industry was allowed to expand. Further tightening of Emission

    norms was done in 1996. In 1997 National Highway Policy has been

    announced which will have a positive impact on the Automobile Industry. The

    Indian Automobile market in general and Passenger Cars in particular have

    witnessed liberalization. Many multinationals like Daewoo, Peugeot, General

    Motors, Mercedes-Benz, Honda, Hyundai, Toyota, Mitsubishi, Suzuki, Volvo,

    Ford and Fiat entered the market. Various companies are coming up with state-

    of-art models of vehicles. TELCO has diversified in Passenger Car segment

  • Chapter- 1 Introduction

    18

    with Indica. Despite the adverse trend in the growth of the industry, it is

    resolutely trying to meet the challenges. Various issues of critical importance to

    the industry are being dealt with forcefully. In 1999 The Honble Supreme

    Court passed an order directing all car manufacturers to comply with Euro I

    emission norms (India 2000 norms) by the 1st of May 1999 in National Capital

    Region (NCR) of Delhi. The deadline was later extended to 1st June 1999. The

    90s have become the melting point for the car industry in India. The consumer

    is king. He is being constantly wooed by both the Indian and foreign

    manufacturers. Though sales had taken a dip in the first few months of 1999, it

    is back to boom time. New models like Marutis Classic, Alto, Station Wagon,

    Fords Ikon and the new look Mitsubishi Lancer have all been launched with

    an eye on the emerging market.

    1.7.4 CURRENT STATUS OF AUTOMOBILE INDUSTRY IN INDIA

    The world standings for the Indian automobile sector, as per the Confederation

    of Indian Industry in financial year 2012, were as follows:

    Largest three-wheeler market

    Second largest two-wheeler market

    Tenth largest passenger car market

    Fourth largest tractor market

    Fifth largest commercial vehicle market

    Fifth largest bus and truck segment

    The cumulative production data for April-March 2012 shows production

    growth of 13.83 percent over same period last year. In March 2012 as

    compared to March 2011, production grew at a single digit rate of 6.83 percent.

    In 2011-12, the industry produced 20,366,432 vehicles of which share of two

    wheelers, passenger vehicles, three wheelers and commercial vehicles were 76

    percent, 15 percent, 4 percent and 4 percent respectively.

    The growth rate for overall domestic sales for 2011-12 was 12.24 percent

    amounting to 17,376,624 vehicles. In the month of only March 2012, domestic

  • Chapter- 1 Introduction

    19

    sales grew at a rate of 10.11 percent as compared to March 2011. Passenger

    Vehicles segment grew at 4.66 percent during April-March 2012 over same

    period last year. Passenger Cars grew by 2.19 percent, Utility Vehicles grew by

    16.47 percent and Vans by 10.01 percent during this period. In March 2012,

    domestic sales of Passenger Cars grew by 19.66 percent over the same month

    last year. Also, sales growth of total passenger vehicle in the month of March

    2012 was at 20.59 percent (as compared to March 2011). For the first time in

    history car sales crossed two million in a financial year. The overall

    Commercial Vehicles segment registered growth of 18.20 percent during April-

    March 2012 as compared to the same period last year. While Medium & Heavy

    Commercial Vehicles (M&HCVs) registered a growth of 7.94 percent, Light

    Commercial Vehicles grew at 27.36 percent. In only March 2012, commercial

    vehicle sales registered a growth of 14.82 percent over March 2011. Three

    Wheelers sales recorded a decline of (-) 2.43 percent in April-March 2012 over

    same period last year. While Goods Carriers grew by 6.31 percent during

    April-March 2012, Passenger Carriers registered decline by (-) 4.50 percent. In

    March 2012, total Three Wheelers sales declined by (-) 9.11 percent over

    March 2011. Total Two Wheelers sales registered a growth of 14.16 percent

    during April-March 2012. Mopeds, Motorcycles and Scooters grew by 11.39

    percent, 12.01 percent and 24.55 percent respectively. If we compare sales

    figures of March 2012 to March 2011, the growth for two wheelers was 8.27

    percent.

    During April-March 2012, the industry exported 2,910,055 automobiles

    registering a growth of 25.44 percent. Passenger Vehicles registered growth at

    14.18 percent in this period. Commercial Vehicles, Three Wheelers and Two

    Wheelers segments recorded growth of 25.15 percent, 34.41 percent and 27.13

    percent respectively during April-March 2012. For the first time in history car

    exports crossed half a million in a financial year. In March 2012 compared to

    March 2011, overall automobile exports registered a growth of 17.81 percent.

    Overall Indian Automobile Industry has shown 2.61% growth in 2012-13

    compare to 2011-12. Production and Domestic sales has registered growth of

  • Chapter- 1 Introduction

    20

    1.20% and 2.61%, however export is negative growth due to negative global

    environment and fluctuation.

    Table 1.1: Indian Automobiles Industry Domestic Sales Trends

    Automobile Domestic Sales Trends (Number

    of Vehicles)

    Category 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

    Passenger

    Vehicles

    1,379,979 1,549,882 1,552,703 1,951,333 2,501,542 2,618,072 2,686,429

    Commercial

    Vehicles

    467,765 490,494 384,194 532,721 684,905 809,532 793,150

    Three

    Wheelers

    403,910 364,781 349,727 440,392 526,024 513,251 538,291

    Two

    Wheelers

    7,872,334 7,249,278 7,437,619 9,370,951 11,768,910 13,435,769 13,797,748

    Grand Total 10,123,988 9,654,435 9,724,243 12,295,397 15,481,381 17,376,624 17,815,618

    Source: Siam (Society of Indian Automobile Manufacturers) Industry Statistics, 2013

    Table 1.2: Indian Automobiles industry Production Trends

    Automobile Production Trends (Number of

    Vehicles)

    Category 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

    Passenger

    Vehicles

    1,545,223 1,777,583 1,838,593 2,357,411 2,982,772 3,146,069 3,233,561

    Commercial

    Vehicles

    519,982 549,006 416,870 567,556 760,735 929,136 831,744

    Three

    Wheelers

    556,126 500,660 497,020 619,194 799,553 879,289 839,742

    Two

    Wheelers

    8,466,666 8,026,681 8,419,792 10,512,903 13,349,349 15,427,532 15,721,180

    Grand Total 11,087,997 10,853,930 11,172,275 14,057,064 17,892,409 20,382,026 20,626,227

    Source: Siam (Society of Indian Automobile Manufacturers) Industry Statistics, 2013

  • Chapter- 1 Introduction

    21

    Table 1.3: Indian Automobiles Industry Exports Trends

    Automobile Exports Trends

    (Number

    of

    Vehicles)

    Category 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

    Passenger

    Vehicles

    198,452 218,401 335,729 446,145 444,326 507,318 554,686

    Commercial

    Vehicles

    49,537 58,994 42,625 45,009 74,043 92,663 79,944

    Three

    Wheelers

    143,896 141,225 148,066 173,214 269,968 362,876 303,088

    Two

    Wheelers

    619,644 819,713 1,004,174 1,140,058 1,531,619 1,947,198 1,960,941

    Grand Total 1,011,529 1,238,333 1,530,594 1,804,426 2,319,956 2,910,055 2,898,659

    Source: Siam (Society of Indian Automobile Manufacturers) Industry Statistics, 2013

    Diagram 1.1: Domestic Market Share of Automobiles for 2011-12

    Source: Based on Siam (Society of Indian Automobile Manufacturers) Industry

    Statistics, 2012

    15% 5%

    3%

    77%

    Passenger Vehicles

    Commercial Vehicles

    Three Wheelers

    Two Wheelers

  • Chapter- 1 Introduction

    22

    1.7.5 GROWTH AND DEVELOPMENT OF AUTOMOBILE

    INDUSTRY IN INDIA

    It is a known markets fact that health of countrys automobile industry is one of

    the key indicators of the manufacturing competitiveness of the country. India

    has emerged as one of the key global (both as consumption and as production

    base) in automobile industry and particularly in last few years it has witnessed

    tremendous growth and has also been base for global manufacturers .

    Volkswagen, Nissan, Renault, General Motors, Ford, Honda, Suzuki, Hyundai,

    Daimler, BMW, Skoda, Audi, all top brands are present in India and also

    manufacturing/assembling locally. India is 2nd largest two wheeler

    manufacturer, 5th largest Commercial vehicles manufacturer, largest three

    wheeler manufacturer and 10th largest passenger vehicles manufacturers.

    Automobile industrys turnover in financial year 2011-12 was USD 56,259.57

    million (estimated) and it contributes 5-7% of Indias GDP. Automobile

    industry witnessed a CAGR (Compound Annual Growth Rate) of 12.7%

    between 2006-07 and 2010-11, to reach total production units of 17.91 million

    units. Two wheelers represent largest segment with 75% share followed by

    17% of passenger vehicles and 4% each by commercial vehicles and three

    wheelers. But most interesting aspect is that passenger vehicle segment exhibits

    highest growth of 17.9% followed by 12% of two wheelers. Growth of both

    commercial vehicles and three wheeler segments were between 9-10%.

    However, in Revenue terms, passenger vehicles is the largest segment with

    approx. 63% share followed by commercial vehicles with 22%, and two

    wheelers and three wheelers with remaining 15%.

    Domestic sales had grown at relatively slower pace than production with sales

    CAGR of 11.3%. It again reinforces the fact the passenger vehicles emerged

    out as largest growth segment with 16% followed by 11.6% CAGR of two

    wheelers. As of 2010-11 there was domestic demand of 2.5 million passenger

    vehicles and 11.8 million two wheelers, approximately 676 thousand units of

    commercial vehicles and 526 thousand units of three wheelers which were sold

  • Chapter- 1 Introduction

    23

    in Indian market. An interesting features is that ration of domestic sales to

    Production is decreasing indicating an attractive demand for exports. From

    91% in 2006-07 it decreased to 86% in 2010-11.

    Diagram 1.2: Sales Development of Indian Automobile Industry

    Source: Based on Siam (Society of Indian Automobile Manufacturers) report, 2011

    India exported approx. 2.3 million automobiles of which comprise of about 0.5

    million passenger vehicles and 1.5 million two wheelers and about 270

    thousand units of 3 wheelers. Passenger vehicles with around 25% CAGR

    growth is the highest growth segment followed closely by 2 wheelers with 24%

    CAGR growth and three wheelers with impressive 17% CAGR. India has

    emerged as one of the attractive manufacturing base for Automobiles globally

    and this is true for all the segments. Hyundai is exporting close to 50% of its

    production and same is true for Reanult and Nissan. In fact, India is

    increasingly becoming base for small car and compact car manufacturing

    globally. Both the segments of commercial vehicles and passenger vehicles are

  • Chapter- 1 Introduction

    24

    highly competitive with presence of all the global top manufacturers. Latest to

    enter India was Nissan and Renault in passenger vehicles and Bharat Benz in

    commercial vehicles. In most of the segments, market leaders are domestic

    companies but closely contested by rival global brands. For example:

    a) Two wheelers: Hero Motor Corp. has 55% market share and Bajaj has

    22% share.

    b) Three wheelers: Piaggio and Bajaj have nearly equal share of 40% each.

    c) Commercial vehicles: Tata with 65% is dominating leader. However,

    Ashok has 2nd highest share in medium and heavy commercial vehicles

    segment with 24% whereas Mahindras are 2nd in light commercial

    vehicles segment with 30% share.

    d) Passenger vehicles: Maruti Suzuki has 45% market share, Hyundai has

    16% and Tata has 15% share.

    Foreign Direct Investment (FDI) Policy

    A policy of automatic approval up to 100% FDI has been a boon for the

    Industry. The policy alone has led to a turnover of 12 billion USD in the Indian

    auto industry. No need for licensing and no restriction on import of auto

    components make this sector very attractive for foreign investors. Apart from

    this, advanced technology yet cost effectiveness and efficient manpower add to

    the list of advantages which India offers as a target country for investment.

    With a lot of foreign players like General Motors, Toyota, Renault, BMW, etc.

    already carrying out their activities successfully in India, FDI has definitely

    contributed to the growth story of the Indian automobile industry. According to

    the Department of Industrial Policy and Promotion (DIPP), the auto sector

    accounts for 4% of total FDI inflow into India. As per the DIPPs FDI figures

    for May 2012, FDI inflow into the auto sector for the period April 2011 to

    March 2012 totaled USD 923 million; cumulative FDI into the sector for the

    period April 2000 to May 2012 stood at USD 6,853 million. The DIPP is part

  • Chapter- 1 Introduction

    25

    of the Government of Indias Ministry of Commerce and Industry; it is

    responsible for formulating and implementing the countrys FDI policy.

    The Department of Heavy Industry, under the Ministry of Heavy Industries and

    Public Enterprises, is the main agency in India for promoting the growth and

    development of the automotive industry. The department assists the industry in

    achievement of its expansion plans through policy initiatives, suitable

    interventions for restructuring of tariffs and trade, promotion of technological

    collaboration and up-gradation as well as research and development. The

    department is also concerned with the development of the heavy engineering

    industry, machine tools industry, heavy electrical industry, industrial

    machinery, etc

    Auto Policy, 2002

    In order to further accelerate and sustain advancements in the auto sector, the

    department has undertaken several policy measures and incentives. The most

    important being the announcement of the 'Auto Policy' of 2002, which aims to

    establish a globally competitive automotive industry in India and double its

    contribution to the economy by 2010. The policy seeks to set out the direction

    of growth for the sector and promote R&D therein so as to ensure continuous

    technology upgradation as well as building up of better designing capacities. It

    emphasizes on low emission fuel auto technologies and availability of

    appropriate auto fuels in order to take auto manufacturing to a self-sustaining

    level. Broadly, the objectives of the auto policy are to:-

    a) Exalt the sector as a lever of industrial growth and employment and to

    achieve a high degree of value addition in the country.

    b) Emerge as a global source for auto components.

    c) Establish an international hub for manufacturing small, affordable

    passenger cars and a key center for manufacturing tractors and two-

    wheelers in the world.

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    26

    d) Ensure a balanced transition to open trade at a minimal risk to the Indian

    economy and local industry.

    e) Conduce incessant modernization of the industry and facilitate

    indigenous design, research and development.

    f) Steer India's software industry into automotive technology.

    g) Assist development of vehicles propelled by alternate energy sources.

    h) Development of domestic safety and environmental standards at par

    with international standards.

    National Automotive Testing and R &D Infrastructure Project (NATRIP)

    Another milestone in this field has been the launching of the National

    Automotive Testing and R &D Infrastructure Project (NATRIP) which aims to

    create core global competencies in automotive sector and facilitate its

    integration with the world economy. It seeks to develop 'state-of -the- art'

    testing, validation and R& D infrastructure in the country with a view to

    support the growth and development effort of the automotive industry to reach

    international levels. NATRIP envisages setting up of world-class and

    homologation facilities in India with a total investment of Rs. 1,718 crores

    within the three automotive hubs of the country. These are: Manesar in

    Northern India; Chennai in Southern India; and Pune and Ahmednagar in

    Western India. The project largely aims at:-

    a) Creating critically needed automotive testing and validation

    infrastructure to enable the Government to usher in global vehicular

    safety, emission and performance standards.

    b) Deepening of manufacturing in India by achieving high degree of value

    addition and enhancing employment potential in the country.

    c) Facilitating convergence of India's strengths in IT and electronics with

    automotive engineering.

    d) Enhancing India's global outreach in this sector by facilitating

    development and mass production of high technology driven, affordable

  • Chapter- 1 Introduction

    27

    and globally acceptable automotive products and by de-bottlenecking

    their exports.

    e) Removing the crippling absence of basic product testing, validation and

    development infrastructure for automotive industry.

    Automotive Mission Plan (2006-2016)

    Besides, the announcement of 'Automotive Mission Plan' for the period of

    2006-2016 is a major step taken to make India a global automotive hub. The

    Mission Plan aims to make India emerge as the destination of choice in the

    world for design and manufacture of automobiles and auto components, with

    output reaching a level of US$ 145 billion (accounting for more than 10% of

    the GDP) and providing additional employment to 25 million people by 2016.

    It envisages increase in production of automotive industry from the current

    level of Rs. 1,69,000 crores to reach Rs. 6,00,000 crores by 2016. The Mission

    seeks to oversee the development of the automotive industry, that is, the

    present scenario of the sector, its broad role in the growth of national economy,

    its linkages with other key facets of the economy as well as its future growth

    prospects. This is involved in improving the automobiles in the Indian domestic

    market, providing world class facilities of automotive testing and certification

    as well as ensuring a healthy competition among the manufacturers at a level

    playing field.

    The future challenges for the Indian automobile industry in achieving the

    targets defined in the Automotive Mission Plan would primarily consist of

    developing a supply base in terms of technical and human capabilities,

    achieving economies of scale and lowering manufacturing costs, as well as

    overcoming infrastructural bottlenecks. It also involves stimulating domestic

    demand and exploiting export and international business opportunities. In all

    these, the role of the Government is of facilitating infrastructure creation,

    promoting the countrys capabilities, creating a favourable and predictable

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    28

    business environment, attracting investments and promoting R&D. While, the

    role of industry is primarily of designing and manufacturing products of world-

    class quality standards, establishing cost competitiveness, improving

    productivity of both labour and capital, achieving scale and R & D enhancing

    capabilities as well as showcasing Indias products in potential markets.

    All such initiatives indicate that the Indian automotive industry has been

    emerging as a sunrise sector of the economy. It is not only meeting the growing

    domestic demands, but also gradually increasing its penetration in the

    international markets. It has been continuously restructuring itself and

    absorbing newer technologies in order to align itself to the global developments

    and realize its potentialities. Endowed with several advantages like low cost

    and high skill manpower; globally competitive auto-ancillary industry;

    established testing and Research & Development centres; production of steel

    at lowest cost; etc., the industry provide immense investment opportunities.

    This has instilled confidence in auto manufacturers to face international

    competition as well as improve quality standards of vehicles with safety norms

    in the wake of rapidly increasing traffic. Various policy incentives including

    time bound implementation of Automotive Mission Plan together with

    establishment of world class testing, homologation and certification facilities

    would ensure Indian automotive industry a distinct edge amongst the newly

    emerging automotive destinations of the world.

    Indian Automobile Market - Reasons to cheer

    The Indian Automobile Industry has a bright future because of several factors

    working towards increasing demand for automobiles:

    a) Rapid Urbanization: Currently only 21% of the population lives in the

    urban areas. Given how India is performing, the figures are hoped to

    touch 35% by 2020 and 40% by 2030.

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    29

    b) Rising per capita GDP: The per capita GDP of India increased from

    1200 USD in 2011 to almost 1330 USD in 2012. This is further

    expected cross the 2000 mark by 2015. Increasing GDP would mean

    increased purchasing power and hence increased demand for

    automobiles

    c) Overall growth of other industries: Industries are usually interdependent

    on each other. The effect of expansion of other industries is bound to

    percolate to the automobile industry as well. Since transport is a basic

    need of every industry, demand for automobiles will rise with every

    positive change in an industry.

    d) Car buyers getting younger: It is no more a hidden fact that India is one

    of the youngest countries in the world with a median age of almost 26

    years; much lower than the Worlds biggest economies. It only shows

    that the work class constitutes majorly of young individuals. The car

    buying age has been on a decline. Where a person aged 39 used to buy a

    car in the year 2000, this age has gradually come down to 33 in 2010. It

    is only expected to become lesser in the coming years.

    e) Growing Middle class: With the middle class of India growing annually,

    benefits of this sector are still untapped. It is the transition from the

    lower class to the middle class which converts car into a need from a

    luxury. Other factors like affordability, innovation, infrastructure

    facilities and price of fuel also affect the demand for automobiles to a

    large extent. These challenges keep the automakers on their toes all the

    time. With the middle class in India still growing annually, the benefits

    of this sector are still untapped.

    f) Rising industrial and agricultural output, which contribute positively to

    the GDP and thereby increase the purchasing power.

    g) Availability of easy finance schemes.

    h) Cost efficiencies contributing to lower production costs.

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    i) Favourable Government policies.

    j) Growth in road infrastructure across the country.

    1.7.6 FUTURE PROSPECTS OF AUTOMOBILE INDUSTRY IN

    INDIA

    The Indian two-wheeler market possesses a significant potential, and is

    anticipated to grow at a CAGR of around 11% during 2011- 2015 to reach 17.8

    Million Units by the end of 2015. By 2016 the size of the Indian automobile

    industry is expected to grow by 13%, to reach a mark of US$ 120-159 billion.

    The Passenger Vehicle Market of India will sell almost 5 million vehicles by

    2017-2018. The Indian Automobile Exports will also grow and cross the 17

    billion USD mark by 2015-2016. And, there are factors which are demand

    determinants playing in favour of the Indian automobile Industry like rising

    family Income, product innovations, demographics and favourable duty

    structure; there is a lot which the industry is yet to see. The future looks bright

    and being an entrepreneur, if someone is looking for opportunities in this

    Industry, anything creative/ innovative related to the automobile industry is

    bound to work. The Society of Indian Automobile Manufacturers estimates that

    by 2015 India shall be producing 5 million vehicles and in the next 5 years this

    would increase by a further 4 million. It is expected that by 2050 India would

    be sitting atop the global automobile market with 611 million cars in its streets.

    The future for Indian Automobile industry is really bright and all the sub

    segments shall witness growth. Major Drivers would be Strong local demand,

    rising per capita income, establishment of India as global auto hub, product

    innovation and multi financing options.

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    Diagram 1.3: Growth estimates and demand drivers of Indian Automobile

    Industry

    Source: Based on Siam (Society of Indian Automobile Manufacturers) report, 2012

    The Indian Automobile segment shall increase from 17.9 million units in 2010-

    11 to 29.1 Million units in 2015-16 and shall be in excess of 120 billion dollar

    industry by then. Passenger vehicles segment shall cross 5 million units and

    commercial vehicles and three wheelers each shall cross 1 million units. So,

    coming years shall establish India more strongly as base for Automobile

    manufacturing and which in ripple affect shall lead to demand increase in

    R&D, Engineering services and other service industries as off shoring.

    1.7.7. SWOT ANALYSIS OF AUTOMOBILE INDUSTRY IN INDIA

    Strengths:

    a) Globally cost competitive.

    b) Adheres to strict quality controls.

    c) Adoption or Access to latest technology.

    d) Large domestic market.

    e) Government incentives for manufacturing plants.

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    f) Able to achieve significant gains in productivity.

    Weaknes