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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.

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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 Honda’s Global Vision

3.2 Honda’s 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


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


163

6.5 Average age of Inventory Period of the Companies from the


166

6.6 Debtors’ Turnover Ratio of the Companies from the


167

6.7 Average Collection Period of the Companies from the


170

6.8 Creditors’ Turnover Ratio of the Companies from the


172

6.9 Average Payment Period of the Companies from the


174

6.10 Working Capital Turnover Ratio of the Companies from the


175

6.11 Fixed Assets Turnover Ratio of the Companies from the 177

x


6.12 Total Assets Turnover Ratio of the Companies from the


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


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


207

6.25 Administrative Expenses Ratio of the Companies from the


209

6.26 Selling and Distribution Expenses Ratio of the Companies 210

xi


6.27 Cost of Goods Sold Ratio of the Companies from the


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


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


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


159

6.3 Absolute Liquidity Ratio of the Companies from the


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


(Times)

165

xiii

6.6 Graph showing Creditors’ Turnover Ratio of the


(Times)

172

6.7 Graph showing Working Capital Turnover Ratio of the


(Times)

176

6.8 Graph showing Fixed Assets Turnover Ratio of the


(Times)

178

6.9 Graph showing Total Assets Turnover Ratio of the


(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


187

6.13 Graph showing Proprietary Ratio of the Companies from


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


(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


201

6.19 Graph showing Operating Ratio of the Companies from


203

6.20 Graph showing Operating Profit Ratio of the Companies


(Percentage)

205

6.21 Graph showing Return on Assets Ratio of the Companies


(Percentage)

214

6.22 Graph showing Return on Investment Ratio of the


(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


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 Citroën 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.


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 1990‟s, 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


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


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.


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 country‟s 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.


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 project‟s structure.

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


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 organization‟s performance

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

ratios, profitability ratios and long term solvency ratios.


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


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

India‟s GDP and is responsible for 7 to 8 percent of India‟s 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 India‟s largest automobile company; the company manufactures commercial

and passenger vehicles, and is the world‟s fourth-largest truck manufacturer

and the second-largest bus manufacturer. Maruti Suzuki is India‟s largest

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

Hero MotoCorp is the world‟s largest two-wheeler manufacturing company in

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

Auto is the world‟s 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


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


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 clichéd 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


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 WORLD’S 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


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


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


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

1970‟s 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


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


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 Hon‟ble 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 Maruti‟s Classic, Alto, Station Wagon,

Ford‟s 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


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


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



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


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


22

1.7.5 GROWTH AND DEVELOPMENT OF AUTOMOBILE

INDUSTRY IN INDIA

It is a known markets fact that health of country‟s 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 industry‟s turnover in financial year 2011-12 was USD 56,259.57

million (estimated) and it contributes 5-7% of India‟s 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


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


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 Mahindra‟s 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 DIPP‟s 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


25

of the Government of India‟s Ministry of Commerce and Industry; it is

responsible for formulating and implementing the country‟s 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.


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


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 country‟s capabilities, creating a favourable and predictable


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 India‟s 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.


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 World‟s 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.


30

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.


31

Diagram 1.3: Growth estimates and demand drivers of Indian Automobile

Industry


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.


32

f) Able to achieve significant gains in productivity.

Weakness:

a) Low research and development capability.

b) Industry is exposed to cyclical downturns in the automotive Industry.

c) Most component companies are dependent on global majors for

technology.

d) Low labor productivity.

e) High interest costs and high overheads.

f) Rising cost of production.

Opportunities:

a) Sourcing hub for global automobile majors.

b) Export opportunities may be realized through diversification of export

basket.

c) Increase in the income level.

d) Cut in excise duties.

e) Rising rural demand.

Threats:

a) Pressure on prices from OEM‟s (Original Equipment Manufacturers)

continues.

b) Imports from FTA (Foreign Trade Agreements) Regime Countries, in

certain component segments are a threat to local industry.

c) Smaller players, who do not upgrade to global standards, would get

extinct.

d) Rising interest rates.

e) Cut throat competition.

f) Lack of technology for Indian Companies.


33

1.8 CLASSIFICATION OF INDIAN AUTOMOBILE INDUSTRY

The Automobile Industry of India comprises of the following four broad

categories of vehicles:

1 Two-wheelers

2 Three-wheelers

3 Commercial Vehicles

4 Passenger Vehicles

Two-wheelers, being the most popular means of personal transport, alone

account for about 75% of the total automobile production in India, while

passenger vehicles account for nearly 16% of the production. However, owing

to their lower sales realisations, two wheelers account for only around 32% of

the sales in terms of value while passenger vehicles account for around 62% of

the same. Nearly 59% of these two wheelers sold were motorcycles and about

12% were scoters. Mopeds occupy a small portion in the two wheeler market

however; electric two wheelers are yet to penetrate. Commercial vehicles are

categorised into heavy, medium and light. They account for about 5% of the

market. Three wheelers are categorised into passenger carriers and goods

carriers. Three wheelers account for about 4% of the market in India. The

passenger vehicles are further categorised into passenger cars, utility vehicles

and multi-purpose vehicles. All sedan, hatchback, station wagon and sports

cars fall under passenger cars. Tata Nano, is the world‟s cheapest passenger

car, manufactured by Tata Motors - a leading automaker of India. Multi-

purpose vehicles or people-carriers are similar in shape to a van and are taller

than a sedan, hatchback or a station wagon, and are designed for maximum

interior room. Utility vehicles are designed for specific tasks. The passenger

vehicles manufacturing account for about 15% of the market in India.


34

Diagram 1.4: Classification of Indian Automobile Industry

1.8.1 TWO WHEELERS AUTOMOBILE INDUSTRY IN INDIA

India is the second largest producer and manufacturer of two-wheelers in the

world. Indian two-wheeler industry has got spectacular growth in the last few

years. Indian two-wheeler industry had a small beginning in the early 50's. The

Automobile Products of India (API) started manufacturing scooters in the

country. Bikes are a major segment of Indian two wheeler industry, the other

two being scooters and mopeds. Indian companies are among the largest two-

wheeler manufacturers in the world. Hero Honda and Bajaj Auto are two of the

Indian companies that top the list of world companies manufacturing two-

wheelers. The two-wheeler market was opened to foreign companies in the mid

1980s. The openness of Indian market to foreign companies leads to the arrival

of new models of two-wheelers into India. Easy availability of loans from the

banks, relatively low rate of interest and the discount of prices offered by the

dealers and manufacturers lead to the increasing demand for two-wheeler

vehicles in India. This lead to the strong growth of Indian automobile industry,

Kinetic Honda was introduced in the Indian market during the mid 80s. The

Indian two-wheeler industry has come a long way since its humble beginning

in 1948 when Bajaj Auto started importing and selling Vespa Scooters in India.


35

Since then, the customer preferences have changed in favor of motorcycles and

gearless scooters that score higher on technology, fuel economy and aesthetic

appeal, at the expense of metal-bodied geared scooters and mopeds. These

changes in customer preferences have had an impact on the fortunes of the

players.

Diagram 1.5: Classification of Indian Two Wheelers Industry

There are many two-wheeler manufacturers in India. Major players in the two

wheeler industry are Hero MotoCorp, Bajaj Auto Ltd. and TVS Motor

Company Ltd. The other key players in the two-wheeler industry are Kinetic

Motor Company Ltd, Kinetic Engineering Ltd., LML Ltd., Yamaha Motors

India Ltd., Majestic Auto Ltd., Royal Enfield Ltd. and Honda Motorcycle &

Scooter India (P) Ltd.

a) Bajaj Auto limited: Famous for making scooters that are reliable and

last long. They started producing motorbikes. Most of their scooters like

Chetak, Super, Cub etc., seem to have gone out of production, they have


36

now (January 2007) come up with BAJAJ KRISTAL .They also make 3

wheelers.

b) Hero MotoCorp: Hero MotoCorp, is now the world‟s largest

manufacturer of two wheelers.

c) Honda Motorcycle & Scooter India: Honda of Japan has setup a wholly

owned subsidiary in India to make bikes for Indian market.

d) Kinetic Motor Company Limited: It has come a long way, since

introducing the moped LUNA! They have started RENT-A-BIKE and

setup offices in certain parts of India.

e) Royal Enfield: Famous for BULLET and other tough vehicles for police

and armed forces.

f) TVS Motor Company limited: TVS Motor Company is the first two-

wheeler manufacturer in the world to be honoured with the hallmark of

Japanese Quality – The Deming Prize for Total Quality Management.

From mopeds to motorbikes, they have progressed.

g) Yamaha Motors India Limited: It was incorporated in August 2001 as a

100′% subsidiary of Yamaha Motors, Japan.

h) LML Machines: After successfully selling LML scooters, this company

ran into problems and lock out was declared in March 2006.

The Indian two wheeler industry has shown rapid rate of growth in last one

decade. Its share in automobile industry has increased from 15% in 2001 to

17% in 2010 .Annual sales of two wheeler industry have increased from Rs.

7486 crores in 2001 to Rs. 30096.82 crores in 2010. A snapshot of the two

wheelers manufacturers operating in India across time shows that while the

core that existed 10 years back continues to remain the same, there have been

several casualties along the way but at the same time there have been several

new entrants. This is also the period which witnessed the end of Hero Honda‟s

27 years old JV with Honda in 2010. Rising income levels, reducing excise

duties, higher loan tenure and loan-to-value offered by the financing companies

have all fuelled the growth of two-wheeler demand.

With sales volumes of 10.1 million units, the motorcycles segment is the

largest sub-segment of the domestic 2W industry accounting for a bulk of its


37

volumes. However, over the last five years, the motorcycles segment has seen

its volume share in the domestic 2W industry slide down to 75.1% in 2011-12

from the highs of 83.5% recorded in 2006-07. Although domestic motorcycle

volumes grew at 9.0% CAGR during the last five years, both the scooters

segment as well as the mopeds segment grew at a much faster CAGR of 22.2%

and 17.0%, respectively; contributing to reduction in the motorcycle segment‟s

volume share.

Diagram 1.6: Trend in two wheelers segment volume mix (Domestic)


In 2011-12 two wheelers sold 13,435,769 vehicles in domestic market,

produced 15,453,619 vehicles and exported 1,947,198 vehicles. Total Two

Wheelers sales registered a growth of 14.16% during April to March 2012.

Mopeds, Motorcycles and Scooters grew by 11.4%, 11.9% and 24.6%

respectively. If we compare sales figures of March 2012 to March 2011, the

growth for two wheelers was 8.27%. Two wheeler industry remains to be an

attractive segment of the Automobiles segment. In 2012-13, the Scooter

segment has outperformed the two wheeler industry and the credit to revive the

market is given to Honda Activa. The sale of Scooters grew at a YOY rate of

24.6% in 2011-12 as compared to motorcycles sales which was at 11.9%.

83.50% 79.80% 78.70% 78.40% 76.50% 75.15%

12.00% 14.50% 15.50% 15.60% 17.60% 19.19%

4.50% 5.70% 5.80% 6.00% 5.90% 5.80%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

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

Mopeds

Scooters

Motorcycles


38

Table 1.4: Trend in Two Wheelers Sales and Growth

FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Entry

Motorcycles

2,499,963 2,490,392 1,788,353 1,400,441 1,394,815 1,533,245 1,766,072

Growth % -0.4% -28.2% -21.7% -0.4% 9.9% 15.2%

Executive

Motorcycles

2,790,657 3,407,905 3,288,262 3,617,805 4,698,323 5,862,409 6,660,616

Growth % 22.1% -3.5% 10.0% 29.9% 24.8% 13.6%

Premium

Motorcycles

523,248 655,366 692,266 816,924 1,247,992 1,623,436 1,665,154

Growth % 25.2% 5.6% 18.0% 52.8% 30.1% 2.6%

Total

Motorcycles

5,813,868 6,553,664 5,768,881 5,835,169 7,341,130 9,019,090 10,091,842

Growth % 12.7% -12.0% 1.1% 25.8% 22.9% 11.9%

Scooters 893,145 937,036 1,049,569 1,145,818 1,462,507 2,057,604 2,562,841

Growth % 4.9% 12.0% 9.2% 27.6% 40.7% 24.6%

Mopeds 275,927 331,393 398,905 438,477 564,839 697,418 776,866

Growth % 20.1% 20.4% 9.9% 28.8% 23.5% 11.4%

Overall

Two

Wheelers

6,982,940 7,822,093 7,217,355 7,419,464 9,368,476 11,774,112 13,431,549

Growth % 12.0% -7.7% 2.8% 26.3% 25.7% 14.1%


Table 1.5: Trend in Two Wheelers Market Share

Segments Companies FY

2006

FY

2007

FY

2008

FY

2009

FY

2010

FY

2011

FY

2012

Motorcycles

Hero 51.3% 50.0% 56.4% 61.6% 60.2% 55.0% 57.3%

Bajaj 30.2% 31.9% 28.9% 22.0% 24.4% 26.8% 25.4%

TVS 13.0% 12.9% 8.8% 7.9% 6.8% 7.0% 6.2%

HMSI 1.7% 2.5% 4.4% 0.2% 0.2% 7.0% 7.0%

Others 3.8% 2.7% 1.5% 2.3% 2.5% 3.0% 3.5%

Scooters

Hero 0.0% 9.8% 9.8% 13.4% 14.3% 16.7% 16.3%

Bajaj 11.9% 2.1% 2.0% 0.8% 0.3% 0.0% 0.0%

TVS 26.2% 26.7% 23.8% 20.9% 20.5% 21.2% 19.4%

HMSI 51.0% 56.3% 58.0% 57.1% 50.6% 43.4% 47.8%

Others 10.0% 5.2% 5.5% 7.7% 14.4% 18.8% 16.5%

Overall Two

Wheelers

Hero 42.6% 43.0% 46.4% 50.4% 49.3% 45.7% 46.1%

Bajaj 20.7% 20.9% 23.4% 17.4% 19.2% 20.5% 19.1%

TVS 18.2% 18.3% 16.0% 15.4% 14.6% 15.0% 14.1%

HMSI 8.1% 8.9% 12.1% 13.8% 12.8% 13.2% 14.9%

Others 4.5% 2.9% 2.0% 3.0% 4.2% 5.6% 5.8%



39

Untouchably Hero MotoCorp Limited remains the king in the two-wheeler

segment in India controlling 50% of market. The Scooter market is dominated

by Honda Motorcycle and Scooters India Private Limited (HMSI).

ICRA (Indian Credit Ratings Agency) expects the scooters segment to

gradually increase its share in the domestic two wheeler market from 19.1% in

2011-12 to ~27% by 2016-17E. With this, the volumes in the domestic scooters

market are estimated to get doubled by 2016-17E over the current levels.

Additionally, the entry of new players in the industry, multitude of new model/

variant launches, growing distribution reach, cheaper ownership costs on a

relative basis are expected to be some of the other prime movers for industry

growth over the medium term. In ICRA‟s view, while the trend in rising

commodity prices, hardening interest rates and increasing fuel costs may lead

to some moderation in industry growth over the short term, the growth over the

medium to long term is expected to remain in double digits.

1.8.2 THREE WHEELERS AUTOMOBILE INDUSTRY IN INDIA

India is foremost producer, consumer and exporter of three wheelers in the

world. Three wheelers are widely used both for passenger carriage and for

goods transportation over short to medium distances. In the three wheeler

segment, the classification is broadly in terms of carriage and passenger

vehicles. The industry is characterized by two segments: Passenger carrier and

Goods carrier. These can be further classified according to mass of the

vehicles, seating capacity (3+1 / 4+1 / 6+1), payload capacity (0.35T / 0.50T /

0.75T / >0.75 T), engine type (2-stroke/4-stroke, 150cc/175cc/200cc/400cc,

front-engine/rear-engine) and fuel consumption (Diesel/Petrol/CNG/LPG).

The leading three wheelers manufacturers in India are Bajaj Auto, Mahindra &

Mahindra and the Italy-based Piaggio. Bajaj Auto has a range of models for

passenger three wheelers namely RE 2S, RE 4S, RE 4S CNG, RE 4S LPG, RE

Diesel and RE Diesel Mega while its existing carriage three wheelers is called

GC 1000. M&M has got Champion range of three wheelers. Champion pick


40

up, Champion delivery vans and Champion Passenger carriers are seen more in

western parts of India. Alfa three wheelers carriages of M&M are also in great

demand. TVS Motors recently entered the three wheeler segment as well.

The key players of three wheelers companies in India are:

a) Bajaj Auto Three Wheelers: They make passenger and cargo three

wheelers too.

b) Force Motors: They make three wheelers.

c) Sonalika: They make three wheelers and also Sonalika cars.

d) Scooters India: They were makers of the famous scooter

“LAMBRETTA”! Now they make three wheelers and even export it.

e) Piaggio: It is wholly subsidiary of Piaggio Italy. They have come up

with diesel 3 wheelers.

Over the years, the Indian three-wheelers industry has traversed a high growth

trajectory and evolved from being an import-dependent industry before 1960s

to becoming the world‟s foremost producer, consumer and exporter. The

domestic three wheelers passenger vehicle segment has recorded healthy 10%

CAGR (Compound Annual Growth Rate) volume growth over the last decade.

Besides, with improving road infrastructure and increasing of goods

transportation, the demand for three wheeler goods vehicles had surged during

the first half (~32% CAGR) of the last decade; although the same has been

severely impacted during 2007-2009 (~50% de-growth) due to economic

slowdown and successful entry of four wheelers SCVs (Small Commercial

Vehicles) . However, demand for domestic three wheelers goods segment has

revived again and has grown at ~10%. The contribution from goods segment to

total domestic three wheelers sales had increased rapidly from 27% in 2003 to

41% in 2007, then declined steeply to 21% in 2010 and has stabilized near that

levels since last 2-3 years. The contribution from exports has increased

immensely from ~16% in 2003 to ~41% of total industry sales in financial year

2012. Overall, the Indian three wheelers industry is transforming into an


41

exports driven industry, mainly catering to the passenger transport segment

wherever public transport systems are inadequate.

Diagram 1.7: Three Wheelers Industry Sales (Dom vs. Exports)


Bajaj Auto is the clear market leader in the passenger carrier segment with

~66% market share, Piaggio is the market leader in the goods carrier segment

with ~55% market share. Bajaj Auto has been the industry pioneer and has

remained the leading three wheelers manufacturer / exporter from India over

the last four decades. It enjoys near monopoly in the three wheelers passenger

auto-rickshaws segment. Besides, with well established brands & deeply

penetrated distribution network in the major exports markets, the company

boosts of ~87% market share in three wheelers exports. Overall, the company

is expected to remain the main beneficiary of surging demand from emerging

economies. M&M is the third largest player with Champion and Alfa brands.

The company was focused primarily on the 0.5T 3W cargo and 0.75 ton 3W

cargo segment. However, the company also entered the passenger segment with

launch of Alpha Diesel, which helped it improve its market share in the

domestic three wheelers passenger market from ~2% in FY 2008 to ~12.3% in

2012. Besides, Chennai based TVS Motors has gained 5-6% market share in

the passenger segment. Scooters India has been losing market shares and Force


42

Motors has nearly exited the three wheelers business to concentrate on its LCV

business.

Diagram 1.8: Market Shares of Three Wheelers Industry (Domestic and

Exports)


India is the world's foremost producer, consumer and exporter of three-

wheelers with domestic sales of 5.13 lakh units and exports of 3.63 lakh units

in the financial year ending 2012. Three wheelers are widely used in India as

an affordable means of short-to-medium distance public transportation and last

mile connectivity for goods transportation. Apart from the domestic demand,

India has also emerged as important export hub for three wheelers with

presence in some of the South Asian, African and Latin American markets that

are replicating Indian three wheelers story with rising disposable incomes but

inadequate public transport systems. Overall, the three wheelers industry has

witnessed relatively healthy 15% CAGR volume growth over the last decade

driven by moderate domestic growth (~10% CAGR) and robust exports growth

(~38% CAGR).

However, the successful launch of four-wheeled Small Commercial Vehicles

(mainly Tata ACE in 2005-06) has altered the industry dynamics considerably

over the last five years. While the domestic three wheelers goods segment has


43

de-grown at 9% CAGR over the last five years, SCVs have reported robust

21% CAGR growth over the same period. Moreover, slowing economic

growth, moderating consumer goods consumption, high inflation, increase in

financing costs, rising fuel prices, absence of fresh permits by the state

governments and overall high base has impacted domestic three wheelers sales

in 2012.

Table 1.6: Indian Three Wheelers Industry Sales

FY07 FY08 FY09 FY10 FY11 FY12 FY08 FY09 FY10 FY11 FY12

Domestic: 3W

Passenger

carriers

236,788 234,774 268,489 349,868 425,358 406,236 -1% 14% 30% 22% -4%

Domestic: 3W

Goods Carriers

167,122 130,007 81,238 90,524 100,666 107,015 -22% -38% 11% 11% 6%

Exports: 3W

Passenger

Carriers

142,944 140,406 146,914 172,468 268,435 360,736 -2% 5% 17% 56% 34%

Exports: 3W

Goods Carriers

952 819 1,152 746 1533 2140 -14% 41% -35% 105% 40%

Total 3W Sales 547,806 506,006 497,793 613,606 795,992 876,127 -8% -2% 23% 30% 10%


ICRA Research expects the domestic three wheelers passenger segment to

benefit from product up-gradations (2-stroke to 4-stroke, Petrol/Diesel to CNG,

front engine to rear engine vehicles) as well as opening of fresh permits by

various state governments. Despite stiff competition from four wheelers SCVs,

the domestic three wheelers goods segment continues to benefit from its

favorable operating economics for First Time Users (FTUs). Lastly, ICRA

expects three wheelers exports to remain the main growth driver for the

industry due to rising disposable incomes, evolving travel & consumption

patterns, improving road infrastructure, increasing demand for motorized

transportation and inadequate public transport systems in the target emerging

markets. ICRA expects the three wheelers industry to report a moderate volume

CAGR of 7-8% over the next five years. It expects the long-term sales growth

to be the highest in the exports segment, followed by that in the passenger

carrier segment and the lowest in the goods carrier segment due to intense

competition from the four-wheeler small commercial vehicles. According to


44

"India Three wheeler Market Forecast & Opportunities, 2017", the market for

three wheelers in India is expected to witness phenomenal growth. The changes

in FDI policies and booming retail sector in the country are driving the growth

for commercial loading three wheelers. The rising population and increasing

need for affordable and convenient transportation is fuelling the market for

passenger three wheelers. By 2017, three wheelers market in India is expected

to reach up to USD 4.2 Billion.

1.8.3 COMMERCIAL VEHICLES AUTOMOBILE INDUSTRY IN

INDIA

India is the 5th largest commercial vehicle manufacturer in the world and its

primary growth is driven by a healthy economic climate combined with

massive investments from the government in infrastructure activities as well as

a developing public transportation system. The Indian Commercial Vehicles

(CV) market is segmented on the basis of gross vehicle weight (GVW) into:

Heavy Commercial Vehicles (HCVs), Medium Commercial Vehicles (MCVs)

and Light Commercial Vehicles (LCVs). GVW is defined as vehicle weight

plus the rated payload; the rated payload being the maximum weight permitted

to be loaded on to the vehicle under the Motor Vehicles Act, 1988. Vehicles

with a GVW of more than 16 tonnes are classified as HCVs, vehicles with a

GVW of 7.5-16 tonnes are classified as MCVs and vehicles with a GVW of

less than 7.5 tonnes are classified as LCVs.

The medium and heavy commercial vehicles sub-segment consists of rigid

trucks, tractor trailers, semi-trailers, bulkers and tippers. These vehicles may

have a range of two to twelve axles and they mostly run on diesel.

Manufacturing in this sub-segment is dominated by Indian companies, Ashok

Leyland, Eicher Motors and Tata Motors. The two largest manufacturers of

buses in India are Tata Motors and Ashok Leyland. Another vehicle included

as part of medium and heavy sized commercial vehicles is the tempo. Tempos


45

are smaller than full sized trucks that cater to the rural and urban areas where

big trucks cannot travel.

Light commercial vehicles (LCV, also sometimes light goods vehicle or LGV)

is a commercial carrier vehicles with a gross vehicle weight (GVW) of up to

3.5 tonnes. Vehicles which qualify in this category are pickup trucks, vans and

three-wheelers all commercially based goods or passenger carrier. The LCV

concept was created as a compact truck and is usually optimised to be ruggedly

built, have low operating costs and powerful yet fuel efficient engines, and to

be utilised in intra-city operations. Tata Motors produces India„s first mini

truck called Tata Ace.

In terms of usage, Commercial vehicles may be categorised as goods carriers

and passenger carriers. Among passenger carriers in the less than 7.5 tonne

GVW segment, those with sitting capacity up to 13 are categorised as utility

vehicles (or UVs, and not part of LCVs) while those with capacity over 13

passengers are grouped as LCVs. At present, the overall CV industry is split

between the LCV and M&HCV segments roughly in the ratio of 45:55. Around

13% of the vehicles sold in the LCV as well as the M&HCV segments are

passenger carriers. Besides LCVs and M&HCVs, three-wheelers that can carry

load up to 1.5 tonnes are also an important mode of goods transport.

The key players of Commercial Vehicles makers in India are:

a) Ashok Leyland: They make buses, trucks, defense vehicles and engines.

b) Eicher Motors: They make buses, automotive gears etc.

c) Force Motors: They make Light commercial vehicles, Multi utility

vehicles and Heavy commercial vehicles. They also make three

wheelers.

d) Mahindra & Mahindra: They make trucks and buses. They also make 4

wheelers.

e) Swaraj Mazda: They make buses and trucks and other vehicles.


46

f) Tata Motors: Apart from cars, they make: utility vehicles. medium and

heavy commercial vehicles, intermediate commercial vehicles, light

commercial vehicles, small commercial vehicles, tippers, buses, defense

vehicles

g) Volvo Buses & Trucks: VOLVO makes Buses and Trucks in India.

With the country‟s highway infrastructure improving and the hub-and-spoke

model gaining increasing acceptance, the domestic truck industry is witnessing

polarization, with growth in the HCV and SCV segments outperforming the

overall industry growth rate. Within the M&HCV segment, the share of

heavy-duty, long-haulage trucks is witnessing a steady increase in proportion

to the total M&HCV volumes, while in the LCV segment, SCVs are

accounting for most of the volumes. In terms of cyclicality, the MCV segment

is comparatively less affected by industrial slowdowns as these are primarily

used for transportation of agriculture produce, consumer durables, and

some bulky commodities (like construction material) compared to HCVs,

which cater more to the industrial segment. In LCVs, the share of the sub-3.5T

segment has also been increasing. The sub-3.5T segment has been able to

increase its share of LCVs consistently from 50% in FY 2004 to close to 85%

in FY 2010. The size of the sub-3.5T LCVs and three wheelers goods carriers

market has expanded from 56,000 units in FY 2002 to over 300,000 units in FY

2010, a CAGR of 23.4%. However, within this, the mix of SCVs and three

wheelers has changed from 25:75 in FY2002 to 70:30 in FY 2010,

underscoring the preference for four-wheeled transportation. The overall CV

industry is split between the LCV and M&HCV segments roughly in the ratio

of 45:55. Around 13% of the vehicles sold in the LCV as well as the M&HCV

segments are passenger carriers.

During FY 2007-10, the domestic CV industry has grown a modest CAGR of

4.3% largely reflecting the sharp downturn witnessed in FY 2009. The

recovery witnessed in FY 2010 helped the industry report strong growth in FY

2010 benefitting from the low-base of FY 2009. During the FY 2010, the

domestic CV industry has continued its strong growth momentum, reporting a


47

growth of 38.7% over the FY 2009. The CV industry in India, as is the trend

internationally, is cyclical, with periods of volume growth leading to over-

investments in fleet capacity and subsequently to periods of correction.

Commercial Vehicles sales grew at CAGR 19.47% during the period FY 2002-

2012, LCVs with 23% growth rate grew at the high pace during this period,

while M&HCVs with CAGR of 15% grew modestly during the same period.

Table 1.7: Trends in Market Share in the Domestic M & HCV Segment

M & HCV

Segment

FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011

Tata Motors

62.0% 62.9% 60.5% 61.9% 64.9% 60.1%

Ashok Leyland

27.0% 27.9% 27.5% 25.7% 21.2% 25.5%

Eicher Motors

7.4% 6.8% 8.2% 7.4% 8.9% 9.3%

Other Players

3.5% 2.4% 3.9% 5.0% 5.0% 5.15%


Table 1.8: Trends in Market Share in the Domestic LCV Segment

LCV Segment FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011

Tata Motors 60.1% 65.4% 62.1% 59.9% 60.5% 56.0%

M & M 26.1% 24.3% 25.6% 27.8% 28.2% 32.7%

Force Motors

5.0% 3.8% 5.0% 3.9% 3.6% 4.8%

Other Players 8.8% 6.5% 7.2% 8.4% 7.8% 6.5%


In the LCV segment, Tata Motors and M&M enjoy a dominant market share.

Force has a strong presence in the passenger LCV segment. Piaggio is a

relatively new entrant in the goods LCV segment. The M&HCV segment is

dominated by Tata Motors and Ashok Leyland, followed by Eicher Motors.

Ashok Leyland is particularly strong in the passenger M&HCV segment and

has traditionally enjoyed a slightly higher market share over Tata Motors.


48

Over the last two decades, both the LCV and the M&HCV segments have

grown at similar rates, although volume growth in the M&HCV segment has

been more volatile. Growth in both the LCV and M&HCV segments is linked

to economic activity and the level of infrastructure development, and exhibits

cyclicality. The truck segment of the business (M&HCV goods carriers) is

however prone to lumpy capacity addition at the fleet operator level and hence

experiences more severe demand shocks. The LCV segment, though cyclical,

usually exhibits steadier demand patterns on account of the relatively wider

usage range. The top three Commercial Vehicle Manufacturers in India are:

Tata Motors (58.5%), Mahindra and Mahindra (15.7%) and Ashok Leyland

(11.0%).

Table 1.9: Trend in Domestic Commercial Vehicle Volumes and Growth

Rates by Segments

LCVs Domestic Commercial Vehicle Sales (in Nos) YoY Growth (%)

FY08 FY09 FY10 FY11 FY12 FY13 FY08 FY09 FY10 FY11 FY12 FY13

Passenger

Segment

27,832 26,952 34,413 44,816 48,868 48,153 17.2% -3.2% 27.7% 30.2% 9.0% -1.5%

Goods

Segment

188,080 173,747 253,364 317,030 411,415 476,734 11.6% -7.6% 45.8% 25.1% 29.8% 15.9%

Total

LCV

Sales

215,912 200,699 287,777 361,846 460,283 524,887 12.3% -7.0% 43.4% 25.7% 27.2% 14.0%

M&HCV

Passenger

Segment

38,647 34,892 43,083 47,938 49,882 46,553 34.7% -9.7% 23.5% 11.3% 4.1% -6.7%

Goods

Segment

235,935 148,603 201,861 275,121 299,334 221,710 -4.4% -37% 35.8% 36.3% 8.8% -26%

Total

M&HCV

Sales

274,582 183,495 244,944 323,059 349,216 268,263 -0.4% -33% 33.5% 31.9% 8.1% -23%

Total CV

Sales

490,494 384,194 532,721 684,905 809,499 793,150 -6.1% 21.7% 38.7% 28.6% 18.2% -2.0%


Most market segments of the Indian commercial vehicles industry currently

operate as duopolies, with the top two players‟ together accounting for a

market share of over 85%. Tata Motors & Ashok Leyland continues to

dominate the domestic truck scene in India with a combined market share of

over 85-90% and rest of the players making up the rest of the pie. The overall

commercial vehicle sales in India grew by 18.20% in 2011-12 at 8,09,532 units


49

Vs 6,84,905 units in 2010-11. The sales of medium & heavy trucks posted a

growth of 8.79% in 2011-12 at 2,99,309 vs 2,75,121 units in 2010-11 & light

commercial vehicles grew faster at almost 30% with 4,11,460 units sold in

2010-11. After experiencing a growth of over 30% during 2009-10 and 2010-

11, the buoyancy in domestic CV industry has been on a wane since then.

Slowing industrial growth and weakening investment sentiment across sectors

has had a significant adverse impact on CV demand since the second half of

2011-12. While in 2011-12, the growth in the domestic CV industry slowed

down to 18.2% vis-à-vis the prior year, the industry volume growth entered

into the negative territory in 2012-13 as macro-economic environment

continued to remain weak which coupled with high-base led to contraction of

2% in new CV sales. In 2012-13, segment-wise performance was characterized

by a wide dispersion in growth rates with the LCV segment witnessing a

growth of 14.0% and M&HCVs declining by a sharp 23.2%.

ICRA expects M & HCV to decline by 17-20%, while LCV volumes to

contract by 9-10% in FY14. Medium –term growth outlook for M & HCVs is

expected to be around 9.5-11% and for LCVs around 10-12%. The overall

commercial vehicle sales in India grew at 18.20% in 2011-12 and as per

industry estimates, the Indian market which has seen the entry of international

majors like Damiler, Volvo, Beiqi Foton will see a CAGR growth of 15% till

2016-17. The Indian commercial vehicle market will double to 1.6 million

units in the next five years thanks to the increase in infrastructure spending,

rapid urbanization and entry of major multinational players in the country.

Global majors will redefine brand positioning in the market while domestic

companies will build R&D competence and optimize costs through outsourcing

and modularization.

1.8.4 PASSENGER VEHICLES AUTOMOBILE INDUSTRY IN INDIA

The Indian Automobile Industry has got a tremendous market potential. With

the growth of population and change in their pattern of life style as a result of


50

urbanization, there has been a rapid increase in demand for Indian automobiles.

Due to the emergence of globalization and liberalization there is a stiff

competition among the variety of car industries which are focusing attention in

capturing the Indian markets. Due to the economic boom, higher income levels

and the growing purchasing power of the Indian urban populace, cars have

transformed into a necessitated ingredient for Indian middle class families. The

Government of India allowed Foreign Joint Venture in the industry since early

1990. Subsequently, the Indian Government allowed Foreign Direct Investment

in the industry, which saw many automobile giants entering the Indian market

with their models, readily available, without much waiting time for the

delivery. Thus major car manufacturers such as Suzuki, Ford, Toyota, General

Motors, Skoda, Hyundai, Honda, Renault, Mitsubishi, Nissan, Volvo, Audi,

BMW and Benz, set up their manufacturing units in India with Joint Venture

collaboration with Indian companies. These foreign manufacturers began to

compete with the Domestic Players such as Hindustan Motors, Tata Motors,

and Fiat India etc to increase their market share, with their highly

technological, innovative and attractive models of passenger cars. Sudden

interest of major global players has made Indian automobile industry very

competitive, as India provides twin benefit of ready market and low cost

manufacturing base for them. With the explosion of the automobile industry,

due to its globalization and liberalization, car manufacturers introduced much

innovative and technological advancement in their models. Presently, there are

19 passenger vehicles manufacturers in India. The largest Indian passenger car

manufacturers include Tata Motors, Maruti Suzuki, Mahindra & Mahindra and

Hindustan Motors. Maruti occupies 50% of the market share in the mini and

compact cars and is maintaining its share despite the stiff competition from

manufacturers like Hyundai and Tata Motors, occupies over 20% of the market

share in the small and compact car segment. Presence of foreign players such

as Mercedes-Benz, Fiat, General Motors and Toyota is also growing in this

segment. Recently, the passenger car segment has also seen the entry of other

global majors such as BMW, Audi, Volkswagen and Volvo. The Indian car


51

industry is dominated by Korean and Japanese automakers. Western carmakers

such as Ford and General Motors have not been as successful as their Asian

counterparts like Hyundai and Suzuki in the Indian market. The Indian car

industry is still in the growth and evolution stage and is depending on the

domestic and regional market.

India‟s passenger car industry is broken down into multiple segments. This is

done for ease of understanding and improved competition among

manufacturers to get bigger pies of particular segments. While there are

multiple ways of segmenting this industry like based on price and engine size

but the most prevalent and the official method is based on dimension i.e. the

length of the vehicle under consideration:

A1 Segment - Mini – Up to 3400mm (M800, Nano)

A2 Segment - Compact – 3401 to 4000mm (Alto, wagon r, Zen,i10,A-

star,Swift,i20,palio,indica etc)

A3 Segment – Midsize – 4001 to 4500mm (Manza, City, Sx4, Dzire, Logan,

Accent, Fiesta, Verna etc)

A4 Segment - Executive – 4501 to 4700mm (Corolla, civic, C class, Cruze,

Optra, Octavia etc)

A5 Segment - Premium – 4701 to 5000mm (Camry, E class, Accord, Sonata,

Laura, Superb etc)

A6 Segment – Luxury – Above 5000mm (Mercedes S class, 5 series etc)

B1 Segment - Van – Omni, Versa, Magic etc

B2 Segment – Multi Utility Vehicles (MUV) / Multi Purpose Vehicle (MPU)

– Innova, Tavera, Sumo etc

SUV Segment - CRV, Vitara etc


52

Diagram 1.9: Market Share of Sub-Segments of Passenger Cars in 2012-13


Segments Market Leader

Micro Tata Motors Limited

Mini Maruti India Limited

Compact Maruti India Limited

Super Compact Maruti India Limited

Mid – Size Hyundai Motor India Limited

Executive Toyota Kirloskar Motor Private Limited

Premium Skoda Auto India Private Limited

Market share of passenger cars in India is dominated by Maruti Suzuki and

Mahindra & Mahindra is the market leader of utility vehicles. Established

automobile manufacturers and new entrants in the Indian automobile market

are expanding their production capacities on a large scale. Companies

undergoing expansion include Maruti Suzuki, General Motors, Tata Motors,

Volkswagen Group, Toyota, Honda and Hyundai. The Renault Nissan

Alliance's new automobile plant near Chennai commenced production in 2010.

Peugeot-Citroen is planning a comeback to India and Mazda is entering the

42%

1%

1%3%

11%

30%

0% 12% Compact

Executive

Luxury

Micro

Mid-Size

Mini

Premium

Super Compact


53

Indian passenger car market. Cars have tilled now been affordable to only a

fraction of India's over 200 m households. With the advent of the Tata minicar,

the Nano, which received top marks for its styling and design, retails for

approx. USD 3,000 (Delhi on-road) and therefore has created a completely new

segment in the car market and made autos within the reach to a substantial

segment of the approx. 50 million current two wheeler owners and first time

car buyers. The market for cheap minicars seems to be a lot smaller than what

was earlier projected. India became the fifth largest car manufacturer in the

world in 2011. Passenger cars and utility vehicles are the main segments of the

Indian passenger vehicle industry with the former accounting for 78% of total

volumes. India has primarily been a small-car market, mainly due to the high

demand for a cost-effective mode of transportation. Within the passenger car

segment, small cars comprising A1 and A2 segment account for almost 80% of

total volumes.

Diagram 1.10: Passenger Car Volumes: Segment –wise concentration

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

Unlike some of the other emerging markets where market shares are more

fragmented, the Indian passenger vehicle industry has been dominated by three

82% 82% 77% 75% 75% 77% 77% 77% 78% 78%

16% 17%20% 21% 21% 18% 19% 20% 18% 18%

2% 1% 3% 4% 4% 5% 4% 3% 4% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011

A1 - A2 Segment: Small Car A3 Segment: Mid Size

A4 - A6:Executive, Premium , Luxury


54

major players – Maruti Suzuki, Hyundai Motors and Tata Motors, which

collectively accounted for over 80% of total volumes in 2010. These players

with their strong product portfolio, particularly in the small car segment,

extensive distribution and servicing reach and strong brand franchise (created

over several years) have maintained their market position for years together.

Table 1.10: Trend in Market Share of leading companies in the domestic

Passenger Vehicles Market

OEMs

FY 2002

FY 2003

FY 2004

FY 2005

FY 2006

FY 2007

FY 2008

FY 2009

FY 2010

FY 2011

Maruti

Suzuki

50.4% 46.7% 46.7% 45.9% 46.1% 46.1% 45.9% 46.5% 44.7% 44.9%

Hyundai

Motors

13.0% 14.6% 14.4% 13.4% 13.9% 14.1% 14.0% 15.7% 16.2% 14.4%

Tata

Motors

13.2% 14.7% 15.5% 16.9% 16.5% 16.4% 14.7% 14.9% 14.7% 14.0%

M&M

6.6% 7.4% 7.6% 7.5% 7.4% 6.5% 8.4% 7.7% 8.0% 7.2%

General

Motors

1.3% 1.2% 2.0% 2.7% 2.7% 2.8% 4.3% 4.0% 4.5% 4.3%

Ford

2.2% 2.2% 2.4% 2.6% 2.5% 3.0% 2.2% 1.8% 1.9% 3.9%

Toyota

Motors

3.7% 4.3% 4.7% 4.1% 4.1% 3.7% 3.6% 3.0% 3.3% 3.1%

Honda

Motors

1.6% 1.9% 2.4% 3.5% 3.7% 4.4% 4.1% 3.4% 3.2% 2.5%



55

Table 1.11: Trend in Market Share in the Small Car Segment

OEMs FY 2010 FY 2011

Maruti 55.9% 54.0%

Hyundai 23.8% 20.9%

Tata Motors 12.1% 10.9%

Ford 0.7% 5.1%

General Motors 5.1% 4.7%

Volkswagen 0.1% 1.9%

Nissan 0.0% 0.8%

Skoda 0.5% 0.7%

Fiat 1.1% 0.8%

Honda 0.6% 0.3%

Toyota 0.0% 0.0%


Table 1.12: Trend in Market Share in Mid-Size Car Segment


Maruti 35.9% 35.8%

Hyundai 11.0% 9.6%

Toyota 0.0% 2.2%

Honda 16.3% 12.7%


Tata Motors 20.5% 24.0%

Ford 9.6% 4.7%

M&M 1.9% 2.7%

Nissan 0.0% 0.0%

Others 4.7% 3.1%



56

Table 1.13: Trend in Market Share in Executive Car Segment


General Motors 12.5% 22.1%

Toyota 21.0% 20.5%

Skoda 16.9% 12.7%

Fiat 24.0% 17.3%


Mercedes 3.6% 5.3%

Honda 12.9% 9.6%

BMW 3.3% 4.6%

Audi 0.6% 1.5%

Renault 0.0% 0.0%

Maruti 0.0% 0.3%

HM 0.0% 0.0%


Table 1.14: Trend in Market Share in Luxury and Premium Car Segment


Skoda 23.9% 22.2%

BMW 14.3% 20.1%


Audi 12.7% 17.4%

Mercedes 14.6% 17.8%

Honda 20.9% 13.5%

Hyundai 3.3% 1.5%

Toyota 3.0% 2.3%

Nissan 1.6% 1.3%


Indian automobile manufacturers produced a record 14.82 million motor

vehicles in 2010. 3.54 million cars and commercial vehicles were produced in

2010 out of which 3.05 million were cars. Domestic passenger vehicle sales hit

a new record in 2009-10 when over 1.95 million vehicles were sold. The luxury


57

car segment grew at 76 % in 2008 over the previous year although actual sales

figures were still very low at around 8,000 units. The Indian passenger vehicles

segment grew by 26 per cent to 19.5 lakh units in 2009-10. Passenger vehicles

segment is ranked the seventh largest in the world and the present size of the

market makes it comparable with some economies. The domestic passenger

vehicles industry has been on a relatively steady growth phase over most of the

last decade and has registered a 10 years CAGR of 10.3% during 2001-2010. It

has been one of the few markets worldwide which saw growing passenger car

sales during the liquidity crisis and recessionary phase witnessed during 2009.

Over the past 10 years, export of vehicles have grown at a CAGR of 31.7% to

achieve volumes of 0.45 million units in 2010. ICRA expects overall growth

momentum to be sustained driven by strong domestic demand and increased

thrust on exports.

Diagram 1.11: Trend in Domestic Sales of Passenger Vehicles Industry


Passenger Vehicles segment grew at 4.66% during 2011-2012 over same

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

16.47% and Vans by 10.01% during this period. In March 2012, domestic sales

of Passenger Cars grew by 19.66% over the same month last year. Also, sales

growth of total passenger vehicle in the month of March 2012 was at 20.59%

(as compared to March 2011). For the first time in history car sales crossed two


58

million in a financial year. One of the hot spot in world automotive industry is

Indian car market. Car sales are down by more than 6% in 2012-13 compared

to 2011-12. The main reasons are high interest rates, fuel price, high inflation,

low movement in other sectors etc. Utility vehicle segment is having maximum

growth of 52% in this segment. Maruti Ertiga has put successful foot print this

segment. This vehicle is giving good competition to Innova. SUV segment also

grown due to its fuel economy and price combination became top choice for

larger families.

Table 1.15: Passenger Vehicles Sales Volumes trend

Segments (Passenger

Vehicles) Volumes YoY Growth (%)

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 09 FY 10 FY 11 FY 12 FY13

Domestic 1,552,703 1,951,333 2,501,542 2,629,839 2,686,429 0.2% 25.7% 28.2% 5.1% 2.2%

Exports 335,729 446,145 444,326 508,783 554,686 53.7% 32.9% -0.4% 14.5% 9.0%

Total 1,888,432 2,397,478 2,945,868 3,126,855 3,184,525 6.8% 27.0% 22.9% 6.5% 3.3%

Source: Siam (Society of Indian Automobile Manufacturers) and ICRA (Indian Credit

Ratings Agency) Industry Statistics, 2013

Diagram 1.12: Passenger Vehicles Majors’ Market Share in 2012-13

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

Statistics, 2013

39%

14%12%

12%

23%

Maruti

Hyundai

Tata

M&M

Others


59

Table 1.16: Domestic Sales and Market Share of Passenger Vehicles

Industry in 2011-12 and 2012-13

Passenger

Vehicles

Segment

Domestic Sales Growth Market Share

FY 2011-12 FY 2012-13 FY 2012-13 FY 2011-12 FY 2012-13

Maruti Suzuki 1,006,316 1,051,046 4.44% 38.27% 39.12%

Hyundai 388,779 383,611 -1.33% 14.78% 14.28%

Tata 371,350 314,464 -15.32% 14.12% 11.71%

M&M 245,700 310,707 26.46% 9.34% 11.57%

Toyota 160,203 165,504 3.31% 6.09% 6.16%

General Motors 110,050 88,150 -19.90% 4.18% 3.28%

Ford 92,665 77,225 -16.66% 3.52% 2.87%

Honda Cars 54,420 73,483 35.03% 2.07% 2.74%

Volkswagen 78,271 65,465 -16.36% 2.98% 2.44%

Renault 3,666 52,463 1331.07% 0.14% 1.95%

Nissan 33,261 36,955 11.11% 1.26% 1.38%

Skoda 34,089 29,067 -14.73% 1.30% 1.08%

BMW* 9,593 7,221 -24.73% 0.36% 0.27%

Audi* 6,547 6,901 5.41% 0.25% 0.26%

Fiat 16,074 6,933 -56.87% 0.61% 0.26%

Mercedes- Benz* 7,419 5,006 -32.52% 0.28% 0.19%

HindustanMotors 4,923 5,589 13.53% 0.19% 0.21%

Force Motors 5,234 4,562 -12.84% 0.20% 0.17%

Tata-JLR* 796 1,597 100.63% 0.03% 0.06%

International

Cars & Motors

483 260 -46.17% 0.02% 0.01%

Porsche 0 220 21900.00% 0.00% 0.01%

Total 2,629,839 2,686,429 2.15%


Maruti has increased market share due its better performance in utility vehicles

segment compare to 2011-12. Tata is still third largest car manufacture with

marker share of 15%. Tata has de-growth of 15% which is very significant.


60

Tata need to revive its product position and brand value which play important

role in passenger segment.

Rating agency ICRA said that the Indian passenger vehicle industry will touch

48.6 lakh units by 2015-16 due to factors like robust economic growth, rising

disposable income and easy availability of finances. Indian passenger vehicle

(PV) industry will reach 4.86 million in annual sales by FY16, representing a

growth of 10.8 per cent CAGR (compound annual growth rate) over the next

five years. A buoyant economic growth, growing middle class population,

rising disposable income levels, relatively low penetration of cars and adequate

availability of financing are likely to provide an ideal backdrop for a sustained

long-term demand growth for the sector. The outlook on Indian passenger

vehicles industry is as under:

1 Domestic market is expected to grow at a CAGR of 10-11 per cent by

2017.

2 Small car segment to grow at a CAGR of 6-7 per cent by 2017.

3 Mid size segment to record rise of 17-18 per cent by 2017.

4 A4-A6 to remain niche segment.

5 Utility vehicles to grow at a CAGR of around 15-16 per cent during 2012-

2017.

6 Inadequate public transport infrastructure to fuel growth in multi utility

vehicles segment.

7 Rising young population coupled with rising income and low penetration

levels will fuel growth.

8 Growing demand for mid-size cars and rise preference for diesel variants

to boost the realization in the medium term.

9 Diesel vehicles will surpass market share of petrol vehicles in the near

term.

10 Asian markets to fuel the growth in short term as demand drops in the

European markets.


61

1.9 MAJOR AUTOMOBILE COMPANIES IN INDIA

Starting from the era when there was too slim of a variety of cars available in

Indian market, Indian automobile industry has come up a long way to have a

diverse array of cars these days. There are a number of top automobile

companies running their operations in India, which again have a range of

models in different segments of cars. However, while looking for top 10

automobile companies in India; one name that would always lead the list is

Maruti Suzuki India Limited. Maruti Suzuki has consistently been the

dominant leader in the Indian automobile industry. However, there are also

other big names like Tata Motors, Mahindra and Mahindra, Hyundai Motors,

Hindustan Motors etc. During its early days, the most of the Indian car auto

manufacturers banked upon foreign technologies. But the scenario has changed

over the years and currently, the Indian auto manufacturers are using their own

technology. Due to the growing pace of Indian automobile market, a number of

car manufacturers including the global leaders have locked their horns in the

Indian auto market. Key players of Automobile manufactures in India are:

Maruti Suzuki India Limited

Tata Motors Limited

General Motors India Limited

Ford India Limited

Eicher Motors Limited

Bajaj Auto Limited

Hero MotoCorp

Ashok Leyland Limited

Hindustan Motors Limited

Hyundai Motors India Limited

Royal Enfield Motors

TVS Motors Company Limited

Mahindra and Mahindra Limited

Swaraj Mazda Limited

Force Motors Limited


62

The global payers in India are:

a) Cars/ SUVs: Maruti Suzuki India Limited, Tata Motors Limited,

Hyundai Motors India Limited, Mahindra & Mahindra Limited, Honda

Cars India Limited, Fiat, Audi, General Motors Limited, Ford India

Limited, Hindustan Motors Limited, Chevrolet, Mitsubishi, Mercedes-

Benz, Skoda and Toyota.

b) Two Wheelers: Bajaj Auto Limited, Hero MotoCorps Limited, Honda

Motorcycle and Scooter India Private Limited, Kinetic, LML India,

Royal Enfield Motors Limited, TVS Motor, Suzuki Motor and Yamaha.

c) Commercial vehicles: Ashok Leyland, Swaraj Mazda, Eicher Motors,

Mahindra & Mahindra, Tata, Mitsubishi, Force, Hindustan Motors,

Maruti Suzuki, Volvo, Sonalika and Escorts Limited.

Table 1.17: List of Top Automobile Companies in India, 2011 (Figures in

Crores)

2011 Economic

Times 500 Rank Company Turnover PAT Assets

7 Tata Motors Ltd. 123222.91 9273.62 52209.48

21 Mahindra & Mahindra Ltd. 37026.37 3079.73 36926.19

19 Maruti Suzuki India Ltd. 38140.69 2382.37 14762.9

41 Hero MotoCorp Ltd. 19669.29 1927.9 4447.22

46 Bajaj Auto Ltd. 17008.05 3454.89 5154.96

67 Ashok Leyland Ltd. 11133.04 631.3 6621.16

110 TVS Motor Company Ltd. 6569.99 127.94 1745.06

148 Eicher Motors Ltd. 5138.64 243.12 474.14

396 Force Motors Ltd. 1574.05 58.62 583.79

http://www.business.mapsofindia.com/commercial-vehicles-industry/tata-motors.html

http://www.business.mapsofindia.com/commercial-vehicles-industry/mahindra-and-mahindra.html

http://www.business.mapsofindia.com/india-company/m/maruti-udyog.html

http://www.business.mapsofindia.com/india-company/hero-honda.html

http://www.business.mapsofindia.com/india-company/bajaj-auto.html

http://www.business.mapsofindia.com/india-company/ashok-leyland.html

http://www.business.mapsofindia.com/india-company/tvs-motors.html

http://www.business.mapsofindia.com/commercial-vehicles-industry/eicher-motors.html

http://www.business.mapsofindia.com/india-company/f/force-motors.html


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1.10 PROFILE OF MAJOR PASSENGER VEHICLES COMPANIES

1.10.1 Maruti Suzuki India Limited

Maruti Suzuki India Limited is a subsidiary company of Japanese automaker

Suzuki Motor Corporation. It has a market share of 44.9% of the Indian

passenger car market as of March 2011. Maruti Suzuki offers a complete range

of cars from entry level Maruti 800 and Alto, to hatchback Ritz, A-Star, Swift,

Wagon-R, Estillo and sedans DZire, SX4, in the 'C' segment Maruti Eeco,

Multi Purpose vehicle Ertiga and Sports Utility vehicle Grand Vitara. Maruti

Udyog Limited (MUL) was established in February 1981, though the actual

production commenced in 1983 with the Maruti 800. It is the market leader in

India, and on 17 September 2007, Maruti Udyog Limited was renamed as

Maruti Suzuki India Limited. Maruti Suzuki is India‟s leading automobile

manufacturer and the market leader in the car segment, both in terms of volume

of vehicles sold and revenue earned. Its manufacturing facilities are located at

two facilities Gurgaon and Manesar south of Delhi. Maruti Suzuki‟s Gurgaon

facility has an installed capacity of 900,000 units per annum. Maruti Suzuki

offers 15 models, Maruti 800, Alto, WagonR, Estilo, A-star, Ritz, Swift, Swift

DZire, SX4, Omni, Eeco, Gypsy, Grand Vitara, Kizashi and the newly

launched Ertiga. Swift, Swift DZire, A-star and SX4 are manufactured in

Manesar, Grand Vitara and Kizashi are imported from Japan.

In 2010-11, the company sold over 1.27 Million vehicles including 1,38,266

units of exports. With this, at the end of March 2011, Maruti Suzuki had a

market share of 44.9 per cent of the Indian passenger car market. Maruti's

average revenue for the year ending 2010-11 is US$7.13 billion. In the

financial year 2010-2011 Maruti Suzuki reported a net sales figure of 37,522

crore rupees. They recorded sales of 36,128 crores in 2010-11 & a net profit

margin of 6.06% in 2011. During the fiscal year ended March 31, 2012 (fiscal

2012), the Company sold over 1.13 million vehicles, including 127,379 units of

exports. Maruti Suzuki is the only Indian Company to have crossed the 10

http://en.wikipedia.org/wiki/Automaker

http://en.wikipedia.org/wiki/Suzuki

http://en.wikipedia.org/wiki/Maruti_800

http://en.wikipedia.org/wiki/Maruti_Alto

http://en.wikipedia.org/wiki/Maruti_Ritz

http://en.wikipedia.org/wiki/Suzuki_Alto#International

http://en.wikipedia.org/wiki/Maruti_Swift

http://en.wikipedia.org/wiki/Maruti_Wagon-R

http://en.wikipedia.org/w/index.php?title=Maruti_Estillo&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=Maruti_DZire&action=edit&redlink=1

http://en.wikipedia.org/wiki/Maruti_SX4

http://en.wikipedia.org/wiki/Maruti_Eeco

http://en.wikipedia.org/wiki/Maruti_Ertiga

http://en.wikipedia.org/wiki/Maruti_Grand_Vitara

http://en.wikipedia.org/wiki/Gurgaon

http://en.wikipedia.org/wiki/Manesar

http://en.wikipedia.org/wiki/Delhi

http://en.wikipedia.org/wiki/Maruti_800

http://en.wikipedia.org/wiki/Maruti_Alto

http://en.wikipedia.org/wiki/Suzuki_Wagon_R

http://en.wikipedia.org/wiki/Suzuki_MR_Wagon

http://en.wikipedia.org/wiki/Suzuki_Alto#International

http://en.wikipedia.org/wiki/Suzuki_Splash

http://en.wikipedia.org/wiki/Suzuki_Swift

http://en.wikipedia.org/wiki/Maruti_Suzuki_Swift_DZire



http://en.wikipedia.org/wiki/Suzuki_SX4

http://en.wikipedia.org/wiki/Maruti_Omni

http://en.wikipedia.org/wiki/Maruti_Eeco

http://en.wikipedia.org/wiki/Maruti_Gypsy

http://en.wikipedia.org/wiki/Suzuki_Grand_Vitara

http://en.wikipedia.org/wiki/Suzuki_Kizashi

http://en.wikipedia.org/wiki/Maruti_Ertiga


64

million sales mark since its inception. In 2011-12, the company sold over 1.13

million vehicles including 1,27,379 units of exports. Maruti Suzuki's revenue

has grown consistently over the years. The Company plans to expand its

manufacturing capacity to 1.75 million by 2013.

1.10.2 Tata Motors Limited

Tata Motors Limited (formerly TELCO) is an Indian multinational automotive

manufacturing company headquartered in Mumbai, Maharashtra, India and a

subsidiary of the Tata Group. Its products include passenger cars, trucks, vans,

coaches, buses and military vehicles. It is the world's eighteenth-largest motor

vehicle manufacturing company, fourth-largest truck manufacturer and second-

largest bus manufacturer by volume. It is the leader in commercial vehicles and

is among the top three in passenger vehicles in India with products in the

compact, midsize car and utility vehicle segments. It has the 3rd largest Sales

and Service Network after Maruti Suzuki and Hyundai. Tata Motors has auto

manufacturing and assembly plants in Jamshedpur, Pantnagar, Lucknow,

Sanand, Dharwad and Pune, (India) as well as in Argentina, South Africa,

Thailand and the United Kingdom. Tata Motors has produced and sold over

6.5 million vehicles in India since 1954. Tata Motors entered the passenger

vehicle market in 1991 by launching the Tata Sierra, a multi utility vehicle.

After the launch of Tata Sumo (LCV, 1994) and Tata Safari (1998, India's first

sports utility vehicle), Tata launched the Indica in 1998, the first fully

indigenous Indian passenger car. The success of Indica played a key role in the

growth of Tata Motors.

Models of Tata Motors Limited are Tata Indica, Indica V2 Xeta, Tata Indigo,

Tata Indigo Marina, Tata Indigo SX, Tata Safari, Tata Sumo Victa, Tata

Sumo, Tata Aria, Tata Indigo XL, Tata Xenon XT and Tata Nano.

In January 2008, Tata Motors unveiled its People's Car, the Tata Nano, and a

development which signifies a first for the global automobile industry. The

Tata Nano has been subsequently launched as planned, in India in March 2009.

http://en.wikipedia.org/wiki/Multinational_corporation

http://en.wikipedia.org/wiki/Automotive_industry

http://en.wikipedia.org/wiki/Mumbai,_Maharashtra

http://en.wikipedia.org/wiki/Tata_Group

http://en.wikipedia.org/wiki/Automotive_industry#Top_vehicle_manufacturing_groups_.3Cby_volume.3E

http://en.wikipedia.org/wiki/Automotive_industry#Top_vehicle_manufacturing_groups_.3Cby_volume.3E

http://en.wikipedia.org/wiki/Maruti_Suzuki

http://en.wikipedia.org/wiki/Hyundai_Motor_India_Limited

http://en.wikipedia.org/wiki/Jamshedpur

http://en.wikipedia.org/wiki/Pantnagar

http://en.wikipedia.org/wiki/Lucknow

http://en.wikipedia.org/wiki/Sanand

http://en.wikipedia.org/wiki/Dharwad

http://en.wikipedia.org/wiki/Pune

http://en.wikipedia.org/wiki/Tata_Sierra

http://en.wikipedia.org/wiki/Tata_Sumo

http://en.wikipedia.org/wiki/Tata_Indica

http://www.iloveindia.com/cars/tata-motors/tata-indica.html

http://www.iloveindia.com/cars/tata-motors/tata-indica-xeta.html

http://www.iloveindia.com/cars/tata-motors/tata-indigo.html

http://www.iloveindia.com/cars/tata-motors/tata-indigo-marina.html

http://www.iloveindia.com/cars/tata-motors/tata-indigo-sx.html

http://www.iloveindia.com/cars/tata-motors/tata-safari.html

http://www.iloveindia.com/cars/tata-motors/tata-sumo-victa.html

http://www.iloveindia.com/cars/tata-motors/sumo.html



http://www.iloveindia.com/cars/tata-motors/tata-aria.html

http://www.iloveindia.com/cars/tata-motors/tata-motors-indigo-xl.html

http://www.iloveindia.com/cars/tata-motors/tata-xenon-xt.html


65

Compounded Annual Growth Rate of the Passenger Vehicles Industry during

the Period 2007-11 has been 12.8%. It is 3rd Largest Player in India with

market share of 13-15%. Tata motors sold 3,13,385 cars in 2011-12 and its

market share during the year was 13.12%.

1.10.3 Hyundai Motors India Limited

Hyundai Motors India Limited is a wholly owned subsidiary of the Hyundai

Motors Company in India. It is the largest passenger car exporter and the

second-largest car manufacturer in India. The Company was formed in 6 May

1996 by the Hyundai Motors Company of South Korea. Models of HMIL are

Hyundai Accent Executive, Hyundai Santro Xing, Hyundai Uber Cool i20,

Hyundai Next Gen i10, Hyundai Fluidic Verna, Hyundai EON and Hyundai

Neo Fluidic Elantra. Hyundai Motors presently markets 49 variants of

passenger cars across segments. These includes the Santro in the B segment,

the i10, the premium hatchback i20 in the B+ segment, the Accent and the

Verna in the C segment, the Sonata Transform in the E segment. HMIL's first

car, the Hyundai Santro was launched in 23 September 1998 and was a

runaway success.

HMIL is the first automotive company in India to achieve the export of 10 lakh

cars in just over a decade. Hyundai Motor, continuing its tradition of being the

fastest growing passenger car manufacturer, registered total sales of 559,880

vehicles in the year 2009, an increase of 14.4% over 2008. In the domestic

market it clocked a growth of 18.1% as compared to 2008 with 289,863 units,

while overseas sales grew by 10.7%, with export of 270,017 units. Hyundai is

the leading exporter of passenger cars with a market share of 66% of the total

exports of passenger cars from India, making it a significant contributor to the

Indian automobile industry. It sold 3,88,799 cars in 2011-12 with a market

share of 13.88%. It is a dominant passenger car manufacturer in India,

controlling 14% market share in the passenger vehicles segment. The company

sold a total of 6,16,039 vehicles 2010–11.

http://en.wikipedia.org/wiki/Hyundai_Motor_Company



http://en.wikipedia.org/wiki/India


http://en.wikipedia.org/wiki/South_Korea

http://en.wikipedia.org/wiki/Hyundai_Accent

http://en.wikipedia.org/wiki/Hyundai_Santro_Xing

http://en.wikipedia.org/wiki/Hyundai_i20


http://en.wikipedia.org/wiki/Hyundai_Verna#Fourth_generation_.28RB.3B_2010.E2.80.93present.29

http://en.wikipedia.org/wiki/Hyundai_Eon

http://en.wikipedia.org/wiki/Hyundai_Santro


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1.10.4 Mahindra & Mahindra Limited

Mahindra & Mahindra Limited (M&M) is an Indian multinational automaker

headquartered in Mumbai, Maharashtra, India. It is one of the largest

automobile manufacturers by production in India and a subsidiary of Mahindra

Group conglomerate. It formerly had a joint venture with Ford India Private

Limited to build passenger cars. It is ranked 21 in the list of top companies of

India in Fortune India 500 in 2011. M&M is a major automobile manufacturer

of utility vehicles, passenger cars, pickups, commercial vehicles, and two

wheelers. M&M made its entry into the passenger car segment with the Logan

in April 2007 under the Mahindra Renault joint venture. M&M's automotive

division makes a wide range of vehicles including MUVs, LCVs and three

wheelers. It offers over 20 models including new generation multi-utility

vehicles like the Scorpio and the Bolero. Commercial Vehicles models of

M&M are Alfa, Gio, Mahindra Navistar Trucks, Bolero Maxi Truck, Genio,

Loadking, Maxximo and Tourister Buses. Personal Vehicles models are

Bolero, REVA Electric Cars, Scorpio, Thar, Verito ,Xylo, Actyon, Actyon

Sports, Chairman W, Korando, Kyron, Rexton, Rodius, XUV 500 and

Quanto.

M&M Ltd., India‟s leading SUV manufacturer, announced a 25% rise in its

sales, which stood at 47001 units during March 2012 as against 37522 units

during March 2011. This is the highest ever monthly sales number in the

history of the company. The Passenger Vehicles segment (which includes the

UVs and Verito) has registered a growth of 33%, having sold 23020 units in

March 2012, as against 17320 units during March 2011

1.10.5 General Motors India Private Limited

General Motors India Private Limited is a 50:50 partnership between General

Motors and Shanghai Automotive Industry Corporation (SAIC) that is engaged

in the automobile business in India. The new joint venture company is called

http://en.wikipedia.org/wiki/Multinational_corporation

http://en.wikipedia.org/wiki/Automaker

http://en.wikipedia.org/wiki/Mumbai,_Maharashtra

http://en.wikipedia.org/wiki/Automobile_manufacturer

http://en.wikipedia.org/wiki/Mahindra_Group



http://en.wikipedia.org/wiki/Ford_India_Private_Limited



http://en.wikipedia.org/wiki/Fortune_India_500

http://en.wikipedia.org/wiki/Mahindra_Scorpio

http://en.wikipedia.org/wiki/Mahindra_Bolero_Camper

http://www.mahindra.com/What-We-Do/Automotive/Products/Alfa

http://www.mahindra.com/What-We-Do/Automotive/Products/Gio

http://www.mahindra.com/What-We-Do/Automotive/Products/Mahindra-Navistar-Trucks

http://www.mahindra.com/What-We-Do/Automotive/Products/Genio

http://www.mahindra.com/What-We-Do/Automotive/Products/Maxximo

http://www.mahindra.com/What-We-Do/Automotive/Products/Tourister-Buses

http://www.mahindra.com/What-We-Do/Automotive/Products/Bolero

http://www.mahindra.com/What-We-Do/Automotive/Products/REVA-Electric-Cars

http://www.mahindra.com/What-We-Do/Automotive/Products/Scorpio

http://www.mahindra.com/What-We-Do/Automotive/Products/Thar

http://www.mahindra.com/What-We-Do/Automotive/Products/Verito

http://www.mahindra.com/What-We-Do/Automotive/Products/Xylo

http://www.mahindra.com/What-We-Do/Automotive/Products/Actyon

http://www.mahindra.com/What-We-Do/Automotive/Products/Actyon-Sports



http://www.mahindra.com/What-We-Do/Automotive/Products/Chairman-W

http://www.mahindra.com/What-We-Do/Automotive/Products/Korando

http://www.mahindra.com/What-We-Do/Automotive/Products/Kyron

http://www.mahindra.com/What-We-Do/Automotive/Products/Rodius

http://www.mahindra.com/What-We-Do/Automotive/Products/XUV-500

http://www.mahindra.com/What-We-Do/Automotive/Products/Quanto

http://en.wikipedia.org/wiki/General_Motors





67

General Motors SAIC Investment Limited(GMSIL) and is the 5th largest

automobile manufacturing company in India after Maruti Suzuki, Hyundai,

Tata Motors and Mahindra. In 1994, GMIPL was formed as a joint venture,

owned 50 percent by Hindustan Motors and 50 percent by General Motors, to

produce and sell Opel branded vehicles. GM India started its Indian journey in

1996 and bought out the Hindustan Motors interest in 1999. Models of GM are

Chevrolet Optra, Chevrolet Tavera, Chevrolet Aveo, Chevrolet Aveo U-VA,

Chevrolet Spark, Chevrolet Captiva, Chevrolet Cruze and Chevrolet Beat.It

offers products under the Chevrolet brand in the country. Chevrolet has

emerged as one of the fastest growing automotive nameplates in India today.

GMIPL continued to produce Opel cars at the Halol facility until 2003, when it

started production of Chevrolet vehicles at that location. In 2000, GMIPL

moved its headquarters to Gurgaon. GMIPL began construction of a second

vehicle assembly plant in Talagaon in 2006, which began production of

Chevrolet vehicles in September 2008.

General Motors- Chevrolet sold 110,048 cars in the year 2011-12 and has a

market share of 3.75%. General Motors India has registered a growth of 13% in

March 2012, compared to the corresponding period last year. It sold 10,588

vehicles in March 2012 as against 9,391 units in March 2011. The growth was

primarily driven by the much sought after Chevrolet Beat and the Chevrolet

Tavera. While the Beat recorded its highest sales since its launch, the Tavera

crossed the 2,000 mark again after 5 years. The March 2012 sales comprised of

5638 units of Beat, 2075 units of Tavera, 107 units of Aveo, 123 units of Optra,

44 units of Captiva, 722 units of Cruze and 1879 units of Spark. GM India

exports the Beat car to Europe and Asia Pacific. 20% of the cars produced in

India will be exported to these continents. Beat comes in three models - Beat

PS, Beat LS and Beat LT. The company exports vehicles to Bangladesh, Nepal

and Sri Lanka.


http://en.wikipedia.org/wiki/Hyundai_Motor_India_Limited

http://en.wikipedia.org/wiki/Tata_Motors

http://en.wikipedia.org/wiki/Mahindra_%26_Mahindra_Limited

http://en.wikipedia.org/wiki/Hindustan_Motors

http://en.wikipedia.org/wiki/Opel

http://en.wikipedia.org/wiki/Chevrolet_Optra

http://en.wikipedia.org/wiki/Chevrolet_Tavera

http://en.wikipedia.org/wiki/Chevrolet_Aveo

http://en.wikipedia.org/wiki/Daewoo_Kalos

http://en.wikipedia.org/wiki/Chevrolet_Spark

http://en.wikipedia.org/wiki/Chevrolet_Captiva

http://en.wikipedia.org/wiki/Chevrolet_Cruze

http://en.wikipedia.org/wiki/Chevrolet_Beat

http://en.wikipedia.org/wiki/Chevrolet


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1.10.6 Hindustan Motors limited

Hindustan Motors limited is an Indian automaker based in Kolkata, West

Bengal, India. It is part of the Birla Technical Services industrial group. The

company was the largest car manufacturer in India before the rise of Maruti

Udyog. It is the producer of the Ambassador car, widely used as a taxicab and

as a government limousine. One of the original three car manufacturers in

India, founded in 1942 by Mr. B. M. Birla, it was a leader in car sales until the

1980s, when the industry was opened up from protection. All through its

history, the company has depended on government patronage for its sales and

for survival by eliminating competition. It began in Port Okha near Gujarat; in

1948, it moved to West Bengal. The Place is now Called Hindmotor. Along

with passenger cars (Ambassador, Grand, and Avigo )and Multi Utility

Vehicles (Trekker, Porter, and Pushpak), Hindustan Motors also manufactures

passenger cars in the mid size premium segment (Mitsubishi Lancer, Lancer

Select, and Lancer Cedia) and has brought in Sports Utility Vehicle (Mitsubishi

Pajero) into the Indian market in collaboration with Mitsubishi Motors, Japan.

Hindustan has a joint venture with Mitsubishi that started 1998. Models

produced include: Mitsubishi Lancer Evolution X, Mitsubishi Lancer,

Mitsubishi Cedia , Mitsubishi Pajero, Mitsubishi Montero, Mitsubishi

Outlander ,

Indian automobile manufacturer Hindustan Motors (HM) has posted a growth

of 166.45 percent in its sales for the month of February 2013 over sales in the

same month in 2012. The carmaker also reported significant growth of 104.37

percent in the month of January 2013 in comparison to its sales in the month in

2012. HM has witnessed a growth of 147 percent in its net profits in the quarter

ending December 31, 2012. The automaker posted net profit of Rs 20.36 crore

in the quarter in comparison to a net loss of Rs 42.81 crore in the same quarter

in 2011. The Indian carmaker sold a total of 826 units in the month of February

2013 in comparison to 310 units sold in the same month in 2012.Hindustan

Motors is exporting its Ambassador to British and Japanese markets. The

http://en.wikipedia.org/wiki/Birla_Technical_Services

http://en.wikipedia.org/wiki/Maruti_Udyog



http://en.wikipedia.org/wiki/Hindustan_Ambassador

http://en.wikipedia.org/wiki/Taxicab

http://en.wikipedia.org/wiki/Limousine

http://en.wikipedia.org/wiki/Protectionism

http://en.wikipedia.org/wiki/Gujarat

http://en.wikipedia.org/wiki/Hindmotor

http://en.wikipedia.org/wiki/Mitsubishi_Motors


69

company is also exporting its Trucks to Bangladesh, Egypt, New Zealand, Sri

Lanka and Mauritius.

1.10.7 Ford India Private Limited

Ford India Private Limited is a wholly owned subsidiary of the Ford Motor

Company in India. Ford India Private Limited's head quarters are located in

Chengalpattu, Chennai, Tamil Nadu. It currently is the 6th largest car maker in

India after Maruti Suzuki, Hyundai, Tata, Mahindra and Chevrolet. It offers

passenger and sports utility vehicles. Production began with the joint venture

Mahindra Ford India Limited (MFIL) in October 1995, a 50-50 venture with

Mahindra & Mahindra Limited. Ford Motor Company increased its interest to

72% in March 1998 and renamed the company Ford India Private Limited.

Models of FIPL are Ford Endeavour, Ford Classic, All New Ford Fiesta, Ford

Figo and Ford Ecosport. FIPL's main manufacturing plant located in

Maraimalai Nagar, Chennai has a capacity to produce 150,000 cars on a two-

shift basis and 200,000 with three shifts. In 2010-11, the company's production

crossed the 100,000 mark. FIPL has 230 dealerships across 123 cities in 22

states and 3 Union Territories of India.

In the year 2010, FIPL recorded sales of 83,887 vehicles against 29,488

vehicles sold during the year 2009 and registered a sales growth of 172%.From

January to December 2011, the company sold 96,270 domestic units. Ford

India has sold over 1 lakh units of cars during the 2010-11 after registering a

97% growth for the quarter ending March 2011.In financial year 2010-11, the

company was able to witness 29804 units that stood at 97% growth compared

to 15154 units same time last year. Production at Ford India has crossed

100,000 units in a single financial year. Ford India was able to sell 10485 units

of Ford Figo hatch in March 2011 compared to 9478 units same month last

year. The company has witnessed 10000+ units of sales in March 2011. Ford

India currently exports 40 percent of its engine production and 25 percent of its

car production to 35 countries, some of them are, South Africa, Nepal, Mexico,


70

Kenya, Bahrain, Angola, Bermuda, Ghana, Iraq, Liberia, Lebanon, Malawi,

Madagascar, Mauritius, Nigeria, Senegal, Tanzania, UAE, Zambia and

Zimbabwe. Between January 2011 and April 2011, Ford India had exported

1,167 units of cars.

1.10.8 Toyota Kirloskar Motor Private Limited

Toyota Kirloskar Motor Private Limited is a subsidiary of Toyota Motor

Corporation of Japan (with Kirloskar Group as a minority owner), for the

manufacture and sales of Toyota cars in India. Toyota Kirloskar Motor Private

Limited (TKM) was established in 1997 and is a joint venture between Toyota

(89%) and Kirloskar Group (11%). It sells its cars through a network of dealers

in more than 60 cities throughout India. TKM's annual production capacity is

about 80,000 units. It launched a second Bangalore production plant that began

operations in late 2010.Models of TKMPL are Toyota Corolla, Toyota Innova,

Toyota Etios, Toyota Etios Liva, Toyota Fortuner and Toyota Camry. Models

imported are Toyota Land Cruiser Prado, Toyota Land Cruiser and Toyota

Prius. The company has been in car market for years now, and has established a

brand of its own. Toyota Kirloskar is the 7th leading producers of cars in India.

Corolla is one of the most sold cars around the world.

TKMPL sold 74,759 vehicles in India in the year 2010 registering a growth rate

of 38% compared to 2009 sales. TKM registered an annual growth of 82% in

the year 2011. The company sold 1,36,150 units as compared to 74,762 units in

2010. The Etios series sales topped the yearly sales volume with 43,313 units

of Etios and 20,262 units of Etios Liva sold respectively in 2011. Toyota,

which entered India a decade back, sold 1,60,203 vehicles in the previous fiscal

2011-12 to become India's fifth-largest carmaker. Auto sales remained subdued

during these months and grew by a marginal 0.86%, the lowest in the past three

years. The company is aiming at an annual production of around 4 lakh

vehicles by 2015-16 that would take its market share to around 10%.


71

1.10.9 Skoda India Private Limited

Skoda India Private Limited is also referred to as Skoda Auto India and is a

subsidiary company, which is fully owned by Skoda Auto, which is a Czech

automotive company and is a division of Volkswagen Group Sales India. It is

one of the leading brands of car in India and has played its major role in

establishing itself in the Indian automobile market. The Company was

established in India in November of 2001, and has two headquarters, one in

Aurangabad, Maharashtra and the second in Chakan. It develops,

manufactures, and markets passenger cars and SUVs in India. Models of Skoda

India Pvt. Ltd. are Škoda Superb, Škoda Laura, Škoda Fabia and Škoda Rapid.

It imports Škoda Yeti. It currently has 106 dealerships and 89 service centres

across cities. It has sold over 1,61,959 units since November 2001. In the year

2010-11, the Company recorded sales of 20,019 units.

Skoda sold 6,84,226 cars in 2009, however this figure was global. Laura and

Octavia are the super-sellers in the Indian market while Fabia trails behind just

a little at a figure of 7,000 cars. The company‟s sales figures increased

primarily due to the Octavia which had sales figures of 2,73,590 cars in 2009.

Another successful model in 2009 was the Skoda Fabia. Skoda Fabia‟s total

number of cars sold went up to 2,64,173 cars, which is 7.1 per cent higher than

Fabia‟s sales in 2008. Compared to last year, sales increased of the cars Superb

(44,548 cars), Yeti (11,018 cars), Superb Combi (735 cars), Roomster (47,152

cars) and Octavia Tour (43,745 cars). In 2010, the company made 13.5 billion

dollars in revenue and spent 11.5 billion dollars on production of cars. The

profit of the company in the same year was approximately 2 billion dollars.

1.10.10 Volkswagen India Private Limited

Volkswagen India Private Limited is a subsidiary of Volkswagen Group Sales

India Private Limited that assembles, manufactures and distributes Volkswagen

vehicles in India. Volkswagen is a German based automobile manufacturing


72

company. Volkswagen entered into the Indian market in 2007. It established

the Volkswagen India Private Limited (VIPL) in the same year. It operates its

manufacturing plant in Chakan, Maharashtra which is capable of producing

110,000 vehicles per annum. Volkswagen India Private Limited currently has

more than 70 dealerships in 56 cities across 18 states and 2 union territories of

India. Models of VIPL are Volkswagen Passat, Volkswagen Jetta, Volkswagen

Polo and Volkswagen Vento. It imports Volkswagen Touareg, Volkswagen

New Beetle and Volkswagen Phaeton. In the year 2010, VIPL recorded sales of

32,627 vehicles against 3,039 vehicles sold during the year 2009 and registered

a sales growth of over 1,000%.

Chapter- 2

Review of Literature

Chapter-2 Review of Literature

73

Review of Literature

A number of research studies have been carried out on different aspects of

financial appraisal by the researchers, economists and academicians in

India and abroad. Different authors have analysed performance in different

perspectives. A review of these analyses is important in order to develop an

approach that can be employed in the context of the study related to

financial appraisal of Indian automobile industry.

Nagarajan and Burthwal (1990)

in their research work entitled

“profitability and structure: A firm level study of Indian Pharmaceutical

Industry”, intensively examined the relationship between profitability and

structure, using a sample of thirty-eight pharmaceutical firms in India for the

period 1970-1982. Two measures of profitability i.e., ratio of net profit to

total sales revenue and the ratio of net profits to total assets have been used to

find out the determination of profitability. The analysis demonstrated that

under the condition of price controls the most significant determinant of the

profitability of the firms in this industry is vertical integration. Size and

advertising intensity did not appear to be major determinants. This was

perhaps due to the inability of firms to translate their market power into

prices, because of controls. The coefficient of growth rate of sales was

positive and significant, suggesting that factors on the demand side of a firm

had a greater impact on profitability than on the supply side.

Jagan Mohan Rao (1993) in „Financial appraisal of Indian

Automotive Tyre Industry‟ studied the financial appraisal of Indian

automotive tyre industry. The study was intended to probe into the financial

condition-financial strength and weakness-of the Indian tyre industry. To this

end a modest attempt has been made to measure and evaluate the financial

performance through inter-company and inter-sectoral analysis over a given

period of time (1981-1988). The main findings are that fixed assets utilisation

in many of the tyre undertakings was not as productive as expected and


74

inventory was managed fairly well. The tyre industry's overall profit

performance was subjected to inconsistency and ineffective.

Kallu Rao (1993)

has made a study of intercompany financial analysis

of tea industry-retrospect and prospect. An attempt has been made in this

study to analyse the important variables of tea industry and projected

future trends regarding sales and profit for the next 10 year periods, with a

view to help the policy makers to take appropriate decisions. Various

financial ratios have been calculated for analyzing the financial health of the

industry. The forecast of sales and profits of tea manufacturing companies

shows that the Indian tea industry has bright prospects. The recent changes in

the Indian economic policies will boost up the foreign exchange earnings,

which will benefit those companies, which are exporting to hard currency

areas.

Chandrasekaran (1993)

in „Determinants of profitability in Cement

Industry‟ has studied the determinants of profitability in cement industry. The

objective of this study was to examine determinants of profitability in cement

industry. The study aims at drawing inference on impact of policy measures

which led to change in price and distribution polices relevant for cement

industry. Determinants of profitability are analysed using the technique of

ordinary least squares. Based on existing theories and relevant econometric

empirical works, variables are selected. The study concluded that efficiency in

inventory management and efficient management of current assets were

important to improve profitability.

Pai, Vadivel and Kamala (1995)

studied the diversified companies and

financial performance: A study. An effort was made to study the

relationship between diversified firms and their financial performance. Seven

large firms having different products-both related and otherwise-in their

portfolio and operating in diverse industries were analyzed. A set of

performance measures / ratios was employed to determine the level of


75

financial performance. The results reveal that the diversified firms studied

have been healthy financial performance. However, variation in performance

from one firm to another has been observed and statistically established.

In RBI study (1995)

an attempt was made to study the financial

performance of private corporate business sector during the period 1994-95.

Of the 1030 companies covered in this study, 925 are non-financial

companies and 105 are financial companies. The results of the non-financial

and financial companies are also analyzed size-wise apart from the analysis of

the consolidated results for the entire sector. The good corporate performance

during 1994-95 reflected in major profitability ratios registering distinct

improvement in the year under review as compared to the previous year.

Vijayakumar and Venkatachalam (1995)

in „Working Capital and

Profitability - An Empirical Analysis‟ studied the impact of working capital

on profitability in sugar industry of Tamil Nadu by selecting a sample of 13

companies; 6 companies in co-operative sector and 7 companies in private

sector over the period 1982-83 to 1991-92. They applied simple correlation

and multiple regression analysis on working capital and profitability ratios.

They concluded through correlation and regression analysis that liquid ratio,

inventory turnover ratio, receivables turnover ratio and cash turnover ratio

had influenced the profitability of sugar industry in Tamil Nadu.

Sidhu and Gurpreet Bhatia (1998)

studied the factors affecting

profitability in Indian textile industry. In this study an attempt was made to

identify the major determinants of profitability in Indian textile industry with

the help of empirical data taken from Bombay Stock Exchange Directory for

the year 1983. To find out the factors affecting profitability, regression

analysis had been applied. From the analysis, there was no clear-cut

relationship between current profitability and capital intensity. The age of the

firm was having generally negative but statistically insignificant relationship

with current profitability which points towards the fact firms in Indian textile


76

industry are absolute and need modernization.

Vijayakumar (1998)

has examined the determinants of corporate size,

growth and profitability- the Indian experience. To meet the objectives of the

study, Indian public sector industries were selected. The data relating to size,

growth and profitability were collected from their annual reports

published by the Bureau of Public Enterprises (BPE), Government of India.

The study covers the period from 1980-81 to 1995-96. The technique of

average, correlation and linear and multiple regression analysis has been used

in this study. Inter - industry analysis reveals that the growth is positively and

significantly associated with the size in all the industry groups except textiles.

Agarwal (1999)

studied the profitability and growth in Indian

Automobile manufacturing industry. The objective of this study is to examine

if firms have been making super normal profits since 1975 when price

controls were removed. It also evaluates the impact of policy changes since

1981-82 on profitability and growth of firms in the industry using Tobin‟s

Square as a measure of profitability. The study finds no evidence to show that

firms have made super normal profits. Profitability is found to be explained

mainly by the age of the firms, vertical integration, diversification and

industry policy dummy variable. Important determinants of the growth of

firms are found as diversification, industry policy dummy variables, gross

retained profits and expansion of capacities. Results also reveal differences in

performance between car and non-car sectors as well as within the sectors of

the industry.

Juliet D’Souza and William L.Megginson (1999) have studied the financial

and operating performance of privatized firms during the 1990s. This

study compares the pre and post privatization financial and operating

performance of 85 companies from 28 industrialized countries that were

privatized through public share offerings for the period from 1990 through

1996. The significant increases in profitability, output, operating efficiency,


77

dividend payments and significant decreases in leverage ratios for the full

sample of firms after privatization were noticed. Capital expenditures increase

significantly in absolute terms, but not relative to sales. Employment declines,

but insignificantly. The findings of the study strongly suggest that

privatization yields significant performance improvements.

Rajeswari (2000) studied the Liquidity Management of Tamil Nadu Cement

Corporation Ltd. Alangulam-A Case Study. It can be concluded from the

analysis; the liquidity position of TANCEM is not stable. Regarding

liquidity ratios, there was too much of liquidity in the first two years of the

study period. A very high degree of liquidity is also bad as idle assets earn

nothing and affects profitability. It can be concluded that the liquidity

management of TANCEM is poor and is not satisfactory.

Dabasish Sur, Joydeep Biswas and Prasenjit Ganguly (2001)

studied

the Liquidity Management in Indian Private Sector Enterprises: A case

study of Indian Primary Aluminum industry. From the analysis, it may be

summarized that the overall performance regarding liquidity management at

INDAL was better in terms of efficient utilization of short term funds,

whereas HINDALCO was unable to do so. A very high degree of positive

correlation between liquidity and profitability in case of both the companies

was a notable feature, reflecting the favorable effect of liquidity on

profitability.

Aggarwal and Singla (2001)

in their study developed a single index of

financial performance through the technique of Multiple Discriminant

Analysis (MDA).They attempt to identity from among the 11 ratios, used as

inputs, those ratios, which are relevant in distinguish between profit making

units and loss making units in Indian paper industry. The study indicates that

model has correctly classified 82.14 percent of units selected as profit making

and loss marking. The study also shows that inventory turnover ratio, interest

coverage ratio, net profit to total assets and earnings per share are the most


78

important indicators of financial performance. The study also suggests that

the results of MDA can be used as predictor of future profitability / sickness.

Dabasish Sur (2001) studied the Liquidity Management: An overview

of four companies in Indian Power Sector. In this study a

comparative analysis regarding the liquidity management in Electricity

generation and distribution industry has been made for the period 1987-88 to

1996-97. The study reveals that the overall liquidity should be managed in

such a way that not only it should not hamper profitability but also its

contribution towards increase in profitability should be positive.

Debashish Rei and Debashish Sur (2001) studied the profitability analysis

of Indian food products industry: A case study of Cadbury India Ltd. The

study attempts to measure the profitability scenario of Cadbury India Ltd. and

analyses the relationship among various profitability ratios and their joint

impact using multiple correlation co-efficient and multiple regression method.

The study on the inter-relation between the selected ratios regarding the

company‟s position and performance and profitability of the company

revealed both negative and positive association.

Mansur A. Mulla (2002)

in „Use of „Z‟ score analysis for evaluation of

financial health of textile mills - A case study‟ has been made an insight

into the financial health of Shri Venkatesh Co-operative Textile Mills Ltd.,

Arunageri of Dharwad District. The „Z‟ score analysis has been applied to

evaluate the general trend in financial health of a firm over a period by using

many of the accounting ratios. From the study it was concluded that the

textiles mill under study was just on the verge of financial collapse. On the

one hand, current assets declined because of the negative profitability

performance, whereas on the other hand, the current liabilities were on the

increase because of poor liquidity performance of the mill.

Vijayakumar (2002) in “Determinants of Profitability-A firm level study of


79

the Sugar Industry of Tamil Nadu”, delved into the various

determinants of profitability viz., growth rate of sales, vertical integration and

leverage. Apart from these three variables, he had selected current ratio,

operating expenses to sales ratio and inventory turnover ratio. Econometric

models were used to test the various hypotheses relating to profitability with

other variables. The researcher noted in his conclusion that efficiency in

inventory management and current assets are important to improve the

profitability.

Vijayakumar (2002)

in his study „Financial appraisal of Salem Co-

operative Sugar Mills Ltd, Mohanur‟ analysed the various aspects of the

working of Salem Co-operative Sugar Mills Ltd, Mohanur. Financial

appraisal has been studied with respect to profitability, capital structure, fixed

assets and working capital. The researcher's main finding is about the Mill‟s

over reliance on external funds which results in interest burden. It is certain

that the Mill will have better scope to function in an efficient manner if the

owner's funds are increased and the borrowings are reduced.

Sudarsana Reddy (2003)

studied the Financial Performance of Paper

industry in AP. The main objectives set for the study are to evaluate the

financing methods and practices to analyze the investment pattern and

utilization of fixed assets, to ascertain the working capital condition, to review

the profitability performance and to suggest measures to improve the

profitability. The data collected have been examined through ratios, trend,

common size, comparative financial statement analysis and statistical tests

have been applied in appropriate context. The main findings of the study are

that A.P paper industry needs the introduction of additional funds along with

restructuring of finances and modernization of technology for better operating

performance.

Petia Topalova (2004)

in his study uses firm level data to examine the

performance of India‟s non financial corporate sector since 1989 and


80

evaluate its financial vulnerabilities. The study shows promising trends in

liquidity, profitability and leverage of the sector emerged in the early 1990s;

they experienced a reversal after 1996. Nevertheless, most indicators were

still at comfortable levels, and there is evidence of improvement in 2002. The

study also reveals that a number of firms still face problems servicing their

debt obligations, posing a risk to lenders. The study of aggregate interest

coverage of the corporate sector indicates that potential non-performing loans

of the corporate sector remain high. This underscores the need of the

corporate sector remain high. This underscores the need for close monitoring

of the corporate sector in the future.

Santimoy Patra (2005)

the impact of liquidity on profitability is analysed

in his study considering the case Tata Iron & Steel Company Limited.

The study of the impact of liquidity ratios on profitability showed both

negative and positive association. Out of seven liquidity ratios selected for

this study, four ratios namely current ratio, acid test ratio, current assets to

total assets ratio and inventory turnover ratio showed negative correlation

with profitability ratio. However, these correlation co-efficient were not

statistically significant. The remaining three ratios namely working capital

turnover ratio, receivable turnover ratio and cash turnover ratio have shown

positive association with the profitability ratio, all of which are statistically

significant at 5% level of significance. The result of all the correlation co-

efficient is as desirable except correlation co-efficient between inventory

turnover ratio and ROI. However this undesirable sign between ITR and ROI

is not supported by the multiple regression analysis, which shows the positive

association between these two variables. There is increasing profitability

which depends upon many factors including liquidity.

S.P.Singh (2006)

in his study performance of sugar mills in Uttar Pradesh

by ownership, size and location. Performance assessment of the sugar industry

and setting targets for the relatively inefficient mill to improve their

efficiency and productivity is crucial, as the interest of various stakeholders


81

is largely dependent on its performance. The performance of the mills is

found to vary significantly across sector, plant size and region. The private

sector mills achieve the highest efficiency scores, followed by the cooperative

sector. It has also been observed that the mills with bigger plant size attain

relatively higher efficiency scores, moreover, the mills located in the WK

found better performer as compared to their counter parts of other regions.

Labour and energy inputs are found highly underutilized in almost all the

inefficient mills.

Debasish Sur and Kaushik Chakraborty (2006)

in his study financial

performance of Indian Pharmaceutical industry: The Indian

Pharmaceutical industry has been playing a very significant role in increasing

the life expectancy and in decreasing the mortality rate. It is the 5th

largest in

terms of volume and the 14th

largest in value terms in the world. The

comparative analysis the financial performance of Indian Pharmaceutical

industry for the period 1993 to 2002 by selecting six notable companies of the

industry. The comparison has been made from almost all points of view

regarding financial performance using relevant statistical tools.

S.K. Srivastava (2007) in his study Role of Organizational

management and managerial effectiveness in promoting performance and

production. Management is a universal Phenomenon. It is present in virtually

all walks of life. Management is not confined merely to a factory or an office.

Skillful management is needed in clubs, families, Schools, Sports, teams and

social functions like marriages, Picnics parties and so on. Lack of proper

management invariable results in chaos, wastage of time, money and efforts.

Although management is needed in various activities, it has special

significance with respect to business enterprises in the public as well as

private sectors. The productive efficiency of business firm depends a great

deal on the Quality of management. Also effectiveness of management is a

major factor determining the growth and prosperity of a business on which


82

rests the process of economic growth.

Adolphus J. Toby (2007) in his study financial management modeling of the

performance of Nigerian quoted small and medium-sized Enterprises. It is

conceptualized that sustained growth, adequate liquidity and requisite

profitability in the SME sector is significantly related to their investment

and financing decisions. The empirical results show a significantly inverse

relationship between current ratio and the gross profit margin, holding the

working capital gap constant. The quoted SMES current assets ratio are

significantly sensitive to commercial Banks „liquidity ratio, cash reserve

requirements, and loan-to-deposit ratio. Overall, over model results confirm

that the SME sector in Nigeria is still limited by the liquidity-profitability

dilemma, efficiency constraints, Pecking order reversals, stringent monetary

policy regimes and a risk-over banking system.

From the above review of empirical works it is clear that different authors

have approached financial appraisal in different ways in varying level of

analysis. These different approaches helped in the emergence of more and

more literature on the subject over time. It gives an idea on extensive and

diversed works on financial appraisal. It has been noticed that the studies on

financial performance in various sectors provide divergent results over the

study period. The main reason for the divergence in the results is the different

in the method used for the measurement of factors specially profitability,

solvency, liquidity, asset productivity, capital structure and growth rate in the

operating performance and social performance all the studies aimed to analyse

the financial performance in Indian industries with number of factors.

Chapter- 3

Honda Siel Cars India Limited - Its’ Profile

Chapter-3 Honda Siel Cars India Limited - Its’ Profile

83

Honda Siel Cars India Limited - Its’ Profile

Honda Motor Company, Japan with its headquarters in Tokyo, has

manufacturing operations in 32 countries with 109 production bases. The

company principal of Honda Worldwide is dedication to supplying products of

the highest quality yet at a reasonable price for worldwide customer

satisfaction. It has 3 business divisions namely two wheelers, four wheelers and

Power Products. Apart from Honda Motorcycle and Scooter India Private Ltd.

(HMSI) that manufactures two wheelers, the other business divisions in India

include Honda Cars India Limited (HCIL) and Honda Siel Power Products

Limited (HSPP). The history of the Honda Motor Company began with

the vision of one man – Soichiro Honda. His dream was personal mobility

for everyone. Soichiro Honda founded the Honda Motor Company in 1948. In

the same year, he designed and engineered the first product of this Company

– a 50cc motorised bike on a bicycle frame-in his small shed at Hamamatsu.

„Challenging the Limits‟ is a phrase commonly heard across the length and

breadth of Honda. It was made popular by its founder, Soichiro Honda who

knew that his fledgling company had to out-think and out-perform its

competitors every step of the way in order to survive. After all, he started out at

a time when his country was devastated by war. Soichiro‟s vision was

international in character. His desire was to lead the world in technology, and

make a significant contribution to the creation of a better society. Honda is a

global company with a global viewpoint and a four-region global strategy that

is reflected in a solid commitment to local markets and economies. However,

the most enduring challenge has been to satisfy the ever – changing needs of

their customers. This is the essential spirit of Honda. The Company‟s vision is

“To be a Company that the Society would want to Exist”. It strongly believes

in Co-existence and Co-evolution, wherever it operates.

It originally began producing motorcycles in the mid 20th

century and began

manufacturing automobiles (the Honda Civic) in 1972. After the original


84

Civics‟ inception, Honda produced many variants of this highly successful

vehicle, such as the four-door-sedan, wagons, hatchback, coupe and more

recently the hybrid. Honda currently has two automotive brands (Honda and

Acura) and it produces over 20 other vehicle models, such as the Accord,

Element, Insight, Odyssey Minivan, Pilot SUV, and Ridgeline Truck, in

addition to producing motorcycles and power products. Since Honda began

producing automobiles it has been a leader in producing fuel efficient and low

emissions vehicles. In 1977 and 1983, Civic models ranked first in U.S. fuel-

economy tests. Honda has also introduced hybrid vehicles such as the Insight,

Civic and Accord in 1999, 2002 and 2004 respectively. Honda operates in India

through the following subsidiaries and joint ventures:

a) Honda Motorcycle and Scooter India Private Limited

b) Honda R & D (India) Private Limited

c) Honda Cars India Limited

d) Honda Trading Corporation India Private Limited

e) Honda Siel Power Products Limited

f) Honda Motors Company Limited

3.1. HONDA'S GLOBAL VISION

Soichiro's vision was international in character. His desire was to lead the

world in technology, and make a significant contribution to the creation of a

better society. As a result, most of the products that Honda developed started

out by making a difference. Whether it was the CVCC engine in the sixties or

the solar powered car of the nineties, they all sought to challenge and overcome

conventional wisdom.

Basic Principles

Respect for the individual. The Three Joys (buying, selling and creating).


85

Company Principle (Mission Statement)

Maintaining a global viewpoint, we are dedicated to supplying products of the

highest quality, yet at a reasonable price for worldwide customer satisfaction.

Management Policies

Proceed always with ambition and youthfulness.

Respect sound theory, develop fresh ideas, and make the most effective

use of time.

Enjoy work and encourage open communication.

Strive constantly for a harmonious flow of work.

Be ever mindful of the value of research and endeavor.

Dreams inspire us to create innovative products that enhance mobility and

benefit society. To meet the particular needs of customers in different regions

around the world, we base our sales networks, research and development

centers and manufacturing facilities in each region. Furthermore, as a socially

responsible corporate citizen, we strive to address important environmental and

safety issues.

3.2. HONDA’S MILESTONES

1947: Honda produced its first product, the A-type bicycle engine.

1959: The America Honda Company is setup in Los Angeles. The

company sells the Honda Dream, Berley and Honda 50 motorcycles.

1962: American Honda Company launches its advertising campaign.

Honda sells power equipment products in the US which include the F-

190 mini-tiller and the E-300 and E-40 portable generators.

1969: The Honda Dream CB 750 Four motorcycle debuts in North

America.

1973: Honda makes two new inventions: the Honda Civic hatchback and

the four stroke engine that‟s more fuel efficient than the 2-stroke engine.


86

1974: The Honda Civic CVCC engine is introduced.

1982: Honda of America begins producing the Accord at Marysville,

Ohio making it the first Japanese automaker to make cars in America.

1990: Honda released the Acura NSX car with the VTEC engine

technology.

1991: The Accord Wagon is introduced in America.

1994: Honda enters the Indy Car open wheel racing series

1995: The Civic is released and it‟s the first vehicle to meet California‟s

Low Emission Vehicle emission standards.

1996: Honda begins production at a new plant in Ohio.

1997: Honda starts leasing the Honda EV Plus.

1998: Honda started producing the All Terrain Vehicles in South

Carolina and the Honda Civic GX.

1999: The Honda Insight is launched.

2001 Automobile production reaches 10 million units in the U.S. Fit and

Civic Hybrid released.

2002 Leasing of FCX fuel-cell vehicle begins in Japan and the U.S. Fit

achieves No.1 annual sales among domestic registered vehicles.

2003 Worldwide automobile production reaches 50 million units.

2005 Leasing of FCX fuel cell vehicle for home use begins. Worldwide

sales of Honda hybrid vehicles reach 100,000 units.

2006 Sales of Bioethanol-compatible Flexible Fuel Vehicle (FFV)

models for Brazilian market begin. Acura brand launched in China.

2008 Leasing of FCX Clarity fuel cell vehicle begins in Japan and the

U.S.

2009 Insight hybrid vehicle released.

2010 CR-Z hybrid vehicle released.


87

3.3. PROFILE OF HONDA SIEL CARS INDIA LIMITED

Honda Siel Cars India Ltd. (HSCIL) is a subsidiary of the Honda Motor

Company Limited of Japan, for the production, marketing and export of

passenger cars in India. It began operations in December 1995 as a joint

venture between Honda Motor Company and Usha International of Siddharth

Shriram Group. Honda Siel Cars India Limited is now known as Honda Cars

India Limited (HCIL). In August, 2012, Honda bought out Usha International‟s

entire 3.16% stake for Rs.1.8 billion in the joint venture. The Company

officially changed its name to Honda Cars India Ltd. and became a 100%

subsidiary of Honda. Honda Cars India Ltd., leading manufacturer of passenger

cars in India provide Honda‟s latest passenger car models and technologies, to

the Indian customers. The Company‟s first state-of-the-art manufacturing unit

was set up at Greater Noida, U.P in 1997 with an investment of Rs. 450 crores.

The green-field project is spread across 150 acres of land (over 6,00,000 sq.

m.). The total investment made by the company in India is Rs 1620 crores in

Greater Noida plant .The annual capacity of this facility is 100,000 units. The

company‟s second manufacturing facility is in Tapukara, Rajasthan. This

facility is spread over 600 acres and will have an initial production capacity of

60,000 units per annum, with an investment of about Rs 1,000 crore. The first

phase of this facility was inaugurated in September 2008.

The company‟s product range includes Honda Brio, Honda Jazz, Honda City,

Honda Civic, Honda Accord and Honda Amaze which are produced at the

Greater Noida facility with an indigenization level of 80%, 77%, 76%, 74%

and 28% respectively. The CR-V is imported from Japan as Completely Built

Units. Honda‟s models are strongly associated with advanced design and

technology, apart from its established qualities of durability, reliability and

fuel-efficiency. Honda Cars has a strong sales and distribution network spread

across the country. The network includes 135 authorised dealership facilities in

83 cities. Its dealerships are based on the “3S Facility” (Sales, Service, Spares)

format, offering complete range of services to its customers. The company


88

operates under the stringent standards of ISO 9001 for quality management and

ISO14001 for environment management. Honda Cars India Ltd. nine member

Board is dominated by Honda Motor Company‟s representatives and they

continue to lend their expertise to Honda Cars India Ltd. in the areas of new

product development, production management, vendor development and

finance.

During the financial year 2010-11, in the absence of new models, Honda Cars

India Limited sold 59,463 units, as against 61,815 units during the year 2009-

10. The Company‟s performance has been adversely impacted by the rising fuel

prices, unfavourable foreign exchange rates, expanding gap between prices of

diesel and petrol, and increasing competition through aggressive sales

promotion policies prevalent during the year. Honda Cars India Limited

reported loss after tax of Rs 6044.8 million in 2011-12 and surplus transferred

to Balance Sheet was Rs 2592.0 million. The Company‟s operations during the

year 2011-12 were severely impacted due to unfortunate natural calamities in

Japan and Thailand in the year 2011, leading to non-availability of critical

components/parts and also due to rising fuel prices and expanding gap between

prices of diesel and petrol. As a result, the launch of BRIO, the new small car,

was adversely affected and during the financial year 2011-12, the Company

sold 54,427 units in comparison to 59,552 units during the year 2010-11

witnessing a 8.5% drop in sales.

The Company has a market share of 2.08% in the overall passenger vehicle

segment. Honda Cars India registered a 35 per cent growth in sales for the

financial year 2012-13. In 2011-12, the company had sold 54,427 units, and it

witnessed a 35 per cent jump in sales at 73,483 units in 2012-13. Accordingly,

the Company has continued its focus on strengthening the in-house cost

constitution, endeavouring for increased localisation levels, developing local

suppliers and building capacity for critical components at its Plant at Tapukara,

so as to optimize its product line-up to address diverse market requirements,

minimize the risk of foreign exchange fluctuations and dependence on imports.


89

As production resumed to full capacity from February, 2012, the Company is

now ready to give more joys to its customers. With the introduction of Brio and

launch of updated Jazz and City models, the Company has a refreshed line-up

of cars, which are competitively priced.

3.3.1. Product Range

Honda Car's product range in India includes the Honda City ZX in the mid-

size segment, Civic & Civic Hybrid in the Lower D segment and Accord in the

luxury segment and third generation all-new CR-V (both 2.0L 2 WD and 2.4L

4WD) in the SUV segment. While the City ZX, Civic and Accord are

manufactured at the company's plant, the CR-V & Civic Hybrid is imported

from Japan as a Completely Built Unit. HCIL produces the following vehicles

in India for local and export market:

a) Honda City

Honda's all-new Third Generation Honda City was launched in September

2008. It comes with a completely new design, new engine, spacious cabin and

equipped with various active and passive safety features. The company has also

launched the 1.5 V MT & AT version of the City in September 2009. The new

Honda City is available as SMT, VMT and VAT. Additionally, all the variants

is available in 2 attractive types – Elegance and Inspire. The all new Honda

City achieved milestone sales with 50,000 units sold within one year of its

launch. Since its launch in the country in 1998, Honda City has been a best

seller in the premium car segment.

Honda City Models

Honda City 1.5 E MT

Honda City 1.5 S AT

Honda City 1.5 S MT


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b) Honda Accord

The Honda Accord was first introduced in India in year 2003. HSCI launched

the 8th generation Honda Accord in India in May 2008. The Honda Accord is

available in 2.4L and 3.5L V6 engine. The 2.4L comes in three types in both

Automatic and Manual transmission − Accord 2.4, Accord 2.4 Elegance and

Accord 2.4 Inspire. The All-new Accord comes with 5-speed Manual

Transmission and 5-speed Automatic transmission with Paddle shift, to give

the exhilarating experience of F-1 racing. The AT now has Shift Holding

System which avoids unnecessary gear shifting on winding roads and helps in

hassle free drive. The Honda Accord V6 3.5-liter comes with Electric Sunroof

and additional luxury features for enhanced exterior styling.

Honda Accord Models

Honda Accord 2.4 AT

Honda Accord 2.4 Elegance AT

Honda Accord 2.4 Elegance MT

Honda Accord 2.4 Inspire AT

Honda Accord 2.4 Inspire MT

Honda Accord 2.4 MT

c) Honda City ZX

Honda City ZX is today recognized as one of the most successful car brands in

the country. Its success is a replica of the success of its predecessor - the

original Honda City, launched way back in 1997. In fact, HSCI took a historic

step in 2003, when it introduced the New-City at a time when the original City

was still performing brilliantly and it was an immediate success. The City ZX

was launched two years later in 2005 as an enhanced version of the New-City

and is strongly associated with durability, reliability, quality and fuel-

efficiency. The City ZX range includes 4 variants - EXi, GXi, CVT (Automatic

Transmission) and VTEC. While EXi, GXi and CVT variants come with the


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advanced combustion system of the 1.5 litre Intelligent Dual & Sequential

Ignition (i-DSI) engine, City VTEC embodies a 1.5 litre VTEC (Variable

Valve Timing and Lift Electronic Control) engine. The VTEC version was

reintroduced in the new City in response to customer demand. The City VTEC

comes with sporty exteriors and plush interiors, catering to the premium

segment customers.

Honda City ZX Models

Honda City ZX CVT

Honda City ZX EXi

Honda City ZX GXi

Honda City ZX VTEC

Honda City ZX VTEC Plus

d) Honda Civic

The Civic is Honda‟s largest selling model globally and is now sold in

approximately 160 nations and regions worldwide. Honda Civic was launched

in India in July 2006 which became a runaway success .The new Civic was

launched in September 2009 with more aggressive and sportier look. The new

V grade Civic juxtaposes Honda‟s advanced technology with striking design.

The new Curved 5 Point Metallic Front Grille and restyled Front Sporty

Bumper add to a pulsating and aggressive appeal of the car. The introduction of

stylized Dark Smokey Headlights & Crystalline Octagonal Tail Lights

enhances the contemporary look of the car.

Honda Civic Models

Honda Civic 1.8E MT

Honda Civic 1.8V AT

Honda Civic 1.8V MT

Honda Civic Sport


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Honda Civic Hybrid CVT

e) Honda Jazz

Honda Jazz is the company‟s first offering in the premium compact car

segment. The car was introduced in 2009. The Jazz is a segment-defining car

that has won accolades and adoration all over the world. Widely acclaimed for

its dynamic styling, spacious interiors, versatile utility and remarkable

performance, the Honda Jazz brings added fun and excitement to the driving

experience. The Jazz‟s dynamic performance is achieved by four-cylinder 1.2-

liter i-VTEC engine, featuring Programmed Fuel Injection that delivers

maximum output of 90 PS (66 kW) @ 6,200 rpm and Torque of 110 Nm (11.2

kg-m) @ 4800 rpm while giving impressive fuel economy of 16.1 km/l, as per

ARAI test data. Safety of passengers and pedestrians is a top priority for Honda

and all safety equipment is standard across all variants. The Jazz practicality

has been enhanced with three-mode “Magic Seat” configuration to achieve

multiple seating and cargo-carrying configurations for long or tall objects in

addition to the standard five-passenger mode.

Honda Jazz Models

Honda Jazz S(Basic)

Honda Jazz Select

Honda Jazz X

f) Honda Brio

The Honda Brio is a five-door subcompact hatchback produced by Honda in

India, Thailand and Indonesia. The car was introduced in 2011. The Brio

prototype was first shown at 2010 Thailand International Motor Show. The car

is developed to position in a class below Honda Fit for emerging markets. The

initial markets were Thailand and India. The car is designed as a commuter

with Honda's "man maximum, machine minimum" principle. The Brio is

http://en.wikipedia.org/wiki/Subcompact_car

http://en.wikipedia.org/wiki/Hatchback

http://en.wikipedia.org/wiki/Honda


http://en.wikipedia.org/wiki/Thailand

http://en.wikipedia.org/wiki/Indonesia

http://en.wikipedia.org/wiki/Honda_Fit


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powered by a 4-cylinder, 1.2 L (73 cu in) L12B i-VTEC gasoline engine

delivering up to 90 PS (66.2 kW; 88.8 bhp). It is available with either a 5-speed

manual or a continuously variable transmission. Safety equipment includes

dual front airbags, anti-lock braking system, electronic brakeforce distribution

and front pretensioner seat belts. In the Indian market, it competes against

Maruti Suzuki's Swift and Ritz, Hyundai's i10, Ford's Figo, Nissan's Micra and

Toyota's Etios Liva.

Honda Brio Models

Honda Brio E MT

Honda Brio S MT

Honda Brio V MT

Honda Brio VX MT

Honda Brio VX AT

g) Honda CR-V

The Honda CR-V is sold as a Completely Built Unit (CBU) import and is

available on confirmed order basis for the customers. The Honda CR-V was

first introduced in India in July 2003. It went on to become the segment leader

since its launch winning several awards for itself. The all new 3rd generation

CR-V was introduced in India in November 2006 which offered its customers a

distinctive combination of „the comfort of a sedan with the thrills of a SUV‟.

Honda launched a refreshed version of the 3rd generation CR-V in November

2009. The new Honda CR-V offers its customers a distinctive combination of

refined styling and high quality. The Honda CR-V is available in 2.0 L - MT

2WD and 2.4L MT /AT Real-time 4WD.

Honda CR-V Models

Honda CR-V2.0 2WD

Honda CR-V 2.4 AT

http://en.wikipedia.org/wiki/Straight-four_engine

http://en.wikipedia.org/wiki/Honda_L_engine#L12B_i-VTEC

http://en.wikipedia.org/wiki/Manual_transmission

http://en.wikipedia.org/wiki/Continuously_variable_transmission

http://en.wikipedia.org/wiki/Airbag

http://en.wikipedia.org/wiki/Anti-lock_braking_system

http://en.wikipedia.org/wiki/Electronic_brakeforce_distribution

http://en.wikipedia.org/wiki/Seat_belt#Pretensioners_and_webclamps


http://en.wikipedia.org/wiki/Suzuki_Swift

http://en.wikipedia.org/wiki/Suzuki_Ritz

http://en.wikipedia.org/wiki/Hyundai


http://en.wikipedia.org/wiki/Ford

http://en.wikipedia.org/wiki/Ford_Figo

http://en.wikipedia.org/wiki/Nissan

http://en.wikipedia.org/wiki/Nissan_Micra

http://en.wikipedia.org/wiki/Toyota

http://en.wikipedia.org/wiki/Toyota_Etios


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Honda CR-V2.4 MT

h) Honda Amaze

The Honda Amaze is a four-door subcompact sedan produced by Honda. The

Amaze is the sedan version of the Brio. Honda launched the Amaze in India on

April 11, 2013 which has been developed at Honda R&D Asia Pacific Co., Ltd.

located in Bangkok, Thailand. The Amaze is available in petrol and diesel

engine. The petrol version is available in 6 variants and the diesel version is

available in 4 variants. The Amaze is being manufactured at the company‟s

facility in Greater Noida, with a localisation level of more than 90%. The

Amaze will be a significant step for the company in India as it will be its first

diesel car in India. The car will also be available with the 1.2 L (73 cu in) L12B

i-VTEC petrol engine that is used in the Jazz and Brio hatchbacks. Apart from

being the company‟s first diesel car in India, the Amaze will also be slotted in

that lucrative sub 4-meter entry-level sedan segment, where it will compete

against the Maruti Suzuki Swift DZire and the Tata Indigo eCS.

Honda Amaze Models

Honda Amaze S AT

Honda Amaze 1.2 E MT

Honda Amaze 1.2EX MT

Honda Amaze 1.2 S MT

Honda Amaze 1.5 E MT

Honda Amaze 1.5EX MT

3.3.2. Awards and Accolades of the Company

2012

2012 India Vehicle Dependability Study - Honda Civic - Premium

Midsize Car

2012 India Vehicle Dependability Study - Honda CR-V - SUV

http://en.wikipedia.org/wiki/Subcompact_car

http://en.wikipedia.org/wiki/Sedan_%28automobile%29

http://en.wikipedia.org/wiki/Honda

http://en.wikipedia.org/wiki/Honda_Brio


http://en.wikipedia.org/wiki/Bangkok

http://en.wikipedia.org/wiki/Thailand

http://en.wikipedia.org/wiki/Petrol_engine

http://en.wikipedia.org/wiki/Diesel_engine

http://en.wikipedia.org/wiki/Greater_Noida




http://en.wikipedia.org/wiki/Honda_Fit


http://en.wikipedia.org/wiki/Tata_Indigo


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JD Power Asia Pacific 2011 India IQS - Honda Brio - Premium

Compact Car

JD Power Asia Pacific 2011 India IQS - Best Car in Midsize Segment-

Honda City No.1

2012 India Automotive Performance, Execution and Layout Study -

Honda Jazz - Premium Compact Car

NDTV Car & Bike Awards 2012- Small Car of the year -Honda Brio

Hatchback of the Year B.S. Motoring Awards 2012- Honda Brio

2011

Honda Brio awarded Hatch of the year - Petrol 2011 by Car India

CNBC TV-18 Overdrive Awards 2011 - Storyboard Auto Commercial of

the year-Honda Jazz

JD Power Asia Pacific 2011 India IQS - Best Car in Premium Midsize

Segment- Honda Civic


Honda City No.1

CNBC TV-18 Overdrive Awards 2011-Storyboard Auto Commercial of

the year-Honda Jazz

2010

JD Power Asia Pacific 2010 India IQS - Best Car in Premium Compact

Segment-Honda Jazz

Car of the Year -NDTV Profit – Car India & Bike India Awards 2010-

Honda Jazz

Small Car of the Year -NDTV Profit – Car India & Bike India Awards

2010- Honda Jazz


Honda City


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JD Power Asia Pacific 2010 India IQS - Best Car in Premium Midsize

Segment- Honda Civic

2009

JD Power Asia Pacific 2009 India IQS - Honda City No.1

Indian Car of the Year 2009 (ICOTY 2009) - New Honda City

JD Power Asia Pacific 2009 India IQS - Honda Civic No.1

India‟s Favourite Car for Enthusiasts 2009-Honda Civic

India‟s Favourite Car for Chaffeur-Driven Executives 2009-Honda

Accord

2009 Best Luxury Car (UTVi Autocar Awards)- Honda Accord

2008

Total Customer Satisfaction (Honda City and Honda CR-V) by TNS

'Best Executive Car' (Honda Civic), CNBC Autocar Auto Awards

'Best Brand for eco friendliness' (HSCI) by Auto India

'Best ad campaign of the year' (HSCI's 10th anniversary campaign) by

Overdrive

2007

SUV of the Year' (Honda CR-V) by NDTV Profit Car & Bike

'SUV of the Year' (Honda CR-V) by Overdrive awards 2007

'Best Driver's Car award (Honda CR-V) by CNBC TV-18 Autocar Auto

Awards

'Car of the Year'(Honda Civic) by CNBC TV-18 Autocar Auto Awards

2007

'Car of the Year'(Honda Civic) by NDTV Profit Car & Bike Awards

2007

TNS Total Customer Satisfaction Study 2006 (Accord, CR-V & City)


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Viewer's Choice of the year - CNBC TV 18 Autocar Auto Awards,

2007-Honda Civic

Executive Car of the year - NDTV Profit Car India and Bike India

Awards 2007- Honda Civic

2006

Best Indian Company (unlisted) by Business Standard Group

Manufacturer of the Year by NDTV Profit-Car India

Manufacturer of the Year by CNBC-TV 18 Autocar India

No 1 Mid Size Car (Honda City); No 1 Entry Luxury Car (Honda

Accord) and No 1 Premium SUV (Honda CR-V) by TNS

Best Mid-size Car in Initial Quality (Honda City) and Most Appealing

Mid-size car (Honda City) by JD Power

2005

CNBC Autocar CAR of the year 2004 - Honda City

ICICI Overdrive SUV of the Year 2004 - Honda CR-V

ICICI Overdrive Car of the Year 2004 - Honda City

Business Standard Motoring Car of the Year 2004 - Honda City

2004

CNBC Autocar CAR of the year 2004 - Honda City

ICICI Overdrive SUV of the Year 2004 - Honda CR-V

ICICI Overdrive Car of the Year 2004 - Honda City

Business Standard Motoring Car of the Year 2004 - Honda City

3.3.3. Future Prospects of the company

Aiming to garner a larger pie in the automobile market, Japanese car maker

Honda plans to launch four new models in India by 2015. The proposed models

include an upgraded variant of its highly popular compact hatchback Jazz, a

http://www.zigwheels.com/newcars/Honda


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compact Sports Utility Vehicle, a seven seater multi-purpose vehicle and an

upgraded premium sedan City. Honda Cars India Ltd. currently sells premium

hatchback Brio, midsize sedan Amaze, premium Sedan City, premium SUV

CR-V and luxury sedan Accord in the country, and it has about 150 dealers.

The Company is planning to launch four more models. They will start with

next generation Jazz, two new models in new segments - a seven seater MPV

and a compact SUV - and an upgraded City. For the financial year 2013-14,

the company expects to sell about one lakh units. The company has planned to

increase its dealership outlets to 162 during the financial year 2014.

Automobile maker Honda Cars India Limited (HCIL) would invest Rs 2,500

crore at Tapukara plant in Alwar District in Rajasthan. The investments would

be to build a new assembly line for cars with an annual installed capacity of

1,20,000 units, a new diesel engine component production line and a forging

plant. Combined with the capacity of the new plant, HCIL‟s total installed

production capacity will be increased to 240,000 units per annum in 2014.

http://timesofindia.indiatimes.com/topic/Sports

Chapter- 4

Financial Appraisal

Techniques - An

Overview

Chapter- 4 Financial Appraisal Techniques- An Overview

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Financial Appraisal Techniques - An Overview

Financial Statements present a summary of the accounts of the business

enterprise to convey an understanding of financial results and position of a

business enterprise. As rightly said by Hampton John J “A financial statement

is an organised collection of data according to logical and consistent

accounting procedures. Its purpose is to convey an understanding of some

financial aspects of a business firm. It may show a position at a moment of time

as in case of a balance sheet or may reveal a series of activities over a given

period of time as in case of an income statement.” American Institute of

Certified Public Accountants (AICPA) state that „Financial Statements are

prepared for the purpose of presenting a periodical review or report on the

progress by the management and deals with (a) status of investments in

business and (b) results achieved during the period under review. The term

financial statements generally refer to the combination of Balance Sheet (also

termed as Position Statement) and Income Statement (also termed Profit and

Loss Account).

4.1. ANALYSIS AND INTERPRETATION OF FINANCIAL

STATEMENTS

The analysis refers to methodical arrangement of data where in the figures

contained in the financial statements are regrouped and the relationship is

studied between the component parts of financial statements. For the purpose

of analysis, the data is sometimes rearranged; the meaningful relationships are

established by comparing the figures of current year with that of the previous

years; or calculating certain ratios, etc. Thus the complex and heterogeneous

information contained in financial statements is broken up into simple and

valuable information and significant relationships are established between the

elements of these financial statements. This is what we mean by analysis.


100

Analysis simplifies the heterogeneous data, regroups the figures contained in

financial statements, but the meaning and significance of these simplified

figures is explained by interpretation. It is the process of drawing

inferences/conclusions and explaining the purpose and the result of analysis.

Though, both the analysis and interpretation are related to different aspects, it is

difficult to draw a definite line of difference between them. Both are

complementary to each other and are interrelated. Analysis is useless without

interpretation and the interpretation is not possible without analysis. Most of

the authors have used the „Analysis‟ to imply both the analysis and

interpretation. As put by Myers, “Financial Statement analysis is largely a

study of relationship among the various financial factors in a business as

disclosed by a single set of statements and a study of trend of these factors as

shown in a series of statements.”

Broadly, the objective of financial analysis is to understand the financial

information contained in the financial statements in order to identify the

strength and weakness of the firm, to make a forecast about the future and to

take decisions regarding the operating and financing plans of the business. The

main objectives of analysis of financial statement are:

a) To assess the operating Performance (profitability and efficiency) of the

business as-a whole and for different departments and units.

b) To find out the relative importance and meaning of different elements of

financial statements.

c) To assess the short-term (liquidity) and long-term financial (solvency)

position of the firm.

d) To facilitate relative comparison of various departments and branches of

the same firm and various firms engaged in the same line of business.

e) To identify the causes and effects of unfavourable changes in various

operating and financial aspects and thereby taking remedial measures for

improvement.


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4.2. TYPES OF ANALYSIS AND INTERPRETATION

The analysis of financial statements can be undertaken in a number of ways.

The type of analysis and interpretation depends on the number of years, types

of persons involved and purpose for which the analysis is carried out. Man

Mohan and Goyal has identified two common basis for classification.

(i) On the basis of Modus Operandi:

Modus Operandi basis of classification of financial analysis is related to the

number of years involved in the analysis. It may be classified into two types as

described below:

(a) Vertical Analysis

It is also known as „Static Analysis‟. It refers to the study of relationships of

various items of financial statements of one accounting period only. It

incorporates the study of only one set of financial statements. Common size

financial statements and financial ratios are two important tools used in vertical

analysis.

(b) Horizontal Analysis

It covers a period of more than one accounting periods, therefore also termed as

„Dynamic Analysis‟. It is an analysis of financial statements of an organization

of two or more years. This type of analysis is quite useful for identifying the

long-term trends in various indicators of performance. 'Comparative Statements

and „Trend Percentages, are the important tools employed in this analysis.

(ii) On the basis of Material Used:

According to materials used, it can be classified into following two parts:


102

(a) External Analysis

External Analysis is done by the persons who do not have an access to the

detailed basic accounting records of the business firm. These outsiders include

investors, creditors, government agencies and the general public. The external

analysis is based on the published financial statements and data, thus serves

only a limited purpose.

(b) Internal Analysis

It is the analysis of financial statements of an enterprise by the persons who are

internal to the firm and has an access to the detailed accounting records of the

business. It is conducted either by the employees of the firm or an outside

agency may be employed to undertake analysis for measuring the operating and

managerial efficiency for the different sub-units of an organization.

4.3. TOOLS AND TECHNIQUES OF FINANCIAL ANALYSIS

A variety of tools and techniques are available to the financial analyst.

Financial analyst chooses the techniques to suit the requirements of different

enterprises under different situations. The following are some of the common

techniques of financial analysis:

1 Comparative Financial Statements

2 Common Size Financial Statements

3 Trend Analysis

4 Funds Flow Analysis

5 Cash Flow Analysis

6 Cost Volume Profit (CVP) Analysis

7 Ratio Analysis


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4.3.1. Comparative Financial Statements

In Comparative Financial Statements, two or more balance sheet and/or the

income statement are shown simultaneously, in columnar or form to facilities

comparison. It is a horizontal analysis of the firm in which figures for more

than one year are shown side by side to study the trend of different items. It is a

technique which is being followed while preparing most of the published

annual report. The comparative financial statements are prepared to show:

a) The absolute figures for different items for two or more periods.

b) The amount of absolute changes from one period to another.

c) The changes in terms of percentages.

It can be prepared for both balance sheet and income statement. It is useful for

identifying the direction of changes and to study the trend in different

indicators of performance of an enterprise. Such type of comparison is useful

for identifying the areas in which the firm has improved its performance and

the areas in which the performance as a firm has deteriorated.

4.3.2. Common Size Financial Statements

In Common Size Financial Statements, the relationship of different items of

financial statement is established with some common base. In the Common

Size Income Statement, the sales figure is assumed to be 100 and all Figures

are expressed as a percentage of total sales. In the Common Size Balance

Sheet, each item of the balance sheet is slated as a percentage of the total of

assets side or total of the capital and liabilities side. The percentages so

calculated can be compared with the corresponding percentages in some other

period. For this purpose, it is necessary that both the companies should be

following the uniform accounting policies and procedures.


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4.3.3. Trend Analysis

It is useful for studying financial statements for several years. In this method,

the profit and account and the balance sheet of an accounting year are taken as

the base year. Any year may be taken as the base year, it may be the earliest

year involved or any intervening year. Base should normally be the earliest

year in the study period is taken as the base year. Each item in the base year's

financial statement is taken as 100. All the corresponding figures in the

financial statements of other years are expressed as a percentage of their value

in the financial statements of the base year.

4.3.4. Funds Flow Analysis

Funds Flow Statement is also known as „Statement of Sources and

Applications of Funds‟. The funds flow statement summarises the flow of

funds during the year. It describes the sources of funds and applications of

funds between two balance sheet dates. This statement is a historical record of

where the funds came and how these were utilized during the accounting

period. The sources from which the funds comes in the firm are Funds from

operations, issue of shares and debentures, sale of fixed assets and long term

investments, decreases in working capital, raising a loan etc. The uses to which

funds are applied are funds lost in operations, repayment of long term loans,

redemption of preference shares and debentures, increase in working capital,

purchase of fixed assets or long term investments etc. This statement explains

the liquidity position of the business enterprise and the factors which causes

changes in working capital of the firm. It guides the management about the

allocation of scarce resources and helps in assessing the overall credit

worthiness of the firm. It helps to know whether the internal and external

sources of funds are adequate according to the requirements of the funds. It

helps the management to plan for the sources of repayment of long-term debt,

redemption of preference share capital and other liabilities.


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4.3.5. Cash Flow Analysis

Cash Flow Statement analyses the movement of funds in terms of cash, i.e.,

cash transactions where in cash moved in and out of the firm. The movement of

cash into the firm is called cash inflow and the movement of cash out of the

firm is called cash outflow. It is prepared to study the impact of various

transactions on the cash position of the firm. It may be defined as, summary of

receipts and disbursements during the period , reconciling the opening balance

of cash with the closing balance of information gathered from balance sheet

and profit and loss account. It explains reasons for changes in the cash position

of the firm. Transactions which results in an increase in cash are described as

cash inflows and transactions which results in decrease in cash are termed as

cash outflows. It is prepared to know the changes in cash position from one

period to another. It is a statement which shows the sources and applications of

cash during the period. The cash may be generated from sources, like, cash

operating profit, sale of fixed assets, issue of share capital for cash, issue of

other securities for cash, etc. The application of cash may be cash operating

loss, purchase of fixed assets, payment of tax, dividend, redemption of

debentures, repayment of the borrowings, etc.

4.3.6. Cost Volume Profit Analysis

Cost–volume-profit analysis is a planning tool that analyses the relationship

between price, cost structure, volume and profit. It is an examination of cost

and revenue behavioural patterns and their relationships with profit. The

analysis separates costs into fixed and variable components and determines the

level of activity where costs and revenues are in equilibrium. Cost –volume-

profit analysis is an analytical technique which uses the degree of cost

variability for measuring the effect of changes in volume on resulting profits.

Such analyses assumes that the plant assets of the firm will remain the same in

the short- run, therefore, the established level of fixed cost will also remain

unchanged during the period being studied. This analysis provides information


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for managerial decision-making regarding cost of production at various levels

of operation, volume or level of production required, profits expected and

variation between cost of production and sales revenue.

4.3.7. Ratio Analysis

Ratio analysis is an important and powerful technique or method, generally,

used for analysis of Financial Statements. Ratios are used as a yardstick for

evaluating the financial condition and performance of a firm. Analysis and

interpretation of various accounting ratios gives a better understanding of

financial condition and performance of the firm in a better manner than the

perusal of financial statements. A ratio or financial ratio is a relationship

between two accounting figures, expressed mathematically. Ratio Analysis

helps to ascertain the financial condition of the firm. In financial analysis, a

ratio is compared against a benchmark for evaluating the financial position and

performance of a firm. Financial ratios help to summarise large quantities of

financial data to make qualitative judgment about the firm‟s financial

performance. Ratios are the symptoms of health of an organization like blood

pressure, pulse or temperature of an individual. Ratios are the indicators for

further investigation.

Ratio can be expressed as:

a) Percentage say, gross profit ratio is 25% of sales [calculated by dividing

gross profit (Rs. 10,000) by sales (Rs. 40,000) and multiplying by 100];

b) Proportion say, current ratio is 2:1 [calculated by dividing current assets

(Rs. 20,000) by current liabilities (Rs.10,000)];

c) Times say, inventory turnover ratio is 5 times [calculated by dividing

sales (Rs.40,00) by average inventory (Rs.8,000)].


107

A single ratio is not meaningful. For proper interpretation and understanding,

ratios are to be compared. Comparison can be with

a) Past ratios i.e. ratios from previous years‟ financial statements of the

same firm.

b) Competitors‟ ratios i.e. similar ratios of the nearest successful

competitors.

c) Industry ratios i.e. ratios of the industry to which the firm belongs to.

d) Projected ratios i.e. ratios developed by the firm which were prepared,

earlier, and projected to achieve.

4.4. CLASSIFICATION OF RATIOS

Several ratios can be grouped into various classes, according to the activity or

function they perform. There are several groups of persons- creditors,

investors, lenders, management and public, interested in interpretation of the

financial statements. Each group identifies those ratios, relevant to its

requirements. They wish to interpret ratios, for those purposes they are

interested in, to take appropriate decisions to serve their own individual

interests. In view of the diverse requirements of the various users of the ratios,

the ratios can be classified into four categories:

1. Liquidity Ratios: They measure the firm‟s ability to meet current

obligations.

2. Activity Ratios: They reflect the firm‟s efficiency in utilising the assets.

3. Leverage Ratios: These ratios show the proportion of debt and equity in

financing the firm‟s assets.

4. Profitability Ratios: These ratios measure overall performance and

effectiveness of the firm.


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4.4.1. LIQUIDITY RATIOS

Liquidity ratios measure the firm‟s ability to meet current obligations, as and

when they fall due. A firm should ensure that it does not suffer from lack of

liquidity and also does not have excess liquidity. In the absence of adequate

liquidity, the firm would not be able to pay creditors on the due date. If the firm

maintains more liquidity, it will not experience any difficulty in making

payments. However, a higher degree of liquidity is bad, as idle assets earn

nothing, while there is cost for the funds. The firm‟s funds will be,

unnecessarily, tied up in liquid assets. Both inadequate and excess liquidity are

not desirable. It is necessary for the firm to strike a proper balance between

high liquidity and lack of liquidity. These ratios are termed as „working capital

ratio‟ or „short term solvency ratio‟. Liquidity ratios are highly useful to

creditors and commercial banks that provide short-term credit. The liquidity

ratios are classified as under:

Current Ratio

Liquidity Ratios Quick Ratio

Absolute Liquidity Ratio

(i) Current Ratio

Current ratio is defined as the relationship between current assets and current

liabilities. It refers to the measurement of the firm‟s ability to meet its short-

term obligations. It establishes the relationship between the current assets and

the current liabilities. It is calculated as follows:

Current assets normally mean such assets which are converted into cash within

a year‟s time or during the normal operating cycle of the business. It usually


109

includes cash in hand and at bank, debtors (less provision for bad and doubtful

debts), inventories - raw materials, work-in-progress and finished goods,

prepaid expenses, bills receivable, marketable securities, etc. Current liabilities

represent the liabilities which are payable within a year‟s time during the

normal operating cycle of the business. It includes sundry creditors, bills

payable, outstanding expenses, bank overdraft, etc.

Interpretation:

The current ratio is used to find out the ability of the business to pay-off its

short-term obligations. The current ratio of 2:1 is reckoned as an ideal ratio.

This ratio should be neither too high nor too low. A very high current ratio is

also not desirable since it means inefficient use of working capital. It may be

due to the piling up of obsolete inventory, excessive cash, large amount of

debtors due to inefficient collection policy, etc. On the other hand, a low ratio

indicates inability of the company to meet adequately its short-term

obligations.

(ii) Liquid Ratio (Quick Ratio) (Acid Test Ratio)

Liquid ratio establishes the relationship between liquid assets and current

liabilities. Liquid assets are those that can be converted into cash, quickly,

without loss of value. Cash and balance in current account with bank are the

most liquid assets. Other assets that are considered, relatively, liquid are

debtors, bills receivable and marketable securities. Inventories and prepaid

expenses are excluded from this category. Inventories are considered less liquid

as they require time for realising into cash and have a tendency to fluctuate, in

value, at the time of realisation. Prepaid expenses cannot be recovered in cash,

normally, hence they are excluded.

Liquid Assets = Current Assets –Inventory -Prepaid Expenses


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Interpretation:

It helps to assess the ability of the company to meet its obligation without

waiting for much time to liquidate its assets. Ideal Quick/Liquid Ratio is 1:1.

Thus, an organisation must have quick assets equivalent to 100% of its current

liabilities. However, the result of quick ratio should be interpreted carefully

keeping in view the composition of liquid assets.

(iii) Absolute Liquidity Ratio (Super-Quick Ratio) (Cash Ratio)

This ratio establishes the relationship between the absolute liquid assets and

current liabilities. Absolute liquid assets usually constitute of cash in hand and

at bank and marketable securities. Cash is the most liquid asset. Although

debtors and bills receivable are, generally, better realisable than inventories,

still, there are doubts regarding their realisation, more so, in time. So, they are

not considered, immediately, available for making payments and so excluded

for the calculation of cash ratio. It is the most vigorous test of the firm‟s

liquidity position. However, this ratio is hardly used in practice. It may be

expressed as follows.

Interpretation:

Cash ratio of 1:2 is considered acceptable. It means Rs. 1 liquid assets are

considered adequate to pay Rs. 2 of current liabilities as all the creditors are not

expected to demand cash, at the same time, and cash may be realised, at least

something, from debtors and inventories too. More so, sanctioned working

capital limits of the bank are not always, fully, utilised and the balance drawing

power is available to the firm for immediate withdrawal of cash.


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4.4.2. EFFICIENCY OR TURNOVER RATIOS

Activity Ratio is also called turnover ratios or asset utilisation ratio or

efficiency ratios. It is concerned with measuring the efficiency with which asset

is managed. It refers to the speed and rapidity with which assets are converted

into sales. The greater is the rate of turnover or conversion, the more efficient is

the utilization or management of the asset. These ratios are usually calculated

with reference to sales/cost of goods sold and are expressed in terms of rate or

times. Activity Ratio may be calculated for all the assets, however, some of the

important activity ratios are as follows:

Inventory Turnover Ratio

Efficiency Ratios Debtors‟ Turnover Ratio

Creditors‟ Turnover Ratio

Other Turnover Ratio

(i) Inventory Turnover Ratio

The Institute of Chartered Accountants of India defines inventories in

Accounting Standard 2 as follows: “Inventories are assets held for sale in the

ordinary course of business, in the process of production for such sale; or in the

form of materials or supplies to be consumed in the production process or in

the rendering of services.”

This ratio is also called as „Stock Velocity Ratio‟ and establishes the

relationship between the cost of goods sold during a given period and the

average inventory held during the year by firm. It is calculated as follows:


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Cost of Goods Sold = Opening Stock + Purchases - Closing Stock

(Or)

= Net Sales - Gross Profit

Sometimes, it is difficult to calculate cost of goods sold on the basis of

available information. In such a case, net sale are used in place of cost of goods

sold. It may be computed on the following basis:

Average age of Inventory Period

The concept of Inventory Turnover Ratio can be extended to find out the

number of days of inventory holding as follows:

Where, 360/365 is taken as number of days in a year.

Interpretation:

It measures the liquidity of the inventory. It indicates the velocity with which

the goods move, thus serves as a yardstick of efficient inventory management.

The lower this ratio, the better it is. A lower inventory ratio indicates quick

sales. But a low turnover ratio should be analyzed carefully as it may result in

lower investment in inventory and frequent stock outs. A high ratio is an

indicator of slow moving, obsolete or poor quality goods which the company

may not be able to sell.


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(ii) Debtors’ Turnover Ratio

It is also known as the „Receivables Turnover Ratio‟ or „Receivables Velocity

Ratio‟. It establishes the relationship between net credit sales of the year and

the average debtors. It indicates how well receivables are turning into cash. It

refers to the speed with which receivables are converted into cash, thus

important for analysing the liquidity position of the firm. This ratio may be

calculated using the following formula:

The term receivables here include both the trade debtors and bills receivable.

Average Accounts Receivable =

In case information about credit sale and average debtors is not available, this

ratio may be calculated on the basis of total sales and closing balance of

receivables.

Average Collection Period

The other important ratio related to „Debtor‟s Turnover Ratio is the „Average

Collection Period‟. It states the average debt collection period. It is useful

because it indicates the average period of credit extended by the firm and the

effectiveness of credit and collection policy of the firm. A low „Average

Collection Period‟ implies the shorter time lag between credit sales and cash

collection. It may be calculated by any of the following methods:


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(Or)

Interpretation:

In absolute terms, high debtors ratio and low collection period is an indicator of

highly liquid accounts receivable. A shorter collection period implies prompt

payment by debtors and restrictive credit policy. On the other hand, low'

debtors‟ turnover ratio and longer collection period implies liberal credit and

collection policy. As such, credit policy should be neither too liberal nor too

restrictive. A restrictive credit policy can affect sales adversely and thus reduce

profits. The efficiency of firms‟ credit and collection policy can be evaluated

by comparing it with the average of the industry. There is no ideal collection

period of debtors. It depends upon the peculiar characteristics of the industry,

business and the firm.

(iii) Creditors’ Turnover Ratio

It establishes the relationship between the net credit purchases and the average

trade creditors. It is also known as „Creditors' Velocity Ratio‟. It indicates the

speed with which the payments for credit purchases are made to the trade

creditors. It is computed as follows:

The term Accounts Payable includes both „Trade Creditors‟ and „Bills

Payable‟.


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Average Payment Period or Credit Period

This ratio is supported by another ratio, viz., „Average Payment Period‟ which

may be calculated by any of the following methods:

(Or)

Interpretation:

A low „Creditors' turnover ratio‟ or „Larger Average Payment Period‟ implies

liberal credit terms granted by the supplier. But excessive „large average

payment period' means an unusual delay in the payment to the suppliers and

thus affects adversely the credit reputation of the firm. On the other hand, a

higher „creditors turnover ratio' or a „shorter credit period' implies that the

creditors are being paid promptly which enhances the credit worthiness of the

company. However, shorter credit period also means that the company is not

taking full advantage of the credit facilities granted by the suppliers. Therefore,

it should be neither too high nor too low. As far as possible, the company

should try to maintain the Average Payment Period in line with the credit terms

of the supplier.

(iv) Other Turnover Ratios

(a) Working Capital Turnover Ratio

It is an indication of the velocity or efficiency in the utilization of the working

capital during the year. The working capital here means the net working capital

which is equal to the total current assets less total current liabilities. It is

calculated as follows:


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The higher the working capital turnover ratio, the lower is the investment in the

working capital and greater is the contribution to sales. However, high working

capital turnover ratio also implies a risky proposition for the firm and low net

working capital in relation to the sales volume.

(b) Fixed Assets Turnover Ratio

It indicates the efficiency of the fixed assets towards contribution to sales. It

helps to assess whether the investment in fixed assets is justified or not. It is

calculated as follows:

Higher fixed assets turnover ratio indicates the higher efficiency in the

utilization of the fixed assets.

(c) Total Assets Turnover Ratio

It measures the efficiency in the use of total assets. This ratio is calculated as

follows:

4.4.3. LEVERAGE RATIOS (FINANCIAL RATIOS) (LONG-TERM

SOLVENCY RATIOS)

These ratios are used to assess the long-term solvency of the business. The

short-term creditors are interested in short-term solvency of the business.

Liquidity of the firm can be ascertained and understood with the help of

Liquidity Ratios. The long-term solvency of the business can be judged by

using Leverage Ratios. Leverage Ratios are used to assess the following two


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aspects of the long-term solvency of a firm: ability to repay the principal

amount when due; and the ability to pay the interest and dividend promptly and

periodically as per the agreed terms and conditions. The following ratios fall in

this category:

(i) Capital Gearing Ratio

Capital Gearing Ratio refers to the relationship between the fixed income

bearing capital and variable income bearing capital. The fixed interest bearing

capital includes the funds provided by the debenture holders and preference

shareholders. The variable income bearing capital includes the funds provided

by equity shareholders. It includes the equity share capital and other reserves. It

can be calculated as follows:

The numerator of the above equation includes both the debt and the preference

share capital. The denominator of the above equation includes equity share

capital and other reserves meant for equity shareholders.

Interpretation:

In case, the amount of fixed interest or dividend bearing funds is more than the

equity shareholders' funds, the capital structure is said to be highly geared. On

the other hand, the capital structure is said to be low geared, if reverse is the

case. If both the components are equal, the capital structure is said to be evenly

geared. There is another implication of capital gearing ratio. It indicates the

additional residual benefits accruing to the equity shareholders' funds. It is due

to the fact that the company earns a certain rate of return on the capital

employed, but is required to pay only a fixed return against loans and

preference share capital.


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(ii) Debt Equity Ratio

The debt-equity (D/E) ratio is another tool of financial analysis. The debt

equity-ratio reflects the relative contribution of creditors and owners of

business in the capital structure of the firm. It is also called „External-Internal

Equity‟ Ratio. It is computed as follows:

External Equities = Debentures + Long-term loans + Short-term Creditors

(Creditors, Bill Payable, Outstanding Expenses, Provision for Income tax,

Proposed Dividend etc.)

(Or)

External Equities = Long-Term Debts + Current Liabilities

Internal Equities/Shareholders‟ Funds = Equity Share Capital + Preference

Share Capital + Capital Reserves + Revenue Reserves.

Interpretation:

Debt Equity Ratio indicates the extent to which debt financing has been used in

business. This ratio shows the level of dependence on the outsiders. As a

general rule, there should be a mix of debt and equity. The owners want to

conduct business, with maximum outsiders‟ funds to take less risk for their

investment. At the same time, they want to maximise their earnings, at the cost

and risk of outsiders‟ funds. The outsiders (lenders and creditors) want the

owners‟ share, on a higher side in the business and assume lower risk, with

more safety to their funds.

Total debt to net worth of 1:1 is considered satisfactory, as a thumb rule. In

some businesses, a high ratio 2:1 or even more may be considered satisfactory,

say, for example in the case of contractor‟s business. It all depends upon the


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financial policy of the firm, risk bearing profile and nature of business.

Generally speaking, the long-term creditors welcome a low ratio as owners‟

funds provide the necessary cushion to them, in the event of liquidation. A high

debt-equity ratio may be unfavourable as the firm may not be able to raise

further borrowing, without paying higher interest, and accepting stringent

conditions. This situation creates undue pressures and unfavourable conditions

to the firm from the creditors.

(iii) Total Debt Ratio

Total Debt Ratio compares the total debts (long-term as well as short-term)

with total assets.

Total Debts = Long Term Debts + Current liabilities

Interpretation:

This ratio depicts the proportion of total assets, financed by total liabilities. A

higher ratio is a threat to the solvency of the firm. A lower ratio is an indication

that the firm may be missing the available opportunities to improve

profitability. What is required a balanced proportion of debt and equity so as to

take care of the interests of lenders, the shareholders and the firm, as a whole.

(iv) Proprietary Ratio

It is also known as „Net Worth to Total Assets Ratio‟ or „Capital Ratio‟ It

establishes the relationship between shareholders' funds and total assets of

business. Its main purpose is to find out how much funds have been provided

by shareholders for investment in assets of the business.


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Proprietors‟ Funds/Shareholders‟ Funds = Ordinary Share Capital + Preference

Share Capital + Reserves and surplus.

Total Assets = Fixed Assets + Current Assets (excluding fictitious assets)

Interpretation:

This ratio is quite significant for the creditors of business. With the help of this

ratio, it can be ascertained in what proportion owners have provided funds for

investment in assets of business. The higher the ratio, the more profitable it is

for the creditors and the lesser is the dependence on external funds. If the ratio

is low, the creditors can be suspicious about the repayment of their debt which

indicates greater risk to the creditors. The higher the ratio, the better it is. A

ratio below 50% may be quite alarming for the creditors. The greater the

percentage financing provided by shareholders equity, the larger is the cushion

of protection for the firm‟s creditors.

(v) Fixed Assets to Proprietors’ Funds Ratio

This ratio establishes relationship between fixed assets and proprietors‟ funds.

The main objective of this ratio is to find out in what proportion owners funds

are invested in fixed assets.

Fixed Assets here means net fixed assets, i.e., after charging depreciation

proprietors‟ funds are the same as internal equities in the debt equity ratio.

Interpretation:

The higher proportion of proprietors‟ funds to fixed assets is a measure of long-

term financial soundness of business. However, the lower the ratio, the better it

is for the long term solvency of business because proprietors funds will be

available for working capital needs also. For industrial units, the standard is


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usually 65%. If the ratio is more than one, it means that a part of fixed assets

has been financed from debt capital.

(vi) Current Assets to Proprietors’ Funds Ratio

This ratio establishes relationship between current assets and proprietor‟s

funds. The main objective of this ratio is to find out in what proportion

proprietors fund has been invested in current assets. It is calculated as follows:

(vii) Interest Coverage Ratio

It is also known as „Debt Service Ratio‟ or „Fixed Charges Cover‟. It

establishes the relationship between the amount of net profit before deduction

of interest and tax, and the fixed interest charges. Interest Coverage Ratio may

be calculated as follows:

Interpretation:

This ratio indicates the extent to which earnings can fall, without causing any

embarrassment to the firm, regarding the payment of interest charges. The

higher the ratio, better it is both for the firm and lenders. For the firm, the

probability of default in payment of interest is reduced and for the lenders, the

firm is considered to be less risky. However, too high a ratio indicates the firm

is very conservative in not using the debt to its best advantage of the

shareholders. On the other hand, a lower coverage ratio indicates the excessive

use of debt.


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(viii) Dividend Coverage Ratio

This ratio measures the margin of safety available to preference shareholders

with regard to the payment of dividend. Though the payment of preference

dividend is not compulsory, it is assumed that the payment of such dividend is

payable only out of profit after taxes, thus it is calculated as follows:

The higher is the ratio the greater is the security for the presence shareholders.

4.4.4. PROFITABILITY RATIOS

The profitability ratios measure the profitability or the operational efficiency of

the firm. A lack of profit may arise due to poor sales, lack of control over the

expenses. Both the shareholders (owners) and the management are interested in

measuring the operational efficiency or profitability of the firm. Even the

prospective investors and creditors of the firm look at the profitability

prospects of the firm. The profitability ratios are the relative measurement

which can be determined on the basis of either sales or investment.

(i) Profitability Ratios Related to Sales

These ratios are calculated on the basis of sale. If a firm does not earn adequate

profit on sales, it will be difficult for the firm to pay operating expenses and the

owners will not able to get reasonable return on their investments. The

following ratios fall in this category:

(a) Gross Profit Ratio

(b) Net Profit Ratio

(c) Operating Profit Ratio

(d) Operating Expenses Ratio

(e) Expenses Ratio


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(a) Gross Profit Ratio

It is also called the average mark up ratio. This ratio establishes the relationship

between the gross profit of the firm and net sales. It is generally expressed in

terms of percentage of gross profit earned on sales. It is calculated as follows:

Gross Profit = Net Sales - Cost of Goods Sold

Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses –

Closing Stock

Net Sales = Sales – Sales Return

Net Purchases = Purchases – Purchase Return

Interpretation:

The Gross Profit Ratio measures the per rupee gross profit earned on every 1

rupee of sales. It indicates the efficiency with which the firm

purchases/produces the goods. The improvement in gross profit ratio over the

previous years may be due to improved efficiency of the firm in manufacturing

or trading activities which may result from increase in the selling price or

decrease in the cost price or reduction in raw material consumption per unit,

etc. The deterioration in gross profit ratio over the previous years may be due

to the decline in the efficiency of the firm in manufacturing or trading activities

which may be due to decrease in the selling price per unit of goods sold or

increase in the cost price or increase in the raw material consumption per unit

or increase in the direct expenses, etc. The amount of gross profit earned by the

firm should be adequate to cover operating and non operating expenses and to

provide for reasonable return for the shareholders.


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(b) Net Profit Ratio

The net profit ratio establishes the relationship between the net profit (after tax)

of the firm and net sales. Net profit is obtained, after deducting operating

expenses, interest and taxes from gross profit and is calculated as follows:

The net profit can also be calculated from operating profit as follows:

Net Profit = Operating Profit + Non Operating Income - Non Operating

Expenses.

Interpretation:

It is a meaningful tool to judge the profitability of the firm when this ratio is

studied along with the Gross Profit Ratio and Operating Profit Ratio. Net Profit

ratio indicates the overall efficiency of the management in manufacturing,

administering and selling the products. Net profit has a direct relationship with

the return on investment. If net profit is high, with no change in investment,

return on investment would be high. If there is fall in profits, return on

investment would also go down.

(c) Operating Ratio

This ratio establishes the relationship between the aggregate of cost of goods

sold and other operating expenses on the one hand and the sales revenue on the

other hand. Other operating expenses comprise of administrative overheads,

selling and distribution overheads. Financial charges such as interest, provision

for taxation, etc are excluded from operating expenses. It is calculated as

follows:


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Interpretation:

It is a yardstick for measurement of the operating efficiency of the firm. A

higher operating expense ratio is not favourable since it will leave a small

amount of income to meet non-operating expenses. It should be low enough to

generate a reasonable return for the shareholders. The comparison of operating

ratio with that of the past or average of the industry will indicate whether the

operating cost component is reasonable or not in relation to sales. The reasons

for the variation in the operating expense ratio should be carefully analyzed

which may be due to external uncontrollable factors, internal factor or

management policies of the firm etc.

(d) Operating Profit Ratio

This ratio measures the relationship between the operating profit and net sales.

The operating profit is also termed as the earnings before interest and taxes.

The operating profit refers to the profit generated by the firm from operating

activities. It is calculated as follows:

Net Operating Profit = Net Sales- Operating Cost

Operating Cost = Cost of Goods Sold + Operating Expenses

(Or)

Net Operating Profit =Net Profit (After taxes) + Non-Operating Expenses -

Non-operating Income


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Non-operating Expenses relates to financial charges such as unexpected

interest payments, loss on sale of fixed assets or on account of contingencies,

tax liability, etc. Non operating income relates to dividend, interest received on

long-term investment, profit on sale of goods, etc.

Interpretation:

This Ratio determines the efficiency of the firm in the management of the

business. There are no standard norms for the evaluation of this ratio. However,

the comparison of the OP Ratio with that of the past and/or industry averages

provides an indication about the operating management and conditions of the

business.

(e) Expense Ratios

The operating ratio can be calculated separately for each element of operating

cost, viz


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(ii) Profitability Ratios Related to Investment

A financial analyst is interested to measure the profitability of the firm with

reference to assets employed by the firm. The larger the assets employed, the

greater should be the profits and vice versa. The following are the four

important ratios identified on the basis of linking of the profitability via- a-via

the assets employed by the firm.

(a) Return on Assets

(b) Return on Capital Employed or Return on Investment

(c) Return on Shareholders‟ Funds

(d) Return on Equity Shareholders‟ Funds

(a) Return on Assets (ROA)

It measures the profitability of the firm in relation to assets employed by the

firm. It is computed to know how much is the profit generated by the firm per

rupees of assets used. As 'net profit‟ and „net assets‟ have a number of

meanings, there are a number of approaches to compute the ROA. Usually, the

following approaches are used:

Interpretation:

It measures the overall efficiency of the management in generating profits from

the use of assets. The increase in the size of the firm should be accompanied

with the increase in the ROA; only then the employment of more assets is

justified. The ROA of the firm should be compared with the industry average to

judge the operating efficiency of the firm with respect to the assets employed.


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(b) Return on Investment

It is also known as „Return on Capital Employed‟ or „Rate of Return‟. It is

calculated on the basis of the following formula:

(Or)

The amount of capital employed has been defined differently by different

authors. However, the following approach is the most popular and acceptable

one.

Capital Employed = Net Fixed Assets + Working Capital

= Net Fixed Assets + (Current Assets - Current Liabilities)

(Or)

= Equity Share Capital + Preference Share Capital + Reserves and

Surplus + Long Term Loans - (Fictitious Assets + Non Operating

Assets)

(c) Return on Shareholders’ Funds

It is also called „Return on Net worth Ratio‟ or „Return on Proprietors‟ Funds‟.

It determines the profitability of the company from the perspective of

shareholders. It is computed as follows:


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(d) Return on Equity Shareholder’s Funds

This ratio determines the profitability of the firm from the perspective of equity

shareholders. It is calculated after taking into account the amount of dividend

payable to preference shareholders. It is computed as follows:

Return on Equity Shareholder's Funds =

Where, Equity Shareholder's Funds = Equity Share Capital + Revenue Surplus

+ Capital Reserves – Accumulated Loses if any

(iii) Profitability Ratios from the Point of View of Owners of the Business

The profitability of the firm from the point of view of owners of the business

can be assessed from the following ratios:

a) Earnings Per Share

b) Dividend Per Share

c) Payout Ratio

d) Price Earnings Ratio

e) Earnings and Dividend Yield Ratio

(a) Earnings Per Share

The profitability of the shareholder‟s investment can be assessed by calculating

the earnings per share. EPS is determined by the following formula:

The number of equity shares should be adjusted for bonus or rights issue, if any

made during the year.


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Interpretation:

The comparison of the EPS of the firm with that of the industry average and the

earnings per share of other firms helps in assessing the profitability of the firm

on per share basis. It helps in determining the market value of the share and the

capacity of the company to pay dividend to its equity shareholders.

(b) Dividend Per Share

The profit which is left after paying off taxes and preference dividend belongs

to equity shareholders. But the earnings which they really receive are the

amount of dividends distributed to them. The amount of earnings distributed to

equity shareholders per share is known as dividend per share and is calculated

as follows:

(C) Dividend Payout Ratio

Dividend Payout Ratio refers to the proportion of the earnings which has been

distributed to the shareholders as dividend. The company does not distribute all

of its earnings to equity shareholder The earnings not distributed are retained

back in the business and meant to be invested for the future growth prospects of

the firm.

(d) Price Earnings Ratio

It measures the relationship between the market price of an equity share and the

earning per share and is calculated as follows:


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The PE Ratio indicates the expectation of equity investors about the

earnings or performance of the firm. It is widely used by security analysts to

find out whether the equity share of the company is undervalued or overvalued.

(e) Earnings and Dividend Yield Ratio

The yield is defined as the rate of return on the amount invested in the business.

In order to find out the yield of an equity share, the earnings per share and

Dividend Per Share should be compared with the market price per share. That

is as follows:

The „Earnings Yield' is the inverse of „Price Earnings Ratio‟. It is also known

as „Earnings Price Ratio‟. The dividend yield and the earnings yield ratio

evaluate the return of the shareholders in relation to the market price of shares.

4.5. USEFULNESS OF RATIO ANALYSIS

Ratio analysis is an important tool for analysis of financial statements. It

determines the profitability, financial position and efficiency of the business.

Management can take important decisions on the basis of ratio analysis. It is

important for all parties including creditors, investors and financial institutions.

(i) Useful in Analysis of Financial Statements: Accounting ratios are widely

used for analysis of financial statements. It is a tool in the hands of financial

analyst to summarize and simplify the voluminous financial data. Accounting

Ratios helps in working out significant accounting data relationships from


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financial statements. Thus, provides greater insight into the profit ability and

financial position of the concern.

(ii) Useful in Simplifying Accounting Figures: Ratios simplify the

comprehensive financial data available in financial statements. It helps in

communicating precisely the interrelationship between accounting figures

available in financial statements. Financial ratios provides understandable

platform to detailed and complicated financial figures.

(iii) Useful in Judging the Operating Efficiency of the Business: Ratio

analysis is helpful to assess the operating efficiency of the firm. It helps to

determine whether the assets are being used efficiently or not. It is a useful tool

for the diagnosis of financial health of concern which can be judged from

profitability, liquidity, solvency ratios, etc.

(iv) Useful in Planning: Accounting ratios are very useful for planning and

forecasting. The ratio analysis helps in working out important relationships

among different accounting figures which can be used for future planning and

forecasting.

(v) Useful in Locating the Factors Responsible for Failure of the Business:

Accounting figures help to locate the factors which are responsible for failure

of the business, thus management can take necessary corrective and remedial

measures to overcome the factors responsible for failure of time to ensure

success in the future.

(vi) Useful for Inter-firm and Intrafirm Comparisons: Accounting ratios

helps in comparing the performance of the firm with that of other firm and of

industry in general. It also makes possible the comparison of different units in

the same firm, which is called intrafirm comparison. Such comparison are

useful for the development of healthy competition between the firms and

between different units within the firm.


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(vii) Helps in Determining Trends: With the use of ratio analysis, the trends

in profits, sales, cost, etc., can be ascertained. These trend ratios enable the

analyst to judge the performance of the company over the years.

(viii) Helps in Establishing Standards: The standards for each ratio can be

established. The management can compare the actual with the standards and

can take corrective measures to remove the variances and rectification of errors

committed in the past.

4.6. LIMITATIONS OF RATIO ANALYSIS

Ratio analysis plays a significant role in the process of analysis and

interpretation of financial statements. It is one of the most widely used tool for

analysis and interpretation of financial statements. Though it plays a pivotal

role, it is subject to certain limitations which are identified as below:

(i) Limitations of Accounting Data: Accounting ratios are based on the

information available in the books of accounts. If the books of accounts do not

provide correct values for assets, liabilities and other items, it is not possible to

compute the correct realistic, meaningful and useful ratios.

(ii) Lack of Standards: No standards have been established for most of the

accounting ratios. Lack of adequate standards makes it difficult to provide

adequate comparisons.

(iii) Different Meanings are put on Different Terms: There are a number of

accounting ratios where in different meanings are used for different terms. For

example, a firm may work out ROI on the basis of profits after interest and

taxes, the other firm may consider profits before interest but after tax for

computation of ROI. Obviously, the ratios which will be worked out will not be

comparable.

(iv) Window Dressing: It means manipulation of accounts to conceal the

actual facts and show better picture than what actually is. For example, in order


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to improve the Current Ratio before the balance sheet, the firm may postpone

the purchase of inventory before the balance sheet data for the next year.

Similarly, the company may pay off certain current liabilities before the

balance sheet data.

(v) Diverse Accounting Policies: The management is free to use diverse

accounting policies and practices for the valuation of inventories, depreciation,

treatment of research and development expenditure, etc. Such- differences will

make some of the accounting ratios strictly incomparable if they are based on

different accounting policies, it is also possible that the firm may have changed

the accounting policy from one period to another

(vi) Results may be misleading in the Absence of Absolute Data: Ratios

sometimes give a misleading picture in the absence of absolute data from

which such ratios have been derived. It is extremely careful while comparing

the results of one firm with those of another, if two firms differ in any

significant manner, say in size, location, etc.

(vii) Ignore Qualitative Factors: Accounting ratios considers quantitative

factors and ignore qualitative factors which results into distorted conclusions.

For example, credits are granted to customers on basis of his financial position

but success of the firm also depends on managerial ability of customers

(viii) Limited Use of Single Ratio: Conclusions drawn from analysing the

financial statements should not be based on single ratio, rather all the related

ratios should be considered for this purpose. Single ratio cannot provide all the

relevant information on a particular aspect.

Chapter- 5

Financial Appraisal

of Automobile

Industry in India

Chapter- 5 Financial Appraisal of Automobile Industry in India

135

Financial Appraisal of Automobile Industry in India

Finance is the nerve centre and lifeline of any economic activity and is

therefore, omnipresent in every sphere of economic and business life. It plays

an extremely crucial role in the continuity and growth of the business. An

enterprise, which commits itself to an activity, requires finance. No business

firm can be promoted, established and expanded without adequate financial

resources. Success and survival of a business firm depends on how well its

financial function is managed. The firm may have abundant resources-human

and physical, but if the available funds are not properly utilized for the benefit

of the firm, it will come to an early end. So, the finance manager has to utilize

the available funds for the benefit of the business firm. Every effort should be

made to render the financial function as effective as possible.

Appraisal refers to a critical review of the activities for improving performance.

It compares the actual performance with targets fixed, identifies causes of

significant variations, and devises corrective actions. This is naturally tuned to

assessing whether the business operations would be safe, profitable, and

appropriate in a given economic situation. It is known that in the interest of

good health, medical authorities generally advise every individual to have a

periodical checkup and examination of his body. Similarly, in the interest of

good operating results every concern should have a periodical appraisal-both

diagnostic as well as preventive in nature. In the case of an already bad or

deteriorating situation it locates the areas and indicates where to improve,

where, as in case of good condition, it shows ways to further improve the

performance. The assessment of business performance is more complex and

difficult, since it must deal with the effectiveness with which capital is

employed, the efficiency and profitability of operations and the value and

safety of various claims against the business.

Financial appraisal is the process of determining the operating and financial

characteristics of a firm from accounting and financial statements. The goals of


136

such appraisal are to determine the efficiencies or performance of a firm’s

management as reflected in the financial records and reports. The analyst

attempts to measure the firms operating performance, profitability, liquidity,

solvency etc., to prove that the business is conducted in a rational and normal

way ensuring enough returns to the shareholders to at least maintain its market

value. Keeping in view the interest of investors and the society as a whole, a

company’s performance can be evaluated broadly on the basis of its operating

achievement, financial achievement and social achievement.

All the above factors have their own importance. Yet, an investor, apart from

other things, first looks to get back sufficient returns from his Investment.

Therefore, financial appraisal of a company stands the most important factor

for its evaluation. The study continues itself with the financial appraisal of

selected industries. The important areas of financial appraisal include

production, cost trends, sales, profitability, financial strength, working capital,

liquidity and managerial efficiency.

Appraisal of performance of a company can be done through a careful and

critical analysis of financial statements; financial analysis helps managers in

controlling their enterprise’s performance. It does this by providing them with a

system and set of procedures for analyzing and understanding financial

indicators of performance. The two important financial statements are the

“Profit and Loss Account” and the “Balance Sheet”. Financial statements

indicate the operating results and financial position of a concern; therefore, by

analyzing and interpreting these statements performance can be appraised. It is

for this purpose, analysis of financial statements is made. Financial statement

analysis is a preliminary step towards the final evaluation of the results drawn

by the analyst or management accountant. Appraisal or evaluation of such

results is made thereafter by the management. The analysis of financial

statements spotlights the significant facts and relationships concerning

management performance, corporate efficiency, financial strength and

weakness, which would have otherwise been buried in a maze of details.


137

According to Metoalf and Titard, analysis of financial statements is a process

of evaluating relationship between component parts of financial statement to

obtain a better understanding of a firm’s position and performance.

5.1. PROCESS OF FINANCIAL APPRAISAL

The financial statements contain all the data relating to operating results and

financial position of the business. Besides this, other documents such as

reports, schedules and explanatory notes are also appended. Overall

performance of the business is appraised by analyzing these statements. Hence,

the process of financial statement analysis is the key process of financial

appraisal. The process of financial appraisal through financial statement

analysis is summarized as:

a) Some logical arrangement of financial data is made in an orderly

sequence in a condensed form. The balance sheet and profit and loss

account figures are rearranged to facilitate performance appraisal.

b) Figures are approximated to the nearest thousands or lakhs or crores to

simplify the process of appraisal.

c) The analyst should utilize his knowledge of financial statements to draw

up performance appraisal programme, which must be tailored to fit in the

specific needs.

d) Performance appraisal may be conducted either internally or externally.

Internal appraisal is accomplished by those who are within the enterprise and

have access to detailed records and all other information related to business.

Such appraisal is generally conducted by the management for their purposes.

External appraisal, on the other hand, is conducted by those or for those who

are outside a business enterprise, such as share holders, creditors, bankers,

trade unions, government agencies and research scholars.


138

5.2. IMPORTANCE AND USEFULNESS OF FINANCIAL APPRAISAL

In any economic society all active participants do become interested in varying

degrees in the performance of the business enterprise. Within every

commercial enterprise, of whatever size, there are inevitably many different

interests to be served. Some of these interest groups include owners,

employees, customers, society, government, suppliers and managers. By

appraising the performance through financial statement analysis, management

may review a company’s progress to date and decide upon the course of action

to be taken in future. Financial appraisal helps management in the task of

planning of operations. The Financial appraisal enables the management to

operate the control system of the business organization more effectively. It

helps to identify the weaker spots of a company’s operations and to take

corrective action. Furthermore, it tends to restrain management as they are

under pressure to maintain a favourable financial position. Investors

comprising share holders and debenture holders, have a vital interest in the

appraisal of performance of an enterprise. Investors are interested in two

things:

Firstly, they want the safety of their investment; secondly, the ability of a

company to earn profit. They are also interested in a concern whose future is

bright. Through Financial appraisal they get the information which they need.

Creditors are interested in ascertaining whether the company can employ the

funds loaned to in such a way that it will be to meet current interest obligations

and repay loans when it falls due. They act as a magic eye highlighting the

credit worthiness of a company. Creditors often appraise the performance of a

company before lending the money and supplying the goods. Government

regulates economic activities in various spheres. Central and state governments

and local authorities are also interested in knowing the performance of a

business in order to access their revenues through various taxes to regulate

capital issues and public utility regulations. Employees have an interest in the

operating results and the financial strength of a company. The remuneration of


139

workers must be generated from the company’s revenues. Thus, worker’s

wages, to a great extent, depend upon the success of the firm.

In addition to the above, news agencies, trade association, economic and

commercial research institutions, stock exchanges, economist and research

workers, members of parliament, members of public accounts committee in

respect of government companies are also interested in the results of Financial

appraisal, of knowing the progress being made in the present position of an

industry.

5.3. FINANCIAL APPRAISAL OF AUTOMOBILE INDUSTRY

In India, the automobile industry is one of the largest industries. It is one of the

key sectors of the economy. The industry has shown great advances since de-

licensing and opening up of the sector to Foreign Direct Investment (FDI) in

1991-92. The present study is undertaken to make a financial appraisal of the

selected companies of the Indian automobile industry. The study is undertaken

to analyse the growth of automobile industry after liberalization, its production

trend, sales trend, profitability analysis, financial structure, financial

performance and assessment of financial health of the industry.

Production is considered as the backbone of the manufacturing sector.

Production function is considered as the effective tool to satisfy the customer’s

demand. The study of the production performance is important to know the

operating level of the business and the financial efficiency of the business

enterprise. Therefore, the present study attempts to make a precise analysis on

the production trend of the Indian automobile industry after liberalization.

Sales are an important component for the development of business. Sales can

be enhanced by following good sales policy. Due to pricing policy of the

government, companies face fluctuations in their sales. These fluctuations may

lead to increase or decrease in the financial risk of the companies. The present

study is carried out to study the sales trends of the automobile industry in India.


140

The efficiency of the business is measured by the amount of profit earned. The

greater the profit, the more efficient is the business considered to be.

Management gives top priority to increase the profits and maximise their

shareholders’ wealth. The efficiency of a management is measured in terms of

profit generated by the business. It is sometimes said that higher profitability

implies greater efficiency. The management of a firm is generally eager to

measure its operating efficiency of a firm and its ability to ensure adequate

return to its shareholders depends ultimately on the profits earned. The profit of

a business may be measured by studying the profitability of investment in it.

Profitability may be defined as the ability of a given investment to earn a return

from its use. This ability is referred to as lending power or operating

performance of the investment concerned. Profitability is a relative term and its

relation with the other factors affects profit. It is the test of efficiency, powerful

motivational factor and the measure of control in any business. Hence, an

attempt has been made to study the profitability of Indian automobile industry.

An analysis of the profitability reveals how the position of profits stands as a

result of total transactions made during the year. Profitability implies profit-

making ability of a business enterprise. Profitability is the main indicator of the

efficiency and effectiveness of a business enterprise in achieving its goal of

earning profit. Profitability as a relative measure enables the management to

make prompt change in the financial and production policies in the light of past

performance. Many important management decisions pertaining to such issues

as further expansion of plant, adoption of modern technology, rising of

additional funds, payment of bonus and higher dividend are linked with this

relative measure. Profitability of a firm can be measured by its profitability

ratios. In the process of performance appraisal of a business, profitability ratios

can be calculated to measure the operating efficiency. The profitability ratios

can be determined on the basis of either investment or sales and for this


141

purpose a quantitative relationship between the profit and the investment or the

sales is established.

Financial structure of a business consists of three elements: assets, liabilities

and capital. The financial structure provides an insight into the various types of

sources tapped to finance, the total assets employed in a business enterprise.

That part of financial structure which represents long-term sources is known as

capital structure. Since the balance sheet is a detailed form of the fundamental

or structure equation, it is set for the financial structure of an enterprise. It

states the nature and amount of each of the various assets, liabilities and

property interest of the owner or owners. Stating the nature of the assets,

liabilities and capital is not as difficult as stating their amounts. The financial

structure can be made initially from the point of view of the time for which

funds are needed. It includes both the source of finance, i.e., short term and

long term. In the present study various long term and short term ratios have

been calculated to analyse the financial strength of various selected companies

in Indian automobile industry.

Automobile Production:

The cumulative production data for April-March 2011 shows production

growth of 27.28 percent over same period last year. The industry produced

17,892,409 vehicles of which share of two wheelers, passenger vehicles, three

wheelers and commercial vehicles were 75 percent, 17 percent, 4.5 percent and

4.25 percent respectively. The data indicated below taking base as 2001-02

figure as 100, there is a marked improvement in the production relating with

Passenger Vehicles – within that comprising of Passenger cars, Utility Vehicles

and Multi- purpose Vehicles. This is an indication of development in this sector

after Auto Policy 2002. The Passenger Car segment has grown by leaps and

ChapterChapterChapterChapter---- 5 5 5 5 Financial Appraisal of Automobile Industry in IndiaFinancial Appraisal of Automobile Industry in IndiaFinancial Appraisal of Automobile Industry in IndiaFinancial Appraisal of Automobile Industry in India

142

bounds mainly because of purchasing power, variety of cars (segmenting as

per the income and social status) and lastly the auto-finance facility.

Table 5.1: Production Trends of Automobile Industry - Base Year 2001-02

(100) Indexing

Category

Nu

mb

er o

f V

ehic

les

2001-02 2007-08 2008-09 2009-10 2010-11 2011-12

Passenger

Vehicles

669719

(100)

1777583

(265)

1838593

(275)

2357411

(352)

2982772

(445)

3123528

(466)

Commercial

Vehicles

162508

(100)

549006

(338)

416870

(257)

567556

(349)

760735

(468)

911574

(561)

Three

Wheelers

212748

(100)

500660

(235)

497020

(234)

619194

(291)

799553

(376)

877711

(413)

Two

Wheelers

4271327

(100)

8026681

(188)

8419792

(197)

10512903

(246)

13349349

(313)

15453619

(362)

Grand Total 5316302

(100)

10853930

(204)

11172275

(210)

14057064

(264)

1,78,92,409

(337)

20,366,432

(383) Source: data from Siam (Society of Indian Automobile Manufacturers) Industry

Statistics, 2012 and self constructed.

Diagram 5.1 : Production Growth Trends of Automobile Industry

Source: data from Siam (Society of Indian Automobile Manufacturers) Industry


There is a fall in Production and Sales in the year 2008-09 due to recession in

USA and Europe. As compared to 2006-07, in the FY 2007-08 there is fall in


143

production in two-wheelers by 5.2% which lead to over all grand total less by

5%.The cumulative production data for April-March 2012 shows production

growth of 13.83 percent over same period last year. In 2011-12, the industry

produced 20,366,432 vehicles of which 76 percent share is of two wheelers,

15.6 percent is passenger vehicles, three wheelers 4.3 percent and commercial

vehicles were 4.5 percent. There is a maximum decrease in Commercial

Vehicle production by 24% in the year 2008-09. In the FY 2009-10 and 2010-

11, there is increase in production in all the categories: Two Wheelers, Three

Wheelers, Commercial Vehicles and Passenger Vehicles. The total vehicles

growth in FY 2007-08 is on negative by 2% and marginal increase in FY 2008-

09 by 3% because of economy recession in Europe.

Automobile Domestic Sales:

The growth rate recorded for Domestic Sales for 2010-11 was 25.9 percent

amounting to 15,481,381 vehicles. The growth rate for overall domestic sales

for 2011-12 was 12.24 percent amounting to 17,376,624 vehicles. Passenger

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

period last year – comprising of Passenger Cars grew by 2.19 percent, Utility

Vehicles grew by 16.47 percent and Vans by 10.01 percent during this period.

The overall Commercial Vehicles segment registered growth of 18.20 percent

during April-March 2012 as compared to the same period last year. In this

segment Medium and Heavy Commercial Vehicles (MCVs & HCVs)

registered a growth of 7.94 percent; Light Commercial Vehicles grew at 27.36

percent. Three Wheelers sales recorded a decline of (-) 2.43 percent in April-

March 2012 over same period last year. While the Goods Carriers grew by 6.31

percent during April-March 2012, Passenger Carriers registered decline by (-)

4.50 percent. 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. There is a steady

increase in the sales of Passenger Vehicles as shown in the figure 25. The


144

maximum increase is in the FY 2010-11 as compared with FY 2008-09, which

is by 62% approximately.

Table 5.2: Domestic Sales Trend– Base Year 2001-02 (100) Indexing

Category

Nu

mb

er o

f V

ehic

les

2001-02 2007-08 2008-09 2009-10 2010-11 2011-12

Passenger

Vehicles

53165

(100)

218401

(411)

335729

(632)

446145

(840)

444326

(836)

507318

(954)

Commercial

Vehicles

11870

(100)

58994

(497)

42625

(360)

45009

(379)

74043

(624)

92663

(781)

Three

Wheelers

15462

(100)

141225

(913)

148066

(958)

173214

(1120)

269968

(1746)

362876

(2347)

Two

Wheelers

104183

(100)

819713

(787)

1004174

(964)

1140058

(1094)

1531619

(1470)

1947198

(1869)

Grand Total 184680

(100)

1238333

(670)

1530594

(829)

1804426

(977)

2319956

(1256)

2910055



Automobile Exports:

During April-March 2011, overall automobile exports registered a growth rate

of 28.6 percent. Passenger Vehicles registered marginal growth at 1.64 percent

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

segments recorded growth of 69.51 percent, 55.86 percent and 35.04 percent

respectively during April-March 2011.

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. The dominating part of

exports is in Three Wheelers followed by Two Wheelers and Passenger Cars –

this is in actual number terms. There is an overall growth in exports from

2001/02 to 2011/12 but the percentage growth over FY on FY is not the same.

Comparing FY 2011-12 with FY 2007-08, there is a significant growth in

volume terms in all the categories – Passenger Vehicles by 132%, Commercial


145

Vehicles by 57%, Three Wheelers by 157%, Two Wheelers by 138%

(maximum increase) and Grand Total by 135%.

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

Category N

um

ber

of

Veh

icle

s 2001-02 2007-08 2008-09 2009-10 2010-11 2011-12

Passenger

Vehicles

53165

(100)

218401

(411)

335729

(632)

446145

(840)

444326

(836)

507318

(954)

Commercial

Vehicles

11870

(100)

58994

(497)

42625

(360)

45009

(379)

74043

(624)

92663

(781)

Three

Wheelers

15462

(100)

141225

(913)

148066

(958)

173214

(1120)

269968

(1746)

362876

(2347)

Two

Wheelers

104183

(100)

819713

(787)

1004174

(964)

1140058

(1094)

1531619

(1470)

1947198

(1869)

Grand Total 184680

(100)

1238333

(670)

1530594

(829)

1804426

(977)

2319956

(1256)

2910055



The present chapter focuses on Financial Appraisal of Automobile Industry

in India. It analyses the performance of seven leading companies of four

wheelers Automobile Industry in India. The selection of the company is done

on the basis of their market share. Companies selected from passenger vehicle

segment are Tata Motors Limited, Maruti Suzuki India Limited, Mahindra

and Mahindra Limited and Hindustan Motors Limited. Leading Indian

companies selected from Commercial Vehicles segment are SML Isuzu, Ashok

Leyland and VST Tillers.

There are different tools to investigate the efficiency level, but the ratio

analysis has been found most suitable and has been used for the analysis. The

study attempts to investigate significant difference (if any) in the financial

performance of the selected companies on the basis of four parameters viz.,

profitability, liquidity, managerial efficiency and leverage. Profitability of

companies has been analysed on the basis of five variables viz., Operating

Margin (%), Net Profit Margin (%), Earnings per Share (EPS), Return on

Net Worth (%) and Dividend per Share. The analysis of liquidity position has

been done on the basis of current ratio and quick ratio. As managerial

efficiency of a company lies with effective use of the assets therefore,


146

managerial efficiency has been tested on the basis of inventory turnover ratio

and fixed asset turnover ratio. The leverage (long term solvency) of selected

companies has been analysed through the ratio of long-term debt to equity and

proprietary ratio i.e., the proportion of owner’s fund to total resources. The

data used for analysis is a secondary data (taken from way2wealth.com). The

data has been collected for a period of 10 years from 2001-02 to 2010-11. The

financial performance of selected companies have been analysed through

financial ratios.

Liquidity Analysis:

Liquidity analysis attempts to analyse the firm’s ability to meet its immediate

maturing short-term obligations. It is usually done through the calculation of

current ratio and quick (liquid) ratio. A company must attempt to maintain

optimum (ideal) ratio which undoubting depends upon the type of

manufacturing industry. If liquidity ratios of a company are higher than the

ideal ratios, the company is said to be having idle investment. Likewise, if

ratio is lesser to required one, the deficit will represent possible difficulties in

the payment of current liabilities of firm and it is surely not a healthy sign for

the company. The result of average liquidity analysis of selected companies is

shown in the following table:

Table 5.4: Analysis of Average Liquidity Ratios of Selected Companies


Average

Liquidity

Ratios

(Times)

Tata

Motors

Maruti

Suzuki

Mahindra

&

Mahindra

Hindustan

Motors

SML

Isuzu

Ashok

Leyland

VST

Tillers

Current

Ratio 0.91900 1.4130 1.1610 1.0750 1.5030 1.4200 1.8150

Quick

Ratio 0.64800 1.0460 0.81700 0.53600 0.95800 0.86900 1.0470

Source: International Journal of Research in Computer Application and Management,

November 2011.


147

Liquidity ratios of selected companies reveal that liquidity position of

commercial vehicle segment is better than that of passenger car manufacturers.

VST Tillers’ proportion of current as well as liquid assets is sufficient enough

to meet its current liabilities. However, liquidity positions of Tata Motors and

Hindustan Motors are not so healthy in comparison to other companies.

Managerial Efficiency Analysis:

Managerial efficiency of a company lies in making optimum utilisation of the

assets of the companies. To analyse the managerial efficiency of the selected

companies, we calculated, inventory turnover ratio and fixed assets ratio.

Inventory is the most crucial asset for a manufacturing organisation.

Particularly with reference to inventory turnover ratio, the cost of materials in

Indian automobile industry is the major component in production cost and its

share is increasing (Narayanan and Vashishth 2008). The managerial efficiency

to keep an optimum level of asset lies in maintaining an adequate ratio of assets

to turnover. Inventory turnover ratio depicts how long a company takes on an

average to sale its stock and replaces its inventory. Higher inventory turnover is

considered to be desirable as it usually implies strong sales. On the contrary,

lower turnover ratio reflects the poor volume of sales and excess inventory

which ultimately accounts for an investment with a zero rate of return.

Likewise, Higher fixed assets ratio implies that company has invested lesser

amount in fixed assets to generate sales revenue hence it depicts better ability

of company to utilise the fixed assets. On the contrary, lower ratio expresses

the company's efficiency to use its fixed assets in an optimum manner. The

result of average managerial efficiency analysis of selected companies is shown

in the following table:


148

Table 5.5: Analysis of Average Managerial Efficiency Ratios of Selected

Companies (April 2001 to March 2011)

Average

Efficiency

Ratios

(Times)

Tata

Motors

Maruti

Suzuki

Mahindra

&

Mahindra

Hindustan

Motors

SML

Isuzu

Ashok

Leyland

VST

Tillers

Inventory

Turnover

Ratio

12.977 25.077 12.989 9.2350 6.7220 7.0400 6.7200

Fixed

Asset

Turnover

Ratio

2.1940 2.3190 2.7210 1.3720 10.109 1.9410 3.1290


November 2011.

The analysis of inventory turnover ratio shows that the performance of

passenger vehicle manufacturers (Maruti Suzuki followed by Mahindra and

Tata group) could be called satisfactory. However the study of fixed asset

turnover ratio indicates the efficiency of SML Isuzu of commercial vehicle

segment to generate revenue from its fixed assets.

Profitability Analysis:

Profitability indicates company’s efficiency to manage the resources and

generate profit for its shareholders. It could be analysed through various

ratios. To analyse the profitability of the selected companies, we

calculated five profitability ratios viz., operating margin, net margin, return

on net worth, earning per share and dividend per share. Return on net worth

and earnings per share have been taken after adjustment. The result of average

profitability analysis of selected companies is shown in the following table:


149

Table 5.6: Analysis of Average Profitability Ratios of Selected Companies


Average

Profitability

Ratios

Tata

Motors

Maruti

Suzuki

Mahindra &

Mahindra

Hindustan

Motors

SML

Isuzu

Ashok

Leyland

VST

Tillers

Operating

Margin (%)

10.329

11.465

11.107

2.6090

6.6770

10.387

12.991

Net Profit

Margin (%)

5.0600

6.5850

8.0330

2.9580

3.1800

5.1950

7.4050

Return on Net

Worth (%)

15.882

15.993

19.408

92.147

28.084

17.609

19.462

Earnings per

share

25.980

50.644

30.613

3.9130

15.989

5.4940

23.764

Dividend Per

Share

10.850

6.5000

9.6500

0.00

5.1500

2.6700

4.4000


November 2011.

The analysis of operating and net margin reveals that commercial vehicle

manufacturer VST Tillers is leading and is followed by Maruti Suzuki and

Mahindra and Mahindra. The performance of SML Isuzu remained lesser

volatile during the study period however margin secured by it is not very

satisfactory. The competitive performance of Mahindra and Mahindra shows

its strength to maintain its resilience. Its worst performance on this parameter,

during the study period, is better than that of its peer group. The average

earning per share of Maruti Suzuki is far ahead from other enterprises.

However, average dividend payout ratio of the company is not so liberal.

Dividend declared by Tata Motors is comparatively more than the other

companies of the group but undoubted, it is highly volatile. The average

profitability of Hindustan Motors is not so sound throughout the study period


150

and that resulted into non-declaration of dividend. The study further found

that the operating and net margins of automobile industry in India are not as

volatile as compared to return on net worth and earnings per share.

Leverage (Long-term Solvency) Analysis:

Leverage ratios are designed to depict the future prospects of company to get

finance. These ratios also give an idea about the degree of risk caused as a

result of debt financing. To analyse the long term solvency of the selected

companies, we calculated, debt-equity ratio and proprietary ratio. Here, it is

important to mention that only long term debts have been considered for the

calculation of the ratio. Usually, lower the debt-equity ratio, higher is the

degree of protection enjoyed by the creditors. This is so because company has

to pay fixed obligation in the form of interest irrespective of the volume of the

profit. On the contrary as proprietary ratio represents the owner’s fund to

assets. Higher ratio generally indicates secured position to creditors and a lower

ratio indicates greater risk to creditors. The result of average leverage analysis

of selected companies is shown in the following table:

Table 5.7: Analysis of Average Leverage Ratios of Selected Companies


Average

Leverage

Ratios

(Times)

Tata

Motors

Maruti

Suzuki

Mahindra

&

Mahindra

Hindustan

Motors

SML

Isuzu

Ashok

Leyland

VST

Tillers

Debt Equity 0.5500 0.0690 0.5900 1.8750 0.1020 0.6290 0.0650

Proprietary

Ratio 58.6840 91.8040 66.3860 32.4130 56.4530 59.7560 91.7540


November 2011.


151

Leverage analysis of selected companies reveals that the long-term solvency

position of VST Tillers and Maruti Suzuki is very satisfactory to their creditors.

These companies enjoy least average long-term equity ratio and higher average

proprietary ratio in comparison to their peer group. Further the leverage

position of these companies is relatively lesser volatile. The study also shows

that the leverage position of Hindustan Motors is not very pleasant for its

creditors.

We assign ranks to different companies for selected variables on the basis of

their average performance. A company showing best average performance for a

particular variable has been assigned 1st rank for that variable and likewise

company securing least ratio has been assigned 7th rank for that variable.

However, for long-term debt to equity ratio the methodology has been reversed

as lower ratio is preferable by creditors. After the assignment of ranks to all the

variables, the composite score for each parameter has been computed and again

ranks are been assigned for each parameter. The parameter having least value

of composite score has been assigned Fist rank and parameter having highest

score has been assigned last rank. The assignment of ranks on the basis of

average performance of selected companies is shown in the following table:


152

Table 5.8: Assignment of Ranks to Selected Companies on the basis of their Average Performance (April 2001 to March 2011)

Particulars Tata

Motors

Maruti

Suzuki

Mahindra &

Mahindra

Hindustan

Motors

SML

Isuzu

Ashok

Leyland

VST

Tillers

Liquidity:

Current Ratio 7 4 5 6 2 3 1

Quick Ratio 6 2 5 7 3 4 1

Composite Score 13 6 10 13 5 7 2

Rank on the basis of Liquidity VI III V VI II IV I

Managerial Efficiency (Activity):

Inventory Turnover Ratio 3 1 2 4 6 5 7

Fixed Assets Turnover Ratio 5 4 3 7 1 6 2

Composite Score 8 5 5 11 7 11 9

Rank on the basis of Efficiency III I I V II V IV

Profitability:

Operating Margin (%) 5 2 3 7 6 4 1

Net Profit Margin (%) 5 3 1 7 6 4 2


153

Particulars Tata

Motors

Maruti

Suzuki

Mahindra &

Mahindra

Hindustan

Motors

SML

Isuzu

Ashok

Leyland

VST

Tillers

Return On Net Worth (%) 6 5 3 7 1 4 2

Earnings Per Share 3 1 2 7 5 6 4

Dividend Per Share 1 3 2 7 4 6 5

Composite Score 20 14 11 35 22 24 14

Rank on the basis of Profitability III II I VI IV V II

Leverage (Long term Solvency):

Long Term Debt / Equity 4 2 5 7 3 6 1

Proprietary (Owners fund as % of total

Source)

5 1 3 7 6 4 2

Composite Ratio 9 3 8 14 9 10 3

Rank on the basis of Leverage III I II V III IV I

Source: International Journal of Research in Computer Application and Management, November 2011.


154

As shown from table 5.8, Mahindra & Mahindra Limited found best in terms

of profitability among all the peer companies of the industry. It is followed by

Maruti Suzuki, VST Tillers and Tata Motors. In terms of liquidity,

commercial vehicle manufacturers are more efficient. However, passenger

vehicle manufacturer Maruti Suzuki also demonstrates sound liquidity

position. The managerial efficiency of Maruti is also very satisfactory in the

industry. The leverage positions of Maruti Suzuki and VST Tillers are very

satisfactory. However the same for Hindustan Motors is not very rosy.

Further, here it is important to note that the pre-indicated ranks are not the

sole indicator of business efficiency. As a matter of fact the interpretation of

ratio depends upon number of factors. In the present paper a general criteria

for assessment of ratio has been used. According to which the company with

higher profitability, higher liquidity ratios (not more than ideal ratio), lower

debt-equity ratio (not less than ideal ratio), higher proprietary ratio (not more

than ideal ratio) and higher turnover ratio is assumed to be more efficient.

Chapter- 6

Financial Appraisal of

Honda Cars India Ltd.

and other companies –

Analysis of Data.

ChapterChapterChapterChapter---- 6 6 6 6 Financial Appraisal of Honda Cars India Ltd. Financial Appraisal of Honda Cars India Ltd. Financial Appraisal of Honda Cars India Ltd. Financial Appraisal of Honda Cars India Ltd. and....and....and....and....

155

Financial Appraisal of Honda Cars India Ltd. and Financial Appraisal of Honda Cars India Ltd. and Financial Appraisal of Honda Cars India Ltd. and Financial Appraisal of Honda Cars India Ltd. and other companies other companies other companies other companies –––– Analysis of DataAnalysis of DataAnalysis of DataAnalysis of Data

We have already discussed the theoretical framework of financial appraisal in

chapter four and have applied them for overall financial appraisal of

automobile industry in India in chapter five. This chapter six will primarily

focus 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 Limited, Maruti Suzuki India Limited and Tata Motors

Limited. There are different tools to investigate the efficiency level, but the

ratio analysis has been found most suitable and has been used for the analysis.

The study attempts to investigate significant difference (if any) in the financial

performance of the selected on the basis of four parameters viz., liquidity,

managerial efficiency, leverage and profitability.

The analysis of liquidity position has been done on the basis of current ratio,

liquid (quick) ratio and absolute liquid ratio. Managerial efficiency has been

tested on the basis of stock turnover ratio, debtors’ turnover ratio, Creditors’

turnover ratio, working capital turnover ratio, fixed asset turnover ratio and

total assets turnover ratio. The leverage (long term solvency) of selected

companies has been analysed through capital gearing ratio, debt-equity ratio,

total debt ratio, proprietary ratio, fixed assets to proprietors’ funds ratio, current

assets to proprietors’ funds ratio and interest coverage ratio. Profitability of

companies has been analysed on the basis of gross profit ratio, net profit

ratio, operating ratio, operating profit ratio, direct material expenses

ratio, administrative expenses ratio, selling and distribution expenses

ratio and cost of goods sold ratio, return on assets ratio, return on

investment ratio and return on shareholders’ funds ratio. The data used

for analysis is a secondary data and has been taken from the annual reports of

the companies, published by CMIE (Centre for Monitoring Indian Economy).

The data has been collected for a period of 5 years from 2007-08 to 2011-12.

ChapterChapterChapterChapter---- 6 6 6 6 Financial Appraisal of Honda Cars India Ltd. Financial Appraisal of Honda Cars India Ltd. Financial Appraisal of Honda Cars India Ltd. Financial Appraisal of Honda Cars India Ltd. and....and....and....and....

156

The financial performance of selected companies have been analysed by

ca lcu la t ing financial ratios.

6.1. LIQUIDITY ANALYSIS

Liquidity analysis is done through liquidity ratios. Liquidity ratios are also

termed as ‘Working Capital Ratios’ or ‘Short Term Solvency Ratios’.

Liquidity ratios measure the liquidity position of the concerns and highlight the

relative strength of the concerns in meeting their current obligations to

maintain sound liquidity in the business. These ratios are used to measure the

firm’s ability to meet short term obligations. They compare short term

obligations with the short term (or current) resources available to meet these

obligations. Management can make use of these ratios to find out how

efficiently the working capital is being used in the business. The inadequacy of

the working capital can be very disastrous for the company as it refers to the

inability of the company to pay off its short-term obligations. Liquidity ratios

are highly useful to creditors and commercial banks that provide short-term

credit.

a) Current Ratio

This ratio is used to evaluate the short term financial position of the business

concern. It compares the current assets and current liabilities of the firm. It

indicates the ability of the business to meet its short term obligations. Current

ratio of 2:1 is considered ideal for concern i.e. current assets should be twice of

the current liabilities. If the ratio is less than 2, difficulty may be experienced in

the payment of current liabilities and day-to day operations of the business may

suffer. If the ratio is higher than 2, it is very comfortable for the creditors but,

for the concern, it is indicator of idle funds. The position of current ratio from

the year 2008 to 2012 is presented in the following table:

Chapter- 6 Financial Appraisal of Honda Cars India Ltd. and....

157

Table 6.1: Current Ratio of the Companies from the Financial Year 2007-

08 to 2011-12 (Times)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. 1.41 1.30 0.98 1.36 1.17

Maruti

Suzuki India

Ltd.

1.09 1.61 1.05 1.66 1.41

Tata Motors

Ltd. 0.97 0.89 0.66 0.93 0.73

Diagram 6.1: Graph showing Current Ratio of the Companies from the


Current ratio of Honda Cars in financial year 2008 was comparatively higher

than the ratio of other financial years which indicates that during the year 2008

the company efficiently meets its short term obligations i.e. made efficient use

of working capital. But it does not satisfy the standard of ideal current ratio i.e.

2:1 which denotes that the current assets of the business should be twice of the

current liabilities. Current ratio of Honda Cars declines to 1.30 times in 2009

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


158

and the company has the lowest current ratio of 0.98 times in 2010 which

implies that in the year 2010, the company experienced difficulty in the

payment of its current liabilities. But during the financial year 2011 and 2012,

the current ratio of the company raises to 1.36 times and 1.17 times

respectively.

Current ratio of Honda Cars when compared to Maruti Suzuki and Tata Motors

shows that Maruti Suzuki comparatively has a higher current ratio which

implies that Maruti Suzuki efficiently meets its short term obligations and thus

the short term creditors of the company feels secured for their repayments by

the company. But in the year 2008, current ratio of Honda Cars was 1.41 times

which was even more than the current ratio of Maruti Suzuki. During the

financial year 2008 to 2012, Maruti Suzuki has the highest current ratio in 2011

at 1.66 times. During the financial year 2008 to 2012, Tata Motors has the

lowest current ratio than Honda Cars and Maruti Suzuki, indicating that Tata

Motors does not meet its short term obligations efficiently and thus its short

term creditors feels unsecured for their repayments by the company.

Current ratio of Honda Cars was less than the current ratio of Maruti Suzuki

but more than the current ratio of Tata Motors. But during the year 2008,

Honda Cars has current ratio of 0.41 times which was even more than Maruti

Suzuki‟s current ratio.

b) Liquid Ratio (Quick Ratio)

It is used as a complementary ratio to the current ratio. It is calculated by

comparing the relationship between liquid assets and current liabilities. Liquid

assets are those assets which can easily, at a short notice be converted into cash

without loss in value. It usually includes all the current assets except

inventories and prepaid expenses. It helps to assess the ability of the company

to meet its obligations without waiting for much time to liquidate its assets. It

measures the firm‟s capacity to payoff current obligations immediately with its

most liquid (quick) assets and is a “more rigorous test of liquidity than the

current ratio”. An ideal liquid ratio is 1:1. Thus, an organisation must have


159

quick assets equivalent to 100% of its current liabilities. The position of liquid

ratio from the year 2008 to 2012 is presented in the following table:

Table 6.2: Liquid Ratio of the Companies from the Financial Year 2007-

08 to 2011-12 (Times)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. 0.49 0.76 0.42 0.63 0.67

Maruti Suzuki

India Ltd. 0.72 1.35 0.71 1.32 1.09

Tata Motors

Ltd. 0.74 0.68 0.49 0.68 0.50

Diagram 6.2: Graph showing Liquid Ratio of the Companies from the


Honda Cars has a very low liquid ratio of 0.49 times in 2008 but the ratio of the

company increases to 0.76 times in financial year 2009 which shows that the

company was now much able to pay its current obligations immediately out of

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


160

its liquid assets although was not able to pay 100% of its current liabilities

immediately. But during the year 2010, the company has a lowest liquid ratio

of 0.42 times and the company was not able to pay its current obligations

immediately out of its liquid assets. During the financial year 2011 and 2012,

the company again raises its liquid ratio to 0.63 times and 0.67 times

respectively.

Liquid ratio of Honda Cars when compared with Maruti Suzuki and Tata

Motors shows that Maruti Suzuki has higher liquid ratio from financial year

2009 to 2012 at 1.35 times, 0.71 times, 1.32 times and 1.09 times respectively.

The company was in a better position to pay off its current liabilities

immediately. Tata Motors has adequate liquid ratio of 0.74 times in 2008 and

since then the liquid ratio of the company is declining. Tata Motors had a very

low liquid ratio of 0.49 times and 0.50 times respectively during the financial

year 2010 and 2012 respectively and thus the company does not maintain

sufficient liquid assets to pay off its current liabilities immediately.

Honda Cars has lower liquid ratio than Maruti Suzuki and Tata Motors. But

only in financial year 2009 and 2012, liquid ratio of Honda Cars was even

higher than Tata Motors.

c) Absolute Liquidity Ratio (Super-Quick Ratio)

This ratio measures the ability of a business to repay its current liabilities by its

absolute liquid assets. Absolute liquid assets usually constitute of cash in hand

and at bank and marketable securities. The desirable norm for this ratio is 1:2.

It is the most vigorous test of the firm‟s liquidity position. However, this ratio

is hardly used in practice because keeping large cash balance yields no return

in the business. The position of absolute liquidity ratio from the year 2008 to

2012 is presented in the following table:


161

Table 6.3: Absolute Liquidity Ratio of the Companies from the Financial

Year 2007-08 to 2011-12 (Times)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. 0.08 0.05 0.04 0.02 0.31

Maruti Suzuki

India Ltd. 0.11 0.57 0.02 0.60 0.43

Tata Motors

Ltd. 0.22 0.10 0.10 0.15 0.09

Diagram 6.3: Graph showing Absolute Liquidity Ratio of the Companies


Absolute liquidity ratio of Honda Cars is showing a decreasing trend from the

financial year 2008 to 2011. This indicates that the company does not have

sufficient absolute liquid assets to pay its current obligations immediately.

Lower ratio shows that the company relies too much on inventory or other

assets to pay its current liabilities and thus the liquidity of the company is not

satisfactory. But in the year 2012, the absolute liquidity ratio of the company

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


162

shows significant improvement and increases to 0.311 times which shows that

now the company is in better position to pay its current obligations out of its

absolute liquid assets.

Absolute liquidity ratio of Honda Cars when compared to the Maruti Suzuki

and Tata Motors shows that the Maruti Suzuki comparatively has higher ratio.

Maruti Suzuki has a high ratio in 2009 and 2011 at 0.50 times and 0.60 times

respectively and thus satisfied the standard norm of absolute liquid ratio i.e.

0.50 times. This implies that the company has sufficient absolute liquid assets

to pay its current obligations immediately. Maruti Suzuki also has an adequate

ratio in 2012 at 0.43 times but has a very low ratio during the financial year

2008 and 2010 at 0.11 times and 0.02 times respectively. Absolute liquidity

ratio of Tata Motors is very low and showing a decreasing trend from the

financial year 2008 to 2012, which represents that the day-to day cash

management of the company is poor and does not has adequate absolute liquid

assets to pay its short term obligations immediately. Thus the company must

improve its liquidity position.

Absolute liquidity ratio of Honda Cars was lower than the ratio of Maruti

Suzuki and Tata Motors. But during year 2012, ratio of Honda Cars was even


6.2. MANAGERIAL EFFICIENCY ANALYSIS

Managerial efficiency analysis is done through efficiency ratios. Efficiency

Ratios is also called „Turnover Ratios‟ or „Activity Ratios‟. These ratios

measure how well the resources at the disposal of the concern are being

utilized. It is a measure of movement and reflects how frequently an asset has

moved or turned over during the period. It refers to the speed and rapidity with

which assets are converted into sales. The greater is the rate of turnover or

conversion, the more efficient is the utilization or management of the asset.


163

These ratios are usually calculated with reference to sales/cost of goods sold

and are expressed in terms of rate or times.

a) Inventory Turnover Ratio

It is also called „Stock Velocity Ratio‟ and establishes the relationship between

the cost of goods sold during a given period and the average inventory held

during the year by company. This ratio indicates whether inventory has been

efficiently used or not. It shows the speed with which the Stock is rotated into

sales or cost of goods sold i.e. the number of times the Stock is turned into

sales during the year. The higher the ratio, the better it is, since it indicates that

stock is selling quickly. A low inventory turnover ratio indicates that stock

does not sell quickly and remains lying in the godown for quite a long time. By

comparing the inventory turnover ratio of current year with the previous year,

the management can assess whether inventory has been more effectively used

or not. There is no ideal standard ratio for evaluating the inventory turnover

ratio of a company. It can be compared with the inventory turnover ratio of the

same company in the past or inventory turnover ratio of the industry. The

position of inventory turnover ratio from the year 2008 to 2012 is presented in

the following table:

Table 6.4: Inventory Turnover Ratio of the Companies from the Financial

Year 2007-08 to 2011-12 (Times)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. 7.98 7.34 8.09 5.12 4.91

Maruti

Suzuki India

Ltd.

15.54 16.56 21.03 21.62 17.50

Tata Motors

Ltd. 8.56 8.36 9.87 10.47 9.85


164

Diagram 6.4: Graph showing Inventory Turnover Ratio of the Companies


Inventory turnover ratio of Honda Cars has been declining from the financial

year 2008 to 2012 except the year 2010. The ratio of Honda Cars declined from

7.98 times in 2008 to 4.91 times in 2012. During the year 2010, the ratio was

comparatively high at 8.09 times indicating that the stock of the company is

selling quickly. In a business where inventory turnover ratio is high, goods can

be sold at a low margin of profit and even then, the profitability may be quite

high. During the financial year 2012, Honda Cars has lowest inventory

turnover ratio of 4.91 times showing that the stock does not sell quickly and

remains lying in the godown for quite a long time. This results in increased

storage costs, blocking of funds and losses on account of goods becoming

obsolete or unsalable.

Inventory turnover ratio of Honda Cars when compared to Maruti Suzuki and

Tata Motors showed that Maruti Suzuki had the highest inventory turnover

ratio during the financial year 2008 to 2012 at 15.54 times, 16.56 times, 21.03

times, 21.62 times and 17.50 times respectively. This indicates that the stock of

Maruti Suzuki is selling quickly and thus reducing the blockage of funds in

0

5

10

15

20

25

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


165

unsold stock, carrying cost and storage costs of inventory. Inventory turnover

ratio of Tata Motors is less than the stock turnover ratio of Maruti Suzuki but

more than the stock turnover ratio of Honda Cars. Thus the stock of Tata

Motors was not selling as quickly as Maruti Suzuki‟s stock but was selling

more quickly than the stock of Honda Cars. Honda Cars has the lowest

inventory turnover ratio during the financial year 2008 to 2012 at 7.98 times,

7.34 times, 8.09 times, 5.12 times and 4.91 times respectively showing that the

stock of Honda Cars does not sell as quickly as the sock of Maruti Suzuki and

Tata Motors.

Inventory turnover ratio of Honda Cars was lower than the ratio of Maruti

Suzuki and Tata Motors.

Average age of Inventory

This ratio is also called as „Stock Holding Period‟. It indicates the velocity with

which the goods move, thus serves as a yardstick of efficient inventory

management. This ratio is calculated for finding out the number of days of

stock holdings in a company. The lower the average age of inventory, the better

it is, as it indicates the stock of the company quickly converts into sales. The

high average age of inventory indicates that the stock of the company takes

long time to convert it into sales and thus the funds of the company may be

locked into its stock. The position of average age of inventory from the year

2008 to 2012 is presented in the following table:


166

Table 6.5: Average age of Inventory of the Companies from the Financial

Year 2007-08 to 2011-12 (Days)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. 45 49 45 70 73

Maruti

Suzuki India

Ltd.

23 22 17 17 21

Tata Motors

Ltd. 42 43 36 34 37

Note: Here we consider, 360 days in a year.

The average age of inventory of Honda Cars is showing an increasing trend

from the financial year 2008 to 2012. The average age of inventory of Honda

Cars significantly increases to70 days and 73 days in the year 2011 and 2012

respectively. It implies that during the year 2011 and 2012, the company has to

hold the stock for a longer duration and thus takes long period to convert the

stock into sales due to various reasons and it also shows that the funds of the

company were unnecessary blocked and there was slow recovery of cash, tied

in stocks. Thus, comparatively during the financial year 2008 to 2010, the stock

of the company was selling more quickly.

Average age of inventory of Honda Cars when compared to Maruti Suzuki and

Tata Motors shows that Maruti Suzuki has the lowest average age of inventory

indicating that the Maruti Suzuki‟s stock quickly converts into sales which

increases the fast recovery of cash and thus the company does not faces the

problem of liquidity crunch. Average age of inventory of Tata Motors was

more than the average age of inventory of Maruti Suzuki but less than the

average age of inventory of Honda Cars. Thus the stock of Tata Motors takes

more time to convert it into sales than the stock of Maruti Suzuki but takes less

time than the stock of Honda Cars. Honda Cars has highest average age of


167

inventory stating that the stock of the company takes long period to convert it

into sales and thus the company has slow recovery of cash.

Honda Cars has larger average age of inventory than Maruti Suzuki and Tata

Motors.

b) Debtors’ Turnover Ratio

It is also known as the „Receivables Turnover Ratio‟ or „Receivables Velocity

Ratio‟. It establishes the relationship between net credit sales of the year and

the average debtors. This ratio indicates the speed with which the amount is

collected from debtors i.e. the number of times on average the receivables are

turn over in each financial year. The higher the ratio, the better it is, since it

indicates that amount from debtors is being collected more quickly. The more

quickly the debtors pay, the less is the risk from bad debts. It is difficult to set

up a standard for this ratio. It depends on the policy of the management and the

nature of industry. By comparing the debtors‟ turnover ratio of the current year

with the previous year, it may be assessed whether the sales policy of the

management is efficient or not. The position of debtors‟ turnover ratio from the

year 2008 to 2012 is presented in the following table:

Table 6.6: Debtors’ Turnover Ratio of the Companies from the Financial

Year 2007-08 to 2011-12 (Times)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. N.A. 83.0 68.24 22.65 17.72

Maruti

Suzuki India

Ltd.

25.46 25.86 33.50 43.86 39.39

Tata Motors

Ltd. 29.34 18.59 17.77 18.66 20.23

Note: Here we consider the net sales as net credit sales.


168

Diagram 6.5: Graph showing Debtors’ Turnover Ratio of the Companies


Debtors‟ turnover ratio of Honda Cars is showing a decreasing trend from the

financial year 2009 to 2012 which shows the decline in the speed with which

the amount is being collected from the debtors. During the year 2009 and 2010,

the company has a very high Debtors‟ turnover ratio of 83 times and 68.24

times respectively, which indicates that the amount from debtors is being

collected more quickly. The more quickly the debtors pay, the less is the risk

from bad debts, and so lower the expense of collection and increase in the

liquidity of the company. However, it may also suggest a restrictive credit

policy of the company. Debtors‟ turnover ratio of the company decreases to

22.65 times and 17.72 times in the year 2011 and 2012, which reveals the

inefficient credit sales policy of the management. It means that credit sales

have been made to customers who do not deserve much credit.

Debtors‟ turnover ratio of Honda Cars when compared to the ratio of Maruti

Suzuki and Tata Motors shows that during the financial year 2009 and 2010,

Honda Cars has higher ratio than Maruti Suzuki and Tata Motors but in the

year 2011 and 2012, the ratio of Maruti Suzuki has been more than the ratio of

0

10

20

30

40

50

60

70

80

90

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


169

Honda Cars and Tata Motors. Only in the year 2008, the ratio of Tata Motors

was even more than the ratio of Maruti Suzuki. Debtors‟ turnover ratio of

Maruti Suzuki is showing an increasing trend from the financial year 2008 to

2011. The higher the ratio, the better it is, since it indicates that amount from

debtors is being collected more quickly. The more quickly the debtors pay, the

less is the risk from bad debts. During the financial year 2009 to 2011, ratio of

Tata Motors was less than the ratio of Maruti Suzuki and Honda Cars which

implies that the Tata Motors have not been collecting the amount from its

debtors quickly and can thus have the problem of liquidity crunch. It also

shows the inefficient credit sales policy of the company. But only in 2012, the

debtors‟ turnover ratio of Tata Motors was more than the ratio of Honda Cars.

Honda Cars has higher debtors‟ turnover ratio than Maruti Suzuki in 2009 and

2010 but lower ratio than Maruti Suzuki in financial year 2011 and 2012.

Honda Cars has higher ratio than Tata Motors but in the year 2012, ratio of

Honda Cars was even lower than Tata Motors.

Average Collection Period

It states the average debt collection period. This ratio indicates the time within

which the amount is collected from debtors and bills receivables. This ratio

shows the time in which the customers are paying for credit sales. Longer

collection period indicates the excessive blockage of funds with the debtors

which increases the chances of bad debts and also shows the liberal credit

policy of the company. On the other hand, if there is decrease in debt collection

period, it indicates prompt payment by debtors which reduces the chances of

bad debts and it also shows the restrictive credit policy of the company. As

such, credit policy of the company should neither be too liberal nor too

restrictive. There is no ideal collection period of debtors. It depends upon the

peculiar characteristics of the industry, business and the firm. The position of

average collection period from the year 2008 to 2012 is presented in the

following table:


170

Table 6.7: Average Collection Period of the Companies from the Financial

Year 2007-08 to 2011-12 (Days)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. N.A. 4 5 16 20

Maruti

Suzuki v 14 14 11 8 9

Tata Motors

Ltd. 12 19 20 19 18


Average collection period of Honda Cars is showing an increasing trend during

the financial year 2009 to 2012. This implies that the time taken by the

company in collection of the amount from its debtors is increasing which is

also increasing the chances of bad debts. During the year 2009 and 2010,

Honda Cars has a shorter collection period of 4 days and 5 days respectively.

This indicates the prompt payment by debtors which reduces the chances of

bad debts in the company. This also shows the restrictive credit policy of the

company. But during 2011 and 2012, collection period of the company

significantly increases to 16 days and 20 days respectively, this indicates

excessive blockage of funds with the debtors of the company which increases

the chances of bad debts. It also shows the liberal credit policy of the company.

A higher debt collection period is thus, an indicator of the inefficiency and

negligence on the part of management of the company.

Comparison of average collection period of Honda Cars to Maruti Suzuki and

Tata Motors shows that collection period of Maruti Suzuki is showing a

decreasing trend which implies that the debtors of the company are paying

promptly and reduces the chances of bad debt . This is an indication of the

efficiency of management. During the year 2009 and 2010, Honda Cars has the

shorter collection period than Maruti Suzuki and Tata Motors but in the year


171

2011 and 2012, Maruti Suzuki has the low collection period than Honda Cars

and Tata Motors. Lower collection period implies prompt payment by the

debtors and restrictive credit policy. During the financial year 2009 to 2011,

Tata Motors has a higher debt collection period than Maruti Suzuki and Honda

Cars. This shows excessive blockage of funds with the debtors which increases

the chances of bad debts in Tata Motors. It is also an indication of liberal credit

policy of Tata Motors and reveals the inefficiency and negligence on the part of

management of Tata Motors. But in 2012, Honda Cars has higher collection

period than Tata Motors and Maruti Suzuki.

Honda Cars has smaller collection period than Maruti Suzuki in the year 2009

and 2010 but in 2011 and 2012, Honda Cars has larger collection period than

Maruti Suzuki. Honda Cars has smaller collection period than Tata Motors but

in 2012, collection period of Honda Cars was even higher than Tata Motors.

c) Creditors’ Turnover Ratio

It establishes the relationship between the net credit purchases and the average

trade creditors. It is also known as „Creditors' Velocity Ratio‟. This ratio

indicates the speed with which the amount is being paid to creditors i.e. the

speed with which payments for credit purchase are made to the trade creditors.

The higher the ratio, the better it is, since it will indicate that the creditors are

being paid more quickly which increases the creditworthiness of the company.

A low creditors' turnover ratio implies an unusual delay in the payment to the

suppliers. The position of creditors‟ turnover ratio from the year 2008 to 2012

is presented in the following table:


172

Table 6.8: Creditors’ Turnover Ratio of the Companies from the Financial

Year 2007-08 to 2011-12 (Times)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. 7.60 5.16 5.0 3.55 3.01

Maruti

Suzuki India

Ltd.

7.45 7.40 9.16 11.53 9.47

Tata Motors

India Ltd. 2.79 2.15 2.42 3.33 4.59

Note: Here we consider the net purchases as net credit purchases.

Diagram 6.6: Graph showing Creditors’ Turnover Ratio of the Companies


Creditors‟ turnover ratio of Honda Cars is showing decreasing trend from the

financial year 2008 to 2012 which implies that the company is making delay in

the payment to its creditors and thus adversely affects the credit worthiness of

the company. HCIL has a highest creditors‟ turnover ratio in 2008 which

0

2

4

6

8

10

12

14

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


173

implies that during the year, creditors of the company have been paid promptly

which enhances the credit worthiness of the company. But during the year

2012, the company has the lowest creditors‟ turnover ratio of 3.012 times

which indicates that the creditors are not being paid on the due date by the

company which adversely affects the credit reputation of the company.

Comparison of creditors‟ turnover ratio of Honda Cars with Maruti Suzuki and

Tata Motors shows that Maruti Suzuki has higher creditors‟ turnover ratio than

the ratio of Honda Cars and Tata Motors. This indicates that Maruti Suzuki is

paying off its creditors promptly which increases the credit worthiness of the

company. From the financial year 2008, creditors‟ turnover ratio of Maruti

Suzuki increases to 11.53 times in 2011 but falls down to 9.47 times in the year

2012. During the Maruti Suzuki‟s 2008 to 2012, Tata Motors has the lowest

creditors‟ turnover ratio than the ratio of Maruti Suzuki and Honda Cars. This

indicates that Tata Motors is not paying its creditors promptly which adversely

affects its credit worthiness. But in 2012, Tata Motors increases its ratio to 4.59

times which was even more than the ratio of Honda Cars.

Honda Cars has lower creditors‟ turnover ratio than Maruti Suzuki but has

higher ratio than Tata Motors. Only in 2012, creditors‟ turnover ratio of Honda

Cars was even lower than Tata Motors.

Average Payment Period

This ratio indicates the period which is normally taken by the company to make

payment to its creditors. The lower the ratio, the better it is, because a shorter

payment period implies that the creditors are being paid promptly which

enhances the credit worthiness of the company. The position of average

payment period from the year 2008 to 2012 is presented in the following table:


174

Table 6.9: Average Payment Period of the Companies from the Financial

Year 2007-08 to 2011-12 (Days)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. 47 70 72 101 120

Maruti Suzuki

India Ltd. 48 49 39 31 38

Tata Motors

Ltd. 129 167 148 108 78


Average payment period of Honda Cars have been showing increasing trend

from the financial year 2008 to 2012 which implies that the credit worthiness

of the company is decreasing or the company is availing the benefit of the

liberal credit terms granted by the suppliers. But Honda Cars has a shortest

average payment period of 47 days in 2008 which implies that the creditors

were promptly paid during the year 2008. Shortest credit period also means that

the company is not taking full advantage of the credit facilities granted by the

suppliers. In 2012, Honda Cars has excessive larger payment period of 120

days which means an unusual delay in the payment to the suppliers and thus

affects the credit reputation of the company.

Comparison of average payment period of Honda Cars to Maruti Suzuki and

Tata Motors shows that the Maruti Suzuki has the lowest payment period than

Honda Cars and Tata Motors. This indicates that the Maruti Suzuki is paying

its creditors promptly and thus increasing its credit worthiness. During the

financial year 2008 to 2011, Tata Motors has the highest payment period than

Maruti Suzuki and Honda Cars. This reveals that Tata Motors is making

unusual delay in the payment to the suppliers. But in 2012, Honda Cars has the

highest average payment period of 120 days which was even more than the

payment period of Tata Motors and this adversely affects the credit reputation

of Honda Cars.


175

Honda Cars has larger payment period than Maruti Suzuki but has smaller

payment period than Tata Motors. Only in 2012, payment period of Honda

Cars was even larger than Tata Motors.

d) Other Turnover Ratios

i. Working Capital Turnover Ratio

This ratio reveals how efficiently working capital has been utilized in making

sales. In other words, it shows the number of times working capital has been

utilized in making sales. Working Capital is the excess of current assets over

current liabilities. A high working capital turnover ratio shows efficient use of

working capital and quick turnover of current assets like stock and debtors. A

low working capital turnover ratio indicates under utilization of working

capital. However a very high turnover ratio of working capital is also

dangerous, as it is a sign of over trading, i.e., doing business with too little

working capital. On the other hand, a very low turnover ratio of working

capital may be assign of under-trading in comparison to working capital, i.e.,

the working capital is in excess of the requirements of the business. The

position of working capital turnover ratio from the year 2008 to 2012 is

presented in the following table:

Table 6.10: Working Capital Turnover Ratio of the Companies from the


2008 2009 2010 2011 2012

Honda Cars

India Ltd. 10.52 17.49 52.50 23.86 12.19

Maruti

Suzuki India

Ltd.

22.25 17.21 25.20 24.24 13.58

Tata Motors

Ltd. 22.35 (35.25) (10.05) (13.68) (17.37)


176

Diagram 6.7: Graph showing Working Capital Turnover Ratio of the

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

Working capital turnover ratio of Honda Cars is showing an increasing trend

from the financial year 2008 to 2010. During the year 2008, Honda Cars has

lowest working capital turnover ratio of 10.52 times indicating inefficient

utilization of working capital. But the ratio increases to 17.59 times in 2009

which implies that Honda Cars has efficiently utilized its working capital.

Honda Cars has a very high working capital turnover ratio of 52.5 times in

financial year 2010 which is a sign of over-trading i.e. doing business with too

little working capital. It is an indicator of the shortage of working capital and

may put the company in financial difficulties. But the ratio stabilizes in 2011

and 2012 at 23.86 times and 12.19 times respectively.

Working capital turnover ratio of Honda Cars when compared to Maruti Suzuki

and Tata Motors shows that Maruti Suzuki has the higher working capital

turnover ratio than the ratio of Honda Cars and Tata Motors during the

financial year 2008 to 2012. This indicates efficient use of working capital and

quick turnover of current assets by Maruti Suzuki. But in 2009, Honda Cars

also has higher working capital turnover ratio of 17.49 times which shows

efficient utilization of working capital by the company. In the year 2008, Tata

Motors has adequate working capital turnover ratio indicating efficient use of

-40

-30

-20

-10

0

10

20

30

40

50

60

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


177

working capital. But during the financial year 2009 to 2012, Tata Motors has a

very low working capital turnover ratio which indicates under-trading in

comparison to working capital i.e. the working capital is in the excess of the

requirements of the company.

Honda Cars has lower working capital turnover ratio than Maruti Suzuki but in

2010, ratio of Honda Cars was higher than Maruti Suzuki. Honda Cars has

higher ratio than Tata Motors but in 2008, ratio of Honda Cars was even lower

than Tata Motors.

ii. Fixed Assets Turnover Ratio

It indicates the efficiency of the fixed assets towards contribution to sales. This

ratio reveals how efficiently the fixed assets are being utilized to generate sales

in the business. Compared with the previous year, if there is increase in this

ratio, it will indicate that there is better utilisation of fixed assets. Thus, higher

fixed assets turnover ratio indicates the higher efficiency in the utilization of

the fixed assets. If there is a fall in this ratio, it will show that fixed assets have

not been used as efficiently, as they had been used in the previous year. The

position of fixed assets turnover ratio from the year 2008 to 2012 is presented


Table 6.11: Fixed Assets Turnover Ratio of the Companies from the


2008 2009 2010 2011 2012

Honda Cars

India Ltd. 4.45 2.21 2.95 2.57 1.84

Maruti Suzuki

India Ltd. 4.42 4.12 5.35 5.60 4.26

Tata Motors

Ltd. 2.68 1.71 2.13 2.70 2.81

Note: Here we consider that net fixed assets exclude depreciation and include capital

work in progress.


178

Diagram 6.8: Graph showing Fixed Assets Turnover Ratio of the


Fixed assets turnover ratio of Honda Cars is showing decreasing trend from the

financial year 2008 to 2012. Fixed assets turnover ratio of Honda Cars was

higher during the year 2008 at 4.45 times but has declined to 1.84 times in

2012. This indicates that during the year 2008, company has efficiently utilized

its fixed assets. During 2012, the lowest fixed assets turnover ratio of the

company shows inefficient use of the fixed assets in the company which will

result in low sales volume coupled with high overhead charges and under

utilization of the available capacity. Thus, the management must strive for

using fixed assets efficiently in the business.

Fixed assets turnover ratio of Honda Cars when compared to Maruti Suzuki

and Tata Motors shows that during the financial year 08 to 2012, Maruti Suzuki

has higher fixed assets turnover ratio than the ratio of Honda Cars and Tata

Motors. From the year 2008, fixed assets turnover ratio of Maruti Suzuki is

showing an increasing which shows that Maruti Suzuki has been efficiently

using its fixed assets but in 2012, the ratio falls to 4.26 times. During the

financial year 2008 to 2010, fixed assets turnover ratio of Tata Motors was less

than the ratio of Honda Cars indicating that Tata Motors has not been making

0

1

2

3

4

5

6

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


179

use of its fixed assets efficiently. During 2011, both Honda Cars and Tata

Motors have the same ratio but during 2012, fixed assets turnover ratio of

Honda Cars was less than the ratio of Tata Motors.

Fixed assets turnover ratio of Honda Cars has been lower than Maruti Suzuki

but higher than Tata Motors. During 2011 and 2012, ratio of Honda Cars was

even lower than Tata Motors.

iii. Total Assets Turnover Ratio

This ratio establishes the relationship between total assets and net sales of the

business. It shows how efficiently the total assets are being utilized in the

business. Compared with the previous year, if there is increase in this ratio, it

will indicate that there is better utilisation of total assets. Thus, higher total

assets turnover ratio indicates the higher efficiency in the utilization of the total

assets. If there is a fall in this ratio, it will show that total assets have not been

used as efficiently, as they had been used in the previous year. The position of

total assets turnover ratio from the year 2008 to 2012 is presented in the

following table:

Table 6.12: Total Assets Turnover Ratio of the Companies from the


2008 2009 2010 2011 2012

Honda Cars

India Ltd. 2.36 1.50 1.76 1.38 1.07

Maruti

Suzuki India

Ltd.

1.45 1.49 1.76 1.95 1.55

Tata Motors

Ltd. 1.09 0.67 0.69 0.86 0.99

Note: Here we consider that total Assets includes net fixed assets, investments and

current assets loans and advances.


180

Diagram 6.9: Graph showing Total Assets Turnover Ratio of the


Total assets turnover ratio of Honda Cars is showing decreasing trend from the

financial year 2008 to 2012. Total assets turnover ratio of Honda Cars was

higher during 2008 at 2.36 times but has declined to 1.07 times in 2012. This

indicates that during the year 2008, company has efficiently utilized its total

assets. During the financial year 2012, the lowest total assets turnover ratio of

the company shows inefficient use of the total assets in the company which will

result in low sales volume coupled with high overhead charges and under

utilization of the available capacity.

Total assets turnover ratio of Honda Cars when compared to the Maruti Suzuki

and Tata Motors shows that during the financial year 2008 to 2012, total assets

turnover ratio of Maruti Suzuki was more than the ratio of Honda Cars and

Tata Motors. From the year 2008, total assets turnover ratio of Maruti Suzuki is

showing an increasing which shows that Maruti Suzuki has been efficiently

using its total assets. Honda Cars and Maruti Suzuki both have the same ratio

in 2009 and 2010 at 1.50 times and 1.76 times respectively which implies the

better use of the total assets of the companies. During the financial year 2008 to

2012, total assets turnover ratio of Tata Motors is showing a declining trend.

Total assets turnover ratio of Tata Motors was also less than the ratio of Honda

0

0.5

1

1.5

2

2.5

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


181

Cars indicating that Tata Motors has not been making use of its total assets

efficiently in the business.

Total assets turnover ratio of Honda Cars has been lower than Maruti Suzuki

and higher than Tata Motors. But in 2008, ratio of Honda Cars was higher than

Maruti Suzuki.

6.3. LEVERAGE (LONG TERM SOLVENCY) ANALYSIS

Leverage analysis is done through Leverage Ratios. Leverage Ratios are also

known as „Long Term Solvency Ratios‟ or „Financial Ratios‟ or „Capital

Structure Ratios‟. Long Term Solvency Ratios analyses the long term solvency

of a business which depends on firms‟ adequate resources to meet its long term

funds requirements, appropriate debt equity mix to raise long term funds and

earnings to pay interest and installment of long term loans in time. These ratios

are used to assess the following two aspects of the long-term solvency of a firm

i.e. ability to repay the principal amount when due; and the ability to pay the

interest and dividend promptly and periodically as per the agreed terms and

conditions. Usually the long term lenders, debenture holders and financial

institutions are interested in these ratios. With the help of these ratios, they

want to judge the ability of a firm to pay the interest regularly as well as repay

the principal, when due.

a) Capital Gearing Ratio

This ratio establishes the relationship between fixed interest bearing capital and

shareholders‟ funds and thus examines the capital structure of the company. A

company is said to be highly geared if the major share of the total capital is in

the form of fixed- interest-bearing securities or this ratio is more than one. If

this ratio is less than one, it is said to be low geared. If it is exactly one, it is

evenly geared. This ratio must be carefully planned as it affects the company‟s

capacity to maintain a uniform dividend policy during difficult trading periods

that may occur. The lower the capital gearing ratio, the better it is for the

company because it shows that too much capital has not been raised by way of

debentures. Too much capital should not be raised by way of debentures

because debentures do not share in business losses. There is another


182

implication of capital gearing ratio. It indicates the additional residual benefits

accruing to the equity shareholders' funds. It is due to the fact that the company

earns a certain rate of return on the capital employed, but is required to pay

only a fixed return against loans and preference share capital. The position of

capital gearing ratio from the year 2008 to 2012 is presented in the following

table:

Table 6.13: Capital Gearing Ratio of the Companies from the Financial

Year 2007-08 to 2011-12 (Times)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. N.A. 0.98 0.66 1.68 0.49

Maruti

Suzuki India

Ltd.

0.10 0.07 0.06 0.01 0.07

Tata Motors

Ltd. 0.80 1.07 1.11 0.73 0.56

Diagram 6.10: Graph showing Capital Gearing Ratio of the Companies


0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


183

Capital gearing ratio of Honda Cars is showing a declining trend from 2009 to

2012, except the year 2011 in which the ratio of the company increases to 1.68

times. This indicates that during 2009, 2010 and 2012, the capital gearing ratio

of the company was low which implies that the fixed interest bearing funds of

the company was less than its equity shareholders‟ funds. Honda Cars has the

lowest capital gearing ratio during 2012 which indicates that the company

during the year was less burdened to pay fixed interest charges for its fixed

interest bearing funds. But during the year 2011, the capital gearing ratio

increases to 1.68 times indicating that the capital structure of the company is

highly geared, as the amount of fixed interest bearing funds is more than the

equity shareholders‟ funds. Thus, during 2011, Honda Cars is more burdened

with paying off more fixed interest charges.

Capital gearing ratio of Honda Cars when compared to Maruti Suzuki and Tata

Motors shows that Maruti Suzuki has low capital gearing ratio than the ratio of

Maruti Suzuki and Tata Motors. This indicates that the fixed interest bearing

funds of Maruti Suzuki is less than its equity shareholders‟ funds and thus it is

less burdened with paying off its fixed interest charges. During the year 2008 to

2012, Tata Motors has the highly geared ratio, which was more than the ratio of

Maruti Suzuki and Honda Cars indicating that Tata Motors has more fixed

interest bearing funds than its equity shareholders‟ funds and thus is more

burdened with paying off its fixed interest charges. But in 2011, Honda Cars

has a high capital gearing ratio of 1.68 times which is even more than the ratio

of Tata Motors.

Honda Cars has higher capital gearing ratio than Maruti Suzuki and has lower

ratio than Tata Motors. But in the year 2011, ratio of Honda Cars was higher

than Tata Motors.


184

b) Debt Equity Ratio

It is also known as „External-Internal Equity Ratio‟. Debt equity ratio shows a

relationship between long term debts and shareholders‟ funds. In other words,

this ratio indicates the relationship between the outsiders‟ funds and

shareholders‟ funds. This ratio indicates the extent of funds provided by long-

term lenders in comparison to the funds provided by the owners, i.e.

shareholders. It measures the extent of equity covering the debt. This ratio is

calculated to know about the firms‟ repayment capacity of long term debts.

Generally, the ratio of 1:1 is considered satisfactory. A low ratio is considered

favourable from the long term creditors‟ point of view because a high

proportion of owners‟ funds provide a large margin of safety for them. A high

debt equity ratio which indicates that the claims of outsiders are greater than

those of owners, may not be considered by the creditors because it gives a

lesser margin of safety for them at the liquidation of a company. The position

of debt equity ratio from the year 2008 to 2012 is presented in the following

table:

Table 6.14: Debt Equity Ratio of the Companies from the Financial Year

2007-08 to 2011-12 (Times)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. N.A. 1.57 1.65 3.0 1.30

Maruti

Suzuki India

Ltd.

0.44 0.43 0.37 0.30 0.44

Tata Motors

Ltd. 2.15 1.96 2.27 1.49 1.57


185

Diagram 6.11: Graph showing Debt Equity Ratio of the Companies from


Debt equity ratio of Honda Cars has been showing increasing trend from the

financial year 2009 to 2011 at 1.57 times, 1.65 times and 3 times respectively

which indicates that the claim of the outsiders are more than those of the

owners which may not be considered by the long term creditors of the company

because it gives a lesser margin of safety for them at the liquidation of the

company. But the company‟s Debt equity ratio significantly falls down to 1.30

times in 2012, showing a high proportion of owners‟ funds than the outsiders‟

funds which is favourable from the point of view of the long term creditors of

the company as it provide a large margin of safety to them for their repayment

by the company.

Debt equity ratio of Honda Cars when compared to Maruti Suzuki and Tata

Motors shows that Maruti Suzuki has a low Debt equity ratio than the ratio of

Honda Cars and Tata Motors. Debt equity ratio of Maruti Suzuki is showing a

declining trend during the year 2008 to 2012. This reveals that the creditors of

Maruti Suzuki has large margin of safety against all possible losses in case of

liquidation of the company. But during the financial year 2008 to the 2012,

Tata Motors has high Debt equity ratio than the ratio of Maruti Suzuki and

0

0.5

1

1.5

2

2.5

3

3.5

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


186

Honda Cars, except the year 2011. This implies that the claim of outsiders of

Tata Motors is more than its shareholders‟ funds, against the firm‟s assets.

Thus the long term creditors of Tata Motors feels unsecured about their

repayment by the company and they can also interfere in the affairs of the

business or put certain restrictive conditions on the operations of the business.

During 2011, Honda Cars has a very high Debt equity ratio of 3 times which

was even more than the ratio of Tata Motors.

Debt equity ratio of Honda Cars has been higher than Maruti Suzuki and lower

than Tata Motors. But in 2011, debt equity ratio of Honda Cars was even


c) Total Debt Ratio

This ratio is also known as „Solvency Ratio‟. This ratio depicts the proportion

of firms‟ total assets, financed by total debt. Total debt represents both long

term as well as short term debt. It also helps in ascertaining the long term

solvency of the company. To the creditor, a low ratio would ensure greater

security for extending credit to the firm. However a too low ratio suggests that

the management is not using its credit most advantageously. The position of

total debt ratio from the year 2008 to 2012 is presented in the following table:

Table 6.15: Total Debt Ratio of the Companies from the Financial Year

2007-08 to 2011-12 (Times)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. N.A. 0.64 0.66 0.75 2.50

Maruti

Suzuki India

Ltd.

0.30 0.30 0.26 0.23 0.30

Tata Motors

Ltd. 0.65 0.64 0.67 0.55 0.56




187

Diagram 6.12: Graph showing Total Debt Ratio of the Companies from


Total debt ratio of Honda Cars is showing an increasing trend from the

financial year 2009 to 2012. This indicates that the total debts of the company

are more than its total assets which is not considered favourable from the point

of view of the creditors of the company. In 2012, debt ratio increased highly

rose to 2.50 times which is a threat to the solvency of Honda Cars as it

indicates that the company is carrying too much debt. This is of concern to the

company because it may not be able to repay the debts and nor may borrow the

additional funds required. This situation is risky because short term financing is

limited and may not be available in an emergency.

Total debt ratio of Honda Cars when compared to the ratio of Maruti Suzuki

and Tata Motors, shows that the Maruti Suzuki has low total debt ratio than the

ratio of Honda Cars and Tata Motors. This reveals that the Maruti Suzuki is not

risky because it has plenty of financing available when compared to its needs.

However, it also indicates that the company should take on more debt. The

reason for this is that the ability to borrow is considered a resource. During the

year 2008 to 2010, Tata Motors has higher total debt ratio of 0.65 times, 0.64

0

0.5

1

1.5

2

2.5

3

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


188

times and 0.67 times respectively, but during 2009 and 2010, total debt ratio of

Honda Cars was equal to the ratio of Tata Motors. During the financial year

2011 and 2012, Honda Cars has higher debt ratio of 0.75 times and 2.50 times

respectively which was even more than the ratio of Tata Motors. This shows

threat to the solvency of the company as it indicates that the company is

carrying too much debt.

Total debt equity ratio of Honda Cars has been higher than Maruti Suzuki and

Tata Motors. But during the year 2009 and 2010, debt equity ratio of Honda

Cars and Tata Motors was equal.

d) Proprietary Ratio

This ratio is also known as „Equity Ratio‟ or „Net Worth to Total Assets Ratio‟.

It measures the proportion of the company‟s assets that are provided or claimed

by the owners. This ratio is quite significant for the creditors of business. With

the help of this ratio, it can be ascertained in what proportion owners have

provided funds for investment in assets of business. The higher the ratio, the

more profitable it is for the creditors and the lesser is the dependence on

external funds. If the ratio is low, the creditors can be suspicious about the

repayment of their debt which indicates greater risk to the creditors. The higher

the ratio, the better it is. A ratio below 50% may be quite alarming for the

creditors. The greater the percentage financing provided by shareholders

equity, the larger is the cushion of protection for the firm‟s creditors. The

position of proprietary ratio from the year 2008 to 2012 is presented in the

following table:


189

Table 6.16: Proprietary Ratio of the Companies from the Financial Year

2007-08 to 2011-12 (Times)

2008 2009 2010 2011 2012

Honda Cars

India Ltd.

0.68 0.41 0.39 0.24 0.43

Maruti

Suzuki India

Ltd.

0.68 0.68 0.72 0.75 0.68

Tata Motors

Ltd.

0.30 0.32 0.29 0.36 0.36



Diagram 6.13: Graph showing Proprietary Ratio of the Companies from


Proprietary ratio of Honda Cars is showing a decreasing trend from the

financial year 2008 to 2012. This reveals that the company is more depending

on external funds and thus the creditors of the company can be suspicious

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


190

about the repayment of their debts which indicates greater risk to the creditors.

But in the year 2008, Honda Cars has the larger Proprietary ratio of 0.68 times

which implies that the dependency on external sources was less during the year

and financial position of the company was sound. The greater the percentage

financing provided by shareholders equity, the larger is the cushion of

protection for the firm‟s creditors. Whereas, in 2011, Proprietary ratio of the

company falls to 0.24 times indicating more dependence on external sources

and greater risk to the creditors about the repayment of their debts.

Proprietary ratio of Honda Cars when compared to the ratio of Maruti Suzuki

and Tata Motors shows that during the year 2008 to 2012, the Maruti Suzuki

has higher proprietary ratio than the ratio of Honda Cars and Tata Motors. This

implies that Maruti Suzuki has less dependence on external funds, creditors

were not suspicious about the repayment of their debts and the financial

position of the company was also sound. The proprietary ratio of Tata Motors

was even lower than the ratio of Honda Cars except the year 2011, which

implies that the Tata Motors is depending more on external funds and which

increases the risk of the creditors about the repayment of their debts. But in

2011, proprietary ratio of Honda Cars was less than the ratio of Tata Motors at

0.24 times. A ratio below 50% may be quite alarming for the creditors of the

company.

Proprietary ratio of Honda Cars has been lower than Maruti Suzuki and higher

than Tata Motors. But in the year 2011, proprietary ratio of Honda Cars was

even lower than Tata Motors.

e) Fixed Assets to Proprietors’ Funds Ratio

This ratio measures the proportion in which owners‟ funds are invested in fixed

assets of the company. The higher proportion of proprietors‟ funds to fixed

assets is a measure of long-term financial soundness of business. However, the

lower the ratio, the better it is for the long term solvency of business because


191

proprietors funds will be available for working capital needs also. For industrial

units, the standard is usually 65%. If the ratio is more than one, it means that a

part of fixed assets has been financed from debt capital. The position of fixed

assets to proprietors‟ funds ratio from the year 2008 to 2012 is presented in the

following table:

Table 6.17: Fixed Assets to Proprietors’ Funds Ratio of the Companies


2008 2009 2010 2011 2012

Honda Cars

India Ltd. 0.77 1.65 1.50 2.16 1.32

Maruti

Suzuki India

Ltd.

0.47 0.52 0.45 0.46 0.53

Tata Motors

Ltd. 1.33 1.19 1.09 0.86 0.97

Diagram 6.14: Graph showing Fixed Assets to Proprietors’ Funds Ratio of

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

0

0.5

1

1.5

2

2.5

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


192

Fixed assets to proprietors‟ funds ratio of Honda Cars have been showing an

increasing trend from the financial year 2008 to 2011 at 0.77times, 1.65 times,

1.50 times and 2.16 times respectively. This implies that the part of the fixed

assets of the company has been financed from debt capital. Though the

company doesn‟t satisfy the standard ratio norm of the fixed assets to

proprietors‟ funds ratio but still has the lowest ratio in 2008 at 0.77 times

measuring comparatively better long term financial soundness of the company

because Proprietors‟ funds will be available for working capital needs also. But

in 2011, the ratio of the company raises highly to 2.16 times indicating long

term solvency of the company to be unsound as if the ratio is more than 1, it

suggest that a part of fixed assets has been financed from the debt capital but

the ratio falls to 1.32 times in 2012.

Fixed assets to proprietors‟ funds ratio of Honda Cars when compared to the

ratio of Maruti Suzuki and Tata Motors indicates that the Maruti Suzuki has

lowest ratio during the year 2008 to 2012 at 0.47 times, 0.52 times, 0.45 times,

0.46 times and 0.53 times respectively which measures long term financial

soundness of the company as the fixed asset of the company have not been

financed from debt capital. Fixed assets to proprietors‟ funds ratio of Tata

Motors have been showing a decreasing trend from 2008 to 2011. The ratio of

Tata Motors was more than the ratio of Maruti Suzuki but was less than the

ratio of Honda Cars which reveals that the fixed assets of Honda Cars have

been much financed by the debt capital but in 2008, fixed assets to proprietors‟

funds ratio of Tata Motors was more than the ratio of Honda Cars.

Honda Cars has higher fixed assets to proprietor‟s funds ratio than Maruti

Suzuki and Tata Motors. But only in 2008, ratio of Honda Cars was lower than

Tata Motors.

f) Current Assets to Proprietors’ Funds Ratio

This ratio establishes relationship between current assets and proprietor‟s

funds. This ratio indicates the extent to which shareholders‟ funds have gone


193

into the financing of the current assets. The main objective of this ratio is to

find out in what proportion proprietors fund has been invested in current assets.

The lower this ratio, the better it is for the company because it implies that the

current assets are mainly financed by the proprietors‟ funds and less is the

dependency on external sources. The position of current assets to proprietors‟

funds ratio from the year 2008 to 2012 is presented in the following table:

Table 6.18: Current Assets to Proprietors’ Funds Ratio of the Companies


2008 2009 2010 2011 2012

Honda Cars

India Ltd. 0.68 0.76 0.98 1.83 0.95

Maruti

Suzuki India

Ltd.

0.36 0.58 0.31 0.49 0.52

Tata Motors

Ltd. 1.32 0.79 0.77 0.71 0.74

Diagram 6.15: Graph showing Current Assets to Proprietors’ Funds Ratio

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

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


194

Honda Cars has the lowest current assets to proprietors‟ funds ratio in 2008 at

0.68 times which implies that the current assets are mainly financed by the

proprietors‟ funds and less is the dependency on external sources which in turn

indicates a sound financial position of the company. During the financial year

2008 to 2011, the ratio of the company have been showing increasing trend

which implies that comparatively lesser proportion of current assets being

financed by the proprietors funds. The ratio was very high in 2011 at 1.83 times

which reveals the increased dependency on external funds for the financing of

the current assets of the company and thus during the year 2011, financial

position of the company was weak but in the year 2012, the ratio falls to 0.95

times which implies the improvement in the financial position of the company.

Current assets to proprietors‟ funds ratio of Honda Cars when compared to

Maruti Suzuki and Tata Motors shows that Maruti Suzuki has low ratio which

indicates that the company has less dependency on external sources for the

financing of its current assets and larger is the proportion of proprietors funds

for the current assets of the company and thus shows a sound financial position

of the company. During 2008 and 2009, Tata Motors has very high ratio of

1.32 times and 0.79 times respectively. But during the financial year 2010 to

2012, current assets to proprietors‟ funds ratio of Honda Cars was even more

than the ratio of Tata Motors at 0.98 times, 1.83 times and 0.95 times

respectively which shows the increased dependency on external sources for the

financing of the current assets of the company.

Honda Cars has higher current assets to proprietor‟s funds ratio than Maruti

Suzuki and Tata Motors. But during the year 2008 and 2009, ratio of Honda

Cars was lower than Tata Motors.


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g) Interest Coverage Ratio

It is also known as „Debt Service Ratio‟ or „Fixed Charges Cover Ratio‟. It

establishes the relationship between the amount of net profit before deduction

of interest and tax, and the fixed interest charges. This ratio indicates how

many times the interest charges are covered by the profits available to pay

interest charges. This ratio measures the ability of a firm to protect the interests

of long term creditors. The higher the ratio, better it is both for the firm and

lenders. For the firm, the probability of default in payment of interest is

reduced and from the point of view of lenders, the larger is the coverage, the

greater is the security for them with respect to their periodical interest

payments. An interest coverage ratio of 6 to 7 times is considered appropriate.

The position of interest coverage ratio from the year 2008 to 2012 is presented


Table 6.19: Interest Coverage Ratio of the Companies from the Financial

Year 2007-08 to 2011-12 (Times)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. N.A. 16.81 1.33 2.67 18.79

Maruti

Suzuki India

Ltd.

43.0 33.50 108.23 125.35 39.88

Tata Motors

Ltd. 10.12 2.50 3.56 2.58 2.10


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Diagram 6.16: Graph showing Interest Coverage Ratio of the Companies


Honda Cars has smaller interest coverage ratio of 1.33 times and 2.67 times

during the year 2010 and 2011 respectively which implies that the operating

profit of the company is 1.33 times and 2.67 times of its interest liability and

thus the lenders of the company feels less secured with respect to their

periodical interest payments. The company has larger interest coverage ratio

during 2009 and 2012 indicating that the creditors has greater security with

respect to their periodical interest payments. The company has sufficient profits

to pay its fixed interest charges regularly which have a favorable impact on the

credit worthiness of the company.

Interest coverage ratio of Honda Cars when compared to Maruti Suzuki and

Tata Motors shows that Maruti Suzuki has larger interest coverage ratio than

the ratio of Honda Cars and Tata Motors which indicates that Maruti Suzuki

has larger ability to protect the interest of long term creditors of the company

and there is larger margin of safety for the lenders of Maruti Suzuki about their

periodical interest payment by the company. The company has sufficient

profits to pay interest on long term loans regularly and hence the long term

0

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40

60

80

100

120

140

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


197

solvency position of the company is quite satisfactory. Comparatively, Honda

Cars has larger interest coverage ratio than Tata Motors. This implies that the

lenders of Honda Cars are more secured with respect to their periodical interest

payment by the company and the lenders of Tata Motors feel unsecured about

their payment of periodical interest payment by Tata Motors. But only in the

year 2008, interest coverage ratio of Tata Motors was appropriate to pay fixed

interest charges regularly to their lenders.

Interest coverage ratio of Maruti Suzuki has been higher than Honda Cars and

Tata Motors. Honda Cars has larger interest coverage ratio than Tata Motors

but during 2010, ratio of Honda Cars was even lower than Tata Motors.

6.4. PROFITABILITY ANALYSIS

Profitability refers to the ability of a business to each profit. It shows the

efficiency of the business. These ratios measure the profit earning capacity or

the operational efficiency of the company. Profitability analysis is done

through profitability ratios. Profitability has direct link with sales. Thus, these

ratios calculated on the basis of sales. Generally profitability ratio is calculated

in percentage (%). The operating efficiency of a firm and its ability to provide

sufficient return to its shareholders or owners depends on the profits earned by

the company. If adequate profits are not earned on sales, difficulty will be

experienced in meeting the operating expenses and no profit will be left for the

owners of the company.

I. Profitability Ratios Related to Sales

a) Gross Profit Ratio

Gross Profit Ratio reveals the profit earning capacity of the business with

reference to its sales. It reflects how well cost of goods sold, a major expense

item, is being controlled. It shows the profit made on sales before taking

accounts of overheads. Increase in the gross profit ratio will mean reduction in

cost or increase in selling price and decrease in gross profit ratio will mean


198

increase in cost or sales at lesser price. The gross profit ratio also works as a

guide to the management in determining its selling and distribution expenses.

The effective control system can be adopted on the basis of gross profit ratio.

Higher gross profit ratio is always in the interest of the business. The position

of gross profit ratio from the year 2008 to 2012 is presented in the following

table:

Table 6.20: Gross Profit Ratio of the Companies from the Financial Year

2007-08 to 2011-12 (Percentage)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. 25.10 13.52 18.58 21.0 5.95

Maruti

Suzuki India

Ltd.

24.30 21.0 23.33 20.87 19.0

Tata Motors

Ltd. 24.89 22.16 27.25 23.32 22.28

Diagram 6.17: Graph showing Gross Profit Ratio of the Companies from


0

5

10

15

20

25

30

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


199

Honda Cars has high Gross profit ratio of 25.10% in 2008 which falls in 2009

at 13.52%, the ratio rises to 18.58 % and 21% in 2010 and 2011 respectively

but it highly falls in 2012 at 5.95%. The higher gross profit ratio of the

company in 2008 indicates the improved efficiency of the company in

manufacturing or trading activities which may result from increase in selling

price or decrease in cost price or reduction in raw material consumption per

unit. But the lowest Gross profit ratio of 5.95% in 2012 implies the decline in

the efficiency of the company, decrease in selling price per unit or increase in

direct expenses of the company.

Gross profit ratio of Honda Cars when compared to Maruti Suzuki and Tata

Motors indicates that Tata Motors has higher gross profit ratio than the ratio of

Honda Cars and Maruti Suzuki. This indicates the reduction in cost price or

raw material consumption or sale at a higher price in Tata Motors. It has

adequate gross profit ratio to cover fixed expenses, dividends and creation of

reserves in the company. During the financial year 2009, 2010 and 2012, gross

profit ratio of Honda Cars was even less than the ratio of Maruti Suzuki.

Deterioration in the gross profit of Honda Cars indicates decrease in selling

price or increase in cost price or increase in raw material or increase in the

direct expenses of the company. Thus, it implies that Honda Cars is not

controlling its direct expenses efficiently. Gross profit ratio of Honda Cars,

Maruti Suzuki and Tata Motors has declined from the financial year 2008 to

2012, which indicates the increase in the selling price, increase in the raw

material consumption, increase in cost of goods sold and also the increase in

the direct expenses of these companies.

Gross profit ratio of Honda Cars has been lower than Maruti Suzuki and Tata

Motors. But only in financial year 2008, ratio of Honda Cars was slightly more

than Maruti Suzuki and Tata Motors; and in 2011, Honda Cars and Maruti

Suzuki has the same ratio.


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b) Net Profit Ratio

This ratio establishes relationship between net profit and net sales. This ratio

measures the efficiency of the firm in generating additional revenue over and

above the total cost of operations. It indicates the proportion of the revenue

available to the owners of the firm. This ratio provides a clear picture of how

efficiently the firm maintains control over its total expense. The higher the

ratio, the better it is as increase in the net profit shows better performance of

the management in the business and decrease in the ratio indicates managerial

inefficiency and excessive selling and distribution expenses. This ratio should

be analysed as a time series. Net profit ratio of the firm when compared with

the average of the industry or net profit of competitors indicates the

profitability position of the firm. The position of net profit ratio from the year


Table 6.21: Net Profit Ratio of the Companies from the Financial Year

2007-08 to 2011-12 (Percentage)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. 5.93 (5.64) (0.86) (5.40) (18.98)

Maruti Suzuki

India Ltd. 9.69 5.98 8.62 6.38 4.71

Tata Motors

Ltd. 7.22 4.0 6.38 3.88 2.31


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Diagram 6.18: Graph showing Net Profit Ratio of the Companies from the

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

Honda Cars has Net profit ratio of 5.93% in 2008 indicating that the company

has adequate profitability during the year. But during the financial year 2009 to

2012, Honda Cars have been incurring huge net losses and it even rose to

(18.98%) in 2012. This implies managerial inefficiency and excessive selling

and distribution expenses in the company. This also reveals that the company

does not efficiently maintain control over its total expenses. So, corrective

actions should be taken by the company to remove the causes responsible for

the heavy net loss ratio. Thus, during the financial year 2009 to 2012, the

operational efficiency of the company was weak.

Comparison of Net profit ratio of Honda Cars with Maruti Suzuki and Tata

Motors shows that Honda Cars only has Net profit ratio in negative i.e. net loss.

During the year 2008 to 2012, Maruti Suzuki has higher net profit ratio than the

ratio of Honda Cars and Tata Motors which shows the sound operational

efficiency and profitability position of Maruti Suzuki. This also implies that

Maruti Suzuki have been efficiently controlled its operating and non-operating

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10

15

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012Honda Cars

Maruti Suzuki

Tata Motors


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expenses. Maruti Suzuki has high Net profit ratio of 9.69% in the year 2008

which declined to 4.71% in 2012; this reflects increase in the operating and

non-operating expenses of the company in 2012. Net profit ratio of Tata

Motors was more than the ratio of Honda Cars but less than the ratio of Maruti

Suzuki. Thus during 2008 to 2012, Honda Cars has the lowest net profit ratio.

Net profit ratio of Tata Motors is also declined from the year 2008 at 7.22% to

2.31% in 2012, which implies that the operating and non-operating expenses of

Tata Motors have also been increasing.

Net profit ratio of Honda Cars has been lower than Maruti Suzuki and Tata

Motors as Honda Cars has been incurring net losses during the financial year

2009 to 2012.

c) Operating Ratio

This ratio is also known as „Operating Expenses Ratio‟. This ratio establishes

the relationship between the aggregate of cost of goods sold and other

operating expenses on the one hand and the sales revenue on the other hand.

Other operating expenses comprise of administrative overheads, selling and

distribution overheads. Financial charges such as interest, provision for

taxation, dividends etc. are excluded from operating expenses. This ratio is the

measure of efficiency and profitability of the business. The lesser is the ratio,

the better it is because less operating ratio means higher net profits. The

comparison of Operating Ratio with that of the past or average of the industry

will indicate whether the operating cost component is reasonable or not in

relation to sales. The position of operating ratio from the year 2008 to 2012 is

presented in the following table:


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Table 6.22: Operating Ratio of the Companies from the Financial Year

2007-08 to 2011-12 (Percentage)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. 87.74 103.0 95.72 95.33 120.0

Maruti

Suzuki India

Ltd.

87.67 92.55 88.65 92.0 94.84

Tata Motors

Ltd. 93.29 98.48 90.5 92.0 94.34

Diagram 6.19: Graph showing Operating Ratio of the Companies from the


Honda Cars has lower operating ratio of 87.74% in financial year 2008

indicating efficiency and profitability of the company during the year. But the

operating ratio of the company have been showing increasing trend from the

financial year 2008 to 2012. Operating ratio of the company even rose to 120%

in the year 2012. This is unfavorable for the company as it would have a

0

20

40

60

80

100

120

140

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


204

smaller margin of operating profit for the payment of dividends and the

creation of reserves. This shows that the company has been unable to control its

operating cost which adversely affects the operating profit of the company.

This shows inefficiency of the company in the management of the business.

Operating ratio of Honda Cars when compared to the ratio of Maruti Suzuki

and Tata Motors shows that Maruti Suzuki has the lowest operating ratio

during the year 2008 to 2012, this indicates the higher efficiency and

profitability of the Maruti Suzuki. The lesser is the Operating ratio, the better it

is for the company because less Operating ratio means higher net profit. But the

Operating ratio of Maruti Suzuki has been increasing from the financial year

2008 to 2012 at 94.84% and thus the company should control its operating cost

for a better operational efficiency. During the year 2009 to 2012, operating

ratio of Honda Cars was even more than the ratio of Tata Motors; this implies

that the operating cost of Honda Cars has been very high and it adversely

affects the efficiency and profitability of the company.

Operating ratio of Honda Cars has been higher than Maruti Suzuki and Tata

Motors. But in 2008, ratio of Honda Cars was less than the ratio of Tata

Motors.

d) Operating Profit Ratio

This ratio measures the relationship between the operating profit and net sales.

The operating profit is also termed as the earnings before interest and taxes.

The operating profit refers to the profit generated by the firm from operating

activities. This ratio indicates the portion remaining out of every rupee worth of

sales after all operating costs and expenses have been made. The higher the

operating profit ratio, the better it is for the company. This ratio determines the

efficiency of the firm in the management of the business. There are no standard

norms for the evaluation of this ratio. However, the comparison of the

Operating Profit Ratio with that of the past and/or industry averages provides

an indication about the operating management and conditions of the business.


205

The position of operating profit ratio from the year 2008 to 2012 is presented in


Table 6.23: Operating Profit Ratio of the Companies from the Financial

Year 2007-08 to 2011-12 (Percentage)

2008 2009 2010 2011 2012

Honda Cars

India Ltd. 12.25 (3.48) 4.27 4.66 (20.12)

Maruti Suzuki

India Ltd. 12.32 7.44 11.34 7.95 5.15

Tata Motors

Ltd. 6.70 1.51 9.48 7.93 5.65

Diagram 6.20: Graph showing Operating Profit Ratio of the Companies

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

Honda Cars has a high Operating profit ratio of 12.25% in financial year 2008

indicating efficiency and profitability of the company. This implies that during

2008, Honda Cars has efficiently controlled its operating costs and thus has

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5

10

15

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012Honda Cars

Maruti Suzuki

Tata Motors


206

larger profits available after all operating costs have been met, to be distributed

to shareholders and for the creation of reserves. However, during the financial

year 2008 to 2012, Operating profit ratio of Honda Cars is showing a

decreasing trend, the company even incurs net operating loss in 2009 and 2012.

This indicates that the company has been unable to control its cost of goods

sold, operating expenses efficiently and is thus reducing the profitability of the

company.

Operating profit ratio of Honda Cars when compared to Maruti Suzuki and

Tata Motors indicates that Maruti Suzuki has higher Operating profit ratio than

the ratio of Honda Cars and Tata Motors. This indicates that comparatively

Maruti Suzuki have been efficiently controlling its cost of goods sold and

operating expenses and is thus increasing its profitability. But the ratio of

Maruti Suzuki has been showing a declining trend from the financial year 2008

to 2012. Operating profit ratio of Tata Motors was less than the ratio of Maruti

Suzuki but during the year 2009 to 2012, ratio of Tata Motors was more than

the ratio of Honda Cars and Honda Cars has lowest Operating profit ratio. This

implies that Honda Cars have not been controlling its operating cost efficiently

which is adversely affecting its profitability. Thus, Honda Cars should

efficiently control its operating costs for increasing the net profits available

after all the operating costs have been met.

Operating profit ratio of Honda Cars has been lower than Maruti Suzuki and

Tata Motors. But in 2008, Honda Cars and Maruti Suzuki both has the same

ratio and the ratio of Honda Cars was more than Tata Motors.

e) Expenses Ratio

These Ratios indicate the relationship between expenses and sales. Although

the operating ratio reveals the ratio of total operating expenses in relation to

sales but some of the expenses included in operating ratio may be increasing

while some may be decreasing. Hence, specific expenses ratio are computed by

dividing each type of expense with the net sales to analyse the causes of


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variation in each type of expenses. Various expenses ratios, when compared

with the same ratios of the previous year, indicates that whether the expenses in

relation to sales are increasing, decreasing or remain stationary. The lower the

expenses ratio, the greater will be the profitability and higher the ratio, lower

will be the profitability.

i. Direct material Cost Ratio

This ratio indicates the relationship between direct material cost and sales. This

ratio is calculated to ascertain the portion of sales revenue consumed by direct

material cost. The lower the direct material cost ratio, the greater will be the

profitability and higher the ratio, lower will be the profitability. Direct raw

material ratio of firm, when compared with the same ratio of the previous year,

indicates that whether the direct material cost ratio in relation to sales are

increasing, decreasing or remain stationary or it can also be compared with the

average direct raw material ratio of the industry. The position of direct material

cost ratio from the year 2008 to 2012 is presented in the following table:

Table 6.24: Direct Material Cost Ratio of the Companies from the


2008 2009 2010 2011 2012

Honda Cars

India Ltd. 81.82 78.27 87.0 82.65 84.26

Maruti

Suzuki India

Ltd.

77.32 77.53 77.32 79.27 81.36

Tata Motors

Ltd. 71.92 73.67 71.0 73.84 75.0

Direct raw material cost ratio of Honda Cars in the year 2008 was 81.82% but

it increased to 84.26% in 2012 and the ratio even increased to 87% in 2010.

This indicates that that a high portion of sales revenue is consumed by direct


208

material cost and thus decreases the efficiency and profitability of the company

as an increase in direct material cost thereby increases the operating cost of the

company. But Honda Cars comparatively has lower ratio of 78.27% in the year

2009 which implies that during the year management of the company has

efficiently controlled its raw material cost which decrease the operating cost of

the company and thus increases the profitability of the company.

Direct material cost ratio of Honda Cars when compared to Maruti Suzuki and

Tata Motors suggests that Honda Cars has higher ratio than the ratio of Maruti

Suzuki and Tata Motors. This implies that comparatively Honda Cars have not

been efficiently controlling its raw material cost which increases its operating

cost and reduces the profitability of the company. Maruti Suzuki has a stable

ratio of 77% during the financial year 2008 to 2010 but the ratio increases to

81.36% 2012. Direct material cost ratio of Tata Motors was much lower than

the ratio of Honda Cars and Maruti Suzuki. This reveals that the management

of Tata Motors is efficiently controlling its operating cost this in turns increases

its profitability.

Direct material cost ratio of Honda Cars has been higher than Maruti Suzuki

and Tata Motors.

ii. Administrative Expenses Ratio

This ratio indicates the relationship between administrative expenses and sales.

This ratio discloses the portion of sales revenue consumed by office and

administrative expenses ratio. The lower the administrative expenses ratio, the

greater will be the profitability and higher the ratio, lower will be the

profitability. Administrative expenses ratio of firm, when compared with the

same ratio of the previous year, indicates that whether the administrative

expenses in relation to sales are increasing, decreasing or remain stationary or

it can also be compared with the average administrative expenses ratio of the


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industry. The position of administrative expenses ratio from the year 2008 to

2012 is presented in the following table:

Table 6.25: Administrative Expenses Ratio of the Companies from the


2008 2009 2010 2011 2012

Honda Cars

India Ltd. 10.73 14.19 11.73 13.23 18.90

Maruti

Suzuki India

Ltd.

8.84 10.0 8.83 10.24 10.98

Tata Motors

Ltd. 15.92 17.63 14.81 13.0 14.17

From the financial year 2008, administrative expenses ratio of Honda Cars

increases to 14.91% in 2009, the ratio even increased to 18.90% in 2012. This

implies that during 2009 and 2012, management of the company has not

efficiently controlled its administrative expenses, and thus it increases the

operating expenses of the company and reduces its profitability. Administrative

expenses ratio of the company was lower in 2008 and 2010 at 10.73% and

11.73% respectively, indicating that during this period, management of the

company has efficiently controlled its administrative expenses and increases its

profitability.

Administrative expenses ratio of Honda Cars when compared to the ratio of

Maruti Suzuki and Tata Motors shows that Maruti Suzuki has the lowest

administrative expenses ratio which indicates high efficiency of the

management of Maruti Suzuki in controlling its administrative expenses and it

in turns increases the profitability of Maruti Suzuki. During the year 2008 to

2010, Tata Motors comparatively has higher administrative expenses ratio

than the ratio of Maruti Suzuki and Tata Motors. This implies increase in the

administrative expenses of Tata Motors and it has also not been effectively

controlled by the management and thus decreases the profitability of Tata


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Motors. But during the year 2012, administrative expense ratio of Honda Cars

was even higher than the ratio of Tata Motors, which implies that during 2012,

Honda Cars has not effectively controlled its administrative expenses and thus

lowers the profitability of the company.

Administrative expenses ratio of Honda Cars has been higher than Maruti

Suzuki and Tata Motors. But during the year 2008 to 2010, ratio of Honda Cars

has been lower than Tata Motors.

iii. Selling and Distribution Expenses Ratio

This ratio indicates the relationship between selling and distribution expenses

and sales. This ratio discloses the portion of sales revenue consumed by selling

and distribution expenses ratio. The lower the selling and distribution expenses

ratio, the greater will be the profitability and higher the ratio, lower will be the

profitability. Selling and distribution expenses ratio of firm, when compared

with the same ratio of the previous year, indicates that whether the selling and

distribution expenses in relation to sales are increasing, decreasing or remain

stationary or the selling and distribution expenses ratio of a firm can also be

compared with the average selling and distribution expenses ratio of the

industry. The position of selling and distribution expenses ratio from the year


Table 6.26: Selling and Distribution Expenses Ratio of the Companies


2008 2009 2010 2011 2012

Honda Cars

India Ltd. 2.12 2.81 2.58 3.19 7.16

Maruti Suzuki

India Ltd. 3.13 3.62 3.16 2.67 2.86

Tata Motors

Ltd. 2.26 2.98 2.95 2.37 2.45


211

Honda Cars has a lower selling and distribution expenses ratio during the

financial year 2008 to 2010, which states that the management of the company

have been efficiently controlling its selling and distribution expenses and is

thus increasing the profitability of the company. Thus, lower the selling and

distribution expenses ratio, the better it is for the company. But in 2012, selling

and distribution expenses ratio of the company significantly increases to

7.16%. This indicates that during the year selling and distribution expenses of

the company increases and has not been efficiently controlled by the

management of the company which adversely affects its profitability.

Selling and distribution expenses ratio of Honda Cars when compared to

Maruti Suzuki and TML shows that the ratio of Tata Motors is lower than the

ratio of Maruti Suzuki and Honda Cars, and the ratio of Tata Motors is much

more stable. This shows that Tata Motors is efficiently controlling its selling

and distribution expenses. Maruti Suzuki‟s selling and distribution expenses

ratio is showing a declining trend from the financial year 2008 to 2012, which

reveals that the company is also controlling its selling and distribution expenses

efficiently, and it has a favourable effect on the profitability of the company.

During the year 2008 to 2011, selling and distribution expenses ratio of Honda

Cars was also effectively controlled by its management but in 2012, the ratio

increases highly to 7.16% which adversely affects its profitability.

Honda Cars has lower selling and distribution ratio than Maruti Suzuki and

Tata Motors. But in 2011and 2012, ratio of Honda Cars was even higher than

Maruti Suzuki and Tata Motors.

iv. Cost of Goods Sold Ratio

This ratio indicates the relationship between cost of goods sold and sales. This

ratio is calculated to know the portion of sales revenues consumed by cost of

goods sold. The lower the cost of goods sold ratio, the greater will be the

profitability and higher the ratio, lower will be the profitability. Cost of goods

sold ratio of firm, when compared with the same ratio of the previous year,


212

indicates that whether the cost of goods sold in relation to sales are increasing,

decreasing or remain stationary or it can also be compared with the average

cost of goods sold ratio of the industry. The position of cost of goods sold ratio

from the year 2008 to 2012 is presented in the following table:

Table 6.27: Cost of Goods Sold Ratio of the Companies from the Financial


2008 2009 2010 2011 2012

Honda Cars

India Ltd. 74.89 86.40 81.41 78.90 94.0

Maruti

Suzuki India

Ltd.

75.69 78.92 76.66 79.12 80.98

Tata Motors

Ltd. 75.10 77.87 72.74 76.67 77.71

Cost of goods sold ratio of Honda Cars is showing an increasing trend from the

financial year 2008 to 2012. This states that the cost of goods sold of the

company is increasing and has not been effectively controlled by the

management and thus adversely affects the profitability of the company. Honda

Cars has a low cost of goods sold ratio of 74.89% during 2008 which implies

that during the year, the company has controlled its cost of goods sold and thus

has favourable effect on the profitability of the company. But during 2009,

2010 and 2012, the company has a very high cost of goods sold ratio of 86.4%,

81.41% and 94% respectively. This reveals that during theses financial years,

larger portion of cost of goods sold is consumed by the sales revenue of the

company and thus has adverse effect on the efficiency and profitability of the

company.

Cost of goods sold ratio of Honda Cars when compared to the ratio of Maruti

Suzuki and Tata Motors shows that Honda Cars has higher ratio than the ratio


213

of Maruti Suzuki and Tata Motors. This indicates that the management of

Honda Cars has not been controlling its cost of goods sold which has an

adverse affect on the efficiency and profitability of the company. Tata Motors

has lower cost of goods sold ratio than the ratio of Maruti Suzuki and Honda

Cars. This implies that cost of goods sold is efficiently controlled by the

management of Tata Motors, which in turns has a favourable affect on its

profitability. Ratio of Maruti Suzuki is showing an increasing trend from the

financial year 2008 to 2012, which has an adverse affect on the efficiency and

profitability of the company.

Honda Cars has higher cost of goods sold ratio than Maruti Suzuki and Tata

Motors. But in 2008, ratio of Honda Cars was lower than Maruti Suzuki and

Tata Motors.

II. Profitability Ratios Related to Investment

These ratios reflect the true earning capacity of the resources employed in the

business. Sometimes the profitability ratios based on sales are high whereas

profitability ratios based on investment are low. Since the capital is employed

to earn profit, these ratios are the real measure of the success of the business

and managerial efficiency. A financial analyst is interested to measure the

profitability of the firm with reference to assets employed by the firm. The

larger the assets employed, the greater should be the profits and vice versa.

a) Return on Assets (ROA)

One of the most widely used ratios is the return on assets. It measures the

profitability of the firm in relation to assets employed by the firm. It is

computed to know how much is the profit generated by the firm per rupees of

assets used. It measures the overall efficiency of the management in generating

profits from the use of assets. The higher the return on assets ratio the better it

is for the company. The increase in the size of the firm should be accompanied

with the increase in the ROA, only then the employment of more assets is


214

justified. The ROA of the firm should be compared with the industry average to

judge the operating efficiency of the firm with respect to the assets employed.

The position of return on assets ratio from the year 2008 to 2012 is presented in


Table 6.28: Return on Assets Ratio of the Companies from the Financial


2008 2009 2010 2011 2012

Honda Cars

India Ltd. 14.03 (8.45) (1.52) (7.47) (20.35)

Maruti Suzuki

India Ltd. 14.0 8.96 15.26 12.45 7.34

Tata Motors

Ltd. 7.88 2.68 4.45 3.34 2.29

Note: Here we consider that total Assets includes net fixed assets, investments

and current assets loans and advances.

Diagram 6.21: Graph showing Return on Assets Ratio of the Companies


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0

5

10

15

20

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


215

Honda Cars has a high return on assets ratio of 14.03% in 2008 which shows

that the management has efficiently used its assets to increase the profitability

of the company. But during the year 2009 to 2012, Honda Cars has been

incurring negative returns on assets and negative returns on assets even

increases to (20.35%) in 2012. This indicates the inefficiency of the

management in generating profits from the use of the assets of the company

and has an adverse affect on the profitability of the company. Thus the

company must use its assets efficiently to increase its profitability.

Return on assets ratio of Honda Cars when compared to Maruti Suzuki and

Tata Motors shows that Maruti Suzuki has higher ratio than the ratio of Honda

Cars and Tata Motors. This implies that comparatively Maruti Suzuki has been

efficiently earning higher returns on the use of its assets in the business.

Although the ratio of Maruti Suzuki have been showing a decreasing trend

from the year 2008 to 2012. Tata Motors has more return on assets ratio than

the ratio of Honda Cars, which implies that comparatively Tata Motors has

been higher returns from the use of its assets in the business although the ratio

of Tata Motors is also showing a decreasing trend from 2008 to 2012. During

the year 2009 to 2012, Honda Cars has been incurring negative returns on the

use of its assets in the business. This implies that the company is also not

making use of its assets efficiently and thus reducing the profitability of the

company.

Return on assets ratio of Honda Cars has been lower than Maruti Suzuki and

Tata Motors as during the financial year 2009 to 2012 as Honda Cars has been

incurring negative returns from the use of its assets in the business. But only in

2008, ratio of Honda Cars and Maruti Suzuki was same, and Honda Cars has

higher ratio than Tata Motors.

b) Return on Investment

It is also known as „Return on Capital Employed‟ or „Rate of Return‟. It is

calculated by comparing the profit earned and the capital employed to earn it.


216

Since profit is the overall objective of a business enterprise, this ratio is a

barometer of the overall performance of the enterprise. It measures how

efficiently the capital employed in the business is being used. The ratio can be

used to judge the borrowing policy of the enterprise. This ratio helps in taking

decisions regarding capital investment in new projects. Lenders like bankers

and financial institutions will be able to determine whether the enterprise is

variable for giving credit or extending loans or not. With the help of this ratio,

shareholders can also find out whether they will receive regular and higher

dividend or not. The higher the ratio, the better it is, for the company. By

comparing the previous year ratio with that of the current year, it is ascertained

whether the return on capital employed ratio is increasing, decreasing or is

stationary. A comparison of this ratio with the ratio of similar firms will throw

light on the relative profitability and strength of the firm. The position of return

on investment ratio from the year 2008 to 2012 is presented in the following

table:

Table 6.29: Return on Investment Ratio of the Companies from the


2008 2009 2010 2011 2012

Honda Cars

India Ltd. 32.21 (15.8) (1.76) (3.09) (30.15)

Maruti Suzuki

India Ltd. 59.52 24.32 64.55 34.27 20.98

Tata Motors

Ltd. 28.08 12.54 37.0 22.0 18.48

Note: Here we consider net operating profit before interest and tax. Capital employed

includes net fixed assets and working capital.


217

Diagram 6.22: Graph showing Return on Investment Ratio of the

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

Honda Cars has a higher return on capital employed ratio of 32.21% in 2008

which indicates that during the year capital employed of the business has been

efficiently utilized by the management which increases the overall profitability

of the company. But during the year 2009 to 2012, the company has been

incurring negative returns on capital employed in the business and it even

increases to (30.15%) in 2012. This implies that during this period, funds

provided by the shareholders and creditors have not been used efficiently in the

company. This will have an adverse affect on the company to provide adequate

return to its shareholders and the overall profitability of the company declines.

Lenders like bankers and financial institutions will not be willing to extend

credit to the company. It will also have an adverse affect on the decisions of the

company regarding capital investment in new projects.

Comparison of return on capital employed ratio of Honda Cars to Maruti

Suzuki and Tata Motors shows that Maruti Suzuki comparatively has much

higher return on capital employed ratio during the financial year 2008 to 2012.

The company has a very higher ratio in 2008 and 2010 at 59.52% and 64.55%

-40

-20

0

20

40

60

80

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Honda Cars

Maruti Suzuki

Tata Motors


218

respectively, which implies that Maruti Suzuki is efficiently and profitably

employing the capital in the company and this increases the overall profitability

of the company. The company is able to give regular and high dividend to its

shareholders. A higher percentage of return on capital employed will satisfy the

owners that their funds are profitably utilized. But the ratio of Maruti Suzuki

decreases to 20.98% in 2012. Only during the year 2008, return on capital

employed ratio of Honda Cars was higher than the ratio of Tata Motors. But

during 2009 to 2012, return on capital employed ratio of Honda Cars was even

lower than the ratio of Tata Motors, as Honda Cars has been incurring negative

returns on capital employed. This implies that Honda Cars has not utilized the

capital employed in the business efficiently and it adversely affects its overall

profitability.

Return on investment ratio of Honda Cars has been lower than Maruti Suzuki

and Tata Motors as during 2009 to 2012 as Honda Cars has been incurring

negative returns on the capital employed in the business. But in 2008, return on

investment ratio of Honda Cars was more than Tata Motors.

c) Return on Shareholders’ Funds

This ratio is also called „Return on Net worth Ratio‟ or „Return on Proprietors‟

Funds‟. Return on shareholders‟ funds measures the profitability of the funds

invested by the shareholders. This ratio determines the profitability of the firm

from the perspective of equity shareholders. The higher the ratio, the better it

is, for the company. This ratio reveals how profitably the proprietors‟ funds

have been utilized by the company. By comparing the previous year ratio with

that of the current year, it is ascertained whether the return on shareholders‟

funds ratio is increasing, decreasing or is stationary. A comparison of this ratio

with the ratio of similar firms will throw light on the relative profitability and

strength of the firm. The position of return on shareholders‟ funds ratio from

the year 2008 to 2012 is presented in the following table:


219

Table 6.30: Return on Shareholders’ Funds Ratio of the Companies from


2008 2009 2010 2011 2012

Honda Cars

India Ltd. 20.52 (20.61) (3.84) (30.17) (46.46)

Maruti Suzuki

India Ltd. 20.56 13.0 21.0 16.50 10.76

Tata Motors

Ltd. 25.88 8.18 14.96 9.05 6.32

Note: Here we consider net profit after interest and tax.

Diagram 6.23: Graph showing Return on Shareholders’ Funds Ratio of

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

Honda Cars has a higher return on shareholders‟ funds in 2008 at 20.52%

which reveals that the shareholders‟ funds have been profitably utilized by the

company and management has been efficiently using the resources of the

company which increases the profitability of the company. But during the year

2009 to 2012, the company has been incurring negative returns on

shareholders‟ funds in the business and it even increases to (46.46%) in 2012.

-60

-50

-40

-30

-20

-10

0

10

20

30

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 Honda Cars

Maruti Suzuki

Tata Motors


220

This implies that during this period, funds provided by the shareholders have

not been used efficiently in the company and thus affects the profitability of the

company. The company was unable to pay fair return to the shareholders of the

company which has an adverse affect on the profitability of the company.

Comparison of return on shareholders‟ funds ratio of Honda Cars to Maruti

Suzuki and Tata Motors indicates that although the ratio of Maruti Suzuki is

showing decreasing trend but has higher ratio than the ratio of Honda Cars and

Tata Motors during the year 2008 to 2012. This implies that the funds provided

by the shareholders have been profitably utilized by the management of Maruti

Suzuki and the company was able to pay regular and high dividend to its

shareholders. A higher percentage of return on shareholders‟ funds will satisfy

the shareholders that their funds are profitably utilized. During the year 2008 to

2012, return on shareholders‟ funds ratio of Honda Cars was even lower than

the ratio of Tata Motors, as Honda Cars has been incurring negative returns on

shareholders‟ funds. This implies that Honda Cars has not utilized the funds

provided by the shareholders in the business efficiently and it adversely affects

its profitability. Thus the company will be unable to provide fair return to its

shareholders.

Honda Cars has lower return on shareholders‟ fund ratio than Maruti Suzuki

and Tata Motors as during the year 2009 to 2012 as Honda Cars has been

incurring negative returns on shareholders‟ funds.

Chapter- 7

Conclusions and Suggestions

ChapterChapterChapterChapter---- 7 7 7 7 Conclusions and SuggestionsConclusions and SuggestionsConclusions and SuggestionsConclusions and Suggestions

221

Conclusions and SuggestionsConclusions and SuggestionsConclusions and SuggestionsConclusions and Suggestions

On the canvas of the Indian economy, automobile industry occupies a

prominent place. This sector has witnessed tremendous growth during the last

two decades. 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. Automobile Industry

was delicensed in July 1991 with the announcement of the New Industrial

Policy. The passenger car industry was, however, delicensed in 1993. The

industry contributes ~22% of India's manufacturing GDP (Gross Domestic

Product) and ~7% of India's overall GDP. The Indian automobile industry

provides direct employment to 1 million people and indirect employment to 18

million people in the country. 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. 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.

Two-wheelers, being the most popular means of personal transport, alone

account for about 75% of the total automobile production in India, while

passenger vehicles account for nearly 16% of the production. However, owing

to their lower sales realisations, two wheelers account for only around 32% of

the sales in terms of value while passenger vehicles account for around 62% of

the same. Commercial vehicles are categorised into heavy, medium and light.

They account for about 5% of the market. Three wheelers are categorised into

passenger carriers and goods carriers. Three wheelers account for about 4% of

the market in India. The passenger vehicles are further categorised into

passenger cars, utility vehicles and multi-purpose vehicles. 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.

Chapter- 7 Conclusions and Suggestions

222

The major Indian companies present in the automobiles market include Tata

Motors, Maruti Suzuki India, Mahindra & Mahindra, Ashok Leyland, Hero

MotoCorp and Bajaj Auto. Tata Motors is India‟s largest automobile company;

the company manufactures commercial and passenger vehicles, and is the

world‟s fourth-largest truck manufacturer and the second-largest bus

manufacturer. Maruti Suzuki is India‟s largest passenger car company,

accounting for 45% share of the Indian car market. Hero MotoCorp is the

world‟s largest two-wheeler manufacturing company in the world. Its market

share in the Indian two-wheeler segment is 41%. Bajaj Auto is the world‟s

fourth-largest two-wheeler and three-wheeler manufacturer. The largest Indian

passenger car manufacturers include Tata Motors, Maruti Suzuki, Mahindra &

Mahindra and Hindustan Motors. Presence of foreign players such as

Mercedes-Benz, Fiat, General Motors and Toyota is also growing in this

segment. Recently, the passenger car segment has also seen the entry of other

global majors such as BMW, Audi, Volkswagen and Volvo. Maruti occupies

50% of the market share in the mini and compact cars and is maintaining its

share despite the stiff competition from manufacturers like Hyundai and Tata

Motors, occupies over 20% of the market share in the small and compact car

segment.

The production, sales and export development of automobile industry during

2006-07 to 2010-11 was at a CAGR (Compound Annual Growth Rate) of

12.7%, 11.3% and 23.7% respectively. The domestic passenger vehicles

industry has been on a relatively steady growth phase over most of the last

decade and has registered a 10 years CAGR of 10.3% during the period. The

Indian car industry is still in the growth and evolution stage and is depending

on the domestic and regional market. Overall Indian Automobile Industry has

shown 2.61% growth in 2012-13 compare to 2011-12. Production and

Domestic sales has registered growth of 1.20% and 2.61%, however export is

negative growth due to negative global environment and fluctuation


223

Various research studies have been carried out on different aspects of

financial appraisal by the researchers, economists and academicians in India

and abroad. Jagan Mohan Rao (1993) in „Financial appraisal of

Indian Automotive Tyre Industry‟ studied the financial appraisal of

Indian automotive tyre industry. The study was intended to probe into the

financial condition-financial strength and weakness-of the Indian tyre industry.

Agarwal (1999)

studied the profitability and growth in Indian

Automobile manufacturing industry. The objective of this study is to examine

if firms have been making super normal profits since 1975 when price

controls were removed.

Honda Siel Cars India Limited is a subsidiary of the Honda Motor Company

Limited of Japan, for the production, marketing and export of passenger cars in

India. It began operations in December 1995 as a joint venture between Honda

Motor Company and Usha International of Siddharth Shriram Group. Honda

Siel Cars India Limited is now known as Honda Cars India Limited. In August,

2012, the Company officially changed its name to Honda Cars India Limited

and became a 100% subsidiary of Honda Motor Company. The company‟s

product range includes Honda Brio, Honda Jazz, Honda City, Honda Civic,

Honda Accord and Honda Amaze which are produced at the Greater Noida

facility. In 2011-12, the company had sold 54,427 units, and it witnessed a 35

per cent jump in sales at 73,483 units in 2012-13. During the year 2012-13, the

Company has a market share of 2.74% in the overall passenger vehicle

segment.

The various tools and techniques of financial appraisal are comparative

financial statements, common size financial statements, trend analysis, funds

flow analysis, cash flow analysis, cost volume profit analysis and ratio analysis.

Ratio analysis has been found the most suitable tool of analysis and has been

used in our study for the analysis. Ratio analysis helps to ascertain the financial

condition of the firm. Financial ratios help to summarise large quantities of

financial data to make qualitative judgment about the firm‟s financial


224

performance. The ratios can be classified into four categories: liquidity ratios,

managerial efficiency ratios, leverage (long term solvency) ratios and

profitability ratios.

Liquidity analysis attempts to analyses the companies‟ ability to meet its short-

term obligations. It is usually done through the calculation of current ratio and

quick (liquid) ratio and absolute liquid ratio. The company must attempt to

maintain optimum (ideal) ratio which depends upon the type of manufacturing

industry. If liquidity ratios of the company are higher than the ideal ratios, the

company is said to be having idle investment. Likewise, if ratio is lesser to

required one, the deficit will represent possible difficulties in the payment of

current liabilities of firm and it is surely not a healthy sign for the company.

Managerial efficiency of the company lies in making optimum utilisation of the

assets of the companies.

Managerial efficiency ratios are classified as inventory turnover ratio, debtors‟

turnover ratio, creditors‟ turnover ratio, working capital turnover ratio, fixed

assets turnover ratio and total assets turnover ratio of selected companies.

Inventory turnover ratio depicts how long a company takes on an average to

sale its stock and replaces its inventory. Higher inventory turnover is

considered to be desirable as it usually implies strong sales. Debtors‟ turnover

ratio indicates the speed with which the amount is collected from debtors. The

higher the debtors‟ turnover ratio, the better it is, since it indicates that amount

from debtors is being collected more quickly. Creditors‟ turnover ratio

indicates the speed with which the amount is being paid to creditors. The

higher the creditors‟ turnover ratio, the better it is, since it will indicate that the

creditors are being paid more quickly which increases the creditworthiness of

the company. Working capital turnover ratio reveals how efficiently working

capital has been utilized in making sales. A high working capital turnover ratio

shows efficient use of working capital and quick turnover of current assets like

stock and debtors. Higher fixed assets ratio implies that company has invested

lesser amount in fixed assets to generate sales revenue hence it depicts better


225

ability of company to utilise the fixed assets. Total assets turnover ratio shows

how efficiently the total assets are being utilized in the business. Higher total

assets turnover ratio indicates the higher efficiency in the utilization of the total

assets.

Leverage ratios assess the following two aspects of the long-term solvency of a

firm i.e. ability to repay the principal amount when due; and the ability to pay

the interest and dividend promptly and periodically as per the agreed terms and

conditions. Leverage ratios are classified as capital gearing ratio, debt-equity

ratio, total debt ratio, proprietary ratio, fixed assets to proprietors‟ funds ratio,

current assets to proprietors‟ funds ratio and interest coverage ratio. Capital

gearing ratio establishes the relationship between fixed interest bearing capital

and shareholders‟ funds and thus examines the capital structure of the

company. The lower the capital gearing ratio, the better it is for the company

because it shows that too much capital has not been raised by way of

debentures as debenture holders do not share in business losses.

Debt equity ratio indicates the extent of funds provided by long-term lenders in

comparison to the funds provided by the owners, i.e. shareholders. Usually,

lower the debt-equity ratio, higher is the degree of protection enjoyed by the

creditors. Total debt ratio depicts the proportion of firms‟ total assets, financed

by total debt. To the creditor, a low ratio would ensure greater security for

extending credit to the firm. Proprietary ratio measures the proportion of the

company‟s assets that are provided or claimed by the owners. Higher

proprietary ratio generally indicates secured position to creditors and a lower

ratio indicates greater risk to creditors. Fixed assets to proprietors‟ funds ratio

measures the proportion in which owners‟ funds are invested in fixed assets of

the company. The lower this ratio, the better it is for the long term solvency of

business because proprietors‟ funds will be available for working capital needs

also. Current assets to proprietors‟ funds ratio indicates the extent to which

shareholders‟ funds have gone into the financing of the current assets. The

lower this ratio, the better it is for the company because it implies that the


226

current assets are mainly financed by the proprietors‟ funds and less is the

dependency on external sources. Interest Coverage Ratio indicates how many

times the interest charges are covered by the profits available to pay interest

charges. The higher the interest coverage ratio ensures larger security for the

creditors with respect to their periodical interest payments.

Profitability refers to the ability of a business to earn profit. It shows the

efficiency of the business. These ratios measure the profit earning capacity or

the operational efficiency of the company. Profitability ratios are further

classified as gross profit ratio, net profit ratio, operating ratio, operating profit

ratio, expenses ratios, return on assets ratio, return on investment ratio and

return on shareholders‟ funds ratio. Gross profit ratio shows the profit made

on sales before taking accounts of overheads. Higher gross profit ratio is

always in the interest of the business. Increase in the gross profit ratio will

mean reduction in cost or increase in selling price. Net profit ratio measures the

efficiency of the firm in generating additional revenue over and above the total

cost of operations. The higher the net profit ratio, the better it is as increase in

the net profit shows better performance of the management in the business.

Operating ratio establishes the relationship between the aggregate of cost of

goods sold and other operating expenses on the one hand and the sales revenue

on the other hand. The lesser is the operating ratio, the better it is because less

operating ratio means higher net profits. The operating profit ratio refers to the

profit generated by the firm from operating activities. The higher the operating

profit ratio, the better it is because increase in operating profit ratio determines

the efficiency of the firm in the management of the business. Expenses ratios

indicate the relationship between expenses and sales. The lower the expenses

ratio, the greater will be the profitability and higher the ratio, lower will be the

profitability.

Return on assets ratio measures the overall efficiency of the management in

generating profits from the use of assets. The higher the return on assets ratio

the better it is for the company. Return on investment ratio measures how


227

efficiently the capital employed in the business is being used. The higher the

return on investment ratio, the better it is, for the company because this ratio is

a barometer of the overall performance of the enterprise. The ratio can be used

to judge the borrowing policy of the enterprise. Return on shareholders‟ funds

measures the profitability of the funds invested by the shareholders. The higher

the return on shareholders‟ funds ratio, the better it is, for the company because

it shows that the proprietors‟ funds have been profitably utilized by the

company.

Financial appraisal is the process of determining the operating and financial

characteristics of a firm from accounting and financial statements. The goals of

such appraisal are to determine the efficiencies or performance of a firm‟s

management as reflected in the financial records and reports. The important

areas of financial appraisal include production, cost trends and sales,

profitability, financial strength, working capital, liquidity and productivity. The

present study is undertaken to make a financial appraisal of the selected

companies of the Indian automobile industry. The study analyses the growth of

automobile industry after liberalization, its production trend, sales trend,

exports trend, profitability analysis, financial structure and financial

performance of the automobile industry.

The study focuses on the financial appraisal of Honda Cars India Ltd. We also

study the comparative financial appraisal of the three companies i.e. Honda

Cars India Ltd., Maruti Suzuki India Ltd. and Tata Motors Ltd. Financial

appraisal of selected companies i.e. Honda Cars India Ltd., Maruti Suzuki India

Ltd. and Tata Motors Ltd. have been studied by Liquidity analysis, managerial

efficiency analysis, leverage (long term solvency) analysis and profitability

analysis. In the present study liquidity analysis of the selected companies is

done through the study of current ratio, liquid ratio and absolute liquid ratio.

The present study analyses the efficiency of the selected companies though the

study of inventory turnover ratio, debtors‟ turnover ratio, creditors‟ turnover

ratio, working capital turnover ratio, fixed assets turnover ratio and total assets


228

turnover ratio of selected companies. Leverage analysis of the selected

companies is done though the study of capital gearing ratio, debt-equity ratio,

total debt ratio, proprietary ratio, fixed assets to proprietors‟ funds ratio, current

assets to proprietors‟ funds ratio and interest coverage ratio. The present

study analyses the profitability of the selected companies through the

study of gross profit ratio, net profit ratio, operating ratio, operating profit ratio,

direct material expenses ratio, administrative expenses ratio, selling and

distribution expenses ratio and cost of goods sold ratio, return on assets ratio,

return on investment ratio and return on shareholders‟ funds ratio. Average

liquidity, managerial efficiency, leverage and profitability performance of

selected companies is shown in the following table:

Table 7.1: Average Liquidity, Managerial Efficiency, Leverage and

Profitability Performance of Selected Companies (April 2007 to March

2012)

Ratios Honda cars

India Ltd.

Maruti Suzuki

India Ltd.

Tata Motors

Ltd.

Average Liquidity Ratios (Times)

Current Ratio 1.24 1.36 0.83

Liquid Ratio 0.59 1.03 0.61

Absolute Liquidity Ratio 0.10 0.33 0.13

Average Managerial Efficiency Ratios (Times)

Inventory Turnover Ratio 6.68 18.45 9.42

Debtors‟ Turnover Ratio 47.90 33.61 20.91

Creditors‟ Turnover Ratio 4.86 9.0 3.05

Working Capital Turnover Ratio 23.31 20.4 (10.8)

Fixed Assets Turnover Ratio 2.80 4.75 2.40

Total Assets Turnover Ratio 1.61 1.64 0.86

Average Leverage Ratios (Times)

Capital Gearing Ratio 0.95 0.064 0.85


229

Debt Equity Ratio 1.88 0.39 1.89

Total Debt Ratio 1.13 0.27 0.61

Proprietary Ratio 0.43 0.70 0.32

Fixed Assets to Proprietors‟

Funds Ratio 1.48 0.48 1.08

Current Assets to Proprietors‟

Funds Ratio 1.04 0.452 0.866

Interest Coverage Ratio 9.90 69.99 4.17

Average Profitability Ratios (%)

Gross Profit Ratio 16.83 21.7 23.98

Net Profit Ratio (4.99) 7.07 4.75

Operating Ratio 100.35 91.14 93.72

Operating Profit Ratio (0.484) 8.84 6.25

Direct Material Cost Ratio 82.8 78.56 73.08

Administrative Expenses Ratio 13.75 9.77 15.10

Selling and Distribution

Expenses Ratio 3.57 3.08 2.60

Cost of Goods Sold Ratio 83.12 78.27 76.01

Return on Assets Ratio ( 4.75) 11.60 4.12

Return on Investments Ratio (3.71) 40.72 23.62

Return on Shareholders‟ Funds

Ratio (16.11) 16.36 12.87

Liquidity ratios of selected companies reveal that liquidity position of Maruti

Suzuki is better than that of Honda Cars and Tata Motors. Maruti Suzuki‟s,

proportion of current assets, liquid assets and absolute liquid assets is sufficient

enough to meet its current liabilities. However, liquidity position of Honda

Cars is not so healthy in comparison to Maruti Suzuki and Tata Motors. Thus,

proportion of current assets, liquid assets and absolute liquid assets of Honda

Cars is not sufficient enough to meet its current liabilities.


230

The analysis of inventory turnover ratio shows that the stock of Maruti Suzuki

is selling more quickly (followed by Tata Motors and Honda Cars). However,

there is delay in the sale of stock of Honda Cars. The study of debtor‟s turnover

ratio indicates that Honda Cars is collecting the amount from its debtors more

quickly (followed by Maruti Suzuki and Tata Motors). The more quickly the

debtors pay, the less is the risk from bad debts. However, the analysis of

creditors‟ turnover ratio shows that Maruti Suzuki is paying its creditors more

quickly (followed by Honda Cars and Tata Motors) which increases the

creditworthiness of Maruti Suzuki. The analysis of working capital turnover

ratio shows that Honda Cars has efficiently utilized its working capital

(followed by Maruti Suzuki and Tata Motors). However, the study of fixed

assets turnover ratio and total assets turnover ratio indicates that Maruti Suzuki

has efficiently utilized its fixed assets as well as total assets (followed by

Honda Cars and Tata Motors).

The analysis of capital gearing ratio of selected companies reveals that the

capital structure of Maruti Suzuki is low geared (followed by Tata Motors and

Honda Cars). In Honda Cars, the proportion of fixed interest bearing capital is

more than the equity shareholders‟ funds and thus the company is highly

geared. The study of debt equity ratio shows that the long term creditors of

Maruti Suzuki are more secured about the repayment of their debts by the

company (followed by Honda Cars and Tata Motors). The study of total debt

ratio shows the solvency of is much better (followed by Tata Motors and

Honda Cars). However, there is threat to the solvency of Honda Cars as the

company is carrying too much debt. The analysis of proprietary ratio indicates

that the assets of Maruti Suzuki are mainly financed by its proprietors‟ funds

(followed by Honda Cars and Tata Motors) and thus lesser is the dependence

on external funds. The study of fixed assets to proprietors‟ funds and current

assets to proprietors‟ funds reveals that that the current assets and fixed assets

of Maruti Suzuki are mainly financed by the proprietors‟ funds (followed by

Tata Motors and Honda Cars) and less is the dependency on external sources.


231

However the analysis of interest coverage ratio shows that the lenders of

Maruti Suzuki are more secured with respect to their periodical interest

payments (followed by Honda Cars and Tata Motors). This has a favourable

impact on the credit worthiness of Maruti Suzuki (followed by Honda Cars and

Tata Motors).

The analysis of gross profit ratio reveals that the Tata Motors is efficiently

generating higher profits made on sales (followed by Maruti Suzuki and Honda

Cars) before taking accounts of overheads. Deterioration in the gross profit of

Honda Cars indicates decrease in selling price or increase in cost price or

increase in raw material or increase in the direct expenses of the company and

thus, it also implies that Honda Cars is not controlling its direct expenses

efficiently. The study of net profit ratio indicates the sound operational

efficiency and profitability position of Maruti Suzuki (followed by Tata Motors

and Honda Cars) in generating additional revenue over and above the total cost

of operations. Honda Cars has been even incurring net loss which reveals that

Honda Cars has inefficiently controlled its operating and non-operating

expenses and thus decreases its efficiency in generating net profit.

The analysis of operating ratio shows that Maruti Suzuki has efficiently

controlled its operating cost (Tata Motors and Honda Cars), and thus has a

favourable impact on its profitability. It also shows that Honda Cars has been

unable to control its operating cost which adversely affects the operating profit

of the company and shows inefficiency of the Honda Cars in the management

of the business. The analysis of operating profit ratio indicates that Maruti

Suzuki has efficiently controlled its cost of goods sold and operating expenses

(followed by Tata Motors and Honda Cars) and thus has larger profits available

after all operating costs have been met, to be distributed to shareholders and for

the creation of reserves. This also shows that Honda Cars has been unable to

control its cost of goods sold, operating expenses efficiently and thus has an

adverse affect on the profitability of the company. The study of direct material

cost ratio, selling and distribution expenses ratio and cost of goods sold ratio


232

reveals that Tata Motors has efficiently controlled its direct material cost ,

selling and distribution expenses and cost of goods sold (followed by Maruti

Suzuki and Honda Cars) and thus has a favourable impact on the efficiency and

profitability of the company. This also implies the inefficiency of Honda Cars

in controlling its direct material cost, selling and distribution expenses and cost

of goods sold and thus reduces its profitability. However, the study of

administrative expenses ratio shows that Maruti Suzuki has efficiently

controlled its administrative expenses (followed by Honda Cars and Tata

Motors) and thus increases the profitability of the company.

The analysis of return on assets ratio and return on investment ratio indicates

the overall efficiency of the management of Maruti Suzuki (followed by Tata

Motors and Honda Cars) in generating profits from the use of assets and capital

employed in the business. This also shows that Honda Cars has been even

incurring negative returns from the use of assets and capital employed in the

business and thus has an adverse affect on the profitability of the company. The

study of return on shareholders‟ funds reveals that the management of Maruti

Suzuki has profitably utilized the funds provided by the shareholders (followed

by Tata Motors and Honda Cars) and Maruti Suzuki was much efficiently able

to pay regular and higher dividend to its shareholders. This also shows that

Honda Cars has been incurring negative returns on shareholders‟ funds because

Honda Cars has inefficiently utilized the funds provided by the shareholders in

the business and it adversely affects its profitability. Thus, Honda Cars will be

unable to provide fair return to its shareholders.

Ranking of the Companies

This section assigns ranks to the selected companies for selected variables on

the basis of their average performance. A company showing best average

performance for a particular variable has been assigned 1st rank for that

variable and likewise company securing least ratio has been assigned 3rd rank

for that variable. However, the methodology has been reversed for capital


233

gearing ratio, debt equity ratio, total debt ratio, fixed assets to proprietor‟s

funds ratio, current assets to proprietor‟s funds ratio, operating ratio, direct

material expenses ratio, administrative expenses ratio, selling and

distribution expenses ratio and cost of goods sold ratio . After the

assignment of ranks to all the variables, the composite score for each parameter

has been computed and again ranks are been assigned for each parameter. The

parameter having least value of composite score has been assigned Fist rank

and parameter having highest score has been assigned third rank. The

assignment of ranks on the basis of average performance of selected companies

is shown in the following table:

Table 7.2: Assignment of Ranks to Selected Companies on the basis of


Particulars Honda cars

India Ltd.

Maruti Suzuki

India Ltd.

Tata

Motors

Ltd.

Liquidity:

Current Ratio 2 1 3

Liquid Ratio 3 1 2

Absolute Liquidity Ratio 3 1 2

Composite Score 8 3 7

Rank on the basis of

Liquidity III I II

Managerial Efficiency:

Inventory Turnover Ratio 3 1 2

Debtors‟ Turnover Ratio 1 2 3

Creditors‟ Turnover Ratio 2 1 3

Working Capital Turnover

Ratio 1 2 3

Fixed Assets Turnover Ratio 2 1 3


234

Total Assets Turnover Ratio 2 1 3



Efficiency II I III

Leverage ( Long term Solvency):

Capital Gearing Ratio 3 1 2

Debt Equity Ratio 2 1 3

Total Debt Ratio 3 1 2

Proprietary Ratio 2 1 3

Fixed Assets to Proprietors‟

Funds Ratio 3 1 2

Current Assets to

Proprietors‟ Funds Ratio 3 1 2

Interest Coverage Ratio 2 1 3



Leverage III I II

Profitability:

Gross Profit Ratio 3 2 1

Net Profit Ratio 3 1 2

Operating Ratio 3 1 2

Operating Profit Ratio 3 1 2

Direct Material Cost Ratio 3 2 1

Administrative Expenses

Ratio 2 1 3

Selling and Distribution

Expenses Ratio 3 2 1

Cost of Goods Sold Ratio 3 2 1

Return on Assets Ratio 3 1 2

Return on Investments Ratio 3 1 2


235

Return on Shareholders’

Funds Ratio 3 1 2



Profitability III I II

As shown from table 7.2, Maruti Suzuki found best in terms of liquidity

among the companies selected for the study. It is followed by Tata Motors and

Honda Cars. However, the liquidity position of Tata Motors and Honda Cars

is almost the same. The managerial efficiency of Maruti Suzuki is very sound

(followed by Honda Cars and Tata Motors). Honda Cars also has a

satisfactory managerial efficiency. The leverage position of Maruti Suzuki is

very sound (followed by Tata Motors and Honda Cars). However, the leverage

position of Tata Motors and Honda Cars is almost the same. In terms of

profitability, Maruti Suzuki is very efficient (followed by Tata Motors and

Honda Cars). However, the profitability position of Honda Cars is very

inefficient. Further, here it is important to note that the pre-indicated ranks are

not the sole indicator of business efficiency. As a matter of fact the

interpretation of ratio depends upon number of factors. In the present study a

general criteria for assessment of ratio has been used. According to which the

company with higher profitability, higher liquidity ratios (not more than ideal

ratio), lower debt-equity ratio (not less than ideal ratio), higher proprietary

ratio (not more than ideal ratio) and higher turnover ratio is assumed to be

more efficient.


236

SUGGESTIONS

Keeping in view the above observations relating to the study, the following

measures are suggested which would go on a long way to improve the

performance of Indian automobile industry.

1. It is suggested that there is a need for Indian automobile industry to adopt

producing and selling wide range of products, to adopt better market

strategy, by reducing cost and revising selling prices to enhance the value

of turnover so as to go ahead in the era of competitions.

2. Inventory is the most crucial asset for a manufacturing organisation.

Particularly with reference to inventory turnover ratio, the cost of

materials in Indian automobile industry is the major component in

production cost and its share is increasing (Narayanan and Vashishth

2008). The managerial efficiency to keep an optimum level of asset lies in

maintaining an adequate ratio of assets to turnover.

3. Cost accounting and cost audit should be made mandatory in automobile

industry and they should be called to prepare cost sheet along with their

annual financial statements.

4. A systematic, prompt and regular flow of information and its analysis is

important for improving productivity, efficiency and profitability. A

suitable management information system needs to be evolved which will

take care of the data requirement of administrative officers as well as

other units like factory etc., for internal management and control.

Appropriate organisational arrangements should be made for the

successful implementation of management information system in Indian

automobile industry.

5. At present, in India the financial statements are presented on historical

cost basis. As such these statements do not exhibit the correct realizable

value of the assets on the date of the balance sheet. Thus, the true

profitability cannot be ascertained on the basis of the figures given in the

balance sheet on historical cost basis. It is, therefore, suggested that a


237

supplementary statement should be included in the annual report

showing the figures of assets and liabilities on the basis of current

values.

6. At present, the profit and loss account of multi-product concern is

disclosed in a consolidated form which cannot measure and judge the

performance and profitability of each activity. Hence, the profit and loss

accounts should be prepared on departmental activity basis by each multi

product concern.

7. The policy of borrowed financing in automobile industry is not proper. So,

the company should use wisely the borrowed funds and should try to

reduce the fixed charges burden gradually by decreasing borrowed funds

and by enhancing in owners fund.

8. The automobile industry is impeded by power and the state of road

infrastructure in the country. Because of the road condition the penetration

level of automobile in India is very low compared to other developing

countries. Therefore, it is suggested that mass road building project

should be seriously implemented in the next fifteen years are

imperative.

9. Method of production by the Indian automobile industry is based on the

assembly of different components in a knock down condition. The

MNC’s have not been improving the quality of produce in India rather

they have been in a sense “importing” high quality products into the

country. This is actually providing in India. Cost of fuel is important and

at the same this fuel quality needs to be improved in terms of gumming

tendency, and dust contamination.

10. The inverted duty structure of customs duty on raw materials components

and finished goods needs to be corrected. The government should grant

certain funds to leading Indian automobiles companies for research and

development so that Indian vehicles can really become world class in

five years time. Vehicles with 100 per cent local content should be

given a concessional excise duty of 50 per cent of the normal rate.


238

Further, all local constraints like the outdated industrial disputes act,

factories act and the like, which make local manufacturing far more

difficult, should be modified without further delay.

11. Liquidity position of Honda cars India Ltd. is not sound as compared to

Maruti Suzuki India Ltd and Tata Motors Ltd. Honda cars India Ltd.

should efficiently control its current assets and liquid assets to pay its

current liabilities so that the creditors of the company feel secured about

the repayment of their amounts by the company. This will enhance the

creditworthiness and also the short term solvency of the company.

12. Honda cars India Ltd. should also improve its managerial efficiency by

effectively controlling its inventory, fixed assets and total assets. The

company should also make payment to its creditors quickly as this will

increase the creditworthiness and also the short term solvency of the

company.

13. Leverage position of Honda cars India Ltd. is not sound as compared to

Maruti Suzuki and Tata Motors. Honda Cars should not raise too much

capital by way of fixed interest bearing capital because company has to

pay fixed obligation in the form of interest irrespective of the volume of

the profit. The company should increase the proportion of proprietors’

funds in the business. This will improve the long term solvency position

of the company.

14. Profitability position of Honda cars India Ltd. is not sound as compared to

Maruti Suzuki India Ltd and Tata Motors Ltd. Honda Cars should

efficiently control its direct material cost, cost of goods sold,

administrative expenses and selling and distribution expenses. Honda Cars

should also efficiently utilize the assets, proprietors’ funds and capital

employed in the business.

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239

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Reports:

1. ‘Auto Policy’- Department of Heavy Industries, Ministry of Heavy

Industries and Public Enterprises, Government of India, New Delhi

(2011)

2. ‘Automotive mission plan 2016’– A mission for development of

Indian Automotive Industry, Ministry of Heavy Industries and Public

Enterprises, Government of India (2012)

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3. Annual Reports of Honda Cars India Limited from the Financial Year

2007-08 to 2011-12

4. Annual Reports of Maruti Suzuki India Limited from the Financial

Year 2007-08 to 2011-12

5. Annual Reports of Tata Motors Limited from the Financial Year 2007-

08 to 2011-12

6. Annual Reports of the Indian Automobile Industry

Newspapers:

1. Financial Express

2. Hindustan Times Online

3. Indian Express

4. The Economic Times

5. The Hindu

6. The Times of India

Websites:

1. www.auto.indiamart.com

2. www.cmie.com

3. www.economictimes.com

4. www.economywatch.com

5. www.google.com

6. www.icra.com

http://www.google.com/

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244

7. www.indiainfoline.com

8. www.indianeconomy.org

9. www.indiastat.com

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11. www.infoshine.com

12. www.siamindia.com

http://www.indiainfoline.com/

http://www.indiastat.com/

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http://www.infoshine.com/

Appendices

Appendices

245

Financial Statistics: Liabilities and Assets

HONDA CARS INDIA LTD.

2008 2009 2010 2011 2012

(Rs. in Millions)

LIABILITIES

Shareholders' Funds:

Paid up Share Capital 3600 3600 3600 3600 5699.7

Reserves and Surplus 7899.9 5934.3 5581.1 3452.8 7308.3

Total 11500 9534.3 9181.1 7052.8 13008

Loan Funds:

Secured Loans N.A. 2246.15 3346 5133 354.1

Unsecured Loans N.A. 7168.08 2742.2 6772.8 6032.1

Total N.A. 9414.23 6088.2 11905.8 6386.2

Current Liabilities Provisions:

Creditors 5342.83 5225.09 8991.4 9303.38 8514.1

Other Current Liabilities 5417.49 5401.27 9010.19 9349.6 10420.4

Provisions 164.71 157.69 139.14 159.39 116.3

Total 5582.21 5558.96 9149.33 9509.05 10536.7

ASSETS

Fixed Assets:

Gross block 12910.8 18933.4 22407.9 22463.3 29225.2

Less: Accumulated Depreciation 7675.5 7352 10209 12798.1 12585.6

Net block 7235.91 11581.45 12198.9 9665.2 16639.6

Capital Work-in- progress 1693.7 4163.28 1611.6 5632.8 602.3

Total Fixed Assets 8929.61 15744.73 13810.5 15298 17242

Investments N.A 256.43 256.43 230.59 118

Current Assets loans advances:

Inventories 5164.4 3038.59 5167.7 6948.36 5249.3

Receivables 183.48 655.2 540.62 2935.14 657.8

Cash & Bank Balance 455.09 324.87 387.65 204.31 3279.9

Current Assets 5802.97 4018.67 6096 10088 9187

Loans advances 2079.39 3223.92 2922.7 2851 3143.5

Total Current assets 7881.94 7242.59 9018.7 12938.8 12330.5

Appendices

246


MARUTI SUZUKI INDIA LTD.

2008 2009 2010 2011 2012

(Rs. in Millions)

LIABILITIES


Paid up Share Capital 1445 1445 1445 1445 1445

Reserves and Surplus 82709 92004 116906 137230 150429

Total 84154 93449 118351 138675 151874

Loan Funds:

Secured Loans 1 1 265 N.A. N.A.

Unsecured Loans 9001 6988 7949 1702 10783

Total 9002 6989 8214 1702 10783


Creditors 16962 25696 23181 26083 33499

Other Current Liabilities 24562 30169 29394 36013 49391

Provisions 3695 3807 6284 5258 6985

Total 28257 33976 35678 41271 56376

ASSETS

Fixed Assets:

Gross block 72853 87206 104067 117377 147347

Less: Depreciation 39888 46498 53820 62083 72140

Net block 32965 40708 50247 55294 75207

Capital Work -in -progress 7363 8613 3876 8625 6114

Total Fixed Assets 40328 49321 54123 63919 81321

Investments 51807 31733 71766 51068 61474

Inventories 10380 9023 12088 14150 17965

Receivables 6555 9189 8099 8245 9376

Cash & Bank Balance 3305 19390 982 25085 24361

Other Current Assets 331 981 848 1930 3764

Current Assets 20571 38583 22017 49410 55466

Loans advances 10408 16328 15707 19383 24498

Total Current Assets 30979 54911 37724 68793 79964

Appendices

247


TATA MOTORS LTD.

TATA MOTORS LTD.

2008 2009 2010 2011 2012

(Rs. in Millions)

LIABILITIES


Paid up Share Capital 385.54 514.05 570.6 637.71 634.75

Reserves and Surplus 7453.96 11716.1 14394.87 19375.59 18991.26

Total 7839.5 12230.15 14965.47 20013.3 19626.01

Loan Funds:

Secured Loans 2461.99 5251.65 7742.6 7708.52 6915.77

Unsecured Loans 3818.53 7913.91 8883.31 6929.67 4095.86

Total 6280.52 13165.56 16625.91 14638.19 11011.63


Creditors 8368.16 8731.27 11824.69 8817.27 8744.83

Other Current Liabilities 8643.67 8958.25 14609.16 12027.64 16215.78

Provisions 1989.43 1877.26 2763.43 3267.11 3600.82

Total 10633.1 10835.51 17372.59 15294.75 19816.6

ASSETS

Fixed Assets:

Net block of Fixed Assets 5387.31 7645.27 11203.89 13417.07 15019.52

Capital Work-in -progress 5064.96 6954.04 5232.15 3799.03 4036.67

Total Fixed Assets 10452.27 14599.31 16436.04 17216.1 19056.19

Investments 4910.27 12968.13 22336.9 22624.21 20493.55

Current Assets loans advances:

Inventories 2421.83 2229.81 2935.59 3891.39 4588.23

Receivables 1130.73 1555.2 2391.92 2602.88 2708.32

Cash & Bank Balance 2397.31 1141.82 1753.26 2428.92 1840.96

Other Current Assets 0.86 0.11 0.11 111.85 113.41

Current Assets 5950.73 4926.94 7080.88 9035.04 9250.92

Loans advances 4409.52 4764.75 4457.1 5280.26 5359.85

Total Current Assets 10360.25 9691.69 11537.98 14315.3 14610.77

Appendices

248

Operating Statistics: Incomes and Expenses

HONDA CARS INDIA LTD.

2008 2009 2010 2011 2012

(Rs. in Millions)

INCOMES

Net Sales 39747.08 34834.66 40811.06 39368.51 31847.2

Other Incomes:

Interest on long term deposits 260.45 8.94 9.082 10.839 136.5

Income Tax Refund N.A. N.A. 150.236 0.84 51.9

Profit on Sale of Fixed Assets 1.84 13.5 5.209 55.627 98.5

Excess provision written back 21.15 9.02 54.35 65.026 131.6

Other Receipts 366.64 394.66 1014.39 740.42 836.2

Total Other Incomes 650.1 426.13 1233.271 872.753 1254.7

Total Incomes 40397.19 35260.8 42044.3 40241.2 33101.9

EXPENSES

Purchases 32524.84 27266.39 35537.13 32541.14 26834.80

Cost of Goods Sold 29768.41 30123.04 33225.92 31063.31 29953.9

Administrtive General Expenses:

Travelling Conveyance 223.41 221.11 212.856 267.28 285.6

Insurance 129.66 316.11 325.99 309.3 116.9

Repair Maintainance Expenses 157.01 315.48 226.97 321.69 311.6

Rent, Rates and Taxes 172.69 225.8 211.24 249.08 288.7

Auditor's Remuneration 1.8 2 2.035 2.368 3

Donations Subscription N.A. 17.3 10.5 3.6 N.A.

Other Administrative General Expenses 3581.147 3846.972 3799.48 4058.45 5015.1

Total 4265.717 4944.77 4789.08 5211.79 6020.9

Selling & Distribution Expenses:

Advertisement Expenses 416.43 733.52 810.12 645.97 2263.3

Warranty claim Expenses 85.25 51.82 32.98 46.45 19.9

Other Selling distribution Expenses 342.04 195.39 209.98 565.87 N.A.

Total 843.72 980.73 1053.09 1258.3 2283.2

Net Provisions Charged:

Appendices

249

Provision-bad & doubtful debts N.A. N.A. 0 12 0

Provision-diminution long term investment N.A. 115.66 0 25.84 112.7

Total N.A. 115.66 0 37.84 112.7

Loss on sle of Fixed Assets 204.44 31.13 4.21 31.3 128.3

Administrative Selling Other Expenses 5319.41 6488.42 6155.07 7028.1 9082.9

Depreciation-Tangible assets 1222.98 1934.42 2904.67 2728.58 2226.6

Interest Expenses-Long term loans 0.39 164.69 181.04 216.67 305.9

Provision for Taxation 1257.38 -967.69 -69.22 1332.97 N.A.

Total Expenses 36779.98 38194.13 42466.72 41036.68 41568.7

Net Profit/Loss before Tax(PBT) 3617.207 -2933.33 -422.384 -795.418 -6044.8

Provision for Taxation 1257.38 -967.69 -69.22 1332.97 N.A.

Profit after Tax(PAT) 2359.822 -1965.64 -353.158 -2128.39 -6044.8

P/L carried to B/S(Res. & Surplus) 7899.947 5934.307 5581.149 3452.761 -2592

Appendices

250


MARUTI SUZUKI INDIA LTD.

2008 2009 2010 2011 2012

(Rs. in Millions)

INCOMES

Gross sales of Products 209493 230852 318073 401021 386141

less: Excise duty 30890 27269 28488 42531 39082

Net Sales of Products 178603 203583 289585 358490 347059

Other Operating Revenue 759 970 1404 7694 8812

Other Incomes 8371 9985 10209 5088 8268

Total Incomes 187733 214538 301198 371272 364139

EXPENSES

Purchases 138113 157854 223931 284199 282395

Cost of Goods Sold 135196 160672 221998 283639 281083

Finance Cost 596 510 335 250 552

Depreciation 5682 7065 8250 10135 11384

Administrative Expenses 15801 20369 25583 36738 38139

Selling & Distribution Expenses 5602 7382 9160 9600 9958

Other Expenses 24 2005 232 79 1988

Less: Vehicles for own use -198 -223 -296 -257 -427

Total Expenses 162703 197780 265273 340184 342677

Profit before Tax(PBT) 25030 16578 35925 31088 21462

Tax Expense -7722 -4571 -10949 -8202 -5110

Profit after Tax(PAT) 17308 12187 24976 22886 16352

Profit brought forward 56373 70257 80042 100499 118578

Profit carried forward to Balance

Sheet 70257 80042 100499 118578 130777

Appendices

251


TATA MOTORS LTD.

2008 2009 2010 2011 2012

(Rs. in Millions)

INCOMES

Gross sales of Products 32425.3 27911.8 37843.44 50710.45 58650.42

Less: Excise duty -4354.52 -2938.48 -2771.05 -4095.51 -4914.38

Net Sales of Products 28070.78 24973.32 35072.39 46614.94 53736.04

Other Operating Revenue 668.63 687.47 520.66 463.5 570.52

Other Incomes 483.18 925.97 1853.45 422.97 574.08

Total Incomes 29222.59 26586.76 37446.5 47511.41 54880.64

EXPENSES

Purchases 20190.19 18398.94 24905.83 34421.60 40328.77

Cost of Goods Sold 21082.1 19447.58 25512.1 35743.45 41762.44

Finance Cost 282.37 673.68 1103.84 1383.7 1218.62

Depreciation 652.31 874.54 1033.87 1360.77 1606.74

Administrative Expenses 4470.56 4403.65 5196.12 6064.89 7618.84

Selling & Distribution Expenses 636.28 744.44 1036.92 1107.33 1317.57

Other Expenses 427.46 279.87 540.12 325.31 337.29

Expenses t/f to capital &

other Accounts -744.23 -916.02 -726.46 -817.68 -907.13

Total Expenses 26806.85 25507.74 33696.51 45167.77 52954.37

Profit before Exceptional &

Extraordinary items 2415.74 1079.02 3749.99 2343.64 1926.27

Extra ordinary & exceptional items 160.73 -65.26 -920.45 -147.12 -585.24

Profit before Tax(PBT) 2576.47 1013.76 2829.54 2196.52 1341.03

Tax Expense 547.55 12.5 589.46 384.7 98.8

Profit after Tax(PAT) 2028.92 1001.26 2240.08 1811.82 1242.23