Ratio Analysis - Tata and M & M

Description
It explains the Financial Ratio analysis for TATA and Mahindra and Mahindra

Financial Ratio Analysis of Tata Motors and Mahindra & Mahindra

Table of Contents

Definitions.................................................................................................................................. 3 Financial Highlights of Mahindra & Mahindra (2008-2009) .................................................... 9

Financial Highlights of Tata Motors (2008-2009) ................................................................... 11 Ratios of Mahindra & Mahindra and Tata Motors .................................................................. 13 Trend Analysis ......................................................................................................................... 14 Annexure I: Sample Calculation .............................................................................................. 29 Annexure II: Financial Statements of Mahindra & Mahindra (2008-2009) ............................ 41 Annexure III: Financial Statements of Tata Motors (2008-2009) ........................................... 43

Definitions mid term Profitability Ratios:
A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. Some examples of profitability ratios are: 1. Net Profit Margin: It is a ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. Net Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales. 2. Asset Turnover: The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales by assets. Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. 3. Return on Capital Employed (ROCE): It is a ratio that indicates the efficiency and profitability of a company's capital investments. It is calculated as EBIT divided by total assets minus current liabilities. ROCE should always be higher than the rate at which the company borrows; otherwise any increase in borrowing will reduce shareholders' earnings. A variation of this ratio is return on average 3

capital employed (ROACE), which takes the average of opening and closing capital employed for the time period.

Liquidity Ratios:
They are financial metrics that are used to determine a company's ability to pay off its shortterms debts obligations and generally, higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio. Different analysts consider different assets to be relevant in calculating liquidity. Some analysts will calculate only the sum of cash and equivalents divided by current liabilities because they feel that they are the most liquid assets, and would be the most likely to be used to cover short-term debts in an emergency. A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern. 4. Current Ratio: It is a liquidity ratio that measures a company's ability to pay short-term obligations. It can be calculated as current assets divided by current liabilities. The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign. The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is always more useful to compare companies within the same industry. 5. Acid Test Ratio: It indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The acid-test ratio is calculated by: 4

Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital ratio, it means current assets are highly dependent on inventory. The term comes from the way gold miners would test whether their findings were real gold nuggets. Unlike other metals, gold does not corrode in acid; if the nugget didn't dissolve when submerged in acid, it was said to have passed the acid test. If a company's financial statements pass the figurative acid test, this indicates its financial integrity.

Efficiency Ratios:
These ratios look at the internal working of a firm. They measure the efficiency with which the business manages its assets and liabilities. They are used to assess the extent to which assets and liabilities are well utilise and well managed. Efficiency improvements should help increase profitability and cash flow. 6. Stock Turnover Ratio: This measures the number of times in a year that a business sells and replenishes its stock. It is calculated by cost of sales divided by average stock. Average stock is calculated by the sum of opening and closing stock divided by 2. The sales are valued at cost. If the stock turnover ratio equals 3, it means that the firm has stocked up and then sold its goods 3 times over during the year. 7. Stock Turnover Period: It tells us the average length of time the average item is held before being sold. It is calculated by stock divided by cost of sales multiplied by 365 days. 8. Debtor Turnover Ratio: Debtor turnover ratio is found out by dividing credit sales by average debtors. Debtors turnover indicates the number of times debtors turnover each year. Generally the higher the value of debtors? turnover, the more efficient is the management of credit. 9. Debtor Turnover Period:
The average number of days for which debtors remain outstanding is called the

Debtor Turnover Period. It is calculated by the number of days in a year divided debtor turnover.

5

Financial Structure Ratios:
Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at including debt, equity, assets and interest expenses. 10. Gearing Ratio: A general term describing a financial ratio that compares some form of owner's equity (or capital) to borrowed funds. Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds. A company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are. A greater proportion of equity provides a cushion and is seen as a measure of financial strength. 11. Interest Cover Ratio: A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period. It is calculated by EBIT divided by interest expense. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses.

6

Investment Ratios:
These ratios are used by potential investors when making investment decisions. 12. Return on Shareholder’s Fund (ROSF): The Return on Shareholders? Funds (ROSF) ratio has historically been used by industry investors as a measure of the profit for the period which is available to the owner?s stake in a business. It is calculated as ((PAT & preference dividend) / (Ordinary share capital + Reserves)).5 Investors & the industry will look at the relative size of the Return on Shareholders? Funds ratio. This is because a high ROSF percentage indicates that a company is profitable and has more profit available for shareholders. ROSF is a narrower assessment of profitability (compared with ROCE) and therefore gives the investor a deeper insight into the profitability that they are concerned with. It is always critical to take professional investment advice before making any investment decisions. 13. Ordinary Dividend Cover: Dividend Cover ratio, is calculated as the earnings per share-basic (EPS-basic) divided by the annual total dividend amount per share. Dividend cover expresses a company's ability to pay ordinary dividends to shareholders out of profits earned. It shows how many times the ordinary dividend is covered by the profit available and, for example, if a company pays out one quarter of its profit as dividends, then the Dividend cover ratio is four. The calculation is the EPS-basic / annual dividend per share (DPS). 14. Earnings per share (EPS): It is the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share, serves as an indicator of a company's profitability.

Earnings per share, is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-toearnings valuation ratio. An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.

7

15. Price earnings ratio (P/E): A valuation ratio of a company's current share price compared to its per-share earnings.

In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects. The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings. It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.

8

Financial Highlights of Mahindra & Mahindra (2008-2009) Income from Operations & Other Income:
The income from operations in the current year is lower mainly on account of the transfer of the Company?s logistics business to its wholly owned subsidiary from the beginning of the current year. Other income during FY-2009 at Rs.270.34 crores is more than double of Rs.130.37 crores earned in the previous year. This increase is on account of higher dividends received from the subsidiaries, profit on sale of Swaraj Mazda shares and higher income from increased level of surplus funds arising from the PTL merger.

Expenditure:
? The total expenditure during the year as a percentage of Net sales / Income from Operations is 94.23% as compared to 90.44 % in the previous year. ? Material Cost: For the year ended March 31, 2009, material cost as a percentage of net sales shows an increase over the previous year mainly due to the significant increases in material costs in the first half of the current year, lower closing inventory and lower income from operations due to the transfer of logistics business. ? Personnel Cost as a percentage of sales has increased from 7.52 % to 7.83 %. This is mainly due to increase in officers? strength, annual increments and refinements in actuarial assumptions affecting calculation of gratuity. ? Other Expenses as a percentage of net sales shows a decrease over the previous year as a percentage to net sales and operating income mainly due to the freight cost reduction on transfer of logistics business. However, the expenses in absolute terms are higher due to losses on account of forward cover cancellations arising from lower than planned exports due to global recession and increase in professional fees on acquisitions, corporate branding, etc. ? The depreciation for the year ended March 31, 2009 is at Rs. 291.51 crores as compared to Rs. 238.66 crores in the previous year due to capitalization of the Xylo related assets and the increase in amortization of intangibles in the current year. ? The interest expense of Rs.45.26 crores (net of interest income of Rs.134.12 crores) for the year ended March 31, 2009 is higher than the interest expense of Rs.24.24 crores (net of interest income of Rs.87.59 crores) in the previous year due to increased borrowings to meet the Company?s capital expenditure and other growth plans.

9

? The profit from Exceptional items during the year ended 31st March, 2009 is Rs.10.27 crores as against Rs.172.73 crores last year. The profit in the current year is on account of surplus on transfer of the Company?s logistics business to its wholly owned subsidiary. In the previous year, the profit was due to the gain from the valuation of certain shares received by the Company under two court approved merger schemes at the fair value of the shares parted with in exchange for them. ? The provision for current tax, fringe benefit tax and deferred tax for the year ended 31st March, 2009 as a percentage to profit before tax is lower than the previous year, on account of a higher tax-free dividend income during the year and increased profits in a new plant eligible for deduction under Section 80IC of the Income Tax Act, 1961.

Fixed Assets:
As at 31st March, 2009 the Gross Block of Fixed Assets and Capital Work in Progress was Rs. 5,540.62 crores as compared to Rs. 4,202.58 crores as at 31st March, 2008. During the year, the Company incurred capital expenditure of Rs. 895.90 crores (previous year Rs. 754.27 crores). The major items of capital expenditure were on New Product Development, Capacity Enhancement, and Research & Development. This included purchase of Intangible assets aggregating Rs.169.86 crores (previous year Rs.71.42 crores). The Gross Block for the year has also increased by Rs.308.71 crores on account of the additions of Fixed Assets due to the merger of Punjab tractors Limited (PTL) with the Company.

Inventories:
March 31, 2009 Raw materials and bought out components as a % of consumption Finished goods as a % of gross sales 4.46% March 31, 2008 4.66%

3.31%

4.68%

The reduction in inventory levels is due to focus on supply chain management and better planning and control.

Sundry Debtors:
Sundry debtors amount to Rs. 1,043.65 crores as at March 31, 2009, as compared with Rs. 1,004.88 crores as at March 31, 2008. Debtors as a percentage of gross sales and income from operations are 7.09% for the year ended March 31, 2009, as compared to 7.67% for the previous year. The Company has been able to achieve this improvement in its debtors level due to its proactive emphasis on collections.

10

Financial Highlights of Tata Motors (2008-2009)
? Full year FY09 volumes declined by 13.5% causing Net Revenues to fall to Rs.256.6 Billion, a decline of 10.7%. Average realisation grew 3.3% mainly due to pricing actions undertaken by the company during the year. ? Material costs which were at significantly high levels over the past many quarters saw some respite in Q4 as the global commodity prices showed signs of weakening. Additionally the cost reduction efforts of the company also enabled a cost reduction of about Rs. 3196 million. Consequently raw material cost as percentage of net revenues was reduced to 72.6% in FY09. ? In response to a weak market environment, Company tried to align the production in line with demand as best as it could and also undertook other measures to contain overheads. Additionally the other expenses item was also benefited by the lower production levels which reduced variable manufacturing and S&D costs. This is reflected in the lower other expenses of Rs. 3326 million for the full year FY09. ? Consequently, Operating Profit for FY09 stood at Rs 17.5 billion. Reported operating profit margins stood at 6.83% in FY09 (FY08:10.2%). ? During 2008, Company transferred technology to two subsidiary companies for Rs. 1694 million and realized a gain of Rs. 300 million from transfer of activity relating to financing of Construction Equipment to Tata Capital Ltd which are included in the Total Income from operations for the year ended March 31, 2008. Total Income from operations for the year ended March 31, 2009 includes Rs. 1388 million towards transfer of technology to one of its subsidiary companies. Adjusting for these items, operating margin stood at 6.13% in FY09 (FY08: 9.57%). ? During the year ended March 31, 2009, the Company has divested its stake in Tata AutoComp Systems Ltd and Tata Steel Ltd and sold its investments in Tata Tele Services Ltd. The resultant profits of Rs. 1138 million, Rs. 3585 million and Rs. 478 million respectively are included in the other income. ? Depreciation costs increased by 34% for the full year FY2009. This increase has been due to the increase in fixed assets mainly due to the expansion of capacity at Uttaranchal for the production of Tata Ace and Magic and Pune plant for the production of the Indica Vista and Indigo variants. ? High interest rate environment for most part of the year along with increased debt resulted in an increase of interest cost which stood at Rs.6737 million for FY09

11

? Net Profit for FY09 stood at Rs.10.01 billion compared with Rs.20.29 billion in FY08. ? As on March 31, 2009, the balance sheet size of the Company was Rs. 267.9 billion as compared to Rs 150.9 billion as on 31st Mar?09. Net of vehicle financing loans and receivables, which stood at Rs.20 billion, the Company?s capital employed, was Rs 248 billion. ? As on 31st March?09, 449.8 million ordinary shares (Face value Rs.10) and 64.2 million „An? ordinary shares (Face valueRs.10) were outstanding on the balance sheet of Tata Motors. The increase in share capital from FY08 was on account of the Rights Issue offer made by the Company. ? The Gross total debt (inc. Foreign Currency Convertible Notes, FCCNs) stood Rs 131.6 billion as on 31tst March?09. The Company?s Net Debt (Net of the surplus investible funds) stood at Rs 124 billion while the Company?s net debt to equity ratio stood at 0.99.Borrowings increased mainly to support Capex, Investments and increased working capital requirements in a volume decline scenario. ? As of yearend FY09, the total amount raised from the fixed deposit scheme to the public and shareholders stood at Rs.12 billion. ? Up to Mar 31st 2009, 97.6% of the Zero coupon Convertible Notes (due 2009) have been converted into Ordinary Shares / ADSs. There have been no conversions of the other FCCNs issued by the Company.

12

Ratios of Mahindra & Mahindra and Tata Motors

Automotive Industry
1 Profitability Ratios
a b c Net Profit Margin Asset Turnover Return on Capital Employed(ROCE)

Mahindra
2007 14.93% 1.85 27.60% 2008 13.24% 1.54 20.46% 2009 8.55% 1.36 11.61%

Tata Motors
2007 9.87% 2.355 23.24% 2008 9.08% 1.904 17.28% 2009 5.34% 0.971 5.19%

2 Liquidity Ratios
a b Current Ratio Acid Test Ratio 1.41 0.76 1.13 0.58 1.06 0.55 1.360 0.208 0.974 0.332 0.894 0.249

3 Efficiency Ratios
a b c d Stock Turnover Ratio Debtors Turnover Ratio Stock Turnover Period Debtors Turnover Period 14.03 14.38 26.01 25.38 14.19 12.67 25.72 28.81 15.32 12.35 23.82 29.56 17.273 36.744 21.131 9.934 16.075 30.048 22.706 12.147 16.418 19.108 22.232 19.102

4 Financial Structure Ratios
a b Gearing Ratio Interest Cover Ratio 31.41% 36.99% 52.22 43.51% 23.90 36.85% 19.724 44.48% 80.570 51.84% 3.838

5 Investment Ratios
a b c d Return on Shareholders' Funds (ROSF) Ordinary Dividend Cover Earnings Per Share (EPS) (Rs.) Price Earnings Ratio (P/E) (as on March 31) Stock Price (in Rs.) at BSE (as on March 31) 30.61% 3.85 45.68 15.66 715.30 25.36% 3.90 46.15 15.07 695.65 15.90% 3.00 30.70 12.48 383.20 27.71% 3.293 49.387 13.55 669.25 25.80% 3.497 52.474 11.88 623.45 8.17% 3.207 19.440 9.27 180.30

(Please refer to Annexure I, II, III)

13

Trend Analysis Profitability Ratios

Net Profit Margin(NPM)
16% 14.93% 13.24%

Net Profit Margin

14% 12% 10% 8% 6% 4% 2% 0% 2006 - 07 9.87% 9.08%

8.55% 5.34%

2007 - 08

2008 - 09

Mahindra & Mahindra
Graph 1

Tata Motors

The NPM trends for both the companies follow a similar downward trend over the three financial years. Tata shows a lower NPM than M&M over the 3 years. As we know, NPM = EBIT/ Net Sales. To arrive at the EBIT value we have to deduct Cost of Goods sold and Depreciation from Net Sales. That is, EBIT = Net Sales – Expenditures – Depreciation. In case of Tata Motors the depreciation value is very large as compared to M&M. For Tata Motors the net sales reduced over the period 07-08 to 08-09, due to reduced volumes. Simultaneously EBIT value reduced drastically during the same period due to high depreciation; this lead to the drastic downward slope of the graph. In case of Mahindra & Mahindra over the period 07-08 to 08-09 net sales went up by 17%. This explains downward slope of Mahindra.

14

Asset Turnover
2.5 2.355

Asset Turnover

2.0 1.5 1.0 0.5 0.0 2006 - 07 1.85 1.54

1.904

1.36 0.971

2007 - 08

2008 - 09

Mahindra & Mahindra
Graph 2

Tata Motors

The Asset Turnover trends for both the companies follow a similar downward trend over the three financial years. Tata shows a higher AT over the first two years and then falls drastically in the third year. As we know Asset Turnover = Net sales / Total Capital Employed (TCE) In case of Tata Motors the net sales have declined between 07-08 and 08-09 while the TCE has increased by 73%. This explains the drastic drop in the asset turnover of Tata Motors. The Total capital employed increased as loans taken increased. These loans were used to fund the purchase of fixed assets and for investment purposes in subsidiary companies (as per the cash flow statement). As explained earlier the net sales reduced because of lower sales volumes. In case of Mahindra & Mahindra net sales are up year on year during these three fiscal years. But the Total Capital Employed increased by a much larger extent. This explains the downward slope of the AT Curve for M&M. During this period M&M used the increased capital to purchase fixed assets and investments (as per the cash flow statement).

15

Return on Capital Employed (ROCE)
30% 27.60% 25% 20% 23.24% 17.28% 11.61% 20.46%

ROCE

15% 10% 5% 0% 2006 - 07

5.19% 2007 - 08 2008 - 09

Mahindra & Mahindra
Graph 3

Tata Motors

The ROCE trends for both the companies follow a similar downward trend over the three financial years. As we know, ROCE = Net Profit Margin ? Asset Turnover. Since both the companies had downward slopes for NPM and AT during the three fiscal years; the ROCE trends for both the companies are downward sloping.

16

Liquidity Ratios

Current Ratio
1.60 1.40 1.20 1.41 1.36 1.13 1.06

Current Ratio

1.00 0.80 0.60 0.40 0.20 0.00 2006 - 07 2007 - 08 Tata Motors 2008 - 09 Mahindra and Mahindra
Graph 4

0.97

0.89

The Current Ratio trends for both the companies follow a similar downward trend over the three financial years. As we know Current Ratio = Current Assets/ Current Liabilities. During these three fiscal years Tata motors’ current assets are gradually decreasing over the period while the current liabilities are increasing over the same period. This explains the downward slope of the current ratio trend. Current liabilities increased drastically (almost 38%) over the period 2006-07 to 2007-08 giving the graph a steep slope during this period. This increase was due to an almost 90% increase in acceptances. During the same period, Mahindra & Mahindra’s current liabilities (80%) have grown by a larger percentage as compared to current assets (35%) for the given period. Current assets increased drastically due to increase in cash & bank balances and loans & advances. Current liabilities increased drastically due to an increase in sundry creditors. The resultant effect was that of a downward slope of the current ratio curve for M&M.

17

Acid Test Ratio
0.80 0.70 0.60 0.76 0.58 0.55

Acid Test Ratio

0.50 0.40 0.30 0.33 0.20 0.10 0.00 2006 - 07 2007 - 08 Tata Motors 2008 - 09 Mahindra and Mahindra
Graph 5

0.21

0.25

The Acid Test Ratio trends for both the companies follow a different trend over the three financial years. As we know Acid Test Ratio = (Cash + Sundry debtors) / Current liabilities For Tata motors, cash position as on 31st March 2008 was higher than on 31st March 2007. This happened because mainly because operating cash flows were very high during 2008. This explains the upward slope of the Acid Test Ratio trend for Tata during the first two years. The cash position on 31st December 2009 was lower as compared to 31st March 2008. This was because Tata made cash investments in its subsidiary companies and invested in fixed assets. Debtors have continuously increased over the three years and so did the current liabilities. The net effect is that of a downward slope of the trend during 2008-09. For Mahindra & Mahindra cash position as on 31st March 2008 was lower than on 31st March 2007. This was primarily because M&M made large purchases of investments. The cash position as on 31st March 2009 was higher than on 31st March 2008 because the cash generated from operations was higher than investment outflows. Sundry debtors continuously increased during the three fiscal years and so did the current liabilities. The net effect is of a downward slope which is steeper initially and then flattens out between the last two years.

18

Efficiency Ratios

Stock Turnover Ratio
20.00 18.00 17.27 16.08

Stock Turnover Ratio

16.42 15.32

16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 2006 - 07 2007 - 08 2008 - 09 14.03 14.19

Year
Mahindra & Mahindra
Graph 6

Tata Motors

Stock Turnover Ratio = Cost of Sales/Average Stock For TATA Motors, the cost of sales has increased from year 2007 to 2008. However the cost of sales has been lower for year 2009 amongst the three years (For year 2009, the decrease is primarily due to less consumption of raw materials and processing charges. The average stock has decreased but not proportionally to the decrease in cost of sales). Overall, the stock turnover ratio has not varied considerably over the three years. For Mahindra & Mahindra, the stock turnover ratio has increased marginally over the three years from 14.03 to 15.32. The Cost of Sales has increased consistently for M&M during these years. Also, the average stock held by the company has shown a steady increase. Therefore, there has been a marginal increase in the stock turnover ratio for M&M during these years.

19

Debtors Turnover Ratio
40.00

Debtors Turnover Ratio

35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00

36.74 30.05

19.11

14.38

12.67

12.35

2006 - 07

2007 - 08

2008 - 09

Year
Mahindra & Mahindra
Graph 7

Tata Motors

Debtors Turnover Ratio = Credit Sales (or Net Sales)/Average debtors For TATA Motors, the sundry debtors have doubled over the three years from about Rs 716.60 crores to Rs 1555.20 crores. From the year 2007 to 2008, there has been increase in net sales but sizeable increase in unsecured sundry debtors has led to decrease in Debtors? turnover ratio. From the year 2008 to 2009, the net sales have dropped while the sundry debtors have continued to increase leading to sharp decline in the Debtors? turnover ratio. The sales volumes decreased by 15.2% y-o-y to 265,373 units in FY09 as compared to 312,935 units in FY08 because of severe liquidity crunch and slowing economy CV domestic sales. So, the cycle of converting credit into cash has become longer for Tata Motors in FY 2009 as compared to FY 2007. For Mahindra & Mahindra, the net sales and sundry debtors have increased steadily during the three years. Therefore, there has not been any considerable deviation in Debtors? Turnover ratio.

20

Stock Turnover Period
30.00 26.01 25.72 23.82 22.71 22.23

Stock Turnover Period

25.00 20.00 15.00 10.00 5.00 0.00 2006 - 07 2007 - 08

21.13

2008 - 09

Year
Mahindra & Mahindra
Graph 8

Tata Motors

Stock Turnover Period = 365 days/Stock Turnover Ratio For TATA Motors, Stock Turnover Ratio decreases from FY 2007 to FY 2008 and then increases from FY 2008 to FY 2009 and therefore the stock turnover period has increased from FY 2007 to 2008 and decreased thereafter. For Mahindra & Mahindra, Stock Turnover Ratio consistently decreases from FY 2007 to FY 2009; therefore the stock turnover period has increased from FY 2007 to FY 2009.

21

Debtors Turnover Period
35.00

Debtors Turnover Period

30.00 28.81 25.00 20.00 15.00 10.00 9.93 5.00 0.00 2006 - 07 2007 - 08 2008 - 09 12.15 12.15 25.38 29.56

Year
Mahindra & Mahindra
Graph 9

Tata Motors

Debtors? Turnover Period = 365 days/ Debtors Turnover ratio For TATA Motors, Debtors? Turnover Ratio decreases from FY 2007 to FY 2008 and further decreases marginally from FY 2008 to FY 2009, therefore the debtors? turnover period has increased from FY 2007 to 2008 and remained constant thereafter. This shows that the average number of days? worth credit sales that is locked in debtors (accounts receivable) has increased over these three years and the company is not able to convert credit into cash in an efficient manner in FY 2009 as compared to FY 2007. For Mahindra & Mahindra, Debtors? Turnover Ratio decreases from FY 2007 to FY 2009, therefore the debtors? turnover period has increased from FY 2007 to 2009.

22

Financial Structure Ratios

Gearing Ratio
60% 50% 44.48% 36.85% 36.99% 30% 31.41% 20% 10% 0% 2006 - 07 2007 - 08 Tata Motors 2008 - 09 Mahindra and Mahindra
Graph 10

51.84% 43.51%

Gearing Ratio

40%

The Gearing Ratio trends for both the companies follow a similar upward trend over the three financial years. As we know Gearing ratio = Loans / (Loans + Shareholders? funds). For Tata Motors he loan amount over the three year period has more than trebled, whereas the shareholders? funds have only doubled. In effect the gearing ratio has increased. Unsecured Loans increased because of increase in commercial papers, foreign currency convertible notes, increase in short term loans from banks, public and shareholders. Secured loans increased because of increase in cash credit and overdrafts accounts. For Mahindra & Mahindra over the three year period loans have more than doubled, whereas the shareholders? funds have only increased by 50%. So the gearing ratio has increased but not at the same rate as that of Tata.

23

Interest Cover Ratio
90 80 80.570

Interest Cover Ratio

70 60 50 40 30 20 10 0 N.A. 2006 - 07 2007 - 08 Tata Motors 3.838 2008 - 09 19.724 52.22

23.90

Mahindra and Mahindra
Graph 11

The Interest cover ratio trends for both the companies follow a similar downward trend over the last two financial years. As we know Interest cover ratio = PBIT/Interest. Interest expenditure for Tata motors decreased and then increased. PBIT decreased slightly from 2006-07 to 2007-08, but it fell drastically between 2007-08 & 2008-09. This explains the inverted V-shape of the graph. For Mahindra & Mahindra during the last two years, PBIT decreased whereas interest expenditure increased by 100%. This explains the sudden drop in M&Ms interest cover ratio. The interest expenditure increased on account of higher interest payable for loans and debentures during 2008-09.

24

Investment Ratios

Return on Shareholders' Funds
35.00% 30.00% 25.00% 30.61% 25.36%

% ROSF

27.71%

25.80% 15.90%

20.00% 15.00% 10.00% 8.17% 5.00% 0.00% 2006 - 07 2007 - 08 2008 - 09

Year
Mahindra and Mahindra
Graph 12

Tata Motors

Both the companies showed a decreasing trend for Return on Shareholder?s Funds (ROSF) for the last three years. For Tata Motors this ratio showed was relatively stable between a range of 25-28% in the years 2006-07 and 2007-08. However in the financial year 2008-09 there was a steep decline in this ratio to 8.17%. The primary reason for this was a decline of around 50% in the profit after tax figure (PAT) for the year 2008-09. The major contributors for decline in the PAT figure was a decline of 10.7% in the Net Sales from 2007-08 to 2008-09 and also higher interest payments to service their loans. The total shareholder funds also increased primarily on account of the Rights Issue offer made by the company. Mahindra & Mahindra showed a continuous decline in this ratio over the past three years. It declined from 25.36% in 2007-08 to 15.9% in 2008-09. This was due to a decrease in PAT from Rs 1103 crores to Rs 837 crores. Also on account of amalgamation of Punjab Tractors Limited (PTL) with the company, the company credited Investment Fluctuation Reserve Account under the Reserves and Surplus by Rs. 677.00 crores. This being the excess of the value of the net assets of PTL over the face value of shares allotted to the shareholders of PTL. ROSF also declined from 30.6% in 2006-07 to 25.36% in 2007-08 because the increase in PAT was not substantial enough as compared to the shareholders funds available to the company. Mahindra and Mahindra had a comparatively higher ROSF for the given period than Tata Motors. 25

Ordinary Dividend Cover
Ordinary Dividend Cover Ratio
4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 2006 - 07 2007 - 08 2008 - 09 3.293 3.497 3.85 3.90 3.00 3.207

Year
Mahindra and Mahindra
Graph 13

Tata Motors

This ratio has shown a similar trend for both the companies in the given period. The ordinary dividend cover increased marginally for both companies from 2006-07 to 2007-08 and then marginally decreased in 2008-09. In case of Tata Motors there is little variation in this ratio over the period of last three years. It increased from 3.3 in 2006-07 to 3.5 in 2007-08 and then declined to 3.21 in 2008-09. This means that the post-tax earnings of Tata Motors are 3.2 to 3.5 times the dividend paid by the company. In other words, the dividends paid by the company are 28-32% of the post-tax profit in the past three years. For Mahindra & Mahindra also it increased marginally from 3.85 in 2006-07 to 3.90 in 2007-08 and then declined to 3.00 in 2008-09. Therefore the dividends paid by the company are 25-33% of the post-tax profits in the past three years.

26

Earning per Share
60.00 50.00 40.00 30.00 20.00 19.440 10.00 0.00 2006 - 07 2007 - 08 2008 - 09 49.387 45.68 52.474

46.15 30.70

Rupees

Year
Mahindra and Mahindra
Graph 14

Tata Motors

Both the companies showed a significant dip in Earnings per Share (EPS) in 2008-09 as compared to 2007-08. For Tata Motors the EPS declined from Rs 52.5 in 2007-08 to Rs 19.4 in 2008-09. This was due to a significant dip in Profit after Tax (PAT) on account of decrease in turnover, due to slump in domestic and international markets. However, the EPS had increased from Rs 49.38 in 2006-07 to Rs 52.5 in 2007-08 due to increase a 6.03% increase in PAT on account of a lower tax provision owing to the increase in spend on Research and Development and income from capital gains, which is subject to a lower tax rate. In case of Mahindra & Mahindra the EPS declined from Rs 46.15 in 2007-08 to Rs 30.70 in 2008-09. This was due to a decline in PAT from Rs 1103 crores in 2007-2008 to Rs 837 crores in 2008-09 which was on account of higher material costs as % of sales, higher personnel cost as % of sales, higher depreciation due to capitalization of the Xylo related assets and increase in amortization of intangibles and also higher interest costs due to increased borrowings to meet the company?s capital expenditure and other growth plans. Also, the number of shares increased from 38.55 crores in 200708 to 51.4 crores in 2008-09 on account of the rights issue offer made by the company. However, in the year 2007-08 there was a marginal increase in EPS from Rs 45.68 in 2006-07 to Rs 46.15 in 2007-08 due to a higher post tax profit. Mahindra & Mahindra had a comparatively higher EPS in 2008-09 than Tata Motors.

27

Price-Earnings Ratio
35.00 30.00 25.00 13.55 11.88 9.27 15.66 15.07 12.48

P/E Ratio

20.00 15.00 10.00 5.00 0.00 2006 - 07 2007 - 08 2008 - 09

Year
Mahindra & Mahindra
Graph 15

Tata Motors

Price-Earnings Ratio = Current Stock Price/Earnings per share (EPS) A higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio. For both the companies, Price-Earnings ratio (as on March 31) has decreased from the financial year 2006-07 to 2008-09.

28

Annexure I: Sample Calculation Financial ratios using the Annual Report of Tata Motors (FY 2008 2009)
Mere statistics/data presented in the different financial statements do not reveal the true picture of a financial position of a firm. Properly analyzed and interpreted financial statements can provide valuable insights into a firm?s performance. One of the tools to extract essential information (for investors) from these financial statements is ratio analysis. Financial ratios can be broadly classified into 1. 2. 3. 4. 5. Profitability Ratios Liquidity Ratios Efficiency Ratios Financial Structure Ratios Investment Ratios

Here, we present the sample calculation of ratios from one of the annual reports (Financial year 2008-2009) of TATA Motors. We have looked into the relevant schedules and notes provided in the annual report and tried to reason out the validity of any component of an item in the financial statements to be included in the calculation of financial ratios. Note: All the figures used in the computation of ratios are in Rs. Crores

29

Profitability Ratios
1. Net Profit Margin% [(Profit before Interest & Tax/Net Sales)*100] From the profit and loss account for the year ended March 31, 2009 pg no 57

Interest can be derived from Note 4 of the Schedule “B” of the schedules forming part of the balance sheet and Profit & loss statement in the annual report on page 83.

Net Sales = 25660.79

Net Profit Margin = [(Profit before Tax + Interest)/ Net Sales]*100 = [(1013.76 + 357.22)/25660.79]*100 = 5.34 % Net Profit Margin = 5.34 % 30

2. Asset Turnover (Net Sales/Total Assets) As shown in the above ratio, the net sales of the company in the year 2008-09 are 25660.79. The total assets can be derived from the balance sheet (as at March 31, 2009) in annual report pg no 56.

Asset Turnover = Net Sales/Total Assets = 25660.79/26425.64 = 0.971 Asset Turnover = 0.97

3. Return on Capital Employed (ROCE = NPM * AT) Return on Capital Employed is calculated as the ratio of profit before interest and tax to the sum of share capital, reserves and long term debt. As per Du Pont Analysis, it is simply equal to the product of Net Profit Margin % and Asset Turnover. Using Du Pont Analysis, ROCE = Net Profit Margin % * Asset Turnover = 5.34 % * 0.97 = 5.188 % Return on Capital Employed = 5.19 %

31

Liquidity Ratios
4. Current Ratio (Current Assets/Current Liabilities) From the balance sheet (as at March 31, 2009) in annual report pg no 56,

We have calculated the current ratio as ratio of the current assets, loans & advances to current liabilities and provisions. Current ratio = (Current Assets, Loans & Advances)/(Current Liabilities & Provisions) = 9691.69/10835.51 = 0.8944 Current ratio = 0.89

5. Acid Test or Quick Ratio (Quick Assets/Current Liabilities) From the balance sheet (as at March 31, 2009) in annual report pg no 56,

We have calculated the acid ratio as the ratio of quick assets (Sundry Debtors, Cash and Bank Balances) to the current liabilities and provisions. Quick Assets are cash and other assets which can or will be converted into cash fairly soon. Acid Test Ratio = (Sundry Debtors + Cash & Bank Balances)/ (Current Liabilities & Provisions) = (1555.20 + 1141.82)/10835.51 = 0.2489 Acid Test (Quick) Ratio = 0.25 32

Efficiency Ratios
6. Stock Turnover Ratio (Cost of Sales/Average Stock) Referring to the profit and loss account for the year ended March 31, 2009 pg no 57

Cost of sales does not include general selling and distribution expenses; therefore we look into the Schedule “B” for profit and loss account (manufacturing & other expenses) on page no 60 in the annual report. We have identified that the Cost of Sales can have the following four components a. Purchase of products for sale b. Raw Materials and components c. Processing Charges d. Salaries, wages & bonus

Cost of Sales = Cost on (Purchase of products for sale + Raw Materials and components + Processing Charges + Salaries wages & Bonus) = 2180.32 + 16218.62 + 810.60 + 1227.77 33

Cost of Sales = 20437.31 ---------------------- (i) Average Stock is calculated by taking simple average of opening stock and closing stock. From the Schedule “B” for profit and loss account (Changes in Stock-in-trade and Work-inProgress) on page no 60 in the annual report, the average stock is calculated as follows:

Average Stock = (Opening Stock + Closing Stock)/2 = (1363.86 + 1125.82)/2 Average Stock = 1244.84 ---------------------- (ii) Therefore, Stock Turnover Ratio = Cost of Sales/Average Stock = 20437.31/1244.84 [From (i) and (ii)] = 16.418 Stock Turnover Ratio = 16.42

7. Stock Turnover Period (365 days/Stock Turnover Ratio) Stock turnover period is the ratio of average stock to cost of sales per day. Alternatively, the stock turnover period can be calculated using Stock Turnover Ratio as Stock Turnover Period = 365 days/Stock Turnover Ratio = 365/16.418 = 22.232 days Stock Turnover Period = 22.23 days

8. Debtors Turnover Ratio (Credit Sales/Average Debtors) As credit sales is not explicitly mentioned in the profit and account statement of the annual report, we are taking an exception in using total net sales instead of credit sales in the calculation of this ratio. Referring to the profit and loss account for the year ended March 31, 2009 pg no 57

34

Net Sales = 25660.79 --------------------------- (i) Average Debtors is calculated by taking simple average of opening accounts receivables (sundry debtors for yr 2007-2008) and closing accounts receivables (sundry debtors for yr 2008-2009). From the balance sheet (as at March 31, 2009) in annual report pg no 56,

Average Debtors = (Opening Sundry Debtors + Closing Sundry Debtors)/2 = (1555.20 + 1130.73)/2 Average Debtors = 1342.965 ----------------- (ii) Therefore, Debtors Turnover Ratio = Net Sales/Average Debtors = 25660.79/1342.965 [From (i) and (ii)] = 19.108 Debtors Turnover Ratio = 19.11

9. Debtors Turnover Period (365 days/Debtors Turnover Ratio) Debtors? turnover period is the ratio of average debtors to credit sales per day. Alternatively, the debtors? turnover period can be calculated using Debtors Turnover Ratio as Debtors Turnover Period = 365 days/Debtors Turnover Ratio = 365/19.108 = 19.102 days Debtors Turnover Period = 19.10 days

35

Financial Structure Ratios
10. Gearing Ratio [(Loans + Preference Capital/Total Capital Employed)*100] From the balance sheet (as at March 31, 2009) in annual report pg no 56,

After checking the Schedule 1 of the balance sheet in the annual report, we find that no preference shares were issued. Therefore, the preference capital here is taken as zero. Total Capital Employed is calculated by taking the sum of loan funds and shareholders? funds. Gearing ratio = [(Loans + Preference Capital)/Total Capital employed]*100 OR [(Loans fund + Preference Capital)/(Shareholders? fund + Loans fund)]*100 = [(13165.56 + 0)/(12230.15 + 13165.56)]*100 = 51.84 % Gearing ratio = 51.84 %

11. Interest Cover Ratio (Profit before interest and tax/Interest payable) From the profit and loss account for the year ended March 31, 2009 pg no 57

36

Interest can be derived from Note 4 of the Schedule “B” of the schedules forming part of the balance sheet and Profit & loss statement in the annual report on page 83.

Interest Cover Ratio = (Profit before Tax + Interest)/Interest = (1013.76 + 357.22)/357.22 = 3.838 Interest Cover Ratio = 3.84

37

Investment Ratios
12. Return on Shareholders’ fund [{(PAT-Misc Exp-Preference Dividend)/(Ordinary Share Capital + Reserves)} *100] Return on Shareholders? fund is calculated by taking percentage of profit after interest, tax and preference dividend to the total Shareholders? fund. As Tata Motors has issued no preference shares in the financial year 2008-09, therefore the preference dividend is zero. This can be validated by looking at Notes on Capital in the Schedule 1 of the balance sheet in the annual report. From the profit and loss account for the year ended March 31, 2009 pg no 57

From the balance sheet (as at March 31, 2009) in annual report pg no 56,

Return on Shareholders? fund (ROSF) = (Profit after interest, tax & Pref. Dividend/Shareholders? Fund)*100 Or [(PAT-Misc Exp-Preference Dividend)/(Ordinary Share Capital + Reserves)]*100 = [(1001.26 – 2.02 – 0)/(514.05 + 11716.10)] * 100 = 8.17 % Return on Shareholders? fund (ROSF) = 8.17 %

38

13. Ordinary Dividend Cover (Profit after interest, tax & preference dividend/Ordinary Dividend for the year) Referring to the profit and loss account for the year ended March 31, 2009 pg no 57

From the balance sheet (as at March 31, 2009) in annual report pg no 56,

Ordinary Dividend Cover expresses a company's ability to pay ordinary dividends to shareholders out of profits earned. It is calculated by taking the ratio of profit after interest, tax & preference dividend to the dividend on ordinary shares given by the company in the given financial year. Ordinary Dividend Cover = PAT, tax & preference dividend/ Ordinary Dividend = (PAT - Misc Exp - Preference Dividend)/Proposed dividend for the yr = (1001.26 – 2.02 – 0)/311.61 = 3.207 As Tata Motors has issued no preference shares in the financial year 2008-09, therefore the preference dividend is zero. Ordinary Dividend Cover = 3.21

14. Earnings per Share (EPS) (Profit after interest, tax & preference dividend/Number of Ordinary Shares) EPS is the portion of a company's profit allocated to each outstanding share of common stock. It is calculated for ordinary shares; therefore it is ratio of profit after interest, tax and preference dividend to the number of ordinary shares outstanding. From the profit and loss account for the year ended March 31, 2009 pg no 57

39

Preference Dividend is zero. From the balance sheet (as at March 31, 2009) in annual report pg no 56,

Referring to the Schedule 1 from the schedules to the balance sheet on the page in the annual report

EPS = Profit after interest, tax & preference dividend/Number of Ordinary Shares = (PAT - Misc Exp - Preference Dividend)/No. of ordinary shares = (1001.36 – 2.02 – 0)/51.4008314 (in crores of shares) = Rs 19.442 Earnings per Share (EPS) = Rs 19.44

15. Price Earnings Ratio (P/E ratio) (Market price of the share/EPS) The P/E ratio (price-to-earnings ratio) of a stock is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is calculated by taking ratio of the market price of the share to the Earning per share) Example: Taking the stock market price of Tata Motors on March 31, 2009, we can calculate P/E ratio of the stock on that date. Stock Price of Tata Motors on March 31, 2009 = Rs 180.30 (data taken from BSE website) Average EPS over the last 12 months (as calculated above) = Rs 19.4421 P/E Ratio = 180.30/19.442 = 9.274 P/E Ratio = 9.27 40

Annexure II: Financial Statements of Mahindra & Mahindra (20082009)

41

42

Annexure III: Financial Statements of Tata Motors (2008-2009)

43

44



doc_764110749.docx
 

Attachments

Back
Top