Automobile Industry Fundamental Analysis

INTRODUCTION
The favourable Indian market conditions are acting as a catalyst for luxury and premium carmakers, which are receiving impetus from new launches. India is emerging as an export hub for sports utility vehicles (SUVs). Global automobile majors are looking to leverage India’s cost-competitive manufacturing practices and are assessing opportunities to export SUVs to Europe, South Africa and Southeast Asia too. India is also one of the key markets for hybrid and electric medium-heavy-duty trucks and buses. Government initiatives: The Government of India allows 100 per cent foreign direct investment (FDI) in the automotive industry through automatic route. The Government also plans to accelerate the supply of electric vehicles over the next eight years. It is expected that there will be a demand for 5-7 million electricity-operated vehicles by 2020. The contribution of automotive sector in the gross domestic product (GDP) is expected to double, reaching a turnover worth US$ 145 billion in 2016, with special focus on export of small cars, MUVs, two ; three wheelers and auto components, as per the Automotive Mission Plan (AMP) 2006-2016. With the view of the above statistics the purpose of this project is to determine the financial performance of some of the big players in automotive industry. To determine which company is financially sound and which is not and what the future prospects of the company. Almost all vital ratios are calculated and compared with that of the industry. This brings into picture the overall performance of the company as a whole in respect to the industry as well as the with peers in the market.

RATIO ANALYSIS
Companies in consideration 1. TATA Motors
2. Maruti Suzuki Ltd.
3. Mahindra ; Mahindra(M;M)
4. Hyundai
5. Force Motors
Industry Analysis and comparison

2.1 LIQUIDITY RATIO
Table 1: Current Ratio
Years/Company
Tata
Maruti
M;M
Hyundai
Force Motors
Industry
2009
1.04
1.61
2.21
1.79
1.16
1.46
2010
1.02
1.06
2.44
1.41
1.36
1.19
2011
1.03
1.46
2.18
1.96
1.41
1.40
2012
1.05
1.19
1.32
1.69
2.81
1.35
Average
1.04
1.33
2.04
1.71
1.69
1.35

Figure 1: Current Ratio

The current ratio tells the liquidity of the firm and the current assets should be more than the current liabilities so that the company is able to pay their liabilities. The 4 years average of Tata motors could not maintain its current ratio above the industry average in any of the year. The average of Marathi was also not higher than the industry average, except in 2011 all other years are low. The average of Mahindra ; Mahindra, Hyundai ; Force motor is higher than the industry average.

Table 2: Quick Ratio
Years/Company
Tata
Maruti
M;M
Hyundai
Force Motors
Industry
2009
0.70
1.35
1.82
1.13
0.49
1.05
2010
0.75
0.72
2.02
1.05
0.78
0.85
2011
0.68
1.09
1.77
1.52
0.68
0.97
2012
0.72
0.85
1.00
1.27
1.90
0.89
Average
0.71
1.00
1.65
1.24
0.96
0.94

Figure 2: Quick Ratio

Quick ratio is use to tell the liquidity position of the company. It helps to know how quick the company can pay its short term liabilities. Quick ratio of Tata motors is less than the industry average in the entire period of 4 years. The Mahindra ; Mahindra ; Hyundai ratios is higher than the industry average and in Force Motors the ratio was slightly higher than the industry average in 2012 and low in all other years. In Marathi the ratio of 2010 ; 2012 years was less than the industry average and rest are high.

Table 3: Cash Flow from Operations
Years/Company
Tata
Maruti
M;M
Hyundai
Force Motors
Industry
2009
0.02
0.48
0.41
0.05
-0.09
0.03
2010
0.22
1.14
0.33
0.65
0.18
0.51
2011
0.28
0.99
-0.18
0.77
0.17
0.47
2012
0.34
0.53
0.01
0.49
-0.35
0.31
Average
0.22
0.78
0.14
0.49
-0.02
0.33

Figure 3: Cash Flow from Operations
The Ratio of Tata motors in the year 2012 is slightly higher than the industry average and in the rest of years it is low. The Force motors ratio in 2009 ; 2012 are negative because the cash from the operating activities are negative, in 2010; 2011 the ratio is less than the industry average so the company is not performing well. In Maruti the ratio of all the years are higher than the industrial average the company is performing well. In Mahindra; Mahindra the ratio in 2011 is negative and in 2009, 2010 higher than the industry average and in 2012 it is lower than the industry average. In Hyundai except in the year 2009 the ratio is lower than the industry average and all other years are high

Table 4: Cash Ratio
Years/Company
Tata
Maruti
M;M
Hyundai
Force Motors
industry
2009
0.55
1.07
0.35
0.53
0.23
0.76
2010
0.57
0.49
0.33
0.46
0.33
0.58
2011
0.51
0.88
0.17
1.22
0.30
0.74
2012
0.56
0.68
0.25
1.02
1.51
0.71
Average
0.55
0.78
0.28
0.81
0.59
0.70

Figure 4: Cash Ratio

As shown in table 4, the cash ratio of the industry is 0.70. All the companies under study have maintained around the average mean except Mahindra ; Mahindra Ltd. This is because of the lower cash balance as compared to short term liabilities. However Figure 4 shows variations in ratio of different companies which reveals that they all have different cash policies.

2.2 ACTIVITY RATIO
Table: 1 Debtors Turnover Ratio
Years/Company
Tata Motors
Maruti Suzuki
Mahindra ;
Mahindra
Hyundai
Force Motors
Industry
2009
30.91
26.02
5.47
11.26
6.24
19.33
2010
15.95
33.55
7.23
9.86
7.24
19.28
2011
18.43
44.74
6.31
13.52
9.79
26.30
2012
23.12
40.36
10.23
25.35
13.12
30.05
Average
22.10
36.17
7.31
15.00
9.10
26.48

Figure 1: Debtors Turnover Ratio

This ratio determines in how many times the debtors pay cash as compared to the net sales. The higher the ratio the better it is for the company as the debtors pay back the cash on time. The industry average to around 26.48 whereas Maruti has the least debtors as the ratio is higher than that of the industry.

Table: 2 Creditors Turnover Ratio
Years/Company
Tata Motors
Maruti Suzuki
Mahindra ;
Mahindra
Hyundai
Force Motors
Industry
2009
5.10
7.49
1.93
5.72
5.09
14.74
2010
3.09
9.27
2.38
5.86
3.03
32.43
2011
3.63
11.14
2.01
6.51
4.00
30.38
2012
4.06
8.41
3.53
7.77
6.88
21.57
Average
3.97
9.08
2.46
6.47
4.75
17.33

Figure 2: Creditors Turnover Ratio

When it comes to creditors’ turnover ratio the lower the better it is for the company to pay back the creditors however it should not exceed limits. As Figure No. 2 shows all the company have lesser the creditors’ turnover ratio as they get enough credit period to back for its purchases.

Table: 3 Inventory Turnover Ratio
Years/Company
Tata Motors
Maruti Suzuki
Mahindra ;
Mahindra
Hyundai
Force Motors
Industry
2009
13.53
21.37
5.80
8.49
3.55
11.70
2010
8.59
27.77
6.54
11.57
5.07
14.58
2011
9.96
27.87
5.45
15.77
6.04
17.28
2012
10.57
22.14
7.64
15.84
6.19
13.73
Average
10.66
24.79
6.36
12.92
5.21
13.38

Figure 3: Inventory Turnover Ratio

This ratio indicates the turnover of inventory as sales. The higher the ratio the better it is for the company. Maruti has the highest inventory turnover which is a good sign, it also means that the company manage it inventory well. Similarly all other companies show a low inventory turnover ratio which means they have huge inventory pile up for sale as finished goods or as raw materials.

Table: 4 Fixed Asset Turnover Ratio
Years/Company
Tata Motors
Maruti Suzuki
Mahindra ;
Mahindra
Hyundai
Force Motors
Industry
2009
5.12
5.63
2.03
3.81
2.69
4.23
2010
3.09
6.45
2.21
4.47
3.45
4.33
2011
3.70
6.93
1.77
5.06
4.51
5.04
2012
4.28
5.45
1.57
5.91
4.95
4.66
Average
4.05
6.11
1.89
4.81
3.90
5.70

Figure: 4 Fixed Asset Turnover Ratio

This ratio states that the no. of times the sales are to the total fixed asset of the company. Therefore the greater it is the better it is for the company. Mahindra has the least fixed asset turnover ratio which means that it is not utilizing its ratios to the optimum. Similarly, Maruti has the most asset generated revenue as it is the largest car manufacturer with the highest market share followed by Hyundai and Tata motors.

Table 5: Total Asset Turnover Ratio
Years/Company
Tata Motors
Maruti Suzuki
Mahindra ;
Mahindra
Hyundai
Force Motors
Industry
2009
3.59
2.14
0.61
2.31
1.06
1.90
2010
2.25
2.58
0.65
3.07
1.38
2.10
2011
2.45
2.70
0.59
3.18
1.75
2.54
2012
2.31
2.29
0.86
3.21
1.62
2.28
Average
2.65
2.43
0.68
2.94
1.45
2.32

Figure 5: Total Asset Turnover Ratio

Similar to the fixed asset turnover, Total asset turnover ratio shows the sales generated by the entire fixed asset. The higher the better it is for the company. As figure 5 shows Mahindra has the least turnover ratio which means its sales is lower than the others for every one rupee of asset in its balance sheet. The industry average is around 2.32 only Mahindra and Force motors are lower than the industry average.

Table 6: WC Turnover Ratio
Years/Company
Tata Motors
Maruti Suzuki
Mahindra ;
Mahindra
Hyundai
Force Motors
Industry
2009
123.3
17.5
1.9
7.4
0.02
11.4
2010
99.2
25.5
1.9
9.9
0.03
17.0
2011
124.2
36.9
1.9
9.6
0.03
22.4
2012
82.0
25.5
7.7
8.5
0.04
16.1
Average
107.17
26.36
3.36
8.83
0.03
12.8

Figure 6: WC Turnover Ratio

The higher the ratio the better it is as the working capital is the only net assets which are used in the day to day operations of the business and they generate the cash for the business. Further, Force Motors has the least WC turnover which shows that the company is not doing well in terms of its working capital management it needs to invest less in WC or increase he sale potentially with the WC investment.

2.3 Solvency Ratio
Table 1: Debt to Equity Ratio
Year
Tata
Maruti
M;M
Hyundai
Force Motors
Industry
2009
5.89
0.0695
1.73
1.38
0.7
0.52
2010
4.28
0.064
1.33
0.67
0.52
0.42
2011
1.71
0.021
1.19
0.64
0.747
0.48
2012
1.44
0.075
0.96
0.59
0.05
0.37
Average
3.33
0.057375
1.3025
0.82
0.50425
0.4475

Figure: 1 Debt Equity Ratio
Debt Equity Ratio is a measure of a company’s financial leverage calculated by dividing its debt liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. Nearly all the companies in figure 1 have debt equity more than the industry average which means that the automobile industry resort more to external liabilities in the form of debt. However TATA motors have the highest debt equity which average around 3.3 in the last 4 years. It gives a red signal for its increasing debt component and is not financially a signal of strength. Maruti has the least debt as seen in the figure lower than the industry average.

Table: 2 Debts to Total Capital
Year
Tata
Maruti
M;M
Hyundai
Force Motors
Industry
2009
0.85
0.074
0.63
1.38
0.41
0.34
2010
0.8
0.069
0.57
0.67
0.34
0.029
2011
0.55
0.022
0.54
0.64
0.427
0.32
2012
0.53
0.081
0.49
0.59
0.049
0.26
Average
0.6825
0.0615
0.5575
0.82
0.78
0.23725

Figure 2: Debt to Total Capital

Companies can finance their operations through either debt or equity. The debt-to-capital ratio gives users an idea of a company’s financial structure. The higher the debt-to-capital ratio, the more debt the company has compared to its equity. This tells investors whether a company is more prone to using debt financing or equity financing. As stated in debt to equity ratio Maruti has the least and the others have all above the industry. This shows that automobile industry is more debt ridden.

Table: 3 Times Interest Earned (TIE)
Year
Tata
Maruti
M&M
Hyundai
Force Motors
2009
0.02
34.54
4.11
2.3
6.3
2010
2.43
109.3
4.86
6.8
3.38
2011
5.38
132.9
5.42
27.7
4.49
2012
5.54
40.7
3.29
13.6
29.7
Average
3.3425
79.36
4.42
12.6
10.9675

Figure: 3 TIE

A metric used to measure a company’s ability to meet its debt obligations. It is calculated by taking a company’s earnings before interest and taxes (EBIT) and dividing it by the total interest payable on bonds and other contractual debt. The higher the ratio the better it is. Maruti has the highest ratio as its debt component is very low. Similarly, all the other companies range from 3-12 on an average which is good overall as the company is able to meet its fixed liabilities i.e. interest on debts.

Table: 4 Cash flow from Operations to Debt
Year
Tata
Maruti
M&M
Hyundai
Force Motors
Industry
2009
0.02
2.35
0.28
0.03
-0.21
0.04
2010
0.26
4.94
0.2
1.02
0.39
0.83
2011
0.34
12.31
-0.14
0.82
0.29
0.58
2012
0.39
2.27
0
0.74
-2.33
0.5
Average
0.2525
5.4675
0.085
0.6525
-0.465
0.4875

Figure: 4 Cash flow from Operations to Debt

This coverage ratio compares a company’s operating cash flow to its total debt. As seen in the previous ratios Maruti has least debt so the ratio is more as compared to the debt in the denominator. Similarly the rest are close to the industry which on average is 0.4875 (Table: 4). This shows that even though the debt is huge in the automobile industry the amount it generates from its operations is not much compared to the debt and is sometimes negative as well when the cash from operations is negative.

2.4 PROFITABILITY RATIOS

Table: 1 Operating Profit (%)

Figure 1: Operating Profit Ratio (%)

Table 1 shows the operating profit of the various companies in the automobile industry. As shown in figure 1 Force Motors has the highest operating profit over the years but in the last year 2012. The industry average is 7.58%. Almost all companies have fared well as compared to the industry.

Table 2: Profit before Tax Margin

Figure 2: Profit before Tax Margin

The industry average for profit before tax margin is 3.48% over the period. As shown in figure 2 all the companies have a margin above the industry except Tata motors which in 2009 performed badly. This was due to reduced sale in 2009 and 2010. Overall, the companies have fared well in the net margin performance.

Table 3: Net Profit Margin (%)

Figure 3: Net Profit Margin (%)

The industry average is around 2.02%. All the companies have performed over the industry except for Hyundai motors which only performed better in 2012. Again force motors had the largest rise because of increasing sales and reduced expenses to a larger extend. On the whole, an industry average of 2.02 is very low. M;M, Maruti and Force Motors are the only ones performing over 6% on an average. Tata Motors and Hyundai have low net profits which gives a bad result from the investor’s point of view.

Table: 4 Return on Total Capital (%)

Figure: 4 Return on Total Capital

Although the industry average is 9.19% as shown in table 4, most companies have given larger returns to their capital employed around 15%-20% with force motors as an exception which has 33% returns to its capital because of rising profits. Tata Motors which showed lowest returns in 2009 has gained in the recent years. This is a positive sign for the company. Maruti has also lowered its returns in the recent years however managed to maintain it much higher than the industry’s.

Table 5: ROE (%)

Figure 5: ROE (%)

Tata Motors had negative returns in 2009 but it gained well in the recent years and rose much higher than the industry which stands at 7.51%. Return on Equity is an important indicator for an investor. As we see it ranges from 15%-20% for all the companies it is a positive sign for the shareholders to invest their money in the industry. Although a large amount of PAT is kept aside as retained earnings but a larger ROE gives an indication that the company has future growth prospects.

Table: 6 ROA (%)

Figure: 6 ROA (%)

Return on Assets shows the revenue generating capacity of the total operating assets of a company. In a manufacturing company assets play a vital role in the performance and therefore this ratio is a good indicator of the profits generated by the assets. Force motors shows the largest returns in assets in 2009 and 2012 the others maintain an average above the industry’s of 9.19% around 15%-20%. M;M shows lowest returns of 12.66% which shows that the company still hasn’t utilized its assets to the fullest.

CONCLUSION

GOLD NUGGETS: MARUTI and MAHINDRA are definitely the GOLD Nuggets of the industry as they have potential to manage the inventory well, with consistent profits and debt under control. TATA motors should reduce the debt taken to improve its profitability. Force Motors should improve the WC management and also it should get more profits from operations rather than from sale of investments. These are GREY Areas. Hyundai has an average performance. It lies somewhere in between the two.