mohd islam Final Report11.doc

7/31/2019 mohd islam Final Report11.doc

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Letter of Authorization

The report is submitted as partial fulfillment of the requirement of MBA Program of JKPS

GURGOAN, which has been authorized by Prof. SANJAY RASTOGI.

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ACKNOWLEDGEMENT

I am grateful to Maruti Suzuki India Limited for providing me the opportunity to undertake

Summer Internship Program at their organization. The SIP has been of great learning to me and

has allowed me to understand various things from a practical point of view.

I would like to express sincere gratitude towards Mr. Lalit Khilani, Deputy Manager Finance

and various Departmental heads, because without their help, guidance and encouragement this

report would not have been possible.

I would also like to thank my college mentor Prof. SANJAY RASTOGI for his continuous

support and guidance. Without him, the project would not have been a success.

My gratitude and appreciation extends to all my friends who have been directly orindirectly

being associated with the project for their support and encouragement.

Finally, I owe my deepest and most invaluable debt to my family as I would have never come

this far without their unconditional love and support.

(MOHAMMAD ISLAM)

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TABLE OF CONTENT

ACKNOWLEDGEMENT .................................................................................2

CHAPTER 1: INTRODUCTION .....................................................................5

PURPOSEOFTHEPROJECT ............................................................................................................... 5LIMITATIONSOFTHE STUDY: ..........................................................................................................6METHODOLOGY: ...........................................................................................................................7

CHAPTER 2: ANALYSIS .................................................................................8

SWOT ANALYSIS

........................................................................................................................ 8INDUSTRY..................................................................................................................................17ABOUTTHE COMPANY: ................................................................................................................22

CHAPTER 3: PROJECT DESCRIPTION ....................................................28

ABOUTTHEPROJECT.................................................................................................................... 28TYPESOFBENCHMARKING............................................................................................................ 28TRENDANALYSISOF MARUTI SUZUKI INDIA LTD. FROM FY06 TO FY08 .........................................34TRENDANALYSISOF TATA MOTORS LTD. FROM FY06 TO FY08 ....................................................45TRENDANALYSISOF MAHINDRAAND MAHINDRA LTDFROM FY06 TO FY08 ...................................55INTERFIRM ANALYSIS ...............................................................................................................64

ECONOMIC VALUE ADDED........................................................................................................... 70CALCULATIONOF EVA .............................................................................................................72CFROI .....................................................................................................................................75

RECOMMENDATION ....................................................................................77

CONCLUSION: ................................................................................................78

REFERENCES: ................................................................................................79

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ABSTRACT

A leader in the automobile sector with more than 50 % market share, Maruti Suzuki India

Limited was looking for ways to reduce its costs. With the number of players increasing and

the existing players aggressively coming up with new products the company needed to

benchmark itself with the other players in the market to look for ways to retain its market share

in the increasingly competitive market. The sharp increase in prices of inputs and the economic

slowdown has made it imperative for the companies to look for avenues for growth and ways to

reduce the various costs associated with the manufacturing of the products. For this it is

important to understand the financial structure of the competitors.

Hence Benchmarking of Maruti Suzuki with respect to that of Tata Motors Pvt. Ltd and

Mahindra and Mahindra Pvt. Ltd was undertaken.

For the above purpose the financial statements of all the companies were analyzed and then

reconciled as per the policies and procedures adopted at Maruti Suzuki. The next step involved

calculation of the various ratios to understand the short term liquidity, long term solvency, long

term profitability and cost associated with manufacturing of the products of different

companies. Both inter and intra firm analysis was undertaken and then comparison of Maruti

Suzuki with respect to the financial statements of other companies was done. . The analysis

would help to understand:

The financial soundness of the companies

The policies and accounting methods undertaken by them

The costs of various heads like manufacturing, selling and distribution

The reason for increase in the costs and comparison of the same with respect to its

competitors-whether the increasing in costs are due to huge imports undertaken by the

company, or is it due to increase in the input price of various parts

The position of the product of the company with that of its competitors

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CHAPTER 1: Introduction

Purpose of the project

The project involves benchmarking Maruti Suzuki India Limited with respect to Tata Motors

Pvt. Ltd and Mahindra and Mahindra Pvt. Ltd. The project involves study of the financial

statements of the above mentioned companies and then reconciliation of the accounts of the

other companies as per the books of accounts of Maruti. It aims at inter firm and intra firm

comparison to help Maruti Suzuki to look for avenues to reduce costs and look for avenues toincrease its market share.

Primary Objective:

The main objective of the project is to help Maruti Suzuki to analyze itself with respect to its

competitors so as to help the company to produce cars in an effective, efficient and efficacious

manner. The project also would help the company to look for avenues to increase its market

share by understanding the product and the promotional strategies undertaken by itscompetitors.

Sub-Objective:

Finding out the various ratios to understand the financial soundness of the companies

with respect to the short term liquidity position, long term profitability, long term

solvency, interest coverage and the various cost ratios.

Calculate the Economic Value Added

Calculate the Cash Flow return on Investment

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The rapid growth in cellular phone and cable and satellite television penetration in India in

recent years is fuelling the desire of a better lifestyle. These would acts as an enabler for the

automobile industry and help to cater to the new sectors of the economy.

International Business:

The automobile companies are expanding their product portfolio and increasing launching new

products to cater to the needs of both the domestic and the international market. This has

resulted in changing of policies of the companies and plans of making India as a hub for

exports. The companies are increasingly targeting new and untapped foreign countries.

Threats

Global Competition:

India is increasingly becoming a preferred destination for the global automotive players. The

global automotive manufactures present in India are enhancing their production capacities and

many new global players are entering the country in anticipation of burgeoning automotive

demand. To counter the threat of growing global competition, the companies are planning to

bridge the quality gap between its products and foreign offerings while maintaining its low costproduct development/sourcing advantage.

Fuel Prices:

The international crude prices moved as high in the range of US$ 70 to 144 per barrel but

stabilized in the range 0f US$ 50 to 60 per barrel. Hardening of fuel prices could adversely

affect impact domestic automotive sales.

Input Costs:

Prices of commodity items particularly steel, non-ferrous metals, rubber and engineering

plastics etc witnessed an upward movement, which was offset by the cost reduction initiatives

pursued by the various automobile companies. The increase in the prices of raw material has

lead to a sharp decline in the profit of the automobile companies.

Interest rates hardening and other inflationary trends:

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schemes. For example there are no offers on Swift diesel and Dzire owing to the huge

demand for the product.

Bargaining power of suppliers

1. Strategic Suppliers: Steel is a major input in the automobile industry and the suppliers

are a few in number. Any revision of prices by these players may influence the

profitability of the manufacturers.

2. Substitute inputs: They are restricted to non-critical or additional components like

electronic gadgets and interior design components and thus the suppliers of the same

have a major influence on the decision making power.

3. Switching costs of suppliers: The cost of switching plays an important role in terms of

deciding the power of suppliers. If the switching cost is low, the suppliers have huge

influence in terms of decision making. MSIL being the largest manufacturer enjoys

considerable influence over its suppliers. 70 % of the suppliers are within the range of

100 m from the Gurgaon plant.

4. Competition between suppliers: The number of suppliers for the particular product also

influences the decision making power of the suppliers. If there are large numbers of

suppliers for a particular product, the manufacturer has a say in decisions.

Industry Competitors:

1. Number of Players: The number of firms operating in the market plays a major role in

the industry. If the degree of competition is high, then buyers have a say in decision

making.

2. Products and Price: The product range offered by the company and the target segment

chosen by the company influences the decision making power. Maruti Suzuki

manufactures 11 models catering to different segment The price and the features

associated with respect to the product influence the decision making. For example we

have the Wagon R competing with respect to the Santro Xing. Thus the buyers while

purchasing the product look for the substitutes available in the market and the segment

they are planning to purchase.

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THE 3 K

Kimerareta Koto Ga - What has been decided

Kihin Doro - as per standard

Kichin To Momoru - must be followed(Annual Report 2007-08)

Shareholders Structure:-

Suzuki Motor Corporation has 54 % stake in Maruti Suzuki India Limited. The rest of the

shares are held by financial institutions such as LIC, and the general public.

Board Of Directors:

Mr R.C. Bhargav Chairman

Mr. Shinzo Nakanishi - Managing Director

Snapshot of company`s performance:

Highest ever domestic sale in the year 2007-08 -711818 units

Highest ever export -53024 units

Highest ever Net sales in2007-08 - Rs 178603 million

Highest ever Net profit - Rs 17308 million

Models:

The company offers 11 models to cater to the needs of different customers. The various models

offered include:

Maruti 800 Omni Alto

Wagon R Swift Swift Dzire

Versa Sx4 Grand Vitara

Zen Estilo Gypsy

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Finance division

Maruti Suzuki India Limited has seven different departments under the fianc division to ease

the functionality of the finance department given the nature of complexity attached with respect

to the functions performed by the departments. The various departments under finance division

are:

Budget, Cost and Accounts Department (BAC)

Sales Accounting Department (SAC)

Vendor Payments and Excise Department (VPE)

Corporate Accounts and Reporting (CAR)

Direct Taxation (TAX)

Corporate Finance and Planning (CFP)

Internal Audit (IAU)

Finance Secretary (FNS)

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Tata Motors Ltd with Maruti Suzuki India Ltd

1. Income has been categorized as Sales, Income from Services and Dividend and

other income.

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Decrease in Finished Goods: There is 54 % decrease in Finished Goods from 4857 million

to 2247 million.

Increase in components and raw materials at factory: There is 107 % increase in

Components and raw materials at factory from 846 million to 1747 million.

Increase in Tools at Factory: There is 60 %increase in Tools at Factory from 86 million to

138 million.

From FY07-08, the Days in Inventory (DII) increased from 17 to 21.This is pertaining to

following factors:

Increase in Finished Goods: There is 141 % increase in Finished Goods from 2247 million

to 5408 million.

Increase in Components at factory: There is 26 % increase in Consumables at Factory from

1747 million to 2204 million.

Inference:

From FY06 to FY07, the inventory reduced due to discontinuation of several products. The old

Zen was discontinued .In the run up to launch of a new WagonR and WagonR Duo, the

company brought down the production and inventory of old WagonR. Also .Production of

Swift shifted out of Gurgaon plant to upcoming facility in Manesar. The company launched

the new Zen Estilo and Swift Diesel.

The increase in inventory from FY07 to FY08 is due to the new products launched and

increased capacity because of Manesar Plant. The company launched SX4, Swift Dzire andGrand Vitara. During the year, the Company discontinued production of Esteem, its entry

sedan launched in 1994.

3. Long Term Profitability

Ratios Analyzed: DuPont analysis

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Decrease in Equity Margin: From FY07 to FY08, the Equity Margin has decreased from

1.48 to 1.46.

Increase in Assets Turnover: From FY07 to FY08, the Assets turnover increased from

1.44 to 1.45. This increase is due to 22 % increase in Net Sales and 24 % increase in Net

Assets. The 24 % increase in Net Assets from 76522 to 94857 million is mainly due to

following reasons:

o Increase in Investments: There is 52 % increase in Investments from Rs 34092

to Rs 51807 million. The major change was in the long term unquoted mutual

funds. It increased by 130 % from Rs 1321 million to Rs 3037 million.

o Increase in Capital Work in Progress: There is 194 % increase in Capital Work

in Progress from Rs 2507 million to Rs. 7363 million.

Increase in PAT: The PAT increased by 31 % from 11834 to 15553 million.

Inference:

The profitability has decreased from FY06 to FY07 and increased from FY07 to FY08.This is

due to the decrease in Assets Turnover, as the asset base of company increased. The company

has been pursuing expansion initiatives to enhance its production capacities and improve the

products. The companys new plant at Manesar started operations in September 2006.All the

newly launched models namely Swift, SX4 and DZire.

The company is also setting up a new gasoline engine plant in its Gurgaon facilities. The new

engines produced will be more fuel efficient and help to serve a customer better. In recentyears, the Company has also undertaken a series of market initiatives, notably the expansion of

the sales network, offering the entire range of car-related services in a convenient and

transparent manner and implementing standards to improve customer service.

Thus with increase in assets, new product launches and attempts to improve the margins, the

profitability of company can increase in the coming years.

4. Long Term Solvency

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(Source:Annual Report)

From FY06- FY07, the Interest Coverage Ratio has decreased from 86 to 61.This change in

pertaining to the following reason:

Increase in Interest to be paid: From FY06 to FY07, the interest increased by 84 % from

Rs. 204 million to Rs. 376 million.

From FY07 to FY08, the Interest Coverage ratio decreased from 61 to 43.This is pertaining to

the following reason:

Increase in Interest: From FY07 to FY08, the interest increased by 58 % from Rs. 376

to Rs. 596 million.

Inference:

The companys debt has been increasing over the years. The increase is mainly observed in the

unsecured loan portion of the debt .Further, in FY07 and FY08 the unsecured loan has been in

the form of Foreign Currency or Export Credit.

The low debt ratio and high interest coverage ratio underscores the financial strengths of the

company. Thus the financial obligations can be timely fulfilled from the operating income.

The company has been awarded the highest financial credit rating of AAA/Stable (long term)

and P1+ (Short Term) on its bank facilities by CRISIL.

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5. Margin Ratios:

Material Cost:


From FY-6 to FY07, the Material cost margin decreased from 0.78 to 0.74.This is pertaining

to following major reasons:

Increase In Net Sales: From Fy06 to FY07, the net sales increased by 21 % from120034 million to 145922 million.

Increase in consumption of Raw Materials: From FY06 to FY07, there is only 14 %

increase in consumption of Raw Materials and Components from 88766 million to

101374 million.

Inference

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For FY07-FY08, the Manufacturing, administration and other expenses margin remained

almost constant. The increase in manufacturing expenses was mainly due to power and fuel

expenses, which increased by 51 % and increase in royalty by 35 %.

Selling, Distribution and other expenses to Sales

From FY06 to FY07,the Selling and Distribution expenses Margin has remained Constant at

0.03.Thus it can be noted that the increase in selling and distribution expenses have been in

accordance to the increase Net Sales for each year.

EBIT Margin and EBITDA Margin

From FY06 to FY07, the EBIT Margin has 0.15 to 0.16 and EBITDA Margin has increased

from 0.17 to 0.18.The increase has been mainly due to following reasons:

Increase in EBIT: The EBIT has increased by 30 % from 17704 million to 23,174

million. But the Expenses have increased by only 17 %.

Increase in Depreciation: The depreciation increased by 84 % from 204 million to 376

million.

From FY07 to FY08, the EBIT Margin decreased from 0.16 to 0.14 and EBITDA Margin has

remained constant at 0.18.The decrease in EBIT Margin is pertaining to the following factors:

Increase in Expenses: The EBIT increased by 10 %, even while Net Sales showed

growth of 22% .The expenses increased by 28 % due to increase in Consumption of

Raw Materials and 36 % increase in Manufacturing, Administration and other

expenses.

Increase in Depreciation: From FY07 to FY08, the depreciation increased by 109 %

from Rs. 2714 million to Rs 5682 million. Based on technical evaluations and

considering various market trends like shortening of product life cycles, the company

has revised the estimated useful life of certain Plant and Machinery from between 9-13

years, to between 8-11 years, of dies and figs from 5 years to 4 years and Electronic

Data Processing from 6 years to 3 years.

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Inference:

The VA-VE initiatives (Value Analysis and Value Engineering) pursued aggressively by the

company in partnership with suppliers have helped the company reduced cost of making a car

without compromising on quality. The higher depreciation provision, is a move by the

Company to proactively align its financial accounting with shorter product lifecycles

anticipated in the future. Thus the company plans to upgrade its assets in the future to improve

the product according to market trend.

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(Source: Annual report, Tata Motors Ltd)

Return on Equity:

From FY06 to FY07: The increase in ROE from 0.27 to 0.28 can be attributed to the following

reasons:

Increase in Assets turnover : From FY06 to FY07, the increase in from 2.27 to 2.36 is

pertaining to the following reasons:

o Increase in Net Sales: There is the 33 % increase in Net Sales from Rs. 2,

06,534 million to Rs. 2, 74,700 million.

o Increase in Net Assets: The Net Fixed Assets increased by 35 % from Rs 65363

million to Rs 88715 million. The increase in Net Fixed Assets is mainly due to

164% increase in Capital Work in Progress and 22% increase in Investments.

o Increase in Investments: Investments of the Company increased to Rs.24770

million in FY 2006-07 from Rs.2, 0151.5 million in FY 2005-06. The Company

made an investment of Rs.5500 million in the wholly owned subsidiary viz.

TML Financial Services Limited engaged in the vehicle financing operations.

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Increase in Financial Leverage (FL): From FY06 to FY07, the Financial Leverage

increased from 1.64 to 1.7.This increase is attributed to the increase in Net Assets of the

company. The Shareholders Equity has increased due to 25 % increase in Reserves and

Surplus. The increase in Reserves and surplus of the firm can be attributed mainly to the46 % increase in the General Reserves of the company.

From FY07 to FY08: The decrease in ROE from 0.28 to 0.26 can be attributed to the

following reasons:

Decrease in Assets Turnover: From FY07 to FY08, the ROA has decreased from 2.36 to

1.9. This is due to following reasons:

o No major change in Net Sales: Net Sales has just increased 4 % from FY07 to

FY08.

o Increase in Assets: Net fixed Assets has increased 73 % from FY07 to

FY08.This is mainly due to 98 % increase in Investments and 101 % in Capital

Work in Progress. The capital work in progress includes the Product

development Cost Rs 17058.6 million and Advances for Capital Expenditure of

Rs. 6689.2 millions.o Increase in Investments: Investments increased to Rs. 4,910.27 millions in FY

2007-08 from Rs. 2,477.00 millions from FY07. During the year, the Company

continued to make additional long term and strategic investments. The Company

further invested Rs. 6000 million in its 100% subsidiary Tata Motors Finance

Limited to further strengthen the vehicle financing activities. The Company also

invested Rs. 6015.9 million in Fiat India Automobiles Private Limited for

manufacturing Fiat and Tata cars and Fiat power trains. The Company investedRs.1795 million in the rights issue of securities of Tata Steel Limited. The

amount invested in various mutual funds as at March 31, 2008 was Rs. 7907

million as against Rs. 519.9 million as at March 31, 2007 representing surplus

cash parked for future use.

Increase in Financial Leverage: The financial Leverage has increased from 1.7 to 1.92.This

can be mainly attributed to the following reasons:

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investments. The company has the strategy of capitalization of expenses (Expenditure and

interest) to reduce the effects of capital expenditure for three years .Expenditure Transferred to

Capital and other accounts has increase at average rate of 133 % from Rs. 3088 million

(FY06) to Rs. 11314 million (FY08).

4. Margin Ratios

Ratios Analyzed: Material cost to Sales ratio; Manufaturing, administration and other

expenses to Sales ratio; Selling and distribution expenses to Sales Ratio;Employee Cost to

Sales Ratio

(Source: Annual report, Tata Motors Ltd)

Material Cost Margin

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Provision and write off for sundry debtors, vehicle loans and advances: It increased by

169 % from 615 million to 1657 million.

From FY07 to FY08, the Manufacturing, administration and other expenses margin increasedfrom 0.09 to 0.1.This increase is mainly due to the following reasons:

Increase in Stores, spare part and Tools: It increased by 38 % from 5046 million to

7011 million.

Increase in Rent: It increased by 109 % from 199 million to 418.7 million.

Provision and write off for sundry debtor, vehicle loan and advances: It increased by

118 % from 1657 million to 3628.

Inference:

The EBIT margin has been decreasing constantly from FY06 to FY08.The expenses margin

ratio has also mainly shown increasing trend. The expenses of company have been on rise

because of external factors like increasing input prices and internal factors like increasing debt

and depreciation. Thus, over the years, the trend is negative with the increase in expenses and

lagging sales.

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From FY06-FY07,the current ratio increased from 1.34 to 1.41.The increase in Current Ratio

is pertaining to following factors:

Increase in Cash and Bank Balances: The cash and bank balance increased by 81 %

from Rs.7303 million to Rs. 13260 million.

Increase in Loans and Advances: There is 68 % increase in Loans and Advances from

Rs. 4988 million to Rs. 8394 million.This increase is due to 133 % increase in

Advances and loans to subsidiaries.

From FY07 to FY08, the current ratio decreased from 1.41 to 1.12.This decrease can be

explained by following changes :

Decrease in cash and bank balances: The cash and bank balances decreased by 35%

from Rs.13260 million to Rs 8612 million.

Inference:

The current ratio has been greater than 1 all throughout the years. But the liquidity position of

the company has improved from 2006 to 2007, but has decreased from 2007 to 2008.

Quick ratio has decreased to 0.79 from 1.07 from 2007 to 08.Thus company can face liquidity

crunch if the cash and bank balance is not improved. Further, other assets(plant and machinery

held for sale) has increased by 7800 %.

2. Long Term Solvency Position of the Firm

Ratios Analyzed: Debt Ratio, Debt Equity Ratio, Interest Coverage Ratio

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Days in Inventory

From FY06 to FY07, the DII decreased from 40 33 .This increase is due to:

Decrease in Work in Progress: There is 19 % decrease in Work in Progress.

From FY07 to FY08, the DII increased from 33 to 36 days. This is due to:

Increase in Finished products produced and purchased for sale: There is 29 % increase

in finished products from Rs. 4483million to Rs. 5794 million

DSO has shown the similar nature.

From FY06 to FY07, the DSO has decreased from 29 to 26 days.This is due to followingreasons:

Increase in debtors (considered good): The sundry debtors outstanding over six months

have increased by 39 % from Rs. 613 million to Rs 858 million.

From FY07 to FY08, the DSO has increased from 26 to 33 days.

The increase for the year 2007 to 08 can be explained by:

Decrease in debtors outstanding over six months : There is decrease in debtors,

considered doubtful by 31 % from Rs 459 to Rs 316 million. Decrease in Provision for doubtful debt: The Provision for doubtful debt decreased by

37 % from Rs 523 million to Rs 428 million.

DPO has continuously improved over the years from 63 days in Fy06 to 73 in FY08.

Inference: From FY07 to FY08, the increase in DSO and DII be explained by the aggressive

credit policies of the company. The company has enhanced its operations overseas and has

marked increase in exports. The increase in debtors is mainly on account of increase in exports

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growth in Companys Genset engines and logistic business. The increase in DII is due to

increase in inventory due to launch of new products and increased capacity

DPO has continuously improved over the years. This is due to improvement in its supply

chain by reducing dealer stocks and outstanding. The cash conversion cycle has shown

reduction over the years .showing that company is able to utilize every Re. 1 invested in the

Current Assets.

5. Margin Ratios

Ratios Analyzed: Material cost to Sales ratio; Manufacturing, administration and other

expenses to Sales ratio; Selling and distribution expenses to Sales Ratio; Employee Cost to

Sales Ratio

Selling and distribution margin

Selling and distribution expense has been increasing from 5.7 to 7.4 % of net sales.

For the year 2006-07, sales promotion and advertisement expense increased by half. The

Company entered the passenger car segment through another subsidiary Mahindra Renault

Pvt. Ltd (MRPL). Production of Logan mid-sized sedan commenced around the end of the

fiscal year 2006-07. Sales commenced from April 2007. A refreshed version of the Bolero was

launched in March 2007.

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For the year 07-08, Discount allowed almost doubled. Further, freight outwards has been

increasing by 40 % (Year on year).This can be explained by the increase in exports.

Manufacturing, administration and other expenses margin

For the year 2006-07 the manufacturing expenses increased from 6.1 to 6.4 %.This has been

mainly due to excess of cost over current value investments (244 %)and provision for doubtful

debts(851%).For the year 2007-08,the manufacturing expenses increased from 6.4 % to 6.

7%.This has been due to increase in power and fuel (40 %), rent (72%) and amortization of

expenses (77%).

Employee Cost Margin

Personnel Cost to Sales has been increasing from 6.9 to 7.8 %. Increase in personnel cost in

absolute value is mainly due to increase in officers strength, annual increments and the impact

of wage settlements.

Material cost Margin

The Material Cost to Sales has decreased from 73.6 to 71.8 from 2006-07.this has been due to

decrease in the consumption of raw materials .This decrease is mainly due to

Efficiencies arising out of strategic sourcing and reengineering initiatives undertaken by the

company . Material cost is also impacted by product-mix changes.

From 2007-08, it has increased from 71.8 to 73.7 .There has been an increase in increase in

purchase of traded goods.

6. Long term Profitability

Ratios analyzed: DuPont Analysis: Return on Equity ,Assets turnover, Financial Leverage,

Profit Margin

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Inter firm Analysis

1. Short Term Liquidity

Current Ratio, Quick Ratio

Maruti Suzuki India Ltd maintained the highest current ratio and quick ratio in FY06 and

FY07.In FY08, Mahindra and Mahindra Ltd has the best current liquidity position among the

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Outstanding (DSO) among the three companies in FY06 and FY07. Maruti Suzuki India Ltd

and Mahindra and Mahindra Ltd have shown the similar trend over the three years i.e. the

decrease in DII from FY06 to FY07 and then increase from FY07 to FY08.Maruti Suzuki India

Ltd has maintained the lowest DII among the competitors over the years.

Thus the working Capital Position of the company has been the healthiest among its

competitors.

3. Long Term Solvency

Debt Ratio

MSIL has maintained a very low debt ratio with respect to its competitors. It can be observed

that the each of the three companies have shown increase in debt ratio over the years.

The company is the healthiest firm among its competitors over the years

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4. Margin Ratio

Material Cost Margin

MSIL has the highest material cost margin among its competitors over the years. Mahindra and

Mahindra Ltd has the lowest material margin. This is because it indigenously uses indigenously

available raw materials.

Profit Margin

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Mahindra and Mahindra Ltd has maintained the highest Profit Margin among its competitors.

Due to high material cost margin, the MSIL Profit Margin lags behind the Mahindra and

Mahindra Ltd. Tata Motors have maintained the lowest Profit Margin among its competitors.

5. Long Term Profitability

Return on Equity

Maruti Suzuki India Ltd has the lowest Return on Equity among its competitors over the years.

Mahindra and Mahindra Ltd has maintained the highest ROE among the competitors over the

years.

Earnings per Share

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Economic Value Added

The Economic Value Added (EVA) is a measure of surplus value created on an investment.

The return on capital (ROC) is assumed to be the true cash flow return on capital earned on

an investment. The cost of capital is defined as the weighted average of the costs of the

different financing instruments used to finance the investment.

EVA = (Return on Capital - Cost of Capital) (Capital Invested in Project)

Measuring Cost of Capital

The Cost of Capital is calculated as Weighted Average Cost of Capital.

WACC: Percentage of Debt in total Value of firm*Cost of Debt + Percentage of Equity in total

Value of firm*Cost of Equity

It has two components:

Cost of Equity: it is the opportunity cost for an investor and an implicit cost for the

company .This is the expected return of investors for a company. To find the cost of

equity, Risk and Return model is used.

Measuring Risk: The spread of the actual return around the expected return is

measured by the variance or standard deviation of the distribution. The greater the

deviation of the actual returns from the expected returns, the greater the variance. The

model to find the risk used is CAPM. i.e the Capital Asset Pricing Model.

Expected rate of return on asset = Risk free rate+ Beta of asset (Risk Premium for average risk

asset)

Risk free rate: It is the rate with no default risk. It is assumed as interest on Central

Government Dated Securities of year 2005-06.The risk free rate is taken as 7.34 %.

(Source: http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/80303.pdf)

Risk Premium: The risk premium is the extra return that would be demanded by the investors

for shifting the money from a riskless investment to an average risk investment.

Estimating risk premium: There are three ways of estimating the risk premium in the Capital

Asset Pricing Model, Survey Premium, Historical premium. In CAPM, the premium is

computed to be difference between average returns on stocks and average returns on risk free

securities over an extended period of history.

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Time period used: Five years data has been taken from FY04 to FY08.

Market Return: The annual return on stock is taken as the Market Return. The arithmetic

average return measures the simple mean of the series of annual returns.

KE=Rf + beta(Rm- Rf)

Market Return: It is the average annual return. It is calculated from closing price of S&P

Nifty.

The daily return is calculated as

Daily Return = ln(Pi/Pi-1)

Pi: Closing of ith day

Pi-1: Closing of (i-1)th day

Average Daily Return is the arithmetic mean of the daily return.

Beta: The beta is estimated from the historical data. It can be calculated by dividing the

covariance of stock price with market by variance of the market. Thus from the calculation of

the above inputs the Expected Rate of Return or Cost of equity can be found out.

Cost of Debt: The cost of debt measures the current cost to firm of borrowing funds to finance

its assets. It reflects the default risk of the company i.e. the inability to pay off the obligations

of creditors. The most widely used measure of a firms default risk is its bond rating. It can be

estimated from the financial ratios. This rating is called synthetic rating. The interest coverage

ratio is used to assign the synthetic bond rating.

Estimating the Tax advantage: Interest is tax deductible and the resulting tax saving reduces

the cost of borrowing to firms. Thus after-tax cost of debt =Pre-tax cost of debt(1-Marginal tax

rate)

Cost of debt = Interest(1-t)/EBIT

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The Cost of Equity for Maruti Suzuki India Ltd is 28.43 %,Mahindra and Mahindra Ltd is

Figures in Rs.millions

Maruti

Mahindra and

Mahndra Ltd Tata Motors Ltd

FY0

6

FY0

7

FY0

8

FY0

6

FY0

7

FY0

8

FY0

6

FY0

7

FY0

8

Number ofOutstandingShares

289.00

289.00

289.00

233.00

238.00

239.00

382.00

385.00

385.00

Market Value ofEquity

239003.00

239003.00

239003.00

162412.65

162412.65

162412.65

2378

71.40

237871.40

237871.40

Market Value ofDebt

717.00

6308.00

9002.00

8833.82

16360.07

25870.60

29368.40

40091.40

62805.20

Percentage ofEquity 1.00 0.97 0.96 0.95 0.91 0.86 0.89 0.86 0.79Percentage ofDebt 0.00 0.03 0.04 0.05 0.09 0.14 0.11 0.14 0.21

cost of Equity 0.28 0.28 0.28 0.37 0.37 0.37 0.44 0.44 0.44Cost ofDebt(after tax) 0.18 0.04 0.04

Assumption:Tax rate is 35%.

WACC 0.28 0.28 0.28 0.35 0.33 0.32 0.39 0.37 0.35

Return onCapitalemployed 0.32 0.30 0.27 0.28 0.28 0.20 0.23 0.22 0.17

Total Capitalemployed

56022.00

76522.00

94857.00

39209.49

51911.53

69803.20

90823.30

116556.30

150896.90

EVA1832.

132030.

51

--657.0

5

-2631.

03

-2904.

10

-7995.

33

-14778.14

-17832.09

-26373.17

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CFROI

CFROI or Cash flow return on investment is one of the accounting indicators of value

creation. It clarifies how economic value is created in a firm and acts as a reliable guide to:

making investment decisions; taking key strategic decisions; and understanding economic

value. It shows how to judge and compare individual equities across markets and company

sectors. It has cutting edge theory and practice.

The CFROI is a measure of the cash flow return made on capital.

CFROI = (Adjusted EBIT (1-t) + Depreciation & Other Non-cash

Charges) / Capital Invested

Figures inMillions

MSIL M&M Tata Motors Ltd

FY0

6

FY0

7

FY0

8

FY

06

FY0

7

FY0

8 FY06

FY0

7

FY0

8

EBIT

17704.0

0

23174.0

0

25626.0

0917

2.34

13354.8

3

13373.2

023367.

5029429.90

30020.80

TAX RATE 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35DEPRECIATI

ON

2854.00

2714.00

5682.00

2000.05

2095.87

2386.60

5209.40

5862.90

6523.10

NET

WORKING

CAPITAL

Capital

Employed

55243.00

74847.00

93156.00

37922.53

51889.16

69371.30

84739.10

108788.90

141200.20

CFROI 0.26 0.24 0.24 0.21 0.21 0.16 0.24 0.23 0.18

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Recommendation

1. The company cash and bank balance have reduced .In fact; the net decrease in cash flow

for the year has been in FY08.This has been due to increase in Purchase and investment

activities. This can be major threat to the financial health of the company. Thus, cash and

bank balance should be maintained.

2. The company has strong fundamentals with low debt equity ratio and high net operating

earnings. The company should leverage these factors to increase its debt. This will reduce

the cost of capital of the company and maintain the cash and bank balance. The company

can issue debentures convertible to equity shares like Mahindra and Mahindra Ltd or quasi

equity shares.

3. The material cost margin of the company remains highest among the industry. This is

because company imports raw materials and components. Thus company should use

indigenously produced raw materials and components.

4. The manufacturing expenses have manly increased because of increase in royalty. The

company can use try to develop new technologies in house to reduce the royalty cost.

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