Roll number: 6, 40, 61, 65

Financial management project 2

Group members Roll number: 6, 40, 61, 65 I. Objective

TVS Motor Company Limited, which is part of TVS Group, manufactures motorcycles, scooters, mopeds and auto rickshaws in India. The objective of the project is to assess the overall financial condition of TVS Motor Company and see how it has changed over the five year period and how it is in relation to its competitors are Hero and Bajaj. II. Analysis 1: Sustainable Growth Rate - SGR The sustainable growth rate is a measure of how much a firm can grow without borrowing more money. The formulas for calculating SGR = ROE * Earnings Retention Rate SGR for year 2010 = 10.53 % * 72.78% = 7.66% SGR for year 2011 = 19.46% * 70.42% =13.70% Actual GR = 12% SGR>AGR D/E ratio year 2010 =1.16 D/E ratio year 2011 = 0.79 The D/E ratio is decreasing from 1.16 to 0.79. 2. Financial Ratio analysis: Ratio analysis helps to ascertain the financial condition of the firm. The main analysis of the following ratios are compared against a benchmark for evaluating the financial position and performance of a firm. We mainly compare with past ratios and competitors ratio.

1.
Liquidity Ratios Mar '12 Current Ratio Quick Ratio 0.71 0.44 Mar '11 1 0.59 TVS Mar '10 1.13 0.75 Mar '09 1.15 0.68 Mar '08 1.07 0.47

Bajaj
Mar '12 0.88 0.72

Hero
Mar '12 0.42 0.28

Roll number: 6, 40, 61, 65 Analysis: +, Current Ratio is a liquidity ratio that measures company's ability to pay its debt over the next 12 months or its business cycle. The current ratio of TVS is lower the standard 2:1 and decline follow year indicating that TVSs liquidity is not managing well to pay debt over the next 12 months. Although it performed better than its competitors, it plunge every year. Year 2012, Current ratio reduces to 0.71 is lesser than 1 means that the company does not have enough current assets to pay current liabilities. This also shows that the company has a high financial risk for next period of time. The lower current ratio may be caused by insufficiency of funds to pay creditors, or the company is trading beyond resources and the resources are inadequate to the high volume of trade. But it seems to be better than Hero in managing pay debt to creditors. +, The Quick Ratio is also declining and a lower quick ratio of company means that it relies too much on inventory or other assets to pay its short-term liabilities. Bajaj has a better quick ratio indicating that its managing a better position to pay off its short term liabilities than TVS and Hero. 2.
Management Efficiency Ratios Inventory Turnover Ratio Debtors Turnover Ratio Investments Turnover Ratio Fixed Assets Turnover Ratio Total Assets Turnover Ratio Asset Turnover Ratio Average Raw Material Holding Average Finished Goods Held Number of Days In Working Capital TVS Mar '12 13.19 28.24 13.19 3.34 3.79 3.88 --(6.28) Mar '11 13.27 25.17 13.27 3.13 3.46 3.38 13.97 15.53 7.50 Mar '10 17.12 21.71 17.12 2.29 2.33 2.43 11.36 9.06 9.62 Mar '09 13.31 27.25 13.31 1.97 2.14 2.29 15.11 11.12 12.72 Mar '08 9.61 32.31 9.61 1.8 2.16 1.8 14 23.92 5.94

Bajaj
Mar '12 30.97 49.66 30.97 5.75 3.19 3.43 5.97 9.44 (11.05)

Hero
Mar '12 40.84 117.09 40.84 4.05 4.91 4.85 8.81 2.84 (40.58)

Analysis: These ratios reflect management of assets and their effective utilization. The faster assets are converted into sales with speed, the more profit you will get. In other way, it brings out relationship between the assets and sales. i. Inventory turnover ratio: this ratio measures company's efficiency in turning its inventory into sales. Its purpose is to measure the liquidity of the inventory. TVS has lower Inventory turnover ratio than Bajaj and Hero. Its indicating a signal of inefficiency, since inventory usually has a rate of return of zero. The reason for that is TVS got lower sales period of time from Dec11 to Mar12. The reason was given is that "A weak economic scenario, high inflation, rising fuel prices, high interest rates and poor monsoon in south India affected sales,". A low turnover rate can indicate poor liquidity (since we analyzed before).

Roll number: 6, 40, 61, 65 ii. Debtor turnover ratio or Receivables turnover ratio: this ratio measures company's efficiency in collecting its sales on credit and collection policies. The shorter the period of collection, the better is the quality of debtors. TVSs debtor turnover ratio is lower than that of Hero and Bajaj. It means that TVS has longer receivables are being held than its competitors. It may imply that TVS should review its credit policies in order to ensure the timely collection of credit sales that is not earning interest for company. iii. Fixed asset turnover ratio looks at how efficiently the company uses its fixed assets, like plant and equipment, to generate sales. TVSs fixed asset turnover ratio is lower than that of Hero and Bajaj, its indicating the company is not operating up to capacity and your plant and equipment is likely sitting idle. iv. Total asset turnover ratio shows how efficiently your assets, in total, generate sales. TVS has lower ratios than Hero but higher than Bajaj. It means that TVS manage better and more efficiently its asset to generate sales than Bajaj but not better Hero. In other way, Hero manages more efficiently its asset to generate sales than TVS and Bajaj. 3. Profitability Ratios
Profitability Ratios Mar '12 Operating Profit Margin(%) Profit Before Interest And Tax Margin(%) Gross Profit Margin(%) Cash Profit Margin(%) Adjusted Cash Margin(%) Net Profit Margin(%) Adjusted Net Profit Margin(%) Return On Capital Employed(%) Return On Net Worth(%) 6.58 4.92 4.93 5.12 5.12 3.48 3.48 19.81 21.3 Mar '11 4.92 3.12 3.18 4.94 4.94 3.08 3.08 18.38 19.46 TVS Mar '10 4.79 2.4 2.44 5.06 5.06 1.98 1.98 9.85 10.53 Mar '09 3.29 0.48 0.49 3.53 3.53 0.82 0.82 5.37 4.21 Mar '08 1.4 -1.49 -1.53 2.96 2.96 0.96 0.96 1.08 4.13

Bajaj
Mar '12 19.14 18.06 18.39 15.33 15.33 15.11 15.11 64.24 49.72

Hero
Mar '12 15.46 10.77 10.81 13.56 13.56 10.04 10.04 49.83 55.43

Analysis: Profitability ratios are to measure the operating efficiency of the company i. Gross Profit margin ratio: It measures company's manufacturing and distribution efficiency during the production process. It is a measurement of how much from each dollar of a company's revenue is available to cover overhead, other expenses and profits. TVSs gross profit margin ratio is lower than that of Bajaj and Hero. It is indicating that the company is unable to control its production. TVS is unable to manage well in term of company's pricing, cost structure and production. Bajajs gross profit margin ratio is higher than its competitors, it means that Bajaj make a reasonable profit as long as it keeps the overhead cost in control far better than TVS. ii. Operating margin is used to measure company's pricing strategy and operating efficiency. It gives an idea of how much a company makes (before interest and taxes) on each dollar of sales. Operating margin ratio shows whether the fixed costs are too high for the production or sales volume. TVSs operating margin ratio is increasing; it

Roll number: 6, 40, 61, 65 is indicating the company is earning more per dollar of sales. However, Bajaj performed better than Hero and TVS in term of operating margin. Net profit margin measures how much of each dollar earned by the company is translated into profits. TVSs net profit margin ratio is lower than that of Hero and Bajaj. It is indicating TVS is managing less effective in converting revenue into actual profit. However, Net profit margin is increasing, it also mean that the investor may have a better chance of receiving dividends. Return of capital employed indicates the efficiency and profitability of a company's capital investments. TVS improved their overall efficiency of its business. However, TVSs ROCE ratio is lower than that of Hero and Bajaj, it is indicating an inefficient use of TVS's assets. Return of Equity shows how many dollars of earnings result from each dollar of equity. TVSs ROE ratio is 21.3% lower than financial benchmark for automobile industry is 34% and lower than its competitors. These means that TVS is using its resources is not effective.
Bajaj
Mar '09 1.11 1.11 Mar '08 0.81 0.81 Mar '12 0.02 0.02

iii.

iv.

v.

Leverage ratios
Mar '12 Debt Equity Ratio Long Term Debt Equity Ratio 0.61 0.41 Mar '11 0.79 0.72

TVS Mar '10 1.16 1.16

Hero
Mar '12 0.23 0.23

Analysis: Leverage ratios measure the extent of debt financing in a firm. i. Debt equity ratio show the level of dependence on the outsiders or the extent to which debt financing has been used in business. TVSs DE ratio is higher than its competitor, Hero and Bajaj. It bring unfavorable for TVS as the company may not be able to raise further borrowing without paying higher interest and accepting strictly conditions if compare with its competitors. ii. Long term debt equity ratio of TVS is higher than its competitors. It may threat to the competitive advantage of the firm.
Bajaj
Mar '09 Mar '08 Mar '12

Market based ratios

Mar '12 Mar '11

TVS Mar '10

Hero
Mar '12

Earnings Per Share P/E

5.24 8.2

4.1 15.3

3.71 23.3

1.31 19

1.34 28.7

103.81 17.4

119.09 18.4

Analysis: i. Earning 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 priceto-earnings valuation ratio. TVS has very low EPS ratio compared with its competitors. It is resulted of ineffective financial system in TVS as we analyzed above.

Roll number: 6, 40, 61, 65 ii. P/E tells us how much investors are willing to pay per dollar of earnings TVSs P/E ratios is showing that its share is not attractive investor if compares with Hero and Bajaj. Or in other way, Investor has lower expectation for TVSs growth than that of Hero and Bajaj.

III. Conclusion As the result of above analysis, TVS has poor liquidity, ineffective in management of asset and utilization, ineffective in operating system, unfavorable for borrowing money from outside. TVSs financial system is ineffective, hence TVS is not attracting for investors to investing on their shares.