Objectives

This study is to analyze the financial position of TVS Motor, an Indian automobile manufacturer, from the perspective of potential investor. Financial statements of past 6 years are used to compare the past performance and profitability of the firm. Ratio analysis is used as a tool to calculate the strengths and weaknesses over a period of time and to compare with a similar profile competitor. Past 3 years statements are used in comparing the ratios with the competitor. In this financial analysis I will identify the financial strengths and weaknesses of the firm by calculating various ratios to establish the relationships between the items in the balance sheet and the profit & loss account.

Executive Summary
1. TVS Motor is in a financially bad position compared to its historical performance. 2. ROI has been declining but it is similarly placed in liquidity ratios when compared with its competitor in the industry. 3. Sales have dropped along with the overall market conditions, so can assume to recover when economy recovers. 4. Liabilities have increased due to increased investment in new manufacturing facilities and bringing new products which have not contributed to the profitability. 5. There is financial risk in making investment into this firm due to low interest cover, but this could improve with future economics of scale 6. I would recommend more analysis which should include firms loss making subsidiaries before making the final decision on investment.

Introduction
TVS Motor Company Limited is the third largest two-wheeler manufacturer in India, with annual turnover of more than USD 1 billion in 2008-2009 (TVS Motor). TVS Motor currently manufactures low end mopeds, automatic scooters, different motorcycles

and three wheelers for passenger market. The company has 3 manufacturing plants in India and one at Indonesian subsidiary with total production capacity of 2.5 million units a year. There are around 10 two-wheeler manufactures in India out of which this study uses BAJAJ auto Limited for comparative purposes. BAJAJ Auto is the second largest two-wheeler manufacturer (Bajaj Auto) with products similar to TVS. Also BAJAJ Auto was demerged in 2008 making it a pure auto company much similar to TVS while other two-wheeler manufactures are either not publicly traded or have more portfolios in their business. Data for this study is primarily collected from corresponding firms official websites. The balance sheet and Profit & Loss account statements are included in Appendix-C for reference. Calculations were carried out by copying the data to Excel work book and the formulas used for various ratio calculations are listed in Appendix-A. Sales trend of overall market is included as Appendix-B.

Financial statement highlights

Sales revenue declined sharply during financial year 2007-2008 due to drop in sales during recession. Before the recession the firm was investing heavily to increase production and to diversify to different geographies. Two manufacturing plants were added to assets during that time with corresponding increase in liabilities. Some items described in the annual report should also be highlighted to understand the limitations of using only the financial statements for this analysis. The cash flow statement is prepared under indirect method and so no data has been taken from it. Interest is shown as net interest after considering interest income in profit and loss statement but for this analysis, I considered the actual payable interest amount. Product development expenses are amortized over three years instead of writing it off each year.

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Ratio analysis
Ratio analysis is useful to compare the risk and return relationships of different times of firms (Atril and McLaney 2008). This study also compares TVS Motor with its competitor BAJAJ Auto to establish its position against others in the industry.

Liquidity ratios
Liquidity ratios attempt to measure a company's ability to pay off its short-term debt obligations. The greater the coverage of liquid assets to short-term liabilities the better, as it is a clear signal that a company can pay its debts that are coming due in the near future and still fund its ongoing operations. On the other hand, a company with a low coverage rate should raise a red flag for investors as it may be a sign that the company will have difficulty meeting running its operations, as well as meeting its obligations.

Liquidity ratios
1.6 1.4

1.2
1 0.8 0.6 0.4 0.2 0 2005 2006 2007 2008 2009 Current ratio Quick ratio

Figure 1 Liquidity ratios of TVS for past 5 years

Current ratio

Current ratio indicates the availability of current assets with that of current liability. We can see that over 5 years current ratio has increased from unsatisfactory level of 0.94 to satisfactory level of 1.37. This compares favourably with its competitor which has the ratio below 1.

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TVS Bajaj Quick ratio

Current ratio 2008 2009 1.36707543 1.45116347 0.87877206 0.953933442

Quick ratio shows the relationship between liquid assets which can be converted to cash and current liabilities. Quick ratio of TVS is not satisfactory as they are short with their assets to pay the liabilities, as in all 5 years the quick ratio is less than 1. But when compared with its peer it looks indeed that TVS is placed better than BAJAJ.
Quick ratio 2008 2009 0.651804146 0.930646445 0.692540843 0.814925581

TVS Bajaj

Financial gearing
Financial gearing shows the proportions of debt and equity in financing the firms assets. These ratios can be used to determine the overall level of financial risk the firm is taking and its ability of using debt to shareholders advantage.

Leverage ratio
40 35 30 25 20 15 10 5 0 2005 2006 2007 2008 2009 Gearing ratio Interest cover

Figure 2 Leverage ratios of TVS for past 5 years

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Gearing ratio shows the firm's long term debt expressed as a percentage of its equity. This ratio has been maintained by TVS for quite some time and compares equally with BAJAJ. Interest cover ratio measure the operating profit with respect to the interest payable by the firm. This ratio for TVS is too small and the probability of making loss with a small reduction in profit is high. When compared with its competitor BAJAJ, the dangerously low level is clearly visible. Increasing the profitability or converting some of the debt to equity should increase this ratio.
Gearing 2008 45.47232 26.47059 Interest cover 2008 2009 3.770706 1.867822 172.0194 38.27939

TVS Bajaj

2009 56.552 49.3585

TVS Bajaj

Efficiency ratios
Efficiency ratios reflect the firms efficiency in utilizing its assets. These ratios look at how efficiently and effectively a company is using its resources to generate sales and increase shareholder value.

Efficiency ratio
8 7 6 5 4 3 2 1 0 2005 2006 2007 2008 2009 Total asset turnover Fixed asset turnover

Figure 3: Efficiency ratio of TVS for past 5 years

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TVS motors total production capacity is 2.5 million but sales are only 1.4 million, which is why the asset utilisation has reduced from earlier levels. The values look similar when comparing with the competitor and show the overcapacity of whole industry.
Total asset utilisation 2008 2009 TVS 4.612513 4.805521 Bajaj 3.544019 4.553311 Fixed asset utilisation 2008 2009 TVS 2.665343 2.647753 Bajaj 3.065964 2.683074

Profitability ratios
Profitability ratios measure overall performance and effectiveness of the firm in generating profit, and are calculated by establishing relationships between sales and assets. Return on investment (ROI) shows the operating profit with respect to fixed assets and return on shareholder fund (ROSF) shows net profit to capital including reserves. Both these measures are considered as primary ratios for business performance along with operating margin which shows operating profit to sales ratio.

Profitability Ratio
30 25 20 Operating margin 15 10 5 0 2005 2006 2007 2008 2009 ROSF ROI

Figure 4: Profitability ratio of TVS for past 5 years

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When compared with BAJAJ the decreasing returns are clearly visible particularly the gross profit margin is similar for both. It seems TVS needs to increase its sales to get the economics of scale to improve its return on investment.
Return On Investment 2008 2009 TVS 2.951463 7.532943 Bajaj 17.60857 25.28444 Gross profit margin 2008 2009 TVS 21.01218 22.13894 Bajaj 21.49474 21.68811

Investors ratios
Investors ratio shows the returns to the share holders of the firm. Earnings per share (EPS) show the returns to the investors from the profitability of the firm. Book value per share shows the wealth created by business for the owners. As we can see below, TVS motors EPS has been decreasing and stays at very low due to decreasing profits. We can also see that investors wealth did not increase as one would prefer for past few years.

Investor's ratio
40 35 30 25

20
15

Earnings per share Book value per share

10
5

0
2005 2006 2007 2008 2009

Figure 5: Investor's ratio of TVS for past 5 years

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Stock performance
Stock price of TVS motor (BSE-TVS) has been declining for past few years and didnt quite follow the overall stock market trend (BSE500-Auto). We can also see that sock value decreases during the March-April period which is when annual report is released showing clear sign of investors wrath for declining profits. Although stock prices has been increasing for past few months along with the overall market sentiments, we need to wait for the year end results to see whether TVS could increase its sales and profit.

Figure 6: Stock price of TVS for past 5 years

Figure 7: Share market for past 5 years (AUTO and BSE500)

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Conclusion
As we have seen in this analysis, current financial position of TVS motor is not so healthy. It has invested heavily in new manufacturing plants and introducing new products when the overall market has shrunk. The risk of investing in this firm at this point is very high but we cannot ignore the risk reward relationship. The reward for the investor will be high if the new products are favourably received in the market. Apart from the financial position of the company, we also need to see its future prospects in the industry. Also this study did not consider the financial details of its loss making subsidiaries as these details are not readily available in the public domain. I would recommend the potential investor to do more analysis on future prospects and performance of the subsidiary companies before taking the final decision.

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Appendix-A
1. Current ratio = Current assets / current liabilities a. Current assets = Cash and near cash + Inventories 2. Quick ratio = Cash and near cash / current liabilities 3. Gearing ratio = non-current liabilities / average assets a. average assets = capital + reserves + non-current liabilities calculated as average of current year and last year 4. Interest cover = Operating profit / Interest 5. Total asset utilisation = sales / average assets 6. Fixed asset utilisation = sales / Fixed assets (Non-current assets) 7. Operating margin = Operating profit / sales * 100 8. Gross margin = Gross profit / sales * 100 9. Return on investment (ROI) = Operating Profit / average assets 10. Return on shareholders funds (ROSF) = Net profit less dividend / Average of shareholders funds a. shareholders funds = Capital + reserves and surplus 11. Earnings per share (EPS) = Profit before extraordinary items / number of ordinary shares 12. Book value per share = shareholders funds / number of ordinary shares

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Appendix-B
Sales
Total sales of two wheelers have reduced in the past two years from their peak in 2007. Sales of TVS motor as well as BAJAJ is also following similar trend as can be seen from below graph. TVS was lagging behind in introducing new products covering different market during the upward trend of 2005 to 2007. It has introduced new products over the last 2 years which helped it to minimize the declining sale.

Sales Trend
9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 TVS Bajaj Total TVS Bajaj

4,000,000
3,000,000 2,000,000 1,000,000 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

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