Financial Management Assignment – Financial

Analysis of Eicher Motors Ltd

Internal Project carried out as a part of Curriculum & Internal Assignment for
Semester III under the able guidance of Prof Balkrishna Parab at Jamnalal
Bajaj Institute of Management Studies.

Trilok Prabhakaran 12/14/18 MMM 17-M-518

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Acknowledgement

I would like to express my sincere thanks to our Prof. Balkrishna Parab for imbibing our minds with the
valuable lessons and the sharing the real insights about the nuances of Financial Management at large. It
was an exquisite learning experience that made a mark at the profoundest part of my mind.

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A. Executive Summary

Eicher Motors Limited (EML) is the flagship company of the Eicher Group, which was a catalyst in the green
revolution in India with the production of India’s first agricultural tractor in 1959. EML is now a leading
player in the Indian automotive space.

Eicher Motors owns the iconic Royal Enfield motorcycle business, which leads the premium motorcycle
segment in India. The oldest motorcycle brand in continuous production world-wide, Royal Enfield has
witnessed a huge surge in demand in the recent past and is charting its course to be the leading player in
the mid-sized motorcycle segment globally.

EML’s joint venture with the Volvo group, VE Commercial Vehicles Limited, designs, manufactures and
markets reliable, fuel-efficient trucks and buses; and is leading the path in driving modernization in
commercial transportation in India and other developing markets.

EML’s joint venture with US based Polaris Industries Inc formed in 2012, Eicher Polaris Private Ltd. (EPPL)
launched the Multix, a new 3-in-1 vehicle purpose built for the independent businessman in June 2015.
For the fifteen months ended March 2016, Eicher Motors recorded its highest ever total income of INR
15,689 crores (USD 2.4 billion) and is listed on the Bombay and National Stock Exchanges. As of April 1st,
2016, Eicher Motors Limited became a part of the Nifty 50 Index.

B. Brief Background of the Company

1982

The company was incorporated on 14th October, and the certificate of commencement of business was
obtained on 28th March 1983. It was promoted in the joint sector by Eicher Goodearth Ltd., Mitsubishi
Corporation, Japan, Mitsubishi Motors Corporation, Japan and Madhya Pradesh Audyogik Vikas Nigam
Ltd. The main objective of the company is to manufacture of light commercial vehicles belonging to
Mitsubishi `CANTER' series.

❖ The Company undertook to set up a project for the manufacture of Mitsubishi `Canter' series of
commercial vehicles with an installed capacity of 6,000 vehicles per annum.
❖ 1990 - In order to suit the customers' requirement, new applications like container van with
double cabin, milk tanker and soft drink carrier were developed.
❖ Three new markets were opened in East Africa during the year. A new 4 tyre model was launched
in select pockets and another model with higher payload was ready for launch. Plans were afoot
to indigenize the remaining major parts viz. Cab panels, side members etc. During the year, the
Company started an independent `auto finance division' for financing retail vehicles in
underdeveloped areas.
❖ The company was gearing up its capacity to 12,000 vehicles per annum to exploit the opportunity
in commercial vehicles market.

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❖ During the year, a new model was introduced with improved gradeability in select markets. - The
assets of the Company together with its inter-connected companies exceeded Rs. 100 crores and
consequently effective April, the provision of Section 20(a)(ii) & Section 26 of the MRTP Act
became applicable to the Company. The Company was registered as an MRTP undertaking.

1997

Left Hand Drive (LHD) vehicle primarily for export markets was developed. A new model was introduced
during the year with improved gradeability in select markets.

❖ The Company recently introduced the skyline school bus, which incorporates safety features like
a stop sign, retractable footsteps, hazard warning lamps. The bus has been designed jointly with
institute of road traffic education, a non-governmental organization.

❖ The company has entered into a technical collaboration agreement with the Finland-based Valtra
Inc. for the manufacture of 61 and higher to hp tractors.

❖ Eicher, which had introduced a new 42 hp tractor recently, launched a 50 hp model this year. -
Eicher Motors had entered into a technical assistance agreement with Mitsubishi Motor
Corporation in 1986 to manufacture the canter range of light commercial vehicles (LCV) at its
Pithampur plant.

2002

❖ Launches India's first indigenously designed and developed Heavy Commercial Vehicle (HCV).

2003

❖ Introduces its first HCV called 'Eicher Jumbo 20.16' in Karnataka.

❖ Files Expression of Interest in acquiring Punjab State Industrial Development Corporation stake in
Punjab Tractors.
❖ Posts a 32% growth in the sales of its CV in the domestic market.
❖ UBI ties up with Eicher and L & T for financing equipment and farm vehicles
❖ Indian promoters buy out Mitsubishi's stake in Eicher Motors

2010

❖ Eicher Motors firms up on strong Dec sales -Volvo is working hard with its partner Eicher Motors
in order to develop Asia Truck. -Lalit Malik has been appointed as the Chief Financial Officer of
the Company. -The company launched the VE-series of Heavy-Duty trucks.

2013

❖ EICHER Unveils ‘The Future of Indian Trucking With The All New Pro Series ‘ROYAL Enfield Prepares
For Its Next Level Of Global Growth: Commences Commercial Production From The Oragadam
Manufacturing Facility.

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2014

❖ ROYAL Enfield Recreates History and Completes Top To Tip Ride In Record Time -Eicher Motors
Board Recommends Dividend.

2015

❖ Eicher Motors Ltd has entered into a Business Purchase Agreement, relating to the purchase of
the business and assets of Harris Performance Products Limited, UK -Eicher Motors - Royal Enfield
acquires UK-based Harris Performance -Eicher Motors - Eicher Polaris Pvt. Ltd. Launches Multix
India's First Personal Utility Vehicle -Eicher Motors Ltd - Royal Enfield announces direct
distribution subsidiary in North America -Eicher Motors resumes production at Royal Enfield
facilities

2016

❖ Eicher Motors -Royal Enfield introduces Himalayan- the most definitive motorcycle for your
Himalayan adventure.

2017

❖ Eicher Motors -Royal Enfield has started commercial production from its new manufacturing
facility at Vallam Vadagal near Chennai. -Eicher Motors -Royal Enfield has unveiled its ground-up
modern twin motorcycles the Interceptor INT 650 and the Continental GT 650 at the EICMA Motor
Show, Milan.

2018

❖ Eicher Motor added 150 new dealerships in India taking the total retail outlet strength to 825
exclusive stores in the country, making it the strongest premium motorcycle distribution in the
country by a large margin.

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C. Strategic Analysis

Strategic Framework of Eicher Motors:

For any organization to excel and accomplish its goal, it needs strategic clarity. To get where you want to
go, you first need to understand where you are. Strategic analysis is a tool that businesses use to map out
their current positions before they develop strategic plans for future direction and growth. There are
many ways to perform a strategic analysis -- but the most common is a SWOT analysis -- which considers
your company's strengths, weaknesses, opportunities and threats.

The SWOT analysis of Eicher Motors Ltd. Will be useful for.

• Strategic Planning & Decision-Making Process at all levels

• Assessment & Evaluation of responsiveness to the external environment.
• identification of Business Opportunities which can be capitalized.
• Identification of Potential Threats in the business environment.
• Identifying areas for Strategic changes & Improvements.

The analysis will be essential for those having strategic interest in the company & will be especially useful
for key decision makers, top management of companies, suppliers, vendors, current & potential investors,
industry & company analysts & those associated with the industry or the company.

Strength of Eicher Motors Ltd:

1. Excellent brand equity and strengths in Indian Market

2. Sound Pan India recognition in light trucks, buses & Bikes.
3. Sound fundamentals in turbo diesel engines that they developed in joint venture with Volvo.
4. Experienced, high quality, productive and low-cost work force.
5. Asset Leverage
6. Robust Distribution network in Tier-1 cities.
7. Strong Management
8. Pricing Power
9. Innovative Culture
10. Unique Products
11. Legacy and Dignity of Royal Enfield brand heritage which has a cult following.
12. Customer Loyalty
13. VECV (Volvo – Eicher Commercial Vehicle) Poised to benefit from strong tailwinds in the domestic
CV industry

Weakness:

1. High dependence on 350cc segment, particularly on Classic 350 brand.

2. Less emphasis on conventional marketing & trade promotion.
3. Inability to establish itself in segments other than 350cc, despite new launches.
4. Weak technical competencies when compared to companies like Ducati & Harley Davidson Motor
Company to scale up to high level bike segments.

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5. Perceived as too Indianized – it will take them a long time to establish a global branding.
6. VECV (Volvo – Eicher Commercial Vehicle) , increasing competitive intensity may possess risk to
margins and profitability.

Opportunities:

1. Exports provide huge opportunity to establish itself as a leader in the global mid-sized segment.
2. Gain control over UK and Europe markets by re-enforcing the heritage of Enfield Bikes.
3. Deep roots of British style manufacturing processes given their own heritage of the British rule in
India and other common wealth states.
4. Well placed to ride the premiumization trend of the domestic motorcycle industry.
5. Improve presence in the Tier 2 & Tier 3 cities, would unlock sales potential via expansion of
distribution network.
6. Excellent test drives and experience reports of LCV & Bikes can invite attention of Logistics
Company & urban middle class at global level – if they build their manufacturing and supply chain
effectively, they can virtually capture the market.
7. Acquisition Synergies
8. Emerging Markets – India like markets as well as emerging countries present untapped
opportunities in mid-size segment.

Threats:

1. Brand Fatigue impacting sales as Tier 1 Sales slows down.

2. International Competition from well established global players foraying in the Indian Markets.
3. Change in Taste of Consumer: Economics of Fuel consumption, Sleek and slender and low noise
design.
4. Political Risk – India’s Commitment to Paris Accord for INDC and reducing the fossil fuel
consumption by 40% and also the Air pollution problem in Tier 1 cities might prove detrimental
for sales, partially due to enforced regulation or austerity measures.
5. Government Regulation – The Auto Industry is striving to proactively mitigate vehicular emissions
and is bound to honor the verdict of the Supreme Court in the matter of Sales and Registration of
BS VI Vehicles versus manufacture, with effect from 1st April 2020, despite this becoming a huge
challenge for the industry.
6. Loss of Brand appeal on moving to Electric powertrain.
7. VECV – Aggressiveness of competitors with bout of new launches in the LMD segment could hurt
market share.

Eicher Motor strived to achieve the following strategic objectives.

i. FOCUSED ON DRIVING REVENUE AND PROFIT GROWTH

ii. INVESTED IN OUR BRANDS AND BUSINESS
iii. BECAME MORE EFFICIENT
iv. REFOCUSED ON CORE BUSINESS MODEL

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a) Analysis of the Industry Structure & Profitability

The Indian auto industry became the 4th largest in the world with sales increasing 9.5 per cent year-
on-year to 4.02 million units (excluding two wheelers) in 2017. It was the 7th largest manufacturer of
commercial vehicles in 2017.

The Two Wheelers segment dominates the market in terms of volume owing to a growing middle class
and a young population. Moreover, the growing interest of the companies in exploring the rural
markets further aided the growth of the sector.

India is also a prominent auto exporter and has strong export growth expectations for the near future.
Automobile exports grew 26.56 per cent during April-July 2018. It is expected to grow at a CAGR of
3.05 per cent during 2016-2026. In addition, several initiatives by the Government of India and the
major automobile players in the Indian market are expected to make India a leader in the two-wheeler
and four-wheeler market in the world by 2020.

The automobile industry is supported by various factors such as availability of skilled labor at low cost,
robust R&D centers and low-cost steel production. The industry also provides great opportunities for
investment and direct and indirect employment to skilled and unskilled labor.

Indian automotive industry (including component manufacturing) is expected to reach Rs 16.16-18.18

trillion (US$ 251.4-282.8 billion) by 2026. Two-wheelers are expected to grow 9 per cent in 2018.

PEST Analysis:

1. Political Factors: Indian Automobile industry, especially the commercial vehicle market is poised
to grow tremendously in the next few years. Primarily due to the increase in the infrastructure
spend, rapid urbanization and aggressive Road and transportation development being promoted
and carried out by the Government. The Government has set a target to complete 300 highways
project by March 2019. The Make in India programme, will be a major boost for supply chain and
logistics services which invariably shall lead to growth of commercial of vehicle sales.

Fig 1: India Outlook 2018

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2. Economic Factors: Growth of Commercial vehicles and Premium motorcycles is closely linked to
country’s economic growth. The impetus by the manufacturing & ecommerce giants have helped
fuel economic growth.
3. Social Factors: India has an increasing and dominant young population which are an aspirational
class. RE motorcycles have an edge as it becomes a niche product. The brand equity for RE
motorcycles is very high and is equally popular amongst the veterans who have been using it for
ages.
4. Technological Factors: Joint ventures and collaborations due to entry of international players has
helped Eicher get a competitive edge, it has successfully collaborated with Sweden’s AB Volvo &
Japan’s Mitsubishi for development of LCV.

Fig 2: Source: SIAM – Overview of Indian Automobile Market.

Fig 3: Domestic Sales Trend – Source SIAM.

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Fig 4: Timeline: History of Automobile Industry in India.

Model that shape Industry Competition.

In 1980, Michael Porter presented the five forces that shape competition in the industry for any
business organization as – Rivalry among existing competitors, threats of new entrants, bargaining
power of suppliers, bargaining power of buyers, and threat of substitute products or services. These
forces determine the competitive position of organizations in the markets of their operations.

One important observation that Michael E Porter made about these forces is that if these forces are
intense then almost no company gains distinct competitive advantages and earns attractive returns
on investments.

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Figure 5: Porter’s Five Forces Strategy that Shape Competition

i. Degree of Actual and Potential Competition.

a. Rivalry among Existing Firm – There is an intense rivalry amongst the existing
firms. While RE enjoyed virtual monopoly in the greater than 250cc premium
segment. With Classic Legends, a Subsidiary of Mahindra & Mahindra
relaunching the JAWA 300 cc motorcycles to directly compete with the RE
series.

Notable Competitors:
• Ashok Leyland & Tata Motors account for more than 80-85 % of
market share in the commercial vehicle segment.
• They have excellent brand recall & wide and established dealer
and servicing network in India.
• Strong Goodwill amongst existing customers.

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Fig 6: Relaunching Jawa Motor Series – Mahindra & Mahindra

b. Threat of New Entrants – New entrants always enter the markets with a
desire to capture market shares quickly and hence tend to put lot of pressure
on product pricing thus capping the profit potential of the market. With the
new companies around the world finally eyeing the lucrative Indian market,
threat of competition is only increasing, with the advent of players like BMW,
Triumph, Husqvarna, Honda, Norton, Benelli and UM trying to carve their
market share in this space.

c. Threat of Substitute Products – Eicher Motors enjoys a virtual monopoly

when it comes to bikes. Yet the threat to its line might increase with the
advent of Substitute products, e.g. Electric Bikes, High End Superbikes. If
automobile industry is itself under threat from electric vehicles. Then it shall
surely impact the biking industry, where efficiency & mileage has always been
a problem.

Fig 7: Pulsar & TVS have aggressively introduced sports themed bikes

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Relaunching : Both Pulsar & KTM offer lucrative bikes for Youth at equivalent
prices.

Fig 8 :Voxan Electric Bike – Threat to conventional Motorbikes.

ii. Relative bargaining Power

a. Bargaining Power of Buyers - The bargaining power of buyers shall be lesser
if competition is less given that customers will not have many choices for
purchasing products. This is true in case of RE Motorcycles, yet when it comes
to LCV vehicles, due to intense competition the buyers have multiple choices.
Therefore, Buyers have relative bargaining power in case of light commercial
vehicles and not so when it comes to RE Bikes which sell at a premium.
b. Bargaining Power of Suppliers - However, the bargaining power of suppliers
is higher in case of lesser competition given that lesser competition will not
develop the supplier network (and their mutual competition) and hence they
will tend to have more bargaining power.

b) Competitive Strategy Analysis

i. Cost Leadership: Cost leadership is a strategy companies use to increase efficiencies
and reduce production costs below the industry average or their closest competitor.
This helps passing on the price benefits to consumers and become cost competitive,
thereby gaining market share.

Fig 9 : Waiting Period of RE motorcycles

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Better efficient production and plant utilization has improved the waiting time, this
has helped improve the customer satisfaction and serviceability.

ii. Differentiation: Royal Enfield unit has enjoyed extremely rich global heritage of
practical leisure motorcycling of over a hundred years. The RE motorcycles have stood
out of the competition and crafted a niche market for itself. It enjoys a superior legacy
status with the value of bike fetching more than its initial cost price.
The economic growth and purchasing power increase has fostered the sales of RE
motorcycles. The company has continually expanded the customer offering.

The Offerings are:

Sr No Product Launch Year
1 Thunderbird Twinspark 350 2009
2 Classic 500 2009
3 New Bullet 350 2010
4 New Thunderbird 350 2012
5 New Thunderbird 500 2012
6 New Bullet 500 2013
7 Continental GT 2013
8 Himalayan 2016
9 Continental GT 650 2018
10 Interceptor 650 2018

They used segmented revenue growth strategies across their business in a way that
varied by market type. And aligned their employee incentives accordingly. In
emerging markets, they focused primarily on increasing volume, keeping our
products affordable and strengthening the foundation of our future success. In
developing markets, we struck a balance between volume and pricing. In developed
markets, we relied more on price/mix and improving profitability by offering more
premium bikes.

c) Corporate Strategy Analysis

Corporate Level Strategy
• Eicher Trucks & Buses (ETB) – ETB recorded an excellent overall performance,
while light and medium duty vehicles – have grown, the continued
acceptability and positive response to ‘VE’ Series of heavy-duty trucks have
paid well to the efforts and would provide the base for validating the long
term strategy of becoming a significant player in the heavy duty market. The
company is trying to achieve this by investing heavily in R&D and introducing
a host of differentiated products which will drive future growth.
• Volvo Trucks India (VTI) – VTI was largely able to capture and benefit from
the growth in the mining sector and the legislative push for growth. It is

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poised for growth based on its strength of superior customer value and
advanced technology.

To seize this opportunity, the company took steps to reshape their business. They
looked hard at their operating structure and identified areas where they could be
faster, smarter and more efficient. Finally removed a layer of functional management
and connected their regional business units directly to headquarters. Then
proceeding to streamline several important internal processes and removed
roadblocks and barriers that inhibited from being as effective and responsive as we
knew we could be. This has helped increase and improve all aspect of the value chain.

Business Level Strategy

Through this period the key strategic financial pillars were strong operating cash flow,
negative working capital and razor-sharp focus on maximizing operating leverage. The
company’s stellar performance on all these metrics has resulted in best-in-class
returns on capital employed.

They have strived to maximize the production capacity from the existing plant, to
meet the growing demand of motorcycles. In, March 2018, they sold a staggering
8,20,121 motorcycles & 65,932 VE commercial Vehicles.

Their strategic initiatives have revolved around effective cost management, improved
operational parameters and a differentiated pipeline of products. This has
contributed towards YOY growth.

The New plants In Oragadam, near Chennai has boosted production capacity.
The planned development of VECV’s medium duty engine plant has become the
defacto hub for Volvo globally. The domestic requirement is being met through this
capacity.

Adoption of such a crucial technology transfer has helped, since with the BS VI
requirement ahead, they would already have the technology which is Euro 6
compliant.
The introduction of RE Chrome & Dessert Storm model variants in multiple colors
have pushed sales and lucrative for youth.
In the Commercial Vehicle segment, Eicher motors have pursued
• Cost effective operations
• Leadership in Light Duty / Medium Duty commercial segments
• Specialist skills and experience in developing low cost, better
performance products.
• Excellent After Sales service for LD/MD segment.

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Value Chain Analysis

a. Eicher Engineering Components (EEC) – The performance is directly linked,

the company plans to create a base and hub for supplying to OEM’s
throughout the globe. The long-term vision is to the grow in segments like
aggregate assembly and outsourcing business. EEC’s capability of offering
design -build services shall be potential game changer.
b. Eicher Engineering Solutions (EES) – The strategy of becoming a global player
in the International Engineering services industry will prove a valuable
revenue stream and also develop the in-house expertise for spearheading the
Indian Markets.
c. VE Powertrain (VEPT) Project – It meets the VE medium duty segments
engine requirement and also provides significant edge to Heavy duty series.
Built with the state of the art technology from Volvo and amalgamates the
frugal standards of manufacturing of VE group , thereby unlocking Value.

Fig 10 : Eicher Motor Value Chain – Matrix.

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D. Financial Analysis
Eicher Motors – Consolidated Financial Statement.

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Mahindra & Mahindra – Consolidated Financial Statement.

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Mahindra & Mahindra – Consolidated Financial Statement.

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Ashok Leyland – Consolidated Financial Statement.

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Maruti Suzuki – Consolidated Financial Statement.

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Financial Ratios – Comparative Analysis

Table 11 – Ratio Comparison

Assigned Comparable Companies Comparable Comment

Company Mahindra & Ashok Maruti Company
Eicher Mahindra Leyland Suzuki Median
Motors Ltd (b+c)/2
Liquidity Ratio
Current Ratio 0.35 1.20 1.02 0.51 0.77

Quick Ratio 0.18 1.01 0.86 0.31 0.59

Efficiency Ratio

Inventory 23.25 9.99 13.54 25.96 18.4

Turnover Ratio

Days Inventory in Stock 15.7 36.5 26.95 14.06 21.3

(DIS)

Receivables Turnover 134.93 10.98 25.44 55.98 40.71

Average Collection 2.71 33.22 14.34 6.519 10.43

Period

Operating Cycle 18.41 69.72 41.29 20.58 30.93

Payables Turnover 3.85 9926.2 3.41 4.28 4.07

Average Payment 94.72 0.0367 106.95 85.27 89.99

Period

Cash Conversion Cycle -76.31 69.66 -65.66 -64.68 -65.17

(CCC)

Leverage Ratios

Equity Ratio 0.26 0.33 0.25 0.71 0.3

Debt to Equity (DER) 0.35 2.05 3.06 0.36 1.205

Ratio

Debt-Total Asset Ratio 0.262 0.67 0.75 0.26 0.466

Interest Coverage Ratio 583.45 3.589 14.42 33.29 23.86

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Eicher Comparable Companies Comparable Comment

Motors Mahindra & Ashok Maruti Company
Mahindra Leyland Suzuki Median
Profitability Analysis

Operating Profit Margin 0.31 0.11 0.13 0.14 0.135

Net Margin 0.21 0.09 0.06 0.10 0.1

Return on Assets 0.21 0.06 0.05 0.13 0.1

Return on Equity 0.28 0.18 0.22 0.19 0.21

Earnings Per Share 718.99 64.01 61.96 260.8 162.41

Dividend Payout Ratio 0.16 0.12 0.04 0.30 0.14

Valuation Analysis

Price Earnings Multiple 32.98 11.82 1.71 29.55 20.69

(PE) Ratio

Book Value per Share 2579.3 362.17 281.17 1409.4 321.67

(BVpS)

Sales per Share (SpS) 3366.35 750.2 1021.5 2715.87 1869

PS: The Above ratios are calculated based on the consolidated Balance sheet and Profit & Loss statement
for the Financial Year 2017-2018. The comments have been separately addressed in the following section.

The Comparable Companies were selected from the automobile sector which had similar line of business
or automobile offerings and was not much divergent in their line of business. The rationale being able to
have a clearer peer to peer comparison.

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i. Calculation of, and commentary on, liquidity ratios.

i. Current ratio - It is the relationship between current analysis assets and current
liabilities of the business. It is computed to access short term financial position of the
company, so that short term obligations can be met.

Objective: The objective of this ratio is to assess the ability of an enterprise to meet
its short-term liabilities promptly. Low ratio indicates that the company is not able to
meet its current liabilities whereas high ratio indicates inefficient use of funds or
funds lying idle. Although there is no hard and fast rule but still Current ratio of 2:1 is
consider satisfactory and that in the automobile industry the value is usually around
0.5.
Comments: The current ratio of this company is 0.35. It clearly shows that the short-
term financial position is not so sound

ii. Quick ratio - Liquid assets put against the current liabilities shows the liquid ratio or
Quick ratio. (Except inventory)

Calculations Quick Ratio = Liquid Quick Assets/ Current Liabilities

Objective: Quick Ratio is considered to be a better measure of short-term financial

position as compared to current ratio. This ratio eliminates the non-liquid part of
current assets and hence it will help the investor to take the decisions precisely.
Ideally value of QR is 1: 1. Higher value of ratio indicates under-stocking and Low ratio
value indicates Over-stocking.
Comments: From the liquidity point of view, the quick ratio of Eicher Motors is 0.18
which is lower as compared to its peers and the industry median of 0.59

ii. Calculation of, and commentary on, efficiency/activity ratios.

i. Inventory Turnover ratio
The inventory turnover ratio is an efficiency ratio that shows how effectively
inventory is managed by comparing cost of goods sold with average inventory for a
period. ... In other words, it measures how many times a company sold its total
average inventory rupee amount during the year.
Comments: Eicher Motor has higher inventory turnover ratio of 23.25 as compared
to the industry median of 18.4.

ii. Days Inventory in Stock (DIS)

The days sales of inventory (DSI) is a financial ratio that indicates the average time (in
days) that a company takes to turn its inventory (including goods that are a work in
progress) into sales.
Generally, a lower DSI is preferred as it indicates a shorter duration to clear off the
inventory though the average DSI varies from one industry to another.

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Comments: Eicher Motor has DIS of 15.7 as compared to the company median of
21.3. This is good which highlights flow of capital.

iii. Receivables Turnover

The receivables turnover ratio is an accounting measure used to quantify a firm's
effectiveness in extending credit and in collecting debts on that credit.
Comments: Eicher Motor has a high Receivables Turnover ratio suggesting that it is
effective in collecting the payments made on credit to dealers.

iv. Average Collection Period (ACP)

The average collection period is the amount of time it takes for a business to receive
payments owed in terms of accounts receivable.
Comments: Eicher Motor has the lowest Avg collection period of 2.71 days as
compared to the industry median of 10.43.

v. Operating Cycle
The operating cycle is the average period of time required for a business to make an
initial outlay of cash to produce goods, sell the goods, and receive cash from
customers in exchange for the goods
Comments: Eicher Motor has a good operating cycle period of 18.41 days as
compared to its peers and the industry median of 30.93 days.

vi. Payables Turnover

Accounts payable turnover ratio is calculated by taking the total purchases made from
suppliers, or cost of sales, and dividing it by the average accounts payable amount
during the same period.
Comments: Eicher Motor has the Payables Turnover ratio of 3.85 as compared to
the industry median of 4.07.

vii. Average Payment Period (APP)

The average payment period (APP) is defined as the number of days a company takes
to pay off credit purchases.
Comments: Eicher Motor has higher average payment period of 94.72 days, which
means it is able to use and optimize the supplier’s credit and pass on the benefit to
its stakeholders. It shows that the bargaining power of suppliers are less.

viii. Cash Conversion Cycle (CCC)

The cash conversion cycle (CCC) is a metric that expresses the length of time (in days)
that it takes for a company to convert its investments in inventory and other
resources into cash flows from sales.
Comments: Eicher Motor has best in industry cash conversion cycle of (-76.31) as
compared to its peers as mentioned in the table. Negative CCC means they make use
of the money from suppliers to effectively run the operation.

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iii. Calculation of, and commentary on, leverage/ solvency ratios.

i. Equity Ratio
This ratio measures the proportion of total assets being financed by the shareholders.
Comments: Eicher Motor has an equity ratio of 0.26 or 26% as compared to the
industry median of 30%.

ii. Debt – Equity Ratio (DER)

This ratio judges the long-term financial position of the firm. It indicates the relation
between Internal Equities and External Equities Calculation
Objective: The Ratio indicates the amount of capital supplied to the business by the
investors and cushion available on liquidation. It also indicates the extent to which
the firm depends upon outsiders for its existence.
Comments: Generally, Lower this ratio, the better it is as seen in the case of Eicher
Motor which has DER of 35%.

iii. Debt – Total Assets Ratio

The two components of this ratio are total assets and long-term debt. It measures the
extent to which the debt is covered by assets.
Comments: Higher ratio represents lower security to the leaders of long term loan.
The acceptable value to ratio is 1 : 2. In this case the Debt to Total Asset ratio is 26.2%
which is better than the comparable median of 46%.

iv. Interest Coverage Ratio (ICR)

This ratio measures the number a times the company can pay interest in a financial
year. The interest repaying capability is highlighted via this ratio.
Comments: Eicher Motor has an ICR of 583.45, hence it is in a comfortable position
to repay its interest and there is no threat due to insolvency.

iv. Calculation of, and commentary on, profitability ratios.

i. Operating Profit Margin
Adequate GP is required to cover the operating expenses, fixed charges, dividends
and reserves.
Objective: This ratio shows the average margins on goods sold. It should be adequate
so that fixed charges can be covered.
Comments: The Operating Profit is 31% which is a good as compared to its peer and
comparable median.

ii. Net Margin

It is indicator of the overall position of the efficiency of business. Profit before tax and
profit after tax, any of them can be taken.
Objective: It helps in determining the operational efficiency of business Comment As
it can be seen, the ratio of 2018.The net margin of Eicher Motor is 21% as compared
to its peer.

Financial Analysis – Eicher Motors.

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iii. Return on Assets

This shows the reduction in revenue generation because assets were not utilized
properly or vice versa.
Objective: It helps determine, the utilization of capital assets and optimization
achieved.
Comments: The return on assets for Eicher motor is 21% and better than the
comparable median. This shows that utilization is high.

iv. Return on Equity

The return on equity is a measure of the profitability of a business in relation to the
equity, also known as net assets or assets minus liabilities. ROE is a measure of how
well a company uses investments to generate earnings growth.
Comments: Eicher Motor has a ROE of 28%, which is better than its peer. This
highlights the company’s prudence while investing.

v. Earnings per Share (EPS)

It measures the earning of equity shareholders after meeting all the obligations. Net
profit after tax and preference dividend is used.
Objective: It helps in evaluating the prevailing market price of shares in light of profit
earning capacity. More the earnings better will be the performance Comments the
EPS is very minimum which can be improved by increasing the performance of the
business.
Comments: The EPS of Eicher Motor is high, also given the fact that price of Eicher
motor is relatively higher as compared to its Peers.

vi. Dividend payout Ratio (DVR)

It represents dividend distributed per equity share.
Objective: The objective of this ratio is to measure the dividend distributed among
shareholders. Higher the DPS, better it is for the image of the company. Higher DPS
will result in higher investment in future.
Comments: It has 16 % DVR , this is fairly encouraging and promising return.

v. Calculation of, and commentary on, Valuation Analysis.

i. Price – Earnings Multiple
It establishes the relation between market price of share and earning per share. It
indicates how many times is the market price to its earning.
Objective: This ratio will help us to judge the market price of share. It indicates how
much the public is ready to pay for future earnings prospects of company. It is also
used for knowing the position of over or under valuation of shares.
Comments: Generally higher ratio is preferred because it ensures the faith of
investors in the stability in the earnings of company. PE of Eicher Motors is 32.98 ,
investors see value and growth in this stock. The comparable median is around 20.69.

Financial Analysis – Eicher Motors.

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ii. Book Value per Share (BVpS)

Book value per share indicates the book value (or accounting value) of each share of
stock. Book value is a company's net asset value, which is calculated by total assets
minus intangible assets and liabilities. A relatively high book value per share in
relation to stock price often occurs when a stock is undervalued.
Comments: The Book value per share for Eicher motor is 2579.3 higher than the
median of 321.67.

iii. Sales per Share (SpS)

The term sales per share represents the portion of a company's revenue that is
allocated to each share of common stock. The figure can be calculated simply by
dividing sales earned in a given reporting period (usually quarterly or annually) by the
total number of shares outstanding during the same term. The sales-per-share ratio
is useful as a quick glance at a company's business activity strength.
Comments: Eicher motor has a SpS of 3366.35 , showcasing its higher revenue
strength as compared to its Peers.

Financial Analysis – Eicher Motors.

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E. Commentary on overall financial performance of the company

The ratio analysis is an effective management tool for proper decision making that will improve your
knowledge of financial results and trends over time. Ratio is used to relate one piece of financial data to
another, for the comparing ratio put two pieces of data on an equivalent base. The ratio analysis is
used to determine an organization liquidity position, leverage position, the effectiveness of assert
utilization, and profitability performance . From an investors’ point of view, financial statement analysis
is useful in future prediction while managerial standing point of view ratio analysis helps to understand
strengths and weaknesses of the organization’s finance as well as its helps to plan strategies for
company future performance.

Ratio analysis are basically divided into five categories; Profitability, sustainability ratio, operational
efficiency ratio, leverage ratio, other ratio.

In this study several key ratios were calculated to understand position of Eicher Motor Ltd are discussed
such as measures of liquidity, profitability, investment and overall performance . These ratios could
influence the financial wellbeing of the company.

Inventory Turnover ratio and Operating cycle measure the company’s effectiveness. Eicher Motor enjoys
a good turnover ratio which is healthy sign in companies which have high value inventory.

It has a low average collection period, which implies it is able to cash in the credit sales and while the
significantly longer average payment period, signifies its hold over the supplier. It demonstrates that the
bargaining power of suppliers is less.

EML has a Cash Conversion cycle of negative 76.31 days. This is good sign for shareholders as it showcases
judicious use of the equity and capital. Using the borrowed money to its maximum extent.

While current ratio and quick ratio of the company is significantly low, which highlights and underscores
the inherent risk. Ideally the ratio should be 1:1. However, current ratio is lower than 1:1 therefore; show
short term creditors (trade payables) should be cautious that there aren’t sufficient liquid asserts
comfortably to cover their claim. On the other hand it means company invested in the business more than
previous year which is good for the company`s future growth .

The quick ratio has also decreased which is similar to current ratio that is also measured by the ability
to use of company’s cash and equivalent to pay its current liabilities

The leverage ratio is always referred as a gearing ratio which measures company`s utilities debt to
financial growth. The debt to equity ratio indicates whether the company is depended on debts or
shareholder capital to fund assert and activities and company’s capital structure .

Financial Analysis – Eicher Motors.

32

The debt to equity ratio of Eicher Motor Ltd has indicated that every Rs.1 of shareholder ownership in
the company, the company owes Rs 0.35 to creditors, which are compares well with its peer in the same
industry. Also, for every Rs.1 of asset there is a Rs 0.26 of debt which is being serviced.

Based on the operating income, The Interest coverage ratio is very high i.e. 583.45, which is it has
sufficient income to pay off the liabilities in the form of interest. Hence the creditors should not have
much fear based on the sheer size of operating revenue to service the debt.

EML and Profitability ratios, as a business point of view investors are much more concerned about earning
pre-share which is market prospective ratio that is calculated by the net profits earned per share of stock
outstanding. EML’s earnings per share is higher compared to the comparing companies. Return on Assert
and Return on Equity is important to understand the company`s effectiveness in the utilization of assets,
cash and equity as against sales are generated by each rupee of company assets. It has ROA of 21% and
ROE of 28% which are relatively higher and showcases optimized management as compared to the
industry and its peers.

According to table 11 net profit margin is 21% which is higher compared to peers and lucrative as per the
industry standards.Net profits margin shows percentage of sales after paid all expenses which is useful
information for the company`s shareholders.

EML share of Dividend is at 16%, which compares the ratio of dividend paid as against the earnings per
share. So out of the entire earnings 16% is paid out and the remaining plugged back into operations.
Dividends are source of income and helps maintain the faith of investors in the stock and signals strong
growth.

Valuation analysis consist of ratios that help investors carry out the valuation and to gauge the market
sentiments. With PE ratio of 32.98 the stock is surely overpriced; the investors are speculative and have
banked on it being appreciated over the longer run. Hence this highlights the higher PE ratio.

Those who are bullish on the stock and based on the market conditions can take a long position in the
stock.

The Book Value per share is the minimum value of a company’s equity. In theory, BVPS is the sum that
shareholders would receive in the event that the firm was liquidated, and all the tangible assets were
sold and the liabilities were paid. The BVpS of Eicher Motor is Rs.2579 this is 10.84 % of the current
market price.

Sales per Share denotes and signifies the business strength and the topline of the company. Sales per
share is a ratio that computes the total revenue earned per share over a designated period which in case
of Eicher Motors Ltd is Rs. 3366.33.

Conclusion: Based on the overall financial and strategic analysis, the fundamentals of the stock are well
in place and the market looks ripe for expansion. Further growth would be achieved if Eicher Motors is
able to unlock and penetrate in the Tier 2 & Tier 3 cities of India and India-like markets abroad.

The aggressive R&D push and technology leveraged in LE Commercial vehicle space and Brand Equity
with respect to Royal Enfield bikes in the Mid-Market segment shall be harbinger of new era of Leisure
Motor Cycling. The terrain looks promising like the vast icy range of Himalaya with global road paved
with opportunities, its matter of Riding Through the Enfield Royally.

Financial Analysis – Eicher Motors.