FINANCIAL STATEMENT ANALYSIS

OF

MARUTI SUZUKI INDIA LIMITED

SUBMITTED TO

Prof D. V Ramana

By:

Debi Prasad Panda (U107013) Abhishek Jain (U107062)

Dhruv Atal Mongia (U107014) Akil V Laxman (U107063)

Dinah Rodrigues (U107015) Krishna Ramesh (U107085)

 ACKNOWLEDGEMENT

We would like to express our deepest gratitude to our instructor Dr. D. V. Ramana for
guiding us and helping us understand the fundamentals of Financial Accounting. This
project has given us the opportunity to analyze the practical aspects of Financial
Accounting and Management especially with respect to the Automobile industry.

2
 TABLE OF CONTENTS

ACKNOWLEDGEMENT 2

SYNOPSIS 5

ENVIRONMENT ANALYSIS 6

MARUTI SUZUKI INDIA LTD 13

Company History 13

Share Holding Pattern 14

International Market 14

Domestic Market 15

Products 16

Accolades 2006 17

Industry Analysis Bases on Porter’s Five Forces Model 17

1. Industry Rivalry 17
2. Threat of substitutes 19
3. Buyer Power 19
4. Supplier Power 19
5. Barriers to Entry / Threat of Entry 20

FINANCIAL STATEMENT ANALYSIS 21

Condensed Financial Statements and their Analysis 21

Analysis 22
Analysis 23
Analysis 24

Ratio Analysis 25
Liquidity Ratios 25

3
 Solvency Ratios 33
Profitability Ratios 37
Market Based Returns 44
Dupont Analysis 48
Dupont Analysis for RONW for 2005 - 2006 49
Dupont Analysis for ROCE for 2005 – 2006 50
EVA Analysis 51

INTER – COMPANY ANALYSIS 53

ACCOUNTING POLICIES ANALYSIS 61

REFERENCES 66

4
Synopsis

The objective of the project was to undertake a detailed financial statements analysis of
Maruti Suzuki India Limited from 2003-04 to 2005-06 using the annual report of the
company for the three years. This included analysis of the following:

a) Environment, Industry, and Company (EIC) Analysis

b) Industry Analysis using Porter’s Five forces.

c) Change in Accounting Policies

• Fixed Assets: Valuation/Revaluation/Depreciation/Revaluation of fixed assets

• Investments: Valuation and presentation

• Inventory: Valuation and presentation

• Employee Related Liabilities: Valuation and presentation

d) Financial Statement Analysis:

• Liquidity/Profitability/Solvency/Efficiency Ratios and their trends

• Du-Pont Analysis (3 Forces).

• Analysis of the Cash Flow Statements.

e) Inter company analysis of the financial ratios

5
Environment Analysis

Country Outlook: The GDP growth is expected to rise slightly to 9.0% in fiscal year
2007/08 (April-March). High international oil prices can lead to a significant widening of
the merchandise trade deficit, but the surpluses on the services and transfers accounts
can limit the size of the current-account deficit. Although rising oil prices may affect
overall GDP growth. Also rising value of rupee will have its impact on the industry.
Exports will be hit hard and imports will become cheaper. The high inflation rate was
also a concern in the last year. Inflation in this year is expected to be a little lower due to
base effect. Thus it will have some positive impact.

Policy trends: The indications are that reformist tendencies are being diluted by the
constraints of coalition government, discontent among the UPA’s left-wing allies and the
power of vested interests. Progress on privatization, liberalization of the foreign direct
investment regime and reform of India’s rigid labour laws can be slow, owing to the fact
that the Left Front, on which the minority government relies for support to push through
legislation, opposes such measures. India is nevertheless attempting to create a
competitive, export-oriented manufacturing sector, and to some extent is succeeding.
The government plans to foster competition among states and to promote export-led
manufacturing growth through the expansion of Special Economic Zones (SEZs). The
aim is to provide an internationally competitive environment for exporters, although the
crucial proposal to liberalize labor markets within the SEZs has been watered down.

The SEZ have run into hot water because of industry interference .But FDI have
come out strong and passed all levels of inflow achieved before.

Investment climate

Given the high growth expectations and a liberal government policy, the investment
potential in the Indian auto sector is huge. ACMA is forecasting a 12-15% annual growth
in the passenger car sales, 10% in commercial vehicles and around 10% in two

6
wheelers. Several passenger car makers have already achieved near full capacity
utilization and are expanding. Almost all the major automobile manufacturers such as
GM, Ford, DaimlerChrysler, Honda, Toyota, Hyundai, and Fiat already have made
significant investments in India. In the next 2-3 years, the passenger vehicle industry is
expected to see investments of more than Rs 30 billion. Similarly, two wheeler industries
are expected to attract investment amounting to Rs 10 billion.

There has also been a surge in exports of cars, utility vehicles and two wheelers. The
expected growth in domestic sales and exports of vehicles also offers significant
opportunity for investors to invest in the auto ancillary industry. Already several
international suppliers such as Delphi, Visteon, TRW, Johnson Controls, Denso and

Dana, have set up manufacturing facilities and are expanding rapidly to serve not only
the domestic market but also to supply to their global customers. Another attractive area
of investment for vehicle and parts makers is research and design, to take advantage of
India’s low cost advantage. However, investment in commercial vehicle manufacturing
looks relatively unattractive, given the current size and structure of the Indian market.

Recently, government has liberalized the investment norms for the auto sector. Local
content requirements and export obligations have been scrapped, and minimum
investment requirements also have been diluted. Import duties on vehicles and parts
have been gradually coming down and are expected to decline further.

Several state governments also offer attractive incentives, such as sales tax relaxations
and confessional land, to potential investors. However, manufacture of certain
components continues to be reserved for the small-scale sector. This reservation is also
expected to lift gradually.

Labor Market: The Indian workforce is easy to train and turns over at a relatively low
rate. English is widely spoken by managerial and supervisory personnel and to some
degree by unskilled workers. The literacy rate, in native languages or English, is 62%
(73% for men and 50% for women). According to the 2001 census (the most recent
available), the total working population in India was 402m, out of a total population of

7
1.03bn. Of the 402m workers, 313m were main workers (roughly speaking, working for
more than six months per year) and 89m were marginal workers (working for fewer than
six months per year). However, the official statistics count only people who are formally
employed. The Economist Intelligence Unit estimated the labor force to be 476.6m in
2003, a 2.6% increase from a year earlier.

Competition Policy: India’s markets are monopolized in only a few areas reserved for
the public sector, such as postal services and railways. Most other public-sector
monopolies have vanished as the government has permitted greater private
participation. Monopolies are rare in activities open to the private sector. The Monopolies
and Restrictive Trade Practices (MRTP) Act 1969 had the general goals of reducing
harmful market concentration, controlling large companies and distributing wealth and
economic power as widely as possible. The Monopolies and Restrictive Trade Practices
Commission (MRTPC) was empowered to enforce the MRTP Act. The legislation
covered the activities of firms deemed to dominate their industries (known as MRTP
firms) until 1991, when an amendment limited its scope to the regulation of unfair trading
practices (not monopolies). Under the amended act, MRTP firms no longer need
government approval to expand, appoint directors, or acquire, establish or merge with
another firm.

Automobile Industry

The automotive sector makes up a relatively small share of India's economy: in fiscal
year 2002/03 (April-March) domestic sales of all cars, trucks and related equipment
totalled (US$15bn), or 2.2% of GDP. The gross turnover of the automotive industry,
which includes some ancillary businesses, was 15bn$ in 2006/07, according to the
Society of Indian Automobile Manufacturers. The ancillaries market is around 3bn $ Of a
total labour force of an estimated 472m in 2003, the automotive industry provides direct
and indirect employment to 10.2m people. In calendar year 2004, 3.54m passenger cars
and multi-utility vehicles were sold domestically. Although this represented around an
18% increase in sales year on year, the stock of cars in India is still only 13 per 1,000
populations.

Indian car buyers focus chiefly on price and fuel economy, and small, cheap cars make

8
up the bulk of sales. Maruti is the market leader.

In 2006/07 thirty-one companies were producing passenger vehicles—nineteen

manufactured two- and three-wheelers and twelve produced light, medium and heavy
commercial vehicles. They manufactured a total of 8.7m vehicles. Most of this
production was for domestic consumption, with exports forming a marginal (11%) but
rapidly growing share.

Key players: Suzuki dominates the automotive landscape through its Indian subsidiary,
Maruti, which held a 52% share of the car market in April-December 2007. But Maruti’s
grip has been slipping: as recently as 1999 its market share was more than 68%. The
history of Suzuki-Maruti says much about the Indian economy and the slow pace of
reform. The government created Maruti in 1981 as a state-owned car company. It
entered into a joint venture with Suzuki a year later, but the government retained most of
the shares until the early 1990s, when they were divided evenly with Suzuki. A dispute
over management control of Maruti in 1998 paved the way for the government's transfer
of full control to Suzuki in 2002. In June 2003 the government sold off much of its
remaining stake in a public stock offering.

Installed capacity

The Automobile Manufacturers have put up a robust manufacturing capacity of 95 lakh

plus vehicles per annum since 1993. Today India is the world's second largest
manufacturer of two wheelers, fifth largest manufacturer of commercial vehicles and
manufactures largest number of tractors in the world. The country offers ninth largest
passenger car market in World today. A supplier driven market, having no more than a
handful of vehicular models two decades ago, now offers more than 150 models and
variants by way of customer options. The installed capacity of the automobile sector
during the year 2003-04 was as under:

9
Production

One of the largest industries in India, automotive industry has been witnessing
impressive growth during the last two decades. Abolition of licensing in 1991, permitting
automatic approval and successive liberalization of the sector over the years have led to
all round development of this industry. The freeing of the industry from restrictive
environment has, on the one hand, helped it to restructure, absorb newer technologies,
align itself to the global developments and realize its potential and on the other hand,
this has significantly increased industry's contribution to overall industrial growth in the
country. Overall automobile sector bagged a growth of 18% in the five period till 2007

Export

Automotive industry of India is now finding increasing recognition worldwide and a

beginning has been made in exports of vehicles as well as components. The automobile
industry along with the component industry is also contributing to the export effort of the
country. During the year 2002-03 the export of automobile industry had registered a
growth rate of 65.35% while it was 55.98% during the year 2003-04. The details of
exports during 2003-04 and 2004-05 (upto April-Sept. 2004) are given below:-

(in 000’s)

S. No EXPORT 2004-05 2005-06

1. Commercial vehicles 41 50

2. Passenger cars and 176 198

Multi- Utility Vehicles

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4. 2-wheelers 513 619

5. 3-wheelers 77 114

TOTAL 807 981

Demand: Private consumption per head in India is estimated at US$1000 in 2007; a car,
therefore, remains unaffordable to the vast majority of the population, 70% of which still
live in villages. Strong economic growth has, however, helped to raise incomes and
make cars more affordable. Despite the low level of GDP per head, income per head
measured by purchasing power parity was an estimated US$3,030, and is rising by
nearly 10% a year. Just as important, incomes are several times higher in the fast-
growing urban regions near Delhi, Bangalore and Mumbai than in rural areas. As a
result, at least 60m Indian households can afford basic consumer goods, of which about
10% can afford inexpensive cars. It is these middle-class Indians—like their more
numerous counterparts in China—who are attracting the attention of foreign car
companies.

A surge in car sales in the early and mid-1990s was stimulated by the general trend
towards economic liberalization, the delicensing of the car sector in 1993, the continued
entry of foreign producers, and favorable tax changes, which lowered prices. These
trends, which then slowed for several years, have witnessed a revival. In a further sign of
economic liberalization, in June 2003 the government sold a 25% stake in Maruti, by far
the country's leading carmaker, in an initial public offering that was strongly
oversubscribed. The government retains a 20% interest. (Suzuki of Japan, which owns
54% of Maruti, has management control of the company.)

Few inexpensive cars are imported because of high duties, although import tariffs are
coming down.

The used-car market in India has been largely unorganized; brokers account for most of
the purchases. The entrance of Maruti and Ford, one of the Big Three US carmakers,

11
should bring greater structure to the used-car market and lead to an increase in sales.
Importing used cars is impractical because of duties in excess of 100%.

Better road infrastructure should contribute to rising demand for personal transport. The
construction of a four-lane national highway network linking four major cities, called the
Golden Quadrilateral, is due to be completed in 2007.

Cars are not the primary means of private transport in India. Despite rising sales of new
cars, Indian roads are still dominated by scooters and motorcycles—more than 6m were
sold in 2004, six times the number of passenger cars. Year-on-year growth in two-
wheeler sales accelerated in 2004 (13%) after two years of decline.

Historically hostile to overseas investment, the government now allows 100% foreign
ownership of automotive companies. The excise tax on cars was lowered and tariffs on
imports were also reduced, although they remain high by world standards. Falling
interest rates—currently at 30-year lows—have also made cars more affordable.

Supply: Companies, which include most of the world's major manufacturers, produce
cars in India. Production of passenger vehicles, which includes cars, utility vehicles and
multi-purpose vehicles, reached 3,555,000 units in 2006/07. Automotive manufacturing
trends in India have changed over the past seven years: the number of commercial
vehicles produced fell sharply from 240,551 units in 1996/97 to 156,706 units in 2000/01,
before accelerating sharply in this decade as stronger economic growth and rising
investment have stimulated the need for commercial vehicles. In 2006/07 production
totalled 5,200,000 a 27% increase year on year.

Exports have become one of the automotive industry's biggest growth areas. Although
starting from a low base, exports of cars and related vehicles rose by 35% in the 2006-
2007. Most exports go to developing countries in Asia, where inexpensive cars can find
a market. Egypt, Kenya and Nigeria are also important destinations. But as quality has
improved, some Indian manufacturers have headed up market. Small cars such as
Maruti's Alto, Hyundai's Santro and Tata's Indica (known as the City Rover) have found
ready buyers in Western Europe.

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MARUTI SUZUKI INDIA LTD

Company History

Maruti Suzuki India Ltd is one of India's leading automobile manufacturers.

Maruti Suzuki India Limited (MUL) was established in Feb 1981 through an Act of
Parliament, as a Government company with Suzuki Motor Corporation of Japan holding
26 per cent stake. The Joint Venture agreement was signed between Government of
India and Suzuki Motor Company (now Suzuki Motor Corporation of Japan) in Oct 1982.

The objectives of MUL then were:

• Modernization of the Indian Automobile Industry.

• Production of fuel-efficient vehicles to conserve scarce
resources.
• Production of large number of motor vehicles which was
necessary for economic growth.

The company went into production in a record time of 13 months and the first car was
rolled out from Maruti Suzuki India Limited Gurgaon in December, 1983. It is a
subsidiary of Suzuki Motor Corporation of Japan. Suzuki Motor Corporation increased its
stake on two occasions (26>> 40 >> 50 >> controlling stake and brought it to 50 per cent
in the mid 1990s (and to 54% with privatization in 2002).

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Share Holding Pattern

percentage

4% 10%
1 President of India

31% 2 Suzuki Motors

Corporation
3 Instituitions

4 Non Instituitions
55%

International Market

It is India’s largest passenger car manufacturer and has a global presence with a well-
established network in several countries across Asia, Europe, Africa, South and Latin
America. Europe has been the largest market with exports of over 280000 units. Even in
the highly developed markets of Netherlands, UK , Germany, France & Italy, Maruti
vehicle have made a mark. The top ten destinations of the cumulative exports have been
Netherlands, Italy, U.K., Germany, Algeria, Chile, Hungary, Sri Lanka, Nepal and
Denmark in that order.

Maruti has also entered some unconventional markets like Angola, Benin, Djibouti ,
Ethiopia, Morocco , Uganda, Algeria, Egypt, Chile, Costa Rica and El Salvador and
witnessed sizeable growth. The Middle-East region has also opened up and is showing
good potential for growth. Some markets in this region where Maruti has a good
presence are Saudi Arabia, Jordan, Kuwait, Bahrain, Qatar and UAE.

In Europe the number of units sold is 280000 in 34 countries,in Africa it is 45000units,

in Latin America it is 29000units and Oceania the number of units sold is 6300units.

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Domestic Market

Maruti Suzuki India Limited, a subsidiary of Suzuki Motor Corporation of Japan, has
been the leader of the Indian car market for about two decades. Its manufacturing plant,
located some 25 km south of New Delhi in Gurgaon, has an installed capacity of
3,50,000 units per annum, with a capability to produce about half a million vehicles.

15
Products

The company has a portfolio of 10 brands, including Maruti 800, Omni, premium
small car Zen, international brands Alto and WagonR, Gypsy, mid size Esteem,
luxury car Baleno, Versa, SX4, Swift and Luxury SUV Grand Vitara XL7.

At the end of 2003-04, Maruti had a market share of over 55 per cent of the Indian
passenger car market. The company sold over 4,20,000 passenger cars in the domestic
market in 2003-04. It also exported over 51,000 vehicles (highest ever since it started
exports in 1986) during the year, raising the cumulative tally of exported vehicles to over
3,30,000. Maruti's channel partners own and manage 303 sales outlets across 189
Indian cities. The service network covers over 1000 towns and cities, bolstered by 1923
authorized service outlets.

Maruti products including Maruti 800, the Zen and the Esteem have been rated best cars
in their category in Total Customer Satisfaction Survey 2004 conducted by TNS -
Automotive.

The company's quality systems and practices have been rated as a "benchmark for the
automotive industry world-wide" by A V Belgium, global auditors for International
Organisation for Standardisation.

In keeping with its leadership position, Maruti supports safe driving and traffic
management through mass media messages and a state-of-the art driving training and
research institute that it manages for the Delhi Government.

Rankings for the TCS study are done at the vehicle segment level to provide comparisons
among similar vehicles. This year, Maruti 800 topped the table in the entry compact
category and Maruti Wagon R held its sway in the premium compact category. Maruti
Suzuki Swift was the frontrunner in the upper premium compact while Tata Indica Diesel
topped the small car - diesel category.

16
Accolades 2006

• JD Power CSI: 1st Rank, 7 years in a row 2000 - 2006

• JD Power SSI: 1st Rank, 3 years in a row 2004 - 2006
• Tops TNS TCS Survey in key segments, 5 years in a row 2002 - 2006
• Among Top 5 car companies in the Forbes list of the Worlds Most Reputed
Companies - Nov 06
• Features in Business Today's annual list of "20 companies to look for in 2007" -
Nov 06
• The only automobile manufacturer to feature in Business Today's list of "India's
Best 10 Marketers - Nov 06
• Ranks 1st for Corporate Social Responsibility by TNS Automotive

Industry Analysis Bases on Porter’s Five Forces Model

1. Industry Rivalry

In the traditional economic model, competition among rival firms drives profits to
zero. But competition is not perfect.

• Industry Concentration

The Concentration Ratio (CR) indicates the percent of market share held by a
company. A high concentration ratio indicates that a high concentration of market
share is held by the largest firms - the industry is concentrated. With only a few
firms holding a large market share, the market is less competitive (closer to a
monopoly). A low concentration ratio indicates that the industry is characterized
by many rivals, none of which has a significant market share. These fragmented
markets are said to be competitive. If rivalry among firms in an industry is low,
the industry is considered to be disciplined.

17
In case of cars in India ( Maruti in this case), the market share is about 52% and
other firms too have a moderate to high percentage. So the industry is quite
concentrated.

• High Fixed costs

When total costs are mostly fixed costs, the firm must produce capacity to attain
the lowest unit costs. Since the firm must sell this large quantity of product, high
levels of production lead to a fight for market share and results in increased
rivalry. The industry is typically capital intensive and thus involves high fixed
costs.

• Slow market growth

In growing market, firms can improve their economies. Though the market growth
has been impressive in the last few years (about 8 to 15%), it takes a beat in
even slight economic disturbances as it involves a luxury good. Aggressive
pricing is needed to sustain growth in such situations.

• Low switching costs

Free switching between products makes it difficult for the companies to capture
customers. Since, the purchase of the product involves a good amount of
decision making, brand loyalty is high and switching between products is rare.

• Diversity of rivals

Industry becomes unstable as the diversification increases. In this case the

diversity of rivals is moderate as most offer products which are close to standard
versions and the competitors are also mostly similar in strength.

18
2. Threat of substitutes

A product’s price elasticity is affected by the presence of substitutes as its

demand is affected by the change in the substitute’s prices. The new
technologies available also affect the demand of the product. In case of Maruti’s
products, the threat of substitutes is high. The competition is intense as several
players have products in the categories given by Maruti. However, in the 800cc
range it is the market leader and the threat of substitute products is low. Price
performance comparison favours heavily towards Maruti in most product
categories. Also the high availability and quality of services offered by Maruti
gives the customer a better trade-off.

3. Buyer Power

It specifies the impact of customers on the product. When buyer power is strong,
the buyer is the one who sets the price in the market. In the case of Maruti , the
sales volumes have shown increasing trend over past so many years. The
customers are more or less concentrated in metros or other tier two cities. The
industry is also concentrated in these regions mostly. Most of them are have
good amount of knowledge about the product. Except the 800cc range in other
categories brand loyalty is only moderate. Also it is diificult to measure since
repurchases are rare. Product differentiation is high as there are many categories
in the passenger vehicle segment. Buyers get incentives in the form of cost
discounts and better after sales services.

4. Supplier Power

Suppliers can influence the industry by deciding on the price at which the raw
materials can be sold. This is done in order to capture profits from the market.

Steel is a major input in this industry and so steel prices have a sharp and
immediate impact on the product price. Substitute inputs are restricted to non
critical or additional components like electronic gadgets and interior design
components. The industry being capital intensive switching costs of suppliers is
high, other than steel as raw material which is highly price sensitive and the firm

19
 may easily move towards a supplier with lower cost. Presence of substitute
inputs is also high.

5. Barriers to Entry / Threat of Entry

These are the characteristics that inhibit the entrance of new rivals into the
market and in turn protect the profits of the existing firms. Based on the present
profit levels in the market, one can expect the entrance of new firms into the
market or not. The entrance is however also affected by the start-up costs.

• Government policies

Governments restrict competition through granting of monopolies and through

regulation. The industry in India is witnessing strong competition with little
government imposed restrictions. The government has in fact diluted its stake in
Maruti and has taken steps to ensure grater competition and industry
development.

• Patents and Proprietary knowledge

Competitively advantageous ideas and knowledge are treated as private property

when patented. This prevents others from using the knowledge and thus creating
a barrier to entry. Patents and other such IP related issues are not very
significant in the industry.

• Asset specificity

It gives the extent to which the assets can be utilized to produce a different
product. Firstly, the firm holding such an asset they will resist the efforts of other
firms. Secondly, the entrants are reluctant to invest if a firm uses specialized

20
 technology. Asset specificity in the segment is low as the production processes
are generally standardized.

• Economies of scale

The Minimum Efficient Scale (MES) is the point at which unit costs are
minimized. The greater the difference between the MES and the entry unit cost,
greater is the barrier. Economies of scale are becoming increasingly important as
competition is driving the profit margins to lower levels. Also being a capital
intensive industry economies of scale have important consequences

Financial Statement Analysis

Condensed Financial Statements and their Analysis

Condensed Balance Sheet(In Rs. Millions)

2006 2005 2004

Capital 1,445 1,445 1,445

Reserves 55,190 43,443 36,137

LTL 6,696 3,076 3,119

CL 20,875 16,080 15,318

Total 84,206 64,044 56,019

Fixed Assets 20,491 19,158 19,057

21
 Investments 21,147 15,166 16,773

CA 42,568 29,720 20,189

Total 84,206 64,044 56,019

Analysis

1. There has been no change in capital over the three years.

2. The company’s reserves have been growing continuously .It means the
company is making more and more profits.

3. The long term liabilities have doubled in 2007.It means some large loan has
been taken in year2006-2007.

4. The current liabilities have also increased by 25 % in 2007.Without an increase

in fixed assets; this means the money was used to fund operations or
investments.

5. Investments have increased in 2007 .This means increased future cash flows.

6. The current assets have doubled in 2007.Current assets have been financed
by long term liabilities and current liabilities. This means the scale of operations
of maruti has increased without capacity expansion. This means there will be
evident growth in the very near future in profits, sales and share price.

Condensed Income Statement

2006 2005 2004

Sales 126,767 113,538 97,510

22
 COGS 94,107 85,856 69,861

Operating Expenses 11,640 9,705 14,545

Depreciation 2,891 4,568 4,949

PBIT 18,129 13,409 8,155

Interest 223 360 457

PBT 17,906 13,049 7,698

Tax 5,740 4,513 2,277

PAT 12,166 8,536 5,421

Analysis
1. The profits in 2005-2006 have increased because of two things. One due to

increase in sales and other due to decrease in operating expenses. But there
has been a great increase in the cost of product. Thus the decrease in operating
expenses played a big role.

2. There must have been increase in the cost of inputs as there has been an
increase in the cost of goods sold.

3. The increase in the profits for year 2005-2006 has been mainly due to increase in

sales.

4. Surprisingly the interest paid by the company in 2005-2006 decreased as the

amount of liabilities both long term and short tem almost doubled in this period as

23
 compared to the last period.

5. The tax doubled in 2004-2005 as compared to last period.

Condensed CFS

2006 2005 2004

Opening CIH 10,353 2,402 9,894

CFF 2,674 -918 -2,340

CFI -7,569 -1,927 -15,511

CFO 14,416 10,737 10,359

Closing CIH 19,874 10,294 2,402

Analysis

1. There has been increase cash expenditure on investments

2. Operational activities have brought inflow of cash

3. There has been increase in inflow of cash from financing activities, possibly

investments.

24
Ratio Analysis

Liquidity Ratios

These are the indicators of the ability of the company to convert its assets into cash or to
obtain cash to meet short term obligations

Working Capital

Working capital is a widely used measure of liquidity. This is given by the following
formula

Working Capital = Current Assets – Current Liabilities

It is important as a measure of liquid assets that provide safety cushion to creditors. It is

also important to measure the liquid reserve available to meet contingencies and
uncertainties in a company’s cash inflows.

Working capital is a double edged sword. Companies need working capital to effectively
operate yet working capital is costly as it must be financed and can entail other operating
costs such as credit losses and storage and logistics costs.

Trend Analysis

2005-2006 2004-2005 2003-2004

CA 42,568 29,720 20,189

CL 20,875 16,080 15,318

Working Capital 21,693 13,640 4,871

As can be observed, working capital has been increasing over the years. This is due to
the sharp increase in current assets. Current liabilities have also shown an increase.

25
However that has been offset by the increase in the current assets. Another factor that
can attribute for the increasing working capital for Maruti Suzuki Ltd is the fact that it
doesn’t follow the JIT form of inventory.

Working Capital(in millions of Rs.)

700.00

600.00

500.00

400.00
Working Capital(in millions of Rs.)
300.00

200.00

100.00

0.00
2005-06 2004-05 2003-04

Current Ratio

It is calculated as following

Current Ratio = Current Assets / Current Liabilities

Relevance:

• Current Liability coverage: Higher the current ratio, greater is the assurance
we have that current liabilities will be paid.
• Buffer against losses: Current Ratio shows the margin of safety available to
cover shrinkage in non cash current asset values when ultimately disposing off
or liquidating them
• Reserve of liquid funds: It is the measure of margin of safety against
uncertainties and random shocks to the company’s cash flows.

Limitations:

It is static measure of resources available at a point in time to meet the current

26
obligations. The current reservoir of cash does not have a logical or causal relation to its
future cash flows. These cash flows depend on factor excluded from the ratio i.e sales,
expenditure, cash, profits.

2005-2006 2004-2005 2003-2004

CA 42,568 29,720 20,189

CL 20,875 16,080 15,318

Current Ratio 2.04 1.85 1.32

Liquid Ratio

A more stringent test of the liquidity uses the Liquidity ratio, also known as the Quick or
the Acid Test Ratio which includes the assets most quickly convertible to cash. This is a
better test of liquidity as it handles issues of window dressing.

Quick (Acid Test) Ratio = (Current Assets – Inventory) / Current Liabilities

2005-2006 2004-2005 2003-2004

CA 42,568 29,720 20,189

CL 20,875 16,080 15,318

Stock 8,894 6,666 4,398

Current Ratio 1.61 1.43 1.03

27
Absolute Cash Ratio

This ratio tests the liquidity on an immediate basis as it tests for liquidity with the cash
and near cash items only. It is expressed as

Absolute Cash Ratio = (Current Assets – Stock – Debtors)/ Current Liabilities

2005-2006 2004-2005 2003-2004

CA 42,568 29,720 20,189

CL 20,875 16,080 15,318

Stock 8,894 6,666 4,398

Debtors 6,767 5,995 6,894

Current Ratio 1.29 1.06 0.58

Trend Analysis

2005-2006 2004-2005 2003-2004

Current Ratio 2.04 1.85 1.32

Liquid Ratio 1.61 1.43 1.03

Absolute Current Ratio 1.29 1.06 0.58

28
 2.50

2.00

1.50 Current Ratio

Liquid Ratio
1.00 Absolute Current Ratio

0.50

0.00
2005-06 2004-05 2003-04

As can be observed, the liquidity ratios have been increasing over the years. This can be
mainly attributed to the increase in the current assets over the last 3 years. The current
assets have seen a jump by 110% in the last 3 years. Even though the current liabilities
have gone up by 26%, this increase has been adjusted by the huge increase in the
current assets to give increasing liquidity over the years.

2005-2006 2004-2005 2003-2004

CL 20,875 16,080 15,318

CA 42,568 29,720 20,189

Efficiency Ratios

Liquidity refers to the speed in converting the accounts receivable to cash. The efficiency
ratios are a measure of this speed.

29
Debtor Days

A ratio used to work out how many days on average it takes a company to get paid for
what it sells. It is calculated by dividing the figure for trade debtors shown in its accounts
by its sales, and then multiplying by 365.

Debtor days = (debtors ÷ Sales) ×365

This indicates whether debtors are being allowed excessive credit. A high figure (more
than the industry average) may suggest general problems with debt collection or the
financial position of major customers.

2005-2006 2004-2005 2003-2004

Debtors 6,767 5,995 6,894

Sales 126,767 113,538 97,510

Debtor Days 19.48 19.27 25.81

Creditor Days

A ratio used to work out how many days on average it takes a company to pay its
creditors. It is calculated by dividing the trade creditors shown in its accounts by its cost
of sales, or sales, and then multiplying by 365

Creditor Days = (Creditors / Sales ) * 365

Lengthening creditor days may mean that a company is heading for financial problems
as it is failing to pay creditors, on the other hand it may mean that a company is simply
getting better at getting good credit terms out of its suppliers (improving its working
capital management), or that its pattern of purchasing has changed.

30
 2005-2006 2004-2005 2003-2004

Creditor 6,351 4,637 7,598

Sales 126,767 113,538 97,510

Creditor Days 18.29 14.91 28.44

Inventory Days

A financial measure of a company's performance that gives investors an idea of how

long it takes a company to turn its inventory (including goods that are work in progress, if
applicable) into sales.

Inventory Days = (Inventory / Cost of Sales ) * 365

2005-2006 2004-2005 2003-2004

Inventory 8,894 6,666 4,398

COGS 94,107 85,856 69,861

Inventory Days 34.50 28.34 22.98

Working Capital Days

This is a combination of the ratios above. The working capital days ratio is given as
follows:

Working Capital Days = Inventory Days + Debtor Days – Creditor Days

2005-2006 2004-2005 2003-2004

31
 Debtor Days 19.48 19.27 25.81

Creditor Days 18.29 14.91 28.44

Inventory Days 34.50 28.34 22.98

Working Capital Days 35.69 32.70 20.35

Trend Analysis

It can be observed that the debtor days has gone down by 24% while the creditor days
has also decreased by 35%. This implies that Maruti has been successful in collecting its
receivables efficiently. However it has also had to repay its creditors at a faster rate.

The inventory days has increased by 50%. This is not a pleasing trend where Maruti is
keeping its inventory idle for a longer amount of time.

30.00

25.00

20.00
Debtor Days
15.00 Creditor Days
Inventory Days
10.00

5.00

0.00
2005-06 2004-05 2003-04

32
Solvency Ratios

Debt Equity Ratio

It is a measure of a company's financial leverage calculated by dividing its total liabilities

by stockholders' equity. It indicates what proportion of equity and debt the company is
using to finance its assets.

DER = LTL / Shareholder's Equity

A high debt/equity ratio generally means that a company has been aggressive in
financing its growth with debt. This can result in volatile earnings as a result of the
additional interest expense.

If a lot of debt is used to finance increased operations (high debt to equity), the company
could potentially generate more earnings than it would have without this outside
financing. If this were to increase earnings by a greater amount than the debt cost
(interest), then the shareholders benefit as more earnings are being spread among the
same amount of shareholders. However, the cost of this debt financing may outweigh
the return that the company generates on the debt through investment and business
activities and become too much for the company to handle. This can lead to bankruptcy,
which would leave shareholders with nothing.

The debt/equity ratio also depends on the industry in which the company operates.

2005-2006 2004-2005 2003-2004

LTL 6,696 3,076 3,119

Owners Fund 56,635 44,888 37,582

Debt Equity Ratio 0.12 0.07 0.08

33
Debt Ratio

It is a ratio that indicates what proportion of debt a company has relative to its assets.
The measure gives an idea to the leverage of the company along with the potential risks
the company faces in terms of its debt-load.

Debt Ratio = Total Debt / Total Assets

A debt ratio of greater than 1 indicates that a company has more debt than assets,
meanwhile, a debt ratio of less than 1 indicates that a company has more assets than
debt. Used in conjunction with other measures of financial health, the debt ratio can help
investors determine a company's level of risk.

2005-2006 2004-2005 2003-2004

LTL 6,696 3,076 3,119

Total Assets 84,206 64,044 56,019

Debt Ratio 0.08 0.05 0.06

Equity Ratio

Total assets divided by shareholder equity. Asset/equity ratio is often used as a measure
of leverage.

Equity Ratio = Net worth / Total Assets

2005-2006 2004-2005 2003-2004

Owners Fund 56,635 44,888 37,582

Total Assets 84,206 64,044 56,019

34
 Equity Ratio 0.67 0.70 0.67

Interest Coverage Ratios

The interest coverage ratio is a measurement of the number of times a company could
make its interest payments with its earnings before interest and taxes; the lower the
ratio, the higher the company’s debt burden.

ICR = EBIT / Total Interest Expense

2005-2006 2004-2005 2003-2004

Interest 223 360 457

PBIT 18,129 13,409 8,155

Interest Coverage Ratio 81.30 37.25 17.84

Trend Analysis

2005-2006 2004-2005 2003-2004

Debt Equity Ratio 0.12 0.07 0.08

Debt Ratio 0.08 0.05 0.06

Equity Ratio 0.67 0.70 0.67

Interest Coverage Ratio 81.30 37.25 17.84

35
 0.80

0.70

0.60

0.50
Debt Ratio
0.40 Equity Ratio
0.30 DER

0.20

0.10

0.00
2005-06 2004-05 2003-04

As can be observed, the Equity ratio has been almost constant over the years. This
implies that the net worth of the company as a part of the total assets has remained
almost same. However the debt ratio has first decreased and then increased. This is
responsible for the trend of the Debt Equity Ratio as well. The long term liabilities have
increased significantly in the selected period. A new plant opened at Manesar near
Gurgaon in 2006 could be responsible for the increased long term loans.

The Interest Coverage Ratio has increased by 355% in the selected period. This
phenomenal increase in the ICR can be attributed to the 51% decrease in the interest
and the 122% increase in the PBIT. However a point to note is that the interest has
decreased even though the long term loans have increased drastically. This could be
possible because the interest on the newly added loan is not yet applicable and is to be
paid in the next financial year.

Interest Coverage Ratio

90.00
80.00
70.00
60.00
50.00
Interest Coverage Ratio
40.00
30.00
20.00
10.00
0.00
2005-06 2004-05 2003-04

36
Profitability Ratios

The profitability ratios give an indication of the ability of the company to generate profits.

Profit Margin Ratios

The profit margin ratios state how much profit the company makes for every dollar of
sales. The net profit margin ratio is the most commonly used profit margin ratio.

A low profit margin ratio indicates that low amount of earnings, required to pay fixed
costs and profits, are generated from revenues. A low profit margin ratio indicates that
the business is unable to control its production costs.

The profit margin ratio provides clues to the company's pricing, cost structure and
production efficiency. The profit margin ratio is a good ratio to benchmark against
competitors.

Net Profit Margin Ratio (PAT to Sales)

Net Profit Margin Ratio (After Tax Margin Ratio) = Net profit after tax / sales.

2005-2006 2004-2005 2003-2004

PAT 12,166 8,536 5,421

Sales 126,767 113,538 97,510

Net Profit Margin Ratio 0.10 0.08 0.06

37
Operating Profit Margin (PBIT to Sales)

Operating Profit Margin (Operating Margin)

= Net Income before Interest and Taxes / Sales.

2005-2006 2004-2005 2003-2004

PBIT 18,129 13,409 8,155

Sales 126,767 113,538 97,510

Operating Profit Margin 0.14 0.12 0.08

Operating Expenses to Sales

This is the ratio of operating expenses to sales during the year. This indicates that
portion of expenses comes from the sales made during the year.

2005-2006 2004-2005 2003-2004

Operating Expenses 11,640 9,705 14,545

Sales 126,767 113,538 97,510

Operating Expenses/ Sales 0.09 0.09 0.15

38
Trend Analysis

2005-2006 2004-2005 2003-2004

PBIT/Sales (%) 14.30 11.81 8.36

PAT/Sales (%) 9.60 7.52 5.56

Operating Expenses/Sales (%) 9.18 8.55 14.92

As can be observed, the Net Profit Margin Ratio and the Operating profit Margin have
both increased over the years. While the former has shown a 71% increase, the latter
has shown a 72% increase. A reason for the increasing profit margins could be the
declining Operating Expenses to Sales ratio. This ratio has declined by 38% over the
years. The sales have increased by 30% in the past few years which is another factor
for increase in the profit margins.

Profitability Ratios

16.00
14.00
12.00
10.00
PAT / Sales
8.00 PBIT / Sales
6.00 Op.Profit / Sales
4.00
2.00
0.00
2005-06 2004-05 2003-04

Return on Investment

The ROI is perhaps the most important ratio of all. It is the percentage of return on funds
invested in the business by its owners. In short, this ratio tells the owner whether or not
all the effort put into the business has been worthwhile. If the ROI is less than the rate of

39
return on an alternative, risk-free investment such as a bank savings account, the owner
may be wiser to sell the company, put the money in such a savings instrument, and
avoid the daily struggles of small business management. The ROI can be calculated in
three ways:

Return on Investment = Return on Net worth

= Return on Capital Employed

= Return on Total Assets

Return on invested capital is an important indicator of a company’s long term financial

strength. It uses key summary features from both the income statement and the balance
sheet to assess profitability. It can effectively convey the return on invested capital from
varying perspectives of different financing contributors.

Return on Net worth (RONW)

Net after Tax Profit divided by Net Worth, this is the 'final measure' of profitability to
evaluate overall return. This ratio measures return relative to investment in the company.
Put another way, Return on Net Worth indicates how well a company leverages the
investment in it. It may appear higher for startups and sole proprietorships due to owner
compensation draws accounted as net profit

RONW = PAT / Net Worth

2005-2006 2004-2005 2003-2004

PAT 12,166 8,536 5,421

Net worth 56,635 44,888 37,582

PAT/Net
worth 0.21 0.19 0.14

40
Return on Capital Employed (ROCE)

It is a ratio that indicates the efficiency and profitability of a company's capital

investments. It is calculated as:

ROCE = Profit Before Interest and Taxation / Capital Employed

ROCE should ideally be higher than the rate at which the company borrows, otherwise
any increase in borrowing will reduce shareholders' earnings.

2005-2006 2004-2005 2003-2004

PBIT 18,129 13,409 8,155

Capital Employed 63,331 47,964 47,701

PBIT/Capital Employed 0.29 0.28 0.20

Return on Total Assets (ROTA)

It is a measure of how effectively a company uses its assets. It is calculated by

ROTA = (Income before interest and tax) / (Fixed Assets + Current Assets).

It is also an indicator of how profitable a company is relative to its total assets. ROTA
gives an idea as to how efficient management is at using its assets to generate earnings.

2005-2006 2004-2005 2003-2004

PBIT 18,129 13,409 8,155

Total Assets 84,206 64,044 56,019

PBIT/Capital Employed 0.22 0.21 0.15

41
Trend Analysis

2005-2006 2004-2005 2003-2004

ROTA 0.22 0.21 0.15

ROCE 0.29 0.28 0.20

RONW 0.21 0.19 0.14

As can be observed, the Return on Investment has been increasing over the years. This
can be attributed to the 124% increase in PAT and 122% increase in PBIT. The net
worth has increased by 50% and the Capital Employed has increased by 32% but the
increase in these items has been compensated by the drastic increase in PBIT and PAT.

0.30

0.25

0.20
ROCE
0.15 ROTA
RONW
0.10

0.05

0.00
2005-06 2004-05 2003-04

EPS

Companies often use a weighted average of shares outstanding over the reporting term.
EPS can be calculated for the previous year ("trailing EPS"), for the current year
("current EPS"), or for the coming year ("forward EPS"). Note that last year's EPS would
be actual, while current year and forward year EPS would be estimates.

42
It is calculated as

EPS = Total Earnings / Number of shares outstanding.

2005-2006 2004-2005 2003-2004

EPS 42.20 30.46 18.77

Trend Analysis

The EPS has been increasing constantly over the years. There has been a 124%
increase in the EPS. Since the number of shares has remained constant at 310000000,
the rise can be fully attributed to the increased earnings over the years.

Earnings per share

45
40
35
30
25
Earnings per share
20
15
10
5
0
'2003-04' '2004-05' '2005-06'

DPS
A performance metric used to gauge the quality of a company's earnings per share
(EPS) if all convertible securities were exercised. Convertible securities refer to all
outstanding convertible preferred shares, convertible debentures, stock options
(primarily employee based) and warrants. Unless the company has no additional

43
potential shares outstanding (a relatively rare circumstance) the diluted EPS will always
be lower than the simple EPS.

DPS = Total Earnings/ (No of Shares outstanding + No of possible convertible

shares)

This is a conservative metric because it indicates somewhat of a worst-case scenario.

On one hand, everyone holding options, warrants, convertible preferred shares, etc. is
unlikely convert their shares all at once. At the same time, if things go well, there is a
good chance that all options and convertibles will be converted into common stock.

Market Based Returns

Price Earning Ratio

It is a valuation ratio of a company's current share price compared to its per-share

earnings.

EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken
from the estimates of earnings expected in the next four quarters (projected or forward
P/E). A third variation uses the sum of the last two actual quarters and the estimates of
the next two quarters.

It is also known as "price multiple" or "earnings multiple".

In general, a high P/E suggests that investors are expecting higher earnings growth in
the future compared to companies with a lower P/E.

P/E Ratio = Market Value per share / Earnings per share

Trend Analysis

2005-2006 2004-2005 2003-2004

MV 927.35 636.5 461.25

44
 EPS 42.20 30.46 18.77

Price Earning Ratio 21.98 20.90 24.57

PE Ratio over the Years

25
24
PE Ratio

23
22
21
20
19
2005-2006 2004-2005 2003-2004
Year

Series1

As can be observed the Price Earning ratio has had a declining trend. It has declined by
10.5 % over the years. This can be attributed to the 124% increase in EPS and 101%
increase in the Market Value. Since the growth in EPS has been higher than the growth
of the market value, Price earning ratio has declined over the years.

Market Capitalization

Market capitalization indicates the public’s opinion of the company’s net worth. It is a
determining factor in stock evaluation. It is calculated as follows:

Market Capitalization = Market Value * No of Shares

2005-2006 2004-2005 2003-2004

Market Value 927.35 636.5 461.25

No of Shares 310,000,000 310,000,000 310,000,000

Market Capitalization (in Rs Million) 287,478.50 197,315.00 142,987.50

45
As can be observed, Maruti has had a phenomenal growth of 101% in market
capitalization. This can mainly be attributed to the 101% increase in Market Value as the
number of shares has not changed in the selected years.

Market Capitalization (in Rs Million)

142,987.50
2003-2004

197,315.00
Years

2004-2005

287,478.50
2005-2006

0.00 50,000.00 100,000.00 150,000.00 200,000.00 250,000.00 300,000.00 350,000.00

Market Capitalisation

Market Capitalization (in Rs Million)

Market Capitalization to Net Worth

This is a ratio of market capitalization to net worth of the company. This indicates how
much of the market capitalization is driven by the shareholder’s fund. It is expressed as
follows:

Market Capitalization to Net worth = Market Capitalization / Net worth

2005-2006 2004-2005 2003-2004

Market Value 287,478.50 197,315.00 142,987.00

Net worth 56,635 44,888 37,582

Market Capitalization/Net worth 5.08 4.40 3.80

As can be observed, this ratio has been increasing over the years. The 50% increase in
net worth has added to the 34% growth in this ratio due to the 101% increase in market
capitalization.

46
 Market Capitalization to Networth

2003-2004
Market Value
Years

Net worth
2004-2005
Market Capitalization/Net
worth
2005-2006

0.00 100,00 200,00 300,00 400,00

0.00 0.00 0.00 0.00
Capitalization & Networth

Average Market Capitalization

The average market capitalization can be arrived by taking the product of the average
market value and the average number of shares.

Average Market Capitalization = Avg. Market Value * Avg. No of Shares.

2005-2006 2004-2005 2003-2004

Market Value 927.35 636.5 461.25

Average Market Value 675.0333333 365.916667 153.75

No of Shares 310,000,000 310,000,000 310,000,000

Average No of Shares 310,000,000 310,000,000 310,000,000

Market Capitalization (in Rs 1000 Million) 287.48 197.32 142.99

Average Market Capitalization (in Rs 1000 million) 209.26 113.43 47.66

47
As can be observed , the actual capitalization starts from below the average market
capitalization and moves over the average capitalization over the period.

350.00

300.00

250.00 Market Capitalization

(in Rs 1000 Million)
200.00

150.00 Average Market

Capitalization (in Rs
100.00 1000 million)

50.00

0.00
2005-2006 2004-2005 2003-2004

Dupont Analysis

The DuPont Model is a technique that can be used to analyze the profitability of a
company using traditional performance management tools. To enable this, the DuPont
model integrates elements of the Income Statement with those of the Balance Sheet.

The advantages of Dupont Analysis are as follows:

• Simplicity

• Can be easily linked to compensation schemes

• Can be used to convince management about steps needed to professionalize

purchasing or sales function.

The limitations of Dupont Analysis are

• It is based on accounting numbers which are not reliable\

• It does not include cost of capital

48
 RONW = PAT/Net worth

RONW = PAT/Sales * Sales/Assets * Assets/ Net worth

Dupont 2005-2006 2004-2005 2003-2004

RONW 0.21 0.19 0.14
Profit Margin 9.60 7.52 5.56
Asset
Turnover 1.51 1.77 1.74
Equity
Multiplier 1.49 1.43 1.49

Dupont Analysis for RONW for 2005 - 2006

PAT/NW = 21%

PAT/Sales = 9.6% Sales/TA = 1.51 TA/NW = 1.49

Sales/FA = 6.19 Sales/CA = 2.98

Sales/Debtors = 18.73

Sales/Stock = 14.25

Sales/Cash = 4.17

Implications

We observe that the RONW has been steadily improving for the company during the
period . This can be mainly attributed to the improving profit margins that the company
has attained due the various cost-cutting measures adopted during the same period.
The decreased asset turnover ratio can be attributed to the rise in fixed assets due to the
establishment of the new plant at Manesar.

49
ROCE = PBIT/ CE

ROCE = PBIT/Sales * Sales/TA * TA/CE

Dupont 2005-2006 2004-2005 2003-2004

ROCE 0.29 0.28 0.20
Profit Margin 14.30 11.81 8.36
Asset Turnover 1.51 1.77 1.74
Asset Leverage 1.33 1.34 1.38

Dupont Analysis for ROCE for 2005 – 2006

ROCE

PBIT/CE = 29%

Profit Margin Asset Turnover Asset Leverage

PBIT/Sales = 14% Sales/TA = 1.5 TA/CE = 1.33

Depreciation/Sales Operating Cost of Raw Materials

Expenditure/Sales / Sales
= 2.28%
= 9.18% =74.2%

Implications

We observe that the ROCE has improved a lot for the company during the period . This
can be mainly attributed to the vastly improved profit margins that the company has
attained due the various cost-cutting measures adopted during the same period.

50
EVA Analysis

Profit is the output of the GAAP driven accounting assumptions. One of the important
accounting assumptions is that the interest is treated as an expense, whereas the
dividend is treated as distribution of profit. Sometimes, such assumption result in
situations where the company show the accounting profit but may be destroying the
wealth of the shareholders. To address such anomaly, the concept of the residual profit
(from the economics literature) has been made popularized as Economic Value Added
by Stern and Stewart.

EVA measures whether the operating profit is enough compared to the total costs of
capital employed. Stewart defined EVA as Net operating profit after taxes (NOPAT)
subtracted with a capital charge.

Economic Value Added is calculated as follows:

• EVA = NOPAT – Capital Charge

• NOPAT = Net Operating Profit After Tax (before interest)
• Capital Charge = Cost of both Debt and Equity
• Capital Charge = WaCC * CE
• Capital Charge = Ke*Capital + Kd*Debt

EVA = NOPAT - (Cost of Capital * Capital Employed)

Cost of capital = Cost of Equity x Proportion of equity from capital + Cost of debt x
Proportion of debt from capital x (1-tax rate)

Cost of capital or Weighted average cost of capital (WACC) is the average cost of both
equity capital and interest bearing debt. Cost of equity capital is the opportunity return
from an investment with same risk as the company has. Cost of equity is usually defined
with Capital asset pricing model (CAPM). The estimation of cost of debt is naturally more
straightforward, since its cost is explicit. Cost of debt includes also the tax shield due to
tax allowance on interest expenses.

The idea behind EVA is that shareholders must earn a return that compensates the risk
taken. In other words equity capital has to earn at least same return as similarly risky

51
investments at equity markets. If that is not the case, then there is no real profit made
and actually the company operates at a loss from the viewpoint of shareholders. On the
other hand if EVA is zero, this should be treated as a sufficient achievement because the
shareholders have earned a return that compensates the risk. This approach - using
average risk-adjusted market return as a minimum requirement - is justified since that
average return is easily obtained from diversified long-term investments on stock
markets. Average long-term stock market return reflects the average return that the
public companies generate from their operations.

Accounting Adjustments

As defined earlier EVA is the Net operating profit after taxes (NOPAT) subtracted with
the cost of capital employed. But the calculation is not as simple as calculating the total
capital employed is a difficult task due to the plethora of accounting distortion in the
balance sheet. So there are more than 250 accounting adjustments as proposed by
Stern Stewart to be done in moving to EVA. In practice most organisations do no more
than fifteen relevant adjustments to do the calculation. The adjustment include netting
the non-interest bearing liabilities against the current asset that means adding back to
the equity the gross write-offs, reserves, provisions and capitalised value of the R & D
and Advertising. These accounting adjustment are referred as equity equivalents and
their effects on the Capital and NOPAT are summarised below.

EVA for 2005-2006

Capital
Employed 63,331

Interest 223
Loans 6,696
Cost of debt 3.33

Beta 0.96
Cost of Equity 0.16

WACC 1.59

NOPAT 12389.00

EVA -88300.1

52
Implications

We observe that the ROCE has improved a lot for the company during the period . This
can be mainly be attributed to the vastly improved profit margins that the company has
attained due the various cost-cutting measures adopted during the same period

Inter – Company Analysis

A brief snapshot into how Maruti stands against its close competitors TATA Motors and
Mahindra & Mahindra can be done by looking at the following graphs. The analysis is
direct and needs no explanations.

Current Ratio

Tata M o to rs

M &M

M UL

0.00 0.50 1.00 1.50 2.00 2.50

Current Ratio

Debtor Days
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
M UL M &M Tata M o to rs

53
 Creditor Days

120.00

100.00

80.00

60.00

40.00

20.00

0.00
M UL M &M Tata M o to rs

Equity Ratio
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
M UL M &M Tata M o to rs

Debt Equity Ratio

0.60

0.50

0.40

0.30

0.20

0.10

0.00
M UL M &M Tata M o to rs

54
Debt Ratio
0.25

0.20

0.15

0.10

0.05

0.00
M UL M &M Tata M o to rs

Interest Coverage Ratio

90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
M UL M &M Tata M o to rs

PBIT/TA
0.25

0.20

0.15

0.10

0.05

0.00
M UL M &M Tata M o to rs

55
 PBIT/CE
0.30
0.29
0.29
0.28
0.28
0.27
0.27
0.26
M UL M &M Tata M o to rs

PAT/OF
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
M UL M &M Tata M o to rs

Operating Profit/Sales (%)

16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
M UL M &M Tata M o to rs

56
PBIT/Sales (%)
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
M UL M &M Tata M o to rs

PAT/Sales (%)

12.00

10.00

8.00

6.00

4.00

2.00

0.00
M UL M &M Tata M o to rs

57
Inter- Company Dupont Analysis Comparison

MUL - 05/06
ROCE 0.29
Operating Decision Investment Decision Financial Decision

PBIT/Sales 0.14 Sales/TA 1.51 TA/CE 1.33

COGS/Sales 0.74 Sales/FA 6.19 TA/ Capital 58.27

Opex/Sales 0.09 Sales/Debtors 18.73 TA/RS 1.53

Depreciation /
Sales 0.02 Sales/Stock 14.25 TA/LTL 12.58

Sales / Other CA 3.76

Tata Motors - 05/06

ROCE 0.26
Operating Decision Investment Decision Financial Decision

PBIT/Sales 0.11 Sales/TA 1.29 TA/CE 1.76

COGS/Sales 0.66 Sales/FA 4.57 TA/ Capital 41.89

Opex/Sales 0.21 Sales/Debtors 28.82 TA/RS 3.11

Depreciation /
Sales 0.03 Sales/Stock 10.26 TA/LTL 5.46

Sales / Other
CA 3.06

Mahindra & Mahindra - 05/06

ROCE 0.29
Operating Decision Investment Decision Financial Decision

PBIT/Sales 0.14 Sales/TA 1.33 TA/CE 1.52

COGS/Sales 0.71 Sales/FA 5.14 TA/ Capital 25.49

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 Opex/Sales 0.19 Sales/Debtors 12.52 TA/RS 2.24

Depreciation /
Sales 0.03 Sales/Stock 9.09 TA/LTL 6.78

Sales / Other
CA 6.48

Implications

As the PBIT/Sales for M&M and Maruti are higher than Tata motors , we can infer that
maruti operates on a higher profit margin than Tata Motors. Maruti also seems to have
improved its processes and made its operations more efficient due to which the
Opex/Sales of the company is much lower than that of its competitors. The
Sales/Debtors ratio of Tata Motors is surprisingly high as compared to the two
competitors against which it is pitter in this comparison. The higher TA/LTL ratio of MSIL
indicates that it if financed more by equity rather than debt as compared to its
competitors.

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EVA Analysis

MUL Tata Motors M&M

Capital Capital Capital
Employed 63,331 Employed 84,739.10 Employed 37,923

Interest 223 Interest 2,263.50 Interest 269.56

Loans 6,696 Loans 29,368 Loans 8,834
Cost of debt 3.33 Cost of debt 7.71 Cost of debt 3.05

Beta 0.96 Beta 1.08 Beta 1.08

Cost of Equity 0.16 Cost of Equity 0.17 Cost of Equity 0.17

WACC 1.59 WACC 2.78 WACC 0.84

NOPAT 12389.00 NOPAT 17,552.30 NOPAT 8848.46

- -
EVA -88300.1 EVA 218,035.30 EVA 22960.468

Implications

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Accounting Policies Analysis

The following policies have remained the same over 2004-2005 and 2006-2007, except
where explicitly mentioned.

Basis for Preparation of Accounts

The accounts of Maruti are prepared in accordance with historical cost convention, using
the applicable accounting standards issued by the Institute of Chartered Accountants of
India and the relevant provisions of the Companies Act, 1956.

Revenue Recognition

Domestic and Export Sales recognized on transfer of significant risks and rewards to the
customer which takes place on dispatch of goods from the factory/stockyard/storage
area and port respectively.

Fixed Assets

Fixed Assets (except freehold land) are carried at cost of acquisition or construction or at
manufacturing cost (in case of own manufactured assets) in the year of capitalization
less accumulated depreciation.

Borrowing Costs

Borrowing costs that are directly attributable to the acquisition, construction or

production of qualifying assets are capitalized till the month in which the asset is put to
use as part of the cost of that asset.

Depreciation

a) Fixed Assets except for lease hold land are depreciated on straight line method on a
pro-rata basis from the month in which the asset is put to use, at the following rates:

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 i) Assets capitalized before 02.04.1987

Depreciation has been provided at the rates computed in terms of Section 205
(2) (b) of the Companies Act, 1956, in terms of Circular No. 1/86 dated 21.05.86
of the Government of India.

ii) Assets capitalized on or after 02.04.1987

Depreciation has been provided at the rates prescribed in Schedule XIV to the
Companies Act, 1956 except for certain fixed assets where based on
management’s estimate of the useful life of the assets, higher depreciation has
been provided on straight line method at the following rates:

Plant and Machinery:

Single Shift 7.31%

Double Shift 11.88%
Triple Shift 15.83%
Dies and Jigs 20% to 41%

b) Leasehold land is amortized over the period of lease.

c) Plant and machinery, the written down value of which at the beginning of the year is
Rs. 5,000/- or less, and other assets, the written down value of which at the beginning of
the year is Rs. 1,000/- or less, are depreciated at the rate of 100%. Assets purchased
during the year costing Rs. 5,000 or less are depreciated at the rate of 100%.

d) In case the historical cost of an asset undergoes a change due to increase or

decrease in long term liability on account of foreign exchange fluctuation, change in
duties etc., the depreciation on revised unamortized depreciable amount is provided
prospectively over the residual useful life of the asset.

Inventories

a) Inventories are valued at lower of cost, determined on weighted average basis,

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and net realizable value.

b) Tools are written off over a period of three years except for tools valued at Rs.
5,000/- or less individually which are charged off to revenue in the year of purchase.

c) Machinery spares (other than those supplied along with main plant and
machinery, which are capitalized and depreciated accordingly) are charged off to
revenue on consumption except those valued at Rs. 5,000/- or less individually, which
are charged off to revenue in the year of purchase and those whose value are not
individually ascertainable are written off over a period of three years.

Investments

Investments are assets held by an enterprise for earning income by way of dividends,
interest, and rentals, for capital appreciation, or for other benefits to the investing
enterprise. Assets held as stock-in-trade are not ‘investments’.

A current investment is an investment that is by its nature readily realizable and is

intended to be held for not more than one year from the date on which such investment
is made.

A long term investment is an investment other than a current investment. An investment

property is an investment in land or buildings that are not intended to be occupied
substantially for use by, or in the operations of, the investing enterprise.

In Maruti, Current investments are valued at lower of cost and fair value. Long-term
investments are valued at cost except in case of permanent diminution in their value,
wherein necessary provision is made.

8) Foreign Currency Translations

a) Foreign Currency transactions are recorded at the exchange rate prevailing at the
date of transaction. Exchange differences arising on settlement of transactions, except
those relating to fixed assets, are recognized as income or expense in the year in which
they arise. The cost of the respective fixed assets is adjusted for exchange differences
arising on repayment of liabilities incurred for the purpose of acquiring such fixed assets.

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b) At the balance sheet date all assets, other than fixed assets, and liabilities
denominated in foreign currency but not covered by forward contracts are reported at the
exchange rate prevailing at the balance sheet date. The cost of the respective fixed
assets is adjusted for increase or decrease in liabilities incurred for the purpose of
acquiring such fixed assets due to application of the exchange rate prevailing at the
balance sheet date.

c) The difference between the forward rate and the exchange rate at the inception of a
forward contract is recognized as income or expense over the life of the contract except
in respect of liabilities incurred for acquiring fixed assets in which case such difference is
adjusted in the cost of the respective fixed assets.

d) At the balance sheet date all assets and liabilities covered by forward contracts are
stated at the forward contract rates.

f) Profit or Loss arising on cancellation or renewal of a forward contract is recognized as

income or expense in the year in which such cancellation or renewal has been made
except in the case of a forward contract relating to liabilities incurred for acquiring fixed
assets, where the profit or loss is adjusted in the cost of the respective fixed assets.

9) Retirement Benefit Costs

Gratuity and leave encashment benefits on retirement are accounted for on the basis of
actuarial valuations at the end of the period.

10) Deferred revenue Expenditure

Deferred Revenue Expenditure is being written off as current expenses, in accordance

with the provisions of AS 26 issued by the Institute of Chartered Accountants of India
which defines Intangible Assets.

11) Customs Duty

Customs Duty paid on components imported specifically for export vehicles is debited to
Customs Duty Deposit Account and duty drawback recoverable on export of vehicles is
credited to this account. Other categories of duties available as drawback are debited to

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purchases and credited to income on export of vehicles.

12) Government Grants

Government Grants are recognized in the profit and loss account in accordance with the
related scheme and in the period in which these are accrued.

13) Deferred Tax

Tax expense for the period, comprising current tax and deferred tax, is included in
determining the net profit / (loss) for the year.

Deferred tax is recognized for all timing differences. Deferred tax assets are carried
forward to the extent it is reasonably / virtually certain that future taxable profit will be
available against which such deferred tax assets can be realized. Deferred tax assets
are reviewed at each balance sheet date and written down/ written up to reflect the
amount that is reasonably/ virtually certain (as the case may be) to be realized.

Deferred tax assets and liabilities are measured at the tax rates that have been enacted
or substantively enacted at the balance sheet date.

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REFERENCES :

• www.way2wealth.com
• www.investopedia.com
• www.finance-glossary.com
• www.investorwords.com
• www.bizminer.com
• www.icicidirect.com
• www.bseindia.com
• economictimes.indiatimes.com

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