Financial analysis of mahindra

Financial analysis of mahindra

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  1 | Pa g e On Mahindra and Mahindra Ltd. (2011-12 and 2012-13) Prepared by: Nimisha Agarwal (2013173) Priya Jain (2013210)
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  CONTENTS S.No. TopicPage No. 2 | P a g e 1. Introduction 3 2. Ratio Analysis 4-7 3. Main revenue generating activities 8 4. Major growth drivers of the company 8 5. Accounting Policies 9-11 6. Financial health of the company 11 7. Major expense heads for the company 12 8. Cash Flow Statement analysis 13-14 9. Management Discussion Analysis 15 10. References 16
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  Founded in 1945as a steel trading company, the company entered automotive manufacturing in 1947 with a license to bring the iconic Willys Jeep onto Indian roads. Over the years, they have diversified into many new businesses in order to better meet the needs of the customers. They follow a unique business model of creating empowered companies that enjoy the best of entrepreneurial independence and Group-wide synergies. This principle has led our growth into a US $16.2 billion multinationa l group with more than 155,000 employees in over 100 countries across the globe. Today, their operations span 18 key industries that form the foundation of every modern economy: aerospace, aftermarket, agribusiness, automotive, components, construction equipment, consult ing services, defence, energy, farm equipment, finance and insurance, industrial equipment, informa t ion technology, leisure and hospitality, logistics, real estate, retail, and two wheelers. Their federated structure enables each business to chart its own future and simultaneously leverage synergies across the entire Group’s competencies. In this way, the diversity of their expertise allows them to bring their customers the best in many fields. From the founding in 1945, they have been connected internationally by business partnerships, a multinational workforce, and the boundless ambition to integrate themselves with global communit ies and bring opportunity to customers across the world. Their products and services support the customers’ ambitions to improve their living standards; responsible business practices positively engage the communities they join through employme nt, education, and outreach; and their commitment to sustainable business is bringing green technology and awareness into the mainstream through their products, services, and light-footprint manufactur ing processes. Mahindra & Mahindra was set up as a steel trading company in 1945. It eventually saw business opportunity in expanding into manufacturing and selling larger MUVs, starting with assembly under licence of the Willys Jeep in India. Soon established as the Jeep manufacturers of India, the company later commenced upon the task of expanding itself, choosing to utillize the manufacturing industry of light commercial vehicles (LCVs) and agricultural tractors. Today, Mahindra & Mahindra is a key game player in the utility vehicle manufacturing and branding sectors in the Indian automobile industry with its flagship UV Scorpio and swiftly exploits India's growing global market presence in both the automotive and farming industries to push its products in other countries. Over the past few years, the company has taken interest in new industries and in foreign markets. They entered the two-wheeler industry by taking over Kinetic Motors in India. M&M also has controlling stake in REVA Electric Car Company and acquired South Korea's SsangYong Motor Company in 2011. 3 | P a g e INTRODUCTION
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  The US basedReputation Institute once ranked Mahindra amongst the top Ten Indian companies in its 'Global 200: The World's Best Corporate Reputations' list. 4 | P a g e RATIO ANALYSIS 1. RETURN ON INVESTMENT RATIO Ratio Return on Assets 12.92 12.98 Return on Invested Capital 18.04 17.83 Return on Net Worth 22.87 23.65 2. ACTIVITY/ TURNOVER RATIO 2012-13 (%) 2011-12 (%) Ratio 2012-13 2011-12 Total Asset Turnover Ratio 1.48 1.332 Invested Capital Turnover Ratio 2.067 1.92 Inventory Turnover Ratio 13.01 10.36 Working Capital Turnover Ratio 50.3 50.51
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  5 | Pa g e Ratio 2012-13 (Days) 2011-12 (Days) Average Collection Period 20.20 22.78 Day’s Inventory 28.06 35.23 3. LIQUIDITY RATIO Ratio 2012-13 2011-12 Current Ratio 1.10 1.09 Acid Test Ratio 0.80 0.77
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  6 | Pa g e 4. SOLVENCY RATIO Ratio 2012-13 2011-12 Debt Equity Ratio 0.317 1.23 Debt to Total Invested Capital 0.24 0.52 Interest Coverage Ratio 34.86 24.57 5. CAPITAL MARKET RATIO Ratio 2012-13 2011-12 Earnings per Share 56.85 48.97
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  7 | Pa g e Ratio 2012-13 2011-12 Price Earning Ratio 14.29 18.03 Ratio 2012-13 (Rs.) 2011-12 (Rs.) Cash Realization 1.236 0.95
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  8 | Pa g e 6. PROFITABILITY RATIO Ratio 2012-13 (%) 2011-12 (%) Gross Profit Ratio 21.09 23.26 Net Profit Ratio 6.62 8.15 Operating Profit Ratio 11.69 12.62 Main Revenue Generating Activities The main revenue generating activities of Mahindra & Mahindra Ltd. are:  Automotive sector: The automotive sector launched several new products and also received numerous awards and accolades. Company’s market share of the total Indian automotive
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  market increased to13.2% in the Financial Year 2012-13 as compared to 11.5% in the previous year.  Farm Equipment sector: With its quest to deliver ‘Farm Tech Prosperity’ to the Indian farmer, the Financial Year 2012-13 saw numerous initiatives by the Farm Equipment Sector in the area of farm mechanisation and across the agriculture value chain. 9 | P a g e Major Growth Drivers of the Company  Opportunity to Cross-Sale a) The company’s farm division recorded sales of 236666 tractors against the 214325 tractors sold in the previous year, recording a growth of 10.4%. b) The Mahindra Powerol Brand, the company achieved a gross revenue of Rs. 1000 crore. This achievement was despite the fact that the telecom segment DG sales accounting for only 19% of revenues.  Given a wider client base Mahindra and Mahindra in order to strengthen its product portfolio have entered new segments and the company has successfully launched many new products over the past two years. In the oversea market, the company registered a volume growth of 11.2% over the previous year. The growth was driven by volume in SAARC countries, Chile and South Africa.  Better Cost Management The company continues with a rigorous cost restricting exercise and efficiency improvements which have resulted in significant saving through continued focus on cost controls, process efficiencies and product innovations thereby enabling the company to maintain profitable growth in current economic scenario.  Good Performance in Weak Economic Times In these challenging times, the Automotive and Farm Divisions of your Company have secured good performance reflection in substantial growth in the net income of the Company by 26.8% from Rs. 32319 crores in the previous year to from Rs. 40990 crores in the current year.  Performance of the Subsidiary Companies Subsidiary companies continue to contribute to the overall growth of the company. The major subsidiary such as Mahindra & Mahindra Financial Services Limited with a 44% growth in its consolidated profits and Mahindra Lifespace Developers limited with a 19% growth. Accounting Policies (A) Basis of Accounting: The financial statements are prepared in accordance with the generally accepted accounting principles in India and comply with the Accounting Standards notified under sub-section (3C) of Section 211 of the Companies Act, 1956 and the relevant provisions thereof.
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  10 | Pa g e (B) Tangible Assets: (a) (i) Tangible assets are carried at cost less depreciation except as stated in (ii) below. Cost includes financing cost relating to borrowed funds attributable to the construction or acquisition of qualifying tangible assets upto the date the assets are ready for use. Where the acquisition of depreciable tangible assets are financed through long term foreign currency loans (having a term of 12 months or more at the time of their origination) the exchange differences on such loans are added to or subtracted from the cost of such depreciable tangible assets. When an asset is scrapped or otherwise disposed off, the cost and related depreciation are removed from the books of account and resultant profit (including capital profit) or loss, if any, is reflected in the Statement of Profit and Loss. (ii) Land and Buildings had been revalued as at 31st October, 1984 at depreciated replacement values on the basis of a valuation made by a firm of Chartered Surveyors and Valuers. (b) (i) Leasehold land is amortised over the period of the lease. (ii) Depreciation on assets is calculated on Straight Line Method over their estimated useful lives, or lives based on the rates specified in Schedule XIV to the Companies Act, 1956, whichever is higher. Accordingly depreciation is provided on: (1) Certain items of Plant and Machinery individually costing more than Rs. 5,000 - over their useful lives (2 years, 3 years, 5 years or 7 years, as the case may be). (2) Cars and Vehicles – at 15% of cost. (iii) Depreciation charge for each year is after deducting the amount representing the depreciation on the increase due to revaluation of Land and Buildings, transferred from the Revaluation Reserve. (C) Intangible Assets: Intangible assets are initially measured at cost and amortised so as to reflect the pattern in which the asset’s economic benefits are consumed. (a) Technical Knowhow: The expenditure incurred is amortised over the estimated period of benefit, not exceeding six years commencing with the year of purchase of the technology. (b)Development Expenditure: The expenditure incurred on technical services and other project/product related expenses are amortised over the estimated period of benefit, not exceeding five years. (c) Software Expenditure: The expenditure incurred is amortised over three financial years equally commencing from the year in which the expenditure is incurred. (D) Impairment of Assets: The carrying value of assets/cash generating units at each balance sheet date is reviewed for impairment. If any indication of impairment exists, the recoverable amount of such assets is estimated and impairment is recognised, if the carrying amount of these assets exceeds their recoverable amount. (E) Investments: Long term investments are valued at cost. Current investments are valued at the lower of cost and fair value, determined by category of investment. (F) Inventories: Inventories comprise all costs of purchase, conversion and other costs incurred in bringing the inventories to their present location and condition.
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   Raw materialsand bought out components are valued at the lower of cost or net realisable 11 | P a g e value. Cost is determined on the basis of the weighted average method.  Finished goods produced and purchased for sale, manufactured components and work-in-progress are carried at cost or net realisable value whichever is lower. Excise duty is included in the value of finished goods inventory.  Stores, spares and tools other than obsolete and slow moving items are carried at cost. Obsolete and slow moving items are valued at cost or estimated net realisable value, whichever is lower. (G) Foreign Exchange Transactions: Transactions in foreign currencies (other than firm commitments and highly probable forecast transactions) are recorded at the exchange rates prevailing on the date of transaction. Monetary items are translated at the year-end rates. (H) Derivative Instruments and Hedge Accounting: The Company uses foreign currency forward contracts and currency options to hedge its risks associated with foreign currency fluctuations relating to certain firm commitments and highly probable forecast transactions. The Company has applied to such contracts the hedge accounting principles set out in Accounting Standard 30 ‘Financia l Instruments: Recognition and Measurement’ (AS 30) by marking them to market at each reporting date. (I) Revenue Recognition: Sales of products and services including export benefits thereon are recognised when the products are shipped or services rendered. Excise duty recovered on sales is included in “Revenue from Operations”. Dividends from investments are recognised in the Statement of Profit and Loss when the right to receive payment is established. (J) Government Grants :The Company, directly or indirectly through a consortium of Mahindra Group Companies, is entitled to various incentives from government authorities in respect of manufacturing units located in developing regions. The Company accounts for its entitlement as income on accrual basis. (K) Employee Benefits: In respect of Defined Contribution Plans/Defined Benefit Plans/Long term Compensated Absences. (L) Borrowing Costs: All borrowing costs are charged to the Statement of Profit and Loss except expenses incurred on raising long term borrowings are amortised over the period of borrowings. (M) Product Warranty: In respect of warranties given by the Company on sale of certain products, the estimated costs of these warranties are accrued at the time of sale. (N) Leases: The Company’s significant leasing arrangements are in respect of operating leases for premises (residential, office, stores, godowns, computer hardware etc.). The aggregate lease rentals payable are charged as rent. (O) Taxes on Income: Current tax is determined as the amount of tax payable in respect of taxable income for the year. Deferred tax is recognised, subject to consideration of prudence, on timing differences, being the difference between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent periods. (P) Segment Reporting: Segments are identified having regard to the dominant source and nature of risks and returns and internal organisation and management structure. Revenues and expenses have been identified to the segment based on their relationship to the business activity of the segment.
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  12 | Pa g e Financial Health of the Company 1. Shareholders ( Present & Potential) The present and potential shareholders of the company predicts the financial health with the help of ratios like return on invested capital, return on net worth, debt equity ratio, debt to total invested capital, earning per share and profitability ratio. There has been a marginal decrease in return on investment and profitability ratio but earning per share has shown a significant increase which the most important ratio is considered by the present and potential shareholders. The earnings per share has increased by Rs.7.88 i.e. approximately by 16% whereas the profitability ratio has shown a decrease of 5-10%. 2. Managers( Efficiency) The managers are concerned about the return on investment, activity ratio, liquidity ratio and profitability ratio in order to measure the degree of efficiency of their operations. The return on investment has decreased marginally which plays an important role in wealth creation for shareholders. The activity ratios like total asset turnover ratio and inventory turnover ratio have shown a increase of 15-20% which indicates that the management is able to use its assets effectively and activity ratios like average collection period and day’s inventory have decreased which implies that the operational activities of the management are effective as they are able to generate good revenues from its resources. 3. Lenders (Long term and Short term) The lenders are concerned with the each ratio so as to analyze the credibility and liquidity of the company. The short term fund providers i.e. working capital fund providers are majorly concerned about the liquidity and activity ratio. The company’s liquidity has increased marginally by 1-2% over a period of time i.e. the company has the ability to meet any emergency arising out of uneven flow of funds. The long term fund providers are concerned about the return on investment, solvency ratio and profitability ratio. The return on investment and profitability ratio have decreased by 5-10% which is matter of concern for the lenders as their funds are at risk but the increase in interest coverage ratio shows the safety of payment of interest charges to the lenders. Major Expense Heads of the Company The major expense heads of the company are:  Cost of material consumed is equal to opening stock of raw material plus purchase of raw material minus closing stock of raw material which has increased by 10.35%  Purchases of stock in trade increased by 84.27%  Employee benefit expense includes salaries, bonus, contribution to provident fund and other employee related expense which has increased by 9.68%
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   Finance Costsincludes interest charges, discount charges and other borrowing 13 | P a g e charges which has increased by 17.47%  Depreciation and Amortization expense increased by 23.37%  Other expenses includes manufacturing, administrative and selling & distribution expenses which has increased by 19.88%. 2011-12 64% Cost of Materials Consumed Purchases of Stock-in- Trade Employee Ben efits Expense Finance Costs Depreciation and Amortisation Expense Other Expenses 2% 1% 10% 2012-13 26% 56% Cost of Materials Consumed Purchases of Stock-in- Trade Employee Benefits Expense Finance Costs Depreciation and Amortisation Expense Other Expenses Cash Flow Statement Analysis 2% 1% 18% 6% 9% 5% While analyzing the cash flow statement, the activities of the company are divided into 3 categories: 1. Operating Activities: Principle revenue generating activities of the company Cash flow generated from operating activities helps the firm to maintain its operating capabilities, repay loans and make new investments without accessing to external/alternative source of financing.
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  The cash flowsgenerated from operating activities have increased approximately by 52% i.e. increased from Rs.2734.95 to Rs.4145.71 due to following reasons:  Cash receipts from sale of goods and rendering services i.e. sales revenue increased by 14 | P a g e Rs.8511.09 from 2011-12 to 2012-13.  Cash payments to and behalf of employees i.e. Employee benefit expense increased by Rs.164.67 from 2011-12 to 2012-13. 2. Investing Activities: Acquisition and disposal of long term assets and other investments Cash flow generated from investing activities is a key indicator of the extent to which organisation has made expenditure for resources intended to generate future income and cash flows. The cash used in investing activities have increased approximately by 53% i.e. increased from Rs.1885.33 to 2895.95 due to following reasons:  Cash payments to acquire fixed assets worth Rs.1374.69 in 2011-12 and Rs.1435.62 in 2012- 13.  Cash receipts from disposal of fixed assets worth Rs.34.27 in2011-12 and Rs.46.32 in 2012- 13.  Cash payments to acquire investments both current and non-cuurent worth Rs.22271.87 in 2011-12 and Rs.41769.42 in 2012-13.  Cash receipts from sale of both current and non-current investments worth Rs.21207.57 in 2011-12 and Rs.40486.87 in 2012-13.  Interest and dividend received on investments of Rs.270.28 in 2011-12 and Rs.325.22 in 2012-13. 3. Financing Activities: Change in the size and composition of the owner’s capital and borrowings Cash flow generated from financing activities helps in predicting the claims of fund providers on future cash flows. The cash used in financing activities have increased approximately by 300% i.e. increased from Rs.306.15 to Rs.1221.89 due to following reasons:  Cash proceeds from issuing shares or other similar instruments worth Rs.0.64 in 2012-13  Cash proceeds from issuing debentures, bonds and short/long term borrowings worth Rs.900.97 in 2011-12 and Rs.227.48 in 2012-13.  Cash repayments of amounts borrowed i.e. Rs.249.72 in 2011-12 and Rs.380.73 in 2012-13.  Dividend paid of Rs.800.78 in 2011-12 and Rs.866.97 in 2012-13.  Interest and finance charges paid of Rs.149.57 in 2011-12 and Rs.201.50 in 2012-13. Particulars 2012-13 2011-12 Operating Activities 4145.71 2734.95 Investing Activities -2895.95 -1885.33 Financing Activities 1163.96 1136.11
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  5000 4000 3000 2000 1000 0 -1000 -2000 -3000 -4000 Cash Flow Statement Analysis Operating Activities Investing Activities Financing Activities Net Flow of funds Type of activity Conclusion: The company is able to finance its investing activities from the cash flow from operating activities and is not dependent upon external funds in order to fund its activities. But over a period of time, the company has tremendously increased the financing activities which in turn will affect the profits of the company due to the burden of financing costs like interest on loan and dividend on shares. The company is able to increase its revenue from operating activities by 52% which reflects its operating efficiency as the capital base has remained same during the period. 15 | P a g e Note: All figures are in Crores. Management Discussion Analysis Some major issues covered in MDA are as follows: 2012-13 2011-12
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  1. Capacity: Withthe rapid growth of the Indian auto industry, Company’s key suppliers occasionally face capacity constraints and are unable to meet demand peaks. This could lead to loss of volumes and market share. 2. Competitive Intensity: The company continues to invest in new product development and technology upgrades and will focus on delivering customer centric products. Frugal innovat ion remains a thrust as it moves forward. 3. Tax and Excise Duty Regulations: With the resulting lower price tag for small cars, customers may opt to postpone large car purchases or buy small car which could impact the growth large car segment. 4. Diesel – Petrol price parity: Deregulation of the prices will impact the cost of ownership and may have an impact on the demand of your Company’s products, as almost all its products are diesel powered. 5. Commodity Prices: Commodity prices declined in the first half of the Financial Year 2013- 14, but rupee depreciation restricted the price decline in India, resulting in moderate commodit y inflation. 6. Environment and Alternate fuels: Stringent regulatory norms are being introduced to 16 | P a g e safeguard the environment, especially in the area of emissions. 7. Financial Market Conditions: The cutting of CRR, the cost of borrowing in the corporate loan market remained relatively high. Continued CAD and the depreciation of INR can have implications for the management of fiscal and monetary policies. 8. New Projects: To meet customer needs, the company is investing in an aggressive new product. The success of new product launches will have an important bearing on its future growth and profitability. 9. Monsoon: An untimely monsoon and uneven spread have the potential of adversely impacting the business especially the tractor business and the automotive business to some extent. 10. Investment in Technology: Growing environmental consciousness among consumers, government regulations to manage traffic congestion, improvement in public transport infrastructure are trends that will have a significant impact on the future of the automotive industry. 11. Price War: Investments in capacity augmentation by most players and industry de-growth over the previous year could lead to price wars. 12. Increased Competition: Increased competition will lead to more frequent product launches in all industry segments and raise customer expectations in terms of performance, quality and technology, leading to higher costs. References  Official website of Mahindra and Mahindra Ltd.: www.mahindra.com
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   For currentmarket price of Mahindra and Mahindra Ltd. Shares: 17 | P a g e www.moneycontrol.com  Book reference: Financial Accounting for management by N Ramachandran and Ram Kumar Kakani published by Tata McGraw Hill Education Private Limited  For company information: en.wikipedia.org  Hadouts provided in the class by the faculty ( Dr. Pawan Jain)