Analyzing Financal Statements for Planning and Cost
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Analyzing Financial Statements of Tata Motors for Planning and Cost
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Institution
Introduction
Tata Motors Limited(formerlyTELCO, short forTata Engineering and Locomotive Company) is an Indian multinational locomotivemanufacturing company headquartered in India and a subsidiary of theTata Group. Its products include passenger cars, trucks, vans, coaches, buses, construction equipment and military vehicles. It is theworld's seventh largest automobile manufacturing company, fourth-largest truck manufacturer and second-largest bus manufacturer by volume. The company has vehicle assembly operations in India, UK, South Korea, Thailand, Spain and South Africa and its principle subsidiaries include Jaguar Land Rover, Tata Daewoo and Tata Hispano.
Tata Motors is listed in Bombay Stock Exchange, and NewYork Stock Exchange and it is among the Fortune Global 500 biggest corporations in the world
Indian Automobile Industry
The automobile industry in India is one of the largest markets in the world and also rated to be one of the fastest growing markets. Though recently it is experiencing flat to negative growth, it is expected to be the largest market by 2050 primarily driven by economic liberalization, policy relaxation and increased international expansion by domestic players like Tata Motors, Maruti and M&M
Below I have evaluated the financial performance of one of the leading automobile player, Tata Motors, and have also made necessary recommendations for a sustainable growth going forward
Historical Income Statement for Tata Motors
Amount in INR Crores (except where stated otherwise)Particulars / Mar '14 / Mar'13
Sales Turnover
/ 44,765.72 / 54,306.56
Excise Duty / 0 / 0
Net Sales / 44,765.72 / 54,306.56
Raw Materials (Cost of Goods Sold) / 33,764.40 / 41,081.79
Gross Profit / 11,001.32 / 13,224.77
Power & Fuel Cost / 484.66 / 550.89
Employee Cost / 2,837.00 / 2,691.45
Other Manufacturing Expenses / 425.76 / 0
Selling and Admin Expenses / 0 / 0
Miscellaneous Expenses / 5,679.52 / 6,428.72
Preoperative Exp Capitalized / 0 / 0
Total Operating Expenses / 9,426.94 / 9,671.06
Operating Profit
/ 1,574.38 / 3,553.71
Other Income / 1,662.33 / -11.16
Stock Adjustments / 143.60 / 623.84
PBDIT / 3,380.31 / 4,166.39
Interest / 1,387.76 / 1,218.62
PBDT / 1,992.55 / 2,947.77
Depreciation / 1,817.62 / 1,606.74
Other Written Off / 0 / 0
Profit Before Tax / 174.93 / 1,341.03
Extra-ordinary items / 0 / 0
PBT (Post Extra-ord Items) / 174.93 / 1,341.03
Tax / -126.88 / 98.8
Net Profit after Tax / 301.81 / 1,242.23
Total Value Addition / 9,426.94 / 9,671.06
Preference Dividend / 0 / 0
Equity Dividend / 645.2 / 1,280.70
Corporate Dividend Tax / 79.03 / 183.02
Per share data (annualized)
Shares in issue (lakhs) / 31,901.16 / 31,735.47
Earnings Per Share (Rs) / 0.95 / 3.91
Equity Dividend (%) / 100 / 200
Market Price per share (Rs) / 202.4 / 152.75
Book Value (Rs) / 59.98 / 61.84
Historical Balance Sheet for Tata Motors
Particulars / Mar'14 / Mar'13Sources Of Funds
Total Share Capital / 638.07 / 634.75
Equity Share Capital / 638.07 / 634.75
Share Application Money / 0 / 0
Preference Share Capital / 0 / 0
Reserves / 18,496.77 / 18,991.26
Revaluation Reserves / 0 / 0
Net worth / 19,134.84 / 19,626.01
Long Term Debt / 8,036.63 / 8,046.66
Short Term Debt / 6,232.06 / 2,964.97
Total Debt / 14,268.69 / 11,011.63
Current Liabilities / 16,580.47 / 20,280.82
Provisions / 2,200.77 / 3,600.82
Total CL & Provisions / 18,781.24 / 23,881.64
Total Liabilities / 52,184.77 / 54,519.28
Application Of Funds
Gross Block / 25,190.73 / 23,676.46
Less: Accum. Depreciation / 9,734.99 / 8,656.94
Net Block / 15,455.74 / 15,019.52
Capital Work in Progress / 4,752.80 / 4,036.67
Investments / 19934.39 / 20493.55
Inventories / 4,455.03 / 4,588.23
Sundry Debtors / 1,818.04 / 2,708.32
Cash and Bank Balance / 462.86 / 1,840.96
Total Current Assets / 6,735.93 / 9,137.51
Loans and Advances / 5,305.91 / 5,832.03
Fixed Deposits / 0 / 0
Total CA, Loans & Advances / 12,041.84 / 14,969.54
Deferred Credit / 0 / 0
Miscellaneous Expenses / 0 / 0
Total Assets / 52,184.77 / 54,519.28
Contingent Liabilities
/ 14,981.11 / 15,413.62
Book Value (Rs) / 59.98 / 61.84
Ratio Analysis for Tata Motors
Ratio analysis is the quantitative analysis of a company’s financial statements in order to evaluate the operational and financial performance of a company. In the following section, I have evaluated the company’s efficiency, liquidity, profitability and solvency over a period of time and have also conducted a peer comparison/industry benchmarking. Below is a snapshot of all the key financial matrices for Tata Motors over the last 2 years:
Particulars / Tata Motors / Industry Average / Formulae Used2014 / 2013 / 2014 / 2013
Current Ratio / 0.41 / 0.45 / 0.62 / 0.51 / Current Assets/Current Liabilities
Quick Ratio / 0.14 / 0.22 / 0.29 / 0.18 / (Current Assets-Inventory)/Current Liabilities
Inventory Turnover Ratio / 10.05 / 11.84 / 14.88 / 10.14 / Sales Turnover/Inventory
Total Assets Turnover Ratio / 0.86 / 1.00 / 1.34 / 1.22 / Net Sales/Total Assets
Total Debt Ratio / 0.27 / 0.20 / 0.21 / 0.25 / Total Debt/Total Assets
Total Debt to Equity Ratio / 0.75 / 0.56 / 0.62 / 0.48 / Total Debt / Equity or Net Worth
Gross Profit Ratio / 24.6% / 24.4% / 21.27% / 20.92% / Gross Profit/Net Sales
Return on Total Assets / 2.99% / 4.69% / 2.5% / 3.80% / PBIT/Total Assets
Return on Net Equity / 1.58% / 6.33% / 4.5% / 5.8% / PAT/Net Worth
Price Earnings ratio / 213.05 / 39.10 / 178.54 / 45.88 / Earnings per share/Market price per share
(a) Liquidity Ratio:
Liquidity ratio is used to determine a company’s ability to meet its short term obligations. The higher the ratio is, the better the company would be in meeting it’s near term debt obligations and hence seen to be more liquid. The typical matrices used are: Current ratio and Quick ratio
Current ratio indicates the short term financial soundness of the firm with a higher number indicating better capacity to meet current obligation. Further, Quick ratio is a more stringent measure of liquidity, which is based on those current assets, which are highly liquid and can be converted into cash quickly
We see that the Current as well as Quick ratio declined for Tata Motors over the previous year, which means that the liquidity for the firm took a hit over the last year. It is also lagging the industry average thus indicating that the peers are better off in meeting their short term liabilities more efficiently where-as Tata Motors is facing somewhat of a liquidity crunch
(b) Turnover Ratio:
A turnover ratio indicates how quickly a company is able to turn around its assets and convert it into cash. Inventory turnover ratio explains the ability of the company to convert its inventories to cash by selling and Assets turnover is the amount of sales the company is able to generate per dollar of its assets. These are the two widely used measure of operation efficiency for a corporate and higher the number, more efficient the company is
We see that the Inventory turnover of the company went down from 2013 to 2014. In 2013, the company was seen to be more efficient vis-à-vis its peers with the firm able to liquidate its inventory more efficiently than its peers. However, in 2014, the inventory turnover ratio saw a fall and is now lagging the industry average thus indicating that the inventory levels for the company has gone up and the firm is now having increased cash being blocked in the inventory. Further, this also indicates that the inventory management for the company has been less efficient and operational efficiency in terms of generating sales has come down for Tata Motors over the last year and also compared to its peers
(c) Solvency ratio
Solvency ratios are a financial metric used to measure the ability of a firm in meeting its long-term debt and other obligations. This indicates whether the cash flow of a company is sufficient enough to meet its debt obligations there-by hinting towards the financial stability of the firm
The two ratios evaluated here are Total Debt and Debt –Equity ratios. Debt ratio talks about the financial leverage of the firm i.e. the proportion of assets that are finance by debt. A higher number means increased leverage and a greater financial risk. Debt-Equity ratio also measures the financial leverage and indicates the proportion of equity and debt used to finance a company’s assets. Similar to the debt ratio, a lower number indicates a higher financial soundness
We see that the Debt ratio as well as the Debt-equity ratio has gone up for Tata Motors in 2014 compared to 2013. In 2013, the firm had a lower degree of financial leverage vis-à-vis its peers however this has increased in 2014 which means that the level of debt financing for the company has gone up. This can be attributed to the fact that the company raised additional debt for its international expansion, however this level should be looked upon going forward as a higher number will increase concerns among its lenders and investors
(d) Profitability ratio
A very important and most widely used financial metric, which is used to assess a firm’s ability to generate income as compared to its expenses. Higher the number is better it is for the company. Here we have evaluated the following profitability ratios: Gross Profit Margin, Return on Assets and Return on Equity
Gross profit margin measures the financial health of a firm by comparing the revenues with its cost of goods sold. It indicates the percentage of revenues spent on procuring/producing the goods sold. Return on Assets is a measure to see how efficiently a company uses its assets to generate earnings and is indicated by comparing the EBIT with Total Assets. Finally, Return on Equity is the profit/net income generated for the equity shareholders and measures the Net Income vis-à-vis the equity investments in the company
We see that the Gross profit margin has been somewhat consistent over the last year for Tata Motors and has been higher than the industry average. This indicated that Tata Motors has been highly efficient in managing its materials and labor flows along-with the direct cost incurred as opposed to its peers.
The Return on Assets for Tata Motors has seen a year-on-year fall however is still ahead of the industry average. This suggests that in 2014, Tata Motors wasn’t able to generate as much earnings as in 2013, proportionate to its assets. However, it has been successful enough to leverage its asset investments and generate earnings ahead of its competitors
However, despite of its quality performance on ROA and Gross profit margin, the company’s return on equity has seen a substantial fall over the last year and that too at a time when its peers were able to provide a substantially higher return. This indicates that the money invested by shareholders generated lesser return compared to its peers which can be attributed to the higher interest expenses that the firm had to bear on account of an increased debt level.
(e) Earnings Multiple
Earnings multiple indicates how much an investor is willing to pay for a company’s share in return of a $1 earning. The higher number indicates a bullish growth sentiment among the investors
We see that the P/E multiple for Tata Motors saw a significant uptick over the last year. Though, the industry average also shot-up, the proportionate increase for Tata Motors was much higher than its peers. This indicates that the investors are expecting a substantial growth in the Indian Automobile industry going forward and are particularly bullish on Tata Motors expecting a humongous growth driven by its international expansion
Conclusion and Recommendations
Tata Motors saw ~20% decline in its sales volume over the last year, primarily driven by the economic slowdown and higher interest rates. However, the operating expenses were somewhat constant to the last year there-by hurting the profit margin for the firm. Further, we see that the interest burden has increased on the company as a result of the rising debt levels which the company needs to monitor going forward. The company has been expanding its domestic as well as international operations, which is a big positive move and the investors are expecting a significant positive growth going forward. The company has been highly successful in generating an above average returns on total assets but the returns to the shareholders has taken a hit owing to the rising interest costs. The Indian Automobile industry is expected to see a substantial growth going forward driven by reduction in interest rates, overall economic recovery and increased spending power.
Tata Motors, with its existing market and growth trajectory, is expected to benefit the most of the recovering economy. However, there are certain areas where-in the company needs to focus in order to achieve the desirable growth.
Though the company has been able to deliver a consistent Gross profit margin, the net profit margins have shown fluctuations, which is a worrying factor. The fluctuations can be attributed to the higher borrowing costs, higher depreciation and increased operating expenses. Though the interest cost is expected to cool down as the international expansion starts getting operational, the company need to keep a close watch on its expenses.
Thus, it can be concluded that the inner strength of the company is remarkable; however it can work towards improving its profitability and liquidity through optimum capital gearing and reduction in operating expenses