HERO MOTOCORP

FINANCIAL ANALYSIS

Group 2:
AMBUJ ARIND: 16P126
ANANYA KHANNA: 16P127
ANURAG AGARWAL: 16P130
HONEY VASHISHTHA: 16P143
PUSHKAL MISHRA: 16P156
SRIRURU KIRAN KUMAR:
16P170

Introduction
The Indian automotive industry has emerged as a 'sunrise sector' in the Indian
economy. It plays a significant role in driving economic growth. The industry
employs 29 million people, directly and indirectly. Automobile industry
contributes for about 7.1 % of total GDP, 26% of Industry GDP and about 49% of
manufacturing GDP. With the total production of 23.36 million units Indian
automobile sector is seventh largest in the world. India is emerging as one of
the world's fastest growing passenger car markets and second largest two
wheeler manufacturer.
Indian Two-Wheeler Industry is the largest in the world as far as the volume of
production and sales are concerned. India is the biggest two-wheeler market on
this planet, registering an overall growth rate of 9.5 percent between 2006 and
2015. The volume growth recorded in the 2014-15 fiscal year stood at a
commendable 14.8 percent on a year-on-year basis. The 'Make in India'
campaign of the Government of India is also going to attract more foreign
investment into Indian Two-Wheeler Industry creating further growth
opportunities in the coming years. The constant upsurge in demand in two
wheeler markets owes a lot to the launching of new attractive models at
affordable prices, design innovations made from youths perspective and latest
technology utilized in manufacturing of vehicles.
Motorcycles form the majority share of the two wheeler markets, followed by the
scooters. The market share of the scooters is expanding and has grown by about
5 percent over the previous year in FY 14-15. The estimated revenue of the two
wheeler segment has grown to about Rs 755 Billion with the sales of about 18
million units in 2014-2015. Overall growth was mainly driven by the scooters
segment which saw a strong growth of 25.2 per cent CAGR 2014-2015.
Motorcycle segment saw a modest growth of 7.9 percent CAGR in FY 2014-2015.
During Q1 FY16, the two-wheeler industry grew by a modest 0.6% YoY owing to
relatively weak performance across segments with motorcycle volumes degrowing by 2% YoY during the quarter. Though scooter volumes posted growth in
Q1 FY16, at 7.3%, it was much lower than the healthy double-digit growth of last

eight quarters mainly owing to

languid performance during the
first two months of the fiscal.

Major Players in Two

Wheeler Segment:
The major players in the two
wheeler segment are
1. Hero Motorcorp ltd.
2. Honda Motorcycle and Scooters India
Pvt. Ltd.
3. Bajaj Auto
4. TVS Motors.

Hero Motor Corp Ltd :

Hero MotoCorp Ltd was incorporated as Hero Honda Motors Ltd on January 19,
1984. Hero Honda was incorporated as the JV between Hero Group and Honda
Motor Company (HMC) of Japan. In December 2010 both parties ended the JV
with HMC divesting its stake and a new corporate entity Hero Motorcorp Ltd was
born.
Hero Motorcorp Ltd. is the worlds largest two wheeler producer. After the
separation in 2010 from Honda, Hero started to partner with the overseas
company to develop the technology indigenously. Hero bought a 49.2 per cent
stake in its US-based technology partner, Erik Buell Racing (EBR) for $25 million,
in July 2013. Hero also has alliances with Austria-based AVL, and Italy-based
Engines Engineering for developing in-house capabilities to make its own
engines.
Locations
Hero's manufacturing plants are located in Gurgaon and Dharuhera in Haryana,
Haridwar in Uttarkhand and Neemrana in Rajasthan, the total installed capacity
of the four plants is about 7.65 million units per annum. The company's
extensive sales and service network now spans over 6,000 customer touch
points with about 760 dealers across India.
Product portfolio:
Motorcycle: Splendor (5 Variants), Passion (3 Variants), Karizma (2 Variants),
Xtreme (2 Variants), Hunk, Impulse, Achiever, Ignitor, Glamour (2 Variants),
Super splendor, HF (2 Variants)
Scooter Segment: Pleasure
The motorcycles segment accounts for about 89 per cent of the company's
domestic two-wheeler volumes, scooters make up the rest of the share. Hero
has also been able to acquire a good market share of about 18 per cent (in
2014-15) in the domestic scooters segment since its entry in 2005-06. In the
exports market, Heros performance has been limited due to the restriction till

2011 because of the presence of HMC in ASEAN, Latin America and Africa. But
after the separation Hero has recently entered into various markets with a focus
on Africa, Latin America and the South-East Asian markets. Hero owns a very
small market share of about 6 % in the export market.

Recent / Upcoming investments

Hero has earmarked a capital expenditure of about Rs 24-25 billion over the
next 1-2 years for greenfield expansions and setting up a R&D centre. The
company's greenfield expansions include a plant in Gujarat, with an installed
capacity of 1.2 million units in the first phase and up to 1.8 million units in the
second phase, which involves an investment of Rs. 11 billion. Hero is also
setting up a R&D centre in Kukus (Rajasthan) investing Rs. 4.5 billion.

Absolute Analysis
Turnover:
The turnover of the company has increased from 19742.14 crores in FY 2011 to
28168.82 crores in FY 2015. It witnessed YOY growth on account of strong export
sales and moderate domestic demand.

Turnover
Turnover
30000
25000

28168.82
24027.06

24259.94

25814.7

19742.14
20000
15000
10000
5000
0
2 0 1 0 -2 0 1 1

2 0 1 1 -2 0 1 2

2 0 1 2 -2 0 1 3

2 0 1 3 -2 0 1 4

2 0 1 4 -2 0 1 5

Expenses:
The total expenses have increased from Rs 16839.99 crores in FY 2011 to
Rs.24133.90 crores in FY 2015. The main reasons for increase in expenses can be
attributed to increase in cost of materials consumed, increase in employee benefits
as well as increase in other expenses(power, fuel, rent etc.)

Total Expenses
Total Expenses
30000.00
24133.90

25000.00
20000.00
16839.99

20043.71

20577.08

21828.26

15000.00
10000.00
5000.00
0.00
2 0 1 0 -2 0 1 1

2 0 1 1 -2 0 1 2

2 0 1 2 -2 0 1 3

2 0 1 3 -2 0 1 4

2 0 1 4 -2 0 1 5

Gross income:
The gross income has witnessed YOY growth of 9.2% on account of increase in
demand and greater sales. The gross income has increased from 19,688 crore
rupees in FY 2011 to 28,078 crore rupees in FY 2015.

Gross Income(in Crore)

Gross Income(in Crore)
30,000
25,000

28,078
23,944

24,166

2 0 1 1 -2 0 1 2

2 0 1 2 -2 0 1 3

25,722

19,688
20,000
15,000
10,000
5,000
0
2 0 1 0 -2 0 1 1

2 0 1 3 -2 0 1 4

2 0 1 4 -2 0 1 5

Profit After Tax:

The PAT of the company has increased from 1,928 crore rupees in FY 2011 to
2,386 crore rupees in FY 2015 owing to efficient operation architecture and
increase in sales.

Profit after Tax(in Crore)

Profit after Tax(in Crore)
3,000

2,000

2,386

2,378

2,500
1,928

2,118

2,109

2 0 1 2 -2 0 1 3

2 0 1 3 -2 0 1 4

1,500
1,000
500
0
2 0 1 0 -2 0 1 1

2 0 1 1 -2 0 1 2

2 0 1 4 -2 0 1 5

Gross block:
Gross block is the sum total of all assets of the company valued at their cost of
acquisition. This is inclusive of the depreciation that is to be charged on each
asset. It has increased substantially due to the completion of multiple
expansion plans of the company.

Gross Block(in Crore)

Gross Block(in Crore)
9,000

8,114

8,000
7,000

6,308

6,685

6,909

2 0 1 2 -2 0 1 3

2 0 1 3 -2 0 1 4

6,000 5,538
5,000
4,000
3,000
2,000
1,000
0
2 0 1 0 -2 0 1 1

2 0 1 1 -2 0 1 2

2 0 1 4 -2 0 1 5

Equity:
Equity has increased from 2956.08 crore rupees in FY 2011 to 6541.33 crore
rupees in FY 2015.

Equity(in Crore)
Equity(in Crore)
7000.00

6541.33

6000.00
5000.00

5599.87
5006.24
4289.83

4000.00
2956.06
3000.00
2000.00
1000.00
0.00
2 0 1 0 -2 0 1 1

2 0 1 1 -2 0 1 2

2 0 1 2 -2 0 1 3

2 0 1 3 -2 0 1 4

2 0 1 4 -2 0 1 5

Accounting Policies
The following accounting policies have been followed in the preparation of financial
statements of the company for the fiscal year 2014-15:
1. Accounting Convention:
The financial statements of the company have been prepared in
accordance with the Generally Accepted Accounting Principles in India
(Indian GAAP) to comply with the Accounting Standards
The financial statements have been prepared on accrual basis under
the historical cost convention
2. Operating Cycle: The operating cycle has been taken as 12 months for the
purpose of classification of its assets and liabilities as current and non-current
3. Fixed / Intangible assets and depreciation / amortization:
Fixed assets have been stated at cost less accumulated depreciation.
Cost of acquisition is inclusive of freight, duties, taxes and other
incidental expenses
Depreciation has been charged on a prorate basis at the straight line
method rates prescribed in Schedule II to the Companies Act, 2013
Intangible assets, comprising of expenditure on model fee etc.,
incurred have been amortized on a straight line method over a period
of five years. Licenses for Technical know-how / export licenses have
been amortized on a straight line basis up to June 30, 2014 i.e. forty
two months
Leasehold land has been amortized over the period of lease
4. Investments:
Current investments have been stated at lower of cost and fair value
computed category wise

 Long term investments have been stated at cost less provision for
diminution, if any
5. Inventories: Raw materials and components, stores and spares, loose tools,
finished goods and work in progress have been valued at cost or net
realizable value, whichever is lower
6. Foreign currency transactions:
Transactions in foreign currency have been recorded at the exchange
rate prevailing at the time of the transaction. All loss or gain on
translation have been charged to revenue in the year in which it is
incurred
Monetary assets and liabilities denominated in foreign currency are
restated at the rate prevailing at the year end and resultant gain or
loss is recognized
7. Sales:
Gross sales are inclusive of applicable excise duty and freight but are
exclusive of sales tax
Scrap is accounted for on sale basis
8. Warranty claims: The estimated liability for product warranties has been
recorded when products are sold
9. Provisions and contingent liabilities: Provisions have not been discounted to
their present value and have been determined based on the best estimate
required to settle the obligation at the balance sheet date

Ratio Analysis
Liquidity Ratios:
Current Ratio: The current ratio is a liquidity ratio that measures a company's
ability to pay short-term and long-term obligations. To gauge this ability, the current
ratio considers the current total assets of a company relative to that companys
current total liabilities. Higher current ratio implies healthier short term liquidity
comfort level. A current ratio below 1 indicates that the company may not be able
to meet its obligations in the short run. However, it is not always a matter of worry if
this ratio temporarily falls below 1 as many times companies squeeze out short
term cash sources to achieve a capital intensive plan with a longer term outlook.

Quick Ratio
The quick ratio is a tougher test of liquidity than the current ratio. It
eliminates certain current assets such as inventory and prepaid expenses
that may be more difficult to convert to cash. Like the current ratio, having a
quick ratio above one means a company should have little problem with
liquidity. The higher the ratio, the more liquid it is, and the better able the
company will be to ride out any downturn in its business.

1.15

2015

1.36
1.1

2014

1.26
1.06

2013

1.22
0.96

2012

1.11
0.87

2011

0.96
0

0.2

0.4

0.6
Current Ratio

0.8

1.2

1.4

1.6

Quick Ratio

The above chart shows that the companys liquidity ratios have been
increasing consistently over the last 5 years. This is due to decrease in its
liability payable towards MOU signed with Honda Motor Company Limited
Japan (Honda) for right and license to manufacture, assemble, sell and
distribute certain products/parts and export license for certain products and
their service parts under the intellectual property rights.

Chart Title
2.5
2.13
1.95

2
1.5

1.48

1.36

1.28

1.07

0.9

1.25

1.15

0.54
0.5
0

Current Ratio

Quick Ratio

Bajaj Auto

Eicher Motors

TVS Motor

Industry Average

Hero MotoCorp

As is evident from the current and quick ratio values of Hero Motorcorp of
1.36 and 1.15 , the liquidity position of the company is greater than 1 but is
less than the industry average of 1.48 and 1.25 respectively but the
difference is not much. Also Hero Motors average current ratio over the last 5
financial years has been 1.04 times which indicates that that the Company is comfortably
placed to pay for its short term obligations.

Solvency Ratios:
Debt-Equity Ratio: Debt/Equity Ratio is a debt ratio used to measure a company's
financial leverage, calculated by dividing a companys total liabilities by
its stockholders' equity. The D/E ratio indicates how much debt a company is using
to finance its assets relative to the amount of value represented in
shareholders equity.

Debt-Equity Ratio = Total Liabilities /

Shareholders' Equity

Interest Service Coverage Ratio: The interest coverage ratio is a debt

ratio and profitability ratio used to determine how easily a company can
pay interest on outstanding debt. The interest coverage ratio may be calculated by
dividing a company's earnings before interest and taxes (EBIT) during a given
period by the amount a company must pay in interest on its debts during the same
period.

Interest Service Coverage Ratio = EBIT / Interest

Description

2011

2012

2013

2014

2015

Debt-Equity

0.73

0.40

0.19

0.05

0.00

159.52

135.49

213.36

243.58

301.16

Ratio
ISCR

The debt-equity ratio of the company has been decreasing over the years
and has reduced to zero in FY 2015. Hero Motors average interest coverage
ratio over the last 5 financial years has been 208.79 times which indicates
that the Company has been generating enough for the shareholders after
servicing its debt obligations. Also the ISCR value is comfortably greater than
the industry average of 94.34 which is a good sign.

700

630.4

600
478.86

500
400

301.16

300
200

94.34

100
16.62
0

ISCR
Bajaj Auto

Eicher Motors

TVS Motor

Industry Average

Hero MotoCorp

Profitability Ratios:
Gross Profit Margin: Gross profit margin is a financial metric used to assess a
company's financial health and business model by revealing the proportion of
money left over from revenues after accounting for the cost of goods
sold (COGS). Gross profit margin, also known as gross margin, is calculated by
dividing gross profit by revenues.

Gross Profit Margin = (Revenue COGS)/

Revenue

Operating Margin: Operating margin is a margin ratio used to measure a

company's pricing strategy and operating efficiency. Operating margin is a

measurement of what proportion of a company's revenue is left over after

paying for variable costs of production such as wages, raw materials, etc.

Operating Profit Margin = Operating Income/

Revenue
Profit
After
Tax
Margin: After-tax profit margin is a financial performance ratio, calculated by
dividing net profit

PAT Margin = PAT/ Revenue

after taxes by
revenue. A company's
after-tax profit margin
is important because
it tells investors the
percentage of money

a company actually earns per unit of revenue.

Description
Revenue
Gross Profit
Gross Profit Margin

2011

2012

2013

2014

2015

19742.1
4

24027.0
6

24259.9
4

25814.7
0

28168.8
2

5552.38
28.1245

6578.19
27.3782

6801.63
28.0364

7500.32
29.0544

8294.16
29.4444

Operating Profit
Operating Profit
Margin
Profit After Tax
PAT Margin

2902.15

3983.35

3682.86

3986.44

4034.92

14.7002
8

16.5786

15.1808
3

15.4425
2

14.3240
6

1927.90
9.76540
5

2378.13
9.89771
5

2118.16
8.73110
2

2109.08
8.17007
4

2385.64
8.46908

It is evident that the margin on sales have been reducing for the Hero Motorcorp
due to competitive pricing to maintain market share in the industry.

EBIT Margin
30
24.09

25
20

18.17
14.32

15

13.09

10
4.51

5
0

Bajaj Auto

Eicher Motors

Hero MotoCorp

TVS Motor

Industry Average

EBIT Margin

The above chart compares the EBIT Margins of different players in the two-wheeler
industry as well as the industry average. Though the operating margin of Hero
Motorcorp is more than the industry average but it is still less than its competitors
which indicates further scope of improvement.
Return on Equity: It is a measure of profitability that calculates how many dollars
of profit a company generates with each dollar of shareholders' equity. ROE is more
than a measure of profit; it's a measure of efficiency. A rising ROE suggests that a
company is increasing its ability to generate profit without needing as much capital.

It also indicates how well a company's management is deploying the shareholders'

capital. In other words, the higher the ROE the better.

Return on Equity = PAT / Net Worth or Equity

ROE
70.00

65.22

60.00

55.44

50.00

42.31
37.66

40.00
30.00
20.00
10.00
0.00

ROE
2011

2012

2013

2014

2015

36.47

ROE- FY2015
60

54.4

50
40

36.47

33.21

27.72

30

22.73

20
10
0

ROE
Bajaj Auto

Eicher Motors

TVS Motor

Industry Average

Hero MotoCorp

As can be seen from the above chart, the ROE of the company has been decreasing
for the last 5 years due to increasing competition in the market. Also comparing the
ROE with those of the peer companies shows that it is more than most of Heros
competitors.
Return on Total Assets: The return on total assets (ROTA) is a ratio that
measures a company's earnings before interest and taxes (EBIT) against its total net
assets. The ratio is considered to be an indicator of how effectively a company is
using its assets to generate earnings before contractual obligations must be paid.

Return on Total Assets = EBIT / Total Net Assets

The
average return on total assets has increased over the last 5 years due to owing to

efficient operational architecture and higher realizations. The company has been
increasingly utilizing its assets more efficiently to create more returns.

Return on Capital Employed: Return on capital employed (ROCE) is a financial

ratio that measures a company's profitability and the efficiency with which its
capital is employed. A higher ROCE indicates more efficient use of capital. ROCE
should be higher than the companys capital cost; otherwise it indicates that the
company is not employing its capital effectively and is not generating shareholder
value.

Return on Capital Employed= EBIT / Capital

Employed

ROCE- FY2015
90
77.68

80

65.54

70
60
50
40

45.16

39.97

30

21.35

20
10
0

ROCE
Bajaj Auto

Eicher Motors

TVS Motor

Industry Average

Hero MotoCorp

The return on capital employed or ROCE for the company has not followed any
particular pattern over the last 5 years. As shown in the above chart the ROCE value
of Hero Motorcorp is much higher than the industry average as well as most of its
peers. It implies that it is generating good returns both for its investors as well its
debtors.

Activity Ratios:
CE Turnover: The Capital Employed Turnover Ratio shows how efficiently the sales
are generated from the capital employed by the firm. This ratio helps the investors
or the creditors to determine the ability of a firm to generate revenues from the
capital employed and act as a key decision factor for lending more money to the
asking firm.

CE Turnover= Revenue / Capital Employed

Total Assets Turnover: Asset turnover ratio is the ratio of the value of a
companys sales or revenue generated relative to the value of its assets. The ratio
can often be used as an indicator of the efficiency with which a company is
deploying its assets in generating revenue. Generally speaking, the higher the asset
turnover ratio, the better the company is performing, since higher ratios imply that
the

Assets Turnover= Revenue / Total Assets

company is generating more revenue per unit of assets.

5.00
4.50

4.70

4.68
4.40

4.63

4.58

4.00
3.50
3.00
2.33

2.50

2.48

2.62

2.05

2.00
1.50
1.00
0.50
0.00

CE Turnover
2011

Total Assets Turnover

2012

2013

2014

2015

2.73

The above chart shows that the assets turnover for Hero Motorcorp has been
increasing over the last 5 years. This means it has been able to utilize its assets
efficiently to increase the sales. But it is also seen that the Capital Employed
Turnover has decreased on an average over the last 5 years. This can be attributed
to the fact that the companys current liabilities have decreased faster than
increase in its sales.

Total Assets Turnover Ratio

3

2.73

2.63

2.5
2.1
2
1.5

1.79
1.49

1
0.5
0

Total Assets Turnover

Bajaj Auto

Eicher Motors

TVS Motor

Industry Average

Hero MotoCorp

The above chart compares the total assets turnover ratios for different players in
the two-wheeler industry. It can be seen that the asset utilization is best in the
industry for Hero Motorcorp Ltd. at 2.73 much higher than the industry average of
2.1
Inventory Turnover: Inventory turnover is a ratio showing how many times a
company's inventory is sold and replaced over a period of time. The days in the
period can then be divided by the inventory turnover formula to calculate the days
it takes to sell the inventory on hand. It is calculated as sales divided by average
inventory. Inventory turnover measures how fast a company is selling inventory and
is generally compared against industry averages. A low turnover implies weak sales
and, therefore, excess inventory. A high ratio implies either strong sales and/or large
discounts.

Debtors/Receivables Turnover Ratio: An accounting measure used to quantify

a firm's effectiveness in extending credit and in collecting debts on that credit. The
receivables turnover ratio is an activity ratio measuring how efficiently a firm uses
its a
ets.

ss

Inventory Turnover= Revenue / Average

Inventory

Receivables turnover ratio can be calculated by dividing the net value of

credit sales during a given period by the average accounts receivable during
the same period. Average accounts receivable can be calculated by adding
the value of accounts receivable at the beginning of the desired period to
their value at the end of the period and dividing the sum by two.

Debtors Turnover= Revenue / Average Accounts

Receivables

180.00

165.22

160.00
140.00
119.27

120.00
100.00
80.00
60.00
40.00

51.77
41.07 40.03

36.97 39.52 37.94

32.56

24.39

20.00
0.00

Inventory Turnover
2011

2012

Debtors Turnover
2013

2014

2015

The above chart shows that the inventory turnover has decreased over the last 5
years which indicates an increase in amount of inventory on hand. According to the
annual report there has been an increase in the amount of the raw materials and
finished goods in stock. The company has been maintaining higher amount of
inventory to compensate for increase in sales of the two wheelers.

Total Assets Turnover Ratio

350.00
300.00

292.00

250.00
200.00
150.00
100.00
50.00
0.00

29.77

24.39 25.67 28.21

30.98

Debtors Turnover
Bajaj Auto

Eicher Motors

TVS Motor

Industry Average

19.03

37.94

15.73

26.49

Inventory Turnover
Hero MotoCorp

As can been seen from the above chart the inventory turnover of Hero Motorcorp is
highest in the industry, which also indicates that their stocks are moving faster than
their peers. On comparison of the debtors turnover of the company shows that it is
the lowest in the industry. This indicates that the company needs to improve on its
cash collection process to make it more efficient.

Cash Flow Analysis:

The cash flow statement shows how much cash comes in and goes out of the
company over the quarter or the year. The cash flow statement is divided into three
sections: cash flows from operations, financing and investing.
Cash Flows from Operating Activities
This section shows how much cash comes from sales of the company's goods and
services, less the amount of cash needed to make and sell those goods and
services. Investors tend to prefer companies that produce a net positive cash flow
from operating activities.

Cash Flows from Investing Activities

This section largely reflects the amount of cash the company has spent on capital
expenditures, such as new equipment or anything else that needed to keep the
business going. It also includes acquisitions of other businesses and monetary
investments such as money market funds.
Cash Flow From Financing Activities

This section describes the goings-on of cash associated with outside financing
activities. Typical sources of cash inflow would be cash raised by selling stock and
bonds or by bank borrowings. Likewise, paying back a bank loan would show up as a
use of cash flow, as would dividend payments and common stock repurchases.

The following observations can be made from the cash flow statement of the
company:
1. The net cash from operating activities has decreased from 2963.41 crores in
FY 2014 to 2250.00 crore rupees in FY 2015. This is due to increase in trade
receivables, short term loans and advances and long term loans and
advances. The company has paid more amount of advance income tax,
capital advances in this fiscal which has decreased the cash in hand.
2. The company has sold its investments in shares and invested in construction
of fixed assets such as buildings, plant and machinery. The net effect has
been a small positive cash flow of 12.08 crores in FY 2015.
3. The cash outflow from financing activities has increased from 1,414.93 crore
rupees in FY 2014 to 2,230.52 crore rupees in FY 2015. This is due to greater
dividend payout of 1,897.03 crore rupees from 1,199.29 crore rupees. This
indicates either a dearth of investment opportunities for the company or an
attempt to boost the share prices.

DuPont Analysis:
According to DuPont analysis, ROE is affected by three things: operating
efficiency, which is measured by profit margin; asset use efficiency, which is
measured by total asset turnover; and financial leverage, which is measured
by the equity multiplier.
Therefore, DuPont analysis is represented in mathematical form by the
following calculation:

ROE = Profit Margin x Asset Turnover Ratio x Equity

Multiplier

Net margin: Expressed as a percentage, net margin is the revenue that

remains after subtracting all operating expenses, taxes, interest and
preferred stock dividends from a company's total revenue.

Asset turnover ratio: This ratio is an efficiency measurement used to

determine how effectively a company uses its assets to generate revenue.
The formula for calculating asset turnover ratio is total revenue divided by
total assets. As a general rule, the higher the resulting number, the better
the company is performing.
Equity multiplier: This ratio measures financial leverage. By comparing
total assets to total stockholders' equity, the equity multiplier indicates
whether a company finances the purchase of assets primarily through debt
or equity. The higher the equity multiplier, the more leveraged the company,
or the more debt it has in relation to its total assets.

2011

2012

2013

2014

2015

PATM (%)

9.77

9.90

8.73

8.17

8.47

Sales /
Total
Assets(x)

2.05

2.33

2.48

2.62

2.73

Assets to
Equity (x)

3.25

2.40

1.95

1.76

1.58

ROE

65.22

55.44

42.31

37.66

36.47

The above DuPont Analysis shows the following things:

1. The profit margin of the company has declined from 9.77 % to 8.47 % in the
last 5 years. This can be attributed to low pricing due to the need to maintain
competitive position in the market.
2. The asset turnover ratio has increased from 2.05 to 2.73 i.e. an increase of
33%. This signifies that the company is generating more revenue per unit of
assets and is performing better.
3. The asset to equity ratio has decreased from 3.25 to 1.58 i.e. a decrease of
51%. This indicates a gradual shift of the companys assets from debt to
equity and further signifies the improvement in financial position of the
company.
4. The ROE of the company has declined from 65.22 % to 36.47 % in the last 5
years. This is due to a decrease in the profit margin as well as leverage ratio
of the company over the period.

Inter-Firm Comparision and Trend

Analysis

Chart Title
700.00
600.00
500.00
400.00
300.00
200.00
100.00
0.00

Hero

BSE Auto

TVS Motors

The above graph shows the performance of Hero Motocorp relative to its peers and
SENSEX. As can be seen from the graph, the company has underperformed w.r.t the
SENSEX as well as its peers. Though the share price has increased over the years
from 1630.5(Jan-2011) to 3303.8(Aug-2016) i.e. an increase of 102%, the BSE Auto
index has increased by 462.9 %.

Conclusions and Recommendations:

1. Will you recommend investment in the shares of the company?

Ans. The financial inclusion initiatives of the government will ensure greater
availability of credit to the rural population. Also the rural income is expected to
increase due to good monsoon. So we expect the sales to increase and share
prices to increase. So we recommend investment in the shares of the company.
2. Will you recommend a long-term loan to the company?
Ans. The company is in good financial condition and has paid off all its loans. Its
interest service coverage ratio is 301.16 which is much higher than the industry
average. So it is in a comfortable position to repay any future interest as well as
principal. Also from the DuPont Analysis we get that the profitability of the firm
can be increased by increasing the debt-equity ratio of the company. So it would
be in a more suitable position to repay the debt. So we recommend a long-term
loan to the company.
3. Will you recommend that the supplier should extend credit?
Ans.

The payables turnover of the company is higher than the industry

average. As such the company in a better position to repay its creditors and so
the supplier should extend credit to the company.
4. What will be your advice to the management & employees?
Ans. The two wheeler industry is growing at a high growth rate of 16 percent and
we expect high sales due to good monsoon and pending implementation of the
GST bill. It is has invested heavily in generation of fixed assets and has zero
outstanding debt which bodes well for the future. We would advise the company
to invest heavily in new products and In advertising to try and capture the
growth which is due in the two-wheeler segment in the near future.