SUMMER TRAINING REPORT ON

FUNDAMENTAL ANALYSIS OF AUTOMOBILE COs For SHAREKHAN LTD

In Partial Fulfillment for the award of the degree Post Graduate Diploma in Business Management 2010-2012

Under the supervision of

Mr. Beslal (Assistant manager)

Submitted ByAMIT KUMAR ALOK

Submitted to-

A-04 New Delhi Institution of Management

F-13, Okhla Phase-1, New Delhi-110020 PH: 011-32056115/16/17, 9654297211
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ACKNOWLEDGEMENT

It is a great sense of satisfaction and a matter of privilege to me to work with SHAREKHAN LTD. I wish to express my heartiest thanks to Sharekhan ltd. for providing me the opportunity to undergo training in their esteemed organization. I would like to take this opportunity to thank Dr. Manab Adhikary, Director, NDIM and my special indeptness to Mr. SUMANTA BISWAS, our project in charge, whose guidance was a great support and all the members of the Institute who were always ready to assist me. It gives me immense pleasure to express my gratitude towards all the individuals who have helped me in completing this project. I am extremely grateful to my project guide Mr. Beslal (Assistant Manager, SHAREKHAN LIMITED) for his invaluable guidance during the project period, which helped me in completing the project successfully. He helped me in understanding the subject well. I would also like to thank Mr. R.K.SHARMA for his immense support and guidance, which helped me in understanding various aspects of the subject.
AMIT KUMAR ALOK

DECLARATION

I, AMIT KUMAR ALOK, student of New Delhi Institution of Management (2010-2012) hereby declare that every part of the Project Report on fundamental analysis that I have submitted is original.

I was in regular contact with the nominated guide and contacted number of times for discussing the project.

Date of project submission:-______________ <<Signature of the Student>>

Facultys Comments: _____________________________________________________________________________ _____________________________________________________________________________ ___________________________________

<<Signature of Faculty guide>> <<Name>>

PREFACE

The professional training is the internal part of MBA program. It helps the student understand practical aspects of business management in a better way as part of PGDBM program at NDIM, New Delhi. Financial management is the systematic and objective identification, collection, analysis, dissemination and use of information for the purpose of improving decision making related to identification and solution of problem and opportunity. Perception is a process by which an individual selects, organizes and interprets information input to create a meaningful picture of the world around us. To be a Master of Business Administration student is a matter of pride because we are in a field, which help us to develop from a normal human being into a disciplined and dedicated professional. One has to be a good learner to sharpen knowledge in a particular field to achieve and attain the desired goals and heights. I analyzed the fundamentals of Tata Motors. I used the Balance Sheet, Profit & loss account, Cash flow and Fund flow statement and Ratio analysis. During my project work I learned about the requirements of fundamental analysis for choosing a company to invest in share market.

EXECUTIVE SUMMARY

The project on fundamental analysis is based on financial performance of automobile companies (TATA MOTORS, MARUTI SUZUKI, HINDUSTAN MOTORS). The main objectives of the project are: 1. Financial analysis and market performance of the above mention companies. 2. Market position, Economic and industry environment. 3. Share price prediction.

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SL.NO.

TOPIC

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Introduction to Fundamental Analysis All fundamental analysis starts at a companys Financial Statement. While it is true that this statement contains a vast array of figures for our purposes we can narrow down the important numbers and in a relatively short time frame have an idea of how a company is traveling. At the very least we will have to look at a companys Income Statement (Profit and Loss Statement) and Balance Sheet. These can be found in the companys annual report, company website under investor information, or at the market they are listed on. Before we get started on the data a few words of caution about fundamental analysis. Using fundamental analysis your basic objective is to come up with a fair value for a companys stock. If the current stock price is under your valuation then it is a buy signal, if the price is over then it is a sell signal. In other words you have arrived at what you think is the intrinsic value of a companys stock. However, the market price may bear no relation to the intrinsic value you have arrived at. The market price is made up of your intrinsic value but it also considers extrinsic factors like political and economic factors, market sentiment, future conditions and many other hard to quantify factors. Therefore, even though your fundamental analysis may indicate a stock is undervalued the market may not agree and continue to mark down the value of the stock. In this case the extrinsic factors outweigh the intrinsic factors and you may be better to delay purchase of the stock until the market better appreciates the value of the stock you consider undervalued. Often in these circumstances the analyst is tempted to blame the market for getting it wrong however, it pays to remember that the market price is always right as it reflects the price that buyer and sellers can agree on.

INDIAN ECONOMY
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According to the Economic Survey 2010-11, tabled in Parliament on February 25, 2011 by the Union Finance Minister, Mr Pranab Mukherjee, the economy is expected to grow at 8.6 per cent in 2010-11 and is expected to be around 9 per cent in the next fiscal year. The growth has been broad based with a rebound in the Agriculture sector which is expected to grow around 5.4 per cent. Manufacturing and Services sector have registered impressive gains. The Survey reports that the industrial output growth rate was 8.6 per cent while the manufacturing sector registered a growth rate of 9.1 per cent in 2010-11.

AUTO-SECTOR
Post liberalization in 1991, Indian automobile sector has been aptly described as the sunrise sector. Owing to its vertical and horizontal integration with other key segments of the economy, the industry is said to be a major growth driver. A steady growth in the sector has attracted heavy investments from various foreign majors through direct investments or private equity. India continues to consolidate its position on the global front being one of the worlds top 10 auto-producing countries. India, the seventh largest vehicle producing nation in the world, now accounts for 5 per cent of global auto production, up from 1.4 per cent at the beginning of 2000, according to Society of Indian Automobile Manufacturers (SIAM). According to a study by global consultancy firm Ernst & Young, the Indian market will clock the fastest compound annual growth rate between 2009 and 2020, more than double that of China and the triad of North America, Europe and Japan. India's CAGR between 2009 and 2020 is expected to be 14 per cent compared with China's 6 per cent, other emerging markets' 6 per cent (which includes BRIC nations) and the triads 4 per cent.

PROFILE TATA MOTORS

Tata Motors Limited is India's largest automobile company, with consolidated revenues of Rs. 95,567 crores(USD 20 billion) in 2009-10. It is the leader in commercial vehicles in each segment, and among the top three in passenger vehicles with winning products in the compact, midsize car and utility vehicle segments. The company is the world's fourth largest truck manufacturer, and the world's second largest bus manufacturer. The company's 24,000 employees are guided by the vision to be "best in the manner in which we operate best in the products we deliver and best in our value system and ethics." Established in 1945, Tata Motors' presence indeed cuts across the length and breadth of India. Over 5.9 million Tata vehicles ply on Indian roads, since the first rolled out in 1954. The company's manufacturing base in India is spread across Jamshedpur (Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh), Pantnagar (Uttarakhand) and Dharwad (Karnataka). Following a strategic alliance with Fiat in 2005, it has set up an industrial joint venture with Fiat Group Automobiles at Ranjangaon (Maharashtra) to produce both Fiat and Tata cars and Fiat power trains. The company is establishing a new plant at Sanand (Gujarat). The company's dealership, sales, services and spare parts network comprises over 3500 touch points; Tata Motors also distributes and markets Fiat branded cars in India. Tata Motors, the first company from India's engineering sector to be listed in the New York Stock Exchange (September 2004), has also emerged as an international automobile company. Through subsidiaries and associate companies, Tata Motors has operations in the UK, South Korea, Thailand and Spain. Among them is Jaguar Land Rover, a business comprising the two iconic British brands that was acquired in 2008. In 2004, it acquired the Daewoo Commercial Vehicles Company, South Korea's second largest truck maker. The rechristened Tata Daewoo Commercial Vehicles Company has launched several new products in the Korean market, while also exporting these products to several international markets. Today two-thirds of heavy commercial vehicle exports out of South Korea are from Tata Daewoo. In 2005, Tata Motors
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acquired a 21% stake in Hispano Carrocera, a reputed Spanish bus and coach manufacturer, and subsequently the remaining stake in 2009. Hispano's presence is being expanded in other markets. In 2006, Tata Motors formed a joint venture with the Brazil-based Marcopolo, a global leader in body-building for buses and coaches to manufacture fully-built buses and coaches for India and select international markets. In 2006, Tata Motors entered into joint venture with Thonburi Automotive Assembly Plant Company of Thailand to manufacture and market the company's pickup vehicles in Thailand. The new plant of Tata Motors (Thailand) has begun production of the Xenon pickup truck, with the Xenon having been launched in Thailand in 2008. Tata Motors is also expanding its international footprint, established through exports since 1961. The company's commercial and passenger vehicles are already being marketed in several countries in Europe, Africa, the Middle East, South East Asia, South Asia and South America. It has franchisee/joint venture assembly operations in Kenya, Bangladesh, Ukraine, Russia, Senegal and South Africa. The foundation of the company's growth over the last 50 years is a deep understanding of economic stimuli and customer needs, and the ability to translate them into customer-desired offerings through leading edge R&D. With over 3,000 engineers and scientists, the company's Engineering Research Centre, established in 1966, has enabled pioneering technologies and products. The company today has R&D centres in Pune, Jamshedpur, Lucknow, Dharwad in India, and in South Korea, Spain, and the UK. It was Tata Motors, which developed the first indigenously developed Light Commercial Vehicle, India's first Sports Utility Vehicle and, in 1998, the Tata Indica, India's first fully indigenous passenger car. Within two years of launch, Tata Indica became India's largest selling car in its segment. In 2005, Tata Motors created a new segment by launching the Tata Ace, India's first indigenously developed mini-truck. In January 2008, Tata Motors unveiled its People's Car, the Tata Nano, which India and the world have been looking forward to. The Tata Nano has been subsequently launched, as planned, in India in March 2009. A development, which signifies a first for the global
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automobile industry, the Nano brings the comfort and safety of a car within the reach of thousands of families. The standard version has been priced at Rs.100,000 (excluding VAT and transportation cost). In May 2009, Tata Motors introduced ushered in a new era in the Indian automobile industry, in keeping with its pioneering tradition, by unveiling its new range of world standard trucks

called Prima. In their power, speed, carrying capacity, operating economy and trims, they will introduce new benchmarks in India and match the best in the world in performance at a lower life-cycle cost. Tata Motors is equally focussed on environment-friendly technologies in emissions and alternative fuels. . It has developed electric and hybrid vehicles both for personal and public transportation. It has also been implementing several environment-friendly technologies in manufacturing processes, significantly enhancing resource conservation Through its subsidiaries, the company is engaged in engineering and automotive solutions, construction equipment manufacturing, automotive vehicle components manufacturing and supply chain activities, machine tools and factory automation solutions, high-precision tooling and plastic and electronic components for automotive and computer applications, and automotive retailing and service operations. Tata Motors is committed to improving the quality of life of communities by working on four thrust areas employability, education, health and environment. The activities touch the lives of more than a million citizens. The company's support on education and employability is focused on youth and women. They range from schools to technical education institutes to actual facilitation of income generation. In health, our intervention is in both preventive and curative health care. The goal of environment protection is achieved through tree plantation, conserving water and creating new water bodies and, last but not the least, by introducing appropriate technologies in our vehicles and operations for constantly enhancing environment care. With the foundation of its rich heritage, Tata Motors today is etching a refulgent future.

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Balance Sheet This document is often overlooked but provides a great deal of insight into how a company is traveling. It will not reveal cash flow or profitability but it will tell you what assets the company owns and more importantly how they paid for those assets. The Balance sheet is divided into three sections. Assets: What the company owns Liabilities: What the company owes Shareholders Equity: The net worth of the company Assets = Liabilities + Shareholders Equity (hence the Balance Sheet)

BALANCE SHEET OF TATA MOTORS

Rs. In cr. SOURCES OF FUNDS : Share Capital Reserves and Surplus Total Shareholders Funds Secured Loans Unsecured Loans Total Debt Minority Interest Total Liabilities 570.60 7,635.88 8,206.48 21,290.03 13,902.33 35,192.36 213.51 43,612.35 514.05 5,426.59 5,940.64 13,705.50 21,268.35 34,973.85 403.03 41,317.52
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March, 2010 March, 2009

APPLICATION OF FUNDS : Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans and Advances Inventories Sundry Debtors Cash and Bank Balance Loans and Advances Less: Current Liab. and Prov. Current Liabilities Provisions Net Current Assets Miscellaneous Expenses not w/o Total Assets Contingent Liabilities 36,729.77 7,643.50 -535.97 0.00 43,612.35 6,929.37 26,265.47 8,140.02 522.06 86.08 41,317.52 6,220.54 11,312.03 7,191.18 8,743.32 16,590.77 10,950.60 4,794.86 4,121.34 15,060.75 68,274.70 34,413.52 33,861.18 8,068.02 2,219.12 62,188.03 33,269.05 28,918.98 10,533.00 1,257.40

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Assets are usually listed in descending order of how fast they can be turned into cash. The same goes for liabilities, those due first are at the top with longer term borrowing at the end. Assets and liabilities are divided into current (collectible within one year) and non-current (collectible over a longer term). Liabilities are also divided into current and non-current. We first task is to look at the assets of TATA MOTORS to see whether they fit the business. We note that TATA MOTORS has approx Rs. 43,612.35cr. of assets and that Rs. -535.97cr. of those assets are considered net current asset. This indicates the company cannot draw on a fair amount of cash in a relatively short amount of time. Next we should check how the assets are paid for. For this we have to check the liabilities and shareholders equity. In TATA MOTORSs case the total assets of Rs. 43,612.35cr are paid for by approx Rs. 35,192.36cr in debt and RS. 8,206.48cr. This high amount of debt owed is our first red flag. However we do have a way of seeing whether this will be a problem. Working Capital and the Current Ratio The current ratio measures a companys ability to pay its current liabilities when they fall due. The difference between the current assets of a company and its current liabilities is called the net working capital. The amount of net working capital determines a companys ability to pay its bills, finance its operations and take advantage of opportunities in the short term. The accepted practice is to express this as a ratio: Current Ratio = Current Assets/Current liabilities =43,837/44,372= 0.99 : 1 In other words TATA MOTORS has Rs. 0.99 in current assets for every one Rs. in current liabilities. Most analysts will expect that figure to be closer to 2:1. Companies that are in high growth phases usually need more of a cushion, as their cash requirements will be large and sometimes unexpected. This ratio is a definite red flag as we move towards our investment decision. Despite the rather thin cushion we could note that bank borrowings are quite small and the company could easily borrow in the short term to meet any liabilities that fall due.
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Price to Book Value Assets are generally recorded in the balance sheet at cost or book value less depreciation over time. Book value is used to indicate how much a company is worth if all the assets were sold off and all the debt paid. The remaining amount would be the book value of the company. Generally when you take the total liabilities away for the total assets you are left the shareholders equity. Therefore we can find the book value of a company at the bottom of the Balance Sheet. For TATA MOTORS the book value equals Rs. 8,206.48cr . Next we find the total number of share outstanding 570,723,818. We then divide TATA MOTORS book value by the number of shares outstanding. Book Value per share = Book Value/ No. Shares = 8,206,800,000/570,723,818= Rs. 143.8 per share Furthermore we divide the market price of the TATA MOTORS (Rs. 760 as at 31 March 2010) by the book value per share. Price to Book Value = Share Price/ Book Value per share =760/143.8= 5.28 The share price is 5.28x the book value. A lower share price to book value is better. A lower figure indicates the potential for share price growth if the company can utilize its assets more efficiently to generate more profit. The best way to determine what this outcome indicates above is to compare it with other price to book values of companies that are in a similar business. Force Motorss price/book was 12.01 and Eisher Motorss was 2.27.At the moment it seems to indicate that the share price when compared to book value is fairly priced. Therefore, so far we have a red flag based on the current ratio and a yellow flag based the price to book value.

Debt to Equity Ratio

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This ratio gives the investor an idea of how the TATA MOTORS has paid for its assets. Generally, less long-term debt to equity is better. However, debt is not all bad, especially when it has allowed management to make astute purchases to increase the profitability of the company. Too much debt can reduce the flexibility of the company in the market place and ultimately can lead to bankruptcy. Usually analysts will compare this ratio to the companys competitors or market averages. The Debt to Equity ratio is found by dividing the amount of long-term debt. Total Debt to Equity Ratio = Debt/Shareholders equity =35,192.36/8,206.48= 4.29:1 This ratio above tells us that for every Rs. 4.29 of debt, TATA MOTORS has Rs.1 of equity. Summary Using the information from the balance sheet above a picture is starting to emerge regarding whether TATA MOTORS is a good buy. The questions and answers we have posed include: 1. Current Ratio: Over two and stable over time gets a positive response. Our result of 0.99:1 is on the low side and cause for concern. 2. Price to book value: In line with industry averages but with a lower figure indicating more chance of growth in the stock price. Our figure of 5.28x is a little high but is probably neutral. 3. Debt to Equity Ratio: Lower is better and should not be over one. Our figure of 0.14 indicates TATA MOTORS has high debt and could not borrow more to chase investment opportunities. Overall the analysis of the TATA MOTORS Balance Sheet has not given us a clear idea of whether to buy the stock or not. To help us reach a conclusion we will consider the Profit and Loss statement in the next section.

The Income (Profit and loss) Statement

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The Income Statement is probably the most well known financial document. The reason is because it contains figures such as the companys sales, expenses and profits. All these items are linked directly to the day-to-day performance of the company. The Income Statement provides management with an indication of how successful they are at running the company. More importantly it tells management what sort of profit they are making. Companies can function for a short time without profits however; in the end they must make a profit to survive. Below is an Income Statement for TATA MOTORS.

PROFIT AND LOSS ACCOUNT OF TATA MOTORS

Rs. in Cr. Mar 2010 Mar 2009

INCOME : Sales Turnover Other Income Stock Adjustments Total Income EXPENDITURE : Raw Materials Excise Duty Power and Fuel Cost Other Manufacturing Expenses Employee Cost Selling and Administration Expenses Miscellaneous Expenses Less: Preoperative Expenditure Capitalised Profit before Interest, Depreciation and Tax 62,644.06 47,231.60 3,048.17 689.45 2,273.16 8,942.89 9,804.82 7,239.24 4,592.50 9,875.09 3,212.36 686.30 1,639.09 7,297.42 8,798.88 7,563.99 4,638.83 2,548.12
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95,567.42 74,093.31 3,208.29 1,148.67 1,038.66 -793.04

99,924.38 74,338.93

Interest and Financial Charges Profit before Depreciation and Tax Depreciation Minority Interest before PAT Profit Before Tax Tax Profit After Tax Minority Interest after PAT Profit/Loss of Associate Company Profit after Minority Interest and P/L of Assoc. Co. Adjustment below Net Profit P and L Balance brought forward Appropriations P and L Bal. carried down Equity Dividend Preference Dividend Corporate Dividend Tax Equity Dividend (%) Earning Per Share (Rs.) Book Value Extraordinary Items

2,465.32 7,409.77 3,887.13 0.00

2,170.60 377.52 2,506.77 0.00

3,522.64 -2,129.25 1,005.75 335.75

2,516.89 -2,465.00 30.33 84.50 -11.48 -51.73

2,571.06 -2,505.25 0.00 -1,553.66 2,035.25 0.00 1,764.12 812.53

-1,017.85 -1,553.66 859.05 0.00 142.80 150.00 48.64 140.57 1,045.05 311.61 0.00 52.97 60.00 (56.88) 113.41 290.87

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The first item to note is that the two columns represent one year of operation ending in March 2010 and March 2009 respectively. The figures are presented like this to allow the analyst to compare the same period of operation for each year. The income statement starts with the revenue for the period, deducts the expenses and arrives at the net profit for the period. After net profit the Income Statement usually distributes the profit across all the shares outstanding to come up with a net profit figure per share or Earnings Per Share (EPS). PBIDT Margin The Profit Margin is calculated by dividing Net Profit by Revenue. From above the PBDIT for 2010 is Rs. 9,875.09. The Revenue for 2010 is Rs. 95,567.42. Profit Margin = PBDIT/ Revenue = 9,875.09/95,567.42= 10.33% In other words, for every Rs. of revenue TATA MOTORS receives, it kept 10.33 paisa as PBDIT. A higher Profit Margin is better. This result looks ok but is not spectacular. Given the scale of the Auto sector boom in India we might have expected a larger profit margin. The 10.33% figure could indicate the TATA MOTORS is facing rising competition restricting its ability to raise prices or expenses are increasing as labour and materials are in short supply. However, what we can say is that the profit margin in the same period last year was 3.42% every Rs. received in revenue. This indicates that profit margins are rising and is considered a positive signal. As a result we will consider the Profit Margin as a green flag. Interest Coverage Ratio This measure indicates how many times over the interest payments could be made with the current net profit and level of debt. As noted previously TATA MOTORS has a high level of debt so we would expect this figure to be low. To find the Interest Coverage Ratio the analyst takes the net profit and divides it by the interest expense. For TATA MOTORS we will use the Short term bank borrowings for 2010 from the Balance Sheet of Rs. 3,007cr. If we assume an interest rate of 7% on borrowing then our interest bill would be Rs. 210.49cr.
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Interest Coverage ratio = Net Profit/Interest expense = 2,516.89/210.49= 11.96x interest expense This figure demonstrates that TATA MOTORS has a net profit that could pay 11.96 times current interest payments. For the investor this demonstrates that TATA MOTORS has the capacity to borrow larger amounts of cash before they would have trouble making the interest payments. Usually a figure of 3 to 4 is considered on the low side. Anything above is considered good. This ratio provides us green flag for TATA MOTOTS. Earnings per Share Growth At the end of the Income Statement, there is the Earnings per Share (EPS). This figure is the Net Profit divided by the number of shares outstanding. The EPS increases for TATA MOTORS from March, 2009 to March, 2010 to Rs. 48.64 from (56.88) per share. This is a spectacular achievement by management and seems to have been made possible by increasing revenue and by holding down costs. While one year figures are not the basis to make a long-term decision they do indicate the company is on a high growth trajectory. This could result in significant increase in the share price if the growth in EPS is sustained. With the qualification of only one years figures this provides another green flag for TATA MOTORS. Share price to Earnings per share Ratio or (P/E) Ratio The PE as it is commonly known is calculated by dividing the market price of the stock by its current EPS. The figure is used to compare the price of stock on a relative basis. A 25 stock with a P/E of 10 is cheaper on a EPS basis than a Rs.10 stock with a P/E of 20. The first stock would have EPS of Rs. 2.5 and the other stock would have an EPS of 50 paisa hence, the first stock is cheaper. A lower P/E is better. However, it should always be seen within the context of the company, the industry and the wider market. A low P/E indicating a stock is cheap may also point to problems within the company. Further research may be warranted. A P/E ratio uses historical figures and may not indicate what will happen in the future. Companies in high growth industries will tend to have higher P/E ratios that ones in low growth industries. With those cautions it is an extremely useful way of measuring the value of a stock compared to its peers and the broader market place.
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The stock price of TATA MOTORS was Rs.752 on 31March 2010. P/E Ratio= Share price/EPS =752/48.64 P/E Ratio = 15.46 In other words the share price is 15.46 times the years earnings per share for 2010. To determine what this figure tells us we should compare it to companies in the same industry or sector, and to the market average P/E for all companies. It was on the lower side compares to the market and to other companies. However, given the EPS growth and the continuing auto sector boom in India we would expect this figure to fall in the coming years. Therefore it may indicate that the current share price is undervalued compared to the growth that may lie ahead for this company. Unfortunately we cannot be clearer than that. A relatively low P/E indicates you are not paying too much for your share of the company. Any earnings on the upside will be quickly reflected in the share price. However it may indicate that the company has problems or is stuck in a low growth industry or market. For TATA MOTORS it is clearly in a growth industry and its EPS growth indicates it is taking advantage of that growth. For these reasons we will consider the P/E ratio of 15.46 a positive number and give it a green flag. Income Statement Summary Above we have outlined a basic approach to analyzing the Income Statement on a Fundamental basis. Profit Margin: Higher is better. Look for increasing Profit Margins over time. Interest Coverage Ratio: Anything above 5 is excellent. EPS Growth: Earnings should steadily increase over time. This will underpin an increasing share price. P/E ratio: No simple answer. Generally lower is better. Compare to peers and the market average. In the final section we will put our analyses of the Balance Sheet and Income Statement of TATA MOTORS together and figure out if the stock is a buy at the current price.

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Should we buy TATA MOTORS? We have now been through the basics of Fundamental Analysis. We have considered the Annual Report, the Balance Sheet and the Income Statement. We now have a framework by which to consider those documents and form an opinion about the health of the company we are considering. However, we should remember that all the data is based on past performance and may not be continued in the future. In addition the performance of a companys stock price is based on both extrinsic as well as intrinsic factors. Conclusions Balance Sheet Result Signal Current Ratio 0.99:1 Red Flag Price to book value Debt to Equity ratio
INCOME STATEMENT

5.28x 4.29:1

Green Flag Red Flag

PBIDT Margin Interest coverage ratio EPS Growth P/E Ratio

10.33% 11.96x 189.3% 15.46

Green Flag Green Flag Green Flag Green Flag

We should buy it because out of 7 readings 5 are showing positivity for buying it.

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Maruti Suzuki India Ltd (formerly Maruti Udyog Ltd) is India`s largest passenger car company, accounting for over 50 per cent of the domestic car market. The company offers full range of cars from entry level Maruti 800 & Alto to stylish hatchback Ritz, A-star, Swift, Wagon R, Estillo and sedans DZire, SX4 and Sports Utility vehicle Grand Vitara. The company is a subsidiary of Suzuki Motor Corporation of Japan. The company is engaged in the business of manufacturing, purchase and sale of motor vehicles and spare parts (automobiles). The other activities of the company include facilitation of pre-owned car sales, fleet management and car financing. They have four plants, three located at Palam Gurgaon Road, Gurgaon, Haryana and one located at Manesar Industrial Town, Gurgaon, Haryana. The company has seven subsidiary companies, namely Maruti Insurance Business Agency Ltd, Maruti Insurance Distribution Services Ltd, Maruti Insurance Agency Solutions Ltd, Maruti Insurance Agency Network Ltd, Maruti Insurance Agency Services Ltd Maruti Insurance Agency Logistics Ltd and True Value Solutions Ltd. The first six subsidiaries are engaged in the business of selling motor insurance policies to owners of Maruti Suzuki vehicles and seventh subsidiary, True Value Solutions Ltd is engaged in the business of sale of certified pre-owned cars under the brand `Maruti True Value`. Maruti Suzuki India Ltd was incorporated on February 24, 1981 with the name Maruti Udyog Ltd. The company was formed as a government company, with Suzuki as a minor partner, to make a people`s car for middle class India. Over the years, the company`s product range has widened, ownership has changed hands and the customer has evolved. In October 2, 1982, the company signed the license and joint venture agreement with Suzuki Motor Corporation, Japan. In the year 1983, the company started their productions and launched Maruti 800. In the year 1984, they introduced Maruti Omni and during the next year, they launched Maruti Gypsy in the market. In the year 1987, the company forayed into the foreign market by exporting first lot of 500 cars to Hungary. In the year 1990, the company launched India`s first three-box car, Sedan. In the year 1992, Suzuki Motor Corporation, Japan increased their stake in the company to 50%. In the year 1993, they introduced the Maruti Zen and in the next year they launched Maruti Esteem in the market. In the year 1995, the company commenced their second plant. In the year 1997, they started Maruti Service Master as model workshop in India to look after sales services. In the year 1999, the third plant with new press, paint and assembly shops became operational. In the year 2000, the company launched Maruti Alto in the market. In the year 2002, Suzuki Motor Corporation increased their stake in the company to 54.2%. In January 2002, the company introduced 10 finance companies (8 + 2JVs) in Mumbai. Also, they found one new business segment, Maruti True Value for sales, purchase
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and trade of pre-owned cars in India. In the year 2005, the company launched the first world strategic model from Suzuki Motor Corporation `the SWIFT` in India. In the year 2006, they launched WaganR Duo with LPG and also the New Zen Estillo. During the year 2006-07, the company commenced operations in the new car plant and the diesel engine facility at Manesar, Haryana. In November 2006, they inaugurated a new institute of Driving Training and Research (IDTR), which was set up as a collaborative project with Delhi Government at Sarai Kale Khan in South Delhi. During the year 2007-08, the company signed an agreement with the Adani group for exporting 200,000 units annually through the Mundra port in Gujarat. They launched Swift Diesel and SX4- Luxury Sedan with Tag line `MEN ARE BACK` during the year. In July 2007, the company launched the new Grand Vitara, a stylish, muscular and 5-seater in the MUV segment. The company changed their name from Maruti Udyog Ltd to Maruti Suzuki India Ltd with effect from September 17, 2007. During the year, the company entered into a joint venture agreement with Magneti Marelli Powertrain SpA and formed Magneti Marelli Powertrain India Pvt Ltd for manufacturing Electric Control Units. Also they entered into another joint venture agreement with Futaba Industrial Co Ltd and formed FMI Automotive Components Ltd for manufacturing Exhaust Systems Components. During the year, the company made pact with Shriram City Union Finance Ltd, a part of Shriram Group, Chennai, to offer easy, transparent and hassle-free car finance to their customers, particularly in semi urban and rural markets. The agreement is a joint initiative of the two companies for providing competitive car finance to people in Tier-II and Tier-III cities across the country. During the year 2008-09, the company launched a new A2 segment car, branded the A-star in India and in Europe as the new Alto. They raised their production capacity to a landmark 1 million cars. In June 2008, the company launched Maruti 800 Duo, which is a dual fuel (LPG-cum- petrol) model car. In March 2009, the company launched A-star or Suzuki Alto at Geneva Motor Show sales begin at EU. In April 2009, the company revealed new Ritz K12M engine at Gurgaon plant. The company plans to modernize some part of their Gurgaon plant, expand their K-series capacity, invest further in new model development and take the projects of test track and crash course facility and Brand Centres further.

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BALANCE SHEET OF MARUTI SUZUKI

Rs. In cr.
SOURCES OF FUNDS : Share Capital Reserves and Surplus Total Shareholders Funds Secured Loans Unsecured Loans Total Debt Minority Interest Total Liabilities APPLICATION OF FUNDS : Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans and Advances Inventories Sundry Debtors Cash and Bank Balance 1,227.60 849.40 162.70 921.30 978.80 1,986.80
25

March, 2011 March, 2010

144.50 12,038.10 12,182.60 36.20 869.30 905.50 0.00

144.50 9,420.80 9,565.30 11.90 746.90 758.80 0.00

13,088.10 10,324.10

10,608.50 5,437.20 5,171.30 392.20 7,396.80

8,904.10 4,687.80 4,216.30 867.40 3,277.20

Loans and Advances Less: Current Liab. and Prov. Current Liabilities Provisions Net Current Assets Miscellaneous Expenses not w/o Total Assets Contingent Liabilities

1,767.30

1,832.70

3,258.80 620.40 127.80 0.00

3,400.90 355.50 1,963.20 0.00

13,088.10 10,324.10 2,753.90 1,388.70

Assets are usually listed in descending order of how fast they can be turned into cash. The same goes for liabilities, those due first are at the top with longer term borrowing at the end. Assets and liabilities are divided into current (collectible within one year) and non-current (collectible over a longer term). Liabilities are also divided into current and non-current. We first task is to look at the assets of MARUTI SUZUKI to see whether they fit the business. We note that MARUTI SUZUKI has approx Rs13,088.10 cr. of assets and that Rs. 127.80cr. of those assets are considered net current asset. This indicates the company cannot draw on a fair amount of cash in a relatively short amount of time. Next we should check how the assets are paid for. For this we have to check the liabilities and shareholders equity. In MARUTI SUZUKIs case the total assets of Rs. 13,088.10 cr are paid for by approx Rs. 905.50cr in debt and RS. 12,182.60cr. This high amount of debt owed is our first red flag. However we do have a way of seeing whether this will be a problem. Working Capital and the Current Ratio
26

The current ratio measures a companys ability to pay its current liabilities when they fall due. The difference between the current assets of a company and its current liabilities is called the net working capital. The amount of net working capital determines a companys ability to pay its bills, finance its operations and take advantage of opportunities in the short term. The accepted practice is to express this as a ratio: Current Ratio = Current Assets/Current liabilities = 2140/ 3,258.80 =.66:1 In other words MARUTI SUZUKI has Rs. 0.66 in current assets for every one Rs. in current liabilities. Most analysts will expect that figure to be closer to 2:1. Companies that are in high growth phases usually need more of a cushion, as their cash requirements will be large and sometimes unexpected. This ratio is a definite red flag as we move towards our investment decision. Despite the rather thin cushion we could note that bank borrowings are quite small and the company could easily borrow in the short term to meet any liabilities that fall due. Price to Book Value Assets are generally recorded in the balance sheet at cost or book value less depreciation over time. Book value is used to indicate how much a company is worth if all the assets were sold off and all the debt paid. The remaining amount would be the book value of the company. Generally when you take the total liabilities away for the total assets you are left the shareholders equity. Therefore we can find the book value of a company at the bottom of the Balance Sheet. For MARUTI SUZUKI the book value equals Rs. 12,182.60 cr . Next we find the total number of share outstanding 144.50. We then divide MARUTI SUZUKI book value by the number of shares outstanding. Book Value per share = Book Value/ No. Shares = 12,182.60 /144.50= Rs. 84.30per share Furthermore we divide the market price of the MARUTI SUZUKI (Rs. 1211 as on 10th Aug 2011) by the book value per share. Price to Book Value = Share Price/ Book Value per share =1211.95/143.8= 8.42 The share price is 8.42x the book value.
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A lower share price to book value is better. A lower figure indicates the potential for share price growth if the company can utilize its assets more efficiently to generate more profit. The best way to determine what this outcome indicates above is to compare it with other price to book values of companies that are in a similar business. Force Motorss price/book was 12.01 and Eisher Motorss was 2.27.At the moment it seems to indicate that the share price when compared to book value is fairly priced. Therefore, so far we have a red flag based on the current ratio and a yellow flag based the price to book value.

Debt to Equity Ratio This ratio gives the investor an idea of how the MARUTI SUZUKI has paid for its assets. Generally, less long-term debt to equity is better. However, debt is not all bad, especially when it has allowed management to make astute purchases to increase the profitability of the company. Too much debt can reduce the flexibility of the company in the market place and ultimately can lead to bankruptcy. Usually analysts will compare this ratio to the companys competitors or market averages. The Debt to Equity ratio is found by dividing the amount of long-term debt. Total Debt to Equity Ratio = Debt/Shareholders equity =905.50/12,182.60= 0.074:1 This ratio above tells us that for every Rs. 0.074 of debt, MARUTI SUZUKI has Rs.1 of equity. Summary Using the information from the balance sheet above a picture is starting to emerge regarding whether MARUTI SUZUKI is a good buy. The questions and answers we have posed include: 1. Current Ratio: Over two and stable over time gets a positive response. Our result of .039:1 is on the low side and cause for concern.

28

2. Price to book value: In line with industry averages but with a lower figure indicating more chance of growth in the stock price. Our figure of 8.42x is a little high but is probably neutral. 3. Debt to Equity Ratio: Lower is better and should not be over one. Our figure of 0.074 indicates MARUTI SUZUKI has high debt and could not borrow more to chase investment opportunities. Overall the analysis of the MARUTI SUZUKI Balance Sheet has not given us a clear idea of whether to buy the stock or not. To help us reach a conclusion we will consider the Profit and Loss statement in the next section.

The Income (Profit and loss) Statement The Income Statement is probably the most well known financial document. The reason is because it contains figures such as the companys sales, expenses and profits. All these items are linked directly to the day-to-day performance of the company. The Income Statement provides management with an indication of how successful they are at running the company. More importantly it tells management what sort of profit they are making. Companies can function for a short time without profits however; in the end they must make a profit to survive. Below is an Income Statement for MARUTI SUZUKI.

29

PROFIT AND LOSS ACCOUNT OF MARUTI SUZUKI

Rs. In cr.
INCOME :

March, 2011 March, 2010

Sales Turnover Other Income Stock Adjustments Total Income

EXPENDITURE :

32,469.20 23,411.90 1,033.30 194.10 1,114.80 -281.00

33,696.60 24,245.70

Raw Materials Excise Duty Power and Fuel Cost Other Manufacturing Expenses Employee Cost Selling and Administration Expenses Miscellaneous Expenses Less: Preoperative Expenditure Capitalised Profit before Interest, Depreciation and Tax Interest and Financial Charges Profit before Depreciation and Tax Depreciation Minority Interest before PAT Profit Before Tax Tax

22,655.30 15,937.40 2,877.70 216.60 311.10 560.50 2,085.70 444.00 0.00 4,545.70 37.40 4,508.30 841.40 0.00 3,666.90 1,121.90 2,749.70 193.60 255.10 481.30 1,544.50 611.80 0.00 2,472.30 54.50 2,417.80 716.50 0.00 1,701.30 473.70
30

Profit After Tax Minority Interest after PAT Profit/Loss of Associate Company Profit after Minority Interest and P/L of Assoc. Co. Adjustment below Net Profit P and L Balance brought forward Appropriations P and L Bal. carried down Equity Dividend Preference Dividend Corporate Dividend Tax Equity Dividend (%) Earning Per Share (Rs.) Book Value Extraordinary Items

2,545.00 0.00 79.70 2,624.70 0.00 8,221.00 451.90 10,393.80 173.30 0.00 28.80 120.00 89.82 421.54 80.24

1,227.60 0.00 -0.20 1,227.40 0.00 7,233.80 240.20 8,221.00 101.10 0.00 17.20 70.00 41.88 330.98 146.42

31

The first item to note is that the two columns represent one year of operation ending in March 2011 and March 2010 respectively. The figures are presented like this to allow the analyst to compare the same period of operation for each year. The income statement starts with the revenue for the period, deducts the expenses and arrives at the net profit for the period. After net profit the Income Statement usually distributes the profit across all the shares outstanding to come up with a net profit figure per share or Earnings Per Share (EPS). PBIDT Margin The Profit Margin is calculated by dividing Net Profit by Revenue. From above the PBDIT for 2011 is Rs. 4,545.70. The Revenue for 2010 is Rs. 32,469.20. Profit Margin = PBDIT/ Revenue = 4,545.70/32,469.20. = 14% In other words, for every Rs. of revenue MARUTI SUZUKI receives, it kept 14 paisa as PBDIT. A higher Profit Margin is better. This result looks ok but is not spectacular. Given the scale of the Auto sector boom in India we might have expected a larger profit margin. The 14% figure could indicate the MARUTI SUZUKI is facing rising competition restricting its ability to raise prices or expenses are increasing as labour and materials are in short supply. However, what we can say is that the profit margin in the same period last year was 10.6% every Rs. received in revenue. This indicates that profit margins are rising and is considered a positive signal. As a result we will consider the Profit Margin as a green flag. Interest Coverage Ratio This measure indicates how many times over the interest payments could be made with the current net profit and level of debt. As noted previously MARUTI SUZUKI has a high level of debt so we would expect this figure to be low. To find the Interest Coverage Ratio the analyst takes the net profit and divides it by the interest expense. For MARUTI SUZUKI we will use the Short term bank borrowings for 2011 from the Balance Sheet of Rs. 3,007cr. If we assume an interest rate of 7% on borrowing then our interest bill would be Rs. 210.49cr.
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Interest Coverage ratio = Net Profit/Interest expense = 2,545/210.49= 11.96x interest expense This figure demonstrates that MARUTI SUZUKI has a net profit that could pay 11.96 times current interest payments. For the investor this demonstrates that MARUTI SUZUKI has the capacity to borrow larger amounts of cash before they would have trouble making the interest payments. Usually a figure of 3 to 4 is considered on the low side. Anything above is considered good. This ratio provides us green flag for MARUTI SUZUKI. Earnings per Share Growth At the end of the Income Statement, there is the Earnings per Share (EPS). This figure is the Net Profit divided by the number of shares outstanding. The EPS increases for MARUTI SUZUKI from March, 2010 to March, 2011 to Rs. 89.82 from 41.88 per share. This is a spectacular achievement by management and seems to have been made possible by increasing revenue and by holding down costs. While one year figures are not the basis to make a long-term decision they do indicate the company is on a high growth trajectory. This could result in significant increase in the share price if the growth in EPS is sustained. With the qualification of only one years figures this provides another green flag for MARUTI SUZUKI. Share price to Earnings per share Ratio or (P/E) Ratio
The PE as it is commonly known is calculated by dividing the market price of the stock by its

current EPS. The figure is used to compare the price of stock on a relative basis. A 25 stock with a P/E of 10 is cheaper on a EPS basis than a Rs.10 stock with a P/E of 20. The first stock would have EPS of Rs. 2.5 and the other stock would have an EPS of 50 paisa hence, the first stock is cheaper. A lower P/E is better. However, it should always be seen within the context of the company, the industry and the wider market. A low P/E indicating a stock is cheap may also point to problems within the company. Further research may be warranted. A P/E ratio uses historical figures and may not indicate what will happen in the future. Companies in high growth industries will tend to have higher P/E ratios that ones in low growth industries. With those cautions it is an extremely useful way of measuring the value of a stock compared to its peers and the broader market place.
33

The stock price of MARUTI SUZUKI was Rs.1211.95 on 10th Aug 2011. P/E Ratio= Share price/EPS =1211.95/89.82 P/E Ratio = 13.49 In other words the share price is 13.49 times the years earnings per share for 2011. To determine what this figure tells us we should compare it to companies in the same industry or sector, and to the market average P/E for all companies. It was on the lower side compares to the market and to other companies. However, given the EPS growth and the continuing auto sector boom in India we would expect this figure to fall in the coming years. Therefore it may indicate that the current share price is undervalued compared to the growth that may lie ahead for this company. Unfortunately we cannot be clearer than that. A relatively low P/E indicates you are not paying too much for your share of the company. Any earnings on the upside will be quickly reflected in the share price. However it may indicate that the company has problems or is stuck in a low growth industry or market. For TATA MOTORS it is clearly in a growth industry and its EPS growth indicates it is taking advantage of that growth. For these reasons we will consider the P/E ratio of 13.49 a positive number and give it a green flag. Income Statement Summary Above we have outlined a basic approach to analyzing the Income Statement on a Fundamental basis. Profit Margin: Higher is better. Look for increasing Profit Margins over time. Interest Coverage Ratio: Anything above 5 is excellent. EPS Growth: Earnings should steadily increase over time. This will underpin an increasing share price. P/E ratio: No simple answer. Generally lower is better. Compare to peers and the market average. In the final section we will put our analyses of the Balance Sheet and Income Statement of MARUTI SUZUKI together and figure out if the stock is a buy at the current price.

34

Should we buy MARUTI SUZUKI? We have now been through the basics of Fundamental Analysis. We have considered the Annual Report, the Balance Sheet and the Income Statement. We now have a framework by which to consider those documents and form an opinion about the health of the company we are considering. However, we should remember that all the data is based on past performance and may not be continued in the future. In addition the performance of a companys stock price is based on both extrinsic as well as intrinsic factors. Conclusions Balance Sheet Result Signal Current Ratio 0.66:1 Red Flag Price to book value Debt to Equity ratio
INCOME STATEMENT

8.42x 0.074:1

Red Flag Green Flag

PBIDT Margin Interest coverage ratio EPS Growth P/E Ratio

14% 11.96x 89.82 13.49

Green Flag Green Flag Green Flag Green Flag

We should buy it because out of 7 readings 5 are showing positivity for buying it and the low debt to equity ratio insure that we can get more loan it required so the low current ratio is an issue.

35

Hindustan Motors Ltd is one of the premier automobile manufacturing companies in India.
The company is the leader in the Indian Automobile Industry, creating customer delight and satisfaction through their products. They produce a range of vehicles which includes Passenger cars, RTV, Multi Utility Vehicles, the versatile Bedford trucks. They also manufacture passenger cars in the mid size premium segment which includes Mitsubishi Lancer, Lancer Select, and Lancer Cedia. They brought Sports Utility Vehicle (Mitsubishi Pajero) into the Indian market in collaboration with Mitsubishi Motors, Japan. Hindustan Motors Ltd was incorporated in the year 1942 at Port Okha in Gujarat as a small assembly plant for passenger car. In the year 1948, they shifted their activities to Uttarpara in West Bengal and set up facilities for the manufacture of cars and trucks and in the year 1971, the company diversified their activities by setting up an Earthmoving Equipment Division at Tiruvallur in Tamil Nadu for the manufacture of Earthmoving equipments such as dumpers, front-end loaders and crawler tractors. In the year 1985, the company commenced a Power Products Division at Hosur for manufacture of heavy duty transmission required for Earth moving Equipments and in the year 1986, they commenced the commercial vehicle division for the manufacture of Heavy Commercial Vehicles at Vadodara in Gujarat. In the year 1987, the company in collaboration with Isuzu Motor Company of Japan commenced their production of petrol engines and transmissions at Pithampur in Madhya Pradesh. In the year 1996, the company modernized, upgraded and expanded their three existing divisions namely Earthmoving Equipment Division, Power Plant Division and the Uttarpara Plant. In the year 1997, they began the production of Road Trusted Vehicle and in the year 1998, they commenced Mitsubishi Lancer Car project. During the year 1999-2000, the company entered into an agreement with Allison Transmission Division of General Motors of USA for marketing on-highway transmission. The Earthmoving Equipment Division of the company was sold to Caterpillar India Pvt Ltd, a wholly owned subsidiary of Caterpillar Inc, USA with effect form February 9, 2001. During the year 2001-02, the company in collaboration with Mitsubishi Motors of Japan launched Mitsubishi Pajero in India. Also, they entered into an arrangement with Ford India Ltd for the supply of engines and transmission to Ford India from their Pithampur factory. The company set up Remote Services Division at Chennai as a Software Technology Park towards the end of the financial year 200203. They also set up subsidiary in USA during the year 2003-04, for promoting the business and for rendering certain services in connection with the business of Remote Services Division of the company. During the year 2003-04, the company introduced two new variants of Ambassador namely Grand and Avigo. Also they launched new version of Lancer with 1.8 Litre petrol engine as well as automatic transmission with the brand name, Lancer Invex. Power Products Division in Hosur exported transmission components Rs 4 crore to Allison
36

Transmission Division of General Motors USA during the year. During the year 2004-05, Power Unit Plant at Pithampur and Power Products Division at Hosur were transferred to AVTEC, a company jointly held by HM, Actis and C K Birla Group. In January 2006, they introduced a new model of premium car, manufactured under license from Mitsubishi Motors, Japan and branded as Lancer Cedia. In A new model of `Montero` was launched in June 2007 and an upgraded model with automatic transmission was launched in January 2008. In February 2008, upgraded Pajero was launched in the market. The Chennai Plant introduced two models of Premium Sport Utility Vehicles from Mitsubishi Motors, Japan during the year 2007-08. In December 2008, the company in collaboration with Shandong Shifeng, a China based automotive and agri-equipment company launched their mini commercial vehicle namely HMShifeng Winner. Also, they are in the process of launching two more variants of the mini-truck with Chinese collaboration. BALANCE SHEET OF HINDUSTAN MOTORS

Rs. In cr.

March, 2011 March, 2010

SOURCES OF FUNDS : Share Capital Reserves and Surplus Total Shareholders Funds Secured Loans Unsecured Loans Total Debt Minority Interest Total Liabilities APPLICATION OF FUNDS : Gross Block 481.04 480.39
37

80.67 -37.38 43.29 40.53 93.17 133.70 0.00 176.99

161.26 -85.69 75.57 30.69 65.61 96.30 0.00 171.87

Less: Accum. Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans and Advances Inventories Sundry Debtors Cash and Bank Balance Loans and Advances Less: Current Liab. and Prov. Current Liabilities Provisions Net Current Assets Miscellaneous Expenses not w/o Total Assets Contingent Liabilities

353.03 128.01 2.29 100.53

341.33 139.06 4.26 101.69

99.39 17.19 31.42 61.49

73.62 12.57 42.13 59.65

255.13 8.20 -53.84 0.00

254.72 6.39 -73.14 0.00

176.99 97.56

171.87 185.59

Assets are usually listed in descending order of how fast they can be turned into cash. The same goes for liabilities, those due first are at the top with longer term borrowing at the end. Assets and liabilities are divided into current (collectible within one year) and non-current (collectible over a longer term). Liabilities are also divided into current and non-current. We first task is to look at the assets of HINDUSTAN MOTORS to see whether they fit the business. We note that HINDUSTAN MOTORS has approx Rs. 176.99cr. of
38

assets and that Rs. -53.84cr. of those assets are considered net current asset. This indicates the company cannot draw on a fair amount of cash in a relatively short amount of time. Next we should check how the assets are paid for. For this we have to check the liabilities and shareholders equity. In HINDUSTAN MOTORSs case the total assets of Rs. 176.99cr are paid for by approx Rs. 133.70cr in debt and RS. 43.29cr. This high amount of debt owed is our first red flag. However we do have a way of seeing whether this will be a problem. Working Capital and the Current Ratio The current ratio measures a companys ability to pay its current liabilities when they fall due. The difference between the current assets of a company and its current liabilities is called the net working capital. The amount of net working capital determines a companys ability to pay its bills, finance its operations and take advantage of opportunities in the short term. The accepted practice is to express this as a ratio: Current Ratio = Current Assets/Current liabilities = 137/255.13 = 0.53:1 In other words HINDUSTAN MOTORSs has Rs. 0.53 in current assets for every one Rs. in current liabilities. Most analysts will expect that figure to be closer to 2:1. Companies that are in high growth phases usually need more of a cushion, as their cash requirements will be large and sometimes unexpected. This ratio is a definite red flag as we move towards our investment decision. Despite the rather thin cushion we could note that bank borrowings are quite small and the company could easily borrow in the short term to meet any liabilities that fall due. Price to Book Value Assets are generally recorded in the balance sheet at cost or book value less depreciation over time. Book value is used to indicate how much a company is worth if all the assets were sold off and all the debt paid. The remaining amount would be the book value of the company. Generally when you take the total liabilities away for the total assets you are left the shareholders equity. Therefore
39

we can find the book value of a company at the bottom of the Balance Sheet. For HINDUSTAN MOTORS the book value equals Rs. 43.29cr . Next we find the total number of share outstanding 80.67. We then divide HINDUSTAN MOTORS book value by the number of shares outstanding. Price to Book Value = Share Price/ Book Value per share =2.53(written in P/L ac) The share price is 2.53x the book value. A lower share price to book value is better. A lower figure indicates the potential for share price growth if the company can utilize its assets more efficiently to generate more profit. The best way to determine what this outcome indicates above is to compare it with other price to book values of companies that are in a similar business. Force Motorss price/book was 12.01 and Eisher Motorss was 2.27.At the moment it seems to indicate that the share price when compared to book value is fairly priced. Therefore, so far we have a red flag based on the current ratio and a yellow flag based the price to book value.

Debt to Equity Ratio This ratio gives the investor an idea of how the HINDUSTAN MOTORS has paid for its assets. Generally, less long-term debt to equity is better. However, debt is not all bad, especially when it has allowed management to make astute purchases to increase the profitability of the company. Too much debt can reduce the flexibility of the company in the market place and ultimately can lead to bankruptcy. Usually analysts will compare this ratio to the companys competitors or market averages. The Debt to Equity ratio is found by dividing the amount of long-term debt. Total Debt to Equity Ratio = Debt/Shareholders equity =133.70/43= 3.09:1 This ratio above tells us that for every Rs. 3.09 of debt, HINDUSTAN MOTORS has Rs.1 of equity.
40

Summary Using the information from the balance sheet above a picture is starting to emerge regarding whether HINDUSTAN MOTORS is a good buy. The questions and answers we have posed include: 1. Current Ratio: Over two and stable over time gets a positive response. Our result of 0.53:1 is on the low side and cause for concern. 2. Price to book value: In line with industry averages but with a lower figure indicating more chance of growth in the stock price. Our figure of 2.53x is a little high but is probably neutral. 3. Debt to Equity Ratio: Lower is better and should not be over one. Our figure of 3.09:1 indicates HINDUSTAN MOTORS has high debt and could not borrow more to chase investment opportunities. Overall the analysis of the HINDUSTAN MOTORS Balance Sheet has not given us a clear idea of whether to buy the stock or not. To help us reach a conclusion we will consider the Profit and Loss statement in the next section.

41

The Income (Profit and loss) Statement The Income Statement is probably the most well known financial document. The reason is because it contains figures such as the companys sales, expenses and profits. All these items are linked directly to the day-to-day performance of the company. The Income Statement provides management with an indication of how successful they are at running the company. More importantly it tells management what sort of profit they are making. Companies can function for a short time without profits however; in the end they must make a profit to survive. Below is an Income Statement for HINDUSTAN MOTORS.

PROFIT AND LOSS ACCOUNT OF HINDUSTAN MOTORS Rs. In cr. March, 2011 March, 2010

Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses

850.04 147.60 702.44 107.15 3.57 813.16 548.57 17.01 83.26 2.20 0.00 121.96 0.00 773.00 Mar '11 -66.99 40.16 27.16

735.99 122.22 613.77 62.23 -0.70 675.30 470.59 14.86 72.24 3.49 84.50 24.37 0.00 670.05 Mar '10 -56.98 5.25 11.04
42

Operating Profit PBDIT Interest

PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)

13.00 16.74 0.00 -3.74 -1.01 -4.75 -5.52 0.75 224.44 0.00 0.00 0.00 1,611.72 0.05 0.00 2.53

-5.79 17.64 13.03 -36.46 3.31 -33.15 17.94 -51.10 199.47 0.00 0.00 0.00 1,611.72 -3.17 0.00 2.01

43

The first item to note is that the two columns represent one year of operation ending in March 2011 and March 2010 respectively. The figures are presented like this to allow the analyst to compare the same period of operation for each year. The income statement starts with the revenue for the period, deducts the expenses and arrives at the net profit for the period. After net profit the Income Statement usually distributes the profit across all the shares outstanding to come up with a net profit figure per share or Earnings Per Share (EPS). PBIDT Margin The Profit Margin is calculated by dividing Net Profit by Revenue. From above the PBDIT for 2011 is Rs. 4,545.70. The Revenue for 2010 is Rs. 32,469.20. Profit Margin = 40/702 = 5.6% In other words, for every Rs. of revenue HINDUSTAN MOTORS receives, it kept 14 paisa as PBDIT. A higher Profit Margin is better. This result looks ok but is not spectacular. Given the scale of the Auto sector boom in India we might have expected a larger profit margin. The 14% figure could indicate the HINDUSTAN MOTORS is facing rising competition restricting its ability to raise prices or expenses are increasing as labour and materials are in short supply. However, what we can say is that the profit margin in the same period last year was 3.42% every Rs. received in revenue. This indicates that profit margins are rising and is considered a positive signal. As a result we will consider the Profit Margin as a green flag. Interest Coverage Ratio This measure indicates how many times over the interest payments could be made with the current net profit and level of debt. As noted previously HINDUSTAN MOTORS has a high level of debt so we would expect this figure to be low. To find the Interest Coverage Ratio the analyst takes the net profit and divides it by the interest expense. For HINDUSTAN MOTORS we will use the Short term bank borrowings for 2011 from the Balance Sheet of Rs. 3,007cr. If we assume an interest rate of 7% on borrowing then our interest bill would be Rs. 210.49cr.
44

Interest Coverage ratio = Net Profit/Interest expense = 2,545/210.49= 11.96x interest expense This figure demonstrates that HINDUSTAN MOTORS has a net profit that could pay 11.96 times current interest payments. For the investor this demonstrates that HINDUSTAN MOTORS has the capacity to borrow larger amounts of cash before they would have trouble making the interest payments. Usually a figure of 3 to 4 is considered on the low side. Anything above is considered good. This ratio provides us green flag for HINDUSTAN MOTORS. Earnings per Share Growth At the end of the Income Statement, there is the Earnings per Share (EPS). This figure is the Net Profit divided by the number of shares outstanding. The EPS decreased for HINDUSTAN MOTORS from March, 2010 to March, 2011 to Rs. 0.05 from (3.17) per share. While one year figures are not the basis to make a longterm decision they do indicate the company is on a high growth trajectory. This could result in significant increase in the share price if the growth in EPS is sustained. With the qualification of only one years figures this provides another green flag for HINDUSTAN MOTORS. Share price to Earnings per share Ratio or (P/E) Ratio The PE as it is commonly known is calculated by dividing the market price of the stock by its current EPS. The figure is used to compare the price of stock on a relative basis. A 25 stock with a P/E of 10 is cheaper on a EPS basis than a Rs.10 stock with a P/E of 20. The first stock would have EPS of Rs. 2.5 and the other stock would have an EPS of 50 paisa hence, the first stock is cheaper. A lower P/E is better. However, it should always be seen within the context of the company, the industry and the wider market. A low P/E indicating a stock is cheap may also point to problems within the company. Further research may be warranted. A P/E ratio uses historical figures and may not indicate what will happen in the future. Companies in high growth industries will tend to have higher P/E ratios that ones in low growth industries. With those cautions it is an extremely useful way of measuring the value of a stock compared to its peers and the broader market place.
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The stock price of HINDUSTAN MOTORS was Rs.1211.95 on 10th Aug 2011. P/E Ratio= Share price/EPS =15.75/0.05 P/E Ratio = 315 In other words the share price is 315 times the years earnings per share for 2011. To determine what this figure tells us we should compare it to companies in the same industry or sector, and to the market average P/E for all companies. It was on the lower side compares to the market and to other companies. However, given the EPS growth and the continuing auto sector boom in India we would expect this figure to fall in the coming years. Therefore it may indicate that the current share price is undervalued compared to the growth that may lie ahead for this company. Unfortunately we cannot be clearer than that. A relatively low P/E indicates you are not paying too much for your share of the company. Any earnings on the upside will be quickly reflected in the share price. However it may indicate that the company has problems or is stuck in a low growth industry or market. For HINDUSTAN MOTORS it is clearly in a growth industry and its EPS growth indicates it is taking advantage of that growth. For these reasons we will consider the P/E ratio of 315 a positive number and give it a red flag. Income Statement Summary Above we have outlined a basic approach to analyzing the Income Statement on a Fundamental basis. Profit Margin: Higher is better. Look for increasing Profit Margins over time. Interest Coverage Ratio: Anything above 5 is excellent. EPS Growth: Earnings should steadily increase over time. This will underpin an increasing share price. P/E ratio: No simple answer. Generally lower is better. Compare to peers and the market average. In the final section we will put our analyses of the Balance Sheet and Income Statement of HINDUSTAN MOTORS together and figure out if the stock is a buy at the current price.

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Should we buy HINDUSTAN MOTORS? We have now been through the basics of Fundamental Analysis. We have considered the Annual Report, the Balance Sheet and the Income Statement. We now have a framework by which to consider those documents and form an opinion about the health of the company we are considering. However, we should remember that all the data is based on past performance and may not be continued in the future. In addition the performance of a companys stock price is based on both extrinsic as well as intrinsic factors. Conclusions Balance Sheet Result Signal Current Ratio 0.53.1 Red Flag Price to book value Debt to Equity ratio
INCOME STATEMENT

2.53x 3.09

Green Flag Red Flag

PBIDT Margin Interest coverage ratio EPS Growth P/E Ratio

5.6% 11.96x 0.05 315

Red Flag

Green Flag Red Flag Red Flag

We should not buy it because out of 7 readings 5 are showing negativity for not buying it.

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