CHAPTER IV

FINANCIAL PERFORMANCE O F SELEXT AlJTOMOBlLE UNITS

T h ~ s chapter evaluates the financ~al performance o f the select sample unlts,

cspcc~dlly In ternls o f c f i c l ~ \ c and cf ic lcnt cxp lo~ta l~on o f d~fferent determlnants

relating to prof i tdh~l~ty. d ~ \ ~ d c n d pol~cy, cap~tdl fc~rn~at~on In terms o f addltlons to fixed

,~~scts. Inventory Invcstnlcnt and llou o f runds An aggregate e\,aluat~on o f d~fferent

aspects o f financ~al pcrlomlancc IS undenaken by constructnng vatlous ratlos and by

l i tung mult~plc regression equauons.

SECTION I

I \ .I FIXED IN\ ESTMEN I FLNCTIO3

F~xed !n\csl~ncnt rcfcrh to the drqulslllon o f land and hu~ld~ngs. plant and

mach~nery. equlpnicnt and rn~rccllancour terns like furniture and \chicles F~xed

lnvcstment 1s tntcndcd ellher to replace the old stock or 12 crcatr nen cdpaclr? ~n a f i m ~

In thls sat lon an dttcn~[)t IS made to analysc thc beha\lour and dctern11nanls o f fixed

Investment Although. In\cstment is not e \p l~c~ t l y s~g~ l~ f i can t on Its dependence on

rctanned profits, the profil analvs~s and consequent determlnants o f reta~rled profits are

havlnp an ~nflucnce In In\cslmcnt decls~ons Therefore. the present study has analysed.

lnlcr aha

a. Thc ~ n d ~ v ~ d u a l nnfluencnng factors o fcap~ta l formallon In an cntrrprlse.

b. The Inter - re la t~onsh~p assoc~ated wlth the cap~la l formallon and that of the

flow of external funds and retalncd profits

A brlcf rcvlew of the emplrlcal studles on lndustnal economics show that the

cost of capital. profit. Internal and external funds, s u e of market and the deslred

product~ve c;!paclty are some of the major determinants In capltal formation The

present study however. lricluded the output (sales), profit as composite variable

(deflated value of output) along wlth lagged fixed Investment, cost of funds and

exlstlng stock of capital The output seems to be better explanatory vanable in some of

the studies of the current nature Slnce Investments into the fixed assets is not

Instantaneous due to the lack of deslred capltal. requlred funds and such other factors.

lagged Inbentory Investment IS also taken Into conslderatlon The model IS

It., u + 1% I Y , , 1). .AY. + B I GRE , + PA ESF, A Pr INV,

IF, = Flxed In\estment

t', = Output

At' , = Change In output

GRE , = Gross Retamed Profit

ESF, - Flow of F.xternal Fund

INV , ; Inventory Investment

IE ,.I = Lagged fixed Investment

K ,.! = Gross caplral Investnient

(TI Ip) , = Cost o f c a p ~ t a l

A n e r havlng carefully csllmated thesc vanables, s tep-wlse m u l t ~ p l e regressions

an worked out to drsclose the relatrvc influence o f the independent vanables on the size

o f fixed lnvcstmenl The estlmatcd comh~na t lons are exp la~n ing the vanat lons in size o f

fixed investment o f the sclcctcd unlts to thc extent o f 99 per cent to 93 p e r c e n t ( ~ 2

value) ( D e t a ~ l s In l able l V 1 )

F ~ x e d Invcstnicnt and output The s l / r o f output IS s a ~ d to be an Important determinant

o f investment demarid at finn le\el It 1s gcncrally believed that the current output and

the growth In output arc attributed to the better ut l l~sat lon o f capaclty w h ~ c h will make

further ~nvestrneiit attractlbc Therefore 11 1s expected to have a co-efficient w ~ t h

p o s ~ t i \ c sign Thc results o f thc current study show co-eff ic~ents o f outputs t o the stze

of fixed ~n \es tmen t u ~ t h posltlvc slgns In all the selected units Also the '1' values

rndlcale statlst~call) s~ynlficdticc

F ~ x e d In \es tn~cn l arid cl ia~igcs In output c c o r d ~ n g to accelerator theory, the

dcsired Icvcl of cap~ ta l stock should he proportional to changes in output Then it i s the

changcs tn output or cxpcctcd pressurc o f demand for the product that should explaln

the !n\est!licnt hcha\ lour There IS a Last volume o f empirical u o r k s supporting thrs

hypolhes~s Houckcr . In the present study the c o e f f ~ c ~ c n t s a re found negatlve and also

s lgn~ficant In fibc firms These negattve c o - eflicients conclude that the expected

dcmand for products IS not a cructal factor in determining the s i r e of fixed Investment

Negative coc lXc~en t s may be due to under u t ~ l t z a t ~ o n o f capaclty o r d u e to the lrcenslng

pollcy o f the govcnilncnt

F~xed Inveamenl and Flow of External funds External funds are most oRen

sought l o meel the Investment demand Contrary to the Internal funds. thts source IS

expensive and carrles a h ~ g h rate o f rlsk and t h ~ s rlsk factor Increases w ~ t h the Increase

In the use o f cxleni;~l funds The Investment gap, wh~ch anses due to the l ~ m ~ t e d

ava~lab~l l ty o f ~nternal funds IS generally fixed by a flow o f external funds Therefore.

the vanable 1s bel~cvcd to have a posltlve assoclatlon w11h fixed lnvcstment The results

also ~nd~cate s~gn~ficancc for this vanable In the case o f Ashok Leyland However. for

other unlls 11 15 no1 stat~sl~cally slgnlficant

Flxed Invesmient and In\entory Invcstmcnt inventory Investment may prove

complementary l o the fixcd Inbestmen1 dependmy upon the nature and growth o f the

limi 1 here IS a counlcr argument wh~ch states that at tlmes o f l ~ r n ~ t e d supply o f funds.

the In\entory !n\,esunerlt IS expected to adversely affect the fixed Investment The firms

miplo>Ing large proponlon o f total funds louards Inventory Investment are I~ke l y lo

have an dd\erse uffcct 1hc rcsults suggest the cornpetltlve nature W h ~ l e the co-

c l l i c ~ e n ~ In c&e ofrZslioL L.c)ldnd IS positive and s~g i~ f i can t w ~ r h a 'I' value o f 3 67.

the same 1s o thcm~se In cdsc or other untts For Bajaj. Hindustan Motors the

cocff~ctents arc neyatl\c dnd s~gnlficant Marginally posltlve co-eflic~ents In case of

I elco and Prcnilcr lridlcate thdt the Inventory lnvcslment 1s essenl~ally complemenlar)

to fixcd Investment 1 h ~ s suppons the alternat~ve argument on role played by Inventory

on fixed Investment

F ~ x d lnveslmcnr and l a u d fixed lnvestment S~nce the Investment IS perce~ved

as a conttnuous process, the lagged fixed Investment IS postulated to have a posltlve

effect on 11 The laggnl f i x~u l Investment IS l ~ k e l y to sttmulate the current lnvesmlenl In

fixed assets due to unul~llsul Ilcens~ng capaclty suppofled by demand In the present

study all equations show slatlst~cally s~gn~f ican t posltlve co-efiic~ents for t h ~ s vanable

F ~ x e d lnvcslmenl and Gross cap~tal stock lnvcstment In fixed assets dcpcnd greatly

upon the sl7e of exlbllng capital stock bes~des thc demand and supply factors The

under -u t~ l~sa t~on or over-utlllsatlon of productive capaclty whlch IS thc hasc of the

cxtstlng capttal stock. detcrmlncs the demand for further cap~tal forniat~on W h ~ l e a

posltne co-effic~ent expla~ns thc better u t~ l l sa t~on of cxlstlng capaczly and attracts

funher Investment. a ncgatlve co-effic~ent w ~ l l show the under u r ~ l ~ s a l ~ o n of capaclt)

The results for AshoL I cyland and Baja~ show a posltlve co-effic~ent. u h ~ l e I I IS

rlcgatt\c for other unlts (Hlndustan Motors. Mah~ndra & Mahlndra. Telco and Prcrn~er

Auto) 'Thus the results suggcst that the exlstlng stock of capttal IS an lmponant factor

for ~ ~ ~ \ e s t n i e n t d c c ~ s ~ o n s

F ~ x e d In\cstrnent and coat of c a p ~ t r l Cost of cap~tal IS postulated lo ha \c a ncgatlbe co-

cl l ic~cnt In Ihc In\cstnlrnt f u n c l ~ o ~ i A number of emp~ncal s tud~es carr~cd but b)

d~fTerent researchcra Iron1 lllne to tlme confirm that the cost of funds had *cry l~tt le

Impact OII In\,eslmcnt Although the Kencs~an argument of an Increase in the rate of

Invcstmcnt n lAu the ~n\estmcnt less attractive by narrowing the gap herwecn the

rnarglnal e f f ~ c ~ e n c y o f cap~lal and the rate o f return on ~nvestrnent Thc ernplncal

s tud~es show that the use ofd~ffercn t sources of funds at d~fferent tame pcr~ods IS Itkely

to makc the Investment - Interest re la t~onsh~p vary over t ~ m e and ~f the Internal rate of

return in h ~ g h l y uncenaln. the smaller fluctuat~ons In Interest rates found not

sign~ficantly affect~ng the ~ntestment The results of the present study also show that

t h ~ s vanable to play a vcry niarglnal rolc In all the selected unlts

TABLE IV.l

CO-EFFICIENTS O F REGRESSION EQUATION ESTIMATED WITH FIXED INVESTMENT AS DEPENDENT ON DIFFERENT FIRMS'

SPECIFIC AND INDUSTRY VARIABLES MODEL.

11, u I l , Y , a 11, l v . + I%, L K L . * I l , tS f , + V'INV,

+ I , 5 . I 8 + ..{ ; }, W h o r

IF, I <.d ~"Lc~,",'.", k , Oulpvl .¶Y 1 hanyc ~n uutpu~ G R I . - Grou Relrbncd Profit I , F lou 01 Lr lcrnr l Fund I , - Inrcnlor\ In\cnmcnl

I t . , L I K ~ L ~ f t ~ d I n r c s t m ~ n ~ K , , Gross ~dps i r l lnvcrrmen! t 1 , ip), - c "St of i~p , , * l

r- I 1

< O Y h l A \ l

\',

3Y.

I I 1 I I I 1

IE, , ( 2 4 ~ ~ ( 1 4 ~ ) I ( 1 121 1 1 1 271 ~ I Z J ? I

tS I . ,

41 I

1, 11 .. l l 1 ' l I

I('

F V A L l l E ,

I l l L

\ lo I

2'1602 11 841

0 156- 12 271

-0 14d. (.:

4 *O I

-723 72 I-OYFl

II 52 I l l 421

11211 I 141

1 . A.hnlc 1 rv l -nci 1 trnntrrl WI1 - Ranen Temm I.tmfiled H M I - kilndustan M o t o n Lnmttcd

' S ~ g n ~ f i c a n l at 5% l c v c l

** S ~ g n ~ f i c a n i a1 I % kvcl F ~ g u m I n p.rcn*ts ~nd lca tcs calculated '1' values

0Rl)lS

Mv5V

l i U L I Lq

h u 2

728 (XI 1 - 1 ill

i l 142.. ( 5 hhl

h o 1

4 Y 7 211 1-1 I71

01174.. (6 1 1

11 6l i l .. / I 1 ~ 2 h '. I l l 1 1 I

11 0861 10771

OW42

l l l V

I h t q 4 E q

h o I

OlP)82 lOYS1

09941

9543

$271 7' 12241

0241" I 3 461

-0 397.. 1.5 Y31

\02

11 14x2 I 1 711 ,

t q \u 1

09721

1450

1401 5.. 11 701

I1 253.' ( 1 341

-0 4(Y..

1 3 T 2.. I 1307t

I 0 12-"" 11 6 3 ,

41 285.. 147-, i

OY92'J

5804

0 W32

6672

Il'W13

814 %

TABLE No IV.l (Continued)

CO-EFFICIENTS OF REGRESSION EQUATION ESTIMATED WITH FIXED INVESTMENT AS DEPENDENT ON DIFFERENT FIRMS'

SPECIFIC AND INDUSTRY VARIABLES

. l ! , , l L , , . I%, K , , . 11%

b 1 . d Inrc~nwnt Oulpll Change 10 oulpu! C ~ r w Rclamed Prufii Flow of trtcrnal Fund lovsnlo~ Inrr.slmcn! l ~ g g c d fi.4 Inr crtnhcnt Grus, capttrl I n ~ e n m n l ('oa ofcrplt~l

i ,

FVALI IE

51MI

MML - M a h i n h & M h n d n Llrn~tcd. T F L - TELCO L~mtcd. PAI . - Prcrn~cr Aulomob~les Llrnltcd S~gn~ficanl at So,. lcvcl .. Slgnltic8nl #I lh level

1.1gurcs ~n p.rmlher~s andrate calculalcd ' I ' balucr

ZUI 4

~ L I

\D I

1 kl.

289 1

t q b o Z

Eq 'io I

1271 1 " ,486)

PAL

1.q bo 1

I y 2

M 410 1

24208 1 1 6 3 1

354 b

(476 ' o l l l

4 No2

1263l,-' 15511

Fa 0 5

3475').. l io l r i

Eq " 1 0 2

24266 (174 ,

2546

M \oi

22213' 121111

3407 7 b l IF) 87 78 lOl 2

IV.4 INVENTORY INVESTMENT FUNCTION

Total stock of ~nvcntones 16 defined as the aggregate Investment In raw

materials. finlshed and scml-finlshed goods and other m~scellaneous Items, machlnep

spares. loose tools (consumahlcs) and goods-~n-trans~t Inventory lnvestment 1s

complementary to fixed Investment and gtven the quantum of resources - the

components of Inrcstnlcnt are competltlve to each other An attempt IS made In t h ~ s

scrtlon to analysc the hehau~our and dctcrm~nants of Inventory Investment rn order to

get a complctc picture o f t h e financing bchav~our and related Issues

O d ~ n d n least bqudre (OLS) regrcsslon equations arc estlmatcd w ~ t h respect to

!he I lke l dctcnn~nants O F Inventory rn\cstmcnt as d~scusscd In the Collowlng

paragraphs A b r ~ c f r e \ ~ c u o f the emplr~cal studles (Krlshnarnunhy 1964, Trl\ ,ed~

Iv'01 re\cal 111dt I I ~ C cost of horroulngs. uholesalc prlce Index of In\sntory, degree of

capaclt! ut~l~satlon. sales and ~nventor)-rurno\er ratlos as major determ~nants of

In\enton ln\csttncrlt Along u , ~ t h these \a r~ahles . the present stud) has also Included

thc flou O F ckterndl Funds. in\,estrnent In fixed assets and lagged Inventones into 11s

equduons for cstllr~dtlnp thc regressron results From the ernplrlcal s tud~es (Vlnod

PraLashl070. \'enhalachalaml977) the sales. crilsttng stock of lnventones and

I ~ \ C I I I O T ) turno\.cr ratnos ha \c hecn round to etnergc as nipo on ant \ arlables

The underlying thcor~es and the pnor cons~dera t~ons of vanous factors affecting

Investment suggest the following rc la r~onsh~ps

The model IS

' B\ ( 'u , ' PC. ESF + {h INS, :

whcre

INV, Inventory ln~estmenl

S, Salcs

(lNSn'cos!)t lnvcntory Turnover Ratlo

11 , F~xcd In\estmenrs

1 % ('ost ol Borrou~ngs

C'u , C'apdc~t) u t~ l~sa t~on

tSF !.lo= of External Funds

I X S , , Ldgged Invenlorleb

Thc reyresblon cqudtlon arc prescnted along w~th the11 't' s ta t~s t~cs and 'F ' ratlos

In Fable I \ ' Z

Inventory lnvcstme~lts and level of Sales Sales, as a proxy to the slze of a firm IS

expected to lnflucncc thc s ~ / c of~nvcntory Inbcstmcnt S ~ n ~ ~ l a r l } . an Increase In sales IS

expected to tncreasc the demand for Inventory hold~ngs to meet thr requirements of

growing sales. Sales and inventones iue closely ~nter-related where~n the Increase In

s1re of sales ~ncFUcses the Inventory level whlch ~n-turn Increases the sales Therefore.

sales 16 postulated to have a pos~ t~ve relal~onsh~p w ~ t h the Inventory ~nvestment. The

regresston results of the selected untts are In confirm~ty wtth the postulated slgns The

satd vanable IS found highly stgn~ficant In tnfluenclng the tnvmtory investment in all

the units.

Inventory Investn~enls and Inventory Turnover Ratlo Firms want to malntaln

cenaln level oftnventones In order to ensure a regular supply of tintshed goods to thelr

customers 'Thus tnvenlory lurno\,er ratto IS helteved to be pos~tlvely related to the

Inventory tnvestment The regresston results. on the contrary. show a negative co-

eficlent In all the firms Thetr ' I ' statlstlc values are also not found stgn~ficant This

indtcatcs an ~nslgnificant influence of this variable In inventory As such Investment 1s

nlostly planned based on future demand for the firm's product rather than on the past

hlstory of turno\,er made

In\entory In\cslrnent and In\estrncnt I r l fixed Assets Ftrnls ha \e llmlted funds

and such rcx~urces are lo be shdred hctueen the fixcd and In\entor) in\estmeni

rcqulrernents Slnce fixed In\cstlllctlts absorb a major share of the ava~lable funds. 11 1s

cxpcetcd to h a ~ e a ncgatl\c rcldt~onrhtp u ~ t h Inventory In\estmcnt Howeker. during

the days of expansion and grou,t11. the t\\o components may be complementar) lo each

other whercln the co-cflictcnt must be postt~vc The latcr arpumerit pro\es true In the

results obia~ncd for Htt~dustan Motors, Tclco and Premter .4uto The co-efficient is

p o s ~ t ~ v e In thrcc tinns and ncgauvctv styn~ficant In o then

Inventory Investment and Cost of Rorroulngs The cost factor may adversel)

affccl the demand for tnvcstment espectally in case where the returns from such

invcsunma arc not attracti\ely large Therefom, cost of borrowing IS expected to have

a negattve co-emc~ent The regrnslon results of Ashok Leyland. Mahindra & Mahindra

and Telco are conslslenl w ~ t h the expectatron and possess the expected slgn The co-

cfl ic~enls in c a of Bajaj. Hindustan Motors and Premier Auto, on the other hand, are

posltlve. ~ m p l y ~ n g the redundancy of relat~onsh~p. In all the three cases the explanatory

power of the co-effic~cnt IS also found very weak The poslt~ve assoc~at~on of the cost

of borrow~ngs lnd~catcs that the finn whlch hold large quantltles of Inventory suffer

wlth under ut~l~satton of Inventory

lnventory Investment and Flow of External Funds Flow of external funds helps In

financing the Inventory lnvestmenl The cons~derat~on 1s slrnply the ava~labrl~ty of

funds for holding stocks The w-effic~ents for Bajaj and Mahlndra 6t Mahtndra are

lound p o s ~ t ~ v c although not statlst~cally slgn~ficant For Ashok Leyland. Hlndustan

Motors. Telco and Premlrr Auto the co-effic~ents are found ncgatlve. ~ n d l c a t ~ n g non

. i \ a ~ l a b ~ l ~ t y of funds for hold~np s ~ o c k s

TABLE IV.2

CO-EFFICIENTS OF REGRESSION EQUATION ESTIMATED WITH INVENTORY INVESTMENT AS DEPENDENT ON DIFFERENT FIRMS'

SPECIFIC AND INDUSTRY VARIABLES

rhrrr lh \ , Inrcnlw) Invotmm! 5, 5 v k r i l h \ l c ~ ~ r ~ , lnvmlory lurnurcr Kdtoa

I f , F t r d Invrrcmnt~ I , < au of Bonorrrnys Cu, Capcsly vl~l~ratlon kSF = F b u of E r ~ m r a l Fundr I W S , , Lap%& Inbentar8c\

ALL. - Ashok L.ryiand Lnrntad. BTL - Bapj Tcrnpt 1 tmited. HML - H1ndust.n Motors L~rn~ted S~gn~ficanl a! 5% lcvcl

* * S~gntf icsn~ 81 1% lcvcl F18urcr m p r r n t h n ~ r tndratc calcuhtcd ' t ' valucr

TABLE IV.2 (Continued)

CO-EFFICIENTS O F REGRESSION EQUATION ESTIMATED WITH INVENTORY INVESTMENT AS DEPENDENT ON DIFFERENT FIRMS'

SPECIFIC AND INDUSTRY VARIABLES

MOVLL.

I \ \ , u + f l , S , * '$2('"s}+ L j I., . I , TCUII I

b. C u , * IL tbk . 11. INS, ,

S tpn~f icsn l a l 5% l cvc l *. Slgnlhcsnt a1 I"* lcvc l Ftgurer I n parcnlhcrtr mdtcatc ralculatcd ' I ' valucs

*here I h \ , lnrcnlov In rmmcn l , >ale, ~IZS-I'UIII, lnrrnlvr, lumovcr Katw I f I lxcd I n v c ~ m n l s I C osi o< Bonovtngs I u C - l l y ul8llsatton I \I I l o r of External Funds I \ \ L.uwrd In%entor>a

r , I

i I MML PAL

I TtL

4 4 0 l

2238 2'. ( i - 2 1

Eq No l

62494 1165)

Eq N o 2

3281 7.. I7Y41

1.q so 1

--, 11 0 4 4 1 1521 0 11447 1 O l 2 i

(4 4 0 2

SW8Y (1771

t-q 4 2

t(( U o 3

44495 0 4 2 1

tq Zo 3

I(flfi2 5 04l11

141 79

11251

IV.5 FI.OW OF EXTERNAL FUNDS

The s17.e o f external funds Include share holders' capital, shorl term borrowings.

long-term borrow~ngs (lncludlng debentures) and net amount payable to cred~tors The

demand for exlernal fund arises when Internal funds are not suflic~ent to meet the

~nvcstments requlred Flow of external funds would s~gn~ficantly influence the

Invcstmenl 111 cap~lal assets and Invcntones Thls sectlon analyses the behav~our and

dctenntnan~s of external funds 0L.S estlrnates are worked out for d~fferent ~ndependent

var~ahlcs and the spec~ficat~ons are explained A revlew of the empirical stud~es

F U ~ ~ C C I lh,~t 111\~strnen1 111 fixed asscts and Inventones. worklng cap~tal. flou of Internal

funds. cost o f c a p ~ t a l and exlstrng stock of funds. etc. emerge as variables of ~mporlance

In ~nflucnc~rig the flow o f external funds Present study cons~ders these and the stock of

trade crcd~t aild lagged ~n\.cntoncs as add~tional vanables The model IS

\\'ticre

I.SI Flou of cltcrnal funds

IF, - I~ivestnicnts In F ~ x e d Assets

I ' Investnie~~ts In Inventory

GKC - Gross Raalned Profit

I , - Cost of C-ap~tal

ESS , , = L a s c d flow of Eternal fund

The multrple regressron results. relatlng to these wmbrnatrons are presented In

TablelV.3

Flow of Lxtcrnal Funds and Frxed Investment An expanding firm expects to spend In

the longrun an ever lncrcdsrng amount to finance a large number of rnvestment projects

and holding of rnvenrorrcs 7 hcse projects are undertaken erther as they are cons~dered

prolitable or to protect thcrr market share Hence thrs vanable 1s expected to have a

p i s ~ t ~ v e re la t~onsh~p wrth the SILC of external funds The results of the present study

reveal that the co-cffiuents are posrtrve rn all the selected unlts

Flou of kutunl~l funds arid lnvcntory Investment The srze of Inventory investments

act more as dcpcndcrit on flow of external funds rather than a determtnant But the

results o f t h c prcsunr study reveal thdr In all the selected firms a posrtlve s~gnrficant co-

cflic~ent for thta \ d r t ~ h l c ts found T h ~ s tnd~cates that exceptrng Bajaj. all the other

linns ha\ c becn ur~l t s~ng the external funds for financrng Inventory lnvestmen~

t low o f txternal lond, ~ ~ i t f Keta~ncd Profit D ~ v ~ d e n d s when pard would reduce the

amount 01 rct.rnicd p to l i~s (~ntcmdl funds) Thus a poslttve relat~onshrp IS expected

hctwcen the a \ d t l . ~ h r l ~ r of reldlncd funds and the flow of external funds for financrng

the expansrori programs of the firm Many earher research studres vlz James

\valtcfl1956). (;ordori( 1959). Lrntncr(l956). have rncluded thts vanahle and In one o f

the s tud~es Ktng(lO74) In u h ~ c h dl\rdends uere consrderd. rt IS found not

s~gn~f icant The regressron results show a negatrve slgnrficant co-efficrent for t h ~ s

~ ,wrable rndrcatlng a supplenrcntary role of rnternal funds for external funds

Flow of External funds and cost of Borrowtngs Cost of capttal IS constdered to be an

tmponant explanatory vanable Matnstream economtc analysts matntatns that cost of

capllal would have a negatlve eflect on the flow of external funds However. the effect

may pmve to be tns~gnlficant for two reasons Ftnt, the existence of lmperfecl cap~tal

market whlch may not allow the cost factor to have a free play in dtrecttng the market

forces. Sccondiy. In case of ccnaln firms the cost of capttal may be below thelr

opponuntty cost on account of regulattons and controls The results of t h ~ s study show

that t h ~ s hypothes~s 1s true In case of all the selected untts under study For all the firms

thc co-emc~ent tnd~catc an tnslpnlficant negatlve relat~onsh~p

Flow of kxternal Funds and L.agged Flow of External Funds. The results of regression

analys~s shou that all thc selected untts under study are havlng posttlve co-efftc~ents

but the lercl of s~gn~ficance IS low In the case of Ashok Leyland In the case 1f BaJaJ,

Htnduslari Motors. Mah~ndra & Mahtndra. Telco and Premter Auto the level of

s~gn~ficancc 1s cons~derahly h~gh utth '1' values rangtng betueen 3 25 and 10 97. Hence

the past Ic\el of external lunds found to be the major detennlnants of the current flow

of externdl furids

TABLE 1\'.3

CO-EFFICIENTS O F REGRESSION EQUATION ESTIMATED WITH FI.OW O F EXTERNAL FUNDS AS DEPENDENT ON DIFFERENT FIRMS'

SPECIFIC AND INDUSTRY VARIABLES

F st, . 11,1 t , + 11. INV . 11, ( ,kt * 11.r + 1 l . t ~ ~

H hctc

A1 I Ashoh Lqland Lan~ttcd. H I L - Balaj Tempo Ltnuted. HML - Hmduaan Motors L,rn,tcd

Elfurcs In parenthcrs mdtcatc calculated ' t ' values

TABLE lV.3 (Continued)

CO-EFFICIENTS OF REGRESSION EQUATION ESTIMATED WITH FLOW OF EXTERNAL FUNDS AS DEPENDENT ON

DIFFERENT FIRMS' SPEClFlC AND INDUSTRY VARIABLES

MODEL

LSt, <L 11, 1 1 , . I%? INV, . 111 ClKf , . 11.1 . is. t>.S

f . b b , Clux 01 cxtrmd lundr I f . Inreunmls 10 Ftred Arr l r I%\ . Invcslnmls an lnrcntury o u t ~ r o s s R F U ~ F ~ Profit I c 0s of C dpll.1 t S < , L a a d flow u l l.~rrnul fund

1 IN\., I C;." '' I 0 - 4 ' ' / U S "' 1 Ifih., 1 " 5 5 '' I !J 144 I U l l l i ' 1 u l i b ' / IIJI ( l I 0 0 4 9 1 14(FIl 14101 (13l11 (2 Ik) I 12iOi

MML . Mahtndra 6: Mah~ndra L ~ m ~ t c d . ~ I t L - 1.L.L ('0 1 zrn~lcd. PAL. Premlrr Aulomobllcs L~mllcd

M M I

Slynbficanl al 5% k \ c l .* S~yn~ficanr a1 1% k v c l

h o l

~ L L

%oZ

PAL

t 4 . % t q t q t q h t q h Nu 1 hu 1 \n l h o 2 \a Z 'YO X

IV.1 PROFIT FUNCTION

Automoh~le firms d~ffer w~dely w ~ t h respect to thew slze, structure. product~on

and spcc~al~satton Any study on trends In profits IS essent~ally keep the ~nter-firm

d~ffcrenccs In rhar product mlh w h ~ l e cvaluat~ng then financ~al performance The

Increasing Icvcl5 01 profit. olhcr thlngs remalntng constant. ~ n d ~ c a t e about the

~oundness and \uccc\s of huslnesr operallons 11 ensures the suppl) of funds. provtdes

cncouragcmerlt l i ~ r funhcr Investment and helps In attracting external resources

l~hcrcforc da a firrt step of financial performance an attempt IS made In thls sectlon to

cxanilne the trcnds and determ~nants of profits D~fferent theoret~cal vlews on profit

scneratlon and proli tah~l~tv arc as follows

( a ) 5l.111.1~er1al theorytSchumpeter 1939) regards profit as the result of

cllic ~ctlt cm)rdlndrlorl and organlsatlon

( h ) KI\L dnd unccrlalnty theory(Howley 1893) cons~ders profit lo be the

rc\r ~ r d Ibr nsA hcdrlng

( c ) (~ro \ \ t t l thcowc d r t a n uood 1975) suggests that profit and growth rates

:nostl\ ~ntcrrclatcs to cach other and

(d l Ttlu ~ndustry and factor market structure theory(Ba1n 1951) putsforth

that the market ~nformat~on. factor cost structure. controls by the

ro\cmment and scller concentration as declslve factors In explalnlng

profits

None of thcse theor~es suhstant~ally offer a sat~sfactory explanallon on profits

bchav~or They are mostly complementary to each other rather than competnrve. The

managennl theory explatns profit as that part of the product value whtch goes to the

entrepreneur aner compensating for factors of production Schumpeter ( 1939) explalns

that profits occur to the firm when 11 introduces the lnnovat~ons and not to the Inventor

In thls sense profit IS the reward for managerla1 s k ~ l l Howley (1893) contents that

supervlslon and to-ord~natlon are the routlne jobs o f management and bearrng nsk cn a

dynamlc economy shoulil he cornpcnsated hy way o f profit Kn~ght (1921) has argued

that uncenalnty ahout prtcc. demand. market condlt~ons and technology are the rnaJor

Iiclors u,h~cIi ehp1~111 prolits

Growth theory assumes that the goals of a firm are to cause 11s sales to grow as

rap~dly aa possthlc. s~rhlcct to Ilic constraints o f growth In demand. growth In capaclty

and thc a \a~lah~l~t ! , ol lindnce Tor ~nkestment

Kdlcckl ( 11)541 ~ o r ~ ~ l u d e s t h a ~ the monopoly profits depend on the extent of

nldrhrt ~rnpcrfcct~i?ns .lnd tailor costs ratlo In an o l ~ g o p o l ~ s l ~ c market. for Instance. a

fin11 u ~ t h g ~ \ c n .1ssc1\ c\pcrlcd to ohtaln 11ot more than a rnaxlrnum amount of profit

after t d l n y 111to ~ L L O L I I I I ht\ n \a l s ' poucr lo compete hlm by pnce retal~at~ons ~f he

docs, no1 accept 4 falr ].\Ion c>l.prolit

It Sollous Iron? the prcced~ng d ~ s c u s s ~ o n that the posslble determ~nants of profit

uould include scale o l opcratlons. market share. stre of the firm, capactty uul~sat~on.

product pncc, u n ~ t lictor cost. ~nvestnlent, cap~tal output ratlo and rnarhet structure

tl111p1ncal s t i ~ i l ~ c s o f H ~ l l ~ a r n s o n (1'406). s ~ n g h and M ~ t t l n g t o n (1968). Eram (1968).

S*an?y Rao (1975) ctc . shou that sales. product pnces, factor pnces. capaclty

ul~llsat~on. srze of the firm. market structure and investment expenditure are some o i t h e

major d c t e r m ~ n w t s o f profits Further these deterrn~nants are found s~gnrficant at

d~ffercnt degrees In most of the s tud~es Therefore. the same var~ables have been

considered in the present study to examine the profit behav~our of the sample unrts of

the Four-wheelcr industry Ordinary least square (OLS) equations have been worked

out w ~ l h the explanatory variables, lrke sales. market share. capaclty utilization. cost of

capltal, lnveslrnent cxpcndtture and such olhcr var~ableh to detemlne their lnnuence

The general model IS as lollour

Where

PATND, Nct Profit

( 1 ) S, Sales

I ? , I , 3 \ cars mo\ ~ n g Alerage of Investment

14) Cu. - Capac~t). C'tiIl-/aIlon

( 5 , P,. Whole sale prlce Index of Vehicles

( ( , I ( 1 . Sharc ofuagcs in balue added

( 7 ) (1 i,p), Cost of Capital

( 8 ) DP, - P r ~ c e Control dummy

Subset equat~ons are uorhed out to aboid mul11-collneanty problem on one hand

and duplication of explanatory p w e r In some of the vanables on the other The

multiplc regression results, relating to thcse comh~nations are presented In Table IV 3

A cursory glance at the results o f different cornbinat~ons show that the profit

equation for Telco had a best explanatory power w ~ t h an R~ 0.9920 compared to the

other unlts Ashok Lcyland. Bajaj had the explanatory power o f 90 per cent whlle

Hlnduslan Motors and Mahlndra & Mahlndra had only 77 63 per cent and 62 65 per

cent respect~vely D ~ f i r e n t ~ndependent var~ables have the following explanations on

profits ofselcct firms

Net Profit and Sales Sdlcc rerenuc 1s lnvarlably the most ~mponant

d e t m ~ n a n t ~nfluenclng thc net profits lncreaslng sales Increases the net profits

s~n~ultaneouslv at constant contnbuuon ratlo Thus a posltlve relat~onsh~p IS postulated

between the net profits and sales The present repress~on results show that the sales

ranable IS found p o s ~ l ~ v e and algnlficant at 1 percent level In case of almost all the

sclecled firms excepting. Bajaj. ~ndlcatlng the change In sales cerlalnly adds to the

hottom llnc or the company

he1 Profil dnd UdrLct Shdrc The rl/c of' Iho rntrher share coupled wlth larger turno\er

naturally n lscs the profitab~l~ty of a firm The sire of market share as an explanator)

ranshlc 1s complementary to s ~ l n and 11 1s expccted to have a pos~t~\ ,e

co-effic~ent wlth that of' the sire o f the net profits The regression results show an

ncgatlve co-elXc~ent for all the firms selected Thls rnlght he due to ~mposltlon of pnce

controls and other llcenslng pol~cles of the government towards automob~le Industry

Net Profit and Capaclty U t ~ l ~ s a t ~ o n At hrgher levels of capac~ly utiltsat~on an ~ncrease

In profils expeztcd largely on account of the economtes of scale in production and

through larger sales volumes A postclve assoc~at~on ts expected In between the stze of

the net profits and the capaclty u l~ l l sa t~on The regresslon results lndlcate that the

B ~ J ~ J , Mahindra & Mahlndra and Prem~er show a poslttve co-eflic~ent postulatrng the

expected result On the other hand. the Ashok Leyland, l f~ndustan Motor and Telco

exh ib~t a negallve relat~onsh~p between profits and capaclty u t ~ l ~ s a t ~ o n The reason

artnbulablr l o this negallve reldt~onshlp may be due to controls exercised by the

Government hy t hc~ r l~censlng pollcy Many d tlme the ~nstalled capaclty 1s Found

h~yhe r than the opcratlny cdpaclty

Uct Pmf i t and brayes Profit 1s defined as the excess o f sales revenue over cost

.ind, therefore. the -ages h a n g a niajor cosl I! 1s expecled to Inversely relate to profits

I he regrcsslon runs for thls \a r~db lc rcbeal that the share of uages In case o f Ashok

Leyland. Uah~nd ra & Mahlndrd and Telco 13 found poslrlve and s~gn~f icant whlch IS

dttrihutablc to the relat~vcly h~yhcr le\els o f labour product^\ ~ t? . In them For Bajaj,

t l~nduatan Motr,rs. Prern~cr Auto the relat~onsh~p bcturcn o f profits and wages are

found ncgdtr\c concurring u ~ t h the cxpccled rcsull

Yet Profits arid In\cs~rnent ln\cstnlcnt c\pcnd~ture plaks a double role on one hand

11 pro\ldca the c\tr.i caprclty necdcd to meet a glven Incresqe In demand. on the other

hand. 11 IS also a u a y o f In ipm\l l is the l i m n s eff~c~encb T h ~ s 1s expected to possess a

p o s ~ t ~ v e relatlonsh~p u ~ t h the site o f ncl profits The regresslon results lndrcate that In

case o f Hlndustan Motors. Mah~l ldra Bi Mah~ndra and Telco. the co-efliclents are

found to h a w a ncgatlvc s~gn~f icance aga~nst the evldence o f most o f the earller

s lud~es I t may be due to gross under uullsat~on o f the plant capaclty . For Ashok

Leyland. Bajaj and pren i~cr Auto the co-effic~ents are posl t~ve and stgn~ficant

Profit and Cost of ('apttal Thc regression run for cost of cap~tal possesses a postttve

slgn and 11 is stgnificanl In almost all the firms excepting in Ashok Leyland Thls

pos~ttve relartonsh~p IS in contrast lo the expectattons T h ~ s may be due to the fact that

cost of funds may bc growing pua~tlrely w ~ t h poslt!ve scales ofoperations

TABLE IV.4

CO-EFFICIENTS O F REGRESSION EQUATION ESTIMATED WITH PROFITS AS DEPENDENT ON DIFFERENT FIRMS SPECIFIC AND

INDUSTRY VARIABLES

novet..

A1.L . A s h d kylmnd I . n m t t d B'r l - U v ~ r l Icmp, I.>msaf HML. - H#ndurtm Molun Llrnllcd b$g"$f&cmt u 5% krcl .. Sap8ftrmi aI IY. I r \ r l

F~yurcr tn prcnthnts mdnr*tr c ~ l < u I ~ i c d ' I ~ ~ I Y U

I

I c.ONSTAN.r

I

( j $ r l i -. o ( l h b (1W6.. I I I X P I ~ -10987. 0 17 .. !s , 2 1 . 1 7 2 , l l ) I V , I O Y O I

\ L I 14

bu I

732 11:

1rthl1

HML

Eq h o I

8671 0.. (3581

BTL

I q

" 1 -

1 1 3 2 )

+Y 1

"7 1'3

1 1 501

14 \ 1

7V<v h2 ( I 44)

tq hi02

3% 41 1 1 9 2 )

tq N O ?

325 86 I 1 IS)

TABLE IV.4 (Continued)

CO-EFFICIENTS O F REGRESSION EQUATION ESTIMATED WITH PROFITS AS DEPENDENT ON DIFFERENT FIRMS' SPECIFIC AND

INDUSTRY VARIABL.ES

P % I 911, '.a Prof,, \, &In \. l b. Markc, Sharr 1 3 \ear> mulllly A \ r r * e r "I 1n\<,rmcn, ( U ( JPJCI IV ~l l i l . l l l t ln

F'. U'holr \alcpr~<r find'\ uf \chsilr, ($4 L \ 1, 5h.m of urac , an ~ d u r d d c d I f pl, Con or C rp#rdl [>I ' Pncr ( oo!rul c i u m ~ n ~ .

MMI - Mahlndra b. Mahtndra I ~ n ~ a l r d . rt.1 - 'I EL CC) I.lrnlrcd. PAL - Pmrnlcr Auturnohlles L lrnltcd Slgnlficant at 5% Irvel

'* S~mn~f icmt a1 1% level Figures m puenthcs~r lndtcalc calculated ' t ' values

IV.2. DIVIDEND POI.ICY

Dividends represent the primary and actlvc decrs~on vanahles of corporate

firms Internal savrngs are dctcrmrned as residuals aflcr dividends have been p a d out

In other words. the corporate findnclal pol~cy IS mostly drvrdend orlented In the sense

that dtvldends take precedence ovcr the other aspects of' financ~al polrcy In t h ~ s s a n o n

an attempt IS made to analyse the behavlour and determinants of drv~dends D ~ v ~ d e n d s

are dependent on s ~ z e of net profits and there exlsts an ~nter-relat~onsh~p between

dl\ idends and retamed earnrngs

S ~ r n p l e regression equations are fitted. wrth drbrdend as the dependent on

dilTcrent ~ndivrdual var~ahles Ernpirrcal studtes relaling to drvldends reveal that the

profits. idggcd d~vrdends. changes in sales. llquld~ty and flou of external funds to be the

malor detcrmrnants o f di\.idcnds Thc present study also rncluded the lagged profits.

rn\estment cxpend~ture and marhct shdrr for greater comparison along wrth above sald

\ arldhles are hetter explarn of the profitah~llty In selected units

1'hc follourng frarneuorh o f t h e rcldtlonshrps 1s estlmatrd

DIV, I - Lagged drvrdends

LQDTY = L ~ q u ~ d l t y position

IE = Investment Expend~ture

ESF = Flow of External Funds

S, /Z S, - Market Share

The rnultlple regrcsslon results. rclal~ng to these conlh~nat~ons are presented In

Table IV.5

Dlvtdend and Net Profits Current Net Profits arc consldcred as the major

detcrmtnant o f d ~ v ~ d e n d as they represent the capaclty of the firm to pay dlv~dends. It

has also been found qutte appropriate In expla~nlng the corporate d ~ v ~ d e n d behav~our

and 11 IS postulated to have a p o s ~ t ~ v e co-effic~ent I he results of the present study

reveal that the co-cfl ic~mts of net prolits In all the firms are In confirmlty u , ~ t h the

expected reldt~onsh~p The co-effic~entr are rlso found s~gntficant as ~ n d ~ c a t e d by the 't'

stattstlc The endogenous vanables rncluded ~n the model are found to possess good

explanatory power uhlch IS proved by t h e ~ r respeLtlve R' \dlues In most companler

e x p l a ~ n ~ n g about 0 5 per cent to 99 per cent of the changss In the equatlon These

c,hscnatlons suppon [tic earller stud~es and c o n f i n the Tact thdt the net profits as major

determ~nant o l ' d ~ \ tdend payment for many firms

Dtvtdend and Laggcd d ~ v ~ d e n d s The rat~onale of use oT lagged dtv~dends as

dctcrm~nant of d~vldcnd policy 1s to expla~n the existence of speed of adjustment

nicchan~srn whtch states that cornpwlcs try to ach~eve a cenaln dlrldend payout ratlo In

the longrun The past d ~ v ~ d e n d s would affect to a certan extent the d~vldend poltcy of a

firm. In the context of lndlan tndustrtes most s tud~es (Llnmer 1956. V.K. Sastry 1906)

whlch have lncludcd this vanable In the d~vldend equalton concluded that the lagged

dlv~dends to have slgn~ficant p s l t l v e co-effic~ent The results of the present study

also suppofl with posltlve co-effic~ent and the co-efficlents are found stat~st~cally

slgnlficant at 5 percent level In four unlts expect~ng Hlndustm Motors and Mahlndra &

Mahlndra

D~vldend and changes In sales An Increase In sales naturally generate addlt~onal

profits u h ~ c h In turn Increase the profitah~llly and would affect tile d ~ v ~ d e n d pol~cy of a

firm Thus a p o s ~ t ~ v e relattonsh~p IS postulated hetween thcse two ~ a r ~ a b l e s . In contrast

to this argument. there are contradlct~ng verslons whlch argue that an Increase In sales

generate ~ncreased worklng capltal requirement w h ~ c h In turn may adversely affect the

relatlonshlp betuecn d ~ v ~ d c n d s and profits The regress~on results est~niated support the

former argument In case of Premlcr Auto where~n the co-cffic~ent 1s posltlbe and

s ~ g n ~ f i c a n t 'The co-eK~c~ents arc found negatlve for Bajaj and Telco lo say that the

d ~ v ~ d e n d are adbcrsely affect~ng for change In sales But In majorlty of equatlon the co-

c f f ~ c ~ e n t s arc not slgn~ficant to lndlcate that the changes In sales to be an lmponant

banable ~ n f l u e n r ~ n g the d ~ b ~ d e n d paynienr

[)lwdends and L.lqu~d~ry Posltron L ~ q u ~ d ~ t y posluon o f a firni refers 10 the excess of

rurrcnt ilsscls o \ e r currcnt llah11111es Though. on surface I I s~gnals on the abillly of d

firm In dru-lanrig dlbtdcnds and thus I~hely to exhlb~t a pusltlbr assoclatlon ulth

d~\ ldcnds . a deeper analys~s proves contra? to t h ~ s point Too much l~quldlty means

Idle cash halances whlch may reduce the profitab~llty of the firni Idle cash balances

ellcourage lnlercst burden on borrowed lunds there by leare lower amount of profit for

dlv~dcnd dlstnbutlon This argument postulates a negatlvc relat~onshlp between the two

vwables Thc calculated regression co-effic~ents In most equauons are lndeterm~nate,

as they are not statist~cally slpn~ficant. Hence the liqu~dlty positlon IS not an Important

determinant of Dlv~dend

Dividends and Invcstrncnl F.xpendtturc lnvestmcnt expend~turc is the total

cxpcr~dlture in fixed asscls and tnventorles T h ~ s varlahle 1s cxpected to posses a

negative relallon to dl\ldends ;is thc company decldes to finance much of 11s

Investnient requlrements from Internal resources Then the d~vidend and Investment

dcc~slons competes with each other Contrary. when thc Investments are financed hy

external sources. dlv~dcnd disbursals are likely to be hampered In such a case. as 11 was

suppuned hq cmplncal research stud~es. the div~dend decls~ons could he expected to

ldryely drpcndenl on pattcm of financing Investment expenditure The present study

rrpon a neyatlve ~ n s ~ g n ~ f i c a n t co-efficient for this vanable In case of Ashok Leyland.

and posltive s ~ ~ n ~ l i c a n t co-erric~ent In case of Bajaj. tl~ndustan Motors. Telco and

Prenllcr Auto

[)I \ Idends and Flou of t\ternal funds In w, for as external funds can be used to

nlcet the demand Ibr funds this \anable I S cxpected to have a poslti\e Influence on

dividends In a fiml It enables the firm to dlstnbute a larger p m of profits to the

sharcholdcrs In sptte of larger investment demand and working capital requlrements

Hov.ever. therc may he a ncgatl\e relat~onsh~p between the two var~ahles ~f the firm is

not assumd of the a\allahil~ty of outs~de funds Many of the earher stud~es(V K Sastry

1966) in India have concluded that the flow of external funds have no slgnrficant

Impact on dlvidcnd policy The results of the regressron equation ~ n d ~ c a t e a positive

co-effic~ent In case o f Telco and Ashok Leyland and others confirmed w ~ t h the earlter

s tud~es whcrcln the vanable IS found not s~gn~f icanl

TABLE IV.5

CO-EFFICIENTS OF REGRESSION EQUATION ESTIMATED WITH DIVIDEND AS DEPENDENT ON DIFFERENT FIRMS' SPECIFIC AND

INDUSTRY VARIABLES

%IOD€ I.

I ) , \ r r . ( I , P A T N I ) , + I N \ , , . (I . L V D l Y , (1.11

I\, I \* , [i, 1 \

H hcrr I) , \ , Vtr ~dcnds P A ~ Y I I k t ~ r ~ , r , t , IXV, - Logged dvr ldcnd, LQolY L 8quldsly pur~r~an 11 Inrcslmcnl F ~ w d ~ t ~ r c t S t Flow oCkx!rrn*l Funds \ % \ , Markc, Sharr

5 3 52h 1 0 2,)) ( 0 8 7 ) 1 0 W I

ALL - Ash& Icylsnd 1.1rnttcd. BTL - Bap) Tcrnpo Lnrnltcd. HML - Htndustan Motors L~rn~ted Sngntficant .I 5% lcvcf

.* Slgnlficml a1 I% lcvcl Ftgurn an pvrnlhesa ~ndlcatr calculated ' I ' \aluer

TABLE IV.5 (Continued)

CO-EFFICLENTS O F REGRESSION EQUATION ESTIMATED WITH DIVIDEND AS DEPENDENT ON DIFFERENT FIRMS' SPECIFIC AND

INDUSTRY VARlABLES

U Iacr~ ll,> 111\ ~dcnd. k'4TVI). hr! Prrlfiw I l l \ I rpgrd dar ldcndr 1 CIDTV I iqu~d!t\ poszrmn 1 I l n \ c \ l m r o l Fkpndlture i \ I I t u u o l Lxlcrndl Funds \ 5 \ U ~ r h c l \h.rr

TEL

MML. . Mah~ndra & Mnh~ndra 1.1rnltrd. TEL - TELCO Llmlted. PAL - k m ~ e r Autarnob~les L ~ m ~ t c d Slgn~f ican~ at 5% Ievcl

* * Stgnlficsnt a1 1 % level Ftgurcr tn p.rcnthes~r lndicatr colculetcd ' 1 ' values

From the above equallons. the following qulck conclus~ons could be drawn

I ) Capllal formdl~on In select auto unlts IS Influenced by factors I ~ k e output

and lagged fixed Investment

I Swe of Inventory Investments are found deterrnlned by vanables 11ke

salcs and !wentory turnover

111) Flnanc~ng of d~merent requlrcmcnts are mostly by external funds are

~nflucnced hy factors hke Inventory Investment and fixed Investment

I V ) Profits In select auto unrts are found determ~ned mostly by vanables like

sales, prrces of veh~cles and cost of capital

v) The dlv~dend declslons 1s found Influenced by Issues relatlng to profits.

l ~ q u ~ d ~ t y and market share

Section I1

FINANCIAI. PERFORMANCE THROUGH VARIOUS INDICES

Aflcr analystng the financtal performance through rhe behav~our o f d~fferent

dyl tdm~c rartahles on profits, lrlrcstnlcnt on fitxed uscts, Investment I n Inventones.

I ) t \ tdc~ids and Lxlcnial l l o u o f funds. an attempt 15 made to analyse the financ~al

pcrfr~rmancc o f the select firms through dtfTercnt lndtces by conaructlng certatn ratlos

lion1 thc financtal stalcmcnts. as suggested bv lntcrnat~onal Labour Organlsat~on ( [LO)

'I he dtfTcrntt groups o f rattos arc ds C01lou.s

I hc a h n r w td lndtccs ha\c hcen c~m\tdcrcd for measuring the o\erall

pcrf~~rniancc o f thc w l c r t untls Houc\er. duc to ltnlltat~ons on d~f le ren l aspecu o f the

data. the stud\ h.ts c<mstdera.i onl? four tndlce?. \I,. the general performance.

opcrallnp pcrformanrc. financ~al pcrfonnwlcc and c k t t v e n e s s o f In\estmenr for

yrcater comprrrlwti The ratsus consldcrcd undcr cach catcgor) are also llmltcd l o the

extent o f data a\atlahlc tn \-anous financ~al statements o f the selected firms puhlrshcd

by h m b a h Stock t x c h w y e O l l i c ~ a I D~rcc tory f i e ~ndlcators c o n s ~ d c d under cach

calcgory and tlrc method o i thc t r calculatton IS glven In Table IV 6

(1) in order lo cvaluale the general and overall performance of the select firms. the

Mudy has calculated the n a profits before tax-to-capital employed. sales-to-

uptcill employed. and n a profits beforc tax-to-sales as Important ratlos The

lira ntlo IS expected lo prov~dc necessary tnformat~on on the profitab~llly of an

orynnt/atlon, the ~ ~ o n d ratlo 1s l~kely to throw hght an the effectlve ut~llzat~on

ol rap~lrl rcwurccs cniploycd in gcnerattng the annual turnover The 1 s t ratlo

~ n d ~ c a t a the proli~ rnnrgln for every hundred ruprcs of sales made In the

d ~ f r a r n ~ firms

1111 IhC sccoml categon of ~ndrcators constdered are relrted to the c\aluat~on of the

rnulycnrl perlorniance Thr m ~ o s cons~dcred In this regard are largely relate

to Ihc c n m l of u t ~ l ~ t ~ t ~ o n o i resources More spec~ficnlly. the opermng profit-

10-operal~ny e.u.ir ra110 I \ cxpcrted to roeal ~ h c onerarln?: pmfirab~l~l) and

u 1 1 t 1 n I r = t s The \slue dddcd-lo-operdr~ng assets ratlo IS

supplned c\pldtn lhc Jrnount of talur added pcr rupee or operallny assets

cmplv\ed h? ttic wlurlcd firnis Cost of sales to stocks I S crpected to explan

thc ~ o \ c ~ l t o n lumorcr rinl nia~mals mmagcmetit In these selected unlts The

raw, ul y r u s \ Y I U F 4 c d to fixcd assets r c i m to the extent o i fixed assets

u11l1mJ

( 1 8 1 ) Ihllerrnl ratros c~ms~dcrcd ar ~ndtccs of financ~dl pcrlomrmie arc e\pected to

throw 11gh1 on thc CNCCII\C ultllsnl~on n i uorklng ~ ~ p t t a l and nia~ntcnance of

Iqurdrr? for the p u r p l r of day-~o-da? upcratlons Feu ~mponant ntlos

c a u t d n c d ln l h ~ s r rgd are sa1a.10-nork~ng capital. to ~nd~cr t e the

eEa t~vcnr r r tn uttlltat~on of work~ng capital resources. stock-to-uorklng

cqr ta l . to ~ n d ~ c a t c the sl/e of Inventory matnta~nod out of workrng capital

bslancn. l n d e deblor6 lo avcriige dally sales. to ~ n d ~ c a t c the col'lcc~~on penod

and effrclency in cncnshtng Ihc debtors and current nssets to c u m 1 I ~ a b ~ l ~ t ~ e s as

ucll as lrqurd asscls lo cunenl Irab~l~trcs. to revrcu the l ~ q u ~ d r l y posltlon nShlch

rn lurn ~ n d ~ r a l c s thc ab~ltly of the firm In meeung shon term o b l ~ y a r ~ o n s

( I V ) The cflccttvcncss of thc tn\ca!ntcnts made In the sc luc td firms under study IS

gauged through the profilahtl~ly rat105 l l lc net profits afler tax to nerwonh It IS

c x p c c t d lo rndtcatc thc prnfit ar~d profitahrl~ty of Lhc firms on the equlry capllal

r o u r c c s mobrlrblllrcd by the firms The caprtal gcanng rauo biz.. F ~ x d Interest

caprtal 111 capttal c r n p l t n ~ ~ i ~ n d ~ c s t e s thc appllcallon of ouulden long term debt

tn Ihc caprlal slructurc I hc quantum of deb! rellec~s on the profits a \a~lable to

rhc rharcholdcn

I \ ) 1 hc ra1lor concernmy rndlccs rclallng to h e cos! hrcah down exhtbts the dtrect

costs l m ~ t c n a l . labour I In\ o l \ d for e\cry hundrcd rupees of sales Product~on

ornhc.d.l ir .wln. x l l ~ n g clrcrhcads-to-wles and gcncral expenses-lo-sales

projcrl thc q u n l u n l 01 u\ crhcads ~ncurrh l pcr hundred rupees of sales These

rallm k i p thc mmagcmcnt 10 controll~ng \arwua cxpcnd~lures and help tn

tnlpmr Inp pmfilr

Group

-- --

code

x,

S.

x

x.

x.

F~xcd asscls

Sale less materials

lo la l wags & Salaries

___-_l_l

The Index mtuem

Gu~de to managmal performance in using asws a\allablc to managenlent

Add& \slue per lupce iiloperat~ng a w l s (USC sales ~f add4 \slue not a\.a~lahlc Indication of asset util~sat~on)

lnd~calcs tunio\cr o l SI(~LS h~gh rate guards agalnsl obsoberccncc

(Jtlllsal~on o f fixed assets (use sales, lfadded value not ava~lahle)

Value added per B 1 wages & Salaries pa~d.

Analysis of the different indices lor different phases across tbe select firms (Tables

IV 7 to IV 13)

'The general perfomlance lnd~ces, dunng d~fferent phases of study across the

d~fierent companles show a posltlve s~gn~ficant trend w ~ t h respect to Return on cap~tal

employedO(l) A highest value or net surplus (before tax and Interest) to capital

enlployed(40 24 per cent) was observable In Hlndustan Motors Ltd., In the first Phase

of the study The lowest ratio of 10 70 per cent 1s notlcable In case of Mahindra and

Mahlrldra Lld (M&M). dunng the second phase of the study. The next ratlo of retamed

earnlngr to networth(X2) of general performance lndlces. for the different phases of the

study across the difierent companles show a posltlve trend excepttng In Hindustan

Motors I.td(HML). and Ashok Leyland Ltd(AL) The thlrd ratlo of general

pcrformdnce. I e . sales to cap~tal employed(X3) is found posltlve In all the phases of

the study across the board ranging from an h~ghest ~ a l u e of 485 9 tlmes In Hindustan

Motors(tih4L) dunng the th~rd phase of the study and a lowest value of 156 Z tlmes In

the ca r . of Ashok Leyland Ltd . during the th~rd phase of the study The ratlo of net

profit margln on sales(X4) In d~fferent phases of the study across d~fferent companles

shows a pos~tivc s~gntficant performance

The effic~enc) of managerla1 performance. IS analysed uslng certaln Imponant

ratios l ~ k e the ratlo of added value per rupee of operating assets(X6) It 1s found

pos~tlve dunng all the six phases of study across d~fferent companies deprctlng an

h~ghesl value 1 631 In the case of Ashok Leyland Ltd (AL) and a lowest value of 0 625

In the case of Hlndustan Moton(HML) The contnbutton of value added by

employees(X9).wh1ch lnd~cates about the productiv~ty of labour and management IS

found posltive across the board w ~ t h an hlghest value of 24.72 In Marut1 Udyog

Ltd (MLIL)

AS any performance evaluat~on w~thout the financral performance Indices 8s

mcanlngless. cenaln Imporcant financlai rarros are workedout to judge the financ~al

strengths o f dlfferent automobile unlls durrng drfferent phases of the study The

average current ratro(X14) In almost all d~fferent companles IS found ranglng between

0 36 to 1 2, exceptrng In Mahlndra & Mahrndra Ltd (M&M) This ~ndrcates a rust-

enough l ~ q u l d ~ t y In most companres The ratro of long-term debt to pardup cap~tal.

reserves and longterm loans(X16) ~ n d ~ c a t e s an adequate use of leverage In the cap~tal

struclure The worked out value of this ratlo IS hovenng between 0.123 to 0.617 trmes

dunng drfferent phases across d~fferent companies An h~ghest ratro of 0 6 1 7 IS

wlrnessed In Slarut~ Lldyoy Ltd (MUL) and a louest value of 0 I23 IS found In Ashok

Leyland L.rd (41.) The rarro of fixed assests to total cap~tal employed(X17).on the

otherhand. ~ndlcates the proponron of fixed assets per rupee o f c a p ~ t a l employed The

ratro IS rangrrig between 0 442 and 0 984 durrng dlfferent phases An h~ghest ratlo of

o 984 1s seen In casc of Hlndusran Motors Ltd(HML) and a lowest ratlo 0 442 IS

observed durrng the fiflh phase In case of Marut1 Udyog Ltd (MUL) Thrs ~ n d ~ c a t e s

thaf a company's major portion of 11s Investments are In the form o f fixed assets whrch

help rn rncresrny the value addrtron through manufacturing The ratlo of gmss profit

to sales as a perccntagc(X21) IS found posltlve Thrs ratlo IS found ranglng between

I 33 per cent and 17 85 per cent A lowest ratlo IS not~ceable under the second phase In

c a ~ ofAshok Leyland Ltd and a hrghest ratlo 1s wrtnessed In the case of Bajaj Tempo

Ltd (BTL) dunng te first phase of the study

The efficiency In performance ultimately has to serve the community through

addittonal investment Therefore. an attempt 1s made to judge the performance of the

~ndustry from the angle of cap~tal forrnat~on For thls purpose select ratios have been

worked out and analysed The ratlo of earnlngs to floss dlvldend(X23) Indicates a

posltlve trend over d~fferent phases of the study across d~fferent companies exceptlng In

case of H~ndustan Motors Ltd (HML) An h~ghcst ratlo of 10 02 IS observeable In case

of ma rut^ IJdyog Ltd(MUL) and the lowest ratlo of 0 49 1s not~ced In the case of Ashok

Leyland Ltd LAL) dunng the second phase of the study The ratlo of net surplus(after

tax) to networth(X24) ~nd~cates the profits ava~lablle per rupee of networth The ratlo 1s

found pos~ t~ve In almost all the cornpanles exceptlng In H~ndunan Motors Ltd (HMLI

and Prem~er Automob~les Ltd (P.4L) An h~ghest ratlo of 2 74 1s observed lnMarutl

l?dyog L.td (M1:L) dunng the s~xth phase oithe study

Thc 1.151 sectlon of the ~ n d ~ c e s show the cost break-down related to net sales

achlcbed In t h ~ s group. ratlos l~he nlaterlals to sales. labour cost to sales and overheads

to sales are cornp~led From d~fferent ratlos I( 1s clearly observable that the matenals

comprises of the major component of sales An h~ghest ratto of matenals to sales

( X 2 5 ) say (17 62 per cent IS found In case of Mahlndra & Mahlndra Ltd. dunng the first

phase of the study and a lowest ratlo of 4 2 0 5 per cent IS observed In case of Premier

Automob~les I.td (PAL) dunng the fifth phase of the study Next follows the labour

cost The rdt~o of labour cost to sales ( X 2 6 ) 1s ranglng between 19 90 per cent to 7 18

per cent An hlghst ratlo IS witnessed In the case of Prem~er Automob~les Ltd dunng

the th~rd phase of the study and a lowest ratlo IS noticed In case of Ashok Leyland

Lld.(AL) dunng the second phase of the study The other costs l ~ k e product~on

overheads, selling overheads ilnd general adrnln~stratlon overheads form a negllg~ble

per cent on sales

TABLE IV.7

TRENDS IN DIFFERENT PERFORMANCE INDICES O F ASHOK LEYLAND LIMITED DURING 1962-1996

PHASES I I1 111 IV L VI

1%2- 1974- 1978- 1982- 1986- 1990- 1963 1975 1979 1983 1987 1991

Code l o to lo to to to Min Max Average

I 1974- 1977- 1981 1985 1989 1995- I I974 I978 I982 1986 1990 I996

General Performance lndlcn

1 YaIIalemcnt Performance Indices

I X' 0068 0 l l l 0 0 4 6 I X6 I 1 1 8 1631 l 1 W / X7 3 183 3 724 3 151

/ X8 0494 0 943 0 696 i X9 4 334 4 728 5 059

j Cb1nci.1 Performance lndicn

I X I 0 X I 1

; Y12 I X I ? I X I 4 / X I 5

Y16 1 ,I, 1 X I 8

TABLE IV.8

TRENDS IN DIFFERENT PERFORMANCE INDICES O F PREMIER AUTOMOBILES LIMITED DURING 1962-1996

PHASES I I 11 111 IV v VI

I 1%2- 1974- 1978- 1982- 1986- 1990- 1963 1975 1979 1981 1987 1991 1 Code lo lo lo lo to to M l n Max Average

1 1974- 1977- 1981 1985 1989 1995-

I 1974 1978 1982 1986 1990 1996

, General P e r f w m n c r Indico

, Hanagcment Pcdormanre Indices

; Finanr id Performance Indices

TABLE IV.9

TRENDS IN DIFFERENT PERFORMANCE INDICES OF BAJAJ TEMPO LIMITED DURING 1962-1996

I PHASES I 11 I 1 1 1v V VI

1962- 1974- 1978- 1982- 1986- 1990- i 1963 I975 1979 1983 1987 1991

lo lo lo lo lo to Mln Max Average 1974- 1977- 1981 1985 1989 1995- 1974 1978 1982 1986 1990 1996

I X I 0 I Y l l i X i 2 ; X I 3 1 X I 4 i xis ) X I 0

X I : ; X l h

7 746 8 723 1.741 1.884 25 44 25 78 1279 1392 0803 0 68.5 1 8bS -18 56 0158 0 2 6 0 Obbl 0 6 4 2

TABLE IV.10

TRENDS IN DIFFERENT PERFORMANCE INDICES OF MAHINDRA & MAHINDRA LIMITED DURING 1962-1996

PHASES I

j I 11 Ill IV V VI

1962- 1974- 1978- 1982- 1986- 1990- I

1963 1975 1979 1983 1987 1991 / Code to lo to to to lo Mln M a x Average 1074- 1977- 1981 1985 1989 1995-

i 1974 1978 1982 1986 1990 1996 I I General Performmocr Indices I

, P~nanct.1 Performance ladicn

X I U X I 1 XI2 X I 1

, XI4 , X I S ! X I 6 : X I '

\ I n 1 XI9 / X20 / X2I

TABLE IV.ll

TRENDS IN DIFFERENT PERFORMANCE INDICES O F TELCO IAMITED DURING 1962-1996

%I.nagrmrnI Prriormanrr lndtcn 1

- PHASES

I 1 1 111 IV v VI 1962- 1974- 1978- 1982- 1986- 1990- 1963 1975 1979 1983 1987 1991

('ode lo to to to to to Mrn Max Average 1074- 1977- 1981 1985 1989 1995- 1074 1978 1982 1986 1990 1996

--- General Perlormanre lndicw

i S?? 0 583 il 571 0 542 O W 0 758 0 5W 0 lW 1 276 0601 1 2 1554 2914 1794 2413 1910 2779 -0206 4992 2310

! Y24 (I l l 7 11 149 0218 0127 0118 0168 -000.1 0286 0142

1

1 Cmt break down indtre.; 1

TABLE IV.12

TRENDS IN DIFFERENT PERFORMANCE INDICES OF HINDUSTAN MOTORS LIMITED DURING 1962-1996

PHASES I 11 111 IV v v 1

1902- 1974- 1978- 1982- 1986- 1990- 1063 1975 1979 I983 1987 1991

('odc lo 10 lo to lo to 1974- 1977- 1981 1985 1989 19Y5- 1'174 1978 1982 1486 1990 1996

- -- .- -- .- pp

I General Purlurm~ncc Indices

I Managcn~cn! Performance lndlces

Cmt break down Indices

Mln Max Average 1

TABLE IV.13

T W N D S IN DIFFERENT PERFORMANCE INDICES O F MARUTI UDYOC 1,IMITED DURING 1986-1996

- - - - - I I

PHASES V V I I

I ')X(,. IcYXJ. 1987 I991

l o d i l o 10 to Mln Max Average i 1 VXO

! lYJ5-

j IWO I 'Hb L -. . . ~ . - - - - - -. .- -

i i

1 (Icrn.1 Ycrfarmancr lndtcn !

1 C a t brnL dorm idkn

CONCLUSIONS

In thts chapter, an attempt IS made to evaluate the financral pcrformancc of

MICCI aulomoh~le untts. In I ~ S of trends. behavtour and d e t n t n a n t s of profits.

Jtv~dcnds. fixed Inlestment. tnvcntory lnvcstment a& flow of external funds by

nmntny r c g m ~ o n equalsons 'The 0 1 ~ S c.-sllnlatrj arc worked out for Independent

\anahlcs and the spe~tficattorls arc c~p1atnc.d The major explanatory vanahlcs for the

profit arc found ICI hc salcs. markct sharc. threc years movtng average of Investment.

capactty uttltsat~on. uholrsalc prtcc ~ndcx of vch~cles. sharc of wages and cost of

capttnl 'Ihc rcsults o f rhc dtfrcrcnt cornhsnattons for select unru show that the profit

quar ton IS ha\tng tlir k t cxplandlon p u r r Of the d~ffercnt rndepcndent variables

$11 rclaiton to profit. \dlcs rexcnuc IS found to he thc most Important detcrmlnant The

markct shut shuns d I I C ~ I I I \ C coc l f i~ ten t tn case of all the firms. ma\ he due to

I I I I ~ V S I I I O ~ o r prtcc cont~vl and othcr l~ccnstng pol~ctes of the Go\sernment of lndta

tonards thc ordcrl\ grouth of autcu?ioh~lc tndustry Capacsty uttlssatton. as one of the

Jctcml~ndnts o i prvlits. shou a ~ O S I I I \ C co-cfliclent postulating the expected result

Ihc \anahlc tnrcstrncnt lndtcarc a ~ I C ~ I I I V C stgntficance whlch may be annbutcd 10

under uttllsatton o l thc plant capant? Ftnall) the cost of capital IS round to ha\,e a

p s ~ t t \ c rclatlonshlp. wsth [he fact that thc cusl of funds may he groulng. posstl\el)

utth posttt\e r a l c s of operatton In thc dtvldcnd functron, the endogenous lanahles

tncluded in the model arc found to possess g m d explanatory power whtch IS proved h?

thesr rcspcc~rvc R: values tn most of thc wlect unrts. Thc csttmated detcrmtnants of

fixed mvcstment arc cxplatnrng the vanatlons to the cxtent of 93 p e x m t to 99 percent

(R: vsluc) Wtth regard to tnventory Investment funct~on. the study reveals that the cost

of borrowtngs. d c g r a of u p r i t y utrltutton. da. flow of actanal fwrds. lnventory

turnover. Axed lnvcsunmts and l a u d lnventones arc found to m n g c as mponant

vanabler For the f low of external funds. almost all the r c l d finns show a postttve

sllyltf ican~ co-cflictcnt lor the crttmatcd vartahlcs I n the second scctlon o f thc chapter

dtffcrent rattos arc worked oul undcr erch category o f performance lndlces I n gmeral -

all the sample unats arc found to poswhs a posttlve s~~n i f i can t performance across

d t l l n c n ~ slralcgtc phases o f the stud)