tvs motor finance 2010

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Objectives

This study is to analyze the financial position of TVS Motor, an Indian

automobile manufacturer, from the perspective of potential investor. Financial statements

of past 6 years are used to compare the past performance and profitability of the firm.

Ratio analysis is used as a tool to calculate the strengths and weaknesses over a period of

time and to compare with a similar profile competitor. Past 3 years statements are used in

comparing the ratios with the competitor. In this financial analysis I will identify the

financial strengths and weaknesses of the firm by calculating various ratios to establish

the relationships between the items in the balance sheet and the profit & loss account .

Executive Summary

1. TVS Motor is in a financially bad position compared to its historical performance.

2. ROI has been declining but it is similarly placed in liquidity ratios when

compared with its competitor in the industry.

3. Sales have dropped along with the overall market conditions, so can assume to

recover when economy recovers.

4. Liabilities have increased due to increased investment in new manufacturing

facilities and bringing new products which have not contributed to the

profitability.

5. There is financial risk in making investment into this firm due to low interest

cover, but this could improve with future economics of scale

6. I would recommend more analysis which should include firm‟s loss making

subsidiaries before making the final decision on investment.

Introduction

„TVS Motor Company Limited‟ is the third largest two-wheeler manufacturer in

India, with annual turnover of more than USD 1 billion in 2008-2009 (TVS Motor ). TVS

Motor currently manufactures low end mopeds, automatic scooters, different motorcycles



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and three wheelers for passenger market. The company has 3 manufacturing plants in

India and one at Indonesian subsidiary with total production capacity of 2.5 million units

a year.

There are around 10 two-wheeler manufactures in India out of which this study

uses „BAJAJ auto Limited‟ for comparative purposes. BAJAJ Auto is the second largest

two-wheeler manufacturer ( Bajaj Auto) with products similar to TVS. Also BAJAJ Auto

was demerged in 2008 making it a pure auto company much similar to TVS while other

two-wheeler manufactures are either not publicly traded or have more portfolios in their

business.

Data for this study is primarily collected from corresponding firm‟s official

websites. The balance sheet and Profit & Loss account statements are included in

Appendix-C for reference. Calculations were carried out by copying the data to Excel

work book and the formulas used for various ratio calculations are listed in Appendix-A.

Sales trend of overall market is included as Appendix-B.

Financial statement highlights

Sales revenue declined sharply during financial year 2007-2008 due to drop in

sales during recession. Before the recession the firm was investing heavily to increase

production and to diversify to different geographies. Two manufacturing plants were

added to assets during that time with corresponding increase in liabilities.

Some items described in the annual report should also be highlighted to

understand the limitations of using only the financial statements for this analysis. The

cash flow statement is prepared under “indirect method” and so no data has been taken

from it. Interest is shown as net interest after considering interest income in profit and

loss statement but for this analysis, I considered the actual payable interest amount.

Product development expenses are amortized over three years instead of writing it off

each year.



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Ratio analysis

Ratio analysis is useful to compare the risk and return relationships of different

times of firms ( Atril and McLaney 2008). This study also compares „TVS Motor‟ with its

competitor „BAJAJ Auto‟ to establish its position against others in the industry.

Liquidity ratios

Liquidity ratios attempt to measure a company's ability to pay off its short-term

debt obligations. The greater the coverage of liquid assets to short-term liabilities the

better, as it is a clear signal that a company can pay its debts that are coming due in the

near future and still fund its ongoing operations. On the other hand, a company with a

low coverage rate should raise a red flag for investors as it may be a sign that the

company will have difficulty meeting running its operations, as well as meeting its

obligations.

Figure 1 Liquidity ratios of TVS for past 5 years

Current ratio

Current ratio indicates the availability of current assets with that of current liability. We

can see that over 5 years current ratio has increased from unsatisfactory level of 0.94 to

satisfactory level of 1.37. This compares favourably with its competitor which has the ratio

below 1.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2005 2006 2007 2008 2009

Liquidity ratios

Current ratio

Quick ratio



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Current ratio

2008 2009

TVS 1.36707543 1.45116347

Bajaj 0.87877206 0.953933442

Quick ratio

Quick ratio shows the relationship between liquid assets which can be converted to cash

and current liabilities. Quick ratio of TVS is not satisfactory as they are short with their assets to

pay the liabilities, as in all 5 years the quick ratio is less than 1. But when compared with its peer

it looks indeed that TVS is placed better than BAJAJ .

Quick ratio

2008 2009TVS 0.651804146 0.930646445

Bajaj 0.692540843 0.814925581

Financial gearing

Financial gearing shows the proportions of debt and equity in financing the firm‟s assets.

These ratios can be used to determine the overall level of financial risk the firm is taking and its

ability of using debt to shareholder‟s advantage.

Figure 2 Leverage ratios of TVS for past 5 years

0

5

10

15

20

25

30

35

40

2005 2006 2007 2008 2009

Leverage ratio

Gearing ratio

Interest cover



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Gearing ratio shows the firm's long term debt expressed as a percentage of its equity.

This ratio has been maintained by TVS for quite some time and compares equally with BAJAJ.

Interest cover ratio measure the operating profit with respect to the interest payable by the firm.

This ratio for TVS is too small and the probability of making loss with a small reduction in profit

is high. When compared with its competitor BAJAJ, the dangerously low level is clearly visible.

Increasing the profitability or converting some of the debt to equity should increase this ratio.

Gearing Interest cover

2008 2009 2008 2009

TVS 45.47232 56.552 TVS 3.770706 1.867822

Bajaj 26.47059 49.3585 Bajaj 172.0194 38.27939

Efficiency ratios

Efficiency ratios reflect the firm‟s efficiency in utilizing its assets. These ratios look at

how efficiently and effectively a company is using its resources to generate sales and increase

shareholder value.

Figure 3: Efficiency ratio of TVS for past 5 years

0

1

2

3

4

5

6

7

8

2005 2006 2007 2008 2009

Efficiency ratio

Total asset turnover

Fixed asset turnover



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TVS motor‟s total production capacity is 2.5 million but sales are only 1.4 million, which

is why the asset utilisation has reduced from earlier levels. The values look similar when

comparing with the competitor and show the overcapacity of whole industry.

Total asset utilisation Fixed asset utilisation2008 2009 2008 2009

TVS 4.612513 4.805521 TVS 2.665343 2.647753

Bajaj 3.544019 4.553311 Bajaj 3.065964 2.683074

Profitability ratios

Profitability ratios measure overall performance and effectiveness of the firm in

generating profit, and are calculated by establishing relationships between sales and assets.Return on investment (ROI) shows the operating profit with respect to fixed assets and return on

shareholder fund (ROSF) shows net profit to capital including reserves. Both these measures are

considered as primary ratios for business performance along with operating margin which shows

operating profit to sales ratio.

Figure 4: Profitability ratio of TVS for past 5 years

0

5

10

15

20

25

30

2005 2006 2007 2008 2009

Profitability Ratio

Operating margin

ROSF

ROI



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When compared with BAJAJ the decreasing returns are clearly visible particularly the

gross profit margin is similar for both. It seems TVS needs to increase its sales to get the

economics of scale to improve its return on investment.

Return On Investment Gross profit margin2008 2009 2008 2009

TVS 2.951463 7.532943 TVS 21.01218 22.13894

Bajaj 17.60857 25.28444 Bajaj 21.49474 21.68811

Investor‟s ratios

Investor‟s ratio shows the returns to the share holders of the firm . Earnings per share

(EPS) show the returns to the investors from the profitability of the firm. Book value per share

shows the wealth created by business for the owners. As we can see below, TVS motor‟s EPS

has been decreasing and stays at very low due to decreasing profits. We can also see that

investor‟s wealth did not increase as one would prefer for past few years.

Figure 5: Investor's ratio of TVS for past 5 years

0

5

10

15

20

25

30

35

40

2005 2006 2007 2008 2009

Investor's ratio

Earnings per share

Book value per share



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Stock performance

Stock price of TVS motor ( BSE-TVS) has been declining for past few years and didn‟t

quite follow the overall stock market trend ( BSE500-Auto). We can also see that sock value

decreases during the March-April period which is when annual report is released showing clear

sign of investor‟s wrath for declining profits. Although stock prices has been increasing for past

few months along with the overall market sentiments, we need to wait for the year end results to

see whether TVS could increase its sales and profit.

Figure 6: Stock price of TVS for past 5 years

Figure 7: Share market for past 5 years (AUTO and BSE500)



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Conclusion

As we have seen in this analysis, current financial position of TVS motor is not so

healthy. It has invested heavily in new manufacturing plants and introducing new products when

the overall market has shrunk. The risk of investing in this firm at this point is very high but we

cannot ignore the risk reward relationship. The reward for the investor will be high if the new

products are favourably received in the market. Apart from the financial position of the

company, we also need to see its future prospects in the industry. Also this study did not consider

the financial details of its loss making subsidiaries as these details are not readily available in the

public domain. I would recommend the potential investor to do more analysis on future prospects

and performance of the subsidiary companies before taking the final decision.



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Appendix-A

1. Current ratio = Current assets / current liabilities

a. Current assets = Cash and near cash + Inventories

2. Quick ratio = Cash and near cash / current liabilities

3. Gearing ratio = non-current liabilities / average assets

a. average assets = capital + reserves + non-current liabilities calculated as averageof current year and last year

4. Interest cover = Operating profit / Interest

5. Total asset utilisation = sales / average assets

6. Fixed asset utilisation = sales / Fixed assets (Non-current assets)

7. Operating margin = Operating profit / sales * 100

8. Gross margin = Gross profit / sales * 100

9. Return on investment (ROI) = Operating Profit / average assets

10. Return on shareholder’s funds (ROSF) = Net profit less dividend / Average of

shareholder’s funds a. shareholder’s funds = Capital + reserves and surplus

11. Earnings per share (EPS) = Profit before extraordinary items / number of ordinary shares

12. Book value per share = shareholder’s funds / number of ordinary shares



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Appendix-B

Sales

Total sales of two wheelers have reduced in the past two years from their peak in 2007. Sales of

TVS motor as well as BAJAJ is also following similar trend as can be seen from below graph. TVS was

lagging behind in introducing new products covering different market during the upward trend of 2005 to

2007. It has introduced new products over the last 2 years which helped it to minimize the declining sale.

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Sales Trend

TVS

Bajaj

Total

TVS

Bajaj

tvs motor finance 2010

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