FINANCIAL ANALYSIS OF

TATA MOTORS

SUBMITTED BY:
ABHIJEET KUMAR(29)
ABHISHEK MIGLANI (53)
ADITYA KEDIA (51)
AMIT KUMAR (79)
HARMAN JEET SINGH(77)
FLOW OF PRESENTATION
 EVOLUTION OF AUTOMOBILE INDUSTRY
 HISTORY
 INTRODUCTION
 BACKGROUND
 OBJECTIVES
 COST OF CAPITAL
 WORKING CAPITAL MANAGEMENT
 LEVERAGE ANALYSIS
 RATIO ANALYSIS
 CONCLUSION
 KEY LEARNINGS
 BIBLIOGRAPHY
 Evolution of Automobile Industry

Early to mid 90s

Initial Years
Manufacturing was licensed
•Seller’s market and long
Mid 90s – Early 2000s
waiting periods
•High Customs duty on import
•Buyers market
•Delicensing in 1993
•Steep excise duties &
•sales tax •Increase in Indigenization
•Removal of capacity
restrictions
•2 Major players: •Easy Auto finance
Premier Automobiles Ltd
•Decrease in customs &
& Hindustan Motors •Manufactures diversifying
excise
into related activities:
1980s finance lease, fleet
•Auto finance boom- more
management, insurance
players (foreign banks &
•Entry of MUL, better product, and used car market
non banking companies,
with government support
better schemes.
•Seller’s Market
•Long Waiting Periods
 AUTOMOBILE

PASSENGER COMMERCIAL
2 WHEELER 3 WHEELER
VEHICLE VEHICLE

I.C.V. M.C.V. H.C.V.

MOTORCYCLE SCOOTERS SCOOTERETTES MOPEDS

 KEY ENABLERS KEY CHALLENGES

• Favorable Demographics •Cost Pressure

• Improving income curve •High Expectations
• Reducing interest rates •Inadequate Infrastructure Development

Key Focus Areas

• Product development( includes collaboration, new products developed)
• Vendor base (quality of vendors, skill levels , size etc.)
• Manufacturing capability( quality levels, productivity & skill levels, technology )
• Service levels
• Supply chain
• Labor law
• Leverage IT

Key Features of Future Auto Policy

• Foreign Direct Investment
• Import tariff
• Incentives for Research and Development (R&D)
• Environmental Aspects
• Other measures
 Tata Motors - History :

 Founded & established by Mr. Jamshedji Tata in 1945 as a locomotive

manufacturing unit.

 Formerly known as Tata Engineering & Locomotive Company

(TELCO).

 Renamed as Tata Motors in 2003.

 Currently headed by Mr. Ratan Tata.

 Corporate Office
Bombay House
24, Homi Mody Street
Mumbai 400 001, India
Tel.: +(91)-(22)-56561676
 Tata Motors – An Introduction

 India’s largest Automotive company in revenue terms

 Strong R&D skills

 Capability to develop vehicle platforms indigenously at a relatively

low cost

 Began manufacturing Commercial vehicles in 1954

 Currently has four manufacturing plants at Jamshedpur, Pune,

Lucknow and Gunsan (S. Korea)
Tata Motors – An Introduction

 Widest range of product offerings in Indian market

 Medium & Heavy Commercial vehicles
 Light Commercial Vehicles including Pick –ups
 Multi-Utility vehicles
 Passenger cars

 Domestic market leader in Commercial Vehicles and third-largest

player in Passenger Vehicles

 Listed on NYSE on Sep. 27, 2004 through conversion of GDRs

 Organization Structure – TATA Motors
Senior Management Team

RRNNTata
Tata
(Chairman
(Chairman – TataMotors)
– Tata Motors)
Ravi
RaviKant
Kant
(Managing
(ManagingDirector)
Director)
PPPPKadle
Kadle
AAPPArya
Arya PPMMTelang
Telang (ED
(ED––
(President
(President––Heavy
Heavy (President
(President––Light
Light Finance
Finance&&
and Medium
and Medium and Small
and Small Corporate
Corporate
Commercial Rajiv
RajivDube Affairs)
CommercialVehicles
Vehicles Commercial
Commercial (Sr
Dube Affairs) Engineering
(Sr Vice President––
Vice President Engineering
Vehicles)
Vehicles)
Research Centre
Research Centre
Passenger
PassengerCars)
Cars)
Comparatively Speaking

Brand: Tata Ford GM

Sales: $7.6 billion $172 billion $181 billion

# of employees 33,900 246,000 266,000

Profit Margin 20% 17% 6.7%

 Reasons for fall in GDP growth rate
The first year of 11th Five Year Plan saw a marginal fall in GDP growth rate
of 9%.

• The slow down in economy.

• Increase in inflation.
• Poor credit availability.
• Hardening of interest rates
• Rise in prices of input materials.
• Proposed increase in fuel prices and volatility in foreign exchange rates.
• Manufacturing expenses, employee cost increased
• Net raw material consumption inclusive of processing charges increased ,
with pressure on volumes and margins.
 Product Profile of Tata Motors

Passenger Cars Utility Vehicles Trucks Buses Defense

Beta (β)
 the beta (β) of a stock or portfolio is
a number describing the relation of
its returns with that of the financial
market as a whole
 (β) = Coefficient corelation*SD of
stock/SD of the market
 For tata motors =115.9*-0.68/654.6
= -0.12
Cost Of capital
 The cost of capital is the cost of a
company's funds (both Debt and
equity), or, from an investor's point
of view "the expected return on a
portfolio of all the company's existing
securities".
Cost of Equity
 The annual rate of return that an
investor expects to earn when
investing in shares of a company is
known as the cost of equity

 Cost of Equity = Risk free

return+b*market premium
Cost of Equity
 For 2009-10
R(f)=8.5 % , b=-0.12, market
premium = 6 %

Thus, CoE=7.42 %
Cost of debt
 The effective rate that a company pays on
its debt.

 Cost of debt = Interest payment/Total

debt

 For 2009-10
=2239 crores/35192 crores*100=6.36
Weighted average cost of
capital
A calculation of a firm's cost of
capital in which each category of
capital is proportionately weighted.
All capital sources - common stock,
preferred stock, bonds and any other
long-term debt - are included in a
WACC calculation
WACC

WACC = E*R(e) + D*(Rd)*(1-T(c))/V

Where, E= Firm’s equity

R(e)=Cost of equity
D=Firms’s debt
R(d)=Cost of debt
T(c) = Corporate tax rate
WACC
 For year 2009-10
= 570 cr
*7.42+7635cr*7.42+35192cr*6.36/
(570+35192+7635)
=6.94 %
WORKING CAPITAL
MANAGEMENT
 Working capital, also known as net working capital
or NWC, is a financial metric which represents
operating liquidity available to a business. Along with
fixed assets such as plant and equipment, working
capital is considered a part of operating capital. It is
calculated as current assets minus current liabilities. If
current assets are less than current liabilities, an entity
has a working capital deficiency, also called a
working capital deficit.
 Working Capital = Current Assets − Current Liabilities
= 337854300000 - 340730000000
= -220,318,877
 CURRENT ASSETS
 A balance sheet account that represents the value of all
assets that are reasonably expected to be converted into cash
within one year in the normal course of business. Current
assets include cash, accounts receivable, inventory,
marketable securities, prepaid expenses and other
liquid assets that can be readily converted to cash.  
 CURRENT LIABILITIES
 A company's debts or obligations that are due within one
year. Current liabilities appear on the company's balance
sheet and include short term debt, accounts payable, accrued
liabilities and other debts.

 The total current assets and total current
liabilities have increased from 2008-09 to
2009-10. Since the total current liabilities are
greater than current assets , the net working
capital is negative for both the years. A
negative working capital is a sign of managerial
efficiency in a business with low inventory and
accounts receivable (which means they operate
on an almost strictly cash basis).
OPERATING LEVERAGE
 Operating leverage is a measure of the extent
to which, fixed operating costs are being used
in an organization.
 Formula(s) for calculating Operating leverage:
 Degree of Operating Leverage
= Contribution Margin
Earnings Before Interest and Taxes
or Total Sales  TotalVariable Cost
Total Sales  Total Variable Cost  Total Operating Fixed Cost
Calculation of Operating Leverage
for Tata Motors

DEGREE OF OPERATING LEVERAGE

YEAR 2009-10 2008-09

SALES 93611 75502

VARIABLE COST 17284 17500

EBIT 10407 2995

DOL 7.334198 19.36628

FINANCIAL LEVERAGE

 Financial leverage is the extent to which debt

(liability) is used in the Capital Structure (financing)
of the firm. Capital Structure refers to the
relationship between assets, debt (liability) and
equity. The more debt a firm has relative to equity
the greater the financial leverage.
 Degree of Financial Leverage
Percent Changein Earnings Per Share
= Percent ChangeinOperating Income

Earnings Before Interest and Taxes

or Earnings Before Interest and Taxes  Interest
Calculation of Financial Leverage
for Tata Motors

DEGREE OF FINANCIAL LEVERAGE

YEAR 2009-10 2008-09

EBIT 10407 2995

EBT 3522 2129

DFL 2.954855 1.406764

Combined Leverage
 When financial leverage is combined with operating
leverage the effect of a change in output (sales) in
magnified in the change in earning per share (EPS).
Operating leverage gives us the change in EBIT with a
change in sales and financial leverage gives us the
change in EPS with a change in EBIT. We cam then see
the change in EPS for a change in sales (volume of
output). The combining both concepts as can be seen
below:
 Degree of Combined Leverage
Percent Change in Earnings Per Share
+
Percent Change in Sales (or volume)
or= Degree of Operating Leverage x Degree of Financial
Leverage
Calculation of Total Leverage for
Tata Motors

DEGREE OF TOTAL LEVERAGE

YEAR 2009-10 2008-09

DOL 7.334198 19.36628

DFL 2.954855 1.406764

DTL 21.67149 27.24378

Ratio Analysis
Operational &
Financial Ratios
Earning per share:
 The portion of a company's profit allocated to each outstanding
share of common stock. Earnings per share serves as an
indicator of a company's profitability.
 
 In case of Tata Motors the EPS it has had a phenomenal
rise from 19.4 to 39. This implies that the company has
been profitably working for shareholders benefit.

Calculated as:
Net Income- Dividend on Preference Stock
Average outstanding Shares
Dividend per share:

 The the sum of declared dividends for every ordinary share

issued. Dividend per share (DPS) is the total dividends paid out
over an entire year (including interim dividends but not including
special dividends) divided by the number of outstanding ordinary
shares issued. Now in case of Tata Motors the dividend per
share has increased from 6 to 15. This implies that it will be
valuable for the shareholders to hold on to the Tata Motors
shares.
DPS can be calculated by using the following formula:
DPS = (D – SD)/ S
D - Sum of dividends over a period (usually 1 year)
SD - Special, one time dividends
S - Shares outstanding for the period.
Performance Ratios
 
Return on Assets Or Return
on investments:
 This is an important ratio for companies deciding whether
or not to initiate a new project. Simply put, if ROA is
above the rate that the company borrows at then the
project should be accepted, if not then it is rejected.
 ROA formula is mentioned below as:
 Net Income + Interest Expense
 Total Assets
 The return on asset for Tata Motors has increased
from .98 to 1.23, now this specifies that the assets
have been efficiently utilised and being put to the
best use and now the deciding rate for acceptance
of the project the ROA has to be 1.23, otherwise
the project under evaluation will be discarded.
Return on Equity:
 The amount of net income returned as a percentage of
shareholders equity. Return on equity measures a
corporation's profitability by revealing how much profit a
company generates with the money shareholders have
invested.  

ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's
Equity
 The return on equity(ROE) In case of Tata Motors
has increased from -70% to 329%, this implies that
the profitability generated by the company after
investing the shareholders’s funds has increased.
RETURN ON CAPITAL
EMPLOYED:
 A measure of the returns that a company is realizing
from its capital. Calculated as profit before interest and
tax divided by the difference between total assets and
current liabilities. The resulting ratio represents the
efficiency with which capital is being utilized to generate
revenue.
 Also the ROCE in case of Tata Motors has increased from
6.41 to 9.66, this implies and focuses on the efficiency
level with which the capital is being employed and
further used by the Tata Motors.
Equity and Total Debt Ratio:

 A measure of a company's financial leverage calculated

by dividing its total liabilities by stockholders' equity. It
indicates what proportion of equity and debt the
company is using to finance its assets.

Total Liability / Shareholder’s Equity

 This ratio has remained consistent for the Tata Motors

over two three years. So we can say that the financing
proportion has been consistent over years.
Liquidity Ratios
Quick Ratio:

 An indicator of a company's short-term liquidity. The quick

ratio measures a company's ability to meet its short-term
obligations with its most liquid assets. The higher the
quick ratio, the better the position of the company.

The quick ratio is calculated as:

(Current Assets – Inventories)/ Current Liability
The quick ratio of Tata Motors is around 8 which is very
high as compared to the ideal ratio that should be 1:1,
that states the company’s short term liquidity is not at all
satisfactory.
Current Ratio:
 A liquidity ratio that measures a company's ability to pay
short-term obligations. The adequate current ratio is
2:1. In case of Tata Motors the current ratio is .39,
which signifies that the company has to look into the
short term workings of the company.

 The Current Ratio formula is:

=337854300000 = 0.62
340730000000
 RATIOS OF TATA MOTORS:

Particulars Mar 2010 Mar 2009 Mar 2008 Mar 2007 Mar 2006

Operational &
              
Financial Ratios
   Earnings Per Share
39   19.4   23.40   17.41   12.22  
(Rs)
   DPS(Rs) 15.00   6.00   4.50   3.50   2.80  

Performance Ratios               

   ROA(%) 1.23   0.98   0.90   0.98   0.89  

   ROE(%) 17.77   12.21   19.42   16.89   13.89  
   ROCE(%) 6.73   5.54   5.45   5.11   4.52  
EPS Growth(%) 68.90   27.95   34.41   42.47   1.66  

Liquidity Ratios               

  Total
1.11   0.8   0.8   0.6   1.1  
Debt/Equity(x)
  Current Ratio(x) 0.62  0.44   0.46   0.54   0.47  
  Quick Ratio(x) 0.46   0.28   0.24   0.38   0.32  
CONCLUSION
 As on 31st March 2010, the Tata Motors Capital Adequacy Ratio at
13.69% was well above the minimum regulatory requirement of 9%.
 The Tata Motors has pursued an effective strategy over the years to
develop the retail liabilities business, the success of which is reflected
in the fact that savings Tata Motors deposits have grown at a
Compounded Annual Growth Rate (CAGR) of 64% between the years
2000 and 2009.
 The Tata Motors risk management approach relies on the establishment
of comprehensive processes and internal control mechanisms.
 The overall performance in 2008-09 was supported well by a healthy
rise in core income streams such as net interest income and fee
income.
 Portfolio diversification remains the key for managing asset quality and
preventing concentration risks.
Key Learnings
 The Tata Motors strategy to build its business upon strong
customer franchises has continued to deliver impressive
results, and they have continued to extend there reach as well
as deepen existing customer relationships.
 The Tata Motors strives for the continual enhancement of
shareholder value through efficient use of available capital in a
manner that leads to a high return on equity.
 Efforts were made through the year to offer integrated
corporate Tata Motoring solutions to the Tata Motors clientele,
which resulted in significant growth in core fee income.
 For market risk management, the Tata Motors uses both no
statistical measures like position, gaps and sensitivities and
statistical measures like Value at Risk, supplemented by stress
tests and scenario analysis.