UNIVERSITY BUSINESS SCHOOL

Financial Management
Mahindra & Mahindra

Submitted to: Dr. Suveera Gill

Submitted by: Arjun Nanda MBA Gen Section B

Contents
Question 1: Executive summary of the company and its industry. .................................................... 3 Question:2 How much did the company spend on capital expenditures for each of the last five years? Were the capital expenditure increasing or decreasing? Is their capital spending consistent or erratic?.......................................................................................................................................... 11 Question:3 What are the account balances for properties, plant and equipment for the five most recent years? What percent of properties, plant and equipment does the company replaces every year?.................................................................................................................................................. 14 Question: 4 Comment on the capital structure of the company. Compare the capital structure of the selected company with that of five other companies in the same industry. ............................. 15 Question-5 What is the beta measure of the company. .................................................................. 20 Question-6 Calculate the weighted average cost of capital (WACC) of the company. .................... 22 Question-7 What are the five year high and the five years low for the companys debt equity ratio? Compare the debt equity ratio of the selected company with that of five other companies in the same industry. ............................................................................................................................ 24 Question: 8 Construct Du Pont identity for the company ................................................................ 26 Question 9: What are the annual growth rates in the Earnings per share (EPS) and Dividend?...... 30 Question 10: What is the companys Current Payout Ration compared to its historical Payout Ratio? ................................................................................................................................................ 32 Working Capital Position................................................................................................................... 33 Cash Positions ................................................................................................................................... 35 Short Term Financing ........................................................................................................................ 37 Credit Policy ...................................................................................................................................... 39 Inventory Management Policy .......................................................................................................... 41 References: ....................................................................................................................................... 43

Question 1: Executive summary of the company and its industry. Overview of the automotive industry in India:
India is emerging as a source of high value and advanced quality engineering products and services for multinational companies. India is set to emerge not only as a large domestic market for automotive manufacturers, but also as a crucial link in the global automotive chain. Among other industries, the automotive industry in India is understood to be the most dynamic. It has been experiencing strong growth rates after delicensing of the industry in 1991, when major economic reforms took place in India.

A snapshot of the Indian automotive industry:

Indias auto industry is growing fast, but it remains a two-wheel nation. More than 78 percent of motor vehicles on the road are two-wheelers, their popularity driven by low price, high fuel mileage, and an ability to maneuver deftly through Indias dense traffic. For the last eight years, the two-wheeler market has grown at a compounded annual growth rate of 13 percent; in 2007, 8 million units were sold. Over the next seven years, we expect the number sold to nearly double, to 15 million units per year. But even as the market grows, motorbikes face a pack of ultra-low-cost four-wheel challengers: the Sub-A segment automobiles exemplified by Tata Motors Ltd.s $2,500 Nano. The recently launched Nano bridges the gap between 1,000 motorbikes and $5,000 cars. cars from Tata and Bajaj Auto Ltd., the industry is walking the market down the demand curve; the low prices will quadruple the number of potential new-car buyers. While the Sub-A segment gains traction, Indias auto market remains dominated by cars in the A (small) and B (compact) segments, which together account for about 65 percent of sales.

Global small-car players like Hyundai, Suzuki (including Maruti), and Honda, traditionally the leaders in India, now face stiff competition from local manufacturers such as Tata and Bajaj. Renault has partnered with local players Mahindra and Bajaj. In the D segment

(midsize) and higher, the market has been dominated by global manufacturers like Toyota, Volkswagen, Daimler, and BMW.

The overall passenger vehicle market in India is expected to grow from 1.7 million units in 2008 to 2.4 million units by 2013, surpassing the markets in Italy and Spain. By 2012, annual car sales worldwide will increase by about 11 million units per year, with India expected to account for 20 percent of the increase. At that point, India will become the world leader in small-car market growth.

The economic underpinnings of this growth are strong. A historic structural shift in the Indian economy will continue to generate great wealth. Back in 1950, agriculture accounted for more than 50 percent of Indias GDP; today, agriculture accounts for only 15 percent and that share will shrink further. Rapid urbanization drives the need for commercial transportation.

Consider the need to keep food cold: 30 percent of agricultural produce in India now perishes en route to the market due to refrigeration gaps in the supply chain; hence, there is a nationwide need for refrigerated trucks. Rail transport once dominated the people-moving business. No more. Roadway passenger traffic is expected to increase from 40 percent of the total in 2007 to 55 percent by 2020. Meanwhile, an expected increase in defense spending will prompt new demand for commercial vehicles intended for military use. Domestic manufacturers such as Tata and Ashok Leyland Ltd. dominate the militarycommercial market with a diverse product portfolio, while foreign manufacturers like Daimler and AB Volvo remain niche players. The small commercial vehicle segment is growing most quickly, attracting new players both foreign and domestic. Today, India boasts the worlds third-largest market for new commercial vehicles. Because it is also the worlds second-fastest-growing commercial market, its future looks even brighter.

Largest manufacturers in the automotive industry:

The largest Indian passenger car manufacturers include Tata Motors, Maruti Suzuki, Mahindra & Mahindra and Hindustan Motors. Presence of foreign players such as MercedesBenz, Fiat, General Motors and Toyota is also growing in this segment. Recently, the passenger car segment has also seen the entry of other global majors such as BMW, Audi, Volkswagen and Volvo. Major Indian manufacturers of commercial vehicles are Tata Motors, Ashok Leyland, Eicher Motors, Mahindra & Mahindra and Force Motors. Like the passenger car segment, this segment has also seen foreign companies such as Mercedes- Benz and Hyundai entering the market. Two-wheeler manufacturing is dominated by Indian companies like Hero Honda, Bajaj Auto and TVS. Foreign players in this segment include Honda, Yamaha and Piaggio. Three-wheeler manufacturing is also led by Indian companies that include Bajaj Auto, Force Motors and Mahindra & Mahindra.

Figure 1: Market Share Distribution for Light Commercial Vehicles in India.

Figure 2: Market Share Distribution for Utility Vehicles in India.

About the Company Mahindra & Mahindra Ltd.

Mahindra embarked on its journey in 1945 by assembling the Willys Jeep in India and is now a US $7.1 billion Indian multinational. It employs over 1,00,000 people across the globe and enjoys a leadership position in utility vehicles, tractors and information technology, with a significant and growing presence in financial services, tourism, infrastructure development, trade and logistics. The Mahindra Group today is an embodiment of global excellence and enjoys a strong corporate brand image.

Mahindra is the only Indian company among the top tractor brands in the world. It is today a full-range player with a presence in almost every segment of the automobile industry, from two-wheelers to CVs, UVs, SUVs and sedan. Mahindra recently acquired a majority stake in REVA Electric Car Co Ltd. (now called Mahindra REVA), strengthening its position in the Electric Vehicles domain.

Over the past few years, M&M has expanded into new industries and geographies. They entered into the two-wheeler segment by taking over Kinetic Motors in India. The US based Reputation Institute recently ranked Mahindra among the top 10 Indian companies in its 'Global 200: The World's Best Corporate Reputations' list.

Mahindra & Mahindra is a major automobile manufacturer of utility vehicles, passenger cars, pickups, commercial vehicles, and two wheelers. Its tractors are sold on six continents It has acquired plants in China and the United Kingdom, and has three assembly plants in the USA.

M&M has partnerships with international companies like Renault SA, France and International Truck and Engine Corporation, USA.

M&M has a global presence and its products are exported to several countries. Its global subsidiaries include Mahindra Europe, based in Italy, Mahindra USA Inc., Mahindra South Africa and Mahindra (China) Tractor Co. Ltd.

M&M made its entry into the passenger car segment with the Logan in April 2007 under the Mahindra Renault joint venture. M&M will make its maiden entry into the heavy trucks segment with Mahindra Navistar, the joint venture with International Truck, USA.M&M's
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automotive division makes a wide range of vehicles including MUVs, LCVs and three wheelers. It offers over 20 models including new generation multi-utility vehicles like the Scorpio and the Bolero. It formerly had a joint venture with Ford called Ford India Private Limited to build passenger cars.

At the 2008 Delhi Auto Show, Mahindra executives said the company is pursuing an aggressive product expansion program that would see the launch of several new platforms and vehicles over the next three years, including an entry-level SUV designed to seat five passengers and powered by a small turbodiesel engine. True to their word, Mahindra & Mahindra launched the Mahindra Xylo in January 2009.. Also in early 2008, Mahindra commenced its first overseas CKD operations with the launch of the Mahindra Scorpio in Egypt, in partnership with the Bavarian Auto Group. This was soon followed by assembly facilities in Brazil.

Mahindra plans to sell the diesel SUVs and pickup trucks in North America through an independent distributor, Global Vehicles USA, based in Alpharetta, Georgia. CKDs are complete vehicles that will be assembled in the U.S. from kits of parts shipped in crates. In 2010, India's Mahindra & Mahindra Limited was named as the preferred bidder to acquire the bankruptcy-protected SsangYong Motor Company. Mahindra is expected to gain a controlling stake in the company by March 2011 and the planned acquisition has been approved by South Korea's Free Trade Commission.

Performance Review Your Companys Automotive Division recorded total sales of 2,89,333 vehicles and 64,740 three-wheelers as compared to 2,36,759 vehicles and 45,360 three-wheelers in the previous year registering a growth of 22.2% and 42.7% in vehicle sales and three-wheeler sales respectively.

On the domestic sales front, your Company sold 2,74,793 vehicles [including 2,30,110 Multi Utility Vehicles (MUVs), 35,493 small 4-wheelers 0.75 Ton cargo/passenger and 9,190 mini 4 wheelers 0.5 Ton cargo/passenger] registering a growth of 21% over the previous years volumes of 2,27,114 vehicles [including 2,14,128 MUVs, 3,722
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small 4-wheelers 0.75 Ton cargo and 9,264 mini 4 wheelers 0.5 Ton cargo]. The domestic sales volumes of 62,142 three-wheelers was higher by 39.8% as compared to the previous years volume of 44,438 three-wheelers. Your Companys MUV sales volume grew by 7.5% and your Company continued its leadership of the domestic MUV market by posting a market share of 60.9%. All products of your Companys Passenger MUV portfolio performed very well. Bolero volumes grew by 17.8% over the previous year and Bolero is currently Indias largest selling MUV for five consecutive years. Scorpio and Xylo volumes also posted an impressive growth of 19.1% and 14.6% respectively.

In February, 2010, your Company had launched Maxximo in a very competitive small 4wheeler cargo segment (0.75 Ton). During the first full year of sales, Maxximo has impressively established itself in the market, with a sales volume of 35,464 vehicles and a market share of 19.1%.

With an aim to strengthen its product portfolio and to offer better products, your Company has launched four new products viz. Genio, Maxximo Mini Van, Compact CabGio Passenger and Thar which have received good response from the customers.

In the Overseas market, your Company registered a volume growth of 62.2% over the previous year. This growth was driven by volume growth in SAARC, Chile and South Africa. During the year under review, your Company sold 14,540 vehicles [including 305 vehicles sourced from Mahindra Navistar Automotives Limited (MNAL)] and 2,598 three-wheelers in the Overseas market as compared to 10,567 vehicles [including 1,323 vehicles sourced from MNAL] and 922 threewheelers in the previous year.

Spare parts sales for the year stood at Rs.666.97 crores (including Exports of Rs.28.3 crores) as compared to Rs.514.96 crores (including Exports of Rs.22.4 crores) in the previous year, registering a growth of 29.5%.

Board Of Directors: Keshub Mahindra, Chairman Anand G. Mahindra, Vice-Chairman & Managing Director Deepak S. Parekh K. Nanda Nadir B. Godrej M. M. Murugappan Narayanan Vaghul S. Ganguly R. K. Kulkarni Anupam Puri Arun Kanti Dasgupta, Nominee of Life Insurance Corporation of India Bharat Doshi, Executive Director Narayan Shankar, Company Secretary

Accolades & Recognition:

Best In Class Manufacturing Leadership-International India Innovation Summit Automotive Manufacturing Supply Chain Excellence based on Nielsen Study National Award for Value Engineering Autobild Technology Award for Micro Hybrid Xylo-UV of the Year award by NDTV, CNBC, Zig Wheels CII National Energy Management Award 2009-Kandivali Plant 1st prize in the National Energy Conservation Award -2009-Zaheerabad Plant Best Kaizen award at CII-Nashik Plant 1st prize at National Awards of INSSAN-Kandivali,Autosector State level Energy Conservation Award -2009-Haridwar Plant Auto Sector, Kandivli wins Award of Awards in Energy Conservation and Management CII National Award for Water Management-Nashik Plant SPJIMR Marketing Impact Awards 2010

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Question:2 How much did the company spend on capital expenditures for each of the last five years? Were the capital expenditure increasing or decreasing? Is their capital spending consistent or erratic?

Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life that extends beyond the taxable year. Capex are used by a company to acquire or upgrade physical assets such

as equipment, property, or industrial buildings. In accounting, a capital expenditure is added to an asset account ("capitalized"), thus increasing the asset's basis (the cost or value of an asset as adjusted for tax purposes). Capex is commonly found on the cash flow statement as "Investment in Plant Property and Equipment" or something similar in the Investing subsection. For tax purposes, capital expenditures are costs that cannot be deducted in the year in which they are paid or incurred and must be capitalized. The general rule is that if the property acquired has a useful life longer than the taxable year, the cost must be capitalized. The capital expenditure costs are then amortized or depreciated over the life of the asset in question. As stated above, capital expenditures create or add basis to the asset or property, which once adjusted, will determine tax liability in the event of sale or transfer. Capital expenditures are amounts spent on: 1. acquiring fixed assets 2. fixing problems with an asset that existed prior to acquisition if it results in a superior fixture 3. preparing an asset to be used in business 4. restoring property or adapting it to a new or different use 5. starting a new business

Analysis of Capital Expenditure of Mahindra & Mahindra Ltd from Financial Year 2006-07 to Financial Year 2010-2011: (Rupees crores)

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Sr. no. Year 1 2 3 4 5 2010-2011 2009-2010 2008-2009 2007-2008 2006-2007

Capital Expenditure 1367.28 1636.6 1455.4 907.31 864.61

Change in Capital Expenditure -269.32 181.2 548.09 42.7 518.47

Capital Expenditure of Mahindra & Mahindra Ltd from Financial Year 2006-07 to Financial Year 2010-2011:

Capital Expenditure
1800 1600 1400 1200 1000 800 600 400 200 0 1636.6 1455.4 1367.28

864.61

907.31 Capital Expenditure

Analysis: From the figure, it is evident that the capital expenditure for Mahindra & Mahindra increased at a rapid rate from FY 2006-07 to FY 2009-2010. There was a slight decrease in the capital expenditure for FY 2010-2011.

The major items of capital expenditure were for Capital Enhancement, New Product Development and Research and Development.

Thus in the past five years, the capital expenditure has been increasing as a general trend but the increase has been somewhat erratic.

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Future Capital expenditure plans for Mahindra & Mahindra:

Also, Mahindra & Mahindra has pegged a capital expenditure of Rs 5,800 crore over the next three years (fiscal 2012, 2013 & 2014), which will be used for the expansion of various group companies.

M&M's automotive unit plans to launch 8 products by March-end 2012, to boost demand. Automobile sales surged over 30% in 2010-11, but are expected to slowdown to around 16% due to a high base of last year, coupled with rising interest rates and fuel prices. Among the new products that the company plans to launch includes the much talked about global sports utility vehicle (SUV). The company also hopes to launch the Reva NXR by end of the current fiscal year. The Reva NXR will be a four-seater electric passenger car from Mahindra Reva. M&M had acquired Bangalore based Reva last year in its attempt to gain access to and build ecofriendly electric vehicles. Meanwhile, Mahindra 2-wheelers will also re-launch its Stallio motorcycle apart from launching the Mojo motorcycle this fiscal.

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Question:3 What are the account balances for properties, plant and equipment for the five most recent years? What percent of properties, plant and equipment does the company replaces every year?
(Rupees crores) Years Freehold Land Leasehold Land Buildings 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 40.61 54.32 279.28 43.73 64.48 359.36 982.03 45.05 52.98 1547.63 53.73 63.96 398.42 1,079.75 55.54 68.17 1719.57 56.18 58.3 484.75 1,610.91 70.08 76.76 2356.98 48.92 59.69 502.11 1,643.30 68.14 73.44 2395.6 48.89 59 783.16 1,912.02 77.09 78.45 2958.61

Plant and machinery 899.89 Furniture and fittings 38.72 Vehicles Total 44.13 1356.95

(All figures in Rupees Crores) (All figures are net balances after taking additions, deduction, adjustments and depreciation into account)

Years

2006-07 2007-08 2008-09 2009-10 2010-11 1719.57 1547.63 17.1957 2356.98 1719.57 23.5698 2395.6 2356.98 23.956 2958.61 2395.6 29.5861

Net PPE before Commencement of year 1547.63 Net PPE at the end of the year Replacement Percentage 1356.95 15.4763

The assets of Mahindra & Mahindra Ltd. including land, buildings, plant and machinery, furniture and fittings, vehicles have seen continuous additions over the period 5 years ( 200607 to 2010-11) for which the financial performance of the company was studied.

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Question: 4 Comment on the capital structure of the company. Compare the capital structure of the selected company with that of five other companies in the same industry.
In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. When people refer to capital structure they are most likely referring to a firm's debt-to-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is relatively highly levered. A wise mix of debt and equity can increase the return on equity for two reasons : 1: Debt is generally cheaper than equity. 2: Interest payment are tax deductible expenses, whereas dividends are paid from taxed profits. In addition, dividend payment attracts dividend distribution tax.

The Capital structure for Mahindra & Mahindra is as: (Rupees crores) Years 2006-2007 2007-2008 239.07 4,098.53 617.26 1,969.80 0.6 2008-2009 272.62 4,959.26 981 3,071.76 0.77 2009-2010 282.95 7,527.60 602.45 2,277.70 0.37 2010-2011 293.62 9,974.62 407.23 1,998.06 0.23

Equity Share Capital 238.03 Reserves Secured Loans Unsecured Loans Debt Equity Ratio 3,302.01 106.65 1,529.35 0.46

Where, Total Debt = Secured Loans + Unsecured Loans Total Equity = Reserves + Equity Share Capital

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Capital Structure for the financial year 2006-2007

Equity Share Capital Reserves Secured Loans Unsecured Loans

Capital Structure for the financial year 2007-2008

Equity Share Capital Reserves Secured Loans Unsecured Loans

Capital Structure for the financial year 2008-2009

Equity Share Capital Reserves Secured Loans Unsecured Loans

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Capital Structure for the financial year 2009-2010

Equity Share Capital Reserves Secured Loans Unsecured Loans

Capital Structure for the financial year 2010-2011

Equity Share Capital Reserves Secured Loans Unsecured Loans

The Graph showing debt equity ratio is as:

Debt Equity Ratio

0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Debt Equity Ratio

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From the above figure, it can be assessed that the company increased the share of debt in its capital structure from financial year 2005-06 to the financial year 2008-09. This is followed by a decrease in debt in the financial year 2009-10. The reason can be that cost of debt is lower than the cost of other forms of financing to the company or there was a need to raise funds urgently. The major benefit of debt financing is the tax shield. But on the other hand, higher proportion of debt in capital structure can make the company more vulnerable to bankruptcy.

From the figure above we can see that over the last year there has been a major overhaul in the capital structure of the company. The company has successfully repaid a major portion of the debt in the financial years 2009-10 and 2010-11 and the share of equity financing has gone up.

Capital Structure for Bajaj Auto Ltd: (Rupees crores) Years Equity Share Capital Reserves Debt Debt/Equity Ratio 2011 289.37 4,620.85 325.15 0.07 2010 144.68 2,783.66 1,338.58 0.46 2009 144.68 1,725.01 1,570.00 0.84 2008 144.68 1,442.91 1,334.34 0.84 2007 101.18 5,433.14 1,625.43 0.29

Capital Structure for Tata Motors Ltd: (Rupees crores) Years Equity Share Capital Reserves Debt Debt/Equity Ratio 2011 634.65 19,351.40 15,898.75 0.8 2010 570.6 14,208.55 16,625.91 1.12 2009 514.05 11,855.15 13,165.56 1.06 2008 385.54 7,428.45 6,280.52 0.8 2007 385.41 6,458.39 4,009.14 0.59

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Capital Structure for Maruti Suzuki India Ltd: (Rupees crores) Years Equity Share Capital Reserves Debt Debt/Equity Ratio 2011 144.5 13,723.00 309.3 0.02 2010 144.5 11,690.60 821.4 0.07 2009 144.5 9,200.40 698.9 0.07 2008 144.5 8,270.90 900.2 0.11 2007 144.5 6,709.40 630.8 0.09

Capital Structure for Hero Honda Motors Ltd: (Rupees crores) Years Equity Share Capital Reserves Debt Debt/Equity Ratio 2011 39.94 2,916.12 1,491.16 0.5 2010 39.94 3,425.08 66.03 0.02 2009 39.94 3,760.81 78.49 0.02 2008 39.94 2,946.30 132 0.04 2007 39.94 2,430.12 165.17 0.07

Capital Structure for TVS Motors Ltd: (Rupees crores) Years Equity Share Capital Reserves Debt Debt/Equity Ratio 2011 47.51 951.9 785.42 0.79 2010 23.75 841.63 1,003.29 1.16 2009 23.75 789.38 905.98 1.11 2008 23.75 797.83 666.34 0.81 2007 23.75 785.52 633.56 0.78

By comparing the capital structure of M&M with other companies from same industry, we observe that its debt level is different from that of other players catering to the same segment. Companies like Tata Motors, Bajaj Auto , TVS Motors limited have a high amount of debt in their capital structure as compared to Mahindra and Mahindra Ltd. over the period of 5 years. On the other hand companies like Maruti Suzuki India Ltd and Hero Honda Motors Ltd have extremely low levels of debt in their capital structure as compared to Mahindra and Mahindra Ltd.
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Question-5 What is the beta measure of the company.

In finance, the Beta () of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole. An asset has a Beta of zero if its returns change independently of changes in the market's returns. A positive beta means that the asset's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta means that the asset's returns generally move opposite the market's returns: one will tend to be above its average when the other is below its average. The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset's statistical variance that cannot be removed by the diversification provided by the portfolio of many risky assets, because of

the correlation of its returns with the returns of the other assets that are in the portfolio. Beta can be estimated for individual companies using regression analysis against a stock market index.

5 years monthly returns of Mahindra & Mahindra were taken and were compared to the Market returns to get a Beta of 0.929238. Beta was calculated using regression too.

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Regression Statistics Multiple R R Square Adjusted Square Standard Error Observations ANOVA Significance df Regression Residual Total 1 58 59 Coefficients Intercept X Variable 1 0.077650149 1.371048917 0.929237706 0.158657682 SS 3833.782281 6482.223474 10316.00575 Standard Error t Stat 0.056635579 0.955030152 -2.82210272 5.856871829 2.34399E-07 2.666802417 P-value Lower 95% Upper 95% MS F F R 0.360800478 10.57177722 60 0.609618215 0.371634368

3833.782281 34.30294762 2.34399E-07 111.7624737

0.611649853 1.246825559

As we can see that the beta measure of M&M is almost equal to 1, so we can say that the stock is almost equally volatile as the market. The chart showing Mahindra & Mahindra Beta is as follows:

Mahindra & Mahinra

50 40 30 20 10 0 -10 -10 0 -20 -30 -40 -50 -60 y = 0.9292x - 0.0777

M&M 10 20 30 40 Linear (M&M)

-30

-20

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Question-6 Calculate the weighted average cost of capital (WACC) of the company.
A companys assets are financed by either debt or equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every rupee it finances. A firm's WACC is the overall required return on the firm as a whole and, as such, it is often used internally by company directors to determine the economic feasibility of expansionary opportunities and mergers. It is the appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm. 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. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.

Risk free rate Market rate Beta Value

= 8.24% = 13% = 0.93

Interest Expense Total Debt Tax rate

= 70.86 = 2,405.29 = 0.35

Cost of Debt= Interest Expense/ Total Debt = (70.86/2,405.29)*100 = 2.95% Cost of Equity = Rf + beta(Rm-Rf) = 8.24 + 0.93(13-8.24)

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= 8.24 + 0.93(4.76) = 12.67 WACC = Cost of Debt *(1-Tax rate ) *(Debt/Total Capital) + COE *(Equity/total capital)

= 0.29*(1-0.35)*(2,405.29/ 12,718.68) + 12.67(10,313.39/12,718.68) = 0.035647235 + 10.2739 = 10.31%

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Question-7 What are the five year high and the five years low for the companys debt equity ratio? Compare the debt equity ratio of the selected company with that of five other companies in the same industry.
Debt to equity ratio indicates the proportionate claims of owners and the outsiders against the firms assets. The purpose is to get an idea of the cushion available to outsiders on the liquidation of the firm. However, the interpretation of the ratio depends upon the financial and business policy of the company. The owners want to do the business with maximum of outsider's funds in order to take lesser risk of their investment and to increase their earnings (per share) by paying a lower fixed rate of interest to outsiders. The outsiders (creditors) on the other hand, want that shareholders (owners) should invest and risk their share of proportionate investments. A ratio of 1:1 is usually considered to be satisfactory ratio although there cannot be rule of thumb or standard norm for all types of businesses. Theoretically if the owners interests are greater than that of creditors, the financial position is highly solvent. In analysis of the long-term financial position it enjoys the same importance as the current ratio in the analysis of the short-term financial position.

Debt Equity ratio for Mahindra and Mahindra (Five Year)

Debt Equity Ratio

0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0.77 0.6 0.46 0.37 0.23 Debt Equity Ratio

Five Year High Value: .77 for the financial year 2008-09 Five Year Low Value: .23 for the financial year 2010-11

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Comparison of debt equity ratio of Mahindra & Mahindra Ltd. with five other companies in the automotive industry over the period from financial year 2006-07 to financial year 2010-11:

(Rupees crores) Hero Bajaj Year 2010-11 2009-10 2008-09 2007-08 2006-07 Auto 0.07 0.46 0.84 0.84 0.29 Tata Motors 0.8 1.12 1.06 0.8 0.59 Maruti Suzuki India 0.02 0.07 0.07 0.11 0.09 Honda Motors 0.5 0.02 0.02 0.04 0.07 TVS Motors 0.79 1.16 1.11 0.81 0.78 Mahindra & Mahindra
0.23

0.37 0.77 0.6 0.46

Comparison of Debt Equity ratio of Mahindra and Mahindra with other automotive majors:

1.4 1.2 1 0.8 0.6 0.4 0.2 0 Bajaj Auto Tata Motors Maruti Suzuki India Hero Honda Motors TVS Mahindra Motors & Mahindra 2010-11 2009-10 2008-09 2007-08 2006-07

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Question: 8 Construct Du Pont identity for the company

DuPont analysis (also known as the DuPont identity, DuPont equation, DuPont Model or the DuPont method) is an expression which breaks ROE (Return On Equity) into three parts.

ROE Analysis The Du Pont identity breaks down Return on Equity (that is, the returns that investors receive from the firm) into three distinct elements. This analysis enables the analyst to understand the source of superior (or inferior) return by comparison with companies in similar industries (or between industries). The Du Pont identity, however, is less useful for some industries, such as investment banking, that do not use certain concepts or for which the concepts are less meaningful. Variations may be used in certain industries, as long as they also respect the underlying structure of the Du Pont identity. ROE = (Profit margin)*(Asset turnover)*(Equity multiplier) = (Net profit/Sales) * (Sales/Assets) * (Assets/Equity)= (Net Profit/Equity)

Operating efficiency (measured by profit margin) Asset use efficiency (measured by asset turnover) Financial leverage (measured by equity multiplier)

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Net Profit Margin Net Profit Margin The net profit margin is simply the after-tax profit a company generated for each rupee of revenue. Net Profit Margin = Profit after tax/ Sales (Rupees crores) Year 2010-11 2009-10 2008-09 2007-08 2006-07 Reported Net Profit 2,662.10 2,087.75 836.78 1,103.37 1,068.39 Net Sales 23,477.53 18,516.33 13,081.08 11,310.37 9,921.34 Profit Margin 0.1133893 0.1127518 0.0639687 0.0975538 0.1076861
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Asset Turnover

Asset Turnover = Sales/ Total Assets (Rupees crores) Total Year 2010-11 2009-10 2008-09 2007-08 2006-07 Net Sales 23,477.53 18,516.33 13,081.08 11,310.37 9,921.34 Assets 3,496.55 2,922.03 2,739.93 2,399.57 1,995.26 Current Asset Turnover 6.714484277 6.336803524 4.774238758 4.713498669 4.972454718

Equity Multiplier Equity Multiplier = Total Assets / Shareholders Equity (Rupees crores) Total Year 2010-11 2009-10 2008-09 2007-08 2006-07 Assets 3,496.55 2,922.03 2,739.93 2,399.57 1,995.26 Current Equity 10,313.39 7,830.23 5,243.97 4,350.07 3,552.90 Equity Multiplier 0.339030135 0.373172946 0.522491547 0.551616411 0.56158631

Return on Equity

Return on Equity = (Net Profit Margin)* (Total Asset Turnover)* (Equity Multiplier) (Rupees crores) Year 2010-11 2009-10 Profit Margin 0.113389271 0.112751825 Asset Turnover 6.714484277 6.336803524 Equity Multiplier 0.339030135 0.373172946 ROE 0.25812 0.26663
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2008-09 2007-08 2006-07

0.063968724 0.097553838 0.107686059

4.774238758 4.713498669 4.972454718

0.522491547 0.551616411 0.56158631

0.15957 0.25364 0.30071

Ratios used for fundamental analysis:

8 7 6 5 4 3 2 1 0 Profit Margin Asset Turnover Equity Multiplier ROE 2010-11 2009-10 2008-09 2007-08 2006-07

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Question 9: What are the annual growth rates in the Earnings per share (EPS) and Dividend?
Earnings per share (EPS) is the amount of earnings per each outstanding share of a company's stock.

The EPS formula does not include preferred dividends for categories outside of continued operations and net income. Earnings per share for continuing operations and net income are more complicated in that any preferred dividends are removed from net income before calculating EPS. This is because preferred stock rights have precedence over common stock. If preferred dividends total $100,000, then that is money not available to distribute to each share of common stock.
Earnings per Share (Net Income Formula)

Annual Growth Rates of EPS: (Rupees crores) Earnings Per Share Year 2010-11 2009-10 2008-09 2007-08 2006-07 (Rs) 45.33 36.89 30.69 46.15 44.88 Annual Growth 8.44 6.2 -15.46 1.27 Growth % 22.87882895 20.2020202 -33.4994583 2.829768271

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Earning Per Share (Rs)

50 45 40 35 30 25 20 15 10 5 0 2010-11 2009-10 2008-09 2007-08 2006-07

Earning Per Share (Rs)

Annual growth rates in Dividend: (Rupees crores) Year 2010-11 2009-10 2008-09 2007-08 2006-07 Equity Dividend 706.08 549.52 278.83 282.61 282.23 Annual Growth 156.56 270.69 -3.78 0.38 Growth % 22.173125 49.259354 -1.3556647 0.1344609

Equity Dividend (Rs)

800 700 600 500 400 300 200 100 0 2010-11 2009-10 2008-09 2007-08 2006-07 Equity Dividend (Rs)

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Question 10: What is the companys Current Payout Ration compared to its historical Payout Ratio?
The amount of earnings paid out in dividends to shareholders. Investors can use the payout ratio to determine what companies are doing with their earnings.

Calculated as:

For example, a very low payout ratio indicates that a company is primarily focused on retaining its earnings rather than paying out dividends.

The payout ratio also indicates how well earnings support the dividend payments: the lower the ratio, the more secure the dividend because smaller dividends are easier to pay out than larger dividends. (Rupees crores) Earnings Year 2010-11 2009-10 2008-09 2007-08 2006-07 Dividend Per Share 11.5 9.5 10 11.5 11.5 Share (Rs) 45.33 36.89 30.69 46.15 44.88 Per Payout Ratio 0.25 0.26 0.33 0.25 0.26

The Current Payout Ratio of the company is almost the same as the Historical Payout Ratio.

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Question-11 Comment on Following 1) Working capital position 2) Cash positions 3) Short term financing 4) Credit policy 5) Inventory management policy

Working Capital Position

Decisions relating to working capital involve managing the relationship between a firm's short-term assets and its short-term liabilities. Working capital is the amount of capital which is readily available to an organization. That is, working capital is the difference between resources in cash or readily convertible into cash (Current Assets), and cash requirements (Current Liabilities). As a result, the decisions relating to working capital are always current, i.e. short term, decisions. Net working capital 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 Net Working Capital = Current Assets Current Liabilities

Calculations
Current assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of the business where managers have the most direct impact:

accounts receivable (current asset) inventory (current assets), and accounts payable (current liability)

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Positive working capital means that the business is able to pay off its shortterm liabilities. Also, a high working capital can be a signal that the company might be able to expand its operations.

Negative working capital means that the business currently is unable to meet its short-term liabilities with its current assets. Therefore, an immediate increase in sales or additional capital into the company is necessary in order to continue its operations.

(Rupees crores) Net Total Current Years 2010-11 2009-10 2008-09 2007-08 2006-07 Assets 3,496.55 2,922.03 2,739.93 2,399.57 1,995.26 Current Liabilities 5,289.67 3,822.50 3,520.20 2,525.31 2,138.77 Total Assets 12,718.68 10,710.38 9,296.73 6,937.13 5,188.92 CA/ TA 0.27 0.27 0.29 0.35 0.38 Net Working Capital Net Sales Working Capital/Sale s (in %) -7.6376 -4.86311 -5.96487 -1.11172 -1.44648

-1,793.12 23,477.53 -900.47 -780.27 -125.74 -143.51 18,516.33 13,081.08 11,310.37 9,921.34

As we can see that the companys current assets are increasing with time, which is a good thing, but the current liabilities are also increasing and the rate of increase of current liabilities is more than the increase in the current assets.

The low amount of current assets is because the company is operating mainly from the fixed assets as we can see that the percentage of current assets to total assets is very low.

The net working capital has been negative throughout the 5 years of the study of this report and has been decreasing more and more.

Implications: Net Working Capital is necessary because the cash outflows and cash inflows do not coincide. In general the cash outflows resulting from payments of current liability are relatively predictable. The cash inflows are however difficult to predict. More predictable the cash inflows are, the less Net Working Capital will be required. But where the cash inflows are uncertain, it will be necessary to maintain current assets at level adequate to cover current liabilities.
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Cash Positions
The amount of cash that a company, investment fund or bank has on its books at a specific point in time. The cash position is a sign of financial strength and liquidity. In addition to cash itself, it will often take into consideration highly liquid assets such as certificates of deposit, short-term government debt and other cash equivalents. For companies, a large cash position is often a powerful signal of financial strength, while a small cash position is a potential warning sign. This is because cash is needed to fund operations and to pay off obligations. However, too large of a cash position can often signal waste, as the funds are generating very little return.

(Rupees crores) Total Years 2010-11 2009-10 2008-09 2007-08 2006-07 Cash and Bank Balance 447.62 475.17 635.61 310.58 415.89 Assets 3,496.55 2,922.03 2,739.93 2,399.57 1,995.26 Current Cash/CA (%) 12.80 16.26 23.20 12.94 20.84

It can be seen from the above table that company has only a small amount of current assets as cash, showing that company invests it in marketable securities and this kind of investment contributes some profit to the firm.

Years 2010-11 2009-10 2008-09 2007-08 2006-07

Current Ratio 0.86 1.11 0.9 0.86 1.31

Quick Ratio 0.61 0.86 0.83 0.74 1.01

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The current ratio for Mahindra and Mahindra for the year 2011 is 0.86 which implies for every liability worth Re.1, there are assets worth Rs.0.86. The figure should preferably be greater than 1.

The quick ratio for Mahindra and Mahindra during the year 2011 is 0.61, which means it does not have good cash liquidity.

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Short Term Financing

All firms need capital. This capital requirement can be met with either long term or short term capital. Since it is cheaper to issue long-term capital in "big chunks" and the total needs are not totally predictable, the financing tends to be out of sync with the actual needs.

Company need short term finance for the following reasons : Cash flow from operations may not be sufficient to keep up with growth-related financing needs. Firms may prefer to borrow now for their inventory or other short term asset needs rather than wait until they have saved enough. Firms prefer short-term financing instead of long-term sources of financing due to: easier availability usually has lower cost (remember yield curve) matches need for short term assets, like inventory

Sources of Short Term Financing: 1. Short-term loans 2. Trade credit 3. Commercial paper

Note: All the unsecured loans have been considered as short term loans in this study.

(Rupees crores) Years 2010-11 2009-10 2008-09 2007-08 2006-07 Unsecured Loans 1,998.06 2,277.70 3,071.76 1,969.80 1,529.35 Sundry Debtors 1,354.72 1,258.08 1,043.65 1,004.88 700.89

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Short term financial management is one the most important and time consuming activities of a financial manager. For financing working capital, the firm takes the advantage of interest free sources of unsecured short term financing. Normally when a firm has exhausted its sources of unsecured short-term financing, it may be able to obtain additional secured short term loans. Secured short-term loans have some assets pledged as collateral.

We observe that short term loans of the company have risen significantly in the recent years. It can be due to the fact that company is going for aggressive approach of financing.

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Credit Policy
Credit is temporary capital and the objective of credit is to lend with the purpose of increasing profits and sales. A sound credit policy in business is the blue print to managing by measurement and benchmarks.

(Rupees crores) Debtors Years 2010-11 2009-10 2008-09 2007-08 2006-07 Debtors 1,354.72 1,258.08 1,043.65 1,004.88 700.89 Net Sales 23,477.53 18,516.33 13,081.08 11,310.37 9,921.34 Turnover Ratio 17.97 16.09 12.77 13.26 14.82 Average Collection Period 20.77 24.46 28.72 31.98 25.43

Where

Debtor Turnover Ratio = Credit Sales / Average Inventory Average Collection Period = Average Debtors / (Sales/360)

Debtor Turnover Ratio for Mahindra and Mahindra Ltd.:

Debtors Turnover Ratio

20 18 16 14 12 10 8 6 4 2 0 2010-11 2009-10 2008-09 2007-08 2006-07

Debtors Turnover Ratio

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The Company has been able to achieve this significant improvement in its debtors level due to its proactive emphasis on collections. The average collection period has been reducing constantly over the years. However, the debtors and the debtor turnover ratio is on the grow.

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Inventory Management Policy

To minimize the demand and supply imbalances in the supply chain, firms utilise various methods of Inventory Management. Determining the levels of inventory to be maintained has an inherent tradeoff, the greater the cash available for meeting operating needs. Besides, lean, fast moving inventory runs a lower risk of obsolescence and reduces interest and storage charges.

However, on the other hand maintaining high inventory levels helps avoid production delays. Thus, the tradeoff associated with inventory needs to be studied carefully & an appropriate inventory management policy needs to be chalked out for every organisation.

To determine the levels of inventory being maintained by the company, we calculate the Inventory Turnover Ratio. Inventory Turnover Ratio shows us how many times a company's inventory is sold and replaced over a period. High Inventory turnover is a sign of efficient inventory management.

(Rupees crores) Inventory Years 2010-11 2009-10 2008-09 2007-08 2006-07 Inventories 1,694.21 1,188.78 1,060.67 1,084.11 878.48 Net Sales 23,477.53 18,516.33 13,081.08 11,310.37 9,921.34 Ratio 15.64 17.91 14.56 12.49 11.75 Turnover

Inventory Turnover Ratio= Sales/ Average Inventory

We observed that inventory turnover ratio has increased to 17.91 in 2009-10 from 14.56 in 2008-09. This indicates that how fast inventories is used or sold. A high ratio is good from the view point of liquidity and vice versa. It has been given in the annual report that the reduction in inventory levels is due to focus on supply chain management and better planning and control. From the financial managers point of view inventory levels should be kept low

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to ensure that money is not sitting idle by investing in excess resources. The manufacturing manager would keep raw materials inventories high to avoid production delays. In light of this, the inventory policy of a company becomes of paramount importance. Thus the companies ratio is improving as measures for supply chain management have already been taken.

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References:
Books:

R.A. Brealey, S.C. Myers, F. Allen and P. Mohanty. Principles of Corporate Finance. Tata McGraw-Hill Publishing Company Limited. I.M. Pandey. Financial Management . Vikas Publishing House. Chandra, Prasanna. Financial Management. Tata McGraw Hill Publishing Company Ltd.

Websites:

http://www.investopedia.com/ http://www.moneycontrol.com/ http://www.wikipedia.org/ http://www.siamindia.com/ http://money.rediff.com/companies http://www.mahindra.com/ http://www.scribd.com/

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