QUALITY OF EARNINGS AND RED FLAGS

MAHINDRA & MAHINDRA

Submitted to:
Prof. S. Sahoo

SUBMITTED BY:
ANSHUL VERMA
WMP10055

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Ltd.

Cash Flow from Operations Vs. Net Income

In Rs. Crs
CFFO (Before
Tax)
NI

March 2015
3219.49 7.83

March 2014
3727.64 8.64

March 2013
4145.71
9.55

41,133.
11

43,120.
18

43,412.6
5

It is surprising to observe that CFFO/NI ratio for Mahindra & Mahindra is

declining over the years.

Although there is an increase in trade receivables and higher contribution

from cash sales.

It seems that the company if adding to its CFFO by deferring payment to its
vendors, hence leading to increase in Trades payables.

Liquidity Ratio (Quick Ratio)

In Rs. Crs
Current Assets
Current Liability

March 2015
11,698.4 1.05
9
11,069.4
0

March 2014
12,803.4 1.19
1
10,752.3
0

March 2013
9,798.79 1.02
7,662.13

With respect to Current Assets and Current Liability, the Liquidity of the
company has reduced drastically for FY14-15.

This can be supported by the fact that Cash & Bank Balance and Inventories
have reduced significantly since previous FYs.
March 2015
2,064.77

March 2014
2,950.39

Cash & Bank Balance - In Rs. Crs

March 2013
1,781.41

Degree of Financial Leverage:

Debt/Equity
In Rs. Crs
Total Debt
Total Equity

March 2015
2,620.3 0.14
8
19.244.
30

March 2014
3,745.1 0.22
6
16,780.
40

March 2013
3,227.07 0.22
14,648.0
8

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Although the company maintains similar Debt-Equity ratio, but a close

observation reveals that the company has paid all its secured loans (i.e. Bank
& commercial borrowings) and on the other side increasing its Sundry
Creditors under current liabilities.

Long Term Borrowing

Current Liabilities
(Including Trade
Payables)

March 2015
2,620.38
9,000.62

March 2014
3,451.06
8,678.28

In Rs. Crs
March 2013
2,960.40
7,662.13

This can be considered as an attempt to reduce the Fixed Cost obligation

arising out of Long term Debt.

Mahindra & Mahindra has repaid its secured Term loan from Banks and USL
has reduced over the previous years.

Degree of Operating Leverage:

DOL= EBIT/Sales
In Rs. Crs
(A) PBT
(B) Interest
Exp.
(A+B) EBIT
Sales

March 2015
4,168.8 DOL
9
214.30

March 2014
4,369.43 DOL

March 2013
4447.09
DOL

259.22

191.19

4383.1
9
41,133.
11

4628.65

0.11

0.11

43,120.1
8

4638.28

0.11

43,412.6
5

Contrary to DFL, as discussed above, one can observe that DOL for the
company is constant over the years.

If, DOL is more than variability of Earnings (i.e. EBIT is more), hence
reflecting Low Quality of Earnings.

Interest Coverage Ratio:

EBIT/Interest Expense
In Rs. Crs
EBIT

March 2015
4383. 20.45
19

March 2014
4628.65
17.86

March 2013
4638.28
24.26

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Interest Exp.

214.3
0

259.22

191.19

Interest coverage ratio of the company is in good shape and has

improved significantly since 2014.

This is because of significant reduction of Debt in the balance sheet.

Hence which the Tax expense of the company is also increasing and
Tax Shield on the earnings is reducing.
Tax Expense
March 2015
847.78

March 2014
611.08

In Rs. Crs
March 2013
1094.27

Inventory & Inventory Turnover Ratio:

Sales
Inventory
Turnover
Ratio

March 2015
41,133.11
2,437.57
16.87

March 2014
43,120.18
2,803.63
15.38

In Rs. Crs
March 2013
43,412.65
2,419.77
17.94

Inventory Turnover ratio in stagnant over the years.

There has been a slight decrease in Inventories in FY 14-15 as compared to

previous FY. Hence can be treated as a possible indication of stress on Cash
Flows arising out of sales Operations and hence leading to increasing stress
on Working Capital.

INDUSTRY OUTLOOK AND COMPANY PRACTICE

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Introduction
The Indian auto industry is one of the largest in the world with an annual
production of 23.37 million vehicles in FY 2014-15, following a growth of 8.68 per
cent over the last year.
The automobile industry accounts for 7.1 per cent of the country's gross
domestic product (GDP).
The Two Wheelers segment with 81 per cent market share is the leader of the
Indian Automobile market owing to a growing middle class and a young
population. Moreover, the growing interest of the companies in exploring the
rural markets further aided the growth of the sector. The overall Passenger
Vehicle (PV) segment has 13 per cent market share.
India is also a prominent auto exporter and has strong export growth
expectations for the near future. In FY 2014-15, automobile exports grew by 15
per cent over the last year. In addition, several initiatives by the Government of
India and the major automobile players in the Indian market are expected to
make India a leader in the Two Wheeler (2W) and Four Wheeler (4W) market in
the world by 2020.
Market Size
The industry produced a total 14.25 million vehicles including PVs, commercial
vehicles (CVs), three wheelers (3W) and 2W in April-October 2015 as against
13.83 in April-October 2014, registering a marginal growth of 3.07 per cent yearon-year.
The sales of PVs grew by 8.51 per cent in April-October 2015 over the same
period last year. The overall CVs segment registered a growth of 8.02 per cent in
April-October 2015 as compared to same period last year. Medium & Heavy
Commercial Vehicles (M&HCVs) registered very strong growth of 32.3 per cent
while sales of Light Commercial Vehicles (LCVs) reduced by 5.24 per cent during
April-October 2015 year-on-year.
In April-October 2015, overall automobile exports grew by 5.78 per cent. PVs,
CVs, 3Ws and 2Ws registered growth of 6.34 per cent, 17.95 per cent, 18.59 per
cent and 3.22 per cent respectively in April-October 2015 over April- October
2014.
Investments
In order to keep up with the growing demand, several auto makers have started
investing heavily in various segments of the industry during the last few months.
The industry has attracted foreign direct investment (FDI) worth US$ 13.48 billion
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during the period April 2000 to June 2015, according to data released by
Department of Industrial Policy and Promotion (DIPP).
Some of the major investments and developments in the automobile sector in
India are as follows:
Global auto major Ford plans to manufacture in India two families of
engines by 2017, a 2.2 litre diesel engine codenamed Panther, and a 1.2
litre petrol engine codenamed Dragon, which are expected to power
270,000 Ford vehicles globally.
The worlds largest air bag suppliers Autoliv Inc, Takata Corp, TRW
Automotive Inc and Toyoda Gosei Co are setting up plants and increasing
capacity in India.
General Motors plans to invest US$ 1 billion in India by 2020, mainly to
increase the capacity at the Talegaon plant in Maharashtra from 130,000
units a year to 220,000 by 2025.
US-based car maker Chrysler has planned to invest Rs 3,500 crore (US$
525 million) in Maharashtra, to manufacture Jeep Grand Cherokee model.
Mercedes Benz has decided to manufacture the GLA entry SUV in India.
The company has doubled its India assembly capacity to 20,000 units per
annum.
Germany-based luxury car maker Bayerische Motoren Werke AGs (BMW)
local unit has announced to procure components from seven India-based
auto parts makers.
Mahindra Two Wheelers Limited (MTWL) acquired 51 per cent shares in
France-based Peugeot Motorcycles (PMTC).
Government Initiatives
The Government of India encourages foreign investment in the automobile sector
and allows 100 per cent FDI under the automatic route.
Some of the major initiatives taken by the Government of India are:
Government of India aims to make automobiles manufacturing the main
driver of Make in India initiative, as it expects passenger vehicles market
to triple to 9.4 million units by 2026, as highlighted in the Auto Mission
Plan (AMP) 2016-26.
In the Union budget of 2015-16, the Government has announced to
provide credit of Rs 850,000 crore (US$ 127.5 billion) to farmers, which is
expected to boost the tractors segment sales.
The Government plans to promote eco-friendly cars in the country i.e. CNG
based vehicle, hybrid vehicle, and electric vehicle and also made
mandatory of 5 per cent ethanol blending in petrol.
The government has formulated a Scheme for Faster Adoption and
Manufacturing of Electric and Hybrid Vehicles in India, under the National
Electric Mobility Mission 2020 to encourage the progressive induction of
reliable, affordable and efficient electric and hybrid vehicles in the country.
The Automobile Mission Plan (AMP) for the period 20062016, designed by
the government is aimed at accelerating and sustaining growth in this
sector. Also, the well-established Regulatory Framework under the Ministry
of Shipping, Road Transport and Highways, plays a part in providing a
boost to this sector.
Road Ahead
Indias automotive industry is one of the most competitive in the world. It does
not cover 100 per cent of technology or components required to make a car but
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it is giving a good 97 per cent, as highlighted by Mr Vicent Cobee, Corporate

Vice-President, Nissan Motors Datsun.
Leading auto maker Maruti Suzuki expects Indian passenger car market to reach
four million units by 2020, up from 1.97 million units in 2014-15.
The Indian automotive sector has the potential to generate up to US$ 300 billion
in annual revenue by 2026, create 65 million additional jobs and contribute over
12 per cent to Indias Gross Domestic Product, as per the Automotive Mission
Plan 2016-26 prepared jointly by the Society of Indian Automobile Manufacturers
(SIAM) and government.
References: Media Reports, Press Releases, Department of Industrial Policy and
Promotion (DIPP), Automotive Component Manufacturers Association of India
(ACMA), Society of Indian Automobile Manufacturers (SIAM), Union Budget 201516

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