Professional Documents
Culture Documents
UNIVERSITY OF CALICUT
BACHELOR OF COMMERCE
Submitted by
SONU SANTHOSH
(CCASBCM106)
DEPARTMENT OF COMMERCE
MARCH 2021
CHRIST COLLEGE (AUTONOMOUS), IRINJALAKUDA
CALICUT UNIVERSITY
DEPARTMENT OF COMMERCE
CERTIFICATE
The information and data given in the report is authentic to the best of my
knowledge. The report has not been previously submitted for the award of any
Degree, Diploma, Associateship or other similar title of any other university or
institute.
Date: CCASBCM106
ACKNOWLEDGEMENT
I would like to take the opportunity to express my sincere gratitude to all people
who have helped me with sound advice and able guidance.
Above all, I express my eternal gratitude to the Lord Almighty under whose
divine guidance; I have been able to complete this work successfully.
I am thankful to Mr. Lipin raj, Class teacher for his cordial support, valuable
information and guidance, which helped me in completing this task through
various stages.
I would like to express my gratitude to all the faculties of the Department for
their interest and cooperation in this regard.
I extend my hearty gratitude to the librarian and other library staffs of my college
for their wholehearted cooperation.
LIST OF TABLES
LIST OF FIGURES
INDUSTRY AND
CHAPTER 3 14 – 23
COMPANY PROFILE
FINDINGS, SUGGESTIONS
CHAPTER 5 37 – 39
& CONCLUSION
BIBLIOGRAPHY
ANNEXURE
LIST OF TABLES
TABLE
TITLE PAGE NO:
NO:
FIGURE
TITLE PAGE NO:
NO:
Finance is defined as the provision of money at the time when it is required. Every
enterprise, whether big, medium or small, needs finance to carry on its operations
and to achieve its targets. Without adequate finance no enterprise can possibly
accomplish its objectives. Finance refers to the management of flows of money
through an organization. It concerns with the application of skills in the
manipulation, use and control of money. Right from the promotional stage up to
end, finance plays an important role in a company’s life. It is necessary that correct
estimate of the current and future need of capital be made to have an optimum
capital structure which shall help the organization to run its work smoothly and
without any stress. Undoubtedly, finance is one of the most important aspects of a
business. With huge funds, daily cash flow and continuous transactions, managing
and monitoring all the above turn necessary. To be specific financial management
helps the organisation determine what to spend, where to spend and when to spend
and finance is the functional process of business which helps to meet goals and
objectives.
The capital structure is the particular combination of debt and equity used by a
company to finance its overall operations and growth. There are two types of
components in the capital structure they are debt and equity. Debt comes from in
the form of bond issues or loan, while equity may come in the form of common
stock, preferred stock, or retained earnings. Leverages are the benefits to get the
company by using the debt.
Financial leverage is a measure of how much firms use equity and debt to finance
its assets. A company can finance its investments by debt and equity. The company
may also use preference capital. The rate of interest on debt is fixed irrespective of
the company’s rate of return on assets. The financial leverage employed by a
company is intended to earn more on the fixed charges funds than their costs.
1
Here, an attempt is made to study the leverage analysis and profitability of selected
automobile companies (Mahindra & Mahindra, Tata Motors and Bajaj Auto) in
India during the periods from 2016 to 2020. Financing the firm’s assets is a very
crucial problem in every business and as a general rule there should be a proper mix
of debt and equity capital in financing the firm’s assets. The use of long term fixed
interest bearing debt and preference share capital along with the equity shares is
called financial leverage or trading on equity. The long term fixed interest bearing
debt is employed by a firm to earn more from the use of these sources than their cost
so as to increase the return on owner’s equity. Leverage means use of funds or
employment of assets in the capital structure of the firm for which the firm has to
pay fixed cost or fixed return. Employment of such funds will help the firm to
increase the profitability. The leverage of a firm is essentially related to a profit
measure, which may be a return on investment or on earnings before taxes. A proper
combination of both operating leverage and financial leverage contributes to the
growth of the company, while an improper combination of leverage restricts the
growth of the company.
The available literature and data suggest that financial leverage is one of the
factors that affect the firm’s profitability. It comprises the capital structure
decisions. It has been observed that most of the times managers of the company use
some extent of debt and some extent of equity to finance their assets. There for right
choice of the combination of debt and equity is very important for the manager of
any company. Those companies who dislike to borrow funds for the financing of
their assets have to rely completely on equity financing therefore they are free from
any fixed amount of charges to pay which means there is no financial leverage
associated with that company.
Financial leverage ratio tells the extent to which company has used borrowed money
in order to finance its capital structure. If firm borrowed more money from creditors
2
then firm has to pay more amount of cost of debt to the creditor which is called
interest rate which leads to the less net income for the firm which means lower
profitability. In economic boom period, higher financial leverage gives benefits to
the firm but on the other hand, in economic recession this financial leverage has
adverse impact on firms profitability. This could be hapen because there will be less
sale volume in economic recession which make the firm unable to cover the interest
payments to the creditors. The role of financial leverage in magnifying the return of
the shareholders is based on the assumptions that the fixed charged funds can be
obtained at a cost lower than the firm’s rate of return on net assets. Hence it is
necessary to study the leverage and the profitability of selected automobile
companies in India.
An investor who would like to rational and scientific in his investment activity has
to evaluate a lot of information about past performance and future performance of
the companies, industries and the economy as a whole before taking the investment
decision and hence, the present study attempts to analyse the effect of leverage on
financial performance of selected automobile companies in India for last 5 years.
This will help the management to understand more possibilities.
3
1.5 Research design
Research design indicates the method and procedure of conducting research study.
In pursuance of objective stated above, the following research design is used for
conducting the study.
The present study adopts both analytical and descriptive study is used with the
support of secondary data.
The study is based on secondary data. In this study secondary data is collected
from the annual reports of selected automobile companies, published materials in
the form of reports, articles from journals and websites.
The present study has gathered secondary sources of information for a period of 5
years from 2016 to 2020.
To study the relationship between leverage and profitability of the selected Indian
automobile companies, ratio analysis and correlation analysis were used.
• The period for the study is of last 5 years so it is not possible to show life
time performance of company.
• The limitations of financial statements may effect the study.
4
1.8 Chapterisation
Chapter 2 Review of literature: It deals with the literature reviews that are
collected based on this topic.
Chapter 4 Data analysis: It deals with the data analysis and interpretation of the
study.
5
CHAPTER 2
REVIEW OF LITERATURE
2.1 Conceptual review
The term leverages come from physics. In physics the term leverage means to lever'
or to raise. Leverages is action of a lever and mechanical advantage gained by it.
That means lift a given tool with less amount of power. It is a ability to multiply the
effects of some efforts. Generally the term leverage means the relationship between
two inter related variables. These variables may be cost, output, sales revenue,
EBIT EPS etc. Leverages refers to the percentage change in one variable
corresponding to percentage change in the other variable.
Leverage means use of funds or employment of assets in the capital structure of the
firm for which the firm has to pay fixed cost or fixed return. Employment of such
funds will help the firm to increase the profitability.
Type of leverages
There are three types of leverages. They are operating leverage, financial leverage
and combined leverage.
Financial leverage
Financial leverages is the use of borrowed money to finance the purchase of assets,
in the case of assets-backed lending. The financial provider uses the assets as
collateral until the borrower repays the loan. In the case of a cash flow loans, the
general creditworthiness of the company is used back the loan.
6
Characteristics of financial leverage
• Financial leverage relates with liability side of the balance sheet.
• Financial leverage determines the mix of various methods of financing
necessary assets.
• Financial leverage shows the effect of change in EBIT on EPS due to fixed
financial changes.
• Financial leverage involves the financial risk.
7
does not earn as much as the cost of interest bearing securities, then it will
work adversely and hence cannot be employed.
• Beneficial only to companies having stability of earnings: Trading on
equity is beneficial only to the companies having stable and regular earnings.
This is so because interest on debentures is a recurring burden on the
company and a company having irregular income cannot pay interest on its
borrowings during lean years.
• Increases risk and rate of interest: Another limitation of trading on equity
is on account of the fact that every rupee of extra debt increases the risk and
hence the rate of interest on subsequent loans also goes on increasing. It
becomes difficult for the company to obtain further debts without offering
extra securities and higher rates of interest reducing their earnings.
• Restrictions from financial institutions: The financial institutions also
impose restrictions on companies which resort to excessive trading on equity
because of the risk factor and to maintain a balance in the capital structure of
the company.
Operating Leverages
Operating leverages refers to the amount of fixed cost in the cost structure. In simple
words, presence of fixed cost is known as operating leverage. It measures the extend
to which fixed cost is used in operating the firm. If the fixed cost are more as
compared to variable costs, the operating leverage will be high.
8
Importance of operating leverage
• Profit planning: Operating leverage is a function of fixed cost. Hence it is
relevant for capital budgeting decision. Capital budgeting is essential for
long-term profit planning. As such, operating leverage an important role in
capital budgeting decision and long-term profit planning.
• Capital structure planning: Operating leverage shows the effect of changes
in sales on operating profit. Operating income is the basis for decision about
the capacity of firm to bear the burden of payment of interest on debt and
repayment of certain portions of debt. Thus operating leverage influences the
debt equity mix or capital structure planning.
• Risk analysis: Operating leverage tells the impact of changes in sales on
operating profit of the firm. A firm should try to operate at a level sufficiently
higher than break even level so that the chances loss due to fluctuation in
sales are minimised.
Combined Leverages
9
2.2 Empirical review
Reddy (2016) Studied the impact of leverage on profitability of Tata Steel Limited.
The data were collected for the period of 5 years. The data was analyse with the
help of percentages, averages, ratios, correlation analysis and student’s t test. It was
concluded that the company should improve its debt equity ratio in order to have
better trading on equity position and reframe its capital structure.
10
level. With regard to profitability performance, the performance of Dr. Reddy’s
Laboratories is satisfactory but not with leverage as leverage is not maintained at
optimum level.
Tooba Raheel (2015) Studied the relationship between financial leverage and
firm’s profitability of oil and gas companies of Pakistan listed in KSE. The study
was made on 5 companies for the period of 2007 to 2012. The study concluded that
there is no significant relationship between DOL and EPS, DFL and EPS, DCL and
EPS. Thus, fixed operating expenses and financing mix decisions of the firm are not
significantly affect the earning capacity of the listed companies in KSE.
Kumar (2014) Studied relationship between leverage and profitability of Bata India
Limited. The data have been collected for over a period of seven years. The data
collected is analyzed by the percentages, averages, ratios and Correlation analysis
tools reveals that the research evidence of the study indicates that, that degree of
operating leverage is statistically significant positive correlation with the ROI. It is
observed that degree of financial leverage is positively correlated with the ROI. It
11
means that degree of financial leverage of Bata India was not at optimum level. It
is suggested to Bata to revise its capital structure which should include the optimum
blend of equity and borrowed funds so that it has positive impact on Return on
Investment. More over degree of combined leverage is positively correlated with
ROI of Bata India.
Kalpana (2014) Made a study on leverage analyses and its impact on profitability
of selected steel companies traded in BSE. The study is based on the secondary data.
Hypotheses are examined with the help of correlation and test of significance and
also analysis of variance (ANOVA). From this study it is found out that there is a
negative correlation between DOL and EPS, DFL and EPS, and DCL and EPS. The
result shows that the use of debt and fixed cost expenses would reduce the
profitability of the firms. It implies that in order to increase the earnings the firms
need to reduce the use of debt in capital structure and fixed cost in operation of the
firm.
Patel (2014) Studied impact of leverage on profitability of Sabar Dairy. The study
examined the relationship between return on capital employed (ROCE), return on
equity (ROE), return on assets (ROE) and earnings per share (EPS) with operating
leverage, financial leverage and total leverage. The result of regression indicates
that the coefficient of DOL, DFL and DCL is positive with ROCE but not
significant. It has concluded that Sabar Dairy has used the operating leverage,
financial leverage and combined leverage satisfactorily.
Tayyaba (2013) Examined leverage and its impact on the profitability of selected
oil and gas companies. The study is conducted for the period of 6 years. This study
used return on asset, return on equity, return on investment and Earning per share
as dependent variables and degree of financial leverage and degree of operating
leverage as independent variables. The statistical tools like regression, correlation
descriptive analysis and concluded that DFL and ROA have positive relationship
12
while DOL and ROA have inverse relationship. It was concluded that there is a
positive relationship between financial leverage and profit measures.
Soni Bindiya (2013) Studied the impact of operating leverage and financial
leverage on EPS with the help of correlation analysis. Along with this analysis, the
paper also investigates the impact of debt-equity ratio on the EPS of the said firms
to see the impact of debt on the wealth of the firms.
Baxter (1967) Studied that leverage would depend on the variance of net operating
earnings. The business with relatively stable income streams are less vulnerable than
that of firms with fluctuating income stream and involve debt capital in its capital
structure. The study exhibited a negative association between variance of net
operating earnings and degree of leverage.
13
CHAPTER 3
THEORETICAL FRAMEWORK
This chapter deals with the industry and company profiles.
Automobile Industry
India became the fourth largest auto market in 2019 displacing Germany with about
3.99 million units sold in the passenger and commercial vehicles categories. India
is expected to displace Japan as the third largest auto market by 2021.The two
wheelers segment dominates the market in terms of volume 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.
India is also a prominent auto exporter and has strong export growth expectations
for the near future. In addition, several initiatives by the Government of India and
major automobile players in the Indian market is expected to make India a leader in
the two-wheeler and four-wheeler market in the world by 2020.
Market size
14
sales, excluding E-rickshaws, in India witnessed a growth of 20% and reached 1.56
lakh units in financial year 2020 driven by two wheelers.
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$ 24.5 billion
between April 2000 and June 2020, according to the data released by Department
for Promotion of Industry and Internal Trade (DPIIT). Some of the recent/planned
investments and developments in the automobile sector in India are as follows:
15
• In April 2020, TVS Motor Company bought UK’s iconic sporting motorcycle
brand, Norton, for a sum of about Rs.153 crores (US$ 21.89 million), making its
entry into the top end (above 850cc) segment of the superbike market.
• As of May 2019, Jaguar Land Rover (JLR) launched its locally assembled Range
Rover Velar, making JLR cars more affordable by quite some margin.
• In March 2020, Lithium Urban Technologies partnered with renewable energy
solutions provider, Fourth Partner Energy, to build charging infrastructure
across the country.
• In January 2020, Tata Auto Company Systems, the auto-components arm of Tata
Group entered a joint venture with Beijing-based Prestolite Electric to enter the
electric vehicle (EV) components market.
• In December 2019, Force Motors planned to invest Rs.600 crores (US$ 85.85
million) to develop two new models over the next two years.
• Audi India planned to launch nine all-new models including Sedans and SUVs
along with futuristic E-torn EV by end of 2019.
• MG Motor India planned to launch MG ZS EV electric SUV in early 2020 and
have plans to launch affordable EV in the next 3-4 years.
• BYD-Olestra, Tata Motors and Ashok Leyland will supply 5,500 electric buses
for different state departments.
Government Initiatives
16
Some of the recent initiatives taken by the Government of India are:
Achievements
Following are the achievements of the Government in the last four years:
17
• On 29th July 2019, Inter-ministerial panel sanctioned 5,645 electric buses for 65
cities.
• NATRiP’s proposal for “Grant-In-Aid for test facility infrastructure for EV
performance Certification from NATRiP Implementation Society” under the
FAME Scheme was approved by Project Implementation and Sanctioning
Committee (PISC) on 3rd January 2019.
• Under NATRiP, following testing and research centres have been established in
the country since 2015.
• International Centre for Automotive Technology (ICAT), Manesar.
• National Institute for Automotive Inspection, Maintenance & Training
(NIAIMT), Silchar.
• National Automotive Testing Tracks (NATRAX), Indore.
• SAMARTH Udyog - Industry 4.0 centres: ‘Demo cum experience’ centres are
being set up in the country for promoting smart and advanced manufacturing
helping SMEs to implement Industry 4.0 (automation and data exchange in
manufacturing technology).
Mahindra & Mahindra was formerly known as Mohammed & Mahindra as it was
jointly incorporated by the Mahindra brothers – Kailash Chandra Mahindra and
Jagdish Chandra Mahindra, and Malik Ghulam Mohammed. Post partition,
Mohammed moved to Pakistan and the company was renamed as Mahindra &
18
Mahindra in 1948. The company soon moved into the manufacturing of MUVs
under the license of Willys Jeep in India and later moved into the manufacture of
agricultural tractors and LCVs.
Mahindra is particularly known for its foray into the SUV segment and has most of
its popular cars belonging to this sector. The Mahindra Logan was the company’s
first sedan and the company was well accepted in the passenger cars segment. The
Logan was the result of the Mahindra and Renault collaboration.
19
It has its assembly units in China, USA and the UK, along with other countries.
Mahindra cars, especially the SUVs and the tractors, are high in demand not just in
India but also in South Africa, Australia, Malaysia and other parts of the world.
Mahindra manufactures SUVs, saloon cars, pick-up vehicles, lightweight
commercial vehicles, heavy-weight commercial vehicles, motorcycles and tractors.
The business expansion for Mahindra & Mahindra, however, started in 2007 with
its joint venture with Renault. However, the joint venture soon dissolved. The latest
acquisition by Mahindra & Mahindra in September 2017 was the Erkunt Traktor
Sanayi as, a Turkish tractor company. As a result, now Mahindra boasts a
widespread global presence in different automobile and vehicle segments.
Tata Motors have assembly plants and auto manufacturing units in different cities
of India, including Sanand, Lucknow, Pantnagar, Jamshedpur, Pune and
Dharwad. They have facilities in Thailand, UK, South Africa and Argentina too. As
far as their development and research centers are concerned, they are present in
Lucknow, Jamshedpur, Pune and Dharwad, in addition to South Korea, UK and
Spain.
It is the leader in commercial vehicles in each segment, and among the top three in
passenger vehicles with winning products in the compact, midsize car and utility
vehicle segments. The company is the world's fourth largest truck manufacturer, and
the world's second largest bus manufacturer. The company's 23,000 employees are
20
guided by the vision to be 'best in the manner in which they operate best in the
products they deliver and best in their value system and ethics.
Tata Motors, the first company from India's engineering sector to be listed in the
New York Stock Exchange (September 2004), has also emerged as an international
automobile company. Through subsidiaries and associate companies, Tata Motors
has operations in the UK, South Korea, Thailand and Spain. Among them is Jaguar
Land Rover, a business comprising the two iconic British brands that was acquired
in 2008. In 2004, it acquired the Daewoo Commercial Vehicles Company, South
Korea's second largest truck maker. With the launch of Tata Sierra in 1991, it
became the 1st Indian company to manufacture a competitive automobile on its own.
In 1998, they launched Indica and Tata Nano in 2008. In 2004, they acquired
Daewoo Commercial Vehicles Company, and purchased the Jaguar Land Rover in
2008 from ford. In November 2015, Lionel Messi became the company’s brand
ambassador to endorse and promote Tata Motors passenger vehicles on a global
level.
In 1948 Bajaj Auto started selling imported two- and three-wheelers in India. In
1959 Bajaj Auto obtained licence from the Government of India to manufacture
two- and three-wheelers. In the year 1960 Bajaj Auto became a public limited
company. In the year 1970 Bajaj Auto rolled out its 100000th vehicle. In 1971 Bajaj
Auto launched three-wheeler goods carrier. In 1977 the company launched Rear
21
Engine Autorickshaw. On 19 January 1984 the foundation stone was laid for Bajaj
Auto's new plant at Waluj Aurangabad. On 5 November 1985 Bajaj Auto
commenced production at Waluj plant. In 1998 Bajaj Auto commenced production
at its Chakan Pune plant. In November 2001 Bajaj Auto launched its premium bike
'Pulsar'. In February 2003 Bajaj Auto launched Caliber115 in the executive
motorcycle segment. Pursuant to the Scheme of Arrangement of Demerger Bajaj
Holdings & Investments Ltd (BHIL erstwhile BAL) was demerged into three
undertakings with effect from the effective date viz. 20 February 2008. The holding
company operated in the segments such as automotive insurance and investment
and others.
The auto business of the holding company along with all assets and liabilities
pertaining thereto including investments in PT Bajaj Auto Indonesia and in a few
vendor companies transferred to Bajaj Investment & Holding Ltd (BHIL). In
addition a total of Rs 15000 million in cash and cash equivalents also transferred to
Bajaj Investment & Holding Ltd. In April 9 2007 the company inaugurated their
green field plant at Pantnagar in Uttarakhand. In the first year of operations the plant
produced over 275000 vehicles. The company's vehicle assembly plant at Akurdi
was shut down from September 3 2007 due to higher cost of production. During the
year 2007-08 the company launched XCD 125DTSSi and the Three-wheeler Direct
Injected auto rickshaw. The Chakan plant completed the cumulative production of
over 2 million Pulsars. The company plans to maintain the capacity of two and
threewheelers at the current level of 5040000 numbers per annum during the year
ending 31 March 2012. The 4 wheel vehicle development work is under progress
and commercial launch of the first product from this platform is scheduled for
2012.In 2012 Bajaj Auto tied up with Japan's Kawasaki in Indonesia.
In 2013 the Company has introduced another variant of premium motorcycles under
the Bajaj-KTM joint venture namely Duke 390cc for a price of Rs 1.83 lakhs. The
company also received 'CII Design Excellence Award In 2014 Bajaj Auto bagged
22
order in Sri Lanka -People's Choice Bike of the Year CNBC TV18 Overdrive
Awards. The Company has also received Bike of the Year BBC Top gear Awards.
On 8 August 2017 Bajaj Auto and Triumph Motorcycles UK announced global
partnership whereby Bajaj will gain access to the iconic Triumph brand and its great
motorcycles enabling it to offer a wider range of motorcycles within its domestic
market and other international markets.
23
CHAPTER 4
DATA ANALYSIS AND
INTERPRETATION
This chapter deals with analysis and interpretation of the data collected for the study.
The objectives are to find out three types of leverages and to study the impact on
profitability. Here, the average ratio is taken as standard ratio for analyzing the risk
of selected automobile companies.
Table 4.1
Current Ratio
(Rs. In crores)
The above table shows that, the current ratio of selected three automobile
companies. Current ratio depicts the short-term liquidity of the firm. The average
current ratio of Mahindra & Mahindra is 1.27. The current ratio is the highest in the
year 2020 (1.38), when compared with average. The ratio is lowest in the year 2016
(1.18). As the year passed, the company has increased its short liquidity.
In case of Tata Motors, the average ratio is 0.59. The company has highest current
ratio in the year 2016 (0.63) when compared with average ratio. The ratio is lowest
in the year 2017 (0.53). The company maintains a satisfactory short term financial
position.
24
In case of Bajaj Auto, the average ratio is 1.97. The company has highest current
ratio in the year 2017(2.92). The ratio lowest in the year 2019 (1.45). The company
maintain satisfactory, short term financial position.
Figure 4.1
Current Ratio
3.5
2.5
1.5
0.5
0
2016 2017 2018 2019 2020
Mahindra & Mahindra Tata Motors Bajaj Auto
25
Table 4.2
Quick Ratio
(Rs. In crores)
Here, the table shows quick ratio of selected automobile companies. This ratio
measures the ability of firm to meet it short term liabilities. The average quick ratio
of Mahindra & Mahindra is 1. The firm has higher short term liquidity in the year
2018. There was a slight decrease in next year.
The average ratio of Tata Motors is 0.36. When compared to other companies Tata
Motors has the lowest quick ratio. There is a constant trend in the years. In 2016,
the ratio is 0.36 and in the year 2020 the quick ratio becomes 0.38.
Bajaj Auto has the average ratio of 1.75. In the year 2020, ratio becomes 1.30. Bajaj
Auto has the highest quick ratio when compared with the other companies.
26
Figure 4.2
Quick Ratio
0
Category 1 Category 2 Category 3 Category 4
Table 4.3
(Rs. In crores)
27
The above table shows total debt equity ratio of selected automobile companies. The
average ratio of Mahindra & Mahindra is 0.08. The ratio highest in the year
2017(0.10). The ratio lowest in the year 2019 (0.07). In the year 2018 the ratio is
0.09. There is slight decrease in the next year the ratio is 0.07.
In the case of Tata Motors, the average ratio is 0.85. In 2020, the company has the
highest debt equity ratio (1.14). When compared to other companies Tata Motors
has the highest debt equity ratio.
Bajaj Auto has comparatively lower debt components in its capital structure. The
ratio in four years is almost near to zero.
Figure 4.3
1.2
0.8
0.6
0.4
0.2
0
2016 2017 2018 2019 2020
28
Table 4.4
(Rs. In crores)
The above shows the earning per share of selected auto mobile companies. In the
case of Mahindra & Mahindra the average earning per share is 34.34. The earning
per share lowest in the year 2020(11.16). The earning per share highest in the year
2016(53.05).
In the case of Tata Motor the average earning per share is -5.1. The earning per share
highest in the year 2019(5.94). The earning per share lowest in the year 2020,the
ratio is -21.06.
In the case of Bajaj Auto the average earning per share is 149.32. The earning per
share is lowest in the year 2017(132.30). And highest in the year 2020(176.30).
compared with other companies Bajaj Auto have high earning per share.
29
Figure 4.4
200
150
100
50
0
2016 2017 2018 2019 2020
-50
Table 4.5
Operating Leverage
30
The above table shows the operating leverage of selected automobile companies. It
is the ratio between contribution and EBIT. In the case of Mahindra & Mahindra,
the operating leverage is 0.97 in the year 2016. In 2017, it becomes 0.99. It almost
shows a constant trend. In 2018 it becomes 1. The average ratio is 0.97.
The average ratio of Tata Motors is 1.08. The operating leverage shows almost a
constant trend. In the year 2017 and 2018, it is o.75 and 0.94. And in the year 2019
it become 0.75.
In the case of Bajaj Auto, the average ratio is 0.99. in 2019 and 2020 the leverage is
0.99. The operating leverage shows a constant trend.
Figure 4.5
Operating Leverage
1.6
1.4
1.2
0.8
0.6
0.4
0.2
0
2016 2017 2018 2019 2020
31
Table 4.6
Financial Leverage
The above table shows the financial leverage of selected automobile companies. It
is the ratio between EBIT and EBT. In the case of Mahindra & Mahindra it shows
the increasing trend. In the year 2018, the financial leverage is 1.41. In the coming
years it shows increasing trend. In 2019, it becomes 2.05 and in the year 2020
leverages becomes 22. The average financial leverage is 5.78.
In the case of Tata Motors, the average ratio is 1.69. It shows decreasing in trend.
In the year 2018, the financial leverage is 2.29. In the coming years it shows a
decreasing trend. In 2019, it becomes -0.75 and in the year 2020 leverage becomes
-5.71.
In the case of Bajaj Auto the average ratio is 0.83. It shows the constant trend in all
years.
32
Figure 4.6
Financial Leverage
25
20
15
10
0
2016 2017 2018 2019 2020
-5
-10
Table 4.7
Combined Leverage
33
The average combined leverage ratio of Mahindra & Mahindra is 5.72. The
combined leverage of the company shows the increasing trend. In the year 2016 it
is 1.51 and it has increased to 1.89 in the next year.
The average ratio of Tata Motors is 0.68. In the year 2016, the leverage is 1.70 and
that of 2017, it has increased to 8.07. And 2018 the leverage becomes 2.15. In the
year 2019, the leverage is -1.09. In the year 2020 it becomes -7.42.
In the case of Bajaj Auto, the average ratio is 0.82. It shows a constant trend in
nature.
Figure 4.7
Combined Leverage
25
20
15
10
0
2016 2017 2018 2019 2020
-5
-10
34
Correlation Analysis
Table 4.8
The above table shows that the correlation coefficient between the operating
leverage and earning per share of selected automobile companies. It shows that there
is a negative correlation between operating leverage and earning per share of
Mahindra & Mahindra and Bajaj Auto. The table shows that, there is a positive
correlation between operating leverage and earning per share of Tata Motors.
35
Table 4.9
The above table shows that the correlation coefficient between the financial leverage
and earning per share of selected automobile companies. It shows that there is a high
degree of negative correlation between operating leverage and earning per share of
Mahindra & Mahindra and Bajaj Auto. The table shows that, there is a positive
correlation between operating leverage and earning per share of Tata Motors.
Table 4.10
The above table shows that the correlation coefficient between the combined
leverage and earning per share of selected automobile companies. It shows that there
is a high degree of negative correlation between operating leverage and earning per
share of Mahindra & Mahindra and Bajaj Auto. The table shows that, there is a
positive correlation between operating leverage and earning per share of Tata
Motors.
36
CHAPTER 5
5.1 Findings
• The average current ratio is higher in case of Bajaj Auto Limited. It has
higher short term liquidity when compared with other two companies.
Tata Motors has the lowest current ratio.
• The quick ratio of Mahindra & Mahindra Limited shows an in increasing
trend. The short term position of the company is satisfactory when
compared with the other two companies. Tata Motors has the lowest quick
ratio.
• The total debt equity ratio is highest in case of Tata Motors. It means that
company is having highest financial risk. The other two companies have
lowest financial risk.
• Bajaj Auto have the high earnings per share compare with the other two
companies.
• The operating leverage of Mahindra & Mahindra, Tata Motors and Bajaj
Auto are almost similar. Mahindra & Mahindra has the lowest operating
leverage. They are exposed to lowest operating risk.
• The financial leverage is highest in case of Mahindra & Mahindra. It has
the highest financial risk when compared with the other two companies.
Bajaj Auto has the lowest financial leverage.
• The combined leverage is highest in case of Mahindra & Mahindra. The
combined leverage of Tata Motors is lowest.
• According to correlation output of operating leverage and earning per
share, there is a negative relationship in case of Mahindra & Mahindra and
Bajaj. In case of Tata Motors there is a positive relationship.
37
• The correlation output financial leverage and EPS shows that Bajaj Auto
Mahindra & Mahindra have a negative relationship. That of Tata Motors
is positively related.
• There is a negative relationship between combined leverage and EPS that
Bajaj Auto and Mahindra & Mahindra have negative relation.
5.2 Suggestions
• In case of Tata Motors, it is found that there is high operating risk, in order
to reduce the risk it is suggested that Tata Motors should employs greater
amount of variable cost and smaller amount of fixed cost. Because low
operating leverage will give cushion to the management by providing high
margin of safety against fluctuations in sales.
• Since there is negative correlation between the operating leverage and
EPS of Mahindra & Mahindra, Bajaj Auto, it is suggested that the firms
should use low operating leverage in order to increase the EPS of the firm.
• In case of financial leverage, Mahindra & Mahindra has highest financial
risk. In order to reduce the risk, proper planning of capital structure is
needed. It is suggested that they must increase the equity capital and
reduces the long term borrowing in the capital structure of the firm.
• Since there is negative correlation between financial leverage and EPS of
Mahindra & Mahindra and Tata Motors in order to increase EPS, the firm
should employ lower amount of fixed charge bearing funds.
• In case of combined leverage it is suggested that proper balance should be
maintained between the operating and financial leverage in case of Tata
Motors.
38
5.3 Conclusion
The study has been conducted to analysis the impact of leverage on profitability.
Leverage is an important factor which is having an impact on profitability of the
firm which in turn affects the wealth of the shareholders. From this study it is found
that there is a negative correlation between Financial Leverage and EPS, Combined
Leverage and EPS of Mahindra & Mahindra and Bajaj Auto. The result shows that
the use of debt and fixed cost expenses would reduce the profitability of the firm. It
implies that in order to increase the earnings the firm need to reduce the use of debt
in the capital structure and fixed cost in operations of the firms. There is a positive
correlation.
39
BIBLIOGRAPHY
Books
• Financial Management, Author: A.VINOD, First publication in 2010
Journals
Tooba Raheel, F. M. (2015). A Study That Identify the Relationship between the
Financial Leverage and Firms Profitability: Empirical Evidence from Oil and
Gas Companies of Pakistan Listed In KSE . International Journal of Scientific
& Engineering Research , 6 (11), 80-88.
Websites
• En.m.wikipedia.org
• www.moneycotrol.com
APPENDIX