Financial Management

Project

Industry: Automobile

A Study on the Impact of Differences in the Capital Structure of

Various Listed Indian Automobile Companies

Submitted to

Prof. Yukti Bajaj

Submitted By:
Group 9
Aadim Aryavartta Meher, 22PGDM141
Pratik Arora, 22PGDM244
Anamika Mundhra, 22PGDM149
Palak Singhal, 22PGDM033
Shivam Jindal, 22PGDM265
Shubham Sahu, 22PGDM260
Financial Management 1

Acknowledgement

We wish to express our sincere gratitude to our faculty Prof. Yukti Bajaj for providing us with
the opportunity to work on the Financial Management Project and for their constant support and
guidance during the term project.

We are also thankful to each other for showing active coordination that led to the successful
completion of this report.

We had a great learning experience during our research on the chosen industry and companies. It
gave us a platform to enhance our knowledge which will surely help us in the future.
Financial Management 2

Table of Contents

Overview of the Automobile Industry in India 3

Objectives of the Study 5

Methodologies Adopted 6

Link to Excel Document 6

Formulas Used 6

Company Overview 7

Analysis 17

Conclusion 20

References 21
Financial Management 3

Overview of the Automobile Industry in India

The Automobile industry in India has seen significant growth in the past few years and has
become a major contributor to the country's GDP. The industry has been a major economic
growth driver in terms of macroeconomic expansion and technological advancement. The
Automobile Industry in India is one of the largest in the world and has undergone significant
growth in recent years. As of 2021, the industry employs over 34 million people and contributes
significantly to the country's GDP. In 2020, the industry saw a decline due to the COVID-19
pandemic but has since recovered, with a YoY growth of 17.5% in passenger vehicle sales and
8.5% in commercial vehicle sales in 2021.

India is a hub for small car manufacturing, with companies such as Maruti Suzuki and Tata
Motors leading the market. In addition, several foreign automakers have set up production
facilities in the country, including Hyundai, Toyota, and Honda. The two-wheeler segment
dominates the market in terms of volume, thanks to the growing middle class and a wide
percentage of the young population. The rising logistics and passenger transportation industries
are driving up the demand for commercial vehicles. Furthermore, the government of India has
several initiatives in place, such as the Automotive Mission Plan 2026, scrappage policy, and
Financial Management 4

production-linked incentive scheme that are likely to make India one of the global leaders in the
two-wheeler and four-wheeler market by 2022. The Indian government has also taken steps to
support the growth of the industry, such as the Make in India initiative and the FAME India
scheme for electric vehicles.

The market value for the passenger car segment was estimated at US$ 32.70 billion in 2021 and
is expected to reach US$ 54.84 billion by 2027, registering a CAGR of 9% between 2022 and
2027. The electric vehicle market is expected to reach INR 50,000 crore (US$ 7.09 billion) by
2025. According to NITI Aayog and the Rocky Mountain Institute (RMI), the EV finance
industry is likely to reach INR 3.7 lakh crore (US$ 50 billion) by 2030. A study by the CEEW
Centre for Energy Finance found a US$ 206 billion opportunity for electric vehicles in India by
2030. In addition, the EV battery market is expected to grow at a CAGR of 30% until 2026.

The Indian government has targeted a five-fold increase in the export of vehicles from India
during 2016-26. To keep up with the growing demand, several automakers have started investing
in the industry. The sector includes two-wheelers, trucks, cars, buses, three-wheelers, and more,
which play a crucial role in the economic development of the country.

Objectives of the Study

The main objective of this study is to analyze and understand the relationship of capital structure
of a firm in the Indian Automotive industry with respect to factors such as its profitability, value
of the firm, etc. Below are the three hypotheses that we hope to resolve through our analysis:

Hypothesis 1:
H0: There is a relationship b/w the amount of Debt and the Value of a firm in the Indian
Automobile Industry
H1: There is no relationship b/w the amount of Debt and the Value of a firm in the Indian
Automobile Industry
Financial Management 5

Hypothesis 2:
H0: Debt and Cost of Equity of a firm have a direct relationship in the Indian Automobile
Industry
H1: The debt and Cost of Equity of a firm don’t have a direct relationship in the Indian
Automobile Industry

Hypothesis 3:
H0: There is a relationship between Equity in Capital Structure and the Profitability of a firm in
the Indian Automobile Industry
H1: There is no relationship between Equity in Capital Structure and the Profitability of a firm in
the Indian Automobile Industry

Methodologies Adopted

In order to find the results and test our stated hypothesis, we first had to collate all the financial
data of the listed firms in the Indian Automobile Industry. We did this through a combination of
various resources such as the company’s annual reports, MoneyControl, ValueInvesting, etc.
We also used this data to find the Risk Free Rate (Long-term bond rate) and the Equity Market
Risk Premium of the industry. Then we also found other variables such as the Beta value, Tax
Rate, and Debt Equity Ratio of each of the firms from the same sources.
Analyzing the financial statements of the chosen companies, we were ultimately able to figure
out the after-tax Weighted Average Cost of Capital (WACC) and calculate the Value of the firms
using the below-stated formulas.
Once we had this data ready for all the 12 companies we have chosen we collated all the relevant
data in a single sheet as per the requirements of the stated hypothesis. We then calculated the
correlation of the chosen variables to determine their relationship. We did this in terms of the
entire data set, top 25%tile, middle 50%tile, and bottom 25%tile of the data.
Thus, we were able to carry out the analysis and test the above-stated hypothesis in order to
reach a conclusion.
Financial Management 6

Link to Excel Document

https://docs.google.com/spreadsheets/d/1Ns7SpvdcgeC-CI0TB70CotdcSGRV_sAWb_X4W9Je7
Bc/edit?usp=sharing

Formulas Used

● Cost of Equity = Rf + *β(Rf + Rm)

Cost of Equity refers to the minimum rate of return required by an investor to invest in a
company's stock. It represents the compensation the investor requires in exchange for the risk
they take by investing in the company.

● Cost of Debt = Rate of interest at which debt can be raised from the market
Cost of Debt is the rate of interest a company pays on its debt obligations such as bonds, loans,
and mortgages. It represents the cost to the company of borrowing money and includes both the
interest expense and any additional fees or charges associated with the debt.

● Debt to Equity Ratio = Long-term Debt / Equity

The ratio shows how much of a company's financing comes from debt compared to equity and
provides insight into a company's financial leverage and risk. A high debt to equity ratio
indicates a higher level of risk and leverage, while a low ratio indicates a lower level of risk and
leverage.

● WACC = Wd * Kd * (1- t) + We * Ke
WACC is the Weighted Average Cost of Capital, which is the average cost of a company's
various sources of funding, such as debt and equity, with each source's cost being weighted based
on its proportion of the company's capital structure.

● Value of a Firm = EBIT / WACC

The value of a firm is the estimated worth of a company based on its current and expected future
financial performance. The value of a firm is a key factor in decisions such as mergers and
acquisitions, capital investments, and stock valuations.
Financial Management 7

Company Overview

Tata Motors
Tata Motors is an Indian
multinational automobile
manufacturing company. It is a
subsidiary of the Tata Group and
produces a range of cars, trucks,
buses, and military vehicles. Tata
Motors is headquartered in
Mumbai, India, and has
operations in more than 60 countries worldwide. The company's products include passenger cars,
commercial vehicles, and electric vehicles. Some of its popular car models include Tata Nexon,
Tata Altroz, Tata Tiago, and Tata Harrier.

The company also offers financing and insurance options to customers through its Tata Motors
Finance and Tata Motors Insurance divisions. The company has several joint ventures in India
and abroad, including Tata Daewoo in South Korea, Tata Motors European Technical Centre in
the UK, and Tata Motors Jamshedpur in India.

Tata Motors reported revenue of $44.5 billion in the 2020-21 fiscal year. The company has
recorded a decline in its net profit in recent years due to lower sales volume, higher input costs,
and foreign exchange losses. However, Tata Motors has taken several steps to improve its
financial performance, such as reducing costs and increasing focus on the domestic market. The
company's balance sheet has improved with a reduction in debt and an increase in cash reserves.
Overall, Tata Motors is a well-established player in the Indian automotive market and has a
strong brand reputation. The company faces significant challenges in a highly competitive and
rapidly changing global market, but it is taking steps to address these challenges and improve its
financial performance.
Financial Management 8

Mahindra & Mahindra

Mahindra & Mahindra (M&M)
is a leading Indian
multinational conglomerate
with interests in the
automotive, agribusiness,
two-wheelers, construction
equipment, defense, energy,
finance, hospitality,
information technology, leisure
and hospitality, real estate, retail, and telecommunications industries. In the automotive industry,
M&M is known for its range of SUVs, tractors, and commercial vehicles.

Mahindra & Mahindra (M&M) reported revenue of INR 1.62 trillion (approximately $22 billion)
in the 2020-21 financial year. The company's automotive segment, which includes passenger
vehicles and commercial vehicles, reported a revenue of INR 736.69 billion (approximately $10
billion). The company's automotive segment was affected by the Covid-19 pandemic, which led
to a decline in sales volume and a reduction in operating profit.

M&M reported a net profit of INR 27.64 billion (approximately $380 million) for the 2020-21
financial year, which was lower compared to the previous year. The company has taken steps to
improve its financial performance, such as reducing costs, optimizing its product portfolio, and
increasing focus on the domestic market.

M&M has faced challenges in the automotive industry in recent years, such as increased
competition, declining sales, and the impact of government regulations and policies. Despite
these challenges, the company continues to invest in new technologies and expand its product
portfolio to stay ahead in the competitive Indian automotive market.
Financial Management 9

Eicher Motors
Eicher Motors Limited is an Indian multinational
automotive company that manufactures motorcycles
and commercial vehicles, headquartered in New
Delhi. Eicher is the parent company of Royal Enfield,
a manufacturer of middleweight motorcycles.
The Eicher Group has diversified business interests in
design and development, manufacturing, and local
and international marketing of trucks, buses, motorcycles, automotive gears, and components.
Eicher has invested in the potential growth areas of management consultancy services,
customized engineering, and maps and travel guides.

VE Commercial Vehicles (VECV) Limited is a joint venture between Volvo Group and Eicher
Motors Limited. VECV is divided into five business units.:
● Eicher Trucks and Buses
● Volvo Trucks India
● Eicher Engineering Components
● VE Powertrain
Royal Enfield Motors, the motorcycle manufacturing subsidiary, is a part of Eicher Motors.

Hero MotoCorp Limited

Hero MotoCorp Limited (formerly Hero Honda) is an
Indian multinational motorcycle and scooter
manufacturer headquartered in New Delhi. The
company is one of the largest two-wheeler
manufacturers in the world [link expired] as well as in
India, where it has a market share of about 37.1% in
the two-wheeler industry. As of 27 May 2021, the
market capitalization of the company was ₹59,600 crore (US$7.5 billion).
Financial Management 10

Hero MotoCorp has five manufacturing facilities based at Dharuhera, Gurugram, Neemrana,
Haridwar, and Halol. A new manufacturing facility is in the process of being set up in Chittoor in
Andhra Pradesh. Spread over 600 acres, the company has invested 1600 crores in setting up this
greenfield facility These plants together have a production capacity of over 76 lakhs 2-wheelers
per year. Hero MotoCorp has a sales and service network with over 6,000 dealerships and service
points across India. It has had a customer loyalty program since 2000, called the Hero Honda
Passport Program which is now known as Hero GoodLife Program. As of 31 March 2020, the
company has an annual capacity of 9.1 million units in its eight manufacturing facilities. Apart
from these manufacturing facilities the company also has two R&D facilities, in Germany &
Jaipur.

The equity shares of Hero MotoCorp are listed on the Bombay Stock Exchange, and the National
Stock Exchange of India, where it is a constituent of the NIFTY 50. As on 31 December 2013,
the promoters Munjal Family held around 40% equity shares in Hero MotoCorp. Over 6b1,000
individual shareholders hold approx. 7.44% of its shares. Foreign Institutional Investors hold
approx. 30% shares in the company.

HINDUSTAN MOTORS LTD.

Hindustan Motors Limited was established during the pre-Independence era at Port Okha in
Gujarat. Operations were moved in 1948 to Uttarpara in district Hooghly, West Bengal, where
the company began the production of the iconic Ambassador. Equipped with integrated facilities
such as a press shop, forge shop, foundry, machine shop, aggregate assembly units for engines,
axles, etc,, and a strong R&D wing, the company currently manufactures the Ambassador (1500
and 2000 cc diesel, 1800 cc petrol, CNG and LPG variants) in the passenger car segment and
light commercial vehicle 1-tonne payload mini-truck Winner (2000 cc diesel and CNG) at its
Uttarpara and Pithampur plants.

The first and only integrated automobile plant in India, the Uttarpara factory, popularly known as
Hind Motor, also manufactures automotive and forged components.
Financial Management 11

The company also has operations in Pithampur near Indore in Madhya Pradesh where it produces
1800 cc CNG and other variants of Winner.

Hindustan Motors is committed to core values of quality, safety, environmental care and holistic
customer orientation.

The plants:

● Uttarpara (West Bengal)

The automobile division at Uttarpara is engaged in the manufacture of the iconic
Ambassador and light commercial vehicle Winner.
● Pithampur (Madhya Pradesh)
The company produces 1800 cc CNG and other variants of Winner here.

Maruti Suzuki India Ltd.

Maruti Suzuki India Limited (MSIL), a subsidiary of Suzuki Motor Corporation, Japan, is India’s
largest passenger car maker. Maruti Suzuki is credited with having ushered in the automobile
revolution in the country. The Company is engaged in the business of manufacturing and sale of
passenger vehicles in India. Making a small beginning with the iconic Maruti 800 car, Maruti Suzuki
today has a vast portfolio of 16 car models with over 150 variants. Maruti Suzuki’s product range
extends from entry-level small cars like Alto 800, and Alto K10 to the luxury sedan Ciaz. Other
activities include the facilitation of pre-owned car sales, fleet management, and car financing. The
Company has manufacturing facilities in Gurgaon and Manesar in Haryana and a state-of-the-art
R&D center in Rohtak, Haryana.

The Company, formerly known as Maruti Udyog Limited, was incorporated as a joint venture
between the Government of India and Suzuki Motor Corporation, Japan in February 1981. Presently,
Suzuki Motor Corporation owns an equity of 56.2%. The Company’s shares are traded on the
National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Financial Management 12

TVS Motors

TVS Motors is an Indian multinational motorcycle company headquartered in Chennai, India. It

is the third largest motorcycle company in India with a revenue of over $4 billion USD in 2020.
The company offers a range of products including motorcycles, scooters, and three-wheelers.

TVS Motors has a strong presence in domestic as well as international markets with exports to
over 60 countries. TVS Motors offers a range of motorcycles and scooters including Apache,
Radeon, Victor, Jupiter, Wego, Scooty Pep, Scooty Zest, etc.

As of 2020, the company had a revenue of over $4 billion USD and a net profit of around $100
million USD. TVS Motors has a strong balance sheet with low debt levels and has consistently
shown growth in its top and bottom line over the past few years. The company also has a healthy
cash position and generates significant cash flows from its operations.

Ashok Leyland

Ashok Leyland is an Indian multinational automotive manufacturing company headquartered in

Chennai, India. It is the second-largest manufacturer of commercial vehicles in India and one of
the largest bus manufacturers in the world. The company was founded in 1948 and is a
subsidiary of the Hinduja Group, a multinational conglomerate.

Ashok Leyland primarily produces commercial vehicles such as trucks, buses, and defense
vehicles, and also offers engines, spares, and after-sales service. The company has a strong
presence in India as well as in several international markets and exports its products to over 50
countries.

As of 2020, the company had a revenue of over $4 billion USD and a net profit of around $150
million USD. Ashok Leyland has a strong balance sheet and has shown consistent growth in its
top and bottom line over the past few years. The company also has a healthy cash position and
generates significant cash flows from its operations.
Financial Management 13

Escorts Kubota Limited

Escorts Kubota Limited formerly Escorts Limited is an Indian multinational conglomerate that
operates in the sectors of agricultural machinery, construction machinery, material handling, and
railway equipment. Its headquarters are located in Faridabad, Haryana. The company was
launched in 1944 and has marketing operations in more than 40 countries. Escorts manufactures
tractors, automotive components, railway equipment, and construction and material handling
equipment.

Escorts Kubota Limited's management team includes Nikhil Nanda as the Chairman and
Managing Director and Seizi Fukuoka as Deputy Managing Director.

Escorts Agri Machinery: Escorts Agri Machinery was launched in 1960. The company
manufactures tractors under the brand names Farmtrac, Powertrac, and Steeltrac. The first
Escorts tractors were produced in 1961 based on the Ursus license. In 1969, a partnership with
Ford was set up to produce licensed Ford tractors for India.

Escorts has a plant in Mrągowo, Poland, that was purchased from Pol-Mot in 2000, and four
plants in India. There was an assembly plant in Tarboro, North Carolina, that was purchased
from Long Agri, but the North American subsidiary went into receivership in 2008.

Escorts Construction Equipment: Escorts Construction Equipment manufactures and markets

construction and material handling equipment like pick-and-carry cranes, backhoe loader,
vibratory rollers, and forklifts. The manufacturing and assembly facility is located in Sec 58,
Faridabad.

Railway Equipment Division: The Railway Equipment Division manufactures and supplies
critical railway components such as air brake systems, EP brake systems, draft gears, and
couplers, composition brake blocks, dampers, and rubber components to the Indian Railways.
The manufacturing facility is located in Sector 24, Faridabad.

Escorts Auto Products: Escorts Auto Products manufactures auto suspension products such as
shock absorbers, struts, and telescopic front forks for the automotive industry. The company
collaborated with Fichtel & Sachs to introduce the concept of shock absorbers to be
Financial Management 14

manufactured in India in 1966. In 2016, Escorts' Auto Products business was divested to
Pune-based Badve Engineering.

Motorcycles: The motorcycle division of Escorts group used to manufacture Polish SHL M11
175 cc (10.7 cu in) motorcycles under the brand name Rajdoot from the early 1960s until 2005.

In the early 1980s, Escorts started making Yamaha motorcycles in India. Rajdoot 350 was
launched in 1983, which was later followed by the Yamaha RX 100 in 1985. The motorcycle
manufacturing unit in Faridabad, India, was sold to Yamaha in 2001 when Escorts decided to
quit the motorcycle business to concentrate on tractors and auto components.

Jamna Auto Industries

JAI (Jamna Auto Industries Limited) is an Indian multinational suspension system automotive
company headquartered in Delhi, India. JAI produces various types of springs, including tapered
or multi-leaf, parabolic springs, lift axle suspension and air suspension systems. JAI
manufacturing units are found in Yamuna Nagar, Malanpur (near Gwalior), Chennai, Hosur (near
Bangalore), Rudrapur, and Jamshedpur. JAI products are sold in over 25 countries

Operations: The Company has eight manufacturing facilities located at Yamuna Nagar, Malanpur
(near Gwalior), Chennai (two units – Maraimalai Nagar & Pillaipakkam), Jamshedpur, Hosur,
Pune, and Pant Nagar (under subsidiary entity). In six of the plants mainly automotive springs
are manufactured. Its wholly owned subsidiary, Jai Suspension Systems LLP (JSS LLP) has a
plant at Pantnagar in Uttarakhand.

Products: Jamna Auto Industries Limited designs and manufactures a wide range of springs to
meet the requirements of

● Heavy commercial vehicles

● Medium commercial vehicles
● Light commercial vehicles
● Sport utility vehicles
● Trailers and Air suspension systems
Financial Management 15

Bajaj auto

Bajaj Auto Ltd (BAL) is one of the leading two & three wheeler manufacturers in India. The company
is the largest exporter of two and three-wheelers in the country. Presently it is engaged in developing
the manufacturing and distribution of automobiles such as motorcycles, commercial vehicles electric
two-wheelers etc. and parts thereof. Apart from this, it has 3 overseas subsidiaries namely Bajaj
Auto International Holdings BV PT Bajaj Indonesia, and Bajaj Auto (Thailand) Ltd. On 29 November
1945, Bajaj Auto was incorporated under the name 'M/s. Bachraj Trading Corporation Private
Limited. In 1948 Bajaj Auto started selling imported two- and three-wheelers in India. In 1959 Bajaj
Auto obtained a license 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 100000 th vehicle. In 1971 Bajaj Auto launched a three-wheeler goods carrier. In 1977 the
company launched Rear Engine Auto Rickshaw. 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 operates in the segments such as automotive insurance and
investment and others. Considering the growth opportunities in the auto wind-energy insurance and
finance sectors the holding company demerged its activities into three separate entities each of
which can focus on its core businesses and strengthen competencies. 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 was also transferred to
Bajaj Investment & Holding Ltd. As part of the scheme Bajaj Holdings and Investment Ltd was
renamed Bajaj Auto Ltd (BAL). The appointed date of this demerger was closing hours of business
on March 31, 2007.On April 9 2007 the company inaugurated its 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 on September 3 2007 due to the higher cost of
production. In November 2007 Bajaj Auto International Holdings BV a wholly owned subsidiary
company acquired a 14.51% equity stake in KTM Power Sports AG of Austria Europe's second
largest sport motorcycle manufacturer for Rs 345 crore. During the year 2007-08, the company
launched the XCD 125 DTS-Si and the Three-wheeler Direct Injected auto rickshaw. The Chakan
plant completed the cumulative production of over 2 million Pulsar.
Financial Management 16

Force Motors

​Force Motors Ltd is a fully vertically integrated automobile company with expertise in design
development and manufacture of the full spectrum of automotive components, aggregates and
vehicles. Its range of products includes Light Commercial Vehicles (LCV) Multi-Utility Vehicles
(MUVs) Small Commercial Vehicles (SCVs) Sports Utility Vehicles (SUVs) and Agricultural Tractors.
Force Motors is a subsidiary of Jaya Hind Investments Private Limited promoter of the company
which holds a 57.38% stake in the company.Tempo Finance (West) Private Limited a subsidiary
company of Force Motors Limited is engaged in providing financial services. Force Motors Ltd was
incorporated in the year September 08th, 1958 with the name Bajaj Tempo Ltd. The company was
promoted by N K Firodia. Initially, the company started production of the HANSEAT 3-Wheelers in
collaboration with Vidal & Sohn Tempo Werke Germany. In the year 1959, the company started its
manufacturing operation in a small plant in Goregaon a suburb of Mumbai.

In 1961, they acquired about 1502 acres of land in Akurdi near Pune. In May 1961 the company was
converted into a public limited company. In 1964, they transferred their production facility to Pune. In
November 1964 they commenced the manufacture of Tempo Viking 4-wheeled Truck & Vans.In the
year 1969, the company subsequently upgraded the Viking vehicle with a diesel engine and thus
they started manufacturing Matador. In the year 1975, they increased the manufacturing capacity to
12000 vehicles per year in addition to 6000 diesel engines for other purposes.In 1983 the company
entered into a technical collaboration agreement with Daimler Benz AG West Germany for the
manufacture of light commercial vehicles such as Mercedes vans station wagons and mini buses at
Pithampur.In 1987 the company set up a new plant at Pithampur in Madhya Pradesh for the
production of Tempo Traveller. This plant was designed and built to the specification of
Daimler-Benz. They increased the licensed capacity from 30000 to 50000 per annum including 5000
three-wheelers.

In the year 1989, they established the production facility for various rear axles and 5-speed
Mercedes gearboxes. In the year 1990, the company established a new commercial tool room at
Akurdi equipped with the latest CNC 3 dimension dies sinking equipment and capable of
manufacturing large panel dies for bodies. They also established a modern CAD/CAM facility to
support the tool room activity. They entered into an agreement with Ricardo Consulting Engineers for
the technology gradation of the D 301 E2 engine. In the year 1991, the company introduced new
models of Tempo Trax called Challenger and Town & Country in the market. In 1993 they offered
rights to part finance for the modernization of their manufacturing facilities. In the year 1994, the
company entered into a license agreement with Robert-Bosch GmbH for the manufacture of Tractor
Hydraulics.
Financial Management 17

Analysis

Hypothesis 1: The relation between debt and the value of the chosen automobile firms shows a
correlation of 11.12%, which shows that the two are not correlated to each other.
Debt is considered to be a cheaper source of capital for firms and thus it helps the firm in
increasing its value but this doesn’t seem to be true for the automobile industry in India.
The firms which fall in the top 25%tile by their value have a very high (96%) correlation with
the value, which depicts that a high debt in the balance sheet leads to a higher value for the firm.
Whereas, the firms in the bottom 25%tile have a cent percent (-100%) negative correlation which
states that debt and value are inversely related to each other.
Thus, we reject the null hypothesis so there is no relation between debt and the value of the firm.

Hypothesis 1
Company Debt Value

Mahindra & Mahindra ₹457,476 ₹9,399,401

Eicher Motors ₹0 ₹7,789,378
Hero MotoCorp ₹426 ₹7,218,731
Maruti Suzuki ₹2,306 ₹941,148
Escorts ₹44,016 ₹317,223
Jamna Auto Industries ₹1,187 ₹225,285
Bajaj Auto ₹123 ₹56,612
Ashok Leyland ₹1,664 ₹9,182
Hindustan Motors ₹0 ₹31
Force Motors ₹461 ₹29
TVS Motor Company ₹1,405 -₹3,064
Tata Motors ₹812,316 -₹439,032

Correlation Table
Full Data Set Top 25%tile by Value Middle 50%tile by Value Bottom 25%tile by Value
11.12% 96.74% 11.75% -100.00%
Financial Management 18

Hypothesis 2: The relation between debt and equity of the chosen automobile firms shows a
correlation of 44.75%, which shows that the two are related to each other.
It is considered that as the firm increases its debt, the rate of return demanded by the equity
shareholders also increases as the risk to their investment increases.
The firms that fall in the top25%tile by their debt have a very high (98.05%) correlation with the
cost of equity, which depicts that a higher debt raises the return required by the shareholders.
Similarly, the firms that fall in the bottom 25%tile by their debt have a very high (98.49%)
correlation with the cost of equity, which also depicts that there is a positive relation between the
debt raised by a firm and the return demanded by its shareholders.
Thus, we accept the null that there is a relationship between the debt raised by the firm and the
cost of equity of the firm.

Hypothesis 2
Company Debt Cost of Equity

Tata Motors 812,315.80 18.20%

Mahindra & Mahindra 457,476.20 15.43%
Escorts 44,016.00 13.84%
Maruti Suzuki 2,306.00 15.37%
Ashok Leyland 1,664.00 15.57%
TVS Motor Company 1,405.00 15.16%
Jamna Auto Industries 1,187.00 16.81%
Force Motors 461.40 16.21%
Hero MotoCorp 426.00 14.60%
Bajaj Auto 123.00 18.27%
Eicher Motors 0.00 13.60%
Hindustan Motors 0.00 14.46%

Correlation Table
100% data set Top 25% by debt Middle 50% by Debt Bottom 25% by debt
44.75% 98.05% -1.96% 98.49%
Financial Management 19

Hypothesis 3: The relation between equity and profits of the chosen automobile firms shows a
correlation of -43.54%, which shows that the two have an inverse relationship..
Generally, it is considered that raising money through equity helps the firm increase its profit
after tax as it is saved from paying the excess interest expenses for its debt. But in this case, it
shows otherwise that the firms with high profits are the ones that have lower equity.
The firms which fall in the top 25%tile by their profits have a very high (-99.18%) negative
correlation with the profits, which depicts that raising higher equity leads to a lower profit for the
firm.
Whereas, the firms in the bottom 25%tile have a moderate (-48.33%) negative correlation which
states that equity and profits are inversely related to each other.
Thus, we accept the null hypothesis since there is a moderate negative relation between equity
and the profits of the firm.

Hypothesis 3
Company Equity Profit

Eicher Motors 42,711.00 997,701.20

Hero MotoCorp 42,600.00 989,428.00
Mahindra & Mahindra 101,564.00 937,240.00
Tata Motors 30,825.00 913,597.60
Maruti Suzuki 493,903.00 58,955.00
Escorts 41,264.00 52,693.84
Jamna Auto Industries 1,172,960.00 44,127.90
Bajaj Auto 1,172,960.00 4,687.00
Ashok Leyland 7,469.00 834.00
TVS Motor Company 4,822.00 679.00
Force Motors 1,189,840.00 33.00
Hindustan Motors 311.00 21.00

Correlation Table
100% data set Top 25% by profit Middle 50% by profit Bottom 25% by profit
-43.54% -99.18% -40.11% -48.33%
Financial Management 20

Conclusion

It can be concluded from the analysis that the capital structure chosen by a firm can affect
various aspects of its business namely, its cost of equity, profitability, cost of debt, valuation, etc.
It has been noted that debt and value are not related to each other because of the external forces
which exist and affect the automobile industry in India, whereas debt and cost of equity are
directly related and equity and profits are negatively related to each other.

This depicts that the firm should choose its capital structure wisely as it will lead to the firm
getting a higher valuation in the market. A good capital structure ensures that the available funds
are used effectively. It prevents over or under-capitalization. It helps the company in increasing
its profits in the form of higher returns to stakeholders and finally, it helps in maximizing the
shareholder’s wealth which is the prime goal of a financial manager.
Financial Management 21

References

● Automobile Industry, Indian Automobile Companies - IBEF. (n.d.). India Brand Equity

Foundation. https://www.ibef.org/industry/india-automobiles

● India Automobile Market Analysis - Industry Report - Trends, Size & Share. (n.d.).

https://www.mordorintelligence.com/industry-reports/analysis-of-automobile-industry-in-

india

● (2023, January 19). Automotive industry in India - statistics & facts. Statista.

https://www.statista.com/topics/3771/automotive-industry-in-india/

● ValueInvesting.io | Automated DCF and WACC | Intrinsic Value. (n.d.).

https://valueinvesting.io/

● Business News Today: Stock and Share Market News, Economy and Finance News,

Sensex, Nifty, Global Market, NSE, BSE Live IPO News. (n.d.). Moneycontrol.

https://www.moneycontrol.com/

● Bloomberg. (n.d.). https://www.bloomberg.com/markets.

● Yahoo maakt deel uit van de Yahoo-merkenfamilie. (n.d.). https://finance.yahoo.com/