PROJECT REPORT

Submitted for Accounting for Management

Under the IFMR Graduate School of Business
ON

ANNUAL REPORT ANALYSIS BY

Abhishek Kumar(008)
Astha Bhanja(033)
Gopika Sethunath(053)
Samir Prasad Shaw(136)
Suraj Singh(162)

Date of Submission: 26-Sept-2022

 Hero MotoCorp
Introduction:

 Brij Mohan Lall was an Indian entrepreneur and founder of Hero Group. In 1954, he
founded Hero Cycles Limited and began making bicycle parts. In 1984, he signed a deal
with Japan's big auto company Honda, and from here, his world changed again. Together
with Honda, he set up a plant in Dharuhera, Haryana. In 2012, Hero and Honda ended their
partnership. After this, Hero MotoCorp was formed.
 With revenues of over Rs. 29245.47 crores and a capitalization of over Rs 50,000 crore,
Hero MotoCorp is World's largest two-wheeler automobile company. Hero is India's most
trustworthy name in two-wheeler and the world's largest two-wheeler auto manufacturer. It
is also expanding its business in other nations like Africa and South and Central America.
 With changing scenario and the advent of the Electric Vehicle, Hero’s two-wheeler has
bought a significant stake in Ather Energy and also introduced a new product line, Hero
Electric.
 Why Hero MotoCorp?
 We have chosen Hero MotoCorp as it is the largest two-wheeler automobile
manufacturer in the world.
 By analyzing Hero's financial statements, we will learn about the Automobile industry as
a whole because Hero MotoCorp is the market leader in the Automobile sector, which
will also reveal the impact on the economy.
 Furthermore, by evaluating Hero's financial statements, we will gain insights into how
large firms deal with the current economic situation.
 Hero MotoCorp is a corporation that has always upheld its ideals and never forgotten
where it came from. All of these factors encouraged us to choose Hero MotoCorp
 Industry Overview
 India is the largest two-wheeler manufacturer in the world. The two-wheeler sector
contributes to 7% of the manufacturing GDP in India. It is estimated that India has around
190 million two-wheelers. Currently, two-wheeler production accounts for more than 80%
of total automotive production in India. Indian two-wheeler producers have more than 25
million units of installed production capacity. The two-wheeler market is primarily
comprised of the motorcycle and scooter segments.
 Major players are Hero MotoCorp, Bajaj Motors, Honda, Yamaha Motors, Suzuki, and
Eicher Motors.
 Currently, In FY 2020-21, Indian two-wheeler production was down by 12.8% to 18.4
million units against 21 million units in FY 2019-20. Domestic sales plunged 13.2% to
15.1 million units against 17.4 million last year. Exports fell by 6.9% to 3.3 million units
against 3.5 million teams in FY 2019-20.
 Short Term Solvency Ratio
1. Current Ratio
The current Ratio talks about the company’s short-term solvency, i.e., its ability to pay the short-term obligations
through its existing assets. The Current Ratio of Hero MotoCorp has increased by 11.17% from its previous year.
Current Assets
• Inventories, cash, and investments decreased compared to the previous year.
• Trade receivables also decreased as compared to the previous year.
• Total current assets decreased by 8.28% from previous years.
Current Liabilities
• Total outstanding dues decreased by 22.06%.
• Other current liabilities also decreased by 15.04% concerning previous years.
Interpretation
The increase in the Current Ratio is due to a decrease in Current liabilities
(Total outstanding dues); on the other hand, Current assets such as
Inventories, cash, and investments also decrease but not up to that extent.
The current ratio of 1.99 is higher than the industry average of 1.445
2. Quick Ratio
The quick Ratio is the relationship between quick assets and current
liabilities. Here Quick Ratio is increased by 13.81%.
Interpretation
The quick ratio of 1.73 is higher than the previous year’s quick ratio of 1.52,
owing to a decrease in inventories and prepaid expenses. Its quick ratio is
also higher than the industry average of 1.122
3. Absolute liquidity ratio
The absolute Liquidity Ratio shows a company's ability to cover its short-term obligations using only cash and
cash equivalents and current investment. Here Absolute Liquidity Ratio is increased by 12.26%.
Interpretation
The company has both a high current ratio and an Absolute ratio, indicating that it is good in position
regarding paying its short-term obligation.

4. Inventory to net working capital ratio

It shows what portion of a company’s inventories is financed from its available cash. Lower the ratio higher,
the liquidity of the company.
Interpretation
The Inventory to Net Working Capital Ratio has decreased by 26.66%, indicating that the company’s liquidity
ratio has improved. Company working capital also increased from 4842.57 crores to 5042.58 crores.
IN CONCLUSION

Short Term Solvency Ratios 2022 2021

1. Current Ratio 1.99 1.79

2. Quick Ratios 1.73 1.52

3. Absolute Liquid Ratio 1.19 1.06

4. Inventory to Net Working Capital Ratio 0.22 0.30

Can the firm meet its short-term obligations out of its short-
term resources? If the firm is holding much inventory, does it
mean that the company expects higher demand for its products
in the forthcoming year, or is it the case that the firm cannot sell
its inventory?
Yes, the firm is entirely able to meet its short-term obligations. The
company has both a high current ratio and an Absolute ratio,
indicating that it is suitable for paying its short-term debt.
Has the sample firm increased or decreased its inventories?
The firm has decreased its inventory by 23.62%, which shows that
firm has high In liquidity.
Check whether the accounts receivables move in line with sales.
Also, check whether accounts receivables have significantly
increased/decreased.
Yes, Accounts receivable have decreased by 5.05%, whereas Net
Sales have decreased by 5.33 %. This indicates that accounts
receivables move in line with sales.
Long Term Solvency Ratio
1. Debt to Equity Ratio
The Debt-to-Equity Ratio talks about the proportion of Debt and Equity in a company’s capital
structure. It decreased by 16.67 % in 2022 compared to the previous year, indicating that the company
didn’t raise any money through 3rd party liabilities.
Long term debt
The long-term debt has increased over the year by 0.74%.
Net worth
Net worth has grown drastically by 36.56 % compared to the previous year.
Interpretation
The long-term debt has increased & net worth of the company has also grown, but the increase in net
worth is way more than the long-term debt, so the debt-to-equity ratio has decreased concerning the
previous year.
2. Leverage ratio in terms of average total assets
 The Average Total Assets increased by 7.24%, whereas the Average Net Worth increased by 5.61%; hence
there’s no significant change in the Leverage ratio in terms of Average Total Assets.
 
Interpretation
There is little or no change in this ratio, indicating that both Average Total Assets and Average Net worth have
increased in the same proportion.
 
3. Interest coverage ratio
 The Interest coverage ratio helps analyze the firm’s ability to pay its cost of financing as a part of its Profit
Before Interest and Taxes. The Interest Coverage Ratio has improved drastically this year compared to last
year, with a decrease of almost 24.82%.

Interpretation
 
A low-Interest Coverage Ratio indicates that the company has insufficient profits to meet its Interest
Obligations.
Conclusion
Long Term Solvency Ratios 2022 2021

1. Debt to Equity Ratio 0.05 0.06

2. Leverage Ratio ( Average Total Asset / Average Net 1.42 1.39

Worth)
3. Interest Coverage Ratio (PBIT/Finance Cost) 180.41 239.98
Comment on the long-term solvency of the firm. Verify whether the firm has excess
debt in their capital structure compared to net worth or/and Total Assets.
Due to very low debt in capital structure, the company can meet its long-term debt
obligation. There’s no excess debt in the capital structure compared to the net worth as
there is no significant net change in Long Term Debt compared to Net Worth.

 Is the firm able to pay its interest obligations on time?

Yes, the firm has enough earnings to meet its interest obligations on time. The company
also does not have any significant long-term commitments.
ACTIVITY RATIOS

1.  Trade receivable turnover ratio

This ratio indicates the company’s efficiency in collecting the amount due from debtors. It
determines the efficiency with which the trade debtors are managed.
In the case of Hero MotoCorp, Net Sales have decreased by 5.33% from the previous year. In
contrast t, the Average Trade Receivables have increased by 17.40%, which caused a net decrease in
the Trade receivables Ratio of the prior year.
The Collection Period has increased from 24 days to 30 days, an increase of 20% compared to the
previous year.

Interpretation:
A low trade receivable turnover ratio would mean that the firm’s efficiency in converting its trade
receivable into cash has decreased. It also means that the debtors are not paying their dues on time.
The increase in the average collection period indicates that the company cannot collect receivables
at a steady rate.
2. Trade payable ratio
 
This ratio shows the speed with which payments are made to the suppliers for purchases made from
them. It shows the relationship between credit purchases and average Accounts payable.
In the case of Hero MotoCorp, Net Purchases have decreased by 4.29% from the previous year
whereas Average Trade Payables have increased by 14.94% which caused a net decrease in the Trade
Payable Ratio of 16.7% from the previous year.
The Payment Period has increased from 68 days to 82 days which is an increase of 20.59% as
compared to the previous year

Interpretation
 The trade payable ratio has decreased which shows that the payment period has increased compared to
the previous. It shows the company has sufficient cash and working capital for the operating activities.
3. Inventory turnover ratio:
 
Inventory Turnover Ratio (ITR) helps to find how fast a company is able to move stock and
generate sales. Hero’s Inventory turnover ratio has decreased by 5.43%, this is mainly due to a
decrease in COGS by 4.29%.

Inventory holding period

 
The holding period has increased from 21 days to 23 days which is an increase of 9.52% as
compared to the previous year.
 
Interpretation
 
The decrease in the inventory turnover ratio indicates that Hero’s sales decreased as the
average inventory increased from the previous year. The company’s efficiency in converting
inventory into sales has decreased compared to the previous year.
4. Fixed assets turnover ratio
 
The fixed assets turnover ratio establishes a relationship between net sales and Average Fixed Assets.
This ratio indicates how well the fixed assets are being utilized.
In the case of Hero, the Average Fixed Assets have decreased by 1.50% from the previous year,
whereas the net sales have decreased by 4.29%, which caused a net decrease of 3.89% in the Fixed
Asset Turnover Ratio.
 
 Interpretation
 
A decrease in Fixed Asset Ratio indicates that the company is not utilizing its Fixed Assets effectively.
5. Total assets turnover ratio :
 
The total Assets Turnover ratio establishes a relationship between Net Sales and Average
Total Assets. It measures how efficient the firm is in generating revenue from total assets.
In the case of Hero, the Average Total Assets have increased by 16.49% from the previous
year, whereas the Net Sales have increased by 13.87%, which caused a net decrease of 2.25%
in the Total Asset Turnover Ratio.
 
Interpretation:
 
A lower Total Asset Turnover ratio implies that the company is underutilizing its Assets and
not performing effectively and efficiently.
A ratio of 1.08 would mean that the company is generating 1.08 Rupees in Net Sales for
every Rupee of Total Assets.
Conclusion

Activity ratios 2022 2021

Trade receivable turnover ratio 12.13 15.04
Trade payable turnover ratio 4.44 5.33
Fixed assets turnover ratio 4.52 4.7
Total assets turnover ratio 1.31 1.48
Inventory turnover ratio 16.21 17.14
How efficiently is the sample firm able to manage its balance sheet assets and liabilities?
 As we can see that the Trade receivables ratio has decreased which means that the
firm is not able to collect the dues more rapidly as compared to the previous year.
The Trade Payable Ratio has decreased the payment cycle is increase.
On the other hand, the Total Asset Turnover Ratio has decreased which shows that
revenue generation in proportion to the Average Total Asset has decreased which
may not be a good indicator for the company.

How long does the inventory stay in the system? How does the sample firm use the inventory on
a day-to-day basis?
Inventory stays in the system for 23 days which is an increase of 5.73% from the
previous year. The increase in the holding period for the year 2022 as compared to
2021.
What is the average time the sample firm spends collecting cash from its customers?
The Average Collection Period has decreased from 24 to 30 days for the years 2021 and
2022, respectively, with a 29.27 % increase in 2022. A negative cash conversion cycle means
that inventory is sold before you have to pay for it. Or in other words, your vendors are
financing your business operations. A negative cash conversion cycle is a desirable situation
for many businesses

How efficiently does a sample firm generate revenue from its fixed assets?
 Fixed Assets of Hero are decreasing over the past years. The fixed assets
turnover ratio has also reduced by 3.89%, and so has the revenue from
operations. The downward trend in revenue indicates that Hero’s efficiency
has diminished compared to the previous year.
PROFITABILITY RATIOS
 
1. Operating profit ratio:
 
The ratio shows the operating profit as a percent of net sales.
In the case of Hero, PBIT has decreased by 11.19%, and Net Sales have reduced by 5.33%, which has
eventually led to a decrease in the overall Operating Profit Ratio by 6.19% compared to the previous
year.
 
 Interpretation:
 
There has been a reduction of 6.19% in the operating profit ratio; there has been a decrease in the
operating profit by 11.19% the net sales have decreased by a proportion of 5.33%
2. Gross profit ratio:
 
The Gross Profit Ratio measures the firm’s profit compared to the net sales. It slightly reduced by
1.69% in 2022 compared to the previous year. Gross Profit has decreased by 6.93%, whereas net
sales have decreased by 5.33%.
 
Interpretation:
 
The decrease in Net Sales resulted in a reduction of gross profit to 6.93% over the previous year
resulting in a fall in the Gross Profit Ratio. Both the Gross Profit.
Net profit ratio
 
It is the Ratio of Net profit to the Net Sales of the company.
The Net Profit Ratio has fallen by 11.87% compared to the previous year. Net Profit is decreasing
by 16.57%, and Net sales have reduced by 5.33%.

Interpretation
 
The Percentage decrease in Net Profit is higher than the Percentage decrease in Net Sales; thus,
the Net Profit Ratio decreased in the Current year 2021-2022.
IN CONCLUSION

Profitability Ratios: 2022 2021

1. Gross profit ratio [Gross profit/Net Sales]*100 28.69% 29.18%
2. Operating profit ratio [PBIT / Net Sales]*100 16.22% 17.3%
3. Net profit ratio [Net profit/Net sales]*100 8.62% 9.78%
4. Average Total Assets (in crores) 21937.5 20455.1
5. Average Net worth (in crores) 15490.6 14667.4
6. EBIT (or PBIT) (in crores) 4654.46 5241.09
Profit margin

There is a small marginal change in marginal expenses, which means that the company
was able to maintain consistent operating expenses, the net sales went down by 5.33%
which resulted in a decrease in the value of EBITDA and Gross Profit. The cost of
goods sold was decreased by 941 cr. They were able to reduce the cost incurred due to
the purchase of raw materials and inventories. This might be the reason for the reason
of reduced net sales
DU-PONT ANALYSIS

DU-PONT ANALYSIS March March

2022 2021
1. Return on Total Assets(ROTA)    
Operating Profit Ratio (PBIT / Net Sales) 16.22 17.3
Total Assets turnover ratio (Net Sales / Average Total Assets) 1.31 1.48
ROTA ( PBIT / Average Total Assets) 21.22 25.62
     
2. Return On Net Worth    
Net Profit Ratio 8.62 9.78
Total Asset Turnover Ratio 1.31 1.48
Leverage Ratio 1.42 1.39
Return on Net Worth (Net Profit / Average Net Worth) 15.96 20.21
How effective is your sample firm in utilizing total assets to earn profits using Du-Pont
analysis?

Return on total assets

 
Return On Total Assets Ratio measures the firm’s efficiency in generating a profit by its assets. It
is the combination of two ratios, i.e., the Operating Profit Ratio and the Total Asset Turnover
Ratio.
In the case of Hero, the Operating Profit (PBIT) has decreased from 1250.84 crores in 2021 to
1415.8 crores in 2022, and the Average Total Assets have increased from 5839.44 crores in the
year 2021 to 6802.14 crores in the year 2022. This led to an overall decrease in Return on Total
Assets, indicating the company's low efficiency in generating profit out of its Assets.
How effective is your sample firm in utilizing total assets to earn profits using Du-Pont
analysis?

Return on net worth

This Ratio measures the profitability of equity funds invested in the company. It measures
how profitably the owners' funds have been utilized to generate the company's revenue.
 
In the case of Hero, the net profit has decreased from 993.45 crores in the year 2020 to
1105.24 crores in the year 2021, and the Average Net Worth has increased from 2471.53
crores in the year 2020 to 4982.73 crores in the year 2021. This led to an overall decrease in
Return on Net Worth which indicates the low efficiency of the company in generating profit
for its shareholders
Dividend Ratios
• Dividend per share ratio (DPS) is the sum of declared dividends issued by a company for every
ordinary share outstanding. There is almost no change in the dividend per share ratio from the
previous year to this year.

• Dividend Yield ratio is the financial ratio that measures the quantum of cash dividends paid out to
shareholders relative to the market value per share. This year company’s dividend yield ratio had
fallen by 16.12 % over the previous year.

• Dividend Payout ratio shows how much of a company's earnings after tax (EAT) are paid to
shareholders. This year the ratio has increased by 19.66% over the previous year implying that the
company is paying more dividends to increase its share price and raise more funds.

• Retention ratio is the proportion of earnings kept back in the business as retained earnings. The
retention ratio refers to the percentage of net income that is retained to grow the business, rather
than being paid out as dividends. This year the ratio decreased by 35.38 % over the previous year.
Sustainable Growth Rate:

• Sustainable Growth Ratio depicts the maximum rate of

growth at which a company can sustain without having
additional finance. There is a decrease in SGR by 48.97%.
Sustainable rate growth was decreased. The comparison of
ratios depicts that the growth rate of the company was
reduced compared to the previous year because there is a
decrease in both returns on net worth and retention ratio
both were decreased.
INDUSTRY-SPECIFIC RATIO
Compute and comment on industry-specific ratios, if any
Earning Per Share (EPS)
EPS identifies whether the company is able to use its equity share capital effectively to
generate earnings. It also talks about the firm's capacity to pay dividends to its equity
shareholders. Hero MotoCorp's EPS has decreased in 2022 as compared to 2021 by 16.58%.
Equity Shareholders have earned 123.78 rupees per share they hold.
Price to Earning Ratio (P/E)
Price to Earning Ratio (P/E) ratio shows how much the market is ready to pay for one share in
order to get one rupee earning. Hero MotoCorp P/E ratio is 22.31. The P/E ratio has gone up
as compared to the previous year indicating that investors are willing to pay a high price for
one share of Hero MotoCorp. The market price per share has increased from Rs. 2317.02 per
share to Rs. 2762.05 and the earnings per share have decreased from Rs. 148.39 to Rs. 123.78
per share. March 2022
Industry Specific ratio March 2022 March 2021

EPS 123.78 148.39

P/E 22.31 15.61
• Price to Book value (P/B):
• A P/B ratio greater than one suggests that the price of the company share is trading at a higher
price than the company’s book value. The P/B ratio in 2022 stands at 3.5 compared to previous
years’ 3.05. The higher the Price to book r, the more expensive the stock.

• P/S Ratio:
• It measures the relationship bet between the market price of the company share and its net sales
per share. A low P/S ratio could indicate that the stock is undervalued and vice-versa. It measures
the value placed on sales by the market. The P/S ratio for the handstands at 1.92 for two,
compared to 1in3 of the previous year.

• P/CF Ratio:
• It measures the relationship between the market price of the company share and the cash flow per
share. A high P/CF ratio implies that the firm is trading at a higher price but not generating enough
cash flows; it can also depend on the firm's industry and specific operations. A smaller price ratio
is preferred over a more significant multiple as it may reveal that the firm generates sufficient cash
flow that is not yet considered in the current share price. The P/CF ratio for Hero stands at 27.32 in
2022 compared to 11.09 the previous year, resulting in a 146.26% increase.
Comparison with Industry Average
• P/S ratio for Hero is lower than the industry average, which could mean the market is not ready to
pay a higher price based on its net sales compared to other industry firms. For value investors, this
ratio could mean the stock is undervalued.

• P/B ratio for Hero is lower than the industrial average, which could imply that the market is not
ready to pay a premium about the book value of the share compared to other firms in the two-
wheeler industry. For value investors, it could imply that the firm is undervalued.

• P/CF ratio shows how much the market is willing to pay for a given operating cash flow. For Hero,
the ratio is higher than the industry average, which implies the market is ready to pay higher for a
given cash flow compared to other firms. For value investors, the stock could be overvalued.

• Now P/E ratio, P/S ratio, and P/ B ratio are lower than the industry average, which may depict
that the market does not believe in the growth opportunities of Hero MotoCorp as much as it does
for other firms. A high P/CF ratio could also indicate that the company is generating less cash flow
from operating activities compared to other firms in the industry, which is again not a healthy sign
and creates doubt about the future earnings of the company.
INVESTMENT RATIOS
Return on net worth

This Ratio measures the profitability of equity funds invested in the company. It measures how
profitably the owners' funds have been utilized to generate the company's revenue.

In the case of Hero MotoCorp, the net profit has decreased from Rs. 2964.20 crores in the year 2021
to Rs. 2472.02 crores in the year 2022, and the Average Net Worth has increased from Rs. 14667.42
crores in the year 2021 to Rs. 15490.68 crores in the year 2022.

This led to an overall decrease in Return on Net Worth, indicating the company’s low efficiency in
generating profit for its shareholders.
Q. Comment on the quality of earnings of the firm. Are there any significant changes in accounting
policies compared to the previous year? Whether the firm is following conservative or aggressive
accounting methods? How do their accounting policies affect the earnings of the firm?
• Answers: If we look at the gross profit ratio, i.e., -1.69%, then we can assume that the quality of
earnings has marginally decreased, and accordingly operating profit ratio and net profit ratio that has
reduced by 6.19% and 11.87%, therefore, it shows a decline in the quality of earnings of the firm.
There are no such significant changes in accounting policies during the year as compared to prev. Year
as per the annual report of the company.
You analyze the cash flow statement to get more insights into a firm’s cash position. Is there any increase
or decrease in cash and cash equivalents? Where does the money from? How does the firm fund it’s
capital expenditure? Whether the firm is paying excessive dividends as compared to their net profits? Is
there any significant difference between the net profit and the cash flows from operating activities? What
conclusions do you draw from the above analysis?
• Answers: Cash and cash equivalents have decreased over the previous year by 41.69 %. The company
has raised money by selling its fixed assets (PPE). The company’s revenue has dropped, which is also
reflected in its cash flow from operating activities. And the company has paid more dividend this year
to increase its dividend per share ratio so that ultimately its per share value increase in the market,
giving ultimate benefit to the company. The company relies on other sources to generate revenue
besides cash generated from operating activities, so there is a difference between Net Profit and cash
generated from operating activities. The company can generate profit, but its profits are increasing at a
decreasing rate, and that needs to be taken care of.
Contributions

• This study will help in analyzing the financial strengths and weaknesses of the
creditworthiness of Hero MotoCorp. 

• This ratio analysis study is used in decision-making by measuring general efficiency,

measure financial solvency.

• This study will help evaluate economic trends, set financial policy, and build long-
term business activity plans.

• This study will detect unfavorable factors and aid in corrective action.
Limitations

• While calculating the ratios, due to the unavailability of data and difficulties in interpreting data in Hero
MotoCorp India’s Annual report, certain assumptions were made for conducting this financial analysis.

• Since data on long-term borrowings were unavailable, we have assumed lease liability, other financial
liabilities, provisions, and deferred text liabilities under long-term debt.

• Insufficient data for ratio analysis.

• In the trade Receivable turnover ratio, we take net sales instead of credit sales.

• We have assumed the Cost of Goods Sold as a value for credit purchases.

• Since the industry averages for specific ratios were challenging to find, we assumed the average of 4
firms as the industry average, which may affect the actual results.
Thank you