Company BackgroundTATA Motors is a multinational automotive corporation headquartered in Mumbai, India. Part ofthe Tata Group, it was formerly known as TELCO (TATA Engineering and Locomotive Company).Tata Motors is India’s largest automobile company, with consolidated net profit of9,274 crore (US$2.07 billion) in 2010–11. It is the leader in commercial vehicles and among the topthree in passenger vehicles. Tata Motors has products in the compact, midsize car and utility vehiclesegments. The company is the worlds fourth largest truck manufacturer, the worlds second largestbus manufacturer, and employs 50,000 workers. Since first rolled out in 1954, Tata Motors hasproduced and sold over 4 million vehicles in India.Established in 1945, when the company began manufacturing locomotives, the companymanufactured its first commercial vehicle in 1954 in collaboration with Daimler-Benz AG, whichended in 1969. Tata Motors is a dual-listed company traded on both the Bombay Stock Exchange, aswell as on the New York Stock Exchange. Tata Motors in 2005 was ranked among the top 10corporations in India with an annual revenue exceeding INR 320 billion. In 2010, Tata Motorssurpassed Reliance to win the coveted title of Indias most valuable brand in an annual surveyconducted by Brand Finance and The Economic Times.Tata Motors is equally focused on environment-friendly technologies in emissions and alternativefuels. It has developed electric and hybrid vehicles both for personal and public transportation. It hasalso been implementing several environment-friendly technologies in manufacturing processes,significantly enhancing resource conservation.Through its subsidiaries, the Company is engaged in engineering and automotive solutions,construction equipment manufacturing, automotive vehicle components manufacturing and supplychain activities, machine tools and factory automation solutions, high-precision tooling and plasticand electronic components for automotive and computer applications, and automotive retailing andservice operations.Tata Motors is committed to improving the quality of life of communities by working on four thrustareas – employability, education, health and environment. The activities touch the lives of more than amillion citizens. The Companys support on education and employability is focused on youth andwomen. They range from schools to technical education institutes to actual facilitation of incomegeneration. In health, our intervention is in both preventive and curative healthcare. The goal ofenvironment protection is achieved through tree plantation, conserving water and creating new waterbodies and, last but not the least, by introducing appropriate technologies in our vehicles andoperations for constantly enhancing environment care.
Key Accounting Policies of the firmThe financial statements are prepared under the historical cost convention on an accrual basis ofaccounting in accordance with the generally accepted accounting principles, Accounting Standardsnotified under Section 211 (3C) of the Companies Act, 1956 and the relevant provisions thereof. Sales: The company recognizes sales on sale of products or net of products or when products aredelivered to the dealer or customer or when delivered to the carrier for export sales, which is whenrisks and rewards of ownership pass to the dealer / customer. Revenue recognition: Revenues are recognized when collectability of the resulting receivablesis reasonably assuredDividend: Dividend from investments is recognized when the right to receive the payment isestablished and when no significant uncertainty as to measurability or collectability exitsIncome: Interest income is recognized on the time basis determined by the amount outstanding andthe rate applicable and where no significant uncertainty as to measurability or collectability exists. Depreciation and amortization: Depreciation is provided on straight line method (SLM), at the ratesand in the manner prescribed in Schedule XIV to the Companies Act, 1956 Exchange differences: Transactions in foreign currencies are recorded at the exchange ratesprevailing on the date of the transaction. Foreign currency monetary assets and liabilities aretranslated at year end exchange rates. Inventories: Inventories are valued at the lower of cost and net realizable value. Cost of rawmaterials and consumables are ascertained on a moving weighted average / monthly moving weightedaverage basis Investments: Long term investments are stated at cost less other than temporary diminution in value,if any. Current investments are stated at lower of cost and fair value. Fair value of investments inmutual funds is determined on a portfolio basis. Income Tax Expenses: Income tax expenses comprise of current and deferred taxes. Current tax isthe amount of tax payable on the taxable income for the year as determined in accordance with theprovisions of the Income Tax Act, 1961. Current tax is net of credit for entitlement for MinimumAlternative tax.Deferred tax assets in respect of unabsorbed depreciation and carry forward of losses are recognized ifthere is virtual certainty that there will be sufficient future taxable income available to realize suchlosses.
Overall AnalysisCurrent AssetsNet Current Assets increased to Rs. 4,05.11 mn as at March 31, 2011 from Rs. 72.481mn as at March31, 2010 mainly due to – (a) Increase in inventory due to volumes (b) Cash and bank balancesincrease due to surplus cash at Jaguar Land Rover and (c) increase in Loans and advancesCurrent LiabilitiesCurrent liabilities have increased due to increase in sundry creditors, reflecting the volume relatedchanges more particularly in the last quarter.Property, Plant & EquipmentProperty plant and equipment has increased from Rs. 1,040.728mn in 2009-10 to Rs. 1,786.958mn in2010-11 due to product development projects at the company and Jaguar Land Rover, also due to theestablishment of new facilities for Nano and other capacity of the company.Profit before Interest, Exceptional Items And TaxProfit before Interest, Exceptional items and Tax has increased from Rs. 1,040.728mn in 2009-10 toRs. 1,786.958mn in 2010-11, reflecting significant turnaround during the year in the operations ofJaguar Land Rover business.CFOThe cash generated from operations reduced as compared to the previous year due to: Increase in trade and other payables due to increase in manufacturing activity which waspartially offset by: Increase in trade and other receivables due to increase in sales volumes. Increase in inventories representing higher volumes/activity. Increase in vehicle / loans and hire purchase receivables.CFIThe net cash outflow from investing activity reduced during the current year as compared to the lastyear. Net cash used for purchase of fixed assets reduced. The capital expenditure relates mainly tocapacity expansion of product facilities and product development costs for proposed / newproduct launches as well as on quality and reliability improvement projects. During the year 2009-10, the Company sold 20% stake in Telcon, resulting in cash inflow ofRs. 115.95mn Net cash inflow from sale / redemption of other investments. During 2009-10, the Company has sold part of its investment in Tata Steel. During the year, the Company had invested in mutual funds.CFFThe net change in financing activity was outflow of Rs. 140.129mn against net inflow Rs. 284.174mnfor last year. In October 2010, the Company raised Rs. 324.98mn (net) by way of issue of shares throughQIP (against Rs. 179.419mn during the year 2009-10 by way of issue of GDS). The net change in other borrowings during the year was a reduction by Rs. 116.768mn ascompared to increase of Rs. 419.796mn during the last year. The cash outflow on account of dividend increased The net cash outflow on account of interest reduced.
Ratio AnalysisRatios for Tata Motors2011 2010 2009 2008 2007Liquidity RatiosWorking Capital = CA - CL -2164.63 -5834.61 -1143.82 -272.85 2784.05Current Ratio = CA ÷ CL 87% 66% 89% 97% 138%Quick Ratio 0.56 0.44 0.58 0.66 0.92Financial Slack = Cash & Cash Equivalent ÷ Total Assets 2% 1% 3% 9% 4%Operating Cash flow to Current Liabilities = CFO ÷ Avg(CL) 11% 51% 12% 75%CFO to Total Liabilities = Cash Debt Coverage Ratio = CFO ÷ Avg(TL) 5% 24% 6% 45%Inventory Turnover Ratio = COGS ÷ Avg (Inventory) 10.58 10.11 8.26 8.55Receivables Turnover Ratio = NS ÷ Avg(A/R) 19.24 18.03 19.11 30.04Solvency RatiosInterest Coverage Ratio = Times Interest Earned = EBIT ÷ InterestExpense2.9200517 3.5633606 2.5048094 10.124447 9.2191842Total Liabilities to Total Assets= TL ÷ TA 63% 71% 67% 70% 64%Profitability RatiosFixed Assets Turnover = NS ÷ Avg(FA NB) 3.90 3.78 3.94 6.20Current Assets Turnover = NS ÷ Avg(CA) 3.75 3.35 2.56 2.80Average Age of Fixed Assets = Avg(A/D) ÷ Depreciation 5.78 6.54 6.73 7.98Average Life of Fixed Assets = Avg(GB) ÷ Depreciation 14.86 15.70 14.22 15.13Days of Inventory = 365 * Avg(Inventory) ÷ COGS 34.49 36.09 44.19 42.70Days of Receivables = 365 * Avg(A/R) ÷ NS 18.97 20.24 19.10 12.15Operating Cycle (Days) = Days of Inventory + Days of A/R 53.46 56.33 63.30 54.85COGS as % of Sales = COGS ÷ NS 75% 73% 75% 73% 73%Gross Profit Margin as % of Sales = GP ÷ NS 25% 27% 25% 27% 27%Operating Expenses as % of Sales = OE ÷ NS 18% 18% 22% 18% 17%COS as % of Sales = (COGS + OE) ÷ NS 93% 91% 97% 92% 90%Operating Profit Margin as % of Sales = OP ÷ NS 7% 9% 3% 8% 10%Net Profit Margin as % of Sales = NP ÷ NS 4% 13% 4% 7% 7%Effective Tax Rate = Tax Expenses ÷ PBT 18% -61% 1% 21% 26%Return on Assets = NP ÷ Avg(TA) 3% 10% 3% 9% 20%Return on Equity = NP ÷ Avg(Equity) 3.00 8.40 2.23 5.26 4.96EPS = (NP - Preferred Stock Dividends) ÷ Avg Common Stock 3.00 8.40 2.23 5.26 4.96Price Earning Ratio = Stock Price/Share ÷ EPS 48.90 20.46 9.59 12.34 15.45Asset Turnover Ratio = NS ÷ Avg(TA) 0.92 0.81 0.81 1.28 1.45Payout Ratio = Cash Div declared on Common Stock ÷ NI 80.96 44.28 34.52 32.51 35.34Du Pont AnalysisReturn on equity = net profit margin * total asset turnover* Financial Leverage Multiplier2008 2009 2010 2011Return on Equity 0.914733 0.691384 0.458078 0.494369Return on Assets 0.300606 0.220232 0.14226 0.165476Leverage Ratios 3.042964 3.13934 3.220006 2.987566Net profit margin 0.977296 0.965919 0.970953 0.971675
Comparative AnalysisProfitability Vs Sales GrowthSale growth has increased progressively YOY for Tata Motors, except 2009, where we see a negativegrowth (Only Mahindra & Mahindra has positive sales growth in 2009). Profit margin ratio is alsopoorer than the competitors (except 2010)Efficiency Vs ProfitabilityInventory Turnover Ratio of Tata motors has increased to some extent over the years, however it hasalways been more than that of Ashok Leyland and less than that of Mahindra & Mahindra. Profitmargin ratio is also poorer than the competitors (except 2010)53%20%-22%8%35%39%-11%4%26%42%16% 14%4%13%4%7%6% 6%3%6%11% 11%19%10%-30%-20%-10%0%10%20%30%40%50%60%2011 2010 2009 2008Profit Margin Ratio, Percent Sales Growth vs TimeTata Sales growthAshok Sales GrowthMahindra Sales GrowthTata ProfitabilityAshok ProfitabilityMahindra Profitability10.58 10.118.26 8.558.693.51 3.515.0219.1420.6517.4114.174%13%4%7%6% 6%3%6%11% 11%19%10%0%2%4%6%8%10%12%14%16%18%20%0.005.0010.0015.0020.0025.002011 2010 2009 2008Profit Margin Ratio, Inventory Turnover Ratio vs TimeTata_ITOAL_ITOMnM_ITOTata_PMRAL_PMRMnM_PMR
Liquidity Vs ProfitibilityTata Motors has been less liquid compared to its competitors over the years. Profit margin ratio is alsopoorer than the competitors (except 2010)Dividend Payout Vs CapexDividend Payout for Tata Motors has increased YOY. However capital expenditure has beensignificantly larger over the year for Ashok Layland4%13%4%7%6% 6%3%6%11% 11%19%10%0.870.660.890.971.171.36 1.421.321.291.781.441.580%2%4%6%8%10%12%14%16%18%20%0.000.200.400.600.801.001.201.401.601.802.002011 2010 2009 2008Current Ratio, Profit Margin Ratio vs TimeTata_PMRAL_PMRMnM_PMRTata_CRAL_CRMnM_CR239.11 233.04 402.91 441.133526.0266947.2337641.3176209.04123.5 96.7 92.97 72.981%44%35% 33%42%47%70%43%10% 13% 11%23%01000200030004000500060007000800090000%10%20%30%40%50%60%70%80%90%2011 2010 2009 2008Payout Ratio, CapEx vs TimeTata_CapExAL_CapExMnM_CapExTata_PORAL_PORMnM_POR
Assessment of operating and financial performance and position of Tata MotorsTata motors are a part of the cyclical automobile industry so it suffers from fluctuations in its ratiosbut as compared to its competitors it has displayed poorer operational and financial performance.Its Gross Profit margin is higher than the other two but profitability ratios such as EPS ,Profit marginratio and Operating Profit margin are poorer than the other two indicating that operating expenses areproportionately higher cutting into it profit margins.Financially it has been more reliant on debt financing than on equity but this is the norm in theautomotive sector though Mahindra and Mahindra is comparatively less reliant on debt and AshokLeyland is more or less equally dependent.Tata Motors’ liquidity ratios are also poorer as compared to its competitors showing that its ability topay maturing obligations has been compromised relative to its competitors but being part of a hugeconglomerate its not as threatening as it might have been for an independent company.The company’s financial statements indicate that its financial position is not very strong as there aremany negative indicators but its recent acquisitions are regarded as future growth drivers and mayhelp the company overcome operational inefficiencies through technological inputs they provide.Assessment of operating and financial strength and weakness of Tata MotorsThe cash flow from operations has fluctuated over the years peaking in 2009-10 but returning to alow level in 2010-11 and operating profit margin has shown a similar trend indicating operationalefficiency management needs to improve. Operational efficiency has to improve to achieve ratios thatare consistent irrespective of sales as operational efficiency should ideally be independent of salesvolumes.The firm has constantly increased its assets base particularly long term assets and PPE indicatinginvestment in expanding operations on a continual basis.ROA and ROE have fluctuated and effectively declined for more years which are further issues thatneed to be addressed. This implies that investments have not yielded proportionate results over theyears. Better returns would help them keep investors happy and attract more investment. For this theoperational efficiency issues need to be addressed urgently and streamlining of operations to ensureconsistent and better returns is a major issue.Its assets turnover ratio is less than 1 and inventory turnover ratio has consistenly been higher thanAshok Leyland but lower than Mahindra and Mahindra indicating that perhaps it needs betterinventory management to improve its operational efficiency. This becomes especially relevantconsidering the financial challenges faced by the company.One of the factors affecting their financial performance is major acquisitions of foreign carmanufacturers abroad that have required heavy investments. These would probably turn out to bestrengths in the long run as they are utilized in global expansion; and technological benefits andadditional segments of automotive industry they allow the company to foray into will aid the domesticoperations as well.Free Cash flow has been consistently negative indicating growth related expenditures outweigh itsoperational cash inflows. This needs to be addressed for better solvency.
The working capital has remained consistently negative for the last 4 years indicating the mismatchbetween current assets and liabilities has not been rectified.Ultimately there is a lot of scope for improving on the operational as well as financing front andalthough the company is committed to growth and thus needs heavy investment but too