ADVANCED

FINANCIAL
STATEMENT
ANALYSIS

By Group 5:

Akash Gupta 2019PGP007

BSS Pramod 2019PGP012

Khushboo Maroo 2019PGP027

Nishul Wadhwa 2019PGP036

S Rakshana 2019PGP045
 INTRODUCTION

TATA MOTORS MARUTI SUZUKI

Founded in 1945, Tata Motors is a big Headquartered at New Delhi, Maruti Suzuki
VS
multinational automobile company in India is a leading automobile company in India
which is headquartered in Mumbai It is a 56.21% owned subsidiary of the Current market share of Maruti Suzuki is

Diverse portfolio of both commercial and Japanese car and motorcycle 47.4% while that of Tata Motors is only 7.6%

passenger vehicles manufacturer Suzuki Motor For the last 5 years, the return on equity (ROE)

For the last 2 years, the company has been Maruti has been consistently ranked as the of Maruti has been continuously increasing,

experiencing losses largest car manufacturer for quite some time while the same is not true for Tata Motors

Tata Group has been a pioneer in the growing now Maruti has a very small amount of long term

development of Indian economy, however, It has built an amazing brand value in the borrowings or debt as compared to Tata

just having a brand name is not enough to automobile industry by providing best- Motors

survive (and remain profitable) in this affordable products and amazing customer A stealthy growth in the profit margin of

competitive business world service. Maruti Suzuki, as compared to Tata Motors

 Segment Reporting

TATA MOTORS TATA Motors

Share in Revenue by segments
• The Company primarily operates in the automotive segment. The Automotive segment
consists of four reportable sub-segments: Tata Commercial Vehicles, Tata Passenger 2020 2019
Vehicles, Jaguar Land Rover and Vehicle Financing. Commercial Vehicle 36,329.44 14% 58,137.10 19%
Passenger Vehicle 10,481.74 4% 14,469.80 5%
• Other operating segments do not meet the quantitative thresholds for disclosure and have Vehicle Financing 4,295.49 2% 3,700.18 1%
been aggregated. Others consist of IT services and machine tools and factory automation
Jaguar Land Rover 2,08,040.02 79% 2,23,513.58 74%
solutions
Others 3,047.07 1% 3,626.07 1%
• The firm is well diversified and does not have overlap of inter-segment sales Total 2,62,193.76 100% 3,03,446.73 100%
• The Capital expenditure for Jaguar Land Rover Segment of the Business is the highest
(85% in FY20 and 83% in FY19) as it possesses the highest growth potential looking at the MARUTI SUZUKI
current market The Group is primarily in the business of manufacturing, purchase
and sale of motor vehicles, components and spare parts. The other
• The share of Revenue by Commercial Vehicles and Passenger vehicles have reduces from activities of the Group comprise facilitation of pre-owned car sales,
previous year while the share of Jaguar Land Rover and Vehicle Financing have increased. fleet management car financing and servicing of the car manufactured
by the Group.
• The quality of segment reporting by TATA Motors is pretty comprehensive. However, in
the reports it is not very clear about segment profits. Based on the analysis of the various performance indicator of the
Group as a single unit. Therefore, there is no reportable segment for
the Group.
 Microsoft Excel
Worksheet

Reformulation and Modified DuPont

First Level Breakdown Second Level Breakdown

RNOA -0.06 ROOA 0.08
Net Operating Assets 1,20,552.57 OI -7,027.64 Here, we se that Operating Profitability (RNOA) is -6% this is because of
Operating Income -7,027.64 Implicit Interest 26393.6151
losses in the current year, the Financial Leverage is 89% which indicates
OA 2,29,952.66
Financial Leverage 0.89 that Tata is using it’s debt to very well to it’s benefit. We see that the return
Net Financial Obligations 56,660.4800 Implicit Interest 26393.6151 generation less because of its operating profitability which is cover to some
CSE 63,892.09 *Short term borrowing rate 0.24125771
OL 1,09,400.09 extent by its financial leverage.
Net Borrowing Cost 0.0697
Net financial Expenses 3947.5865 OLLEV 0.90748866
We observe that, in Tata’s Case return with no leverage is 8% (ROOA),
Net Financial Obligations 56,660.4800 OL 1,09,400.09
NOA 1,20,552.57 Effect of operating liabilities is -0.14% (RNOA-ROOA) this is due to
Spread -0.13 operational losses in current year. These losses can be credited to the
ROCE -0.17 OLSPREAD -0.1570405
pandemic. The effect of financial Liabilities is negative.(-11%)
ROOA 0.08
*Short-termborrowing rate 24.13%
RNOA -0.06
 Microsoft Excel
Worksheet

Reformulation and Modified DuPont

First Level Breakdown Second Level Breakdown

RNOA 0.45 ROOA 0.34
Net Operating Assets 12,439.80 OI 5,583.45 We se that Operating Profitability (RNOA) is 45%, the Financial Leverage
Operating Income 5,583.45 Implicit Interest 2990.072215
is -75% which indicates that Maruti is not using it’s debt to it’s benefit.
OA 25549.5
We see that the return generation is because of its operating profitability.
Financial Leverage -0.75
Implicit Interest 2990.072215
Net Financial Obligations -36,992.40 Also, the operating spread is 45% which also indicates high operating
*Short term borrowing rate 23%
CSE 49,432.20 OL 13,109.70 profitability for Maruti.

Net Borrowing Cost -0.0007 OLLEV 1.053851348

Net financial Expenses 24.2450 OL 13,109.70 We observe that, in Maruti’s Case return with no leverage is 34% (ROOA),
Net Financial Obligations -36,992.4000 NOA 12,439.80 Effect of operating liabilities is 11% (RNOA-ROOA) and Effect of

OLSPREAD 0.107484067 financial Liabilities is negative.

Spread 0.45
ROOA 0.34 From this breakdown of profitability we understand that Maruti could
ROCE 0.11
*Short-termborrowing rate 23%
RNOA 0.45 make use of it’s leverage better to generate excellent results.
 CASH FLOW ANALYSIS

FY 19 and FY20 – losses - Due to losses in Jaguar Land Rover

The company’s revenue took a hit due to reduced sales in China and Europe in Q4FY20 due to Covid in addition to
economy slowdown pre- covid
Y-o-Y change

2016- 2017- 2018- 2019-

2016 2017 2018 2019 2020 2017 2018 2019 2020
Net Profit 11,579 7,454 8,989 -28,826 -12,071 -0.36 0.21 -4.21 -0.58
Operating cash flow 37,900 30,199 23,857 18,891 26,633 -0.20 -0.21 -0.21 0.41
Capital Expenditure 31,444 16,019 35,049 35,237 29,531 -0.49 1.19 0.01 -0.16
Free Cash Flow 6,456 14,180 -11,192 -16,346 -2,898 2.20 -0.79 1.46 0.18
Cash flow yield (CFO/NI) 3.27 4.05 2.65 -0.66 -2.21
Cash flow yield (FCF/NI) 0.56 1.90 -1.25 0.57 0.24

2020 - Net profit decreased by 58% but operating cash flow increased by 41%. Earnings Management

 Quality of earnings (=CFO/NI) is less than 1 in FY20 which implies low earnings quality.
 The free cash flow of the company in the last 3 years has been negative
 CASH FLOW ANALYSIS

2016 2017 2018 2019 2020 Cash flow Analysis - Tata Motors
Dividend payout 0.01 0.02 0.01 0.00 0.00 50,000

Capex/Depreciation 1.88 0.89 1.63 1.49 1.38 30,000

FCF-Dividend 6348 14059 -11288 -16441 -2955 10,000

Cash flow from ops/sales 0.14 0.11 0.08 0.06 0.10 -10,000 2016 2017 2018 2019 2020
Cash flow/assets 0.14 0.11 0.07 0.06 0.08 -30,000
Asset turnover ratio 1.04 0.99 0.89 0.99 0.82 -50,000
Cash flow adequacy ratio 1.37 0.93 0.69
Cash from Operating Activity - Cash from Financing Activity -
Cash reinvestment ratio 0.99 0.58 1.12 1.20 1.36 Cash from Investing Activity -

 CapEx has been consistently greater than depreciation. This can imply that the company is looking to expand its operations in the near future.
(Recently launched 2 new models in the PV segment -Tata Altroz, Tata Safari SUV)
 The company reduced its dividend outflow by 40% in FY20.
 The cash flow adequacy ratio < 1 for the last two years - current internal cash resources is insufficient to maintain the dividend and operating
growth levels.
 The cashflow reinvestment ratio > 1 for the last 3 years. This implies that the company is looking to expand its operations in the near future.
 CASH FLOW ANALYSIS

Maruti Suzuki           Y-O-Y change

2016- 2017- 2018- 2019- Cash flow Analysis - Maruti
  2016 2017 2018 2019 2020 2017 2018 2019 2020 15,000
Net Profit 5497 7510 7880 7649 5676 0.37 0.05 -0.03 -0.26
10,000
Operating cash
flow 8482 10282 11788 6601 3496 0.21 0.15 -0.44 -0.47 5,000
Capital
Expenditure 2457 3375 3886 4702 3400 0.37 0.15 0.21 -0.28 0
2016 2017 2018 2019 2020
Free Cash Flow 6025 6907 7902 1899 96 0.15 0.14 -0.76 -0.95 -5,000

-10,000

 The company’s sales dropped by 16%. -15,000

 Net profit has declined by 25% in FY20 over the last fiscal year - due to increase in Cash from Operating Activity - Cash from Financing Activity -
cost of production and decrease in consumer demand. Cash from Investing Activity -

Cash flow yield

(CFO/NI) 1.54 1.37 1.50 0.86 0.62 The quality of earnings ratio (=CFO/NI) was less than 1 during FY20 due to large
Cash flow yield payout of accounts payables which reduced the cash from operations.
(FCF/NI) 1.10 0.92 1.00 0.25 0.02
CASH FLOW ANALYSIS

2016 2017 2018 2019 2020

Capex/Depreciation 0.87 1.30 1.41 1.56 0.96
FCF-dividend 5270 5850 5636 -518 -2321
Cash flow from ops/ sales 0.15 0.15 0.15 0.08 0.05
Cash flow/ assets 0.20 0.20 0.20 0.10 0.05
Asset turnover ratio 1.35 1.31 1.32 1.35 1.19
Cash flow adequacy ratio 2.29 1.64 1.14
Cash reinvestment ratio 1.11 1.24 1.18 0.56 -1.79

 Maintained its capital expenditure over the years with its capital expenditure greater than depreciation, despite decreasing profits
 Maintained its high dividend payout, paying out 40% of its net profits
 The cash flow adequacy ratio > 1 indicating sufficient internal cash resources for operations and dividend payments.
 The company has low cash reinvestment ratio which indicates that expansion may not be on the cards for the company in the near
future.
 The company has not borrowed any amount in the last two years – may be looking to focus on core business rather than expansion
Capitalization Issues

• Both the companies depreciate their asset on Straight Line Method (SLM) and
freehold land is measured by both the companies at cost and has not been
depreciated
• If we look at the useful life of assets Maruti Suzuki estimate a fixes year for all
of its vehicles i.e., 8 years whereas Tata Motors estimates the life between 3 to
11 years, thus accommodating the room for exceptional cases
• Two companies strangely differ on estimating useful life of furniture fixtures
and other appliances, as Tata Motors is estimating Furniture, Fixtures and Office
Appliances from 3 to 21 years whereas Maruti Suzuki has fixed life of 10 and 5
years
• As Tata Motors have Total lease liabilities of around 6000 crores whereas
Maruti leases accounts for 60-70 cr. So, it signifies that estimated life of assets
for Tata Motors Differ due to lease commitments with different lessors.
• In a nutshell there is not any significant capitalization issues identified on
comparing both the companies.
 Intercorporate Investments

Tata Motors has intercorporate deposits Company has a Provision of 12.5 cr for
worth 23 cr (The deposits has been given to doubtful Intercorporate deposits which
subsidiaries of Tata Motors) in FY20 which doesn’t impact a company with 75660 cr of
doesn’t impact a company with 2,61,068 cr Revenues, so we will also not take this
of Revenues, so we will not take this investment into account for further analysis.
investment into account for further analysis.
 Foreign Currency Translation(1/2)

Excerpt from the Annual Report

 “10% appreciation/depreciation of the respective foreign currencies with respect to
functional currency of the Company would result in decrease/increase in the Company’s
net profit/(loss) before tax by approximately Rs145.71 crores and Rs 980.21 crores for
financial assets and financial liabilities respectively for the year ended March 31, 2020”
 “The Company has entered into a variety of foreign currency, interest rates and commodity
forward contracts and options to manage its exposure to fluctuations in foreign exchange
rates, interest rates and commodity price risk. The counterparty is generally a bank”

There has been 112% increase in the fair value of derivative financial instruments in FY 20 as compared to FY 19 and also the
Investment in derivates has increased from .11 % of revenue in FY 19 to 2.3 % (Rs 689 cr) in FY 20 shows company has
following a very conservative approach to lower the effect of respective foreign currencies on its income.
In a nutshell Tata Motors has high risk due to foreign currency fluctuations.
 Foreign Currency Translation(2/2)

Foreign Currency Exposure

Excerpt from the Annual Report
 The Group has exposure to foreign currency risk on account of its payables and
receivables in foreign currency which are mitigated through the guidelines
under the foreign currency risk management policy approved by the board of
directors. The Group enters into derivative financial instruments to mitigate the
foreign currency risk and interest rate risk including
 The following table details the Group's sensitivity to a 10% increase and
decrease in the INR against the relevant foreign currencies. The sensitivity
analysis includes only outstanding foreign currency denominated monetary
items as tabulated above and adjusts their translation at the period end for a
10% change in foreign currency rates

There has been significant increase in the Foreign currency / commodity forward from 7.2 cr in 2019 to 105 cr in 2020
shows company has following a very conservative approach to lower the effect of respective foreign currencies on its
income.
 Microsoft Excel
Worksheet

Earnings Management and Red Flags(1/2)

(₹ in crores) Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Earnings Quality 3.27 4.05 2.65 -0.66 -2.21 • Quality of Earnings less than one are considered to be an indicator of low earnings quality due
NI Growth -35.6% 20.6% -420.7% -58.1%
to a high aggregate accrual component or classification shifting
• While net income is down more than 58% in 2020 over 2019, cash from operations is up more
CFO Growth -20.3% -21.0% -20.8% 41.0% than 41% which clearly indicates earnings management, most likely classification shifting.
FCF 6,397 14,127 -11,222 -16,413 -3,069 • CFO is significantly lowered in 2019 and the trend continued till 2020 which shows a high
earning volatility
FCF Growth 120.8% -179.4% 46.3% -81.3%
• Significant increase in CAPEX from FY 18 shows company's is expecting growth from its new
    model. Like we have saw a huge in increase in sale of Tata Motors new cars model i.e. TATA
NI/CFO 30.6% 24.7% 37.7% -152.6% -45.3% Altroz, Tiago, Harrier etc has captured a good market share in a short span of time.
• Earnings quality is very healthy in 2016 and 2017 but the condition has been deteriorated in
CAPEX/Dep 1.89 0.90 1.63 1.50 1.39 2019 and 2020 courtesy to the credit crunch in Indian Economy due to fall of IL&FS and
slowing growth of the Automobile Industry
Earnings Quality Using Free Cash
Flow 0.55 1.90 -1.25 0.57 0.25 • Accounts received has been increased significantly between FY 16 to FY 19 (CAGR of 13%)
but has significantly reduced by 41% in FY20 which is a good sign for the company's market
    position
Receivables -2,223 -4,152 -10,688 -9,109 9,950

Inventory -5,743 -6,621 -3,560 2,069 2,326

Payables 3,947 9,301 7,320 -4,692 -8,085

 Earnings Management and Red Flags(2/2)

• Quality of Earnings less than one are considered to be an indicator of low earnings quality due
All amounts in ₹ million Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
to a high aggregate accrual component or classification shifting.
Earnings Quality 1.54 1.37 1.50 0.86 0.62
• Maruti Suzuki is showing lot of volatility especially reversal in several accrual items over
NI Growth 36.6% 4.9% -2.9% -25.8%
2018-2020 which indicate poor earnings quality. This might be due to aggressive accounting
CFO Growth 21.2% 14.6% -44.0% -47.0% policies
FCF 8,494 10,298 11,814 6,771 3,533
• As we have observed a case of classification shifting in Tata Motors, it is missing in Maruti
FCF Growth 21.2% 14.7% -42.7% -47.8% Suzuki as the growth in NI, CFO and FCF are in parallel in the last 5 years
   
• CFO is significantly lowered in 2019 and the trend continued till 2020 which shows a high
NI/CFO 64.8% 73.0% 66.8% 115.9% 162.4%
earning volatility
CAPEX/Dep 0.87 1.30 1.42 1.61 0.97
• Maruti Suzuki is sitting on 23 million of cash and the cash in hand has been deteriorated in the
Earnings Quality Using Free Cash last few years which is red signal for the investment industry
Flow 1.55 1.37 1.50 0.89 0.62
• CAPEX/Dep less than one has a sign of red flag for the company
   

Receivables -2,223 -4,152 -10,688 -9,109 9,950 • Company is not borrowing any money and also doesn't generate enough cash to fund its
Inventory -5,743 -6,621 -3,560 2,069 2,326
CAPEX (CAPEX has been remain stagnant in the last three years) which shows company is not
planning to launch new models and is dependent on its old model for growth
Payables 3,947 9,301 7,320 -4,692 -8,085
 EVA

NOPAT Calculation NOPAT Calculation

EBIT 17,734 EBIT 7,313
Tax Rate -4% Tax Rate 20%
NOPAT 18443.36 NOPAT 5850.4
• We can observe that both companies show a negative Economic Value Added.
CAPM CAPM
Risk free rate 6.26% Risk free rate 6.26% This basically indicates that companies couldn’t be profitable in the truest
Return of market 18.13% Return of market 18.13% economic sense.
Beta 1.29 Beta 1.12
Return of stock 21.6% Return of stock 19.6% • Even though the financial profit is positive in case of Maruti Suzuki,
Economic profit is negative, which indicates that Maruti Suzuki is failing to
WACC WACC
generating value from the funds invested. Rather, the value is getting erased.
Debt 1,24,788 Debt 184
Equity 62,211 Equity 49,413 • Financially speaking, Tata Motor’s wasn’t profitable and was facing losses.
Capital 1,86,999 Capital 49,597
Debt to capital 66.7% Debt to capital 0.4%
Not so surprisingly, the EVA is also negative.
Equity to capital 33.3% Equity to capital 99.6%
Cost of equity 21.6% Cost of equity 19.6%
Cost of debt 6.0% Cost of debt 58.3%
WACC 11.20% WACC 19.70%

EVA -2509.703553 EVA -3919.215672

 Valuation using AEG (1/2)

1 2 3 4 5
2020A 2021E 2022E 2023E 2024E 2025E

EPS -39.08 42.020321 45.181867 48.58128368 52.2364671 56.166661 • Tata Motors share price is
DPS 0 0 0 0 0 0 currently trading at around 260.
BPS 204 245.72 290.90 339.48 391.72 447.89
It is undervalued in the market
ROCE 20.63% 18.39% 16.70% 15.39% 14.34% as of now
RE(10%Charge) 21.65 20.61 19.49 18.29 16.99
PV Factor @ Discount Rate (1.10)' 1.10 1.21 1.33 1.46 1.61 • P/B of 11.79 (~12) indicates
Present Value of RE 19.682 17.033 14.644 12.491 10.552 that the arrived price of share is
Total PV 74.402
Continuing Value (CV) 294.57423
12 times than that of book value
Present Value of CV 182.91 of share. Actual P/B is lesser.
Value per share 461.010

P/B 11.79657
 Valuation using AEG (2/2)

1 2 3 4 5 • Maruti Suzuki is currently traded

2020A 2021E 2022E 2023E 2024E 2025E
around 8020, which makes it very
EPS 187.9 202.0631 217.2937 233.6724 251.2856 270.2264 overvalued based on the value we
DPS 60.128 64.66019 69.53399 74.77515 80.41138 86.47243
arrived at.
BPS 1,636 1773.80 1921.56 2080.46 2251.33 2435.09
• A P/B value of around 12 suggests that
ROCE 12.35% 12.25% 12.16% 12.08% 12.00%
RE(10%Charge) 38.42 39.91 41.52 43.24 45.09 value of share is 12 times than that of
PV Factor @ Discount Rate (1.10)' 1.10 1.21 1.33 1.46 1.61 book value. Actual P/B is much
Present Value of RE 34.930 32.986 31.192 29.533 27.999
Total PV 156.640
higher, due to higher MPS
Continuing Value (CV) 765.2374
Present Value of CV 475.15
Value per share 2268.193

P/B 12.07128
Forecasting Income Statement and Balance
Sheet

• The forecasted Income Statement and Balance Sheet for both the
companies are in the excel workbooks.
• The assumptions taken for forecasting Income statement and Balance Sheet
for both Tata Motors and Maruti Suzuki are as follows:
• Majority of the values were taken as a proportion of Revenue. The proportion Microsoft Excel
was calculated as a percentage of the particular item to Revenue in FY20. Worksheet

• A compounded annual growth rate approach was taken for forecasting

revenues. Also, the compounded annual growth rate was considered for a few
items, like non-current investments.
• Depreciation was forecasted as a proportion of tangible assets (PP&E).
Thank You