ŠKODA AUTO a.s.

Vysoká Škola

M A S T E R´ S T H E S I S

2014 Javier Fuentes Noguéz

 ŠKODA AUTO a.s. Vysoká Škola

Programme of Study: C-EM Economics and Management

Specialization: Corporate Finance Management in the Global Environment

VALUATION OF ŠKODA AUTO a.s.

Javier FUENTES NOGUÉZ

Thesis supervisor: doc. Ing. Tomáš Krabec, Ph.D., MB

Extract this sheet and replace it with the assignment of the Master Thesis.
Author´s Declaration

Unless otherwise indicated in the text or references, or acknowledged below, this

thesis is entirely the product of my own scholarly work.

Any inaccuracies of fact or faults in reasoning are my own. Accordingly I take full
responsibility. This thesis has not been submitted either in whole or part for a
degree at this or any other university or institution.

I hereby declare that I have mentioned all used sources and that I have cited them
correctly according to copyright of the Act no. 121/2000 Coll., on Copyright and
Related Rights.

This is to certify that the printed version is equivalent to the submitted electronic
one.

Mladá Boleslav, 10th January 2014 Signature

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Acknowledgement

Hereby I would like to thank doc. Ing. Tomáš Krabec, Ph.D., MBA for his helpful
comments and valuable contribution which he gave me when supervising my
Master´s Thesis.

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Table of contents

Introduction 7

1 ŠKODA AUTO a.s. Overview 11

1.1 Identification and Organisational Structure 11

1.2 Board of Management 13

1.3 Description of the Business 13

1.4 ŠKODA AUTO a.s. Growth Strategy 14

1.5 Product Portfolio 15

2 Strategic Analysis 18

2.1 The Automotive Industry in Europe 18

2.2 External Analysis - Automotive situation globally 20

2.2.1 External Analysis - Eurozone 23

2.3 Overview of the Automotive Markets 26

2.4 Internal Analysis 28

2.4.1 Company Organization 28

2.4.2 Production and Logistics 30

2.4.3 Sales and Marketing 34

2.4.4 Human Resources Management 40

2.4.5 Technical Development 43

2.4.6 Purchasing 45

2.4.7 Environmental Responsibility 46

2.4.8 Social Responsibility 48

3 SWOT Analysis 50

4 Financial Analysis 53

4.1 Risk Management System 53

4.2 Financial Situation 55

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 4.3 Financial Statements Analysis 58

4.4 Statement of Financial Position 58

4.4.1 Vertical analysis 58

4.4.2 Horizontal analysis 60

4.5 Income Statement 61

4.5.1 Vertical analysis 61

4.5.2 Horizontal analysis 62

4.6 Financial Ratios 63

4.6.1 Profitability ratios 63

4.6.2 Liquidity ratios 65

4.6.3 Leverage ratios 66

4.6.4 Operating ratios 68

4.7 Working Capital Analysis 69

4.8 Conclusion 71

5 Forecasting Performance – The financial plan 72

5.1 Financial Plan Analysis 74

6 Valuation Approaches (Generic valuation methods – theoretical

background) 76

6.1 Defining Value for the Shareholders 77

6.2 The Discounted Cash Flow model 78

6.3 The Discounted Abnormal Earnings Valuation Method 79

6.4 The Discounted Abnormal Earnings Growth Valuation Method 81

6.5 Valuation using Price Multiples 82

7 Valuation – Application of the methodology 85

7.1 Škoda AUTO a.s. – Valuation by multiples data 85

7.2 Hyundai Motor Company – Valuation by multiples data 88

7.3 KIA Motors. – Valuation by multiples data 91

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 7.4 Valuation - Exchange rate 93

7.5 Valuation based on Free Cash Flow for the Firm 94

8 Conclusion 98

References 99

Appendices 101

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8
Introduction

The valuation of a business according the literature [1, p.13] … is focus on the
determination of the objective value, which can be consider as a proper within the
market with the simple and only goal to estimate the rights of the shareholders of
the company.

The aim of the present work is to estimate the market value on the valuation date
December 2012 of the company ŠKODA AUTO a.s. going through a different type
of theoretical as well as practical analysis and approaches.

The organization of each chapter of the thesis will be as the actual valuation
process of the company and for this reason the content will be structured in five
main parts, the work which will include:

 Overview of the Company

 Strategic and Financial Analyses

 Forecasting Performance – The Financial Plan

 Valuation Approaches – Theoretical Background

 Valuation - Application of the Methodology

On each chapter, topics and sub-topics would be theoretically and briefly

described. One of the purposes of the work is to prepare a detailed analysis of the
business entity, including a theoretical discussion support of possible approaches
to corporate valuation.

The first chapter will be focus on the general overview of the company, providing
general and more detailed information about the entity in order to understand
much better the way of functioning of the business.

This part is followed by the Strategic Analysis, which is one of the key phases of
the valuation process, especially, because the results which would be obtained will
show a better image about the situation that ŠKODA AUTO a.s. presented at the
valuation date.

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This chapter will pay special attention on different factors, which will also
contribute to perceive internal and external key elements of the company in order
to set up a better arguments regarding company’s future performance.

Next part will be based on the Financial Analysis and its main target is to stand out
all the possible risks associated with the financial structure of the entity, as well as
to focus on value generators which may impact the company’s value.

The chapter will analyze the financial management of the entity, mainly using
indicators of liquidity, activity, profitability and financial stability which would serve
as a reference for the company’s long-term existence forecast.

Background analysis will be implemented in the following part with the only aim to
count with a better understanding of the company’s history development, for later
on, to apply the strategic and financial analysis from previous chapters to the
future forecasting performance, having as a key components of this section the
financial statements and also the key portfolio drivers of the company.

On the following part of the work, the main goals of the thesis will be fulfilled; the
first step will be based on the theoretical background of the valuation methods,
which later on, will lead us to the implementation of the valuation approaches in
order to determine the market value of ŠKODA AUTO a.s.

Finally, in the last part of the thesis, the conclusions, a list of the applied
information sources and a separated part with all the figures and tables including
appendices will be incorporated for supporting the information used in the present
work.

The type of information which was used consists of publicly available information
and public company resources (such as financial statements or annual reports).

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1 ŠKODA AUTO a.s. Overview

ŠKODA AUTO a.s., based in Mladá Boleslav in the Czech Republic, is one of the
world’s longest-standing automobile manufacturers.

The tradition of the Company dates back to 1895, when Václav Laurin and Václav
Klement formed a partnership that laid the foundation for over 100 years of Czech
expertise in automotive engineering.

The ŠKODA brand has been a Volkswagen Group brand for more than 20 years.
During this time, the ŠKODA AUTO a.s. Group’s sales have increased
substantially and its product portfolio has expanded significantly. Today, ŠKODA
AUTO a.s. employs more than 26,400 people worldwide.

The ŠKODA AUTO a.s. Group has production facilities in the Czech Republic and
India. Furthermore, Škoda cars are produced in China, Russia, Slovakia, Ukraine
and Kazakhstan.

This international presence will form the basis for the Group’s planned growth over
the next few years. The conditions for this are already in place: impressive
automobiles, a strong brand, a motivated and capable team and the ability to turn
innovations into Simply Clever customer benefits [2, p.3].

1.1 Identification and Organizational Structure

Company’s denomination: ŠKODA AUTO a.s.

Registered office:
Incorporation date:
Legal form:
Registered capital:
Tř. Václava Klementa 869
293 60 Mladá Boleslav, Czech Republic
IČ: 00177041
www address: www.skoda-auto.cz
November 20th, 1990
Incorporated as a joint-stock company.
16,709 (CZK million)

The company is registered in the Commercial Register maintained with the

Municipal Court in Prague, Section B, Insert 332, with file No. Rg. B 332

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The organizational structure of the Company is divided into the following
main areas:
 Central Management Department
 Technical Development
 Production and Logistics
 Sales and Marketing
 Commercial affairs
 Human Resource Management
 Purchasing

The company has its main production plant in Mladá Boleslav and two other
production plants in Vrchlabí and Kvasiny.

ŠKODA AUTO a.s. is a subsidiary of Volkswagen International Finance N.V.

included in the consolidation group of its ultimate parent company and its ultimate
controlling party, VOLKSWAGEN AG (“Volkswagen Group”), with its registered
office in Wolfsburg, the Federal Republic of Germany.

Table 1 ŠKODA AUTO a.s. Group workforce in years 2011 and 2012

ŠKODA AUTO Group Workforce

31.12.2012 31.12.2011 2012 / 2011
Parent Company - permanent employees 23 978 24 177 -0,8%
of which:

- Mladá Boleslav plant 19 559 19 691 -0,7%

- Vrchlabí plant** 938 860 9,1%
- Kvasiny plant 3 481 3 626 -4,0%
Parent Company apprentices 810 759 6,7%
Parent Company - employees total* 24 788 24 936 -0,6%
Subsidiaries - permanent employees 1 607 1 622 -0,9%
Subsidiaries - apprentices 9 7 28,6%
Subsidiaries - employees total* 1 616 1 629 -0,8%
ŠKODA AUTO Group employees total* 26 404 26 565 -0,6%
*excl. temporary employees incl. apprentices, representing the number of employees as at 31st December 2012.

**As at 31st December 2012 Vrchlabí plant including VAD facility (transmissions)

Tab. 1, ŠKODA AUTO a.s. Annual Report 2012 – Human Resources Management p.28, 2013

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1.2 Board of Management
As the statutory body of the Company, the Board of Management runs the
Company’s operations and acts on its behalf. The Board of Management is
responsible for the Company’s long-term strategic goals, devises business and
risk-management policies and ensures business and operations management.

The Board’s powers are laid down in the Articles of Association, the Company’s
internal regulations and legislation of the Czech Republic.

Pursuant to the Company’s Articles of Association, the Board of Management has

seven members, all of whom have an executive role within the Company,
members are listed are following:

Prof. Dr. h.c. Winfried Vahland – Chairman of the Board of Management (since
September 2010)

Werner Eichhorn – Member of the Board of Management for Sales and Marketing
(since September 2012)

Dipl.-Ing. Karlheinz Hell – Member of the Board of Management for Purchase

(since January 2010)

Dipl.-Kfm. Winfried Krause – Member of the Board of Management for Commercial

Affairs (since April 2010)

Dipl.-Ing. Michael Oeljeklaus – Member of the Board of Management for

Production and Logistics, Russia representative of the Board (since August 2010)

Dr. Frank Welsch – Member of the Board of Management for Technical

Development (since September 2012)

Ing. Bohdan Wojnar – Member of the Board of Management for Human Resources
Management (since January 2011)

1.3 Description of the Business

The ŠKODA AUTO a.s. Group ("the Group") is one of the leading corporate
groups in the Czech Republic. It comprises of the parent company ŠKODA AUTO
a.s., its fully consolidated subsidiaries ŠKODA AUTO Deutschland GmbH, ŠKODA
AUTO Slovensko, s.r.o., Skoda Auto India Private Ltd., and associates.

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ŠKODA AUTO a.s.

The parent company, ŠKODA AUTO a.s. ("the Company"), is a Czech company
with a tradition of automotive manufacturing dating back more than a century,
making ŠKODA one of the world’s oldest automotive brands. The Company’s
principal business is the development, manufacture and sale of ŠKODA-brand
automobiles, components and genuine parts, accessories and the provision of
maintenance services.

The sole shareholder of the parent company, ŠKODA AUTO a.s., is the company
Volkswagen International Finance N.V., with its registered office in Amsterdam,
the Netherlands.

Volkswagen International Finance N.V. is an indirect 100% subsidiary of

VOLKSWAGEN AG.

ŠKODA AUTO Deutschland GmbH

ŠKODA AUTO Deutschland GmbH was established in 1991 and has been
a subsidiary of ŠKODA AUTO a.s. since 1995. The company’s principal business
is the purchase and sale of vehicles, genuine parts and accessories.

ŠKODA AUTO Slovensko, s.r.o.

ŠKODA AUTO Slovensko, s.r.o. was established in 1993 as a subsidiary

of ŠKODA AUTO a.s. Its principal business is the purchase and sale of vehicles,
genuine parts and accessories.

ŠKODA AUTO India Prívate Ltd.

This company was established as a subsidiary of ŠKODA AUTO a.s. in 1999

and began assembling vehicles in 2001. Its principal business is the purchase,
manufacture and sale of vehicles, genuine parts, accessories and other goods.

1.4 ŠKODA AUTO a.s. Growth Strategy

The implementation of the ŠKODA growth strategy began in 2010, showing
the first results by 2011. This development continued throughout the 2012 fiscal
year. Sales reached 939,202 deliveries to customers, which was a new record.

ŠKODA AUTO a.s. continued its product offensive with the European launches
of the ŠKODA Citigo and an all-new compact limousine, the ŠKODA Rapid.

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Also, the third generation of the new ŠKODA Octavia was presented to the media
at the end of 2012.

Thanks to its business performance in 2012, the Group is in a good position

for the years to come. Its long-term goal is to increase annual deliveries
to customers to over 1.5 million cars by 2018.

The growth strategy is accompanied by extensive activities to boost profitability

and by investments in the Group’s growth, especially in its home country,
the Czech Republic. Major investments are planned or have already been started
in all three Czech production sites and also in future development, services and
employee training. ŠKODA AUTO a.s. aims to become a more attractive employer
at an international level.

The Group’s increasing internationalization is another key element of its growth

strategy, and leveraging additional potentials in growth markets, such as China,
Russia and India, is a priority.

“Simply Clever” – the company’s mission

All Group activities are defined by the motto “Simply Clever”. These two words
are the core of the brand. They capture the essence of the mission and shape
both of company products and processes. For company customers, “Simply
Clever” stands for practical, sophisticated and smart solutions.

1.5 Product Portfolio

ŠKODA Citigo

Small ŠKODA with a big future - with its modern design, the smallest ŠKODA
brand car, introduced onto the market in 2011, has won the hearts of city dwellers,
mainly due to its fuel economy, efficiency and safety. Thanks to many surprising
details, the ŠKODA Citigo embodies the concept of a modern automobile for urban
use, which is also fun to drive.

ŠKODA Fabia and ŠKODA Fabia Combi

ŠKODA Fabia and ŠKODA Fabia Combi - both models, which offer fuel efficiency
and effective use of space, have been among the best sellers in the ŠKODA brand
portfolio for several years. Reliability, efficient engines, a reasonable price

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and the benefits available make the ŠKODA Fabia an excellent choice for anyone
looking for an attractively-priced car for everyday use.

ŠKODA Roomster

The ŠKODA Roomster is a remarkably spacious car from the ŠKODA brand.
It was designed and named for space, and has been successful with customers
for the same reason. It is clearly recognizable by its clean design and versatile
interior. Since its introduction onto the market in 2006, the ŠKODA brand has also
been successful in the compact multi-purpose vehicle segment.

ŠKODA Yeti

In 2009, ŠKODA entered a new market segment with the ŠKODA Yeti. As one
of the first models in the compact SUV segment, the ŠKODA Yeti has attracted
attention in many markets – and not only in Europe. This model has also been
successful in the market of Russia. Its all-wheel drive system, available upon
request, also makes it ideal for off-road use.

ŠKODA Rapid

The ŠKODA Rapid, a family automobile introduced onto the market in the autumn
of 2012, is the first model that uses major elements of the new ŠKODA brand
design: purity, precision, timelessness and elegance. The interior excels
due to its numerous smart details and abundant space. With specific versions
for India and China, the ŠKODA Rapid is a key model in the ŠKODA growth
strategy.

ŠKODA Octavia and ŠKODA Octavia Combi

The ŠKODA Octavia and ŠKODA Octavia Combi are the core products
of the ŠKODA brand. No other model series in the history of the brand has been
more successful. Since 1996, the ŠKODA Octavia has impressed buyers
with its top design, ample space and high functionality. This entirely new model,
which ŠKODA AUTO a.s. introduced onto the market at the end of 2012,
continues along the path blazed by previous generations of the ŠKODA Octavia
series.

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ŠKODA Superb and ŠKODA Superb Combi

The ŠKODA Superb offers extraordinary quality for an unbeatable price

in the upper middle class. Its spaciousness is exemplary, as are its technical
sophistication and attractive prices for customers. The body styles are also sporty
and elegant. It is rare for an automobile to combine common sense and feeling to
such an extent.

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2 Strategic Analysis

Strategic analysis may be looked upon as the starting point in business valuation,
which has the purpose to determine the potential profit of the company, by
considering internal and external factors that may influence the final, current and
future way of the business through the implementation of different strategies [4,
p.10].

Strategic analysis allows the analyst to probe the economics of a firm at a

qualitative level so that the subsequent accounting and financial analysis is
grounded in business reality.

Strategic analysis also allows the identification of the firm’s profit drivers and key
risks, this in turn enables the analyst to assess the sustainability of the firm’s
current performance and make realistic forecast of future performance [7, p.45].

The analysis will take its initial scenario in the external environment (opportunities
and threats) to get an insight into the drivers that affect the automotive industry
into which Škoda Auto a.s. belongs.

Next, the strategic analysis will be narrowed down in the internal analysis
and concentrate on strengths and weaknesses of the company.

Finally, the findings from the external and internal analysis will be gathered
in a part conclusion and further assessed through a SWOT analysis.

2.1 The Automotive Industry in Europe

The auto sector is often credited as the engine room of Europe. The EU is the
homeland to a competitive and innovative automotive industry that generates
activity throughout the economy – from materials and part supply, to R&D and
manufacturing, to sales and after-sales services.

Manufacturers have trained and developed a highly-skilled workforce, producing

quality products for home and international markets, for example, vehicle
manufacturing supports over 2 million European jobs with an additional 10 million
citizens employed in associate industries, which bring about total exports with a
value over €70 billion annually1.

1
Source: ACEA, Industry Report, 2012.

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The automotive industry has also established itself as a partner in sustainability,
nowadays is visible that the technological advances have brought real solutions,
driving down harmful emissions from industry products and production sites.

Manufacturers have spearheaded significant improvements in vehicle safety and

embraced social responsibility goals.

Vehicle production, which fell by around 20% - 25% from 2008, is expected to
show a slight recovery for the coming year 2013, with commercial vehicles
production expected to reach break-even levels, but keeping shut-downs and
strains on budgets due to the sudden decline in demand.

Millions of Europeans rely on vehicle manufacturing – and the associated supply

chain – to support their families, production facilities have been closed during the
past years and billions of euros in revenue have been threatened by the
slowdown.

Policy makers have a responsibility to protect the interests of citizens and

safeguard the natural environment, but they are also responsible for creating and
atmosphere in which businesses thrive.

Auto makers called for urgent and drastic measures to prevent a prolonged period
of recession to support manufacturing and continue to drive forward the
environmental goals that are shared by policy makers and manufacturers.

On one hand, market incentives have been key to soften the impact of the
recession, encouraging fleet renewal, on the other side, many countries have
already taken a lead in continue with incentives like scrappage schemes and fiscal
incentives, measures that have been efficient during the period of time when they
have been applied.

Vehicle manufacturers continue taking all measures within their reach to emerge
from the economic crisis; however, fewer temporary contracts, lower vehicle
output and shorter working hours are some of the painful steps that will
nevertheless help retain a high-skilled workforce prepared for the future.

Finally, people strongly belief that the automotive sector is an industry with
strength and breadth, which with the right support, will come through the current
crisis and continue delivering economic benefits to the European economy, social

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mobility for millions and the products that will take road transport on a journey to a
more sustainable future.

2.2 External Analysis – Automotive situation globally

With demand for vehicles declining in most mature markets in the face
of the global recession recovery, high fuel costs and urban driving restrictions,
the industry is turning its attention even more strongly towards the expanding
middle classes in the new powerhouses of China, India, Brazil, Russia and other
growing nations.

Globally, the feeling of the market growth in emerging nations is an important trend
– a view shared by auto executives from both, the TRIAD markets (Japan,
Western Europe and North America) and the BRICS (Brazil, Russia, India, China
and Sudáfrica) [5, p.4].

Compared to previous years, issues such as innovative vehicle design, mobility-

as-a-service (MaaS) and connected car technologies are all considered vastly
more important.

Despite relatively low car ownership, emerging markets are equally if not more
eager than their developed counterparts to address the needs of the 21st century
dweller.

World economic situation dominated by debt crisis

Global economic trends were mixed in 2012. First and foremost, the public finance
situation in the major European economies – and the burden it placed on the
financial sector – produced a negative impact over the course of the year.

Highly-volatile financial markets

The downgraded credit rating of leading economies, such as the U.S. and Italy, led
to increasing insecurity on the financial markets and extremely high volatility.

Strong exchange rate fluctuations

Although the national debt crisis considerably weakened the value of the euro, the
Czech koruna depreciated by 2.3% against the euro over the course of the year:
After starting 2012 at an exchange rate of 25.06 CZK/EUR, the rate reached

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between 24.80 and 24.95 CZK/EUR by the middle of the year, before finishing at
25.80 CZK/EUR by the last trading day of the year.

Although the average exchange rate between the U.S. dollar and the euro
changed little, strong fluctuations were reported over the course of the year: The
U.S. dollar fell by approximately 13% in value against the euro in the first half of
the year (from 1.30 to 1.47 USD/EUR), but finished the second half year at a rate
of 1.29 USD/EUR2.

Tab. 2, Source: www.invertia.com.mx – Exchange Rates 2010-2012, 2013.

High raw material prices

Strong price fluctuations were also seen on the raw material markets. Although
prices for most industrial raw materials fell towards the end of 2011, price levels
were still relatively high after the strong increase during this year.

Oil prices rose steeply in the first quarter from approx. USD 92 per barrel to a high
for the year of around USD 128 per barrel in May 2011. The average price per
barrel for the year of USD 110 was therefore 37% higher than the previous year3.

The price of copper hovered between USD 9,000 and USD 10,000 per ton up until
September, before falling to USD 7,500 at the end of the year. Aluminium prices
rose to almost USD 2,800 per ton until the middle of the year, but prices also

2
Source: World Bank, Indicators, Exchange rates 2012, 2013.
3
Source: OPEC: www.opec.org, 2013.

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dropped sharply late in the year. At the end of December aluminium cost USD
2,000 per ton4.

Tab. 3, Source: www.cmegroup.com – Commodities comparison 2007-2011, 2013.

USA and Latin America

The U.S. economy grew by 1.7% in 2012. Unemployment remained at a high level
despite a continued and pronounced expansionary monetary policy. However, the
emerging markets of Latin America continued their positive development, although
at a slower rate.

Asia – China and India remain strong

In China, the growth curve flattened somewhat from the previous year, but still
showed a definite upward trend. Overall, the Chinese economy grew by 9.2% in
2012. Political measures and higher wages ensured the positive development of
the domestic market.

India’s strong rate of economic growth remained relatively strong. GDP grew by
7.0% in 2012. The overall situation was characterized by dynamic growth in
domestic demand. Besides private spending, Indian industry’s willingness to invest
also powered general economic developments.

4
Source: Unión Internacional Metalúrgica, 2013.

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Russia – steady, moderate growth

Russia’s economic development continued at a moderate pace in 2012. Russian

gross domestic product grew at a rate of 3.8% from the previous year. The main
force driving expansion was private consumption, which climbed dramatically
despite slower growth in real incomes as a result of inflation.

2.2.1 External Analysis - Eurozone

The Eurozone in context

The risk of the Eurozone breakup has been averted and slow growth is expected
to begin in the European Union (EU) in mid-2013, plus, the EU’s gross domestic
product (GDP) is forecasted to contract by only 0.1% in the EU in the same year.

GDP growth is expected to average only 1.4% a year from 2014 to 2017,
compared to 2.3% in the ten years preceding the financial crisis5.

Nine of the Eurozone countries (Spain, France, Italy, Finland, Netherlands,

Portugal, Cyprus, Greece and Slovenia) are in a recession, and shrinking
economies make it difficult to ease the debt burden.

The Czech Republic’s positive growth continued in 2011 and 2012. GDP grew by
1.7%. ŠKODA AUTO a.s. accounted for about 7.3% of Czech exports in 2011.

Household spending, on the other hand, continued to fall and finished the year
down 0.4% on 2011. The inflation rate in the Czech Republic was reported at 1.9%
in 2012.

Likewise, the U.K. was unable to escape the impact of the euro-zone crisis. High
unemployment and a weak economy dominated the situation there. The British
economy grew by only 0.8% in 2012.

Consumer’s willingness to make new purchases may be hampered by further

increases in unemployment in 2013; also the ongoing fiscal tightening has
a negative impact on household spending power, but however, as the Eurozone
economy stabilizes and then recovers, consumer spending is expected to start
growing.

5
Source: Eurostat, data as of March, 2013.

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Key concepts on the Automotive field within the Eurozone

As we go along on the analysis we can identify a group of key concepts that add
pressure across the automotive value chain as a summary we can see
the following:

 Vehicle sales decline: sales in 2013 are expected to drop to 1993 levels,
the UK is the only market expected to report an increase on car
registrations while other major markets such as Germany, France, Spain
and Italy could register a double-digit decline6.

 Increasing youth unemployment: growing youth unemployment in EU

nations puts pressure on vehicle sales and current vehicle ownership
models since the number of first-time car buyers are expected to decline.

 Pressure on vehicle pricing: intense price-based competition

as manufacturers offer incentives and undertake self-registrations to prop
up demand.

 Strain on cost structure: as demand declines, manufacturers are forced

to operate at low capacity.

 Dealers and suppliers risk insolvency: estimated decline in vehicle sales

will lead to shutting down of dealers, plus, if plant closures take place,
significant capacity will be eliminated having a direct impact on suppliers7.

Facing macroeconomic uncertainties with multiple strategies

Credit ranking agencies have downgraded Southern European vehicle

manufacturers and suppliers, as a consequence, this will lead to high borrowing
costs (interest rates) and make refinancing even more difficult for already suffering
companies. The lowest interest rate offered in the Eurozone in 2012 by the ECB
in order to stimulate the economy was of 0.5%8.The average retail sales incentives
expected in the first quarter of 2013 in the top five markets – Germany, the UK,
France, Italy and Spain – will be around €2,400 per vehicle9.

6
Source: Vehicle registrations, KBA, CAR Institute, 2013.
7
Source: BBC News, January 2013.
8
Source: The Eurozone and the automotive sector, EY, 2013.
9
Source: LMC Automotive, Global Car and Truck Forecast, 2013.

24
The total estimated vehicle production loss at Western European plants between
2012 and 2015 is about 16 million, while the capacity utilization by carmakers
in Europe in 2012 is located about 65% (down from over 80% in 2007-2008).

Responding to the Eurozone Crisis

Despite the crisis that affects the Eurozone, there are some forecast indicators
which point that the recovery season may be coming out, those signs predict that
there are expected to be 135 premiers in 2013 in the Geneva Motor Show, a good
sign that automotive companies are pushing themselves in order to be back, if we
compare that in 2007 the number of premiers was just of 87, even though the
market forecast, which shows a negative and shrinking consumer confidence trend
within the EU of -20.2% for the Q1 in 201310.

Within the Automotive industry in the EU, there are four main stakeholders who
should apply key measures in order to help the recovery process; such actions
can be summarized as following:

 Vehicle manufacturers: deploy flexible and efficient operations, confirm

the stability of the supplier base as well as embrace new mobility
concepts. All this activities should be put on in order to minimize the
challenges such as global competition, volatile financial markets but
mainly to deal with the weak European performance.

 Suppliers: in order to face with the lower volumes in Western and

Southern European markets and the coming improvements in the
product portfolio by the different brands, it is needed to shift the
production to lower-cost European countries as well as to scout for
collaboration within the energy efficiency field.

 Dealers: since the Western and Southern European markets continues

to remain with a weak performance, the dealers face high inventory
levels as a consequence of the low consumer confidence, in this field is
essential to run new strategies inside the dealer network like to achieve
high customer loyalty based on the alignment of online / social media
and in-store brand and purchase experience, as well as to include
additional services.
10
European Commission Flash Consumer Confidence Indicator, January 2013.

25
  Financial services: since the crisis has begun, most of the brands have
offered competitive incentives (discounts) in order to boost the sales
levels; unfortunately, this measure could bring a risk of brand dilution and
also an increasing impact on residual value of the vehicle. In order to
deal with this threat, automotive brands are playing from the financial
services side in order to maintain a strong financial structure as well as
to protect the credit ratings given.

2.3 Overview of the automotive markets

Positive developments on the global automotive market

The recovery that had begun in 2011 on the global automobile markets continued
in 2012. This trend was mainly driven by the positive developments in markets
as India, China and the USA. Other markets were rather stable in the first
two quarters.

However, in the second half of the year the demand for new cars in Europe
weakened. One of the few exceptions was the UK, which recorded single-digit
growth. The Russian automobile market also grew significantly. Thanks
to the positive development in China, India and the USA, total global automobile
sales increased by 6.3% year-on-year up to the volume of approximately
78.0 million, of which some 66.6 million were passenger cars.

Central Europe

The Central European market dropped by 2.1%. The development of the Czech
market in 2012 was stable. Year-on-year gains reached 0.4%, representing
174,009 vehicles sold. The Hungarian (+ 6.7%) and Slovak (+ 2.0%) markets also
recorded growth. On the other hand, Croatia (- 22.1%) and Slovenia (- 16.8%)
displayed the least positive development in all of Central Europe. A total
of 31,596 vehicles were sold in Croatia and 46,891 in Slovenia. A decrease
in sales by 0.4% was reported in Poland with 270,587 cars sold.

Western Europe

Compared to other regions in the European area, Western Europe was most
seriously hit by the unfavorable economic development. The number of new
vehicles sold dropped in year-on-year comparison by as much as 8.2%.

26
The dynamics of this negative trend in the passenger car market became even
more pronounced in the second half of the year. The only growing markets
in the region were the UK (+ 5.3%) and Switzerland (+ 1.9%). Germany,
the strongest economy and major market in Western Europe, suffered a decline
of 2.9%.

Other markets with previously robust sales also dropped. The Benelux countries
and France contracted significantly, in particular France (- 14.1%), Belgium
(-14.9%) and the Netherlands (- 9.6%).

The Southern European markets have been in recession for four consecutive
years. The economic development here is quite understandably reflected
in the entire car manufacturing industry. Dramatic declines in sales were recorded
in Spain (- 13.4%) and Italy (- 19.9%). The passenger car markets in Greece
and Portugal were still under the spell of the economic crisis, resulting in yet
another remarkable decrease of 40.2%, or 38.0% for all brands.

Eastern Europe

The Eastern European automobile market showed an unexpectedly positive

development in 2012, with growth of 7.7%.

The driving force was Russia in particular, which also plays an important part
in the ŠKODA growth strategy. Compared to 2011, the automobile market growth
here was 10.9%. The market in Romania, however, showed a negative trend,
with a decrease of 25.6%. Ukraine, another important market for ŠKODA,
fell by 1.5%.

Overseas / Asia

The Asian growth markets once again provided the main impetus for the global
automobile market with an increase in sales of 13.3% overall in 2012.

The Chinese economy has been on the rise for a number of years. The same
applies to the automotive industry, proven by the year-on-year growth
in the number of vehicles sold of 9.3%.

In India, negative exchange rate trends and increased price of petrol prevented
even higher growth. And yet India recorded an increase by 11.1%. Overall,

27
positive development was seen in other countries in the Overseas/Asia region,
with a total growth of 12.6%.

2.4 Internal Analysis

Having completed the external analysis, looking at the threats and opportunities
that affect the automotive industry and, in turn, ŠKODA AUTO a.s., this thesis now
moves on to consider the internal factors of the company.

These factors are as opposed to the external, subject to influence by the company
and, therefore, relevant to consider in order to overcome external pressures.

The objective of an internal analysis is to identify potential weaknesses and

strengths within the various processes of the company.

The internal analysis will commence with a company organisation description,

before moving on to address the company’s development, which will serve as an
overall structure for the remaining of the analysis.

2.4.1 Company Organization

The Company is organizationally divided into seven divisions:

— The Central Management division is responsible for ensuring compliance with

customer product-quality requirements, global growth and foreign business
development. The division’s other tasks include strategic planning, active
communication with the media and experts and organisation of meetings of senior
management panels. In the year under review, the division was expanded to
incorporate the Governance, Corporate Risk & Compliance department.

— The Commercial Affairs division is responsible for planning and management,

and thus the effective use of financial resources. In addition, its tasks include
securing information and systems to meet the needs of the Company’s
management.

— The Production and Logistics division is responsible for the production of

vehicles, genuine parts and accessories, engines and components thereof, as well
as logistical operations and production preparation.

— The Sales and Marketing division is responsible for marketing manufactured

vehicles, genuine parts and accessories.

28
— The Human Resources Management division is responsible for providing
personnel services, ensuring that all of the Company’s employees are optimally
qualified, motivated and satisfied. It also handles communication with various
interest groups.

— The Technical Development division is responsible for the development of new

products, design, construction, testing, support for vehicle production and on-going
improvement of the entire range of ŠKODA products. It bears the same
responsibility in relation to engines produced for other VW Group brands.

— The Purchasing division ensures purchases of production and other material,

services and investment units to meet the needs of ŠKODA AUTO a.s.

Relations between Company and shareholders

The Company rigorously complies with all legal regulations to the extent
necessitated by the fact that the Company’s shares are not listed and that it has a
specific shareholder structure in the form of a sole shareholder – Volkswagen
International Finance N.V.

ŠKODA AUTO a.s. complies with the rules set forth in legislation for execution of
extraordinary transactions (i.e. for transactions which in terms of their scope or
value significantly exceed the scope of ordinary business activities). Within the
Company, there are rules governing the relations between Company bodies in the
preparation, approval and implementation of measures and actions of
extraordinary or fundamental importance, such as financial and human resources
planning, production and sales planning, the Company’s participation as a partner
or shareholder in the business of third parties, acquisition or disposal of assets
beyond the scope of ordinary business activities, filling of key positions in
Company management, etc.

Company policy towards stakeholders

ŠKODA AUTO a.s. ranks among the largest companies in the Czech Republic and
is committed to the sustainable development of the society of which it is a part.
The Company is fully aware of its responsibility for the stability of the business
environment. Making every effort to foster the Company’s good reputation,
credibility and reliability with its business partners, employees and other
stakeholders is of key importance.

29
Information openness and transparency

The Company rigorously adheres to and complies with all Czech laws and the
principles of the Code of Corporate Governance set forth in its Chapter V, and
regularly discloses all relevant information about its business, financial and
operating results, shareholder structure and other significant events.

All information is prepared and disclosed in compliance with the accounting

standards and regulations for the disclosure of financial and non-financial
information. Within the strategy of openness, the scope of the disclosure of
information is, in many areas, beyond that stipulated by law.

The Company regularly publishes annual reports. The Annual Report contains
audited annual consolidated and separate financial statements and presents a
detailed picture of the Company’s business activities and financial position. The
Report on Relations between Related Parties is attached to the Annual Report.

In order to prevent a possible conflict of interest, all members of the Board of

Management and the Supervisory Board and all senior executives are required by
internal regulations to notify the Company in writing of any and all material interest
they may have in transactions benefiting third parties and to refrain from exercising
direct influence on decision-making in relation to such transactions. No incidents
were recorded in 2011 that could have led to a conflict of interest in any of the
relevant groups of Company employees or board members.

2.4.2 Production and Logistics

Expansion of production capacities for worldwide growth

The ŠKODA growth strategy was implemented worldwide in 2010. In order to meet
the growing demand for Škoda automobiles, the main focus in 2012 was the
internationalization of ŠKODA AUTO a.s. standards in the various production
sites, particularly in partner plants in Russia and China.

The ŠKODA growth strategy in Russia, India and China

The production capacities in the Russian GAZ plant in Nizhny Novgorod were
expanded in 2012. At the beginning of December, full production of the ŠKODA
Yeti for the Russian market began at the site. Prior to CKD (completely knocked

30
down) production, the ŠKODA Yeti has been produced here as SKD (semi
knocked down). In Nizhny Novgorod, 117 cars were produced as CKD in 2012.

Preparations for the production of the new ŠKODA Octavia in the Group's
assembly plant in Aurangabad started in 2012. The first sets of pre-series vehicles
have already been sent to the Indian facility. At the same time, a number of
measures optimizing production and logistic costs in order to improve profitability
were implemented at both Indian plants (Aurangabad and partner plant in Pune).

The ŠKODA growth strategy is successful in China, too. The first ŠKODA Rapid
cars left the Chinese Yizheng factory in 2012 already. In total, more than 226,000
ŠKODA vehicles were produced in China in 2012.

New models for growth

ŠKODA AUTO a.s. began its announced model offensive, involving the production
of the ŠKODA Rapid, positioned between the ŠKODA Fabia and ŠKODA Octavia
models, in the second half of 2012. In late 2012, production of the new version of
the ŠKODA Octavia began in Mladá Boleslav, while full production of the ŠKODA
Yeti began in Nizhny Novgorod, Russia.

Mladá Boleslav – Parent plant with a perspective for the future

The Mladá Boleslav plant has a key position in the production of ŠKODA brand
vehicles. With the implementation of the growth strategy, significant changes were
made to Mladá Boleslav’s production floor in 2012. Production capacity was
extended, and the production facilities were modified. Investment reached record
levels.

To achieve the extension of vehicle production capacity in plant Mladá Boleslav in

assembly hall MBI from 800 to 1,200 vehicles per day, many adaptions were
implemented and new production facilities were built while production was on
going.

The ultimate completion, tests and final adjustments were successfully achieved
during the plant holiday.

Vehicle production of the Škoda brand

A total of 944,432 ŠKODA vehicles were manufactured worldwide in 2012. This

represents a 4.9% increase compared with the previous year.

31
Production of the ŠKODA Rapid and ŠKODA Octavia began in Mladá Boleslav in
2012. In addition, the production of the SEAT Toledo with a total of 5,000 vehicles
began.

The increase in production volume did not occur only in Europe, but also in
Russia, India and China. In Aurangabad, India, production of Volkswagen and
Audi brand vehicles was also increased. In total, 12,591 of those vehicles were
produced there. In the Chinese partner plants, a total of 226,653 ŠKODA Octavia,
Fabia, Superb and Rapid vehicles was produced in the given period. Overall, this
is an increase in production of 1.6%.

ŠKODA Fabia

ŠKODA Fabia production suffered fluctuations in 2012, but the model remains
popular in its class. A total of 231,930 ŠKODA Fabia vehicles were produced
worldwide – 11.2% fewer than the previous year (2011: 261,107 ŠKODA Fabia
vehicles).

ŠKODA Roomster

ŠKODA Roomster production at the Vrchlabí plant saw an increase in 2012. In

total, 39,249 ŠKODA Roomster cars were built, an increase of 7.7% compared to
2011 (2011: 36,427 ŠKODA Roomster vehicles).

ŠKODA Octavia

The ŠKODA Octavia was the best-selling model of ŠKODA AUTO a.s. once more
in 2012. A total of 406,397 vehicles were produced worldwide. The ŠKODA
Octavia therefore accounted for the largest share of ŠKODA AUTO a.s. production
in 2012 with 43,0% (2011: 402,462 ŠKODA Octavia vehicles, 44.7% of total
ŠKODA AUTO a.s. production).

ŠKODA Yeti

The ŠKODA Yeti, too, recorded rising production numbers. The total volume grew
by 17.6% reaching 90,882 vehicles (2011: 77,312 ŠKODA Yeti vehicles).

ŠKODA Superb

In its class, the ŠKODA Superb saw a slight downturn in sales. Overall, 106,847
vehicles were built in 2012, which is a decrease of 10.8% compared to 2011.

32
Portfolio of models manufactured worldwide (as at 31st December 2012)

Seat Toledo

VW Passat
Roomster

VW Jetta

Audi Q5

Audi Q7
Audi A6

Audi A4
Octavia

Superb
Citigo

Rapid
Fabia

Yeti
Mladá Boleslav (Czech Rep.) • • • •
Vrchlabí (Czech Rep.) • •
Kvasiny (Czech Rep.) • •
Bratislava (Slovakia) •
Kaluga (Russia) • •
Nizhny Novgorod (Russia) •
Aurangabad (India) • • • • • • • • •
Pune (India) • •
Shanghai (China) • • •
Yizheng (China) •
Source: Škoda Auto a.s. Annual Report 2012 – Production and Logistics p.21

Škoda production worldwide 2012 2011 2012/2011

Production of Škoda cars

Fabia* 118,129 142,115 -16.9%

Fabia Combi 59,870 73,023 -18.0%
Fabia Total 177,999 215,138 -17.3%
Rapid 8,128 - -
Roomster 36,756 33,414 10.0%
Roomster Praktik 2,493 3,013 -17.3%
Roomster Total 39,249 36,427 7.7%
Octavia* 141,727 142,289 -0.4%
Octavia Combi 127,831 131,953 -3.1%
Octavia Total** 269,558 274,242 -1.7%
Yeti* 90,882 77,312 17.6%
Superb 26,125 26,009 0.4%
Superb Combi 39,809 44,882 -11.3%
Superb Total 65,934 70,891 -7.0%
Total Škoda brand 651,750 674,010 -3.3%

Škoda production worldwide 2012 2011 2012/2011

Production of Škoda cars in Pune
Rapid 24,148 2,561 > 100%
Fabia 5,194 - -
Total Škoda Pune 29,342 2,561 > 100%

Production of Škoda cars in Bratislava

Citigo 36,687 1,027 > 100%
Total Škoda Bratislava 36,687 1,027 > 100%

33
Production of Škoda cars in China
Fabia 48,737 45,969 6%
Octavia 136,839 128,220 6.7%
Superb 40,913 48,841 -16.2%
Rapid 164 - -
Total Škoda China 226,653 223,030 1.6%

Total Škoda Worldwide 944,432 900,628 4.9%

Production of other VW Group brands

Seat Toledo 5,000 - -
VW Passat 1,704 1,338 27.4%
VW Jetta 4,101 1,858 > 100%
Audi A6 2,556 1,254 > 100%
Audi A4 2,904 2,328 24.7%
Audi Q5 1,302 1,092 19.2%
Audi Q7 24 - -
Total other VW Group brands 17,591 7,870 > 100%

Total Škoda Auto Group 669,341 681,880 -1.8%

Total Škoda worldwide incl. Seat and

Saipl 962,023 908,498 5.9%

Tab. 7, Source: Škoda Auto a.s. Annual Report 2012 – Production and Logistics
p.21

2.4.3 Sales and Marketing

New record in deliveries to customers in 2012

The ŠKODA AUTO Group ended 2012 with a new record of 939,202 vehicles
delivered to customers worldwide – an increase of 6.8% year-on-year. As regards
the total number of cars delivered, Central and Eastern Europe recorded positive
trends, while deliveries in Western Europe went down by 0.9% compared to the
previous year. However, all regions increased their year-on-year market share
statistics. Thus, the ŠKODA growth strategy manifested its viability in the second
year of implementation, and its readiness to face the impacts of economic
problems in the Eurozone.

Central Europe

In Central Europe, ŠKODA AUTO Group was able to boost deliveries and gain
valuable new market share. A total of 124,012 vehicles were delivered to
customers – an increase of 0.7%.

34
In the Czech Republic, ŠKODA maintained its undisputed position as the leading
automobile brand. The number of vehicles delivered to customers increased to
59,674. Outside the Czech Republic, growing deliveries were recorded in Slovakia
(+ 4.7%) as well as Hungary (+ 20.0%). The ŠKODA brand took the first place in
Slovakia with 15,902 vehicles delivered and the second place in Hungary with
6,899 vehicles delivered.

In Poland, the ŠKODA AUTO Group succeeded in delivering 36,307 vehicles and
confirmed its position as the market leader.

Eastern Europe

The deliveries of ŠKODA vehicles in Eastern Europe continued to grow. A total of

137,057 vehicles were delivered to customers – a year-on-year increase of 26.4%.
ŠKODA has been very successful in recent years in Russia, and this market is one
of the keys to the ŠKODA growth strategy. The Russian market became a major
driver of deliveries in 2012. With the total number of vehicles delivered to
customers of 99,062, growth reached 33.7%. ŠKODA AUTO a.s. has been
increasing the deliveries in Ukraine for three years. 14,393 cars were delivered to
customers here – an increase of 31.9%. (2011: +42.6%). Even in the shrinking
Romanian automobile market ŠKODA AUTO a.s. was able to increase its share
and confirm its position as the second-strongest importer with 6,833 deliveries to
the customers.

Western Europe

Despite the difficult economic situation in some countries of the Eurozone, a total
of 358,439 vehicles were delivered in this region – minus 0.9% year-on-year.
Despite the massive overall decline in deliveries of vehicles in this region, ŠKODA
managed to strengthen its market position in Western Europe in 2012.

ŠKODA has further increased its market share in Germany. With 132,580 vehicles
delivered to the customers (+ 3.6%), Germany remains the second most important
market for ŠKODA AUTO a.s.. Good results were achieved in other major Western
European markets in 2012 as well. Deliveries to customers in the challenging
French market came to 22,022 vehicles, resulting in a year-on-year decrease by
1.5%. Because of the overall decline in the passenger car market the ŠKODA
brand managed to improve its market position. In the UK, ŠKODA AUTO a.s.

35
delivered 53,249 vehicles (+ 17.6%), and thus recorded the best sales result there
ever while also increasing its market share.

Other records were established in Austria with 22,300 vehicles (+ 5.1%) and
Denmark with 10,364 vehicles (+ 28.2%). On the other hand, most markets in
Southern Europe considerably contracted due to the tense economic situation.
Deliveries to Spanish customers dropped by 17.9%. Automobile markets in
Portugal and Greece have felt the brunt of the economic and financial crisis, and
consequently went into the red. As a result ŠKODA AUTO a.s. had to come to
terms with losses and reduced deliveries in Portugal (- 24.7%) and Greece (-
29.5%).

Overseas/Asia

The Overseas/Asia region with its growing Chinese and Indian markets plays an
important role in the ŠKODA growth strategy.

Deliveries in this area developed favorably in 2012. A total of 319,694 ŠKODA

brand vehicles were delivered here, which represents an annual increase by
11.8%.

The motor behind this trend was China, globally the biggest market for ŠKODA
AUTO a.s. 235,674 vehicles (+ 7.1%) were delivered here in 2012. The growth in
India equaled 14.2%, resulting in 34,265 delivered cars. We achieved a growth
rate of 49.9% in the Indian market in 2011 already. Almost two thirds of the
deliveries are represented by our compact limousine developed for the local
conditions – ŠKODA Rapid. The model was introduced at the end of 2011, and the
figures for deliveries to customers the last year are in line with the estimated
growth potential.

In other countries in the Overseas/Asia region in 2012 a total of 49,755 ŠKODA

vehicles were delivered, corresponding to a year-on-year increase of 39.2%.

36
Deliveries to customers by region
Deliveries to customers (vehicles) Change in % % share of passenger car market**

2012 2011 2012/2011 2012 2011

Central Europe* 124,012 123,156 0.7% 18.9% 17.7%
Eastern Europe 137,057 108,423 26.4% 4.2% 3.6%
Western Europe 358,439 361,777 -0.9% 3.0% 2.8%
Overseas / Asia 319,694 285,828 11.8% 1.3% 0.6%
Total Škoda brand 939,202 879,184 6.8% 1.4% 1.4%
* in c lu d in g C z e c h R e p . * * T o t a l M a rk e t s

Source: Škoda Auto a.s. Annual Report 2012 – Sales and Marketing p.24

Deliveries to customers - largest markets

Deliveries to customers (vehicles) Change in % % share of passenger car market**

2012 2011 2012/2011 2012 2011

Total Škoda brand 939,202 879,184 6.8% 1.4% 1.4%
China 235,674 220,089 7.1% 1.7% 1.8%
Germany 132,580 128,011 3.6% 4.3% 4.0%
Russia 99,062 74,074 33.7% 3.7% 3.0%
Czech Republic 59,674 58,202 2.5% 34.1% 33.4%
United Kingdom 53,249 45,282 17.6% 2.6% 2.3%
Poland 36,307 38,116 -4.7% 13.4% 12.7%
India 34,265 30,005 14.2% 1.3% 1.3%
Austria 22,300 21,208 5.1% 6.6% 5.9%
France 22,022 22,356 1.5% 1.2% 1.0%
Switzerland 17,830 16,298 9.4% 5.5% 5.1%
Belgium 17,530 18,900 -7.2% 3.6% 3.3%
Netherlands 16,455 20,879 -21.2% 3.3% 3.8%
Slovakia 15,902 15,182 4.7% 22.7% 22.1%
Ukraine 14,393 10,909 31.9% 6.6% 4.9%
Spain* 13,026 15,873 -17.9% 1.9% 2.1%
*excluding Canary Islands **Total Markets

Source: Škoda Auto a.s. Annual Report 2012 – Sales and Marketing p.23

Deliveries to customers by model lines

ŠKODA Citigo

ŠKODA Citigo is the smallest brand model, launched in European markets in

2012. 29,960 customers bought this new car especially designed for urban areas.
It is the first ever model in the brand's modern history that offers both 3-door and
5-door versions.

ŠKODA Fabia

A well-established model, the ŠKODA Fabia, is the second strongest in terms of

volumes delivered. Properly defined pricing policy, two body versions together with
variable assortment resulted in 240,470 units delivered in 2012. The fact that the
ŠKODA Citigo has been launched and the ŠKODA Fabia is near the end of its life

37
cycle, results in a year-on-year decrease by 9.9%. The RS sports versions and the
alluring Monte Carlo derivate contributed to the general attractiveness of the
ŠKODA Fabia for a wide range of customers.

ŠKODA Roomster

Deliveries of the ŠKODA Roomster model increased in 2012. Customers bought a

total of 37,964 ŠKODA Roomster cars, which represents growth of 5.4%. Of those,
2,650, i.e. 7.0%, were the ŠKODA Praktik utility version. ŠKODA Roomster has
been on the market without major changes since its launch in 2006. Stable
demand for this small MPV is a result of utility features and good price positioning.

ŠKODA Rapid

The ŠKODA Rapid compact limousine entered the global market late in 2012. A
total of 24,692 vehicles were delivered to customers of which 3,526 in the Czech
Republic, 21,166 in India. When the market launch will have been completed in
2013 it is expected that the ŠKODA Rapid has established itself as one of the
most successful models within the ŠKODA model range.

ŠKODA Octavia

The ŠKODA Octavia once again underscored its key role as the best-selling car in
the brand’s product portfolio. By achieving a total number of 409,632 vehicles
delivered in 2012, the model once again exceeded the already good results of the
previous year by 5.8%. The ŠKODA Octavia Combi with 124,463 units delivered
made up 30.4% of the overall deliveries of the model.

The sales figures for the ŠKODA Octavia were excellent, taking into account that
the third generation of this model had already been announced and will be
launched in 2013.

ŠKODA Yeti

The ŠKODA Yeti is a model that currently has the highest rate of sales growth
among all ŠKODA vehicles. 87,397 vehicles were delivered to customers in 2012
– growth of 24.3%. With this, the ŠKODA Yeti model strengthened its position in
the attractive compact SUV segment.

38
ŠKODA Superb

The ŠKODA Superb is the brand's flagship. Globally 109,087 vehicles were
delivered, 43,041 in China. The deliveries to customers dropped by 6.5%, which is
partially due to the continued problems of European economies.

Deliveries to customers by model

2012 2011 2012/2011
Citigo 29,960 510 > 100%
Fabia 178,038 192,852 -7.7%
Fabia Combi 62,432 73,911 -15.5%
Fabia Total 240,470 266,763 -9.9%
Rapid 24,692 1,671 > 100%
Rommster 35,314 33,005 7.0%
Roomster Praktik 2,650 3,005 -11.8%
Roomster Total 37,964 36,010 5.4%
Octavia 285,169 261,572 9.0%
Octavia Combi 124,463 125,611 -0.9%
Octavia Total* 409,632 387,183 5.8%
Yeti 87,397 70,321 24.3%
Superb 68,558 73,125 -6.2%
Superb Combi 40,529 43,601 -7.0%
Superb Total 109,087 116,726 -6.5%
Total Škoda brand 939,202 879,184 6.8%
*includes Octavia and Octavia Tour

Source: Škoda Auto a.s. Annual Report 2012 – Sales and Marketing p.25

Sales to corporate customers

Sales to corporate customers played a major role in the success of the ŠKODA
AUTO Group in 2012. Fleet sales (excl. China) in this market segment in 2012
grew to 250,273 vehicles (2011: 239,413 units).

In Western Europe, traditionally a major market for corporate fleets, 148,930 cars
were sold. Central Europe followed with 60,445 delivered cars, Eastern Europe (in
particular Russia and Ukraine) with 26,791 vehicles. Among the national markets
Germany remained the largest in 2012 – here 46,059 cars were sold as fleet
vehicles, which is 18.4% of the total fleet sales of ŠKODA AUTO a.s. Throughout
2012, ŠKODA AUTO a.s. continued the successful implementation of its "Fit For
Fleet" program, comprising comprehensive and professional offers for commercial
customers, small and medium businesses.

Sales of genuine parts and accessories

39
The sales of genuine parts and accessories in 2012 represented an important part
of the sales policy of ŠKODA AUTO a.s. ŠKODA genuine parts and accessories
offer premium quality, a wide range of products, guarantee availability and thus
secure customers satisfaction. With the ever-growing range of models, the
assortment of parts and accessories is expanding; they are sold in more than 100
markets worldwide through advanced logistics channels using the latest IT
technologies.

Accessories logistics center, the first stage of the extension of the ŠKODA Parts
Center – new reception and dispatch terminal – was completed in November
2011. The second stage of the project was the construction of a fully automated
silo 40 meters high, with a capacity of over 30,000 pallets, completed in December
2012. The total area of the depot is now 74,500 sqm.

Revenues from the sales of ŠKODA genuine parts in 2012 were CZK 16.9 billion,
which is an annual increase of 7.5% (2011: CZK 15.7 billion).

By offering genuine accessories the Group is responding to continued growth of a

customer segment that requests a higher level of individuality. At the same time
the Group extends the offer of leisure-time products while meeting strict quality
criteria.

Revenues of ŠKODA genuine accessories were CZK 2.4 billion, compared to

2011, the increase was 9.1% (2011: CZK 2.2 billion).

2.4.4 Human Resources Management

ŠKODA AUTO a.s. significantly strengthened its attractiveness as an employer in
2012 and intends to continue this trend over the years to come.

The objective of human resources management is to further strengthen and

advance the position as active partner in the specialized domains. This approach
includes major support for the specialized areas as regards personnel work,
recruitment of highly qualified new employees, efficient development of all
colleagues, and building up their loyalty to the Company.

One of the main tasks was the adoption of intensive measures aimed at
improvement of staff qualification levels, and the Company succeeded in further
increasing the share of university graduates. Other important topics included the

40
optimization of staff deployment processes, support during foreign assignments,
and internationalization of the Czech plants, in which currently a work force
consisting of 40 nationalities is employed.

ŠKODA AUTO a.s. has long enjoyed a close partnership with the ZO OS KOVO
union within ŠKODA AUTO a.s. Thanks to this cooperation, the Company is able
to respond quickly to the needs of its employees, who provide the Company with
maximum support and greatly contribute to its results. The Company's success
stems from the high loyalty and motivation of employees. This was also reflected
in an internal company survey from 2012 with the participation of 95% of the
Company's employees, which confirmed a further increase in employee
motivation.

ŠKODA AUTO a.s. continues to place great emphasis on the long-term retention
of qualified employees. Certified experience secures permanent employment,
work-life balance and health protection in the workplace, as well as gender and
diversity management. The Company has been closely involved in the support of
women and career development of all age groups.

For its activities in this field, ŠKODA AUTO a.s. was awarded the TOP
Responsible company title in the category "Company welcoming seniors", and in
the European project "2012 – European Year for Active Ageing and Solidarity
between Generations" it was given second award in the category "Workplaces for
all Ages".

Due to the increasing internationalization of the Company, one of the challenges

for human resources management is to increase employee mobility and make
working abroad more attractive, particularly at management level. This will also
promote in-company transfers of professional knowledge and offer employees
extensive opportunities for personal development. Respective programs are
continuously tailored to meet individual needs. As a result, ŠKODA AUTO a.s. has
greatly increased its presence abroad. In 2012, the number of employees sent
abroad exceeded 200 for the first time. A total of 214 employees in 14 countries in
Europe and plants in Russia, India and China, represented the interests of ŠKODA
AUTO a.s. abroad.

41
Qualifications and professional training for employees

An important building block for the HR activities of ŠKODA AUTO a.s. is

qualification of employees, with a focus on continuing education.

Key examples of professional training to promote the Company’s competitiveness

and growth include language courses and training in cross cultural knowledge and
skills, which are intended to prepare employees for the further international
development of ŠKODA AUTO a.s.

The Company also focuses on other areas of professional training and has
invested a total of CZK 21.4 million in renovating employee training facilities for
welding, robotics, pneumatics and hydraulics. Almost 5,000 employees passed
through these laboratories in 2012 and were able to increase their qualifications
extensively. ŠKODA AUTO a.s. is aware of the shortage of technical experts on
the job market and has therefore been heavily involved in enhancing the skills of
young technicians.

In 2012, ŠKODA AUTO a.s. trained approximately 900 young people for their
future careers at its secondary education institute.

The Company is also active in university education. In 2012, approximately 1,100

students attended classes for their future professions at the ŠKODA AUTO
University. ŠKODA AUTO a.s. fulfills its social responsibility in this field in all areas
where it is based, in active response to demographic trends in Europe.

42
 Qualification structure of the Company's permanent employees

14% University Education

34% 5% Basic Education

Technical secondary
education
Secondary education with
47% certificate

Tab. 11, Source: Škoda Auto a.s. Annual Report 2012 – Human Resources Management p.27

Key factor – attractiveness as an employer

In 2012, public opinion surveys once again rated ŠKODA AUTO a.s. one of the
most popular companies in the Czech Republic.

In 2012, it ranked first in the CZECH TOP 100 and is therefore considered the
most admired company in the Czech Republic.

One of the Company's most important awards in the HR field was the Employer of
the Decade award, which clearly confirms the long-term course the Company has
taken in its work with employees.

ŠKODA AUTO a.s. is a highly attractive employer for university graduates. The
Company ranked third in the "Czech Republic Graduate Barometer" and was
named "Captain of the Year" in the Czech Republic. The Company also took first
place in the categories "Best HR advertisement", "Best recruiter" and "Best
presentation at job fairs".

The Company is actively involved in recruiting women. The results of a survey of

around 10,200 final-year students and graduates in economics, engineering and IT
from 22 universities across the country confirmed that the Company is also a
much more attractive employer for women than in 2011.

43
2.4.5 Technical Development
In 2012, ŠKODA AUTO a.s. invested a total of CZK 11 billion in technical
development, a year-on-year increase of 17.0%. The 1766 specialists of Technical
development cooperate within the Volkswagen Group and expand their
professional competence. The acquired skills are applied not only during the
development of ŠKODA models, but they also open up other opportunities for
external orders. Work for other brands within the Group rose by CZK 347 million
year-on-year to reach a total of CZK 894 million, which represents a 63.4%
increase.

ŠKODA Rapid – the new class of ŠKODA

At the Paris Motor Show in 2012, the seventh product series in the ŠKODA
portfolio, the ŠKODA Rapid model, had its world premiere. It is the first series
vehicle featuring the new design: Perfect proportions, cleanly modeled surfaces
and sharp, precision- managed lines, which create a timeless and elegant
appearance.

In the front, the new brand logo is proudly displayed; the typical mask of the cooler
with vertical lamellas directly complements the headlights and, together with the
fog lights, symbolizes a four-leaf shape. The side-view creates a distinctive coupé-
like silhouette with the precise and sharp tornado line. The rear group lights have a
typical design in the shape of the letter C, this time in a new form with a crystalline
finish.

The ŠKODA Rapid was developed to meet the highest demands for functionality,
quality and safety. It meets the needs of customers seeking a family vehicle at a
reasonable price and raises the bar in its class. Despite the compact exterior
dimensions of the vehicle, a record amount of luggage space of up to 550 liters
has been created. The quality of the vehicle is confirmed by the five stars it earned
in the Euro NCAP independent safety test and the Auto Trophy award for the best
priced automobile of 2012. From 2013 on, the ŠKODA Rapid will also be produced
and sold in China. ŠKODA AUTO a.s. will therefore be able to fulfill its ambitions
on the global market.

Development of “Simply Clever” practical solutions has continued for the ŠKODA
Rapid model. The developers' sense for cleverness is evident in the integrated ice

44
scraper covering the fuel tank and the reflective vests located under the driver's
seat.

The holder for multi-media devices and the beverage holder can secure a mobile
phone and other items. Another new feature is the double-sided rug on the floor of
the luggage space. One side has the same appearance as the other upholstery,
while the other side has a rubber surface that protects the floor of the luggage
space from water damage and contamination.

The new ŠKODA Octavia – a class of its own

A significant share of the Company's development activities in 2012 have been

focused on the successor to the ŠKODA brand’s key product, the ŠKODA Octavia,
taking into account trends and customers' wishes. The new design direction has
been further pursued, and the ŠKODA Octavia has acquired greater elegance and
dynamics. The most state-of-the-art platform in the Volkswagen Group is the basis
for the development of the model’s recognized values.

The focal point has been to achieve the greatest utility, functionality and safety,
while at the same time enhancing quality and maintaining an affordable price. A
major reduction in the weight of the vehicle, combined with state-of-the-art engines
contributes to a significant reduction in fuel consumption and CO2 emissions. For
the first time in ŠKODA brand vehicles, a series of innovative assistance systems
has been developed, such as adaptive cruise control, automatic activation of
remote lights and a system for maintaining the vehicle in the lane. Together with
new information technology, vehicle comfort has been advanced to a level usually
found only in superior classes.

2.4.6 Purchasing
Ensuring the smooth progress of the ŠKODA Rapid and the new generation of the
ŠKODA Octavia was the main purchasing objective for ŠKODA AUTO a.s. in
2012, in accordance with the ŠKODA growth strategy. In cooperation with the
purchasing division of the Volkswagen Group, a continuous supply of purchased
parts was guaranteed. The Company used a modular transverse toolkit (MQB) for
the first time in the ŠKODA Octavia. This modular platforms project within the
Volkswagen Group is designed to establish the material cost competitiveness on a
solid basis for the future.

45
New products and projects

ŠKODA AUTO a.s. has ensured the progress of new models, not only with the
help of purchased parts, but also through new machines and equipment. Besides
expansion and reconstruction of the line for the ŠKODA Octavia and ŠKODA
Rapid models, the Company ensured general purchasing of materials for
construction of the new Lean Centre and IT Centre at the Mladá Boleslav plant
and was also involved in the reconstruction of the ŠKODA Museum in Mladá
Boleslav.

The purchasing division also made a significant contribution to the launch of

production for the double-clutch transmission DQ 200 in Vrchlabí.

Securing production capacities at the GAZ plant in Nizhny Novgorod in Russia

was the most important activity abroad for purchasing in 2012. The implementation
of successful localization strategies was supported by local purchasing
organizations.

The Group ensured purchasing of materials and manufacturing resources for this
project, as well as realization of construction work. In 2012, the manufacture of
ŠKODA Yeti vehicles at this plant shifted to a higher knock-down level.

Situation on the raw materials market

The difficult situation on the raw materials market continued in 2012. Despite
stagnating or even declining economic growth in many countries, mainly in
Western Europe, raw materials prices remained unstable and at a high level. In
conjunction with the purchasing divisions of the Volkswagen Group, it was
possible to minimize the effects of the situation on the Group.

Supply of materials

In 2012, ŠKODA AUTO a.s. invested a total of CZK 131.6 billion in purchasing of
production materials. This corresponds to a year-on-year increase of CZK 3.7
billion. A large proportion of this volume originates in the Czech Republic (over
54.5%), followed by Germany, which accounts for approximately a quarter (26.0%)
of the volume of production materials. Deliveries from so-called low-cost countries
comprised more than 7.3% and grew year-on-year by 7.7%.

46
The total volume of general purchasing reached CZK 26.5 billion, which is a year-
on-year decrease of 7.0%. The main contributing factor to this development was
the launch of the new models which had been the subject of investments in the
previous year.

2.4.7 Environmental Responsibility

ŠKODA AUTO a.s. and environmental protection

A production which does not put more stress on the environment than absolutely
necessary is an important element of the Company’s environmental policy. In this
respect, all legal requirements are met, and new, stricter standards are complied
with as early as possible. The company received a renewed ISO 14001 certificate
in 2012.

Environmental investments

As part of its growth strategy, ŠKODA is currently investing in various new

capacities and projects. These investments meet cutting-edge environmental
standards.

For example, the extension of the already-existing Technology and Development

Centre in Česana was begun this year. Further central projects were completed in
2012. Among these are the new Service Training Centre, the new Lean Centre for
optimized production and administration processes, the new IT Centre and the
new ŠKODA Parts Centre for spare parts and accessories.

Production facilities also received extensive investment. ŠKODA AUTO a.s.

modernized and expanded significant parts of the production floor in the Mladá
Boleslav parent plant for the production of the ŠKODA Rapid and the new ŠKODA
Octavia.

Besides extending capacities, ŠKODA AUTO a.s. continuously monitors its

production sites for environmental impact. This includes the adaptation of already
approved partial facilities.

Water protection

Substances that pose a danger to ground water are handled exclusively in rooms
and systems fitted with the appropriate technical safeguards. All substances
potentially harmful to ground water are used and stored in accordance with strict

47
regulations. The floors in all rooms in which such substances are emitted or stored
are completely secure against seepage.

In the interest of maximum resource efficiency, it is of decisive importance to keep

water usage to a minimum and to discharge industrial water back into natural
circulation. In this area, ŠKODA AUTO a.s. has achieved marked improvements
both in the total water used and in the amount of wastewater per vehicle.
Furthermore, the wastewater quality significantly exceeds the prescribed legal
limits.

*In 2012, the calculation methods were changed. Previous years were recalculated.
Tab. 12, Source: Škoda Auto a.s. Annual Report 2012 – Sustainability p.30

2.4.8 Social Responsibility

Social responsibility has always played a key role at ŠKODA AUTO a.s. As one of
the Czech Republic’s leading companies, ŠKODA AUTO a.s. believes it has a
special responsibility for its employees and their families, and – as a good
neighbor – for people in the communities where its plants are located. The
Company pays particular attention to the welfare of its employees, offering a broad
range of social benefits, guaranteeing health and occupational safety standards,
and providing a unique system of corporate training and professional
development.

ŠKODA AUTO a.s. complies with all relevant recommendations of the Code of
Corporate Governance, by which it declares its openness towards the public and
the transparency of its internal processes and relations with the sole shareholder.

48
The Company maintains bilateral and mutually beneficial relationships with
suppliers and follows the legacy of its founders, Laurin and Klement, stating that
“...only the best we can do is good enough for our customers.”

The Company pursues a long-term policy of dedicating maximum effort to limiting

the negative impact of its operations on the environment. This pertains not only to
the Company’s own production and sales operations, but also to its selection of
suppliers who meet the most stringent ISO 14000 environmental standards. Use of
alternative energy sources and development of new products allows ŠKODA
AUTO a.s. to reduce its output of CO2 emissions. In 2012, the Company's Board
of Management adopted the concept for the Green Future program, which is
intended to reduce the environmental impact of production even further.

A summary of information about all of the Company's major activities related to

social responsibility – the Sustainability Report of SKODA AUTO for 2011/2012 –
was published in February 2013.

Support of social activities

ŠKODA AUTO a.s. is involved in sponsorships at both local and regional levels,
i.e. directly where its factories operate, and also on a nationwide and global scale.
In cooperation with leading foundations and charitable organizations, the
Company sponsors a variety of social, cultural and humanitarian projects. The
Company ensures that it also supports sporting events involving persons with
disabilities.

Social commitment

ŠKODA AUTO a.s. is a long-time supporter of the Paraple Center, specifically as a

supplier of vehicles with adjusted hand steering, which help patients become more
self-sufficient. The Car Club organisation, which provides comprehensive services
in eight commercial centers in the Czech Republic, is a major partner in improving
the mobility of disabled people. These commercial centers also employ disabled
people. Other projects funded by the Company include the Forum 2000
Foundation and the Paralympic Committee.

49
ŠKODA AUTO a.s. continues its long-term funding of the organisation “Zdravotní
klaun” (“Clown Doctors”), which arranges for professional clowns to visit seriously
ill children across the Czech Republic under the motto “laughter is the best
doctor”. Another project named “One tree planted for each car sold in the Czech
Republic” demonstrates the active approach of ŠKODA AUTO a.s. to
environmental protection. It allows employees and their families to volunteer for
the Company’s social responsibility activities. In 2012, cooperation had been
established with 44 partners, mainly from municipalities and non-profit
organizations, and more than 363,000 trees were planted in more than 50
locations.

Commitment rewarded

As part of the “European Year of Active Aging and Inter-generational Solidarity”,

ŠKODA AUTO a.s. won an award for its exemplary approach to supporting
seniors. The Company received an award for the company with the most
beneficial approach to seniors in the Top Responsible Company 2012 competition
in the Czech Republic. Moreover, it also performed well in the pan-European
competition in the category "Workplaces for all ages", where it took second place.
The Company was commended for the extensive measures it adopted in response
to demographic trends to promote the employment of seniors.

3 SWOT Analysis

A classical tool, which results very useful and that can be carried out for a
company, product, place or industry is the SWOT analysis which will identify
favorable and unfavorable factors, which could be internal (Strengths and
Weaknesses) and external (Opportunities and Threats) with the main goal to
underline the core which will help to get the highest or to improve the desired
performance.11

The following analysis summarizes the main strengths, weaknesses, opportunities

and threats, as a complementary part and based on the external and internal
review, which has its basis on publicly available information.

11
SWOT Analysis – Idea, Methodology and a practical approach. p.17, 2013.

50
Strengths

- Positive results due to the merge with VW,

- Stable Financial situation,

- Consolidated selling position on the Czech market,

- Growing image and awareness around the world resulting from the VW
partnership (know-how, expertise, etc.),

- Well-developed portfolio, however, interesting improvements regarding

products,

- Combination of German technology and quality production,

- Inexpensive production settled in the Czech Republic in comparison to

other countries,

- Positive customer satisfaction regarding cars and overall service, based on

surveys that have taken place all over the world,

- High conquest capacity as a brand – showing a positive balance of

migration between the customers,

- Optimistic network satisfaction, loyalty and commitment to the brand.

Weaknesses

- Extense dependability on the VW group (prices, launches, limited decision

making, etc.),

- High competition with other group brands, especially on its main segments,

- Wide mobility of used cars within EU countries,

- Out-dated perception of the brand, due to its Eastern European origins.

Customer had / has an image of poor quality, design, assembly and
materials,

- Higher prices in some segments vs. core competitors,

- Low acceptance of certain models in some markets due to end of life cycle
of the product.

- Relatively low market share in the foreign markets (Spain, Italy, France, etc)

51
Opportunities

- Improvements in design on the products, which acts as a main reason for

buying a car based on different worldwide surveys,

- Shopping habits are changing as a result of the crisis / recovery, alternative:

cheaper and smaller cars,

- Increase on competitive market as an extension on the product portfolio

(segments) in coming years as well as territorial expansion,

- Increase production of components or entire vehicles for the Group brands,

- Leasing and fleet market future development opportunities,

- Adaptation of a used cars business program following the VW structure,

- To identify and to implement Škoda’s unique selling proposition by more

aggressive and competitive campaigns in order to increase the image and
awareness of the brand and product portfolio.

Threats

- Wide current and growing competition on the automotive field,

- Negative impact on the sales, which is just recovering, due to the economic
crisis,

- Group internal cannibalization (VW and Seat cars are seen / preferred as
an option),

- Significant growth of pure low cost brands as Dacia, mainly in Europe,

- Aggressiveness on media investments as well as on tactical discounts by

two of the main new relevant competitors: Hyundai and KIA,

- Loyalty of the customers,

- High dealer network dependability the launching and sales of new cars,

- Increase in prices of inputs such as raw materials, as well as in fuel prices.

52
4 Financial Analysis

The main goal of the financial analysis is to assess the performance of a firm in
the context of its stated goals and strategy. There are two principal tools of
financial analysis: ratio and cash flow analysis.

Ratio analysis involves assessing how various line items in a firm’s financial
statements relate to one another. Cash flow analysis allows the analyst to examine
the firm’s liquidity and how the firm is managing its operating, investment and
financing cash flows.

Financial analysis is used in a variety of contexts. Ratio analysis of a company’s

present and past performance provides the foundation for making forecasts of
future performance.

Financial forecasting results very useful for the company valuation, credit
valuation, financial distress prediction, security analysis, mergers and acquisitions
analysis and corporate financial policy analysis [7, p.205].

4.1 Risk Management System

The global operations of ŠKODA AUTO Group in automotive markets pose

numerous risks that may have a negative impact on its financial performance and
business success. At the same time, economic and legislative changes may lead
to a variety of opportunities that the Group strives to utilize to strengthen and
further improve its position among competitors.

Risk management organization

The risk management structure at ŠKODA AUTO Group is based on the common
principle of risk management within the Volkswagen Group, which complies with
German legislative requirements for monitoring and transparency of a company's
activities (KonTraG). Risk management, as an operative component of the
corporate process, involves identification of individual risks in detail, assessment
of their scope, implementation of measures to eliminate them and presentation of
evidence about their effectiveness.

53
The overall risk management is centrally coordinated by the Controlling division in
cooperation with the Internal Audit division and the Governance, Risk &
Compliance department. The joint implementation of the risk management system
is described and ensured by the "Risk Management" organizational directive.

The risk management system is based on decentralized responsibilities. Every

year, standardized questions for evaluating risk situations are forwarded to
employees who handle risks in individual functional areas, including subsidiaries.
Based on their feedback, the complete picture of the potential risk situation is
updated. For each identified risk, a qualitative probability of occurrence and
relevant scope of damages is identified. Appropriate measures are specified in the
form of standards and instructions to minimize or eliminate each risk. Internal rules
are clearly defined and are usually available online. Management is regularly
provided with a report containing a description of the most significant risks and an
up-to-date map of the risks in individual areas, including subsidiaries. In
accordance with strategic aims, measures to eliminate or reduce risks are
proposed and subsequently implemented. The results of these measures are
continuously monitored and evaluated.

The effectiveness and sufficiency of the system is regularly verified, integrated into
the planning, controlling and business processes system, and continuously
optimized as part of the risk management process. In this case, the same
importance is assigned to internal and external requirements, particularly the
German Accounting Law Modernization Act (BilMoG). The system is optimized to
achieve continuous monitoring of the major risk areas, including the
responsibilities of individual organizational units.

Economic, political and legislative risks

With regard to the Group’s business activities, its financial position both as an
exporter and as a local manufacturer is significantly influenced by general
economic conditions and those in individual markets, such as the state of the
economy and the related economic cycle, legislative changes, and also the
political situation, terrorist activities or pandemics in the countries where the Group
is active.

54
This is accompanied by a persistent threat of risks related to a high level of public
debt, high rates of unemployment, and fluctuations in prices of precious metals, oil
and plastic. Other significant risks that could affect the Group’s business activity in
global markets include a divergent pace of economic growth in specific countries
or regions and a vulnerable banking system.

Exports to countries carrying potential territorial and political risks are identified
well in advance and hedged using standard, approved products of the financial
and insurance markets.

In this field, the Group has partnered with Czech and international banking
organizations, including EGAP.

The Group's economic situation may also be adversely affected by additional

technical development costs incurred as a result of changes in legislation, such as
stricter legislative requirements for vehicle safety, fuel consumption or emissions
of harmful substances, as well as adjustments in standard vehicle specifications.
In the area of legislation pertaining to environmental protection, it is necessary to
anticipate tightening of EU legislation governing exhaust-gas emissions.

Financial risks

Financial risks and their management have been one of the most closely
monitored aspects of ŠKODA AUTO Group’s risk management activities.

In terms of materiality, the risk from exchange rate fluctuations against the Czech
crown and their impact on cash flows and the financial and economic performance
of the ŠKODA AUTO Group, is of primary importance. The risks and impact of
exchange rate fluctuations are regularly analyzed and managed with the use of
standard instruments (foreign exchange termed forwards and swaps) approved by
internal and the Volkswagen Group committees. All of these transactions are
executed to comply with the requirements of the international accounting
standards for hedge accounting. A similar method is used to resolve risks
stemming from the purchase of aluminium, copper and lead, raw materials
purchased for the manufacture of products at individual companies within the
ŠKODA AUTO Group.

Active management of the potential impact of trends in interest rates is an integral

part of risk management. The Group guards against credit risks by using hedging

55
instruments, both preventive (e.g. retention of title, advance payment,
documentary letter of credit, etc.) and subsequent (e.g. confirmation of debt
prolonging the statute of limitation, payment calendars, bills of exchange).

The Group employs standard procedures and instruments to manage liquidity risk
and ensure sufficient coverage for the period required, as defined by the internal
rules of ŠKODA AUTO a.s. The funding is based on financial resources of the
Group and resources of Volkswagen Group companies.

4.2 Financial situation

ŠKODA AUTO Group’s consolidated financial statements are reported in
accordance with the IAS/IFRS methodology. The consolidated financial
statements include financial results of the parent company ŠKODA AUTO a.s.,
financial results of the subsidiaries ŠKODA AUTO Deutschland, ŠKODA AUTO
Slovensko, Skoda Auto India, and a share in financial performance of the
associates.

ŠKODA AUTO Group

As a result of rising automobile sales and successful implementation of measures

to boost efficiency, ŠKODA AUTO Group was able to maintain its financial
performance at a stable level in 2012.

Group sales revenues rose by 4.0% year-on-year to CZK 262.6 billion, the highest
in the Group’s history. Operating profit reached CZK 17.9 billion.

Group business performance

In 2012, ŠKODA AUTO Group delivered a total of 939,202 automobiles to

customers worldwide. This is an increase of 6.8% over the previous year and also
a new record. Group sales revenues reflected the trend in sales and reached CZK
262.6 billion. Automobile sales accounted for 84.7% of total Group revenues in the
year under review (2011: 84.3%). The bestselling models were the ŠKODA
Octavia and the ŠKODA Fabia.

Positive development was also reported for the ŠKODA Yeti, followed by the
ŠKODA Octavia and the new ŠKODA Citigo and ŠKODA Rapid models. Sales of
genuine parts and accessories also performed well, with a share of 7.3% of total
Group revenues (2011: 7.1%). Income from the sale of parts to other Volkswagen

56
Group companies, plus other revenues, accounted for the remaining 8.0% (2011:
8.6%).

The cost of sales rose by 2.7% year-on-year to CZK 221.8 billion – although the
rate of increase was slower than growth in revenues. Material costs (costs of raw
materials, production material and purchased goods), which comprised more than
three quarters of the Group’s total costs, accounted for most of the increase.
Distribution expenses rose by 9.3% year-on-year to CZK 19.2 billion. This was
due, on the one hand, to the increase in sales; on the other, to rising marketing
and advertising costs. Administrative expenses for 2012 totaled CZK 6.9 billion –
an increase of 12.0% over the previous year. Other operating profit reached CZK
3.1 billion.

Gross profit was 11.7% higher than the previous year at CZK 40.9 billion. The
gross profit margin (gross profit/revenues ratio) climbed to 15.6% and was
therefore 1.1 percentage points higher than in 2011. This was essentially due to
favorable trends in genuine parts and accessories and further product cost
optimization. The financial result showed a loss of CZK 1.3 billion, due in particular
to valuation differences in financial instruments. The Group’s profit before income
tax declined by 7.0% to CZK 17.9 billion, while profit after tax was CZK 721 million
lower (-4.5%) at CZK 15.4 billion. The return on sales before tax was 6.8% in
2012.

Group cash flows

Cash flows from Group operating activities reached CZK 23.4 billion in 2012. Net
liquidity dropped by 26.3 year-on-year to reach CZK 34.9 billion as at 31
December 2012.

Group asset and capital structure

The Group’s balance sheet total grew by CZK 6.4 billion, at a rate of 4.2% year-
on-year, to reach CZK 160.0 billion as at 31 December 2012. This growth
stemmed primarily from an increase in non-current assets. As of the date of final
balance sheet, the non-current assets represented CZK 83.5 billion, which means
by 29.1% more than the value recorded as at 31 December 2011. There was
exceptional year-on-year increase of the tangible assets (lands, buildings and
facilities) by CZK 10.0 billion (+21.7%).

57
The Group’s capital structure, as defined by the relative amounts of equity and
liabilities, shifted slightly from the previous year. Group equity rose by CZK 9.7
billion to CZK 90.9 billion over the course of the year. Profit for the year boosted
equity by CZK 15.4 billion, and dividends withdrew CZK 7.1 billion.

The Group’s current liabilities were reduced by CZK 1.1 billion (-2.1%) during the
reporting period and non-current liabilities decreased by CZK 2.2 billion, resulting
in a 10.2% decrease compared to the previous year’s balance sheet.

Investments (less development costs) reached a total of CZK 21.1 billion in 2012
and were therefore CZK 6.9 billion higher than in 2011. The bulk of spending went
into product investments in connection with new models, engines and
transmissions.

4.3 Financial Statements Analysis

The financial analysis of a company’s statements is the process which helps us to
understand in a proper and better way if the project or firm being studied is
solvent, viable, stable and/or profitable.

The key part of this analysis is to focus on the historical and current data of the
company, as well as the application of different approaches and computation tools,
such as vertical and horizontal analysis and the calculation of the main financial
ratios in order to come up with a conclusion of the evolution in the performance of
the company as well as to express the trend which the main items of the financial
statements have shown within the analysis period.

4.4 Statement of Financial Position

Statement of Financial position is available on the appendix section.

4.4.1 Vertical Analysis

The vertical analysis is a process in which each entry for each of the three major
categories of accounts (assets, liabilities and equities) in a balance sheet is
represented as a proportion of the total account. The main advantages of vertical
analysis are that the statements of financial position of businesses of all sizes can
easily be compared as well as it makes easier to perceive as a first look annual
changes.

58
Looking to the assets side, as a first look we can see a balanced relationship
between current and non-currents assets along the 5 analyzed years, however,
current assets show a positive trend, having its highest value during 2011,
reaching 58% of the total assets, nevertheless, a reduction of 10% came during
2012.

Most of the items listed on the assets side show an annually increasing trend,
nevertheless, external factors such as the global economic crisis within the
automotive industry may have impacted them and as a consequence, also
stopped this trend during the period from 2009-2011 for finally leading back to a
recovery process from the year 2012.

Tab. 13, Source: Own processing, 2013.

From the passive’s side, the structure was nearly the same during the 5-years
period, however, during 2010 and 2011 the percentage of liabilities of the
company was slightly higher than its equity, situation that makes sense if we think
it from the point of view of financing the operations with external resources within a
period where the automotive field was in crisis and the external debt may result
cheaper.

Is important to mention that the retained earnings of the company is one of the
items that have shown a big chance specially in the last 2 years, due to its
increase from 0% during the first 3 years to an average of 43% in last 2 years.

59
Tab. 14, Source: Own processing, 2013.

4.4.2 Horizontal Analysis

The horizontal analysis is a technique that will help us to graphically identify
changes in the amount over a period of time, the core concept of it, is to evaluate
the trend situations of the main items.

As shown in the graph, is visible the positive trend that the total assets of the
company recorded within the 5-years period, this excluding 2009, where external
factors could stagnate this development.

Inventories show increases and decreases along the time, however, its variations
are not so significant in percentage terms but that makes complicated to define a
clear future trend but it shouldn’t necessarily be considered as unstable item.

Tab. 15, Source: Own processing, 2013.

60
The main items in the following graph show clearly a positive trend as a whole,
based on that, we could infer that if external and internal situation remain
unchanged, this positive and balanced trend will continue in the near future.

One of the main items that have a visual impact from the equity side is the
decrease in the other reserves item, coming from a 42% during 2008-2009 to
become 0% in the last 3 years.

The rest of the items fluctuate within a certain percentage ratio along the time,
which provides us the view that the company’s operations and structure are held
to remain constant and showing just small changes.

Tab. 16, Source: Own processing, 2013.

4.5 Income Statement

Income Statement is available on the appendix section.

4.5.1 Vertical Analysis

By analyzing the Income statement we can clearly see the weight or share that the
different items such as, cost of sales and different type of expenses, have in the
company’s total sales and as a consequence, on its profit.

The total sales of the company show a positive trend, pointing out the year 2009,
when the external factors impacted the company’s sales in a negative way,
however, in the following years the recovery and growth tendency is visible.

61
Tab. 17, Source: Own processing, 2013.

The cost of sales represents in average 85% of the total sales during the 5-year
period of analysis, however, the company counts with a growth positive-trended
gross and also operating profit, the last one being as well stable due to the same
distribution of different type of expenses from 2008 to 2012.

The profit of the year shows the same behavior as the operating profit, being
stable and with a recovery trend after 2009 providing us with the idea that the near
future may be successful for the company in terms of sales and profit, considering
that the external situation would not fluctuate in a negative way.

4.5.2 Horizontal Analysis

During the previous years to 2008, the company counted with a positive trend
regarding its revenues, unfortunately the automotive crisis impacted and from
2008 the decreasing trend is visible on the graph, nevertheless, it reached its
lowest point in 2009 but the company showed positive numbers even at the worst
scenario.

Gross, operating and profit of the year show the same growth behavior, however,
even when from 2009 the recovery was evident, in 2012 the numbers reported
were slightly lower than in the previous year, not clear signal of going down once
again, but keeping the idea that with the announcements done by the company
regarding the expansion on its product portfolio, the sales will be boosted again to
a new and higher level for the coming years.

62
Tab. 18, Source: Own processing, 2013.

4.6 Financial ratios

Financial ratios are a set of comparisons between different items taken from the
financial statements of an organization, with the main goal to help to identify the
logical interrelationships between the items being compared in order to count with
a better view of the operations of the company.

The group of financial ratios may be also divided in the so-called primary ratios,
which point out the company’s strengths and weaknesses and secondary ratios,
which depict the company’s competitive position and financial structure as effects
of the causes identified by the primary ratios.

A most important division is the one which we will describe as we go along this
part, which will be focus on the main indicators of profitability, liquidity, leverage
and operating activities.

4.6.1 Profitability ratios

These ratios measure the return earned on a company’s capital and the financial
cushion related to each CZK/EUR/USD of sales. A firm that has high gross profit
margins, for instance, is going to be much harder to put out of business when the
economy turns down than one that has razor-thin margins. Likewise, a company
with high returns on capital, even with smaller margins, is going to have a better

63
chance of survival because it is so much more profitable relative to the
shareholders’ contributed investment.

2008 2009 2010 2011 2012

PROFITABILITY

ROE 16.14% 5.08% 11.82% 19.79% 16.89%

ROA 9.3% 2.9% 6.5% 10.5% 9.6%

ROS 6.7% 2.5% 4.8% 7.6% 6.8%

Tab. 19, Source: Own processing, 2013.

Tab. 20, Source: Own processing, 2013.

By analyzing these main ratios and beginning by the ROE, we can see that the
company is able to use efficiently the funds which have been invested in order to
generate earnings growth; this is mainly based on the premises that coefficients
between 15% and 20% are considered good and representative and during the
period being analyzed that is a clear sign of consistency.

The same situation is visible looking at the ROA, which tells us what the company
can do with the resources which it has, here we can perceive that the same trend
behavior is shown, in this item, a result higher than 5% is consider good.

Finally we have the ROS, which provides us with the information about how much,
in terms of profit, the company is able to make after paying for different type of
variable costs.

64
In this case the behavior is very similar as in the previous two ratios, declining in
the first two years, showing a positive trend in the following two years and finally
and slight decline in the last period, however, the effect of the external factors
such as an automotive crisis in 2009 are more than visible

4.6.2 Liquidity ratios

Those financial ratios that show the solvency of a company based on its assets
versus its liabilities. In other words, it lets us know the resources available for a
firm to use in order to pay its bills, keep the lights on, and pay the staff.

2008 2009 2010 2011 2012

LIQUIDITY

Cash ratio 0.023 0.033 0.034 0.023 0.084

Quick liquidity 1.31 1.30 1.37 1.43 1.16
Current ratio 1.70 1.62 1.69 1.74 1.53

Tab. 21, Source: Own processing, 2013.

Tab. 22, Source: Own processing, 2013.

The cash ratio is an indicator of the company’s short-term liquidity; it basically

measures the ability that the company has to manage its cash and cash
equivalents to pay its current financial obligations (conservative approach).

Results from this ratio are within a preferred range for considering the company to
be able to face its short-term obligations.

65
Quick ratio is very connected with the goal of covering short-term liabilities;
however, the inventories are excluded in this part due that they may result hard to
replace during the time, the higher the result obtained the better the position the
company has for fulfilling its responsibilities.

As shown in the chart, the company can fulfill the payment of its short-term
liabilities by nearly 1.3 times on average along the 5 years.

Current ratio has same principle, inventories are included in this part, that’s why is
visible that the results are higher and as a consequence it provides a better
financial position to the company, a result lower than 1 would be consider as
insufficient talking about payment terms.

A key concept in this part is the financial stability of the company, which was
shown and determined to be stable on the previous part, based on that we can
infer that the results which Škoda is showing may be completely normal.

4.6.3 Leverage ratios

The ratios used to determine about the companies’ financing methods, or the
ability to meet the obligations. There are many ratios to calculate leverage but the
important factors include debt, interest expenses and equity.

The most important leverage ratio is the debt to equity ratio that gives you an idea
about the debt one company is in and the equity it has at its disposal. Leverage
ratios also determine the company’s cost mix and its effects on the operating
income.

Companies with high fixed cost earn more income because after the break-even
point, with the increase in output the income increases as the cost has already
been incurred.

2008 2009 2010 2011 2012

LEVERAGE

Debt ratio 42% 42% 45% 47% 43%

Equity ratio 58% 58% 55% 53% 57%

Interest Coverage Ratio 14.85 9.62 23.11 36.30 29.21

Tab. 23, Source: Own processing, 2013.

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 Tab. 24, Source: Own processing, 2013.

Debt Ratio is a financial ratio that indicates the percentage of a company's assets
that are provided via debt. The higher the ratio, the greater risk will be associated
with the firm's operation. In addition, high debt to assets ratio may indicate low
borrowing capacity of a firm, which in turn will lower the firm's financial flexibility.

As we can notice, Škoda’s strategy regarding financing has been consistent during
the time, keeping an average of 43% debt which could be consider within a safe
range.

The equity ratio is a financial ratio indicating the relative proportion of equity used
to finance a company's assets.

As shown on the previous ratio, the majority of the company’s operations are
finance by own resources, which have shown to be consistent along the time and
to keep the same average structure as well as balance between debt and equity,
showing just slight change during 2011.

The interest coverage ratio shows us how easily a company can fulfill its interest
obligations regarding outstanding debt.

The results shown by ŠKODA AUTO a.s. are very strong and consistent, following
the same trend as the accounts connected with the profit, however, this ratio can’t
provide us with the full information about if the company is able to re-pay back the
loans or debt which has borrowed.

67
4.6.4 Operating ratios
These financial ratios show the efficiency of management and a company’s
operations in utilizing its capital. In the wholesale and retail industries, this would
include metrics such as inventory turnover, accounts receivable turnover, etc.

2008 2009 2010 2011 2012

OPERATING ACTIVITIES
Inventory turnover 14.78 16.09 15.23 15.73 14.11
Accounts Receivables turnover 14.16 16.26 18.09 19.13 16.47

Current liabilities 62.60 70.25 74.61 72.69 68.40

Tab. 25, Source: Own processing, 2013.

Tab. 26, Source: Own processing, 2013.

In this type of ratios we count with two points of view from the theoretical side
regarding turnover time of the individual assets and how it affects the profitability
and liquidity of the company.

On one hand, is recommended to keep a low turnover assets time, which as a

consequence should lead to a higher profitability while, on the other hand, it
results essential to consider that to count with a low turnover assets time may
represent a reduction of the liquidity indicators.

The Inventory turnover ratio is a measure of the number of times inventory is sold
or used in a time period such as a year.

68
Looking at the results obtained, we can realize an average of 15 times within a
year that the company sells its inventories, which may be consider as a high
number, but which actually represents a high volume of sales of the company.

The second ratio analyzed is the receivables turnover, which represents a

measure used to quantify a firm's effectiveness in extending credit as well as
collecting debts, higher coefficients are preferred.

The company shows a growing tendency, higher than the inventory turnover,
which give us the idea that the company collects in a relative fast way, the income
generated from its sales.

Finally, in terms of analyzing the period in which the company meets its obligations
we can realize that the results obtained are very good, since it’s synchronized and
with the period derived from sales, collecting payments from customers for finally
attend its liabilities with the suppliers or other creditors.

4.7 Working Capital Analysis

The working capital is a measure of both a company's efficiency and its short-term
financial health.

This ratio indicates whether a company has enough short term assets to cover its
short term debt.

2008 2009 2010 2011 2012

Inventories $ 13,543 $ 11,675 $ 14,408 $ 16,061 $ 18,619
Trade receivables $ 7,874 $ 8,485 $ 11,028 $ 13,423 $ 12,015
Prepaid income tax $ 601 $ 577 $ 89 $ 60 $ 447
Prepaid income tax $ 30,798 $ 17,309 $ 15,361 $ 28,076 $ 4,945
Cash and cash equivalents $ 6,198 $ 21,247 $ 35,986 $ 31,251 $ 40,467
Current assets $ 59,014 $ 59,293 $ 76,872 $ 88,871 $ 76,493
Current financial liabilities $ 57 $ 2,214 $ 228 $ 141 $ 107
Trade payables $ 23,873 $ 21,219 $ 27,897 $ 30,105 $ 30,807
Other current liabilities $ 3,268 $ 3,697 $ 4,766 $ 6,258 $ 5,933
Current income tax liabilities $ 2,434 $ 876 $ 1,405 $ 1,217 $ 71
Current provisions $ 5,175 $ 8,655 $ 11,188 $ 13,278 $ 12,986
Current liabilities $ 34,807 $ 36,661 $ 45,484 $ 50,999 $ 49,904
Tab. 27, Source: Own processing, 2013.

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 Net Working Capital

2008 2009 2010 2011 2012

Current assets 59,014 59,293 76,872 88,871 76,493

Current liabilities 34,807 36,661 45,484 50,999 49,904

NWC 24,207 22,632 31,388 37,872 26,589

1.70 1.62 1.69 1.74 1.53
Tab. 28, Source: Own processing, 2013.

On the previous table is possible to see the net working capital which the company
had during the previous 5 years in monetary units as well as a ratio measure, as a
first look, is very clear that the company is strong enough for facing its short-term
obligations, however, a declining and a bit unstable trend is possible to realize.

Tab. 29, Source: Own processing, 2013.

If the decreasing values would continue over the time, this could be due to the
volume of sales of the company are lower and as a consequence its accounts
receivables number continues to get smaller and smaller.

External factors may affect this part of the operations of the company, such a
decreasing volume of sales due to the crisis in 2008, trend which was clearly
improved in the coming years increasing the ratio of net working capital in 2010
and 2011, however the last year is going back to nearly the same levels that were
reached during crisis time, this may not represent anything serious but definitely it
should subject of attention in a near future.

70
4.8 Conclusion
By the application of different financial analysis we come to the point where we
should answer the question whether the company will be able to face the future
without any major risks that could significantly affect its operations in the short and
long run.

In the majority of the indicators from the financial analysis the company showed
good and stable financial situation, by that, we can infer that the company faces no
immediate risk of bankruptcy, as well as it is able to face its obligations in the short
run.

ŠKODA AUTO a.s., showed positive results regarding EBIT and EBITDA along the
period analyzed, positive performances were shown regarding margins,
profitability, the way of managing liquidity and the rest of the operations regarding
capital structure.

Result essential also to remind that the company and the entire sector within the
framework of the reporting period have gone through the economic crisis. It is
therefore evident that the company was able to respond flexibly to adverse
situations in the market and it is expected that in future years it will keep growing
and strengthen its market position from the hand of the VW group.

71
5 Forecasting Performance – The financial plan

Managers need forecast to formulate business plans and provide performance

targets; analysts need forecasts to help communicate their views of the firm’s
prospects to investors; and bankers and debt market participants need forecasts
to assess the likelihood of loan repayment.

Moreover, there are a variety of contexts where the forecast is usefully

summarized in the form of an estimate of the firm’s value. This estimate can be
viewed as an attempt to best reflect in a single summary statistic the manager’s or
analyst’s view of the firm’s prospects.

There are external factors which may be also considered within the forecasting
analysis due to their relevance; one of them is the expected or forecasted growth
rates of a certain market.

In this case, and due to the country of origin of the company, we will consider the
European market as the main and most relevant market, based on the premise
that 5 of the top worldwide sales countries are located in this continent.

In the following chart we can see the real values regarding GDP growth for the
years 2004-2012, where we can also visualize the trend which it followed and the
impact that the crisis had on the year period from 2007 to 2008 as well as the first
signals of a recovery.
Real GDP growth rate - volume
Percentage change on previous year

2004 2005 2006 2007 2008 2009 2010 2011 2012

EU28 2.6 2.2 3.4 3.2 0.4 -4.5 2 1.6 -0.4
EU27 2.6 2.2 3.4 3.2 0.4 -4.5 2 1.7 -0.4

f=forecast b=break in time series p=provisional e=estimated

Source of Data:Eurostat
Last update: 19.12.2013
Tab. 30, Source: Own processing, 2013.

However, statistical agencies as well count with their own premises regarding
future economic development; in the following table we can observe the expected
GDP growth in Europe for the period 2013-2018, data which will be consider for
the forecasting analysis.

72
 Forecasted GDP growth rate - volume
Percentage change on previous year

2013 2014 2015 2016 2017 2018

0 (f) 1.4 (f) 1.9 (f) 1.9 (f) 2.0 (f) 2.1 (f)
0 (f) 1.4 (f) 1.9 (f) 1.9 (f) 2.0 (f) 2.1 (f)

f=forecast b=break in time series p=provisional e=estimated

Source of Data: Eurostat
Last update: 19.12.2013

Tab. 31, Source: Own processing, 2013.

The industry plays an essential role on the forecasting analysis, due to that is
important to have a look on the trend which the sales have had during the past
years in order to be able to predict the most possible scenario for the coming
years. In the following chart we can see the sales development from 2005 to 2012
in the European market:

Tab. 32, Source: www.oica.net, 2013.

73
 Tab. 33, Source: Own processing, 2013.

Counting the background of the total sales of the industry as a reference, is

important also to consider that the sales growth rates tend to be “mean-reverting”:
this means that firms with above-average or below-average rates of sales growth
tend to revert over time to a “normal” level (historically in the range of 6 to 10
percent for European firms) within three to ten years12.

Due to this reason, we will base our assumptions on the historical data which we
had from the company in order to elaborate the projected financial statements of
the company, as well as the main ratios of the company.

We will assume that for the year 2013 there will be 0% growth, having the point
that it will be the year when the recovery process will begin so all the items and
accounts will remain constant, for the years 2014 and 2015 we will compute a
growth rate of 1.4% and 1.9% and for years 2016 to 2018 the growth rates will be
1.9%, 2.0% and 2.1% based on the GDP growth which is expected according to
the Eurostat sources.

Finally, projecting the main financial statements and keeping the conservative
scenario with the growth rates mentioned previously, we got the following results
which will be available on the appendix section.

5.1 Financial Plan Analysis

Based on the premises regarding growth rates and on the projection of the main
financial statements, is important also to verify the main indicators of the company

12
Source: Business Analysis and Valuation IFRS edition. p.277, 2013.

74
by computing the financial ratios now based on the results which we got from the
projection; here we can see the obtained results:

2013 2014 2015 2016 2017 2018

PROFITABILITY
ROE 16.89% 16.97% 16.97% 17.01% 18.32% 18.78%
ROA 9.60% 9.64% 9.64% 9.66% 10.41% 10.67%

ROS 6.83% 6.86% 6.86% 6.88% 7.41% 7.59%

OPERATING ACTIVITIES

Inventory turnover 14.11 14.37 14.65 14.96 15.30 15.68

Accounts Receivables turnover 16.47 16.78 17.10 17.46 17.86 18.31
Current liabilities 68.40 69.70 71.02 72.52 74.18 76.04

LIQUIDITY
Cash ratio 0.084 0.086 0.087 0.089 0.091 0.093

Quick liquidity 1.160 1.182 1.204 1.229 1.258 1.289

Current ratio 1.533 1.562 1.592 1.625 1.662 1.704

LEVERAGE
Debt ratio 43% 44% 45% 46% 47% 48%
Equity ratio 57% 58% 59% 60% 62% 63%

Interest Coverage Ratio 29.21 29.76 30.33 30.97 31.68 32.47

Tab. 34, Source: Own processing, 2013.

By the results which we have obtained after the computation of the projection and
attached to the premises, we can realize that the proposed financial plan fulfills the
“stability” requirements, also taking into consideration the economic factors that
have certain level of influence within the industry being studied. Is also true that
the scenario is quite conservative, but this situation is mainly derived from the
point of view of the economic cycle, which was in a recession season and which is
expecting its recovery starting already in the coming year, improving the conditions
of the markets and expanding itself as in the past.

75
6 Valuation Approaches (Generic valuation methods –
theoretical background)

Valuation is the process of converting a forecast into an estimate of the value of

the firm’s assets or equity. At some level, nearly every business decision involves
valuation, at least implicitly. Within the firm, capital budgeting involves
consideration of how a particular project will affect firm value. Strategic planning
focuses on how value is influenced by lager sets of actions. Outside the firm,
security analysts conduct valuation to support their buy/sell decisions, and
potential acquirers (often with the assistance of investment bankers) estimate the
value of target firms and the synergies they might offer. Even credit analysts, who
typically do not explicitly estimate firm value, must at least implicitly consider the
value of the firm’s equity “cushion” if they are to maintain a complete view of the
risk associated with lending activity.

In practice, a wide variety of valuation approaches are employed. For example, in

evaluating the fairness of a takeover bid, investment bankers commonly use five to
ten different methods of valuation. Among the available methods are the following:

 Discounted dividends. This approach expresses the value of the firm’s

equity as the present value of forecasted future dividends.

 Discounted cash flow (DCF) analysis. This approach involves the

production of detailed, multiple-year forecasts of cash flows. The forecasts
are then discounted at the firm’s estimated cost of capital to arrive at an
estimated present value.

 Discounted abnormal earnings. Under this approach the value of the

firm’s equity is expressed as the sum of its book value and the present
value of forecasted abnormal earnings.

 Discounted abnormal earnings growth. This approach defines the value

of the firm’s equity as the sum of its capitalized next-period earnings
forecast and the present value of forecasted abnormal earnings growth
beyond the next period.

76
  Valuation based on price multiples. Under this approach a current
measure of performance or single forecast of performance is converted
into a value by applying an appropriate price multiple derived from the
value of comparable firms. For example, firm value can be estimated by
applying a price-to-earnings ratio to a forecast of the firm’s earnings for
the coming year. Other commonly used multiples include price-to-book
ratios and price-to-sales ratios.

The previous method will be developed throughout the chapter, and their pros and
cons discussed. All the above approaches can be structured in two ways. The first
is to directly value the equity of the firm, since this is usually the variable the
analyst is directly interested in estimating. The second is to value the assets of the
firm, that is, the claims of equity and net debt, and then to deduct the value of net
debt to arrive at the final equity estimate. Theoretically, both approaches should
generate the same values.

6.1 Defining Value for the Shareholders

How should the shareholders think about the value of their equity claims on a firm?
Finance theory holds that the value of any financial claim is simply the present
value of the cash payoffs that its claimholders receive. Since shareholders receive
cash payoffs from a company in the form of dividends, the value of their equity is
the present value of future dividends.

Equity value = PV of expected future dividends

r
If we denote e as the cost of equity capital (the relevant discount rate), the equity

value is as follows:

Equity Value = Dividend 1 + Dividend 2 + Dividend 3 + …..

( 1 + r e) ( 1 + r e) ² ( 1 + r e) ³

Notice that the valuation formula views a firm as having an indefinite life. But in
reality firms can go bankrupt or get taken over. In these situations shareholders
effectively receive a terminating dividend on their shares.

77
If a firm had a constant dividend growth rate (gdiv) indefinitely, its value would
simplify to the following formula:

Equity Value = Dividend 1

r e - g div
The above valuation formula is called the dividend discount model. It forms the
basis for most of the popular theoretical approaches for equity valuation. Despite
its theoretical importance, the dividend discount model is not a very useful model.

This is because equity value is created primarily through the investment and
operating activities of a firm. Dividends payments tend to be a byproduct of such
activities and their timing and amount depends strongly on the firm’s investment
opportunities. Within a period of five to ten years, which tends to be focus of most
prospective analyses, dividends may reveal very little about the firm’s equity value.

6.2 The Discounted Cash Flow model

The discounted cash flow valuation model clearly reflects this basic principle of
finance. The model defines the value of a firm’s neat assets as the present value
of cash flows generated by these assets (OCF) minus the investments made in
new assets (Investment), or, alternatively stated, as the sum of the free cash flows
to debt and equity holders discounted at the weighted average cost of debt and
equity (WACC).

Asset value = PV of free cash flows to debt and equity claim holders

= OCF 1 - Investment 1 + OCF 2 - Investment 2 + …..

(1 + WACC) (1 + WACC) ²

Note that this equation OCF excludes interest payments (unlike the operating cash
flows reported in IFRS-based cash flow statements), as these are distributions to
debt holders.

The cash flows that are available to equity holders are the cash flows generated
by the firm’s net assets minus capital outlays, adjusted for cash flows from and to
debt holders, such as interest payments, debt repayments and debt issues.

Operating cash flows to equity holders are simply net profit plus depreciation less
changes in working capital. Capital outlays are capital expenditures less asset

78
sales. Finally, net cash flows from debt owners are issues of new debt less
retirements less the after-tax cost of interest. By rearranging these terms, the free
cash flows to equity can be written as follows:

Free cash flows to equity = Net profit – ΔBVA + ΔBVND

Where ΔBVA is the change in book value of operating net assets (changes in
working capital plus capital expenditures less depreciation expense), and ΔBVND
is the change in book value of net debt (interest-bearing debt less excess cash).
Using the discounted cash flow model, equity value is thus estimated as follows:

Equity value = PV of free cash flows to equity claim holders

= Net profit 1 + ΔBVA 1 + ΔBVND 1

( 1 + r e)

+ Net profit 2 + ΔBVA 2 + ΔBVND 2 …..

( 1 + r e) ²

Valuation under this method involves the following three steps:

Step 1: Forecast free cash flows available to equity holders over a finite forecast
horizon (usually 5 to 10 years).

Step 2: Forecast free cash flows beyond the terminal year based on some
simplifying assumption.

Step 3: Discount free cash flows to equity holders at the cost of equity. The
discounted amount represents the estimated value of free cash flows available to
equity.

6.3 The Discounted Abnormal Earnings Valuation Method

As mentioned before, there is a link between dividends, earnings and equity. At
the end of each accounting period net profit for the period is added to retained
earnings, a component of equity. Dividends are taken out of retained earnings.
Stated differently, if all equity effects (other than capital transactions) flow through
the income statement, the expected book value of equity for existing shareholders
at the end of year 1 (BVE1) is simply the book value at the beginning of the year
(BVE0) plus expected net profit (Net Profit1) less expected dividends (Dividend1).
This relation can be written as follows:

79
 Dividend1 = Net profit1 + BVE0 – BVE1

By substituting this identity for dividends into the dividend discount formula and
rearranging the terms, equity value can be rewritten as follows:

Equity value = Book value of equity + PV of expected future abnormal earnings

Abnormal earnings are net profit adjusted for a capital charge, which is computed
as the discount rate multiplied by the beginning book value of equity. Abnormal
earnings incorporate an adjustment to reflect the fact that accountants do not
recognize any opportunity cost for equity funds used.

Thus, the discounted abnormal earnings valuation formula is:

Equity value = Net profit 1 - r e • BVE 0 + Net profit 2 - r e • BVE 1 + …..

BVE0 +
( 1 + r e) ( 1 + r e) ²

The earnings-based formulation has intuitive appeal. If a firm can earn only a
normal rate of return on its book value, then investors should be willing to pay no
more than book value for its shares. Investors should pay more or less than book
value if earnings are above or below this normal level. Thus, the deviation of a
firm’s market value from book value depends on its ability to generate “abnormal
earnings”.

The formulation also implies that a firm’s equity value reflects the cost of its
existing net assets (that is, its book equity) plus the net present value of future
growth options (represented by cumulative abnormal earnings).

One question that arises when valuation is based directly on earnings and book
values is how the estimate is affected by managers’ choice of accounting methods
and accrual estimates. Would estimates of value differ for two otherwise identical
firms if one conservative accounting methods than the other?. Provided that
analysts recognize the impact of differences in accounting methods on future
earnings (and hence their earnings forecasts), the accounting effects per se
should have no influence on their value estimates. There are two reasons for this.
First, accounting choices that affect a firm’s current earnings also affect its book
value, and therefore they affect the capital charges used to estimate future
abnormal earnings. For example, conservative accounting not only lowers a firm’s
current earnings and book equity but also reduces future capital charges and

80
inflates its future abnormal earnings. Second, double-entry bookkeeping is by
nature self-correcting. Inflated earnings for one period have to be ultimately
reversed in subsequent periods.

In practice, the strategic and accounting analysis tools help the analyst to identify
whether abnormal earnings arise from sustainable competitive advantage or from
unsustainable accounting manipulations.

6.4 The Discounted Abnormal Earnings Growth Valuation Method

As discussed, abnormal earnings are the amount of earnings that a firm generates
in excess of the opportunity cost for equity funds used. The annual change in
abnormal earnings is generally referred to as abnormal earnings growth and can
be rewritten as follows:

Abnormal earnings growth = change in abnormal earnings

= ( Net profit 2 - r e • BVE 1) - ( Net profit 1 - r e • BVE 0)

= Net profit 2 + r e • Dividend 1 - ( 1 - r e) • Net Profit 1

= ΔNet profit 2 - r e • ( Net Profit 1 - Dividend 1)
= (abnormal change in earnings)

This formula shows that abnormal earnings growth is actual earnings growth
benchmarked against normal earnings growth. Normal earnings growth is
calculated as the portion of prior period earnings that is retained in the firm times a
normal rate of return. When abnormal earnings growth is zero, the firm functions
like a savings account. In this particular case, the firm earns an abnormal return on
its existing investment but is only able to earn a normal rate of return on the
additional investments that it finances from its retained earnings. Consequently, an
investor would be indifferent between reinvesting earnings in the firm and
receiving all earnings in dividends.

The discounted dividend model can also be recast to generate a valuation model
that defines equity value as the capitalized sum of (1) next-period earnings and (2)
the discounted value of abnormal earnings growth beyond the next period. The
discounted abnormal earnings growth valuation formula is:

81
 Equity value =
Net profit 1
re
+
1
re [ ΔNet profit 2 - r e • ( Net

( 1 + r e)
Profit 1 - Dividend 1)

+
ΔNet profit 3 - r e • ( Net Profit 2 - Dividend 2)
( 1 + r e) ²
+… ]
This approach, under which valuation starts capitalizing next-period earnings, has
practical appeal because investment analysts spend much time and effort on
estimating near-term earnings as the starting point of their analysis. The valuation
formula shows that differences between equity value and capitalized next-period
earnings are explained by abnormal changes in earnings – or changes in
abnormal earnings – beyond the next period.

Notice that this formula also views the firm as having an indefinite life. However,
the formula can be easily used for the valuation of a finite-life investment by
extending the investment’s life by one year and setting earnings and dividends
equal to zero in the last year.

6.5 Valuation using Price Multiples

Valuations based on price multiples are widely used by analysts. The primary
reason for the popularity of this method is its simplicity. Unlike the discounted
dividend, discounted abnormal earnings (growth), and discounted cash flow
methods, multiple-based valuations do not require detailed multiyear forecasts of a
number of parameters such as growth, profitability and cost of capital.

Valuation using multiples involves the following three steps:

Step 1: Select a measure of performance or value (e.g., earnings, sales, cash

flows, book equity, and book assets) as the basis for multiple calculations. The two
most commonly used metrics are based on earnings and book equity.

Step 2: Calculate price multiples for comparable firms, i.e., the ratio of the market
value to the selected measure of performance or value.

Step 3: Apply the comparable firm multiple to the performance or value measure
of the firm being analyzed.

Under this approach, the analyst relies on the market to undertake the difficult task
of considering the short and long-term prospects for growth and profitability and

82
their implications for the values of the comparable firms. Then the analyst
assumes that the pricing of those other firms is applicable to the firm in hand.

Selecting comparable firms

Ideally, price multiples used in a comparable firm analysis are those for firms with
similar operating and financial characteristics. Firms within the same industry are
the most obvious candidates. But even within narrowly defined industries, it is
often difficult to identify comparable firms. Many firms are in multiple industries,
making it difficult to identify representative benchmarks. In addition, firms within
the same industry frequently have different strategies, growth opportunities and
profitability creating selection problems.

One way of dealing with these issues is to average across all firms in the industry.
The analyst implicitly hopes that the various sources of noncomparability cancel
each other out, so that the firm being valued is comparable to a “typical” industry
member. Another approach is to focus on only those firms within the industry
which are most similar.

Another problem is when the comparable firms are located in different countries,
due to that a variety of factors that influence multiples may differ. For example, the
cost of equity, which is inversely related to the price-earnings multiple, is affected
by the risk-free interest rate. Consequently, international differences in risk-free
interest rates lead to international differences in price-earnings multiples. In
addition, international differences in accounting standards may lead to systematic
international differences in net profits, which is the denominator in price earnings
multiples.

The most obvious way to get around this problem is to choose comparable firms
from one country. This is, however, often not feasible in smaller equity markets.

The alternative solution is to explicitly take into account the country factors that
affect multiples.

Multiples for firms with poor performance

Price multiples can be affected when the denominator variable is performing

poorly. This is especially common when the denominator is a flow measure, such
as earnings or cash flows.

83
For dealing with this situation, one option is to simply exclude firms with large
transitory effects from the set of comparable firms. If poor performance is due to a
one-time write down or special item, analysts can simply exclude that effect from
their computation of the comparable multiple.

Finally, analysts can reduce the effect on multiples of temporary problems in past
performance by using a denominator that is a forecast of future performance
rather than the past measure itself. Multiples based on forecasts are termed
leading multiples, whereas those based on historical data are called trailing
multiples. Leading multiples are less likely to include one-time gains and losses in
the denominator, simply because such items are difficult to anticipate.

Adjusting multiples for leverage

Price multiples should be calculated in a way that preserves consistency between

the numerator and denominator. Consistency is an issue for those ratios where the
denominator reflects performance before servicing debt. Examples include the
price-to-sales multiple and any multiple of operating earnings or operating cash
flows. When calculating these multiples, the numerator should include not just the
market value of equity but the value of debt as well.

84
7 Valuation - Application of the methodology

For determining the value of the company at the end of the year 2012, we will
focus in the valuation by multiples approach by comparing the outputs of the
company ŠKODA AUTO a.s. as well as two of their main core competitors mainly
in Europe: Hyundai Motor Company and KIA Motors, the benchmarking
companies were chosen due to its relevance and growth potential in the current
automotive markets.

Once applied the valuation by multiples methodology, a double-checking of the

results will be done by applying the Free Cash Flow for the Firm methodology
(FCFF) to the same firms.

Valuation multiples are the quickest way to value a company, and are useful in
comparing similar companies (comparable company analysis). They attempt to
capture many of a firm's operating and financial characteristics (e.g. expected
growth) in a single number that can be multiplied by some financial metric (e.g.
EBITDA) to yield an enterprise or equity value. Multiples are expressed as a ratio
of capital investment to a financial metric attributable to providers of that capital.

Is important to mention that some of the data is based on premises which were
derived from the forecasting part, keeping in the same way a very conservative
scenario but taking into account as a main factor, the economic situation that the
automotive industry is living, concretely placed on its recovery stage.

7.1 ŠKODA AUTO a.s. – Valuation by multiples data

The following input data was computed using public available data of the company
as well as the calculation tools which are provided on the website of the professor
Aswath Damodaran.13

Current Inputs

Current EBIT = $17,917.00 (in $) Operating Margin = 5.53%

Current Depreciation = $11,792.00 Sales/BV Capital 3.48
Current Tax Rate = 19.00% (in percent) Return on capital = 19.23%
Current Revenues = $262,649.00 (in $)

Capital Invested (Book Value) = $75,450.00

Tab. 35, Source: Damodaran / Multiples spreadsheet, own processing, 2013.

13
Source: http://pages.stern.nyu.edu/~%20adamodar/, 2013.

85
The input data has been extracted from the public information which has been
published on the annual report for the year 2012 of the company, on the right side
of the previous table we can realize an small calculation for the given inputs, which
basically shows us the operating margin of the company, with a result of 5.53%
which mainly points out the idea that the company’s pricing strategy and operating
efficiency are “healthy”, from the point of view that the firm is able to fulfill its
obligations regarding costs, such as interest on debt.

We can also perceive that by the coefficient displayed on the return on capital, the
company is efficient allocation resources within investment projects as well as at
the same time they are profitable.

High Growth Period

Length of high-growth period (n) = 5 (Number of periods) Operating Margin= 5.53%

Reinvestment Rate (as % of EBIT(1-t)) = 60% Sales/Capital = 3.48

Growth rate during period (g) = 11.54% (in percent) Return on Capital = 19.23%
Cost of Equity during period = 8.00% (in percent)

After-tax Cost of Debt = 3.65% (in percent) Cost of capital = 7.69%

Debt Ratio (D / (D + E)) = 7.23% (in percent)
Tab. 36, Source: Damodaran / Multiples spreadsheet, own processing, 2013.

As a part of the multiples analysis, a high growth period scenario is also being
analyzed, taking into account the length of high-growth period of the company
(which was 5 years before the impact of the crisis).

As a main input we can see an additional variable, which is the cost of capital,
counting with a result of 7.69% and which gives us the main idea that the company
must overcome that result before it can generate value, considering its debt and
equity financing resources.

Stable Growth Period

Growth rate in steady state = 2.00% (in percent)

Return on capital in stable growth 5.87% Operating Margin 5.87%

Reinvestment Rate in Stable growth = 34.07% Sales/BV Capital 1.00

Cost of Equity in steady state = 8.00% (in percent) Return on Capital = 5.87%

After-tax Cost of Debt = 3.65% (in percent)

Debt Ratio (D / (D + E)) = 20.00% (in percent) Cost of capital = 7.1290%
Tab. 37, Source: Damodaran / Multiples spreadsheet, own processing, 2013.

86
Stable growth period could be consider as scenario with the highest probability to
occur, it involves a bit more data from the industry, but it gives us a more rational
idea about the way that the company may or have taken.

As we can see the main difference between stages lays on the return on capital
and cost of capital results, being the first one, the one with higher variation and
providing us the idea that the return on capital would not be so high in an stable
period, however, it remains positive and with the same core impression that the
company is able to allocate efficiently its capital on profitable investments and to
remain generating returns.

Output

Enterprise Value = $259,167.91

EV/EBIT = 14.46
EV/EBITDA = 8.72

EV/EBIT(1-t) = 17.86

EV/Sales = 0.99
EV/Capital Invested = 3.43

*Note: Monetary results in this part are presented in CZK (Czech crowns)
Tab. 38, Source: Own processing, 2013.

Finally, we have the output of the analysis and valuation method; on it we can
realize that the estimated value of the enterprise is 259,167.91 CZK as at
December, 2012.

The remaining coefficients remain positive and within the range which could be
consider stable and solid, which is a good signal that the company shows a
“healthy” structure as a result of its positive results and solid operations, however,
is important to remark some additional information that results relevant for the
analysis such as when depreciation and amortization expenses are small, as in
the case of a non-capital-intensive company such as a consulting firm, EV/EBIT
and EV/EBITDA will be similar. Unlike EBITDA, EBIT recognizes that depreciation
and amortization, while non-cash charges, reflect real expenses associated with
the utilization and wear of a firm's assets that will ultimately need to be replaced.

When a company has negative EBITDA, the EV/EBITDA and EV/EBIT multiples
will not be material. In such cases, EV/Sales may be the most appropriate multiple

87
to use. EV/Sales is commonly used in the valuation of companies whose operating
costs still exceed revenues, as might be the case with nascent Internet firms, for
example. However, revenue is a poor metric by which to compare firms, since two
firms with identical revenues may have wildly different margins.

*It is essential to mention that at the end of the valuation process, the
currencies of the companies being evaluated will be exchanged into EUR in
order to count with a better approach and to make easy the identification
and comparison process regarding its value.

7.2 Hyundai Motor Company – Valuation by multiples data

The first company chosen for comparison, as mentioned previously, will be
Hyundai Motor Company, which has its registered office in Seoul, in the republic of
Korea.

Due to the difference in countries, the main variances will be the tax rate which will
be used, which for the Republic of Korea is 24.2% and the currency, which is the
Korean won and which at the end of the valuation will be exchanged into EUR in
order to count with a result which may be comparable between the companies
being evaluated and compared.

Current Inputs

Current EBIT = $9,056,277.00 (in $) Operating Margin = 8.13%

Current Depreciation = $1,689,122.00 Sales/BV Capital 1.76
Current Tax Rate = 24.20% (in percent) Return on capital = 14.33%
Current Revenues = $84,469,721.00 (in $)

Capital Invested (Book Value) = $47,917,575.00

Tab. 39, Source: Damodaran / Multiples spreadsheet, own processing, 2013.

The input data has been extracted from the public information which has been
published on the annual report for the year 2012 of the company and which can be
found on the appendices part of this work, as a result of the calculation for the
given inputs, which basically shows us the operating margin of the company, with
a result of 8.13% which mainly points out the idea that the company’s pricing
strategy and operating efficiency are “very efficient” and in a growing process,
since the company entered to the automotive field and has been improving its
performance regarding sales around the world.

88
We can also perceive that by the coefficient displayed on the return on capital, the
company is efficient allocation resources within investment projects as well as at
the same time they being profitable.

High Growth Period

Length of high-growth period (n) = 5 (Number of periods) Operating Margin = 8.13%

Reinvestment Rate (as % of EBIT(1-t)) = 60% Sales/Capital = 1.76

Growth rate during period (g) = 8.60% (in percent) Return on Capital = 14.33%
Cost of Equity during period = 8.00% (in percent)

After-tax Cost of Debt = 3.41% (in percent) Cost of capital = 7.67%

Debt Ratio (D / (D + E)) = 7.23% (in percent)
Tab. 40, Source: Damodaran / Multiples spreadsheet, own processing, 2013.

As a part of the multiples analysis, a high growth period scenario is also being
analyzed, taking into account the length of high-growth period of the company
(which was 5 years before the impact of the crisis).

As a main input we can see an additional variable, which is the cost of capital,
counting with a result of 7.0822% and which gives us the main idea that the
company must overcome that result before it can generate value, considering its
debt and equity financing resources.

Stable Growth Period

Growth rate in steady state = 2.50% (in percent)

Return on capital in stable growth 10.50% Operating Margin = 10.50%

Reinvestment Rate in Stable growth = 23.81% Sales/BV Capital 1.00

Cost of Equity in steady state = 8.00% (in percent) Return on Capital = 10.50%
After-tax Cost of Debt = 3.41% (in percent)
Debt Ratio (D / (D + E)) = 20.00% (in percent) Cost of capital = 7.0822%
Tab. 41, Source: Damodaran / Multiples spreadsheet, own processing, 2013.

Stable growth period could be consider as scenario with the highest probability to
occur, it involves a bit more data from the industry, but it gives us a more rational
idea about the way that the company may or have taken.

The main difference regarding ŠKODA AUTO a.s. is that Hyundai Motor Company
has gained in recent years higher market share in nearly all the markets in which it
competes directly versus Škoda, due to that reason the growth rate was computed
with a value of 2.5%.

89
As we can see the main difference between stages lays on the return on capital
and cost of capital results, being the first one, the one with higher variation and
providing us the idea that the return on capital would not be so high in an stable
period, however, it remains positive and with the same core impression that the
company is able to allocate efficiently its capital on profitable investments and to
remain generating returns.

Output

Enterprise Value = $16,250,720.33

EV/EBIT = 1.79

EV/EBITDA = 1.51

EV/EBIT(1-t) = 2.37

EV/Sales = 0.19
EV/Capital Invested = 0.34

*Note: Monetary results in this part are presented in KRW (Korean won)
Tab. 42, Source: Own processing, 2013.

Finally, we have the output of the analysis and valuation method; on it we can
realize that the estimated value of the enterprise is 16,250,720.33 KRW as at
December, 2012.

The remaining coefficients remain positive and within the range which could be
consider stable and solid, which is a good signal that the company shows a
“healthy” structure as a result of its positive results and solid operations, however,
is important to remark some additional information that results relevant for the
analysis such as when depreciation and amortization expenses are small, as in
the case of a non-capital-intensive company such as a consulting firm, EV/EBIT
and EV/EBITDA will be similar. Unlike EBITDA, EBIT recognizes that depreciation
and amortization, while non-cash charges, reflect real expenses associated with
the utilization and wear of a firm's assets that will ultimately need to be replaced.

When a company has negative EBITDA, the EV/EBITDA and EV/EBIT multiples
will not be material. In such cases, EV/Sales may be the most appropriate multiple
to use.

90
7.3 KIA Motors – Valuation by multiples data
Going on with the benchmarking of the company, the second firm chosen for
comparison will be KIA Motors, which it is also registered in Seoul, in the republic
of Korea, and which actually is connected to the HMC Group.

KIA Motors is also becoming stronger around the world in the automotive field,
their main strategy is based on the design / image of the vehicles which actually
are offered in a very low prices, gaining by that the awareness of the costumers as
well as their pockets.

The valuation strategy follows the same structure, applying public data which was
obtained from the annual report for the year 2012, following we can see the
calculation and to highlight the main findings.

Current Inputs

Current EBIT = $5,164,056.00 (in $) Operating Margin = 8.29%

Current Depreciation = $1,341,514.00 Sales/BV Capital 2.80
Current Tax Rate = 24.20% (in percent) Return on capital = 23.23%
Current Revenues = $47,242,933.00 (in $)

Capital Invested (Book Value) = $16,848,062.00

Tab. 43, Source: Damodaran / Multiples spreadsheet, own processing, 2013.

The operating margin of the company, with a result of 8.29% which mainly points
out the idea that the company’s pricing strategy and operating efficiency are
performing in a good way, since the company entered to the automotive field and
has been improving its sales performance around the world, due to the low prices
and attractive design, however, quality is a different topic.

High Growth Period

Length of high-growth period (n) = 5 (Number of periods) Operating Margin = 8.29%

Reinvestment Rate (as % of EBIT(1-t)) = 60% Sales/Capital = 2.80

Growth rate during period (g) = 13.94% (in percent) Return on Capital = 23.23%
Cost of Equity during period = 19.00% (in percent)

After-tax Cost of Debt = 4.17% (in percent) Cost of capital = 15.29%

Debt Ratio (D / (D + E)) = 25.00% (in percent)

Tab. 44, Source: Damodaran / Multiples spreadsheet, own processing, 2013.

As a main input we can see an additional variable, which is the cost of capital,
counting with a result of 15.29% and which gives us the main idea that the

91
company must overcome that result before it can generate value, considering its
debt and equity financing resources.

Stable Growth Period

Growth rate in steady state = 2.50% (in percent)

Return on capital in stable growth 29.44% Operating Margin = 10.50%

Reinvestment Rate in Stable growth = 8.49% Sales/BV Capital 2.80

Cost of Equity in steady state = 14.00% (in percent) Return on Capital = 29.44%

After-tax Cost of Debt = 4.17% (in percent)

Debt Ratio (D / (D + E)) = 17.00% (in percent) Cost of capital = 12.33%

Tab. 45, Source: Damodaran / Multiples spreadsheet, own processing, 2013.

In this part, the main variances regarding the previous two companies is that, KIA
has gained in recent years higher market share in nearly all the markets in which it
competes directly versus both firms, due to that reason the growth rate was
computed with a value of 2.5%, since it shows a very attached and similar
behavior as HMC .

As we can see the main difference between stages lays on the return on capital
and cost of capital results, being the first one, the one with higher variation and
providing us the idea that the return on capital would not be so high in an stable
period, however, it remains positive and with the same core impression that the
company is able to allocate efficiently its capital on profitable investments and to
remain generating returns.

Output

Enterprise Value = $10,640,091.20

EV/EBIT = 2.06

EV/EBITDA = 1.64

EV/EBIT(1-t) = 2.72

EV/Sales = 0.23
EV/Capital Invested = 0.63

*Note: Monetary results in this part are presented in KRW (Korean won)
Tab. 46, Source: Own processing, 2013.

Finally, we can conclude that the estimated value of the enterprise is

10,640,091.33 KRW as at December, 2012.

92
The remaining coefficients remain positive and within the range which could be
consider stable and solid, which is a good signal that the company shows a
“healthy” structure as a result of its positive results and solid operations, however,
is important to remark some additional information that results relevant for the
analysis such as when depreciation and amortization expenses are small, as in
the case of a non-capital-intensive company such as a consulting firm, EV/EBIT
and EV/EBITDA will be similar. Unlike EBITDA, EBIT recognizes that depreciation
and amortization, while non-cash charges, reflect real expenses associated with
the utilization and wear of a firm's assets that will ultimately need to be replaced.

7.4 Valuation – Exchange rate

As we have seen on the previous parts, the companies being valued are
registered in different countries, due to that, for the calculations the tax rates which
were applied were different as well as, the final value which resulted from the
valuation process.

Due to that, and in order to be able to compare the value of the firms, it is essential
to convert and unify all those currencies just into one, situation that will allow us to
have a better understanding of the firms’ value as at December, 2012.

The currency chosen is the Euro (EUR), which at the end of the year 2012 had an
exchange rate of 25.08 Czech Korunas per Euro14 and an exchange rate of
1373.17 Korean Won per Euro.

Given the previous information, the result is as follows:

Exchange rate Value of the Company

Company Value obtained
(in €) (in €)
Škoda Auto a.s. CZK 259,167.91 25.08 € 10,333.65 €
Hyundai Motor
KRW 16,250,720.33 1,373.17 € 11,834.46 €
Company

KIA Motors KRW 10,640,091.20 1,373.17 € 7,748.56 €

Tab. 47, Source: Own processing, 2013.

14
Source: www.finance.yahoo.com/currency-converter, 2013.

93
7.5 Valuation based on Free Cash Flow for the Firm (FCFF)
As a second measure of valuation, the FCFF methodology will be implemented for
the company ŠKODA AUTO a.s., the main goal is to compare both approaches
and to point out the reason of the possible differences that may arise between
both perspectives.

7.5.1 Input Data

The first step which will be followed consists in to provide the necessary inputs
within the following template, is important to mention that information such as beta
coefficient, risk premium as well as the tax rate, can be obtained from the website
of the professor Aswath Damodaran15, while the rest of the information has been
taken from the public available resources of the company.

Is important to mention as well that there are some assumptions that are used for
the calculation, for example, we are assuming that the capital expenditures are
zero and that the 100% of the Capex comes from the depreciation, the previous
assumption results ideal when the macroeconomic scenario seems to be quite
stable or in recovery process, such as the one that the company has been facing
since 2012.

We should also consider that the Capex/Depreciation ratio lays or approaches to

the one which the automotive industry shows and finally we should also take into
account that for the calculation of the capital expenditures we will consider an
expected growth rate in operating income of 5% and an expected return on capital
of 15%.

As a result of the previous assumptions we get the following results which will be
the based for the following step:

Expected Growth Rate in Operating Income = 5.00%

Expected Return on Capital = 15.00%
Expected Net Capital Ex and Chg in WC as % of after-tax EBIT = 111.84%

Cap Expe nditure /De pre ciation Ratios by Se ctor

Industry Depreciation Cap Ex Cap Ex/Deprec'n Net CapEx/Sales Net CapEx/EBIT(1-t)
Auto & Truck $ 2,134.54 $ 2,387.37 111.84% 0.79% 7.34%

Tab. 48, Source: CapEx, Damodaran online, data own processing, 2013.

15
Source: http://pages.stern.nyu.edu/~ADAMODAR/, 2013.

94
For the following part we will use some inputs which have been already
determined in the past of the work, as well as the information of the automotive
industry provided by the professor Damodaran on his public website.

Current EBIT $17,917.00 (in currency)

Current tax rate = 19%

Capital Expenditures $2,387.37 (in currency)

Depreciation = $11,792.00 (in currency)
Change in Working Capital = $252.83 (in currency) If negative, enter z ero.
Do you want to change the capital expenditure/depreciation ratio? Yes (Yes or No)
If so, enter capital expenditures as a percent of depreciation 111.84%
Debt ratio = 7.23% ( in percent)

Are you directly entering the cost of equity? (Yes or No) No

If yes, enter cost of equity = (in percent)
If no, enter the inputs for the CAPM
Beta of the stock = 1.02
Riskfree rate = 2.86% (in percent)
Risk Premium= 7.28% (in percent)

Enter the cost of debt = 8.50% T his is a pre-tax cost of borrowing.

Expected Growth Rate = 3% (in percent)

Tab. 49, Source: FCFF, Damodaran online, data own processing, 2013.

As we can see, the data which is shown is taken from the financial statements of
the company, as well as previously computed in the case of the capital expenses,
the fields regarding the Beta of the stock, Risk-free rate, risk premium as well as
the cost of debt, are based on the data that fit better the automotive industry and
which has been taken from the spreadsheets of the professor Damodaran.

In the case of the expected growth rate, this value shouldn’t be higher than the
value of the industry, even though, the company could perform in better way than
the industry average expectations.

95
The outputs of the model are the following:

Firm Details: from inputs on prior page

EBIT (1- tax rate) = $14,512.77
- (Capital Spending - Depreciation) $1,396.17
- Change in Working Capital $252.83
Free Cashflow to Firm = $12,863.77

Tab. 50, Source: FCFF, Damodaran online, data own processing, 2013.

On the previous chart we can clearly see the way how the FCF has been
calculated, as it is pointed out, is based on the inputs which were filled in on the
previous chart and as a result we can see that the FCF has a value of 12, 863.77
CZK, is important to make this remark since all the inputs entered are in the same
currency, we can summarize that the company generates this amount derived
from the expenses, taxes and changes in net working capital as well as
investments.

By this we can infer that ŠKODA AUTO a.s. counts with enough cash after
covering all its expenses and can fulfill its costs and investments duties.

Cost of Equity = 10.29%

Cost of Debt = 6.89%
Cost of Capital = 10.04%
Expected Growth rate = 3.00%

Value of Firm $188,212.73

Growth rate Value

5.00% $268,009.16
4.00% $221,504.99
3.00% $188,212.73
2.00% $163,202.39
1.00% $143,725.48
0.00% $128,128.53
-1.00% $115,357.19

Tab. 51, Source: FCFF, Damodaran online, data own processing, 2013.

We can also see that by computing the previous inputs, we can obtained the value
of the firm, which varies from the value which we have obtained on the valuation

96
based on multiples part and which is in this shows that the company has a value of
188,212.73 CZK (million).

Finally, we can see a chart in which is shown the different possibilities regarding
growth rates and the possible value which could have the company based on
different scenarios.

97
8 Conclusion

The main goal of this work is to determine the value of the company ŠKODA
AUTO a.s. as at the 31st of December of 2012.

As we have seen, the work has been structured in different strategic sections in
order to take us step by step to the final value result, which was centered on the
public available information as well as based on different premises, taking all that
into consideration, the estimate value (opinion) as of December 31st, 2012 is:

259,167.41 CZK (million) or 10,333.65 EUR (million) by the valuation by

multiples approach and 188,212.73 CZK (million) by the FCFF approach
considering a growth rate of 3.00%.

In terms of the analyses, we can clearly say that the company is in very good
financial situation, as well as improving their position in the current market mainly
derived from the belongingness to the Volkswagen group, which definitely counts
as a valuable competitive advantage for the coming years.

The final value result was based on the application and comparison of the
valuation by multiples approach and the Free Cash Flow for the Firm, which in my
opinion, are relevant methods for the analysis of the business.

Based on the previous information, we can conclude that the company has faced
successfully the economic crisis period and that at this point it finds itself on the
recovery and growing season, which certainly will lead the firm to count with an
stronger position worldwide as well as to extend its product portfolio and to be able
to penetrate new markets.

From the perspective of the objectives and according to the above mentioned facts
it can be stated that the objectives of my work have been successfully met.

98
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Madrid, 2007, 184p. ISBN 978-84-8476-304-8
 ŠKODA AUTO a.s. Annual Report 2012. 184p.
 ŠKODA AUTO a.s. information for Investors
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Creating Competitive Advantages. USA: September, 2011, 592p. ISBN
978-00-7743-956-9
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practical approach. Germany, 2007, 92p. ISBN 978-3-640-30303-8
 Krishna G. Palepu, Paul M. Healy and Erik Peek. Business analysis and
Valuation IFRS edition. Great Britain, 2010, 759p. ISBN 978-1-4080-1749-4
 Knapová, B., Krabec, T., Roubíčková, J. EBIT Criterion: Financial Analysis'
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sciences. 2011. v. 5, no. 3, p. 499--507.
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Autónoma de México. PricewaterhouseCoopers. Valuación de empresas y
creación de valor: nuevas formas de reportar sobre la creación de valor en
las empresas. México, 2003. 372p. ISBN 978-1-7179-3215-5
 Krabec, T., Čižinská, R. European Private Equity Markets and Business
Valuation. In Global Business Conference Winter 2013. Croatia: Inovation
Institute, 2013, s. 136--142. ISSN 1848-2252.
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financieros y valuación de inversiones permanentes en acciones. México,
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99
Electronic sources

 http://www.acea.be
 http://www.oica.net
 https://www.cia.gov/library/publications/the-world-factbook/
 http://www.skoda-auto.cz/
 http://new.skoda-auto.com/en/company/investors/management
 http://pages.stern.nyu.edu/~ADAMODAR/
 http://ec.europa.eu
 http://www.hyundai.com
 http://www.kia.com
 http://www.kpmg.com
 http://www.deloitte.com
 http://www.pwc.com
 http://www.ey.com
 http://www.ivsc.org/
 http://www.indexmundi.com/

100
Appendices

Appendix no. 1 102

Appendix no. 2 103

Appendix no. 3 104

Appendix no. 4 105

Appendix no. 5 106

Appendix no. 6 107

Appendix no. 7 108

Appendix no. 8 109

Appendix no. 9 110

Appendix no. 10 111

Appendix no. 11 112

101
Appendix no. 1 – Consolidated Balance Sheet at 31st December 2012

Consolidated Balance Sheet as at 31st December 2012 (CZK million)

2012 2011
Assets
Intangible assets 18,782 13,654
Property, plant and equipment 56,288 46,265
Investments in associates 2,200 940
Other receivables and financial assets 4,196 1,159
Deferred tax assets 2,027 2,668
Non-current assets 83,493 64,686
Inventories 18,619 16,061
Trade receivables 12,015 13,423
Prepaid income tax 447 60
Other receivables and financial assets 4,945 28,076
Cash and cash equivalents 40,467 31,251
Current assets 76,493 88,871
Total assets 159,986 153,557
Equity and liabilities
Share capital 16,709 16,709
Share premium 1,578 1,578
Retained earnings 72,511 64,301
Other reserves 108 (1,517)
Equity attributable to owner of the Company 90,906 81,071
Non-controlling interests - 140
Equity 90,906 81,211
Non-current financial liabilities 3,000 3,000
Other non-current liabilities 5,483 7,317
Non-current provisions 10,693 11,030
Non-current liabilities 19,176 21,347
Current financial liabilities 107 141
Trade payables 30,807 30,105
Other current liabilities 5,933 6,258
Current income tax liabilities 71 1,217
Current provisions 12,986 13,278
Current liabilities 49,904 50,999
Total equity and liabilities 159,986 153,557

Source: Škoda Auto a.s. Annual Report 2012 – Financial section p.48

102
Appendix no. 2 – Consolidated Income Statement at 31st December 2012

Consolidated Income Statement for the year ended 31st December 2012 (CZK million)
2012 2011
Sales 262,649 252,562
Cost of Sales 221,751 215,956
Gross Profit 40,898 36,606
Distribution expenses 19,179 17,549
Administrative expenses 6,855 6,123
Other operating income 10,122 10,040
Other operating expenses 7,069 4,717
Operating profit 17,917 18,257
Financial income 1,689 2,757
Financial expenses 2,944 1,966
Financial Result (-1,255) 791
Share on profit / (loss) of associates 1,272 227
Profit before income tax 17,934 19,275
Income tax expense 2,580 3,200
Profit for the year 15,354 16,075
Attributable to:
Owner of the company 15,354 16,035
Non-controlling interests - 40
15,354 16,075
Source: Škoda Auto a.s. Annual Report 2012 – Financial section p.46

103
Appendix no. 3 – Consolidated Cash Flow Statement at December 31st 2012

Consolidated Cash Flow statement for the year ended 31st December 2012 (CZK million)

2012 2011
Cash and cash equivalents as at 1 January 31,251 35,986
Profit before income tax 17,934 19,275
Depreciation and impairment of non-current assets 11,932 12,746
Change in provisions (910) 3,875
Gain on disposal of non-current assets (10) (11)
Net interest (income) / expense 251 53
Change in inventories (3,747) (1,937)
Change in receivables 1,623 (3,701)
Change in liabilities 1,219 2,355
Income tax paid from operating activities (4,068) (3,561)
Interest paid (614) (531)
Interest received 694 652
Share on (profit) / loss of associates (1,272) (227)
Income from other investments (84) (125)
Unrealised (gains) and losses from derivatives and other
715 (612)
adjustments for non-cash transactions
(Gain) / loss on disposal of a subsidiary (220) 0
Cash flows from operating activities 23,443 28,251
Purchases of non-current assets (18,921) (13,558)
Additions to capitalised development costs (6,104) (3,306)
(Increase) / decrease in short-term deposits* 21,533 (11,500)
Increase in long-term deposits (3,033) 0
Proceeds from sale of non-current assets 44 14
Proceeds from other investments 84 125
Net cash inflow / (outflow) on disposal of a subsidiary (635) 0
Cash flows from investing activities (7,032) (28,225)
Net cash flows (operating & investing activities) 16,411 26
Dividends paid (7,144) (4,767)
Loans received 0 33
Repayments of loans received (33) (120)
Cash flows from financing activities (7,177) (4,854)
Net change in cash and cash equivalents 9,234 (4,828)
Exchange gains / (losses) on cash and cash equivalents (18) 93
Cash and cash equivalents as at 31 December 40,467 31,251

Source: Škoda Auto a.s. Annual Report 2012 – Financial section p.50

104
Appendix no. 4 – Consolidated Statement of changes in equity at December
31st 2012.

Consolidated statement of changes in equity for the year ended 31 December 2012 (CZK million)
Equity
Non-
Share Share Retained Other attributable
controlling Total Equity
Capital Premium Earnings Reserves* to owner of
interests
the Company

Balance as at
16,709 1,578 52,968 3,339 74,594 178 74,772
1 January 2011
Profit of the year - - 16,035 - 16,035 40 16,075
Other comprehensive
- - - (4,856) (4,856) (13) (4,869)
income / (loss)
Total comprehensive
income - - 16,035 (4,856) 11,179 27 11,206
for the year
Dividends paid - - (4,702) - (4,702) (65) (4,767)
Balance as at
16,709 1,578 64,301 (1,517) 81,071 140 81,211
31 December 2011

Balance as at
16,709 1,578 64,301 (1,517) 81,071 140 81,211
1 January 2012
Profit of the year - - 15,354 - 15,354 - 15,354
Other comprehensive
- - - 1,625 1,625 - 1,625
income / (loss)
Total comprehensive
income - - 15,354 1,625 16,979 - 16,979
for the year
Dividends paid - - (7,144) - (7,144) - (7,144)
Disposal of a
- - - - - (140) (140)
subsidiary
Balance as at
16,709 1,578 64,301 108 90,906 - 90,906
31 December 2012
Source: Škoda Auto a.s. Annual Report 2012 – Financial section p.49

105
 Projected Income Statement for the period 2013-2018 (CZK million)

2013 2014 (+1.4%) 2015 (+1.9%) 2016 (+1.9%) 2017 (+2%) 2018 (+2.1%)

Sales 262,649 266,326 271,386 276,543 282,073.47 287,997

Cost of sales 221,751 224,856 229,128 233,481 238,151 243,152
Gross profit 40,898 41,471 42,259 43,061 43,923 44,845
- - - - -
Distribution expenses 19,179 19,448 19,817 20,194 20,597 21,030
Administrative expenses 6,855 6,951 7,083 7,218 7,362 7,517

106
Other operating income 10,122 10,264 10,459 10,657 10,871 11,099
Other operating expenses 7,069 7,168 7,304 7,443 7,592 7,751
Operating Profit 17,917 18,168 18,513 18,865 19,242 19,646
- - - - -
Financial income 1,689 1,713 1,745 1,778 1,814 1,852
Financial expenses 2,944 2,985 3,042 3,100 3,162 3,228
Financial Results (1,255) (1,273) (1,297) (1,321) (1,348) (1,376)
- - - - -
Share on Profit 1,272 1,290 1,314 1,339 1,366 1,395
Profit before income tax 17,934 18,185 18,531 18,883 19,260 19,665
- - - - -
Income tax expense 2,580 2,616 2,666 2,716 2,771 2,829
Profit for the year 15,354 15,569 15,865 16,166 16,490 16,836
- - - - -
Attributable to: - - - - -
15,354 15,569 15,865 16,166 16,490 16,836
Appendix no. 5 – Projected Income Statement for the period 2013-2018.

Owner of the company

Non-controlling interests - - - - - -
15,354 15,569 15,865 16,166 16,490 16,836
Appendix no. 6 – Projected Balance Sheet for the period 2013-2018.

Pojected Balance Sheet for the period 2013-2018 (CZK million)

2013 2014 2015 2016 2017 2018

Assets
Intangible assets 18,782 19,045 19,407 19,776 20,171 20,595
Property, plant and equipment 56,288 57,076 58,160 59,266 60,451 61,720
Investments in associates 2,200 2,231 2,273 2,316 2,363 2,412
Other receivables and financial assets 4,196 4,255 4,336 4,418 4,506 4,601
Deferred tax assets 2,027 2,055 2,094 2,134 2,177 2,223
Non-current assets 83,493 84,662 86,270 87,910 89,668 91,551
Inventories 18,619 18,880 19,238 19,604 19,996 20,416
Trade receivables 12,015 12,183 12,415 12,651 12,904 13,175
Prepaid income tax 447 453.258 461.8699 470.64543 480.05834 490.13956
Prepaid income tax 4,945 5,014 5,110 5,207 5,311 5,422
Cash and cash equivalents 40,467 41,034 41,813 42,608 43,460 44,372
Current assets 76,493 77,564 79,038 80,539 82,150 83,875

Total assets 159,986 162,226 165,308 168,449 171,818 175,426

Equity and liabilities

Share capital 16,709 16,943 17,265 17,593 17,945 18,322
Share premium 1,578 1,600 1,630 1,661 1,695 1,730
Retained earnings 72,511 73,526 74,923 76,347 77,874 79,509
Other reserves 108 110 112 114 116 118
Equity attributable to owner of the Company 90,906 92,179 93,930 95,715 97,629 99,679
Non-controlling interests - 0 0 0 0 0
Equity 90,906 92,179 93,930 95,715 97,629 99,679
Non-current financial liabilities 3,000 3,042 3,100 3,159 3,222 3,290
Other non-current liabilities 5,483 5,560 5,665 5,773 5,889 6,012
Non-current provisions 10,693 10,843 11,049 11,259 11,484 11,725
Non-current liabilities 19,176 19,444 19,814 20,190 20,594 21,027
Current financial liabilities 107 108 111 113 115 117
Trade payables 30,807 31,238 31,832 32,437 33,085 33,780
Other current liabilities 5,933 6,016 6,130 6,247 6,372 6,506
Current income tax liabilities 71 72 73 75 76 78
Current provisions 12,986 13,168 13,418 13,673 13,946 14,239
Current liabilities 49,904 50,603 51,564 52,544 53,595 54,720

Total equity and liabilities 159,986 162,226 165,308 168,449 171,818 175,426

107
 Projected Cash Flow statement for period 2013-2018 (CZK million)
2013 2014 2015 2016 2017 2018
Cash and cash equivalents as at 1 January 31 251 31 689 32 291 32 904 33 562 34 267
Profit before income tax 17 934 18 185 18 531 18 883 19 260 19 665
Depreciation and impairment of non-current assets 11 932 12 099 12 329 12 563 12 814 13 084
Change in provisions (910) -923 -940 -958 -977 -998
Gain on disposal of non-current assets (10) -10 -10 -11 -11 -11
Net interest (income) / expense 251 255 259 264 270 275
Change in inventories (3,747) -4 -4 -4 -4 -4
Change in receivables 1 623 1 646 1 677 1 709 1 743 1 780
Change in liabilities 1 219 1 236 1 260 1 283 1 309 1 337
Income tax paid from operating activities (4,068) -4 -4 -4 -4 -4
Interest paid (614) -623 -634 -646 -659 -673
Interest received 694 704 717 731 745 761
Share on (profit) / loss of associates (1,272) -1 -1 -1 -1 -1
Income from other investments (84) -85 -87 -88 -90 -92
Unrealised (gains) and losses from derivatives and other
715 725,01 738,78519 752,8221086 767,8785508 784,0040003
adjustments for non-cash transactions
(Gain) / loss on disposal of a subsidiary (220) -223,08 -227,31852 -231,637572 -236,270323 -241,232
Cash flows from operating activities 23 443 23 771 24 223 24 683 25 177 25 705
Purchases of non-current assets (18,921) -19 -20 -20 -20 -21

108
Additions to capitalised development costs (6,104) -6 -6 -6 -7 -7
(Increase) / decrease in short-term deposits* 21 533 21 834 22 249 22 672 23 125 23 611
Increase in long-term deposits (3,033) -3 -3 -3 -3 -3
Proceeds from sale of non-current assets 44 45 45 46 47 48
Proceeds from other investments 84 85 87 88 90 92
Net cash inflow / (outflow) on disposal of a subsidiary (635) -644 -656 -669 -682 -696
Cash flows from investing activities (7,032) -7 -7 -7 -8 -8
Net cash flows (operating & investing activities) 23 436 23 764 24 216 24 676 25 169 25 698
Dividends paid (7,144) -7 -7 -8 -8 -8
Loans received 0 0 0 0 0 0
Repayments of loans received (33) -33 -34 -35 -35 -36
Cash flows from financing activities (7,177) -7 -7 -8 -8 -8
Appendix no. 7 – Projected Cash Flow for the period 2013-2018.

Net change in cash and cash equivalents 9 234 9 363 9 541 9 722 9 917 10 125
Exchange gains / (losses) on cash and cash equivalents (18) -18 -19 -19 -19 -20
Cash and cash equivalents as at 31 December 40 467 41 034 41 813 42 608 43 460 44 372
Appendix no. 8 – Hyundai Motor Company, Statement of Financial position
as at December, 2012.

109
Appendix no. 9 – Hyundai Motor Company, Statement of Income as at
December, 2012.

110
Appendix no. 10 – KIA Motors, Statement of Financial position as at
December, 2012.

111
Appendix no. 11 – KIA Motors, Statement of Income as at December, 2012.

112
 ANNOTATION

AUTHOR Javier Fuentes Noguéz

SPECIALISATION Corporate Finance Management in the Global

Environment

Valuation of ŠKODA AUTO a.s.

THESIS TITLE

SUPERVISOR doc. Ing. Tomáš Krabec, Ph.D., MBA

DEPARTMENT DFM YEAR 2014

NUMBER OF PAGES 112

NUMBER OF PICTURES 28

NUMBER OF TABLES 51

NUMBER OF APPENDICES 11

SUMMARY The goal of the thesis is to describe the process of a real

business valuation and procedures in a theoretical way.

The work includes basic theoretical concepts and definitions as

well as short explanations, which will serve on the second stage,
as a first pillar in the application of the methodology.

Next, some of the generic methodologies will be applied by

valuing ŠKODA AUTO a.s. by using publicly available data,
mainly focus on published annual reports, as well as the same
situation for the involved companies which will serve as a
benchmarking.

The thesis will simulate a real valuation assignment for

determining fair value of the equity of the firm.

KEY WORDS Valuation, Methodology, Analysis, Costs. Forecasting.

THESIS INCLUDES UNDISCLOSED PARTS: NO