A Study on Financial Modeling and Valuation

Submitted to
CHITKARA BUSINESS SCHOOL
in partial fulfillment of the requirements for the award of degree of
Master of Business Administration

Submitted by: Supervised by:

DEEPALI JASLEEN KAUR

Roll No:- 2020982519 (Associate professor)

CHITKARA BUSINESS SCHOOL

CHITKARA UNIVERSITY
2020-21
 DECLARATION

I, "DEEPALI”, hereby declare that the work presented herein is genuine work done
originally by me and has not been published or submitted elsewhere. Any literature,
data or work done by others and cited in the report has been given due
acknowledgement and listed in the reference section.

DEEPALI
(Student's Name & Signature)

2020982519
(Roll No.)

Date: 15/01/2021
 TO WHOMSOEVER IT MAY CONCERN

This is to certify that the project titled “Financial modeling and valuation” carried out
by Mr./Ms. DEEPALI (student name), S/o or D/o SANDEEP KATH has been
accomplished under my guidance & supervision as a duly registered MBA student of
Chitkara University. This project is being submitted by him/her in the partial
fulfillment of the requirements for the award of the Master of Business
Administration from Chitkara University.

His/her dissertation represents his/her original work and is worthy of consideration for
the award of the degree of Master of Business Administration.

Jasleen kaur
(Associate Professor)
Signature and Seal of the company
 FINANCIAL MODELING AND VALUATION

INTRODUCTION 1.1

Financial modeling is the process of creating a summary of company expenses and

earnings from a spreadsheet that can be used to calculate the impact of an event or
future decision.

The financial model has many uses for company executives. Financial analysts often
use it to analyze and anticipate how the company's stock performance may be affected
by future events or management decisions. Financial modeling is a reflection of the
company's operating numbers in the past, present, and predicted futures. Such models
are designed to be used as decision-making tools. Company managers can use them to
estimate costs and then generate profits for a proposed new project.

Financial analysts use it to describe or anticipate the effects of events in a company's

stock, from internal factors, such as a change in strategy or business model to external
factors such as a change in economic policy or regulation.
Financial models are used to measure business value or to compare businesses with
peers in the sector. They are also used in strategic planning to evaluate a variety of
conditions, to calculate the cost of new projects, to determine budgets, and to allocate
company resources.

Examples of financial models could include discount analysis, sensitivity analysis, or

in-depth testing.
The issuance of a financial model is used for decision-making and financial analysis,
either within or outside the company. Within the company, management will use
financial models to make decisions about:

 Raising money (debt and / or equity)

 Making acquisitions (businesses and / or assets)
 Growing a business physically (e.g., opening new stores, entering new
markets, etc.)
 Selling or separating goods from business units
 Budgeting and forecasting (planning for future years)
 Capital allocation (most importantly which projects you should invest in)
 Business evaluation
 Financial statement analysis / rate analysis
 Financial management
CONCEPTS 1.2

Understanding excel

Investment Decisions
Techniques

Application of Decision
Techniques

Financial Statement Analysis

Valuation

A) INVESTMENT DECISIONS TECHNIQUE

Investment refers to the purchase of production capacity or capital expenditure
(business use to purchase fixed assets e.g., goods, vehicles etc.)

Why Invest?
 Businesses need to invest in order to grow
 They may want to increase capacity so that they can produce more
 If they produce more, they can sell more and increase sales revenue
 They can also look to invest to increase the efficiency of their operations
Due to the large amount of capital involved, management attempts to calculate the
expected profit and the expected cash flows of the proposed investment. They use
three methods to test investment, which are as follows: -
1.Payback period method: -
This method of investment assessment calculates how long a project takes to recover
its actual investment. The approach therefore focuses on cash flow, highlighting
projects that quickly receive their first investment.
This method is easy to calculate and understand.

 Its use emphasizes monetization, because statistics are based solely on cash flow.
 It also helps managers reduce risk by selecting a project that returns its release as
quickly as possible.
 Early cash flows can be more accurately predicted than the latest, and they are
less affected by inflation.

The big problem with this approach is that it completely ignores profit and profit. And
it doesn't look at interest rate

2. Accounting rate of return (ARR) method: -

This method of investment appraisal calculates the expected profits from the
investment, expressing them as a percentage of the capital invested. The higher the
rate of return, the ‘better’ (i.e., the more profitable) is the project. The ARR is
therefore based on anticipated profits rather than on cash flow.

ARR = (expected average profits / original investment) x 100

Using the above figures, project A generates total profits of £10 000 and project B
total profits of £12 000.

Project A (£) Project B (£)

2500 3000
22000 22000
APR = 11.4% APR = 13.6%

 Project B would therefore be selected using ARR.

 The accounting rate of return method is easy to use and simple to understand.
 It measures and highlights the profitability of each project.
Its disadvantages are that it ignores the timing of a project’s contributions. High
profits in the early years – which can be estimated more accurately, and which help
minimise the project’s risk – are treated in the same way as profits occurring later. It
also concentrates on profits rather than cash flows, ignoring the time value of money
(profits in the later years being eroded by the effects of inflation).

3.Discounted cash flow (DCF) method: -

DCF's policy is based on the use of discounted statistics to determine current cash
inflows and outflows. This approach is sometimes divided into two elements, which
are related:

 the Net Present Value (NPV) approach, which monitors all the appropriate
cash flow from a project for a lifetime, has given them a discount on 'their
current value'
 the internal rate of return (IRR), which compares the amount of return
expected from a project with that identified by the company as capital costs -
projects with an IRR exceeding the capital cost should be considered.

The NPV method calculates the present value of the future cash flow of a project.
Annual cash flows are reduced to the current value, indicating how much
management will need to invest now at a given interest rate to obtain these future
financial benefits. The current total amount of revenue is compared to this total
revenue to calculate the current value of the project. A project with the best NPV will
be selected.

 If NPV is positive - monetary benefits outweigh the financial costs - this

means that the project will receive a refund in excess of its monetary costs
(interest rate / discount applied to the calculations).
 If NPV is negative - this means that the cost of investing in the project
exceeds the current value of future receipts, so it is not worth investing in it.

TIME VALUE OF MONEY: -

The value for money (TVM) is the idea that the money you have now is worth more
than the same amount in the future because of its ability to earn money. This basic
monetary policy concludes that given money can earn interest, any amount of money
is more expensive if it is received sooner. TVM is sometimes also called the reduced
price.

-FORMULA: -
Depending on the particular situation in question, the amount of time in the monetary
formula may change slightly. For example, in the case of a pension or permanent
pension, the standard formula has more or less features. But in general, the most basic
TVM formula looks at the following variables:
  FV = Future value of money
 PV = Present value of money
 i = interest rate
 n = number of compounding periods per year
 t = number of years

Based on these variables, the formula for TVM is:

FV = PV x [ 1 + (i / n)] (n x t)

Time Value of Money Examples

Assume a sum of $10,000 is invested for one year at 10% interest. The future value of
that money is:

FV = $10,000 x [1 + (10% / 1)] ^ (1 x 1) = $11,000

The formula can also be rearranged to find the value of the future sum in present day
dollars. For example, the value of $5,000 one year from today, compounded at 7%
interest, is:

PV = $5,000 / [1 + (7% / 1)] ^ (1 x 1) = $4,673

EFFECT OF COMPOUNDING PERIODS ON FUTURE VALUE: -

The number of intervals can have a significant impact on TVM statistics. To take the
example of $ 10,000 above, if the number of combined times increases to quarter,
monthly, or daily, future price figures are:

 Quarterly Compounding: FV = $10,000 x [1 + (10% / 4)] ^ (4 x 1) = $11,038

 Monthly Compounding: FV = $10,000 x [1 + (10% / 12)] ^ (12 x 1) = $11,047
 Daily Compounding: FV = $10,000 x [1 + (10% / 365)] ^ (365 x 1) = $11,052

This shows TVM depends not only on interest rate and time horizon, but also on how
many times the compounding calculations are computed each year.

B. APPLICATION OF DECISION TECHNIQUES

BREAK EVEN ANALYSIS: -

Break-even analysis is valuable as a preliminary decision-making tool. The
principle idea behind break-even analysis is that all costs are variable (which means
they vary with output), fixed (which means they are relatively constant over time) or a
combination of both.
Break-even analysis is a useful tool as a level calculation of fixed cost-related costs
for a project. Therefore, if a project has a low fixed cost, it will tend to have a lower
break point. Since the leave point is the point at which the cost or expense is equal,
there is no residual loss or gain. It is assumed that, although the cost of the
opportunity has been paid and the proceeds have received a risk-adjusted, expected
return. This means a point of rest and even a point at which the total cost of a business
exceeds its total cost and then the entity is able to create wealth instead of using it.

Lets take an example:-

We are taking different Sales projections during the lifetime:-
Now we will evaluate that at what sale volume the plant will reach to its break even
point.
 Here Lets say Fixed cost is 1,00,000

Variable cost is 35

Selling price is 50

After evaluating from the net profit in the 3 different sale projections we can say that
in pessimistic and Realistic situations the firm is incurring loss and in optimistic
situation plant is earning an revenue of 5,000.

Determination the BREAK EVEN SALES: -

After applying the GOAL SEEK, we determined the breakeven sale that is 6,667
BEP= 6,667

Fig1. Graphical representation of the break even analysis

EMI: -

EMI, which represents the Equated Monthly Installment, is the monthly payment we
make in respect of our preferred loan. “EMI payments include contributions to the
principal and interest on the loan amount. The interest rate forms the bulk of the EMI
payment in the early stages. As we continue to lease loans, the interest rate recovery
rate decreases and the contribution to capital repayments increases.

Description: The EMI is dependent on multiple factors, such as:

1) Principal borrowed

2) Rate of interest

3) Tenure of the loan

4) Monthly/annual resting period

How is EMI calculated?

The mathematical formula to calculate EMI is: EMI = P × r × (1 + r)n/((1 + r)n - 1)

where P= Loan amount,

r= interest rate,
n=tenure in number of months.

For instance, the EMI for a principal amount for Rs 85,000, 18% interest rate and 12
months’ tenure is shown in the following table: -

Principal Amount 85,000

Interest Rate(annual) 18%
R 1.5%
Tenure in no. of months 12
EMI 7,792.80

We can also calculate EMI in excel by using the pmt formula as shown below: -
So we can calculate EMI by both the ways.

C. FINANCIAL STATEMENT ANALAYSIS

Financial statements are written records that transfer business functions and financial
performance of a company. Financial statements are often audited by government
agencies, accountants, firms, etc. The financial statements include:

 Balance Sheet
 Income statement
 Cash flow statement.

-The balance sheet provides an overview of assets, liabilities, and equity of

shareholders as a summary of time.
-The income statement is very focused on the company's income and expenditure over
a period of time. Once the costs are deducted from the income, the statement
generates the company's profit margin called revenue.
-Cash flow statement (CFS) measures how well a company generates cash to pay off
its debt obligations, finance its operating costs, and finance its investment.
PURPOSE: -
The general purpose of the financial statements is to provide information on the
operating results, financial position, and financial performance of the organization.
-The income statement informs the student of the business potential of the for-profit
business. In addition, it specifies the amount of the sale, as well as the type of
different types of costs, depending on how the cost details are compiled.
-The purpose of the balance sheet is to inform the reader of the current state of the
business from the date written on the balance. This information is used to measure the
financial performance, financial, and credit position of an entity
- Finally, the purpose of the cash flow statement is to indicate the nature of cash
receipts and cash withdrawals, at various stages. This information is widely used,
because cash flows are not always consistent with sales and expenses shown in the
income statement.

TREND ANALYSIS OF FINANCIAL STATEMENTS: -

Trend analysis is the process of analyzing a financial statement that shows a change
in the values of the items of the corresponding financial statements over a period of
time. It is a useful tool for assessing habit situations.

Statements of two or more periods are used for horizontal analysis. The first period is
often used as a base period and the items in the statements of all recent periods are
compared with the items in the base period statement. COMMON SIZE is a method
of TREND ANALYSIS.

COMMON SIZE STATEMENTS?

Common size statements are financial statements (usually balance sheet and income
statement) where each line item in the financial statement is divided by and
represented as percentage of a common amount. In case of common size income
statement, each line item of income statement is divided by total revenue and
expressed as percentage of total revenue.

In case of balance sheet, each line item is divided by total assets and expressed as
percentage of total assets.

RATIO ANALYSIS: -

Ratio analysis is the comparison of line items in the financial statements of a

business. Ratio analysis is used to evaluate a number of issues with an entity, such as
its liquidity, efficiency of operations, and profitability.

Some of the Ratios are: -

 Current ratio
 Inventory Turnover ratio
 Debtors Turnover ratio
 Operating Profit ratio
 Net profit Ratio
 Return on net worth
 Debt Equity Ratio
 Interest Coverage Ratio

D. VALUATION: -

Estimating a measure of knowledge of the total value of a company. When business

revenue rises, the company's Profits Margins are stronger, it raises the bank's balance,
and their future is more promising, its price rises higher.
Methods of Valuation
When evaluating a company as a continuous concern, there are three rating methods
used by industry personnel:
(1) DCF analysis
(2) comparative company analysis,
(3) previous performance.

DCF VALUATION
The value of the company is present value of the expected future cash flows,
discounted back at the rate that reflects the riskiness of these cash flows.
 Higher cash flow- Higher company value
 Lower cash flow - Lower company value

The DCF formula is as follows –

DCF = [CF for the 1st year / (1 + r)^1] + [CF for the 2nd year / (1 + r)^2] + [CF for
the 3rd year / (1 + r)^3] + .. + [CF for the nth year / (1 + r)^n]

Where:

CF = Cash Flow in the Period

r = the interest rate or discount rate

n = the period number

Step by step method to arrive at DCF valuation

 Reorganising the company’s financial statements

 Building Forecasts

 Estimating continuing value

  Calculation of weighted average cost of capital

 Calculating the DCF value

 Sensitivity Analysis

 Adjustments to DCF value to arrive at equity value

1.3 RESEARCH METHODLOGY: -

My methodological approach: -

My aim is to systematically describe the financial analysis of Hero Moto Corp

company, to explore an under-researched topic, or to establish a cause-and-effect
relationship. And to achieve this aim I have taken both quantitative as well as
qualitative data from secondary sources.

Type of research: -

I have done research on financial modeling and valuation of Hero Moto Corp under
which I have studied financial statements of the company. I gathered the descriptive
data by gathering observations without intervening.

Why Hero Moto Corp: -

Because Hero Moto Corp is the world’s largest manufacturer of two wheelers, based
in India. This company continues to lead the domestic motor cycle market with 54.6%
market share. Also, the company has seen many ups and downs throughout their life
span up till now. And Recently this company has done capitalization of the new plant
in Chittoor in the last quarter of the year,

Methods of Data collection: -

The information had been collected from different secondary sources like money
control, official websites of Hero Moto Corp, journals, annual report, financial
assessment and personal observation to have an idea about the organizational setup
and functions of financial departments and other groups.

Tools used for Analysis: -

The numbers given in the financial statement are to be analyzed for the given period
of time or relation to other numbers so that significant conclusions could be drawn
regarding the strengths and weaknesses of a business enterprise. The tools for
financial analysis help in this regard. The tools are: -
  Comparative Statements
 Common Size statements
 Ratio Analysis
 Change in Financial Position
 Valuation using the Discounted Cash flow method.
What were the Findings: -
 Analysis of Discounted Cash flow
 Analysis of Common Size Income statement
 Analysis of Common Size Balance Sheet
 Ratio Analysis of Financial statements
 Forecasting of 4 years
 Weighted Average cost of capital
 Undervaluation and Overvaluation of share price

HERO MOTO CORP ANALYSIS

Hero MotoCorp Limited, formerly Hero Honda, is an Indian multinational motorcycle

and scooter manufacturer based in New Delhi, India. The company is the largest two-
wheeler manufacturer in the world, and also in India, where it has a market share of
about 46% in the two-wheeler category.
Hero MotoCorp Limited, a former Hero Honda, is an international Indian motorcycle
and motorcycle manufacturer based in New Delhi, India. The company is the largest
two-wheeler manufacturer in the world, and in India, with a market share of about
46% in the two-wheeled segment.
Hero Honda began operating in 1984 as a joint venture between Hero Cycles
(sometimes called Hero Group, which does not confuse the Hero Group food
company in Switzerland) with India and Honda Japan. In June 2012, Hero MotoCorp
approved a proposal to consolidate the investment arm of its parent Hero Investment
Pvt. With automaker. The decision came 18 months after the split by Hero Honda.

"Hero" is the brand name used by the Munjal brothers in their leading company, Hero
Cycles Ltd. A joint venture between Hero Group and Honda Motor Company was
established in 1984 as Hero Honda Motors Limited in Dharuhera, India. The Munjal
family and the Honda group both owned 26% of the company's shares.

In the 1980's, the company introduced motorcycles that were popular in India for their
fuel economy and low cost. A well-known advertising campaign based on the slogan
'Fill - Shut it - Forget' which emphasized the performance of motorcycle fuel has
helped the company grow at a two-digit speed since its inception. In 2001, the
company became the second largest two-wheeler manufacturing company in India
and worldwide. Maintains global industry leadership to date. The technology in Hero
MotoCorp (formerly Hero Honda) cycling for almost 26 years (1984-2010) came
from its Japanese counterpart Honda.
MISSION AND VISION OF HERO MOTO CORP: -

The Mission: -
Hero MotoCorp's mission is to be a global business that meets the needs and
aspirations of its customers by moving, setting standards on technology, style and
quality to transform its customers into its brand representatives.

The vision: -
The story of Hero Honda started with a simple vision - the vision of a mobile and an
empowered India, powered by its two wheelers. Hero MotoCorp Ltd., company's new
identity, reflects its commitment towards providing world class mobility solutions
with a renewed focus on expanding company's footprint in the global arena. ‘Be the
future of travel’, that’s Hero NewCorp’s new vision as it works on a number of
strategies aimed at sustainable growth in a time of crisis. Some of them could see a
company worth Rs 33,651 crore move into new travel facilities, perhaps across
motorcycles and motorcycles.

1.4 ANALYSIS PART

COMMON SIZE INCOME STATEMENT OF HERO MOTO CORP 2019-20

and 2018-2019

PROFIT & LOSS ACCOUNT OF Mar-19 Mar-20 Common Common

HERO MOTOCORP (in Rs. Cr.) size % size %
2019 2020
  12 months 12months    
INCOME        
REVENUE FROM OPERATIONS 33,124.53 28,408.43 100.00 100.00
[GROSS]
Less: Excise/Service Tax/Other 0 0 0.00 0
Levies
REVENUE FROM OPERATIONS 33,124.53 28,408.43 100.00 100.00
[NET]
TOTAL OPERATING REVENUES 33,650.54 28,836.09 101.59 101.51
Other Income 691.25 778.34 2.09 2.74
TOTAL REVENUE 34,341.79 29,614.43 103.67 104.25
EXPENSES     0.00 0.00
Cost Of Materials Consumed 23,346.10 19,867.19 70.48 69.93
Operating And Direct Expenses 0 0 0.00 0.00
 Changes In Inventories Of -28.38 -169.78 -0.09 -0.60
FG,WIP And Stock-In Trade
Employee Benefit Expenses 1,730.24 1,841.70 5.22 6.48
Finance Costs 8.6 22.02 0.03 0.08
Depreciation And Amortisation 602.01 817.96 1.82 2.88
Expenses
Other Expenses 3,672.49 3,339.02 11.09 11.75
TOTAL EXPENSES 29,331.06 25,718.11 88.55 90.53
PROFIT/LOSS BEFORE 5,010.73 3,896.32 15.13 13.72
EXCEPTIONAL,
EXTRAORDINARY ITEMS AND
TAX

Exceptional Items 0 677.37 0.00 2.38

PROFIT/LOSS BEFORE TAX 5,010.73 4,573.69 15.13 16.10
TAX EXPENSES-CONTINUED     0.00 0.00
OPERATIONS
Current Tax 1,601.02 1,084.11 4.83 3.82
Less: MAT Credit Entitlement 0 0 0.00 0.00
Deferred Tax 24.84 -143.68 0.07 -0.51
Tax For Earlier Years 0 0 0.00 0.00
TOTAL TAX EXPENSES 1,625.86 940.43 4.91 3.31
PROFIT/LOSS AFTER TAX AND 3,384.87 3,633.26 10.22 12.79
BEFORE EXTRAORDINARY
ITEMS
PROFIT/LOSS FROM 3,384.87 3,633.26 10.22 12.79
CONTINUING OPERATIONS
PROFIT/LOSS FOR THE PERIOD 3,384.87 3,633.26 10.22 12.79

INTERPRETATIONS: -
Common-size income statement analysis states every line item on the income
statement as a percentage of sales. If you have more than one year of financial data,
you can compare income statements to see your financial progress.
The two Hero moto corp. income statements in the table above are for 2020and 2019.
Let's see how Hero moto corp did over those years.

 Sales Volume declined by 18.2% annually. This is largely reflective of the

overall slowdown in economic activity. Against the volume drop of 18.2%,
Revenue from Operations declined by 14.3% — the various price increases
taken during the year, favorable product mix and BSVI vehicles dispatched in
fourth quarter of the year, have all helped in partially offsetting the volume
drop y-o-y.

 The Material Cost as a percentage of Revenue fell to 68.3% (vs 69.3%

FY19), largely attributable to softening in material prices and value
 engineering initiatives also supported by periodical price increases in the two
wheelers over the year.

 The Employee Cost has grown by 6.4%, largely reflective of fresh hiring and
annual increment.

 There is an increase in Depreciation and Amortization cost by ` 216 crore

largely on account of capitalization of the new plant in Chittoor in the last
quarter of the year, and accelerated depreciation charged on certain assets
pursuant to phasing out of BSIV.

 Also, there is a great decline in the tax expense which is nearly 40%, on
account of decrease in taxable profit as well as decrease in Corporate tax rate
(from 34.94% to 25.17%).
 This also leads to an overall increase in the profit of the period, eventually
which is a good sign, as the company has smartly managed their decline of
revenue from operations by reducing their cost of production.

COMMON SIZE BALANCE SHEET OF HERO MOTO CORP 2019-20 and

2018-2019

BALANCE SHEET OF Mar-19 Mar-20 common common

HERO MOTOCORP (in Rs. size % size %
Cr.) 2019 2020
         
EQUITIES AND        
LIABILITIES
SHAREHOLDER'S FUNDS        
Equity Share Capital 39.95 39.95 0.23 0.21
TOTAL SHARE CAPITAL 39.95 39.95 0.23 0.21
Reserves and Surplus 12,807.58 14,081.01 72.60 75.10
TOTAL RESERVES AND 12,807.58 14,081.01 72.60 75.10
SURPLUS
TOTAL SHAREHOLDERS 12,857.12 14,136.40 72.88 75.40
FUNDS
NON-CURRENT     0.00 0.00
LIABILITIES
Long Term Borrowings 0 0 0.00 0.00
Deferred Tax Liabilities 536.51 392.83 3.04 2.10
[Net]
Other Long Term 0 121.67 0.00 0.65
Liabilities
Long Term Provisions 117.2 122.37 0.66 0.65
TOTAL NON-CURRENT 653.71 636.87 3.71 3.40
LIABILITIES
 CURRENT LIABILITIES     0.00 0.00
Short Term Borrowings 0 0 0.00 0.00
Trade Payables 3,355.28 3,030.51 19.02 16.16
Other Current Liabilities 716.05 798.99 4.06 4.26
Short Term Provisions 59.03 146.56 0.33 0.78
TOTAL CURRENT 4,130.36 3,976.06 23.41 21.21
LIABILITIES
TOTAL CAPITAL AND 17,641.19 18,749.33 100.00 100.00
LIABILITIES
ASSETS        
NON-CURRENT ASSETS        
Tangible Assets 4,477.53 5,976.99 25.38 31.88
Intangible Assets 141.05 140.09 0.80 0.75
Capital Work-In-Progress 360.67 160.25 2.04 0.85
Other Assets 0 0 0.00 0.00
FIXED ASSETS 5,160.44 6,458.35 29.25 34.45
Non-Current Investments 2,801.51 3,528.17 15.88 18.82
Deferred Tax Assets [Net] 0 0 0.00 0.00
Long Term Loans And 59.96 67.27 0.34 0.36
Advances
Other Non-Current Assets 1,503.64 406.98 8.52 2.17
TOTAL NON-CURRENT 9,525.55 10,460.77 54.00 55.79
ASSETS
CURRENT ASSETS     0.00 0.00
Current Investments 3,167.10 4,694.48 17.95 25.04
Inventories 1,072.37 1,091.97 6.08 5.82
Trade Receivables 2,821.57 1,603.14 15.99 8.55
Cash And Cash 136.46 241.86 0.77 1.29
Equivalents
Short Term Loans And 25.03 22.36 0.14 0.12
Advances
Other Current Assets 893.11 634.75 5.06 3.39
TOTAL CURRENT ASSETS 8,115.64 8,288.56 46.00 44.21

TOTAL ASSETS 17,641.19 18,749.33 100,00 100,00

INTERPRETATIONS: -

Common size balance sheet refers to percentage analysis of balance sheet items on the
basis of the common figure as each item is presented as the percentage which is easy
to compare, like each asset is shown as a percentage of total assets and each liability
is shown as a percentage of total liabilities and stakeholder equity as a percentage of
total stakeholder’s equity.
  During the year, Net fixed assets increased to ` 6,458 crore (from`5,160 crore
in FY19), major increase was on account of new plant capitalization at
Chittoor-Andhra Pradesh.

 Other non-current assets have gone down to ` 97 crore (from ` 664 crore in
FY19). This is because of capitalization of Capital advances which were lying
in previous years into Fixed assets and recognition of pre-paid leasehold land
of previous year under Fixed Assets during the year pursuant to Ind AS 116.

 Trade receivables, which were elevated in the previous| year consequent to

overall slowdown in the economy and consequential higher inventory, have
come down to ` 1,603 crore (vs ` 2,822 crore in FY19). Lower dispatches in
last week of March 2020 on account of lockdown has also resulted in lower
receivables.

 The incentives accrued from various state governments in the previous years
have been received in the current year and hence the Other Current Financial
Assets have gone down to ` 355 crore (vs ` 654 crore in FY19).

 Provisions under Current Liabilities have gone up to ` 147 crore (vs ` 59

crore in FY19) mainly on account of increase in provision relating to
employee benefits.

KEY FINANCIAL RATIOS: -

Changes in Key FY19 FY20 Change

Financial Ratios
Debtors turnover 15.15 12.73 -15.9%
ratio
Inventory 30.13 22.52 -25.3%
turnover ratio
Current Ratio 1.20 0.90 -24.6%

Operating profit 12.86 10.89 -15.3%

margin
Net profit margin 9.86% 12.27% 24.5%

Return on net 27.4% 26.92% -2.1%

worth

Interpretations: -
 DEBTORS TURNOVER RATIO: -.
Debtors Turnover ratio is also known as Account Receivable turnover ratio.
This reflects the number of times the debtors have been converted into cash
during the year.
The receivables turnover ratio is determined by dividing the net credit sales
by average debtors.

Debtor turnover ratio of Hero moto corp has decreased from 15.15 times in
FY19 to 12.73 times in FY20 mainly on account of decrease in the underlying
sales volumes. This is largely reflective of the overall slowdown in economic
activity.

 INVENTORY TURNOVER RATIO: -

Inventory turnover ratio is a measure that measures the number of times a
purchase or sale is made in a given period. Also known as asset exchange,
stock conversion, and stock profit, the asset's formula is calculated by dividing
the cost of the goods sold (COGS) by average inventory.

Inventory turnover ratio of Hero moto corp has lowered from 30.13 times in
FY19 to 22.52 times in FY20 because of lower cost of goods consequent to
lower volume.

 TRADE RECEIVEABLE RATIO: - Trade receivable ratio is the calculation

method used to measure a company's performance in collecting its earnings or
the amount owed to clients. The rating shows how the company uses and
manages the credit it expands to customers and how short-term debt is
collected or paid.

There is an decrease in Trade receivables due to lower dispatch towards the

end of March 2020 on account of national lockdown and lower Financial
assets owing to cash inflow of State incentives during the year have exceeded
the fall in trade payables and other liabilities and hence has brought down the
Current ratio from 1.2 times in FY19 to 0.9 times in FY20.

 OPERATING PROFIT MARGIN: -

The operating margin is the profit made by the company in the sale dollar after
paying variable costs but before paying interest or taxes. To calculate, divide
the operating income (earnings) per sale (revenue).

There is a decrease in Operating profit margin by 15.3% is on account of

negative operating leverage and accelerated depreciation charged during the
year.

 NET PROFIT MARGIN: -

On the income statement, subtract the cost of goods sold, operating expenses,
other expenses, interest (on debt), and taxes from revenue. Divide the result
by revenue. Convert the figure to a percentage by multiplying it by 100.
 The Net profit margins have however increased by 24.5% supported by net
exceptional income during the year and reduction of corporate tax rate.

 RETURN ON NET WORTH: -

Return on Net Worth (RONW) is a calculation of company profits expressed
in percentages. RONW is calculated by dividing the income of the company in
question by the shareholders' shares.

There has been no major change in the Return on Net worth – slightly lower
(by 2.1% y-o-y) on account to lower profits.

 INTEREST COVERAGE AND DEBT EQUITY RATIO: -

These ratios are not applicable to the Company since it has no interest-bearing
loan or any other debt/borrowing.
 Cost of Capital
   
Key Inputs:  
Total Equity to Capital 99.7%
Net Debt to Capital 0.3%
   
Calculations:  
Risk Free Rate 6.5%
Equity Beta 0.16
Market Risk Premium 5.0%
Cost of Equity 7.3%
   
Pre-tax cost of debt 8.0%
Marginal Tax Rate 30.0%
Cost of Debt 5.6%
   
   
Weighted Cost of Equity 7.253%
Weighted Cost of Debt 0.018%
   
Weighted Average Cost of
Capital 7.3%
   

Shares outstanding 19.97

Share price 3,272
Market Cap 65343

Debt 210
WEIGHTED AVERAGE COST OF CAPITAL
Case 1: Optimistic (Higher than historical
average)

DCF Value 18,227.1

Continuing Value 1,06,909.4
Present Value 80,739.4
Enterprise Value 98,966.4
Less  
Debt 209.9
Add  
Equity accounted investments in associates 2,098.3
Investments 1,551.2
Loans to employees 67.7
Security deposits -
Deferred tax assets (net) -
Income tax assets (net) 321.7
Other non-current assets 121.7
Investments 4,709.1
Cash and cash equivalents 305.3
Bank balances 130.1
Loans to employees 20.7
Security deposits 3.1
Others Financial Assets 364.1
Equity Value 1,08,449
Shares Outstanding 20.0
Per Share Value 5,429.5

Case 2: Base (Historical average)

DCF Value 13,082.6

Continuing Value 71,231.4
Present Value 53,797.4
Enterprise Value 66,880.1
Less  
Debt 209.9
Add  
Equity accounted investments in associates 2,098.3
Investments 1,551.2
 Loans to employees 67.7
Security deposits -
Deferred tax assets (net) -
Income tax assets (net) 321.7
Other non-current assets 121.7
Investments 4,709.1
Cash and cash equivalents 305.3
Bank balances 130.1
Loans to employees 20.7
Security deposits 3.1
Others Financial Assets 364.1
Equity Value 76,363
Shares Outstanding 20.0
Per Share Value 3,823.1

Case 3: Worst (Worse than historical average)

DCF Value 10,177.8

Continuing Value 51,176.3
Present Value 38,650.8
Enterprise Value 48,828.6
Less  
Debt 209.9
Add  
Equity accounted investments in associates 2,098.3
Investments 1,551.2
Loans to employees 67.7
Security deposits -
Deferred tax assets (net) -
Income tax assets (net) 321.7
Other non-current assets 121.7
Investments 4,709.1
Cash and cash equivalents 305.3
Bank balances 130.1
Loans to employees 20.7
 Security deposits 3.1
Others Financial Assets 364.1
Equity Value 58,312
Shares Outstanding 20.0
Per Share Value 2,919.4

Price to Earnings Ratio

Company Price EPS PE

Hero MotoCorp 3,257.0 182.1 17.9
Eicher Motors 2,868.7 66.9 42.9
TVS Motor 511.0 13.2 38.9
Bajaj Auto 3,601.0 180.1 20.0

Hero Price EPS PE

MotoCorp
31-Mar-14 2,041.1 94.2 21.7
31-Mar-15 2,021.5 107.2 18.9
31-Mar-16 2,391.5 143.1 16.7
31-Mar-17 2,818.3 179.5 15.7
31-Mar-18 3,496.4 186.3 18.8
31-Mar-19 2,553.2 172.4 14.8
31-Mar-20 3,257.0 182.1 17.9

INTERPRETATION: -

The P/E ratio shows what the market is willing to pay today for a stock based on its
past or future earnings. A high P/E could mean that a stock's price is high relative to
earnings and possibly overvalued. Conversely, a low P/E might indicate that the
current stock price is low relative to earnings.
In Hero Motors case, if compared to the other companies, the stock price is
undervalued as it is low relative to its earnings.
Similarly, if compared to the previous years, Stock price is low relative to its
earnings.
Hence, Undervalued.
2. CERTIFICATE OF COMPLETION: -

3. REFRENCES: -

For this project report I have taken help from various sources: -
 https://www.moneycontrol.com/financials/heromotocorp/profit-lossVI/hhm
 https://www.moneycontrol.com/financials/heromotocorp/balance-
sheetVI/HHM
 https://www.heromotocorp.com/en-
in/uploads/Annual_Reports/pdf/20200717171801-pdf-207.pdf
 https://in.finance.yahoo.com/quote/HEROMOTOCO.NS/history?
period1=1409011200&period2=1610582400&interval=1mo&filter=histor
y&frequency=1mo&includeAdjustedClose=true
 https://in.finance.yahoo.com/quote/%5ECRSLDX/history?
period1=1408838400&period2=1610582400&interval=1mo&filter=histor
y&frequency=1mo&includeAdjustedClose=true
 https://www.screener.in/company/HEROMOTOCO/consolidated/