FINANCIAL REPORTING AND ANALYSIS

PROJECT REPORT

Auto Components Industry

Submitted to
Prof. Mrityunjay Tiwary

Section G – Group 4
Ankit Gami (ABM18038) Priyanshi Jindal (PGP37371)
Bhavya Bansal (PGP37345) Rahul Daluka (PGP37372)
Harsh Jatin Shah (PGP37377) Yash Mundhada (PGP37361)
 Contents
Choice of Industry ................................................................................................................................... 4
Market Size and Business:................................................................................................................... 4
Investments......................................................................................................................................... 4
Government Initiatives: ...................................................................................................................... 4
Pandemic: ........................................................................................................................................... 4
Choice of Players ..................................................................................................................................... 5
Apollo Tyres ........................................................................................................................................ 5
Bharat Forge........................................................................................................................................ 5
Sundaram Fasteners ........................................................................................................................... 5
Major Players .......................................................................................................................................... 5
Bosch India .......................................................................................................................................... 5
Endurance Technologies ..................................................................................................................... 6
Sundaram-Clayton Limited ................................................................................................................. 6
Generic Business Model .......................................................................................................................... 6
Cost Structure ......................................................................................................................................... 6
Material costs...................................................................................................................................... 6
Employees Costs ................................................................................................................................. 7
Finance Costs ...................................................................................................................................... 7
Selling and Distribution Costs ............................................................................................................. 7
Depreciation and Amortization Costs ................................................................................................. 7
Other Expenses ................................................................................................................................... 7
Issues And Concerns Of The Industry ..................................................................................................... 7
Covid Led Disruptions ......................................................................................................................... 7
Confusion around BSVI Norms ............................................................................................................ 8
Ride-Hailing Platforms ........................................................................................................................ 8
Increased Initial Cost ........................................................................................................................... 8
Options for financing .......................................................................................................................... 8
Macroeconomic Analysis Of The Auto-Components Industry ................................................................ 8
Policy support ..................................................................................................................................... 8
Industry demand ................................................................................................................................. 8
Business Cycles.................................................................................................................................... 9
Market Inflation .................................................................................................................................. 9
Fuel Prices ........................................................................................................................................... 9
Interest Rate ....................................................................................................................................... 9
GDP ..................................................................................................................................................... 9

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 Unemployment ................................................................................................................................... 9
Exchange Rates ................................................................................................................................... 9
Accounting Policies ............................................................................................................................... 10
Financial Statement Analysis ................................................................................................................ 13
Analysis Worksheet ........................................................................................................................... 13
Profitability Ratios ............................................................................................................................. 13
Activity Ratios ................................................................................................................................... 15
Liquidity Ratios .................................................................................................................................. 16
Solvency Ratios ................................................................................................................................. 17
References ............................................................................................................................................ 18

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 Choice of Industry
Auto components form the backbone of India Inc. All the industries, manufacturing, logistics,
construction, etc. depend on auto components in a significant manner. As per IBEF reports,
auto-components industry is responsible for 2.3% of India’s Gross Domestic Product (GDP)
and is an employer to as many as 1.5 million people directly and indirectly.
The auto-components industry expanded by a CAGR of 6% over FY16 to FY20 to reach US$
49.3 billion in FY20. The industry is expected to reach US$ 200 billion by FY26. Similar to any
other industry in India, auto-components industry also has organized and un-organized setup.
As per IBEF reports, the organized sector caters to original equipment manufacturers (OEMs)
and consist of high-value precision instruments while the unorganized sector comprises low-
valued products and caters mostly to the aftermarket category.
Following are the major points which intrigued our interest in this industry.
Market Size and Business:
Automobile components constitute a huge penetration in the Indian market and potential of
even more. In FY20, the industry marked a revenue of USD 49.3 billion, rising from USD
39.05 billion in 2016 and even expected to reach USD 200 billion by FY26. The auto
component industry is an export-competitive industry, it exports more than 25% of its
production, with the US and EU accounting for 60% as reported by The Economic Times.
Investments:
As per the data released by Department for Promotion of Industry and Internal Trade (DPIIT),
The Foreign Direct Investment (FDI) inflow into Indian automotive* industry during the period
April 2000-March 2021 stood at USD 25.85 billion.
Government Initiatives:
The Government of India’s Automotive Mission Plan (AMP) 2006-2016 has come a long way
in ensuring growth for the sector. Indian Automobile industry is expected to achieve a
turnover of US$ 300 billion by 2026 and will grow at a CAGR of 15% from its current revenue
of US$ 74 billion as reported by IBEF.
In November 2020, the Union Cabinet approved PLI scheme in automobile and auto
components with an approved financial outlay over a five-year period of Rs. 57,042 crore (US$
8.1 billion).

In the project NATRiP by the government, having an estimated cost of USD 573 million, it is aimed
to create core competency and facilitate integration with global standards. The focus area is to
make testing, validation and research and development infrastructure in the country.

Pandemic:
CRISIL Research projects domestic auto-component production revenue to decline by 7-9% in
fiscal 2021. This will be on account of subdued demand across all automobile asset classes
amid continued weakness in the economy, decline in exports amid COVID-19 outbreak in key

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export destinations and lower demand from replacement market owing to less movement of
vehicles. However, auto component industry is estimated to have witnessed a ~17% drop in
sales revenues during April-December 2020 led by a recovery in demand from Q2 FY21
onwards.

Choice of Players
Apollo Tyres: Apollo Tyres is the largest tyre company in India having a dominant market
share in both the commercial vehicle and passenger vehicle segment. Company has a
presence in Asia, Africa, Middle East and Europe markets - out of these, key being India and
Europe. More focus on the Truck & Bus Radial (TBR) where the company has a notable market
share will enable better market penetration as and when the industry dynamics improves.
Despite Covid-19 related disruption, the company registered healthy growth in sales and
strong profitability in FY21, as the replacement segment witnessed YoY growth and OEM
demand recovery was faster-than-expected. Cost optimisation initiatives (digitalisation,
manpower rationalisation, travelling, consultation cost reduction, etc.) are likely to limit
margin erosion due to sharp surge in raw material prices.
Bharat Forge: Bharat Forge Ltd, incorporated in the year 1961, is a large cap company with a
market cap of Rs 29,993.22 crore, operating in auto ancillaries sector. Bharat Forge's key
products/revenue segments include steel forgings, scrap, export incentives, job work and dies
& tools for the year ending 31-Mar-2019. The company has their manufacturing facilities
spread across India, Europe, US & China. They manufacture a wide range of safety and critical
components for the automotive & non-automotive sector. It is the country`s largest
manufacturer and exporter of automotive components and leading chassis component
manufacturer. The company customer base includes virtually every global automotive OEM
and Tier 1 supplier.
Sundaram Fasteners: Started in 1966, Sundram Fasteners Limited has grown into a global
leader, manufacturing critical, high precision components for the automotive, infrastructure,
windmill and aviation sectors. Our varied range of products encompasses fasteners,
powertrain components, sintered metal parts, iron powder, cold extruded parts, radiator caps
and wind energy components. An unwavering focus on delivering quality has won Sundram
Fasteners Limited the trust of both OEM and aftermarket customers in highly competitive
markets like India, China, Germany, USA, UK, Italy, France and Brazil. The product portfolio of
the company is High Tensile Fasteners, Cold Extruded Parts, Hot Forged, Parts, Powertrain
Components, Pumps and Assemblies, Radiator Caps, Power Metallurgy.

Major Players
Bosch India- Bosch is a significant technology and service provider in India in the areas of
Mobility Solutions, Industrial Technology, Consumer Goods, Energy and Building Technology.
Furthermore, Bosch maintains the largest development facility for end-to-end engineering
and technology solutions outside of Germany in India.

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Bosch Limited, Bosch Chassis Systems India Private Limited, Bosch Rexroth (India) Private
Limited, Robert Bosch Engineering and Business Solutions Private Limited, Bosch Automotive
Electronics India Private Limited, Bosch Electrical Drives India Private Limited, BSH Home
Appliances Private Limited, ETAS Automotive India Private Limited, Robert Bosch Engineering
and Business Solutions Private Limited, Robert Bosch Engineering and Business Solutions
Private Limited, Robert Bosch Engineering and Business Solutions Private Limited, Robert
Bosch Engineering and Business Solutions Private Limited, Robert Bosch Engineering and
Business Solutions Private Limited, Robert Bosch Engineering and Business. Bosch established
its manufacturing activity in India in 1951, and it has since expanded to include 18
manufacturing facilities and seven development and application centers.

Endurance Technologies: Endurance Technologies is a significant manufacturer of

automotive components in India. In the fiscal year 1986, Anurang Engineering Company
Private Limited, which merged with our company in 2006, began producing aluminium
castings in Aurangabad, Maharashtra, India. We have naturally expanded in India over time,
diversifying our skills by providing suspension, gearbox, and brake systems. We have
developed from two aluminium casting machines in FY 1986 to 18 plants in India and seven
sites in Europe. Today Endurance Technologies is India's largest aluminium die casting
producer and a significant automotive component manufacturer specialising in aluminium die
casting (including alloy wheels), suspension, gearbox, and brake systems.

Sundaram-Clayton Limited- Sundaram-Clayton Limited (SCL) is a subsidiary of the $6.5 billion

TVS company, which is one of India's leading automobile and auto component manufacturers
and distributors. SCL is a major producer of aluminium die castings for both the automotive
and non-automotive industries. Non-ferrous gravity and pressure die castings are produced
by the company. Tamil Nadu is home to four of the company's production sites. SCL is also
the holding company for TVS Motor Company Limited, India's third largest two-wheeler
manufacturer and the TVS group's flagship.

Generic Business Model

Domestic wire harness, modules and polymer products, and HVAC (heating, ventilation, and
air conditioning) systems are the three primary categories that the auto-component sector
can be divided into based on their location in the value chain and thus the types of
components they create. The prices are calculated based on the costs of manufacturing these
components plus a profit margin over the total expenses of making a unit. The sector is
primarily credit-based, with high expenses and demand throughout the year. As a result, the
sector has single-digit EBITDA margins, which are clearly evident in their financial statements.
The concept of economies of scale and scope drives the industry, which leads to the formation
of extraordinarily huge and rigid organizations.

Cost Structure
Material costs- The auto-component industry is defined by the kind of components it
produces and the processes that go along with them, which include everything from design

6
to development to assembly and manufacturing. Purchases of raw materials, tools, and
various bought-out components, some of which are customer-nominated, are all included in
the material cost. Material costs are the most major part of the entire cost, accounting for
roughly 40% of it.

Employees Costs- In the entire cost structure, employee costs are the second greatest
contributor after raw materials. Salaries and pay, contributions to the provident fund,
gratuities, employee pension plans, and expenses for employee welfare are all included in
employee costs. The cost is determined by the size of the operation, geographic reach, and
client skill needs.

Finance Costs: Finance and interest charges are included in the income statements of most
car component manufacturers. On average, it accounts for about 10-15 percent of total costs.
Interest on long-term borrowings, exchange differences used to modify borrowing costs,
interest on lease liabilities, and other finance costs such as foreign exchange losses, gains on
long-term loan facilities, mark-to-market gains, and derivatives losses are all included in these
costs.

Selling and Distribution Costs: These expenses account for 20% of the industry's total
operating expenditures. It comprises distribution network margins, as well as advertising and
marketing costs, which are critical components, especially if you're a tier-2 or tier-3 producer
in the value chain.

Depreciation and Amortization Costs: All costs originating from asset wear and tear,
allocation of purchase costs and capital expenditures over the asset's lifetime, and
impairment losses are included in this category. These expenses account for 8-10% of total
operational expenses. Depreciation on plant, property, and equipment, impairment losses on
right-of-use assets, amortization on intangible assets, and depreciation on investment
properties are just a few examples (net of the capitalized amounts during the year).

Other Expenses: General administrative expenses, energy costs, repair and maintenance
costs, renting and lease costs, freight and forwarding costs, auditors' remuneration, net
foreign exchange loss, and legal and professional fees are among the other expenses. On
average, these costs account for roughly 25% of the total costs.

Issues And Concerns Of The Industry

Because the behavior and growth of the auto-component business are inextricably related to
the behavior and growth of the automotive and vehicle industries, the sector faces similar
concerns.

Covid Led Disruptions- Demand and investment in the automotive industry are plummeting.
It's also dealing with a sudden and broad halt in economic activity, with workers being forced
to stay at home, supply networks grinding to a standstill, and industries shuttering.
Restrictions on people's movement and an abrupt halt in economic activity are projected to
result in a significant reduction in sectoral output and GDP (GDP).

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Confusion around BSVI Norms- The BS6 emission standards were set to take effect in April
2020, and all automobile manufacturers were required to modify their engine offerings
accordingly. However, not all automakers have stated their position on the approaching
transition and its implications for their product selection. As a result, several consumers put
off buying a new automobile until more information about BS6-compliant models became
available. The uncertainty was exacerbated by the lack of BS6 fuel across the country.

Ride-Hailing Platforms: In tier-1 cities, traffic congestion and a lack of parking, as well as the
high cost of vehicle ownership and reduced resale value, an increasing number of consumers
are opting for ride-hailing services like Ola and Uber. People in cities prefer to take taxis to
work rather than owning and driving their own cars.

Increased Initial Cost: The requirement to obtain third-party insurance for a period of time
has increased the cost of ownership of automobiles. Instead of one year, buyers must now
get three-year insurance.

Options for financing: In India, 70% of cars are purchased on credit. The NBFC crisis depleted
liquidity and made obtaining loans extremely difficult. Customers with poor credit scores
were no longer eligible for loans from banking organisations. Banks also boosted down
payments by lowering the LTV (Loan to Value) ratio on autos. As a result of the higher
acquisition costs, demand is diminished. The dealers' capacity to purchase inventory was
further hampered by the difficulty in obtaining credit.

Macroeconomic Analysis Of The Auto-Components Industry

Policy support- NATRiP centres provide strong support for R&D and product development.
FAME II, a specific policy, was developed to encourage the use of electric vehicles and
promote production. For the auto components sector, 100% FDI is permitted using the
automatic route. The Indian government has set aside US$ 7.8 billion in production-linked
incentive programmes under the Department of Heavy Industries for the automobile and
auto component sectors. The vehicle and auto component sector has received the largest
budget investment of US$ 7.68 billion for incentives out of the whole PLI plan of US$ 26.55
billion.

Export opportunities- India is becoming a global centre for auto component procurement,
with the industry exporting more than 25% of its output each year. Exports of auto
components are predicted to expand at a rate of 23.9 percent per year until they reach US$
80 billion in 2026. Due to its high number of players, India has a competitive edge in auto
component categories such as shafts, bearings, and fasteners. In the following years, this
aspect is likely to result in increasing exports.

Industry demand: The burgeoning middle class and growing working population are likely to
remain the primary demand drivers. India is the world's fifth-largest vehicle market. By 2025,
4 million electric vehicles might be marketed annually, rising to 10 million by 2030. The market
is estimated to reach US$ 206 billion by the end of the year. Domestic players are projected

8
to see a boost in demand as a result of measures to minimise auto component import
dependency.

Business Cycles: Business cycles are the periodic ups and downs that an economy (GDP)
experiences around a long-term trend. Cyclical industries are ones whose revenue swings in
response to changes in GDP. The auto-component sector is cyclical in nature, with strong
demand elasticity. As a result, when the economy is in a state of flux, the auto-comp industry
may experience difficulties as well. The interruption created by the COVID-19 epidemic is a
perfect example of this.

Market Inflation: Inflation is defined as an increase in an economy's overall price level.

People's purchasing power is reduced as inflation rises since they can now buy less for the
same amount of money. Inflation damages the car component sector because demand falls
and input costs grow even though average revenue (or price) per unit rises.

Fuel Prices: A major increase in fuel prices could have a negative influence on auto sales. This
element has been discovered to cause uncertainty in operation costs, which could affect the
entire cost of car manufacture. As a result, the value of an investment and consumer demand
are affected.

Interest Rate: Interest rates are the rates at which money is borrowed and lent in general.
Consumers can buy more when interest rates decrease because they can borrow at reduced
rates to finance their purchases. Because 70% of automobiles in India are purchased with a
loan, demand for car loans rises, and the economy experiences a CAPEX boom. Furthermore,
a decrease in interest rates raises the value of the auto-component business, resulting in an
increase in the market price of automotive stocks. According to research, a 1% fall in the
government bond rate raises the value of auto-comps by 0.28 percent.

GDP: GDP stands for Gross Domestic Product, which is the total value of all products and
services produced by a country. India's automobile industry is a substantial contributor to the
country's GDP. It accounts for about half of all manufacturing output and more than 7% of
total GDP. It also contributes significantly to foreign exchange revenues. As a result, long-term
demand is positively related to GDP per capita. The demand for OEM and replacement parts,
as well as the average revenue per unit, closely track the pace of GDP growth.

Unemployment: The unemployment rate is calculated by dividing the number of people who
are involuntarily unemployed by the total working population. Increased unemployment
reduces people's earning potential and, as a result, their discretionary income. Because
demand for vehicles is highly elastic, they spend less on capital goods like cars.

Exchange Rates: The rate at which local currency can be exchanged for a foreign currency is
known as the exchange rate. A drop in the currency rate makes the rupee more inexpensive
to foreigners, which boosts demand for Indian auto-component producers. As a result,
demand for export segments of the automobile industry, particularly in the premium
category, rises, resulting in higher revenues for auto-comps.

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 Accounting Policies
The following accounting policies are followed while preparation of financial statements by
companies in auto-component industry:
a. Statement of Compliance: The financial statements in this sector are prepared under
Section 133 of the Companies Act 2013 read with Companies (Indian Accounting
Standards) Rules 2015 as per the Indian Accounting Standards.

b. Preparation Basis: The assets and liabilities are classified as current and non-current on
the basis of the company’s operating cycle of 12 months. The current assets here do
not include the elements which are not expected to be realized within a period of one
year. Similarly, current liabilities do not include the items that are due after one year.
Moreover, the financial statements are prepared on a historical cost basis. But this does not
include financial instruments that are measured at fair value at the end of every reporting
period.
c. Revenue Recognition practice: Revenue is recognized at the amount at which the
company sells the product to the customers. Revenue from sales of goods or rendering
of services is net of Indirect taxes, returns and discounts.

How does the company recognize revenue from:

• Sale of components: The revenue is recognized only when the components are sold and
delivered to the customers. It is recognized at the transaction price.
• Revenue from Assembly of components: The companies can have contracts with the
customers to assemble customized components from various parts procured from
suppliers identified by the customer.

When another party is involved in providing goods or services to its customer, the
company determines whether it is a principal or an agent in these transactions by
evaluating the nature of its promise to the customer. The company is a principal and
records revenue on a gross basis if it controls the promised goods or services before
transferring them to the customer. However, if the company's role is only to arrange
for another entity to provide the goods or services, then the company is an agent and
will need to record revenue at the net amount that it retains for its agency services.

• Development of tools: The revenue for development of tools is recognized by the

company over time. The revenue is recognized on the basis of the total costs incurred
relative to the total expected costs to complete the tool.

d. Property, Plant and Equipment: The Property, plant and equipment are stated in the
balance sheet at the cost less the accumulated depreciation and any accumulated
impairment loss, if any.

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 In this industry, the PPE is recorded at the cost initially. The cost includes all the
expenditures made in order to bring the asset to its intended use. First time issues
of operating supplies for a new property/factory, consisting of stores & spares etc. are
capitalised and depreciated over their estimated useful life. Subsequent expenditure
relating to property, plant and equipment is capitalised only when it is probable that
future economic benefits associated with these will flow to the company and the cost
of the item can be measured reliably.
e. Depreciation: Like any other industry, the depreciation is charged to the Statement of Profit
and Loss so as to expense the cost of assets (other than freehold land and properties under
construction) less their residual values over their useful lives, using the straight-line method,
as per the useful life prescribed in Schedule II to the Companies Act, 2013.

In respect of buildings on leasehold land, depreciation is based on the tenure which is lower
of the life of the buildings or the expected lease period. Improvements to leasehold buildings
are depreciated on the basis of their estimated useful lives or the expected lease period.
Freehold land is not depreciated.
The asset's useful lives and residual values are reviewed at the Balance Sheet date and the
effect of any changes in estimates are accounted for on a prospective basis.

An item of property, plant and equipment is derecognised upon disposal or when no future
economic benefits are expected to arise from the continued use of the asset. Any gain or loss
arising on the disposal or retirement of an item of property, plant and equipment is
determined as the difference between the sales proceeds and the carrying amount of the
asset and is recognised in the Statement of Profit and Loss.
f. Inventories: Cost of inventories also includes all other cost incurred in bringing the inventories
to their present location and condition. Costs are determined on weighted average cost basis.

The inventories are stated at the lower of cost (computed on a weighted average basis) and
the net realizable value. Here the net realisable value is the estimated selling price in the
ordinary course of business less the estimated costs of completion and the estimated costs
necessary to make the sale.
Cost of raw material and traded goods comprise cost of purchase after considering the rebates
and discounts. Cost of work in progress and finished goods comprises direct materials, direct
labour and an appropriate proportion of variable and fixed overhead expenditure, the latter
being allocated on the basis of normal operating capacity.
g. Intangible Assets: In this industry, the intangible assets include the goodwill, the cost of
acquiring the software, designs and also the cost incurred for the development of the
company’s website.
Intangible assets are initially measured at acquisition cost including any directly attributable
costs of preparing the asset for its intended use.
There are various Intangible assets with finite lives that are amortised over their estimated
useful life and are assessed for impairment whenever there is an indication that the intangible
asset may be impaired.

However, Intangible assets with indefinite useful lives are tested for impairment at least
annually, and whenever there is an indication that the asset may be impaired. The estimated
useful life used for amortising intangible assets is as under:

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 An intangible asset is de-recognised on disposal, or when no future economic benefits are
expected to arise from the continued use of the asset. Gains or losses arising from de-
recognition of an intangible asset, measured as the difference between the net disposal
proceeds and the carrying amount of the asset, and are recognised in the Statement of Profit
and Loss when the asset is derecognised.

h. Impairment of Assets: Assets that are subject to amortisation are reviewed for impairment
periodically including whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. An impairment loss is recognised for the amount by which
the asset's carrying amount exceeds its recoverable amount.

Recoverable amount is the higher of fair value less costs of disposal and value in use. In
assessing value in use, the estimated future cash flows are discounted to their present value
using a pre-tax discount rate that reflects current market assessments of the time value of
money and the risks specific to the asset for which the estimates of future cash flows have not
been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its
carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its
recoverable amount. An impairment loss is recognised immediately in the Statement of Profit
and Loss.

i. Foreign Currency Translation: Income and expenses in foreign currencies are recorded at
exchange rates prevailing on the date of the transaction.
Foreign currency denominated monetary assets and liabilities are translated at the exchange
rate prevailing on the Balance Sheet date. All these are recorded in Indian Currency (Rs.).

j. Borrowing Costs: General and specific borrowing costs directly attributable to the
acquisition or construction of qualifying assets that necessarily takes substantial
period of time to get ready for their intended use or sale, are added to the cost of
those assets, until such time as the assets are substantially ready for their intended
use or sale. Borrowing costs consist of interest and other costs that the company
incurs in connection with the borrowing of funds. Interest income earned on
temporary investment of specific borrowings pending their expenditure on qualifying
assets is deducted from the borrowing costs eligible for capitalization. Borrowing costs
that are not directly attributable to a qualifying asset are recognised in the Statement
of Profit and Loss using the effective interest rate method.

k. Statement of Cash Flows: The cash flow statements are prepared using the indirect
method. The profit/ loss of the period is adjusted for the effects of transactions of the non-
cash nature and any deferrals or accruals of past or future cash receipts or payments.
The entire cash flow statement is divided into 3 major categories:
1. Operating
2. Investing
3. Financing

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 Financial Statement Analysis
Analysis Worksheet

FRA_Financial
Analysis.xlsx

Profitability Ratios
(a) Revenue Growth: Revenue Growth Rate is an indicator of how well a company is able
to grow its sales revenue over a given time period. While the revenue is an actual
number, the revenue growth rates simply compares the current sales figures (total
revenue) with a previous period (typically quarter to quarter or year to year).

Auto industry faced slowdown in FY19/20, hence all companies’ revenues declined.
The growth picked up pace in FY21. The uptick can be attributed to couple of factors,
(i) low base (ii) pent up demand

(b) EBITDA Margin: The EBITDA margin is a measure of a company's operating profit as a
percentage of its revenue.

Sundaram Fasteners has witnessed stable profitability. Apollo has increased EBITDA
margin in FY21 on the back of rubber prices however interest, depreciation and tax
burden seems to have increased.

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(c) PAT Margin: After-tax profit margin is the same as the net profit margin, which is net
income divided by net sales. A high after-tax profit margin generally indicates that a
company runs efficiently, providing more value in the form of profits to shareholders.

Bharat Forge has seen the sharpest decline in the PAT margins than the other two
firms. Bharat forge is facing challenges due to high debt and entering into loss making
territory in FY21.

(d) Return on Total Capital: Return on Total Capital (ROTC) is a return on investment ratio
that quantifies how much return a company has generated through the use of its
capital structure.

Sundaram Fasteners is able to generate better returns for its owners, while the other
two companies are not attractive on return metrics as compared to the industry.

(e) Return on Equity: Return on equity (ROE) is a measure of a company's financial

performance, calculated by dividing net income by shareholders' equity.

14
 Sundaram Fasteners is able to generate better returns for its owners, while the other
two companies are not attractive on return metrics as compared to the industry.

Activity Ratios
(a) Fixed Asset Turnover: The fixed asset turnover ratio (FAT) is, in general, used by
analysts to measure operating performance. This efficiency ratio compares net sales
(income statement) to fixed assets (balance sheet) and measures a company's ability
to generate net sales from its fixed-asset investments, namely property, plant, and
equipment (PP&E).
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝐹𝐴𝑇 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠

Apollo Tyres show slightly low but consistent ratio over the past 5 fiscal years. This
shows that either the Net Sales have decreased quite a bit for Bharat Forge and
Sundaram Fasteners or they are not able to convert their fixed asset investments into
sales. With increasing assets, the sales are not picking up.

15
Liquidity Ratios
(a) Cash Conversion Cycle: The cash conversion cycle (CCC) is a metric that expresses the
length of time (in days) that it takes for a company to convert its investments in
inventory and other resources into cash flows from sales.
𝑐𝑎𝑠ℎ 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑐𝑦𝑐𝑙𝑒
= 𝐷𝑎𝑦𝑠 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 + 𝐷𝑎𝑦𝑠 𝑆𝑎𝑙𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
+ 𝐷𝑎𝑦𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

This historical analysis shows that it takes relatively more time for Bharat Forge to
recover investments into cash flows and that trend is also increasing lately. In comparison
with Apollo Tyres and Sundaram Fasteners, Bharat Forge’s operations are not robust
enough.
(b) OCF to EBITDA: The OCF-to-EBITDA ratio is used to find the mismatch between booked
profits and the actual cash received by the companies. Cash flow from operations
(OCF) are relatively difficult to manipulate. A OCF to EBITDA ratio of significantly less
than one for an extended period can mean that the company is not able to translate
its profits on books into cash profits.

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Solvency Ratios
(a) Debt to Equity: The D/E ratio is an important metric used in corporate finance. It is a
measure of the degree to which a company is financing its operations through debt
versus wholly-owned funds. More specifically, it reflects the ability of shareholder
equity to cover all outstanding debts in the event of a business downturn.

𝐷 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
=
𝐸 𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝑒𝑞𝑢𝑖𝑡𝑦

On analyzing the ratio for past 5 fiscal years it shows that Bharat Forge has an increasing trend
of financing through leverage while other two major players, Apollo Tyres and Sundaram
Fasteners have in fact decreasing trend. This means that Bharat Forge is not able to manage
liabilities and equity financing as efficiently as the other two.
(b) Debt to EBITDA: The main target of this ratio is to reflect the cash available with the
company to pay back its debts, and not how much income is being earned by the firm.
The debt/EBITDA ratio is popular with financial analysts because it relates the debts
of a company to its cash flows by ignoring non-cash expenses. Ultimately it is the cash
flows (as opposed to profits) that will be used to pay off debts.

𝐷𝑒𝑏𝑡 𝑇𝑜𝑡𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

=
𝐸𝐵𝐼𝑇𝐷𝐴 𝐸𝐵𝐼𝑇𝐷𝐴

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Similar to previous analysis, we can see that Bharat Forge has increasing trend of Debt/EBITDA lately
conveys that they depend on leverage more and have relatively lower cash flows. On the other hand
Apollo Tyres and Sundaram Fasteners show much more acceptable ratio and show robust cash flows
with controllable debts.

References
• https://www.investopedia.com/
• https://www.ibef.org/industry.aspx
• https://www.crisil.com/
• https://courses.corporatefinanceinstitute.com/
• https://www.hdfcsec.com/

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