NCIETM Paper Reference ID: 80
Paper Title: FINANCIAL DISTRESS ANALYSIS IN
INDIAN AUTOMOBILE INDUSTRY
Subtitle: Judging Financial Health of 12 Companies from
Auto Ancillary Sector of India using Altman’s Z Score Model
Author1: Mrs. Rakhi Raizada Shrivastav,
PhD Research Scholar. Management (Finance)
Vivekananda Education Society Institute of Management
Studies & Research (VESIMSR) 495-497. Collector’s
Colony. Chembur, Mumbai. 400074. India
rraizada75@gmail.com
Abstract— The performance of any sector is judged through
various indicators. Profitability analysis has been accepted as
the key indicator of the strong financial performance in case
of Indian business world. When due to some reasons the
profitability of the company is adversely affected and if this
condition continues for a long period of time and as a result
the company is unable to meet its fixed charge obligations,
this situation is called financial distress situation. If we
analyze the global business world in recent times, it is full of
business failure cases due to financial distress. Financial
distress is that state in a business when firm’s operating cash
flows are too less to repay contractual obligations. Financial
distress arises in a company when a high amount of fixed or
unavoidable costs exists relative to the amount of cash flow or
income. These financially sick companies are forced to take
corrective and controlling action through financial
restructuring.
There are various reasons of financial distress or sickness for
eg: weakness in the industry in which the firm operates, poor
location of the firm and poor quality of the product,
insufficient capital, inoptimum capital structure and poor state
of the economy etc. All these factors combined attack on the
performance of the business and make it unsustainable.
In the light of the above concept the present paper focuses on
financial distress analysis of Indian automobile industry
through Altman’s Z score model. The Z – score model uses
multiple corporate income and balance sheet values to
measure the financial health of automobile companies. It also
establishes that too much of debts in financing assets of the
company leads to negative impact on the market value of the
firm.
Keywords— Financial distress, automobile companies, Z-
score, bankruptcy, Business failure and financial health.
Author1: Mrs. Rakhi R. Shrivastava. Author2. Dr. Shrini R. Srinivasan
Author 2: Dr.Srini R. Srinivasan, Head- Research Cell @
Vivekananda Education Society Institute of Management
Studies & Research (VESIMSR) 495-497. Collector’s
Colony. Chembur, Mumbai. 400074. India
srinipmc@gmail.com
I. INTRODUCTION
In the current economic scenario, financial management has
assumed much greater significance. It is now a question of
survival of the entities in the total spectrum of economic
activity with pragmatic readjustment of financial management.
The systematic financial management begins with proper
procurement of the funds and ends with effective utilization of
funds by generating positive ROI and earning per share
thereby enhancing market value of the share. The strong and
systematic management leads to long survival of the entity.
This long survival of the entity depends upon the year on year
rising graph of the profitability and strong solvency position of
the company. If the profitability position, solvency position
and financial structure of the firm are not taken proper care,
gradually the unit grows weak leading towards sickness and
ends in corporate failure ultimately.
The disastrous consequences of corporate failure are suffered
by various internal as well as external stakeholders like
shareholders, employees, financial institutions, suppliers,
customers and society as a whole. This industrial sickness or
financial distress in industries is a well-known fact throughout
the world. Financial Distress is a generic term which denotes
deteriorating or debilitating financial condition of an entity.
Often it is inevitable for various reasons. The outstanding
change in technological development render old technologies
outdated, industrial recession make some companies unviable,
international trade policies make some units uncompetitive
and tardy progress in some related sectors shrink market for
others.
On account of these reasons, several business units lead to
sickness from healthy stage, from sickness to incipient
sickness, from incipient sickness to distress and from distress
to ultimate closure of the business unit.
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NCIETM Paper Reference ID: 80
There are a number of reasons to industrial sickness or
financial distress. These reasons are divided into external and
internal reasons. Under internal reasons are: inadequate
technical know-how, locational disadvantage, outdated
production process, high cost of inputs, breakeven point too
high, uneconomic size of project, underestimation of financial
requirements, too much investments in fixed assets,
overestimation of demand, cost overruns due to various
reasons, inadequate mobilization of finance, inappropriate
product-mix, poor quality control, poor capacity utilization,
high cost of production, poor inventory management,
inadequate maintenance and replacement, lack of timely and
adequate modernization, high wastage, liberal dividend policy,
general financial indiscipline, deficiency of funds, overtrading,
unfavorable gearing or keeping adverse debt-equity ratio,
inadequate working capital, lack of effective collection
machinery, excessively high wage structure, inefficient
handling of labour problems, excessive manpower, poor labor
productivity, lack of trained /skilled labour or technically
competent personnel, dependence on single customer or a
limited number of customers, dependence on single or a
limited number of products, poor sales realization, defective
pricing policy, booking of large order at fixed prices in an
inflationary market weak market organization, lack of market
feedback and market research, lack of knowledge of marketing
techniques, over capitalization, lack of professionalism, lack
of feedback to management, lack of proper management
information systems, lack of controls, lack of timely
diversification and excessive expenditure of R&D etc.
There are external causes like non availability of irregular
supply of critical raw materials or other inputs, chronic power
shortage, transport bottlenecks, non availability of adequate
finance at the right time, government price controls, fiscal
duties, abrupt changes in government policies, market
saturation, technological obsolescence, recession fall in
domestic export demand, natural calamities, political situation,
sympathetic strikes, war and multiplicity of labour unions etc.
So all these causes in behavioral sense create a weakness in
the company and lead the company towards financial distress.
II. STATEMENT OF THE PROBLEM
In terms of distribution of auto ancillary industry in India, the
industry is divided into organized and unorganized sectors of
which the organized sector consists of nearly 300 medium and
large sized units which means 75% of industry turnover comes
from this sector. The unorganized sector comprises over 5000
small scale units focusing mainly on low value added
segments of the industry and catering to the replacement
market. The financial net worth of auto ancillary industry is
Rs 120 billion. Around 5000 business players are engaged in
Author1: Mrs. Rakhi R. Shrivastava. Author2. Dr. Shrini R. Srinivasan
manufacturing several automotive components across different
auto product segments. Each product segments comprises of
three to five key players. The salient features of this industry
are low operating cost, low pricing and exemption from excise
duty. Lower labour costs give Indian auto ancillary companies
an absolute cost advantage. Lower labour costs give Indian
auto ancillary companies an absolute cost advantage.
The auto ancillary industry is divided into three segments:
(1) Original equipment market - 40% demand of total value is
served through this market, (2) Replacement Market catering
50% demand of total value and (3) exports catering 10%
demand of total value. On functional basis the auto ancillary
unit is divided in to different products like engine parts,
transmission and steering parts, suspension and braking
components and electrical components, out of which one third
of total production is significantly contributed to auto ancillary
industry by the engine part segments.
Since the fortune of auto ancillary industry depends upon the
growth and development of automobile sector, demand swing
in any of the segment of automobile industry causes change in
the demand of the auto ancillary units. Financial year 2012
was comparatively better than 2013. In 2013 growth in
passenger vehicle was just 9% and commercial vehicles went
up by 1.7%. Exports of the automobile products did well. As a
consequence of the performance of automobile industry, the
auto ancillary industry also showed positive changes.
The ultimate objective of any company is to maximize
shareholders’ wealth which is viewed in the profit earning
capacity and management efficiency of the company. When
production increases, cost of goods also increases. If there is
continuous increase in the cost and a slowdown in the demand
for the product, this increase in cost erodes profit of the
company gradually and causes financial distress. The term
financial distress includes a broad spectrum of problems
ranging from relatively minor liquidity shortages to
bankruptcy. The problem of financial distress will magnify
with an increase in financial leverage which in turn is so
poisonous that it may lead to liquidation of business. In the
light of above context, the present research study analyses
financial health of 12 companies from auto ancillary industry
of India using Z score model for the period of 10 years.
Altman’s Z score model has proved successful in the
prediction of strength and weaknesses of any company.
III. REVIEW OF LITERATURE
Sickness prediction at the early stage, bankruptcy study of the
various companies and financial distress analysis have been
done on a large scale based on the pioneering research done by
Beavar (1966), Altman’s Z score model (1968) and Ohlson
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NCIETM Paper Reference ID: 80
(1980). These researchers applied standard statistical
techniques to predict bankruptcy conditions of the companies.
Prof. Edward I. Altman’s (1968) study used multiple
discriminate analyses in order to depict bankruptcy of the
sample of 33 publically traded manufacturing bankrupt
companies’ between1946 to1965 and compared them with 33
non sick companies selected on the basis of random sampling.
He selected five key ratios of twenty two initially considered.
The result of MDA analysis yielded equation of Z score and
predicted financial health of bankrupt companies with 94%
accuracy and with 97% accuracy of non-bankrupt companies
one year before they went into such condition. The Z score
model developed by Prof. Altman has gained momentous
importance because of the accuracy factor in the prediction.
William H. Beaver (1967) predicted financial health of 79
sick companies and 79 non sick companies. He used five key
ratios in measuring health of the companies. These ratios were
(i) Cash Flow to total debt; (ii) Net Income to Total Assets
(iii) Total Debt to Total Assets (iv) Net Working Capital to
Total Assets and (v) Current Assets to Current Liabilities. The
meaningful findings added value to the sick firms in taking
timely corrective measures to come out from financial distress
condition. The analysis depicts that sick firm had more debts
and poor rate of return on total capital employed or total
assets. The sick companies’ current ratio was very low and
they had uncontrolled receivables as their cash flows were not
sufficient. Even the inventory level was not up to the mark so
this created a big mismatch in the demand and supply of the
product. The observation established that the most dominant
ratio to depict the financial health of these companies was cash
flow to total debt ratio.
Schipper (1977) examined private colleges and inferred
financial imbalances in terms of debt and equity capital as the
major cause of bankruptcy.
Lau (1987) and Hill (1996) extended the field by moving
forward from the study of bankruptcy to multiple states of
corporate decline including financial distress among auto
suppliers.
The study done by Platt & Platt (2006) depicts multi industry
model of financial distress for major US companies. The most
important finding from their study was that bankruptcy and
financial distress are not simply two sequential steps in the
same process but companies face financial distress due to poor
operating results or due to macroeconomic indicators while
bankruptcy is an action which companies take to protect their
assets often as a result of balance sheet issues.
Johah Aiyabei (2002) developed a financial health prediction
study for the small sized business firms located in Kenya
using Z score model and analyzed theoretical problems as
major causes for the financial distress condition in the firms.
Author1: Mrs. Rakhi R. Shrivastava. Author2. Dr. Shrini R. Srinivasan
Choudhary A, & Barua S.(2009) have employed Z score
model to predict financial distress for the companies listed on
Dhaka Stock Exchange. Since the rule of accounting
treatment, accounting information disclosure and the
government structure are different so these aspects brought
difference in result as Z score was not fully applicable on this
study.
Krishna Chaitanya (2005) have also used Z score model to
measure financial health of IDBI and concluded that IDBI
would become insolvent in the years to come.
Muller, Hamman and Steyn Bruwer (2009) tested the
effectiveness of the four different methods used to predict
financial distress on south African companies listed on
Johannesburg Stock Exchange. The result depicts that multiple
discriminant Analysis and recursive partitioning have the
highest prediction accuracy for predicting failed firms.
V. Dheendhayalan (2008) prepared a meaningful cse study
on SAIL or Steel Authority India Limited and used Z score to
predict financial health of the company. The inference drawn
showed that the financial health of the company was good and
there were no signs of distress.
Samarakoon, Lalith P. Hasan and Tanveer (2003)
presented financial health analysis on 13 distress firm with 13
non distressed firms of the same size from the same industry
in Srilanka and were able to establish the fact that these Z
score models depict higher degree of accuracy in predicting
financial health of the companies.
It is observed that financial stress is studied less frequently
than bankruptcy because it is very difficult to find out start
point and end point of financial distress whereas bankruptcy
starts in the court of law and ends at a specific date after the
repayment and settlement of all debts. Now a days industrial
sickness has been defined by RBI and Board for Industrial and
financial reconstruction (BIFR). There are various levels of
financial distress ranging from companies at the border of
distress to less problem facing companies. The well known
definitions of financial distress are as follows:
Signals of layoffs, restructurings or irregular dividend
payments as analysed by Lau (1987).
Year-on-year a low interest coverage ratio as studied
by Asquith, Gertner and Scharfistain (1994)
Poor position of cash flows showing insufficiency of
cash flows to settle debts reached at maturities of
long term debts as analysed by Whitaker (1999).
The change in equity price or negative EBIT used by
John, Lang and Netter (1992). Negative net income
before special items, used by Hofer (1980).
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NCIETM Paper Reference ID: 80
IV. OBJECTIVES OF THE STUDY
The main objective of the present study is to find out
financial health distress of 12 companies for the period of
10 years from auto ancillary sector of India listed on
National Stock Exchange in terms of strong, weak and
sick using Z score model which is a successful model to
predict financial health of any company:
a. To find out working capital to total Assets ratio of 12
companies.
b. To find out retained earnings to total assets of 12
companies
c. To find out ROI of the 12 companies.
d. To find out proportion of equity to total liabilities.
e. To find out sales turnover ratio of 12 companies.
f. To find out average and coefficient of Variance for
each variable.
g. To find out Z score for each company.
V. RESEARCH METHODOLOGY
This paper is based on secondary data. For the analysis, 10
years Balance sheet and Income statements of 12 companies
have been collected from Prowess database of Centre for
Monitoring Indian Economy (CMIE) and this was verified
from the annual reports of the company available on the
websites of the respective company. The study has been
undertaken for the period of 10 years from 2004 to 2013.
Following random sampling, the sample of the study covers
12 companies from auto ancillary sector of India listed on
national Stock Exchange. These companies are 1) Amar Raja
Batteries Ltd, Amtek India Ltd, Bharat Gears ltd, Bosch Ltd,
Clutch Auto ltd, Gabrial India Ltd, Hindustan Composite Ltd,
High Tech Gears Ltd, India Nippon Electricals Ltd, JBM Auto
Ltd, Superjit Engineering Ltd and Sundaram Clayton Ltd.
VI. LIMITATIONS OF THE STUDY
1. The present research study focuses only on the
selected twelve companies taken as sample of the
study from the auto ancillary industry of India.
2. The study presents analysis of financial health based
on only 10 years’ time period i.e from 2003-04 to
2013-14.
3. The analysis is done from the financial data available
on the websites of the companies.
VII. THEORETICAL FRAMEWORK
Edward I. Altman, Professor of Finance in New York
University, tried to develop a new technique where only one
Author1: Mrs. Rakhi R. Shrivastava. Author2. Dr. Shrini R. Srinivasan
index, named Z score was computed by combining major
financial ratios. This technique is known as Multiple
Discriminant Analysis. This model has itself as the leading
multivariate predictor model of corporate failure and it has
been the subject of numerous tests around the world. Z score
is a common statistical method of standardizing data on one
index for comparison. Z score is the output from a credit-
strength test that gauges the likelihood of bankruptcy. The
formula may be used to predict the probability that a firm will
go into bankruptcy within two years. Z scores are used to
predict corporate defaults The Z score uses multiple corporate
income and balance sheet values to measure the financial
health of a company. The Z score represents a point in time.
Estimation of Z-Score Formula
The Z score is a linear combination of four or five common
business ratios, weighted by coefficients. The coefficients
were estimated by identifying a set of firms which had
declared bankruptcy and then collecting a matched sample of
the firms which had survived, with matching by the industry
and approximate size (assets). Altman applied the statistical
method of discriminate analysis to a dataset of publically held
manufacturers. Based on multiple discriminate Analyses,
According to Altman, a company’s Z score is a positive
function of five factors:
..1
Where:
X1 ---- stands for net working capital to total assets
(NWC/TA)*100 measuring net liquid assets of accompany to
total capitalization.
X2---- stands for retained earnings to total assets
(RE/TA)*100 of the company indicating efficiency of
management in manufacturing, sales, administration and other
activities
X3----- stands for Operating Profit to total assets (ROI)
specifying profitability of the company through productive use
of assets of the company.
X4---- stands for the book value of the equity to book value of
total debt (MVE/TL). It depicts how much assets of the
company decline in its value if the liabilities goes beyond a
point.
X5--- stands for net sales to total assets of the company
basically it is sales turnover of the company showing sales
generating capacity of the company by effective utilization of
resources.
Although the weights are not equal, the higher each ratio,
higher the Z score lowers is the probability of bankruptcy.
Using the sample of 66 companies, 33 failed and 33
successful, Altman’s model achieved an accuracy rate of 95%.
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NCIETM Paper Reference ID: 80
Inference: The table depicts year wise Z score of Company 1
Z Score Ratio Values: The coefficient Value of calculated in the sample. Observation of Z score states that this company
ratios as recommended by Altman is as follows: has very strong financial position and Z score is increasing
Financial Ratios in Altaman’s Coefficient of Ratio as since 2003-04 to 2013-14. In 2003-04 Z score value of Amtek
Modal recommended by Altman Auto was 2.88 and it reached to 1.618 in 2013. This
Net Working Capital / T otal Assets observation says that company is facing initial symptoms of
0.012 or 1.2
(X1) financial distress if corrective measures are taken; it may go
Retained Earnings /T otal Assets (X2) 0.014 or 1.4 first bankrupt and gradually will turn into sick unit.
Earnings Before Interest & T axes /
0.033 or 3.3 Table VIII.2: Showing various ratios (X1, X2,
T otal Assets (X3)
Market Value of Equity/T otal X3, X4, X5) and year wise Z score value of C3 & C4.
0.006 or 0.6
Liabilities (X4) Company C3 C4
Year X1 X2 X3 X4 X5 Z Score X1 X2 X3 X4 X5 Z Score
Net Sales/T otal Assets (X5) 0.0999 or 1.0
2003-2004 0.164 0.058 0.077 0.032 0.741 1.292 0.42 0.065 0.397 0.895 1.684 4.125
2004 -2005 0.244 0.085 0.114 0.062 1.058 1.884 0.423 0.117 0.33 0.902 1.743 4.044
2005-2006 0.215 0.105 0.1 0.086 1.117 1.903 0.435 0.268 0.318 0.909 1.694 4.187
Z score Measurement Scale for measuring Financial 2006-2007 0.233 0.179 0.13 0.176 1.193 2.257 0.391 0.368 0.272 0.913 1.529 3.959
Health: Altman after presenting his analysis of 66 companies 2007-2008 0.203 0.206 0.135 0.206 1.392 2.493 0.511 0.423 0.224 0.921 1.381 3.878
2008-2009 0.217 0.225 0.079 0.229 1.426 2.4 0.447 0.387 0.178 0.923 1.317 3.536
recognized the following scale to measure financial distress of 2009-2010 0.178 0.247 0.106 0.254 1.44 2.503 0.482 0.34 0.247 0.937 1.533 3.964
2010-2011 0.006 0.211 0.097 0.216 1.408 2.16 0.47 0.351 0.278 0.939 1.598 4.134
companies:
2011-2012 0.04 0.244 0.148 0.256 1.613 2.645 0.514 0.403 0.234 0.968 1.504 4.038
2012-2013 0.018 0.257 0.072 0.269 1.475 2.255 0.443 0.338 0.201 0.98 1.373 3.628
2013-2014 0.028 0.234 0.052 0.245 1.442 2.121 0.454 0.306 0.268 0.929 1.536 3.949
Recommended Score Interpretation (Sickness predicted) Total 1.548 2.051 1.109 2.033 14.31 4.99 3.367 2.946 10.21 16.89
No danger of bankruptcy and company is financially safe & Mean 0.141 0.186 0.101 0.185 2.384 2.174 0.454 0.306 0.268 0.929 1.536 3.949
Z Score More than 2.99 SD 0.096 0.071 0.03 0.085 0.249 0.038 0.115 0.063 0.026 0.139
Sound.
CV 68.34 38.01 29.3 46.01 10.45 8.369 37.72 23.38 2.832 9.051
The company is on alert to work for betterment in terms
Z score from 2.77 to 2.99
of solvency of the company. Source: Computed Data
It depicts signs of grey areas in the company. Company
Inference: Bharat Gears Ltd. has also shown very low Z score
Z score from 1.80 to 2.77 may go bankrupt within two years if no action or remedy is
taken. value but looking at 10 years time period, the company is
Z Score below 1.80 There is definite failure and closure of the company
travelling very hard to improve its financial health because in
2003-04 the z score of this company was 1.29 which shows
Altman’s Modified Guidelines very poor financial management of the company but in 2013-
If Z Score >2.675 Firms are financially sound. 14 it has gone to 2.12, it indicates that gradually company is
The firm is leading to bankruptcy and ultimately will lead working towards improvement in financial health. Bosch Ltd.
If Z Score < 2.675
to failure within next two years.
4th company in the sample shows sound Z Score value. It
VIII. ANALYSIS & INTERPRETATION OF DATA depicts that the financial health of the company is too strong to
fall.
Table VIII.1: Showing various ratios (X1, X2,
Table VIII.3: Showing various ratios (X1, X2,
X3, X4, X5) and year wise Z score value of C1 & C2.
X3, X4, X5) and year wise Z score value of C5 & C6
Company C1 C2
Company C5 C6
Year X1 X2 X3 X4 X5 Z Score X1 X2 X3 X4 X5 Z Score
Year X1 X2 X3 X4 X5 Z Score X1 X2 X3 X4 X5 Z Score
2003-2004 0.36 0.86 0.116 0.92 1.06 3.64084 0.23 0.38 0.23 0.55 0.99 2.8848 2003-2004 0.374 0.397 0.104 0.383 0.76 2.34 0.274 0.397 0.203 0.434 3.765 5.581
2004 -2005 0.41 0.83 0.12 0.89 1.33 3.91125 0.56 0.42 0.1 0.47 0.41 2.2849 2004 -2005 0.433 0.466 0.156 0.472 0.923 2.892 0.293 0.466 0.206 0.503 1.898 3.882
2005-2006 0.41 0.79 0.221 0.84 1.89 4.72375 0.64 0.44 0.09 0.45 0.3 2.2611 2005-2006 0.608 0.455 0.175 0.534 1.025 3.289 0.317 0.455 0.157 0.49 2.182 4.011
2006-2007 0.53 0.6 0.243 0.63 1.96 4.62898 0.3 0.56 0.11 0.57 0.38 2.2379
2006-2007 0.669 0.605 0.197 0.553 1.129 3.761 0.418 0.605 0.161 0.64 2.419 4.681
2007-2008 0.58 0.5 0.28 0.51 2.11 4.73466 0.36 0.49 0.08 0.51 0.28 1.9438
2007-2008 0.604 0.45 0.145 0.587 0.927 3.114 0.377 0.45 0.1 0.476 2.551 4.249
2008-2009 0.47 0.56 0.301 0.59 2.32 5.0124 0.37 0.42 0.04 0.44 0.18 1.6203
2009-2010 0.46 0.83 0.46 0.86 2.68 6.41752 0.36 0.55 0.05 0.59 0.19 1.9191
2008-2009 0.432 0.433 0.097 0.53 0.734 2.498 0.293 0.433 0.111 0.458 1.698 3.295
2009-2010 0.424 0.477 0.114 0.466 0.692 2.523 0.296 0.477 0.219 0.501 1.836 3.882
2010-2011 0.5 0.85 0.348 0.87 2.8 6.25999 0.39 0.56 0.07 0.57 0.24 2.0516
2010-2011 0.437 0.534 0.117 0.463 0.692 2.63 0.276 0.534 0.259 0.556 2.357 4.626
2011-2012 0.56 0.89 0.392 0.91 2.87 6.62148 0.3 0.55 0.08 0.56 0.29 2.0391
2012-2013 0.58 0.91 0.394 0.92 2.58 6.40808 0.17 0.44 0.08 0.44 0.28 1.618 2011-2012 0.405 0.695 0.113 0.45 0.618 2.72 0.325 0.695 0.285 0.718 2.885 5.62
2012-2013 1 0.752 -0.02 0.389 0.258 2.679 0.188 0.752 0.255 0.796 3.502 6.101
2013-2014 0.46 0.93 0.387 0.94 2.37 6.06958
2013-2014 0.539 0.526 0.12 0.483 0.776 2.845 0.182 0.792 0.265 0.835 3.737 6.438
Total 5.32 8.55 3.262 8.88 24 3.68 4.81 0.94 5.13 3.54
Mean 0.48 0.78 0.297 0.81 2.18 5.31168 0.37 0.48 0.09 0.51 0.35 2.0861 Total 5.926 5.79 1.32 5.311 8.533 3.237 6.056 2.221 6.406 28.83
SD 0.07 0.15 0.113 0.15 0.59 0.14 0.07 0.05 0.06 0.24 Mean 14.68 0.526 0.12 0.483 0.776 2.845 0.294 0.551 0.202 0.582 2.621 4.761
CV 15.3 19.4 38.26 18.9 26.9 38.5 14.3 55 11.7 66.6 SD 0.182 0.113 0.056 0.064 0.232 0.07 0.139 0.063 0.142 0.755
CV 1.237 21.51 46.6 13.31 29.96 23.61 25.21 31.27 24.4 28.8
Source: Computed Data
Source: Computed Data

Author1: Mrs. Rakhi R. Shrivastava. Author2. Dr. Shrini R. Srinivasan Page 5

NCIETM Paper Reference ID: 80
Inference: Clutch Auto ltd. comes under healthy company trends which means that year on Year Company is able to
according to its Z score value. The Z score is consistent in the manage its financial position in better ways.
study period. Gabriel India ltd. falls into too healthy zone
based on the Z score value. This company is really showing Table VIII.6 Showing various ratios (X1, X2,
signs of long term strong life in the auto ancillary industry. X3, X4, X5) and year wise Z score value of C11 & C12
Company C11 C12
Table VIII.4 Showing various ratios (X1, X2, Year X1 X2 X3 X4 X5 Z Score X1 X2 X3 X4 X5 Z Score
2003-2004 0.361 0.379 0.283 0.512 1.553 3.761 0.282 0.798 0.292 0.879 1.843 4.788
X3, X4, X5) and year wise Z score value of C7 & C8 2004 -2005 0.454 0.428 0.299 0.534 1.655 4.105 0.316 0.633 0.248 0.687 1.585 4.081
Company C7 C8 2005-2006 0.589 0.491 0.32 0.579 1.741 4.539 0.258 0.621 0.264 0.665 1.489 3.938
Year X1 X2 X3 X4 X5 Z Score X1 X2 X3 X4 X5 Z Score 2006-2007 0.495 0.443 0.238 0.506 1.368 3.672 0.299 0.581 0.273 0.615 1.502 3.943
2003-2004 0.268 -0.2 -0.01 0.166 1.927 2.048 0.158 0.458 0.318 0.537 2.359 4.561 2007-2008 0.445 0.375 0.154 0.427 1.202 3.025 0.285 0.453 0.125 0.472 0.889 2.56
2004 -2005 0.055 -0.13 0.095 0.45 4.511 4.977 0.178 0.294 0.231 0.395 1.927 3.552 2008-2009 0.275 0.482 0.267 0.538 1.529 3.74 0.344 0.397 0.084 0.413 0.894 2.39
2005-2006 -0.09 -0.33 -0.08 0.364 2.206 1.6 0.134 0.234 0.182 0.307 1.744 3.017 2009-2010 0.297 0.496 0.34 0.592 1.683 4.211 0.383 0.424 0.098 0.459 0.973 2.625
2006-2007 0.107 -0.24 -0.09 0.355 2.772 2.494 0.232 0.247 0.216 0.311 2.06 3.583 2010-2011 0.295 0.563 0.34 0.641 1.974 4.625 0.27 0.389 0.14 0.419 1.301 2.884
2007-2008 0.028 -0.15 -0.09 0.512 3.303 3.128 0.135 0.25 0.206 0.492 1.862 3.347 2011-2012 0.28 0.593 0.34 0.655 1.937 4.619 0.142 0.448 0.175 0.464 1.665 3.319
2008-2009 -0.1 -0.35 -0.25 0.417 3.452 2.256 -0.02 0.249 0.246 0.539 2.283 3.744 2012-2013 0.262 0.605 0.288 0.653 1.667 4.172 0.049 0.416 0.132 0.43 1.499 2.833
2009-2010 -0.57 -0.95 -0.42 0.295 5.411 2.189 -0 0.39 0.34 0.67 2.343 4.408 2013-2014 0.272 0.594 0.27 0.632 1.531 3.961 -0.02 0.519 0.168 0.534 1.861 3.44
2010-2011 -0.34 -0.27 -0.36 0.234 4.875 3.03 0.126 0.42 0.444 0.696 2.568 5.188 Total 4.025 5.45 3.142 6.27 17.84 2.609 5.678 2 6.037 15.5
2011-2012 -0.36 -0.39 -0.64 0.184 3.794 0.822 0.102 0.613 0.385 0.696 2.223 4.893 Mean 0.366 0.495 0.286 0.57 1.622 4.039 0.237 0.516 0.182 0.549 1.409 3.346
2012-2013 -2.42 -3.09 -2.96 -0.79 18.02 0.531 0.049 0.737 0.262 0.831 1.865 4.319
SD 0.112 0.085 0.055 0.073 0.225 0.126 0.129 0.075 0.147 0.353
2013-2014
CV 30.62 17.08 19.35 12.87 13.88 53.09 24.96 41.03 26.82 25.08
Total -3.43 -6.11 -4.8 2.19 50.27 1.088 3.891 2.83 5.473 21.23
Mean -0.34 -0.61 -0.48 0.219 5.027 2.308 0.109 0.389 0.283 0.547 2.123 4.061
SD 0.773 0.903 0.9 0.371 4.702 0.079 0.173 0.086 0.176 0.27
Source: Computed Data
CV -225 -148 -187 169.6 93.52 73.03 44.41 30.23 32.21 12.74
Inference: Superjit Engineering Ltd also depicts too healthy Z
Source: Computed Data score value which means company is not in the area of
Inference: Hindustan Composite Ltd. does not show very financial distress. Sunderam Clayton falls into strong
good financial performance because Z score is weak in the companies in terms of financial health since the Z score value
study period. As per Z score the company is gradually leading in the period of 10 years from 2003-2013-14 has been
to financial distress. The financial health of this company is consistently improving. The score slightly grew weak in 2008-
very sound since the Z score has surpassed the recommended 2011but it was improved since then.
score by Altman in the study period of 10 years in this
research study. Table VIII.7a: 10 Years Z score Values of 12 companies with
mean Z score value
Table VIII.5 Showing various ratios (X1, X2,
Altman's Z Score for 12 Auto Ancillary Companies in India
X3, X4, X5) and year wise Z score value of C9 & C10 Z Score Value of 12 Companies for the Period of 10 Years
Name of the Companies
Company C9 C10 taken as sample 2003- 2004 - 2005- 2006- 2007- 2008- 2009- 2010- 2011- 2012- 2013-
Year X1 X2 X3 X4 X5 Z Score X1 X2 X3 X4 X5 Z Score 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
2003-2004 0.147 0.83 0.374 0.96 1.549 4.697 0.339 0.472 0.145 0.635 0.958 2.883 Amar Raja Batteries Ltd 3.640843 3.911 4.724 4.629 4.735 5.0124 6.42 6.26 6.62 6.41 6.07
2004 -2005 0.176 0.849 0.264 0.964 1.457 4.308 0.362 0.456 0.246 0.586 1.725 3.964
Amtek Auto Ltd 2.884754 2.285 2.261 2.238 1.944 1.6203 1.92 2.05 2.04 1.62
2005-2006 0.166 0.865 0.197 0.968 1.236 3.878 0.38 0.393 0.227 0.485 1.505 3.552
2006-2007 0.188 0.88 0.154 0.973 1.088 3.638 0.36 0.318 0.166 0.381 1.341 2.995 Bharat Gears Ltd: 1.29224 1.884 1.903 2.257 2.493 2.4002 2.5 2.16 2.64 2.25 2.12
2007-2008 0.127 0.901 0.103 0.989 0.904 3.25 0.468 0.246 0.13 0.315 1.276 2.799 BOSCH Ltd: 4.124653 4.044 4.187 3.959 3.878 3.5363 3.96 4.13 4.04 3.63 3.95
2008-2009 0.338 0.912 0.086 0.996 0.921 3.486 0.383 0.242 0.131 0.295 1.105 2.513 Clutch Auto Ltd. 2.339732 2.892 3.289 3.761 3.114 2.4982 2.52 2.63 2.72 2.68 2.84
2009-2010 0.189 0.919 0.15 0.996 1.085 3.69 0.366 0.323 0.118 0.385 0.973 2.485 Gabriel India Ltd. 5.580509 3.882 4.011 4.681 4.249 3.295 3.88 4.63 5.62 6.1 6.44
2010-2011 0.319 0.93 0.183 1 1.333 4.222 0.279 0.299 0.136 0.351 1.223 2.638 Hindustan Composite Ltd. 2.048149 4.977 1.6 2.494 3.128 2.2561 2.19 3.03 0.82 0.53
2011-2012 0.317 0.941 0.191 1 1.364 4.293 0.3 0.3 0.147 0.349 1.265 2.741
HighTech gears Ltd. 4.560506 3.552 3.017 3.583 3.347 3.7436 4.41 5.19 4.89 4.32
2012-2013 0.282 0.945 0.162 1 1.296 4.091 0.229 0.334 0.163 0.383 1.441 2.952
India NIPPON Electricals Ltd. 4.696595 4.308 3.878 3.638 3.25 3.4856 3.69 4.22 4.29 4.09
Total 2.247 8.972 1.864 9.846 12.23 3.466 3.385 1.609 4.166 12.81
Mean 0.225 0.897 0.186 0.985 1.223 3.955 0.347 0.339 0.161 0.417 1.281 2.952 JBM Auto ltd: 2.883246 3.964 3.552 2.995 2.799 2.5134 2.48 2.64 2.74 2.95
SD 0.08 0.04 0.083 0.016 0.218 0.066 0.079 0.043 0.115 0.238 Superjit Engineering Ltd 3.760595 4.105 4.539 3.672 3.025 3.7398 4.21 4.62 4.62 4.17
CV 35.6 4.424 44.3 1.66 17.83 18.92 23.36 26.57 27.53 18.6 Sundaram Clayton Limited 4.788149 4.081 3.938 3.943 2.56 2.3895 2.63 2.88 3.32 2.83 3.44

Source: Computed Data Source: Computed Data

Inference: India Nippon Electricals Ltd.’s Z score ranges
from 4.7 to 4.0 in the period of 10 years which indicates very
sound financial health of the company. The JBN Auto ltd.
depicts normal financial health and Z score shows rising

Author1: Mrs. Rakhi R. Shrivastava. Author2. Dr. Shrini R. Srinivasan Page 6

NCIETM Paper Reference ID: 80
Graph VIII.7a
A. Interpretations of Net Working Capital to Total
Assets (X1)
Net working capital is the excess amount of current assets over
current liabilities. Net working capital to total assets ratio
measures liquidity position of the company relative to total
capital employed by the company. Operational efficiency
increases working capital where as continuous operating
losses drain working capital and turn positive working capital
into negative working capital which is really a serious
problem. Table NoVIII.1 to Table No VIII.6 depicts
average/mean value of 10 years net liquid assets to total assets
i.e. X1 for 12 companies from auto ancillary industry. The
analysis shows that only C1 (0.48) and C4 (0.45) have
moderate investment in current assets and C2 (0.37), C10
TABLE NO. VIII.7b: Statement Showing the Z-score (0.35) and C11 (0.37) show low investment in current assets,
Healthy and Distressed Zone for Selected Auto Ancillary C3 (0.14), C6 (0.29), C8 (0.11), C9 (0.22) and C12 (0.24)
Companies depict unsatisfactory condition of working capital as a
Z Score Model percentage of total capitalization. The condition of C7 shows
Abb Auto Ancillary companies Inference
Financial Health
negative working capital which is really a serious problem for
C1 Amar Raja Batteries Ltd 5.236 Too Healthy
the company as it is a threat to the liquid position of the
C2 Amtek Auto Ltd 2.086 Healthy
company whereas C5 depicts very high percentage of working
C3 Bharat Gears Ltd: 2.174 Healthy
capital which is again not good for the company as this cash
C4 BOSCH Ltd: 3.949 Too Healthy
C5 Clutch Auto Ltd. 2.845 Healthy
flow can be invested in order to generate short term returns
C6 Gabriel India Ltd. 4.761 Too Healthy instead of blocking it into current assets.
C7 Hindustan Composite Ltd. 2.308 Healthy These analyses will help companies to maintain an ideal ratio
C8 HighTech gears Ltd. 4.061 Too Healthy of investment in the current assets which is neither on the too
C9 India NIPPON Electricals Ltd. 3.955 Too Healthy much investment side nor towards negative working capital
C10 JBM Auto ltd: 2.952 Healthy side. It will help companies to maintain a balanced amount of
C11 Superjit Engineering Ltd 4.047 Too Healthy investment in current assets without disturbing liquidity
C12 Sundaram Clayton Limited 3.346 Too Healthy
position of the company.
Source: Computed Data The condition of C7 is really very serious in terms of liquidity
Graph VIII.7b as it is portraying negative value of this ratio. To improve cash
liquidity problem, this company can adopt any of the
following remedies like reduction in its annual dividend,
restructuring its existing debt facilities in order to reduce tax
burden and tapping equity and debt markets for restructured
funding.

B. Retained Earnings Total Assets (X2)

IX. FINDINGS
Findings of the Z score analysis variable wise i.e X1, X2, X3,
X4 and X5 for the sample of 12 auto ancillary companies from
Indian automobile sector are summarized below:
The second major variable to depict financial health under Z
score model is ratio of retained earnings to total assets. This
ratio indicates the portion of total assets financed by retained
earnings. The higher ratio indicates the strong and sound
position in terms of financial stability during the times of low
profitability periods and it also signposts that company is
financing its assets through internal funds than through
borrowed funds. Looking at the position of companies taken
as sample in this study for the period of 10 years, it is found
out from the table VIII.1 to VIII.6 that percentage of retained

Author1: Mrs. Rakhi R. Shrivastava. Author2. Dr. Shrini R. Srinivasan Page 7

NCIETM Paper Reference ID: 80
earnings in financing long term assets of 12 companies in the
study period is like this: C1-0.78, C2-0.48, C3-0.19, C4-0.31,
C5-0.53, C6-0.55, C7-0.6, C8-0.39, C9-0.9, C10-0.34, C11-
0.5 and C12-0.52. It is evident from this data that every auto
ancillary company under the study period is relying more on
debt financing not on internal financing through retained
earnings which has only created high leverage ratio and
ultimately risk of defaulting in repayment of interest. This
situation if not controlled, will lead towards financial distress
and ultimately bankruptcy.
C. Interpretation of Earnings before Interest and Taxes
to Total Assets (X3)
This ratio judges operating performance and productivity of
the assets. Table VIII.1 to VIII.6 show that Companies like
C1, C2, C5 and C6 have shown very low operating
performance and companies like C4, C10, C9 and C12 have
demonstrated slightly higher performance than previous
companies. Companies like C7, C8 and C11 are showing
average performance reason for which can be too much
competition. The overall picture of the sample depicts poor
utilization of assets in generating revenue.
D. Interpretation of Book Value of Equity to Total
Liabilities or Book Value of Debt (X4)
This ratio plays an important role in defining long term
financial policies of the company. The company having 2:1
equity debt mix is considered as excellent for businesses in
managing their finances and companies having 1:1 equity debt
mix are considered as good. It is a well known fact that too
much of debt may cause financial overburden and can turn a
firm insolvent. If debt funds are more than equity funds in the
debt equity ratio of the company it will reduce profit of the
company despite showing increase profitability of the
shareholders. This situation may be good in favorable times
but really a curse in unfavorable times. From Table VIII.1 to
VIII.6, it is observed that the equity portion of C3 (0.18) and
C7 is 0.22 which is quite low as compared to other companies.
Companies in the second rank are C2 (0.51), C5 (0.48) and C6
(0.58), C8 (0.55), C10 (0.42), C11 (0.57) and C12 (0.55).
These companies depict that there is proper combination of
debt and equity mix in the capital structure of the companies
during study period. Remaining companies like C1 (0.81), C4
(0.93) and C9 (0.98) show more reliance on the usage of
equity funds than debt funds to finance long term investments
since the ratio value is very high. On analyzing above cases it
is evident that companies C1, C4 and C9 are excellent in their
capital structure as they are able to provide a margin of safety
to their creditors in the times of bankruptcy.
Author1: Mrs. Rakhi R. Shrivastava. Author2. Dr. Shrini R. Srinivasan
E. Interpretation of Sales to Total Assets (X5)
Business success cannot be imagined without excellent sales
revenue. Sales revenue is the backbone of business survival
and performance. Sales to total assets means total assets
turnover ratio. Higher ratio depicts effective utilization of
assets in generating sales of the companies whereas low ratio
indicates underutilization of assets of the companies and
indicates towards poor financial management practices in the
optimum utilization of resources in generating sales of the
company. From the table VIII.1 to VIII.6, the value of total
sales turnover ratio shows that the company 7 has best
performance that is C7-5.03. It is utilizing its assets in
generating sales in much better manner as compared to other
companies in the said period and lowest performance is that of
C2. It is evident from the ratio value that these companies are
not utilizing full capacity of their assets in boosting up their
sales. It is suggested that these companies must use their assets
up-to optimum level in order to generate maximum sales and
thereby increasing revenue for the company concern.
X. CONCLUSION
Having analyzed performance of five variables individually,
the Z score health of the companies under the study for the
period of 10 ten years is as follows. The financial health
through Z score model of companies under this study is
divided into two categories. Out of 12 companies, 7
companies, Amar Raja Batteries Ltd (5.235895), Bosch Ltd
(3.949414), Gabrial India Ltd (4.760522) India Nippon
Electrical Ltd.( 3.955156), High Tech gear ltd (4.061075),
Superjit Engineering Ltd (4.046931) and Sundaram Clayton
Limited (3.345628) are in the too healthy zone and Amtek
Auto ltd (2.08607), Bharat Gears Ltd (2.174053), Clutch Auto
Ltd (2.844562). Hindustan Composite Ltd. (2.307568) and
JBM Auto ltd (2.952134) are in grey area or healthy zone. In
healthy zone, it is very difficult to predict the timing of the
bankruptcy of the company though it displays grey areas of
the companies. Finally, the study is concluded that all
companies taken for the study display positive z score value
showing strong financial health position. This study will be
very useful and important for every company in Indian Auto
Ancillary industry.
Abbreviations used:
C1- Company 1- for Amar Raja Batteries ltd.
C2- Company 2 - Amtek Auto ltd.
C3- Company 3- Bharat gears Ltd.
C4- Company 4 - Bosch Ltd.
C5- Company 5 - Clutch Auto Ltd.
C6- Company 6 - Gabriel India ltd.
C7- Company 7 - Hindustan Composite ltd.
Page 8
NCIETM Paper Reference ID: 80
C8- Company 8 - High tech Gears Ltd.
C9 – Company 9 - India Nippon Electricals Ltd.
C10 - Company 10 - JBM Auto ltd.
C11- Company 11 - Superjit Engineering Ltd.
C12- Company 12 - Sunderam Clayton Ltd.
ACKNOWLEDGMENT
I sincerely acknowledge my gratitude and blessings to all of
those who supported me in any respect during the completion
of this research study. I extend my deep sense of gratitude to
Sterling Institute of Management Studies, Nerul Navi Mumbai
for providing me suitable resources to complete this research
paper. Honestly it gives me immense pleasure and honor to
work for this project under the guidance of my PhD guide,
Dr. Srini R. Srinivasan, Head Research Cell @ VESIMSR,
University of Mumbai who made it possible. Secondly, I am
grateful to my parents Shri Rajendra Prakash Saxena and Smt
Kusum Saxena for their continuous motivation, my husband
Mr. Ashish Shrivastava and my two lovely daughters Abhisri
and Ratnanshi who have endured all my failure of duty
towards them. Without their enthusiastic support, innocent
assistance and cooperation, it would not have been possible to
complete this project.
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Author1: Mrs. Rakhi R. Shrivastava. Author2. Dr. Shrini R. Srinivasan
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