Quality of Earnings of Automobile Industry

(w.r.t TVS Motors Ltd., Hero MotoCorp Ltd., and Eicher Motors Ltd.)

Submitted By:
Radhika Chaudhary
C20-115
Automobile Industry:
(Two and Three Wheelers)
 The Indian auto industry became the 4th largest in the world with
sales increasing 9.5 per cent year-on-year.
 The Two Wheelers segment dominates the market in terms of volume
owing to a growing middle class and a young population.
 Two wheelers sales registered a growth at 4.86 % with scooters
declining by 0.27 % while motorcycles and mopeds grew by 7.76
%and 2.41%.
 The companies taken into study are Eicher Motors Ltd., TVS Motors
Ltd., and Hero MotoCorp Ltd.
 The data has been taken from the Annual Reports and Value
research’s website.
 TVS Motors Ltd.
Ratio Formula 2018-19 2017-18 2016-17 2015-16 2014-15
Return on Total
Assets PAT/ Share holder's Funds 22.83% 24.81% 22.97% 23.31% 24.17%

Net Profit Margin PAT/Sales 3.59% 4.06% 4.08% 3.73% 3.12%

Assets Turnover
Ratio Sales/Total Assets 1.21 1.24 2.03 2.21 2.24
Total Assets/Shareholder's
Leverage Ratio Funds 5.27 4.93 2.77 2.83 3.45

• The company is able to maintain a good ROTA because of high leverage. TVS
Motors currently has a long term borrowing of Rs.4909 Crores which is
incomparably higher than competitors.

• On one hand, TVS has huge sales amount in their Statement of P&L, on the other
hand, the Net Profit Margin as compared to the competitor is very low which is
would have affected the ROTA but because of high leverage, the effect got
nullified.

• Going deeper into Net profit margin, we see that TVS has 94.6% COGS/Sales
Ratio which is reducing the profits.
Eicher Motors Ltd.
Ratio Formula 2018-19 2017-18 2016-17 2015-16 2014-15
Return on Total
Assets PAT/ Share holder's Funds 22.00% 27.36% 28.50% 32.58% 27.89%
Net Profit
Margin PAT/Sales 20.02% 21.45% 21.66% 19.28% 8.03%
Assets Turnover
Ratio Sales/Total Assets 0.86 0.94 1.00 1.06 1.36
Total Assets/Shareholder's
Leverage Ratio Funds 1.28 1.35 1.31 1.60 2.55

• Though the ROTA is more or less similar to TVS Motors but the quality of
earnings is more balanced and better.
• The company is managing a moderate leverage i.e. below 2.
• The company is experiencing good profit margins because of less cost of
goods sold (COGS) and less operating expenses.
• The COGS to Sales Ratio is somewhere around 72% in all the years where
as for TVS Motors Ltd, it was around 95%.
• Eicher Motors Ltd has once experienced a highest ROTA of 32 % when the
Current Assets Turnover Ratio was around 14.14.
• This happened mainly because the receivables fell down to Rs.40 Crores in
FY’16.
Hero MotoCorp Ltd.
Ratio Formula 2018-19 2017-18 2016-17 2015-16 2014-15
Return on
Total Assets PAT/ Share holder's Funds 25.96% 30.68% 31.31% 34.84% 35.91%
Net Profit
Margin PAT/Sales 10.03% 11.31% 11.29% 10.82% 8.53%
Assets
Turnover Ratio Sales/Total Assets 1.69 1.72 1.75 2.05 2.58
Total Assets/Shareholder's
Leverage Ratio Funds 1.53 1.57 1.59 1.57 1.63
 The company’s ROTA is best compared to the other two owing to a good amount of profit
and less shareholders’ funds (Issued equity) maintained by the company.

 The Net profit margin is good and is increasing marginally as the company is increasing
its efficiency hence earning a higher margin on the operating revenue.

 The asset turnover is gradually declining due to increase in assets (particularly current
assets). Unlike the other companies Hero has maintained positive net current assets
(working capital) from the beginning.

 The company has constantly maintained its leverage ratio and the debt is optimum.
THANK YOU !