Financial Performance Analysis as a determinant of Profitability in Indian automobile industry

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1 Financial Performance Analysis as a determinant of Profitability in Indian automobile industry Author : Priyanka R Gowda Research Student, Department of Management Sciences, Maharaja Institute of Technology-Mysore, Viswesariah Technological University-Belgaum. Co-Author : Dr. Manoj Kumara N V Assistant Professor, Department of Management Sciences, Maharaja Institute of Technology-Mysore, Maharaja Research Foundation, University of Mysore, India. ABSTRACT: The automotive industry in India is the 10 th largest in the world with the annual production of approximately 2 million units. It s one of the key drivers to boost economic growth. The present paper measures the financial performance of major selected automobile companies for the period of 5 years from by using ratio analysis. The purpose of the study is to evaluate and compare the financial performance of selected 9 companies to rate their financial performances. The aim of the study is to analyze by comparing the risk of different companies, their rate of return, future trends and their strengths and weaknesses. Key words: Financial performance, Automobile Industry, Ratios, T-test, s. INTRODUCTION: Finance is regarded as lifeblood of any business organization, thus it is very much essential to evaluate the financial performance business organization. The purpose of financial analysis is to diagnose the current & past financial condition of a company & to give some picture about its future condition. Financial performance analysis is vital for the triumph of an enterprise. Financial performance analysis is an appraisal of the feasibility, solidity and fertility of a Business. Widely used tools & techniques of financial analysis are: Figure No- 1 Tools of Financial Analysis The research paper considers ratio analysis to evaluate the financial performance of selected major automotive companies. The ratio analysis is an effective tool in controlling the whole business & planning for future needs. 64

2 Ratio is the relationship b\w the two figures expressed mathematically. They provide numerical relationship b\w two relevant financial data. They are calculated from data provided in balance sheet & profit & loss account. They provide easy understanding, comparison & interpretation.to compare & analyze the liquidity, solvency & profitability. To know the ability of the company to earn profit, get return on investment, ability to meet obligation, value of assets, extent & nature of liabilities. Ratio analysis helps to express the relationship b\w two accounting figures in such a way that user can draw conclusion about the performance, Strength & weakness of a company. This study will help the investor to identify the nature of the automotive sector & make investment decisions wisely. LITERATURE REVIEW Maksymiuk (2006) states the influences of foreign direct investments (FDI) on the automotive industry in Poland. The data and indices provided in the work confirm the close relationships between FDI and the automotive industry. Narayanan K. (1997) has attempted to analyze the effects of de-regulation policy introduced in India during eighties on technology acquisition and competitiveness in the Indian automobile industry. The variation is due to the up-gradation of technology the economy. Pradhan, Singh (2008) studies that in recent years developing countries have emerged as significant participants in the OFDI (Outward foreign direct investment) activities having the strategic asset seeking motive. Such OFDI which is assets exploiting cum augmenting involves potential two way cross border knowledge flows. This study examines these issues for the Indian automotive industry that is currently transnationalizing at a rapid rate in terms of both exports and OFDI. The study traces the technological capability building and several dimensions of OFDI in this industry. It undertakes a quantitative analysis of the influence of OFDI activities on the in house (domestic) R&D performance of Indian automotive firms during Sharma (2008) in her study on Indian Automotive Industry has analysed the sales and capabilities of different firms in automobile industry. The study indicates that the growth in the automobile sector is expected to grow due to rising disposable income and increasing consumerism. The global automakers will continue to allocate a rising proportion of the foreign direct investment in India, growing auto-manufacturing first and latter auto engineering R&D services. Kale (2011), in the last decade the Indian auto industry has shown increasing levels of technological sophistication and significant growth. This paper reveals that key attributes of firm ownership such as managerial vision and diversified nature of business, helped Indian firms in the development of the innovative capabilities. Balakrishnan, Jagathy (2011) Globalization and liberalization, with the entry of many prominent foreign manufacturers, changed the automobile scenario in India, since early 1990s. Manufacturers such as Ford, General Motors, Honda, Toyota, Suzuki, Hyundai, Renault, Mitsubishi, Benz, BMW, Volkswagen and Nissan set up their manufacturing units in India in joint venture with their Indian counterpart companies by making use of the Foreign Direct Investment policy of the Government of India. These manufacturers started capturing the hearts of Indian car customers with their choice of technological and innovative product features, with quality and reliability. With the multiplicity of choices available to the Indian passenger car buyers, it drastically changed the way the car purchase scenario in India. Ray (2012),this study tries to access the performance of Indian automobile industry in terms of various financial indicators, sales trend, production trend, export trend etc. for the period of to the result suggests that the automobile industry has been passing through turbulent phases characterized by enhanced debt burden, low utilization of assets, and 65

3 above all, huge liquidity crunch. The key to success in the industry is to improve labour productivity, labour flexibility, and capital efficiency. Dharmaraj and Kathirvel (2013), the Indian Automobile Industry marked a new journey in the 1991 with the financial revolutionary New Industrial Policy Act 1991, opening automatic route which allowed the 100 per cent Foreign Direct Investment(FDI). Here, an attempt is made to find out the effect of FDI on the financial performance of Indian Automobile Industry. For this purpose, sixteen companies were selected and analyzed through various financial ratios. Descriptive statistical tools like Mean, Standard Deviation and Student s paired Test were used to test the hypothesis. The liquidity analysis showed little changes and profitability analyses showed an increasing trend during post FDI when compared to pre FDI. The efficiency analysis showed that the companies are efficiently utilizing the available resources during post FDI as compared to pre FDI. It is concluded that foreign direct investment in India makes positive impact on the financial variables of the Automobile Companies. Gary W.selnow(2003) analyzed various approaches to promote retirement investment.his study found that financial analysis has a good chance of making wise decisions about retirement investments. Douglas A.Hersahey and Hendrik p. Van Dalen (2006) in the study explored the Psychological mechanisms that underlie the retirement planning and saving tendencies of Dutch and American Workers the research suggests that policy analysts should take into account both individual and cultural differences in the psychological predispositions of workers when considering Pension reforms that stress individual responsibility for planning and saving. M.Kabir Hassan and Dr.Shari Lawrance (2007) states that, the financial preparation for retirement. Regarding retirement plan contributions, the findings indicate significant positive effects regarding income and womanhood.education is significant and positive as a predictor for the decision to contribute to a pension plan for women in their thirties, thus supporting the hypothesis of a significant positive relationship between education and pension plan contributions. OBJECTIVES OF THE STUDY To identify the financial performance of the selected Automobile companies. To ascertain the relationship between fixed assets turnover and the remaining performance ratios. To determine the relationship between the financial performance ratios To evaluate the changes in the mean value of financial performance ratios. THEORETICAL BACKGROUND RATIO ANAYSIS: Ratio is a relationship between two figures expressed mathematically. Financial ratio provides numerical relationship between two relevant financial data.they are calculated from the balance sheet and profit and loss account. Ratio summarizes the data for easy understanding, comparison and interpretation. Ratios are been classified into various categories such as: Current ratio. 66

4 Quick ratio. Inventory turnover ratio. Fixed asset turnover ratio. Earnings retention ratio. Equity ratio. Dividend payout ratio. Current Ratio: The current ratio measures the ability of the firm to meet its current liabilities, current assets gets converted into cash during the operating cycle of the firm and provides the funds needed to pay current liabilities. So higher the current ratio, greater the short term solvency Current ratio= Current assets/current liabilities. Current assets include cash, current investment, debtors, inventories, loans and advances and prepaid expenses. Current liabilities include installments of loans. The general form of current ratio in India is Quick Ratio: Quick assets are defined as current assets excluding inventories. Quick are also called as acid test ratio. It is based on those current assets which are highly liquid. Quick ratio= Quick assets/current liabilities. Horizon s limited quick ratio is 0.73 Inventory Turnover Ratio: These ratios measure how fast the inventory is moving through the firm and generating the sales. Inventory turnover reflects the efficiency of inventory management. The higher the ratio is more efficient the management of inventories. Inventory turnover ratio= Cost of goods sold/average inventory Horizon s limited inventory turnover is 6.24 Fixed Asset Turnover Ratio: This ratio measures sales per rupees of investment in fixed assets. It measures the efficiency with which fixed assets are employed high ratio indicates a high degree of efficiency in asset utilization and low reflects in inefficient use of assets. Fixed asset turnover ratio= Net sales/average net fixed assets Horizon s fixed asset turnover ratio is Earnings Retention Ratio: It is also called as plowback ratio. It is a ratio that measures the amount of earnings retained after dividends have been paid out to the shareholders. Retention ratio= Total gross profit-payout ratio (or) 67

5 (1-b) dividend payout ratio. The investors prefer to have higher retention ratio in fast growing business and lower retention ratio in slower growing business. Dividend Payout Ratio (Net Profit): It is an amount of dividends paid to stockholders relative to the amount of total net income of a company. It measures the portion of profits the company decides to keep to fund operation and the portion of profits that is given to its shareholders. Dividend payout ratio=total dividends/net income Long Term Debt /Equity Ratio: It is used to indicate how much debt a company is using to finance its assets relative to the amount represented in shareholder s equity. Debt to equity ratio= Total liabilities /shareholder s equity. Dividend Payout Ratio (Cash Flow): It is a proportion of free cash flow (after preferred dividends) that is paid as the dividends to common shareholders. This ratio is useful to analyze cash flow being paid in dividends. If this number is consistently high or greater than 1 it indicates that firm is paying out more in dividend than it is receiving in actual cash. Dividend payout ratio (c/f) = Common stock (cash flow from operations-capital expenditure-preferred dividends paid) RESEARCH METHODOLOGY Research Method: analytical research method is used to evaluate the financial performance of selected automobile companies by considering the study period of 5 years from 2012 to 2016 with the use of selected financial performance ratios. Period of the study: the study period considered 5 years from 2012 to Source of data: the essential data for the study have been collected from the annual reports, Journals, Research Paper, Articles, Books and Websites. The financial data and information gathered from the secondary source Money Control database. Tools for the Study: in order to identify the overall performance of selected automobile companies several financial ratios were used and all tabulated data are evaluate with the use Statistical tools for proving or disproving the hypotheses. One sample t-test, Karl Pearson correlation, Partial correlation and descriptive statistics use to analyze the implications of ratios on financial performance. Sampling Method: the study is based on convenient sampling method. The automobile industry reported high growth performance which reported in the recent years. Therefore the present study restricted to top 9 companies in automobile sector. 68

6 Sample: the following automobile companies are selected for the study. The details of the selected firms are shown in table. Sl.No Company Name Net profit(cr) Market Rank capitalization(cr) 1 TVS Motors th 2 Force Motors th 3 Maruthi Suzuki st 4 Bajaj Automobiles rd 5 Tata Motors nd 6 Mahindra & Mahindra th 7 Hero Moto Corp th 8 Ashok Leyland th 9 Eicher Motors th Hypotheses of the study: the following hypotheses are framed to analyzing the financial performance of selected automobile companies. H 0 : there is no relationship between fixed assets turnover and the remaining performance ratios. Ho: there is no significant relationship between the financial performance ratios H0: there are no significant changes in the mean value of financial performance ratios. DATA ANALYSIS AND INTERPRETATION: In order to compare the financial performance of selected automobile companies, ratios have used, several ratios were estimated and the mean were computed. The mean were compared to find out the statistical significance change and the relationships among the variables ( Ratios) of selected automobile companies under study with the passage of time using one sample t-test, correlation and partial correlation. Table- 2 Descriptive Statistics Ratios N Min Max Mean S.D Variance Skewness Kurtosis LTDE CR QR ITOR DPR DPRC ERR TAR Source: SPSS Database-Authors Calculations 69

7 Based on table no 1 the LTDE resulted It clearly shows that it is more than the industry standard (2:1), so therefore there is a possibility of payment of high interest and more leverage which will cost high burden with respect to cost of overall capital. CR resulted It shows that it is less than the industry standard (1.33).so it states that short term solvency cannot be met efficiently. QR resulted It clearly shows that it is more than the industry standard (2:1), so therefore they contain more current assets which are highly liquid. ITOR resulted It shows that it is more than the industry standard (6.24), so therefore it is observed that inventory is moving fast and generating many sales. ERR resulted in Shows that firm maintaining appropriate reserves reflects in healthy growth during crisis. DPRC resulted in it shows that it is more industry standard (1), therefore firm has an effective dividend policy which reflects in positive returns to equity share holders.tar resulted in The above table shows that it is more than industry standard (2.15) indicates that there is high degree of efficiency in utilisation of assets which results in profitability. Thus as per the above study it is found that variations are less and efficiency is more. So investor can invest in this sector to efficient returns. The company can take efficient decisions on their liquidity management. Table -3 One-Sample Test Test Value = 0 t df Sig. (2- tailed) Mean Difference 95% Confidence Interval of the Difference Lower Upper LTDE CR QR ITOR DPR DPRC ERR TAR Source: SPSS Database-Authors Calculations Table 2 shows that one Sample T test with including of selected financial ratios, considering of 9 selected automobile companies mean values the study consider 5% significance level. Therefore if the calculated T value is more than significance level H0 is rejected, with respect to the P value if the P value is less than the significance level than reject the H0. The study resulted that the overall financial performance ratio are less than significance level of 5%, hence H0 is rejected. 70

8 Therefore the study proves that there is a significant change in the mean value of financial ratios. All above selected companies are performing well expect few companies,the mean difference is less than 50% in all cases except few (ERR) and also the study found that there is a significant difference between mean values of selected sample companies. Table -4 Proximity Matrix between Vectors of Values LTDE CR QR ITOR DPR DPRC ERR TAR LTDE CR QR ITOR DPR DPRC ERR TAR This is a similarity matrix Source: SPSS Database-Authors Calculations Table 3 shows the similarity matrix between the selected variables of selected automobile companies the result found that there is a highest similarity found between QR and LTDE at and lowest reported in ERR and LTDE Highest similarity found between OR and CR at 0.906and lowest reported in in CR and ITOR. Highest similarity found between CR and and lowest reported in DPRC and QR Highest similarity found between TAR & & lowest in DPR & ITOR Highest similarity between DPRC & & lowest in ITOR & Highest similarity between DPR & lowest in OR & Highest similarity between TAR & & lowest in OR & Highest similarity between ITOR & & lowest in LTDE & Therefore from the above study it is proved that ERR and DPRC have high negative proximity (-0.655) thus few above selected automobile companies are inefficient to maximise the returns to the share holder s wealth. The company have more liquidity and consistency in terms of meeting the current liabilities (.906 between CR & OR). Table-5 s Control Variables LTDE CR QR ITOR DPR DPRC ERR TAR LTDE Sig (2-tailed)

9 df CR Sig (2-tailed) df QR Sig (2-tailed) df ITOR Sig (2-tailed) df DPR Sig (2-tailed) df DPRC Sig (2-tailed) df ERR Sig (2-tailed) df Source: SPSS Database-Authors Calculations Table 4 shows that LTDE has a positive relationship with OR by.800% & ERR by -.330% & DPR by % have a negative relationship CR has a positive relationship with QR by.899% & negative relationship with DPRC by -.155% & DPR by -.379% QR has a positive relationship with CR by.899% & negative relationship with ERR by -.136% & DPR by -.243% ITOR has a positive relationship with LTDE by.448% & negative relationship with ERR by -.299%. DPR has a positive relationship with DPRC by.544% & negative relationship with LTDE by -.055%, CR by -.379%, QR by -.243% & ERR by -.652% DPRC has a positive relationship with DPR by.5444% & negative relationship with CR by -.155% & ERR by -.706% ERR has a positive relationship with CR by 0.83%& negative relationship with LTDE by -.330%, QR by -.136%, ITOR by -.229%, DPR by -.652% & DPRC by -.706% The above study shows that there is a strong positive significant relationship between CR & QR (0.899) resulting in more liquidity and consistency position in terms of current liability of the above selected sample companies. And also it resulted in negative and weak relationship between LTDE & DPR (-0.055) showing that the above selected sample automobile companies do not have significant relationship in terms of LTDE & DPR thus it clearly shows that the proportionate change of debt of selected automobile firms do not influence or impact or effect the firms dividend decisions. Table-6 s LTDE CR QR ITOR DPR DPRC ERR TAR 72

10 LTDE Pearson (r) 1.592(**).786(**).357(*) (*) Sig. (2-tailed) Covariance N CR Pearson.592(**) 1.906(**) (*) (*) Sig. (2-tailed) Covariance QR Pearson.786(**).906(**) Sig. (2-tailed) Covariance ITOR Pearson.357(*) (*) (**) Sig. (2-tailed) Covariance DPR Pearson (*) (**) -.655(**) Sig. (2-tailed) Covariance DPRC Pearson (*).475(**) (**).308(*) Sig. (2-tailed) Covariance ERR Pearson -.333(*) (**) -.648(**) Sig. (2-tailed) Covariance TAR Pearson (*) (**) (*) Sig. (2-tailed) Covariance ** is significant at the 0.01 level (2-tailed). * is significant at the 0.05 level (2-tailed). Source: SPSS Database-Authors Calculations Table 5 shows that LTDE has a statistically strong positive relationship and is statistically significant by 1% with CR & QR. ITOR & ERR have weak relationship and statistically significant at 5%. The remaining ratio shows the relationship but those are not statistically significant. CR has a highly statistically significant relationship by 1 % with LTDE & QR, & DPR & TAR are less statistically significant by 5% and has a weak relationship. QR is highly statistically significant by 1 % with LTDE & CR is less statistically significant by 5% and has weak relationship. 73

11 ITOR is a highly statistically significant by 1 % with TAR & LTDE, DPRC is less statistically significant by 5% and has weak relationship. DPR has a highly statistically significant by one %with DPRC & ERR, CR is less statistically significant by 5% and has weak relationship. DPRC has a highly statistically significant by 1 % with DPR & ERR, ITOR & TAR are less statistically significant by 5% and has weak relationship. ERR has a highly statistically significant by one %with DPR & DPRC, LTDE have less statistically significant by 5% and has weak relationship. TAR has a highly statistically significant by one % with ITOR & CR, DPRC have less statistically significant by 5% and has weak relationship. From the above study it is found that QR & CR (.906) of the above selected sample automobile companies have strong and highly significant relationship resulting in more liquidity and consistency in terms of meeting current liabilities of the firm. Conclusion Ratio analysis helps to compare the financial statements of the firms and comparison of financial performance also investigated over a period of time. Firms have made use of more borrowed funds. The study found the positive strong relationship between current ratio and quick ratio. It evolves the effective inventory management and conversion period leads to higher the liquidity power to the firm. Therefore, the study proves that there is a significant change in the mean value of financial ratios. Generally, the level of current ratio varies from industry to industry depending on the special industry characteristics. A firm differs from the industry ratio because of its policy. Many analyst believe that quick ratio indicates an adequate ability to satisfy current obligations but one should aware that such general rule do not apply to all situations. A more significant evaluation is obtained by comparing the current ration and quick ratio. The selected sample automobile companies had no significant relationship in terms of long term debt and dividend per share. It clearly shows that the proportionate change of debt of selected automobiles firm do not influence or impact the firm s decision. Normally, the borrowed money yield a return higher than the interest, the difference in the profit earned and the interest paid, increase the return on equity. If researcher incorporates the market performance ratio with a study period of more than 7 years, it may leads to find the significant output by considering overall companies in individual sector. BIBILOGRAPHY Articles and Journals: 1. Gary.W.Slenow (2003).Douglas.A. Hersaley & Hendrik.P.Vandales (2006), M.Kabir Hassan & Dr.Shari Lawrance (2007) www. iosrjournals.org.vol 16. Issue 6. ver.1 (jun2014). Pp IOSR journal of business & management (IOSR-JBM) 2.Sumesh Kumar & Dr.Gurubachan kaur Bhatia (2009) International journal of advanced research in management & social science. Vol 3. Issue no.9 pp Narayanan K. (1997) Financial analysis ISSN: Management and Soc Maksymiuk (2006) Impact Factor: Vol. 3 No. 9 September

12 4. Amalendu Bhunia, Sri Somnath Mukhuti and Sri Gautam Roy Financial Performance Analysis-A Case Study, 25 th may 2011 Current Research Journal of Social Sciences 3(3): , 2011ISSN: Maxwell Scientific Organization, Raju Sharma Comparing and Analyzing Financial Statements to Make an Investment Decision: Case Study of Automotive Industry Vaasan Ammattikorkeakoulu University of Applied 2012 Iosr Journal Of Business And Management (IOSR-JBM) e-issn: X, p- ISSN: Volume 16, Issue 6. Ver. I (Jun. 2014), PP Page 6. Sumesh Kumar* Dr. Gurbachan Kaur Bhatia FINANCIAL PERFORMANCE OF INDIAN AUTOMOBILE COMPANIES AFTER LIBERALIZATION: A COMPARATIVE STUDY OF MARUTI SUZUKI AND TATA MOTORS ** Vol. 3 No. 9 September IJARMSS 195International Journal of Advanced Research in ISSN: Management and Social Sciences 7. Bagechi, S.K.(2004), Accounting Ratios for Risk Evaluation, The Management Accountant, (July)Vol-39, No.7-pp Dr. Nishi Sharma Financial Analysis of Indian Automobile Industry International Journal of Research in Computer Application & Management file:///c:/documents%20and%20settings/user/my%20documents/downloads/ijrcm-2-cvol-1_issue-9_art- 21%20%282%29.pdf Books: 1. C. R. Kothari. (2004). Research Methodology Methods & Techniques. New Age International Publishers. 2. I M. Pandey. (2009). Financial Management. Vikas Publishing House Pvt. Ltd. 3. M Y. Khan & P. K Jain. (2007). Financial Management. Tata McGraw-Hill Education. Websites: control.com 2. Economic Dailies: 1. The Economic Times 2. The Times of India 3. Hindustan Times 4. Financial Express 75