Annexure – I
COMPARATIVE STUDY AND RATIO ANALYSIS
Submitted in partial fulfillment of PGDM
PGDM Batch 2011-13
Submitted To:
Submitted By:
Dr. MADAN MOHAN
SYED ALTAF HUSSAIN
P.G.D.M (7072)
Section- B
Batch- 2011/13
Annexure – I (Inner Copy)
TOPIC OF SUMMER TRAINING
Comparative Study And Ratio Analysis
Submitted in partial fulfillment of PGDM
PGDM BATCH 2011-13
Submitted By
SYED ALTAF HUSSAIN
Faculty Guide
Director Academics
Annexure II
Declaration
I SYED ALTAF HUSSAIN hereby declare that the project titled MUTUAL FUNDS is an
original work carried out under the guidance of PROF. JAGDEESH REDDY.
The report submitted is a bonafide work of my own efforts and has not been
submitted to any institute or published before.
Signature of the student
SYED ALTAF HUSSAIN
Date:
Place:
Annexure – III
Certificate from the organization
TO WHOMESOEVER IT MAY CONCERN
This is to certify that Mr. SYED ALTAF HUSSAIN of PGDM has successfully completed
Summer Training Program for a period of 45 days with FUTURE CAPITAL SECURITIES
LTD. from 30th APRIL 2012 to 14th JUNE 2012.
As per our assessment he is hard working and his performance has been good during
the training program.
We wish him all the success for his future.
Signature:
NAVEEN KUMAR DHONTHI
MANAGER
Date:
Place:
Annexure – IV
Faculty Guide Certificate
I Prof. JAGDEESH REDDY certify Mr. SYED ALTAF HUSSAIN that the work
done and the training undertaken by him is genuine to the best of my
knowledge and acceptable.
Signature
Prof. JAGDEESH REDDY
Date:
Annexure V
Acknowledgement
Words of gratitude
Signature of the student
SYED ALTAF HUSSAIN
Date:
Place:
Annexure VI
INDEX
Chapter no.
Content
Page no.
1
INTRODUCTION
8
2
COMPANY PROFILE
10
INDUSTRY PROFILE
LITERATURE REVIEW
3
RESEARCH METHOLOGY
4
DATA COLLECTION
ANALYSIS & INTERPRETATION
5
FINDINGS
RECOMMENDATIONS
CONCLUSION
Bibliography
BOOKS/ARTICLES REFERRED
WEBSITES REFERRED
CHAPTER:1 INTRODUCTION
India is the second largest manufacturer and producer of two-wheelers in the world. It
stands next only to Japan and China in terms of the number of two-wheelers produced
and domestic sales respectively. This distinction was achieved due to variety of reasons
like restrictive policy followed by the Government of India towards the passenger car
industry, rising demand for personal transport, inefficiency in the public transportation
system etc.
The Indian two-wheeler industry made a small beginning in the early 50s when
Automobile Products of India (API) started manufacturing scooters in the country. Until
1958, API and Enfield were the sole producers.
In 1948, Bajaj Auto began trading in imported Vespa scooters and three-wheelers. Finally,
in 1960, it set up a shop to manufacture them in technical collaboration with Piaggio of
Italy. The agreement expired in 1971.
In the initial stages, the scooter segment was dominated by API; it was later overtaken
by Bajaj Auto. Although various government and private enterprises entered the fray for
scooters, the only new player that has lasted till today is LML.
Under the regulated regime, foreign companies were not allowed to operate in India. It was
a complete seller market with the waiting period for getting a scooter from Bajaj Auto
being as high as 12 years.
The motorcycles segment was no different, with only three manufacturers viz Enfield, Ideal
Jawa and Escorts. While Enfield bullet was a four-stroke bike, Jawa and the Rajdoot were
two-stroke bikes. The motorcycle segment was initially dominated by Enfield 350cc bikes
and Escorts 175cc bike.
The two-wheeler market was opened to foreign competition in the mid-80s. And the then
market leaders - Escorts and Enfield - were caught unaware by the onslaught of the 100cc
bikes of the four Indo-Japanese joint ventures. With the availability of fuel efficient low
power bikes, demand swelled, resulting in Hero Honda - then the only producer of four
stroke bikes (100cc category), gaining a top slot.
The first Japanese motorcycles were introduced in the early eighties. TVS Suzuki and
Hero Honda brought in the first two-stroke and four-stroke engine motorcycles
respectively. These two players
Initially started with assembly of CKD kits, and later on progressed to indigenous
manufacturing. In the 90s the major growth for motorcycle segment was brought in by
Japanese motorcycles, which grew at a rate of nearly 25% CAGR in the last five years.
The industry had a smooth ride in the 50s, 60s and 70s when the Government
prohibited new entries and strictly controlled capacity expansion. The industry saw a
sudden growth in the 80s. The industry witnessed a steady growth of 14% leading to a
peak volume of 1.9mn vehicles in 1990.
THE TWO WHEELER IN INDIA:
The two-wheeler industry in India has grown rapidly in the country since the
announcement of the process of liberalization in 1991 by the then finance minister Dr.
Manmohan Singh, now Prime Minister of India.
Previously, there were only a handful of two-wheeler models available in the country.
Currently, India is the second largest producer of two-wheelers in the world. It stands next
only to China and Japan in terms of the number of two-wheelers produced and the sales of
two-wheelers respectively. In the year 2005-2006, the annual production of two-wheelers in
India stood at around 7600801 units.
The trend of owning two-wheelers is due to a variety of facts peculiar to India. One of the
chief factors is poor public transport in many parts of India. Additionally, two-wheelers offer
a great deal of convenience and mobility for the Indian family.
Bajaj auto began trading in imported Vespa Scooters in 1948. Meanwhile Automobile
Products of India (API) commenced production of scooters in the country in the early 50‟s.
Until 1958, API and Enfield were the only producers of two-wheelers in
India.
However, Bajaj signed a technical collaboration in 1960 with Piaggio of Italy to produce
Bajaj Scooters. This deal expired in 1971.
The condition of motorcycle manufacturers was no different. Until the mid 80‟s, there
were only three major motorcycle manufacturers in India namely Rajdoot, Escorts, and
Enfield. The two- wheeler market was opened to foreign manufacturers in the mid 80‟s.
The industry, which had seen a smooth ride before, faced fierce foreign competition.
Motorcycle companies like the Yamaha, Honda, and Kawasaki, set up shop in India in
collaboration with various Indian two-wheeler companies. Companies like Escorts, Rajdoot
and faced immense competition from smaller 100 cc Japanese technology motorbikes.
Bikes manufactured by Hero Honda, the only company manufacturing four-stroke bikes at
that time, gained massive popularity.
In the mid 80‟s, Kinetic introduced a variomatic gearless scooter in collaboration with
Honda. This scooter became instantly popular with the younger generation, especially
people who found it difficult to use geared scooters. The introduction of scooterettes
created another segment for people such as women and teenagers who could not get used
to driving either motorcycles or gearless scooters. Many companies such as Kinetc, TVS,
and Hero also started manufacturing mopeds that proved immensely popular with people
who wanted a simple riding machine.
The change in the government‟s policy owning to pollution control norms and the Kyoto
agreement
saw the phasing out of two stroke two-wheelers from production. Currently there are
around 10 two-wheeler manufacturers in the country, they being Bajaj, Hero, Hero Honda,
Honda, Indus, Kinetic, Royal Enfield, Suzuki, TVS, and Yamaha.
The latest trend in the two-wheeler market is the introduction of electrically operated
vehicles from a range of manufacturers such as Indus and Hero. These can be
recharged from convenient household electrical points. The only disadvantage is speed,
which is restricted to around 25 miles per hour.
Chapter 2: Company Profile
Hero Honda Motors Ltd
Another good year
Share Price Chart
BSE Code 500182
NSE Code HEROHONDA
Shareholding pattern (%)
Bloomberg Code HH@IN
Government 55.0
Market Cap Rs110bn
Institutional 32.4
CMP Rs553
Public 11.2
Others 1.4
52week H/L 597/320
Face Value Rs2
Share Holding Pattern
Company background
Hero Honda Motors Ltd (HHML), established in 1984, is a joint venture between Hero
Group, the world’s largest bicycle manufacturers and the Honda Motor Company of Japan.
Today it is the world’s largest two-wheeler manufacturer. Hero Group belongs to the Munjal
family and came into existence in 1956. It manufactured bicycle components in the early
1940’s and later became the world’s largest bicycle manufacturer.
HHML manufactures a range of motorcycles with brands like CD Dawn, Splendor,
Passion, CBZ, Karizma and Ambition. It is the market leader in two-wheelers and its
Splendor range of bikes is the largest selling motorcycle in the country.
KEY HIGHLIGHTS
Market leader in two‐ wheelers and domestic motorcycle segment
Hero Honda is a market leader in the two‐ wheeler segment with a 39% share of
sales volumes in H1FY11. Bajaj Auto, the closest competitor, has a 27% share
followed by TVS Motors’ 15%. Hero Honda’s market share is on account of its
dominant position in the domestic motorcycle segment, where it has a 53% market
share, led by leadership in the executive sub‐ segment.
Market share has declined but volume growth continues
Despite Hero Honda’s market share declining to 53% (from 60% in FY09) in the
domestic two‐ wheeler segment; it has registered volume growth of 24% in FY10
and 8% growth H1 FY11 thanks to the expanding two‐ wheeler market.
Advantage Hero Honda: Strong distribution with rural edge
Over the years, Hero Honda has built its distribution network of 550 dealers and
3,500 service centers. More than 2,000 rural channel partners work on the rural
vertical through the ‘Har Gaon Har Aangan’ program. Over the past four years, its
distribution network has grown nearly 2x compared to peers.
The distribution network is fairly spread across the rural and semi‐ urban areas,
leading to a strong growth of 23.6% in sales volumes in FY10. The rural sector
contributes ~44% to Hero Honda’s total sales volumes.
Late entrant in scooters, yet a decent share in pie
Hero Honda launched its first scooter ‐ Pleasure ‐ in FY06. Since then it has
augmented its market share from 2% in FY06 to 16% in FY10. Hero Honda’s focus
on urban women and youth in this segment has helped it deliver volumes. It has
only one brand, Pleasure; while Honda has three brands – Activa, Aviator and Dio.
KEY RISKS
• Possible exit of its JV partner—Honda
• The major raw materials used to manufacture two‐ wheelers are steel (40% of
basic raw material costs), aluminum (30% of basic raw material costs) and plastic
(8% of basic raw material costs).
Any inability to pass on the increase in the raw materials cost could affect the
EBITDA margins.
• Slowdown in financing of two‐ wheelers.
Dividend payment:
The Board of Directors has recommended 1000 per cent dividend for the financial year
2010-11. The dividend, if approved by shareholders at the ensuing AGM shall be paid to
those shareholders whose names appear on the Register of Members as on Friday,
September 4, 2011. In respect of shares held in electronic form, the dividend will be
payable to the beneficial owners of the shares as on the closing hours of business on
Monday, August 31, 2011 as per details furnished by the Depositories for this purpose.
Listing on Stock Exchange
As on March 31, 2011, the securities of the Company are listed on the following
exchanges:
1. Bombay Stock Exchange Limited, (BSE) based at Phirozth Jeejeebhoy Towers, 25
Floor, Dalal Street, Mumbai 400 001; &
2. National Stock Exchange of India Limited, (NSE) based at Exchange Plaza, Plot No. C/1,
G Block, Bandra Kurla Complex, Bandra East, Mumbai 400 051.
Further, the Company had applied for delisting of its shares from The Calcutta Stock
Exchange Association Limited (CSE) and complied with the procedural formalities for the
same immediately after the approval received from the shareholders, but the final approval
of the same is still awaited. However, the in-principal approval has been received after the
grant of approval by the De-listing Committee of the CSE.
BOARD OF DIRECTORS
No.
Name of the Directors
Designation
1
Mr. Brijmohan Lall Munjal
Chairman & Whole-time Director
2
Mr. Pawan Munjal
Managing Director & CEO
3
Mr. Toshiaki Nakagawa
Joint Managing Director
4
Mr. Sumihisa Fukuda
Technical Director
5
Mr. Om Prakash Munjal
Non-executive Director
6
Mr. Sunil Kant Munjal
Non-executive Director
7
Mr. Masahiro Takedagawa
Non-executive Director
8
Mr. Satoshi Matsuzawa
Non-executive Director
(Alternate Director to Mr. Takashi
Nagai)
9
Mr. Pradeep Dinodia
Non-executive & Independent Director
10
Gen. (Retd.) Ved Prakash Malik
Non-executive & Independent Director
11
Mr. Analjit Singh
Non-executive & Independent Director
12
Dr. Pritam Singh
Non-executive & Independent Director
13
Ms. Shobhana Bhartia
Non-executive & Independent Director
14
Mr. Sunil Bharti Mittal
Non-executive & Independent Director
15.
Mr. Meleveetil Damodaran
Non-executive & Independent Director
16.
Mr. Arun Nath Maira
Non-executive & Independent Director
BAJAJ AUTO
Company Profile
Bajaj Auto Limited
Type
Traded as
Public
BSE: 532977, NSE: BAJAJ-AUTO
BSE SENSEX Constituent
Industry
Automotive
Headquarters
Pune, Maharashtra, India
Key people
Rahul Bajaj (Chairman)
Products
Motorcycles, three-wheeler vehicles and cars
Revenue
16,974 crore (US$3.39 billion) (2011)[1]
Net income
3,454 crore (US$689.07 million) (2011)
Employees
10,250 (2006-07)
Parent
Bajaj Group
Website
www.bajajauto.com
History
A small factory that forayed into sugar manufacturing in 1931 is today ranked among
the top ten business houses in India, along with stalwarts such as Tata and Wipro. The
Bajaj Group was founded in 1926 by Jamnalal Bajaj and after independence, his son
Kamalnayan consolidated and diversified the group, branching into various industries, such
as electrical equipment and appliances, cement, ayurvedic medicines, iron and steel,
automobiles, insurance, travel and finance. At the turn of the century, the business
conglomerate had net assets worth $1,333 million and a sales turnover of more than
$1,300 million. In 2001, the Centre for Monitoring Indian economy (CMIE) ranked the Bajaj
Group as the fifth largest among the business families in India. The group has 37
companies, including Bajaj Electricals, Bajaj Allianz General Insurance and Bajaj Auto,
under its umbrella and over 25,000 employees worldwide.
Tryst with two-wheelers
Bajaj Auto is the group's flagship company. It was founded as M/s Bachraj Trading
Corporation Private Limited in November 1945. Bajaj Auto has its headquarters in Pune,
Maharashtra; its main business was to import and sell two and three wheeler automobiles
in India. In 1959, Government of India licensed the company to manufacture two and three
wheeler automobiles.
Currently, Baja Auto is headed by Rahul Bajaj as Chairman, assisted by his son Rajiv
Bajaj as Managing Director. Under Rahul Bajaj's, the turnover of Bajaj Auto has escalated
from less than a quarter of a million dollars to $2.3 billion. Under the latter's leadership,
Bajaj Auto is now ranked 31st in the Forbes 40 India list.
Bajaj Auto manufactures scooters, motorcycles and three-wheeler vehicles for
passenger and goods transport. The company also manufactures spare parts for all their
vehicles. Bajaj Auto is ranked as India's largest and the world's fourth largest two and three
wheeler manufacturer and it exports these vehicles to a number of countries in Asia,
Europe, Latin America, and the US. The company has now ventured into the four-wheeler
market as well.
Divide to multiply
For the manufacturing and financing segments to achieve greater efficiency, the demerger
of Bajaj Auto was approved in May 2007. The various businesses that made up Bajaj Auto
were demerged to form two distinct entities; the newly incorporated subsidiaries were Bajaj
Holdings and Investment (BHIL) and Bajaj Finserv (BFL). Moneycontrol.com reports that
after the demerger, Bajaj Auto would deal with autos, BHIL would be the investment
company and BFL would cover wind power, financial services and insurance.
Gaining ground
In November 2007, The Telegraph reported that Bajaj Auto subsidiary, Bajaj Auto
International Holdings BV (based in Netherlands) acquired a 14.5 percent stake in KTM
Power Sports AG for Rs. 300 crore. KTM is Europe's second largest sports motorcycle
manufacturer. The deal will provide the know-how for joint development of water-cooled 4stroke 125cc and 250cc engines at the Bajaj Pune plant, to be used by both the parties and
Bajaj will distribute KTM products in India and Southeast Asian countries where Bajaj has a
distribution network. A Bajaj Auto press release for the year 2007-2008 revealed that it has
increased the KTM Power Sports AG stake to 24.45 percent.
In May 2008, Bajaj Auto entered a three-way joint venture with Japanese Nissan
Motor Co. and French Renault to develop, produce and market a low cost car named ULC.
The wholesale price of ULC would start at $2500, and this car is predicted to be the first
major competition for the Tata's one lakh Nano. The new company will be constituted with
Renault and Nissan owning 25 percent each and 50 percent will be owned by Bajaj Auto.
Initial planned capacity of this company is estimated at 400,000 units per year. ULC is
expected to hit the markets by 2011.
King of the road
Bajaj Auto launched the new Platina 125 DTS-Si electric start range of motorcycles in
September 2008, targeting 10,000 unit sales in the first month. In 2007, the demand
upsurge for Platina and XCD 125 DTS-Si was so intense that dealerships could not handle
it. The waiting period increased for delivery and Bajaj Auto had to increase production to
75,000 per month.
In September 2008, company sales reached 217,365 motorcycles, an increase of six
percent over the previous year. Similarly, the total two and three-wheeler count in
September 2008 showed an increase of six percent over the previous year's numbers.
Number speak
Bajaj Auto reported a net profit of Rs. 137.7 crore during the last quarter of 2008.
Revenues touched Rs. 2,081 crore despite a 12 percent fall in motorcycle sales. The
operating profit of Rs. 179 crore recorded a 34 percent decline compared to the previous
year. During the fiscal year 2007-2008, Bajaj Auto informed a net profit of Rs. 749.5 crore
on revenues of Rs. 9,164 crore.
Applause for the auto king
Over the years, Bajaj Auto has been lauded both for its products and for its
manufacturing processes. Besides, several export excellence awards have added to the
Bajaj Auto stable.
CNBC-TV18 conferred the Autocar Auto Bike of the Year 2007' award on the Bajaj
Pulsar DTS-Fi motorcycle. Bajaj Auto won the Total Productive Maintenance (TPM)
Excellence' award in 2006 - bestowed by the Japan Institute of Plant Maintenance (JIPM) in
recognition of the state-of-the-art Bajaj Auto manufacturing processes at Waluj and
Chakan. NDTV Profit handed over the Bike of the year 2007' award to Bajaj's Platina
100cc.
Key highlights
Market share in motorcycle segment improves in FY10
Successive launches of new models in the executive and premium segments and the
presence of its own financing arm (Bajaj Auto Finance) have driven growth in BAL’s
motorcycles business. In FY10, BAL launched new models like Pulsar 135 and Discover
100, which enabled it to regain a marginal market share of around 2% from 21.9% in FY09
to 24.3% in FY10. For April 2010-August 2010, BAL has had a market share of 27% in the
segment.
Market leader in passenger three-wheelers segment
Bajaj is the market leader in the passenger three-wheeler segment with a 47% market
share
in FY10. Though BAL’s three-seater is one of the most preferred across cities,
offering the option of different fuels and the highest number of variants, the company is
increasingly facing competition from Piaggio, Greaves Vehicles Limited and TVS. In FY10,
BAL’s passenger three-wheeler volumes grew around 46%, outperforming the industry
which grew by around 40%.
KEY RISKS
1. Rising raw materials prices like steel, rubber
2. Stiff competition from competitors in two-wheeler and three wheeler
segment
3. Foreign exchange fluctuations as exports make up around 15% of total revenues
in FY10
BACKGROUND
BAL is the second-largest player in the domestic two wheeler industry and the largest
Indian exporter of two and three-wheelers. The company has three plants in
Maharashtra — at Chakan, Waluj and Akurdi, and one in Pantnagar, Uttarakhand with
total capacity of 4.3 million units as of 2009-10. The company has two insurance joint
ventures (i.e.) Bajaj Allianz General Insurance Company Limited and Bajaj Allianz Life
Insurance Company Limited (with a 74% equity holding in both). BAL was de-merged in
2007-08. Following this, the automotive business continued to be a part of BAL while
the consumer and insurance businesses were transferred to a new company – Bajaj
Fin Serv. The other company formed was Bajaj Holdings and Investments (BHIL),
which holds a 30% stake in BAL and Bajaj Fin serv. BAL operates in some international
markets through fully-owned subsidiaries such as Bajaj Auto International Holdings B V
(BAIH BV) and PT Bajaj Indonesia (PT BAI), based in Netherlands and Indonesia,
respectively.
FINANCIAL PROFILE:
BAL’s revenues grew by 36% in FY10, driven by volume growth in the motorcycles
segment. New model launches in the executive and premium segment also improved
the company’s realizations. There was also a price increase of around 2-3% on account
of vehicles certified as per new emission norms.
Operating margins increased sharply by around 900 bps to 21.5% in FY10
as compared to 12.5% in FY09 on account of the increase in revenues and decline in
raw material costs. Improved product m i x in the motorcycles segment and an increase
in export realizations also helped.
Management - Bajaj Auto
Name
Designation
Rahul Bajaj
Chairman / Chair Person
Rajiv Bajaj
Managing Director
Kantikumar R Podar
Director
D J Balaji Rao
Director
J N Godrej
Director
Suman Kirloskar
Director
Nanoo Pamnani
Director
P Murari
Director
Name
Designation
Madhur Bajaj
Vice Chairman
Sanjiv Bajaj
Non Executive Director
Shekhar Bajaj
Director
D S Mehta
Director
S H Khan
Director
Naresh Chandra
Director
Manish Kejriwal
Director
Niraj Bajaj
Director
INDIAN AUTOMOTIVE INDUSTRY
Two-wheeler segment is dominated by motorcycles
•
The domestic two-wheeler industry has grown steadily at a CAGR of 8.5 per cent
from 4.2 million in 2001 to 7.43 million in 2009.
•
The motorcycle segment continues to dominate the market.
•
Entry-level bikes (engine power below 125cc and price in the range of US$ 850–
1,000) account for around 80 per cent of sales.
•
The cost of ownership and economics of operations are key purchase criteria.
•
The premium-bike segment (engine power above 150cc and price in the range of
US$ 1,200–2,000) is growing at a faster pace than entry-level vehicles; this is an
indication of the increasing affluence of customers.
•
Recent trends indicate that 100cc bikes are being preferred over 125cc bikes by the
market.
ROFILE OF INDIAN AUTOMOTIVE INDUSTRY
While the motorcycle segment is growing, the scooter segment is shrinking
•
The scooter segment, except the A2 segment, is shrinking.
•
Bikes in the 75cc to 125cc range corner the major share of the two-wheeler
segment.
•
The B3 segment is the fastest-growing segment in the Indian two-wheeler market.
•
The C1 segment continues to fall owing to lower demand for mopeds.
Domestic two wheeler industry.
10
8
6
4
2
0
2002
2003
2004
2005
2006
2007
2008
2009
Domestic two wheeler industry.
YEAR
2002
2003
2004
2005
2006
2007
2008
2009
UNITS IN MILLIONS
4.1
4.81
5.36
6.21
7.05
7.86
7.25
7.43
Two-wheeler segment is dominated by motorcycles
•
The domestic two-wheeler industry has grown steadily at a CAGR of 8.5 per cent
from 4.2 million in 2001 to 7.43 million in 2009.
•
The motor cycle segment continues to dominate the market.
•
Entry level bikes (engine power below 125cc and price in the range of US $ 8501000) account for around 80% of sales.
•
The cost of ownership and economics of operations are key purchase criteria.
•
The premium bike segment (engine power above 150cc and price in the range of
US$ 1,200–2,000) is growing at a faster pace than entry-level vehicles; this is an
indication of the increasing affluence of the customers.
•
Recent trends indicate that 100cc bikes are being preferred over 125cc bikes by the
market.
While the motorcycle segment is growing, the scooter segment is shrinking.
•
The scooter segment, except the A2 segment, is shrinking.
•
Bikes in the 75cc to 125cc range corner the major share of the two-wheeler
segment.
•
The B3 segment is the fastest-growing segment in the Indian two-wheeler market.
•
The C1 segment continues to fall owing to lower demand for mopeds.
Segment
A1
Description
Share in
Share in 2007-
Share in
2001-02
08
2008-09
5%
0.5%
0.2%
Scooter with engine
capacity less than 75cc.
A2
Scooter with engine
5%
13%
13%
capacity less than 75cc
and 125cc.
A3
Scooter with engine
12%
1%
0.5%
62%
58%
56%
5%
21%
25%
1%
0.5%
0.5%
10%
6%
5%
capacity between 125
and 250cc..
B2
Motorcycle with engine
capacity between 75cc
and 125cc.
B3
Motorcycle with engine
capacity less than
125cc and 250cc.
B4
Motorcycle with engine
capacity above 250cc.
C1
Mopeds
The domestic two-wheeler market is dominated by Indian players .
•
Hero Honda: Largest two-wheeler manufacturer in the world.
•
Bajaj Auto: Second-largest two-wheeler manufacturer and largest three-wheeler
manufacturer in India.
•
TVS Motor Co.: Third-largest two-wheeler manufacturer in India; has established a
manufacturing facility in Indonesia.
•
Honda Motorcycle & Scooter India (Pvt) Ltd. (HMSIL): Has recently entered the
Indian market through its own subsidiary (in addition to its joint venture Hero Honda).
•
Suzuki Motorcycle India Pvt. Ltd.: The Company started its India operations in
February 2006 through this fully-owned subsidiary.
In the two-wheeler market in India competition is intense with around 10 players competing
for a share of the industry.
The players include global giants such as Honda, Suzuki an Yamaha as well as Indian
players such as Bajaj and TVS.
The market leader is Hero Honda Motors closely followed by Bajaj Autos.
The segment is characterized by frequent new product launches with over 2 models
launched in 2007-08 and close to 16 models and variants launched in 2008-09.
YEAR WISE ECONOMIC SCENARIO:
2007:
During the year in review, the Indian Automobile industry faced perhaps one of its most
arduous tests. The emergence of short term factors like inflation and interest rates as well
as high input prices somewhat stymied the strong profitability levels that your Company has
been traditionally used to.
Wholesale price inflation crossed 6.5 per cent during the year after a long period. Prime
lending rates hovered between 12 and 13 per cent as a result of monetary tightening by the
Reserve Bank of India. In 2006, world export prices of minerals and non-ferrous metals
increased by 56 per cent. Since the automobile industry depends heavily on critical
commodities such as aluminum, nickel and steel, this made procurement expensive.
2008:
ECONOMIC PERFORMANCE
India continues to be one of the fastest-growing continental-size economies of the world.
The strong macro fundamentals are reflected in the GDP growth average of around 9
percent in the last 4 years. At a basic level, the rising aspirations of a consuming class,
favourable demographics and the increasing propensity to save and invest, have also
helped sustain the growth momentum since 2004.
India’s growth story has also been propelled by sustained industrial growth, and a booming
services sector – the latter accounting for more than 55 per cent of national output. Each of
these factors should sustain the country’s growth story in the long term.
OUTLOOK
Nevertheless, towards the end of the financial year, some areas of short term concern
started appearing. From February 2007 onwards, food prices began going up, and
combined with rising crude prices, led to a surge in inflation to double digit levels. This
prompted the Reserve Bank to increase money supply in the economy, which in turn led to a
rise in interest.
As interest rates began their alarming climb, many consumers began to postpone buying
decisions, affecting sales across a number of industry sectors. The global slowdown,
triggered by the US subprime housing crisis, and the subsequent turbulence in global
investment banks has worsened economic sentiment across continents, and India has been
no exception.
It is being widely interpreted that economic growth in 2008-09 might slow to less than 8 per
cent.
2009:
GLOBAL ENVIRONMENT
The world is travelling through its most barren road in seven decades, but the worst seems
to be over. According to the IMF, while the global economy is projected to contract by 1.4
per cent in 2009, it is expected to rebound gradually thereafter, and expand by 2.5 per cent
in 2010. There is now greater resolve among world leaders to ride this crisis as a team—
which is quite unprecedented. At the recent G-20 conference in London, heads of financial
ministers and heads of federal banks were close to completing the delivery of $850 billion of
additional resources agreed in April, including a plan to support social protection and safety
nets, boost trade and safeguard development in low income countries. This should boost the
process of recovery across the globe, not only in the West, but also in under developed
countries especially in Africa.
IMPACT ON INDIA
A rapid integration with the global economy ensured that India experienced the knock-on
effects of the global crisis. During the year in review, India’s financial markets – equity
market, money market, foreign exchange market and credit market –all came under
pressure mainly because of drying up of global finance, drying up of domestic capital
finance and lower corporate earnings.
There were two dimensions to the economic slowdown. In the first half of the year in review,
inflation ran into double digits as a result of the global crude shock and the global food grain
shortage. To control inflation, the RBI clamped down on money supply, and reduced liquidity
in the economy. By the time inflation started coming under control, domestic interest rates
started shooting up. Meanwhile, the global crisis erupted, putting further pressure on liquidity
levels.
By the second half of the year, slowdown was clearly apparent in export-intensive sectors,
both in the manufacturing and service side. By December, the slowdown turned into degrowth. The cutback in demand from Europe and the US was so sharp that even a
competitive rupee, which devalued by around 12 per cent during the year, couldn’t act as a
buffer. India ended 2008-09 with GDP falling from over 9 per cent in the previous year to a
little over six and a half per cent.
STAGING A RECOVERY
Today, however, India has been one of the first countries to stage a recovery. In the first
quarter of 2009-10, Indian GDP grew in excess of 6 per cent—compared to 5.8 per cent in
the previous quarter. This compares with 0.3 per cent growths posted by Germany and
France, two countries in Europe where the recession is believed to have ended.
India’s growth resilience today is being equated with China’s. This is an important
development. Even eighteen months ago, India’s ability to catch up with China was
questioned. With China easily clocking double digit growth rates, it was assumed that India
would take a few more years to come close. Now, as China’s export-centric economy
struggles on the one hand to cope with dwindling global trade, and on the other, tries to
grapple with a potential bubble in its real estate and stock market, the baton of providing the
world sustainable growth in the short term has passed to India.
LITERATURE REVIEW
Success in the competitive marketplace depends not only on building a better mousetrap,
but also on getting the financing right. A firm financing a new business venture must seek a
competitive mix of debt and equity based on the pricing of these funds in the capital market
and the appetite for risk among the investors who provide them. The chief financial officers
of major firms are preoccupied with balancing debt and equity in the corporate balance
sheet. In the world of project finance, this balancing act is even more difficult owing to the
structure of project financing deals, their greater risks, and the incentives that guide their
sponsors. These factors weigh heavily in deciding if there is enough equity in a project
finance deal.
Limited Recourse versus Full Recourse Financing In traditional corporate finance, a
company will keep a project on its balance sheet or fund it through a new company with the
backing of the parent firm. The added comfort of having full recourse to the parent lowers
the cost of capital because it lowers the market's perception of risks. Traditional project
financing, on the other hand, limits the recourse to the parent firm or firms by setting up a
legally distinct "special purpose company." As captured by its name, limited recourse
financing keeps the project debt off the balance sheet of the sponsors and relies instead on
the project's cash flows to raise debt and equity funds. Insulating the parent firm from the
project, however, entails a cost. Markets correctly perceive the greater risk of default in the
absence of stronger links to the sponsor and, therefore, charge higher interest on the debt
and demand a greater return on equity.
Capital Structure of Project Financing Both corporate and project finance deals draw capital
from equity (permanent capital) and some form of debt (temporary capital) either long-term,
short-term or quasi-equity. The mix of these forms of financing and their cost make up the
cost of capital to the firm or project. Evaluating the capital structure of a project is
complicated, but simply put, the capital structure is the proportion of equity in the total
financing package.
Why is Capital Structure an Issue? In theory, with perfectly competitive capital markets and
the absence of bankruptcy costs there would be arbitrage between the different sources of
funds. The cost of capital in a project would not depend on the relative amounts of debt and
equity. In a less-than-perfect world, with imperfect markets and substantial bankruptcy
costs, the amounts of debt and equity do affect costs and, therefore, the project's financial
viability. For example, the higher the ratio of debt-to-equity (leverage) in a project, the higher
the potential return to owner's equity. At the same time, raising the level of debt also
increases the risks to equity since a project's cash flow is variable and returns are paid after
operational costs, taxes, and debt service.
How Much Equity is Enough?
Initially at least, the overall capital cost of a project is decreased by replacing equity with
cheaper debt. However, default risk also increases with the amount of indebtedness. At
some point, higher levels of debt raise the cost of borrowing owing to the greater risk
premia.
On both debt and equity what, then, is the optimal amount of debt and equity?
Unfortunately, in practice it is extremely hard to assess the cost of debt and equity as
related to the capital structure of a project. In principle, equity should be provided up to the
point that the debt service can be consistently supported by the project's cash flow under a
variety of events, while allowing an adequate return to shareholders. Some factors in
selecting the right level of indebtedness, which in turn determines the level of equity, can be
identified.
Cash Flow Level and Variability:
Because the debt must be serviced first to avoid default, the more variable the cash flow of
a project the less debt can be carried. For example, a power project that has a guaranteed
price and output contract with a public utility can carry more debt than a project selling to a
spot market where both price and demand fluctuate. As well, the more positive the
correlation among inflows or outflows and the more negative the correlation between inflows
and outflows, the lower the level of debt.
Debt Maturity and Cost:
Although total interest payments are greater for long-term debt, yearly amortization
payments are lower than for a similar amount of short-term debt. As projects, tend to build
up cash flow slowly, it is crucial for debt to be long term and have a grace period, especially
during the construction phase. Surprisingly, cost is a relatively minor issue when dealing in
the same currency, since the cost variations between sources of debt are not likely to have
a sizable impact on debt capacity.
Availability of risk hedges:
If a project can hedge some of the risks (reduce the variability or the harmful correlations), it
may increase the level of debt it can carry. For instance, guaranteed input prices, forward
sales of output, or currency swaps to make all flows denominated in the same currency will
increase the debt capacity of a project by lowering risk.
Capitals at Risk Beyond concerns about the amount of equity are those issues related to
type of equity participation. A sponsor whose earnings are primarily from dividends paid on
equity, will have a longer-term view than, say, the sponsor who has sizable up-front fees for
advisory and/or construction services. Where there is sizable fee-based income, sponsors
are likely to exaggerate the debt capacity of a project and thus raise its long-term riskinessafter all, they get their returns at the beginning. If markets worked perfectly, these incautious
sponsors would be "weeded out" through competition. However, asymmetries in information
and imperfect competition do exist, so that lenders, who themselves receive up-front fees,
may accept higher levels of risk at rates that are incompatible with project fundamentals.
One way to ensure the longer term viability of a project is to have sponsor or equity holders
remain as managers of the project. The continued presence of those who have capital at
risk in the project assures more realistic cash flow projections and their realization through
good project management. The concept of capital at risk differs from that of the total equity
because it refers to only those own funds that sponsor-managers have invested in the
project and that are exposed to project risk. In the case where the original equity holder is
part of a construction consortium, equity capital may come from earnings on the
construction contract. In effect, the sponsor's exposure is only for those funds obtained from
the project. Once a reasonable return on its risk capital is earned, the sponsor may abandon
or neglect the project, even when it apparently has higher equity participation. Creditors,
both public and private, should consider the incentives that guide the key players in a project
before committing their own funds. The payback period for capital at risk (or the time
required to get their money out) is the clearest signal to the lender of the underlying interests
of each party. Viewed from the perspective of capital at risk, it is possible to see how the
lack of long-term financing for projects may reflect the lack of a long-term commitment by
sponsors. As a rule, the shorter the payback period the lower the amount of debt lenders
should be willing to provide.
About stocks
What Are Stocks?
In finance, a stock represents a share in the ownership of an incorporated company. In
industrial societies wealth used in production is owned in the aggregate mostly by
corporations rather than by individuals because of the huge investments required. This trend
began in 17th-century England when merchants formed JOINT-STOCKCOMPANIES,
pooling capital to be used jointly in trading and manufacturing. Participants then received
dividends, shares of the common PROFIT proportionate to their original investments.
The Definition of a Stock:
Plain and simple, stock is a share in the ownership of a company. Stock represents a claim
on the company's assets and earnings. As you acquire more stock, your ownership stake in
the company becomes greater. Whether you say shares, equity, or stock, it all means the
same thing. The wealth of individuals includes claims against, or investments in,
corporations. These are called securities, the two most common being bonds and stocks.
Corporate bonds are evidences of corporate debt to the bondholder. Stocks are evidences
of ownership, or equity. Investors buy stock in the hope that it will yield income from
dividends and appreciate, or grow, in value.
Different Types of Stocks:
There are two main types of stocks:
1. Common stock
2. Preferred stock
Common stock:
When people talk about stocks they are usually referring to this type. In fact, the majority of
stock is issued is in this form. Common shares represent ownership in a company and a
claim (dividends) on a portion of profits. Investors get one vote per share to elect the board
members, who oversee the major decisions made by management. Over the long term,
common stock, by means of capital growth, yields higher returns than almost every other
investment. This higher return comes at a cost since common stocks entail the most risk. If
a company goes bankrupt and liquidates, the common shareholders will not receive money
until the creditors, bondholders and preferred shareholders are paid.
Preferred Stock:
Preferred stock represents some degree of ownership in a company but usually doesn't
come with the same voting rights. (This may vary depending on the company.) With
preferred shares, investors are usually guaranteed a fixed dividend forever. This is different
than common stock, which has variable dividends that are never guaranteed. Another
advantage is that in the event of liquidation, preferred shareholders are paid off before the
common shareholder (but still after debt holders). Preferred stock may also be callable,
meaning that the company has the option to purchase the shares from shareholders at
anytime for any reason (usually for a premium). Some people consider preferred stock to be
more like debt than equity. A good way to think of these kinds of shares is to see them as
being in between bonds and common shares.
About Stock Market
Why invest in the stock market?
It is risky to invest in stock market as returns are not sure. Also it is difficult to say with
surety whether they will make a profit or loss but the average investor buys stock hoping
that the stock's price will rise, so the shares can be sold at a profit. They take the risk of the
price falling because they hope to make more money in the market, than they can with safe
investments such as bank CD's or government bonds.
What Stock Market Returns to Expect?
Stock market returns rely solely on what types of investments you choose. The riskier the
investments, the more you can gain or lose in any year. However, if you are investing for a
long time horizon, then more risk will almost surely mean higher returns. Also note that this
assumes you invest in a diversified portfolio (i.e. not just one stock). There is no hard and
fast rule as to exactly what to expect when you invest. And because the amount of risk you
take in your investments can also not be measured accurately, it is even harder to know
what type of returns to expect.
Stock Valuation
Stock valuation can be considered as a tool for picking out stocks that will bring you good
returns. Imagine buying a car without knowing its value, or investing thousands of dollars in
property with no potential. sounds scary? Yet, this is exactly what it amounts to if you put
money into deals without assessing the value. Intelligent investment needs a lot of effort. If
you want to invest in stocks, the first thing to look out for is its valuation. Valuation of a stock
means the price or 'actual' value it holds. If you are doing stock valuation then you need not
study the stock chart every time or worry about the trend in the market or the interest rates
of the stocks. Never invest in stocks without knowing the value, because that is like going up
a blind alley where you have no idea what you will end up with. Investment in stocks without
valuation is like risking your money deliberately. While the fluctuations in the stock market
cannot be avoided, with the accurate valuation of a stock, you can minimize the risk factor. It
will ensure that you not shoot in the dark, and make sensible investments. Use the valuation
of stocks to serve as a guide for buying and selling stocks. Instead of pouring your hard
earned money into stocks without valuation, it is better to be patient and carry out a
thorough research to determine the worth of stocks before buying. You do not have to be a
math genius, or a stock market guru either. All you need is basic mathematical skill, and the
perseverance to look for all the valuation information available.
You cannot make the most of valuation if you do not understand or appreciate its
importance in the stock market. Spending a large amount in buying shares based on what
others say may well result in losses. Neither should you buy based on media hype, as this
may mislead you, and you may end up losing every penny you invested. Owning stocks of a
company in the form of shares can be a very good wealth-building tool for you as it grants
you claim on everything that the company owns. Hence, assessing the value of the
company, the profit it is generating and how beneficial it can prove to you, is a worthwhile
enterprise. Valuation can prove to be especially beneficial for middle class investors, as they
have limited resources to overcome losses occurred in stock market.
Therefore, valuation can be considered the key factor in buying stocks. Just as one
assesses the value of anything one buys on the basis of a specified standard, stocks too
need to be valued to determine whether the investment will bring you returns or not. Be
aware, there are companies in the stock market that are making huge profits, but their
stocks are of no value. Hence, spending time on carrying out your own research will help
you pick up the right stock for your portfolio.
Factors that Affect Stock Valuation
Overall market:
Often quoted is "all boats float up or down with the rise and fall of the tide", but the stock
market is not pulled up or down by the moon (at least I don't think so). When the market is
going up, 2 out of 3 stocks are rising. When the market is going down, 3 out of 4 are tanking
with it.
Industry:
There are market sectors, such as financial services and health care, that traditionally does
well. One year it may be coal (yes, in 1964), another year technology (most of 1990’s), or
gold (2002).
Companies within an industry:
When many companies within an industry are doing well, they tend to pull the rest of the
companies in the industry up with them. When they are failing, they tend to pull related
companies down with them.
News visibility:
When a company is in the news with new, leading-edge products, its stock price will
generally rise. But watch out for a quick reversal on ANY bad news.
Stock valuation Methods
There are several methods used to value companies and their stocks. They attempt to give
an estimate of their fair value, by using fundamental economic criteria. This theoretical
valuation has to be perfected with market criteria, as the final purpose is to determine
potential market prices.
Fundamental Analysis (fair value – intrinsic value based)
Fundamental analysis is seeking the reason for the price change or for its prediction. It is a
logical method. Fundamental Analysis uses the financial statements of the company to
investigate the value of the company with regard to its potential growth in earnings. It starts
with abroad analysis of the economy: economy growth, inflation, unemployment, money
supply and the level and direction of interest rates. By considering the indicators that affect
the economy, financial analysts can then forecast future levels of GDP. These forecasts are
used as a basis for projecting the future sales and earnings of the companies within these
industries. Fundamentalists then select the common stock with favorable sectors of the
economy. This method of forecasting is called top- down approach. The other approach
financial analyst use is the bottom- top approach, which starts with sales and earnings
projections for companies in different sectors of the economy in which they are. The analyst
look for certain characteristics of the companies as basis for selection as low sales- to –
price- earning ratio, low p/e ratio, or small or mid cap stocks.
The procedure to do fundamental analysis is first select the country or economy for
investment. Then select the sector on the basis of certain factors like most upcoming,
current market scenario, future potential, government support, demand, past performance,
etc. Then select the company on the basis as told above. In bottom-up approach sales is
forecasted on the basis of current new, past of the company, certain triggers which can
affect its sales or profit margin.
Then other calculations are done on the sales basis or are budgeted and net profit is
arrived. Finally the discounted cash flow statement is made to arrive at target price. Finally
the ratios are calculated which tell about valuation of the company like ROE, EPS, P/E, etc.
The most theoretically sound stock valuation method is called discounted cash flow (DCF)
method, involving discounting the profits (dividends, earnings, or cash flow) the stock will
bring to the stockholder in the foreseeable future, and a final value on disposition. The
discount rate normally has to include a risk premium which is commonly based on the
capital asset pricing model.
Arguments against Fundamental Analysis:
Those who do not use fundamental analysis have two major arguments against it. The first
is that they believe that this type of investing is based on exactly the kind of information that
all major participants in publicly traded markets already know, so therefore it can provide no
real advantage. If you cannot get a leg up by doing all of this fundamental work
understanding the business, why bother? The second is that much of the fundamental
information is "fuzzy" or "squishy," meaning that it is often up to the person looking at it to
interpret its significance. Although gifted individuals can succeed, this group reasons, the
average person would be better served by not paying attention to this kind of information.
Also it is difficult to quantify the qualitative factors that may affect a business.
About Value?
In general, the value of an asset is the price that a willing and able buyer pays to a
then an offer does not establish the value of the asset’
Several Kinds of “Value”
There are several types of value, of which we are concerned with four: Book Value – The
carrying value on the balance sheet of the firm’s equity (Total Assets less Total Liabilities)

Tangible Book Value – Book value minus intangible assets (goodwill, patents, etc)

Market Value - The price of an asset as determined in a competitive marketplace.

Intrinsic Value - The present value of the expected future cash flows discounted at
the decision maker’s required rate of return
Determinants of Intrinsic Value
There are two primary determinants of the intrinsic value of an asset to an individual

The size and timing of the expected future cash flows.

The individual’s required rate of return (this is determined by a number of other
factors such as risk/return preferences, returns on competing Investments, expected
inflation, etc.)
Note that the intrinsic value of an asset can be, and often is, different for each Individual
(that’s what makes markets work).
INDIAN EQUITY MARKETS
The turnover in the Indian equity markets (BSE and NSE combined) registered a strong
46% growth in FY10-11 (36% CAGR over the last 5 year). However, the markets have
witnessed a structural change over the last few quarters with a decline in the higher yielding
cash volume and a sharp rise in the lower yielding options volume. On the back of sustained
high competitive environment and the change in trading pattern, the blended broking yields
declined in FY11 leading to only a moderate growth in broking revenues. However,
expenses increased sharply with higher employee costs and costs associated with building
capacities in existing as well as new business lines. Consequently the brokerage houses’
profitability declined in FY10-11.
Some of the larger brokerage houses have reasonably well diversified revenue streams but
still remain largely vulnerable to capital markets environment. Given the current challenging
outlook for the equity markets over the short term, ICRA expects pressures on the revenue
growth over the next few quarters and consequently the overall profitability indicators.
SUMMARY
Strengths

Huge market potential given the under-penetration of equities as an investment
avenue amongst Indian investor community and an increasing investor interest in
new market segments like commodities, currency futures, interest rate derivatives.

Adequate capitalization levels, at least for larger players provides cushion to absorb
potential losses resulting from the short term challenges in the operating
environment.

A relatively diversified revenue profile at least for the larger players.

A more flexible cost structure arising from the increasing reliance on franchisee
model.
Challenges

Protecting brokerage yields and market share in the highly competitive and
fragmented equity brokerage industry; further accentuated by the rising share of the
low yielding options segment.

Volatility in earnings and profitability due to linkages with vagaries of capital market
and increasing cost of regulatory compliances.

Achieving a critical scale of operations and managing costs to sustain profitability
even in a prolonged dull phase.

Managing the inherent refinancing risk as players scale up capital market funding
book.

Continue investing in upgrading the risk management systems and monitoring
policies to mitigate associated risks, especially during periods of extreme market
volatility

Scaling up the non broking business lines to diversify revenue streams while
containing risks.

Greater dominance of the foreign brokerage houses in the institutional broking
segment
Strong growth in options trading drive industry broking volumes in FY11
The domestic equity brokerage turnover (BSE and NSE combined) registered an increase of
46% in FY10-11 to Rs 339 lakh crore led by a sharp 127% growth in the options segment2.
The derivatives segment contributed to 86% of the overall turnover in FY11 as compared to
76% in FY10 while the options segment accounted for 58% in FY11 (37% in FY10) and
futures segment for 29% during the same period (39% in FY10). Within the Options
segment, the index option based on NIFTY alone accounted for nearly 95% of the total
options volume, providing adequate liquidity and further fueling investor appetite. The strong
growth of the options segment may be partly attributable to the fact that beginning FY09, the
brokerage and Securities Transaction Tax (STT) in the options segment are charged on the
premium portion and not on the entire open interest. The activity levels were further
supported by the increasing comfort of traders/investors dealing with these products coupled
with higher participation in the Indian equities market by sophisticated investors such as
Foreign Institutional Investors (FIIs). While the FII participation increased to 15% in FY11
form 12% in FY10 and the proprietary trading segment participation declined to 22% from
26%, the Retail and Domestic Institutional Investor participation remained stable at around
56% and 7%, respectively in the same period.
Chart 1: Equity Broking Turnover – Year wise
Source: NSE and BSE website
The year-on-year changes in the brokerage volumes at the exchanges have been quite
volatile indicating the inherent volatile nature of the capital markets. The average daily
turnover3 in the equities segment stood at Rs 1.32 lakh crores witnessing a growth of 38%
in FY11. As the number of trading days was higher in FY11 than in FY10, the rise in the total
volumes at the exchanges is higher than the rise in the average daily turnover.
Chart 2: Y-o-Y growth – Equity Brokerage Turnover
Source: NSE and BSE website
However the more lucrative cash market volumes continue to fall
Equity brokerage volumes in the cash market have seen a continuous decline from its peak
in Q2FY10 with the average daily trading volumes (BSE and NSE combined) in the cash
segment at Rs 16,115 crores in Q4FY11 as compared to Rs 24,085 crores in Q2FY10.
Accordingly, the share of the cash segment at the exchanges declined from 26% in Q2FY10
to ~10% in Q4FY11. In Q4FY11, the options segment contributed to 65% of the total
turnover while the futures segment contributed the balance 25%. The total volumes declined
in Q1FY12 with further fall in the proportion of cash trades.
Chart 3: Equity Brokerage Turnover – Quarter wise
Source: NSE and BSE Website
Similar trend seen in number of trades as well
In terms of trading activity in the market, it declined in the cash segment with both decline in the number of
trades and the trade size at the NSE and BSE. The average trade size declined 7.3% y-o-y and stood at Rs
22,365 in FY11 as compared to Rs 24,115 in FY10.
Chart 4: Total number of trades– cash segment
Source: ICRA Research
Chart 13: Profitability
Source: ICRA Research
Brokerage houses’ net profitability declined in FY11 with moderate growth in revenues but
with costs increasing sharply. The return on networth stood at ~7.2% in FY11 as compared
to ~12.3% in FY10 on account of lower net profits. Going forward, ICRA expects the
profitability of the brokerage houses to remain muted in the next few quarters.
NOTE: Revenue
profile has been consolidated for the 16 brokerage houses (on consolidated
group basis) having an accumulated equity broking market share of ~29% in FY11 (32% in
FY10). For our analysis of market share, we have only considered non-proprietary trading
turnover of brokerage companies while the market universe includes proprietary trading. So
to that extent, their market share could be higher than quoted here.
S.no
Company
Rating
1
Anand Rathi Shares and Stock Brokers Ltd
LA-
2
Anand Rathi Commodities Limited
A2+(SO)
3
Angel Global Capital Pvt Ltd
A1
4
Bonanza Commodity Brokers Pvt Ltd
A2
5
Bonanza Portfolio Limited
A2
6
CD Integrated Services Ltd
A3+
6
Crosseas Capital Services Pvt. Ltd.
A4+
7
Dalmia Securities Private Limited
A1
8
Dimensional Seurities Private Limited
LBBB-
9
East India Securities Limited
LBBB+
10
Edelweiss Capital Limited
BB+
11
Emkay Global Financial Services Ltd
A2+
12
Gandhi Securities and Investment Pvt Ltd,
A3
13
Gupta Equities Private Limited
LBB+
14
HDFC Securities Limited
A1+
15
IDBI Capital Market Services Ltd
A1+
16
IDFC-SSKI Securities Private Limited
A1+
17
IL&FS Securities Services Ltd
A1+
18
India Infoline Limited
LAA-
19
Infinity.Com Financial Securities Limited
LBBB
20
Intime Spectrum Securities Limited
LBBB-
21
Inventure Growth & Securities Limited
A3+
22
Investsmart Financial Services Ltd
A1+
23
Jhaveri Securities Ltd
LBB+
24
Joindre Capital Services Pvt. Ltd.
LBBB-
25
Kantilal Chhaganlal Securities Pvt Ltd
LBB+
26
Karvy Stock Broking Limited
A1+
27
KIFS Securities Limited
A2+
28
Kotak Commodities Services Limited
A1+
29
Kotak Securities Limited
A1
30
Master Capital Services Limited
A3+
CHAPTER 4: DATA COLLECTION
Financial Highlights and Key Ratios: Hero Honda
Balance Sheet
Particulars
( In Rs. Cr. )
Mar ‘11
Mar ‘10
Mar ‘09
Mar ‘08
Mar '07
Sources Of Funds
Total Share Capital
39.94
39.94
39.94
39.94
39.94
Equity Share Capital
39.94
39.94
39.94
39.94
39.94
Share Application Money
0
0
0
0
0
Preference Share Capital
0
0
0
0
0
2,916.12
3,425.08
3,760.81
Reserves
2,946.30 2,430.12
Revaluation Reserves
0
0
0
Net worth
2,956.06
3,465.02
3,800.75
Secured Loans
1,458.45
0
0
0
0
32.71
66.03
78.49
132
165.17
Total Debt
1,491.16
66.03
78.49
132
165.17
Total Liabilities
4,447.22
3,531.05
3,879.24
3,118.24 2,635.23
Gross Block
5,538.46
2,750.98
2,516.27
1,938.78 1,800.63
Less: Accum. Depreciation
1,458.18
1,092.20
942.56
Net Block
4,080.28
1,658.78
1,573.71
125.14
48.14
120.54
5,128.75
3,925.71
3,368.75
Inventories
524.93
436.4
326.83
317.1
275.58
Sundry Debtors
130.59
108.39
149.94
297.44
335.25
47.75
1,863.48
217.49
130.58
35.26
Total Current Assets
703.27
2,408.27
694.26
745.12
646.09
Loans and Advances
783.48
438.46
325.8
196.37
268.04
23.77
43.73
2.08
0.51
0.52
1,510.52
2,890.46
1,022.14
942
914.65
0
0
0
0
0
Current Liabilities
5,316.40
3,965.69
1,678.93
Provisions
1,081.07
1,026.35
526.97
Total CL & Provisions
6,397.47
4,992.04
2,205.90
-4,886.95
-2,101.58
-1,183.76
-1,013.33
-694.09
0
0
0
0
0
4,447.22
3,531.05
3,879.24
131.9
73.04
100.54
Unsecured Loans
0
0
2,986.24 2,470.06
Application Of Funds
Capital Work in Progress
Investments
Cash and Bank Balance
Fixed Deposits
Total CA, Loans & Advances
Deferred Credit
Net Current Assets
Miscellaneous Expenses
Total Assets
Contingent Liabilities
782.52
635.1
1,156.26 1,165.53
408.49
189.92
2,566.82 1,973.87
1,455.57 1,171.50
499.76
437.24
1,955.33 1,608.74
3,118.24 2,635.23
56.37
165.59
Book Value (Rs)
148.03
173.52
Profit & Loss account
Particulars
190.33
149.55
123.7
(in Rs. Cr.)
Mar '11
Mar '10
Mar '09
Mar '08
Mar '07
Income
Sales Turnover
Excise Duty
Net Sales
Other Income
Stock Adjustments
Total Income
20,787.27 16,856.43 13,553.23 12,048.30 11,553.47
1,420.30
1,016.85
1,227.85
1,703.29
1,647.52
19,366.97 15,839.58 12,325.38 10,345.01
9,905.95
238.27
290.69
222.14
216.3
197.68
27
-11.54
22.09
-14.14
3.2
19,632.24 16,118.73 12,569.61 10,547.17 10,106.83
Expenditure
Raw Materials
14,236.45 10,822.99
8,842.14
7,465.36
7,255.66
Power & Fuel Cost
100.47
81.05
73.7
56.55
52.45
Employee Cost
618.95
560.32
448.65
383.45
353.81
Other Manufacturing Expenses
409.89
454.36
354.08
304.11
280.17
1,090.72
885.03
669.98
563.27
558.99
340.42
280.64
205.9
190.36
206.11
0
0
0
0
0
16,796.90 13,084.39 10,594.45
8,963.10
8,707.19
Selling and Admin Expenses
Miscellaneous Expenses
Preoperative Exp Capitalized
Total Expenses
Operating Profit
2,597.07
2,743.65
1,753.02
1,367.77
1,201.96
PBDIT
2,835.34
3,034.34
1,975.16
1,584.07
1,399.64
28.2
11.14
13.04
13.47
13.76
2,807.14
3,023.20
1,962.12
1,570.60
1,385.88
402.38
191.47
180.66
160.32
139.78
0
0
0
0
0
Interest
PBDT
Depreciation
Other Written Off
Profit Before Tax
2,404.76
2,831.73
1,781.46
1,410.28
1,246.10
0
0
0
0
0
2,404.76
2,831.73
1,781.46
1,410.28
1,246.10
476.86
599.9
499.7
442.4
388.21
Reported Net Profit
1,927.90
2,231.83
1,281.76
967.88
857.89
Total Value Addition
2,560.45
2,261.40
1,752.31
1,497.74
1,451.53
Preference Dividend
0
0
0
0
0
2,096.72
2,196.56
399.38
379.41
339.47
340.14
371
67.87
64.48
57.69
1,996.88
1,996.88
1,996.88
1,996.88
1,996.88
96.55
111.77
64.19
48.47
42.96
5,250.00
5,500.00
1,000.00
950
850
148.03
173.52
190.33
149.55
123.7
Mar '11
Mar '10
Mar '09
Mar '08
Extra-ordinary items
PBT (Post Extra-ord Items)
Tax
Equity Dividend
Corporate Dividend Tax
Per share data (annualised)
Shares in issue (lakhs)
Earnings Per Share (Rs)
Equity Dividend (%)
Book Value (Rs)
Ratios:
Particulars
Mar '07
Investment Valuation Ratios
Face Value
2
2
2
2
2
105
110
20
19
17
Operating Profit Per Share (Rs)
130.06
137.4
87.79
68.5
60.19
Net Operating Profit Per Share (Rs)
969.86
793.22
617.23
518.06
496.07
Free Reserves Per Share (Rs)
146.03
171.52
188.33
147.55
121.7
59.98
59.98
59.98
59.98
59.98
Dividend Per Share
Bonus in Equity Capital
Profitability Ratios
Operating Profit Margin (%)
13.4
17.32
14.22
13.22
12.13
11.26
16.01
12.64
11.57
10.63
Gross Profit Margin (%)
11.33
16.11
12.75
11.67
12.85
Cash Profit Margin (%)
11.36
14
10.84
9.59
9.98
Adjusted Cash Margin (%)
11.36
14
10.84
9.59
8.84
Net Profit Margin (%)
9.89
14
10.3
9.27
8.58
Adjusted Net Profit Margin (%)
9.89
14
10.3
9.27
7.44
Return On Capital Employed (%)
52.13
75.07
43.33
41.57
43.48
Return On Net Worth (%)
65.21
64.41
33.72
32.41
34.73
Adjusted Return on Net Worth (%)
61.34
58.87
30.73
28.14
30.11
148.03
173.52
190.33
149.55
123.7
148.03
173.52
190.33
149.55
123.7
52.13
75.07
43.33
41.57
43.48
Current Ratio
0.24
0.58
0.46
0.48
0.57
Quick Ratio
0.15
0.49
0.31
0.32
0.4
Debt Equity Ratio
0.5
0.02
0.02
0.04
0.07
Long Term Debt Equity Ratio
0.5
0.02
0.02
0.04
0.07
146.73
1,262.36
664.4
648.15
711.75
0.5
0.02
0.02
0.04
0.07
Financial Charges Coverage Ratio
96.48
255.15
142.76
108.14
93.44
Financial Charges Coverage Ratio
83.63
218.53
113.15
84.76
73.51
43.88
42.8
47.53
42.82
36.25
Profit Before Interest And Tax Margin
(%)
Return on Assets Excluding
Revaluations
Return on Assets Including
Revaluations
Return on Long Term Funds (%)
Liquidity And Solvency Ratios
Debt Coverage Ratios
Interest Cover
Total Debt to Owners Fund
Post Tax
Management Efficiency Ratios
Inventory Turnover Ratio
Debtors Turnover Ratio
162.08
122.63
55.1
32.7
40.11
43.88
42.8
47.53
42.82
47.48
Fixed Assets Turnover Ratio
3.7
6.29
5.34
5.89
9.54
Total Assets Turnover Ratio
4.68
4.8
3.36
3.52
3.99
3.7
6.29
5.34
5.89
6.01
Dividend Payout Ratio Net Profit
126.39
115.04
36.45
45.86
46.29
Dividend Payout Ratio Cash Profit
104.57
105.95
31.95
39.34
39.8
Earning Retention Ratio
-34.38
-25.86
60.01
47.19
46.62
-9.98
-15.06
65.36
55.65
55.06
0.67
0.03
0.06
0.13
0.19
96.55
111.77
64.19
48.47
42.96
148.03
173.52
190.33
149.55
123.7
Investments Turnover Ratio
Asset Turnover Ratio
Cash Flow Indicator Ratios
Cash Earning Retention Ratio
Adjusted Cash Flow Times
Earnings Per Share
Book Value
Cash Flow:
( In Rs. Cr. )
Particulars
Mar '11
Mar '10
Mar '09
Mar '08
Mar
'07
Net Profit Before Tax
2404.76
2831.73 1781.46 1410.28
1246.1
Net Cash From Operating Activities
2288.11
2686.64 1359.03 1211.78
625.05
Net Cash (used in)/from Investing
-1322.31
-527.63
-861.19
-781.01
Activities
Net Cash (used in)/from Financing
273.13
-989.18
-
-499.93
-432.33
-
Activities
Net (decrease)/increase In Cash and
2109.31
-23.38
49.7
474.34
-2.09
-1.56
Cash Equivalents
122.42
Opening Cash & Cash Equivalents
62.61
13.45
15.19
16.66
158.72
Closing Cash & Cash Equivalents
39.23
63.15
13.1
15.1
36.3
Financial Statements
Profit & Loss account
Particular
(in Rs. Cr.)
Mar '11
Mar '10
Mar '09
Income
Sales Turnover
17,386.51
12,420.95
9,310.24
934.71
607.70
610.07
16,451.80
11,813.25
8,700.17
1,176.00
22.50
-6.20
82.79
47.60
-24.49
17,710.59
11,883.35
8,669.48
11,965.30
8,187.11
6,502.10
86.61
70.35
60.89
494.33
411.76
366.67
61.77
57.54
57.08
Selling and Admin Expenses
450.18
407.61
381.73
Miscellaneous Expenses
237.76
221.94
225.56
Preoperative Exp Capitalised
-16.66
-15.67
-14.42
Total Expenses
13,279.29
9,340.64
7,579.61
Operating Profit
3,255.30
2,520.21
1,096.07
PBDIT
4,431.30
2,542.71
1,089.87
1.69
5.98
21.01
4,429.61
2,536.73
1,068.86
122.84
136.45
129.79
Other Written Off
0.00
0
0
Profit Before Tax
4,306.77
2,400.28
939.07
46.77
26.87
18.72
PBT (Post Extra-ord Items)
4,353.54
2,427.15
957.79
Tax
1,011.02
710.12
301.61
Reported Net Profit
3,339.73
1,702.73
656.48
Total Value Addition
1,313.99
1,153.53
1,077.51
Preference Dividend
0.00
0.00
0.00
1,157.47
578.73
318.3
Excise Duty
Net Sales
Other Income
Stock Adjustments
Total Income
Expenditure
Raw Materials
Power & Fuel Cost
Employee Cost
Other Manufacturing Expenses
Interest
PBDT
Depreciation
Extra-ordinary items
Equity Dividend
Corporate Dividend Tax
187.77
96.12
54.1
Shares in issue (lakhs)
2,893.67
1,446.84
1,446.84
Earning Per Share (Rs)
115.42
117.69
45.37
400
400
220
169.69
202.4
129.23
Per share data (annualised)
Equity Dividend (%)
Book Value (Rs)
BALANCE SHEET
Particulars
Mar '11
Mar '10
Mar '09
Sources Of Funds
Total Share Capital
289.37
144.68
144.68
Equity Share Capital
289.37
144.68
144.68
Share Application Money
0
0
0
Preference Share Capital
0.00
0.00
0.00
4,620.85
2,783.66
1,725.01
0.00
0.00
0.00
4,910.22
2,928.34
1,869.69
23.53
12.98
0.00
Unsecured Loans
301.62
1,325.60
1,570.00
Total Debt
325.15
1,338.58
1,570.00
5,235.37
4,266.92
3,439.69
Gross Block
3,395.16
3,379.25
3,350.20
Less: Accum. Depreciation
1,912.45
1,899.66
1,807.91
Net Block
1,482.71
1,479.59
1,542.29
149.34
120.84
106.48
4,795.20
4,021.52
1,808.52
Inventories
547.28
446.21
338.84
Sundry Debtors
362.76
272.84
358.65
Cash and Bank Balance
155.45
100.2
135.68
Reserves
Revaluation Reserves
Networth
Secured Loans
Total Liabilities
Application Of Funds
Capital Work in Progress
Investments
Total Current Assets
1,065.49
819.25
833.17
Loans and Advances
3,891.66
2,291.29
1,567.09
401.04
1.21
1.19
5,358.19
3,111.75
2,401.45
0.00
0.00
0.00
Current Liabilities
2,624.35
2,218.06
1,378.20
Provisions
3,925.72
2,248.72
1,224.15
Total CL & Provisions
6,550.07
4,466.78
2,602.35
-1,191.88
-1,355.03
-200.9
0
0
183.3
5,235.37
4,266.92
3,439.69
Fixed Deposits
Total CA, Loans & Advances
Deffered Credit
Net Current Assets
Miscellaneous Expenses
Total Assets
Cash Flow
Particulars
(in Rs. Cr)
Mar '11
Mar '10
Mar '09
Net Profit Before Tax
4350.75
2411.13
958.09
Net Cash From Operating Activities
2013.72
2737.11
411.49
-1096.64
-2163.62
-207.66
-862
-608.95
-123.03
55.08
-35.46
80.8
Opening Cash & Cash Equivalents
101.41
136.87
56.07
Closing Cash & Cash Equivalents
156.49
101.41
136.87
Net Cash (used in)/from Investing Activities
Net Cash (used in)/from Financing Activities
Net (decrease)/increase In Cash and Cash Equivalents
RATIOS
Particulars
Mar '11
Mar '10
Mar '09
Investment Valuation Ratios
Face Value
10
10
10
Dividend Per Share
40
40
22
Operating Profit Per Share (Rs)
112.4
173.02
75.64
Net Operating Profit Per Share (Rs)
568.54
816.49
601.32
Free Reserves Per Share (Rs)
158.97
190.09
106.56
89.45
78.91
78.91
Operating Profit Margin(%)
19.76
21.19
12.57
Profit Before Interest And Tax Margin(%)
18.56
19.78
10.88
Gross Profit Margin(%)
19.02
20.03
11.08
Cash Profit Margin(%)
15.7
16.2
10.55
Adjusted Cash Margin(%)
15.7
16.2
10.55
Net Profit Margin(%)
19.8
14.23
7.4
Adjusted Net Profit Margin(%)
19.8
14.23
7.4
Return On Capital Employed(%)
67.57
59.01
32.8
Return On Net Worth(%)
68.01
58.14
38.92
Adjusted Return on Net Worth(%)
51.42
61.53
47.78
Return on Assets Excluding Revaluations
169.69
202.4
116.56
Return on Assets Including Revaluations
169.69
202.4
116.56
69.67
59.19
35.36
0.8
0.69
0.84
Quick Ratio
0.71
0.55
0.73
Debt Equity Ratio
0.07
0.46
0.84
Long Term Debt Equity Ratio
0.03
0.45
0.71
Bonus in Equity Capital
Profitability Ratios
Return on Long Term Funds(%)
Liquidity And Solvency Ratios
Current Ratio
Debt Coverage Ratios
Interest Cover
2,093.39
421.06
53.71
0.07
0.46
0.84
Financial Charges Coverage Ratio
2,166.08
443.88
59.89
Financial Charges Coverage Ratio Post Tax
2,049.86
308.56
38.42
32.8
28.87
28.64
51.77
37.41
27.45
Investments Turnover Ratio
32.8
28.87
28.64
Fixed Assets Turnover Ratio
4.85
3.5
2.6
Total Assets Turnover Ratio
3.14
2.77
2.53
Asset Turnover Ratio
4.85
3.5
2.6
Total Debt to Owners Fund
Management Efficiency Ratios
Inventory Turnover Ratio
Debtors Turnover Ratio
Analysis of Hero Honda
Sales and Profits:
Companies sales have accelerated high in the past 5 years ie., from 2007-2011, particularly
in the last 3 years.
( In Rs. Cr. )
Mar '11
Mar '10
Mar '09
Mar '08
Mar '07
20,787.27
16,856.43
13,553.23
12,048.30
11,553.47
Net Sales
19,366.97
15,839.58
12,325.38
10,345.01
9,905.95
EXPENSES
While with sales, expenses also increased year on year but the company managed to cut
down its manufacturing expenses from March 2010 to 2011.
( In Rs. Cr. )
Particulars
Other Manufacturing Expenses
Mar '11
Mar '10
Mar '09
Mar '08
Mar '07
409.89
454.36
354.08
304.11
280.17
Expenses like raw materials, miscellaneous, power and fuel, employee cost have increased
considerably during the years which has pulled the profits down for the company and
remained a big area of concern for future growth.
( In Rs. Cr. )
Particulars
Mar '11
Mar '10
Mar '09
Mar '08
Mar '07
14,236.45
10,822.99
8,842.14
7,465.36
7,255.66
Power & Fuel Cost
100.47
81.05
73.7
56.55
52.45
Employee Cost
618.95
560.32
448.65
383.45
353.81
Miscellaneous Expenses
340.42
280.64
205.9
190.36
206.11
Mar '11
Mar '10
Mar '09
Mar '08
Mar '07
Operating Profit
2,597.07
2,743.65
1,753.02
1,367.77
1,201.96
Reported Net Profit
1,927.90
2,231.83
1,281.76
967.88
857.89
Raw Materials
Particulars
The growth numbers are excellent with Sales up 19%, EBITDA 24% and Net Profit 23%
CAGR over 5 years.
Margins are not at any peak but have held up well in current inflationary conditions.
( In Rs. Cr. )
Particulars
Sales Turnover
Mar '11
20,787.27
Mar '10
Mar '09
Mar '08
Mar '07
16,856.43 13,553.23 12,048.30 11,553.47
Operating Profit Margin (%)
13.4
17.32
14.22
13.22
12.13
Net Profit Margin (%)
9.89
14
10.3
9.27
8.58
Equity –Dividends:
The Hero Group has also announced that it would place the shares with two private equity
(PE) firms. If this stake sale happens at a price that’s considerably lower than the market
price, this could affect Hero Honda’s share price.
Meanwhile, in the last few quarters, the company has lost ground; its market share has
dropped from 57% to 52%, with its nearest competitor Bajaj Auto Ltd gaining at its expense.
Another challenge is to upgrade technology and stand on its own feet on product
development in the absence of its 25-year-old technology partner, Honda. While the
company fights these battles, it also has to contend with higher raw material costs.
At the current market price of Rs1,518, Hero Honda trades at about 14 times estimated
fiscal 2012 earnings, in line with expected growth rate in sales for the industry over the next
two years.
Particulars
Mar '11
Mar '10
Mar '09
Mar '08
Mar '07
Equity Dividend
2,096.72
2,196.56
399.38
379.41
339.47
Equity Dividend (%)
5,250.00
5,500.00
1,000.00
950
850
Dividend Per Share
105
110
20
19
17
59.98
59.98
59.98
59.98
59.98
Bonus in Equity Capital
Dividend is 2250%, which gives a yield of 2.4%.
Cash Flow:
Cash from operating activities has risen steadily at 38% CAGR. Annualised EPS is
up 22.6 % CAGR over the last 4 years.
ROCE was 52% in 2011, and between 42-75% in 5 years before that. One of the reasons
for this is that the Equity Capital has been 40 crores for the last 10 years. This is excellent, a
sign of good capital stability.
Particulars
Mar '11
Mar '10
Mar '09
Mar '08
Mar '07
Net Cash From Operating Activities
2288.11
2686.64
1359.03
1211.78
625.05
Mar '11
Mar '10
Mar '09
Mar '08
Mar '07
96.55
111.77
64.19
48.47
42.96
PE and EPS:
Particulars
Earnings Per Share
The view of the EPS charts in shows that EPS grew very rapidly in end ‘07- early ‘10 period,
then fell in the 2010. The recovery has come in 2011, so that EPS is today at all time highs
currently.
The view of the EPS charts in the above figure shows that EPS grew very rapidly in end ‘07early ‘10 period, then fell in the 2010. The recovery has come in 2011, so that EPS is today
at all time highs currently.
INTERPRETATION
Risks:
Competition in India is intensifying: Honda is launching new products, and planning
Chinese model imports and new manufacturing capacity. Bajaj, Yamaha and even new
players like Ducati, and Harley Davidson are launching high-end bikes in India.
•
New partnerships with AVL and EBR (detailed above) will strengthen products. New
capacity is planned.
•
HM is strong on the lower end products, Economy and Executive. However these are
lower margin products. While HM has some products in the Premium (and none in
Power), it is a weakness.
•
As a volume leader, HM is best placed to get profits from Economy and Executive
segments.
•
HM certainly needs to strengthen offerings in the profitable upper end segments and
launch an attractive - - Power segment product. One way to do this is to open higher
end focused dealer outlets.
•
HM is close to 100% capacity utilization at its plants. This makes the firm sensitive to
any production disruption. Also the firm may not be able to respond to any surge in
demand, if it happens.
•
HM is an experienced market player, and will be able to respond to market demands
profitably.
•
By 2012, HM plans a steady capacity addition to 10m units, an almost 40% growth.
•
Macro-economic risks like hike in interest rates, high inflation, petrol prices and Retail
and GDP slowdown.
•
To some extend these above are already playing out in India. However two wheelers
are the main means of personal transportation for the vast majority of middle and
lower middle class Indians, and demand may remain robust. Also above economic
headwinds should clear in 6-9 months
•
The acquisition of Honda stake in 2011 by promoters was for an undisclosed sum,
which was never revealed to public. Estimates vary from 5,000 to 9,500 crores. It is a
liability taken by promoters, so there is no compulsion to go public with this, but it
would have been a good example of corporate governance and transparency if this
were done.
•
Labour: HM is a large employer at its factories. It is critical to have good staff relations,
not just in HM itself, but also in the ancillary complex of suppliers to HM. The last
public report of a strike at HM is in April 2006 (5 days at Gurgaon). There have been
strikes at suppliers like Exide (Mar 2010) and Rico Auto (Oct 2009).
•
So far Labour relations have been a positive for HM.
Analysis of Bajaj Auto

In a record year, net sales and other operating income grew by over 39% to 16,609
crore.

Company sold a record 3.82 million units – consisting of 3,387,043 motorcycles and
436,884 three-wheelers.

Exports were at an all-time high – and comfortably crossed the 1 million mark, and
rose by 35% to 1,203,718 units.

The Company’s operating EBITDA for FY2011 grew by 30.6% over the previous year to
3,385 crore. The operating EBITDA margin was 20.4% of net sales and other
operating income.

Operating profit before tax (PBT) and exceptional items increased by 33% to
3,260 crore.

Profit after tax and exceptional items increased from 1,704 crore to 3,340 crore.
No doubt, some of this excellent performance was on account of a smart rebound of
the Indian economy, which has grown by 8.6% in FY2011 — second only to China. After
all, the year saw total motorcycle sales by the industry increasing by 24% to 10.5 million
units.
Comparison of Financial Statements
Balance Sheet
( In Rs. Cr. )
Particulars
HERO
BAJAJ
Sources Of Funds
Total Share Capital
39.94
289.37
Equity Share Capital
39.94
289.37
Share Application Money
0
0
Preference Share Capital
0
0.00
Reserves
Revaluation Reserves
2,916.12
0
4,620.85
0.00
Net worth
2,956.06
4,910.22
Secured Loans
1,458.45
23.53
32.71
301.62
Total Debt
1,491.16
325.15
Total Liabilities
4,447.22
5,235.37
Gross Block
5,538.46
3,395.16
Less: Accum. Depreciation
1,458.18
1,912.45
Net Block
4,080.28
1,482.71
Unsecured Loans
Application Of Funds
Capital Work in Progress
Investments
125.14
5,128.75
149.34
4,795.20
Inventories
524.93
547.28
Sundry Debtors
130.59
362.76
47.75
155.45
Total Current Assets
703.27
1,065.49
Loans and Advances
783.48
3,891.66
23.77
401.04
Cash and Bank Balance
Fixed Deposits
Total CA, Loans & Advances
1,510.52
Deferred Credit
0
5,358.19
0.00
Current Liabilities
5,316.40
2,624.35
Provisions
1,081.07
3,925.72
Total CL & Provisions
6,397.47
6,550.07
-4,886.95
-1,191.88
Net Current Assets
Miscellaneous Expenses
Total Assets
0
4,447.22
Profit & Loss account for the year ended March 2011
PARTICULARS
0
5,235.37
(in Rs. Cr.)
HERO
BAJAJ
Income
20,787.27
17,386.51
1,420.30
934.71
19,366.97
16,451.80
238.27
1,176.00
27
82.79
19,632.24
17,710.59
14,236.45
11,965.30
Power & Fuel Cost
100.47
86.61
Employee Cost
618.95
494.33
Other Manufacturing Expenses
409.89
61.77
1,090.72
450.18
340.42
237.76
0
-16.66
16,796.90
13,279.29
Sales Turnover
Excise Duty
Net Sales
Other Income
Stock Adjustments
Total Income
Expenditure
Raw Materials
Selling and Admin Expenses
Miscellaneous Expenses
Preoperative Exp Capitalized
Total Expenses
Operating Profit
2,597.07
3,255.30
PBDIT
2,835.34
4,431.30
28.2
1.69
2,807.14
4,429.61
402.38
122.84
Other Written Off
0
0.00
Profit Before Tax
2,404.76
4,306.77
0
46.77
2,404.76
4,353.54
476.86
1,011.02
Reported Net Profit
1,927.90
3,339.73
Total Value Addition
2,560.45
1,313.99
Preference Dividend
0
0.00
2,096.72
1,157.47
340.14
187.77
1,996.88
2,893.67
96.55
115.42
5,250.00
400
148.03
169.69
Interest
PBDT
Depreciation
Extra-ordinary items
PBT (Post Extra-ord Items)
Tax
Equity Dividend
Corporate Dividend Tax
Per share data (annualised)
Shares in issue (lakhs)
Earnings Per Share (Rs)
Equity Dividend (%)
Book Value (Rs)
Ratios:
PARTICULARS
HERO
BAJAJ
Investment Valuation Ratios
Face Value
Dividend Per Share
Operating Profit Per Share (Rs)
2
10
105
40
130.06
112.4
Net Operating Profit Per Share (Rs)
969.86
568.54
Free Reserves Per Share (Rs)
146.03
158.97
59.98
89.45
13.4
19.76
Profit Before Interest And Tax Margin (%)
11.26
18.56
Gross Profit Margin (%)
11.33
19.02
Cash Profit Margin (%)
11.36
15.7
Adjusted Cash Margin (%)
11.36
15.7
Net Profit Margin (%)
9.89
19.8
Adjusted Net Profit Margin (%)
9.89
19.8
Return On Capital Employed (%)
52.13
67.57
Return On Net Worth (%)
65.21
68.01
Adjusted Return on Net Worth (%)
61.34
51.42
Return on Assets Excluding Revaluations
148.03
169.69
Return on Assets Including Revaluations
148.03
169.69
52.13
69.67
Current Ratio
0.24
0.8
Quick Ratio
0.15
0.71
Debt Equity Ratio
0.5
0.07
Long Term Debt Equity Ratio
0.5
0.03
146.73
2,093.39
0.5
0.07
96.48
2,166.08
Bonus in Equity Capital
Profitability Ratios
Operating Profit Margin (%)
Return on Long Term Funds (%)
Liquidity And Solvency Ratios
Debt Coverage Ratios
Interest Cover
Total Debt to Owners Fund
Financial Charges Coverage Ratio
83.63
2,049.86
43.88
32.8
162.08
51.77
43.88
32.8
Fixed Assets Turnover Ratio
3.7
4.85
Total Assets Turnover Ratio
4.68
3.14
3.7
4.85
Dividend Payout Ratio Net Profit
126.39
40.27
Dividend Payout Ratio Cash Profit
104.57
38.85
Earning Retention Ratio
-34.38
46.73
-9.98
49.2
0.67
0.12
96.55
2.45
148.03
27.74
Financial Charges Coverage Ratio Post Tax
Management Efficiency Ratios
Inventory Turnover Ratio
Debtors Turnover Ratio
Investments Turnover Ratio
Asset Turnover Ratio
Cash Flow Indicator Ratios
Cash Earning Retention Ratio
Adjusted Cash Flow Times
Earnings Per Share
Book Value
Cash Flow:
( In Rs. Cr. )
Particulars
HERO
BAJAJ
Net Profit Before Tax
2404.76
4350.75
Net Cash From Operating Activities
2288.11
2013.72
Net Cash (used in)/from Investing Activities
-1322.31
-1096.64
Net Cash (used in)/from Financing Activities
-989.18
-862
-23.38
55.08
62.61
101.41
Net (decrease)/increase In Cash and Cash Equivalents
Opening Cash & Cash Equivalents
Closing Cash & Cash Equivalents
156.49
39.23
Ratio Analysis
Current ratio
PARTICULARS
HERO
BAJAJ
Current Ratio
0.24
0.8
0.8
0.7
0.6
0.5
HERO
0.4
BAJAJ
0.3
0.2
0.1
0
2008
2009
2010
2011
Current ratio of Hero Honda is 0.24 and Bajaj auto is 0.8.
Current ratio of 2:1 is usually considered ideal.
Current ratio of 1 means that the company is in position to pay the one year obligations.
In this scenario Hero Honda liquidity position is poor when compared to Bajaj auto. Bajaj
auto is in good position to pay its near future debts.
Current ratio of Bajaj auto is better than Hero Honda.
Quick ratio
PARTICULARS
HERO
BAJAJ
Quick Ratio
0.15
0.71
0.8
0.7
0.6
0.5
HERO
0.4
BAJAJ
0.3
0.2
0.1
0
2008
2009
2010
2011
Quick ratio of Hero Honda is 0.15 and Bajaj auto is 0.71
Quick ratio of 1 is considered ideal, and very high quick ratio is also not advisable as funds
can be used for more profitable purposes.
In quick ratio also Bajaj auto is in good position than Hero Honda.
Liquidity is a major concern for Hero Honda which will worry its investors.
Debt Equity ratio
PARTICULARS
HERO
BAJAJ
Debt Equity Ratio
0.5
0.07
0.9
0.8
0.7
0.6
0.5
HERO
0.4
BAJAJ
0.3
0.2
0.1
0
2008
2009
2010
2011
Debt to equity ratio of both the companies is satisfactory but when compared with each
other the ratio of Bajaj auto is much lesser than Hero Honda.
From the above figures we can say for every one rupee Hero Honda is holding 50ps as debt
and for every one rupee Bajaj auto is holding 7ps as debt which is really good for the
company and can attract creditors to invest their funds.
Bajaj is in much better position than hero Honda in terms of debt to equity.
Inventory turnover ratio:
Particulars
HERO
BAJAJ
Inventory Turnover Ratio
43.88
32.8
50
45
40
35
30
HERO
25
BAJAJ
20
15
10
5
0
2008
2009
2010
2011
Inventory turnover ratio represents how many times inventory has turn into sales. The
greater the ratio the better it is. It is calculated by using the following formula
Cost of goods sold / average stock
Hero Honda has shown a good inventory turnover ratio I.e, 43.88 where as Bajaj auto has a
inventory ratio of 32.88.
This signifies the quality of inventory management and supply chain management system of
Hero Honda is superior to Bajaj auto.
Debtors’ turnover ratio:
Debtors turnover ratio is calculated by using the following formula
Net credit sales/Average debtors
A high debt turnover ratio represents a sound credit management policy.
In this case Hero Honda has a good DTR when compared to Bajaj auto.
Particulars
HERO
BAJAJ
Debtors Turnover Ratio
162.08
51.77
180
160
140
120
100
HERO
80
BAJAJ
60
40
20
0
2008
2009
2010
2011
Fixed Asset turnover ratio:
A high fixed asset turnover ratio indicates better utilization of firm’s fixed assets. A ratio of 5
is generally considered ideal.
Particulars
HERO
BAJAJ
Fixed Assets Turnover Ratio
3.7
4.85
7
6
5
4
HERO
3
BAJAJ
2
1
0
2008
2009
2010
2011
When compared both Hero Honda and Bajaj auto both the companies are not reached the
ideal mark for Fixed Assets turnover ratio. However Bajaj auto is closer to ideal mark i.e,
4.7.This is the area where both the companies has scope to improve.
PROFITABILITY RATIO
A class of financial metrics that are used to assess a business's ability to generate
earnings as compared to its expenses and other relevant costs incurred during a
specific period of time. For most of these ratios, having a higher value relative to a
competitor's ratio or the same ratio from a previous period is indicative that the company
is doing well.
Some examples of profitability ratios are profit margin, return on assets and return on
equity. It is important to note that a little bit of background knowledge is necessary in
order to make relevant comparisons when analyzing these ratios.
For instances, some industries experience seasonality in their operations. The retail
industry, for example, typically experiences higher revenues and earnings for the
Christmas season. Therefore, it would not be too useful to compare a retailer's fourthquarter profit margin with its first-quarter profit margin. On the other hand, comparing a
retailer's fourth-quarter profit margin with the profit margin from the same period a year
before would be far more informative.
Operating Margin
A ratio used to measure a company's pricing strategy and operating
efficiency.
Operating margin is a measurement of what proportion of a company's revenue is left
over after paying for variable costs of production such as wages, raw materials, etc.
A healthy operating margin is required for a company to be able to pay for its fixed
costs, such as interest on debt. It Is Also known as "operating profit margin."
Calculate as:
Operating margin gives analysts an idea of how much a company makes (before
interest and taxes) on each dollar of sales. When looking at operating margin to
determine the quality of a company, it is best to look at the change in operating
margin over time and to compare the company's yearly or quarterly figures to
those of its competitors. If a company's margin is increasing, it is earning more per
dollar of sales.
For example, if a company has an operating margin of 12%, this means that it makes
$0.12 (before interest and taxes) for every dollar of sales. Often, nonrecurring cash
flows, such as cash paid out in a lawsuit settlement, are excluded from the operating
margin calculation because they don't represent a company's true operating performance.
Sr.no
Name of companies
2008
2009
2010
2011
1.
HERO HONDA MOTORS LIMITED
13.22
14.22
17.32
13.4
2.
BAJAJ AUTO LIMITED
12.29
12.57
21.19
19.76
25
20
15
HERO
BAJAJ
10
5
0
2008
2009
2010
2011
Gross profit ratio:
Gross profit ratio is calculated by using the following formula.
It reveals the result of trading operations of business; it indicates the profitability of the core
activity of the business.
Particulars
HERO
BAJAJ
Gross Profit Margin (%)
11.33
19.02
25
20
15
HERO
BAJAJ
10
5
0
2008
2009
2010
2011
There is no particular standard for gross profit ratio the higher the ratio the better it is.
Bajaj auto has a higher ratio of gross profit when compared with Hero Honda.
NET PROFIT MARGIN
For a business to survive in the long term it must generate profit. Therefore the net
profit margin ratio is one of the key performance indicators for your business.
The net profit margin ratio indicates profit levels of a business after all costs have been
taken into account. It is worth analysing the ratio over time. A variation in the ratio from
year to year may be due to abnormal conditions or expenses. Variations may also indicate
cost blowouts which need to be addressed.
A decline in the ratio over time may indicate a margin squeeze suggesting that
productivity improvements may need to be initiated. In some cases, the costs of such
improvements may lead to a further drop in the ratio or even losses before increased
profitability is achieved. The calculation used to obtain the ratio is:
Net Profit Margin = Net Profit
x 100
Sales
Sr.no
NAME OF COMPANIES
2008
2009
2010
2011
1
Hero Honda motors limited
9.27
10.3
14
9.89
2
Bajaj auto limited
8.32
7.4
14.23
19.8
25
20
15
HERO
BAJAJ
10
5
0
2008
2009
2010
2011
Earnings per share:
It is the earning accruing to the equity share holder on every share held by him, in other
words earning per share is the net profit after tax and preference dividend that is earned on
one unit of equity, which is one equity share. It is calculated by using the following formula:
(Profit after tax – preference dividend) / number of equity share
Particulars
Hero Honda
Bajaj Auto
Mar '11
Mar '10
Mar '09
Mar '08
Mar '07
96.55
111.77
64.19
48.47
42.96
115.42
117.69
45.37
52.25
122.35
140
120
100
80
HERO
60
BAJAJ
40
20
0
2008
2009
2010
2011
Hero Honda
The factors contributing for the high EPS (2009-10) are as follows
23.6% growth in sales to 4,600,130 two wheelers in 2009-10 from 3,722,000 two wheelers
in 2008-09.
74.1 % growth in net profit after tax to Rs 2231.83 crores, EPS of Rs. 111.77
17.4% EBITDA margins v/s 14.1% in last year.
Bajaj Auto
EPS in the year 2007-08 fall because of the decreasing domestic demand for two wheelers
the reason behind this is the sharp tightening of non food credit by the Reserve Bank of
India and all commercial banks and non banking financing companies”.
Increase in the interest rates by RBI due to its credit and monetary policy to high levels.
Banks also curtailed the supply of credit reduced their exposure to auto loans.
Earnings per share was subsequently increasing from march 2007 but in march 2010, there
was tremendous increase in EPS because Net sales and other operating income grew by
35 % to Rs 119.21 billion.
There was surplus cash and cash equivalents in the company’s balance sheet as on 31
March 2010 stood at Rs 32.6 billion, versus Rs 9.3 billion on 31 March 2009.
Price Earnings Ratio (P/E):
It expresses the relationship between market price of one share and the earnings per share
of that company. P/E ratio is calculated by using the following formula
Market price of equity share / Earning per share
Particulars
Hero Honda
Bajaj Auto
P/E
17
15
As on 26-6-2012
P/E RATIO
17.5
17
16.5
16
P/E RATIO
15.5
15
14.5
14
HERO HONDA
BAJAJ AUTO
CHAPTER 5
Growth Factors –
1. The festive season spread over two months during the quarter worked wonders for
the company in terms of volume growth, which was also seen across all the
segments in the automobile sector.
2. Decrease in raw material prices, depreciation, and the effective taxation rate at the
Haridwar plant (from 28% in first quarter to 22.31% in second quarter) led to the
higher bottom line compared to the 26.8% increase in top line
3. Stock prices have been building up since August in accordance with strong market
fundamentals and good earnings forecast. Prices touched a high of Rs.1724 in 3rd
week of September and moved in the range of 1600-1700 ahead of the earnings
announcement. Prices opened up on Thursday post announcement and rose up by
2.4% but were dragged down due overall weakness in the market.
Factors responsible for decreasing the share price:
Though the company has achieved a strong volume growth in first half of FY2010, but with
the ongoing strikes at one of its major suppliers Rico Auto and few other auto ancillaries in
the Gurgaon belt could lead to production constraints in second half of FY2010. Thus we
believe that if the demand continues to remain strong, the ongoing agitations in the factories
of its major suppliers could affect its production, thereby pushing down its sales volume on a
quarterly basis.
Company expects an increase in prices of steel and aluminum between 5 to 10 per cent in
the coming quarters as the economy revives. Increasing Interest rate can be threat to all the
automobile players in the short term.
Opinion and Recommendations
•
Two wheeler sales in India reflect of the state of the economy, perhaps better than
four wheelers. The Indian economy today is at a demand inflection point, due to a
combination of ‘demographic dividend’, increased per capita wealth and lifestyle
aspirations. HM is well placed to take advantage of these economic conditions.
•
In the next 5 years, India will establish itself as an accepted manufacturing and
export base for Automobiles, particularly smaller cars and two wheelers. HM will be
able to exploit this trend.
•
HM has for long dominated the Indian two-wheeler market. This will continue.
Additionally, free of restrictions from the Honda JV, HM should enter a new phase
of technology independence and export led growth.
•
Consumers have accepted the Honda JV split and HM has outperformed in 2012.
This is a fine stability signal.
•
The 5-year financial review has revealed good growth, high profitability, excellent
ROCE and low debt.
•
A recent dip in the shares of 17% makes for a good entry point for investors.
HM is a Blue Chip, Low Risk, Medium Gain stock with a good dividend. It can be a Core
holding for Long Term & Retirement investments. At these levels and in this trajectory, it is a
BUY