Mokshithdass Mohandass (@02774176)

Finance Term Project

On-

Selecting a Company I have chosen Eicher company for the project. It is one of the leading companies in India that has made a mark in the HSVs and hence, I would be happy to understand and analyze the future prospects of the company. Company Background Eicher is one of the leading auto firms that have already captured investors interest. The companys current stock price surprisingly sells for 1940 and this is one of the highest stock prices that an auto company can ever get. Thus, Eicher which is setting a new benchmark in the auto industry really has a lot of potential and can easily capture the market share from its biggest competitor Tata Motors. Eicher Motors was founded way back in 1948 by Siddharth Lal. The entire stocks of the company are owned by Indian shareholders. Eicher Motors is traded at BSE, with the ticker symbol 505200. The Business Environment Automobile Industry is one of the most versatile industries one can ever find and hence, Eicher Motors plays a major role in it. While Tata Motors and Ashok Leyland are its biggest competitors, Eicher has its own fleet of products that does not compete with Tata Motors or Ashok Leyland directly. Eicher Motors specializes in Heavy Vehicles such as trucks.

Industry Background Eicher has specialized in manufacturing of trucks and has a joint venture with Volvo, the worlds leading truck maker. Trucks have always been in-demand globally and with Eicher doing a joint venture with Volvo, the quality of the trucks have been outstanding. Thus, the demand for Eicher-Volvo (VE) trucks became extremely demanding and with the best technology available, the sales increased and currently, the firm is beaming with success. Analysis of Operating Results and Financial Position There has been a huge demand for the financial details of any firm. While the basic details has to be submitted to the government, the details such as balance sheet and income statement are much in-demand from the stockholders. The companys internal details allow the stockholders to accurately assess the companys financial strength. Let us take a look at some of the companys details -

Industry Analysis Market Div. Market Description Cap. P/E % % Value Industry: Automobile LCVs/HCVs* 16.1B 30.2 7.9 1.69 1.78 2.9 ROE Yield to Book Margin % Value Net Profit

Liquidity Ratios & Efficiency Ratios Eicher Motors Year Current Ratio Quick Ratio Inventory Turnover Ratio Days Sales Outstanding Eicher Motors 1.17B 17.16 2.22 33.62 17.97 3 23 19.61 4.99 0.83 9.75 17.33 2011 0.56 0.4 2010 0.52 0.41 2009 1.19 1.14

The above table gives us the information about Current Ratio, Quick Ratio, Inventory Turnover Ratio and Days Sales Outstanding.

Solvency Ratios Eicher Risk Factors Year Debt Ratio=Total Liabilities/Total Assets Total The above table information Ratio, Total Short Term Debt Debt Liabilities/Shareholders Equity Total Short Term Debt/Total Assets Long term Debt/Shareholders Equity Profitability Ratios Eicher Risk Factors Year Profit Margin on Sales Basic Earning Power 2011 15.73 0.21 Motors 2010 9.19 0.14 2009 5.42 0.11 0.03 0.02 0.01 0.0066 0.0049 0.0064 0.04 0.02 0.01 gives us the about Debt Liabilities, Total and Long Term 0.04 0.03 0.01 2011 Motors 2010 2009

Ratio Return on Total Assets Return on Common Equity 16.51 9.66 8.1 1.69 3.07 1.71

The above table gives us information about the Risk factors of a company such as Profit Margin on Sales, Basic Earning Power Ratio, Return on Total Assets and Return on Common Equity.

Market Value Ratios Eicher Risk Factors Year P/E Ratio P/CF Ratio Market/Book 2011 53.02 32.01 8.75 Motors 2010 40.45 37.62 3.91 2009 44.09 19.29 3.56

The above table gives us information about the Risk Factors such as P/E Ratio, P/CF Ratio and Market to Book Required Ratios Risk Factors Du Pont Equation Year Current Ratio Risk Factors Profit Margin Total Assets Turnover Return on Assets Return on Equity Eicher Motors 2011 2010 Eicher 0.56 0.52 Motors 15.73 1.07 1.69 16.51 9.19 0.92 3.07 9.66 5.42 1.43 1.71 8.1 2009 1.19 Ratio.

Quick Ratio Total Assets Turnover Inventory Turnover Ratio Debt Ratio=Total Liabilities/Total Assets Debt Equity Ratio=Total Liabilities/Shareholders Equity Gross Profit Margin Net Profit Margin The above table of details about Return on Assets Return on Equity

0.4 1.07 17.16 0.04 0.04 7.69 15.73 1.69 0.16

0.41 0.92 17.97 0.03 0.02 4.63 9.19 3.07 0.96

1.14 1.43 19.61 0.01 0.01 -0.12 5.42 1.71 0.81 offers a set the firm.

Now, let us analyze each and every obtained value Current Ratio: This is seen as a measure of the working capital. We see that the current ratio in 2009 was 1.19 when compared to 2011 which is 0.56 only.

Quick Ratio: The quick ratio is higher in 2009 with 1.14 whereas the quick ratio has dropped significantly for the last year. Thus, the quick ratios and current ratios determine the companys working capital and by the results, the firm is not considered high by the investors.

Total Assets Turn Over: The Total Assets Turnover determines the firms profit conversion. The table shows that 2009 had a higher Total Assets Turn Over ratio, but has reduced for the following years.

Inventory Turn over Ratio: Higher the Inventory Turn Over Ratio, higher is the companys success rate. In the analysis, Eicher has managed to have a higher Inventory Turn Over ratio, and it was the highest in 2009.

Debt Ratio: Lower the value, higher is the liquidity of the company. The firm had the lowest debt ratio in 2009.

Debt Equity Ratio: Again, lower the value, lower is the companys risk. Again, the company had the lowest debt equity ratio in 2009.

Gross Profit Margin: In spite of the company having all parameters within the industry average, the gross profit margin was negative in 2009. In 2011 however, the company had a 7.49% gross profit margin.

Net profit Margin: The Net Profit Margin also increased in 2011 and was lower in the last two years.

Return on Assets: The Return on Assets was highest in 2010 but was lower in the other two years. This is a critical parameter as higher the value, better is the companys financial strength.

Return on Equity: An extremely important parameter, as this decides the strength of the firm. The highest ROE was noted in 2010.

Comparison to Industry Benchmarks

Tata Motors and Ashok Leyland are the biggest competitors to Eicher but with Eicher joining hands with Volvo (worlds 2nd leading truck manufacturer), Eicher manufactured some of the worlds best trucks. Thus, the parameter for benchmark would be technology and Eicher had an upper hand in this. Valuation of the Company Two models have been used for the valuation 1. CAPM MODEL rs = rf + bi (rm - rf) rs = 12.5% +.9 (8-12.5) rs = 8.45% 2. DCF MODEL g= ROE (1-Div payout ratio) g=16.5(1-0.11) g=14.69% Do=11 D1=Do(1+g)=11(1+0.0842)= 11.93 D2=D1(1+g)=11.93(1+0.0842)=12.94 P1= (D2/rs) + g=12.94/(0.081-0.046)=369.7 Timeline (0------11-----11.93------382.65) Cf0=0 cf1=11 cf2=11.93 cf3=382.65 I/Y=4.63 NPV=355.48

Po=355.48 According to DCF model the cost of new stock should be 355.48. Currently the stock is traded for Rs 1940.50, so it is heavily overpriced.

Recommendations and Conclusions

Considering the DCF and CAPM models results, I would recommend that the firm reduce its stock price to 355.48 and if not, investors would not be increased to buy the stock. With the companys ROE seeing a reduction in the last two years, it is advisable that the firm reduce the stock price.