International Journal of Management (IJM) Volume 6, Issue 9, Sep 2015, pp. 44-50, Article ID: IJM_06_09_005 Available online at http://iaeme.com/Home/issue/IJM?Volume=6&Issue=9 ISSN Print: 0976-6502 and ISSN Online: 0976-6510 © IAEME Publication ______
LONG TERM SOLVENCY ANALYSIS: A CASE STUDY OF TATA MOTORS AND MARUTI SUZUKI
Vineet Singh Assistant Professor, Dept. of Commerce, Guru Ghasidas Vishwavidyalaya, Bilaspur, Chhattisgarh.
ABSTRACT This study aims to highlight the debt and equity position of two major car manufacturing companies in India i.e. Tata Motors and Maruti Suzuki. In order to enhance the quality of study, a comparison is made between debt equity ratios of both the companies and further t- test is applied to find out that whether there is a significant difference between debt equity ratio of Maruti Suzuki and Tata Motors or not. Keywords: Tata Motors, Maruti Suzuki, Debt Equity Ratio. Cite this Article: Vineet Singh. Long Term Solvency Analysis: A Case Study of Tata Motors and Maruti Suzuki, International Journal of Management, 6(9), 2015, pp. 44-50. http://iaeme.com/Home/issue/IJM?Volume=6&Issue=9
1. INTRODUCTION ‘Tata Motors’ was established in 1945 in India and its first vehicle rolled out in 1954. The company’s manufacturing plants are located Jamshedpur (Jharkhand), Pune (Maharashtra), Dharwad (Karnataka), Pantnagar (Uttarakhand), Lucknow (Uttar Pradesh), and Sanand (Gujarat). In 2005 the company established a joint venture with Fiat Group Automobiles at Rajangaon (Maharashtra) to manufacture Tata and Fiat cars along with Fiat power trains. Tata Motors group comprises of over 60000 employees with over 6600 dealership, sales, service and spare parts network across the world. In the year 2004 the company was listed in New York Stock Exchange. The company also operates in number of other countries like UK, South Korea, Thailand, South Africa and Indonesia through its subsidiaries and associate companies. The major acquisition of Tata Motors includes ‘Daewoo’ in 2004 which is South Korea’s second largest truck maker and ‘Jaguar Land Rover’ in 2008. The company is engaged in manufacturing both commercial and passenger vehicles which are being marketed in several countries like Europe, Africa, Middle East, South East Asia, South Asia, South America, Australia, Russia and it also has joint ventures in Bangladesh, Ukraine, and Senegal. The cars and utility vehicles manufactures by Tata http://iaeme.com/Home/journal/IJM 44 [email protected] Long Term Solvency Analysis: A Case Study of Tata Motors and Maruti Suzuki
Motors in India includes Nano for the entry level customers, Bolt, Vista and Indica for hatchback enthusiast, Zest, Manza and Indigo for sedan loving customers, Safari Storme and Safari Dicor for those who prefer Sports Utility Vehicle, Sumo Gold, Movus, Venture and Xenon XT are for people who likes Utility Vehicles and a Multi Utility Vehicle ‘Aria’ for those who have a big family and want to travel in comfort without compromising on quality, looks and presence. Apart from cars and utility vehicles the company also manufactures small pickups like ace, magic and winger, trucks like Prima, Construck and Light Trucks, buses and even defence vehicles for the Indian Army. ‘Maruti Suzuki’ is a subsidiary of Japanese automobile and motorcycle manufacturer ‘Suzuki’. In India, ‘Maruti Suzuki’ had started its business in 1982 by establishing a manufacturing unit at Gurgaon, Haryana. The company’s headquarter is situated at Nelson Mandela Road, New Delhi. ‘Maruti Suzuki 800’ was the first model to hit Indian roads in 1983. Today, the company manufactures 1.5 million family cars every year that is equivalent to one car in every 12 seconds and moreover it has a team of 12500 professionals who turned out in manufacturing 14 family cars with over 150 variants successfully. In addition, the sales network of the company is spread over 1097 cities with service network in more than 1454 cities. The company also owns a diesel engine plant with a capacity to manufacture 7 lakh diesel cars every year. ‘Maruti Suzuki’ also exports cars to more than 125 countries including European market like Netherlands, Germany, France, Italy and UK. The company manufactures cars keeping in view the preferences of different categories of customers, such as for entry level the company manufactures Alto 800, Alto K10 and Celerio, for hatchback enthusiast consumers it has Wagon R, Singray, Ritz and Swift. Further the company also manufactures Dzire and Ciaz in sedan segment, Omni and Eeco in the ‘C’ segment, a multipurpose vehicle Ertiga along with sports utility vehicles Gypsy and Grand Vitara. Debt equity ratio is calculated to estimate the long term solvency of an enterprise or in other words, it conveys the relationship between long-term debts and shareholders fund of a company. Debt Equity Ratio indicates the proportion of funds which are obtained by long-term borrowings in comparison to shareholders fund. The major sources of long-term funds comprises of debentures, mortgaged loan, loan from financial institutions, bank loan etc. whereas, in order to calculate shareholders fund the sum total of accumulated losses and fictitious assets such as preliminary expenses, underwriting commission, share issue expenses are to be deducted from the sum total of equity share capital, preference share capital, share premium, general reserve, capital reserve, credit balance of profit and loss account and other reserves. Thus, Debt Equity Ratio = Debt ÷ Equity or Long Term Loans ÷ Shareholder’s Fund. The objective behind calculating this ratio is to assess the ability of firm to meet its long term liabilities or to ascertain the soundness of long-term financial policies of the firm. Normally debt equity ratio of 2:1 is considered to be safe which reflects that debts are twice the equity. A debt equity ratio of more than 2:1 reflects a risky financial position of a firm from long-term point of view because it means that a firm may find it difficult to meet its long term commitments.
1.1. Objectives of Study • To find out the amount of debt and equity in Tata Motors from 2010-11 to 2014-15. • To find out the amount of debt and equity in Maruti Suzuki from 2010-11 to 2014-15.
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• To calculate and compare the debt equity ratio of Tata Motors and Maruti Suzuki during 2010-2011 to 2014-15. • To test whether there is a significant difference between debt equity ratio of Tata Motors and Maruti Suzuki with the help of t test during 2010-11 to 2014-15.
2. RESEARCH METHODOLOGY The study is mainly based on secondary data. The relevant information in this regard has been collected from various sources like journals, articles, textbooks, websites and annual reports of Maruti Suzuki and Tata Motors., The analysis is carried out through various statistical tools like percentage, average, t test etc.
3. ANALYSIS AND INTERPRETATION In order to analyze long-term solvency of Tata Motors and Maruti Suzuki debt equity ratio has been calculated and is explained with the help of table and graphical representation followed by a comparative analysis.
Table 1 Debt Equity Ratio (Tata Motors) Debt/Long Term Debt Equity Years Equity/Net Worth Loan Ratio 2010-11 15898.75 20013.30 0.79 2011-12 9964.13 19626.01 0.51 2012-13 9290.22 19134.84 0.49 2013-14 10901.93 19176.65 0.57 2014-15 12605.76 14862.59 0.85 Average 11732.16 18562.68 0.63
Figure 1 Debt Equity Ratio (Tata Motors) Debt Equity Ratio (Tata Motors) 25000 0.90 0.80 20000 0.70 0.60 15000 0.50 Debt/Long Term Loan 0.40 10000 0.30 Equity/Net Worth Amount in Rs. in Amount 5000 0.20 Debt Equity Ratio 0.10 0 0.00 2010-11 2011-12 2012-13 2013-14 2014-15 Years
The above table no. 1 and figure no. 1 exhibits that debt equity ratio of “Tata Motors” stood at an average of 0.63:1 for the study period 2010-11 to 2014-15. The debt equity ratio of Tata Motors fluctuates from 0.49:1 to 0.85:1 during the study period. It is in the year 2012-13 when the company is able to maintain lowest debt equity ratio of 0.49:1 and the highest debt equity ratio was witnessed in the year 2014- 15. During the entire study period, it was in 2010-11 when the company had maximum amount of debt as well as equity i.e. Rs. 15898.75 crores and Rs. 20013.3
http://iaeme.com/Home/journal/IJM 46 [email protected] Long Term Solvency Analysis: A Case Study of Tata Motors and Maruti Suzuki crores respectively which resulted in debt equity ratio of 0.79:1. The company’s debt and net worth stood at an average of Rs. 11732.16 crores and Rs. 18562.68 crores respectively. A debt equity ratio of 2:1 is considered to be satisfactory, which means that debts are twice the equity. If debts are more than, twice the equities it reflects a risky financial position of the firm in the long run. Since, the debt equity ratio of Tata Motors stood at an average of 0.63:1 it reveals that the company is lesser dependent on debt and it will also be able to repay its long term commitments in time.
Table 2 Debt Equity Ratio (Maruti Suzuki) Debt/Long Term Equity/Net Debt Equity Years Loan Worth Ratio 2010-11 309.30 13867.50 0.02 2011-12 96.60 15187.40 0.01 2012-13 646.50 18578.90 0.03 2013-14 699.00 20978.00 0.03 2014-15 250.20 23704.20 0.01 Average 400.32 18463.20 0.02
Figure 2 Debt Equity Ratio (Maruti Suzuki) Debt Equity Ratio (Maruti Suzuki) 25000 0.04 0.04 20000 0.03 15000 0.03 0.02 Debt/Long Term Loan 10000 0.02 Equity/Net Worth
Amount in Rs. in Amount 0.01 5000 Debt Equity Ratio 0.01 0 0.00 2010-11 2011-12 2012-13 2013-14 2014-15 Years
Table no. 2 and figure no. 2 reveal that the debt equity ratio of “Maruti Suzuki” stood at an average of 0.63:1 for the study period 2010-11 to 2014-15. During the study period the entire debt of the company stood at an average of Rs. 400.32 crores whereas the net worth of the company stood at an average of Rs. 18463.20 crores. The debt equity ratio of Maruti Suzuki ranges from 0.01:1 to 0.03:1 during the study period. It is in the years 2011-12 and 2014-15 when the company is able to maintain lowest debt equity ratio of 0.01:1 and the highest debt equity ratio was witnessed in the years 2012-13 and 2013-14. During the entire study period, it was in 2013-14 when the company had maximum amount of debt i.e. Rs. 699.00 crores and maximum amount of equity was held by the company in 2014-15 i.e. Rs. 23704.2 crores. The debt equity ratio of Maruti Suzuki stood at an average of 0.02:1 which reveals that the company is very lesser dependent on debt and it will not face any difficulty to pay off its long term commitments in time.
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Table 3 Debt Equity Ratio (Tata Motors vs Maruti Suzuki) Debt Equity Ratio (Tata Debt Equity Ratio (Maruti Years Motors) Suzuki) 2010-11 0.79 0.02 2011-12 0.51 0.01 2012-13 0.49 0.03 2013-14 0.57 0.03 2014-15 0.85 0.01 Average 0.63 0.02
Figure 3 Debt Equity Ratio (Tata Motors vs Maruti Suzuki) Debt Equity Ratio (Tata Motors vs Maruti Suzuki) 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 2010-11 2011-12 2012-13 2013-14 2014-15
Debt Equity Ratio (Tata Motors) Debt Equity Ratio (Maruti Suzuki)
Table no. 3 and figure no. 3 portray a comparison between debt equity ratio of Tata Motors and Maruti Suzuki. The above analysis interprets that both the companies are able to maintain a far satisfactory debt equity ratio than standard. The debt equity ratio of Tata motors and Maruti Suzuki stood at an average of 0.63:1 and 0.02:1 during the study period which means that both the companies are able to control the debt level in their capital structure. When debts are more than twice the equities it means that the company is excessive dependent on debt which is not a favourable condition from long term point of view. If the proportion of debt is more than twice than that of equities/net worth it reveals that a firm might face difficulty to reimburse its long term debts in time.
4. HYPOTHESIS TESTING ON DEBT EQUITY RATIO (TATA MOTORS AND MARUTI SUZUKI) To test whether there is a significant difference between debt equity ratio of Tata Motors and Maruti Suzuki the following hypothesis is framed and tested through t-test at 95% confidence level:
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H0 There is no significant difference between debt equity ratio of Tata Motors and Maruti Suzuki
H1 There is a significant difference between debt equity ratio of Tata Motors and Maruti Suzuki t-Test: Two-Sample Assuming Unequal Variances DEBT EQUITY RATIO DEBT EQUITY RATIO PARAMETERS (TATA MOTORS) (MARUTI SUZUKI) Mean 0.640855 0.021468 Variance 0.028412 0.000167 Observations 5 5 Hypothesized Mean Difference 0 df 4 t Stat 8.192707 P(T<=t) one-tail 0.000605 t Critical one-tail 2.131847 P(T<=t) two-tail 0.001209 t Critical two-tail 2.776445 Since the calculated value of t one tail at at.05 level of significance is less than table value of t, alternate hypothesis is rejected and null hypothesis is accepted that there is no significant difference between debt equity ratio of Tata Motors and Maruti Suzuki.
5. CONCLUSION On the basis of above analysis and interpretation in can be concluded that Tata Motors and Maruti Suzuki are maintaining debt equity ratio at an average of 0.63:1 and 0.02:1 respectively during the study period of 2010-11 to 2014-15, which is less than, standard debt equity ratio of 2:1. A debt equity ratio of less than 2:1 is considered to be good and a debt equity ratio of more than 2:1 is considered to be risky from the view point of long term solvency. Debt equity ratio indicates the proportion of funds which are obtained by long-term borrowings in comparison to shareholders fund. If the proportions of long term borrowings are more than twice the shareholders funds it reflects that a firm is more dependent on long term borrowings. Higher dependence on long term borrowings reduces the solvency of firm in long term and lesser dependence on long term borrowings increases the solvency of firm in the long run. If debts are twice the equity or less than twice the equity it means that a firm will be able to repay its debts in long run without any problem, and if debts are more than twice the equity it means that a firm might face difficulty to repay its debts in long term. Since, both the companies are maintaining debt equity ratio of less than 2:1 for the study period it means that both the companies i.e. Tata Motors and Maruti Suzuki are maintaining good solvency from long term point of view and both will be able to meet their long term commitments without any problem. In addition, the above analysis also reveals that there is no significant difference between debt equity ratio of Tata Motors and Maruti Suzuki.
REFERENCES
[1] Annual Reports of Tata Motors 2010-11 to 2014-15. [2] Annual Reports of Maruti Suzuki 2010-11 to 2014-15.
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[3] James, C. Van Horne, Financial Management and Policy, Prentice-Hall of India Pvt. Ltd, New Delhi, 2008. [4] Johnson, R.W., Financial Management, Allyn and Bacon, Boston, 1998. [5] Keown, A.J., Martin, J.D., Petty, J.W. & Scott, D.F., Financial Management- Principles and Applications’, Pearson Education India, 2007. [6] Khan, M.Y. and Jain, P.K., ‘Financial Management: Text and Problems’, Tata McGraw-Hill Publication Company Limited, New Delhi, 2010. [7] Joy, O.M., ‘Introduction to Financial Management’, Richard D. Irwin, Homewood III, 2003. [8] Vineet Singh and Abhinna Srivastava. Receivables Management in Leading Heavy Electrical Industries in India, International Journal of Management, 6(4), 2015, pp. 1 - 8. [9] Vineet Singh. Significance Of Working Capital Turnover Ratio: A Case Study of BHEL and Crompton Greaves, International Journal of Management, 6(3), 2015, pp. 1 – 7.
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