FINANCIAL ACCOUNTING

PROJECT REPORT
GROUP 8

Mrinalini Singh (1511337)

Pramod Rangarajan (1511341)
Punit P Parekh (1511345)
Shiva Rohit (1511356)

INTRODUCTION
Mahindra & Mahindra (M&M) was founded as a steel trading company in 1945. It entered the
automotive manufacturing with the iconic Willys Jeep in 1947. Today, M&M is one of the largest
vehicle manufacturers in India and the largest tractor manufacturer in the world. The Brand Trust
Report, India Study 2014, ranks M&M as 10th most trusted brand in India. It was also ranked 21st in
Fortune India 500 companies in 2011.
BUSINESS SUMMARY
Mahindra and Mahindra Limited (M&M) is an Indian multinational automobile manufacturing which is
one of the largest vehicle manufacturers by production in India and the largest manufacturer of tractors
across the world. Its mission is to create the distribution network by providing the dealers and
customers the largest choice of unique world-class products and services. In terms of business divisions
Mahindra and Mahindra is divided into Automotive Division, Farm Division, Finance Division, and
Energy Division.
Market Profile
Since Mahindra and Mahindra is majorly involved in the automotive division, we shall be focusing on
this industry primarily. The Indian auto industry is one of the largest in the world with an annual
production of 21.48 million vehicles in FY 2013-14. The automobile industry accounts for 22 per cent
of the country's manufacturing gross domestic product (GDP).
Sales of commercial vehicles in India grew 5.3 per cent to 52,481 units in January 2015 from a year
ago, according to Society of Indian Automobile Manufacturers (SIAM).To match production with
demand, many auto makers have started to invest heavily in various segments in the industry in the last
few months. The industry has attracted foreign direct investment (FDI) worth US$ 12,232.06 million
during the period April 2000 to February 2015. India is probably the most competitive country in the
world for the automotive industry and future prospects are quite bright.
STRATEGY OF MAHINDRA & MAHINDRA
Mahindra & Mahindra believes in the power of Resilience and wishes to achieve resilience through
market leadership, strong financials, value creation, innovation, portfolio diversification and customer
centricity. It has two main divisions- automotive division and farm division. Both these divisions are
affected by economic environment as well as nature and the arrival of monsoons. The Passenger
Vehicle industry showed signs of revival in 2015 but it has been patchy and car industry growth is
largely driven by new launches. There is also a trend in Utility Vehicle segment to go for more
compact UVs. Both PV and UV showed a decline in 2015 unlike commercial vehicles, which showed a
gain in 2015. Spare part sales also witnessed growth for Mahindra & Mahindra. The key elements of
automotive strategy include strengthening the product portfolio, refreshing and updating existing
product, strengthening R&D and technology capabilities, overseas expansion and exploring alternative
fuel technology.

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The farm division had a sharp decline due to poor monsoon and unseasonal rains in 2015. The crop
care solutions and distributions of seeds as well as power generation sector have shown growth.
Mahindra Defense Systems Divisions, Mahindra Defense Naval systems and Mahindra Special
Services group are no longer mentioned in Directors Report from 2014 onwards. For Farm division the
strategy includes expanding the reach of its mechanization products so it can cater to a wider consumer
base. In order to further this and develop products to address global opportunities in the tractor and
agro-machinery space, in May 2015, Mahindra & Mahindra signed an agreement to acquire a 33%
voting stake in Japan based Mitsubishi Agriculture Machinery Co. Ltd.
ACCOUNTING ANALYSIS
The FY 15 financial statements of M&M have been prepared in accordance with the Indian GAAP and
are in compliance with the Accounting Standards specified in Section 133 of the Companies Act, 2013.
However, up to FY 14, the financial statements were in compliance with Accounting Standards under
the Companies Act, 1956 and the relevant provisions. This is the most important statutory change in
accounting and reporting policy for M&M. Besides March 31st being the year end, the use of accrual
basis of accounting and historical cost concept, the other important accounting policies are enlisted
below:
1. Depreciation:- For FY 15, it is calculated in Straight Line Method over the estimated useful
life of the assets which are in accordance with the Schedule II of the Companies Act, 2013.
However, for certain asset classes, the useful life is based on the Companys expected usage
pattern supported by technical assessment. For instance, for buildings (roads) useful life is 15
years while for vehicles it is 5years. On the contrary, up to FY 14, depreciation was calculated
in Straight Line Method over their estimated useful lives or lives based on the rates mentioned
in Schedule XIV of the Companies Act, 1956, whichever is higher. For instance, cars and
vehicles were depreciated at 15% of the cost.
2. Intangible Assets: - Intangible assets are amortised on a Straight Line Basis which reflects the
consumption pattern of the assets economic benefits. For example, the expenditure incurred on
technical knowhow and development expenditure is amortised over the estimated period of
benefit not exceeding 6 years and 5 years respectively.
3. Inventories: - All costs of purchase and conversion incurred in bringing the inventories to the
present state and location are included in the amount of inventories. Raw materials, finished
goods produced and purchased for sale, manufactured components and work-in-progress are
carried at cost or net realisable value whichever is lower. The weighted average method is used
in determining cost. On the other hand, stores, spare and tools are carried at cost.
4. Revenue Recognition: - The revenue from sale of products and services including export
benefits are recognised when the products are shipped or services rendered. Revenue form
Operations includes the excise duty recovered on sales. Dividend from investments are
recognised in the Profit and Loss Account when the right to receive the payment is established.
5. ESOPs: - The Intrinsic Value Method is used to measure the compensation cost of Employee
Stock Option Scheme. The intrinsic value (the excess of market price of the underlying equity
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shares on the date of grant over the exercise price of the option) is recognised and amortised on
a Straight Line Basis over the vesting period.
6. Borrowing Costs: - Borrowing costs that are attributable to the construction or acquisition of
qualifying assets are capitalised as part of the cost of those assets. Additionally, the expenses
incurred in the raising of long term borrowings are amortised over the period of the borrowings.
Any unamortised expenditure is fully written off in the year of buyback or repayment of
borrowings.
PROFITABILITY ANALYSIS
Profitability ratios measure the degree of operating success of the company. Investors are very keen to
learn about the ability of the company to earn revenues in the excess of its expenses.
Profit Margin
Profit margin measures the net profit earned from each rupee
of revenue. Profit margin is calculated excluding the revenue
from exceptional items, which gives us the more appropriate
picture of how company is performing. We see that the
profit margin for year 2015 stands at 7.50% as compared to
9.05% in 2014. In the year 2014 there was increase in the
profit margin and it grew from 7.95% to 9.05% owing to
increase in the sales and net profit. Profit grew from Rs
3262.2 crores to Rs 3732.56 crores.
Asset Turnover Ratio
This indicates whether the company is utilizing its assets
efficiently or not. In 2015 the turnover ratio decreased from
1.40 to 1.23, which is not a good sign for Mahindra and
Mahindra. This decrease could be attributed to the fact that
the total assets increased by higher value as compared to its
sales. There was also an increase in Asset turnover ratio in
2013 from 1.48 to 1.60.
Return on Assets:
It is a measure of profitability given the level of investment.
It is good indicator of companys overall performance.
However it decreased from 12.72% to 9.29% in 2015. It
could attribute to the fact that there was decrease in overall
profit of the company given that the total assets increased.
This decline was mainly due to economic slowdown at the
same time poor monsoons, which severely constrained the
rural income and domestic demand.
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Return on Equity
Return on equity is a measure of profitability from the
shareholders standpoint. It measures the efficiency of the
use of shareholders funds. It decreased from 23.73% to
16.56 % owing to lower profits in 2015 and greater
shareholder funds. However there was not much change in
the ROE in 2013-14 and 2012-13 because of not much
change in shareholder funds.

Operating Profit Margin

Since non-operating items are determined by factors that
have little to do with efficiency of management of asset, so
we consider only revenues from sale and cost of operations
to calculate the operating profit margin. It decreased from
7.24% to 6.10% in 2015 owing to decrease in Net Operating
Profit on Assets after tax. Although it increased from 6.61 %
to 7.24% in 2014.
Operating Asset Turnover Ratio
Operating assets includes those, which are used in normal
operations, which is obtained by deducting current
investment and term deposit in banks from total assets. It
decreased from 1.55 in 2014 to 01.38 in 2015, which says
company net sales from its operating asset decreased. There
was also decrease in operating asset turn over from 1.76 in
2013 to 1.55 in 2014, which is not a good sign for the
company as sales are coming mostly from the operating
assets. However there was increase in operating asset turn
over from 1.63 in 2012 to 1.76 in 2013.

SOLVENCY RATIOS
Solvency analysis tells us how well a company can fulfill its financial obligations. Solvency is affected
by the debts taken by the company for financing its assets / operations. In general, heavy debt reduces a
companys solvency as debt is riskier compared to equity.
Debt to Equity Ratio
This ratio provides the relationship between capitals obtained
from creditors to the amount obtained from shareholders.
Although debts are advantageous as it is cheaper than equity,
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excessive use of debts can be risky. This is because the company is legally obligated to pay back the
interest and principal amounts. This ratio also indicates the scale of Financial Leverage. Higher ratios
means higher leverage and higher leverage leads to higher risk for creditors. For M&M, Debt to Equity
Ratio has been seen to decrease over the past four years. The ratio in 2014-15 was 0.15 compared to
0.28 in 2012-11. This is a good sign for the company as many analysts consider a ratio of 0.3 or less to
be healthy. This is because lower ratios show that the company has low debt and hence low risk. It is
therefore less affected by changing interest rates and credit conditions.
Liabilities to Equity Ratio
This ratio is a variant of the above Debt to Equity Ratio. It
gives the relationship between all liabilities to the
shareholders equity. Just like the above ratio, as liabilities
to equity ratio increases the risk to the creditors increases.
For M&M, Liabilities to Equity Ratio has been seen to
decrease over the past four years. The ratio in 2014-15 was
0.76 compared to 1.04 in 2012-11.
Interest Cover
This ratio indicates the ability of a company to pay its current
interest payment with the earnings made. In simple terms, it
measures the safety margin a company keeps for paying interest
during a given period. This margin is useful for the company in
order to survive unpredictable financial crisis. It is the protection
that available to the creditors.
For M&M, Interest Cover has been steady around 25 over
the last three years except for 2014, when it was 34.17. This
shows that M&M can sufficiently cover its interest expense,
which is a good indicator for the creditors.
LIQUIDITY RATIOS
These ratios mention the current position of the company in terms of meeting its current or short-term
obligations.
Current Ratio
Current Ratio measures firms abilities to repay its current
liabilities with its short-term assets. The current ratio for
Mahindra & Mahindra is lower than recommended 2:1 and
has seen a 12.40% decrease from 1.29 in 2014 to 1.13 in
2015 due to 30% decrease in cash & bank balance as well as
a decrease in inventory and short-term loans and advances.
This may raise liquidity concerns but is not alarming as
current ratios of competitors are also at a lower level.
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Quick Ratio
Quick ratio captures firms abilities to cover its current liabilities
from liquid assets, assuming receivables to be liquid. Quick
Ratio showed an increasing trend from 2012 to 2014 but had a
11.34% decrease from 2014 to 2015. Although current liabilities
have been increasing year on year, it can be observed that quick
assets, calculated as current assets minus inventory, has
decreased from 2014 to 2015 mainly due to 30% decrease in cash
and bank balance as well as 18.26% decrease in short term loans
and advances.
Inventory Turnover Ratio
Inventory turnover ratio is the number of times a companys
inventories are turned into cash and higher turnover may point
to better inventory management. It has been declining since
2013 and has shown a 2.9% decline from 2014 to 2015. It has
showed a decline in 2014-2015 due to 6.28% decrease in cost
of materials consumed and 8.88% decrease in purchases of
Stock-in trade while inventory has been steadily increasing.
Major component of inventory is Finished Products Produced,
comprising 40.05% of the inventory in 2015. The other large
component is Raw materials and Bought- out Components
comprising 30.69% of inventory. More than 8% of both these
components is in transit but is included in the balance sheet
inventory.
Average Inventory Holding Period
Average inventory holding period has been calculated as
365/inventory turnover ratio. This has shown an increasing
trend from 2013 with the holding period returning back to
2013 levels in 2015 at 27.69 days.

Receivable Turnover Ratio

Receivable Turnover Ratio shows the ability of firm to collect
dues from customers. It measures the firms efficiency in credit
policy requirements and collection mechanisms and the number
of times each year receivables are turned into cash. It has not
shown a steady trend over these four years. Although the trade
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receivables have increased steadily each year mainly due to increase in export sales, sales has
fluctuated. There has been an encouraging 3.01% increase in RTO from 2014 to 2015.

Receivables Collection Period

Receivables collection period has decreased from its very
high value in 2013, but has shown 11.71% increase from
2014 to 2015, which is an improvement. It has been
calculated as 365/inventory turnover ratio.

Operating Cycle
Operating cycle is the time between acquisition of assets for
processing and their realization in cash. It is the time taken
to convert inventories into cash (turn inventories to
receivables to cash). Average operating cycle has increased
from 2013 to 2014 but is still lower than the high value of
63.38 in 2013. In 2015 it was approximately 51.44 days and
has increased from 2014 due to increase in inventory
holding period.

CAPITAL MARKET RATIOS

These ratios are indicators, which a stock analyst can use to gauge the prevailing market sentiment
about the concerned company. They highlight how other investors value a company. The three major
capital market ratios for Mahindra and Mahindra are discussed below. All of them have one factor in
common; they are juxtaposing the current market price of the companys shares with an indicator of the
companys potential to generate profits.
Price-Earnings Ratio
The PE multiple implies the cost to acquire a rupee of
companys earnings. It is the ratio of market price of a share to
the annual EPS. It is widely quoted by analysts as an indicator
of the companys growth prospects. The PE ratio for Mahindra
and Mahindra has been steadily increasing over the last 4 years.
However, FY 15 witnessed the steepest increase (from 15.4
times to 21.11 times). Up to FY 14, the percentage rise in stock
price was greater than that of EPS. However, in FY 15, the rise
in share price from Rs. 980.65 to Rs. 1187.15 (21.06% rise) was
accompanied by a fall in EPS from Rs. 63.67 to Rs. 56.23
(11.69% fall). The fall in EPS is attributable to 3.9% decline in
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net sales and income from operations owing to decreasing tractor business volumes and automotive
business volumes in FY 15.
However, the automotive sector began to show signs of recovery towards the fag end of FY15. Hence,
the steep rise in PE multiple, in spite of a fall in EPS, is an indication of future growth prospects.
According to HDFCs Indian Automobile Industry overview FY15, Mahindra and Mahindra has
potential growth prospects in FY16 owing to recovery in the automobile sector and because of new
launches on both product and engine side.
Dividend Yield
Dividend yield is the ratio of dividend per share to market
price per share. It represents the dividend earnings for
shareholders as a percentage of the market price of shares.
While the dividend per share for Mahindra and Mahindra
has been about Rs. 12.88 (average), the market price of its
shares has risen by about 75% over the 4 years under
consideration. Evidently, the dividend yield is low and
steadily decreasing. The dividend per share was lower by
Re. 1 in FY 15 owing to a fall in net profit for the year.
However, besides dividends, the return for shareholders also
includes the change in stock price over the period (capital
gain). The total return in a period is thus the ratio of the sum
of appreciation in share value and dividend to the market
price of the share. For Mahindra and Mahindra, the total
return to shareholders has moved from negative territory in
FY 12 to over 18% in FY 15. This is mainly because of stable
dividend per share and steady appreciation in share prices.
The market factored in the future growth prospects; hence the
steep rise in share price in FY 15 improved the total return to
shareholders.
Price-to-book ratio
Price-to-book ratio is a key indicator for investors to
understand whether the stock of a company is underpriced or
overpriced relative to the book value of a share. For M&M,
the ratio has increased steadily albeit at a snails pace.
Although there has not been any significant issue of equity
share capital, the book value per share has risen from Rs.
205.50 to Rs. 325.59 (a rise of 58.44%) as against a 75.08%
rise in the market price of a share. The year-end market
price is suggestive of the future growth prospects of the
company, which are not matched by that years financial
reports. The surge in market price coupled with tepid growth
in book value per share led to a spike in the price-to-book
ratio for FY 15.
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CASH FLOW ANALYSIS

Profit before exceptional items and taxation

Operating Profit before Working Capital changes
NET CASH FROM OPERATING ACTIVITIES
NET CASH USED IN INVESTING ACTIVITIES

(All figures are in Rs. Crores)

2015
2014
2013
3833.17 4316.64 4356.47
4435.81 4834.48 4863.03
3219.49 3727.64 4145.71
2423.09 2407.08 2895.95
1584.82 -823.93 1221.89

NET CASH USED IN FINANCING ACTIVITIES

NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS
-788.42
Capital Expenditure (Purchase of Fixed Assets)
2034.55
Free Cash Flow
1184.94

496.63
1704.30
2023.34

27.87
1435.62
2710.09

2012
3497.62
3962.45
2734.95
1885.33
-306.15
543.47
1374.69
1360.26

The above table summarizes the important figures from the Cash Flow Statement of Mahindra and
Mahindra over the four years under consideration. The purchase and sale of current investments
(mainly mutual funds) has been exceptionally high in all the four years. Additionally, cash flow from
financing activities has been negative in all the four years because of greater loan repayments than new
long-term borrowings (except in FY 12) and substantial dividend and interest payments. The Cash
Flow statement is analyzed using the following ratios:Earnings Quality
The cash flow statement provides an important measure to
ascertain the earnings quality of the company. However, it
cannot be denied that the earnings represented by an
increase in the companys cash position are the highest
quality earnings. In the last two years, M&M earnings
quality has deteriorated from operating cash flow being 95%
of net income (in FY 13) to 84% of net income (in FY 15).
The reasons are twofold. Firstly, the net income has declined
in the last two years. While the automotive business
witnessed a fall in volumes. Secondly, more money was
blocked in trade receivables due to growth in volume of
tractor sales in FY14 and increase in export sales in FY15.
Besides, other income has been on the higher side due to
higher dividend and interest income.

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Free Cash Flow to Net Income

Free cash flow is the difference between cash flow from
operating activities and capital expenditure in plant, property
and equipment (necessary for growth of business and
maintenance of firms assets). Free cash flow thereby is an
indicator of the firms ability to finance expansionary
activities using internally generated funds. For comparison
purposes, free cash flow is shown as a percentage of the net
income (profit before exceptional items and tax). (3)
Despite a fall in net income, the ratio has declined steeply in
the last two years i.e free cash flow has fallen by a greater
proportion than net income. This is because of increasing
capital expenditure on New Product Development, Capacity
Enhancement and Research and Development.
Operating Cash Flow Ratio
Operating Cash Flow Ratio is the ratio of cash flow from
operating activities to current liabilities. It is a very
important liquidity ratio from the cash flow statement. It
indicates the firms ability to meet it short-term debt
obligations from its operating cash flows. This ratio is a
cause of concern for M&M. It is not only less than 1
(suggesting that the company is not generating enough cash
from operating activities to meet its current liabilities) but
has declined substantially in the last two years.
Besides a fall in the cash flow from operating activities in
the last two years (because of a fall in net income and
increase in trade receivables and other income), the current
liabilities (especially trade payables) have been high and
increasing. Although increase in trade payables generates
cash for working capital, it also creates an obligation to pay
in the near future.
LEARNINGS
As an investor I see that the purchase and sale of current investments (mainly mutual funds) has been
exceptionally high in all the four years. The PE ratio for Mahindra and Mahindra has been steadily
increasing over the last 4 years despite decline in net profit. I is possibly due to future growth of
automotive sector and companys new launches. Although the growth perspectives seems good,
company seems overpriced. The Accounting Policies must be carefully perused. Minor discrepancies in
the policy may lead to major changes in the profits of the company.

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Annexure 1

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Annexure 2

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Annexure 3

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Annexure 4

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References
1. Earnings-quality-analysis-operating, thevalueatrisk.blogspot.in
2. Free-cash-flow-alternate-bottom-line, thevalueatrisk.blogspot.in

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