CHAPTER III

M
 CHAPTER III
METHODOLOGY

In research, the methodology needs to be cautiously designed to capitulate results

that are as objective as realistic. An able-bodied comprehensible modus operandi empowers
the new-fangled research investigator re-examine the study milieu. Good methodology
follows the standards of the established conventions. For the present study, a number of
indispensable inimitabilities of the research methodology skirmishing the application
magnitude and research rationalization of each one are defined here in this chapter.

The ensuing paragraphs in this chapter deal with the methodology adopted in
selection and analysis of data for this study. It outlines the objective and scope of the study,
procedure followed for selection of the sample and the collection of data, classification of
the sample and the technique followed in analyzing the data for the period of study.
Further, the hypotheses set and limitations of the study have also been dealt herein.

The problem

The title of the study is Working Capital Management of Indian Automobile

Industry.

Objectives of the study

The present study in general aims at making a comparative study of working capital
management performance in commercial vehicles, passenger cars and multiutility vehicles
and two and three wheelers sectors of Indian automobile industry. The specific objectives
of the study are:

1. To examine the structure, source and utilization of working capital and its
components;
2. To estimate the risk-return analysis of working capital position;
3. To assess the liquidity position;

4. To assess the impact of working capital ratios on profitability; and

 5. To estimate transactions demand functions of working capital and its various
components on efficiency in utilization of working capital in the selected units of
the automobile industry in India.

Research Design

It is not possible in practice for an individual research worker to approach all the
bits and pieces in the universe. Researchers select only a small amount of bits pieces from
the universe for the purpose of the study on the basis of stratified sampling. The sample so
selected constitutes the sample design for the purpose. A research design is a definite plan
for obtaining a sample from a given population. Research design means a sketch or a
drawing of a research projects structure. It comprises a series of prior pronouncements
that, taken together, provide a roadmap for carrying out a research project. The research
design of the present study is outlined hereunder.

Selection of sample

Keeping in view the scope of the study, it is decided to include all the companies
under automobile industry working before or from the year 2001-02 to 2015-16. But,
owing to several constraints such as non-availability of financial statements or non-working
of a company in a particular year etc., the researcher is compelled to restrict the number of
sample companies to 17. Therefore, this study is expost facto based on survey method
making a survey of seventeen companies in Indian automobile industry. There are 26
companies operating in the Indian Automobile Industry. The companies under automobile
industry are classified into three sectors namely; commercial vehicles, passenger cars and
multiutility vehicles and two and three wheelers. The details of the sector with the available
companies of Indian automobile industry are presented in Table 3.1.

Table 3.1
 Total number of companies available in Indian Automobile Industry
15 years data
Total companies
S.No Sectors available
available
companies
1 Commercial Vehicles 5 5
2 Passenger Cars and
8 3
Multiutility Vehicles
3 Two and Three Wheelers 13 9
Total 26 17

Source: Prowess Database

All the three sectors have been selected for the purpose of the study. The selected
sectors include 26 companies. Out of 26 companies, 5 are under commercial vehicles, 8
under passenger cars and multiutility vehicles and 13 under two and three wheelers sector.
Out of 26 companies of the selected sectors, 15 years data is available for 17 companies
only. Therefore, all the 17 companies are included in the sample. It accounts for 69.23 per
cent of the total companies available in the Indian automobile industry. The selected 17
companies include 5 under commercial vehicles, 3 under passenger cars and multiutility
vehicles and 9 under two and three wheelers sectors. List of companies selected included
in the present study along with year of incorporation, ownership and its market share is
presented in Table 3.2.

It is evident from the Table 3.2 that sample company represents 98.74 percentage
of market share in commercial vehicles, 87.08 percentage in passenger cars and
multiutility vehicles and 99.81 percentage in two and three wheelers. Thus, the findings
based on the occurrence of such representative sample may be presumed to be true
representative of automobile industry in the country.

Table 3.2
 List of sample companies included in the present study

Total
Year of Market
market
S.No Sectors / Companies Incor Ownership share
share
poration (%) (%)

Commercial Vehicles (5)

1 Ashok Leyland Ltd 1956 Hinduja Group 35.62
2 Tata Motors Ltd 1956 Tata Group 34.22
3 Bajaj Tempo Ltd 1958 Firodia Group 11.50
4 Eicher Motors Ltd 1982 Eicher Group 10.65
5 Swaraj Mazda Ltd 1983 State and 6.75 98.74
Private Sector

Passenger Cars and

Multiutility Vehicles (3)
6 Hindustan Motors Ltd 1942 Birla 8.31
C.K.Group
7 Mahindra and Mahindra Ltd 1945 Mahindra and 42.17
Mahindra
8 Maruti Udyog Ltd 1981 Private 36.60 87.08
(Foreign)

Two and Three Wheelers (9)

9 Bajaj Auto Ltd 1945 Bajaj Group 18.80
10 LML Ltd 1972 LML Group 11.58
11 Maharastra Scooters Ltd 1975 Bajaj Group 7.80
12 TVS Motor Company Ltd 1982 TVS Group 12.93
13 Kinetic Motors Ltd 1984 Firodia Group 11.75
14 Hero Honda Motors Ltd 1984 Hero (Munsals) 10.54
Groups
15 Kinetic Engineering Ltd 1970 Firodia Group 9.72
16 Majestic Auto Ltd 1986 Hero Group 9.04
17 Scooters India Ltd 1972 Central Govt. 7.65 99.81
Commercial
Enterprise
Period of Study

The period 2001-02 to 2015-16 is selected for this study of Indian

automobile industry. This 15 years period is chosen in order to have a fairly long,
cyclically well balanced period, for which reasonably homogenous, reliable and
upto-date financial data would be available. Further, the span chosen for the study is
the period of the beginning of liberalization measures introduced by the
Government of India. Hence, the period 2001-02 to 2015-16 is an era of growth of
working capital management in the manufacturing sector, particularly automobile
industry and has got genuine economic significance of its own.

Source of Data

The study is mainly based on secondary data. The major source of data
analyzed and interpreted in this study related to all those companies selected is
collected from PROWESS database, which is the most reliable on the empowered
corporate database of Centre for Monitoring Indian Economy (CMIE). It contains a
highly normalized database built on a sound understanding of disclosure in India on
around 12,000 companies, which include public, private, co-operative and joint
sector companies. The database provides financial statements, ratio analysis, funds
flow, cash flow, product profiles, returns and risk on the stock market etc.

Besides prowess databases, relevant secondary data have also been collected
from BSE Stock Exchange Official Directory, CMIE Publications, Annual Survey
of Industry, Business newspapers, Reports on Currency and Finance, Libraries of
various Research Institutions, through Internet etc. The study required variety of
data therefore, websites like http://indiainfoline.com, www.indiastat.com and
www.google.com have been comprehensively searched.

Data Editing

For this study, major part of data come from secondary sources. Data have
been collected in raw form and then it is made suitable for analysis as per the
methodology defined for the purpose.
Data Analysis

The financial and statistical analysis approach plays a vital role in the
financial environment. To enjoy the benefit of financial and statistical analysis
researcher has collected, assembled and correlated the data, classified the data
appropriately and condensed them into a related data series; stated the resultant
information in a comprehensive form, text, tables and analyzed and interpreted the
reported data. The financial and statistical techniques applied in the study are given
below.

In the course of analysis in this study, use of various accounting and

statistical techniques have been made. Accounting technique includes ratio analysis,
while among statistical techniques the arithmetic mean (X), co-efficient of variation
(CV), test of significance (f test), trend indices, simple growth rates, correlation co-
efficient (r), co-efficient of determination (R2), linear regression equations, analysis
of times series, chi-square test and analysis of variance have been applied through
EXCEL, SPSS statistical softwares. In addition, multiple regression and
discriminant analysis were also applied using financial ratio as variables.
Econometric models are used to describe the demand for working capital and its
various components.

Ratio Analysis

Ratio analysis is regarded as one of the best tools in analysis and comparing
the time series accounting data of different firms. That is why it has been
extensively used in the present study. Various ratios are computed in order to
analyze the size, composition and circulation of working capital and its various
components (inventory, receivables and cash) have been explained at the relevant
places in different chapters. However, in this study the use of ratios has not been
made in the course of analysis directly. To make the analysis and interpretation more
precise and accurate, the values of X, CV and f have been computed from the
ratios.

(i) Arithmetic mean (X)

It gives a single value to describe the whole data. It has been obtained by
adding the values of all observations and dividing it by the number of observations.
 X = Lx/N

where Lx - Sum of variables and N- Number of observations.

(ii) Co-efficient of variations (CV)

It is used in problems which requires to compare the variability of two or

more than two series. The series, for which the co-efficient of variations is greater,
is said to be more variable or conversely less consistent, less uniform, less stable or
less homogeneous. On the other hand, the series for which co-efficient of variations
is less, is said to be less variable or more consistent, more uniform, more stable or
more homogeneous. In ratio analysis of financial data, less co-efficient of variation
in a ratio is taken to mean relatively better control of the management on that ratio.

CV = o/X

where a - Standard deviation and X is the mean.

(iii) t test

Along with the X and C.V values for each group of ratios, the values of t
static have been computed in order to determine whether the mean of a sample
(particular unit) deviates significantly from population (Industry) mean.

(X-n)
t =---------------- X VN
S

where X is the mean and S is the standard deviation of the sample with size N and p
is the population mean.

If the calculated value of f exceeds the tabulated value, it indicates that the
difference between X and p is significant. If it is less than the table value, the
difference between X and p is not significant; hence, the sample distribution closely
resembles the population distribution with mean p.
Simple Growth Rates

In order to see at what rate the growth has taken place in the working capital
and its various components in relation to sales during the period under study, simple
growth rates and average growth rates have been computed.

g =------------------ x IOO
Y-i

where g is the growth rate and Yt and Y,.! are the values of variable Y in time t
(current year) and time t_i (previous year) respectively.

Trend indices

In order to compute the index of change in variable, the following formula

has been used.

Yt

It =----- x 100

Y0

where Yt is the value of the variable in the year t for which the index is to be
computed, Y0 is the value of the variable in the base year. In order to measure the
change in the relative proportion of various components of the working capital to
the total, such indices have been computed.
Analysis of Time Series

Time series analysis is used to detect patterns of change in statistical

information over regular intervals of time. For the analysis of working capital of
automobile industry of India, the secular trend values are proposed to be computed
by the method of least square at relevant places.

Chi-square test

The chi-square test is the simplest and most widely used non-parametric test
in statistical work. Symbolically;

Chi-square = (O - E)2 / E

Where O refers to the observed frequencies and E refers to the expected

frequencies. The calculated value of chi-square is compared with the table value of
chi-square for given degrees of freedom at a certain specified level of significance.
If at the stated level the calculated value of chi-square is more than the table value
of chi-square, the difference between expected and observed values is considered to
be significant, i.e., it could not have arisen due to chance factor. The technique of
chi-square is applied for the analysis of working capital trend.

Analysis of variance

The analysis of variance has been developed specially to test the hypothesis
whether the means of several samples have significant difference or not. From this
technique, one is able to determine whether the samples have the same mean as the
population from which they have been drawn. The technique of analysis of variance
is proposed to be applied for the analysis of working capital trends and liquidity
analysis.

Linear Regression Analysis

To make future projections of dependent variables (such as working capital,

inventory and receivables) for a given value of independent variable
(sales) possible, the linear regression equation (Y = a + bX) has been used. Further,
in this part of the analysis, the values of correlation co-efficient (r), co-efficient of
determination (R2) and f test have been computed in order to ascertain the
closeness or relationship between dependent and independent variables.

The Discriminant Analysis

The use of ratio analysis to judge the liquidity position of the enterprises is
not free from certain limitations. The limitations arise from the fact that the
methodology is basically univariate; that is, each ratio is examined in isolation. Due
to this, the financial analyst has to use his own judgement to assess the combined
effects of two or more ratios. A linear multiple discriminant analysis has been
applied in finance to problems involving more than two groups. Altman has applied
the discriminant analysis in predicting bankruptcy but here it is applied in
operational adequacy of working capital and liquidity predication context. This
study considers a simple case in which two variables Xi and X2 are used to
discriminate between two groups - good and poor risks. The two variables used are
networking capital in terms of monthly operational requirements (Xj)and net
working capital in terms of monthly sales requirements (X2) in the case of
operational adequacy of working capital and also current ratio (Xi) and liquid ratio
(X2) in the case of liquidity assessment. Let

Z = aX1 + bX2 . . .(1.1)

be a linear combination of X1 and X2. The problem is to determine the values of a

and b by means of past data and some criterion that proves Z useful as an index
for discriminating among members of the two groups . In this study, discriminate
analysis has been performed for all the selected years. However, its limitation is
that only two variables are being considered.

Scope of the study

The present study includes the empirical analysis of working capital

management of Indian automobile industry. The scope of working capital is very
wide and broad-based. For the theoretical understanding, the meaning
 and definition of working capital and various concepts have come under the
purview of the study. The second part of the study is confined to the various
approaches to the study of working capital management. For the analytical and
technical study, tools and techniques, such as ratios, mean, standard deviation, co-
efficient of variation, compound annual growth rate, t-test, ANOVA, Chi-Square
test, correlation, regression and their interpretation are included in the study. It also
contains the analysis of impact of working capital on profitability. The period of
study has been confined to the years between 2001-02 to 2015-16.

Limitations of the study

However, there are some limitations of the study, which are generally
inherent in all such studies conducted at human being level. The most important
among them are:

1. The study is based on secondary data obtained from the published annual
reports and as such its finding depends entirely on the accuracy of such data.

2. In order to make a study on working capital management more fruitful, it is

essential that data should be of frequent time intervals. But, such type of weekly
or monthly data could not be obtained and due to this the study has been forced
to use the annual data which are available in profit and loss accounts and
balance sheets. The use of annual data in this study is thus likely to make the
conclusions somewhat less valid and less reliable.
3. The present study is largely based on ratio analysis which has its own
limitations.
4. Statistical test used in the study to interpret the analyzed data to generalize the
findings of the study for the entire population has got their own limitations and
result in the analysis is subject to some constraints as are applicable to statistical
tools.
5. The analysis of financial statement of business enterprise gives diagnostic
indicators. Researchers being outside external analyst obviously have no
access to internal data. Therefore, inside view of the organization cannot be
characterized in the study.
6. The financial statement does not keep pace with the changing price level.
However, all these limitations, do not, in any way, affect the worth of this research
work.

Chapter Scheme

In order to present this research work in a lucid way, it has been divided into
six chapters. The layout of these chapters is delineated below. Chapter I is
conceptual in nature and has been divided in to six parts, which includes
introduction, meaning and concept of working capital management, need and
importance of the study, selection of automobile industry, significance of the study
and research questions.

Chapter II presents the various approaches to the study of working capital

management by financial executives, theorists and academicians.
Chapter III encompasses the research methodology of the study. This chapter
includes the problem, objectives of the study, research design,
sampling design, period of study, sources of data, data editing,
selection of variables, data analysis, scope of the study, limitations of
the study and chapter scheme.

Chapter IV deals with the structure, sources and utilization of working capital and
its components in the selected enterprises.

Chapter V brings out empirical analysis of working capital such as

assessment of liquidity, impact of working capital on
profitability and estimating demand for working capital.

Chapter VI embodies the summary of conclusions and some workable

recommendations for the smooth and efficient functioning of Indian
automobile industry.

Towards the end of this research work, comprehensive bibliographies on the

subject and some appendices have also been added.
References

1. Fred Weston, J. and Brigham, E.F, (1981), Managerial Finance, New

York: The Dryden Press, p. 185.
2. Altman, E.I, (September 1968), Financial ratios, Discriminant analysis
and the Prediction of Corporate Bankruptcy, The Journal of Finance,
pp.589-609.
3. Fred Weston, J. and Brigham, E.F, (1981), op. cite., p.186.

4. John Maynard Keynes (1936), The General Theory of Employment,

Harcount Brace and Company, p.201.