Finance - Working Capital - Escort Project

CONTENTS
• INTRODUCTION
• PROFILE
• FINDINGS OF THE STUDY
• PROJECTIONS
• RESEARCH METHODOLOGY
• LIMITATIONS
• CONCLUSIONS
• RECOMMENDATIONS
• REFERENCES
Objectives
 Year wise comparative study of the Escorts Mahle Limited in terms of

variation in its Profitability, operational efficiency, liquidity and solvency
during the years 2003, 2004, 2005, and 2006.
 Comparative analysis of profitability, operational efficiency liquidity and

solvency of Escorts Mahle and Goetze India with other Industry players.
 Making financial projections of Escorts Mahle for the next two years.
 The main aim of the research is to derive out the suggestions and
conditions, which favors the lowering of cost and improving the
profitability of the company.
INTRODUCTION
Auto- Ancillary Industry
The auto ancillary sector in India was stagnant till the 'people's car' Maruti appeared
on the Indian roads. Prior to this the sector was supplying components to the likes of Telco,
Bajaj, HM, Premiere Automobiles and M&M. Today, the Indian automotive component
industry manufactures a broad range of parts required by various domestic and Multinational
automobile manufacturers. The auto ancillary industry has moved with the trend and
modernised its manufacturing plants and techniques. Most of the multinational auto
manufacturers who have set up shops in India outsource their component requirements from
within India. Import dependence is low, approximately 13% of domestic demand, and usually
restricted to items requiring special steels and materials or precision engineering (gearboxes
for instance).
The auto ancillary sector is dotted with small to medium sized firms with most having
small capacities. However, two or three top firms controlling 80-90% of the market dominate
certain segments. A lot of these firms have entered into joint ventures with foreign firms in
order to tap the technology and enter the global markets. The Indian firms are able to compete
globally due to cost competitiveness.

MARKET STRUCTURE
The Automotive Component Manufactures Association (ACMA) classifies the auto ancillary
industry into the following product segments:
Engine and engine parts: Pistons, piston rings, piston pins, gaskets, carburetors, fuel
injection pumps, etc.
Drive transmission and steering parts: Transmission gears, steering gears, crown wheels
and pinions, axles, wheels, etc.
Suspension and braking parts: Leaf springs, shock absorbers, brake assemblies, etc.
Electricals: Spark plugs, starter motors, generators, distributors, voltage regulators, flywheel
magnetos, ignition coils, etc.
Equipment: Dashboard instruments, headlights, horns, wipers, etc.
Others: Fan belts, sheet metal parts, plastic mouldings, etc.
Auto component manufactures supply to two kinds of buyers – original equipment
(OE) manufacturers and the replacement market. At present the replacement market forms
around 65% of demand. The relative importance of the OE and replacement markets varies
across products depending upon the factors like life of auto component, quality and materials
used in auto component, average age of vehicle etc. For eg, in case of spark plugs the
replacement demand is close to 80%. On the other hand, radiators, shock absorbers and
carburetors account for a replacement market demand of less than 40%. OEMs account for
approximately 25% of the demand and exports account for the balance 10%. Sales of auto
components are carried out through dealer network of components, authorized vehicle dealers
and retailers.
Replacement market: The margins are slightly higher in the replacement market, though the
success depends on the established brand name and distribution network. The small scale
players score over the bigger names in this segment because of excise duty exemptions and
lower overheads.
OEM Market: Demand from the OEM market is dependent on the demand for new vehicles.
This market is characterized by requirements of high quality, tight delivery schedules and
lower margins. OEM’s have also come to realize the importance of vendor development.
With players like Telco and Ashok Leyland reducing the amount of vertical integration, it
will be important for them to build long-term relationships with ancillaries helping them with
quality improvement and technology absorption.
Export: The recession in the domestic automobile market during FY91 and FY92 induced
companies to develop the export markets. Since then this sector has grown.
Auto ancillary players have been hit hard by a slowdown in the automobile segment for the
past two years. Units, particularly belonging to the small-scale sector have faced the brunt of
rising costs and lower capacity utilization.
A Industry Look
CAPACITY IN ATUTOMATIVE INDUSTRY
PISTONS
Total 21,367,000
Auto Piston Mfg. Co, Ltd. Amritsar 500,000
Abilities India Pistons & Rings Ltd., Ghaziabad 900,000
Escorts Ltd., New Delhi 7,827,000
India Pistons Ltd. Chennai 3,000,000
Menon Pistons Ltd. Kolhapur 2,400,000
Shriram Pistons & Rings Ltd., New Delhi 3,200,000
Samkrg Pistons Ltd., Hyderabad 3,000,000
Total 21,367,000
PISTON PINS
Total 22,057,000
Auto Pistons Mfg. Co. Ltd., Amritsar 450,000
Escorts Ltd., New Delhi 8,047,000
India Pistons Ltd., Chennai 3,000,000
Maco Pvt. Ltd., New Delhi 3,600,000
Maini Precision Products Pvt. Ltd., N.A.
Bangalore*
Menon Pistons Ltd., Kolhapur 360,000
Sri Ramdas Motor Transport Ltd. New Delhi 400,000
Total 22,057,000
PISTON RINGS
Total 125,982,000
Auto Piston Mfg. Co. Ltd., Amritsar 3,600,000
Abilities India Pistons & Rings Ltd., 400,000
Ghaziabad
Goetze (India) Ltd., New Delhi 48,312,000
India Pistons Ltd., Chennai 15,000,000
I.P. Rings Ltd., Chennai 4,500,000
Menon Pistons Ltd., Kolhapur 6,000,000
Perfect Circle Victor Ltd., Nasik 21,000,000
Precision Castings & Components, Delhi 1,800,000
Supercircle Pvt. Ltd., New Delhi* 4,000,000
Total 125,982,000
PROFILE
ESCORTS GROUP
The Escorts Group was created by Yudi and Hari Nanada. They started it as agency
house in 1994. Today it ranks among top 10 industrial giants. It has more than eight
specialized marketing divisions, vast network of sales and outlets in the country and has
representation in the overseas market.
The Escorts Group, with modern manufacturing facilities and an extensive
marketing network, is among the large Indian Corporations operating in the diverse fields of
agri-machinery, bi-wheelers, construction and material handling equipment, automotive and
railway ancillaries, telecommunication and financial services.
The group has restructured itself to meet the challenges of a newly liberalized Indian
economy with a view to further consolidate its market shares in the domestic market, while
targeting transnational business through an aggressive programme of joint venture and

strategic alliances with global majors, buttressed by radical modernization of its
manufacturing facilities.
The Company’s automotive and railway ancillary business groups are shifting gears to
cope with the challenges of the future. Escorts Ltd. is hiving off its piston and pin operations
into a joint venture with Mahle of Germany. Goetz India Ltd., a group company and the
largest manufacturer of piston rings has signed a accord with its joint venture partner T & N,
U K to manufacture aluminium radiator and power metal components for the Indian and
overseas automotive industries.
The future of Escorts is a bold appreciation of the challenges that lies ahead in an
open market economy. Vision 2005 is driving the company towards the opening years of a
new century with an uncompromising stress on quality and enhancement of investor value.
The core belief is that a company can grow to new heights based on a creditable track record
and a vision that is not daunted by competition but thrives on it.

ESCORTS
Escorts Limited had been manufacturing Pistons under a Technical Collaboration
Agreement with M/s Mahle GmbH, Germany. A plant had first been set up in Patiala in 1960.
This alongwith the piston ring facility of Goetze (India) limited enabled Escorts to become
the largest producer of piston assemblies in the country. A second plant was set up at
Bangalore at 1977 and over the years Escorts established a commanding position as an OE
supplier, where its main customers includes TELCO, Ashok Leyland, Bajaj Auto, Indian
Railways, Defence Establishment, TVS Kirloskar, Mahindra, Maruti Udyog etc. It also built
up a strong presence in the Replacement Market, where it developed an extensive dealer
network.
Mahle GmbH are world leaders in Pistons, with manufacturing facilities spread
throughout the Globe. Group Turnover is DM 3800 million.
In 1996 Escorts entered into a Joint Venture Agreement with M/s Mahle GmbH, in
which both partners had a 50% share. On 1st October 1996, Escorts Mahle Limited (the joint
venture Company) acquired the pistons business of Escorts Ltd as a going concern. It also
acquired the Piston business of Goetze (India) Limited at Patiala, which was being carried out
under a technical licence from Mahle. This acquisition was funded by the issue of equity
share capital of Rs 15 crores, issued at a premium of Rs 30 crores, and 14% Cumulative
Redeemable Preference Shares amounting to Rs 52.50 crores.
Its main competitors are India Pistons and Sriram Pistons.

The Management of the company is headed by an eminent Board of Directors headed
by Mr. Anil Nanda as Chairman. Other members of the Board of Directors are as follows:
Mr. B R Kapoor - Executive Director
Mr. H Henning - Director Technical
Mr. N Nanda
Dr. Ing. Klaus J Henke
Dr. Rudolf Paulik
Mr. Joern W eipert
Escorts Mahle Limited is the largest manufacturer of Piston assembly in the country
with a capacity of 7 million Pistons per annum. It holds the highest market share in the
country. Be it the original equipment manufacturer or after-market, Escorts Mahle piston
assembly is the first choice of every discerning customer.
Escorts Mahle has the wide range of Piston assemblies varying from a 39mm-moped
piston to 300mm pistons for Diesel Locomotive engines covering 2 wheelers, cars, Jeeps,
Light Commercial Vehicles, Heavy Commercial vehicles & Locomotive engines.
It maintains the technological leadership through continuous R&D and is the first
company to introduce many original piston designs in the country. Ring Carrier Piston for
trucks, Strut type design for Light commercial vehicles, Thin Walled Piston design for high
performance Passenger cars, Thin groove piston for low emission BI-wheeler engines,
Pistons with cast in cooling coil & Steel crown piston are the important design among the
many designs developed.

It also exports Pistons to many countries like SAARC region, South East Asia, Middle
East, Africa, Europe, North & South America.
STRENGTHS
1. Promoter Pedigree - The Company is an associate of Escorts one of the India's

leading producers of industrial, automotive and other products and services for
professional and personal use.
2. Access to the latest technology and Benefits of the R&D activities undertaken by the
Escorts Group.
3. Its production capacity, making it the largest producer in the industry as well as
market leader in India.
4. Access to the international market
WEAKNESS
1. The Company has been making losses since commencement of operations in 2004.
2. The losses of the Company have eroded more than 50% of Net worth of the Company.
FINDINGS
OF THE STUDY
Profitability Ratios
The Profitability ratios measure the profitability or the operational efficiency of the firm.
Gross Profit Ratio
This ratio shows the relationship of sales with the direct costs such as purchases,
manufacturing cost, etc. and, thus, is important.
It is calculated as:
Gross Profit Ratio = Gross Profit x 100

Net Sales
Appendix 7 reveals the Gross Profit ratio for EML in the last four years. For the year
2005, it has declined to 41.36 from 48.01 of the year 2005. The reason is the rise in the
expenses. All the expenses; material, labour, factory, administration and selling &
distribution expenses has raised over the last year. This is definitely not an ideal situational.
In the present scenario operational efficiency is the key to success.
Appendix 8 shows the Gross Profit Ratio for EML and GIL, together and other
players in the industry. For EML and GIL it is 49.27 for the year 2005 while the major
players like SAMKRG and Shriram have managed to have quite higher Gross Profit Ratio of
55.91 and 48.64 respectively.
This is not a very encouraging sign in the present scenario when the market is getting
more and more competitive and price sensitive.

A Look… at Escorts Ltd.
GrossProfit Ratio
50
48 48.01
46
45.4
44
Times
42
41.36
40.75
40
38
36
1998 1999 2000 2001
Years
Gross Profit Ratio

A Look …at the Industry
Gross Profit Ratio
60 57.11
55.91
51.8
49.27 48.35 48.64 48.21
50
44.14
40
Times 30
20
10
0
SAMKRG (Be st) E.M.L. + G.I.L Shriram I.P.L. (Worst)
Com panies
2000 2001
Operating Ratio
Operating Ratio is the test of the operational efficiency of the business. It shows the
percentage of sales that is absorbed by the cost of sales and operating expenses. In simple
words, it measures the extent of cost incurred for making the sale.
Operating ratio = All operating cost and expenses x 100
Net Sales
Appendix 7 reveals the EML’s year wise condition and states that operating ratio is
103.23 for the year 2005 which is much greater then that of the year 2005. It was 92.43 in
2005. In 2005 it is all time high since last four years. Such a situation is not encouraging. All
the expenses have raised and demands attention. This is one of reasons why the company is
making losses.
Appendix 8 shows the picture of the whole industry. Very evident from the graph that
EML and GIL, as together are lagging in this field from its major competitors. Its operating
ratio is 94.06 which is much higher as compared to SAMKRG, which is just 68.57. It is 77.67
and 89.86 for the Shriram and IPL respectively for the year 2005. This raises the question that
why it is so high for our organization when other players are managed to maintain at lower
levels. Though, when compared to that of the previous year operating ratio has raised for
every player in the industry.
This is alarming situation for our organization.

A Look … at Escorts Ltd.
OperatingRatio
106
104
103.23
102
100
98.85
98
Times
96
94 94.48
92 92.43
90
88
86
1998 1999 2000 2001
Years
Operating Ratio
OperatingRatio
100 94.06
89.86 88.4
90 84.18
77.1277.67
80
68.57
70 64.18
60
Times 50
40
30
20
10
0
SAMKRG (Be st) Shriram I.P.L. E.M.L. + G.I.L.
(Worst)
Companies
2000 2001
OperatingNet Profit Ratio
10
8
7.57
6
5.52
4
Times
2
1.15
0
1998 1999 2000 2001
-2
-3.23
-4
Years
Operating Net Profit Ratio

A Look… at the Industry
OperatingNet Profit Ratio
40
35.82
35
31.43
30
25 22.8822.33
Tim es 20
15.82
15
11.6
10.14
10
5.94
0
SAMKRG (Best) Shriram I.P.L. E.M.L. + G.I.L.
(Worst)
Com panies
2000 2001
Return on Investment
ROI judges the overall performance of the concern. It measures how efficiently the
sources entrusted to the business are being used. The purpose is to ascertain how much
income the use of Rs 100 of capital generates.
ROI = Profit before interest, Tax and Dividend x 100

Capital Employed
The company is making losses since last three years. Appendix 7 shows that ROI was
0.54 in the year 2003 and after that it remains negative for three consecutive years. It was –
5.75 for 2004, -4.91 for 2005 and –22.59 for the year 2005. This is not at encouraging rather
much alarming for the management.
Appendix 8 reveals the position of the whole industry. Shriram has managed to have
ROI of 17.32, which is highest among all the players while for EML and GIL together it is –
5.75 which least in the industry. Apart from our organization, IPL also has negative ROI,
which is –3.08 for the year 2005. Shriram is the only player in the industry who has achieved
the higher ROI then that of the previous year otherwise for all other players ROI has declined.
EML & GIL together and IPL travel from positive ROI to negative, which is not an ideal
situation.
Negative ROI is seeking the immediate attention of the management.

Return On Investment
0.84
0
1998 1999 2000 2001
Percentage (%)
-5 -4.91
-10
-11.27
-15
-20
-22.59
-25
Years
ROI
A Look … at the Industry
Return on Investment
20
17.32
15.19
15
12.57
10
7.01
6.3
(%) 5
0.54
0
-3.08
-5 -5.75
-10
Shriram (Best) SAMKRG I.P.L. E.M.L. + G.I.L
(Worst)
Companies
2000 2001
Expense ratios
Expense ratios are calculated to ascertain relationship that exits between operating
expenses and volume of sales. It indicates the portion of sales which is consumed by various
operating expenses. Thus such an analysis will through good light on the levels of efficiency
prevailing in different aspects of the work.
Material Cost to Sales Ratio:

Ratio
This ratio indicates the efficiency with regard to material cost.
Material Cost to Sales Ratio = Direct Material Cost x 100

Net Sales
Appendix 7 shows that the material costs to its sales have reached to 40.34 times for
the year 2005. It is all time high since last 4 years which is not a healthy sign. It was 34.24
in2003 and has risen year after year.
Appendix 8 shows the condition of the whole industry, every player in the industry
have seen the rise in this ratio as compared with that of previous year. Shriram have managed
this ratio at 24.56 which is best in the industry while IPL has 35.63 for the year 2005 which is
worst among the industry players. For EML and GIL, together it is 31.1 for 2005.
This shows that management should pay immediate attention in case of EML because
in present scenario is the key to success.
A Look … at Escorts
Material Cost to SalesRatio
41
40.34
40
39
38
37
Times
36.5
36
35
34.24 34.3
34
33
32
31
1998 1999 2000 2001
Years
Material Cost to Sales Ratio

Material Cost toSalesRatio
40
35.63
35 32.99
31.32 31.1
30
24.56 24.26 24.59

25 22.24
Times 20
15
10
0
Shriram (B est) SA M KRG E.M .L. + G.I.L I.P.L. (Worst)
C ompanies
2000 2001
Labour Cost to Sales Ratio:
This ratio indicates the efficiency in the personnel cost incurred by the organisation.
Labour Cost to Sales Ratio = Direct Labour Cost x 100

Net Sales
Appendix 7 shows the year wise in house condition of EML. It reveals that this ratio
was 23.04 for the year 2003 which rose 28.49 in the year 2005. This is not an ideal situation
for the organisation. This is one of the most important problems for EML.
Appendix 8 puts light and raises certain question for the management of EML and
GIL as this ration is 27.54 which is worst in the industry. SAMKRG has just 13.38 which is
almost half of that of EML. Others players like Shriram and IPL too have much lower labour
cost to sales ratio. It is just 15.36 and 18.7 for Shriram and IPL respectively for the year 2005.
These figures are not at all satisfactory rather these are alarming in the present time.
Management needs to take immediate action in this regard.
Labour Expensesto SalesRatio
35
30 29.25
27.51 28.49
25
23.04
20
Times
15
10
0
1998 1999 2000 2001
Years
Labour to Sales Ratio

Labour Cost to SalesRatio
30 27.54
25.96
25
20 18.52 18.7
15.36
14.42
Tim es 15 13.38
12.01
10
0
SAMKRG (Be st) Shriram I.P.L. E.M.L. + G.I.L.
(W orst)
Com panies
2000 2001
Factory Expenses to Sales Ratio:
This ratio puts light on the efficiency in regard of other manufacturing and factory
expenses.
It is calculated as :
Factory Expenses to Sales Ratio = Factory Expenses x 100

Net Sales
Appendix 7 shows that EML is moving on the right track in this aspect as this ratio
declined from 25.01 (2003) to 18.28 in the year 2005.
Appendix 8 revels that EML and GIL, together has the best ratio in the industry whish
is just 18.97 while it is 27.96 for Shriram, 22.55 for SAMKRG and 0.22 for IPL. Thus
Shriram’s ratio is worst in the field while that of EML and GIL is best. Apart from Shriram
all the players in the industry have seen the rise as compared to that of previous year.
These figures are satisfactory rather encouraging.

Factory Expenses toSales Ratio
30
25 25.01
20
18.09 17.69 18.28
Times
15
10
0
1998 1999 2000 2001
Year
Factory Exp to Sales Ratio

Factory Expensesto SalesRatio
29.42
30 27.96
25
22.55
20.22
18.97
20 18.18 18.79 18.72
Tim es 15
10
0
E.M.L. + I.P.L SAMKRG Shriram (Worst)
G.I.L(Be st)
Com panies
2000 2001
Administration Expenses to Sales ratio:
This ratio shows the efficiency with regard to office and administration expenses.
Administration expenses to sales ratio = Administration Expenses x 100

Net Sales
Appendix 7 shows that this ratio has remained almost stagnant over the period of time
for EML. It was 10.7 for 2003 and 10.3 for the year 2005, though the year 2005 was
exemplary in itself as this ratio was 8.56 in that year.
Appendix 8 shows that SAMKRG is best in the industry in this regard with the ratio
of 7.53 times while IPL is worst with 15.3 times for the year 2005. EML and GIL, together
has the ratio of 11.64 times for the year 2005. None of the company has neither improved
much nor loosed much in this regard.
The figure for EML doesn’t seem satisfactory when compared to SAMKRG.
Admn Expensesto Salesratio
14
12 11.81
10.7 10.3
10
8.56
Times
0
1998 1999 2000 2001
Years
Admn Exp to Sales ratio

Admn ExpensesRatio
16 15.3
13.88
14
12 11.45 11.64
10
8.29 8.11
7.92
Tim es 7.53
8
0
SAMKRG (Be st) Shriram E.M.L. + G.I.L I.P.L. (Worst)
Com panies
2000 2001
Selling and Distribution Expenses to Sales ratio:
This ratio shows the efficiency with regard to selling and distribution expenses.
Selling& Distribution expenses to sales = Selling& Distribution Exp. x 100

Net Sales
Appendix 7 shows that EML has seen a constant rise in its selling & distribution
expenses. It was 1.49 in 2003, 3.19 in 2004, 4.94 in 2005 and 7.46 in 2005. This is an attempt
to maintain the present market share and capture new market, which doesn’t seem to be
justified.
Appendix 8 shows that this ratio is maximum for EML and GIL, together. It is 4.16
for the year 2005 while its minimum for Shriram which equals to 2.85. For SAMKRG it is
3.56 for 2005.

These figures are alarming and need a constant check.
Sell ing& Distribution Expenses toSales Ratio
8
7.46
7
5 4.94
Times
3 3.19
2
1.49
1
0
1998 1999 2000 2001
Years
Sell & Dis Exp to Sales Ratio

Selling& Distribution Expensesto SalesRatio
4.5 4.16
4
3.56
3.5
2.85 2.79
3 2.75
2.5
tim es
2
1.36
1.5
0.5
0
Shriram (Be st) SAMKRG E.M.L. + G.I.L (Worst)
Com panies
2000 2001
Fixed Asset Turnover:
This ratio shows how well the fixed assets are being utilized. It indicates whether the
investment in fixed assets has been judicious or not. In manufacturing concern, the ratio is
important and appropriate since sales are produced not only by the use of working capital but
also by the capital invested in fixed assets.
The ratio is calculated as:
Fixed Asset turnover Ratio = Sales .

Fixed Assets
Appendix 7 shows the year wise in-house condition of Escorts Mahle Ltd.. In last four
years the company has not been able to cross the figure of 1 for its fixed asset turnover. This
is not a satisfactory situation. Rather the turnover has declined over a period of time. It was
0.79 for the year 2003 and is 0.75 for the year 2005. It was 0.64 and 0.67 for the years2004
and 2005 respectively.

Appendix 8 shows that condition in the whole industry is not very encouraging. Apart
IPL none of the company has been able to have a turnover of even one. IPL has the highest
turnover of 1.1 for the year 2005 while EML and GIL as together has the worst turnover in
the industry. It is just 0.33 for the year 2005. It has declined as compared to the previous year
as turnover was 0.56 for the year 2005. The turnover for the Shriram and SAMKRG are 0.77
and 0.43 respectively.
The situation with this regard is not encouraging. Management needs to pay attention
in this field and should find immediate solution.
FixedAsset Turnover
0.9
0.8 0.79
0.75
0.7
0.67
0.64
0.6
Times
0.5
0.4
0.3
0.2
0.1
0
1998 1999 2000 2001
Years
Fixed Asset Turnover

FixedAsset Turnover
1.2
1.12
1.1
0.77
0.8 0.73
Tim es 0.6 0.56
0.47
0.43
0.4 0.33
0.2
0
I.P.L. (Be st) Shriram SAMKRG E.M.L. + G.I.L
(Worst)
Com panies
2000 2001
Net Working Capital Turnover Ratio:
This ratio indicates the number of times a unit invested in Working Capital produces
sale. In other words, this ratio indicates the efficiency or otherwise in the utilization of short-
term funds in making the sales.
Net Working Capital Turnover Ratio = Sales .

Net Working Capital
Appendix 7 shows that since last four EML has the highest Net Working Capital
Turnover in the year 2005. EML has the turnover of 21.75 in the year 2005, which is much
higher than that of year 2005 which was just 5.78. It was 4.16 and 5.26 for 2003 & 2004
respectively.
Despite the fall, turnover of the EML and GIL seems to be satisfactory in comparison
to the other Industry players, as it was 4.34 in 2005 and the turnover of Shriram was 4.47
which was highest among all in the industry. IPL has the turnover of 3.63 in 2005. SAMKRG
has small turnovers of 2.86 which is least in the industry. Apart from Sriram turnover for all
the players has declined as compared to previous year.
Industry wise turnover is satisfactory for EML and GIL, together while EML alone
has shown a tremendous performance.
Net WorkingCapital turnover
25
21.75
20
15
10
5.26 5.78
5
4.16
0
1998 1999 2000 2001
Y ears
Net Working Capital turnover

Net WorkingCapital Turnover
5.04
4.88
5
4.47
4.34
4.19
4 3.63
3.29
2.86
Tim es 3
0
Shriram (Be st) E.M.L. + G.I.L I.P.L SAMKRG(Worst)
Com panies
2000 2001
RESEARCH
METHODOLOGY
Research Design
The following analysis explores the financial performance of the company Escorts
Mahle Ltd. vis-à-vis the Industry. The comparison has been made against the competitors
India Pistons Ltd., SAMKRG Pistons And Rings Ltd. and Shriram Pistons on the grounds of
Profitability ratios, Activity ratios, liquidity ratios and some other key ratios. The combined
ratios of EML and GIL are taken for the comparison because they together cover the entire
range of products which other players manufacture individually. This gives the better basis
for comparison. The comparisons do reveal its strength and / or weakness with other leading
Industry players of the market.
The year wise comparison of Escorts Mahle Ltd. has been made which reveals
whether the entity is moving in the right direction with the greater pace or not. The
comparison has been made for the year 2003,2004, 2005 and 2005.
Projections are made for the next two years, that shows that the direction and pace of
growth.
Data Collection Method
The data of the two entities, Escorts Mahle Ltd. and Goetze Ltd. and the other
companies in the Industry like Shriram Pistons, India Pistons etc. have been collected through
the Annual Reports.
Some ratios and Industry related data have collected through Prowess Database – CMIE
and some finance related internet sites.
Finished Goods Turnover:
This ratio is the test of efficient utilization. It measures the number of times inventories
are sold and replaced during the year by comparing the cost of goods sold with the stock
carried.
When a company carries stock, a portion of its capital is looked up. Higher ratio indicates
that activities are maintained with the help of the smaller stock and that there are fewer
changes of stock containing obsolete, unsaleable or over valued items.
Finished Goods Turnover = Cost of Goods sold

Finished Goods
where Cost of goods sold is

Cost of goods sold = Opening stock + Purchases + Direct expenses –
Closing stock.
Direct Expenses includes Salary & wages, Fright & Distribution costs, excise duty,
manufacturing expenses.
EML has the turnover of 25.12 in the year 2005, which was 18.95 in 2005, but
figures prior to this period were more impressing as turnover was 36.42 in2004. So, company
has seen a decline in turnover as compared to 2003 and 2004.
EML and GIL, taken together has a stock turnover of 16.14 times for the year 2005.
Shriram Pistons has the maximum turnover of 21.6 while IPL has least turnover of just 10.53
for the year 2005.
FinishedGoodsTurnover
40
36.42
35
31.3
30
25 25.12
Times
20 18.95
15
10
0
1998 1999 2000 2001
Year
F G (Stock) Turnover
FinishedGoodsTurnover
34.89
35
30
25
21.16
20
17.01
Tim es 16.27 16.14
14.42 14.07
15
10.53
10
0
Shriram (Be st) SAMKRG E.M.L. + G.I.L I.P.L (Worst)
Com panies
2000 2001
Debtors Turnover Ratio (DTR)
This ratio show the efficiency achieved in using the funds invested in debtors. A
higher DTR implies quicker collection of debtors and also enables the Company to transact a
larger volume of business without corresponding increase in the investment in debtors.
Debtors turnover Ratio = Total Sales .

A/Cs Receivables
The term A/Cs Receivable includes “ Trade Debtors” and “ Bills Receivable”.
Appendix 7 shows that DTR declined for the year 2005 as it reached 8.89 from 13.83
(2005). The turnover rose for the years 2004 from that of 2003 and further rose for the year
2005. It was 11.23 for 2003, 12.34 for 2004 which reached to 13.83 in 2005.
If seen with relation to the number of holding days, EML holds it for 41.06 days
which is much higher as compared to 26.38 days which was in 2005. The is offering credit of
45 days for OE market and 7 days with CD for local customers and 10 days with CD for
outstation customer in the Retail market. It is 30 days for both local and out station customers
without CD. So, 26.38 days seems absolutely fine, which was in 2005 but 41.06 is quite high,
which was in 2005.

Amongst all Companies in the industry, EML and GIL, together has the best and
highest DTR that is 10.89, though it has declined as compared to previous year which was
14.95. This shows we follow the best policy. SAMKRG has the worst turnover among all the
companies of the industry. DTR of IPL and Shriram were 9.66 and 9.33 times respectively.
If seen with relation to the number of holding days, we hold it for 33.52 days as
compared to 24.41 days of that of previous year whereas SAMKRG is holding for 44.93 days
in 2005. IPL and Shriram are holding for about 38 and 39 days respectively in 2005.
So, we are the best with regard to our credit policy and its collections policy.
Debtor Turnover Ratio
16
14 13.83
12 12.34
11.23
10
8.89
Times
0
1998 1999 2000 2001
Years
Debtor Turnover
Debtor Turnover
16 14.95
14
12 10.89 10.91
9.66 9.77
10 9.33
8.12
Tim es 8 6.79
0
E.M.L. + I.P.L Shriram SAMKRG(Worst)
G.I.L(Be st)
Com panies
2000 2001
Liquidity Analysis
Current Ratio
This ratio is a basic measure of judging the ability of the company to pay off its
current obligations out of its short-term resources. The higher the CR, the larger is the amount
available per rupee of short-term obligation and accordingly, the greater is the feeling of
security. Although sometimes it is said that a CR of 1.33:1 is ideal, but there is no rigidity
about it.
It is calculated as :-
Current Ratio = Current Assets

Current Liabilities
Appendix 7 reveals the year wise conditions and states the current ratio for the EML.
It has 1.11 for 2005 which was 1.83 on 2005. This ratio has declined in comparison from
prior years, as it was 2.37 in 2003. Though CR has declined but company is well in position
to meet in obligations and at the same time, not carrying ideal cash.
It is observed from Appendix 8 that E.M.L and G.I.L, taken together has C.R of 1.69
for the year 2005 as compared to 3.35 & 2.22 of SAMKRG and I.P.L the major competitors
in the industry. This shows the company’s efficiency in current asset management. The
company is better off the competitors. Thus the average C.R of E.M.L. and G.I.L is not to be
taken as alarming.
Quick Ratio
This ratio is an indicator of short-term solvency of the firm. It is a stricter test of

liquidity than the C.R as illiquid portion of the current assets has been eliminated. It gives no
consideration to inventory, which may be slow moving. Q.R places more emphasis on
immediate conversion of assets into cash than does the C.R.. Rule of the thumb is 1:1 for the
Q.R.
This is calculated as:
Quick Ratio = Liquid assets

Current liabilities
Liquid assets include cash, bills receivable, marketable securities, and debtors, etc excluding
stock prepaid expenses. Liquid assets are those which are either in the form of cash or cash
equivalents or can be converted in the cash very shortly.
Appendix 7 reveals the condition and states the quick ratio for the E.M.L as it
has 0.71 in 2005while Q.R. was 1.4 in the year 2003. The constant decline over the period of
three years was good as it was 1 in the year 2005 but further decline in 2005 is not a good
signal. Heavy dependence on sundry creditors, acceptances and bank overdraft has increased
the current liabilities to a great extent
Appendix 8 reveals that Q.R. for E.M.L. and G.I.L. was 1.43 as compared to even
2.26 for SAMKRG. While the other two competitors have lower Q.R. of 1.18 and 1.39 for
I.P.L. and Shriram respectively for the year 2005. The reason behind the higher Q.R. is that
the Q.R. for G.I.L. is over 2, which is not an ideal one.
So, the Q.R. for G.I.L. is not satisfactory.

PROJECTIONS
PROJECTED P & L ACCOUNT
2005-2006 2005-2006
Income
Gross Sales 19572.10 19427.72
Less: Excise 2693.31 2679.69
Net Sales 16878.79 16748.03
Other Income 628.33 616.36
Total Income 17507.12 17364.39
Expenditure
Material, Manufacturing & Operating
R.Material & Components 5642.78 5214.09
Ring & Lines Purchased 1005.67 799.02
Stores & Spare 1462.94 1332.03
Repairs to Building 51.21 10.60
Repairs to machinery 227.18 135.00
Power & Fuel 1168.19 1106.32
Lease & Rent 41.13 39.04
Royalty 266.55 264.62
Total 9865.65 8900.72
Gross Margin 7641.47 8463.67
Personnel 4961.68 4484.53

Incentive Bonus 335.69 374.31
VRS written off 315.81 679.76
Admn. Expenses 1022.33 897.87
Selling Expenses 1454.36 1477.66
Profit (448.40) 549.54
(before Depreciation & Interest)
Depreciation 1106.86 1111.27
Profit before Interest (1555.26) (561.73)
(Rs in Lacs)
2005-2006 2005-2006
Income
Net Sales 100% 100%
Other Income 3.72% 3.68%
Total Income 103.72% 103.68%

EXPENDITURE
Material, Manufacturing & Operating

Raw Material & Components 33.43% 31.13%
Ring & Lines Purchased 5.96% 4.71%
Stores & Spare 8.67% 7.95%
Repairs to Building 0.30% 0.06%
Repairs to machinery 1.35% 0.81%
Power & Fuel 6.92% 6.61%
Lease & Rent 0.24% 0.23%
Royalty 1.58% 1.58%
Total 58.45% 53.14%
Gross Margin 45.27% 50.54%

Personnel 29.40% 26.78%
Incentive Bonus 1.99% 2.23%
VRS written off 1.87% 4.06%
Admn. Expenses 6.06% 5.36%
Selling Expenses 8.62% 3.28%
Profit -2.66% 3.28%

(before Depreciation & Interest)
Depreciation 6.56% 6.64%
Profit before Interest -9.21% -3.35%

CONCLUSIONS
There is an economic slowdown all around the world. The market is turning to more
price intensive competition. In such a situation, decline in profits, lowering of turnover is not
a surprise for any industry. Same is the case with auto ancillary industry. The largest
manufacturer of the pistons and rings in the industry, Escorts Mahle is passing through tough
times. Losses for three consecutive years have made the condition so bad that it raises some
doubts on the company’s ability to continue as a going concern in the minds of some people.
Definitely, its time for management to plan again and move on the right track. Company
should frame a “vision” that would help it to be in its prosperous days again.
Company has best debtor turnover, which shows its efficient credit management.
Gross Profit Ratio, though has declined from previous year but still is satisfactory as
compared to Industry norms. So, is the case with Net Working Capital Turnover. All this
shows the efficiency of the management however; due to some limitations company has not
been able to have good figures in some areas. Despite of fact that EML and GIL are the
market leaders and carries a good brand image both in the OEM and RM, company is making
losses and losses have accumulated to 580 million. It has negative ROI (-5.75) in the year
2005. Its Operating Ratio is worst in the industry. The reason is its high expenses. Its Labour
to Sales Ratio (27.5) is double of SAMKRG’s (13.58). High Labour cost is one of its major
problems. For which it has introduced VRS, in which around 1000 employees were asked to
leave the organisation. Material and administration cost have raised the operating cost for the
company. Its Selling and Distribution Expenses is highest among the players in the industry,
reason is the aggressive sales promotion to capture the maximum market share. In this price
sensitive Indian Market, EML has failed to offer its products at competitive rates due to its
higher operating cost.
The other factor that needs immediate attention is the lower fixed asset turnover. The
fixed assets are not being utilized to its full. So, better product mix, increase in the market
share by innovative sales and improving realization is the need of time. Company is operating
at around 70% of its capacity but is making loss. Therefore, disposing of assets to pay off its
debt is need of time.
Higher interest rates both for short term and long term is another matter of concern. In
present scenario when banks are offering at down to earth rates, company has failed to avail
that due to its lower creditworthiness. Debt service coverage ratio for EML is –6.44 and for
EML and GIL as together is –1.51 and therefore the company has defaulted in the repayment
of a loan. This is an alarming situation and needs immediate attention.
Management needs to pay attention to these some issues and it needs to encash the
company’s strength of the company like production capacity, its brand image, its market
share and like to be back in bright days.

RECOMMENDATIONS
RECOMMENDATION
At the working level and the middle management levels, costs and profits
have not been considered important. These subjects have not been in the
consciousness of the individual. Reasons being, in large organizations the task of
an individual is so remote from the overall objectives of the top management that
the cost and profit impact of his actions or decisions is difficult to see. But in
today’s times when operational efficiency can be the key to success, cost reduction
program is must for the organization like Escort Mahle. On the basic values of a
cost reduction program, then lies in its ability to develop cost consciousness and
cost sensitivity in every employee.

COST REDUCTION PROGRAM CRITERIA
1. Top Management Sponsorship
“ The cost reduction program should be established by top management and
have the emphasis, attention, and administration of senior officials.”
Cost reduction must be viewed as the normal responsibility of every
supervisor and manager, from first-line supervision to the very top. The cost
reduction program must be integrated into the total organization objectives.
Performance in the program must be reviewed periodically at all levels of
the management and compared with the established goals. Responsibility for
administering the program needs to be defined clearly.
2. Comprehensive Scope
“The program should provide continuing emphasis on the cost reduction
throughout the entire organization and, to the extent feasible, among
principal subcontractors and suppliers.”
This may be achieved by the establishment of goals for all units of the
organization, down to a fairly low level.

3. Organization Structure
“Specific organizational elements and individuals in the organization should
be given formal responsibility for cost reduction program management and
coordination.”
4. Goals or Objectives
“The cost reduction program will include the establishment of goals or
objectives by the contractors in the form best suited to the organizational
structure and methods of operations.”
5. Rules and Procedures
“Organization should establish rules and procedures for documenting ad
reporting progress in the cost reduction program. These rules and procedures
should be based on the organization ‘s internal management practices and
should include definitions of savings, computational methods and formats,
techniques of documenting and reporting.”

6. Validation of Savings
“The contractor should have an effective internal system to validate reported
savings.”
7. Employee Motivation
“Positive efforts to promote cost conscious attitudes on the part of all
employees and the encouragement and recognition of ideas resulting there-
from should be an internal part of the program.” For example, a Memo that
asks for one cost reduction idea from member of supervision within a
specified time will have most dramatic results.
Individual recognition is always an effective motivator. A common
device is a commendation certificate, with a copy in this employment
record, to each employee who suggests a cost reduction that is implemented.
Not so common is to include cost effectiveness as one parameter to be
measured on a supervisory review form.

8. Idea Interchange
“There should be an effective program for the interchange of cost reduction
ideas throughout the organisation.”

COST REDUCTION PROGRAMS AT PLANTS
Some reduction programs at the plant level are the need of time. Proper
implementation of such programs can make the difference in the cost levels of the
organization. Some are:
 Employee Suggestion Program
“A formal program for soliciting, investigating and installing cost
reduction and improvement ideas from employees.” Employee suggestion
programs are common throughout industry and some departments of
government. Some organizations have had employee suggestion programs
for many years, thus attesting to their conviction that such programs are
worthwhile.
 Management Improvement
“A formal, documented program consisting of specific items should
be established at the beginning of each year by management for the purpose
of improving operations, controls or organization. A means of focusing high
level attention and establishing timetables for improvement through

operations and organizational analysis, systems and procedures refinement,
performance data utilization, management by exception and techniques and
like.” Implementation of management improvements will result in
substantial monetary savings, better-coordinated management effort,
improved organization alignment, and management control tools. Included
in management is “Operation Underbrush”, a special program designed
to eliminate unnecessary costs in paperwork and procedures and improve
communications. There is also the reports and records management, which
controls the number of types of report and their distribution.
 Work Simplification
The techniques of industrial engineering are closely interrelated, but
the most interesting principal features of work simplification are those that
enable a clear view of what is happening.
 Zero Defects
This program is largely motivational, designed to improve quality and
generate in employees greater pride in workmanship. This program may not
appear to be directly related to cost reduction. However, it is obvious that if
quality is improved and rejection rates reduced, cost reduction will

inevitably occur. Therefore, in any organization with both a zero defects
program and a cost reduction program conscious attention should be applied
to their interrelationship. Sometimes the ground rules of the two programs
conflict.
NEW CONCEPTS
Some new concepts are earning popularity in the corporate world these days. These
could be the good source to cut cost, to make the system more efficient and speedy.
 Variable Pay to Performance
A widely accepted tool in today’s time of intense competition, is offering
Variable Pay Packages to the employees. Many organizations are now
opting for this program. Even the old economy companies like L&T, SAIL,
etc. have started using this program. Originally this program is generated for
motivating the employees to perform better but today it is also used to cut
cost. In this program, a part of the salary is made variable, say 30%, which
depends on the performance of the employees. At lower level, organization
may set targets; at middle level to top level, standards need to defined. This
program demands complete transparency and healthy communication within
the organization. Such a move not only motivates the employees to perform
better but also helps the organization to identify poor performers.

 Paperless Organization
In this age of technology, the word paperless doesn’t surprise anybody. But
when it comes to implementation many people doesn’t take a lead. This is
because of some limitations of the system and the nature of business.
Despite of the fact that Escorts Mahle is well technically versed but still, to
large extent paperwork can be avoided. This not only reduces the cost but
also makes the system speedy and saves the invaluable time of the staff.
 Business Process Outsourcing
Outsourcing is another new but widely accepted concept in today’s time.
This not helps to cut cost but also helps to concentrate on important works
rather than everything. Rational judgment of what should be outsourced to
whom the job is to be given should be taken.
 Factoring
Since, the receivable management is a specialized type of activity involving
a lot of time and efforts, therefore, some firms do avail the services of
specialist organizations engaged in this business, known as factoring firms.
In this relationship, financial firm purchases the receivables of the firm in

the business of selling goods. Thus, factoring is a tool to release the working
capital tied up in credit, for more profitable uses and relieves the
management from collections job so they can concentrate on other important
activities. Though Escorts Mahle is efficiently handling its debtor but the
scope for perfection always remains. Therefore, Factoring can be a better
option for the organisation.

Limitations
 The following analysis has been made on the basis of data collected through
Companies Annual reports. Such financial statements are sometimes modified and
don’t present the real situation. So, reliability of the data is the major limitation of the
analysis.
 Menon Pistons Ltd. is not included in the study due to non-availability of the data.
Though Menon Pistons to have a respectable share in the market and therefore should
be included in the comparative study.
 Non-access to some internal financial data limits me to have better insight to the
business. So, it limits to have in-depth analysis in certain areas.
Analysis of Data
For analyzing data the technique of ratio analysis, simple mathematical tools like
percentages, averages etc. have been used. Graphical presentation is made to highlight the
important issues.
REFRENCES
BIBLIOGRAPHY
 BOOKS
 Financial Management by R.P.Rustagi (Galgotia Publishing Company)
 Analysis of Financial Statement by T.S.Grehwal (Sultan Chand & Sons)
 Techniques of Financial Analysis: A Guide to value Creation
 SITES
 www.acmainfo.com
 www.automeet.com
 www.escortsmahle.com
 www.goetzeindia.net
 www.shriramindia.com
 www.samkrgpistonsandrings.com
 www.indiainfoline.com
 www.bolnet.com
 www.financialexpress.com
 www.equityreasearch.com
 www.corporatefinance.com
 www.cfonet.com

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CONTENTS

• FINDINGS OF THE STUDY

 Year wise comparative study of the Escorts Mahle Limited in terms of

 Comparative analysis of profitability, operational efficiency liquidity and

globally due to cost competitiveness.

Equipment: Dashboard instruments, headlights, horns, wipers, etc.

Others: Fan belts, sheet metal parts, plastic mouldings, etc.

Auto component manufactures supply to two kinds of buyers – original equipment

quality improvement and technology absorption.

representation in the overseas market.

The Escorts Group, with modern manufacturing facilities and an extensive

agri-machinery, bi-wheelers, construction and material handling equipment, automotive and

railway ancillaries, telecommunication and financial services.

targeting transnational business through an aggressive programme of joint venture and

overseas automotive industries.

and a vision that is not daunted by competition but thrives on it.

Escorts Limited had been manufacturing Pistons under a Technical Collaboration

up a strong presence in the Replacement Market, where it developed an extensive dealer

throughout the Globe. Group Turnover is DM 3800 million.

share capital of Rs 15 crores, issued at a premium of Rs 30 crores, and 14% Cumulative

Redeemable Preference Shares amounting to Rs 52.50 crores.

Its main competitors are India Pistons and Sriram Pistons.

Mr. B R Kapoor - Executive Director

Mr. H Henning - Director Technical

Dr. Ing. Klaus J Henke

Dr. Rudolf Paulik

Mr. Joern W eipert

country. Be it the original equipment manufacturer or after-market, Escorts Mahle piston

assembly is the first choice of every discerning customer.

Light Commercial Vehicles, Heavy Commercial vehicles & Locomotive engines.

many designs developed.

East, Africa, Europe, North & South America.

1. Promoter Pedigree - The Company is an associate of Escorts one of the India's

4. Access to the international market

Gross Profit Ratio

Gross Profit Ratio = Gross Profit x 100

55.91 and 48.64 respectively.

more and more competitive and price sensitive.

Gross Profit Ratio

Gross Profit Ratio

Operating ratio = All operating cost and expenses x 100

every player in the industry.

This is alarming situation for our organization.

OperatingNet Profit Ratio

Operating Net Profit Ratio

OperatingNet Profit Ratio

ROI = Profit before interest, Tax and Dividend x 100

Negative ROI is seeking the immediate attention of the management.

Material Cost to Sales Ratio:

This ratio indicates the efficiency with regard to material cost.

Material Cost to Sales Ratio = Direct Material Cost x 100

Material Cost to SalesRatio

Material Cost to Sales Ratio

Material Cost toSalesRatio

24.56 24.26 24.59

Labour Cost to Sales Ratio = Direct Labour Cost x 100

Labour Expensesto SalesRatio

Labour to Sales Ratio

Labour Cost to SalesRatio

Factory Expenses to Sales Ratio = Factory Expenses x 100

declined from 25.01 (2003) to 18.28 in the year 2005.

These figures are satisfactory rather encouraging.

Factory Expenses toSales Ratio