A REPORT ON

RATIO ANALYSIS OF FINANCIAL STATEMENTS OF ASHOK LEYLAND

Submitted By : Anshul Agrawal Gunjan Agarwal

Submitted To : Prof. Vandana Sohoni

Index

Company Profile An Introduction to Ashok Leyland

03

Part I Analysis of Profitability 1.1 Gross Profit Ratio 1.2 Net Profit Ratio 1.3 Asset Turnover 1.4 Return on Asset 1.5 Return on Equity

04

Part II - Analysis of Solvency 2.1 Debt to Equity 2.2 Interest Coverage Ratio

05

Part III - Analysis of Liquidity 3.1 Current Ratio 3.2 Quick Ratio 3.3 Debtor Turnover Ratio 3.4 Average Collection Period 3.5 Inventory Turnover

Cash flow statement analysis

Recommendations & Suggestion

..

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COMPANY PROFILE

shok Leyland is a commercial vehicle manufacturing company based in Chennai, India. It is the second largest commercial vehicle company in India in the medium and heavy commercial vehicle (M&HCV) segment with a market share of 28% (2007-08).Ashok Leyland is a market leader in the bus segment. The company was established in 1948 as Ashok Motors, with an aim to assemble Austin cars. Manufacturing of commercial vehicles was started in 1955 with equity contribution from the British company, Leyland Motors. Today the Company is the flagship of the Hinduja Group, a British-based and Indian originated transnational conglomerate. Ashok Leyland is a technology leader in the commercial vehicles sector of India. Its annual turnover exceeded USD 2 billion in 2007-08. Selling close to around 83,000 medium and heavy vehicles in 2007-08, Ashok Leyland is India's largest exporter of medium and heavy duty trucks out of India. It is also one of the largest Private Sector Employers in India - with about 12,000 employees working in 6 factories and offices spread over the length and breadth of India Over the years, Ashok Leyland vehicles have built a reputation for reliability and ruggedness. This was mainly due to the product design

legacy carried Leyland.

over

from

British

In the populous Indian metros, four out of the five State Transport Undertaking (STU) buses come from Ashok Leyland. Some of them like the doubledecker and vestibule buses are unique models from Ashok Leyland, tailormade for high-density routes. In 1987, the overseas holding by Land Rover Leyland International Holdings Limited (LRLIH) was taken over by a joint venture between the Hinduja Group, the Non-Resident Indian transnational group and IVECO Fiat SpA, part of the Fiat Group and Europe's leading truck manufacturer. This resulted in Ashok Leyland launching the "Cargo" range of trucks. These vehicles used Iveco engines and for the first time AL vehicles had factory-fitted cabs. The Cargo trucks are no longer in production and the use of Iveco engine was discontinued, but the Cargo cab continues to be used on the eComet range of trucks. Ashok Leyland also had a collaboration with Hino Motors, Japan from whom the technology for the Hseries engines was bought. Many indigenous versions of H-series engine was developed with 4 and 6 cylinder and also conforming to BS2 and BS3 emission norms in India. These engines proved to be extremely popular with the customers primarily for their excellent fuel efficiency. Most

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current models of Ashok Leyland come with H-series engines. In the journey towards global standards of quality, Ashok Leyland reached a major milestone in 1993 when it became the first in India's automobile history to win the ISO 9002 certification. The more comprehensive

ISO 9001 certification came in 1994, QS 9000 in 1998 and ISO 14001 certification for all vehicle manufacturing units in 2002. In 2006, Ashok Leyland became the first automobile company in India to receive the TS16949 Corporate Certification.

PART- I ANALYSIS OF PROFITABILITY

Profitability Ratios
To analyze the profitability of a company profitability ratios are used. These ratios measure the operating or income performance of a company. The goal of a business is to make a profit, so this type of ratio examines how well a company is meeting that goal. The commonly used ratios to evaluate profitability are: Gross Profit ratio Net Profit ratio Return on Assets Asset Turnover Return on Equity

PARTICULARS GROSS PROFIT NET SALES PAT AVG. TOTAL ASSETS AVG. EQUITY SHARE HOLDER'S FUND

2004-05

2005-06

2006-07

2007-08

12090. 5 41818. 97 2714.1 19776. 61 11098. 31

14785. 7 52476. 57 3273.2 35253. 66 22515. 94

17,049.85 71681.76 4412.86 40743.05 25079.82

19,644. 89 77291. 23 4693.1 50016. 41 20217. 75

Profitability Ratio Analysis

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1. 1 Gross Profit Ratio = Gross Profit 100 Net Sales

2004-05 GROSS PROFIT NET SALES 2005-06 2006-07 2007-08

12090. 5 41818. 97
2004-05

14785. 7 52476. 57
2005-06

17,049.8 5 71681.76
2006-07

19,644.8 9 77291.23
2007-08

GROSS PROFIT RATIO (%)

28.91

28.18

23.79

25.42

Analysis
The GP ratio is showing continuously decreasing trend, starting from 2004/05 in 28.91% to 23.79% in the financial year 2006/07. This shows that a company is loosing its productivity in maintaining its gross profit margin. In 2007-08 the ratio again slightly been increased from 23.79 to 25.42.

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1.2. Net Profit = PAT Sales

PAT NET SALES

100
2004-05 2005-06 2006-07 2007-08

2714.1 41818. 97

3273.2 52476. 57

4412.86 71681.76

4693.1 77291.23

2004-05 NETPROFIT(%)

2005-06

2006-07

2007-08

6.49

6.24

6.16

6.07

Analysis
The NP ratio is showing declining trend from 6.49% in the year 2004/05 to 6.07% in the year 2007/08 which shows that there is increased amount of expenses in the form that increasing in the prices of row material.

1.3. Assets Turnover Ratio =

Net Sales Avg. Total Assets

2004-05 AVG. TOTAL ASSETS NET SALES

2005-06

2006-07

2007-08

19776. 61 41818. 97

35253. 66 52476. 57

40743.05 71681.76

50016.41 77291.23

2004-05 ASSET TURN OVER (times)

2005-06

2006-07

2007-08

2.11

1.49

1.76

1.55

Analysis Page 6 of 18

This ratio measures how efficiently a company uses its assets. The asset turnover ratio is decreasing. Although the return on asset for the year 2008 is highest but the asset turnover ratio is least for this year. The company is not using its assets optimally.

1.4. Return of Assets = Profit after tax Average Total Assets

2004-05 PAT AVG. TOTAL ASSETS 2005-06 2006-07

100

2007-08

2714.1 19776. 61
2004-05 2005-06

3273.2 35253. 66
2006-07

4412.86 40743.05
2007-08

4693.1 50016.41

RETURN ON ASSETS (%)

13.72

9.28

10.83

9.38

Analysis
This ratio is used to measure a companys success in using its assets to earn income for owners and creditors, those who are financing the business. There is a steep fall in the year 2006, after that there is a satisfactory utilization of the assets as the graph shows.

1.5. Return on Equity = PAT 100 Avg. Common Shareholders equity

2004-05 PAT AVG. EQUITY SHARE HOLDER'S FUND 2005-06 2006-07

2007-08

2714.1 11098. 31
2004-05

3273.2 22515. 94
2005-06

4412.86 25079.82
2006-07

4693.1 20217.75
2007-08

RETURN ON EQUITY(%)

24.46

14.54

17.60

23.21

Analysis Page 7 of 18

The ROE of the company is 42.46% in the 2004/05 which has been decreased to 17.60% in the 2006/07 and then slightly increased to 23.21% in the 2008/07.Also one point here to be noted is that ROE of the company is higher than the ROA, which may be due to the concept called trading on equity.

PART II - ANALYSIS OF SOLVENCY

PARTICULARS SECURED+UNSECURED LOANS EQUITY SHARE HOLDER'S FUND PBIT INTEREST ON LONG TERM DEBT

2004-05

2005-06

2006-07

2007-08

8804.0 6 11678. 65 3882.8 7 236.94

6919.2 8 14124. 53 4594.1 8 288.33

6403.98 18945.68 6402.11 226.29

8875.0 1 21489. 82 7197.0 6 688.19

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Solvency Ratio Analysis

2.1. Debt - Equity Ratio =

Loan funds Total shareholders

2004-05 DEBT TO EQUITY RATIO

2005-06

2006-07

2007-08

0.75

0.49

0.34

0.41

Analysis
This ratio is used to compare the amount of debt a company has with the amount the owners have invested in the company. It compares the amount of creditors claims to the owners claims to the assets of the firm. Trend shows that in 2005 the company was highly leverage but after it has managed to control this ratio in the year 2006 and 2007.

2.2. Interest coverage ratio= Profit before interest & tax Interest expense
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2004-05 INTEREST COVERAGE RATIO

2005-06

2006-07

2007-08

16.39

15.93

28.29

10.46

Analysis
This ratio suggests that whether company manages to earn sufficient income to cover its expenses. The ratio of the company indicates that company depends much on borrowed funds. The high interest ratio means that company depends more on debt funds.

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PART III ANALYSIS OF LIQUIDITY

Liquidity Ratios:
LIQUIDITY RATIO PARTICULARS CURRENT ASSETS CURRENT LIABILITIES QUICK ASSETS SALES AVG. DEBTOR DEBTORS + BR COGS AVG. INVENTORY
2004-05 2005-06 Rs in millions 2006-07 2007-08

21572. 63 11656. 67 15891. 82

41818.97

22324. 13 14085. 16 13298. 52

52476.57

26977.14 17558.55 16273.93

71681.76

28752. 56 22719. 4 16513. 42

77291.23

4321.93 4321.93 29,728.47

4415.51 4415.51 37,690.87

4736.06 4736.06 54,631.91

4493.55 4493.55 57,646.34

5375.1 1

7353.2 1

9864.41

11471. 17

Liquidity Ratio Analysis

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3.1 Current Ratio =

Current Assets Current Liabilities

2004-05 2005-06 2006-07 2007-08

CURRENT ASSETS CURRENT LIABILITIES CURRENT RATIO

21572. 63 11656. 67 1.85

22324. 13 14085. 16 1.58

26977.14 17558.55 1.54

28752.56 22719.4 1.27

Analysis
This ratio is used to measure a companys ability to pay current liabilities with current assets. This ratio helps creditors to determine if a company can meet its short- term obligations. The gradual decrease shows that companys liquidity has worsened. The company should rethink over its credit policy.

3.2. Quick Ratio = Current Assets Inventories Current Liabilities

2004-05 CURRENT LIABILITIES QUICK ASSETS 2005-06 2006-07 2007-08

11656. 67 15891. 82
2004-05

14085. 16 13298. 52
2005-06

17558.55 16273.93
2006-07

22719.4 16513.42
2007-08

QUICK RATIO

1.36

0.94

0.93

0.73

Analysis
This ratio is used to measure a companys ability to meet its short-term obligations. This ratio is similar to the current ratio. However by limiting the numerator to very liquid current assets, it is a stricter test. It is often called as the acid test ratio. The quick ratio is worse than the current ratio. This means that the current ratio was because of inventory. The liquid asset other than inventory of the company needs considerable attention.

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3.3. Debtor turnover ratio= Sales Average Debtors

2004-05 SALES AVG. DEBTOR
41818.97

2005-06
52476.57

2006-07
71681.76

2007-08
77291.23

4321.93 2004-05

4415.51 2005-06

4736.06 2006-07

4493.55 2007-08

DEBTORS TURNOVER RATIO

9.68

11.88

15.14

17.20

Analysis:
This ratio indicates the number of times each year the debtors turn into cash. It shows the effectiveness of the firms collection and credit policy. The high ratio indicates the ability of firms collection of cash from the debtors. The trend of the past three years indicates that the firm has managed to improve its credit policy.

3.4. Average collection period= Average Debtors Sales/360

2004-05 AVG. COLLECTION PERIOD(Days)

2005-06

2006-07

2007-08

37.21

30.29
2004-05

23.79
2005-06
52476.57

20.93
2006-07
71681.76

2007-08
77291.23

SALES AVG. DEBTOR

41818.97

4321.93

4415.51

4736.06

4493.55

Analysis

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This ratio shows that the average collection period is going lower from 37.21 days in the year 2004-05 to 20.93 days in the 2008-07.It means that lower capital is getting blocked up from 20004-05 to 2008-07.It shows the improvement in the credit policy of the company.

3.5. Inventory Turnover Ratio =

Cost of Goods Sold___ Average Inventory

2005-06 37,690.87 2006-07 54,631.91 2007-08 57,646.34

COGS AVG. INVENTORY

2004-05 29,728.47

5375.1 1
2004-05

7353.2 1
2005-06

9864.41
2006-07

11471.17
2007-08

INVENTORY TURNOVER(TIMES)

5.53

5.13

5.54

5.03

Analysis
This ratio is used to measure how quickly a company is selling its inventory. This ratio tells how many times each year a firms inventory is turned over. The inventory turnover of the company over the period of four years has remained stable more or less.

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PART IV - CASH FLOW STATEMENT ANALYSIS

Cash Flow Statement for the year ended March 31, 2008-2007
(Rs. Millions) 2007 6,045.06 1,505.74 164.76 (65.30) 196.46 (160.94) (98.85) (323.15) (168.13) (781.54) 6,314.11

2008 Cash low from operating activities Profit before tax Adjustments for: Depreciation, amortisation and impairment Other amortizations Foreign exchange (gains)/losses Interest expense net of interest capitalization Interest income Income from investments (Profit)/Loss on disposal of fixed assets/long term investments Diminution in value of investments written back net Transfer from General Reserve Employee benefits Operating profit before working capital changes Adjustments for changes in : 6,381.5 1,773.61 143.49 (63.60) 615.01 (214.67) (22.85) (375.86)

8,236.63

Inventories Debtors Advances Current liabilities and provisions Cash generated from operations Income tax including Fringe benefit tax paid Net cash low from operating activities before extraordinary expenditure Compensation under Voluntary retirement scheme Net cash low from operating activities after extraordinary expenditure Cash low from investing activities Payments for assets acquisition

(1,535.93 ) 1,426.87 261.52 3,596.82 11,985.91 (1,280.65 ) 10,705.26 (48.41) 10,656.85 (6,209.04 )

(1,677.60) (1,005.76) (1,047.41) 4,102.54 6,685.88 (1,356.00) 5,329.88 (330.37) 4,999.51

(6,812.87)

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Proceeds on sale of fixed assets Purchase of Investments Sale/redemption of investments Income from investments Interest Dividend Changes in advances

113.65 (373.82) 474.95 106.61 22.85 (2,231.98 ) (8,096.78 )

108.49 (50.64) 817.93 59.43 129.39 (1,473.70)

Net cash low used in investing activities Cash low from financing activities Long term borrowings Raised Repaid Changes in short term borrowings Debenture/Loan raising expenses paid Interest paid net Dividend paid and tax thereon Interim dividend and tax thereon Net cash low from financing activities Net cash inflow/(outflow) Opening cash and cash equivalents Closing cash and cash equivalents Net increase/(decrease) in cash and cash equivalents

(7,221.97)

3,672.1 (404.71) 993.32 (68.94) (546.59)

2,162.35 (829.95) (2.47) (181.67) (1,792.34) (2,264.32) (2,908.40) (5,130.86) 7,082.88 1,952.02 (5,130.86)

3,645.18 6,205.25 1,952.02 8,157.27 6,205.25

Analysis:
Figures in the brackets represent outflow. Interest paid is exclusive of purchases of investments is 5831.43 millions. Cash and cash equivalents after the adjustment of cash credits balances related to unclaimed dividend is Rs 4491.75 millions. The statement of cash flow reveals a net cash outflow from operations of Rs. 10705.26 millions whereas the company shows a net profit of Rs 6381.50 million. There is a sharp decrease in the inventories of the company. I.e. Rs 1535.93 million and debtors have increased Rs 1426.87 million. Further compensation under voluntary retirement scheme is Rs 48.41 million. And a net profit on the sale of investment is Rs 474.95 million. Profit on disposal of fixed assets would be Rs 375.86 million for the year 2008. The conversion of Foreign Currency Convertible Notes into equity shares has not been considered in the above statement. Cash flows from Investing activities includes acquisition of 100% shares in Albonair GmbH (cost Rs. 1.59 million) and Defiance Testing & Engineering Services (cost Rs. 141.05 million) and disposal of 60% (Rs. 0.95 million) and 51% (Rs. 71.94 million) shares respectively therein.

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The company has used more cash in operations than all of the cash it received from its investing and financing activities resulting into a net increase in cash.

RECOMMENDATIONS & SUGGESTIONS

Ashok Leyland is the second largest manufacturer of medium and heavy commercial vehicles (M/HCV) in India. It had a 24% market share in the domestic medium and heavy vehicles (M&HCV) segment in FY07 and a marginal presence in the LCV segment (light commercial vehicles). Ashok Leyland is also a key player in the passenger bus segment with almost 49% share in FY07. CVs contributed to 92% of revenues in FY07 while engines and spare parts contributed to the balance. Transportation- A structural change: The CV segment in India is going through a structural shift. With the government's thrust on road development projects, road sector has gained significant advantage over railways that has been a mainstay for transportation of coal, food grain and cement till now. If one considers the trends of the developed nations, almost two-third of the non-bulk goods are transported through roads. Bus segment is a growth story: The bus segment has the potential to witness the exponential growth witnessed in the goods commercial vehicles during last three years. We agree with the view of the management about the potential that the bus segment has. Our belief stems from the fact that the State Transport Undertakings (STUs) are operating at significantly high utilisation levels (120% to 130% of their capacity). Though the STUs are facing resource crunch due to number of reasons, we believe that renewal of fleet is an eventuality in the long run. Aggressive expansion plans: In order to cash in on the industry growth story, the company has lined up an aggressive expansion plan whereby it will be more than doubling its capacity over the next 2-3 years by making an investment in the region of Rs 40 bn. Included in the expansion plan is a brand new integrated plant for 50,000 vehicles per

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annum in the state of Uttaranchal, which will not only help it save on transportation costs but will also provide certain fiscal incentives. Sector: The growth of the auto industry is directly linked to the growth in the industrial activity, which in turn is a function of domestic GDP growth. Given the projected strong economic growth in the country, the CV sector is likely to witness robust growth rate in the long term. Sales: Net sales of the company have averaged Rs 46 bn in the last five years and are expected to climb higher, given the long-term growth prospects of the economy.

Current ratio: Ashok Leylands average current ratio during the period FY03 to FY07 has been 1.5 times. This indicates that the company is comfortably placed to pay off its short-term obligations, which gives comfort to its lenders.

Debt to equity ratio: A highly leveraged business is the first to get hit during times of economic downturn, as companies have to consistently pay interest costs, despite lower profitability. We believe that a debt to equity ratio of greater than 1 is a high risk proposition. Considering Ashok Leylands average debt to equity ratio of 0.6 over the past five fiscals Long term EPS growth: We expect the company's net profits to grow at a compounded rate of around 8% over the period FY08 to FY12 (CAGR of 38% during FY02 to FY07). Based on a normal scenario, we consider a historical compounded growth of over 20% in net profits over a 5-year period as healthy for a company.

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