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Long term solvency analysis: a case study of Tata motors and Maruti Suzuki

Long term solvency analysis: a case study of Tata motors and Maruti Suzuki
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This study aims to highlight the debt and equity position of two major car manufacturing companies in India i.e. Tata Motors and Maruti Suzuki.

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Long term solvency analysis: a case study of Tata motors and Maruti Suzuki

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  1. International Journal of Management (IJM)
    Volume 6, Issue 9, Sep 2015, pp. 44-50, Article ID: IJM_06_09_005
    Available online at
    http://www.iaeme.com/IJM/issues.asp?JTypeIJM&VType=6&IType=9
    ISSN Print: 0976-6502 and ISSN Online: 0976-6510
    © IAEME Publication
    Journal Impact Factor (2015): 7.9270 (Calculated by GISI)
    www.jifactor.com
    ___________________________________________________________________________

    LONG TERM SOLVENCY ANALYSIS: A
    CASE STUDY OF TATA MOTORS AND
    MARUTI SUZUKI
    Vineet Singh
    Assistant Professor, Dept. of Commerce,
    Guru Ghasidas Vishwavidyalaya, Bilaspur, Chhattisgarh.

    ABSTRACT
    This study aims to highlight the debt and equity position of two major car
    manufacturing companies in India i.e. Tata Motors and Maruti Suzuki. In
    order to enhance the quality of study, a comparison is made between debt
    equity ratios of both the companies and further t- test is applied to find out
    that whether there is a significant difference between debt equity ratio of
    Maruti Suzuki and Tata Motors or not.
    Keywords: Tata Motors, Maruti Suzuki, Debt Equity Ratio.
    Cite this Article: Vineet Singh. Long Term Solvency Analysis: A Case Study
    of Tata Motors and Maruti Suzuki, International Journal of Management, 6(9),
    2015, pp. 44-50.
    http://www.iaeme.com/IJM/issues.asp?JTypeIJM&VType=6&IType=9

    1. INTRODUCTION
    ‘Tata Motors’ was established in 1945 in India and its first vehicle rolled out in 1954.
    The company’s manufacturing plants are located Jamshedpur (Jharkhand), Pune
    (Maharashtra), Dharwad (Karnataka), Pantnagar (Uttarakhand), Lucknow (Uttar
    Pradesh), and Sanand (Gujarat). In 2005 the company established a joint venture with
    Fiat Group Automobiles at Rajangaon (Maharashtra) to manufacture Tata and Fiat
    cars along with Fiat power trains. Tata Motors group comprises of over 60000
    employees with over 6600 dealership, sales, service and spare parts network across
    the world. In the year 2004 the company was listed in New York Stock Exchange.
    The company also operates in number of other countries like UK, South Korea,
    Thailand, South Africa and Indonesia through its subsidiaries and associate
    companies. The major acquisition of Tata Motors includes ‘Daewoo’ in 2004 which is
    South Korea’s second largest truck maker and ‘Jaguar Land Rover’ in 2008. The
    company is engaged in manufacturing both commercial and passenger vehicles which
    are being marketed in several countries like Europe, Africa, Middle East, South East

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  2. Long Term Solvency Analysis: A Case Study of Tata Motors and Maruti Suzuki

    Asia, South Asia, South America, Australia, Russia and it also has joint ventures in
    Bangladesh, Ukraine, and Senegal. The cars and utility vehicles manufactures by Tata
    Motors in India includes Nano for the entry level customers, Bolt, Vista and Indica for
    hatchback enthusiast, Zest, Manza and Indigo for sedan loving customers, Safari
    Storme and Safari Dicor for those who prefer Sports Utility Vehicle, Sumo Gold,
    Movus, Venture and Xenon XT are for people who likes Utility Vehicles and a Multi
    Utility Vehicle ‘Aria’ for those who have a big family and want to travel in comfort
    without compromising on quality, looks and presence. Apart from cars and utility
    vehicles the company also manufactures small pickups like ace, magic and winger,
    trucks like Prima, Construck and Light Trucks, buses and even defence vehicles for
    the Indian Army.
    ‘Maruti Suzuki’ is a subsidiary of Japanese automobile and motorcycle
    manufacturer ‘Suzuki’. In India, ‘Maruti Suzuki’ had started its business in 1982 by
    establishing a manufacturing unit at Gurgaon, Haryana. The company’s headquarter is
    situated at Nelson Mandela Road, New Delhi. ‘Maruti Suzuki 800’ was the first
    model to hit Indian roads in 1983. Today, the company manufactures 1.5 million
    family cars every year that is equivalent to one car in every 12 seconds and moreover
    it has a team of 12500 professionals who turned out in manufacturing 14 family cars
    with over 150 variants successfully. In addition, the sales network of the company is
    spread over 1097 cities with service network in more than 1454 cities. The company
    also owns a diesel engine plant with a capacity to manufacture 7 lakh diesel cars
    every year. ‘Maruti Suzuki’ also exports cars to more than 125 countries including
    European market like Netherlands, Germany, France, Italy and UK. The company
    manufactures cars keeping in view the preferences of different categories of
    customers, such as for entry level the company manufactures Alto 800, Alto K10 and
    Celerio, for hatchback enthusiast consumers it has Wagon R, Singray, Ritz and Swift.
    Further the company also manufactures Dzire and Ciaz in seda n segment, Omni and
    Eeco in the ‘C’ segment, a multipurpose vehicle Ertiga along with sports utility
    vehicles Gypsy and Grand Vitara.
    Debt equity ratio is calculated to estimate the long term solvency of an enterprise
    or in other words, it conveys the relationship between long-term debts and
    shareholders fund of a company. Debt Equity Ratio indicates the proportion of funds
    which are obtained by long-term borrowings in comparison to shareholders fund. The
    major sources of long-term funds comprises of debentures, mortgaged loan, loan from
    financial institutions, bank loan etc. whereas, in order to calculate shareholders fund
    the sum total of accumulated losses and fictitious assets such as preliminary expenses,
    underwriting commission, share issue expenses are to be deducted from the sum total
    of equity share capital, preference share capital, share premium, general reserve,
    capital reserve, credit balance of profit and loss account and other reserves.
    Thus, Debt Equity Ratio = Debt ÷ Equity or Long Term Loans ÷ Shareholder’s
    Fund. The objective behind calculating this ratio is to assess the ability of firm to meet
    its long term liabilities or to ascertain the soundness of long-term financial policies of
    the firm. Normally debt equity ratio of 2:1 is considered to be safe which reflects that
    debts are twice the equity. A debt equity ratio of more than 2:1 reflects a risky
    financial position of a firm from long-term point of view because it means that a firm
    may find it difficult to meet its long term commitments.

    1.1. Objectives of Study
     To find out the amount of debt and equity in Tata Motors from 2010-11 to 2014-15.

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  3. Vineet Singh

     To find out the amount of debt and equity in Maruti Suzuki from 2010-11 to 2014-15.
     To calculate and compare the debt equity ratio of Tata Motors and Maruti Suzuki
    during 2010-2011 to 2014-15.
     To test whether there is a significant difference between debt equity ratio of Tata
    Motors and Maruti Suzuki with the help of t test during 2010-11 to 2014-15.

    2. RESEARCH METHODOLOGY
    The study is mainly based on secondary data. The relevant information in this regard
    has been collected from various sources like journals, articles, textbooks, websites and
    annual reports of Maruti Suzuki and Tata Motors., The analysis is carried out through
    various statistical tools like percentage, average, t test etc.

    3. ANALYSIS AND INTERPRETATION
    In order to analyze long-term solvency of Tata Motors and Maruti Suzuki debt equity
    ratio has been calculated and is explained with the help of table and graphical
    representation followed by a comparative analysis.

    Table 1 Debt Equity Ratio (Tata Motors)

    Debt/Long Term Debt Equity
    Years Equity/Net Worth
    Loan Ratio
    2010-11 15898.75 20013.30 0.79
    2011-12 9964.13 19626.01 0.51
    2012-13 9290.22 19134.84 0.49
    2013-14 10901.93 19176.65 0.57
    2014-15 12605.76 14862.59 0.85
    Average 11732.16 18562.68 0.63

    Figure 1 Debt Equity Ratio (Tata Motors)

    Debt Equity Ratio (Tata Motors)
    25000 0.90
    0.80
    20000 0.70
    Amount in Rs.

    0.60
    15000
    0.50
    Debt/Long Term Loan
    0.40
    10000
    0.30 Equity/Net Worth
    5000 0.20 Debt Equity Ratio
    0.10
    0 0.00
    2010-11 2011-12 2012-13 2013-14 2014-15
    Years

    The above table no. 1 and figure no. 1 exhibits that debt equity ratio of “Tata
    Motors” stood at an average of 0.63:1 for the study period 2010-11 to 2014-15. The
    debt equity ratio of Tata Motors fluctuates from 0.49:1 to 0.85:1 during the study
    period. It is in the year 2012-13 when the company is able to maintain lowest debt
    equity ratio of 0.49:1 and the highest debt equity ratio was witnessed in the year 2014-
    15. During the entire study period, it was in 2010-11 when the company had

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  4. Long Term Solvency Analysis: A Case Study of Tata Motors and Maruti Suzuki

    maximum amount of debt as well as equity i.e. Rs. 15898.75 crores and Rs. 20013.3
    crores respectively which resulted in debt equity ratio of 0.79:1. The company’s debt
    and net worth stood at an average of Rs. 11732.16 crores and Rs. 18562.68 crores
    respectively. A debt equity ratio of 2:1 is considered to be satisfactory, which means
    that debts are twice the equity. If debts are more than, twice the equities it reflects a
    risky financial position of the firm in the long run. Since, the debt equity ratio of Tata
    Motors stood at an average of 0.63:1 it reveals that the company is lesser dependent
    on debt and it will also be able to repay its long term commitments in time.

    Table 2 Debt Equity Ratio (Maruti Suzuki)

    Debt/Long Term Equity/Net Debt Equity
    Years
    Loan Worth Ratio
    2010-11 309.30 13867.50 0.02
    2011-12 96.60 15187.40 0.01
    2012-13 646.50 18578.90 0.03
    2013-14 699.00 20978.00 0.03
    2014-15 250.20 23704.20 0.01
    Average 400.32 18463.20 0.02

    Figure 2 Debt Equity Ratio (Maruti Suzuki)

    Debt Equity Ratio (Maruti Suzuki)
    25000 0.04
    0.04
    20000
    0.03
    Amount in Rs.

    15000 0.03
    0.02 Debt/Long Term Loan
    10000 0.02 Equity/Net Worth
    0.01 Debt Equity Ratio
    5000
    0.01
    0 0.00
    2010-11 2011-12 2012-13 2013-14 2014-15
    Years

    Table no. 2 and figure no. 2 reveal that the debt equity ratio of “Maruti Suzuki”
    stood at an average of 0.63:1 for the study period 2010-11 to 2014-15. During the
    study period the entire debt of the company stood at an average of Rs. 400.32 crores
    whereas the net worth of the company stood at an average of Rs. 18463.20 crores. The
    debt equity ratio of Maruti Suzuki ranges from 0.01:1 to 0.03:1 during the study
    period. It is in the years 2011-12 and 2014-15 when the company is able to maintain
    lowest debt equity ratio of 0.01:1 and the highest debt equity ratio was witnessed in
    the years 2012-13 and 2013-14. During the entire study period, it was in 2013-14
    when the company had maximum amount of debt i.e. Rs. 699.00 crores and maximum
    amount of equity was held by the company in 2014-15 i.e. Rs. 23704.2 crores. The
    debt equity ratio of Maruti Suzuki stood at an average of 0.02:1 which reveals that the
    company is very lesser dependent on debt and it will not face any difficulty to pay off
    its long term commitments in time.

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  5. Vineet Singh

    Table 3 Debt Equity Ratio (Tata Motors vs Maruti Suzuki)
    Debt Equity Ratio (Tata Debt Equity Ratio (Maruti
    Years
    Motors) Suzuki)
    2010-11 0.79 0.02
    2011-12 0.51 0.01
    2012-13 0.49 0.03
    2013-14 0.57 0.03
    2014-15 0.85 0.01
    Average 0.63 0.02

    Figure 3 Debt Equity Ratio (Tata Motors vs Maruti Suzuki)

    Debt Equity Ratio (Tata Motors vs Maruti Suzuki)
    0.90
    0.80
    0.70
    0.60
    0.50
    0.40
    0.30
    0.20
    0.10
    0.00
    2010-11 2011-12 2012-13 2013-14 2014-15

    Debt Equity Ratio (Tata Motors) Debt Equity Ratio (Maruti Suzuki)

    Table no. 3 and figure no. 3 portray a comparison between debt equity ratio of
    Tata Motors and Maruti Suzuki. The above analysis interprets that both the companies
    are able to maintain a far satisfactory debt equity ratio than standard. The debt equity
    ratio of Tata motors and Maruti Suzuki stood at an average of 0.63:1 and 0.02:1
    during the study period which means that both the companies are able to control the
    debt level in their capital structure. When debts are more than twice the equities it
    means that the company is excessive dependent on debt which is not a favourable
    condition from long term point of view. If the proportion of debt is more than twice
    than that of equities/net worth it reveals that a firm might face difficulty to reimburse
    its long term debts in time.

    4. HYPOTHESIS TESTING ON DEBT EQUITY RATIO (TATA
    MOTORS AND MARUTI SUZUKI)
    To test whether there is a significant difference between debt equity ratio of Tata
    Motors and Maruti Suzuki the following hypothesis is framed and tested through t-test
    at 95% confidence level:

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  6. Long Term Solvency Analysis: A Case Study of Tata Motors and Maruti Suzuki

    H0 There is no significant difference between debt equity ratio of Tata Motors and
    Maruti Suzuki
    H1 There is a significant difference between debt equity ratio of Tata Motors and
    Maruti Suzuki
    t-Test: Two-Sample Assuming Unequal Variances
    DEBT EQUITY RATIO DEBT EQUITY RATIO
    PARAMETERS
    (TATA MOTORS) (MARUTI SUZUKI)
    Mean 0.640855 0.021468
    Variance 0.028412 0.000167
    Observations 5 5
    Hypothesized Mean Difference 0
    df 4
    t Stat 8.192707
    P(T

  7. Vineet Singh

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    [8] Vineet Singh and Abhinna Srivastava. Receivables Management in Leading
    Heavy Electrical Industries in India, International Journal of Management, 6(4),
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    [9] Vineet Singh. Significance Of Working Capital Turnover Ratio: A Case Study of
    BHEL and Crompton Greaves, International Journal of Management, 6(3), 2015,
    pp. 1 – 7.

    http://www.iaeme.com/IJM/index.asp 50 editor@iaeme.com

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