CORPORATE FINANCE

REPORT ON
AUTOMOBILE INDUSTRY

Muskan Garg
 INTRODUCTION TO AUTOMOBILE SECTOR

India was the world's fourth largest manufacturer of cars and seventh largest manufacturer of
commercial vehicles in 2019.

The industry attracted

Foreign Direct
Investment (FDI) worth
US$ 24.5 billion
between April 2000 and
June 2020 accounting
for approx. 5% of the
total FDI during the
period according to the
data released by Department for Promotion of Industry and Internal Trade (DPIIT).

Domestic automobile production increased at 2.36% CAGR between FY16-FY20 with 26.36
million vehicles being manufactured in the country in FY20. Overall, domestic automobiles
sales increased at 1.29% CAGR between FY16-FY20 with 21.55 million vehicles being sold
in FY20.

Overall, automobile export reached 4.77 million vehicles in FY20, growing at a CAGR of
6.94% during FY16-FY20. Two wheelers made up 73.9% of the vehicles exported, followed
by passenger vehicles at 14.2%, three wheelers at 10.5% and commercial vehicles at 1.3%.

India is also a
prominent auto
exporter and has
strong export
growth
expectations for
the near future.
In addition,
several initiatives by the Government of India and major automobile players in the Indian
market is expected to make India a leader in the two-wheeler and four-wheeler market in the
world by 2020.

The automobile industry is supported by various factors such as availability of skilled labour
at low cost, robust Research and Development centres, and low-cost steel production. The
industry also provides great opportunities for investment and direct and indirect employment
to skilled and unskilled labour.

Indian automotive industry (including component manufacturing) is expected to reach Rs.

16.16-18.18 trillion (US$ 251.4-282.8 billion) by 2026.
 ANALYSIS

1. MARUTI SUZUKI INDIA LIMITED

First, I start off by calculating the returns on the Maruti Suzuki and the Market Return of the
NSE Stock.

I assumed risk free rate to be 5.95%, where as the market return is 14.30%, beta value comes
out to be 0.30 which shows that the stock is defensive in nature.

Capital Asset pricing model is 4.37 the WACC value is same as CAPM i.e. 4.37 because of
the no debt presence for the Maruti Suzuki, the debt to equity ratio is 0.

The growth rate of the company was 9.03% whereas the growth of the automobile industry
was just 4.90%, which that the company is overvalued than the rest of its competitors.

The P/E ratio of Maruti Suzuki is 22.92 and its EPS is 187.03, calculated by dividing the net
profit (5650 crores) by the Number of shares (30, 20, 80, 060).

The discount rate is assumed to be 10%, NPV is then calculated of the net profit which comes
to be 5136.36, thus the business is profitable.

2. MAHINDRA & MAHINDRA LIMITED

First, I start off by calculating the returns on the Mahindra & Mahindra and the return of the
NSE Stock.

I assumed risk free rate to be 5.95%, where as the market return is 14.30%, beta value comes
out to be 2.55 which shows that the stock is aggressive in nature.

Capital Asset pricing model is 34.18 the WACC value is smaller than CAPM i.e. 15.62
because of the debt presence for the Mahindra & Mahindra, the debt to equity ratio is 1.19 .

The growth rate of the company was 2.63% whereas the growth of the automobile industry
was 4.90%, which states that the company is undervalued than the rest of its competitors.

The P/E ratio of Mahindra & Mahindra is 15.32 and its EPS is 10.70, calculated by dividing
the net profit (1330.55 crores) by the Number of shares (1243192544).

The discount rate is assumed to be 10%, NPV is then calculated of the net profit which comes
to be 1209.59, thus the business is profitable.
 CONCLUSION

The project report was based on comparison between two firms of Automobile sector i.e.
Maruti Suzuki India Limited and Mahindra & Mahindra Limited. I have made use of
different tools for calculating the real status of firms and on the basis of that I have done in-
depth analysis so that I can compare both the firms from every aspect.

COMPANY Market Return on security P/E Earnings Per NPV

Return (Weighted Ratio Share
Average Cost of
Capital)
Maruti Suzuki 14.3% 4.944 22.92 187.03 5136.36
India Limited
Mahindra & 14.3% 16.636 15.32 10.70 1209.59
Mahindra

COMPANY P/E Ratio Growth Rate Growth Rate Analysis

of Automobile
Industry
Maruti Suzuki 22.92 4.90% 9.03% Overvalued
India Limited
Mahindra & 15.32 4.90% 2.63% Undervalued
Mahindra

COMPANY Capital Beta Analysis

Structure
Maruti Suzuki 100% Equity 0.34 Defensive
India Limited * 0% Debt
Mahindra & 46% Equity 2.55 Aggressive
Mahindra * 54% Debt

First, I calculated the return of both the companies and the return of the NSE stock to reach
out towards our Beta Factor

Calculation of Return=(Closing Price on Jan 1,2021)- (Opening price on Jan 1,2020)

(Opening price on Jan 1,2020)

Calculation of Beta factor= Return of company-risk free rate
Market return- risk free rate

By using these formulas, I calculated our beta factor for both the companies
By looking at the beta factor of both the companies I can conclude that as Maruti’s beta
is 0.34 which means it is defensive in nature that means it has consistent and stable
earnings and while Mahindra’s beta factor is 2.55, which means it is aggressive and
earnings of Mahindra are not consistent in nature.

Next, I calculated CAPM for both the Companies, The Capital Asset Pricing Model (CAPM)
describes the relationship between systematic risk and expected return for assets, generating
expected returns for assets given the risk of those assets and cost of capital.

CAPM= Rf + βi [E(Rm)−Rf]

Hence the CAPM calculated of Maruti is 4.94 and for Mahindra is 36.4 that means
Mahindra is expecting high return for assets in future than Maruti.

Next, I calculated WACC; WACC is the rate that a company is expected to pay on average to
all its security holders to finance its assets.

WACC= Cost of Equity* value of Equity/ Value of Debt*Cost of Debt

Here, WACC comes out for Maruti to be 4.94 due to absence of debts and for Mahindra
is 16.63. That means, at Mahindra, company is expected to pay more than at Maruti for
financing its assets.

Next, I calculated P/E ratio which is the ratio for valuing a company that measures its current
share price relative to its per-share earnings.

P/E Ratio = Price

Earnings
Here, P/E Ratio comes out to be 22.92 for Maruti and 15.32 for Mahindra that means
we have to pay 22.92 for every dollar of earnings of Maruti and 15.32 for every dollar of
earning of Mahindra. That means, Maruti’s P/E ratio is better than Mahindra. That
means its stock has been higher values in the market than Mahindra.
Next, I calculated EPS, calculated by dividing the net profit by the Number of shares.

EPS for Maruti came out to be 187.03and for Mahindra is 10.70 that means Maruti’s
earning is more as per each share as compared to Mahindra

Next, NPV is calculated by dividing the net profit by the Number of shares.

For Maruti, NPV is 5136.36 and for Mahindra , NPV is 1209.59 that means Maruti is
more profitable.

After analysing different tools on both the companies, I can reach out to the conclusion
that investing in Maruti Suzuki India Limited is more profitable than investing in
Mahindra & Mahindra Limited.

---
 REFERENCES

Financial Data from Thomson Reuters Eikon

https://www.ibef.org/industry/automobiles-presentation
https://www.moneycontrol.com/india/stockpricequote/auto-
carsjeeps/marutisuzukiindia/MS24
https://finbox.com/NSEI:MARUTI/models/wacc
https://finbox.com/NSEI:M&M/models/wacc
https://www.moneycontrol.com/india/stockpricequote/auto-
carsjeeps/marutisuzukiindia/MS24
https://finbox.com/NSEI:MARUTI/models/wacc
https://finbox.com/NSEI:M&M/models/wacc