DUPONT Analysis of RONW

ROCEPBIT/CE

Profit MarginPBIT/ SALES

Asset TurnoverSALES/ TOTAL ASSETS

Asset LeverageTOTAL ASSETS/ CE

RONWPAT/NW

Profit MarginPAT/ SALES

Asset TurnoverSALES/ TOTAL ASSETS

Asset LeverageTOTAL ASSETS/ NET WORTH

DUPONT Analysis of RONW

Ashok Leyland

DUPONT 2004-05 2003-04 2002-03

RONW 20.02% 16.30% 12.40%

Profit Margin 5.6% 4.9% 3.91%

Asset Turnover 142.9% 155.1% 250.3%

Asset Leverage 249.9% 213.48% 252.08%

DUPONT Analysis of ROCE

DUPONT 2004-05 2003-04 2002-03

ROCE 15.9% 17% 10.1%

Profit Margin 7.37% 7.29% 5.53%

Asset Turnover 142.9% 155.1% 126%

ROTAPBIT/TA

TurnoverRevenues/Total Asset

Operating Profit PBIT/ Revenues

Current Asset LeverageSales / CA

Asset Leverage 151.1% 150.2% 144.6%

Implications:

The ROCE shows a declining trend except for the last year. This was largely due to decline in Profit Margins. The company has however tamed the buck by increasing the asset turnover to arrive at a better overall ROCE.

The ROCE is not as good as NALCO (28%) but equivalent to that of STERLITE

DUPONT Analysis of ROTA

DUPONT 2004-05 2003-04 2002-03

ROTA 15.9% 17% 10.1%

Turnover 125.8% 134.7% 143.5%

Operating Profit 8.38% 8.39% 8.38%

Current Asset Leverage 223% 268.3% 229.3%

Bajaj Auto

DUPONT ANALYSIS

DuPont Analysis :

Dupont Analysis is an approach to analyse the firm by evaluating inter relationships

among many of the performance measures. In the Dupont Analysis we try to find out

what are the factors/drivers that are causing the profits to move up. By identifying

these factors/drivers we can concentrate on them and improve our efficiency.

ROTA

ROTA = PBIT / Total Asset0.1311

Expenses / Sales

0.1624

Sales / Total Asset

0.7638

Sales / Inventory

25.5861

2004 - 05

2003 - 04

ROCE 2002 - 2003

ROCE 2004 - 05

TA Chart

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2004-05 2003-04 2002-03TA (mn)

RONW = PAT / NW0.1794

RONW 2003 - 2004

RONW 2004 - 05

RONW = PAT / NW0.1917

RONW = PAT / NW

0.1578

DRLDuPont Analysis

The three components of DuPont measure the profitability, efficiency and the degree of leverage of the firm. The DuPont chart makes an intra firm comparison among these three parameters for three years.

The profitability of the firm as shown by the first component has decreased from 0.26 to 0.05 which is not good for the company. This can be further explained as a consequence of the increase in the cost of goods sold which is in turn due to the increase in raw material and labor costs. There is also a marginal increase in the marketing expenses which may not significantly affect profitability. Therefore the major causes for poor profitability are rising material and labor costs.

The second component is indicative of the asset use efficiency of the firm. The asset turnover has decreased from 0.73 to 0.59. This shows a declining trend in the usage efficiency of the assets. When the DuPont chart is used to track down the area of concern, we can find that fixed asset turnover has remained fairly constant and in some cases even improved over the three years. However, current asset turnover is not so satisfactory. Even among the current assets, we can find that the ratio of sales to cash has been fairly consistent. Stock turnover has on the other hand declined and this is the reason for inefficient asset usage. Stock here implies both raw materials and finished goods. We can see that the stock turnover ratio has declined from 7.1 to 5.69 thereby causing resource inefficiency.

The third component shows the degree of leverage of the firm. Though the ratio between total assets and capital employed has remained fairly consistent, on closer examination, one can find that there is a huge anomaly with respect to long term loans. There is a steep decline from 62 times to 11 times. This shows how the leverage of the firm has changed as a result of long term loans. The company has taken huge long term loans to finance its activities and this has rightly been reflected in the DuPont chart.

DU-PONT CHARTS

Tata Motors

ROCE-2005

In case of Tata Motors Ltd. we can see that the RoCE was at 0.28 i.e. for every Rs.100 of CE the profit(PBIT) is Rs.23, in 2002-2003. this went up to 0.43 i.e. for every Rs.100 of CE the profit(PBIT) is Rs.43, in 2003-2004 and took a plunge in 2004-2005 when it went down to 0.33 i.e. for every Rs.100 of CE the profit(PBIT) is Rs.33. What seems strange is that the other ratios have been indicating a bull run for the company and this is the first ratio that the picture isn’t all that rosy as it seems to be. To analyze what is going wrong, we will have to

scrutinize the balance sheet a little more closely. Immediately we’ll find that two components of CE have drastically gone up. The share capital has gone up, and complementing that increase, the long term debts have increased drastically. Though the secured loans have gone down, a big chunk of unsecured loans has come in. this rate of increase in CE is higher than the rate at which the PBIT has been increasing. This points at possibility of better corporate governance to boost up ROI on CE i.e. RoCE, and hence benefiting the Profit Generating Ability(PGA) of the company.

RONW – 200 5

Tata Motors has been enjoying a steady increase in the RoNW last three financial years. However, there has been a slight slowdown in this increase in rate between the FY ended 2004 and the FY ended 2005. As can be seen in the balance sheet, the PAT as well as the PBIT has been increasing. Therefore the only other reason why this could be happening is because of the increase in the share capital. This fact can be corroborated from the increase in the share capital as can be seen in the balance sheet.

ROTA - 20 05

Tata Motors Ltd. has faced a situation similar to the previous ratio here. The RoTA has gone up in the FYs ended 2002-2003 and 2003-2004. Here after seeing the balance sheet, we can find out the reason. The assets have been increasing at faster rate as compared to the PBIT. This is also proves another thing, the investment decisions of the company are not garnering enough profits.

8.0 DuPont Analysis:Hero Honda

8.0.1 Return on Net Worth

8.0.2 Return on Capital Employed

8.0.3 Return on Total Asset

The return on Net Worth of Hero Honda is a staggering 63.95%, which is way above those of Bajaj & TVS. The major rise behind the huge RONW is the fact that the Net worth of Hero Honda is way lower as compared that of its competitors. The Net Worth of Hero Honda stands at Rs 1139 crore, out of which capital comprises of Rs 40 crore, whereas that of Bajaj stands at Rs 3694 crore. One of the strengths of Hero Honda is the efficient working capital

management as a result its able to reduce its cost to the minimum extent possible. It has a policy of financing even its fixed assets by current liability. As a result it is using a source which either does not has any cost or if it has any cost its very minimum. The following important facts stand out from the Dupont analysis:

Its cogs/sales ratio has fallen from 85% in 01-02 to 82% in 03-04. This reflects the large scale cost reduction measures initiated by Hero Honda. In this tough competition where selling price cannot be increased, cost reduction is the only option available for increasing the profits.

Its sales/FA ratio increased from 925% in 01-02 to 1019% in 03-04. This shows that Hero Honda is able to generate more sales from same amount of Fixed assets. It shows that they are also undertaking measures to increase productivity, which is of utmost importance for survival in modern competitive world.

Its sales/cash ratio has increased from 4166% to 16157%, which reflects the after effect of a sound cash management policy. The company is maintaining cash which is optimum, considering its future plans.

The sales/debtors ratio has increased from 4522%in 01-02 to 13693% in 03-04, which shows the efficient credit and follow up procedure. Thus the company is ale to play with its creditors because o its position as a market leader and for other reasons as well, which in turn reduces the financing needs of the company.

Sales/inventories ratio rose to 3186% in 03-04 from 2545% in 01-02, This is also the effect of working capital management policies.

Similarly ROCE of Hero Honda is around 82% for last few years, whereas that of its competitors is hovering around the 20% level. This not only reflects the above proved sound working capital management, but also reflects the low debt policy of Hero Honda. The Long term Debt of Hero Honda for 03-04 is Rs 175crore whereas that of Bajaj has touched the sky high limit of Rs 1006 crore. It shows that Hero Honda is also not using its 2nd source of finance,i.e. Long term Debt. Thus it clearly shows that Hero Honda’s major source of finance is its current liabilities, which stood at Rs 1260.05crore which not only exceeds its current liability, but is also very close to crossing its figure of capital employed. This is a breathtaking fact, which shows the company is financing its fixed assets from its current liabilities. This can be risky as the company might face short term liquidity crisis in future. But the company is following with this because of its control over sundry debtors, whereby its able to realize funds from debtors at a very short notice.The above analysis gives us a light as to why Hero Honda is able to maintain its dominance in 2 wheeler segment for such a long period.

red to that from sale of goods.

The data used to calculate all the ratios used in DU PONT chart are shown below.

DATATVS BAJAJ

2002-03 2003-04 2004-05 2002-03 2003-04 2004-05SALES 2704.53 2820.21 2875.91 4159.08 4755.17 5736.35PBIT 203.97 215.74 201.24 789.71 961.33 1087.07TA 1069.35 1281.13 1521.98 6193.93 7148.23 8295.19FA 532.67 704.18 770.48 1298.22 1232.07 1140.83

CA 448.76 436.03 506.65 2155.13 2053.04 2589.74CE 539.79 676.09 769.33 1523.34 966.72 940.65OF 422.95 574.95 678.83 3240.6 3693.62 4134.34LTL 121.89 119.01 186.84 840.22 1005.72 1226.99COGS 1858.68 1855.17 1981.42 2692.75 3199.22 4102.08EXP 583 705 683 806.52 888.58 931.43DEP 79.91 79.89 89.63 171.15 179.89 185.36INVENTORY 214.07 216.66 233.23 207.98 202.56 224.17DEBTORS 52.21 51.9 34.56 167.03 133.94 176.34CASH 82.46 18 73.87 30.02 79.37 108.68OTHER CA 0 0.19 0.29 59.44 45.48 68.53LOANS & ADV 100.02 149.28 164.7 1690.63 1591.68 2012.01

ANALYSIS

TVS has a lower ROCE mainly because of low operating profit (PBIT) and

comparatively higher capital employed. This has been the recent trend in past

3 years when TVS is trying to expand and hence incurring more cost on it, as

a result its non-trade investment is quite low as compared to other

competitors who have been operating in market for a quit long time.

PBIT/SALES is less for TVS mainly because of higher EXP/SALES as

compared to the industry average.

SALES/TA of TVS is more than the industry average mainly because of lower

Total-Assets, which in turn is due to lower Current-Assets.

SALES/CA is also quite high for TVS as compared that of Bajaj mainly

because of lower amounts of ‘OTHER CA’ and ‘LOANS & ADV’, or in other

words, huge SALES/OTHER CA and SALES/LOANS & ADV.