Hero Honda Financial Analysis

Investment Decisions Analysis Company: Hero Honda Motors Ltd. Balance sheet | | | | | | | | |YEAR |Mar’ 10 |Mar’ 09 |Mar’ 08 |Mar’ 07 |Mar’ 06 | | | |Fixed assets | |Gross block |2,750. 98 |2,516. 27 |1,938. 78 |1,800. 63 |1,471. 97 | |Less : revaluation reserve |- |- |- |- |- | |Less : accumulated depreciation |1,092. 20 |942. 56 |782. 52 |635. 10 |522. 60 | |Net block |1,658. 78 |1,573. 71 |1,156. 6 |1,165. 53 |949. 37 | |Capital work-in-progress |48. 14 |120. 54 |408. 49 |189. 92 |44. 19 | |Investments |3,925. 71 |3,368. 75 |2,566. 82 |1,973. 87 |2,061. 89 | |Net current assets | |Current assets, loans & advances |2,890. 46 |1,022. 14 |942. 00 |914. 65 |822. 6 | |Less : current liabilities & provisions |4,992. 04 |2,205. 90 |1,955. 33 |1,608. 74 |1,682. 90 | |Total net current assets |-2,101. 58 |-1,183. 76 |-1,013. 33 |-694. 09 |-860. 34 | |Miscellaneous expenses not written |- |- |- |- |- | |Total |3,531. 05 |3,879. 24 |3,118. 24 |2,635. 23 |2,195. 11 | Fixed / Intangible Assets and Depreciation/Amortisation

Fixed assets are stated at cost less accumulated depreciation. Cost of acquisition is inclusive of freight , duties, taxes, and other incidental expenses. Depriciation is charged on a pro-rate basis at the straight line method prescribed in schedule XIV to the companies act, 1956. Assets covered under employee benefit scheme are amortised over a period of five years. Assets costing upto Rs. 5000 each are fully depreciated in the year of purchase. Intangible assets, comprising of expenditure on model fee etc. , incurred are amortised on a straight line method over a period of five years. Lease hold land has been amortised over the period of lease. Interpretations

The Gross block is increasing every year and there’s no revaluation as the revaluation reserve is zero. Moreover, the FAs are stated at cost. Hence, the company is investing in FA every year. Hence, we can say that the company is growing continuously. In 2009, FA purchase = Gross block of 2009 – Gross block of 2008 = INR 234. 71 cr Investments Current investments are stated at lower of cost and fair value computed categorywise. Long-term investments are stated at cost less provision for permanent diminuition, if any. Net cash used in investing activity (2009): INR 844. 59 cr Interpretation Hero Honda Motors has been continuously increasing its investment every year.

Hence, it is benefitting its shareholder through capital gains and not through dividends. Inventories Stores and spares and loose tools are stated at cost or under. Raw materials and components, finished goods and work in progress are valued at cost or net realisable value, whichever is lower. The basis of determining cost for various categories of inventories are as follows:- Stores and spares, loose tools, raw materials and components – Weighted average cost Materials in transit - Actual cost Work in progress and finished goods - Material cost plus appropriate share of labour, manufacturing overheads and excise duty Provisions and Contingent Liabilities

Provision involving substantial degree of estimation in measurement are recognized when there is present obligation as a result of past events and it is probable that there will be an out flow of resources. Contingent liabilities are not recognized but are disclosed in the notes. Working capital management and Liquidity Ratios The company has been able to effectively control the recievable and inventories enabling it to continue to operate on negative working capital. Key indicators of profitability : 09-10 08-09 Inventory Period 10. 6 11. 0 Operating Cycle 13. 3 16. 9 Cash Cycle -17. 0 -13. 1 Current Ratio 0. 45 0. 51 Acid Test Ratio 0. 26 0. 30

The average of inventory, recievables and payables has been taken into consideration of inventory period, operating and cash cycle. 1. Current ratio Current Ratio = CA/ CL = 3. 19 Interpretation 1. For every one Rupee of CL the company has CA worth Rs. 3. 19. 2. Hence, from the operational point of view, the safety margin is 68. 65% ie. Firm will be able to meet its current obligations even with a 68. 75% decline in the value of its CAs. 3. Hence, short term lenders will feel more safe and secured with PRIL. 2. Acid test/ Quick ratio Quick ratio = (Current Assets – Inventory – Prepaid expenses)/ Current Liabilities = 1. 45 Interpretation An ATR of 1 is considered satisfactory.

Hence, PRIL has a good liquidity position. 3. Inventory Turnover ratio ITR = COGS/ Avg finished goods inventory = 3. 77 Inventory Period = 12/ITR = 3. 18 Interpretation 1. Lower average inventory 2. Finished goods are stored for a period of 3. 18 months before they are sold. 3. Since, the ITR is not that high, the company is required to maintain high liquidity ratios (which the company actually does). 4. Long term assets to Total assets ratio LTA/ TA = 0. 46 Interpretation 1. The majority of assets of the company are short term or current assets. 2. This is good for the company as the company has a low ITR and hence is required to maintain high CA to meet its CL.

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