FM12
FINANCIAL MANAGEMENT
Assignment I
Assignment Code: 2012 FM12 B1 Last Date of Submission: 15th October 2012
Maximum Marks: 100
Attempt all the questions. All questions carry equal marks.
Section A
1. Explain the concept of risk analysis with reference to capital budgeting. Briefly describe the methods as measures of dealing with risks of capital budgeting
2. Explain the following methods of working out the cost of equity shares:
(i) Dividend Price Approach
(ii) Earning Price Ratio
(iii) Dividend Plus Growth Approach
(iv) Realised Yield Approach
(v) Capital Asset Pricing Model (CAPM)
3. ABC Ltd. Produces electronic components with a selling price per of Rs.100. Fixed cost amount to
Rs.2,00,000/-
5000 units are produced and sold each year. Annual profits amount to Rs.50,000/-. The company’s all equity financed assets are Rs.5,00,000/-. The company proposes to change its production process, adding Rs.4,00,000/- to investment and Rs. 50,000/- to fixed operational costs.
The consequences of such a proposal are:
(i) Reduction in variable cost per unit by Rs.10/-
(ii) Increase in output by 2000 units.
(iii) Reduction in selling price per unit to Rs.95/-
(a) Assume an average cost of capital 10%. Examine the above proposal and advise whether or not the company should make the change.
(b) Also work out the degree of operating leverage.
4. You are required to determine the weighted average cost of capital of a firm using (i) book–value weights and (ii) market value weights. The following information is available for your perusal:
Present book value of the firm's capital structure is:.
Rs
Debentures of Rs. 100 each 8,00,000
Preference shares of Rs. 100 each 2,00,000
Equity shares of Rs. 10 each 10,00,000
20,00,000
All these securities are traded in the capital markets. Recent prices are: Debentures @ Rs. 110, Preference shares @ Rs. 120 and Equity shares @ Rs. 22.
Anticipated external financing opportunities are as follows:
(i) Rs.100 per debenture redeemable at par : 20 years maturity 8% coupon rate, 4% floatation costs,
sale price Rs. 100.
(ii) Rs.100 preference share redeemable at par : 15 years maturity, 10% dividend rate, 5% floatation
costs, sale price Rs. 100.
(iii) Equity shares : Rs. 2 per share floatation costs, sale price Rs. 22.
In addition, the dividend expected on the equity share at the end of the year is Rs. 2 per share; the anticipated growth rate in dividends is 5% and the firm has the practice of paying all its earnings in the form of dividend. The corporate tax rate is 50%.
Section B
5. Case Study
Hardware Ltd. manufactures computer hardware products in different divisions which operate as profit centers. Printer Division makes and sells printers. The Printer Division's budgeted income statement, based on a sales volume of 15,000 units is given below. The Printer Division's Manager believes that sales can be increased by 2,400 units. If the selling price is reduced by Rs. 20 per unit from the present price of Rs. 400 per unit, and that, for this additional volume, no additional fixed costs will be incurred.
Printer Division presently uses a component purchased from an outside supplier at Rs. 70 per unit. A similar component is being produced by the Components Division of Hardware Ltd. and sold outside at a price of Rs. 100 per unit. Components Division can make this component for the Printer Division with a small modification in the specification, which would mean a reduction in the Direct Material cost for the Components Division by Rs. 1.5 per unit. Further, the Component Division will not incur variable selling cost on units transferred to the Printer Division. The Printer Division's Manager has offered the Component Division's Manager a price of Rs. 50 per unit of the component.
Component Division has the capacity to produce 75,000 units, of which only 64,000 can be absorbed by the outside market.
The current budgeted income statement for Components Division is based on a volume of 64,000 units considering all of it as sold outside.
Printer Division Component Division
Rs. '000 Rs. '000
Sales revenue
Manufacturing cost:
Component
Other direct materials, direct
labour and variable OH
Fixed OH
Total manufacturing cost
Gross margin
Variable marketing costs
Fixed marketing and Admn. OH
Non–manufacturing cost
Operating profit 6,000
1,050
1,680
480
3,210
2,790
270
855
1,125
1,665 6,400
—
1,920
704
2,624
3,776
384
704
1,088
2,688
(i) Should the Printer Division reduce the price by Rs. 20 per unit even if it is not able to procure the components from the Component Division at Rs. 50 per unit.
(ii) Without prejudice to your answer to part (i) above, assume that Printer Division needs 17,400 units and that, either it takes all its requirements from Component Division or all of it from outside source. Should the Component Division be willing to supply the Printer Division at Rs. 50 per unit?
(iii) Without prejudice to your answer to part (i) above, assume that Printer Division needs 17,400 units. Would it be in the best interest of Hardware Ltd. for the Components Division to supply the components to the Printer Division at Rs. 50?
Support each of your conclusions with appropriate calculations.
FM12
FINANCIAL MANAGEMENT
Assignment II
Assignment Code: 2012 FM12 B2 Last Date of Submission: 15th November 2012
Maximum Marks: 100
Attempt all the questions. All questions carry equal marks.
Section A
1. Explain how the working capital management policies affect the profitability and liquidity of the firm?
2. What is the Modigliani-Miller’s irrelevance hypothesis in dividend decision making? Critically evaluate its assumption.
3. From the following balance sheets of Winners Ltd. for years ended 31st March, 2003 and 2004, prepare a cash flow statement:
Liabilities 31.03.2003 31.03.2004
(Rs.) (Rs. )
Equity shares of Rs.100 each 9,00,000 12,00,000
Securities premium - 90,000
Profit and loss appropriation account 3,00,000 3,00,000
Profit for the year 50,000 6,00,000
9% Debentures 4,00,000 3,00,000
Sundry creditors 4,05,000 2,30,000
Provision for taxation 1,50,000 3,00,000
Proposed dividend 45,000 1,00,000
22,50,000 31,20,000
Assets 31.03.2003 31.03.2004
(Rs.) (Rs. )
Land 6,00,000 7,50,000
Plant and machinery 12,00,000 13,50,000
Less: depreciation 4,20,000 7,80,000 4,50,000 9,00,000
Loan to subsidiary company 50,000
Share in subsidiary company 60,000 60,000
Stock in trade 3,70,000 4,50,000
Debtors 3,00,000 4,00,000
Bank 90,000 60,000
22,50,000 31,20,000
The following additional information are available:
(i) A plant costing Rs.1,50,000 was sold during the year for Rs.60,000. Accumulated depreciation on this plant was Rs.1,00,000 and profit/loss, if any, arising out of this sale was transferred to profit and loss account.
(ii) During the year, the company paid income-tax amounting to Rs.1,80,000.
4. From the following information provided by Big Brothers Ltd., draw up its balance sheet:
Current ratio
Liquid ratio
Net working capital
Stock turnover ratio (cost of sales/closing stock)
Gross profit ratio
Fixed assets turnover ratio (on cost of sales)
Average collection period
Fixed assets to shareholders net worth
Reserve and surplus to capital
Long term loans 2.5
1.5
Rs.60,000
6 times
20
2 times
2 months
0.8
0.5
Rs.30,000
Section B
5. Case Study
A multi product company has been producing an electronic components in its department P. the budget of department P for the next year is as under:
Budgeted Production and Sales 72,000 units.
Rs. Per unit
Selling price
Direct materials 200
X 1kg per unit
Y I kg per unit 40
30
Direct wages
Variable overheads
Fixed overheads
Total
Profit 40
20
60
190
10_
Subsequent to the preparation of the budget, the company offered that the setting up of an electronic park in the region where the company is situated has resulted in migration of the majority of the departments workforce and consequently the company is forced to take a decision on the closer of the department and abandonment of the budget. The company was however, advised to produce either 24000 or 48,000 components in the next year by employing contract labour. A few remaining workers will be absorbed by the company with in the organization against vacancies. The relevant data are as under:
(a) The cost of contract labour is Rs.6 per hour and the standard contract labour time per unit s 10 hours. The contract labour, however, will have to be trained at a fixed cost of Rs.40,000.
(b) The stock of material X is 72000kg. There is no other use for this material. The quantity not used in department P will have to be disposed of. The cost of disposal is Rs.4000 plus Re.1 per kg disposed off.
(c) The stock of material Y is 36000kg. if this material is not used in department P, a quantity up to 24000kg can be used in another department a substitute for an equivalent weight of a material which currently costs Rs.36 per kg. Material Y originally cost Rs.30 per kg and its current market price is Rs.40 per kg. if any surplus material Y is sold, it will fetch a realization of Rs.20 pre kg sold.
(d) The variance overheads will be 30% higher per unit produced than originally budgeted.
(e) If department P is to closed down immediately, the foreman who will otherwise retire at the end of next year, will be asked to retire earlier and he will be paid Rs.80,000 as compensation. His salary is Rs.6,000 per month.
(f) The only machine used in department P originally cost Rs. 1,40,000 and it can be currently sold for Rs.86,000. This sales values will go down to RS.80,000 at the end of the next year and if the machine is used during the next year for any production activity in the year, the sale value will further decrease by Rs.1000 per every 1000 units produced.
(g) The fixed overheads are apportionment of general overheads and will not be altered by any decision concerning department P.
(h) The sales manager states that a sales volume of 24000 units can be achieved if the selling price is set at Rs.180 per unit. He further stated that a sales volume of 48000 units will be achieved if the selling price per unit is reduced to Rs.150 and an advertisement expenditure of RS.30,000 is spent.
Required:
(i) Prepare a statement indicating the financial implications of the choice to be made between the following alternatives:
(A) Close down department P immediately.
(B) Operate department P for a further year to produce 24000 units of he component.
(C) Operate department P for a further year to produce 48000 units of the component.
(ii) Advise the management on the course of action to be taken.
GM02
Economic and Social Environment of Business
Assignment I
Assignment Code: 2012 GM02 B1 Last Date of Submission: 15th October 2012
Maximum Marks: 100
Attempt all Questions. All questions carry equal marks.
Section A
1. What do you understand by the socio-cultural environment of business and how is it important for business? Briefly explain with the help of suitable examples. (20)
2. Write short note on:
a. Difference between Economic Growth and Economic Development
b. Unemployment (10+10=20)
3. Bring out distinguishing features of industrial policy of 1991 and its impact on the technology status of Indian industry. (20)
4. What measures have been adopted by government to control inflation? What is the relationship between unemployment rate and inflation rate? (20)
Section B
Case Study: Auto makers may see decline in net profit
Market leaders in different categories led by Maruti Suzuki India Ltd., India’s largest seller of cars, may say net profit grew for the third quarter of fiscal 2008 as they sold more vehicles in the festival season. But most other companies, especially two-wheeler and commercial vehicle makers, are likely to report a decline in net profit or a muted growth in earnings as lending rates that are at a five-year high curbed buying and eroded sales.
Fewer trucks, passenger vehicles (cars and utility vehicles) and two-wheelers were sold in the three months ended December, and sales fell by 1.8% in that period – the third straight quarterly decline, as high interest rates forced customers to defer purchases. As many as 85% of India’s passenger vehicles and 60% of two-wheelers are financed by banks or other financiers.
The company that is likely to post the largest yearly increase in profit for the quarter ended December is Maruti, according to the average of estimates of five analysts whom Mint polled.
Maruti sold more cars in the quarter, riding on higher festive season buying and rebates. The festival season, which includes Dussehra and Diwali, is considered an auspicious time to purchase consumer durables. Maruti is expected to record a 22.53% increase in its net profit at Rs.461.2 crore for the quarter.
“Maruti would be able to enhance its profitability due to successful cost reduction, productivity improvement and increased localization,” wrote Amit Kasat and Rohan Korde, analysts at Motilal Oswal Securities Ltd. in a report.
Still, rising input/power costs, consolidation of the Manesar assembly plant and higher royalty payments owing to new model launches are challenges to margins.
Mahindra and Mahindra Ltd., India’s largest seller of utility vehicles, is expected to say sales rose by 14% as it sold more Scorpio and Bolero models. Its profits are likely to grow at a slower rate due to a decline in the sales of tractors which are more profitable, but are bought by customers who are more interest-rate-sensitive. As with tractors, commercial vehicle makers Ashok Leyland Ltd. and Tata Motors Ltd. too, are facing the brunt of higher interest rates as truck sales slowed to a single digit increase in the quarter ended December after posting double-digit growth in the past three years.
While Tata Motors is expected to post a flat growth in profit, rival Ashok Leyland is likely to say both sales and net profit declined.
In the two-wheeler segment, Hero Honda Motors Ltd., the country’s largest two-wheeler maker and the only listed company to post an increase in sales, is likely to show an increase in net profit of 9.4%.
“In two-wheelers, margins will be under pressure due to higher raw material costs, and advertising and marketing costs as a result of new launches in the case of Bajaj Auto and TVS Motor,” said Vaishali Jajoo, automotive analyst with Angel Broking Ltd.
TVS Motor Co. is introducing as many as nine new products in the year to March (its first launch was in August 2007) but cannot sell one of these, the Flame – this was to be the cornerstone of its turnaround – because the model was stuck in a patent litigation. Bajaj Auto Ltd. launched the XCD model, which helped it arrest the decline in sales, but promotional expenses on the product and rebates of up to Rs.3,000 on the Platina model are likely to dent its profit.
Questions:
i. What factors forced two-wheeler and commercial vehicle makers to report a decline in net profit? What challenges are faced by Maruti Suzuki India Ltd. in the ever-changing business environment? (20)
FINANCIAL MANAGEMENT
Assignment I
Assignment Code: 2012 FM12 B1 Last Date of Submission: 15th October 2012
Maximum Marks: 100
Attempt all the questions. All questions carry equal marks.
Section A
1. Explain the concept of risk analysis with reference to capital budgeting. Briefly describe the methods as measures of dealing with risks of capital budgeting
2. Explain the following methods of working out the cost of equity shares:
(i) Dividend Price Approach
(ii) Earning Price Ratio
(iii) Dividend Plus Growth Approach
(iv) Realised Yield Approach
(v) Capital Asset Pricing Model (CAPM)
3. ABC Ltd. Produces electronic components with a selling price per of Rs.100. Fixed cost amount to
Rs.2,00,000/-
5000 units are produced and sold each year. Annual profits amount to Rs.50,000/-. The company’s all equity financed assets are Rs.5,00,000/-. The company proposes to change its production process, adding Rs.4,00,000/- to investment and Rs. 50,000/- to fixed operational costs.
The consequences of such a proposal are:
(i) Reduction in variable cost per unit by Rs.10/-
(ii) Increase in output by 2000 units.
(iii) Reduction in selling price per unit to Rs.95/-
(a) Assume an average cost of capital 10%. Examine the above proposal and advise whether or not the company should make the change.
(b) Also work out the degree of operating leverage.
4. You are required to determine the weighted average cost of capital of a firm using (i) book–value weights and (ii) market value weights. The following information is available for your perusal:
Present book value of the firm's capital structure is:.
Rs
Debentures of Rs. 100 each 8,00,000
Preference shares of Rs. 100 each 2,00,000
Equity shares of Rs. 10 each 10,00,000
20,00,000
All these securities are traded in the capital markets. Recent prices are: Debentures @ Rs. 110, Preference shares @ Rs. 120 and Equity shares @ Rs. 22.
Anticipated external financing opportunities are as follows:
(i) Rs.100 per debenture redeemable at par : 20 years maturity 8% coupon rate, 4% floatation costs,
sale price Rs. 100.
(ii) Rs.100 preference share redeemable at par : 15 years maturity, 10% dividend rate, 5% floatation
costs, sale price Rs. 100.
(iii) Equity shares : Rs. 2 per share floatation costs, sale price Rs. 22.
In addition, the dividend expected on the equity share at the end of the year is Rs. 2 per share; the anticipated growth rate in dividends is 5% and the firm has the practice of paying all its earnings in the form of dividend. The corporate tax rate is 50%.
Section B
5. Case Study
Hardware Ltd. manufactures computer hardware products in different divisions which operate as profit centers. Printer Division makes and sells printers. The Printer Division's budgeted income statement, based on a sales volume of 15,000 units is given below. The Printer Division's Manager believes that sales can be increased by 2,400 units. If the selling price is reduced by Rs. 20 per unit from the present price of Rs. 400 per unit, and that, for this additional volume, no additional fixed costs will be incurred.
Printer Division presently uses a component purchased from an outside supplier at Rs. 70 per unit. A similar component is being produced by the Components Division of Hardware Ltd. and sold outside at a price of Rs. 100 per unit. Components Division can make this component for the Printer Division with a small modification in the specification, which would mean a reduction in the Direct Material cost for the Components Division by Rs. 1.5 per unit. Further, the Component Division will not incur variable selling cost on units transferred to the Printer Division. The Printer Division's Manager has offered the Component Division's Manager a price of Rs. 50 per unit of the component.
Component Division has the capacity to produce 75,000 units, of which only 64,000 can be absorbed by the outside market.
The current budgeted income statement for Components Division is based on a volume of 64,000 units considering all of it as sold outside.
Printer Division Component Division
Rs. '000 Rs. '000
Sales revenue
Manufacturing cost:
Component
Other direct materials, direct
labour and variable OH
Fixed OH
Total manufacturing cost
Gross margin
Variable marketing costs
Fixed marketing and Admn. OH
Non–manufacturing cost
Operating profit 6,000
1,050
1,680
480
3,210
2,790
270
855
1,125
1,665 6,400
—
1,920
704
2,624
3,776
384
704
1,088
2,688
(i) Should the Printer Division reduce the price by Rs. 20 per unit even if it is not able to procure the components from the Component Division at Rs. 50 per unit.
(ii) Without prejudice to your answer to part (i) above, assume that Printer Division needs 17,400 units and that, either it takes all its requirements from Component Division or all of it from outside source. Should the Component Division be willing to supply the Printer Division at Rs. 50 per unit?
(iii) Without prejudice to your answer to part (i) above, assume that Printer Division needs 17,400 units. Would it be in the best interest of Hardware Ltd. for the Components Division to supply the components to the Printer Division at Rs. 50?
Support each of your conclusions with appropriate calculations.
FM12
FINANCIAL MANAGEMENT
Assignment II
Assignment Code: 2012 FM12 B2 Last Date of Submission: 15th November 2012
Maximum Marks: 100
Attempt all the questions. All questions carry equal marks.
Section A
1. Explain how the working capital management policies affect the profitability and liquidity of the firm?
2. What is the Modigliani-Miller’s irrelevance hypothesis in dividend decision making? Critically evaluate its assumption.
3. From the following balance sheets of Winners Ltd. for years ended 31st March, 2003 and 2004, prepare a cash flow statement:
Liabilities 31.03.2003 31.03.2004
(Rs.) (Rs. )
Equity shares of Rs.100 each 9,00,000 12,00,000
Securities premium - 90,000
Profit and loss appropriation account 3,00,000 3,00,000
Profit for the year 50,000 6,00,000
9% Debentures 4,00,000 3,00,000
Sundry creditors 4,05,000 2,30,000
Provision for taxation 1,50,000 3,00,000
Proposed dividend 45,000 1,00,000
22,50,000 31,20,000
Assets 31.03.2003 31.03.2004
(Rs.) (Rs. )
Land 6,00,000 7,50,000
Plant and machinery 12,00,000 13,50,000
Less: depreciation 4,20,000 7,80,000 4,50,000 9,00,000
Loan to subsidiary company 50,000
Share in subsidiary company 60,000 60,000
Stock in trade 3,70,000 4,50,000
Debtors 3,00,000 4,00,000
Bank 90,000 60,000
22,50,000 31,20,000
The following additional information are available:
(i) A plant costing Rs.1,50,000 was sold during the year for Rs.60,000. Accumulated depreciation on this plant was Rs.1,00,000 and profit/loss, if any, arising out of this sale was transferred to profit and loss account.
(ii) During the year, the company paid income-tax amounting to Rs.1,80,000.
4. From the following information provided by Big Brothers Ltd., draw up its balance sheet:
Current ratio
Liquid ratio
Net working capital
Stock turnover ratio (cost of sales/closing stock)
Gross profit ratio
Fixed assets turnover ratio (on cost of sales)
Average collection period
Fixed assets to shareholders net worth
Reserve and surplus to capital
Long term loans 2.5
1.5
Rs.60,000
6 times
20
2 times
2 months
0.8
0.5
Rs.30,000
Section B
5. Case Study
A multi product company has been producing an electronic components in its department P. the budget of department P for the next year is as under:
Budgeted Production and Sales 72,000 units.
Rs. Per unit
Selling price
Direct materials 200
X 1kg per unit
Y I kg per unit 40
30
Direct wages
Variable overheads
Fixed overheads
Total
Profit 40
20
60
190
10_
Subsequent to the preparation of the budget, the company offered that the setting up of an electronic park in the region where the company is situated has resulted in migration of the majority of the departments workforce and consequently the company is forced to take a decision on the closer of the department and abandonment of the budget. The company was however, advised to produce either 24000 or 48,000 components in the next year by employing contract labour. A few remaining workers will be absorbed by the company with in the organization against vacancies. The relevant data are as under:
(a) The cost of contract labour is Rs.6 per hour and the standard contract labour time per unit s 10 hours. The contract labour, however, will have to be trained at a fixed cost of Rs.40,000.
(b) The stock of material X is 72000kg. There is no other use for this material. The quantity not used in department P will have to be disposed of. The cost of disposal is Rs.4000 plus Re.1 per kg disposed off.
(c) The stock of material Y is 36000kg. if this material is not used in department P, a quantity up to 24000kg can be used in another department a substitute for an equivalent weight of a material which currently costs Rs.36 per kg. Material Y originally cost Rs.30 per kg and its current market price is Rs.40 per kg. if any surplus material Y is sold, it will fetch a realization of Rs.20 pre kg sold.
(d) The variance overheads will be 30% higher per unit produced than originally budgeted.
(e) If department P is to closed down immediately, the foreman who will otherwise retire at the end of next year, will be asked to retire earlier and he will be paid Rs.80,000 as compensation. His salary is Rs.6,000 per month.
(f) The only machine used in department P originally cost Rs. 1,40,000 and it can be currently sold for Rs.86,000. This sales values will go down to RS.80,000 at the end of the next year and if the machine is used during the next year for any production activity in the year, the sale value will further decrease by Rs.1000 per every 1000 units produced.
(g) The fixed overheads are apportionment of general overheads and will not be altered by any decision concerning department P.
(h) The sales manager states that a sales volume of 24000 units can be achieved if the selling price is set at Rs.180 per unit. He further stated that a sales volume of 48000 units will be achieved if the selling price per unit is reduced to Rs.150 and an advertisement expenditure of RS.30,000 is spent.
Required:
(i) Prepare a statement indicating the financial implications of the choice to be made between the following alternatives:
(A) Close down department P immediately.
(B) Operate department P for a further year to produce 24000 units of he component.
(C) Operate department P for a further year to produce 48000 units of the component.
(ii) Advise the management on the course of action to be taken.
GM02
Economic and Social Environment of Business
Assignment I
Assignment Code: 2012 GM02 B1 Last Date of Submission: 15th October 2012
Maximum Marks: 100
Attempt all Questions. All questions carry equal marks.
Section A
1. What do you understand by the socio-cultural environment of business and how is it important for business? Briefly explain with the help of suitable examples. (20)
2. Write short note on:
a. Difference between Economic Growth and Economic Development
b. Unemployment (10+10=20)
3. Bring out distinguishing features of industrial policy of 1991 and its impact on the technology status of Indian industry. (20)
4. What measures have been adopted by government to control inflation? What is the relationship between unemployment rate and inflation rate? (20)
Section B
Case Study: Auto makers may see decline in net profit
Market leaders in different categories led by Maruti Suzuki India Ltd., India’s largest seller of cars, may say net profit grew for the third quarter of fiscal 2008 as they sold more vehicles in the festival season. But most other companies, especially two-wheeler and commercial vehicle makers, are likely to report a decline in net profit or a muted growth in earnings as lending rates that are at a five-year high curbed buying and eroded sales.
Fewer trucks, passenger vehicles (cars and utility vehicles) and two-wheelers were sold in the three months ended December, and sales fell by 1.8% in that period – the third straight quarterly decline, as high interest rates forced customers to defer purchases. As many as 85% of India’s passenger vehicles and 60% of two-wheelers are financed by banks or other financiers.
The company that is likely to post the largest yearly increase in profit for the quarter ended December is Maruti, according to the average of estimates of five analysts whom Mint polled.
Maruti sold more cars in the quarter, riding on higher festive season buying and rebates. The festival season, which includes Dussehra and Diwali, is considered an auspicious time to purchase consumer durables. Maruti is expected to record a 22.53% increase in its net profit at Rs.461.2 crore for the quarter.
“Maruti would be able to enhance its profitability due to successful cost reduction, productivity improvement and increased localization,” wrote Amit Kasat and Rohan Korde, analysts at Motilal Oswal Securities Ltd. in a report.
Still, rising input/power costs, consolidation of the Manesar assembly plant and higher royalty payments owing to new model launches are challenges to margins.
Mahindra and Mahindra Ltd., India’s largest seller of utility vehicles, is expected to say sales rose by 14% as it sold more Scorpio and Bolero models. Its profits are likely to grow at a slower rate due to a decline in the sales of tractors which are more profitable, but are bought by customers who are more interest-rate-sensitive. As with tractors, commercial vehicle makers Ashok Leyland Ltd. and Tata Motors Ltd. too, are facing the brunt of higher interest rates as truck sales slowed to a single digit increase in the quarter ended December after posting double-digit growth in the past three years.
While Tata Motors is expected to post a flat growth in profit, rival Ashok Leyland is likely to say both sales and net profit declined.
In the two-wheeler segment, Hero Honda Motors Ltd., the country’s largest two-wheeler maker and the only listed company to post an increase in sales, is likely to show an increase in net profit of 9.4%.
“In two-wheelers, margins will be under pressure due to higher raw material costs, and advertising and marketing costs as a result of new launches in the case of Bajaj Auto and TVS Motor,” said Vaishali Jajoo, automotive analyst with Angel Broking Ltd.
TVS Motor Co. is introducing as many as nine new products in the year to March (its first launch was in August 2007) but cannot sell one of these, the Flame – this was to be the cornerstone of its turnaround – because the model was stuck in a patent litigation. Bajaj Auto Ltd. launched the XCD model, which helped it arrest the decline in sales, but promotional expenses on the product and rebates of up to Rs.3,000 on the Platina model are likely to dent its profit.
Questions:
i. What factors forced two-wheeler and commercial vehicle makers to report a decline in net profit? What challenges are faced by Maruti Suzuki India Ltd. in the ever-changing business environment? (20)
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