Volume : 2 | Issue : 9 | September 2013 • ISSN No 2277 - 8179 Financial Performance of Indian Automobile Industry – A Comparative Study During Pre and Post Foreign Direct Investment Research Paper Commerce KEYWORDS : Foreign Direct Investment, Financial Performance, Liquidity, Profitability, Efficiency and Solvency A.Dharmaraj Ph.D., Research Scholar, Department of Commerce, Karpagam University, Coimbatore – 641 021 Dr.N.Kathirvel Assistant Professor, Department of Commerce, Govt Arts College, Udumalpet - 642126 ABSTRACT The Indian Automobile Industry marked a new journey in the 1991 with the financial revolutionary New Industrial Policy Act 1991 opening automatic route which allowed the 100 per cent Foreign Direct Investment(FDI). Here, an attempt is made to find out the effect of FDI on the financial performance of Indian Automobile Industry. For this purpose, sixteen companies were selected and analysed through various financial ratios. Descriptive statistical tools like Mean, Standard Deviation and Student’s paired ‘t’ Test were used to test the hypothesis. The liquidity analysis showed little changes and profitability analyses showed an increasing trend during post FDI when compared to pre FDI. The efficiency analysis showed that the companies are efficiently utilising the available resources during post FDI as compared to pre FDI. It is concluded that foreign direct investment in India makes positive impact on the financial variables of the Automobile Companies. INTRODUCTION Most of the global players have set up business in India. India is one of the world’s fastest growing passenger car market and the second largest two wheeler manufacturer. It is the largest motor cycle manufacturer and the fifth largest commercial vehicle manufacturer. The industry is producing nearly 13 lakhs passenger vehicles, 4 lakhs commercial vehicles, 76 lakhs two wheelers and three lakhs tractors per year. The Indian Automobile Industry, after de-licensing in July, 1991 is growing at an average rate of 17 per cent for the past few years. The industry has reached a turnover of Rs. 1,65,000 cores and investment of over Rs. 50,000 crores. Gross turnover of the automobile manufacturers in india was $ 58,583 during 2010-11 as per SIAM . FDI inflows were worth $35.12 billion in 2011-12 (DIPP). The industry generates 1.31 crores employments and contributes 17% to indirect taxes. During the last five years, the export in auto sector has grown on an average compound growth rate of 30% every year. STATEMENT OF THE PROBLEM Many policy makers and academics concur that Foreign Direct Investment (FDI) can have positive effects on a host country’s development. In addition to the direct capital financing it supplies, FDI can be a source of precious technology and know-how while development linkages with local firms can help jump-start an economy. It is imperative to study the financial performance of this sector so as to guide the future policy makers to decide whether to continue, increase, or reduce or to drop the importance and assistance given to this sector. Therefore, the present study is undertaken to compare the financial performance of Indian Automobile Industry during pre and post FDI. REVIEW OF LITERATURE A large number of research studies have been carried out on different aspects of the FDI and financial performance in different perspectives. Rajalakshmi K and Ramachandran T (2011)1 examined the impact of Foreign Direct Investment on India’s Automobile Sector-With Reference to Passenger Car Segment. Muthumoni.A (2008)2 conducted a study on the performance appraisal of Indian Automobile Industry. Norhidayah Mohamad and Yasuo Hoshino (2012)3 examined the effects of Japanese parent company’s financial performance with interactions on the Japanese foreign subsidiaries financial performance. Nurhan Aydinet et.al (2007)4 on “Foreign Ownership and Firm Performance; Evidence from Turkey” studied the role of ownership and structure on the firm’s performance. Mital Menapara and Vijay Pithadia (2011)5conducted a study on the financial performance of select companies during pre-post merger and acquisition. These studies were helpful in determining the variables and choosing the statistical tools. FOREIGN DIRECT INVESTMENT FDI Inflows to Automobile Industry has been at an increasing 54 IJSR - INTERNATIONAL JOURNAL OF SCIENTIFIC RESEARCH rate as India has witnessed a major economic liberalization over the years various industries. The automobile sector in India is growing by 18 percent per year (RBI Statistics)6. FDI inflows increased after 2006. Starting from a baseline of less than $ 1 billion in 1990, India hasbecome the second most important FDI destination (after China) for transnational corporations during 2010-2012. Cumulative FDI Equity Inflows received during January 2000- December 2010 were Rs. 568,246.20 crores (US$ 127.00 billion). Out of this, the amount of FDI inflows in the Automobile industry during January 2000 to December 2010 is Rs. 25,972.59 crores (US$ 5.74 billion) which is 4.52% of the total FDI inflows (RBI handbook 2011)7. As in 2011, China, India and Singapore were the three leading countries for inward FDI, attracting more than half of all projects in Asia-Pacific region (The FDI Report 2013)8. OBJECTIVES OF THE STUDY The financial performance of the Indian automobile industry is analysed through liquidity, profitability, efficiency and solvency ratios. The main objective of this paper is to compare and analyse the financial performance of the Indian Automobile industry during pre and post Foreign Direct Investment. SAMPLING DESIGN Forty eight companies are operating in the Indian Automobile industry during the study period. Out of this only 16 companies were selected for the study which is based on Purposive Sampling method. PERIOD OF THE STUDY The period for this study covered fourteen years from 1999 to 2012 and the essential data for this study have been collected from the annual reports of sixteen companies. The financial year starts from 1st April to 31st March every year. DATA COLLECTION The financial data and information required for the study are drawn from the secondary source Prowess corporate databases developed by CMIE. HYPOTHESIS OF THE STUDY The researchers identified the following null hypothesis for the study. H0 - There would be no significant difference in the means score of financial variables in Indian automobile industry during pre and post foreign direct investment. DATA ANALYSIS In order to identify the performance and the profitability of Automobile Industries various financial ratios were estimated and the averages were computed for the companies in Indian Au- Research Paper tomobile Industry, during the seven years before and after FDI inflows. The averages were compared to see if there was any statistically significant change in financial performance due to FDI inflow, using Students paired “t”distribution test. ANALYSIS AND INTERPRETATION BY USING RATIO ANALYSIS Ratios are simply means of highlighting in arithmetical terms the relationships between the figures drawn from financial statements expressed in terms of Time, Percentage and Rate. In this paper, Current Ratio (CR), Quick Ratio (QR), Inventory to Total Assets (ITA), Quick Assets to Total Assets (QATA), Current Assets to Total Assets (CATA) and Working Capital to Total Assets Ratios (WCTA) were computed for the purpose of analysing liquidity of the firms. To know the profitability in the present study, Return on Sales (ROS), Return on Equity (ROE), Return on Total Assets (ROTA), Return on Capital Employed (ROCE), Operating Profit to Sales (OPR) and Net Income to Total Debts (NITA) were calculated. Inventory Turnover Ratio (ITR), Debtors Turnover Ratio (DTR), Fixed Assets Turnover Ratio (FATR) and Working Capital Turnover Ratios (WCTR) were worked out to know the efficiency of the companies. To know the long term solvency position of automobile companies during pre FDI and post FDI, Total Debt to Total Assets Ratio (TDTA), Net Fixed Assets to Equity Ratio (NFAE), Debt – Equity Ratio (DER), Total Assets to Equity Ratio (TAE) and Long Term Debt-Equity Ratio (LTDE) were calculated. The relevant ‘t’ test statistics, is calculated from the data and then compared with its table value based on ‘t’ – distribution at a 5 per cent level of significance to accept or reject the null hypothesis. Table.1 LIQUITY ANALYSIS OF INDIAN AUTOMOBILE INDUSTRY WITH STUDENT’S PAIRED “t” TEST (In Times) MEAN PAIRED “t” TEST VARIABLES PRE POST FDI FDI MEAN SD T SIG. (2-TAILED) CR 1.93 1.5 0.43 0.10 11.339 0.000 (Sig) QR 1.69 1.32 0.37 0.27 3.631 0.011 (Sig) ITA 0.32 0.26 0.06 0.03 6.089 0.001 (Sig) QATA 0.63 0.48 0.15 0.16 2.368 0.056 (Sig) CATA 0.95 0.74 0.21 0.14 3.878 0.008 (Sig) WCTA 0.31 0.17 0.14 0.07 5.359 0.002 (Sig) Source: Computed from Annual Report, analysed using SPSS 16.0 The table shows fluctuating trend in the liquidity ratios of the Indian automobile industry. The average CR, QR, ITA, QATAR, CATAR and WCTA were decreasing from pre FDI and post FDI. During the pre FDI, all these ratios were above the industry average. The table shows that the t value of CR, QR, ITAR, QATA, CATA, WCTA were significant, so null hypothesis is rejected and which means there is significant effect of Foreign Direct Investment on liquidity of Indian Automobile Industry. Table.2 PROFITABILITY ANALYSIS OF INDIAN AUTOMOBILE INDUSTRY WITH STUDENT’S PAIRED “t” TEST (In Percentages) MEAN VARIABLES PRE POST FDI FDI PAIRED “t” TEST ROS 1.49 -5.87 10.56 -1.472 0.191 ROE 12.61 9.15 3.46 ROTA 0.16 -6.68 10.67 -1.655 0.149 ROCE 17.54 14.16 0.15 0.16 2.368 0.050 (Sig) OPR 9.38 16.49 0.21 0.14 3.878 0.008 (Sig) NITD 2.48 3.55 0.07 5.359 0.002 (Sig) 7.37 6.84 MEAN SD 0.14 7.03 T SIG. (2-TAILED) 1.301 0.241 Source: Computed from Annual Report, analysed using SPSS 16.0 Volume : 2 | Issue : 9 | September 2013 • ISSN No 2277 - 8179 It shows positive trend in the profitability ratios of the Indian automobile industry. The average of ROS, ROE, ROTA, ROCE, OPR and NITD were increasing in post FDI compared to pre FDI. The ratios, Return on Sales, Return on Total Assets, Operating Ratio and Net income to Total Debts shows an increasing in post FDI compared to pre FDI. Return on Equity shows an industrial average of 11.29, but during pre FDI it was 12.61, later it was decreased to 9.15 during post FDI. It is found that profitability of Automobile companies increased during post FDI. The calculated ‘t’ value of Return on Capital Employed, Operating Ratio and Net Income to Total Debts Ratio were significant, which means there is significant effect of Foreign Direct Investment on profitability, so null hypothesis is rejected. Table.3 EFFICIENCY ANALYSIS OF INDIAN AUTOMOBILE INDUSTRY WITH STUDENT’S PAIRED “t” TEST (In Times) MEAN VARIABLES PRE FDI PAIRED “t” TEST POST MEAN SD FDI T SIG. (2-TAILED) ITR 10.24 12.33 -2.09 0.95 -5.815 0.001 (Sig) DTR 23.18 27.32 -4.15 19.24 -0.571 0.589 FATR 3.35 3.09 0.25 0.63 1.053 0.333 WCTR 0.81 4.29 -3.48 8.24 -1.117 0.307 Source: Computed from Annual Report, analysed using SPSS 16.0 The average of ITR, DTR, FATR and WCTR were increased during the post FDI compared to pre FDI, the overall average of these ratios increased in post FDI as compared to pre FDI. It is found that efficiency of Indian Automobile Industry increased during post FDI. For Inventory Turnover Ratio, the calculated value of ‘t’ is significant, which shows that there is significant effect of Foreign Direct Investment on ITR of Indian Automobile Industry and it is insignificant for other variables, null hypothesis is accepted. Table.4 SOLVENCY ANALYSIS OF INDIAN AUTOMOBILE INDUSTRY WITH STUDENT’S PAIRED “t” TEST MEAN PAIRED “t” TEST VARIABLES PRE POST T FDI FDI MEAN SD SIG. (2-TAILED) TDTA 0.41 0.43 -0.02 0.06 -0.877 0.414 NFAE 0.4 -0.25 1.18 -0.556 0.599 DER 1.17 1.07 0.10 0.67 0.379 0.717 TAE 1.91 2 -0.09 1.75 -0.14 0.893 0.65 LTDE 0.84 0.72 0.12 0.56 0.586 0.579 Source: Computed from Annual Report, analysed using SPSS 16.0 The average of TDTA, NFAE and TAE increased during post FDI compared to pre FDI. The Ratios, DER and LTDE were shows decreasing trend during post FDI. It is found that there was a little change in long term solvency position of Indian Automobile Industry during post FDI compared to pre FDI. The calculated ‘t’ value of solvency ratios showed insignificant result, null hypothesis accepted, which means there is a significant impact of FDI on solvency ratios of Indian Automobile Industry. CONCLUSION Growing middle class population with increased purchasing power along with the economic growth during past decade, have attracted multinational corporations to Indian market. From this study, it is concluded that the liquidity ratios showed little changes and profitability showed an increasing trend during post FDI when compared to pre FDI. The efficiency ratios showed that the companies are efficiently utilising the available resources during the post FDI period when compared to pre FDI. The foreign direct investment inflow in India does not IJSR - INTERNATIONAL JOURNAL OF SCIENTIFIC RESEARCH 55 Volume : 2 | Issue : 9 | September 2013 • ISSN No 2277 - 8179 affect the solvency position of the companies. Operating Ratio was increasing but its uncontrollable. Companies have to focus not on enlightening the ratio but on important issues like enlightening the ROCE by dipping assets rather than rising profit. Companies must have broad knowledge of ratios advantage, limitations and standards of different industry along with ability to make relative analysis in order to use them meritoriously to examine adverse trend or abnormality thoroughly and take remedial measures consequently. In order to get meaningful REFERENCE Research Paper ratio it should be compared against the standard and past performance of a company may not be considered as a benchmark when change due to circumstances are possible. Abbreviation: FDI – Foreign Direct Investment, SIAM - Society of Indian Automobile Manaufacturers., DIPP - Department of Industrial Policy & Promation., CMIE – Centre for Monitoring Indian Economy. 1. Rajalakshmi K and Ramachandran T (2011), Impact of Foreign Direct Investment on India’s Automobile Sector-With Reference to Passenger Car Segment, Research journal of Science and IT Management, Vol.1, Issue 1, Nov 2011, pp. 22-41. | 2. Muthumoni.A (2008) “A Study on the performance appraisal of Indian Automobile Industry”, Ph.D Dissertation submitted to Bharathidasan University, Tiruchirappalli. | 3. Norhidayah Mohamad and Yasuo Hoshino (2012), Survival and Financial Performance of Japanese Subsidiaries in Malaysia and Thailand, Business and Management Review Vol. 2(4) June, 2012 pp. 21 – 41. | 4. Nurhan Aydin, Mustafa Sayim and Abdullah Yalama (2007), Foreign Ownership and Firm Performance; Evidence from Turkey, International Journal of Finance and Economics, Issue II. | 5. Mital Menapara and Vijay Pithadia (2011), A study on financial performance of selected companies during pre-post merger and acquisition, Journal of Research in Commerce & Management, Vol.1, Issue.11, 2011 Pp.192-198. | 6. RBI Statistics on FDI | 7. RBI handbook 2011 | 8. The FDI Report 2013, published by UNCTAD. | 9. Department of Industrial Policy & Promation – DIPP, FDI Statistics. | 10. SIAM Website: http://www.siamindia.com. 56 IJSR - INTERNATIONAL JOURNAL OF SCIENTIFIC RESEARCH