BUSINESS VALUATION

CIA-I
IDENTIFYING THE DRIVERS OF DCF VALUATION OF TATA
MOTORS

SUBMITTED BY
Anagha Merrine Baby 2028148
Vidhi Sancheti 2028135
Deekshita Bohra 2028141
Jojin Jijo 2028164
Jeenu Ann Jacob 2028144
SECTION F7

UNDER THE GUIDANCE OF

Dr Anirban Ghatak

MBA PROGRAMME
SCHOOL OF BUSINESS AND MANAGEMENT
CHRIST (DEEMED TO BE UNIVERSITY), BANGALORE
July 2021
 INTRODUCTION
The automobile enterprise is taken into consideration to be one of the most important drivers of financial
increase because of its linkages with a couple of industries. The increase of this area blessings the commodity
area as automobile production calls for steel, aluminium, plastic, etc. It additionally holds significance for the
NBFC/Banks in shape of vehicle financing. Moreover, it's far a vital supply of call for the oil & fuelling
enterprise. The vehicle enterprise in India is one in every of the most important withinside the international
with income of approximately 18.6 million devices in FY2021. Its contribution to the GDP of India stands at
round 7%. There has been a regular decline in income during the last years: 2019-20 became impacted through
the intake slowdown and 2020-21 became impacted through the effect of Covid-19 brought on lockdown
regulations other than an ordinary financial slowdown.

India became the fifth-biggest car marketplace in 2020 and is predicted to be the third-biggest in phrases of
quantity through 2026. Indian automobile enterprise (which includes factor production) is predicted to attain
Rs. 16.16- Rs.18.18 trillion (US$ 251.4-282.eight billion) through 2026.

Segmented market

 Automobile sector split into four segments, i.e., twowheelers, three-wheelers, passenger vehicles and
commercial vehicles, each having few market leaders.
 Two-wheelers and passenger vehicles dominate the domestic demand.
 Two-wheelers accounted for 80.9% of the domestic demand in FY20.

Growth prospects

 The Indian automotive industry is expected to reach US$ 300 billion by 2026.
 Strong policy support from the Government.
 A study by CEEW Centre for Energy Finance recognised US$ 206 billion opportunity for electric
vehicles in India by 2030.

Fifth-largest automobile market

 In 2019-20, the total passenger vehicles sales reached ~2.8 million, while ~2.7 million units were sold
in FY21.
 In April 2021, the total passenger vehicles sales reached 261,633.
 It was the seventh-largest manufacturer of commercial vehicles in 2019.
 Presence of established domestic and international original equipment manufacturers (OEMs).
 Strong market in terms of domestic demand and exports.
EVOLUTION OF THE AUTOMOBILE SECTOR IN INDIA

SEGMENTS
 MARKET OVERVIEW

 The automotive manufacturing industry comprises the production of commercial vehicles, passenger
cars, three-wheelers and two-wheelers.

 In FY21, domestic automobile sales (passenger, three-wheeler, and two-wheeler vehicles) was 18.61
million.

 In April 2021, automobile production (passenger, three-wheeler, two-wheeler vehicles, and

quadricycle) was 1.88 million.

 Overall, domestic automobiles sales increased at a CAGR of 1.29% between FY16-FY20 with 21.55
million vehicles being sold in FY20.

 The Indian auto industry is expected to record strong growth in 2021-22, post recovering from effects
of COVID-19 pandemic. Electric vehicles, especially twowheelers, are likely to witness positive sales
in 2021-22.

 A report by India Energy Storage Alliance estimated that EV market in India is likely to increase at a
CAGR of 36% until 2026. In addition, projection for EV battery market is forecast to expand at a
CAGR of 30% during the same period
  Two-wheelers and passenger vehicles dominate the domestic Indian auto market. Passenger car sales
are dominated by small and mid-sized cars. Two-wheelers and passenger cars accounted for 81.2%
and 14.6% market share, respectively, accounting for a combined sale of over 17.8 million vehicles in
FY21.

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

RECENT TRENDS

Luxury vehicles

 The luxury car market is expected to register sales of 28,000- 33,000 units in 2021, up from 20,000-
21,000 units sold in 2020. The entry of new manufacturers and new launches is likely to propel this
market in 2021.
 In 2021 luxury car manufacturers have lined up 70 new product launches which includes BMW
bringing in 25 new units, Mercedes Benz (15), Jaguar Land Rover (10), Audi (7), Volvo (5) and the
remaining from manufacturers such as Rolls Royce, Lamborghini, Ferrari and Porsche.

Catering to Indian needs

 Most firms including Ford & Volkswagen have adapted themselves to cater to the large Indian middle-
class population by dropping their traditional structure and designs. This has allowed them to compete
directly with domestic firms, making the sector highly competitive.
 Hyundai has entered a strategic alliance with shared mobility company, Revv, under which it will
provide cars on subscription in six cities in India. This will provide customers the opportunity to use
Hyundai’s models with hassle-free ownership, flexibility and limited commitment.

New financing options

 According to NITI Aayog and Rocky Mountain Institute (RMI) India's EV finance industry is likely
to reach Rs. 3.7 lakh crore (US$ 50 billion) in 2030.
 In January 2021, Tata Motors entered a partnership with leading private banks, including HDFC Bank,
ICICI Bank and Yes Bank, to fund its commercial vehicles.
 In November 2020, Mercedes Benz partnered with the State Bank of India to provide attractive interest
rates, while expanding customer base by reaching out to potential HNI customers of the bank.
 STRATEGIES ADOPTED

Capacity addition

 Hero MotoCorp will invest Rs. 2,500 crores (US$ 387.9 million) by the end of FY21 to increase its
production capacity in India.
 In September 2020, Toyota Kirloskar Motors announced investment of over Rs. 2,000 (US$ 272.6
million) in India directed towards developing electric components and technologies.

Electric vehicles

 The electric vehicle market is estimated to be Rs. 50,000 crore (US$ 7.09 billion) opportunity in India
by 2025.
 EV sales, excluding E-rickshaws, in India witnessed a growth of 20% and reached 1.56 lakh units in
FY20 driven by twowheelers.
 In February 2021, Ather Energy begins the production of the Ather 450 Plus and the 450X e-scooters
at its new manufacturing facility located in Hosur, Tamil Nadu which has an installed capacity of
500,000 units per annum.

GROWTH DRIVERS

Policy support

 Initiatives like Make in India, Automotive Mission Plan 2026, and NEMMP 2020 will give a huge
boost to the sector.
 In Union Budget 2021-22, the government introduced the voluntary vehicle scrappage policy, which
is likely to boost demand for new vehicles after removing old unfit vehicles currently plying on the
Indian roads.
 To install electric vehicle supply equipment (EVSE) infrastructure for EVs, various public sector firms,
ministries and railways have come together to create infrastructure and manufacturing components.

Growing demand

 Rising income and a growing young population.

 Greater availability of credit and financing options.
 Demand for commercial vehicles increasing due to high level of activity in the infrastructure sector.

Support infrastructure and high investment

 From April 2000 to December 2020, 4.7% of the total FDI inflows to India went into the automobiles
sector.
  In February 2021, the Delhi government started the process to set up 100 vehicle battery charging
points across the state to push adoption of electric vehicles.
 In October 2020, Japan Bank for International Cooperation (JBIC) agreed to provide US$ 1 billion
(Rs. 7,400 crore) to SBI (State Bank of India) for funding the manufacturing and sales business of
suppliers and dealers of Japanese automobile manufacturers and providing auto loans for the purchase
of Japanese automobiles in India.

INITIATIVES BY THE GOVERNMENT

Production Linked Scheme (PLI)

The Atmanirbhar Bharat has put manufacturing at the centre and emphasized its importance in promoting
Indian growth and job creation. A strong, dynamic and dynamic manufacturing sector will be a growth engine.
Per capita income, largely dependent on manufacturing and export growth, suggesting the need for a well-
planned strategy to attract investment, ensure efficiency and economies of scale, and make Indian
manufacturing companies globally competitive.

With the aim of improving India's production and export capacities, the Indian government introduced the
Production Linked Incentive Scheme (PLI) in the 10 key sectors under the aegis of Atmanirbhar Bharat (table
below). Total expenses are estimated at `Rs 1.46 million lakh and with sector-specific financial limits. Of the
estimated expenses around Rs. Rs 57,042 crore will be allocated to automobiles and automotive components.

Foreign Direct Investment (FDI)

The enterprise attracted Foreign Direct Investment (FDI) really well worth US$ 25 billion among April 2000
and December 2020 accounting for ~5% of the overall FDI throughout the duration consistent with the records
launched via way of means of the Department for Promotion of Industry and Internal Trade (DPIIT).

FDI fairness inflows had been US$49 billion in FY20 compared to US$44.37 billion throughout FY19. It is
US$30.zero billion for FY21 (as much as September-2020). The motive for the lower as maximum of the
investments is diverted to non-production industries. Within the producing area, industries like automobile,
telecommunication, metallurgical, non-traditional energy, chemical (apart from fertilizers), meals processing,
and petroleum & herbal fuelling get the majority of FDI fairness flows. These industries collectively accounted
for approximately 67% of FDI fairness flows into the producing area in FY20.
 KEY FINANCIAL RATIOS

The following are the most important financial ratios that investors and analysts look at when evaluating the
auto industry.

1. Debt-to-Equity Ratio:

Because the auto industry is capital-intensive, an important metric for evaluating auto companies is the debt-
to-equity ratio (D/E), which measures a company's overall financial health and indicates its ability to meet its
financing obligations. An increasing D/E ratio indicates a company is being increasingly financed by creditors
rather than by its own equity. Therefore, both investors and potential lenders prefer to see a lower D/E ratio.
A D/E ratio of 1 indicates a company whose assets and liabilities are equal. However, it's important to compare
D/E ratios to companies within the same industry, as different industries have different debt requirements. The
average D/E ratio is typically higher for larger companies and particularly for more capital-intensive industries
such as the auto industry.

Alternative debt or leverage ratios that are often employed to evaluate companies in the auto industry include
the debt-to-capital ratio and the current ratio.
2. Inventory Turnover Ratio:

The inventory turnover ratio is an important evaluation metric specifically applied within the auto industry to
auto dealerships. It is usually considered a warning sign for auto sales if auto dealerships begin carrying
substantially more than about 60 days’ worth of inventory on their lots. The inventory turnover ratio calculates
the number of times in a year, or another specified time frame, that a company's inventory is sold, or turned
over. It is a good measure of how efficiently a company manages ordering and inventory, but more importantly
for car dealerships, it is an indication of how rapidly they are selling the existing inventory of cars on their lot.

Alternatives to considering the inventory turnover ratio include examining the days sales of inventory (DSI)
ratio or the seasonally adjusted annual rate (SAAR).

3. Return on Equity Ratio:

The ROE is a key financial ratio for evaluating almost any company, and it is certainly considered an
important metric for analyzing companies in the auto industry. The ROE is especially important to investors
because it measures a company's net profit returned in relation to shareholder equity, essentially how profitable
a company is for its investors. Ideally, investors and analysts prefer to see higher returns on equity, and ROEs
of 15% to 20% are considered favorable. Along with the return-on-equity ratio, analysts may also look at
the return on capital employed (ROCE) ratio or the return on assets (ROA) ratio.
 NON-FINANCIAL RATIOS IN THE AUTOMOBILE INDUSTRY

Non-financial ratios are those that do not have a monetary value. There are several sorts of non-financial ratios
– any data in business that contains a number may almost certainly be classified as a ratio and evaluated.
Because many non-financial metrics are less vulnerable to external noise than accounting measures, using
them may improve managers' performance by giving a more accurate assessment of their activities. This also
reduces the risk that managers face when calculating remuneration. They aid in determining a company's
strengths and weaknesses.

It is no secret that the automobile market is highly competitive, pushing any automotive company to make
every potential improvement to compete. A firm must know precisely what to measure and how to measure
it. A firm can evaluate the areas of success and areas requiring development and the extent to which those
areas must be addressed by examining the most significant non-financial ratios. The non-financial ratios listed
below are the most important in the car business.

1. Employee Turnover Ratio:

The proportion of employees who leave or are asked to leave an organization and are replaced by new
employees is known as employee turnover. Employee turnover is usually monitored each year.

Calculation: divide the total number of leavers in a month by your average number of employees in a month
 2. Average Downtime:

Downtime is one of the most important indications for automotive firms to be aware of.

Average Downtime = (downtime hours in a time period) ÷ (total time available to produce vehicles in
the same time period) x 100.
Of course, every automobile company must take steps to guarantee that this period is as short as possible.
Downtime is expensive, especially in the automobile sector, where it is considered to be considerably more
costly than in other manufacturing industries.

3. Utilization Rate:

This is a ratio of how many automobiles an automotive business can create in a certain amount of time to how
many vehicles the company might theoretically make in the same timeframe if time and labour were used
optimally.

Calculation:

Utilization rate = (actual level of output) ÷ (maximum level of output) x 100.

This is a ratio of how many automobiles an automotive business can create in a certain amount of time to how
many vehicles the company might theoretically make in the same timeframe if time and labour were used
optimally.

The utilization rate is essential for automotive firms because it shows how efficiently they spend their time
and labour. If the rate goes below the standard, the consequences for the firm might be severe.

4. Safety Incidents per Employee:

When it comes to moving the automobile sector toward a safer workplace, worker safety is of the highest
significance.

The following calculation gives the value of this metric:

Safety incidents per employee = (number of safety incidents in a time period) ÷ (number of employees
working during the time period).

Having a comprehensive system for measuring safety events in place helps to keep workers safe. However, it
is also a method of detecting when equipment is not working correctly, as accidents are frequently the
consequence of equipment faults.

5. Throughput:

Throughput is the average number of units generated during a specific time period.
 Throughput = (units produced) ÷ (time)

Throughput may be used by automobile industries to determine if there are any flaws in the production process.
If Downtime is excessive, machines are not functioning at appropriate cycle times, tools and equipment are
not well maintained, or there is simply an inefficient cycle, throughput will be poor.

6. Yield

This statistic calculates the proportion of cars built correctly and according to the vehicle requirements the
first time they pass through the manufacturing line, with no rework.

Calculation
This metric may be calculated by dividing the number of vehicles appropriately manufactured by the total
number of vehicles that went through an auto company's production line.

This measure is significant since it reflects an automaker's ability to be efficient on the assembly line, minimize
scrap, and increase capacity.

7. Defective Units/Recall Rates

This measure calculates the percentage of faulty cars produced in a given time period as a percentage of total
vehicles manufactured.

Calculation
This measure is computed by dividing the total number of vehicles recalled owing to a defect in the vehicle
manufactured within a specific time period by the total number of vehicles produced within the same time
period.

This statistic is a significant quality indicator for automakers. If the rate is low, it keeps consumers safe and
reduces the costs associated with product recalls and the potential negative press that comes with recalls,
which may deter consumers from purchasing products from companies with high recall rates.

8. Scrap Rate

This measure calculates the proportion of material utilized that cannot be used because it is faulty or there
were mistakes in the process of manufacturing

Calculation:
The total amount of scrap material is divided by the total amount of materials used.

This measure is significant because it assesses an automotive company's capacity to be as efficient as feasible
without discarding vehicles or materials due to mistakes and how effectively it maintains quality control. A
high scrap rate can be expensive for a firm.
 Analysing Non-Financial indicators of Tata Motors Ltd

Employee Turnover Rate - 8.70%

The employee turnover ratio is low, and hence the company is performing well with the employees. The
company is emphasizing many areas such as growth opportunities, skill up-gradation, learning and
development, technical and functional know-how, grievance redressal, occupational health and safety,
employee wellbeing to ensure the satisfaction of their employees.

Capacity Utilization Rate - 100%

Number of units produced-4, 58,512

Operating at 100% capacity utilization today, the plant has rolled out 4, 58,512 units since inception and is
among the fastest expanding Tata Motors plants.

Safety Performance Ratio -0.26

The safety performance increased in FY 21 from last year due to the higher displacement of people from one
job to another and restriction of physical training of employees due to the COVID-19 pandemic. Safety
considerations are taken care into account at the conceptualization and design phase, even in new offices,
establishments, and warehouses. HIRA and programmes like Work Permit System, JSA, Hot Work, LOTO,
Confined Space, Electrical safety and Road safety are practised to ensure that the exposure to risks is
eliminated, minimized and managed correctly to avoid any incidents. These standards and procedures are
common across all plants/sites and incidents.

Scrap rate - 4- 6%

The scrap rate for the company is 4- 6%, which is fairly a good metric that shows the company's ability to
manufacture the vehicles as per the customer requirements in an efficient manner.

Fig: Non - Financial from Annual Report of Tata Mors 2020-2021

 COMPANY ANALYSIS

I. Revenue Drivers Tata Motors:

A major proportion of the revenue of the company is derived from the manufacturing of automobiles and also
from their other businesses include IT services, machine tools, and factory automation solutions, which form
a rather small percentage of its total revenue.

Tata Motors earned about 99.3% of its revenues from its automotive operations in the FY 2020-21. The
segment is divided into four reporting segments: Tat commercial vehicles, tata passenger vehicles, Jaguar
Land Rover and Vehicle Financing. The company also earns revenue from its other operations which is Tata
Technologies that offer IT services. The operation incurred loss in the FY 2020-21 and revenue decreased by
14.3%. The division represents about 1-1.2% of the total revenues of the company.

Following are a few developments on the revenue drivers of the company observed in the financial year 2020-
21:

1. Improving Operations: The company was able to drive their revenue by addressing several
bottlenecks in the supply chain and scaling up capacity.
2. People: The business grew by 2% and revenue by 7% by focussing on maintaining the health, safety
and wellbeing of the employees as well as the supporting ecosystem.
3. Increased demand due to change in sales strategy: The shift to personal mobility and preference for
the ‘New Forever’ range of cars and SUVs led to the Passenger Vehicle business recording its highest
ever annual sales in 8 years and growing its market share to 8.2%.
4. Innovation in Passenger Vehicle Segment: Passenger vehicle segment increased in revenue on
account of pent-up demand, better products and safety features of our New forever range of vehicles.
The revenue from Passenger Cars in India has increased by 105.9% to `5,832 crores in FY 2020-21
from `2,833 crores in FY 2019-20, Electric vehicle increased to `571 crores in FY 2020-21 from `152
 crores in FY 2019-20 and Utility Vehicles increased by 56.7% to `6,534 crores in FY 2020-21 from
`4,169 crores in FY 2019-20.
5. Increased selling price due to Covid 19: The revenue of commercial vehicle at overall level
decreased mainly due to the COVID-19 pandemic, lower freight utilizations, difficulties in obtaining
financing and some hesitation due to rising costs for BS VI vehicles. There is a reduction in sales
volume which was partially offset by increase in average selling price per unit under BS VI norms.
6. Favourable Sales Mix: The reduction in revenue was much lower than the decline in wholesales
volumes, reflecting the strong favourable sales mix, higher average revenue per vehicle and much
lower incentive spending during the year.

Trend analysis of the Revenue of the company from FY 2016-17 to FY 2020-21

Particulars 2016-17 2017-18 2018-19 2019-20 2020-21

Revenue from Operations

Revenue 49,100.41 59,624.69 68,764.88 43,485.76 46,559.39

Other operating Revenue 978.84 1,557.60 437.88 442.41 472.08

Total Revenue from Operations 50,079.25 61,182.29 69,202.76 43,928.17 47,031.47

Trend Analysis

Particulars 2016-17 2017-18 2018-19 2019-20 2020-21

Revenue from Operations

Revenue 100% 21.43% 40.05% -11.44% -5.18%

Other operating Revenue 100% 59.13% -55.27% -54.80% -51.77%

Changes in Revenue drivers from 2016-2021:

Tata Motors has had nearly 40% increase in Revenue from 2016 to 2018. The increase in revenue in 2018 was
driven by the Tata and other brand segments contributing to nearly 80% of the increase. However the FY
2019-20 saw a great dip in Revenue by 11% which was said to be due to a slowdown in demand, liquidity
stress and low freight availability for vargo operators. The flagship product of Tata Motors Jaguar Land Rover
reported a revenue dip of 9.9% due to weaker market conditions. FY 2020-21 saw the impact of Covid 19
aswell while the company slowly seems to picking up from its dip in 2019. The revenue pick up is assumed
to be due to the developments in revenue drivers that the company has taken in the current year.

II. Cost Drivers

2017 2018 2019 2020 2021

Revenue 45297.4 60389.01 71757.42 45311.22 47874.43

Cost of Goods sold 31345.48 42684.91 50615.78 32574.51 35432.26

% Of revenue 69.2% 70.7% 70.5% 71.9% 74.0%

year on year growth 36.18% 18.58% -35.64% 8.77%

Employee Benefit Expenses 3764.35 3966.73 4273.1 4384.31 4212.99

% Of revenue 8.31% 6.57% 5.95% 9.68% 8.80%

year on year growth 5.38% 7.72% 2.60% -3.91%

454.48 474.98 571.76 830.24 907.64

Product development / engineering
 expenses

% Of revenue 1.0% 0.8% 0.8% 1.8% 1.9%

year on year growth 4.51% 20.38% 45.21% 9.32%

Other Expenses 8083.12 9251.41 9895.68 7959.75 5803.57

% Of revenue 17.84% 15.32% 13.79% 17.57% 12.12%

year on year growth 14.45% 6.96% -19.56% -27.09%

Amounts Transfer to Capital Accounts -941.6 -855.08 -1093.11 -1169.46 -817.53

% Of revenue -2.08% -1.42% -1.52% -2.58% -1.71%

year on year growth -9.19% 27.84% 6.98% -30.09%

Exceptional items -338.71 -966.66 -203.07 -2510.92 1392.08

% Of revenue -0.75% -1.60% -0.28% -5.54% 2.91%

year on year growth -385.39% -121.01% -1136.48% 155.44%

Tax % -3.24% -9.29% 15.77% -2.28% -3.58%

 Cost of goods sold

The changes in cost of goods sold from 2017-2021 are attributable to the product mix and reduction in line
with the revenue.

In 2020-21, the cost of materials, as percentage of revenue, is the highest i.e., 74% due to the increasing prices
of commodities, especially steel and other precious metals.

Prices of commodity items used in manufacturing automobiles, including steel, aluminium, copper, zinc,
rubber, platinum, palladium and rhodium, have become increasingly volatile in recent years. Prices of
commodity items such as steel, nonferrous metals, precious metals, rubber and petroleum products have
generally risen in recent years and may significantly rise in the future.

 Employee benefits expenses

The employee benefit expenses include costs like salaries, wages and bonus, Contribution to PPF and staff
welfare expenses. The increase and decrease of the employee benefit expenses is majorly based upon the total
headcount of the employees. The other reasons are higher performance payment accruals and wage revisions.
The employee headcount gradually decreased from 82,797 to 78,906 from 2019 to 2020 and decreased to
75,278 by 2021. This decrease was led primarily due to voluntary early separations. By 2021 the employee
benefit expenses decreased due to reduction in staff welfare expenses due to nationwide lockdown and reduced
overtime.

 Product development/engineering expenses

Product development/Engineering expenses represent research costs and costs pertaining to minor product
enhancements, refreshes, and upgrades to existing vehicle models. It is increasing from 2019 to improve the
quality of the products with varied resources.

 Other expenses

The various components of other expenses are freight and transportation, works operations, publicity
(marketing), warranty and product liability, processing charges, store, spare parts and tools, power and fuel,
IT etc. The changes in these items are driven by volumes and size of operation. From 2017 to 2019, the
increase in revenue led to the increase in the expenses, but a drastic decline was evident from 2020 to 2021
due to Covid 19 pandemic lockdown, thereby reducing revenue and expenses as well.

 Amount capitalised to capital accounts

Amount capitalized represents expenditure transferred to capital and other accounts allocated out of employee
cost and other expenses, incurred in connection with product development projects and other capital items.
The expenditure transferred to capital and other accounts has increased due to various product development
projects undertaken by the Company for the introduction of new products and the development of engine and
product variants.

 Tax expense

The effective tax rate in Fiscal 2018 was 32.3% as compared to 30.0% in Fiscal 2017 (PBT includes share of
profit of Joint Venture and associates). For Tata Motors Ltd and certain subsidiaries, the Company has not
recognized deferred tax assets due to uncertainty of future taxable profits till 2020. In Fiscal 2018, there was
a reduction in the US Federal rate from 35% to 21% and in the UK Corporation tax from 19% to 17% resulting
in a deferred tax charge.

Additional deduction for patent, research and product development cost of Rs 282 crores in FY 2019-20 and
Rs 89 crores in FY 2018-19, was mainly due to reduction in Research and Development claims at Tata Motors
Limited.

 Exceptional items

The various components included in exceptional items are

1. Employee separation cost - early retirement to various employees resulting in an expense

2. Defined benefit pension plan amendment past service cost - pension schemes are required to
equalize benefits for male and female members under the guaranteed minimum pension
3. Write off/provision (reversal) for tangible/intangible assets (including under development)
4. Charge associated with change in Strategy and Impairment losses
5. Provisions for, Onerous Contracts and related supplier claims, costs of closure of operation of a
subsidiary
6. Impairment in subsidiaries and loan given to a Joint venture

A huge amount was transferred from the capital accounts due in the charge associated with change in strategy
for JLR in 2020-21 with the aim of implementing electric luxury vehicles. This led to higher positive
exceptional items cost in 2021 as assets were written down in relation to models cancelled. The Company has
made provision of `241.86 crores during FY 2018-19 for certain of its investments in subsidiary companies,
due to continued losses and also sold TAL Manufacturing Solutions Limited to Tata Advanced Systems Ltd.
In order to make the Company fit for future certain product development programs were reviewed and
accordingly an impairment charge was taken for all the years.

III. Working Capital Drivers:

Tata Motors funds their short-term working capital requirements with cash generated from operations,
overdraft facilities with banks, short and medium-term borrowings from lending institutions, banks and
commercial paper.

Identified below are the various Working Capital drivers of the company and their trend over the past 5 years.

Particulars 2016-17 2017-18 2018-19 2019-20 2020-21

Inventories 5504.42 5670.13 4662 3831.92 4551.71

Trade Receivables 2128 3479.81 3250.64 1978.06 2087.51

Prepaid Balances 104.23 94 94.93 97.27 127.37

Trade Payables 7015.21 9411.05 10408.83 8102.25 8115.01

Trend Analysis: 2016-17 2017-18 2018-19 2019-20 2020-21

Inventories 100% 3.01% -15.30% -30.38% -17.31%

Trade Receivables 100% 63.52% 52.76% -7.05% -1.90%

Prepaid Balances 100% -9.81% -8.92% -6.68% 22.20%

Trade Payables 100% 34.15% 48.38% 15.50% 15.68%

The Company’s financial condition has been affected due to the COVID-19 pandemic. The Company
implemented major cost control measures for its standalone business and achieved `4,500 crores worth savings
in working capital alone.

In the case of Inventories, the cost of raw materials, components and consumables are ascertained using the
FIFO approach of inventory valuation. Cost, including fixed and variable production overheads, are allocated
to work-in-progress and finished goods determined on a full absorption cost basis. In terms of number of days
to sales, finished goods represented 42 inventory days in sales in FY 2020-21.

Changes in Working Capital drivers from 2016-2021:

Observing the change in working capital over the five years, it was noticed that the working capital limit
allocated for the India operations from various banks have reduced from 14,000 Crores in 2016-17 to 10,000
Crores in 2020-21.

The number of days of sales of finished goods represented 34 inventory days in 2016 and currently represents
42 inventory days. The numbers show that when compared to previous years, the moving of tata motor
products is comparatively slow and this can be an effect of weak market conditions and sales volume.

IV. Capex driver

2017 2018 2019 2020 2021

Fixed assets at the beginning 17573.25 17897.12 18192.52 18316.61 18870.67

Depreciation 3037.12 3101.89 3098.64 3375.29 3681.61

Capex 3360.99 3397.29 3222.73 3929.35 3964.41

Fixed assets at the end 17897.12 18192.52 18316.61 18870.67 19153.47

Depreciation as % of beginning fixed

assets 17.28% 17.33% 17.03% 18.43% 19.51%

Capex as % of beginning fixed assets 19.13% 18.98% 17.71% 21.45% 21.01%

year on year growth of Capex 1.08% -5.14% 21.93% 0.89%

Capex

The Company finances its capital expenditures and research and development investments through cash
generated from operations, cash and cash equivalents, debt and equity funding. The Company also raises funds
through sale of investments, including divestment in stakes of subsidiaries on a selective basis.

The capital expenditures for 2019-2020 are related to new products under development, including BSVI.
2019-20. Capital expenditures totalled Rs. 3929.35 crores and Rs. 3222.73 crores during FY 2019-20 and FY
2018-19, respectively. Tata motor’s automotive operations accounted for a majority of such capital
expenditures. Their capital expenditures in India during FY 2019-20 and 2020-21 related mostly to (i) the
introduction of new products, such as the Tata Altroz, Nexon EV, Tata Harrier facelift version 2020 (ii) the
development of planned future products and technologies, and (iii) quality and reliability improvements aimed
at reducing operating costs. Reduction in capital expenditure in 2018-19 considering the macroeconomic
environment by suspending certain programs. Its current plan is to invest over Rs. 28,900 crores in FY 2021-
22 in new products and technologies.

Depreciation and amortization

The depreciation and amortization expense has increased from 2017 to 2018 to new product launches provided
by capex requirements and opening of new facilities.

From 2018 to 2019 the cost decreased to 17.03% mainly due to impairment recognized along with favourable
foreign currency translation and the increase for 2020 and 2021 is due to unfavourable foreign currency
translation and is further increased in 2021 due to Job 1 programs and Capitalization of Altroz and BSVI
projects.

V. Debt Structure:

The Company determines the amount of capital required on the basis of annual operating plans and long-term
product and other strategic investment plans. The funding requirements are met through equity, convertible
and non-convertible debt securities, senior notes and other long-term/short-term borrowings. The capital
structure of Tata Motors has changed from investing more in Equity rather than debt in 2016 to more of debt
than equity in 2021.

As of 2020, Tata motors had about 48,000 crore of net automotive debt and the company wants to bring their
debt levels to zero in the next three years to bring back shareholders wealth that was eroded over the past 5
years due to bad market conditions.
 References:

 https://www.business-standard.com/article/markets/tata-motors-q1-loss-widens-to-rs-3-680-crore-
revenue-slips-8-119072500877_1.html
 https://www.reuters.com/world/india/indias-tata-motors-raises-425-mln-offshore-bonds-pare-debt-
meet-expenses-2021-06-03/
 https://www.investopedia.com/articles/active-trading/082015/key-financial-ratios-analyze-
automotive-industry.asp
 https://in.tradingview.com/chart/dQ0gToFE/