Case Study on Liquidity Management in Auto Finance Industry

Comparative Study between Bajaj Auto Finance Ltd and Tata Motors Finance Ltd.

Performance Evaluation of Auto Finance Companies in India

Ratio Analysis- A Comparative Study between Bajaj Auto Finance Ltd and Tata Motors Finance Ltd.

Introduction, Importance and Significance of the Study

The auto finance industry has witnessed a swift recovery in 2009-10, after recording a 25 per cent decline in disbursements in 2008-09. While high non-performing assets continue to be a concern due to unbridled credit expansion in the previous years, disbursements have picked up and credit-appraisal mechanisms are being strengthened, pointing to a brighter outlook for the industry. Among individual vehicle segments, we project double-digit growth in disbursements in the cars & utility vehicles (UVs) and commercial vehicles (CVs) segments in 2009-10 and 2010-11. For the two-wheeler finance market, the outlook is much more sombre, as financiers were badly hurt due to higher operating expenses and rising incidence of defaults, and are unlikely to enter the market in a hurry.

The two-wheeler finance market is estimated to witness a second consecutive year of slide (negative 6.8 per cent), recording disbursements of Rs 71 billion in 2009-10, after a sharp fall of 31.6 per cent in disbursements in the previous year. Higher operating expenses and rising incidence of defaults have made the segment unprofitable, forcing many financiers to exit the market.

Rationale for the Study

Performance evaluation of a company is usually related to how well a company can use it assets, share holder equity and liability, revenue and expenses. Financial ratio analysis is one of the best tools of performance evaluation of any company. This study is undertaken in order to determine the financial position of the retail auto finance  company and to make a judgment of the retail fiance auto company efficiency, its operation and management and how well the company has been able to utilize its assets and earn profit.

Objectives of the Study

This study has the following broad objectives:

• To work out the overall quantum of liquidity maintained by Bajaj Auto Finance Ltd and Tata Motors Finance Ltd., and to compare the liquidity position of both the companies.

• To examine the liquidity management of both the companies during the period under study on the basis of technique of ratio analysis by calculating important liquidity ratios.

• To compare the different liquidity ratios of both the companies and test the significance of difference by using parametric Student’s t-test.

• To evaluate the different liquidity ratios of both the companies and to test the significance of difference by using non-parametric Mann-Whitney U-test; and

• To draw meaningful conclusions and offer necessary suggestions to improve the efficiency of liquidity management of both the companies.

Hypothesis for the Study

The following hypotheses will be formulated and tested in the present study:

H0: There is no significant difference between the liquidity management of the selected retail finance auto companies; and

H1: There is a significant difference between the liquidity management of the selected retail finance auto companies.

Research Methodology

Sample Design

The current study will be carried out by taking a sample of two leading pharmaceutical companies of India, viz., Baja Auto Finance Ltd and Tata Motors Finance  Limited.

Sources of Data

The relevant data will be mainly gathered from the published annual reports and accounts of the selected retail auto finance companies. The other sources which will beconsulted are technical and trade journals, newspapers and other published information.

Tools of Data Analysis

The present study will apply quantitative tools such as mean, standard deviation, Coefficient of Variation (CV), t-test, and Mann-Whitney U-test.

The technique of ratio analysis will  also use to examine the different aspects of liquidity of both the companies.

Six liquidity ratios, such as Current Ratio (CR), Quick Ratio (QR), Debtors Turnover Ratio (DTR), Inventory Turnover Ratio (ITR), Current Assets Turnover Ratio (CATR), and Working Capital Turnover Ratio (WCTR), will be calculated and analyzed to examine the liquidity position of both the retail finance auto companies.

Expected Contribution from the Study

Liquidity management is the functional area of finance that covers all the current accounts of the firm. It is concerned with the management of the level of individual current assets as well as the management of total working capital. Liquidity means a firm’s capacity to meet its obligations when they fall due. In other words, the firm can pay all its bills on due date and have sufficient cash to meet emergencies . If a firm has sufficient net working capital, it is deemed to have sufficient liquidity, while a deficit of working capital implies negative liquidity and the company is not likely to be able to pay off even its current liabilities, and hence, may considerably damage its reputation. Thus, weak liquidity position is perceived as a threat to the solvency of the company. The present study is based on net working capital concept. Excessive working capital results in unnecessary accumulation of inventories and idle funds which earn no return . On the other hand, inadequate working capital also suffers from operating inefficiencies and loss of reputation when the business is not able to honor its commitments. Therefore, it is very important to determine the appropriate amount of working capital in order to maintain adequate liquidity position of the company.

Chapterisation

·         Introduction

·         Literature Review

·         Research Methodology

·         Data Analysis and Findings

·         Recommendations & Conclusion

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