Now from the cash flow statement s clear that there has been two expenses which are purchase of fixed assets and purchase of investments which sum up to be RSI. 52 Cry. After deducting this amount we get the remaining balance to be RSI. 96. 5 Cry. Which is the expense of the year 2010 but its future value for the same has to be calculated. As on 2010 the remaining balance is = RSI. 96. 5 * (1 RSI. 109. 2 (cry. Approve. ) It can be concluded that the company invested RSI. 26. 4 Cry. In acquisition of Dunlop Tires International Ltd. In the year 2007 and RSI. 161. 2 Cry. In acquisition of Predestine B. V. In the year 2009-10. Apollo Ltd. Menaced its 5 year strategic growth plan, with a clear goal of growth. In 2010 we can see that the net profit shot up from RSI 13. 9 Cry to RSI 65. Car. This can be attributed to the acquisition decision that the company took. Appraise the solvency of Capital investment financing policy? (Do they have sufficient inflows to cover debts? ) Sol: Looking at the cash flow from operations we can see that Apollo Tires Ltd. Has grown from 2007 to 2010 and then drastically the growth fell in 2011 which again flipped in 2012, but if we look at the compounded growth for these ears the growth has not been impressive with slightly over 8% for the period.
Having said that we can see that cash used in financing activities has risen over the years and was significantly higher for 3 years from 2009 to 2012 I. E. 1245, 1088 and 807 Cry. Respectively. This indicate that company has infused cash to build capacity for future projects and expansion to gain competitive advantage over others. To give more justification to the solvency of the Apollo tires we can see that their net profit has risen at a CARR of 23. 4% from 2007 to 2012 which shows that their business has grown and the investment made by them is quite Justified. Another important point we can have a look at is their reserves which stands at circa. In the yr. 2012 and have recorded a CARR of 21. 21% from 2007 till 2012. This shows that they have taken Capital investments decisions not only on the base of the expected growth from the plant or asset but keeping in mind the importance of cash reserves which is very crucial for the smooth functioning of the organization.
Question 3 What is the importance of sound capital investment and measure its impact on firm’s profitability Capital investment plays a very crucial role in the development of any equines organization, to grow and keep up with the pace of growing economy and increasing competition companies need to make investments to build capacity in order to meet the future demands. Looking at Apollo Tires Ltd. Investment patterns we can see that they have done two strategic investments, one in 2007 by acquiring Dunlop Tires International Ltd. In South Africa for RSI. 24. Cry. And another in 2009-10 by acquiring Predestine B. V. Of Netherlands. Also if we observe their Net Cash used in investing activities we can see an upward trend for a long period and then a slight dip in 2012. This indicates that firm had indulged in aggressive buying of assets to increase their production in order to either maximize their profitability or work on Economies of scale. Further if we assess their production capability, it has increased from 920 MAT/Day in 2008 to matt/Day in 2012 which has increased by an average of 14. 17% Y-o-Y and by 73. 6% in 2012 as compared with 2007. Further if we look into their Profit and loss A/C we can see that their Revenue has soared from RSI. 47. 81 Cry. In 2007 to RSI. 129. 02 Cry in 2012 and in the same period their net profit raised from RSI. 11. Cry. In 2007 to RSI. 41. 2 Cry 2012 which means that their Sales roared by staggering rate of 169. 85% and Net profit by 252. 1% in 2012 as compared to 2007. This clarifies that a sound capital investment is crucial for an organization to be an effective player in the market and generate Revenues and net profit over and above expectations.
What are the growth prospects of this Company? What could be the right strategy for the company to grow? If we look at the Indian tire industry it is estimated to be around RSI. 38 thousand Cry. And has been growing at CARR of 12. 4% for the last 10 years. Also, 70% of the market is controlled by major players like MR.., Apollo, Cheat, J tires and Barilla. Thus, with the growth in Industry the major players are going to grow the most. Also Apollo there’s top line has grown at a CARR of 27% for the past five years.
Looking at these trends and as already discussed the trend of their revenue and net profit the prospects for growth looks quite sharp for the company and also taking into consideration the business they have expanded in South Africa and Europe which have added to the revenue as much as 33% shows that they are growing constantly and spreading their wings abroad. Another critical thing to look into is that they have reduced their dependence in replacement market from 87% to 73% to tap into other markets and establish relationships as Memo’s with manufacturing companies which will directly impact their growth as the automobile industry grows.
Considering the fact that they have enough reserves in cash, made strategic acquisitions abroad, invested in building asset by capital investments, diversifying their tire business and increased net profit and Revenues and tire industry growing as a whole we can be sure that growth prospects of Apollo tire looks bright. Right Strategy: We have already seen a lot of steps taken by Apollo tires such as strategic acquisitions in South Africa and Europe and then we have seen them investing in building capacity for expansion.
Further if we look at the tire industry closely we can see that the Motor Cycle and scooter segment has grown by 72% and 130% respectively in the year 2012 as compared to 2007 and Apollo tire has not yet entered in this segment which remains untapped market for them. Though the competition in country like India is huge from both Organized and Unrecognized sector but with the reputation and scale they are operating at and the cash backup hey have it would be the right strategy for them to get into two wheeler market in India as soon as possible.
Another strategy could be to explore the market of cycle tire in India which is major dominated by the unrecognized sector. Though this segment have huge potential enjoying the rural population of country which accounts for almost 70% of the population the decision could be a gamble as it would incur huge cost to penetrate the rural markets and provide the products at cheaper price to steal business from unrecognized sector which is not going to be an easy task ND looking at the scale of business if project fails it would incur huge cost to the company.
Question 5 Explore the effective ways of capital budgeting for future growth The effective ways of capital budgeting based on Cash Flow Measures are- A. The payback period is the most basic and simple decision tool. With this method, one is basically determining project. In order to calculate this, we would take the total cost of the project and divide it by how much cash inflow you expect to receive each year; this will give us the total number of years or the payback period. B. The net present value decision LOL is a more common and more effective process of evaluating a project.
It requires calculating the difference between the project cost (cash outflows) and cash flows generated by that project (cash inflows). The NP tool is effective because it uses discounted cash flow analysis, where future cash flows are discounted at a discount rate to compensate for the uncertainty of those future cash flows. The term “present value” in NP refers to the fact that cash flows earned in the future are not worth as much as cash flows today. So, the future cash flows are discounted to the present value. The difference provides us with the net present value.
C. The internal rate of return is a discount rate that is commonly used to determine how much of a return an investor can expect to realize from a particular project. The internal rate of return is the discount rate that occurs when a project is break even, or when the NP equals O. One choose a project where the AIR is higher than the cost of financing. In other words, if the cost of capital is 4%, one don’t accept projects unless the AIR is greater than 4%. The greater the difference between the financing cost and the AIR, the more attractive the project becomes.