Summer Training Project Report

ON
“Financial Modeling And Valuation of Hero Moto Corp”
By
“Deepika Rajput”
“Roll No: 2200520700018”
Under the guidance of
“Dr. Raji”
In partial fulfilment of the requirement for the award of the
Degree of Master of Business Administration

Submitted at

DEPARTMENT OF BUSINESS ADMINISTRATION

INSTITITUTE OF ENGINEERING ANTECHNOLOGY
JANKIPURAM, LUCKNOW, UP-226021
 “FINANCIAL MODELING AND
VALUATION OF HERO MOTO CORP”

2
 Department of Business Administration
Institute of Engineering & Technology, Lucknow

STUDENT DECLARATION

I undersigned, hereby declared that the project titled FINANCIAL MODELING AND

VALUATION OF HERO MOTO CORP submitted in partial fulfilment for the award of the

Degree of Master Business Administration is a bonafide record of work done by me under

guidance of Dr. Raji . This report has not previously formed the basis for the award of any

degree, diploma, or similar title of any University.

Place: IET, LUCKNOW

Date:

Signature of the Student

DEEPIKA RAJPUT
2200520700018

3
 Department of Business Administration
Institute of Engineering & Technology, Lucknow

CERTIFICATE FROM ORGANIZATION

4
 Department of Business Administration
Institute of Engineering & Technology, Lucknow

CERTIFICATE FROM INSTITUTION

This is to certify that Ms DEEPIKA RAJPUT, Third semester of Master of Business

Administration, Institute of Engineering &Technology, Sitapur Road, Lucknow has completed

the project report entitled Financial Modeling And Valuation of Hero Moto Corp in the

partial fulfilment of the requirements for the awards of Degree of Master of Business

Administration.

Date:
Place: IET, LUCKNOW

Dr. Durga wati Kushwaha

Co- Convenor

5
 Department of Business Administration
Institute of Engineering & Technology, Lucknow

CERTIFICATE FROM FACULTY GUIDE

This is to certify that Ms DEEPIKA RAJPUT, Third semester of Master of Business

Administration, Institute of Engineering &Technology, Sitapur Road, Lucknow has completed

the project report entitled Financial Modling And Valuation of Hero Moto Corp in the

partial fulfilment of the requirements for the awards of Degree of Master of Business

Administration.

Date:
Place: IET, LUCKNOW

Signature of the Faculty Guide

Dr. Raji

6
 PREFACE

As a part of MBA curriculum and in order to gain practical knowledge in the field of

management, we are required to make a project report.

The blend of learning and knowledge acquired during my Summer Internship at the company

is presented in this project report.

The rationale behind doing Summer Internship and preparing the report is to study. This

project represents a comprehensive exploration of the intricate world of financial analysis,

modeling, and valuation, aiming to provide a valuable resource for both beginners and

seasoned professionals in the field.

In today's dynamic and competitive business environment, the ability to make informed

financial decisions is paramount. Financial modeling and valuation serve as indispensable

tools for assessing the health and potential of businesses, guiding strategic decisions, and

attracting investment.

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 ACKNOWLEDGEMENT

I am hereby thankful to the Institute of Engineering and Technology for providing me all the

facilities and infrastructure to take my work to the final stage.

I would like to express my deep sense of respect and gratitude to wards my department co-

ordinator Dr. Durgawati Kushwaha my advisor and guide Dr. Raji, assistant professor,

department of business administration, IET Lucknow who has given me an opportunity to work

under her guidance. She has been a constant source of inspiration throughout my work. Her

invaluable knowledge and innovative ideas helped me to take the work to the final stage.

Last but not the least I am thankful to all who have directly or indirectly helped for the

completion of my project.

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 TABLE OF CONTENT

Sl. No. Description Page no.

I Title of the Topic 2
II Student’s declaration 3
III Certificate from organization 4
IV Certificate from the institution 5
V Certificate from faculty guide 6
VI Preface 7
VII Acknowledgement 8
1 Chapter 1 Introduction 10-25
1.1 Overview
1.2 Industry profile
1.3 Company profile

2 Chapter 2 Literature Review 26-49

2.1 Review of Literature
2.2 Conceptual Understanding

3 Chapter 3 Research Methodology 50-57

3.1 Problem statement
3.2 Objective of the study
3.3 Hypothesis
3.4 Research design
3.5 Data collection and analysis

4 Chapter 4 Data analysis and interpretation 58-67

5 Chapter 5 68-75
5.1 Findings
5.2 Recommendation
5.3 Limitations
5.4 Conclusion

6 References 76

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 CHAPTER – 1
INTRODUCTION

1.1 Overview

A) Industry Overview

The automotive industry is a vast and dynamic sector that encompasses the design,

development, manufacturing, marketing, and sale of motor vehicles. It plays a crucial role in

the global economy and has far-reaching implications for transportation, technology, and

environmental sustainability. Here is an overview of the automobile industry:

1. Types of Vehicles

 Passenger Vehicles: This category includes cars, SUVs (Sports Utility Vehicles), and

crossovers designed for personal transportation.

 Commercial Vehicles: This includes trucks, buses, and vans used for transporting

goods and passengers.

 Two-wheelers: Motorcycles and scooters are popular for personal transportation,

especially in many Asian countries.

 Electric Vehicles (EVs): The industry is witnessing a shift towards electric-powered

vehicles to address environmental concerns and reduce reliance on traditional fossil

fuels.

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2. Manufacturing Process

 Automobile manufacturing involves a complex process of designing, engineering, and

assembling various components.

 The industry relies on extensive supply chains, with suppliers providing parts and

systems to manufacturers.

3. Technological Trends

 Electric and Hybrid Vehicles: The industry is witnessing a shift toward electric and

hybrid technologies to reduce emissions and dependence on fossil fuels.

 Autonomous Vehicles: Research and development in self-driving technology are

ongoing, with companies working towards achieving higher levels of autonomy.

 Connectivity: Vehicles are becoming more connected, with features such as GPS,

infotainment systems, and advanced driver assistance systems.

4. Environmental Concerns

 The industry is under pressure to address environmental issues, leading to the

development of cleaner and more fuel-efficient vehicles.

 Governments worldwide are implementing regulations to reduce emissions and

promote sustainable practices in the automotive sector.

5. Global Market Dynamics

 The automotive industry is influenced by economic conditions, consumer preferences,

and regulatory changes.

 Emerging markets, such as China and India, are becoming increasingly important in

terms of production and consumption.

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6. Challenges

 The industry faces challenges related to changing consumer preferences, regulatory

requirements, and the need for continuous innovation.

 Global supply chain disruptions, as experienced during the COVID-19 pandemic, can

impact production and distribution.

7. Future Outlook

 The future of the automotive industry is expected to be shaped by advancements in

electric and autonomous technologies, as well as a continued focus on sustainability.

B) Topic Overview

Financial statements are formal record of the financial activities of a business, person or other

entity and provide an overview of a business or person's financial condition in both short and

long term. They give an accurate picture of a company's condition and operating results in a

condensed form financial statements are used as a management tool primarily by company

executive and investor's in assessing the overall position and operating results of the company.

Analysis and Interpretation of financial statements help in determining the liquidity position,

long term solvency, financial viability and profitability of a firm Ratio analysis shows whether

the company is improving or deteriorating in past years. Moreover, comparison of different

aspects of all the firms can be done effectively with this. It helps the clients to decide in which

firm the risk is less or in which one they should invest so that maximan benefit can be earned.

Industries are capital intensive; hence a lot of money is invested in it. So before investing in

companies one has to carefully study its financial condition and worthiness. An attempt has

been carried out in this project to analyse and interpret the financial statements of a company.

12
Global Major Players:

1. Toyota Motor Corporation

 Overview: One of the largest automakers globally, known for a wide range of

vehicles, including hybrids.

 Relative Position: Among the top automakers in terms of production and sales.

2. Volkswagen Group

 Overview: A German multinational with a diverse portfolio, including brands

like Volkswagen, Audi, Porsche, and more.

 Relative Position: A major player in the industry with a global presence.

3. General Motors

 Overview: An American multinational with brands such as Chevrolet, GMC,

and Cadillac.

 Relative Position: Historically one of the largest automakers globally.

4. Ford Motor Company

 Overview: An American automaker known for its cars, trucks, SUVs, and the

iconic Ford Mustang.

 Relative Position: A significant player in the global automotive market.

5. Honda Motor Co., Ltd

 Overview: A Japanese automaker with a focus on motorcycles, automobiles,

and power equipment.

 Relative Position: Globally recognized with a strong presence in various

markets.

6. Tesla, Inc.

 Overview: A leading electric vehicle (EV) manufacturer known for its

innovative technology.

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  Relative Position: Particularly influential in the electric vehicle segment,

gaining prominence in the industry.

Hero Moto Corp:

 Overview

 Hero Moto Corp is an Indian multinational two-wheeler and three-wheeler

manufacturer.

 Known for its motorcycles, scooters.

 Relative Position

 Hero Moto Corp is a significant player in the Indian automotive market and has

a strong global presence, especially in the two-wheeler segment.

 The company has strategic partnerships with international brands like KTM and

Triumph.

 Hero Moto Corp has been actively involved in the production and promotion of

electric vehicles.

14
1.2 Industry Profile

A well-developed transport network indicates a well-developed economy. For rapid

developed a well-developed and well-knit transportation system is essential. As India’s

transport network is developing at fast space, Indian Automobile Industry is growing too.

Also, the Automobile Industry has strong backward and forward linkages and hence

provides employment to a large section of the population. Thus the role of Automobile

Industry cannot be overlooked in Indian Economy. All kinds of vehicles are produced by

the Automobile Industry.

The Automobile Industry in India-the tenth largest in the world with an annual production

of approximately 2 million units-is expected to become one of the major global

automobiles industries in the coming years. A number of domestic companies produce

automobiles in India and the growing presence of multinational investment, too, has led to

an increase in overall growth. Following the economic reforms of 1991 the Indian

automotive industry has demonstrated sustained growth as a result of increases

competitiveness and relaxed restrictions.

Indian Automobile Industry includes the manufacture of trucks, buses, passenger cars,

defence vehicles, two-wheelers, etc. The industry can be broadly divided into the car

manufacturing, two-wheeler manufacturing and heavy vehicles manufacturing units.

Hero MotoCorp Limited is an Indian multinational motorcycle and scooter manufacturer

headquartered in New Delhi. It is one of the world's largest two-wheeler manufacturer and has a market

share of about 46% in the Indian two-wheeler industry. As of 27 May 2021, the market capitalization of

the company was ₹59,600 crore (equivalent to ₹700 billion or US$8.8 billion in 2023).

15
The major two-Wheeler manufacturers are:

1. Hero Moto Corp

2. Yamaha Motors

3. Honda motors

4. Suzuki Motors

5. TVS Motors

6. Mahindra & Mahindra

7. Bajaj Auto

8. Royal Enfield

9. Piaggio & C. Sp

10. Kinetic Engineering Ltd.

The heavy motors like buses, trucks, defence vehicles, auto rickshaws, and other

multiutility vehicles are manufactured by TATA-Telco, Ashok Leyland, Eicher Motors,

Bajaj, Mahindra& Mahindra, etc.

Following India’s growing openness, the arrival of new and existing models, easy

availability of finance at relatively low rate of interest and price discounts offered by the

dealers and manufactures all have stirred the demand for vehicles and a strong growth of

the Indian automobile industry.

16
1.3 Company Profile

Hero MotoCorp Ltd. (Formerly Hero Honda Motors Ltd.) is the world's largest manufacturer

of two – wheelers, based in India. In 2001, the Company achieved the coveted position of

being the largest two-wheeler manufacturing Company in India and also, the ‘World No.1’

two-wheeler Company in terms of unit volume sales in a calendar year. Hero MotoCorp Ltd.

continues to maintain this position till date.

Vision

The story began with a simple vision – the vision of a mobile and an empowered India, powered

by its bikes. Hero MotoCorp Ltd., company’s new identity, reflects its commitment towards

providing world class mobility solutions with renewed focus on expanding company’s

footprint in the global arena.

Mission

Hero MotoCorp’s mission is to become a global enterprise fulfilling its customers’ needs and

aspirations for mobility, setting benchmarks in technology, styling and quality so that it

converts its customers into its brand advocates. The Company will provide an engaging

environment for its people to perform to their true potential. It will continue its focus on value

creation and enduring relationships with its partners.

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Strategy

Hero MotoCorp’s key strategies are to build a robust product portfolio across categories,

explore growth opportunities globally, continuously improve its operational efficiency,

aggressively expand its reach to customers, continue to invest in brand building activities and

ensure customer and shareholder delight.

Manufacturing

Hero Honda bikes are manufactured across three globally benchmarked manufacturing

facilities. Two of these are based at Gurgaon and Dharuhera which are located in the state of

Haryana in northern India. The third and the latest manufacturing plant is based at Haridwar,

in the hill state of Uttarakhand.

Technology

In the 1980’s the Company pioneered the introduction of fuel-efficient, environment friendly

four-stroke motorcycles in the country. It became the first Company to launch the Fuel

Injection (FI) technology in Indian motorcycles, with the launch of the Glamour FI in June

2006. Its plants use world class equipment and processes and have become a benchmark in

leanness and productivity. Hero MotoCorp, in its endeavour to remain technology pioneer,

will continue to innovate and develop cutting edge products and processes.

Products

Hero Honda's product range includes variety of motorcycles that have set the industry standards

across all the market segments. The Company also started manufacturing scooter in 2005. Hero

Honda offers large no. of products and caters to wide variety of requirements across all the

segments.

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Distribution

The Company’s growth in the two wheeler market in India is the result of an intrinsic ability

to increase reach in new geographies and growth markets. Hero MotoCorp’s extensive sales

and service network now spans over to 5000 customer touch points. These comprise a mix of

authorized dealerships, Service & Spare Parts outlets, and dealer-appointed outlets across the

country.

Brand

The new Hero is rising and is poised to shine on the global arena. Company’s new identity

“Hero MotoCorp Ltd.” is truly reflective of its vision to strengthen focus on mobility and

technology and creating global footprint. Building and promoting new brand identity will be

central to all its initiatives, utilizing every opportunity and leveraging its strong presence across

sports, entertainment and ground- level activation.

2014-15 Performance

Total unit sales of 54,02,444 two-wheelers, growth of 17.44 per cent

Total net operating income of Rs. 19,401.15 Crores, growth of 22.32 per cent

Net profit after tax at Rs. 1,927.90 Crores

Total dividend of 5250% or Rs. 105 per share including Interim Dividend of Rs. 70 per share

on face value of each

Share of Rs. 2 each

EBIDTA margin for the year 13.49 per cent

EPS of Rs. 96.54

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1.4 SWOT Analysis

Hero Motocorp is a leading Indian manufacturer of two-wheelers (i.e. motorcycles and scooters),

headquartered in New Delhi. Based on market capitalization, it is not only the largest two-wheeler

manufacturer in India but also the largest in the world. In 2018, Hero Motocorp has already

expanded its global presence to 37 countries across 4 continents. In the same year, it became the

first two-wheeler company in the world to achieve more than 7.5 million unit sales.

It was previously branded as "Hero Honda," until 2011, the joint venture between Honda Japan

and the Hero Group (managed by the Munjal brothers) ceased after the emergence of a series of

problems between the two companies.

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 Strengths

Hero Motocorp enjoys various competitive advantages and strengths that have contributed to

its success and immense growth for more than three decades.

 Brand Recognition: Brand and brand trust plays a huge part when purchase decisions are

made by consumers. Hero MotoCorp is a strong brand that is synonymous with reliability and

fuel-efficient two-wheelers. According to The Brand Trust Report published by Trust Research

Advisory, the conglomerate surged 223 places to rank 33 as one of India's most trusted brands

in 2018. It was ranked 6 in the automobile category, the highest of any Indian two-wheeler

manufacturer on the shortlist.

 Extensive Domestic Network: Hero MotoCorp has over 6,500 dealerships and service points

across India. A large number of service points has allowed it to roll out its Express Service

scheme, where it strives to service a customer's vehicle within 60 minutes.

 Strong Global Presence: Ever since the termination of the joint venture between Hero Group

of India and Honda of Japan, Hero MotoCorp began to establish its global footprint. As of late

2018, its two-wheelers are being sold in over 37 countries, and has 8 manufacturing plants in

3 countries.

 Large Product Portfolio: Not only does Hero MotoCorp provide a large variety of two-

wheelers, but it is also moving rapidly alongside current market trends as well. In late 2016, it

made its first venture into the electric vehicle market by investing in a Bangalore-based tech

manufacturer, Ather Energy. It has a rich and diversified portfolio targeting different segments.

For example, the XPulse series is catered to the international consumer and the Xtreme series

is targeted at the growing premium motorcycle segment.

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 Weaknesses

Despite its strong domestic presence and large market, Hero MotorCorp still has some

weaknesses that can threaten its growth and future.

 Poor Gender Diversification: As of late 2018, Hero MotoCorp had only 256 female

employees out of 8266. Although the figure has tripled from a mere 1% in 2014, much more

still can be done to address gender inequality and diversification.

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 Global Exports: Despite having a gargantuan market share domestically, Hero MotoCorp is

still largely focused on India. In 2017, only 12% of the units sold by all two-wheeler

manufacturers in India contributed to exports. This is greatly eclipsed by China, which had

exported more than 46% of units sold, more than 4 times the amount. As more competitors are

looking to jump on the two-wheeler market in India, it would be unwise for the company to

solely focus on its home ground.

 Declining Service Quality: In a study conducted by the International Journal of Innovative

Research in Science, Engineering, and Technology in 2015, the overall service quality for Hero

MotoCorp fell below the expectations of end consumers. According to the study based using

the SERVQUAL model of service quality, Bajaj Auto, one of its closest competitors, was

deemed to have better overall service and appeal.

23
 Opportunities

 Joint Ventures and Acquisitions: Despite the terminated joint venture with Honda Japan, it

is crucial to note that for many years, technology in its two-wheelers came from Honda.

Acquiring start-ups or going into joint ventures will allow the conglomerate to obtain more

valuable technology and tap into other market segments. A good example is its 49.2% stake

buyout of Erik Buell Racing, which allows Hero MotoCorp to synergize motor technologies

and extend sales into the North American market.

 Electric Two Wheelers: The electric bike and scooter market is booming globally and it would

be an opportunity for Hero MotoCorp to leverage. The e-bike market is expected to reach about

24.3 billion U.S. dollars by 2025. According to Prescient and Strategic Intelligence, the electric

scooter and motorcycles market in India alone will surge past $617.7 million by 2025.

Threats

 Strong Competition: Hero MotoCorp faces strong competition domestically despite its strong

foothold in India. The two-wheeler market in India is very competitive and is dominated by

three other major players, TVS Motors, Honda, and Bajaj Auto. In 2012, Honda launched

made-in-China two-wheelers which are priced lower than equivalent cost-efficient models.

Honda has been expanding aggressively since the joint venture was terminated in 2010. It

began enticing Hero dealers to join the Honda network under its subsidiary in India, Honda

Motorcycles and Scooters India Pvt. Ltd (HSMI). Similarly, TVS Motors has collaborated with

BMW to establish its presence in the premium motorcycle market in direct competition with

Hero's Xtreme series. The competition will continue to remain strong as India is an extremely

large market to delve into.

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 Public Transport Infrastructure: The government of India is striving to improve on its public

transport infrastructure. Projects such as the National Highways Development Project (NHDP)

under the ambitious Bharatmala Pariyojana will add on more than 80,000 km of highways in

India. In early 2019, India's Union Minister Nitin Gadkari announced that India's public

transport will be based on the London model with an MoU with Transport for London (TFL)

being signed in the previous year. Government initiatives will reduce the demand for

automobiles if public transport becomes more reliable.

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 CHAPTER – 2

LITERATURE REVIEW

2.1 Review of Literature

A literature review in financial modeling involves a systematic examination and analysis of

existing academic and industry literature related to the field of financial modeling. It provides

an overview of the current state of knowledge, identifies key theories and methodologies, and

explores the evolution and application of financial models in various contexts.

 Use Of Financial Modeling

According to Gautam, U.S. (2005) Accountancy Financial Statement is generally explained

as financial information which is the information relating to financial position of any firm

in a capsule form. Financial Statement according to J.A Ohison (1999) was defined as a

written report that summarizes the financial status of an organization for a stated period of

time. It include an income statement and balance sheet or statement of the financial position

describing the flow of resources, profit and loss and the distribution or retention of profit.

According to Meigns et al. (2001), Financial Statement simply means a declaration of what

is believed to be true and which, communicated in terms of monetary unit. It describes

certain attributes of a company that is considered to fairly represent its financial activities.

Meigs and Meigs (2003) stated that the rate return on investment (ROI) is a test of

management’s efficiently in using available resources.

26
 According to J.A Ohison (1999), Financial modeling reflects modern approaches to the

probability interpretation, provides introduction and systematization of risk indicators, and

the necessity of improving theoretical and probabilistic disciplines of economic orientation.

 Objectives of Financial Modeling

The objective of financial modeling is to combine accounting, finance, and business metrics

to create a forecast of a company's future results. A financial model is simply a spreadsheet

which is usually built in Microsoft Excel, that forecasts a business's financial performance

into the future.

 Financial modeling combines accounting, finance, and business metrics to create a forecast

of a company’s future results.

 The main goal of financial modeling is to accurately project a company’s future financial

performance.

 Modeling can be useful for valuing companies, determining whether a company should raise

capital or grow the business organically or through acquisitions.

27
 Users and Users Of Financial Modeling

a) Owners and Managers

b) Employers

c) Investor Bankers

d) Financial Institutions

e) Merger & Acquisitions

f) Financial Analysts

 Classification of Financial Modeling

According to Diamond (2006), all watchful business owners have an innate sense of how

well their business is doing. Almost without thinking about it, these business owners can

tell you any time during the month how close they are to butting budgeted figures.

a) Income Statement

According to Patrick, Ralph, Barry & Susan (2002:63-92), income statement provides

the information of the transactions occurred in a certain period of time called accounting

period. Expenses include purchase, administrative expenses, selling expenses, depreciation,

amortization expenses and income tax paid. Initially gross profit is calculated by subtracting

cost of goods, Labor cost, raw materials and overhead expenses occurred during the sales

period falls under the cost of goods sold category.

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According to Diamond (2006), Operating income is calculated by subtracting the

depreciation and the other selling and administrative expenses. From the operating income,

interest and/or amortization is paid which will result in earning before tax income of the

entity.

Finally, income tax is paid from earning before tax resulting in net profit. Management

decides if they want to pay dividends or not. If they do pay dividends then preferred

dividends are paid first and afterwards common stock holders’ dividends are paid. The

residue income also known as the retained earnings are reinvested in the firm. (Charles and

Patricia , 1983:24-27)

29
b) Balance Sheet

A firm’s assets, liabilities and equity at a given time period are presented in the balance

sheet. It shows the financial position at a point in time. There are two sub accounts in balance

sheet. Assets account is the first one, which includes all the current and fixed assets of the

company. Current assets also named as working capital provide short-term benefit for the

entity. The other items which fall under assets are property, plant, equipment, goodwill,

intangibles, long term investments, note receivable and other long term assets. Additionally,

the other sub account includes all the liabilities and equity. Accounts payable, accrued

expenses, notes payable, short terms debt are the major componets of current liabilities.

While total long term debt, deferred income tax and minority interest added to the current

liabilities sums up the total liabilities. Total liabilities summed up with total equity make

total liabilities & shareholder’s equity, which is always equal to the total assets. (Frank,

1989).

30
 c) Cash Flow Statement

According to Patrick et al (2002:99), cash flow helps the investor and creditors to access the

ability of the firm to generate positive future cash flow, ability to meet the debt obligations and

to shed light on the cash and non-cash aspect of the investing and financial transactions.

Operating activities includes net income, depreciation, the increase or decrease in marketable

securities, accounts receivable, inventory, prepaid expenses, account payable, and accrued

expenses. The cash involved in purchase or sales of fixed assets falls under investing activities.

Finally sales and retirement of notes, preferred and common stock, other corporate securities

and bonds falls under financial activities in the statement of cash flow report. (Timothy and

joseph, 2003:76-79)

31
 Software for Financial Modeling

Forecasting a company’s operations into the future can be very complex. Each business is

unique and requires a very specific set of assumptions and calculations. Excel is

used because it is the most flexible and customizable spreadsheet tool available. Other

software programs may be too rigid and specialized, whereas Excel knowledge is generally

more universal.

32
 2.2 Conceptual Understanding

 Financial Modeling

The process of creating a numerical representation of your company’s current financial

situation is known as financial modelling. This means taking stock of current revenue,

expenses, debts, and more. A good financial model is accurate, flexible, easy to understand,

and provides valuable insights into the financial health and potential of a company or project.

Financial modelling requires various skills and knowledge, such as accounting

principles, financial statements, valuation methods, functions, and Excel formulas (such as

VBA macros).

However, you cannot rely on spreadsheets alone to take major company decisions because they

are error-prone and inconsistent.

A financial model helps answer questions such as:

 What’s the net present value (NPV) of a company?

 How will a new project affect profitability?

 What are the risks and opportunities in different scenarios?

Financial modelling requires a comprehensive understanding of accounting, finance, and

business metrics. It also requires you to think creatively and logically, and have a keen eye for

detail to ensure nothing slips.

33
  Uses of Financial Modeling

Financial models help estimate the valuation of a business or make comparisons in the

industry. Some common uses of financial modelling include:

 Valuation: It estimates a company’s value or an investment, such as stocks, bonds, or real

estate.

 Forecasting: You can also use it to forecast line items such as future revenue, expenses,

and cash flows.

 Budgeting: Financial modelling helps build budgets and allocate resources based on

projections.

 Risk management: Financial modelling also assesses market, credit, or operational risks.

34
  Types Of Financial Modeling

1) 3-statement model

This model projects a company’s income and cash flow statement, and its balance sheet.

 The income statement shows the company’s revenues, expenses, and profits over a given time

 The balance sheet includes the company’s assets, liabilities, and equity,

 The cash flow statement displays the company’s inflows and outflows

The statements are interconnected, and changes in one impact the others.

35
We can use the three-statement model to predict the revenue, expenses, profits, assets,

liabilities, and cash flows.

2) Discounted cash flow (DCF)

This type estimates the company’s value based on its future cash flows. The discounted cash

flow analysis takes the time value of money, which means forecasted cash flows are discounted

to their current value. The model needs you to make assumptions about a company’s future

cash flows, growth, and discount rate.For example, say you’re considering investing in a startup

and you’d like to estimate its value. A DCF model helps estimate the company’s future revenue

and discount them back to their present value, taking the time value of money into the account.

3) M&A

This next type evaluates the financial results of mergers and acquisitions. Also known as the

merger model, it considers cash flows and valuations of both the acquiring and target

companies. It helps investors and analysts determine whether an M&A makes financial sense.

Imagine you work for a private equity firm considering acquiring another company. An M&A

model helps evaluate the financial implications of the acquisition and considers the cash flows

and valuations of both the acquiring and target companies.

4) Initial public offering (IPO)

In this model, the fair value of a company’s shares is estimated when it goes public. It considers

the company’s financials, growth prospects, and market conditions. It helps investors and

underwriters determine the offering price of the shares.

36
Suppose you’re an investment banker. You need to advise a company on its IPO. The IPO

model helps estimate the fair value of the company’s shares and considers the financials,

growth prospects, and market conditions.

5) Option pricing model

The option pricing model determines the fair value of options, which gives the holder the

right to buy or sell an asset. It considers the asset’s price, volatility, depreciation, and interest

rates. This model is used by traders and investors to determine fair value and make trading

decisions.

 Benefits Of Financial Modeling

1. Improved and in-depth understanding:

It requires a comprehensive understanding of the business model, business units, operations,

cash flow, expenses, and revenue streams. This helps analysts understand how a business

operates and the different factors that impact it.

2. Informed decision-making:

Another benefit is that it allows individuals and businesses to make better financial decisions.

Financial models provide data analysis of a company’s financial situation. This helps evaluate

different scenarios, such as strategy changes, market conditions, or regulations.

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3. Accurate budgeting and forecasting:

You can also estimate the expected cash inflows and outflows and decide the optimal source

and level of funding you require. Financial models also help create realistic budgets and

forecasts.

4. Better compliance:

Financial models ensure that a company’s financial statements are as per the relevant

accounting standards and regulations.

5. Business valuation:

Financial modelling helps determine the value of a business or a project by estimating future

cash flows. This is useful for companies that want to sell their stake, raise capital, or merge

with other organizations.

6. Business growth:

You can identify new opportunities for growth and expansion by analyzing market trends,

demand, and competitor behavior. Financial models also help optimize resource allocation and

cost of capital across different projects and segments.

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  Components of Financial Modeling

1. Income statement

The income statement summarizes the revenues, expenses, and profits of a company over some

time, a quarter, or a year. It shows how they generate income from operations and other sources,

and how they get costs to run their business.

The bottom line of the income statement is the net income or earnings of the company.

2. Balance sheet

This statement displays the assets, liabilities, and equity of a company, usually at the end of a

quarter or a year. It shows what the company owns and owes, and how much it is worth.

Assets = Liabilities + Equity.

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3. Cash flow statement

A cash flow statement shows the inflows and outflows of money for a company. It shows how

the company generates and uses the money from operating, investing, and financing activities.

The net change in cash on the cash flow statement should be equal to the change in cash

on the balance sheet.

 Process Of Financial Modeling

i) The problem: The first step is to define the problem you have. For this, you need to

determine the model’s objective, the data needed, and the assumptions.

ii) Gather data: Once you’re done identifying the problem, you need to gather data on the

variables you will use in the model. For example, you could collect financial statements,

market data, or economic indicators.

iii) Identify key drivers: Next, you have to identify the key drivers that will affect the

financial outcomes of the model. These variables include sales growth rates, the total

number of products or services sold, along with interest and tax rates.

iv) Develop assumptions: Based on your data and drivers, develop assumptions for the

model. These include revenue growth projections and other variables.

v) Build the model: In the next step, you have to create the model using various tools. You

can use spreadsheets, financial modelling software, or program it yourself with Python.

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 vi) Test the model: Once you create the model, you must test and validate it. Run various

scenarios through the model and compare the results to actual outcomes to ensure model

accuracy.

 Who Build Financial model ?

1. Investment bankers:

Investment bankers build financial models to analyze and evaluate the profitability and risks

of M&As, IPOs, and other corporate transactions.

2. Equity research analysts:

These analysts evaluate the financial performance and prospects of companies and make

investment recommendations.

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3. CFOs:

Corporate finance professionals, such as CFOs, analyze and forecast financial performance,

develop budgets and strategic plans, and assess investment opportunities.

4. Private equity professionals:

With a financial model, equity professionals evaluate and value investment opportunities and

also analyze the returns and risks of investments.

5. Management consultants:

These consultants build financial models from the ground up to analyze and evaluate the impact

of strategic decisions, such as entering new markets or launching new products.

6. Accountants:

Accountants build financial models to analyze financial data, prepare financial statements and

reports, and provide financial advice to clients.

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 Financial modelling software

Financial modelling software creates financial models and performs complex analyses. It lets

users build, manipulate, and analyze financial data and projections.Financial modelling

software allows you to automate the process of building financial models and reduces the

chances of errors that could arise from manual computations. The software includes a range of

pre-built templates and formulas that serve as a starting point, as well as data visualization,

scenario analysis, and sensitivity testing tools.

1. Cube

Cube is a real-time FP&A platform that incorporates your spreadsheet and offers FP&A teams

real-time access to financial and operational data, allowing for faster and better financial

reporting, planning, and analysis.

Cube helps users save time, reduce errors, and improve insights, allowing them to communicate

the story behind the numbers quickly. Cube bridges the best of both worlds by melding your

trusted spreadsheet’s user-friendly flexibility and familiarity with the robust control and

scalability of performance software.

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2. Anaplan

Anaplan helps optimize business planning and performance management across various

functions, including finance, sales, supply chain, workforce, and marketing. The platform’s

planning tools facilitate budgeting, forecasting, modelling, pricing optimization, analysis, and

other planning and management tasks.

Businesses use the planning platform’s connected planning feature for modelling and planning,

among other tasks. Anaplan’s calculation engine empowers thousands of concurrent users to

access centralized data pools and collaborate in planning and creating models across all

departments.

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3. Board

Board is an intelligent planning platform that helps you gain smarter planning, actionable

insights, and better outcomes.

It empowers leading enterprises to uncover critical insights that inform business decisions and

integrate strategy, finance, and operations to plan more intelligently and attain full control of

performance throughout the entire organization.

With Board, companies can manage and regulate their entire planning process, from goal

setting to operational execution.

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4. AchieveIt

Manual processes and disconnected systems limit visibility, impact accountability, and allow

day-to-day tasks to take over, leading to key plans failing. Strategy leaders rely on AchieveIt

to connect, monitor, and execute their most critical plans and initiatives, enhancing visibility,

increasing accountability, and promoting collaboration.

AchieveIt is trusted by global organizations for managing key plans and initiatives. AchieveIt

is a strategic planning software that identifies and corrects untapped potential in your planning

and execution process.

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5. SAP Analytics Cloud

The SAP Analytics Cloud solution allows you to integrate analytics and planning seamlessly

by integrating with SAP applications and easy access to data sources.

As the analytics and planning solution within the SAP Business Technology Platform, SAP

Analytics Cloud provides trusted insights and integrated planning processes across the entire

enterprise to help you make better decisions.

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Valuation

Valuation is the process of arriving at the worth of the company, also known as intrinsic

value or fair value, by analysing its financial performance as stated in its financial statements.

Market Cap = per Share Price X Number of outstanding shares

 Valuation Type

 Company’s P/E < Peer Group average PE Undervalued

 Company’s P/E > Peer Group average PE Overvalued

ABSOLUTE
Company's historical and
projected financial
performance and use of
assets
Discount Cash Flows (DCF)

RELATIVE
Compare to similar
companies' values
Price to earning

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DCF Valuation

The value of a company is the present value of the expected future cash flows,

discounted back at rate that reflects the riskiness of these cash flows.

 Higher cash flows – Higher company value

 Lower cash flows – Lower company value

DCF Valuation =FCF1/(1+r) + FCF2/(1+r)2 +…….+FCFn/(1+r)n

FCF = free cash flow in year ‘n’ ( Recognise the financial statement of the company)

‘r’ = discount rate

‘n’ = number of years for which a company is expected to be operational

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 CHAPTER -3

RESEARCH METHODOLOGY

3.1 Problem Statement

Despite being a prominent player in the industry, Hero Moto Corp. is encountering challenges

in its financial performance that demand a comprehensive financial statement analysis. The

company's financial statements lack clarity and fail to provide meaningful insights, hindering

effective decision-making. Issues such as Accurate Cash Flow Projections, Macro-economic

factors, industry risks, Assumptions Sensitivity impacting the company's ability to attract

investors and optimize its financial resources.

1. Accurate Cash Flow Projections: Estimating future cash flows can be challenging,

as it requires predicting sales growth, operating expenses, and capital expenditures

with a high degree of accuracy.

2. Macro-Economic Factors: External economic conditions can affect cash flows and

discount rates. Changes in interest rates, inflation, may impact the accuracy of

forecasting.

3. Industry Risks: The two-wheeler industry faces specific risks related to market

trends, regulatory changes, and technological advancements. Incorporating these

factors into valuation is crucial.

4. Assumption Sensitivity: DCF is highly sensitive to the input assumptions. Small

changes in growth rates, discount rates, or other variables can lead to significant

variations in the valuation.

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3.2 Objective of the Study

These objective collectively contribute to a project aimed at understanding, evaluating, and

enhancing the financial health and strategic positioning of Hero MotoCorp.

1. To analyse the historical performance of a company or industry by studying past

financial statements and other data sources

2. To develop forecasts and scenarios for future performance, such as sales growth,

earnings estimates, cash flow projections, and more

3. To identify trends in financial data that can be used to make informed decisions about

investments, financing, or operations

4. To assess risk and evaluate potential outcomes

5. To facilitate financial planning, budgeting, forecasting, and business decision-making.

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3.3 Hypothesis

Hypothesis Testing is a method of statistical inference. It is used to test if a statement regarding

a population parameter is statistically significant. Hypothesis testing is a powerful tool for

testing the power of predictions.

Hypothesis Testing is a critical part of the scientific method, which is a systematic approach to

assessing theories through observation. A good theory is one that can make accurate

predictions. For an analyst who makes predictions, hypothesis testing is a rigorous way of

backing up his prediction with statistical analysis.

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 Stating the Null Hypothesis and Alternative Hypothesis

The Null Hypothesis is usually set as what we don’t want to be true. It is the hypothesis to be

tested. Therefore, the Null Hypothesis is considered to be true until we have sufficient evidence

to reject it. If we reject the null hypothesis, we are led to the alternative hypothesis.

H0 (null hypothesis) : The adoption of financial modelling and Discounted Cash Flow (DCF)

valuation methods for forecasting the intrinsic valuation methods for forecasting the intrinsic

value of the company does not lead to a statistically significant improvement in the precision

of valuation predictions

The alternative hypothesis would then be what we are evaluating, so, in this case, it would be:

Ha (alternative hypothesis) : The incorporation of financial modelling and Discounted Cash

Flow (DCF) valuation methods for forecasting the intrinsic value of the company significantly

enhances the accuracy of valuation predictions.

Significant Level is 5%

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3.4 Research Design

Research design is the framework of research methods and techniques chosen by a

researcher to conduct a study. The design allows researchers to sharpen the research

methods suitable for the subject matter and set up their studies for success.

 Case Study Research Design

Objective: To conduct an in-depth examination of a specific instance or instance of

financial modelling and valuation, such as the application to Hero MotoCorp.

Data Collection: Gather data through document analysis and direct observation of the

financial modelling process and its outcomes.

Analysis: Use qualitative methods to analyse the case, exploring the impact of financial

modelling on decision-making and intrinsic value.

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 Research Method

 Quantitative Research

In financial modeling and valuation, sensitivity analysis is an integral part of quantitative

research. Financial modeling involves creating mathematical representations of financial

situations, often in the form of spreadsheets, to make predictions or inform decision-making.

 Nature of Financial Modeling: Financial modeling, including valuation models, is

inherently quantitative. Researchers use mathematical representations to simulate and

project financial scenarios.

 Sensitivity Analysis in Valuation Models: Sensitivity analysis is extensively used in

financial valuation models. It involves varying key input parameters or assumptions,

such as growth rates, discount rates, and terminal values, to observe the impact on the

valuation output.

 Risk Assessment and Decision-Making: Sensitivity analysis is crucial for risk

assessment. It helps decision-makers understand the sensitivity of the valuation to

different factors, aiding in risk mitigation and strategic decision-making.

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3.5 Data Collection & Analysis Tool

Data collection is a crucial phase in the research process, and researchers can employ various methods

to gather information based on the nature of their study. There are two broad categories of data

collection methods: primary and secondary. Within these categories, there are several specific types of

data collection methods.

 Secondary Data Collection

When conducting secondary data collection for financial modeling and valuation of a company

like Hero MotoCorp, you typically gather information directly from the company, industry

reports. Here are potential sources for collecting data:

Financial Statements:

Source: Obtain Hero MotoCorp's annual reports, quarterly reports, and financial

statements. These documents are primary sources of financial information and include

details such as income statements, balance sheets, and cash flow statements.

Data Sources: Financial Databases

Bloomberg, capital IQ, Stock Screener

These databases provide access to various types of financial information, including

historical financials from financial statements. Financial databases allow you to analyse

the historical data and easily export the data into Excel.

 Analysis Tools

When conducting financial modeling and valuation for companies like Hero MotoCorp

using Excel, various analytical tools within Excel itself can be leveraged. Here are five key

Excel tools and functionalities commonly used in financial modeling and valuation:

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1. Excel Data Tables and Scenario Manager:

Description: Excel's Data Tables and Scenario Manager are invaluable for

conducting sensitivity analysis and scenario testing.

Application:

 Data Tables: Analyse the impact of changes in one or more input variables on

the output (e.g., valuation).

 Scenario Manager: Create and compare different scenarios by varying multiple

input parameters, providing a comprehensive analysis of potential outcomes.

2. Solver Add-In:

Description: Solver is an Excel add-in used for optimization tasks. It helps find the

optimal solution for a problem by adjusting input variables based on specified

constraints.

Application:

 Use Solver to optimize financial models by maximizing or minimizing a target

variable (e.g., maximizing shareholder value) while adhering to constraints.

3. Goal Seek :

Description: Goal Seek is a built-in Excel tool that allows users to set a target value

for a cell by adjusting the value of another cell.

Application:

 Employ Goal Seek to determine the input required to achieve a specific financial

outcome, enhancing the model's flexibility.

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 CHAPTER – 4

DATA ANALYSIS AND INTERPRETATION

INPUT – P&L Assumptions

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59
Balance Statement Assumptions

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OUTPUT- P&L Statement

Year Forecasting Value Of NOPAT

2019 14,385

2020 30,773

2021 31,696

2022 32,647

2023 33,626

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Balance Sheet

Year Forecasting Value Of Working Capital

2019 (1,720)

2020 (1,771)

2021 (1,824)

2022 (1,879)

2023 (1,936)

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Cash Flow

Year Forecasting Value Of Net Cash Flow

2019 15,353

2020 31,770

2021 32,723

2022 33,705

2023 34,716

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DCF Valuation

64
WACC (Weighted Average Cost of Capital)

65
Source – P&L Source

66
Balance Sheet

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 CHAPTER – 5

5.1 Finding

As per the finding of the project DCF value and Intrinsic Value doesn’t match with the actual

result due to inaccuracy in secondary collected data.

Actual Result:

In Base Case

In Worst case

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In Best Case

DCF Value- In Best Case

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 Above is based on Report of Alpha Spread

This DCF valuation model was created by Alpha Spread and was last updated on Jan 8,
2024.

Estimated DCF Value of one Hero MotoCorp stock is 4 363.284 INR. Compared to the
current market price of 4 101.3501 INR, the stock is undervalued by 6%.

70
 5.2 Recommendation

When conducting financial modeling and valuation for Hero MotoCorp using Excel, several

limitations may be encountered. Here are some common limitations to be aware of:

1. Assumptions Sensitivity:

 Financial models heavily rely on assumptions. Small changes in key assumptions can

lead to significant variations in the valuation. It's essential to conduct sensitivity

analysis to understand the model's robustness.

2. Historical Data Accuracy:

 The accuracy of financial models depends on the accuracy of historical financial data.

Inaccurate or incomplete historical data can compromise the reliability of projections

and valuations.

3. External Factors:

 External factors such as changes in economic conditions, regulatory environments, or

industry trends may not be fully captured in the model. Acknowledge the limitations of

predicting external influences.

4. Complexity and Flexibility:

 Some financial models can become overly complex, making them difficult to

understand or modify. Lack of flexibility can hinder the ability to adapt the model to

changing business conditions.

5. Market Dynamics:

 Models may not fully capture the dynamic nature of markets. Changes in competitive

landscapes or industry disruptions might not be accurately reflected in the model.

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6. Lack of Real-time Data:

 Financial models are typically based on historical data, and obtaining real-time data for

up-to-the-minute analysis may not always be feasible. This can limit the model's

relevance in rapidly changing environments.

7. Limited Scope:

 The model's effectiveness may be limited to the scope of variables considered. External

factors or events not included in the model might impact the company's performance

and valuation.

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 5.3 Limitation

1. Continuous Monitoring:

 Establish a system for continuous monitoring of relevant economic, industry, and

company-specific factors. Regularly update the model to reflect changes in the business

environment.

2. Scenario Planning:

 Expand scenario analysis to include a broader range of potential future scenarios. This

can help stakeholders understand the impact of various external factors on the

company's financial performance and valuation.

3. Regular Model Reviews:

 Implement a regular review process for the financial model. This should involve

multiple stakeholders to identify and rectify any errors, ensure data accuracy, and

improve the overall quality of the model.

4. Enhanced Sensitivity Analysis:

 Conduct more detailed sensitivity analysis on critical assumptions. Clearly

communicate how changes in these assumptions can affect the financial outcomes,

providing stakeholders with a deeper understanding of the model's sensitivity.

5. Incorporate Real-time Data:

 Explore options to incorporate real-time or more recent data into the financial model.

This can improve the model's relevance, especially in industries or markets with rapid

changes.

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5.4 Conclusion

In conclusion, the financial modeling and valuation for Hero MotoCorp using Excel have

provided valuable insights into the company's performance and potential future scenarios.

However, it is crucial to acknowledge and address certain limitations to enhance the robustness

and reliability of the analysis.

The limitations, ranging from sensitivity to assumptions and external factors to the potential

for human errors, emphasize the need for continuous improvement and vigilance in financial

modeling practices. To mitigate these challenges, a series of recommendations have been

outlined.

Continuous monitoring, scenario planning, and regular model reviews are essential to adapt the

financial model to changing business environments. Enhanced sensitivity analysis and the

incorporation of real-time data can further improve the model's accuracy and relevance.

Collaboration with stakeholders and external validation contribute to a more comprehensive

and accurate representation of Hero MotoCorp's financial landscape.

The importance of clear documentation, flexibility, and simplicity in the model cannot be

overstated. These elements not only facilitate better understanding but also enable seamless

updates and modifications. Training and knowledge transfer ensure that individuals involved

in the modeling process are well-equipped to maintain consistency and accuracy.

Finally, integrating the financial model with risk management practices enhances the

identification and assessment of potential risks associated with assumptions and outcomes.

In adopting these recommendations, stakeholders can have greater confidence in the financial

model's ability to inform strategic decision-making. It is imperative to recognize that financial

74
modeling is an iterative process, and ongoing refinements will be necessary to adapt to the

dynamic nature of markets and industries.

Ultimately, the financial modeling and valuation for Hero MotoCorp serve as valuable tools

for understanding the company's financial landscape. By acknowledging and addressing

limitations while implementing these recommendations, the analysis becomes a more reliable

and insightful resource for guiding future strategies and actions.

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