Operational Adequacy of Working Capital Management of Selected Indian Automobile Industry-A Bivariate Discriminant Analysis

The study in general aims at making a study of the management performance relating to working capital in the selected units of the automobile industry in India. It covers seventeen major units in the automobile industry (five in commercial vehicles sector, three in passenger cars and multiutility vehicles sector and nine in two and three wheelers sector). For the purpose of the study, necessary data on working capital and other related variables were collected for the period 1992-93 to 2006-07. The financial statements used were mainly the Profit and Loss accounts and Balance Sheets published in the annual reports of the respective units. The study used a variety of financial ratios to accomplish the objectives. It employed discriminant analysis to examine adequacy of working capital.

The operational adequacy of the working capital of the selected units has also been assessed by employing the discriminant analysis based on the size of working capital in terms of monthly operational requirements and sales requirements as independent variables. The construction of discriminate function suggests that the size of net working capital in terms of monthly operational requirements appeared to be stronger than sales requirements in all the years. The discriminate Z values were estimated and the good risk and poor risk enterprises may also be identified by computing the cut-off values.

The comparison of good and poor risk units as per the current ratio and as per the discriminant score shows that the misclassification of units is noticed in all the years. It can be concluded that in the years 1992-93 to 2006-07 Ashok Leyland Ltd in commercial vehicles sector, Mahindra and Mahindra Ltd in passenger cars and multiutility vehicles sector and Bajaj Auto Ltd in two and three wheelers sector units maintained adequate size of the working capital throughout the period under study.