Hero Honda Bajaj Accounting

It is very evident from these charts that HHML is not only replacing its assets using the depreciation funds but also creating new assets which are manifolds in what has been scrapped.

3. Depreciation and Deferred Tax Asset/Liability

Financial statements of HHML have consistently revealed that the company is accumulating Deferred tax liabilities on account of depreciation.  Since the deferred tax is reported as a liability it is clear that the HHML has shown more profit in the books of accounts as compared to what has been shown for Income tax purpose.

The chart below shows the total accumulated deferred tax liabilities that HHML has created as against the additions per month.

Although the depreciation accounting method used by the company for accounting purpose and its difference from the method used in income tax calculation purpose has resulted into a tax liability, the amount is very low as compared to the total tax paid by the company.

2. Bajaj Auto Ltd.

4. Accounting Policies followed for Depreciation

Similar to HHML in BAL’s case  the depreciation/amortization is provided on Straight Line Method (SLM) for the useful life of the assets and rates as per the schedule XIV of Companies Act 1956.  BAL provides pro-rata depreciation from the month in which the fixed asset is acquired or first put in service.  Below are the various depreciation rates used by BAL for the various assets :

5. Fixed Assets v/s Depreciation

Unlike in the case of HHML in case of BAL the increase in Gross profit and accumulated depreciation is not following an ever-increasing trend. Infact the net increase is not much significant.  The gross block for BAL as on March, 31st 2004 was INR 2,703 Crore which has increased to INR 2,984 Crore till the end of FY 2008.   Particularly year 2007-08 is of interest here where BAL has acquired “Manufacturing Undertaking” which would be discussed in later section.

On and average the accumulated depreciation for each year froms 59% of the Fixed asset values as shown in the chart below :

If we look closely on an year by year basis to see how BAL has accumulated the depreciation charges and by what rate had it increased its assets the results are not equivalent to what HHML has done. In case of HHML we saw that the value of Net Fixed Assets added were more than the depreciation accumulated but in case of BAL the story is different :

It can be easily seen that until 2005-06 net fixed asset addition for BAL were less than the accumulated depreciation. But for the last two years the company is looking to expand its fixed assets.

Now, let us have a look at the actual additions and deletions of fixed assets for BAL :

The effect seen in chart above (2006-2008) is a combined effect  opening up of a new plant in Uttarakhand and shut down of  the  Akurdi plant.

6. Depreciation and Deferred Tax Asset/Liability

In this section for the case of BAL we would only consider the Deferred tax Asset/liability on the account of depreciation.  The following chart is helpful for us to understand the movements in deferred tax asses/liability past 5 years:

For the years through 2003-04 to 2006-07 we can easily see that the Deferred tax liability for BAL was negative which means that it was actually an asset for the company. Which translates to BAL showing less profits in books of accounts as compared to what was  shown for taxable purpose.

A very interesting thing to note here is that in year 2007-08 the deferred tax assets have converted into the deferred tax liabilities. This is due to the acquisition of  “Bajaj Auto International Holdings BV” and PT Bajaj Indonesia (PTBAI, 2006-07).

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Profitability analysis of  HHML & BAL

1. HHML Profitability