TATA Power

CAPITAL STRUCTURE ANALYSIS

A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. A company's proportion of short and long-term debt is considered when analyzing capital structure. When analysts refer to capital structure they are most likely referring to a firm's debt-to-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is relatively highly levered.

Theories of capital structure

1. Net Income Approach Net Income Approach was presented by Durand. The theory suggests increasing value of the firm by decreasing overall cost of capital which is measured in terms of Weighted Average Cost of Capital. This can be done by having higher proportion of debt, which is a cheaper source of finance compared to equity finance. Weighted Average Cost of Capital (WACC) is the weighted average costs of equity and debts where the weights are the amount of capital raised from each source.
Assumptions of Net Income Approach

Net Income Approach makes certain assumptions which are as follows.

Increase in debt will not affect the confidence levels of the investors. The cost of debt is less than cost of equity. There are no taxes levied.

2. Net Operating Income Approach Net Operating Income Approach was also suggested by Durand. This approach is of the opposite view of Net Income approach. This approach suggests that the capital structure decision of a firm is irrelevant and that any change in the leverage or debt will not result in a change in the total value of the firm as well as the market price of its shares. This approach also says that the overall cost of capital is independent of the degree of leverage. Net Operating Income Approach Net Operating Income Approach was also suggested by Durand. This approach is of the opposite view of Net Income approach. This approach suggests that the capital structure decision of a firm is irrelevant and that any change in the leverage or debt will not result in a change in the total value of the firm as well as the market

price of its shares. This approach also says that the overall cost of capital is independent of the degree of leverage.

3. Modigliani Millar Approach Modigliani Millar approach, popularly known as the MM approach is similar to the Net operating income approach. The MM approach favors the Net operating income approach and agrees with the fact that the cost of capital is independent of the degree of leverage and at any mix of debt-equity proportions. The significance of this MM approach is that it provides operational or behavioral justification for constant cost of capital at any degree of leverage. Whereas, the net operating income approach does not provide operational justification for independence of the company's cost of capital. 4. Traditional Approach The Net Income theory and Net Operating Income theory stand in extreme forms. Traditional approach stands in the midway between these two theories. This Traditional theory was advocated by financial experts Ezta Solomon and Fred Weston. According to this theory a proper and right combination of debt and equity will always lead to market value enhancement of the firm. This approach accepts that the equity shareholders perceive financial risk and expect premiums for the risks undertaken. This theory also states that after a level of debt in the capital structure, the cost of equity capital increases.

Determinants of capital Structure

1. Cost: Ideal pattern of capital structure is one that minimizes the cost of capital and maximizes the EPS. 2. Business Risk : Excluding debt, business risk is the basic risk of the company's operations. The greater the business risk, the lower the optimal debt ratio. 3. Company's Tax Exposure : Debt payments are tax deductible. As such, if a company's tax rate is high, using debt as a means of financing a project is attractive because the tax deductibility of the debt payments protects some income from taxes. 4. Financial Flexibility: This is essentially the firm's ability to raise capital in bad times. It should come as no surprise that companies typically have no problem raising capital when sales are growing and earnings are strong. 5. Management Style : Management styles range from aggressive to conservative. The more conservative a management's approach is, the less inclined it is to use debt to increase profits. An aggressive management may try to grow the firm quickly, using significant amounts of debt to ramp up the growth of the company's earnings per share (EPS). 6. Growth Rate: Firms that are in the growth stage of their cycle typically finance that growth through debt, borrowing money to grow faster. The conflict that arises with this method is that the revenues of growth firms are typically unstable and unproven. As such, a high debt load is usually not appropriate. 7. Stability In Cash Flow: The firm's cash flow stability also affects its capital structure. If firm's cash flows are relatively stable, then it may find no difficulties in meeting its fixed charge obligation. As a result, the firm may attempt to take the benefits by using leverage to some extent.

Capital Structure Analysis Of TATA Power

Ratio Debt Equity Ratio= Total debt/net worth 2011
7,053.69/11,175.58 = 0.63

2012
9,197.13/11,756.99 = 0.78

2013
11,124.72/12,260.85 = 0.91

Comparison of Debt Equity Ratio

Ratio

Tata Power

Debt Equity Ratio= Total debt/net worth

0.91

Power Grid Jindal Corporation Steel of India and Power 2.62 1.57

NHPC

NTPC

0.63

0.66

Capital Structure Of TATA Power

Period

Instrument

Authorised Capital (in Cr)

Issued Share no Capital

Face Value

Capital

2012-2013 Equity Share 2011-2012 Equity Share 2010-2011 Equity Share

300 300 300

242.95 2373072360 242.95 2373072360 242.95 237307236

1 1 10

237.31 237.31 237.31

*Source: www.Moneycontrol.com

Current News Of TATA Power

1. Tata Sons pledges 2.13 crore shares in Tata Power: Tata Sons has pledged 2.13 crore shares in Tata Power to raise funds for the group. As per Tuesday's market price of Rs 87.65, the worth of pledged shares stood at about Rs 187 crore. Tata Sons, the holding company of Tata Group, pledged 21,350,000 shares, amounting to 0.90 per cent stake, in country's largest private power utility Tata Power, the power firm said in a regulatory filing to the stock exchange. 2. Tata Powers Financial Health Still Good: The Tata Power Company (TPC)s financial health is still sound and it can weather the current crisis related to its Mundra power plant, said a senior executive of TPC. Still we have a debt to EBITDA (earnings before interest, taxes, depreciation and amortisation) ratio of 5:1 and a debt to equity ratio of 2:1 at the consolidated level, which is healthy from a bankers point of view, S. Padmanabhan, Executive Director (Operations), told BW Businessworld. 3. Tata Power Company Limited organises training: Tata Power organises Career Development Programs for youth in Maithon and Dhanbad: Tata Power, India's largest integrated power pany's Joint Venture with Damodar Valley Corporation (DVC) called Maithon Power Limited (MPL) has successfully pleted the 7th batch of recruitment through its unique initiative for youth in collaboration with Tata Consultancy Services (TCS). The Company trained 385 local youth, out of which 93 have cleared all the interview rounds. 73 of these candidates have already started working with TCS-Kolkata.