Professional Documents
Culture Documents
In
NCL Industries Ltd. at Hyderabad
T. SUNITHA
098060143
DECLARATION
by
me
to
the Department
of
Business
Signature
T.
Table of contents
CONTENT :
i.
Company Certificate
ii.
Organisation Certificate
iii.
Acknowledgement
iv.
Declaration
PAGE NUMBERS
(i)
(ii)
(iii)
(iv)
List of Tables
(i)
List of figures
(ii)
1. INTRODUCTION
2. REVIEW OF LITERATURE
3. THE COMPANY
4. COMPANY PROFILE
5. DATA ANALYSIS & PRESENTATION
Presentation and Analysis
Interpretations
6. SUMMARI & CONCLUSIONS
7. BIBLIOGRAPHY
01
2&3
06
19
04
04
47
68
73
8. APPENDICES
Appendix A Organisational structure of Bloggs Ltd
Appendix B -
ACKNOWLEDGEMENT
3
(CHARTERTED
ACCOUNTANTS),
UMARANI
NAME
T.Sunitha
INTRODUCTION:
4
The value of the firm depends upon its expected earnings stream and
the rate used to discount this stream. The rate used to discount earnings stream
its the firms required rate of return or the cost of capital. Thus, the capital
structure decision can affect the value of the firm either by changing the
expected earnings of the firm, but it can affect the reside earnings of the
shareholders. The effect of leverage on the cost of capital is not very clear.
Conflicting opinions have been expressed on this issue. In fact, this issue is
one of the most continuous areas in the theory of finance, and perhaps more
theoretical and empirical work has been done on this subject than any other.
If leverage affects the cost of capital and the value of the firm, an
optimum capital structure would be obtained at that combination of debt and
equity that maximizes the total value of the firm or minimizes the weighted
average cost of capital. The question of the existence of optimum use of
leverage has been put very succinctly by Ezra Solomon in the following
words.
Given that a firm has certain structure of assets, which offers net
operating earnings of given size and quality, and given a certain structure of
rates in the capital markets, is there some specific degree of financial leverage
at which the market value of the firms securities will be higher than at other
degrees of leverage?
The existence of an optimum capital structure is not accepted by all.
These exist two extreme views and middle position. David Durand identified
the two extreme views the net income and net operating approaches.
OBJECTIVES:
The project is an attempt to seek an insight into the aspects that are
involved in the capital structuring and financial decisions of the company. This
project endeavors to achieve the following objectives.
Examining the financing trends in the NCL Industries LTD. for the period
of 2001-06.
SCOPE:
A study of the capital structure involves an examination of long term as
well as short term sources that a company taps in order to meet its
requirements of finance. The scope of the study is confined to the sources that
NCL Ind. LTD tapped over the years under study i.e. 2001-06
Discussions with the Finance manager Mr. Arun Kumar, and other
members of the Finance department.
DATA ANALYSIS
The collected data has been processed using the tools of
Ratio analysis
Graphical analysis
Year-year analysis
These tools access in the interpretation and understanding of the Existing
scenario of the Capital Structure.
CEMENT INDUSTRY
INTRODUCTION
Cement is a key infrastructure industry. It has been decontrolled
from price and distribution n 1st March 1989 and delicensed on 25 th July
1991. However, the performance of the industry and prices of cement are
monitored regularly. The constraints faced by the industry are reviewed
in the Infrastructure coordination committee meetings held in the cabinet
secretariat under the chairmanship of secretary (coordination).
Its
10
EXPORTS
Apart from meeting the entire domestic demand, the industry is
also exporting cement and clinker. The export of cement during 2001-02
and 2003-04 was 5.14 million tones and 6.92 million tones respectively.
Export during April-May, 2003 was 1.35 million tones. Major exporters
were Gujarat Ambuja Cements Ltd. and L&T Ltd.
RECOMMENDATIONS ON CEMENT INDUSTRY
For the development of the cement industry Working Group on
cement Industry was constituted by the planning commission for the
formulation of X Five Year Plan. The working Group has projected a
growth rate of 10% for the cement industry during the plan period and has
projected creation of additional capacity of 40-62 million tones mainly
through expansion of existing plants. The working Group has identified
following thrust areas for improving demand for cement;
report
submitted
recommendations for
by
the
organization
has
made
several
11
TECHNOLOICAL CHANGE
Cement industry has made tremendous strides in technological up
gradation and assimilation of latest technology. At present ninety three per
cent of the total capacity in the industry is based on modern and
environment-friendly dry process technology and only seven per cent of
the capacity is based on old wet and semi-dry process technology. There
is tremendous scope for waste heat recovery in cement plants and thereby
reduction in emission level. One project for co-generation of power
utilizing waste heat in an Indian cement plant is being implemented with
Japanese assistance under Green Aid Plan. The induction of advanced
technology has helped the industry immensely to conserve energy and
fuel and to save materials substantially. Indian is also producing different
varieties of cement like Ordinary Portland Cement (OPC), Portland
Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS),
Oil Well Cement, Rapid Hardening Portland Cement, Sulphate Resisting
Portland Cement, White Cement etc. Production of these varieties of
cement conform to the BIS Specifications. It is worth mentioning that
some cement plants have set up dedicated jetties for promoting bulk
transportation and export.
12
The value of the firm depends upon its expected earnings stream and
the rate used to discount this stream. The rate used to discount earnings stream
its the firms required rate of return or the cost of capital. Thus, the capital
structure decision can affect the value of the firm either by changing the
expected earnings of the firm, but it can affect the reside earnings of the
shareholders. The effect of leverage on the cost of capital is not very clear.
Conflicting opinions have been expressed on this issue. In fact, this issue is
one of the most continuous areas in the theory of finance, and perhaps more
theoretical and empirical work has been done on this subject than any other.
If leverage affects the cost of capital and the value of the firm, an
optimum capital structure would be obtained at that combination of debt and
equity that maximizes the total value of the firm or minimizes the weighted
average cost of capital. The question of the existence of optimum use of
leverage has been put very succinctly by Ezra Solomon in the following
words.
Given that a firm has certain structure of assets, which offers net
operating earnings of given size and quality, and given a certain structure of
rates in the capital markets, is there some specific degree of financial leverage
at which the market value of the firms securities will be higher than at other
degrees of leverage?
The existence of an optimum capital structure is not accepted by all.
These exist two extreme views and middle position. David Durand identified
the two extreme views the net income and net operating approaches.
13
14
resulting from the use of debt adds to the value of the firm. This advantage
reduces the when personal income taxes are considered.
CAPITAL STRUCTURE MATTERS: THE NET INCOME APPROACH:
The essence of the net income (NI) approach is that the firm can increase
its value or lower the overall cost of capital by increasing the proportion of
debt in the capital structure. The crucial assumptions of this approach are:
1)
The use of debt does not change the risk perception of investors; as a
result, the equity capitalization rate, kc and the debt capitalization rate, kd,
remain constant with changes in leverage.
2)
The debt capitalization rate is less than the equity capitalization rate
(i.e. kd<ke)
3)
It is obvious from equation 1 that, with constant annual net operating income
(NOI), the overall cost of capital would decrease as the value of the firm v
increases. The overall cost of capital ko can also be measured by
KO = Ke - (Ke - Kd) D/V
As per the assumptions of the NI approach Ke and Kd are
constant and Kd is less than Ke. Therefore, Ko will decrease as D/V increases.
Equation 2 also implies that the overall cost of capital K o will be equal to Ke if
the form does not employ any debt (i.e. D/V =0), and that K o will approach Kd
as D/V approaches one.
15
rA and rD are constant for all degree of leverage. Given this, the cost of equity
can be expressed as.
The critical premise of this approach is that the market capitalizes the
firm as a whole at discount rate, which is independent of the firms debt-equity
ratio. As a consequence, the decision between debt and equity is irrelevant. An
increase in the use of debt funds which are apparently cheaper or offset by an
increase in the equity capitalization rate. This happens because equity
investors seek higher compensation as they are exposed to greater risk arising
from increase in the degree of leverages. They raise the capitalization rate rE
(lower the price earnings ratio, as the degree of leverage increases.
without affecting the total income and risk which influence the market value
(or equivalently the average cost of capital) of the firm. Arguing in a similar
vein, Modigliani and Miller, in a seminal contribution made in 1958,
forcefully advanced the proposition that the cost of capital of a firm is
independent of its capital structure.
17
18
19
20
1.
2.
3.
21
Capital Reserve
General Reserve
Contingency Reserve
1.
2.
22
COMPANY PROFILE
NCL Industries Ltd is a company established in 1981 and today it is marked
among the top ten Cement Production companies of India, growing at over
25% as of 2006. NCL Industries Ltd has a countrywide office, network with
fully computerized operations and a professional team & worker. The
company has an installed capacity of 297000 tones of Cement & 3000 tones of
Cement Boards. The company is expanding after Economic reforms have set
in NCL Industries has spread its wings over several high production based
mechanism as will.
The companies sister concerns include Altek Coating Products Ltd.
NCL energy ltd, NCL homes ltd, Kakatiya Chemical Ltd. the members of the
Board comprised of eminent personalities from the field of Banking, Taxation,
Corporate loss and Industry. Jaya Bharath Reddy is the Chairman and Ravi
(Managing Director) industrialist having through knowledge and experience in
cement business and allied fields, with a new appointed M.D Sri. K.Ravi. The
broad based clientele group reflects the high respect and with NCL Industries
Ltd, in production circles. The client includes repeated business houses like
NCL homes Ltd, and confident financial institutions such as OBC (Oriental
Bank of Commerce), Vijaya Bank and Canara Bank.
The Plant is located in Nalgonda District of A.P where abundant raw
materials such as Lime Stone, Fire Wood etc., are available. Apart from the
main resources River Krishna flowing adjacent to the plant.
23
Theoretical Aspects
CAPITAL STRUCTURE DEFINED:
24
Cost of capital
Dilution of control
Floatation costs
25
26
27
EMBED PBrush
28
30
The board of Director or the chief financial officer (CEO) of a company should
develop an appropriate capital structure, which is most advantageous to the company. This
can be done only when all those factors, which are relevant to the companys capital
structure decision, are properly analyzed and balanced. The capital structure should be
planned generally keeping in view the interest of the equity shareholders and financial
requirements of the company. The equity shareholders being the shareholders of the
company and the providers of the risk capital (equity) would be concerned about the ways
of financing a companys operation. However, the interests of the other groups, such as
employees, customer, creditors, and government, should also be given reasonable
consideration. When the company lay down its objectives in terms of the shareholders
wealth maximizing (SWM), it is generally compatible with the interest of the other groups.
Thus, while developing an appropriate capital structure for it company, the financial
manager should inter alia aim at maximizing the long-term market price per share.
Theoretically there may be a precise point of range with in which the market value per
share is maximum. In practice for most companies with in an industry there may be a range
of appropriate capital structure with in which there would not be great differences in the
market value per share. One way to get an idea of this range is to observe the capital
structure patterns of companies Vis-a Vis their market prices of shares. It may be found
empirically that there is no significance in the differences in the share value with in a given
range. The management of the company may fit its capital structure near the top of its range
in order to make of maximum use of favorable leverage, subject to other requirement
(SEBI) and stock exchanges.
31
1)
RETURN: the capital structure of the company should be most advantageous, subject to
the other considerations; it should generate maximum returns to the shareholders without
adding additional cost to them.
2)
RISK: the use of excessive debt threatens the solvency of the company. To the point debt
does not add significant risk it should be used other wise it uses should be avoided.
3)
4)
CAPACITY: - The capital structure should be determined within the debt capacity of the
company and this capacity should not be exceeded. The debt capacity of the company
depends on its ability to generate future cash flows. It should have enough cash flows to
pay creditors, fixed charges and principal sum.
5)
CONTROL: The capital structure should involve minimum risk of loss of control of the
company. The owner of the closely held companys of particularly concerned about dilution
of the control.
32
Valuation approach for determining the impact of debt on the shareholders value.
Cash flow approached for analyzing the firms ability to service debt.
In addition to these approaches governing the capital structure decisions, many other factors
such as control, flexibility, or marketability are also considered in practice.
EBIT-EPS APPROACH:
We shall emphasize some of the main conclusions here .The use of fixed cost sources
of finance, such as debt and preference share capital to finance the assets of the company, is
know as financial leverage or trading on equity. If the assets financed with the use of debt
yield a return greater than the cost of debt, the earnings per share also increases without an
increase in the owners investment. The earnings per share also increase when the preference
share capital is used to acquire the assets. But the leverage impact is more pronounced in case
of debt because
33
(I)
The cost of debt is usually lower than the cost of performance share capital and
(II)
Because of its effect on the earnings per share, financial leverage is an important
consideration in planning the capital structure of a company. The companies with high level
of the earnings before interest and taxes (EBIT) can make profitable use of the high degree of
leverage to increase return on the shareholders equity. One common method of examining
the impact of leverage is to analyze the relation ship between EPS and various possible levels
of EBIT under alternative methods of financing.
The EBIT-EPS analysis is an important tool in the hands of financial manager to get an
insight into the firms capital structure management .He can considered the possible
fluctuations in EBIT and examine their impact on EPS under different financial plans of the
probability of earning a rate of return on the firms assets less than the cost of debt is
insignificant, a large amount of debt can be used by the firm to increase the earning for share.
This may have a favorable effect on the market value per share. On the other hand, if the
probability of earning a rate of return on the firms assets less than the cost of debt is very
high, the firm should refrain from employing debt capital .it may, thus, be concluded that the
greater the level of EBIT and lower the probability of down word fluctuation, the more
beneficial it is to employ debt in the capital structure However, it should be realized that the
EBIT EPS is a first step in deciding about a firms capital structure .It suffers from certain
limitations and doesnt provide unambiguous guide in determining the capital structure of a
firm in practice.
34
RATIO ANALYSIS: The primary user of financial statements are evaluating part performance and
predicting future performance and both of these are facilitated by comparison. Therefore the
focus of financial analysis is always on the crucial information contained in the financial
statements. This depends on the objectives and purpose of such analysis. The purpose of
evaluating such financial statement is different form person to person depending on its
relationship. In other words even though the business unit itself and shareholders, debenture
holders, investors etc. all under take the financial analysis differs. For example, trade
creditors may be interested primarily in the liquidity of a firm because the ability of the
business unit to play their claims is best judged by means of a through analysis of its
l9iquidity. The shareholders and the potential investors may be interested in the present and
the future earnings per share, the stability of such earnings and comparison of these
earnings with other units in thee industry. Similarly the debenture holders and financial
institutions lending long-term loans maybe concerned with the cash flow ability of the
business unit to pay back the debts in the long run. The management of business unit, it
contrast, looks to the financial statements from various angles. These statements are
required not only for the managements own evaluation and decision making but also for
internal control and overall performance of the firm. Thus the scope extent and means of
any financial analysis vary as per the specific needs of the analyst. Financial statement
analysis is a part of the larger information processing system, which forms the very basis of
any decision making process.
The financial analyst always needs certain yardsticks to evaluate the
efficiency and performance of business unit. The one of the most frequently used yardsticks
is ratio analysis. Ratio analysis involves the use of various methods for calculating and
interpreting financial ratios to assess the performance and status of the business unit. It is a
tool of financial analysis, which studies the numerical or quantitative relationship between
35
with other variable and such ratio value is compared with standard or norms in order to
highlight the deviations made from those standards/norms. In other words, ratios are
relative figures reflecting the relationship between variables and enable the analysts to draw
conclusions regarding the financial operations.
However, it must be noted that ratio analysis merely highlights the potential areas of
concern or areas needing immediate attention but it does not come out with the conclusion
as regards causes of such deviations from the norms. For instance, ABC Ltd. Introduced the
concept of ratio analysis by calculating the variety of ratios and comparing the same with
norms based on industry averages. While comparing the inventory ratio was 22.6 as
compared to industry average turnover ratio of 11.2. However on closer sell tiny due to
large variation from the norms, it was found that the business units inventory level during
the year was kept at extremely low level. This resulted in numerous production held sales
and lower profits. In other words, what was initially looking like an extremely efficient
inventory management, turned out to be a problem area with the help of ratio analysis? As a
matter of caution, it must however be added that a single ration or two cannot generally
provide that necessary details so as to analyze the overall performance of the business unit.
In order to arrive at the reasonable conclusion regarding overall performance of the
business unit, an analysis of the entire group of ratio is required. However, ration analysis
should not be considered as ultimate objective test but it may be carried further based on the
out come and revelations about the causes of variations. Some times large variations are due
to unreliability of financial data or inaccuracies contained there in therefore before taking
any decision the basis of ration analysis, their reliability must be ensured. Similarly, while
doing the inter-firm comparison, the variations may be due to different technologies or
degree of risk in those units or items to be examined are in fact the comparable only. It must
be mentioned here that if ratios are used to evaluate operating performance, these should
exclude extra ordinary items because there are regarded as non-recurring items that do not
reflect normal performance.
Ratio analysis is the systematic process of determining and interpreting the
numerical relationship various pairs of items derived form the financial statements of a
36
business. Absolute figures do not convey much tangible meaning and is not meaningful
while comparing the performance of one business with the other.
It is very important that the base (or denominator) selected for each ratio is
relevant with the numerator. The two must be such that one is closely connected and is
influenced by the other
CAPITAL STRUCTURE RATIOS
Capital structure or leverage ratios are used to analyse the long-term solvency or
stability of a particular business unit. The short-term creditors are interested in current
financial position and use liquidity ratios. The long-term creditors world judge the
soundness of a business on the basis of the long-term financial strength measured in terms
of its ability to pay the interest regularly as well as repay the installment on due dates. This
long-term solvency can be judged by using leverage or structural ratios.
There are two aspects of the long-term solvency of a firm:(i) Ability to repay the principal when due, and
(ii) Regular payment of interest, there are thus two different but mutually dependent and
interrelated types of leverage ratio such as:
(a)
owners capital,
computed form balance sheet eg: debt-equity ratio, dividend coverage ratio, debt service
coverage ratio etc.,
37
a.
RETURN ON ASSETS
In this case profits are related to assets as follows
Return on assets =
Particulars
ROA =
PAT
TOTAL
ASSETS
2001
2002
2003
2004
2005
2006
290.77
274.5
104.12
128.57
252.19
340.78
9044.4
1
3.21
8916.51
3.08
9283.8
8632.11 8985.5 6
1.21
1.43
2.72
1017.3
2
3.34
2001
290.77
2002
274.5
2003
104.12
7111.40
7112.91
6827.97
= 4.08
= 3.85
=1.52
2004
128.57
2005
252.19
2006
340.78
6993.93
7079.20
9994.02
=3.56
=3.40
PAT
38
=1.83
YEAR 2000-2001
Performance of company (Amount in Rs.000s)
Gross Revenue
Profit (Loss) before tax
Earnings per share Rs.
773919
30577
1.79
Total Expenditure
Profit after tax
Dividend ratio
743342
29077
10%
YEAR 2001-2002
Performance of company (Amount in Rs.000s)
Gross Revenue
Profit (Loss) before tax
Earnings per share Rs.
742200
30279
1.69
Total Expenditure
Profit after tax
Dividend ratio
711921
27450
10%
YEAR 2002-2003
PERFORMANCE OF COMPANY (AMOUNT IN RS.000S)
Gross Revenue
Profit (Loss) before tax
Earnings per share Rs.
715556
10412
5%
YEAR 2003-2004
PERFORMANCE
Gross Revenue
Profit (Loss) before tax
Earnings per share Rs.
OF COMPANY
(AMOUNT
IN
RS.000S)
715556
10412
5%
YEAR 2004-2005
PERFORMANCE
OF COMPANY
39
(AMOUNT
IN
RS.000S)
Gross Revenue
Profit (Loss) before tax
Earnings per share Rs.
872511
25219
10%
YEAR 2005-2006
PERFORMANCE
OF COMPANY
(AMOUNT
IN
RS.000S)
Gross Revenue
1203680
3
71313
2.10
34078
15%
2.
Cement turn over has increased by 6% as against fall in Sales realization by 15%
last year.
40
3.
Cement Boards Division has contributed 18% more than the previous year to the
PBDIT.
4.
Perform Division realization has increased by 4% even the Turn over have came
down to 845 lacs from 1189lacs in last year.
5.
The profit After Tax has came down from 302 lacs to 112lacs in Current year
because of slope in Cement Industry.
6.
The Interest cost has come down by 24% due to reduction in Interest rates by
Commercial Banks & Public Deposits.
PERFORMANCE ANALYSIS OF 2003-2004
The Cement Industry has a successful year because of Govt. policies such as
infrastructure Development a Rural housing. There has been a small reduction in Gross
Sales and with the performance of prefab Division the Gross Profit gap has narrowed and
contributing to the EBIT. The Gross Profit has increased considerably from 1014 lacs in
Last year to 1259 lacs in Current year. The interest payment has increased by 14 lacs in the
Current year and the Profit before Tax at 331 lacs when compared to 112 lacs in Last year.
The Net profit also increased from 104 lacs in Last year to 128.57 lacs in Current year.
The Director has recommended a 7.5% Dividend and in Last year it was at 5%.
41
interest and payment of loan funds for which the company is paying higher rate of interest.
In the previous year, the cash credit granted by UCO bank to the tune of Rs.594 lacs and
losing of loan funds borrowed from Vijaya Bank and Canara Bank factors, which can
tribute to increase in the Profit before Tax to the tune of Rs.190 lacs the company declared a
dividend of 10% on its equity to its shareholders when compared to 7.5% in the previous
year. The EPS of the company also increased considerably which investors in coming
period. The company has taken up a plant expansion program during the year to increase
the production activity and to meet the increase in the demand
PERFORMANCE ANALYSIS OF 2005-2006
Company is operating in 3 segments, out of which cement contributes about 55% of
turnover while the Boards and prefab segments contribute about 45%. Huge investment in
the industrial sector over the next 3 years is expected to lead to higher cement off take on
the back of strong GDP growth across the country. It is expected that the domestic cement
consumption would grow at a CAGR of 8% for the next 5 ears. By FY 2001 the domestic
consumption is expected to grow to 199 million Tons from 136 million Tons consumption
FY2006. During the year 2005-06 your companys Gross sales increased by about 38% to
Rs.12708 Lacks from Rs.9224 Lacks in FY
Rs.10337 Lacks from Rs.7448 Lacks in FY 2004-05. Improved sales from all the tree
divisions particularly from prefab division contributed for increased turnover.
EBIT LEVELS
Particulars
Earnings Before
Interest & Tax
2001
2002
2003
2004
2005
2006
1096.15
969.61
618.76
803
861.16
1235.69
42
Change
126.54
477.39
294.2
234.99
374.53
% Change
The EBIT level is in a decreasing trend because of drastic decline in prices in Cement
Industry during above period.
In the year 2005 and 2006 the EBIT level has increased substantially because of Raise inn
Cement prices because of demand and the policies of Govt. such as rural housing and
irrigation project taken up.
43
INTERPRETATION
The EBIT level in 2001 is at 1096.15 lacs and is decreasing every year till 2003. Because of
slump in the Cement Industry less realisation. The EBIT levels in 2004 again started
growing and reached to 802.46 lacs and in 2005 were at 861.16 lakhs and in 2006 were at
861.16, because of the sale price increase per bag and increase in demand. The
infrastructure program taken up by the A.P. Govt. in the field s of rural housing irrigation
projects created demand and whole Cement Industries are making profits.
44
PERFORMANCE
EPS ANALYSIS
Particulars
Profit After Tax
Less: Preference
Dividend
Amount of Equity share
holder
No. OF equity share of
Rs.10/- each
EPS
2001
29077000
2002
2745000
2003
10412000
2004
2005
30569000 32806000
-
2006
34078000
-
29077000 27450000
10412000
16234825 16234825
1.79
1.69
16234825
0.64
45
INTERPRETATION
The PAT is in an increasing trend from 2003-2004 because of increase in sale prices and
also decreases in the cost of manufacturing. In 2005 and 2006 even the cost of
manufacturing has increased by 5% because of higher sales volume PAT has increased
considerably, which leads to higher EPS, which is at 9.36 in 2006
EBIT EPS CHART
One convenient and useful way showing the relationship between EBIT and
EPS for the alternative financial plans is to prepare the EBIT-EPS chart. The chart is easy to
prepare since for any given level of financial leverage, EPS is linearly related to EBIT. As
noted earlier, the formula for calculating EPS is
EPS = (EBIT - INT) (1 T)
(EBIT - INT) (1 T)
We assume that the level of debt, the cost of debt and the tax rate are constant. Therefore in
equation, the terms (1-T)/N and INT (=iD) are constant: EPS will increase if EBIT
increases and fall if EBIT declines. Can also be written as follows
Under the assumption made, the first part of is a constant and can be represented by an
EBIT is a random variable since it can assume a value more or less than expected. The term
(1 T)/N are also a constant and can be shown as b. Thus, the EPS, formula can be written
as:
EPS = a + bEBIT
Clearly indicates that EPS is a linear function of EBIT.
46
FINANCING DECISION
Mobilization
Costing
Timing/Availability
Business interests
Therefore,
the
strategy
is
to
always
keep
sufficient
Cost of funds
Mode of repayment
Assets security
Stock options
48
OWNERS FUND
EQUITY
CAPITAL
RETAINED
EARNINGS
BORROWED FUND
PREFERENCE
CAPITAL
CONVENTIONAL
NON- CONVENTIONAL
SOURCES
SOURCES
FINANCIAL
SUPPLIERS CREDIT
INSTITUTION
SHORT TERM
BANK
BANK BORROWINGS
CASH CREDIT
HIRE PURCHASE
DEBENTURES
FIXED DEPOSITS
ICD
49
Particulars
2005-06
2000-01
2001-02
2002-03
2003-04
2004-05
a) Share capital
1622.93
1622.93
1622.93
1622.93
1622.93
2179.97
1502.87
796.48
890.21
881.46
948.59
937.65
c)Deferred tax
TOTAL (A)
Loan Funds
3125.8
778.62
3198.03
787.99
3301.13
2504.39
2571.52
3117.62
a) Secured Loans
1724.9
1372.53
1413.17
1167.82
1783.66
4015.28
b) Unsecured Loans
2299.16
2588.22
2161.95
2404.33
1711.95
1954.07
TOTAL (B)
TOTAL (A+B)
% of S H in total C.E
% of Loan Fund in
total C.E
4024.06
7154.86
43.72
3960.75
7158.78
44.67
3575.12
6876.24
48
3572.15
6075.92
41.22
3495.61
6067.13
42.38
5969.35
9086.97
34.3
56.28
55.33
52
58.78
57.62
65.69
Source of funds
Share holders funds
50
51
INTERPRETATION
The shareholder fund is at 3125.8 constitutes 43.72% in total C.E and loan funds constitute
56.28% in 2000-01. The Funding Mix on an average for 6 years will be 45% of
shareholders Fund and 55% of Loan Funds there by the company is trying to maintain a
good Funding Mix. The leverage or trading on equity is also good because the company
affectively utilizing the Loan Funds in the Capital Structure. So that it leads to higher profit
increase of EPS in 2003 at 0.79 to 2006 1.55
52
TERM LOANS
2000-2001
Particulars
TERM LOANS
IDBI
0.00
IFCI
0.00
0.00
0.00
0.00
0.00
0.00
Funded interest
0.00
0.00
1027.98
CASH CREDIT
Global Trust Bank
641.33
Vijaya Bank
55.59
696.92
1,724.90
UNSECURED LOANS
Deposits from public
727.76
0.34
0.00
1.60
1,566.21
3.25
TOTAL
2,299.16
53
TERM LOANS
2001-2002
Particulars
TERM LOANS
IDBI
0.00
IFCI
0.00
0.00
0.00
0.00
0.00
0.00
Funded interest
0.00
0.00
677.75
CASH CREDIT
Global Trust Bank
638.21
Vijaya Bank
56.57
694.78
1,372.53
UNSECURED LOANS
Deposits from public
602.15
4.64
0.00
0.00
1730.39
50.00
Others
201.04
TOTAL
2588.22
54
TERM LOANS
2002-2003
Particulars
TERM LOANS
Indian Renewable Energy
development agency ltd.
Non convertible debentures
255.00
509.61
0.00
0.00
0.00
0.00
Funded interest
0.00
0.00
CASH CREDIT
Global Trust Bank
583.41
Vijaya Bank
65.15
648.56
1,413.17
UNSECURED LOANS
Deposits from public
600.54
21.25
100.09
0.00
1,239.02
0.00
Others
201.04
TOTAL
2161.94
55
TERM LOANS
2003-2004
Particulars
TERM LOANS
Indian Renewable Energy
development agency ltd.
Non convertible debentures
207.00
0.00
0.00
0.00
0.00
0.00
Funded interest
0.00
0.00
CASH CREDIT
Global Trust Bank
627.10
Vijaya Bank
174.12
158.98
960.20
1167.20
UNSECURED LOANS
Deposits from public
592.31
1600.68
Lease/Hire purchase
10.30
Others
201.04
TOTAL
3571.53
56
TERM LOANS
2004-2005
Particulars
TERM LOANS
Indian Renewable Energy
development agency ltd.
Non convertible debentures
779.17
0.00
0.00
0.00
0.00
0.00
Funded interest
0.00
0.00
CASH CREDIT
Oriental Bank of Commerce
410.15
UCO Bank
594.34
0.00
1004.49
1167.20
UNSECURED LOANS
Deposits from public
399.69
1053.83
Lease/Hire purchase
57.39
Others
201.04
TOTAL
3495.64
57
TERM LOANS
2005-2006
Particulars
TERM LOANS
Indian Renewable Energy
development agency ltd.
Non convertible debentures
2532.14
0.00
0.00
0.00
0.00
0.00
Funded interest
0.00
0.00
CASH CREDIT
Oriental Bank of Commerce
561.32
UCO Bank
Canara Bank Factors
UTI Bank Ltd
306.54
403.46
211.82
1483.14
4015.28
UNSECURED LOANS
Interest free from sales tax
deferment loan
Deposits from public
162.40
919.26
Lease/Hire purchase
54.25
Others
201.29
TOTAL
5969.35
616.87
58
INTERPRETATION
The Non-convertible debentures are being redeemed from 2001 and 2002 financial year
onwards and were completely repaid by 2005-2006. The cash credit assistance was
provided by Global Trust Bank and Vijaya Bank to the tune of Rs.696 lacs and Canara bank
factors to the tune Rs.158 lacs was completely repaid by taking cash credit facility from
Oriental Bank of Commerce and UCO Bank to the tune of Rs.1000 lacs. The company is
paying of deposits from public every year.
Deposits from public were stood at 727.76 lacs in 2000-2001 and in 2005-2006 it
came down to 399.69 lacs. The IRIDA has granted Rs.255 lacs term loan for installation of
energy saving equipment and the loan was again increased to 779.17 lacs in 2005-2006.
59
714986
Total assets
714986
162293
150287
Secured Loans
Application of
funds
Net fixed assets
Net current assets
Accumulated losses
172496
Reserves &
surplus
Unsecured loans
522854
182008
Investments
Misc. Expenditure
6278
3846
229916
715878
Total assets
715878
162293
79648
Secured Loans
Application of
funds
Net fixed assets
Net current assets
Accumulated losses
137253
Reserves &
surplus
Unsecured loans
554677
150891
Investments
Misc. Expenditure
5723
4587
258822
687624
Total assets
687624
162293
Secured Loans
141317
89021
78799
216194
60
Application of funds
Net fixed assets
Net current assets
Accumulated losses
517233
160545
Nil
Investments
Misc. Expenditure
5019
4827
Financial leverage results from the presence of fixed financial charges in the
firm income stream. These fixed charges dont vary with EBIT availability post payment
balances belong to equity holders.
Financial leverage is concerned with the effect of charges in the EBIT on the
earnings available to shareholders.
YEAR 2003-2004
Position of Mobilization and Development of funds
(Amount in RS. 000s)
Total liabilities
Sources of funds
Paid u capital
703225
Total assets
703225
162293
Secured Loans
Application of funds
Net fixed assets
Net current assets
Accumulated losses
116720
88146
78799
240433
Investments
Misc. Expenditure
10000
4827
477931
211462
Nil
928386
94859
1041.93
171195
481100 Investments
213820 Misc. Expenditure
Nil
61
13000
2986
1017320
Total assets
1017320
1623.48
Secured Loans
Application of funds
Net fixed assets
Net current assets
Accumulated losses
4015.28
93765
1086.23
195407
Investments
Misc. Expenditure
13000
4910
7055.88
2938.22
Nil
62
FINANCIAL LEVERAGE
INTRODUCTION:
Leverage, a very general concept, represents influence or power. In financial
analysis leverage represents the influence of a financial variable over same
other related financial variable.
Financial leverage is related to the financing activities of a firm. The sources from
which funds can be raised by a firm, from the viewpoint of the cost can be categorized into:
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DEFINITION:
Financial leverage is the ability of the firm to use fixed financial charges to
magnify the effects of changes in EBIT on EPS i.e., financial leverage involves the use of
funds obtained at fixed cost in the hope of increasing the return to shareholder.
The favorable leverage occurs when the Firm earns more on the assets
purchase with the funds than the fixed costs of their use. The adverse business conditions,
this fixed charge could be a burden and pulled down the companies wealth
MEANING OF FINANCIAL LEVERAGE:
As stated earlier a company can finance its investments by debt/equity. The
company may also use preference capital. The rate of interest on debt is fixed, irrespective
of the companys rate of return on assets. The company has a legal banding to pay interest
on debt .The rate of preference dividend is also fixed, but preference dividend are paid
when company earns profits. The ordinary shareholders are entitled to the residual income.
That is, earnings after interest and taxes belong to them. The rate of equity dividend is not
fixed and depends on the dividend policy of a company.
The use of the fixed charges, sources of funds such as debt and preference
capital along with owners equity in the capital structure, is described as financial
leverages or gearing or trading or equity. The use of a term trading on equity is
derived from the fact that it is the owners equity that is used as a basis to raise debt, that is,
the equity that is traded upon the supplier of the debt has limited participation in the
companies profit and therefore, he will insists on protection in earnings and protection in
values represented by owners equitys
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Financial leverage magnifies the shareholders earnings we also find that the
variability of EBIT causes EPS to fluctuate within wider ranges with debt in the capital
structure that is with more debt EPS raises and falls faster than the rise and fall in EBIT.
Thus financial leverage not only magnifies EPS but also increases its variability.
The variability of EBIT and EPs distinguish between two types of riskoperating risk and financial risk. The distinction between operating and financial risk was
long ago recognized by Marshall in the following words.
OPERATING RISK: -
Operating risk can be defined as the variability of EBIT (or return on total assets).
The environment internal and external in which a firm operates determines the variability of
EBIT. So long as the environment is given to the firm, operating risk is an unavoidable risk.
A firm is better placed to face such risk if it can predict it with a fair degree of accuracy.
Variability of sales
2.
Variability of expenses
65
1. VARIABILITY OF SALES:
The variability of sales revenue is in fact a major determinant of operating
risk. Sales of a company may fluctuate because of three reasons. First the changes in
general economic conditions may affect the level of business activity. Business cycle is an
economic phenomenon, which affects sales of all companies. Second certain events affect
sales of company belongings to a particular industry for example the general economic
condition may be good but a particular industry may be hit by recession, other factors may
include the availability of raw materials, technological changes, action of competitors,
industrial relations, shifts in consumer preferences and so on. Third sales may also be
affected by the factors, which are internal to the company. The change in management the
product market decision of the company and its investment policy or strike in the company
has a great influence on the companys sales.
2. VARIABILITY OF EXPENSES: Given the variability of sales the variability of EBIT is further affected by the
composition of fixed and variable expenses. Higher the proportion of fixed expenses
relative to variable expenses, higher the degree of operating leverage. The operating
leverage affects EBIT. High operating leverage leads to faster increase in EBIT when sales
are rising. In bad times when sales are falling high operating leverage becomes a nuisance;
EBIT declines at a greater rate than fall in sales. Operating leverage causes wide
fluctuations in EBIT with varying sales. Operating expenses may also vary on account of
changes in input prices and may also contribute to the variability of EBIT.
66
FINANCIAL RISK: For a given degree of variability of EBIT the variability of EPS and ROE increases
with more financial leverage. The variability of EPS caused by the use of financial leverage
is called financial risk. Firms exposed to same degree of operating risk can differ with
respect to financial risk when they finance their assets differently. A totally equity financed
firm will have no financial risk. But when debt is used the firm adds financial risk.
Financial risk is this avoidable risk if the firm decides not to use any debt in its capital
structure.
1)
67
The first two measures of financial leverage can be expressed in terms of book or
market values. The market value to financial leverage is the erotically more appropriate
because market values reflect the current altitude of investors. But, it is difficult to get
reliable information on market values in practice. The market values of securities fluctuate
quite frequently.
There is no difference between the first two measures of financial leverage in
operational terms. They are related to each other in the following manner.
These relationships indicate that both these measures of financial leverage will rank
companies in the same order. However, the first measure (i.e., D/V) is more specific as its
value ranges between zeros to one. The value of the second measure (i.e., D/S) may vary
from zero to any large number. The debt-equity ratio, as a measure of financial leverage, is
more popular in practice. There is usually an accepted industry standard to which the
companys debt-equity ratio is compared. The company will be considered risky if its debtequity ratio exceeds the industry-standard. Financial institutions and banks in India also
focus on debt-equity ratio in their lending decisions.
The first two measures of financial leverage are also measures of capital gearing.
They are static in nature as they show the borrowing position of the company at a point of
time. These measures thus fail to reflect the level of financial risk, which inherent in the
possible failure of the company to pay interest repay debt.
68
69
70
RATIO ANALYSIS: The primary user of financial statements are evaluating part performance and
predicting future performance and both of these are facilitated by comparison. Therefore the
focus of financial analysis is always on the crucial information contained in the financial
statements. This depends on the objectives and purpose of such analysis. The purpose of
evaluating such financial statement is different form person to person depending on its
relationship. In other words even though the business unit itself and shareholders, debenture
holders, investors etc. all under take the financial analysis differs. For example, trade
creditors may be interested primarily in the liquidity of a firm because the ability of the
business unit to play their claims is best judged by means of a through analysis of its
l9iquidity. The shareholders and the potential investors may be interested in the present and
the future earnings per share, the stability of such earnings and comparison of these
earnings with other units in thee industry. Similarly the debenture holders and financial
institutions lending long-term loans maybe concerned with the cash flow ability of the
business unit to pay back the debts in the long run. The management of business unit, it
contrast, looks to the financial statements from various angles. These statements are
required not only for the managements own evaluation and decision making but also for
internal control and overall performance of the firm. Thus the scope extent and means of
any financial analysis vary as per the specific needs of the analyst. Financial statement
analysis is a part of the larger information processing system, which forms the very basis of
any decision making process.
The financial analyst always needs certain yardsticks to evaluate the
efficiency and performance of business unit. The one of the most frequently used yardsticks
is ratio analysis. Ratio analysis involves the use of various methods for calculating and
interpreting financial ratios to assess the performance and status of the business unit. It is a
tool of financial analysis, which studies the numerical or quantitative relationship between
with other variable and such ratio value is compared with standard or norms in order to
highlight the deviations made from those standards/norms. In other words, ratios are
relative figures reflecting the relationship between variables and enable the analysts to draw
conclusions regarding the financial operations.
71
However, it must be noted that ratio analysis merely highlights the potential areas of
concern or areas needing immediate attention but it does not come out with the conclusion
as regards causes of such deviations from the norms. For instance, ABC Ltd. Introduced the
concept of ratio analysis by calculating the variety of ratios and comparing the same with
norms based on industry averages. While comparing the inventory ratio was 22.6 as
compared to industry average turnover ratio of 11.2. However on closer sell tiny due to
large variation from the norms, it was found that the business units inventory level during
the year was kept at extremely low level. This resulted in numerous production held sales
and lower profits. In other words, what was initially looking like an extremely efficient
inventory management, turned out to be a problem area with the help of ratio analysis? As a
matter of caution, it must however be added that a single ration or two cannot generally
provide that necessary details so as to analyze the overall performance of the business unit.
In order to arrive at the reasonable conclusion regarding overall performance of the
business unit, an analysis of the entire group of ratio is required. However, ration analysis
should not be considered as ultimate objective test but it may be carried further based on the
out come and revelations about the causes of variations. Some times large variations are due
to unreliability of financial data or inaccuracies contained there in therefore before taking
any decision the basis of ration analysis, their reliability must be ensured. Similarly, while
doing the inter-firm comparison, the variations may be due to different technologies or
degree of risk in those units or items to be examined are in fact the comparable only. It must
be mentioned here that if ratios are used to evaluate operating performance, these should
exclude extra ordinary items because there are regarded as non-recurring items that do not
reflect normal performance.
Ratio analysis is the systematic process of determining and interpreting the
numerical relationship various pairs of items derived form the financial statements of a
business. Absolute figures do not convey much tangible meaning and is not meaningful
while comparing the performance of one business with the other.
72
It is very important that the base (or denominator) selected for each ratio is
relevant with the numerator. The two must be such that one is closely connected and is
influenced by the other.
CONCLUSIONS
1)
2)
The interest charges were 492.21 in 2004 and 357.07in 2005 and 522.56 respectively
shows that the company redeemed fixed interest bearing funds from time to time out of
profit from 2003-2004.Debantures were partly redeemed with the help of debenture
redemption reserve and other references.
3)
The PAT (Profit After Tax) in 2005-2006 is at 340.78 lakhs. The PAT has increased in
prices in whole Cement industry during the above period. The profit has increased almost
15% during the period 2003-2006.
4)
5)
A steady transfer for dividend during 2003-2006 from P&L appropriation but in 2003
there is no adequate dividend equity Shareholders.
6)
The share capital of the company remained in charge during the three-year period
because of no public issues made by the company.
7)
The secured loans have decreased consistently from 2003-2005 and slight increase in
2006.
73
8)
The unsured loans have increased from 2003-2006. All the secured and an insecure loan
obtained by the company to optimize the leverage financially has some set books. Because
of non-payment of dividends to share holders. Because of less profit made during the
period.
9)
The reserves of the company steadily increase from 2003 to 2006. Because of less
transfer in P&L appropriation A/C and transfer to differed Tax. Thus marginalizing the
equity interest net worth of the company.
10)
The current ratio of the company in 2003-04 is at 2.08 and in 2004-05 at 1.98 and in
2005-06 at 1.95, which is as per the norms of the manufacturing Industry. The current Ratio
shows that the companys liquidity or short-term solvency is in a better position to pay off
the current liabilities as and when payable.
The quick ratio is also increased considerably during the period.
74
75
TECHNOLOICAL CHANGE
Cement industry has made tremendous strides in technological up gradation and
assimilation of latest technology. At present ninety three per cent of the total capacity
in the industry is based on modern and environment-friendly dry process technology
and only seven per cent of the capacity is based on old wet and semi-dry process
technology. There is tremendous scope for waste heat recovery in cement plants and
thereby reduction in emission level. One project for co-generation of power utilizing
waste heat in an Indian cement plant is being implemented with Japanese assistance
under Green Aid Plan. The induction of advanced technology has helped the industry
immensely to conserve energy and fuel and to save materials substantially. Indian is
also producing different varieties of cement like Ordinary Portland Cement (OPC),
Portland Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil
Well Cement, Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement,
White Cement etc. Production of these varieties of cement conform to the BIS
Specifications. It is worth mentioning that some cement plants have set up dedicated
jetties for promoting bulk transportation and export.
76
SUGGESTIONS:
1.
The company has to maintain the optimal capital structure and leverage so that in
coming years it can contribute to the wealth of the shareholders.
2.
The mining loyalty contracts should be revised so that it will decrease the direct in
the production
3.
The company has to exercise control over its out side purchases and overheads
which have effect on the profitability of the company.
4.
As the interest rates in pubic Financial institutions are in a decreasing trend after
globalization the company going on searching for loan funds at a less rate of interest as in
the case of UCO Bank.
5.
77
BIBLOGRAPHY
1)
Financial Management
2)
Financial Management
I.M. Pandey
3)
Financial Management
Prasanna Chandra
4)
Financial Management
R.P. Rastogi
5)
Strategic Management
6)
nclindustries.com
7)
News Papers
Financial Express
Economic Times
8)
Websites
www.nclind.com
www.google.com
78