• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
Capital structure efficiency of cement industry in tamil nadu
 

Capital structure efficiency of cement industry in tamil nadu

on

  • 646 views

 

Statistics

Views

Total Views
646
Views on SlideShare
646
Embed Views
0

Actions

Likes
2
Downloads
7
Comments
0

0 Embeds 0

No embeds

Accessibility

Categories

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    Capital structure efficiency of cement industry in tamil nadu Capital structure efficiency of cement industry in tamil nadu Document Transcript

    • INTERNATIONAL JOURNAL OF (2013) – 6502(Print), ISSN (IJM) International Journal of Management (IJM), ISSN MANAGEMENT 0976 – 6510(Online), Volume 4, Issue 1, January- February 0976ISSN 0976-6502 (Print)ISSN 0976-6510 (Online)Volume 4, Issue 1, January- February (2013), pp. 190-196 IJM© IAEME: www.iaeme.com/ijm.aspJournal Impact Factor (2012): 3.5420 (Calculated by GISI) ©IAEMEwww.jifactor.com CAPITAL STRUCTURE EFFICIENCY OF CEMENT INDUSTRY IN TAMIL NADU Dr.V.Sarangarajan1, Dr.S.A.Lourthuraj2, Dr.A.Ananth3 1 Director, Christhuraj Institute of Management, Panjappur, Trichy- 620 012 2 Asst.Professor, Jamal Institute of Management,Jamal Mohammed College, Trichy-20 3 HOD, Dept.of Management Studies, C.K.College of Engg.& Technology,Cuddalore – 03 ABSTRACT Capital structure is a combination of debt and equity of companies. Capital structure is most significant discipline of company’s operations. The researchers carried out the study with the objective of finding out the capital structure management efficiency of cement industry in Tamil Nadu. Ten years data has been employed in this study from 1996-97 to 2005-2006. To find out the capital structure management efficiency the authors employed DEA by an application of KonSI DEA Analysis for Benchmarking Software Professional Version. The authors found that the result of increase in interest cost and costly unsecured loan affected these companies capital structure. Internal funds mobilization, right issue, and higher internal accrual will help the companies to sustain decent bottom-line. Key words: Debt, Equity, Capital Structure, Data Envelopment Analysis, cement industry I. INTRODUCTION Capital Structure is a combination of debt and equity capital maintained by a firm. Capital structure is also called as financial structure of a firm. A companys proportion of short and long-term debt is considered when analyzing capital structure. Most of the authors used debt-to-equity ratio for evaluating capital structure, 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. B.Nimalathasan & Valeriu Brabete (2010) pointed out capital structure and its impact on profitability: a study of listed manufacturing companies in Sri Lanka. The analysis shows that Dept equity ratio is positively and strongly associated to all profitability ratios (Gross Profit, Operating Profit & Net Profit Ratios). DEA measures efficiency of a Decision Making Unit (DMU) by maximizing the ratio of weighted outputs over weighted inputs. This ratio is normalized according to best practical peers and efficiency 190
    • International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 –6510(Online), Volume 4, Issue 1, January- February (2013)is calculated to be between 0 and 1, as 1 representing efficient unit. In this research theauthors make use of DEA in cement industry to find out the Capital Structure Managementefficiency.II. REVIEW OF LITERATURE Chakraborty (2010) employed two performance measures, including ratio of profitbefore interest, tax and depreciation to total assets and ratio of cash flows to total assets andtwo leverage measures, including ratio of total borrowing to assets and ratio of liability andequity, and reported a negative relation between these ones. Ebaid (2009) investigates the impact of capital structure choice on performance of 64firms from 1997-2005 in the Egyptian capital market. He employs three accounting –basedmeasures including ROA, ROE and gross profit margin, and concludes capital structurechoices, generally, has a weak –to- no impact on firm performance. Ong Tze San and Boon Heng Teh (2011) focused on construction companies whichare listed in Main Board of Bursa Malaysia from 2005-2008, the result shows that there is arelationship between capital structure and corporate performance and there is also evidencethat shows that no relationship between the variables have been investigated. Puwanenthiren Pratheepkanth. (2011) analyzed the capital structure and its impact onfinancial performance capacity during 2005 to 2009 of Business companies in Sri Lanka. Theresults shown the relationship between the capital structure and financial performance isnegative. Saad (2010). The argument about the capital structure started in the early of 1950Chakra borty (2010) suggested that in the perfect market, financing strategies do not affectthe value of the firm, but later they argue that firm value can be increased by changing thecapital structure because of tax advantage of debts Modigliani and Miller (1963). Ali Saeedi and Mahmoodi (2011)examines the relationship between capital structureand firm performance the study used sample of 320 firms listed on Tehran Stock exchangeover the period 2002- 2009. Expect all of the financial companies and banks, the study usesfour performance measures (including ROA, ROE, EPS and Tobin’s Q) as dependentvariable and three capital structures (including long- term debt short –term debt and total debtratio) as independent variable. The study indicated that firm performances, which is measuredby EPS and Tobin’s Q, is significantly and positively associated with capital structure, whilereported a negative relation between capital structure and ROA, and no significantrelationship between ROE and Capital structure. Zertun and Tian (2007) investigated the effect which capital structure has had oncorporate performance using a panel data sample representing of 167 Jordanian companiesduring 1989- 2003. The study showed that a firm’s capital structure had significantly negativeimpact on the firm’s performance measures, in both the accounting and market’s measures. Chen and Manso (2010) emphasize that incorporating macroeconomic risk canincrease agency costs of debt substantially. Morellec and Schuerhoff (2011) focus on the implications of asymmetric informationon the financing and timing of corporate investment. Hackbarth and Mauer (2011) study the relation between the priority structure ofcorporate debt and firms investment and financing decisions. Nadeem and Wang (2010) investigate the influencing factors on capital structuredecisions. They find positive significant relationship between capital structure and firm’ssize. 191
    • International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 –6510(Online), Volume 4, Issue 1, January- February (2013)III. METHODOLOGY The pooled data collection is to assess the impact of regulation on performance ofcement companies in Tamil Nadu over the time horizon viz., 1996-97 to 2005-06. Theapproach to macroeconomic variables is time series. The design of the study is based on thesecondary sources of information on financial data. The secondary data is practically, aquantitative method that requires standardized information in order to define or describevariables or to study the relationships between the variables. The data was tested forsuitability using simple statistical tools such as standard deviation, standard error of thesample. Due to non- accessibility of sensitive company data, the effect of windowdressing could not be ascertained. However , Data was accepted as these were frequentlyinspected by SEBI and Institute of Charted Accountants of India . The study, it was felt,will be useful if the random sample drawn from the population of cement industry in the stateof Tamil Nadu. T he present study includes India Cements Limited (ICL), Dalmia Cement(Bharat) Limited (DCL), Madras Cements Limited (MCL) and Chettinadu CementCorporation Limited (CCCL). Data first analyzed and experimented using non-parametric econometric Data Envelopment Analysis (DEA) programming approach forScale efficiency.IV. RESULTS AND DISCUSSIONTable 1.Capital Structure Efficiency Score of India Cements Limited, Dalmia Cement(Bharat) Limited, Madras Cements Limited, Chettinadu Cement Corporation Limitedand Sample Total of cement industry in Tamil Nadu. Efficiency Scores Year/ ICL DCL MCL CCCL Sample Company Industry 1996 1.0000 1.0000 1.0000 0.9163 0.9508 1997 0.9271 0.7014 0.7227 1.0000 1.0000 1998 1.0000 0.7476 0.9199 1.0000 1.0000 1999 0.5561 0.8036 1.0000 0.7595 0.5358 2000 0.5424 0.7584 0.9058 0.8756 0.5385 2001 0.4913 0.7987 0.7936 1.0000 0.4912 2002 0.3836 1.0000 0.5022 0.5931 0.4195 2003 0.3448 1.0000 0.5258 0.7321 0.3524 2004 1.0000 1.0000 0.5760 0.6122 0.8752 2005 0.9925 0.5781 1.0000 0.6235 0.6276 Inputs: Secured Loan,Un Secured Loan and Current Liabilities Output: Share Holders Wealth Model : output oriented model Scale : Constant returns- to- ScaleSource: Published Annual Reports of the companies, KonSI DEA Analysis forBenchmarking Software Professional Version. 192
    • International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 –6510(Online), Volume 4, Issue 1, January- February (2013)1. Capital Structure Efficiency of India Cements Limited (ICL)Table 1 and Bar chart in figure 1 reveal the efficiency scores of ICL. The efficient years(1996, 1998 and 2004) have scores one. DEA measures efficiency of a Decision Making Unit(DMU) by maximizing the ratio of weighted outputs over weighted inputs. This ratio isnormalized according to best practical peers and efficiency is calculated to be between 0 and1, as 1 representing efficient unit. The value 0.3448 is the inefficient score of the year 2003means that its output can simultaneously be increased by a factor of 190.02%. From the DataEnvelopment Analysis , the conclusion drawn that the ICL has efficiently utilized their debtslike secured loan, unsecured loan and current liabilities to maximize the return in the form ofshareholders fund except during the years 1997,1999-2003 and 2005 . The DataEnvelopment Analysis states that the ICL is also not that much efficient company in so for asCapital Structure efficiency is concerned. Cost of funds is playing an important role ininefficient capital structure management. Fig.1. Capital Structure Efficiency of India Cements Limited (ICL) Efficie ncy s cor e of India ce me nts limite d 1.0 0.8 efficiency score 0.6 0.4 0.2 0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 ye ar2. Capital Structure Efficiency of DalmiaCement (Bharat) Limited (DCL)Table 1 and Bar chart in figure2 reveal efficiency scores of DCL. The efficient years (1996,2002, 2003 and 2004) have scores one. The value 0.5781 is the inefficient score of the year2005 means that its output can simultaneously be increased by a factor of 72.98%. From theabove Data Envelopment Analysis, the conclusion drawn that, the DCL has efficientlyutilized their debts like secured loan, unsecured loan and current liabilities to maximize thereturn in the form of shareholders fund except during the years 1997, 1997-2001 and 2005.The Data Envelopment analysis states that the DCL is also had least efficient company in sofor as capital structure efficiency is concerned. Cost of funds is playing an important role indebt efficiency. 193
    • International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 –6510(Online), Volume 4, Issue 1, January- February (2013) Fig.2. Capital Structure Efficiency of DalmiaCement (Bharat) Limited (DCL) E f fic ie n c y o f D a lm ia C e m e n t ( B h a r a t) L im ite d 1 .0 0 .8 Efficiency Score 0 .6 0 .4 0 .2 0 .0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year3. Capital Structure Efficiency of Madras Cements Limited (MCL)Table 1 and Bar chart in figure 3 reveal the efficiency scores of MCL. The efficient years(1996, 1999 and 2005) have scores one. The value 0.5022 is the inefficient score of the year2002 means that its output can simultaneously be increased by a factor of 99.98% From theabove Data Envelopment Analysis, the conclusion drawn that the MCL has efficientlyutilized their debts like secured loan, unsecured loan and current liabilities to maximize thereturn in the form of shareholders fund except during the years 1997, 1998 and 2000-2004.The Data Envelopment Analysis clearly states that the MCL is also had less efficientcompany in so for as capital structure efficiency is concerned. Cost of funds is playing animportant role in debt management. Fig.3. Capital Structure Efficiency of Madras Cements Limited (MCL) E ff ic i e n c y S c o r e o f M a d r a s C e m e n ts L im ite d 1 .0 0 .8 Efficiency Score 0 .6 0 .4 0 .2 0 .0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year 194
    • International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 –6510(Online), Volume 4, Issue 1, January- February (2013)4. Capital Structure Efficiency of Chettinadu Cement Corporation Limited (CCCL)Table 1 and Bar chart in figure 4 reveal the efficiency scores of CCCL. The efficient years (1997,1998 and 2001) have scores one. The value 0.5931 is the inefficient score of the year 2003 means thatits output can simultaneously be increased by a factor of 68.60% From the above Data EnvelopmentAnalysis, the conclusion drawn that, the CCCL has efficiently utilized their debts like secured loan,unsecured loan and current liabilities to maximize the return in the form of shareholders fund exceptduring the years 1996, 1999, 2000, and 2002 - 2005. Fig.4. Capital Structure Efficiency of Chettinadu Cement Corporation Limited (CCCL) E ffic ie n c y S c o r e o f C h e tti n a d u C e m e n t C o r p o r a tio n L im ite d 1 .0 0 .8 Efficiency Score 0 .6 0 .4 0 .2 0 .0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year5. Capital Structure Efficiency of Cement Industry in Tamil NaduTable 1 and Bar chart in figure 5 reveal efficiency score of sample total of cement industry in TamilNadu. The efficient years (1997 and 1998) have scores one. The value 0.3524 is the inefficient scoreof the year 2003 means that its output can simultaneously be increased by a factor of 183.76%. Fromthe above Data Envelopment Analysis, the conclusion drawn that, the cement industry in Tamil Naduhas efficiently utilized their debts like secured loan, unsecured loan and current liabilities to maximizethe return in the form of shareholders fund except during the years 1996, and 1999 - 2005. Fig.5. Capital Structure Efficiency for the Sample Total of Tamil Nadu Cement Industry E ffic ie n c y fo r th e S a m p le T o ta l o f T a m il N a d u C e m e n t In d u s tr y 1 .0 0 .8 Efficiency Score 0 .6 0 .4 0 .2 0 .0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year 195
    • International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 –6510(Online), Volume 4, Issue 1, January- February (2013)V. CONCLUSION From the above Data Envelopment Analysis, the conclusion drawn that, the cementindustry in Tamil Nadu efficiently utilized their debts like secured loan, unsecured loan andcurrent liabilities to maximize the return in the form of shareholders fund except during theyears 1996 and1999-2005. This can be seen through raise in secured loan as resulted in fallin unsecured loan and vice versa till 2000. There has been increase the level of secured loanmobilized which has declined in operation and high cost unsecured loan moreover restrictionon public deposits mobilization. The inefficient operations can be seen through decliningprofit. The high negative bottom-line during 2003 and 2004 is result of increase in interestcost and costly unsecured loan. Internal funds mobilization, right issue, and higher internalaccruals will help the companies to sustain decent bottom-line.REFERENCES1) Ali Saeedi and Iman Mahmoodi, 2011. “Capital Structure and Firm Performance: Evidencefrom Iranian Companies”. International Research Journal of Finance and Economics.2) Banker RD, Charnes A, Cooper WW (1984). Some Models for Estimating Technical andScale Inefficiency in Data Envelopment Analysis. Manage. Sci., 30(9):1078-1092.3) Chakraborty, I., 2010. “Capital structure in an emerging stock market: The case of India”,Research in International Business and Finance, Vol. 24, pp. 295-314.4) Charnes A, Cooper WW, Rhodes E (1978). Measuring the Efficiency of Decision MakingUnits. Eur. J. Oper. Res., l: 2(6):429-444.5) Chen, H., and G. Manso, 2010, Macroeconomic risk and debt overhang, Working Paper,MIT.6) Ebaid, E. I., 2009. “The impact of capital-structure choice on firm performance: empiricalevidence from Egypt”, The Journal of Risk Finance, Vol. 10, No. 5, pp. 477-4877) Hackbarth, D., and D. Mauer, 2011, optimal priority structure, capital structure, andinvestment, forthcoming, Review of Financial Studies.8) Modigliani, F. F. & Miller, M. H. (1963). Corporation income taxes and the cost of capital:acorrection. American Economic Review, 53(3), 433–443.9) Morellec, E., and N. Schuerhoff, 2011, corporate investment and financing under asymmetricinformation, Journal of Financial Economics 99: 262-288.10) Nadeem, A. and Wang, Z. 2010. “Financing Behavior of Textile Firms in Pakistan”.International Journal of Innovation, Management and Technology, Vol. 1, No. 2, June2010130-135.11) Nimalathasan, B., Valeriu B., 2010 Capital Structure and Its Impact on Profitability: A Studyof Listed Manufacturing Companies in Sri Lanka (2010), Revista Tinerilor Economist/The YoungEconomists Journal 13,55-6112) Ong Tze San and Boon Heng Teh. 2011. “Capital Structure and Corporate Performance ofMalaysian Construction Sector”. International Journal of Humanities and Social Science, 1(2):28-36.13) Puwanenthiren Pratheepkanth, 2011. “Capital Structure and Financial Performance: Evidencefrom Selected Business Companies in Colombo Stock Exchange Sri Lanka”. Journal of Arts, Science& Commerce.14) Saad, N. M. (2010). Corporate Governance Compliances and the Effects to capital Structure.International Journal of Economics and Financial, 2(1), 105-114.15) Zeitun, R. and Tian, G., 2007. “Capital structure and corporate performance: evidence fromJordan”, Australasian Accounting Business and Finance Journal, Vol. 1, pp. 40-4516) Jyotsna Ghildiyal Bijalwan, “Corporate Governance System In India” InternationalJournal of Management (IJM), Volume 3, Issue 2, 2012, pp. 260-269, Published by IAEME. 196