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    R power final R power final Document Transcript

    • A Project Report On“STUDY ON CAPITAL STRUCTURE OF RELIANCE POWER AND COMPARISION WITH OTHER COMPANY”International Institute of Information Technology Submitted By VIVEK SETHIA NISHIT DHOLAKIA NITIN KIRNAPURE (BM JULY-09)International Institute of Information Technology P-14 RAJIV GANDHI INFOTECH PARK HINJEWADI PUNE –411057 (2010-11)
    • Project Report on Power Sector Capital Structure In Comparison with IT , FMCG & Automobile Industry
    • IndexSR. NO. TOPIC 1. Project Introduction 2. Capital Structure (Theory) 3. Factor affecting Capital Structure 4. Company Profile of Reliance Power 5. Capital Structure of Reliance Power 6. Company Profile of Tata Power 7. Capital Structure of TATA Power 8. Company Profile of NTPC 9. Capital Structure of NTPC 10. Company Profile of TATA Motors 11. Capital Structure of TATA Motors 12. Company Profile of HUL 13. Capital Structure of HUL 14. Company Profile of Infosys 15. Capital Structure of Infosys
    • Project Introduction The Project is all about study of Capital Structure of Power Sector. How the Co. raisefunds to finance their project on power generation. Apart from it we have done someresearch on other industry one from each sector of IT, FMCG and Automobile industryCompany Studied Are:-1. RELIANCE POWER2. TATA POWER3. NTPC4. TATA MOTOR5. HUL6. INFOSYSCapital Structure - What It Is and Why It Matters The term capital structure refers to the percentage of capital (money) at work in a businessby type. Broadly speaking, there are two forms of capital: equity capital and debt capital. Each has itsown benefits and drawbacks and a substantial part of wise corporate stewardship and management is attempting to find the perfect capital structure in terms of risk / reward payoff for shareholders.
    • CAPITAL STRUCTURE The combination of debt and equity used to finance a firm’s projects is referred to as its capital structure. The capital structure of a firm is some mix of debt, internally generated equity, and new equity. But what is the right mixture? The best capital structure depends on several factors. Theories of Capital structure1. Pecking Order Theory In the theory of firms capital structure and financing decisions, the Pecking Order Theory or Pecking Order Model was developed by Stewart C. Myers and Nicolas Majluf in 1984. It states that companies prioritize their sources of financing (from internal financing to equity) according to the Principle of least effort, or of least resistance, preferring to raise equity as a financing means of last resort. Hence, internal funds are used first, and when that is depleted, debt is issued, and when it is not sensible to issue any more debt, equity is issued.2. Trade-Off Theory The Trade-Off Theory of Capital Structure refers to the idea that a company chooses how much debt finance and how much equity finance to use by balancing the costs and benefits. The classical version of the hypothesis goes back to Kraus and Litzenberger who considered a balance between the dead- weight costs of bankruptcy and the tax saving benefits of debt. Often agency costs are also included in the balance. This theory is often set up as a competitor theory to the Pecking Order Theory of Capital Structure. A review of the literature is provided by Frank and Goyal.
    • An important purpose of the theory is to explain the fact that corporationsusually are financed partly with debt and partly with equity. It states that there isan advantage to financing with debt, the tax benefits of debt and there is a costof financing with debt, the costs of financial distress including bankruptcy costsof debt and non-bankruptcy costs (e.g. staff leaving, suppliers demandingdisadvantageous payment terms, bondholder/stockholder infighting, etc). Themarginal benefit of further increases in debt declines as debt increases, whilethe marginal cost increases, so that a firm that is optimizing its overall valuewill focus on this trade-off when choosing how much debt and equity to use forfinancing. 3. Agency Cost A type of internal cost that arises from, or must be paid to, an agent acting on behalf of a principal. Agency costs arise because of core problems such as conflicts of interest between shareholders and management. Shareholders wish for management to run the company in a way that increases shareholder value. But management may wish to grow the company in ways that maximize their personal power and wealth that may not be in the best interests of shareholders. Agency Costs Some common examples of the principal-agent relationship include: management (agent) and shareholders (principal), or politicians (agent) and voters (principal). Agency costs are inevitable within an organization whenever the principals are not completely in charge; the costs can usually be best spent on providing proper material incentives (such as performance bonuses and stock options) and moral incentives for agents to properly execute their duties, thereby aligning the interests of principals (owners) and agents.
    • FACTORS AFFECTING CAPITAL STRUCTURE Size of the company Growth and Stability of Sales Growth Opportunities Profit Margin Tangible Assets Cash Flow Ability Taxes Non-debt Tax shield Risk Floatation Cost Financial Slack Cost of Financial Distress1. Size:- From the theoretical point of view, the effect of size on leverage is ambiguous. “Larger firms tend to be more diversified and fail less often, so size may be an inverse proxy for the probability of bankruptcy. If so, size should have a positive impact on the supply debt. However, size may also be a proxy for the information outside investors have, which should increase their preference for equity relative to debt.2. Growth and Stability of Sales:- There are no consistent theoretical predictions on the effects of Growth in sales on leverage. If company’s sales are growing then and there is more possibility of increase in sales growth rate then company should use more equity financing but it will be affect by profit margin. If profit is increasing than company should prefer more leverage because it will give tax shield. If company’s sales are stable and sales are growing at a steady rate company should not prefer high leverage. Because it’s increase cost of capital.
    • 3. Growth Opportunity: Firms with high future growth opportunities should use more equity financing, because a higher leveraged company is more likely to pass up profitable investment opportunities. If there is a growth opportunity then such an investment effectively transfers wealth from stockholders to debt holders. Therefore a negative relation between growth opportunities and leverage is predicted. As market-to-book ratio is used in order to proxy for growth opportunities, there is one more reason to expect a negative relation – “The theory predicts that firms with high market-to-book ratios have higher costs of financial distress, which is why we expect a negative correlation.”4. Profit margin:- There are no consistent theoretical predictions on the effects of profitability on leverage. From the point of view of the trade-off theory, more profitable companies should have higher leverage because they have more income to shield from taxes. The free cash-flow theory would suggest that more profitable companies should use more debt in order to discipline managers, to induce them to pay out cash instead of spending money on inefficient projects. However, from the point of view of the pecking-order theory, firms prefer internal financing to external. So more profitable companies have a lower need for external financing and therefore should have lower leverage.5. Tangible assets:- It is assumed, from the theoretical point of view that tangible assets can be used as collateral. Therefore higher tangibility lowers the risk of a creditor and increases the value of the assets in the case of bankruptcy. The more tangible the firm’s assets, the greater its ability to issue secured debt and the less information revealed about future profits. Thus a positive relation between tangibility and leverage is predicted.6. Cash flow:- If free cash flow is showing increasing trend then company should prefer less leverage. If free cash flow is not increasing or is not sufficient then company can increase leverage based on growth rate or growth opportunity and profit margin and other factors.7. Taxes According to the trade-off theory, a company with a higher tax rate should use more debt and therefore should have higher leverage, because it has more income to shield from taxes.8. Non-debt Tax shield:- Other items apart from interest expenses, which contribute to a decrease in tax payments, are labelled as non-debt tax shields (for example the tax deduction for depreciation). Depreciation is an effective tax shield, and thus it offsets the tax shield benefits of leverage. So Non-debt tax shield has a negative relation with leverage.
    • 9. Risk:- Here risk means probability of bankruptcy. So risks have negative relation with leverage.10. Floatation Cost The expense involved in selling a new security issue. This expense includes items such as registration of the issue and payment to the investment banker. Flotation costs depend on the size and riskiness of an issue as well as on the type of security to be sold. If floatation cost increase its increase cost of capital. So floatation cost has negative relation with leverage.11. Financial Slack Financial Slack can be defined as the amount of funds a firm has available to invest without visiting the external financial markets after paying interest and before paying dividends and Depreciation. The following factors influence whether firms should have more equity (financial slack) or more Debt in their capital structures. Firms Track Record of Picking Good Investments. The likelihood of good investments and opportunities rising.12. Financial Distress:- A condition where a company not able to meet or has difficulty paying off its financial obligations to its creditors. The chance of financial distress increases when a firm has high fixed costs, illiquid assets, or revenues that are sensitive to economic downturns. A company under financial distress can incur costs related to the situation, such as more expensive financing, opportunity costs of projects and less productive employees. The firms cost of borrowing additional capital will usually increase, making it more difficult and expensive to raise the much needed funds. In an effort to satisfy short-term obligations, management might pass on profitable longer-term projects. And financial distress has a negative relation with leverage.13. Dividend policy:- Some time dividend policy will affect the capital structure. Sometime company have a policy to pay high amount of profit as a dividend then this type of condition will affect the capital structure in recession time or company have a shortage of investment in near future time to maintain a high growth rate and to maintain dividend policy.
    • Company Profile Of Power Sector
    • (Shri. Anil Dhirubhai Ambani)
    • Reliance Power Limited is a part of the Reliance Anil Dhriubhai Ambani Group group,one of India‟s largest business houses. The group comprises companies in thetelecommunications, financial services, media and entertainment, infrastructure and energysectors. The energy sector companies include Reliance Infrastructure Ltd, RelianceNatural Resources Limited and Reliance Power Limited.Reliance Power has been established to develop the Reliance Anil Dhirubhai Ambani Groupand is established to develop, construct and operate power projects domestically andinternationally. The Company on its own and through subsidiaries has a portfolio of almost35,000 MW of power generation capacity, both operational as well as under development.The power projects are planned to be diverse in geographic location, fuel type, fuel sourceand off-take, and each project is planned to be strategically located near an available fuelsupply or load center. The company has 600 MW of operational power generation assets. Theprojects under development include seven coal-fired projects to be fueled by reserves fromcaptive mines and supplies from India and abroad, two gas-fired projects to be fueledprimarily by reserves from the Krishna Godavari Basin (the "KG Basin") off the east coast ofIndia, and seven hydroelectric projects, six of them in Arunachal Pradesh and one inUttarakhand.The company has won three of the four Ultra Mega Power Projects (Sasan UMPP,Krishnapatnam UMPP & Tilaiya UMPP) awarded by the Govt of India till date. The UMPPis an initiative by the government to collaborate with power generation companies to set up4,000 MW projects to ease the country‟s power deficit situation.Besides these, Reliance Power is also considering the development of coal bed methane(CBM) power generation projects based from CBM blocks being exposed by its affiliates.The company is also planning to register projects with the Clean Development Mechanismexecutive board for issuance of CER certificates to augment its revenues
    • Mission  To attain global best practices and become a leading power generating company.  To achieve excellence in project execution, quality, reliability, safety and operational efficiency.  To relentlessly pursue new opportunities, capitalizing on synergies in the power generation sector.  To consistently enhance our competitiveness and deliver profitable growth.  To practice highest standards of corporate governance and be a financially sound company.  To be a responsible corporate citizen nurturing human values and concern for society.  To improve the lives of local community in all our projects.  To be a partner in nation building and contribute towards India’s economic growth.  To promote a work culture that fosters learning, individual growth, team spirit and creativity to overcome challenges and attain goals.  To encourage ideas, talent and value systems and become the employer of choice.  To earn the trust and confidence of all stakeholders, exceeding their expectations.  To uphold the guiding principles of trust, integrity and transparency in all aspects of interactions and dealings.Vision  To build a global enterprise for all our stakeholders  To be the largest private sector power generation company in India  To be the largest hydro power generation company in India  To be the largest green power company in India  To be the largest coal mining company in IndiaBoard of Directors  Shri. Anil Dhirubhai Ambani  Shri S. L. Rao  Shri J. L. Bajaj  Dr. V. K. Chaturvedi  Shri. K.H. Mankad  Dr. Yogendra Narain
    • Capital structure of R-PowerR-Power is a fully equity finance company as on 31-03-2010. R-power capital structureis good and it is as per company condition and company requirement and futuregrowth.Year 2006 2007 2008 2009 2010Equity 0.05 200.04 2,259.95 2,396.80 2,396.80Debt 0.00 0.00 0.00 0.00 0.00Total 0.05 200.04 2,259.95 2,396.80 2,396.80Equity ratio 1 1 1 1 1Debt ratio 0 0 0 0 0Cost of Equity 0 0 0 20.86 14.13Cost of Debt 0 0 0 0 0WACC 0 0 0 20.86 14.13Revenue (sales + Other) - - 112.83 273.81 223.79Profit Margin:Net Profit Margin - 7.19 83.9 90.9 122.09Return On Long term Fund - 0.68 0.64 1.45 0.89EPS -25.57 0.01 0.41 1.04 1.14DPS 0 0 0 0 0
    • Leverage ratiosLong term debt / Equity - - - - -Total debt/equity - - - - -Owners fund as % of - 100 100 100 100total sourceFixed assets turnover - 0.03 - - -ratioLiquidity ratiosCurrent ratio 1.72 9.16 12.6 167.36 189.31Current ratio (inc. st 1.72 9.16 12.6 167.36 189.31loans)Quick ratio 1.72 9.16 12.6 167.36 189.31Inventory turnover ratio - - - - -Payout ratiosDividend payout ratio - - - - -(net profit)Dividend payout ratio - - - - -(cash profit)Earning retention ratio - 100 100 100 100Cash earnings retention - 100 100 100 100ratioCoverage ratiosAdjusted cash flow time - - - - -total debtFinancial charges - 1.67 15.27 113.42 74.91coverage ratioFin. charges cov.ratio - 1.2 17.54 142.03 162.62(post tax)Free Cash flow -0.13 -38.88 -4811.17 -2271.98 765.22TAX 0.02 0.38 6.2 7.57 15.71Non Debt Tax ShieldDepriciation - - - 0.2 0.51
    • Factors affecting Capital Structure R-Power1. Size :- Reliance Power Limited is a part of the Reliance Anil Dhriubhai Ambani Group, one of India‟s largest business houses. The group comprises companies in the telecommunications, financial services, media and entertainment, infrastructure and energy sectors. The energy sector companies include Reliance Infrastructure Ltd, Reliance Natural Resources Limited and Reliance Power Limited. Reliance Power has been established to develop the Reliance Anil Dhirubhai Ambani Group and is established to develop, construct and operate power projects domestically and internationally. The Company on its own and through subsidiaries has a portfolio of almost 35,000 MW of power generation capacity, both operational as well as under development Reliance power is a big company and when it comes into market in 2008. That was the biggest IPO in Indian Capital market history. So here R power can raise debt without any problem but R-Power is an initial stage and production will start from 2011. So leverage is not good for company because its increase cost of capital and cash will be go out for company. R-Power is fully equity company its good for company because there will be high growth opportunity in future. More debt means extra burden on cash and its affect investment and its not good for company in future.2. Growth and stability in Revenue:- R-Power production will start from 2011. So here is not income from sales. In this case growth and stability of revenue does not affect the capital structure of R-Power. R- Power other income is growing and showing increasing trend and its shows a negative relation with leverage but profit margin is also increasing so in this condition company should use debt financing.3. Growth opportunity:- In energy and power sector there are lots of opportunities and India has deficit of energy and power. So company have a very good growth opportunity and company will grow with high growth rate. High growth opportunity has a negative relation with leverage.4. Profit Margin:- From 2008 company profit margin is increasing and company have to pay tax on it. If profit margin is high company should use leverage to save tax. EPS is also increasing from 2007. But company is not using leverage because company is in his initial stage and company require the cash to invest in the plant and machinery. Company assuming that company will grow at higher rate in future so company is not using leverage. As sales will increase in future time, company may use leverage to save taxes.
    • 5. Tangible Assets:- Fixed asset are increasing and it will help the company to raise debt from market. But company is in his initial stage and it is high growth company and so company prefer no leverage but in near future this factor will help to lever the company.6. Cash Flow:- In this company free cash flow is negative. In this case equity finance is better rather than debt financing. Free Cash Flow NOPAT -0.13 0.17 75.47 190.81 108.97 Add: DEP 0 0 0 0.2 0.51 Less: Change in 0 38.55 4,886.50 2,452.22 -658.72 WC Less: Capital 0 0.5 0.14 10.77 2.98 Expenditure Free Cash flow -0.13 -38.88 -4811.17 -2271.98 765.227. Taxes:- Production will start from 2011. So here tax will not affect the capital structure. All other factors are in favour of equity finance rather than debt finance.8. Non- debt Tax shield:- In R-Power depreciation is negligible. So this factor is not effective in this case.9. Risk:- Bankruptcy cost is in this case is negligible because R-power belongs to ADAG Group. So here is no bankruptcy cost because of financial support from ADAG Group and R- Power is a Big name in Indian market.10. Dividend policy:- Right now company is not paying any dividend. And this kind of policy help in equity finance company.
    • Conclusion:- R-Power is fully equity finance company because there are following reason: Company is in his initial stage. High growth company. High growth opportunity in near future time. Right now production is not started. Company need high investment. Company have a big financial support of ADAG group. Company have no fear of high tax. So above factors are favour in fully equity finance. So company prefer no leverage. Because of this company have Zero dividend policy.
    • (Chairmen:- Shri Ratan Tata)Lighting up Lives! Recognised as India‟s largest private sector power utility, with a reputation fortrustworthiness, built up over nearly nine decades, Tata Power surges ahead into yet anotheryear with plans of sustained growth, greater value to consumer and reliable power supply. Led by a powerful vision, Tata Power pioneered the generation of electricity in India.It has now successfully served the Mumbai consumers for over ninety years and has spreadits footprints across the nation. Today, it is the country‟s largest private player in the sector.Apart from Mumbai and Delhi, the company has generation capacities in Jojobera, Jharkhandand Karnataka. Tata Power has an installed power generation capacity of about 3000 Mega Watts,with the Mumbai power business, which has a unique mix of Thermal and Hydro Power,generated at the Thermal Power Station, Trombay, and the Hydro Electric Power Stations atBhira, Bhivpuri and Khopoli, accounting for 1797 MW. Its diverse generation capabilityfacilitates the company in producing low cost energy, thereby giving its consumers a greatervalue for money. Among its many achievements that Tata Power can proudly boast of are theinstallation and commissioning of India‟s first 500 MW unit (at its Thermal PowerGenerating Station, Trombay) the 150 MW Pumped Storage Unit at its Hydro GeneratingStation, Bhira, and environmental control systems like the Flue Gas Desulphurisation plant. Tata Power has a first of its kind joint venture with Power Grid Corporation of Indiafor the 1200 km Tala Transmission Project.
    • North Delhi Power Limited A joint venture with the State Government of Delhi for its North Delhi consumers, theNDPL serves over 8 lakhs satisfied consumers with a peak load of 1050 MW, also providingstate-of-the-art technology driven processes for enhancing consumer billing and relatedservices. Tata Power Trading Company Limited (TPTCL), a wholly owned subsidiary of theTata Power Company has been awarded the first ever power trading license by the CentralElectricity Regulatory Commission (CERC) under section 14 of the Electricity Act 2003,enabling it to carry out transactions all over India.International Projects Leveraging upon its engineering skills and understanding of the power business, TataPower has carried out several overseas projects and successfully completed erection, testingand commissioning of major power projects in Saudi Arabia, Bangladesh, Kuwait, Algeria,Myanmar and Thailand. The company has also undertaken projects pertaining to power plant/ operations management and plant operations training.Strategic Electronics Division (SED) The Strategic Electronics Division of Tata Power has been in operation for over 30years and has been pursuing development and production activities for the Indian defencesector. SED successfully developed the Multi Barrel Rocket Launcher, „Pinaka‟, proven inthe field through extended user trials which led to its induction into the Indian Army. TheDivision has developed specialised equipment for Air Defence and Naval Combat systems.Corporate Social Responsibility Tata Power is committed to setting high standards in its pursuit of socialresponsibility and remaining sensitive to the issues of resource conservation, environmentprotection and enrichment and development of local communities in its areas of operations.The company has a simple philosophy that guides its activities in these matters, “Giving backis a means towards going ahead". Our widespread programmes on biodiversity conservation, afforestation, pisciculture,family planning, health services, primary and secondary education and many more have madeinroads into the tiny hamlets and tribal regions of our hydro catchment areas and it is ourendeavour to light up these dark and narrow streets to new dawns.
    • Capital structure of Tata PowerTata Power is a levered company as on 31-03-2010.Year 2006 2007 2008 2009 2010Equity 197.92 197.92 220.72 221.44 237.33Debt 2,796.81 3,675.52 3,083.35 5,247.06 5,963.42Total 2,994.73 3,873.44 3,304.07 5,468.50 6,200.75Equity ratio 0.0660894 0.0510967 0.0668025 0.0404937 0.038274Debt ratio 0.9339106 0.9489033 0.9331975 0.9595063 0.961726Cost of Equity 25.08 33.6 12.89 19.69 19.25Cost of Debt 5.4569313 5.09070825 5.5725104 6.2078574 7.053671WACC 5.02 4.89 4.28 4.77 5.22Growth in sales 4,553.23 4,918.53 5,909.60 7,257.05 7,104.22Profit Margin:Net Profit Margin 12.92 13.26 14.35 12.32 12.88Return On Long term Fund 8.72 7.62 7.18 7.67 9.94EPS 45.41 50.46 52.81 56.72 60.07DPS 8.5 9.5 10.5 11.5 12Leverage ratiosLong term debt / Equity 0.49 0.6 0.34 0.52 0.55Total debt/equity 0.5 0.61 0.38 0.6 0.56
    • Owners fund as % of total 66.34 61.97 72.15 62.22 63.84sourceFixed assets turnover ratio 0.76 0.78 0.91 0.8 0.7Liquidity ratiosCurrent ratio 2.22 2.25 2.04 2.1 2.45Current ratio (inc. st loans) 2.18 2.22 1.78 1.64 2.39Quick ratio 1.85 2 1.75 1.77 2.17Inventory turnover ratio 498.76 6,072.41 18.7 15.49 18.98Payout ratiosDividend payout ratio (net 31.41 31.6 30.84 31.2 34.08profit)Dividend payout ratio 21.34 22.05 23.02 22.9 22.65(cash profit)Earning retention ratio 56.37 54.01 43.09 40.16 63.82Cash earnings retention 73.65 71.79 65.02 64.68 76.44ratioCoverage ratiosAdjusted cash flow time 3.84 4.71 4.02 6.44 4.35total debtFinancial charges coverage 6.63 5.55 6.23 4.15 5.02ratioFin. charges cov.ratio 6.89 6.34 7.78 4.86 4.39(post tax)Free Cash flow 718.01 -144.91 771.19 -2172.38 -737.07TAX 130.68 70.03 132.35 210.91 320.72Non Debt Tax ShieldDepriciation 278.34 291.92 290.5 328.85 477.94Fixed Assets 5,924.74 6,229.71 6,481.99 8,985.86 10,010.80
    • Factors affecting Capital Structure of Tata Power1. Size :- Recognized as India largest private sector power utility, with a reputation for trustworthiness, built up over nearly nine decades, Tata Power surges ahead into yet another year with plans of sustained growth, greater value to consumer and reliable power supply. Led by a powerful vision, Tata Power pioneered the generation of electricity in India. It has now successfully served the Mumbai consumers for over ninety years and has spread its footprints across the nation. Today, it is the country‟s largest private player in the sector. Apart from Mumbai and Delhi, the company has generation capacities in Jojobera, Jharkhand and Karnataka. Tata Power has an installed power generation capacity of about 3000 Mega Watts, with the Mumbai power business, which has a unique mix of Thermal and Hydro Power, generated at the Thermal Power Station, Trombay, and the Hydro Electric Power Stations at Bhira, Bhivpuri and Khopoli, accounting for 1797 MW. Its diverse generation capability facilitates the company in producing low cost energy, thereby giving its consumers a greater value for money.2. Growth and stability in Revenue:- Tata Power sales is showing increasing trend from 2006 and profit margin is average more than 12.5. Because of Revenue increasing and also profit is increasing more income comes under tax. So company prefer more debt financing. Debt financing is more risky but company have a support from tata group.3. Growth opportunity:- In energy and power sector there are lots of opportunities and India has deficit of energy and power. So company have a very good growth opportunity and company will grow with high growth rate. High growth opportunity has a negative relation with leverage. But in case of Tata power this company is stable company and revenue is growing and profit is growing and company does not need high investment like R-Power so thats why company is high debt financing company.4. Profit Margin:- From 2006 to 2008 company profit margin is increasing and in 2009 profit margin is decreased but also growing in 2010. Company have to pay tax on it. If profit margin is high company should use leverage to save tax. EPS is also increasing from 2006. Because of profit margin and EPS is increasing company prefer more debt.
    • 5. Tangible Assets:- Fixed asset are increasing and it will help the company to raise debt from market. If tangible assets are increasing company is able to raise secure debt. That‟s why company is able to maintain high debt Ratio.6. Cash Flow:- Free Cash Flow NOPAT 439.67 478.75 471.44 480.77 892.75 Add: DEP 278.34 291.92 290.5 328.85 477.94 Less: Change in WC 0.00 610.61 -261.53 478.13 1,082.82 Less: Capital Expenditure 0 304.97 252.28 2,503.87 1,024.94 Free Cash flow 718.01 -144.91 771.19 -2172.38 -737.07 Equity ratio 0.0660894 0.0510967 0.0668025 0.0404937 0.038274 Debt ratio 0.9339106 0.9489033 0.9331975 0.9595063 0.961726 WACC 5.02 4.89 4.28 4.77 5.22 According to this table when ever company has a negative cash debt ratio is increase and whenever company has a positive cash flow equity ratio is increasing so, that‟s why company prefer more debt finance.7. Taxes:- In Tata Power case sales is growing and here tax is also growing. That‟s why company prefer more debt financing company.8. Non- debt Tax shield:- In Tata power depreciation is growing. But here this factor is not effective to influence capital structure.
    • 9. Risk:- Bankruptcy cost is in this case is negligible because Tata power belongs to Tata Group. So here is no bankruptcy cost because of financial support from Tata Group and Tata Power is a Big name in Indian market. Equity ratio 0.0660894 0.0510967 0.0668025 0.0404937 0.038274 Debt ratio 0.9339106 0.9489033 0.9331975 0.9595063 0.961726 Cost of Equity 25.08 33.6 12.89 19.69 19.25 Cost of Debt 5.4569313 5.09070825 5.5725104 6.2078574 7.053671 WACC 5.02 4.89 4.28 4.77 5.22 Whenever cost of equity is increasing ratio of equity is also decreasing and whenever cost of debt is increasing company prefer equity financing. Here little change in cost of equity and coat of debt affect the capital structure. Conclusion:- Tata Power is highly debt finance company because there are following reason: Tata power is developed company High growth company and also sales revenue is increasing High growth opportunity in near future time. No need of too much investment Company have a big financial support of Tata group. Company have no fear of bankruptcy cost Growing profit and growing tax affect the capital structure. When Cost of debt increase company prefer equity financing.
    • NATIONAL THERMAL POWER CONSERVATION
    • India‟s largest power company, NTPC was set up in 1975 to accelerate powerdevelopment in India. NTPC is emerging as a diversified power major with presence in theentire value chain of the power generation business. Apart from power generation, which isthe mainstay of the company, NTPC has already ventured into consultancy, power trading,ash utilisation and coal mining. NTPC ranked 317th in the „2009, Forbes Global 2000‟ranking of the World‟s biggest companies. NTPC became a Maharatna company in May,2010, one of the only four companies to be awarded this status. The total installed capacity of the company is 32,694 MW (including JVs) with 15coal based and 7 gas based stations, located across the country. In addition under JVs, 5stations are coal based & another station uses naptha/LNG as fuel. The company has set atarget to have an installed power generating capacity of 1,28,000 MW by the year 2032. Thecapacity will have a diversified fuel mix comprising 56% coal, 16% Gas, 11% Nuclear and17% Renewable Energy Sources(RES) including hydro. By 2032, non fossil fuel basedgeneration capacity shall make up nearly 28% of NTPC‟s portfolio.Vision“To be the world’s largest and best power producer, powering India’sgrowth.”Mission“Develop and provide reliable power, related products and services atcompetitive prices, integrating multiple energy sources with innovativeand eco-friendly technologies and contribute to society.”
    • Capital structure of NTPCNTPC is a levered company as on 31-03-2010.Year 2006 2007 2008 2009 2010Equity 8245.5 8245.5 8245.5 8245.5 8245.5Debt 20,638.10 25,141.10 27,190.60 34,567.80 37,797.00Total 28,883.60 33,386.60 35,436.10 42,813.30 46,042.50Equity ratio 0.2854734 0.24697034 0.2326864 0.192592 0.1790845Debt ratio 0.7145266 0.75302966 0.7673136 0.807408 0.8209155Cost of Equity 35.55 164.03 9.04 13.38 13.81Cost of Debt 9.7131034 8.17665098 7.2900193 5.0249076 4.9260523WACC 14.88 45.05 5.78 5.24 5.19Growth in sales 26,142.90 32,631.70 37,091.00 41,975.20 46,377.70Profit Margin:Net Profit Margin 20.2 19.39 18.51 18.11 17.72Return On Long term Fund 12.26 14.69 15.15 12.27 12.45EPS 7.06 8.33 8.99 9.95 10.59DPS 2.8 3.2 3.5 3.6 3.8Leverage ratiosLong term debt / Equity 0.45 0.51 0.5 0.58 0.59
    • Total debt/equity 0.45 0.51 0.5 0.58 0.59Owners fund as % of total 68.53 65.9 66.62 63.05 62.76sourceFixed assets turnover ratio 0.56 0.64 0.69 0.67 0.69Liquidity ratiosCurrent ratio 2.11 2.42 2.36 2.89 2.81Current ratio (inc. st loans) 2.11 2.42 2.36 2.89 2.81Quick ratio 1.84 2.18 2.16 2.59 2.5Inventory turnover ratio 25.14 30.5 33.59 28.21 27.54Payout ratiosDividend payout ratio (net 45.23 44.11 45.53 42.31 41.94profit)Dividend payout ratio 33.45 33.83 35.33 32.83 32.16(cash profit)Earning retention ratio 46.91 54.23 54.17 51.75 54.8Cash earnings retention 62.44 65.2 64.49 63.7 65.96ratioCoverage ratiosAdjusted cash flow time 2.95 2.89 2.86 3.62 3.51total debtFinancial charges coverage 5.04 6.29 7.31 7.97 8.22ratioFin. charges cov.ratio 4.93 5.35 5.82 7.08 7.11(post tax)Free Cash flow 7005.7 -1567.5 4278.9 -2048 6826.4TAX 1,082.40 2,163.70 2,994.20 2,554.70 2,682.70Non Debt Tax ShieldDepriciation 2,047.70 2,075.40 2,138.50 2,364.50 2,650.10
    • Factors affecting Capital Structure of NTPC1. Size :-NTPC is a big company and chances of failure of a big company is less. So company can behigh equity finance company and can be high debt finance company.2. Growth and stability in Revenue:-NTPC sales is showing increasing trend from 2006. Because of Revenue increasing and alsoprofit is increasing more income comes under tax. So company prefer more debt financing.Debt financing is more risky but company save some amount by Tax shield.3. Growth opportunity:-In energy and power sector there are lots of opportunities and India has deficit of energy andpower. So company have a very good growth opportunity and company will grow with highgrowth rate. High growth opportunity has a negative relation with leverage. But in case ofNTPC this company is stable company and revenue is growing and profit is growing andcompany does not need high investment like R-Power so thats why company is high debtfinancing company.4. Profit Margin:-From 2006 company profit margin is decreased but overall profit is increasing. Companyhave to pay tax on it. If profit margin is high company should use leverage to save tax. EPS isalso increasing from 2006. Because of profit margin and increasing company prefer moredebt.5. Tangible Assets:-Fixed asset are increasing and it will help the company to raise debt from market. If tangibleassets are increasing company is able to raise secure debt. That‟s why company is able tomaintain high debt Ratio.6. Cash Flow:- Free Cash Flow NOPAT 4,958.00 6,615.80 7,366.70 7,190.30 8,098.90 Add: DEP 2,047.70 2,075.40 2,138.50 2,364.50 2,650.10 Less: Change in WC 0 5,572.10 2,462.50 2,617.80 -388.20 Less: Capital Expenditure 0 4,686.60 2,763.80 8,985.00 4,310.80 Free Cash flow 7005.7 -1567.5 4278.9 -2048 6826.4 Equity ratio 0.2854734 0.24697034 0.2326864 0.192592 0.1790845
    • Debt ratio 0.7145266 0.75302966 0.7673136 0.807408 0.8209155 WACC 14.88 45.05 5.78 5.24 5.19 According to this table when ever company has a negative free cash flow, debt ratio is increase. That‟s why company prefer more debt finance.10. Taxes:- In NTPC case sales is growing and here tax is also growing. And more debt shield more income from Taxes. That‟s why company prefer more debt financing company.11. Non- debt Tax shield:- In NTPC depreciation is growing. But here this factor is not effective to influence capital structure.12. Risk:- Bankruptcy cost is in this case is negligible because NTPC is govt organisation.13. Cost of Debt and Cost of Equity:- Equity ratio 0.2854734 0.24697034 0.2326864 0.192592 0.1790845 Debt ratio 0.7145266 0.75302966 0.7673136 0.807408 0.8209155 Cost of Equity 35.55 164.03 9.04 13.38 13.81 Cost of Debt 9.7131034 8.17665098 7.2900193 5.0249076 4.9260523 WACC 14.88 45.05 5.78 5.24 5.19 The company from its initial stage highly debt financing company. From 2006 cost of debt is decreasing that‟s why company prefer more debt financing. If we look the trend of cost of debt, is decreasing. So company prefer more debt finance and more volatility in market return increase the cost of equity, which is higher than cost of debt.
    • Conclusion:- NTPC is highly debt finance company because there are following reason: NTPC is developed company High growth company and also sales revenue is increasing High growth opportunity in near future time. No need of too much investment Company have a big financial support of Tata group. Company have no fear of bankruptcy cost Growing profit and growing tax affect the capital structure. When Cost of debt increasing company prefer equity financing. Over All Capital Structure of Power Sector Company As we seen that in power sector companies have no definite capital structure. As R- Power is fully equity finance company and Tata power is highly debt finance company and NTPC is mixed equity-debt finance company. NTPC is more debt finance company. So here is not definite capital structure and capital structure is changed by several factors as we seen in above cases.
    • Tata Motors Limited is Indias largest automobile company, with consolidatedrevenues of Rs. 92,519 crores (USD 20 billion) in 2009-10. It is the leader in commercialvehicles in each segment, and among the top three in passenger vehicles with winningproducts in the compact, midsize car and utility vehicle segments. The company is theworlds fourth largest truck manufacturer, and the worlds second largest bus manufacturer. The companys 24,000 employees are guided by the vision to be "best in the mannerin which we operate, best in the products we deliver, and best in our value system andethics." Established in 1945, Tata Motors presence indeed cuts across the length and breadthof India. Over 5.9 million Tata vehicles ply on Indian roads, since the first rolled out in 1954.The companys manufacturing base in India is spread across Jamshedpur (Jharkhand), Pune(Maharashtra), Lucknow (Uttar Pradesh), Pantnagar (Uttarakhand) and Dharwad (Karnataka).Following a strategic alliance with Fiat in 2005, it has set up an industrial joint venture withFiat Group Automobiles at Ranjangaon (Maharashtra) to produce both Fiat and Tata cars andFiat powertrains. The company is establishing a new plant at Sanand (Gujarat). Thecompanys dealership, sales, services and spare parts network comprises over 3500 touchpoints; Tata Motors also distributes and markets Fiat branded cars in India. Tata Motors, the first company from Indias engineering sector to be listed in the NewYork Stock Exchange (September 2004), has also emerged as an international automobilecompany. Through subsidiaries and associate companies, Tata Motors has operations in theUK, South Korea, Thailand and Spain. Among them is Jaguar Land Rover, a businesscomprising the two iconic British brands that was acquired in 2008. In 2004, it acquired theDaewoo Commercial Vehicles Company, South Koreas second largest truck maker Tata Motors is also expanding its international footprint, established through exportssince 1961. The companys commercial and passenger vehicles are already being marketed inseveral countries in Europe, Africa, the Middle East, South East Asia, South Asia and SouthAmerica. It has franchisee/joint venture assembly operations in Kenya, Bangladesh, Ukraine,Russia, Senegal and South Africa. Tata Motors is committed to improving the quality of life of communities by workingon four thrust areas – employability, education, health and environment. The activities touchthe lives of more than a million citizens. The companys support on education andemployability is focused on youth and women. They range from schools to technicaleducation institutes to actual facilitation of income generation. In health, our intervention isin both preventive and curative health care. The goal of environment protection is achievedthrough tree plantation, conserving water and creating new water bodies and, last but not theleast, by introducing appropriate technologies in our vehicles and operations for constantlyenhancing environment care. With the foundation of its rich heritage, Tata Motors today isetching a refulgent future.
    • Capital structure of Tata MotorTata Motor is highly debt finance company as on 31-03-2010.Year 2006 2007 2008 2009 2010Equity 382.87 385.41 385.54 514.05 570.6Debt 2936.84 4009.14 6280.52 13165.56 16625.91Total 3319.71 4394.55 6666.06 13679.61 17196.51Equity ratio 0.1153324 0.08770181 0.0578363 0.0375778 0.0331812Debt ratio 0.8846676 0.91229819 0.9421637 0.9624222 0.9668188Cost of Equity 24.39 23.19 12.26 28.84 27.84Cost of Debt 11.925743 11.3677746 7.5082955 5.3542728 7.4958303WACC 9.8 8.87 5.38 4.54 5.77Growth in sales 20,088.63 26,664.25 28,767.91 25,660.67 35,373.29Profit Margin:Net Profit Margin 7.35 6.94 6.96 3.77 6.26Return On Long term Fund 28.65 31.18 22.85 8.89 12.26EPS 39.94 49.65 52.63 19.48 39.26DPS 13 15 15 6 15Leverage ratiosLong term debt / Equity 0.41 0.31 0.49 0.49 0.79Total debt/equity 0.53 0.58 0.8 1.06 1.12
    • Owners fund as % of total 65.23 63.05 55.43 48.44 47.05sourceFixed assets turnover ratio 2.55 3.08 2.69 1.88 1.95Liquidity ratiosCurrent ratio 1.24 1.24 0.89 0.84 0.62Current ratio (inc. st loans) 1.07 0.85 0.64 0.43 0.44Quick ratio 0.96 0.91 0.66 0.58 0.43Inventory turnover ratio 12.63 13.26 14.44 13.47 13.5Payout ratiosDividend payout ratio (net 37.13 35.34 32.51 34.52 44.28profit)Dividend payout ratio 26.73 26.16 24.02 17.94 29.02(cash profit)Earning retention ratio 58.31 59.9 60.13 62.49 30.22Cash earnings retention 70.98 71.32 72.18 81.29 61.84ratioCoverage ratiosAdjusted cash flow time 1.5 1.7 2.65 7.13 6.4total debtFinancial charges coverage 8.08 7.62 7.19 3.64 3.56ratioFin. charges cov.ratio 7.06 6.67 6.82 3.73 3.74(post tax)Free Cash flow 1882.59 1394.54 3497.24 -517.23 3277.34TAX 524.93 660.37 547.55 12.5 589.46Non Debt Tax ShieldDepriciation 520.94 586.29 652.31 874.54 1,033.87
    • Factors affecting Capital Structure of Tata Motor1. Size :-Tata Motor is a big company and chances of failure of a big company is less. So companycan be high equity finance company and can be high debt finance company.2. Growth and stability in Revenue:- Tata Motor sales is showing increasing trend from 2006 to 2008 and in 2009 sales is decreasing and in 2010 sales is increasing. Because of Revenue increasing and also profit is increasing more income comes under tax. So company prefer more debt financing. Debt financing is more risky but company save some amount by Tax shield. Tata Motor capital structure is may be affecting by sales because whenever sales is increase, company prefer more debt finance.3. Growth opportunity:- In automobile sector there are lots of opportunities. In last 5 year Indian Automobile sector is booming and India become a auto hub after US and China.4. Profit Margin:- From 2006 company profit margin is decreased but overall profit is increasing. Company have to pay tax on it. If profit margin is high company should use leverage to save tax. EPS is also increasing from 2006. Because of profit margin and increasing company prefer more debt.5. Tangible Assets:- Fixed asset are increasing and it will help the company to raise debt from market. If tangible assets are increasing company is able to raise secure debt. That‟s why company is able to maintain high debt Ratio.6. Cash Flow:- Free Cash Flow NOPAT 1,361.65 1,686.31 1,654.17 921.51 1,421.49 Add: DEP 520.94 586.29 652.31 874.54 1,033.87 Less: Change in WC 0 73.81 -3,245.79 -761.06 -5,333.62 Less: Capital Expenditure 0 804.25 2,055.03 3,074.34 4,511.64 Free Cash flow 1882.59 1394.54 3497.24 -517.23 3277.34 Equity ratio 0.1153324 0.08770181 0.0578363 0.0375778 0.0331812 Debt ratio 0.8846676 0.91229819 0.9421637 0.9624222 0.9668188 WACC 9.8 8.87 5.38 4.54 5.77
    • According to this table whatever company has a negative or positive free cash flow, debt ratio is increase. So in this case free cash flow does not affect the capital structure of company.14. Taxes:- In Tata Motor case sales is growing and here tax is also growing. And more debt shield more income from Taxes. That‟s why company prefer more debt financing company.15. Non- debt Tax shield:- In Tata Motor depreciation is growing. But here this factor is not effective to influence capital structure.16. Risk:- Bankruptcy cost is in this case is negligible because Tata Motor is a big name in market and Tata Motor is a part of Tata Group, which is top most corporate organization in INDIA.17. Cost of Debt and Cost of Equity:- Equity ratio 0.1153324 0.08770181 0.0578363 0.0375778 0.0331812 Debt ratio 0.8846676 0.91229819 0.9421637 0.9624222 0.9668188 Cost of Equity 24.39 23.19 12.26 28.84 27.84 Cost of Debt 11.925743 11.3677746 7.5082955 5.3542728 7.4958303 WACC 9.8 8.87 5.38 4.54 5.77 . From 2006 cost of debt is decreasing that‟s why company prefer more debt financing. If we look the trend of cost of debt, is decreasing. So company prefer more debt finance and more volatility in market return increase the cost of equity, which is higher than cost of debt. In this type of condition company prefer more debt rather than equity.
    • Conclusion:- Tata Motor is highly debt finance company because there are following reason: Tata motor is developed company High growth company and also sales revenue is increasing High growth opportunity in near future time. Company have a big financial support of Tata group. Company have no fear of bankruptcy cost Growing profit affect the capital structure. When Cost of debt increasing company prefer equity financing. But in this case cost of debt is decreasing so company prefer debt financing.
    • Hindustan Unilever Limited (HUL) is Indias largest Fast Moving Consumer GoodsCompany, touching the lives of two out of three Indians with over 20 distinct categories inHome & Personal Care Products and Foods & Beverages. The company‟s Turnover is Rs.17,523 crores (for the financial year 2009 - 2010) HUL is a subsidiary of Unilever, one of the world‟s leading suppliers of fast movingconsumer goods with strong local roots in more than 100 countries across the globe withannual sales of about €40 billion in 2009 Unilever has about 52% shareholding in HUL. Hindustan Unilever was recently rated among the top four companies globally in thelist of “Global Top Companies for Leaders” by a study sponsored by Hewitt Associates, inpartnership with Fortune magazine and the RBL Group. The company was ranked numberone in the Asia-Pacific region and in India. The mission that inspires HULs more than 15,000 employees, including over 1,400managers, is to help people feel good, look good and get more out of life with brands andservices that are good for them and good for others. It is a mission HUL shares with itsparent company, Unilever, which holds about 52 % of the equity. HULs brands touch the lives of two out of three Indians. They endow the companywith turnover of Rs.17,523 crores (for the 12 month period – April 1, 2009 to March 31,2010). The mission that inspires HULs more than 15,000 employees, including over 1,400managers, is to help people feel good, look good and get more out of life with brands andservices that are good for them and good for others. It is a mission HUL shares with itsparent company, Unilever, which holds about 52 % of the equity.
    • Capital structure of HULHUL is fully equity finance company as on 31-03-2010.Year 2006 2007 2008 2009 2010Equity 220.12 220.68 217.75 217.99 218.17Debt 56.94 72.6 88.53 421.95 0Total 277.06 293.28 306.28 639.94 218.17Equity ratio 0.7944849 0.75245499 0.7109508 0.3406413 1Debt ratio 0.2055151 0.24754501 0.2890492 0.6593587 0Cost of Equity 10.06 10.63 7.96 5.46 7.57Cost of Debt 33.702143 14.7796143 28.803795 6.000711 0WACC 12.59 9.48 11.17 4.51 7.57Growth in sales 11,193.88 12,244.02 13,880.56 20,504.28 17,769.12Profit Margin:Net Profit Margin 12.42 14.94 12.58 12.09 12.29Return On Long term Fund 69.33 67.65 147.26 142.88 106.78EPS 6.4 8.41 8.12 11.47 10.09DPS 5 6 9 7.5 6.5Leverage ratiosLong term debt / Equity - - - - -Total debt/equity 0.02 0.02 0.06 0.2 -Owners fund as % of total 97.58 97.4 94.2 83 100source
    • Fixed assets turnover ratio 5.11 5.35 5.64 7.81 5.35Liquidity ratiosCurrent ratio 0.7 0.74 0.69 1.01 0.83Current ratio (inc. st loans) 0.69 0.72 0.67 0.92 0.83Quick ratio 0.32 0.33 0.24 0.51 0.45Inventory turnover ratio 9.97 9.27 8.2 9.26 8.99Payout ratiosDividend payout ratio (net 89.49 81.45 131.8 76.47 75.2profit)Dividend payout ratio 82.23 76.11 122.23 70.93 69.4(cash profit)Earning retention ratio 1.94 -0.12 -39.13 18.5 21.25Cash earnings retention 10.59 7.83 -28.52 24.77 27.59ratioCoverage ratiosAdjusted cash flow time 0.04 0.04 0.04 0.16 -total debtFinancial charges coverage 89.76 183.74 88.52 123.99 421.5ratioFin. charges cov.ratio 80.85 185.99 75.81 107.47 342.84(post tax)Free Cash flow 1409.51 1519.56 1991.85 635.81 2775.1TAX 294 321.8 417.14 572.94 648.36Non Debt Tax ShieldDepriciation 124.45 130.16 138.36 195.3 184.03
    • Factors affecting Capital Structure of HUL1. Size :-HUL is a big company and chances of failure of a big company is less. So company can behigh equity finance company and can be high debt finance company.2. Growth and stability in Revenue:-HUL sales are showing increasing trend from 2006 to 2009 and in 2010 sales is decreasing.Because of Revenue increasing and also profit is increasing so more income comes under tax.So company prefer more debt financing. Debt financing is more risky but company savesome amount by Tax shield.7. Growth opportunity:-In FMCG sector there are opportunities. Indian FMCG sector is growing at steady rate. Thissector is well developed in Indian market. But here growth rate is very low. There is notrequired heavy investment in next 5 year.8. Profit Margin:- From 2006 company profit margin is decreased but overall profit is increasing. Company have to pay tax on it. If profit margin is high company should use leverage to save tax. EPS is also increasing from 2006-09. Because of profit margin and increasing company prefer more debt.9. Tangible Assets:- Fixed asset are increasing and it will help the company to raise debt from market. If tangible assets are increasing company is able to raise secure debt. That‟s why company is able to maintain high debt Ratio.10. Cash Flow:- Free Cash Flow NOPAT 1,285.06 1,509.52 1,675.85 2,346.32 2,102.69 Add: DEP 124.45 130.16 138.36 195.3 184.03 Less: Change in WC 0 32.54 -384.03 1,693.16 -1,188.61 Less: Capital Expenditure 0 87.58 206.39 212.65 700.23 Free Cash flow 1409.51 1519.56 1991.85 635.81 2775.1 Equity ratio 0.7944849 0.75245499 0.7109508 0.3406413 1 Debt ratio 0.2055151 0.24754501 0.2890492 0.6593587 0 WACC 12.59 9.48 11.17 4.51 7.57
    • According to this table company has a positive free cash flow from 2006-09, debt ratio is increase. In 2009 suddenly free cash flow is less than 2009, debt is also increase and in 2010 free cash flow is four time higher than 2009, in this time company is fully equity finance company. In this company free cash flow is not effective. Because capital structure is not affected by free cash flow in this company.18. Taxes:- In HUL case sales is growing and here tax is also growing. And more debt shield more income from Taxes. That‟s why company prefer more debt financing company.19. Non- debt Tax shield:- In HUL depreciation is growing. But here this factor can be effective to influence capital structure. Because depreciation is reached almost 80% of equity and depreciation has a negative relation with leverage.20. Risk:- Bankruptcy cost is in this case is negligible because HUL is blue chip company. It has a good image and goodwill in market.21. Cost of Debt and Cost of Equity:- Equity ratio 0.7944849 0.75245499 0.7109508 0.3406413 1 Debt ratio 0.2055151 0.24754501 0.2890492 0.6593587 0 Cost of Equity 10.06 10.63 7.96 5.46 7.57 Cost of Debt 33.702143 14.7796143 28.803795 6.000711 0 WACC 12.59 9.48 11.17 4.51 7.57 In HUL case cost of equity or debt increasing or decreasing, debt ratio is ever increasing. In 2010 suddenly company become fully equity finance company. So in this determining the appropriate capital structure is difficult.
    • Conclusion:- HUL is more equity finance company because there are following reason: HUL is developed company Sales revenue is increasing Company have a sufficient amount of Free cash flow Company have no fear of bankruptcy cost Growing profit and growing tax affect the capital structure. In company like HUL determination of factor affecting capital structure, is difficult.
    • N. R. Narayana Murthy(Chairman of the Board and Chief Mentor, Infosys Technologies)
    • Infosys Technologies Ltd. (NASDAQ: INFY) was started in 1981 by seven peoplewith US$ 250. Today, we are a global leader in the "next generation" of IT and consultingwith revenues of US$ 5.4 billion (LTM Sep-10). Infosys defines, designs and delivers technology-enabled business solutions that helpGlobal 2000 companies win in a Flat World. Infosys also provides a complete range ofservices by leveraging our domain and business expertise and strategic alliances with leadingtechnology providers. Our offerings span business and technology consulting, application services, systemsintegration, product engineering, custom software development, maintenance, re-engineering,independent testing and validation services, IT infrastructure services and business processoutsourcing.Infosys pioneered the Global Delivery Model (GDM), which emerged as a disruptive force inthe industry leading to the rise of offshore outsourcing. The GDM is based on the principle oftaking work to the location where the best talent is available, where it makes the besteconomic sense, with the least amount of acceptable risk.Infosys has a global footprint with 63 offices and development centers in India, China,Australia, the Czech Republic, Poland, the UK, Canada and Japan. Infosys and itssubsidiaries have 122,468 employees as on September 30, 2010.Infosys takes pride in building strategic long-term client relationships. Over 97% of ourrevenues come from existing customers (FY 10).LocationsCorporate headquarters : Bangalore, IndiaUS headquarters : Fremont, CAWorldwide offices : Atlanta, Bangalore, Beijing, Bellevue, Berkeley Heights, Bhubaneswar,Brussels, Charlotte, Chennai, Detroit, Frankfurt, Fremont, Hong Kong, Hyderabad, LakeForest, Lisle, London, Mangalore, Mauritius, Melbourne, Milano, Mohali, Mumbai, Mysore,New Delhi, Paris, Phoenix, Plano, Pune, Quincy, Reston, Shanghai, Sharjah, Stockholm,Stuttgart, Sydney, Thiruvananthapuram, Tokyo, Toronto, Utrecht, Zurich.Employees 49,422
    • Capital structure of INFOSYSINFOSYS is fully equity finance company as on 31-03-2010.Year 2006 2007 2008 2009 2010Equity 138 286 286 286 287Debt 0.00 0 0 0 0Total 138.00 286.00 286.00 286.00 287.00Equity ratio 1 1 1 1 1Debt ratio 0 0 0 0 0Cost of Equity 13.33 13.93 9.15 14.41 14.48Cost of Debt 0 0 0 0 0WACC 13.33 13.93 9.15 14.41 14.48Growth in sales 9,028.00 13,149.00 15,648.00 20,264.00 21,140.00Profit Margin:Net Profit Margin 26.17 28.05 27.37 27.52 26.31Return On Long term Fund 40.62 36.64 37.77 39.8 33.9EPS 87.86 66.23 78.15 101.58 101.3DPS 45 11.5 33.25 23.5 25Leverage ratiosLong term debt / Equity - - - - -
    • Total debt/equity - - - - -Owners fund as % of total 100 100 100 100 100sourceFixed assets turnover ratio 3.18 3.38 3.47 3.39 5.59Liquidity ratiosCurrent ratio 2.75 4.96 3.3 4.71 4.28Current ratio (inc. st loans) 2.75 4.96 3.3 4.71 4.28Quick ratio 2.73 4.91 3.28 4.67 4.2Inventory turnover ratio - - - - -Payout ratiosDividend payout ratio (net 58.32 19.85 49.77 27.03 28.84profit)Dividend payout ratio 49.89 17.66 44.35 24.15 25.32(cash profit)Earning retention ratio 43.48 79.91 50.17 74.6 70.92Cash earnings retention 51.43 82.15 55.6 77.16 74.49ratioCoverage ratiosAdjusted cash flow time - - - - -total debtFinancial charges coverage 3,211.00 4,559.00 5,642.00 3,891.00 -ratioFin. charges cov.ratio 2,831.00 4,253.00 5,017.00 3,257.50 -(post tax)Free Cash flow 2907 -174 3013 1612 7947TAX 303 352 630 895 1,717.00Non Debt Tax ShieldDepriciation 409 469 546 694 807
    • Factors affecting Capital Structure of INFOSYS1. SizeINFOSYS is a big company and chances of failure of a big company is less. So company canbe high equity finance company and can be high debt finance company.2. Growth and stability in Revenue:-Infosys sales are showing increasing trend from 2006. Because of Revenue increasing andalso profit is increasing so more income comes under tax. But company is 100 % equityfinance company. In this case sales do not effective factor which affect the capital structure.3. Growth opportunity:-In IT sector there is lots of growth opportunities and it‟s a key sector of today‟s Indianeconomy. IT sector will grow at high growth rate in near future. That‟s required investment.In this point of view equity financing is a good decision.4. Profit Margin:-From 2006 company profit margin is increasing and despite a high tax rate company follows100% equity finance capital structure. So in this case sales is not effective factor to affectcapital structure.5. Tangible Assets:-Fixed asset are increasing and it will help the company to raise debt from market. If tangibleassets are increasing company is able to raise secure debt. But company is fully equityfinance company. So here it is not a effective factor.6. Cash Flow:- Free Cash Flow NOPAT 2,498.00 3,737.00 4,465.00 6,191.00 5,755.00 Add: DEP 409 469 546 694 807 Less: Change in WC 0 3,328.00 1,379.00 3,795.00 822.00 Less: Capital Expenditure 0 1,052.00 619.00 1,478.00 -2,207.00 Free Cash flow 2907 -174 3013 1612 7947 Equity ratio 1 1 1 1 1 Debt ratio 0 0 0 0 0 WACC 13.33 13.93 9.15 14.41 14.48
    • According to this table company has a positive free cash flow from 2006. In company like Infosys they have too much free cash flow, here debt financing is not a good choice for company. 7. Taxes:- In Infosys case sales is growing and here tax is also growing. But company is fully equity finance company. Although Infosys have a more free cash flow and investment in IT sector is quite low. So there is no need of debt financing to save some money. If they become levered it will be costlier for Infosys. 8. Non- debt Tax shield:- Depreciation is growing. More Depreciation shield more income from tax. So these factors help to maintain fully equity finance. 9. Risk:- Bankruptcy cost is in this case is negligible. Because Infosys is a big name in market and have a good image and goodwill in market. 10. Cost of Debt and Cost of Equity:- Equity ratio 1 1 1 1 1 Debt ratio 0 0 0 0 0 Cost of Equity 13.33 13.93 9.15 14.41 14.48 Cost of Debt 0 0 0 0 0 WACC 13.33 13.93 9.15 14.41 14.48 In the case of Infosys cost of equity and debt does not affect capital structure. Conclusion:- Infosys is fully equity finance company because there are following reason: Infosys is developed company Sales revenue is increasing Company have a sufficient amount of Free cash flow Company have no fear of bankruptcy cost Growing profit and growing tax affect the capital structure. Depreciation is increasing and it has a negative relation with leverage.
    • Findings Capital structure is differing from different-different company. There is no exact capital structure for company. There is no formula for calculating capital structure. Size of company matters in capital structure. Because blue-chip Company have no fear of bankruptcy cost and they easily get debt finance. Future investment and growth opportunity matter in framing of capital structure. Interest rate or tax rate also matters in capital structure. Some factor will affect capital structure of one company, is not necessary that it can affect the capital structure of other company. But there is no rule and regulation for framing a optimal capital structure. Optimal capital structure will depend upon company’s need and requirement and condition of company and other factors also matters. In a same sector company, no company have a same kind of capital structure. Company financial condition will also matters in capital structure. Capital structure is also depending upon cost of funding. It means if cost of debt is cheaper then cost of Equity, Company will prefer debt financing. But it is not necessary for company that company have to prefer debt finance if cost of debt is available at cheaper rate. And vise –e –versa in case of if cost of equity is cheaper than cost of debt.