OPTIMAL CAPITAL STRUCTURE OF AUTOMOBILE INDUSTRY 2014-2015.

1. FINANCIAL MANAGEMENT
PRESENTATION
AUTOMOBILEINDUSTRY

2. BY: LTB03
• MEHSHINA BANO(068)
• MOHINI YADAV(072)
• RUPALIGUPTA(101)
• SAKSHI SAHAI (104)
• SINDHU KUMARSINGH(172)
• AMIT PRAKASH (175)

3. CONTENT
 INTRODUCTION
 ATUL AUTO LTD.
 BAJAJ AUTO LTD.
 TVS
 ROYAL ENFIELD
 CONCLUSION

4. INTRODUCTION
Theauto manufacturing industry is considered to behighly capital and labor intensive.
Themajorcosts for producing and selling automobiles include:
 Labor
 Materials
 Advertising

5. CAPITAL STRUCTURE OF ATUL AUTO LIMITED
 DEBT
AtulAutoLimited hasnotobtainedanytermloans.ThereareonlyLongtermprovisionsanddeferred tax
liabilityin noncurrentliability.The Companyhasmaintainedits statusof“DebtFree Company”
 EQUITY
Thecompanyhasonlyoneclassof equityshareshavinga valueof` 5per Share(previousyear`10/-per
share).Eachholderequitysharesis entitled toone votepershare.
The companydeclaresandpaysdividend in IndianRupees.Interim Dividend andfinalDividend arepaidby
the company

6. FINANCIAL RATIOS
2010-11 2011-12 2012-13 2013-14 2014-15
25.8 32.7 40.1 35.5 37.8 ROE
2010-11 2011-12 2012-13 2013-14 2014-15
36.44 39.82 40.1 35.5 37.8 ROI
2010-11 2011-12 2012-13 2013-14 2014-15
0.14 0.06 0.00 0.00 0.00 D-E

7. Relation between O.L. and F.L.
0
0.5
1
1.5
2
2.5
3
3.5
2011-12 2012-13 2013-14 2014-15
Operating leverage
Finacial leverage

8. REASONS FOR HAVING ZERO DEBT
 High volatilityof automobileindustry
Theautomobilesectorischaracterizedbycontinuousup-gradationin termsoftechnology,manufacturing
processanddesign capability
 Strategy of AtulAutoLimited
Liquidityalsoenablesus tomakea rapidshiftin direction,shouldthe marketso demand.”
 Imitation of debt to equity ratio of comparable firms
Industryaverageofdebt toequityratioforthe automobileindustryisquite low

9. Output Summary
Current Optimal
Debt to
Capital 0.00% 10.00%
Cost of
capital 19.10% 18.68%
Enterprise
value ₹ 10,47,81,68,000.00
₹
10,88,05,40,616.62
Value per
share ₹ 490.00 ₹ 508.34
For details, check "Optimal Capital Structure" worksheet
RESULTS FROM ANALYSIS
Current Optimal Change
D/(D+E) Ratio = 0.00% 10.00% 10.00%
Beta for the
Stock = 1.41 1.52 0.11
Cost of Equity = 19.10% 19.95% 0.85%
Rating on Debt A3/A-
After-tax cost of Debt
= 6.46% 7.31% 0.84%
WACC 19.10% 18.68% -0.42%
Implied Growth
Rate = 7.82%
Enterprise value $10,47,81,68,000 $10,88,05,40,617 $40,23,72,617
Value/share (Perpetual
Growth) = $490.00 $508.34 $18.34
ATUL AUTO LIMITED
8 FEB ,2015
Capital
Structure Financial Market Income Statement
Current MV
of Equity = $10,75,21,68,000 Current Beta for Stock = 1.41 Current EBITDA = $63,78,16,280
Market
Value of
interest-
bearing debt
= $0 Current Bond Rating = A3/A- Current Depreciation = $5,58,10,284
# of Shares
Outstanding
= 21943200 Summary of Inputs Current Tax Rate = 32.45%
Debt Value
of Operating
leases = $0
Long Term Government Bond
Rate = 7.82%
Current Capital
Spending= $36,38,71,230
Equity Risk
Premium = 8.00% Pre-tax cost of debt = 9.57%
Current Interest
Expense = $0

10. OPTIMUM CAPITAL STRUCTURE
 From the optimal capital structure, the current debt to capital ratio of company is zero but
as can be seen from the model it would be optimum if Atul takes 10% of the capital for
equity .
 This is obvious because Atul is a cash rich company and the current growth rate of the
company is also high so if it raises its fund through debt then it would get large tax
benefits.
 However the company is just following the trend of comparable firms currently, and due
to fluctuating fuel prices it hesitates to take debt. We can also see that the optimum capital
structure is quite near to the current model so Atul is going in the right direction.

11. Capital structure of bajaj auto ltd.
 DEBT
BAJAJAuto Limited has not obtained anyterm loans .Thereare only Long term provisions and deferred tax
liability in noncurrentliability. TheCompanyhas maintained its status of “Debt Free Company”
EQUITY
Thecompanyhas only one class of equityshares havinga value of ` 5 per Share(previous year`10/-per share).
Each holder equityshares is entitled to one vote per share.
Thecompanydeclares and pays dividend inIndianRupees. InterimDividend and final Dividend arepaid by the
company

12. Financial ratios
2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 ROI
2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 ROE
2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 D/E RATIO

13. Relation between dol&dfl

14. DOL,
0.022367855
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2010-2011 2011-2012 2012-2013 2013-2014 2014-2015
AxisTitle

16. Optimum capital structure
 From the optimal capital structure, the current debt to capital ratio of company is zero but
as can be seen from the model it would be optimum ifAtul takes 10% of the capital for
equity .
 This is obvious because Atul is a cash rich company and the current growth rate of the
company is also high so if it raises its fund through debt then it would get large tax
benefits.
 However the company is just following the trend of comparable firms currently, and due
to fluctuating fuel prices it hesitates to take debt. We can also see that the optimum capital
structure is quite near to the current model soAtul is going in the right direction.

17. The company came into existence in 1911. It is named after the founder T V Sundaram
lyengar.
But within the company TVS havealways stood for Trust, Valueand Service.
VenuSrinivasan is the chairman and managing director.
It is the third largest two-wheeler manufacturer in India and one among the top ten in the
world.
The companyhas a production capacity of 3million 2wheelers a year.
It has four manufacturing plants located in Tamil Nadu, Karnataka, Himachal Pradesh
and one in Indonesia.

18. RATIOS
YEARS
RATIOS
2011 2012 2013 2014 2015
D/E RATIO 0.78 0.53 0.52 0.43 0.43
ROE 19.46 21.3 9.47 18.48 21.14
ROI 20.44 22.2 9.85 19.12 21.76
ICR 8.56 6.54 6.29 14.67 17.63
DOL / DFL
YEARS
DOL/DFL
2011 2012 2013 2014 2015
DOL
2.68 1.24 40.49 7.11 1.04
DFL
1.08 1.67 1.2 1.57 1.17

19. OPTIMUM CAPITAL STRUCTURE
RESULTS FROM ANALYSIS
CURRENT OPTIMAL CHANGE
D/(D+E) Ratio = 3.69% 10.00% 6.31%
Beta for the Stock = 1.58 1.66 0.08
Cost of Equity = 20.46% 21.07% 0.61%
Rating on Debt Not rated
After-tax cost of Debt = 7.44% 8.45% 1.01%
WACC 19.98% 19.80% -0.18%
Implied Growth Rate = 7.82%
Enterprise value INR 14,077.70 $14,284 INR 205.95
Value/share (Perpetual Growth)
= INR 285.50 $289.83 INR 4.33

20. FINDINGS
Average two years ROE of TVS Motor company ltd. is 20.This indicates that TVS has employed
shareholdersmoneyeffectively in profitableinvestment opportunities.
 TVS motor bike company did not issue additional shares in between. Therefore, there is no
occurrencestockdilution.
 A fall in operating Cash Flow (OCF) in 2015 despite a rising net profit is a cause for concern because
of high working capital requirements. TVS motor bike company must have a higher operating cash
flow.
 Investors are suggested that they must keep eye on company’s total debt if they are interested in
investing intotvsmotorcompanyltd.

22. INTRODUCTION
Royal Enfield motorcycles had been sold in India since 1949. In 1965, the Indian
governmentlooked for a suitable motorcycle for its police and army, for use patrolling
the country's border. The Bullet was chosen as the most suitable bike for the job. The
Indian government ordered 800 350-ccmodel Bullets, an enormous orderfor the
time. In 1955, the Redditch company joined Madras Motors in India in forming
"Enfield India" toassemble, underlicence, the 350 ccRoyal Enfield Bullet motorcycle
in Madras (now called Chennai).

23. Year 2014 2013 2012 2011 2010
Debt Equity
ratio
- - 0.03 0.03 0.04
Return on
equity
24.5 19.2 18.5 20.7 15.3
Return on
Investment
455.14 303.76 232.97 200.07 169.53
Interest
coverage ratio
478.86 1346.00 669.46 57.51 27.77
Debt Service
coverage ratio
- - 0.03 0.03 0.04
DFL .86 .87 .70 1.13 -0.07
DOL 1.48 1.70 .38 1.52 3.97
FINANCIAL RATIOS

24. RESULTS FROM ANALYSIS
Current Optimal Change
D/(D+E) Ratio = 0.11% 10.00% 9.89%
Beta for the Stock = 0.97 1.04 0.07
Cost of Equity = 14.34% 14.90% 0.56%
Rating on Debt Aaa/AAA
After-tax cost of Debt = 5.07% 5.40% 0.34%
WACC
14.32%
13.95% -0.38%
Implied Growth Rate = 6.75%
Enterprise value ₹ 49,115.79 ₹ 51,680.00 ₹ 2,564.21
Value/share (Perpetual Growth) = ₹ 18,119.15 ₹ 19,065.35 ₹ 946.20
OPTIMAL
CAPITAL STRUCTURE

25. CONCLUSION