Nirma Limited Cost Of Capital

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Nirma Limited Cost Of Capital

  1. 1. NIRMA LIMITED-Cost of Capital Nirma’s Cost of Equity (Fig. in Rs. Cr. ) Mar '07 Mar '08 Equity Share Capital 79.57 79.57 Preference Share Capital 2.79 2.79 Reserves 2,347.42 2,502.62 Revaluation Reserves 0 0 Net worth 2,429.78 2,584.98 Calculation of Ke: Ke= Rf + β (Rm-Rf) Rf= 4.5056% (364 day T-bills, cut-off at the last auction , Source: http://www.rbi.org.in/home.aspx) Rm= 15 % (Considering India’s growing Soda Ash and Detergent Industry) β= 0.66 (Taking from last assignment based on last one year price data)  Ke= 4.5 % + 0.66 x (15 %- 4.5%)= 11.43% Nirma’s Cost of Debt Nirma Ltd. (Rs. Crore) Mar-07 Mar-08 Bank borrowings 239.15 182.54 Short term bank borrowings 239.15 182.54 Long term bank borrowings 0 0 Total Secured borrowings (in Rs. Crores) 239.15 182.54 Short-term loans from banks in foreign currency 43.57 87.94 Non-Convertible debentures 0 140 Borrowings from corporate bodies 41.12 33.37 Deferred credit 0.96 0.04 Total Unsecured borrowings (in Rs. Crores) 85.65 261.35 Total borrowings 324.8 443.89
  2. 2. Calculation of Kd: 1st Method: By Interest Expense Interest= Rs. 23.31 Crore Average Debt for the year 2006-07 and 2007-08 = Rs .384.345 Crore Interest rate = Interest / Average Debt= 6.06 % Tax Rate = 34 % ( Indian Corporate Tax rate) Kd= 6.06 % x (1- 0.34) = 4 % 2nd Method: By contribution of each debt Nirma Ltd. (Rs. Crore) Weighted Mar-08 Weightage Interest Rates Interest Rates Bank borrowings 182.54 Short term bank borrowings 182.54 0.41 13%* 0.05 Long term bank borrowings 0 Secured borrowings (in Rs. Crores) 182.54 Short-term loans from banks in foreign currency 87.94 0.20 1.89%** 0.37 Non-Convertible debentures # 140 0.32 7.84%*** 2.47 Borrowings from corporate bodies 33.37 0.08 10% 0.01 Deferred credit 0.04 0.00 4% 0.00 261.35 Total borrowings 443.89 2.91 * PLR (Source: http://www.rbi.org.in/home.aspx) ** LIBOR rates- 1 year (The interest is fixed with a reasonable spread over LIBOR, Source http:// www. ucobank.com /internationalbanking.htm) ***MIBOR rate for 3 Month (Source: http://www.nse-india.com/marketinfo/eod_information /bidbor .jsp) # The Floating Rate Non-Convertible Debentures were redeemable with interest on the expiry of 364 days from the deemed date of allotment. However the investor/ company were given the option to put/call the FRNCD any day from the date of allotment. These FRNCD were all privately placed debentures. Kd= 2.91 x (1-0.34) = 2%
  3. 3. Considering the above two cost of debt ( by interest expense and by contribution by each debt), I consider the cost of debt by interest expense more accurate for the following reasons: This figure (interest rate paid) was indicated by the annual report of the company. The interest rates of individual debts vary over time and can increase or decrease in future. The above figures are taken on a conservative basis with the current LIBOR and MIBOR rates. So, the figure of 2% is more on the conservative side.  Kd= 4% Market value of Equity: No. of shares = 15.91 Crores Price/ Share ( as on 20.2.2009) = Rs. 96.05 Market Capitalization = Rs. 1528.155 Crores Reserves = Rs. 2,502.62 Crores Total Market Value of Equity = Rs. 4030.77 Crores Market Value of Debt: The FRNCD were all privately placed debentures and hence no current data is available on the net. Due to this limitation, we assume the Market Value of Debt to be same as the Book Value. Total Market Value of Debt = Rs. 443.89 Crores Market Value of Preference Shares: Preference Shares Issued = 2,79,285 Shares Market Value of each share ( as on 20.2.2009) = Rs. 96.05  Total Market Value of Preference Shares = Rs. 2. 68 Crores
  4. 4. WACC According to Market Value Kc = Ke*Pe + Kd*Pd + Kps*Pps Ke= 11.43% Kd= 4% Kps= 6% Pe= 0.90 Pd= 0.099 Pps= 0.0066  Kc = 10.72 % Book Value of Equity Market Capitalization = Rs. 79.57 Crores Reserves = Rs. 2,502.62 Crores Total Book Value of Equity = Rs. 2582.19 Crores Book Value of Debt: Total Book Value of Debt = Rs. 443.89 Crores Book Value of Preference Shares: Preference Shares Issued = 2,79,285 Shares Face Value of each share =Rs. 100
  5. 5.  Total Book Value of Preference Shares = Rs. 2. 79 Crores WACC According to Book Value Kc = Ke*Pe + Kd*Pd + Kps*Pps Ke= 11.43% Kd= 4% Kps= 6% Pe= 0.85 Pd= 0.146 Pps= 0.0009  Kc = 10.30 %
  6. 6. Henkel India-Peer Henkel’s Cost of Equity (Fig. in Rs. Cr. ) Mar '07 Mar '08 Equity Share Capital 116.46 116.46 Preference Share Capital 68 68 Reserves 27.39 37.86 Revaluation Reserves 0 0 Net worth 211.85 222.32 Calculation of Ke: Ke= Rf + β (Rm-Rf) Rf= 4.5056% (364 day T-bills, cut-off at the last auction , Source: http://www.rbi.org.in/home.aspx) Rm= 15 % (Considering India’s growing Soda Ash and Detergent Industry) β= 1.05 (Taking from CMIE-PROWESS. This company is making losses presently and hence the higher value is considered.)  Ke= 4.5 % + 1.05 x (15 %- 4.5%)= 15.525% Henkel’s Cost of Debt Henkel India Ltd. ( All Fig. in Rs. Crore) Dec 2006 Dec 2007 Secured borrowings 15.55 10.18 Unsecured borrowings 171.13 282.1 Bank borrowings 186.68 292.28 Short term bank borrowings 186.68 292.28 Calculation of Kd: 1st Method: By Interest Expense Interest= Rs. 22.27 Crore Average Debt for the year 2006-07 and 2007-08 = Rs .239.48 Crore Interest rate = Interest / Average Debt= 9.30 % Tax Rate = 34 % (Indian Corporate Tax rate)
  7. 7. Kd= 9.30 % x (1- 0.34) = 6.14 % 2nd Method: By contribution of each debt Henkel India Ltd. ( All Fig. in Rs. Dec Weightage Interest Weighted Interest Crore) 2007 Rates Rates Secured borrowings 10.18 Unsecured borrowings 282.1 Bank borrowings 292.28 1 13%* 13% Short term bank borrowings 292.28 * PLR (Source: http://www.rbi.org.in/home.aspx) Kd= 13% x (1-0.34) = 8.58% Considering the above two cost of debt ( by interest expense and by contribution by each debt), I consider the cost of debt by interest expense more accurate for the following reasons: This figure (interest rate paid) was indicated by the annual report of the company. The interest rates of individual debts vary over time and can increase or decrease in future. The current bank lending rates are 13%. However, the company might have negotiated well for the loan with the corresponding reduction to around 9% (average cost of debt).  Kd= 6.14% Market value of Equity: No. of shares = 11.64 Crores Price/ Share ( as on 20.2.2009) = Rs. 11.54 Market Capitalization = Rs. 134.32 Crores Reserves = Rs. 37.86 Crores
  8. 8. Total Market Value of Equity = Rs. 172.18 Crores Market Value of Debt: Debt is short term borrowings from banks. Hence market value is same as book value Total Market Value of Debt = Rs. 292.28 Crores Market Value of Preference Shares: Preference Shares Issued = 6.80 Crores Market Value of each share ( as on 20.2.2009) = Rs. 78.472 Crores  Total Market Value of Preference Shares = Rs. 78.472 Crores WACC According to Market Value Kc = Ke*Pe + Kd*Pd + Kps*Pps Ke= 15.525% Kd= 6.14% Kps= 6% (2.8 Crore Shares with 9% and 4 Crores Shares with 4%) Pe= 0.317 Pd= 0.538 Pps= 0.144  Kc = 9.08 %
  9. 9. Book Value of Equity Market Capitalization = Rs. 116.46 Crores Reserves = Rs. 37.86 Crores Total Book Value of Equity = Rs. 154.32 Crores Book Value of Debt: Total Book Value of Debt = Rs. 292.28 Crores Book Value of Preference Shares: Preference Shares Issued = 6.8 Crore Shares Face Value of each share =Rs. 10  Total Book Value of Preference Shares = Rs. 68 Crores WACC According to Book Value Kc = Ke*Pe + Kd*Pd + Kps*Pps Ke= 15.525% Kd= 6.14% Kps= 6% (2.8 Crore Shares with 9% and 4 Crores Shares with 4%) Pe= 0.3 Pd= 0.56 Pps= 0.14  Kc = 8.94 %
  10. 10. Conclusions: Wacc Nirma Henkel Market value 10.72% 9.08% Book Value 10.30% 8.94%  The cost of capital for both the companies is higher when calculated as per the Market Value method as the market value of equity is higher than the book value in the case of both the companies.  In case of Nirma ltd. the proportion of debt (Pd) is very less as compared to Henkel where it is very high (more than 50%).  The cost of equity of Henkel is higher than Nirma because of higher β.  However, the Wacc of Henkel is coming out to be lesser than Nirma. This is because the proportions of equity, debt and preference shares are more distributed than in Nirma which is predominantly equity based (which is an expensive source of finance).  Thus, inspite of being well established in the market, Nirma has higher Wacc as compared to Henkel. Nirma can reduce the Wacc by increasing the debt (current Debt-to-Equity Ratio for Nirma is 0.15) Dec '07 Nirma Ltd. Henkel Ltd. Debt to equity ratio 0.15 1.33 How HR managers of your company might influence the cost of capital? HR managers can reduce the cost of capital (by reducing β and hence the cost of equity) by making the company less risky by keeping the company’s operations proper by ensuring the right organizational structure (according to the environmental conditions and strategy of the organization) and keeping the employees motivated to ensure high operational efficiency and reducing the business risk!! References:  http://www.nse- data_44_11.xls india.com/marketinfo/eod_information/bidbor.jsp  Cmie-Prowess  www.indiainfoline.com  www.sebi.gov.in

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