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Applied Corporate Finance Project for
M/s. Titan Company Ltd.
I. Introduction
Financial statement analysis is the process of reviewing and evaluating a company's financial statements
such as the balance sheet or profit and loss statement, thereby gaining an understanding of the financial
health of the company and enabling more effective decision making. Financial statements record
financial data; however, this information must be evaluated through financial statement analysis to
become more useful to investors, shareholders, managers and other interested parties.
Financial statement analysis is a method or process involving specific techniques for evaluating risks,
performance, financial health, and future prospects of an organization. It is used by a variety of
stakeholders, such as credit and equity investors, the government, the public, and decision-makers
within the organization. These stakeholders have different interests and apply a variety of different
techniques to meet their needs.
The present study is primarily intended to unearth the Corporate Finance applications with
“Titan Company ltd.”
II. Objectives
The study is conducted with the following specific objectives:
To understand overall Corporate Governance of the Company
To measure Risk free rate, Equity Risk premium, Market returns, Beta, Cost of equity and Cost
of Capital of the company
To calculating Fundamental beta
To identifying optimal capital structure of the company
To understand the dividend policy of the company and to provide findings and recommendations
to the companies for effective corporate decision making.
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III. Company Overview
The Company was incorporated on 26th July, at Chennai. The manufacture analog electronic watches
with a choice of Over150designs.The Company was promoted jointly by Questar Investments, Ltd., a
Tata Company with its associates Tata Sons, Ltd., and Tata Press, Ltd., and Tamil Nadu Industrial
Development Corporation, Ltd. (TIDCO). The main objective of the company is to manufacture analog
electronic watches with a choice of over 150 designs.
The Company Limited is engaged in offering watches, jewelry and others. The Company's segments
include Watches, Jewellery, Eyewear and Others. The Company offers plain and studded gold jewelry
brands, such as Tanishq, GoldPlus, Zoya, Mia, which are retailed through Tanishq, GoldPlus, Zoya &
Mia stores. The Company offers watches and accessories, such as bags, sunglasses in brands, including
Titan, Sonata, Fastrack and sub brands, such as Raga and Edge among others. The Company's watches
and accessories are retailed through World of Titan, Helios and Fastrack stores. The Company offers
frames, contact lenses, and Sunglasses in brands, such as Eye+. The Company's eyewear brands are
retailed through Titan Eye Plus stores. It also offers precision engineering component and sub-
assemblies (PECSA) and machine building and automation (MBA) solutions. The Company's
subsidiaries include Titan Time Products Limited, Favre Leuba AG and Titan Engineering and
Automation Limited.
IV. Vision, Mission and Objective of the Company
VISION
We create elevating experiences for the people we touch and significantly impact the world we work in.
MISSION
We will do this through a pioneering spirit and a caring, value-driven culture that fosters innovation,
drives performance and ensures the highest global standards in everything we do.
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V. Corporate Governance
a). CEO
The CEO is Mr. Bhaskar Bhat .He is the managing director of Titan company.
b). Board of Directors
Directors Independent Director
Mr N .N Tata, Director
Mr Harish Bhat, Director
Mr T K Arun, Director
Mr T K Balaji, Independent Director
Ms Vinita Bali, Independent Director
Mrs Hema Ravichandar, Independent Director
Prof. Das Narayandas, Independent Director
Mrs Ireena Vittal, Independent Director
Mr Ashwani Puri, Independent Director
c). Relationship with Financial Market and Society
Total customer orientation: Customers take precedence over all else, always.
Employee appreciation: We value and respect Titanians and endeavour to fulfil their needs and
aspirations.
Performance culture and teamwork: At Titan Company, high performance is a way of life
and is nurtured by teamwork.
Creativity and Innovation: Driven by innovation and creativity, we focus on smarter
approaches and newer technologies.
Passion for excellence: In all our pursuits, we ceaselessly strive for excellence.
Corporate Citizenship: We ensure that a part of our resources is invested in environment and
community betterment
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VI. Stockholder Analysis
S.No Details
1 Listings NSE,BSE
2 Type of Shares Equity Share
3 Share Holding of Promoter and Promoter
Group 471,007,920
4 Share Price Rs 316.25
5 Share Holding of Promoter and Promoter
Group %
53.05%
Category No. of Shares Percentage
Promoters 471,007,920 53.05
Foreign Institutions 195,205,979 21.99
General Public 168,122,017 18.94
NBFC and Mutual Funds 22,298,883 2.51
VII. Risk and Return Analysis
Risk free
rate (Rf)
for India
Rf= 10 Year Zero Bond yield – Default Country
Spread
Rf = 7.4 % - 2.44 %
5% Approx.
Equity
Risk
Premium
(Historical
Returns
Method)
ERP = Base premium for mature market + Country
Risk Premium
Country Risk Premium
= Country Default Spread x
* The Current US Market risk premium is 4.8%
Country Risk Premium for
India = 2.44% x 1.5
= 3.6%
ERP = 4.8%* + 3.6% = 8.4%
8.4% (8% Approx)
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Market
Returns
(Rm)
Rm = ERP + Rf
Rm = 8.4 % + 5 %
Rm = 13.4%
Beta
Covariance (Asset and Market) / Variance of the
Market
(or)
SLOPE / LINEST in Excel
ß = 0.63
Cost of
Equity
Re = Rf + ß (Rm – Rf)
Re=10.10%
Cost of
Debt
(Opening Interest + Closing Interest) / (Opening ST
& LT Loans + Closing ST & LT Loans)
Rd=58%
We
Market Capitalization on Equity / (M.Cap. Equity +
Debt (LT & ST))
We =99%
Wd
Debt / (M.Cap. Equity + Debt (LT & ST))
Wd=1%
Cost of
Capital
(WACC)
We*Re + Wd*Rd(1-Taxrate)
Assume Tax Rate is 30%
WACC=10.28%
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Calculating Fundamental Beta
Historical Beta
Beta of the Company B=0.63
Debt/Equity Ratio D/E=0.03
Similar Type of Companies under the same Sector Beta D/E Tax rate – 30%
PC Jewellary 0.93 1.04
Gitanjli 1.17 1.72
Unlevered Beta Computation for PC Jewellry and Gitanjli
Formula BL/(1+D/E(1-t)
PC Jewellary Beta
0.53819
Gitanjli Beta
0.53085
Average (Unlevered Beta)
0.53452
Levered Beta for Glenmark
Formula BUL x (1+D/E(1-t)
Levered Beta 0.54575
VIII. Capital Structure
Equity Share capital Value (Book Value) 349000
Debt (Long term + Short term & Others) 93504
D/E Ratio 0.27
Debt to Capital Ratio 0.211
Market Cap Value as on ……. 29687.57
Debt (Long term + Short term & Others) 93504
D/E Ratio 3.15
Debt to Capital Ratio 0.76
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Cost of Capital Vs. Cost of Debt
Cost of Capital (CoC)=7.25 %
Cost of Debt (CoD)= 9%
Here CoC is less than of CoD i.e. (CoC < CoD)
Tax benefits
Cost Reduction
Profit Retention
Financial Leverage
Tax Savings
Optimal Capital Structure
a) Cost of Capital Approach
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b) Operating Income Approach
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c) Adjusted Present Value Approach
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d) Sector Approach
IX. Dividend Policy
(a). Dividend Summary
For the year ending March 2016, Titan Company has declared an equity dividend of 220.00%
amounting to Rs 2.2 per share. At the current share price of Rs 310.15 this results in a dividend yield of
0.71%.
The company has a good dividend track report and has consistently declared dividends for the last 5
years.
* As per the Profit & Loss account
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(b). Assessment of Dividend Policy
2014 2015 2016
Long Term Debt - - -
Current liabilities 351405 269363 276602
Current Assets (Less cash) 434053 463362 503635
Net Profits
81626 68939
Depreciation and Amortization
8957 9956
Capital Expenditure
20934 25516
Change in Debt
- -
Change in Current Assets
29309 40273
Change in Current Liabilities
(82042) 7239
Free Cash Flow to Equity
(41702) 20345
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Dividend Paid (including taxes)
21691 47575
Equity Value
308387 349000
Return on Equity
26.5% 19.8%
Cost of Equity 10.0% 10.0% 10.0%
Dividend Payout Ratio
26.6% 69.0%
(c). Assessment of Dividend Policy with Peers
Particular Titan company PC jewellary(peer1) Gitanjli(peer 2)
2014-15 2015-16 2014-15 2015-16 2014-15 2015-16
Net Profits
81626 68939 378.43 399.66 8958 13513
Dividend Paid (including
taxes) 21691 47575 68.97 31.43 616 -
Payout Ratios 26.6% 69% 18.2% 7.9% 6.88% 0%
The net profit of Titian company decreasing from 2015-2016 but payout ratio is increasing. This not
good for the company. Why because the out flow is more than inflow. They are paying more divined to
attract the shareholders. The peers company payout ratio are decreasing year to year it means they are
not investing others project.so this create some benefit to titan company.
X. Major Findings
Share Holding of Promoters 53.05%
Fundamental Beta of Titan Company Ltd. is 0.63 which is less than 1 (<1).This indicates
Company is less volatile than the market.
Here Cost of debt (9%) is greater than the cost of Capital (7.25%). This indicates a bad sign
because If the cod of a firm increases , the levered beta of a firm increases and thereby increases the coe
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of a firm this will affect the creditness of a firm ,which means credit rating of a firm decreases ,So in here
I recommend that decrease the value of debt.
In Cost of Capital Approach, we realize that the cost of capital first goes down as we increase
the debt, and then after reaching Optimal level, starts rising again as cost of equity and debt both
begin rising with higher debt levels. The Optimal Debt Equity Ratio is 0.27.
In Operating Income Approach, we realize that the highest firm value is at debt equity
of 0.27. The Income drop results in the firm value dropping, even though cost of capital is
lower elsewhere.
In Adjusted Present Value Approach, the optimal Debt Capital ratio is 0.4. This means
Debt Equity ratio is 0.66.
In Sector Approach, looking at peers such as PC Jellwery and Gitanjli, we see that average Debt
Equity ratio should be about 6561% for Titan company . which is very high .
In Dividend Policy, return on Equity is greater than the cost of Equity (RoE > CoE). So
the company is creating value on retained money. It means the company is creating value
by investing that money in good projects.
In Dividend Policy, Free cash flow to Equity got decrease from 2015 to 2016. This Free
Cash Flow to Equity means how much cash we can pay to the shareholders. It implies that
Company is reinvesting in good projects to expand its market.
Here Titan company Ltd has high payout ratios compared to the Peer Companies pc jewellery
and Gitanjli . The Dividend Pay-out ratios of Titan Company Ltd. is showing increasing trend
every year from 2014-2016. This indicates that company can afford to pay such high dividends.
XI. Recommendations
The cost of debt is greater than of cost of equity .i recommend the company to decrease their
debt.
The company beta is 0.63 the company has the good risk facing capacity.
The company need to concentrate their net profit.
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XII. Conclusion
In the present study, I understood overall Corporate governance and Dividend Policy of Titan company
Ltd. It is concluded that the company can increase their Debt Equity ratio from 0.4 to 0.66.
XIII. References
1. http://www.godrejcp.com/
2. http://www.itcportal.com/
3. http://marico.com/
4. http://www.moneycontrol.com/
5. http://www.investopedia.com/
6. http://www.google.com/