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By :- Neha Bist (64) Rahul Arora (80) Raiza Siddeque (81) Sayani Barman (92) Yamini Dhawan (119) FM Presentation on Capital Structure Analysis of Firms
Transcript

FM Presentation on Capital Structure Analysis of FirmsBy :Neha Bist (64) Rahul Arora (80) Raiza Siddeque (81) Sayani Barman (92) Yamini Dhawan (119)

INTRODUCTIONy As per the requirements of the project we have selected three

firms from BSE-1000 Index.y The companies we have taken for analysis are as follows:1. 2. 3.

UNITECH INDIA Ltd. UNITED SPIRITS Ltd. ABAN OFFSHORE Ltd.

UNITED SPIRITS LTD.y United Spirits Limited (USL) is the largest spirits company in

India and among the top 3 spirits companies in the world y The company has 17 millionaire brands (selling more than a million cases a year) in its portfolio and enjoys a strong 59% market share for its first line brands in India

Debt-Equity Ratioy The change in debt to equity ratio of the company is given in the

following graph:debt equity ratio2.5

2 2 1.79

1.5 1.11 1 0.58 0.5 0.62

debt equity ratio

0 2004-05 2005-06 2006-07 2007-08 2008-09

Reason for the decrease of D/E ratio from 1.1(2006-07) to .58(2007-08)y Whyte and Mackay(Scottish whisky maker) acquisition in 2007

took a $625 million loan. y The acquisition debt trimmed from Rs 3,143crore in March 2009 to Rs 433crore in December 2009 post the sale of treasure stock worth Rs1,050crore and a $350 million Qualified Institutional Placement (QIP) in the latter half of 2009.

SHARE PRICE MOVEMENT

REASON FOR VARIATIONS IN STOCK PRICESy Leverage of the company increased, still the share price of the

company improved in 2007 y Share price decreased after acquisition, as debt with recourse to USL has been trimmed from Rs 3,143crore in March 2009 to Rs 433crore in December 2009 post the sale of treasure stock worth Rs1,050crore and a $350 million Qualified Institutional Placement (QIP) in the latter half of 2009. y Company was accused because of1. 2.

Siphoning of the funds Promoters stake was pledged as collateral security for raising funds for the expansion of Kingfisher Airlines

Optimal debt equity ratio14 12

10

8 rd re 6 ra

4

2

0 0 0.2 0.4 0.6 0.8 1 1.2

The optimal debt equity ratio is 1.01

Name of the company D/E Dabur USL United Breweries

rd 0.14 0.73 1.01

re 9.33 8.959 8.267

ra 10.23 10.96 11.99

9.77 8.98 8.87

UNITECH INDIA Ltd.y Established in 1972, by Ramesh Chandra y originally formed as United Technical Consultant Private Ltd y Now, Leading real estate developer in India y Conferred with the title of "Superbrand" by Superbrands India in

2009 y Launched Unitech Infra, venture into infrastructure business, leveraging its decades of experience and expertise in real estate.

DEBT TO EQUITY RATIO

DEBT EQUITY RATIO4 3.5

3

2.5

2 Series1 1.5

1

0.5

0 2005-06 2006-07 2007-08 2008-09 2009-10

REASON FOR THE VARIATIONS IN D/E RATIOy Debt equity ratio decreased substantially from 2.69 to 0.62. y The high growth strategy adopted the company necessitated the company to

take considerable amount of debt. y Total outstanding debt was in excess of Rs. 10,000crores as of 30th Sep08 of which over Rs. 2,500 crores was due for repayment before 31st Mar09. y Rise in average cost of debt due to the tight liquidity environment. y The changes in the global financial system, especially after September 2008 were unprecedented, that resulted in:y Sharp downward spiral in cash and credit y Negative investor confidence. y Major refinancing risk in a market with very tight liquidity. y Matters were made much worse by the fall-out that the financial crisis has had on the global real economy.

y But during 2009-2010 the progress achieved by the company, resulted

in a significant improvement in its cash flows y The net debt to equity ratio, as of 31st Mar10, was at a healthy 0.51, because of reduction in debt y During last financial year, Company successfully raised nearly Rs.4,400 Crores through two rounds of Qualified Institutional Placement (QIP) y The said funds aided the company in y Reducing its debt by almost Rs.3000 Crores y Reinforced the confidence and trust the investors place in the company

SHARE PRICE MOVEMENT

REASON FOR THE DECLINE IN SHARE PRICEy Share price declined substantially since 2008 and the trend

continues till now. y This could probably be because ofy increased leverage y economic downturn.

y Even after the improvement of the debt to equity ratio in

2010, the share price of Unitech is more or less consistent.

Optimal debt equity ratio14 12

10

8 Rd Re 6 Ra

4

2

0 0 0.5 1 1.5 2 2.5

The optimal debt equity ratio is 2.1

Comparison with competitorsName Unitech Lancotech Jaiprakash associates D/E Rd 0.62 0.89 Re 7.04 7.24 Ra 8.6 8.94 7.33 7.29

2.106

5.89

12.88

7.1255

ABAN OFFSHORE LTDy Established in 1986 y India's largest offshore drilling services provider to oil

companies, mainly for ONGC. y The group has also ventured into construction, offshore and onshore drilling, wind energy and power generation, Information Technology enabled services, hotels and resorts, tea plantations and in marketing

REASONS FOR THE VARIATION OF D/E RATIOy D/E ratio changed from 2.76 in march 2006 to 3.71 in

march 2008, a significant increase in the ratio. y acquired Norwegian drilling major Sinvest, in 2006 at an enterprise value of $2.2 billion thus inviting high debt. y The acquisition of Sinvest when the stockmarket was soaring added instant power to Abans global operations y when oil prices were northward bound, it brought in a huge $3.1-billion (Rs 15,800 crore) debt in a balance sheet of Rs 2,000 crore-plus, mainly through borrowing from a clutch of banks like ICICI,PNB and Axis

Rd, Re and Ra OF ABAN OFFSHORE LTD70 60

50

40 rd re 30 ra

20

10

0 -0.5 0 0.5 1 1.5 2

The optimal debt equity ratio is 1.88

Comparison with competitorsoptimal rd Indraprastha GasGuj Gas

D/E 0.05 0.02 0.8 1.12 1.88

rd 6 6 7.46488 8.265 8.155

re 26.58 25.992 40.11 45.015 58.396

ra 25.466 25.55 24.195 24 23.72

Guj State Petro

Petronet LNG

Aban offshore

Impact of Capital Structure on Firm Valuey Firm value is inversely related to cost of capital. In order to

find the relationship between the capital structure and firm value we are finding the relationship between the capital structure of the firm and its cost of capital. y From these three examples which we have analysed above we can see that even when there is a change in the debt equity ratio of the firm, the cost of capital remains more or less the same


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