Description
This is a presentation describes the factors that influence the firm's capital structure in metal industry, cement industry, automobiles, banking, FMCG.
CAPITAL STRUCTURE OF INDIAN FIRMS
Capital Structure
? Risk and Return is the base for Capital Structure
? Optimal capital structure = balance between the
use of debt and equity maximize stock price ? High risky debt capital Reduction in Shareholders value ? Three Major theories - Trade-off theory, Agency Cost theory and Pecking-Order theory
Factors that influence the firm’s capital structure:
? Existing debt position
? Management’s perception towards risk
? Business risk ? Cost of debt
? Cost of Equity
? WACC ? The firm’s Tax position
? Financial flexibility
? Leverages
Industries Studied
? Metal Industry
? ?
? Cement Industry
? ?
SAIL TATA Steel Tata Motors Maruti Suzuki Ltd Canara Bank ICICI
ACC Ltd India Cements Dabur Ltd HUL
? Automobiles
?
? FMCG
?
?
?
? Banking
? ?
OVERVIEW-METAL INDUSTRY
? Traditionally high debt equity mix ? Rising prices in global and domestic markets lead
? ? ? ? ?
changes in debt equity and force companies to maintain higher reserves This lead to expansion : Eg. Tata steel maintained $4billion as reserve and acquired Corus Eg. JSW steels had undergone 2MT of production expansion Classification is made on the basis of age of the companies Aged companies like Tata steel & SAIL are classified as adult companies
Trend in issue of security
? Most commonly used instrument in steel industry from ? ?
?
? ? ?
1990 is Debenture/bonds. GDRS/ADRS was first issued by TATA steel in 1996. Non-convertible debenture was issued in 1998 by Hindalco industries ltd. and Hindustan zinc ltd. Same here Hindalco came up with new kind of instrument i.e. secured foreign currency borrowing. TATA steel introduce Zero coupon bonds in 2001. Convertible debenture was introduced in same year by Hindalco Industries. Sterlite issued Preference capital to its share holders.
D/E
Sesa Hindalco Industries J S W Steel Jindal Saw Jindal Steel & Power N M D Goa Ltd. Ltd. Ltd. Ltd. C Ltd. Ltd. Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 0.3 0.53 0.53 0.64 0.66 0.66 1.89 1.79 0.76 1.54 2.12 1.75 2.19 1.53 2.41 1.55 1.75 0.53 0.65 1.75 2.13 1.86 1.15 0 0 1.05 0.72 0.24 0.03 0.01 0 0 0
Steel Sterlite Authori Industri ty Of es Tata India (India) Steel Ltd. Ltd. Ltd. 9.57 12.58 2.28 0.59 0.3 0.22 0.13 0.28 1.3 2.05 2.83 1.23 0.85 0.46 0.23 0.27 0.25 1.99 1.31 0.78 0.47 0.34 1.76 1.58 2.17
Welspun Corp Ltd.
2.35 1.45 1.7
Steel Authority of India Ltd
? 1996 – Issued GDRs
? Company has been NCDS and bond dominated with
high Debt Equity ratio. ? From 1992 there has not been even a single equity issue, split or buyback in domestic market.
Tata Steels Ltd
? 1994 – Issued ECBs
? Sept 1999 – Issued Preference Shares
? July 2009 – Issued GDRs ? 1995 to 2009 ? Issued, converted & forfeited Equity shares ? NCDs have been used
OVERVIEW-AUTOMOBILE INDUSTRY
? Automobile industry in India is the ninth largest in the ? ? ?
? ?
whole world Post liberalization India, sustained growth as a result of competitiveness and relaxed restrictions Driven by manufacturers such as Tata Motors, Mahindra and Mahindra, Maruti Suzuki (Major players) In the commercial vehicle segment TATA Motors has adequate ratio of debt to equity giving maximum returns to its shareholders Its current capital structure also has capacity to raise further capital if required for funding. Mahindra & Mahindra has better structure in the tractor segment
Trend in issue of security
? Hero Honda first issued non convertible debenture
bonds in year 1995. ? Most of the other companies in this industry used non convertible debenture/bonds in the year 2000. ? Secured foreign currency borrowing was first used in 2003 by appolo tyres and bharat forge ltd. ? Amtek used preference share in 2003.
D/E
Bajaj Amtek Apollo Auto Auto Ltd. Tyres Ltd. Ltd. Dec02 Dec03 Dec04 Dec05 Dec06 Dec07 Dec08 Dec09 0.82 0.75 0.65
Bharat Forge Cummins Ltd. India Ltd. 0.03 0.04
Exide Escort Industries s Ltd. Ltd. 3.65 5.81 1.29 0.93
Maruti Mahindra & Suzuki M R F Mahindra India Ltd. Ltd. Ltd. 1.44 1.54
Tata Moto rs Ltd. 1.33 0.83
0.96
1.23 1.33 0.84 1.01 1.23
0.71
0.91 1.19 0.91 0.55 0.66 0.83 0.98 1.15 0.92 1.2 1 1.33
0.08
0.09 0.05 0.03 0.03 0.02
2.62
2.79 1.94 1.9 1.84 0.3
0.59
0.67 0.72 0.61 0.65 0.65 0.62 0.47 0.86 0.38 0.22
1.26
1.61 1.49 1.69 1.69 1.83
0.12 0.47
0.1 0.62 0.14 0.55 0.1 0.95 0.15 1.34 0.09 6.09
Tata Motors Ltd
? GDRs – 1994, 1996 & 2009
? 1997 – 2002 – majorly denominated by issues of
NCDs ? 2004 – Issued ECBs ? 2003 – 2009 – Issued, converted Equity ? 2009 onwards – mixed use of NCDs & Equity, with high debt equity ratio
Maruti Suzuki Ltd
? Equity Denominated (rights, splits, offer 2003)
? 2000 – Issued NCDs
OVERVIEW-CEMENT INDUSTRY
? The Indian cement industry is one of the pillar sectors of ?
?
?
?
the economy In view of LPG, while India Cements Industry faced many challenges, opportunities to improve sales also emerged Cement Industry continues to adopt a series of readjusting and restructuring measures including up gradation of technology The cement industry can enlarge global market shares so long as the industry players firmly seize the business opportunities In order to manage stiff competition, drastic steps are being taken to reduce cost of production
Trend in issue of security
? Most commonly used instrument – Debenture/bonds. ? Non convertible bonds/debenture was first introduced by ? ? ? ? ? ? ? ?
Ambuja cement in 1996. In 2000 all the four companies issued non convertible bonds/debenture. Secured foreign currency bonds was used by ACC and Ambuja in 2000. Same year ACC issued equity share first time since 1990. In 2002 again most of the companies issued equity share. India cements issued some ZCB in year 2003. India cements also issued some preference share in same year. India cements came up with warrants in year 2005. In 2006 again India cements came up with convertible debenture.
ACC Ltd
? 1992 – Equity firm
? 1996 Issued Ist Non Convertible debentures
? Till 2001 – various rounds of NCDs ? 2001-2004 – Tapped Equity market several times
? Mar 2004 – Reached out for ECBs & GDRs
? Apr 2004 onwards – Issued, converted, split equity
stocks.
India Cements
? 1994 – Issued GDRs
? 1997 – Issued Non Convertible Debentures
? 2000 – Preference shares ? 2006 onwards – Equity
Company has tapped all possible sources of finance and mostly 1st in their sector.
OVERVIEW-BANKING INDUSTRY
? Due to financial intermediation, exposed to severe
competition leading to various types of financial and nonfinancial risks ? Expected losses are generally taken care of by suitable pricing methodology, ? Unexpected losses, both on account of individual exposure and the whole portfolio , are be borne by the bank itself ? Hence is to be taken care of by the requisite capital ? Need for suitable capital structure and sufficient Capital Adequacy Ratio is felt ? Need for capital results in : ? re-alignment in risk-weighted assets ? redeployment of excess funds over statutory SLRrequirements
Trend in issue of security
? In 1990 SBI used secured foreign currency bonds. ? IDBI first time issued debenture/bonds in year 1991. ? In year 1994 all the banks but Kotak Mahindra repaid ? ? ?
?
there secured borrowings. Again in year 1997 most of the banks took some or other form of secured borrowings. In year 2000 IDBI used most of the instruments like non convertible bonds and ZCB. Again in the year 2001 most of the banks repaid their secured borrowings. Banks doesn’t use debenture and bonds as commonly as other industry uses.
D/E
Kotak Punja Mahin b I D B I dra Natio Federal HDFC ICICI Bank Bank nal Bank Ltd. Bank Ltd. Bank Ltd. Ltd. Ltd. Bank SBI 1.17 0.04 0.1 0.05 0.01 0.06 2.56 0.21 0.24 0.33 0.9 0.44 1.68 1.55 1.81 1.85 1.94 0.58 0.75 0.49 0.54 0.93 0.73 0.78 0.64 0.71 0.83 0.86 0.94 9.62 6.62 5.44 3.69 2.5 3.42 8.91 6.92 8.42 8.87 7.99 7.71 1.79 2.54 2.56 2.64 1.83 2.15 0.73 0.87 1.01 0.76 1.14 0.79 0.83 0.76 0.81 0.86 1.24 1.67
Axis Allahabad Bank Bank Ltd. Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07
Bank Of Baroda
Bank Of Canara India Bank
Dec-08
Dec-09 Dec-10
0.33
0.64 0.78
1.03
1.52 1.07
0.83
0.96 0.85
1.36
1.31
1.04
1.38
0.32
0.28
0.68
0.66 0.61
2.37
2.46 2.23
6.46
6.03
1.56
1.16
0.75
0.64
1.6
1.45
ICICI Bank
? 1999 – Issued 1st NCDs
? 2000, 2005 & 2007 – Tapped foreign markets
through ADRs ? Oct 2003, Apr 2004 – Euro issue of ENCB Company has financed its needs through frequent Equity & NCDs issues.
Canara Bank
? Company has been Debt dominated for the period of
last 10 years from 1999 – 2009 ? 2002 – Public issue of Equity ? 2009 – Issued bonds
OVERVIEW-FMCG INDUSTRY
? FMCG companies are mostly dependent on equity ? ?
?
?
financing Long term debts form a very insignificant portion of their total financing As a result fmcg companies low geared companies Highly geared companies are unattractive for investors as faces difficulty in paying interest on borrowings if operations fail to generate sufficient revenue FMCG companies hence need to have an attractive capital structure because the short cycle times in the business demand high liquidity
Trend in issue of security
? This industry also has debenture/bonds as most ?
? ? ?
?
?
commonly used instrument to raise funds. Non convertible bonds/debenture was used to raise very small amount of fund by Mcleod Russel India Ltd. in the year 1994. Mcleod Russel India Ltd. only issued ZCB in 1996. HUL issued capital in primary market in year 2001 first time since 1990. Secured currency borrowings was first used by Ruchi Soya Inds. Ltd. to raise small funds in 2002. Ruchi Soya Inds. Ltd. also issued preference share in 2002. Tata tea first issued convertible warrants in 2007.
D/E
D/E Ratio Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09
Godrej ColgateConsumer Palmolive Dabur India Products (India) Ltd. Ltd. Ltd.
Hindustan Unilever Ltd. 0.03
Mcleod Russel Ruchi Soya I T C Ltd. India Ltd. Inds. Ltd.
Tata Tea Ltd.
0.09 0.06 0.05 0.04 0.02 0.02 0.03 0.02
0.69 0.44 0.43 0.4 0.22 0.35 0.16 0.28 0.87 1.42 1.11 0.49
0.02 0.8 0.76 0.05 0.04 0.07
0.08 0.03 0.02 0.03 0.02 0.02 0.02 1.31 0.7 0.81 0.67
0.81 0.85 2.43 2.31 1.35 1.78 1.82 1.58
1.69 1.65 1.41 1.13 1.12 2.26 0.78 0.68
0.2
0.01
FMCG
? Dabur – It has remained an all Equity firm
throughout over a period of 1993 – 2010 ? HUL – issued NCDs in 2003
?
Equity denominated otherwise (Buybacks n ESOPS are favorite instruments)
Thank You !!!
doc_777276412.pptx
This is a presentation describes the factors that influence the firm's capital structure in metal industry, cement industry, automobiles, banking, FMCG.
CAPITAL STRUCTURE OF INDIAN FIRMS
Capital Structure
? Risk and Return is the base for Capital Structure
? Optimal capital structure = balance between the
use of debt and equity maximize stock price ? High risky debt capital Reduction in Shareholders value ? Three Major theories - Trade-off theory, Agency Cost theory and Pecking-Order theory
Factors that influence the firm’s capital structure:
? Existing debt position
? Management’s perception towards risk
? Business risk ? Cost of debt
? Cost of Equity
? WACC ? The firm’s Tax position
? Financial flexibility
? Leverages
Industries Studied
? Metal Industry
? ?
? Cement Industry
? ?
SAIL TATA Steel Tata Motors Maruti Suzuki Ltd Canara Bank ICICI
ACC Ltd India Cements Dabur Ltd HUL
? Automobiles
?
? FMCG
?
?
?
? Banking
? ?
OVERVIEW-METAL INDUSTRY
? Traditionally high debt equity mix ? Rising prices in global and domestic markets lead
? ? ? ? ?
changes in debt equity and force companies to maintain higher reserves This lead to expansion : Eg. Tata steel maintained $4billion as reserve and acquired Corus Eg. JSW steels had undergone 2MT of production expansion Classification is made on the basis of age of the companies Aged companies like Tata steel & SAIL are classified as adult companies
Trend in issue of security
? Most commonly used instrument in steel industry from ? ?
?
? ? ?
1990 is Debenture/bonds. GDRS/ADRS was first issued by TATA steel in 1996. Non-convertible debenture was issued in 1998 by Hindalco industries ltd. and Hindustan zinc ltd. Same here Hindalco came up with new kind of instrument i.e. secured foreign currency borrowing. TATA steel introduce Zero coupon bonds in 2001. Convertible debenture was introduced in same year by Hindalco Industries. Sterlite issued Preference capital to its share holders.
D/E
Sesa Hindalco Industries J S W Steel Jindal Saw Jindal Steel & Power N M D Goa Ltd. Ltd. Ltd. Ltd. C Ltd. Ltd. Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 0.3 0.53 0.53 0.64 0.66 0.66 1.89 1.79 0.76 1.54 2.12 1.75 2.19 1.53 2.41 1.55 1.75 0.53 0.65 1.75 2.13 1.86 1.15 0 0 1.05 0.72 0.24 0.03 0.01 0 0 0
Steel Sterlite Authori Industri ty Of es Tata India (India) Steel Ltd. Ltd. Ltd. 9.57 12.58 2.28 0.59 0.3 0.22 0.13 0.28 1.3 2.05 2.83 1.23 0.85 0.46 0.23 0.27 0.25 1.99 1.31 0.78 0.47 0.34 1.76 1.58 2.17
Welspun Corp Ltd.
2.35 1.45 1.7
Steel Authority of India Ltd
? 1996 – Issued GDRs
? Company has been NCDS and bond dominated with
high Debt Equity ratio. ? From 1992 there has not been even a single equity issue, split or buyback in domestic market.
Tata Steels Ltd
? 1994 – Issued ECBs
? Sept 1999 – Issued Preference Shares
? July 2009 – Issued GDRs ? 1995 to 2009 ? Issued, converted & forfeited Equity shares ? NCDs have been used
OVERVIEW-AUTOMOBILE INDUSTRY
? Automobile industry in India is the ninth largest in the ? ? ?
? ?
whole world Post liberalization India, sustained growth as a result of competitiveness and relaxed restrictions Driven by manufacturers such as Tata Motors, Mahindra and Mahindra, Maruti Suzuki (Major players) In the commercial vehicle segment TATA Motors has adequate ratio of debt to equity giving maximum returns to its shareholders Its current capital structure also has capacity to raise further capital if required for funding. Mahindra & Mahindra has better structure in the tractor segment
Trend in issue of security
? Hero Honda first issued non convertible debenture
bonds in year 1995. ? Most of the other companies in this industry used non convertible debenture/bonds in the year 2000. ? Secured foreign currency borrowing was first used in 2003 by appolo tyres and bharat forge ltd. ? Amtek used preference share in 2003.
D/E
Bajaj Amtek Apollo Auto Auto Ltd. Tyres Ltd. Ltd. Dec02 Dec03 Dec04 Dec05 Dec06 Dec07 Dec08 Dec09 0.82 0.75 0.65
Bharat Forge Cummins Ltd. India Ltd. 0.03 0.04
Exide Escort Industries s Ltd. Ltd. 3.65 5.81 1.29 0.93
Maruti Mahindra & Suzuki M R F Mahindra India Ltd. Ltd. Ltd. 1.44 1.54
Tata Moto rs Ltd. 1.33 0.83
0.96
1.23 1.33 0.84 1.01 1.23
0.71
0.91 1.19 0.91 0.55 0.66 0.83 0.98 1.15 0.92 1.2 1 1.33
0.08
0.09 0.05 0.03 0.03 0.02
2.62
2.79 1.94 1.9 1.84 0.3
0.59
0.67 0.72 0.61 0.65 0.65 0.62 0.47 0.86 0.38 0.22
1.26
1.61 1.49 1.69 1.69 1.83
0.12 0.47
0.1 0.62 0.14 0.55 0.1 0.95 0.15 1.34 0.09 6.09
Tata Motors Ltd
? GDRs – 1994, 1996 & 2009
? 1997 – 2002 – majorly denominated by issues of
NCDs ? 2004 – Issued ECBs ? 2003 – 2009 – Issued, converted Equity ? 2009 onwards – mixed use of NCDs & Equity, with high debt equity ratio
Maruti Suzuki Ltd
? Equity Denominated (rights, splits, offer 2003)
? 2000 – Issued NCDs
OVERVIEW-CEMENT INDUSTRY
? The Indian cement industry is one of the pillar sectors of ?
?
?
?
the economy In view of LPG, while India Cements Industry faced many challenges, opportunities to improve sales also emerged Cement Industry continues to adopt a series of readjusting and restructuring measures including up gradation of technology The cement industry can enlarge global market shares so long as the industry players firmly seize the business opportunities In order to manage stiff competition, drastic steps are being taken to reduce cost of production
Trend in issue of security
? Most commonly used instrument – Debenture/bonds. ? Non convertible bonds/debenture was first introduced by ? ? ? ? ? ? ? ?
Ambuja cement in 1996. In 2000 all the four companies issued non convertible bonds/debenture. Secured foreign currency bonds was used by ACC and Ambuja in 2000. Same year ACC issued equity share first time since 1990. In 2002 again most of the companies issued equity share. India cements issued some ZCB in year 2003. India cements also issued some preference share in same year. India cements came up with warrants in year 2005. In 2006 again India cements came up with convertible debenture.
ACC Ltd
? 1992 – Equity firm
? 1996 Issued Ist Non Convertible debentures
? Till 2001 – various rounds of NCDs ? 2001-2004 – Tapped Equity market several times
? Mar 2004 – Reached out for ECBs & GDRs
? Apr 2004 onwards – Issued, converted, split equity
stocks.
India Cements
? 1994 – Issued GDRs
? 1997 – Issued Non Convertible Debentures
? 2000 – Preference shares ? 2006 onwards – Equity
Company has tapped all possible sources of finance and mostly 1st in their sector.
OVERVIEW-BANKING INDUSTRY
? Due to financial intermediation, exposed to severe
competition leading to various types of financial and nonfinancial risks ? Expected losses are generally taken care of by suitable pricing methodology, ? Unexpected losses, both on account of individual exposure and the whole portfolio , are be borne by the bank itself ? Hence is to be taken care of by the requisite capital ? Need for suitable capital structure and sufficient Capital Adequacy Ratio is felt ? Need for capital results in : ? re-alignment in risk-weighted assets ? redeployment of excess funds over statutory SLRrequirements
Trend in issue of security
? In 1990 SBI used secured foreign currency bonds. ? IDBI first time issued debenture/bonds in year 1991. ? In year 1994 all the banks but Kotak Mahindra repaid ? ? ?
?
there secured borrowings. Again in year 1997 most of the banks took some or other form of secured borrowings. In year 2000 IDBI used most of the instruments like non convertible bonds and ZCB. Again in the year 2001 most of the banks repaid their secured borrowings. Banks doesn’t use debenture and bonds as commonly as other industry uses.
D/E
Kotak Punja Mahin b I D B I dra Natio Federal HDFC ICICI Bank Bank nal Bank Ltd. Bank Ltd. Bank Ltd. Ltd. Ltd. Bank SBI 1.17 0.04 0.1 0.05 0.01 0.06 2.56 0.21 0.24 0.33 0.9 0.44 1.68 1.55 1.81 1.85 1.94 0.58 0.75 0.49 0.54 0.93 0.73 0.78 0.64 0.71 0.83 0.86 0.94 9.62 6.62 5.44 3.69 2.5 3.42 8.91 6.92 8.42 8.87 7.99 7.71 1.79 2.54 2.56 2.64 1.83 2.15 0.73 0.87 1.01 0.76 1.14 0.79 0.83 0.76 0.81 0.86 1.24 1.67
Axis Allahabad Bank Bank Ltd. Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07
Bank Of Baroda
Bank Of Canara India Bank
Dec-08
Dec-09 Dec-10
0.33
0.64 0.78
1.03
1.52 1.07
0.83
0.96 0.85
1.36
1.31
1.04
1.38
0.32
0.28
0.68
0.66 0.61
2.37
2.46 2.23
6.46
6.03
1.56
1.16
0.75
0.64
1.6
1.45
ICICI Bank
? 1999 – Issued 1st NCDs
? 2000, 2005 & 2007 – Tapped foreign markets
through ADRs ? Oct 2003, Apr 2004 – Euro issue of ENCB Company has financed its needs through frequent Equity & NCDs issues.
Canara Bank
? Company has been Debt dominated for the period of
last 10 years from 1999 – 2009 ? 2002 – Public issue of Equity ? 2009 – Issued bonds
OVERVIEW-FMCG INDUSTRY
? FMCG companies are mostly dependent on equity ? ?
?
?
financing Long term debts form a very insignificant portion of their total financing As a result fmcg companies low geared companies Highly geared companies are unattractive for investors as faces difficulty in paying interest on borrowings if operations fail to generate sufficient revenue FMCG companies hence need to have an attractive capital structure because the short cycle times in the business demand high liquidity
Trend in issue of security
? This industry also has debenture/bonds as most ?
? ? ?
?
?
commonly used instrument to raise funds. Non convertible bonds/debenture was used to raise very small amount of fund by Mcleod Russel India Ltd. in the year 1994. Mcleod Russel India Ltd. only issued ZCB in 1996. HUL issued capital in primary market in year 2001 first time since 1990. Secured currency borrowings was first used by Ruchi Soya Inds. Ltd. to raise small funds in 2002. Ruchi Soya Inds. Ltd. also issued preference share in 2002. Tata tea first issued convertible warrants in 2007.
D/E
D/E Ratio Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09
Godrej ColgateConsumer Palmolive Dabur India Products (India) Ltd. Ltd. Ltd.
Hindustan Unilever Ltd. 0.03
Mcleod Russel Ruchi Soya I T C Ltd. India Ltd. Inds. Ltd.
Tata Tea Ltd.
0.09 0.06 0.05 0.04 0.02 0.02 0.03 0.02
0.69 0.44 0.43 0.4 0.22 0.35 0.16 0.28 0.87 1.42 1.11 0.49
0.02 0.8 0.76 0.05 0.04 0.07
0.08 0.03 0.02 0.03 0.02 0.02 0.02 1.31 0.7 0.81 0.67
0.81 0.85 2.43 2.31 1.35 1.78 1.82 1.58
1.69 1.65 1.41 1.13 1.12 2.26 0.78 0.68
0.2
0.01
FMCG
? Dabur – It has remained an all Equity firm
throughout over a period of 1993 – 2010 ? HUL – issued NCDs in 2003
?
Equity denominated otherwise (Buybacks n ESOPS are favorite instruments)
Thank You !!!
doc_777276412.pptx