Description
PPT for Study on Corporate Financea of Idea Cellular
Corporate Finance –
A Study on Idea Cellular
Beta Analysis, Leverage Analysis, Dividend Policy
Analysis and Alternate financing policy analysis
for Idea Cellular (532822 | IDEA)
Sarang Bhutada, MBA Student at DoMS, IIT Madras
Financial Management, under Dr. Thenmozhi
[email protected]
om
Debt Structure
2008 2007 2006 2005
Debt 65147.59 42505.04 29156.07 NA
Shareholder’s
Equity
49525.20 46300.09 28423.68 NA
Total Capital 114672.79 88805.13 57579.75 NA
EBITDA 22712.65 14859.63 7260.52 NA
Interest Expense 4592.27 3293.10 2532.59 2600
EBIT 11168.61+4592.27 =
15760.88
5090.52+3293.10 =
8383.62
1285.05+2532.59 =
3817.64
260.5+260
0 = 2860.5
PAT 10443.62 5020.61 1256.03 260.5
Number of shares 2635.36 2592.86 2259.53 2259.53
EPS 3.963 1.936 0.556 0.115
2 Dept. of Management Studies, IIT Madras
Observations
•The debt of the company has been steadily rising by around 50% Y-o-Y
•Increase in equity has solely been on account of the change in retained earnings
•Equity Share Capital almost constant, preferential shares marginally increased
•Total capital has been significantly increasing, owing to increase in both – debt and
shareholder earnings
•Interest expense has been increasing rapidly (> 30%) over the years
•Telecom industry requires an upfront investment (infrastructure, licence fees, etc) and
hence the heavy interest payments.
3 Dept. of Management Studies, IIT Madras
Ratio Analysis
2008
2007 2006
Debt to total capital
ratio
65147.59/114672.79
=0.5681 -> 56.81% debt
42505.04/88805.13 =
0.4786 -> 47.86% debt
29156.07/57579.75 =
0.5063 -> 50.63% debt
Debt equity ratio 65147.59/49525.20 =
1.3154
42505.04/46300.09 =
0.9180
29156.07/28423.68 =
1.0258
Interest Coverage ratio 22712.65/4592.27 =
4.946
14859.63/3293.10 =
4.512
7260.52/2532.59 =
2.867
Debt Service Coverage
ratio
22712.65/(4592.27 +
1.538*65147.59)= 0.2167
14859.63/(3293.10 +
1.538*42505.04) =
0.2164
7260.52/(2532.59 +
1.538*29156.07) =
0.1532
Debt is being
maintained at
around 50%
levels
Earnings
convincingly
cover the
interest charges
DSCR = EBITDA / [ Int exp + Loan Repayment/(1-tax rate )]
4 Dept. of Management Studies, IIT Madras
Observations
Capital structuring of the company, has been around the 50-50 mark for debt and equity
(ordinary+pref). The interest coverage has been increasing over the years, indicating the
company?s increasing strength in its earnings, to cover up its interest costs.
Industry Comparison
Debt/Total Capital =
69879.58 / (161008.16+69879.58) = 30.26
%
Thus, Idea has a higher debt factor than the
industry.
Source: Capitaline, IIT Subscription
5 Dept. of Management Studies, IIT Madras
EBIT – EPS Analysis for 2008
EBIT 5000 10000 20000 25000
Interest 4592.27 4592.27 4592.27 4592.27
PBT 407.73 5407.73 15407.73 20407.73
PAT 265.02 3515.02 10015.02 13265.02
N. Shares 2635.36 2635.36 2635.36 2635.36
EPS 0.1 1.334 3.8 5.033
EBIT EPS
5000 0.1
10000 1.334
15760.88 3.963
20000 3.8
25000 5.033
y = 0.0023x - 6E-06
0
1
2
3
4
5
6
0 5000 10000 15000 20000 25000 30000
EPS - EBIT Analysis
EPS
Linear (EPS)
6 Dept. of Management Studies, IIT Madras
Leverage Analysis
? Degree of Operating Leverage (DOL)
? Unavailability of data on fixed costs of company
? For other approach,
DOL = % Change in EBIT / % Change in Sales
2008 2007 2006 2005
EBIT 15760.88 8383.62 3817.64 2860.5
Sales 67199.9 43664 20070.68 16320.4
Calculation DOL
For 2008 [ (15760.88 – 8383.62)/15760.88 / (67199.9 – 43664) /67199.9 ] 1.336
For 2007 [ (8383.62 – 3817.64)/8383.62 / (43664 – 20070.68)/43664] 1.08
For 2006 [ (3817.64 – 2860.5)/3817.64 / (20070.68 – 16320.4)/20070.68 ] 1.342
7 Dept. of Management Studies, IIT Madras
Leverage Analysis
? Degree of Financial Leverage (DFL)
? Unavailability of data on fixed costs of company
? For other approach,
DFL = % Change in EPS / % Change in EBIT
2008 2007 2006 2005
EBIT 15760.88 8383.62 3817.64 2860.5
EPS 3.963 1.936 0.556 0.115
Calculation DFL
For 2008 [ (3.963 – 1.936)/3.963 ] / [ (15760.88 – 8383.62) / 15760.88 ] 1.092
For 2007 [(1.936 – 0.556) / 1.936] / [ (8383.62 – 3817.64) / 8383.62 ] 1.308
For 2006 [ (0.556 – 0.115) / 0.556 ] / [ (3817.64 - 2860.5) / 3817.64 ] 3.163
8 Dept. of Management Studies, IIT Madras
Leverage Analysis
? Degree of Combined Leverage (DCL)
? DCL = DOL x DFL
Year DOL DFL DCL = DOL x DFL
2008 1.336 1.092 1.459
2007 1.08 1.308 1.413
2006 1.342 3.163 4.245
9 Dept. of Management Studies, IIT Madras
Leverage Analysis - Comments
DFL: Degree of financial leverage
? By assessing the DFL, one can understand the impact of change in EBIT on the EPS of the
company. In addition to this it also helps in assessing the financial risk of the firm.
? Idea cellular has been able to achieve an increase in RoE by reducing the DFL year-on-
year. This implies that the company is managing its debt well and is generating returns
much greater than the cost of capital.
? The financial risk associated with Idea Cellular has been decreasing.
DOL: Degree of operating leverage
? DOL gives a measurement of the degree to which a firm or project incurs a combination of
fixed and variable costs. A telecom industry like Idea has certain fixed costs – like license
fee, but infrastructure it needs can be classified as a variable costs (number of towers
increase with number of users). The processing servers and the towers are a major chunk
of the cost and are variable in nature.
? The current DOL is not high, as compared to the market which indicates the high proportion
of variable costs in Idea?s business model.
DCL: Degree of combined leverage
? The degree of combined leverage gives the change in EPS as an effect of the relative
change in sales i.e. how much does EPS increase, corresponding to an increase in an unit
of sales.
? DCL is the multiplicative sum of DOL and DFL. For Idea, DCL has been reduced from 4.245
to ~1.4 and has been maintained there. We can assume that it is management?s policy to
maintain DCL around 1.4 i.e. a change in sales should correspond to a slightly greater
change in EPS currently.
Dividend Policy Analysis
? Quoting from the Annual Reports – “
? “ “
”
? No dividend declared so far
? Not uncommon in telecom sector
? It shouldn?t be long before it starts rolling out dividends
? Dividend-per-share, Dividend Payout ratio, Growth in dividend and dividend
yield is 0
? Conversely, Retention Ratio is 100%
11 Dept. of Management Studies, IIT Madras
Dividend Policy Analysis
? Earnings Yield or P/E Analysis
? Industry P/E average: 15.10
? Idea coming in line with Industry P/E
? Fall in P/E cannot be taken as undervaluation, as wild fluctuations immediately
post-listing are common in Indian markets
Year 2008 2007 2006
EPS 3.963 1.936 0.556
Share Price 89.31 120.65 Company not listed
Earnings Yield 0.0443 0.016 NA
P/E 22.536 62.319 NA
12 Dept. of Management Studies, IIT Madras
Dividend Policy Analysis – Price of Scrip
Walter?s Model
Walter?s model was developed on the following assumptions:
? The firm finances all investments through retained earnings i.e. no debt or equity
? The firm?s rate of return, r, and its cost of capital, k, are constant
? All earnings are either distributed as dividends or reinvested internally
immediately
? Constant EPS and DIV
? The firm has a long and infinite life
? The formula is given by –
P = (DIV/k) + [ r (EPS-DIV)/k /k]
13 Dept. of Management Studies, IIT Madras
Dividend Policy Analysis – Price of Scrip
Walter?s Model
? Now, the company has not issued any dividend so far. Thus, DIV =0
? Thus, P = r x EPS / k
2
? Where r ? firm?s rate of return
K ? firm?s cost of capital
? For Idea,
R -> Return on Investment ROI = PAT / Total Capital = 10443.62 / 114672.79
P = 0.0917 x 3.963 / 0.1092
2
P = 30.475
? Yesterday?s (28/03/09) closing price = Rs. 52
14 Dept. of Management Studies, IIT Madras
Dividend Policy Analysis – Price of Scrip
Walter?s Model - Recommendations
? Almost all the assumptions by Walter are flouted by Idea Cellular scrip
convincingly
? As per Walter?s model, Idea Cellular is a Growth Firm as its rate of return (r ) is
greater than its cost of capital (k).
? For such firms, the model recommends that payout ratio should be 0 and all
earnings must be reinvested in the company.
15 Dept. of Management Studies, IIT Madras
Dividend Policy Analysis – Price of Scrip
Gordon?s Model
? P0 = EPS1 (1-b) / k(1-b) = EPS1 / k
? Thus, P0 = 3.963 / 0.1092 = 36.29
? As per this model, if payout is 0%, then the theoretical value of P0 achieves infinity or
a very large value.
? To get a meaningful value of share, value of b should be less than k/r.
? Now for Idea,
k/r = 10.92 / 21.08 = 0.518 or 51.8% i.e. the company should retain less than 52% of
its earnings.
? However, as of now, since startup costs are not recovered, the company is not
declaring dividends. However, in the longer term, the company can think of shifting
the retention ratio to 50%, as per this model
16 Dept. of Management Studies, IIT Madras
Dividend Policy Analysis – Comments
? Company has a low cost of capital and a higher return on equity This means that the
firm can turn around capital really well.
? The zero-dividend rate does not reflect company?s policy but rather the company?s
inability – since full costs haven?t been recovered yet.
? The growth rate is not sustainable in a really long term, in the business that the
company is in. The telecom service space is hugely competitive and margins cannot
be forever maintained.
? Dividend policy cannot be the only factor to be looked into, while performing a
valuation exercise for this company.
? Telecom sector has certain key assets like spectrum allocations, tower-infrastructure
and brand values which must be looked into quite methodically, while valuing such
companies.
17 Dept. of Management Studies, IIT Madras
Additional Financing Policy Analysis
? Consider a situation where Idea Cellular wants to raise 100% of its total capital.
Alternate financing policy analysis is restricted to 2008 – and based on data
available in year 2008.
? As per Annual report 2008,
Total Capital ? Debt + Equity ? 49525.20 + 65147.59 = 114672.79
Additional Capital to be raised ? 114672.79
Total New Capital Base ? 229345.58
Now, observing the growth in EBIT over the last few years, we can find out the
„natural growth rate? for the company.
EBIT 15760.88 8383.62 3817.64 2860.5
Growth 46.8% 54.46% 25.07%
18 Dept. of Management Studies, IIT Madras
Additional Financing Policy Analysis
? Raising Additional Capital
1. 100% equity
2. 50% equity – 50% debt
3. 100% debt
? Average share price – 120.37
A premium of Rs. 95 can be charged over the face value of the share for raising
funds through equity.
? New issue can be issued at Rs. 105 (95 premium + 10 face value) comfortably.
Thus, No. of shares for
100% equity = 114672.79 / 105 = 1092.12
50% equity = 0.50 x 114672.79 / 105 = 546.06
? 12% is reasonable as the latest corporate debt instrument – from Tata Capital –
is available at 12%.
? Interest is assumed at 12% since this is current PLR.
19 Dept. of Management Studies, IIT Madras
Additional Financing Policy Analysis
20 Dept. of Management Studies, IIT Madras
Additional Financing Policy Analysis – Leverage Analysis between
alternatives
? Between Existing and Alternative 1:
DFL
(E-1)
= %Change in EPS/%Change in EBIT
= (4.696-3.963)/3.963 / (31521.76-15760.88)/15760.88 = 0.185
? Between Existing and Alternative 2:
DFL
(E-2)
= %Change in EPS/%Change in EBIT
= (4.096-3.963)/3.963 / (31521.76-15760.88)/ 15760.88 = 0.033
? Between Existing and Alternative 3:
DFL
(E-3)
= %Change in EPS/%Change in EBIT
= (3.248 – 3.963)/3.963 / (31521.76-15760.88)/ 15760.88 = -0.18
? Financial leverages do not change greatly with choosing either option and hence
leverage analysis confirms that we need not worry about leverage risks while
choosing between options
21 Dept. of Management Studies, IIT Madras
Additional Financing Policy Analysis – Plotting Indifference
Curves
? Alternative 1: 100% Equity
22 Dept. of Management Studies, IIT Madras
Additional Financing Policy Analysis – Plotting Indifference
Curves
? Alternative 2: 50% Debt – 50% Equity
? Alternative 3: 100% Debt
23 Dept. of Management Studies, IIT Madras
Alternate Financing Policy Analysis –Indifference Curve
24 Dept. of Management Studies, IIT Madras
In Conclusion
? Idea cellular is sufficiently cash-rich and the coverage ratios are promising. It
appears that the firm was looking at a target 50-50 model for debt equity and
ratios of all years revolve around this.
? The firm has moved on from being a highly leveraged one to one of stable
leverage. This indicates stabilization of operations.
? A telecom firm is indeed subject to many risks, both internally and externally.
However, the external risks have been decreasing every year due to favorable
government policy on telecom.
? The firm has not yet recovered costs and hence not declared a dividend since its
listing. However, it can be concluded from feelers gathered that this is certainly
not the policy of the company. Once costs are recovered, adequate dividend will
certainly be disbursed.
? The firm can gain on the profitability front if it moves towards more debt in the
longer run, as indicated by the EBIT-EPS analysis.
? It is not possible for this firm to move to a 100% debt or 100% equity models,
however, it does throw an interesting analysis to the - what if? question in capital
structuring.
25 Dept. of Management Studies, IIT Madras
Thank You.
Comments, requests, feedback and suggestions to
[email protected] please
26 Dept. of Management Studies, IIT Madras
doc_753234365.pps
PPT for Study on Corporate Financea of Idea Cellular
Corporate Finance –
A Study on Idea Cellular
Beta Analysis, Leverage Analysis, Dividend Policy
Analysis and Alternate financing policy analysis
for Idea Cellular (532822 | IDEA)
Sarang Bhutada, MBA Student at DoMS, IIT Madras
Financial Management, under Dr. Thenmozhi
[email protected]
om
Debt Structure
2008 2007 2006 2005
Debt 65147.59 42505.04 29156.07 NA
Shareholder’s
Equity
49525.20 46300.09 28423.68 NA
Total Capital 114672.79 88805.13 57579.75 NA
EBITDA 22712.65 14859.63 7260.52 NA
Interest Expense 4592.27 3293.10 2532.59 2600
EBIT 11168.61+4592.27 =
15760.88
5090.52+3293.10 =
8383.62
1285.05+2532.59 =
3817.64
260.5+260
0 = 2860.5
PAT 10443.62 5020.61 1256.03 260.5
Number of shares 2635.36 2592.86 2259.53 2259.53
EPS 3.963 1.936 0.556 0.115
2 Dept. of Management Studies, IIT Madras
Observations
•The debt of the company has been steadily rising by around 50% Y-o-Y
•Increase in equity has solely been on account of the change in retained earnings
•Equity Share Capital almost constant, preferential shares marginally increased
•Total capital has been significantly increasing, owing to increase in both – debt and
shareholder earnings
•Interest expense has been increasing rapidly (> 30%) over the years
•Telecom industry requires an upfront investment (infrastructure, licence fees, etc) and
hence the heavy interest payments.
3 Dept. of Management Studies, IIT Madras
Ratio Analysis
2008
2007 2006
Debt to total capital
ratio
65147.59/114672.79
=0.5681 -> 56.81% debt
42505.04/88805.13 =
0.4786 -> 47.86% debt
29156.07/57579.75 =
0.5063 -> 50.63% debt
Debt equity ratio 65147.59/49525.20 =
1.3154
42505.04/46300.09 =
0.9180
29156.07/28423.68 =
1.0258
Interest Coverage ratio 22712.65/4592.27 =
4.946
14859.63/3293.10 =
4.512
7260.52/2532.59 =
2.867
Debt Service Coverage
ratio
22712.65/(4592.27 +
1.538*65147.59)= 0.2167
14859.63/(3293.10 +
1.538*42505.04) =
0.2164
7260.52/(2532.59 +
1.538*29156.07) =
0.1532
Debt is being
maintained at
around 50%
levels
Earnings
convincingly
cover the
interest charges
DSCR = EBITDA / [ Int exp + Loan Repayment/(1-tax rate )]
4 Dept. of Management Studies, IIT Madras
Observations
Capital structuring of the company, has been around the 50-50 mark for debt and equity
(ordinary+pref). The interest coverage has been increasing over the years, indicating the
company?s increasing strength in its earnings, to cover up its interest costs.
Industry Comparison
Debt/Total Capital =
69879.58 / (161008.16+69879.58) = 30.26
%
Thus, Idea has a higher debt factor than the
industry.
Source: Capitaline, IIT Subscription
5 Dept. of Management Studies, IIT Madras
EBIT – EPS Analysis for 2008
EBIT 5000 10000 20000 25000
Interest 4592.27 4592.27 4592.27 4592.27
PBT 407.73 5407.73 15407.73 20407.73
PAT 265.02 3515.02 10015.02 13265.02
N. Shares 2635.36 2635.36 2635.36 2635.36
EPS 0.1 1.334 3.8 5.033
EBIT EPS
5000 0.1
10000 1.334
15760.88 3.963
20000 3.8
25000 5.033
y = 0.0023x - 6E-06
0
1
2
3
4
5
6
0 5000 10000 15000 20000 25000 30000
EPS - EBIT Analysis
EPS
Linear (EPS)
6 Dept. of Management Studies, IIT Madras
Leverage Analysis
? Degree of Operating Leverage (DOL)
? Unavailability of data on fixed costs of company
? For other approach,
DOL = % Change in EBIT / % Change in Sales
2008 2007 2006 2005
EBIT 15760.88 8383.62 3817.64 2860.5
Sales 67199.9 43664 20070.68 16320.4
Calculation DOL
For 2008 [ (15760.88 – 8383.62)/15760.88 / (67199.9 – 43664) /67199.9 ] 1.336
For 2007 [ (8383.62 – 3817.64)/8383.62 / (43664 – 20070.68)/43664] 1.08
For 2006 [ (3817.64 – 2860.5)/3817.64 / (20070.68 – 16320.4)/20070.68 ] 1.342
7 Dept. of Management Studies, IIT Madras
Leverage Analysis
? Degree of Financial Leverage (DFL)
? Unavailability of data on fixed costs of company
? For other approach,
DFL = % Change in EPS / % Change in EBIT
2008 2007 2006 2005
EBIT 15760.88 8383.62 3817.64 2860.5
EPS 3.963 1.936 0.556 0.115
Calculation DFL
For 2008 [ (3.963 – 1.936)/3.963 ] / [ (15760.88 – 8383.62) / 15760.88 ] 1.092
For 2007 [(1.936 – 0.556) / 1.936] / [ (8383.62 – 3817.64) / 8383.62 ] 1.308
For 2006 [ (0.556 – 0.115) / 0.556 ] / [ (3817.64 - 2860.5) / 3817.64 ] 3.163
8 Dept. of Management Studies, IIT Madras
Leverage Analysis
? Degree of Combined Leverage (DCL)
? DCL = DOL x DFL
Year DOL DFL DCL = DOL x DFL
2008 1.336 1.092 1.459
2007 1.08 1.308 1.413
2006 1.342 3.163 4.245
9 Dept. of Management Studies, IIT Madras
Leverage Analysis - Comments
DFL: Degree of financial leverage
? By assessing the DFL, one can understand the impact of change in EBIT on the EPS of the
company. In addition to this it also helps in assessing the financial risk of the firm.
? Idea cellular has been able to achieve an increase in RoE by reducing the DFL year-on-
year. This implies that the company is managing its debt well and is generating returns
much greater than the cost of capital.
? The financial risk associated with Idea Cellular has been decreasing.
DOL: Degree of operating leverage
? DOL gives a measurement of the degree to which a firm or project incurs a combination of
fixed and variable costs. A telecom industry like Idea has certain fixed costs – like license
fee, but infrastructure it needs can be classified as a variable costs (number of towers
increase with number of users). The processing servers and the towers are a major chunk
of the cost and are variable in nature.
? The current DOL is not high, as compared to the market which indicates the high proportion
of variable costs in Idea?s business model.
DCL: Degree of combined leverage
? The degree of combined leverage gives the change in EPS as an effect of the relative
change in sales i.e. how much does EPS increase, corresponding to an increase in an unit
of sales.
? DCL is the multiplicative sum of DOL and DFL. For Idea, DCL has been reduced from 4.245
to ~1.4 and has been maintained there. We can assume that it is management?s policy to
maintain DCL around 1.4 i.e. a change in sales should correspond to a slightly greater
change in EPS currently.
Dividend Policy Analysis
? Quoting from the Annual Reports – “
? “ “
”
? No dividend declared so far
? Not uncommon in telecom sector
? It shouldn?t be long before it starts rolling out dividends
? Dividend-per-share, Dividend Payout ratio, Growth in dividend and dividend
yield is 0
? Conversely, Retention Ratio is 100%
11 Dept. of Management Studies, IIT Madras
Dividend Policy Analysis
? Earnings Yield or P/E Analysis
? Industry P/E average: 15.10
? Idea coming in line with Industry P/E
? Fall in P/E cannot be taken as undervaluation, as wild fluctuations immediately
post-listing are common in Indian markets
Year 2008 2007 2006
EPS 3.963 1.936 0.556
Share Price 89.31 120.65 Company not listed
Earnings Yield 0.0443 0.016 NA
P/E 22.536 62.319 NA
12 Dept. of Management Studies, IIT Madras
Dividend Policy Analysis – Price of Scrip
Walter?s Model
Walter?s model was developed on the following assumptions:
? The firm finances all investments through retained earnings i.e. no debt or equity
? The firm?s rate of return, r, and its cost of capital, k, are constant
? All earnings are either distributed as dividends or reinvested internally
immediately
? Constant EPS and DIV
? The firm has a long and infinite life
? The formula is given by –
P = (DIV/k) + [ r (EPS-DIV)/k /k]
13 Dept. of Management Studies, IIT Madras
Dividend Policy Analysis – Price of Scrip
Walter?s Model
? Now, the company has not issued any dividend so far. Thus, DIV =0
? Thus, P = r x EPS / k
2
? Where r ? firm?s rate of return
K ? firm?s cost of capital
? For Idea,
R -> Return on Investment ROI = PAT / Total Capital = 10443.62 / 114672.79
P = 0.0917 x 3.963 / 0.1092
2
P = 30.475
? Yesterday?s (28/03/09) closing price = Rs. 52
14 Dept. of Management Studies, IIT Madras
Dividend Policy Analysis – Price of Scrip
Walter?s Model - Recommendations
? Almost all the assumptions by Walter are flouted by Idea Cellular scrip
convincingly
? As per Walter?s model, Idea Cellular is a Growth Firm as its rate of return (r ) is
greater than its cost of capital (k).
? For such firms, the model recommends that payout ratio should be 0 and all
earnings must be reinvested in the company.
15 Dept. of Management Studies, IIT Madras
Dividend Policy Analysis – Price of Scrip
Gordon?s Model
? P0 = EPS1 (1-b) / k(1-b) = EPS1 / k
? Thus, P0 = 3.963 / 0.1092 = 36.29
? As per this model, if payout is 0%, then the theoretical value of P0 achieves infinity or
a very large value.
? To get a meaningful value of share, value of b should be less than k/r.
? Now for Idea,
k/r = 10.92 / 21.08 = 0.518 or 51.8% i.e. the company should retain less than 52% of
its earnings.
? However, as of now, since startup costs are not recovered, the company is not
declaring dividends. However, in the longer term, the company can think of shifting
the retention ratio to 50%, as per this model
16 Dept. of Management Studies, IIT Madras
Dividend Policy Analysis – Comments
? Company has a low cost of capital and a higher return on equity This means that the
firm can turn around capital really well.
? The zero-dividend rate does not reflect company?s policy but rather the company?s
inability – since full costs haven?t been recovered yet.
? The growth rate is not sustainable in a really long term, in the business that the
company is in. The telecom service space is hugely competitive and margins cannot
be forever maintained.
? Dividend policy cannot be the only factor to be looked into, while performing a
valuation exercise for this company.
? Telecom sector has certain key assets like spectrum allocations, tower-infrastructure
and brand values which must be looked into quite methodically, while valuing such
companies.
17 Dept. of Management Studies, IIT Madras
Additional Financing Policy Analysis
? Consider a situation where Idea Cellular wants to raise 100% of its total capital.
Alternate financing policy analysis is restricted to 2008 – and based on data
available in year 2008.
? As per Annual report 2008,
Total Capital ? Debt + Equity ? 49525.20 + 65147.59 = 114672.79
Additional Capital to be raised ? 114672.79
Total New Capital Base ? 229345.58
Now, observing the growth in EBIT over the last few years, we can find out the
„natural growth rate? for the company.
EBIT 15760.88 8383.62 3817.64 2860.5
Growth 46.8% 54.46% 25.07%
18 Dept. of Management Studies, IIT Madras
Additional Financing Policy Analysis
? Raising Additional Capital
1. 100% equity
2. 50% equity – 50% debt
3. 100% debt
? Average share price – 120.37
A premium of Rs. 95 can be charged over the face value of the share for raising
funds through equity.
? New issue can be issued at Rs. 105 (95 premium + 10 face value) comfortably.
Thus, No. of shares for
100% equity = 114672.79 / 105 = 1092.12
50% equity = 0.50 x 114672.79 / 105 = 546.06
? 12% is reasonable as the latest corporate debt instrument – from Tata Capital –
is available at 12%.
? Interest is assumed at 12% since this is current PLR.
19 Dept. of Management Studies, IIT Madras
Additional Financing Policy Analysis
20 Dept. of Management Studies, IIT Madras
Additional Financing Policy Analysis – Leverage Analysis between
alternatives
? Between Existing and Alternative 1:
DFL
(E-1)
= %Change in EPS/%Change in EBIT
= (4.696-3.963)/3.963 / (31521.76-15760.88)/15760.88 = 0.185
? Between Existing and Alternative 2:
DFL
(E-2)
= %Change in EPS/%Change in EBIT
= (4.096-3.963)/3.963 / (31521.76-15760.88)/ 15760.88 = 0.033
? Between Existing and Alternative 3:
DFL
(E-3)
= %Change in EPS/%Change in EBIT
= (3.248 – 3.963)/3.963 / (31521.76-15760.88)/ 15760.88 = -0.18
? Financial leverages do not change greatly with choosing either option and hence
leverage analysis confirms that we need not worry about leverage risks while
choosing between options
21 Dept. of Management Studies, IIT Madras
Additional Financing Policy Analysis – Plotting Indifference
Curves
? Alternative 1: 100% Equity
22 Dept. of Management Studies, IIT Madras
Additional Financing Policy Analysis – Plotting Indifference
Curves
? Alternative 2: 50% Debt – 50% Equity
? Alternative 3: 100% Debt
23 Dept. of Management Studies, IIT Madras
Alternate Financing Policy Analysis –Indifference Curve
24 Dept. of Management Studies, IIT Madras
In Conclusion
? Idea cellular is sufficiently cash-rich and the coverage ratios are promising. It
appears that the firm was looking at a target 50-50 model for debt equity and
ratios of all years revolve around this.
? The firm has moved on from being a highly leveraged one to one of stable
leverage. This indicates stabilization of operations.
? A telecom firm is indeed subject to many risks, both internally and externally.
However, the external risks have been decreasing every year due to favorable
government policy on telecom.
? The firm has not yet recovered costs and hence not declared a dividend since its
listing. However, it can be concluded from feelers gathered that this is certainly
not the policy of the company. Once costs are recovered, adequate dividend will
certainly be disbursed.
? The firm can gain on the profitability front if it moves towards more debt in the
longer run, as indicated by the EBIT-EPS analysis.
? It is not possible for this firm to move to a 100% debt or 100% equity models,
however, it does throw an interesting analysis to the - what if? question in capital
structuring.
25 Dept. of Management Studies, IIT Madras
Thank You.
Comments, requests, feedback and suggestions to
[email protected] please
26 Dept. of Management Studies, IIT Madras
doc_753234365.pps