A Project Report On COMPARATIVE ANALYSIS OF CAPITAL STRUCTURE OF SME’S AT NSIC BY SRAVANI DV H.T.NO: 217013683024 Submitted in partial fulfillment of the requirement For the award of BACHEOLOR OF BUSINESS MANAGEMENT Under the guidance of Mr. Ch. Naresh Associate Professor
VISHWA VISHWANI INSTITUTE OF SYSTEMS AND MANAGEMENT (Affiliated to Osmania University, Hyderabad) (2013-2016)
DECLARATION
I hereby declare that project report on “COMPARATIVE ANALYSIS OF CAPITAL STRUCTURE OF SME’S AT NSIC” is an original and bonafide work under taken by me impartial fulfillment for the award of (BACHEOLOR OF BUSINESS ADMINISTRATION, Osmania University, Hyderabad) I also declare that this project is the result of my own efforts and has not been submitted to any other university or institution for the award of any Degree/Diploma.
SRAVANI DV H.T.NO: 217013683024
ACKNOWLEDGMENT The satisfaction and euphoria after the completion of any work would be incomplete without the mention of the people behind the successful completion of work. I would like to express with much sincerity, my deep sense of gratitude to Dr. P. CHAKRAVARTHI, PRINCIPAL, VVISM, for promoting excellent academic environment. My heart full thanks to Mrs VANI KOTLA, company guide for her guidance in completing my project work. 2
I also extend my thanks to Mr G.SUMANTH KUMAR, H.O.D, BBA for his assistance timely suggestions, guidance and having provided all facilities to complete this project work successfully. I would like to thank my project Guide and Faculty Mr CH.NARESH, for his valuable guidance. Finally, I would like to express my sincere thanks to all our faculty and friends for their timely suggestions and encouragement provided for
the successful
completion of this
project.
SRAVANI DV H.T.NO: 217013683024
LIST OF CONTENTS S. No 1.
2. 3 4
Topic Abstract Chapter -1 Introduction Objectives Need for capital structure planning Scope and coverage Research and methodology Limitations Chapter-2 Literature review Chapter-3 Company & Industry Profile Chapter -4 3
Pg. no 07 08 08 11 11 12 12 13 14 18,22 & 26
5 6 7
Conceptual framework Chapter-5 Data analysis & interpretation Chapter -6 Findings & suggestions Chapter-7 Conclusion Bibliography Annexures-1,2
30 44 52 & 53 54
LIST OF TABLES s.no Table no.
Name
Page No.
1
3.2.6
Company profile
2
5.1
Calculation of Debt-equity ratio
45
3
5.2
Calculation of Solvency ratio
47
4
5.3
Calculation of Interest coverage ratio
49
5
5.4
Calculation of Earnings per share ratio
50
LIST OF GRAPHS s.no Graph
Name
Page No.
No. 1
5.1(a)
Debt –equity ratios between serwel and raghuvamsi companies
46
2
5.2(b)
Solvency ratios between serwel and raghuvamsi electronics
48
3
5.3(c)
Variations of EBIT ratio in serwel and raghuvamsi companies
49
4
4
5.4(d)
EPS ratio of serwel and raghuvamsi companies
5
50
ABSTRACT One of the most critical areas of the finance function is to make decisions about the firm’s capital structure. Capital is required to finance investments in plant and machinery, inventory, accounts receivable and so on. Capital structure is the part of financial structure, which represents long term sources. It is the permanent financing of the company represented primarily by shareholders’ funds and long term debt and excluding all shortterm credit. To quote Walker, “The term capital structure is generally defined to include only long term debt and total stockholder’s investment” (Walker).It refers to the Capitalization of long term sources of funds such as debentures, preference share capital, long term debt and equity share capital including reserves and surplus (retained earnings). According to Bogen, “The capital structure may consist of a single class of stock, or it may be complicated by several issues of bonds and preferred stock, the characteristics of which may vary considerably”. In other words, “capital structure refers to the composition of capitalization i.e., to the proportion between debt and equity that make up capitalization” (Philips). Weston and Brigham have indicated the capital structure by the following equation (Weston): Capital Structure = Long term debt – Preferred stock + Net worth (or) Capital Structure = Total Assets – Current Liabilities. In this Project, an attempt has been made to study the “Pattern of Capital Structure in SME at NSIC. An analysis of long-term solvency, assessment of debt-equity, debt to total fund and justification for the use of debt through the application of ratio analysis and statistical test has been undertaken. The time period considered for evaluating the study is four years.
Chapter-1 INTRODUCTION 1.1Introduction of capital structure The financing decisions occupy a pivotal role in the overall finance function in a corporate firm which mainly concerns itself with an efficient utilization of the funds provided by the owners or obtained from external sources together with those retained or 6
ploughed back out of surplus or undistributed profits. These decisions are mainly in the nature of planning capital structure, working capital and mechanism through which funds can be raised from the capital market whenever required. The financing decisions explains how to plan an appropriate mix with least count, how to raise long term funds, and how to mobilize the funds for working capital within a short span of time. Such a financing policy provides an appropriate backdrop for formulating effective policies for investment of funds as well as management of earnings. It contributes to magnifying the earnings on equity as profitability (expressed as return on equity), to a large extent, is dependent on the degree of leverage in the capital structure. Besides, the valuation of the structure of physical assets depends fundamentally on the financing mix. This makes it necessary for the management of a firm to pursue a well thought out of financing policy, which ought to be framed initially, incorporating, among other things, the proportion of the debt and equity, types of debts and own funds to be used and volume of the funds to be raised from each source or combination of sources, to enable the firm to have a proper capitalization. In the absence of this, the firm may face the problem of either over-capitalization or under-capitalization impeding its smooth financial functioning. It is obvious that functioning decisions are extremely important for corporate firms. Such decisions, in management parlance, are termed as capital structure decisions. The term capital structure is used to describe the combination of various sources of finance employed to raise funds. It implies, in other words, that when a firm chooses to use a group of sources in certain proportions the resulting pattern is referred to as capital structure of the firm. The sources of finance could be divided in terms of ownership of funds and duration of funds. The former comprises owned and borrowed funds while the latter includes long, medium and short term funds. Of the two, the duration-based classification is useful for preparing a plan to meet long term as well as short term capital requirements while ownership-based classification is useful for selection of specified sources, determining debt-equity ratio and analyzing impact of capital structure decisions on the earnings on equity. As the ownership based classification suggests that there are two types of sources of finance, namely owned and borrowed funds, the capital structure represents the component relationship between owned and borrowed funds. The owned funds which are also described as equity fund may be defined as funds provided by or belonging to the share-holders. In the opinion Raj want 7
Singh and Brij Kumar, the capital structure is made up of the long term borrowings, the preferred stock and the common stock equity including all related net worth accounts. Similarly Morarka.R observes that the capital structure implies a degree of permanency and normally omits short term borrowings of less than one year but would include other intermediate and long term borrowings. The financial institutions consider only long term sources of finance for computing the debt-equity ratio of corporate firm.
1.2 Definition A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity, the capital structure is how a firm finances its overall operations and growth
by
using
different
sources
of
funds.
Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure
1.3 Theories of capital structure Different kinds of theories have been propounded by different authors to explain the relationship between capital structure, cost of capital and the value of the firm. The main contributors to the theories are Durand, Ezra, Solomon, Modigliani and Miller. The important theories are discussed below: 1.
Net Income Approach Net Operating Income Approach. The Traditional Approach. Modigliani and Miller Approach. Net Income Approach. According to this approach, a firm can minimize the weighted average cost of capital and increase the value of the firm as well as market price of equity shares by using debt financing to the maximum possible extent. The theory propounds that a company can increase its value and decrease the overall cost of capital by increasing the proportion of debt in its capital structure. This approach
2.
is based upon the following assumptions: The cost of debt is less than the cost of equity. There are no taxes. The risk perception of investors is not changed by the use of debt. Net Operating Income Approach. This theory as suggested by Durand is another extreme of the effect of leverage on the value of the firm. It is diametrically opposite to the net income approach. According to this approach, change in the capital structure if a company does not affect the market value of the firm and the overall 8
cost of capital remains constant irrespective of the method of financing. It implies that the overall cost of capital remains the same whether the debt- equity mix is 50:50 or 20:80 or 0:100. Thus, there is nothing as an optimal capital structure and every capital structure is the optimum capital structure. This theory presumes that: 3.
The market capitalizes the value of the firm as a whole. The business risk remains constant at every level of debt equity mix; There are no corporate taxes. The Traditional Approach. The traditional approach, also known as intermediate approach, is a compromise between extremes of net income approach and net operating income approach. According to this theory, the value of the firm can be increased initially or the cost of capital can be decreased by using more debt as the debt is a cheaper source of funds than equity. Thus, optimum capital structure can be reached by a proper debt-equity mix. Beyond a particular point, the cost of equity increases because increased debt increases the financial risk of the equity shareholders. The advantage of cheaper debt at this point of capital structure is offset by increased cost of equity. After this there comes a stage, when the increased cost of equity cannot be offset by the advantage of low-cost debt. Thus, overall cost of capital, according to this theory, decreases up to a certain point, remains more or less unchanged for moderate increase in debt thereafter; and increases or rises beyond a certain point. Even the cost of debt may increase at this stage due to increased financial risk.
1.4 Objectives The present study aims at endeavoring the following objectives:
To analyze the pattern of capital structure; To assess of long-term solvency; and To ascertain the justification for the use of debt.
Capital structure means the mixture of share capital and other long term liabilities. In capital structure, we include equity share capital, preference share capital, debenture and long term debt. Some of companies want to become smart. They slowly decrease equity share capital and increases loan excessively which may be very risky because these company has to pay fixed cost of interest and has to manage repayment of loan after some time. Some mistake in it, may be risky for its solvency. So, decision relating to capital structure is very important for company 9
1.5 Need for capital structure For the real growth of the company the financial manager of the company should plan an optimum capital for the company. The optimum capital structure is one that maximizes the market value of the firm. There are significant variations among industries and companies within an industry in terms of capital structure. Since a number of factors influence the capital structure decision of a company, the judgment of the person making the capital structure decisions play a crucial part. A totally theoretical model can’t adequately handle all those factors, which affects the capital structure decision in practice. These factors are highly psychological, complex and qualitative and do not always follow accepted theory, since capital markets are not perfect and decision has to be taken under imperfect knowledge and risk. An appropriate capital structure or target capital structure can be developed only when all those factors, which are relevant to the company’s capital structure decision, are properly analyzed and balanced. The capital structure should be planed generally keeping in view the interest of the equity shareholders and financial requirements of the company. The equity shareholders being the owner of the company and the providers of risk capital (equity), would be concerned about the ways of financing a company’s operations. However, the interest of other groups, such as employee, customers, creditors, society and government, should be given reasonable consideration when the company lays down its objective in terms of the shareholders wealth maximization, it is generally compatible with the interest of other groups. The management of companies may fix its capital structure near the top of this range in order to make maximum use of favorable leverage, subject to other requirements such as flexibility, solvency, control and norms set by the financial institutionsThe Security Exchange Board of India (SEBI) and Stock Exchanges.
1.6 Scope and coverage The present study is confined to SME. This study is restricted to assess the pattern of capital structure in SME with the help of the ratio analysis. The time period considered for evaluating the study is four years
1.7 Research methodology “Research Methodology is a systematic and objective process of identifying and formulating the problem by setting objectives and methods for collecting, editing, calculating, evaluating, analyzing, interpreting and presenting data in order to find justified solutions.” 10
Research design: The Descriptive research design has been using in this study. Descriptive research studies, which are concerned with describing the characteristics of a particular individual or of a group or a situation. Studies concerned with specific predictions, with narration of facts and characteristics concerning individual, group or a situation are examples of descriptive research studies.in this project, income and balance statements are evaluated to know the state of affairs as it existed during the years 2010-2015. This helps to know the performance of the schemes. Sources of Data: There are two sources of data namely: 1. Primary data 2. Secondary data Primary Data: Primary data are those which are collected for the first time and so are in crude form. They are original in character. If an individual or an office collects the data to study a problem, the data are the raw material of the enquiry. Primary data are always collected from the source. It is collected either by the investigator himself or through his agents. Secondary Data: Secondary data are those which have already been collected by someone for the purpose and are available for the present study. The choice to a large extent depends on the preliminaries to data collection some of the commonly used methods are discussed below; In this research, the various sources of secondary data, which are used, are: • Literature Reviews • Journals • Magazines • Balance sheets
1.8 Tools of analysis The present study is confined to SME. This study is restricted to assess the pattern of capital structure in SME with the help of the ratio analysis. The time period considered for evaluating the study is four years
1.9 Limitations It requires a small business to make regular monthly payments of principal and interest. Availability is often limited to established businesses. Since lenders primarily seek security for their funds, it can be difficult for unproven businesses to obtain loans. 11
Very complicate and expensive to administer.
Chapter-2 REVIEW OF LITERATURE Study on capital structure has become one of the most significant subjects of interest in modern finance. It has acquired lot of recognition from researchers during recent years. There exists a vast body of literature that has examined the determinants of the capital structure of companies in developed economies. Empirical works based on theories of capital structure has been previously conducted for Australia (Cassar and Holmes, 2003; Johnsen and McMahon, 2005), Spain (Sorgorb, 2005), UK (Hall et al., 2000) and the US (Gregory et al., 2005). However studies on capital structure have been extended to the developing economy contexts only in recent past. The level of development of a country’s legal and financial systems has been shown to influence the capital structure of its enterprises (Fan et al., 2006). In economies with relatively weak investor protection, enterprises are more likely to employ short-term debt than long-term debt in their capital structure. This is in contrast to enterprises in economies with active stock markets and large banking sectors which have more long-term debts (Demirguc-Kunt and Maksimovic (1999). Despite of the growing volume of literature on the determinants of capital structure in the developing economy context is available, there has been limited work conducted on SMEs in these countries. One possible reason for this discrepancy is that SME data is often scarce and sometimes not reliable, since these firms are not officially required to disclose detailed information or to have their reports audited. Some preliminary work has been carried out for Poland (Klapper et al., 2006), Vietnam (Nguyen and Ramachandran, 2006), and Ghana (Abor and Biekpe, 2007). All these studies implies to the fact that the that theories of capital structure developed to explain the financing decisions of SMEs in developed economies are not equally applicable in developing economies, due to their institutional and organizational differences. Many authors suggested the firm size as a potential determinant of capital structure decision.
12
Determinants of capital structure of Chinese-listed companies. Jean J. Chen in this paper develops a preliminary study to explore the determinants of capital structure of Chinese-listed companies using firm-level panel data. The findings reflect the transitional nature of the Chinese corporate environment. They suggest that some of the insights from modern finance theory of capital structure are portable to China in that certain firm-specific factors that are relevant for explaining capital structure in developed economies are also relevant in China. However, neither the trade-off model nor the Pecking order hypothesis derived from the Western settings provides convincing explanations for the capital choices of the Chinese firms. The capital choice decision of Chinese firms seems to follow a “new Pecking order”—retained profit, equity, and long-term debt. This is because the fundamental institutional assumptions underpinning the Western models are not valid in China. These significant institutional differences and financial constraints in the banking sector in China are the factors influencing firms' leverage decision and they are at least as important as the firm-specific factors. The study has laid some groundwork upon which a more detailed evaluation of Chinese firms' capital structure could be based.
“Determinants of capital structure of Chinese-listed companies, December 2004 -Jean J. Chen” Small and medium-size enterprises: Access to finance as a growth constraints Thorsten Beck in this paper presents recent research on access to finance by small and medium-size enterprises (SMEs). SMEs form a large part of private sector in many developed and developing countries. While cross-country research sheds doubt on a causal link between SMEs and economic development, there is substantial evidence that small firms face larger growth constraints and have less access to formal sources of external finance, potentially explaining the lack of SMEs’ contribution to growth. Financial and institutional development helps alleviate SMEs’ growth constraints and increase their access to external finance and thus levels the playing field between firms of different sizes. Specific financing tools such as leasing and factoring can be useful in facilitating greater access to 13
finance even in the absence of well-developed institutions, as can systems of credit information sharing and a more competitive banking structure. “Small and medium-size enterprises: Access to finance as a growth constraints, June 2006 -Thorsten Beck” The Determinants of Capital Structure Choice Sheridan Titamin and Robert wessel’s in this paper analyzes the explanatory power of some of the recent theories of optimal capital structure. The study extends empirical work on capital structure theory in three ways. First, it examines a much broader set of capital structure theories, many of which have not previously been analyzed empirically. Second, since the theories have different empirical implications in regard to different types of debt instruments, the authors analyze measures of short-term, long-term, and convertible debt rather than an aggregate measure of total debt. Third, the study uses a factor-analytic technique that mitigates the measurement problems encountered when working with proxy variables.
“Determinants of Capital Structure Choice, March 1998 By Sheridan Titamin and Robert wessel’s” SME Capital Structure: The Dominance of Demand Factors In this study, Kenny Bell and Ed Vos has described SME capital structure behavior is found typically to follow pecking order behavior. However, the theoretical underpinnings of the pecking order theory are doubted in the case of SMEs as SME managers highly value financial freedom, independence, and control while the pecking order theory assumes firms desire financial wealth and suffer from severe adverse selection costs in accessing external finance. Alternatively, the contentment hypothesis of Vos, et al (2007) contends the reason SMEs exhibit pecking order behavior is the aversion to loss of control to outside financiers and the preference for financial freedom. This paper develops the capital structure predictions of the contentment hypothesis, reviews the predictions of the tradeoff and pecking order theories for relevant variables, reviews the findings of existing SME capital 14
structure studies, and provides original empirical support for the contentment hypothesis using a survey of over 2,000 firms from Germany, Greece, Ireland, South Korea, Portugal, Spain, and Vietnam. “SME Capital Structure: The Dominance of Demand Factors, August 2009 - By Kenny Bell and Ed Vos” Impact of Capital Structure on Firm Performance: Evidence from Manufacturing Sector SMEs in UK D K Y Abeywardhana states in his study is to investigate empirically the impact of capital structure on firm performance. This study examined the impact of capital structure on firm performance of manufacturing sector SMEs in UK for the period of 1998-2008. The authors hypothesize that there is a negative relationship between capital structure and firm performance. To examine the association, the authors run a Pearson correlation and multiple regression analysis. Results of this study reveals that there is a significant negative relationship between leverage and firm performance (ROA, ROCE), strong negative relationship between liquidity and firm performance and highly significant positive relationship between size and the firm performance. This study concluded that firms which perform well do not rely on debt capital and they finance their operations from retained earnings and specially SMEs have less access to external finance and face difficulties in borrowing funds. It is recommended that firm should establish the point at which the weighted average cost of capital is minimized and to maintain the optimal capital structure and thereby maximize the shareholders wealth. “Impact of Capital Structure on Firm Performance: Evidence from Manufacturing Sector SMEs in UK, November 2015 -D K Y Abheywardhana”
15
Chapter-3 COMPANY &INDUSTRIAL PROFILE
3.1 An ISO 9001:2008 Company 3.1.1 Industry profile To collect and disseminate both domestic as well as international marketing intelligence benefits of MSMEs. This cell, in addition to spreading awareness about various programmers/schemes for MSMEs, will specifically maintain database and disseminate information on the following. National small industries corporation (NSIC), AN ISO 9001: 2008 certified company and a govt. of India enterprise has been working to fulfill its mission of promoting, aiding and fostering the growth of micro, small & medium enterprises in the country. Over a period of five decades of transition, growth and development, NSIC has proved its strength within the country and abroad by promoting modernization, up gradation of technology, quality consciousness, strengthening linking with large and medium enterprises and enhancing exports-projects from small industries. NSIC operation through country wide network of 123 offices and technical centre’s in the country. In addition, NSIC has 48 training cum incubation centers & with a large professional manpower; NSIC provides a package of services as per the needs of MSME sectors. To manage operations in African countries, NSIC operates from its office in Johannesburg, South Africa. This cell provides a single point contact to collect database relating to bulk buyers in government, public and private sectors, the detail of exporters, international buyers and technology suppliers. Besides, the information on trade leads and products wise buyers and sellers as well as database relating to DGS & D suppliers with prices of their products, shall also be provided by this NSIC marketing intelligence cell to help MSMEs in getting appropriate information at one place and at the right time which will enable MSMEs in enhancing their ability to gauge and be at par with the global demand. 16
MSMEs need to be provided with market related information, new avenues for their products, new business practices, both domestically as well as overseas. MSMEs are handicapped because of non availability of information pertaining to central government / state government policies and programs, the support schemes and services of central /state PSUs availability of new technologies, international and national tenders, opportunities available in various countries for products and project exports. The NSIC marketing intelligence cell will integrate the available information at one strengthen their efforts in focused manner.
3.1.2 Schemes of NSIC: The national small industries corporation limited an ISO 9001: 2008 certified company established in 1955, has been working to fulfill its mission of promoting, aiding and fostering the growth of micro and small enterprises in the country. NSIC carries forward its mission to assist micro and small enterprises with a set of specially tailored schemes designed to put them in a competitive and advantageous position. The scheme comprises of facilitating marketing support, credit support, technology support and other support services. Marketing is a strategic tool for business development and survival of the enterprises in today’s Competitive era. NSIC acts as a facilitator to promote micro and small enterprises products and has devised a number of schemes to support in their marketing efforts both in the outside the country. Some of the schemes are briefly described an under. 3.1.3 Single point registration for government purchase: Government is the largest buyer of product from micro and small enterprises. In order to meet its requirement of purchase, NSIC operation a single point registration scheme under the government purchase program, where in NSIC issue registration to eligible micro and small enterprises for the purpose of suppliers to the government departments. The registration is par with DGS & D, the unit registration under this gets the following facilities. • • • •
Issue of tender sets free of cost Exemption from payment of earnest money Waiver of security deposit up to the money limit for which the unit is registered Issue of competency certificate in case the value of an order exceeds the monetary limit, after due verification.
3.1.4 Infomediary services: 17
Information plays a vital role in the success if any business. Keeping in mind the information needs to micro and small enterprises. NSIC has launched its infomediary services. A one stop, one window bouquet for aids that will provide information on business, technology, finance and also exhibit the core competence of Indian micro and small enterprises in terms of price and quality internationally as well as domestically.
3.1.5 Some important services provided are: • • • • •
Tender information in your e-mail box and web based browsing Banner display on NSIC’C website Accesses to wide range of technologies from India and abroad Joint venture opportunities and information on of trade and events Comprehensive information on government policies rules, regulations, schemes and incentives.
3.1.6 Raw material assistance: NSIC extends short term financial assistance to micro and small enterprises for procurement of raw material on need basis. The salient features • Financial assistance for procurement of raw material up to 90 days • MOU with NALCO, HCL, SAIL, RINL FOR supply of bulk materials • Easy and quick disbursement • Flexibility of repayment
3.1.7 Tender marketing: The corporation participates in bulk global tender enquiries and local tenders of central & state government and public sector enterprises on behalf of micro and small enterprises. It is aimed to assist micro and small enterprises with ability to manufacture quality products with brand equity & credibility or have limited financial capabilities.
3.1.8Benefits: NSIC will provide all financial support depending upon the unit’s individual requirements like purchase of raw materials and financing of sale bill. Enhance business volume helps micro and small enterprises to achieve maximum capability utilization. Micro and small enterprises are exempted from depositing earnest money. It ensures fair margin to micro and small enterprises for their production.
3.1.9Performance and credit rating scheme for micro and small enterprises: To ensure micro and small enterprises to ascertain the strength and weakness of their existing operation and to take corrective measures to enhance their organization strength, NSIC is operating performance and credit rating scheme through empanelled agencies like 18
ICRA; ONICRA, DUN & BRAD STREET, CRISIL, FITCH, CARE and SNERA. Micro and small enterprises has the liberty to choose among any of the rating agencies empanelled with NSIC. The rating agencies will charge the credit rating fee according to their policies. The benefits to small enterprises are as follows. • An in dependent trusted third party opinion on capabilities and credit-worthiness of • • •
micro and small enterprises Availability of credit at attractive interest Recognition in global trade Prompt sanctions of credit from banks financial institutions.
3.1.10 Facilitation of credit support through banks: Any kind of financial assistance i.e., terms loan, working capital loan, bill discounting facility and export finance can be arrange through united bank of India, UCO bank, oriental bank of commerce, central bank of India, bank of Maharashtra, YES bank and HSDC at the most competitive interest rates. The terms and condition of finance shall be of individual bank. NSIC will undertake the follow up the proposals with the bank selected by the unit for obtaining finance shall ensure timely disposal. Application forms of the individual banks can be had from the office of the NSIC.
3.2 Company profile - About serwel electronics ltd. Serwel Electronics was established in 1996 with a vision to provide Power Solutions. Sewell is committed to excellence in the areas of Designing, Manufacturing and Development of all types of power products which is a Power and Distribution Transformers, Servo Voltage Stabilizers, UPS, Variac's etc. Sewell products are appreciated for its Efficient Performance, Long Service Life, Reliability, Sturdy Construction and Dimensional Accuracy.
3.2.1 Infrastructure Set Up and Our Team Sewell products are manufactured on state-of-the-art machines with latest technology, we deliver zero defect power products. This is achieved through team of experts and streamlined production process. With synchronous approach, we strive to deliver quality proven power products meeting our customer’s expectations. Our plants are well equipped with most modern Machinery & Testing Equipments to conduct tests as per IS: 5142 with an installed capacity of 100000 units per annum. Serwel operations includes 3 manufacturing facilities, two facilities located in Hyderabad and one in Bangalore. We provide sales and support services from marketing offices spread across pan India. 19
3.2.2 Quality Sewell is an ISO 9001:2000 certified company with a commitment of well defined quality systems that ensures quality products and services are delivered to our customers. R & D is a continuous process in Sewell and we are committed to introduce new products which can be customized as per customers request and configurations. All products are tested on various parameters like safety, electricity consumption, durability, maintainability, etc. The stringent quality check imbibed by us assures conformance of products in relation to international quality standards.
3.2.3 Products
Electronic voltage stabilizers. Power & Distribution Transformers. Automatic power Factor. LT panel boards. Energy saver. UPS.
3.2.4 Infrastructure We possess a state-of-the-art manufacturing units, which are facilitated with the latest machinery, equipment and technology. With these facilities, we are able to meet the bulk requirements of our clients. We make sure that we upgrade our machinery from time to time for the smooth functioning of our manufacturing process.
3.2.5 Profile Serwell is one of the leading manufacturers of Servo Stabilizers, Distribution and Power Transformers, Ultra Isolation Transformers, APFC Panels, Auto Transformers and Power Savers. Sewell constantly adds new products every year to existing product line and is in business to address electrical needs of customers from more than 16 years. 3.2.6
Company Profile
Basic Information
20
Business Type
Supplier Manufacturer Service provider
Ownership & Capital
Year of Establishment Ownership Type
1996 Public Limited Company
Trade & Market
Annual Turnover Export Percentage
Rs. 50 - 100 Cr (or US$ 10 million - 20 million Approx). 20-40%
Quality & Certification
Trade Memberships
Enclosed
Team & Staff
Total Number of Employees
101 to 500 People
Company USP Primary competitive
Experienced R&D
Department
Good financial position &TQM
advantage
Large production capacity
Statutory Profile
PAN No. Registration Authority Registration No. TIN No. / VAT No.
AAECS3499J Hyderabad AAECS3499JXM003 28250204177V
Packaging/Payment and Shipment Details
21
Provide customized solutions
Payment Mode
Shipment mode
Cheque
Credit card
DD
LC
By air
By cargo
By road
By sea
3.2.7 Core Value Sewell Electronics Limited values its customers and enjoys working side-by-side with them in delivering solid business value. We believe in respecting our customers, listening to their requests and understanding their expectations. We strive to exceed their expectations in affordability, quality and on-time delivery. For our employees, we treat them with respect and trust, and lead through competence, creativity and teamwork
3.2.8 Our Infrastructure Sewell Electronics Limited processes modernized and sophisticated infrastructure that spread across a widespread land area. To accomplish bulk demands with utmost ease, we have segregated our infrastructure into a number of specialized departments. These departments are well-equipped with modernized machines and requisite tools to timely execute our work processes with utmost precision. Our manufacturing cum designing department is installed with hi-tech machines and sophisticated equipment and designing patterns to ensure that dimensionally accurate and robust range of products in the market Quality Policy / Processes Premier aim of our organization is to offer quality-assured range of products to our worldwide customers. To manufacture our exclusive product range, we make use of finest grade components and material that are sourced from trusted sources. Besides the product development is carried under strict surveillance of experienced quality inspectors. These professionals ensure that the product range is developed as per the agreed demands and regulatory specifications. Not only this, our ardent quality inspectors have proper arrangement to cautiously check these products on the basis of varied quality checks. Owing to robust and never failing quality control, we are able to offer internationally acclaimed range of products to our customers. 22
3.2.9 Production Capacity With installed modernized machines and sophisticated tools and equipment, we are able to furnish bulk demands of our customers with utmost ease and within the constraints of time. Besides, machines installed aids in conduction of thorough testing as per IS: 5142 norms. Owing to the use of modernized machines and tools, we are able to produce around 35000 units per year. Our manufactured products are safely stored in our capacious warehousing facility. Owing to proper segregation into various sections, our warehouse aids in storing range as per proper nomenclature and labeling, thereby ensuring quick retrieval and timed dispatch. minimum turnover as of the eligibility criteria for MSE's.
3.3
RaghuVamsi Machine Tools Pvt Ltd
3.4
Company Profile
3.3.1About the company Incorporated in 1992 RaghuVamsi Machine Tools Pvt. Ltd have created an enviable niche in industry for our products’ excellence in all across the nation. The company is engaged in manufacturing, exporting and supplying a wide assortment of Aero Engine Components, Aero structure Components, Avionic Components, Defense Components, Oil & Gas Components and Power Transmission Components. Our company has earned a dignified position by efficiently serving to its valuable clients’ with qualitative products. We develop products incorporating advanced technologies and better quality material, which have enabled us making best products available to the customers. The material, we use in the production process, is sourced from trustworthy vendors, whom we have chosen conducting stringent surveys of industry. We work in close proximity with the customers, in order to 23
comprehend their aspirations and offer products accordingly. As a result, we have acquired the trust of maximum customers and expanded our base of satisfied clients from all across the country. Our company possesses team of extremely dedicated and talented professionals, who dedicatedly perform the whole task and ensure accomplishing the specific targets successfully. They cordially perform the whole operations and ensure to achieve the predetermined objectives of a company successfully. Mr. G.Vamshi Vikas is the managing director of our organization, who have helped us growing and achieving a desired niche in industry. All these are just because of his sound managerial qualities, business acumen, foresightedness, industrial experience and sincere business approach.
3.3.2 Company Mission To create value and make a difference in the field of Precision Manufacturing by using world class machine shop, best quality methods, up to date technology - achieving consistent delivery and zero-defect parts to our customers at competitive prices.
3.3.3 Company Core Values Reliability: To be Reliable towards Quality and Delivery to enhance customer satisfaction Integrity: Our Integrity towards Work, Values & Customers Social Responsibility: Responsible towards society - Primary focus on Education & Environment.
3.3.4 Company Management Raghu Vamsi’s Management Team is comprised of Professional & Highly experienced leaders from a variety of industry backgrounds. They have a comprehensive vision of the aerospace industry and understand the strategic business needs of our customers. Together they continue to drive our integrated vision of growth. Vamshi Vikas Ganesula - Managing Director Vamshi vikas Ganesula is managing director of raghuvamsi reporting to the board of directors provides leadership to ensure the organization achieves its mission and vision while meeting the expectation of all stakeholders. He heads the strategy &business development of the company. A business graduate from IIM-C took over the business in 2004 at an age of 23 after the sudden death of the founder. In spam of 8 years company grew from 15 employees to 200 entering important sectors of Aerospace, Defense and oil &gas. 24
Reporting to the Managing Director, Mr.Subba rao heads the Sales & Coordination Team. He ensures the customer requirements are met and bridges the customer with the company to ensure 100% quality & on time delivery. A Master’s graduate in Mechanical Engineering from MIT, Chennai joined Raghu Vamshi in 2008. He has over 40 years of experience in Aerospace industry and has worked in various senior
management
disciplines
including
Operations,
Marketing,
and
Customer
Coordination in Hindustan Aeronautics Limited before retiring as AGM, Production in 2004. He also Served as Secretary HAL in Indian Embassy, Moscow coordinating all aerospace industries in Russia with all HAL’s in India. Mallikarjuna Swami – General Manager Mallikarjuna Swami is General Manager Operations of Raghu Vamsi mechanical engineer having 42 years of experience and worked as a senior management member in HAL – koraput division and in reputed automotive component manufactures like range engine valves, range Die cart and Synergies Casting Ltd.
3.3.5 Company Future Plans Raghu Vamshi, in a short span of time, has evolved as a successful manufacturing partner to its customers by providing High Precision machining and Engineering CAD/CAM Services. A strategically defined plan till 2015 will further enhance our current capabilities Our future plans include value-added services like:
Sheet Metal Welding NADCAP NDT NADCAP Plating Assembly Services EMS Activity
3.3.6 Awards and Achievements Managing Director of Raghu Vamshi, Mr.G.Vamsi Vikas was honored with “Bharat Guarav Award” in 2007 by All India Business and Community foundation in the 37th National Seminar on “outstanding contributions to National development”. He was honored with “Bharat vikas rattan award” in 2009. He was honored with “Rashtriya udyog samman puraskar” in 2006. He was also honored with “young enterprising award “f or the year 2005 by Fenner India Ltd. 25
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Chapter-4 CONCEPTUAL FRAMEWORK 4.1Capital structure theories The financing decisions occupy a pivotal role in the overall finance function in a corporate firm which mainly concerns itself with an efficient utilization of the funds provided by the owners or obtained from external sources together with those retained or ploughed back out of surplus or undistributed profits. These decisions are mainly in the nature of planning capital structure, working capital and mechanism through which funds can be raised from the capital market whenever required. The financing decisions explains how to plan an appropriate mix with least count, how to raise long term funds, and how to mobilize the funds for working capital within a short span of time. Such a financing policy provides an appropriate backdrop for formulating effective policies for investment of funds as well as management of earnings. It contributes to magnifying the earnings on equity as 26
profitability (expressed as return on equity), to a large extent, is dependent on the degree of leverage in the capital structure. Besides, the valuation of the structure of physical assets depends fundamentally on the financing mix. This makes it necessary for the management of a firm to pursue a well thought out of financing policy, which ought to be framed initially, incorporating, among other things, the proportion of the debt and equity, types of debts and own funds to be used and volume of the funds to be raised from each source or combination of sources, to enable the firm to have a proper capitalization. In the absence of this, the firm may face the problem of either over-capitalization or under-capitalization impeding its smooth financial functioning. It is obvious that functioning decisions are extremely important for corporate firms. Such decisions, in management parlance, are termed as capital structure decisions. The term capital structure is used to describe the combination of various sources of finance employed to raise funds. It implies, in other words, that when a firm chooses to use a group of sources in certain proportions the resulting pattern is referred to as capital structure of the firm. The sources of finance could be divided in terms of ownership of funds and duration of funds. The former comprises owned and borrowed funds while the latter includes long, medium and short term funds. Of the two, the duration-based classification is useful for preparing a plan to meet long term as well as short term capital requirements while ownership-based classification is useful for selection of specified sources, determining debt-equity ratio and analyzing impact of capital structure decisions on the earnings on equity. As the ownership based classification suggests that there are two types of sources of finance, namely owned and borrowed funds, the capital structure represents the component relationship between owned and borrowed funds. The owned funds which are also described as equity fund may be defined as funds provided by or belonging to the share-holders. In the opinion Raj want Singh and Brij Kumar, the capital structure is made up of the long term borrowings, the preferred stock and the common stock equity including all related net worth accounts. Similarly Morarka.R observes that the capital structure implies a degree of permanency and normally omits short term borrowings of less than one year but would include other intermediate and long term borrowings. The financial institutions consider only long term sources of finance for computing the debt-equity ratio of corporate firm. Definition 27
A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity, the capital structure is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure Theories of capital structure Different kinds of theories have been propounded by different authors to explain the relationship between capital structure, cost of capital and the value of the firm. The main contributors to the theories are Durand, Ezra, Solomon, Modigliani and Miller. The important theories are discussed below:
Net Income Approach Net Operating Income Approach. The Traditional Approach. Modigliani and Miller Approach.
1. Net Income Approach. According to this approach, a firm can minimize the weighted average cost of capital and increase the value of the firm as well as market price of equity shares by using debt financing to the maximum possible extent. The theory propounds that a company can increase its value and decrease the overall cost of capital by increasing the proportion of debt in its capital structure. This approach is based upon the following assumptions:
The cost of debt is less than the cost of equity. There are no taxes. The risk perception of investors is not changed by the use of debt.
2. Net Operating Income Approach. This theory as suggested by Durand is another extreme of the effect of leverage on the value of the firm. It is diametrically opposite to the net income approach. According to this approach, change in the capital structure if a company does not affect the market value of the firm and the overall cost of capital remains constant irrespective of the method of financing. It implies that the overall cost of capital remains the same whether the debt- equity mix is 50:50 or 20:80 or 0:100. Thus, there is nothing as an optimal capital structure and every capital structure is the optimum capital structure. This theory presumes that: The market capitalizes the value of the firm as a whole. The business risk remains constant at every level of debt equity mix; There are no corporate taxes. 28
3. The Traditional Approach. The traditional approach, also known as intermediate approach, is a compromise between extremes of net income approach and net operating income approach. According to this theory, the value of the firm can be increased initially or the cost of capital can be decreased by using more debt as the debt is a cheaper source of funds than equity. Thus, optimum capital structure can be reached by a proper debt-equity mix. Beyond a particular point, the cost of equity increases because increased debt increases the financial risk of the equity shareholders. The advantage of cheaper debt at this point of capital structure is offset by increased cost of equity. After this there comes a stage, when the increased cost of equity cannot be offset by the advantage of low-cost debt. Thus, overall cost of capital, according to this theory, decreases up to a certain point, remains more or less unchanged for moderate increase in debt thereafter; and increases or rises beyond a certain point. Even the cost of debt may increase at this stage due to increased financial risk.
4.2 How can financial leverage affect the value? One thing is sure that wherever and whatever way one sources the finance from, it cannot change the operating income levels. Financial leverage can, at the max, have an impact on the net income or the EPS (Earning per Share). The reason is explained further. Changing the financing mix means changing the level of debts and change in levels of debt can impact the interest payable by that firm. Decrease in interest would increase the net income and thereby the EPS and it is a general belief that the increase in EPS leads to increase in the value of the firm.
4.3 concept of optimal capital structure Optimal capital structure may be defined as that relationship of debt and equity which maximizes the value of company’s share in the stock exchange. Kulkarni and Satyaprasad defined optimum capital structure as ‘the one in which the marginal real cost of each available method of financing is the same’. They included both the explicit and implicit cost under the term real cost. According to Prof Ezra Solomon, ‘Optimal capital structure is that mix of debt and equity which will maximize the market value of a company’. Hence there should be a judicious combination of the various sources of long-term funds which provides a lower overall cost 29
of capital and so a higher total market value for the capital structure. Optimal capital structure may thus be defined as, the mixing of the permanent sources of funds used by the firm in a manner that will maximize the company’s common stock price by minimizing the firm’s composite cost of capital. The concept of optimal capital structure has drawn a great deal of attention in accounting and finance literature. Capital structure means the proportion of debt and equity in the total capital of a firm. The objective of a firm is to maximize the value of its business. This is done by maximizing market value of the shares and minimizing the cost of capital of a firm. An optimal capital structure is that proportion of debt and equity, which fulfils this objective of a firm. Thus an optimal capital structure tries to optimize two variables at the same time: cost of capital and market value of shares.
4.4 frame work of capital structure: FRICT analysis A financial structure may be evaluated from various perspectives. From the owner’s point of view, return, risk and value are important considerations. From the strategic point of view, flexibility is an important concern. Issue of control, flexibility and feasibility assume great significance. A sound capital structure will be achieved by balancing all these considerations: Flexibility: the capital structure should be determined within the debt capacity of the company, and this capacity should not be exceeded. The debt capacity of a company depends on its ability to generate funds cash flows. It should have enough cash to pay creditor’s fixed charges and principal sum and leave some excess cash to meet future contingency. The capital structure should be flexible. It should be possible for a company to adapt its capital structure with a minimum cost and delay if warranted by a changed situation. It should also be possible for the company to provide funds whether needed to finance its profitable activities. Risk: the risk depends on the variability in the firm’s operations. It may be caused by the macroeconomic factors and industry and firm specific factors. The excessive use of debt magnifies the variability of shareholders’ earnings, and threatens the solvency of the company. Income: the capital structure of the company should be most advantageous to the owners (shareholders) of the firm. It should create value; subject to other considerations, it should generate maximum returns to the shareholders with minimum additional cost. 30
Control: the capital structure should involve minimum risk of loss of control of the company. The owners of closely held companies are particularly concerned about dilution of control. Timing: the capital structure should be feasible to implement given the current and future conditions of the capital market, the sequencing of sources of financing is important. The current decision influences the future options of raising capital. The FRICT (flexibility, risk, income, control and timing) analysis provides general framework for evaluating a firm’s capital structure. The particular characteristics of a company may reflect some additional specific features. Further the emphasis given to each of these features will differ from company to company.
4.5 Factors affecting capital structure theories: Debt and equity differ in cost and risk. As debt involves less cost but it is very risky securities whereas equity is expensive securities but these are safe securities from companies’ point of view. Debt is risky because payment of regular interest on debt is a legal obligation of the business. In case they fail to pay debt security holders can claim over the assets of the company and if firm fails to meet return of principal amount it can even go to liquidation and stage of insolvency. Equity securities are safe securities from company’s point of view as company has no legal obligation to pay dividend to equity shareholders if it is running in loss but these are expensive securities. Capital structure of the business affects the profitability and financial risk. A best capital structure is the one which results in maximizing the value of equity shareholder or which brings rise in the price of equity shares. Generally companies use the concept of financial leverage to set up capital structure. The various factors which influence the decision of capital structure are: 1. Cash Flow Position: The decision related to composition of capital structure also depends upon the ability of business to generate enough cash flow. The company is under legal obligation to pay a fixed rate of interest to debenture holders, dividend to preference shares and principal and interest amount for loan. Sometimes company makes sufficient profit but it is not able to generate cash inflow for making payments. 31
The expected cash flow must match with the obligation of making payments because if company fails to make fixed payment it may face insolvency. Before including the debt in capital structure company must analyze properly the liquidity of its working capital. A company employs more of debt securities in its capital structure if company is sure of generating enough cash inflow whereas if there is shortage of cash then it must employ more of equity in its capital structure as there is no liability of company to pay its equity shareholders. 2. Interest Coverage Ratio (ICR): It refers to number of time companies earnings before interest and taxes (EBIT) cover the interest payment obligation. ICR= EBIT/ Interest High ICR means companies can have more of borrowed fund securities whereas lower ICR means less borrowed fund securities. 3. Debt Service Coverage Ratio (DSCR): It is one step ahead ICR, i.e., ICR covers the obligation to pay back interest on debt but DSCR takes care of return of interest as well as principal repayment.
If DSCR is high then company can have more debt in capital structure as high DSCR indicates ability of company to repay its debt but if DSCR is less then company must avoid debt and depend upon equity capital only. 4. Return on Investment: Return on investment is another crucial factor which helps in deciding the capital structure. If return on investment is more than rate of interest then company must prefer debt in its capital structure whereas if return on investment is less than rate of interest to be paid on debt, then company should avoid debt and rely on equity capital. This point is explained earlier also in financial gearing by giving examples. 5. Cost of Debt: If firm can arrange borrowed fund at low rate of interest then it will prefer more of debt as compared to equity. 6. Tax Rate: High tax rate makes debt cheaper as interest paid to debt security holders is subtracted from income before calculating tax whereas companies have to pay tax on dividend paid to 32
shareholders. So high end tax rate means prefer debt whereas at low tax rate we can prefer equity in capital structure. 7. Cost of Equity: Another factor which helps in deciding capital structure is cost of equity. Owners or equity shareholders expect a return on their investment i.e., earning per share. As far as debt is increasing earnings per share (EPS), then we can include it in capital structure but when EPS starts decreasing with inclusion of debt then we must depend upon equity share capital only. 8. Floatation Costs: Floatation cost is the cost involved in the issue of shares or debentures. These costs include the cost of advertisement, underwriting statutory fees etc. It is a major consideration for small companies but even large companies cannot ignore this factor because along with cost there are many legal formalities to be completed before entering into capital market. Issue of shares, debentures requires more formalities as well as more floatation cost Whereas there is less cost involved in raising capital by loans or advances. 9. Risk Consideration: Financial risk refers to a position when a company is unable to meet its fixed financial charges such as interest, preference dividend, payment to creditors etc. Apart from financial risk business has some operating risk also. It depends upon operating cost; higher operating cost means higher business risk. The total risk depends upon both financial as well as business risk. If firm’s business risk is low then it can raise more capital by issue of debt securities whereas at the time of high business risk it should depend upon equity. 10. Flexibility: Excess of debt may restrict the firm’s capacity to borrow further. To maintain flexibility it must maintain some borrowing power to take care of unforeseen circumstances. 11. Control: The equity shareholders are considered as the owners of the company and they have complete control over the company. They take all the important decisions for managing the company. The debenture holders have no say in the management and preference shareholders have limited right to vote in the annual general meeting. So the total control of the company lies in the hands of equity shareholders. 33
If the owners and existing shareholders want to have complete control over the company, they must employ more of debt securities in the capital structure because if more of equity shares are issued then another shareholder or a group of shareholders may purchase many shares and gain control over the company. Equity shareholders select the directors who constitute the Board of Directors and Board has the responsibility and power of managing the company. So if another group of shareholders gets more shares then chance of losing control is more. Debt suppliers do not have voting rights but if large amount of debt is given then debtholders may put certain terms and conditions on the company such as restriction on payment of dividend, undertake more loans, investment in long term funds etc. So company must keep in mind type of debt securities to be issued. If existing shareholders want complete control then they should prefer debt, loans of small amount, etc. If they don’t mind sharing the control then they may go for equity shares also. 12. Regulatory Framework: Issues of shares and debentures have to be done within the SEBI guidelines and for taking loans. Companies have to follow the regulations of monetary policies. If SEBI guidelines are easy then companies may prefer issue of securities for additional capital whereas if monetary policies are more flexible then they may go for more of loans. 13. Stock Market Condition: There are two main conditions of market, i.e., Boom condition. These conditions affect the capital structure specially when company is planning to raise additional capital. Depending upon the market condition the investors may be more careful in their dealings. During depression period in the market business is slow and investors also hesitate to take risk so at this time it is advisable to issue borrowed fund securities as these are less risky and ensure
fixed
repayment and regular payment of interest but if there is Boom period, business is flourishing and investors also take risk and prefer to invest in equity shares to earn more in the form of dividend. 14. Capital Structure of other Companies: Some companies frame their capital structure according to Industrial norms. But proper care must be taken as blindly following Industrial norms may lead to financial risk. If firm cannot afford high risk it should not raise more debt only because other firms are rising. 34
4.6 Essential features of a capital mix A sound or an appropriate capital structure should have the following essentials features: 1. Maximum possible use of leverage. 2. The capital structure should be flexible so that it can be easily altered. 3. To avoid undue financial/business risk with the increase of debt. 4. The use of debt should be within the capacity of a firm. The firm should be in a position to meet its obligations in paying the loan and interest charges as when due. 5. It should involve minimum possible risk of loss of control. 6. It must avoid undue restrictions in agreement of debt. 7. It should be easy to understand and simple to operate to the extent possible.
4.7 EBIT –EPS Analysis: EBIT-EPS analysis gives a scientific basis for comparison among various financial plans and shows ways to maximize EPS. Hence EBIT-EPS analysis may be defined as ‘a tool of financial planning that evaluates various alternatives of financing a project under varying levels of EBIT and suggests the best alternative having highest EPS and determines the most profitable level of EBIT. Concept of EBIT-EPS Analysis: The EBIT-EBT analysis is the method that studies the leverage, i.e. comparing alternative methods of financing at different levels of EBIT. Simply put, EBIT-EPS analysis examines the effect of financial leverage on the EPS with varying levels of EBIT or under alternative financial plans. It examines the effect of financial leverage on the behavior of EPS under different financing alternatives and with varying levels of EBIT. EBIT-EPS analysis is used for making the choice of the combination and of the various sources. It helps select the alternative that yields the highest EPS. We know that a firm can finance its investment from various sources such as borrowed capital or equity capital. The proportion of various sources may also be different under various financial plans. In every financing plan the firm’s objectives lie in maximizing EPS. Advantages of EBIT-EPS Analysis: We have seen that EBIT-EPS analysis examines the effect of financial leverage on the behavior of EPS under various financing plans with varying levels of EBIT. It helps a firm in determining optimum financial planning having highest EPS. Various advantages derived from EBIT-EPS analysis may be enumerated below: Financial Planning: 35
Use of EBIT-EPS analysis is indispensable for determining sources of funds. In case of financial planning the objective of the firm lies in maximizing EPS. EBIT-EPS analysis evaluates the alternatives and finds the level of EBIT that maximizes EPS. Comparative Analysis: EBIT-EPS analysis is useful in evaluating the relative efficiency of departments, product lines and markets. It identifies the EBIT earned by these different departments, product lines and from various markets, which helps financial planners rank them according to profitability and also assess the risk associated with each. Performance Evaluation: This analysis is useful in comparative evaluation of performances of various sources of funds. It evaluates whether a fund obtained from a source is used in a project that produces a rate of return higher than its cost. Determining Optimum Mix: EBIT-EPS analysis is advantageous in selecting the optimum mix of debt and equity. By emphasizing on the relative value of EPS, this analysis determines the optimum mix of debt and equity in the capital structure. It helps determine the alternative that gives the highest value of EPS as the most profitable financing plan or the most profitable level of EBIT as the case may be. Limitations of EBIT-EPS Analysis: Finance managers are very much interested in knowing the sensitivity of the earnings per share with the changes in EBIT; this is clearly available with the help of EBIT-EPS analysis but this technique also suffers from certain limitations, as described below No Consideration for Risk: Leverage increases the level of risk, but this technique ignores the risk factor. When a corporation, on its borrowed capital, earns more than the interest it has to pay on debt, any financial planning can be accepted irrespective of risk. But in times of poor business the reverse of this situation arises—which attracts high degree of risk. This aspect is not dealt in EBIT-EPS analysis. Contradictory Results: It gives a contradictory result where under different alternative financing plans new equity shares are not taken into consideration. Even the comparison becomes difficult if the number of alternatives increase and sometimes it also gives erroneous result under such situation. Over-capitalization: This analysis cannot determine the state of over-capitalization of a firm. Beyond a certain point, additional capital cannot be employed to produce a return in excess of the payments that must be made for its use. But this aspect is ignored in EBIT-EPS analysis. 36
4.8 Pattern of Capital Structure The term ‘capital structure’ refers to the relationship between the various long-term forms of financing such as debenture, preference share capital and equity share capital. Financing the firm’s assets is a very crucial problem in every business and as a general rule there should be a proper mix of debt and equity capital in financing the firm’s assets. The use of long-term fixed interest bearing debt and preference share capital along with equity shares is called financial leverage or trading on equity. In case of new company the capital structure may be of any of the following four patterns:
Capital structure with equity shares only Capital structure with equity as well as preference shares Capital structure with equity shares and debt capital Capital structure with equity shares, preference shares and debt capital.
4.9 Approaches to establish target capital structure The capital structure should be planned initially when a company is incorporated. The initial capital structure should be designed very carefully. The management of the company should set a target capital structure and the subsequent financing decisions should be made with a view to achieve the target capital structure. The company needs funds to finance its activities continuously. Every time when funds have to be procured, the financial manager weighs the pros and cons of various sources of finance and selects the most advantageous sources keeping in view the target capital structure and financial manager deals with existing capital structure. Thus the capital structure decision is a continuous one and has to be taken whenever a firm needs additional finances. Three common approaches to decide about a firm’s capital structure EBIT-EPS approach for analyzing the impact of debt on shareholders’ return and risk. Valuation approach for determining the impact of debt on the shareholder’s values Cash flow analysis for analyzing the firm’s ability to service debt and avoid financial distress.
4.10 Changes in capitalization No scheme of capitalization or capital structure can be said to be of permanent character or of static nature in the fast changing world of business. The initial patterns of capitalization, however planned, can never fully anticipate the efforts of these changes in the economy. The scheme of capitalization may become outmoded with the changing conditions of the 37
financial markets. Thus it may become necessary to make changes in the scheme of capitalization to suit the present needs of a company. A sound capital structure is one which can be adjusted according to the needs of the changing conditions. The following are the main reasons necessitating change in capitalization: To restore balance in the financial plan: if the financial structure of a company has become top heavy with fixed cost bearing securities resulting into a great strain on the financial position of the company ,the company may readjust its capital structure by redeeming the preference shares or debentures out of the proceeds of new issue of equity shares. This will lead to easing out the tension or reduce the strain and restore the balance in the financial plan. To simplify the capital structure: when a company has issued a variety of securities at different points of time to raise funds at difficult terms, it may need to consolidate such securities to simplify the financial plan as and when the market conditions are favorable. To suit investors needs: a company may have to change capitalization to suit the needs of its investors. The companies often resort to split up of its shares to make these more attractive especially when the market activity in the company’s share is limited due to high face value and wide fluctuations in its market prices. To write off the deficit: In case a company has not been doing well and book value of its assets is overvalued as compared to their real worth or when there are accumulated losses ,it is better for the company to reorganize its capital by reducing book value of its liabilities and assets to their real values such reorganization is also necessitated, because, otherwise the company cannot legally pay dividends to its shareholders even in future when it makes profits without writing off the losses.
Chapter-5 DATA INTERPRETATION AND ANALYSIS 38
5.1 Ratio analysis: Ratio analysis is one of the oldest methods of financial statements analysis. It was developed by banks and other lenders to help them chose amongst competing companies asking for their credit. Two sets of financial statements can be difficult to compare. The effect of time, of being in different industries and having different styles of conducting business can make it almost impossible to come up with a conclusion as to which company is a better investment. Ratio analysis helps creditors solve these issues. Ratio analysis is a tool that was developed to perform quantitative analysis on numbers found on financial statements. Ratios help link the three financial statements together and offer figures that are comparable between companies and across industries and sectors. Ratio analysis is one of the most widely used fundamental analysis techniques. However, financial ratios vary across different industries and sectors and comparisons between completely different types of companies are often not valid. In addition, it is important to analyze trends in company ratios instead of solely emphasizing a single period’s figures. What is a ratio? It’s a mathematical expression relating one number to another, often providing a relative comparison. Financial ratios are no different—they form a basis of comparison between figures found on financial statements .As with all types of fundamental analysis, it is often most useful to compare the financial ratios of a firm to those of other companies. Financial ratios fall into several categories. For the purpose of this analysis, the commonly used ratios are grouped into four categories: activity, liquidity, solvency and profitability. Following ratios have been used to analyze and interpret the result of the study: Debt – Equity ratio. Solvency ratio. Interest coverage ratio. Earnings per share ratio.
5.2 Computation of ratio 5.2.1 Debt-equity ratio The main object of calculating the debt-equity ratio is to measure the relative interest of owners and creditors in the firm. From the creditors’ point of view, it measures the extent to 39
which their interest is covered by owned funds. A standard debt-equity norm for all industrial units is neither desirable nor practicable. Different standard debt-equity ratios are used for different industry groups. However, in less developed countries, such standards cannot be accepted. Therefore, this ratio depends upon industry, circumstances, and prevailing practices and so on. The generally accepted standard norm of debt-equity ratio is 2:1. The ratio may be calculated in terms of the relative proportion of long term debt i.e. borrowed funds and shareholders' equity i.e. net worth. This is a vital ratio to determine the efficiency of the financial management of business undertakings (Roy Chowdhary). Debt - equity ratio is calculated by using the following formula: Debt – Equity Ratio = Long Term Debt / Net Worth. The debt - equity ratio of Serwel private Limited and Raghuvamsi private limited is presented in Table -5.1 Serwel private Ltd.
Year
Debt ( in Rs)
09-10
Raghuvamsi private Ltd.
Equity (in Rs)
Ratio
Year
Debt (in Rs)
Equity (in Rs)
RATIO
90194572
80883376
1.11
09-10
25361218
19017075
1.33
10-11
18201951
142525426
12.7
10-11
20800000
20915100
0.99
11-12
28083967
20292436
1.38
11-12
28083967
20292436
1.38
12-13
44902047
269394812
0.41
12-13
42042434
51438286
0.81
13-14
87183784
208336107
0.41
13-14
39409580
58572104
0.67
14-15
288095383
97369359
2.95
14-15
47741624
31786007
1.5
5.1(a)Graph showing the variation of ratios between serwel and raghuvamsi
40
5.1(b) Interpretation: Table 1 shows Debt-Equity ratio of Serwel pvt. Ltd. And Raghuvamshi pvt.Ltd. The Debt-Equity ratio is calculated by dividing the long term debt and Net worth. It is evident that long term debt of the company serwel decreased remarkably from Rs.90194572 in 2009 to 87183784 in 2014 and again a rapid increase of Rs.288095383 in 2015. Net Worth had a gradual rise of Rs.80883376 in 2010 and a rapid fall in 2014 by Rs. 26939481 and again rose by Rs. 97369359 in 2015. In other words Net Worth is fluctuating in the entire study in serwel electronics pvt.Ltd. It is evident that long term debt of the company raghuvamshi increased remarkably from Rs. 25361218 in 2010 to Rs.47741624 in 2015. Net worth is also rapidly increasing from Rs.19017075 in 2010 to Rs.31786007 in the year 2015. Debt-Equity ratio had varied from the higher of 1.3 times in 2010 to the lowest 2.9 in 2015. The ratio is well slight above than the standard ratio of 2:1. It means that the debt employed by the company was slight high from the point of view as the standard ratio. However, the interest of the debt-holders of the company was well protected. 5.2.2 Solvency ratio Solvency is the term which is used to describe the financial position of any business which is capable to meet outside obligations in full out of its own assets. So their ratio establishes relationship between total liabilities and total assets. 41
Solvency ratio is calculated by using the following formula: Solvency ratio = total liabilities / total assets. The solvency ratio of Serwel private Limited and Rraghuvamshi private limited is presented in Table – 5.2 SURWELL PVT. LTD. Year Total liabilities Total assets (in Rs.) (in Rs.) 09-10 172610403 172610403
RAGHUVAMSI PVT. LTD. Ratio Year Total liabilities Total 1
9-10
(in Rs.) 57368776
(in Rs.) 5736776
1
10-11
327250093
327250093
1
10-11
8495300
8495300
1
11-12
927662724
9277662724
1
11-12
102138072
102138072
1
12-13
1225470915
1225470915
1
12-13
116767188
116767188
1
13-14
1311264590
1311264590
1
13-14
114422012
114422012
1
14-15
1074191635
1074191635
1
14-15
110996369
110996369
1
5.2(a) Graph showing solvency ratio of serwel and raghuvamshi
42
pvt.Ltd.
assets Ratio
5.2(b) Interpretation: Table 2 shows solvency ratio of Serwel pvt. Ltd. And Raghuvamshi pvt.ltd. Solvency ratio is calculated by dividing total liabilities by total assets giving 1 as ratio from the year 2010 to 15. Total assets and liabilities had a gradual rise in 2011 of Rs.172610403 and a rapid fall in 2015 by 1074191635 in serwel electronics and also it is rise from Rs.5736776 in 2010 to Rs.110996369 in 2015 in raghuvamsi electronic Pvt. Ltd.In other words Net Worth is fluctuating in the entire study.
5.2.3 Interest coverage Ratio = EBIT/interest Interest Coverage Ratio, sometimes called Times Interest Earned Ratio and the abbreviation TIE is used. It is a term that indicates how many times the total income covers interest payments. The interest coverage indicates the size of safety cushion for creditors. The indicator is one of the balance sheet debt ratios (of long-term financial stability). Calculation: Interest Coverage Ratio = EBIT / Total Interest Payable The interest coverage ratio of Serwel private Limited and Rraghuvamshi private limited is presented in Table - 5.3 Serwel Pvt.Ltd. Year EBIT 09-10 10-11 11-12
Rs.) 36095913 71508287 89018291
(in Interest Rs.) 9945333 16491369 4294877
(in Ratio 36.2 11.32 20.74 43
Raghuvamsi Pvt.Ltd. Year EBIT (in Interest 09-10 10-11 11-12
Rs.) 5477108 3689174 5665064
Rs.) 3839642 3515770 4580779
(in Ratio 1.42 1.04 1.23
12-13 13-14 14-15
111747738 152821207 951254340
60437125 69432605 91997441
1.85 2.26 10.32
12-13 13-14 14-15
10277314 10736974 8524233
6699981 5462317 4841782
1.53 0.31 1.76
5.3(a) Graph showing variation in EBIT ratios in serwel and raghuvamshi electronics pvt.Ltd.
5.3(b) Interpretation Table 3 shows EBIT ratio of Serwel pt. Ltd. And Raghuvamshi pt. ltd. EBIT ratio is calculated by dividing EBT by interest from the year 2010 to 2015. EBIT had a gradual rise in 2011 of Rs.71508287 and increasing gradually to Rs.951254340 in 2015 in Serwel electronics Ltd. In the same way RAGHU VAMSI company has rise from Rs.5477108 in 2010 to Rs. 8524233.In other words EBIT has been increasing from past few years. Graph shows that Serwel Company has decreased EBIT ratio from year 2010 of 36.2 to 2015 of 10.3 where as raghuvamshi company has increased EBIT ratio from 2010 of 1.4 to 1.7 in 2015.
5.4 Earnings per share The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability. Calculated as = Earnings after tax No. of shares The EPS of Serwel private Limited and Raghuvamsi private limited is presented in table Table – 5.4 Serwel pvt.Ltd. Year EAT 09-10 10-11 11-12
Rs.) 20161351 33191254 57590554
Raghuvamshi pvt.Ltd. Year EAT (in No.
(in No. Of shares Ratio 1863300 186330 321920
108.2 178.1 178.8 44
09-10 10-11 11-12
Rs.) 590475 1160252 113017
shares 190170.7 202925.3 201795.1
of Ratio 3.1 5.7 5.6
12-13 13-14 14-15
40278831 84683957 22058556
417370 417370 973693.59
96.5 202.8 22.6
12-13 13-14 14-15
246608 3566909 2544574
257191.4 292860.5 317860
0.9 12.1 8.05
5.4(a) Graph shows EPS ratio of serwel and Raghuvamashi pvt.Ltd.
5.4(b) Interpretation Table 4 shows EPS ratio of Serwel pt. Ltd. And Raghuvamsi pvt. ltd. EBIT ratio is calculated by dividing EAT by no. of shares.EPS is calculated here from the year 2010 to 2015. EAT had a gradual rise in 2010 of Rs. 20161351 and is being increasing in 2015 by 22058556 in serwel electronics and in Raghuvamsi company Rs. 590475 in 2010 rose to Rs. 2544574 in 2015. In other words EAT has gained profits in entire study. Earnings per share ratio is 108.2 in 2010 and has increased to 22.6 in 2015 in serwel and 3.1 in 2010 and raised to 8.05 in 2015 in Raghuvamsi company.
Chapter-6 FINDINGS, SUGGESTIONS &CONCLUSIONS 45
6.1 FINDINGS The average ratio of debt and equity is better in serwel as compared to raghuvamsi electronics. It shows that serwel is more using debt financing in its capital structure pattern as compared to raghuvamsi electronics. It implies that company is adopting NOI approach of capital structure. The more use of debt financing in this industry is increasing the value of the firm and minimising the cost of capital resulting in overall wealth maximisation of shareholders. It has been found from the study that average of debt equity ratio of serwel in 201415 i.e. 2.97 where as the average of debt equity ratio in Raghu vamsi pvt.Ltd. is only 1.5 as per the standard norm of 2:1 of debt equity ratio for the industries. It has been found from the study that the average solvency ratio is maintained as 1:1 from the last five years in both raghuvamsi and serwel electronics. The average EBIT ratio of serwel is better compared to Raghuvamsi in past few years and the ratio has been declined from 36.2 in 2010 to 10.6 in 2015,where as raghuvamsi is maintained with 1.4 in 2010 to 1.7 in 2015. The EPS of Serwel private Limited is far better compared to Raghuvamsi private limited in the year 2014-15 is 22.6 and 8.05 respectively. The rising overall average of trend of debt and equity in case of both the SME’s this implies that these industries have access to market for both equity and debt financing. Initially, companies were raising maximum debt fund to reduce the cost of capital but which resulted in increase in financial risk. So they shifted to equity financing also .They are maintaining a trade-off between debt and equity.
6.2 SUGGESTIONS The SERWEL and Raghuvamsi industries should improve their debt equity ratio as it is not as per the standard norm. These industries are not using as much debt as expected from them. The average ratio of debt and equity is not better in raghuvamsi industry as compared to serwel industry. The Raghuvamsi industry should pay more attention towards their reserves and surpluses, because due to this they are not getting higher 46
profits. They should more focus towards debt financing to maximise the wealth of shareholders. Both the SME’s are advised to maintain a trade –off between debt and equity in future also so as to achieve the objective of optimum capital structure. The solvency ratio of Serwel private Limited and Raghuvamshi private limited
presented is good and if maintained in the same manner would be profitable. The EPS of Serwel private Limited and Raghuvamsi private limited presented shows that serwel has better yields in as profits, if Raghu vamshi shareholders investment is to be increased in coming years then this would excellent opportunity
for raghuvamsi to maximize the profits. The interest coverage ratio of serwel is great compared to raghuvamsi capital structure of Raghuvamsi is to be increased for good profit returns.
Chapter-7 CONCLUSION Results of the present empirical study revealed that long term funds had apportioned nearly two-third of total funds when compared to short term funds in the SMEs selected for the study. The firms had utilized more owned funds than borrowed funds. The SMEs had shown an inclination in strengthening long term funds consisting of both shareholders’ funds as well as long term borrowed funds in order to finance its assets requirement. The financial risk of the firms is comparatively low since it mostly depended on equity financing. The mobilization of the debt funds by the company means that it could raise the external funds to bring the optimum capital structure i.e. minimize the cost of capital and maximize the share value of the firm. This may due to the tax deductibility of the interest paid on debt. Thus the benefits of financial leverage can be reaped for improving the financial performance of the firm. The behaviour of the interest coverage ratio was unpredictable. The interest charges are 47
fully covered by the earnings before interest and taxes. A higher interest coverage ratio is desirable, but too high ratio indicates that the firm is very conservative in using debt, and it is not using debt to the best advantage of the shareholders. Hence, it is suggested that SMEs shall tap the debt funds optimal to maintain a balanced capital structure. The financial performance of a firm is greatly influenced by its capital structure. An optimal capital structure maximizes the shareholder’s wealth with best combination of debt and equity mix thereby minimizing the cost of capital
BIBLIOGRAPHY References 1. Khan M Y., Financial Services, Tata McGraw Hill Education Private Ltd. Fifth Edition, 2010. 2. I M Pandey., financial management, vikas publishing house Pvt Ltd.,Tenth edition,2010. 3. Gordan E ., Natrajan K., Financial markets and services, Himalaya publishing house,2013 4. Jean J. Chen-Determinants of capital structure of Chinese-listed companies., Journal of business research,2004 5. Thorsten Beck, Small and medium-size enterprises: Access to finance as a growth constraints, Elsevier publications, Journal of business research.2006 6. Sheridan Titman and Roberto Wessel’s., The Determinants of capital structure choice,Weily Publications,1998. Stable URL: http://www.jstor.org/stable/2328319 7. Kenny Bell and Ed Vos., SME Capital Structure: The Dominance of Demand Factors,SSRN,August,2009. Stable URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1456725 8. D K Y Abeywardhana, Impact of Capital Structure on Firm Performance: Evidence from Manufacturing Sector SMEs in UK,WBI conference., November 2015. Stable URL: http://www.wbiworldconpro.com/pages/paper/melbourne-conference-2015november/3392 48
WEBSITES http://www.nsic.co.in/ http://www.raghuvamsi.com/ http://serwel.com/ http://www.moneycontrol.com/
Balance Sheet and Profit And Loss Statements of Serwel Pvt.,Ltd BALANCE SHEET AS ON MARCH 31, 2010 Schedule
As on march 31, 2010
1
18633000
2
23855376
3
38395000
I. Source of funds (1) Shareholders funds (A) Capital (B) Reserves (C) Share application money (2) Loan funds
4
(A) Secured loans
5
(3) Deferred tax liability
90194572 1532455
TOTAL
49
II. Application of funds (1) Fixed assets
6 48579211
(A) Gross blocks
3019880
(B) Less : Depreciation
45559331
(C) Net block (3) Current assets, loans and advances
7 15818864
(A) Sundry debtors
402846
(B) Cash and bank balances (C) Loans & advances
8
Less : current liabilities
15538059 2174998
Provisions
TOTAL
172610403
PROFIT N LOSS FOR THE YEAR ENDED MARCH 31, 2010 SCHEDULE
For the year ended march 31, 2010
9
432572279
INCOME Turn Over Other In come
3827522
Accretion/Desertion to shock
10 TOTAL
6323470 442723271
EXPENDITURE 6986202
Manufacturing Expenses
11
Personnel Expenses
12
Administrative Expenses
13
8047645 390110845 TOTAL
405144692
50
Profit before Finance Charges, Depreciation & Taxation
37578580 14
Less : Finance charges
9945333 27633247
Profit before Depreciation & Taxation
1482667
Less : Depreciation 6
Profit before Taxation
26150580
Less : Provisions for Taxation (a) Income Tax
5100000
(b) Fringe benefit tax
0
Add/Less Deferred Tax Asset/Liability
889229
TOTAL
20161351
BALANCE SHEET AS ON MARCH 31, 2011 Schedule
As on march 31,2011
1
18633000
2
67495000
3
56397426
I. Source of funds (1) Shareholders funds (A) Capital (C) Share. application money (B) Reserves (2) Loan funds
4
(A) Secured loans
5
(3) Deferred tax liability TOTAL
182031951 2692716 327250093
51
II. Application of funds (1) Fixed assets
6
(A) Gross blocks
66269776
(B) Less : Depreciation
5144380
(C) Net block
61125396
(D) Capital work in progress
10248722
(2) Current assets, loans and advances
7
(A) Inventories
247960320
(B) Sundry debtors
13131345
(C) Cash and bank balances
21113953
(E) Loans & advances
10348998
Less : current liabilities &
8
Provisions
23465504 13213137
NET current assets
255875975
TOTAL
327250093
PROFIT N LOSS AS ON MARCH 31, 2011 SCHEDULE
AS ON MARCH 31,2011
INCOME 699429726
Turn Over
21801161
Other In come
524937
Accretion/Desertion to shock TOTAL
721755824
EXPENDITURE Manufacturing Expenses
12097686
Personnel Expenses
17150981
Administrative Expenses
618874371
52
TOTAL
648123038
Profit before Finance Charges, Depreciation & Taxation
73632786
Less : Finance charges
16491369
Profit before Depreciation & Taxation
57141417
Less : Depreciation
2124497
Profit before Taxation
55016918
Less : Provisions for Taxation
16809354
(a) Income Tax
3856049
(b) Fringe benefit tax
0
Add/Less Deferred Tax Asset/Liability
1160261
TOTAL
33191254
BALANCE SHEET AS ON MARCH 31, 2012 Schedule
As on march 31,2012
I. Source of funds (1) Shareholders funds 32192000
(A) Capital
168223981
(B) Reserves
57524000
(C) Share allotment money (2) Net current liabilities
29722227
(3) Current liabilities
640000516 TOTAL
927662724
53
II. Application of funds (1) Fixed assets 67091194
(A)Tangible assets
9993151
(B) Intangible assets
338005
(C) Loans and advances
3421540
(D) Capital work in progress (2) Current assets, loans and advances
514956753
(A) Inventories
249805856
(B) Sundry debtors
55309392
(C) Cash and bank balances
26284938 461895
(D) Loans & advances NET current assets
TOTAL
927662724
PROFIT N LOSS AS ON MARCH 31, 2012 Schedule
As on march 31, 2012
INCOME Turn Over
1228708974
Other In come
4112033
Accretion/Desertion to shock
125157646
TOTAL
1357978653
EXPENDITURE 134981853
Manufacturing Expenses
26518732
Personnel Expenses
54
TOTAL
161500585
Profit before Finance Charges, Depreciation & Taxation
83144983 42948477
Less : Finance charges
40196506
Profit before Depreciation & Taxation
5473092
Less : Depreciation
34723414
Profit before Taxation Less : Provisions for Taxation
26142075
(a) Income Tax
990785
Add/Less Deferred Tax Asset/Liabilities
TOTAL
57590554
55
56
57
58
Balance Sheets and Profit & Loss Statements of Raghuvamsi Pvt. Ltd. BALANCE SHEET AS ON MARCH 31, 2010 Schedule
As on march 31, 2010
I. Source of funds (1) Shareholders funds 16746600
(A) Capital
590475
(B) Reserves
1680000
(C) share allotment money (2) Loan funds (A) Secured loans
25361218
(B) Unsecured loans
12990483
TOTAL
57368776
II. Application of funds (1) Fixed assets 38594750
(A) Gross blocks
9586815
(B) Less : Depreciation
29007935
(C) Net block
1000
(2) Investments (3) Current assets, loans and advances
9444873
(A) Inventories
18388963
(B) Sundry debtors (C) Cash and bank balances
603310 8308260
(E) Loans & advances
7887281
Less : current liabilities TOTAL
57368776
59
PROFIT N LOSS AS ON MARCH 31, 2010 Schedule
As on march 31, 2010
INCOME Turn Over
59794835 449546
Other In come
1283520
Accretion/Desertion to shock TOTAL
61527902
EXPENDITURE 9991134
Manufacturing Expenses
2030565
Personnel Expenses
2351540
Administrative Expenses TOTAL
12573239
Profit before Finance Charges, Depreciation & Taxation
7271529 3839642
Less : Finance charges
3431887
Profit before Depreciation & Taxation
1794421
Less : Depreciation
1637466
Profit before Taxation Less : Provisions for Taxation
265000
(a) Income Tax
276281 505710
(b) Fringe benefit tax Add loss from last year TOTAL
590475
60
BALANCE SHEET AS ON MARCH 31, 2011 Schedule
As on march 31, 2011
I. Source of funds (1) Shareholders funds 16746600
(A) Capital
2488500
(B) Reserves
1680000
(C)Share application money (2) Loan funds
20800000
(A) Secured loans
17400000
(B) Unsecured loans
TOTAL
59115100
II. Application of funds (1) Fixed assets 40594800
(A) Gross blocks
11466900
(B) Less : Depreciation
29107900
(C) Net block
1000
(2) Investments (3) Current assets, loans and advances
9625000
(A) Inventories
20145000
(B) Sundry debtors
94000
(C) Cash and bank balances
7929000
(D) Loans & advances
7840000
Less : current liabilities & Provisions TOTAL
59115100
PROFIT N LOSS AS ON MARCH 31, 2011
61
Schedule
As on march 31, 2011
INCOME Turn Over
64000000
Other In come
1258100 6000000
Accretion/Desertion to shock TOTAL
88741900
EXPENDITURE 10718900
Manufacturing Expenses
6606000
Personnel Expenses
3084000
Administrative Expenses TOTAL
20408900
Profit before Finance Charges, Depreciation & Taxation
8253000
Less : Finance charges
3655000
Profit before Depreciation & Taxation
4598000
Less : Depreciation
1800000
Profit before Taxation
2698000
Less : Provisions for tax 800000
Income Tax TOTAL
1898000
62
BALANCE SHEET AS ON MARCH 31, 2012 Schedule
As on march 31, 2012
I. Source of funds (1) Shareholders funds 18426500
(A) Capital
1865936
(B) Reserves (2) Loan funds
28083967
(A) Secured loans
19807055
(B) Unsecured loans
512483
(3) Deferred tax liability
30442131
(4) Other liabilities TOTAL
102138072
II. Application of funds (1) Fixed assets 35743383
(A) Gross blocks
1000
(2) Investments (3) Current assets, loans and advances (A) Investments
2900000
(B) Inventories
24547739
(C) Sundry debtors
34312372
(D) Cash and bank balances
48537
(E) Other current assets
3097176
(F) Loans and advances
1487864
TOTAL
102138072
63
PROFIT N LOSS AS ON MARCH 31, 2012 Schedule
As on march 31, 2012
INCOME 57176277
Turn Over
1168669
Other Income TOTAL
58344946
EXPENDITURE 48200537
Manufacturing Expenses
5197285
Personnel Expenses
5300974
Administrative Expenses TOTAL
58698796
Profit before Finance Charges, Depreciation & Taxation
77111662 4580779
Less : Finance charges
2530883
Profit before Depreciation & Taxation
2046598
Less : Depreciation
484285
Profit before Taxation Less : Provisions for Taxation
26600
(a) Income Tax
344668
(b) Fringe benefit tax TOTAL
113017
64
65
66
67
68
69
70