Project Report Swati

INSTITUTE OF PROFESSINAL EDUCATION AND RESEARCH- WINTER PROJECT

CAPITAL STRUCTURE OF DIFFERENT COMPANIES

Submitted To: -

Submitted By:-

PROF. PARUL SHRIVASTAVA (FACULTY FINANCE)

SWATI TIWARI

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ACKNOWLEDGEMENT

I express my gratitude to those who assisted me in accomplishing this challenging project on ―CAPITAL STRUCTURE OF DIFFERENT COMPANIES ”

I am extremely thankful and mention my deepest sense of gratitude to my guide PROF. PARUL SHRIVASATVA (FACULTY FINANCE), who motivated me to receive enormous amount of input and inspiration at the various stages during my project preparation and assisted me in bringing out my project in the present form. I thankfully acknowledge an active support by my Project Guide who overwhelmingly shared his knowledge with me and strengthened my conceptual framework. I am also thankful to all the Finance Faculties of INSTITUTE OF PROFESSIONAL EDUCATION AND RESEARCH (IPER), BHOPAL who supported me in various ways and enlightened me about the valuable information pertaining to my research work.

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ACKNOWLEDGEMENT

I express my gratitude to those who assisted me in accomplishing this challenging project on ―CAPITAL STRUCTURE OF DIFFERENT COMPANIES ”

I am extremely thankful and mention my deepest sense of gratitude to my guide PROF. PARUL SHRIVASATVA (FACULTY FINANCE), who motivated me to receive enormous amount of input and inspiration at the various stages during my project preparation and assisted me in bringing out my project in the present form. I thankfully acknowledge an active support by my Project Guide who overwhelmingly shared his knowledge with me and strengthened my conceptual framework. I am also thankful to all the Finance Faculties of INSTITUTE OF PROFESSIONAL EDUCATION AND RESEARCH (IPER), BHOPAL who supported me in various ways and enlightened me about the valuable information pertaining to my research work.

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DECLARATION I hereby declare that the project titled ―To study of “CAPITAL STRUCTURE OF DIFFERENT DIFFERENT COMPANIES COMPANIES” done in Bhopal. This is submitted by me as a part of our curriculum in partial fulfillment for the award of the ―Post Graduate Diploma in Management INSTITUTE OF PROFESSION PROFESSIONAL AL EDUCATION EDUCATION AND RESEARCH RESEARCH approved (PGDM) from INSTITUTE by A.I.C.T.E.

Date: Place:

SWATI TIWARI

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CAPITAL STRUCTURE OF DIFFERENT COMPANIES CHAPTERISATION 1.) Conceptual Overview 2.) Research Methodology

2.1 Objective 2.2 Method 2.3 Significance 2.4 Limitations 3.) Theoretical Data

3.1 What is capital structure? 3.2 Types of capital structure theories. 3.3 Types of finance (capital structure). 4.) Data analysis 5.) Findings 6.) Conclusion

BIBLIOGRAPHY

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RESEARCH METHODOLGY

Title – CAPITAL STRUCTURE OF THE COMPANIES 2.1) Objectives 1) To know how the capital structure is formed in different companies 2) To know that how earnings of the company is related to the capital structure the company has.

2.2) Methodology 1) A sample of 5 sectors is taken and 5 companies from each sector. Banking IT Pharmacy Capital goods FMCG

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2) The time period is for 5 years 3) Different ratios so as to know the capital structure of the company.

2.3) Significance 

Analyzing the debts and equity of the company so as to know the better or optimum capital structure for the company.

2.4) Hypothesis 1) Null Hypothesis- Capital structure has no relationship with firm value that is Capital structure changes do not affect firm value. 2) Alternate Hypothesis- It affects the earnings of the company.

Limitations:

The sample size and time period is limited for this research. It can not give a proper idea about the capital structure of the companies.

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CONCEPTUAL OVERVIEW Capital Structure:

The term capital structure refers to the percentage of capital (money) at work in a business by type. Broadly speaking, there are two forms of capital: equity capital and debt capital. Each has its own benefits and drawbacks and a substantial part of wise corporate stewardship and management is attempting to find the perfect capital structure in terms of risk / reward payoff for shareholders. This is true for Fortune 500 companies and for small business owners trying to determine how much of their startup money should come from a bank loan without endangering the business. Capital structure describes how a corporation has organized its capital — how it obtains the financial resources with which it operates its business. Businesses adopt various capital structures to meet both internal needs for capital and external requirements for returns on shareholders investments.

Equity Capital:

This refers to money put up and owned by the shareholders (owners). Typically, equity capital consists of two types: 1.) Contributed capital, which is the money that was originally invested in the business in exchange for shares of stock or ownership and 2.) Retained earnings, which represents profits from past years that have been kept by the company and used to strengthen the balance sheet or fund growth, acquisitions, or expansion. Many consider equity capital to be the most expensive type of capital a company can utilize because it‘s "cost" is the return the firm must earn to attract investment. A speculative mining company that is looking for silver in a remote region of Africa may require a much higher return on equity to get investors to purchase the stock than a firm such as Procter & Gamble, which sells everything from toothpaste and shampoo to detergent and beauty products. Debt Capital:

The debt capital in a company's capital structure refers to borrowed money that is at work in the business. The safest type is generally considered long-term bonds because the company has years, if not decades, to come up with the principal, while paying interest only in the meantime. Other types of debt capital can include short-term commercial paper utilized by giants such as Wal-Mart and General Electric that amount to billions of dollars in 24-hour loans from the capital markets to meet day-to-day working capital requirements such as payroll and utility bills. The cost of debt capital in the capital structure depends on the health of the company's balance 6


sheet - a triple AAA rated firm is going to be able to borrow at extremely low rates versus a speculative company with tons of debt, which may have to pay 15% or more in exchange for debt capital.

Other Forms of Capital:

There are actually other forms of capital, such as vendor financing where a company can sell goods before they have to pay the bill to the vendor that can drastically increase return on equity but don't cost the company anything. This was one of the secrets to Sam Walton's success at Wal-Mart. He was often able to sell Tide detergent before having to pay the bill to Procter & Gamble, in effect, using PG's money to grow his retailer. In the case of an insurance company, the policyholder "float" represents money that doesn't belong to the firm but that it gets to use and earn an investment on until it has to pay it out for accidents or medical bills, in the case of an auto insurer. The cost of other forms of capital in the capital structure varies greatly on a caseby-case basis and often comes down to the talent and discipline of managers. CAPITAL STRUCTURE

EQUITY CAPITAL

DEBT CAPITAL

OTHER FORMS OF CAPITAL STRUCTURE

Seeking the Optimal Capital Structure

Many middle class individuals believe that the goal in life is to be debt-free (see should I Pay off My Debt or Invest?). When you reach the upper echelons of finance, however, that idea is almost anathema. Many of the most successful companies in the world base their capital structure on one simple consideration: the cost of capital. If you can borrow money at 7% for 30 years in a world of 3% inflation and reinvest it in core operations at 15%, you would be wise to consider at least 40% to 50% in debt capital in your overall capital structure. Of course, how much debt you take on comes down to how secure the revenues your business generates are - if you sell an indispensable product that people simply must have, the debt will be much lower risk than if you operate a theme park in a tourist town at the height of a boom 7


market. Again, this is where managerial talent, experience, and wisdom come into play. The great managers have a knack for consistently lowering their weighted average cost of capital by increasing productivity, seeking out higher return products, and more. To truly understand the idea of capital structure, you need to take a few moments to read Return on Equity: The DuPont Model to understand how the capital structure represents one of the three components in determining the rate of return a company will earn on the money its owners have invested in it. Whether you own a doughnut shop or are considering investing in publicly traded stocks, its knowledge you simply must have.

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THEROETICAL BACKGROUND INTRODUCTION:

The capital structure of a company is referred to the way in which the company finances itself through debts, equity and securities; it can therefore be referred to as the capital composition of the company taking into consideration its liabilities, Modigliani and Miller propose the Modigliani Miller theorem of capital structure which states that the value of a company in a perfect market is unaffected by the way the company is financed but through the capital structure it employs. Other theories to describe the capital structures employed by a company include the trade off theory, the agency cost theory and pecking order theory, and however the Modigliani Miller theory provides the basis at which a modern company should determine its capital structure. The trade off theory recognizes that capital raised by firms is constituted by both debts and equity, however the theory states that there is an advantage of financing through debts due to tax benefit of the debts, however some costs arises as a result of debt costs and bankrupt costs and non bankrupt costs. The theory further states that the marginal benefit of debts declines as the level of debts and at the same time the marginal cost of debts increases as debts increase, therefore a rational firm will optimize by the trade off point to determine the level of debts and equity to finance its operations. The pecking order theory was developed by Stewart Myers (1984) and it states that firms will adhere to the hierarchy of financing whereby the firm will prefer to finance itself internally and when all internal finances are depleted it will opt for equity, therefore this theory supports the fact that debts are preferred by firms than equity. The agency cost theory analyses three costs which give explanation to the importance of the capital structure, these costs include asset substitution, underinvestment and cash flow; it gives the importance of management to adopt the most optimal form of capital structure. THEORIES AND APPROACHES OF CAPITAL STRUCTURE

There are several variations of the traditional theory. But the thrust of all views is that capital structure matters. One earlier versions of the view that capital structure is relevant is the net income approach. 

The Net Income Approach

According to the Net Income (NI) Approach, the capital structure decision is relevant to the valuation of the firm. In other words, a change in the financial leverage will lead to a corresponding change in the overall cost of capital as well as the total value of the firm. If, 9


therefore, the degree of financial leverage as measured by the ratio of debt to equity is increased, the weighted average cost of capital will decline, while the value of the firm as well as the market price of ordinary shares will increase. Conversely, a decrease in the leverage will cause an increase in the overall cost of capital and a decline both in the value of the firm as well as the market price of equity shares. The NI income approach to valuation is based on three assumptions: 1. There are no taxes. 2. The cost of debt is less than the equity-capitalisation rate or the cost of equity. 3. The use of debt does not change the risk perception of investors.

The financial risk perception of the investors does not change with the introduction of debt or change in leverage implies that due to change in leverage, there is no change in either the cost of debt or the cost of equity. The implication of three assumptions underlying the NI approach is that as the degree of leverage increases, the proportion of a cheaper source of funds, that is, debt in the capital structure increases. As a result, the weighted average cost of capital tends to decline, leading to an increase in the value of the firm. Thus, with the cost of debt and cost of equity being constant, the increased use of debt (increase in leverage), will magnify the share holder‘s earnings and, thereby, the market value of the ordinary shares. The financial leverage is, according to the NI approach, an important variable to the capital structure of a firm. With a judicious mixture of debt equity, a firm can evolve an optimum capital structure which will be the one at which value of the firm is the highest and overall cost of capital structure is the lowest. At that structure, the market price per share would be maximum. If the firm uses no debt or if the financial leverage is zero, the overall cost of capital will be equal to the equity-capitalisation rate. The weighted average cost of capital will decline and will approach the cost of debt as the degree of leverage reaches one.

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Net Operating Income (NOI) Approach

Another theory of capital structure is the Net Operating Income (NOI) Approach. This approach is diametrically opposite to the NI Approach. The essence of this Approach is that the capital structure decision of a firm is irrelevant. Any change in leverage will not lead to any change in the total value of the firm and the market price of shares as well as the overall cost capital is independent of the degree of leverage. Overall cost of capital/capitalisation rate (k 0 ) is Constant

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The NOI Approach to valuation argues that the overall capitalisation rate of the firm remains constant, for all degrees of leverage. The value of the firm is determined by:   



In other words, the market evaluates the firm as a whole. The split of the capitalisation between debt and equity is, therefore, not significant. Residual value of Equity

The value of equity is a residual value which is determined by deducting the total value of debt from the total value of the firm. Changes in cost of Equity Capital

The equity-capitalisation rate/cost of equity capital (k e) increases with the degree of leverage. The increase in the proportion of debt in the capital structure relative to equity shares would lead to an increase in the financial risk to the ordinary shareholders. To compensate for the increased risk, the shareholders would expect a higher rate of return on their investments. The increase in the equity-capitalisation rate (or the lowering of the price-earning ratio that is P/E ratio) would match the increase in the debt-equity ratio. The k e would be = k0 + (k0-k1) [B/S]. Cost of Debt

The cost of debt (k i) has two parts: (a) Explicit Cost which is represented by the rate of interest irrespective of the degree of leverage, the firm is assumed to be able to borrow at a given rate of interest. This implies that the increasing proportion of debt in the financial structure does not affect the financial risk of the lenders and they do not penalize the firm by charging higher interest. (b) Implicit or hidden cost is a change in k e, increase in the degree of leverage or the proportion of debt to equity causes an increase in the cost of equity capital. This increase in k e, being attributable to the increase in debt, is the implicit part of k i. Thus, the advantage associated with the use of debt, supposed to be a ‗cheaper‘ source of funds in terms of the explicit cost is exactly neutralized by the implicit cost represented by the increase in k e. The real cost of debt and the real cost of equity, according to the NOI Approach, are the same and equal k 0. Optimum Capital Structure

The total value of the firm is unaffected by its capital structure. No matter what the degree of leverage is, the total value of the firm will remain constant. The market place of shares will also 11


not change in the debt-equity ratio. There is nothing such as optimum capital structure. Any capital structure is optimum according to the NOI Approach. 

Modigliani-Miller (MM) Approach

In an article published in 1958, Modigliani and Miller propounded their view which is known as ‗Modigliani-Miller Approach‘. Their approach is identical with the net operating income approach. They have also concluded that in the absence of taxes, a firm‘s market value and the cost of capital remain constant to the changes in capital structure. In other words, an optimum capital structure does not exits. The net operating income approach leads to the same conclusion, but Modigliani and miller have provided a behavioral justification in favor of this conclusion. That is, they refer to a particular behavior of the investors in support of this conclusion. Assumptions

Their conclusion is based on the following assumptions: The capital market is perfect in the sense that investors have perfect knowledge of market forces; they are free to buy and sell securities; the cost of transactions is zero; and they behave rationally. Firms can be classified into different group consisting of firms having equal business risks. They can be divided into ―equivalent risk class‖. Since all investors have complete information, they all use the same figure of net operating income of the firm to ascertain its market value. All firms distribute the entire earning among their shareholders in the form of dividend. It means dividend payout ratio is 100%. No corporate income taxes exist.

Under these assumptions, Modigliani and Miller have derives following propositions: (1)Market value of the firm and the cost of capital are independent of capital structure. In other words, a change in debt-equity ratio can have no effect on the market value of the firm as also on the cost of capital (2)The expected yield on equity has two components the rate of equity capitalization when debts are non-existent plus a premium for the financial risk arising from debts. Therefore, the advantage of low-cost debt if offset by the increase in expected yield on equity. (3)The financing decision has no impact on the expected yield on equity. The financing decision and investment decision are therefore, independent of each other.

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We shall consider in detail only first proposition which states that market value of a firm and the cost of capital are independent of the degree of financial leverage in capital structure. They explain this proposition in terms of the behavior of investors. Arbitrage process

If the price of a product is unequal in two markets, traders buy it in the market where price is low and sell it in the market where price is high. This phenomenon is known as price differential or arbitrage. As a result of this process of arbitrage, price tends to decline in the high-priced market and price tends to rise in the low-priced market unit the differential is totally removed. Modigliani and Miller explain their approach in terms of the same process of arbitrage. They hold that two firms, identical in all respects except leverage cannot have different market value. If two identical firms have different market values, arbitrage will take palce unit difference in the market values is removed completely. To illustrate, let us suppose that there are two firms – X and Y- belonging to the same group of homogenous risk. The firm X is unleveled as its capital structure consists of equity capital only, while firm Y is levered as its capital structure includes 10 per cent debentures of Rs.1,00,000 in this case, according to traditional approach, the market value of firm Y would be higher than that of firm X. But according to M-M approach, this situation cannot persist for long. The market value of the equity share of firm Y is high but investment in it is more risky while the market value of the equity share of firm X is low but investment in it is safe. Hence investors will sell out equity shares of firm Y and purchase equity shares of firm X. Consequently the market value of the equity shares of firm Y while fall, while the market value of the equity shares of firm X will rise. Through this process of arbitrage therefore, the market values of the firms X and Y will be equalized. This is true for all firms belonging to the same group. In equilibrium situation, the average cost of capital will be same for all firms in the group. The opposite will happen if the market value of the firm X is higher than that of the firm Y. In this case investors will sell equity shares of X and buy those of Y. Consequently market values of these two firms will be equalized. This argument is based on the assumption that investors are well informed and behave rationally, and hence they engage in personal leverage or home-made leverage as against the corporate leverage to restore equilibrium in the market. At this stage it is necessary to understand what personal leverage means. If the market value of a levered firm is high investors sell its equity shares. In addition to the money receive in exchange of equity shares. They borrow funds on their personal account and invest in the unleveled firm to obtain the same return for smaller investment outlay. This activity is known as personal leverage or home-made leverage.

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Traditional Approach

Traditional approach is an intermediate approach between the net income approach and net operating income approach. According to this approach: (1) An optimum capital structure does exist. (2) Market value of the firm can be increased and average cost of capital can be reduced through a prudent manipulation of leverage. (3) The cost of debt capital increases if debts are increases beyond a definite limit. This is because the greater the risk of business the higher the rate of interest the creditors would ask for. The rate of equity capitalization will also increase with it. Thus there remains no benefit of leverage when debts are increased beyond a certain limit. The cost of capital also goes up. Thus at a definite level of mixture of debts to equity capital, average cost of capital also increases. The capital structure is optimum at this level of the mix of debts to equity capital. The effect of change in capital structure on the overall cost of capital can be divided into three stages as follows First stage In the first stage the overall cost of capital falls and the value of the firm increases with the increase in leverage. This leverage has beneficial effect as debts as debts are less expensive. The cost of equity remains constant or increases negligibly. The proportion of risk is less in such a firm. Second stage A stage is reached when increase in leverage has no effect on the value or the cost of capital, of the firm. Neither the cost of capital falls nor the value of the firm rises. This is because the increase in the cost of equity due to the assed financial risk offsets the advantage of low cost debt. This is the stage wherein the value of the firm is maximum and cost of capital minimum. Third stage

Beyond a definite limit of leverage the cost of capital increases with leverage and the value of the firm decreases with leverage. This is because with the increase in debts investors begin to realize the degree of financial risk and hence they desire to earn a higher rate of return on equity shares. The resultant increase in equity capitalization rate will more than offset the advantage of low-cost debt. It follows that the cost of capital is a function of the degree of leverage. Hence, an optimum capital structure can be achieved by establishing an appropriate degree of leverage in capital structure.

LEVERAGE RATIO:

Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses. 14


A ratio used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ. In layman‘s term, leverage indicates the action of a lever or the mechanical advantage gained by it. However, management accountants define leverage as the ability of a firm to use fixed cost asset or funds to magnify the return to its owners. Leverage is meeting a fixed cost or paying fixed returns for employing assets or funds.

Just as mechanical advantage is gained from the action of a lever (since it raises a heavy object with a small force), likewise, a small change in sale may result in a big change in income of a firm, and thereby the firm enjoys the advantage of the application of lever. The term leverage is used here in this sense. In the case of the firm, here the fixed cost is to be treated as the fulcrum of the leverage. In layman‘s terms, the term leverage measures the relationship between 2 variables. In financial analysis, the term leverage the represents the influence of one financial leverage variable over some other financial leverage. Classification of leverage:

Just as fixed cost may be broadly classified into: 1. Operating fixed cost 2. Financial fixed cost, likewise, leverage may be classified into: Operating leverage, and Financial leverage Operational leverage is dependent on three factors: 1. Sale volume 2. Fixed cost(in monetary terms), and 3. Variable contribution margin.  

Techniques for calculating operating leverage: The following two techniques are normally used for calculating operating leverage – (A) Level of output measurement of Operating Leverage; (B) Break even/cost – volume profit analysis of Operating Leverage.

OPERATING LEVERAGE :

Operating leverage measure the effect of change in sales quantity and operating capacity on earning before interest and taxes (EBIT). Essentially, operating leverage boils down to an analysis of fixed costs and variable costs. Operating leverage is highest in companies that have a high proportion of fixed operating costs in relation to variable operating costs. This kind of company uses more fixed assets in the operation of the company. Conversely, operating leverage 15


is lowest in companies that have a low proportion of fixed operating costs in relation to variable operating costs. The benefits of high operating leverage can be immense. Companies with high operating leverage can make more money from each additional sale if they don't have to increase costs to produce more sales. The minute business picks up, fixed assets such as property, plant and equipment (PP&E), as well as existing workers, can do a whole lot more without adding additional costs. Profit margins expand and earnings soar faster than revenues. The best way to explain operating leverage is by way of examples. Take, for example, a software maker such as Microsoft. The bulk of this company's cost structure is fixed and limited to upfront development and marketing costs. Whether it sells one copy or 10 million copies of its latest Windows software, Microsoft's costs remain basically unchanged. So, once the company has sold enough copies to cover its fixed costs, every additional dollar of sales revenue drops into the bottom line. In other words, Microsoft possesses remarkably high operating leverage. By contrast, a retailer, such as Wal-Mart demonstrates relatively low operating leverage. The company has fairly low levels of fixed costs, while its variable costs are large. Merchandise inventory represents Wal-Mart's biggest cost. For each product sale that Wal-Mart rings in, the company has to pay for the supply of that product. As a result, Wal-Mart's cost of goods sold (COGS) continues to rise as sales revenues rise. Measuring Operating Leverage

Operating leverage occurs when a company has fixed costs that must be met regardless of sales volume. When the firm has fixed costs, the percentage change in profits due to changes in sales volume is greater than the percentage change in sales. With positive (i.e. greater than zero) fixed operating costs, a change of 1% in sales produces a change of greater than 1% in operating profit. A measure of this leverage effect is referred to as the degree of operating leverage (DOL), which shows the extent to which operating profits change as sales volume changes. This indicates the expected response in profits if sales volumes change. Specifically, DOL is the percentage change in income (usually taken as earnings before interest and tax, or EBIT) divided by the percentage change in the level of sales output.

FINANCIAL LEVERAGE: 16


The degree to which an investor or business is utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Financial leverage is not always bad, however; it can increase the shareholders' return on their investment and often there are tax advantages associated with borrowing .

Degree of financial leverage:

A leverage ratio summarizing the affect a particular amount of financial leverage has on a company's earnings per share (EPS). Financial leverage involves using fixed costs to finance the firm, and will include higher expenses before interest and taxes (EBIT). The higher the degree of financial leverage, the more volatile EPS will be, all other things remaining the same. The formula is as follows:

Most likely, the firm under evaluation will be trying to optimize EPS, and this ratio can be used to help determine the most appropriate level of financial leverage to use to achieve that goal.

The higher the DFL the higher the financial risk associated with it, vice versa. Financial Leverage is also termed as Trading on Equity. A high degree of finance leverage indicates a proportionately high use of fixed income bearing securities in the capital structure of the company. A low degree of financial leverage indicates less use of fixed income bearing securities in the capital structure of the company.

COMBINED LEVERAGE:

The combined effect of operating leverage and financial leverage measures the impact of change contribution on the EPS. Combined leverage is the product of operating leverage and financial leverage. It is a proxy for the total risk of a company. Combined leverage represents an important principle of finance. As it is the product of financial leverage and operating leverage, companies should be reluctant to increase financial leverage if the operating leverage is already high. Conversely, companies with low operating leverage (and therefore operating a stable business) can afford to be more highly geared .

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It is computed as: = Operating leverage * Financial leverage =

 

=

*

 

  

Return on Investment – ROI :-

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. The return on investment formula:

In the above formula "gains from investment", refers to the proceeds obtained from selling the investment of interest. Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken. Earnings Per Share – EPS:-

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:

When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. Earnings per share are generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio. 18


An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures. Earnings Before Interest & Tax - EBIT

An indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest. EBIT is also referred to as "operating earnings", "operating profit" and "operating income", as you can re-arrange the formula to be calculated as follows: EBIT = Revenue - Operating Expenses

Also known as Profit before Interest & Taxes (PBIT), and equals Net Income with interest and taxes added back to it. In other words, EBIT is all profits before taking into account interest payments and income taxes. An important factor contributing to the widespread use of EBIT is the way in which it nulls the effects of the different capital structures and tax rates used by different companies. By excluding both taxes and interest expenses, the figure hones in on the company's ability to profit and thus makes for easier cross-company comparisons. EBIT was the precursor to the EBITDA calculation, which takes the process further by removing two non-cash items from the equation (depreciation and amortization). Dividend per share DPS:-

The sum of declared dividends for every ordinary share issued. Dividend per share (DPS) is the total dividends paid out over an entire year (including interim dividends but not including special dividends) divided by the number of outstanding ordinary shares issued. DPS can be calculated by using the following formula:

D - Sum of dividends over a period (usually 1 year)

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SD - Special, one time dividends S - Shares outstanding for the period Dividends per share are usually easily found on quote pages as the dividend paid in the most recent quarter which is then used to calculate the dividend yield. Dividends over the entire year (not including any special dividends) must be added together for a proper calculation of DPS, including interim dividends. Special dividends are dividends which are only expected to be issued once so are not included. The total number of ordinary shares outstanding is sometimes calculated using the weighted average over the reporting period.

Debt/Equity Ratio:-

A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as corporate ones. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing. Cost Of Debt:-

It is the effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; however, because interest expense is deductible, the after-tax cost is seen most often. This is one part of the company's capital structure, which also includes the cost of equity.

A company will use various bonds, loans and other forms of debt, so this measure is useful for giving an idea as to the overall rate being paid by the company to use debt financing. The

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measure can also give investors an idea as to the riskiness of the company compared to others, because riskier companies generally have a higher cost of debt. Cost Of Equity:-

In financial theory, the return that stockholders require for a company is the cost of equity. The traditional formula for cost of equity (COE) is the dividend capitalization model:

A firm's cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership.

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CASE STUDY BANKING SECTOR 

ICICI BANK

ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00 billion (US$ 81 billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the year ended March 31, 2010. The Bank has a network of 2,510 branches and 5,808 ATMs in India, and has a presence in 19 countries, including India. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium and Germany. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).

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IDBI BANK LTD.

IDBI Bank Ltd. is a Universal Bank with its operations driven by a cutting edge core Banking IT platform. The Bank offers personalized banking and financial solutions to its clients in the retail and corporate banking arena through its large network of Branches and ATMs, spread across length and breadth of India. We have also set up an overseas branch at Dubai and have plans to open representative offices in various other parts of the Globe, for encashing emerging global opportunities. As on March 31, 2010, the Bank had a network of 720 Branches and 1210 ATMs and plans to roll out another 300 branches during FY 2010-11. The Bank's total business, during Fy 200910, reached Rs. 3.06 Lakh Crore (up by 41.7 %), Balance sheet reached Rs. 2.34 Lakh Crore (up by 35.5 %) while it earned a net profit of Rs. 1031 Crore (up by 20 %). Our vision for the Bank is for it to be the trusted partner in progress, by leveraging quality human capital and setting global standards of excellence, to build the most valued financial conglomerate. Our experience of financial markets helps us to effectively cope with challenges and capitalize on the emerging opportunities by participating effectively in our country‘s growth process.

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AXIS BANK LTD.

Axis Bank was the first of the new private banks to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) and other four PSU insurance companies, i.e. National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance Company Ltd. The Bank today is capitalized to the extent of Rs. 408.84 crores with the public holding (other than promoters and GDRs) at 53.81%. The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai. The Bank has a very wide network of more than 1095 branches (including 57 Service Branches/CPCs as on 30th September 2010). The Bank has a network of over 4846 ATMs (as on 30th September 2010) providing 24 hrs a day banking convenience to its customers. This is one of the largest ATM networks in the country. The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to a chieve excellence. 

HDFC BANK

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The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's liberalization of the Indian Banking Industry in 1994. The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. HDFC Bank recognizes the importance of good corporate governance, which is generally accepted as a key factor in attaining fairness for all stakeholders and achieving organizational efficiency. This Corporate Governance Policy, therefore, is established to provide a direction and framework for managing and monitoring the bank in accordance with the principles of good corporate governance. 

STATE BANK OF INDIA (SBI)

The State Bank of India, the country‘s oldest Bank and a premier in terms of balance sheet size, number of branches, market capitalization and profits is today going through a momentous phase of Change and Transformation – the two hundred year old Public sector behemoth is today stirring out of its Public Sector legacy and moving with an agility to give the Private and Foreign Banks a run for their money.

The bank is entering into many new businesses with strategic tie ups – Pension Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking, Point of Sale Merchant Acquisition, Advisory Services, structured products etc – each one of these initiatives having a huge potential for growth. The Bank is forging ahead with cutting edge technology and innovative new banking models, to expand its Rural Banking base, looking at the vast untapped potential in the hinterland and proposes to cover 100,000 villages in the next two years. It is also focusing at the top end of the market, on whole sale banking capabilities to provide India‘s growing mid / large Corporate with a complete array of products and services. It is consolidating its global treasury operations and entering into structured products and derivative instruments. Today, the Bank is the largest provider of infrastructure debt and the largest arranger of external commercial borrowings in the country. It is the only Indian bank to feature in the Fortune 500 list. CAPITAL GOODS 

BHEL

BHEL is the largest engineering and manufacturing enterprise in India in the energyrelated/infrastructure sector, today. BHEL was established more than 40 years ago, ushering in the indigenous Heavy Electrical Equipment industry in India - a dream that has been more than realized 24


with a well-recognized track record of performance. The company has been earning profits continuously since 1971-72 and paying dividends since 1976-77. BHEL caters to the core sectors of the Indian Economy, viz. Power, Transmission, Industry, Transportation, Renewable Energy, Oil & Gas and Defense. The wide network of BHEL‘s 15 Manufacturing Divisions, 4 Power Sector Regional Centers, 8 Service Centers, 15 Regional Offices, 4 Overseas Offices, 1 Subsidiary and over 100 project sites spread all over India enables the Company to promptly serve its customers and provide them with suitable products, systems and services -- efficiently and at competitive prices. The high level of quality & reliability of its products is due to the emphasis on design, engineering and manufacturing to international standards by acquiring and adapting some of the best technologies from leading companies in the world, together with technologies developed in its own R&D centers. BHEL has acquired certifications to Quality Management Systems (ISO 9001), Environmental Management Systems (ISO 14001) and Occupational Health & Safety Management Systems (OHSAS 18001) and is also well on its journey towards Total Quality Management. BHEL's vision is to become a world-class engineering enterprise, committed to enhancing stakeholder value. The company is striving to give shape to its aspirations and fulfill the expectations of the country to become a global player. 

ABB

As one of the world‘s leading engineering companies, ABB helps customers to use electrical power effectively and to increase industrial productivity in a sustainable way. The ABB Group of companies operates in over 100 countries and employs about 120,000 people.

ABB operations in India include 14 manufacturing facilities with over 7500 employees. Customers are served through an extensive countrywide presence with more than 18 marketing offices, 8 service centers, 3 logistics warehouses and a network of over 800 channel partners. The ABB Group is increasingly leveraging the Indian operations for projects, products, services, engineering and R&D. The Authorized Share Capital of the Company is Rs.500, 000,000 divided into 212,500,000 Equity Shares of Rs.2/- each and 750,000 – 11% Redeemable 10 years, Cumulative Preference Shares of Rs.100/- each. The Issued, Subscribed and Paid-up share capital of the Company, as at the end of the financial year ended December 31, 2007, is Rs.423,816,750/-, consisting of 211,908,375 Equity Shares of the face value of Rs.2/each. 

SIEMENS

The Siemens Group in India has emerged as a leading inventor, innovator and implementer of leading-edge technology enabled solutions operating in the core business segments of Industry, Energy and Healthcare. The Group‘s business is represented by various companies that span across 25


these various segments. Siemens brings to India state-of-the-art technology that adds value to customers through a combination of multiple high-end technologies for complete solutions. The Group has the competence and capability to integrate all products, systems and services. It caters to Industry needs across market segments by undertaking complete projects such as Hospitals, Airports and Industrial units. The Siemens Group in India comprises of 22 companies, providing direct employment to over 17,000 persons. Currently, the group has 18 manufacturing plants, a wide network up of Sales and Service offices across the country as well as over 500 channel partners. Today, Siemens, with its world-class solutions plays a key role in India‘s quest for developing modern 

ELECON ENGINEERING COMPANY LTD.

Elecon Engineering Company Limited was established in the year 1951. Since then it has been cast in the mould of a pioneer. Setting trailblazing standards of technical excellence scaling new heights in its determination to deliver the best. From elevators, conveyors and gears to material handling plants. For over 5 decades, Elecon has supplied hi-tech equipment to major core sectors such as steel, fertilizers, cement , coal, lignite and iron ore mines, Sugar, power stations and port mechanization in India and abroad. From a modest start of design and manufacture of Elevators and Conveyors from which incidently, the company derives its corporate identity. viz. "Elecon". It has grown over the years to be known as a pioneer of the concept of mechanized way of Bulk Material Handling Equipment in India. During the span of more than 4 decades, Elecon has encompassed all the major core sectors through its supplies of highly sophisticated equipment bearing ample testimony of the symbolic mark of Elecon's unbeatable technology. Elecon has thus, made its presence felt through consistent and satisfactory performance of its equipment in such core sectors as fertilizer, cement, coal/power generation, chemical, steel plant and port mechanization etc., across the country. Elecon is the first company in India to have manufactured sophisticated equipment for Bulk Material Handling.

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BEML LTD.

BEML Limited (formerly Bharat Earth Movers Limited) was established in May 1964 as a Public Sector Undertaking for manufacture of Rail Coaches & Spare Parts and Mining Equipment at its Bangalore Complex. The Company has partially disinvested and presently Government of India owns 54 percent of total equity and rest 46 percent is held by Public, Financial Institutions, Foreign Institutional Investors, Banks and Employees. The Company started with a modest turnover of ` 5 Cr during 1965 and today, thanks to its diverse

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business portfolio, the company has been able to achieve a turnover of more than `3,500 Cr. Its three major Business verticals viz., Mining & Construction, Defence and Rail & Metro are serviced by its nine manufacturing units located at Bangalore, Kolar Gold Fields (KGF), Mysore, Palakkad and Subsidiary - Vignyan Industries Ltd, in Chikmagalur District. BEML‘s products are exported to more than 56 countries. As part of company‘s globalization strategy, the company has expanded its global reach by opening local company at Indonesia and Brazil recently in addition to Malaysia and China offices. INFORMATION TECHNOLOGY 

INFOSYS

Infosys Technologies Ltd. (NASDAQ: INFY) was started in 1981 by seven people with US$ 250. Today, we are a global leader in the "next generation" of IT and consulting with revenues of US$ 5.4 billion (LTM Sep-10). Infosys defines, designs and delivers technology-enabled business solutions that help Global 2000 companies win in a Flat World. Infosys also provides a complete range of services by leveraging our domain and business expertise and strategic alliances with leading technology providers. Our offerings span business and technology consulting, application services, systems integration, product engineering, custom software development, maintenance, reengineering, independent testing and validation services, IT infrastructure services and business process outsourcing. Infosys pioneered the Global Delivery Model (GDM), which emerged as a disruptive force in the industry leading to the rise of offshore outsourcing. The GDM is based on the principle of taking work to the location where the best talent is available, where it makes the best economic sense, with the least amount of acceptable risk. Infosys has a global footprint with 63 offices and development centers in India, China, Australia, the Czech Republic, Poland, the UK, Canada and Japan. Infosys and its subsidiaries have 122,468 employees as on September 30, 2010. Infosys takes pride in building strategic long-term client relationships. Over 97% of our revenues come from existing customers.

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TCS-TATA COSULTANCY SERVICES

Tata Consultancy Services Limited (TCS) (BSE: 532540, NSE: TCS) is a Software services consulting company headquartered in Mumbai, India. TCS is the largest provider of information technology and business process outsourcing services in Asia.TCS has

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offices in 42 countries with more than 142 branches across the globe. The company is listed on the National Stock Exchange and Bombay Stock Exchange of India. TCS

is

one

of

the

operative

subsidiaries

of

one

of

India's

largest

and

oldest conglomerate company, the Tata Group or Tata Sons Limited, which has interests in areas such as energy, telecommunications, financial services, manufacturing, chemicals, engineering, materials, government and healthcare. TCS established the first software research center in India, the Tata Research Development and Design Center, in Pune, India in 1981.TRDDC undertakes research in Software Engineering, Process Engineering and Systems Research. Researchers at TRDDC also developed Master Craft (now called TCS Code Generator Framework) a Model Driven Development software that can automatically create code based on a model of software, and rewrite the code based on the user's needs.

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WIPRO

Wipro IT Business, a division of Wipro Limited (NYSE:WIT), is amongst the largest global IT services, BPO and Product Engineering companies. In addition to the IT business, Wipro also has leadership position in niche market segments of consumer products and lighting solutions. The company has been listed since 1945 and started its technology business in 1980. Today, Wipro generates USD 6 billion (India GAAP figure 2009-10) of annual revenues. Its equity shares are listed in India on the Mumbai Stock Exchange and the National Stock Exchange; as well as on the New York Stock Exchange in the US. Wipro makes an ideal partner for organizations looking at transformational IT solutions because of its core capabilities, great human resources, commitment to quality and the global infrastructure to deliver a wide range of technology and business consulting solutions and services, 24/7. Wipro enables business results by being a ‗transformation catalyst‘. It offers integrated portfolio of services to its clients in the areas of Consulting,

System

Integration

and

Outsourcing

for

key-industry

verticals.

One of the world‘s largest third party R&D services provider, Wipro caters to product

engineering requirements in multiple domains. Most of the technology that you come across in daily life - airplanes, automobile navigation systems, cell phones, computing

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servers, drug delivery devices, microwaves, printers, refrigerators, set top boxes, TVs - will find a Wipro component in them.

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TECH MAHINDRA

Tech Mahindra is part of the US $7.1 billion Mahindra Group, in partnership with British Telecommunications plc (BT), one of the world‘s leading communications service

providers. Focused primarily on the telecommunications industry, Tech Mahindra is a leading global systems integrator and business transformation consulting organization. Tech Mahindra has recently expanded its IT portfolio by acquiring the leading global business and information technology services company, Mahindra Satyam (earlier known as Satyam Computer Services). Tech Mahindra‘s capabilities spread across a broad spectrum, including Business Support

Systems (BSS), Operations Support Systems (OSS), Network Design & Engineering, Next Generation Networks, Mobility Solutions, Security consulting and Testing. The solutions portfolio includes Consulting, Application Development & Management, Network Services, Solution Integration, Product Engineering, Infrastructure Managed Services, Remote Infrastructure Management and BPO. With an array of service offerings for TSPs, TEMs and ISVs, Tech Mahindra is a chosen transformation partner for several leading wireline, wireless and broadband operators in Europe, Asia-Pacific and North America. Tech Mahindra has a global footprint through operations in more than 25 countries with 17 sales offices and 13 delivery centers.Tech Mahindra's track record for value delivery is supported by over 34, 000 professionals who provide a unique blend of culture, domain expertise and in depth technology skill sets.

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MAHINDRA SATYAM

We are Mahindra Satyam, leading information, communications and technology (ICT) company

providing

top-class

business

consulting,

information

technology

and

communication services. Leveraging deep industry and functional expertise, leading technology practices and a global delivery model, we enable companies achieve their business goals and transformation objectives.

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We are powered by a pool of talented IT and consulting professionals across enterprise solutions, client relationship management, business intelligence, business process quality, operations management, engineering solutions, digital convergence, product lifecycle management, and infrastructure management services, among other capabilities. Our development and delivery centers in the US, Canada, Brazil, the UK, Hungary, Egypt, UAE, India, China, Malaysia, Singapore and Australia serve numerous clients, including several Fortune 500 companies. We are part of the $7.1 billion Mahindra Group, a global industrial federation of companies and one of the top 10 business houses based in India. The Group‘s interests span automotive products, aviation, components, farm equipment, financial services, hospitality, information technology, logistics, real estate and retail.

PHARMACUETICALS

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RANBAXY

Ranbaxy Laboratories Limited (Ranbaxy), India's largest pharmaceutical company, is an integrated, research based, international pharmaceutical company, producing a wide range of quality, affordable generic medicines, trusted by healthcare professionals and patients across geographies. Ranbaxy today has a presence in 23 of the top 25 pharmaceutical markets of the world. The Company has a global footprint in 46 countries, world-class manufacturing facilities in 7 countries and serves customers in over 125 countries. In June 2008, Ranbaxy entered into an alliance with one of the largest Japanese innovator companies, Daiichi Sankyo Company Ltd., to create an innovator and generic pharmaceutical powerhouse. The combined entity now ranks among the top 20 pharmaceutical companies, globally. The transformational deal will place Ranbaxy in a higher growth trajectory and it will emerge stronger in terms of its global reach and in its capabilities in drug development and manufacturing. Ranbaxy was incorporated in 1961 and went public in 1973. For the year 2009, the Company recorded Global Sales of US $ 1519 Mn. The Company has a balanced mix of revenues from emerging and developed markets that contribute 54% and 39% respectively. In 2009, North America, the Company's largest market contributed sales of US $ 397 Mn,

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followed by Europe garnering US $ 269 Mn and Asia clocking sales of around US $ 441 Mn.

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CIPLA

Cipla has registered excellent growth for the year FY01 with 38% improvement in top line and 34% increase in bottom line. The company‘s entry into generic business in a big way has paid rich dividend. Cipla‘s recent offer for anti -AIDS drugs to South African countries

will enhance exports. Strong presence in asthmatic, antibiotic and cardiovascular segments will help to retain leadership position in the domestic market. Cipla is likely to emerge as a leading global player in anti-AIDS and inhaler segments. We estimate the company to outperform most peers in the current year on account of developments as mentioned in the report. Cipla occupies 3rd position in the domestic formulations market and commands a market share of 4.74%. The company is growing rapidly at 22.1% compared to the market growth of 10.1%. Cipla currently markets 346 products and is the market leader in the generic segment with more than 100 products. The company has strong presence in anti-asthmatic, antibiotics, cardiovascular, anti-AIDS and anticancer areas. We expect the company to maintain the leading position in these segments due to its several fast moving brands and rapid introduction of new products.

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WYETH

Wyeth Pharmaceuticals, a division of Wyeth, has leading products in the areas of women‘s health

care,

infectious

disease,

gastrointestinal

health,

central

nervous

system,

inflammation, transplantation, hemophilia, oncology, vaccines and nutritional products. Wyeth is one of the world‘s largest research -driven pharmaceutical and health care

products companies. It is a leader in the discovery, development, manufacturing and marketing of pharmaceuticals, vaccines, biotechnology products and non-prescription medicines that improve the quality of life for people worldwide. The Company‘s major

divisions include Wyeth Pharmaceuticals, Wyeth Consumer Healthcare and Fort Dodge Animal Health.

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Wyeth Pharmaceuticals, formerly Wyeth-Ayerst Laboratories, is the original company founded by the Wyeth brothers, originally known as John Wyeth and Brother. They focus on the research, development, and marketing of prescription drugs. The pharmaceuticals division is further subdivided into five subdivisions: Wyeth Research, Prescription Products, Biotech, Vaccines, and Nutritionals. Wyeth's research and development director Robert Ruffolo has been quoted in the New York Times about the firm's efforts to develop new drugs. 

DR. REDDY’S

Established in 1984, Dr. Reddy‘s Laboratories (NYSE: RDY) is an emerging global pharmaceutical company. As a fully integrated pharmaceutical company, our purpose is to provide affordable and innovative medicines through our three core businesses:

-Pharmaceutical Services and Active Ingredients, comprising our Active Pharmaceuticals and Custom Pharmaceuticals businesses; -Global Generics, which includes branded and unbranded generics; and -Proprietary Products, which includes New Chemical Entities (NCEs), Differentiated Formulations, and Generic Biopharmaceuticals. Our products are marketed globally, with a focus on India, US, Europe and Russia. Dr. Reddy‘s conducts NCE research in the areas of metabolic disorders, cardiovascular indications, antiinfective and inflammation. Our strong portfolio of businesses, geographies and products gives us an edge in an increasingly competitive global market and allows us to provide affordable medication to people across the world, regardless of geographic and socio-economic barriers. 

AUROBINDO PHARMA

Among the largest 'Vertically Integrated' pharmaceutical companies in India, Aurobindo has robust product portfolio spread over major product areas encompassing CVS, CNS, Anti-Retroviral, Antibiotics, Gastroenterological, Anti-Diabetics and Anti-Allergic with approved manufacturing facilities by USFDA, UKMHRA, WHO, MCC-SA, ANVISA-Brazil for both APIs & Formulations and has Global presence with own infrastructure, strategic alliances, subsidiaries & joint ventures. Aurobindo‘s R & D strengths lie in developing intellectual property in non-infringing processes and resolving complex chemistry challenges. In the process, Aurobindo develops new drug delivery systems, dosage formulations and applies new technology for better processes. 32


Among the largest 'Vertically Integrated' pharmaceutical companies in India, Aurobindo has robust product portfolio spread over major product areas encompassing CVS, CNS, Anti-Retroviral, Antibiotics, Gastroenterological, Anti-Diabetics and Anti-Allergic with approved manufacturing facilities by USFDA, UKMHRA, WHO, MCC-SA, ANVISA-Brazil for both APIs & Formulations and has Global presence with own infrastructure, strategic alliances, subsidiaries & joint ventures. Aurobindo‘s R & D strengths lie in developing intellectual property in non-infringing processes and resolving complex chemistry challenges. In the process, Aurobindo develops new drug delivery systems, dosage formulations and applies new technology for better processes. FMCG 

HUL (HINDUSTAN UNILEVER LTD.)

Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods Company, touching the lives of two out of three Indians with over 20 distinct categories in Home & Personal Care Products and Foods & Beverages. The company‘s Turnover is Rs. 17,523 crores (for the financial year 2009 - 2010) HUL is a subsidiary of Unilever; one of the world‘s leading suppliers of fast moving consumer goods with strong local roots in more than 100 countries across the globe with annual sales of about €40 billion in 2009 Unilever has about 52% shareholding in HUL. Hindustan Unilever was recently rated among the top four companies globally in the list of ―Global Top Companies for Leaders‖ by a study sponsored by Hewitt Associates, in partnership with Fortune magazine and the RBL Group. The company was ranked number one in the Asia-Pacific region and in India. The mission that inspires HUL's more than 15,000 employees, including over 1,400 managers, is to help people feel good, look good and get more out of life with brands and services that are good for them and good for others. It is a mission HUL shares with its parent company, Unilever, which holds about 52 % of the equity. 

ITC

ITC is one of India's foremost private sector companies with a market capitalisation of over US $ 30 billion and a turnover of US $ 6 billion.* ITC is rated among the World's Best Big Companies, Asia's 'Fab 50' and the World's Most Reputable Companies by Forbes magazine, among India's Most Respected Companies by BusinessWorld and among India's Most Valuable Companies by Business Today. ITC ranks among India's `10 Most Valuable (Company) Brands', in a study conducted by Brand Finance and published by the Economic Times. ITC also ranks among Asia's 50 best performing companies compiled by Business Week. ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Information Technology, Branded Apparel, 33


Personal Care, Stationery, Safety Matches and other FMCG products. While ITC is an outstanding market leader in its traditional businesses of Cigarettes, Hotels, Paperboards, Packaging and AgriExports, it is rapidly gaining market share even in its nascent businesses of Packaged Foods & Confectionery, Branded Apparel, Personal Care and Stationery. As one of India's most valuable and respected corporations, ITC is widely perceived to be dedicatedly nation-oriented. Chairman Y C Deveshwar calls this source of inspiration "a commitment beyond the market". In his own words: "ITC believes that its aspiration to create enduring value for the nation provides the motive force to sustain growing shareholder value. ITC practices this philosophy by not only driving each of its businesses towards international competitiveness but by also consciously contributing to enhancing the competitiveness of the larger value chain of which it is a part." 

P&G (PROCTOR AND GAMBLE)

The Procter & Gamble Company (P&G) is a giant in the area of consumer goods. The leading maker of household products in the United States, P&G has operations in nearly 80 countries around the world and markets its nearly 300 brands in more than 160 countries; more than half of the company's revenues are derived overseas. Among its products, which fall into the main categories of fabric care, home care, beauty care, baby care, family care, health care, snacks, and beverages, are 16 that generate more than $1 billion in annual revenues: Actonel (osteoporosis treatment); Always (feminine protection); Ariel, Downy, and Tide (laundry care); Bounty (paper towels); Charmin (bathroom tissue); Crest (toothpaste); Folgers (coffee); Head & Shoulders, Pantene, and Wella (hair care); Iams (pet food); Olay (skin care); Pampers (diapers); and Pringles (snacks). Committed to remaining the leader in its markets, P&G is one of the most aggressive marketers and is the largest advertiser in the world. Many innovations that are now common practices in corporate America — including extensive market research, the brand-management system, and employee profit-sharing programs — were first developed at Procter & Gamble.    

COLGATE AND PALMOLIVE

Driving Growth Worldwide Building Market Leadership Growing Profitability

Colgate's long history of strong performance comes from absolute focus on our core global businesses: Oral Care, Personal Care, Home Care and Pet Nutrition. This has been combined with a successful worldwide financial strategy. Around the world, Colgate has consistently increased gross margin while at the same time reducing costs in order to fund growth initiatives, including new product development and increases in marketing spending. These, in turn, have generated greater profitability. Colgate managers around the world are dedicated to increasing market shares in all our core businesses. Colgate has achieved global leadership in toothpaste, hand dishwashing liquid, liquid hand soap and specialty pet food. 34




MARICO

Marico is a leading Indian Group in Consumer Products & Services in the Global Beauty and Wellness space. Marico's Products and Services in Hair care, Skin Care and Healthy Foods generated a Turnover of about Rs. 26.6 billion (about USD 600 Million) during 2009-10. Marico markets well-known brands such as Parachute, Saffola, Sweekar, Hair & Care, Nihar, Shanti, Mediker, Revive, Manjal, Kaya, Aromatic, Fiancee, HairCode, Caivil, Code 10 and Black Chic. Marico's brands and their extensions occupy leadership positions with significant market shares in most categories- Coconut Oil, Hair Oils, Post wash hair care, Anti-lice Treatment, Premium Refined Edible Oils, niche Fabric Care etc. Marico is also present in the Skin Care Solutions segment through Kaya Skin Clinics in India, Middle East and Bangladesh. In addition, Marico also acquired the aesthetics business, of the Singapore based Derma Rx Asia Pacific Pte. Ltd. (Derma Rx), under the Kaya portfolio. Marico's branded products are present in Bangladesh, other SAARC countries, the Middle East, Egypt, Malaysia and South Africa. The Overseas Sales franchise of Marico's Consumer Products (whether as exports from India or as local operations in a foreign country) is one of the largest amongst Indian Companies and is entirely in branded products and services. Harsh Mariwala was awarded the Ernst & Young ‗Entrepreneur of the Year Award‘ 2009 in the Manufacturing category.

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ANALYSIS OF DATA 

BANKING SECTOR

DEBT EQUITY RATIO COMPANIES/YEAR

2006

2007

2008

2009

2010

ICICI

228.8135

313.3033

278.678

256.6012

265.7483

IDBI

0.011571

0.012116

0.012679

0.012495

0.010028

HDFC

192.7486

222.6536

296.9485

342.041

393.9357

AXIS

153.5558

227.1818

260.6868

355.3093

391.1192

SBI

780.3293

902.9535

932.9522

1253.444

1428.818

1600 1400 1200

ICICI

1000

IDBI

800

HDFC

600

AXIS

400

SBI

200 0 2006



2007

2008

2009

2010

Banking sector is the sector which has highest debt equity ratio as compare to the other sectors. Different banks like for example I have taken five banks to know about the proportion of debt equity ratio in these banks. IDBI‘s debt equity ratio is below zero because it is having less equity as compare to debts which they have taken which is not good for IDBI. ICICI debt equity ratio is fluctuating year by year. SBI‘s debt eq uity ratio is high as compare to other banks which means they have put their loans at risk of not being repaid. Other banks like HDFC and AXIS are having less debt equity ratio as compare to SBI which shows that they have taken less risk as compare to SBI.

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COST OF DEBT COMPANIES/YEAR

2006 3.06394 2 5.76138 5 2.07791 8 2.75003 8 3.19063 6

ICICI IDBI HDFC AXIS SBI

2007 3.77370 5 6.86104 4 2.90612 5 3.04098 4 3.20562 9

2008 4.92285 3 9.29709 4 3.01824 7 3.08092 9 3.52279 7

2009 5.17092 3 12.8207 7 3.98097 4 3.64302 3 3.50532 8

2010 3.85958 12.9836 1 2.80672 8 2.72089 4 3.39088

14 12 10

ICICI

8

IDBI

6

HDFC

4

AXIS

2

SBI

0 2006

2007

2008

2009

2010

COST OF EQUITY COMPANIES/YEAR

2006

2007

2008

2009

2010

ICICI

10.10825

11.61517

8.33064

6.988208

7.969708

IDBI

9.930315

8.320364

9.008793

9.86932

10.92301

HDFC

22.3794

22.61358

14.27092

15.34755

13.99827

AXIS

18.60726

21.11883

12.73069

18.41922

16.07813

SBI

9.594834

8.108383

8.906183

9.768369

10.81988

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25 20 ICICI 15

IDBI HDFC

10

AXIS 5

SBI

0 2006 

2007

2008

2009

2010

In case of banking sector cost of debt in IDBI is very high which means their debts are larger then the cost of equity i.e. it is leveraged and IDBI has a high debts which shows that this position of bank has brought him at risk and less profitable position. Other banks like HDFC, SBI, ICICI and AXIS are having less cost of debts and comparatively less as compare to IDBI which has very high cost of debts in the year 2010. There debts are increasing consistently. Cost of equity in the year 2010 is highest for axis bank which means they will get greater return rates to attract investments and SBI has the lower cost of equity that means they will get lesser returns to attract investments.

ROI COMPANIES/YEAR

ICICI

2006 0.03550 2

2007 0.03408 2

2008 0.03730 4

2009 0.03646 6

2010 0.03329 4

IDBI

0.022125

0.024549

0.022238

0.017154

0.014059

HDFC

0.039302

0.045233

0.032194

0.038168

0.050313

AXIS

0.022533

0.024502

0.031776

0.039183

0.044923

SBI

0.027112

0.030448

0.03551

0.033053

0.032073

0.06 0.05 ICICI 0.04

IDBI

0.03

HDFC

0.02

AXIS

0.01

SBI

0 2006

2007

2008

2009

2010

38


In banking sector, ROI for HDFC is highest in the year 2010 it has declined in 2008 but after that it has increased which shows that HDFC has utilized its capital effectively so as to generate profit which is good. Similarly AXIS has also improved its ROI and is consistently growing. In beginning it has increased slowly but after 2007 it has increased with great pace and has getting good ROI as compare to other banks like ICICI, IDBI and SBI. IDBI has least ROI among all five banks in the year 2010 which shows that they are not effectively utilizing their capital and their profits are also bei ng affected by this.



EBIT COMPANIES/YEAR

2006

2007

2008

2009

2010

ICICI

2540.07

3110.22

4157.73

3758.13

4024.98

IDBI

560.89

630.31

729.46

858.54

1031.13

HDFC

1115.94

1382.54

1590.18

2244.94

2948.7

AXIS

485.08

659.03

1071.03

1815.36

2514.53

SBI

4406.67

4541.31

6729.12

9121.23

9166.05

10000 8000

ICICI

6000

IDBI

4000

HDFC AXIS

2000

SBI

0 2006



2007

2008

2009

2010

EBIT for ICICI and SBI has maximum EBIT from 2006 -2010 consistent which means in spite of having debts they are earning profit. But IDBI is having least EBIT and it has having high cost of debts also which is not good and comparatively it shows that IDBI has not done well. Where as HDFC and AXIS are not having much high EBIT as compare to ICICI and SBI and also they are not having less EBIT as IDBI bank has. HDFC and AXIS bank has almost same level of EBIT and has increased with not much difference between each other. This shows that how effective capital structure the bank has.

39


EPS COMPANIES/YEAR

2006

2007

2008

2009

2010

ICICI

28.55

34.59

37.37

33.76

36.1

IDBI

7.75

8.7

10.06

11.85

14.23

HDFC

35.64

43.29

44.87

52.77

64.42

AXIS

17.41

23.4

29.94

50.57

62.06

SBI

83.73

86.29

106.56

143.67

144.37

200 ICICI

150

IDBI 100

HDFC AXIS

50

SBI

0 2006



2007

2008

2009

2010

EPS for HDFC, AXIS, SBI and IDBI are almost at same level but after 2008 EPS for AXIS bank has increased and among these 4 banks AXIS and HDFC has having almost same EPS. But the HDFC‘s EPS has less equity as compare to AXIS which means HDFC has utilized its capital effectively so as to generate an income out of it. SBI has highest EPS and also there equity is also less as compare to other banks which shows that SBI is the only bank which has uses its capital very effectively to get the profit out of it and IDBI bank has very less EPS which shows that they have not uses its capital effectively.

DPS COMPANIES/YEAR

2006

2007

2008

2009

2010

ICICI

8.5

10

11

11

12

IDBI

1.5

1.5

2

2.5

3

HDFC

4.5

5.5

7

8.5

10

AXIS

3.5

4.5

6

10

12

14

14

21.5

29

30

SBI

40


35 30 25

ICICI

20

IDBI

15

HDFC

10

AXIS SBI

5 0 2006



2007

2008

2009

2010

DPS in banking sector for all banks vary differently. SBI has highest DPS which shows that since 2006 they are providing high dividend to their shareholders as compare to other banks which helps to know that how profitably SBI has worked till 2010 (according to the data available). Reason for high dividend per share for SBI can be their reinvestment into core business assets and paying down of debt which shows that they have got higher dividends for their shareholders. And here also IDBI has least DPS which shows that the banks profitability is very low and is providing less dividend to their shareholders. The reason can be their higher debts which they have to pay in form of interest every year. ICICI has comparatively high DPS as compare to HDFC and AXIS bank. Among all 5 banks ICICI has second highest DPS for all 5 years which shows the profitable side of bank is good.

DFL COMPANIES/YEAR

2006

2007

2008

2009

2010

ICICI

0.01124

0.011121

0.008988

0.008983

0.008969

IDBI

0.013817

0.013803

0.013791

0.013803

0.0138

HDFC

0.031937

0.031312

0.028217

0.023506

0.021847

AXIS

0.946815

0.959438

0.447064

0.991479

0.589939

SBI

0.999512

1.00068

0.487601

0.979657

0.991547

41


1.2 1

ICICI

0.8

IDBI

0.6

HDFC

0.4

AXIS

0.2

SBI

0 2006





2007

2008

2009

2010

DFL for banking sector has fluctuated every year and except SBI all bank has less then 1 DFL which shows that SBI has associated with high risk and indicates high use of fixed income bearing securities in the capital structure of the bank whereas in the case of banks which are having low Degree of Financial Leverage like HDFC, IDBI and ICICI has less use of fixed income bearing securities in the capital structure of these banks. AXIS bank has also comparatively high DFL form other banks but low from SBI in the year 2010.

PHARMACY SECTOR


2006

2007

2008

2009

2010

RANBAXY

0.43

1.35

1.38

1.05

0.85

CIPLA

0.24

0.04

0.15

0.22

--

WYETH

0.01

0.01

0.01

0.01

0.01

AUROBINDO

1.33

2.13

1.44

1.6

1.02

DR REDDY'S

0.41

0.08

0.1

0.12

0.1

2.50 2.00

RANBAXY

1.50

CIPLA WYETH

1.00

AUROBINDO 0.50

DR REDDY'S

0.00 2006

2007

2008

2009

2010

42


Debt equity ratio for WYETH is low which means they have low as compare to the equity of the company. AUROBINDO has high debt equity ratio which means it is not good for the company as it is highly debt company from 5 consecutive years. RANBAXY is also high debt company which means it has put their loans at high risk of not being repaid. CIPLA and DR. REDDY‘s has low debt equity ratio which means it is quite well for the company as they are having low debts.



COST OF DEBTS COMPANIES/YEAR

2006

2007

2008

2009

2010

RANBAXY

0.25

0.19

0.06

0.02

0.30

CIPLA

7.91

59.36

7.53

2.48

731.79

WYETH

8476.26

8236.8

7909.46

9665.24

7506.98

AUROBINDO

0.146156

0.131227

0.245835

0.19795

0.416782

DR REDDY'S

1.134846

8.962868

12.06193

5.412775

28.9407

12,000.00 10,000.00 RANBAXY

8,000.00

CIPLA 6,000.00

WYETH

4,000.00

AUROBINDO

2,000.00

DR REDDY'S

0.00 2006 2007 2008 2009 2010


2006

2007

2008

2009

2010

RANBAXY

9.68

17.59

26.27

-29.80

14.58

CIPLA

31.59

21.68

19.48

18.52

18.80

WYETH

30.40589

39.48021

34.5723

40.03454

23.15934

AUROBINDO

7.894677

25.37861

24.35915

9.933923

27.8696

DR REDDY'S

9.493702

27.43647

10.05178

10.83886

14.51237

43


50.00 40.00 30.00

RANBAXY

20.00

CIPLA

10.00

WYETH

0.00 -10.00

2006

2007

2008

2009

AUROBINDO

2010

DR REDDY'S

-20.00 -30.00 -40.00

Cost of debt and Cost of equity for WYETH is that there EBIT is 320 times approx is more then the interest we are paying on our debts which is good. Cost of debts for DR. REDDY‘s is fluctuating every year with high rate and cost of equity is also fluctuating every year which means in some years they were good and in some years they were not so good. RANBAXY‘s cost of equity is fluctuating and in the year it has reached negative in the year 2009 which means they have not got the required return rates to attract investments in the year but there cost of debts is less which means they have. Cost of debt for CIPLA has comparatively low from other companies but in the year 2010 it has reached high.



ROI COMPANIES/YEAR

2006

RANBAXY

2007

2008

2009

2010

3.07

10.05

4.93

2.52

8.03

CIPLA

26.67

23.4

18.17

22.39

22.16

WYETH

37.13

42.75

45.24

53.58

28.82

7.21

9.65

11.76

13.53

17.54

8.9

30.79

10.55

13.46

15.87

AUROBINDO DR REDDY'S

60 50

RANBAXY

40

CIPLA

30

WYETH

20

AUROBINDO

10

DR REDDY'S

0 2006

2007

2008

2009

2010

44


ROI for WYETH is high which is good for it as is shows that they are getting good return on their investments but in the year 2010 it decreased with high rate. On the other side ROI for AUROBINDO has increased consecutively from the last 5 years but it is comparatively low from other companies. ROI of CIPLA and RANBAXY is also fluctuating and CIPLA is having high ROI as compare to RANBAXY which is comparatively good for CIPLA.



EBIT COMPANIES/YEAR

2006

2007

2008

2009

RANBAXY

206.36

496.87

846.99

-1,485.9

CIPLA

725.91

819.14

856.41

953.54

WYETH AUROBINDO DR REDDY'S

2010

990.10 1,341.3 9

12.13

12.75

15.24

21.08

8.82

5.71

7.15

8.51

9.03

12.54

3.9

27.04

6.8

7.21

4.62

1,500.00 1,000.00 RANBAXY

500.00

CIPLA

0.00 2006 -500.00 -1,000.00

2007

2008

2009

2010


-1,500.00 -2,000.00 

EBIT for RANBAXY has increased for 2 – 3 years but after 2008 it has decreased and become negative which is not good for the company but after that it has increased and become positive which shows that company has done well in that year. EBIT for CIPLA is highest among all five companies and is increased consecutively for five years which shows the profitability of the company and how effectively they are utilizing the capital of the company. EBIT for WYETH, AUROBINDO and DR. REDDY is almost at same level.

45


EPS COMPANIES/YEAR

RANBAXY

2006

2007

2008

2009

2010

5.69

10.21

16.56

-24.85

13.61

20.26

8.59

9.02

9.99

13.47

29.8

40.65

35.86

43.87

25.97

AUROBINDO

13.02

42.94

54.08

23.91

94.34

DR REDDY'S

27.53

70.09

28.26

33.29

50.11

CIPLA WYETH

120 100 80 RANBAXY 60

CIPLA

40

WYETH AUROBINDO

20

DR REDDY'S 0 2006

2007

2008

2009

2010

-20 -40 

EPS for AUROBINDO‘s has so many fluctuations and after 2009 it has increased because their cost of equity has decreased which means they have done proper utilization of capital structure with less equity. In case of RANBAXY, EBIT in year 2009 has become negative because their equity has not been utilized properly which results in negative EBIT. CIPLA has comparatively low EPS as compare to others but it never went negative and is consistent from 2007 to 2010. DR REDDY‘s EPS has so many fluctuations in beginning it was very high but after that it has decreased and is trying to improve their utilization of investments made by them.

DPS COMPANIES/YEAR

RANBAXY CIPLA WYETH AUROBINDO DR REDDY'S

2006

2007

2008

2009

2010

8.5

8.5

8.5

--

--

2

2

2

2

2

25

30

30

32.5

20

1.5

2.5

3.25

4.5

5

5

3.75

3.75

6.25

11.25

46


35 30 25

RANBAXY

20

CIPLA

15

WYETH

10

AUROBINDO

5

DR REDDY'S

0 20 06

20 07

20 08

20 09

2 0 10

DPS of WYETH is very high as compare to other companies which shows that they have paid high dividend to their shareholders. It is because they have effective capital utilization which helps them to generate profit. But the DPS for WYETH has declined after 2009. CIPLA is consistently having same DPS which means even they are having high earnings then also they have paid same dividends as previous year. This is because they are paying interest on their debts as CIPLA is a leveraged company. DPS for AUROBINDO has increased consistently as their earnings are also increased. On the other side DPS for RANBAXY was consistent from last three years and then it decreased because they have to pay the interest on their earnings for the debt which they have taken. DR. REDDY‘s DPS has increased because there earnings on per share has increased which increases their dividends.



DFL COMPANIES/YEAR

2006

2007

2008

2009

2010

RANBAXY

1.20

0.56

0.88

0.91

0.93

CIPLA

1.27

-4.48

1.10

0.95

0.86

2.456719

3.188235

2.353018

2.08112

2.944444

1.09623

2.296026

0.814567

1.411977

1.330986

0.578108

0.414219

1.052256

0.693555

1.142307


4.00 RANBAXY

2.00

CIPLA

0.00 20 06 -2.00 -4.00

20 07

20 08

20 09

2 0 10


-6.00

47






DFL of WYETH has increased in 2010 which indicates a high proportionately high use of fixed income bearing securities in the capital structure of the company. There were many fluctuations in DFL of WYETH. Similarly with AUROBINDO DFL has increased in beginning and then it has so many fluctuations and after 2009 it is increasing which shows that they also have high income bearing securities in the capital structure of the company but the low DFL for CIPLA indicates that there is a less use of fixed income bearing securities in the capital structure. RANBAXY and DR. REDDY‘s DFL is almost at same level.

IT SECTOR


2006

2007

0.01

TCS

0.01

2008

200 9 2009

2010

0

0

0

INFOSYS

0

0

0

0

0

TECH MAHINDRA

0

0.06

0.08

0

0.48

MAHINDRA SATYAM

0

0

0

-1.22

0.02

0.01

0.03

0.33

0.4

0.31

WIPRO

0.6 0.4 0.2 TCS

0 -0.2

20 06

20 07

20 08

2 00 9

20 10

INFOSYS

-0.4

TECH MAHINDRA

-0.6

MAHINDRA SATYAM

-0.8

WIPRO

-1 -1.2 -1.4



INFOSYS is a debt free company that is why there debt equity is ‗0‘ and MAHINDRA SATYAM was having negative debt equity ratio which means there equity has been affected badly due to the scandal. Where as TECH MAHINDRA and WIPRO is having high cost of debt equity ratio which means they both are having high debts as compare to the other companies which is not good for both of the companies

48



TCS

2006 1282.33 1

2007 1510.52 6

2008 4927.81 9

2009 200 9 1262.98 4

2010 1226.57 9

0

0

0

0 2260.05 6 953.475 9

123.037 971.276 3 120.752 5

0 53.0810 5 910.851 3 0.52222 4

0 0.19607 5 14.3464 3 0.58074 8

INFOSYS TECH MAHINDRA MAHINDRA SATYAM WIPRO

0 4.31778 0.30919

6000 5000 TCS

4000

INFOSYS

3000

TECH MAHINDRA 2000

MAHINDRA SATYAM

1000

WIPRO

0 20 06

20 07

20 08

20 09

20 10

-1000


TCS INFOSYS TECH MAHINDRA MAHINDRA SATYAM WIPRO

2006 2007 48.8610 47.1954 5 4 35.8189 34.7830 1 1 38.1450 8.61804 8 7 29.0303 25.1635 5 5 32.8918 31.4788 9 6

2008 200 9 2009 2010 40.4215 34.4326 7 9 36.9851 33.8533 33.2077 26.6816 8 8 9 29.4218 56.0823 27.0660 6 1 3 23.7520 7 1384.13 2.16269 27.0647 24.3315 28.1516 8 3 9

49


200 0 20 06

-200

20 07

2 00 8

20 09

20 10 TCS

-400

INFOSYS

-600

TECH MAHINDRA

-800

MAHINDRA SATYAM

-1000

WIPRO

-1200 -1400 -1600 

Cost of debt for TCS is very high in the year 2008 and among all the companies and at the end cost of debt for all the companies are declining. INFOSYS has no cost of debts as it is a debt free company. TECH MAHINDRA has also has ‗0‘ costs of debts in the year 2006 and 2009. MAHINDRA SATYAM has also having debts in the beginning and in the year 2009 it has become negative but in 2010 it again increased. The negative debts shows that there is no money in the company in form of debts and the amount which is there is also went down due to the scandal occurred in MAHINDRA SATYAM. Cost of equity for all the company is between 1-50 cr. except MAHINDRA SATYAM. In case of MAHINDRA SATYAM it went negative in the year 2009 and 2010 which shows the critical condition of the company.

ROI COMPANIES/YEARS

2006

TCS

2007

2008

2009

2010

55.7

49.87

42.92

43.27

42.46

39.78541

38.15624

39.95552

38.30647

35.55999

-

74.08

58.62

61.76

19.97

MAHINDRA SATYAM

27.34

27.02

26.69

-33.45

1.94

WIPRO

35.58

33.3

23.23

26.77

23.06

INFOSYS TECH MAHINDRA

80 60

TCS

40

INFOSYS

20

TECH MAHINDRA

0 -20

MAHINDRA SATYAM 20 06

20 07

2 00 8

20 09

20 10

WIPRO

-40

50




It has been measured that ROI of all companies has more or less gone down. This may be due to high competition or saturation in the industry. ROI has fallen sharply in case of MAHINDRA SATYAM (fallen because of scandal), in the year 2010 it has risen. There are many fluctuations in ROI of WIPRO and TECH MAHINDRA. TECH MAHINDRA has also reached highest in 2007 to 2009 and after that it has declined.

EBIT COMPANIES/YEAR

2006

TCS

3116.87

INFOSYS

2007 4176.7

2008

2009

5396.38

5250.24

2010 6393.9

2744

4259

5390

6822

7836

240.64

167.5

421.1

1093

1034.2

MAHINDRA SATYAM

1448.61

1580.84

1941.8

-7773.9

-47.5

WIPRO

2,343.55

3,183.40

3,586.50

3,744.70

5,797.20

TECH MAHINDRA

10000 8000 6000

TCS

4000

INFOSYS

2000 0 -2000 -4000 -6000

TECH MAHINDRA 2006

2007

2008

2009

2010

MAHINDRA SATYAM WIPRO

-8000 -10000 

The highest growth is shown by INFOSYS (trend analysis). All companies except MAHINDRA SATYAM have experienced positive growth, increase in earnings .The work culture, ethical values and the cost effective mechanism of INFOSYS have given it tremendous growth in its market capitalisation and earnings. And with MAHINDRA SATYAM again the same problem raised, which is due to scandal and it affects the earnings of the company.

51


EPS COMPANIES/YEAR

2006

2007

55.53

TCS

2008

38.39

2009

42.48

2010

43.66

28.71

INFOSYS

87.21

64.07

76.03

101.62

100.97

TECH MAHINDRA

19.57

48.69

63.09

81.05

61.42

MAHINDRA SATYAM

38.21

21.33

25.59

-13.27

2.94

14.17

19.48

20.96

20.3

33.3

WIPRO

120 100

TCS

80

INFOSYS

60

TECH MAHINDRA

40

MAHINDRA SATYAM

20

WIPRO

0 2006

-20



2007

2008

2009

2010

It is highest incase of Infosys. Thus gives an indication of high profitability of the company. WIPRO and TECH-MAHINDRA have also experienced growth in EPS. The maximum growth in the 5 yrs span is noticed incase of TECH-MAHINDRA. Again it can be spotted that the EPS of MAHINDRA SATYAM has fallen, that is decrease in its profitability. Since the takeover of TECH MAHINDRA it has experienced growth in EPS as well as ROI.

DPS COMPANIES/YEAR

TCS

2006

2007

2008

2009

2010

13.5

11.5

14

14

20

45

11.5

33.25

23.5

25

8.8

2.3

5.5

4

3.5

MAHINDRA SATYAM

7

3.5

3.5

1

--

WIPRO

5

6

6

4

6

INFOSYS TECH MAHINDRA

52


30 25 ABB

20

BHEL 15

SIEMENS

10

ELECON

5

BEML

0 2006



2007

2008

2009

2010

DPS of TCS and INFOSYS is very high which shows that it is a very profitable company as they are having high Dividend Per Share and it is increasing consecutively from last consecutive five years of span. In INFOSYS dividend for per share has increased every year except in 2007 and after that it has increased which implicates that the earnings of this company is very high. TECH MAHINDRA, WIPRO and MAHINDRA SATYAM are having comparatively almost same DPS means that they are almost at same level.

DFL COMPANIES/YEAR

TCS INFOSYS TECH MAHINDRA MAHINDRA SATYAM WIPRO

2006 2007 0.53757 5 -90.786 1.04001 7 -0.4805 0.51866 7 -4.8960 0.93515 6 -4.8432 0.03826 -0.0261

2008 2009 2010 0.36472 6 2.70811 1.57208 0.70282 4 1.26694 -0.0424 0.01272 4.50837 0.19531 3 9 0.87472 0.30427 6 3 1.22741 0.02267 0.02187 0.01171

53


20 0 2006

2007

2008

2009

TCS

2010

-20

INFOSYS

-40

TECH MAHINDRA MAHINDRA SATYAM

-60

WIPRO -80 -100 



DFL for almost all companies are less then 1and also negative for some companies which shows that the DFL in this sector is not very high in fact it has went negative in some companies. In case of TCS, DFL has went -90.78 which shows that there was a very less use of fixed income bearing securities in the capital structure of the company. No company was having high DFL showing high use of fixed income bearing securities.

FMCG SECTOR


HUL ITC

2006

2008

2009

2010

0.02

0.03

0.06

0.2

--

0.01

0.02

0.02

0.01

0.01

0

0

0

0

0

0.81

0.91

1.09

0.84

0.66

0.02

0.02

0.03

0.02

0.01

P AND G MARICO COLGATE PALMOLIVE

2007

1.2 1 HUL

0.8

ITC 0.6

P AND G

0.4

MARICO

0.2

COLGATE PALMOLIVE

0 2006

2007

2008

2009

2010

54




Debt equity ratio for P&G is 0 which means P&G is a debt free company and they have invested the capital by their own. MARICO has highest debt equity ratio which means they are having high equity as compare because their debts are very low. HUL, ITC and COLGATE PALMOLIVE is having debt equity ratio almost at same level.


HUL ITC P AND G MARICO COLGATE PALMOLIVE

2006 95.0570 8 113.805 6

2007 153.654 3 147.767 6

2008 61.0058 7 78.4862 2

2009 2010 17.9125 5 0 61.8589 49.7623 1 2

0 8.68954 4 95.8961 6

0 3.96801 2 102.204 5

0 2.56945 6 41.5303 2

0 2.12361 8 66.0344 2

0 3.70595 9 0

180 160 140 120

HUL

100

ITC P AND G

80

MARICO

60

COLGATE PALMOLIVE

40 20 0 2006

2007

2008

2009

2010

COST OF EQUITY 55


COMPANIES/YEAR

HUL

2006 67.5182 6 -2173.2 58.0807 7 45.0765 9 101.865 6

ITC P AND G MARICO COLGATE PALMOLIVE

2007 74.1314 8 3174.94 34.7170 7 94.7548 7 110.821 3

2008 144.828 10324.6 41.8295 2 65.3854 9 155.918 2

2009 135.648 7 5213.40 3 43.8809 6 46.3198 4 143.177 1

2010 93.0953 1 2657.37 5 35.7979 2 46.0164 9 135.438 9

6000 4000 2000 HUL

0 -2000

2006

2007

2008

2009

2010

ITC P AND G

-4000

MARICO

-6000

COLGATE PALMOLIVE

-8000 -10000 -12000



Cost of debt has fallen in case of every company. ITC has comparatively high cost of debt thereby making it riskier to invest in. and in case of MARICO it is somewhat constant. But for P&G costs of debts are zero because P&G is a debt free company. Cost of equity is almost constant in HUL and MARICO with slight changes and cost of equity has fluctuated very sharply in ITC. In beginning cost of equity for ITC is negative which means the companies future is in danger as it has negative value but after that it has increased but that also doesn‘t reduces the company‘s future as risky.

ROI COMPANIES/YEAR

HUL

2006 67.66

2007 65.89

2008 138.72

2009 118.59

2010 106.78

56


ITC

36.26

37.24

36.6

34.6

42.64

P AND G

36.26

25.6

33.12

54.6

42.1

MARICO COLGATE PALMOLIVE

21.47

46.72

33.6

38.8

34.07

70.17

90.52

167.88

156.03

--

200

HUL

150

ITC P AND G

100

MARICO 50 COLGATE PALMOLIVE

0 2006



2007

2008

2009

2010

All I have seen by this is that there is growth only in COLGATE PALMOLIVE. All have shown increasing returns thereby increasing earnings the trend is similar in the four companies. It is falling slightly after 2008 because of high competition and competitive pricing, thereby reducing earnings and returns.

EBIT COMPANIES/YEAR

2006 1,677.2 7 3,259.2 3

2007 2,188.1 3 3,936.2 1

2008 2,366.4 4 4,527.1 9

2009 3,046.1 8 4,798.8 2

2010 2,813.4 0 6,068.6 6

P AND G

149.08

145.50

180.11

219.87

233.65


109.49

156.76

193.02

205.07

318.41

192.13

206.78

278.88

347.01

484.31

HUL ITC

57


7,000.00 6,000.00 5,000.00

HUL

4,000.00

ITC P AND G

3,000.00

MARICO 2,000.00

COLGATE PALMOLIVE

1,000.00 0.00 2006



2007

2008

2009

2010

Highest growth is seen in ITC. It also deals in tobacco, on which the taxes are high as are also the profit margins. Hotel business also brings in huge earnings and it also indicates they are using their capital effectively. So earnings have experienced good growth across the 5 year trend. HUL has also seen good growth. HUL has also seen good growth. Only a slight increase is seen in the other 3 companies. It indicates that HUL and ITC have large market capitalisation.

EPS COMPANIES/YEAR

HUL

2006

2007

2008

2009

2010

6.4

8.41

8.12

11.47

10.09

5.95

7.18

8.28

8.65

10.64

P AND G

42.98

27.67

40.48

55.1

55.38


17.05

1.88

2.35

2.33

3.86

10.12

11.78

17.04

21.34

31.12

ITC

58


60 HUL 50 ITC

40

P AND G

30 20

MARICO

10

COLGATE PALMOLIVE

0 2006 

2007

2008

2009

2010

Highest growth is seen in COLGATE PALMOLIVE which means their earnings on per share is good as compare to others which shows that there equity is less. The five year trend favors COLGATE PALMOLIVE. The highest EPS is in P&G and their equity is also less which means it is a better company, but except MARICO all have witnessed positive growth.

DPS COMPANIES/YEAR

HUL ITC P AND G MARICO COLGATE PALMOLIVE

2006

2007

2008

2009

2010

5

6

9

7.5

6.5

2.65

3.1

3.5

3.7

10

25

20

20

22.5

22.5

6.2

0.66

0.66

0.66

0.66

7.5

9.5

13

15

20

59


30

HUL

25 ITC

20

P AND G

15 10

MARICO

5 COLGATE PALMOLIVE

0 2006



2007

2008

2009

2010

DPS for P&G is highest among all companies as they are paying highest dividend to their shareholders as they profit generated by P&G is not been distributed in the form of interest as the company is debt free. Similarly with COLGATE PALMOLIVE, DPS has increased continuously because their earnings are also increasing continuously. But with MARICO, DPS has decreased after 2006 and is consistent till 2010. And ITC‘s, DPS was consistent from the beginning till 2009 but it increased in 2010 as their profit margin is very compare to other years and as they are having debts so they have to pay interest also so they have consistent DPS for continuously four years.

DFL COMPANIES/YEAR

2007

2008

2009

2010

3.284982

1.031139

0.42315

1.436288

1.574438

-15.4673

0.995239

1.020408

0.74477

0.869406

P AND G

9.838181

14.83355

1.946262

1.636057

0.081082


0.610634

-2.06087

1.080805

-0.13633

1.188104

3.23424

2.151222

1.280601

1.032947

1.158286

HUL ITC

2006

60


20 15 10 HUL 5

ITC

0

P AND G 2006

2007

2008

2009

2010

MARICO

-5

COLGATE PALMOLIVE -10 -15 -20 



P&G is the only company having high DFL which means they are having the high financial risk associated with it as in the beginning P&G was having highest DFL but in the year 2010 all companies are almost at same level. ITC was also having the least DFL in the beginning in fact it was negative which indicates that there is less use of fixed income bearing securities in the capital structure of the company. MARICO has also negative DFL in beginning but there after there is an increase in DFL.

CAPITAL GOODS SECTOR

debt to equity ratio COMPANIES/YEAR

2006

ABB

2007

2008

2009

2010

0

0

0

0

0

0.08

0.01

0.01

0.01

0.01

SIEMENS

0

0

0

0

0

ELECON

2

1.51

1.73

2.15

1.6

0.03

0.02

0.18

0.3

0.45

BHEL

BEML 2.5 2

ABB BHEL

1.5

SIEMENS

1

ELECON

0.5

BEML

0 2006

2007

2008

2009

2010

61


Debt equity ratio for ELECON is high among all five companies as they are having less debts but high equity means that as compare to the debts ELECON is having less equity. BEML debt equity ratio is increasing which shows that they have put their loans at risk. ABB and SIEMENS is the company among these five which is having debt equity ratio.




ABB

2006 1240.71 4 4.57366 227352. 1 1.51647 7 168.273 7

BHEL SIEMENS ELECON BEML

2007 30504.2 9 63.8721 6 137455 1.33134 7 156.767 7

2008 13870.0 9 87.1060 1 16509.3 9 0.79252 8 3.36070 2

2009

2010

77642.5 68.5422 1 23048.5 6 0.37106 5 1.16684 9

100.840 3 33813.5 4 0.33897 0.51439 1

250000 200000

ABB

150000

BHEL SIEMENS

100000

ELECON 50000

BEML

0 2006

2007

2008

2009

2010


ABB BHEL SIEMENS

2006 25.3765 6 23.7955 3 34.7323 4

2007 29.5034 1 28.2635 9 38.3092 4

2008 31.0405 6 27.8019 1 29.6420 5

2009 26.3612 6 25.2079 4 36.6718 3

2010 14.8923 9 27.9406 6 24.2559 4

62


28.7541 3 22.1785 9

ELECON BEML

30.2113 1 20.5627 1

30.8044 9 13.5612 7

22.3688 8 14.3488 5

21.5198 5 11.1644 4

45 40 35 ABB

30 25

BHEL

20

SIEMENS

15

ELECON

10

BEML

5 0 2006



2007

2008

2009

2010

SIEMENS is the company among all five which has the highest cost of debt as well as the highest cost of equity. So SIEMENS is the company which has the high risk in future also the cost of debt for SIEMENS is highest which indicates that it is positioned at riskier position and also at less profitability. BEML is has lowest cost of equity and is decreased by time and cost of debt has also declining consecutively for five years. ABB also has the high cost of debt therefore it is risky to invest in ABB as it is highly debt company.

ROI COMPANIES/YEAR

2006

2007

2008

2009

2010

ABB

38.79

44.61

51.38

39.34

26

BHEL

29.35

42.84

41.56

36.95

41.37

46.5

43.07

26.72

42.16

38.01

ELECON

21.75

23.87

21.2

18.82

16.32

BEML

32.84

32.65

18.01

16.1

11.93

SIEMENS

63


60 50 ABB

40

BHEL 30

SIEMENS

20

ELECON

10

BEML

0 2006



2007

2008

2009

2010

Only BHEL is showing increasing ROI across the trend which means they are getting better returns in their investments. ABB has also having high ROI in the year 2008 but it has declined after 2008 as their equity has also decreased after 2008. But among all the five companies SIEMENS is the only company having consistently high ROI as compare to others and also there are not many fluctuations in there ROI. ELECON and BEML are having almost same level of ROI at the end with slight changes.

EBIT COMPANIES/YEAR

2006

2007

2008

2009

2010

ABB

30.79

34.61

49.18

37.14

24

BHEL

14.85

18.34

26.31

19.95

18.07

SIEMENS

523.6

885.8

905.02

1451.09

1280.95

ELECON

16.75

22.37

19.7

17.32

14.82

281.91

BEML

332.23

359.22

392.89

342.04

1600 1400 1200

ABB

1000

BHEL

800

SIEMENS

600

ELECON

400

BEML

200 0 2006

2007

2008

2009

2010

64




SIEMENS has the maximum growth in their earnings and has highest EBIT among all five companies which means that they have effectively utilizing their capital consistently and BEML has also having good EBIT as compare to other three which says that their capital is being effectively utilized. ELECON, BHEL and ABB are almost at same level. There is not much change in EBIT of these companies.

EPS COMPANIES/YEAR

2006

2007

2008

2009

2010

ABB

51.6

80.3

23.2

25.83

16.74

BHEL

68.6

98.66

58.41

64.11

88.06

SIEMENS

21.7

35.39

17.6

30.99

24.53

48.85

17.75

7.24

6.19

7.13

50.87

55.77

54.19

64.56

53.51

ELECON BEML

120 100 ABB

80

BHEL 60

SIEMENS

40

ELECON BEML

20 0 2006



2007

2008

2009

2010

EPS for BHEL is high in this trend and also equity for BHEL is high, a trusted and an old brand having an ever expanding market capitalization and attracting business form all over the globe, which shows that the company must be using their capital efficiently to generate income. Whereas ELECON has lowest EPS which shows that they may not be utilizing their capital comparatively effective from others. But as it is observed that there are many fluctuations in EPS for all the 5 companies in this sector. 65


DPS COMPANIES/YEAR

2006

ABB BHEL

2007

2008

2009

2010

8

10

2.2

2.2

2

14.5

24.5

15.25

17

23.3

3.8

4.8

3

5

5

5

1.5

1.5

1.5

1.5

10

12

12

12

10

SIEMENS ELECON BEML

30 25 ABB 20

BHEL

15

SIEMENS

10

ELECON

5

BEML

0 2006 

2007

2008

2009

2010

DPS for BHEL is highest among all the companies because there earnings (EBIT) is also high and also BEML is providing high dividend to there shareholders because they are also having comparatively good earnings. ELECON has reduced its DPS after 2006 as there earnings are also reduced by the time. Similarly with ABB, DPS has been reduced after 2007 and is consistent for three years.

DFL COMPANIES/YEAR

ABB BHEL SIEMENS ELECON BEML

2006

2007

2008

2009

2010

0.977323

1.087864

-1.57897

0.803318

0.999159

1.0495

0.694665

-2.23797

1.086519

0.982831

-1.75737

0.912

-23.1674

1.260892

1.777865

1.834055

-0.83239

-2.29456

-2.21743

6.789893

0.53964

0.34873

1.280408

2.04163

1.322449

66


10 5 ABB

0 -5

2006

2007

2008

2009

2010

BHEL SIEMENS

-10 -15

ELECON BEML

-20 -25 

DFL for ELECON has reached highest in the year 2010 which shows that they have high financial risk as there is a high use of fixed income borrowings securities. Earlier ELECON was also having negative DFL. But SIEMENS was also having negative DFL but there after it has increased and has created a financial risk associated with the company. ABB and BHEL has almost same level of DFL and it also indicates that there is not much risk associated with it as there leverage is comparatively low.

67


FINDINGS 



With the help of DEBT TO EQUITY RATIO it is known that an excessively high ratio of debt to equity will put their loans at risk of not being not paid. It indicates how much the company is leveraged by comparing what is owed and what is owned. A high COST OF EQUITY indicates that the market views the company's future as risky, thus requiring greater return rates to attract investments. A lower cost of equity indicates just the opposite and high COST OF DEBT means the company is highly leveraged (i.e., debt financing is large relative to owner equity). A highly leveraged position becomes riskier and less profitable.



ROI i.e. Return On Investment, measures how effectively the firm uses its capital to generate profit; the higher the ROI, the better is the firm.



EBIT indicates the earnings of the company that how the company has earned income in the amount of capital they invested whether in form of debts.



With the help of EPS it is measured that how much the company is earning in each share. It shows how effectively the company has utilized its capital to generate income An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation.



DFL, Degree of Financial Leverage indicates that high degree of finance leverage indicates a proportionately high use of fixed income bearing securities in the capital structure of the company. A low degree of financial leverage indicates less use of fixed income bearing securities in the capital structure of the company. These all ratio‘s help me in knowing the capital structure different companies. The changes in different ratio indicates the capital of the company is effectively utilized or not and the capital structure of the company is effective or not. These ratios have helped me to know how different components of the company, which are related to the capital structure of the company has an effect on the profitability and the position or image of the company in the market. These ratios have helped us to know whether the company‘s capital structure is optimum or not. And whether these companies have utilized the capital of the company effectively.

Like in banking sector IDBI was the bank which was having high debts so their capital 68


structure is more reliable on borrowings that is they have made their capital through debts which they have taken and the SBI was the bank with more earnings among all the banks which clearly shows that they have utilized their capital effectively so as to generate an income. Now in pharmacy sector Wyeth was the company who was much reliable on their debts for capital. Earnings are also not very good in case of Wyeth. But Cipla has done quite well in this sector as they were not having much debt and their earnings are also high as compare to others. IT sector shows that Infosys is debt free company and there earnings are also high. Among all the companies in IT sector Infosys is the only company which is debt free and has good earnings as well as return on investments. But Mahindra Satyam, due to its scandal has suffered a lot in the market in the year 2009-2010. Almost all ratios like EBIT,EPS and many others has become negative due to that scandal which has obviously affect the capital structure of the company. Now when it comes to FMCG sector there were so many big companies under this sector which I have taken like HUL, ITC, P&G and many others but among all these P&G is the only company which is debt free and their earnings are also better as compare to other companies which are market leaders in the field. Last sector which is capital goods in which Siemens and ABB is highly reliable on debts for their capital and their earnings are also pretty good as compare to other companies of the same sector. These all are the findings through my research work that how the companies form their capital structure and make full utilization of so as to earn more out of it.

69


CONCLUSION Through this research work it has been concluded that many companies take so much amount of debt so as to form their capital structure to so that they can utilize it for their work so that they can earn more profit from their capital. It has also been understood that an optimum capital structure is when the companies are having less debts so that they have to pay less interest to it through there earnings or profit in a year. This research concludes that not all companies have debts to form their capital structure some companies arrange or form their capital structure by their own . So at last, I would like to say that a company with low debts and with good earnings form a good capital structure and has a huge potential to grow in the market.

70


BIBLIOGRAPHY 

Management Accounting by: KHAN AND JAIN

 http://www.google.co.in/  http://www.investopedia.com

 http://www.solutionmatrix.com  http://www.moneycontrol.com/

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Project Report Swati

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