capital structure of hindalco industries limited

7/30/2019 Capital Structure of Hindalco Industries Limited

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ON

(2008-09)

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ACCURATE INSTITUTE OF MANAGEMENT ANDTECHNOLOGY, GREATER NOIDA

(2008-2010)

Submitted To: Submitted By:R.S Tiwari Pradeep KumarHOD, MBA Deptt. Roll No. 0822570030

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ACKNOWLEDGEMENT

In an organization, be it an industry, a school or society, no outcomes can beachieved by one man working in isolation. Its always a group working andachieving the outcome in totality. It is the outcome of all the guidance andsupport that I received from this organization.

I would like to thank Mr. S.K. Das, G.M. (Training) for having arrangementmy training in this organization.

I would like to thank Mr. D.C. Kabra, Vice President (Fin. & A/Cs) for givingme a chance to work with this organization and for extending words of encouragement and wisdom.

I am also thankful to Mr. Gopal Purohit, G.M. (Fin. & A/Cs) , other members

of the Finance & Accounts Department for making available all resourcesrequired for the completion of this project report.

I would like to thank Mr. Vimal Raheja, Assist. Manager (Account &Finance) . His valuable guidance and constant encouragement have helped metremendously in the completion of this project.

In the last I would like to thank Mr.S.N.Roy (Lyzing Officer, Personal) Whohad helped me a lot by providing information & suggestions.

Last but not the least I would like to thanks my teachers without whosefeedback and encouragement, this project would not has been possible. Their help has gone a long way in successful completion of my project.

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TABLE OF CONTENTS

PAGESChapter No. 1

Company Profile 4-18

Chapter No. 2

Objective of Study & R.M. 19-21Chapter No. 3

Capital Structure 22-29

Leverage Analysis 30-33

EBIT-EPS Analysis 34-36

Cost Of Capital 37-46

Ratio Analysis 47-55

Chapter No. 4

Findings, Suggestion & Conclusion 56-59

Chapter No. 5

Annexure 60-64

Chapter No. 6

Bibliography 65-66

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Chapter No. 1

COMPANY PROFILE

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ADITYA BIRLA GROUP

INTRODUCTION

The Aditya Birla Group is India's first truly multinational corporation. Global in vision,

rooted in values, the Group is driven by a performance ethic pegged on value creation for its

multiple stakeholders. A US$ 28 billion conglomerate, with a market capitalisation of US$ 26

billion and in the League of Fortune 500, it is anchored by an extraordinary force of 100,000

employees belonging to over 25 different nationalities. Over 50 per cent of its revenues flowfrom its operations across the world.

The Group's products and services offer distinctive customer solutions worldwide. Its 85

state-of-the-art manufacturing units and sectoral services span 20 countries India,

Thailand, Laos, Indonesia, Philippines, Egypt, Canada, Australia, China, USA, UK,

Germany, Hungary, Brazil, Italy, France, Luxembourg, Switzerland, Malaysia and Korea.

A premium conglomerate, the Aditya Birla Group is a dominant player in all of the sectors in

which it operates. Among these are viscose staple fibre, metals, cement, and viscose filament

yarn, branded apparel, carbon black, chemicals, fertilisers, insulators, financial services,

telecom, BPO and IT services.

The Hewitt-Economic Times and Wall Street Journal Study 2007 have adjudged the Group

the best employer in India and among the top 20 in Asia.

Globally the group is:

A metals powerhouse, among the worlds most cost-efficient aluminium and copper

producers. Hindalco, from its fold, is a Fortune 500 company. It is also the largest aluminium

rolling company and one of the three biggest producers of primary aluminium in Asia, with

the largest single location copper smelter

No.1 in viscose staple fibre

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The third largest producer of insulators

The fourth largest producer of carbon black

The eleventh largest cement producer and the second largest in India

Among the best energy efficient fertiliser plants

Among the world's top 15 and India's top three BPO companies

In India, the Group holds a frontrunner position as:

Indias leading copper producer

A premier branded garments player

The second largest player in viscose filament yarn

The second largest in the chlor alkali sector

Among the top five mobile telephony players

A leading player in life insurance and asset management

Beyond businessA value-based, caring corporate citizen, the Aditya Birla Group inherently believes in the

trusteeship concept of management. Parts of the Groups profits are ploughed back into

meaningful welfare-driven initiatives that make a qualitative difference to the lives of

marginalised people. These activities are carried out under the aegis of the Aditya Birla

Centre for Community Initiatives and Rural Development, which are spearheaded by Mrs.

Rajashree Birla.

Indian Roots

Company Products / servicesGrasim Viscose staple fiber, rayon grade pulp,

cement, chemicals, sponge iron, textiles:: UltraTech Cement Ltd * Ordinary Portland cement, Portland blast

furnace slag cement, Portland pozzolanacement and grey Portland cement

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http://www.grasim.com/http://www.adityabirla.com/our_companies/indian_companies/ultratech_cement.htmhttp://www.grasim.com/http://www.adityabirla.com/our_companies/indian_companies/ultratech_cement.htm


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:: Shree Digvijay Cement * Cement and clinker Hindalco aluminium, copper :: Indian Aluminium Company Ltd * aluminium foil:: Bihar Caustic and Chemicals Ltd * Caustic soda

Aditya Birla Nuvo Garments, viscose filament yarn, carbon black, textiles

:: Idea Cellular Ltd. Cellular telecommunications:: Aditya Birla Insulators Limited Insulators:: Birla Sun Life Insurance Co.Ltd ** Insurance

:: Birla Sun Life Asset ManagementCompany Ltd. **

Mutual funds

:: Birla Sun Life Distribution CompanyLtd.**

Investment planning services

:: PSI Data Systems * Application development, maintenance andenhancement solutions

:: TransWorks * Customer relations management (CRM)services inbound customer service,including technical support; email / web-chatsupport; and outbound telemarketing.

:: Birla Global Finance Ltd * Asset-based finance, corporate finance andinvestment banking, capital market, treasury.

:: Birla Insurance Advisory Services Ltd Non-life insurance advisory services:: Madura Garments Garments

:: Hi Tech Carbon Carbon black Aditya Birla Retail Multi-format storesTanfac Industries Ltd. ** Fluorine chemicalsEssel Mining & Industries Ltd Iron and manganese ore mining, noble Ferro

alloys, nitrogen production

Joint Venture

Company Partner Key products / servicesBirla Sun Life InsuranceCompany Ltd.

Sun Life (Canada) Insurance solutions

Tanfac Industries Ltd. TIDCO (Tamil Nadu IndustrialDevelopment Corporation)

Fluorine chemicals

Birla Sun Life AssetManagement Company Ltd.

Sun Life (Canada) Mutual funds

Birla Sun Life Distribution Sun Life (Canada) Investment planning services

Great Employer

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http://www.adityabirla.com/our_companies/indian_companies/shree_digvijay_cement.htmhttp://www.hindalco.com/http://hindalco.com/about_us/tapping_new_markets.htmhttp://www.adityabirla.com/our_companies/indian_companies/bihar_caustic.htmhttp://www.adityabirlanuvo.net/http://www.adityabirla.com/our_companies/indian_companies/idea.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insulators.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/indian_companies/psi_datasystems.htmhttp://www.adityabirla.com/our_companies/indian_companies/transworks.htmhttp://adityabirlanuvo.co.in/products/financial_services.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insurance_advisory_service.htmhttp://www.adityabirlanuvo.net/products/garments.htmhttp://www.adityabirla.com/our_companies/indian_companies/hitech_carbon.htmhttp://www.adityabirla.com/media/press_releases/200705may/aditya_birla_retail_more.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/indian_companies/essel_mining.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/indian_companies/shree_digvijay_cement.htmhttp://www.hindalco.com/http://hindalco.com/about_us/tapping_new_markets.htmhttp://www.adityabirla.com/our_companies/indian_companies/bihar_caustic.htmhttp://www.adityabirlanuvo.net/http://www.adityabirla.com/our_companies/indian_companies/idea.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insulators.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/indian_companies/psi_datasystems.htmhttp://www.adityabirla.com/our_companies/indian_companies/transworks.htmhttp://adityabirlanuvo.co.in/products/financial_services.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insurance_advisory_service.htmhttp://www.adityabirlanuvo.net/products/garments.htmhttp://www.adityabirla.com/our_companies/indian_companies/hitech_carbon.htmhttp://www.adityabirla.com/media/press_releases/200705may/aditya_birla_retail_more.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/indian_companies/essel_mining.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htm


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Maybe you would like to take a crash course on branding, run a marathon or even go deepinto the hinterland to manage a water conservation project, or probably do all of these whileworking quietly on a global acquisition. At the Aditya Birla Group, opportunities are onlylimited by your imagination.

The $12 billion Indian conglomerate was ranked number one in India and among the best inAsia by Hewitt in their Best Employers Survey 2007. The India winners were chosen after asix-month long intensive research that included 230 participating companies and more than44,000 respondent employees, representing the views of more than one million employees.The Best Employers in Asia study spanned some of the most dynamic markets in Asiaattracting more than 750 employers. What is the DNA of a best employer? Contrary to the

popular belief, its not a lifetime employment guarantee or remuneration but anorganizations ability to provide customized solutions to an employees unique situation.Given the diverse range of organizations represented in the Best Employers in India list, to bethe best, parameters like industry size, ownership and legacy didnt matter. But what did,were metrics like employee engagement and alignment, opportunities for growth anddevelopment, performance differentiation, quality of HR initiatives and employee diversity.

THE JOURNEY OF SUCCESS OF ADITYA BIRLA GROUP The Aditya Birla Group, India's first multinational corporation, traces its origins back to thetiny village of Pilani in the Rajasthan desert, where Seth Shiv Narayan Birla started cottontrading operations in 1857. Today, the Group's footprint extends to 20 countries and itsrevenues are US$ 24 billion. We retrace the highlights of this remarkable journey, startingfrom the present:

2008With the acquisition of novelis Hindalco has become the worlds largest rolling company.Hindalco is now a global player with a strong presence in five continents and is in the

leageus of the top 7 global players. It product portfolio is a natural hedge against the volatilityof the LME .

2007:: In May 2007, Novelis became a Hindalco subsidiary with the completion of the

acquisition process. The transaction makes Hindalco the world's largest aluminiumrolling company and one of the biggest producers of primary aluminium in Asia, aswell as being India's leading copper producer.

2006:: Grasim Industries Limited, India; Thai Rayon Public Company Limited, Thailand and

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P.T. Indo Bharat Rayon, Indonesia form a JV with Hubei Jing Wei Chemical FibreCompany, China, for VSF.

:: Hindalco awarded the Greentech Safety Silver Award for its outstanding safety performance during 2005-06.

2005:: Indian Rayon re-christened as Aditya Birla Nuvo.:: Aditya Birla Group to set up a world-class aluminium project in Orissa.:: The Aditya Birla Group signs a framework agreement to acquire St Anne Nackawic

Pulp Mill, Canada.

2004 :: Board reconstituted with Mr. Kumar Mangalam Birla taking over as Chairman.:: Completion of the implementation process to demerge the cement business of L&T

and completion of open offer by Grasim, with the latter acquiring controlling stake inthe newly formed company UltraTech.

:: Grasim, Nagda, received the FICCI Annual Award 2003-2004 inrecognition of corporate initiative in rural development.

:: Bihar Caustic and Chemicals Ltd., Rehla, Jharkhand, has received theFICCI Annual Award 2003-2004 in recognition of corporate initiative in familywelfare.

:: Hindalco receives India CFO Award 2004 for excellence in finance in a largecorporate.

:: Scheme of Arrangement announced to merge Indal with Hindalco.:: Indian Rayon completes its Brownfield expansion of 40,000 TPA at Hi-Tech Carbon,

Gummidipundi, taking total capacity to 1,60,000 TPA.:: Deming Award for Indo Gulf.:: Indal wins FICCI Award 2002-2003 for 'Corporate Initiative in Rural Development'.

2003 :: Mr. Kumar Mangalam Birla, Chairman of the Group, is selected as Business India's

Businessman of the Year - 2003.:: Mr. Kumar Mangalam Birla is selected as The Economic Times' Business Leader of

the year.:: The Group is ranked 16th in India's first ever survey of 'Great places to work in',

published in Business World magazine. The Group's joint venture concern, Birla SunLife Insurance, is ranked 9th in the same study.:: The Group is ranked 20th in a study on the 'Best Employers in India', conducted by

Hewitt Associates and Business Today.:: Hindalco receives the Asian CSR Award for its "Rural Poverty Alleviation

Programme". The Asian CSR Awards are Asia's premier awards programme onCorporate Social Responsibility.

:: The Group acquires the Mount Gordon Copper mines in Australia, another strategicstep in becoming a globally competitive copper player.

:: Liaoning Birla Carbon, the Group's first carbon black company in China, is

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incorporated.:: Indian Rayon acquires TransWorks, a leading Indian ITES / BPO company.

SECTORWISE TURNOVER OF ADITYA BIRLA GROUP

The data on this page reflects the Group's operations for FY 2007-08

ALUMINIUM

Hindalco is Asias largest primary producer of Aluminium and among the

most cost-efficient producers globally. Hindalco enjoys a leadership

position in primary aluminium and downstream products.

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companys integrated complex at Renukoot houses an Alumina refinery, Aluminium Smelter

and facilities for production of semi fabricated products. Power is sourced from the

Companys captive power Plant at Renusagar, located at distance of about 45 km from

Renukoot. The Plant has a current generation capacity of 854 MW having 10 power

generating units. Excellent operation standards have ensured a consistent plant load factor of

over 90%. The integrated complex at Renukoot also houses two co-generation plants of 37.5

MW and 41 MW capacities respectively.

Besides the integrated complex at Renukoot, Hindalcos other manufacturing facilities are

located at many diverse locations in the country. Smelters are located at Hirakund, Orissa,

with a captive power plant and coal mines and at Alupuram, Karla. Rolled Product facilities

are located at Belur and Latoya and an Extrusions plant at Alupuram.

Production of Aluminium

Extracting Alumina from bauxite, and then smelting the alumina into aluminium, produces

primary aluminum. The extraction is alumina is accomplished through a chemical process.

This begins when bauxite chunks are crushed on wet ground to form slurry, which is fed into

digesters, where the alumina contents of bauxite are dissolved in caustic soda and the slurry is

separated into red mud and sodium alumina solution. Alumina hydrate is filtered and washed

free of caustic soda and then calcined in gas suspension calcine to produce calcined alumina.

In the final stage of aluminium production, calcined alumina is smelted into molten primary

aluminium into rods of electrolytic cells; the alumina is dissolved in molten cryolite

(Aluminium fluoride). The reaction in the cells is powered by electricity carbon anodes are

used in the process. The molten aluminium is crucibles are poured modules to form ingots or

billets of various sizes or transferred for further processing into semi-fabricated products. It

takes the company approximately two tons of yield one ton of primary aluminium.

Aluminium is the primary product of Hindalco.

It has following characteristics:

It is light; its density is only 1/3 rd of steel.

It is resistant to weather.

It can be used in contact with a wide range of foodstuff.

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It has a high reflective and finds many decorative uses.

It alloys can equal or even exceed. The strength of normal construction steel.

It is highly elastic.

It keeps its toughness down to very low temperatures.

It is easily worked and formed; it can be rolled to very thin foil.

It conducts electricity and heat nearly as well as copper.

Raw Materials

Bauxite

Hindalco obtained about 65% of its Bauxite requirement from its own mines and purchased

around 35% of the Bauxite from the market.

Caustic Soda

To Cates its caustic soda need the company has set up BCCL (Bihar Caustic and Chemical

Ltd.) in joint venture with the state government of Bihar. BCCL Cates around 90% of the

caustic needs of Hindalco. Rest is purchased from the Kanoria Chemicals and Industries Ltd.

Renukoot.

CP Coke

CP coke is baked with hard pitch to make carbon anodes, which are used in the process of

electrolysis.

Aluminium fluoride

It is used in the smelting process. The company buys almost all of its aluminium fluoride

from Tanfac Industries Ltd.

Hard Pitch

It is used along with CP Coke to make carbon anodes for the smelting processes.

Power

Power plays a vital role in the aluminium industry. It takes 16000 KW of power to produce

one ton of aluminium. Hindalco has its own captive power plant of 900 s MW situated 35 km

from its main plant at Renusagar. Hindalco also buys the deflect power from the state

government of U.P.

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Financial performance .

Net sales and turnover from aluminium business in fy-08 stood at Rs71450

million as compared with Rs73444 in FY-07 A DROP OF 3%, primarily on

account of a sharp decline in domestic metal realization , primarily a fall out of

sharp depreciation in US $ even as LME was almost flat . in US $ terms the

revenues increased by 9%.

Earning before interest & taxes(EBIT) declined by 17% to Rs 24,231 million

due to pressure on realization and increased costs. The cost increase was

primarily on account of a sharp surge in crude prices , which resulted in high

prices of its derivatives and also increased prices of alternative fuel such as coal.Aluminium producers across the globe experienced a sharp fall in EBIT.

COPPER

Copper Business

The copper business faced one of the most trying years in its entire nine years history.

Despite the high prevailing copper prices and improved long term and spot Tc/Rc ascompared to the previous year, business suffered on account of difficult operating conditions.

Production

The copper business suffered production disruption on account of various problems both

external and internal. The heavy rainfall in the state of Gujarat during the first week of July

resulted in flooding of plant as well as the neighbouring areas. Road transportation was cut-

off resulting in serious dislocations in the movement of essential input and personnel notgetting access to the site.

The 180,000tpa Smelter 1 had been working at less than optimal levels due to longer

campaign runs and underwent a 25 days over due BI-annual maintenance Shutdown in the

months of November- December 2005.

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Companys new smelter was commissioned in july2005.the commissioning of new copper

smelters always associated with a long-drawn ramp up process, and the experience at Dahej

was no exception.

Profitability

Net Sales and Operating Revenue fdxc Net sales and operating Revenue for the year 2007-08 increased by 5% YOY on the back higher volumes increased VAP tonnage and higher mark ups for both metals. A largeincreased in Net Sales and Operating Revenues was though negated by a sharp decline in USdoller.

Net profit increased 12% to Rs.28609 Million on account of tax adjustment for earlier year.Cash profit increased from Rs.32,024 Million to Rs.34487 Million.

Production Capacity

Division Capacity LocationAlumina

Chemicals

1,60,000 tpa 7,00,000 tpa (Renukoot) , 1,10000 tpa (Muri)

3,50000 tpa (Belgaum)Primary

Aluminium

4,45,000 tpa 3,45,000 tpa (Renukoot) , 1,00,000 tpa (Hirakund)

14,000 tpa (Alupuram)Extrusions 42,000 tpa 30,000 tpa (Renukoot) , 12,000 tpa (Alupuram)Rolled Products 2,00,000 tpa 80,000 tpa (Renukoot) , 45,000 tpa (Begum)

45,000 tpa (Taloja) , 3,00,000tpa(mouda)Wire Rods 64,400 tpa 40,000 tpa (Renukoot) , 10,000 tpa (Alupuram) ,14,400

tpa(mouda)

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Aluminium foil 11,000 tpa 5,000 tpa (Silvassa) , 6,000 tpa (kalwa)Aluminium

Wheels

3,00000 tpa Silvassa

Copper

Cathodes

5,00000 tpa Dahej

Power 187.2mw 741.7mw (Renu Sagar), 78mw (Renukoot),267.5mw

(Hirakud)

BUSINESS PERFORMANCE REVIEW

As stated earlier, Company has recorded its best ever performance during fiscal

2007-08.A snapshot is provided below

Aluminium

Rs. MnShare

Copper

Rs. Mn.Share

Unallocable Total

Rs. Mn

Net Sales &OperatingRevenue

71,45037.43%

120,65562.81%

(94) 192,105

EBIT 24,23182.80%

5,03412.20%

3,797 29,265

EBITMargins(%)

33.91% 4.17% _ 38.08%

CapitalEmployed

71,41437.19%

1,20,59662.81%

85,275 1,92,010

ROCE(%) 33.93% 4.17% 17.93%

Graphical Representation of EBIT

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PRIMARY ALUMINIUM PRODUCTS OF HINDALCO

Hindalco is a dominant player in primary aluminium, with over 42 per cent market share. Its product range includes

IngotsHindalco produces high purity ingots through the smelting process. Alloyingots of various grades are also produced mainly used for production of castings in Auto Industry as well as electrical applications. Both these

products are re-melted and further processed into a large number of productsfor various downstream applications. Hindalco's metal is a registered brand atLondon Metal Exchange (LME).

Wire rodsHindalco manufactures wire rods, in a continuous casting and rolling process.Electrical Conductor (EC) wire rods are used for the production of cables,

ACSR and AAC conductors. Alloy wire rods are used to produce AAACconductors.

BilletsHindalco's aluminium billets are produced by a state-of-the-art Wagstaff casting process using Airslip technology. These are top quality billets with asmooth surface finish. Billets are used mainly for producing extrusions andforgings.

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Hindalco Extrusions are manufactured from high-quality billets made out of virgin in-house

metal. They have found applications in a wide spectrum of segments, such as, architectural,electrical, industrial, transport, defence and consumer durables among others. HindalcoExtrusions is a leading brand in each of these segments.

HINDALCOS ROLLED PRODUCTS

Hindalco is the world's largest aluminium rolling company with theacquisition of Novelis, the global leader in value-added high-end

aluminium flat rolled products and aluminium can recycling. Thecombined volume of sales of flat rolled products in the world market isabout 3 million tonnes and the market share is more than 20 per cent.

Hindalco is the largest manufacturer of the entire range of flat rolled products in India. Itenjoys nearly 60 per cent of market share and its rolled products are widely used in varioussegments such as packaging, transportation, building and construction, electrical, defence andgeneral engineering applications.The company's commitment to quality and service along with its extensive infrastructure hasmade Hindalco a prime source for best-selling brands. Continuous improvements inmanufacturing, processes, practices and systems ensure that customers' needs and

expectations are fully met.

FOIL AND PACKING,

Hindalco's Foils and Packaging Division operates out of threemodern, well-equipped plants located at Kalwa inMaharashtra, Silvassa in Dadra & Nagar Haveli and itssubsidiary unit Indal Kollur, in Andhra Pradesh. The 'Tri-Plant' advantage gives the Hindalco Foil marketing team aseamless 'One Stop Shop' approach to an entire range of

products.All plants employ high-end technology and professional expertise to develop visuallyappealing and functionally useful packaging. Delivering 'not-tried-before' solutions tocustomers in India and across the globe, Hindalco's Foil and Packaging Division has thedistinction of being India's leading supplier of foil laminates plain, lacquered and printed.

Hindalco's complete backward integration, right down to the raw material stage from bauxiteore to primary metal, guarantees full control over the quality of the final foil output.

ALLOY WHEELS

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Hindalco manufactures world-class aluminium alloy wheels at its state-of-the-art foil plant located at Silvassa, Dadra and Nagar Haveli, wherealloy wheels and aluminium foil are produced. This has helped thecompany to optimise capacity and enhance the share of value-addedsemi-fabricated products.

The 300,000-piece alloy wheel plant is progressively increasing production.

Branded as Aura alloy wheels, these high performance wheels are available for nearly allvehicles running on the Indian roads. Maruti-Suzuki, Tata Motors, Fiat India and HM-Mitsubishi India have already approved them for original equipment supplies. The vendor approval process is on with a number of other automobile manufacturers.

CONCLUSIONAs the conclusion the company has delivered a record performance amidst challenging

business environment. The company has challenged out expansion in alumina and aggressivegrowth plans in aluminium. The efforts will be collected by an excellent proportionaterelationship between equity and debt.

Therefore the company is evident of success of these efforts in transforming the company tothe league of Global Top-10 in both the metal and deliver superior value to stakeholderseven in the future.

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Chapter No. 2

OBJECTIVE OF STUDY&

RESEARCH METHODOLOGY

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OBJECTIVE OF STUDY

To know about the capital structure and combination of debt and equity.

The objective of study involves understanding of different aspect of capital structure.

To study the different aspect related to capital structure of Hindalco Industries

Limited which contributes most to make Hindalco one of the lowest cost producers in

profit involving organization in the world.

To have deep study about the financial leverage of the organization

To study various approaches to establish target capital structure.

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RESEARCH METHODOLOGY

Research methodology used here is purely exploratory. It is used when one is seeking into thegeneral nature of the problem, possible decisions alternatives and relevant variables that needto be considered

The research methodology is highly flexible, unstructured and qualitative. Exploratoryresearch hypothesis are either vague or ill defined, or they do not exists at all.

Sampling Plan

There has been no sampling plan as such as the study involved understanding the various process and analysing them. The study involved the detailed analysis of secondary datacalculated from various sources and therefore no sample size and plan has been considered.

Data Source

Data has been collected trough literature survey and expert opinion. Literature surveyincludes the collection of data from various sources like study material.

The part of data is collected from primary source and other from secondary source.

Primary source

Information gathered by interview and discussing with the members of department.

Secondary source

Company annual reportSelected books and magazines.

Data Analysis

To analysis data I use different financial tools and techniques.

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Chapter No. 3

CAPITAL STRUCTURE

Meaning of capital structure

Pattern of capital structure

Optimum capital structure

Sources of funds

Equity verses Debentures

FRICT Analysis

Theories of Capital structure

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CAPITAL STRUCTURE

INTRODUCTION

For the establishment of a firm, assets are required and assets of the company can be financed

either by increasing owners claim or creditors claim. The owners claim increase when firm

raises fund by issuing ordinary shares or by retaining the earning; the creditors claims

increases by borrowing. The various means of financing represent the financial structure of

the enterprise.

MEANING

Capital structure refers to the mix of sources from where the long-term funds required in the

business may be raised. Simply put, capital structure is used to represent the proportionate

relationship between debt and equity. Equity includes paid up share capital, share premium

and retained earnings. Capital structure decision is a significant decision. It influences

shareholder return and risk. Consequently, the market value of share may be effected capital

structure decision.

The company have to plan its capital structure initially at the time of promotion.

Consequently, whenever funds have to be raised to finance investments, a capital structure

decision is involved. A demand for raising funds generates a new capital structure a decision

has to be made to the quantity and forms of financing. This decision will involve an analysis

of the existing capital structure and the factors, which will govern the decision at present. The

companys policies to retain or distribute earnings affect the owners claim. Shareholders

equity position is strengthened by retention of earning. Thus, the dividend decision has a

bearing on the capital structure of the company. The new financing decision of the company

may be its debt-equity mix. The debt equity mix has implications for the shareholders

earnings and risk, which in turn will affect the cost of capital and the market value of the

firm.

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PATTERNS OF THE CAPITAL STRUCTURE

In case of new company, the capital structure may be of any of the following patterns:

Capital Structure with equity shares onlyCapital Structure with equity and preference shares

Capital Structure with equity and debentures

Capital Structure with equity, preference shares and debentures

Debt is the liability on which interest has to be paid irrespective of the company profits.

While equity consists of shareholder or owners funds on which payment of dividend

depends upon the companys profit. A high proportion of debt content in the capital structure

increases the risk and may lead to financial insolvency in adverse time. However, rasingfund through debt is cheaper as compared to financing through shares. This because

figure-3 interest on debt is allowed as an expense for taxes purpose. Dividend is

considered to be an appropriation of profits; hence payment on dividend does not result in

any tax benefit to the company. This means if accompany, is in 50% tax bracket, pays

interest at 12% on its debentures, the effective cost to it comes only 6% while if the

amount is raised by 12%Preference shares, the cost of raising the amount would be

12%. Thus rasing the funds by borrowing is cheaper resulting in higher availability of profit for shareholders. This increases the earning per share of the company, which is

the basic objective of the finance manager.

OPTIMUM CAPITAL STRUCTURE

A firm should try to maintain an optimum capital structure with a view of to maintain

financial stability. The optimum capital structure is obtained when the market value per

equity share is the maximum. It may be defined as that relationship of debt and equity

securities which maximizes the value of a companys share in the stock exchange. In case a

company borrows and this borrowing helps in increasing the value of companys share in the

stock exchange, it can be said that the borrowing has helped the company in moving towards

its optimum capital structure; In case, the borrowing results in fall in market value of the

companys equity shares, it can be said that the borrowing has moved the company from its

optimum capital structure.

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The objective of the firm should therefore be to select the financing or debt equity mix, which

will lead to maximum value of the firm.

CONSIDERATION

The following considerations will greatly help a finance manager in achieving his goal of optimum capital structure:

We should take advantage of favourable financial leverage.

We should take advantage of the leverage offered by the corporate taxes.

We should avoid a perceived high risk capital structure.

SOURCES OF FUNDS Security financing- This includes financing through shares including both equity and

preference shares and debentures.Internal Financing This includes financing through depreciation funds and retainedearnings.Loan Financing- This includes both short term and long-term loans .

EQUITY SHARE VERSUS DEBENTURES

A company may prefer financing through debenture as compared to equity shares on account

of following reasons:Interest on debenture is allowed as an expense for tax purpose.Debenture holds have generally no say in the management of the companyUnderwriters may have little hesitation in accepting the companys proposal sincedebentures are adequately backed by the companys assets.

Moreover, the company may find it beneficial to pay short-term loan by raising funds throughdebentures at a time when interest rates on such loans are higher as compared to the interestrate payable on the debentures. However, the company cannot go an unlimited extent of financing through debentures. It has to strike a balance between risk and saving effected by

27

Sources of Funds

Security Financing Internal Financing Loan Financing


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COST OF CAPITAL

Cost is an important consideration in capital structure decision. It is obvious that a business

should be at least capable of earning enough revenue to meet its cost of capital and finance its

growth. Hence, along with a risk as a factor; the finance manager has to consider the costaspect carefully while determining the Capital Structure.

CONTROL

Along with cost and risk factor, the control aspect is also an important consideration in

planning the Capital Structure. When a company issues further equity share. It automatically

dilutes the controlling interest of the present owners. Similarly, preference shareholders can

voting rights and thereby affect the composition of the Board of Directors in case dividend on

such share is not paid for two consecutive yearsTRADING ON EQUITY:

A company may raise funds either by the issue of shares or by borrowings. Borrowings carry

a fixed rate of interest and this interest is payable irrespective of fact where there is profit or

not. Preference shareholders are also entitled to a fixed rate of dividends but payment of

dividend is, subject to the profitability of the company. In case of rate of return on the total

capital employed i.e. shareholders funds plus long term borrowings, is more than the rate of

interest on borrowed funds or rate of dividends on preference shares, it is said that companyis trading on equity.

CURRENT YEAR (2007-2008)

i

29

32%

67%


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0

20000

40000

60000

80000

100000

120000

140000

Proportionof Financial

Mix

Years

Capital Structure of Hindalco for Four Years

Share CapitalReservesLoan Fund

Share Capital 1043 986 928 925

Reserves 123137 95077 75644 67654

Loan Fund 73686 49034 38000 25646

2006-07

2005-06

2004-05

2003-04

The graph above clearly depicts that the proportion of debt in the financing mix of Hindalcois much more as compared to share capital. The debt content is 37% whereas the proportionof share capital and reserves and surplus is 1% and 62% respectively.

s2003-04 to 2007-08

THE FRICT ANALYSIS

A financial structure may be evaluated from various perspectives from owners point of view,return; risk and value are important consideration. From the strategic point of view, flexibilityis an important concern and flexibility assumes great significance. A sound capital structurewill be achieved by balancing all these consideration:

FLEXIBILITY: the Capital Structure should be determined within the debt capacityof the company and this capacity should be flexible. It should be possible for acompany to adapt its Capital Structure within a minimum cost and delay if warranted

by a changed situation.

RISK: risk depends on the variability in the firms operation. It may be caused bymacro economic factor and industry and firms specific factor. The excessive use of debt magnifies the variability of shareholders earnings and threatens the solvency of the company.

30

122617173683285

FY-08


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INCOME: The Capital Structure of the company should be most advantageous tothe owners of the firms. It should create value; subject to other consideration. Itshould generate maximum return to the shareholders with minimum additional cost.CONTROL the Capital Structure should involve the minimum risk of loss of controlof the company. The owner of closely held companies is particularly concerned aboutdilution of control.

TIMING: The Capital Structure should be feasible to implement given the currentand future condition of the capital market. The sequencing of source of financing isimportant. The current decision influences the future option of raising capital.

The FRICT analysis provides the general framework for evaluating firms Capital Structure.

THEORIES OF CAPITAL STRUCTURE

The objective of firm should be directed towards the maximisation of the value of the firm,

the Capital Structure, or leverage decision should be examined from the point of view of its

impact on the value of the firm. If the values of the firm can be affected by Capital Structure

or financing decision, a firm would like to have a Capital Structure, which maximize the

market value of the firm.

There are broadly four approaches in this regard. These are:

Net Income Approach

Net Operating Income Approach

Traditional Theory

Modigliani-Miller Approach

These approaches analysis relationship between the leverage, cost of capital and the values of

the firm in different way. However, the following assumptions are made to understand these

relationships.

1. There are only two source of funds i.e. debt and equity

2. The total assets of firm are given. The degree of leverage can be changed by selling

debt to repurchase shares or selling shares to retire debt.

3. There are no retained earnings

4. The operating profit of firm is given and expected to grow.

5. The business risk is assumed to be constant and is not affected by the financing mix

decision.

6. There are no corporate taxes.

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7. The investors have the same subjective probability distribution of expected earnings.

LEAVERAGE ANALYSIS

Financial leverage

Relationship between financial leverage & rate of return.

Determination of whether Hindalco is trading on Equity.

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LEAVERAGE ANALYSISFinancial leverage is defined as the ability of a firm to use fixed financial charges to

magnify the effect of change in E.B.I.T on the firms earning per share. The financial

leverage occurs when a firms Capital Structure contain obligation of fixed financial charges.For instance, interest on debentures, dividend on preference share etc., along with owners

equity to enhance earning of equity shareholders. The fixed financial charges do not vary

with the operating profit. They are fixed and are to be paid irrespective of level of operating

profit. The ordinary shareholders of firm are entitled to residual income i.e. earning after

fixed financial charges.

Favourable and Unfavourable Financial leverageFinancial leverage may be favourable or unfavourable depending upon whether the earning

made by the use of fixed interest or dividend bearing securities exceeds the explicit fixed

cost, the firm has to pay for the employment of such funds or not. The leverage will be

considered to be favourable so long the firm earns more on assets purchased with the funds

than the fixed cost of their use. Unfavourable leverage occurs when the firm does not earn as

much as the funds cost.

Significance Of Financial Leverage

Financial leverage help in deciding the appropriate Capital Structure. One of the objectives of

planning an appropriate Capital Structure is to maximize the return on equity shareholders

funds or maximize the earning per share.

Financial leverage is double-edged sword . On one hand, it increases the earning per share

and on the other hand it increases the financial risks high financial leverage means high

fixed financial cost and high financial risk i.e. as the debt content in Capital Structureincreases, the financial leverage increases and at the same time the financial risk is also

increases i.e. risk of insolvency increases. The finance manager is required to trade-off

between risk and return for determining the appropriate amount of debt.

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(Rs. in Millions) i

Relationship between financial leverage & required rate of return

i

1.03

1.04

1.05

1.06

1.07

1.08

1.09

1.10

1.11

1.12

1.13

2006-07 2005-06 2004-05 2003-04

Degree of financialleverage

Years

Financial leverage of Hindalco

Degree of f inancialleverage

34

Particulars 2007-08 2006-07 2005-06 2004-05 2003-04

Net sales & operating

income

1,92,010 183130 113965 95231 62262

Total expenditure 157999 (142980) (87914) (72465) (47113)

Operating profit 34011 40150 26051 22766 15149

Other income 4929 3701 2439 2700 2093

Depreciation 5878 (6381) (5211) (4633) (3174)

EBIT 33062 37470 23279 20833 14068

Interest charges 2806 (2424) (2252) (1700) (1612)

PBT 30256 35046 21027 19133 12456

Degree of financialleverage

1.09 1.07 1.11 1.09 1.13


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Relationship between financial leverage and firms required rate of return to

equity shareholders with corporate tax is given by:

Re = Ro + D/E (1-T) (Ro-Rb)

Where,

Re = required rate of return to equity shareholders

Ro = required rate of return for an all equity firm.

Rb = required rate of return to lenders

EXPLANATION:

The above graph clearly depicts that with higher debt content Re i.e. required rate of return

by shareholders is going up while TWACC is getting lower.

Determination of whether Hindalco is Trading on Equity

Trading on Equity

A company may raise funds either by issue of shares or by debentures. Debentures carry a

fixed rate of interest and this interest has to be paid irrespective of profits. Of course,

preference share are also entitled to a fixed rate of dividend depends upon the profitability of

the company. In case, the rate of return on the total capital employed is more than the rate of interest on debentures or rate of dividend on preference shares, it is said that company is

trading on equity.

Rate of return on equity shareholders fund

=PAT/Equity shareholders fund

= 28609/174359

= 16%

General rate of return = (PAT + Interest) / Total capital employed

= 31415/270881

= 11%

The general rate of return is only 11% while the return on equity shareholders fund is 16%.

Thus, we can say that Hindalco is trading on Equity.

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EBIT-EPS ANALYSIS

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EBIT-EPS Analysis

The design of an appropriate capital structure is one of the major decision areas in financial

management.

A widely used financial technique to design an appropriate capital structure is E.B.I.T-EPSanalysis. As a method of capital structure planning, it essentially involves the comparison of alternative methods of financing under various assumptions of E.B.I.T. the choice of combination of source with the capital structure would be one that, for a given level of E.B.I.T. would ensure the largest EPS. Alternatively, the choice of combination shouldensure the maximum market price per share.

MPS = EPS * Price-Earning ratioii

(Rs. in million)Particulars 2007-08 2006-07 2005-06

EBIT 33062 37470 23279

Interest Charges 2806 (2424) (2252)

PBT & Extraordinary items 30256 35046 21027

Extraordinary items - - 30

PBT 30256 35046 21057

Provision for Current Tax 6063 (9841) (3241)

Provision for Deferred Tax 875 551 (1160)

Provision for fringe benefit tax 114 (113) (101)

PAT 28609 25643 16556

No. Of Shares Outstanding 1167151498 1004921647 986116213

EPS 24.51 25.52 16.79

ii Figures in brackets indicates negative value

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0

10

20

30

EPS

2006-07 2005-06

Years

Earning Per Share of Hindalco

EPS

INTERPREATION:

In FY-2007, The EPS of Hindalco was Rs. .25.52. But In FY-2008, It decrease to Rs. 24.51 . .This change may be due to fluctuation in the sales value and operating leverage. It is obviousthat net profits Hindalco greatly with small fluctuation on sales figure especially because of high fixed costs. Hence, EPS fluctuated. The Financial Leverage may heighten this effect.

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COST OF CAPITAL

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COST OF CAPITAL

The cost of capital is a significant factor in designing the capital structure of an undertaking.The basis reason behind running a business undertaking is to earn a return at least equal to itscost of capital. Commercial undertaking has no relevance if it does not expect to earn its costof capital. Therefore, cost of capital constitutes an important factor in various businessdecisions.

The cost of capital estimate for a business is used for two purposes:Evaluating the performance of a business: - The operating profit generated by a

business is evaluated against the minimum profit that the business is expected to generated asimplied by the cost of capital for that business. The profit generated by the business over andabove the minimum profit expectation is termed as the Economic Value Added (EVA) for that business.

Evaluating capital investment projects: - All projects that generate a return over andabove their respective cost of capital are EVA positive by nature and therefore value adding.The appropriate cost of capital is used therefore to evaluate such projects into those that addvalue and those that do not, thereby enabling financial decision-making.

MEASUREMENT OF COST OF CAPITAL

Cost of DebtThe explicit cost of debt is the interest rate as per contract adjusted for tax and the cost of

raising the debt.

C ost of irredeemable debentures

Cost of debentures not redeemable during the lifetime of the company.

Kd = I/NP * (1-T)

Where,Kd = Cost of Debt after taxI = Annual Interest Rate

NP= Net Proceeds of debenturesT = Tax rate

Cost of redeemable debenture

If the debenture were redeemable after the expiry of a fixed period the cost of debenturewould be:

Kd = I (1-t) + (RV-NP) / N (RV + NP) /2

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Where,I = Annual Interest PaymentNP = Net Proceeds of DebentureT = Tax Rate

N = Life of Debentures

Cost of Preference Share

In the case of preference share, the dividend rate can be taken as its cost since it is thisamount, which the company intends to pay against preference shares. As in the case of debt,the issue expenses or the discount / premium on issue/ redemption has also to be taken intoaccount.

Cost of irredeemable share = PD/ PO

Where,PD = Annual preference dividendPO = Net proceeds in issue preference share-

Cost of redeemable preference share

If the preference share were redeemable after the expiry of a fixed period the cost of preference share would be.

KP = PD + (RV-NP) / N(RV + NP) /2

Where,PD = Annual preference dividendRV = Redemption value of preferenceNP = Net proceeds an issue of preference shareN = Life of preference share

Cost of ordinary of Equity share

Calculation of the cost of ordinary share involves a complex procedure. This is becauseunlike debt and preference share there is no fixed rate of interest or dividend against ordinaryshares. Hence, to assign a certain cost to equity share is not a question of mere calculation. Itrequires an understanding of many factors basically concerning the behaviour of investor andtheir expectations. Since there can be different interpretations of investors behaviour, therefare many approaches regarding calculation of cost of equity share.

The four main approaches are:(1) D/P (Dividend /Price)(2) E/P (Earning /Price) ratio(3) D/P + g (Dividend /Price + Growth rate of earning) and(4) Realized yield approach

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1) D /P- ratio (Dividend Price) approach

This emphasizes that dividend expected by an investor from a particular company; do so inthe expectations of ascertain return. In other words, when an investor buys ordinary shares of a certain risk, he accepts a certain return. The accepted rate of return is the cost of ordinaryshare capital. Under this approach, therefore, the cost of ordinary share capital is calculatedon the basis of the present value of the expected future stream of dividend.

Ke = D / NPWhereKe = Cost of equityD = DividendNP = Net proceeds of share

2) E /P (Earnings / Price) ratio approachIn this approach, the cost of ordinary share capital is based upon the expected rate of earnings

of a company. The investor expects a certain amount of earnings whether distributed or not from the company.

Ke = E / NPWhereE = EarningNP = Net proceeds of shares

3) D / P + growth approach

This approach emphasis upon investor what actually expects to receive from his investmentsin a particular ordinary share in terms of dividend plus the rate of growth in dividend /earnings. This growth rate in dividend (g) which taken to be equal to the compoundgrowth rate in earning per share.

Ke = D / P + gWhereD = Dividend per shareP = Market price of the shareG = Growth rate

4) Realized yield approach

This approach considers the basic factor of the D/P + g approach but, instead of using theexpected values of the dividend and capital appreciation, past yields are used to denotethe cost of capital. This approach is based upon the assumptions that past behaviour will be repeated in future and therefore, may be used to measure the cost of ordinarycapital.

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COST OF RETAINED EARNINGS

The companies do not generally distribute the entire profits earned by them by way of dividend among their shareholders. They retain some profits for future expansion of the

business. The amount retained by company, if it had been distributed among theshareholders by way of dividend, would have given them some earning. The companyhas deprived the shareholders of these earnings by retaining a part of profit with it.Thus, the cost of retained earnings is the earning forgone by the shareholders. Simply,stated, the opportunity cost of retained earnings may be taken as the cost of the retainedearnings. It is equal to the income that shareholders could have earned by placing thesefunds in alternative investments.

WEIGHTED AVERAGE COST OF CAPITAL

The composite or overall cost of capital of a firm is the weighted averages of the cost of various sources of funds. Weights are taken to be the proportion of each source of funds in the capital structure. While making financing decision this overall or weightedcost is used. Each investment is financed from the pool of funds, which represents thevarious sources from which funds have been raised. Any decision of investmenttherefore has to be made with reference to the overall cost of capital and not withreference to cost of specific source of funds.

WACC = WI * KI + W2 * K2 + + Wn * Kn

Calculation of the cost of capital

The elegance of a theory lies in its practical application. The theory of measuring cost of capital is not simple. Hindalco was founded in 1962. It is a large integrated aluminium,copper, chemical, foil, wheel, carbon etc. It has a total sale of Rs. 183,130 million, totalgross assets of Rs. and net profit of Rs. 25,643 million in 2007.

The average market price of Hindalco one share in 2007 was Rs. 177. The market value of the companys equity is obtained by multiplying the number of the outstanding shares() by the average share price. The market value of debt is assumed to be equal to the

book value. On Hindalcos EPS, DPS, Payout, average share price, dividend yield,earning yield, price to book value per share and ROE for the years 1996 to 2007

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HINDALCO FINANCIAL DATA 1996-2007

Years EPS(Rs.)

DPS(Rs.)

B.V.of share

Dividendpayoutratio (%)

DividendYield(%)

EarningYield(%)

ROE(%)

1996-97 4.94 0.45 30.74 9.00 1.50 16.07 18.48

1997-98 6.27 0.53 36.83 9.50 1.40 17.02 19.72

1998-99 7.16 0.65 43.72 9.00 1.40 16.37 18.90

1999-00 7.74 0.80 51.02 10.00 1.50 15.17 18.01

2000-01 8.57 1.20 58.80 14.00 2.00 14.57 16.58

2001-02 8.67 1.35 61.53 16.50 2.00 14.09 16.70

2002-03 5.92 1.35 66.95 22.00 2.00 8.84 15.05

2003-04 8.53 1.65 74.16 19.00 2.00 11.51 15.00

2004-05 13.48 2.00 82.54 15.00 2.40 16.33 17.88

2005-06 16.79 2.00 97.40 13.00 2.30 17.23 20.50

2006-07 25.52 1.70 118.97 7.90 1.30 19.59 20.45

2007-08 24.51 1.85 142.09 9.3 1.12 16.41

Estimation of Hindalcos Cost of Equity

There are two approaches for calculating the cost of equity1. The constant dividend-growth model2. The capital asset pricing model (CAPM)

Dividend Growth Model

The formula for calculating the cost of equity is as follows: DIV 1

Ke = -------- + gP 0

Where the first term DIV / P 0 is the dividend yield and the second term g, is the expected(constant) growth in dividends. Hindalcos dividend yield in 2007 is . The dividend yield of the company has varied between

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Estimation of Growth Rate

In practice, four methods may be used to estimate the growth rate:

1) Internal growth :- Growth may be approximately by calculating the product of retention ratio and return on equity (ROE)

g = Retention ratio * ROE

This approach may be used when the firm has a stable dividend policy. Hindalcos payoutratio has fluctuated over years. However, on an average, it has distributed about 13% of itsnet profit and retained 87% in the past decade. In the most recent year 2006 is 2006, itretained about 85% of its profit. The companys ROE in 2006 is 20.50% and 10 yearsaverage is 17%. Assuming that the current retention ratio of 85% and ROE of 17% will

continue in the future, then Hindalco is expected to grow at % year.

G = Retention ratio* ROE = 0.85*0.17 = 14%

The constant growth model has its limitation. It is not application to those companies, whichhave highly unstable dividend policy (or retention ratio) and fluctuating ROE. One way toovercome this limitation is to estimate Ke for a large sample of companies of equivalent risk in the same industry a use the average k, as an approximation of the cost of equity of thecompany under consideration.

2) Past average growth : - In practice, growth may be based on past EPS rather DPS

since companies do not change their DPS frequently with changes in EPS. Thus, DPS

grows at a slow rate. The average of EPS past growth rates may be used as a proxy for

the future growth. There are two alternatives available for calculating the average (1)

the arithmetic average and (2) the geometric average. These two methods will give

different estimates of the average growth rate. The geometric average will give a

compounded average and is preferable when there is much variability in EPS data.

The geometric average EPS growth rate for Hindalco for the period 1996 to 2006 is as

follows:

EPS n EPSo (1 + g) n

EPS n(1+g) n =--------

EPSo

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3) Regression approach for estimating growth:- Both arithmetic average

geometric methods of calculating growth have limitations. Simple average methods of

calculating growth have limitations. Simple average gives the same weight to each

years earning while geometric average estimates a compounded rate based on onlytwo observations. Both techniques are quite inadequate to use when earning are

widely fluctuation. The regression technique estimates growth over time (t)

incorporating all observations. The linear regression model is as follows:

EPS 1 = a + bt

The linear model indicates growth in terms of rupees. A better method is the log-linear

regression model, which estimates growth in percentage term:In (EPS) is natural logarithm of EPS. The slope of the regression line (1+g) and it is

estimates as follows:

Yt In EPSIn (1+g) = -----------------

Yt

Where Yt is Y 1-Y

9.0989In (1+g) = ----------- = 0.1123

82.98

Taking anti-log on both sides, we get

1+g = 1.1198g = 1.1198-1 = 0.1198 or 12%

The growth rate estimated according the different methods are summarized. The growthrate estimated by log-linear model is the most appropriate since Hindalcos EPS are

highly variable. Thus, for the calculation of the Hindalcos cost of equity, we shall

assume that the future dividend rate will be the same as the current dividend yield (2.3%)

is and that the future growth will be 12%. According to the dividend-growth model,

Hindalcos cost of equity will be as follows:

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Div 1K e = ---------------- + g

P 0

K e = 2.3%+12% = 14.3%

Estimate of growth rate and cost of equity

Method Growth Rate Cost of Equity

Internal growth 8.8% 11.1%Arithmetic average 20.8% 23.1%Geometric average 12.4% 14.7 %Long linear growth 12.0% 14.3%

For different growth rate, Hindalcos cost of equity is calculated. It variesBetween 11.1% to 23.1%. The geometric average and the long linear growthMethods give almost the same estimates for the growth rate and the cost of Equity, i.e. about 14-15%, for Hindalco. This seems to be a reasonable estimateOf Hindalcos cost of equity.

Capital Asset Pricing Model

An alternative model for calculating Hindalcos cost of equity is the capital assetPricing model (CAPM). The use of CAPM requires the following information.

The expected risk free rate of returnThe expected risk premiumBeta of Hindalcos returns

Risk free rate The risk free rate is generally approximated by the highly liquid, short-Term government security. The yield on one-year government bonds in India is about

10%. This could be used as a proxy for the risk free rate.

Market premium The difference between the expected market rate of return and theRisk free rate of return is the expected market premium. There are no estimates of theMarket premium available in India. The average monthly sensex return during the periodApril 2003 to 2006 has been 8%. This implies an annual market rate of return 68%

HINDALCOS COST OF DEBT

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HINDALCO has both short term (monthly bank borrowing) and long-term debt. It also hascurrent liabilities such as cretitors. What is the cost of current liabilities? Should it beincluded in the computation of weighted cost of capital? There is no unanimity on this issue.The majority view is that current liabilities do not involve any explicit cost, and therefore,should be excluded from the cost of capital calculation.

An alternative view is that they involve implicit cost of current liabilities? Since they involvethe same risk as bank borrowing, the before tax cost of current liabilities can be treated equalto bank borrowing. We have ignored current liabilities in the calculation of Hindalcos cost of capital. Hindalco has 85 percent short term and 15 percent long-term debt. Bank borrowing and other short term debts cost about 16 percent and long term debt about 14 percent in India. We mayassume that Hindalcos will these costs in obtaining debt in future. Further, if we assume thatHindalcos short-term debt will continue to be 85 percent and long term about 14 percent inIndia we may assume that HINDALCO will incur these costs in obtaining debt in future.

Further if we assume that Hindalcos short term debt will continue to 85 percent and longterm debt and 15 percent and that corporate tax will be 35 percent, then the after tax weightedmarginal cost of its debt will be:WEIGHTED COST OF DEBT = 0.16(1-0.35)*85= 0.14(1-0.35)* 0.15

=0.0884 =0.0136=0.102 OR APPROX 10%HINDALCOS WEIGHTED AVERAGE COST OF CAPITAL

We have estimated Hindalcos cost of equity and cost of debt. If we know the targetcapital structure, we can estimate Hindalcos weighted average cost of capital. Target capitalstructure may be expressed in the book value or market value. Let us assume that thatHindalcos will maintain its current capital structure in the future. ITS WEIGHTEDAVERAGE COST OF CAPITAL will be as follows:

HINDALCOS weighted average cost of the capital is about 11 or 12 percent. Its market

value weighted average cost of capital is slightly higher than book value weighted average

cost of capital since the market value of equity is more than the book value .IF Hindalco is

48

Sources of cost of capital weight weighted costCapital BV MV BV MV

Equity Debt 0.12 0.72 0.84 0.086 0.101

0.10 0.28 0.16 0.028 0.016

Total 0.114 0.117


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considering an investment project of average risk that has the same capital structure as the

Hindalco, then it can use 12 percent as discounted rate to compute projects NPV.

WACC = cost of equity*1/1+(D/E)+cost of debt * (1-T)*(D/E)/1+(D/E)

RATIO ANALYSIS

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RATIO ANALYSIS

It is a widely used tool of financial analysis. The term ratio refers to the relationship

expressed in mathematical terms between two individual figures or group of figuresconnected with each other in some logical manner and are selected from financial

statements of the concern. A financial ratio helps to express the relationship between two

accounting figures in such a way that users can draw conclusion about the performance,

strengths and weaknesses of a firm.

Ratio to be used for capital structure analysis:

Earning per shareDividend per share

P/E ratio

Dividend pay-out ratio

Debt-equity ratio

Interest coverage ratio

Return on investment

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Earning per share

EPS shows the profitability of the firm on a per share basis, it does not reflect how muchis paid as dividend and how much is retained in the business.

EPS = Profit after tax/No. Of shares

Significance

The EPS helps in determining the market price of the equity shares of the company. Acomparison of earning per share of the company with another will also help in decidingwhether the equity share capital is being effectively used or not. Helps is estimating thecompanys capacity to pay dividend to its equity shareholder.

EPS of HindalcoParticulars FY-08 FY-07 FY-06 FY-05 FY-04Earning per Share(Computed)

24.51 25.52 16.79 13.48 8.53

iii

Interpretation The EPS of Hindalco shows an upward trend since FY-04. There isconsiderable increase in EPS in FY-08. The figure is indicating that Hindalco has achievedwealth maximization objective to a great extent.iii

51

0

5

10

15

20

25

30

EPS

FY-2007 FY-2006 FY-2005 FY-2004 FY-2003

Years

EPS of Hindalco

EP

FY-08 FY-07 FY-06 FY-05 FY-04 FY-03


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Dividend Per Share

It indicates the amount of profit distributed to shareholders per share. It is calculated as:

DPS = PAT/No. Of equity shares

DPS of Hindalco

Particulars FY-08 FY-07 FY-06 FY-05 FY-04Dividend per share(Computed)

1.85 1.70 2.20 2.00 1.65

0.00

0.50

1.00

1.50

2.00

2.50

DPS

FY-2007 FY-2006 FY-2005 FY-2004 FY-2003

Years

DPS of Hindalco

DPS

iv

InterpretationOver the years the DPS of Hindalco has been increasing from Rs. 1.65 per share to Rs. 1.70

per share till FY 2007. But it has increased after FY 2007 to 1.85. This Dividend payment isquite high showing that the retaining most of its earning for future investments in projects.

iv

52

FY-08 FY-07 FY-06 FY-05 FY-04 FY-03


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Price to EarningThis ratio indicates the number of times the earning per share is covered by its market price.

P/E ratio = MP per share/EPSSignificance

P/E ratio helps the investor in deciding whether to buy or not to buy the share of the companyat a particular market price.

Price to Earning of Hindalco

Particulars FY-08 FY-07 FY-06 FY-05 FY-04Price toEarning

6.7 5.11 10.9 9.04 13.40

Interpretation:

P/E ratio of Hindalco considerably increased in FY 2004, but it has decreased to great extentin FY 2008. Thus, the EPS is covered by its market price by 6.7 times.

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0.00

2.00

4.006.00

8.00

10.00

12.00

14.00

P/E

FY-2007

FY-2006

FY-2005

FY-2004

FY-2003

Years

Price to earning of Hindalco

Price to earning

FY-08 FY-07 FY-06 FY-05 FY-04 FY-03


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Dividend Payout RatioThe ratio indicates what proportion of EPS has been used for paying dividend

Pay-out ratio = DPS/EPSSignificance

The payout ratios are indicators of the amount of earning that have been ploughed back in the business. Lower payout, the higher the amount earnings ploughed back in the business andvice-versa.

Pay-out ratio of Hindalco

InterpretationThe ratio has increased to a some point extent in 2008 as compared to previous FinancialYears. It indicates that company is ploughing go a large amount of its earnings for futureexpansion of business.

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Particulars FY-08 FY-07 FY-06 FY-05 FY-04DPS (Rs) 1.85 1.70 2.20 2 1.65EPS (Rs) 24.51 25.52 16.79 13.48 8.53

Pay-out ratio 0.08 0.07 .13 .15 .19

Payout ratio of Hindalco

0.00

0.05

0.10

0.15

0.20

0.25

FY-2007 FY-2006 FY-2005 FY-2004 FY-2003

Years

P a y o u

t R a

t i o

Payout ratio

FY-2008 FY-2007 FY-2006 FY-2005 FY-2004 FY-2003

FY-2008 FY-2007 FY-2006 FY-2005 FY-2004 FY-2003


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Debt- Equity Ratio

The relationship between borrowed funds and owners capital is a popular measure of thefinancial solvency of a firm. That is shown by debt equity ratio. It is a ratio of the outsidersfund to the owners funds.

Debt-Equity ratio = Total Debt/ Net Worth

Particulars FY-2008FY-2007 FY-2006 FY-2005 FY-2004 FY-2003

Debt Equity ratio .48 0.57 0.49 0.47 0.36 0.37

InterpretationThe accepted norm for debt-equity ratio is 2:1. Thus, it is apparent that there is ample scopefor the company to raise further loan capital.

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FY-08 FY-07 FY-06 FY-05 FY-04 FY-03


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Interest-coverage ratio

The interest coverage ratio shows the number of times the interest charged is covered byfunds that are ordinarily available for the payment. Since taxes are computed after interest,

interest-coverage is calculated in relation to before tax earning. Depreciation is a non-cashitem. Therefore, funds equals to depreciation are also available to pay interest charge. We canthus calculate interest coverage ratio as earning before depreciation, interest and taxes divide

by interest.

ICR = EBIDTA / Interest

Particulars FY-2008 FY-2007 FY-2006 FY-2005 FY-2004 FY-2003

Interest Coverage Ratio 14.21 18.09 12.65 14.98 9.82 10.72

InterpretationThe Interest coverage ratio is considered to be ideal if it is 5 to 6 times of interest charge iscovered by funds that are ordinarily available for the payment. The coverage is thereforesatisfactory and the Hindalco will have sufficient cash available to pay interest.

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Interest Coverage Ratio of Hindalco

0.00

2.00

4.00

6.00

8.00

10.00

12.0014.00

16.00

18.00

20.00

FY-2007 FY-2006 FY-2005 FY-2004 FY-2003

Years

R u p e e s

InterestCoverage Ratio

FY-08 FY-07 FY-06 FY-05 FY-04 FY-03


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Return on capital employed

It is calculated by dividing EBIT by capital employed .ROCE = EBIT / Capital employed

Particulars FY-2008 FY-2007 FY-2006 FY-2005 FY-2004 FY-2003

EBIT 33062 38323.00 23279.00 20833.00 14068.00 11992.00

Capital Employed 270880 209093.00 157370.00 125869.00 104176.00 94351.00

ROCE 0.12 0.18 0.15 0.17 0.14 0.13Interpretatio

The ROCE has decreased. It was 18% in FY-07. Now it stands at 12%.

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ROCE of Hindalco

0.00

0.020.04

0.06

0.08

0.10

0.12

0.140.16

0.18

0.20

FY-2007 FY-2006 FY-2005 FY-2004 FY-2003

Years

P e r c e n

t

ROCE

FY-08 FY-07 FY-06 FY-05 FY-04 FY-03


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Chapter No. 4

FINDINGS, SUGGESTIONS

AND

CONCLUSION

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FINDINGS

The rate of return on equity shareholders funds is low than general rate

of return. Hence, Hindalco is trading on equity.

The debt equity ratio of 0.48 indicates that company is considering the

interest of investors.

The earning per share of Hindalco is showing downward trend.

The proportionate increase in long-term loan fund is more than

proportionate increase in share capital.

The dividend pay out ratio of Hindalco is decreasing year by year. But in

FY-08 It is increase so it .

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SUGGESTIONS

The debt equity ratio of Hindalco is 0.48The company has ample scope to

raise further loan capital.

The management should try to maintain trade-off between risk and return

for determining the appropriate amount of debt in capital structure.

The company should take the advantage of financial leverage very

carefully as it also increases the financial risk.

The management should try to substitute long term funds used to finance

current assets with short term funds are generally cheaper. This will

positively improve efficiency.

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CONCLUSION

Hindalco industries ltd. has an appropriate capital structure.

Hindalco is taking the full advantage of financial leverage

.

The endeavour of company is to maximize earning per share i.e.

achieving wealth maximization objective.

Hindalco is retaining lions share of earning for expansion purpose.

On the whole, it can be said that Hindalco enjoys a sound financial position

from the point of view of all concerned parties the corporate management, the

leading institutions and the investors. The overall performance of the companyis satisfactory and it will further improve when the facilities at the disposal of

company are fully utilized. However, the management must remain cautious

towards the financial position of the company. The management should take all

possible steps in the near future to improve the financial position of the

company.

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Chapter No. 5

APPENDIX

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BALANCE SHEET

(As on 31 st March 2008)

z(Rs. in Million)

As at 31st As at 31st As at 31st March, 2008 March, 2007 March, 2006

SOURCES OF FUNDSSHAREHOLDERS' FUNDS

Share Capital 1226.48 1,043.25 985.66

Share capital suspense 4.06Share Warrants 1390.96

Reserves and Surplus 171736.65 123,137.12 95,076.86

174358.15 124,180.37 96,062.52

LOAN FUNDS

Secured Loans 62054.23 64,102.03 28,480.47

Unsecured Loans 21231.61 9,583.98 20,553.91

83285.84 73,686.01 49,034.38

DEFERRED TAX LIABILITY(NET) 13236.74 11,258.01 12,333.59

270880.73s 209,124.39 157,430.49

APPLICATION OF FUNDSFIXED ASSETS

Gross Block 126084.59 112,526.55 104,182.53

Less : Depreciation 46368.07 40,563.25 35,310.72

Less : Impairment 1623.15 1,896.21 1,043.81

Net Block 78093.37 70,067.09 67,828.00

Capital Work-in-Progress 11198.69 14,764.25 8,329.17

89292.06 84,831.34 76,157.17

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INVESTMENTS141079.86

86,753.17 39,712.86

CURRENT ASSETS, LOANSAND ADVANCES

Inventories 50979.06 43,153.14 40,950.88

Sundry Debtors 15650.22 15,045.02 12,484.01

Cash and Bank Balances 1469.77 6,654.96 9,172.85

Other Current Assets 623.04 1,188.08 2,447.34

Loans and Advances 9794.60 11,742.20 7,972.66

78516.69

77,783.40 73,027.74Less :CURRENT LIABILITIES AND

PROVISIONS

Current Liabilities 28947.79 27,433.79 21,995.62

Provisions 9060.09 12,841.41 9,531.66

38007.88 40,275.20 31,527.28

NET CURRENT ASSETS 40508.81

37,508.20 41,500.46MISCELLANEOUS

EXPENDITURE _ 31.68 60.00

(to the extent not written off or adjusted)

270880.73 209,124.39 157,430.49

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PROFIT & LOSS ACCOUNT

(For the Year ended on 31 st March 2008)

(Rs. in Million) For the year For the year

Ended 31st ended 31stende

d 31st

INCOME March, 2008March,

2007

Gross Sales and OperatingRevenues 210219.31

199,200.86

124,763.64

Less: Excise Duty 18209.0416,070.9

810,79

8.88 Net Sales and Operating

Revenues 192010.27183,129.8

8113,96

4.76

Other Income 4929.37

3,700.6

9

2,43

9.11

196939.64186,830.5

7116,40

3.87EXPENDITURE

(Increase)/ Decrease in Stocks (1370.26)(4,425.1

7)(10,33

8.40)

Trade purchase 925.18 230.19Manufacturing and other expanses 158444.27 147175.00Interest and finance charges 2806.30 2423.88depreciation 5878.09 5528.02impairment _ 852.40

166683.58 151784.32

Profit before tax 30256.06 35046.25

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Provision for tax 6063.56 9841.00Provision for deferred tax 875.79 551.00Provision for fringe benefit tax 114.00 113.00

Tax adjustment for earlier years 5406.68 _

Net profit 28609.39 25643.25Balance brought forwardfrom previous year 1000.00 550.00

Balance brought forward fromamalgamating company 15.62 _ Transfer from debentureredemption reserve 1721.70 1450.00Balance available forappropriations 31315.47 27643.25Appropriations

DeventureRedemption Reserve 50.00 186.82Dividend on preference shares 0.24 -

Dividend tax on preference shares 0.04 -

Interim Dividend on EquityShares _ 1,773.44Tax on interim Dividend _ 248.72Proposed Dividend on Equity Shares 2268.93 _ Tax on proposed dividend 385.60 _ Transfer to General Reserve 25610.66 24434.27Balance Carried to Balance Sheet 3000.00 1000.00

31315.47 27643.25Earning per Share (EPS )

Basic EPS (in Rs) 24.51 25.52Diluted EPS (in Rs) 24.38 25.52Basic EPS before Tax adjustmentfor earlier years (in Rs)

19.8825.52

Diluted EPS before tax adjustment for earlier year (in Rs) 19.77 25.52

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Chapter No. 6

BIBLIOGRAPHY

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BIBLIOGRAPHY

Pandey I.M., Financial Management

Maheshwari S.N., Financial Management

Chandra Prashanaa, Finance sense

Annual Report Of Hindalco Industries Limited (2007 & 2008)

Magazines & Journals Issue

Light Metal Age February 2008

Aluminium International Today March-April, 2008

Websites:

www.aluminiumleader.com

www.aditya-birla.com

www.hindalco.com

www.wikipedia.com

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i

ii

capital structure of hindalco industries limited

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