fm ii project_group 10_section a
DESCRIPTION
Leverage and capital structure analysisTRANSCRIPT
FM II PROJECT
SUBMITTED BY:
RISHI KATIYAR (14PGP040)
ROHIT KRISHNAN (14PGP041)
SINDHU NA (14PGP042)
SOMAL KANT (14PGP043)
GROUP 10_SECTION A
14/03/15
PHASE 1 -LEVERAGE AND CAPITAL STRUCTURE ANALYSIS
LEVERAGE ANALYSIS
There are two types of leverage:
a) Operating Leverage
b) Financial Leverage
DEGREE OF OPERATING LEVERAGE [DOL]
The multiplier effect where a small change in sales revenue is magnified into a larger change in operating income.
DEGREE OF FINANCIAL LEVERAGE (DFL)
The multiplier effect where a small change in operating income is magnified into a larger change in earnings per share.
Phase 2 - Payout policiesStock Return is the combination of Capital Gain Yield and Dividend Yield. Dilemma arises at the decision time that should the firm use retained earnings for financial profitable capital earnings or paying Dividend to stockholders.
Dividend is a payment made by a company to its shareholders usually as a distribution of profits. When a company makes profit it can either re-invest it in the business or it distribute it to its shareholders by way of dividends
If we retained earnings from profitable investments, dividend yield will be Zero, but stock price will be increase and resulting in a higher capital gain. If we pay dividends, stockholders receive an immediate cash reward for investing but the capital gain will decrease since this cash is not invested in the firm.
A reduction in dividends paid is not appreciated by investors and usually the stock price moves down as this could point towards difficult times ahead for the company. On the other hand a stable dividend payout ratio indicates a solid dividend policy by the company's management.
There are mainly three models in which investment and dividend decisions are related.
Walter model: - According to this model the Dividend policy of the firm has a bearing on share valuation. The firm is an all equity financed entity and the firm relies only on the retained earnings for future investments. The rate of return on investment is constant and the firm has an infinite life.
P = (D+ (E-D)*r/k)/ K
Gordon model: - According to Gordon model Retained earnings is the only source of financing. Rate of return on the firm’s investment is constant and growth rate is the product of retention ratio and rate of return. Cost of capital for the firm remains constant and it is greater than the growth rate. Firm has a perpetual life and tax does not exist
P0= E (1 – b)/ (k – br)
MM Approach: - This Model says that Value of the firm depends on the earnings from the investments not on the dividend distribution.
P0= (1/(1+ke))(D1+P1)
Let analyze the dividend paid by the telecom companies like Eicher Motors, Force Motors, Tata Motors and Ashok Leyland in the last 5 years.
Phase 3 - Working Capital Management
ASHOK LEYLANDPhase 1 - Leverage and Capital Structure Analysis
2014 2013 2012 2011 2010Sales -20.33 -3.28 15.45 50.89 21.46EBIT -57.33 -10.33 -4.59 53.21 75.35EPS -93.23 -23.37 -55.17 49.01 122.99 Degree of Financial Leverage
1.626199
2.262343
12.01961
0.921067 1.63225
Degree of Operational Leverage 2.81997 3.14939
-0.29709
1.045589
3.511184
DTL4.58583
4 7.125-
3.570870.96305
85.73112
8 ROA % 0.23 3.47 5.03 6.31 4.89ROE% 0.91 14.32 20.37 25.32 19.13EPS 0.11 1.63 2.13 4.75 3.18DPS 0 0.6 1 2 1.5
Total Debt3,36,67
42,81,81
32,36,99
12,42,65
92,26,79
9
Total Equity4,44,78
94,45,51
14,21,23
33,96,29
63,66,87
6
Total Liability7,81,46
37,27,32
46,58,22
46,38,95
55,93,67
5
D/E 0.756930.63256
10.56261
30.61231
8 0.61819
Since Greater the firms operating leverage greater is the profit with percentage change in sales.
By fixed cost financing a small change in EBIT brings larger change in earning per share.
As we know that business risk increases with lower Degree of operating lease.
The combined degree of leverage has varied year on year. For the previous year i.e. 2014 DTL was 4.585834 which means 1% change in their sales would change EPS by 4.585834 %. There operating leverage is low which means that heir business risk is high. For better understanding of DOL we need to compare it with the industry.Their DEBT has also increased Y-O-Y which means either they are investing in their operation or buying back their shares. Again we need to compare it with the industry.
Phase 2- Payout Policies
For the year ending March 2014, Ashok Leyland has declared an equity dividend of 0% amounting to Rs 0 per share. At the current share price of Rs 23.70, this results in a dividend yield of 0%.
The company has paid dividend in previous years and has consistently declared dividends for the last 5 years. Year on year, both dividends per share and earnings per share excluding extraordinary items growth have changed significantly . Initially there was increase in dividend yield but with slowdown in automobile industry affected the company as well as the company started investing in R&D which reduced its net profit hence reduction in dividends pay out from 2011 onwards.
In 2014 company reported negative profit before tax but reported net profit was positive hence it was not viable to pay dividend to its shareholders.
In 2012 company last issued two shares for one share and in the same year book value of the company fell 50% but then next year it increased 50 % and has remained constant since then.
Announcement Effective Dividend Dividend Remarks
Date Date Type (%)
10-05-2013 04-07-2013 Final 60 Rs.0.6000 per share(60%)Dividend
14-05-2012 12-07-2012 Final 100 -
19-05-2011 29-06-2011 Final 200 -
29-04-2010 16-07-2010 Final 150 -
15-05-2009 14-07-2009 Final 100 -
2014 2013 2012 2011 2010
Shares in issue (lakhs) 26,606.77 26,606.77 26,606.77 13,303.38 13,303.38
Earning Per Share (Rs) 0.11 1.63 2.13 4.75 3.18
Equity Dividend (%) 0 60 100 200 150
Book Value (Rs) 16.72 16.74 10.89 19.97 17.46
Profit Before Tax -91.21 470.71 689.97 801.81 544.78
Reported Net Profit (in Cr.) 29.38 433.71 565.98 631.3 423.67
2014 2013 2012 2011 20100
100
200
300
400
500
600
700
Reported Net Profit (in Cr.)
Reported Net Profit (in Cr.)
2014 2013 2012 2011 20100
50
100
150
200
250
Equity Dividend (%)
Equity Dividend (%)
Phase 3 - Working Capital ManagementAshok Leyland Operating and Cash Conversion Cycle
Mar-14 Mar-13 Mar-12
Average age of inventory 51.56 53.99 57.07
Average collection period 45.44 34.68 30.79
Operating cycle 97 88.67 87.86
Accounts payable period 94.45 84.44 76.72
Cash conversion cycle 2.55 4.23 11.14
Table : Cash conversion cycle for Ashok Leyland.
Industry-Operating and Cash Conversion Cycle
Mar-14 Mar-13 Mar-12
Average age of inventory 43.99 38.02 34.27
Average collection period 24.58 23.07 21.15
Operating cycle 68.57 61.09 56.02
Accounts payable period 61.77 53.93 47.55
Cash conversion cycle 6.8 7.16 8.47
Table : Cash conversion cycle of Industry
2014 2013 2012
Cash Conversion Cycle Com-pany
2.55 4.23 11.14
Cash Conversion Cycle Industry 6.8 7.16 8.47
2.57.5
12.517.522.5
Cash Conversion Cycle
Days
Figure : Comparison of Cash Conversion Cycle of Ashok Leyland vs
Industry
2014 2013 2012
Operating Cycle Company 97 88.67 87.86
Operating Cycle Industry 68.57 61.09 56.02
10
30
50
70
90
110
Operating Cycle
Days
Figure : Comparison of Operating Cycle of Ashok Leyland vs Industry
The cash conversion cycle of Ashok Leyland was very low in the FY 2012 and
continued in FY 2013 but it has increased in FY 2014 above industry average to
11 days as compared to industry 8 days. This implies that the company's
inventory turnover has increased which is evident from its sales. The operating
cycle has reduced for both the industry and company but company has
observed less decrease as compared to industry which indicates that company
has not been able to keep pace with its competitior. The collection period has
gone low therefore there is a possibility of low defaulters and bad debt, but it
is more than the industry hence they need to reduce the collection period.
In their financial statement they have been registering negative cash flows
from their Investing and Financing activities and their "DEBT to Equity" ratio
has increased but at the same time their Tax Rate has increased by more than
120%.
FORCE MOTORS
Leverage Ratios
Gross Sales 2301.14 2276.35 2369.16 1780.621075.
8
EBIT 156.65 97.53 146.1 149.9101.7
7
Change in Sales 0.01089024
-0.03917422
20.33052532
30.65515895
1
Change in EBIT 0.60617246
-0.33244353
2 -0.025350230.47292915
4
Degree of Operating Leverage(EBIT/Sales) 55.6619878
8.486282921 -0.0766968
0.721854067
Degree of Financial Leverage(EPS/EBIT) 7.324709052.95591008
4 -515.262963
-0.06316702
6
Degree of Total Leverage: 407.70786625.0846892
639.5190187
2
-0.04559737
5
Earnings Per Share (Rs) 58.97 10.84 625.62 44.49 45.86
Change in EPS 4.4400369
-0.98267318
813.0620364
1
-0.02987352
8
DPS(Rs) 3 3 10 5
ROA (%) 3.96 0.74 54.87 6.12
Total Debt/Equity(x) 0.02 0.04 0.05 0.74
ROE (%) 6.53 1.24 111.58 18.98
ROCE (%) 5.88 2.28 117.3 20.76
Phase 1 - Leverage and Capital Structure Analysis
The DOL during the period 2013-2014 shows a sudden surge from 8.48 to 55.66 . It shows that with 1% increase in sales the operating profit is increasing by 60.6%, which is good sign for the company. The DFL has increased from '2.95 to 7.' during the period 2013-2014. It shows that with 60% change in operating profit the EPS is changing by 444% which is healthy.
The degree of combined/Total leverage has fluctuated greatly over the past 4 years, and this is mainy due to fluctuation in the share prices which in turn affects the EPS values. Now their leveraged state is healthy.As for the capital structure also has been refined in 2014, moving from maintaining a D/E ratioof 0.2 indicating borings equivalent to 2% of total equity.
Phase 2 - Payout PoliciesAccording to the above table as on March 2014, Force Motors had an equity dividend of 30% with a dividend per share value of 3. The share price is currently 337.65, and hence we have a dividend yield of .9%.The graph tracing the dividend yield for past five years is given below.
2014 2013 2012 2011 2010Book Value (Rs) 930.48 875.02 867.69 253.7 215.02Shares in issue (lakhs) 131.76 131.76 131.76 131.76 131.76Earnings Per Share (Rs) 58.97 10.84 625.62 44.49 45.86Equity Dividend (%) 30 30 100 50 30
Profit Before Tax 62.64 19.131,011.30 81.59 40.27
Book Value (Rs) 930.48 875.02 867.69 253.7 215.02
Reported Net Profit 77.69 14.28 824.33 58.62 60.42Dividend per share 3 3 10 5 3
Over the past 5 years, both dividends per share and earnings per share have been fluctuating wildly. The dividend per share was at its peak in 2012 with a value of 10 . In 2012 the net profit rose 3714.81% to Rs 798.44 crore in the quarter ended March 2012 as against Rs 20.93 crore during the previous quarter ended March 2011 . This explains the sudden spike in the dividend yield during the year 2012. However this profit could not be sustained and in the subsequent years the dividend payout settled to more stable levels.
Phase 3 - Working Capital ManagementAshok Leyland Operating and Cash Conversion Cycle
Mar-14 Mar-13 Mar-12
Average age of inventory 89.88592597 92.11776 83.88251
Average collection period 24.38435973 20.12732 27.3845
Operating cycle 114.2702857 112.2451 111.267
Accounts payable period 51.01 63.38 70.26
Cash conversion cycle 63.2602857 49.24 41.007
Table : Cash conversion cycle for Force Motors.
Industry-Operating and Cash Conversion Cycle
Mar-14 Mar-13 Mar-12
Average age of inventory 43.99 38.02 34.27
Average collection period 24.58 23.07 21.15
Operating cycle 68.57 61.09 56.02
Accounts payable period 61.77 53.93 47.55
Cash conversion cycle 6.8 7.16 8.47
Table : Cash conversion cycle of Industry
2014 2013 2012
Cash conversion cycle 63.26 49.24 41
Operating cycle 114.27 112.24 111.26
10
30
50
70
90
110
IndustryDa
ys
Figure : Comparison of Cash Conversion Cycle of Force Motors vs
Industry
2014 2013 2012
Cash conversion cycle 63.26 49.24 41
Operating cycle 114.27 112.24 111.26
10
30
50
70
90
110
Company
Days
Figure : Comparison of Operating Cycle of Force Motors vs Industry
TATA MOTORS
Phase 1 - Leverage and Capital Structure Analysis
DOL Mar-14 Mar-13 Mar-12 Mar-11 Mar-10
EBIT -80.05 -38.95 -28.51 -12.16 123.37SALES -23.41 -17.57 15.33 32.3 38.87
DOL3.41947
92.21684
7-
1.85975-
0.376473.17391
3
DCL Mar-14 Mar-13 Mar-12 Mar-11 Mar-10
DFL-
0.123051.94685
53.02665
72.24342
10.82313
4
DOL3.41947
92.21684
7-
1.85975-
0.376473.17391
3
DTL-
0.420764.31587
9-
5.62883-
0.844582.61255
5 Mar-14 Mar-13 Mar-12 Mar-11 Mar-10 Earnings Per Share (Rs) 1.04 0.95 3.91 28.55 39.26 DPS(Rs) 2 2 4 20 15 ROA (%) 0.66 0.57 2.29 3.46 5.12 ROE (%) 1.75 1.57 6.32 10.37 16.51 Mar-14 Mar-13 Mar-12 Mar-11 Mar-10
Total Debts11,717.1
3 9,981.4110,649.6
913,153.7
216,594.5
4
Total Liabilities30,893.7
829,116.2
530,017.3
533,167.0
231,560.0
1
Total Equity42,610.9
139,097.6
640,667.0
446,320.7
448,154.5
5
D/E 0.274980.25529
40.26187
5 0.28397 0.34461
The degree of combined leverage has decreased for the year 2014. It is not maintaining a healthy leveraged state as it is fluctuating. A 1% increase in sales will incur a decrease of 0.42% EPS. This is not a good sign. But by maintaining , a high operating leverage they have considerably reduced their business risk.
They are maintaining a similar capital structure without much change in debt and equity for the past 5 years.
Phase 2 - Payout Policies
For the year ending March 2014, Tata Motors has declared an equity dividend of 100.00% amounting to Rs 2 per share. At the current share price of Rs 584.30 this results in a dividend yield of 0.34%.
The company has a good dividend track report and has consistently declared dividends for the last 5 years.
Over the past 5 years, EPS was almost fluctuating. Large fluctuation can be seen in the years 2011, 2012.
Percentage of equity dividend was 100 % for the last two years whereas the previous two years saw a percentage equity dividend of 200 %.
TATA MOTORS
Year Mar '14 Mar '13 Mar '12 Mar '11 Mar '10
Profit Before Tax (in Rs. Crore) -1,025.80 174.93 1,341.03 2,196.52 2,829.54Reported Net Profit (in Rs. Crore) 334.52 301.81 1,242.23 1,811.82 2,240.08Shares in issue (lakhs) 32,186.80 31,901.16 31,735.47 6,346.14 5,705.58Earnings Per Share (Rs) 1.04 0.95 3.91 28.55 39.26
Equity Dividend (%) 100 100 200 200 150Book Value (Rs) 59.58 59.98 61.84 315.36 259.03
SPLIT HISTORY
Tata Motors had last split the face value of its shares from Rs 10 to Rs 2 in 2011.The share has been quoting on an ex-split basis from September 12, 2011.
SPLIT HISTORY
ANNOUNCEMENT DATE OLD FV NEW FV26-05-2011 10 2
2014 2013 2012 2011 20100
500
1000
1500
2000
2500
REPORTED NET PROFIT (Cr.)
REPORTED NET PROFIT (Cr.)
2014 2013 2012 2011 20100
50
100
150
200
250
EQUITY DIVIDENT (%)
EQUITY DIVIDENT (%)
Phase 3 - Working Capital Management
Cash Conversion Cycle of company:
MAR'14 MAR'13 MAR'12AVERAGE AGE OF INVENTORY 41.05737 36.31841 30.8277AVERAGE COLLECTION PERIOD 14.67 16.75 16.37OPERATING CYCLE 55.72737 53.06841 47.1977ACCOUNTS PAYABLE PERIOD 43.86 36.71 30.11
CASH CONVERSION CYCLE 11.86737 16.35841 17.0877
Cash Conversion Cycle of Industry:
Mar-14 Mar-13 Mar-12Average age of inventory 43.99 38.02 34.27Average collection period 24.58 23.07 21.15Operating cycle 68.57 61.09 56.02Accounts payable period 61.77 53.93 47.55Cash conversion cycle 6.8 7.16 8.47
Cash Conversion Cycle:
2014 2013 20120
5
10
15
20
25
30
IndustryTata Motors
Operating Cycle:
2014 2013 20120
20
40
60
80
100
120
140
IndustryTata Motors
Tata Motors - CCC, OC, Payable Period
2014 2013 20120
20
40
60
80
100
120
Payable periodOCCCC
The company is witnessing a decrease in cash conversion cycle. This indicates that the company is trying to manage its working capital effectively compared to its previous years. It is maintaining its operating cycle greater than its payable period which helps in managing the working capital effectively.
The cash conversion cycle of Tata Motors is higher than the industry standard during the year 2014. It manages its working capital less effectively compared to its industry standards.
EICHER MOTORS
Phase 1 - Leverage and Capital Structure Analysis
Ratio Dec 2013 Dec 2012 Dec 2011 Dec 2010 Dec 2009 Dec 2008Operational & Financial Ratios Earnings Per Share (Rs) 103.04 53.61 46.15 28 29.64 13.88 CEPS(Rs) 114.29 59.97 50.97 32.01 37.62 19.3 Adjusted EPS (Rs.) 103.04 53.61 46.15 28 29.64 13.88 DPS(Rs) 30 20 16 11 7 5 Adjusted DPS(Rs) 30 20 16 11 7 5 Book NAV/Share(Rs) 303.75 232.98 200.09 169.51 306.85 171.2 Adjusted Book Value (Rs) 303.75 232.98 200.09 169.51 306.85 171.2 Tax Rate(%) 23.28 16.71 12.18 12.9 19.52 -11.56 Dividend Pay 29.11 37.3 34.67 39.28 23.61 36.01
Out Ratio(%)Margin Ratios Core EBITDA Margin(%) 16.36 12.33 10.75 8.35 5.82 0.23 EBIT Margin(%) 18.95 14.76 19.37 18.41 11.53 4.99 Pre Tax Margin(%) 18.94 14.74 19.09 17.88 11.43 4.53 PAT Margin (%) 14.53 12.28 16.77 15.57 9.2 5.05 Cash Profit Margin (%) 16.11 13.73 18.52 17.8 11.67 7.02Performance Ratios ROA (%) 22.22 16.03 17.58 12.72 6.52 4.52 ROE (%) 38.42 24.76 24.99 17.85 8.63 8.3 ROCE (%) 49.82 29.3 27.97 20.06 10.41 6.7 Asset Turnover(x) 1.53 1.31 1.05 0.82 0.71 0.9 Inventory Turnover(x) 17.49 19.54 20.21 19.27 19.71 6.72 Debtors Turnover(x) 209.25 228.99 191.95 109.71 79.45 10.54 Sales/Fixed Asset(x) 5.97 5.38 4.01 3.17 2.9 2.15 Working Capital/Sales(x) 4.63 3.18 1.89 1.23 1.19 1.84Efficiency Ratios Fixed Capital/Sales(x) 0.17 0.19 0.25 0.32 0.35 0.46 Receivable days 1.74 1.59 1.9 3.33 4.59 34.62 Inventory Days 20.86 18.68 18.06 18.94 18.52 54.33 Payable days 52.6 45.43 52.98 72.79 67.59 93.59Growth Ratio Net Sales Growth(%) 62.25 56.27 53.13 16.9 -45.44 -68.79 Core EBITDA Growth(%) 105.97 21.89 56.92 74.93 71.47 -77.24 EBIT Growth(%) 108.79 21 61.3 89.54 22.05 -62.71 PAT Growth(%) 92.47 16.23 65.1 101.01 -3.77 -38.14 EPS Growth(%) 92.19 16.18 64.79 -5.54 113.52 -38.14Financial
Stability Ratios Total Debt/Equity(x) 0 0.01 0.03 0.04 0.03 0.02 Current Ratio(x) 1.65 1.99 2.73 3.48 3.54 4.84 Quick Ratio(x) 1.49 1.87 2.53 3.3 3.38 4.67 Interest Cover(x) 1346 669.46 71.21 34.7 112.02 10.74
DFL0.84741244
6 0.770476191.05693311
6 -0.06187179 5.14829932 0.60819646
DOL1.74763052
2 0.373200641.15377376
25.29822485
2 -0.48525528 0.91161506
DTL1.48096385
50.28754220
71.21946169
8 -0.32781065 -2.498239440.55444105
2WACC(%) 13 13 14.5 14 14 14EBIT 363.42 174.06 144.07 89.06 47.1
Value of Firm27.9553846
213.3892307
79.93586206
96.36142857
13.36428571
4
The degree of combined leveraged has increased over the years of eicher motors but the 1% increase in sales will only increase the EPS by 1.4% which is not a good sign, there operating leverage is increased that means they are improving there operations but not significantly, and the capital structure they have tried to maintain at 0.
Phase 2 - Payout PoliciesThe company has tried to maintain the dividend payout ratio of around 30-40%, indicating the company have the solid dividend policy. Although from the year 2009 to 2010 company has doubled the shares issue but its dividend per has also increased with increasing earning per share signaling to the investors that company has very good future prospect and its profits is increasing significantly which will contribute to more capital gain in future.
Column1 13-Dec 12-Dec 11-Dec 10-Dec 9-DecPBT 363.15 173.8 142.27 86.78 -48.51Reported Net Profit 278.62 144.76 124.55 75.44 37.53Shares in issue (lakhs) 270.39 270.01 269.93 269.38 126.6Earning Per Share (Rs) 103.04 53.61 46.14 28.01 29.64 DPS(Rs) 30 20 16 11 7Equity Dividend (%) 300 200 160 110 70
Book Value (Rs) 303.76 232.97 200.07 169.53 306.85Dividend payout ratio 0.291149 0.373065 0.346771 0.392717 0.236167
As we can see althouth the net profit in the year 2013 has almost doubled but its has not rolled out the dividend accordingly rather it has lowered the dividend payout ratio from 37.3% to 29.11% signalling its might be retaining earnings for the purpose of more
investment and will provide more DPS in the future and the company will be beneficial in the long run for the purpose of capital gain.
Market reaction can be seen with with the huge increase in share price from 2013 to 2015 because of its solid dividend policy and the good future prospect.
Phase 3 - Working Capital Management
Dec-15 13-Dec 12-Dec 11-Dec 10-Dec 9-Dec
Efficiency Ratios
Average Collection Period 1.25 1.74 1.59 1.90 3.33 4.59
Average Inventory days 19.18 20.86 18.68 18.06 18.94 18.52
operating Cycle 20.43 22.60 20.27 19.96 22.70 23.11
Average Payable days 51.87 52.60 45.43 52.98 72.79 67.59
Cash conversion Cycle -31.44 -30.00 -25.16 -33.02 -50.09 -44.48
The company have negative cash conversion cycle, which indicates that the company has very effectively managed its working capital, i.e its operating cycle is very less as compared to average payable days which means company has cash available for too many days, which it can use for other purposes.
The industry average is very poor in comparison with this company, the company has tried to maintain its CCC around -30 days since last 5 years, which means it have extra 30 days before it makes its payment so finally we can say that the company is very good in managing its working capital.