r power final

A

Project Report

On

“STUDY ON CAPITAL STRUCTURE OF RELIANCE POWER AND

COMPARISION WITH OTHER COMPANY”

International Institute of Information Technology

Submitted By

VIVEK SETHIA

NISHIT DHOLAKIA

NITIN KIRNAPURE

(BM JULY-09)

International Institute of Information Technology

P-14 RAJIV GANDHI INFOTECH PARK

HINJEWADI

PUNE –411057

(2010-11)

Project Report on Power Sector Capital Structure

In Comparison with

IT , FMCG & Automobile Industry

Index SR. NO. TOPIC

1. Project Introduction 2. Capital Structure (Theory)

3. Factor affecting Capital Structure

4. Company Profile of Reliance Power

5. Capital Structure of Reliance Power

6. Company Profile of Tata Power

7. Capital Structure of TATA Power

8. Company Profile of NTPC

9. Capital Structure of NTPC

10. Company Profile of TATA Motors

11. Capital Structure of TATA Motors

12. Company Profile of HUL

13. Capital Structure of HUL

14. Company Profile of Infosys

15. Capital Structure of Infosys

Project Introduction

The Project is all about study of Capital Structure of Power Sector. How the Co. raise funds to finance their project on power generation. Apart from it we have done some research on other industry one from each sector of IT, FMCG and Automobile industry

Company Studied Are:- 1. RELIANCE POWER 2. TATA POWER 3. NTPC 4. TATA MOTOR 5. HUL 6. INFOSYS

Capital Structure - What It Is and Why It Matters

The term capital structure refers to the percentage of capital (money) at work in a business by type. Broadly speaking, there are two forms of capital: equity capital and debt capital. Each has its own benefits and drawbacks and a substantial part of wise corporate stewardship and management is attempting to find the perfect capital structure in terms of risk / reward payoff for shareholders.

CAPITAL STRUCTURE

The combination of debt and equity used to finance a firm’s projects is referred to as its capital structure. The capital structure of a firm is some mix of debt, internally generated equity, and new equity. But what is the right mixture? The best capital structure depends on several factors.

1. Pecking Order Theory

In the theory of firm's capital structure and financing decisions, the

Pecking Order Theory or Pecking Order Model was developed by Stewart C.

Myers and Nicolas Majluf in 1984.

It states that companies prioritize their sources of financing (from internal

financing to equity) according to the Principle of least effort, or of least

resistance, preferring to raise equity as a financing means of last resort. Hence,

internal funds are used first, and when that is depleted, debt is issued, and when

it is not sensible to issue any more debt, equity is issued.

2. Trade-Off Theory

The Trade-Off Theory of Capital Structure refers to the idea that a

company chooses how much debt finance and how much equity finance to use

by balancing the costs and benefits. The classical version of the hypothesis goes

back to Kraus and Litzenberger who considered a balance between the dead-

weight costs of bankruptcy and the tax saving benefits of debt. Often agency

costs are also included in the balance. This theory is often set up as a competitor

theory to the Pecking Order Theory of Capital Structure. A review of the

literature is provided by Frank and Goyal.

Theories of Capital structure

An important purpose of the theory is to explain the fact that corporations

usually are financed partly with debt and partly with equity. It states that there is

an advantage to financing with debt, the tax benefits of debt and there is a cost

of financing with debt, the costs of financial distress including bankruptcy costs

of debt and non-bankruptcy costs (e.g. staff leaving, suppliers demanding

disadvantageous payment terms, bondholder/stockholder infighting, etc). The

marginal benefit of further increases in debt declines as debt increases, while

the marginal cost increases, so that a firm that is optimizing its overall value

will focus on this trade-off when choosing how much debt and equity to use for

financing.

3. Agency Cost

A type of internal cost that arises from, or must be paid to, an agent

acting on behalf of a principal. Agency costs arise because of core

problems such as conflicts of interest between shareholders and

management. Shareholders wish for management to run the company in a

way that increases shareholder value. But management may wish to grow

the company in ways that maximize their personal power and wealth that

may not be in the best interests of shareholders.

Agency Costs Some common examples of the principal-agent relationship include:

management (agent) and shareholders (principal), or politicians (agent)

and voters (principal).

Agency costs are inevitable within an organization whenever the

principals are not completely in charge; the costs can usually be best

spent on providing proper material incentives (such as performance

bonuses and stock options) and moral incentives for agents to properly

execute their duties, thereby aligning the interests of principals (owners)

and agents.

FACTORS AFFECTING CAPITAL STRUCTURE

1. Size:- From the theoretical point of view, the effect of size on leverage is ambiguous. “Larger firms tend to be more diversified and fail less often, so size may be an inverse proxy for the probability of bankruptcy. If so, size should have a positive impact on the supply debt. However, size may also be a proxy for the information outside investors have, which should increase their preference for equity relative to debt.

2. Growth and Stability of Sales:- There are no consistent theoretical predictions on the effects of Growth in sales on leverage. If company’s sales are growing then and there is more possibility of increase in sales growth rate then company should use more equity financing but it will be affect by profit margin. If profit is increasing than company should prefer more leverage because it will give tax shield. If company’s sales are stable and sales are growing at a steady rate company should not prefer high leverage. Because it’s increase cost of capital.

Size of the company Growth and Stability of Sales Growth Opportunities Profit Margin Tangible Assets Cash Flow Ability Taxes Non-debt Tax shield Risk Floatation Cost Financial Slack Cost of Financial Distress

3. Growth Opportunity: Firms with high future growth opportunities should use more equity financing, because a higher leveraged company is more likely to pass up profitable investment opportunities. If there is a growth opportunity then such an investment effectively transfers wealth from stockholders to debt holders. Therefore a negative relation between growth opportunities and leverage is predicted. As market-to-book ratio is used in order to proxy for growth opportunities, there is one more reason to expect a negative relation – “The theory predicts that firms with high market-to-book ratios have higher costs of financial distress, which is why we expect a negative correlation.”

4. Profit margin:- There are no consistent theoretical predictions on the effects of profitability on leverage. From the point of view of the trade-off theory, more profitable companies should have higher leverage because they have more income to shield from taxes. The free cash-flow theory would suggest that more profitable companies should use more debt in order to discipline managers, to induce them to pay out cash instead of spending money on inefficient projects. However, from the point of view of the pecking-order theory, firms prefer internal financing to external. So more profitable companies have a lower need for external financing and therefore should have lower leverage.

5. Tangible assets:- It is assumed, from the theoretical point of view that tangible assets can be used as collateral. Therefore higher tangibility lowers the risk of a creditor and increases the value of the assets in the case of bankruptcy. The more tangible the firm’s assets, the greater its ability to issue secured debt and the less information revealed about future profits. Thus a positive relation between tangibility and leverage is predicted.

6. Cash flow:- If free cash flow is showing increasing trend then company should prefer less leverage. If free cash flow is not increasing or is not sufficient then company can increase leverage based on growth rate or growth opportunity and profit margin and other factors.

7. Taxes According to the trade-off theory, a company with a higher tax rate should use more debt and therefore should have higher leverage, because it has more income to shield from taxes.

8. Non-debt Tax shield:- Other items apart from interest expenses, which contribute to a decrease in tax payments, are labelled as non-debt tax shields (for example the tax deduction for depreciation). Depreciation is an effective tax shield, and thus it offsets the tax shield benefits of leverage. So Non-debt tax shield has a negative relation with leverage.

9. Risk:- Here risk means probability of bankruptcy. So risks have negative relation with leverage.

10. Floatation Cost The expense involved in selling a new security issue. This expense includes items such as registration of the issue and payment to the investment banker. Flotation costs depend on the size and riskiness of an issue as well as on the type of security to be sold. If floatation cost increase its increase cost of capital. So floatation cost has negative relation with leverage.

11. Financial Slack Financial Slack can be defined as the amount of funds a firm has available to invest without visiting the external financial markets after paying interest and before paying dividends and Depreciation. The following factors influence whether firms should have more equity (financial slack) or more Debt in their capital structures.

Firms Track Record of Picking Good Investments.

The likelihood of good investments and opportunities rising.

12. Financial Distress:- A condition where a company not able to meet or has difficulty paying off its financial obligations to its creditors. The chance of financial distress increases when a firm has high fixed costs, illiquid assets, or revenues that are sensitive to economic downturns. A company under financial distress can incur costs related to the situation, such as more expensive financing, opportunity costs of projects and less productive employees. The firm's cost of borrowing additional capital will usually increase, making it more difficult and expensive to raise the much needed funds. In an effort to satisfy short-term obligations, management might pass on profitable longer-term projects. And financial distress has a negative relation with leverage.

13. Dividend policy:-

Some time dividend policy will affect the capital structure. Sometime company have a policy to pay high amount of profit as a dividend then this type of condition will affect the capital structure in recession time or company have a shortage of investment in near future time to maintain a high growth rate and to maintain dividend policy.

Company Profile

Of

Power Sector

(Shri. Anil Dhirubhai Ambani)

http://www.reliancepower.co.in/anil_ambani.html

Reliance Power Limited is a part of the Reliance Anil Dhriubhai Ambani Group group,

one of India‟s largest business houses. The group comprises companies in the

telecommunications, financial services, media and entertainment, infrastructure and energy

sectors. The energy sector companies include Reliance Infrastructure Ltd, Reliance

Natural Resources Limited and Reliance Power Limited.

Reliance Power has been established to develop the Reliance Anil Dhirubhai Ambani Group

and is established to develop, construct and operate power projects domestically and

internationally. The Company on its own and through subsidiaries has a portfolio of almost

35,000 MW of power generation capacity, both operational as well as under development.

The power projects are planned to be diverse in geographic location, fuel type, fuel source

and off-take, and each project is planned to be strategically located near an available fuel

supply or load center. The company has 600 MW of operational power generation assets. The

projects under development include seven coal-fired projects to be fueled by reserves from

captive mines and supplies from India and abroad, two gas-fired projects to be fueled

primarily by reserves from the Krishna Godavari Basin (the "KG Basin") off the east coast of

India, and seven hydroelectric projects, six of them in Arunachal Pradesh and one in

Uttarakhand.

The company has won three of the four Ultra Mega Power Projects (Sasan UMPP,

Krishnapatnam UMPP & Tilaiya UMPP) awarded by the Govt of India till date. The UMPP

is an initiative by the government to collaborate with power generation companies to set up

4,000 MW projects to ease the country‟s power deficit situation.

Besides these, Reliance Power is also considering the development of coal bed methane

(CBM) power generation projects based from CBM blocks being exposed by its affiliates.

The company is also planning to register projects with the Clean Development Mechanism

executive board for issuance of CER certificates to augment its revenues

Mission

To attain global best practices and become a leading power generating company. To achieve excellence in project execution, quality, reliability, safety and operational

efficiency. To relentlessly pursue new opportunities, capitalizing on synergies in the power generation

sector. To consistently enhance our competitiveness and deliver profitable growth. To practice highest standards of corporate governance and be a financially sound company. To be a responsible corporate citizen nurturing human values and concern for society. To improve the lives of local community in all our projects. To be a partner in nation building and contribute towards India’s economic growth. To promote a work culture that fosters learning, individual growth, team spirit and creativity

to overcome challenges and attain goals. To encourage ideas, talent and value systems and become the employer of choice. To earn the trust and confidence of all stakeholders, exceeding their expectations. To uphold the guiding principles of trust, integrity and transparency in all aspects of

interactions and dealings.

Vision

To build a global enterprise for all our stakeholders To be the largest private sector power generation company in India To be the largest hydro power generation company in India To be the largest green power company in India To be the largest coal mining company in India

Board of Directors

Shri. Anil Dhirubhai Ambani Shri S. L. Rao Shri J. L. Bajaj Dr. V. K. Chaturvedi Shri. K.H. Mankad Dr. Yogendra Narain

http://www.reliancepower.co.in/anil_ambani.html

http://www.reliancepower.co.in/rao.html

http://www.reliancepower.co.in/bajaj.html

http://www.reliancepower.co.in/chaturvedi.html

http://www.reliancepower.co.in/mankad.html

http://www.reliancepower.co.in/narain.html

Capital structure of R-Power

R-Power is a fully equity finance company as on 31-03-2010. R-power capital structure

is good and it is as per company condition and company requirement and future

growth.

Year 2006 2007 2008 2009 2010

Equity 0.05 200.04 2,259.95 2,396.80 2,396.80

Debt 0.00 0.00 0.00 0.00 0.00

Total 0.05 200.04 2,259.95 2,396.80 2,396.80

Equity ratio 1 1 1 1 1

Debt ratio 0 0 0 0 0

Cost of Equity 0 0 0 20.86 14.13

Cost of Debt 0 0 0 0 0

WACC 0 0 0 20.86 14.13

Revenue (sales + Other) - - 112.83 273.81 223.79

Profit Margin:

Net Profit Margin - 7.19 83.9 90.9 122.09

Return On Long term Fund - 0.68 0.64 1.45 0.89

EPS -25.57 0.01 0.41 1.04 1.14

DPS 0 0 0 0 0

Leverage ratios

Long term debt / Equity - - - - -

Total debt/equity - - - - -

Owners fund as % of

total source

- 100 100 100 100

Fixed assets turnover

ratio

- 0.03 - - -

Liquidity ratios

Current ratio 1.72 9.16 12.6 167.36 189.31

Current ratio (inc. st

loans)

1.72 9.16 12.6 167.36 189.31

Quick ratio 1.72 9.16 12.6 167.36 189.31

Inventory turnover ratio - - - - -

Payout ratios

Dividend payout ratio

(net profit)

- - - - -

Dividend payout ratio

(cash profit)

- - - - -

Earning retention ratio - 100 100 100 100

Cash earnings retention

ratio

- 100 100 100 100

Coverage ratios

Adjusted cash flow time

total debt

- - - - -

Financial charges

coverage ratio

- 1.67 15.27 113.42 74.91

Fin. charges cov.ratio

(post tax)

- 1.2 17.54 142.03 162.62

Free Cash flow -0.13 -38.88 -4811.17 -2271.98 765.22

TAX 0.02 0.38 6.2 7.57 15.71

Non Debt Tax Shield

Depriciation - - - 0.2 0.51

Factors affecting Capital Structure R-Power

1. Size :-

Reliance Power Limited is a part of the Reliance Anil Dhriubhai Ambani Group, one

of India‟s largest business houses. The group comprises companies in the

telecommunications, financial services, media and entertainment, infrastructure and energy

sectors. The energy sector companies include Reliance Infrastructure Ltd, Reliance Natural

Resources Limited and Reliance Power Limited.

Reliance Power has been established to develop the Reliance Anil Dhirubhai Ambani

Group and is established to develop, construct and operate power projects domestically and

internationally. The Company on its own and through subsidiaries has a portfolio of almost

35,000 MW of power generation capacity, both operational as well as under development

Reliance power is a big company and when it comes into market in 2008. That was

the biggest IPO in Indian Capital market history. So here R power can raise debt without any

problem but R-Power is an initial stage and production will start from 2011. So leverage is

not good for company because its increase cost of capital and cash will be go out for

company.

R-Power is fully equity company its good for company because there will be high

growth opportunity in future. More debt means extra burden on cash and its affect investment

and its not good for company in future.

2. Growth and stability in Revenue:-

R-Power production will start from 2011. So here is not income from sales. In this

case growth and stability of revenue does not affect the capital structure of R-Power. R-

Power other income is growing and showing increasing trend and its shows a negative

relation with leverage but profit margin is also increasing so in this condition company

should use debt financing.

3. Growth opportunity:-

In energy and power sector there are lots of opportunities and India has deficit of

energy and power. So company have a very good growth opportunity and company will grow

with high growth rate. High growth opportunity has a negative relation with leverage.

4. Profit Margin:-

From 2008 company profit margin is increasing and company have to pay tax on it. If

profit margin is high company should use leverage to save tax. EPS is also increasing from

2007. But company is not using leverage because company is in his initial stage and company

require the cash to invest in the plant and machinery. Company assuming that company will

grow at higher rate in future so company is not using leverage. As sales will increase in future

time, company may use leverage to save taxes.

5. Tangible Assets:-

Fixed asset are increasing and it will help the company to raise debt from market. But

company is in his initial stage and it is high growth company and so company prefer no

leverage but in near future this factor will help to lever the company.

6. Cash Flow:-

In this company free cash flow is negative. In this case equity finance is better rather than

debt financing.

Free Cash Flow

NOPAT -0.13 0.17 75.47 190.81 108.97

Add: DEP 0 0 0 0.2 0.51

Less: Change in WC

0 38.55 4,886.50 2,452.22 -658.72

Less: Capital Expenditure

0 0.5 0.14 10.77 2.98

Free Cash flow -0.13 -38.88 -4811.17 -2271.98 765.22

7. Taxes:-

Production will start from 2011. So here tax will not affect the capital structure. All other

factors are in favour of equity finance rather than debt finance.

8. Non- debt Tax shield:-

In R-Power depreciation is negligible. So this factor is not effective in this case.

9. Risk:-

Bankruptcy cost is in this case is negligible because R-power belongs to ADAG

Group. So here is no bankruptcy cost because of financial support from ADAG Group and R-

Power is a Big name in Indian market.

10. Dividend policy:-

Right now company is not paying any dividend. And this kind of policy help in equity

finance company.

Conclusion:-

R-Power is fully equity finance company because there are following reason:

Company is in his initial stage.

High growth company.

High growth opportunity in near future time.

Right now production is not started.

Company need high investment.

Company have a big financial support of ADAG group.

Company have no fear of high tax.

So above factors are favour in fully equity finance. So company prefer no leverage.

Because of this company have Zero dividend policy.

(Chairmen:- Shri Ratan Tata)

Lighting up Lives!

Recognised as India‟s largest private sector power utility, with a reputation for

trustworthiness, built up over nearly nine decades, Tata Power surges ahead into yet another

year with plans of sustained growth, greater value to consumer and reliable power supply.

Led by a powerful vision, Tata Power pioneered the generation of electricity in India.

It has now successfully served the Mumbai consumers for over ninety years and has spread

its footprints across the nation. Today, it is the country‟s largest private player in the sector.

Apart from Mumbai and Delhi, the company has generation capacities in Jojobera, Jharkhand

and Karnataka.

Tata Power has an installed power generation capacity of about 3000 Mega Watts,

with the Mumbai power business, which has a unique mix of Thermal and Hydro Power,

generated at the Thermal Power Station, Trombay, and the Hydro Electric Power Stations at

Bhira, Bhivpuri and Khopoli, accounting for 1797 MW. Its diverse generation capability

facilitates the company in producing low cost energy, thereby giving its consumers a greater

value for money.

Among its many achievements that Tata Power can proudly boast of are the

installation and commissioning of India‟s first 500 MW unit (at its Thermal Power

Generating Station, Trombay) the 150 MW Pumped Storage Unit at its Hydro Generating

Station, Bhira, and environmental control systems like the Flue Gas Desulphurisation plant.

Tata Power has a first of its kind joint venture with Power Grid Corporation of India

for the 1200 km Tala Transmission Project.

North Delhi Power Limited

A joint venture with the State Government of Delhi for its North Delhi consumers, the

NDPL serves over 8 lakhs satisfied consumers with a peak load of 1050 MW, also providing

state-of-the-art technology driven processes for enhancing consumer billing and related

services.

Tata Power Trading Company Limited (TPTCL), a wholly owned subsidiary of the

Tata Power Company has been awarded the first ever power trading license by the Central

Electricity Regulatory Commission (CERC) under section 14 of the Electricity Act 2003,

enabling it to carry out transactions all over India.

International Projects

Leveraging upon its engineering skills and understanding of the power business, Tata

Power has carried out several overseas projects and successfully completed erection, testing

and commissioning of major power projects in Saudi Arabia, Bangladesh, Kuwait, Algeria,

Myanmar and Thailand. The company has also undertaken projects pertaining to power plant

/ operations management and plant operations training.

Strategic Electronics Division (SED)

The Strategic Electronics Division of Tata Power has been in operation for over 30

years and has been pursuing development and production activities for the Indian defence

sector. SED successfully developed the Multi Barrel Rocket Launcher, „Pinaka‟, proven in

the field through extended user trials which led to its induction into the Indian Army. The

Division has developed specialised equipment for Air Defence and Naval Combat systems.

Corporate Social Responsibility

Tata Power is committed to setting high standards in its pursuit of social

responsibility and remaining sensitive to the issues of resource conservation, environment

protection and enrichment and development of local communities in its areas of operations.

The company has a simple philosophy that guides its activities in these matters, “Giving back

is a means towards going ahead".

Our widespread programmes on biodiversity conservation, afforestation, pisciculture,

family planning, health services, primary and secondary education and many more have made

inroads into the tiny hamlets and tribal regions of our hydro catchment areas and it is our

endeavour to light up these dark and narrow streets to new dawns.

Capital structure of Tata Power

Tata Power is a levered company as on 31-03-2010.

Year 2006 2007 2008 2009 2010

Equity 197.92 197.92 220.72 221.44 237.33

Debt 2,796.81 3,675.52 3,083.35 5,247.06 5,963.42

Total 2,994.73 3,873.44 3,304.07 5,468.50 6,200.75

Equity ratio 0.0660894 0.0510967 0.0668025 0.0404937 0.038274

Debt ratio 0.9339106 0.9489033 0.9331975 0.9595063 0.961726

Cost of Equity 25.08 33.6 12.89 19.69 19.25

Cost of Debt 5.4569313 5.09070825 5.5725104 6.2078574 7.053671

WACC 5.02 4.89 4.28 4.77 5.22

Growth in sales 4,553.23 4,918.53 5,909.60 7,257.05 7,104.22

Profit Margin:

Net Profit Margin 12.92 13.26 14.35 12.32 12.88

Return On Long term Fund 8.72 7.62 7.18 7.67 9.94

EPS 45.41 50.46 52.81 56.72 60.07

DPS 8.5 9.5 10.5 11.5 12

Leverage ratios

Long term debt / Equity 0.49 0.6 0.34 0.52 0.55

Total debt/equity 0.5 0.61 0.38 0.6 0.56

Owners fund as % of total source

66.34 61.97 72.15 62.22 63.84

Fixed assets turnover ratio 0.76 0.78 0.91 0.8 0.7

Liquidity ratios

Current ratio 2.22 2.25 2.04 2.1 2.45

Current ratio (inc. st loans) 2.18 2.22 1.78 1.64 2.39

Quick ratio 1.85 2 1.75 1.77 2.17

Inventory turnover ratio 498.76 6,072.41 18.7 15.49 18.98

Payout ratios

Dividend payout ratio (net profit)

31.41 31.6 30.84 31.2 34.08

Dividend payout ratio (cash profit)

21.34 22.05 23.02 22.9 22.65

Earning retention ratio 56.37 54.01 43.09 40.16 63.82

Cash earnings retention ratio

73.65 71.79 65.02 64.68 76.44

Coverage ratios

Adjusted cash flow time total debt

3.84 4.71 4.02 6.44 4.35

Financial charges coverage ratio

6.63 5.55 6.23 4.15 5.02

Fin. charges cov.ratio (post tax)

6.89 6.34 7.78 4.86 4.39

Free Cash flow 718.01 -144.91 771.19 -2172.38 -737.07

TAX 130.68 70.03 132.35 210.91 320.72

Non Debt Tax Shield

Depriciation 278.34 291.92 290.5 328.85 477.94

Fixed Assets 5,924.74 6,229.71 6,481.99 8,985.86 10,010.80

Factors affecting Capital Structure of Tata Power

1. Size :-

Recognized as India largest private sector power utility, with a reputation for

trustworthiness, built up over nearly nine decades, Tata Power surges ahead into yet another

year with plans of sustained growth, greater value to consumer and reliable power supply.

Led by a powerful vision, Tata Power pioneered the generation of electricity in India.

It has now successfully served the Mumbai consumers for over ninety years and has spread

its footprints across the nation. Today, it is the country‟s largest private player in the sector.

Apart from Mumbai and Delhi, the company has generation capacities in Jojobera, Jharkhand

and Karnataka.

Tata Power has an installed power generation capacity of about 3000 Mega Watts,

with the Mumbai power business, which has a unique mix of Thermal and Hydro Power,

generated at the Thermal Power Station, Trombay, and the Hydro Electric Power Stations at

Bhira, Bhivpuri and Khopoli, accounting for 1797 MW. Its diverse generation capability

facilitates the company in producing low cost energy, thereby giving its consumers a greater

value for money.


Tata Power sales is showing increasing trend from 2006 and profit margin is average

more than 12.5. Because of Revenue increasing and also profit is increasing more income

comes under tax. So company prefer more debt financing. Debt financing is more risky but

company have a support from tata group.


In energy and power sector there are lots of opportunities and India has deficit of

energy and power. So company have a very good growth opportunity and company will grow

with high growth rate. High growth opportunity has a negative relation with leverage. But in

case of Tata power this company is stable company and revenue is growing and profit is

growing and company does not need high investment like R-Power so thats why company is

high debt financing company.

4. Profit Margin:-

From 2006 to 2008 company profit margin is increasing and in 2009 profit margin is

decreased but also growing in 2010. Company have to pay tax on it. If profit margin is high

company should use leverage to save tax. EPS is also increasing from 2006. Because of

profit margin and EPS is increasing company prefer more debt.


Fixed asset are increasing and it will help the company to raise debt from market. If

tangible assets are increasing company is able to raise secure debt. That‟s why company is

able to maintain high debt Ratio.

6. Cash Flow:-

Free Cash Flow

NOPAT 439.67 478.75 471.44 480.77 892.75

Add: DEP 278.34 291.92 290.5 328.85 477.94

Less: Change in WC 0.00 610.61 -261.53 478.13 1,082.82

Less: Capital Expenditure 0 304.97 252.28 2,503.87 1,024.94

Free Cash flow 718.01 -144.91 771.19 -2172.38 -737.07

Equity ratio 0.0660894 0.0510967 0.0668025 0.0404937 0.038274

Debt ratio 0.9339106 0.9489033 0.9331975 0.9595063 0.961726

WACC 5.02 4.89 4.28 4.77 5.22

According to this table when ever company has a negative cash debt ratio is increase and

whenever company has a positive cash flow equity ratio is increasing so, that‟s why company

prefer more debt finance.

7. Taxes:-

In Tata Power case sales is growing and here tax is also growing. That‟s why

company prefer more debt financing company.


In Tata power depreciation is growing. But here this factor is not effective to

influence capital structure.

9. Risk:-

Bankruptcy cost is in this case is negligible because Tata power belongs to Tata

Group. So here is no bankruptcy cost because of financial support from Tata Group and Tata

Power is a Big name in Indian market.

Equity ratio 0.0660894 0.0510967 0.0668025 0.0404937 0.038274

Debt ratio 0.9339106 0.9489033 0.9331975 0.9595063 0.961726

Cost of Equity 25.08 33.6 12.89 19.69 19.25

Cost of Debt 5.4569313 5.09070825 5.5725104 6.2078574 7.053671

WACC 5.02 4.89 4.28 4.77 5.22

Whenever cost of equity is increasing ratio of equity is also decreasing and whenever cost of

debt is increasing company prefer equity financing. Here little change in cost of equity and

coat of debt affect the capital structure.

Conclusion:-

Tata Power is highly debt finance company because there are following reason:

Tata power is developed company

High growth company and also sales revenue is increasing


No need of too much investment

Company have a big financial support of Tata group.

Company have no fear of bankruptcy cost

Growing profit and growing tax affect the capital structure.

When Cost of debt increase company prefer equity financing.

NATIONAL THERMAL POWER CONSERVATION

India‟s largest power company, NTPC was set up in 1975 to accelerate power

development in India. NTPC is emerging as a diversified power major with presence in the

entire value chain of the power generation business. Apart from power generation, which is

the mainstay of the company, NTPC has already ventured into consultancy, power trading,

ash utilisation and coal mining. NTPC ranked 317th

in the „2009, Forbes Global 2000‟

ranking of the World‟s biggest companies. NTPC became a Maharatna company in May,

2010, one of the only four companies to be awarded this status.

The total installed capacity of the company is 32,694 MW (including JVs) with 15

coal based and 7 gas based stations, located across the country. In addition under JVs, 5

stations are coal based & another station uses naptha/LNG as fuel. The company has set a

target to have an installed power generating capacity of 1,28,000 MW by the year 2032. The

capacity will have a diversified fuel mix comprising 56% coal, 16% Gas, 11% Nuclear and

17% Renewable Energy Sources(RES) including hydro. By 2032, non fossil fuel based

generation capacity shall make up nearly 28% of NTPC‟s portfolio.

Vision

“To be the world’s largest and best power producer, powering India’s growth.”

Mission

“Develop and provide reliable power, related products and services at

competitive prices, integrating multiple energy sources with innovative and eco-friendly technologies and contribute to society.”

Capital structure of NTPC

NTPC is a levered company as on 31-03-2010.

Year 2006 2007 2008 2009 2010

Equity 8245.5 8245.5 8245.5 8245.5 8245.5

Debt 20,638.10 25,141.10 27,190.60 34,567.80 37,797.00

Total 28,883.60 33,386.60 35,436.10 42,813.30 46,042.50

Equity ratio 0.2854734 0.24697034 0.2326864 0.192592 0.1790845

Debt ratio 0.7145266 0.75302966 0.7673136 0.807408 0.8209155

Cost of Equity 35.55 164.03 9.04 13.38 13.81

Cost of Debt 9.7131034 8.17665098 7.2900193 5.0249076 4.9260523

WACC 14.88 45.05 5.78 5.24 5.19

Growth in sales 26,142.90 32,631.70 37,091.00 41,975.20 46,377.70

Profit Margin:



EPS 7.06 8.33 8.99 9.95 10.59

DPS 2.8 3.2 3.5 3.6 3.8

Leverage ratios




68.53 65.9 66.62 63.05 62.76


Liquidity ratios

Current ratio 2.11 2.42 2.36 2.89 2.81


Quick ratio 1.84 2.18 2.16 2.59 2.5

Inventory turnover ratio 25.14 30.5 33.59 28.21 27.54

Payout ratios


45.23 44.11 45.53 42.31 41.94


33.45 33.83 35.33 32.83 32.16



62.44 65.2 64.49 63.7 65.96

Coverage ratios


2.95 2.89 2.86 3.62 3.51


5.04 6.29 7.31 7.97 8.22


4.93 5.35 5.82 7.08 7.11

Free Cash flow 7005.7 -1567.5 4278.9 -2048 6826.4

TAX 1,082.40 2,163.70 2,994.20 2,554.70 2,682.70

Non Debt Tax Shield

Depriciation 2,047.70 2,075.40 2,138.50 2,364.50 2,650.10

Factors affecting Capital Structure of NTPC

1. Size :-

NTPC is a big company and chances of failure of a big company is less. So company can be high equity finance company and can be high debt finance company.


NTPC sales is showing increasing trend from 2006. Because of Revenue increasing and also

profit is increasing more income comes under tax. So company prefer more debt financing.

Debt financing is more risky but company save some amount by Tax shield.


In energy and power sector there are lots of opportunities and India has deficit of energy and

power. So company have a very good growth opportunity and company will grow with high

growth rate. High growth opportunity has a negative relation with leverage. But in case of

NTPC this company is stable company and revenue is growing and profit is growing and

company does not need high investment like R-Power so thats why company is high debt

financing company.

4. Profit Margin:-

From 2006 company profit margin is decreased but overall profit is increasing. Company

have to pay tax on it. If profit margin is high company should use leverage to save tax. EPS is

also increasing from 2006. Because of profit margin and increasing company prefer more

debt.


Fixed asset are increasing and it will help the company to raise debt from market. If tangible

assets are increasing company is able to raise secure debt. That‟s why company is able to

maintain high debt Ratio.

6. Cash Flow:-

Free Cash Flow

NOPAT 4,958.00 6,615.80 7,366.70 7,190.30 8,098.90

Add: DEP 2,047.70 2,075.40 2,138.50 2,364.50 2,650.10

Less: Change in WC 0 5,572.10 2,462.50 2,617.80 -388.20

Less: Capital Expenditure 0 4,686.60 2,763.80 8,985.00 4,310.80

Free Cash flow 7005.7 -1567.5 4278.9 -2048 6826.4

Equity ratio 0.2854734 0.24697034 0.2326864 0.192592 0.1790845

According to this table when ever company has a negative free cash flow, debt ratio is

increase. That‟s why company prefer more debt finance.

10. Taxes:-

In NTPC case sales is growing and here tax is also growing. And more debt shield more

income from Taxes. That‟s why company prefer more debt financing company.


In NTPC depreciation is growing. But here this factor is not effective to influence capital

structure.

12. Risk:-

Bankruptcy cost is in this case is negligible because NTPC is govt organisation.

13. Cost of Debt and Cost of Equity:-

Equity ratio 0.2854734 0.24697034 0.2326864 0.192592 0.1790845

Debt ratio 0.7145266 0.75302966 0.7673136 0.807408 0.8209155

Cost of Equity 35.55 164.03 9.04 13.38 13.81

Cost of Debt 9.7131034 8.17665098 7.2900193 5.0249076 4.9260523

WACC 14.88 45.05 5.78 5.24 5.19

The company from its initial stage highly debt financing company. From 2006 cost of debt is

decreasing that‟s why company prefer more debt financing. If we look the trend of cost of

debt, is decreasing. So company prefer more debt finance and more volatility in market return

increase the cost of equity, which is higher than cost of debt.

Debt ratio 0.7145266 0.75302966 0.7673136 0.807408 0.8209155

WACC 14.88 45.05 5.78 5.24 5.19

Conclusion:-

NTPC is highly debt finance company because there are following reason:

NTPC is developed company



No need of too much investment




When Cost of debt increasing company prefer equity financing.

Over All Capital Structure of Power Sector Company

As we seen that in power sector companies have no definite capital structure. As R-

Power is fully equity finance company and Tata power is highly debt finance company and

NTPC is mixed equity-debt finance company. NTPC is more debt finance company.

So here is not definite capital structure and capital structure is changed by several factors as

we seen in above cases.

Tata Motors Limited is India's largest automobile company, with consolidated

revenues of Rs. 92,519 crores (USD 20 billion) in 2009-10. It is the leader in commercial

vehicles in each segment, and among the top three in passenger vehicles with winning

products in the compact, midsize car and utility vehicle segments. The company is the

world's fourth largest truck manufacturer, and the world's second largest bus manufacturer.

The company's 24,000 employees are guided by the vision to be "best in the manner

in which we operate, best in the products we deliver, and best in our value system and

ethics."

Established in 1945, Tata Motors' presence indeed cuts across the length and breadth

of India. Over 5.9 million Tata vehicles ply on Indian roads, since the first rolled out in 1954.

The company's manufacturing base in India is spread across Jamshedpur (Jharkhand), Pune

(Maharashtra), Lucknow (Uttar Pradesh), Pantnagar (Uttarakhand) and Dharwad (Karnataka).

Following a strategic alliance with Fiat in 2005, it has set up an industrial joint venture with

Fiat Group Automobiles at Ranjangaon (Maharashtra) to produce both Fiat and Tata cars and

Fiat powertrains. The company is establishing a new plant at Sanand (Gujarat). The

company's dealership, sales, services and spare parts network comprises over 3500 touch

points; Tata Motors also distributes and markets Fiat branded cars in India.

Tata Motors, the first company from India's engineering sector to be listed in the New

York Stock Exchange (September 2004), has also emerged as an international automobile

company. Through subsidiaries and associate companies, Tata Motors has operations in the

UK, South Korea, Thailand and Spain. Among them is Jaguar Land Rover, a business

comprising the two iconic British brands that was acquired in 2008. In 2004, it acquired the

Daewoo Commercial Vehicles Company, South Korea's second largest truck maker

Tata Motors is also expanding its international footprint, established through exports

since 1961. The company's commercial and passenger vehicles are already being marketed in

several countries in Europe, Africa, the Middle East, South East Asia, South Asia and South

America. It has franchisee/joint venture assembly operations in Kenya, Bangladesh, Ukraine,

Russia, Senegal and South Africa.

Tata Motors is committed to improving the quality of life of communities by working

on four thrust areas – employability, education, health and environment. The activities touch

the lives of more than a million citizens. The company's support on education and

employability is focused on youth and women. They range from schools to technical

education institutes to actual facilitation of income generation. In health, our intervention is

in both preventive and curative health care. The goal of environment protection is achieved

through tree plantation, conserving water and creating new water bodies and, last but not the

least, by introducing appropriate technologies in our vehicles and operations for constantly

enhancing environment care. With the foundation of its rich heritage, Tata Motors today is

etching a refulgent future.

Capital structure of Tata Motor

Tata Motor is highly debt finance company as on 31-03-2010.

Year 2006 2007 2008 2009 2010

Equity 382.87 385.41 385.54 514.05 570.6

Debt 2936.84 4009.14 6280.52 13165.56 16625.91

Total 3319.71 4394.55 6666.06 13679.61 17196.51

Equity ratio 0.1153324 0.08770181 0.0578363 0.0375778 0.0331812

Debt ratio 0.8846676 0.91229819 0.9421637 0.9624222 0.9668188

Cost of Equity 24.39 23.19 12.26 28.84 27.84

Cost of Debt 11.925743 11.3677746 7.5082955 5.3542728 7.4958303

WACC 9.8 8.87 5.38 4.54 5.77

Growth in sales 20,088.63 26,664.25 28,767.91 25,660.67 35,373.29

Profit Margin:



EPS 39.94 49.65 52.63 19.48 39.26

DPS 13 15 15 6 15

Leverage ratios




65.23 63.05 55.43 48.44 47.05


Liquidity ratios

Current ratio 1.24 1.24 0.89 0.84 0.62


Quick ratio 0.96 0.91 0.66 0.58 0.43


Payout ratios


37.13 35.34 32.51 34.52 44.28


26.73 26.16 24.02 17.94 29.02



70.98 71.32 72.18 81.29 61.84

Coverage ratios


1.5 1.7 2.65 7.13 6.4


8.08 7.62 7.19 3.64 3.56


7.06 6.67 6.82 3.73 3.74

Free Cash flow 1882.59 1394.54 3497.24 -517.23 3277.34

TAX 524.93 660.37 547.55 12.5 589.46

Non Debt Tax Shield

Depriciation 520.94 586.29 652.31 874.54 1,033.87

Factors affecting Capital Structure of Tata Motor

1. Size :-

Tata Motor is a big company and chances of failure of a big company is less. So company can be high equity finance company and can be high debt finance company.


Tata Motor sales is showing increasing trend from 2006 to 2008 and in 2009 sales is

decreasing and in 2010 sales is increasing. Because of Revenue increasing and also profit is

increasing more income comes under tax. So company prefer more debt financing. Debt

financing is more risky but company save some amount by Tax shield. Tata Motor capital

structure is may be affecting by sales because whenever sales is increase, company prefer

more debt finance.

3. Growth opportunity:- In automobile sector there are lots of opportunities. In last 5 year Indian Automobile sector is

booming and India become a auto hub after US and China.

4. Profit Margin:- From 2006 company profit margin is decreased but overall profit is increasing. Company


also increasing from 2006. Because of profit margin and increasing company prefer more

debt.





6. Cash Flow:-

Free Cash Flow

NOPAT 1,361.65 1,686.31 1,654.17 921.51 1,421.49

Add: DEP 520.94 586.29 652.31 874.54 1,033.87

Less: Change in WC 0 73.81 -3,245.79 -761.06 -5,333.62

Less: Capital Expenditure 0 804.25 2,055.03 3,074.34 4,511.64

Free Cash flow 1882.59 1394.54 3497.24 -517.23 3277.34

Equity ratio 0.1153324 0.08770181 0.0578363 0.0375778 0.0331812

Debt ratio 0.8846676 0.91229819 0.9421637 0.9624222 0.9668188

WACC 9.8 8.87 5.38 4.54 5.77

According to this table whatever company has a negative or positive free cash flow, debt ratio

is increase. So in this case free cash flow does not affect the capital structure of company.

14. Taxes:-

In Tata Motor case sales is growing and here tax is also growing. And more debt shield more



In Tata Motor depreciation is growing. But here this factor is not effective to influence capital

structure.

16. Risk:-

Bankruptcy cost is in this case is negligible because Tata Motor is a big name in market and

Tata Motor is a part of Tata Group, which is top most corporate organization in INDIA.


Equity ratio 0.1153324 0.08770181 0.0578363 0.0375778 0.0331812

Debt ratio 0.8846676 0.91229819 0.9421637 0.9624222 0.9668188

Cost of Equity 24.39 23.19 12.26 28.84 27.84

Cost of Debt 11.925743 11.3677746 7.5082955 5.3542728 7.4958303

WACC 9.8 8.87 5.38 4.54 5.77

. From 2006 cost of debt is decreasing that‟s why company prefer more debt financing. If we

look the trend of cost of debt, is decreasing. So company prefer more debt finance and more

volatility in market return increase the cost of equity, which is higher than cost of debt. In this

type of condition company prefer more debt rather than equity.

Conclusion:-

Tata Motor is highly debt finance company because there are following reason:

Tata motor is developed company





Growing profit affect the capital structure.

When Cost of debt increasing company prefer equity financing. But in this case cost of debt

is decreasing so company prefer debt financing.

Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods

Company, touching the lives of two out of three Indians with over 20 distinct categories in

Home & Personal Care Products and Foods & Beverages. The company‟s Turnover is Rs.

17,523 crores (for the financial year 2009 - 2010)

HUL is a subsidiary of Unilever, one of the world‟s leading suppliers of fast moving

consumer goods with strong local roots in more than 100 countries across the globe with

annual sales of about €40 billion in 2009 Unilever has about 52% shareholding in HUL.

Hindustan Unilever was recently rated among the top four companies globally in the

list of “Global Top Companies for Leaders” by a study sponsored by Hewitt Associates, in

partnership with Fortune magazine and the RBL Group. The company was ranked number

one in the Asia-Pacific region and in India.

The mission that inspires HUL's more than 15,000 employees, including over 1,400

managers, is to help people feel good, look good and get more out of life with brands and

services that are good for them and good for others. It is a mission HUL shares with its

parent company, Unilever, which holds about 52 % of the equity.

HUL's brands touch the lives of two out of three Indians. They endow the company

with turnover of Rs.17,523 crores (for the 12 month period – April 1, 2009 to March 31,

2010).

The mission that inspires HUL's more than 15,000 employees, including over 1,400

managers, is to help people feel good, look good and get more out of life with brands and

services that are good for them and good for others. It is a mission HUL shares with its

parent company, Unilever, which holds about 52 % of the equity.

Capital structure of HUL

HUL is fully equity finance company as on 31-03-2010.

Year 2006 2007 2008 2009 2010

Equity 220.12 220.68 217.75 217.99 218.17

Debt 56.94 72.6 88.53 421.95 0

Total 277.06 293.28 306.28 639.94 218.17

Equity ratio 0.7944849 0.75245499 0.7109508 0.3406413 1

Debt ratio 0.2055151 0.24754501 0.2890492 0.6593587 0

Cost of Equity 10.06 10.63 7.96 5.46 7.57

Cost of Debt 33.702143 14.7796143 28.803795 6.000711 0

WACC 12.59 9.48 11.17 4.51 7.57

Growth in sales 11,193.88 12,244.02 13,880.56 20,504.28 17,769.12

Profit Margin:



EPS 6.4 8.41 8.12 11.47 10.09

DPS 5 6 9 7.5 6.5

Leverage ratios


Total debt/equity 0.02 0.02 0.06 0.2 -


97.58 97.4 94.2 83 100


Liquidity ratios

Current ratio 0.7 0.74 0.69 1.01 0.83


Quick ratio 0.32 0.33 0.24 0.51 0.45


Payout ratios


89.49 81.45 131.8 76.47 75.2


82.23 76.11 122.23 70.93 69.4

Earning retention ratio 1.94 -0.12 -39.13 18.5 21.25


10.59 7.83 -28.52 24.77 27.59

Coverage ratios


0.04 0.04 0.04 0.16 -


89.76 183.74 88.52 123.99 421.5


80.85 185.99 75.81 107.47 342.84

Free Cash flow 1409.51 1519.56 1991.85 635.81 2775.1

TAX 294 321.8 417.14 572.94 648.36

Non Debt Tax Shield

Depriciation 124.45 130.16 138.36 195.3 184.03

Factors affecting Capital Structure of HUL

1. Size :-

HUL is a big company and chances of failure of a big company is less. So company can be high equity finance company and can be high debt finance company.


HUL sales are showing increasing trend from 2006 to 2009 and in 2010 sales is decreasing.

Because of Revenue increasing and also profit is increasing so more income comes under tax.

So company prefer more debt financing. Debt financing is more risky but company save

some amount by Tax shield.


In FMCG sector there are opportunities. Indian FMCG sector is growing at steady rate. This

sector is well developed in Indian market. But here growth rate is very low. There is not

required heavy investment in next 5 year.

8. Profit Margin:- From 2006 company profit margin is decreased but overall profit is increasing. Company


also increasing from 2006-09. Because of profit margin and increasing company prefer more

debt.





10. Cash Flow:-

Free Cash Flow

NOPAT 1,285.06 1,509.52 1,675.85 2,346.32 2,102.69

Add: DEP 124.45 130.16 138.36 195.3 184.03

Less: Change in WC 0 32.54 -384.03 1,693.16 -1,188.61

Less: Capital Expenditure 0 87.58 206.39 212.65 700.23

Free Cash flow 1409.51 1519.56 1991.85 635.81 2775.1

Equity ratio 0.7944849 0.75245499 0.7109508 0.3406413 1

Debt ratio 0.2055151 0.24754501 0.2890492 0.6593587 0

WACC 12.59 9.48 11.17 4.51 7.57

According to this table company has a positive free cash flow from 2006-09, debt ratio is

increase. In 2009 suddenly free cash flow is less than 2009, debt is also increase and in 2010

free cash flow is four time higher than 2009, in this time company is fully equity finance

company.

In this company free cash flow is not effective. Because capital structure is not affected by

free cash flow in this company.

18. Taxes:-

In HUL case sales is growing and here tax is also growing. And more debt shield more



In HUL depreciation is growing. But here this factor can be effective to influence capital

structure. Because depreciation is reached almost 80% of equity and depreciation has a

negative relation with leverage.

20. Risk:-

Bankruptcy cost is in this case is negligible because HUL is blue chip company. It has a good

image and goodwill in market.


Equity ratio 0.7944849 0.75245499 0.7109508 0.3406413 1

Debt ratio 0.2055151 0.24754501 0.2890492 0.6593587 0

Cost of Equity 10.06 10.63 7.96 5.46 7.57

Cost of Debt 33.702143 14.7796143 28.803795 6.000711 0

WACC 12.59 9.48 11.17 4.51 7.57

In HUL case cost of equity or debt increasing or decreasing, debt ratio is ever increasing. In

2010 suddenly company become fully equity finance company. So in this determining the

appropriate capital structure is difficult.

Conclusion:-

HUL is more equity finance company because there are following reason:

HUL is developed company

Sales revenue is increasing

Company have a sufficient amount of Free cash flow



In company like HUL determination of factor affecting capital structure, is difficult.

N. R. Narayana Murthy

(Chairman of the Board and Chief Mentor, Infosys Technologies)

Infosys Technologies Ltd. (NASDAQ: INFY) was started in 1981 by seven people

with US$ 250. Today, we are a global leader in the "next generation" of IT and consulting

with revenues of US$ 5.4 billion (LTM Sep-10).

Infosys defines, designs and delivers technology-enabled business solutions that help

Global 2000 companies win in a Flat World. Infosys also provides a complete range of

services by leveraging our domain and business expertise and strategic alliances with leading

technology providers.

Our offerings span business and technology consulting, application services, systems

integration, product engineering, custom software development, maintenance, re-engineering,

independent testing and validation services, IT infrastructure services and business process

outsourcing.

Infosys pioneered the Global Delivery Model (GDM), which emerged as a disruptive force in

the industry leading to the rise of offshore outsourcing. The GDM is based on the principle of

taking work to the location where the best talent is available, where it makes the best

economic sense, with the least amount of acceptable risk.

Infosys has a global footprint with 63 offices and development centers in India, China,

Australia, the Czech Republic, Poland, the UK, Canada and Japan. Infosys and its

subsidiaries have 122,468 employees as on September 30, 2010.

Infosys takes pride in building strategic long-term client relationships. Over 97% of our

revenues come from existing customers (FY 10).

Locations

Corporate headquarters : Bangalore, India

US headquarters : Fremont, CA

Worldwide offices : Atlanta, Bangalore, Beijing, Bellevue, Berkeley Heights, Bhubaneswar,

Brussels, Charlotte, Chennai, Detroit, Frankfurt, Fremont, Hong Kong, Hyderabad, Lake

Forest, Lisle, London, Mangalore, Mauritius, Melbourne, Milano, Mohali, Mumbai, Mysore,

New Delhi, Paris, Phoenix, Plano, Pune, Quincy, Reston, Shanghai, Sharjah, Stockholm,

Stuttgart, Sydney, Thiruvananthapuram, Tokyo, Toronto, Utrecht, Zurich.

Employees 49,422

http://www.infosys.com/about/who-we-are/Pages/history.aspx

http://www.infosys.com/about/who-we-are/Pages/history.aspx

http://www.infosys.com/flat-world/business/pages/index.aspx

http://www.infosys.com/about/alliances/pages/index.aspx

http://www.infosys.com/offerings/pages/index.aspx

http://www.infosys.com/offerings/consulting-services/pages/index.aspx

http://www.infosys.com/offerings/IT-services/application-services/pages/index.aspx

http://www.infosys.com/offerings/IT-services/systems-integration/pages/index.aspx

http://www.infosys.com/offerings/IT-services/systems-integration/pages/index.aspx

http://www.infosys.com/offerings/engineering-services/product-engineering/pages/index.aspx

http://www.infosys.com/offerings/engineering-services/pages/index.aspx

http://www.infosys.com/offerings/IT-services/independent-validation-testing-services/pages/index.aspx

http://www.infosys.com/offerings/IT-services/infrastructure-services/pages/index.aspx

http://www.infosys.com/offerings/BPO-services/Pages/index.aspx

http://www.infosys.com/offerings/BPO-services/Pages/index.aspx

http://www.infosys.com/global-sourcing/global-delivery-model/pages/index.aspx

http://www.infosys.com/contact/pages/index.aspx

Capital structure of INFOSYS

INFOSYS is fully equity finance company as on 31-03-2010.

Year 2006 2007 2008 2009 2010

Equity 138 286 286 286 287

Debt 0.00 0 0 0 0

Total 138.00 286.00 286.00 286.00 287.00



Cost of Equity 13.33 13.93 9.15 14.41 14.48


WACC 13.33 13.93 9.15 14.41 14.48

Growth in sales 9,028.00 13,149.00 15,648.00 20,264.00 21,140.00

Profit Margin:



EPS 87.86 66.23 78.15 101.58 101.3

DPS 45 11.5 33.25 23.5 25

Leverage ratios


Total debt/equity - - - - -


100 100 100 100 100


Liquidity ratios

Current ratio 2.75 4.96 3.3 4.71 4.28


Quick ratio 2.73 4.91 3.28 4.67 4.2

Inventory turnover ratio - - - - -

Payout ratios


58.32 19.85 49.77 27.03 28.84


49.89 17.66 44.35 24.15 25.32



51.43 82.15 55.6 77.16 74.49

Coverage ratios


- - - - -


3,211.00 4,559.00 5,642.00 3,891.00 -


2,831.00 4,253.00 5,017.00 3,257.50 -

Free Cash flow 2907 -174 3013 1612 7947

TAX 303 352 630 895 1,717.00

Non Debt Tax Shield

Depriciation 409 469 546 694 807

Factors affecting Capital Structure of INFOSYS

1. Size

INFOSYS is a big company and chances of failure of a big company is less. So company can be high equity finance company and can be high debt finance company.


Infosys sales are showing increasing trend from 2006. Because of Revenue increasing and

also profit is increasing so more income comes under tax. But company is 100 % equity

finance company. In this case sales do not effective factor which affect the capital structure.


In IT sector there is lots of growth opportunities and it‟s a key sector of today‟s Indian

economy. IT sector will grow at high growth rate in near future. That‟s required investment.

In this point of view equity financing is a good decision.

4. Profit Margin:-

From 2006 company profit margin is increasing and despite a high tax rate company follows

100% equity finance capital structure. So in this case sales is not effective factor to affect

capital structure.



assets are increasing company is able to raise secure debt. But company is fully equity

finance company. So here it is not a effective factor.

6. Cash Flow:-

Free Cash Flow

NOPAT 2,498.00 3,737.00 4,465.00 6,191.00 5,755.00

Add: DEP 409 469 546 694 807

Less: Change in WC 0 3,328.00 1,379.00 3,795.00 822.00

Less: Capital Expenditure 0 1,052.00 619.00 1,478.00 -2,207.00

Free Cash flow 2907 -174 3013 1612 7947



WACC 13.33 13.93 9.15 14.41 14.48

According to this table company has a positive free cash flow from 2006. In company like

Infosys they have too much free cash flow, here debt financing is not a good choice for

company.

7. Taxes:-

In Infosys case sales is growing and here tax is also growing. But company is fully equity

finance company. Although Infosys have a more free cash flow and investment in IT sector is

quite low. So there is no need of debt financing to save some money. If they become levered

it will be costlier for Infosys.


Depreciation is growing. More Depreciation shield more income from tax. So these factors

help to maintain fully equity finance.

9. Risk:-

Bankruptcy cost is in this case is negligible. Because Infosys is a big name in market and

have a good image and goodwill in market.




Cost of Equity 13.33 13.93 9.15 14.41 14.48


WACC 13.33 13.93 9.15 14.41 14.48

In the case of Infosys cost of equity and debt does not affect capital structure.

Conclusion:- Infosys is fully equity finance company because there are following reason:

Infosys is developed company

Sales revenue is increasing

Company have a sufficient amount of Free cash flow



Depreciation is increasing and it has a negative relation with leverage.

Findings

Capital structure is differing from different-different company.

There is no exact capital structure for company.

There is no formula for calculating capital structure.

Size of company matters in capital structure. Because blue-chip Company have no fear of bankruptcy cost and they easily get debt finance.

Future investment and growth opportunity matter in framing of capital structure.

Interest rate or tax rate also matters in capital structure.

Some factor will affect capital structure of one company, is not necessary that it can affect the capital structure of other company.

But there is no rule and regulation for framing a optimal capital structure.

Optimal capital structure will depend upon company’s need and requirement and

condition of company and other factors also matters.

In a same sector company, no company have a same kind of capital structure.

Company financial condition will also matters in capital structure.

Capital structure is also depending upon cost of funding. It means if cost of debt is cheaper then cost of Equity, Company will prefer debt financing. But it is not necessary for company that company have to prefer debt finance if cost of debt is available at cheaper rate. And vise –e –versa in case of if cost of equity is cheaper than cost of debt.

r power final

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debt capital

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perfect capital structure

capital structure theory3

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capital structure of