capital structure
TRANSCRIPT
INTRODUCTION TO THE UNIT
The existence of GNA came into being in 1946, in a small village called Bundala in
District Jalandhar of Punjab. GNA has made its presence prominent not only in India but
also across the world.
Today, more than 6000 families are proud to be associated with this giant colossal
tree that bloomed from a seedling sown 59 years ago. Founded with a modest beginning
by Late Mr. Amar Singh Ji and nourished by his sons Mr. Rachhpal Singh and Mr.
Gursaran Singh, with the artistic creativity that was gifted to the next generation by
tradition, GNA is now boosted and taken care by the third generation Mr. Jasvinder
Singh, Mr. Maninder Singh, Mr. Ranbir Singh and Mr. Gurdeep Singh. Today GNA
group has created an important place for itself in Indian as well as Global Automotive
Industry.
GNA group is on a fast moving track towards growth and globalization. The company
has a large customer base covering different sectors of the automotive industry with
diversified product range. Along with this the company shows steady growth profile even
during the time when there is demand fluctuations in the automotive sector.
GNA is an Original Equipment supplier to various Automobile Majors besides having
a strong presence in the replacement market.GNA has been accredited with ISO 9002 and
QS 9000 certifications for its quality systems, holds a reliable name in the world of
automotive components. Quality Management at GNA is a timeless concept wherein,
changes in customer expectations is a driving force to go beyond conformance to
standards. GNA’s quality assurance is equipped with the finest equipment ranging from
metallurgical microscope to mobile spectrometer, ultrasonic flow detector, micro
hardness testers, surface roughness testers, profile projectors and involute profile
testers.GNA sincerely believes in technology up-gradation for keeping a competitive
edge. Indeed, this explains the continuous replacement of conventional manufacturing
equipment with modernized transfer lines resulting in increased productivity and
efficiency at low cost. GNA’s core competency lies in its strong knowledge base of
engineering and over 59 years of experience in manufacturing. GNA has come a long
way yet journey toward excellence is never ending Sri. Amar Singh Ji made a modest
beginning with an ‘atta-chakki’ {Flour mill. Late Sardar Amar Singh established a small
unit for the manufacture of axles under the name of ‘Nirankar Auto Engg. works in the
late 1946. Through the last 59 years the company has grown in leaps and bounds and
established itself as a major source of vehicle paets in India as well as in world. Exports
market of GNA range of products have a wide spectra of applications in heavy, medium
and high commercial vehicles i.e. passenger cars, jeeps, tractors, trucks etc.
GNA group is today spread over area of 3,50,000 sq.mts. employing a total man power of
about 2000 personnel with a turn over of 29.78 million US $ coming from all units.
GNA group basically consists of following four companies:
M/S Guru Nanak Auto Enterprises Ltd., Bundala
M/S Guru Nanak Auto Udyog Ltd., Bundala
M/S Guru Nanak Auto Duraparts, Mehtiana
M/S Guru Nanak Auto Axles Ltd., Mehtiana
As per concern my training we will concentrate on M/S Guru Nanak Auto Duraparts
which was being established at Mehtiana {Dist. Hoshiarpur} which is situated 20 kms
from Phagwada. This unit was set up in 1993, just beside the previously set up unit M/S
Guru Nanak Auto Axle Ltd. This unit is covered in 1550 sq mts. Here in this unit all type
of gears is manufactured by high quality precision imported hobbing and gear cutting
machines. This unit also manufacure rear axle shafts, UJ cross, propeller shafts, steering
components, PTO shafts etc.
AUTHORIZATION OF THE UNIT
GNA group is on a fast moving track towards growth and globalization. The company has a large
customer base covering different sectors of the automotive industry with a diversified product range. GNA
manufactures quality automobile components, which meet the highest international standards. The products
include Rear Axle Shafts and U. J. Crosses, Propeller Shaft Assemblies, Hydraulic Lift Shafts, Steering
components, Wheel Spanners, Brake S-cam Shafts, P. T. O. Shafts and Forgings for the automobile industry,
for use in all types of light, medium and heavy vehicles.
Click here for a larger view
HEAD OFFICE
Mehtiana 146 001, Distt. Hoshiarpur
Punjab (India)
Phone : +91 (1882) 262273 (7 Lines)
Fax : +91 (1882) 262302/262280
Email : [email protected]
KENTUCKY EXPOSITION CENTRE
LOUISVILLE, KENTUCKY, USA.
Friday, Saturday, Sunday
September 24-25-26, 2004
STAND NO:4711
60th IAA Show, Hanover, Germany
23-30 September, 2004
Hall No.H11 Stand No.F48
at Fairgrounds of Deutsche Messe AG-
Hanover, Germany
CONTACT INFORMATION
Axles Division
Company Name GNA Axles Limited
Contact Person Jasvinder Singh (Director Marketing)
Ranbir Singh (Director Works)
Address VPO Mehtiana, Distt. Hoshiarpur – 146001
Punjab (India)
Phone : +91-1882-262273 (7 Lines)
Fax : +91-1882-262280
Email : [email protected]
Established 1994
Covered Area (Sq. Mtr.) 20000
Products Rear Axle Shafts, Hydraulic Lift Shafts,
Power Take Off Shafts, Spindle Beams
Gear & Gear Box Division
Company Name GNA Duraparts
Contact Person Gurdeep Singh
Address VPO Mehtiana, Distt. Hoshiarpur – 146001
Punjab (India)
Phone : +91-1882-262273 (7 Lines)
Fax : +91-1882-262280
Email : [email protected]
Established 1994
Covered Area (Sq. Mtr.) 20000
Products Spur Bevel & Pinions, Bull Gears & Pinion
Shafts, Internet Ring Gears, Planet Carrier,
Gear Boxes for Agriculture Equipments,
Flanges
Propeller Shaft Divison
Company Name GNA Udyog Limited
Contact Person Maninder Singh
Address Bundala, Distt. Jalandhar Punjab (India)
Phone : +91-1826-270101 (5 Lines)Fax : +91-1826-270025Email : [email protected]
Established 1994
Covered Area (Sq. Mtr.) 10000
Products Propeller Shaft Assy., Inter Drive Shaft Assy. Steering Components, Front Hubs & Knuckles.
CO M/S Guru Nanak Auto NR
MATION
The Corporate offices, Punjab, India
COMMUNICATION NETWORK
MANUFACTURING UNITS & ADMINISTRATION OFFICE
MANUFACTURING UNITS &
ADMINISTRATION OFFICEPHONE NO. FAX. NO.
GNA Axles Ltd. GNA
Duraparts
Sehra Overseas
(Export
Division)
Plants:Mehtiana – 146001 Distt. Hoshiarpur
(Pb.) Office : Mehtiana – 146001 Distt.
Hoshiarpur (Pb.)
Email:[email protected]
91-1882-
262273
(7lines)
91-1882-262302,
262280
GNA Udyog Ltd.
Plant:Bundala-141304 Distt. Jalandhar (Pb.)
Office: G. T. Road, Goraya-144 409 Distt.
Jalandhar (Pb.). INDIA
91-1826-70101
(5 lines)
91-1826-62301
(6 lines)
91-1826-70025
91-1826- 62627
Various departments in GNA Duraparts
1). FORGING SHOP:
Forging involves heating of a metal stock to a desired temperature; enable it to
acquire sufficient plasticity followed by the operations like hammering, bending &
piecering etc. to give it the desired shape. The forging process is very important and has
indispensable position among the various manufacturing processes generally adopted in
the workshops due to some reasons i.e. it refines the structures of metal, it renders the
metal stronger by setting the direction of the grains & it effects considerable saving in
time the labour and material as compaired to the production of same by cutting from a
solid stock and then shaping it.
Forging department is one of the most important as every production is started from
here it self. There are two types of forging sections. The categorization can be done on
the base of the mechanism of the various machinery present i.e. in forging I we can say
upsetting forging/closed die forging and similarly in forging II we can say it as drop
forging/open die forging. These two sections consist of under mentioned machines:
Forging I: It consists of following machines:
i) Horizontal bandsaws having capacity of working upon maximum diameter jobs of
245mm, power3HP or 2.2 KW, efficiency of 82% & RPM of 1430. The diameter of
job varies from 75 to 125mm.
(ii) Forging furnace can be gas or oil fired and are widely used for heating the jobs
for hammer forging. They prove quiet economical and facilitate better temperature and
atmosphere control. Here in this shop oil fired is mostly used in which furnace oil is used
as a fuel. There are brick arrangements provided in these furnaces Forging furnaces
having working temperatures of 1123-1200 degree Celsius, mounted with 10hp powered
motor & have capacity of work to be done of 1.25 ton/hr.
(iii)Up set forging machine here are of two types and can be differentiated with the
help of its working load capacity i.e 500 ton and 800 ton. The diameter of the job
that can be worked upon these machines are 115 and 150 mm respectively. The power
used for running of these machines is pneumatic type i.e. air pressure.
(iv)Compressors for producing air pressure for working the pneumatic
machines. These are of reciprocating type. The oil used in the is of type AWS 100.
he capacity of oil tank is of 10 litres. Working pressure is of 7kg/cm2g and
hydraulic test pressure is 11.55 kg/cm2g.
In forging I two types of products are being made. One is axle. The total production of
the axle per day is 650 to 700. similarly the product made is shaft & the total production
per day is 200 to 300.
Forging II : There are following machines in this shop:
(i)Forging furnaces are used to heat the raw material up to 1100 degree Celsius
with the help of rough furnace oil, which is used as fuel. The feed of rough material are
given in batch type feed and in continuous way. A pusher is provided to push the
rectangular work pieces, which are brought, from the band saws. This pusher is operated
by an electric motor. There is a pump to control the amount of oil to the furnace.
(ii)Power hammers here are of two types are of two types i.e. capacity wise
one is of 6.5 ton and 2.5 ton. These hammers are used to hit on to the die to form several
shapes of products e.g. crown etc. These machine are working on the principle of
pneumatic type i.e. power used is of air pressure. Pneumatic hammer is operated by a
rotary air compressor of single stage type of two in quantity. Air is compressed to
pressure of 7 bars and temperature of 120 degree F. the maximum pressure can be
produced up to 20 bar. A foot operated lever controls the air supply and required blows of
the hammer is obtained. This hammer is used for forging of ring gear, drive gear, tail
pinion, star gear and bevel gears etc.
(iii)Power presses are kept in adjacent side of these power hammers so that
they can be used for piercing and blanking operations just after hammering. These
presses are of mechanical type and have capacity of 400 and 200 tones. These presses
work on the crank mechanism.
(iv)Normalizing furnace is used to normalize the product, which is to cover the
cracks produced after hammering and other machines. The normalizing temperature is
kept at the constant value of 880 to 920 degree Celsius with the help of setting of
thermocouple. The type of structure obtained will depend upon thickness of the cross
section and rate of cooling. Thin section will give much finer grain than that of thick
section. Furnace oil is used as fuel in the normalizing furnace. There are 3 heat zones
while this process. For example when material is 20MnCr5 zone I is of 880 degree C,
zone II is of 900 degree C & zone III is of 920 degree C. time taken for all these is only
20 minutes. The purposes of normalizing are to produce a uniform structure, grain
refinement, reduce internal stresses, improve mach inability & improve hardness,
strength & other mechanical properties.
(v)Short blasting machine is used for removing scaling produced due to past
processes. This is done by throwing small size balls on the work material in batch way.
This also produces somewhat good surface finish. The common material of metal shorts
is malleable iron & cast steel.
(vi)Brinell hardness tester is used to know the hardness in brinell scale before
sending the product to next procedure.
In forging II there are also two main products i.e. crown and bull gear. The total
production per shift of these two products are 250 and 300 respectively. The total number
of workers in both forging I and forging II are 100.
Forging Furnaces:-
The furnaces used in the unit are oil-fired furnaces. In these furnaces, first of all from
the main tank the supply of oil is provided to the furnace. A pumping unit is provided
to all the furnaces used and this pumping unit consists of a heater which heats the oil
to a temperature of 90-100 degrees and then the oil is supplied to the furnace. A
blower is present which moves the air into the re-cubature. Its function is to heat the
air to a temperature of about 250 degrees ant then move the air into the furnace. The
furnace temperature which is used for forging is 1250-1300 degrees. A regulating
valve is present and it is used to regulate the supply of oil and a butterfly valve is
present to regulate the supply of air.
Following are its two types:-
1. Pusher-type furnace: - In the pusher-type a pushing system is provided which
is used to push the work-pieces into the furnace. The pusher mechanism which
is used is hydraulic and it is controlled by oil pressure. The temperature inside
the furnace is 95-105 degrees and the pressure is 12-15 pound per square inch
(psi).
2. Batch-type furnace: - In the batch-type furnace, a batch of the work pieces is
made & that batch of work pieces is heated at the required temperature &
afterwards the work pieces are moved one by one to the forging machines.
Working procedure in forging shop: -
1. Material cutting: - This is the first step which is involved in forging. After the
material is received & inspected it is sent for the material cutting. In material cutting
operation the material is cut in accordance with the required dimensions. The material
cutting is done on band saw machines which are fully automatic in operation. After the
material cutting is done the material is sent into the forging shop.
2. Heating: - This is the second step which is involved. In this step the material is
heated to the forging temperature in the furnace. The forging temperature is 1250-1300
degrees. The furnaces which are used are oil-fired furnaces & they can be either pusher
type or batch type. After the material is heated it is sent to the forging machines. The
process of heating the stock can be divided into two stages: -
First stage (Preheating zone): - In this stage the temperature to which the stock is heated
is 500-700 degrees.
Second stage (Full heating zone): - In this stage the temperature is 1260-1300 degrees.
1. Forging: - In this step the material is forged on either a drop hammer or a
forging press or on the up-setter. The type of the machine which is to be used depends
upon the shape & size of the component to be forged.
2. Trimming: - In this operation the excess & unwanted material is removed from
the forged component. After forging operation is done then the forged component is
passed to the trimming press for the material removal.
3. Heat treatment: - After the trimming operation is done then the forged
component is ready for heat treatment. In this operation the forged components are
placed in trays made of mild steel & are placed in the furnace for a suitable period of
time. The heat treatment processes which are done at GNAU are normalizing,
hardening & tempering. The type of the heat treatment process which is to be done
depends upon the type of the steel. After heating, quenching of the heated components
is done in a quenching bath for a suitable period of time. The heat treatment process is
done to improve the mechanical properties of steel & to relieve the internal stresses
which are set up due to forging.
4. Shot-blasting: - This process is done to remove the scales & impurities which
are caused during heat treatment. After the heat treatment the components are put in
the shot-blasting machine & thus the scales are removed & the components are
polished.
5. Grinding: - This is the final step involved. In this step the unwanted material is
removed from the components to provide them a smooth surface finish. The grinding
process is done on the grinding machines which comprises of the grinding wheel.
After the grinding process is completed the hardness checking of the components is
done & afterwards these forged components are sent to the machine shop for further
machining.
Measuring instruments used in forging shop: -
The measuring instruments which are used in the forging shop are: -
1. Vernier caliper
2. Measuring scale
3. Measuring tape
4. External & internal calipers
Temperature measurement instruments used in forging shop: -
1. Thermocouple
2. Optical pyrometer
The thermocouples are located at suitable heating zones inside the furnace & they
measure the temperature of the heating zone & this temperature is represented on the
digital temperature indicator to the operator.
Various departments in GNA Duraparts
1). FORGING SHOP:
Forging involves heating of a metal stock to a desired temperature; enable it to
acquire sufficient plasticity followed by the operations like hammering, bending &
piecering etc. to give it the desired shape. The forging process is very important and
has indispensable position among the various manufacturing processes generally
adopted in the workshops due to some reasons i.e. it refines the structures of metal, it
renders the metal stronger by setting the direction of the grains & it effects
considerable saving in time the labour and material as compaired to the production of
same by cutting from a solid stock and then shaping it.
Forging department is one of the most important as every production is started
from here it self. There are two types of forging sections. The categorization can be
done on the base of the mechanism of the various machinery present i.e. in forging I
we can say upsetting forging/closed die forging and similarly in forging II we can say
it as drop forging/open die forging. These two sections consist of under mentioned
machines:
Forging I: It consists of following machines:
i) Horizontal bandsaws having capacity of working upon maximum diameter jobs of
245mm, power3HP or 2.2 KW, efficiency of 82% & RPM of 1430. The diameter of job
varies from 75 to 125mm.
(ii) Forging furnace can be gas or oil fired and are widely used for heating the jobs for
hammer forging. They prove quiet economical and facilitate better temperature and
atmosphere control. Here in this shop oil fired is mostly used in which furnace oil is used
as a fuel. There are brick arrangements provided in these furnaces Forging furnaces
having working temperatures of 1123-1200 degree Celsius, mounted with 10hp powered
motor & have capacity of work to be done of 1.25 ton/hr.
(iii) Up set forging machine here are of two types and can be differentiated with the
help of its working load capacity i.e 500 ton and 800 ton. The diameter of the job
that can be worked upon these machines are 115 and 150 mm respectively. The power
used for running of these machines is pneumatic type i.e. air pressure.
(iv) Compressors for producing air pressure for working the pneumatic
machines. These are of reciprocating type. The oil used in the is of type AWS 100.
he capacity of oil tank is of 10 litres. Working pressure is of 7kg/cm2g and
hydraulic test pressure is 11.55 kg/cm2g.
In forging I two types of products are being made. One is axle. The total
production of the axle per day is 650 to 700. similarly the product made is shaft & the
total production per day is 200 to 300.
Forging II : There are following machines in this shop:
(i) Forging furnaces are used to heat the raw material up to 1100 degree Celsius with
the help of rough furnace oil, which is used as fuel. The feed of rough material are given
in batch type feed and in continuous way. A pusher is provided to push the rectangular
work pieces, which are brought, from the band saws. This pusher is operated by an
electric motor. There is a pump to control the amount of oil to the furnace.
(ii) Power hammers here are of two types are of two types i.e. capacity wise one is of
6.5 ton and 2.5 ton. These hammers are used to hit on to the die to form several shapes of
products e.g. crown etc. These machine are working on the principle of pneumatic type
i.e. power used is of air pressure. Pneumatic hammer is operated by a rotary air
compressor of single stage type of two in quantity. Air is compressed to pressure of 7
bars and temperature of 120 degree F. the maximum pressure can be produced up to 20
bar. A foot operated lever controls the air supply and required blows of the hammer is
obtained. This hammer is used for forging of ring gear, drive gear, tail pinion, star gear
and bevel gears etc.
(iii) Power presses are kept in adjacent side of these power hammers so that they can
be used for piercing and blanking operations just after hammering. These presses are of
mechanical type and have capacity of 400 and 200 tones. These presses work on the
crank mechanism.
(iv) Normalizing furnace is used to normalize the product, which is to cover the cracks
produced after hammering and other machines. The normalizing temperature is kept at
the constant value of 880 to 920 degree Celsius with the help of setting of thermocouple.
The type of structure obtained will depend upon thickness of the cross section and rate of
cooling. Thin section will give much finer grain than that of thick section. Furnace oil is
used as fuel in the normalizing furnace. There are 3 heat zones while this process. For
example when material is 20MnCr5 zone I is of 880 degree C, zone II is of 900 degree C
& zone III is of 920 degree C. time taken for all these is only 20 minutes. The purposes of
normalizing are to produce a uniform structure, grain refinement, reduce internal stresses,
improve mach inability & improve hardness, strength & other mechanical properties.
(v) Short blasting machine is used for removing scaling produced due to past
processes. This is done by throwing small size balls on the work material in batch way.
This also produces somewhat good surface finish. The common material of metal shorts
is malleable iron & cast steel.
(vi) Brinell hardness tester is used to know the hardness in brinell scale before sending
the product to next procedure.
In forging II there are also two main products i.e. crown and bull gear. The total
production per shift of these two products are 250 and 300 respectively. The total number
of workers in both forging I and forging II are 100.
Forging Furnaces:-
The furnaces used in the unit are oil-fired furnaces. In these furnaces, first of all
from the main tank the supply of oil is provided to the furnace. A pumping unit is
provided to all the furnaces used and this pumping unit consists of a heater which
heats the oil to a temperature of 90-100 degrees and then the oil is supplied to the
furnace. A blower is present which moves the air into the re-cubature. Its function is
to heat the air to a temperature of about 250 degrees ant then move the air into the
furnace. The furnace temperature which is used for forging is 1250-1300 degrees. A
regulating valve is present and it is used to regulate the supply of oil and a butterfly
valve is present to regulate the supply of air.
Following are its two types:-
3. Pusher-type furnace: - In the pusher-type a pushing system is provided which is
used to push the work-pieces into the furnace. The pusher mechanism which is used is
hydraulic and it is controlled by oil pressure. The temperature inside the furnace is 95-
105 degrees and the pressure is 12-15 pound per square inch (psi).
4. Batch-type furnace: - In the batch-type furnace, a batch of the work pieces is made &
that batch of work pieces is heated at the required temperature & afterwards the
work pieces are moved one by one to the forging machines.
Working procedure in forging shop: -
6. Material cutting: - This is the first step which is involved in forging. After the material
is received & inspected it is sent for the material cutting. In material cutting
operation the material is cut in accordance with the required dimensions. The
material cutting is done on band saw machines which are fully automatic in
operation. After the material cutting is done the material is sent into the forging shop.
7. Heating: - This is the second step which is involved. In this step the material is
heated to the forging temperature in the furnace. The forging temperature is 1250-1300
degrees. The furnaces which are used are oil-fired furnaces & they can be either pusher
type or batch type. After the material is heated it is sent to the forging machines. The
process of heating the stock can be divided into two stages: -
First stage (Preheating zone): - In this stage the temperature to which the stock is heated
is 500-700 degrees.
Second stage (Full heating zone): - In this stage the temperature is 1260-1300 degrees.
8. Forging: - In this step the material is forged on either a drop hammer or a
forging press or on the up-setter. The type of the machine which is to be used
depends upon the shape & size of the component to be forged.
9. Trimming: - In this operation the excess & unwanted material is removed from
the forged component. After forging operation is done then the forged component
is passed to the trimming press for the material removal.
10. Heat treatment: - After the trimming operation is done then the forged
component is ready for heat treatment. In this operation the forged components are
placed in trays made of mild steel & are placed in the furnace for a suitable period
of time. The heat treatment processes which are done at GNAU are normalizing,
hardening & tempering. The type of the heat treatment process which is to be done
depends upon the type of the steel. After heating, quenching of the heated
components is done in a quenching bath for a suitable period of time. The heat
treatment process is done to improve the mechanical properties of steel & to
relieve the internal stresses which are set up due to forging.
11. Shot-blasting: - This process is done to remove the scales & impurities which
are caused during heat treatment. After the heat treatment the components are put
in the shot-blasting machine & thus the scales are removed & the components are
polished.
12. Grinding: - This is the final step involved. In this step the unwanted material is
removed from the components to provide them a smooth surface finish. The
grinding process is done on the grinding machines which comprises of the grinding
wheel. After the grinding process is completed the hardness checking of the
components is done & afterwards these forged components are sent to the machine
shop for further machining.
Measuring instruments used in forging shop: -
The measuring instruments which are used in the forging shop are: -
5. Vernier caliper
6. Measuring scale
7. Measuring tape
8. External & internal calipers
Temperature measurement instruments used in forging shop: -
3. Thermocouple
4. Optical pyrometer
The thermocouples are located at suitable heating zones inside the furnace & they
measure the temperature of the heating zone & this temperature is represented on the
digital temperature indicator to the operator.
Furnace oil used in forging shop: -
The furnace oil which is used in the furnaces is the residual furnace oil (RFO).
Fuel consumption in the furnaces is 100 liters.
4). HEAT TREATMENT:
Heat treatment is defined as an operation involving heating and cooling of a metal
or alloy in a solid state to obtain desirable conditions. There are many causes of the heat
treatment to be done to the product to be done. It is done to cause relief of internal
stresses developed during cold working processes. It is done to harden and strengthen
materials, improve machine ability, change grain size, improve ductility and toughness,
increase heat wear and corrosion resistance of materials & to homogenize the structure.
As the name refers it is the shop in which heat treatment is given to the product to give it
required hardness. This is done with the help of following mentioned processes & various
machines:
I. Carburizing: Carburizing is a method of introducing carbon into solid iron-base
alloys in order to produce a hard case. Carburizing may be pack carburizing, gas
carburizing and liquid carburizing. But here only gas carburizing is being done. In
this process components are heated at 920 degree Celsius for four hours in an
atmosphere of gases of [CO+H2+N2]. The main motive of this process is to diffuse
into the outer surface of the components. It is the process by which the increasing of
percentage of carbon is being done to gain good surface hardness. This can be only
possible with the help of following apparatus:
(i) EOT crane is used to carry the fixtures on which batches of items are carried. This
crane has capacity to load 2 ton.
(ii) Washing bay is filled with casting soda in which is the products which are covered
with layer of oil & coolants are being washed. This process is being done for 10 to
15 minutes.
(iii) Carburizing furnace is the apparatus used for carburizing process. In this apparatus
the temperature is maintained at 920 degree Celsius. In this after washing the crane lifts
the fixture of the products and put into this apparatus. This process is carried for long
period of 15 to 16 hours. The fluid used in this process is carburizing fluid 440.
(iv) Super quenching apparatus is the area where the fixture from the last process is put
into. In this process the super quenching oil is the quenching medium. There is heat
exchanger arrangement which does not allow the temperature of oil to raise more than 75
degree Celsius.
II. Tempering: Tempering involves heating hardening components below the lower
critical temperature i.e. at 180 degree Celsius. In this process this temperature is
being hold for about 2 to 2 ½ hours and the cooling is being done open air. At this
temperature a hexagonal lose packed carbide begin to form and with the rejection
of carbon the crystal structure of martensite changes from tetragonal to body
centered cubic characteristic of ferrite. This process is being carried with the help
of following apparatus:
(i) Tempering furnace is used for this process in which temperature is being maintained
between 200 & 250 degree Celsius. In this furnace the walls inside are winded
with the element which is being heated and there is a motor attached to fan to
spread the hot air on the fixture on which the products are being arranged.
III. Scaling removing: It is being done with the help of short blasting machine.
This process is used to clean the components after heat treatment. The metal slides
are thrown on the surface e of the components. The material used as the short balls
are malleable iron, cast iron or cast steel.
IV. Hardness checking: It is being done with the help of Rockwell hardness
testing machine. The harness is kept between 58 & 61 Rockwell hardness.
Purpose of Heat treatment: -
1. To relieve the internal stresses set-up in the material after hot or cold
working in order to improve the machinability.
2. To improve the mechanical properties like tensile strength, hardness,
ductility, shock resistance etc.
3. To modify the structure of steel.
4. To increase the corrosion & wear resistance.
Furnace specifications: -
Type of furnace – Oil fired
Fuel used – Residual Furnace Oil (RFO)
Maximum loading capacity of trays - 150-200 kg at a time
Capacity of hardening furnace – 15 ton
Maximum loading capacity of furnace – 12 trays at a time
Capacity of tempering furnace – 15 ton
Fuel consumption – Approximately 100 liters per day
Measuring instruments used in heat treatment: -
1. To check heat treatment furnace temperature, Temperature controller /
Indicator thermocouple are used.
2. To check hardness, BHN Testing Machine / Micro-measure are used.
3. To quench oil temperature checking, temperature indicator is used.
Heat treatment of machined components: -
The first stage of the heat treatment was concerned with the heat treatment of the
components after forging. Now in the second stage comes the heat treatment of the
components after machining. These heat treatment processes mainly comprises of the
case hardening techniques of heat treatment. The case hardening processes which are
used in GNAU are: -
1. Induction hardening: - The Induction hardening is a surface hardening
process in which the surface layers of the metal are hardened but a relatively soft
core is maintained. The induction hardening is achieved by passing a high
frequency alternating current through the work-piece which is placed in an inductor
coil. The alternating current generates a magnetic field of equal intensity but of
reverse polarity. Thus, the current penetrates & the surface of the piece is hardened
but a soft core remains.
2. Carburizing: - Carburizing is the process of saturating the surface layer of
steel with carbon. The main purpose of carburizing is to obtain a hard & wear-
resistant surface on machine parts by the enrichment of the surface layer with
carbon. The various machined parts are directly carburized after getting machined
& after carburization they are sent for final grinding. There are various techniques
of carburizing like – pack carburizing, gas carburizing & liquid carburizing. At
GNAU gas carburizing in the electrical carburizing furnace is done.
Heat treatment equipments: -
1. Induction hardening machine (medium – frequency)
2. Carburizing furnace (electrical)
3. Tempering furnace (electrical)
4. Magnetic particle tester (MPT)
5. Hardness Testing machine
6. Grinding machine
7. Gas welding machine
Procedure for Induction hardening: -
1. Machining – After forging the components are sent to the machine shop for
the subsequent machining which is to be done & after machining the components
are ready for the case hardening.
2. Induction hardening – After the subsequent machining is done in the
machine shop the components are ready to be induction hardened & the induction
hardening is done on the induction hardening machines which are of medium &
low frequency. The main tooling of these machines is the induction coil.
3. Hardness testing – After the Induction hardening is completed the hardness
testing of the hardened pieces is done. The hardness tester is used for testing the
hardness.
4. Checking case hardness – After hardness testing is done the checking of the
case hardness of the components is done to find the depth of the hardened layer.
The micro-measure is used for checking the case hardness.
5. Magnetic particle testing (MPT) – In this step the components are checked
for any cracks which might have been developed during the induction hardening.
First of all the components are sprayed with kerosene oil & then they are viewed
under the ultrasonic light for finding any crack. If any crack might be present it
would be illuminated with green light.
6. Tempering – Tempering is done to remove the brittleness which might have
been developed during heat treatment & thus it restores the ductility of the
hardened component. The tempering is done in the tempering furnace which is
electrical in its operation.
7. Grinding – Grinding is the final step which is involved. In this step any
unwanted material which is present at the edges is removed & a smooth finish is
provided.
Procedure for carburizing: -
1. Carburizing – After the machining of the components is done then they are
sent for carburization. The carburizing is done in the carburizing furnace which is
electrical in operation. The gas carburizing is done in which the work-pieces are
placed in a medium of oxygen & a carbon containing gas & at high temperature
the oxygen decomposes the carbon present in the other gas to evolve free carbon
which then enters the surface layers of the components. Thermocouples are used
for the temperature indication during the carburizing process.
2. Quenching – After the carburization is done the components are quenched
inside a quenching tank which can be either a water quenching or an oil quenching
tank.
3. Hardness & case-depth checking – After the quenching process is complete
the hardness & the case depth checking of the components is done by using a
hardness tester & a micro-measure.
4. Tempering – In this step the tempering of the case hardened components is
done to remove the brittleness. The tempering is done the tempering furnace.
5. Grinding – This is the final step involved in which the unwanted material
is removed from the edges of the components on the grinding machine.
5). PRODUCT PLANNING CONTROL {PPC} :
PPC includes the investigation, co-ordination and it ensures timely production of
products through efficient and optimum use of facilities like man, machine, material
evaluation of manufacturing capabilities and requirements and money. PPC’s function
serves as the brain of the organization. Its objective is to provide a physical system
together with a set of operational guidelines to efficiently convert materials, human skills
and other inputs into finished products. The highest efficiency in production is obtained
by manufacturing the required quality, at the required time by the best and cheapest
method. Management employs production planning and control {PPC} to coordinate all
manufacturing activities.
Products are manufactured by the transformation of raw materials. Planning looks
ahead, anticipates possible difficulties and decide that in advance as how to production
and how it can be carried out in best way. A production planning control system has main
function to perform some before arrival of raw material and tools and other while the raw
material process undergoes processing. The main function of this section is to plan about
production of the product. This includes many things such as raw material ordering,
processing time management etc. This department calculates the total production time of
each product and thinks it advance process working period. The main motive of this
department is to reduce the inventory of raw material. So there fore the planning is done
such that the total amount of steel kept in unit is under control. Following mentioned are
step by step calculations which are planned for raw material planning by PPC
department:
1) Number of components in
(i). Cutting section
(ii). Forging
(iii). Forging vendor department
(iv). Vendor
(v). Machine shop
2) Total
3) Target of the month(say February)
4) Steel stock
5) Peaces that can be made from stock
6) Due steel
7) Pieces that can be made from the due steel
8) Total
9) Balance for next month(say march)
10) Weight of piece
11) Net steel required
From above all steps we can see that the main motive of PPC department in raw
material planning is that overhaul process will start 2 months before the need so that
forging takes place in 1st month and rest work in last month. Thus by all this planning the
department decides the need of net steel as raw material.
Objectives of PPC:
1. To maintain adequate but not excessive stocks of raw materials, work in
process and of finished goods to meet production requirements and delivery
schedules.
2. To coordinate the production activities of different departments.
3. To ensure effective utilization of production facilities.
4. To prepare production schedules advertisements to meet delivery schedules.
5. To operate the plant at optimum level of efficiency.
6. To ensure production of right product in right quality at the right time.
Importance of PPC:
1. PPC acts as factory’s nervous system as it regulates all plant operations just as
nervous system regulates muscular movements.
2. PPC acts as an effective instrument for cost control.
3. PPC is helpful in accelerating industrial productivity.
4. PPC rationalizes plant operations.
5. PPC benefits the society.
Functions of PPC: Following are the main functions of PPC:-
1. Planning: It is necessary to plan things properly for getting best results.
Similarly for production planning in advance, it is very necessary that how
planning should be done and controlled. It is the department which decides about
each element of the job, what should be done, where, how & when?
Functions of Planning:
To investigate about the complete details and requirements of the product to be
manufactured.
Predetermination of future achievements.
Planning about quality and quantity of material.
Planning the design of the product to be manufactured.
Planning about the sequence of the operations.
Planning about interval transportation.
2. Routing: Routing may be defined as the selection of path, which each part of the
product will follow being transferred from raw material to finished products. Path of
the product will also give sequence of the operations to be adopted.
In other words routing means determination of most advantageous path to be followed
from department to department and machine to machine till raw material gets its final
shape.
Routing in industry depends upon the nature and the type of industry:
Continuous industry – As such these industries are also automatic. Therefore the
problem of routing in these industries is very simple. Once the route is decided in
the beginning, generally no further control over the route is needed.
Assembly industry – Such industries require various components to be assembled
at a particular time therefore it is necessary that no component should fail to reach
at proper time and proper place in the required quantity otherwise whole of
production line will be upheld resulting in wastage of time and production delay.
(i) Scheduling:- Scheduling determines the program for the operations. In
scheduling, order of sequence of each operation and their starting time and
finishing time is decided so that the required materials, machines may be kept
ready as schedule. Thus, it may be defined as a fixation of time and the date for
each operation as well as determines the sequence of operations to be followed.
This program is prepared by the planning department and assigns things for
various operations.
Types of schedules:-
Master schedule – It shows the dates on which important production
items are to be completed. It is a monthly or a weekly break of the production
requirements of each product.
Shop schedule – After preparing master schedule, shop schedules are
prepared. It assigns a definite period of time to a particular shop for manufacturing
products in the required quantity.
ii) Dispatching;- It is concerned with starting the processes. It gives necessary
authority to start a particular work, which has already been planned under routing and
scheduling.
Functions of dispatching;-
The materials are removed from stores to machines.
To distribute machine loading and schedule charts, route sheets and
other necessary instructions and forms.
To issue inspection orders clearly stating the type of inspection required
at various stages.
To order tool sections for issuing proper tools, jigs and fixtures and
other essential articles.
(ii) Follow-up:- After dispatching production orders to various
shops, it is necessary to regulate the process of job through various processes. For
this purpose follow-up section is formed.
Functions of follow-up:-
It assures that material should reach the shop in required time so that
work should progress in a smooth way.
It observes that particular product is passing through all its operations
from raw material to its final shape as per schedule.
We can divide PPC department in following mentioned 3 phases:
I. Planning phase:
Forecasting : It includes type of estimation, quality and quality of future work
Order writing : It provides authority to one or more persons to undertake a
particular job.
Product design : It is done for collection of information regarding specifications
bill of material and drawings.
Process planning : It is to find out the most economical process of doing the work
and deciding how and where the work will be done.
Tool control : It determines the requirements and control of the tool used in
manufacturing processes.
Material control: It determines the requirements and control of the material for the
production of the product.
Loading : It is the assignment of the work to manpower, machinery etc.
Scheduling : It is time phase of loading and determines when and in
what sequences the work will be carried out.
II. Action phase:
Dispatching : It is the transition from planning to action phase. In this
workers are ordered to start work.
III. Control phase: The control of production is necessary to be sure that the
production schedules are being met and job will be delivered as per the
predefined plans, a production control group.
Receives work progress report
Compare them with scheduled plans
Removes causes of delays in production
Modifies the schedules or plant capacities
Expedites the work
Advantages of PPC:-
Better service to customer in promised delivery dates.
Fewer risk orders in plant and less overtime.
Lower inventory work in progress.
Less finished stock required to give the same service to customer.
Better control of raw material.
More effective use of equipment.
PPC department act as a bridge between the production section and management.
It gets manufacturing order from marketing department, raw material and other
equipments from purchase department, specifications from engg. department and then
makes plan accordingly. The PPC department gets the manufacturing order 3 months
before the product issuing date because it has to make planning’s for production and
get material for 20 days before start of production. 10% extra material is supplied to
the production section because some pieces may be rejected while inspection. If the
work is more or the machines are not free due to some other work then work has to be
given to vendors. If there is any problem comes whether in small or large way the
PPC department have to answer for it. So there fore the perfect planning is to be made
so that there is negligible amount of mistakes.
6). METALLURGICAL LAB:
This lab’s main purpose is of do inspection f raw material do acceptance or
rejection of the material. This also helps to now various contents of material in the made
specimen after forging processes. So there fore this department is an essential part of the
industry. This lab performs the following functions:
(i) Macro Etch test in which HCl is being used to clean structure of given
metal.
(ii) Jominy hardenabily test is performed in which we do heating and then end
quenching and then check the hardness of the specimen.
(iii) Step down test is the test in which magnaflux on step down sample is being
done.
(iv) Cracks detection is the test in which magnaflux powder and kerosene
mixture is used to clean the surface and the checking of cracks is done in
microscope.
(v) Grain size checking test is a test in which the grain size is being checked
with the help of microscope.
(vi) Microstructure checkup up is being done after normalizing, tempering,
hardening, carburizing etc.
The main frequently performed work in this lab is estimation of percentage of
carbon in the specimen in between the production processes. In this the chips of the
material is being produced using the drilling machine. Then their chips are heated in the
furnace with cupric oxide (CuO) in presence of dry oxygen free from carbon dioxide. The
reaction took place is as below:
C + 2CuO = CO2 + 2Cu
Other gases and carbon dioxide are absorved in U tubes containing anhydrous
(CaCl2) and solution of K(OH) respectively. The volumes of containers are noted before
and after the combustion. These volumes are compaired with the charts and thus
percentage of carbon is estimated.
Similarly there are some equipments and apparatus required for performing
various tests which are mentioned as in following:
I. Treatment or experimental zone:
(i) Combustion table furnace
(ii) Control unit for carbon apparatus {used to know about carbon content and
working temperature kept is 1200 degree Celsius}
(iii) Strohlein apparatus {used to know carbon content in steel}
(iv) Weight balancing machine
(v) Barometer {used to know the atmospheric pressure}
(vi) Volumetric section {used to check % of Mn, Cr, Ni, Cu, molebedinum,sulphur,
phosphorus &vanadium}
(vii) Fume chamber
(viii) Distillation plant
(ix) Microscope
(x) Drilling machine
(xi) Phosphating tank
(xii) Surface grinder
(xiii) Muffle furnace{temperature ranges from 0 to 1200 degree Celsius}
(xiv) Jominy apparatus for quenching test
II Sample preparation zone:
(iii) Polishing machine
(iv) Belt grinder
(v) Abrasive machine {used for sample cutting}
(vi) Muffle furnace {used for tempering, normalizing etc.}
(vii) Quenching tank
7). ENGINEERING CELL:
In this department the main purpose is to make a file/report on the product to be
manufactured. First of all the customer send the intimation of the product to the purchase
department in which there are many things such as bill of material to be used for
manufacturing the product, drawing of the product, tolerances, mechanical properties of
the product etc. This file is being brought to the engineering department.
The engineering department consists of designers, engineers and drafts men who
helps in performing their work in this department. The engineering department first of
draws the product lay out. Then the flowchart of the manufacturing processes are being
made. Then in the same serial order the list of costs incurred for manufacturing of the
product is being made. This quotation may contain various kind of costs such as cost for
raw material, machining, labour, die arrangements etc. So there fore the main function of
the engineering department is of preparation of details of manufacturing information of
the product to be made.
This all work of engineering department is done for the requirements of good
production which are mentioned as following:
1). To ring customer satisfaction that the product will work properly and the price is
reasonable.
2). Adequate profit that it should be easy to manufacture with in the available
resources and should call for minimum number of operations.
According to this department the main part is the drawings of the part. A designer
communicates his ideas to the manufacturing section through the medium of drawing.
Drawing shows the exact size and shape of he product. An engineering drawing should
contain following information for the manufacturer:
1. Component part number and part description.
2. Dimensions from a common datum face to facilitate setting and ganging.
3. Tolerances and limits allowable.
4. Material details or the specifications.
5. Finishing description.
8). COMPUTER NETWORK CONTROL (CNC) :
CNC shop is equipped with various costly machines, which may be automatic, and
computer controlled type. The labour used in this shop is highly skilled type. The list of
various machines used in this shop is as following:
Gear hobber made by Churchill Company in England. This machine is of
mechanical type and have maximum full load current 15 amps.
Gear hobber made by Lorenz Company having maximum hammering load
capacity of 1.5 kg.
Gear hobber made by Lorenz Company having maximum hammering load
capacity of 1000 kg.
CNC – 03 made by Frontor 1856 weisser. It is assembled with a monitor of
simens. This machine is used for rough turning & facing functions.
CNC – 03 made by Frontor 1856 weisser. It is assembled with a monitor of
simens. But this machine is used for final turning, boring, step facing etc.
Horizontal machining center made by Rolland, which is a universal
machine. The coolant used is biostable coolant. The machining capacity is
500 L.
Grinder with a tapered wheel made by Fortuna Werke AG.
CNC Turning machine made by Frontor 1856 Weisser.
Vertical CNC machining center made by Hart Ford. The various functions
that can be performed are drilling, milling, boring, reaming & tapping. This
machine can be worked at higher RPM i.e. 8000 RPM.
Surface broaching machine, which works vertically and is made by
Varinelli.
CNC machine used for turning operation and is made by Duplo Standard.
The control panel is of sinumerilic.
Then there are 5 CNC machines in line. These all are made by Itala.
CNC drilling machine made by Leadwell.
CNC robodrill made by Hanuc.
Multiple spindle-drilling machine made by Eifco.
Radial machine.
8 spindle drilling machine made by Wavis.
CNC turning machine made by Maho Grazino.
Shaft gear hobbing machine made by Churchill.
Lathe machine made by Lotus high cut.
Cylindrical grinder.
Rockwell hardness testing machine.
CAPITAL STRUCTURE
INTRODUCTION
In order to run and manage a company, funds are needed. Right from the promotional stage upto end, finances play an important role in a company’s life. If funds are inadequate, the business suffers and if the funds are not properly managed, the entire organization suffers. It is, therefore, necessary that correct estimate of the current and future need of capital be made to have an optimum capital structure which shall help the organization to run its work smoothly and without any stress.
Estimate of capital requirements is necessary but the formation of a capital structure is important. According to Gerestenbeg, “Capital structure of a company refers to the composition or make up of its capitalization and it includes all long tem capital resources viz: loans, reserves, shares and bonds.”
The capital structure is made up of debt and equity securities and refers to permanent financing of a firm. It is composed of long-term debt, preference share capital and shareholder’s funds.
CAPITALIZATION, CAPITAL STRUCTURE AND FINANCIAL STRUCTURE
The terms, capitalization, capital structure and financial structure, do not mean the same. While capitalization is a quantitative of the financial planning of an enterprise, capital structure is concerned with the qualitative aspect. Capitalization refers to the total amount issued by a company while capital structure refers to the kinds of securities and the
proportionate amounts that make up capitalization. For raising long-term furnaces, accompany can issue three types of securities viz. equity shares, preference shares and debentures. A decision about the proportion among these type of securities refers to the capital structure of an enterprise.
Some authors on financial management define capital structure is a broad sense so as to include even the proportion of short term debt. In fact, they refer to capital structure as financial structure. Financial structure means the entire liabilities side of the balance sheet. In the words of Nemmers and Grunewal, “ Financial structure refers to all the financial resources marhsled by the firm, short as well as long term and all forms of debt as well as equity.
IMPORTANCE OF CAPITAL STRUCTURE
The term “Capital Structure” refers to the relationship between the various long terms forms of financing such as debenture, preference share capital and equity share capital. Financing the firm’s assets is a very crucial problem is every business and as a general rule there should be a proper mix of debt and equity capital along with equity shares is called financial leverage or trading on equity. The long term fixed interest bearing debts is employed by a firm to earn more from the use of these sources than their cost so as to increase the return on owner’s equity. It is true that capital structure cannot affect the total earnings a firm but is can affect the share of earnings available for equity shareholders. Say, for example, a company has an equity capital of 1000 shares of Rs. 10 each fully paid and earns an average profit of Rs. 30,000. Now the capital wants to make an expansion and needs another Rs. 1,00,000. The options with the company are either to issue new shares or raise loans @10% p.a. Assuming that the company would earn the same rate of profits. It is advisable to raise loans as by doing so earnings per share will magnify. The company shall pay only R. 10,000 as interest and profit expected shall be Rs.60,000 (before payment of interest). After that payment of interest the profits left for equity shareholders shall Rs. 50,000 (ignoring tax). It is 50% return on the equity capital against 30% return otherwise. However, leverage can operate adversely also if the rate the interest on long-terms loans is more than the expected rate of earning of the firm.
OPTIMAL CAPITAL STRUCTURE
The capital structure decision can influence the value of the firm through the cost of capital and trading on equity or leverage. The optimal capital structure may be defined as “that capital structure or combination of debt and equity that leads to the maximum value of the firm” Optimal capital structure maximizes the value of the company and hence the wealth of its owners and minimizes the company’s cost of capital (Solomon, Ezra. The theory of financial management). Thus, every firm should aim at achievement the optimal capital structure and then to maintain it.
The following considerations should be kept in mind while maximizing the value of the firm in achievement the goal of optimal capital structure:
1) If the return on investment is higher than the fixed cost of funds, the company should prefer to raise funds having a fixed cost, such as debentures, loans and preference share capital. It will increase earnings per share and market value of the firm. Thus, a company should, make maximum possible use of leverage.
2) When debt is used as a source of finance, the firm saves a considerable amount in payment of tax as interest is allowed as a deductible expenses in computation of tax. Hence, the effective cost of debt is reduced, called tax leverage. A company should, therefore, take advantages of tax leverage.
3) The firm should avoid undue financial risk attached with the use of increased debt financing. If the shareholders perceive high risk in using further debt capital, it will reduce the market price of share.
4) The capital structure should be flexible.
RISK RETURN TRADE OFF
The financial or capital structure decision of a firm to use a certain proportion of debt or otherwise in the capital mix involves two types of risks:
1) Financial Risk: The financial risk arise on account of the use of debt or fixed interest bearing securities in its capital. A company with no debt financing has no financial risk. The extent of financial risk depends on the leverage of the firm’s capital structure. A firm using debt in it capital has to pay fixed interest charges and the lack of ability to pay fixed interest increases the risk of liquidation. The financial risk also implies the variability of earning available to equity shareholders.
2) Non-Employment of debt Capital (NEDC) Risk: If a firm does not use debt in its capital structure, it has to face the risk arising out of non-employment of debt
capital. The NEDC risk has an inverse relationship and vice versa. A firm that does not use debt cannot make use of financial leverage to increase its earnings per share: it may also lose control by issue or more and more equity; the cost of floatation of equity may also be higher as compared to costs of raising debt.
Thus a firm has reach a balance (trade-off) between the financial risk and risk of non-employment of debt capital to increase its market value.
Thus a fnon employment of debt capital to increase its market value.
The finance manager, in trying to achieve the optimal capital structure has to determine the minimum overall total risk and maximize the possible return to achieve the objective
CAPITAL STRUCTURE DECISION
DEBT-EQUITY MIX
Financial Risk Non Employment of debt capital (NEDC) Risk
RISK RETURN TRADE OFF
MARKET VALUE OF THE FIRM FIRM
of higher market value of the firm. The figure above depicts the financial risk, the NEDC risk and optimal capital structure.
THEORIES OF CAPITAL STRUCTURE
Different kinds of theories have been propounded by different authors to explain the relationship between capital structures. Cost of capital and value of the firm, the main contributors to the theories are Durand, Ezra, Solomon, Modigliani and Miller.
The important Approach.
1. Net Income Approach
2. Net Opening Income Approach.
3. The Traditional Approach.
4. Modigliani and Miller Approach
1. Net Income Approach: According to this approach, a firm can minimize the weighted average cost of capital and increase the value of the firm as well as market price of equity shares by using debt financing to the maximum possible extent. The theory propounds that a company can increase its value and decrease the overall cost of capital by increasing the proportion of debt in its capital structure.
2. Net Operating Income Approach: This theory as suggested by Durand is another extreme of the effects of leverage on the value of the firm. It is diametrically opposite to the net income approach. Accordingly to this approach, change in the capital structure of a capital structure of a company does not affect the market value of the firm and the overall cost of capital remains constant irrespective of the method of financing. It implies that the overall cost of capital remains the same whether the debt-equity mix is 50:30 or 20:80 or 0:100. Thus, there is nothing as an optimal capital structure and every capital structure is the optimum capital structure.
3. The Traditional Approach: The traditional approach, also known as intermediate approach, is a compromise between the two extremes f net income approach and net operating income approach. According to this theory, the value of the firm can be increase initially or the cost of capital can be decreased by using more debt as the debt is a cheaper source funds than equity. Thus, optimum capital structure can be reached by a proper debt equity mix. Beyond a particular point, the cost of equity increase because increased debt increase the financial risk of the equity shareholders. The advantage of cheaper debt at this point of capital structure is offset by increased cost of equity. After this there comes a stage, when the increased cost of equity cannot be offset by the advantages of low cost debt.
4. Modigliani and Miller Approach: M & M hypothesis is identical with the net opening income approach if taxes are ignored. However, when corporate taxes are assured assumed to exist, their hypotheses are similar to the Net Income Approach.
a) In the absence of taxes. (Theory of Irrelevance): The theory proves that the cost of capital is not affected by changes in the capital structure or say that the debt equity mix is irrelevant in the determination of the total value of a firm. The reason argued is that though debt is cheaper to equity, with increased use of debt as source of finance, the cost of equity increase. This increase in cost of equity offsets the advantage of the low cost of debt. Thus, although the financial leverage affects the cost of equity, the overall cost of capital remains constant. The theory emphasizes the fact that a firm’s opening income is a determinant of its total value.
b) When the corporate taxes are assumed to exist. (Theory of Relevance): Modigliani and Miller, in their article of 1963 have recognized that the value of the firm will increase or cost of capital will decrease with the use of debt on account of deductibility of increase
charges for tax purpose. This, the optimum capital structure can be achieved by maximizing the debt mix in the equity of a firm.
CAPITAL STRUCTURE MANAGEMENT OR PLANNING THE CAPITAL STRUCTURE
Estimation of capital requirements for current and future needs is important for a firm. Equally important is the determining of capital mix. Equity and debt are the two principle sources of finance of a business. But, what should be the proportion between debt and equity in the capital structure of a form? How much financial leverage should a firm employ? This is a very difficult question. To answer this question, the relationship between the financial leverage and the value of the firm or cost of capital has to be studied. Capital structure planning, which aims at the maximization of profits and the wealth of the shareholders, ensure the maximum value of a firm or the minimum cost of capital.
ESSENTIAL FEATURES OF A SOUND/OPTIMAL CAPITAL MIX
A sound or an appropriate capital structure should have the following essential features:-
i) Maximum possible use of leverage.
ii) The capital structure should be flexible so that it can be easily altered.
iii) To avoid undue financial/business risk with the increase of debt.
iv) The use of debt should be within the capacity of a firm. The firm should be in a position to meet its obligations in paying the loan and interest charges as and when due.
v) It should involve minimum possible risk f loss of control.
FACTORS DETERMINING THE CAPITAL STRUCTURE
The capital structure of a concern depends upon a large number of factors such as leverage or trading on equity, growth of the company, nature and size of business, the idea of retaining control, flexibility of capital structure, requirements of investors, cost of floatation of new securities, timing of issue, corporate tax rate and the legal requirements. It is not possible to rank hem because all such factors are of different important and the influence of individual factors of a firm changes over a period of time.
The factors influencing the capital structure are discussed as follows:-
1. Financial Leverage or Trading on Equity: The use of long term fixed interest bearing debt and preference share capital along with equity share capital is called financial leverage or trading on equity. Effects of leverage on the shareholders return or earnings per share have already been discussed in this chapter. The use of long term debt increases, magnifies the earnings per share if the firm yields a return higher than the cost of debt. The earnings per share also increase with the use of preference share capital but to the act fact that interest is allowed to be deducted while computing tax, the leverage impact of debt is much more.
2. Growth and Stability of Sales: The capital structure of a firm is highly influenced by the growth and stability of its sales. If the sales of a firm are expected to remain fairly stable, it can raise a higher level of debt. Stability of sales ensures that the firm will not face any difficulty in meeting its fixed commitments of interest payment and repayments of debt. Similarly, the rate f growth in sales also affects the capital structure decision.
3. Cost of Capital: every rupee invested in a firm has a cost. Cost of capital refers to the minimum return expected by its suppliers. The capital structure should provide for the minimum cost f capital. The main sources of finance for a firm are equity, preference share capital and debt capital. The return expected by the supplier of capital depends upon the risk they have to undertake. Usually, debt is a cheaper source of finance compared to preference and equity capital due to (i) fixed rate of interest on debt. (ii) legal obligation to pay interest.
4. Risk: There are two types of risk that are to be considered while planning the capital structure of a firm viz (i) business risk and (ii) financial risk. Business risk refers to the variability to earnings before interest and taxes. Business risk can be internal as well as external. Internal risk is caused due to improper products mix non availability of raw materials, incompetence to face competition, absence of strategic management etc. internal risk is associated with efficiency with which a firm conducts it operations within the broader environment thrust upon it. External business risk arises due to change in operating conditions caused by conditions thrust upon the firm which are beyond its control e.g. business cycle.
5. Cash Flow Ability to Service Debt: A firm which shall be able to generate larger and stable cash inflows can employ more debt in its capital structure as compared to the one which has unstable and lesser ability to generate cash inflow. Debt financial implies burden of fixed charge due to the fixed payment of interest and the principal. Whenever a firm wants to raise additional funds, it should estimate, project its future cash inflows to ensure the coverage of fixed charges.
6. Nature and Size of a Firm: Nature and size of a firm also influence its capital structure. All public utility concern has different capital structure as compared to other manufacturing concern. Public utility concerns may employ more of debt because of stability and regularity of their earnings. On the other hand, a concern which cannot provide stable earnings due to the nature of its business will have to rely mainly on equity capital.
7. Control: Whenever additional funds are required by a firm, the management of the firm wants to raise the funds without any loss of control over the firm. In case the funds are raised though the issue of equity shares, the control of the existing shareholder is diluted. Hence they might raise the additional funds by way of fixed interest bearing debt and preference share capital. Preference shareholders and debenture holders do not have the voting right. Hence, from the point of view of control, debt financing is recommended. But, depending largely upon debt financing may create other problems, such as, too much restrictions imposed upon imposed upon by the lenders or suppliers of finance and a complete loss of control by way of liquidation of the company.
8. Flexibility: Capital structure of a firm should be flexible, i.e. it should be such as to be capable of using adjusted according to the needs of the changing conditions. It should be possible to raise additional funds. Whenever the need be, without much difficulty and delay. A firm should arrange its capital structure in such a manner that it can substitute one from of financing by another.
9. Requirement of Investors: The requirements of investors is another factor that influence the capital structure of a firm. It is necessary to meet the requirements of both institutional as well as private investors when debt financing is used. Investors are
generally classified under three kinds, i.e. bold investors, cautions investors and less cautions investor.
10. Capital Market Conditions (Timing): Capital Market Conditions do no remain the same for ever sometimes there may be depression while at other times there may be boom in the market is depressed and there are pessimistic business conditions, the company should not issue equity shares as investors would prefer safety.
PRINCIPLE OF CAPITAL STRUCTURE DECISION
The capital structure decisions are influenced by a variety of factors discussed above. From these factors, we can summaries the main principles of capital structure decisions as follows:
1. Cost Principle
2. Risk Principle
3. Control Principle
4. Flexible Principle
5. Timing Principle
All these principles have already been explained while discussing factors determining the capital structure.
CAPITAL GEARING
The term ‘Capital Gearing’ refers to the relationship between equity capital (equity shares plus reserve) and long terms debt. It may be planned or historical, he latter describing a state of affairs where the capital structure has evolved over a period of time, but not necessary in the most advantageous way. In simple words capital gearing means the ration between the various types of securities in the capital structure of the company.
SIGNIFICANCE OF CAPITAL GEARING
The problem of capital gearing is very important in a company. It has a direct bearing on the divisible profits of a company and hence a proper capital gearing is very important for the smooth running of an enterprises. In case of low geared company, the fixed cost of capital by way of fixed dividend on preference shares and interest on debentures is low and the equity shareholders may get a higher rate of dividend.