-
7/30/2019 Capital Structure of Hindalco Industries Limited
1/69
ON
(2008-09)
1
-
7/30/2019 Capital Structure of Hindalco Industries Limited
2/69
ACCURATE INSTITUTE OF MANAGEMENT ANDTECHNOLOGY, GREATER NOIDA
(2008-2010)
Submitted To: Submitted By:R.S Tiwari Pradeep KumarHOD, MBA Deptt. Roll No. 0822570030
2
-
7/30/2019 Capital Structure of Hindalco Industries Limited
3/69
ACKNOWLEDGEMENT
In an organization, be it an industry, a school or society, no outcomes can beachieved by one man working in isolation. Its always a group working andachieving the outcome in totality. It is the outcome of all the guidance andsupport that I received from this organization.
I would like to thank Mr. S.K. Das, G.M. (Training) for having arrangementmy training in this organization.
I would like to thank Mr. D.C. Kabra, Vice President (Fin. & A/Cs) for givingme a chance to work with this organization and for extending words of encouragement and wisdom.
I am also thankful to Mr. Gopal Purohit, G.M. (Fin. & A/Cs) , other members
of the Finance & Accounts Department for making available all resourcesrequired for the completion of this project report.
I would like to thank Mr. Vimal Raheja, Assist. Manager (Account &Finance) . His valuable guidance and constant encouragement have helped metremendously in the completion of this project.
In the last I would like to thank Mr.S.N.Roy (Lyzing Officer, Personal) Whohad helped me a lot by providing information & suggestions.
Last but not the least I would like to thanks my teachers without whosefeedback and encouragement, this project would not has been possible. Their help has gone a long way in successful completion of my project.
3
-
7/30/2019 Capital Structure of Hindalco Industries Limited
4/69
4
-
7/30/2019 Capital Structure of Hindalco Industries Limited
5/69
TABLE OF CONTENTS
PAGESChapter No. 1
Company Profile 4-18
Chapter No. 2
Objective of Study & R.M. 19-21Chapter No. 3
Capital Structure 22-29
Leverage Analysis 30-33
EBIT-EPS Analysis 34-36
Cost Of Capital 37-46
Ratio Analysis 47-55
Chapter No. 4
Findings, Suggestion & Conclusion 56-59
Chapter No. 5
Annexure 60-64
Chapter No. 6
Bibliography 65-66
5
-
7/30/2019 Capital Structure of Hindalco Industries Limited
6/69
Chapter No. 1
COMPANY PROFILE
6
-
7/30/2019 Capital Structure of Hindalco Industries Limited
7/69
ADITYA BIRLA GROUP
INTRODUCTION
The Aditya Birla Group is India's first truly multinational corporation. Global in vision,
rooted in values, the Group is driven by a performance ethic pegged on value creation for its
multiple stakeholders. A US$ 28 billion conglomerate, with a market capitalisation of US$ 26
billion and in the League of Fortune 500, it is anchored by an extraordinary force of 100,000
employees belonging to over 25 different nationalities. Over 50 per cent of its revenues flowfrom its operations across the world.
The Group's products and services offer distinctive customer solutions worldwide. Its 85
state-of-the-art manufacturing units and sectoral services span 20 countries India,
Thailand, Laos, Indonesia, Philippines, Egypt, Canada, Australia, China, USA, UK,
Germany, Hungary, Brazil, Italy, France, Luxembourg, Switzerland, Malaysia and Korea.
A premium conglomerate, the Aditya Birla Group is a dominant player in all of the sectors in
which it operates. Among these are viscose staple fibre, metals, cement, and viscose filament
yarn, branded apparel, carbon black, chemicals, fertilisers, insulators, financial services,
telecom, BPO and IT services.
The Hewitt-Economic Times and Wall Street Journal Study 2007 have adjudged the Group
the best employer in India and among the top 20 in Asia.
Globally the group is:
A metals powerhouse, among the worlds most cost-efficient aluminium and copper
producers. Hindalco, from its fold, is a Fortune 500 company. It is also the largest aluminium
rolling company and one of the three biggest producers of primary aluminium in Asia, with
the largest single location copper smelter
No.1 in viscose staple fibre
7
-
7/30/2019 Capital Structure of Hindalco Industries Limited
8/69
The third largest producer of insulators
The fourth largest producer of carbon black
The eleventh largest cement producer and the second largest in India
Among the best energy efficient fertiliser plants
Among the world's top 15 and India's top three BPO companies
In India, the Group holds a frontrunner position as:
Indias leading copper producer
A premier branded garments player
The second largest player in viscose filament yarn
The second largest in the chlor alkali sector
Among the top five mobile telephony players
A leading player in life insurance and asset management
Beyond businessA value-based, caring corporate citizen, the Aditya Birla Group inherently believes in the
trusteeship concept of management. Parts of the Groups profits are ploughed back into
meaningful welfare-driven initiatives that make a qualitative difference to the lives of
marginalised people. These activities are carried out under the aegis of the Aditya Birla
Centre for Community Initiatives and Rural Development, which are spearheaded by Mrs.
Rajashree Birla.
Indian Roots
Company Products / servicesGrasim Viscose staple fiber, rayon grade pulp,
cement, chemicals, sponge iron, textiles:: UltraTech Cement Ltd * Ordinary Portland cement, Portland blast
furnace slag cement, Portland pozzolanacement and grey Portland cement
8
http://www.grasim.com/http://www.adityabirla.com/our_companies/indian_companies/ultratech_cement.htmhttp://www.grasim.com/http://www.adityabirla.com/our_companies/indian_companies/ultratech_cement.htm -
7/30/2019 Capital Structure of Hindalco Industries Limited
9/69
:: Shree Digvijay Cement * Cement and clinker Hindalco aluminium, copper :: Indian Aluminium Company Ltd * aluminium foil:: Bihar Caustic and Chemicals Ltd * Caustic soda
Aditya Birla Nuvo Garments, viscose filament yarn, carbon black, textiles
:: Idea Cellular Ltd. Cellular telecommunications:: Aditya Birla Insulators Limited Insulators:: Birla Sun Life Insurance Co.Ltd ** Insurance
:: Birla Sun Life Asset ManagementCompany Ltd. **
Mutual funds
:: Birla Sun Life Distribution CompanyLtd.**
Investment planning services
:: PSI Data Systems * Application development, maintenance andenhancement solutions
:: TransWorks * Customer relations management (CRM)services inbound customer service,including technical support; email / web-chatsupport; and outbound telemarketing.
:: Birla Global Finance Ltd * Asset-based finance, corporate finance andinvestment banking, capital market, treasury.
:: Birla Insurance Advisory Services Ltd Non-life insurance advisory services:: Madura Garments Garments
:: Hi Tech Carbon Carbon black Aditya Birla Retail Multi-format storesTanfac Industries Ltd. ** Fluorine chemicalsEssel Mining & Industries Ltd Iron and manganese ore mining, noble Ferro
alloys, nitrogen production
Joint Venture
Company Partner Key products / servicesBirla Sun Life InsuranceCompany Ltd.
Sun Life (Canada) Insurance solutions
Tanfac Industries Ltd. TIDCO (Tamil Nadu IndustrialDevelopment Corporation)
Fluorine chemicals
Birla Sun Life AssetManagement Company Ltd.
Sun Life (Canada) Mutual funds
Birla Sun Life Distribution Sun Life (Canada) Investment planning services
Great Employer
9
http://www.adityabirla.com/our_companies/indian_companies/shree_digvijay_cement.htmhttp://www.hindalco.com/http://hindalco.com/about_us/tapping_new_markets.htmhttp://www.adityabirla.com/our_companies/indian_companies/bihar_caustic.htmhttp://www.adityabirlanuvo.net/http://www.adityabirla.com/our_companies/indian_companies/idea.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insulators.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/indian_companies/psi_datasystems.htmhttp://www.adityabirla.com/our_companies/indian_companies/transworks.htmhttp://adityabirlanuvo.co.in/products/financial_services.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insurance_advisory_service.htmhttp://www.adityabirlanuvo.net/products/garments.htmhttp://www.adityabirla.com/our_companies/indian_companies/hitech_carbon.htmhttp://www.adityabirla.com/media/press_releases/200705may/aditya_birla_retail_more.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/indian_companies/essel_mining.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/indian_companies/shree_digvijay_cement.htmhttp://www.hindalco.com/http://hindalco.com/about_us/tapping_new_markets.htmhttp://www.adityabirla.com/our_companies/indian_companies/bihar_caustic.htmhttp://www.adityabirlanuvo.net/http://www.adityabirla.com/our_companies/indian_companies/idea.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insulators.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/indian_companies/psi_datasystems.htmhttp://www.adityabirla.com/our_companies/indian_companies/transworks.htmhttp://adityabirlanuvo.co.in/products/financial_services.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insurance_advisory_service.htmhttp://www.adityabirlanuvo.net/products/garments.htmhttp://www.adityabirla.com/our_companies/indian_companies/hitech_carbon.htmhttp://www.adityabirla.com/media/press_releases/200705may/aditya_birla_retail_more.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/indian_companies/essel_mining.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htm -
7/30/2019 Capital Structure of Hindalco Industries Limited
10/69
Maybe you would like to take a crash course on branding, run a marathon or even go deepinto the hinterland to manage a water conservation project, or probably do all of these whileworking quietly on a global acquisition. At the Aditya Birla Group, opportunities are onlylimited by your imagination.
The $12 billion Indian conglomerate was ranked number one in India and among the best inAsia by Hewitt in their Best Employers Survey 2007. The India winners were chosen after asix-month long intensive research that included 230 participating companies and more than44,000 respondent employees, representing the views of more than one million employees.The Best Employers in Asia study spanned some of the most dynamic markets in Asiaattracting more than 750 employers. What is the DNA of a best employer? Contrary to the
popular belief, its not a lifetime employment guarantee or remuneration but anorganizations ability to provide customized solutions to an employees unique situation.Given the diverse range of organizations represented in the Best Employers in India list, to bethe best, parameters like industry size, ownership and legacy didnt matter. But what did,were metrics like employee engagement and alignment, opportunities for growth anddevelopment, performance differentiation, quality of HR initiatives and employee diversity.
THE JOURNEY OF SUCCESS OF ADITYA BIRLA GROUP The Aditya Birla Group, India's first multinational corporation, traces its origins back to thetiny village of Pilani in the Rajasthan desert, where Seth Shiv Narayan Birla started cottontrading operations in 1857. Today, the Group's footprint extends to 20 countries and itsrevenues are US$ 24 billion. We retrace the highlights of this remarkable journey, startingfrom the present:
2008With the acquisition of novelis Hindalco has become the worlds largest rolling company.Hindalco is now a global player with a strong presence in five continents and is in the
leageus of the top 7 global players. It product portfolio is a natural hedge against the volatilityof the LME .
2007:: In May 2007, Novelis became a Hindalco subsidiary with the completion of the
acquisition process. The transaction makes Hindalco the world's largest aluminiumrolling company and one of the biggest producers of primary aluminium in Asia, aswell as being India's leading copper producer.
2006:: Grasim Industries Limited, India; Thai Rayon Public Company Limited, Thailand and
10
-
7/30/2019 Capital Structure of Hindalco Industries Limited
11/69
P.T. Indo Bharat Rayon, Indonesia form a JV with Hubei Jing Wei Chemical FibreCompany, China, for VSF.
:: Hindalco awarded the Greentech Safety Silver Award for its outstanding safety performance during 2005-06.
2005:: Indian Rayon re-christened as Aditya Birla Nuvo.:: Aditya Birla Group to set up a world-class aluminium project in Orissa.:: The Aditya Birla Group signs a framework agreement to acquire St Anne Nackawic
Pulp Mill, Canada.
2004 :: Board reconstituted with Mr. Kumar Mangalam Birla taking over as Chairman.:: Completion of the implementation process to demerge the cement business of L&T
and completion of open offer by Grasim, with the latter acquiring controlling stake inthe newly formed company UltraTech.
:: Grasim, Nagda, received the FICCI Annual Award 2003-2004 inrecognition of corporate initiative in rural development.
:: Bihar Caustic and Chemicals Ltd., Rehla, Jharkhand, has received theFICCI Annual Award 2003-2004 in recognition of corporate initiative in familywelfare.
:: Hindalco receives India CFO Award 2004 for excellence in finance in a largecorporate.
:: Scheme of Arrangement announced to merge Indal with Hindalco.:: Indian Rayon completes its Brownfield expansion of 40,000 TPA at Hi-Tech Carbon,
Gummidipundi, taking total capacity to 1,60,000 TPA.:: Deming Award for Indo Gulf.:: Indal wins FICCI Award 2002-2003 for 'Corporate Initiative in Rural Development'.
2003 :: Mr. Kumar Mangalam Birla, Chairman of the Group, is selected as Business India's
Businessman of the Year - 2003.:: Mr. Kumar Mangalam Birla is selected as The Economic Times' Business Leader of
the year.:: The Group is ranked 16th in India's first ever survey of 'Great places to work in',
published in Business World magazine. The Group's joint venture concern, Birla SunLife Insurance, is ranked 9th in the same study.:: The Group is ranked 20th in a study on the 'Best Employers in India', conducted by
Hewitt Associates and Business Today.:: Hindalco receives the Asian CSR Award for its "Rural Poverty Alleviation
Programme". The Asian CSR Awards are Asia's premier awards programme onCorporate Social Responsibility.
:: The Group acquires the Mount Gordon Copper mines in Australia, another strategicstep in becoming a globally competitive copper player.
:: Liaoning Birla Carbon, the Group's first carbon black company in China, is
11
-
7/30/2019 Capital Structure of Hindalco Industries Limited
12/69
incorporated.:: Indian Rayon acquires TransWorks, a leading Indian ITES / BPO company.
SECTORWISE TURNOVER OF ADITYA BIRLA GROUP
The data on this page reflects the Group's operations for FY 2007-08
ALUMINIUM
Hindalco is Asias largest primary producer of Aluminium and among the
most cost-efficient producers globally. Hindalco enjoys a leadership
position in primary aluminium and downstream products.
12
-
7/30/2019 Capital Structure of Hindalco Industries Limited
13/69
companys integrated complex at Renukoot houses an Alumina refinery, Aluminium Smelter
and facilities for production of semi fabricated products. Power is sourced from the
Companys captive power Plant at Renusagar, located at distance of about 45 km from
Renukoot. The Plant has a current generation capacity of 854 MW having 10 power
generating units. Excellent operation standards have ensured a consistent plant load factor of
over 90%. The integrated complex at Renukoot also houses two co-generation plants of 37.5
MW and 41 MW capacities respectively.
Besides the integrated complex at Renukoot, Hindalcos other manufacturing facilities are
located at many diverse locations in the country. Smelters are located at Hirakund, Orissa,
with a captive power plant and coal mines and at Alupuram, Karla. Rolled Product facilities
are located at Belur and Latoya and an Extrusions plant at Alupuram.
Production of Aluminium
Extracting Alumina from bauxite, and then smelting the alumina into aluminium, produces
primary aluminum. The extraction is alumina is accomplished through a chemical process.
This begins when bauxite chunks are crushed on wet ground to form slurry, which is fed into
digesters, where the alumina contents of bauxite are dissolved in caustic soda and the slurry is
separated into red mud and sodium alumina solution. Alumina hydrate is filtered and washed
free of caustic soda and then calcined in gas suspension calcine to produce calcined alumina.
In the final stage of aluminium production, calcined alumina is smelted into molten primary
aluminium into rods of electrolytic cells; the alumina is dissolved in molten cryolite
(Aluminium fluoride). The reaction in the cells is powered by electricity carbon anodes are
used in the process. The molten aluminium is crucibles are poured modules to form ingots or
billets of various sizes or transferred for further processing into semi-fabricated products. It
takes the company approximately two tons of yield one ton of primary aluminium.
Aluminium is the primary product of Hindalco.
It has following characteristics:
It is light; its density is only 1/3 rd of steel.
It is resistant to weather.
It can be used in contact with a wide range of foodstuff.
13
-
7/30/2019 Capital Structure of Hindalco Industries Limited
14/69
It has a high reflective and finds many decorative uses.
It alloys can equal or even exceed. The strength of normal construction steel.
It is highly elastic.
It keeps its toughness down to very low temperatures.
It is easily worked and formed; it can be rolled to very thin foil.
It conducts electricity and heat nearly as well as copper.
Raw Materials
Bauxite
Hindalco obtained about 65% of its Bauxite requirement from its own mines and purchased
around 35% of the Bauxite from the market.
Caustic Soda
To Cates its caustic soda need the company has set up BCCL (Bihar Caustic and Chemical
Ltd.) in joint venture with the state government of Bihar. BCCL Cates around 90% of the
caustic needs of Hindalco. Rest is purchased from the Kanoria Chemicals and Industries Ltd.
Renukoot.
CP Coke
CP coke is baked with hard pitch to make carbon anodes, which are used in the process of
electrolysis.
Aluminium fluoride
It is used in the smelting process. The company buys almost all of its aluminium fluoride
from Tanfac Industries Ltd.
Hard Pitch
It is used along with CP Coke to make carbon anodes for the smelting processes.
Power
Power plays a vital role in the aluminium industry. It takes 16000 KW of power to produce
one ton of aluminium. Hindalco has its own captive power plant of 900 s MW situated 35 km
from its main plant at Renusagar. Hindalco also buys the deflect power from the state
government of U.P.
14
-
7/30/2019 Capital Structure of Hindalco Industries Limited
15/69
Financial performance .
Net sales and turnover from aluminium business in fy-08 stood at Rs71450
million as compared with Rs73444 in FY-07 A DROP OF 3%, primarily on
account of a sharp decline in domestic metal realization , primarily a fall out of
sharp depreciation in US $ even as LME was almost flat . in US $ terms the
revenues increased by 9%.
Earning before interest & taxes(EBIT) declined by 17% to Rs 24,231 million
due to pressure on realization and increased costs. The cost increase was
primarily on account of a sharp surge in crude prices , which resulted in high
prices of its derivatives and also increased prices of alternative fuel such as coal.Aluminium producers across the globe experienced a sharp fall in EBIT.
COPPER
Copper Business
The copper business faced one of the most trying years in its entire nine years history.
Despite the high prevailing copper prices and improved long term and spot Tc/Rc ascompared to the previous year, business suffered on account of difficult operating conditions.
Production
The copper business suffered production disruption on account of various problems both
external and internal. The heavy rainfall in the state of Gujarat during the first week of July
resulted in flooding of plant as well as the neighbouring areas. Road transportation was cut-
off resulting in serious dislocations in the movement of essential input and personnel notgetting access to the site.
The 180,000tpa Smelter 1 had been working at less than optimal levels due to longer
campaign runs and underwent a 25 days over due BI-annual maintenance Shutdown in the
months of November- December 2005.
15
-
7/30/2019 Capital Structure of Hindalco Industries Limited
16/69
Companys new smelter was commissioned in july2005.the commissioning of new copper
smelters always associated with a long-drawn ramp up process, and the experience at Dahej
was no exception.
Profitability
Net Sales and Operating Revenue fdxc Net sales and operating Revenue for the year 2007-08 increased by 5% YOY on the back higher volumes increased VAP tonnage and higher mark ups for both metals. A largeincreased in Net Sales and Operating Revenues was though negated by a sharp decline in USdoller.
Net profit increased 12% to Rs.28609 Million on account of tax adjustment for earlier year.Cash profit increased from Rs.32,024 Million to Rs.34487 Million.
Production Capacity
Division Capacity LocationAlumina
Chemicals
1,60,000 tpa 7,00,000 tpa (Renukoot) , 1,10000 tpa (Muri)
3,50000 tpa (Belgaum)Primary
Aluminium
4,45,000 tpa 3,45,000 tpa (Renukoot) , 1,00,000 tpa (Hirakund)
14,000 tpa (Alupuram)Extrusions 42,000 tpa 30,000 tpa (Renukoot) , 12,000 tpa (Alupuram)Rolled Products 2,00,000 tpa 80,000 tpa (Renukoot) , 45,000 tpa (Begum)
45,000 tpa (Taloja) , 3,00,000tpa(mouda)Wire Rods 64,400 tpa 40,000 tpa (Renukoot) , 10,000 tpa (Alupuram) ,14,400
tpa(mouda)
16
-
7/30/2019 Capital Structure of Hindalco Industries Limited
17/69
Aluminium foil 11,000 tpa 5,000 tpa (Silvassa) , 6,000 tpa (kalwa)Aluminium
Wheels
3,00000 tpa Silvassa
Copper
Cathodes
5,00000 tpa Dahej
Power 187.2mw 741.7mw (Renu Sagar), 78mw (Renukoot),267.5mw
(Hirakud)
BUSINESS PERFORMANCE REVIEW
As stated earlier, Company has recorded its best ever performance during fiscal
2007-08.A snapshot is provided below
Aluminium
Rs. MnShare
Copper
Rs. Mn.Share
Unallocable Total
Rs. Mn
Net Sales &OperatingRevenue
71,45037.43%
120,65562.81%
(94) 192,105
EBIT 24,23182.80%
5,03412.20%
3,797 29,265
EBITMargins(%)
33.91% 4.17% _ 38.08%
CapitalEmployed
71,41437.19%
1,20,59662.81%
85,275 1,92,010
ROCE(%) 33.93% 4.17% 17.93%
Graphical Representation of EBIT
17
-
7/30/2019 Capital Structure of Hindalco Industries Limited
18/69
PRIMARY ALUMINIUM PRODUCTS OF HINDALCO
Hindalco is a dominant player in primary aluminium, with over 42 per cent market share. Its product range includes
IngotsHindalco produces high purity ingots through the smelting process. Alloyingots of various grades are also produced mainly used for production of castings in Auto Industry as well as electrical applications. Both these
products are re-melted and further processed into a large number of productsfor various downstream applications. Hindalco's metal is a registered brand atLondon Metal Exchange (LME).
Wire rodsHindalco manufactures wire rods, in a continuous casting and rolling process.Electrical Conductor (EC) wire rods are used for the production of cables,
ACSR and AAC conductors. Alloy wire rods are used to produce AAACconductors.
BilletsHindalco's aluminium billets are produced by a state-of-the-art Wagstaff casting process using Airslip technology. These are top quality billets with asmooth surface finish. Billets are used mainly for producing extrusions andforgings.
18
FY08
-
7/30/2019 Capital Structure of Hindalco Industries Limited
19/69
Hindalco Extrusions are manufactured from high-quality billets made out of virgin in-house
metal. They have found applications in a wide spectrum of segments, such as, architectural,electrical, industrial, transport, defence and consumer durables among others. HindalcoExtrusions is a leading brand in each of these segments.
HINDALCOS ROLLED PRODUCTS
Hindalco is the world's largest aluminium rolling company with theacquisition of Novelis, the global leader in value-added high-end
aluminium flat rolled products and aluminium can recycling. Thecombined volume of sales of flat rolled products in the world market isabout 3 million tonnes and the market share is more than 20 per cent.
Hindalco is the largest manufacturer of the entire range of flat rolled products in India. Itenjoys nearly 60 per cent of market share and its rolled products are widely used in varioussegments such as packaging, transportation, building and construction, electrical, defence andgeneral engineering applications.The company's commitment to quality and service along with its extensive infrastructure hasmade Hindalco a prime source for best-selling brands. Continuous improvements inmanufacturing, processes, practices and systems ensure that customers' needs and
expectations are fully met.
FOIL AND PACKING,
Hindalco's Foils and Packaging Division operates out of threemodern, well-equipped plants located at Kalwa inMaharashtra, Silvassa in Dadra & Nagar Haveli and itssubsidiary unit Indal Kollur, in Andhra Pradesh. The 'Tri-Plant' advantage gives the Hindalco Foil marketing team aseamless 'One Stop Shop' approach to an entire range of
products.All plants employ high-end technology and professional expertise to develop visuallyappealing and functionally useful packaging. Delivering 'not-tried-before' solutions tocustomers in India and across the globe, Hindalco's Foil and Packaging Division has thedistinction of being India's leading supplier of foil laminates plain, lacquered and printed.
Hindalco's complete backward integration, right down to the raw material stage from bauxiteore to primary metal, guarantees full control over the quality of the final foil output.
ALLOY WHEELS
19
-
7/30/2019 Capital Structure of Hindalco Industries Limited
20/69
Hindalco manufactures world-class aluminium alloy wheels at its state-of-the-art foil plant located at Silvassa, Dadra and Nagar Haveli, wherealloy wheels and aluminium foil are produced. This has helped thecompany to optimise capacity and enhance the share of value-addedsemi-fabricated products.
The 300,000-piece alloy wheel plant is progressively increasing production.
Branded as Aura alloy wheels, these high performance wheels are available for nearly allvehicles running on the Indian roads. Maruti-Suzuki, Tata Motors, Fiat India and HM-Mitsubishi India have already approved them for original equipment supplies. The vendor approval process is on with a number of other automobile manufacturers.
CONCLUSIONAs the conclusion the company has delivered a record performance amidst challenging
business environment. The company has challenged out expansion in alumina and aggressivegrowth plans in aluminium. The efforts will be collected by an excellent proportionaterelationship between equity and debt.
Therefore the company is evident of success of these efforts in transforming the company tothe league of Global Top-10 in both the metal and deliver superior value to stakeholderseven in the future.
20
-
7/30/2019 Capital Structure of Hindalco Industries Limited
21/69
Chapter No. 2
OBJECTIVE OF STUDY&
RESEARCH METHODOLOGY
21
-
7/30/2019 Capital Structure of Hindalco Industries Limited
22/69
OBJECTIVE OF STUDY
To know about the capital structure and combination of debt and equity.
The objective of study involves understanding of different aspect of capital structure.
To study the different aspect related to capital structure of Hindalco Industries
Limited which contributes most to make Hindalco one of the lowest cost producers in
profit involving organization in the world.
To have deep study about the financial leverage of the organization
To study various approaches to establish target capital structure.
22
-
7/30/2019 Capital Structure of Hindalco Industries Limited
23/69
RESEARCH METHODOLOGY
Research methodology used here is purely exploratory. It is used when one is seeking into thegeneral nature of the problem, possible decisions alternatives and relevant variables that needto be considered
The research methodology is highly flexible, unstructured and qualitative. Exploratoryresearch hypothesis are either vague or ill defined, or they do not exists at all.
Sampling Plan
There has been no sampling plan as such as the study involved understanding the various process and analysing them. The study involved the detailed analysis of secondary datacalculated from various sources and therefore no sample size and plan has been considered.
Data Source
Data has been collected trough literature survey and expert opinion. Literature surveyincludes the collection of data from various sources like study material.
The part of data is collected from primary source and other from secondary source.
Primary source
Information gathered by interview and discussing with the members of department.
Secondary source
Company annual reportSelected books and magazines.
Data Analysis
To analysis data I use different financial tools and techniques.
23
-
7/30/2019 Capital Structure of Hindalco Industries Limited
24/69
Chapter No. 3
CAPITAL STRUCTURE
Meaning of capital structure
Pattern of capital structure
Optimum capital structure
Sources of funds
Equity verses Debentures
FRICT Analysis
Theories of Capital structure
24
-
7/30/2019 Capital Structure of Hindalco Industries Limited
25/69
CAPITAL STRUCTURE
INTRODUCTION
For the establishment of a firm, assets are required and assets of the company can be financed
either by increasing owners claim or creditors claim. The owners claim increase when firm
raises fund by issuing ordinary shares or by retaining the earning; the creditors claims
increases by borrowing. The various means of financing represent the financial structure of
the enterprise.
MEANING
Capital structure refers to the mix of sources from where the long-term funds required in the
business may be raised. Simply put, capital structure is used to represent the proportionate
relationship between debt and equity. Equity includes paid up share capital, share premium
and retained earnings. Capital structure decision is a significant decision. It influences
shareholder return and risk. Consequently, the market value of share may be effected capital
structure decision.
The company have to plan its capital structure initially at the time of promotion.
Consequently, whenever funds have to be raised to finance investments, a capital structure
decision is involved. A demand for raising funds generates a new capital structure a decision
has to be made to the quantity and forms of financing. This decision will involve an analysis
of the existing capital structure and the factors, which will govern the decision at present. The
companys policies to retain or distribute earnings affect the owners claim. Shareholders
equity position is strengthened by retention of earning. Thus, the dividend decision has a
bearing on the capital structure of the company. The new financing decision of the company
may be its debt-equity mix. The debt equity mix has implications for the shareholders
earnings and risk, which in turn will affect the cost of capital and the market value of the
firm.
25
-
7/30/2019 Capital Structure of Hindalco Industries Limited
26/69
PATTERNS OF THE CAPITAL STRUCTURE
In case of new company, the capital structure may be of any of the following patterns:
Capital Structure with equity shares onlyCapital Structure with equity and preference shares
Capital Structure with equity and debentures
Capital Structure with equity, preference shares and debentures
Debt is the liability on which interest has to be paid irrespective of the company profits.
While equity consists of shareholder or owners funds on which payment of dividend
depends upon the companys profit. A high proportion of debt content in the capital structure
increases the risk and may lead to financial insolvency in adverse time. However, rasingfund through debt is cheaper as compared to financing through shares. This because
figure-3 interest on debt is allowed as an expense for taxes purpose. Dividend is
considered to be an appropriation of profits; hence payment on dividend does not result in
any tax benefit to the company. This means if accompany, is in 50% tax bracket, pays
interest at 12% on its debentures, the effective cost to it comes only 6% while if the
amount is raised by 12%Preference shares, the cost of raising the amount would be
12%. Thus rasing the funds by borrowing is cheaper resulting in higher availability of profit for shareholders. This increases the earning per share of the company, which is
the basic objective of the finance manager.
OPTIMUM CAPITAL STRUCTURE
A firm should try to maintain an optimum capital structure with a view of to maintain
financial stability. The optimum capital structure is obtained when the market value per
equity share is the maximum. It may be defined as that relationship of debt and equity
securities which maximizes the value of a companys share in the stock exchange. In case a
company borrows and this borrowing helps in increasing the value of companys share in the
stock exchange, it can be said that the borrowing has helped the company in moving towards
its optimum capital structure; In case, the borrowing results in fall in market value of the
companys equity shares, it can be said that the borrowing has moved the company from its
optimum capital structure.
26
-
7/30/2019 Capital Structure of Hindalco Industries Limited
27/69
The objective of the firm should therefore be to select the financing or debt equity mix, which
will lead to maximum value of the firm.
CONSIDERATION
The following considerations will greatly help a finance manager in achieving his goal of optimum capital structure:
We should take advantage of favourable financial leverage.
We should take advantage of the leverage offered by the corporate taxes.
We should avoid a perceived high risk capital structure.
SOURCES OF FUNDS Security financing- This includes financing through shares including both equity and
preference shares and debentures.Internal Financing This includes financing through depreciation funds and retainedearnings.Loan Financing- This includes both short term and long-term loans .
EQUITY SHARE VERSUS DEBENTURES
A company may prefer financing through debenture as compared to equity shares on account
of following reasons:Interest on debenture is allowed as an expense for tax purpose.Debenture holds have generally no say in the management of the companyUnderwriters may have little hesitation in accepting the companys proposal sincedebentures are adequately backed by the companys assets.
Moreover, the company may find it beneficial to pay short-term loan by raising funds throughdebentures at a time when interest rates on such loans are higher as compared to the interestrate payable on the debentures. However, the company cannot go an unlimited extent of financing through debentures. It has to strike a balance between risk and saving effected by
27
Sources of Funds
Security Financing Internal Financing Loan Financing
-
7/30/2019 Capital Structure of Hindalco Industries Limited
28/69
-
7/30/2019 Capital Structure of Hindalco Industries Limited
29/69
COST OF CAPITAL
Cost is an important consideration in capital structure decision. It is obvious that a business
should be at least capable of earning enough revenue to meet its cost of capital and finance its
growth. Hence, along with a risk as a factor; the finance manager has to consider the costaspect carefully while determining the Capital Structure.
CONTROL
Along with cost and risk factor, the control aspect is also an important consideration in
planning the Capital Structure. When a company issues further equity share. It automatically
dilutes the controlling interest of the present owners. Similarly, preference shareholders can
voting rights and thereby affect the composition of the Board of Directors in case dividend on
such share is not paid for two consecutive yearsTRADING ON EQUITY:
A company may raise funds either by the issue of shares or by borrowings. Borrowings carry
a fixed rate of interest and this interest is payable irrespective of fact where there is profit or
not. Preference shareholders are also entitled to a fixed rate of dividends but payment of
dividend is, subject to the profitability of the company. In case of rate of return on the total
capital employed i.e. shareholders funds plus long term borrowings, is more than the rate of
interest on borrowed funds or rate of dividends on preference shares, it is said that companyis trading on equity.
CURRENT YEAR (2007-2008)
i
29
32%
67%
-
7/30/2019 Capital Structure of Hindalco Industries Limited
30/69
0
20000
40000
60000
80000
100000
120000
140000
Proportionof Financial
Mix
Years
Capital Structure of Hindalco for Four Years
Share CapitalReservesLoan Fund
Share Capital 1043 986 928 925
Reserves 123137 95077 75644 67654
Loan Fund 73686 49034 38000 25646
2006-07
2005-06
2004-05
2003-04
The graph above clearly depicts that the proportion of debt in the financing mix of Hindalcois much more as compared to share capital. The debt content is 37% whereas the proportionof share capital and reserves and surplus is 1% and 62% respectively.
s2003-04 to 2007-08
THE FRICT ANALYSIS
A financial structure may be evaluated from various perspectives from owners point of view,return; risk and value are important consideration. From the strategic point of view, flexibilityis an important concern and flexibility assumes great significance. A sound capital structurewill be achieved by balancing all these consideration:
FLEXIBILITY: the Capital Structure should be determined within the debt capacityof the company and this capacity should be flexible. It should be possible for acompany to adapt its Capital Structure within a minimum cost and delay if warranted
by a changed situation.
RISK: risk depends on the variability in the firms operation. It may be caused bymacro economic factor and industry and firms specific factor. The excessive use of debt magnifies the variability of shareholders earnings and threatens the solvency of the company.
30
122617173683285
FY-08
-
7/30/2019 Capital Structure of Hindalco Industries Limited
31/69
INCOME: The Capital Structure of the company should be most advantageous tothe owners of the firms. It should create value; subject to other consideration. Itshould generate maximum return to the shareholders with minimum additional cost.CONTROL the Capital Structure should involve the minimum risk of loss of controlof the company. The owner of closely held companies is particularly concerned aboutdilution of control.
TIMING: The Capital Structure should be feasible to implement given the currentand future condition of the capital market. The sequencing of source of financing isimportant. The current decision influences the future option of raising capital.
The FRICT analysis provides the general framework for evaluating firms Capital Structure.
THEORIES OF CAPITAL STRUCTURE
The objective of firm should be directed towards the maximisation of the value of the firm,
the Capital Structure, or leverage decision should be examined from the point of view of its
impact on the value of the firm. If the values of the firm can be affected by Capital Structure
or financing decision, a firm would like to have a Capital Structure, which maximize the
market value of the firm.
There are broadly four approaches in this regard. These are:
Net Income Approach
Net Operating Income Approach
Traditional Theory
Modigliani-Miller Approach
These approaches analysis relationship between the leverage, cost of capital and the values of
the firm in different way. However, the following assumptions are made to understand these
relationships.
1. There are only two source of funds i.e. debt and equity
2. The total assets of firm are given. The degree of leverage can be changed by selling
debt to repurchase shares or selling shares to retire debt.
3. There are no retained earnings
4. The operating profit of firm is given and expected to grow.
5. The business risk is assumed to be constant and is not affected by the financing mix
decision.
6. There are no corporate taxes.
31
-
7/30/2019 Capital Structure of Hindalco Industries Limited
32/69
7. The investors have the same subjective probability distribution of expected earnings.
LEAVERAGE ANALYSIS
Financial leverage
Relationship between financial leverage & rate of return.
Determination of whether Hindalco is trading on Equity.
32
-
7/30/2019 Capital Structure of Hindalco Industries Limited
33/69
LEAVERAGE ANALYSISFinancial leverage is defined as the ability of a firm to use fixed financial charges to
magnify the effect of change in E.B.I.T on the firms earning per share. The financial
leverage occurs when a firms Capital Structure contain obligation of fixed financial charges.For instance, interest on debentures, dividend on preference share etc., along with owners
equity to enhance earning of equity shareholders. The fixed financial charges do not vary
with the operating profit. They are fixed and are to be paid irrespective of level of operating
profit. The ordinary shareholders of firm are entitled to residual income i.e. earning after
fixed financial charges.
Favourable and Unfavourable Financial leverageFinancial leverage may be favourable or unfavourable depending upon whether the earning
made by the use of fixed interest or dividend bearing securities exceeds the explicit fixed
cost, the firm has to pay for the employment of such funds or not. The leverage will be
considered to be favourable so long the firm earns more on assets purchased with the funds
than the fixed cost of their use. Unfavourable leverage occurs when the firm does not earn as
much as the funds cost.
Significance Of Financial Leverage
Financial leverage help in deciding the appropriate Capital Structure. One of the objectives of
planning an appropriate Capital Structure is to maximize the return on equity shareholders
funds or maximize the earning per share.
Financial leverage is double-edged sword . On one hand, it increases the earning per share
and on the other hand it increases the financial risks high financial leverage means high
fixed financial cost and high financial risk i.e. as the debt content in Capital Structureincreases, the financial leverage increases and at the same time the financial risk is also
increases i.e. risk of insolvency increases. The finance manager is required to trade-off
between risk and return for determining the appropriate amount of debt.
33
-
7/30/2019 Capital Structure of Hindalco Industries Limited
34/69
(Rs. in Millions) i
Relationship between financial leverage & required rate of return
i
1.03
1.04
1.05
1.06
1.07
1.08
1.09
1.10
1.11
1.12
1.13
2006-07 2005-06 2004-05 2003-04
Degree of financialleverage
Years
Financial leverage of Hindalco
Degree of f inancialleverage
34
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Net sales & operating
income
1,92,010 183130 113965 95231 62262
Total expenditure 157999 (142980) (87914) (72465) (47113)
Operating profit 34011 40150 26051 22766 15149
Other income 4929 3701 2439 2700 2093
Depreciation 5878 (6381) (5211) (4633) (3174)
EBIT 33062 37470 23279 20833 14068
Interest charges 2806 (2424) (2252) (1700) (1612)
PBT 30256 35046 21027 19133 12456
Degree of financialleverage
1.09 1.07 1.11 1.09 1.13
-
7/30/2019 Capital Structure of Hindalco Industries Limited
35/69
Relationship between financial leverage and firms required rate of return to
equity shareholders with corporate tax is given by:
Re = Ro + D/E (1-T) (Ro-Rb)
Where,
Re = required rate of return to equity shareholders
Ro = required rate of return for an all equity firm.
Rb = required rate of return to lenders
EXPLANATION:
The above graph clearly depicts that with higher debt content Re i.e. required rate of return
by shareholders is going up while TWACC is getting lower.
Determination of whether Hindalco is Trading on Equity
Trading on Equity
A company may raise funds either by issue of shares or by debentures. Debentures carry a
fixed rate of interest and this interest has to be paid irrespective of profits. Of course,
preference share are also entitled to a fixed rate of dividend depends upon the profitability of
the company. In case, the rate of return on the total capital employed is more than the rate of interest on debentures or rate of dividend on preference shares, it is said that company is
trading on equity.
Rate of return on equity shareholders fund
=PAT/Equity shareholders fund
= 28609/174359
= 16%
General rate of return = (PAT + Interest) / Total capital employed
= 31415/270881
= 11%
The general rate of return is only 11% while the return on equity shareholders fund is 16%.
Thus, we can say that Hindalco is trading on Equity.
35
-
7/30/2019 Capital Structure of Hindalco Industries Limited
36/69
EBIT-EPS ANALYSIS
36
-
7/30/2019 Capital Structure of Hindalco Industries Limited
37/69
EBIT-EPS Analysis
The design of an appropriate capital structure is one of the major decision areas in financial
management.
A widely used financial technique to design an appropriate capital structure is E.B.I.T-EPSanalysis. As a method of capital structure planning, it essentially involves the comparison of alternative methods of financing under various assumptions of E.B.I.T. the choice of combination of source with the capital structure would be one that, for a given level of E.B.I.T. would ensure the largest EPS. Alternatively, the choice of combination shouldensure the maximum market price per share.
MPS = EPS * Price-Earning ratioii
(Rs. in million)Particulars 2007-08 2006-07 2005-06
EBIT 33062 37470 23279
Interest Charges 2806 (2424) (2252)
PBT & Extraordinary items 30256 35046 21027
Extraordinary items - - 30
PBT 30256 35046 21057
Provision for Current Tax 6063 (9841) (3241)
Provision for Deferred Tax 875 551 (1160)
Provision for fringe benefit tax 114 (113) (101)
PAT 28609 25643 16556
No. Of Shares Outstanding 1167151498 1004921647 986116213
EPS 24.51 25.52 16.79
ii Figures in brackets indicates negative value
37
-
7/30/2019 Capital Structure of Hindalco Industries Limited
38/69
0
10
20
30
EPS
2006-07 2005-06
Years
Earning Per Share of Hindalco
EPS
INTERPREATION:
In FY-2007, The EPS of Hindalco was Rs. .25.52. But In FY-2008, It decrease to Rs. 24.51 . .This change may be due to fluctuation in the sales value and operating leverage. It is obviousthat net profits Hindalco greatly with small fluctuation on sales figure especially because of high fixed costs. Hence, EPS fluctuated. The Financial Leverage may heighten this effect.
38
-
7/30/2019 Capital Structure of Hindalco Industries Limited
39/69
COST OF CAPITAL
39
-
7/30/2019 Capital Structure of Hindalco Industries Limited
40/69
COST OF CAPITAL
The cost of capital is a significant factor in designing the capital structure of an undertaking.The basis reason behind running a business undertaking is to earn a return at least equal to itscost of capital. Commercial undertaking has no relevance if it does not expect to earn its costof capital. Therefore, cost of capital constitutes an important factor in various businessdecisions.
The cost of capital estimate for a business is used for two purposes:Evaluating the performance of a business: - The operating profit generated by a
business is evaluated against the minimum profit that the business is expected to generated asimplied by the cost of capital for that business. The profit generated by the business over andabove the minimum profit expectation is termed as the Economic Value Added (EVA) for that business.
Evaluating capital investment projects: - All projects that generate a return over andabove their respective cost of capital are EVA positive by nature and therefore value adding.The appropriate cost of capital is used therefore to evaluate such projects into those that addvalue and those that do not, thereby enabling financial decision-making.
MEASUREMENT OF COST OF CAPITAL
Cost of DebtThe explicit cost of debt is the interest rate as per contract adjusted for tax and the cost of
raising the debt.
C ost of irredeemable debentures
Cost of debentures not redeemable during the lifetime of the company.
Kd = I/NP * (1-T)
Where,Kd = Cost of Debt after taxI = Annual Interest Rate
NP= Net Proceeds of debenturesT = Tax rate
Cost of redeemable debenture
If the debenture were redeemable after the expiry of a fixed period the cost of debenturewould be:
Kd = I (1-t) + (RV-NP) / N (RV + NP) /2
40
-
7/30/2019 Capital Structure of Hindalco Industries Limited
41/69
Where,I = Annual Interest PaymentNP = Net Proceeds of DebentureT = Tax Rate
N = Life of Debentures
Cost of Preference Share
In the case of preference share, the dividend rate can be taken as its cost since it is thisamount, which the company intends to pay against preference shares. As in the case of debt,the issue expenses or the discount / premium on issue/ redemption has also to be taken intoaccount.
Cost of irredeemable share = PD/ PO
Where,PD = Annual preference dividendPO = Net proceeds in issue preference share-
Cost of redeemable preference share
If the preference share were redeemable after the expiry of a fixed period the cost of preference share would be.
KP = PD + (RV-NP) / N(RV + NP) /2
Where,PD = Annual preference dividendRV = Redemption value of preferenceNP = Net proceeds an issue of preference shareN = Life of preference share
Cost of ordinary of Equity share
Calculation of the cost of ordinary share involves a complex procedure. This is becauseunlike debt and preference share there is no fixed rate of interest or dividend against ordinaryshares. Hence, to assign a certain cost to equity share is not a question of mere calculation. Itrequires an understanding of many factors basically concerning the behaviour of investor andtheir expectations. Since there can be different interpretations of investors behaviour, therefare many approaches regarding calculation of cost of equity share.
The four main approaches are:(1) D/P (Dividend /Price)(2) E/P (Earning /Price) ratio(3) D/P + g (Dividend /Price + Growth rate of earning) and(4) Realized yield approach
41
-
7/30/2019 Capital Structure of Hindalco Industries Limited
42/69
1) D /P- ratio (Dividend Price) approach
This emphasizes that dividend expected by an investor from a particular company; do so inthe expectations of ascertain return. In other words, when an investor buys ordinary shares of a certain risk, he accepts a certain return. The accepted rate of return is the cost of ordinaryshare capital. Under this approach, therefore, the cost of ordinary share capital is calculatedon the basis of the present value of the expected future stream of dividend.
Ke = D / NPWhereKe = Cost of equityD = DividendNP = Net proceeds of share
2) E /P (Earnings / Price) ratio approachIn this approach, the cost of ordinary share capital is based upon the expected rate of earnings
of a company. The investor expects a certain amount of earnings whether distributed or not from the company.
Ke = E / NPWhereE = EarningNP = Net proceeds of shares
3) D / P + growth approach
This approach emphasis upon investor what actually expects to receive from his investmentsin a particular ordinary share in terms of dividend plus the rate of growth in dividend /earnings. This growth rate in dividend (g) which taken to be equal to the compoundgrowth rate in earning per share.
Ke = D / P + gWhereD = Dividend per shareP = Market price of the shareG = Growth rate
4) Realized yield approach
This approach considers the basic factor of the D/P + g approach but, instead of using theexpected values of the dividend and capital appreciation, past yields are used to denotethe cost of capital. This approach is based upon the assumptions that past behaviour will be repeated in future and therefore, may be used to measure the cost of ordinarycapital.
42
-
7/30/2019 Capital Structure of Hindalco Industries Limited
43/69
COST OF RETAINED EARNINGS
The companies do not generally distribute the entire profits earned by them by way of dividend among their shareholders. They retain some profits for future expansion of the
business. The amount retained by company, if it had been distributed among theshareholders by way of dividend, would have given them some earning. The companyhas deprived the shareholders of these earnings by retaining a part of profit with it.Thus, the cost of retained earnings is the earning forgone by the shareholders. Simply,stated, the opportunity cost of retained earnings may be taken as the cost of the retainedearnings. It is equal to the income that shareholders could have earned by placing thesefunds in alternative investments.
WEIGHTED AVERAGE COST OF CAPITAL
The composite or overall cost of capital of a firm is the weighted averages of the cost of various sources of funds. Weights are taken to be the proportion of each source of funds in the capital structure. While making financing decision this overall or weightedcost is used. Each investment is financed from the pool of funds, which represents thevarious sources from which funds have been raised. Any decision of investmenttherefore has to be made with reference to the overall cost of capital and not withreference to cost of specific source of funds.
WACC = WI * KI + W2 * K2 + + Wn * Kn
Calculation of the cost of capital
The elegance of a theory lies in its practical application. The theory of measuring cost of capital is not simple. Hindalco was founded in 1962. It is a large integrated aluminium,copper, chemical, foil, wheel, carbon etc. It has a total sale of Rs. 183,130 million, totalgross assets of Rs. and net profit of Rs. 25,643 million in 2007.
The average market price of Hindalco one share in 2007 was Rs. 177. The market value of the companys equity is obtained by multiplying the number of the outstanding shares() by the average share price. The market value of debt is assumed to be equal to the
book value. On Hindalcos EPS, DPS, Payout, average share price, dividend yield,earning yield, price to book value per share and ROE for the years 1996 to 2007
43
-
7/30/2019 Capital Structure of Hindalco Industries Limited
44/69
HINDALCO FINANCIAL DATA 1996-2007
Years EPS(Rs.)
DPS(Rs.)
B.V.of share
Dividendpayoutratio (%)
DividendYield(%)
EarningYield(%)
ROE(%)
1996-97 4.94 0.45 30.74 9.00 1.50 16.07 18.48
1997-98 6.27 0.53 36.83 9.50 1.40 17.02 19.72
1998-99 7.16 0.65 43.72 9.00 1.40 16.37 18.90
1999-00 7.74 0.80 51.02 10.00 1.50 15.17 18.01
2000-01 8.57 1.20 58.80 14.00 2.00 14.57 16.58
2001-02 8.67 1.35 61.53 16.50 2.00 14.09 16.70
2002-03 5.92 1.35 66.95 22.00 2.00 8.84 15.05
2003-04 8.53 1.65 74.16 19.00 2.00 11.51 15.00
2004-05 13.48 2.00 82.54 15.00 2.40 16.33 17.88
2005-06 16.79 2.00 97.40 13.00 2.30 17.23 20.50
2006-07 25.52 1.70 118.97 7.90 1.30 19.59 20.45
2007-08 24.51 1.85 142.09 9.3 1.12 16.41
Estimation of Hindalcos Cost of Equity
There are two approaches for calculating the cost of equity1. The constant dividend-growth model2. The capital asset pricing model (CAPM)
Dividend Growth Model
The formula for calculating the cost of equity is as follows: DIV 1
Ke = -------- + gP 0
Where the first term DIV / P 0 is the dividend yield and the second term g, is the expected(constant) growth in dividends. Hindalcos dividend yield in 2007 is . The dividend yield of the company has varied between
44
-
7/30/2019 Capital Structure of Hindalco Industries Limited
45/69
Estimation of Growth Rate
In practice, four methods may be used to estimate the growth rate:
1) Internal growth :- Growth may be approximately by calculating the product of retention ratio and return on equity (ROE)
g = Retention ratio * ROE
This approach may be used when the firm has a stable dividend policy. Hindalcos payoutratio has fluctuated over years. However, on an average, it has distributed about 13% of itsnet profit and retained 87% in the past decade. In the most recent year 2006 is 2006, itretained about 85% of its profit. The companys ROE in 2006 is 20.50% and 10 yearsaverage is 17%. Assuming that the current retention ratio of 85% and ROE of 17% will
continue in the future, then Hindalco is expected to grow at % year.
G = Retention ratio* ROE = 0.85*0.17 = 14%
The constant growth model has its limitation. It is not application to those companies, whichhave highly unstable dividend policy (or retention ratio) and fluctuating ROE. One way toovercome this limitation is to estimate Ke for a large sample of companies of equivalent risk in the same industry a use the average k, as an approximation of the cost of equity of thecompany under consideration.
2) Past average growth : - In practice, growth may be based on past EPS rather DPS
since companies do not change their DPS frequently with changes in EPS. Thus, DPS
grows at a slow rate. The average of EPS past growth rates may be used as a proxy for
the future growth. There are two alternatives available for calculating the average (1)
the arithmetic average and (2) the geometric average. These two methods will give
different estimates of the average growth rate. The geometric average will give a
compounded average and is preferable when there is much variability in EPS data.
The geometric average EPS growth rate for Hindalco for the period 1996 to 2006 is as
follows:
EPS n EPSo (1 + g) n
EPS n(1+g) n =--------
EPSo
45
-
7/30/2019 Capital Structure of Hindalco Industries Limited
46/69
3) Regression approach for estimating growth:- Both arithmetic average
geometric methods of calculating growth have limitations. Simple average methods of
calculating growth have limitations. Simple average gives the same weight to each
years earning while geometric average estimates a compounded rate based on onlytwo observations. Both techniques are quite inadequate to use when earning are
widely fluctuation. The regression technique estimates growth over time (t)
incorporating all observations. The linear regression model is as follows:
EPS 1 = a + bt
The linear model indicates growth in terms of rupees. A better method is the log-linear
regression model, which estimates growth in percentage term:In (EPS) is natural logarithm of EPS. The slope of the regression line (1+g) and it is
estimates as follows:
Yt In EPSIn (1+g) = -----------------
Yt
Where Yt is Y 1-Y
9.0989In (1+g) = ----------- = 0.1123
82.98
Taking anti-log on both sides, we get
1+g = 1.1198g = 1.1198-1 = 0.1198 or 12%
The growth rate estimated according the different methods are summarized. The growthrate estimated by log-linear model is the most appropriate since Hindalcos EPS are
highly variable. Thus, for the calculation of the Hindalcos cost of equity, we shall
assume that the future dividend rate will be the same as the current dividend yield (2.3%)
is and that the future growth will be 12%. According to the dividend-growth model,
Hindalcos cost of equity will be as follows:
46
-
7/30/2019 Capital Structure of Hindalco Industries Limited
47/69
Div 1K e = ---------------- + g
P 0
K e = 2.3%+12% = 14.3%
Estimate of growth rate and cost of equity
Method Growth Rate Cost of Equity
Internal growth 8.8% 11.1%Arithmetic average 20.8% 23.1%Geometric average 12.4% 14.7 %Long linear growth 12.0% 14.3%
For different growth rate, Hindalcos cost of equity is calculated. It variesBetween 11.1% to 23.1%. The geometric average and the long linear growthMethods give almost the same estimates for the growth rate and the cost of Equity, i.e. about 14-15%, for Hindalco. This seems to be a reasonable estimateOf Hindalcos cost of equity.
Capital Asset Pricing Model
An alternative model for calculating Hindalcos cost of equity is the capital assetPricing model (CAPM). The use of CAPM requires the following information.
The expected risk free rate of returnThe expected risk premiumBeta of Hindalcos returns
Risk free rate The risk free rate is generally approximated by the highly liquid, short-Term government security. The yield on one-year government bonds in India is about
10%. This could be used as a proxy for the risk free rate.
Market premium The difference between the expected market rate of return and theRisk free rate of return is the expected market premium. There are no estimates of theMarket premium available in India. The average monthly sensex return during the periodApril 2003 to 2006 has been 8%. This implies an annual market rate of return 68%
HINDALCOS COST OF DEBT
47
-
7/30/2019 Capital Structure of Hindalco Industries Limited
48/69
HINDALCO has both short term (monthly bank borrowing) and long-term debt. It also hascurrent liabilities such as cretitors. What is the cost of current liabilities? Should it beincluded in the computation of weighted cost of capital? There is no unanimity on this issue.The majority view is that current liabilities do not involve any explicit cost, and therefore,should be excluded from the cost of capital calculation.
An alternative view is that they involve implicit cost of current liabilities? Since they involvethe same risk as bank borrowing, the before tax cost of current liabilities can be treated equalto bank borrowing. We have ignored current liabilities in the calculation of Hindalcos cost of capital. Hindalco has 85 percent short term and 15 percent long-term debt. Bank borrowing and other short term debts cost about 16 percent and long term debt about 14 percent in India. We mayassume that Hindalcos will these costs in obtaining debt in future. Further, if we assume thatHindalcos short-term debt will continue to be 85 percent and long term about 14 percent inIndia we may assume that HINDALCO will incur these costs in obtaining debt in future.
Further if we assume that Hindalcos short term debt will continue to 85 percent and longterm debt and 15 percent and that corporate tax will be 35 percent, then the after tax weightedmarginal cost of its debt will be:WEIGHTED COST OF DEBT = 0.16(1-0.35)*85= 0.14(1-0.35)* 0.15
=0.0884 =0.0136=0.102 OR APPROX 10%HINDALCOS WEIGHTED AVERAGE COST OF CAPITAL
We have estimated Hindalcos cost of equity and cost of debt. If we know the targetcapital structure, we can estimate Hindalcos weighted average cost of capital. Target capitalstructure may be expressed in the book value or market value. Let us assume that thatHindalcos will maintain its current capital structure in the future. ITS WEIGHTEDAVERAGE COST OF CAPITAL will be as follows:
HINDALCOS weighted average cost of the capital is about 11 or 12 percent. Its market
value weighted average cost of capital is slightly higher than book value weighted average
cost of capital since the market value of equity is more than the book value .IF Hindalco is
48
Sources of cost of capital weight weighted costCapital BV MV BV MV
Equity Debt 0.12 0.72 0.84 0.086 0.101
0.10 0.28 0.16 0.028 0.016
Total 0.114 0.117
-
7/30/2019 Capital Structure of Hindalco Industries Limited
49/69
considering an investment project of average risk that has the same capital structure as the
Hindalco, then it can use 12 percent as discounted rate to compute projects NPV.
WACC = cost of equity*1/1+(D/E)+cost of debt * (1-T)*(D/E)/1+(D/E)
RATIO ANALYSIS
49
-
7/30/2019 Capital Structure of Hindalco Industries Limited
50/69
RATIO ANALYSIS
It is a widely used tool of financial analysis. The term ratio refers to the relationship
expressed in mathematical terms between two individual figures or group of figuresconnected with each other in some logical manner and are selected from financial
statements of the concern. A financial ratio helps to express the relationship between two
accounting figures in such a way that users can draw conclusion about the performance,
strengths and weaknesses of a firm.
Ratio to be used for capital structure analysis:
Earning per shareDividend per share
P/E ratio
Dividend pay-out ratio
Debt-equity ratio
Interest coverage ratio
Return on investment
50
-
7/30/2019 Capital Structure of Hindalco Industries Limited
51/69
Earning per share
EPS shows the profitability of the firm on a per share basis, it does not reflect how muchis paid as dividend and how much is retained in the business.
EPS = Profit after tax/No. Of shares
Significance
The EPS helps in determining the market price of the equity shares of the company. Acomparison of earning per share of the company with another will also help in decidingwhether the equity share capital is being effectively used or not. Helps is estimating thecompanys capacity to pay dividend to its equity shareholder.
EPS of HindalcoParticulars FY-08 FY-07 FY-06 FY-05 FY-04Earning per Share(Computed)
24.51 25.52 16.79 13.48 8.53
iii
Interpretation The EPS of Hindalco shows an upward trend since FY-04. There isconsiderable increase in EPS in FY-08. The figure is indicating that Hindalco has achievedwealth maximization objective to a great extent.iii
51
0
5
10
15
20
25
30
EPS
FY-2007 FY-2006 FY-2005 FY-2004 FY-2003
Years
EPS of Hindalco
EP
FY-08 FY-07 FY-06 FY-05 FY-04 FY-03
-
7/30/2019 Capital Structure of Hindalco Industries Limited
52/69
Dividend Per Share
It indicates the amount of profit distributed to shareholders per share. It is calculated as:
DPS = PAT/No. Of equity shares
DPS of Hindalco
Particulars FY-08 FY-07 FY-06 FY-05 FY-04Dividend per share(Computed)
1.85 1.70 2.20 2.00 1.65
0.00
0.50
1.00
1.50
2.00
2.50
DPS
FY-2007 FY-2006 FY-2005 FY-2004 FY-2003
Years
DPS of Hindalco
DPS
iv
InterpretationOver the years the DPS of Hindalco has been increasing from Rs. 1.65 per share to Rs. 1.70
per share till FY 2007. But it has increased after FY 2007 to 1.85. This Dividend payment isquite high showing that the retaining most of its earning for future investments in projects.
iv
52
FY-08 FY-07 FY-06 FY-05 FY-04 FY-03
-
7/30/2019 Capital Structure of Hindalco Industries Limited
53/69
Price to EarningThis ratio indicates the number of times the earning per share is covered by its market price.
P/E ratio = MP per share/EPSSignificance
P/E ratio helps the investor in deciding whether to buy or not to buy the share of the companyat a particular market price.
Price to Earning of Hindalco
Particulars FY-08 FY-07 FY-06 FY-05 FY-04Price toEarning
6.7 5.11 10.9 9.04 13.40
Interpretation:
P/E ratio of Hindalco considerably increased in FY 2004, but it has decreased to great extentin FY 2008. Thus, the EPS is covered by its market price by 6.7 times.
53
0.00
2.00
4.006.00
8.00
10.00
12.00
14.00
P/E
FY-2007
FY-2006
FY-2005
FY-2004
FY-2003
Years
Price to earning of Hindalco
Price to earning
FY-08 FY-07 FY-06 FY-05 FY-04 FY-03
-
7/30/2019 Capital Structure of Hindalco Industries Limited
54/69
Dividend Payout RatioThe ratio indicates what proportion of EPS has been used for paying dividend
Pay-out ratio = DPS/EPSSignificance
The payout ratios are indicators of the amount of earning that have been ploughed back in the business. Lower payout, the higher the amount earnings ploughed back in the business andvice-versa.
Pay-out ratio of Hindalco
InterpretationThe ratio has increased to a some point extent in 2008 as compared to previous FinancialYears. It indicates that company is ploughing go a large amount of its earnings for futureexpansion of business.
54
Particulars FY-08 FY-07 FY-06 FY-05 FY-04DPS (Rs) 1.85 1.70 2.20 2 1.65EPS (Rs) 24.51 25.52 16.79 13.48 8.53
Pay-out ratio 0.08 0.07 .13 .15 .19
Payout ratio of Hindalco
0.00
0.05
0.10
0.15
0.20
0.25
FY-2007 FY-2006 FY-2005 FY-2004 FY-2003
Years
P a y o u
t R a
t i o
Payout ratio
FY-2008 FY-2007 FY-2006 FY-2005 FY-2004 FY-2003
FY-2008 FY-2007 FY-2006 FY-2005 FY-2004 FY-2003
-
7/30/2019 Capital Structure of Hindalco Industries Limited
55/69
Debt- Equity Ratio
The relationship between borrowed funds and owners capital is a popular measure of thefinancial solvency of a firm. That is shown by debt equity ratio. It is a ratio of the outsidersfund to the owners funds.
Debt-Equity ratio = Total Debt/ Net Worth
Particulars FY-2008FY-2007 FY-2006 FY-2005 FY-2004 FY-2003
Debt Equity ratio .48 0.57 0.49 0.47 0.36 0.37
InterpretationThe accepted norm for debt-equity ratio is 2:1. Thus, it is apparent that there is ample scopefor the company to raise further loan capital.
55
FY-08 FY-07 FY-06 FY-05 FY-04 FY-03
-
7/30/2019 Capital Structure of Hindalco Industries Limited
56/69
Interest-coverage ratio
The interest coverage ratio shows the number of times the interest charged is covered byfunds that are ordinarily available for the payment. Since taxes are computed after interest,
interest-coverage is calculated in relation to before tax earning. Depreciation is a non-cashitem. Therefore, funds equals to depreciation are also available to pay interest charge. We canthus calculate interest coverage ratio as earning before depreciation, interest and taxes divide
by interest.
ICR = EBIDTA / Interest
Particulars FY-2008 FY-2007 FY-2006 FY-2005 FY-2004 FY-2003
Interest Coverage Ratio 14.21 18.09 12.65 14.98 9.82 10.72
InterpretationThe Interest coverage ratio is considered to be ideal if it is 5 to 6 times of interest charge iscovered by funds that are ordinarily available for the payment. The coverage is thereforesatisfactory and the Hindalco will have sufficient cash available to pay interest.
56
Interest Coverage Ratio of Hindalco
0.00
2.00
4.00
6.00
8.00
10.00
12.0014.00
16.00
18.00
20.00
FY-2007 FY-2006 FY-2005 FY-2004 FY-2003
Years
R u p e e s
InterestCoverage Ratio
FY-08 FY-07 FY-06 FY-05 FY-04 FY-03
-
7/30/2019 Capital Structure of Hindalco Industries Limited
57/69
Return on capital employed
It is calculated by dividing EBIT by capital employed .ROCE = EBIT / Capital employed
Particulars FY-2008 FY-2007 FY-2006 FY-2005 FY-2004 FY-2003
EBIT 33062 38323.00 23279.00 20833.00 14068.00 11992.00
Capital Employed 270880 209093.00 157370.00 125869.00 104176.00 94351.00
ROCE 0.12 0.18 0.15 0.17 0.14 0.13Interpretatio
The ROCE has decreased. It was 18% in FY-07. Now it stands at 12%.
57
ROCE of Hindalco
0.00
0.020.04
0.06
0.08
0.10
0.12
0.140.16
0.18
0.20
FY-2007 FY-2006 FY-2005 FY-2004 FY-2003
Years
P e r c e n
t
ROCE
FY-08 FY-07 FY-06 FY-05 FY-04 FY-03
-
7/30/2019 Capital Structure of Hindalco Industries Limited
58/69
Chapter No. 4
FINDINGS, SUGGESTIONS
AND
CONCLUSION
58
-
7/30/2019 Capital Structure of Hindalco Industries Limited
59/69
FINDINGS
The rate of return on equity shareholders funds is low than general rate
of return. Hence, Hindalco is trading on equity.
The debt equity ratio of 0.48 indicates that company is considering the
interest of investors.
The earning per share of Hindalco is showing downward trend.
The proportionate increase in long-term loan fund is more than
proportionate increase in share capital.
The dividend pay out ratio of Hindalco is decreasing year by year. But in
FY-08 It is increase so it .
59
-
7/30/2019 Capital Structure of Hindalco Industries Limited
60/69
SUGGESTIONS
The debt equity ratio of Hindalco is 0.48The company has ample scope to
raise further loan capital.
The management should try to maintain trade-off between risk and return
for determining the appropriate amount of debt in capital structure.
The company should take the advantage of financial leverage very
carefully as it also increases the financial risk.
The management should try to substitute long term funds used to finance
current assets with short term funds are generally cheaper. This will
positively improve efficiency.
60
-
7/30/2019 Capital Structure of Hindalco Industries Limited
61/69
CONCLUSION
Hindalco industries ltd. has an appropriate capital structure.
Hindalco is taking the full advantage of financial leverage
.
The endeavour of company is to maximize earning per share i.e.
achieving wealth maximization objective.
Hindalco is retaining lions share of earning for expansion purpose.
On the whole, it can be said that Hindalco enjoys a sound financial position
from the point of view of all concerned parties the corporate management, the
leading institutions and the investors. The overall performance of the companyis satisfactory and it will further improve when the facilities at the disposal of
company are fully utilized. However, the management must remain cautious
towards the financial position of the company. The management should take all
possible steps in the near future to improve the financial position of the
company.
61
-
7/30/2019 Capital Structure of Hindalco Industries Limited
62/69
Chapter No. 5
APPENDIX
62
-
7/30/2019 Capital Structure of Hindalco Industries Limited
63/69
BALANCE SHEET
(As on 31 st March 2008)
z(Rs. in Million)
As at 31st As at 31st As at 31st March, 2008 March, 2007 March, 2006
SOURCES OF FUNDSSHAREHOLDERS' FUNDS
Share Capital 1226.48 1,043.25 985.66
Share capital suspense 4.06Share Warrants 1390.96
Reserves and Surplus 171736.65 123,137.12 95,076.86
174358.15 124,180.37 96,062.52
LOAN FUNDS
Secured Loans 62054.23 64,102.03 28,480.47
Unsecured Loans 21231.61 9,583.98 20,553.91
83285.84 73,686.01 49,034.38
DEFERRED TAX LIABILITY(NET) 13236.74 11,258.01 12,333.59
270880.73s 209,124.39 157,430.49
APPLICATION OF FUNDSFIXED ASSETS
Gross Block 126084.59 112,526.55 104,182.53
Less : Depreciation 46368.07 40,563.25 35,310.72
Less : Impairment 1623.15 1,896.21 1,043.81
Net Block 78093.37 70,067.09 67,828.00
Capital Work-in-Progress 11198.69 14,764.25 8,329.17
89292.06 84,831.34 76,157.17
63
-
7/30/2019 Capital Structure of Hindalco Industries Limited
64/69
INVESTMENTS141079.86
86,753.17 39,712.86
CURRENT ASSETS, LOANSAND ADVANCES
Inventories 50979.06 43,153.14 40,950.88
Sundry Debtors 15650.22 15,045.02 12,484.01
Cash and Bank Balances 1469.77 6,654.96 9,172.85
Other Current Assets 623.04 1,188.08 2,447.34
Loans and Advances 9794.60 11,742.20 7,972.66
78516.69
77,783.40 73,027.74Less :CURRENT LIABILITIES AND
PROVISIONS
Current Liabilities 28947.79 27,433.79 21,995.62
Provisions 9060.09 12,841.41 9,531.66
38007.88 40,275.20 31,527.28
NET CURRENT ASSETS 40508.81
37,508.20 41,500.46MISCELLANEOUS
EXPENDITURE _ 31.68 60.00
(to the extent not written off or adjusted)
270880.73 209,124.39 157,430.49
64
-
7/30/2019 Capital Structure of Hindalco Industries Limited
65/69
PROFIT & LOSS ACCOUNT
(For the Year ended on 31 st March 2008)
(Rs. in Million) For the year For the year
Ended 31st ended 31stende
d 31st
INCOME March, 2008March,
2007
Gross Sales and OperatingRevenues 210219.31
199,200.86
124,763.64
Less: Excise Duty 18209.0416,070.9
810,79
8.88 Net Sales and Operating
Revenues 192010.27183,129.8
8113,96
4.76
Other Income 4929.37
3,700.6
9
2,43
9.11
196939.64186,830.5
7116,40
3.87EXPENDITURE
(Increase)/ Decrease in Stocks (1370.26)(4,425.1
7)(10,33
8.40)
Trade purchase 925.18 230.19Manufacturing and other expanses 158444.27 147175.00Interest and finance charges 2806.30 2423.88depreciation 5878.09 5528.02impairment _ 852.40
166683.58 151784.32
Profit before tax 30256.06 35046.25
65
-
7/30/2019 Capital Structure of Hindalco Industries Limited
66/69
Provision for tax 6063.56 9841.00Provision for deferred tax 875.79 551.00Provision for fringe benefit tax 114.00 113.00
Tax adjustment for earlier years 5406.68 _
Net profit 28609.39 25643.25Balance brought forwardfrom previous year 1000.00 550.00
Balance brought forward fromamalgamating company 15.62 _ Transfer from debentureredemption reserve 1721.70 1450.00Balance available forappropriations 31315.47 27643.25Appropriations
DeventureRedemption Reserve 50.00 186.82Dividend on preference shares 0.24 -
Dividend tax on preference shares 0.04 -
Interim Dividend on EquityShares _ 1,773.44Tax on interim Dividend _ 248.72Proposed Dividend on Equity Shares 2268.93 _ Tax on proposed dividend 385.60 _ Transfer to General Reserve 25610.66 24434.27Balance Carried to Balance Sheet 3000.00 1000.00
31315.47 27643.25Earning per Share (EPS )
Basic EPS (in Rs) 24.51 25.52Diluted EPS (in Rs) 24.38 25.52Basic EPS before Tax adjustmentfor earlier years (in Rs)
19.8825.52
Diluted EPS before tax adjustment for earlier year (in Rs) 19.77 25.52
66
-
7/30/2019 Capital Structure of Hindalco Industries Limited
67/69
Chapter No. 6
BIBLIOGRAPHY
67
-
7/30/2019 Capital Structure of Hindalco Industries Limited
68/69
BIBLIOGRAPHY
Pandey I.M., Financial Management
Maheshwari S.N., Financial Management
Chandra Prashanaa, Finance sense
Annual Report Of Hindalco Industries Limited (2007 & 2008)
Magazines & Journals Issue
Light Metal Age February 2008
Aluminium International Today March-April, 2008
Websites:
www.aluminiumleader.com
www.aditya-birla.com
www.hindalco.com
www.wikipedia.com
68
-
7/30/2019 Capital Structure of Hindalco Industries Limited
69/69
i
ii