Capital Structure of Birla Tyres
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Transcript of Capital Structure of Birla Tyres
CHAPTER -1 INTRODUCTION TO INDUSTRY
COMPANY PROFILE
INDUSTRY PROFILE
The tyre industry has evolved from the more basic cross ply to the more sophisticated radial
tyres. Nylon cords that impart low weight and additional strength to the tyres have also replaced
Cotton ply. This industry is strongly linked to the automobile sector. This industry is also driven
by agricultural and infrastructural activity that takes place in the region, as these two have an
impact on the transport sector.
India Vs Global
The global tyre market currently is estimated at USD 70 billion while the Indian market is
around Rs. 100 million. The global market is dominated by Goodyear-Sumitomo with a share of
22%. On the other hand, the domestic industry is dominated by MRF Ltd. Several mergers and
acquisitions have characterized the global market, in the recent past. This is essentially to acquire
technology, gain wider access to markets and be competitive. Indian players are also
reengineering their businesses and looking at strategic tie-ups in this segment.
In terms of technology, radial tyre usage has been catching up at a quick pace in the global
market. Almost all the automobile segments have shifted to radial tyres and the usage of cross
ply is restricted to trucks and buses only. On the other hand, in the domestic market, the radial
tyres are being used only in the passenger car segment while the rest of them still stick to the
cross ply variety. This is because of the lower price of cross ply and its re-treadability. In
addition, the poor quality of roads in India restricts the use of such tyres.
CURRENT SCENARIO
PRICING SCENARIO
Pricing is influenced by the demand. Since the tyre demand has not significantly increased in the
last one year, many of the tyre companies have surplus stocks. Hence in the last 2-3 months the
tyre companies are offering discounts between 20 to 40 percent to car manufacturers, but the car
companies are trying to squeeze more discounts. The cheap imports of non-radial tyres from
China are also adding to the present woos of these tyre manufacturers.
EXIM SCENARIO
The export market for India has been predominantly to the USA that accounts for nearly 30% of
exports from the country. These are mostly of the cross ply variety. However, of late India’s
share in the US market is being threatened by China and Japan. These two countries are able to
offer prices that are lower than that offered by Indian manufacturers. In addition, these two
nations are logistically better placed than India when it comes to exporting to the USA. Domestic
tyre manufacturers are also facing threat from imports from China and South Korea. The landed
cost of tyres from China is lower than the Indian price by 30%. In addition, tyres from South
Korea are imported at 30% customs duty while from other countries the duty levied is 35%. Thus
in both cases the domestic tyre manufacturers are feeling the heat.
GOVERNMENT POLICIES
The recent budget policy of the government has also not brought much relief to the tyre
manufacturers. The major issues of concern are high import duty on raw materials, ban on import
of used tyres, lack of exemption in import duty for steel and polyester tyre cords (currently being
imported) and imports of tyres from South Korea at lower duty.
CRYSTAL GAZING
The future is expected to see many strategic alliances among the domestic and global players to
enable them to have access to latest technology and expand their distribution network. A better
distribution will also ensure easy availability. The introduction of newer auto models will
significantly have a bearing on the tyres demand. The tyre companies will also be looking for tie-
ups with the OEM’s for better stability and long-term relationship. For instance, the international
player Bridgestone has a tie-up with Tatas for supply of tyres for its model ‘Indica’. Bridgestone
has entered the Indian market in association with Associated Cement Companies and has set up a
manufacturing plant at Kheda in Madhya Pradesh. Hyundai’s associate tyre manufacturer is
reported to set up operations at Sriperumbudur, in Tamil Nadu.Other multinational tyre
companies are also likely to enter the Indian market viz. Michelin with J.K.Tyres and Pirelli of
Italy, with Birla Tyres.
Birla Tyres was first established in 1991, as part of Kesoram Industries Limited. It then
collaborated with world-class tyre manufacturer Pirelli, in the production and development of its
tyres. Since then, Birla Tyres has built a solid reputation for quality and is now recognised as one
of the best tyre manufacturers around.
Kesoram Industries is a dynamic company with businesses in the fields of cement, rayon yarn,
spun pipes and heavy chemicals.
NETWORK EXPANSION
We have over 170 sales depots to meet every customer's needs. Find our new office locations at
Shankagiri, Panvel, Secunderabad, Daltongunge and Siwan.
INFRASTRUCTURE
We equip our production facilities with the latest technology to deliver the quality and reliability
Birla Tyres is known for. Our factory at Laksar, Uttrakhand, has a production capacity of over 44
lakh truck per year.
CHAIRMAN'S MESSAGE
We continue to operate in certain sectors where our customers trust our strategic vision. Cement
and Tyres, the two significant businesses of Kesoram have seen a mixed year. To meet the
challenges of these dynamic markets and to continue on our journey of success, we have
necessary foresight, strategy and preparedness. "
Birla Tyres was first established in 1991, as part of Kesoram Industries Limited. It then
collaborated with world-class tyre manufacturer Pirelli, in the production and development of its
tyres. Since then, Birla Tyres has built a solid reputation for quality and is now recognised as one
of the best tyre manufacturers around.
Kesoram Industries is a dynamic company with businesses in the fields of cement, rayon yarn,
spun pipes and heavy chemicals.
NETWORK EXPANSION
We have over 170 sales depots to meet every customer's needs. Find our new office locations at
Shankagiri, Panvel, Secunderabad, Daltongunge and Siwan.
INFRASTRUCTURE
We equip our production facilities with the latest technology to deliver the quality and reliability
Birla Tyres is known for. Our factory at Laksar, Uttrakhand, has a production capacity of over 44
lakh truck per year.
MILESTONES
Like our products, Birla Tyres remains resilient and keeps forging ahead, always ready to
explore the uncharted.
The first plant in Balasore was set up in collaboration with world-renowned tyre
manufacturer Pirelli in 1991.
The new high-tech factory at Laksar-Haridwar, Uttaranchal, was built in a record time of
10 months. This modern Rs. 2300 crore Haridwar factory today has a combined
production capacity of over 44 lakh truck tyres per year.
The company enjoyed an increase in turnover of Rs. 1947.22 crore in 2008 to Rs.
2849.61 crores in 2009. We are now looking ahead to reach a target of Rs. 5500 crore.
The Haridwar plant attained a total projected investment of Rs. 2300 crores.
In 2009, our export turnover exceeded Rs. 375 crore. Birla Tyres now exports to over 50
countries.
Our robust domestic network consists of 10 zonal offices. We have also grown our sales
depots from 80 to more than 170 points to meet every customer demand.
We have more than 170 new sales engineers at major locations to provide 24-hour claim
settlements.
With an expanding network of over 3200 dealers, Birla Tyres is growing from strength to
strength. We are constantly working on new and attractive schemes to increase dealer
benefits.
ACCREDITATIONS
International experts have recognised how Birla Tyres' pursuit of quality has created positive
impact for its stakeholders. Take a look below and see our progress in the areas of productivity,
environmental impact, product quality and organizational change.
BIAS
XPL
Extra thick casing for superior load carrying capacity backed by additional warranty of crown
concussion. Reinforced bead area to withstand toughest road conditions.
XET DLX
Unique straight lug design for better traction and reinforced casing for more loading capacity.
SAMSON
Unique straight-lug design & special tread compound for better road handling & mileage.
Reinforced casing for extra load carrying capacity.
BT 112 PLATINUM
Specially designed tread pattern for high mileage & excellent traction on metalled and
uninstalled roads. Heavy duty casing for multiple retreads.
BT 112 PLUS
Unique cross lug designs and extra pattern depth. Special tread compound for better mileage.
Reinforced clinch area for better torque resistance. Premium casing for additional retreads.
BT 339 PLATINUM
Extra deep tread and increased rubber volume for better traction and mileage. Ribs stabilised
with high tie-bars to reduce tread movement and rib sinking. Optimised foot-print and higher OD
to reduced ground pressure. Excellent casing for multiple retreads. Trouble free service.
ZETA + DLX
Supreme tread mileage due to extra pattern depth and super abrasion resistant tread compound.
Wider sidewall protection to prevent sidewall damage. Premium casing for additional retreads.
ROADMILER
Extra deep premium tyre for extra mileage, state-of the- art sinusoidal pattern for uniform wear,
anti- rib sinking and excellent steering control. Additional advantage for power steering
application. Very attractive and effective buttress design for cooler running. Premium casing for
additional retreads.
BT 339 +
ZYNO DLX
Premium depth tread pattern for extra mileage and improved casing for additional retreads.
ULTRA PLUS
Extra strong casing for wide range of load applications. Extra deep tread for more mileage.
BT ULTRA
BT 112 GOLD
Specially treated casing for more retreads. Rear fitment lug design suitable for long haulage.
Higher tread depth for extra mileage.
TARZAN DLX
High mileage straight lug tyre for rear fitment. Suitable for long hauls. Special tread compound
to resist lug chipping. Specially treated casing for more retreads.
BT 111
High mileage lug tyre for rear fitment. Deep tread pattern provides excellent traction and long
service. Strong casing for more retreads.
BT 112
Deep tread pattern provides excellent traction and longer life. Special tread compound designed
against chipping & chunking. Reinforced nylon casing offers durability & multiple retreads.
RAFTAR
TISON DLX
Proven cross lug design with reinforced casing ensures excellent cost per km.
BT 339
Premium depth five rib design. Rugged shoulder for resisitance to damage due to road hazards.
Abrasion resistant tread compound for more mileage.
BT 339 N
BT 339*
TIRIB DLX
Proven fine rib tread patterns for optimum mileage and steering control.
BT 336
Five rib universal 'Z' design. Special tread compound for high abrasion resistance.
BT 334
Five rib premium depth tyre for front fitment. Specially designed 'Z' tread pattern for superb
steering control and excellent mileage.
RUSTOM
Deep tread pattern provides excellent traction and longer life. Special tread compound designed
against chipping & chunking. Reinforced nylon casting offers durability & multiple retreads.
BT 334 *
Five rib premium depth tyre for front fitment. Specially designed 'Z' tread pattern for superb
steering control and excellent mileage.
BT-MAX
High mileage cross lug tyre for normal load application (upto 12 mt) with multiple retreads.
ZING
Premium depth Tyre with low cost per km for normal load application specially built for dummy
axle.
ZINA
Optimised tread design for easy steering and even wear. Excellent road holding and steering
capability. Reinforced casing for impact & multiple retreads.
SUPER BT
Higher depth for longer life and more mileage. Special cut resistance compound, better tractions,
less slippage & self cleaning, robust tread design for on and off the road usage.
Passenger Car
Bias
BT 339
Premium depth five rib design. Rugged shoulder for resisitance to damage due to road hazards.
Abrasion resistant tread compound for more mileage.
BT 444
Specially designed tread pattern for extra grip and steering control.
BT 446
Extra deep tread for better mileage.
THUNDER
Motor Cycle
Bias
ROADMAXX BT R-41
Rear tread pattern and uniform tread groves for excellent grip
ROADMAXX BT F-21
Longest life and high speed stability
ROADMAXX BT F-81
Specially made for powerful braking and wet grip
ROADMAXX BT R-42
Rear tread pattern supported with large tread blocks for excellent grip and stability
ROADMAXX BT R-81
Longest mileage and Heavy duty casing
ROADMAXX BT R-82
Specially designed for high speed stability and wet grip
INTRODUCTION TO CAPITAL STRUCTURE
CAPITAL: Capital the dictionary meaning of the term capital is wealth capital is the total
account invested in business the capital of a business is the claim of the owner to the business is
the claim of the owner to the business. It basicall y refers to total funds invested in any business.
CAPITALSTRUCTURE: It is the QUALITY OF FUNDS in the business. In this we
determine the proportion in which funds should be raised from different sources as securities. In
this way CAPITAL STRUCTURE decisions are related to the mutual ratio of long term sources
of CAPITAL.
LONG TERM SOURCES: These are the sources from which capital can be made
available for more than three years which can be OWNED & BORROWED funds.
TYPE OF LONG TERM SOURCES: 1. OWNED FUNDS: These are owned by the ,firm Which includes SHARE CAPITAL &
RESERVE &SURPLUS.
2. BORROWED FUNDS: These are the debts taken by the firm on which the firm has to
pay Interest at a fixed rate which includes DEBENTURES & LONG TERM LOANS from
Financial Institutions.
SHARE CAPITAL: The whole CAPITAL is divided in to SHARE of small values. Such as
the whole capital of Re.1000000 is divided in to 10000 shares of Re.100 each.
SHAREHOLDERS: These are the parties who invest in the shares.
DIVIDEND: This is that part of NET PROFIT which is to be distributed to the Shareholders.
TYPES OF SHARES: There are two types of Share EQUITY &PREFERENCE
EQUITY SHARES: These shares are the shares on which Dividend is paid after meeting all
obligations to other parties are repaid only at the time of Winding Up of the company after
meeting the Liability towards all other parties. Equity Shareholders are the Real Owners of the
company. They have Voting Rights & Right to participate directly in the decision making
process of company. Dividend paid is not fixed & company is not bound to pay Dividend.
PREFERENCE SHARES: These shares are like the Debenture because Dividend is paid at
a fixed rate & these shareholders are given Priority over Equity Shareholders (7). But they don’t
have Voting Right but in some special cases right can be given. They are also given priority over
the assets at the time of Winding Up.
RESERVE &SURPLUS: This is the UNDISTRIBUTED PROFITS remained for some
specific purpose or for meeting uncertainties. These are the INTERNAL SOURCES of providing
FUNDS.
DEBENTURES: These are the like the Certificate which are basically the
ACKNOWLEDGEMENT OF DEBT issued in the favour of Debenture holder .These can be
SECURED OR UNSECURED. They are paid INTEREST at a fixed rate .It is a kind of
agreement in which all terms & conditions are decided in advance such as lifetime of
Debentures, Rate of Interest etc.
LOANS FROM FINANCIAL INSTITUTES: These are the loans in which Financial
Institutes get interest on decided rate. In this an agreement is set up in advance.
COST OF CAPITAL: This is the minimum “Rate of Return” the company has to pay to
various suppliers of funds. As Dividend to Shareholders & Interest to Debt providers.
OPTIMAL CAPITAL STRUCTURE: A capital Structure is said to be optimal where
the VALUE OF FIRM can be MAXIMISED(4) & COST OF CAPITAL can be MINIMISED.
TWO BASIC PURPOSE: Further two are the basic aims considered while deciding the
ratio:
“MAXIMUM VALUE OF FIRM”
“MINIMUM COST OF CAPITAL”
QUALITIES OF A SOUND OR OPTIMUM CAPITAL STRUCTUREFollowing are the FEATURES of an OPTIMAL Capital Structure:
1. SIMPLICITY: So far as possible, the Capital Structure of the firm should be simple. It
means that, there must be minimum number of securities to be issued. If it becomes complicated
in beginning, it can be difficult to maintain in future.
2. FLEXIBILITY: The Capital Structure of the firm should be flexible so that it can be changed
7as & when needed. As New sources can be added to Capital Structure at the time of expansion
& can be repaid easily at the time of reduction.
3. MINIMUM COST OF CAPITAL : As described earlier that this is One of the ultimate aims
of the Financial Manager. The Cost of Capital Is In the form of Interest & Dividend. Thus the
combination should be the Cheapest as possible and Average cost of capital is to be considered.
4. ADEQUATE LIQUIDITY: The term Liquidity refers to the firm’s Ability to meet
itsSHORT term OBLIGATIONS & DAY TO DAY working. There is an inverse relation
between LIQUIDITY & PROFITABILITY. So a manager should be able to set up that Ratio
which balances the both.
5. MINIMUM RISK: Risk is one of the most important factors to be considered. As the more
use of Borrowed Funds will increase the Risk As they have to be paid before the claims of
shareholders. So Risk & Return must be balanced(15).
6. LEGAL REQUIREMENTS: Capital Structure should be maintained in Conformity with the
Legal Requirements of the country. As under the Capital Issue Control Act, the ratio of Debt to
Equity must be 2:1 in any firm(5). Similarly, related to Interest Rate on Debentures. Thus all such
kinds of Rules to be studied well.
7. MAXIMUM RETURN : Capital Structure must facilitate maximum return to the Investors.
and always Return on Capital must be greate than Cost of capital. Only than any firm can
survive.
8. CONTROL: The Control of the firm lies in the hands of the Shareholders because they are
having the voting rights in the meetings of the Companies. But in some special cases, Preference
Shareholders & Debenture holder may also get these rights(13) .So it should be considered that
control must lie in few hands for Better control.
In finance, capital structure refers to the way a corporation finances its assets through some
combination of equity, debt, or hybrid securities. A firm's capital structure is then the
composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and
$80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of
debt to total financing, 80% in this example, is referred to as the firm's leverage. In reality,
capital structure may be highly complex and include dozens of sources. Gearing Ratio is the
proportion of the capital employed of the firm which come from outside of the business finance,
e.g. by taking a short term loan etc.
The Modigliani-Miller theorem, proposed by Franco Modigliani and Merton Miller, forms the
basis for modern thinking on capital structure, though it is generally viewed as a purely
theoretical result since it assumes away many important factors in the capital structure decision.
The theorem states that, in a perfect market, how a firm is financed is irrelevant to its value. This
result provides the base with which to examine real world reasons why capital structure is
relevant, that is, a company's value is affected by the capital structure it employs. Some other
reasons include bankruptcy costs, agency costs, taxes, and information asymmetry. This analysis
can then be extended to look at whether there is in fact an optimal capital structure: the one
which maximizes the value of the firm.
CAPITAL STRUCTURE IN A PERFECT MARKET:-
Assume a perfect capital market (no transaction or bankruptcy costs; perfect information); firms
and individuals can borrow at the same interest rate; no taxes; and investment decisions aren't
affected by financing decisions. Modigliani and Miller made two findings under these
conditions. Their first 'proposition' was that the value of a company is independent of its capital
structure. Their second 'proposition' stated that the cost of equity for a leveraged firm is equal to
the cost of equity for an unleveraged firm, plus an added premium for financial risk. That is, as
leverage increases, while the burden of individual risks is shifted between different investor
classes, total risk is conserved and hence no extra value created.
Their analysis was extended to include the effect of taxes and risky debt. Under a classical tax
system, the tax deductibility of interest makes debt financing valuable; that is, the cost of capital
decreases as the proportion of debt in the capital structure increases. The optimal structure, then
would be to have virtually no equity at all.
CAPITAL STRUCTURE IN THE REAL WORLD
If capital structure is irrelevant in a perfect market, then imperfections which exist in the real
world must be the cause of its relevance. The theories below try to address some of these
imperfections, by relaxing assumptions made in the M&M model.
TRADE-OFF THEORY
Trade-off theory allows the bankruptcy cost to exist. It states that there is an advantage to
financing with debt (namely, the tax benefit of debts) and that there is a cost of financing with
debt (the bankruptcy costs of debt). The marginal benefit of further increases in debt declines as
debt increases, while the marginal cost increases, so that a firm that is optimizing its overall
value will focus on this trade-off when choosing how much debt and equity to use for financing.
Empirically, this theory may explain differences in D/E ratios between industries, but it doesn't
explain differences within the same industry.
PECKING ORDER THEORY
Pecking Order theory tries to capture the costs of asymmetric information. It states that
companies prioritize their sources of financing (from internal financing to equity) according to
the law of least effort, or of least resistance, preferring to raise equity as a financing means “of
last resort”. Hence: internal financing is used first; when that is depleted, then debt is issued; and
when it is no longer sensible to issue any more debt, equity is issued. This theory maintains that
businesses adhere to a hierarchy of financing sources and prefer internal financing when
available, and debt is preferred over equity if external financing is required (equity would mean
issuring shares which meant 'bringing external ownership' into the company. Thus, the form of
debt a firm chooses can act as a signal of its need for external finance. The pecking order theory
is popularized by Myers (1984)[1] when he argues that equity is a less preferred means to raise
capital because when managers (who are assumed to know better about true condition of the firm
than investors) issue new equity, investors believe that managers think that the firm is
overvalued and managers are taking advantage of this over-valuation. As a result, investors will
place a lower value to the new equity issuance..
AGENCY COSTS
There are three types of agency costs which can help explain the relevance of capital structure.
Asset substitution effect: As D/E increases, management has an increased incentive to
undertake risky (even negative NPV) projects. This is because if the project is successful,
share holders get all the upside, whereas if it is unsuccessful, debt holders get all the
downside. If the projects are undertaken, there is a chance of firm value decreasing and a
wealth transfer from debt holders to share holders.
Underinvestment problem: If debt is risky (e.g., in a growth company), the gain from
the project will accrue to debtholders rather than shareholders. Thus, management have
an incentive to reject positive NPV projects, even though they have the potential to
increase firm value.
Free cash flow: unless free cash flow is given back to investors, management has an
incentive to destroy firm value through empire building and perks etc. Increasing
leverage imposes financial discipline on management.
OTHER
The neutral mutation hypothesis—firms fall into various habits of financing, which do
not impact on value.
Market timing hypothesis—capital structure is the outcome of the historical cumulative
timing of the market by managers.
Accelerated investment effect—even in absence of agency costs, levered firms use to
invest faster because of the existence of default risk.
ARBITRAGE
Similar questions are also the concern of a variety of speculator known as a capital-structure
arbitrageur, see arbitrage.
A capital-structure arbitrageur seeks opportunities created by differential pricing of various
instruments issued by one corporation. Consider, for example, traditional bonds and convertible
bonds. The latter are bonds that are, under contracted-for conditions, convertible into shares of
equity. The stock-option component of a convertible bond has a calculable value in itself. The
value of the whole instrument should be the value of the traditional bonds plus the extra value of
the option feature. If the spread (the difference between the convertible and the non-convertible
bonds) grows excessively, then the capital-structure arbitrageur will bet that it will converge.
FACTORS AFFECTING CAPITAL
STRUCTURE
Initially, at the time of promotion of the company, capital structure plan is to be prepared very
carefully. First of all, the objective of the capital structure should be determined & then the
financing decisions should be taken accordingly. Company has to arrange for funds for its
activities continuously. Therefore, capital structure decisions have to be taken on continuous
basis. Following factors must be taken in to consideration while taken decisions regarding the
capital structure:
.
1. SIZE OF BUSINESS: Small business has to face great difficulty in raising long Term
finance. If, it is all able to get Long Term Loan, it has to accept unreasonable conditions & has to
pay high interest. Therefore, While preparing capital structure plan, company should make
proper use of its size.
2.FORM OF BUSINESS ORGANISATION: ‘CONTROL’ is much significant in the
case of private companies, sole traders & partnership firms because in such businesses ,
ownership is widely spread. Therefore, control can’t be restricted.
3. STABILITY OF EARNINGS: The sale & stability of income affects the quantum of
leverage. The companies which have stability in income sales can use more of debt in their
capital structure. The industries producing consumer goods face more fluctuations but in the case
of public utility institutions are safer. Thus stability is a good factor for deciding the ratio of
funds.
4. DEGREE OF COMPETITION: If in an industry, the degree for competition is high;
such companies in the industry should use greater degree of share capital as compared to debt
capital.
5. STAGE OF LIFE CYCLE: Stage of life cycle of a firm is also an important factor. As
if a firm is in the initial stage then there are more chances of failure so share capital is a good
option.
6. CORPORATION TAX: Due to the current provision of tax, the use of debt is cheaper
as compared to share capital. On the other hand, if the shareholders fall in low income tax
bracket, they will like to get high dividend & in such case the company will meet its financial
requirement from external source.
7. STATE REGULATION: Capital Structure should be maintained in Conformity with the
Legal Requirements of the country(32). As under the Capital Issue Control Act, the ratio of Debt
to Equity must be 2:1 in any firm. Similarly, related to Interest Rate on Debentures. Thus all such
kinds of Rules to be studied well.
8.STATE OF CAPITAL MARKET: Capital Structure decisions of the company are also
affected by the state of capital Market. Sometimes Company wants to issue ordinary shares but
investors are not ready to invest due to high risk(34) .In such a situation, company should issue
other securities for raising the funds, but not the ordinary share.
9.ATTITUDE OF MANAGEMENT: The Attitude of management towards the factors
affecting the capital structure also affects the Capital Structure. Some managers do not want to
bear risk. In such case ordinary share capital should be used in place of debt & if managers are
not in a situation to bear risk then borrowed funds should be more.
10.TRADING ON EQUITY: To arrange funds for acquiring company’s assets, the use of Fixed
Cost sources like Preference share capital & debt funds is called as Trading On Equity or
Financial Leverage. If the return on assets acquired from the debt funds is greater than the cost of
debt, Earning per Share will increase. Therefore, a company should use such sources of funds
which will lead to increase in EPS.
11. LEVERAGE RATIO OF OTHER FIRMS IN THE INDUSTRY: While taking capital
structure decisions, debt-equity ratio of other firms in the industry should be compared. Debt-
equity ratio of the industry acts as a standard. If debt-equity ratio of the firm is not similar to the
debt-equity ratio of the Industry, its reasons should be ascertained.
12. FLEXIBILITY: The Capital Structure of the firm should be flexible so that it can be
changed as & when needed. As New sources can be added to Capital Structure at the time of
expansion & can be repaid easily at the time of reduction.
13. CONTROL : The Control of the firm lies in the hands of the Shareholders because they are
having the voting rights in the meetings of the Companies. But in some special cases, Preference
Shareholders & Debenture holder may also get these rights .So it should be considered that
control must lie in few hands for Better control.
14. FLEXIBILITY: The Capital Structure of the firm should be flexible so that it can be
changed as & when needed. As New sources can be added to Capital Structure at the time of
expansion & can be repaid easily at the time of reduction.
Flexibility in the capital structure depends upon the following:
(1) Flexibility in the Fixed Assets
(2) Restrictive conditions in the debt agreement
(3) Terms of redemption
(4) Debt Capacity
15.FLOATATION COST: These are the costs incurred at the time of issue of the securities .
These costs include commission, stationary & other expenses. Normally the cost of debt is less
than the cost of shares. Therefore, the companies are attracted towards the borrowed funds. If the
amount of issue is increased, the percentage of floatation costs can decrease.
CAPITAL STRUCTURE THEORIES
NET INCOME APPROACH (NI)
According to this approach, the cost of debt and the cost of equity do not change with a change
in the leverage ratio. As a result the average cost of capital declines as the leverage ratio
increases. This is because when the leverage ratio increases, the cost of debt, which is lower than
the cost of equity, gets a higher weightage in the calculation of the cost of capital.
The formula to calculate the average cost of capital is as follows:
Ko = Kd (B/ (B+S)) + Ke (S/(B+S))
Where:
Ko is the average cost of capital
Kd is the cost of debt
B is the market value of debt
S is the market value of equity
Ke is the cost of equity
Net Operating income Approach (NOI)(9)
According to this approach:
The overall capitalisation rate remains constant for all levels of financial leverage
The cost of debt also remains constant for all levels of financial leverage
The cost of equity increases linearly with financial leverage
The formula to calculate the cost of capital is Ko=Kd(B/(B+S))+Ke(S/(B+S))
Ko and Kd are constant for all levels of leverage. Given this, the cost of equity can be expressed
as follows:
Ke =Ko+(Ko-Kd)(B/S)
TRADITIONAL OR INTERMEDIATE APPROACH
This approach is midway between the NI and the NOI approach. The main propositions of this
approach are:
The cost of debt remains almost constant up to a certain degree of leverage but rises thereafter at
an increasing rate.
The cost of equity remains more or less constant or rises gradually up to a certain degree
of leverage and rises sharply thereafter.
The cost of capital due to the behaviour of the cost of debt and cost of equity
o Decreases up to a certain point
o Remains more or less constant for moderate increases in leverage thereafter
o Rises beyond that level at an increasing rate.
MM APPROACH
According to this approach, the capital structure decision of a firm is irrelevant. This approach
supports the NOI approach and provides a behavioural justification for it
Additional assumptions of this approach include(10):
Capital markets are perfect. All information is freely available and there are no
transaction costs
All investors are rational
Firms can be grouped into ‘Equivalent risk classes’ on the basis of their business risk
There are no taxes
This approach indicates that the capital structure is irrelevant because of the arbitrage process
which will correct any imbalance i.e. expectations will change and a stage will be reached where
further arbitrage is not possible.
EVALUATING ORGANIZATIONAL
(Birla Tyres) CAPITAL STRUCTURE
For stock investors that favor companies with good fundamentals, a "strong" balance sheet is an
important consideration for investing in a company's stock. The strength of a Birla Tyres balance
sheet can be evaluated by three broad categories of investment-quality measurements: working
capital adequacy, asset performance and capital structure. In this article, we'll look at evaluating
balance sheet strength based on the composition of a company's capital structure.
Birla Tyres capitalization (not to be confused with market capitalization) describes the
composition of a company's permanent or long-term capital, which consists of a combination of
debt and equity. A healthy proportion of equity capital, as opposed to debt capital, in a
company's capital structure is an indication of financial fitness.
CLARIFYING CAPITAL STRUCTURE RELATED TERMINOLOGY
The equity part of the debt-equity relationship is the easiest to define. In Birla Tyres capital
structure, equity consists of a company's common and preferred stock plus retained earnings,
which are summed up in the shareholders' equity account on a balance sheet. This invested
capital and debt, generally of the long-term variety, comprises a company's capitalization, i.e. a
permanent type of funding to support a company's growth and related assets.
A discussion of debt is less straightforward. Investment literature often equates a company's debt
with its liabilities. Investors should understand that there is a difference between operational and
debt liabilities - it is the latter that forms the debt component of a company's capitalization -
but that's not the end of the debt story.
Among financial analysts and investment research services, there is no universal agreement as to
what constitutes a debt liability. For many analysts, the debt component in a company's
capitalization is simply a balance sheet's long-term debt. This definition is too
simplistic. Investors should stick to a stricter interpretation of debt where the debt component of
a company's capitalization should consist of the following: short-term borrowings (notes
payable), the current portion of long-term debt, long-term debt, two-thirds (rule of thumb) of the
principal amount of operating leases and redeemable preferred stock. Using a comprehensive
total debt figure is a prudent analytical tool for stock investors.
It's worth noting here that both international and U.S. financial accounting standards boards are
proposing rule changes that would treat operating leases and pension "projected-benefits" as
balance sheet liabilities. The new proposed rules certainly alert investors to the true nature of
these off-balance sheet obligations that have all the earmarks of debt.
IS THERE AN OPTIMAL DEBT-EQUITY RELATIONSHIP?In financial terms, debt is a good example of the proverbial two-edged sword. Astute use of
leverage (debt) increases the amount of financial resources available to a company for growth
and expansion. The assumption is that management can earn more on borrowed funds than it
pays in interest expense and fees on these funds. However, as successful as this formula may
seem, it does require that a company maintain a solid record of complying with its various
borrowing commitments.
A company considered too highly leveraged (too much debt versus equity) may find its freedom
of action restricted by its creditors and/or may have its profitability hurt as a result of paying
high interest costs. Of course, the worst-case scenario would be having trouble meeting operating
and debt liabilities during periods of adverse economic conditions. Lastly, a company in a highly
competitive business, if hobbled by high debt, may find its competitors taking advantage of its
problems to grab more market share.
Unfortunately, there is no magic proportion of debt that a company can take on. The debt-equity
relationship varies according to industries involved, a company's line of business and its stage of
development. However, because investors are better off putting their money into companies with
strong balance sheets, common sense tells us that these companies should have, generally
speaking, lower debt and higher equity levels.
CAPITAL RATIOS AND INDICATORS
In general, analysts use three different ratios to assess the financial strength of a company's
capitalization structure. The first two, the so-called debt and debt/equity ratios, are popular
measurements; however, it's the capitalization ratio that delivers the key insights to evaluating a
company's capital position.
The debt ratio compares total liabilities to total assets. Obviously, more of the former means less
equity and, therefore, indicates a more leveraged position. The problem with this measurement is
that it is too broad in scope, which, as a consequence, gives equal weight to operational and debt
liabilities. The same criticism can be applied to the debt/equity ratio, which compares total
liabilities to total shareholders' equity. Current and non-current operational liabilities, particularly
the latter, represent obligations that will be with the company forever. Also, unlike debt, there
are no fixed payments of principal or interest attached to operational liabilities.
The capitalization ratio (total debt/total capitalization) compares the debt component of a
company's capital structure (the sum of obligations categorized as debt + total shareholders'
equity) to the equity component. Expressed as a percentage, a low number is indicative of a
healthy equity cushion, which is always more desirable than a high percentage of debt.
ADDITIONAL EVALUATIVE DEBT-EQUITY CONSIDERATIONSCompanies in an aggressive acquisition mode can rack up a large amount of purchased goodwill
in their balance sheets. Investors need to be alert to the impact of intangibles on the equity
component of a company's ( Birla Tyres ) capitalization. A material amount of intangible assets
need to be considered carefully for its potential negative effect as a deduction (or impairment) of
equity, which, as a consequence, will adversely affect the capitalization ratio.
Funded debt is the technical term applied to the portion of a company's long-term debt that is
made up of bonds and other similar long-term, fixed-maturity types of borrowings. No matter
how problematic a company's financial condition may be, the holders of these obligations cannot
demand payment as long the company pays the interest on its funded debt. In contrast, bank debt
is usually subject to acceleration clauses and/or covenants that allow the lender to call its loan.
From the investor's perspective, the greater the percentage of funded debt to total debt disclosed
in the debt note in the notes to financial statements, the better. Funded debt gives a company
more wiggle room.
Lastly, credit ratings are formal risk evaluations by credit-rating agencies - Moody's, Standard &
Poor's, Duff & Phelps and Fitch – of a company's ability to repay principal and interest on debt
obligations, principally bonds and commercial paper. Here again, this information should appear
in the footnotes. Obviously, investors should be glad to see high-quality rankings on the debt of
companies they are considering as investment opportunities and be wary of the reverse.
A company's ( Birla Tyres ) reasonable, proportional use of debt and equity to support its assets
is a key indicator of balance sheet strength. A healthy capital structure of the star paper mill that
reflects a low level of debt and a corresponding high level of equity is a very positive sign of
investment quality.
NEED OF THE STUDY
Tyre Industry is growing at a very fast speed. Now it is becoming the main part of growth of
Indian economy. Different companies are entered in Tyre industry. The sources of income of
these companies is to sell Tyres at National and international platform . I did my training in
Birla Tyre , So I want to know about the Birla Tyres and to analysis about the Capital structure
of Ratio analysis is the best source. It tells about the ability of payment of liability of company.
Some parameters which I have taken for the research study such as different ratios for analysis &
interpreter for results .
LITERATURE REVIEW
Literature Review is the way to express background of ideas that come to mind during the
research formulation. I asked various employees of the company about the new technological
initiative taken by the company. The project being conducted was "Financial Leverage of
Mindarika Pvt. Ltd on the basis of Debt-Equity Structure & their Impact on Shareholder Wealth
& Profitability”. Once the problem is formulated, the researcher undertakes an extensive
literature review connected with the problem.
CONCEPTUAL LITERATURE:-Conceptual literature is that which relates with concepts and theories. Help from different books
should be taken for different concepts and theories.
1.Malcolm stephens,2004 examines the causes of the reduction in trade finance in South East
Asia countries post-1997 with a particular focus on the role of export credit agencies.It concludes
that while such agencies did not cause or prolong the problem they did not contribute
significantly to a solution.The paper also suggests some implications from events in South East
Asia for both traditional debt-relief mechanisms and for the architecture of the international
financial system.
2.Koven Levit,2004 examines the arrangement is a non-binding, international agreement,it
nonetheless engenders unswerving compliance. This Article unfolds by empirically establishing
sustaind and pervasive compliance among industrialized ECAs. Having documented
compliance,the article then explores why the arrangement breeds such compliance,focusing on
three categories of compliance factors:state interests,international systemic linkages,and the
Arrangement’s architecture.While all factors are undoubtedly part of the compliance puzzle,the
arrangement itself-the nitty gritty of its substsntive and procedural rules-emerges as the integral
piece.
3.Jean-Pierre Chauffour 2005 export insurance and guarantees suggest that publicly
Backed export credit agencies have played a role to prevent a complete drying up of trade
finance markets during the current financial crisis. Given that export credit agencies are mainly
located in advanced and emerging economies, the question arises whether developing countries
that are not equipped with these agencies should establish their own agencies to support
exporting firms and avoid trade finance shortages in times of crisis.
4.Christian Saborowski examines a number of issues requiring attention in the decision
whether to establish such specialized financial institutions. It concludes that developing countries
should consider export credit agencies only when certain pre-requirements in termsof financial
capacity,institutional capability,governance at met.
5.Ahmet I.Soylemezoglu 2006 The arrangement on officially supported Export credits(the
arrangement) is an informal,”gentelmen’s agreement”among industrialized countries export
credit agencies (ECAs).ECAs are officialy supported governmental institutions that provide
financing in support of nationals exports.The arrangement sets specific, highly technical
parameters on the type of financing packages that ECAs may offer to promote national exports,
with the goal of eliminating competition among ECAs and thereby “leveling the playing field”
for exporters.
6.Jun Du examines a rich panel data set, we provide a rigorous analysis of the relationship
between access to external finance, foreign direct investment and the exports of private
enterprises in china. We conclude that, in order to foster the exports of indigenous enterprises,
the elimination of financial discrimination against private firms is likely to be a more effective
policy tool than the reliance on spillovers from multinational firms.
7.Sourafel Girma The export business in India is growing ,whether it is related to goods or
services. The India is a growing consumer hubas well. The contemporary international financial
issues, namely US sub-prime lending, appreciation of Indian currency; growing export and flow
of FIIs investment in India are changing the equation for exporters, bankers, investors and
therefore ECGC. The research study aims at determining how ECGC will be able to fulfill its
objective in the current scenario.
8.Daniele Giovannueei examines increasing participation of relatively inexperienced enterprises
in international trade calls for a concise and jargon-free, general reference to the many ways by
which traders can arrange for payments to be made and the relative merits, of each from a risk
standpoint. The most common methods i.e. letters of credit, are covered in some detail including
examples.
9.Vrajlal K.Sapovadia examines research study aims at determining how ECGC will be able to
fulfill its objective in the current scenario. The research will address studying present level of
ECGC performance and to compare with their counterparts, and to evaluate performance on
various measurable parameters. What shall be the impact of current trend if it continues on
spread sheet and its impact on stakeholders and ECGC ? And finally, to suggest what additional
measure ECGC should take to perform in adversity. The study envisages critical analysis of
various schemes of ECGC vis-à-vis financial performance.
10.Mare Auboin examines the paper discusses the efforts deployed in 2008 and 2009 by various
players, governments, multilateral financial institutions, regional development banks, export
credit agencies, to mobilize greater flows of trade finance to offset some of the “pull-back” by
commercial institutions in the period of acute crisis that has characterized the financial sector in
the past two years. Given that 80 to 90% of trade transactions involve some form of credit,
insurance or guarantee one can reasonably say that supply-side driven shortages of trade finance
have a potential to inflict further damages to international trade. As an institution geared towards
the balanced expansion of world trade, the WTO had been concerned with occurrences of market
tightening throughout this period.
11.Mare Auboin examines efforts deployed by various players, mainly multilateral financial
institutions ,regional development banks, export credit agencies, to mobalize greater flows of
trade finance for developing countries, with a view to help them integrate in world trade. As an
institution geared towards the balanced expansion of world trade, the WTO is in the business of
making trade possible. Its various functions include reducing trade barriers, negotiating and
implementing global trade rules and settling disputes on the basis of the rule of law.
12.Dominic Coppens examines the degree of policy space the WTO leaves its members to
support export credits for non-agricultural goods. In the light of existing case law, it illustrates
that export credit support offered by export credit agencies that aims at complementing the
private trade finance market would in principle be prohibited under the SCM Agreement
13.Ernst Baltecensperger examines this paper endeavors to uncover in how far public export
insurance schemes foster international trade. Based on a gravity equation augmented with
contingency that firms contract defaulting foreign buyers, empirical results suggest that OECD
countries issuing trade credits with generous state guarantees did, during the 1999 to 2005
period, not witness more exports towards politically and commercially more unstable low
income countries. Rather, publically indemnified trade finance has promoted exports, to a
modest degree, towards high and middle income countries, where financial intermediaries and
markets provide practicable alternatives to hedge against payment risks.
14.Andrei A. Levehenko This paper points out the reverse link: financial development is
influenced by comparative advantage. The authors illustrate this idea using a model in which a
country’s financial systems is an equilibrium outcome of the economy’s productive structure:
financial systems are more developed in countries with large financially intensive sectors. After
trade opening demand for external finance and therefore financial development, are higher in a
country that specializes in financially intensive goods. By contrast, financial development is
lower in countries that primarily export goods which do not rely on external finance.
15.Quy Toan Do external finance need of exports and relate it to the level of financial
development. In order to overcome the simultaneity problem, they adopt a strategy in the spirit
of Frankel and Romer (1999). The authors exploit sector-level bilateral trade data to construct,
for each country and time period ,a predicted value of external finance need of exports based on
the estimated effect of geography variables on trade volumes across sectors. Their results
indicate that financial development is an equilibrium outcome that depends strongly on a
country’s trade pattern.
16.Mare Auboin The paper discusses a number of issues related to the treatment of trade credit
internationally, a priori and a posteriori and creditors in the case of default which are currently of
interest to the trade finance community, in particular the traditional providers of trade credit and
guarantees, such as banks, export credit agencies, regional development banks and multilateral
agencies. The paper does not deal with the specific issue of regulation of official insured export
credit, under the OECD arrangement, which is a specific matter left out of this analysis.
18.Nils Herger examines this contribution demonstrates that export credit support in accordance
with the safe haven might still be counter available and actionable. Finally, it is argued that an
exception which can be modified by a subgroup of WTO members, like the safe haven, can do
longer be accepted.
19.Mohd Arif examines an understanding of international financial management is crucial to not
only large MNCs with numerous foreign subsidiaries, but also to the small business engaged in
exporting or importing 75% of the 43300 US. Firms that export have less than 100 employees.
International business is even important to companies that have no intention of engaging in
international business.
20.Yoon Je Cho examines as directed credit programs should be small, narrowly focused and of
limited duration. They should be financed by long term funds to prevent inflation and
macroeconomic instability. Directed credit programs were a major tool of development in the
1960s and 1970s.In the 1980s,
EMPIRICAL LITERATURE:-Empirical literature consists of study made by other in the same field. The published data in
newspapers books & magazines available for discussion with people of organization.
BOOKS:
Kothari, C.R “Quantitative Techniques”: Knowledge about the quantitative techniques
of scaling the data & different types of research and different types of research designs.
Kothari C.R. “Research Methodology & Techniques”: Knowledge about research
process, sample design, research design etc. The information regarding the basics of
research and research methodology, what are the different types of research designs,
problem statement, sources of data collection and methods of data collection are given in
this section.6.
Gupta S.K “Management Accounting”: Page20.1-20.20,Knowledge about leverages
meaning and type, Financial Leverage or Trading on equity, Impact of financial
Leverage,
Gupta S.K “Management Accounting”: Degree of Financial Leverage, significance of
Financial leverage, Limitation of Financial Leverage/Trading on Equity.
Gupta S.P., “Business Statistics”: From here researcher found the information regarding
correlation , trend and statistical tools.
Goel D.K “Management Accounting and Financial Management5” : In this researcher
found the different types of ratios and there formulas and about thumb rule and all basic
concept.
Pandey , I.)“Financial Management”: How to prepare comparative balance sheet and
how can we evaluate.
Maheshwari ,S.N “‘Advanced Accounting7”: It explains ratio analysis as a tool to
analyze the financial statements of organization. Different ratios depict the position of
firm in market.
Mittal R.K , “Management Accounting& Financial Management8” from this researcher
took information about how to prepare comparative balance sheet and how to interpret it.
Bhalla, V.K, “ Financial Management and Policy”: Knowlegde about Financial
Leverage and the rate of EPS and Financial Breakeven Point.
Beri G.C“Marketing Research” tell about the data collection, methods of data collection.
Gupta S.P., “Business Statistics” revealed the information about the correlation, its type
and its importance.
Hooda R.P(., “Statistics for Business and Economics”: It explains ratio analysis as a tool
to analyze the financial statements of organization. Different ratios depict the position of
firm in market.
Schaum,“Statistical outline” :-The information regarding the statistical tools and their
limitations in different fields the research is given in this section.
JOURNALS:-Kumar Santanu, “Finance India”:- Information about Optimality in Firm’s Capital
Structure has been taken from this jornal.
Kaur Kuldip “Finance India” :-From this articles researcher have taken the meaning of
efficiency and different types of efficiency regarding determinants of debt-equity mix..
Veni P. “Management Accountant”:- It is a case study regarding leverage, Capital structure,
dividend policy and practices.
Sufi Amir ,“The Journal of Finance”:- It gives information about optimal debt contract
which will allocate certain right to creditors.
Axelson Ulf “The Journal of Finance”:- From these pages researcher read theory about
financial structure of private equity funds and also about levered buyouts.
Vinayak Ravindar,“The Indian Journal of Commerce”:- This paper attempts to develop
and test a theory on capital structure of corporate giants of india which helped researcher in
the project.
Whited Toni “ The Journal of Finance”:-Researcher has taken information about estimated
financing friction are higher for low dividend firms.
Sharma J.P., “The Indian Journal of Commerce”:-This paper has reveal information
regarding much wider regarding activities than purely start up situations are undertaken by
venture capital.
MAGAZINES:- Tibrewala Shalini, “Buisness World”:- This paper has given information regarding
bonds that look good both in short and long terms.
Dungore Parizad, “ Icfai Reader”:- The stock prices outpace market initially and
investors are drawn to acquiring firm attracted by their rapid growth in earning.
Biswas Joydeep, “Icfai Reader”:- The Indian corporate sector became more and more
dependent among others to the external borrowings trade use and other current liabilities.
Shah Rashesh, “Business World”:-Researcher expect liquidity to be a neutral factor as a
cash flow into equities,
Dubey Rajeev, “Buisness World”:- In this researcher has taken idea about shareholders
have been left wondering if company is morphing itself into a conglomerate.
Seth Meera, “Business World”:-Private equity investors who offered to buy the debt ,
converted into the equity and then served a diktat about targets.
Sinha Paritosh, “Icfai Reader”:- It gives the information regarding the return on equity
addresses. The same question in term of the percentage return earned after meeting the
fund invested by the shareholder.
Annual Report:-Balance Sheet & P/L account of the year 2007 & 2010.
WEBSITES:-
www.capitaline.com:- This provide researcher information any every financial aspect of
different companies. It also provided me knowledge about management and history of
different companies.
www.investopedia.com:- This site help to get data for debt to equity ratio & market capitalization
Private equity investors who offered to buy the debt , converted into the equity and then served a
diktat about targets..
www.economywatch.com/business: This site explains about the overview of business,
ongoing developments.
http://www.investorwords.com/1952/financial_leverage.html: This site explain The
degree to which an investor or business is utilizing borrowed money. Companies.
http://www.12manage.com/description_financial_leverage.html: This site explain
Investments and Leverage and risk, Accounting leverage is total assets divided by total
assets
http://autonews.indiacar.com/news/n12234.htm: Mindarika's second plant to be functional
by August-end Mindarika Pvt Ltd, part of the Rs 300 crore plus Minda Group,
www.moneycontrol.com:- This site helped in providing various data regarding status of
industry.
www.minda/group/mindarika/annualreport:- This site reveals the information regarding
company profile and balance sheet.
STATEMENT OF THE OBJECTIVES
MAIN OBJECTIVE: -
The project is designed to show the Capital structure of the BIRLA TYRES .
SUB OBJECTIVE
1. The basic objective of studying the ratios of the company is to know the financial
position of the company.
2. Another reason is to study that the company’s profit trends.
3. To know the borrowings of the company as well as the liquidity position of the company.
4. To know the solvency of the business and the capacity to give interest to the long-term
loan
5. To study the balance of cash and credit in the organization.
RESEARCH METHODOLOGY
Research is a systematic and continuous method of defining a problem, collecting the facts and
analyzing them, reaching conclusion forming generalizations.
Research methodology is a way to systematically solve the problem. It may be understood as a
science of studying how research is done scientifically. In it we study the various Steps that are
generally adopted by a researcher in studying his research problem along with the logic behind
them.
The scope of research methodology is wider than that of research method(. Thus when we talk of
research methodology we not only talk of research methods but also consider the logic behind
the method we use in the context of our research study and explain why we are using a particular
method.
So we should consider the following steps in research methodology:
Meaning of research
Problem statement
Research design
Sample design
Data collection
Analysis and Interpretation of data
MEANING OF RESEARCH
Research is defined as “a scientific & systematic search for pertinent information on a specific
topic”. Research is an art of scientific investigation. Research is a systemized effort to gain new
knowledge. It is a careful inquiry especially through search for new facts in any branch of
knowledge. The search for knowledge through objective and systematic method of finding
solution to a problem is a research.
RESEARCH DESIGN:-Research design involves a series of rational decision making benefits at each point from such
sophisticated design to ensure accuracy, confidence and commensurate with large investment of
resources.
The research design is formulated for the above problem is descriptive. The information is
obtained from the primary as well as secondary sources. Primary sources are the working staff of
the company and secondary sources are the information contained in the files of Company (Birla
Tyres )and other subject related books and journals. The time period available for the research of
is 40 days.
Research design
Descriptive
NATURE OF RESEARCH:-The research methodology adopted during the project is descriptive in nature. A characteristic in
research studies in business management in their reliance on secondary data source in particular
and primary data in general.
What is study about
Why is study being made
Where will the study be carried out
What type of data are required
What will be the sample design
How will the data be collected
How will the data be analyzed?
DATA COLLECTION
The task of data collection is begins after a research problem has been defined and research
designed/ plan chalked out. Data collection is to gather the data from the population. The data
can be collected of two types:
PRIMARY DATA:The Primary data are those, which are collected afresh and for the first time, and thus happened
to be original in character. Methods of collection of Primary data are as follows:
o Interview
o Observation Method
SECONDARY DATA:-The Secondary data are those which have already been collected by some one else and which
have already been passed through the statistical tool. Methods of collection of Secondary data
are:-
Journals,
Websites
balance sheet
profit & loss
NOTE : “In this the researcher has used the secondary data for the
research study”.
SAMPLING DESIGN:
A sample design is a definite plan for obtaining a sample from the sampling frame. It refers to
the technique or the procedure that is adopted in selecting the sampling units from which
inferences about the population is drawn. Sampling design is determined before the collection of
the data.
Several decisions have to be taken in context to the decision about the appropriate sample
selection so that accurate data is obtained and efficient results are draw
I chose descriptive research in my research because I use more secondary data. In this I take data
from internet, books, and journal’s primary data is very less so it is the reason to chose the
descriptive research
SAMPLING SIZE
The sample of the project report is; Annual reports, Balance sheets , internet , Books & Journals,
Company Manual .
SAMPLING UNIT : BIRLA TYRE
SAMPLING AREA : BIRLA TYRE FINANCIALS
SAMPLING PERIOD :
The time period of the study _______________ to _____________ ( 45 days ) .
LIMITATION OF THE STUDY
In spite of best efforts of the investigator the study was subjected to following limitations:-
STUDY OF INTERIM REPORTS: it is only the study of interim reports and secondary
data present on different websites so not much reliable as primary data.
Analysis is based only on monetary information and not on non monetary factors.
CHANGES IN ACCOUNTING PROCEDURE by a firm may often make financial
statements misleading.
MINOR PLAYER: I have studied only a single firm of the industry. So, I got
knowledge about just a minor player in the team.
TIME PERIOD: The time period given to me for the completion of the project was
short in such a short span of time it is difficult to complete any project in detail.
SECRECY OF INTERNAL DATA: Manager some time denied disclosing some
important financial matters, which can be helpful in this study.
RATIO ANALYSIS
Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of
ratio to interpret the financial statement so that the strength & the weakness of a Railway
workshop standard as well as historical performances & current financial condition can be
determined. The term ratio refers to the numerical or quantitative relationship between two
variables.
SIGNIFICANCE OF RATIO ANALYSIS
i) Helps in decision making
ii) Helps in communicating
iii) Helps in co-ordination
iv) Helps in Control
OBJECTIVE OF USING RATIO ANALYSIS:
Helpful in analyzing financial statement
Simplification of accounting data
Helpful in comparative study
Helpful in locating the weak spots of business
To estimate the trend of the business
Fixation of ideal standards
Effective control
LEVERAGE RATIOS :
CURRENT RATIO :
The current ratio is measure of the firms short term solvency . It indicates the availability of
current assets in rupees for every one rupees of current liability . Current ratio 2:1 or more are
considered satisfactory .
Table 4.1
Particulars 2009 2010 2011 2012 2013Current assets 393.19 460.97 369.77 273.69 161.28Current Liabilities 805.11 674.24 670.27 532.06 480.15
CURRENT Ratio 0.95 0.94 0.90 0.92 0.98
0.95
0.94
0.9
0.92
0.98
0.86
0.88
0.9
0.92
0.94
0.96
0.98
2009 2010 2011 2012 2013
Series1
Graph 4.1
The current ratio of the company between the year 2009-2013 is mostly similar . There is no major fluctuation in these years. This shows the liquidity of the company is good .
QUICK RATIO :
It is also called as Acid test ratio or Liquid ratio. With the help of this ratio, the capacity of the
firm to pay its current liabilities immediately is measured. This is ratio is calculated by dividing
liquid assets by current liabilities.
QUICK RATIO :
= QUICK ASSETS/CURRENT LIABILITIES
Table 4.2
Particulars 2009 2010 2011 2012 2013Quick Ratio 0.80 1.00 0.96 0.93 0.90
0.8
10.96 0.93 0.9
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
2009 2010 2011 2012 2013
Series1
Graph 4.2
The quick ratio of the company is 0.80 in the year of 2009then it has increasing to 1.00 in the year of 2010. Then it has decreasing to 0.96 in the year of 2011 but in the year of 2012 it has again decreasing to 0.93. In the year 2013 it has again decreasing from the last year which is 0.90 . Company quick ratio is no balanced in these years .it slightly increasing & decreasing every year .
LONG TERM SOLVENCY RATIOS:-
DEBT EQUITY RATIO: The relationship between borrowed funds and owners capital is a
popular measure of long term financial solvency of a firm. The relationship is shown by the debt
equity ratio. This ratio reflects the relative claims of creditors & shareholders against the assets
of the firm. Alternatively this ratio indicates the relative proportion of debt and equity in
financial the assets of a firm. One approach is to express the debt equity ratio in terms of the
relative proportion of long term debt and shareholders’ equity.
Debt Equity Ratio = Long Term Debt Shareholder's Fund
DEBT-EQUITY RATIO
Table 4.3
Particulars 2009 2010 2011 2012 2013Debt. Equity Ratio 0.48 0.50 0.46 0.36 0.18
0.480.5
0.46
0.36
0.18
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
2009 2010 2011 2012 2013
Series1
Graph 4.3
The debt equity ratio is increasing which means that the company’s dependence on the
external debt is increasing. In the year 2012,13 it has decreased from the last years .
This shows greater inflexibility in the company’s operation.
INTEREST COVERAGE RATIO :
This ratio used to determine how easily a company can pay interest on outstanding debt. The
interest coverage ratio is calculated by dividing a company's earnings before interest and taxes
(EBIT) of one period by the company's interest expenses of the same period:
INTEREST = NET PROFIT BEFORE INTEREST AND TAXES
COVERAGE FIXED INTEREST CHARGES
RATIO
Table 4.4
YEAR 2009 2010 2011 2012 2013
INTEREST
COVERAGE
RATIO 6.41 4.04 8.00 28.35 20.68
6.41
4.04
8
28.35
20.68
0
5
10
15
20
25
30
2009 2010 2011 2012 2013
Series1
Graph 4.4
The interest coverage ratio first decreasing from 6.41 to 4.04 between the year 2009-
2010 but it increased in the year 2011 to 8 . Then it increases in the year 2012,13 from
28.35,20.68 .
A low ratio indicates excessive use of debt and high ratio indicates retaining.
PROFITABILITY RATIOS:
NET PROFIT RATIO:-
Net profit ratio establishes a relationship between net profit (after tax) and sales, and indicates
the efficiency of the management, selling, administrative and other activities of the firm. This
ratio is the overall measure of firm’s profitability and is calculated as:
Net profit ratio = Net profit *100
Net sales
Table 4.5
YEAR 2009 2010 2011 2012 2013
NET PROFIT
RATIO 9.88 10.03 14.25 24.90 17.68
9.88 10.03
14.25
24.9
17.68
0
5
10
15
20
25
2009 2010 2011 2012 2013
Series1
Graph 4.5
The net profit ratio is 9.88 in the year 2009 then it increases from 10.03 to 14.25 from
the year 2009-2011 . In the year 2012 it is on the peak i.e 24.90 ..
This reveals that the efficiency in manufacturing, administering and selling the products
is increasing between the year 2011-13 .
OPERATING RATIO : Operating profit margin ratio indicates how much profit a company makes after paying for
variable costs of production such as wages, raw materials, etc. It is expressed as a
percentage of sales and shows the efficiency of a company controlling the costs and
expenses associated with business operations. Phrased more simply, it is the return
achieved from standard operations and does not include unique or one time transactions.
Terms used to describe operating profit margin ratios this include operating margin,
operating income margin, operating profit margin or return on sales (ROS).
OPERATING PROFIT RATIO = OPERATING PROFIT X 100
SALES
Table 4.6
YEAR 2009 2010 2011 2012 2013
OPERATING
PROFIT
RATIO 15.09 18.27 20.88 33.31 24.71
15.09
18.27
20.88
33.31
24.71
0
5
10
15
20
25
30
35
2009 2010 2011 2012 2013
Series1
Graph 4.7
The operating profit is increasing from 15.09 to 33.31 in the year 2009-2012 , then it
decreases in the year 2013 which is 24.71. This shows that the operating cost of the
company has balanced from 2011-13.
FINDINGS
After above all the of study various aspects have come in the picture. These are as
follows.
After analyzing the current ratio I found liquidity of the company is not good .
Company quick ratio is no balanced in these years .it slightly increasing & decreasing
every year .
The debt equity ratio is increasing which means that the company’s dependence on the
external debt is increasing. In the year 2010 it has decreased from the last years . This
shows greater inflexibility in the company’s operation.
Interest coverage ratio indicates Company not excessive use of debt.
After analyzing Profitability ratio I found efficiency in manufacturing, administering
and selling the products is increasing between the year 2009-12 but it slightly decrease in
the year 2011.
Operating ratio shows that the operating cost of the company has increased from 2009-
12.
SUGGESTIONS
BIRLA TYRES should use debt in limited amount to reduce the financial risk. As I
have found that company is much more dependent on the debt and equity is being
constant from last five years so at time of contingencies there will be more burdens
on the shoulders of the shareholders. So, company should reduce its dependency on
the debt.
BIRLA TYRES should limit its debts to that extent that the liquidity position of the
firm cannot be impacted and this does not create any hindrance.
They should be a careful decision upon a range of manufacturers and enter into firms
contract between them.
Debt collection period is 45 days which shows lenient debt policy. Debt policy
should make strict to reduce the risk of bad debts.
CONCLUSION
In finance, capital structure refers to the way a corporation finances its assets through some
combination of equity, debt, or hybrid securities. A firm's capital structure is then the
composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and
$80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The Star Paper
Mill standard ratio of debt to total financing, 80% in this example, is referred to as the firm's
leverage. In reality, capital structure may be highly complex and include dozens of sources.
Gearing Ratio is the proportion of the capital employed of the firm which come from outside of
the business finance, e.g. by taking a short term loan etc..
A perfect capital market (no transaction or bankruptcy costs; perfect information); firms and individuals
can borrow at the same interest rate; no taxes; and investment decisions aren't affected by financing
decisions.
While there is a general belief that the world economy has stablised after the global economic
recession, revival is expected to take sometime. Paper demand and price both have shown an
improvement in the later part of the financial year. However continuous rise in raw material and
power & fuel costs are a cause of concern. Your company will continue to strive for better
operational and financial performance in the year to come.
BIBLIOGRAPHY
BOOKS & JOURNALS :
1. Kothari, C.R “Quantitative Techniques” Second Edition, Himalayan Publishing House,
New Delhi, PP-40-45
2. Kothari C.R. “Research Methodology & Techniques” Second Edition, New Age
International Publishers, New Delhi, PP-85-98, 110-115
3. Gupta S.K. “Management Accounting” 8th Edition. PP-20.1-20.20
4. Gupta S.K. “Management Accounting” 5th Edition PP-80.1-80.5
5. Gupta S.P., “Business Statistics” Current Edition, Arya Publications, Agra. PP- 56-78
6. Goel D.K. “Management Accounting and Financial Management” 7th Edition, Vinay
Publications, New Delhi, PP-87-89
7. Pandey , I.M “Financial Management” Surya Publications, New Delhi. PP-49-86
8. Maheshwari ,S.N “‘Advanced Accounting” 1st Edition ,Mcmillan India Ltd., New
Delhi, PP-42-43
WEB- SITES: www.irailway.com
www.capitaline.com
www.investopedia.com
www.economywatch.com/business
http://www.investorwords.com/1952/financial_leverage.html.
http://www.12manage.com/description_financial_leverage.html
http://autonews.indiacar.com/news/n12234.htm
www.moneycontrol.com
http://en.wikipedia.org/wiki/Capital_structure