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SHIV SHAKTI

International Journal of in Multidisciplinary and Academic Research

(SSIJMAR)

Vol. 5, No. 2, April 2016 (ISSN 2278 – 5973)

VALUATION OF SELECTED STOCK BROKING COMPANIES BASED ON CAPITAL

STRUCTURE FORMATION- AN EMPIRICAL ANALYSIS

*Dr.S.Kalaiselvi, Head& Associate Professor of Commerce with CA, Vellalar College for Women(Autonomous),Erode12,TN.

**C.Sangeetha , Assistant Professor of Commerce with CA, Vellalar College for Women (Autonomous), Erode-12,TN.

Impact Factor = 3.133 (Scientific Journal Impact Factor Value for 2012 by Inno Space Scientific Journal Impact Factor)

Global Impact Factor (2013)= 0.326 (By GIF)

Indexing:

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ABSTRACT

Stock-broking is essentially a function of the capital market, which offers the best value proposition for the development of industry.

Top 10 stock broking companies in the year 2012 are selected for the study. Data are obtained from capitaline database. Capital structure

approaches, DuPont analysis, EBIT-EPS analysis tools are used for seven companies engaged in the business of stock broking are

analysed. The study covers a period from 2003 to 2012. The study shows value of companies increased due to more use of debt. Value of

Equity shares is negative in some companies due to the fact that the value of debt is higher than value of company. Financial Health and

Earnings per share of stock broking companies is satisfactory. The Selected stock broking companies gave equal preference for debt and

equity in designing their capital structure.

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VALUATION OF SELECTED STOCK BROKING COMPANIES BASED ON CAPITAL STRUCTURE FORMATION- AN

EMPIRICAL ANALYSIS

*Dr.S.Kalaiselvi **C.Sangeetha ABSTRACT

Stock-broking is essentially a function of the capital market, which offers the best value proposition for the development of

industry. Top 10 stock broking companies in the year 2012 are selected for the study. Data are obtained from capitaline database. Capital

structure approaches, DuPont analysis, EBIT-EPS analysis tools are used for seven companies engaged in the business of stock broking

are analysed. The study covers a period from 2003 to 2012. The study shows value of companies increased due to more use of debt.

Value of Equity shares is negative in some companies due to the fact that the value of debt is higher than value of company. Financial

Health and Earnings per share of stock broking companies is satisfactory. The Selected stock broking companies gave equal preference

for debt and equity in designing their capital structure.

INTRODUCTION

Financing the firm’s assets is a very crucial problem in every business and as a general rule there should be a proper mix of debt

and equity capital in financing the firm’s assets. Every business enterprise, whether big, medium or small, needs capital to carry on its

operations smoothly and to achieve its target. However the actual capital should be neither more or less the amount which is needed and

gainfully employed it is called capital structure of a business. Capital structure of business enterprise should be ideal i.e., according to the

requirement of the business enterprise. The process of investing in the stock market either individually or through a broker is known as

stock broking. This is primarily done by opening a demat account. If done through a broker, broker opens an account helping investor to

operate through online stock broking facility and suggests investment ideas and strategies suiting individual requirement based on

investor objective of tenure of investment. The selected financial investments and respective companies, schemes, risk taking ability and

sum available for investment are considered while forming investment choices. After the amount is invested the broker tracks and

monitors the investments changes or reinvests depending on the performance and generates reports for investor.

*Head& Associate Professor of Commerce with CA, Vellalar College for Women (Autonomous), Erode-12,TN

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**Assistant Professor of Commerce with CA, Vellalar College for Women (Autonomous), Erode-12,TN

STATEMENT OF THE PROBLEM

The capital structure of a company is to be determined initially at the time the company is floated great caution is required at this

stage, since the initial capital structure will have long-term implications. Of course, it is not possible to have an ideal capital structure

but the management should set a target capital structure and the initial capital structure should be framed and subsequent changes in the

capital structure should be done keeping in view the target capital structure. Thus, the capital structure decision is a continuous one and

has to be taken whenever a firm need additional finance.

The study is undertaken to give answers to following questions:

1) What is the market value and overall cost of capital of stock broking companies?

2) What is the financial health of these companies?

3) What is the earning per share and return on equity of the sample companies?

OBJECTIVES OF THE COMPANY

The following are the major objectives of the study:

1. To exhibit the profile of the company and its growth during the study period.

2. To compute the market value and overall cost of capital of selected stock broking companies.

3. To analyse the financial health of sample companies.

4. To compute the earning per share and return on equity of sample companies.

5. Based on the findings of the study, to offer suitable suggestions to sample companies for their improvement.

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METHODOLOGY

The methodology followed to carry out the study has been presented below:

Selection of companies

Top 10 stock broking companies in the year 2012 are selected. The companies selected for the present study is confined only

to 7 companies due to non availability of data.

1. India bulls securities Limited

2. Angel Broking Limited

3. Reliance Securities Limited

4. India Infoline Limited

5. Sharekhan Limited

6. Religare Securities Limited

7. Motilal Oswal Securities Limited

Study period

The study pertains to a period of financial years from 2002-2003 to 2011-2012. For the sake of convenience, the year 2002-2003

are taken as 2003 and so on in the study.

Source of Data

The study is based on secondary data. Data are obtained from capitaline database available in KSR Institute of Management.

Company profiles and additional literature are collected from magazines, news papers, company website and other related websites.

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Analytical Tools

Capital structure approaches is used to compute the market value and overall cost of capital of the companies.

Important financial ratios are computed in percentage or in times to indentify the financial health of the companies.

DuPont analysis is used to identify the return on equity.

EBIT-EPS Analysis is computed to identify the earnings per share.

LIMITATIONS OF THE STUDY

The study covers a decade from 2003 to 2012. It does not consider the changes that have been taken place before and after

the study period.

The study is based on financial accounting data it is subject to the inherent limitations of accounting and accounting

practices.

Majority of data are secondary and they are historical in nature.

Reliability of the study depends upon the reliability of financial statement.

FINDINGS OF THE STUDY

Capital Structure Theories

Net Income Approach

Value of company and overall cost of capital of selected stock broking companies is increased during the study period. Except

Religare securities Limited the value of company is negative in the year 2005, 2009 and 2012 due to negative value of Equity shares

shown in Table 1.

Net Operating Income Approach

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Value of company and overall cost of capital of selected stock broking companies is satisfactory. But during the study period market

value of Equity shares is negative in Sharekhan Limited due to high value of debt, whereas in other companies it shows good value given

in Table 2.

Traditional Approach

Overall cost of capital of selected stock broking companies is satisfactory. But during the study period Sharekhan Limited value

shows less, whereas in case of other companies it shows good value pointed in Table 3.

Modigliani and Miller Approach (with tax)

Value of company is calculated after deducting the tax. The value of Indiabulls Securities Limited, Angel Broking Limited and

Religare Securities Limited is highly satisfied when compared to other broking companies shown in Table 4.

Modigliani and Miller Approach (without tax)

Value of company is high when tax is not deducted. Value of selected stock Broking companies is satisfactory. In the Sharekhan

Limited value of Equity shares is negative during the study period due to high value of debt in Table 5.

Ratio Analysis

The average current ratio of selected stock broking companies was below the standard norm of 2:1 during the study period .

Average Quick Ratio of Angel broking limited is satisfactory whereas other Broking companies do not satisfy the standard norm .

Average Absolute Liquidity Ratio of Angel Broking Limited and Motilal Oswal securities Limited are satisfactory. Other companies

Ratios were below the standard norm 0.5:1.Debt-Equity Ratio of India Infoline Limited and Religare Securities Limited are low when

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compared other broking companies during the study period due to lesser dependence on outsider’s funds.

Average Proprietory ratio of Angel Broking Limited, Sharekhan Limited and Religare Securities Limited is below the standard norm it

indicates that the proportion of shareholders fund in the total assets employed in the business is low .Interest Coverage ratio, Gross Profit

ratio and Net Profit ratio of the stock Broking companies is satisfactory .Average return on shareholder’s investment shows that

profitability and Efficiency of the selected stock broking companies is satisfactory .Operating Profit ratio of India Infoline is low when

compared other companies due to less operational efficiency of the company .Return on Capital Employed indicates that investment by

owners and Creditors have been efficiently used by India Infoline Limited and Motilal Oswal Securities Limited are shown in Table 6.

DuPont Analysis

Average return on Equity of selected stock broking companies is low. In Religare securities limited it is very low due to less Profit

Margin, Asset Turnover and Financial Leverage shown in Table 17.

EBIT-EPS Analysis

Earnings per share of selected stock broking companies under debt financing are high when compared to equity financing.

Companies use more debt to increase Earnings per share shown in Table 18.

CONCLUSION

Indian stock market has become one of the most dynamic and efficient market today. Investors now seek stock market as preferred

place to make investment. Stock market is often taken as a primary indicator of a country’s economic well-being as it enables the

efficient allocation of capital. Stock market is a important place where the companies can raise extra capital by issuing the shares. Capital

structure Approach, Financial Health, Return on Equity and Earnings per share of seven companies engaged in the business of stock

broking are analysed. The study shows value of companies increased due to more use of debt. Value of Equity shares is negative in some

companies due to the fact that the value of debt is higher than value of company. Financial Health and Earnings per share of stock

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broking companies is satisfactory. The Selected stock broking companies gave equal preference for debt and equity in designing their

capital structure.

TABLES & FIGURES

TABLE 1: NET INCOME APPROACH

Total

value of

company

(Rs .in

crores)

2003 2004 2005 2006 2007 2008 2009 2010 2011

2012

Indiabulls

Securities 1.09 10.12 665.31 1399.87 2007.48 13833.02 7567.78 8200.09 18780.78

15751.42

Angel

Broking 497.08 632.52 1024.69 1227.64 1861.41 2215.73 2196.69 3969.56 8193.67

11723.44

Reliance

Securities 2201.61 2118.51 1699.40 2301.80 4422.45 13347.04 16922.32 13357.30 19143.23

16345.42

India

Infoline -11.78 43.75 82.09 345.25 522.79 925.74 536.51 1395.10 1920.30

913.35

Sharekhan 202.37 267.05 166.44 236.10 1384.09 2267.00 2627.02 2580.18 3931.70 2893.04

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Religare

Securities 0.04 0.43 -0.37 39.37 75.02 170.01 -40.15 303.73 224.74

-2174.79

Motilal

Oswal

Securities

70.56 336.63 330.35 1170.88 1061.27 1569.38 86.71 684.87 473.84 192.64

TABLE 2: NET OPERATING INCOME APPROACH

Equity capitalisation

rate(%) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Indiabulls Securities -1.30 -71.70 -230.41 36.24 18.47 -8.24 13.53 25.45 9.65 16.68

Angel broking 13.73 12.38 12.24 34.16 338.25 -53.67 -68.73 64.96 10.44 20.10

Reliance Securities 7.57 7.79 9.55 23.88 9.57 7.42 11.30 11.55 -1.29 20.25

India Infoline 23.94 15.65 24.02 20.76 21.67 29.26 32.17 31.06 19.39 -34.86

Sharekhan -0.17 -2.83 -25.51 -6.97 -3.92 -2.94 -1.94 -2.66 -8.63 -10.01

Religare Securities 11.76 23.08 -57.14 229.02 19.17 60.36 -22.49 47.83 -11.42 30.88

Motilal Oswal 14.07 9.48 23.36 23.87 21.48 21.23 16.61 24.02 29.94 7.18

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TABLE 3 :TRADITIONAL APPROACH

Overall cost of

capital(% ) 2003 2004 2005 2006 2007 2008 2009 2010 2011

2012

Indiabulls Securities 3.67 8.79 7.22 12.39 14.71 6.86 15.82 11.33 8.17 15.71

Angel broking 13.62 13.39 10.35 10.98 11.03 9.64 9.68 8.36 8.98 11.80

Reliance Securities 16.17 14.44 14.96 25.89 17.58 11.84 13.67 12.75 7.49 16.43

India Infoline 28.35 15.59 23.24 12.15 17.21 24.89 28.45 17.72 13.73 12.33

Sharekhan 0.27 2.06 7.86 5.01 2.71 5.10 5.02 6.77 9.19 4.65

Religare Securities _ 11.63 -8.11 11.35 19.02 16.29 -27.52 29.72 11.45 37.31

Motilal Oswal

Securities 15.39 9.93 16.38 15.97 21.85 26.03 14.73 17.46 23.49 9.66

TABLE 4: MODIGLIANI AND MILLER APPROACH (WITH TAX)

Securities

Overall cost of

capital ( %)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Indiabulls Securities -1.19 -34.70 -39.01 483.30 13.22 -7.57 22.80 492.22 12.83 20.99

Angel broking 27.71 22.56 34.21 -86.28 27.54 -31.82 -40.70 -91.61 13.54 23.31

Reliance Securities 17.87 5.14 17.41 33.12 12.15 8.20 14.49 24.16 -1.23 28.28

India Infoline 27.79 21.46 34.10 25.71 23.11 33.23 35.22 31.11 11.91 -42.84

Sharekhan -0.17 -2.78 -22.32 -6.62 -3.82 -2.52 -1.83 -2.33 -6.89 -8.20

Religare Securities 11.76 10.71 -61.54 -218.81 21.63 147.28 -26.46 28.13 14.65 36.60

Motilal Oswal

Securities

16.40 10.77 30.16 25.89 26.62 28.06 15.07 30.93 53.60 6.02

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TABLE 5 : MODIGLIANI AND MILLER APPROACH (WITHOUT TAX)

TABLE6: AVERAGE RATIO OF STOCK BROKING COMPANIES (2003-2012)

Overall cost of

capital ( %) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Indiabulls Securities

Limited -1.30 -71.70 -230.41 36.24 18.47 -8.24 13.53 25.45 9.65 16.68

angel broking limited 13.73 12.38 12.24 34.16 338.25 -53.67 -68.73 64.96 10.44 20.10

Reliance Securities

Limited 7.57 7.79 9.55 23.88 9.57 7.42 11.30 11.55 -1.29 20.25

India Infoline Limited 23.94 15.65 24.02 20.76 21.67 29.26 32.17 31.06 19.39 -34.86

Sharekhan Limited -0.17 -2.83 -25.51 -6.97 -3.92 -2.94 -1.94 -2.66 -8.63 -10.01

Religare Securities

Limited 11.76 23.08 -57.14 229.02 19.17 60.36 -22.49 47.83 -11.42 30.88

Motilal Oswal

Securities Limited 14.07 9.48 23.36 23.87 21.48 21.23 16.61 24.02 29.94 7.18

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TABLE 7:THREE FACTOR ANALYSIS (In %)

Name of the Ratio

Indiabulls

Securities

Ltd

Angel

Broking

Ltd

Reliance

Securities

Ltd

India

Infoline

Ltd

Sharekhan

Ltd

Religare

Securities

Ltd

Motilal

Oswal

Securities

Ltd Current Ratio 0.87 1.12 0.76 0.71 0.32 0.49 0.81

Quick Ratio 0.87 1.12 0.76 0.71 0.32 0.49 0.81

Absolute Liquid Ratio 0.45 0.53 0.41 0.28 0.17 0.32 0.50

Debt Equity Ratio 1.07 1.12 0.96 0.23 1.10 0.22 0.99

Proprietory Ratio 0.82 0.60 0.83 0.83 0.59 0.61 0.79

Interest Coverage

Ratios 2.94 2.94 4.55 9.01 7.62 1.12 7.42

Gross Profit Ratio 26.00 26.14 25.66 24.02 24.08 25.84 25.78

Net Profit Ratio 22.23 19.57 18.83 19.23 19.41 19.28 20.97

Return on

Shareholders’

Investment Ratio

22.75 16.96 16.48 16.67 24.35 19.51 35.46

Operating Profit Ratio 76.40 46.67 84.25 20.41 60.19 61.93 42.14

Return on Capital

Employed 3.67 4.96 4.38 12.98 1.07 5.80 20.38

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Years Indiabulls

Securities Ltd

Angel Broking

Ltd

Reliance

Securities Ltd

India Infoline

Ltd Sharekhan Ltd

Religare

Securities Ltd

Motilal Oswal

Securities Ltd

2003 3.79 6.59 1.87 0.05 1.71 0.10 1.48

2004 0.14 7.38 1.65 0.35 3.72 0.11 3.83

2005 1.84 10.00 2.14 0.69 9.38 0.12 6.30

2006 6.32 10.69 2.88 1.04 7.91 0.09 17.64

2007 9.15 10.88 3.46 5.66 15.77 0.23 24.71

2008 24.84 13.41 7.78 11.17 4.58 0.37 12.15

2009 33.64 15.49 11.59 9.92 4.93 2.88 7.79

2010 21.08 23.69 9.22 12.00 5.59 0.81 7.25

2011 30.00 35.94 7.40 13.61 5.71 0.81 6.91

2012 45.66 51.66 12.49 10.90 2.45 5.55 3.52

Average 17.65 18.57 6.05 6.54 6.18 1.12 9.16

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TABLE 8 : FIVE FACTOR ANALYSIS (In %)

Years Indiabulls

Securities Ltd

Angel Broking

Ltd

Reliance

Securities Ltd

India Infoline

Ltd Sharekhan Ltd

Religare

Securities Ltd

Motilal Oswal

Securities Ltd

2003 3.76 6.49 1.80 - 1.66 - 1.48

2004 0.14 7.34 1.63 - 3.66 0.11 3.81

2005 1.84 9.78 2.10 0.68 9.31 0.11 6.21

2006 6.23 10.56 2.88 1.02 7.65 0.09 17.29

2007 9.07 10.67 3.44 5.63 15.48 0.22 24.19

2008 24.34 13.29 7.75 11.05 4.51 0.36 12.08

2009 32.97 15.07 11.43 9.80 4.71 2.83 7.19

2010 20.51 23.48 9.02 12.00 5.49 0.79 7.14

2011 29.56 35.13 6.76 13.23 5.40 0.79 6.84

2012 44.85 50.17 12.46 10.61 2.40 5.50 3.34

Average 17.33 18.20 5.93 6.40 6.03 1.08 8.96

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TABLE 9 : EARNINGS PER SHARE (Rs. In Crores)

Name of the

Companies

2003 2004 2005 2006 2007

Equity

financing

Debt

financing

Equity

financing

Debt

financing

Equity

financing

Debt

financing

Equity

financing

Debt

financing

Equity

financin

g

Debt

financing

Indiabulls

Securities Ltd

0.02

-0.02

0.04

0.10

1.48

1.60

4.28

5.16

5.01

5.62

Angel

Broking Ltd

3.00

3.16

3.90

4.50

5.08

5.12

5.20

4.92

4.82

5.16

Reliance

Securities Ltd

2.03

2.51

1.82

2.06

1.57

2.42

1.97

2.43

2.59

3.22

India Infoline

Ltd

-0.11

1.06

0.19

55.33

0.43

8.60

0.76

1.09

1.51

1.98

Sharekhan

Ltd

0.19

1.21

1.86

2.01

4.02

4.21

2.47

2.64

7.67

7.75

Religare

Securities Ltd

_

_

-0.05

0.05

0.02

0.21

0.07

0.19

0.18

3.24

Motilal

Oswal

Securities Ltd

0.54

0.98

0.48

1.06

0.72

5.10

10.12

12.42

11.05

11.78

Name of the

Companies

2008 2009 2010 2011 2012

Equity

financing

Debt

financing

Equity

financing

Debt

financing

Equity

financing

Debt

financing

Equity

financing

Debt

financing

Equity

financing

Debt

financing

Indiabulls

Securities Ltd

3.89

4.62

5.25

5.92

12.32

11.42

14.71

14.92

12.30

12.85

Angel Broking

Ltd

4.79

5.61

5.11

6.21

7.71

8.65

18.47

17.46

32.15

34.51

Reliance

Securities Ltd

6.03

6.86

8.55

8.91

6.09

6.99

5.24

6.72

10.37

11.65

India Infoline

Ltd

3.27

3.81

2.45

6.32

3.77

4.35

3.50

4.19

1.54

2.08

Sharekhan Ltd

2.25

3.42

2.99

3.12

3.21

6.92

4.52

5.86

1.62

2.72

Religare

Securities Ltd

0.29

1.38

0.12

0.97

0.55

1.36

0.15

0.91

4.73

6.29

Motilal Oswal

Securities Ltd

5.91

7.42

0.19

1.15

2.29

3.46

2.02

3.12

0.31

1.47

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