Suhas Final Project

LIST OF TABLES

TABL

E NO.PARTICULARS

PAGE

NO.

4.1 Table Showing the Changes in EBIT & EBT 46

4.2 Table Showing the Changes in Contribution & EBIT 48

4.3 Table Showing the Changes in Contribution & EBT 50

4.4 Table Showing the Comparison Of Financial Leverage 52

4.5 Table Showing the Comparison Of Operating Leverage 54

4.6 Table Showing the Comparison Of Combined Leverage 56

4.7 Table Showing the Earning Available to Equity

Shareholders

58

4.8 Table Showing the Comparison Of EPS 60

4.9 Table Showing Debt Equity Ratio 62

4.10 Table Showing Debt to Total Capital Ratio 64

4.11 Table Showing Net Worth to Total Capital Ratio and

Debt to Total Capital Ratio

66

4.12 Table Showing External-Internal Equity Ratio 68

4.13 Table Showing Degree Of Financial Leverage (DFL) 71

4.14 Table Showing Degree Of Operating Leverage (DOL) 74

4.15 Table Showing Degree Of Combined Leverage (DCL) 77

LIST OF GRAPHS

V.V.N DEGREE COLLEGE Page 1

CHAR

T NO.PARTICULARS

PAGE

NO.

4.1 Graph Showing the Changes in EBIT & EBT 47

4.2 Graph Showing the Changes in Contribution & EBIT 49

4.3 Graph Showing the Changes in Contribution & EBT 51

4.4 Graph Showing the Comparison Of Financial Leverage 53

4.5 Graph Showing the Comparison Of Operating Leverage 55

4.6 Graph Showing the Comparison Of Combined Leverage 57

4.7 Graph Showing the Earnings Available to Equity

Shareholders

59

4.8 Graph Showing the Comparison Of EPS 61

4.9 Graph Showing Debt Equity Ratio 63

4.10 Graph Showing Debt to Total Capital Ratio 65

4.11 Graph Showing Net Worth to Total Capital Ratio and

Debt to Total Capital Ratio

67

4.12 Graph Showing External-Internal Equity Ratio 69

4.13 Graph Showing Degree Of Financial Leverage (DFL) 72

4.14 Graph Showing Degree Of Operating Leverage (DOL) 75

4.15 Graph Showing Degree Of Combined Leverage (DCL) 78


CHAPTER - 1

INTRODUCTION

1.1 INTRODUCTION TO FINANCE:


Finance was studied as part of economics before the turn of the present century. It was only in

the early part of the present century when massive consolidation movement tool place that

finance came to be studied as a corporate discipline, formation of large seized understandings

by consolidating the smaller once brought before the management the problem of financing

these giant enterprises. Accordingly, over whelming emphasis was placed on study of sources

and forms of financing the new industrial giants.

MEANING OF FINANCE:

Finance is one of the major elements, which activates the overall growth of the economy.

Finance is the lifeblood of economic activity. Finance is defined as “the provision of money as

the time when it is required every enterprise, whether big, medium or small, needs finance to

carry on its operations and to achieve its target. Finance is regarded as the lifeblood of the

business enterprises without adequate finance; no enterprise can possibly accomplish its

objectives.

The subject of finance has been traditionally classified into two classes:-

1. Public Finance

2. Private Finance

Public finance deals with the requirements and disbursements of funds in the government

institution life states, local self-governments and control governments.

Private finance is concerned with requirements receipt and disbursements of funds in case of

an individual.

Definitions of Finance:-


“The science of raising and expanding the public revenue”

“A branch of economics concerned with resource allocation as well as resource management,

acquisition and investment. Simply, finance deals with matters related to money and markets”.

Finance is a branch of economics that deals with the management of funds, financial sources

and other assets. In broader terms, finance is raising or investing money either as equity or

debt. Finance is a wide-ranging term which includes funding, investments, trading and risk

management (through various types of insurance policies).

Financial Management

Meaning:

Financial Management is the specialized functions directly associated with the top

management. The significance of this function is not only seen in the ‘Line’ but also in the

capacity of ‘Staff’ in the overall administration of a company.

Definitions:

“Financial Management is the application of the planning and control functions to the finance

function.”

- Archer &Ambrosio.

“Financial Management is the operational activity of a business that is responsible for

obtaining and effectively utilizing the funds necessary for efficient operation.”

- Joseph & Massie

SCOPE OF FINANCIAL MANAGEMENT:


Financial management is broadly concerned with the acquisition and use of funds by a business

firm. The important tasks of financial management are categorized as follows:

GOALS OF FINANCIAL MANAGEMENT


Financial

Analysis,

planning and

control

Analysis of financial condition and preference.Profit planning.Financial forecasting.Financial control.

Investing

Management of current assets.Capital budgeting.Managing of mergers, reorganizations and divestments.

Financing

Identification of sources of finance and determination of financing mix.Cultivating sources of funds and raising funds.Allocation of profits between dividends and retained earnings.

SCOPE OF FINANCIAL

MANAGEMENT

Specific Objectives:-

1. Profit Maximization: Earning profits by a company or a corporate is a social

obligation. Profit is the only means through which an efficiency of organization can be

measured. Profit maximization achieved by an organization is regarded as a primary

measure of its success. The survival of the firm depends upon its ability to earn profits.

Though profit maximization has many features different people expressed different

opinions to consider this as main goal of a company.

Profit maximization increases the confidence of management in expansion and

diversification programs of a company.

Profit maximization attracts the investors to invest their savings in securities.

Profits ensure maximum welfare to the share-holders, employees and prompt

payment to creditors of the company.

Profit indicates the efficient use of funds for different requirements.

2. Wealth Maximization: The concept of ‘Wealth Maximization’ refers to the

gradual growth of the value of assets of the firm in terms of benefits it can produce. The

wealth maximization attained by a company is reflected in the market value of shares.


SPECIFIC OBJECTIVES

Profit MaximisationWealth Maximisation

GENERAL OBJECTIVES

Balanced Asset StructureLiquidityJudicious Planning of FundsEfficiencyFinancial Discipline

In other words, it is nothing but the process of creating wealth of an organization. This

maximizes the wealth of shareholders.

Wealth maximization is the net present value of a financial decision. Wealth

maximization concept has been explained differently by practical financial executives.

“When the company’s profits are more, he advises the management to keep certain

amount of profit for future expansion, through which he increases the production and

market share.”

General Objectives:

1. Balanced Asset Structure: The subject of financial management must have a goal

of maintaining balanced asset structure of company. The size of fixed assets is to be

decided scientifically. The size of current assets must permit the company to exploit the

investments on fixed assets.

2. Liquidity: The liquidity objective of a company will exploit the long-term vision of a

company. If a firm is ‘Liquid’, it is an indication of positive growth.

3. Judicious Planning of Funds: The concept of wealth or profit maximization is

achieved only when a company reduces its cost. Cost here not only refers to the overall

cost of operations but also the cost of funds.

4. Efficiency: “Innovate or Perish” is the slogan of this century. If a company is

innovative or efficient, it can be run successfully in its future periods. It is the

obligation of a finance manager to be vigilant in increasing the efficiency level of a

company.

5. Financial Discipline: As in the recent past, country has witnessed different types of

scandals, corporate financial indiscipline, and misuse of funds. Hence it has become an

obligatory responsibility of a company to have financial discipline through various

techniques of financial management i.e., capital budgeting, fund flow and cash flow

statement, performance budgeting, CVP analysis etc.


1. Anticipating Financial Needs: The financial manager has to forecast expected

events in business and note their financial implications. Financial needs can be

anticipated by forecasting expected funds in a business and recording their financial

implications. In a big business, a financial need expands into an impressive array of

documents. These are:

Cash budget which is essentially a cash flow statement;

A Pro-forma income statement summarizing sales, other income, costs, taxes

and net income for the period;

A Pro-forma balance sheet showing what the assets and liabilities will be like

during the forecast period;

A statement of sources and uses of funds, showing where the funds to operate

the business will come from and how they will be absorbed during the period.


Anticipating Financial Needs

Acquiring Financial Resources

Allocating Funds in Business

Administrating the Allocation of Funds

Analysing the Performance of Finance

Accounting and Reporting to Management

A’s of Financial Management

2. Acquiring Financial Resources: This implies knowing when, where and how to

obtain the funds which a business needs. Funds should be acquired well before the need

for them is actually felt. The financial manager should know how to tap the different

sources for both funds. He may require short-term and long-term funds. The financial

image of a corporation has to be improved in appropriate financial circles which are

primarily responsible for supplying finance.

3. Allocating Funds in Business: Allocating funds in a business means investing

them in the best plan of assets. Assets are balanced by weighing their profitability

against liquidity. Profitability refers to the earning of profits. Liquidity means closeness

to money. The finance manager should allocate funds according to their profitability,

liquidity and leverage.

4. Administrating the Allocation of Funds: Once funds are allocated on various

investment opportunities, it is the basic responsibility of the finance manager to watch

the performance of each rupee that has been invested. This helps the management to

increase efficiency by reducing the cost of operations and earn fair amount of profits

out of these investments.

5. Analyzing the performance of Finance: Once the funds are administered, it is

very comfortable for the finance manager to take decisions. Through budgeting, he will

be able to compare the actual with standards. The returns on the investments should be

continuous and consistent. The cost of each financial decision and returns of each

investment must be analyzed. This helps in achieving ‘liquidity’ of a business unit.

6. Accounting and Reporting to the Management: Finance manager not only

acts as line but also as staff. He has to advise and supply information about the

performance of finance to the top management and is also responsible for maintaining

up-to-date records of the performance of financial decisions. Financial management is

concerned with the many responsibilities which are the main thrust of a business

enterprise. Hence accounting and reporting of the performance of finance is an

important aspect of financial management.


FUNCTIONAL AREAS OF FINANCIAL MANAGEMENT:

1. Estimation of Financial Management:

The requirement of finance to a business concern is continuous. It is needed in all the

stages of business cycle namely, initial growth, saturation and declining stage. Funds

are needed to establish the industry both for meeting capital expenditure and revenue

expenditure. Funds are also needed at the growth stage for expansion and to increase

the production to meet the demand of consumers. The requirement of finance rises at

the stage of saturation also for diversification. If the firm becomes sick, to rejuvenate


FUNCTIONAL AREAS OF

FINANCIAL MANAGEME

NT

the activities of such business concern rescheduling, repackage of financial services are

needed. Hence, it is the first task of finance manager.

2. Selection of the Right Sources of Funds:

After estimating the total funds of business concern, it is the second important step of

the finance manager to select the right type of sources of funds at the right time at right

cost. Each financial instrument is associated with different types of costs. Equity has

the cost of dividend or expectation of the shareholders, debenture or borrowings has the

cost of interest, preference share has the cost of dividend. Careful selection has to be

made out of the available alternative sources of funds.

3. Allocation of Funds:

After mobilizing the total funds of a firm, it is the responsibility of finance manager to

distribute the funds to capital expenditure and revenue expenditure. The evaluation of

different proposals of project must be made before making a final decision on

investment. Each investment must yield fair amount of returns, so that it should

contribute to the goal of ‘Wealth Maximization’.

4. Analysis and Interpretation of Financial Performance:

It is another important task of finance manager. He is expected to watch the

performance of each portfolio that can be measured in terms of profitability and returns

on the investments. Ratio analysis and comparison of actual with standard helps the

finance manager to have maximum control over the entire operations of the business

unit.

5. Analysis of Cost-Volume-Profit:

It is another important tool of the financial management that helps the management to

evaluate different proposals of investments. Make or Buy decision, Deletion and

Continuation of a product line decision can be made by adopting CVP/BEP analysis.

This helps the management to achieve long term objectives of a firm.

6. Capital Budgeting:


It is a technique through which a finance manager evaluates the investment proposals.

Pay Back Period, ARR, IRR, NPV are some of the modern techniques, very popular in

capital budgeting. These techniques are adopted by finance manager to attain financial

objective of the enterprise.

7. Working Capital Management:

Working Capital is rightly an adjunct of fixed capital investment. It is a financial

lubricant which keeps business operations going. It is the lifeblood of a firm. Cash is

the central reservoir of a firm and ensures liquidity. The finance manager should weigh

the advantage of customer trade credit, such as increase in volume of sales, against

limitations of costs and risks involved therein. He should match the inventory level to

sales and reduces the stay of inventory during the production. This helps the

management to meet the demand of the market on time.

8. Fair Return to Investors:

Returns are the divisible profits available to the investors. Equity shareholders normally

expect fair amount of profit and capital appreciation for their investment. Unless and

until this is fulfilled by a company, the confidence of the investors will be stake. In long

term it helps the nation to build strong capital formation and increases industrial

activities. It also contributes to the growing activities. Hence a business firm must

assure regular income to the shareholders.

Capital Structure

“Capital structure of a company refers to the composition of its capitalization and it includes all

long term capital sources i.e., loans, reserves, shares and bonds.”

- Gerestenberg


“The capital structure of business can be measured by the ratio of various kinds of permanent

loan and equity capital to total capital.”

- Schwarty

Factors affecting capital structure:

Internal Factors

1. Financial Leverage: The use of fixed securities, such as debt and preference capital

along with owners’ equity in the capital structure is described as ‘financial leverage’.

This decision is most important from the point of financing decisions.


Internal Factors Financial Leverage Cash Flows Risk Growth & Stability Cost of Capital Purpose of Finance Retaining Control Flexibility Asset Structure

External Factors Size of the Company Nature of the Industry Investors Level of Interest Rate Availability of Funds Level of Business Activity Period of finance Taxation Policy Legal Requirements Level of Stock Prices

2. Cash Flows: Cash flow ability of a company will have direct impact on the capital

structure. Cash flows permit the company to meet its short term obligations. Sound cash

flows facilitate the finance manager in raising funds through debt.

3. Risk: Ordinarily, debt securities increase the risk, while equity securities reduce the

risk. The risk attached to the use of leverage is called “Financial Risk”. A firm can

avoid or reduce the risk, if it does not employ debt capital in the capital mix.

4. Growth and Stability: In the initial stages, a firm can meet its financial requirements

through long-term sources, particularly by raising equity shares. Once the company is

stable, it can raise debt or preference capital for growth and expansion programs of the

company.

5. Cost of Capital: The cost of capital refers to the expectation of suppliers of funds. The

objective of knowing the cost of capital is to increase the returns on investments, so

that, a firm should earn sufficient profits to repay the interest and installment of

principal to the lenders.

6. Purpose of Finance: The purpose of finance is another factor that influences the

capital structure. If a firm is engaged in business transactions, it can make use of Debt

and Equity mix or can enjoy leverage benefits. For an existing company, funds may be

required for expansion or diversification. It may be financed through retained earnings,

debentures or preference capital. Hence purpose of business influences the Capital

Structure.

7. Retaining Control: The attitude of the management towards retaining control over the

company will have direct impact on the capital structure. If the existing shareholders

want to continue the same holding on the company, they may not encourage the issue

of additional equity shares. Fresh issue of equity share reduces the interest and holding

over the company. The divisible profits percentage of such company will also come

down. In the long run, it affects the market value of the shares. Hence, in the normal

practical situation, the existing equity shareholders direct the management to raise the

additional source only through debentures or preference shares.


8. Flexibility: Flexibility means the firm’s ability to adopt its capital structure to the

needs of changing conditions; its capital structure should be flexible, so that without

much practical difficulties, a firm can change the securities in capital structure. The

degree of flexibility in the capital structure mainly depends on flexibility in fixed

charges, restrictive covenants in loan agreements, terms of redemption and the debt

capacity.

9. Asset Structure: Funds are needed to make investments on fixed assets and current

assets. Fixed assets investments can be met by long-term sources i.e., through the issue

of equity, debentures or preference capital. A portion of current asset investments are

also financed by long-term sources. Short-term sources are used for meeting the

working capital requirement. Hence, Asset Structure influences the Capital Structure.

External Factors

1. Size of the Company: If the size of the business is small, the requirement of finance is

too little. If the size of the business is large, large amount of capital is required. If a firm

plans to raise smaller amount of capital, it selects only few securities in its capital

structure.

2. Nature of the Industry: The nature of industry, method of production, type of product

etc., will also influence the capital structure. A trading company, which has less asset

structure, has to depend mainly on equity or preference capital to meet their capital

requirement.

3. Investors: The statistics of public issues in the primary market indicates more

fluctuations in the flow of funds. Now the investors are cautious over the investments.

Political, socio-economic factors of the country made the investors to be very alert in

their portfolio management.

4. Level of Interest Rate: The rate of interest will have direct impact on borrowed funds.

If the expectation of the banker is more to get high percentage of interest, a firm can

postpone the mobilization of funds or can make use of retained earnings. Hence, it

affects the capital structure.


5. Availability of Funds: The availability of money in the capital and money market will

directly influence the company financial structure. Hence, a finance manager has to

study the flow and availability of funds before he decides about the capital structure.

6. Period of Finance: Funds are required for different purposes.

o Short term (1-3 years) funds are required to meet working capital requirements.

Hence, it is raised through commercial banks (O.D, Cash Credit).

o Medium term finance (8-10 years) is required to meet expansion and

diversification purposes and which can be raised through issue of preference or

debenture capital.

Hence period of finance will also influence the capital structure.

7. Legal Requirements: The legal and statutory requirement of the Government will also

influence the capital structure. SEBI guidelines on investors protection, maintain

Debt: Equity ratio and current ratio, promoter contribution etc., will have direct bearing

on capital structure. Besides this, the monetary and fiscal policies of the government

also affect the capital structure decision.

8. Level of Business Activity: When a level of business activity of a firm is rising, it

requires more funds for expansion or diversification. The company may opt for raising

additional funds through debentures, preference shares or it can borrow term loans.

Hence, it affects the capital structure.

9. Taxation Policy: High corporate tax, high tax on dividend and capital gains directly

influence the decision of capital structure. High tax discourages the issue of equity and

encourages to issue more amount of debt instrument, as the fixed charges on these

securities, i.e., interest can be directly charged to Profit and Loss A/c for income tax

calculations. Hence capital structure of a company is affected.

1.2 INTRODUCTION TO LEVERAGE:

Leverage has been defined as “the action of a lever, and mechanical advantage gained by

it.” In simple words, it is a force applied at a particular point to get the desired result. The


term leverage refers generally to circumstances which bring about an increase in income

volatility. In business, leverage is the means which a business firm can increase the profits.

The force will be applied on debt; the benefit of this is reflected in the form of higher

returns to equity shareholders. It is termed as “Trading on Equity.”

TYPES OF LEVERAGES:

1. Financial Leverage:

The main aim of any business is to maximize the wealth of the firm and increased

return to the equity holders. Earnings per share are a barometer through which

performance of an industrial unit can be measured.

Financial leverage helps the finance manager to select an appropriate mix of capital

structure. Capital is required for the purpose of meeting both long-term and short-term

financial requirement of a business unit. This could be raised through long term

sources, namely, equity shares, debentures, preference shares, etc. Also could be raised

through short term sources namely, over draft, cash credit, bill discounting, etc., can be

raised to fulfill the short-term requirement through the commercial banks. Each of these

instrument is directly associated with the cost.

Operating Income / EBITo Financial Leverage =

Taxable Income / EBT

Significance of Financial Leverage:

Financial leverage is employed to plan the ratio between debt and equity so that earning per

share is improved. Following is the significance of financial leverage:


1) Planning of Capital Structure: The capital structure is concerned with the raising of

long-term funds, both from shareholders and long-term creditors. The effects of

borrowing on cost of capital and financial risk have to be discussed before selecting a

final capital structure.

2) Profit planning: The earning per share is affected by the degree of financial leverage.

If the profitability of the concern is increasing then fixed cost funds will help in

increasing the availability of profits for equity shareholders. Therefore, financial

leverage is important for profit planning.

3) Financial Leverage is said to be a “Second phase Leverage” as it starts off at the point

where the operating leverage stops.

Limitations of financial leverage:

1) Double-edged weapon: It can be successfully employed to increase the earnings of the

shareholders only when the rate of earnings of the company is more than the fixed rate

of interest. On the other hand, if it does not earn as much as the cost of interest bearing

securities, then it will work adversely and hence cannot be employed.

2) Increases risk and rate of interest: Another fact is that every rupee of extra debt

increases the risk and hence the rate of interest on subsequent loans also goes on

increasing. It becomes difficult for the company to obtain further debts without offering

extra securities and higher rates of interest reducing their earnings.

3) Restrictions from financial institutions: The financial institutions also impose

restrictions on companies which resort to excessive trading on equity because of the

risk factor and to maintain a balance in the capital structure of the company.

2. Operating leverage:

There are two major classifications of costs in the organization. They are,

a) Fixes cost

b) Variable cost


The operating leverage has a bearing on fixed costs. The operating leverage will be at a

low degree when fixed costs are less in the production process. Operating leverage

shows the ability of a firm to use fixed operating cost to increase the effect of change

in sales on its operating profits. It shows the relationship between the changes in sales

and the charges in fixed operating income. Thus the operating leverage has impact

mainly on fixed cost, variable cost and contribution.

Contribution o Operating Leverage =

EBIT / Operating profit

Characteristics of Operating leverage:

a) The concept of operating leverage cannot be applied at the breakeven level, because the

operating profit becomes zero.

b) The operating leverage is the reciprocal (inverse) of the Margin of Safety. In view of

the reciprocal relationship, the inference is that higher the operating leverage, lower

will be the margin of safety and higher risk to the company.

c) The operating leverage decreases as the level of production or activity increases,

provided that other things remain the same.

d) The operating leverage is a function of three factors;

i. The amount of fixed cost.

ii. The contribution.

iii. Volume of sales.

e) For levels of activity below the break-even level, operating leverage is negative.

Significance of Operating Leverage:

It is used to know the impact of earnings per share and the price-earnings ratio.

Operating Leverage is based on the principle of marginal costing, where breakeven

point can be calculated at different level of sales.


Any change in sales due to the change in operating cost results in higher operating

profits.

Therefore, Operating Leverage is said to be “First phase Leverage” which

magnifies the profit due to change in sales volume.

3. Combined leverage:

This leverage shows the relationship between a change in sales and the corresponding

variation in taxable income. If the management feels that a certain percentage change in

sales would result in percentage change to taxable income they would like to know the

level or degree of change and hence they adopt this leverage. Thus, degree of leverage

is adopted to forecast the future study of sales levels and resultant increase/decrease in

taxable income.

o Combined Leverage = Operating Leverage × Financial Leverage

Contribution EBITo Combined Leverage = ×

EBIT / Operating profit EBT

Contribution o Combined Leverage =

Earnings before tax [EBT]

Financial Risk :


Financial Leverage not only maximizes the returns to shareholders but also exposes the

firm to high financial risk, (if it is unplanned). The theory says ‘leverage effect can be

enjoyed only up to a particular point of time or stage’, (if all other things are favorable).

If it crosses the expected line (more debt and less equity), increases the financial risk

(interest burden) and ultimately it leads to insolvency. Capital structure only through

equity is also not favorable to the company, as it reduces EPS, (because of non-

existence of debt capital). The entire earnings of the company will be taxable, as a

result of this, it has to declare lower percentage of dividend, in the long run, it would

directly affect the market value of shares.

Business Risk :

Business risk is related to the investment decisions or assets mix of the firm. Business

risk may be defined as the variability in return on assets. Such variability is the result of

internal and external environment, in which the firm has to operate. Given the

environment in which the firm has to operate, business risk is an unavoidable risk.

Therefore, it is the basic duty of the financial executives to take both the risks in taking

financial as well as investment decisions.

Difference between Operating and Financial Leverage


Operating Leverage Financial Leverage

1. Operating leverage is related to the

investment activities (capital

expenditure decision).

2. The fluctuation in the EBIT can be

predicted with the help of operating

leverage.

3. Financial Manager uses the operating

leverage to identify the items of asset

side of the Balance sheet.

4. Operating leverage is used to predict

business risk.

1. Financial leverage is more concerned

with financial matters (mixing of debt

equity in capital structure).

2. The changes of EPS due to Debt:

Equity Mix is predicted by financial

leverage.

3. The uses of financial leverage to make

decisions in the liability side of the

Balance sheet.

4. Financial leverage is used to analyze

the financial risk.


CHAPTER – 2

RESEARCH DESIGN

2.1 STATEMENT OF THE PROBLEM


This study entitled “IMPACT OF LEVERAGES” with special reference to “KAR

MOBILES LTD, BANGALORE”, the problem of statement is to understand the growth and

impact of the leverages on the Earnings Per Share (EPS) and the Capital Structure of the

company.

2.2OBJECTIVES OF THE STUDY

To analyze the pattern of various leverages to the growth of the company.

To study the importance of leverages in the capital gearing of the company.

To examine the impact of financial leverage on earnings per share and dividend.

To assess the interrelationship between financial leverage, operational leverage and

combined leverage.

To make suggestions based on findings.

2.3SCOPE OF THE STUDY

The study of “IMPACT OF LEVERAGES” was restricted to a period of One Month.

2.4METHODOLOGY

Research methodology may be understood as science of study. This project is done

scientifically and in a systematic manner to solve the research problem with the help of

company’s financial statements.

2.4.1 RESEARCH DESIGN

This is a Descriptive Study that aims at interpreting the Impact of Leverages in the

Organization. It includes fact finding enquiries of different kinds. The major purpose of

descriptive research design is description of the state of affairs as it exists at present. In

this method the researcher has no control over the variables and he/she can only report

what had happened, what is happening.

2.4.2 SOURCES OF DATA


PRIMARY DATA: - The information collected for the first time is called primary data

collection.

SECONDARY DATA: - The information collected from various existing resource is

known as secondary data collection. The researcher referred Various Books of different

Authors, Websites, and Annual Reports of the company in this Research.

2.4.3 SAMPLING TECHNIQUES

The methods used in drawing samples from a population usually in such a manner that

the sample will facilitate determination of some hypothesis concerning the population.

There is no need of Sampling Techniques.

2.4.4 SAMPLING SIZE

The sampling size is number of observations used for calculating estimates of given

population.

2.5PLAN OF ANALYSIS

Simple Percentage Analysis was adopted where ever necessary for this study. The data was

classified and tabulated for the purpose of analysis. Percentages were calculated for the

purpose of generalizations. Charts, Graphs and Diagrams have been drawn based on the

tabulation. Inferences were drawn and conclusions were made.

2.6REFERENCE PERIOD

The reference period for this research is 1 Month.

2.7LIMTATIONS OF THE STUDY


The study covered a vast concept, hence wide collection and coverage of

information was not easily possible.

Analysis of data collected has been done on the assumptions that the information

provided by the respondents is genuine.

Due to time constraints, the study was limited to 1 month.

Confidential matters would not be revealed easily.

2.8CHAPTER SCHEME

Chapter 1:- Introduction

Chapter 2:- Research Design

Chapter 3:- Industry and Company Profile

Chapter 4:- Data Analysis & Interpretation

Chapter 5:- Findings

Chapter 6:- Suggestions


CHAPTER - 3

INDUSTRY AND COMPANY PROFILE

3.1 INDUSTRY PROFILE

Introduction

A valve is a device that is used to control the flow of fluids (liquids, gases, fluidized solids, and

slurries) by opening closing or partially obstructing various passageways. The valves can


function or actuate either manually or automatically. With manual valves, an external force is

necessary to actuate the valve while automatic valves are self actuating valves that operate

freely without any external source; they rather need external mechanical devices to function.

Most of the valves have closed as their default position and need some form of external

intervention to function. Fail safe valves return to their actual position (open or close) when the

external force is removed some valves also have a default position of open and they remain

open until closed for special purposes. Common types of valves include gate valves, butterfly

valves, globe valves, ball valves, etc.

Industry scenario

The industrial valve industry is made up of relatively small number of large global business

and a very large number of small to medium-size manufacturing companies many of which

specialize in niche markets, products or applications. The markets in the developed countries

are now relatively mature and are expected to show little growth for new products in the next

few years and the growth in the developed market will be concentrated on the replacement

market that is one third of the total valve market. Russia, France, the United Kingdom and

Taiwan are also notable valve producers, all with over US$1.3billion in annual shipments.

Germany, Italy and Japan are the world’s largest net exporters of valves. The largest and most

technically proficient valve manufacturing industries are generally located in the developed

nations, as evidenced by the fact that the US, Germany, Japan and Italy together accounted for

50% of global valve production in 2004.


Fy3 Fy4 Fy5 Fy6 Fy70

2

4

6

8

10

12

14

16

Industrial production of valves in India (Fy03 - Fy07)

Increasing price sensitivity in the valve market

Valve industry has become much more price and cost sensitive. There has been downward

pressure on the prices with end users demanding very tight costing from plant manufacturers in

difficult markets due to economic conditions. These price cuts are then transmitted down the

purchasing trials of the valve manufacturers. Many valve prices are lower than they were few

years ago and this is impacting the size of the markets.

The advancement of technology provides to achieve faster industrial growth. The engineering

sector has wide scope for the development of Indian economy by providing employment,

effective utilization of natural resources and earning the foreign exchange. Industrialization is

mainly to attain higher levels of economic development and well being of the people of

country.


3.2 COMPANY PROFILE

A. Background and inception of the company

Kar Valves Limited was born out of an electric supply undertaking in the old

Maharaja’s state of Cochin under the name of Cochin State Power and Light

Corporation Limited.

This company was started in the year 1936 and was engaged in distribution of

electricity.

In 1971 this business was nationalized so the company received compensation from the

government and the shareholders decided to invest in the new business activity.

The company was names as “Kar valves limited” and incorporated in the year 1972

under Indian Companies Act, with a licensed capacity of 1.5 million valves per annum.

Mr.L.L.Narayan laid the foundation stone on 30th August 1973 and established as

private organization and started as a manufacturing unit. Sri V.P.Aghoram was

appointed as the Managing Director of the company in 1972.

The company commenced its commercial production in the year 1975 and the first

invoice was made on 12-03-1975 to M/s.Conwest Private Limited, Delhi.

Large valves for Diesel Loco Applications and Export came into focus. This success

led the company to expand its licensed capacity from 1.5 Million to 5 Million per

annum.

KAR MOBILES LIMITED [KML]

1973 Foundation Stone Laid.

1975 Commercial production started and made forays into OEM segmen.

1976 Developed large valves for diesel loco applications.

1977 First exports made to R A Lister & Co.

1988 Capacity enhanced from 1.5 million to 5 million no’s.

1983 Set up plant II, a 100 % EOU, with a capacity of 1.5 million valves.

1991 Promoted “ETA Technologies” for developing special purpose machines.


1995 Received ISO 9000 Certification.

1996 Business Process Re-engineering implemented.

1997 Entered into technical collaboration with TRW Inc., USA.

1998 Human Resource Development established.

1999 Approved by Electro Motive Division [EMD] of General Motors Corporation.

USA as first vendor from India.

2000 TQM and TPM initiated.

2001 Received QS 9000 Certification.

MILESTONES OF KAR MOBILES LTD

The milestones of KAR MOBILES LIMITED are:-

Kar Mobiles Limited is the recipient of the ISO9002 Certificate.

Kar Mobiles Limited has been honored with the “EXCELLENCE OF EXPORTS”

(E&PC) award since 1988 awards.

Kar Mobiles Limited has been ranked number 2 in India.

KAR MOBILES LIMITED, BANGALORE

The unit has grown substantially employing around 688 employees.

Company became the first vendor from India to be approved by Electro Motive

Division [EMD] of General Motors Corporation, USA.

QS-9000 certified by BVQI.

Exports to almost every part of the Globe.

More than 600 types of valves developed over a wide range of applications.

Initiatives like TQM, TPM and Employee involvement.

Well –equipped standards room with testing facilities.

Synergy with reputed local testing institutes enables and ensures high quality products.


Defect-free products meeting the specification of customers.

Negligible warranty claims.

Concern for environment and initiatives for ISO 140000 Certification.

Kar Mobiles Limited also has one more unit in Tumkur.

GOALS OF THE COMPANY

The goals of Kar Mobiles limited are:-

To achieve a profit before tax of 15%.

To achieve 60% turnover from export by 2008-2009.

To achieve CAGR of 10%.

B. Nature of the Business Carried

The Kar Mobiles Limited manufactures valves for all internal combustion engines. The

company is one the diesel oriented unit which supplies valves for all engines both petrol

and diesel and is fully equipped to support its developing market needs. A valve is a

product rarely noticed by the average person, yet it plays an important role in the quality of

our life. Each time you turn on water faucet, use your dishwasher, or turn on a gas range, or

step in the accelerator of your car, you operate a valve.

Valves made from chrome-silicon alloy steel and exhaust from chrome-nickel-silicon alloy

steel (to operate under high temperature and high stress conditions). Valves are also

supplied with liquid nitrating process or hard chrome plating which increases the surface

hardening the stem. This improves resistance with consequent sliding ease.


C. VISION, MISSION AND QUALITY POLICY

Vision

To achieve 2000 Million Sales by 2013 by strengthening our global presence in Large

Engine Valve market.

Mission

o Provide superior products and service to our customers and maintain market

leadership.

o Evolve as an institution that serves the best interests of all stakeholders.

o Ensure the highest standard of ethics and integrity in all our actions.

Motto

“Customer Satisfaction through on-time delivery of superior quality valves” A

testimony to the company’s commitment to quality system through –

o QS 9000 Quality certificate from BVQI.

o Well equipped standards room with testing facilities.

o Negligible warranty claims.

o Initiation like TQM, TPM and employees involvement.

o Concern for environment and initiatives for ISO 14000 certificate.

Quality Policy

Kar Mobiles Limited is committed to comply with ISO/TS 16949 system

requirements and improve customer satisfaction by –

o Identifying and fulfilling all requirements of the clients/customers.

o Complying with all applicable statutory and regulatory requirements.

o Providing training to all employees to particle total quality management and

achieve continual improvement in all areas.


D. Product Profile

RANGE:-

More than 600 types of valves developed over a wide range of applications.

MATERIALS USED TO PRODUCE VALVES:-

Low Carbon, Matensitic Austenitic and Stainless Valve Steels and Nickel and

alloys are used in manufacture of valves.

TYPES OF VALVES MANUFACTURED:-

The entire array of monometal bimetal (friction/butt welded) valves manufactured

available in a range as below:

Head finish: Machine all over, as forged under head.

Seat: Hard faced, Induction hardened.

Tip end: Flame hardened, Induction hardened, Satellite faced, Wafer welded.

Custom built valves for special applications.


MARKET SEGMENT:-

Agriculture/industry/stationery, Passenger car/light commercial vehicles/heavy

commercial vehicles, tractors.

High performance car, Locomotives, Battle tanks, Marine, two wheelers, Valve train

components.

E. AREA OF OPERATION :-

The company has its network all over the globe, and the manufacturing process entirely

takes place in India. They have agents who market their products behalf of the company

and even they sell their product directly to the customers according to their needs and

satisfaction.

CLEINTS / CUSTOMERS:

OVERSEAS:-

GM and EMD - USA

HATZ - GERMANY

Lister petter Ltd- UK

Lombardi SRL-ITALY

Mirrless black stone-UK

Seyr-CHINA

Vega-GERMANY

Wiscon and Federal-USA.

DOMESTIC:-

o Ashok Leyland

o Bajaj Tempo Ltd

o Bharath earth mover’s Ltd

o Cummins India Ltd


o Diesel Locomotive Works

o Escorts Tractors Ltd

o L & T John Deere

o Mahindra & Mahindra Ltd

o Maruti Udyog Ltd

o TATA Engineering Co Ltd

o VST Tillers and Tractors Ltd

o Hero Honda.

Over a quarter century of service in both domestic and overseas markets, has earned for

the company an impressive clients and substantial market share.

Exports are the main thrust area and the company has gained:

o Ship-to-use and preferred supplier status with OEMs.

o Confidence of transcontinental customers.

Kar Mobiles is the first vendor from India approved by GM and EMD – USA.

F. OWNERSHIP PATTERN :

Pattern of Share Holding:-

Sl

No.

Category No. of shares Percentage of share

holding

1. Promoters 1039769 46.42

2. Government of Kerala 37500 1.67

3. Banks 3978 0.18

4. Private bodies corporate 165189 7.37

5. Individual and others 993564 44.36

Total 2240000 100.00


Rane engine valves Ltd (REVL) is the main promoters of the company with 42.18% share in

the company. Rest of the share is dividend among private body corporate, individual and

others, banks and government of Kerala.

G. COMPETITORS :-

o Rane Engine valves Limited.

o Shriram Piston and Rings Limited.

o Auto Field Engineers

o Benera Udyog Limited.

o Duro Valves Limited.

o Gratto Valves Limited.

o Valcram Valves Limited.

H. INFRASTRUCTURE FACILITIES :-

o Canteen

o Ambulance

o Reading room

o Sports/Club

o Books for reference and Books for technical reference, etc.

New equipped machines used in company:

Friction welding

Two manufacturing plants producing over 6.5 million valves per annum.

Access to the latest product and process technology.

Special purpose machines made in-house for captive usage.

Product lines with robust process and stable (Cp).


Separate production lines to manufacture valves for applications ranging from

Motor Cycle to Locomotive and Marine Engines.

I. ACHEIVEMENTS/AWARDS :-

Awards are part of the evolution and growth of every company. They look at these

recognitions as a source of motivation that drives them to pursue higher levels of

performance and excellence. They are proud of every award they have received, and

they greatly value the role they have played in transforming KAR MOBILES into a

high-performance organization.

ACMA – Automobile Components Manufacture Association of India

CII – Confederations of India Industries

EIA – Exports Inspection Agency, etc..

For their excellence in good quality products, customer satisfaction and commitment

1995 – ISO 9000certification, ISO 9002 certification from BVQI.

2001 – QS 9000 certification.

2003 – ISO 14000 certification.

2004 – ISO 15000 certification.

MAJOR DEPARTMENTS IN KAR MOBILES LIMITED:

1. Production Department.

2. Finance Department.

3. Human Resource Department.

4. Marketing Department


J. ORGANISATION CHART OF KAR MOBILES LIMITED :-

CORPORATE


BUSINESS HEAD

SECREATRY

HEAD MARKETIN

G

HEAD FINANCE

PLANT HEAD,

P1 & TQC

HEAD IS & MRP

HEAD ENGINEERING

HEAD CORP.HR

PLANT HEAD,

P2

HEAD MATERIA

LS

FINANCE DEPARTMENT


HEAD FINANCE CORPORATE

HEAD FINANCE PLANT

INCHARGE

PAYROLL &

TREASUARY

INCHARGE

EXCISE &

CUSTOMS

INCHARGE BILLS PAYABL

E

INCHARGE

COSTING TA BILLS

INCHARGE

SOCIETY

INCHARGE

FITMENT COUPON

S

K. Future growth and prospectus :-

Looking forward, the industry displays tremendous potential in generating employment

and boosting entrepreneurship in country. The spate of new investment plans

announced by global and domestic automobile manufacturers promises the emergence

of India as a global hub for auto components.

The industry is transforming, and the boosting demand will see the emergence of

several new payers in industry. The vast market for auto components, and the diverse

products and technology involved ensures a place and role for many. At the same time

the entry of several global automobile manufacturers will bring in more regulation into

the industry and see a pruning of the spurious market. Among the small players in the

unorganized segment, this implies moving away from being standalone companies to

entering into their contact manufacturing or being ancillary units. The newly defined

rules are specialized, development and delivery that hold the key of the success in the

auto component industry.

At KAR MOBILES, they have always taken a long term perspective when preparing

their business strategies. They expect robust all-round growth in the global economy in

the next 10 years. They also believe that the global economy has become more

inclusive. Countries like India and China are now poised to play a larger role in

determining the course of the global economy. Their manufacturing presence in India,

the U.S, Europe and China has positioned them to capture global growth opportunities,

and is also helping downturns, should they occur. In view of this, they are very

optimistic about the future.

KAR MOBILES is a 37 years old company. Since their inspection they have believed

in setting challenging milestones and have worked hard to achieve their goals.


While scale of operations is an important parameter for manufacturing company like

Kar Mobiles, there are other critical areas like :- Technology, Product development,

Customer Service Human Resource in which they are striving to excel. Their goal is to

be the industry benchmark in all these areas, to be an end-to-end service provider to

global customers and provide them with unassailable value. The company in its

continuous quest for excellence seeks new frontiers, delivering best-of-breed products

that meet global quality standards and adopts innovative techniques to further improve

customer service.


Amount

Rs.

Sales

Less: Variable Cost

Contribution

Less: Fixed Cost

Earnings Before Interest and Tax [EBIT]

CHAPTER – 4

DATA ANALYSIS AND INTERPRETATION

MASTER TABLE TO CALCULATE THE LEVERAGES


Amount

Rs.

Sales

Less: Variable Cost

Contribution

Less: Fixed Cost

Earnings Before Interest and Tax [EBIT]

TABLE NO –4.1

Table showing the Changes in EBIT and EBT

Year EBIT EBT F.L (Times)

2005-06 63513 57759 1.09

2006-07 50503 44507 1.13


2007-08 54769 45333 1.2

2008-09 33976 15295 2.22

2009-10 53879 44429 1.21

EBIT Financial Leverage =

EBT

ANALYSIS:

From the above table we can understand that the company’s EBIT and EBT is 63513 and

57759 in 2005-06, 50503 and 44507 in 2006-07, 54769 and 45333 in 2007-08, 33976 and

15295 in 2008-09, 53879 and 44429 in 2009-10 respectively.

GRAPH NO 4.1 SHOWING THE CHANGES IN EBIT AND EBT


2005-06 2006-07 2007-08 2008-09 2009-100

10000

20000

30000

40000

50000

60000

70000

EBIT and EBT

EBITEBT

INTERPRETATION:

From the above graph we can interpret that there has been a gradual increase in the EBIT&

EBT of the organization during 2009-10 bringing about an impact in the financial leverages of

the organization leading to a increase in the EPS of the company.

TABLE NO –4.2

Table showing the Changes in Contribution and EBIT


Year Contribution EBIT O.L (Times)

2005-06 368490 63513 5.8

2006-07 338262 50503 6.7

2007-08 454537 54769 8.3

2008-09 522758 33976 15.39

2009-10 432580 53879 8.02

Contribution

Operating Leverage =

EBIT

ANALYSIS:

From the above table we can understand that the company’s Contribution and EBIT is

368490 and 63513 in 2005-06, 338262 and 50503 in 2006-07, 454537 and 54769 in 2007-08,

522758 and 33976 in 2008-09, 432580 and 53879 in 2009-10 respectively.

GRAPH NO 4.2 SHOWING THE CHANGES IN CONTRIBUTION AND EBIT


2005-06 2006-07 2007-08 2008-09 2009-100

100000

200000

300000

400000

500000

600000

CONTRIBUTION and EBIT

ContributionEBIT

INTERPRETATION:

From the above graph we can interpret that the organizations contribution a difference of sales

to variable cost has been fluctuating with a comparative increase in the EBIT indicating that

the organization has a decline impact on the sales and its operating expenses.

TABLE NO –4.3


Table showing the Changes in Contribution and EBT

Year Contribution EBT C.L (Times)

2005-06 368490 57759 6.37

2006-07 338262 44507 7.60

2007-08 454537 45333 10.02

2008-09 522758 15295 34.18

2009-10 432580 44429 9.73

Contribution

Combined Leverage =

EBT

ANALYSIS:

From the above table we can understand that the company’s Combined Leverage is 6.37 times

in the year 2005-06, 7.60 times in 2006-07, 10.02 times in 2007-08, 34.18 times in 2008-09,

and 9.73 times in 2009-10.


GRAPH NO 4.3 SHOWING THE CHANGES IN CONTRIBUTION AND

EBT

2005-06 2006-07 2007-08 2008-09 2009-100

100000

200000

300000

400000

500000

600000

CONTRIBUTION and EBT

ContributionEBT

INTERPRETATION:

Combined Leverage shows the relationship between change in sales and the corresponding

variation in taxable income. From the above graph we can observe that there have been

fluctuations in the contribution and the EBT of the organization leaving an impact in

company’s operating costs which can inversely affect the taxable income of the company.


TABLE NO – 4.4

Table showing the Comparison Of Financial Leverage

Year F.L (Times)

2005-06 1.09

2006-07 1.13

2007-08 1.2

2008-09 2.22

2009-10 1.21

ANALYSIS:

From the above table we can understand that the company’s Financial Leverage is 1.09 times

in 2005-06, 1.13 times in 2006-07, 1.20 in 2007-08, 2.22 in 2008-09, and 1.21 in 2009-10.


GRAPH NO 4.4 SHOWING THE COMPARISON OF FINANCIAL

LEVERAGE

2005-06 2006-07 2007-08 2008-09 2009-10

0

0.5

1

1.5

2

2.5

COMPARISON OF FINANCIAL LEVERAGE

F.L (Times)

INTERPRETATION:

The above graph helps in inferring that the financial leverages of the company has shown a

upward growth from the year 2005 to 2009 but has had a fall of the leverage in 2010 indicating

that the firm is surrounded with uncertainty leading the firm to financial difficulties.


TABLE NO –4.5

Table showing the Comparison Of Operating Leverage

Year O.L (Times)

2005-06 5.8

2006-07 6.7

2007-08 8.3

2008-09 15.39

2009-10 8.02

ANALYSIS:

From the above table we can understand that the company’s Operating Leverage is 5.8 times

in 2005-06, 6.7 times in 2006-07, 8.3 times in 2007-08, 15.39 times in 2008-09, and 8.02 times

in 2009-10.


GRAPH NO 4.5 SHOWING THE COMPARISON OF OPERATING

LEVERAGE

2005-06 2006-07 2007-08 2008-09 2009-100

2

4

6

8

10

12

14

16

COMPARISON OF OPERATING LEVERAGE

O.L (Times)

INTERPRETATION:

The above graph helps in inferring that the operational leverages of the company has shown a

upward growth from the year 2005 to 2009 but has had a fall in the leverage in 2009-10

indicating that the firm to work towards it fixed operating expenses.


TABLE NO –4.6

Table showing the Comparison Of Combined Leverage

Year C.L (Times)

2005-06 6.37

2006-07 7.60

2007-08 10.02

2008-09 34.18

2009-10 9.73

ANALYSIS:

From the above table we can understand that the company’s Combined Leverage is 6.37 times

in the year 2005-06, 7.60 times in 2006-07, 10.02 times in 2007-08, 34.18 times in 2008-09,

and 9.73 times in 2009-10.


GRAPH NO 4.6 SHOWING THE COMPARISON OF COMBINED

LEVERAGE

2005-06 2006-07 2007-08 2008-09 2009-100

5

10

15

20

25

30

35

40

COMPARISON OF COMBINED LEVERAGE

C.L (Times)

INTERPRETATION:

The above graph helps in inferring that the combined leverage of the firm has dipped down in

the year 2009-10 indicating a warning to the total risk of the organization i.e., care need to be

taken for both the operating risk and financial risk.


TABLE NO –4.7

Table showing Earnings available to Equity Shareholders

Year Earnings Available to Equity share holders

No. of Shares EPS

2005-06 36472 224000 16.28

2006-07 25167 224000 11.24

2007-08 26933 224000 12.02

2008-09 8195 224000 3.66

2009-10 29275 224000 13.07

Earnings Available to Equity Shareholders

EPS = × 100

No. of Equity Shares

ANALYSIS:

From the above table we can understand that Earnings Per Share (EPS) to equity shareholders

is 16.28, 11.24, 12.02, 3.66, and 13.07 in the years 2005-06, 2006-07, 2007-08, 2008-09, and

2009-10 respectively.


GRAPH NO 4.7 SHOWING THE EARNINGS AVAILABLE TO EQUITY

SHAREHOLDERS

Earnings Available To Equity share holders

No. of Shares0

50000

100000

150000

200000

250000

EARNINGS AVAILABLE TO EQUITY SHAREHOLDERS

2005-062006-072007-082008-092009-10

INTERPRETATION:

The above graph shows that Earnings available to equity share holders has increased during the

year 2009-10, which infers that the market value of equity shares has gone higher in the stock

market compared to the past performance.


TABLE NO –4.8

Table showing the Comparison Of EPS

Year EPS

2005-06 16.28

2006-07 11.24

2007-08 12.02

2008-09 3.66

2009-10 13.07

ANALYSIS:

From the above table we can understand that Earnings Per Share (EPS) to equity shareholders

is 16.28, 11.24, 12.02, 3.66, and 13.07 in the years 2005-06, 2006-07, 2007-08, 2008-09, and

2009-10 respectively.


GRAPH NO 4.8 SHOWING THE COMPARISON OF EARNINGS PER

SHARE

2005-06 2006-07 2007-08 2008-09 2009-100

2

4

6

8

10

12

14

16

18

COMPARISON OF EPS

EPS

INTERPRETATION:

The above graph interprets that the Earnings Per Share of the organization has increased in the

year 2009-2010 indicating that the company has been able to devise an appropriate capital

structure to vary the EBIT of the organization.


TABLE NO –4.9

Table showing Debt Equity Ratio

Year Long Term Debt Equity Share Capital Long Term Debt / Equity

2005-06 95221 22400 4.25

2006-07 88047 22400 3.93

2007-08 146576 22400 6.54

2008-09 165505 22400 7.38

2009-10 81909 22400 3.66

Long Term Debt

Debt Equity Ratio =

Equity Share Capital

ANALYSIS:

From the above table we can understand that the debt equity ratio for the year 2005-06 is 4.25,

2006-07 is 3.93, 2007-08 is 6.54, 2008-09 is 7.38, and in 2009-10 its 3.66.


GRAPH NO 4.9 SHOWING DEBT EQUITY RATIO

2005-06 2006-07 2007-08 2008-09 2009-100

1

2

3

4

5

6

7

8

LONG TERM DEBT AND EQUITY SHARE CAPITAL

Long Term Debt / Equity

INTERPRETATION:

The above graph helps in inferring that there is a drastic increase in the Long Term Debt to

Equity Share Capital Ratio from the year 2005-06 to 2009-10 i.e., 4.25, 3.93, 6.53, 7.38, 3.66

respectively, which infers that the debt equity ratio is unfavorable as it is higher than the

standard ratio 2:1, where the margin of safety for creditors will be less.


TABLE NO –4.10

Table showing Debt to Total Capital Ratio / Funded Debt to Total Capitalization Ratio

Year Capital Employed

Long Term Debt Long Term Debt / Capital Employed * 100

2005-06 304606 95221 31.26%

2006-07 290585 88047 30.30%

2007-08 365564 146576 40.09%

2008-09 387447 165505 42.71%

2009-10 321346 81909 25.49%Long Term Debt

Debt to Total Capital Ratio = × 100

Capital Employed

ANALYSIS:

From the above table we can understand that Debt to Total Capital ratio for the years 2005-06,

2006-07, 2007-08, 2008-09, and 2009-10 are 31.26%, 30.30%, 40.09%, 42.71%, and 25.49%

respectively.

GRAPH NO 4.10 SHOWING DEBT TO TOTAL CAPITAL RATIO


2005-06 2006-07 2007-08 2008-09 2009-100.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

CAPITAL EMPLOYED AND LONG TERM DEBT

Long Term Debt / Capital Employed * 100

INTERPRETATION:

From the above graph we can infer that Debt to Total Capital Ratio is 25.49% in 2009-10

which is below the standards (50% to 55%) indicating the company can raise its long term

sources of funds.

TABLE NO – 4.11


Table showing Net Worth to Total Capital Ratio and Debt to Total Capital Ratio

YearCapital

EmployedNet

Worth

Net Worth / Capital

Employed * 100

Long Term Debt

Long Term Debt / Capital

Employed * 100

2005-06 304606 207364 68.07% 95221 31.26%

2006-07 290585 202538 69.70% 88047 30.30%

2007-08 365564 218988 59.90% 146576 40.09%

2008-09 387447 221942 57.28% 165505 42.71%

2009-10 321346 239437 74.51% 81909 25.49%

Net Worth

Net worth to Total Capital Ratio = × 100

Capital Employed

Long Term Debt

Debt to Total Capital Ratio = × 100

Capital Employed

ANALYSIS:

The above table shows that the net worth to capital employed ratio is 68.07% in 2005-06,

69.70% in 2006-07, 59.90% in 2007-08, 57.28% in 2008-09, and 74.51% in 2009-10.

It also shows that debt to total capital ratio is 31.26% in 2005-06, 30.30% in 2006-07, 40.09%

in 2007-08, 42.71% in 2008-09, and 25.49% in 2009-10.


GRAPH NO 4.11 SHOWING NET WORTH TO TOTAL CAPITAL

RATIO, DEBT TO CAPITAL RATIO

2005-06 2006-07 2007-08 2008-09 2009-100.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

NET WORTH TO TOTAL CAPITAL RATIO & DEBT TO TOTAL CAPITAL RATIO

Net Worth / Capital Employed * 100Long Term Debt / Capital Employed * 100

INTERPRETATION:

The above graph shows that the net worth to total capital ratio has increased in the years

2005-06, 2006-07, and 2009-10 and decreased in 2007-08 and 2008-09 indicating utilization of

funds.

It also shows that debt to total capital ratio has decreased in 2009-10 to 25.49% indicating the

opportunities for the organization to raise long term debts from external sources.


TABLE NO –4.12

Table showing External-Internal Equity Ratio

Year Long Term Debt Net Worth Long Term Debt / Net Worth

2005-06 95221 207364 0.45

2006-07 88047 202538 0.43

2007-08 146576 218988 0.66

2008-09 165505 221942 0.74

2009-10 81909 239437 0.34

Long Term Debt

Debt Capital to Net Worth Ratio =

Net Worth

ANALYSIS:

The above table shows that Debt capital to Net Worth ratio is 0.45 in 2005-06, 0.43 in 2006-07,

0.66 in 2007-08, 0.74 in 2008-09, and 0.34 in 2009-10.


GRAPH NO 4.12 SHOWING EXTERNAL INTERNAL EQUITY RATIO

2005-06 2006-07 2007-08 2008-09 2009-10

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

LONG TERM DEBT AND NET WORTH

External-Internal Equity Ratio

INTERPRETATION:

The above graph shows that Debt Capital to Net Worth ratio for the year 2009-10 is 0.34 which

is less than the standards mentioned (1:1) and hence, the organization is in a favorable position

with respect to its sources of external and internal funds.


DEGREE OF FINANCIAL LEVERAGE (DFL)

o Financial leverage is concerned with the effect of changes in EBIT on the earnings

available to equity shareholders. It is the ability of the firm to use fixed financial

charges to magnify the effect of changes in EBIT on the EPS.

o EBIT-EPS analysis is widely used method of examining the effect of financial leverage.

High fixed financial cost increases the financial leverage and financial risk. The

financial risk refers to the risk of the firm not being able to cover its fixed financial

cost. In case of default, the firm can be technically forced into liquidation. Larger is the

amount of fixed financial cost the larger is the EBIT required to recover them. DFL

depends on fixed financial cost.

o When firms earn more on the asset purchased with the funds than the fixed cost of their

use, the financial leverage is favorable. Unfavorable leverages occur when the firm

does not earn as much as the firm’s cost.

% change in EPS

Degree of Financial Leverage = > 1

% change in EBIT


TABLE NO –4.13

Table showing the Degree of Financial leverage (DFL)

Year % Change in EPS % Change in EBIT DFL (%)

2005-06 0 0 0

2006-07 -30.95 -20.5 1.5

2007-08 6.93 8.44 0.82

2008-09 -69.55 -37.96 1.83

2009-10 257.1 58.58 4.4

Current Year EPS – Previous Year EPS

% Change in EPS =

Previous Year EPS

Current Year EBIT – Previous Year EBIT

% Change in EBIT =

Previous Year EBIT

ANALYSIS:

The above table shows that the degree of financial leverage is 1.5% in 2006-07, 0.82% in

2007-08, 1.83% in 2008-09, and 4.40% in 2009-10. The percentage change in EPS is due to

percentage change in EBIT.


GRAPH NO 4.13 SHOWING THE DEGREE OF FINANCIAL

LEVERAGE

2005-06 2006-07 2007-08 2008-09 2009-100

0.5

1

1.5

2

2.5

3

3.5

4

4.5

DFL (%)

DFL (%)

INTERPRETATION:

The above graph shows that the degree of financial leverage is 1.5% in 2006-07, 0.82% in

2007-08, 1.83% in 2008-09, and 4.40% in 2009-10, which infers that the degree of financial

leverage is favorable to company in 2006-07, 2008-09, 2009-10 and unfavorable in 2007-08

because greater the degree of financial leverage when higher is the quotient of % change in

EPS due to % change in EBIT.


DEGREE OF OPERATING LEVERAGE (DOL)

o Degree of operating leverage is a measure of business or operating risk of the firm.

Operating risk is the risk of the firm not being able to cover its fixed operating cost.

The larger is the magnitude of such cost, the larger is the volume of sales required to

recover them. Thus, the Degree of Operational Leverage depends on fixed operating

cost.

o High Degree of Operating Leverage (DOL) is GOOD when Sales Revenue is rising

and BAD when they are falling.

o Operating Leverage is favorable when increase in sales volume has a positive effect on

EBIT and unfavorable when decrease in sales volume has a negative effect on EBIT.

% Change in EBIT

Degree of Operating Leverage = > 1

% Change in Sales


TABLE NO –4.14

Table showing Degree of Operating Leverage

Year % Change in EBIT % Change in Sales DOL (%)

2005-06 0 0 0

2006-07 -20.48 -5.35 3.82

2007-08 8.44 27.64 0.31

2008-09 -37.96 9.6 -3.95

2009-10 58.58 -13.68 -4.28

Current Year EBIT – Previous Year EBIT

% Change in EBIT =

Previous Year EBIT

Current Year Sales – Previous Year Sales

% Change in Sales =

Previous Year Sales

ANALYSIS:

From the above table we can infer that the degree of operating leverage is 3.82% in 2006-07,

0.31% in 2007-08, -3.95% in 2008-09, and -4.28% in 2009-10.


GRAPH NO 4.14 SHOWING THE DEGREE OF OPERATING

LEVERAGE

2005-06 2006-07 2007-08 2008-09 2009-10

-5

-4

-3

-2

-1

0

1

2

3

4

DOL (%)

DOL (%)

INTERPRETATION:

From the above graph we can interpret that the degree of operating leverage is 3.82% in 2006-

07, 0.31% in 2007-08, -3.95% in 2008-09, and -4.28% in 2009-10, which infers that degree of

operating leverage is favorable in the year 2006-07 and unfavorable in 2007-08, 2008-09, and

2009-10 because greater the degree of operating leverages when higher is the quotient of %

change in EBIT due to % change in sales bringing about an impact in the organizations fixed

operating cost.


DEGREE OF COMBINED LEVERAGE (DCL)

o Degree of Combined Leverage measures the % change in Earnings Per Share (EPS) due

to % change in Sales. It can work in either directions, it is favorable when Sales

increases and unfavorable when Sales decreases.

o Usefulness of DCL lies in the fact that which indicates the effect, the sales changes will

have on EPS. Its potential is also great in the area of choosing financial plans for new

investments.

% Change in EPS

Degree of Combined Leverage =

% Change in Sales


TABLE NO –4.15

Table showing Degree of Combined Leverage

Year % Change in EPS % Change in Sales DCL (%)

2005-06 0 0 0

2006-07 -30.96 -5.35 5.78

2007-08 6.94 27.64 0.25

2008-09 -69.55 9.6 -7.24

2009-10 257.1 -13.68 -18.8

Current Year EPS – Previous Year EPS

% Change in EPS =

Previous Year EPS

Current Year Sales – Previous Year Sales

% Change in Sales =

Previous Year Sales

ANALYSIS:


The above table shows that the degree of combined leverage is 5.78% in 2006-07, 0.25% in

2007-08, -7.24% in 2008-09, and -18.8% in 2009-10.

GRAPH NO 4.15 SHOWING THE DEGREE OF COMBINED

LEVERAGE

2005-06 2006-07 2007-08 2008-09 2009-10

-20

-15

-10

-5

0

5

10

DCL (%)

DCL (%)

INTERPRETATION:

From the above graph we can interpret that Degree of Combined Leverage is 5.78% in

2006-07, 0.25% in 2007-08, -7.24% in 2008-09, and -18.80% in 2009-10, which infers that


company’s combined leverage is favorable in 2007-08, 2008-09 and unfavorable in 2006-07

and 2009-10 due to reduction in % of Sales.

CHAPTER – 5

FINDINGS


FINDINGS:

It has been found that the financing activity of the firm has an effect in the EBIT

defining the ability of the firm to use its fixed financial charges.

It has been found that decrease in the operating leverage indicates a decrease in the

sales volume which is unfavorable to the organization.

It has been found that the total risk of the firm is within manageable limits as the

Degree of Financial leverage is high.

It has been found that Margin of Safety is less for Creditors as debt-equity ratio is

unfavorable.

It has been found that the Debt to Total Capital Ratio is favorable to the organization by

which the firm can raise its long-term finance.

It has been found that the Net Worth to Total Capital Ratio indicates that the firm has

been utilizing its funds properly.

It has been found that the firm has the most appropriate combination of Debt and

Equity indicating a trade of between risk and return.


CHAPTER –6

SUGGESTIONS


SUGGESTIONS:

Based on the analysis and findings from the financial statements of the company,

The following improvement areas are recommended in order to achieve Efficiency and

Profitability of the organization.

The firm needs to increase its sales volume keeping in control the operating

profitability.

The firm’s total risk should be brought into manageable limits by increasing the

Degree of Operating Leverage and decreasing the Degree of Financial leverage.

The firm needs to focus on increasing its Margin of Safety to its Creditors (Outsiders).

The company can plan on expansion as it has a good financial position to raise its

Long-Term Funds.


CHAPTER – 7

BIBLIOGRAHY

REFERENCE BOOKS

Financial Management by REDDY, APPANNAIAH, and SATYAPRASAD.

Financial Management by M.Y.KHAN.

Financial Management by I.M.PANDEY.

Financial Management by PRASANNA CHANDRA.


Financial Management by CA.C. RAMA GOPAL.

Management Accounting by M.N.ARORA.

Management Accounting by SHASHI.K.GUPTA, and R.K.SHARMA.

WEBSITES

www.rane.co.in


http://www.rane.co.in/

CHAPTER – 8

ANNEXURE

BALANCE SHEET (Rs. In thousands)

PARTICULARS2006 2007Rs. Rs.

1. SOURCES OF FUNDS 1. Shareholder's Funds a. Share Capital 22,400 22,400 b. Reserves and Surplus 184,964 207,364 180,138 202,538 2. Loan Funds a. Secured Loans 91,447 87,607 b. Unsecured Loans 3,774 95,221 440 88,047 3. Deferred Tax Liability 2,021 -


TOTAL 304,606 290,585 2. APPLICATION OF FUNDS 1. Fixed Assets a. Gross Block at Cost 256,961 269,722 b. Less : Depreciation 141,329 149,391 c. Net Block 115,632 120,331 d. Capital Work-in-progress at cost 7,466 123,098 4,148 124,479 2. Investments 260 10 3. Deferred Tax Asset - 5,994 4. Current Assets, Loans & Advances a. Inventories 146,119 129,790 b. Sundry Debtors 158,576 170,703 c. Cash and Bank Balances 3,016 6,319 d. Other Current Assets 10,270 11,066 e. Loans and Advances 17,014 334,995 17,149 335,027 Less: Current Liabilities and Provisions a. Liabilities 135,345 130,042 b. Provisions 19,392 154,737 58,983 189,025 Net Current Assets 180,258 146,002 5. Miscellaneous Expenditure Voluntary Retirement 990 14,100

TOTAL 304,606 290,585


PARTICULARS2008 2009Rs. Rs.

1. SOURCES OF FUNDS 1. Shareholder's Funds a. Share Capital 22,400 22,400 b. Reserves and Surplus 196,588 218,988 199,542 221,942 2. Loan Funds a. Secured Loans 146,576 165,505 b. Unsecured Loans - 146,576 - 165,505 3. Deferred Tax Liability - -

TOTAL 365,564 387,447


2. APPLICATION OF FUNDS 1. Fixed Assets a. Gross Block at Cost 292,320 359,186 b. Less : Depreciation 162,169 174,859 c. Net Block 130,151 184,327 d. Capital Work-in-progress at cost 14,556 144,707 3,865 188,192 2. Investments 10 10 3. Deferred Tax Asset 7,567 4,467 4. Current Assets, Loans & Advances a. Inventories 167,470 106,223 b. Sundry Debtors 195,105 215,235 c. Cash and Bank Balances 7,962 2,972 d. Other Current Assets 34,440 30,621 e. Loans and Advances 21,428 426,405 30,441 385,492 Less: Current Liabilities and Provisions a. Liabilities 167,757 124,412 b. Provisions 45,368 213,125 66,302 190,714 Net Current Assets 213,280 194,778 5. Miscellaneous Expenditure Voluntary Retirement - -

TOTAL 365,564 387,447


PARTICULARS2010Rs.

1. SOURCES OF FUNDS 1. Shareholder's Funds a. Share Capital 22,400 b. Reserves and Surplus 217,037 239,437 2. Loan Funds a. Secured Loans 81,909 b. Unsecured Loans - 81,909 3. Deferred Tax Liability -

TOTAL 321,346


2. APPLICATION OF FUNDS 1. Fixed Assets a. Gross Block at Cost 377,303 b. Less : Depreciation 190,124 c. Net Block 187,179 d. Capital Work-in-progress at cost 21,118 208,297 2. Investments 10 3. Deferred Tax Asset 3,137 4. Current Assets, Loans & Advances a. Inventories 81,793 b. Sundry Debtors 163,758 c. Cash and Bank Balances 4,029 d. Other Current Assets 17,356 e. Loans and Advances 21,984 288,920 Less: Current Liabilities and Provisions a. Liabilities 110,279 b. Provisions 68,739 179,018 Net Current Assets 109,902 5. Miscellaneous Expenditure Voluntary Retirement -

TOTAL 321,346

PROFIT AND LOSS ACCOUNT (Rs. In thousands)PARTICULARS 2006 2007

Rs. Rs.INCOME Gross Sales 765,288 728,746Less: Excise Duty 57,006 58,392Net sales 708,282 670,354Operating Revenues 28,144 34,174Other Income 6,711 3,534

TOTAL 743,137 708,062 EXPENDITUREMaterial Cost of Goods Sold - 263,812Raw materials consumed / Sold 272,466 -Purchases of Finished Items 7,012 -


Manufacturing and Other Expenses 385,951 378,910TOTAL 665,429 642,722

Operating Profit 77,708 65,340 Interest 5,754 5,996Depreciation 14,195 14,837Profit Before Tax 57,759 44,507Less: Provision for Taxation - Current 21,400 13,459 - Deferred 2,413 3,381 - Fringe Benefits 2,300 2,500Profit After Tax 36,472 25,167Profit brought forward from last year 10,885 17,140Profit available for Appropriation 47,357 42,307Less: Transfer to General Reserve 20,000 20,000Balance Profit 27,357 22,307Proposed Dividend on Equity Shares - Interim 8,960 6,720 - Final - -Tax on Proposed Dividend 1,257 1,142 Balance Carried to Balance Sheet 17,140 14,445Number of Shares of Rs.10/- each. 224,000 224,000Earnings per share - Basic and Diluted 16.28 11.24

PROFIT AND LOSS ACCOUNT (Rs. In thousands)PARTICULARS 2008 2009

Rs. Rs.INCOMEGross Sales 920,439 998,370Less: Excise Duty 66,826 62,814Net sales 853,613 935,556Operating Revenues 45,302 35,463Other Income 5,704 829

TOTAL 904,619 971,848 EXPENDITUREMaterial Cost of Goods Sold 376,009 448,142Raw materials consumed / Sold - -Purchases of Finished Items - -Manufacturing and Other Expenses 458,043 471,119

TOTAL 834,052 919,261


Operating Profit 70,567 52,587 Interest 9,436 18,681Depreciation 15,798 18,611Profit Before Tax 45,333 15,295Less: Provision for Taxation - Current 17,573 2,000 - Deferred 1,573 3,100 - Fringe Benefits 2,400 2,000Profit After Tax 26,933 8,195Profit brought forward from last year 14,445 10,895Profit available for Appropriation 41,378 19,090Less: Transfer to General Reserve 20,000 1,000Balance Profit 21,378 18,090Proposed Dividend on Equity Shares - Interim 8,960 - - Final - 4,480Tax on Proposed Dividend 1,523 761 Balance Carried to Balance Sheet 10,895 12,849Number of Shares of Rs.10/- each. 224,000 224,000Earnings per share - Basic and Diluted 12.02 3.66

PROFIT AND LOSS ACCOUNT (Rs. In thousands)

PARTICULARS 2010 Rs.INCOMEGross Sales 855,767Less: Excise Duty 48,188Net sales 807,579Operating Revenues 26,320Other Income 85

TOTAL 833,984 EXPENDITUREMaterial Cost of Goods Sold 331,818Raw materials consumed / Sold -Purchases of Finished Items -Manufacturing and Other Expenses 428,451

TOTAL 760,269Operating Profit 73,715


Interest 9,450Depreciation 19,836Profit Before Tax 44,429Less: Provision for Taxation - Current 14,200 - Deferred 1,330 - Fringe Benefits 376Profit After Tax 29,275Profit brought forward from last year 12,849Profit available for Appropriation 42,124Less: Transfer to General Reserve 20,000Balance Profit 22,124Proposed Dividend on Equity Shares - Interim 6,720 - Final 3,360Tax on Proposed Dividend 1,700 Balance Carried to Balance Sheet 10,344Number of Shares of Rs.10/- each. 224,000Earnings per share - Basic and Diluted 13.07


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