AFM ASSIGNMENT II

ZERO DEBT PROFITABLE COMPANIES

Submitted by
Rahul P Amit Mishra Hemand Vinu Pillai Karthik K Janardhanan 12053 12004 1200 120

1) Are certain industries more likely to be highly leveraged than others? What could be the industry characteristics that have a bearing on leverage? Identify 3 highly leveraged and 3 minimal (even zero) leveraged industries to substantiate your answer.

Companies with high leverage a) Sterling Holiday Resorts (India) Hospitality Industry

Sterling Holiday Resorts (India) Ltd is a pioneer in vacation ownership and a leading leisure hospitality company. It was incorporated in 1986 with the vision of delivering great holiday experiences to Indian families. Currently, the company has a total of 1,385 rooms spread across a network of 18 resorts at 15 scenic holiday destinations in India. The company also has 13 additional sites where it plans to add new resorts in the coming years. As on March 31, 2012, the company has a consolidated debt of around Rs 223 crore. Its debt to equity ratio stands at 8.87 times, which is very high.

b) Adani Power Power Industry

An Adani Group company, Adani Power is one of the leading power generation companies in India with total generation capacity of 16,500 MW of which 4,620 MW is currently operational capacity, mostly based on imported coal. Recently the company signed a fuel supply agreement with Coal India but the details are not yet available. It has a total debt of over Rs 38,000 crore as on March 31, 2012 due to which its debt to equity ratio is as high as 6.39x. Its interest payment rose by three times in FY12 due to which Adani Power posted loss in that year.

c) Binani Industries

Binani Industries is a flagship company of the Binani Group with a presence in various diversified businesses such as cement, zinc, metals, fiber glass, minerals, etc. The companys primary revenue comes from the cement and zinc business. Being in various businesses the consolidated debt level of the company has increased to Rs 3,653 crore, taking its debt to equity level at 9.19, which is very high.

2) Pick out 3 zero debt profitable companies. Why do you think they are zero debt even in the presence of huge interest tax shields? Substantiate your reasons with data analysis. You should refer published material including annual reports, analyst reports?

Zero Debt Companies a) TITAN INDUSTRIES LIMITED

Titan Company Limited is an Indian designer and manufacturer of watches, jewelry, precision engineering components and other accessories including sunglasses, wallets, bags and belts. Their brands include Titan, Fastrack, Sonata, Nebula, Raga, Edge, Steel, Regalia, Octane, Xylys, Eye+ and Tanishq . It is a joint venture between the Tata Group, and the Tamil Nadu Industrial Development Corporation. Titan is the world's fifth largest wrist watch manufacturer and exports watches to nearly 40 countries around the world. Financial data Particulars Liabilities Share Capital Mar'13 12 Months 88.78 Mar'12 12 Months 88.78 Mar'11 12 Months 44.39 Mar'10 12 Months 44.39 Mar'09 12 Months 44.39

Reserves & Surplus Net Worth Secured Loan Unsecured Loan TOTAL LIABILITIES

1876.09 1964.87 .00 .00 1964.87

1361.12 1449.90 5.89 .00 1455.79

980.99 1025.38 67.70 .00 1093.08

679.99 724.38 72.79 .00 797.17

506.85 551.24 116.76 58.65 726.65

(Source : http://economictimes.indiatimes.com/titan-industries-ltd/balancesheet/companyid12903.cms)

Financial Ratios
Ratio Debt Equity Ratio (%) Profit Before Interest And Tax Margin (%) Net Profit Margin (%) Interest Cover 2013 00 2012 00 2011 00 2010 .00042 2009 .381

9.36

9.24

8.84

8.02

7.84

7.10 20.87

6.71 21.04

6.40 79.18

5.34 15.26

4.08 10.54

Why Titan is a Zero debt company? The watch and jewellery leader in the organised segment, Titan Industries, is likely to see robust sales growth on the back of rising income levels and stable gold prices. Volumes in watches and jewellery grew 12 per cent and 50 per cent, respectively, in FY08. They later slipped to a negative five per cent for watches and 18 per cent for jewellery in FY09, but recovered in FY10. However, as gold prices stabilise, volumes in the jewellery segment are expected to bounce back. Overall, revenues and earnings have managed to rise at a compounded annual growth rate of 33 per cent and 66 per cent, respectively, since FY05. But, higher gold prices had taken a toll on the jewellery business. Before 2008, the company not only faced lower volumes due to high prices, but also faced other risks, especially inventory gains and losses. The company generally uses gold on lease facility and pays rent on the yellow metal till it is consumed, point analysts. It closes gold contracts at the time of product sale, and not at the time of purchase, say analysts at Prabhudas Lilladhar. According to the management, this strategy ensures 90-95 per cent hedging and the company does not need to carry any naked inventory on its balance sheet, thus, preventing it from any mark-to-market losses or gains. Before April 2008, Titan used to apply fixed making charges on per gram basis, thus, exposing itself to margin volatility in an environment of rising gold prices. From April 2008, Titan has linked making charges to gold prices, charging anything between 16 per cent and 20 per cent of the gold price, thereby ensuring stable margins.

The watch segment, which contributes 22 per cent to its revenues and 46 per cent to earnings before interest and tax, has also been seeing better volumes. The market leader in the branded space is expected to see steady realisations at Rs 950 to Rs 1,000 and better margins as the premium segment expands. Importantly, the company enjoys a 51 per cent premium over the Sensex, courtesy its brand presence. This premium is expected to persist, as its returns-oncapital employed remains high at around 40 per cent. Also, it has steadily generated enough cash from the business to become a zero-debt company.

WHIRLPOOL INDIA LTD

Whirlpool acquired Kelvinator India Limited in 1995 and marked an entry into Indian refrigerator market as well. The same year also saw acquisition of major share in TVS joint venture and later in 1996, Kelvinator and TVS acquisitions were merged to create Indian home appliance leader of the future, Whirlpool India. This expanded the company's portfolio in the Indian subcontinent to washing machines, refrigerator, microwave ovens and air conditioners. Today, Whirlpool is the most recognized brand in home appliances in India and holds a market share of over 25%. The company owns three state-of-the-art manufacturing facilities at Faridabad, Pondicherry and Pune. Each of these manufacturing set-ups features an infrastructure that is witness of Whirlpool's commitment to consumer interests and advanced technology.

Particulars Liabilities Share Capital Reserves & Surplus Net Worth Secured Loan Unsecured Loan TOTAL LIABILITIES

Mar'13 12 Months 126.87 490.67 617.54 .00 .00 617.54

Mar'12 12 Months 126.87 349.45 490.19 .00 .00 490.19

Mar'11 12 Months 180.72 227.39 422.38 .00 .00 422.38

Mar'10 12 Months 279.21 72.84 366.71 .00 .15 366.86

Mar'09 12 Months 279.21 9.82 304.09 .00 110.24 414.32

(Source: http://economictimes.indiatimes.com/whirlpool-of-indialtd/balancesheet/companyid-13483.cms)

Ratio Debt Equity Ratio (%) Long Term Debt Equity Ratio (%) Profit Before Interest And Tax Margin (%) Net Profit Margin (%)

2013
--

2012
--

2011
0.15

2010
0.76

2009
1.92

--

--

0.15

0.76

1.77

4.96

5.89

7.34

8.03

5.40

4.00

4.05

5.37

5.67

3.62

Why whirlpool is a zero debt company?

Whirlpool is a zero debt company because whirlpool feels that zero debt can help in increasing its share value and also it has high income which makes the company debt free. The company have surplus amount of money which also contributed to zero debt.

Goodyear India Ltd

Goodyear's presence in India is over 90 years old, with two plants, one each in Ballabgarh and Aurangabad. In the passenger car segment, Goodyear India supplies tyres to many of the leading Original Equipment Manufacturers. Goodyear India has also been a pioneer in introducing tubeless radial tyres in this segment. In the farm segment, in India, Goodyear tyres are supplied to all the major tractor companies. In 2010/11, Goodyear India was awarded the Superbrand status.

Particulars Liabilities Share Capital Reserves & Surplus Net Worth Secured Loan

Dec'12 12 Months 23.07 330.89 353.96 .00

Dec'11 12 Months 23.07 290.38 316.53 .00

Dec'10 12 Months 23.07 244.49 270.75 .00

Dec'09 12 Months 23.07 188.44 214.83 .00

Dec'08 12 Months 23.07 134.24 160.76 .00

Unsecured Loan TOTAL LIABILITIES

.00 353.96

.00 316.53

.00 270.75

.00 214.83

.00 160.76

(Source:http://economictimes.indiatimes.com/goodyear-india-ltd/balancesheet/companyid13718.cms)

Ratio Debt Equity Ratio (%) Long Term Debt Equity Ratio (%) Profit Before Interest And Tax Margin (%) Net Profit Margin (%)

2013 00

2012 00

2011 00

2010 00

2009 00

00
4.43

00
6.16

00
7.81

00
11.30

00
4.82

3.74

4.24

5.72

7.16

3.47

Goodyear India has maintained a return-on-capital of over 30% since the past five years. It is a zero-debt company and has a cash balance of Rs 250 crore. Despite high rubber prices in 2011, the company was able to post a profit of Rs 64 crore compared with Rs 74 crore in 2010. The average rubber prices in 2011 were 27% higher than in 2010. The company is currently trading a P/E 11.8, while its peers like Apollo Tyres and MRF are trading at a P/E of 9.4 and 6.3 respectively. However, Goodyear India does not look expensive due to its superior balance sheet, higher operating margins and likely growth in earnings on the back of stable rubber prices. All these factors proves that goodyear does not need to depend on debt

*(Article on companies with zero/low debt)

Investments in debt-free companies like ITC, Hindustan Unilever and Voltas pay off for investors
Investors holding shares of companies such asITC, Hindustan Unilever, Voltas and Bata India have become richer by 20-70% in the year through July compared with those owning scrips of Bharti Airtel, Adani Enterprises and Reliance Communications, which fell 20% and 42%, asstock markets rewarded companies with little or no debt while punishing those who piled up large debt on their books.

Thirty eight out of 54 BSE 'A' group companies, excluding public sector and banking stocks, with no debt or liabilities below Rs 500 crore have outperformed the Sensex, which rose 14% in the year through July, while 22 out of 30 stocks with over Rs 10,000 crore debt have underperformed, an ETstudy has shown. Analysts said companies with low debt and strong balance sheets have more stable cash flows and yield better returns for investors. "When interest costs range as high as 13-14%, not many companies are keen on borrowing to finance expansion, given the difficult economic situation and uncertain policies" said Sudip Bandyopadhyay, MD and CEO, Destimoney Securities. "In such a scenario companies with little debt and high cash flows can only grow and create wealth" For instance, Bata India, the largest footwear retailer in India with over 1,300 stores is one of the best performers in the bourses among BSE 'A' group stocks with nearly 68% return so far this year. The shift in strategy like focus on enhancing the premium portfolio, aggressive store expansion and refurbishment plans with a low debt of Rs 19 crore and over Rs 508 crore reserves as of March 2012 has led to accelerated growth for Bata. Eicher Motors, maker of Royal Enfield, and pizza maker Jubilant Foodworks, are classic examples of no or low debt companies generating stellar returns. Eicher Motors has debt of a mere Rs 150 crore while Jubilant Foodworks is a debt-free company. Eicher and Jubilant respectively have given mammoth returns of 578% and 410% over the past three years. "In a tumbling economy, companies with huge loans are facing problems in servicing debt as their profitability and cash flows are under pressure. On the other side, companies with comparatively high cash positions, have flexibility to fund growth-inducing expansion plans" said Dipen Shah, head of research at Kotak Securities. The best performers among the A group stocks, Wockhardt and Strides Arcolab, have managed to generate 365% and 105% year-to-July returns, respectively, partly because they have reduced their debt in the last one year. Wockhadt also restructured its debt after defaulting on $110 million in overseas bonds in 2009.

India's second-largest IT exporter Infosys is the only exception in the debt-free universe of BSE 'A' group to have given a negative return this year. Infosys stock was beaten down heavily over the past few months as the company has failed to meet even watered-down expectations.

The study also reveals that the worst performers of the BSE 'A' Group stocks such as Adani Enterprises, Adani Power, Bharti Airtel, Torrent Power and Reliance Communications have huge debt on their books.

References
www.titan.in

http://www.business-standard.com/article/opinion/titan-industries-regaining-the-lustre110071300041_1.html www.capitaline.com http://articles.economictimes.indiatimes.com/2012-08-23/news/33342237_1_low-debt-crore-debtbata-india http://articles.economictimes.indiatimes.com/2012-05-14/news/31701208_1_rubber-prices-majorrubber-goodyear-india http://www.moneycontrol.com/stocks/company_info/print_main.php http://indiaamazingstocks.blogspot.in/p/zero-debt-companies.html www.goodyear.co.in