REPORT ON STRATEGIC

CORPORATE FINANCE
INDUSTRY- BIOTECHNOLOGY

Analysis of Industry and the Biocon (company).

Formation of new capital structure

ROHIT SINGH
09PG101

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 INDUSTRY-Biotechnology

Balance Sheet

Late 200 200 200 200

   Year st 2009 2008 2007 2006 2005 2004 3 2 1 0
No. of Companies 22 10 14 16 16 19 18 17 16 8 6
  SOURCES OF FUNDS :
360. 240. 258. 188. 256. 243. 237. 83. 80. 43. 46.
  Share Capital 35 8 19 26 72 17 83 69 23 13 15
2,54 2,28 2,57 1,80 1,08 968. 737. 336 262 112 96.
  Reserves Total 2.06 7.75 1.18 5.91 5.41 99 85 .98 .5 .83 54
22.1
  Equity Share Warrants 29.2 29.2 9.34 3 0 0 0 0 0 0 0
  Equity Application
Money 1.41 1.41 1.5 0.91 0 0 0 0 0 0 0
  Total Shareholders 2,93 2,55 2,84 2,01 1,34 1,21 975. 420 342 155 142
Funds 3.02 9.16 0.21 7.21 2.13 2.16 68 .67 .73 .96 .69
1,00 853. 579. 275. 330. 282. 268. 233 168 52. 51.
  Secured Loans 8.48 72 74 57 59 15 7 .07 .38 31 35
347. 331. 311. 333. 557. 85.8 72.8 29. 50. 30. 28.
  Unsecured Loans 24 73 51 82 95 6 7 01 8 63 02
1,35 1,18 891. 609. 888. 368. 341. 262 219 82. 79.
  Total Debt 5.72 5.45 25 39 54 01 57 .08 .18 94 37
4,28 3,74 3,73 2,62 2,23 1,58 1,31 682 561 238 222
  Total Liabilities 8.74 4.61 1.46 6.60 0.67 0.17 7.25 .75 .91 .9 .06
  APPLICATION OF
FUNDS :
2,59 2,23 1,99 1,70 783. 699. 533. 295 71.
  Gross Block 0.47 7.64 4.93 3.28 6 83 52 383 .18 95 77
  Less : Accumulated 702. 616. 487. 371. 234. 186. 143. 99. 69. 21. 12.
Depreciation 31 44 76 71 78 08 36 43 14 33 98
  Less:Impairment of
Assets 0 0 0 0 0 0 0 0 0 0 0
1,88 1,62 1,50 1,33 548. 513. 390. 283 226 73. 58.
  Net Block 8.16 1.20 7.17 1.57 82 75 16 .57 .04 67 79
  Lease Adjustment 0 0 0 0 0 0 0 0 0 0 0
  Capital Work in 474. 328. 503. 313. 623. 382. 96.0 72. 66. 23. 12.
Progress 3 11 33 45 72 57 9 55 83 75 16
780. 730. 871. 231. 207. 323. 78.5 56. 42. 14. 25.
  Investments 82 08 72 66 2 57 7 9 36 31 73
  Current Assets, Loans
& Advances
  Inventories 750. 694. 441. 447. 344. 311. 307. 241 150 68. 50.

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 65 45 04 01 2 45 31 .28 .42 69 61
583. 511. 495. 477. 338. 300. 191. 119 112 50. 25.
  Sundry Debtors 52 28 86 06 15 8 86 .34 .49 01 43
78.1 70.6 161. 175. 18.3 388. 10. 40. 14. 48.
  Cash and Bank 1 6 07 53 468 6 45 64 72 8 19
611. 538. 333. 305. 170. 121. 112. 61. 48. 27. 24.
  Loans and Advances 64 82 66 68 43 28 4 99 98 14 74
2,02 1,81 1,43 1,40 1,32 751. 1,00 433 352 160 148
  Total Current Assets 3.92 5.21 1.63 5.28 0.78 89 0.02 .25 .61 .64 .97
  Less : Current
Liabilities and
Provisions
496. 403. 371. 416. 325. 295. 180. 120 94. 24. 21.
  Current Liabilities 88 08 94 21 62 74 3 .82 42 29 68
298. 281. 118. 173. 114. 30. 25. 13. 5.3
  Provisions 4 66 25 83 64 79.1 60.5 29 94 2 1
  Total Current 795. 684. 490. 590. 440. 374. 240. 151 120 37. 26.
Liabilities 28 74 19 04 26 84 8 .11 .36 49 99
1,22 1,13 941. 815. 880. 377. 759. 282 232 123 121
  Net Current Assets 8.64 0.47 44 24 52 05 22 .14 .25 .15 .98
  Miscellaneous
Expenses not written 21.2 21.1 27.0 27.1 31.7 28.9 26.2 14. 13. 4.0
off 5 1 3 4 3 7 9 59 33 2 3.4
54.2 52.5 14.6 2.9 2.2
  Deferred Tax Assets 5 3 8.37 6 8.04 3.54 5.17 3 3 0 0
158. 138. 127. 107. 69.3 49.2 38.2 29. 21.
  Deferred Tax Liability 68 89 6 12 6 8 5 93 13 0 0
- - - - - - - -
104. 86.3 119. 92.4 61.3 45.7 33.0 18.
  Net Deferred Tax 43 6 23 6 2 4 8 -27 9 0 0
4,28 3,74 3,73 2,62 2,23 1,58 1,31 682 561 238 222
  Total Assets 8.74 4.61 1.46 6.60 0.67 0.17 7.25 .75 .91 .9 .06

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Profit and Loss

Late 200 200 200 200

   Year st 2009 2008 2007 2006 2005 2004 3 2 1 0
No. of Companies 22 10 14 16 16 19 18 17 16 8 6
  INCOME :
2,36 2,00 2,25 2,17 1,51 1,27 995. 715 584 286 220
  Sales Turnover 3.16 9.86 2.05 8.40 5.58 0.82 52 .76 .44 .92 .62
32.4 27.5 31.0 54.8 50.8 42.5 38. 10. 9.4 7.7
  Excise Duty 7 6 9 49.6 6 9 8 02 75 4 6
2,33 1,98 2,22 2,12 1,46 1,21 952. 677 573 277 212
  Net Sales 0.69 2.30 0.96 8.80 0.72 9.93 94 .74 .69 .48 .86
140. 446. 22.6 35.1 24.6 10. 7.9 2.2
  Other Income 24 129 44 63.8 2 2 6 36 7.7 2 7
-
83.1 17.4 24.7 30.4 37.5 40.1 12. 9.0 0.5 5.7
  Stock Adjustments 8 76.9 9 2 2 5 8 11 5 4 9
2,55 2,18 2,68 2,21 1,51 1,29 1,01 700 590 284 220
  Total Income 4.11 8.20 4.89 7.32 3.76 2.60 7.78 .21 .44 .86 .92
  EXPENDITURE :
938. 817. 925. 970. 770. 628. 498. 333 298 149 126
  Raw Materials 11 05 02 3 45 35 34 .55 .68 .6 .2
103. 87.8 101. 85.0 43.8 27.5 23. 16. 2.1
  Power & Fuel Cost 99 9 13 9 1 36.5 6 8 67 4 2.1
273. 203. 235. 183. 100. 98.4 88.5 70. 49. 15. 10.
  Employee Cost 81 24 18 98 45 5 6 79 34 97 17
  Other Manufacturing 95.3 69.7 53.6 30.3 44.4 39.4 28. 21. 4.8 7.6
Expenses 7 77 9 1 9 6 2 01 58 3 6
  Selling and
Administration 340. 304. 300. 259. 168. 126. 96.0 71. 60. 33. 20.
Expenses 62 53 69 15 51 23 3 25 06 01 19
  Miscellaneous 406. 397. 67.4 31.6 33.5 15.9 7.0 2.5 2.9
Expenses 12 5 4 9 8 18.3 7 1 4.6 3 5
  Less: Pre-operative 10.0 10.4 2.8
Expenses Capitalised 0 0 0 0 6.98 5 5 4 0 0 0
2,15 1,88 1,69 1,58 1,14 942. 755. 531 450 208 169
  Total Expenditure 8.02 7.21 9.25 3.82 0.21 24 43 .57 .93 .08 .27
396. 300. 985. 633. 373. 350. 262. 168 139 76. 51.
  Operating Profit 09 99 64 5 55 36 35 .64 .51 78 65
79.5 69.8 36.9 25.7 21.8 24. 21. 13. 9.9
  Interest 2 3 8 41.8 4 7 24.5 33 1 54 2

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 316. 231. 948. 591. 347. 328. 237. 144 118 63. 41.
  Gross Profit 57 16 66 7 81 49 85 .31 .41 24 73
189. 166. 145. 114. 53.4 48.7 37.4 29. 19. 4.2
  Depreciation 78 01 74 21 1 8 2 07 45 6.4 9
126. 65.1 802. 477. 294. 279. 200. 115 98. 56. 37.
  Profit Before Tax 79 5 92 49 4 71 43 .24 96 84 44
110. 56.8 52.7 25.4 28.0 24. 21. 7.5
  Tax 3.4 1.06 06 8 4 6 2 26 93 03 2
  Fringe Benefit tax 5.47 4.89 5.23 3.87 3.56 0 0 0 0 0 0
- -
15.6 21.1 33.3 29.2 12.6 3.0 1.7
  Deferred Tax 5 2 3 7 17.2 6 5.19 5 3 0 0
133. 80.3 654. 387. 220. 241. 167. 86. 72. 35. 29.
  Reported Net Profit 57 2 3 47 9 59 22 19 3 81 92
- - -
119. 118. 263. - - - 0.1 0.0 1.6
  Extraordinary Items 11 73 4 0.16 0.3 0.56 0.07 2 3 2 0
252. 199. 390. 387. 220. 242. 167. 86. 72. 34. 29.
  Adjusted Net Profit 68 05 9 63 6 15 29 07 33 19 92
- - - -
- - 0.1 0.0 0.0 7.6
  Adjst. below Net Profit 0.06 0 0.06 0 0 0 0 1 1 2 8
  P & L Balance brought 1,28 1,13 826. 549. 301. 191. 119. 58. 18. 17.
forward 3.68 7.02 18 38 2 88 49 23 68 07 11
  Statutory
Appropriations 0 0 0 0 0 0 0 0 0 0 0
94.5 93.8 136. 100. 70.2 81.5 108. 27. 32. 24. 16.
  Appropriations 2 4 92 93 5 1 79 11 77 48 4
  P & L Balance carried 1,32 1,12 1,34 835. 451. 351. 177. 117 58. 28. 16.
down 2.67 3.50 3.50 92 85 96 92 .2 2 38 84
63.7 63.7 61.4 38.7 33.6 31.4 17.4 8.6 11. 7.0 5.7
  Dividend 8 8 1 9 6 7 8 8 66 4 1
0.6 0.7 0.9 0.8
  Preference Dividend 0 0 0 2.04 4.07 4.39 0.82 6 7 3 2

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Calculations

ROI, ROE, DOL, DFL

2,36 2,00 2,25 2,17 1,51 1,27 995. 715. 584. 286. 220.
Sales Turnover 3.16 9.86 2.05 8.40 5.58 0.82 52 76 44 92 62
1,88 1,68 1,46 1,39 1,03 843. 666. 460. 401. 192. 159.
Variable Cost 4.21 3.97 4.07 9.84 9.76 79 87 78 59 11 10
478. 325. 787. 778. 475. 427. 328. 254. 182. 94.8 61.5
Contribution 95 89 98 56 82 03 65 98 85 1 2
Operating 1.20 1.08 0.79 1.22 1.27 1.21 1.25 1.51 1.31 1.23 1.19
Leverage 9195 2727 946 8982 3779 8832 2716 1978 0659 4827 1094
Financial 3.12 4.61 1.22 1.32 1.26 1.25 1.30 1.46 1.40 1.35 1.37
Leverage 3985 9954 7569 6729 8852 2583 8936 3381 9762 0809 9541
4,28 3,74 3,73 2,62 2,23 1,58 1,31 682. 561. 238. 222.
Total Liabilities 8.74 4.61 1.46 6.60 0.67 0.17 7.25 75 91 9 06
0.09 0.08 0.26 0.24 0.16 0.22 0.19 0.24 0.24 0.32 0.23
ROI 2356 038 4143 1186 7461 1723 9165 7001 8278 139 2595
133. 80.3 654. 387. 220. 241. 167. 86.1 35.8 29.9
PAT 57 2 3 47 9 59 22 9 72.3 1 2
Total
Shareholders 2,93 2,55 2,84 2,01 1,34 1,21 975. 420. 342. 155. 142.
Funds 3.02 9.16 0.21 7.21 2.13 2.16 68 67 73 96 69
0.03 0.02 0.17 0.14 0.09 0.15 0.12 0.12 0.12 0.14 0.13
ROE 1144 1449 5347 7518 9029 2889 6946 6239 8668 9895 4738
79.5 69.8 36.9 25.7 21.8 24.3 13.5
Interest 2 3 8 41.8 4 7 24.5 3 21.1 4 9.92
Total Loan 1,00 853. 579. 275. 330. 282. 268. 233. 168. 52.3 51.3
Fund 8.48 72 74 57 59 15 7 07 38 1 5
347. 331. 311. 333. 557. 85.8 72.8 29.0 30.6 28.0
24 73 51 82 95 6 7 1 50.8 3 2

Analysis:-

DOL:

The sensitivity of PBIT to changes in Unit sales is referred as the degree of operating leverage.

Looking at the Industry, it has high operating leverage this may be due to

 Depreciation

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  Salaries
 Research and Development

Industry has high fixed cost, this may affect the EBIT in case when the Net Sales falls below, as
happens in times of recession, since company requires higher portion of income to meet its fixed
cost.

DOF

The sensitivity of PBT to change in PBIT is referred to as the degree of financial leverage. It
mainly considers the portion of Interest expense that the industry incurs. Higher the debt to
Equity ratio higher is the debt portion in the capital structure, higher debt results in paying higher
interest. This is good in times of boom as

 Debt in capital structure brings down the average cost of capital.

 Checks the dilution of control
 Provide higher earning to equity share holder

Hence one could conclude that industry is having higher financial leverage, this may give rich
dividend in good times but could prove fatal during recession.

ROI

The ROI of the industry is low and is consistently going down over the past few years. Looking
at this and the average cost of debt one can say that the industry has not done well by not
employing more of debt in its capital structure. This had resulted in lower returns to the equity
shareholder’s & maximizes the overall cost of capital.

ROE

As the debt is less in the capital structure the industry in general has more number of share
holders. The control of the company is consolidated. The return to the equity share holder is low.

The industry is too dependent on the proposed growth in the sector, recession didn’t effect the
industry as the EBIT has a continuous growth over the years.

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BIOCON

BALANCE SHEET:

Mar Mar Mar Mar Mar Mar Mar Mar

   Year 09  08  07  06  05  04  03  02 
  SOURCES OF FUNDS :
 Share Capital 100 50 50 50 50 50 1.84 1.82
1,274. 1,278. 753.0 645.9 491.6 124.8
  Reserves Total 88 20 891.64 4 4 3 7 85.88
  Equity Share Warrants 0 0 0 0 0 0 0 0
   Equity Application Money 0 0 0 0 0 0 0 0
1,374. 1,328. 803. 695. 541. 126.
  Total Shareholders Funds 88 20 941.64 04 94 63 71 87.7
  Secured Loans 101.46 89.26 58.73 67.75 49.33 47.22 58.21 55.86
 Unsecured Loans 62.49 54.62 48.04 37.29 27.01 17.47 10.35 10.6
105. 76.3 64.6 68.5
   Total Debt 163.95 143.88 106.77 04 4 9 6 66.46
1,538. 1,472. 1,048. 908. 772. 606. 195. 154.1
  Total Liabilities 83 08 41 08 28 32 27 6
   APPLICATION OF FUNDS :
191.2 155.3 125.6
  Gross Block 991.62 882.62 861.19 316.1 270.2 3 1 4
 Less : Accumulated Depreciation 277.45 203.16 145 88.29 65.37 47.12 33.32 21.37
   Less:Impairment of Assets 0 0 0 0 0 0 0 0
227.8 204.8 144.1 121.9 104.2
 Net Block 714.17 679.46 716.19 1 3 1 9 7
   Lease Adjustment 0 0 0 0 0 0 0 0
456.4
 Capital Work in Progress 37.69 64.63 29.9 3 310 54.31 7.98 3.71
139.0
  Investments 346.69 477.26 47.02 6 243 8.93 8.48 8.48
  Current Assets, Loans &
Advances
105.3
 Inventories 194.52 167.74 150.66 1 71.29 83.95 46.7 23.38
206.0 172.8 115.9
  Sundry Debtors 310.17 225.66 274.85 4 8 7 73.75 62.35
317.5
 Cash and Bank 6.04 8.12 7.63 2 3.42 1 1.02 0.1
  Loans and Advances 266.28 123.55 78.51 21.3 17.18 26.72 15.68 10

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 334.6 264.7 544.1 137.1
  Total Current Assets 777.01 525.07 511.65 5 7 5 5 95.83
   Less : Current Liabilities and
Provisions
181.8 195.2 113.2
  Current Liabilities 219.69 166.35 175.93 9 7 3 63.45 42.44
 Provisions 76 68.16 40.66 40 33.08 14.28 2.58 5.66
221.8 228.3 127.5
   Total Current Liabilities 295.69 234.51 216.59 9 5 1 66.03 48.1
112.7 416.6
  Net Current Assets 481.32 290.56 295.06 6 36.42 4 71.12 47.73
  Miscellaneous Expenses not
written off 0 0 0 0 0 0 0 0
  Deferred Tax Assets 4.05 3.08 2.73 2.36 1.81 2.01 1.32 1.31
   Deferred Tax Liability 45.09 42.91 42.49 30.34 23.78 19.68 15.62 11.34
- - - -
  Net Deferred Tax -41.04 -39.83 -39.76 27.98 21.97 17.67 -14.3 10.03
1,538. 1,472. 1,048. 908. 772. 606. 195. 154.1
   Total Assets 83 08 41 08 28 32 27 6
 Contingent Liabilities 163.24 153.54 151.43 83.39 59.08 8.98 9 11.12

PROFIT and LOSS A/C:

Mar Mar Mar Mar Mar Mar

Mar Mar 07(12 06(12 05(12 04(12 03(12 02(12
   Year 09(12)  08(12)  )  )  )  )  )  ) 
  INCOME :
887.1 725.7 684.3 531.5 275.1
 Sales Turnover 938.05 903.59 5 5 5 5 6 161.6
   Excise Duty 25.68 26.24 36.18 37.18 37.84 29.03 20.82 0
850.9 688.5 646.5 502.5 254.3
  Net Sales 912.37 877.35 7 7 1 2 4 161.6
  Other Income 77.25 387.84 23.63 11.72 23.41 13.93 3.69 3.87
 Stock Adjustments 26.77 11.96 21.9 20.8 3.04 14.2 10.12 1.05
1,016. 1,277. 721.0 672.9 530.6 268.1 166.5
   Total Income 39 15 896.5 9 6 5 5 2
  EXPENDITURE :
439.3 403.9 351.2 273.9 132.5
 Raw Materials 430.88 403.39 3 5 7 6 3 83.69
  Power & Fuel Cost 71.22 76.12 62.07 30.78 24.6 17.11 12.8 9.11
 Employee Cost 80.09 68.31 58.57 31.98 32.95 33.21 28.76 18.22
  Other Manufacturing Expenses 32.71 29.74 20.98 8.92 10.46 13.03 7.67 3.21
 Selling and Administration
Expenses 98.61 84.19 67.69 51.94 43.84 23.25 19.06 11.14

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  Miscellaneous Expenses 109.19 29.58 11.04 7.33 0.55 6.3 2.54 1.3
 Less: Pre-operative Expenses
Capitalised 0 0 0 0 0 0 0 0
659.6 463.6 366.8 203.3 126.6
   Total Expenditure 822.7 691.33 8 534.9 7 6 6 7
236.8 186.1 209.2 163.7
  Operating Profit 193.69 585.82 2 9 9 9 64.79 39.85
  Interest 4.94 2.87 8.16 2.48 2.69 2.46 5.05 4.67
228.6 183.7 161.3
  Gross Profit 188.75 582.95 6 1 206.6 3 59.74 35.18
  Depreciation 74.28 69 57.61 22.85 18.09 13.85 12.02 7.78
171.0 160.8 188.5 147.4
  Profit Before Tax 114.47 513.95 5 6 1 8 47.72 27.4
  Tax 0 77.69 0 20.86 9.83 19.45 7.58 5
 Fringe Benefit tax 1.45 1.27 0.92 0.51 0 0 0 0
  Deferred Tax 1.22 0.07 11.78 6.01 4.29 3.36 4.27 2.09
158.3 133.4 174.3 124.6
  Reported Net Profit 111.8 434.92 5 8 9 7 35.87 20.31
  Extraordinary Items -91.04 261.25 0.03 0.17 0.18 0.05 0.12 0.01
158.3 133.3 174.2 124.6
  Adjusted Net Profit 202.84 173.67 2 1 1 2 35.75 20.3
  Adjst. below Net Profit 0 0 0 0 0 0 0 0
330.1 238.5 104.3
  P & L Balance brought forward 770.5 437.56 4 2 7 59.07 23.2 2.89
  Statutory Appropriations 0 0 0 0 0 0 0 0
 Appropriations 81.38 101.98 50.93 41.86 40.24 79.37 0 0
437.5 330.1 238.5 104.3
   P & L Balance carried down 800.92 770.5 6 4 2 7 59.07 23.2
  Dividend 60 50 30 25 20 10 0 0
   Preference Dividend 0 0 0 0 0 0 0 0
  Equity Dividend % 60 100 60 50 40 20 0 0
194.9 111.5
   Earnings Per Share-Unit Curr 5.08 42.64 15.33 13 17.16 12.34 5 9
  Earnings Per Share(Adj)-Unit 194.9 111.5
Curr 5.08 42.64 15.33 13 17.16 12.34 5 9
678.2 469.8
   Book Value-Unit Curr 68.7 132.73 94.05 80.18 69.45 54 6 9

CALCULATIONS

 Share Capital 100 50 50 50 50 50 1.84 1.82

Mar Mar Mar Mar Mar Mar Mar Mar
   Year 09  08  07  06  05  04  03  02 
  Total Shareholders 1,374. 1,328. 941.64 803.04 695.94 541.63 126.71 87.7

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 Funds 88 20
 Debt 163.95 143.88 106.77 105.04 76.34 64.69 68.56 66.46
1,538. 1,472. 1,048.
   Total Assets 83 08 41 908.08 772.28 606.32 195.27 154.16
1,016. 1,277.
   Total Income 39 15 896.5 721.09 672.96 530.65 268.15 166.52
   Total Expenditure 822.7 691.33 659.68 534.9 463.67 366.86 203.36 126.67
 Employee Cost 80.09 68.31 58.57 31.98 32.95 33.21 28.76 18.22
Variable Cost 742.61 623.02 601.11 502.92 430.72 333.65 174.60 108.45
Contribution 273.78 654.13 295.39 218.17 242.24 197.00 93.55 58.07
less: Fixed Cost 80.09 68.31 58.57 31.98 32.95 33.21 28.76 18.22
Operating Profit 193.69 585.82 236.82 186.19 209.29 163.79 64.79 39.85
  Interest 4.94 2.87 8.16 2.48 2.69 2.46 5.05 4.67
  Gross Profit 188.75 582.95 228.66 183.71 206.60 161.33 59.74 35.18
  Depreciation 74.28 69 57.61 22.85 18.09 13.85 12.02 7.78
  Profit Before Tax 114.47 513.95 171.05 160.86 188.51 147.48 47.72 27.40
  Reported Net Profit 111.8 434.92 158.35 133.48 174.39 124.67 35.87 20.31
   Preference Dividend 0 0 0 0 0 0 0 0
   Earnings Per Share 5.08 42.64 15.33 13 17.16 12.34 194.95 111.59
Degree of Operating 1.4134 1.1166 1.2473 1.1717 1.1574 1.2027 1.4438 1.4572
Leverage 96 06 19 6 37 6 96 15
Degree of Financial 1.6920 1.1398 1.3845 1.1574 1.1102 1.1105 1.3577 1.4543
Leverage 59 39 07 66 33 91 12 8
Degree of Total 2.3917 1.2727 1.7269 1.3562 1.2850 1.3357 1.9603 2.1193
Leverage 18 5 22 73 25 74 94 43
0.0726 0.2954 0.1510 0.1469 0.2258 0.2056 0.1836 0.1317
Return on Equity 53 46 38 91 12 17 94 46
0.1258 0.3979 0.2258 0.2050 0.2710 0.2701 0.3317 0.2584
Return on Investment 68 54 85 37 03 38 97 98

Analysis:

DOL

Biocon has a higher Degree of Operating leverage; this can be due to any of the above mentioned
reasons. This DOL also includes the weight added due to fixed cost and Biocon it seems has high
fixed cost.

Higher DOL will result in higher sensitivity of PBIT to changes in Unit sales; this may prove
fatal to industry during recession.

Hence company must try and take some make or buy decision, so as to minimize the DOL.

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DOF:

Degree of Financial leverage of Biocon is much lower than the industry average. Hence one can
say company had employed lesser portion of debt in the capital structure. This on one hand had
resulted into:

 Decrease in the EPS to its share holder

 And higher overall cost of debt
 Consolidation of stake of the company

But if one looks at it from the point of Modigliani & Miller we can say company belongs to
lower risk class.

The company had taken lower Debt in the past few years and must not be worried about
repaying it bacl instantly, the outlook of this sector is looking bright and one can very well
assume that the equity share holders of the company will be getting higher return.

ROI:

The company doesn’t have a good ROI and it has fallen consistently over the past few years, this
also tells about the non utilization of the assets. As the cost of debt is much less than the ROI
they had done well in using financial leverage but this should be maintained below a certain
range. Already discussed

ROE

The company has a bad return on equity and this is also due to the fact that the portion of equity
is more in the capital structure, the number of share holders is also more. Better control of the
organization. The debt to equity ratio is very low.

There is a continuous decrease in the EPS level of the company; the absence of debt in the
capital structure has resulted in higher number of equity share holder and thus the decrease.

COMPARISON WITH INDUSTRY

 DOL- is higher than the industry average this means that the company had higher amount
of fixed cost. This will be help full at times of recession. The company is doing more of
making than buying.

 DFL- is also less than the industry, in the past few years the industry had suffered huge
losses and this had mainly resulted due to fall in sales because recession. The company is
better poised and as the outlook of the economy is changing they will make profit.

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 ROI- both the industry and the company is giving lesser return on the total assets. This is
one of the principle reasons why there is less of debt in their capital structure. The
company has a lesser ROI as compared to industry it means that it is not efficient in
utilizing its total assets.

 ROE- the company has much more ROE as compared to the industry; the company is
efficiently utilizing the share holder’s fund and providing higher returns on it. There is
higher number of share holders and the optimal combination of debt and equity.

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ALTERNATIVE 1: 25% with Preference shares @ 10% and 25% with debt
@ 10%
Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
09  08  07  06  05  04  03  02  01  00 
 Share Capital 4.07 4.07 4.07 4.07 4.07 4.07 4.07 4.06 4.06 4.06
  Interest 5.68 7.6 5.83 5.49 4.31 5.66 7.08 7.69 8.16 7.39
  Total 59.7 50.62 44.23 40.35 39.73 38.72 38.04 37.28 39.41 39.56
Shareholders’
Funds
 Debt 19.24 59.88 71.41 51.1 50.17 34.26 28.22 33.61 36.19 36.93
   Total Assets 78.94 110.5 115.6 91.45 89.9 72.98 66.26 70.89 75.6 76.49
4
Extra Finance 39.47 55.25 57.82 45.72 44.95 36.49 33.13 35.44 37.8 38.24
5 5 5
Pref. Share @ 19.73 27.62 28.91 22.86 22.47 18.24 16.56 17.72 18.9 19.12
10% 5 5 25 5 5 5 25 25
Debt @ 15% 19.73 27.62 28.91 22.86 22.47 18.24 16.56 17.72 18.9 19.12
5 5 25 5 5 5 25 25
   Total Income 906.7 898.5 838.6 735.0 610 487.1 432.4 427.3 382.1 354.3
6 4 9 4 4 7 2 9 3
   Total 868.9 863.9 811.3 719.1 594.5 476.9 421.2 415.6 369.0 340.8
Expenditure 5 9 7 2 9 2 9 1 2
 Employee Cost 35.06 28.61 22.56 17.13 13.55 11.37 9.94 10.04 9.22 7.84
Variable Cost 833.8 835.3 788.8 701.9 581.0 465.5 411.3 405.5 359.7 332.9
9 8 1 9 4 5 5 6 9 8
Contribution 72.87 63.16 49.88 33.05 28.96 21.59 21.12 21.76 22.40 21.35
less: Fixed Cost 35.06 28.61 22.56 17.13 13.55 11.37 9.94 10.04 9.22 7.84
Operating Profit 37.81 34.55 27.32 15.92 15.41 10.22 11.18 11.72 13.18 13.51
  Interest 8.640 11.74 10.16 8.919 7.681 8.396 9.564 10.34 10.99 10.25
25 375 65 375 25 75 75 838 5 838
  Gross Profit 29.17 22.81 17.15 7.00 7.73 1.82 1.62 1.37 2.19 3.25
  Depreciation 8.71 7.57 5.41 3.4 8.22 2.5 2.84 2.99 4.2 4.23
  Profit Before 20.46 15.24 11.74 3.60 -0.49 -0.68 -1.22 -1.62 -2.01 -0.98
Tax
Tax @ 35% 7.160 5.332 4.110 1.260 - - - - - -
912 687 225 219 0.171 0.236 0.428 0.566 0.705 0.342
94 86 66 43 25 43
Profit after Tax 13.30 9.90 7.63 2.34 -0.32 -0.44 -0.80 -1.05 -1.31 -0.64
Preference 1.973 2.762 2.891 2.286 2.247 1.824 1.656 1.772 1.89 1.912
Dividend 5 5 25 5 5 5 25 25
Equity Earnings 11.33 7.14 4.74 0.05 -2.57 -2.26 -2.45 -2.82 -3.20 -2.55
Degree of 1.927 1.828 1.825 2.076 1.879 2.112 1.889 1.856 1.699 1.580

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Operating 268 075 769 005 299 524 088 655 545 311
Leverage
Degree of 1.848 2.267 2.326 4.421 - - - - - -
Financial 019 618 393 455 31.36 15.10 9.128 7.241 6.540 13.80
Leverage 9 16 39 83 94 86
Degree of Total 3.561 4.145 4.247 9.178 - - - - - -
Leverage 627 377 456 962 58.95 31.90 17.24 13.44 11.11 21.82
17 25 43 56 66 19
Return on Equity 0.112 0.059 0.044 0.017 - - - - - -
312 75 006 061 0.002 0.004 0.008 0.009 0.011 0.005
37 02 01 89 55 54
Return on 0.319 0.208 0.157 0.116 0.114 0.093 0.112 0.110 0.116 0.117
Investment 314 446 5 056 275 359 486 218 226 75
EPS 27.82 17.54 11.65 0.133 - - - - - -
638 561 178 062 6.306 5.563 6.026 6.956 7.881 6.276
66 61 01 14 16 34

ALTERNATIVE 2: 25%with equity shares @ par and 25%with preference

shares @ 10%
   Year Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
09  08  07  06  05  04  03  02  01  00 
  Interest 5.68 7.6 5.83 5.49 4.31 5.66 7.08 7.69 8.16 7.39
  Total 59.7 50.62 44.23 40.35 39.73 38.72 38.04 37.28 39.41 39.56
Shareholders
Funds
 Debt 19.24 59.88 71.41 51.1 50.17 34.26 28.22 33.61 36.19 36.93
   Total Assets 78.94 110.5 115.6 91.45 89.9 72.98 66.26 70.89 75.6 76.49
4
Extra Finance 39.47 55.25 57.82 45.72 44.95 36.49 33.13 35.44 37.8 38.24
5 5 5
Pref Share @ 19.73 27.62 28.91 22.86 22.47 18.24 16.56 17.72 18.9 19.12
10% 5 5 25 5 5 5 25 25
Equity Share 19.73 27.62 28.91 22.86 22.47 18.24 16.56 17.72 18.9 19.12
5 5 25 5 5 5 25 25
   Total Income 906.7 898.5 838.6 735.0 610 487.1 432.4 427.3 382.1 354.3
6 4 9 4 4 7 2 9 3
   Total 868.9 863.9 811.3 719.1 594.5 476.9 421.2 415.6 369.0 340.8
Expenditure 5 9 7 2 9 2 9 1 2
 Employee Cost 35.06 28.61 22.56 17.13 13.55 11.37 9.94 10.04 9.22 7.84
Variable Cost 833.8 835.3 788.8 701.9 581.0 465.5 411.3 405.5 359.7 332.9
9 8 1 9 4 5 5 6 9 8

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Contribution 72.87 63.16 49.88 33.05 28.96 21.59 21.12 21.76 22.40 21.35
less: Fixed Cost 35.06 28.61 22.56 17.13 13.55 11.37 9.94 10.04 9.22 7.84
Operating 37.81 34.55 27.32 15.92 15.41 10.22 11.18 11.72 13.18 13.51
Profit
  Interest 5.68 7.6 5.83 5.49 4.31 5.66 7.08 7.69 8.16 7.39
  Gross Profit 32.13 26.95 21.49 10.43 11.10 4.56 4.10 4.03 5.02 6.12
  Depreciation 8.71 7.57 5.41 3.4 8.22 2.5 2.84 2.99 4.2 4.23
  Profit Before 23.42 19.38 16.08 7.03 2.88 2.06 1.26 1.04 0.82 1.89
Tax
Tax @ 35% 8.197 6.783 5.628 2.460 1.008 0.721 0.441 0.364 0.287 0.661
5 5
Profit after Tax 15.22 12.60 10.45 4.57 1.87 1.34 0.82 0.68 0.53 1.23
Preference 1.973 2.762 2.891 2.286 2.247 1.824 1.656 1.772 1.89 1.912
Dividend 5 5 25 5 5 5 25 25
Equity Earnings 13.25 9.83 7.56 2.28 -0.38 -0.49 -0.84 -1.10 -1.36 -0.68
Degree of 1.927 1.828 1.825 2.076 1.879 2.112 1.889 1.856 1.699 1.580
Operating 268 075 769 005 299 524 088 655 545 311
Leverage
Degree of 1.614 1.782 1.699 2.264 5.350 4.961 8.873 11.26 16.07 7.148
Financial 432 766 005 58 694 165 016 923 317 148
Leverage
Degree of Total 3.111 3.259 3.101 4.701 10.05 10.48 16.76 20.92 27.31 11.29
Leverage 443 03 99 28 556 058 19 308 707 63
Return on 0.128 0.076 0.060 0.033 0.013 0.012 0.008 0.006 0.004 0.010
Equity 562 256 311 882 232 24 357 7 707
Return on 0.319 0.208 0.157 0.116 0.114 0.093 0.112 0.110 0.116 0.117
Investment 314 446 5 056 275 359 486 218 226 75
 Share Capital 79.43 78.24 73.14 63.21 62.20 56.96 54.60 55.00 58.31 58.68
5 5 25 5 5 5 25 25
EPS 1.667 1.256 1.033 0.361 - - - - - -
968 885 771 202 0.060 0.085 0.153 0.199 0.232 0.116
36 23 37 31 72 52

ALTERNATIVE 3: All Equity Shares @ 50% premium

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No of New
Equity Share
Issued
   Year Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
09  08  07  06  05  04  03  02  01  00 
  Interest 5.68 7.6 5.83 5.49 4.31 5.66 7.08 7.69 8.16 7.39
  Total 59.7 50.62 44.23 40.35 39.73 38.72 38.04 37.28 39.41 39.56
Shareholders
Funds
 Debt 19.24 59.88 71.41 51.1 50.17 34.26 28.22 33.61 36.19 36.93
   Total Assets 78.94 110.5 115.6 91.45 89.9 72.98 66.26 70.89 75.6 76.49
4
Extra Finance 39.47 55.25 57.82 45.72 44.95 36.49 33.13 35.44 37.8 38.24
5 5 5
Equity Share 26.31 36.83 38.54 30.48 29.96 24.32 22.08 23.63 25.2 25.49
@50% Premium 333 333 667 333 667 667 667 667
   Total Income 906.7 898.5 838.6 735.0 610 487.1 432.4 427.3 382.1 354.3
6 4 9 4 4 7 2 9 3
   Total 868.9 863.9 811.3 719.1 594.5 476.9 421.2 415.6 369.0 340.8
Expenditure 5 9 7 2 9 2 9 1 2
 Employee Cost 35.06 28.61 22.56 17.13 13.55 11.37 9.94 10.04 9.22 7.84
Variable Cost 833.8 835.3 788.8 701.9 581.0 465.5 411.3 405.5 359.7 332.9
9 8 1 9 4 5 5 6 9 8
Contribution 72.87 63.16 49.88 33.05 28.96 21.59 21.12 21.76 22.40 21.35
less: Fixed Cost 35.06 28.61 22.56 17.13 13.55 11.37 9.94 10.04 9.22 7.84
Operating Profit 37.81 34.55 27.32 15.92 15.41 10.22 11.18 11.72 13.18 13.51
  Interest 5.68 7.6 5.83 5.49 4.31 5.66 7.08 7.69 8.16 7.39
  Gross Profit 32.13 26.95 21.49 10.43 11.10 4.56 4.10 4.03 5.02 6.12
  Depreciation 8.71 7.57 5.41 3.4 8.22 2.5 2.84 2.99 4.2 4.23
  Profit Before 23.42 19.38 16.08 7.03 2.88 2.06 1.26 1.04 0.82 1.89
Tax
Tax @ 35% 8.197 6.783 5.628 2.460 1.008 0.721 0.441 0.364 0.287 0.661
5 5
Profit after Tax 15.22 12.60 10.45 4.57 1.87 1.34 0.82 0.68 0.53 1.23
Preference 0 0 0 0 0 0 0 0 0 0
Dividend
Equity Earnings 15.22 12.60 10.45 4.57 1.87 1.34 0.82 0.68 0.53 1.23
Degree of 1.927 1.828 1.825 2.076 1.879 2.112 1.889 1.856 1.699 1.580
Operating 268 075 769 005 299 524 088 655 545 311
Leverage
Degree of 1.614 1.782 1.699 2.264 5.350 4.961 8.873 11.26 16.07 7.148
Financial 432 766 005 58 694 165 016 923 317 148
Leverage
Degree of Total 3.111 3.259 3.101 4.701 10.05 10.48 16.76 20.92 27.31 11.29
Leverage 443 03 99 28 556 058 19 308 707 63

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Return on Equity 0.128 0.076 0.060 0.033 0.013 0.012 0.008 0.006 0.004
0.010
562 256 311 882 232 24 357 7 707
Return on 0.319 0.208 0.157 0.116 0.114 0.093 0.112 0.110 0.116
0.117
Investment 314 446 5 056 275 359 486 218 226 75
 Share Capital 86.01 87.45 82.77 70.83 69.69 63.04 60.12 60.91 64.61
65.05
333 333 667 333 667 667 667 667
EPS 1.769 1.440 1.262 0.645 0.268 0.212 0.136 0.110 0.082 0.188
842 425 675 106 592 382 212 983 495 835

EBIT- EPS ANALYSIS

YEAR 9-Mar

Sources OF Funds

Share Capital 100

Reserves Total 1,274.88
Equity Share Warrants 0
Preference Capital 0
Total Shareholders Funds 1,374.88
Secured Loans 101.46
Unsecured Loans 62.49
Total Debt 163.95
Total Liabilities 1,538.83
Reported Net Profit 111.8
Earnings Per Share 5.08

No Of Shares 220078740
Amount to be doubled 3077.66

Preference Capital Rate 10%

Debt Raate 15%
shares Issued @ Rs 10
50% Premium

New Capital to be Employed 1,538.83

Case 1:

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Equity 50% 769.415 No of Shares 2344003100
Preference 25% 384.7075 Tax Rate 35%
Debt 25% 384.7075 Preference Dividend 38.47075
Profit after Tax 36.90 Interest On Debt 57.706125
EPS 0.157423

Case 2:

Equity 25% 384.7075 No of Shares 3643566102

Preference 25% 384.7075 Tax Rate 35%
Debt 50% 769.415 Preference Dividend 38.47075
Profit after Tax 74.41 Interest On Debt 115.41225
EPS 0.204223

Case 3:

Equity 100% 1,538.83 No of Shares 1887936590

Preference 0% Tax Rate 35%
Debt 0% Preference Dividend
Profit after Tax 74.41 Interest On Debt
EPS 0.394134

Case 1:
EBIT 193.69
LESS: Interest 62.64613
EBT 131.04387
LESS: Tax @ 35% 45.8653545
PAT 85.1785155
LESS: Pref Dividend 38.47075
Equity Earnings 46.7077655

No Of Shares 2564081840
EPS 0.157423

Case 2:
EBIT 193.69
LESS: Interest 115.41225
EBT 78.27775
LESS: Tax @ 35% 27.3972125
PAT 50.8805375

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LESS: Pref Dividend 38.47075
Equity Earnings 12.4097875

No Of Shares 3863644842
EPS 0.204223

Case 3:
EBIT 193.69
LESS: Interest 0
EBT 193.69
LESS: Tax @ 35% 67.7915
PAT 125.8985
LESS: Pref Dividend 0
Equity Earnings 125.8985

No Of Shares 2108015330
EPS 0.394134

Indifference Point
EBIT-12 41.47
EBIT-23 -32.44
EBIT-13 -16.01

Suggestion:

My advice to the industry is to go for Capital structure I because

 This capital structure has debt to equity similar to industry

 It is giving good EPS and as compared to case II

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  The leverage that the company will have would be similar in both the new as well as
the old capital structure.

Reference –capitaline.com

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