Chapte r

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INTRODUCTION One of the tough challenges that firms face is to determine the right amount of leverage. Leveraging decision is important because it affects the financial performance of the firm. The capital structure of a firm is defined as specific mix of debt and equity that a firm uses to finance its operations. Firms can choose among many alternative capital structures. For example, firms can issue a large amount of debt or very little debt. Firms have options of arranging lease financing, use warrants, issue convertible bonds, sign forward contracts or trade bond swaps. They can also issue dozens of distinct securities in countless combinations. When a firm considers its financing options, for example debt vs. equity, it must ensure that the amount of leverage does not impose an excess burden on the firm. This means that the firm should be able to meet its financial obligations during both good and bad times. The two important points to be considered while making financing decisions are: First, debt implies fixed financial obligations for the firm. After the firm breaks even, meaning its earnings cover its debt obligations, any additional earnings will be distributed among shareholders. Thus, when times are good and the firm’s earnings are high, debt financing results in higher EPS. However, when times are bad and the firm’s earnings barely cover its debt obligations, there is little left for shareholders and, thus, EPS is low under debt financing. This relationship also shows that EPS exhibits a greater variation under debt as opposed to equity financing in the two scenarios as can be seen from the results shown in the last table. Second, stock financing does not dilute the shares of current owners. Therefore, in the boom scenario, existing shareholders benefit from a higher EPS, but, in the bust scenario, they bear the whole burden of the firm’s poor performance. To the entrepreneur and corporate Liberalization, Globalization and Privatization are the important issues threatening the existence of a firm. In such a complex corporate environment, it is a challenge to the Finance Manager to survive the firm in long run perspective with the objective of maximizing the owner's wealth. With a view to achieve

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this objective finance manager is required to pay his due attention on investment decision, financing decision and dividend decision. Assuming that a sound investment policy and opportunity are in place, it is the intention of this dissertation to optimize the financing decision and dividend decision in the context of achieving the stated objective. Financing decision refers to the selection of appropriate financing mix and so it relates to the capital structure or leverage. Leverage is used to describe the firm's ability to use fixed cost to increase the return to its owners. It is a tool for measuring Business Risk, Financial Risk and Overall Risk. A company's long term debt in relation to equity is its capital structure. The larger the long term debt, the higher the leverage. There are 3 types of leverages that are financial leverage and combined leverage and operating leverage. Financial Leverage* Operating Leverage= Combined Leverage. Capital structure refers to proportion of long-term debt capital and equity capital required to finance investment proposal. There should be an optimum capital structure, which can be attained by the judicious exercise of financial leverage. In order to run and manage a company, funds are needed. Right from the promotional stage, finance plays an important role in a company’s life. If funds are inadequate and not properly managed the entire organization suffers, it is therefore necessary that correct estimation of the current and future need of capital be made to have an optimal capital structure which shall help the organization to run smoothly. The capital structure is made up of debt and equity securities and refers to permanent financing of a firm. On the other hand a general dictionary meaning of the term Leverage refers to an increase of accomplishing some purpose. In Financial Management the term leverage is used to describe the firm’s ability to use fixed cost assets or funds to increase the returns to its owners. This dissertation mainly concentrates on the study of effects of leverage on Manufacturing and service sector firms.

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Chapt er 2 4 .

For example. 5 . It acts as a useful guideline in setting the maximum limits by which the business of the firm should be expanded. 3) To assess the inter relationship between degree of financial leverage (DFL). prudent. 2) To examine the dividend policy of the company.RESEARCH METHODOLOGY The objectives for which study has been undertaken are: 1) To study the methods of raising finance and financial leverages used by the companies. It also helps to evaluate business. So all the data used in the project have been collected from 1) 2) 3) The annual reports of the companies. The task of choosing most suitable combination of different techniques in the light of the firm’s anticipated securities for financing fund requirements earnings is facilitated by it. 4) To examine the relationship between leverage and the value of the firm NEED FOR THE PROJECT Leverage is an important technique which helps the management to take sound. In matters relating to investment also leverage technique is immensely helpful. The Web sites of companies. earning per share (EPS) and dividend per share (DPS). total risk of any organization. Collection of data This project is totally based on the Secondary Data. The data collected from this source have been used and complied with due care as per requirement of the study. The study material. financial and investment decisions. the management is advised to stop expanding business the moment anticipated return on additional investment falls short of fixed charge of debt. financial.

it is in the scope of this project to analyze the differences in the effect of leverage on the profitability of the firms in manufacturing and service industries 6 . The study is limited to five years only. percentage rather than absolute one. Limitation of study: 1. Techniques of analysis For analyzing the degree of association between DFL.Period of study The present study covers a period of two years from 2008-2010. 2. The study has been made by converting the collected data into relative measure such as ratios. This is based on secondary data collected from the annual report of the company. Generally twenty years data is ideal to form trend analysis. EPS and DPS. Scope of the project Capital structure employed by the companies and its effect on the EPS has been studied previously and also the different financial constraints of both the industries have been compared. It was not possible to collect the primary data from the company's office. Particularly.

Chapte r 3 7 .

Financial Leverage. Financial leverage helps to know the responsiveness of E.: bonds. 3. Further. may be defined as. debentures. then its Return On Equity (ROE) will be higher than if it did not borrow. then its ROE will be lower than if it did not borrow. 2. the employment of an asset or sources of fund has to pay fixed cost or fixed return. If the firm's Return On Assets (ROA) is higher than the interest on the loan.S goes without saying that effects of changes in EBIT (Earnings Before Interest & taxes) on the earning per share are shown by the financial leverage. etc) & preferential shares etc. Long-term debt carries a contractual fixed rate of interest & obligatory. Operating Leverage. Financial leverage Financial leverage is primarily concerned with the financial activities which involve raising of funds from the sources from which a firm has to bear fixed charges. Their rate of interest is generally lower than the expected return of the equity shareholders. if the firm's ROA is lower than the interest rate. 8 . Types of leverage There are three type of leverage: 1. On the other hand. It involves use of funds obtained at fixed cost in the capital structure in such a way that it increases the return for common shareholders.S.Leverage Leverage is using given resources in such a way that the potential positive or negative outcome is magnified in finance.P. interest on debt capital is tax-deductible expenses. These two-phenomenon lead to magnification of rate of return on equity capital & hence E. These sources include long-term debt (e. this generally refers to borrowing.P.g. to change in the EBIT. Financial leverage can best be described as the ability of a firm to use fixed financial charges in EBIT on the firm earning per share. Combined or composite leverage. As the debt providers have Prior claim on income & assets of a firm over equity shareholders. In other words.

It is referred to a state at which a firm has to bear fixed financing cost arising from the use of debt capital. Financial leverage occurs when a company employ the fixed cost of funds debt or preference share capital with a view to maximizing earning available to equity shareholder by a way of a higher income of funds.P. and it reflect the effect of change in EBIT on the level of E. Financial leverage can measure with the help of the following formula:Financial leverage = EBIT PBT Financial leverage will have a favorable impact on earning per share a return of equity only. The financial leverage measures the responsiveness of the E. The financial leverage measures the relationship between the EBIT & E. to charge in EBIT If defined as degree of financial leverage% Change in EPS % Change in EBIT Degree of financial leverage = 9 . The firm with high financial leverage will have a relatively high fixed financing cost compared with low financial leverage.S. When the firm’s return on investment exceeds the interest cost of debt it is favorable.P. Financial leverage influence the financial risk as long as the company’s earning are greater than its fixed cost it will enjoy a favorable financial leverage position and make earning available to equity shareholders. This technique also called ‘Trade on equity’.S.P. The impact will be unfavorable if the return on investment is less than interest.S.

Operating leverage 10 .

If a company employs operating leverage then its operating profit will increase at a faster rate for any given increase in sale.B. It is an important determinant of operation risk. It is unfavorable when firm doesn’t earn equivalent to the cost of funds 11 . if sales fall the firm with high operating leverage will suffer more loss than the firm with the no or low operating leverage. Degree of operating leverage = % Change in EBIT % Change in sales Favorable leverage is said to occur when the firm earns more on the assets purchased with the funds than their opportunity use. A firm with high operating leverage will have a relatively high fixed cost in comparison with a firm with low operating leverage. It occurs anytime when firm has fixed costs that must be met regardless of volume in operating leverage.It can be measured by % change in E.Operating leverage associated with investment activities (Assets acquisition). It can be ascertained by the help of following formula Operating leverage = Contribution EBIT Degree of operating leverage A high degree of operating leverage shows the greater impact on the operating income of the company due to variability in its sales. Therefore operating leverage called “2-edged sword”. due to percentage change in sale. However. when fixed cost remains constant the percentage change in profit accompanying a change in volume is greater than the percentage change in volume. which is also responsible for variability in its operating profit.T.I.

Composite Leverage or Combined Leverage or Total Leverage 12 .

P. Composite/combined leverage refers to extent to which firm has fixed operating cost as well as financial cost.P. For given change in sales if company employs high level of operating leverage and financial leverage even a small change in level of sales will have a dramatic effects on earning per share It can be calculated using the following formula. So company should try to achieve balance of both leverages.S associated with given change in sales. while improper combination of both leverages may prove curse for the growth of company. Operating and financial leverage together cause wide fluctuation in E.S.Combined leverage Significance A proper combination of both financial & operating leverage is blessing for the firm’s growth. The degree of operating and financial leverage can be combined to show the effect of total leverage on E. = Contribution PBT 13 .When financial leverage is combined with operating leverage the effect of change in revenues or earning per share is magnified.

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Chapt er 4 INTRODUCTION 15 .

debt or preference share capital with a view to maximizing earnings available to equity shareholders by way of a higher income than the cost of funds. It involves the use of funds obtained at a fixed cost in the hope of increasing the return to common shareholders. Financial leverage influences the financial risk of a company.g. As the debt providers have prior claim on income and assets of a firm over equity shareholders. debenture etc. Financial leverage helps to know the responsiveness of the earnings per share (EPS) to the changes in earnings before interest and taxes (EBIT). Financial leverage will occur when a company employs the fixed cost of funds. Financial leverage can best be described as “the ability of a firm to use fixed financial charges to magnify the effect of changes in EBIT on the firm’s earnings per share. If the earnings are insufficient for covering the fixed cost burden then the company has to face financial risk. These two phenomenon’s lead to the magnification of rate of return on equity capital and hence EPS. It will enjoy a favorable financial leverage position and a make use of the earnings available to equity shareholders. Further interest on debt capital is a tax-deductible expense. It goes without saying that the effects of changes in EBIT on the earnings per share are shown by the financial leverage. As long as the company’s earnings are greater than its fixed costs. These techniques also called “trading on equity”. bonds. Financial leverage refers to the extent to which a firm has fixed financing cost arising from the use of debt capital. which involve raising of funds from the sources for which a firm has to bear a fixed charge. Long-term debt capital carries a contractual fixed rate of interest and its payment is obligatory. their rate of interest is generally lower than the expected return on equity shareholders. The firm with financial leverage will have a relatively high fixed financing cost compared to the firm with a low financial leverage.) and preference share capital. Financial leverage can be measured with the help of the following formula: Financial leverage = EBIT / PBT 16 .Financial leverage is primarily concerned with the financial activities. These sources include long-term debts (e.

3. Each level of EBIT has distinct DFL. DFL will be positive for all values of EBIT that are above the financial Break even 4. financial leverage can be higher and vice – versa. IMPLICATIONS 1. 3. DFL is undefined at financial BEP. Symbolically. Normal situation is one should be high and another should be low. It also explains the impact of market risk on financial risk. 2. wider the fluctuation in return on equity and greater is the financial risk. Ideal situation is when both the leverages are low. 2. The impact will be unfavorable if the return on investment is less than the interest cost. The financial leverage measures the relationship between the EBIT and EPS and it reflects the effects of change in EBIT on the level of EPS. point. 17 . DFL will be negative when the EBIT level goes below the financial BEP. High operating leverage combined with high financial leverage will consolidate risky situation.Greater the financial leverage. This will however starts to decline as EBIT increases and will reach to a limit of one By assembling DFL one can understand the impact of a change in EBIT on the EPS of the company. (1). The financial leverage measures the responsiveness of the EPS to a change in EBIT and is defined as a % change in EPS divided by the % change in EBIT. Financial leverage = % Change in EPS / % Change in EBIT The behaviors of DFL reveals that :1.Financial leverage will have a favorable impact on earnings per share and return on equity only when the firms return on investment exceeds the interest cost of debt. It helps in assessing the financial risk of the company. If a company has a low operating leverage.

relationship. the DOL will be negative. It is to be noted that: 1. 18 . DOL is undefined.APPLICATION AND UTILITY OF LEVERAGE To understand the applications and utility of leverage in financial analysis it is important to understand the behavior of degree of operating leverage. DOL may start declining after ancreasing quantity beyond certain level and will limit to one (1).) 4. If quantity is less than BEP. At BEP. 3. For each level of output there is a distinct DOL. A large DOL indicates that small fluctuation in the level of operation will produce large fluctuation in the level of operating income.(but there is no such direct If quantity is greater than BEP the DOL will be positive (but there is no such direct relationship that less quantity leads to decrease in EBIT no such connection to be formed. 2. 5.

Chapte r 5 PROFITABILITY 19 .

The various components of an income statement and their inter-relationship embrace the profitability status of the firm. Further. it reflects how best the company has put to use its scarce resources to generate a higher rate of profitability. Profitability is also taken as a criterion to measure and assess the relative efficiency of the management of a company to generate profit. variability in profitability is explained by taking into consideration its two components viz profit margin and asset turnover.Profitability is the ability of a company to generate profit. According to Du-Pont control chart. It is an overall measure. It is the overall measure of a company's performance. A company. Profitability is represented by the return on investment (ROI). It indicates the overall result of the management's decision. is considered to be more efficient than other companies. which depicts the efficiency and effectiveness at which the company has been operating. As per this part. This can be shown from the following table – INCOME STATEMENT Total Revenue = EBIT Interest on Debt Tax Preference Dividend = Profit before Tax = Profit after tax = Equity Earnings EBIT = Total revenue – Total cost} Total cost = V+F Now total revenue = Quantity produced * unit selling price Therefore EBIT = Q * S – Q * V – F = Q (S . Profitability is ascertained from the income statement.V) – F Where:20 Variable cost Fixed Expenses . an overall control is exercised on the various resources of a company and necessary corrective action for further improvement in profitability is suggested. which generates a higher rate of profitability.

Q. S = Unit selling price V = Variable cost per unit F = Total fixed cost. and F and EPS is related to EBIT. EPS = PAT / N and EPS per equity = PAT – DP / N Now PAT = EBIT – I – Tax on (EBIT .T) – DP] / N Thus we can see that EBIT is related S.Q = Quantity produced and sold.I) Therefore EPS for equity = [ (EBIT – I )(1 . The total leverage hints that when there is a change in level of operation it results in the corresponding change in the earnings by the individual investor. The financial leverage hints that when earning capacity changes it results in the corresponding change the earning by the individual investor. The operating hints that when we change the level of operation it results in the change In earning capacity. The relationship between organizations total earning capacity and earning by the individual investors establish financial leverage. Thus this relationship can be shown as: 21 .V. The relationship between the two leverage brings out the total leverage. This relationship can be used to understand movement in related items with reference movement in certain items. The relationship between quantity of production sold and earning capacity established operating leverage.

QUANTITY Levels of operation EBIT Earning capacity EPS Earnings per share Op. DBAR. Shegaon 22 . leverage Fin. SSGMCE. leverage Total Leverage Ref: “Lecture Notes on Financial Management” by JCS Ravikant S Wawge.

Capital structure decision is important because it affects the financial performance of the firm.Chapte r 6 Capital Structure One of the tough challenges that firms face is the choice of capital structure. The 23 .

They can also issue dozens of distinct securities in countless combinations Capital Structure theories Mainly there are two different views regarding capital structure of the firm. 4. Thus there is no returned. 3. The firm pays 100 % of its earning as dividend. NI approach NOI approach MM approach Traditional approach. The second view states that there is no optimal capital structure for any firm. investment decisions are assumed constants. The firm’s total assets are given and they do not change. 5. There are four theories /approaches of expanding the relationship between capital structure and cost of capital and value of the firm. firms can issue a large amount of debt or very little debt. The market value of the firm is same for any capital structure (any debt/equity ratio) thus capital structure of the firm is irrelevant. For example. 4. Firms have options of arranging lease financing. the firm can change its capital structure preference share. either by redeeming the debentures by issue of share or by raising debt and reduce equity share capital 24 . Assumptions 1. 2. It emphasizes the determination of the optimum capital structure of a firm at which over all concept of capital for a firm is minimum they are increasing the total value of the firm. issue convertible bonds. One view states that capital structure is relevant for any given firm. Firms can choose among many alternative capital structures. use warrants.capital structure of a firm is defined as specific mix of debt and equity that a firm uses to finance its operations. sign forward contracts or trade bond swaps. This assumption has been removed later. The firm employs only two types of capital ie debt and equity. in other words the The firms total financing remain constant. 3. 2. These are as follows1. there are also no There is no corporate tax.

and vice versa. Total market value of firm. According to this approach. The operating earning (EBIT) is not expanded to grow. Interest payment. 7. The cost of debt is less than cost of equity capitalization rate. Equity capitalization rate. This approach is based on following assumptions: 1. According to this approach capital structure decision is relevant to the valuation of the firm. Overall cost of capital. The business risk remain constant is independent of capital structure and financing All investors are assumed to have same subjectivity of distribution of future expanded EBIT of firm. NI Approach Durand has suggested NI Approach.6. Total market value of debt. 25 . 8. Net income available on equity share. a higher debt content in the capital structure (ie high financial leverage) will result in decline in the overall or WACC this will cause increase in the value of equity shares of the company. Perpetual life of the firm. Uses of some symbols in our analysis of capital structure theories S B V I NI Ko Ke = = = = = = = Total market value of equity debt. risk. In other words a change in the capital structure causes a corresponding change in the overall cost of capital as well as the total value of the firm.

2. 3.

The debt content does not change he risk perception of the investor. There is no corporate tax.

On the basis of NI Approach Total value of the firm as – V=S+B Where S = Ni/Ke.

NOI Approach Durand has also suggested this approach. This approach is just opposite of NI Approach. According do this approach the market value of firm is not at all affected by capital structure changes. The market value of the firm ascertained by capitalizing the NOI at overall cost of capital (Ko) which is considered to be constant. The market value of equity is ascertained by deducting the market value of debt from market value of firm. This approach is based on following assumptions1.

The overall cost of capital (Ko) remains constant for all degrees of debt equity of The marked capitalization value of the firm as a whole and the spilt between debt The use of debt having low cost increase in equity capitalization rate (Ke) Thus the There is no corporate tax.

leverage. 2.
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and equity is no relevant. advantage of debt is set off exactly by increase in capitalization rate (Ke). 4.

The following formula can ascertain according to this approach the value of the firm:V = EBIT/Ko And value of equity (S) = V-B

M-M Approach
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This is Modigliani and Miller approach. According to this approach the value of the firm is independence of its capital structure however there is basic difference between the two. The NOI approach is purely definitional and conceptual. It does not provide operational justification for relevance of capital structure in valuation of the firm. While MM approach support the NOI approach providing behavioral justification for irrelevance of total valuation and cost of capital of the firm from its capital structure, in other words MM approach maintaining that the average cost of capital does not change with the change in the debt weighed equity mix or capital structure of the firm.

Basic Propositions Following are the basic propositions of the MM Approach.  The overall cost of capital (Ko) and value of firm (V) are constant for all level of

debt equity mix. The total market value of the firm is given by capitalizing expected net operating income (NOI) by the rate appropriate for risk classes.
 The cost of equity (Ke) is equal to capitalization rate of pure equity steam plus premium of

financial risk. The financial risk increases with more debt content in capital structure, as a result cost of equity (Ke) increase in manner to off set greatly the use of less expensive source of funds represented by debt.  The cost of rate of investment purpose is completely independent of the way in

which investment is financed. Assumptions 1. Investors are rational. They evaluate risk and return of each investment proposal rationally before investing. They are able to maximize their return at minimum cost. 2. Capital market is 100% competitive. 3. The firm pay no any income tax thus loses its tax advantages. 4. Expected earnings are definite and constant so future earning of firm are known and definite. Traditional Approach
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The traditional approach also known as intermediate approach is a compromise between two extreme of NI & NOI approach. According to this approach the value of firm can be increase initially or using more debt as debt is cheaper source of fund than equity. Thus optimal capital structure can be reached by debt and equity mix. Beyond the certain level equity increases because increase in debt (financial leverage) increases the financial risk of equity shareholder. The advantage of cheaper debt at this point capital structure is offset by increase cost of equity. After there comes a stage when the increase cost of equity cannot be offset by the advantage of the low cost debt. Thus overall cost of capital (Ko) according to this certain point remain more or less constant. According to above discussion it can conclude that the traditional theory support that the cost of capital and value of the firm are dependent upon capital structure of firm.

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Chapte r 7 Earning per share is the reward of an investor for making his investment and it is the best measure of performance of a firm. "The bottom line of income statement is an indictor of 29 .

In this context an example of a firm may be drawn which is running with optimum debt equity combination.performance of "think-tank" or "top-level" of the company. sudden political change or something like this the market price of its equity shares started decreasing and as a result value of the firm went on decreasing. So it should be the objective of financial management to maximize the EPS from the viewpoint of both the investor and investee. Again the objective of financial management is maximization of value measure in terms of market price of equity share of a corporate entity. In practice. So according to this view maximization of market price of equity share leading to the maximization of value of the firm is a criterion of optimum capital structure. Ordinary investors lacking indepth knowledge and inside information mainly depend on EPS to make their investment decision.e. The prevailing view is that the value maximization criterion as a criterion of optimal capital structure is measured in terms of market price of equity share i. change in market price of equity share may occur very rapidly and hence it is very difficult to change the composition of capital structure accordingly. Dividend policy decision Dividend decision is the major decision area of financial management. Theoretically. So increase in market price of equity share due to the influence of external factors leading to the maximization of the value of the firm should not be a criterion of optimum capital structure. Given the objective of the firm to maximize the value of equity share. Capital structure decision is an internal decision of the firm. Due to the downward movement of the value of firm. Rather EPS may be a better substitute.e. the value of the firms is maximized when the market price of equity share is maximized. Its capital structure will not become optimum further and will need restructuring to become optimum again. as a criterion of value maximizing EPS should be the main slogan or mul-mantra of a firm in order to realize the objective of maintaining an appropriate capital structure. A firm is to decide what portion of earning would be distributed to the shareholders by way of dividend and 30 . Now due to the influence of some external factors i. a firm should select a desired combination of financing mix or capital structure to achieve the goal. optimum capital structure implies that combination of debt and equity at which overall cost of capital is Minimum and value of the firms is Maximum.

In particular. which will satisfy the shareholder without hampering future progress of the firm. higher will be the amount of dividend and vice-versa. A finance manager should be able to formulate a suitable dividend policy. The firms with a history of taking on good project and the potential for more good projects in the future acquire much more control over their dividend policy. these firms can pay much less in dividend than they have available as cash profits and hold on to the surplus cash because the shareholder trusts them to reinvest these profits wisely In contrast. The dividend policy of a firm determines the amount of retained earnings. Both dividend and retention are desirable but they are conflicting are desirable but they are conflicting to each other. which can be reinvested by the firm to ultimately result in growth of the firm and subsequent increase in dividends in later years. shareholders of firms having history of poor projects wish to have less retention of profits because of the fear that the profits will be invested in poor projects. In general. However the dividend policy may affect the market price indirectly by affecting the investor’s expectations of growth and risk associated with the stream of dividend. the stability of dividend seems to increase the marker price of the share. The dividend policy of a firm affects the market price of the share. 31 .what portion of the same would be retained in the firm for its future growth. It is common that higher the earnings.

Chapte r 8 32 .

equipment and furniture are good examples of fixed assets.Use of fixed cost bearing capital in the capital structure is termed as financial leverage. Now if a company follows this practice its net return will be attributable to the low base of equity shareholders (lower base being due to the increase in financial leverage). Fixed assets are tangible items usually requiring significant cash outlay and lasting for an extended period of time. its return on equity and EPS. Keeping this theoretical background in view.Generally intangible long-term assets. with the increase in the financial leverage. Such capital especially debt is cheaper than the equity as the cost of debt is generally lower than that of equity and a tax advantage is attached with its use. increase in the financial leverage or use of debt implies that relatively cheaper source of fund replaces a source of fund having relatively higher cost. if total capital employed remains constant. As higher earnings would result in higher dividend. real estate. Conversely decrease in the Earning and Dividend per Share. FIXED ASSETS Fixed assets are those assets owned by a company that contributes to the company's income but are not consumed in the income generating process and are not held for cash conversion purposes. 1. will actually decrease. As a result it will lead to the magnification of return to the equity and thus EPS. the above discussion follows that increase in use of financial leverage increases the Earning per share and thus Dividend per share. So long this situation continues the return on equity or EPS will increase with the increase in financial leverage. 33 . Fixed assets are sometimes collectively referred to as 'plant'. But one should keep in mind that the same holds well in favorable business environment where the company is able to earn a rate of return on investment being higher than its cost of financing. However during the period adversity when the company is not in a position to earn greater (at least equal) rate of return than the cost of debt and preference share. the efforts are made to its applicability in it real corporate practice. instead of increase. In these circumstances. Buildings. The excess of the rate of return on investment over the fixed rate of interest and preference dividend will go to the equity shareholders.

plus interest. Debt vs. "Debt" involves borrowing money to be repaid. If the company is 34 . and the speed of the movement of the inventory through the company is of significant importance to the operating success of the company.A ratio greater than one means assets are mainly financed with debt. 3.DEBT/EQUITY RATIO Indicates the proportion of equity and debt that the company is using to finance its assets. are not categorized as fixed assets but more specifically referred to as 'fixed intangible assets' 2. • A lender is entitled only to repayment of the agreed-upon principal of the loan plus interest. Equity -.such as trademarks and patents. ADVANTAGES OF DEBT COMPARED TO EQUITY Because the lender does not have a claim to equity in the business. less than one means equity provides a majority of the financing. Inventory is a good example of the importance of current assets. Inventory represents assets being held by the company for sale. Sometimes investors only use long term debt instead of total liabilities for a more stringent test.Advantages and Disadvantages In order to expand. it is necessary for business owners to tap financial resources. CURRENT ASSETS It's the current assets that provide the fuel for the engine of growth in a company. debt does not dilute the owner's ownership interest in the company. debt and equity. The following table discusses the advantages and disadvantages of debt financing as compared to equity financing. and has no direct claim on future profits of the business. If the ratio is high (financed more with debt) then the company is in a risky position especially if interest rates are on the rise. Business owners can utilize a variety of financing resources. "Equity" involves raising money by selling interests in the company. initially broken into two categories.

preventing management from pursuing alternative financing options and non-core business opportunities. the owners reap a larger portion of the rewards than they would if they had sold stock in the company to investors in order to finance the growth. • Debt instruments often contain restrictions on the company's activities. investors. principal and interest obligations are Interest on the debt can be deducted on the company's tax return. actual cost of the loan to the company. • Cash flow is required for both principal and interest payments and must be budgeted for. Most loans are not repayable in varying amounts over time based on the business cycles of the company.successful. • • • • Except in the case of variable rate loans. Companies that are too highly leveraged (that have large amounts of debt as compared to equity) often find it difficult to grow because of the high cost of servicing the debt. a business is limited as to the amount of debt it can 35 . Interest is a fixed cost which raises the company's break-even point. hold periodic meetings of shareholders. the more risky the company is considered by lenders and investors. lowering the Raising debt capital is less complicated because the company is not required to The company is not required to send periodic mailings to large numbers of known amounts which can be forecasted and planned for. Accordingly. and seek the vote of shareholders before taking certain actions. DISADVANTAGES OF DEBT COMPARED TO EQUITY • • Unlike equity. • carry. comply with state and federal securities laws and regulations. and owners of the company are in some cases required to personally guarantee repayment of the loan. debt must at some point be repaid. The larger a company's debt-equity ratio. High interest costs during difficult financial periods can increase the risk of insolvency. • The company is usually required to pledge assets of the company to the lender as collateral.

6. 36 . for example in the form of bonds. COST OF EQUITY AND COST OF DEBT When the company issues debt. Dividend payout ratios vary by industry and are affected by market conditions and tax law. 5. both a low dividend payout ratio and a high dividend payout ratio can have good or bad implications. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. DIVIDENT PAYOUT RATIO The dividend payout ratio is the percentage of a company's annual earnings paid out as cash dividends. cost of debt is lower than cost of equity. The fixed-asset turnover ratio is calculated as: This ratio is often used as a measure in manufacturing industries. Because of the ability of debt to escape taxation vis-a-vis equity. Moreover. This interest is tax deductible.specifically property. it to pay bondholders the interest. plant and equipment (PP&E) . it pays dividends. because the company uses the extra money to generate higher returns and.FIXED-ASSET TURNOVER RATIO The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments . This is called a debt tax shield. On the other hand. When companies make these large purchases. A low dividend payout ratio can indicate a fast-growing company whose shareholders willingly forego cash dividends.e. where major purchases are made for PP&E to help increase output. in turn.4. when the company issues equity. prudent investors watch this ratio in following years to see how effective the investment in the fixed assets was. i. This dividend is taxed as corporate income. stocks. a high stock price.net of depreciation.

But a high dividend payout ratio can also point to a mature company with few growth opportunities. This investigation will be helpful to know about any departure from 37 . Also called firm value. 7. Gross Profit Ratio can be calculated in the following manner: Gross Profit Ratio = Gross Profit/Net Sales x 100 Where Gross Profit = Net Sales – Cost of Goods Sold Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock And Net Sales = Total Sales – Sales Return Objective and Significance: Gross Profit Ratio provides guidelines to the concern whether it is earning sufficient profit to cover administration and marketing expenses and is able to cover its fixed expenses. or the value of capital employed.FIRM VALUE Enterprise value. The minor change in the ratio from year to year may be ignored but in case there is big change. 9. Enterprise value is equal to the market value of the shareholders’ equity (stock market capitalisation if a company is quoted) plus the market value of the net financial debt. corresponds to the market value of the enterprise’s machines and commercial activities. Calculated as: 8. it must be investigated.But a low dividend payout ratio can also point to a company that simply can't afford to pay dividends. The gross profit ratio of current year is compared to previous years’ ratios or it is compared with the ratios of the other concerns.GROSS PROFIT RATIO Gross Profit Ratio shows the relationship between Gross Profit of the concern and its Net Sales. Similarly.RETENTION RATIO Percentage of the earnings of a firm that are not paid out to stockholders (shareholders) as dividends but are either reinvested in the firm or are kept as reserve for specified purposes (such as to pay off a debt or purchase a capital asset). a high dividend payout ratio can indicate a blue-chip that pays high dividends and whose stock price is temporarily depressed.

the increment shows the efficiency of the concern. bad stock system. bad sales policies and other such reasons. While comparing the ratio to previous years’ ratios.NET PROFIT RATIO Net Profit Ratio shows the relationship between Net Profit of the concern and Its Net Sales. This ratio is helpful to determine the operational ability of the concern. However it is desirable that this ratio must be high and steady because any fall in it would put the management in difficulty in the realisation of fixed expenses of the business.the standard mark-up and would indicate losses on account of theft. damage. And Net Sales = Total Sales – Sales Return Objective and Significance: In order to work out overall efficiency of the concern Net Profit ratio is calculated. 38 . 10. Net Profit Ratio can be calculated in the following manner: Net Profit Ratio = Net Profit/Net Sales x 100 Where Net Profit = Gross Profit – Selling and Distribution Expenses – Office and Administration Expenses – Financial Expenses – Non Operating Expenses + Non Operating Incomes.

PHARMA INDUSTRY 39 .

Africa and Latin America The Indian vaccine market which was worth US$665 million in 2007-08 is growing at a rate of more than 20% The retail pharmaceutical market in India is expected to cross US$ 12-13 billion by 2012 The Indian drug and pharmaceuticals segment received foreign direct investment to the tune of US$ 1. the domestic pharma market in India was expected to be US$ 10. educated and skilled manpower and cheap labor force among others.2 billion in to the US and Europe followed by Central and Eastern Europe. the pharmaceutical industry is no exception to this.76 billion and this is likely to increase at a compound annual growth rate of 9.43 billion from April 2000 to December 2008 Challenges Every industry has its own sets of advantages and disadvantages under which they have to work. Due to the presence of low cost manufacturing facilities. development. Some of the challenges the industry faces are: 40 . Industry Trends • The pharma industry generally grows at about 1.5 per cent till the year 2015. Globally. In 2008.5-1. India exported drugs worth US$7. manufacturing and research.9 % till 2010 and after that 9.5 % till 2015 In 2007-08.INDIAN PHARMA INDUSTRY The pharmaceutical industry in India is among the most highly organized sectors. the industry is set to scale new heights in the fields of production.9 per cent until 2010 and subsequently at 9.6 times the Gross Domestic Product growth. This industry plays an important role in promoting and sustaining development in the field of global medicine. India ranks third in terms of manufacturing pharma products by volume • • • • • The Indian pharmaceutical industry is expected to grow at a rate of 9.

Export has become an important driving force for growth in this industry with more than 50 % revenue coming from the overseas markets. 41 .• • • • • • • • Regulatory obstacles Lack of proper infrastructure Lack of qualified professionals Expensive research equipments Lack of academic collaboration Underdeveloped molecular discovery program Divide between the industry and study curriculum Government InitiativesThe government of India has undertaken several including policy initiatives and tax breaks for the growth of the pharmaceutical business in India. New Millennium Indian Technology Leadership Initiative and the Drugs and Pharmaceuticals Research Program have been launched by the Government. • Two new schemes namely.25 billion as per the Pharmaceutical Export Council of India. For the financial year 2008-09 the export of drugs is estimated to be $8. the oldest industry chamber in India has predicted 16% growth in the export of India's pharmaceutical growth during 2009-2010. set up by the Government of India. despite the slowdown witnessed in the global economy. which is an organization. exports from the pharmaceutical industry in India have shown good buoyancy in growth. • • The Government is contemplating the creation of SRV or special purpose vehicles with an insurance cover to be used for funding new drug research The Department of Pharmaceuticals is mulling the creation of drug research facilities which can be used by private companies for research work on rent PharmaExport In the recent years. A survey undertaken by FICCI. Some of the measures adopted are: • Pharmaceutical units are eligible for weighted tax reduction at 150% for the research and development expenditure obtained.

The company's product range comprises of anthelmintics. support. The company has 60 active pharmaceutical ingredients to manufacture drugs.6 crore as compared to Rs 394. Some of them are briefly described below: Ranbaxy Laboratories Limited is the biggest pharmaceutical manufacturing company in India. Cipla is an Indian pharmaceutical company renowned for the manufacture of low cost anti AIDS drugs. HoffmannLa Roche Ltd. Stemetil. plant supply. Ismo.189 million which is up by 21%. Nicholas Piramal has entered into join ventures and alliances with several international corporations like Cheissi. Cipla also offers other services like quality control. The company is ranked at the 8th position among the global generic pharmaceutical companies and has presence in 48 countries including world class manufacturing facilities in 10 countries and serves to customers from over 125 countries. Rejoint. F. commissioning and know-how transfer. consulting. cardiovascular drugs. UK.. diagnostic kits and biotechnology products. For the financial year 2008-09 the company registered an increase of 22% in sales and other income over the previous year. During this quarter the company introduced 24 new generic products. Italy. antiasthmatics and corticosteroids. The company has 6 FDA plants that produce active pharma ingredients and 7 FDA inspected and ISO 9001 and ISO 14001 certified plants. Supradyn. antibiotics. Allergan Inc.Key players in Indian Pharmaceutical Industry There are several national and international pharmaceutical companies that operate in India. 18. Reddy's Q1 FY10 result shows the revenues of the company at Rs. Dr. applied for 22 new generic product registrations and filed 4 DMFs. Nicholas Piramal is the second largest pharmaceutical healthcare company in India. IVAX Corp. oncology. Reddy's Laboratories manufactures and markets a wide range of pharmaceuticals both in India and abroad. anti-ulcerants. Most of the country's requirements for pharmaceutical products are met by these companies. critical care products. project appraisal. nutritional supplements. Phensedyl and Haemaccel. engineering. USA etc.5 crore deficit. The brands manufactured by the company include Gardenal. Ranbaxy Laboratories 2009-2010 Q3 Net Profit Results showed a profit of Rs 116.. 42 . antibacterials. recorded during the corresponding period last fiscal. Dr.

it is the world's second largest pharmaceutical company. 43 .8cr which was increase of 39%. vaccines. On November 2009. The net profit was Rs124. anti-infectives and gastro-intestinal/metabolic products among others. The company's 1QFY2010 results show the net sales at Rs880. Zydus Cadila also known as Cadila Healthcare is an Indian pharmaceutical company located in Gujarat.Glaxo Smithkline (GSK) is a United Kingdom based pharma company.3cr which is higher than the estimated Rs773cr. the FDA had announced that the H1N1 vaccine manufactured by GSK would join the list of the four vaccines approved. the increase was on account of higher sales and improvement in the OPM. The company's portfolio of pharma products consist of central nervous system. respiratory. oncology.

DR.REDDYS 44 .

last out” approach. Reddy's offers an unparalleled portfolio to customers. Global Generics. Our expertise in organic synthesis and process development complemented by a controlled supply chain enables us to provide our customers with high quality Bulk Actives at competitive prices. A highly skilled global team focuses on timely delivery of products. Reddy’s conducts NCE research in the areas of metabolic disorders.REDDYS Established in 1984. who include innovators and generic formulators worldwide. the highest levels of customer service. They are aggressively building their product portfolio to cater to generic players in the emerging markets and generic and patent challenge formulators in regulated markets. Dr. regardless of geographic and socio-economic barriers. which includes branded and unbranded generics. Europe and Russia. geographies and products gives an edge in an increasingly competitive global market and allows to provide affordable medication to people across the world. with a focus on India. As a fully integrated pharmaceutical company. With a strong product portfolio of more than 140 products. 45 . We have built the capabilities to consistently deliver on this promise in scale and across the largest product range. and our “first in. comprising Active Pharmaceuticals and Custom Pharmaceuticals businesses. Dr.DR. Reddy’s Laboratories is an emerging global pharmaceutical company. cost competitiveness. Its strong portfolio of businesses. cardiovascular and anti inflamation. Differentiated Formulations. which includes New Chemical Entities (NCEs). Our goal is always to enable our customers to be the first to launch a generic product and to provide value added services to help them remain competitive and profitable for the entire life cycle of the product. Its products are marketed globally. it is little wonder we are today the third ranked API player globally. and full compliance with regulatory and quality requirements. product development. technology leadership. US. including niches like oncology and hormones. Dr. and Proprietary Products. and Generic Biopharmaceuticals. it provides affordable and innovative medicines through three core businesses: Pharmaceutical Services and Active Ingredients.

Its operations capabilities are among its core strengths. and economics. with six USFDA approved plants in India. from the conceptual stage to delivery of drugs to the market place. including the non-executive directors. has full access to any information related to our company. UK. an ideal partner in your product development efforts. Reddy's API. early development work on certain promising molecules. and by delivering cost leadership in API. take decisions within the authority delegated to them and make specific recommendations to the Board on matters in their areas or purview.discharging its fiduciary responsibilities. Our directors are experts in the diverse fields of medicine. Its API business is supported by our technologically advanced Product Development infrastructure. breakthrough product delivery. Dr. They review all significant business decisions. chemistry and medical research human resource development. SWOT ANALYSIS 46 . transparency and disclosure. business strategy. including strategic and regulatory matters. a USFDA inspected plant in Mirfield. The Product Delivery Teams. one in Mexico and our latest addition. the Centres of Excellence and IP teams help create value through Intellectual Property and proactive patenting. finance. Reddy’s Board of Directors comprises eminent individuals from diverse fields. Every member of the Board. and in ensuring that the management observes the highest standards of ethics. Committees appointed by the Board focus on specific areas. All the above advantages make Dr. having a total capacity of 3300KL. The Board acts with autonomy and independence in exercising strategic supervision. which identifies new products and is engaged every step of the way.

etc.a rich source of Active Pharmaceutical Ingredients (APIs). Strong product portfolio Manufacture and market over 250 medicines targeting a wide range of therapies Wide range of anti-cancer drugs developed Over 100 APIs developed Six New Chemical Entities(NCE Low cost base Contributes to company’s high profit margin of around 34% of sales Partnerships with key players in the market keeps its cost base down Research Driven & Global Talent Expertise in developing innovative product formulations 6120 employees worldwide including 951 scientists in which 323 are dedicated towards new drug discovery research. NOVO Nordisk. hence major source of revenue is exports of APIs. Weaknesses: • • High amount of revenues from overseas India . Lack of resources similar to US and Europe based competitors to develop a drug to marketing stage Generic drugs smallest focus 47 . where currency is much more stable than the Indian Rupee • • • • Over-reliance on partnerships In order to compete effectively in global markets. May loose out to western world.Strengths: • • • • • • • • • • • • • • • Wholly owned subsidiaries in US and Europe Joint ventures in China and South Africa Markets pharmaceutical products in 115 countries Partnerships with global pharmaceutical companies like Novartis. strategic partnerships required to develop products. especially Europe.

This may delay the company entry to particular markets which affects revenue • • • • • Competition from US and European Companies Based in lucrative markets e. Products have to pass strict FDA trials before going to market.g. Novartis. Merck & Co Revenues running into billions which dwarfs Reddy’s annual turnover Litigation charges Reddy’s lost the case against Pfizer for the use of generic form of Norvasc drug.Million 48 . many product patents obtained after the 2004 legislation will go off providing an opportunity to the company increase its domestic footprint in Generics Threats:. Legal cost $10m and also loss of market opportunity.• • Smallest portion of revenues from generics at around 20% Lack of patent legislation in India harms sales of its products Opportunities: • • • • • Take a drug all the way to market Take a molecule from its pipeline all the way to the market place cost-effectively market Buy back of the integrated drug development company from ICICI Ventures and Citigroup Domestic Generic drugs market In another 4-6 years. • Needs to gain FDA approval for all sources and products. which can be costly and time consuming. Heightened concerns about profitability of German generics business of Betapharm All amounts in Indian Rs.

83 2007 1.737 to 1.Year 2008-09 2007-08 2006-07 2005-06 2004-05 Sales 68.28 1.3 % EPS 171.58 2008 1.63 2.12 1.502 EBIT 9036 6408 13925 2657 2.055 535.32 0.55 1.700 65.24 1.605 19.25 2006 1.74 4.17 1.094 units change in the EBIT.98 723.59 4.12 0.22 1.62 -90. For every 1 unit change in operating profit EPS changes by 1.245 123.12 5.01 -53. business risk.07 60.38 EPS 54.98 577.92 9.9 2.68 21. In the year 2008-09 the variability of EPS is the highest.46 % EBIT 41.17 10.735 to 1.013 10.89 EBT 8064 5450 12399 2013 1.39 1.27 7.24 1.91 -5 Contribution 14. Thus the sales are closer to break-even in the year 2005-06. Debt increases the probability of cash insolvency over an all-equity-financed firm.61 2005 1.09 18.212 % sales 37.In the year 2008-09 for every 1 unit change in the sales there is 1.326 49. The closer that a firm operates to its break-even point. In the above case business risk is highest in the year 2005-06 49 . Business Risk is the inherent uncertainty in the physical operations of the firm.36 2.09 1. Its impact is shown in the variability of the firm’s operating income (EBIT).274 1.48 20. Financial Risk is the added variability in earnings per share (EPS) plus the risk of possible insolvency that is induced by the use of financial leverage. Interpretation from DOL The DOL increased from the year 2004-05 to 2005-06 and then decreased towards 200809.74 1. Thus the financial risk also steadily increased.242 units.242 during 2004-09.45 -67.68 164.125 24.43 3.242.73 6. DFL increased from 0. DOL magnifies the variability of operating profits and.426 17.84 13.47 -23.61 26.the higher the absolute value of its DOL.4 Interpretation from DFL From above.02 -67 YEAR FL DFL OL DOL CL DTL 2009 1.78 0. In the above case debt increased the variability in EPS as the DFL increased from 0. hence.716 4.

4 2.41 DP Ratio 26.9 0.3 CoE 1.7 0.59 29.58 13.01 4.19 21.94 15.19 2008 21.Reddy’s could use debt as a cheaper source of capital.52 6.94 2007 15.12. Highest DTL is observed in the year 2004-05.71 Fixed Assets and Current assets  Dr.3 10.3 Dbt/Eq ty 0.25 2005 20.07 14. the CoE is higher during the period 2004-07 and Dr.21 60.35 79.4.52 2006 6.08 50 .e.Reddy’s had maximum fixed assets and current assets in the year 2007.8 which is slightly lower than the CoD which is 1. 1.48 18. For every 1 unit increase in sales EPS changed by 13.11 13.9 1. Thus the company enjoyed debt as a cheaper source of capital during 2004-07.71 54.48 20. During 2007-09 the CoE decreased to 1.339 38.57 31.315 8.414 CA 25392 20753 33892 21.8 1.43 82.Interpretation from DTL The percentage change in a firm’s earnings per share (EPS) resulting from a 1 percent change in output (sales) is called DTL.9.7 12.1 2.8 13.71 Retention ratio 71.8 13.Current assets also showed a similar trend but the decrease in the current assets is slightly lower compared to fixed assets Cost of equity and Cost of debt  From the table.82 EPS GPR NPR 19.26 10. thus the company financed its assets using debt and the company is In a risky position. Year DP 2009 26.25 20.220 12.12 0.565 16.92 12.97 93. Debt/equity ratio  In the above case the ratio is greater than 1 in 2007-08 i.Millio CoD YEAR 2009 2008 2007 2006 2005 FA 16.9 78.9 2 3.252 35. All amounts in Indian Rs.55 9.Fixed assets drastically decreased during 2008 and slightly increased towards 2009.703 1.

212 BEP DOL 24267 1. FATR decreased continuously from the year 2006-09.Reddy’s paid a large percentage of the earnings to the shareholders.9 0.5 0.91 2007 1.Reddy’s could leverage and debt and increase the value of the firm.86 2008 0.28 13935 7.97 2006 1.37 1. Also during the same year the WACC is low compared to previous years.6 0.605 19.700 65.  In the year 2006 though the company had highest EPS it paid very meager percentage to the shareholders.62 4. YEAR FA/CA FA/TA FATR 2009 0.64 0.125 24.95 2005 0.59 0.39 9308 18.Reddy’s is able to use the investment on fixed assets to generate 51 .3  The debt to equity ratio and value is the firm are highest during the year 2007-08.8 0.326 49.31 Sales 68. thus Dr.9 65951 20.FATR is highest in the year 2006.33 3.12 65612 15.39 1.7 8.it retained 93% of its earnings during that year. YEAR 2009 2008 2007 2006 2005 From the table: Dbt/Eqt VALUE WACC 56151 16.17 16065 26.13 0.09 19153 2.41 52639 22440 12.64 0.2 1.7 0.53 1. which implies Dr.36 From the table:  sales .From the table:  EPS is highest during 2008-09 and in the same year Dr.

sales and BEP can be observed from the above table i. sales.  An interestion correction berween DOL . 52 .e. DOL is high in the year 2005 when the company’s sales are closer to BEP From the Fixed assets to total assets ratio it can be noticed that the percentage of the fixed assets in the total assets of the company is highest in the year 2006 and same is reflected even in the FA/CA ratio for the year 2006.

The total assets also followed the similar trend EPS-DFL From the graph. it can be noticed that as DFL increased slightly and EPS varied drastically irrespective of the DFL variations. 53 .Fixed assets Vs Current assets  From the graph. the proportion of fixed assets increased from 2005-07 and then decreased.

RANBAXY 54 .

India's largest pharmaceutical company. North America. is an integrated. Ranbaxy entered into an alliance with one of the largest Japanese innovator companies. trusted by healthcare professionals and patients across geographies.Ranbaxy Laboratories Limited (Ranbaxy). The combined entity now ranks among the top 20 pharmaceutical companies. Ranbaxy today has a presence in 23 of the top 25 pharmaceutical markets of the world. producing a wide range of quality. Financials Ranbaxy was incorporated in 1961 and went public in 1973. the Company recorded Global Sales of US $ 1519 Mn. to create an innovator and generic pharmaceutical powerhouse. globally. The Company has a balanced mix of revenues from emerging and developed markets that contribute 54% and 39% respectively. Strategy Ranbaxy is focused on increasing the momentum in the generics business in its key markets through organic and inorganic growth routes. In 2009.. international pharmaceutical company. Growth is well spread across 55 . world-class manufacturing facilities in 7 countries and serves customers in over 125 countries. the Company's largest market contributed sales of US $ 397 Mn. Mission&Vision Ranbaxy's mission is ‘To become a Research-based International Pharmaceutical Company’. In June 2008. followed by Europe garnering US $ 269 Mn and Asia clocking sales of around US $ 441 Mn. research based. The transformational deal will place Ranbaxy in a higher growth trajectory and it will emerge stronger in terms of its global reach and in its capabilities in drug development and manufacturing. affordable generic medicines. For the year 2009. The Company is driven by its vision to ‘Achieve significant business in proprietary prescription products by 2012 with a strong presence in developed markets’. Daiichi Sankyo Company Ltd. The Company has a global footprint in 46 countries.

The R&D environment reflects its commitment to be a leader in the generics space offering value added formulations and development of NDA/ANDAs. when the Company out-licensed its first once-a-day formulation to a multinational company. It is the Company’s constant endeavour to provide a wide basket of generic and innovator products. Ranbaxy’s first significant international success using the NDDS technology platform came in September 1999. In this challenging environment Ranbaxy is enhancing its reach leveraging its competitive advantages to become a top global player.geographies with focus on developed and emerging markets. based on its Novel Drug Delivery System (NDDS) research capability. A first-of-its-kind world class R&D centre was commissioned in 1994. Ranbaxy is among the few Indian pharmaceutical companies in India to have started its research program in the late 70's. long-term competitive advantage. Our people have consistently risen above all challenges maximized opportunities and positioned Ranbaxy as a leader in the global generics space. Driven by innovation and speed to market we focus on delivering world-class generics at an affordable price. in India. The Company will also increasingly focus in high growth potential segments like Vaccines and Biogenerics. the Company has multi-disciplinary R&D centers at Gurgaon. These new areas will add significant depth to the existing product pipeline. in support of its global ambitions. with dedicated facilities for generics research and innovative research. Today. R&D Ranbaxy views its R&D capabilities as a vital component of its business strategy that will provide a sustainable. Ranbaxy’s global footprint extends to 46 countries embracing different locales and cultures to form a family of 50 nationalities with an intellectual pool of some of the best minds in the world 56 . leveraging the unique Hybrid Business Model with Daiichi Sankyo. WorldwideOperations Global Pharma Companies are experiencing an ever changing landscape ripe with challenges and opportunities. Our unwavering determination to achieve excellence leads us to new global benchmarks.

283 units.49 -213.011 2005 Interpretation from DFL From above we can notice that DFL has been continuously fluctuating. business risk. Thus the sales are closer to break-even in the year 2008-09.03 0.36 3.313 -74.22 1.86 1. The closer that a firm operates to its break-even point.24 6.202 -52. Business Risk is the inherent uncertainty in the physical operations of the firm.08 1.21 EBT 10097 -15000 9985 6510 1611 EPS 7.214 0.38403 2006 1.283 to 0. Interpretation from DOL The DOL has decreased from the year 2004-05 to 2007-08 and then increased towards 2008-09.109 61.64 47.28 1.24 0.41 2.in the above case business risk is highest in the year 2008-09. For every 1 unit change in operating profit EPS changes by 2.699 1.305 -76.09 18.633 32.128 2008 1.63 13.87 18.191 1.37 -219.915 units change in the EBIT.442 1. 57 . Thus the financial risk also decreased.77 14.699.915 1. Debt increases the probability of cash insolvency over an all-equity-financed firm.382 311. hence.RANBAXY Year 2009 2008 2007 2006 2005 Sales 76117 74449 69822 61315 51880 % chg 2.4 25.175 -33. Its impact is shown in the variability of the firm’s operating income (EBIT).415 2.542 1.85 20.308 2009 0. Debt also increased the variability in EPS as the DFL decreased from 2. In the year 2008-09 for every 1unit change in the sales there will be 61.118 1.05 -24.07 0.83 % EPS 128.44 2. DOL magnifies the variability of operating profits and.187 57.41745 2007 1.186 -2.58 21. In the year 2004-05 the variability of EPS is the highest.17 174 YEAR FL DFL OL DOL CL DTL 1. the higher is the absolute value of its DOL.351 Contribution EBIT 11991 -2626 13580 9389 3727 10808 -12945 11397 7546 2282 % EBIT 183.244 17.

05 -24.77 14.28 Retn Ratio GPR 100 10.22 NPR 11.5 6.Interpretation from DTL The percentage change in a firm’s earnings per share (EPS) resulting from a 1 percent change in output (sales) is called DPS. It can be noted that the highest cost of debt is greater than the lowest cost of equity.85 20.68 … 2008 49607 58664 0.89 60.For 1 unit increase in sales EPS decreased by 74.93 94.95 2005 20591 28707 2.14 2. YEAR FA CA CoD CO.52 2.72 -22.7 13.78 EPS 7.8 0. Fixed assets and current assets of the company has been continuously increasing from 2005-2009.95 170.9 12.02 0.06 94.5 0.09 18. Thus the company enjoyed debt as a cheaper source of capital.  Debt to equity ratio of the company is less than 1.E DBT/EQTY D/P Ratio 1.9 2009 51135 51020 1.61 -259.8 8.07 5.02 14.06 2006 38953 35761 2. Hence the company financed most of its assets using equity Year 2009 2008 2007 2006 2005 DP ratio … … 60.07 -668.9 0.83 From the table: 58 .79 … 2007 42045 37333 4.28  Ranbaxy could find the debt capital cheaper than equity capital over the period of 6 years from 2004-09.011 unit.5 0.18 6.55 16.06 170.  Ranbaxy had maximum fixed assets in 2009 and maximum current assets in the year 2008.33 9.89 12.

YEAR Sales BEP FA/CA FA/TA FATR DOL 61.  FA/CA ratio and FA/TA ratio are highest for the year 2007 and hence it can be inferred that Ranbaxy invested more in fixed assets during the corresponding year.72 0.00 0.118 61315 12035 0.92 2005 From the table:  FATR decreased from the year 2005-09. which implies Ranbaxy efficiently used the investment on fixed assets to generate sales in the year 2005.542 69822 11223 1.69 WACC 14.  Ranbaxy operated close to BEP IN THE YEAR 2009 and this is indicated by Highest DOL for the same year.93 0.Ranbaxy could not declare any dividents during 2008 and 2009 because of low profits and NPR is negative for the year 2007-08 after paying taxes which indicate loss.2 13 12.915 76117 75090 1.79 0.11 0. when the WACC and debt to equity ratio are low.415 51880 20114 0.73 2006 32.13 0.14 1 2008 1.7 Value of the firm 74892 74155 62933 56788 35186 From the above table:  Debt to equity ratio is highest during the year 2005-06 and highest WACC during 2006-07.85 0.214 74449 29255 0. Year 2009 2008 2007 2006 2005 DBT/EQTY 0.89 0.42 2.50 2 2009 -52.68 0.  The value of the firm is high in the year 2009.52 2.53 2.FATR is highest in the year 2005.71 2007 17.8 12 10. 59 .46 2.

the proportion of current assets and also the total assets increased from 2005-08 and then slightly decreased during 2008-09 EPS -DFL 60 .Fixed assets Vs Current assets From the graph.

e.in the year 2006-07 the earnings per share are maximum i.The cash inflows in the year 2007-08 are not enough to meet the fixed costs and therefore equity share holders could not realize any earnings on the equity share. in this year the firm has succesfully leveraged on the debt to increase the EPS compared to 2005-06 61 .

ANVISABrazil for both APIs & Formulations and has Global presence with own infrastructure. CNS. the Company became a public venture in 1992. strategic alliances. It commenced operations in 1988-1989 with a single unit manufacturing active pharmaceutical ingredients. Gastroenterologicals. Antibiotics. Ramprasad Reddy. WHO. Anti-Retroviral. MCC-SA. Founded in 1986 by Mr. Anti-Diabetics and Anti-Allergic with approved manufacturing facilities by USFDA.V. dosage formulations and applies new technology for better processes. K. Aurobindo has robust product portfolio spread over major product areas encompassing CVS. Aurobindo Pharma was born of a vision. P.AUROBINDO Aurobindo Among the largest 'Vertically Integrated' pharmaceutical companies in India. subsidiaries & joint ventures. In the process. Aurobindo’s R & D strengths lie in developing intellectual property in non-infringing processes and resolving complex chemistry challenges. Aurobindo develops new drug delivery systems. Aurobindo Pharma went 62 . highly committed group of professionals. Mr. Nithyananda Reddy and a small. UKMHRA.

They are adequately supported by a large team of professional managers Aurobindo has a global footprint Scope of operations is large in the U. Vision To become Asia’s leading and one among the top 15 generic pharma companies in the world by 2015. Aurobindo Pharma created a name for itself in the manufacture of bulk actives. Domestic market remains an area of strength. Products The Company has one of the widest product portfolio of 300+ products Major therapeutic segments covered: • Cardio vascular • Neuroscience • Anti-retroviral 63 . banking and consulting to guide and supervise the Company. its area of core competence. Mission To become the most valued pharma partner for the world pharma fraternity by continuously researching. accountability and protecting shareholder interests have always guided the Company. Over the years. It is R&D focused.public in 1995 by listing its shares in various stock exchanges in the country. and is becoming a marketing conglomerate across the world. with a global marketing network. After ensuring a firm foundation of cost effective production capabilities and a clutch of loyal customers. and Europe with considerable presence in Latin America and emerging markets.S. developing & manufacturing a wide range of products complying to the highest regulatory standards Eminent Board Corporate governance. Aurobindo Pharma has evolved into a knowledge driven company. has a multiproduct portfolio with multi-country manufacturing facilities. teaching. the company has entered the high value speciality generic formulations segment. There is an eminent board with considerable knowledge and experience in pharmaceutical and healthcare. Developmental activity is on-going in Japan and Australia. administration.

as in the past. care is taken to create value for all stakeholders. More important. This high energy pharmaceutical company has a passion to succeed in the most competitive markets. Aurobindo has successfully sought and worked for leadership position in its product category. and in particular to the customers and investors. Value creation and cost effectiveness start early at Aurobindo. shareholder value has been increased while meeting customer needs. Ability to control quality and power to price has helped Aurobindo to offer quality pharmaceuticals at affordable prices. All projects are completed within budgeted time without cost overruns. The Company straddles key strategies from fermentation to formulation and is one of the most cost effective producers in the world. The Company has reported profits every year and is a consistent dividend paying company. Aurobindo’s commitment to create good health acts as a constant driver for improvement. sensitivity to the market and relationship with customers are the bedrock for the healthy momentum in the business. Vertically integrated manufacturing process and captive raw material source makes an impact in end product marketing. In this journey. manufacturing capabilities. Performance track record For over two decades. There is considerable head room even as formulations sales have been showing secular rise quarter-on-quarter. This is supported by huge manufacturing capacity for intermediates and active ingredients. Product knowledge. 64 .• Gastro-intestinal • Anti-infective • Pain management • Osteoporosis Capacities There are large capacities for manufacturing formulations. There is an excitement across the organization driving the change to become a global resource in the pharmaceutical industry.

35 1.355 0.2 14722.91 % EPS -55.9 1535.6 929 429.4 3448.4 829.875 1.1 4356 3217.23 1.384 DTL 1.587 1.087 2.463 62.049 1.912 26.963 YEAR 2009 2008 2007 2006 2005 2004 FL 1.653 1.155 4.956 CL 1.4 2311.072 1.333 1.186 DFL 1.243 44.9 54.755 21.2 EPS 23.316 -73.98 13.6 1234 EBIT 2121.8 19797.97 0.388 1.263 1.081 1.097 EBT 1570.1 3610 2498.047 1.188 -60.128 225.1 11591.3 246.392 2.386 OL 1.585 3.932 1.563 Contribution 2945.65 Interpretation from DFL 65 .203 2.82 3.875 1.28 0.34 1.752 85.7 % sales 19.287 1.5 24092.489 1.47 27 -13.1 % EBIT 41.21 42.45 0.AUROBINDO Year 200809 200708 200607 200506 200405 Sales 28852.431 0.22 6.11 91.28 0.167 DOL 2.698 34.206 1.

the higher is the absolute value of its DOL.434 units change in the EBIT.85 0.45 0.in the above case business risk is highest in the year 2004-05 Interpretation from DTL The percentage change in a firm’s earnings per share (EPS) resulting from a 1 percent change in output (sales) is called DPS.43 66 .From above we can notice that DFL has been continuously fluctuating. Business Risk is the inherent uncertainty in the physical operations of the firm.14 0. CoD YEAR 2009 2008 2007 2006 2005 FA 11579 9507 13713 12334 11108 CA 19455 17219 18630 12560 8883 COE 1.in the year 2004-05 for every 1unit change in the sales there will be 4.81 0.06 6. Its impact is shown in the variability of the firm’s operating income (EBIT).For 1 unit increase in sales EPS decreased by unit. In the year 200607 the variability of EPS is the highest.37 6.81 13.16 debt/equit y 0. hence.93 1. Debt also increased the variability in EPS as the DFL increases.02 7.40 1.72 0. The closer that a firm operates to its break-even point.Thus financial risk is highest in the year 2006-07 Interpretation from DOL The DOL has decreased from the year 2004-05 to 2008-09 . Thus the sales are closer to break-even in the year 2004-05.587 units.41 DP ratio 22. DOL magnifies the variability of operating profits and. Debt increases the probability of cash insolvency over an all-equity-financed firm.83 0. For every 1 unit change in operating profit EPS changes by 3. business risk.

35 15.54 10. Aurobindo had maximum fixed assets in 2007 and maximum current assets in the year 2009.  Debt to equity ratio of the company is greater than 1 during 2006-07. Fixed assets and current assets of the company has been continuously increasing from 2005-2007 and then decreased towards 2008.98 13.43 WACC Value of the firm the shareholders and retained 92% of the earnings 2009 2008 2007 2006 2005 13.34 92.06 6.02 9.81 13. Hence the company financed most of its assets using debt in 2007. 67 .22 6.74 4.37 87.13 13.93 1.09 4.89 23.9 10.72 0.54 12.47 91.87 11.02 7.25 16.3 35139 30487 29728 21825 17086 From the table: The value of the firm has been continuously increasing while the debt to equity ratio increased till 2006-07 and decreased during 2007-08. year DP ratio Rtn ratio GPR NPR EPS 2009 2008 2007 2006 2005 22.16 92.85 0.37 6.88 91.91 From the table:  During the year 2007-08 EPS is highest but the company paid only 7% of the earnings to Year Debt/equity 0.45 0.85 16.41 11.6 12.56 20.9 54.21 42.

YEAR 2009 2008 2007 2006 2005

FA/CA 0.60 0.55 0.74 0.98 1.25

FA/TA

FATR

Sales 102228.4 85377.6 88566.1 40097.2 34105.2

BEP

0.74 0.74 0.77 0.75 0.6

0.63 0.75 0.91 1.26 1.31

70022 59798 53380 12654 9487

DOL 2.087 2.049 1.82 3.155 4.431

From the table: FATR decreased from the year 2005-09.FATR is highest in the year 2005, which implies Aurobindo efficiently used the investment on fixed assets to generate sales in the year 2005.

From the graph, it can be noticed that as DFL decreased, EPS also decreased in the corresponding year and increased as the DFL increased. So, it can be said that DFL and EPS are positively correlated. Fixed assets Vs Current assets
68

From the graph, we can notice that proportion of current assets is increased from 2005-09 and the proportion of fixed assets decreased. Also the total assets of the company increased

TELECOM INDUSTRY
69

The Indian Telecommunications network with 203 million connections is the third largest in the world and the second largest among the emerging economies of Asia.Today, it is the fastest growing market in the world. The telecommunication sector continued to register significant success during the year and has emerged as one of the key sectors responsible for India’s resurgent India’s economic growth. Telecom sector accounts for 1 percent of India’s GDP. Likely to double in 23 years • Telecom services contribute 30 percent to India’s total service tax revenue • The Indian telecom sector gives direct employment to more than 4,00,000 people, compared to about 6,00,000 people in China • Not just the enabler of software, BPO and ITeS companies, it is also the lifeline of a fast growing E-commerce space • State-of-the-art telecom infrastructure has led to the rise of cities like Mysore, Mangalore, Jaipur, Ahmedabad, Kochi on the software services map • This has helped spread the benefits of a booming Indian economy to beyond metros and large cities, and wealth creation is happening in tier-2 cities

70

) • Foreign invested companies (Hutchison-Essar. Spice Communications) • • • Fastest Growing Sector – CAGR 22% (2002-07) Second Largest Telecom Market – Lowest tariff charges in the world – Wireless Subscribers – 315.Growth The sector.This rapid growth has been possible due to various proactive and positive decisions of the Government and contribution of both by the public and the private sector. Bharti Tele-Ventures. B & C) Bharti Airtel – Largest player with presence in 23 Circles 71 .4 Categories ( Metro.3 Mn – Wireline Subscribers – 38. has moved to a higher growth path of an average rate of 40-45 per cent during the last two years. which was growing in the range of 20 to 25 per cent up to the year 2002-03. BPL Mobile. A.4 Mn – Teledensity – 30. Tata Teleservices. Major Players There are three types of players in telecom services: • State owned companies (BSNL and MTNL) • Private Indian owned companies (Reliance Infocomm. Escotel. The rapid strides in the telecom sector have been facilitated by liberal policies of the Government that provide easy market access for telecom equipment and a fair regulatory framework for offering telecom services to the Indian consumers at affordable prices. Idea Cellular.6 – 23 Circles .

For every 1 unit change in operating profit EPS changes by 9.5 2198.1 4138.2 3871.53 … 72 D/P Ratio YEAR FA CA 404 67 CoD CoE 6147 2009 8.2 2009 1.84 units.6 9.2 8143.9 Contributio n 8108.36 1.71 2008 1.84 2007 2.69 48.1 0.1 5092.98 EBT 2740.38 -21.1 682.47 30.2 %change in EBIT -8.19 0. DFL has been continuously fluctuating.3 8293.02 508.86 -54.76 FL DFL YEAR 1. In the year 2006-07 the variability of EPS is the highest.5 %change In sales 47.1 14861.1 22674.29 %change in EPS 180 -84.1 2932. Dbt/Eqt y 7 1.86 2006 0.98 0.35 2.1 29496.33 -72.Year 2009 2008 2007 2006 2005 Sales 29356.48 -49.36 47.18 2005 Interpretation from DFL From the above table.19 51.2 6735.44 -1.67 38.09 106.1 EBIT 3787.6 5369.3 .7 EPS 0.1 19853.67 2.8 10864. In the above case as the DFL decreased and the financial risk also decreased.1 43500.08 72.41 1.1 .

05 11.  Though the GPR is high in the year 2004-05.91 100 25.5 1.51 9.58 … … … … Fixed Assets and Current assets IDEA Cellular had maximum fixed assets and current assets in the year 2009.81 15.54 1. Thus the company enjoyed debt as a cheaper source of capital during 2004-09 Debt/equity ratio In the above case the ratio is greater than 1 during the four years period ( from 2004-2008) Thus the company financed its assets using debt and the company is In a risky position in case the interest rate increases.9 35928 2005 35974.44 100 25.29 6.98 0.1 8.54 18.5821 346 2008 3.2 7.4 67 6098 206 2007 9. During 2007-09 the CoE decreased to 7.  In the year 2006-07 the NPR is high and hence the EPS is also high. the CoE is higher during the period 2004-05 and the company could use debt as a cheaper source of capital. Fixed assets decreased during 2008 and in turn increased towards 2009.87 28.1 1.36 1. Cost of equity and Cost of debt From the table. Year Dbt/Eq ty WACC Value 73 .29  IDEA retained 100% of its earning during all the 5 years under study and hence the company did not pay dividents to its shareholders. Current assets decreased from 2005-07 and then increased towards the year 2009.84 8.19 0.38 1.35 2. the NPR is very low.85 2.60 14.62 2.4 58 2006 38768.9 39752 1.71 100 20.1 which is higherer than the CoD which is 1.24 0.33 100 24. Year 2009 2008 2007 2006 2005 EPS Rtn Ratio GPR NPR 100 15.1.

1 19853.9 21666 9 10060 0 64303 44192 40633 From the table.Also the company has comparitively low value during the year 2004-05 when it financed most of its assets using debt.62 0.63 0.48 0.4 12.1 29496.61 1. Pnt EBIT 3787.24 1.54 1.5 Indiff. it is interesting to observe that the value of the company is the highes in the year 2008-09 when it financed most of its assets using equity i.2 8143.1 4138.53 1.52 1.74 0. YEAR 2009 2008 2007 2006 2005 FA/CA FA/TA FATR Sales 29356.8 11.1 22674.FATR is highest in the year 2006.8 13.62 2.95 1.2 3871.01 2333 2560 5240 3384 2593  FATR decreased from the year 2006-09.e.2009 2008 2007 2006 2005 0.52 0.68 2.85 2.  FA/CA ratio and FA/TA ratio are highest for the year 2007. 74 .08 0.2 1. which implies IDEA Cellular efficiently used the investment on fixed assets to generate sales in the year 2005.2 9.75 0.58 14.Hence IDEACellular could not use debt as a cheaper source of finance. debt/ equity ratio is the low.6 5369.9 0.1 43500.6 0.

75 .

From the graph. the proportion of fixed assets increased and the total assets of the company also increased from 2005-09 EPS-DFL From the graph it can be observed that the company leveraged properly and used debt component successfully. EPS and DFL are positively correlated in the case of IDEA CELLULAR Ltd. 76 .

BHARTI AIRTEL 77 .

contributing to its economic resurgence. The Enterprise business provides end-to-end telecom solutions to corporate customers and national and international long distance services to telcos.Mobile. The Telemedia business provides broadband. has been at the forefront of technology and has pioneered several innovations in the telecom sector. The mobile business offers services in India. rose to the pinnacle to achivement and continues to lead. Telemedia services. Enterprise and Digital TV. Airtel. • • Largest Private Integrated Telecom Company in India 3rd Largest Wireless Operator in the World Largest & Fastest Growing Wireless Operator in India Largest Telecom Company listed on Indian Stock Exchange • • 78 . Sri Lanka and Bangladesh. IPTV and telephone services in 89 Indian cities. to connecting India's leading 1000+ corporates. one of Asia’s leading integrated telecom services providers with operations in 19 countries across Asia and Africa.Airtel comes to you from Bharti Airtel Limited. creativity and a team driven “to seize the day” with an ambition to become the most globally admired telecom service. They also connect Indians living in USA. As India's leading telecommunications company Airtel brand has played the role as a major catalyst in India's reforms. The company is structured into four strategic business units . The Digital TV business provides Direct-to-Home TV services across India. Today they touch peoples lives with their Mobile services. UK and Canada with callhome service. a force unleashed into the market with a relentless and unwavering determination to succeed. A spirit charged with energy. Bharti Airtel since its inception. Telemedia. Airtel was born free. in just ten years of operations.

to adapt to the changing environment and evolving customer needs • Making it Happen .to do their best Being Flexible .by striving to change the status quo. • To Diversify into new businesses in agriculture. innovate and energize new ideas with a strong passion and entrepreneurial spirit OBJECTIVES AND VALUES • To undertake transformational projects that have a positive impact on the society and contribute to the nation building process. We deliver what we promise and go out of our way to delight the customer with a little bit more” CORE VALUES • • Empowering People .” MISSION • “ We at Airtel always think in fresh and innovative ways about the needs of our customers and how we want them to feel.with an innate desire to do good 79 .VISION 2020 • • To build India's finest business conglomerate by 2020 Supporting education of underprivileged children through Bharti Foundation Strategic Intent: – To create a conglomerate of the future by bringing about “Big Transformations through Brave Actions. financial services and retail business with world-class partners • • To lay the foundation for building a “conglomerate” of future Openness and transparency .

• The fact that the Airtel has not pulled off a deal with South Africa's MTN could signal the lack of any real emerging market investment opportunity for the business once the Indian market has become mature. Nokia . This has underpinned its large and rising customer base. It is the largest cellular provider in India. Towers are important if your company wishes to provide wide coverage nationally.• Creating Positive Impact – with a desire to create a meaningful difference in society. So the start-up business had to outsource to industry experts in the field. and also provides advertising opportunities in Indian for Google. Weaknesses • An often cited original weakness is that when the business was started by Sunil Bharti Mittal over 15 years ago. • Until recently Airtel did not own its own towers. 80 . This means that the business has access to knowledge and technology from other parts of the telecommunications world.as well as many other telecommunications services to both domestic and corporate customers. with whom they hold a strategic alliance. the business has little knowledge and experience of how a cellular telephone system actually worked. and also supplies broadband and telephone services . • The company has covered the entire Indian nation with its network. • Other stakeholders in Bharti Airtel include Sony-Ericsson.and Sing Tel. SWOT ANALYSIS Strengths • Bharti Airtel has more than 65 million customers (July 2008). Opportunities • The company possesses a customized version of the Google search engine which will enhance broadband services to customers. which was a particular strength of some of its competitors such as Hutchison Essar. The tie-up with Google can only enhance the Airtel brand.

for example replacing the Revenue-PerCustomer model with a Revenue-Per-Minute model which is better suited to India. Threats • Airtel and Vodafone seem to be having an on/off relationship. It sees that less well-off consumers may only be able to afford a few tens of Rupees per call.• Global telecommunications and new technology brands see Airtel as a key strategic player in the Indian market.000 to 160. • The quickly changing pace of the global telecommunications industry could tempt Airtel to go along the acquisition trail which may make it vulnerable if the world goes into recession.000 small villages every year. and also so that the business benefits are scalable . IPTV is another potential new service that could underpin the company's long-term strategy. The new iPhone will be launched in India via an Airtel distributorship. This new business will control more than 60% of India's network towers. Perhaps this was an impact upon the decision not to proceed with talks about the potential purchase of South Africa's MTN in May 2008. • Bharti Airtel is embarking on another joint venture with Vodafone Essar and Idea Cellular to create a new independent tower company called Indus Towers. and instead invested in its rival Hutchison Essar. • Despite being forced to outsource much of its technical operations in the early days. Knowledge and technology previously available to Airtel now moves into the hands of one of its competitors.6% stake in the Airtel business sold it back to Airtel. as the company moved into small and remote villages and towns. this allowed Airtel to work from its own blank sheet of paper. Vodafone which owned a 5. • Bharti Airtel could also be the target for the takeover vision of other global telecommunications players that wish to move into the Indian market. • The company is investing in its operation in 120. 81 . and to question industry approaches and practices .using its 'Matchbox' strategy. Another strategic partnership is held with BlackBerry Wireless Solutions. allowing a competing Inidan industrialist to invest in the new emerging African telecommunications market. This opened the door for talks between Reliance Communication's Anil Ambani and MTN.

Bharti Airtel since its inception has been at the forefront of technology and has steered the course of the telecom sector in the country with its world class products and services. Airtel Telemedia Services & Enterprise Services AIRTEL 82 . The businesses at Bharti Airtel have been structured into three individual strategic business units (SBU's) .Mobile Services.Airtel comes to you from Bharti Airtel Limited. India's largest integrated and the first private telecom services provider with a footprint in all the 23 telecom circles.

13 Contribution EBIT % EBIT EBT EPS % EPS 104523 78394.25 … CoD 8.72 40.4 216814.5 Interpretation from DFL From above .9 41.39 0.7 153481.776 6.21 46.08 53386.6 units.9 59.3 … 0. 9 59172.3 361194.4 1.13 5.8 3.43 … 0.1 73115. 0 37579.5 1.43 10.09 1.Current assets increased from the year 2005-09.65 121. 4 21990.8 15831.we can notice that DFL has decreased from the year 2004-05 towards 200809.60 1.6 % sales 38.627.1 91.01 91359.50 10.15 DFL 191128 0.45 1.1 68.8 0. 2 29542.9 18271.06 1.26 11.8 2.4 34.63 140918 1.528 20. 83 . 4 44454.55 1. Thus the financial risk also decreased CoE YEAR 2009 2008 2007 2006 2005 .3 25698.82 23.73 Dbt/eqt y D/P Ratio Fixed Assets and Current asset  Airtel had maximum fixed assets and current assets in the year 2009.1 49272.7 98.8 65 136.33 59.7 9.Year 2009 2008-09 2008 2007-08 2007 2006-07 2006 2005 2005-06 2004-05 Year Sales FL 372328 268728 183492 115393 80076.4 46783.9 107594. For every 1 unit change in operating profit EPS changes by 1.67 2.05 44.61 … 0. In the year 2005-06 the variability of EPS is the highest.03 85910. DFL decreased from 1.5 38447.8 23454.8 4.01 1. FA CA 480922.6 to 0.07 59.2 2.23 21.1 33.

6 67165 49956 31298 15706 10594 104523 78394.3 2006 0.  FATR increased from the year 2005-07 and decreased towards 2009.99 22.84 0.36 22.YEAR 2009 2008 2007 2006 2005 DP RATIO 5.8  Airtel retained 100% of its earnings during 2005-07 and hence could not pay any dividends to its shareholders during that period.83 FATR Sales Indf.89 FA/TA 0.13 15.89 0.14 NPR 26.15 29.58 23.20 4.33 29.72 .4 2007 0.61 8.  A gradual increase in the value of the company can be observed.  Its Gross Profit Ratios and Net Profit Ratios increased gradually during the given period.25 13.75 0.3 12.08 27.46 17.1 84 0.1 49272. Pnt EBIT 372328 268728 183492 115393 80076.88 5. Year Dbt/Eqty WACC 2009 0.47 23.03 0.73 … … … … Ret ratio 94.88 1 1.3 Value 375301 258130 157751 115362 94371  Airtel financed most of its assets using equity and debt/ equity ratios are unusually low.83 0.61 4.FATR is YEAR 2009 2008 2007 2006 2005 FA/CA 8.9 18271.43 12 2005 0.22 100 100 100 GPR 28.13 9.3 25698.78 95.91 0.2 2008 0.

From the graph. FA/CA ratio and FA/TA ratio are highest for the year 2008. 85 . Because the EPS is continuosly increasing and DFL and EPS are positively correlated in this case. the proportion of fixed assets is very high compared to current assets and the total assets of the company increased from 2005-09 EPS-DFL Airtel used debt to a sufficient extent to give more returns to the shareholders.

TATA COMMUNICATIONS \ 86 .

Tata Communications is a leading global provider of a new world of communications. Tata Communications' depth and breadth of reach in emerging markets includes leadership in Indian enterprise data services. Revenues in 2007-08 are estimated at $70. with connectivity to more than 200 countries across 400 PoPs. and Nepal (United Telecom Limited). (NYSE: TCL) Vision Deliver a new world of communications to advance the reach and leadership of our customers. The Group employs around 350. Tata Group Profile Tata is a rapidly growing business group based in India with significant international operations. Commitment Invest in building long-lasting relationships with customers and partners and lead the industry in responsiveness and flexibility. a Tier-1 IP network. Sri Lanka (Tata Communications Lanka Limited). and nearly 1 million square feet of data center and colocation space worldwide. Tata Communications leverages its advanced solutions capabilities and domain expertise across its global and pan-India network to deliver managed solutions to multi-national enterprises. With a leadership position in emerging markets. of which 61 per cent is from business outside India.8 billion USD . The Tata Global Network includes one of the most advanced and largest submarine cable networks. leadership in global international voice. service providers and Indian consumers. and strategic investments in operators in South Africa (Neotel). Tata Communications Limited is listed on the Bombay Stock Exchange and the National Stock Exchange of India and its ADRs are listed on the New York Stock Exchange.000 people 87 .

In more recent times. UK. engineering. which made India's first indigenously developed car. Indian Hotels and Tata Communications. India's first software company. Tata Chemicals. TCS is a leading global software company. Businessweek ranked the Group sixth amongst the "World's Most Innovative Companies" and the Reputation Institute." Founded by Jamsetji Tata in 1868. The major companies in the Group include Tata Steel. the Group is also gaining international recognition. services. 88 . In tandem with the increasing international footprint of its companies. a UK-based consultancy firm. besides India.worldwide. power.2 million. Tata Motors. in 1998 and recently unveiled the world's lowest-cost car. Brazil. Tata Chemicals is the world's second largest manufacturer of soda ash. The Tata name has been respected in India for 140 years for its adherence to strong values and business ethics. and Tata Motors. Tata Motors is among the top five commercial vehicle manufacturers in the world and has recently acquired Jaguar and Land Rover. the Indica. The Group's 27 publicly listed enterprises have a combined market capitalisation of some $60 billion. Tata Consultancy Services (TCS). the Tata Nano. consumer products and chemicals. recently rated it as the "World's Sixth Most Reputed Firm. Uruguay and China. Brand Finance. hospitality and airlines. for commercial launch by end of 2008. and a shareholder base of 3. recently valued the Tata brand at $11. Tata Tea is the second largest branded tea company in the world. The business operations of the Tata Group currently encompass seven business sectors: communications and information technology. Tata Power. materials. through its UK-based subsidiary Tetley. The Group's major companies are beginning to be counted globally.4 billion and ranked it 57th amongst the Top 100 brands in the world. the Tata Group's early years were inspired by the spirit of nationalism. Tata Communications is one of the world's largest wholesale voice carriers. Tata Steel became the sixth largest steel maker in the world after it acquired Corus. which pioneered the international delivery model. USA. energy. The Group pioneered several industries of national importance in India: steel. with delivery centres in the US. Hungary. among the highest among Indian business houses. Tata Tea. the Tata Group's pioneering spirit has been showcased by companies like Tata Consultancy Services.

healthcare and livelihoods. The Nano car is one example. By combining the assets of Teleglobe and TGN. is held by philanthropic trusts which have created national institutions in science and technology. social studies and the performing arts. VSNLI has achieved the traffic volumes necessary to be a credible low-cost provider in the international wholesale market. The trusts also provide aid and assistance to NGOs in the areas of education. Tata companies also extend social welfare activities to communities around their industrial units. Anchored in India and wedded to its traditional values and strong ethics. terrestrial fibre and satellite capacity – essential for an international wholesale provider wishing to provide end-to-end connectivity without becoming overreliant on partners to fill the geographic gaps. the Group is focusing on new technologies and innovation to drive its business in India and internationally. Twothirds of the equity of Tata Sons. • Commanding presence in international wholesale voice market. a position built on its extensive bilateral relationships. VSNLI’s extensive network includes undersea cable. which in 2008 is ranked the world's fourth fastest. • Geographic footprint. Going forward. world scale businesses in select sectors. The Group aims to build a series of world class. SWOT ANALYSIS Strengths • Scale. medical research.The Tata Group has always believed in returning wealth to the society it serves. the Tata Group's promoter company. The company is now carrying over 16 billion international voice minutes per year. the Group is building a multinational business which will achieve growth through excellence and innovation. as is the Eka supercomputer (developed by another Tata company). 89 . while balancing the interests of its shareholders. The combined development-related expenditure of the Trusts and the companies amounts to around 4 per cent of the Group's net profits. its employees and wider society.

IP points of presence (PoPs) and earth stations. energy. • • Reputation. 90 . The company has over 345Gbit/s of peering capacity with other carriers. and innovative value-added services. The Tata Group.• Tier 1 ISP. switching gateways. VSNLI can claim established status in the sector. VSNLI is an international provider of mobile signalling conversion services. based on Teleglobe’s strong position in this market. materials. VSNL also provides IP VPN services in over 115 locations in India and has started offering national long-distance services in some Indian towns. has activities in business sectors from information systems and communications to engineering. VSNLI can offer a comprehensive suite of voice. VSNLI has acquired a strong presence in the wholesale market. • Access to intellectual property and proprietary (VoIP) technology. VoIP enables better control of least-cost routing. Customer base. • Strength in signalling conversion market. It is one of India's largest business conglomerates. The operator has rolled out its metro Ethernet services in six major cities in India and another 18 cities globally. consumer products and chemicals. and its existing bilateral relationships. services. • Home base in Indian market. Based on Teleglobe’s long history in international wholesale. which held 45.15% of VSNL as of 31 March 2006. supplementing the traditional voice product portfolio with the VoIP network and services. provided through a variety of network options including submarine cable. data and mobile services. This will allow more flexible services for existing customers and the targeting of new customer segments. with revenues of $21. VSNLI has direct connections to the fast growing Indian market via VSNL. • Backing of the Tata Group. • Full portfolio of services.9 billion in 2005/2006. Delhi. VSNLI can obtain enhanced global peering capability and redundancy as a tier-one ISP. Chennai and Bangalore. which was the first ISP in India and now offers hosting and co-location services out of its data centres in Mumbai. Based on Teleglobe/ITXC’s capability. with a multitude of blue-chip fixed and mobile customers for its voice and data services.

With the ITXC expertise on board. • Growth in mobile services. and VSNLI is doing its best to capitalise on this. Teleglobe was one of the leading providers of signalling services to the mobile sector. and while VSNLI now has an impressive roster of long-distance assets. VSNLI is still not incredibly well known as a provider of corporate communications solutions to global enterprises. VSNLI gains a boost in moving from TDM to VoIP technology. Tata Group ownership will help to achieve this by providing the necessary skills and resources needed to become a credible network-based IT services provider. • Image. One way in which VSNLI wants to move up the value chain is by building applications into the network. Opportunities • Leverage Tata Group. a process that was already moving apace and is becoming increasingly important in the international wholesale voice market. As with any erstwhile wholesale provider attempting to serve the enterprise market. it is still underrepresented as an access provider. VSNLI will need to reassure its wholesale customers that its retail activities are not in direct competition with theirs. and to take advantage of expected growth in end-user mobile voice and data traffic. • Leapfrog to VoIP. but there is some way to go before it becomes as well known as some of its competitors. VSNLI can leverage the group’s strengths in IT and network solutions to drive its presence in the corporate marketplace. Access is key to serving the enterprise market. With Tata Group now being VSNL’s major shareholder. • Build applications into the network. • Lack of access networks. Last mile will prove to be a challenge in delivering services to its targeted corporate customer base. 91 . The company is increasing its profile in the marketplace.Weaknesses • Wholesale/retail conflict. The central role this plays in mobile operators’ businesses gives VSNLI the scope to sell other types of mobile-oriented service.

VSNLI states that it is the world’s leading wholesale VoIP carrier.• Reaching new voice market segments. • • Wholesale voice commoditisation. and now VSNLI. and has the world’s largest VoIP network. this will undermine VSNLI’s core international bandwidth business. With a large number of wholesale operators focused on winning business and launching new products specifically for mobile operators. Slump in bandwidth sales. The acquisition of ITXC meant that Teleglobe. 92 . Voice prices are continuing to fall. undermining margins and revenues in the sector. If data growth in India runs out of steam. Threats • Competition for mobile business. producing problems for the company in supporting the opex costs of its significant bandwidth assets. VSNLI should not be complacent about its current standing in the sector. can expand its service portfolio to target a wider market for voice services.

03 0.08 49.3 10.8 3.2 34105.1 11048.25 2.17 2008 2.2 8764.4 63454.2 3725.49 Dbt/eqty DP ratio From the table: 93 . 4 85377.4 14.7 3355.42 to 8.7 -37.38 2.2 %change 19.7 30973 CA 41484.34 EBT EPS %change 417.3 5161.09 -34.2 6 0.4 3.65 2006 1. Thus the financial risk also increased YEAR 2009 2008 2007 2006 2005 FA 116058.6 1489.2 3.4 12991.1 29893.17.60 1.3 CoD 1 1.62 2.89 18.1 40097.7 82963.2 10.6 88566.3 6867.7 -78. DFL increased from 1.11 0.31 YEAR FL DFL 2009 1.7 20617.6 21161 20236.2 5.3 68401.17 units.3 28.28 32.45 2005 0.7 %change 51. In the year 2008-09 the variability of EPS is the highest.10 1.24 2007 1.8 5069. For every 1 unit change in operating profit EPS changes by 8.7 CoE 6.34 0.02 30.TATA communication Year 2009 2008 2007 2006 2005 Sales 102228.56 Contribution EBIT 16092.5 4227.2 120.01 29.1 9.8 4.36 0.42 Interpretation from DFL From above we can notice that DFL increased from the year 2005-09.1 7561.5 6326.4 11199.5 -84.9 -31.21 0.17 10539.7 19.19 8.8 17.

e.02 5.77 28.3 3.08 75.1 53380 5161.7 94 .77 0.02 81.63 102228.7 2005 0.4 14.7  Debt/ Equity increased suddenly from 2007-08 i.25 12.34 86438.80 0. TATA increased the proportion of debt during this period  Value of the company gradually increased from 2005-09 Year 2009 2008 2007 2006 2005 FA/CA FA/TA FATR Sales Indff.75 1.03 75182.23 100 NPR 11.53 0.31 34105.34 From the table:  DP Ratio increased from 2005-08 and decreased to almost half during 2008-09  TATA retained nearly 80% of its earnings for further investments  GPR and NPR decreased from 2005-08 Year Dbt/eqty VALUE WACC 2009 0.1 14.36 10.14 13.91 88566. Pnt EBIT 2.32 0.2 12654 7561.9 13.74 0.4 70022 5069.01 55911.49 82.2 11.71 14.78 0.89 18.26 40097.3 2007 0.87 11.6 2008 0.37 30.02 49.6 1.11 79015.9 12 2006 0.47 EPS 3.3 14.5 1.1 8.36 119763.1 3 0.2 9487 6326.56 32.46 13.6 59798 3355.7 2.75 85377.21 0. TATA invested more in fixed assets and the company fixed assets increased from 2005-09  TATA invested most of its assets using equity  TATA paid more dividends compared to IDEA and Airtel telecom Year 2009 2008 2007 2006 2005 DP ratio Retention Ratio GPR 29.25 8.28 74.62 2.74 0.

the proportion is fixed assets is very high and also amount of total assets increased fro 2005-09. DFL Vs EPS 95 .  FA/CA ratio and FA/TA ratio are highest for the year 2007 FA Vs CA From the graph. which TATA Telecommunications used the investment on fixed assets to generate sales in the year 2005. FATR decreased from the year 2005-09.FATR is highest in the year 2005.

96 .From the graph. DFL and EPS moved together and seems to be correlated because as DFL decreased during 2007-08 EPS also decreased and during 2008-09 as DFL increased EPS also increased.

Companies with 97 .REDDYS  Dr. FINDINGS AND CONCLUSION PHARMA INDUSTRY DR.Reddys used both financial leverage and operating leverage to increase its profitability and hence both financial risk and operating risk is high.Chapte r 9 SUMMARY.

98 . AUROBINDO  Aurobindo used both financial and operating leverage.  WACC is comparable to that of Ranbaxy’s. It retained nearly 90% of its earnings and paid dividends with the remaining earnings. RANBAXY  High DOL and comparatively low DFL and hence high business risk is higher than financial risk. It retained on 80% of its earnings on an WACC is high and debt to equity ratio is also high and hence the financial risk average   and paid dividends to its shareholders during all the five years under study.  Ranbaxy’s sales are close to its BEP sales in the year 2009. It maintained more of current assets and is able to generate sales from the investments on fixed assets.  is high  Sales exceeded the BEP sales in 2005. Hence.The firm used both debt and equity to an equal extent to finance its assets  Its sales were higher than BEP sales during the five year period under study. Dr.  Ranbaxy’s investment in fixed assets increased during the given period and its FATR decreased. But the DOL is higher than DFL .  WACC is lower compared to Dr. Hence business risk is higher than financial risk.high operating leverage are vulnerable to sharp economic and business cycle swings. The firm did not pay dividends for the past 2 years and retained all its earnings for further investments.Reddys reduced its business risk gradually from 2005-2009.Reddys but Ranbaxy financed most of its assets using equity.

 Low debt/ equity ratios compared to others two companies under study. It maintained more of fixed assets and its FATR is also high.  IDEA invested more on fixed assets than on current assets.  Value of the company doubled in the past five years.  Airtel financed most of its assets using equity Value of the company is high  TATA  EPS is low until 2006-07 and increased suddenly almost 9 times for the year 2007-08. The firm retained all its earnings for further investment. AIRTEL  EPS is high compared to other 2 firms and Airtel retained 100% of its earnings during 2005-07 and hence could not pay any dividends to its shareholders during that period. Hence we can say that TATA financed most of its assets using equity.It implies that EBIT during this year is less than the BEP. Low earnings per share and IDEA did not pay any dividends during the period under study. SERVICE INDUSTRY IDEA CELLULAR  DFL is negative during 2008-09 .   IDEA financed most of it assets using debt and hence high financial risk exists. 99 .

Dr.DCL. They rely less on physical infrastructure and machines but more on human capital. operating leverage and combined leverage are calculated using the information published in the annual reports of the companies.EBIT and EPS are calculated for the companies chosen and the trend is observed for a period of 5 years.SUMMARY AND FINDINGS: An empirical study is conducted to analyze the differences in leveraging practices within and between Pharmaceutical industry (manufacturing) and Telecommunications industry (service). lead to negative relationship between leverage and profitability. The existence of agency costs of debt may cause firms to take riskier investment after the issuance of debt to expropriate wealth from the firm’s bondholders because the firm equity is effectively a stock option. Hence they cannot leverage on fixed costs. Effect of degree of leverage on the EPS and EBIT is analyzed.An important observation is that DOL will be maximum when the firm operates 100 . Key players in both the industries are chosen for study. In service firms relative to manufacturing firms entry costs and capital requirements lower because investment in machinery and equipment is almost nonexistent.Reddys. operating leverage and combined leverage are calculated using the information published in the annual reports of the companies. then their total capital invested is mainly working capital. Airtel. The degree of financial. TATA Telecommunications from Telecommunications industry. If service firms lease their facilities (buildings). which in turn. DFL. The degree of financial. Service and manufacturing firms differ fundamentally in overall structure and growth dynamics. Financial leverage has a positive effect on the firm's profitability but the use of excessive debt creates agency problems among shareholders and creditors. DOL. Aurobindo and Ranbaxy are chosen from pharmaceutical industry and Idea Cellular.

This is proved by calculating BEP sales and comparing with the actual sales. Firm’s asset structure affects its leverage in both positive and negative ways. In simple words degree of financial leverage affects the firm value. So. One of the important factor which not only effects the value of the firm but also acts an indicator of nature of financing is debt to equity ratio. Firms with high level of assets that can be used as collateral tend to use more debt rather than issue new equity because costs associated with issuing equity rise due to the 101 .close to the break even.( Dr. Since service firms cannot use operating leverage to increase the profitabililty as most of the capital is predominantly working capital. Ranbaxy with comparatively low debt to equity ratio has high value of the firm. Two out of three firms (TATA and AIRTEL) chosen for study financed most of their assets using equity and hence did not use financial leverage to increase the profitability. Lower risk assets with more stable market values provide better collateral for debt. During 2008-09 when the world suffered from recession IDEA ended up with negative DFL i.e. On the other hand IDEA used financial leverage and pooled high financial risk. the firm’s ability to borrow increases. So. But from the empirical study it is found that Debt to Equity ratio is comparatively lower for companies in service industry. shareholders of the firms that financed most of their assets using equity could benefit from high EPS. companies in service industry are expected to use high degree of financial leverage to increase the profitability. debt to equity ratio and value of the companies are calculated and analyzed. Also. It implies that the enterprise value is inversely proportional to interest cost which is in turn directly proportional to debt to equity ratio and thus Ranbaxy which financed most of its assets using equity has more Firm value.Reddys. only DFL leverage is calculated and its effect on EPS during the given time period is analysed. With better collateral. An interesting phenomenon is observed in case of firms in manufacturing industry.So. Value of the firm can be calculated by subtracting Interest cost from Earnings before interest and tax. There are many factors that affect the enterprise value or the firm value. Ranbaxy). operating leverage decreases as a company’s sales increases and shifts away from the break-even point of sales. EBIT is lower than BEP. Ability of Assets to Support Debt also effects the leveraging decisions.

This supply-side argument might explain why firms who own relatively low ratios of fixed to total assets may have higher leverage (IDEA Cellular).asymmetry of information possessed by insiders and outsider suggests a positive relationship between debt ratios and the firm capacity of collateralized assets. or a low ratio of fixed to total assets. Ranbaxy and Aurobindo has debt to equity ratios comparatively more than that of Airtel and Tata. This is clearly evident from the companies chosen for study. Lending institutions generally attribute more significance to the capacity to convert borrowers’ assets into cash and we conjecture that in the service industry the importance of current rather than fixed assets plays an important role in their decision to offer loans to firms with high ratio of current to total assets. Theoretical research predicts positive relationship between collateralized asset and leverage. Therefore. The findings of this paper show opposite result: leverage decreases as the proportion of fixed asset in the total assets of the firm increases. the costs associated with this agency problem would be higher for the service firms because of the lower level of collateralized assets. The service industry is usually characterized by a relatively low level of fixed assets. Manufacturing and other industries requiring major-investments will often spend heavily on properties. A large capital investment purchases may not immediately yield higher sales. The higher the Fixed Asset Turnover ratio. it would be wise to watch the Fixed Asset Turnover closely over the next year to see if those investments actually helped the company. 102 . Prior empirical studies use fixed assets as its proxy and the findings are consistent with theoretical predictions. the more effective the company's investments in Net Property Plant and Equipment have become.Reddys. and equipment to push themselves ahead of the competition. manufacturing plants. Since service firms do not have high level of assets like manufacturing firms. Airtel and TATA maintained more of fixed assets and so could not use them as collateral. Idea Cellular maintained low fixed to total assets ratio and thus could use more debt by using current assets as collateral. If a company invested in major improvements heavily one year. This is proved by very low debt to equity ratios. It may take a year or more for the company to fully utilize those investments. While Dr. Fixed asset turnover ratio of the companies is also studied. Current assets can more easily be converted to cash and thus have more liquid capacity than fixed asset.

It is desirable that Gross Profit ratio must be high and steady because any fall in it would put the management in difficulty in the realization of fixed expenses of the business. managers have an incentive. If managers work in the interest of shareholders. In conclusion. This may be partly attributed to differences in the asset structure of the firms.Reddys during 2005 and abnormally high during 2007. Firms issue equity when their market valuations are high. They argue that firms with free cash flow but low (or no) growth opportunities may nevertheless invest (overinvest) in that the manager may take on projects with negative net present value. financing choice is not a simple one-period decision but a dynamic occurrence. if the capital market takes into account such potential opportunism.NPR is abnormally low in case of Dr. such a strategy is costly to the manager.suggests that firms that face higher marginal tax rates should use more debt to take advantage of tax shield. or there is a takeover of the firm by another company. NPR and GPR are stable in case of Airtel and halved during Idea Cellular. Modigliani-Miller proposition – the corporate tax case . Net Profit ratio is helpful to determine the operational ability of the concern. These theories suggest a negative relationship between leverage and investment but only for firms with no or little growth opportunities. Corporate income tax has important impact on debt-equity choices. depending on the nature of the growth opportunity. firm size. SUGGESTIONS :103 . Leverage has a significant negative effect on investment because of an agency problem between shareholders and bondholders. they may give up some positive net present value projects due to debt overhang. nondebt tax shield. However. Income tax. Service firms and manufacturing firms follow different leverage practices. Abnormal decrease may be attributed to low sales. The relationship between leverage and growth opportunities can be positive or negative. One major difference observed is that service firms use more of equity than manufacturing firms. The other argument is based on agency conflicts between managers and shareholders. therefore. and growth opportunities are the other factors that determine capital structure choices of the firm which are not studied in this project. to recommit and increase leverage and pay out cash as interest and principal.

and owners of the company are in some cases required to personally guarantee repayment of the loan. Airtel and TATA should invest more on current assets so that they can obtain debt and thus can use financial leverage. which depress stock price because of signaling effects. 3. Managers have better information about a firm’s long-run value than outside investors. 8. As a result. The process of asset securitization is a new and innovative financing method used for funding and risk management purposes. preventing management from pursuing alternative financing options and noncore business opportunities.: Financial Management 5th Edition 104 . Growth opportunities in the economy and of the industry have to be studied before making financing decisions. The company is usually required to pledge assets of the company to the lender as collateral. Signaling theory suggests firms should use less debt than MM suggest. The larger a company's debt-equity ratio. Accordingly. the increased use of debt causes both the costs of debt and equity to increase. 7. Issue stock if they think stock is overvalued. BIBLIOGRAPHY:  Maheswari S. High interest costs during difficult financial periods can increase the risk of insolvency.1. the more risky the company is considered by lenders and investors. a business is limited as to the amount of debt it can carry.Managers act in the best interests of current stockholders. 6. Acquisition of new assets of heavy costs should be done with proper capital budgeting supported by payback period. 2. 9. 11. So.N. 5. 10. the companies must not use large amount of debt. 4. investors view a common stock offering as a negative signal-managers think stock is overvalued.This unused debt capacity helps avoid stock sales.Issue debt if they think stock is undervalued. Debt instruments often contain restrictions on the company's activities.

S. WEBLIOGRAPHY  www. Nahum Biger.wikianswers. Growth Opportunities and The Deregulation of U.  Asset Securitization and Optimal Asset Structure of the Firm by Jure Skarabot.com  www.com/pdf/leverage-analysis.pdf-searcher.com  www. Electric Utilities by Laarni from IBS.investopedia.wikiwealth. Annual reports of companies  Notes on leverage by Alex Tajirian  Paper on Financial Statement Analysis of Leverage and How It Informs About Profitability and Price-to-Book Ratios  Paper on the effect of leverage increases on real earnings management by Irina ZagersMamedova  A journal on The Determinants of Capital Structure in the Service Industry: Evidence from United States by Amarjit Gill.com  http://www. Chenping Pai and Smita Bhutani  A report on telecom industry by Corporate Catalyst India  A reading on Financial Ratio Analysis prepared by Pamela Peterson Drake  Is There Room For Growth? Debt.html 105 .

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