Abstract

ABSTRACT
Introduction:

For a business enterprise finance is regarded as the lifeblood. It is one of the

basic foundations of all kinds of economic activities. It has been said that finance is
the master key to all the sources of manufacturing and merchandising activities and it
is needed to making business profitable. But it is also true that, money begets more
money provided it is properly managed. Hence efficient management of every
business enterprises is closely linked with efficient management of its finance. A
firm’s success and survival is highly dependent on its management of finance. The
goal of an efficient financial decision is to create wealth for owners and lenders and
consequently enhancing the value of the firm. This goal can be achieved by planning,
decision making and controlling over the capital which is employed.

Importance of capital in overall management of the company has been

emphasized by Collin Brooks that, “bad production management and bad sales
management have slain their hundreds but faulty finance has slain its thousands”. In a
developing country like India where financial resources are scare, a sound financial
management play a crucial role. The capital structure possesses a very important place
in a sound financial management of an enterprise as no area of corporate finance has
been discussed and studied as much as capital structure. One of the crucial problems
faced by every business enterprises is whether to raise debt or equity for its long-term
financing needs. Whether the use of debt capital affects the cost of capital and value
of the firm, is a considerable question. A unique characteristic of procuring funds is
that a firm may tap owners’ funds or debt capital and hence the blend of these
different sources of long term funds is termed as capital structure in finance literature.
The discussion on capital structure started from 1958 by Modigliani and Miller in
their article and the discussion on the topic is still equally important till today as no
popularly acceptable theory have been evolved.

Statement of the Problem:

The problem of efficient financing is also faced in aluminium industry in

India. In spite of extensive research, the theory of capital structure remains one of the

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most controversial issues in modern finance. The question raised by Myers’ (1984),
“how do firms choose their capital structure?” is still unanswered. Variables that
determine the capital structure of a firm are the specific variables of the firm as well
as the macroeconomic variables. Most of the earlier studies on capital structure are
based on the specific variables of the firms.

The capital structure of a business reflects the management’s decision over a

long period of time and signifies a long-term financial strength of an organisation. In
India rarely studies have been made on the capital structure in aluminium industry.
This study attempts to shed some light on the capital structure issues in the two major
players of aluminium industry of India i.e. Hindalco Industries Limited (Hindalco)
from private sector and National Aluminium Company Limited (NALCO) from
public sector.

Objectives of the Study:

The main objective of this study is to analyse the capital structure differences
of Hindalco and NALCO with a view to identify factors that influence the capital
structure decision in both the companies. To achieve the main objective, following
specific objectives have been set in this study:

1. To study the existing literature on capital structure and cost of capital.

2. To examine the overall composition of capital structure of Hindalco Industries
Ltd. and National Aluminium Company Ltd.
3. To examine the profitability performance, relationship of capital structure with
profitability and determinants of capital structure of Hindalco and NALCO.
4. To examine the specific and aggregate cost of capital of Hindalco and NALCO.
5. To assess the effect of Capital Structure of Hindalco and NALCO on their Cost
of Capital.
6. To concise major findings and outline the suggestions for making the said
capital structure more effective.

Scope of the Study

The present study is restricted to analyse the comparative performance of two

companies belonging to same industrial sector. The researcher has pursued an inter-

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firm comparison of two companies i.e. Hindalco and NALCO for an intensive study.
The capital structure analysis is focused on sources of long term financing, debt
equity ratio, debt to total assets ratio, equity to total assets ratio, Funded Capital ratio,
several profitability ratios and cost of capital in specific and aggregate sources of
funds.

Methodology of the Study

The population of the present study is restricted with reference to two

companies of Indian aluminium industry i.e., Hindalco Industries Ltd. and National
Aluminium Company Ltd.. To achieve the aforesaid objectives, researcher has been
collected secondary data from the published annual reports of the Hindalco and
NALCO, Information published in various journals and periodicals such as Metal
World, information published by Ministry of mines etc. as per requirements of the
study. Beside these, Historical data related to the share prices of both the companies
have been taken from the website of NSE. This study covers a period of ten years
from the financial year 2005-06 to 2014-15. The analysis is carried out by making use
of different financial ratios related to capital structure, profitability, and other
financial ratios as per requirement of the study. Various statistical tools have been
used as per the requirements of the study. For the processing of the data, Excel and
SPSS packages has been used.

Chapter Plan of the Study:

This study is organised in seven chapters, each deal with a specific spectrum
of the whole research work. The first chapter is introductory in nature and deals with
the theoretical foundation of capital structure, different theories of capital structure
developed by different scholars, objective and scope of the study, research
methodology and limitations of the study. Second chapter is devoted to past studies
related to various aspects of capital structure management. Chapter third presents the
overview of both the companies Hindalco and NALCO with the analysis of
production capacity, production, sales performance, EPS, MPS, dividend distribution,
dividend Pay-out performance, Size in respect of Total Assets, employment of Net
Block and Investment. Fourth chapter presents the trends and patterns of capital
structure of both the companies. Chapter five presents the profitability performance of

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companies, relationship of capital structure with profitability, and the determinants of

capital structure. Sixth chapter covers the cost of capital of both companies in specific
funds as well as in aggregate. This chapter also covers the impact of capital structure
on cost of capital with the help of multiple regression analysis. Seventh and last
chapter summarises the major findings and suggestions of the study.

Findings and Conclusions of the Study:

It has found from our study that both the companies under study are the leader
in the aluminium industry in India. Both the companies collectively produced almost
70 percent of aluminium and alumina of total production in India. One major
difference has been observed that Hindalco has diversified its operations in copper
business but NALCO has restricted its business in aluminium sector only. The total
assets employed, net block, and investment are found more in Hindalco than NALCO.
The Dividend Pay-out ratio and book value per share in both the companies has
increased during the period under study.

Analysis of Capital structure trends and pattern reflects the huge difference in
the capital structure of both the companies. One hand, Hindalco’s management
continuously watch out the quantum of paid-up capital needed and level available and
make effort to seal the deviation on regular basis but the NALCO’s management
avoids such mind puzzle. Besides the low paid-up capital base, the net worth of
Hindalco is found much more than NALCO which indicates that apart from raising
capital through new issues Hindalco also used retained earnings more than NALCO to
fulfill its financial needs. Debt, a vital source of finance is found missing in NALCO.
But Hindalco extensively used the debt component in capital structure. Prima-facie
observation of debt equity ratio in Hindalco reveals the unsatisfactory position but if
we took the nature of business simultaneously then value of the ratio seems to be
normal. Average debt to total assets in Hindalco is found equivalent to 21.5 per cent,
but in recent years (in last three years) average debt is found nearby 30 per cent of
total assets. It is found that in early period relative size of equity to total assets of
Hindalco is found lower than in NALCO. In spite of negative CAGR in ETA,
management of Hindalco can be said efficient. While the CAGR in case of NALCO,
is found almost equal to zero (0.03). From the observation of funded capital ratio, it is
found that for the financing of fixed assets both the firms depends upon the long term
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funds. Further, the strength of the ratio reveals that they have enough surplus of long
term fund after the meeting the requirement of fixed assets financing. However t-test
revealed that the FCR of both the companies is differ and Hindalco used more long
term funds to finance its fixed assets as well as current assets as compared to
NALCO. The capital structure of Hindalco is found pyramid shaped in which base is
built with the paid up capital, share warrants and reserves and surplus. Thereafter, a
moderate portion of long term loan is employed. At last, other liabilities are found in
form of deferred tax liabilities, current liabilities, provisions, and short term loan.
NALCO maintained horizontal capital structure, in the capital structure 76.97 of total
fund is constituted with paid up capital and reserve and surplus and the rest fund is
obtained from short term sources. Long term loan, a vital source of found is found
absent in capital structure mix.

The profitability performance based on turnover i.e. OPR and NPR of both
companies differs from each other, and the performance of NALCO is found better
than Hindalco. In profitability performance based on investment i.e. ROE, ROA, and
ROCE the average of NALCO is found good as compared to Hindalco but the
difference in these profitability ratios of both companies are found statistically
insignificant at 5% level. The PE ratios in both the companies are found statistically
similar but the recent trend in PE ratio indicates that shareholders faith is more in
Hindalco as compared to NALCO. Determinants of capital structure indicate that the
size and profitability have a negative impact on the equity to total assets ratio while
growth has positive impact on the equity financing in both the companies. Impact of
tangibility and liquidity on equity financing is found conflicting which is negative in
Hindalco and positive in NALCO.

Average cost of equity of Hindalco is found greater than cost of equity of

NALCO. But, cost of equity of both the companies is found statistically insignificant.
On the other hand, the average cost of debt capital in Hindalco is found almost half of
its cost of equity which makes clear that the debt is cheaper source of finance as
compared to equity. The weighted average cost of capital in Hindalco is found greater
than that of NALCO when we notice the average value. But the result of t-test again
nullifies the differences in the composite cost of capital. The relationship of equity

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to total assets ratio with the cost of capital is found positive. It means increase in the
use of equity in the financing will increase the overall cost of capital.

Keeping in mind the major findings of the study, the study offered following
suggestions for the betterment of the companies.

Like Hindalco, NALCO should also try to increase its capacity of production
of alumina and aluminium to increase its share of market and India’s share in world’s
aluminium production. NALCO should try to spread and expand its business. It is
found that the capitalisation in NALCO is not increased as much as Hindalco and all
the requirements of additional fund in the company is fulfilled by retained earnings
which denotes that there are lack of expansion plan in NALCO. So, NALCO should
try to utilise borrowing power and capital base to finance its expansion needs in
course of business expansion. The Funded capital ratio indicates that a major portion
of current assets is financed through long term funds in both the companies and it is
higher in Hindalco. So, both the companies should try to finance their non-fixed
assets with short term funds so that these long term funds can be utilised for financing
needs of expansion of business activities. The profitability trend in both the
companies is found decreasing despite the growth in turnover. It is due to increase in
the operating expenses of the companies especially the operating expenses in
Hindalco grew more during the research period. So, management of both the
companies should try to cut down their operating expenses, especially Hindalco.
Further, both the companies should also try to improve their asset utilisation to
improve their profitability for the satisfaction of shareholders of the companies. Both
the companies should carefully consider the liquidity, profitability, tangibility, growth
opportunities and size of the company while deciding their capital structure.
Cost of debt in Hindalco is found much lower than cost of equity which
indicates that company should use debt capital in case of new financing needs. Impact
of equity to total assets ratio on cost of capital has been found positive in both the
companies, which again shows that the use of equity will raise the cost of capital. So
it is, further, recommended to the companies that they should prefer debt capital for
its new project financing. Impact of liquidity on cost of capital is also found positive
and therefore, companies should try to reduce their liquidity but not beyond the safety
level.

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