MotorCycle Industry

A report on Cost of Capital & Capital Structure

Submitted by
Group-7:
Chaitanya Jethani- 301130
Kartik Upadhyay- 301137
Sanjeevani Singh- 301156
Sayani Purkait- 301157
Vasu Mudgal- 301173
Index
This report covers the following contents:

01 Key Tools Used & Definations 05 Bajaj Auto Ltd.

02 Hero MotoCorp Ltd. 06 Scooters India
03 TVS Motor Company 07 Analysis
04 Eicher Motors Ltd. 08 Implications
Capital Asset Pricing Model
Describes the relationship between systematic risk
& expected return for assets, particularly stocks.
It implies that the expected return on a security is
linearly related to its beta.
Expected Return (Ke)= Risk-free rate (Rf) + Beta of
the investment (B) * Market risk premium (Rm-Rf)

According to the June 2020 & May 2021 issues of

Incwert Valuation Chronicles,Equity Risk Premium
in India has been assessed @8.1% beginning April
2020 & @7.5% beginning April 2021.
Taking 10-year Government Bond Yield as a
proxy, the risk-free rate has been identified at
6.31% as of 31/03/ 2020 & at 6.18% as of
31/03/2021.
 Cost of Capital & Capital Structure
Cost of Capital
Calculation of minimum return would be
necessary in order to justify undertaking a
capital budgeting project.
Capital Structure
The specific mix of debt & equity used to
finance a company's assets & operations.
Leverage
Two-Edged Sword

Degree of Degree of Degree of

Operating
Leverage
Measures Business Risk
Analysis of fixed costs in the
capital structure. Can
supercharge profits in good
times, but can crush them in bad
times.
DOL = % change in operating
income (EBIT)/ % change in Sales
Financial
Leverage
Measures Financial Risk
Leveraging the use of debt in the
total capital to reduce the cost of
capital.
DFL= % change in Earning per
Share (EPS)/ % change in
operating income (EBIT)
Combined
Leverage
Measures Total Risk
Summarises combined effect of
Operating Leverage & Financial
Leverage.
DCL= Degree of Ooperating
Leverage * Degree of Financial
Leverage
 Company Snapshot Top Management
Current market price- Rs. 2565.9 Pawan Munjal (CEO)
Revenue as of Sep 2021- Rs. 8453.4 Pradeep Dinodia (Director)
Crores Sumant Kant Munjal (Director)
Dividend- 25rs per share
Current Market Cap- Rs. 51268.02 crores

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Introduction

Time Source: Capitaline Databases

Capital Asset Pricing Model

Since, Hero Moto Corp is an

Unleveraged Company,
Weighted Average Cost of
Capital = Cost of Equity
 Operating and Financial Leverage

(Times)

(Times)
EBIT and EPS Analysis
 Company Snapshot Top Management
Current market price - Rs 643.6 Venu Shrinivasan (MD)
Revenue as of Sep 2021- Rs 5619.41 H. Lakshmanan (Director)
Crores Lakshmi Venu (Director)
Dividend - 1.4rs per share
Current Market Cap - Rs.30577.44
Crores

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Introduction

Time Source: Capitaline Databases

 Weighted Average Cost of Capital
Capital Asset Pricing Model Cost of Debt
Yield-to-Maturity= Finance Costs/ Long-term Borrowings

WACC
 Operating and Financial Leverage

(Times)

(Times)
EBIT- EPS ANALYSIS
 Company Snapshot Top Management
Current market price- Rs.2791.9 S Sandilya (Chairman)
Revenue as of Sep 2021- Rs.2156.83 Siddhartha Lal (MD & CEO)
Crores
Dividend- 17rs per share
Current Market Cap- Rs. 76333.62 Crores

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Introduction

Time Source: Capitaline Databases

Capital Asset Pricing Model

Since, Eicher Motors Ltd. do

not have long-term debt,
Weighted Average Cost of
Capital = Cost of Equity
 Operating and Financial Leverage

(Times)

(Times)
EBIT-EPS Analysis
 Company Snapshot
Current market price- Rs. 3435.7
Revenue as of Sep 2021- Rs.9417.83
Crores
Dividend- 140rs per share
Current Market Cap- Rs. 8385.78 Crores
Top Management
Rahul Bajaj (Chairman)
Madhur Bajaj (Vice Chairman)
Rajiv Bajaj (MD & CEO)
Sanjiv Bajaj (Director)

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Introduction

Time Source: Capitaline Databases

 Weighted Average Cost of Capital
Capital Asset Pricing Model Cost of Debt
Yield-to-Maturity= Finance Costs/ Long-term Borrowings

WACC
 Operating Leverage

(Times)

(Times)
EBIT-EPS Analysis
 Company Snapshot
Public Sector Undertaking (PSU)
Market price as of 31/09/2021- Rs.36.4
Revenue as of Sep 2021- Rs.5.00 Crores
Market Cap- Rs. 317.67 Crores
Top Management
S. Shaktimani (MD & Director)
Mukesh Kumar (Director)

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Introduction

Time Source: Capitaline Databases

 Weighted Average Cost of Capital
Capital Asset Pricing Model Cost of Debt
Yield-to-Maturity= Finance Costs/ Long-term Borrowings

WACC
 Operating Leverage

(Times)

(Times)
EBIT-EPS Analysis
 Analysis
Total Leverage Analysis
Negative leverage
occurs when a
company purchases
an investment using
debt, & the debt has a
greater cost or higher
interest rate than the
return on investment.
(Times)
Hero MotoCorp Ltd.
reduced its raw
material purchase by
25% in 2015-16.
WACC & ROCE
Analysis

The balance in March dipped by

20%, but recovered by October.
Visualize complicated and dense
information with graphs and charts. These
are visual aids that help add more context
to the topic you are discussing.
 All companies except for Scooters
Ind. Ltd. are exceeding their cost of
capital requirements

Over the decade, Hero Motocorp

Implications Ltd. has been identified as the
riskiest investment, followed by Bajaj
Auto Ltd. & Eicher Motors Ltd.

Over the decade, Eicher Motors has

shown the most growth in EBIT and EPS
over the decade followed by TVS Motor
Company.
THANK YOU