INTRODUCTION TO CASE-

Asahi India Ltd, a leading manufacturer of architectural glass and automotive in India, has a
significant presence in the Indian market having a market share of 40% in the automotive
glass segment and 25% in the architectural glass segment. The company faces a tough
situation in its growth phase as it had relied heavily on its borrowed funds in order to meet its
investment requirements.
Usually, in these situations, companies make use of retained earnings for planning their
expansions and the repayment of borrowed funds. Excessive reliance on borrowed money
without taking equity shares into account can result in an over-leveraged capital structure.
Asahi India used a debt-equity ratio in order to maximize its ROE (Return on Equity). It took
advantage of its financial leverage and generated 50% of excess ROE. As of March 2021, the
company had a debt-equity ratio of 1.27, indicating that it is relying on its debt to finance its
operations. The company’s EBIT was sufficient to cover its interest expenses which were
indicated by its interest coverage ratio of 2.43.
The global economic crisis' unfavourable operating environment and the slowdown in most
business segments made it challenging for the company to maintain the high level of debt it
had already accumulated. It was difficult for the company to raise equity as it was already
making a loss when it tried to de-leverage its operations.

PROBLEM STATEMENT-
Asahi India Glass Ltd had the dilemma of decision-making whether to pursue a high-risk-
making strategy of entering the automotive glass business or maintain focus on its core
business which is architectural glass. This decision has significant capital expenditure and
operational risks. The company had already accumulated a high level of debt, which had to be
recovered, and raising equity was still an option for the company as it was running out of
funds to leverage its capital decisions properly.

SWOT ANALYSIS OF ASI-

STRENGTHS WEAKNESS
 Strong brand reputation and  The company has a high debt-
recognition of architectural glass equity ratio of 1.27.
in India.  It is dependent on the Indian
 The company has a diversified market which is vulnerable to
product portfolio. fluctuations in the economy.
 Investments in technology and
advanced manufacturing
facilities.
 Strong strategic partnerships with
leading global glass
manufacturers.
OPPORTUNITIES THREATS
 Growing the automotive industry,  Glass industry in India is highly
the company can expand its competitive
market share.  Demands for glasses can be
 Increased demand for affected by economic downturns
architectural glasses in India.  Environmental regulations can
 Expand into international impact its operations.
markets.
INDUSTRY ANALYSIS OF ASAHI INDIA GLASS LTD-
 The glass industry is witnessing growth in several types of trends, which could be the
growing demand for lightweight glass products.
 The shift which is causing demand for technology in digital printing for glass
decoration.
 The Indian glass industry is expected to grow up to a market size of 11.3 billion by
2025.
 Technological advancements have been noticed such as the use of advanced coatings,
digital printing, and new materials through technology in the glass industry.

IMPACT OF LEVERAGES ON ASI-

a. Positive impact
ASI has been able to generate higher ROE using leverage. The company’s ROE was
15.7% which is greater than the industry average which is 11.9%. Leverage also has
helped the company in maintaining its cash flow position, which will help the company in
growth opportunities.

b. Negative impact
ASI has high debt levels which makes it weak to economic downturns and fluctuations in
the interest rates and increases the risk. This will in turn reduce the financial flexibility of
the company to meet unexpected expenses and growth opportunities.

QUESTIONS IN THE CASE-

The above capital structure/ composition of the funds can be formed after checking the annual
reports of the company for 2010-2011 and 2012-2013

 The company’s borrowed funds have increased 5 times during the 10-year period, and
the shareholder’s funds have decreased. There were no further additions to the equity
share capital since its initial issue. The company also did not take advantage of the
favorable market conditions, when its share price was more than INR 200 per share in
the year 2006. This could be interpreted by looking at Exhibit 5.
 The preference shares are issued by the company and are redeemable as per the terms
of issue. The outstanding redemption of preference shares was INR 139 million as of
March 31st, 2005.
 The company has suffered losses in the last five years. And three out of five years
from 2009-2013. The net losses amounted to INR 1,649 million also taking off the
reserves and surplus of the company.
 Working capital requirements regarding inventories and trade receivables increased.
  The company started relying too much on borrowed funds to meet its capital
expenditure and working capital requirements.

Interest coverage ratio can be analysed based on Exhibit 1- Financial performance of ASI,
2004-2013

The ICR of AIS has declined from 33.6 in 2004 to less than 1 in 2009-2013. It has been
volatile during this period and due to the operating environment, it has declined. The
company’s interest burden has increased due to the high level of borrowed funds, which
reduced the interest-paying capacity of the company. The company's financial leverage can be
determined through the ratio of borrowed funds to equity, which is 13.28 and the highest
financial leverage compared to its other competitors in Exhibit 4.

AIS has followed the method of pecking order and it has relied first on retained earnings and
then on the borrowed funds. The company has continued to expand without any fresh
inclusion of equity shares; therefore, it can reach high financial leverage. But this exposed the
company to high financial risk which made the company unable to pay its interest and the
principal of its borrowed funds/debt.

Pecking order theory highlights the order in the way the company uses its various sources of
funds. Retained earnings form an important part of the shareholder’s equity and this should be
the first choice of funding for a company’s capital expenditure requirements. This theory also
suggests that the companies prefer the option of debt financing rather than equity because the
interest of post-tax is lower than equity. And due to the increased rate of debt, even the debt-
equity ratio increases.

a. Positive consequences
 High financial leverage will increase AIS’s investing capacities and allows it to take
on capital-intensive projects and expand the business into new markets.
 AIS can lower its cost of capital using debt options for financing and increase its
profitability.
 Interest paid on debt will be tax-deductible which can reduce the company’s tax
liability.

b. Negative consequences
  The financial risk of the company will be increased if it has high financial leverage
and it might struggle to meet its debt operations.
 Financial flexibility of the company will be limited, which might restrict the
company’s capability to pay dividends, invest in new projects, expand, etc.
 AIS company’s debt is high which will lead to higher interest rates and the company
also can’t raise additional finances because it already has high level of borrowed
funds.

Given the choice between a public issue and a rights issue, the company has chosen a rights
issue. Public issues are issued for sale to the public at large and this sale will be subjected to a
high level of disclosures and regulatory compliances and is also time-consuming. This type of
issue is also expensive and will dilute the control of promoters as the new shares are made
available to outsiders.
A rights issue is given to the existing shareholders according to their existing proportion of
their holdings. The company avoids dilution of control and these types of issues can be issued
more easily, quickly, and at a lower cost than a public issue. So, the company has chosen the
rights issue to deleverage its financial operations.

The company can opt for the following alternatives-

a. Improve its internal working efficiencies and working capital management and focus on
cost-reduction activities to have increased profitability, which will decrease the company’s
interest-paying burden.
b. Issue of equity shares through a rights issue, by watching for improvement in the equity
market. AIS may also decide on raising additional equity if the market conditions are
relevant and sustainable.
c. AIS can issue preference shares to its promoters, as the dividend paid on preference shares
are not an expense on profit. Redeemable preference shares are flexible and can be
preferred more than equity at times.

CONCLUSION-

Asahi India glass ltd company’s position as leverage is a double-edged sword. The leverage of
the company has helped it to generate a higher return on equity and improve its cash flow
position, but also the type of leveraging it has opted for as debt has increased its debt-equity
ratio and decreased its capacity to pay interest. Therefore, the company needs to maintain a
balanced leverage position to sustain the business, it has already suffered losses. The company
must properly finance its operations to ensure sustainable growth and mitigate the risks that
are associated with the company’s high debt levels.