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C)

Capital Structure Choices

Analyze the existing capital structure of the companies and based on the same, comment on the benefits and the costs of debt to that company, and whether the firm has too much or too little debt, as compared to its peers. State relevant assumptions. Is the capital structure influence by the industry or not? Analyse and comment on the results that you have generated. Industry analysis: Company Power Grid Corporation NTPC NHPC Tata Power Reliance Power Torrent Power Jaiprakash Power Ventures CESC Neyveli Lignite Corporation JSW Energy Average Ratio Debt equity ratio
2.21

0.65 0.62
0.78

0 0.55 2.4 0.43 0.28 0.81 0.873

Industry average Debt Equity ratio: when we take 10 companies and get average ratio we get 8.73

Power Grid Corporation: The companys Debt-Equity ratio is 69:31 The company used its long term financial ratio i.e. it considered long term debt to equity ratio.

Particulars

------------------- in Rs. Cr. ------------------Mar '12 Mar '11 4,629.73 4,629.73 16,579.61 21,209.34 36,325.07 4,557.70 40,882.77 62,092.11 1.93 Mar '10 4,208.84 4,208.84 11,585.08 15,793.92 31,345.78 3,071.01 34,416.79 50,210.71 2.18 Mar '09 4,208.84 4,208.84 9,325.14 13,533.98 25,288.25 3,177.18 28,465.43 41,999.41 2.1 Mar '08 4,208.84 4,208.84 9,545.33 13,754.17 17,552.13 4,711.35 22,263.48 36,017.65 1.62

Total Share Capital Equity Share Capital Reserves Networth Secured Loans Unsecured Loans Total Debt D+E Debt Equity Ratio

4,629.73 4,629.73 19,351.22 23,980.95 48,670.50 4,381.79 53,052.29 77,033.24 2.21

Interest Cover Earning Retention Ratio

3.38 65.34

3.78 64.71

3.25 65.41

1.74 69.34

2.07 63.58

debt equity ratio


2.5 2 1.5 1 0.5 0 Mar '12 Mar '11 Mar '10 Mar '09 Mar '08 debt equity ration

The company has a debt equity ratio of 2.21 currently. It is enjoying the tax benefit to a high extent.

It is not following industry trend for debt equity ratio. It is way above the industry norm. The recent increase in long term debt in 2012 is due to its requirements for expansion of infrastructure. And the debt is further expected to rise to double the current amount. In the total debt it has long term bonds with certain coupon rate which has very less cost of debt due to low risk of debt. The company has some tax free bonds and medium tax level bonds which gives a major advantage. The five years we considered for analysis were in 11th five year plan and the company had a vast expansion for that five year plan. Because of this tax free and partial tax level bonds there is a lot of advantage to its shareholders. Since the company is retaining around 60% of its earnings the risk of bankruptcy is also low.

TATA POWER:
Particulars ------------------- in Rs. Cr. ------------------Mar '12 Total Share Capital Equity Share Capital Share Application Money Reserves Networth Secured Loans Unsecured Loans Total Debt D+E Debt Equity Ratio Interest Cover Earning Retention Ratio 237.33 237.33 0 11,519.66 11,756.99 4,951.27 4,245.86 9,197.13 20,954.12 0.78 4.16 67.19 Mar '11 237.33 237.33 0 10,938.25 11,175.58 4,753.91 2,299.78 7,053.69 18,229.27 0.63 3.53 61.97 Mar '10 237.33 237.33 0 10,295.03 10,532.36 4,105.38 1,858.04 5,963.42 16,495.78 0.57 4.02 63.82 Mar '09 221.44 221.44 0 8,422.06 8,643.50 3,931.71 1,315.35 5,247.06 13,890.56 0.61 3.33 40.16 Mar '08 220.72 220.72 60.99 7,771.12 8,052.83 2,331.09 752.26 3,083.35 11,136.18 0.39 4.63 43.09

debt equity ration


0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Mar '12 Mar '11 Mar '10 Mar '09 Mar '08 debt equity ration

TATA power uses its debt and enjoys the tax benefits to some extent. It has a debt equity ratio of 0.78 which is near the industry average. It has both Bonds and loans from banks which has a bit higher rate of debt than Power Grid Corporation. Looking at the trend the debt equity ratio has increased over 5 years. Since the rate of debt is not very low the company should see when it reaches optimum capital structure and then remain at that level.

Reliance Power:
Particulars ------------------- in Rs. Cr. -------------------

Mar '12 Sources Of Funds Total Share Capital Equity Share Capital Reserves Networth Unsecured Loans Total Debt Total Liabilities Debt Equity Ratio Interest Cover Earning Retention Ratio 2,805.13 2,805.13 13,296.20 16,101.33 0 0 16,101.33 -2.91 100

Mar '11

Mar '10

Mar '09

Mar '08

2,805.13 2,805.13 13,091.44 15,896.57 1,554.05 1,554.05 17,450.62 0.1 3.12 100

2,396.80 2,396.80 11,669.24 14,066.04 0 0 14,066.04 --100

2,396.80 2,396.80 11,396.01 13,792.81 0 0 13,792.81 --100

2,259.95 2,259.95 11,282.72 13,542.67 0 0 13,542.67 --100

debt equity ration


0.12 0.1 0.08 0.06 debt equity 0.04 0.02 0 Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

The company manages capital on its own and through subsidies. Its debt equity ratio is 0 currently. The company had a debt of 1,554.05 crore rupees short term debt in 2011 and now it paid its debt. That was because of short term current liabilities. The company is retaining all its earnings so that it can have internal funds.

The company is not influenced by the industry trend and it is not utilizing the tax benefits as it does not have any debt. The company seems to follow Pecking Order Theory, which says with increased debt there is an increase in risk to shareholders equity.

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