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ON
CAPITAL STRUCTURE
Of
HINDALCO INDUSTRIES LIMITED
Submitted in partial fulfilment of the requirement for the
Award of degree of
SESSION:
UTTAR PRADESH TECHNICAL UNIVERSITY, LUCKNOW (U.P.)
NIBIA, BACHCHHAON, VRM BYPASS, VARANASI-11
Submitted To:Prof. C. LAL
IMS (SHEPA)VARANASI(U.P)
Submitted By:SHIVA SINGH
MBA (Finance)
Roll No. 0918470052
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PREFACE:
Summer training is an integral part of our academic curriculum. During the training a student gets
an opportunity to understand the practical aspects of various functional domains in an organization.
Its built a better understanding of practical challenges that one faces during his/her performance of
tasks.
This project report is the outcome of the summer training that I have undergone at Hindalco
Industries Limited for partial fulfilment ofMaster of Business Administration.
The topic allotted to me by my project guide is Capital Structure of Hindalco
The project emphasizes on the financial aspects about the company and its financing mix.
I have tried to my best to make a good project report which could be further used for any reference
work. However no one can claim perfection in its entirely. So I apologize for the discrepancy, if
any, crept in.
Preparation of project requires perseverance, initiatives, proper guidance and direction. So its
mandatory to take aid of various departments.
Actually a project is the summarized form of seven activities. They are
Planning
Resource Collection
Organizing
Efficiency
Communication
Transparency
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ACKNOWLEDGEMENT
All praise is due to Almighty, the merciful omniscient whose blessing enabled me to complete this
challenging work in time.
I feel great pleasure and satisfaction at the completion of this work and would like to express deep
ineptness and sincere gratitude to all who helped me to accomplish this task.
I am very thankful to all faculty members, M.I.S for their guidance, encouragement and support
that helped me at every step towards the completion of this work.
I would like to thanksMr. Prof C.Lal, Director, I.M.S for being constant guide and for giving me a
chance to work with this big organization. .
I express my deepest gratefulness to Mr. Vimal Raheja, Manager (Account &Finance),
HindalcoIndustriesLtd for providing valuable information whenever I needed one. His valuable
guidance and constant encouragement have helped me tremendously in the completion of this
project.
I express my deep sense of gratitude to my parents, teachers, friends whose patience, forbearance,
endurance and support have directly or indirectly helped me in completion of this project to the
present form.
[Shiva Singh]
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Representation Diagram
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TABLE OF CONTENTS
Chapter No. 1
Industry profile
Company Profile
Brief history of the organization
Vision, mission, objective, strategy
Swot analysis of the organization
Future plans
Problem being faced by organization
Problem formulation of project
Chapter No. 2
RESEARCH METHODOLOGY
Objective of the project
Scope of the study
Period of study
Method of study
Sources of information
Limitation
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Chapter No. 1
INDUSTRY PROFILES
ADITYA BIRLA GROUP
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INDUSTRY OVERVIEW
1. PROFILE OF THE ALUMINIUM INDUSTRY:
The Aluminium industry is highly concentrated ,with just five plants accounting for the entire
production capacity of 7,02,000 tonnes per annum. The capacity and production figure for these
producer are given below: Company capacity (Lac Tones) production (Lac Tones) Capacity
Utilization ( % )
*Figures Pretaining to the year 1999-2000
The per capita consumption of aluminium in India is only 0.5 kg as against 25 kg in USA, 19 kg in
Japan and 10 kg in Europe. Even the worlds average per capita consumption is above 10 times of
thatin India . One reason of low consumption in the country could be the consumption pattern of
aluminium in India is vastly different from that of developed countries consumption level. This
sector is going through a consolidation phase and existing producers are in the process of enhancing
their production capacity so that a demand supply gap expected in bridged. However ,India is a net
COMPANYCAPACITY(Lac
Tonnes)
PRODUCTION(Lac
Tonnes)
CAPACITY
UTILIZATION ( %)
BALCO 1.OO 0.9696
HINDALCO 2.42 2.49103
INDAL 1.17 0.44
37.18
MALCO 0.25 0.020.06
NALCO 2.18 2.1397.56
TOTAL
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exporter of alumina and aluminium metal at present. Sailent features of Indian Aluminium
Industry:-
Highly concentrated industry in the country
Controlled by two private groups and one public sector unit
Bayer-Hall-Heroult technology used by all producers
Electricity , coal and furnance oil are primary energy inputs
All plants have their own captive power units for cheaper and uninterrupted power supply.
Energy cost is 40% of manufacturing cost for metal and 30% for rolled products.
2. QUANTITATIVE DETAILS:
2.1 Raw Meterial and product type:-
Bauxite and calcined petroleum coke are primary raw materials for this industry. However, alumina
is raw materials for smelters and aluminum metal is raw material for tabrication units.
2.2 Fuel usage:
Coal, Furnace oil and electricity are primary energy inputs in aluminium production. Coal is
primarily used to generate steam which is the process while fuel oil is mainly used in calcmation of
alumina and various furnaces in fabrication plants Electricity is the major energy input in
aluminium production and its considered to be prime factor in determining economics of
aluminium production. Hence ,all primary metal producers have installed their own captive power
plants to supply cheaper and uninterrupted power for their used Majority of electricity consumed in
this industry is supplied by their own captive power
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2.3 Technology status:
Invented over 100 year ago Bayer-Hall- Heroult is the only available commercial technology even
today for the production for aluminium . Alumina is the basic raw material for the production of
aluminium metal through electrolytic up to 60% in the form of mono/trib hydrate is carried out
through the Bayer route ,which is an extractive hydro-metallurgical process.
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QUALITY POLICY
We at Hindalco, shall aim to achieve and sustain excellence in all our activities.
We are committed to total customer satisfaction by providing products & services,
which meet or exceed the customar expectations.
Modernisation of the manufacturing facilities, stress on technological innovation &
trainig of employees at all level shall be a continuous process in Hindalco.
A motivated workforce with a sense of pride in the organization shall iead us towards
Total Quality.
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SAFETY POLICY
Use appropriate technology & other resource to up grade safety standards.
To continuously improve the working condition leading to prevention of accident.
Not only continue to comply with all the applicable laws & regulation but also strive to
achieve beyond and set new standard.
To continuously monitor & control work places hazards and protect employees &
community from them.
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ENVIRONMENT POLICY
Innovate & improve the process, equipment, operations, maintenance & other practices
continuously for pollution prevention.
Adopt cleaner technologies wherever techno-economically viable.
Conserve key input resources such as bauxite , caustic , soda, coal, power, water,
furnace oil & other oils.
Remain in compliance with all applicable environment laws and regulations and also
strive to go beyond.
Ensure continual improvement in our environment performance through awareness &
training amongst the employees &contract workers.
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COMPANY PROFILES
ADITYA BIRLA GROUP
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BRIEF HISTORY OF ADITYA BIRLA GROUP
The Aditya Birla Group is Indias firs truly multinational (MNC) & second larges business
house, whosoever 30% of revenues flow from its operations across the world. Global in
vision, rooted in Indian values, the Group is driven by a performance ethic based on value
creation for its multiple stakeholders. A US $ 24 Billion conglomerate, with a market
capitalization of US $ 23 billion , the Group is anchored by an extra- ordinary force of
1,00,000 employees belonging to over 30 different nationalities the world over.
Over 74 Units in India and overseas as well (in Thailand , Indonesia, Malaysia , Philippines,
Egypt and Canada ) and international trading operation spanning several countries including
Singapore, Dubai , Russia , Vietnam, Myanmar and China make it Indias first truly
multinational conglomerate.
Committed to being a global benchmark Group , the Aditya Birla Group reaches out to the
core sector in India . In industrial integral to the nations growth Cement , Aluminium,
Fertilizers , Viscose Staple Fiber, Textile, Power, Telecommunications, Industrial Chemicals
and Financial Services.
The Aditya Birla Group is a dominant player in all the sectors in which it operates such
as Viscose Staple Fiber , Non Ferrous Metals, Cement, Viscose Filament Yarn, Branded
apparel, Carbon Black etc.
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ADITYA BIRLAS GROUPCOMPANIES:
OVERSEAS MANUFACTURING COMPANIES
The Aditya Birla Group, seen today as India's first truly global corporation, has a significant
presence in South East Asia, Africa, North America, Australia and China. The Group is present in
Thailand, Laos, Indonesia and Philippines in the Asian sub-continent, Egypt in Africa, Canada in
North America and has recently forayed into USA, UK, Germany and Hungary.
Country Company Products / services
Thailand Thai Rayon Viscose staple fibre (VSF)
Indo Thai Synthetics Spun and fancy yarns
Thai Acrylic Fibre Acrylic fibre
Thai Carbon Black Carbon black
Aditya Birla Chemicals(Thailand) Ltd.
Sodium phosphates, specialty phosphates, epoxyresins (bis-a and bis-f), diluents, curing agentsand allied products, sodium sulphite, sodiummetasulphite, sodium bisulphite, caustic soda,chlorine, epichlorohydrin, hydrochloric acid,allyl chloride
Thai Peroxide
Thai epoxyThai sulphates
Hydrogen peroxide, peracetic acid, calciumperoxideEpoxy resins
Specially phosphates
Philippines Indo Phil Textile Mills Yarns
Indo Phil Cotton Mills Yarns
Indo Phil Acrylic Mfg.
Corp.
Yarns
Pan Century SurfactantsInc.
Surfactants
Indonesia PT Indo Bharat Rayon Viscose staple fibre (VSF)
PT Elegant Textile Industry Yarns
PT Sunrise Bumi Textiles Yarns
PT Indo Liberty Textiles Yarns
PT Indo Raya Kimia Carbon disulphide
Malaysia Pan century edible oils Refined palm oil, Palm ole in, STEARIN, &PFAD
http://www.adityabirla.com/our_companies/international_companies/thairayon_thailand.htmhttp://www.adityabirla.com/our_companies/international_companies/thairayon_thailand.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_thai_synthetics_company.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_thai_synthetics_company.htmhttp://www.adityabirla.com/our_companies/international_companies/acrylicfibre_thailand.htmhttp://www.adityabirla.com/our_companies/international_companies/acrylicfibre_thailand.htmhttp://www.adityabirla.com/our_companies/international_companies/thai_carbon_black.htmhttp://www.adityabirla.com/our_companies/international_companies/thai_carbon_black.htmhttp://www.adityabirla.com/our_companies/international_companies/abcl.htmhttp://www.adityabirla.com/our_companies/international_companies/abcl.htmhttp://www.adityabirla.com/our_companies/international_companies/abcl.htmhttp://www.adityabirla.com/our_companies/international_companies/thai_peroxide.htmhttp://www.adityabirla.com/our_companies/international_companies/thai_peroxide.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_textile.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_textile.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_cotton.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_cotton.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_acrylic_manufacturing.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_acrylic_manufacturing.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_acrylic_manufacturing.htmhttp://www.adityabirla.com/our_companies/international_companies/pan_century_surfactants.htmhttp://www.adityabirla.com/our_companies/international_companies/pan_century_surfactants.htmhttp://www.adityabirla.com/our_companies/international_companies/pan_century_surfactants.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_indo_bharat_rayon.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_indo_bharat_rayon.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_elegant_textile.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_elegant_textile.htmhttp://www.adityabirla.com/our_companies/international_companies/sunrise_bumi.htmhttp://www.adityabirla.com/our_companies/international_companies/sunrise_bumi.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_indo_liberty_textiles.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_indo_liberty_textiles.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_raya_kimia.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_raya_kimia.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_raya_kimia.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_indo_liberty_textiles.htmhttp://www.adityabirla.com/our_companies/international_companies/sunrise_bumi.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_elegant_textile.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_indo_bharat_rayon.htmhttp://www.adityabirla.com/our_companies/international_companies/pan_century_surfactants.htmhttp://www.adityabirla.com/our_companies/international_companies/pan_century_surfactants.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_acrylic_manufacturing.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_acrylic_manufacturing.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_cotton.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_textile.htmhttp://www.adityabirla.com/our_companies/international_companies/thai_peroxide.htmhttp://www.adityabirla.com/our_companies/international_companies/abcl.htmhttp://www.adityabirla.com/our_companies/international_companies/abcl.htmhttp://www.adityabirla.com/our_companies/international_companies/thai_carbon_black.htmhttp://www.adityabirla.com/our_companies/international_companies/acrylicfibre_thailand.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_thai_synthetics_company.htmhttp://www.adityabirla.com/our_companies/international_companies/thairayon_thailand.htm7/30/2019 Shiva's Project
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Pan century oleo chemicals Fatty acids & glycerin
Egypt Alexandria Carbon BlackCompany S.A.E
Carbon black
Alexandria Fiber CompanyS.A.E
Acrylic fibre
China Liaoning Birla Carbon Co.Ltd.
Carbon black
Canada AV Cell Inc. Softwood/ hardwood pulp (for VSFmanufacture)
AV Nackawic Inc. Dissolving pulp (for VSF manufacture)
Australia Aditya Birla Minerals Ltd-Birla NIFTY,Birla Mount
Garden
Copper mines
Laos Birla Lao Pulp andPlantations CompanyLimited
Pulp wood plantations / pulp plant
Group companies
Company Products / services
Grasim Viscose staple fiber, rayon grade pulp, cement,chemicals, sponge iron, textiles
:: UltraTech Cement Ltd* Ordinary Portland cement, Portland blast furnace slagcement, Portland pozzolana cement and grey Portlandcement
:: Shree Digvijay Cement* Cement and clinker
Hindalco aluminium, copper
:: Indian Aluminium Company Ltd* aluminium foil
:: Bihar Caustic and Chemicals Ltd* Caustic soda
Aditya Birla Nuvo Garments, viscose filament yarn, carbon black, textiles
:: Idea Cellular Ltd. Cellular telecommunications
:: Aditya Birla Insulators Limited Insulators
:: Birla Sun Life Insurance Co.Ltd** Insurance
:: Birla Sun Life Asset Mgmt. Co. Ltd Mutual funds
http://www.adityabirla.com/our_companies/international_companies/alexandria_carbon_black.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_carbon_black.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_carbon_black.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_fiber.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_fiber.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_fiber.htmhttp://www.adityabirla.com/our_companies/international_companies/liaoning_birla_carbon.htmhttp://www.adityabirla.com/our_companies/international_companies/liaoning_birla_carbon.htmhttp://www.adityabirla.com/our_companies/international_companies/liaoning_birla_carbon.htmhttp://www.adityabirla.com/our_companies/international_companies/avcell_canada.htmhttp://www.adityabirla.com/our_companies/international_companies/avcell_canada.htmhttp://www.adityabirla.com/our_companies/international_companies/av_nackawic.htmhttp://www.adityabirla.com/our_companies/international_companies/av_nackawic.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_nifty.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_nifty.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_laos.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_laos.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_laos.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_laos.htmhttp://www.grasim.com/http://www.grasim.com/http://www.adityabirla.com/our_companies/indian_companies/ultratech_cement.htmhttp://www.adityabirla.com/our_companies/indian_companies/shree_digvijay_cement.htmhttp://www.hindalco.com/http://www.hindalco.com/http://hindalco.com/about_us/tapping_new_markets.htmhttp://www.adityabirla.com/our_companies/indian_companies/bihar_caustic.htmhttp://www.adityabirlanuvo.net/http://www.adityabirlanuvo.net/http://www.adityabirla.com/our_companies/indian_companies/idea.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insulators.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insulators.htmhttp://www.adityabirla.com/our_companies/indian_companies/idea.htmhttp://www.adityabirlanuvo.net/http://www.adityabirla.com/our_companies/indian_companies/bihar_caustic.htmhttp://hindalco.com/about_us/tapping_new_markets.htmhttp://www.hindalco.com/http://www.adityabirla.com/our_companies/indian_companies/shree_digvijay_cement.htmhttp://www.adityabirla.com/our_companies/indian_companies/ultratech_cement.htmhttp://www.grasim.com/http://www.adityabirla.com/our_companies/international_companies/birla_laos.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_laos.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_laos.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_nifty.htmhttp://www.adityabirla.com/our_companies/international_companies/av_nackawic.htmhttp://www.adityabirla.com/our_companies/international_companies/avcell_canada.htmhttp://www.adityabirla.com/our_companies/international_companies/liaoning_birla_carbon.htmhttp://www.adityabirla.com/our_companies/international_companies/liaoning_birla_carbon.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_fiber.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_fiber.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_carbon_black.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_carbon_black.htm7/30/2019 Shiva's Project
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:: Birla Sun Life Distribution Co. Ltd. Investment planning services
:: PSI Data Systems Application development, maintenance andenhancement solutions
:: TransWorks Customer relations management (CRM) services
inbound customer service, including technical support;email / web-chat support; and outbound telemarketing.
:: Birla Global Finance Ltd Asset-based finance, corporate finance and investmentbanking, capital market, treasury.
:: Birla Insurance Advisory ServicesLtd.
Non-life insurance advisory services
:: Madura Garments Garments
:: Hi Tech Carbon Carbon black
Aditya Birla Retail Multi-format stores
Tanfac Industries Ltd. Fluorine chemicals
Essel Mining & Industries Ltd Iron and manganese ore mining, noble Ferro alloys,nitrogen production
Joint ventures
Company PartnerKey products /
services
Birla Sun Life Insurance Co.Ltd.
Sun Life (Canada) Insurance solutions
Tanfac Industries Ltd. TIDCO (Tamil Nadu Industrial Development
Corporation)
Fluorine chemicals
Birla Sun Life Asset Mgmt.Co. Ltd.
Sun Life (Canada) Mutualfunds
Birla Sun Life Distribution Sun Life (Canada) Investmentplanning services
http://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/indian_companies/psi_datasystems.htmhttp://www.adityabirla.com/our_companies/indian_companies/transworks.htmhttp://adityabirlanuvo.co.in/products/financial_services.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insurance_advisory_service.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insurance_advisory_service.htmhttp://www.adityabirlanuvo.net/products/garments.htmhttp://www.adityabirla.com/our_companies/indian_companies/hitech_carbon.htmhttp://www.adityabirla.com/media/press_releases/200705may/aditya_birla_retail_more.htmhttp://www.adityabirla.com/media/press_releases/200705may/aditya_birla_retail_more.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/indian_companies/essel_mining.htmhttp://www.adityabirla.com/our_companies/indian_companies/essel_mining.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/indian_companies/essel_mining.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/media/press_releases/200705may/aditya_birla_retail_more.htmhttp://www.adityabirla.com/our_companies/indian_companies/hitech_carbon.htmhttp://www.adityabirlanuvo.net/products/garments.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insurance_advisory_service.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insurance_advisory_service.htmhttp://adityabirlanuvo.co.in/products/financial_services.htmhttp://www.adityabirla.com/our_companies/indian_companies/transworks.htmhttp://www.adityabirla.com/our_companies/indian_companies/psi_datasystems.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htm7/30/2019 Shiva's Project
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Some recent milestones:
In March 2005 the company entered into a MoU with the Government of Jharkhand to
set up aluminium smelter and captive power plant in the state.
In April 2005, the company entered into MoUs with the Orissa and Jharkhand
governments for setting up a Greenfield alumina facility and aluminum facility
respectively, in the states.
In April 2005, the company signed a MoU to establish a world -class integrated
aluminum project in the state of Orissa.
In September 2005, the company split its shares in ratio of 10:1 in order to enhance
liquidity and to encourage participation from retail investors.
In January 2006, the company concluded 4:1 rights issue of its shares on partly paid
basis. It was the largest ever rights issue in the history of corporate India and first one
to issue partly paid instruments.
In March 2006, the company acquired an aluminum rolling mill and wire rods facility,
from Asset Reconstruction Company (India) Limited ( ARCIL), belonging to Pennar
Aluminum Company Limited.
In May 2006, the company's copper mining subsidiary Aditya Birla Minerals Limited
(formerly Birla Mineral Resources Pty Ltd.) came out with an equity offering and
subsequent listing on the Australian Stock Exchange (ASX).
In May 2006, the company signed a MoU with the Government of Madhya Pradesh for
setting up a Greenfield aluminum smelter and a captive power plant . The company also
entered into a joint venture with Essar Power (M.P.) Ltd . to develop and operate
coalmines at Mahan, Madhya Pradesh. The joint venture will supply coal to the
proposed aluminum smelter and power complex in Madhya Pradesh.
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In May 2007, Novelis became a Hindalco subsidiary with the completion of the
acquisition process. The transaction makes Hindalco the world's largest aluminum rolling
company and one of the biggest producers of primary aluminum in Asia, as well as
being India's leading copper producer .
Greentech safety gold award 2008 for outstanding achievement in safety management in
coal based power sector.
Hindalco Hirakud systems runners up at the state levels IT competition 2008
organized by CII in association with the department of informational technology ,
government of Orissa.
Hirakud smelter was awarded the state level safety awards for best occupational health
care 2006 presented in February 2008 at Bhubaneswar.
Talabira coal mines won a host of safety awards namely first in working face and
maintenance of Dozer and pay loader and second in dust suppression at the annual coal
mines safety fortnight 2008 organized by directorate of mine safety Bhubaneswar &
Chaibasa region.
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COMPANY PROFILE
INDUSTRY AT GLANCE:
Hindalco industries limited are the flagship company
of one Indias leading business houses, Aditya birla
group . The has been in operations spanning over 5
decades with global presence. Its turnover of Rs.
624.54 billion in 2005-06 , ranks among Indias top
10 companies in terms of market capitalization a non
ferrous metal powerhouse. Hindalco was set up in
collaboration with Kaiser Aluminum and chemicals
cooperations USA in a record time of 18 months.
Incorporated in 1958 , Hindalco commenced production
of aluminum In 1962 at Renukoot (UP) with an
initial capacity of 20000 MTPA of aluminum metal . HINDALCO also own a large Captive
Thermal Power Plant at Renusagar that meets the power requirement of the company very
effectively . Hindalco currently has primary Aluminum capacity of 3, 45,000 MTPA . Hindalco
operations are organized into two strategic business units- Aluminum and copper. The
company is industry leader in both these business.
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Great Employer
Maybe you would like to take a crash course on branding, run a marathon or even go deep into the
hinterland to manage a water conservation project, or probably do all of these while working
quietly on a global acquisition. At the Aditya Birla Group, opportunities are only limited by your
imagination.
The $12 billion Indian conglomerate was ranked number one in India and among the best in Asia
by Hewitt in their Best Employers Survey 2007. The India winners were chosen after a six-month
long intensive research that included 230 participating companies and more than 44,000 respondent
employees, representing the views of more than one million employees. The Best Employers in
Asia study spanned some of the most dynamic markets in Asia attracting more than 750 employers.
What is the DNA of a best employer? Contrary to the popular belief, its not a lifetime employment
guarantee or remuneration but an organizations ability to provide customized solutions to an
employees unique situation. Given the diverse range of organizations represented in the Best
Employers in India list, to be the best, parameters like industry size, ownership and legacy didnt
matter. But what did, were metrics like employee engagement and alignment, opportunities for
growth and development, performance differentiation, quality of HR initiatives and employee
diversity.
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ALUMINIUM
Hindalco is Asias largest primary producer of Aluminium and among the
most cost-efficient producers globally. Hindalco enjoys a leadership
position in primary aluminium and downstream products.companys
integrated complex at Renukoot houses an Alumina refinery, Aluminium
Smelter and facilities for production of semi fabricated products. Power is
sourced from the Companys captive power Plant at Renusagar, located at distance of about 45 km
from Renukoot. The Plant has a current generation capacity of 854 MW having 10 power
generating units. Excellent operation standards have ensured a consistent plant load factor of over
90%. The integrated complex at Renukoot also houses two co-generation plants of 37.5 MW and 41
MW capacities respectively.
Besides the integrated complex at Renukoot, Hindalcos other manufacturing facilities arelocated at
many diverse locations in the country. Smelters are located at Hirakund, Orissa, with a captive
power plant and coal mines and at Alupuram, Karla. Rolled Product facilities are located at Belur
and Latoya and an Extrusions plant at Alupuram.Production of Aluminium
Extracting Alumina from bauxite, and then smelting the alumina into aluminium, produces primary
aluminum. The extraction is alumina is accomplished through a chemical process. This begins
when bauxite chunks are crushed on wet ground to form slurry, which is fed into digesters, where
the alumina contents of bauxite are dissolved in caustic soda and the slurry is separated into red
mud and sodium alumina solution. Alumina hydrate is filtered and washed free of caustic soda and
the calcined in gas suspension calcine to produce calcined alumina. In the final stage of aluminium
production, calcined alumina is smelted into molten primary aluminium into rods of electrolytic
cells; the alumina is dissolved in molten cryolite (Aluminium fluoride). The reaction in the cells is
powered by electricity carbon anodes are used in the process. The molten aluminium is crucibles
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are poured modules to form ingots or billets of various sizes or transferred for further processing
into semi-fabricated products. It takes the company approximately two tons of yield one ton of
primary aluminium. Aluminium is the primary product of Hindalco.
It has following characteristics:
It is light; its density is only 1/3 rd of steel.
It is resistant to weather.
It can be used in contact with a wide range of foodstuff.
It has a high reflective and finds many decorative uses.
It alloys can equal or even exceed. The strength of normal construction steel.
It is highly elastic.
It keeps its toughness down to very low temperatures.
It is easily worked and formed; it can be rolled to very thin foil.
It conducts electricity and heat nearly as well as coppe
Raw Materials
Bauxite
Hindalco obtained about 65% of its Bauxite requirement from its own mines and purchased around 35% of
the Bauxite from the market.
Caustic Soda
To Cates its caustic soda need the company has set up BCCL (Bihar Caustic and Chemical Ltd.) in
joint venture with the state government of Bihar. BCCL Cates around 90% of the caustic needs of
Hindalco. Rest is purchased from the Kanoria Chemicals and Industries Ltd. Renukoot.
CP Coke
CP coke is baked with hard pitch to make carbon anodes, which are used in the process of
electrolysis.
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Aluminium fluoride
It is used in the smelting process. The company buys almost all of its aluminium fluoride from
Tanfac Industries Ltd.
Hard Pitch
It is used along with CP Coke to make carbon anodes for the smelting processes.
Power
Power plays a vital role in the aluminium industry. It takes 16000 KW of power to produce one ton
of aluminium. Hindalco has its own captive power plant of 900 s MW situated 35 km from its main
plant at Renusagar. Hindalco also buys the deflect power from the state government of U.P.
Financial performance.
Net sales and turnover from aluminium business in fy-08 stood at Rs71450 million as compared with
Rs73444 in FY-07 A DROP OF 3%, primarily on account of a sharp decline in domestic metal
realization , primarily a fall out of sharp depreciation in US $ even as LME was almost flat . in US $ terms
the revenues increased by 9%.
Earning before interest & taxes(EBIT) declined by 17% to Rs 24,231 million due to pressure on realization
and increased costs. The cost increase was primarily on account of a sharp surge in crude prices , which
resulted in high prices of its derivatives and also increased prices of alternative fuel such as coal.
Aluminium producers across the globe experienced a sharp fall in EBIT.
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COPPER
Copper Business
The copper business faced one of the most trying years in its entire nine years history. Despite the
high prevailing copper prices and improved long term and spot Tc/Rc as compared to the previous
year, business suffered on account of difficult operating conditions.
Production
The copper business suffered production disruption on account of various problems both external
and internal. The heavy rainfall in the state of Gujarat during the first week of July resulted in
flooding of plant as well as the neighbouring areas. Road transportation was cut-off resulting in
serious dislocations in the movement of essential input and personnel not getting access to the site.
The 180,000tpa Smelter 1 had been working at less than optimal levels due to longer campaign runs
and underwent a 25 days over due BI-annual maintenance Shutdown in the months of November-
December 2005.Companys new smelter was commissioned in july2005.the commissioning of new
copper smelters always associated with a long-drawn ramp up process, and the experience at Dahej
was no exception.
Profitability
Net Sales and Operating Revenue
Net sales and operating Revenue for the year 2008-09 increased by 5% YOY on the back higher
volumes increased VAP tonnage and higher mark ups for both metals. A large increased in Net
Sales and Operating Revenues was though negated by a sharp decline in US doller.
Net profit increased 12% to Rs.28609 Million on account of tax adjustment for earlier year. Cash
profit increased from Rs.32,024 Million to Rs.34487 Million.
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HINDALCO BUSINESS- Share of Net sales value 2008-09
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PRIMARY ALUMINIUM PRODUCTS OF HINDALCO
Hindalco is a dominant player in primary aluminium, with over 42 per cent market share. Its
product range includes
Ingots
Hindalco produces high purity ingots through the smelting process. Alloy ingots
of various grades are also produced mainly used for production of castings in
Auto Industry as well as electrical applications. Both these products are re-
melted and further processed into a large number of products for various downstream applications.
Hindalco's metal is a registered brand at London Metal Exchange (LME).
Wire rods
Hindalco manufactures wire rods, in a continuous casting and rolling process.
Electrical Conductor (EC) wire rods are used for the production of cables, ACSR
and AAC conductors. Alloy wire rods are used to produce AAAC conductors.
Billets
Hindalco's aluminium billets are produced by a state-of-the-art Wagstaff casting
process using Airslip technology. These are top quality billets with a smooth
surface finish. Billets are used mainly for producing extrusions and forgings.
Hindalco Extrusions are manufactured from high-quality billets made out of
virgin in-house metal. They have found applications in a wide spectrum of segments, such as,
architectural, electrical, industrial, transport, defence and consumer durables among others.
Hindalco Extrusions is a leading brand in each of these segments.
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HINDALCOS ROLLED PRODUCTS
Hindalco is the world's largest aluminium rolling company with the
acquisition of Novelis, the global leader in value-added high-end aluminium
flat rolled products and aluminium can recycling. The combined volume of
sales of flat rolled products in the world market is about 3 million tonnes and the market share is
more than 20 per cent.
Hindalco is the largest manufacturer of the entire range of flat rolled products in India. It enjoys
nearly 60 per cent of market share and its rolled products are widely used in various segments such
as packaging, transportation, building and construction, electrical, defence and general engineering
applications.
The company's commitment to quality and service along with its extensive infrastructure has made
Hindalco a prime source for best-selling brands. Continuous improvements in manufacturing,
processes, practices and systems ensure that customers' needs and expectations are fully met.
FOIL AND PACKING,
Hindalco's Foils and Packaging Division operates out of three modern,
well-equipped plants located at Kalwa in Maharashtra, Silvassa in
Dadra & Nagar Haveli and its subsidiary unit Indal Kollur, in Andhra
Pradesh. The 'Tri-Plant' advantage gives the Hindalco Foil marketing
team a seamless 'One Stop Shop' approach to an entire range of products.
All plants employ high-end technology and professional expertise to develop visually appealing and
functionally useful packaging. Delivering 'not-tried-before' solutions to customers in India and
across the globe, Hindalco's Foil and Packaging Division has the distinction of being India's
leading supplier of foil laminatesplain, lacquered and printed.
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Hindalco's complete backward integration, right down to the raw material stage from bauxite ore to
primary metal, guarantees full control over the quality of the final foil output.
ALLOY WHEELSHindalco manufactures world-class aluminium alloy wheels at its state-of-the-
art foil plant located at Silvassa, Dadra and Nagar Haveli, where alloy wheels
and aluminium foil are produced. This has helped the company to optimise
capacity and enhance the share of value-added semi-fabricated products.
The 300,000-piece alloy wheel plant is progressively increasing production.
Branded as Aura alloy wheels, these high performance wheels are available for nearly all vehicles
running on the Indian roads. Maruti-Suzuki, Tata Motors, Fiat India and HM-Mitsubishi India have
already approved them for original equipment supplies. The vendor approval process is on with a
number of other automobile manufacturers.
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HINDALCO TODAY
Aluminum has turned out to be the wonder metal of the industrialized world. No other
single metal can do so many jobs , so well , and so economically.
Aluminum growth rate is the highest amongst the major basic metals today. Hindalco ranks
as the largest aluminum producer in India, whose more than 58% sales is in value -added
product and has more than 40% in total market share . The companys fully integrated
aluminum operations consist of the mining of Bauxite, conversion of Bauxite into Alumina,
production of primary Aluminum from Alumina by electrolysis and production of Properzi
redraw rods, rolled products, extrusions and value added products like Foil and Wheel at
Silvasa. Hindalcos integrated operations and operational efficiency have enabled the
company to be one of the worlds lowest cost producers of Aluminum. The company cost
efficiency has helped it to record on outstanding performance in the face of adverse
market conditions.
Hindalco also owns a large captive THERMAL POWER PLANT at Renusager that meets
the power requirement of the company very effectively.
HINDALCO has embarked upon a Rs 18 billion brown field expansion project which will
Smelter capacity by 1,00,000MTPA, refining capacity by 2,10,000MTPA , and captive Power
Generation to 769MW.in the year 2000, Hinadalco acquired Alcons 54.6 majority stake In
another Indian aluminum major Indal . This was followed by public offer for an additional
20% stake the acquisition makes possible and excellent synergistic fit -Indal. Strength in
Aluminum and downstream, products dovetail admirably with Hindalco strong presence in
metal.
An ISO 9001 and 14001 certified company , Hindalco achieved significant export in the year
2001- 02 & so on.., and is registered on the London Metal Exchange. Hindalco also has
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star trading house status . Hindalco products range includes Primary Aluminium , Ingot, Alloy
Ingot , Billets , Cast Slabs , Alloy Wire Rod, Sheet Products , Extruded Profiles , Conform
Products , Foils and Allow Wheels.
NOVELIS ACQUISITION
Aditya Birla Groups Hindalco Industries Limited, NOVELIS Inc have entered into a
definitive agreement for HINDALCO to acquire NOVELIS in an all cash transaction which
values NOVELIS at approximately US6$ billion, including approximately US2.4$ billion of
debt.
NOVELIS is the worlds largest producer of rolled aluminum, and recycle of aluminium
cans, with 12500 employees in all 11 countries, a market value of $2.9 billion and $3.2
billion of debt. It was spun off from Canadian Aluminium Company Alcan but incorporated
in Atlanta , USA.
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Renusagar
(CPP)
Bauxite
Mines(Jharkhand &
Chattisgarh)
Silavasa(Foils & Wheels)
Renukoot
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HINDALCO VISION
TO STRENGTHEN OUR POSITION AS A PRIMIUM ALUMINIUM COMPANY,
SUSTAINING DOMESTIC LEADERSHIP AND GLOBAL COMPETETITIVENESS
THROUGH INNOVATION, QUALITY AND VALUE ADDED GROWTH
HINDALCO MISSION
TO RELENTLESSLY PURSUE THE CREATION OF SUPERIOR
SHAREHOLDER VALUE BY EXCEEDING CUSTOMER EXPECTATIONS
PROFITABLY, UNIEASING EMPLOYEE POYENTIAL AND BEING A
RESPONSIBLE CORPORATE CITIZEN ADHERING TO OUR VALUES
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STRENTH
World largest integrated aluminium plant.
Lowest cost producer of aluminium in the globe.
Self-owned power supply at Renusagar.
Sufficient space for future expansion and modernization plans.
Companys esteemed brand image in the world.
Easy availability of raw materials.
Effective and efficient man power.
Productive diversification of productive lines.
Most assumed supply position
The companys favourable attitude towards safety, environment and quality
consideration.
A high degree of quality coconsciousness as the competence of the company
ISO-9002 and ISO-14001 have added more to the prestige of the company.
Ability to face high price competence under adverse marketing situation.
Quick decision making.
Having continuous process of employee development and performance
evaluation.
Having industrial peace, as there has been no major strike, since last to
decades.
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WEAKNESSES
Remote location with transport bottlenecks.
Dose not adhere to deliver schedule.
Late delivery is recurring problem.
Present distribution system and production capacity is not adequate to meet the
present and near future demand.
Observed a low moral and sense of dissatisfaction with regards organisaitionals
policies and promotional activities, during my course of interaction with
various workers.
OPPORTUINTIES
Rapid increase demand of aluminium and its product both in India and abroad
provide company the opportunity of enhancing its production and distribution
worldwide.
There is ample potential in entering, the application of Aluminium in India. It
provide company, with an opportunity to venture into related value added
product such as:
Manufacturing of aluminium canes.
Manufacturing of Aluminium cabinets of computers and inventers.
Introduction of Aluminium furniture are very popular in the Countries
like China, Malaysia and Indonesia.
Introduction to kitchen aluminium utensils with copper buffing and
power coating to grave it attractive appearance.
Diversification strategies in properly adopted, it could open new horizons.
Export of both primary metal and export quality consumer product, such as,
foil ad wheel could prove to be one of the major opportunities.
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THREATS
Introduction of industries engineering plastic in Japan could hamper the
market of Aluminium Industry.
Development of light weighted steel is also one of the threats to the industry.
Cut throat competition with major aluminium producer such as Nalco and
Balco is one of the market threats to the Hindalco.
High price of Aluminium as compared to its cheap substitute such as polyvinyl
chloride.
Failure in power transmission from Renupower to Hindalco could result in a
biggest hampering factor of production.
Policy of government to increase export and excise duty could also increases the
cost of sales and result in reduction of market share.
FUTURE PLANS
Growth plans underway in Aluminium
The expansions of the muri alumina refinery from 110000 tpa is under commissioning in a phased
manner. The production from the expended facility is being ramped up progressively and has
reached 180,000 tpa now .its full capacity during FY09.
Hirakud
Phase II of the expansion of the smelting capacity from 100,000 tpa to 143,000 tpa byis on track. Its
capacity has touched 110,000 tpa in Q4FY08 and will scale upto 143,000 tpa by August 2008.
Greenfield Project
Aditya Aluminium ,the integrated aluminium project ,encompassing 1 to 1.5 million tpa alumina
refinery 260,000 to 359,000 tpa aluminium smelter and 750 to 900 MW captive power plant is
progressing as planned
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Mahan Aluminium project with a smelter capacity of 359 ktpa and CPP of 900 mw is on schedule.
The smelter is expected to roll on July 2011.
Jharkhand project with a smelter capacity of 359 ktpa and CPP of 900 mw ,tubed coal mine has
been allotted jointly with Tata Power. The approximate date of commissioning is June 2012.
Utkal Alumina Refinery with a capacity of 1.5 mtpa construction is currently underway. Bauxite
mining activities will start by March 2009. The commissioning of the plant is expected by January
2011.
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PROBLEM BEING FACED BY
ORGANIZATION
In India, steel is preferred to ALUMINIUM particularly in automobile
sector. The average use of ALUMINIUM in the sector is close to 40 kg/capita as
comparison to worlds average usage of 120kg/capita. So company should try to
persuade the automobile players to start using aluminum.
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PROBLEM FORMULATION OFPROJECT
To find out the reason behind the fall in EPS of the
company in comparison with previous year.
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Chapter No. 2
RESEARCH
METHODOLOGY
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RESEARCH METHODOLOGY
Research methodology used here is purely exploratory. It is used when one is seeking into the
general nature of the problem, possible decisions alternatives and relevant variables that need to be
considered
The research methodology is highly flexible, unstructured and qualitative. Exploratory research
hypothesis are either vague or ill defined, or they do not exists at all.
Sampling Plan
There has been no sampling plan as such as the study involved understanding the various process
and analysing them. The study involved the detailed analysis of secondary data calculated from
various sources and therefore no sample size and plan has been considered.
Data Source
Data has been collected trough literature survey and expert opinion. Literature survey includes the
collection of data from various sources like study material.
The part of data is collected from primary source and other from secondary source.
Primary source
Information gathered by interview and discussing with the members of department.
Secondary source
Company annual report
Selected books and magazines.
Data Analysis
To analysis data I use different financial tools and techniques.
Statistical tools & techniques
graphical presentation
Tabulation of data
Ratio Analysis
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OBJECTIVE OF STUDY
To know about the capital structure and combination of debt and equity.
The understand different aspect of capital structure.
To deep study about the financial leverage of the organization
To study various approaches to establish target capital structure.
SCOPE OF STUDY
To know debtequity ratio of Hindalco
To know about the EPS of Hindalco
To know the financial leverage
To know the knowledge about the capita structure
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TO ACADEMICIANS
The study of financial analysis will enhance the knowledge of academician, they will be known
about financial performance of company.
TO CUSTOMER
This analysis will give consumer to help in analyzing the product which they are
consuming. Are of good quality or not
TO GOVERNMENT
Government can understand the working method and profitability. Which can provide an
insight to assess the taxation? Government cans interment to be supportive and directives to
boost such kind of aluminum industry.
TO INDUSTRY-
This study will help to know about the condition of aluminum industry whether it is on growth or
decline.
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Chapter No. 3
CAPITAL STRUCTURE
Meaning of capital structure
Pattern of capital structure
Optimum capital structure
Sources of funds
Equity verses Debentures
FRICT Analysis
Theories of Capital structure
Capital structure decision process
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implications for the shareholders earnings and risk, which in turn will affect the cost of capital and
the market value of the firm.
PATTERNS OF THE CAPITAL STRUCTURE
In case of new company, the capital structure may be of any of the following patterns:
Capital Structure with equity shares only
Capital Structure with equity and preference shares
Capital Structure with equity and debentures
Capital Structure with equity, preference shares and debentures
Debt is the liability on which interest has to be paid irrespective of the company profits. While
equity consists of shareholder or owners funds on which payment of dividend depends upon the
companys profit. A high proportion of debt content in the capital structure increases the risk and
may lead to financial insolvency in adverse time. However, rasing fund through debt is cheaper
as compared to financing through shares. This because figure-3 interest on debt is allowed as
an expense for taxes purpose. Dividend is considered to be an appropriation of profits; hence
payment on dividend does not result in any tax benefit to the company. This means if accompany,
is in 50% tax bracket, pays interest at 12% on its debentures, the effective cost to it comes
only 6% while if the amount is raised by 12%Preference shares, the cost of raising the
amount would be 12%. Thus rasing the funds by borrowing is cheaper resulting in higher
availability of profit for shareholders. This increases the earning per share of the company,
which is the basic objective of the finance manager.
OPTIMUM CAPITAL STRUCTURE
A firm should try to maintain an optimum capital structure with a view of to maintain financial
stability. The optimum capital structure is obtained when the market value per equity share is the
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maximum. It may be defined as that relationship of debt and equity securities which maximizes the
value of a companys share in the stock exchange. In case a company borrows and this borrowing
helps in increasing the value of companys share in the stock exchange, it can be said that the
borrowing has helped the company in moving towards its optimum capital structure; In case, the
borrowing results in fall in market value of the companys equity shares, it can be said that the
borrowing has moved the company from its optimum capital structure. The objective of the firm
should therefore be to select the financing or debt equity mix, which will lead to maximum value of
the firm.
CONSIDERATION
The following considerations will greatly help a finance manager in achieving his goal of optimum
capital structure:
We should take advantage of favourable financial leverage.
We should take advantage of the leverage offered by the corporate taxes.
We should avoid a perceived high risk capital structure.
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SOURCES OF FUNDS
Security financing- This includes financing through shares including both equity and
preference shares and debentures.
Internal FinancingThis includes financing through depreciation funds and retained earnings.
Loan Financing-This includes both short term and long-term loans.
EQUITY SHARE VERSUS DEBENTURES
A company may prefer financing through debenture as compared to equity shares on account of
following reasons:
Interest on debenture is allowed as an expense for tax purpose.
Debenture holds have generally no say in the management of the company
Underwriters may have little hesitation in accepting the companys proposal since
debentures are adequately backed by the companys assets.
Moreover, the company may find it beneficial to pay short-term loan by raising funds through
debentures at a time when interest rates on such loans are higher as compared to the interest rate
payable on the debentures. However, the company cannot go an unlimited extent of financing
through debentures. It has to strike a balance between risk and saving effected by raising funds
through debentures. The ultimate objective is to maintain unbalanced Capital Structure.
Sources of Funds
Security Financing Internal Financing Debt Financing
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MAJOR CONSIDERATION IN CAPITAL STRUCTURE PLANNING:
There are three major considerations, i.e. risk, cost of capital and control, which help the finance
manager in determining the proportion in which he can raise funds from various sources.
Although, three factors, i.e. risk, cost and control determining the capital structure of a particular
business undertaking at a given point of time. The finance manager attempts to design the Capital
Structure in such a manner that his risk and costs are the least and the control of the existing
management is diluted to the least extent.
RISK
Risk is of two kinds, i.e., financial risk and business risk. Here we are concerned primarily with the
financial risk. Financial risk also is of two types.
RISK OF CASH INSOLVENCY
As a firm raises more debt, its risk of cash insolvency increases. This is due to reasons. Firstly,
higher proportion of debt in the Capital Structure increases the commitments of the company with
regarded to fixed charges this means that a company stands committed to pay a higher amount of
interest irrespective of the fact whether it has cash or not. Secondly, the possibility that the supplier
of funds may withdraw the funds at may give point of time. Thus the long-term creditors may have
to be paid back in instalments even in instalments even if sufficient cash to do so does not exist.
This risk is not there in the case of equity share.
RISK OF BARIATION IN THE EXPECTED EARNING TO EQUITY
SHARE- HOLDER:
In case a firm has higher debt contenting Capital Structure. The risk of variation in expected
earning available to equity shareholder will be higher. This is because of trading of equity. We have
already seen earlier that financial leverage works both ways, i.e. it enhances the shareholders
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returns by a higher or lower than the rate of interest. Thus there will be lower probability that equity
shareholder will enjoy a stable dividend if the debt content is higher in the Capital Structure. In
other words the relative dispersion of expected earning available to equity shareholder will be
greater if the Capital Structure of a firm higher debt content.
COST OF CAPITAL
Cost is an important consideration in capital structure decision. It is obvious that a business should
be at least capable of earning enough revenue to meet its cost of capital and finance its growth.
Hence, along with a risk as a factor; the finance manager has to consider the cost aspect carefully
while determining the Capital Structure.
CONTROL
Along with cost and risk factor, the control aspect is also an important consideration in planning the
Capital Structure. When a company issues further equity share. It automatically dilutes the
controlling interest of the present owners. Similarly, preference shareholders can voting rights and
thereby affect the composition of the Board of Directors in case dividend on such share is not paid
for two consecutive years
TRADING ON EQUITY:
A company may raise funds either by the issue of shares or by borrowings. Borrowings carry a
fixed rate of interest and this interest is payable irrespective of fact where there is profit or not.
Preference shareholders are also entitled to a fixed rate of dividends but payment of dividend is,
subject to the profitability of the company. In case of rate of return on the total capital employed i.e.
shareholders funds plus long term borrowings, is more than the rate of interest on borrowed funds
or rate of dividends on preference shares, it is said that company is trading on equity.
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CURRENT YEAR (2008-2009)
The graph above clearly depicts that the proportion of debt in the financing mix of Hindalco
is much more as compared to share capital. The debt content is 26%whereas the proportion
of share capital and reserves and surplus is 0 and 74%respectively.
Composition of capital
structure
Share
Capital0%
Reserves
67%
LoanFund
33%
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2004-05 to 2008-09 (Rs. In Million)
Particulars 2008-09 2007-08 2006-07 2005-06 2004-05
Share Capital 1705 1226 1043 986 928
Reserves 235847 171736 123137 95077 75644
Loan Fund 83243 83285 73686 49034 38000
Capital Structure of Hindalco for five Years
0
25000
50000
75000
100000
125000
150000
175000
200000
225000
250000
2008-09 2007-08 2006-07 2005-06 2004-05
Share Capital
Reserves
Loan Fund
275000
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THE FRICT ANALYSIS
A financial structure may be evaluated from various perspectives from owners point of view,
return; risk and value are important consideration. From the strategic point of view, flexibility is an
important concern and flexibility assumes great significance. A sound capital structure will be
achieved by balancing all these consideration:
FLEXIBILITY: the Capital Structure should be determined within the debt capacity of the
company and this capacity should be flexible. It should be possible for a company to adapt
its Capital Structure within a minimum cost and delay if warranted by a changed situation.
RISK: risk depends on the variability in the firms operation. It may be caused by macro
economic factor and industry and firms specific factor. The excessive use of debt magnifies
the variability of shareholders earnings and threatens the solvency ofthe company.
INCOME: The Capital Structure of the company should be most advantageous to the
owners of the firms. It should create value; subject to other consideration. It should generate
maximum return to the shareholders with minimum additional cost.
CONTROL the Capital Structure should involve the minimum risk of loss of control of the
company. The owner of closely held companies is particularly concerned about dilution of
control.
TIMING: The Capital Structure should be feasible to implement given the current and
future condition of the capital market. The sequencing of source of financing is important.
The current decision influences the future option of raising capital.
The FRICTanalysis provides the general framework for evaluating firms Capital Structure.
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THEORIES OF CAPITAL STRUCTURE
The objective of firm should be directed towards the maximisation of the value of the firm, the
Capital Structure, or leverage decision should be examined from the point of view of its impact on
the value of the firm. If the values of the firm can be affected by Capital Structure or financing
decision, a firm would like to have a Capital Structure, which maximize the market value of the
firm.
There are broadly four approaches in this regard. These are:
Net Income Approach
Net Operating Income Approach
Traditional Theory
Modigliani-Miller Approach
These approaches analysis relationship between the leverage, cost of capital and the values of the
firm in different way. However, the following assumptions are made to understand these
relationships.
1. There are only two source of funds i.e. debt and equity
2. The total assets of firm are given. The degree of leverage can be changed by selling debt
to repurchase shares or selling shares to retire debt.
3. There are no retained earnings
4. The operating profit of firm is given and expected to grow.
5. The business risk is assumed to be constant and is not affected by the financing mix
decision.
6. There are no corporate taxes.
7. The investors have the same subjective probability distribution of expected earnings.
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Capital Structure Decision Process
Capital Budgeting Decision
Replacement
Modernization
Expansion
Diversification
Need To Raise Funds
Capital Structure Decision
Internal Funds
Debt
Internal Equity
Existing CapitalStructure
Desired Debts EquityMix
Layout Policy
EffectingReturn Effect on Risk
Effect On Cost Of Capital
Value of Firm
OptimumCapital
Structure
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LEAVERAGE ANALYSIS
Financial leverage
Relationship between financial leverage & rate of return.
Determination of whether Hindalco is trading on Equity.
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LEAVERAGE ANALYSIS
Financial leverage is defined as the ability of a firm to use fixed financial charges to magnify
the effect of change in E.B.I.T on the firms earning per share. The financial leverage occurswhen a firms Capital Structure contain obligation of fixed financial charges. For instance, interest
on debentures, dividend on preference share etc., along with owners equity to enhance earning of
equity shareholders. The fixed financial charges do not vary with the operating profit. They are
fixed and are to be paid irrespective of level of operating profit. The ordinary shareholders of firm
are entitled to residual income i.e. earning after fixed financial charges.
Favourable and Unfavourable Financial leverage
Financial leverage may be favourable or unfavourable depending upon whether the earning made
by the use of fixed interest or dividend bearing securities exceeds the explicit fixed cost, the firm
has to pay for the employment of such funds or not. The leverage will be considered to be
favourable so long the firm earns more on assets purchased with the funds than the fixed cost of
their use. Unfavourable leverage occurs when the firm does not earn as much as the funds cost.
Significance Of Financial Leverage
Financial leverage help in deciding the appropriate Capital Structure. One of the objectives of
planning an appropriate Capital Structure is to maximize the return on equity shareholders funds or
maximize the earning per share.
Financial leverage is double-edged sword. On one hand, it increases the earning per share and on
the other hand it increases the financial risks high financial leverage means high fixed financial
cost and high financial risk i.e. as the debt content in Capital Structure increases, the financial
leverage increases and at the same time the financial risk is also increases i.e. risk of insolvency
increases. The finance manager is required to trade-off between risk and return for determining
the appropriate amount of debt.
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(Rs. in Millions)i
Relationship between financial leverage & required rate of return
Relationship between financial leverage and firms required rate of return to equity
shareholders with corporate tax is given by:
Particulars 2008-09 2007-08 2006-07 2005-06 2004-05
Net sales & operating
income1,82,196 1,92,010 183130 113965 95231
Total expenditure (1,51,837) (1,57,999) (1,42,980) (87,914) (72,465)
Operating profit 30,359 34,011 40,150 26,051 22,766
Other income 6,366 4,929 3,701 2,439 2,700
Depreciation (6,443) (5,878) (6,381) (5,211) (4,633)
EBIT 30,282 33,062 37,470 23,279 20,833
Interest charges (3,369) (2,806) (2,424) (2,252) (1,700)
PBT 26,903 30256 35046 21027 19133
Degree of financial
leverage=EBIT/PBT1.12 1.09 1.07 1.11 1.09
1.04
1.05
1.061.07
1.08
1.09
1.1
1.11
1.12
1.13
2008-09 2007-08 2006-07 2005-06 2004-05
Degree of Financial leverage
Degree of Financialleverage
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Re = Ro + D/E (1-T) (Ro-Rb)
Where,
Re =required rate of return to equity shareholders
Ro = required rate of return for an all equity firm.
Rb = required rate of return to lenders
EXPLANATION:
The above graph clearly depicts that with higher debt content Re i.e. required rate of return by
shareholders is going up while TWACC is getting lower.
Determination of whether Hindalco is Trading on Equity
Trading on Equity
A company may raise funds either by issue of shares or by debentures. Debentures carry a fixed
rate of interest and this interest has to be paid irrespective of profits. Of course, preference share are
also entitled to a fixed rate of dividend depends upon the profitability of the company. In case, the
rate of return on the total capital employed is more than the rate of interest on debentures or rate of
dividend on preference shares, it is said that company is trading on equity.
Rate of return on equity shareholders fund
=PAT/Equity shareholders fund
= 22,303/2,37,583
= 9%
General rate of return = (PAT + Interest) / Total capital employed
= 25672/3,34,933
= 7%
The general rate of return is only 7%while the return on equity shareholders fund is 9%. Thus,
we can say that Hindalco is trading on Equity.
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EBIT-EPS ANALYSIS
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EBIT-EPS Analysis
The design of an appropriate capital structure is one of the major decision areas in financial
management.
A widely used financial technique to design an appropriate capital structure is E.B.I.T-EPS
analysis. As a method of capital structure planning, it essentially involves the comparison of
alternative methods of financing under various assumptions of E.B.I.T. the choice of combination
of source with the capital structure would be one that, for a given level of E.B.I.T. would ensure the
largest EPS. Alternatively, the choice of combination should ensure the maximum market price per
share.
MPS = EPS * Price-Earnings ratio
(Rs. in million)
Particulars 2008-09 2007-08 2006-07
EBIT 30,282 33,062 37,470
Interest Charges (3,369) (2,806) (2,424)
PBT & Extraordinary items 26,903 30,256 35,046
Extraordinary items - - -
PBT 22,303 30,256 35,046
Provision for Current Tax 4,781 6,063 (9,841)
Provision for Deferred Tax 1,214 875 551
Provision for fringe benefit tax 113 114 (113)
PAT 22,303 28,609 25,643
No. Of Shares Outstanding 1505245463 1286973135 1004921647
EPS 14.82 22.23 25.52
Figures in brackets indicates negative value
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INTERPREATION:
In FY-2008, The EPS of Hindalco was Rs. 22.23. But In FY-2009, It decrease to Rs. 14.82 This
change may be due to fluctuation in the sales value and operating leverage. It is obvious that net
profits Hindalco greatly with small fluctuation on sales figure especially because of high fixed
costs. Hence, EPS fluctuated. The Financial Leverage may heighten this effect.
0
5
10
15
20
25
30
2008-09 2007-08 2006-07
Earning Per Shear of Hindalco
2008-09
2007-08
2006-07
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COST OF CAPITAL
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COST OF CAPITAL
The cost of capital is a significant factor in designing the capital structure of an undertaking. The
basis reason behind running a business undertaking is to earn a return at least equal to its cost of
capital. Commercial undertaking has no relevance if it does not expect to earn its cost of capital.
Therefore, cost of capital constitutes an important factor in various business decisions.
The cost of capital estimate for a business is used for two purposes:
Evaluating the performance of a business: -The operating profit generated by a business
is evaluated against the minimum profit that the business is expected to generated as implied by the
cost of capital for that business. The profit generated by the business over and above the minimum
profit expectation is termed as the Economic Value Added (EVA) for that business.
Evaluating capital investment projects: - All projects that generate a return over and
above their respective cost of capital are EVA positive by nature and therefore value adding. The
appropriate cost of capital is used therefore to evaluate such projects into those that add value and
those that do not, thereby enabling financial decision-making.
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N = Life of Debentures
Cost of Preference Share
In the case of preference share, the dividend rate can be taken as its cost since it is this amount,
which the company intends to pay against preference shares. As in the case of debt, the issue
expenses or the discount / premium on issue/ redemption has also to be taken into account.
Cost of irredeemable share = PD/ PO
Where,
PD = Annual preference dividend
PO = Net proceeds in issue preference share-
Cost of redeemable preference share
If the preference share were redeemable after the expiry of a fixed period the cost of preference
share would be.
KP = PD + (RV-NP) / N
(RV + NP) /2
Where,
PD = Annual preference dividend
RV = Redemption value of preference
NP = Net proceeds an issue of preference share
N = Life of preference share
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Cost of ordinary of Equity share
Calculation of the cost of ordinary share involves a complex procedure. This is because unlike debt
and preference share there is no fixed rate of interest or dividend against ordinary shares. Hence, to
assign a certain cost to equity share is not a question of mere calculation. It requires an
understanding of many factors basically concerning the behaviour of investor and their
expectations. Since there can be different interpretations of investors behaviour, there fare many
approaches regarding calculation of cost of equity share.
The four main approaches are:
(1)D/P (Dividend /Price)
(2)E/P (Earning /Price) ratio
(3)D/P + g (Dividend /Price + Growth rate of earning) and
(4)Realized yield approach
1) D /P- ratio (Dividend Price) approach
This emphasizes that dividend expected by an investor from a particular company; do so in the
expectations of ascertain return. In other words, when an investor buys ordinary shares of a certain
risk, he accepts a certain return. The accepted rate of return is the cost of ordinary share capital.
Under this approach, therefore, the cost of ordinary share capital is calculated on the basis of the
present value of the expected future stream of dividend.
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Ke = D / NP
Where
Ke = Cost of equityD = Dividend
NP = Net proceeds of share
2) E /P (Earnings / Price) ratio approach
In this approach, the cost of ordinary share capital is based upon the expected rate of
earnings of a company. The investor expects a certain amount of earnings whether
distributed or not from the company.
Ke = E / NP
Where
E = Earning
NP = Net proceeds of shares
3) D / P + growth approach
This approach emphasis upon investor what actually expects to receive from his investments in a
particular ordinary share in terms of dividend plus the rate of growth in dividend / earnings. This
growth rate in dividend (g) which taken to be equal to the compound growth rate in earning per
share.
Ke = D / P + g
Where
D = Dividend per share
P = Market price of the share
G = Growth rate
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4) Realized yield approach
This approach considers the basic factor of the D/P + g approach but, instead of using the expected
values of the dividend and capital appreciation, past yields are used to denote the cost of capital.
This approach is based upon the assumptions that past behaviour will be repeated in future and
therefore, may be used to measure the cost of ordinary capital.
COST OF RETAINED EARNINGS
The companies do not generally distribute the entire profits earned by them by way of dividend
among their shareholders. They retain some profits for future expansion of the business. The
amount retained by company, if it had been distributed among the shareholders by way of dividend,
would have given them some earning. The company has deprived the shareholders of these
earnings by retaining a part of profit with it. Thus, the cost of retained earnings is the earning
forgone by the shareholders. Simply, stated, the opportunity cost of retained earnings may be taken
as the cost of the retained earnings. It is equal to the income that shareholders could have earned by
placing these funds in alternative investments.
WEIGHTED AVERAGE COST OF CAPITAL
The composite or overall cost of capital of a firm is the weighted averages of the cost of various
sources of funds. Weights are taken to be the proportion of each source of funds in the capital
structure. While making financing decision this overall or weighted cost is used. Each investment is
financed from the pool offunds, which represents the various sources from which funds have been
raised. Any decision of investment therefore has to be made with reference to the overall cost of
capital and not with reference to cost of specific source of funds.
WACC = WI * KI + W2 * K2 + + Wn * Kn
Calculation of the cost of capital
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The elegance of a theory lies in its practical application. The theory of measuring cost of capital is
not simple. Hindalco was founded in 1962. It is a large integrated aluminium, copper, chemical,
foil, wheel, carbon etc. It has a total sale of Rs. 1,92010 million, total gross assets of Rs. and net
profit of Rs. 28,609 million in 2008.
The average market price of Hindalco one share in 2008 was Rs. 112. The market value of the
companys equity is obtained by multiplying the number of the outstanding shares () by the average
share price. The market value of debt is assumed to be equal to the book value. On Hindalcos EPS,
DPS, Payout, average share price, dividend yield, earning yield, price to book value per share and
ROE for the years 1996 to 2008
HINDALCO FINANCIAL DATA 1996-2008
Years EPS
(Rs.)
DPS
(Rs.)
B.V.of
share
Dividend
payout
ratio (%)
Dividend
Yield
(%)
Earning
Yield
(%)
ROE
(%)
1996-97 4.94 0.45 30.74 9.00 1.50 16.07 18.481997-
986.27 0.53 36.83 9.50 1.40 17.02 19.72
1998-99 7.16 0.65 43.72 9.00 1.40 16.37 18.90
1999-00 7.74 0.80 51.02 10.00 1.50 15.17 18.01
2000-01 8.57 1.20 58.80 14.00 2.00 14.57 16.58
2001-02 8.67 1.35 61.53 16.50 2.00 14.09 16.70
2002-03 5.92 1.35 66.95 22.00 2.00 8.84 15.05
2003-04 8.53 1.65 74.16 19.00 2.00 11.51 15.00
2004-05 13.48 2.00 82.54 16.00 2.40 16.33 17.88
2005-06 16.79 2.20 97.40 14.90 2.25 17.23 20.50
2006-07 25.52 1.70 118.97 7.90 1.40 21.45 20.45
2007-08 22.23 1.85 142.09 9.3 1.30 15.64 16.41
2008-09 14.82 1.35 139.73 12.00 .97 10.61 9.39
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Estimation of Hindalcos Cost of Equity
There are two approaches for calculating the cost of equity
1. The constant dividend-growth model
2. The capital asset pricing model (CAPM)
Dividend Growth Model
The formula for calculating the cost of equity is as follows:
DIV1
Ke = -------- + g
P0
Where the first term DIV / P0 is the dividend yield and the second term g, is the expected (constant)
growth in dividends. Hindalcos dividend yield in 2008 is . The dividend yield of the company has
varied between 1% to 2.50%.
Estimation of Growth Rate
In practice, four methods may be used to estimate the growth rate:
1) Internal growth:- Growth may be approximately by calculating the product of retention
ratio and return on equity (ROE)
g = Retention ratio * ROE
This approach may be used when the firm has a stable dividend policy. Hindalcos payout ratio has
fluctuated over years. However, on an average, it has distributed about 13% of its net profit and
retained 87% in the past decade. In the most recent year 2008, it retained about 90% of its profit.
The companys ROE in 2007 is 20.45% and 10 years average is 17%. Assuming that the current
retention ratio of 87% and ROE of 17% will continue in the future, then Hindalco is expected to
grow at % year.
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G = Retention ratio* ROE = 0.87*0.17 = 15%
The constant growth model has its limitation. It is not application to those companies, which have
highly unstable dividend policy (or retention ratio) and fluctuating ROE. One way to overcome this
limitation is to estimate Ke for a large sample of companies of equivalent risk in the same industry
a use the average k, as an approximation of the cost of equity of the company under consideration.
2) Past average growth: - In practice, growth may be based on past EPS rather DPS since
companies do not change their DPS frequently with changes in EPS. Thus, DPS grows at a
slow rate. The average of EPS past growth rates may be used as a proxy for the future
growth. There are two alternatives available for calculating the average (1) the arithmetic
average and (2) the geometric average. These two methods will give different estimates of
the average growth rate. The geometric average will give a compounded average and is
preferable when there is much variability in EPS data.
The geometric average EPS growth rate for Hindalco for the period 1996 to 2006 is as follows:
EPSn EPSo (1 + g) n
EPSn
(1+g) n =--------
EPSo
3) Regression approach for estimating growth:- Both arithmetic average geometric
methods of calculating growth have limitations. Simple average methods of calculating
growth have limitations. Simple average gives the same weight to each years earning while
geometric average estimates a compounded rate based on only two observations. Both
techniques are quite inadequate to use when earning are widely fluctuation. The regression
technique estimates growth over time (t) incorporating all observations. The linear
regression model is as follows:
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EPS1 = a + bt
The linear model indicates growth in terms of rupees. A better method is the log-linear
regression model, which estimates growth in percentage term:
In (EPS) is natural logarithm of EPS. The slope of the regression line (1+g) and it is estimates
as follows:
Yt In EPS
In (1+g) = -----------------
Yt
Where Yt is Y1-Y
9.0989
In (1+g) = ----------- = 0.1123
82.98
Taking anti-log on both sides, we get
1+g = 1.1198
g = 1.1198-1 = 0.1198 or 12%
The growth rate estimated according the different methods are summarized. The growth rate
estimated by log-linear model is the most appropriate since Hindalcos EPS are highly variable.
Thus, for the calculation of the Hindalcos co
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