Auto Parts Final Sheet
Content
Cost of Capital: Auto Parts
Batch-8 (MBA F&B)
ByApoorva Sharma (422)
Prashant Anchan (450)
Adarsh Chhajed (411)
1 | Page
Table of Contents
Cost of Capital: Auto parts companies – Summary.....................................................................4
Source of Data............................................................................................................................ 4
List of Companies Analysed....................................................................................................... 4
Authors and Contribution........................................................................................................ 4
Objective.................................................................................................................................... 5
JK Tyres & Industries - Introduction............................................................................................. 7
JK Tyres & industries: Share holding pattern........................................................................... 8
JK Tyres & industries: Corporate Governance..........................................................................8
JK Tyres & industries: Analysis................................................................................................. 9
JK Tyres & industries: Charts & Graphs.................................................................................. 11
Inference:.............................................................................................................................. 12
Balkrishna Industries - Introduction.......................................................................................... 13
Balkrishna Industries: Share holding pattern...................................................................................... 13
Balkrishna Industries: Corporate Governance.......................................................................13
Balkrishna Industries: Analysis.............................................................................................. 14
Balkrishna Industries: Charts & Graphs................................................................................. 16
Inference-.............................................................................................................................. 16
Amtek Auto - Introduction........................................................................................................ 17
Amtek Auto: Share holding pattern....................................................................................... 18
JK Tyres & industries: Analysis............................................................................................... 18
Ametek Auto: Charts & Graphs............................................................................................. 20
Inference:.............................................................................................................................. 21
CEAT limited - Introduction....................................................................................................... 21
CEAT industries: Share holding pattern............................................................................................ 22
CEAT Industries: Corporate Governance............................................................................... 23
CEAT limited : Analysis.......................................................................................................... 24
Inference:.............................................................................................................................. 26
Cost of Capital: Auto parts companies – Summary
Source of Data
List of Companies
Analysed
www.bseindia.com
www.moneycontrol.com
www.rediffmoney.com
www.tradingeconomics.com
JK Tyres & Industries
Balkrishna Industries
Amtek Auto
CEAT Tyres
Apollo Tyres
Authors and Contribution
Name
Apoorva Sharma (422) - 9920590994
Prashant Anchan (450) - 9892364658
Adarsh chhajed (411) - 8087768664
Contribution
Data and Analysis of JK Tyres &
Industries
Data and Analysis of Balkrishna
Industries
Data Analysis of Amtek Auto
Synopsis:
After analyzing trends of WACC for various companies, we can say that CAPM
reflects the market trends better than the other models as the company’s returns
are calculated using stock beta and expected market returns, while WACC calculated
using the EPR model follows the EPS trend and WACC calculated using the Gordon’s
model and waltar model follows the DPS trend.
Objective
To analyze trends in Weighted Average Cost of Capital of chosen pharmaceutical companies
by using different methods for calculating of Cost of Equity.
Appropriateness of Methodology
Cost of Debt:
Cost of debt (long term loans – secured and unsecured) was calculated using the data
available but Cost of Debt (Debentures and Bonds) could not be done since most of the
companies have not issued any debentures and Bonds and even if they have issued it was not
possible to find the exact data to calculate its cost for the same.
Debt financing is done through two ways (i) Loans and (ii) Issue of debentures. When a
company borrows it uses financial leverage; so that it can increase its profitability but at the
same time it is exposed to financial risk. In general cost of debt is less than cost of equity.
The following methodology describes how cost of debt was arrived at i.e. the methodology
used and various parameters involved.
Methodology and Parameters involved in calculating Cost of Debt (Kt)
Identified average total debt (long term loans including both secured and unsecured
loans) from company’s balance sheets for a period of 5 years.
Average total Debt = (Total debt for current year + Total debt for
previous year) / 2
Though corporate tax rate applicable to Corporate is around 33% with surcharges and
education cress, to provide an exact picture of tax rate effective tax rate is used by
considering any tax benefits availed.
Effective tax rate (T) = Tax paid / Profit before tax
Nominal interest rate on loans is calculated by dividing Total Interest paid upon Average
Total Debt.
Nominal Interest rate (I) = Interest Paid / Average Total Debt
Given the Nominal Interest rate and effective tax rate, Cost of Debt (K t) is calculated
using below formula:
Kt = I * (1-T)
Cost of Equity:
Cost of Equity is calculated using Gordon, Earnings Price Ratio and CAPM models for
calculating Cost of Equity. Cost of equity is more challenging to calculate as equity does not
pay a set return to its investors. Similar to the cost of debt, the cost of equity is broadly
defined as the risk weighted expected return required by the investors. The following methods
were used to calculate cost of equity.
1. Gordon’s Model:
Ke = (D0*(1 + g)/P0) + g
Here,
Ke = Cost of Equity
D0 = Dividend per share paid by the company for the current year (Rs.)
g = Annual growth rate in dividends and is calculated using geometric mean of
growth in dividends in the past years or by multiplying retention ratio with ROE
P0 = Current market price of the shares (Rs.)
2. Earnings – Price Ratio Approach:
Ke = E0*(1 + g) / P0
Here,
Ke = Cost of Equity
E0 = EPS for the current year (Rs.)
P0 = Current market price of the shares (Rs.)
3. CAPM approach:
Ri = Rf + βi (Rm – Rf)
Here,
Ri = Cost of Equity
Rf = Risk free rate
Rm = Market return
βi = Beta of the return of company with respect to market returns
βi = βU + βL
βU =Unlevered Beta
βL =levered Beta
βL = βU /(1+D/E)
D=Total Debt
E=Total Equity
Weighted average Cost of Capital:
The weighted average cost of capital (WACC) of a firm refers to how much on an average it
costs a firm to raise money. The importance of the WACC is in its relation to the evaluation of
projects.
The firm’s WACC is the cost of capital for the firm’s mixture of debt and stock in its capital
structure.
WACC = wd(cost of debt) + ws(cost of equity/retained earnings) + wp(cost of
preference stock)
Here,
wd = weight of debt in the firm’s capital structure
ws = weight of share capital
wp = weight of preference share capital
JK Tyres & Industries - Introduction
The company was incorporated as a private limited company in West Bengal in 14th February,
1951. Until 31st March 1970, the company was engaged in the managing agency business.
Thereafter, the company decided to undertake manufacturing activities and obtained a letter
of intent in February 1972 for the manufacture of automobile tyres and tubes.
The company is the undisputed market leader in Truck/Bus radials in India, with 138 selling
locations, 4,000 strong dealer network served by six plants in India and three plants in JK
Tornel, Mexico. With state-of-the-art modern production facilities in all 9 plants, total
production capacity is almost 20 million tyres p.a.
JK Tyres & industries: Share holding pattern
Holder's Name
Promoters
General Public
Foreign Institutions
Foreign Ocb
Other Companies
N Banks Mutual Funds
Foreign NRI
Financial Institutions
Central Govt.
Others
Directors
No of Shares
118717655
29483287
27361232
17437500
16801128
9255291
2985623
2076942
1427600
1246042
21180
% Share Holding
52.34%
13%
12.06%
7.69%
7.41%
4.08%
1.32%
0.92%
0.63%
0.55%
0.01%
JK Tyres & industries: Corporate Governance
Name
Arun K Bajoria
Arvind Singh Mewar
Bakul Jain
Bharat Hari Singhania
Bharat Hari Singhania
Kalpataru Tripathy
Om Prakash Khaitan
Pawan Kumar Rustagi
Pawan Kumar Rustagi
Raghupati Singhania
Sunanda Singhania
Swaroop Chand Sethi
Vikrampati Singhania
Vimal Bhandari
Wolfgang Holzbach
Designation
President & Director
Director
Director
CEO
Managing Director
Director
Director
Vice President (Legal) & Co. Secretary
Secretary
Chairman & Managing Director
Additional Director
Whole Time Director
Deputy Managing Director
Director
Director
JK Tyres & industries: Analysis
JK Tyres& Industries Ltd.
Calculations for the year
Mar '14
Mar '13
Mar '12
Mar '11
Mar '10
Expected Cost of
Debt:
Average Secured Loans
Average Unsecured Loans
Average Total Debt
Interest
Profit Before Tax
Tax
Cost of debt pre tax
Effective tax rate
Effective cost of debt post
tax
1985.16
1954.55
1396.69
758.68
433.33
223.01
265.62
281.35
559.35
426.85
2208.17 2220.17
1678.04
1318.03 860.18
248.3
206.53
170.43
175.7
164.22
195.05
150.31
12.8
68.04
222.21
60.37
44.77
1.8
30.35
82.21
11.24%
30.95%
9.30%
29.79%
10.16%
14.06%
13.33% 19.09%
44.61% 37.00%
7.76%
6.53%
8.73%
7.38% 12.03%
50.00
35
24.99
Expected Cost of
Equity:
Equity Dividend (%)
30
35
DPS (Rs.)
Retention ratio (RR)
ROE (ROE)
Growth rate (g) = RR*ROE
Adjusted Share price
5.00
3.50
2.50
3.00
3.50
67.35%
89.70%
90.25%
89.47%
-7.32%
14.22%
12.84%
36.39
1.48%
1.33%
101.50
9.14%
-0.67%
14.40
22.87% 43.44%
15.40% 38.96%
18.50
40.71
Gordon growth model
28.34%
4.82%
16.58%
34.12% 50.91%
Adjusted EPS (Rs.)
EPS growth*
Adjusted Share price
6.56
25.70
-74.47% 858.96%
36.39
101.50
2.68
-82.05%
14.40
14.93
39.81
-62.50% 758.90%
18.50
40.71
4.60% 242.81%
3.34%
E/P model
BETA
Market Return (Rm)*
Risk free rate (Rf)**
CAPM
Expected WACC
(book value):
AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Average Total Capital (in Rs.
Crs)
Weight of Share Capital
Weight of Debt
30.27%
839.91
%
1.20
41.34%
8.12%
0.57
6.35%
8.42%
0.83
36.08%
8.32%
0.71
0.55
-24.39% 29.92%
8.83%
7.22%
47.92%
7.25%
31.32%
-14.75% 19.77%
Mar '14
Mar '13
Mar '12
Mar '11
Mar '10
836.04
741.94
2208.17 2220.17
670.58
1678.04
714.71
1318.03
3044.21 2962.11
0.2746
0.2505
0.7254
0.7495
2348.62
0.2855
0.7145
2032.74 1553.58
0.3516 0.4463
0.6484 0.5537
WACC (Gordon Growth
Model)
13.42%
6.10%
10.97%
WACC (EPS Model)
WACC (CAPM)
6.90% 65.71%
18.79%
6.71%
7.19%
15.18%
16.78% 29.38%
381.53
15.43%
%
-0.40% 15.49%
Expected WACC
(market value):
AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Total (in Rs. Crs)
Weight of Share Capital
Weight of Debt
WACC (Gordon Growth
Model)
WACC (EPS Model)
WACC (CAPM)
Mar '14
Mar '13
149.41
416.75
2208.17 2220.17
2357.58 2636.92
0.0634
0.1580
0.9366
0.8420
Mar '12
Mar '11
693.40
860.18
Mar '10
59.12
1678.04
1737.16
0.0340
0.9660
75.96 167.15
1318.03 860.18
1393.99 1027.33
0.0545 0.1627
0.9455 0.8373
6.26%
9.00%
7.56% 43.87%
10.31%
6.64%
8.54%
9.50%
8.84% 18.35%
146.73
8.63%
%
6.18% 13.29%
9.07%
Actual Returns:
Mar '14
ROCE (average capital)
Net Profit
ROE (average share
capital)
Growth Rate
Volume of shares in lakhs
Book value of share in Rs
Total value of Shares in
Lakhs
Total value of Shares in
Crores
Market Value of Shares in
Rs
Total Market Value of
Shares in Crores
Mar '13
Mar '12
Mar '11
Mar '10
14.56% 12.05%
134.68
105.54
7.80%
11
11.99% 24.87%
61.32 163.47
16.11% 14.22%
0.15
0.13
1.48%
(0.00)
9.14% 22.87%
0.06
0.21
410.59
410.59
410.59
410.59
410.59
203.62
180.7
163.32
174.07
168.88
74193.6
83604.34
1
69340.4
71471.40
4
67057.56
836.04
741.94
670.58
714.71 693.40
36.39
101.50
14.40
18.50
149.41
416.75
59.12
75.96 167.15
40.71
JK Tyres & industries: Charts & Graphs
Expected Value: Book Value Expected Value: Market Value
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)
Mar '14
Mar '13
Mar '12
Mar '11
Mar '10
JK TyresLtd : ROCE v/s ROE
ROCE (average capital)
ROE (average s hare capital)
50%
40%
30%
20%
10%
0%
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)
Mar '14
Mar '13
Mar '12
Mar '11
Mar '10
Weights : Debt to Equity
0.7254
0.7495
0.7145
W0.6484
eight of Debt
0.5537
Weight of Share Capital
0.2746
0.2505
0.2855
0.3516
0.4463
Mar '14 Mar '13 Mar '12 Mar '11 Mar '10
Dividend Policy Method
2014
2013
2012
DPS
EPS
Cost of Capital(CAPM)
Return on Investment
Retention ratio
Calculated Price of share by
waltar model
2011
2010
5.00
6.56
0.10
0.19
0.90
3.50
25.70
0.07
0.16
0.89
2.50
2.68
0.09
0.12
(0.07)
3.00
14.93
0.06
0.18
0.67
3.50
39.81
0.13
0.32
0.90
77.11
849.65
28.74
599.43
689.50
Actual Price
Calculated Dividend by waltar
model
Calculated price of share by
Gordon model
Calculated Earnings by Gordon
Model at present market price
36.39
101.50
14.40
18.50
40.71
(9.71)
(39.38)
(7.43)
(22.37)
(63.92)
8.78
35.91
(27.70)
85.63
26.22
27.18
72.64
(1.39)
3.23
61.82
Inference•
3 types of firms: Growth firms (r > k), Normal firm (r = k) & Declining firm (r < k)
•
Growth firm: Share price increases with decrease in payout ratio. So optimal payout
ratio: Nil
From the Waltar model and Gordon Model we can see that company is retaining the capital for
capital investment as its maximum ability to pay dividends and earnings based on the share
price is high and its paying a part of it on the basis of payout ratio.
As its a profit making company it is hopeful that it will keep giving increasing dividends to its
shareholders in the coming times.
At the same time it can issue bonus shares to the shareholders to retain their faith or go for a
stock split so that actual share price will decrease and it will allow them to increase their
shareholders numbers.
Inference:
There is very little different between Expected WACC calculated using book value and
calculated using market value as the Debt to equity is 1% i.e. 0.001:0.9 9and debt taken by
the company has been continuously decreasing. Debt to equity ratio was 0.05:0.95 in March
2009 and it reduced to almost 0.01:0.99 in 2014. As a result the WACC calculated is almost
equal to cost of equity for the last few years.
WACC using Gordon Growth model has been continuously decreasing(Except the year 2011)
due to reduction in growth rate as a result of decrease in ROE as growth rates are calculated
by multiplying Retention Ratio with ROE.
WACC calculated using CAPM model is a function of market risk premium and as the market
has been increasing since past decade and beta being almost constant for Divis Laboratories,
the cost of equity has been increasing during the last few years for the company.
Balkrishna Industries - Introduction
Balkrishna Industries, which is a holding company of Balkrishna Tires, Balkrishna Paper Mills and
Balkrishna Synthetic, was incorporated on November 20,1961. It is part of the Siyaram Poddar group, which
has a turnover of over USD 250 million, which operates in four business segments: Paper Boards, Tyres,
Textile Processing and Wind Power. Paper Boards segment manufactures coated and un-coated paper
boards. Tyre segment manufactures a wide range of tyres for diversified and non-traditional applications.
Textile processing segment processes textile fabrics. The registered office of the company is located at
Boisar, Maharashtra.
The company operates mainly in the business segment of tires. It focuses on the production of a range of offhighway tires that includes agricultural, industry, material handling, forestry, lawn and garden, construction
and earth moving tires. Over 95% of the tire production is exported under the BKT brand, with the main
export markets being countries in Western Europe, North America and Australasia including original
equipment manufacturers. In the domestic market, the company supplies to all the major construction
equipment manufacturers and has a presence in the replacement market of the road construction sector.
Balkrishna Industries: Share holding pattern
Balkrishna Industries: Corporate Governance
Name
Arvind Poddar
Designation
Chairman
Arvind Poddar
Managing Director
Vipul Shah
Company Secretary
Vijaylaxmi Poddar
Executive Director
Rajiv Poddar
Joint Managing Director
Dharaprasad Poddar
Chairman Emeritus
Sachin Nath
Chaturvedi
Non Executive & Independent Director
Khurshed Doongaji
Non Executive & Independent Director
Laxmidas Merchant
Non Executive & Independent Director
Sanjay Asher
Non Executive & Independent Director
Ashok Saraf
Non Executive & Independent Director
Ramesh Kumar
Poddar
Non Independent & Non Executive
Director
Balkrishna Industries: Analysis
Particulars (Rs mn)
FY10
FY11
FY12
FY13
FY14
Total Debt
42.4
35.7
939.8
1,501.1
1,655.9
Interest cost
Average cost of debt - pre tax
(%)
25.4
20.6
16.1
18.1
25.3
60.1
52.7
3.3
1.5
1.6
PBT
Tax
311.33
102.38
288.14
90.9
400.41
125.02
535.2
142.1
717.69
157
Tax Rate (%)
32.9
31.5
31.2
26.6
21.9
Post tax cost of Debt (%)
40.32
36.06
2.27
1.09
1.25
Total Shareholders Fund
Debt
Total (Debt + Equity)
660.77
42.35
703.12
831.77
35.74
867.51
1080.09
939.82
2019.91
1418.96
1501.14
2920.1
1884.8
1655.88
3540.68
Weight of Equity: We
94.0
95.9
53.5
48.6
53.2
Weight of Debt: Wd
6.0
4.1
46.5
51.4
46.8
Particulars
%
16.2
0
31.
0
69.
0
8.42
16.879
8.46
0.37
6
3.1
8
11.6
0
13.0
2
Average Post tax cost of Debt
Weight of Debt
Weight of Equity
Risk Free rate (%Rf)
Market Return (%Rm)
Market Risk Premium (MRP) = (Rm - Rf)
Beta (x)
Security Risk Premium (SRP) = β*MRP
Cost of Equity (%) - Rf + SRP
WACC (%)
CAPM
11.598%
Gordon
92.432%
Year
Cost of Equity
Earnings capitalization method
226.591%
2009-10
Prop. Dividend per share
EPS
13.53
Div. Payout
106.82
12.67%
Plowback
87.334%
ROE
31.622%
g
27.617%
2010-11
2011-12
13.53
14.50
18.97
27.54
71.32%
28.677
%
23.713
%
6.800%
52.65%
47.349
%
25.497
%
12.073
2012-13
2013-14
14.50
19.33
36.56
39.66%
50.19
38.51%
60.339%
61.486%
27.703%
29.748%
16.716%
18.291%
%
16.299%
No. of Outstanding Shares
Share Price (1/04/2013 NSE)
Market Value of Equity
26606,80,63
4
2
2
589340,76,04
3
2
1
83
5
Average Interest Payments
Average LT Debts
Market Value of Debt
2.53%
Balkrishna Industries: Charts & Graphs
D/E Ratio Vs Expected Returns
10.00
9.80
9.60
Expected Returns
9.40
9.20
9.00
0.0000 0.2000 0.4000 0.6000 0.8000 1.0000
Debt Equity Ratio
Dividend as per Waltar and Gordon Model
Year
2013-2014
Actual DPS
Actual EPS
Actual Price
Cost of Equity(CAPM)(k)
Return on Investment (r )
Plowback (b)
Dividend per share by Waltar Model
Dividend per share by Gordon Model
19.33
50.19
22
11.598%
0.158356587
0.61
180.52
0.41
Inference•
3 types of firms: Growth firms (r > k), Normal firm (r = k) & Declining firm (r < k)
•
Growth firm: Share price increases with decrease in payout ratio. So optimal payout ratio: Nil
From the Waltar model and Gordon Model we can see that company is retaining the capital for capital
investment as its maximum ability to pay dividends and earnings based on the share price is high and its
paying a part of it on the basis of pay-out ratio.
As it’s a profit making company it is inferred to be able to provide dividends in future to its shareholders.
Systematic risk or market risk is the levered beta used in CAPM calculation. In Gordon model we use
constant dividend growth model to estimate cost of equity. The future earning of company is decided by past
dividends. Also for this company dividends announced is not uniform every year. Hence considering Gordon
Model for computing cost of equity is not appropriate. Also Earnings Price Model considers past earnings of
company, hence it may not give accurate projected returns for this company. Hence this model is least
preferred.
At the same time it can issue bonus shares to the shareholders to retain their faith or go for a stock split so
that actual share price will decrease and it will allow them to increase their shareholders numbers.
There is very little difference between Expected WACC calculated using book value and
calculated using market value as the Debt to equity is 0.7105 and debt taken by the company
has been continuously increasing.
WACC using Gordon Growth model has been continuously decreasing(Except the year 2011)
due to reduction in growth rate as a result of decrease in ROE as growth rates are calculated
by multiplying Retention Ratio with ROE.
Amtek Auto - Introduction
Amtek Auto Limited manufactures and sells automotive components in India and
internationally. Its product portfolio includes flywheel ring gears, such as starter ring gears,
flex plate assemblies, flywheel assemblies, and con-rod piston sub assemblies; and machining
products comprising steering knuckles, ladder frames, engine bearing ladders, exhaust
manifolds, aluminium case housings, bridge fork assemblies, hubs, spindles, connecting rods,
crankshaft assemblies, housings, gear shifter forks, front axle beam assemblies, pivot arms,
flywheel housing and assemblies, wheel hubs, PTO casing, front axle beams, and front and
rear axles. The company also provides forging products consisting of connecting rods and
caps, crankshafts and camshafts, steering levers, gear shifter forks, sector gears and shafts,
front impact beams drive shafts, spindles, hubs and flanges, transmission components,
steering parts, pistons, propeller fork shafts, stub-axles, front axle beam, and front and rear
axle shafts; casting aluminium products, including clutch cases, transmission cases, timing
chain covers, mounting brackets, camshaft covers/carriers, bearing ladders/sumps, structural
covers, and differential flanges; and casting iron products, such as cylinder blocks and heads,
transmission housings, brake carriers and callipers, trumpet casings, crankshafts, intake and
exhaust manifolds, flywheels and flywheel housings, turbo chargers, bell housings, and link
shafts. Company offers its products for passenger cars, two or three wheelers, and light and
heavy commercial vehicles; and tractors, locomotive components, railways, construction and
earth moving vehicles, aerospace, and oil and gas. Amtek Auto Limited was incorporated in
1988 and is based in New Delhi, India.
The company is a Public Limited Company. Below is the list of Board of Directors.
Name
Designation
Arvind Dham
B Lugani
B Venugopal
D S Malik
D S Malik
Gautam Malhotra
John Ernest Flintham
Madhu Vij
Raj Narain Bhardwaj
Rajeev Kumar Thakur
Rajeev Raj Kumar
Rajeev Raj Kumar
Sanjay Chhabra
Sanjiv Bhasin
Vinod Uppal
Chairman & Director
Independent Director
Nominee Director
CEO
Managing Director
Non Executive Director
Senior Managing Driector
Director
Independent Director
Independent Director
Co. Secretary & Compl. Officer
Secretary
Independent Director
Independent Director
Vice President - Finance
Amtek Auto: Share holding pattern
Holder's Name
Promoters
Foreign Institutions
Other Companies
Financial Institutions
General Public
Banks Mutual Funds
Others
Foreign NRI
Foreign Ocb
No of Shares
107912650
81757978
12162350
9008256
7297642
1107566
796699
273287
1500
% Share Holding
48.98%
37.11%
5.52%
4.09%
3.31%
0.5%
0.36%
0.12%
0%
JK Tyres & industries: Analysis
(in Rs.
Crs.)
Amtek Auto
Calculations for the year
Sept
'14
Sept
'13
Jun '12
Jun '11
Jun '10
6,287.39
5,864.77
1,535.00
1,141.76
888.08
Expected Cost of Debt:
Average Secured Loans
Average Unsecured Loans
Average Total Debt
Interest
Profit Before Tax
Tax
82.15
167.41
1964.86
2126.13
1827.81
6369.5
4
6032.1
8
3499.8
6
3267.8
9
2715.8
9
429.11
275.32
185.51
335.17
124.53
472.03
571.71
409.83
132.16
199.83
148.67
120.99
118.28
51.21
57.64
Mar
'09
Cost of debt pre tax
Effective tax rate (Tax Shield)
Effective cost of debt post
tax
6.74%
31.50%
4.56%
21.16%
5.30%
28.86%
10.26%
38.75%
4.59%
28.84%
4.62%
3.60%
3.77%
6.28%
3.26%
25
25
25
50
50
0.50
0.50
0.50
1.00
1.00
Avg
4.31
%
Expected Cost of
Equity:
Equity Dividend (%)
DPS (Rs.)
Retention ratio (RR)
ROE (ROE)
Growth rate (g) = RR*ROE
Adjusted Share price(31 march)
96.07%
97.34%
95.98%
68.63%
83.56%
6.30%
6.05%
159.10
9.39%
9.14%
63.85
6.65%
6.38%
132.25
1.92%
1.32%
150.90
3.93%
3.28%
194.00
Gordon growth model
6.38%
10.00%
6.78%
1.99%
3.81%
Avg
5.79
%
14.68
20.62
13.22
7.09
10.80
-28.81%
159.10
55.98%
63.85
276.64
%
132.25
3.51
-50.49%
150.90
-34.35%
194.00
E/P model
6.57%
50.37%
37.65%
1.15%
2.40%
BETA
Market Return (Rm)
Risk free rate (Rf)
1.06
43.74%
8.96%
0.62
6.35%
8.74%
0.27
36.08%
8.99%
0.84
29.92%
7.75%
CAPM
45.69%
7.27%
16.28%
0.71
-24.39%
8.42%
14.74%
26.42%
Avg
16.1
8%
Mar
'14
Mar
'13
Mar
'12
Mar
'11
Mar
'10
Mar
'09
AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Average Total Capital (in Rs. Crs)
Weight of Share Capital
Weight of Debt
5133.6
6369.5
11503.2
0.45
0.55
4797.9
6032.2
10830.1
0.44
0.56
4383.4
3499.9
7883.3
0.56
0.44
4265.7
3267.9
7533.6
0.57
0.43
3644.7
2715.9
6360.6
0.57
0.43
WACC (Gordon Growth
Model)
WACC (E/P Model)
WACC (CAPM)
5.40%
5.49%
22.95%
6.43%
24.32%
5.22%
5.45%
22.61%
10.72%
3.85%
3.38%
-5.62%
3.58%
2.77%
16.53%
Sept
'14
Sept
'13
Jun '12
Jun '11
Jun '10
3505.26
6369.54
9874.80
0.3550
0.6450
1395.91
6032.18
7428.09
0.1879
0.8121
2916.75
3499.86
6416.61
0.4546
0.5454
3518.60
3267.89
6786.49
0.5185
0.4815
3912.98
2715.89
6628.87
0.5903
0.4097
Adjusted EPS (Rs.)
EPS growth
Adjusted Share price
Expected WACC (book
value):
Expected WACC
(market value):
AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Total (in Rs. Crs)
Weight of Share Capital
Weight of Debt
Avg
19.6
3%
Mar
'09
WACC (Gordon Growth
Model)
WACC (E/P Model)
WACC (CAPM)
Actual Returns:
ROCE (average capital)
Net Profit
ROE (average share capital)
Growth Rate
Volume of shares in lakhs
Book value of share in Rs
Total value of Shares in Lakhs
Total value of Shares in
Crores
Market Value of Shares in Rs
Total Market Value of Shares
in Crores
5.24%
5.31%
19.19%
4.80%
12.39%
4.29%
Sept
'14
7.83%
323.36
6.30%
0.06
Sept
'13
7.82%
450.72
9.39%
0.09
2,203.18
2,186.24
5.14%
19.17%
9.46%
4.06%
3.62%
-4.62%
3.59%
2.75%
16.93%
Jun '12
Jun '11
Jun '10
7.55%
291.56
6.65%
0.06
6.20%
81.82
1.92%
0.01
5.10%
143.06
3.93%
0.03
2,205.48
2,331.74
2,017.00
233.01
219.46
198.75
182.94
180.7
513362
.97
5133.6
3
159.10
3505.2
6
479792
.23
4797.9
2
63.85
1395.9
1
438339
.15
4383.3
9
132.25
2916.7
5
426568
.52
4265.6
9
150.90
3518.6
0
364471
.90
3644.7
2
194.00
3912.9
8
Ametek Auto: Charts & Graphs
Weights : Debt to Equity
Expected Value: Book Value
1.2
38%
1.0
30%
0.8
0.6
Weight
Capital
0.56
0.56
0.55of Share
0.45
0.44
0.44
Weight of 0.57
Debt
0.57
0.43
0.43
0.4
22%
0.0
Mar '14
Mar '13
Mar '12
Mar '11
Mar '10
WACC (E/P Model)
14%
6%
0.2
WACC (Gordon Growth Model)
-2%
Mar '14
-10%
WACC (CAPM)
Mar '13
Mar '12
Mar '11
Mar '10
Expected Value: Market Value
30%
ROCE Vs ROE
10%
WACC (Gordon Growth Model)
WACC (E/P Model)
8%
20%
ROE (average share capital)
6%
10%
4%
ROCE (average capital)
WACC (CAPM)
0%
Sept '14 Sept '13
2%
Jun '12
Jun '11
Jun '10
-10%
0%
Sept '14
Sept '13
Jun '12
Jun '11
Jun '10
Dividend Policy
Sept '14
Sept '13
Jun '12
Jun '11
0.50
14.68
0.19
0.11
0.96
0.50
20.62
0.04
0.10
0.97
0.50
13.22
0.09
0.10
0.96
1.00
3.51
(0.05)
0.09
0.69
43.76
1154.07
150.97
80.58
159.10
63.85
132.25
150.90
(50.49)
(33.08)
(21.85)
0.13
Calculated price of share by
Gordon model
(6.47)
9.34
142.43
10.41
Calculated Earnings by Gordon
Model at present market price
(361.10)
140.89
12.28
50.87
DPS
EPS
Cost of Capital(CAPM)
Return on Investment
Retention ratio
Calculated Price of share by waltar
model
Actual Price
Calculated Dividend by waltar
model
Inference:
Estimating Risk and Return:
Daily closing price of the stock and BSE indx (S&P BSE AUTO) the past 5 years from (04/01/10
to 31/12/14 ) were taken from BSE India website. The same was used for calculation of
average annual return, average annual risk and stock’s beta (β). (detail excel sheet attached)
Amtek Auto
Returns
0.58%
Market Return
Amtek Auto Risk
Market Risk
18.24%
44.97%
19.81%
We observe from the above table that the returns offered by Amtek stock is significantly lower
than the returns offered by Market and similarly Risk offered by Amtek stock is significantly
Higher than the returns offered by Market. The stock is not behaving as per the basic principle
that the amount of risk taken should be directly proportional to the end return. Hence if the
risk appetite of the investor is high, Amtek Auto is not offering fair chance to earn equivalent
high returns.
Estimating Cost of Capital:
Data required in calculation of cost of capital is taken from the last 4 year annual reports of
the firm, downloaded from the company’s website. Data includes Shareholder’s Equity, Debt,
Interest expense, Tax paid, Dividend paid and EPS.
Average Cost of Equity arrived by various methods is
Cost of Equity (Avg of 5
yrs)
CAPM
Gordon
P/E multiple
16.18%
5.79%
19.63 %
CAPM is considered superior to Gordon and P/E method because it uses the risk-return
relationship to arrive at the cost of equity. It brings together systematic risk and return for the
stock, and hence is widely used and accepted for financial investment decisions. Gordon’s
model uses constant dividend growth to estimate the cost of equity. This model is backward
looking as future growth is calculated based on past dividends. Also, in practical scenarios, as
dividend growth various every year for a firm, the model is not accurate in arriving at the cost
of capital. P/E multiple is considered to be least accurate method among the 3. The perceived
growth in the EPS of next year might vary with each individual investor. Hence it is rarely used
for investing decisions.
Therefore, I have used Capital Asset Pricing Model (CAPM) method for calculation of WACC.
Average Wt of Debt = 55.64%
Average Wt of Equity = 45.36%
Weighted Average Cost of Capital, WACC = 9.96%
CEAT limited - Introduction
CEAT, the flagship company of RPG Enterprises, was established in 1958. Its predecessor Cavi Electrici e Affini
Torino SpA was established in Italy in 1924. Today, CEAT is one of India’s tyre manufacturers and has presence
in global markets, and has a capacity of over 95,000+ Tyres per day. CEAT offers tyres to all segments and
manufactures radials for: Heavy-duty Trucks and Buses, Light Commercial Vehicles, Earthmovers, Forklifts,
Tractors, Trailers, Cars, Motorcycles and Scooters as well as Auto-rickshaws. The company is headquartered at
Annie Besant Road, Worli in Mumbai. It has manufacturing plants in Mumbai, Nashik and Halol near Baroda.
CEAT owns:
6 Manufacturing plants
10 outsourcing units for tyres, tubes and flaps
3 dedicated 2-3-wheeler plants controlled by CEAT
Products of CEAT:
CEAT manufactures a wide range of tyres for various customer radials for Indian vehicles and caters to various
user segments including
I.
Heavy-duty Trucks and Buses
II.
Light Commercial Vehicles
III.
Earthmovers
IV.
Forklifts
V.
Tractors
VI.
Trailers
VII.
Cars
VIII.
SUVs
IX.
Motorcycles and Scooters
X.
Auto-rickshaws
CEAT industries: Share holding pattern
(ii) Public shareholding
CEAT Industries: Corporate Governance
Name
Designation
Chairman
Arvind Poddar
Managing Director
Vipul Shah
Company Secretary
Vijaylaxmi Poddar
Executive Director
Rajiv Poddar
Joint Managing Director
Dharaprasad Poddar
Chairman Emeritus
Sachin Nath
Chaturvedi
Non Executive & Independent Director
Khurshed Doongaji
Non Executive & Independent Director
Laxmidas Merchant
Non Executive & Independent Director
Sanjay Asher
Non Executive & Independent Director
Ashok Saraf
Non Executive & Independent Director
Ramesh Kumar
Poddar
Non Independent & Non Executive
Director
CEAT limited : Analysis
Particulars (Rs mn)
FY10
FY11
FY12
FY13
FY14
Total Debt
42.4
35.7
939.8
1,501.1
1,655.9
Interest cost
Average cost of debt - pre tax
(%)
PBT
Tax
25.4
20.6
16.1
18.1
25.3
Tax Rate (%)
32.9
31.5
31.2
26.6
21.9
Post tax cost of Debt (%)
40.32
36.06
2.27
1.09
1.25
60.1
52.7
3.3
1.5
1.6
311.33
288.14
400.41
535.2
717.69
102.38
90.9
125.02
142.1
157
Total Shareholders Fund
Debt
Total (Debt + Equity)
660.77
42.35
703.12
831.77
35.74
867.51
1080.09
939.82
2019.91
1418.96
1501.14
2920.1
1884.8
1655.88
3540.68
Weight of Equity: We
94.0
95.9
53.5
48.6
53.2
Weight of Debt: Wd
6.0
4.1
46.5
51.4
46.8
Particulars
%
16.2
0
31.
0
69.
0
8.42
16.879
8.46
0.37
6
3.1
8
11.6
0
13.0
2
Average Post tax cost of Debt
Weight of Debt
Weight of Equity
Risk Free rate (%Rf)
Market Return (%Rm)
Market Risk Premium (MRP) = (Rm - Rf)
Beta (x)
Security Risk Premium (SRP) = β*MRP
Cost of Equity (%) - Rf + SRP
WACC (%)
CAPM
11.598%
Gordon
92.432%
Cost of Equity
Earnings capitalization method
226.591%
Year
2009-10
Prop. Dividend per share
EPS
13.53
Div. Payout
106.82
12.67%
Plowback
87.334%
ROE
31.622%
g
27.617%
2010-11
2011-12
13.53
14.50
18.97
27.54
71.32%
28.677
%
23.713
%
6.800%
52.65%
47.349
%
25.497
%
12.073
%
2012-13
2013-14
14.50
19.33
36.56
39.66%
50.19
38.51%
60.339%
61.486%
27.703%
29.748%
16.716%
18.291%
10 %
4,29
0,668
No. of Outstanding Shares
Share Price (01/04/2015 - BSE)
Market Value of Equity
Dividend as per Waltar and Gordon Model
830.6
3,563,82
8,841
Year
2013-2014
Actual DPS
Actual EPS
Cost of Equity(CAPM)(k)
Return on Investment (r )
Plowback (b)
Dividend per share by Gordon Model
10
70.58
10.60%
0.287
0.858
9.41
Inference:
•
3 types of firms: Growth firms (r > k), Normal firm (r = k) & Declining firm (r < k)
•
Growth firm: Share price increases with decrease in payout ratio.
From Gordon Model we can see that company is retaining the capital for capital investment as its
maximum ability to pay dividends and earnings based on the share price is high and it’s paying a part
of it on the basis of pay-out ratio.
As it’s a profit making company it is inferred to be able to provide dividends in future to its shareholders.
Systematic risk or market risk is the levered beta used in CAPM calculation. In Gordon model we use
constant dividend growth model to estimate cost of equity. The future earning of company is decided by past
dividends. Also for this company dividends announced is not uniform every year. Hence considering Gordon
Model for computing cost of equity is not appropriate. Also Earnings Price Model considers past earnings of
company, hence it may not give accurate projected returns for this company. Hence this model is least
preferred.
At the same time it can issue bonus shares to the shareholders to retain their faith or go for a stock split so
that actual share price will decrease and it will allow them to increase their shareholders numbers.
Batch-8 (MBA F&B)
ByApoorva Sharma (422)
Prashant Anchan (450)
Adarsh Chhajed (411)
1 | Page
Table of Contents
Cost of Capital: Auto parts companies – Summary.....................................................................4
Source of Data............................................................................................................................ 4
List of Companies Analysed....................................................................................................... 4
Authors and Contribution........................................................................................................ 4
Objective.................................................................................................................................... 5
JK Tyres & Industries - Introduction............................................................................................. 7
JK Tyres & industries: Share holding pattern........................................................................... 8
JK Tyres & industries: Corporate Governance..........................................................................8
JK Tyres & industries: Analysis................................................................................................. 9
JK Tyres & industries: Charts & Graphs.................................................................................. 11
Inference:.............................................................................................................................. 12
Balkrishna Industries - Introduction.......................................................................................... 13
Balkrishna Industries: Share holding pattern...................................................................................... 13
Balkrishna Industries: Corporate Governance.......................................................................13
Balkrishna Industries: Analysis.............................................................................................. 14
Balkrishna Industries: Charts & Graphs................................................................................. 16
Inference-.............................................................................................................................. 16
Amtek Auto - Introduction........................................................................................................ 17
Amtek Auto: Share holding pattern....................................................................................... 18
JK Tyres & industries: Analysis............................................................................................... 18
Ametek Auto: Charts & Graphs............................................................................................. 20
Inference:.............................................................................................................................. 21
CEAT limited - Introduction....................................................................................................... 21
CEAT industries: Share holding pattern............................................................................................ 22
CEAT Industries: Corporate Governance............................................................................... 23
CEAT limited : Analysis.......................................................................................................... 24
Inference:.............................................................................................................................. 26
Cost of Capital: Auto parts companies – Summary
Source of Data
List of Companies
Analysed
www.bseindia.com
www.moneycontrol.com
www.rediffmoney.com
www.tradingeconomics.com
JK Tyres & Industries
Balkrishna Industries
Amtek Auto
CEAT Tyres
Apollo Tyres
Authors and Contribution
Name
Apoorva Sharma (422) - 9920590994
Prashant Anchan (450) - 9892364658
Adarsh chhajed (411) - 8087768664
Contribution
Data and Analysis of JK Tyres &
Industries
Data and Analysis of Balkrishna
Industries
Data Analysis of Amtek Auto
Synopsis:
After analyzing trends of WACC for various companies, we can say that CAPM
reflects the market trends better than the other models as the company’s returns
are calculated using stock beta and expected market returns, while WACC calculated
using the EPR model follows the EPS trend and WACC calculated using the Gordon’s
model and waltar model follows the DPS trend.
Objective
To analyze trends in Weighted Average Cost of Capital of chosen pharmaceutical companies
by using different methods for calculating of Cost of Equity.
Appropriateness of Methodology
Cost of Debt:
Cost of debt (long term loans – secured and unsecured) was calculated using the data
available but Cost of Debt (Debentures and Bonds) could not be done since most of the
companies have not issued any debentures and Bonds and even if they have issued it was not
possible to find the exact data to calculate its cost for the same.
Debt financing is done through two ways (i) Loans and (ii) Issue of debentures. When a
company borrows it uses financial leverage; so that it can increase its profitability but at the
same time it is exposed to financial risk. In general cost of debt is less than cost of equity.
The following methodology describes how cost of debt was arrived at i.e. the methodology
used and various parameters involved.
Methodology and Parameters involved in calculating Cost of Debt (Kt)
Identified average total debt (long term loans including both secured and unsecured
loans) from company’s balance sheets for a period of 5 years.
Average total Debt = (Total debt for current year + Total debt for
previous year) / 2
Though corporate tax rate applicable to Corporate is around 33% with surcharges and
education cress, to provide an exact picture of tax rate effective tax rate is used by
considering any tax benefits availed.
Effective tax rate (T) = Tax paid / Profit before tax
Nominal interest rate on loans is calculated by dividing Total Interest paid upon Average
Total Debt.
Nominal Interest rate (I) = Interest Paid / Average Total Debt
Given the Nominal Interest rate and effective tax rate, Cost of Debt (K t) is calculated
using below formula:
Kt = I * (1-T)
Cost of Equity:
Cost of Equity is calculated using Gordon, Earnings Price Ratio and CAPM models for
calculating Cost of Equity. Cost of equity is more challenging to calculate as equity does not
pay a set return to its investors. Similar to the cost of debt, the cost of equity is broadly
defined as the risk weighted expected return required by the investors. The following methods
were used to calculate cost of equity.
1. Gordon’s Model:
Ke = (D0*(1 + g)/P0) + g
Here,
Ke = Cost of Equity
D0 = Dividend per share paid by the company for the current year (Rs.)
g = Annual growth rate in dividends and is calculated using geometric mean of
growth in dividends in the past years or by multiplying retention ratio with ROE
P0 = Current market price of the shares (Rs.)
2. Earnings – Price Ratio Approach:
Ke = E0*(1 + g) / P0
Here,
Ke = Cost of Equity
E0 = EPS for the current year (Rs.)
P0 = Current market price of the shares (Rs.)
3. CAPM approach:
Ri = Rf + βi (Rm – Rf)
Here,
Ri = Cost of Equity
Rf = Risk free rate
Rm = Market return
βi = Beta of the return of company with respect to market returns
βi = βU + βL
βU =Unlevered Beta
βL =levered Beta
βL = βU /(1+D/E)
D=Total Debt
E=Total Equity
Weighted average Cost of Capital:
The weighted average cost of capital (WACC) of a firm refers to how much on an average it
costs a firm to raise money. The importance of the WACC is in its relation to the evaluation of
projects.
The firm’s WACC is the cost of capital for the firm’s mixture of debt and stock in its capital
structure.
WACC = wd(cost of debt) + ws(cost of equity/retained earnings) + wp(cost of
preference stock)
Here,
wd = weight of debt in the firm’s capital structure
ws = weight of share capital
wp = weight of preference share capital
JK Tyres & Industries - Introduction
The company was incorporated as a private limited company in West Bengal in 14th February,
1951. Until 31st March 1970, the company was engaged in the managing agency business.
Thereafter, the company decided to undertake manufacturing activities and obtained a letter
of intent in February 1972 for the manufacture of automobile tyres and tubes.
The company is the undisputed market leader in Truck/Bus radials in India, with 138 selling
locations, 4,000 strong dealer network served by six plants in India and three plants in JK
Tornel, Mexico. With state-of-the-art modern production facilities in all 9 plants, total
production capacity is almost 20 million tyres p.a.
JK Tyres & industries: Share holding pattern
Holder's Name
Promoters
General Public
Foreign Institutions
Foreign Ocb
Other Companies
N Banks Mutual Funds
Foreign NRI
Financial Institutions
Central Govt.
Others
Directors
No of Shares
118717655
29483287
27361232
17437500
16801128
9255291
2985623
2076942
1427600
1246042
21180
% Share Holding
52.34%
13%
12.06%
7.69%
7.41%
4.08%
1.32%
0.92%
0.63%
0.55%
0.01%
JK Tyres & industries: Corporate Governance
Name
Arun K Bajoria
Arvind Singh Mewar
Bakul Jain
Bharat Hari Singhania
Bharat Hari Singhania
Kalpataru Tripathy
Om Prakash Khaitan
Pawan Kumar Rustagi
Pawan Kumar Rustagi
Raghupati Singhania
Sunanda Singhania
Swaroop Chand Sethi
Vikrampati Singhania
Vimal Bhandari
Wolfgang Holzbach
Designation
President & Director
Director
Director
CEO
Managing Director
Director
Director
Vice President (Legal) & Co. Secretary
Secretary
Chairman & Managing Director
Additional Director
Whole Time Director
Deputy Managing Director
Director
Director
JK Tyres & industries: Analysis
JK Tyres& Industries Ltd.
Calculations for the year
Mar '14
Mar '13
Mar '12
Mar '11
Mar '10
Expected Cost of
Debt:
Average Secured Loans
Average Unsecured Loans
Average Total Debt
Interest
Profit Before Tax
Tax
Cost of debt pre tax
Effective tax rate
Effective cost of debt post
tax
1985.16
1954.55
1396.69
758.68
433.33
223.01
265.62
281.35
559.35
426.85
2208.17 2220.17
1678.04
1318.03 860.18
248.3
206.53
170.43
175.7
164.22
195.05
150.31
12.8
68.04
222.21
60.37
44.77
1.8
30.35
82.21
11.24%
30.95%
9.30%
29.79%
10.16%
14.06%
13.33% 19.09%
44.61% 37.00%
7.76%
6.53%
8.73%
7.38% 12.03%
50.00
35
24.99
Expected Cost of
Equity:
Equity Dividend (%)
30
35
DPS (Rs.)
Retention ratio (RR)
ROE (ROE)
Growth rate (g) = RR*ROE
Adjusted Share price
5.00
3.50
2.50
3.00
3.50
67.35%
89.70%
90.25%
89.47%
-7.32%
14.22%
12.84%
36.39
1.48%
1.33%
101.50
9.14%
-0.67%
14.40
22.87% 43.44%
15.40% 38.96%
18.50
40.71
Gordon growth model
28.34%
4.82%
16.58%
34.12% 50.91%
Adjusted EPS (Rs.)
EPS growth*
Adjusted Share price
6.56
25.70
-74.47% 858.96%
36.39
101.50
2.68
-82.05%
14.40
14.93
39.81
-62.50% 758.90%
18.50
40.71
4.60% 242.81%
3.34%
E/P model
BETA
Market Return (Rm)*
Risk free rate (Rf)**
CAPM
Expected WACC
(book value):
AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Average Total Capital (in Rs.
Crs)
Weight of Share Capital
Weight of Debt
30.27%
839.91
%
1.20
41.34%
8.12%
0.57
6.35%
8.42%
0.83
36.08%
8.32%
0.71
0.55
-24.39% 29.92%
8.83%
7.22%
47.92%
7.25%
31.32%
-14.75% 19.77%
Mar '14
Mar '13
Mar '12
Mar '11
Mar '10
836.04
741.94
2208.17 2220.17
670.58
1678.04
714.71
1318.03
3044.21 2962.11
0.2746
0.2505
0.7254
0.7495
2348.62
0.2855
0.7145
2032.74 1553.58
0.3516 0.4463
0.6484 0.5537
WACC (Gordon Growth
Model)
13.42%
6.10%
10.97%
WACC (EPS Model)
WACC (CAPM)
6.90% 65.71%
18.79%
6.71%
7.19%
15.18%
16.78% 29.38%
381.53
15.43%
%
-0.40% 15.49%
Expected WACC
(market value):
AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Total (in Rs. Crs)
Weight of Share Capital
Weight of Debt
WACC (Gordon Growth
Model)
WACC (EPS Model)
WACC (CAPM)
Mar '14
Mar '13
149.41
416.75
2208.17 2220.17
2357.58 2636.92
0.0634
0.1580
0.9366
0.8420
Mar '12
Mar '11
693.40
860.18
Mar '10
59.12
1678.04
1737.16
0.0340
0.9660
75.96 167.15
1318.03 860.18
1393.99 1027.33
0.0545 0.1627
0.9455 0.8373
6.26%
9.00%
7.56% 43.87%
10.31%
6.64%
8.54%
9.50%
8.84% 18.35%
146.73
8.63%
%
6.18% 13.29%
9.07%
Actual Returns:
Mar '14
ROCE (average capital)
Net Profit
ROE (average share
capital)
Growth Rate
Volume of shares in lakhs
Book value of share in Rs
Total value of Shares in
Lakhs
Total value of Shares in
Crores
Market Value of Shares in
Rs
Total Market Value of
Shares in Crores
Mar '13
Mar '12
Mar '11
Mar '10
14.56% 12.05%
134.68
105.54
7.80%
11
11.99% 24.87%
61.32 163.47
16.11% 14.22%
0.15
0.13
1.48%
(0.00)
9.14% 22.87%
0.06
0.21
410.59
410.59
410.59
410.59
410.59
203.62
180.7
163.32
174.07
168.88
74193.6
83604.34
1
69340.4
71471.40
4
67057.56
836.04
741.94
670.58
714.71 693.40
36.39
101.50
14.40
18.50
149.41
416.75
59.12
75.96 167.15
40.71
JK Tyres & industries: Charts & Graphs
Expected Value: Book Value Expected Value: Market Value
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)
Mar '14
Mar '13
Mar '12
Mar '11
Mar '10
JK TyresLtd : ROCE v/s ROE
ROCE (average capital)
ROE (average s hare capital)
50%
40%
30%
20%
10%
0%
WACC (Gordon Growth Model)
WACC (EPS Model)
WACC (CAPM)
Mar '14
Mar '13
Mar '12
Mar '11
Mar '10
Weights : Debt to Equity
0.7254
0.7495
0.7145
W0.6484
eight of Debt
0.5537
Weight of Share Capital
0.2746
0.2505
0.2855
0.3516
0.4463
Mar '14 Mar '13 Mar '12 Mar '11 Mar '10
Dividend Policy Method
2014
2013
2012
DPS
EPS
Cost of Capital(CAPM)
Return on Investment
Retention ratio
Calculated Price of share by
waltar model
2011
2010
5.00
6.56
0.10
0.19
0.90
3.50
25.70
0.07
0.16
0.89
2.50
2.68
0.09
0.12
(0.07)
3.00
14.93
0.06
0.18
0.67
3.50
39.81
0.13
0.32
0.90
77.11
849.65
28.74
599.43
689.50
Actual Price
Calculated Dividend by waltar
model
Calculated price of share by
Gordon model
Calculated Earnings by Gordon
Model at present market price
36.39
101.50
14.40
18.50
40.71
(9.71)
(39.38)
(7.43)
(22.37)
(63.92)
8.78
35.91
(27.70)
85.63
26.22
27.18
72.64
(1.39)
3.23
61.82
Inference•
3 types of firms: Growth firms (r > k), Normal firm (r = k) & Declining firm (r < k)
•
Growth firm: Share price increases with decrease in payout ratio. So optimal payout
ratio: Nil
From the Waltar model and Gordon Model we can see that company is retaining the capital for
capital investment as its maximum ability to pay dividends and earnings based on the share
price is high and its paying a part of it on the basis of payout ratio.
As its a profit making company it is hopeful that it will keep giving increasing dividends to its
shareholders in the coming times.
At the same time it can issue bonus shares to the shareholders to retain their faith or go for a
stock split so that actual share price will decrease and it will allow them to increase their
shareholders numbers.
Inference:
There is very little different between Expected WACC calculated using book value and
calculated using market value as the Debt to equity is 1% i.e. 0.001:0.9 9and debt taken by
the company has been continuously decreasing. Debt to equity ratio was 0.05:0.95 in March
2009 and it reduced to almost 0.01:0.99 in 2014. As a result the WACC calculated is almost
equal to cost of equity for the last few years.
WACC using Gordon Growth model has been continuously decreasing(Except the year 2011)
due to reduction in growth rate as a result of decrease in ROE as growth rates are calculated
by multiplying Retention Ratio with ROE.
WACC calculated using CAPM model is a function of market risk premium and as the market
has been increasing since past decade and beta being almost constant for Divis Laboratories,
the cost of equity has been increasing during the last few years for the company.
Balkrishna Industries - Introduction
Balkrishna Industries, which is a holding company of Balkrishna Tires, Balkrishna Paper Mills and
Balkrishna Synthetic, was incorporated on November 20,1961. It is part of the Siyaram Poddar group, which
has a turnover of over USD 250 million, which operates in four business segments: Paper Boards, Tyres,
Textile Processing and Wind Power. Paper Boards segment manufactures coated and un-coated paper
boards. Tyre segment manufactures a wide range of tyres for diversified and non-traditional applications.
Textile processing segment processes textile fabrics. The registered office of the company is located at
Boisar, Maharashtra.
The company operates mainly in the business segment of tires. It focuses on the production of a range of offhighway tires that includes agricultural, industry, material handling, forestry, lawn and garden, construction
and earth moving tires. Over 95% of the tire production is exported under the BKT brand, with the main
export markets being countries in Western Europe, North America and Australasia including original
equipment manufacturers. In the domestic market, the company supplies to all the major construction
equipment manufacturers and has a presence in the replacement market of the road construction sector.
Balkrishna Industries: Share holding pattern
Balkrishna Industries: Corporate Governance
Name
Arvind Poddar
Designation
Chairman
Arvind Poddar
Managing Director
Vipul Shah
Company Secretary
Vijaylaxmi Poddar
Executive Director
Rajiv Poddar
Joint Managing Director
Dharaprasad Poddar
Chairman Emeritus
Sachin Nath
Chaturvedi
Non Executive & Independent Director
Khurshed Doongaji
Non Executive & Independent Director
Laxmidas Merchant
Non Executive & Independent Director
Sanjay Asher
Non Executive & Independent Director
Ashok Saraf
Non Executive & Independent Director
Ramesh Kumar
Poddar
Non Independent & Non Executive
Director
Balkrishna Industries: Analysis
Particulars (Rs mn)
FY10
FY11
FY12
FY13
FY14
Total Debt
42.4
35.7
939.8
1,501.1
1,655.9
Interest cost
Average cost of debt - pre tax
(%)
25.4
20.6
16.1
18.1
25.3
60.1
52.7
3.3
1.5
1.6
PBT
Tax
311.33
102.38
288.14
90.9
400.41
125.02
535.2
142.1
717.69
157
Tax Rate (%)
32.9
31.5
31.2
26.6
21.9
Post tax cost of Debt (%)
40.32
36.06
2.27
1.09
1.25
Total Shareholders Fund
Debt
Total (Debt + Equity)
660.77
42.35
703.12
831.77
35.74
867.51
1080.09
939.82
2019.91
1418.96
1501.14
2920.1
1884.8
1655.88
3540.68
Weight of Equity: We
94.0
95.9
53.5
48.6
53.2
Weight of Debt: Wd
6.0
4.1
46.5
51.4
46.8
Particulars
%
16.2
0
31.
0
69.
0
8.42
16.879
8.46
0.37
6
3.1
8
11.6
0
13.0
2
Average Post tax cost of Debt
Weight of Debt
Weight of Equity
Risk Free rate (%Rf)
Market Return (%Rm)
Market Risk Premium (MRP) = (Rm - Rf)
Beta (x)
Security Risk Premium (SRP) = β*MRP
Cost of Equity (%) - Rf + SRP
WACC (%)
CAPM
11.598%
Gordon
92.432%
Year
Cost of Equity
Earnings capitalization method
226.591%
2009-10
Prop. Dividend per share
EPS
13.53
Div. Payout
106.82
12.67%
Plowback
87.334%
ROE
31.622%
g
27.617%
2010-11
2011-12
13.53
14.50
18.97
27.54
71.32%
28.677
%
23.713
%
6.800%
52.65%
47.349
%
25.497
%
12.073
2012-13
2013-14
14.50
19.33
36.56
39.66%
50.19
38.51%
60.339%
61.486%
27.703%
29.748%
16.716%
18.291%
%
16.299%
No. of Outstanding Shares
Share Price (1/04/2013 NSE)
Market Value of Equity
26606,80,63
4
2
2
589340,76,04
3
2
1
83
5
Average Interest Payments
Average LT Debts
Market Value of Debt
2.53%
Balkrishna Industries: Charts & Graphs
D/E Ratio Vs Expected Returns
10.00
9.80
9.60
Expected Returns
9.40
9.20
9.00
0.0000 0.2000 0.4000 0.6000 0.8000 1.0000
Debt Equity Ratio
Dividend as per Waltar and Gordon Model
Year
2013-2014
Actual DPS
Actual EPS
Actual Price
Cost of Equity(CAPM)(k)
Return on Investment (r )
Plowback (b)
Dividend per share by Waltar Model
Dividend per share by Gordon Model
19.33
50.19
22
11.598%
0.158356587
0.61
180.52
0.41
Inference•
3 types of firms: Growth firms (r > k), Normal firm (r = k) & Declining firm (r < k)
•
Growth firm: Share price increases with decrease in payout ratio. So optimal payout ratio: Nil
From the Waltar model and Gordon Model we can see that company is retaining the capital for capital
investment as its maximum ability to pay dividends and earnings based on the share price is high and its
paying a part of it on the basis of pay-out ratio.
As it’s a profit making company it is inferred to be able to provide dividends in future to its shareholders.
Systematic risk or market risk is the levered beta used in CAPM calculation. In Gordon model we use
constant dividend growth model to estimate cost of equity. The future earning of company is decided by past
dividends. Also for this company dividends announced is not uniform every year. Hence considering Gordon
Model for computing cost of equity is not appropriate. Also Earnings Price Model considers past earnings of
company, hence it may not give accurate projected returns for this company. Hence this model is least
preferred.
At the same time it can issue bonus shares to the shareholders to retain their faith or go for a stock split so
that actual share price will decrease and it will allow them to increase their shareholders numbers.
There is very little difference between Expected WACC calculated using book value and
calculated using market value as the Debt to equity is 0.7105 and debt taken by the company
has been continuously increasing.
WACC using Gordon Growth model has been continuously decreasing(Except the year 2011)
due to reduction in growth rate as a result of decrease in ROE as growth rates are calculated
by multiplying Retention Ratio with ROE.
Amtek Auto - Introduction
Amtek Auto Limited manufactures and sells automotive components in India and
internationally. Its product portfolio includes flywheel ring gears, such as starter ring gears,
flex plate assemblies, flywheel assemblies, and con-rod piston sub assemblies; and machining
products comprising steering knuckles, ladder frames, engine bearing ladders, exhaust
manifolds, aluminium case housings, bridge fork assemblies, hubs, spindles, connecting rods,
crankshaft assemblies, housings, gear shifter forks, front axle beam assemblies, pivot arms,
flywheel housing and assemblies, wheel hubs, PTO casing, front axle beams, and front and
rear axles. The company also provides forging products consisting of connecting rods and
caps, crankshafts and camshafts, steering levers, gear shifter forks, sector gears and shafts,
front impact beams drive shafts, spindles, hubs and flanges, transmission components,
steering parts, pistons, propeller fork shafts, stub-axles, front axle beam, and front and rear
axle shafts; casting aluminium products, including clutch cases, transmission cases, timing
chain covers, mounting brackets, camshaft covers/carriers, bearing ladders/sumps, structural
covers, and differential flanges; and casting iron products, such as cylinder blocks and heads,
transmission housings, brake carriers and callipers, trumpet casings, crankshafts, intake and
exhaust manifolds, flywheels and flywheel housings, turbo chargers, bell housings, and link
shafts. Company offers its products for passenger cars, two or three wheelers, and light and
heavy commercial vehicles; and tractors, locomotive components, railways, construction and
earth moving vehicles, aerospace, and oil and gas. Amtek Auto Limited was incorporated in
1988 and is based in New Delhi, India.
The company is a Public Limited Company. Below is the list of Board of Directors.
Name
Designation
Arvind Dham
B Lugani
B Venugopal
D S Malik
D S Malik
Gautam Malhotra
John Ernest Flintham
Madhu Vij
Raj Narain Bhardwaj
Rajeev Kumar Thakur
Rajeev Raj Kumar
Rajeev Raj Kumar
Sanjay Chhabra
Sanjiv Bhasin
Vinod Uppal
Chairman & Director
Independent Director
Nominee Director
CEO
Managing Director
Non Executive Director
Senior Managing Driector
Director
Independent Director
Independent Director
Co. Secretary & Compl. Officer
Secretary
Independent Director
Independent Director
Vice President - Finance
Amtek Auto: Share holding pattern
Holder's Name
Promoters
Foreign Institutions
Other Companies
Financial Institutions
General Public
Banks Mutual Funds
Others
Foreign NRI
Foreign Ocb
No of Shares
107912650
81757978
12162350
9008256
7297642
1107566
796699
273287
1500
% Share Holding
48.98%
37.11%
5.52%
4.09%
3.31%
0.5%
0.36%
0.12%
0%
JK Tyres & industries: Analysis
(in Rs.
Crs.)
Amtek Auto
Calculations for the year
Sept
'14
Sept
'13
Jun '12
Jun '11
Jun '10
6,287.39
5,864.77
1,535.00
1,141.76
888.08
Expected Cost of Debt:
Average Secured Loans
Average Unsecured Loans
Average Total Debt
Interest
Profit Before Tax
Tax
82.15
167.41
1964.86
2126.13
1827.81
6369.5
4
6032.1
8
3499.8
6
3267.8
9
2715.8
9
429.11
275.32
185.51
335.17
124.53
472.03
571.71
409.83
132.16
199.83
148.67
120.99
118.28
51.21
57.64
Mar
'09
Cost of debt pre tax
Effective tax rate (Tax Shield)
Effective cost of debt post
tax
6.74%
31.50%
4.56%
21.16%
5.30%
28.86%
10.26%
38.75%
4.59%
28.84%
4.62%
3.60%
3.77%
6.28%
3.26%
25
25
25
50
50
0.50
0.50
0.50
1.00
1.00
Avg
4.31
%
Expected Cost of
Equity:
Equity Dividend (%)
DPS (Rs.)
Retention ratio (RR)
ROE (ROE)
Growth rate (g) = RR*ROE
Adjusted Share price(31 march)
96.07%
97.34%
95.98%
68.63%
83.56%
6.30%
6.05%
159.10
9.39%
9.14%
63.85
6.65%
6.38%
132.25
1.92%
1.32%
150.90
3.93%
3.28%
194.00
Gordon growth model
6.38%
10.00%
6.78%
1.99%
3.81%
Avg
5.79
%
14.68
20.62
13.22
7.09
10.80
-28.81%
159.10
55.98%
63.85
276.64
%
132.25
3.51
-50.49%
150.90
-34.35%
194.00
E/P model
6.57%
50.37%
37.65%
1.15%
2.40%
BETA
Market Return (Rm)
Risk free rate (Rf)
1.06
43.74%
8.96%
0.62
6.35%
8.74%
0.27
36.08%
8.99%
0.84
29.92%
7.75%
CAPM
45.69%
7.27%
16.28%
0.71
-24.39%
8.42%
14.74%
26.42%
Avg
16.1
8%
Mar
'14
Mar
'13
Mar
'12
Mar
'11
Mar
'10
Mar
'09
AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Average Total Capital (in Rs. Crs)
Weight of Share Capital
Weight of Debt
5133.6
6369.5
11503.2
0.45
0.55
4797.9
6032.2
10830.1
0.44
0.56
4383.4
3499.9
7883.3
0.56
0.44
4265.7
3267.9
7533.6
0.57
0.43
3644.7
2715.9
6360.6
0.57
0.43
WACC (Gordon Growth
Model)
WACC (E/P Model)
WACC (CAPM)
5.40%
5.49%
22.95%
6.43%
24.32%
5.22%
5.45%
22.61%
10.72%
3.85%
3.38%
-5.62%
3.58%
2.77%
16.53%
Sept
'14
Sept
'13
Jun '12
Jun '11
Jun '10
3505.26
6369.54
9874.80
0.3550
0.6450
1395.91
6032.18
7428.09
0.1879
0.8121
2916.75
3499.86
6416.61
0.4546
0.5454
3518.60
3267.89
6786.49
0.5185
0.4815
3912.98
2715.89
6628.87
0.5903
0.4097
Adjusted EPS (Rs.)
EPS growth
Adjusted Share price
Expected WACC (book
value):
Expected WACC
(market value):
AVG Share Capital (in Rs. Crs)
Average Total Debt (in Rs. Crs)
Total (in Rs. Crs)
Weight of Share Capital
Weight of Debt
Avg
19.6
3%
Mar
'09
WACC (Gordon Growth
Model)
WACC (E/P Model)
WACC (CAPM)
Actual Returns:
ROCE (average capital)
Net Profit
ROE (average share capital)
Growth Rate
Volume of shares in lakhs
Book value of share in Rs
Total value of Shares in Lakhs
Total value of Shares in
Crores
Market Value of Shares in Rs
Total Market Value of Shares
in Crores
5.24%
5.31%
19.19%
4.80%
12.39%
4.29%
Sept
'14
7.83%
323.36
6.30%
0.06
Sept
'13
7.82%
450.72
9.39%
0.09
2,203.18
2,186.24
5.14%
19.17%
9.46%
4.06%
3.62%
-4.62%
3.59%
2.75%
16.93%
Jun '12
Jun '11
Jun '10
7.55%
291.56
6.65%
0.06
6.20%
81.82
1.92%
0.01
5.10%
143.06
3.93%
0.03
2,205.48
2,331.74
2,017.00
233.01
219.46
198.75
182.94
180.7
513362
.97
5133.6
3
159.10
3505.2
6
479792
.23
4797.9
2
63.85
1395.9
1
438339
.15
4383.3
9
132.25
2916.7
5
426568
.52
4265.6
9
150.90
3518.6
0
364471
.90
3644.7
2
194.00
3912.9
8
Ametek Auto: Charts & Graphs
Weights : Debt to Equity
Expected Value: Book Value
1.2
38%
1.0
30%
0.8
0.6
Weight
Capital
0.56
0.56
0.55of Share
0.45
0.44
0.44
Weight of 0.57
Debt
0.57
0.43
0.43
0.4
22%
0.0
Mar '14
Mar '13
Mar '12
Mar '11
Mar '10
WACC (E/P Model)
14%
6%
0.2
WACC (Gordon Growth Model)
-2%
Mar '14
-10%
WACC (CAPM)
Mar '13
Mar '12
Mar '11
Mar '10
Expected Value: Market Value
30%
ROCE Vs ROE
10%
WACC (Gordon Growth Model)
WACC (E/P Model)
8%
20%
ROE (average share capital)
6%
10%
4%
ROCE (average capital)
WACC (CAPM)
0%
Sept '14 Sept '13
2%
Jun '12
Jun '11
Jun '10
-10%
0%
Sept '14
Sept '13
Jun '12
Jun '11
Jun '10
Dividend Policy
Sept '14
Sept '13
Jun '12
Jun '11
0.50
14.68
0.19
0.11
0.96
0.50
20.62
0.04
0.10
0.97
0.50
13.22
0.09
0.10
0.96
1.00
3.51
(0.05)
0.09
0.69
43.76
1154.07
150.97
80.58
159.10
63.85
132.25
150.90
(50.49)
(33.08)
(21.85)
0.13
Calculated price of share by
Gordon model
(6.47)
9.34
142.43
10.41
Calculated Earnings by Gordon
Model at present market price
(361.10)
140.89
12.28
50.87
DPS
EPS
Cost of Capital(CAPM)
Return on Investment
Retention ratio
Calculated Price of share by waltar
model
Actual Price
Calculated Dividend by waltar
model
Inference:
Estimating Risk and Return:
Daily closing price of the stock and BSE indx (S&P BSE AUTO) the past 5 years from (04/01/10
to 31/12/14 ) were taken from BSE India website. The same was used for calculation of
average annual return, average annual risk and stock’s beta (β). (detail excel sheet attached)
Amtek Auto
Returns
0.58%
Market Return
Amtek Auto Risk
Market Risk
18.24%
44.97%
19.81%
We observe from the above table that the returns offered by Amtek stock is significantly lower
than the returns offered by Market and similarly Risk offered by Amtek stock is significantly
Higher than the returns offered by Market. The stock is not behaving as per the basic principle
that the amount of risk taken should be directly proportional to the end return. Hence if the
risk appetite of the investor is high, Amtek Auto is not offering fair chance to earn equivalent
high returns.
Estimating Cost of Capital:
Data required in calculation of cost of capital is taken from the last 4 year annual reports of
the firm, downloaded from the company’s website. Data includes Shareholder’s Equity, Debt,
Interest expense, Tax paid, Dividend paid and EPS.
Average Cost of Equity arrived by various methods is
Cost of Equity (Avg of 5
yrs)
CAPM
Gordon
P/E multiple
16.18%
5.79%
19.63 %
CAPM is considered superior to Gordon and P/E method because it uses the risk-return
relationship to arrive at the cost of equity. It brings together systematic risk and return for the
stock, and hence is widely used and accepted for financial investment decisions. Gordon’s
model uses constant dividend growth to estimate the cost of equity. This model is backward
looking as future growth is calculated based on past dividends. Also, in practical scenarios, as
dividend growth various every year for a firm, the model is not accurate in arriving at the cost
of capital. P/E multiple is considered to be least accurate method among the 3. The perceived
growth in the EPS of next year might vary with each individual investor. Hence it is rarely used
for investing decisions.
Therefore, I have used Capital Asset Pricing Model (CAPM) method for calculation of WACC.
Average Wt of Debt = 55.64%
Average Wt of Equity = 45.36%
Weighted Average Cost of Capital, WACC = 9.96%
CEAT limited - Introduction
CEAT, the flagship company of RPG Enterprises, was established in 1958. Its predecessor Cavi Electrici e Affini
Torino SpA was established in Italy in 1924. Today, CEAT is one of India’s tyre manufacturers and has presence
in global markets, and has a capacity of over 95,000+ Tyres per day. CEAT offers tyres to all segments and
manufactures radials for: Heavy-duty Trucks and Buses, Light Commercial Vehicles, Earthmovers, Forklifts,
Tractors, Trailers, Cars, Motorcycles and Scooters as well as Auto-rickshaws. The company is headquartered at
Annie Besant Road, Worli in Mumbai. It has manufacturing plants in Mumbai, Nashik and Halol near Baroda.
CEAT owns:
6 Manufacturing plants
10 outsourcing units for tyres, tubes and flaps
3 dedicated 2-3-wheeler plants controlled by CEAT
Products of CEAT:
CEAT manufactures a wide range of tyres for various customer radials for Indian vehicles and caters to various
user segments including
I.
Heavy-duty Trucks and Buses
II.
Light Commercial Vehicles
III.
Earthmovers
IV.
Forklifts
V.
Tractors
VI.
Trailers
VII.
Cars
VIII.
SUVs
IX.
Motorcycles and Scooters
X.
Auto-rickshaws
CEAT industries: Share holding pattern
(ii) Public shareholding
CEAT Industries: Corporate Governance
Name
Designation
Chairman
Arvind Poddar
Managing Director
Vipul Shah
Company Secretary
Vijaylaxmi Poddar
Executive Director
Rajiv Poddar
Joint Managing Director
Dharaprasad Poddar
Chairman Emeritus
Sachin Nath
Chaturvedi
Non Executive & Independent Director
Khurshed Doongaji
Non Executive & Independent Director
Laxmidas Merchant
Non Executive & Independent Director
Sanjay Asher
Non Executive & Independent Director
Ashok Saraf
Non Executive & Independent Director
Ramesh Kumar
Poddar
Non Independent & Non Executive
Director
CEAT limited : Analysis
Particulars (Rs mn)
FY10
FY11
FY12
FY13
FY14
Total Debt
42.4
35.7
939.8
1,501.1
1,655.9
Interest cost
Average cost of debt - pre tax
(%)
PBT
Tax
25.4
20.6
16.1
18.1
25.3
Tax Rate (%)
32.9
31.5
31.2
26.6
21.9
Post tax cost of Debt (%)
40.32
36.06
2.27
1.09
1.25
60.1
52.7
3.3
1.5
1.6
311.33
288.14
400.41
535.2
717.69
102.38
90.9
125.02
142.1
157
Total Shareholders Fund
Debt
Total (Debt + Equity)
660.77
42.35
703.12
831.77
35.74
867.51
1080.09
939.82
2019.91
1418.96
1501.14
2920.1
1884.8
1655.88
3540.68
Weight of Equity: We
94.0
95.9
53.5
48.6
53.2
Weight of Debt: Wd
6.0
4.1
46.5
51.4
46.8
Particulars
%
16.2
0
31.
0
69.
0
8.42
16.879
8.46
0.37
6
3.1
8
11.6
0
13.0
2
Average Post tax cost of Debt
Weight of Debt
Weight of Equity
Risk Free rate (%Rf)
Market Return (%Rm)
Market Risk Premium (MRP) = (Rm - Rf)
Beta (x)
Security Risk Premium (SRP) = β*MRP
Cost of Equity (%) - Rf + SRP
WACC (%)
CAPM
11.598%
Gordon
92.432%
Cost of Equity
Earnings capitalization method
226.591%
Year
2009-10
Prop. Dividend per share
EPS
13.53
Div. Payout
106.82
12.67%
Plowback
87.334%
ROE
31.622%
g
27.617%
2010-11
2011-12
13.53
14.50
18.97
27.54
71.32%
28.677
%
23.713
%
6.800%
52.65%
47.349
%
25.497
%
12.073
%
2012-13
2013-14
14.50
19.33
36.56
39.66%
50.19
38.51%
60.339%
61.486%
27.703%
29.748%
16.716%
18.291%
10 %
4,29
0,668
No. of Outstanding Shares
Share Price (01/04/2015 - BSE)
Market Value of Equity
Dividend as per Waltar and Gordon Model
830.6
3,563,82
8,841
Year
2013-2014
Actual DPS
Actual EPS
Cost of Equity(CAPM)(k)
Return on Investment (r )
Plowback (b)
Dividend per share by Gordon Model
10
70.58
10.60%
0.287
0.858
9.41
Inference:
•
3 types of firms: Growth firms (r > k), Normal firm (r = k) & Declining firm (r < k)
•
Growth firm: Share price increases with decrease in payout ratio.
From Gordon Model we can see that company is retaining the capital for capital investment as its
maximum ability to pay dividends and earnings based on the share price is high and it’s paying a part
of it on the basis of pay-out ratio.
As it’s a profit making company it is inferred to be able to provide dividends in future to its shareholders.
Systematic risk or market risk is the levered beta used in CAPM calculation. In Gordon model we use
constant dividend growth model to estimate cost of equity. The future earning of company is decided by past
dividends. Also for this company dividends announced is not uniform every year. Hence considering Gordon
Model for computing cost of equity is not appropriate. Also Earnings Price Model considers past earnings of
company, hence it may not give accurate projected returns for this company. Hence this model is least
preferred.
At the same time it can issue bonus shares to the shareholders to retain their faith or go for a stock split so
that actual share price will decrease and it will allow them to increase their shareholders numbers.
