FM II PROJECT

SUBMITTED BY:
RISHI KATIYAR (14PGP040)
ROHIT KRISHNAN (14PGP041)
SINDHU NA (14PGP042)
SOMAL KANT (14PGP043)
GROUP 10_SECTION A
14/03/15

PHASE 1 -LEVERAGE AND CAPITAL STRUCTURE ANALYSIS

LEVERAGE ANALYSIS
There are two types of leverage:
a) Operating Leverage
b) Financial Leverage

DEGREE OF OPERATING LEVERAGE [DOL]

The multiplier effect where a small change in sales revenue is magnified into a
larger change in operating income.

DEGREE OF FINANCIAL LEVERAGE (DFL)

The multiplier effect where a small change in operating income is magnified

into a larger change in earnings per share.

Phase 2 - Payout policies

Stock Return is the combination of Capital Gain Yield and Dividend Yield.
Dilemma arises at the decision time that should the firm use retained
earnings for financial profitable capital earnings or paying Dividend to
stockholders.
Dividend is a payment made by a company to its shareholders usually as
a distribution of profits. When a company makes profit it can either reinvest it in the business or it distribute it to its shareholders by way of
dividends
If we retained earnings from profitable investments, dividend yield will be
Zero, but stock price will be increase and resulting in a higher capital gain.
If we pay dividends, stockholders receive an immediate cash reward for
investing but the capital gain will decrease since this cash is not invested
in the firm.
A reduction in dividends paid is not appreciated by investors and usually
the stock price moves down as this could point towards difficult times
ahead for the company. On the other hand a stable dividend payout ratio
indicates a solid dividend policy by the company's management.
There are mainly three models in which investment and dividend
decisions are related.

Walter model: - According to this model the Dividend policy of the firm
has a bearing on share valuation. The firm is an all equity financed entity
and the firm relies only on the retained earnings for future investments.
The rate of return on investment is constant and the firm has an infinite
life.
P = (D+ (E-D)*r/k)/ K
Gordon model: - According to Gordon model Retained earnings is the
only source of financing. Rate of return on the firms investment is
constant and growth rate is the product of retention ratio and rate of
return. Cost of capital for the firm remains constant and it is greater than
the growth rate. Firm has a perpetual life and tax does not exist
P0= E (1 b)/ (k br)
MM Approach: - This Model says that Value of the firm depends on the
earnings from the investments not on the dividend distribution.
P0= (1/(1+ke))(D1+P1)
Let analyze the dividend paid by the telecom companies like Eicher
Motors, Force Motors, Tata Motors and Ashok Leyland in the last 5 years.

Phase
3
Management

Working

Capital

ASHOK LEYLAND
Phase 1 - Leverage and Capital
Structure Analysis
Sales
EBIT
EPS

2014
-20.33
-57.33
-93.23

2013
-3.28
-10.33
-23.37

2012
15.45
-4.59
-55.17

2011
50.89
53.21
49.01

2010
21.46
75.35
122.99

Degree of Financial
Leverage

1.6261
99

2.2623
43

0.9210
67

1.6322
5

Degree of Operational
Leverage

2.8199
7

3.1493
9

1.0455
89

3.5111
84

DTL

4.5858
34

7.125

12.019
61
0.2970
9
3.5708
7

0.9630
58

5.7311
28

0.23
0.91
0.11
0

3.47
14.32
1.63
0.6

5.03
20.37
2.13
1

6.31
25.32
4.75
2

4.89
19.13
3.18
1.5

3,36,6
74
4,44,7
89
7,81,4
63

2,81,8
13
4,45,5
11
7,27,3
24

2,36,9
91
4,21,2
33
6,58,2
24

2,42,6
59
3,96,2
96
6,38,9
55

2,26,7
99
3,66,8
76
5,93,6
75

0.7569
3

0.6325
61

0.5626
13

0.6123
18

0.6181
9

ROA %
ROE%
EPS
DPS
Total Debt
Total Equity
Total Liability
D/E

Since Greater the firms operating leverage greater is the profit with percentage
change in sales.
By fixed cost financing a small change in EBIT brings larger change in earning
per share.
As we know that business risk increases with lower Degree of operating lease.

The combined degree of leverage has varied year on year. For the previous year
i.e. 2014 DTL was 4.585834 which means 1% change in their sales would change
EPS by 4.585834 %. There operating leverage is low which means that heir
business risk is high. For better understanding of DOL we need to compare it with
the industry.
Their DEBT has also increased Y-O-Y which means either they are investing in
their operation or buying back their shares. Again we need to compare it with the
industry.

Phase 2- Payout Policies

For the year ending March 2014, Ashok Leyland has declared an equity
dividend of 0% amounting to Rs 0 per share. At the current share price of
Rs 23.70, this results in a dividend yield of 0%.
The company has paid dividend in previous years and has consistently
declared dividends for the last 5 years. Year on year, both dividends per
share and earnings per share excluding extraordinary items growth have
changed significantly . Initially there was increase in dividend yield but
with slowdown in automobile industry affected the company as well as the
company started investing in R&D which reduced its net profit hence
reduction in dividends pay out from 2011 onwards.
In 2014 company reported negative profit before tax but reported net
profit was positive hence it was not viable to pay dividend to its
shareholders.
In 2012 company last issued two shares for one share and in the same
year book value of the company fell 50% but then next year it increased
50 % and has remained constant since then.
Announcement

Effective

Dividend

Dividend

Remarks

Date

Date

Type

(%)

10-05-2013

04-07-2013

Final

60

14-05-2012

12-07-2012

Final

100

19-05-2011

29-06-2011

Final

200

29-04-2010

16-07-2010

Final

150

15-05-2009

14-07-2009

Final

100

Rs.0.6000
per
share(60%)Dividend
-

2014

2013

2012

2011

2010

26,606.77

26,606.77

26,606.77

13,303.38

13,303.38

0.11

1.63

2.13

4.75

3.18

60

100

200

150

Book Value (Rs)

16.72

16.74

10.89

19.97

17.46

Profit Before Tax

Reported Net Profit
(in Cr.)

-91.21

470.71

689.97

801.81

544.78

29.38

433.71

565.98

631.3

423.67

Shares in issue
(lakhs)
Earning Per Share
(Rs)
Equity
Dividend
(%)

Reported Net Profit (in Cr.)

700
600
500

Reported Net Profit (in

Cr.)

400
300
200
100
0
2014

2013

2012

2011

2010

Equity Dividend (%)

250
200
150

Equity Dividend (%)

100
50
0
2014

2013

2012

2011

2010

Phase 3 - Working Capital

Management
Ashok Leyland Operating and Cash Conversion Cycle

Mar-14

Mar-13

Mar-12

Average age of inventory

51.56

53.99

57.07

Average collection period

45.44

34.68

30.79

97

88.67

87.86

Accounts payable period

94.45

84.44

76.72

Cash conversion cycle

2.55

4.23

11.14

Operating cycle

Table : Cash conversion cycle for Ashok Leyland.

Industry-Operating and Cash Conversion Cycle

Mar-14

Mar-13

Mar-12

Average age of inventory

43.99

38.02

34.27

Average collection period

24.58

23.07

21.15

Operating cycle

68.57

61.09

56.02

Accounts payable period

61.77

53.93

47.55

Cash conversion cycle

6.8

7.16

8.47

Table : Cash conversion cycle of Industry

Cash Conversion Cycle

25
20
15
Days

10
5
0
2014

2013

2012

Figure : Comparison of Cash Conversion Cycle of Ashok Leyland vs

Industry

Operating Cycle
120
100
80
Days

60
40
20
0
2014

2013

2012

Figure : Comparison of Operating Cycle of Ashok Leyland vs Industry

The cash conversion cycle of Ashok Leyland was very low in the
FY 2012 and continued in FY 2013 but it has increased in FY
2014 above industry average to 11 days as compared to
industry 8 days. This implies that the company's inventory
turnover has increased which is evident from its sales. The
operating cycle has reduced for both the industry and company
but company has observed less decrease as compared to
industry which indicates that company has not been able to
keep pace with its competitior. The collection period has gone
low therefore there is a possibility of low defaulters and bad
debt, but it is more than the industry hence they need to
reduce the collection period.
In their financial statement they have been registering negative
cash flows from their Investing and Financing activities and
their "DEBT to Equity" ratio has increased but at the same time
their Tax Rate has increased by more than 120%.

FORCE MOTORS
Leverage Ratios

2301.14

2276.35

2369.16

1780.62

1075
.8

156.65

97.53

146.1

149.9

101.
77

0.01089024

0.039174
222

0.330525
323

0.655158
951

0.60617246

0.332443
532

0.025350
23

0.472929
154

55.6619878

8.486282
921

0.076696
8

0.721854
067

7.32470905

2.955910
084

515.2629
63

0.063167
026

407.707866

25.08468
926

39.51901
872

0.045597
375

58.97

10.84

625.62

44.49

4.4400369

0.982673
188

13.06203
641

0.029873
528

DPS(Rs)

10

ROA (%)

3.96

0.74

54.87

6.12

Total Debt/Equity(x)

0.02

0.04

0.05

0.74

Gross Sales

EBIT

Change in Sales

Change in EBIT

Degree of Operating
Leverage(EBIT/Sales)

Degree of Financial
Leverage(EPS/EBIT)

Degree of Total Leverage:

Earnings Per Share (Rs)

Change in EPS

45.8
6

ROE (%)

6.53

1.24

111.58

18.98

ROCE (%)

5.88

2.28

117.3

20.76

Phase 1 - Leverage and Capital Structure

Analysis

The DOL during the period 2013-2014 shows a sudden surge

from 8.48 to 55.66 . It shows that with 1% increase in sales the
operating profit is increasing by 60.6%, which is good sign for
the company. The DFL has increased from '2.95 to 7.' during the
period 2013-2014. It shows that with 60% change in operating
profit the EPS is changing by 444% which is healthy.

The degree of combined/Total leverage has fluctuated

greatly over the past 4 years, and this is mainy due to
fluctuation in the share prices which in turn affects the EPS
values. Now their leveraged state is healthy.
As for the capital structure also has been refined in 2014,
moving from maintaining a D/E ratioof 0.2 indicating borings
equivalent to 2% of total equity.

2014
Book
Value
(Rs)
Shares in issue
(lakhs)
Earnings Per
Share (Rs)
Equity
Dividend (%)
Profit
Before
Tax
Book
Value
(Rs)

131.76

2013
875.0
2
131.7
6

58.97

10.84

30

30

62.64

19.13
875.0
2

930.48

930.48

Reported Net
Profit
77.69
Dividend per
share
3

2012

2011

867.69

253.7
131.7
6

2010
215.0
2
131.7
6

44.49

45.86

100
1,011.
30

50

30

81.59

867.69

253.7

40.27
215.0
2

14.28

824.3
3

58.62

60.42

10

131.76
625.6
2

Phase 2 - Payout Policies

According to the above table as on March 2014, Force Motors had an
equity dividend of 30% with a dividend per share value of 3. The share
price is currently 337.65, and hence we have a dividend yield of .9%.The
graph tracing the dividend yield for past five years is given below.

Over the past 5 years, both dividends per share and earnings per share
have been fluctuating wildly. The dividend per share was at its peak in
2012 with a value of 10 . In 2012 the net profit rose 3714.81% to Rs
798.44 crore in the quarter ended March 2012 as against Rs 20.93 crore
during the previous quarter ended March 2011 . This explains the sudden
spike in the dividend yield during the year 2012. However this profit could
not be sustained and in the subsequent years the dividend payout settled
to more stable levels.

Phase 3 - Working Capital

Management
Ashok Leyland Operating and Cash Conversion Cycle

Mar-14

Mar-13

Mar-12

Average age of inventory

89.885925
97

92.11776

83.88251

Average collection period

24.384359
73

20.12732

27.3845

Operating cycle

114.27028
57

112.2451

111.267

Accounts payable period

51.01

Cash conversion cycle

63.260285
7

63.38

49.24

70.26

41.007

Table : Cash conversion cycle for Force Motors.

Industry-Operating and Cash Conversion Cycle

Mar-14

Mar-13

Mar-12

Average age of inventory

43.99

38.02

34.27

Average collection period

24.58

23.07

21.15

Operating cycle

68.57

61.09

56.02

Accounts payable period

61.77

53.93

47.55

Cash conversion cycle

6.8

7.16

8.47

Table : Cash conversion cycle of Industry

Industry
120
100
80
Days

60
40
20
0
2014

2013

2012

Figure : Comparison of Cash Conversion Cycle of Force Motors vs

Industry

Company
120
100
80
Days

60
40
20
0
2014

2013

2012

Figure : Comparison of Operating Cycle of Force Motors vs Industry

TATA MOTORS
Phase 1 - Leverage and Capital
Structure Analysis

EBIT
SALES

Mar14
-80.05
-23.41

DOL
Mar13
-38.95
-17.57

DOL

3.4194
79

DFL
DOL
DTL

Earnings Per
Share (Rs)
DPS(Rs)
ROA (%)
ROE (%)

Total Debts
Total Liabilities
Total Equity
D/E

Mar11
-12.16
32.3
0.3764
7

Mar10
123.37
38.87

2.2168
47

Mar12
-28.51
15.33
1.8597
5

Mar14

DCL
Mar13

Mar12

Mar11

Mar10

0.1230
5

1.9468
55

2.2434
21
0.3764
7
0.8445
8

0.8231
34

Mar11

Mar10

3.4194
79
0.4207
6

2.2168
47
4.3158
79

3.0266
57
1.8597
5
5.6288
3

Mar14

Mar13

Mar12

3.1739
13

3.1739
13
2.6125
55

1.04
2
0.66
1.75

0.95
2
0.57
1.57

3.91
4
2.29
6.32

28.55
20
3.46
10.37

39.26
15
5.12
16.51

Mar14
11,717
.13
30,893
.78
42,610
.91
0.2749
8

Mar13
9,981.
41
29,116
.25
39,097
.66
0.2552
94

Mar12
10,649
.69
30,017
.35
40,667
.04
0.2618
75

Mar11
13,153
.72
33,167
.02
46,320
.74
0.2839
7

Mar10
16,594
.54
31,560
.01
48,154
.55
0.3446
1

The degree of combined leverage has decreased for the year 2014. It is not
maintaining a healthy leveraged state as it is fluctuating. A 1% increase in sales
will incur a decrease of 0.42% EPS. This is not a good sign. But by maintaining ,

a high operating leverage they have considerably reduced their business

risk.
They are maintaining a similar capital structure without much change in
debt and equity for the past 5 years.

Phase 2 - Payout Policies

For the year ending March 2014, Tata Motors has declared an equity
dividend of 100.00% amounting to Rs 2 per share. At the current share
price of Rs 584.30 this results in a dividend yield of 0.34%.
The company has a good dividend track report and has consistently
declared dividends for the last 5 years.
Over the past 5 years, EPS was almost fluctuating. Large fluctuation can
be seen in the years 2011, 2012.
Percentage of equity dividend was 100 % for the last two years whereas
the previous two years saw a percentage equity dividend of 200 %.
TATA MOTORS
Year
Profit
Before
Tax
(in
Rs. Crore)
Reported
Net Profit
(in
Rs.
Crore)
Shares in
issue
(lakhs)

Mar '14

-1,025.80

334.52

32,186.80

Mar '13

174.93

301.81

31,901.16

Mar '12

Mar
'11

Mar '10

1,341.03

2,196.5
2

2,829.54

1,242.23

1,811.8
2

2,240.08

31,735.47

6,346.1
4

5,705.58

Earnings
Per Share
(Rs)
1.04
Equity
Dividend
(%)
Book
Value
(Rs)

0.95

3.91

28.55

39.26

100

100

200

200

150

59.58

59.98

61.84

315.36

259.03

SPLIT HISTORY
Tata Motors had last split the face value of its shares from Rs 10 to Rs 2 in
2011.The share has been quoting on an ex-split basis from September 12,
2011.
SPLIT HISTORY

ANNOUNCEMENT DATE
26-05-2011

OLD FV
10

NEW FV
2

REPORTED NET PROFIT (Cr.)

2500
2000
REPORTED NET PROFIT
(Cr.)

1500
1000
500
0
2014

2013

2012

2011

2010

EQUITY DIVIDENT (%)

250
200
150

EQUITY DIVIDENT (%)

100
50
0
2014

2013

2012

2011

2010

Phase 3 - Working Capital

Management
Cash Conversion Cycle of company:
AVERAGE AGE OF INVENTORY
AVERAGE COLLECTION PERIOD
OPERATING CYCLE
ACCOUNTS PAYABLE PERIOD

MAR'14
MAR'13
MAR'12
41.05737
36.31841
30.8277
14.67
55.72737

16.75
53.06841

16.37
47.1977

43.86

36.71

30.11

CASH CONVERSION CYCLE

11.86737

16.35841

17.0877

Cash Conversion Cycle of Industry:

Average age of
inventory
Average collection
period
Operating cycle
Accounts payable
period
Cash conversion
cycle

Mar-14

Mar-13

Mar-12

43.99

38.02

34.27

24.58
68.57

23.07
61.09

21.15
56.02

61.77

53.93

47.55

6.8

7.16

8.47

Cash Conversion Cycle:

30
25
20
Industry

15

Tata Motors
10
5
0
2014

Operating Cycle:

2013

2012

140
120
100
80
Industry
Tata Motors

60
40
20
0
2014

2013

2012

Tata Motors - CCC, OC, Payable Period

120
100
80
Payable period

60

OC
CCC

40
20
0
2014

2013

2012

The company is witnessing a decrease in cash

conversion cycle. This indicates that the company is
trying to manage its working capital effectively
compared to its previous years. It is maintaining its

operating cycle greater than its payable period which

helps in managing the working capital effectively.
The cash conversion cycle of Tata Motors is higher than
the industry standard during the year 2014. It manages
its working capital less effectively compared to its
industry standards.

EICHER MOTORS
Phase 1 - Leverage and Capital
Structure Analysis
Ratio
Operation
al &
Financial
Ratios
Earnings
Per Share
(Rs)
CEPS(Rs)
Adjusted
EPS (Rs.)
DPS(Rs)
Adjusted
DPS(Rs)
Book
NAV/Share(
Rs)
Adjusted
Book Value
(Rs)
Tax
Rate(%)
Dividend
Pay Out
Ratio(%)
Margin
Ratios
Core
EBITDA
Margin(%)
EBIT
Margin(%)
Pre Tax
Margin(%)
PAT
Margin (%)
Cash
Profit
Margin (%)
Performan
ce Ratios
ROA (%)
ROE (%)

Dec 2013

Dec 2012

Dec 2011

Dec 2010

Dec 2009

Dec 2008

103.04
114.29

53.61
59.97

46.15
50.97

28
32.01

29.64
37.62

13.88
19.3

103.04
30

53.61
20

46.15
16

28
11

29.64
7

13.88
5

30

20

16

11

303.75

232.98

200.09

169.51

306.85

171.2

303.75

232.98

200.09

169.51

306.85

171.2

23.28

16.71

12.18

12.9

19.52

-11.56

29.11

37.3

34.67

39.28

23.61

36.01

16.36

12.33

10.75

8.35

5.82

0.23

18.95

14.76

19.37

18.41

11.53

4.99

18.94

14.74

19.09

17.88

11.43

4.53

14.53

12.28

16.77

15.57

9.2

5.05

16.11

13.73

18.52

17.8

11.67

7.02

22.22
38.42

16.03
24.76

17.58
24.99

12.72
17.85

6.52
8.63

4.52
8.3

ROCE (%)
Asset
Turnover(x)
Inventory
Turnover(x)
Debtors
Turnover(x)
Sales/Fixe
d Asset(x)
Working
Capital/Sale
s(x)
Efficiency
Ratios
Fixed
Capital/Sale
s(x)
Receivabl
e days
Inventory
Days
Payable
days
Growth
Ratio
Net Sales
Growth(%)
Core
EBITDA
Growth(%)
EBIT
Growth(%)
PAT
Growth(%)
EPS
Growth(%)
Financial
Stability
Ratios
Total
Debt/Equity
(x)
Current
Ratio(x)
Quick
Ratio(x)
Interest
Cover(x)
DFL
DOL

49.82

29.3

27.97

20.06

10.41

6.7

1.53

1.31

1.05

0.82

0.71

0.9

17.49

19.54

20.21

19.27

19.71

6.72

209.25

228.99

191.95

109.71

79.45

10.54

5.97

5.38

4.01

3.17

2.9

2.15

4.63

3.18

1.89

1.23

1.19

1.84

0.17

0.19

0.25

0.32

0.35

0.46

1.74

1.59

1.9

3.33

4.59

34.62

20.86

18.68

18.06

18.94

18.52

54.33

52.6

45.43

52.98

72.79

67.59

93.59

62.25

56.27

53.13

16.9

-45.44

-68.79

105.97

21.89

56.92

74.93

71.47

-77.24

108.79

21

61.3

89.54

22.05

-62.71

92.47

16.23

65.1

101.01

-3.77

-38.14

92.19

16.18

64.79

-5.54

113.52

-38.14

0.01

0.03

0.04

0.03

0.02

1.65

1.99

2.73

3.48

3.54

4.84

1.49

1.87

2.53

3.3

3.38

4.67

1346

669.46

71.21

112.02

10.74

0.847412
446
1.747630
522

0.770476
19
0.373200
64

1.056933
116
1.153773
762

34.7
0.061871
79
5.298224
852

5.148299
32
0.485255

0.608196
46
0.911615
06

DTL
WACC(%)
EBIT
Value of
Firm

1.480963
855
13
363.42
27.95538
462

0.287542
207
13
174.06
13.38923
077

1.219461
698
14.5
144.07
9.935862
069

0.327810
65
14
89.06
6.361428
571

28
2.498239
44
14
47.1
3.364285
714

0.554441
052
14

The degree of combined leveraged has increased over

the years of eicher motors but the 1% increase in sales
will only increase the EPS by 1.4% which is not a good
sign, there operating leverage is increased that means
they are improving there operations but not
significantly, and the capital structure they have tried
to maintain at 0.

Phase 2 - Payout Policies

The company has tried to maintain the dividend payout ratio of around
30-40%, indicating the company have the solid dividend policy. Although
from the year 2009 to 2010 company has doubled the shares issue but its
dividend per has also increased with increasing earning per share
signaling to the investors that company has very good future prospect and
its profits is increasing significantly which will contribute to more capital
gain in future.
Column1
PBT
Reported Net Profit
Shares
in
issue
(lakhs)
Earning Per Share
(Rs)
DPS(Rs)
Equity Dividend (%)
Book Value (Rs)
Dividend
payout
ratio

13-Dec
363.15
278.62
270.39

12-Dec
173.8
144.76
270.01

11-Dec
142.27
124.55
269.93

10-Dec
86.78
75.44
269.38

9-Dec
-48.51
37.53
126.6

103.04

53.61

46.14

28.01

29.64

30
300
303.76
0.291149

20
200
232.97
0.373065

16
160
200.07
0.346771

11
110
169.53
0.392717

7
70
306.85
0.236167

As we can see althouth the net profit in the year 2013 has almost doubled
but its has not rolled out the dividend accordingly rather it has lowered
the dividend payout ratio from 37.3% to 29.11% signalling its might be
retaining earnings for the purpose of more investment and will provide
more DPS in the future and the company will be beneficial in the long run
for the purpose of capital gain.

Market reaction can be seen with with the huge increase in share price
from 2013 to 2015 because of its solid dividend policy and the good future
prospect.

Phase 3 - Working Capital

Management
Efficiency Ratios
Average Collection
Period
Average Inventory days
operating Cycle
Average Payable days
Cash conversion Cycle

Dec15

13Dec

12Dec

11Dec

10Dec

9-Dec

1.25

1.74

1.59

1.90

3.33

4.59

19.18

20.86

18.68

18.06

18.94

18.52

20.43
51.87
-31.44

22.60
52.60
-30.00

20.27
45.43
-25.16

19.96
52.98
-33.02

22.70
72.79
-50.09

23.11
67.59
-44.48

The company have negative cash conversion cycle,

which indicates that the company has very effectively

managed its working capital, i.e its operating cycle is

very less as compared to average payable days which
means company has cash available for too many days,
which it can use for other purposes.
The industry average is very poor in comparison with
this company, the company has tried to maintain its
CCC around -30 days since last 5 years, which means it
have extra 30 days before it makes its payment so
finally we can say that the company is very good in
managing its working capital.