Professional Documents
Culture Documents
Share holder value creation Credit Rating Equity Valuation & buy back Treasury management Term Debt management Corporate Liabilities and Hedging risks
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Managerial Dimension
Financial Dimension
Risk Dimension
Cost-of-capital reduction
VALUE CREATION
Operational Dimension
Scale Economies Improve margins
Market Valuation
Release value
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MV/ BV Approach
Value creation
Value maintenance
Value destruction
Economic value is destroyed when ROCE < WACOC EVA = net operating profit after tax cost charges of capital employed
It is the net earnings in excess of the cost of capital supplied by lenders and share holders. It represents the excess return to shareholders over and above the minimum required return. It is net value added to shareholders.
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DCF approach
The true economic (present) value of a firm, or a project or a strategy depends on the cash flows and the appropriate discount rate (adjusted if required). Economic value =PV of net operating cash flows + PV of terminal value
Cost reduction
Optimal Asset utilisation Cost of capital reduction
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Credit Rating
Bond rating Equity rating Commercial paper rating Sovereign rating Project/ company rating
CARE
ICRA
S TAN DAR D AN D PO O R
M O O DYS
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Rating Methodology
Industry Risk Operating Efficiency Market Position
Management Risk
Existing Risk
Project Risk
Financial Risk
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OVERALL RISK
Industry Risk
Industry Characteristics
Importance to the economy Stage of Business cycle Industry size Government policies Cyclical/seasonal factors Entry Barriers
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Industry Risk......
Extent of Competition
Nature and basis of competition Threat from imports Unorganised players Substitutes
Technological risk
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Products
2. MARKET POSITION
Markets
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Products
2. MARKET POSITION Customer Preferences / Brand Loyalty Product Range Competitive advantages Pricing flexibility Brand Equity
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2. MARKET POSITION
Markets
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3. OPERATIONS
Cost structure
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Project Risk
Number and size of projects Means of financing the projects Funding tie up Extent of completion of projects Ability and track record in executing projects Analysis of time and cost overruns, if any
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Capitalization Ratios
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3. FINANCIAL RESOURCES & FINANCIAL FLEXIBILITY Flexibility in deferring capital expenditure programmes
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: Substantial Risk
- Payment possible only if favourable circumstances continue
: Default
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AAA AA A BBB
BB BB C D
FB FC FD
P4 P5
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Market Position
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Debt: equity ratio after proposed buy back not to exceed 2:1 Consent of Lenders No fresh issue allowed for a period of 24 months post buyback
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Defence Mechanism
Success of a Buyback
Pricing :
Premium / discount to market price
Timing :
Economic and political conditions Market phases ( Bearish / Bullish )
Funding :
Debt Preference shares Cash reserves
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Benefits of allowing buy back . Enhanced liquidity for small investor . Enhancing shareholders wealth
. Increase in EPS
. Better servicing of equity
Treasury management
- Resource mobilisation - Resource deployment - Risk management
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- Risk management helps in minimising cost fluctuations for the funds mobilised and in case of forex borrowings helps in minimising losses possible due to any exchange rates fluctuations.
-Treasury management will become more complex as constant monitoring of interest rates will be essential due to severe volatility and falling of interest rates. - Risk profiles change over the life of a company thereby necessitating a continous correction of interest rates on borrowings. ( Infra Projects ) - Corelation between forex market and the domestic money market and Integration of domestic and international markets.
- Parking of mobilised funds till deployment
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Investment Objectives
Time Horizon Income Head : Income head under which returns to be realised to have efficient tax management Risk Profile : Acceptable level of risk or volatility Liquidity Geographic and performance benchmark : Is asset / liability matching an important consideration and against which benchmark index should the portfolio performance be evaluated
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Creating Portfolios
Short term / money market index : Call ( Overnight ) money rates,short term treasury bills and commercial paper,basket of money market mutual funds as an index Government Securities :Short term interest rates Co relation to bond prices basket of G-sec mutual funds as an index.
Corporate Bonds : Co-relation to G-secs, Low liquidity and basket of fixed income mutual funds as index
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Investing Procedure
Need Analysis : Cash flow analysis and Bucketing
Recommendation : Investment policy creation , Different portfolios for different buckets, Product selection
Execution
Predefined methods of tracking portfolio
Support
Reporting
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Treasury Products
Rupee Dollar swaps : offers flexibility to convert FC liability to rupee liability
Swaps between fixed to floating across currencies possible Interest rate swaps linked to MIBOR,T-bill yield etc. Provides hedge against anticipated interest rate volatility and reduces costs Easy documentation and procedures
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Liquidity preference theory which indicate that a back to back maturity of a bond will not increase the cost but in the event of a maturity mismatch cost would increase
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