capital structure of fmcg, it, power and telecom

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The purpose of this project is to investigate empirically, the existence of inter-industry differences in the capital structure of Indian firms and identify the possible sources of such variations in capital structure. The technique used for this cross-sectional analysis is one way ANOVA analysis of variance and co-relation between capital structure and ROI.

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CAPITAL STRUCTUREP R E S E N T E D B Y: D H I E N PA T E L ( 1 9 1 1 3 7 ) R I H A N J I (1 9 1 1 4 1 ) S A N M A N A N K O H LI ( 1 9 1 1 4 5 ) PA YA L S A M A N TA ( 191156 ) R A H U L J I (1 9 1 1 5 9 ) A N

PROJECT OBJECTIVE Analyze and compare the capital structure of firms : Inter- Industry Intra- Industry ( Each industry with different nature) Therefore, to obtain a broader perspective of the market.

PARAMETERSCAPITAL STRUCTURE: Combination of debt and equity that a firm uses to fund its long term financing. Debt to equity ratio= total debt/shareholders equity. FINANCIAL LEVERAGE : Degree of financial leverage can be given by : DFL = % Change in EPS % Change in EBIT The financial leverage ratio is also referred to as the debt to equity ratio. This ratio indicates the extent to which the business relies on debt financing PROFITABILITY: Return on assets (ROA) & Return on investments (ROI)

INDUSTRIES INTO CONSIDERATION

HYPOTHESIS1. Top

firms have low D/E ratio irrespective of industry they are in

2. Firms of same industry follow similar capital structure 3. Firms during expansion mode have high D/E ratio 4. There is a positive correlation between capital structure and return on investment (ROI) 5. There is a positive correlation between profitability (ROA ) and DFL

FMCGG ro w th d ri rs: ve R o b u st G D P g ro w th I cre a se d i co m e n n I cre a se d u rb a n i ti n n za o E vo l n g co n su m e r l fe styl vi i e a n d b u yi g b e h a vi r n o C h a l e n g e s: l Pro l n g e d fo o d i fl ti n o n a o Pri w a rs d u e to ce i cre a se d co m p e ti o n n ti R e q u i m e n t o f co n sta n t re p ro d u ct i n o va ti n & n o a d ve rti n g si

ITG ro w th d ri rs : ve H i h l ski l d h u m a n re so u rce g y le I i a ti s ta ke n b y G o ve rn m e n t n ti ve ( implementation of e -governance p ro j cts); e M a n y g l b a lp l ye rs h a ve se t-u p o a o p e ra ti n s i I d i l ke M i so ft, o n n a i cro O ra cl , e tc e C h a le n g e s : l C o n ce n tra ti n o f I d e ve l p m e n t o T o i fe w cities n

TELECOMG ro w th D ri rs: ve 3 G sp e ctru m Ta x i ce n ti s b y th e G o vt. n ve I cre a si g a cce ss to i te rn e t n n n C h a l e n g e s: l D e cre a si g A R P U ( a ve ra g e n re ve n u e p e r u se r ) S l w i g re ve n u e g ro w th a n d o n a h u g e p re ssu re o n p ro fi t m a rg i s n R u ra lte l -d e n si i sti ll ss e ty s l e th a n 2 5 % , w h i e th e re i l s sa tu ra te d u rb a n te l -d e n si . e ty

POWERG ro w th D ri rs ve Ta x b e n e fi ts E n co u ra g e d p ri te i ve stm e n t i va n n tra n sm i o n se cto r th ro u g h ssi co m p e ti ve b i d i g ti d n C h a le n g e s l D e l y i te ch n o l g y p ro cu re m e n ts a n o D e l y i e n vi n m e n ta l a n ro cl a ra n ce s, l n d a cq u i ti n a n d e a si o fi a n ci lcl su re s n a o La w a n d o rd e r p ro b l m s e S h o rta g e o f tra i e d m a n p o w e r n a n d e q u i m e n ts p N e e d o f h u g e fi a n ce n Fu e lu n a va i a b i i l l ty

D / E RATIO

Testing Hypotheses

H y p o th e sis 1 : Top firms have low D / E rat i sp e cti o f i d u stry th e y a re i rre ve n n Assumption: Top firms according to market capitalization Test statistic: t-test Result: All top firms dont have lower D/E Ratio Analysis: It seems that the type of industry influences the variation in financial leverage ratio of firms across industries. This may be due to the fact that both FMCG and IT industry are relatively less capital intensive as compared to Telecom and Power industry Hence top firms in FMCG and IT industry have very low D/E Ratio as compared to top firms in

Hypothesis 2: Firms of same industry follow similar capital structure Test statistic: ANOVA

SECTOR RESULT FMCG

ANALYSIS

Firms follow similar capital Relatively low capital structure intensive Expenditure mainly for IT Firms dont follow similar advertising avoid taking Higher risks, capital structure debts Wipro has taken debts TELECO Firms dont follow similar unlike Infosys and intensive Relatively capital TCS However, MTNL has zero M capital structure debt POWER Firms dont follow similar Capital intensive , still a lot capital structure variation in capital structure

H y p o th e sis 3 : Firms during expansion m o d e h a ve h i h D / E ra ti g o Test statistic: t-test for paired sample with equal means Assumption: Firms are in expansion whenever there is increase in asset by above 25 % over the previous year Result: There is no correlation between expansion mode and D/E ratio Analysis: A firm may use its equity, or reserves & surplus or debt to invest in expansion. Adani power had high D/E ratio while going in for expansion since power industry is a capital intensive one, however Infosys had zero debt, though it was in expansion phase from 2006-07

H y p o th e sis 4 : T h e re i a p o si ve s ti co rre l ti n b e tw e e n R O I a n d th e d e b t a o e q u i ra ti o f a fi ty o rm Test statistic: t-Test Result: There is no correlation between ROI and the debt equity ratio of a firm Analysis: Though higher ROI refers to easy availability of debt at low interest, still a firm having higher ROI may not consider taking debt in order to avoid financial distress. It may be using its share capital and reserves and surplus to increase its ROI. e.g. Though HUL and NESTLE have higher ROI, they have very low D/E ratio, while Idea cellular has a very high D/ E ratio its ROI being quite less than that of HUL.

H y p o th e sis 5 : T h e re i a p o si ve s ti co rre l ti n b e tw e e n R O A a n d D FL a o

Test statistics: t-Test Result: There is a positive correlation between ROA and DFL

Analysis:

Tax benefits in debt leads to increase in EPS and EAT which leads to increase in ROA.

CAPITAL STRUCTURE DEPENDS ON: Firm size Type of industry Govt. Policies Objective of the firm

LIMITATIONS Only few firms of a sector have been considered We have assumed top firms based on market capitalization Hypotheses have been

Literature Review Modigliani & Miller Theory Pecking Order Theory