IntroductionThe given report contains a review of 5 research paperson capital structures.
First we look at the factors and composition of capitalstructures of Public Ltd companies in India.It is then followed by analysis ofcapital structure across various industries in India. PublicLtd Companies and their capital structureCapital structure refers to what frames the capitalemployed,which simply is the composition or mixture of debt and capital.One ofthe most important and basic aims of a firm is to strengthen shareholder`swealth and capital structure decisions aim at achieving this fundamental.Thereare certain theories associated with capital structure such as the MMapproach,Operating,Net Operating and traditional approach.
All theories havecertain assumptions and merits and demerits since any country or the real wordhas factors such as bankruptcy and agency costs and also the presence oftaxes.In today`s India,firms usually follow the given order of raisingfinance-internal,external borrowed finance and finally external equityfinace,this is commonly known as pecking theory.Firms might also go ahead withthe signalling theory to send positive messages about themselves or to maintaintheir flexibility when it comes to raising debt.Calls related to capitalstructure have bearing on both risk and return associated with a share,which inturn affects the market price of a share and thus these decisions are ofmammoth significance.Using interest bearing bonds,increases the financialleverage which increases the EPS due to the benefit of tax shield as a reasonof interest.
At the same time financial leverage means fixed payments whichmakes it more risky.Therefore it has a two fold counterveiling impact.A generalnotion states a high DFL should be accompanies by a low DOL and vice versa.
Theprofits which a firm makes,scale at which they operate,the size of their assetsplay a major role in determing the leverage structure of a firm.A number of factors determine the capital structurewhich include cost of funds,cost required to raise such funds,the control orownership pattern,the threat associated with that source,agency cost and taxadvantage.Usually debt turns to be cheaper due to tax advantage and the benefitof gearing which it provides.However,lenders may look at several factors beforesubscribing to debt such as firm`s credit rating,number of defaults ifany,interest rate offered,interest-coverage and debt-equity ratio,gross profitmargins and cashflows which the firm has,which means that firms having goodfinancial statements not only enjoy ease of raising loans but also enjoyflexibility as well.In India,it has been observed that after the 1990`s thefirms have also started to pay focus on raising money through equity ascompared to previous years where a major source of finance used to be debt.Thisis attributed to development of new financial products,awareness amongconsumers,advancements in financial markets and certain other legalrequirements and compliances.It has also been observed that large firms havinga huge pool of assets and high credit ratings are in a better position tonegotiate with banks which helps them crack better deals when it comes to debtfinancing.
Thus,we see a wide array of factors affecting capital structure of afirm.Capitalstructure of the FMCG Sector in IndiaOver the years,the fmcgsector has grown with a huge boom across the world and specially in India.Thecompanies undertaken for the study include P and G,Emami Ltd,ColgatePalmolive(India),United Spirits Ltd.Though the FMCG sector has grown withleaps,the studies suggest that there is still a need to improve the wayoperations are conducted to achieve effectual usage of resources which in turnwill ensure optimisation of resources and increase overall effectiveness andproductivity leading to sustained growth.One more thing which has been noticedis that these companies have been able to maintain a very good debtor turnoverratio which clearly indicates that their receivable management has beenabsolutely to the mark.One striking fact was observed was that financialleverage showcased adversarial effect when it came down to valuation orperformance of the company due to Eva and Roa indicators and thus the benefitof increased EPS was set off from the firm`s perspective.
The debt-equity ratiowhich was initially high has now seen a downward trend since firms have madeconsiderable profits in the recent past,and have made debt repayments and usedinternal as well as equity source of financing.The increased profits also meanthigher interest coverage ratio,thus providing a secure environment tolenders.Due to decreased debt,the debt-asset ratio also gives a positivesignal,giving firms further flexibility to raise additional funds in the formof bonds and debentures.The GPR and NPR have also been increasing sinceoperations have gone up and sales have increased.
We see that colgate and emamiwere able to fetch higher returns on long term funds showcasing thatdisbursement of funds in these two companies was much better than other companies.Wesee that profitability has had a positive impact in Colgate even when the firmsuses very less amount of debt.All in all we see that capital structure hasplayed an important role in FMCG sector,however different firms within theindustry have used varying strategies keeping in mind their strengths andweaknesses.
CapitalStructure Of Automobile Industries(2010-14)This review contains an overlook of capitalstructure of Automobile industries with the examples of Tata Motors,MarutiSuzuki and Mahindra and Mahindra.There was a specific focus on debt,equity andleverages of these companies during the analysis of capital structure.In theautomobile sector,the firm`s value of productive assets,monopoly franchise hasan impact on the value of capital which in turn determines the value of thefirm and the value of its`s securities.
Thus,a chain is involved when we look atthe value of a company specifically in the automobile sector and each componentplays a major determinant.We see that over the years,the equity has gone up in TataMotors majorly due to convertible debentures and since the market price ofshares was very high,the company found it better to raise funds through equityrather than debt.In the other two companies,the figures have been relativelystable.We see that debt has constantly increased in Mahindra and Mahindra sincethe gearing instrument helped them take the benefit of leverage as well asincrease the EPS,making the shareholders happy.The Debt of Maruti Suzuki hasseen huge fluctuations indicating that proper management was debt was highlymissing in this particular case.Tata Motors reduced debt till 2012 through hugeprofits used for redemptions as well as using it`s market price of shares andthe conversion policy to it`s advantage.
We see that all companies sawfluctuations in the DOL,which can be attributed the market environment as wellas internal positions of the company,however Tata and Suzuki have made aconstant effort in recent years improve their DOL.Tata is the only companywhich was also able to maintain a decent range of DFL as compared to othertwo.The impact of both DOL and DFL has been reflected in DCL for each of thecompanies.
Tata Motors and Maruti Suzuki showed a clearrealation between capital indicators and MPS.However,for Tata motors an inverserelation was found between MPS,debt and equity.Capitalstructure of IT sector(special focus on TCS)The following researchis about capital structure of IT sector with a key focus on TCS.
In TCS,we findthat the company has widened its asset base with an arch focus of financingthese through long-term funds.The debt from 2012 to 2014 has gone up,howeverthe debt-equity ratio has seen an insignificant increase,showcasing the factthat equity for raising finance has again been prioritised.Since the amount ofdebt is substantially low(1.
9%) the debt to total fund ratio is also verybantam.The interest coverage ratio is 100 times more than the standardindicating that gearing instruments have not been used effectively and that thefirm has a very very low financial risk and follows an extreme form of conservativepolicy.This clearly indicates that the leverage advantage to the firm as wellas investors is highly missing since the tax shield advantage has not been usedby the company.There is a need for TCSto optimise its capital structure which can be done by proper usage of funds inthe company.Capitalstructure of steel companies in IndiaThe given paper talksabout how capital structure has changed over the years for the steel companiesin India and how various components play an important role in deciding thefirm`s capital structure.
Steel industry is one such area where the firm`s own characteristicshave a hefty role to play when it comes to deciding the mix of structure.We seethat before 1990s,steel players used debt as source of finance since it wasmuch cheaper and firms enjoyed protection as well as loans froms specificinstitutions at a lower rate to boost steel production in thecountry.However,with the opening up of the economy after 1991,the number ofinfrastructure projects around the country grew which increased the demand forsteel in the domestic market,also a global increase in demand of steel was seenduring the period because of a favourable market.
At the same time entry offoreign firms meant Indian firms which were already debt saturated need morelong term funds and as a result of these 3 factors,the capital structure saw ashift from a heavily debt financed structure to a mix of debt and equity.The characteristicswhich are widely used to determine the structure today areprofitability,liquidity,size,interest coverage,etc.If the firm is in a positionwhere it is constantly able to generate huge profits,the source of finance usedby the firm is likely to be reserves and hence the debt-equity ratio of suchfims is likely to be low and the same holds true conversely.
There is a need tomeet short term obligations in terms of interest and hence a high liquidityratio might mean a high debt ratio.However,if investments are finance throughthe liquid assets then the above conclusion cannot be drawn.Larger firms are ina better position to negotiate with banks plus the ownership aspect in thesefirms suggests that debt here is likely to play a major role.The company sizealso offers one more benefit of lower financial stress since they are morelikely to be diversified.
A higher interest coverage ratio provides a sense ofsecurity to lenders who will be willing to lend if the given ratio isrelatively high.Thus,we see that howcapital structure in India is different from sector to sector and how thefirm`s own characteristics,basic fundamentals,macro-environment and the marketfactors affect the capital structure of a company and how the firms can use thecapital structure to improve their performance and increase returns forshareholders.References1. International Journal of Innovative Research andPractices Vol.3, Issue 11, November 2015 ISSN 2321-2926 2. IOSRJournal of Business and Management (IOSR-JBM)e-ISSN: 2278-487X, p-ISSN:2319-7668.
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