Assignment for corporate finance, Corporate Finance

 

Assignment Part 1

 

Shareholder Value

Provide (a) one page write-up of the company; (b) Present its significant performance indicators such as P/BV; and (c) apply the shareholder value maximization framework explained in the class to your firm

 

Company Profile

The Bajaj group comprises of 27 different companies. Bajaj Auto Ltd. (BAL) is the flagship company of the group.

The Bajaj group of companies in the year 1926. Mr. Jamnalal Bajaj was the founder. In 1942, his son Kamamnayan took over the reins of the company. He consolidated the group and also diversified the business, thereby elevating the Bajaj group to its current position in the industry. Rahul Bajaj is the Chairman and Managing Director of the company today. Madhur Bajaj is the Vice Chairman and Rajiv Bajaj is the President. Sanjiv Bajaj is the Vice President (Finance).

BAL came into existence as M/s Bachraj Trading Corporation Pvt. Ltd. on November 19, 1945. In 1948, it started sales of two- and three-wheelers in India by importing them. It was much later in 1959 that the company obtained a license from the Govt. of India to manufacture two- and three-wheelers. The growth of BAL since then can be termed as spectacular. In 1969-70, Bajaj sold its 100, 000th vehicle. In 1976-77, Bajaj sold 100, 000 vehicles in a financial year. In 1986-87, 500, 000 vehicles were produced and sold in a single year. In 1994-95, BAL sold a phenomenal 1 million vehicles in a single financial year. Today BAL is the second largest two- and three-wheeler manufacturing company in India, and one of the largest in the world.

Production figures for January 03 in comparison with last year are given below:

 

 

Current year

Previous Year

Production

For Jan 03

Up to Jan 03

For Jan 02

Up to Jan 02

Motorcycles               

74,278

742,649

68,890

536,985

Scooters - Geared

20,525

234,317

37,131

356,648

Scooters - Ungeared

4,581

56,096

2,806

56,188

Step thrus

3,850

47,270

5,965

59,362

Total 2 wheelers

103,234

1,080,332

114,792

1,009,183

Three-Wheelers

17,804

164,453

12,614

130,233

Grand Total

121,038

1,244,785

127,406

1,139,416

 

It has three manufacturing facilities, in Akurdi (Pune), Aurangabad and Chakan (Pune). In keeping with the consumer preference for motorcycles compared to scooters, BAL has re-oriented itself to produce more motorcycles than scooters.

Bajaj Auto Ltd. became a public limited company in the year 1960. Today its annual turnover is a healthy Rs. 44.03 billion and market capitalization stands at Rs. 51.9 billion. In addition to two- and three-wheeler manufacture, BAL has also forayed into insurance and investment business. However, as per fiscal 2002 revenues, automotives resulted in 95% of the revenues.

Significant Financial Data and Performance Indicators

Listed below in the following tables are the key figures from the P/L account and Balance sheet for BAL for the last few years. Also listed are the key financial ratios and valuation ratios that are the Performance indicators for BAL. This data is also used in subsequent sections for analysis purposes.

 

P and L Account

 (Rs.in Crs.)

Year

Mar-02

Mar-01

Mar-00

Mar-99

Mar-98

Sales Turnover

4,146.75

3,597.95

3,705.15

3,526.91

3,157.64

Other Income

372.95

365.99

510.4

380.29

355.57

Stock Adjustments

-30.4

14.13

52

-51.04

30.97

Total Income

4,489.30

3,978.07

4,267.55

3,856.16

3,544.18

Raw Materials

2,269.29

2,026.03

1,902.22

1,694.23

1,514.79

Excise Duty

532.25

574.83

615.82

564.93

514.42

Power & Fuel Cost

63.64

71.03

67.96

65.26

67.15

Other Manufacturing Expenses

144.4

171.97

161.68

156.49

179.27

Employee Cost

237.95

324.37

235.37

230.9

219.83

Selling and Administration Expenses

265.77

263.96

254.88

198.66

163.22

Miscellaneous Expenses

111.72

99.58

85.12

73.02

64.57

Less: Preoperative Expenditure Capitalized

23.21

27.58

28.9

22.9

20.01

Profit before Interest, Depreciation & Tax

887.49

473.88

973.4

895.57

840.94

Interest & Financial Charges

3.38

7.39

3.17

4.67

8.47

Profit before Depreciation & Tax

884.11

466.49

970.23

890.9

832.47

Depreciation

179.7

177.29

145.31

132.7

143.62

Profit Before Tax

704.41

289.2

824.92

758.2

688.85

Tax

183.32

26.64

211.19

217.68

224.7

Profit After Tax

521.09

262.56

613.73

540.52

464.15

Adjustment below Net Profit

-2.93

-12.61

21.13

12.32

-1.57

P & L Balance brought forward

0

0

0

0

0

Appropriations

518.16

249.95

634.86

552.84

462.58

P & L Balance carried down

0

0

0

0

0

Equity Dividend

141.66

80.95

119.39

95.51

95.51

Preference Dividend

0

0

0

0

0

Corporate Dividend Tax

0

8.26

13.13

10.51

9.55

Equity Dividend (%)

140

80

100

80

80

Earning Per Share (Rs.)

51.5

25.13

50.31

44.39

38.08

Book Value

283.23

260.58

268.37

226.3

177.42

Extraordinary Items

81.8

-39.15

110.79

31.73

32.47

 

 

 

Balance Sheet

(Rs.in Crs.)

Year

Mar-02

Mar-01

Mar-00

Mar-99

Mar-98

Share Capital

101.18

101.18

119.39

119.39

119.39

Reserves & Surplus

2,764.59

2,535.35

3,084.69

2,582.35

1,998.83

Total Shareholders Funds

2,865.77

2,636.53

3,204.08

2,701.74

2,118.22

Secured Loans

31.83

55.97

101.58

41.08

27.54

Unsecured Loans

594.27

457.74

394.09

308.61

230.67

Total Debt

626.1

513.71

495.67

349.69

258.21

Total Liabilities

3,491.87

3,150.24

3,699.75

3,051.43

2,376.43

Gross Block

2,536.13

2,467.82

2,041.15

1,717.20

1,561.58

Less: Accum. Depreciation

1,171.79

1,127.89

1,007.34

880.51

889.58

Net Block

1,364.34

1,339.93

1,033.81

836.69

672

Capital Work in Progress

3.96

22.42

80.44

85.12

10.91

Investments

1,966.07

1,184.58

1,952.36

1,459.06

1,143.23

Inventories

179.1

253.44

261.13

177.5

233.38

Sundry Debtors

198.17

120.72

185.8

214.66

127.35

Cash and Bank Balance

25.2

21.34

35.98

54.08

92.51

Loans and Advances

1,632.82

1,666.12

1,890.46

1,750.77

1,356.14

Current Liabilities

690.99

467.55

540.35

421.21

372.82

Provisions

1,199.60

1,006.79

1,200.32

1,105.97

887.01

Net Current Assets

144.7

587.28

632.7

669.83

549.55

Miscellaneous Expenses not w/o

12.8

16.03

0.44

0.73

0.74

Total Assets

3,491.87

3,150.24

3,699.75

3,051.43

2,376.43

Contingent Liabilities

470.72

359.56

451.8

336.35

182.47

 

Key financials

(Rs.in Crs.)

Year end

Mar-02

Mar-01

Mar-00

Mar-99

Mar-98

Net sales

3614.5

3023.12

3089.33

2961.98

2643.22

Operating profit

887.49

473.88

973.4

895.57

840.94

Net profit

521.09

262.56

613.73

540.52

464.15

 


 

 

 

 

 

Cash flow analysis

 

 

 

 

 

 (Rs.in Crs.)

Year end

Mar-02

Mar-01

Mar-00

Mar-99

Mar-98

NOPAT

523.59

269.27

616.09

543.85

469.86

Operating cash flow

724.87

206.02

289.66

329.77

248.31

Free cash flow

644.13

87.1

194.74

234.43

168.78

 


 

 

 

 

 

Key operating ratios

 

 

 

 

 

Year end

Mar-02

Mar-01

Mar-00

Mar-99

Mar-98

EPS (Rs)

51.5

25.13

50.31

44.39

38.08

Book value (Rs)

283.23

260.58

268.37

226.3

177.42

Net Profit Margin (%)

14.52

8.79

19.97

18.35

17.66

Operating Profit Margin (%)

24.55

15.68

31.51

30.24

31.81

ROCE (%)

18.06

9.94

20.12

28.12

32.07

ROE (%)

15.97

10.33

17.03

22.43

23.93

Debt/Equity

0.21

0.17

0.14

0.13

0.12

Interest Cover

176.69

45.97

214.25

163.36

82.33

 

 

 

 

 

 

Valuation ratios

 

 

 

 

 

(Price Rs 521.1, Market Cap Rs 5272.49 crores, as on 12 Feb 2003)

Year end

Mar-02

Mar-01

Mar-00

Mar-99

Mar-98

P/E

10.12

11.47

7.63

-

-

P/BV

1.84

0.99

1.43

-

-









Shareholder value maximization framework

The four key elements that affect the shareholder value of a company are

  • Profitability
  • Growth
  • Risk
  • Capital Market Conditions

Applying the shareholder value maximization framework to Bajaj Auto Ltd. for year 2001 and 2002, we get the following table:

 

Parameters

Year 2002 compared to Year 2001

Profitability

+ (Profitability indicators like Operating Profit Margin, Profit Margin, ROCE have almost doubled)

Growth

+ (Growth in sales and profitability, growth is assets was very minimal)

Risk

0 (Not a very risky business)

Capital Market Conditions

- (Slight upturn due to increased sales and aggressive sales forecasts, downturn due to internal rife in Bajaj family)

S

1+

 

As can be seen from a comparison of the P/BV ratios, it has risen from 0.99 in 2001 to 1.8 in 2002. This indicates a definite increase in shareholder value from the previous year.

Let us apply the shareholder value maximization framework to Bajaj Auto Ltd. and to its close competitors, Hero Honda Motors Ltd. and TVS Motor Company Ltd. The information that we have is presented below:

 

Sales Comparisons (Fiscal Year ending 2002)

 

Company

Sales (Rs. billions)

Sales Growth

Bajaj Auto Ltd.

36.059

19.2 %

Hero Honda Motors Ltd.

44.591

40.7 %

TVS Motor Company Ltd.

19.298

6.1 %

 

Profitability Comparisons (Fiscal Year ending 2002)

 

Company

Gross Profit Margin

EBITDA margin

Bajaj Auto Ltd.

16.3

13.8

Hero Honda Motors Ltd.

20.5

15.5

TVS Motor Company Ltd.

14.4

8.6

 

As can be seen, Hero Honda is doing really well, followed by Baja Auto Ltd. TVS is bringing up the rear.

Applying this information, we get the following table:

 

Parameter

BAL

Hero Honda

TVS

Profitability

+

+

+

Growth

+

+

0

Risk

0

0

0

Capital Market Conditions

-

 

+

S

1+

3+

2+

 

Checking out the P/BV and P/E Ratios for the three companies, we get

 

 

BAL

Hero Honda

TVS

P/BV ratios

1.82

7.42

2.91

 

 

Assignment Part 2

 

Valuation

Find the intrinsic value of your firm using appropriate dividend valuation model. Provide reasoning and comments (if you were to make a buy/sell decision of the firm)

 

Calculate intrinsic value

The dividend payout for Bajaj Auto Ltd. for the last 10 years is as seen below

 

Period ended

Face Value per share (Rs.)

Dividend paid per share (Rs.)

31-03-1990

10/-

11/-

31-03-1991

10/-

10/-

31-03-1992(after Bonus 1:1)

10/-

5/-

31-03-1993

10/-

5/-

31-03-1994

10/-

8/-

31-03-1995(after Bonus 1:1)

10/-

8/-

31-03-1996

10/-

10/-

31-03-1997

10/-

10/-

31-03-1998(after Bonus 1:2)

10/-

8/-

31-03-1999

10/-

8/-

31-03-2000

10/-

10/-

31-03-2001

10/-

8/-

31-03-2002

10/-

12/-

 

So it looks like Bajaj Auto Ltd. has been paying out a dividend ranging from Rs. 8/- to Rs. 10/- per share for most years ranging from 1990 onwards.

If we look at the market prospects for Bajaj, it has taken an aggressive game plan to counter the fierce competition and changing consumer preferences in the market. It has decidedly shifted its focus from geared scooters to motorcycles. It has also planned an onslaught of new releases in the market, targeting all the different market segments in motorcycles. Its major brands Boxer and Pulsar are doing very well in the market. So it appears that BAL has been able to come out of the low level it had hit in 2001. In 2002, Bajaj reported a 15% growth in value due to increased sales. However, BAL is operating in a highly competitive market. It will be very difficult for BAL to maintain these high growth rates for a long time. So it would be advisable to assume a zero-growth model for BAL.

According to the zero-growth model, intrinsic value is given by the formula

 

IV = D/R

Given D = 10 (assuming BAL will maintain dividends at Rs. 10/-) and R = expected rate of return as 15%, the intrinsic value of BAL works out to

 

IV = 10/0.15 = Rs. 66.67

The current market price is Rs. 512.95, which is much higher in comparison to the intrinsic value.

(At the current price of 521.1, we can calculate R = 10/521.1 = 1.9%, which is very low)

Hence it is not advisable to buy BAL shares in the market today with the intention of keeping them. In the short run, of course, there could be capital gains as the share value rises on the basis of expected growth in the two-wheeler market segment.


Assignment Part 3

 

Cost of Capital

Find the beta value for your company from nseindia.com website. Provide the firms approximate over all cost of capital. It will involve calculating its cost of equity, cost of debt, and weighted average cost of capital. Does it have high financial risk (i.e., due to its capital structure)

 

The Beta value for Bajaj Auto Ltd. is 0.73.

            To calculate the Cost of Capital, we will use the Weighted Average Cost of Capital (WACC) formula

            WACC = (E/V) X RE + (D/V) X RD X (1 - TC)
where

            E = Market Value of the firm's equity

            D = Market Value of the firm's debt

            V = Combined Market value of debt and equity = (E + D)

            RE = Cost of Equity Capital

            RD = Cost of Debt Capital

            TC = Corporate Tax Rate

 

            Calculating the cost of capital for BAL, we get:

 

Value

Formula

Amount (Rs.)

E

 

52,726,727,061

Secured Loans (S)

 

318,335,238

Unsecured Loans (U)

 

53,031,231

Interest on S and U (ISU)

 

33,817,261

Interest Rate on S and U (RSU)

 = ISU/(S + U) * 100%

9.11

Sales Tax Deferral Liability under Package Scheme of Incentives 1983, 1988, 1993 (L)

 

5,889,623,171

Interest on L (IL)

 

0

Interest Rate on L (RL)

 = IL/L * 100 %

0

D

 = S + U + L

6,260,989,640

V

 = E + D

53,045,062,299

E/V

 = E/V

0.98

D/V

 = D/V

0.12

RD

 = (S + U)/D*RSU + L/D*RL

0.54

Tc (%)

 

35.00

RD * (1 - Tc)

 = RD * (1 - Tc)

0.35

Beta

 

0.73

RF (%)

 

6.00

RM - RF (%)

 

9.00

RE

 = RF + Beta * (RM - RF)

12.57

WACC (%)

 = (E/V)* RE + (D/V) * RE * (1 - Tc)

12.54






 

The weighted average cost of capital works out to 12.54% a year. As can be seen for BAL, 98% of the capital is in the form of equity. Only about 2% of the capital is funded through debt. It can also be observed that the interest on loans works out to be approximately 9% (excluding the Sales Tax Deferral), whereas the cost of equity works out to be around 12.5%. Since the debt part of the capital is very low (D/E ratio = 0.22), we can see that the financial risk of the company is very low.

Hence it can be seen that in the current scenario of falling interest rates on loans, BAL has a higher cost of capital than is optimum. In addition, BAL has huge reserves of surplus cash that it is unable to invest at the rates matching the cost of capital. Bajaj Auto is estimated to hold about Rs.18, 000 million in the form of loans & advances, debt/equity investments and cash in hand.

BAL is aware of this problem, as is evident from the fact that BAL decided to buyback some of its outstanding equity shares in 2001. This reduction in the capital base has reduced the cost of equity for the company. It has also reduced the huge amount of surplus cash that the company has on its hand.

 


Assignment Part 4

 

Financial Statement Analysis

Calculate all the possible ratios of the firms. Find out the short-term solvency, long-term solvency, activity, and profitability position of the firm? Comment of the changes

 

To calculate the ratios, let us first write down the values as observed in the 57th Annual Report of Bajaj Auto Limited.

 

Values

2002

2001

Current Assets

19,898,138,858

20,616,316,712

Current Liabilities

16,545,321,658

14,743,426,648

Inventory

1,790,979,026

2,534,384,036

Net Working Capital

3,353,000,000

5,873,000,000

Total Debt = Long-term Debt + Short-term Debt

6,260,989,640

5,137,142,332

Net Worth

28,657,774,901

26,365,297,856

Net Sales

36,000,000,000

30,259,000,000

EBDITA

6,205,000,000

3,052,000,000

EBIT

6,221,000,000

4,019,000,000

PAT

5,181,584,506

2,499,475,125

Interest

33,817,261

73,939,010

Dividend

1,416,569,140

809,468,080

Net Fixed Assets

13,683,000,000

13,623,000,000

Total Assets

53,369,819,835

46,245,866,836

Accounts Receivables

1,981,655,342

1,207,179,109

Net Sales

36,000,000,000

30,259,000,000

 

Now calculating the ratios as per the formulae, we get the following values

 

Ratios

 Formula

2002

2001

Short-term solvency ratio

Current Ratio

Current Assets / Current Liabilities

1.20

1.40

Quick Ratio

(Current Assets - Inventory) / Current Liabilities

1.09

1.23

Long-term solvency ratio 

Debt-to-Equity Ratio

Total Debt / Total Equity

0.22

0.19

Long-term Debt Ratio

Long-term Debt / (Long-term Debt + Total Equity)

0.18

0.16

Times Interest Earned

EBIT / Interest

183.96

54.36

Activity Ratios

Receivables Turnover Ratio

Sales / Accounts Receivables

18.17

25.07

Average Collection Period (aka Days Receivables)

365 days / Receivables Turnover Ratio

20.09

14.56

Inventory Turnover Ratio

Sales / Inventory

 20.10

11.94 

Inventory Conversion Period

365 days / Inventory Turnover Ratio

 18.16

30.57

Operating Cycles

Inventory Conversion Period + Average Collection Period

38.25 

45.13

Asset Utilization Ratio

Sales / Total Assets

0.67

0.65

Profitability Ratios

Gross Profit Margin

Gross Profit / Sales

17.24

10.09

Profit Margin

PAT / Sales

14.39

8.26

ROA

PAT / Total Assets

9.71

5.40

ROE

PAT / Total Equity

18.08

9.48

ROCE

PAT / (Long-term Debt + Net Worth)

14.84

7.93

Dividend Payout Ratio

Dividends / PAT

27.34

32.39

 

A look at the short-term solvency ratios indicates that the liquidity position is comfortable, since the current ratio and quick ratios are both above 1, though only slightly. But there is a decrease in both the ratios in year 2002 compared to year 2001 that is of slight concern. This seems to be mainly due to increases in provisions for taxation and proposed dividends.

Looking at the long-term solvency ratios, both the Debt-Equity ratio and the Long-term Debt ratio are in the range of 0.2, which indicates that the company is funded mostly by equity.

Among the activity ratios, the Inventory Conversion Period has been reduced from 30 days to 18.16. This is a positive sign as it indicates an overall reduction in inventory levels held by the company. However, the Average Collection Period has increased from 14.5 to 20. One possible explanation for this could be a more lenient credit policy owing to heavy competition in the industry. The annual report mentions an increase in debtors because of four bank holidays in the last week of March 2002. This could also possibly have had some effect on collections.

The profitability ratios indicate that Gross Profit Margin and Profit Margin have increased significantly in 2002. If we look at the data available for the previous years (See "Significant Financial Data and Performance Indicators"), we perceive that the profitability had drastically fallen in 2001. In 2002, Bajaj seems to be recovery path. These figures, thus, infuse some credibility into the statements by BAL that 2001 was an anomaly year, as far as performance went.


 

Posted Date: 7/24/2012 3:24:36 AM | Location : United States







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