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INTRODUCTION One of the tough challenges that firms face is to determine the right amount of leverage. Leveraging decision is important because it affects the financial performance of the firm. The capital structure of a firm is defined as specific mix of debt and equity that a firm uses to finance its operations. Firms can choose among many alternative capital structures. For example, firms can issue a large amount of debt or very little debt. Firms have options of arranging lease financing, use warrants, issue convertible bonds, sign forward contracts or trade bond swaps. They can also issue dozens of distinct securities in countless combinations. When a firm considers its financing options, for example debt vs. equity, it must ensure that the amount of leverage does not impose an excess burden on the firm. This means that the firm should be able to meet its financial obligations during both good and bad times. The two important points to be considered while making financing decisions are: First, debt implies fixed financial obligations for the firm. After the firm breaks even, meaning its earnings cover its debt obligations, any additional earnings will be distributed among shareholders. Thus, when times are good and the firms earnings are high, debt financing results in higher EPS. However, when times are bad and the firms earnings barely cover its debt obligations, there is little left for shareholders and, thus, EPS is low under debt financing. This relationship also shows that EPS exhibits a greater variation under debt as opposed to equity financing in the two scenarios as can be seen from the results shown in the last table. Second, stock financing does not dilute the shares of current owners. Therefore, in the boom scenario, existing shareholders benefit from a higher EPS, but, in the bust scenario, they bear the whole burden of the firms poor performance. To the entrepreneur and corporate Liberalization, Globalization and Privatization are the important issues threatening the existence of a firm. In such a complex corporate environment, it is a challenge to the Finance Manager to survive the firm in long run perspective with the objective of maximizing the owner's wealth. With a view to achieve

this objective finance manager is required to pay his due attention on investment decision, financing decision and dividend decision. Assuming that a sound investment policy and opportunity are in place, it is the intention of this dissertation to optimize the financing decision and dividend decision in the context of achieving the stated objective. Financing decision refers to the selection of appropriate financing mix and so it relates to the capital structure or leverage. Leverage is used to describe the firm's ability to use fixed cost to increase the return to its owners. It is a tool for measuring Business Risk, Financial Risk and Overall Risk. A company's long term debt in relation to equity is its capital structure. The larger the long term debt, the higher the leverage. There are 3 types of leverages that are financial leverage and combined leverage and operating leverage. Financial Leverage* Operating Leverage= Combined Leverage. Capital structure refers to proportion of long-term debt capital and equity capital required to finance investment proposal. There should be an optimum capital structure, which can be attained by the judicious exercise of financial leverage. In order to run and manage a company, funds are needed. Right from the promotional stage, finance plays an important role in a companys life. If funds are inadequate and not properly managed the entire organization suffers, it is therefore necessary that correct estimation of the current and future need of capital be made to have an optimal capital structure which shall help the organization to run smoothly. The capital structure is made up of debt and equity securities and refers to permanent financing of a firm. On the other hand a general dictionary meaning of the term Leverage refers to an increase of accomplishing some purpose. In Financial Management the term leverage is used to describe the firms ability to use fixed cost assets or funds to increase the returns to its owners. This dissertation mainly concentrates on the study of effects of leverage on Manufacturing and service sector firms.

Chapt er

RESEARCH METHODOLOGY The objectives for which study has been undertaken are: 1) To study the methods of raising finance and financial leverages used by the companies. 2) To examine the dividend policy of the company. 3) To assess the inter relationship between degree of financial leverage (DFL), earning per share (EPS) and dividend per share (DPS). 4) To examine the relationship between leverage and the value of the firm NEED FOR THE PROJECT Leverage is an important technique which helps the management to take sound, prudent, financial and investment decisions. It also helps to evaluate business, financial, total risk of any organization. The task of choosing most suitable combination of different techniques in the light of the firms anticipated securities for financing fund requirements earnings is facilitated by it. In matters relating to investment also leverage technique is immensely helpful. It acts as a useful guideline in setting the maximum limits by which the business of the firm should be expanded. For example, the management is advised to stop expanding business the moment anticipated return on additional investment falls short of fixed charge of debt. Collection of data This project is totally based on the Secondary Data, So all the data used in the project have been collected from 1) 2) 3) The annual reports of the companies. The Web sites of companies. The study material.

The data collected from this source have been used and complied with due care as per requirement of the study.

Period of study The present study covers a period of two years from 2008-2010. Techniques of analysis For analyzing the degree of association between DFL, EPS and DPS. The study has been made by converting the collected data into relative measure such as ratios, percentage rather than absolute one. Limitation of study: 1. The study is limited to five years only. Generally twenty years data is ideal to form trend analysis. 2. This is based on secondary data collected from the annual report of the company. It was not possible to collect the primary data from the company's office. Scope of the project Capital structure employed by the companies and its effect on the EPS has been studied previously and also the different financial constraints of both the industries have been compared. Particularly, it is in the scope of this project to analyze the differences in the effect of leverage on the profitability of the firms in manufacturing and service industries

Chapte r

Leverage Leverage is using given resources in such a way that the potential positive or negative outcome is magnified in finance, this generally refers to borrowing. If the firm's Return On Assets (ROA) is higher than the interest on the loan, then its Return On Equity (ROE) will be higher than if it did not borrow. On the other hand, if the firm's ROA is lower than the interest rate, then its ROE will be lower than if it did not borrow. In other words, may be defined as, the employment of an asset or sources of fund has to pay fixed cost or fixed return. Types of leverage There are three type of leverage: 1. 2. 3. Financial Leverage. Operating Leverage. Combined or composite leverage.

Financial leverage Financial leverage is primarily concerned with the financial activities which involve raising of funds from the sources from which a firm has to bear fixed charges. These sources include long-term debt (e.g.: bonds, debentures, etc) & preferential shares etc. Long-term debt carries a contractual fixed rate of interest & obligatory. As the debt providers have Prior claim on income & assets of a firm over equity shareholders. Their rate of interest is generally lower than the expected return of the equity shareholders. Further, interest on debt capital is tax-deductible expenses. These two-phenomenon lead to magnification of rate of return on equity capital & hence E.P.S goes without saying that effects of changes in EBIT (Earnings Before Interest & taxes) on the earning per share are shown by the financial leverage. Financial leverage can best be described as the ability of a firm to use fixed financial charges in EBIT on the firm earning per share. Financial leverage helps to know the responsiveness of E.P.S. to change in the EBIT. It involves use of funds obtained at fixed cost in the capital structure in such a way that it increases the return for common shareholders.
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It is referred to a state at which a firm has to bear fixed financing cost arising from the use of debt capital. The firm with high financial leverage will have a relatively high fixed financing cost compared with low financial leverage. Financial leverage occurs when a company employ the fixed cost of funds debt or preference share capital with a view to maximizing earning available to equity shareholder by a way of a higher income of funds. This technique also called Trade on equity. Financial leverage influence the financial risk as long as the companys earning are greater than its fixed cost it will enjoy a favorable financial leverage position and make earning available to equity shareholders. Financial leverage can measure with the help of the following formula:Financial leverage = EBIT PBT

Financial leverage will have a favorable impact on earning per share a return of equity only. When the firms return on investment exceeds the interest cost of debt it is favorable. The impact will be unfavorable if the return on investment is less than interest. The financial leverage measures the relationship between the EBIT & E.P.S. and it reflect the effect of change in EBIT on the level of E.P.S. The financial leverage measures the responsiveness of the E.P.S. to charge in EBIT If defined as degree of financial leverage% Change in EPS % Change in EBIT

Degree of financial leverage

Operating leverage
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Operating leverage associated with investment activities (Assets acquisition). It occurs anytime when firm has fixed costs that must be met regardless of volume in operating leverage, when fixed cost remains constant the percentage change in profit accompanying a change in volume is greater than the percentage change in volume. A firm with high operating leverage will have a relatively high fixed cost in comparison with a firm with low operating leverage. If a company employs operating leverage then its operating profit will increase at a faster rate for any given increase in sale. However, if sales fall the firm with high operating leverage will suffer more loss than the firm with the no or low operating leverage. Therefore operating leverage called 2-edged sword. It can be ascertained by the help of following formula Operating leverage = Contribution EBIT

Degree of operating leverage A high degree of operating leverage shows the greater impact on the operating income of the company due to variability in its sales, which is also responsible for variability in its operating profit. It is an important determinant of operation risk.It can be measured by % change in E.B.I.T. due to percentage change in sale. Degree of operating leverage = % Change in EBIT % Change in sales

Favorable leverage is said to occur when the firm earns more on the assets purchased with the funds than their opportunity use. It is unfavorable when firm doesnt earn equivalent to the cost of funds

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Composite Leverage or Combined Leverage or Total Leverage

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When financial leverage is combined with operating leverage the effect of change in revenues or earning per share is magnified. Composite/combined leverage refers to extent to which firm has fixed operating cost as well as financial cost. The degree of operating and financial leverage can be combined to show the effect of total leverage on E.P.S associated with given change in sales. Operating and financial leverage together cause wide fluctuation in E.P.S. For given change in sales if company employs high level of operating leverage and financial leverage even a small change in level of sales will have a dramatic effects on earning per share It can be calculated using the following formula;Combined leverage Significance A proper combination of both financial & operating leverage is blessing for the firms growth, while improper combination of both leverages may prove curse for the growth of company. So company should try to achieve balance of both leverages. = Contribution PBT

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Chapt er

INTRODUCTION

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Financial leverage is primarily concerned with the financial activities, which involve raising of funds from the sources for which a firm has to bear a fixed charge. These sources include long-term debts (e.g. bonds, debenture etc.) and preference share capital. Long-term debt capital carries a contractual fixed rate of interest and its payment is obligatory. As the debt providers have prior claim on income and assets of a firm over equity shareholders, their rate of interest is generally lower than the expected return on equity shareholders. Further interest on debt capital is a tax-deductible expense. These two phenomenons lead to the magnification of rate of return on equity capital and hence EPS. It goes without saying that the effects of changes in EBIT on the earnings per share are shown by the financial leverage. Financial leverage can best be described as the ability of a firm to use fixed financial charges to magnify the effect of changes in EBIT on the firms earnings per share. Financial leverage helps to know the responsiveness of the earnings per share (EPS) to the changes in earnings before interest and taxes (EBIT). It involves the use of funds obtained at a fixed cost in the hope of increasing the return to common shareholders. Financial leverage refers to the extent to which a firm has fixed financing cost arising from the use of debt capital. The firm with financial leverage will have a relatively high fixed financing cost compared to the firm with a low financial leverage. Financial leverage will occur when a company employs the fixed cost of funds, debt or preference share capital with a view to maximizing earnings available to equity shareholders by way of a higher income than the cost of funds. These techniques also called trading on equity. Financial leverage influences the financial risk of a company. If the earnings are insufficient for covering the fixed cost burden then the company has to face financial risk. As long as the companys earnings are greater than its fixed costs, It will enjoy a favorable financial leverage position and a make use of the earnings available to equity shareholders. Financial leverage can be measured with the help of the following formula: Financial leverage = EBIT / PBT

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Financial leverage will have a favorable impact on earnings per share and return on equity only when the firms return on investment exceeds the interest cost of debt. The impact will be unfavorable if the return on investment is less than the interest cost. The financial leverage measures the relationship between the EBIT and EPS and it reflects the effects of change in EBIT on the level of EPS. The financial leverage measures the responsiveness of the EPS to a change in EBIT and is defined as a % change in EPS divided by the % change in EBIT. Symbolically, Financial leverage = % Change in EPS / % Change in EBIT

The behaviors of DFL reveals that :1. 2.

3.

Each level of EBIT has distinct DFL. DFL is undefined at financial BEP. DFL will be negative when the EBIT level goes below the financial BEP. DFL will be positive for all values of EBIT that are above the financial Break even

4. (1).

point. This will however starts to decline as EBIT increases and will reach to a limit of one By assembling DFL one can understand the impact of a change in EBIT on the EPS of the company. It helps in assessing the financial risk of the company. It also explains the impact of market risk on financial risk.Greater the financial leverage, wider the fluctuation in return on equity and greater is the financial risk. IMPLICATIONS 1. High operating leverage combined with high financial leverage will consolidate

risky situation.
2.

Normal situation is one should be high and another should be low. If a company

has a low operating leverage, financial leverage can be higher and vice versa. 3. Ideal situation is when both the leverages are low.

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APPLICATION AND UTILITY OF LEVERAGE To understand the applications and utility of leverage in financial analysis it is important to understand the behavior of degree of operating leverage. It is to be noted that: 1. 2.
3.

For each level of output there is a distinct DOL. At BEP, DOL is undefined. If quantity is less than BEP, the DOL will be negative.(but there is no such direct If quantity is greater than BEP the DOL will be positive (but there is no such direct

relationship that less quantity leads to decrease in EBIT no such connection to be formed.) 4. relationship. DOL may start declining after ancreasing quantity beyond certain level and will limit to one (1). 5. A large DOL indicates that small fluctuation in the level of operation will produce large fluctuation in the level of operating income.

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Chapte r

PROFITABILITY

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Profitability is the ability of a company to generate profit. It is an overall measure, which depicts the efficiency and effectiveness at which the company has been operating. It indicates the overall result of the management's decision. Further, it reflects how best the company has put to use its scarce resources to generate a higher rate of profitability. Profitability is also taken as a criterion to measure and assess the relative efficiency of the management of a company to generate profit. A company, which generates a higher rate of profitability, is considered to be more efficient than other companies. Profitability is represented by the return on investment (ROI). It is the overall measure of a company's performance. According to Du-Pont control chart, variability in profitability is explained by taking into consideration its two components viz profit margin and asset turnover. As per this part, an overall control is exercised on the various resources of a company and necessary corrective action for further improvement in profitability is suggested. Profitability is ascertained from the income statement. The various components of an income statement and their inter-relationship embrace the profitability status of the firm. This can be shown from the following table INCOME STATEMENT Total Revenue = EBIT Interest on Debt Tax Preference Dividend = Profit before Tax = Profit after tax = Equity Earnings EBIT = Total revenue Total cost} Total cost = V+F Now total revenue = Quantity produced * unit selling price Therefore EBIT = Q * S Q * V F = Q (S - V) F Where:20

Variable cost Fixed Expenses

Q = Quantity produced and sold. S = Unit selling price V = Variable cost per unit F = Total fixed cost. EPS = PAT / N and EPS per equity = PAT DP / N Now PAT = EBIT I Tax on (EBIT - I) Therefore EPS for equity = [ (EBIT I )(1 - T) DP] / N Thus we can see that EBIT is related S, Q.V, and F and EPS is related to EBIT. This relationship can be used to understand movement in related items with reference movement in certain items. The relationship between quantity of production sold and earning capacity established operating leverage. The operating hints that when we change the level of operation it results in the change In earning capacity. The relationship between organizations total earning capacity and earning by the individual investors establish financial leverage. The financial leverage hints that when earning capacity changes it results in the corresponding change the earning by the individual investor. The relationship between the two leverage brings out the total leverage. The total leverage hints that when there is a change in level of operation it results in the corresponding change in the earnings by the individual investor. Thus this relationship can be shown as:

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QUANTITY Levels of operation

EBIT Earning capacity

EPS Earnings per share

Op. leverage

Fin. leverage

Total Leverage Ref: Lecture Notes on Financial Management by JCS Ravikant S Wawge, DBAR, SSGMCE, Shegaon

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Chapte r

Capital Structure One of the tough challenges that firms face is the choice of capital structure. Capital structure decision is important because it affects the financial performance of the firm. The
2 23

capital structure of a firm is defined as specific mix of debt and equity that a firm uses to finance its operations. Firms can choose among many alternative capital structures. For example, firms can issue a large amount of debt or very little debt. Firms have options of arranging lease financing, use warrants, issue convertible bonds, sign forward contracts or trade bond swaps. They can also issue dozens of distinct securities in countless combinations

Capital Structure theories Mainly there are two different views regarding capital structure of the firm. One view states that capital structure is relevant for any given firm. It emphasizes the determination of the optimum capital structure of a firm at which over all concept of capital for a firm is minimum they are increasing the total value of the firm. The second view states that there is no optimal capital structure for any firm. The market value of the firm is same for any capital structure (any debt/equity ratio) thus capital structure of the firm is irrelevant. There are four theories /approaches of expanding the relationship between capital structure and cost of capital and value of the firm. These are as follows1. 2. 3. 4. NI approach NOI approach MM approach Traditional approach.

Assumptions 1. 2. 3. 4. 5. The firm employs only two types of capital ie debt and equity. there are also no There is no corporate tax. This assumption has been removed later. The firm pays 100 % of its earning as dividend. Thus there is no returned. The firms total assets are given and they do not change, in other words the The firms total financing remain constant. the firm can change its capital structure

preference share.

investment decisions are assumed constants. either by redeeming the debentures by issue of share or by raising debt and reduce equity share capital 6. The operating earning (EBIT) is not expanded to grow.
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7. risk. 8.

The business risk remain constant is independent of capital structure and financing All investors are assumed to have same subjectivity of distribution of future

expanded EBIT of firm. Perpetual life of the firm. Uses of some symbols in our analysis of capital structure theories S B V I NI Ko Ke = = = = = = = Total market value of equity debt. Total market value of debt. Total market value of firm. Interest payment. Net income available on equity share. Overall cost of capital. Equity capitalization rate.

NI Approach Durand has suggested NI Approach. According to this approach capital structure decision is relevant to the valuation of the firm. In other words a change in the capital structure causes a corresponding change in the overall cost of capital as well as the total value of the firm. According to this approach, a higher debt content in the capital structure (ie high financial leverage) will result in decline in the overall or WACC this will cause increase in the value of equity shares of the company, and vice versa.

This approach is based on following assumptions: 1. 2. The cost of debt is less than cost of equity capitalization rate. The debt content does not change he risk perception of the investor.
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3.

There is no corporate tax.

On the basis of NI Approach Total value of the firm as V=S+B Where S = Ni/Ke.

NOI Approach Durand has also suggested this approach. This approach is just opposite of NI Approach. According do this approach the market value of firm is not at all affected by capital structure changes. The market value of the firm ascertained by capitalizing the NOI at overall cost of capital (Ko) which is considered to be constant. The market value of equity is ascertained by deducting the market value of debt from market value of firm. This approach is based on following assumptions1.

The overall cost of capital (Ko) remains constant for all degrees of debt equity of The marked capitalization value of the firm as a whole and the spilt between debt The use of debt having low cost increase in equity capitalization rate (Ke) Thus the There is no corporate tax.

leverage. 2.
3.

and equity is no relevant. advantage of debt is set off exactly by increase in capitalization rate (Ke). 4.

The following formula can ascertain according to this approach the value of the firm:V = EBIT/Ko And value of equity (S) = V-B

M-M Approach

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This is Modigliani and Miller approach. According to this approach the value of the firm is independence of its capital structure however there is basic difference between the two. The NOI approach is purely definitional and conceptual. It does not provide operational justification for relevance of capital structure in valuation of the firm. While MM approach support the NOI approach providing behavioral justification for irrelevance of total valuation and cost of capital of the firm from its capital structure, in other words MM approach maintaining that the average cost of capital does not change with the change in the debt weighed equity mix or capital structure of the firm.

Basic Propositions Following are the basic propositions of the MM Approach. The overall cost of capital (Ko) and value of firm (V) are constant for all level of

debt equity mix. The total market value of the firm is given by capitalizing expected net operating income (NOI) by the rate appropriate for risk classes.
The cost of equity (Ke) is equal to capitalization rate of pure equity steam plus premium of

financial risk. The financial risk increases with more debt content in capital structure, as a result cost of equity (Ke) increase in manner to off set greatly the use of less expensive source of funds represented by debt. The cost of rate of investment purpose is completely independent of the way in

which investment is financed. Assumptions 1. Investors are rational. They evaluate risk and return of each investment proposal rationally before investing. They are able to maximize their return at minimum cost. 2. Capital market is 100% competitive. 3. The firm pay no any income tax thus loses its tax advantages. 4. Expected earnings are definite and constant so future earning of firm are known and definite. Traditional Approach
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The traditional approach also known as intermediate approach is a compromise between two extreme of NI & NOI approach. According to this approach the value of firm can be increase initially or using more debt as debt is cheaper source of fund than equity. Thus optimal capital structure can be reached by debt and equity mix. Beyond the certain level equity increases because increase in debt (financial leverage) increases the financial risk of equity shareholder. The advantage of cheaper debt at this point capital structure is offset by increase cost of equity. After there comes a stage when the increase cost of equity cannot be offset by the advantage of the low cost debt. Thus overall cost of capital (Ko) according to this certain point remain more or less constant. According to above discussion it can conclude that the traditional theory support that the cost of capital and value of the firm are dependent upon capital structure of firm.

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Chapte r

Earning per share is the reward of an investor for making his investment and it is the best measure of performance of a firm. "The bottom line of income statement is an indictor of
2 29

performance of "think-tank" or "top-level" of the company. Ordinary investors lacking indepth knowledge and inside information mainly depend on EPS to make their investment decision. So it should be the objective of financial management to maximize the EPS from the viewpoint of both the investor and investee. Again the objective of financial management is maximization of value measure in terms of market price of equity share of a corporate entity. Given the objective of the firm to maximize the value of equity share, a firm should select a desired combination of financing mix or capital structure to achieve the goal. Theoretically, optimum capital structure implies that combination of debt and equity at which overall cost of capital is Minimum and value of the firms is Maximum. The prevailing view is that the value maximization criterion as a criterion of optimal capital structure is measured in terms of market price of equity share i.e. the value of the firms is maximized when the market price of equity share is maximized. So according to this view maximization of market price of equity share leading to the maximization of value of the firm is a criterion of optimum capital structure. In this context an example of a firm may be drawn which is running with optimum debt equity combination. Now due to the influence of some external factors i.e. sudden political change or something like this the market price of its equity shares started decreasing and as a result value of the firm went on decreasing. Due to the downward movement of the value of firm. Its capital structure will not become optimum further and will need restructuring to become optimum again. In practice, change in market price of equity share may occur very rapidly and hence it is very difficult to change the composition of capital structure accordingly. Capital structure decision is an internal decision of the firm. So increase in market price of equity share due to the influence of external factors leading to the maximization of the value of the firm should not be a criterion of optimum capital structure. Rather EPS may be a better substitute, as a criterion of value maximizing EPS should be the main slogan or mul-mantra of a firm in order to realize the objective of maintaining an appropriate capital structure.

Dividend policy decision Dividend decision is the major decision area of financial management. A firm is to decide what portion of earning would be distributed to the shareholders by way of dividend and
3 30

what portion of the same would be retained in the firm for its future growth. Both dividend and retention are desirable but they are conflicting are desirable but they are conflicting to each other. A finance manager should be able to formulate a suitable dividend policy, which will satisfy the shareholder without hampering future progress of the firm. It is common that higher the earnings, higher will be the amount of dividend and vice-versa. The firms with a history of taking on good project and the potential for more good projects in the future acquire much more control over their dividend policy. In particular, these firms can pay much less in dividend than they have available as cash profits and hold on to the surplus cash because the shareholder trusts them to reinvest these profits wisely In contrast, shareholders of firms having history of poor projects wish to have less retention of profits because of the fear that the profits will be invested in poor projects. The dividend policy of a firm affects the market price of the share. In general, the stability of dividend seems to increase the marker price of the share. However the dividend policy may affect the market price indirectly by affecting the investors expectations of growth and risk associated with the stream of dividend. The dividend policy of a firm determines the amount of retained earnings, which can be reinvested by the firm to ultimately result in growth of the firm and subsequent increase in dividends in later years.

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Chapte r

3 32

Use of fixed cost bearing capital in the capital structure is termed as financial leverage. Such capital especially debt is cheaper than the equity as the cost of debt is generally lower than that of equity and a tax advantage is attached with its use. In these circumstances, if total capital employed remains constant, increase in the financial leverage or use of debt implies that relatively cheaper source of fund replaces a source of fund having relatively higher cost. Now if a company follows this practice its net return will be attributable to the low base of equity shareholders (lower base being due to the increase in financial leverage). As a result it will lead to the magnification of return to the equity and thus EPS. But one should keep in mind that the same holds well in favorable business environment where the company is able to earn a rate of return on investment being higher than its cost of financing. So long this situation continues the return on equity or EPS will increase with the increase in financial leverage. The excess of the rate of return on investment over the fixed rate of interest and preference dividend will go to the equity shareholders. However during the period adversity when the company is not in a position to earn greater (at least equal) rate of return than the cost of debt and preference share, its return on equity and EPS, instead of increase, will actually decrease, with the increase in the financial leverage. As higher earnings would result in higher dividend, the above discussion follows that increase in use of financial leverage increases the Earning per share and thus Dividend per share. Conversely decrease in the Earning and Dividend per Share. Keeping this theoretical background in view, the efforts are made to its applicability in it real corporate practice. 1. FIXED ASSETS Fixed assets are those assets owned by a company that contributes to the company's income but are not consumed in the income generating process and are not held for cash conversion purposes. Fixed assets are tangible items usually requiring significant cash outlay and lasting for an extended period of time. Buildings, real estate, equipment and furniture are good examples of fixed assets. Fixed assets are sometimes collectively referred to as 'plant'.Generally intangible long-term assets,
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such as trademarks and patents, are not categorized as fixed assets but more specifically referred to as 'fixed intangible assets' 2. CURRENT ASSETS It's the current assets that provide the fuel for the engine of growth in a company. Inventory is a good example of the importance of current assets. Inventory represents assets being held by the company for sale, and the speed of the movement of the inventory through the company is of significant importance to the operating success of the company. 3.DEBT/EQUITY RATIO

Indicates the proportion of equity and debt that the company is using to finance its assets. Sometimes investors only use long term debt instead of total liabilities for a more stringent test.A ratio greater than one means assets are mainly financed with debt, less than one means equity provides a majority of the financing. If the ratio is high (financed more with debt) then the company is in a risky position especially if interest rates are on the rise. Debt vs. Equity -- Advantages and Disadvantages In order to expand, it is necessary for business owners to tap financial resources. Business owners can utilize a variety of financing resources, initially broken into two categories, debt and equity. "Debt" involves borrowing money to be repaid, plus interest. "Equity" involves raising money by selling interests in the company. The following table discusses the advantages and disadvantages of debt financing as compared to equity financing. ADVANTAGES OF DEBT COMPARED TO EQUITY Because the lender does not have a claim to equity in the business, debt does not dilute the owner's ownership interest in the company. A lender is entitled only to repayment of the agreed-upon principal of the loan plus

interest, and has no direct claim on future profits of the business. If the company is
34

successful, the owners reap a larger portion of the rewards than they would if they had sold stock in the company to investors in order to finance the growth. Except in the case of variable rate loans, principal and interest obligations are Interest on the debt can be deducted on the company's tax return, lowering the Raising debt capital is less complicated because the company is not required to The company is not required to send periodic mailings to large numbers of known amounts which can be forecasted and planned for. actual cost of the loan to the company. comply with state and federal securities laws and regulations. investors, hold periodic meetings of shareholders, and seek the vote of shareholders before taking certain actions. DISADVANTAGES OF DEBT COMPARED TO EQUITY Unlike equity, debt must at some point be repaid. Interest is a fixed cost which raises the company's break-even point. High interest

costs during difficult financial periods can increase the risk of insolvency. Companies that are too highly leveraged (that have large amounts of debt as compared to equity) often find it difficult to grow because of the high cost of servicing the debt. Cash flow is required for both principal and interest payments and must be budgeted for. Most loans are not repayable in varying amounts over time based on the business cycles of the company. Debt instruments often contain restrictions on the company's activities, preventing management from pursuing alternative financing options and non-core business opportunities. carry. The company is usually required to pledge assets of the company to the lender as collateral, and owners of the company are in some cases required to personally guarantee repayment of the loan. The larger a company's debt-equity ratio, the more risky the company is considered by lenders and investors. Accordingly, a business is limited as to the amount of debt it can

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4.FIXED-ASSET TURNOVER RATIO The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues.

The fixed-asset turnover ratio is calculated as:

This ratio is often used as a measure in manufacturing industries, where major purchases are made for PP&E to help increase output. When companies make these large purchases, prudent investors watch this ratio in following years to see how effective the investment in the fixed assets was. 5. COST OF EQUITY AND COST OF DEBT When the company issues debt, for example in the form of bonds, it to pay bondholders the interest. This interest is tax deductible. On the other hand, when the company issues equity, i.e. stocks, it pays dividends. This dividend is taxed as corporate income. Because of the ability of debt to escape taxation vis-a-vis equity, cost of debt is lower than cost of equity. This is called a debt tax shield. 6. DIVIDENT PAYOUT RATIO The dividend payout ratio is the percentage of a company's annual earnings paid out as cash dividends. Dividend payout ratios vary by industry and are affected by market conditions and tax law. Moreover, both a low dividend payout ratio and a high dividend payout ratio can have good or bad implications. A low dividend payout ratio can indicate a fast-growing company whose shareholders willingly forego cash dividends, because the company uses the extra money to generate higher returns and, in turn, a high stock price.
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But a low dividend payout ratio can also point to a company that simply can't afford to pay dividends. Similarly, a high dividend payout ratio can indicate a blue-chip that pays high dividends and whose stock price is temporarily depressed. But a high dividend payout ratio can also point to a mature company with few growth opportunities. 7.RETENTION RATIO
Percentage of the earnings of a firm that are not paid out to stockholders (shareholders) as dividends but are either reinvested in the firm or are kept as reserve for specified purposes (such as to pay off a debt or purchase a capital asset).

Calculated as:

8.FIRM VALUE Enterprise value, or the value of capital employed, corresponds to the market value of the enterprises machines and commercial activities. Enterprise value is equal to the market value of the shareholders equity (stock market capitalisation if a company is quoted) plus the market value of the net financial debt. Also called firm value. 9.GROSS PROFIT RATIO Gross Profit Ratio shows the relationship between Gross Profit of the concern and its Net Sales. Gross Profit Ratio can be calculated in the following manner: Gross Profit Ratio = Gross Profit/Net Sales x 100 Where Gross Profit = Net Sales Cost of Goods Sold Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses Closing Stock And Net Sales = Total Sales Sales Return Objective and Significance: Gross Profit Ratio provides guidelines to the concern whether it is earning sufficient profit to cover administration and marketing expenses and is able to cover its fixed expenses. The gross profit ratio of current year is compared to previous years ratios or it is compared with the ratios of the other concerns. The minor change in the ratio from year to year may be ignored but in case there is big change, it must be investigated. This investigation will be helpful to know about any departure from
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the standard mark-up and would indicate losses on account of theft, damage, bad stock system, bad sales policies and other such reasons. However it is desirable that this ratio must be high and steady because any fall in it would put the management in difficulty in the realisation of fixed expenses of the business. 10.NET PROFIT RATIO Net Profit Ratio shows the relationship between Net Profit of the concern and Its Net Sales. Net Profit Ratio can be calculated in the following manner: Net Profit Ratio = Net Profit/Net Sales x 100 Where Net Profit = Gross Profit Selling and Distribution Expenses Office and Administration Expenses Financial Expenses Non Operating Expenses + Non Operating Incomes. And Net Sales = Total Sales Sales Return Objective and Significance: In order to work out overall efficiency of the concern Net Profit ratio is calculated. This ratio is helpful to determine the operational ability of the concern. While comparing the ratio to previous years ratios, the increment shows the efficiency of the concern.

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PHARMA INDUSTRY

39

INDIAN PHARMA INDUSTRY The pharmaceutical industry in India is among the most highly organized sectors. This industry plays an important role in promoting and sustaining development in the field of global medicine. Due to the presence of low cost manufacturing facilities, educated and skilled manpower and cheap labor force among others, the industry is set to scale new heights in the fields of production, development, manufacturing and research. In 2008, the domestic pharma market in India was expected to be US$ 10.76 billion and this is likely to increase at a compound annual growth rate of 9.9 per cent until 2010 and subsequently at 9.5 per cent till the year 2015. Industry Trends

The pharma industry generally grows at about 1.5-1.6 times the Gross Domestic Product growth. Globally, India ranks third in terms of manufacturing pharma products by volume

The Indian pharmaceutical industry is expected to grow at a rate of 9.9 % till 2010 and after that 9.5 % till 2015 In 2007-08, India exported drugs worth US$7.2 billion in to the US and Europe followed by Central and Eastern Europe, Africa and Latin America The Indian vaccine market which was worth US$665 million in 2007-08 is growing at a rate of more than 20% The retail pharmaceutical market in India is expected to cross US$ 12-13 billion by 2012 The Indian drug and pharmaceuticals segment received foreign direct investment to the tune of US$ 1.43 billion from April 2000 to December 2008

Challenges Every industry has its own sets of advantages and disadvantages under which they have to work; the pharmaceutical industry is no exception to this. Some of the challenges the industry faces are:

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Regulatory obstacles Lack of proper infrastructure Lack of qualified professionals Expensive research equipments Lack of academic collaboration Underdeveloped molecular discovery program Divide between the industry and study curriculum Government InitiativesThe government of India has undertaken several including policy initiatives and tax breaks for the growth of the pharmaceutical business in India. Some of the measures adopted are:

Pharmaceutical units are eligible for weighted tax reduction at 150% for the research and development expenditure obtained.

Two new schemes namely, New Millennium Indian Technology Leadership Initiative and the Drugs and Pharmaceuticals Research Program have been launched by the Government.

The Government is contemplating the creation of SRV or special purpose vehicles with an insurance cover to be used for funding new drug research The Department of Pharmaceuticals is mulling the creation of drug research facilities which can be used by private companies for research work on rent

PharmaExport In the recent years, despite the slowdown witnessed in the global economy, exports from the pharmaceutical industry in India have shown good buoyancy in growth. Export has become an important driving force for growth in this industry with more than 50 % revenue coming from the overseas markets. For the financial year 2008-09 the export of drugs is estimated to be $8.25 billion as per the Pharmaceutical Export Council of India, which is an organization, set up by the Government of India. A survey undertaken by FICCI, the oldest industry chamber in India has predicted 16% growth in the export of India's pharmaceutical growth during 2009-2010.
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Key players in Indian Pharmaceutical Industry There are several national and international pharmaceutical companies that operate in India. Most of the country's requirements for pharmaceutical products are met by these companies. Some of them are briefly described below: Ranbaxy Laboratories Limited is the biggest pharmaceutical manufacturing company in India. The company is ranked at the 8th position among the global generic pharmaceutical companies and has presence in 48 countries including world class manufacturing facilities in 10 countries and serves to customers from over 125 countries. Ranbaxy Laboratories 2009-2010 Q3 Net Profit Results showed a profit of Rs 116.6 crore as compared to Rs 394.5 crore deficit, recorded during the corresponding period last fiscal. Dr. Reddy's Laboratories manufactures and markets a wide range of pharmaceuticals both in India and abroad. The company has 60 active pharmaceutical ingredients to manufacture drugs, critical care products, diagnostic kits and biotechnology products. The company has 6 FDA plants that produce active pharma ingredients and 7 FDA inspected and ISO 9001 and ISO 14001 certified plants. Dr. Reddy's Q1 FY10 result shows the revenues of the company at Rs. 18,189 million which is up by 21%. During this quarter the company introduced 24 new generic products, applied for 22 new generic product registrations and filed 4 DMFs. Cipla is an Indian pharmaceutical company renowned for the manufacture of low cost anti AIDS drugs. The company's product range comprises of anthelmintics, oncology, antibacterials, cardiovascular drugs, antibiotics, nutritional supplements, anti-ulcerants, antiasthmatics and corticosteroids. Cipla also offers other services like quality control, engineering, project appraisal, plant supply, consulting, commissioning and know-how transfer, support. For the financial year 2008-09 the company registered an increase of 22% in sales and other income over the previous year. Nicholas Piramal is the second largest pharmaceutical healthcare company in India. The brands manufactured by the company include Gardenal, Ismo, Stemetil, Rejoint, Supradyn, Phensedyl and Haemaccel. Nicholas Piramal has entered into join ventures and alliances with several international corporations like Cheissi, Italy; IVAX Corp; UK, F. HoffmannLa Roche Ltd., Allergan Inc., USA etc.
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Glaxo Smithkline (GSK) is a United Kingdom based pharma company; it is the world's second largest pharmaceutical company. The company's portfolio of pharma products consist of central nervous system, respiratory, oncology, vaccines, anti-infectives and gastro-intestinal/metabolic products among others. On November 2009, the FDA had announced that the H1N1 vaccine manufactured by GSK would join the list of the four vaccines approved. Zydus Cadila also known as Cadila Healthcare is an Indian pharmaceutical company located in Gujarat. The company's 1QFY2010 results show the net sales at Rs880.3cr which is higher than the estimated Rs773cr. The net profit was Rs124.8cr which was increase of 39%; the increase was on account of higher sales and improvement in the OPM.

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DR.REDDYS

44

DR.REDDYS Established in 1984, Dr. Reddys Laboratories is an emerging global pharmaceutical company. As a fully integrated pharmaceutical company, it provides affordable and innovative medicines through three core businesses: Pharmaceutical Services and Active Ingredients, comprising Active Pharmaceuticals and Custom Pharmaceuticals businesses; Global Generics, which includes branded and unbranded generics; and Proprietary Products, which includes New Chemical Entities (NCEs), Differentiated Formulations, and Generic Biopharmaceuticals. Its products are marketed globally, with a focus on India, US, Europe and Russia. Dr. Reddys conducts NCE research in the areas of metabolic disorders, cardiovascular and anti inflamation. Its strong portfolio of businesses, geographies and products gives an edge in an increasingly competitive global market and allows to provide affordable medication to people across the world, regardless of geographic and socio-economic barriers. Dr. Reddy's offers an unparalleled portfolio to customers, who include innovators and generic formulators worldwide. With a strong product portfolio of more than 140 products, including niches like oncology and hormones, and our first in, last out approach, it is little wonder we are today the third ranked API player globally. Our goal is always to enable our customers to be the first to launch a generic product and to provide value added services to help them remain competitive and profitable for the entire life cycle of the product. We have built the capabilities to consistently deliver on this promise in scale and across the largest product range. A highly skilled global team focuses on timely delivery of products, product development, technology leadership, cost competitiveness, the highest levels of customer service, and full compliance with regulatory and quality requirements. Our expertise in organic synthesis and process development complemented by a controlled supply chain enables us to provide our customers with high quality Bulk Actives at competitive prices. They are aggressively building their product portfolio to cater to generic players in the emerging markets and generic and patent challenge formulators in regulated markets.
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Its operations capabilities are among its core strengths, with six USFDA approved plants in India, one in Mexico and our latest addition, a USFDA inspected plant in Mirfield, UK, having a total capacity of 3300KL. Its API business is supported by our technologically advanced Product Development infrastructure, which identifies new products and is engaged every step of the way, from the conceptual stage to delivery of drugs to the market place. The Product Delivery Teams, the Centres of Excellence and IP teams help create value through Intellectual Property and proactive patenting; early development work on certain promising molecules; breakthrough product delivery; and by delivering cost leadership in API. All the above advantages make Dr. Reddy's API, an ideal partner in your product development efforts. Dr. Reddys Board of Directors comprises eminent individuals from diverse fields. The Board acts with autonomy and independence in exercising strategic supervision,discharging its fiduciary responsibilities, and in ensuring that the management observes the highest standards of ethics, transparency and disclosure. Our directors are experts in the diverse fields of medicine, chemistry and medical research human resource development, business strategy, finance, and economics. They review all significant business decisions, including strategic and regulatory matters. Every member of the Board, including the non-executive directors, has full access to any information related to our company. Committees appointed by the Board focus on specific areas, take decisions within the authority delegated to them and make specific recommendations to the Board on matters in their areas or purview.

SWOT ANALYSIS
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Strengths:

Wholly owned subsidiaries in US and Europe Joint ventures in China and South Africa Markets pharmaceutical products in 115 countries Partnerships with global pharmaceutical companies like Novartis, NOVO Nordisk, etc. Strong product portfolio Manufacture and market over 250 medicines targeting a wide range of therapies Wide range of anti-cancer drugs developed Over 100 APIs developed Six New Chemical Entities(NCE Low cost base Contributes to companys high profit margin of around 34% of sales Partnerships with key players in the market keeps its cost base down Research Driven & Global Talent Expertise in developing innovative product formulations 6120 employees worldwide including 951 scientists in which 323 are dedicated towards new drug discovery research.

Weaknesses: High amount of revenues from overseas India - a rich source of Active Pharmaceutical Ingredients (APIs), hence major source of revenue is exports of APIs. May loose out to western world, especially Europe, where currency is much more stable than the Indian Rupee Over-reliance on partnerships In order to compete effectively in global markets, strategic partnerships required to develop products. Lack of resources similar to US and Europe based competitors to develop a drug to marketing stage Generic drugs smallest focus
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Smallest portion of revenues from generics at around 20% Lack of patent legislation in India harms sales of its products

Opportunities: Take a drug all the way to market Take a molecule from its pipeline all the way to the market place cost-effectively market Buy back of the integrated drug development company from ICICI Ventures and Citigroup Domestic Generic drugs market In another 4-6 years, many product patents obtained after the 2004 legislation will go off providing an opportunity to the company increase its domestic footprint in Generics Threats:.

Needs to gain FDA approval for all sources and products. Products have to pass strict FDA trials before going to market, which can be costly and time consuming. This may delay the company entry to particular markets which affects revenue

Competition from US and European Companies Based in lucrative markets e.g. Novartis, Merck & Co Revenues running into billions which dwarfs Reddys annual turnover Litigation charges Reddys lost the case against Pfizer for the use of generic form of Norvasc drug. Legal cost $10m and also loss of market opportunity. Heightened concerns about profitability of German generics business of Betapharm

All amounts in Indian Rs.Million 48

Year 2008-09 2007-08 2006-07 2005-06 2004-05

Sales 68,326 49,700 65,125 24,605 19,212

% sales 37.47 -23.68 164.68 21.91 -5

Contribution 14,013 10,426 17,716 4,274 1,502

EBIT 9036 6408 13925 2657 2,46

% EBIT 41.01 -53.98 723.98 577.62 -90.89

EBT 8064 5450 12399 2013 1,38

EPS 54.48 20.07 60.92 9.59 4.3

% EPS 171.45 -67.055 535.245 123.02 -67

YEAR FL DFL OL DOL CL DTL 2009 1.12 1.24 1.55 1.09 1.74 4.58 2008 1.17 1.24 1.63 2.28 1.9 2.83 2007 1.12 0.74 1.27 7.39 1.43 3.25 2006 1.32 0.22 1.61 26.36 2.12 5.61 2005 1.78 0.73 6.09 18.17 10.84 13.4

Interpretation from DFL From above, DFL

increased from 0.737 to 1.242 during 2004-09. In the year 2008-09 the variability of EPS is the highest. For every 1 unit change in operating profit EPS changes by 1.242 units. In the above case debt increased the variability in EPS as the DFL increased from 0.735 to 1.242. Thus the financial risk also steadily increased. Financial Risk is the added variability in earnings per share (EPS) plus the risk of possible insolvency that is induced by the use of financial leverage. Debt increases the probability of cash insolvency over an all-equity-financed firm. Interpretation from DOL The DOL increased from the year 2004-05 to 2005-06 and then decreased towards 200809.In the year 2008-09 for every 1 unit change in the sales there is 1.094 units change in the EBIT. The closer that a firm operates to its break-even point,the higher the absolute value of its DOL. Thus the sales are closer to break-even in the year 2005-06. Business Risk is the inherent uncertainty in the physical operations of the firm. Its impact is shown in the variability of the firms operating income (EBIT). DOL magnifies the variability of operating profits and, hence, business risk. In the above case business risk is highest in the year 2005-06
49

Interpretation from DTL The percentage change in a firms earnings per share (EPS) resulting from a 1 percent change in output (sales) is called DTL. Highest DTL is observed in the year 2004-05. For every 1 unit increase in sales EPS changed by 13.4.

All amounts in Indian Rs.Millio CoD YEAR 2009 2008 2007 2006 2005 FA 16,220 12,339 38,252 35,315 8,414 CA 25392 20753 33892 21,565 16,703 1.9 2 3.4 2.1 2.3 CoE 1.8 1.8 13.8 13.7 12.3 Dbt/Eq ty 0.9 1.12 0.9 0.7 0.41 DP Ratio 26.19 21.94 15.52 6.25 20.71

Fixed Assets and Current assets Dr.Reddys had maximum fixed assets and current assets in the year 2007.Fixed

assets drastically decreased during 2008 and slightly increased towards 2009.Current assets also showed a similar trend but the decrease in the current assets is slightly lower compared to fixed assets Cost of equity and Cost of debt From the table, the CoE is higher during the period 2004-07 and Dr.Reddys could

use debt as a cheaper source of capital. During 2007-09 the CoE decreased to 1.8 which is slightly lower than the CoD which is 1.9. Thus the company enjoyed debt as a cheaper source of capital during 2004-07. Debt/equity ratio In the above case the ratio is greater than 1 in 2007-08 i.e. 1.12. thus the company

financed its assets using debt and the company is In a risky position.

Year DP 2009 26.19 2008 21.94 2007 15.52 2006 6.25 2005 20.71

Retention ratio 71.35 79.43 82.97 93.9 78.82

EPS GPR NPR 19.71 54.48 18.48 20.07 14.11 13.21 60.92 12.58 13.57 31.55 9.59 29.01 4.3 10.26 10.08

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From the table: EPS is highest during 2008-09 and in the same year Dr.Reddys paid a large

percentage of the earnings to the shareholders. In the year 2006 though the company had highest EPS it paid very meager

percentage to the shareholders.it retained 93% of its earnings during that year.
YEAR 2009 2008 2007 2006 2005 From the table: Dbt/Eqt VALUE WACC 56151 16.8 0.9 65951 20.2 1.12 65612 15.6 0.9 0.7 0.41 52639 22440 12.7 8.3

The debt to equity ratio and value is the firm are highest during the year 2007-08,

thus Dr.Reddys could leverage and debt and increase the value of the firm. Also during the same year the WACC is low compared to previous years.

YEAR FA/CA FA/TA FATR 2009 0.64 0.39 1.86 2008 0.59 0.37 1.91 2007 1.13 0.53 1.97 2006 1.64 0.62 4.95 2005 0.5 0.33 3.31

Sales 68,326 49,700 65,125 24,605 19,212

BEP DOL 24267 1.09 19153 2.28 13935 7.39 9308 18.17 16065 26.36

From the table:

sales .

FATR decreased continuously from the year 2006-09.FATR is highest in the year

2006, which implies Dr.Reddys is able to use the investment on fixed assets to generate

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 sales.

An interestion correction berween DOL , sales and BEP can be observed from the

above table i.e. DOL is high in the year 2005 when the companys sales are closer to BEP

From the Fixed assets to total assets ratio it can be noticed that the percentage of

the fixed assets in the total assets of the company is highest in the year 2006 and same is reflected even in the FA/CA ratio for the year 2006.

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Fixed assets Vs Current assets

From the graph, the proportion of fixed assets increased from 2005-07 and then decreased.The total assets also followed the similar trend

EPS-DFL

From the graph, it can be noticed that as DFL increased slightly and EPS varied drastically irrespective of the DFL variations.
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RANBAXY

54

Ranbaxy Laboratories Limited (Ranbaxy), India's largest pharmaceutical company, is an integrated, research based, international pharmaceutical company, producing a wide range of quality, affordable generic medicines, trusted by healthcare professionals and patients across geographies. Ranbaxy today has a presence in 23 of the top 25 pharmaceutical markets of the world. The Company has a global footprint in 46 countries, world-class manufacturing facilities in 7 countries and serves customers in over 125 countries. In June 2008, Ranbaxy entered into an alliance with one of the largest Japanese innovator companies, Daiichi Sankyo Company Ltd., to create an innovator and generic pharmaceutical powerhouse. The combined entity now ranks among the top 20 pharmaceutical companies, globally. The transformational deal will place Ranbaxy in a higher growth trajectory and it will emerge stronger in terms of its global reach and in its capabilities in drug development and manufacturing. Mission&Vision Ranbaxy's mission is To become a Research-based International Pharmaceutical Company. The Company is driven by its vision to Achieve significant business in proprietary prescription products by 2012 with a strong presence in developed markets. Financials Ranbaxy was incorporated in 1961 and went public in 1973. For the year 2009, the Company recorded Global Sales of US $ 1519 Mn. The Company has a balanced mix of revenues from emerging and developed markets that contribute 54% and 39% respectively. In 2009, North America, the Company's largest market contributed sales of US $ 397 Mn, followed by Europe garnering US $ 269 Mn and Asia clocking sales of around US $ 441 Mn. Strategy Ranbaxy is focused on increasing the momentum in the generics business in its key markets through organic and inorganic growth routes. Growth is well spread across
55

geographies with focus on developed and emerging markets. It is the Companys constant endeavour to provide a wide basket of generic and innovator products, leveraging the unique Hybrid Business Model with Daiichi Sankyo. The Company will also increasingly focus in high growth potential segments like Vaccines and Biogenerics. These new areas will add significant depth to the existing product pipeline. R&D Ranbaxy views its R&D capabilities as a vital component of its business strategy that will provide a sustainable, long-term competitive advantage. Ranbaxy is among the few Indian pharmaceutical companies in India to have started its research program in the late 70's, in support of its global ambitions. A first-of-its-kind world class R&D centre was commissioned in 1994. Today, the Company has multi-disciplinary R&D centers at Gurgaon, in India, with dedicated facilities for generics research and innovative research. The R&D environment reflects its commitment to be a leader in the generics space offering value added formulations and development of NDA/ANDAs, based on its Novel Drug Delivery System (NDDS) research capability. Ranbaxys first significant international success using the NDDS technology platform came in September 1999, when the Company out-licensed its first once-a-day formulation to a multinational company. WorldwideOperations Global Pharma Companies are experiencing an ever changing landscape ripe with challenges and opportunities. In this challenging environment Ranbaxy is enhancing its reach leveraging its competitive advantages to become a top global player. Driven by innovation and speed to market we focus on delivering world-class generics at an affordable price. Our unwavering determination to achieve excellence leads us to new global benchmarks. Our people have consistently risen above all challenges maximized opportunities and positioned Ranbaxy as a leader in the global generics space. Ranbaxys global footprint extends to 46 countries embracing different locales and cultures to form a family of 50 nationalities with an intellectual pool of some of the best minds in the world

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RANBAXY

Year 2009 2008 2007 2006 2005

Sales 76117 74449 69822 61315 51880

% chg 2.24 6.63 13.87 18.186 -2.351

Contribution EBIT 11991 -2626 13580 9389 3727 10808 -12945 11397 7546 2282

% EBIT 183.49 -213.58 21.382 311.305 -76.21

EBT 10097 -15000 9985 6510 1611

EPS 7.05 -24.85 20.77 14.09 18.83

% EPS 128.37 -219.64 47.4 25.17 174

YEAR FL DFL OL DOL CL DTL 1.07 0.699 1.109 61.915 1.187 57.308 2009 0.86 1.03 0.202 -52.214 0.175 -33.128 2008 1.44 2.22 1.191 1.542 1.36 3.41745 2007 1.24 0.08 1.244 17.118 1.442 1.38403 2006 1.41 2.28 1.633 32.415 2.313 -74.011 2005

Interpretation from DFL From above we can notice that DFL has been continuously fluctuating. In the year 2004-05 the variability of EPS is the highest. For every 1 unit change in operating profit EPS changes by 2.283 units. Debt increases the probability of cash insolvency over an all-equity-financed firm. Debt also increased the variability in EPS as the DFL decreased from 2.283 to 0.699. Thus the financial risk also decreased. Interpretation from DOL The DOL has decreased from the year 2004-05 to 2007-08 and then increased towards 2008-09. In the year 2008-09 for every 1unit change in the sales there will be 61.915 units change in the EBIT. The closer that a firm operates to its break-even point, the higher is the absolute value of its DOL. Thus the sales are closer to break-even in the year 2008-09. Business Risk is the inherent uncertainty in the physical operations of the firm. Its impact is shown in the variability of the firms operating income (EBIT). DOL magnifies the variability of operating profits and, hence, business risk.in the above case business risk is highest in the year 2008-09.
57

Interpretation from DTL The percentage change in a firms earnings per share (EPS) resulting from a 1 percent change in output (sales) is called DPS.For 1 unit increase in sales EPS decreased by 74.011 unit.

YEAR FA CA CoD CO.E DBT/EQTY D/P Ratio 1.9 2009 51135 51020 1.8 0.68 2008 49607 58664 0.5 6.02 0.79 2007 42045 37333 4.9 12.5 0.89 60.06 2006 38953 35761 2.7 13.5 0.93 94.95 2005 20591 28707 2.8 8.9 0.06 170.28

Ranbaxy could find the debt capital cheaper than equity capital over the period of 6 years from 2004-09. It can be noted that the highest cost of debt is greater than the lowest cost of equity. Thus the company enjoyed debt as a cheaper source of capital. Ranbaxy had maximum fixed assets in 2009 and maximum current assets in the year 2008. Fixed assets and current assets of the company has been continuously increasing from 2005-2009. Debt to equity ratio of the company is less than 1. Hence the company financed most of its assets using equity
Year 2009 2008 2007 2006 2005 DP ratio 60.06 94.95 170.28 Retn Ratio GPR 100 10.52 2.07 -668.18 6.55 16.89 12.61 -259.14 2.22 NPR 11.72 -22.02 14.33 9.07 5.78 EPS 7.05 -24.85 20.77 14.09 18.83

From the table:

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Ranbaxy could not declare any dividents during 2008 and 2009 because of low profits and NPR is negative for the year 2007-08 after paying taxes which indicate loss.
Year 2009 2008 2007 2006 2005 DBT/EQTY 0.68 0.79 0.89 0.93 0.69 WACC 14.2 13 12.8 12 10.7 Value of the firm 74892 74155 62933 56788 35186

From the above table: Debt to equity ratio is highest during the year 2005-06 and highest WACC during 2006-07. The value of the firm is high in the year 2009, when the WACC and debt to equity ratio are low.
YEAR Sales BEP FA/CA FA/TA FATR DOL 61.915 76117 75090 1.00 0.50 2 2009 -52.214 74449 29255 0.85 0.46 2.14 1 2008 1.542 69822 11223 1.13 0.53 2.71 2007 17.118 61315 12035 0.11 0.52 2.73 2006 32.415 51880 20114 0.72 0.42 2.92 2005

From the table: FATR decreased from the year 2005-09.FATR is highest in the year 2005, which

implies Ranbaxy efficiently used the investment on fixed assets to generate sales in the year 2005. Ranbaxy operated close to BEP IN THE YEAR 2009 and this is indicated by

Highest DOL for the same year. FA/CA ratio and FA/TA ratio are highest for the year 2007 and hence it can be

inferred that Ranbaxy invested more in fixed assets during the corresponding year.

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Fixed assets Vs Current assets

From the graph, the proportion of current assets and also the total assets increased from 2005-08 and then slightly decreased during 2008-09 EPS -DFL

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The cash inflows in the year 2007-08 are not enough to meet the fixed costs and therefore equity share holders could not realize any earnings on the equity share.in the year 2006-07 the earnings per share are maximum i.e. in this year the firm has succesfully leveraged on the debt to increase the EPS compared to 2005-06

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AUROBINDO

Aurobindo Among the largest 'Vertically Integrated' pharmaceutical companies in India, Aurobindo has robust product portfolio spread over major product areas encompassing CVS, CNS, Anti-Retroviral, Antibiotics, Gastroenterologicals, Anti-Diabetics and Anti-Allergic with approved manufacturing facilities by USFDA, UKMHRA, WHO, MCC-SA, ANVISABrazil for both APIs & Formulations and has Global presence with own infrastructure, strategic alliances, subsidiaries & joint ventures. Aurobindos R & D strengths lie in developing intellectual property in non-infringing processes and resolving complex chemistry challenges. In the process, Aurobindo develops new drug delivery systems, dosage formulations and applies new technology for better processes. Aurobindo Pharma was born of a vision. Founded in 1986 by Mr. P.V. Ramprasad Reddy, Mr. K. Nithyananda Reddy and a small, highly committed group of professionals, the Company became a public venture in 1992. It commenced operations in 1988-1989 with a single unit manufacturing active pharmaceutical ingredients. Aurobindo Pharma went
62

public in 1995 by listing its shares in various stock exchanges in the country. Over the years, Aurobindo Pharma has evolved into a knowledge driven company. It is R&D focused, has a multiproduct portfolio with multi-country manufacturing facilities, and is becoming a marketing conglomerate across the world. Aurobindo Pharma created a name for itself in the manufacture of bulk actives, its area of core competence. After ensuring a firm foundation of cost effective production capabilities and a clutch of loyal customers, the company has entered the high value speciality generic formulations segment, with a global marketing network. Vision To become Asias leading and one among the top 15 generic pharma companies in the world by 2015. Mission To become the most valued pharma partner for the world pharma fraternity by continuously researching, developing & manufacturing a wide range of products complying to the highest regulatory standards Eminent Board Corporate governance, accountability and protecting shareholder interests have always guided the Company. There is an eminent board with considerable knowledge and experience in pharmaceutical and healthcare, administration, teaching, banking and consulting to guide and supervise the Company. They are adequately supported by a large team of professional managers Aurobindo has a global footprint Scope of operations is large in the U.S. and Europe with considerable presence in Latin America and emerging markets. Developmental activity is on-going in Japan and Australia. Domestic market remains an area of strength. Products The Company has one of the widest product portfolio of 300+ products Major therapeutic segments covered: Cardio vascular Neuroscience Anti-retroviral
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 Gastro-intestinal Anti-infective Pain management Osteoporosis Capacities There are large capacities for manufacturing formulations. This is supported by huge manufacturing capacity for intermediates and active ingredients. There is considerable head room even as formulations sales have been showing secular rise quarter-on-quarter. Performance track record For over two decades, Aurobindo has successfully sought and worked for leadership position in its product category. Product knowledge, manufacturing capabilities, sensitivity to the market and relationship with customers are the bedrock for the healthy momentum in the business. The Company has reported profits every year and is a consistent dividend paying company. More important, shareholder value has been increased while meeting customer needs. This high energy pharmaceutical company has a passion to succeed in the most competitive markets. Aurobindos commitment to create good health acts as a constant driver for improvement. The Company straddles key strategies from fermentation to formulation and is one of the most cost effective producers in the world. Vertically integrated manufacturing process and captive raw material source makes an impact in end product marketing. Ability to control quality and power to price has helped Aurobindo to offer quality pharmaceuticals at affordable prices. All projects are completed within budgeted time without cost overruns. Value creation and cost effectiveness start early at Aurobindo. There is an excitement across the organization driving the change to become a global resource in the pharmaceutical industry. In this journey, as in the past, care is taken to create value for all stakeholders, and in particular to the customers and investors.

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AUROBINDO Year 200809 200708 200607 200506 200405 Sales 28852.5 24092.8 19797.2 14722.1 11591.7 % sales 19.755 21.698 34.47 27 -13.563 Contribution 2945.1 4356 3217.3 246.6 1234 EBIT 2121.1 3610 2498.9 1535.4 829.1 % EBIT 41.243 44.463 62.752 85.188 -60.097 EBT 1570.4 3448.4 2311.6 929 429.2 EPS 23.9 54.21 42.98 13.22 6.91 % EPS -55.912 26.128 225.11 91.316 -73.963

YEAR 2009 2008 2007 2006 2005 2004

FL 1.35 1.047 1.081 1.653 1.932 1.186

DFL 1.355 0.585 3.587 1.072 1.23 1.386

OL 1.388 1.206 1.287 1.333 1.489 1.167

DOL 2.087 2.049 1.82 3.155 4.431 0.956

CL 1.875 1.263 1.392 2.203 2.875 1.384

DTL 1.45 0.28 0.34 1.97 0.28 0.65

Interpretation from DFL

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From above we can notice that DFL has been continuously fluctuating. In the year 200607 the variability of EPS is the highest. For every 1 unit change in operating profit EPS changes by 3.587 units. Debt increases the probability of cash insolvency over an all-equity-financed firm. Debt also increased the variability in EPS as the DFL increases.Thus financial risk is highest in the year 2006-07 Interpretation from DOL The DOL has decreased from the year 2004-05 to 2008-09 .in the year 2004-05 for every 1unit change in the sales there will be 4.434 units change in the EBIT. The closer that a firm operates to its break-even point, the higher is the absolute value of its DOL. Thus the sales are closer to break-even in the year 2004-05. Business Risk is the inherent uncertainty in the physical operations of the firm. Its impact is shown in the variability of the firms operating income (EBIT). DOL magnifies the variability of operating profits and, hence, business risk.in the above case business risk is highest in the year 2004-05 Interpretation from DTL The percentage change in a firms earnings per share (EPS) resulting from a 1 percent change in output (sales) is called DPS.For 1 unit increase in sales EPS decreased by unit.
CoD YEAR 2009 2008 2007 2006 2005 FA 11579 9507 13713 12334 11108 CA 19455 17219 18630 12560 8883 COE 1.40 1.14 0.83 0.81 0.41 DP ratio 22.02 7.06 6.81 13.37 6.16 debt/equit y 0.85 0.93 1.45 0.72 0.43

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 Aurobindo had maximum fixed assets in 2007 and maximum current assets in the year 2009. Fixed assets and current assets of the company has been continuously increasing from 2005-2007 and then decreased towards 2008. Debt to equity ratio of the company is greater than 1 during 2006-07. Hence the company financed most of its assets using debt in 2007.

year

DP ratio

Rtn ratio

GPR

NPR

EPS

2009 2008 2007 2006 2005

22.02 7.06 6.81 13.37 6.16

92.47 91.88 91.34 92.37 87.56

20.35 15.54 10.87 11.02 9.25

16.09 4.54 12.41 11.74 4.89

23.9 54.21 42.98 13.22 6.91

From the table: During the year 2007-08 EPS is highest but the company paid only 7% of the earnings to
Year Debt/equity 0.85 0.93 1.45 0.72 0.43 WACC Value of the firm

the shareholders and retained 92% of the earnings

2009 2008 2007 2006 2005

13.85 16.13 13.6 12.9 10.3

35139 30487 29728 21825 17086

From the table: The value of the firm has been continuously increasing while the debt to equity ratio increased till 2006-07 and decreased during 2007-08.
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YEAR 2009 2008 2007 2006 2005

FA/CA 0.60 0.55 0.74 0.98 1.25

FA/TA

FATR

Sales 102228.4 85377.6 88566.1 40097.2 34105.2

BEP

0.74 0.74 0.77 0.75 0.6

0.63 0.75 0.91 1.26 1.31

70022 59798 53380 12654 9487

DOL 2.087 2.049 1.82 3.155 4.431

From the table: FATR decreased from the year 2005-09.FATR is highest in the year 2005, which implies Aurobindo efficiently used the investment on fixed assets to generate sales in the year 2005.

From the graph, it can be noticed that as DFL decreased, EPS also decreased in the corresponding year and increased as the DFL increased. So, it can be said that DFL and EPS are positively correlated. Fixed assets Vs Current assets
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From the graph, we can notice that proportion of current assets is increased from 2005-09 and the proportion of fixed assets decreased. Also the total assets of the company increased

TELECOM INDUSTRY
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The Indian Telecommunications network with 203 million connections is the third largest in the world and the second largest among the emerging economies of Asia.Today, it is the fastest growing market in the world. The telecommunication sector continued to register significant success during the year and has emerged as one of the key sectors responsible for Indias resurgent Indias economic growth. Telecom sector accounts for 1 percent of Indias GDP. Likely to double in 23 years Telecom services contribute 30 percent to Indias total service tax revenue The Indian telecom sector gives direct employment to more than 4,00,000 people, compared to about 6,00,000 people in China Not just the enabler of software, BPO and ITeS companies, it is also the lifeline of a fast growing E-commerce space State-of-the-art telecom infrastructure has led to the rise of cities like Mysore, Mangalore, Jaipur, Ahmedabad, Kochi on the software services map This has helped spread the benefits of a booming Indian economy to beyond metros and large cities, and wealth creation is happening in tier-2 cities

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Growth The sector, which was growing in the range of 20 to 25 per cent up to the year 2002-03, has moved to a higher growth path of an average rate of 40-45 per cent during the last two years.This rapid growth has been possible due to various proactive and positive decisions of the Government and contribution of both by the public and the private sector. The rapid strides in the telecom sector have been facilitated by liberal policies of the Government that provide easy market access for telecom equipment and a fair regulatory framework for offering telecom services to the Indian consumers at affordable prices. Major Players There are three types of players in telecom services: State owned companies (BSNL and MTNL) Private Indian owned companies (Reliance Infocomm, Tata Teleservices,) Foreign invested companies (Hutchison-Essar, Bharti Tele-Ventures, Escotel, Idea Cellular, BPL Mobile, Spice Communications)

Fastest Growing Sector CAGR 22% (2002-07) Second Largest Telecom Market Lowest tariff charges in the world Wireless Subscribers 315.3 Mn Wireline Subscribers 38.4 Mn Teledensity 30.6 23 Circles - 4 Categories ( Metro, A, B & C) Bharti Airtel Largest player with presence in 23 Circles
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Year 2009 2008 2007 2006 2005

Sales 29356.1 19853.1 43500.1 29496.1 22674.5

%change In sales 47.86 -54.36 47.47 30.08 72.9

Contributio n 8108.2 6735.1 14861.8 10864.3 8293.1

EBIT 3787.1 4138.2 8143.6 5369.2 3871.2

%change in EBIT -8.48 -49.19 51.67 38.69 48.98

EBT 2740.1 2932.1 5092.5 2198.1 682.7

EPS 0.98 0.35 2.19 0.36 1.29

%change in EPS 180 -84.02 508.33 -72.09 106.76

FL DFL YEAR 1.38 -21.2 2009 1.41 1.71 2008 1.6 9.84 2007 2.44 -1.86 2006 0.67 2.18 2005

Interpretation from DFL From the above table, DFL has been continuously fluctuating. In the year 2006-07 the variability of EPS is the highest. For every 1 unit change in operating profit EPS changes by 9.84 units. In the above case as the DFL decreased and the financial risk also decreased.
Dbt/Eqt y 7 1.1 .1 0.53 72 D/P Ratio

YEAR

FA

CA 404 67

CoD

CoE

6147 2009 8.3

5821 346 2008 3.4 67 6098 206 2007 9.4 58 2006 38768.9 35928 2005 35974.9 39752

1.1 1.5 1.2 7.1

8.60 14.54 18.87 28.38

1.54 1.62 2.85 2.58

Fixed Assets and Current assets IDEA Cellular had maximum fixed assets and current assets in the year 2009. Fixed assets decreased during 2008 and in turn increased towards 2009. Current assets decreased from 2005-07 and then increased towards the year 2009. Cost of equity and Cost of debt From the table, the CoE is higher during the period 2004-05 and the company could use debt as a cheaper source of capital. During 2007-09 the CoE decreased to 7.1 which is higherer than the CoD which is 1.1. Thus the company enjoyed debt as a cheaper source of capital during 2004-09 Debt/equity ratio In the above case the ratio is greater than 1 during the four years period ( from 2004-2008) Thus the company financed its assets using debt and the company is In a risky position in case the interest rate increases.
Year 2009 2008 2007 2006 2005 EPS Rtn Ratio GPR NPR 100 15.84 8.71 100 20.51 9.91 100 25.81 15.33 100 24.05 11.44 100 25.29 6.24

0.98 0.35 2.19 0.36 1.29

IDEA retained 100% of its earning during all the 5 years under study and hence the company did not pay dividents to its shareholders. Though the GPR is high in the year 2004-05, the NPR is very low. In the year 2006-07 the NPR is high and hence the EPS is also high. Year Dbt/Eq ty WACC Value 73

2009 2008 2007 2006 2005

0.53 1.54 1.62 2.85 2.58

14.8 13.4
12.8 11.2 9.9

21666 9 10060 0 64303 44192 40633

From the table, it is interesting to observe that the value of the company is the highes in the year 2008-09 when it financed most of its assets using equity i.e. debt/ equity ratio is the low.Also the company has comparitively low value during the year 2004-05 when it financed most of its assets using debt.Hence IDEACellular could not use debt as a cheaper source of finance.

YEAR 2009 2008 2007 2006 2005

FA/CA

FA/TA

FATR

Sales 29356.1 19853.1 43500.1 29496.1 22674.5

Indiff. Pnt

EBIT 3787.1 4138.2 8143.6 5369.2 3871.2

1.52 1.68 2.95 1.08 0.9

0.6 0.63 0.75 0.52 0.48

0.62 0.74 0.61 1.24 1.01

2333 2560 5240 3384 2593

FATR decreased from the year 2006-09.FATR is highest in the year 2006, which implies IDEA Cellular efficiently used the investment on fixed assets to generate sales in the year 2005. FA/CA ratio and FA/TA ratio are highest for the year 2007.

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75

From the graph, the proportion of fixed assets increased and the total assets of the company also increased from 2005-09

EPS-DFL

From the graph it can be observed that the company leveraged properly and used debt component successfully. EPS and DFL are positively correlated in the case of IDEA CELLULAR Ltd.

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BHARTI AIRTEL

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Airtel comes to you from Bharti Airtel Limited, one of Asias leading integrated telecom services providers with operations in 19 countries across Asia and Africa. Bharti Airtel since its inception, has been at the forefront of technology and has pioneered several innovations in the telecom sector. The company is structured into four strategic business units - Mobile, Telemedia, Enterprise and Digital TV. The mobile business offers services in India, Sri Lanka and Bangladesh. The Telemedia business provides broadband, IPTV and telephone services in 89 Indian cities. The Digital TV business provides Direct-to-Home TV services across India. The Enterprise business provides end-to-end telecom solutions to corporate customers and national and international long distance services to telcos. Airtel was born free, a force unleashed into the market with a relentless and unwavering determination to succeed. A spirit charged with energy, creativity and a team driven to seize the day with an ambition to become the most globally admired telecom service. Airtel, in just ten years of operations, rose to the pinnacle to achivement and continues to lead. As India's leading telecommunications company Airtel brand has played the role as a major catalyst in India's reforms, contributing to its economic resurgence.

Today they touch peoples lives with their Mobile services, Telemedia services, to connecting India's leading 1000+ corporates. They also connect Indians living in USA, UK and Canada with callhome service.

Largest Private Integrated Telecom Company in India 3rd Largest Wireless Operator in the World Largest & Fastest Growing Wireless Operator in India Largest Telecom Company listed on Indian Stock Exchange

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VISION 2020 To build India's finest business conglomerate by 2020 Supporting education of underprivileged children through Bharti Foundation

Strategic Intent: To create a conglomerate of the future by bringing about Big Transformations through Brave Actions. MISSION We at Airtel always think in fresh and innovative ways about the needs of our customers and how we want them to feel. We deliver what we promise and go out of our way to delight the customer with a little bit more CORE VALUES

Empowering People - to do their best Being Flexible - to adapt to the changing environment and evolving customer needs

Making it Happen - by striving to change the status quo, innovate and energize new ideas with a strong passion and entrepreneurial spirit

OBJECTIVES AND VALUES

To undertake transformational projects that have a positive impact on the society and contribute to the nation building process.

To Diversify into new businesses in agriculture, financial services and retail business with world-class partners

To lay the foundation for building a conglomerate of future Openness and transparency - with an innate desire to do good

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Creating Positive Impact with a desire to create a meaningful difference in society.

SWOT ANALYSIS Strengths

Bharti Airtel has more than 65 million customers (July 2008). It is the largest cellular provider in India, and also supplies broadband and telephone services - as well as many other telecommunications services to both domestic and corporate customers.

Other stakeholders in Bharti Airtel include Sony-Ericsson, Nokia - and Sing Tel, with whom they hold a strategic alliance. This means that the business has access to knowledge and technology from other parts of the telecommunications world.

The company has covered the entire Indian nation with its network. This has underpinned its large and rising customer base.

Weaknesses

An often cited original weakness is that when the business was started by Sunil Bharti Mittal over 15 years ago, the business has little knowledge and experience of how a cellular telephone system actually worked. So the start-up business had to outsource to industry experts in the field.

Until recently Airtel did not own its own towers, which was a particular strength of some of its competitors such as Hutchison Essar. Towers are important if your company wishes to provide wide coverage nationally.

The fact that the Airtel has not pulled off a deal with South Africa's MTN could signal the lack of any real emerging market investment opportunity for the business once the Indian market has become mature.

Opportunities

The company possesses a customized version of the Google search engine which will enhance broadband services to customers. The tie-up with Google can only enhance the Airtel brand, and also provides advertising opportunities in Indian for Google.
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Global telecommunications and new technology brands see Airtel as a key strategic player in the Indian market. The new iPhone will be launched in India via an Airtel distributorship. Another strategic partnership is held with BlackBerry Wireless Solutions.

Despite being forced to outsource much of its technical operations in the early days, this allowed Airtel to work from its own blank sheet of paper, and to question industry approaches and practices - for example replacing the Revenue-PerCustomer model with a Revenue-Per-Minute model which is better suited to India, as the company moved into small and remote villages and towns.

The company is investing in its operation in 120,000 to 160,000 small villages every year. It sees that less well-off consumers may only be able to afford a few tens of Rupees per call, and also so that the business benefits are scalable - using its 'Matchbox' strategy.

Bharti Airtel is embarking on another joint venture with Vodafone Essar and Idea Cellular to create a new independent tower company called Indus Towers. This new business will control more than 60% of India's network towers. IPTV is another potential new service that could underpin the company's long-term strategy.

Threats

Airtel and Vodafone seem to be having an on/off relationship. Vodafone which owned a 5.6% stake in the Airtel business sold it back to Airtel, and instead invested in its rival Hutchison Essar. Knowledge and technology previously available to Airtel now moves into the hands of one of its competitors.

The quickly changing pace of the global telecommunications industry could tempt Airtel to go along the acquisition trail which may make it vulnerable if the world goes into recession. Perhaps this was an impact upon the decision not to proceed with talks about the potential purchase of South Africa's MTN in May 2008. This opened the door for talks between Reliance Communication's Anil Ambani and MTN, allowing a competing Inidan industrialist to invest in the new emerging African telecommunications market.

Bharti Airtel could also be the target for the takeover vision of other global telecommunications players that wish to move into the Indian market.
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Airtel comes to you from Bharti Airtel Limited, India's largest integrated and the first private telecom services provider with a footprint in all the 23 telecom circles. Bharti Airtel since its inception has been at the forefront of technology and has steered the course of the telecom sector in the country with its world class products and services. The businesses at Bharti Airtel have been structured into three individual strategic business units (SBU's) - Mobile Services, Airtel Telemedia Services & Enterprise Services

AIRTEL 82

Year 2009 2008-09 2008 2007-08 2007 2006-07 2006 2005 2005-06 2004-05

Year

Sales

FL 372328 268728 183492 115393 80076.6

% sales

38.55 1.21 46.45 1.07 59.01 1.05 44.1 68.06 1.09 1.15

DFL 191128 0.63 140918 1.01 91359.5 1.08 53386.5 38447.4 1.60 1.13

Contribution

EBIT

% EBIT

EBT

EPS

% EPS

104523 78394.1 49272.3 25698.9 18271.1

33.33 59.1 91.72 40.65 121.03

85910.1 73115.4 46783.8 23454.8 15831.9

41.4 34.23 21.43 10.776 6.528

20.9 59.7 98.8 65 136.5

Interpretation from DFL

From above ,we can notice that DFL has decreased from the year 2004-05 towards 200809. In the year 2005-06 the variability of EPS is the highest. For every 1 unit change in operating profit EPS changes by 1.6 units. DFL decreased from 1.6 to 0.627. Thus the financial risk also decreased
CoE YEAR 2009 2008 2007 2006 2005 . FA CA 480922. 9 59172.3 361194. 0 37579.4 216814. 4 44454.7 153481. 2 29542.9 107594. 4 21990.7 9.50 10.8 3.26 11.2 2.82 23.8 2.67 2.8 4.39 0.61 0.43 0.3 0.25 CoD 8.8 0.13 5.73 Dbt/eqt y D/P Ratio

Fixed Assets and Current asset

Airtel had maximum fixed assets and current assets in the year 2009.Current assets

increased from the year 2005-09.

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YEAR 2009 2008 2007 2006 2005

DP RATIO 5.73

Ret ratio 94.78 95.22 100 100 100

GPR 28.15 29.33 29.08 27.47 23.14

NPR 26.36 22.58 23.99 22.46 17.8

Airtel retained 100% of its earnings during 2005-07 and hence could not pay any dividends to its shareholders during that period. Its Gross Profit Ratios and Net Profit Ratios increased gradually during the given period.

Year 2009 2008 2007 2006 2005

Dbt/Eqt y WACC 0.13 15.2 0.25 13.4 0.3 12.3 0.43 12 0.61 8.3

Value 375301 258130 157751 115362 94371

Airtel financed most of its assets using equity and debt/ equity ratios are unusually low. A gradual increase in the value of the company can be observed.

FATR increased from the year 2005-07 and decreased towards 2009.FATR is
YEAR 2009 2008 2007 2006 2005 FA/CA 8.13 9.61 4.88 5.20 4.89 FA/TA 0.89 0.91 0.83 0.84 0.83 FATR Sales Indf. Pnt EBIT 372328 268728 183492 115393 80076.6 67165 49956 31298 15706 10594 104523 78394.1 49272.3 25698.9 18271.1 84

0.88 1 1.03 0.75 0.72

 FA/CA ratio and FA/TA ratio are highest for the year 2008.

From the graph, the proportion of fixed assets is very high compared to current assets and the total assets of the company increased from 2005-09 EPS-DFL

Airtel used debt to a sufficient extent to give more returns to the shareholders. Because the EPS is continuosly increasing and DFL and EPS are positively correlated in this case.

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TATA COMMUNICATIONS
\

86

Tata Communications is a leading global provider of a new world of communications. With a leadership position in emerging markets, Tata Communications leverages its advanced solutions capabilities and domain expertise across its global and pan-India network to deliver managed solutions to multi-national enterprises, service providers and Indian consumers. The Tata Global Network includes one of the most advanced and largest submarine cable networks, a Tier-1 IP network, with connectivity to more than 200 countries across 400 PoPs, and nearly 1 million square feet of data center and colocation space worldwide. Tata Communications' depth and breadth of reach in emerging markets includes leadership in Indian enterprise data services, leadership in global international voice, and strategic investments in operators in South Africa (Neotel), Sri Lanka (Tata Communications Lanka Limited), and Nepal (United Telecom Limited). Tata Communications Limited is listed on the Bombay Stock Exchange and the National Stock Exchange of India and its ADRs are listed on the New York Stock Exchange. (NYSE: TCL) Vision Deliver a new world of communications to advance the reach and leadership of our customers. Commitment Invest in building long-lasting relationships with customers and partners and lead the industry in responsiveness and flexibility. Tata Group Profile Tata is a rapidly growing business group based in India with significant international operations. Revenues in 2007-08 are estimated at $70.8 billion USD , of which 61 per cent is from business outside India. The Group employs around 350,000 people

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worldwide. The Tata name has been respected in India for 140 years for its adherence to strong values and business ethics. The business operations of the Tata Group currently encompass seven business sectors: communications and information technology, engineering, materials, services, energy, consumer products and chemicals. The Group's 27 publicly listed enterprises have a combined market capitalisation of some $60 billion, among the highest among Indian business houses, and a shareholder base of 3.2 million. The major companies in the Group include Tata Steel, Tata Motors, Tata Consultancy Services (TCS), Tata Power, Tata Chemicals, Tata Tea, Indian Hotels and Tata Communications. The Group's major companies are beginning to be counted globally. Tata Steel became the sixth largest steel maker in the world after it acquired Corus. Tata Motors is among the top five commercial vehicle manufacturers in the world and has recently acquired Jaguar and Land Rover. TCS is a leading global software company, with delivery centres in the US, UK, Hungary, Brazil, Uruguay and China, besides India. Tata Tea is the second largest branded tea company in the world, through its UK-based subsidiary Tetley. Tata Chemicals is the world's second largest manufacturer of soda ash. Tata Communications is one of the world's largest wholesale voice carriers. In tandem with the increasing international footprint of its companies, the Group is also gaining international recognition. Brand Finance, a UK-based consultancy firm, recently valued the Tata brand at $11.4 billion and ranked it 57th amongst the Top 100 brands in the world. Businessweek ranked the Group sixth amongst the "World's Most Innovative Companies" and the Reputation Institute, USA, recently rated it as the "World's Sixth Most Reputed Firm." Founded by Jamsetji Tata in 1868, the Tata Group's early years were inspired by the spirit of nationalism. The Group pioneered several industries of national importance in India: steel, power, hospitality and airlines. In more recent times, the Tata Group's pioneering spirit has been showcased by companies like Tata Consultancy Services, India's first software company, which pioneered the international delivery model, and Tata Motors, which made India's first indigenously developed car, the Indica, in 1998 and recently unveiled the world's lowest-cost car, the Tata Nano, for commercial launch by end of 2008.
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The Tata Group has always believed in returning wealth to the society it serves. Twothirds of the equity of Tata Sons, the Tata Group's promoter company, is held by philanthropic trusts which have created national institutions in science and technology, medical research, social studies and the performing arts. The trusts also provide aid and assistance to NGOs in the areas of education, healthcare and livelihoods. Tata companies also extend social welfare activities to communities around their industrial units. The combined development-related expenditure of the Trusts and the companies amounts to around 4 per cent of the Group's net profits. Going forward, the Group is focusing on new technologies and innovation to drive its business in India and internationally. The Nano car is one example, as is the Eka supercomputer (developed by another Tata company), which in 2008 is ranked the world's fourth fastest. The Group aims to build a series of world class, world scale businesses in select sectors. Anchored in India and wedded to its traditional values and strong ethics, the Group is building a multinational business which will achieve growth through excellence and innovation, while balancing the interests of its shareholders, its employees and wider society. SWOT ANALYSIS Strengths

Scale. By combining the assets of Teleglobe and TGN, VSNLI has achieved the traffic volumes necessary to be a credible low-cost provider in the international wholesale market.

Geographic footprint. VSNLIs extensive network includes undersea cable, terrestrial fibre and satellite capacity essential for an international wholesale provider wishing to provide end-to-end connectivity without becoming overreliant on partners to fill the geographic gaps.

Commanding presence in international wholesale voice market. The company is now carrying over 16 billion international voice minutes per year, a position built on its extensive bilateral relationships.

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Tier 1 ISP. VSNLI can obtain enhanced global peering capability and redundancy as a tier-one ISP. The company has over 345Gbit/s of peering capacity with other carriers.

Full portfolio of services. VSNLI can offer a comprehensive suite of voice, data and mobile services, provided through a variety of network options including submarine cable, switching gateways, IP points of presence (PoPs) and earth stations.

Strength in signalling conversion market. VSNLI is an international provider of mobile signalling conversion services, based on Teleglobes strong position in this market.

Access to intellectual property and proprietary (VoIP) technology. Based on Teleglobe/ITXCs capability, VoIP enables better control of least-cost routing, supplementing the traditional voice product portfolio with the VoIP network and services, and innovative value-added services. This will allow more flexible services for existing customers and the targeting of new customer segments.

Home base in Indian market. VSNLI has direct connections to the fast growing Indian market via VSNL, which was the first ISP in India and now offers hosting and co-location services out of its data centres in Mumbai, Delhi, Chennai and Bangalore. VSNL also provides IP VPN services in over 115 locations in India and has started offering national long-distance services in some Indian towns. The operator has rolled out its metro Ethernet services in six major cities in India and another 18 cities globally.

Reputation. Based on Teleglobes long history in international wholesale, and its existing bilateral relationships, VSNLI can claim established status in the sector. Customer base. VSNLI has acquired a strong presence in the wholesale market, with a multitude of blue-chip fixed and mobile customers for its voice and data services.

Backing of the Tata Group. The Tata Group, which held 45.15% of VSNL as of 31 March 2006, has activities in business sectors from information systems and communications to engineering, materials, services, energy, consumer products and chemicals. It is one of India's largest business conglomerates, with revenues of $21.9 billion in 2005/2006.

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Weaknesses

Wholesale/retail conflict. As with any erstwhile wholesale provider attempting to serve the enterprise market, VSNLI will need to reassure its wholesale customers that its retail activities are not in direct competition with theirs.

Image. VSNLI is still not incredibly well known as a provider of corporate communications solutions to global enterprises. The company is increasing its profile in the marketplace, but there is some way to go before it becomes as well known as some of its competitors.

Lack of access networks. Access is key to serving the enterprise market, and while VSNLI now has an impressive roster of long-distance assets, it is still underrepresented as an access provider. Last mile will prove to be a challenge in delivering services to its targeted corporate customer base.

Opportunities

Leverage Tata Group. With Tata Group now being VSNLs major shareholder, VSNLI can leverage the groups strengths in IT and network solutions to drive its presence in the corporate marketplace.

Build applications into the network. One way in which VSNLI wants to move up the value chain is by building applications into the network. Tata Group ownership will help to achieve this by providing the necessary skills and resources needed to become a credible network-based IT services provider.

Growth in mobile services. Teleglobe was one of the leading providers of signalling services to the mobile sector, and VSNLI is doing its best to capitalise on this. The central role this plays in mobile operators businesses gives VSNLI the scope to sell other types of mobile-oriented service, and to take advantage of expected growth in end-user mobile voice and data traffic.

Leapfrog to VoIP. With the ITXC expertise on board, VSNLI gains a boost in moving from TDM to VoIP technology, a process that was already moving apace and is becoming increasingly important in the international wholesale voice market.
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Reaching new voice market segments. The acquisition of ITXC meant that Teleglobe, and now VSNLI, can expand its service portfolio to target a wider market for voice services. VSNLI states that it is the worlds leading wholesale VoIP carrier, and has the worlds largest VoIP network.

Threats

Competition for mobile business. With a large number of wholesale operators focused on winning business and launching new products specifically for mobile operators, VSNLI should not be complacent about its current standing in the sector.

Wholesale voice commoditisation. Voice prices are continuing to fall, undermining margins and revenues in the sector. Slump in bandwidth sales. If data growth in India runs out of steam, this will undermine VSNLIs core international bandwidth business, producing problems for the company in supporting the opex costs of its significant bandwidth assets.

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TATA communication Year 2009 2008 2007 2006 2005 Sales 102228. 4 85377.6 88566.1 40097.2 34105.2 %change 19.7 -37.2 120.8 17.56 Contribution EBIT 16092.4 11199.4 12991.1 11048.2 8764.8 5069.7 3355.3 5161.1 7561.5 6326.7 %change 51.09 -34.9 -31.7 19.5 4227.6 1489.2 3725.3 6867.17 10539.8 3.21 0.62 2.89 18.4 14.34 EBT EPS %change 417.7 -78.5 -84.3 28.31

YEAR FL DFL 2009 1.19 8.17 2008 2.25 2.24 2007 1.38 2.65 2006 1.10 1.45 2005 0.60 1.42

Interpretation from DFL From above we can notice that DFL increased from the year 2005-09. In the year 2008-09 the variability of EPS is the highest. For every 1 unit change in operating profit EPS changes by 8.17 units. DFL increased from 1.42 to 8.17. Thus the financial risk also increased
YEAR 2009 2008 2007 2006 2005 FA 116058.7 82963.3 68401.4 63454.7 30973 CA 41484.1 29893.7 20617.6 21161 20236.7 CoE 6.2 5.8 4.2 3.4 3.3 CoD 1 1.2 10.3 10.1 9.2 6 0.36 0.34 0.11 0.03 0.01 29.08 49.28 32.02 30.49 Dbt/eqty DP ratio

From the table:

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 TATA invested more in fixed assets and the company fixed assets increased from 2005-09 TATA invested most of its assets using equity TATA paid more dividends compared to IDEA and Airtel telecom

Year 2009 2008 2007 2006 2005

DP ratio Retention Ratio GPR 29.08 75.02 49.28 74.56 32.02 81.37 30.49 82.77 28.23 100

NPR 11.36 10.14 13.71 14.02 5.46 13.25 8.87 11.25 12.1 14.47

EPS 3.21 0.62 2.89 18.4 14.34

From the table: DP Ratio increased from 2005-08 and decreased to almost half during 2008-09 TATA retained nearly 80% of its earnings for further investments GPR and NPR decreased from 2005-08 Year Dbt/eqty VALUE WACC 2009 0.36 119763.3 14.6 2008 0.34 86438.9 13.3 2007 0.11 79015.9 12 2006 0.03 75182.2 11.7 2005 0.01 55911.1 8.7 Debt/ Equity increased suddenly from 2007-08 i.e. TATA increased the proportion of debt during this period Value of the company gradually increased from 2005-09 Year 2009 2008 2007 2006 2005 FA/CA FA/TA FATR Sales Indff. Pnt EBIT 2.80 0.74 0.63 102228.4 70022 5069.7 2.78 0.74 0.75 85377.6 59798 3355.3 3.32 0.77 0.91 88566.1 53380 5161.1 3 0.75 1.26 40097.2 12654 7561.5 1.53 0.6 1.31 34105.2 9487 6326.7

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 FATR decreased from the year 2005-09.FATR is highest in the year 2005, which TATA Telecommunications used the investment on fixed assets to generate sales in the year 2005. FA/CA ratio and FA/TA ratio are highest for the year 2007

FA Vs CA

From the graph, the proportion is fixed assets is very high and also amount of total assets increased fro 2005-09.

DFL Vs EPS

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From the graph. DFL and EPS moved together and seems to be correlated because as DFL decreased during 2007-08 EPS also decreased and during 2008-09 as DFL increased EPS also increased.

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Chapte r

SUMMARY, FINDINGS AND CONCLUSION

PHARMA INDUSTRY DR.REDDYS Dr.Reddys used both financial leverage and operating leverage to increase its

profitability and hence both financial risk and operating risk is high. Companies with
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high operating leverage are vulnerable to sharp economic and business cycle swings. Hence, Dr.Reddys reduced its business risk gradually from 2005-2009. is high Sales exceeded the BEP sales in 2005. It retained on 80% of its earnings on an WACC is high and debt to equity ratio is also high and hence the financial risk

average and paid dividends to its shareholders during all the five years under study. It maintained more of current assets and is able to generate sales from the

investments on fixed assets. RANBAXY High DOL and comparatively low DFL and hence high business risk is higher

than financial risk. WACC is lower compared to Dr.Reddys but Ranbaxy financed most of its

assets using equity. Ranbaxys sales are close to its BEP sales in the year 2009. The firm did not

pay dividends for the past 2 years and retained all its earnings for further investments. Ranbaxys investment in fixed assets increased during the given period and its

FATR decreased.

AUROBINDO Aurobindo used both financial and operating leverage. But the DOL is higher

than DFL . Hence business risk is higher than financial risk. WACC is comparable to that of Ranbaxys.The firm used both debt and equity

to an equal extent to finance its assets Its sales were higher than BEP sales during the five year period under study. It

retained nearly 90% of its earnings and paid dividends with the remaining earnings.
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It maintained more of fixed assets and its FATR is also high.

SERVICE INDUSTRY IDEA CELLULAR

DFL is negative during 2008-09 .It implies that EBIT during this year is less

than the BEP.

IDEA financed most of it assets using debt and hence high financial risk exists. Low earnings per share and IDEA did not pay any dividends during the period

under study. The firm retained all its earnings for further investment. IDEA invested more on fixed assets than on current assets.

AIRTEL

EPS is high compared to other 2 firms and Airtel retained 100% of its earnings

during 2005-07 and hence could not pay any dividends to its shareholders during that period.

Airtel financed most of its assets using equity Value of the company is high

TATA

EPS is low until 2006-07 and increased suddenly almost 9 times for the year

2007-08.

Low debt/ equity ratios compared to others two companies under study. Hence

we can say that TATA financed most of its assets using equity. Value of the company doubled in the past five years.

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SUMMARY AND FINDINGS: An empirical study is conducted to analyze the differences in leveraging practices within and between Pharmaceutical industry (manufacturing) and Telecommunications industry (service). Key players in both the industries are chosen for study. Dr.Reddys, Aurobindo and Ranbaxy are chosen from pharmaceutical industry and Idea Cellular, Airtel, TATA Telecommunications from Telecommunications industry. The degree of financial, operating leverage and combined leverage are calculated using the information published in the annual reports of the companies. Service and manufacturing firms differ fundamentally in overall structure and growth dynamics. In service firms relative to manufacturing firms entry costs and capital requirements lower because investment in machinery and equipment is almost nonexistent. If service firms lease their facilities (buildings), then their total capital invested is

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mainly working capital. They rely less on physical infrastructure and machines but more on human capital. Hence they cannot leverage on fixed costs. Financial leverage has a positive effect on the firm's profitability but the use of excessive debt creates agency problems among shareholders and creditors, which in turn, lead to negative relationship between leverage and profitability. The existence of agency costs of debt may cause firms to take riskier investment after the issuance of debt to expropriate wealth from the firms bondholders because the firm equity is effectively a stock option. The degree of financial, operating leverage and combined leverage are calculated using the information published in the annual reports of the companies. DFL, DOL,DCL,EBIT and EPS are calculated for the companies chosen and the trend is observed for a period of 5 years. Effect of degree of leverage on the EPS and EBIT is analyzed.An important observation is that DOL will be maximum when the firm operates close to the break even. This is proved by calculating BEP sales and comparing with the actual sales. Since service firms cannot use operating leverage to increase the profitabililty as most of the capital is predominantly working capital. So, only DFL leverage is calculated and its effect on EPS during the given time period is analysed.So, companies in service industry are expected to use high degree of financial leverage to increase the profitability. But from the empirical study it is found that Debt to Equity ratio is comparatively lower for companies in service industry. Two out of three firms (TATA and AIRTEL) chosen for study financed most of their assets using equity and hence did not use financial leverage to increase the profitability. On the other hand IDEA used financial leverage and pooled high financial risk. During 2008-09 when the world suffered from recession IDEA ended up with negative DFL i.e. EBIT is lower than BEP. An interesting phenomenon is observed in case of firms in manufacturing industry, operating leverage decreases as a companys sales increases and shifts away from the break-even point of sales.( Dr.Reddys, Ranbaxy). Also, shareholders of the firms that financed most of their assets using equity could benefit from high EPS. There are many factors that affect the enterprise value or the firm value. One of the important factor which not only effects the value of the firm but also acts an indicator of nature of financing is debt to equity ratio. So, debt to equity ratio and value of the companies are calculated and analyzed.
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Ranbaxy with comparatively low debt to equity ratio has high value of the firm. Value of the firm can be calculated by subtracting Interest cost from Earnings before interest and tax. It implies that the enterprise value is inversely proportional to interest cost which is in turn directly proportional to debt to equity ratio and thus Ranbaxy which financed most of its assets using equity has more Firm value. In simple words degree of financial leverage affects the firm value. Firms asset structure affects its leverage in both positive and negative ways. Ability of Assets to Support Debt also effects the leveraging decisions. Lower risk assets with more stable market values provide better collateral for debt. With better collateral, the firms ability to borrow increases. Firms with high level of assets that can be used as collateral tend to use more debt rather than issue new equity because costs associated with issuing equity rise due to the asymmetry of information possessed by insiders and outsider suggests a positive relationship between debt ratios and the firm capacity of collateralized assets. Since service firms do not have high level of assets like manufacturing firms. Therefore, the costs associated with this agency problem would be higher for the service firms because of the lower level of collateralized assets. This is clearly evident from the companies chosen for study. While Dr.Reddys, Ranbaxy and Aurobindo has debt to equity ratios comparatively more than that of Airtel and Tata. Theoretical research predicts positive relationship between collateralized asset and leverage. Prior empirical studies use fixed assets as its proxy and the findings are consistent with theoretical predictions. The findings of this paper show opposite result: leverage decreases as the proportion of fixed asset in the total assets of the firm increases. The service industry is usually characterized by a relatively low level of fixed assets. Current assets can more easily be converted to cash and thus have more liquid capacity than fixed asset. Lending institutions generally attribute more significance to the capacity to convert borrowers assets into cash and we conjecture that in the service industry the importance of current rather than fixed assets plays an important role in their decision to offer loans to firms with high ratio of current to total assets, or a low ratio of fixed to total assets. This supply-side argument might explain why firms who own relatively low ratios of fixed to total assets may have higher leverage (IDEA Cellular).

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Idea Cellular maintained low fixed to total assets ratio and thus could use more debt by using current assets as collateral. Airtel and TATA maintained more of fixed assets and so could not use them as collateral. This is proved by very low debt to equity ratios. Fixed asset turnover ratio of the companies is also studied. Manufacturing and other industries requiring major-investments will often spend heavily on properties, manufacturing plants, and equipment to push themselves ahead of the competition. A large capital investment purchases may not immediately yield higher sales. It may take a year or more for the company to fully utilize those investments. If a company invested in major improvements heavily one year, it would be wise to watch the Fixed Asset Turnover closely over the next year to see if those investments actually helped the company. The higher the Fixed Asset Turnover ratio, the more effective the company's investments in Net Property Plant and Equipment have become. It is desirable that Gross Profit ratio must be high and steady because any fall in it would put the management in difficulty in the realization of fixed expenses of the business. Net Profit ratio is helpful to determine the operational ability of the concern. NPR and GPR are stable in case of Airtel and halved during Idea Cellular.NPR is abnormally low in case of Dr.Reddys during 2005 and abnormally high during 2007. Abnormal decrease may be attributed to low sales. Income tax, nondebt tax shield, firm size, and growth opportunities are the other factors that determine capital structure choices of the firm which are not studied in this project. The relationship between leverage and growth opportunities can be positive or negative, depending on the nature of the growth opportunity. Leverage has a significant negative effect on investment because of an agency problem between shareholders and bondholders. If managers work in the interest of shareholders, they may give up some positive net present value projects due to debt overhang. The other argument is based on agency conflicts between managers and shareholders. They argue that firms with free cash flow but low (or no) growth opportunities may nevertheless invest (overinvest) in that the manager may take on projects with negative net present value. However, such a strategy is costly to the manager, if the capital market takes into account such potential opportunism, or there is a takeover of the firm by another company; managers have an incentive, therefore, to recommit and increase leverage and pay out cash
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as interest and principal. These theories suggest a negative relationship between leverage and investment but only for firms with no or little growth opportunities. Corporate income tax has important impact on debt-equity choices. Modigliani-Miller proposition the corporate tax case - suggests that firms that face higher marginal tax rates should use more debt to take advantage of tax shield. In conclusion, financing choice is not a simple one-period decision but a dynamic occurrence. Firms issue equity when their market valuations are high. Service firms and manufacturing firms follow different leverage practices. One major difference observed is that service firms use more of equity than manufacturing firms. This may be partly attributed to differences in the asset structure of the firms.

SUGGESTIONS :1. High interest costs during difficult financial periods can increase the risk of

insolvency. So, the companies must not use large amount of debt. 2. Airtel and TATA should invest more on current assets so that they can obtain debt and thus can use financial leverage. 3. Debt instruments often contain restrictions on the company's activities, preventing management from pursuing alternative financing options and noncore business opportunities. 4. The larger a company's debt-equity ratio, the more risky the company is considered by lenders and investors. Accordingly, a business is limited as to the amount of debt it can carry. 5. The company is usually required to pledge assets of the company to the lender as collateral, and owners of the company are in some cases required to personally guarantee repayment of the loan.
6. Growth opportunities in the economy and of the industry have to be studied

before making financing decisions.

7. Acquisition of new assets of heavy costs should be done with proper capital

budgeting supported by payback period.

8. The process of asset securitization is a new and innovative financing method

used for funding and risk management purposes.

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9. the increased use of debt causes both the costs of debt and equity to increase.

10. Signaling theory suggests firms should use less debt than MM suggest.This unused debt capacity helps avoid stock sales, which depress stock price because of signaling effects.
11. Managers have better information about a firms long-run value than outside

investors.Managers act in the best interests of current stockholders. Issue stock if they think stock is overvalued.Issue debt if they think stock is undervalued. As a result, investors view a common stock offering as a negative signal-managers think stock is overvalued.

BIBLIOGRAPHY:
Maheswari S.N.: Financial Management 5th Edition

Annual reports of companies Notes on leverage by Alex Tajirian Paper on Financial Statement Analysis of Leverage and How It Informs About Profitability and Price-to-Book Ratios Paper on the effect of leverage increases on real earnings management by Irina ZagersMamedova
A journal on The Determinants of Capital Structure in the Service Industry: Evidence

from United States by Amarjit Gill, Nahum Biger, Chenping Pai and Smita Bhutani A report on telecom industry by Corporate Catalyst India A reading on Financial Ratio Analysis prepared by Pamela Peterson Drake Is There Room For Growth? Debt, Growth Opportunities and The Deregulation of U.S. Electric Utilities by Laarni from IBS. Asset Securitization and Optimal Asset Structure of the Firm by Jure Skarabot.

WEBLIOGRAPHY
www.wikiwealth.com www.wikianswers.com 105

 www.investopedia.com http://www.pdf-searcher.com/pdf/leverage-analysis.html

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