Kamal Pvc Industries Pvt Finance Essay - Free Essay Example

Sample details Pages: 12 Words: 3453 Downloads: 2 Date added: 2017/06/26 Category Finance Essay Type Argumentative essay Did you like this example? The area in the finance of dealing with the decisions on monitory grounds is identified as corporate finance. Maximize shareholder value is the primary object of corporate finance. The decisions and techniques can be long term or short term. Don’t waste time! Our writers will create an original "Kamal Pvc Industries Pvt Finance Essay" essay for you Create order The long term decisions are pertaining to capital investment which consist with equity or debt financing and when or whether payment of dividends to shareholders. Decisions deal with current assets and current liabilities such as managing inventories, cash and short term lending and borrowing are focused by short term decisions. Raise capital as appropriate by evaluating the companys financial needs that best fit to the needs, grow, develop, create and acquire businesses based on that, is corporate finance which also associate with investment banking. The Company Kamal (PVC) Industries (Pvt) Ltd (KPL) Profile The company founded in 1982 as a PVC pipe manufacturer producing limited range of pipes with one injection molding machine and single extruder and a small number of operators and resources. In 1985 added another two extruder machines and a PVC mixing plant to enhance the production capacity. The range of products with KTK brand was established in the market with a good reputation for high quality. In late 1990s further expanded the production process by investing on sophisticated machinery in the entire process. They were awarded with ISO 9001-2000 quality certificate for the range of products. Presently introduced with a wide range of products such as agricultural pipes in HDPE, irrigation drip pipes, electrical trunking and rain water gutters in PVC.ÂÂ  Now the company is in the capacity of manufacturing pipes in large diameter to cater the requirement of National Water Supply Department and considerable market share gained in the PVC pipe industry. The company intends to further expand the product range to cover pressure pipes with large diameter and sewerage fittings by offering complete solution to water and waste water projects. Range of Products PVC pipes Drainage and irrigation pipes and fittings PVC trunking and conduits Fittings made of injection molding technology Gutters and fittings for rain water management Solvent and Tile trims By implementing 5S practices in the work flow company has improved the productivity and steps taken to ensure safety of products and quality up to standards of national and international. Models Concepts Share Holder Value Discuss about the management decision which grow earnings, dividend and share price of the company that affects the ability to increase the cash flow and deliver value to share holders over a period. Valuation Discuss about the dividend valuation model which value of the firms share capital Cost of capital Discuss about the beta value of the company and provide firms overall cost of capital. Calculating cost of debt, cost of capital and weighted average cost of capital (WACC) are also discussed by the author. Financial Statement Analysis Calculated firms all possible ratios such as short term solvency, long term solvency, activities and profitability and changes. Performance indicators of the company Used the following performance indicators to assess the general and financial standing of the company. Growth Measure Compounded Annual Growth Rate of Total Assets (CAGRTA) Profitability Measure ROA Profit Margin Measure NPM Asset Utilization Measure Sales-to-Asset Ratio (STA) Risk Measure Variance of ROA (VROA) Tobins Q Ratio Total Sales Earnings per Share (EPS) EPS = {PAT / n}, n= number of equity shares Market Capitalization = MV per Share * n Book Value of Equity (BV) = {Net Worth / n} Price-to-Earnings Ratio (P/E Ratio) P/E Ratio = Market Price per Share / EPS = Market Capitalization / PAT Price-to-Book Value Ratio (P/BV Ratio) P/BV Ratio = Market Value per Share / Book Value per Share = Market Capitalization / Net Worth Following table contains some of the above ratios of Kamal PVC Industries (Pvt) Limited a Share Statistics ÂÂ   ÂÂ   ÂÂ   ÂÂ   As on 31-Dec-11 31-Dec-10 31-Dec-09 ÂÂ   ÂÂ   ÂÂ   ÂÂ   EPS (Rs.) 8.12 3.71 5.97 CFPS (Rs.) 13.79 9.05 10.84 Book Value (Rs.) 56.98 67.14 65.10 P/E Ratio 9.2 P/BV Ratio 1.3 DPS (Rs.) 2.00 1.50 1.50 ÂÂ   ÂÂ   ÂÂ   ÂÂ   Note: * Market Capitalization (For March, 2012) = 1246.82 (Rs. Mn.) * Market value per share (For March, 2012) = Rs. 75 Application of Shareholder Value Maximization Framework Factors affecting Shareholders Value are: Capital Market Conditions Profitability Æ’ÂÂ   Includes factors such as Sales Turnover / Profit Margin Risk Growth Assessing these factors for the company gives us a framework on which one can base a buying/selling criterion for the companys stock. Profit: Kamal PVC Industries (Pvt) Limited has been showing an increase in its profit margin for the past years, and there is still scope in this respect as the company is now increasing its product range and with demand expected to remain due to it market in white goods and electronic items. Hence the positive + rating. Risk: The risk factor for any company is always a matter of subjectivity. Hence the neutral rating O. Growth: Potential for growth is always there for a company in this field. Kamal PVC Industries (Pvt) Limited has also started work on RD and is expected to come out with newer products at the same time it is also looking into expanding its production capacity. Hence the positive + rating. Capital Market Conditions: Capital market conditions are quite unpredictable and with the ever-changing global scenario it is quite difficult to gauge this properly. Hence the neutral O rating. This has been put down in the following table: Factor Kamal PVC Industries (Pvt) Limited Profit + Risk O Growth + Capital Market Conditions O Overall 2 + Cost of Capital Beta Value Risk is an important consideration while investing in any security. It is the possibility that realised returns will be less than the returns expected. The degree, to which different portfolios are affected by risk as compared to the effect on the market as a whole, varies and is measured by Beta. The Beta factor describes the movement in a stocks or a portfolios returns in relation to that of the market returns. Beta is given by: Beta = {Covariance (X, Y) / Variance (X)} Where, Y is the returns on the security, X is the market returns or index, Covariance is a measure of how the two variables co-vary, and Variance is the square of standard deviation. Value of Beta for Bayer ABS Limited: 0.75 Cost of Capital Cost of Capital is the required return necessary to make any project worth its investment cost. This includes the cost of debt and the cost of equity. It can also be taken as the rate of return that the firm would receive if they invested their money someplace else with similar risk. Cost of Equity is the return that stockholders require from a company, and the Cost of Debt is the return that debt investors require from a company. Weighted Average Cost of Capital (WACC) is calculated by multiplying the cost of each capital component by its proportional weight and then summing them up: WACC = ((E/V) x Re) + {((D/V) x Rd) x (1 T)} Where: Re = Cost of Equity, Rd = Cost of Debt, E/V = percentage of financing that is equity, D/V = percentage of financing that is debt, E = the market value of the firms equity, D = the market value of the firms debt, V = E + D T = the corporate tax rate. Calculations: Taking Re as 16 %, Rd as 8 %, E/V as Rs. 1000, D/V as Rs. 500, and T as 40%, and substituting these values in the WACC formula, we get: WACC = (1000/1500 x 16) + {(500/1500 x 8) x (1 0.4)} = 10.67 + (2.67 x 0.6) = 12.27 Note: Looking at the Balance Sheet (For Kamal PVC Industries (Pvt) Limited Refer Appendix A), we see that, Equity Capital (Equity Share Capital + Reserves) = 1000 (Rs. Mn.) approx. Debt Capital = 500 (Rs. Mn.) approx. Hence the example above provides a close approximation for the companys WACC. Capital Asset Pricing Model (CAPM) Capital Asset Pricing Model (CAPM) is a model which utilizes the measure of systematic risk, B to price assets. The expected rate of return is given by: Ke = Rf + B x {Rf Rm} Where: Rf = Risk free rate of return, Rm = Market rate of return, Ke = Expected rate of return, B = Beta value for the stock. Calculations: Taking Rf as 6%, Rm as 12%, and beta, B (for Kamal PVC Industries (Pvt) Limited) as 0.75, and substituting these values in the CAP model, we get the expected rate of return, Ke as: Ke = 6 + {0.75 x (12 6)} = 6 + 4.5 = 10.5 Hence, an investor in the company Kamal PVC Industries (Pvt) Limited would be looking for a return of 10.5 % on his investments. Financial Risk (Due to Capital Structure of the Firm) Capital Structure of a firm is the mix of debt, preferred shock, and equity used for its long-term financing. Comments: We know that greater the financial leverage, lower will be the cost of capital for the firm. The management of Kamal PVC Industries (Pvt) Limited can hence look at increasing the debt financing to reduce the cost of capital for the firm. At the same time, since the company is financed more by equity capital and is less financed by debt, hence the financial risk as perceived by the shareholder will be less. No new equity has been issued since 1999; this is a positive thing as the existing shareholders have a better influence on the direction of the company. Comments for the Leverage Ratios (Refer Appendix A): The leverage ratios (Debt-to-Networth and Long-term Debt to Networth) for the company are on the lower side. These are in fact less than the industry (Petrochemical sector) average (which are around 1.0), and hence this can be a cause for concern. The ratios being low at the same time implies that the financial risk involved for the company is on the lower side as well. Financial Statement Analysis Ratio Calculation: A Financial Ratio is an index that relates two accounting numbers and is obtained by dividing one number by the other. Following five categories essentially encompass most of the important financial ratios: Short-Term Solvency Ratios (Liquidity Ratios) Current Ratio = Current Assets / Current Liabilities It is a good measure of the short-term liquidity position of a company. It basically shows the ability to cover ones current liabilities with ones current assets. Quick Ratio = {Current Assets Inventory} / Current Liabilities This is also called the Acid-Test Ratio. It basically shows the ability to cover ones current liabilities with ones most liquid assets. NWC-to-Total Assets Ratio = NWC / Total Assets Net Working Capital measure. Long-Term Solvency Ratios (Financial Leverage Ratios) Debt-Equity Ratio = Total Debt / Total Equity It is a measure of a companys debt utilization. It gives the extent to which a company is financed by debt. Interest Coverage Ratio = EBIT / Interest It is also called as the Times Interest Earned or TIE Ratio. It is a measure of a companys interest obligations. Cash Coverage Ratio = {EBIT + Depreciation} / Interest It is a measure of a companys interest obligation coverage by cash alone. Asset management Ratios (Turnover Ratios) Receivables Turnover Ratio It is a measure of receivables turnover. Payables Turnover Ratio It is a measure of payables turnover for a company. Total Asset Turnover Ratio It is a measure of the total asset turnover for a company. Profitability Ratios Profit Margin It is a measure of the profit margin of the company. This is important to gauge the financial position of the company. Return on Investment ROI tells how a company has done through its securities investments. Return on Equity It is a measure of return on the equity for the shareholders of the company. Market Value Ratios Price-Earnings Ratio P/E ratio shows how much investors are willing to pay for earnings per share of the company. Market-to-Book Value Ratio It is a measure of how the companys stock is doing with respect to its intrinsic or the book value of the stock. Earnings per Share It is a good measure of profitability of a companys stock. EPS is the portion of a companys profit allocated to each outstanding share of common stock. Leverages Leverages are of prime importance in the analysis of a companies risk. They give a good picture of the business, financial and the overall risk of a companys operations. Following three leverages are the most important in this regard: Operating Leverage (OL) = Contribution / EBIT It is a measure of the business risk. Financial Leverage (FL) = EBIT / PBT It is a measure of the financial risk. Combined Leverage = OL * FL = Contribution / PBT It is a measure of the overall risk. Comments: Based on the ratios and the leverages, we can comment on the position of the company with respect to: Short-term Solvency Position: The short-term solvency position of Kamal PVC Industries (Pvt) Limited is not as good as one would like it to be. The decrease in the current ratio to a value below the unity mark should be a concern. This shows that the company has some liquidity problems. Long-term Solvency Position: The long-term solvency of the company appears to be ok. The company has to improve its debt-equity ratio to meet industry average. Activity Position: Activity ratios for Kamal PVC Industries (Pvt) Limited are not in order. Indications of variable activity are available on comparing the ratios over the years. The company needs to ensure lower days of receivables and come up with proper working capital management measures. Profitability Position: The profitability position of Kamal PVC Industries (Pvt) Limited has improved over the years. This may be attributed to the increase in sales and to the decrease in the debt liabilities. The profit measure ratios have shown a substantial improvement from 1999 to 2001. Both the PAT and the cash profit have increased substantially over the years. This shows that the company has been operating at comfortable profit margins and that too despite the increasing competition. PS: One thing should be noted that over the three years under consideration, the year 2010 has been below par. One can see that the company was performing about fine in the year 2009, and has shown a large improvement in the year 2011, but the year 2010 has not been good, compared to the year 2009. This may be attributed to global competition and pressure from other competitors. Also, since a substantial market for the companys products is in the white goods and the electronics and IT sectors, hence the health of these sectors too might have been a cause for poor performance. Statement Analysis: (Refer Appendix A for the financial statements and common size statements for the company for three financial years) Observations: There has been no change in the Equity share capital of the company. Decrease in Reserves and decrease in the total debt for the company is again a positive thing implying better utilization efforts by the company. The Net Sales have been rising at a steady pace, likewise for the operating income and the profits. The tax liabilities of the company have increased over the year, but this is normal as this is due to more income. The Equity-Debt ratio has also been showing an upward trend over the years. Both the PAT and the cash profit have increased substantially over the years. This shows that the company has been operating at comfortable profit margins. Comment on Changes: Based on the observations and the data available for the three financial years, we can make the following comments on the financial position of the company: Increased Capital Turnover of Kamal PVC Industries (Pvt) Limited coupled with higher margins had led to an increase in return on capital employed (RoCE). The companys total debt has decreased from Rs. 572.78 mn as on December 31, 2009 to Rs. 475.91 mn as on December 31, 2011. The company s EPS has improved from around Rs. 6.0 in 2009 to around Rs. 8.0 in 2011. Improvement can also be seen in the Cash Flow per Share (CFPS) and in the dividend payout in year 2011 as compared to previous years. Cash Flows to Debt and Equity When calculating the amount of cash flowing to debt and equity holders, it is not appropriate to use the unlevered free cash flows because these cash flows do not reflect the tax savings from the interest paid. Starting with the UFCF, add back the taxes saved to obtain the total amount of cash available to suppliers of capital. Hurdle Price At times a firm may wish to know at what price it would have to sell its product for a particular investment to have a positive net present value. A procedure for determining this price is as follows: Express the operating cash flow in terms of price. There may be multiple phases such as a short start-up period, a long operating period, and a final year in which the terminal value is calculated. Write out the expression for the NPV using the appropriate discount rate. For the longer operating period, one can calculate an annuity factor to multiply by the operating cash flow expression. Solve the expression for the cash flow that would result in an NPV of zero. Since the operating cash flow was written in terms of price, the price now can be found. Debt Valuation While debt may be issued at a particular face value and coupon rate, the debt value changes as market interest rates change. The debt can be valued by determining the present value of the cash flows, discounting the coupon payments at the market rate of interest for debt of the same duration and rating. The final periods cash flow will include the final coupon payment and the face value of the bond. Investment Decision If the unlevered NPV of a project is negative, aside from potential strategic benefits, the project is destroying value, even if the levered NPV is positive. The firm always could benefit from the tax shield of debt by borrowing money and putting it to other uses such as stock buybacks. Optimal Capital Structure The total value of a firm is the sum of the value of its equity and the value of its debt. The optimal capital structure is the amount of debt and equity that maximizes the value of the firm. Share Buyback If a firm has extra cash on hand it may choose to buy back some of its outstanding shares. One interesting aspect of such transactions is that they can be based on information that the firm has that the market does not have. Therefore, a share buyback could serve as a signal that the share price has potential to rise at above average rates. Mergers and Acquisitions Companies may combine for direct financial reasons or for non-financial ones such as expanding a product line. The target firm usually is acquired at a premium to its market value, with the hope that synergies from the merger will exceed the price premium. Mergers and acquisitions do not always achieve their goals, as promised synergies may fail to materialize. Appendix A Income Statement: Income Statement ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   As on (12 Months) 31-Dec-11 ÂÂ   31-Dec-10 ÂÂ   31-Dec-09 ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   Profit / Loss A/C Rs. Mn. %OI Rs. Mn. %OI Rs. Mn. %OI Net Sales 2411.81 95.38 2138.62 97.69 1630.73 97.89 Operating Income (OI) 2528.73 100 2189.14 100 1665.81 100 OPBDIT 351.82 13.91 247.76 11.32 296.01 17.77 OPBDT 293.12 11.59 156.62 7.15 202.46 12.15 OPBT 193.35 7.65 62.66 2.86 116.84 7.01 Non-Operating Income 2.29 0.09 5.03 0.23 1.67 0.1 Extraordinary/Prior Period -1.4 -0.06 0 0 0 0 Tax 51.5 2.04 2.53 0.12 13.59 0.82 Profit After Tax (PAT) 142.74 5.64 65.16 2.98 104.92 6.3 Cash Profit 242.51 9.59 159.11 7.27 190.54 11.44 Dividend-Equity 35.17 1.39 26.38 1.2 26.38 1.58 ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   Balance Sheet: Balance Sheet ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   As on 31-Dec-11 ÂÂ   31-Dec-10 ÂÂ   31-Dec-09 ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   Assets Rs. Mn. %BT Rs. Mn. %BT Rs. Mn. %BT Gross Block 2065.86 80.17 1924.58 80.09 1762.46 76.77 Net Block 1359.8 52.77 1314.63 54.71 1244.93 54.22 Capital WIP 139.77 5.42 148.98 6.2 183.43 7.99 Investments 0.45 0.02 0.45 0.02 0.45 0.02 Inventory 370.11 14.36 348.81 14.52 313.3 13.65 Receivables 600.92 23.32 485.89 20.22 470.62 20.5 Other Current Assets 105.95 4.11 104.11 4.33 83.17 3.62 Balance Sheet Total 2577.01 100 2402.87 100 2295.9 100 ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   Liabilities Rs. Mn. %BT Rs. Mn. %BT Rs. Mn. %BT Equity Share Capital 175.86 6.82 175.86 7.32 175.86 7.66 Reserves 826.2 32.06 1004.83 41.82 968.92 42.2 Total Debt 475.91 18.47 452.42 18.83 572.78 24.95 Creditors and Acceptances 610.08 23.67 579 24.1 443.08 19.3 Other current liab/prov. 488.97 18.97 190.77 7.94 135.27 5.89 Balance Sheet Total 2577.01 100 2402.87 100 2295.9 100 ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   Ratio Analysis: Ratio Analysis ÂÂ   ÂÂ   ÂÂ   ÂÂ   As on 31-Dec-11 31-Dec-10 31-Dec-09 ÂÂ   ÂÂ   ÂÂ   ÂÂ   OPBIT / Prod. Cap. Empl. (%) 18.85 10.37 13.72 PBIT / Capital Employed (%) 18.9 10.7 13.82 PAT / Networth (%) 14.24 5.52 9.17 Tax / PBT (%) 26.51 3.74 11.47 Total Debt / Networth 0.47 0.38 0.5 Long Term Debt / Networth 0.4 0.34 0.36 PBDIT / Finance Charges 6.01 2.77 3.18 Current Ratio 0.98 1.22 1.5 RM Inventory (Days Consumption) 42.85 39.92 59.39 FG inventory (Days Cost of Sales) 24.33 27.3 30.32 Receivables (Days Gross Sales) 79.7 72.61 93.1 Creditors (Days Cost of Sales) 102.29 108.86 118.06 Op. Current Assets (Days OI) 155 156 190 ÂÂ   ÂÂ   ÂÂ   ÂÂ   Detailed Ratio Analysis (For Two Financial Years): Ratios Analysis Kamal PVC Industries (Pvt) Limited Comparison 31-Dec-11 31-Dec-10 Profitability Ratios ÂÂ   ÂÂ   OPBIT/Productive Capital Employed (%) 18.85 10.37 ROCE (%) 23.8 15.17 RONW (%) 14.24 5.52 TAX/PBT (%) 26.51 3.74 Gross Profit Margin (%) 7.65 2.86 Net Profit Margin (%) 5.64 2.98 Operating Profit Margin (%) 13.91 11.32 Dividend Payout Ratio (%) 24.64 40.48 Dividend/Operating Cash Flow (%) 14.5 16.58 Leverage Ratios ÂÂ   ÂÂ   Debt Equity Ratio (Times) 0.47 0.38 LTD/NW (Times) 0.4 0.34 Liquidity Ratios ÂÂ   ÂÂ   Current Ratio (Times) 0.98 1.22 Flow Ratio (Times) 0.21 0.38 Cash/CA (%) 50.89 35.1 Cash/CL (%) 22.07 20.67 PBDIT/Finance Charges (Times) 6.01 2.77 Activity Ratios ÂÂ   ÂÂ   RM Inventory (Days Consumption) 42.85 39.92 FG Inventory (Days Cost of Sales) 24.33 27.3 Receivables (Days Gross Sales) 79.7 72.61 Creditors (Days Cost of Sales) 102.29 108.86 Op.Curr.Assets (Days OI) 155 156 Working Capital (Net of Cash) (Rs Mn) -622.53 -316.39 Working Capital Cycle (Days OI) -4.06 -6.92 Growth Ratios ÂÂ   ÂÂ   Growth in Total Income (%) 14.16 31.28 CAG in Total Income (3 periods)(%) 14.44 20.37 Growth in Gross Profits (%) 208.57 -46.37 CAG in Gross Profits (3 Periods) (%) 18.28 17.57 Growth in Net Profits (%) 119.07 -37.9 CAG in Net Profits (3 Periods) (%) 10.81 22.67 Growth in Net Profits- (projected) (%) 0 0 Growth in Operating Profits (%) 42 -16.3 CAG in Operating Profits (3 Periods) (%) 5.93 3.65 Cash Flow Forex Details ÂÂ   ÂÂ   Forex Exchg Earnings/ForexOutflow (Times) 0.29 0.4 Forex Earnings /OI (%) 1.69 2.06