shiva's project

7/30/2019 Shiva's Project

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ON

CAPITAL STRUCTURE

Of

HINDALCO INDUSTRIES LIMITED

Submitted in partial fulfilment of the requirement for the

Award of degree of

SESSION:

UTTAR PRADESH TECHNICAL UNIVERSITY, LUCKNOW (U.P.)

NIBIA, BACHCHHAON, VRM BYPASS, VARANASI-11

Submitted To:Prof. C. LAL

IMS (SHEPA)VARANASI(U.P)

Submitted By:SHIVA SINGH

MBA (Finance)

Roll No. 0918470052


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PREFACE:

Summer training is an integral part of our academic curriculum. During the training a student gets

an opportunity to understand the practical aspects of various functional domains in an organization.

Its built a better understanding of practical challenges that one faces during his/her performance of

tasks.

This project report is the outcome of the summer training that I have undergone at Hindalco

Industries Limited for partial fulfilment ofMaster of Business Administration.

The topic allotted to me by my project guide is Capital Structure of Hindalco

The project emphasizes on the financial aspects about the company and its financing mix.

I have tried to my best to make a good project report which could be further used for any reference

work. However no one can claim perfection in its entirely. So I apologize for the discrepancy, if

any, crept in.

Preparation of project requires perseverance, initiatives, proper guidance and direction. So its

mandatory to take aid of various departments.

Actually a project is the summarized form of seven activities. They are

Planning

Resource Collection

Organizing

Efficiency

Communication

Transparency


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ACKNOWLEDGEMENT

All praise is due to Almighty, the merciful omniscient whose blessing enabled me to complete this

challenging work in time.

I feel great pleasure and satisfaction at the completion of this work and would like to express deep

ineptness and sincere gratitude to all who helped me to accomplish this task.

I am very thankful to all faculty members, M.I.S for their guidance, encouragement and support

that helped me at every step towards the completion of this work.

I would like to thanksMr. Prof C.Lal, Director, I.M.S for being constant guide and for giving me a

chance to work with this big organization. .

I express my deepest gratefulness to Mr. Vimal Raheja, Manager (Account &Finance),

HindalcoIndustriesLtd for providing valuable information whenever I needed one. His valuable

guidance and constant encouragement have helped me tremendously in the completion of this

project.

I express my deep sense of gratitude to my parents, teachers, friends whose patience, forbearance,

endurance and support have directly or indirectly helped me in completion of this project to the

present form.

[Shiva Singh]


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Representation Diagram


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TABLE OF CONTENTS

Chapter No. 1

Industry profile

Company Profile

Brief history of the organization

Vision, mission, objective, strategy

Swot analysis of the organization

Future plans

Problem being faced by organization

Problem formulation of project

Chapter No. 2

RESEARCH METHODOLOGY

Objective of the project

Scope of the study

Period of study

Method of study

Sources of information

Limitation


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Chapter No. 1

INDUSTRY PROFILES

ADITYA BIRLA GROUP


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INDUSTRY OVERVIEW

1. PROFILE OF THE ALUMINIUM INDUSTRY:

The Aluminium industry is highly concentrated ,with just five plants accounting for the entire

production capacity of 7,02,000 tonnes per annum. The capacity and production figure for these

producer are given below: Company capacity (Lac Tones) production (Lac Tones) Capacity

Utilization ( % )

*Figures Pretaining to the year 1999-2000

The per capita consumption of aluminium in India is only 0.5 kg as against 25 kg in USA, 19 kg in

Japan and 10 kg in Europe. Even the worlds average per capita consumption is above 10 times of

thatin India . One reason of low consumption in the country could be the consumption pattern of

aluminium in India is vastly different from that of developed countries consumption level. This

sector is going through a consolidation phase and existing producers are in the process of enhancing

their production capacity so that a demand supply gap expected in bridged. However ,India is a net

COMPANYCAPACITY(Lac

Tonnes)

PRODUCTION(Lac

Tonnes)

CAPACITY

UTILIZATION ( %)

BALCO 1.OO 0.9696

HINDALCO 2.42 2.49103

INDAL 1.17 0.44

37.18

MALCO 0.25 0.020.06

NALCO 2.18 2.1397.56

TOTAL


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exporter of alumina and aluminium metal at present. Sailent features of Indian Aluminium

Industry:-

Highly concentrated industry in the country

Controlled by two private groups and one public sector unit

Bayer-Hall-Heroult technology used by all producers

Electricity , coal and furnance oil are primary energy inputs

All plants have their own captive power units for cheaper and uninterrupted power supply.

Energy cost is 40% of manufacturing cost for metal and 30% for rolled products.

2. QUANTITATIVE DETAILS:

2.1 Raw Meterial and product type:-

Bauxite and calcined petroleum coke are primary raw materials for this industry. However, alumina

is raw materials for smelters and aluminum metal is raw material for tabrication units.

2.2 Fuel usage:

Coal, Furnace oil and electricity are primary energy inputs in aluminium production. Coal is

primarily used to generate steam which is the process while fuel oil is mainly used in calcmation of

alumina and various furnaces in fabrication plants Electricity is the major energy input in

aluminium production and its considered to be prime factor in determining economics of

aluminium production. Hence ,all primary metal producers have installed their own captive power

plants to supply cheaper and uninterrupted power for their used Majority of electricity consumed in

this industry is supplied by their own captive power


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2.3 Technology status:

Invented over 100 year ago Bayer-Hall- Heroult is the only available commercial technology even

today for the production for aluminium . Alumina is the basic raw material for the production of

aluminium metal through electrolytic up to 60% in the form of mono/trib hydrate is carried out

through the Bayer route ,which is an extractive hydro-metallurgical process.


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QUALITY POLICY

We at Hindalco, shall aim to achieve and sustain excellence in all our activities.

We are committed to total customer satisfaction by providing products & services,

which meet or exceed the customar expectations.

Modernisation of the manufacturing facilities, stress on technological innovation &

trainig of employees at all level shall be a continuous process in Hindalco.

A motivated workforce with a sense of pride in the organization shall iead us towards

Total Quality.


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SAFETY POLICY

Use appropriate technology & other resource to up grade safety standards.

To continuously improve the working condition leading to prevention of accident.

Not only continue to comply with all the applicable laws & regulation but also strive to

achieve beyond and set new standard.

To continuously monitor & control work places hazards and protect employees &

community from them.


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ENVIRONMENT POLICY

Innovate & improve the process, equipment, operations, maintenance & other practices

continuously for pollution prevention.

Adopt cleaner technologies wherever techno-economically viable.

Conserve key input resources such as bauxite , caustic , soda, coal, power, water,

furnace oil & other oils.

Remain in compliance with all applicable environment laws and regulations and also

strive to go beyond.

Ensure continual improvement in our environment performance through awareness &

training amongst the employees &contract workers.


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COMPANY PROFILES

ADITYA BIRLA GROUP


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BRIEF HISTORY OF ADITYA BIRLA GROUP

The Aditya Birla Group is Indias firs truly multinational (MNC) & second larges business

house, whosoever 30% of revenues flow from its operations across the world. Global in

vision, rooted in Indian values, the Group is driven by a performance ethic based on value

creation for its multiple stakeholders. A US $ 24 Billion conglomerate, with a market

capitalization of US $ 23 billion , the Group is anchored by an extraordinary force of

1,00,000 employees belonging to over 30 different nationalities the world over.

Over 74 Units in India and overseas as well (in Thailand , Indonesia, Malaysia , Philippines,

Egypt and Canada ) and international trading operation spanning several countries including

Singapore, Dubai , Russia , Vietnam, Myanmar and China make it Indias first truly

multinational conglomerate.

Committed to being a global benchmark Group , the Aditya Birla Group reaches out to the

core sector in India . In industrial integral to the nations growth Cement , Aluminium,

Fertilizers , Viscose Staple Fiber, Textile, Power, Telecommunications, Industrial Chemicals

and Financial Services.

The Aditya Birla Group is a dominant player in all the sectors in which it operates such

as Viscose Staple Fiber , Non Ferrous Metals, Cement, Viscose Filament Yarn, Branded

apparel, Carbon Black etc.


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ADITYA BIRLAS GROUPCOMPANIES:

OVERSEAS MANUFACTURING COMPANIES

The Aditya Birla Group, seen today as India's first truly global corporation, has a significant

presence in South East Asia, Africa, North America, Australia and China. The Group is present in

Thailand, Laos, Indonesia and Philippines in the Asian sub-continent, Egypt in Africa, Canada in

North America and has recently forayed into USA, UK, Germany and Hungary.

Country Company Products / services

Thailand Thai Rayon Viscose staple fibre (VSF)

Indo Thai Synthetics Spun and fancy yarns

Thai Acrylic Fibre Acrylic fibre

Thai Carbon Black Carbon black

Aditya Birla Chemicals(Thailand) Ltd.

Sodium phosphates, specialty phosphates, epoxyresins (bis-a and bis-f), diluents, curing agentsand allied products, sodium sulphite, sodiummetasulphite, sodium bisulphite, caustic soda,chlorine, epichlorohydrin, hydrochloric acid,allyl chloride

Thai Peroxide

Thai epoxyThai sulphates

Hydrogen peroxide, peracetic acid, calciumperoxideEpoxy resins

Specially phosphates

Philippines Indo Phil Textile Mills Yarns

Indo Phil Cotton Mills Yarns

Indo Phil Acrylic Mfg.

Corp.

Yarns

Pan Century SurfactantsInc.

Surfactants

Indonesia PT Indo Bharat Rayon Viscose staple fibre (VSF)

PT Elegant Textile Industry Yarns

PT Sunrise Bumi Textiles Yarns

PT Indo Liberty Textiles Yarns

PT Indo Raya Kimia Carbon disulphide

Malaysia Pan century edible oils Refined palm oil, Palm ole in, STEARIN, &PFAD
http://www.adityabirla.com/our_companies/international_companies/thairayon_thailand.htmhttp://www.adityabirla.com/our_companies/international_companies/thairayon_thailand.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_thai_synthetics_company.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_thai_synthetics_company.htmhttp://www.adityabirla.com/our_companies/international_companies/acrylicfibre_thailand.htmhttp://www.adityabirla.com/our_companies/international_companies/acrylicfibre_thailand.htmhttp://www.adityabirla.com/our_companies/international_companies/thai_carbon_black.htmhttp://www.adityabirla.com/our_companies/international_companies/thai_carbon_black.htmhttp://www.adityabirla.com/our_companies/international_companies/abcl.htmhttp://www.adityabirla.com/our_companies/international_companies/abcl.htmhttp://www.adityabirla.com/our_companies/international_companies/abcl.htmhttp://www.adityabirla.com/our_companies/international_companies/thai_peroxide.htmhttp://www.adityabirla.com/our_companies/international_companies/thai_peroxide.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_textile.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_textile.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_cotton.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_cotton.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_acrylic_manufacturing.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_acrylic_manufacturing.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_acrylic_manufacturing.htmhttp://www.adityabirla.com/our_companies/international_companies/pan_century_surfactants.htmhttp://www.adityabirla.com/our_companies/international_companies/pan_century_surfactants.htmhttp://www.adityabirla.com/our_companies/international_companies/pan_century_surfactants.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_indo_bharat_rayon.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_indo_bharat_rayon.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_elegant_textile.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_elegant_textile.htmhttp://www.adityabirla.com/our_companies/international_companies/sunrise_bumi.htmhttp://www.adityabirla.com/our_companies/international_companies/sunrise_bumi.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_indo_liberty_textiles.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_indo_liberty_textiles.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_raya_kimia.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_raya_kimia.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_raya_kimia.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_indo_liberty_textiles.htmhttp://www.adityabirla.com/our_companies/international_companies/sunrise_bumi.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_elegant_textile.htmhttp://www.adityabirla.com/our_companies/international_companies/pt_indo_bharat_rayon.htmhttp://www.adityabirla.com/our_companies/international_companies/pan_century_surfactants.htmhttp://www.adityabirla.com/our_companies/international_companies/pan_century_surfactants.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_acrylic_manufacturing.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_acrylic_manufacturing.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_cotton.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_phil_textile.htmhttp://www.adityabirla.com/our_companies/international_companies/thai_peroxide.htmhttp://www.adityabirla.com/our_companies/international_companies/abcl.htmhttp://www.adityabirla.com/our_companies/international_companies/abcl.htmhttp://www.adityabirla.com/our_companies/international_companies/thai_carbon_black.htmhttp://www.adityabirla.com/our_companies/international_companies/acrylicfibre_thailand.htmhttp://www.adityabirla.com/our_companies/international_companies/indo_thai_synthetics_company.htmhttp://www.adityabirla.com/our_companies/international_companies/thairayon_thailand.htm


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Pan century oleo chemicals Fatty acids & glycerin

Egypt Alexandria Carbon BlackCompany S.A.E

Carbon black

Alexandria Fiber CompanyS.A.E

Acrylic fibre

China Liaoning Birla Carbon Co.Ltd.

Carbon black

Canada AV Cell Inc. Softwood/ hardwood pulp (for VSFmanufacture)

AV Nackawic Inc. Dissolving pulp (for VSF manufacture)

Australia Aditya Birla Minerals Ltd-Birla NIFTY,Birla Mount

Garden

Copper mines

Laos Birla Lao Pulp andPlantations CompanyLimited

Pulp wood plantations / pulp plant

Group companies

Company Products / services

Grasim Viscose staple fiber, rayon grade pulp, cement,chemicals, sponge iron, textiles

:: UltraTech Cement Ltd* Ordinary Portland cement, Portland blast furnace slagcement, Portland pozzolana cement and grey Portlandcement

:: Shree Digvijay Cement* Cement and clinker

Hindalco aluminium, copper

:: Indian Aluminium Company Ltd* aluminium foil

:: Bihar Caustic and Chemicals Ltd* Caustic soda

Aditya Birla Nuvo Garments, viscose filament yarn, carbon black, textiles

:: Idea Cellular Ltd. Cellular telecommunications

:: Aditya Birla Insulators Limited Insulators

:: Birla Sun Life Insurance Co.Ltd** Insurance

:: Birla Sun Life Asset Mgmt. Co. Ltd Mutual funds
http://www.adityabirla.com/our_companies/international_companies/alexandria_carbon_black.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_carbon_black.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_carbon_black.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_fiber.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_fiber.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_fiber.htmhttp://www.adityabirla.com/our_companies/international_companies/liaoning_birla_carbon.htmhttp://www.adityabirla.com/our_companies/international_companies/liaoning_birla_carbon.htmhttp://www.adityabirla.com/our_companies/international_companies/liaoning_birla_carbon.htmhttp://www.adityabirla.com/our_companies/international_companies/avcell_canada.htmhttp://www.adityabirla.com/our_companies/international_companies/avcell_canada.htmhttp://www.adityabirla.com/our_companies/international_companies/av_nackawic.htmhttp://www.adityabirla.com/our_companies/international_companies/av_nackawic.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_nifty.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_nifty.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_laos.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_laos.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_laos.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_laos.htmhttp://www.grasim.com/http://www.grasim.com/http://www.adityabirla.com/our_companies/indian_companies/ultratech_cement.htmhttp://www.adityabirla.com/our_companies/indian_companies/shree_digvijay_cement.htmhttp://www.hindalco.com/http://www.hindalco.com/http://hindalco.com/about_us/tapping_new_markets.htmhttp://www.adityabirla.com/our_companies/indian_companies/bihar_caustic.htmhttp://www.adityabirlanuvo.net/http://www.adityabirlanuvo.net/http://www.adityabirla.com/our_companies/indian_companies/idea.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insulators.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insulators.htmhttp://www.adityabirla.com/our_companies/indian_companies/idea.htmhttp://www.adityabirlanuvo.net/http://www.adityabirla.com/our_companies/indian_companies/bihar_caustic.htmhttp://hindalco.com/about_us/tapping_new_markets.htmhttp://www.hindalco.com/http://www.adityabirla.com/our_companies/indian_companies/shree_digvijay_cement.htmhttp://www.adityabirla.com/our_companies/indian_companies/ultratech_cement.htmhttp://www.grasim.com/http://www.adityabirla.com/our_companies/international_companies/birla_laos.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_laos.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_laos.htmhttp://www.adityabirla.com/our_companies/international_companies/birla_nifty.htmhttp://www.adityabirla.com/our_companies/international_companies/av_nackawic.htmhttp://www.adityabirla.com/our_companies/international_companies/avcell_canada.htmhttp://www.adityabirla.com/our_companies/international_companies/liaoning_birla_carbon.htmhttp://www.adityabirla.com/our_companies/international_companies/liaoning_birla_carbon.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_fiber.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_fiber.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_carbon_black.htmhttp://www.adityabirla.com/our_companies/international_companies/alexandria_carbon_black.htm


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:: Birla Sun Life Distribution Co. Ltd. Investment planning services

:: PSI Data Systems Application development, maintenance andenhancement solutions

:: TransWorks Customer relations management (CRM) services

inbound customer service, including technical support;email / web-chat support; and outbound telemarketing.

:: Birla Global Finance Ltd Asset-based finance, corporate finance and investmentbanking, capital market, treasury.

:: Birla Insurance Advisory ServicesLtd.

Non-life insurance advisory services

:: Madura Garments Garments

:: Hi Tech Carbon Carbon black

Aditya Birla Retail Multi-format stores

Tanfac Industries Ltd. Fluorine chemicals

Essel Mining & Industries Ltd Iron and manganese ore mining, noble Ferro alloys,nitrogen production

Joint ventures

Company PartnerKey products /

services

Birla Sun Life Insurance Co.Ltd.

Sun Life (Canada) Insurance solutions

Tanfac Industries Ltd. TIDCO (Tamil Nadu Industrial Development

Corporation)

Fluorine chemicals

Birla Sun Life Asset Mgmt.Co. Ltd.

Sun Life (Canada) Mutualfunds

Birla Sun Life Distribution Sun Life (Canada) Investmentplanning services
http://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/indian_companies/psi_datasystems.htmhttp://www.adityabirla.com/our_companies/indian_companies/transworks.htmhttp://adityabirlanuvo.co.in/products/financial_services.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insurance_advisory_service.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insurance_advisory_service.htmhttp://www.adityabirlanuvo.net/products/garments.htmhttp://www.adityabirla.com/our_companies/indian_companies/hitech_carbon.htmhttp://www.adityabirla.com/media/press_releases/200705may/aditya_birla_retail_more.htmhttp://www.adityabirla.com/media/press_releases/200705may/aditya_birla_retail_more.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/indian_companies/essel_mining.htmhttp://www.adityabirla.com/our_companies/indian_companies/essel_mining.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_management.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_insurance.htmhttp://www.adityabirla.com/our_companies/indian_companies/essel_mining.htmhttp://www.adityabirla.com/our_companies/joint_ventures/tanfac_industries.htmhttp://www.adityabirla.com/media/press_releases/200705may/aditya_birla_retail_more.htmhttp://www.adityabirla.com/our_companies/indian_companies/hitech_carbon.htmhttp://www.adityabirlanuvo.net/products/garments.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insurance_advisory_service.htmhttp://www.adityabirla.com/our_companies/indian_companies/birla_insurance_advisory_service.htmhttp://adityabirlanuvo.co.in/products/financial_services.htmhttp://www.adityabirla.com/our_companies/indian_companies/transworks.htmhttp://www.adityabirla.com/our_companies/indian_companies/psi_datasystems.htmhttp://www.adityabirla.com/our_companies/joint_ventures/birlasunlife_distribution.htm


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Some recent milestones:

In March 2005 the company entered into a MoU with the Government of Jharkhand to

set up aluminium smelter and captive power plant in the state.

In April 2005, the company entered into MoUs with the Orissa and Jharkhand

governments for setting up a Greenfield alumina facility and aluminum facility

respectively, in the states.

In April 2005, the company signed a MoU to establish a world -class integrated

aluminum project in the state of Orissa.

In September 2005, the company split its shares in ratio of 10:1 in order to enhance

liquidity and to encourage participation from retail investors.

In January 2006, the company concluded 4:1 rights issue of its shares on partly paid

basis. It was the largest ever rights issue in the history of corporate India and first one

to issue partly paid instruments.

In March 2006, the company acquired an aluminum rolling mill and wire rods facility,

from Asset Reconstruction Company (India) Limited ( ARCIL), belonging to Pennar

Aluminum Company Limited.

In May 2006, the company's copper mining subsidiary Aditya Birla Minerals Limited

(formerly Birla Mineral Resources Pty Ltd.) came out with an equity offering and

subsequent listing on the Australian Stock Exchange (ASX).

In May 2006, the company signed a MoU with the Government of Madhya Pradesh for

setting up a Greenfield aluminum smelter and a captive power plant . The company also

entered into a joint venture with Essar Power (M.P.) Ltd . to develop and operate

coalmines at Mahan, Madhya Pradesh. The joint venture will supply coal to the

proposed aluminum smelter and power complex in Madhya Pradesh.


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In May 2007, Novelis became a Hindalco subsidiary with the completion of the

acquisition process. The transaction makes Hindalco the world's largest aluminum rolling

company and one of the biggest producers of primary aluminum in Asia, as well as

being India's leading copper producer .

Greentech safety gold award 2008 for outstanding achievement in safety management in

coal based power sector.

Hindalco Hirakud systems runners up at the state levels IT competition 2008

organized by CII in association with the department of informational technology ,

government of Orissa.

Hirakud smelter was awarded the state level safety awards for best occupational health

care 2006 presented in February 2008 at Bhubaneswar.

Talabira coal mines won a host of safety awards namely first in working face and

maintenance of Dozer and pay loader and second in dust suppression at the annual coal

mines safety fortnight 2008 organized by directorate of mine safety Bhubaneswar &

Chaibasa region.


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COMPANY PROFILE

INDUSTRY AT GLANCE:

Hindalco industries limited are the flagship company

of one Indias leading business houses, Aditya birla

group . The has been in operations spanning over 5

decades with global presence. Its turnover of Rs.

624.54 billion in 2005-06 , ranks among Indias top

10 companies in terms of market capitalization a non

ferrous metal powerhouse. Hindalco was set up in

collaboration with Kaiser Aluminum and chemicals

cooperations USA in a record time of 18 months.

Incorporated in 1958 , Hindalco commenced production

of aluminum In 1962 at Renukoot (UP) with an

initial capacity of 20000 MTPA of aluminum metal . HINDALCO also own a large Captive

Thermal Power Plant at Renusagar that meets the power requirement of the company very

effectively . Hindalco currently has primary Aluminum capacity of 3, 45,000 MTPA . Hindalco

operations are organized into two strategic business units- Aluminum and copper. The

company is industry leader in both these business.


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Great Employer

Maybe you would like to take a crash course on branding, run a marathon or even go deep into the

hinterland to manage a water conservation project, or probably do all of these while working

quietly on a global acquisition. At the Aditya Birla Group, opportunities are only limited by your

imagination.

The $12 billion Indian conglomerate was ranked number one in India and among the best in Asia

by Hewitt in their Best Employers Survey 2007. The India winners were chosen after a six-month

long intensive research that included 230 participating companies and more than 44,000 respondent

employees, representing the views of more than one million employees. The Best Employers in

Asia study spanned some of the most dynamic markets in Asia attracting more than 750 employers.

What is the DNA of a best employer? Contrary to the popular belief, its not a lifetime employment

guarantee or remuneration but an organizations ability to provide customized solutions to an

employees unique situation. Given the diverse range of organizations represented in the Best

Employers in India list, to be the best, parameters like industry size, ownership and legacy didnt

matter. But what did, were metrics like employee engagement and alignment, opportunities for

growth and development, performance differentiation, quality of HR initiatives and employee

diversity.


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ALUMINIUM

Hindalco is Asias largest primary producer of Aluminium and among the

most cost-efficient producers globally. Hindalco enjoys a leadership

position in primary aluminium and downstream products.companys

integrated complex at Renukoot houses an Alumina refinery, Aluminium

Smelter and facilities for production of semi fabricated products. Power is

sourced from the Companys captive power Plant at Renusagar, located at distance of about 45 km

from Renukoot. The Plant has a current generation capacity of 854 MW having 10 power

generating units. Excellent operation standards have ensured a consistent plant load factor of over

90%. The integrated complex at Renukoot also houses two co-generation plants of 37.5 MW and 41

MW capacities respectively.

Besides the integrated complex at Renukoot, Hindalcos other manufacturing facilities arelocated at

many diverse locations in the country. Smelters are located at Hirakund, Orissa, with a captive

power plant and coal mines and at Alupuram, Karla. Rolled Product facilities are located at Belur

and Latoya and an Extrusions plant at Alupuram.Production of Aluminium

Extracting Alumina from bauxite, and then smelting the alumina into aluminium, produces primary

aluminum. The extraction is alumina is accomplished through a chemical process. This begins

when bauxite chunks are crushed on wet ground to form slurry, which is fed into digesters, where

the alumina contents of bauxite are dissolved in caustic soda and the slurry is separated into red

mud and sodium alumina solution. Alumina hydrate is filtered and washed free of caustic soda and

the calcined in gas suspension calcine to produce calcined alumina. In the final stage of aluminium

production, calcined alumina is smelted into molten primary aluminium into rods of electrolytic

cells; the alumina is dissolved in molten cryolite (Aluminium fluoride). The reaction in the cells is

powered by electricity carbon anodes are used in the process. The molten aluminium is crucibles


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are poured modules to form ingots or billets of various sizes or transferred for further processing

into semi-fabricated products. It takes the company approximately two tons of yield one ton of

primary aluminium. Aluminium is the primary product of Hindalco.

It has following characteristics:

It is light; its density is only 1/3 rd of steel.

It is resistant to weather.

It can be used in contact with a wide range of foodstuff.

It has a high reflective and finds many decorative uses.

It alloys can equal or even exceed. The strength of normal construction steel.

It is highly elastic.

It keeps its toughness down to very low temperatures.

It is easily worked and formed; it can be rolled to very thin foil.

It conducts electricity and heat nearly as well as coppe

Raw Materials

Bauxite

Hindalco obtained about 65% of its Bauxite requirement from its own mines and purchased around 35% of

the Bauxite from the market.

Caustic Soda

To Cates its caustic soda need the company has set up BCCL (Bihar Caustic and Chemical Ltd.) in

joint venture with the state government of Bihar. BCCL Cates around 90% of the caustic needs of

Hindalco. Rest is purchased from the Kanoria Chemicals and Industries Ltd. Renukoot.

CP Coke

CP coke is baked with hard pitch to make carbon anodes, which are used in the process of

electrolysis.


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Aluminium fluoride

It is used in the smelting process. The company buys almost all of its aluminium fluoride from

Tanfac Industries Ltd.

Hard Pitch

It is used along with CP Coke to make carbon anodes for the smelting processes.

Power

Power plays a vital role in the aluminium industry. It takes 16000 KW of power to produce one ton

of aluminium. Hindalco has its own captive power plant of 900 s MW situated 35 km from its main

plant at Renusagar. Hindalco also buys the deflect power from the state government of U.P.

Financial performance.

Net sales and turnover from aluminium business in fy-08 stood at Rs71450 million as compared with

Rs73444 in FY-07 A DROP OF 3%, primarily on account of a sharp decline in domestic metal

realization , primarily a fall out of sharp depreciation in US $ even as LME was almost flat . in US $ terms

the revenues increased by 9%.

Earning before interest & taxes(EBIT) declined by 17% to Rs 24,231 million due to pressure on realization

and increased costs. The cost increase was primarily on account of a sharp surge in crude prices , which

resulted in high prices of its derivatives and also increased prices of alternative fuel such as coal.

Aluminium producers across the globe experienced a sharp fall in EBIT.


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COPPER

Copper Business

The copper business faced one of the most trying years in its entire nine years history. Despite the

high prevailing copper prices and improved long term and spot Tc/Rc as compared to the previous

year, business suffered on account of difficult operating conditions.

Production

The copper business suffered production disruption on account of various problems both external

and internal. The heavy rainfall in the state of Gujarat during the first week of July resulted in

flooding of plant as well as the neighbouring areas. Road transportation was cut-off resulting in

serious dislocations in the movement of essential input and personnel not getting access to the site.

The 180,000tpa Smelter 1 had been working at less than optimal levels due to longer campaign runs

and underwent a 25 days over due BI-annual maintenance Shutdown in the months of November-

December 2005.Companys new smelter was commissioned in july2005.the commissioning of new

copper smelters always associated with a long-drawn ramp up process, and the experience at Dahej

was no exception.

Profitability

Net Sales and Operating Revenue

Net sales and operating Revenue for the year 2008-09 increased by 5% YOY on the back higher

volumes increased VAP tonnage and higher mark ups for both metals. A large increased in Net

Sales and Operating Revenues was though negated by a sharp decline in US doller.

Net profit increased 12% to Rs.28609 Million on account of tax adjustment for earlier year. Cash

profit increased from Rs.32,024 Million to Rs.34487 Million.


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HINDALCO BUSINESS- Share of Net sales value 2008-09


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PRIMARY ALUMINIUM PRODUCTS OF HINDALCO

Hindalco is a dominant player in primary aluminium, with over 42 per cent market share. Its

product range includes

Ingots

Hindalco produces high purity ingots through the smelting process. Alloy ingots

of various grades are also produced mainly used for production of castings in

Auto Industry as well as electrical applications. Both these products are re-

melted and further processed into a large number of products for various downstream applications.

Hindalco's metal is a registered brand at London Metal Exchange (LME).

Wire rods

Hindalco manufactures wire rods, in a continuous casting and rolling process.

Electrical Conductor (EC) wire rods are used for the production of cables, ACSR

and AAC conductors. Alloy wire rods are used to produce AAAC conductors.

Billets

Hindalco's aluminium billets are produced by a state-of-the-art Wagstaff casting

process using Airslip technology. These are top quality billets with a smooth

surface finish. Billets are used mainly for producing extrusions and forgings.

Hindalco Extrusions are manufactured from high-quality billets made out of

virgin in-house metal. They have found applications in a wide spectrum of segments, such as,

architectural, electrical, industrial, transport, defence and consumer durables among others.

Hindalco Extrusions is a leading brand in each of these segments.


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HINDALCOS ROLLED PRODUCTS

Hindalco is the world's largest aluminium rolling company with the

acquisition of Novelis, the global leader in value-added high-end aluminium

flat rolled products and aluminium can recycling. The combined volume of

sales of flat rolled products in the world market is about 3 million tonnes and the market share is

more than 20 per cent.

Hindalco is the largest manufacturer of the entire range of flat rolled products in India. It enjoys

nearly 60 per cent of market share and its rolled products are widely used in various segments such

as packaging, transportation, building and construction, electrical, defence and general engineering

applications.

The company's commitment to quality and service along with its extensive infrastructure has made

Hindalco a prime source for best-selling brands. Continuous improvements in manufacturing,

processes, practices and systems ensure that customers' needs and expectations are fully met.

FOIL AND PACKING,

Hindalco's Foils and Packaging Division operates out of three modern,

well-equipped plants located at Kalwa in Maharashtra, Silvassa in

Dadra & Nagar Haveli and its subsidiary unit Indal Kollur, in Andhra

Pradesh. The 'Tri-Plant' advantage gives the Hindalco Foil marketing

team a seamless 'One Stop Shop' approach to an entire range of products.

All plants employ high-end technology and professional expertise to develop visually appealing and

functionally useful packaging. Delivering 'not-tried-before' solutions to customers in India and

across the globe, Hindalco's Foil and Packaging Division has the distinction of being India's

leading supplier of foil laminatesplain, lacquered and printed.


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Hindalco's complete backward integration, right down to the raw material stage from bauxite ore to

primary metal, guarantees full control over the quality of the final foil output.

ALLOY WHEELSHindalco manufactures world-class aluminium alloy wheels at its state-of-the-

art foil plant located at Silvassa, Dadra and Nagar Haveli, where alloy wheels

and aluminium foil are produced. This has helped the company to optimise

capacity and enhance the share of value-added semi-fabricated products.

The 300,000-piece alloy wheel plant is progressively increasing production.

Branded as Aura alloy wheels, these high performance wheels are available for nearly all vehicles

running on the Indian roads. Maruti-Suzuki, Tata Motors, Fiat India and HM-Mitsubishi India have

already approved them for original equipment supplies. The vendor approval process is on with a

number of other automobile manufacturers.


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HINDALCO TODAY

Aluminum has turned out to be the wonder metal of the industrialized world. No other

single metal can do so many jobs , so well , and so economically.

Aluminum growth rate is the highest amongst the major basic metals today. Hindalco ranks

as the largest aluminum producer in India, whose more than 58% sales is in value -added

product and has more than 40% in total market share . The companys fully integrated

aluminum operations consist of the mining of Bauxite, conversion of Bauxite into Alumina,

production of primary Aluminum from Alumina by electrolysis and production of Properzi

redraw rods, rolled products, extrusions and value added products like Foil and Wheel at

Silvasa. Hindalcos integrated operations and operational efficiency have enabled the

company to be one of the worlds lowest cost producers of Aluminum. The company cost

efficiency has helped it to record on outstanding performance in the face of adverse

market conditions.

Hindalco also owns a large captive THERMAL POWER PLANT at Renusager that meets

the power requirement of the company very effectively.

HINDALCO has embarked upon a Rs 18 billion brown field expansion project which will

Smelter capacity by 1,00,000MTPA, refining capacity by 2,10,000MTPA , and captive Power

Generation to 769MW.in the year 2000, Hinadalco acquired Alcons 54.6 majority stake In

another Indian aluminum major Indal . This was followed by public offer for an additional

20% stake the acquisition makes possible and excellent synergistic fit -Indal. Strength in

Aluminum and downstream, products dovetail admirably with Hindalco strong presence in

metal.

An ISO 9001 and 14001 certified company , Hindalco achieved significant export in the year

2001- 02 & so on.., and is registered on the London Metal Exchange. Hindalco also has


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star trading house status . Hindalco products range includes Primary Aluminium , Ingot, Alloy

Ingot , Billets , Cast Slabs , Alloy Wire Rod, Sheet Products , Extruded Profiles , Conform

Products , Foils and Allow Wheels.

NOVELIS ACQUISITION

Aditya Birla Groups Hindalco Industries Limited, NOVELIS Inc have entered into a

definitive agreement for HINDALCO to acquire NOVELIS in an all cash transaction which

values NOVELIS at approximately US6$ billion, including approximately US2.4$ billion of

debt.

NOVELIS is the worlds largest producer of rolled aluminum, and recycle of aluminium

cans, with 12500 employees in all 11 countries, a market value of $2.9 billion and $3.2

billion of debt. It was spun off from Canadian Aluminium Company Alcan but incorporated

in Atlanta , USA.


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Renusagar

(CPP)

Bauxite

Mines(Jharkhand &

Chattisgarh)

Silavasa(Foils & Wheels)

Renukoot


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HINDALCO VISION

TO STRENGTHEN OUR POSITION AS A PRIMIUM ALUMINIUM COMPANY,

SUSTAINING DOMESTIC LEADERSHIP AND GLOBAL COMPETETITIVENESS

THROUGH INNOVATION, QUALITY AND VALUE ADDED GROWTH

HINDALCO MISSION

TO RELENTLESSLY PURSUE THE CREATION OF SUPERIOR

SHAREHOLDER VALUE BY EXCEEDING CUSTOMER EXPECTATIONS

PROFITABLY, UNIEASING EMPLOYEE POYENTIAL AND BEING A

RESPONSIBLE CORPORATE CITIZEN ADHERING TO OUR VALUES


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STRENTH

World largest integrated aluminium plant.

Lowest cost producer of aluminium in the globe.

Self-owned power supply at Renusagar.

Sufficient space for future expansion and modernization plans.

Companys esteemed brand image in the world.

Easy availability of raw materials.

Effective and efficient man power.

Productive diversification of productive lines.

Most assumed supply position

The companys favourable attitude towards safety, environment and quality

consideration.

A high degree of quality coconsciousness as the competence of the company

ISO-9002 and ISO-14001 have added more to the prestige of the company.

Ability to face high price competence under adverse marketing situation.

Quick decision making.

Having continuous process of employee development and performance

evaluation.

Having industrial peace, as there has been no major strike, since last to

decades.


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WEAKNESSES

Remote location with transport bottlenecks.

Dose not adhere to deliver schedule.

Late delivery is recurring problem.

Present distribution system and production capacity is not adequate to meet the

present and near future demand.

Observed a low moral and sense of dissatisfaction with regards organisaitionals

policies and promotional activities, during my course of interaction with

various workers.

OPPORTUINTIES

Rapid increase demand of aluminium and its product both in India and abroad

provide company the opportunity of enhancing its production and distribution

worldwide.

There is ample potential in entering, the application of Aluminium in India. It

provide company, with an opportunity to venture into related value added

product such as:

Manufacturing of aluminium canes.

Manufacturing of Aluminium cabinets of computers and inventers.

Introduction of Aluminium furniture are very popular in the Countries

like China, Malaysia and Indonesia.

Introduction to kitchen aluminium utensils with copper buffing and

power coating to grave it attractive appearance.

Diversification strategies in properly adopted, it could open new horizons.

Export of both primary metal and export quality consumer product, such as,

foil ad wheel could prove to be one of the major opportunities.


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THREATS

Introduction of industries engineering plastic in Japan could hamper the

market of Aluminium Industry.

Development of light weighted steel is also one of the threats to the industry.

Cut throat competition with major aluminium producer such as Nalco and

Balco is one of the market threats to the Hindalco.

High price of Aluminium as compared to its cheap substitute such as polyvinyl

chloride.

Failure in power transmission from Renupower to Hindalco could result in a

biggest hampering factor of production.

Policy of government to increase export and excise duty could also increases the

cost of sales and result in reduction of market share.

FUTURE PLANS

Growth plans underway in Aluminium

The expansions of the muri alumina refinery from 110000 tpa is under commissioning in a phased

manner. The production from the expended facility is being ramped up progressively and has

reached 180,000 tpa now .its full capacity during FY09.

Hirakud

Phase II of the expansion of the smelting capacity from 100,000 tpa to 143,000 tpa byis on track. Its

capacity has touched 110,000 tpa in Q4FY08 and will scale upto 143,000 tpa by August 2008.

Greenfield Project

Aditya Aluminium ,the integrated aluminium project ,encompassing 1 to 1.5 million tpa alumina

refinery 260,000 to 359,000 tpa aluminium smelter and 750 to 900 MW captive power plant is

progressing as planned


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Mahan Aluminium project with a smelter capacity of 359 ktpa and CPP of 900 mw is on schedule.

The smelter is expected to roll on July 2011.

Jharkhand project with a smelter capacity of 359 ktpa and CPP of 900 mw ,tubed coal mine has

been allotted jointly with Tata Power. The approximate date of commissioning is June 2012.

Utkal Alumina Refinery with a capacity of 1.5 mtpa construction is currently underway. Bauxite

mining activities will start by March 2009. The commissioning of the plant is expected by January

2011.


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PROBLEM BEING FACED BY

ORGANIZATION

In India, steel is preferred to ALUMINIUM particularly in automobile

sector. The average use of ALUMINIUM in the sector is close to 40 kg/capita as

comparison to worlds average usage of 120kg/capita. So company should try to

persuade the automobile players to start using aluminum.


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PROBLEM FORMULATION OFPROJECT

To find out the reason behind the fall in EPS of the

company in comparison with previous year.


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Chapter No. 2

RESEARCH

METHODOLOGY


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RESEARCH METHODOLOGY

Research methodology used here is purely exploratory. It is used when one is seeking into the

general nature of the problem, possible decisions alternatives and relevant variables that need to be

considered

The research methodology is highly flexible, unstructured and qualitative. Exploratory research

hypothesis are either vague or ill defined, or they do not exists at all.

Sampling Plan

There has been no sampling plan as such as the study involved understanding the various process

and analysing them. The study involved the detailed analysis of secondary data calculated from

various sources and therefore no sample size and plan has been considered.

Data Source

Data has been collected trough literature survey and expert opinion. Literature survey includes the

collection of data from various sources like study material.

The part of data is collected from primary source and other from secondary source.

Primary source

Information gathered by interview and discussing with the members of department.

Secondary source

Company annual report

Selected books and magazines.

Data Analysis

To analysis data I use different financial tools and techniques.

Statistical tools & techniques

graphical presentation

Tabulation of data

Ratio Analysis


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OBJECTIVE OF STUDY

To know about the capital structure and combination of debt and equity.

The understand different aspect of capital structure.

To deep study about the financial leverage of the organization

To study various approaches to establish target capital structure.

SCOPE OF STUDY

To know debtequity ratio of Hindalco

To know about the EPS of Hindalco

To know the financial leverage

To know the knowledge about the capita structure


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TO ACADEMICIANS

The study of financial analysis will enhance the knowledge of academician, they will be known

about financial performance of company.

TO CUSTOMER

This analysis will give consumer to help in analyzing the product which they are

consuming. Are of good quality or not

TO GOVERNMENT

Government can understand the working method and profitability. Which can provide an

insight to assess the taxation? Government cans interment to be supportive and directives to

boost such kind of aluminum industry.

TO INDUSTRY-

This study will help to know about the condition of aluminum industry whether it is on growth or

decline.


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Chapter No. 3

CAPITAL STRUCTURE

Meaning of capital structure

Pattern of capital structure

Optimum capital structure

Sources of funds

Equity verses Debentures

FRICT Analysis

Theories of Capital structure

Capital structure decision process


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implications for the shareholders earnings and risk, which in turn will affect the cost of capital and

the market value of the firm.

PATTERNS OF THE CAPITAL STRUCTURE

In case of new company, the capital structure may be of any of the following patterns:

Capital Structure with equity shares only

Capital Structure with equity and preference shares

Capital Structure with equity and debentures

Capital Structure with equity, preference shares and debentures

Debt is the liability on which interest has to be paid irrespective of the company profits. While

equity consists of shareholder or owners funds on which payment of dividend depends upon the

companys profit. A high proportion of debt content in the capital structure increases the risk and

may lead to financial insolvency in adverse time. However, rasing fund through debt is cheaper

as compared to financing through shares. This because figure-3 interest on debt is allowed as

an expense for taxes purpose. Dividend is considered to be an appropriation of profits; hence

payment on dividend does not result in any tax benefit to the company. This means if accompany,

is in 50% tax bracket, pays interest at 12% on its debentures, the effective cost to it comes

only 6% while if the amount is raised by 12%Preference shares, the cost of raising the

amount would be 12%. Thus rasing the funds by borrowing is cheaper resulting in higher

availability of profit for shareholders. This increases the earning per share of the company,

which is the basic objective of the finance manager.

OPTIMUM CAPITAL STRUCTURE

A firm should try to maintain an optimum capital structure with a view of to maintain financial

stability. The optimum capital structure is obtained when the market value per equity share is the


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maximum. It may be defined as that relationship of debt and equity securities which maximizes the

value of a companys share in the stock exchange. In case a company borrows and this borrowing

helps in increasing the value of companys share in the stock exchange, it can be said that the

borrowing has helped the company in moving towards its optimum capital structure; In case, the

borrowing results in fall in market value of the companys equity shares, it can be said that the

borrowing has moved the company from its optimum capital structure. The objective of the firm

should therefore be to select the financing or debt equity mix, which will lead to maximum value of

the firm.

CONSIDERATION

The following considerations will greatly help a finance manager in achieving his goal of optimum

capital structure:

We should take advantage of favourable financial leverage.

We should take advantage of the leverage offered by the corporate taxes.

We should avoid a perceived high risk capital structure.


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SOURCES OF FUNDS

Security financing- This includes financing through shares including both equity and

preference shares and debentures.

Internal FinancingThis includes financing through depreciation funds and retained earnings.

Loan Financing-This includes both short term and long-term loans.

EQUITY SHARE VERSUS DEBENTURES

A company may prefer financing through debenture as compared to equity shares on account of

following reasons:

Interest on debenture is allowed as an expense for tax purpose.

Debenture holds have generally no say in the management of the company

Underwriters may have little hesitation in accepting the companys proposal since

debentures are adequately backed by the companys assets.

Moreover, the company may find it beneficial to pay short-term loan by raising funds through

debentures at a time when interest rates on such loans are higher as compared to the interest rate

payable on the debentures. However, the company cannot go an unlimited extent of financing

through debentures. It has to strike a balance between risk and saving effected by raising funds

through debentures. The ultimate objective is to maintain unbalanced Capital Structure.

Sources of Funds

Security Financing Internal Financing Debt Financing


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MAJOR CONSIDERATION IN CAPITAL STRUCTURE PLANNING:

There are three major considerations, i.e. risk, cost of capital and control, which help the finance

manager in determining the proportion in which he can raise funds from various sources.

Although, three factors, i.e. risk, cost and control determining the capital structure of a particular

business undertaking at a given point of time. The finance manager attempts to design the Capital

Structure in such a manner that his risk and costs are the least and the control of the existing

management is diluted to the least extent.

RISK

Risk is of two kinds, i.e., financial risk and business risk. Here we are concerned primarily with the

financial risk. Financial risk also is of two types.

RISK OF CASH INSOLVENCY

As a firm raises more debt, its risk of cash insolvency increases. This is due to reasons. Firstly,

higher proportion of debt in the Capital Structure increases the commitments of the company with

regarded to fixed charges this means that a company stands committed to pay a higher amount of

interest irrespective of the fact whether it has cash or not. Secondly, the possibility that the supplier

of funds may withdraw the funds at may give point of time. Thus the long-term creditors may have

to be paid back in instalments even in instalments even if sufficient cash to do so does not exist.

This risk is not there in the case of equity share.

RISK OF BARIATION IN THE EXPECTED EARNING TO EQUITY

SHARE- HOLDER:

In case a firm has higher debt contenting Capital Structure. The risk of variation in expected

earning available to equity shareholder will be higher. This is because of trading of equity. We have

already seen earlier that financial leverage works both ways, i.e. it enhances the shareholders


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returns by a higher or lower than the rate of interest. Thus there will be lower probability that equity

shareholder will enjoy a stable dividend if the debt content is higher in the Capital Structure. In

other words the relative dispersion of expected earning available to equity shareholder will be

greater if the Capital Structure of a firm higher debt content.

COST OF CAPITAL

Cost is an important consideration in capital structure decision. It is obvious that a business should

be at least capable of earning enough revenue to meet its cost of capital and finance its growth.

Hence, along with a risk as a factor; the finance manager has to consider the cost aspect carefully

while determining the Capital Structure.

CONTROL

Along with cost and risk factor, the control aspect is also an important consideration in planning the

Capital Structure. When a company issues further equity share. It automatically dilutes the

controlling interest of the present owners. Similarly, preference shareholders can voting rights and

thereby affect the composition of the Board of Directors in case dividend on such share is not paid

for two consecutive years

TRADING ON EQUITY:

A company may raise funds either by the issue of shares or by borrowings. Borrowings carry a

fixed rate of interest and this interest is payable irrespective of fact where there is profit or not.

Preference shareholders are also entitled to a fixed rate of dividends but payment of dividend is,

subject to the profitability of the company. In case of rate of return on the total capital employed i.e.

shareholders funds plus long term borrowings, is more than the rate of interest on borrowed funds

or rate of dividends on preference shares, it is said that company is trading on equity.


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CURRENT YEAR (2008-2009)

The graph above clearly depicts that the proportion of debt in the financing mix of Hindalco

is much more as compared to share capital. The debt content is 26%whereas the proportion

of share capital and reserves and surplus is 0 and 74%respectively.

Composition of capital

structure

Share

Capital0%

Reserves

67%

LoanFund

33%


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2004-05 to 2008-09 (Rs. In Million)

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

Share Capital 1705 1226 1043 986 928

Reserves 235847 171736 123137 95077 75644

Loan Fund 83243 83285 73686 49034 38000

Capital Structure of Hindalco for five Years

0

25000

50000

75000

100000

125000

150000

175000

200000

225000

250000

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

Share Capital

Reserves

Loan Fund

275000


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THE FRICT ANALYSIS

A financial structure may be evaluated from various perspectives from owners point of view,

return; risk and value are important consideration. From the strategic point of view, flexibility is an

important concern and flexibility assumes great significance. A sound capital structure will be

achieved by balancing all these consideration:

FLEXIBILITY: the Capital Structure should be determined within the debt capacity of the

company and this capacity should be flexible. It should be possible for a company to adapt

its Capital Structure within a minimum cost and delay if warranted by a changed situation.

RISK: risk depends on the variability in the firms operation. It may be caused by macro

economic factor and industry and firms specific factor. The excessive use of debt magnifies

the variability of shareholders earnings and threatens the solvency ofthe company.

INCOME: The Capital Structure of the company should be most advantageous to the

owners of the firms. It should create value; subject to other consideration. It should generate

maximum return to the shareholders with minimum additional cost.

CONTROL the Capital Structure should involve the minimum risk of loss of control of the

company. The owner of closely held companies is particularly concerned about dilution of

control.

TIMING: The Capital Structure should be feasible to implement given the current and

future condition of the capital market. The sequencing of source of financing is important.

The current decision influences the future option of raising capital.

The FRICTanalysis provides the general framework for evaluating firms Capital Structure.


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THEORIES OF CAPITAL STRUCTURE

The objective of firm should be directed towards the maximisation of the value of the firm, the

Capital Structure, or leverage decision should be examined from the point of view of its impact on

the value of the firm. If the values of the firm can be affected by Capital Structure or financing

decision, a firm would like to have a Capital Structure, which maximize the market value of the

firm.

There are broadly four approaches in this regard. These are:

Net Income Approach

Net Operating Income Approach

Traditional Theory

Modigliani-Miller Approach

These approaches analysis relationship between the leverage, cost of capital and the values of the

firm in different way. However, the following assumptions are made to understand these

relationships.

1. There are only two source of funds i.e. debt and equity

2. The total assets of firm are given. The degree of leverage can be changed by selling debt

to repurchase shares or selling shares to retire debt.

3. There are no retained earnings

4. The operating profit of firm is given and expected to grow.

5. The business risk is assumed to be constant and is not affected by the financing mix

decision.

6. There are no corporate taxes.

7. The investors have the same subjective probability distribution of expected earnings.


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Capital Structure Decision Process

Capital Budgeting Decision

Replacement

Modernization

Expansion

Diversification

Need To Raise Funds

Capital Structure Decision

Internal Funds

Debt

Internal Equity

Existing CapitalStructure

Desired Debts EquityMix

Layout Policy

EffectingReturn Effect on Risk

Effect On Cost Of Capital

Value of Firm

OptimumCapital

Structure


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LEAVERAGE ANALYSIS

Financial leverage

Relationship between financial leverage & rate of return.

Determination of whether Hindalco is trading on Equity.


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LEAVERAGE ANALYSIS

Financial leverage is defined as the ability of a firm to use fixed financial charges to magnify

the effect of change in E.B.I.T on the firms earning per share. The financial leverage occurswhen a firms Capital Structure contain obligation of fixed financial charges. For instance, interest

on debentures, dividend on preference share etc., along with owners equity to enhance earning of

equity shareholders. The fixed financial charges do not vary with the operating profit. They are

fixed and are to be paid irrespective of level of operating profit. The ordinary shareholders of firm

are entitled to residual income i.e. earning after fixed financial charges.

Favourable and Unfavourable Financial leverage

Financial leverage may be favourable or unfavourable depending upon whether the earning made

by the use of fixed interest or dividend bearing securities exceeds the explicit fixed cost, the firm

has to pay for the employment of such funds or not. The leverage will be considered to be

favourable so long the firm earns more on assets purchased with the funds than the fixed cost of

their use. Unfavourable leverage occurs when the firm does not earn as much as the funds cost.

Significance Of Financial Leverage

Financial leverage help in deciding the appropriate Capital Structure. One of the objectives of

planning an appropriate Capital Structure is to maximize the return on equity shareholders funds or

maximize the earning per share.

Financial leverage is double-edged sword. On one hand, it increases the earning per share and on

the other hand it increases the financial risks high financial leverage means high fixed financial

cost and high financial risk i.e. as the debt content in Capital Structure increases, the financial

leverage increases and at the same time the financial risk is also increases i.e. risk of insolvency

increases. The finance manager is required to trade-off between risk and return for determining

the appropriate amount of debt.


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(Rs. in Millions)i

Relationship between financial leverage & required rate of return

Relationship between financial leverage and firms required rate of return to equity

shareholders with corporate tax is given by:

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

Net sales & operating

income1,82,196 1,92,010 183130 113965 95231

Total expenditure (1,51,837) (1,57,999) (1,42,980) (87,914) (72,465)

Operating profit 30,359 34,011 40,150 26,051 22,766

Other income 6,366 4,929 3,701 2,439 2,700

Depreciation (6,443) (5,878) (6,381) (5,211) (4,633)

EBIT 30,282 33,062 37,470 23,279 20,833

Interest charges (3,369) (2,806) (2,424) (2,252) (1,700)

PBT 26,903 30256 35046 21027 19133

Degree of financial

leverage=EBIT/PBT1.12 1.09 1.07 1.11 1.09

1.04

1.05

1.061.07

1.08

1.09

1.1

1.11

1.12

1.13

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

Degree of Financial leverage

Degree of Financialleverage


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Re = Ro + D/E (1-T) (Ro-Rb)

Where,

Re =required rate of return to equity shareholders

Ro = required rate of return for an all equity firm.

Rb = required rate of return to lenders

EXPLANATION:

The above graph clearly depicts that with higher debt content Re i.e. required rate of return by

shareholders is going up while TWACC is getting lower.

Determination of whether Hindalco is Trading on Equity

Trading on Equity

A company may raise funds either by issue of shares or by debentures. Debentures carry a fixed

rate of interest and this interest has to be paid irrespective of profits. Of course, preference share are

also entitled to a fixed rate of dividend depends upon the profitability of the company. In case, the

rate of return on the total capital employed is more than the rate of interest on debentures or rate of

dividend on preference shares, it is said that company is trading on equity.

Rate of return on equity shareholders fund

=PAT/Equity shareholders fund

= 22,303/2,37,583

= 9%

General rate of return = (PAT + Interest) / Total capital employed

= 25672/3,34,933

= 7%

The general rate of return is only 7%while the return on equity shareholders fund is 9%. Thus,

we can say that Hindalco is trading on Equity.


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EBIT-EPS ANALYSIS


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EBIT-EPS Analysis

The design of an appropriate capital structure is one of the major decision areas in financial

management.

A widely used financial technique to design an appropriate capital structure is E.B.I.T-EPS

analysis. As a method of capital structure planning, it essentially involves the comparison of

alternative methods of financing under various assumptions of E.B.I.T. the choice of combination

of source with the capital structure would be one that, for a given level of E.B.I.T. would ensure the

largest EPS. Alternatively, the choice of combination should ensure the maximum market price per

share.

MPS = EPS * Price-Earnings ratio

(Rs. in million)

Particulars 2008-09 2007-08 2006-07

EBIT 30,282 33,062 37,470

Interest Charges (3,369) (2,806) (2,424)

PBT & Extraordinary items 26,903 30,256 35,046

Extraordinary items - - -

PBT 22,303 30,256 35,046

Provision for Current Tax 4,781 6,063 (9,841)

Provision for Deferred Tax 1,214 875 551

Provision for fringe benefit tax 113 114 (113)

PAT 22,303 28,609 25,643

No. Of Shares Outstanding 1505245463 1286973135 1004921647

EPS 14.82 22.23 25.52

Figures in brackets indicates negative value


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INTERPREATION:

In FY-2008, The EPS of Hindalco was Rs. 22.23. But In FY-2009, It decrease to Rs. 14.82 This

change may be due to fluctuation in the sales value and operating leverage. It is obvious that net

profits Hindalco greatly with small fluctuation on sales figure especially because of high fixed

costs. Hence, EPS fluctuated. The Financial Leverage may heighten this effect.

0

5

10

15

20

25

30

2008-09 2007-08 2006-07

Earning Per Shear of Hindalco

2008-09

2007-08

2006-07


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COST OF CAPITAL


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COST OF CAPITAL

The cost of capital is a significant factor in designing the capital structure of an undertaking. The

basis reason behind running a business undertaking is to earn a return at least equal to its cost of

capital. Commercial undertaking has no relevance if it does not expect to earn its cost of capital.

Therefore, cost of capital constitutes an important factor in various business decisions.

The cost of capital estimate for a business is used for two purposes:

Evaluating the performance of a business: -The operating profit generated by a business

is evaluated against the minimum profit that the business is expected to generated as implied by the

cost of capital for that business. The profit generated by the business over and above the minimum

profit expectation is termed as the Economic Value Added (EVA) for that business.

Evaluating capital investment projects: - All projects that generate a return over and

above their respective cost of capital are EVA positive by nature and therefore value adding. The

appropriate cost of capital is used therefore to evaluate such projects into those that add value and

those that do not, thereby enabling financial decision-making.


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N = Life of Debentures

Cost of Preference Share

In the case of preference share, the dividend rate can be taken as its cost since it is this amount,

which the company intends to pay against preference shares. As in the case of debt, the issue

expenses or the discount / premium on issue/ redemption has also to be taken into account.

Cost of irredeemable share = PD/ PO

Where,

PD = Annual preference dividend

PO = Net proceeds in issue preference share-

Cost of redeemable preference share

If the preference share were redeemable after the expiry of a fixed period the cost of preference

share would be.

KP = PD + (RV-NP) / N

(RV + NP) /2

Where,

PD = Annual preference dividend

RV = Redemption value of preference

NP = Net proceeds an issue of preference share

N = Life of preference share


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Cost of ordinary of Equity share

Calculation of the cost of ordinary share involves a complex procedure. This is because unlike debt

and preference share there is no fixed rate of interest or dividend against ordinary shares. Hence, to

assign a certain cost to equity share is not a question of mere calculation. It requires an

understanding of many factors basically concerning the behaviour of investor and their

expectations. Since there can be different interpretations of investors behaviour, there fare many

approaches regarding calculation of cost of equity share.

The four main approaches are:

(1)D/P (Dividend /Price)

(2)E/P (Earning /Price) ratio

(3)D/P + g (Dividend /Price + Growth rate of earning) and

(4)Realized yield approach

1) D /P- ratio (Dividend Price) approach

This emphasizes that dividend expected by an investor from a particular company; do so in the

expectations of ascertain return. In other words, when an investor buys ordinary shares of a certain

risk, he accepts a certain return. The accepted rate of return is the cost of ordinary share capital.

Under this approach, therefore, the cost of ordinary share capital is calculated on the basis of the

present value of the expected future stream of dividend.


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Ke = D / NP

Where

Ke = Cost of equityD = Dividend

NP = Net proceeds of share

2) E /P (Earnings / Price) ratio approach

In this approach, the cost of ordinary share capital is based upon the expected rate of

earnings of a company. The investor expects a certain amount of earnings whether

distributed or not from the company.

Ke = E / NP

Where

E = Earning

NP = Net proceeds of shares

3) D / P + growth approach

This approach emphasis upon investor what actually expects to receive from his investments in a

particular ordinary share in terms of dividend plus the rate of growth in dividend / earnings. This

growth rate in dividend (g) which taken to be equal to the compound growth rate in earning per

share.

Ke = D / P + g

Where

D = Dividend per share

P = Market price of the share

G = Growth rate


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4) Realized yield approach

This approach considers the basic factor of the D/P + g approach but, instead of using the expected

values of the dividend and capital appreciation, past yields are used to denote the cost of capital.

This approach is based upon the assumptions that past behaviour will be repeated in future and

therefore, may be used to measure the cost of ordinary capital.

COST OF RETAINED EARNINGS

The companies do not generally distribute the entire profits earned by them by way of dividend

among their shareholders. They retain some profits for future expansion of the business. The

amount retained by company, if it had been distributed among the shareholders by way of dividend,

would have given them some earning. The company has deprived the shareholders of these

earnings by retaining a part of profit with it. Thus, the cost of retained earnings is the earning

forgone by the shareholders. Simply, stated, the opportunity cost of retained earnings may be taken

as the cost of the retained earnings. It is equal to the income that shareholders could have earned by

placing these funds in alternative investments.

WEIGHTED AVERAGE COST OF CAPITAL

The composite or overall cost of capital of a firm is the weighted averages of the cost of various

sources of funds. Weights are taken to be the proportion of each source of funds in the capital

structure. While making financing decision this overall or weighted cost is used. Each investment is

financed from the pool offunds, which represents the various sources from which funds have been

raised. Any decision of investment therefore has to be made with reference to the overall cost of

capital and not with reference to cost of specific source of funds.

WACC = WI * KI + W2 * K2 + + Wn * Kn

Calculation of the cost of capital


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The elegance of a theory lies in its practical application. The theory of measuring cost of capital is

not simple. Hindalco was founded in 1962. It is a large integrated aluminium, copper, chemical,

foil, wheel, carbon etc. It has a total sale of Rs. 1,92010 million, total gross assets of Rs. and net

profit of Rs. 28,609 million in 2008.

The average market price of Hindalco one share in 2008 was Rs. 112. The market value of the

companys equity is obtained by multiplying the number of the outstanding shares () by the average

share price. The market value of debt is assumed to be equal to the book value. On Hindalcos EPS,

DPS, Payout, average share price, dividend yield, earning yield, price to book value per share and

ROE for the years 1996 to 2008

HINDALCO FINANCIAL DATA 1996-2008

Years EPS

(Rs.)

DPS

(Rs.)

B.V.of

share

Dividend

payout

ratio (%)

Dividend

Yield

(%)

Earning

Yield

(%)

ROE

(%)

1996-97 4.94 0.45 30.74 9.00 1.50 16.07 18.481997-

986.27 0.53 36.83 9.50 1.40 17.02 19.72

1998-99 7.16 0.65 43.72 9.00 1.40 16.37 18.90

1999-00 7.74 0.80 51.02 10.00 1.50 15.17 18.01

2000-01 8.57 1.20 58.80 14.00 2.00 14.57 16.58

2001-02 8.67 1.35 61.53 16.50 2.00 14.09 16.70

2002-03 5.92 1.35 66.95 22.00 2.00 8.84 15.05

2003-04 8.53 1.65 74.16 19.00 2.00 11.51 15.00

2004-05 13.48 2.00 82.54 16.00 2.40 16.33 17.88

2005-06 16.79 2.20 97.40 14.90 2.25 17.23 20.50

2006-07 25.52 1.70 118.97 7.90 1.40 21.45 20.45

2007-08 22.23 1.85 142.09 9.3 1.30 15.64 16.41

2008-09 14.82 1.35 139.73 12.00 .97 10.61 9.39


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Estimation of Hindalcos Cost of Equity

There are two approaches for calculating the cost of equity

1. The constant dividend-growth model

2. The capital asset pricing model (CAPM)

Dividend Growth Model

The formula for calculating the cost of equity is as follows:

DIV1

Ke = -------- + g

P0

Where the first term DIV / P0 is the dividend yield and the second term g, is the expected (constant)

growth in dividends. Hindalcos dividend yield in 2008 is . The dividend yield of the company has

varied between 1% to 2.50%.

Estimation of Growth Rate

In practice, four methods may be used to estimate the growth rate:

1) Internal growth:- Growth may be approximately by calculating the product of retention

ratio and return on equity (ROE)

g = Retention ratio * ROE

This approach may be used when the firm has a stable dividend policy. Hindalcos payout ratio has

fluctuated over years. However, on an average, it has distributed about 13% of its net profit and

retained 87% in the past decade. In the most recent year 2008, it retained about 90% of its profit.

The companys ROE in 2007 is 20.45% and 10 years average is 17%. Assuming that the current

retention ratio of 87% and ROE of 17% will continue in the future, then Hindalco is expected to

grow at % year.


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G = Retention ratio* ROE = 0.87*0.17 = 15%

The constant growth model has its limitation. It is not application to those companies, which have

highly unstable dividend policy (or retention ratio) and fluctuating ROE. One way to overcome this

limitation is to estimate Ke for a large sample of companies of equivalent risk in the same industry

a use the average k, as an approximation of the cost of equity of the company under consideration.

2) Past average growth: - In practice, growth may be based on past EPS rather DPS since

companies do not change their DPS frequently with changes in EPS. Thus, DPS grows at a

slow rate. The average of EPS past growth rates may be used as a proxy for the future

growth. There are two alternatives available for calculating the average (1) the arithmetic

average and (2) the geometric average. These two methods will give different estimates of

the average growth rate. The geometric average will give a compounded average and is

preferable when there is much variability in EPS data.

The geometric average EPS growth rate for Hindalco for the period 1996 to 2006 is as follows:

EPSn EPSo (1 + g) n

EPSn

(1+g) n =--------

EPSo

3) Regression approach for estimating growth:- Both arithmetic average geometric

methods of calculating growth have limitations. Simple average methods of calculating

growth have limitations. Simple average gives the same weight to each years earning while

geometric average estimates a compounded rate based on only two observations. Both

techniques are quite inadequate to use when earning are widely fluctuation. The regression

technique estimates growth over time (t) incorporating all observations. The linear

regression model is as follows:


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EPS1 = a + bt

The linear model indicates growth in terms of rupees. A better method is the log-linear

regression model, which estimates growth in percentage term:

In (EPS) is natural logarithm of EPS. The slope of the regression line (1+g) and it is estimates

as follows:

Yt In EPS

In (1+g) = -----------------

Yt

Where Yt is Y1-Y

9.0989

In (1+g) = ----------- = 0.1123

82.98

Taking anti-log on both sides, we get

1+g = 1.1198

g = 1.1198-1 = 0.1198 or 12%

The growth rate estimated according the different methods are summarized. The growth rate

estimated by log-linear model is the most appropriate since Hindalcos EPS are highly variable.

Thus, for the calculation of the Hindalcos co

shiva's project

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