Nirma Limited Cost Of Capital

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  • 1. NIRMA LIMITED-Cost of Capital Nirmas Cost of Equity (Fig. in Rs. Cr. )Mar '07 Mar '08 Equity Share Capital79.57 79.57 Preference Share Capital2.792.79 Reserves2,347.422,502.62 Revaluation Reserves0 0 Net worth 2,429.782,584.98Calculation of Ke: Ke= Rf + (Rm-Rf)Rf= 4.5056% (364 day T-bills, cut-off at the last auction , Source: http://www.rbi.org.in/home.aspx)Rm= 15 % (Considering Indias growing Soda Ash and Detergent Industry)= 0.66 (Taking from last assignment based on last one year price data) Ke= 4.5 % + 0.66 x (15 %- 4.5%)= 11.43%Nirmas Cost of Debt Nirma Ltd. (Rs. Crore)Mar-07 Mar-08Bank borrowings 239.15 182.54Short term bank borrowings 239.15 182.54Long term bank borrowings00 Total Secured borrowings (in Rs. Crores)239.15 182.54 Short-term loans from banks in foreign currency 43.5787.94 Non-Convertible debentures0140 Borrowings from corporate bodies41.1233.37 Deferred credit 0.96 0.04 Total Unsecured borrowings (in Rs. Crores)85.65261.35 Total borrowings324.8443.89

2. Calculation of Kd: 1st Method: By Interest Expense Interest= Rs. 23.31 CroreAverage Debt for the year 2006-07 and 2007-08 = Rs .384.345 CroreInterest rate = Interest / Average Debt= 6.06 %Tax Rate = 34 % ( Indian Corporate Tax rate) Kd= 6.06 % x (1- 0.34) = 4 %2nd Method: By contribution of each debt Nirma Ltd. (Rs. Crore)Weighted Mar-08 WeightageInterest RatesInterest Rates Bank borrowings 182.54Short term bank borrowings 182.54 0.41 13%*0.05Long term bank borrowings0 Secured borrowings (in Rs. Crores)182.54 Short-term loans from banks in foreign currency 87.940.20 1.89%** 0.37 Non-Convertible debentures #1400.32 7.84%***2.47 Borrowings from corporate bodies33.370.08 10% 0.01 Deferred credit 0.04 0.00 4%0.00 261.35 Total borrowings443.892.91 * PLR (Source: http://www.rbi.org.in/home.aspx)** LIBOR rates- 1 year (The interest is fixed with a reasonable spread over LIBOR, Source http:// www. ucobank.com /internationalbanking.htm)***MIBOR rate for 3 Month (Source: http://www.nse-india.com/marketinfo/eod_information /bidbor .jsp)# The Floating Rate Non-Convertible Debentures were redeemable with interest on the expiry of 364 days from the deemed date of allotment. However the investor/ company were given the option to put/call the FRNCD any day from the date of allotment. These FRNCD were all privately placed debentures. Kd= 2.91 x (1-0.34) = 2% 3. Considering the above two cost of debt ( by interest expense and by contribution by each debt), I consider the cost of debt by interest expense more accurate for the following reasons:This figure (interest rate paid) was indicated by the annual report of the company.The interest rates of individual debts vary over time and can increase or decrease in future. The above figures are taken on a conservative basis with the current LIBOR and MIBOR rates. So, the figure of 2% is more on the conservative side. Kd= 4% Market value of Equity: No. of shares = 15.91 CroresPrice/ Share ( as on 20.2.2009) = Rs. 96.05Market Capitalization = Rs. 1528.155 CroresReserves = Rs. 2,502.62 Crores Total Market Value of Equity = Rs. 4030.77 Crores Market Value of Debt: The FRNCD were all privately placed debentures and hence no current data is available on the net. Due to this limitation, we assume the Market Value of Debt to be same as the Book Value. Total Market Value of Debt = Rs. 443.89 Crores Market Value of Preference Shares: Preference Shares Issued = 2,79,285 SharesMarket Value of each share ( as on 20.2.2009) = Rs. 96.05 Total Market Value of Preference Shares = Rs. 2. 68 Crores 4. WACC According to Market Value Kc = Ke*Pe + Kd*Pd + Kps*PpsKe= 11.43%Kd= 4%Kps= 6%Pe= 0.90Pd= 0.099Pps= 0.0066 Kc = 10.72 %Book Value of Equity Market Capitalization = Rs. 79.57 CroresReserves = Rs. 2,502.62 Crores Total Book Value of Equity = Rs. 2582.19 Crores Book Value of Debt: Total Book Value of Debt = Rs. 443.89 Crores Book Value of Preference Shares: Preference Shares Issued = 2,79,285 SharesFace Value of each share =Rs. 100 5. Total Book Value of Preference Shares = Rs. 2. 79 CroresWACC According to Book Value Kc = Ke*Pe + Kd*Pd + Kps*PpsKe= 11.43%Kd= 4%Kps= 6%Pe= 0.85Pd= 0.146Pps= 0.0009Kc = 10.30 % 6. Henkel India-PeerHenkels Cost of Equity (Fig. in Rs. Cr. )Mar '07Mar '08Equity Share Capital116.46 116.46 Preference Share Capital68 68 Reserves27.3937.86 Revaluation Reserves00 Net worth 211.85 222.32 Calculation of Ke: Ke= Rf + (Rm-Rf)Rf= 4.5056% (364 day T-bills, cut-off at the last auction , Source: http://www.rbi.org.in/home.aspx)Rm= 15 % (Considering Indias growing Soda Ash and Detergent Industry)= 1.05 (Taking from CMIE-PROWESS. This company is making losses presently and hence the higher value is considered.) Ke= 4.5 % + 1.05 x (15 %- 4.5%)= 15.525%Henkels Cost of Debt Henkel India Ltd. ( All Fig. in Rs. Crore)Dec 2006 Dec 2007Secured borrowings 15.5510.18Unsecured borrowings 171.13 282.1Bank borrowings186.68 292.28 Short term bank borrowings186.68 292.28Calculation of Kd: 1st Method: By Interest Expense Interest= Rs. 22.27 CroreAverage Debt for the year 2006-07 and 2007-08 = Rs .239.48 CroreInterest rate = Interest / Average Debt= 9.30 %Tax Rate = 34 % (Indian Corporate Tax rate) 7. Kd= 9.30 % x (1- 0.34) = 6.14 %2nd Method: By contribution of each debt Henkel India Ltd. ( All Fig. in Rs. Dec WeightageInterest Weighted Interest Crore) 2007RatesRatesSecured borrowings10.18Unsecured borrowings282.1Bank borrowings 292.28 113%* 13%Short term bank borrowings292.28 * PLR (Source: http://www.rbi.org.in/home.aspx)Kd= 13% x (1-0.34) = 8.58%Considering the above two cost of debt ( by interest expense and by contribution by each debt), I consider the cost of debt by interest expense more accurate for the following reasons:This figure (interest rate paid) was indicated by the annual report of the company.The interest rates of individual debts vary over time and can increase or decrease in future. The current bank lending rates are 13%. However, the company might have negotiated well for the loan with the corresponding reduction to around 9% (average cost of debt). Kd= 6.14% Market value of Equity: No. of shares = 11.64 CroresPrice/ Share ( as on 20.2.2009) = Rs. 11.54Market Capitalization = Rs. 134.32 CroresReserves = Rs. 37.86 Crores 8. Total Market Value of Equity = Rs. 172.18 Crores Market Value of Debt: Debt is short term borrowings from banks. Hence market value is same as book value Total Market Value of Debt = Rs. 292.28 CroresMarket Value of Preference Shares: Preference Shares Issued = 6.80 CroresMarket Value of each share ( as on 20.2.2009) = Rs. 78.472 Crores Total Market Value of Preference Shares = Rs. 78.472 CroresWACC According to Market Value Kc = Ke*Pe + Kd*Pd + Kps*PpsKe= 15.525%Kd= 6.14%Kps= 6% (2.8 Crore Shares with 9% and 4 Crores Shares with 4%)Pe= 0.317Pd= 0.538Pps= 0.144 Kc = 9.08 % 9. Book Value of Equity Market Capitalization = Rs. 116.46 Crores Reserves = Rs. 37.86 Crores Total Book Value of Equity = Rs. 154.32 Crores Book Value of Debt: Total Book Value of Debt = Rs. 292.28 Crores Book Value of Preference Shares: Preference Shares Issued = 6.8 Crore Shares Face Value of each share =Rs. 10 Total Book Value of Preference Shares = Rs. 68 CroresWACC According to Book Value Kc = Ke*Pe + Kd*Pd + Kps*PpsKe= 15.525%Kd= 6.14%Kps= 6% (2.8 Crore Shares with 9% and 4 Crores Shares with 4%)Pe= 0.3Pd= 0.56Pps= 0.14 Kc = 8.94 % 10. Conclusions: WaccNirma Henkel Market value10.72%9.08% Book Value10.30%8.94%The cost of capital for both the companies is higher when calculated as per the Market Value method as the market value of equity is higher than the book value in the case of both the companies. In case of Nirma ltd. the proportion of debt (Pd) is very less as compared to Henkel where it is very high (more than 50%). The cost of equity of Henkel is higher than Nirma because of higher . However, the Wacc of Henkel is coming out to be lesser than Nirma. This is because the proportions of equity, debt and preference shares are more distributed than in Nirma which is predominantly equity based (which is an expensive source of finance). Thus, inspite of being well established in the market, Nirma has higher Wacc as compared to Henkel. Nirma can reduce the Wacc by increasing the debt (current Debt-to-Equity Ratio for Nirma is 0.15)Dec '07Nirma Ltd.Henkel Ltd. Debt to equity ratio 0.151.33 How HR managers of your company might influence the cost of capital?HR managers can reduce the cost of capital (by reducing and hence the cost of equity) by making the company less risky by keeping the companys operations proper by ensuring the right organizational structure (according to the environmental conditions and strategy of the organization) and keeping the employees motivated to ensure high operational efficiency and reducing the business risk!!References: http://www.nse- data_44_11.xls india.com/marketinfo/eod_information/bidbor.jsp Cmie-Prowess www.indiainfoline.com www.sebi.gov.in