Final Capital Structure in Oil and Gas Sector

7/30/2019 Final Capital Structure in Oil and Gas Sector

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ABSTRACT

The term capital structure refers to the percentage of capital (money) at work in a

business by type. Broadly speaking, there are two forms of capital: equity capital and

debt capital. Each has its own benefits and drawbacks and a substantial part of wise

corporate stewardship and management is attempting to find the perfect capital structure

in terms of risk / reward payoff for shareholders. Oil and Gas industry is a symbol of

technical marvel by human kind. Being one of the fastest growing sectors in the world its

dynamic growth phases are explained by nature of competition, product life cycle and

consumer demand. Today, the global Oil and Gas industry is concerned with consumer

demands for styling, safety, and comfort; and with labor relations and refinery efficiency.The industry is at the crossroads with global mergers and relocation of production centers

to emerging developing economies. Due to its deep forward and backward linkages with

several key segments of the economy, the Oil and Gas industry is having a strong

multiplier effect on the growth of a country and hence is capable of being the driver of

economic growth. It plays a major catalytic role in developing transport sector in one

hand and help industrial sector on the other to grow faster and thereby generate a

significant employment opportunities. Also as many countries are opening the land

border for trade and developing international road links, the contribution of Oil and Gas

sector in increasing exports and imports will be significantly high. As Oil and Gas

industry is becoming more and more standardized, the level of competition is increasing

and production base of most of Oil-giant companies are being shifted from the developed

countries to developing countries to take the advantage of low cost of production.

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1. INTRODUCTION

Indian Oil and Gas Sector:

The Oil and Gas sector is a key player in the global and Indian economy. The global oil

and gas industry contributes 5 per cent directly to the total refinery employment, 12.9 per

cent to the total refinery production value and 8.3 per cent to the total industrial

investment. It also contributes US$560 billion to the public revenue of different

countries, in terms of taxes on fuel, circulation, sales and registration. The annual

turnover of the global Oil industry is around US$5.09 trillion, which is equivalent to the

sixth largest economy in the world. In addition, the Oil industry is linked with several

other sectors in the economy and hence its indirect contribution is much higher than this.

All over the world it has been treated as a leading economic sector because of its

extensive economic linkages. Indias manufacture of 7.9 million s, including 1.3 million

passenger cars, amounted to 2.4 per cent and 7 per cent, respectively, of global

production in number. The Oil-components refinery sector is another key player in the

Indian Oil and Gas industry. Exports from India in this sector rose from US$1.0 billion in

2009-10 to US$1.8 billion in 2010-11, contributing 1 per cent to the world trade in Oil

components in current USD. In India, the Oil and Gas industry provides directemployment to about 5 lakh persons. It contributes 4.7 per cent to Indias GDP and 19

per cent to Indias indirect tax revenue. Till early 1980s, there were very few players in

the Indian Oil sector, which was suffering from low volumes of production, obsolete and

substandard technologies. With de-licensing in the 1980s and opening up of this sector to

FDI in 1993, the sector has grown rapidly due to the entry of global players. A rapidly

growing middle class, rising per capita incomes and relatively easier availability of

finance have been driving the demand in India, which in turn, has prompted the

government to invest at unprecedented levels in roads infrastructure, including projects

such as Golden Quadrilateral and North-East-South-West Corridor with feeder roads. The

Reserve Bank of Indias (RBI) Annual Policy Statement documents an annual growth of

37.9 per cent in credit flow to s industry in 2009. Given that passenger car penetration

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rate is just about 8.5 s per thousand, which is among the lowest in the world, there is a

huge potential demand for Oil and Gass in the country.

Policy Environment and Evolution of Indian Oil Industry:

The policy framework of Indias Oil and Gas industry and its impact on its growth While

the ties between bureaucrats and the managers of state-owned enterprises played a

positive role especially since the late 1980s, ties between politicians and industrialists and

between politicians and labour leaders have impeded the growth. The first phase of 1940s

and 1950s was characterized by socialist ideology and vested interests, resulting in

protection to the domestic Oil industry and entry barriers for foreign firms. There was a

good relationship between politicians and industrialists in this phase, but bureaucrats

played little role. Development of ancillaries segment as recommended by the L.K. JhaCommittee report in 1960 was a major event that took place towards the end of this

phase. During the second phase of rules, regulations and politics, many political

developments and economic problems affected the Oil industry, especially passenger cars

segment, in the 1960s and 1970s. The third phase starting in the early 1980s was

characterized by delicensing, liberalization and opening up of FDI in the Oil sector.

These policies resulted in the establishment of new LCV manufacturers (for example,

Swaraj Mazda, DCM Hindustan Petroleum) and passenger car manufacturers.7 All these

developments led to structural changes in the Indian Oil industry. Pingle argues that state

intervention and ownership need not imply poor results and performance, as

demonstrated by Bharat Petroleum Limited (MUL). Further, the non contractual relations

between bureaucrats and MUL dictated most of the policies in the 1980s, which were

biased towards passenger cars and MUL in particular. However, DCosta (2002) argues

that MULs success is not particularly attributable to the support from bureaucrats.

Rather, any firm that is as good as MUL in terms of scale economies, first-comer

advantage, affordability, product novelty, consumer choice, financing schemes and

extensive servicing networks would have performed as well, even in the absence of

bureaucratic support. DCosta has other criticisms about Pingle (2000). The major

shortcoming of Pingles study is that it ignores the issues related to sector specific

technologies and regional differences across the country.

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Productivity:

The performance of the Indian Oil industry with respect to the productivity growth Partial

and total factor productivity of the Indian Oil and Gas industry have been calculated for

the period from 1990-91 to 2010-11, using the Divisia-Tornquist index for the estimationof the total factor productivity growth. The author finds that the domestic Oil industry has

registered a negative and insignificant productivity growth during the last one and a half

decade. Among the partial factor productivity indices only labour productivity has seen a

significant improvement, while the productivity of other three inputs (capital, energy and

materials) havent shown any significant improvement. Labour productivity has increased

mainly due to the increase in the capital intensity, which has grown at a rate of 0.14 per

cent per annum from 1990-91 to 2010-11.

Organized Oil Sector in India:

While the Original Equipment Manufacturers (OEMs) are at the top of the Oil supply

chain, it should be noted that there are a few OEMs in India which supply some

components to other OEMs in India or abroad. Most of the Indian OEMs are members of

the Society of Indian Oil and Gas Manufacturers (SIAM), while most of the Tier-1 Oil

component manufacturers are members of the Oil and Gas Component Manufacturers

Association (ACMA). All of them are in the organized sector and supply directly to theOEMs in India and abroad or to Tier-1 players abroad. Tier-2 and Tier-3 Oil-component

manufacturers are relatively smaller players. Though some of the Tier-2 players are in the

organized sector, most of them are in the unorganized sector. Tier-3 manufacturers

include all Oil-component suppliers in the unorganized sector, including some Own

Account Manufacturing Enterprises (OAMEs) that operate with one working owner and

his family members, wherein refinery involves use of a single machine such as the lathe.

Oil-component manufacturers cater not only to the OEMs, but also to the after-sales

market. In the recent years, there has been a rapid transformation in the character of the

Oil and Gas aftermarket, as a fast maturing organized, skill-intensive and knowledge

driven activity. Hence, the Oil industry in India possesses a very diverse and complex

structure, in terms of scale, nature of operation, market structure, etc.

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Unorganized Oil Sector in India:

The unorganized sector consists of enterprises that are not registered under certain

sections of the Factories Act.20 In this section, data on the unorganized refinery sector

from the National Sample Survey Organization (NSSO) is used. The unorganized Oilsector in India has grown in terms of number of enterprises, employment, output, capital,

capital intensity and labour productivity. However, capital productivity has fallen

considerably. Very similar trends are observed in OAME, NDME and DME21 in rural

and urban areas. However, it is evident that the growth of this sector has been quite low

in the rural areas than in the urban areas.

Commercial s:

The commercial production in India increased from 156,706 in 2007 to 350,033 in 2010.

This segment can be divided into three categories heavy commercial s (HCVs), medium

commercial s (MDVs or MCVs) and light commercial s (LCVs). Medium and heavy

commercial s formed about 62 per cent of the total domestic sales of CVs in 2004. These

segments have also been driving growth, having grown at a CAGR of nearly 24.7 per

cent over the past five years. The key trends facilitating growth in this sector are the

development of ports and highways, increase in construction activities and agricultural

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output. With better roads and highway corridors linking major cities, the demand for

larger, multi-axle trucks is increasing in India.

Passenger s:

Passenger s consist of passenger cars and utility s. This segment has been growing at a

CAGR of 11.3 per cent for the past four years. A key trend in this segment is that with

rising income levels and availability of better financing options, customers are

increasingly aspiring for higher-end models. There has been a gradual shift from entry-

level models to higher-end models in each segment. For example, in passenger cars, till

recently, the Maruti 800 used to define the entry level car, and had a predominant market

share. Over the last 3-4 years, higher-end models such as ONGC Santro, Maruti Wagon

R, Alto and Tata Indica have overtaken the Maruti 800. Another development has been

the blurring of the dividing line between utility s and passenger cars, with models like

Mahindra & Mahindras Scorpio attracting customers from both segments. Upper end

sports utility s (SUVs) attract potential luxury car buyers by offering the same level of

comfort in the interiors, coupled with on-road performance capability.

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Competitive Advantages:

India has several competitive advantages in the Oil and Gas sector, which have been

analyzed using the following framework. Availability of skilled manpower with

engineering and design capabilities India has a growing workforce that is English-speaking, highly skilled and trained in designing and machining skills required by the Oil

and Gas and engineering industries. In a combined assessment of manpower availability

and capabilities, India ranks much ahead of other competing economies.

Many Indian and global players are leveraging this advantage by increasingly

outsourcing activities like design and R&D to their Indian arms. The Society of Indian

Oil and Gas manufacturers (SIAM) estimates that Oil and Gas manufacturers are

expected to invest US$ 5.7 billion in the Indian market from 2005 to 2010. Of this, about

US$ 2.3 billion will be on research and development and the rest probably on capex.

Some examples of investment in areas leveraging the engineering and design capabilities

of India include:

MICO, the Indian operation of Bosch and a key player in fuel injection

equipment, ignition systems and electricals, has invested in the MICO Application

Centre (MAC) for R&D. It has emerged as a key global R&D competency centre

catering to the entire Bosch Group. It is the first of its kind in India and the Bosch

Groups first outside Europe.

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GM set up a technical centre at Bangalore that became fully operational in

September 2003. The centre focuses on both R&D and engineering, and takes up

high-value work to complement current research programs, as well as new

exploratory research projects.

Large market with significant potential for growth in demand:

India offers a huge growth opportunity for the Oil and Gas sector the domestic market

is large and has the potential to grow further in the future due to positive demographic

trends and the current low penetration levels.

Government Regulations and Support:

The Government of India (GoI) has identified the Oil and Gas sector as a key focus area

for improving Indias global competitiveness and achieving high economic growth. The

Government formulated the Oil Policy for India with a vision to establish a globally

competitive industry in India and to double its contribution to the economy by 2010. It

intends to promote Research & Development in Oil and Gas industry by strengthening

the efforts of industry in this direction by providing suitable fiscal and financial

incentives. Some of the policy initiatives include:

Oilmatic approval for foreign equity investment upto 100 per cent of manufacture

of Oil and Gass and component is permitted.

The customs duty on inputs and raw materials has been reduced from 20 per cent

to 15 per cent. The peak rate of customs duty on parts and components of battery-

operated s have been reduced from 20 per cent to 10 per cent. These new

regulations would strengthen Indias commitment to globalization. Apart from

this, custom duty has been reduced from 105 per cent to 100 per cent on secondhand cars and motorcycles.

National Oil and Gas Fuel Policy has been announced, which envisages a phased

program for introducing Euro emission and fuel regulations by 2010.

Tractors of engine capacity more than 1800 cc for semi-trailers will now attract

excise duty at the rate of 16 per cent.

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Excise duty is being reduced on tyres, tubes and flaps from 24 per cent to 16 per

cent. Customs duty on lead is 5 per cent.

A package of fiscal incentives including benefits of double taxation treaty is now

available.

These government policies reflect the priority government accords to the Oil and Gas

sector. A liberalized overall policy regime, with specific incentives, provides a very

conducive environment for investments and exports in the sector.

The outlook for Indias Oil and Gas sector appears bright:

The outlook for Indias Oil and Gas sector is highly promising. In view of current growth

trends and prospect of continuous economic growth of over 5 per cent, all segments of

the Oil industry are likely to see continued growth. Large infrastructure development

projects underway in India combined with favorable government policies will also drive

Oil and Gas growth in the next few years. Easy availability of finance and moderate cost

of financing facilitated by double income families will drive sales in the next few years.

India is also emerging as an outsourcing hub for global majors. Companies like GM,

Ford, Hindustan Petroleum and ONGC are implementing their expansion plans in the

current year. While Ford and Hindustan Petroleum continue to leverage India as a sourceof components, ONGC and Suzuki have identified India as a global source for specific

small car models. At the same time, Indian players are likely to increasingly venture

overseas, both for organic growth as well as acquisitions. The Oil and Gas sector in India

is poised to become significant, both in the domestic market as well as globally.

Determinants of market share of Oil and Gas industry:

Costs: sales ratio has a significant positive impact on market share. This could be

attributable to the fact that firms that manufacture high-value items are likely to

have a higher market share, since their sales, in value terms, could be higher than

others.

Emolument share has a negative effect on market share, showing that labour cost

constraints can distort a firms competitiveness.

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Export: sales ratio has a significant positive effect on market share, implying that

export-oriented firms are more competitive, perhaps because of their versatility

and other merits that are required for catering to international markets.

Power/fuel cost share has a significant negative effect on market share, implying

that efficient technologies may go a long way in improving the firms

competitiveness.

Imported material expenses share in total material expenses has a negative

significant impact on market share, indicating that import of Oil-components from

abroad does not guarantee competitiveness of the firms, unless it is an item that is

unavailable in Indian industry

Borrowings share in total investments and interests share in total costs have

negative significant effect on market-share, which means that too much

dependence on credit may adversely affect a firms competitiveness. This also

calls for improvements in credit system and its cost in India.

Inventory cost share significantly distorts competitiveness, and hence, firms

following lean refinery are more likely to be competitive than others.

Share of imported know-how expenses in overall is competitiveness-enhancing,

and hence, firms could aggressively go for importing know-how that is required

for various aspects of production, so as to be more competitive.

Advertising costs as a share of total costs, has a significant negative effect on

market share, implying that unless the structural factors such as price and quality

are good, mere propaganda by advertising may in fact turn harmful for market

share.

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- ( Capital Spending - Depreciation) (1-Debt Ratio)

- Working Capital (1- Debt Ratio)

= Free Cashflows to Equity

Lenders Interest Expenses (1 - tax rate)

+ Principal Payments

Firm Free Cashflows to Firm

= Equity = Free Cashflows to Equity

+ Lenders + Interest Expenses (1 - tax rate)

+ Principal Payments

Optimum Capital Structure and Cost of Capital:

If the cash flows to the firm are held constant, and the cost of capital is minimized, the

value of the firm will be maximized.

RETURN DIFFERENTIAL APPROACH

THE ADJUSTED PRESENT VALUE APPROACH:

In the adjusted present value (APV) approach, we begin with the value of the firm

without debt. As we add debt to the firm, we consider the net effect on value by

considering both the benefits and the costs of borrowing. To do this, we assume that the

primary benefit of borrowing is a tax benefit and that the most significant cost ofborrowing is the added risk of bankruptcy.

The mechanisms of APV valuation:

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We estimate the value of the firm in three steps. We begin by estimating the value of the

firm with no leverage. We then consider the present value of the interest tax savings

generated by borrowing a given amount of money. Finally, we evaluate the effect of

borrowing the amount on the probability that the firm will go bankrupt, and the expected

cost of bankruptcy.

Value of unlevered firm:

The first step in this approach is the estimation of the value of the unlevered firm. This

can be accomplished by valuing the firm as if it had no debt, i.e., by discounting the

expected free cash flow to the firm at the unlevered cost of equity. In the special case

where cash flows grow at a constant rate in perpetuity, the value of the firm is easily

computed.

Value of Unlevered Firm =FCFFo (1+g)/ Bu-g

Where FCFF0 is the current after-tax operating cash flow to the firm, u is the unlevered

cost of equity and g is the expected growth rate. In the more general case, you can value

the firm using any set of growth assumptions you believe are reasonable for the firm.

The inputs needed for this valuation are the expected cash flows, growth rates and the

unlevered cost of equity. To estimate the latter, we can draw on our earlier analysis and

compute the unlevered beta of the firm.

Bunlevered= (Bcurrent) / 1+(1-t)D/E

Where,

unlevered = Unlevered beta of the firm

current = Current equity beta of the firm

t = Tax rate for the firmD/E = Current debt/equity ratio

This unlevered beta can then be used to arrive at the unlevered cost of equity.

Expected tax benefit from borrowing:

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The second step in this approach is the calculation of the expected tax benefit from a

given level of debt. This tax benefit is a function of the tax rate of the firm and is

discounted at the cost of debt to reflect the riskiness of this cash flow. If the tax savings

are viewed as a perpetuity,

Value of Tax benefits=(Tax rate)(Cost of Debt)(Debt)/(Cost of debt)

=(Tax rate)(Debt)

The tax rate used here is the firms marginal tax rate and it is assumed to stay constant

over time. If we anticipate the tax rate changing over time, we can still compute the

present value of tax benefits over time, but we cannot use the perpetual growth equation

cited above.

Estimating Bankruptcy Costs and Net Effect:

The third step is to evaluate the effect of the given level of debt on the default risk of thefirm and on expected bankruptcy. In theory, at least, this requires the estimation of the

probability of default with the additional debt and the direct and indirect cost of

bankruptcy. Ifa is the probability of default after the additional debt and BC is the

present value of the bankruptcy cost, the present value of expected bankruptcy cost can

be estimated.

PV of Expected Bankruptcy Cost = Probability of bankruptcy * PV of bankruptcy cost

This step of the adjusted present value approach poses the most significant estimationproblem, since neither the probability of bankruptcy nor the bankruptcy cost can be

estimated directly.

There are two basic ways in which the probability of bankruptcy can be estimated

indirectly. One is to estimate a bond rating, as we did in the cost of capital approach, at

each level of debt and use the empirical estimates of default probabilities for each rating.

Cost of Capital versus APV valuation:

In an APV valuation, the value of a levered firm is obtained by adding the net effect of

debt to the unlevered firm value.

Value of Levered Firm =

In the cost of capital approach, the effects of leverage show up in the cost of capital, with

the tax benefit incorporated in the after-tax cost of debt and the bankruptcy costs in both

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the levered beta and the pre-tax cost of debt. Will the two approaches yield the same

value? Not necessarily. The first reason for the differences is that the models consider

bankruptcy costs very differently, with the adjusted present value approach providing

more flexibility in allowing you to consider indirect bankruptcy costs. To the extent that

these costs do not show up or show up inadequately in the pre-tax cost of debt, the APV

approach will yield a more conservative estimate of value. The second reason is that the

APV approach considers the tax benefit from a dollar debt value, usually based upon

existing debt. The cost of capital approach estimates the tax benefit from a debt ratio that

may require the firm to borrow increasing amounts in the future. For instance, assuming a

market debt to capital ratio of 30% in perpetuity for a growing firm will require it to

borrow more in the future and the tax benefit from expected future borrowings is

incorporated into value today.

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3. LITERATURE REVIEW

Evaluating a Company's Capital Structure:

For stock investors that favor companies with good fundamentals, a "strong" balance

sheet is an important consideration for investing in a company's stock. The strength of a

company' balance sheet can be evaluated by three broad categories of investment-quality

measurements: working capital adequacy, asset performance and capital structure. In this

article, we'll look at evaluating balance sheet strength based on the composition of a

company's capital structure. A company's capitalization (not to be confused with market

capitalization) describes the composition of a company's permanent or long-term capital,

which consists of a combination of debt and equity. A healthy proportion of equity

capital, as opposed to debt capital, in a company's capital structure is an indication of

financial fitness.

Clarifying Capital Structure Related Terminology:

The equity part of the debt-equity relationship is the easiest to define. In a company's

capital structure, equity consists of a company's common and preferred stock plus

retained earnings, which are summed up in the shareholders' equity account on a balance

sheet. This invested capital and debt, generally of the long-term variety, comprises a

company's capitalization, i.e. a permanent type of funding to support a company's growth

and related assets. A discussion of debt is less straightforward. Investment literature often

equates a company's debt with its liabilities. Investors should understand that there is a

difference between operational and debt liabilities - it is the latter that forms the debt

component of a company's capitalization - but that's not the end of the debt story. Among

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financial analysts and investment research services, there is no universal agreement as to

what constitutes a debt liability. For many analysts, the debt component in a company's

capitalization is simply a balance sheet's long-term debt. This definition is too

simplistic. Investors should stick to a stricter interpretation of debt where the debt

component of a company's capitalization should consist of the following: short-term

borrowings (notes payable), the current portion of long-term debt, long-term debt, two-

thirds (rule of thumb) of the principal amount of operating leases and redeemable

preferred stock. Using a comprehensive total debt figure is a prudent analytical tool for

stock investors.

Is there an optimal debt-equity relationship?

In financial terms, debt is a good example of the proverbial two-edged sword. Astute use

of leverage (debt) increases the amount of financial resources available to a company for

growth and expansion. The assumption is that management can earn more on borrowed

funds than it pays in interest expense and fees on these funds. However, as successful as

this formula may seem, it does require that a company maintain a solid record of

complying with its various borrowing commitments. A company considered too highly

leveraged (too much debt versus equity) may find its freedom of action restricted by its

creditors and/or may have its profitability hurt as a result of paying high interest costs. Ofcourse, the worst-case scenario would be having trouble meeting operating and debt

liabilities during periods of adverse economic conditions. Lastly, a company in a highly

competitive business, if hobbled by high debt, may find its competitors taking advantage

of its problems to grab more market share. Unfortunately, there is no magic proportion of

debt that a company can take on. The debt-equity relationship varies according to

industries involved, a company's line of business and its stage of development.

However, because investors are better off putting their money into companies with strong

balance sheets, common sense tells us that these companies should have, generally

speaking, lower debt and higher equity levels.

Capital Ratios and Indicators:

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In general, analysts use three different ratios to assess the financial strength of a

company's capitalization structure. The first two, the so-called debt and debt/equity

ratios, are popular measurements; however, it's the capitalization ratio that delivers the

key insights to evaluating a company's capital position. The debt ratio compares total

liabilities to total assets. Obviously, more of the former means less equity and, therefore,

indicates a more leveraged position. The problem with this measurement is that it is too

broad in scope, which, as a consequence, gives equal weight to operational and debt

liabilities. The same criticism can be applied to the debt/equity ratio, which compares

total liabilities to total shareholders' equity. Current and non-current operational

liabilities, particularly the latter, represent obligations that will be with the company

forever. Also, unlike debt, there are no fixed payments of principal or interest attached tooperational liabilities. The capitalization ratio (total debt/total capitalization) compares

the debt component of a company's capital structure (the sum of obligations categorized

as debt + total shareholders' equity) to the equity component. Expressed as a percentage,

a low number is indicative of a healthy equity cushion, which is always more desirable

than a high percentage of debt.

Additional Evaluative Debt-Equity Considerations:

Companies in an aggressive acquisition mode can rack up a large amount of purchased

goodwill in their balance sheets. Investors need to be alert to the impact of intangibles on

the equity component of a company's capitalization. A material amount of intangible

assets need to be considered carefully for its potential negative effect as a deduction (or

impairment) of equity, which, as a consequence, will adversely affect the capitalization

ratio.

Funded debt is the technical term applied to the portion of a company's long-term

debt that is made up of bonds and other similar long-term, fixed-maturity types of

borrowings. No matter how problematic a company's financial condition may be, the

holders of these obligations cannot demand payment as long the company pays the

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interest on its funded debt. In contrast, bank debt is usually subject to acceleration clauses

and/or covenants that allow the lender to call its loan. From the investor's perspective, the

greater the percentage of funded debt to total debt disclosed in the debt note in the notes

to financial statements, the better. Funded debt gives a company more wiggle room.

Lastly, credit ratings are formal risk evaluations by credit-rating agencies - Moody's,

Standard & Poor's, Duff & Phelps and Fitch of a company's ability to repay principal

and interest on debt obligations, principally bonds and commercial paper. Here again, this

information should appear in the footnotes. Obviously, investors should be glad to see

high-quality rankings on the debt of companies they are considering as investment

opportunities and be wary of the reverse.

Seeking the Optimal Capital Structure:

Many middle class individuals believe that the goal in life is to be debt-free. When you

reach the upper echelons of finance, however, that idea is almost anathema. Many of the

most successful companies in the world base their capital structure on one simple

consideration: the cost of capital. If you can borrow money at 7% for 30 years in a world

of 3% inflation and reinvest it in core operations at 15%, you would be wise to consider

at least 40% to 50% in debt capital in your overall capital structure. Of course, how muchdebt you take on comes down to how secure the revenues your business generates are - if

you sell an indispensable product that people simply must have, the debt will be much

lower risk than if you operate a theme park in a tourist town at the height of a boom

market. Again, this is where managerial talent, experience, and wisdom come into play.

The great managers have a knack for consistently lowering their weighted average cost of

capital by increasing productivity, seeking out higher return products, and more. To truly

understand the idea of capital structure, you need to take a few moments to read Return

on Equity: The DuPont Model to understand how the capital structure represents one of

the three components in determining the rate of return a company will earn on the money

its owners have invested in it. Whether you own a doughnut shop or are considering

investing in publicly traded stocks, it's knowledge you simply must have.

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Median

Oil Companies

Average

Oil Companies

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STDAV

Oil Companies

Examining the results above we can see that there seems to have been a change in the

debt pattern amongst the Oil companies. Just as Lev and many others presented in the

there is a change taking place in the way that we see and evaluate the corporate world and

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its value drivers. Maybe the search for security has made the banks and the market

extending the wrong companies credit; if there is a correlation between the value of the

underlying assets and the loan capacity of a corporation then companies who cannot

securitize their assets will be worse off in a recession. The Oil company has up until now

been assessed as once whole entity which gives it a lower leverage compared to the

traditional company; but this would also make it better positioned and less volatile in

recession. Unfortunately the lack of further data to conclude the regression analysis and

finalize this study the data just shows us that we can identify but not explain a change.

This article did not have the aim to further increase or change the amount of information

provided to the creditors; what we can see is that suddenly corporations without any real

assets have a proportionally large amount of debt in their capital structure. The reason for

this is almost without a doubt that their market value on equity has deteriorated; but whatis interesting is that the trend related to the traditional companies has changed. This can

indicate that the loans given to the conceptual companies prior to the deterioration of the

market value of equity were proportionally larger than in the past. Further tells us that the

there has been a market driven change in how we assess corporate without any substantial

securities; if this change was driven by increased liquidity or a fundamental assessment

change in the market is for future research to tell. To conclude; there been a change in

capital structure where the proportion of debt and in long term debt over the last ten years

has increased amongst conceptual companies; it is though far away from being in the

same proportions as for the Oil companies.

Growth opportunities:

For companies with growth opportunities, the use of debt is limited as in the case of

bankruptcy, the value of growth opportunities will be close to zero. This show that firms

should use equity to finance their growth because such financing reduces agency costs

between shareholders and managers, whereas firms with less growth prospects should use

debt because it has a disciplinary role. This shows that firms with growth opportunities

may invest sub-optimally, and therefore creditors will be more reluctant to lend for long

horizons. This problem can be solved by short-term financing or by convertible bonds.

From a pecking order theory perspective, growth firms with strong financing needs will

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issue securities less subject to informational asymmetries, i.e. short-term debt. If these

firms have very close relationships with banks, there will be less informational

asymmetry problems, and they will be able to have access to long term debt financing as

well. A common proxy for growth opportunities is the market value to book value of total

assets. IT companies with growth opportunities should exhibit a greater market-to-book

than firms with less growth opportunities, but it is suggest that this is not necessarily the

case. This will typically occur when assets whose values have increased over time have

been fully depreciated, as well as when assets with high value are not accounted for in the

balance sheet. They find a negative relationship between growth opportunities and

leverage. They suggest that this may be due to firms issuing equity when stock prices are

high. As mentioned by them, large stock price increases are usually associated with

improved growth opportunities, leading to a lower debt ratio.

Size:

Oil companies tend to be more diversified, and hence their cash flows are less volatile.

Size may then be inversely related to the probability of bankruptcy. They suggest that

large firms have easier access to the markets and can borrow at better conditions. For

small firms, the conflicts between creditors and shareholders are more severe because themanagers of such firms tend to be large shareholders and are better able to switch from

one investment project to another. However, this problem may be mitigated with the use

of short term debt, convertible bonds, as well as long term bank financing. Most

empirical studies report indeed a positive sign for the relationship between size and

leverage. Less conclusive results are reported by other authors. For India, however, they

find that a negative relationship exists. They confirm the finding of them for company

and argue that the negative relationship is not due to asymmetrical information, but rather

to the characteristics of the bankruptcy law and the system which offer better protection

to creditors than is the case in other countries.

Profitability:

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One of the main theoretical controversies concerns the relationship between leverage and

profitability of the firm. According to the pecking order theory, firms prefer using

internal sources of financing first, then debt and finally external equity obtained by stock

issues. All things being equal, the more profitable the firms are, the more internal

financing they will have, and therefore we should expect a negative relationship between

leverage and profitability. This relationship is one of the most systematic findings in the

empirical literature In a trade-off theory framework, an opposite conclusion is expected.

When firms are profitable, they should prefer debt to benefit from the tax shield. In

addition, if past profitability is a good proxy for future profitability, profitable firms can

borrow more as the likelihood of paying back the loans is greater. Dynamic theoretical

models based on the existence of a target debt-to-equity ratio show (1) that there are

adjustment costs to raise the debt-to-equity ratio towards the target and (2) that debt caneasily be reimbursed with excess cash provided by internal sources. This leads firms to

have a pecking order behavior in the short term, despite the fact that they aim at

increasing their debt-to-equity ratio.

Collaterals:

Tangible assets are likely to have an impact on the borrowing decisions of a firm because

they are less subject to informational asymmetries and usually they have a greater value

than intangible assets in case of bankruptcy. Additionally, the moral hazard risks are

reduced when the firm offers tangible assets as collateral, because this constitutes a

positive signal to the creditors who can request the selling of these assets in the case of

default. As such, tangible assets constitute good collateral for loans. According to them, a

firm can increase the value of equity by issuing collateralized debt when the current

creditors do not have such guarantee. Hence, firms have an incentive to do so, and one

would expect a positive relation between the importance of tangible assets and the degree

of leverage. Based on the agency problems between managers and shareholders, they

suggest that firms with more tangible assets should take more debt. This is due to the

behavior of managers who refuse to liquidate the firm even when the liquidation value is

higher than the value of the firm as a going concern. Indeed, by increasing the leverage,

the probability of default will increase which is to the benefit of the shareholders. In an

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agency theory framework, debt can have another disciplinary role: by increasing the debt

level, the free cash flow will decrease. As opposed to the former, this disciplinary role of

debt should mainly occur in firms with few tangible assets, because in such a case it is

very difficult to monitor the excessive expenses of managers. From a pecking order

theory perspective, firms with few tangible assets are more sensitive to informational

asymmetries. These firms will thus issue debt rather than equity when they need external

financing, leading to an expected negative relation between the importance of intangible

assets and leverage. Most empirical studies conclude to a positive relation between

collaterals and the level of debt. Inconclusive results are reported for instance by them.

Operating Risk:

Many authors have included a measure of risk as an explanatory variable of the debt

level. Leverage increases the volatility of the net profit. Firms that have high operating

risk can lower the volatility of the net profit by reducing the level of debt. By so doing,

bankruptcy risk will decrease, and the probability of fully benefiting from the tax shield

will increase. A negative relation between operating risk and leverage is also expectedfrom a pecking order theory perspective: firms with high volatility of results try to

accumulate cash during good years, to avoid under investment issues in the future.

Taxes:

The impact of taxation on leverage is twofold. On the one hand, companies have an

incentive to take debt because they can benefit from the tax shield. On the other hand,

since revenues from debt are taxed more heavily than revenues from equity, firms also

have an incentive to use equity rather than debt. As suggested by them, the financial

structure decisions are irrelevant given that bankruptcy costs can be neglected in

equilibrium. They show that if non-debt tax shields exist, then firms are likely not to use

fully debt tax shields. In other words, firms with large non-debt tax shields have a lower

incentive to use debt from a tax shield point of view, and thus may use less debt.

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Empirically, this substitution effect is difficult to measure as finding an accurate proxy

for the tax reduction that excludes the effect of economic depreciation and expenses is

tedious. According to them, the tax shield accounts on average to 4.3% of the firm value

when both corporate and personal taxes are considered.

A capital structure is the mix of a company's financing which is used to fund its day-to-

day operations. This source of funds can originate from equity, debt and hybrid

securities. The equity will come in the form of common and preferred stocks. The debt

is broken out into long-term and short-term debts. Lastly hybrid securities are a group of

securities that are a combination of debt and equity. When analyzing a company it is

important to note their mix of debt and equity, because it gives a firm picture of the

financial health of the company.

If capital structure is irrelevant in a perfect market, then imperfections which exist in the

real world must be the cause of its relevance. The theories below try to address some of

these imperfections, by relaxing assumptions made in the M&M model.

Trade-off theory:

Trade-off theory allows the bankruptcy cost to exist. It states that there is an advantage tofinancing with debt (namely, the tax benefit of debts) and that there is a cost of financing

with debt (the bankruptcy costs of debt). The marginal benefit of further increases in debt

declines as debt increases, while the marginal cost increases, so that a firm that is

optimizing its overall value will focus on this trade-off when choosing how much debt

and equity to use for financing. Empirically, this theory may explain differences in D/E

ratios between industries, but it doesn't explain differences within the same industry.

Pecking order theory:

Pecking Order theory tries to capture the costs of asymmetric information. It states that

companies prioritize their sources of financing (from internal financing to equity)

according to the law of least effort, or of least resistance, preferring to raise equity as a

financing means of last resort. Hence: internal financing is used first; when that is

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depleted, then debt is issued; and when it is no longer sensible to issue any more debt,

equity is issued. This theory maintains that businesses adhere to a hierarchy of financing

sources and prefer internal financing when available, and debt is preferred over equity if

external financing is required (equity would mean issuing shares which meant 'bringing

external ownership' into the company. Thus, the form of debt a firm chooses can act as a

signal of its need for external finance. The pecking order theory is popularized by Myers

(1984) when he argues that equity is a less preferred means to raise capital because when

managers (who are assumed to know better about true condition of the firm than

investors) issue new equity, investors believe that managers think that the firm is

overvalued and managers are taking advantage of this over-valuation. As a result,

investors will place a lower value to the new equity issuance.

Agency Costs:

There are three types of agency costs which can help explain the relevance of capital

structure.

Asset substitution effect: As D/E increases, management has an increased

incentive to undertake risky (even negative NPV) projects. This is because if the

project is successful, share holders get all the upside, whereas if it is unsuccessful,

debt holders get all the downside. If the projects are undertaken, there is a chance

of firm value decreasing and a wealth transfer from debt holders to share holders.

Underinvestment problem: If debt is risky (e.g., in a growth company), the gain

from the project will accrue to debt holders rather than shareholders. Thus,

management have an incentive to reject positive NPV projects, even though they

have the potential to increase firm value.

Free cash flow: unless free cash flow is given back to investors, management has

an incentive to destroy firm value through empire building and perks etc.Increasing leverage imposes financial discipline on management.

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Other:

The neutral mutation hypothesisfirms fall into various habits of financing,

which do not impact on value.

Market timing hypothesiscapital structure is the outcome of the historicalcumulative timing of the market by managers.

Accelerated investment effecteven in absence of agency costs, levered firms

use to invest faster because of the existence of default risk.

Following Modigliani and Miller's pioneering work on capital structure, we are left with

the question, "Is there such a thing as an optimal capital structure for a company? In

other words, is there a best way to finance the company: an optimal debt/equity ratio?"

According to the trade-off theory, the answer is yes - in fact, you might even say that

there is an optimal range. There is a specific debt/equity ratio that will minimize a

company's cost of capital. (This is also the point at which the value of the company will

be maximized.) However, because the cost of capital curve is fairly shallow (like the

bottom of a bowl), you can deviate from this optimal debt/equity ratio without

appreciably increasing the cost of capital This creates a range in the bottom portion of

the curve where the cost of capital is essentially the same throughout the range. There is a

danger of getting outside of this range however. The cost of capital will increase rapidlyonce you get outside the range, as shown by the blueAverage Cost of Capitalline in the

graph below.

The Trade-off View of the Cost of Capital

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A company's overall cost of capital is a weighted average of the cost of debt and the cost

of equity. For example, if a company's debt/equity ratio is 30/70 and the after-tax cost of

debt is 4% and the cost of equity is 10.5%, the company's overall cost of capital is 0.30 *

4% plus 0.70 * 10.5%, or 8.55%.

Let's take a company from its inception:

1. When a company is new, it will likely be financed entirely with equity, so its

average cost of capital is the same as its cost of equity (10% in the graph above

for a 0/100 debt/equity ratio).

2. As the company grows, it establishes a track record and attracts the confidence oflenders. As the company increases its use of debt, the company's debt/equity ratio

increases and the average cost of capital decreases. In essence, the company is

substituting the cheaper debt for the more expensive equity, thereby decreasing its

overall cost. (It might be useful to think of the company borrowing money, then

using that borrowed money to buy back some of its common stock. The debt goes

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up, the equity goes down, and the company's average cost of capital decreases

because the company has substituted the cheaper debt for the more expensive

equity.)

3. Eventually, as the company's debt/equity ratio increases, the cost of debt and the

cost of equity will increase. Lenders will become more concerned about the risk

of the loan and will increase the interest rate on its loans. Common shareholders

will become more concerned about default on the loans (and, in bankruptcy,

losing all of their investment) and will insist on receiving a higher rate of return to

compensate them for the higher risk. Since both the cost of debt and equity

increases, the average cost of capital will also increase.

4. This results in a minimum point on the cost of capital curve. However, the curve

(for most industries) is relatively shallow. This means that the financial manager

has considerable flexibility in choosing a debt/equity ratio. He or she wants to

move to the shallow portion of the curve and, once there, remain there. However,

there is a range of debt/equity ratios that will allow the company to stay in this

shallow portion of the curve.

Just remember that there is a danger in getting outside of this range.

If you move too far to the left-hand side of the curve, you are paying too much to

raise money - you would be better off borrowing money (at a relatively low after-

tax interest rate) and buying back some of the more expensive equity. (The cost

of financing with debt is always considerably lower than financing with equity.)

If you move too far to the right-hand side of the curve, you are paying too much

to raise money - lenders and stockholders perceive your company as being too

risky. You should either pay down the debt or issue new equity in the next round

of financing in order to reduce the risk and to move back into the shallow portion

of the curve.

Pecking Order Theory:

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PetroleumHindustan Motors 2.18 0.78 0.3 0.7Skoda 0.8 0.94 0.43 0.57Mahindra &

Mahindra 1.56 0.19 0.43 0.57

Moving Average for 2002/03 to 2006/07

Company Return (2007-08) Debt-Equity Dividend Payout Retention RatioIndian Oil

Corporation 0.37 1.39 0.49 0.51ONGC 0.2 0.13 0.21 0.79Bharat Petroleum 0.09 0.06 0.2 0.8Hindustan

Petroleum -0.24 0.22 0.12 0.88Hindustan Motors 0.11 0.73 0.24 0.76Skoda 0.32 0.94 0.41 0.59Mahindra &

Mahindra 0.09 0.15 0.49 0.51



Corporation 1.14 1.32 0.46 0.54ONGC 1.79 0.14 0.22 0.78Bharat Petroleum 1.55 0.08 0.23 0.77Hindustan

Petroleum 0.91 0.17 0.22 0.78Hindustan Motors 0.67 0.65 0.21 0.79Skoda 0.87 0.9 0.46 0.54Mahindra &

Mahindra 0.63 0.14 0.56 0.44

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Corporation -0.06 1.12 0.36 0.64ONGC 0.0087 0.12 0.22 0.78

Bharat Petroleum -0.1 0.11 0.25 0.75Hindustan

Petroleum 0.02 0.12 0.24 0.76Hindustan Motors 0.01 0.6 0.22 0.78Skoda 0.03 0.79 0.44 0.56Mahindra &

Mahindra -0.22 0.14 0.59 0.41

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Cross Sectional Regression Results

Model Y = a + b 1 X 1 + b 2 X 2

The above table shows the year wise regression results of all the samples studied. Here Y

denotes the return on the equity shares, X 1 denotes debt equity ratio and X 2 denotes

dividend payout.

From the P- Values ascertained, we can conclude that:-

In the year 2005/06 there is no relationship between debt- equity ratio and return

on equity whereas there is relationship between dividend payout ratio and return

on equity



on equity.



on equity.

In the year 2008/09 there is relationship between debt- equity ratio and return on

equity and also between dividend payout ratio and return on equity.

In the year 2009/10 there is relationship between debt- equity ratio and return on

equity and also between dividend payout ratio and return on equity.

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2007/08 0.42 1.42 0.42 0.492008/09 1.2 1.35 0.31 0.482009/10 -0.03 1.1 0.4 0.61

Bharat

Petroleum

Return on

Shares

Debt-Equity

Ratio

Dividend Payout

Ratio Retention2000/01 -0.24 1.17 1.07 -0.32001/02 0.06 1.24 0.06 0.72002/03 0.1 1.37 0.04 22003/04 0.09 1.21 0.13 0.122004/05 -0.12 1.43 0.23 0.062005/06 -0.23 1.33 0.65 0.132006/07 0.10 1.32 0.05 0.332007/08 0.38 1.44 0.34 0.452008/09 1.08 1.30 0.29 0.442009/10 -0.09 1.09 0.06 0.59

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Hindustan

Petroleum

Return on

Shares

Debt-Equity

Ratio

Dividend Payout

Ratio Retention2000/01 -0.39 1.13 1.5 -0.42001/02 0.04 1.19 0.6 0.392002/03 0.21 1.24 0.3 02003/04 0.13 1.23 0.12 0.292004/05 -0.05 1.42 0.33 0.062005/06 -0.09 1.39 0.66 0.092006/07 0.78 1.37 0.22 0.322007/08 0.28 1.33 0.39 0.462008/09 1.04 1.32 0.45 0.432009/10 -0.23 1.13 0.05 0.58

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New Issues of shares, which may be made by a company when it requires further

funds. Such new shares are usually offered at a discount to existing shareholders,

based on a predetermined ratio, without having to pay brokerage. The entitlements to

the new shares offered are known as Rights, as shareholders have the right to acquire

the shares or to sell the rights to these new shares on the stock market. A company

may also make a Bonus Issue to shareholders at no cost.

1. DIVIDEND PAYOUT A ratio showing the percentage of net profits paid out in

dividends on common stock, after reducing net profits by the amount of dividends paid

on preferred stock. It calculated as the percentage of dividend paid on profit after tax. In

this study dividend payout ratio is expressed as the ratio of dividend paid to the net profit

after tax. D/P Ratio = Dividend Paid / Net profit after tax

2. RETENTION RATIOS Retention ratio shows the rate of earnings retained by the

company for financing the investments needs. Retained earnings are the main internal

source of finance for the company. This explains to what extent the earnings of the firm

are ploughed back to the business. Technically it is one minus the dividend paid out ratio.

Retention Ratio = 1 D/P Ratio.

3. DEBT EQUITY RATIOS Debt Equity ratio shows capital structure of the firm. This

represents the capital structure of the company. It is defined as the ratio of debt to equity

of the firm. D/E Ratio = Debt / Equity

4. RETURNS ON SHARES Return on shares is calculated by dividing the previous year

s price from the current year price and the log natural of the resultant figure is

calculated as it gives a continuously compounded rate of return

5. VALUE OF THE FIRM The effect on the value of the firm is analyzed by studying thereturn on equity shares. Return on Equity share = P1 / P0, where P1 is the market price of

equity share for current year and P0 is the market price of the equity share for the

previous year.

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Net Sales & PAT Chart:

P/E Chart:

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Calculation of WACC when cost of equity is to be calculated through first formula,

As we have calculated the WACC for ONGC motors, Infosys, Indian oil, Bharat

Petroleum, Maruti, and Ranbaxy for past five years are given below.

ONGC

YEAR 2011 2010 2009 2008 2007

WACC0.174

50.228

30.20

80.27

60.14

6OPTIMAL MIX 90% 90% 90% 90% 90%

Hindustan Petroleum

YEAR 2011 2010 2009 2008 2007WACC 0.096 0.057 0.061 0.044 0.042OPTIMAL MIX 90% 90% 90% 90% 90%

INDIAN OIL

YEAR 2011 2010 2009 2008 2007

WACC 0.4029 0.5787 0.6011.312

6 0.6072

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OPTIMAL MIX 90% 90% 90% 90% 90%

Bharat Petroleum

YEAR 2011 2010 2009 2008 2007

WACC 0.6733 0.7448 0.96280.962

8 0.7524OPTIMAL MIX 90% 90% 90% 90% 90%

Calculation of WACC when cost of equity is to be calculated through second formula,

As we have calculated the WACC for ONGC motors, Infosys, Indian Oil, Bharat

Petroleum, Maruti, Ranbaxy for past five years are given below.

ONGCYEAR 2011 2010 2009 2008 2007WACC 0.5545 0.6633 0.111 -0.3892 -0.5668OPTIMAL MIX 90% 90% 90% 10% 10%

Hindustan Petroleum


INDIAN OIL


Bharat Petroleum

YEAR 2011 2010 2009 2008 2007WACC -1.608 0.5985 2.1677 1.304 1.145OPTIMAL MIX 10% 90% 90% 90% 90%

Calculation of WACC when cost of equity is to be calculated through third formula,

As we have calculated the WACC for ONGC motors, Infosys, Indian oil, Hll, Maruti,

Ranbaxy for past five years are given below.

ONGC

YEAR 2011 2010 2009 2008 2007

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WACC 0.018 0.1513 0.014 0.0183 0.0241OPTIMAL MIX 0% 90% 0% 0% 0%

Hindustan Petroleum

YEAR 2011 2010 2009 2008 2007WACC -0.0204 -0.0204 -0.0204 -0.0204 -0.0204OPTIMAL MIX 90% 90% 90% 90% 90%

INDIAN OIL


Bharat Petroleum

YEAR 2011 2010 2009 2008 2007WACC 0.0129 -0.003 -0.0043 0.0289 0.0291OPTIMAL MIX 0% 90% 90% 0% 0%

5. RECOMMENDATION

At the current market price of Rs.602.00 the stock is trading at a P/Ex of 19.26xfor FY10E and 17.41x for FY11E.

The EPS of the stock is expected to be at Rs.31.26 and Rs.34.58 for FY10E and

FY11E respectively.

On the basis of price to book value, the stock trades at 4.84x and 3.79x for FY10E

and FY11E respectively.

Oil Products business added 37 new clients during the quarter taking the total

active clients to 840 clients up from 830 at the end of sequential quarter.

Indian Oil Corporation has entered into a multi-year contract with an iconic

beverage company

Indian Oil Corporation has entered into a 5 year agreement with BP to provide IT

Applications Development and Maintenance (ADAM) services for BP's Fuels

Value Chain and Corporate businesses globally.

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Despite the weakness in demand, the healthcare, energy & utility &

communication media service segments have experienced double-digit growth in

the last six quarters. This will help the Company in offsetting the impact of the

slowdown in the other verticals.

ONGC crossing, a tata subsidiary signed a significant and large multi-year

outsourcing contract with a large outsourcer of data processing services in the US.

Some large UK based dealers have chosen Tata, as its IT partner, to deliver a new

and robust operating model that supports the retailers strategic and commercial

objectives.

The Net sales and PAT of the company is expected to grow at a CAGR of 15%

and 16% respectively over FY08 to FY11E.

6. CONCLUSION

This study tests DeAngelo and Masulis' (1980) and Masulis' (1983) theory that Indian Oil

Corporation would seek an "optimum debt level," and that a firm could increase or

decrease its value by changing its debt level so that it moved toward or away from the

industry average. Our results do not find support for the argument. We defined industry

using two different databases and calculated the leverage ratio based on book and market

values for equity, but the results did not change. Our overall conclusion is that the

relationship between a firm's debt level and that of its industry does not appear to be of

concern to the market. A single post-event interval (day 2 to 90) depicted a slow,

negative effect following the debt issue (a 3.2% loss). The High Debt firms hadsignificant negative market reactions for several intervals; however, the difference

between this group and the Low Debt firms was not statistically significant. These results

suggest, overall, that the market does not consider industry averages for leverage as

discriminators for firms' financial leverage.

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The findings were surprising. The above review of empirical research cited numerous

studies which had documented a relationship between industry membership and capital

structure. Firms in a given industry tend to have similar capital structures. Our study

shows that the market does not appear to consider the relationship between a firm's

leverage ratio and the industry's leverage ratio important. This finding is consistent with

the original Modigliani and Miller (1958) proposition that financial leverage is irrelevant

to the value of the firm. Further research that employs additional leverage ratios and

alternate industry classifications will provide additional evidence and insight into this

problem.

7. RFERENCES

Jensen, M. C., "Agency Costs of Free Cash Flow, Coporate Finance and

Takeovers,"American Economic Review 76, 1986, pp. 323-339.

Jensen, M.C., and W.H. Meckling, "Theory of the Firm: Managerial Behavior,

Agency Costs and Ownership Structure," Journal of Financial Economics 3,

December 1976, pp. 305-360.

Kim, E.H., "A Mean-Variance Theory of Optimal Capital Structure and Corporate

Debt Capacity,"Journal of Finance 33, March 1978, pp. 45-63.

Kraus, A. and R.H. Litzenberger, "A State Preference Model of Optimal Financial

Leverage,"Journal of Finance, September 1973, pp. 911-922.

Lev, B., "On the Association Between Operating Leverage and Risk," Journal of

Financial and Quantitative Analysis, September 1974, pp. 627-641.

Websites:

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http://myiris.com/shares/research/firstcall/WIPRO_20091109.pdf

http://en.wikipedia.org/wiki/Capital_structure

http://www.rhsmith.umd.edu/faculty/Gphillips/courses/bmgt640/Capstr.pdf

http://www.igidr.ac.in/~money/mfc_5/malabika.pdf

Documents

Final Capital Structure in Oil and Gas Sector