Group 9 - Section A - FM II Project Report

Indian Institute of Management
Raipur
Finance Management II, Term 3

Project report on the companies:
Industry: Cigarettes/Tobacco
Submitted to:
Prof. K.K. Ray
Associate
Professor
Submitted by:
Group 9, Section A
Issac Solomon (13PGP020)
Parthasarathi NR
(13PGP039)
Piyush Mohit (13PGP042)
Vanamamalai R
INDIAN INSTITUTE OF MANAGEMENT RAIPUR,

FM-II, TERM 3, GROUP 9, SECTION A
LEVERAGE ANALYSIS
Leverage: Leverage refers to use of various financial instruments or borrowed
capital to increase the potential return of an investment.
Operating Leverage arises from fixed operating costs. It affects a firms business
risk.
Financial Leverage arises from fixed financing costs. It affects a firms financial
risk.
Degree of Operating Leverage
DOL=
changeEBIT
changeSales
Degree of Financial Leverage
DFL=
change EPS
change EBIT
Degree of Combined Leverage
DCL=
change EPS
change Sales
Godfrey Philips
Leverages
Mar '13
Mar '12
Mar '11
Mar '10
Mar '09
Mar '08
EBIT
263.76
288.95
254.97
176.83
171.72
190.66
% change in EBIT
-9.55%
11.76%
30.65%
2.89%
-11.03%
3,643.33
3,386.94
3,083.24
2,607.66
2,269.05
7.04%
8.97%
15.42%
12.99%
19.59%
1.99
0.22
-0.56
Sales
% Change in Sales
Degree of Operating
Leverage
-1.36
1.31
EPS
163.50
174.54
159.76
110.66
104.39
% Change in EPS
-6.75%
8.47%
30.74%
5.66%
-14.55%
-0.96
0.94
1.99
0.44
-0.74
1.30125
1.238532
3.959061
0.097055
0.418169
Degree of Financial
Leverage
Degree of Combined
Leverage
1,824.62
119.58
Table 1: Leverages for Godfrey Philips

Figure 1: Leverages for Godfrey Philips

Degree of financial leverage and Degree of operating leverage both have
increased during the financial years 2010 and 2011 because of the increase in
EBIT during the period. During the next two years though the EBIT was
comparatively equal to that of the year 2011, because of reduced sales DOL and
DFL both have come down.
Golden Tobacco
Leverages
EBIT
% change in EBIT
Mar '13
Mar '12
Mar '11
Mar '10
Mar '09
Mar
'08
-20.16
-6.37
-17.00
2.18
13.35
20.64
68.40%
-166.86%
112.82%
-512.89%
-54.56%
Sales
131.70
128.09
156.29
150.13
173.68
% Change in Sales
2.75%
-22.02%
3.94%
-15.69%
-74.60%
Degree of Operating
Leverage
24.92
7.58
28.60
32.70
0.73
EPS
-24.69
-16.52
-19.27
-6.45
0.14
33.10%
-16.65%
66.54%
102.21%
-5104.32%
12.06
0.76
16.87
68.43
300.3853
5.728553
482.5163
-6.52
213.054
% Change in EPS
Degree of Financial
Leverage
Degree of Combined
Leverage
303.23
7.41
50.043611
Table 2: Leverages for Golden Tobacco

Figure 2: Leverages for Golden Tobacco

DFL and DCL shows the similar pattern for all the five years. EBIT is negative for
the years 2011. 2012 and 2013. Sales have also dropped during the years 2009,
2010 and 2012. Earnings per share have reduced during the years 2009 and
2012. Because of these factors DOL, DFL and DCL have shown fluctuating
pattern as in the graph.
Industry Average
Leverages
EBIT
% change in EBIT
Sales
% Change in Sales
Degree of Operating Leverage
PBT
Degree of Financial Leverage
Degree of Combined Leverage
Mar '13
Mar '12
Mar '11
Mar '10
Mar '09
11912.08
11390.35
9930.02
7993.41
6821.29
4.38%
12.82%
19.50%
14.66%
38,418.65
34,556.07
31,413.81
27,115.04
10.05%
9.09%
13.68%
10.98%
24,137.15
0.44
1.41
1.43
1.34
11685.66
11209.48
9713.84
7830.64
6626.58
1.02
1.02
1.02
1.02
1.03
0.444076
1.432675
1.456893
1.362939
Table 3: Leverages for Tobacco Industry

Cigarettes/Tobacco
Industry
Figure 3: Leverages for Tobacco Industry

Degree of financial leverage has remained constant throughout the years
because of the constant interest with respect to EBIT during all the years.
Growth in sales have also been constant throughout the period. But EBIT growth
is less in the year 2013 compared to the sales growth. Because of this Degree of
operating leverage has come down in the year 2013 and subsequently the
degree of combined leverage have also come down in the year 2013.
Three graphs below compares Degree of Operating leverage, Degree of Financial
leverage and Degree of Combined leverage for the companies along with
industry.
Figure 4: Degree of Operating Leverages

Figure 5: Degree of Financial Leverages
Degree of fi nancial leverage

600
500
400
300
200
100
0
Ma r ' 1 3
-100
Ma r '1 2
Ma r '1 1
Godfrey Philips
Golden Tobacco
Ma r ' 1 0
Ma r '0 9
-200
-300
Industry Avg
Figure 6: Degree of Combined Leverages

Golden Tobacco has higher DOL, DFL and DCL than the Industry average. This
puts more risk to the firm. For a little change in sales, it will huge impact on the
EBIT. On a positive side it is good for the firm. But if the sales comes down, EBIT
will drop to a greater extent. Godfrey Philips has normal DOL, DFL and DCL
which even matches with that of the industry average. Its risk is very less. The
firm will have proportionate change in EBIT with respect to the sales.

Capital Structure
Capital Structure: Capital Structure is the combination of equity, debt etc.
through which a company finances its assets. An optimal capital structure is the
one that minimizes firms cost of capital & maximizes firms value.
Godfrey Philips
Description
2013
2012
2011
2010
2009
Shareholder's Funds ( E )
1057.42
936.06
802.90
679.07
594.29
Total Debt (D)
225.38
266.25
192.86
114.55
95.29
Debt to Equity Ratio (D/E)
0.213144
0.28444
0.2402
0.168693
0.160338
D+E
1282.80
1202.31
995.76
793.62
689.58
Tax Paid
67.40
76.25
75.48
50.20
57.62
Profit Before Tax
236.84
257.30
241.35
169.92
165.85
Tax = (Tax Paid / PBT)
-28.46%
-29.63%
-31.27%
-29.54%
-34.74%
ROE (%)
17.00
20.82
22.38
18.80
19.49
DPS(Rs)
40.00
40.00
35.00
25.00
25.00
Earnings Per Share (Rs)
163.50
174.54
159.76
110.66
104.39
Dividend Payout Ratio (P)
0.244641
0.229176
0.219077
0.225924
0.239491
g =(1- P)* ROE
12.84048
16.05083
17.48084
14.55639
14.82518
Price Per share (P0)
2743.60
3135.45
1920.00
1947.75
720.85
Interest
26.93
31.65
13.62
6.91
5.87
Long Term Debt
225.38
266.25
192.86
114.55
95.29
Ke
15.16532
15.1635
15.16897
15.16358
15.18543
Kd
0.119471
0.070608
0.060288
0.061613
ke * E / (D+E)
12.50085
11.80554
12.23107
12.97482
13.08707
kd * D/(D+E)
0.02099
0.013675
0.008702
0.008514
WACC
12.52184
11.80554
12.24475
12.98352
13.09558
Firm Value
1353.133
1533.613
1354.608
922.1423
826.4841
Table 4: Capital structure for Godfrey Philips

The value of firm is maximum during the year 2012. This is because Weighted
Average Cost of Capital is minimum during this period. Though Profit after tax is

also maximum during this period, minimum WACC is the main contribution for
its maximum value. A firm increase its value by reducing its WACC.
Figure 7: ROE and WACC for Godfrey Philips

From the above figure we can infer that as always ROE is greater than WACC,
firm is growing constantly and is in financially good condition.
Golden Tobacco
Description
2013
2012
2011
2010
2009
-65.56
-22.15
6.90
40.79
52.12
69.06
145.31
152.11
97.71
107.64
-1.05327
-6.56149
22.03834
2.395766
2.0650881
D+E
3.49
123.16
159.01
138.50
159.76
Tax Paid
0.01
0.01
0.02
0.04
0.43
Profit Before Tax
-43.40
-29.03
-33.87
-11.30
0.68
Tax = (Tax Paid / PBT)
Shareholder's Funds ( E )
Total Debt (D)
Debt to Equity Ratio (D/E)
0.03%
0.05%
0.05%
0.33%
-62.99%
ROE (%)
0.00
0.00
-249.20
-32.05
0.20
DPS(Rs)
0.00
0.00
0.00
0.00
0.00
-41.86
-19.79
-19.39
-6.66
0.05
Dividend Payout Ratio (P)
g =(1- P)* ROE
-249.2
-32.0539
0.2004444
Price Per share (P0)
22.45
35.00
80.75
110.30
40.55
Interest
23.25
22.66
16.87
13.48
12.68
Long Term Debt
69.06
145.31
152.11
97.71
107.64
-56.2106
-56.2106
-56.2106
-56.2106
-56.21063
Ke

Kd
0.336643
0.110911
0.137934
0.1177917
ke * E / (D+E)
1055.215
10.10711
-2.43987
-16.5531
-18.33899
kd * D/(D+E)
6.656286
0.106097
0.097315
0.0793616
WACC
1061.872
10.10711
2.333776
16.45583
18.259632
Firm Value
-4.08876
-287.399
-1451.87
-68.8913
1.3709751
Table 5: Capital structure for Golden Tobacco

EBIT for the firm is constantly decreasing and WACC varies for every year. The
firm had its maximum value when EBIT was positive and it was in the year 2009.
In the year 2011, even though WACC was minimum compared to all other years,
since EBIT was negative firms value was not maximum in that year.
Figure 8: ROE and WACC for Golden Tobacco

From the previous graph we can infer that ROE was always less than WACC for
Golden Tobacco except from the year 2009. This shows that the firm is declining
and making losses continuously.

Dividend Analysis
A distribution of a portion of a company's earnings, decided by the board of
directors, to a class of its shareholders. The dividend is most often quoted in
terms of the amount each share receives (dividends per share). It can also be
quoted in terms of a percent of the current market price, referred to as dividend
yield.
Capital Gain
Dividend Gain
Godfrey Philips
Dividend returns
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Capital gain
-0.12497
0.633047
-0.01425
1.702018
-0.4446
Dividend gain
0.014579
0.11039
0.012757
0.64580
4
0.018229
0.00398
2
0.012835
1.71485
4
0.034681
0.40992
Return
Table 6: Dividend returns for Godfrey Philips

Mar13
Mar12
Mar11
Mar10
Mar09
163.50
174.54
159.76
110.66
104.39
Adjusted EPS (Rs.)
163.50
174.54
159.76
110.66
104.39
CEPS(Rs)
251.94
238.42
201.74
151.26
133.94
40.00
40.00
35.00
25.00
25.00
40.00
2743.6
0
1016.8
7
1016.8
7
40.00
3135.4
5
35.00
1920.0
0
25.00
1947.7
5
25.00
720.85
900.16
772.11
653.03
571.50
900.16
772.11
653.03
571.50
28.46
29.63
31.27
29.54
34.74
24.46
22.92
21.91
22.59
23.95
DESCRIPTION
DPS(Rs)
Adjusted DPS(Rs)
Close Price (Rs)
Book Value (Rs)
Adjusted Book Value (Rs)
Tax Rate (%)
Dividend Pay Out Ratio
(%)
Table 7: Share values for Godfrey Philips
Figure 9: Dividend returns for Godfrey Philips

10
Figure 10: EPS and DPS for Godfrey Philips
Figure 11: Market Price for Godfrey Philips

From the above tables, charts and graphs we can see that share value of the
firm has witnessed a constant growth. Accordingly EPS and DPS has also shown
a constant growth. Market price of the firm has come down in Mar 2011
compared to Mar 2012. So there is a drop in capital gain as shown in the graph.
Above graph shows that in the later part of the year, the market price started

11
increasing again resulting in increased capital gain. Also since the firm is
growing, it pays dividends every year.
Golden Tobacco
Dividend returns
Mar-13
Mar-12
Mar-11
-0.35857 -0.56656 -0.26791
0
0
0
-0.35857 -0.56656 -0.26791
Capital gain
Dividend gain
Return
Mar-10
1.720099
0
1.720099
Mar-09
-0.82022
0
-0.82022
Table 8: Dividend returns for Golden Tobacco
Mar13
Mar12
Mar11
Mar10
Mar09
-41.86
-19.79
-19.39
-6.66
0.05
Adjusted EPS (Rs.)
-41.86
-19.79
-19.39
-6.66
0.05
CEPS(Rs)
-41.15
-19.19
-18.52
-5.50
1.50
DPS(Rs)
0.00
0.00
0.00
0.00
0.00
Adjusted DPS(Rs)
0.00
0.00
0.00
0.00
0.00
Close Price (Rs)
22.45
35.00
80.75
110.30
40.55
Book Value (Rs)
-63.62
-21.74
-1.91
17.47
24.06
Adjusted Book Value (Rs)
-63.62
-21.74
-1.91
17.47
24.06
-0.02
-0.04
-0.05
-0.32
84.03
0.00
0.00
0.00
0.00
0.00
DESCRIPTION
Tax Rate (%)

Dividend Pay Out Ratio
(%)
Table 9: Share values for Golden Tobacco

12
Figure 12: Dividend returns for Golden Tobacco
Figure 13: EPS and DPS for Golden Tobacco

13
Figure 14: Market price for Golden Tobacco
From the above tables, charts and graphs we can see that share value of the
firm has witnessed a constant fall. Same pattern reflects in the EPS and DPS of
the firm. Market price of the firm has come down constantly till date from Jan
2010. So there is a drop in capital gain as shown in the graph. The reason for
poor performance of firm in share market is due to the poor financial status of
the firm. Firms EBIT had been constantly decrease for the past few years. Hence
earning per share has come down. Firm does not distribute dividend to the
shareholders. As the company is in the declining stage, it is good to distribute
the dividends the shareholders which the firm is not doing right now.

14
Working Capital Management

Godfrey Philips - Cash conversion cycle
MarMarMarMar13
12
11
10
Mar09
Average age of inventory
46.34
39.64
42.58
51.37
49.07
Average collection period
7.73
6.48
5.60
5.57
4.30
Operating cycle
54.06
46.12
48.18
56.94
53.36
Accounts payable period
30.59
28.48
47.77
75.05
88.24
Cash conversion cycle
23.47
17.65
0.42 -18.11 -34.88
Table 10: Cash conversion cycle for Godfrey Philips

The cash conversion cycle of Godfrey Philips is very low. This implies that the
company is turning cash put into production as cash in the form of revenue in a
shorter duration of time. The collection period is low therefore there is a
possibility of low defaulters and bad debt. On the whole the performance of
Godfrey Philips in managing working capital is good.
Golden tobacco - Cash conversion cycle

MarMarMarMar13
12
11
10
Mar09
222.76
254.79
234.69
238.31
161.58
33.28
256.0
4
44.16
298.9
5
31.62
266.3
0
29.10
267.4
2
41.86
203.4
3
87.53
168.5
2
93.06
205.8
9
46.38
219.9
3
28.33
239.0
9
26.91
176.5
2
Operating cycle
Table 11: Cash conversion cycle for Golden Tobacco

The cash conversion cycle of Golden Philips is very high. This implies that the
company is finding it difficult to generate revenue, it delays its payments which

15
may result in the tarnishing of the goodwill of the company. The company is not
good and finding it tough in managing the working capital.
Cigarette/Tobacco Industry -Cash conversion cycle

MarMarMarMar13
12
11
10
Mar09
55.20
56.60
59.07
62.92
66.38
10.20
10.05
10.97
11.19
11.16
65.40
66.65
70.04
74.11
77.54
35.77
38.58
68.23
96.44
97.98
29.63
28.07
Operating cycle
1.81 -22.33 -20.44
Table 12: Cash conversion cycle for Tobacco industry
Cash Conversion Cycle

300
250
200
150
100
50
0
41334
-50
40969
Gd philips
40603
Gdn tobacco
40238
39873
Industry
Figure 15: Cash conversion cycle for the company and industry
From the above table and the graph you can see that the cigarette and tobacco
industry on the whole is having a lower cash conversion cycle. It can also be
inferred that Golden tobaccos performance is far lower than the performance of
the industry and Godfrey Philips is performing really well in the industry.

16
References:
http://www.acekp.in/company-snapshot/100163
http://www.acekp.in/company-snapshot/100151
http://www.wikipedia.org/
http://www.moneycontrol.com/india/stockpricequote/cigarettes/goldentoba
cco/GT09
http://www.moneycontrol.com/india/stockpricequote/cigarettes/godfreyphil
lipsindia/GPI
http://www.investopedia.com/

17

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Indian Institute of Management

Finance Management II, Term 3

INDIAN INSTITUTE OF MANAGEMENT RAIPUR,

Degree of Financial Leverage

Degree of Combined Leverage

Table 1: Leverages for Godfrey Philips

INDIAN INSTITUTE OF MANAGEMENT RAIPUR,

Figure 1: Leverages for Godfrey Philips

Table 2: Leverages for Golden Tobacco

INDIAN INSTITUTE OF MANAGEMENT RAIPUR,

Figure 2: Leverages for Golden Tobacco

Table 3: Leverages for Tobacco Industry

INDIAN INSTITUTE OF MANAGEMENT RAIPUR,

Figure 3: Leverages for Tobacco Industry

Figure 4: Degree of Operating Leverages

INDIAN INSTITUTE OF MANAGEMENT RAIPUR,

Figure 5: Degree of Financial Leverages

Degree of fi nancial leverage

Figure 6: Degree of Combined Leverages

INDIAN INSTITUTE OF MANAGEMENT RAIPUR,

Total Debt (D)

Debt to Equity Ratio (D/E)

Profit Before Tax

Tax = (Tax Paid / PBT)

Earnings Per Share (Rs)

Dividend Payout Ratio (P)

g =(1- P)* ROE

Price Per share (P0)

Long Term Debt

Table 4: Capital structure for Godfrey Philips

INDIAN INSTITUTE OF MANAGEMENT RAIPUR,

Figure 7: ROE and WACC for Godfrey Philips

Profit Before Tax

Tax = (Tax Paid / PBT)

Dividend Payout Ratio (P)

g =(1- P)* ROE

Price Per share (P0)

Long Term Debt

Earnings Per Share (Rs)

INDIAN INSTITUTE OF MANAGEMENT RAIPUR,

Table 5: Capital structure for Golden Tobacco

Figure 8: ROE and WACC for Golden Tobacco

INDIAN INSTITUTE OF MANAGEMENT RAIPUR,

Table 6: Dividend returns for Godfrey Philips

Earnings Per Share (Rs)

Adjusted EPS (Rs.)

Table 7: Share values for Godfrey Philips

Figure 9: Dividend returns for Godfrey Philips

INDIAN INSTITUTE OF MANAGEMENT RAIPUR,

Figure 10: EPS and DPS for Godfrey Philips

Figure 11: Market Price for Godfrey Philips

INDIAN INSTITUTE OF MANAGEMENT RAIPUR,

Table 8: Dividend returns for Golden Tobacco

Earnings Per Share (Rs)

Adjusted EPS (Rs.)

Close Price (Rs)

Book Value (Rs)

Adjusted Book Value (Rs)

Tax Rate (%)

Table 9: Share values for Golden Tobacco

INDIAN INSTITUTE OF MANAGEMENT RAIPUR,

Figure 12: Dividend returns for Golden Tobacco

Figure 13: EPS and DPS for Golden Tobacco