PROJECT ON

INVESTMENT APPRAISAL

EXIDE INDUSTRIES LTD.

INTRODUCTION

The Battery Industry is poised to grow by more than double within the next five years. Nearly
all the major global automobile manufacturers have set up base in India and are also looking
at India for export of their products. Interestingly, several commercial vehicle manufacturers
have identified India as a manufacturing base for their export market which would also lead
to a higher demand for Indian batteries. This would definitely expand the market base for
automotive batteries manifold. In addition, with the thrust on infrastructure, communication
and power sectors, the consumption of industrial batteries are also expected to rise
substantially. EXIDE continues to maintain its leadership position in India . Exide is a market
leader in the aftermarket branded automotive industry in India. The reasons for Exide’s
continued top and bottom line growth during the year under review is the fact that the
company is not entirely dependent on only the automotive industry. Today approximately 35
per cent of its business and profits come from industrial range of batteries like telecom,
power, traction, inverter, UPS etc. Some of these sub-segments like Inverter, UPS and
Telecom did exceptionally well during the year, helping the company to turn in superior
numbers.

1
EXIDE PERFORMANCE

As there was fall out of the global economic downturn, the auto industry in particular and
other core industries including infrastructure, telecom, power etc. in general showed either a
sharp de-growth or a tapering down of growth. This definitely affected the operations of the
Company but inspite of such difficult circumstances, EXIDE succeeded in increasing its net
turnover by an average of 40% over the last 5 years i.e from 2005-2009 as shown in figure
1.1. For FY2009, the company reported 19.2% jump in Net Sales to Rs 37,609 millions.
However, Exide Industry’s performance was better than the other ancillary companies during
the year, as its Revenue not only depends on the Automobile industry, but it also derives
almost 35% of its Revenues from industrial battery segments like telecom, power, traction,
inverter, UPS, etc. Consistent growth in the Replacement Automotive Battery Segment also
helped post a better performance during the year.

Net Sales
40000
35000
30000
25000 Net Sales
20000
15000
10000
5000
0
2009 2008 2007 2006 2005

(Figure:-1.1)

The operating profit of the company had also a tremendous growth of 204% from year 2005
to year 2009. This shows that the company is generating more income and less expenditure
over these years.

2
DIVIDEND POLICY

Payout (%)
30

25

20 Payout (%)
15

10

0
2009 2008 2007 2006 2005

Figure:-1.2

The company paid a total dividend of Rs.187.5millions in FY 2005 which increased to

Rs.480 crores in FY 2008-09 which shows company growth during the years. As shown in
figure 1.2, we can see that the dividend payout which the company is paying is decreased
over the years from FY 2005 to FY 2008 and then again it increased in the FY 2009. It means
company was paying less dividend in order to make a reserve for itself in future. It gave very
less dividend in the year 2008 because recession had an impact on the total profitability of the
company, but as the inflation rate goes down it can be seen that it paid comparatively more
dividend than the previous year.
Also the earning per share of is company has increased from Rs 3.30 in 2007-2008 to Rs 3.55
in 2008-09. The company declared final dividend of 20% (Rs0.2 per share) in addition to the
40% interim dividend (Rs0.4 per share) announced earlier in the year. With this, total
dividend for FY 2009 was 60% (Rs0.6 per share) resulting in 1.1% yield at the current market
price.

3
DEBT’S TO EQUITY

Debt-Equity Ratio

2005 Debt-Equity Ratio

2006
2007
2008
2009

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7

(Figure:- 1.3)

As shown in figure 1.3, the company is having a decreasing trend in debt-equity ratio of 0.64
times in the FY 2005 to 0.30 times in the FY 2009. This clearly shows that earlier company
used debt as their major source for finance because it was in their expansion period but over
the years it started using equity as their major source of finance. This shows EXIDE’s strong
position in the market.

4
ESTIMATION OF INCOME STATEMENT FOR NEXT FIVE YEAR

ASSUMPTIONS

 The average growth rate of sales is taken by calculating the average growth rate

of past 4 years. The average growth rate trend for 4 years is 31%. Expenditure

are also increasing by the same rate as sales are increasing.

 Inflation rate has been ignored because it is assumed that there will be

fluctuation in inflation rate in future.

 Other income is calculated as per the trend in investment done by the company

during tha last 4 years.

 Tax rate for the next five is taken as 30% as per current corporate tax rate.

 Depreciation is rate is taken as per the average trend for the last 4 years.

Considering average change in the capital expenditure for future. It is assumed

that company is not going to make any further additions of asset for the next

five year. So the company is following straight line method for depreciation

considering 4% as the rate of depreciation.

 Interest rate is taken as per the rate of current year which was on FY 2009. It is

assumed that interest rate remains constant for the next 5 years.

 Future estimation for income statement is calculated as per the method followed

in the book “ FINANCIAL MANAGEMENT” – I. M PANDEY.

Note:- All figures are in millions.

5
 ESTIMATION OF INCOME STATEMENT

PROJECTED INCOME STATEMENT

(Rs. In Mn.)
PARTICULARS 2009 % 2010 % 2011 % 2012 % 2013 % 2014
Net Sales 37609.8 31 49268.8 31 64542.1 31 84550.2 31 110760.8 31 145096.6
                       
EXPENDITURE :                      
Raw Materials 22224.1 31 32268648 31 42271929 31 55376227 31 72542858 31 95031144
Power & Fuel Cost 1188.9 31 1557.459 31 2040.271 31 2672.755 31 3501.31 31 4586.716
Employee Cost 1652.1 31 2164.251 31 2835.169 31 3714.071 31 4865.433 31 6373.717
Other Mfg Expenses 692.8 31 907.568 31 1188.914 31 1557.477 31 2040.295 31 2672.787
                       
Gross Profit 11851.9 31 15525.99 31 20339.05 31 26644.15 31 34903.84 31 45724.03
less:- Operating
expenses                      
Selling Expenses 6089.6 31 7977.376 31 10450.36 31 13689.97 31 17933.87 31 23493.37
Miscellaneous Expenses 102.8 31 134.668 31 176.4151 31 231.1038 31 302.7459 31 396.5972
                       
operating profit 5659.5 31 7413.945 31 7468.634 31 9783.91 31 12816.92 31 16790.17
add :-other income 67.7 35 91.1242 35 122.6532 31 160.6757 31 210.4851 31 275.7355
                       
EBDIT 5727.2   7505.069   7591.287   9944.586   13027.41   17065.9
LESS:- Depriciation 679.4 6 721.7266 6 766.6902 6 814.455 6 865.1955 6 919.0972
EBIT 5047.8   6783.343   6824.597   9130.131   12162.21   16146.81
LESS:- Interest 516 16 599.9016 16 697.4456 16 810.8503 16 942.6945 16 1095.977
EBT 4531.8   6183.441   6127.151   8319.281   11219.52   15050.83
less:-TAX (30%) 1559   1855.032   1838.145   2495.784   3365.855   4515.249
                       
PAT 2972.8   4328.409   4289.006   5823.496   7853.662   10535.58
                       

( Table:- 1)

6
COST OF CAPITAL

ASSUMPTION

 The growth rate is taken 20% which is the overall growth rate of the company.

 The market price which is considered while calculating the cost of equity is

taken as an average of opening and closing price as on 31 st march 2009.

(Source:- company annual report, BSE market price column).

 Cost of equity is calculated by using Gordon’s Growth Model.

COST OF CAPITAL

COST OF CAPITAL (%)

25

20
COST OF CAPITAL (%)
15

10

0
COST OF DEBT COST OF EQUITY WACC

( Figure :- 1.4 )

CALCULATION OF COST OF CAPITAL

7
 Computation of Growth rate
(Rs. In Mn.)
Growth rate Formula    
0.19645
    9  
0.23775
Roe PAT/Equity 7  
Retention ratio 1- Dividend Payout 0.8263  
Equity (Rs.)   12503.5  
PAT   2972.8  
Dividend
Payout   0.1737  
Growth rate(%) Roe* Retention ratio   19.64
(Table:- 1.1)

Computation of Cost of Debt

(Rs. In
Mn)
cost of debt Formula Rs.
interest   516
total debt   3171.8
16.26836
kd(%) Interest/Total Debt 5
     
( Table :- 1.2)

Computation of Cost of Equity

( Rs. In
Mn.)
Cost of Equity Formula  
DPS   0.2
Market Price
(Rs.)   38.65
Growth Rate(%)   20
     
ke(%)   20.72
( Table:- 1.4)

Gordon growth rate model

Cost of equity = DPS( 1+ growth) + growth / Price of the share - growth

8
Computation of capital ( Weighted Average Cost of Cpital)

(Rs. In Mn.)
Wacc  
kd(%) 16.26
tax rate(%) 30
Ke(%) 20.72
Debt (Rs.) 3171.8
debt+equity (total liability) 15675.3
Equity (Rs.) 12503.5
   
WACC=KeWe + KdWd(1 –t)(%) 18.64
   
( Table :- 1.4)

As shown in table 1.1, the overall growth rate for the company is 20%.Total debt for the
company in the FY 2009 was 3171.8 millions and the interest paid for the debt during the
year was Rs.516 millions .As shown in table- 1.2,the total cost of debt calculated for the
company is 16.26%. Similarly the company paid the dividend of Rs. 0.20 per share to its
share holder. Considering the market value of share on 31 st march 2009, the cost of equity for
the company is 20.72% which is relatively higher than growth rate which is 20%. As shown
in above table-1.3 the gap between cost of equity and growth rate is relatively very small.
This shows that comapny’s greater opportunity to invest in future projects. It also shows
company’s quick recovery of returns from the investment in an adequate shorter period.
The cost of capital of capital is calculated using weighted average cost of capital which is
shown in Table:-1.4 and as per shown in Figure:-1.3. It shows the minimum required rate
of return on funds which is committed to the project, which is the discount rate for cash
flows.

CASH FLOW ESTIMATIONS

9
ASSUMPTIONS AND CALCULATION

 Initial Investment is taken as 20% of gross block which is the base year i.e FY

2009 (Source:- Schedule 5 fixed asset schedule from annual report of company).

 Depreciation rate is taken at 6% which average rate for last 4 years.

 Interest is taken 16% which is interest rate for FY 2009.

 The change in working capital is calculated by taking change in current year

working capital from last year. By calculating the percentage change of net-

working capital for sales by using Net working capital/Sales of base year which

is FY 2009. That percentage change is then calculated with the change in sales

for the next five year. Same procedure is carried out for the change in capital

expenditure for future estimation of five years.

( In Mn.)
PARTICULARS YEAR 0   YEAR1 YEAR2 YEAR3 YEAR4 YEAR5
  2009   2010 2011 2012 2013 2014
Investment 2513.4            
Profit After 4289.00 7853.66 10535.5
Tax     4328.4 6 5823.49 2 8
               
599.901 697.445 810.850 942.694 1095.97
INTEREST     6 6 3 5 7
DEPRECIATIO 721.726 766.690 865.195 919.097
N     6 2 814.455 5 2
NET WC
Change 487.7   881.71 1152.31 1505.96 1968.13 2572.16
Change in
capex 168   544.24 714.59 938.26 1231.93 1617.53
               
NET CASH
FLOW     4224.07 3886.24 5004.57 6461.49 8360.96
               
Total
Investment 3169.1            
( Table:- 1.5)

METHODS OF INVESTMENT APPRAISAL

10
NET PRESENT VALUE COMPUTATION
Net present value of an investment is the difference between present value of cash inflows
and cash outflows. The present values of cash flows are obtained at a discount rate equivalent
to the cost of capital.

C1 C2 C3 Cn
NPV= [ + 2
+
(1+k ) (1+k ) (1+k )3
+ … ⋯ ⋯+
(1+k )n
−Co
]
( Rs. In Mn.)
  YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
PARTICULARS 2009 2010 2011 2012 2013 2014
TOTAL
INVESTMENT 3169.1          
4224.07 3886.24 5004.57 6461.49 8360.96
NET CASH FLOW   8 2 5 2 4
Discount Rate 18.64 1.1864 3.474 4.122 4.8905 5.8021
3560.41 1118.66 1214.11 1321.23 1441.02
Present value   6 5 3 3 4
TOTAL CASH 8655.45
INFLOW 2          
Initial Investment 3169.1          
5486.35
NPV 2          
             
( Table:- 1.6)

In the above Table:-1.6, we can see the amount of NPV is positive i.e NPV>0 which is Rs.
5487 millions. The positive net present value of an investment represents the maximum
amount company would be ready to pay for purchasing the opportunity of making the
investment. The net present value Rs. 5487 millions can be interpreted to represent the
amount the company could raise at the rate of return which is 18.64%, in addition to the
initial outlay of 31619.1 millions to distribute to its shareholders and by the end 5 years.

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PAYBACK PERIOD

The number of years required to recover the initial outlay of the investment is payback
Initial outlay
Payback =
cash inflow
(Rs. In Mn.)
  2010 2011 2012 2013 2014
3886.24 5004.57 6461.49 8360.96
NET CASH FLOW 4224.078 2 5 2 4
INITIAL OUTLAY 2513.4        
7MONTHS
PAYBACK PERIOD 14DAYS        
INITIAL OUTLAY/CASH
FLOW*12          
( Table:- 1.6)

As per the payback rule, the project is accepted because the project is giving early recovery
of its investments, thus it gives an insight in to the liquidity of the project. The funds so
released can be useful for the company to put it in to other use or to invest in other projects.

ACCOUNTING RATE OF RETURN (ARR)

Accounting rate of return is the rate arrived at by expressing the average annual net profit
(after tax) as given in the income statement as a percentage of the total investment or average
investment.
Average Profit After Tax
ARR =
Initial outlay
(Rs. In Mn.)

  2010 2011 2012 2013 2014      

AVERAG
PARTICULAR             SUM E
4289.00 5823.4 7853.66 10535.5 32830.1 6566.02
PAT 4328.4 6 9 2 8   4 8
INITIAL
OUTLAY 2513.4              
AVERAGE
RATE OF 2.61240
RETURN 9              
ARR 261%              

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 (Table:-1.7)

The investment decision will be to select the project since it is generating higher
rate of return for the company in the future.
INTERNAL RATE OF RETURN ( IRR)
The internal rate of return of a investment is defined as the rate of discount at
which the present value of cash inflows and present value of cash outflows are
equal. It can be restated as the rate of discount, at which the present value of
cash flows associated with a project equal zero.

N1
[
IRR= r 1 + N + N × ( r 2−r 1¿
1 2 ]
Where,
r1 – smaller rate of interest

r2 - higher rate of interest

N1 – NPV at smaller rate

N2 – NPV at higher rate

( Rs. In Mn.)
  YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5    
PARTICULARS 2009 2010 2011 2012 2013 2014    
NPV-
INITIAL INITIAL
OUTLAY 2513.4           SUM OUTLAY
NET CASH
FLOW   4224.078 3886.242 5004.575 6461.492 8360.964    
NPV@ 400%   1408.026 431.8046 185.3546 79.77151 34.40726 2139.364 -374.036
NPV@ 350%   1689.631 621.7987 320.2928 165.4142 85.61627 2882.753 369.3533
                 
374.842
IRR@2513.4 5              
( Table:-1.8)

As shown in the above Table:-1.8, the trial and error method is used to find out IRR, here
two discount rate are taken one at 400% and one at 350%,. At 400% the company is having
negative net present value which is Rs.-374,and at 350% it has positive NPV which is

13
Rs.369. As the discount rates increases, the negative NPV diminishes and become zero at
350%, but reaching a maximum it started reaching a maximum it decreases and at 400% it
becomes zero.
From this it is clear that the investment combines the feature of both lending and borrowing.

CONCLUSION

After the analysis of EXIDE LTD. I find that the company is now at its growing stages. The
capital structure of the company could change if the company is planning to invest into its
growth.

After the analysis of the investment appraisal and the future estimation for the company I feel
that the company should invest in to the project as all the method used are satisfying the
conditions.

Looking at the company’s current situation I can say that company is having a bright future,
this I can say by the company’s overall growth rate, earning per share that the company is
making and the returns that the company is giving to its shareholder.

14
BIBLIOGRAPHY

 Financial Management, Ninth Edition – I.M Pandey

 www.moneycontrol.com
 The financial data was sourced from Capitaline, a financial database in the college.
 www.bseindia.com
 www. investopedia.com
 www.exideindustries.com

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