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A STUDY ON CAPITAL STRUCTURE ANALYSIS

OF L&T FINANCE HOLDINGS LTD.

Guided by- prof. Dr. Sujit Deb/Ambarish Deb

THE ICFAI UNIVERSITY TRIPURA

SUBMITTED BY

NAME : SONALI MISHRA

ID : 18IUT0180006

PROGRAME : MBA

SESSION : 2018-20
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Sl TABLE OF CONTENT Page No.

No.

01. INTRODUCTION

02. ACKNOWLEDGEMENT

03. COMPANY PROFILE

04. OBJECTIVES

05. METHODOLOGY

06. FACTS FINDINGS & OBSERVATIONS

07. CONCLUSION
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INTRODUCTION
. In general leverage refers to accomplish certain things which are otherwise not
possible i.e lifting of heavy objects with the help of levers. This concept in
leverage is also valid in business .

. In finance the term leverage is used to describe the firm’s ability to use fixed cost
assets or funds to increase the return to its owners; i.e equality shareholders. In
other words, the fixed funds i.e debentures and preference share capital act as the
fulcrum, which assists the lever i.e the firm to lift i.e to increase the earnings of its
owner.

. If earnings less the variable costs exceed the fixed costs i.e preference dividend
and interest on debenture or earnings before interest and exceed the fixed return
requirement the leverage is called favorable.

. Leverage is also the influence which an independent variable has over a

dependent/related variable i.e rainfall over production in financial context, sales
and fixed cost over profit.

Types of leverage

OPERATING LEVERAGE
The leverage associated with investment (asset acquisition) activities is
referred as operating leverage.
Operating leverage is also defined as the ratio of the percentage change
in operating income for a given percentage change in sales.
. The risk associated with operating leverage is called operating risk. It is
the risk of not being able to cover fixed operating costs by him
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FINANCIAL LEVERAGE:
 Leverage associated with financing activities is called financial
leverage.
 The use of long term fixed interest bearing debt & preference
share capital along with equity share capital is called financial
leverage or trading on equity.
 It measures the effect of change in EBIT on the EPS of the
company.
 The measures of financial leverage is the degree of financial
leverage
 The risk associated with financial leverage is called financial risk-
Financial risk is the risk of not being able to cover fixed financial
costs by the firm.

COMBINED LEVERAGE:

 Combined leverage is the product of operating leverage &

financial leverage.
 The measure of total leverage is the degree of total leverage
 Total risk is the risk associated with combined leverage

ACKNOWLEDGEMENT
I take the opportunity to thank Prof. Sankaraj Roy for giving me the opportunity
to do a study of financial statements and also analyze them through this project
on analysis of Capital structure of L&T Finance Holdings Ltd.

I would also like to thank everyone else for helping me in carrying out this study.
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COMPANY PROFILE
L&T Finance Holdings Limited is a non-banking financial institution-core investment company.
The Company's segments include Retail and Mid Market Finance, which consists of rural
products finance, personal vehicle finance, microfinance, housing finance, commercial vehicle
finance, construction equipment finance, loans and leases, loan against shares and supply chain
finance; Wholesale Finance, which consists of project finance and non-project corporate finance
to infra and non-infra segments across power-thermal and renewable; transportation-roads, ports
and airports; telecom, and other non-infra segments; Investment Management, which consists of
assets management of mutual fund and private equity fund, and Other Business, which consists
of wealth management and financial product distribution. It offers a range of financial products
and services across retail, corporate, housing and infrastructure finance sectors, as well as mutual
fund products and investment management services.

OBJECTIVES

 To assess Capital Structure analysis of last 5 Fiscal years of L&T Finance Holdings Ltd.
 To determine the long term profitability.

Methodology
The study is based on secondary data & the data are collected from websites like “profitndtv.com” &
www.moneycontrol.com

Leverage was applied to analyze the performance of the company.

Following Leverage are used for this study:

%𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐸𝐵𝐼𝑇
Operating Leverage = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑆𝑎𝑙𝑒𝑠 × 100

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐸𝑃𝑆
Financial Leverage = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐸𝐵𝐼𝑇 × 100

Combined Leverag = O.L × F.L

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FACTS FINDINGS & OBSERVATION

% change in EBIT
2014 = 131.73 − 88.90 ÷ 88.90 × 100 = 48.17

2015 = 196.89 − 131.73 ÷ 131.72 × 100 = 49.46

2016 = 252.03 − 196.89 ÷ 196.89 × 100 = 28.00

2017 = 368.09 − 252.03 ÷ 252.03 × 100 = 46.05

2018 = 245.11 − 368.09 ÷ 368.09 × 100 = (33.41)

% Change in Sales
2014 = 171.98 = 111.84 ÷ 111.84 × 100 = 53.77

2015 = 257.57 − 171.98 ÷ 171.98 × 100 = 49.88

2016 = 290.62 − 257.57 ÷ 257.57 × 100 = 12.83

2017 = 348.50 − 290.62 ÷ 290.62 × 100 = 19.91

2018 = 277.58 − 348.50 ÷ 348.50 × 100 = ((20.35)

% Change in EPS
2014 = 1.80 − .44 ÷ .44 × 100 = 309.09

2015 = . 70 − 1.80 ÷ 1.80 × 100 = (61.11)

2016 = . 88 − .70 ÷ .70 × 100 = 25.71

2017 = 1.25 − .88 ÷ .88 × 100 = 42.04

2018 = . 71 − 1.25 ÷ 1.25 × 100 = (43.2)

Operating leverage:
2014 = 48.17 ÷ 53.77 = .89

2015 = 49.46 ÷ 49.88 = .99

2016 = 28.00 ÷ 12.83 = 2.18

2017 = 46.05 ÷ 19.91 = 2.31

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2018 = (−33.41) ÷ (−20.35) = 1.6

Above solution shows that 2017 Operating Leverage is more compare to Last 5 years. Utilizing
Operating Leverage will allow variable cost to be reduced in favour of Fixed Cost ; therefore
profits will increase more for a given increase in sales. In other word, because V.C are reduced,
each sale will contribute a higher profit margin to the company.

Operating Leverage also increase the forecasting risk. A company with higher operating
Leverage has the potential to generate much larger profits then a company with lower operating
leverage.

Financial Leverage
2014 = 309.09 ÷ 48.17 = 6.41

2015 = −61.11 ÷ 49.46 = 1.23

2016 = 25.71 ÷ 28.00 = .91

2017 = 42.04 ÷ 46.05 = .91

2018 = (−43.02) ÷ (−33.41) = 1.28

Impacts of Financial Leverage

Above solution shows that 2016 & 2017 Financial is less compare to Last 5 years.

From a company’s perspective, the use of financial leverage can be positively- or sometimes
negatively – impact its return on equity as a consequence of the increased level of risk

. Financial leverage is the degree to which a company uses fixed-income securities such as debt and
preferred equity. The more debt financing a company uses, the higher its financial leverage. A high
degree of financial leverage means high interest payments, which negatively affect the company's bottom-
line earnings per share.

Financial risk is the risk to the stockholders that is caused by an increase in debt and preferred equities in
a company's capital structure. As a company increases debt and preferred equities, interest payments
increase, reducing EPS. As a result, risk to stockholder return is increased. A company should keep its
optimal capital structure in mind when making financing decisions to ensure any increases in debt and
preferred equity increase the value of the company.

Combined Leverage
2014 = . 89 × 6.41 = 5.70

2015 = . 99 × 1.23 = 1.21

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2016 = 2.18 × .91 = 1.98

2017 = 2.31 × .91 = 2.10

2018 = 1.64 × 1.28 = 2.09

Combined or total leverage measures total risk of L&T Finance Holdings Ltd. In the year 2018
the risk is almost the same compare to previous year.

This ratio has been known to be very useful to a company or firm as it helps a firm understand
the effects of combining financial and operating leverage on the total earnings of the company. A
high level of combined leverage shows the risk involved in the company as there are more fixed
costs in the company, while a low combined leverage would mean better for the company.

Leverage

2014 2015 2016 2017 2018

6.41
5.7

2.18 2.31 1.98 2.1 2.09

1.64
1.23 1.28 1.21
0.89 0.99 0.91 0.91

Operating Leverage Fiancial Leverage Combined Leverage

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2014(Cr) 2015(Cr) 2016(Cr) 2017(Cr) 2018(Cr)

Equity capital 1716.76 1718.45 1720..19 1753.40 1755.72

Deb t Capital 1221.59 805.96 704.17 -446.40 -286.66

Equity Capital

Equity capital is the invested money that, in contrast to debt capital, is not repaid to the investors
in the normal course of business. It represents the risk capital staked by the owners through
purchase of a company's common stock

An increase in the total of capital stock showing on a company's balance sheet is bad for
investors, because it represents the issuance of additional stock shares, which dilute the
ownership value of investors' existing shares. However, the increase in capital stock may, in the
long run, benefit investors in the form of increased return on equity through capital gains, an
increase in dividend payouts or both.

Increases in the total capital stock negatively impact existing shareholders since they result
in dilution. An increase in the total number of stock shares means that each existing share
represents a smaller percentage of ownership. As the companies earnings are divided by the new,
larger number of shares to determine the company's Earnings Per Share (EPS), the company's
EPS figure will drop.

However, increases in capital stock can ultimately be beneficial for investors. The increase in
capital for the company raised by selling additional shares of stock can finance additional
company growth. If the company invests the additional capital successfully, then the ultimate
gains in stock price and dividend payouts realized by investors may be more than sufficient to
compensate for the dilution of their shares.

Debt capital

Debt capital is the capital that a business raises by taking out a loan. It is a loan made to
a company that is normally repaid at some future date. Debt capital differs from equity or share
capital because subscribers to debt capital do not become part owners of the business, but are
merely creditors, and the suppliers of debt capital usually receive a contractually fixed annual
percentage return on their loan, and this is known as the coupon rate
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There are two reasons why a company should use debt for large portion of
business:

First, the government encourages businesses to use debt by allowing them to deduct the interest
on the debt from corporate income taxes. With the corporate tax rate at 35% (one of the highest
in the world) that deduction is quite enticing. It is not uncommon for a company’s cost of debt to
be below five percent after considering the tax break associated with interest.

Second, debt is a much cheaper form of financing than equity. It starts with the fact that equity is
riskier than debt. Because a company typically has no legal obligation to pay dividends to
common shareholders, those shareholders want a certain rate of return. Debt is much less risky
for the investor because the firm is legally obligated to pay it. In addition, shareholders (those
that provided the equity funding) are the first to lose their investments when a firm goes
bankrupt. Finally, much of the return on equity is tied up in stock appreciation, which requires a
company to grow revenue, profit and cash flow. An investor typically wants at least a 10% return
due to these risks, while debt can usually be found at a lower rate.

These facts make debt a bargain.

It would not be rational for a public company to be funded only by equity. It’s too inefficient.
Debt is a lower cost source of funds and allows a higher return to the equity investors by
leveraging their money.

So why not finance a business entirely with debt? Because all debt, or even 90% debt, would be too risky
to those providing the financing. A business needs to balance the use of debt and equity to keep the
average cost of capital at its minimum. We call that the Weighed Average Cost of Capital or WACC.

Conclusion
 L&T Finance Holdings Ltd. has low rate of Operating Leverage, indicates a
low interest outflow & lower borrowings.
 In 2014 L&T Finance Holdings Ltd has high rate of Financial Leverage
which is high compare to other years.
 L&T Ltd that successfully assess leverage demonstrates by its success that it
can handle the risk associated with carrying debt.
 Loans likely to be available at more attractive interest rates.
 EBIT is decreased in the year 2018 & 2016 compare to other years.
 The overall efficiency of L&T is higher than that of its competitors in
previous year comparison.
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