Cases in Corporate Finance 0070090254, 9780070090255

Table of contents :
Cover
Half Title
Title Page
Copy Right
Dedication
Preface
Acknowledgements
Contents
Brief Description of Cases
Case Descriptions
Module 1: Building Blocks
Case 1: Lisa Mathew's Investment Opportunities
Case 2: Valuation Problem Set (A)
Case 3: Reliance Capital
Case 4: Cost of Capital for Utilities in India
Case 5: Financial Statements and Industry Structure, 2007
Case 6: The Use of Cash Flow Statements
Case 7: Financial Performance of Major Steel Firms
Case 8: Value Based Management at Marico Ltd.
Module 2: Capital Budgeting and Discounted Cash Flow Valuation
Chapter 9: Valuation Problem Set (B)
Case 10: Indian Premier League
Case 11: Option Pricing Problem Set
Case 12: Tata Steel:The Bid for Corus
Module 3: Working Capital Management
Case 13: Working Capital Management at Excel Crop Care Ltd.
Module 4: Capital Structure, Short-Term and Long-Term Financing
Case 14: Trent Ltd. Rights Issue of Convertibles and Warrants
Case 15: Financial Instruments Problem Set
Case 16: BGR Energy Systems’Initial Public Offering
Case 17: Shree Cement Ltd.
Case 18: Fujairah Bank

Citation preview

Cases in Corporate Finance

Cases in Corporate Finance

Vishwanath S R Institute of Management Technology, Nagpur

Tata McGraw-Hill Publishing Company Limited NEW DELHI McGraw-Hill Offices New Delhi New York St Louis San Francisco Auckland Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal San Juan Santiago Singapore Sydney Tokyo Toronto

Tata McGraw-Hill Published by Tata McGraw-Hill Publishing Company Limited, 7 West Patel Nagar, New Delhi 110 008. Cases in Corporate Finance Copyright © 2009, by Tata McGraw-Hill Publishing Company Limited. No part of this publication may be reproduced or distributed in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publishers. The program listings (if any) may be entered, stored and executed in a computer system, but they may not be reproduced for publication. This edition can be exported from India only by the publishers, Tata McGraw-Hill Publishing Company Limited. ISBN (13): 978-0-07-009025-5 ISBN (10): 0-07-009025-4 Managing Director: Ajay Shukla General Manager—Publishing (B&E/HSSL and School): V Biju Kumar Editorial Manager—B&E: Tapas K Maji Editorial Executive: Hemant K Jha Development Editor: Shalini Negi Executive (Editorial Services): Anubha Srivastava Senior Production Manager: Manohar Lal Production Executive: Atul Gupta General Manager—Marketing (Higher Education & School): Michael J. Cruz Asst. Product Manager: Vijay Sarathi Jagannathan Controller—Production: Rajender P Ghansela Asst. General Manager—Production: B L Dogra Information contained in this work has been obtained by Tata McGraw-Hill, from sources believed to be reliable. However, neither Tata McGraw-Hill nor its authors guarantee the accuracy or completeness of any information published herein, and neither Tata McGraw-Hill nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that Tata McGraw-Hill and its authors are supplying information but are not attempting to render engineering or other professional services. If such services are required, the assistance of an appropriate professional should be sought. Typeset at Text-o-Graphics, B1/56 Arawali Apartment, Sector 34, Noida 201 301 and printed at Sai Printo Pack, A-102/4, Okhla Industrial Area, Phase–II, New Delhi 110 020 Cover Design: K Anoop Cover printed at: Rashtriya Printers RALQCRZFRALCR

To Sri Krishna, the only real guru and to the following Harvard Business School professors whose writings inspired this volume: Andre Perold, Benjamin Esty, Brian Hall, Carliss Baldwin, Carl Kester, George Chacko, Jay Light, Joshua Lerner, Karen Wruck, Kenneth Froot, Krishna Palepu, Lisa Meulbroek, Malcolm Baker, Malcolm Salter, Mihir Desai, Paul Gompers, Paul Healy, Peter Tufano, Randolph Cohen, Richard Ruback, Stuart Gilson, Thomas Piper, Timothy Luehrman, and William Fruhan

Preface

This book presents 18 case studies in finance, targeted towards upper-level undergraduates and MBA students. The purpose of these cases is to facilitate class room discussion of tools and concepts of corporate finance. The range of topics includes value creation, economic profit, financial analysis and forecasting, cost of capital, discounted cash flow valuation, security design, bank loans and mergers and acquisitions. The spirit of these cases is to show how financial managers add value to the firm through the financial choices they make.

INTRODUCTION TO CASE METHOD TEACHING Pioneered by the Harvard Business School, the case method of teaching is, by far, the most popular method of instruction in business schools around the world. Quite often the available cases are written either in the North American or European context. Though the underlying theories these cases are supposed to reinforce are global, students can better identify them with local cases. This book tries to bridge the gap in the Indian/Asian context. The case method is not only the most relevant and practical way to learn managerial skills, it is exciting and fun. Success in business comes from experience and knowledge, from the ability to analyse and reflect, from observing and interacting with others, and learning from these encounters. The case method of instruction, the standard practice in good business schools, is based on these principles. It is a process of inductive learning that goes beyond facts and theories—a process that teaches individuals not only how to manage organisations, but also how to continually grow and learn throughout life. The case method presents the greatest challenges confronting leading companies today and places the student in the role of the decision maker. Bringing real-life business problems into the classroom is the essence of the case method. The case method fuses analysis and action. The goal of the case method of instruction is to create an environment where students learn how to tackle difficult, complex problems by probing,

viii

Preface

discussing, and integrating, working together towards an understanding much deeper than could be achieved on their own. Students learn what it feels like to exercise judgement, make decisions, and take responsibility. In doing so, they must sharpen their skills of effective communication and be able to persuade, synthesise, and adapt.

EDUCATIONAL OBJECTIVES Financial management is concerned with the manner in which individuals and firms allocate resources across assets and over time. How does a company ensure that it has enough money to operate and grow? How do managers make good investment decisions? This book examines the role of finance in supporting other functional areas of the firm while fostering an understanding of how financial decisions can create value. The central theme of the book is value-based management which assumes that value creation should be the key factor in making financial, strategic and operating decisions. The cases depict a wide range of financial and business situations. The cases have been drawn from most areas of corporate finance. They represent a wide range of industries and time periods. They also illustrate different phases of a firm’s life cycle. It is quite common to supplement cases with text book readings. Instructors may assign any standard text on corporate finance. We have provided a small list in a subsequent section. The book includes two types of instructional materials—cases and problem sets. Problem sets are included to demonstrate the application of theory to real life data. Examples include risk and return of investing in stocks, option pricing theory, valuation of exotic financial instruments and issues in valuation. These can be combined with lectures. In a way, cases build on what is covered in problem sets. The problem sets include examples of real life companies. The valuation problem set (A) and (B), for instance, require students to estimate returns, beta and such other parameters for listed firms; value publicly listed companies etc. Cases are more decision oriented in the sense that students are required to make decisions after analysing data given in the case. Case topics include: n

Basic analytical skills and principles of corporate finance

n

Functions of modern capital markets and financial institutions

n

Estimation of cost of capital

n

Standard techniques of analysis, including capital budgeting, discounted cash flow valuation, and risk analysis

n

Estimation and management of working capital

n

Estimating external fund requirement and executing an intelligent financing strategy

Preface

ix

TARGET AUDIENCE This book is meant to be used in a standard Financial Management or Corporate Finance course in an MBA program although students of other professional programs like CFA/CPA/Cost and Management Accounting would find it useful. The cases are best taught with a standard corporate finance text book. This book is suitable for those who are seeking a career in corporate finance, investment banking, general management, strategy consulting, securities analysis, commercial banking, and investment management. The book can also be used in executive education programs such as Finance for senior non-finance managers or Financial Management Program for finance managers.

ORGANISATION OF THE BOOK The book is organised into four modules. The first module consists of cases that form the building blocks of modern finance. These are on-time value of money, risk and return, estimation of cost of capital, financial statement analysis, and value-based management. The second module covers capital budgeting and valuation. This module introduces standard DCF models in a variety of settings. We have also included a problem set on option pricing in which real options are discussed. The third module is on working capital estimation and management. Case topic includes seasonality and working capital management, and WCM and competitive advantage. The last module is on long-term and short-term financing. Case topics include design of securities, initial public offerings, and bank loans.

INSTRUCTORS’ MANUAL It is a standard practice for case writers to prepare a teaching note along with the case to aid class discussion. The teaching notes for the cases are available for the benefit of instructors on the companion website of this book http://www.mhhe.com/corpfincases

DISCLAIMER Cases are prepared for the sole purpose of aiding class discussion. Cases are not meant to serve as endorsements, or sources of data, or illustrations of effective or ineffective management. VISHWANATH S R

Acknowledgements

I have benefited from many individuals while working on this book. I would like to thank my colleagues at IMT, Nagpur. In particular, I would like to thank Anwar Ali (Director), Gopal (Dean), and Pawan Jain. My students have always been a source of research support. I would like to recognise the able assistance of my students Abhinav Tiwari, Anu Kumari, Akash Chibber, and Amol Sangeet of IMT for their research assistance. Many executives have been generous in sharing their experience and information with me. I would like to thank Priya Ayyar (Edelweiss Capital), Gurudas Pai (ABN AMRO), Sunil Singhania (Reliance Capital), Veda Vyas Rao (SBI Capital Markets), and Pranav (Enam). Special thanks are due to Rajesh Haldipur (SDM Institute for Management Development, Mysore) who co-wrote the Corus case study. VISHWANATH S R

Contents

Preface Acknowledgements Brief Description of Cases Case Descriptions

vii xi xv xvi

MODULE 1: BUILDING BLOCKS 1. Lisa Mathew’s Investment Opportunities

3

2. Valuation Problem Set (A)

6

3. Reliance Capital

48

4. Cost of Capital for Utilities in India

99

5. Financial Statements and Industry Structure, 2007

114

6. The Use of Cash Flow Statements

118

7. Financial Performance of Major Steel Firms

126

8. Value Based Management at Marico Ltd.

142

MODULE 2: CAPITAL BUDGETING AND DISCOUNTED CASH FLOW VALUATION 9. Valuation Problem Set (B)

163

10. Indian Premier League

173

11. Option Pricing Problem Set

195

12. Tata Steel: The Bid for Corus

200

xiv

Contents

MODULE 3: WORKING CAPITAL MANAGEMENT 13. Working Capital Management at Excel Crop Care Ltd.

235

MODULE 4: CAPITAL STRUCTURE, SHORT-TERM AND LONG-TERM FINANCING 14. Trent Ltd. Rights Issue of Convertibles and Warrants

255

15. Financial Instruments Problem Set

266

16. BGR Energy Systems’ Initial Public Offering

275

17. Shree Cement Ltd.

290

18. Fujairah Bank

299

Brief Description of Cases

The following table provides a brief description of all the cases. Case Name

Topic

Lisa Mathew’s Investment Opportunities Valuation Problem Set (A) Reliance Capital Cost of Capital for Utilities in India Financial Statements and Industry Structure, 2007 The Use of Cash Flow Statements Financial Performance of Major Steel Firms Value Based Management at Marico Ltd. Valuation Problem Set (B) Indian Premier League Option Pricing Problem Set Tata Steel: The Bid for Corus Working Capital Management at Excel Crop Care Ltd. Trent Ltd. Rights Issue of Convertibles and Warrants Financial Instruments Problem Set BGR Energy Systems’ Initial Public Offering Shree Cement Ltd.

Time value of money, capital budgeting Risk and return Risk and return Estimation of cost of capital Financial statement analysis

Fujairah Bank

Financial statement analysis Financial statement analysis Role of CFO, value, economic profit Financial forecasting, discounted cash flow valuation Capital budgeting, discounted cash flow valuation Options, derivatives, real options Mergers and acquisitions, valuation Working capital, short-term financial management Capital structure, financing, convertibles and warrants Financing, financial innovation, financial engineering Financing, IPOs Bank loans, short-term financial planning and management Bank loans, short-term financial planning and management, financial forecasting

Case Descriptions

MODULE 1: BUILDING BLOCKS C1: Lisa Mathew’s Investment Opportunities An individual is appraising a hotel project. She is required to take a decision on the basis of NPV and DCF analysis. She also has to determine the size of the investment. The objective is to introduce time value of money and discounted cash flow analysis.

C2: Valuation Problem Set (A) The problem set covers estimation of returns, standard deviations, alpha, beta, R2 and standard error for stocks using different return intervals and market proxies as well as construction of two stock portfolios. The objective is to introduce the risk and return of investments in stocks.

C3: Reliance Capital The case introduces risk and return of investing in stocks in the context of a mutual fund. The objective is to introduce risk and return of investments in stocks and mutual funds.

C4: Cost of Capital for Utilities in India The case presents the cost of capital estimation procedure for utilities in India. The objective is to introduce issues in the estimation of cost of capital.

C5: Financial Statements and Industry Structure, 2007 The case demonstrates how financial statements reflect industry characteristics. The objective is to introduce the use of ratios in predicting firm characteristics. Students are asked to predict the firm and its industry group using disguised financial statements.

Case Descriptions

xvii

C6: The Use of Cash Flow Statements The case presents the cash flow statements of three companies drawn from India and the U.S. The objective is to introduce analysis of cash flow statements. In particular, the case demonstrates how cash flow statements reflect the life cycle of the firm, the nature of business and the financial condition of the company.

C7: Financial Performance of Major Steel Firms The balance sheet, income statement and cash flow statements of major steel firms in India are presented. Students are required to assess the financial performance of these firms. The objective is to introduce financial statement and industry analysis.

C8: Value Based Management at Marico Ltd. The case presents measures of financial performance and health for Marico. The measures include economic profit (also known as Economic Value Added) and other classic measures, such as financial ratios and stock price performance. Students are asked to evaluate the strategy and estimate the potential value creation ability of Marico. The objective of the case is to introduce principles of value based management, and show how to interpret the range of financial criteria presented and reflect on the consistency of those criteria in measuring value creation of firms.

MODULE 2: CAPITAL BUDGETING AND DISCOUNTED CASH FLOW VALUATION C9: Valuation Problem Set (B) The valuation problem set covers: (1) Building a simple proforma, (2) Determinants and use of valuation metrics like P/E, P/B (3) Valuation of a public company’s stock, and (4) Evaluation of a proposed high-leverage, project finance transaction. The learning objective is to help students gain familiarity with practical applications of valuation techniques.

C10: Indian Premier League The Indian Premier League (IPL) conceived by the Board of Control for Cricket in India (BCCI) is a T20 format cricket competition. The case tracks the development of the plan and launch of the first season of play. The case asks how attractive the plan is to all the parties involved and requires students to assess the risk and reward of the plan. The learning objective is to help students gain familiarity with performing discounted cash flow analysis.

xviii

Case Descriptions

C11: Option Pricing Problem Set This case presents seven exercises designed to introduce students to option pricing using the BlackScholes/Merton’s model and binomial-tree analysis and its application in capital budgeting. The learning objective is to introduce the analysis of plain-vanilla call and put option prices.

C12: Tata Steel: The Bid for Corus The case documents a high profile cross border acquisition by an Indian company. Students are required to assess the strategic motives of these firms and perform a valuation analysis. The learning objective is to introduce issues in a cross border, high leverage acquisition.

MODULE 3: WORKING CAPITAL MANAGEMENT C13: Working Capital Management at Excel Crop Care Ltd. In 2006, a divisional manager at ECCL commissioned a study to improve the overall working capital management. Students are asked to make inter-firm comparisons and estimate the likely savings from improvements. The objective of the case is to introduce issues in overall working capital management. To explore a range of issues in working capital management with a primary focus on accounts receivable and inventory; extend students’ skills in financial statement modeling and analysis; and examine some of the challenges in financial (and general) management of firms in developing countries.

MODULE 4: CAPITAL STRUCTURE, SHORT-TERM AND LONG-TERM FINANCING C14: Trent Ltd. Rights Issue of Convertibles and Warrants Trent Ltd. is faced with a large need for external financing to support growth. The case illustrates the value of convertible debt and warrant as a financing instrument in these circumstances. The objective of the case is to introduce issues in the design of securities.

C15: Financial Instruments Problem Set The problem set covers valuation of some innovative financial instruments. The objective is to introduce valuation of seven innovative financial instruments.

C16: BGR Energy Systems’ Initial Public Offering The case presents the initial public offering of shares by a rapidly growing firm. The objective is to introduce issues in going public and IPO valuation.

Case Descriptions

xix

C17: Shree Cement Ltd. The case documents a request from a company to enhance and renew working capital limits from a major bank. The bank has to decide whether to accept the proposal. The case introduces concepts like maximum permissible finance.

C18: Fujairah Bank A credit analyst at a major UAE Bank receives a proposal from an existing customer for the enhancement of working capital limits. The case provides an understanding of the commercial banking industry and the role of a loan officer, and asks the student to assess a proposed loan. The case provides an opportunity for financial statement analysis. The objective of the case is to introduce issues credit analysis and working capital estimation.

Case Map for the Benefit of Readers In the table given below, I have provided a link to specific chapters in standard text books like Principles of Corporate Finance by Brealey, Myers and Allen and Fundamentals of Corporate Finance by Stephen Ross, Westerfield, and Jaffe. Readers may use the cases along with these or other standard text books. Case No.

Principles of Corporate Finance

Fundamentals of Corporate Finance

1

Ch 1, 2, 3, 4, 5, 13

Ch 1, 4, 5, 6

2, 3

Ch 7, 8

Ch 9, 10

4

Ch 9

Ch 12

5, 6, 7

Ch 28

Ch 2, 3

8, 14

Ch 17, 18

9, 10

Ch 10, 11

Ch 6, 7

11

Ch 20, 21

Ch 22, 23

12

Ch 33, 34

Ch 29

13

Ch 30, 31

Ch 26-28

14

Ch 22

Ch 24, 13, 14, 18

14, 15, 16

Ch 14, 15

Ch 19, 20

17, 18

Ch 32

Ch 26-28

Module 1 BUILDING BLOCKS

1. 2. 3. 4. 5. 6. 7. 8.

Lisa Mathew’s Investment Opportunities Valuation Problem Set (A) Reliance Capital Cost of Capital for Utilities in India Financial Statements and Industry Structure, 2007 The Use of Cash Flow Statements Financial Performance of Major Steel Firms Value Based Management at Marico Ltd.

CASE

1

Lisa Mathew’s Investment Opportunities DESCRIPTION An individual is appraising a hotel project. She is required to take a decision on the basis of NPV and DCF analysis. She also has to determine the size of the investment.

LEARNING OBJECTIVE To introduce time value of money and discounted cash flow analysis.

SUBJECTS COVERED Capital Budgeting, Time Value.

This case was prepared by Prof Vishwanath S.R. of Institute of Management Technology, Nagpur, India for the sole purpose of aiding classroom discussion. Cases are not intended to serve as endorsements, or sources of data, or illustrations of effective or ineffective management.

4

Cases in Corporate Finance

Lisa will receive Rs. 20 m today and Rs. 30 m one year from today. She does not have any other assets. Capital markets are perfect. In other words, there are no taxes or transaction costs, and all investors have the same, relevant information about investment payoffs. Assume that the rate of interest is 6%. Also assume that the investment horizon is one year. 1. What is Lisa’s current wealth? How much can she spend and consume today? How much money can she spend and consume one year from now if she consumes nothing today? Suppose that instead of having a two period gift, Lisa has an initial wealth of Rs. 40 m. She decides to invest part of the Rs. 40 m in a hotel which she will own. The table given below indicates the future, end of the year, cash flows that will result from an investment today. Investment today Rs. m

Future cash flow Rs. m

10 20

18 33

30 40

44 54

2. How much of the Rs. 40 m should Lisa invest in the hotel? What happens to Lisa’s wealth when she makes the investment in the hotel business? 3. How would your answer change if the cash flows occur at the beginning of the year? 4. How would your answer change if the same cash flows in Q1 occur over three years? That is, Rs. 18 m would be received every year for three years for the first project; Rs. 33 m for the second and so on. 5. How would your answer change if the first year cash flows grow at 3% forever? 6. Assume the data in Q1. Suppose that Lisa has a strong preference for current versus future consumption, and would like to consume at least Rs. 30 m immediately. Is this consumption possible, in light of the planned investment in the hotel? 7. Assume that Lisa does not have the Rs. 40 m gift to begin with, but still has the necessary ability to develop and operate the hotel. Should she still make the investment in the hotel? Assume that the only source of funding is a bank loan. 8. Assume that Lisa issues publicly traded bonds instead of taking a loan at an interest rate of 7%, with a tenor of 5 years. What would be the market price of the bond? Assume a face value of Rs. 1000. 9. Individuals are of two types, savers and spenders. While all individuals prefer current consumption, spenders have a relatively higher preference for current consumption. What if Lisa shares her ownership interest in the hotel business with a widely diffuse group of investors who have different preferences for consumption? How much of the Rs. 40 m will the savers want to invest in the hotel and how much will the spenders want to invest? Assume that the firm pays out whatever is not invested.

Case 1: Lisa Mathew’s Investment Opportunities

5

10. Lisa’s business now consists of cash remaining after the investment in the hotel and the hotel. Assume that Lisa is contemplating another investment, namely to sell Pizzas for a multinational chain. This project will require an amount of Rs. 25 m investment and will yield a future cash flow of Rs. 34 m. Should she undertake the investment? Assume that she does not want to use internal cash to finance the investment, nor does she want to use debt financing. There are currently 200,000 shares outstanding.

CASE

2

Valuation Problem Set (A) DESCRIPTION The problem set covers estimation of returns, standard deviations, alpha, beta, R2 and standard error for stocks using different return intervals and market proxies as well as construction of two stock portfolios.

LEARNING OBJECTIVE To introduce the risk and return of investments in stocks.

SUBJECTS COVERED Investment Management, Security Analysis, Portfolio Management.

This problem set was prepared by Prof Vishwanath S. R. with the assistance of Anu Kumari, Abhinav Tiwari and Akash Chibber, PGDBM ’08, IMT, Nagpur, as the basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.

Case 2: Valuation Problem Set (A) 7

Problem 1—Estimation of Returns, Standard Deviation and Beta Part A: Calculate the mean returns using closing prices of ACC stock and Sensex given in Exhibit 1. Calculate their standard deviation. Annualise the daily returns and standard deviation. Assume 300 trading days. Compare the volatilities of ACC stock and the index. What can you infer? Part B: Calculate alpha and beta of ACC stock (against the Bombay Stock Exchange Sensitive Index, Sensex). Interpret the value of alpha, beta, and standard error. Establish 1 standard deviation, 2 standard deviation and 3 standard deviation confidence intervals for the beta estimate. Use daily returns for 2007.

Problem 2—The Impact of Return Interval and Market Proxy on the Beta Estimate Part A: Calculate the standard deviation. Compare the volatilities of ACC and HDFC stock. Which of them is riskier? Estimate the beta of HBFC stock vis-à-vis Nifty using daily stock price and index data provided in Exhibit 2. Part B: Construct two stock portfolios consisting of ACC and HDFC stocks by altering weights from 10% ACC to 100% ACC in steps of 10%. Identify the least risky portfolio. Use daily returns for 2007. Part C: Estimate the beta of HDFC stock by regressing daily, weekly and monthly returns against Nifty and Sensex returns. Use the data given in Exhibits 3, 4 and 5. What is the impact of changing return interval (i.e. weekly and monthly returns) and the market proxy (Nifty and Sensex) on the estimate of beta? Plot the regression results and summarise regression statistics.

Problem 3—Estimation of Cost of Equity Estimate the cost of equity for HDFC Bank using the Capital Asset Pricing Model. Use the beta estimate obtained by regressing weekly returns of HDFC Bank against Nifty. Assume the following information: 1 year T Bill rate = 7.77% 10 year T Bond rate = 7.9% 30 year T Bond rate = 8.24% Market Risk Premium = 9%

8

Cases in Corporate Finance

Exhibit 1 Date

Stock Price Data of ACC Stock High Price

Low Price

10/31/2007 10/30/2007 10/29/2007

Open Price 1064 1085 1088

1089 1098.9 1117

1061.1 1057.05 1067

Closing Price 1077.5 1067.7 1081.7

BSE SENSEX 19837.99 19783.51 19977.67

10/26/2007 10/25/2007 10/24/2007

1070 1081 1079.95

1100 1095 1104

1059.2 1051 1055.15

1079.45 1061.2 1078.1

19243.17 18770.89 18512.91

10/23/2007 10/22/2007 10/19/2007

1039 984.7 1070

1075 1037.7 1080

1030.4 965 962

1065.15 1018.2 991.1

18492.84 17613.99 17559.98

10/18/2007 10/17/2007 10/16/2007

1214.95 1200 1280

1244.9 1225 1314.85

1000 1126 1230

1036 1202.65 1266.6

17998.39 18715.82 19051.86

10/15/2007 10/12/2007 10/11/2007

1277 1257.3 1225.1

1299 1304 1288

1260.25 1238.3 1200

1285.95 1250.55 1260.3

19058.67 18419.04 18814.07

10/10/2007 10/9/2007 10/8/2007

1185 1078 1198

1231 1182.6 1198

1185 1078 1095.3

1218.15 1176.65 1115.1

18658.25 18280.24 17491.39

10/5/2007 10/4/2007 10/3/2007

1025 1235 1225

1230 1240 1265

1025 1204.2 1176

1176.6 1214.35 1228.45

17773.36 17777.14 17847.04

10/1/2007 9/28/2007 9/27/2007

1230 1196 1195

1230 1215.5 1209

1024 1182 1162

1209.85 1194.9 1188.5

17328.62 17291.1 17150.56

9/26/2007 9/25/2007 9/24/2007

1151 1148 1135

1173.5 1168.25 1150

1142 1127.55 1128

1155.95 1149.35 1139.85

16921.39 16899.54 16845.83

9/21/2007 9/20/2007 9/19/2007

1140 1153 1171

1159 1173.95 1174.5

1128 1130 1132

1132.9 1137.55 1153

16564.23 16347.95 16322.75

9/18/2007 9/17/2007 9/14/2007

1124.8 1150 1139

1129.55 1150 1144.95

1105.1 1100.9 1101.1

1122.55 1110.45 1106.85

15669.12 15504.43 15603.8

9/13/2007 9/12/2007 9/11/2007

1095.1 1105 1100

1136 1117 1117.4

1095.1 1099.1 1090

1128.8 1101.85 1104.05

15614.44 15505.36 15542.77

9/10/2007 9/7/2007 9/6/2007

1094 1106 1082.4

1102 1109.8 1111.1

1072 1082 1073

1093.25 1086.75 1102.2

15596.83 15590.42 15616.31

9/5/2007 9/4/2007 9/3/2007

1106 1082 1072

1109 1111 1086.7

1075.1 1074.1 1058

1082.4 1097.55 1071.1

15446.15 15465.4 15422.05 (Contd.)

Case 2: Valuation Problem Set (A) 9

(Exhibit 1 Contd.) Date

Open Price

High Price

Low Price

Closing Price

BSE SENSEX

8/31/2007

1075

1077

1056

1065.9

15318.6

8/30/2007 8/29/2007 8/28/2007

1049 1007 1045

1066.75 1045 1045

1030 992.1 1021.3

1061.1 1041.15 1026.6

15121.74 14993.04 14919.19

8/27/2007 8/24/2007 8/23/2007

1015 985 974

1039.95 1017.25 1001

1011 970.15 965

1036.9 1010.35 972.4

14842.38 14424.87 14163.98

959.75 973 995

908.1 928 958.5

953.15 936.75 963.2

14248.66 13989.11 14427.55

926.3 947 986.05

951.75 979.55 990.3

14141.52 14358.21 15000.91

1012.3 1000.9 1000.95

15017.21 14868.25 15100.15

8/22/2007 8/21/2007 8/20/2007

948.5 973 984.8

8/17/2007 8/16/2007 8/14/2007

981 950 1018

993 996.9 1019.9

8/13/2007 8/10/2007 8/9/2007

1010.95 975 1038

1024.7 1009.7 1058

8/8/2007 8/7/2007 8/6/2007

997 994.95 989

1031.4 1011.95 989

997 981.1 961

1025 985.75 979.05

15307.98 14932.77 14903.03

995 949.9 958

1003.3 983.05 965.9

15138.4 14985.7 14935.77

1005 950 995

8/3/2007 8/2/2007 8/1/2007

995 970 1048

1020 1012 1050

7/31/2007 7/30/2007 7/27/2007

1033.85 999 1010

1067 1054.7 1021

1030 990 977

1059.95 1022.6 999.9

15550.99 15260.91 15234.57

7/26/2007 7/25/2007 7/24/2007

1078 1103 1140

1088 1103 1142

1007 1042.15 1105

1021.65 1070.5 1117.85

15776.31 15699.33 15794.92

7/23/2007 7/20/2007 7/19/2007

1105 1155 1141

1150 1159 1160

1088.15 1102 1119

1139.75 1107.2 1150.3

15732.2 15565.55 15550.13

7/18/2007 7/17/2007 7/16/2007

1113 1125 1100

1145 1141.25 1127

1096 1105 1097

1133.1 1110.6 1118.35

15301.17 15289.82 15311.22

7/13/2007 7/12/2007 7/11/2007

1080 1079.9 1029.9

1122.8 1085.9 1083

1080 1066 1021.25

1095.8 1072.4 1069.45

15272.72 15092.04 14910.62

7/10/2007 7/9/2007 7/6/2007

1040 1040 1011

1051.9 1054.5 1048.5

1030.05 1021 999

1036.7 1046.3 1040.7

15009.88 15045.73 14964.12

7/5/2007 7/4/2007

1030 947.9

1034 1047

1021.75 1022.55

14861.89 14880.24

981 940

(Contd.)

10

Cases in Corporate Finance

(Exhibit 1 Contd.) Date

Open Price

High Price

Low Price

Closing Price

BSE SENSEX

7/3/2007 7/2/2007 6/29/2007

950 940 903

950 951 939

932 920 890

938.3 936.2 933.8

14806.51 14664.26 14650.51

6/28/2007 6/27/2007 6/26/2007

845.2 847.75 862

907.9 850 863.2

842 824 842.6

898.9 829.8 846.1

14504.57 14431.06 14501.08

6/25/2007 6/22/2007 6/21/2007

850 855.2 853

861.95 864.4 860.8

847 845.05 837

856.15 851 855.25

14487.72 14467.36 14499.24

6/20/2007 6/19/2007 6/18/2007

850 825 825

868 847.5 831

843.5 821 815.1

848.65 843.4 823.6

14411.95 14295.5 14080.14

6/15/2007 6/14/2007 6/13/2007

828 811.95 805

833 830 819

815.2 799.1 788

819.55 825.3 798.45

14162.71 14203.72 14003.03

6/12/2007 6/11/2007 6/8/2007

765 775 798

812.85 779 803

765 761.6 760

806.95 764.45 768.55

14130.95 14083.41 14063.81

6/7/2007 6/6/2007 6/5/2007

821 838 840

828 842 843

801 814.65 828.7

803.95 822.35 836.45

14186.18 14255.93 14535.01

6/4/2007 6/1/2007 5/31/2007

857 860 866

861.8 866 870

835 850.85 843.2

838.75 852 855.6

14495.77 14570.75 14544.46

5/30/2007 5/29/2007 5/28/2007

870 870 900

880.4 874.9 900

856 862.1 865

861.7 870.65 869.95

14411.38 14508.21 14397.89

5/25/2007 5/24/2007 5/23/2007

840 882.45 895.65

861.1 887.5 899

831.55 851.15 875

858.05 857.95 886.85

14338.45 14218.11 14363.26

5/22/2007 5/21/2007 5/18/2007

865 879.8 895

898 888.9 908

865 867 872

890.75 871.5 875.15

14453.72 14418.6 14303.41

5/17/2007 5/16/2007 5/15/2007

880 876.2 868

893.9 881.5 879.8

873 869.3 863.5

889.2 872.5 875.1

14299.71 14127.31 13929.33

5/14/2007 5/11/2007 5/10/2007

855 860 880

873.5 870 885.6

855 840 871.15

867.4 850.35 875.25

13965.86 13796.16 13771.23

5/9/2007 5/8/2007

887 860

890 895

872 851.05

875.7 885.55

13781.51 13765.46 (Contd.)

Case 2: Valuation Problem Set (A) 11

(Exhibit 1 Contd.) High Price

Low Price

5/7/2007 5/4/2007 5/3/2007

Date

Open Price 874 855 841

874 880.2 861.95

853.5 842 841

Closing Price 862.4 859.05 852.25

BSE SENSEX 13879.25 13934.27 14078.21

4/30/2007 4/27/2007 4/26/2007 4/25/2007 4/24/2007

818 830 840 818.1 790

841.05 836.8 849.85 835.75 823.45

812 815 827.2 813 790

838.85 821.9 830.65 832.7 817.1

13872.37 13908.58 14228.88 14217.77 14136.72

4/23/2007 4/20/2007 4/19/2007

793.1 785 810

806 807.8 818

784.5 785 780.1

796.25 790.95 788.1

13928.33 13897.41 13619.7

4/18/2007 4/17/2007 4/16/2007

810.1 790 760

825.45 813.8 791.4

810.1 782.05 755

816.75 806.7 786.55

13672.19 13607.04 13695.58

4/13/2007 4/12/2007 4/11/2007

730 730 750.5

750.9 734 750.5

727 721.3 730.05

748.1 726.25 731.7

13384.08 13113.81 13183.24

4/10/2007 4/9/2007 4/5/2007

744 725.6 719

753.3 744.2 735.5

735 724 709.05

746.5 741.65 721.9

13189.54 13177.74 12856.08

4/4/2007 4/3/2007 4/2/2007

691 700 726

720 715 729.9

680 690.25 698.05

714.45 704.8 704.65

12786.77 12624.58 12455.37

3/30/2007 3/29/2007 3/28/2007

740 732 727.5

745.9 742.5 740.5

730 727.1 723.05

734.65 734.95 734.9

13072.1 12979.66 12884.34

3/26/2007 3/23/2007 3/22/2007

745 754 760

755.45 779.2 763

731.15 740.25 746.55

734.55 745.65 753.1

13124.32 13285.93 13308.03

3/21/2007 3/20/2007 3/19/2007

745 740 720

762 761.9 742

737 740 720

752.5 748.3 739.25

12945.88 12705.94 12644.99

3/16/2007 3/15/2007 3/14/2007

739 745 729.7

742 770 756

716.05 727.1 708

721.9 731.65 747.55

12430.4 12543.85 12529.62

3/13/2007 3/12/2007 3/9/2007

757 780.1 844.5

805 803.9 856

738 735.05 771.5

749.85 747.6 780.85

12982.98 12902.63 12884.99

3/8/2007 3/7/2007 3/6/2007

815 850 819

842 868 868

784 754 810

833.35 813.95 854.4

13049.35 12579.75 12697.09

3/5/2007

840

845.1

803

813.2

12415.04 (Contd.)

12

Cases in Corporate Finance

(Exhibit 1 Contd.) High Price

Low Price

3/2/2007 3/1/2007 2/28/2007

Date

Open Price 865 899 925

892.8 912 934.9

850 841.1 857.25

855.55 876.55 900.05

12886.13 13159.55 12938.09

2/27/2007 2/26/2007 2/23/2007

950 915 965

965 958.9 965

941 910 897.55

961.05 945.9 915.65

13478.83 13649.52 13632.53

2/22/2007 2/21/2007 2/20/2007

1011 1012.5 1019

1011.15 1017 1020

948 991 1002

963.5 1008 1013.5

14021.31 14188.49 14253.38

2/19/2007 2/15/2007 2/14/2007

1025 1025 1000

1035 1048 1037

1013.1 1011 982

1017.05 1017.55 1021.55

14402.9 14355.55 14009.9

2/13/2007 2/12/2007 2/9/2007

1018 1030 1065

1024.9 1115 1072

994 1000 1030

1011.4 1023.95 1035.05

14090.98 14190.7 14538.9

2/8/2007 2/7/2007 2/6/2007 2/5/2007

1070 1049 1040 1050

1075 1070 1058.55 1052.9

1052 1043.3 1038.1 1025

1066.85 1062.8 1044.65 1040.45

14652.09 14643.13 14478.19 14515.9

2/2/2007 2/1/2007 1/31/2007

1030 1024.9 1039

1057 1053 1053

1030 1015 1017

1040.5 1034.95 1020.25

14403.77 14267.18 14090.92

1/29/2007 1/25/2007 1/24/2007

1042.5 1034.75 1040

1052 1055 1062

1034 1020.55 1019.35

1044.45 1040.9 1026.35

14211.96 14282.72 14110.46

1/23/2007 1/22/2007 1/19/2007

1100 1111 1107

1100 1124 1116.2

1031 1098.25 1083.1

1037 1115.8 1105.6

14041.24 14209.24 14182.71

1/18/2007 1/17/2007 1/16/2007

1104 1108 1080

1109 1119 1105

1080 1087.25 1076.1

1096.25 1094.3 1101.4

14217.75 14131.34 14114.73

1/15/2007 1/12/2007 1/11/2007

1065 1045 1021

1091 1073.7 1054

1065 1045 1021

1083.6 1069.3 1049.75

14129.64 14056.53 13630.71

1/10/2007 1/9/2007 1/8/2007

1026 1020 1056

1034.9 1044 1059.9

1012 1011 1020

1019.65 1023.55 1028.4

13362.16 13566.33 13652.15

1/5/2007 1/4/2007 1/3/2007

1070 1077 1098

1080 1089.9 1105

1045 1064 1069.5

1055.15 1071.05 1075.55

13860.52 13871.71 14014.92

1/2/2007

1099

1099

1083

1092.4

13942.24

Source: National Stock Exchange.

Closing Price

BSE SENSEX

Case 2: Valuation Problem Set (A) 13

Exhibit 2 Date

Stock Price and Index Data NIFTY

HDFC Bank Ltd

2-Jan-06 3-Jan-06 4-Jan-06

2835.95 2883.35 2904.4

713.45 713.3 732.05

5-Jan-06 6-Jan-06 9-Jan-06

2899.85 2914 2910.1

739.5 768.95 764.85

10-Jan-06 12-Jan-06 13-Jan-06

2870.8 2850.7 2850.55

748.35 746.65 729.9

16-Jan-06 17-Jan-06 18-Jan-06

2833.1 2829.1 2809.2

741.4 749 744.7

19-Jan-06 20-Jan-06 23-Jan-06

2870.85 2900.95 2884.05

728.45 725.15 719.5

24-Jan-06 25-Jan-06 27-Jan-06

2908 2940.35 2982.75

715.9 718.9 737.1

30-Jan-06 31-Jan-06 1-Feb-06

2974.5 3001.1 2971.55

743.55 762.45 738.8

2-Feb-06 3-Feb-06 6-Feb-06

2967.45 2940.6 3000.45

739.5 731.85 744.8

7-Feb-06 8-Feb-06 10-Feb-06

3020.1 3008.95 3027.55

770.75 762.45 762.05

13-Feb-06 14-Feb-06 15-Feb-06

3041.15 3017.55 3022.2

746.45 747.9 743.75

16-Feb-06 17-Feb-06 20-Feb-06

3021.6 2981.5 3005.85

760 742.35 722.2

21-Feb-06 22-Feb-06 23-Feb-06

3035.5 3050.8 3062.1

724.8 726.65 721.95

24-Feb-06 27-Feb-06 28-Feb-06

3050.05 3067.45 3074.7

711.45 728.15 737.15

1-Mar-06 2-Mar-06 3-Mar-06

3123.1 3150.7 3147.35

746.85 758.25 759.7 (Contd.)

14

Cases in Corporate Finance

(Exhibit 2 Contd.) Date

NIFTY

HDFC Bank Ltd

6-Mar-06

3190.4

760.1

7-Mar-06 8-Mar-06 9-Mar-06

3182.8 3116.7 3129.1

757.75 760.05 750.2

10-Mar-06 13-Mar-06 14-Mar-06

3183.9 3202.65 3195.35

749 769.25 762

16-Mar-06 17-Mar-06 20-Mar-06

3226.6 3234.05 3265.65

767.6 764.25 765.55

21-Mar-06 22-Mar-06 23-Mar-06

3262.3 3240.15 3247.15

754.8 757.35 741.95

24-Mar-06 27-Mar-06 28-Mar-06 29-Mar-06

3279.8 3321.65 3325 3354.2

734.85 738.25 742.7 746.25

30-Mar-06 31-Mar-06 3 -Apr-06

3418.95 3402.55 3473.3

779.5 774.25 773.85

4 -Apr-06 5 -Apr-06 7 -Apr-06

3483.15 3510.9 3454.8

832.85 841 817.7

10-Apr-06 12-Apr-06 13-Apr-06

3478.45 3380 3345.5

825.3 809 803.95

17-Apr-06 18-Apr-06 19-Apr-06

3425.15 3518.1 3535.85

814.6 834.45 848.5

20-Apr-06 21-Apr-06 24-Apr-06

3573.5 3573.05 3548.9

850 848.65 822.4

25-Apr-06 26-Apr-06 27-Apr-06

3462.65 3555.75 3508.1

824.65 837.05 824.2

28-Apr-06 29-Apr-06 2-May-06

3508.35 3557.6 3605.45

817.35 825.8 851.3

3-May-06 4-May-06 5-May-06

3634.25 3648.4 3663.95

863.2 883.75 878.65 (Contd.)

Case 2: Valuation Problem Set (A) 15

(Exhibit 2 Contd.) Date

NIFTY

HDFC Bank Ltd

8-May-06 9-May-06 10-May-06

3693.15 3720.55 3754.25

876.1 852.65 871.05

11-May-06 12-May-06 15-May-06

3701.05 3650.05 3502.95

870.5 875.3 843.55

16-May-06 17-May-06 18-May-06

3523.3 3635.1 3388.9

847.7 844.3 819.65

19-May-06 22-May-06 23-May-06

3246.9 3081.35 3199.35

809.65 786.95 781.2

24-May-06 25-May-06 26-May-06

3115.55 3177.7 3209.6

768.6 758.15 773.95

29-May-06 30-May-06 31-May-06

3214.9 3185.3 3071.05

764.3 750.1 745.2

1-Jun-06 2-Jun-06 5-Jun-06

2962.25 3091.35 3016.65

738.65 765.05 739.4

6-Jun-06 7-Jun-06 8-Jun-06

2937.3 2860.45 2724.35

722.6 720.75 692.65

9-Jun-06 12-Jun-06 13-Jun-06

2866.3 2776.85 2663.3

712.7 692.25 651.65

14-Jun-06 15-Jun-06 16-Jun-06

2632.8 2798.8 2890.35

638.95 697.7 734.5

19-Jun-06 20-Jun-06 21-Jun-06

2916.9 2861.3 2923.45

736.3 708.95 709.05

22-Jun-06 23-Jun-06 25-Jun-06

2994.75 3042.7 3050.3

730.95 749.4 741.45

26-Jun-06 27-Jun-06 28-Jun-06

2943.2 2982.45 2981.1

761.6 741.05 726.65

29-Jun-06 30-Jun-06 3 -Jul-06

2997.9 3128.2 3150.95

749.35 795.95 778.5 (Contd.)

16

Cases in Corporate Finance

(Exhibit 2 Contd.) Date

NIFTY

HDFC Bank Ltd

4 -Jul-06 5 -Jul-06

3138.65 3197.1

787.25 807.4

6 -Jul-06 7 -Jul-06 10 -Jul-06 11 -Jul-06

3156.4 3075.85 3142 3116.15

800 779.3 778.6 761.55

12 -Jul-06 13 -Jul-06 14 -Jul-06

3195.9 3169.3 3123.35

761.2 746.35 729.3

17 -Jul-06 18 -Jul-06 19 -Jul-06

3007.55 2993.65 2932.75

707.45 710.25 697.2

20 -Jul-06 21 -Jul-06 24 -Jul-06

3023.05 2945 2985.85

726.45 709.85 729.5

25 -Jul-06 26 -Jul-06 27 -Jul-06

3040.5 3110.15 3156.15

766 781.1 788.15

28 -Jul-06 31 -Jul-06 1-Aug-06

3130.8 3143.2 3147.8

795.5 795 781.15

2-Aug-06 3-Aug-06 4-Aug-06

3182.1 3190 3176.75

779.75 797.85 800.4

7-Aug-06 8-Aug-06 9-Aug-06

3151.1 3212.4 3254.6

803.5 813.55 808.85

10-Aug-06 11-Aug-06 14-Aug-06

3260.1 3274.35 3313.1

805.45 810.65 807.45

16-Aug-06 17-Aug-06 18-Aug-06

3356.05 3353.9 3356.75

846.15 848.65 841.1

21-Aug-06 22-Aug-06 23-Aug-06

3366 3364.6 3335.8

837.55 858.7 852.95

24-Aug-06 25-Aug-06 28-Aug-06

3370.4 3385.95 3401.1

853.35 850 845.45

29-Aug-06 30-Aug-06 31-Aug-06

3425.7 3430.35 3413.9

845.45 840 852.05 (Contd.)

Case 2: Valuation Problem Set (A) 17

(Exhibit 2 Contd.) Date

NIFTY

HDFC Bank Ltd

1-Sep-06 4-Sep-06 5-Sep-06

3435.45 3476.85 3473.75

876.25 880.3 874.7

6-Sep-06 7-Sep-06 8-Sep-06

3477.25 3454.55 3471.45

864 848.75 849.2

11-Sep-06 12-Sep-06 13-Sep-06

3366.15 3389.9 3454.55

822.8 840.55 873.8

14-Sep-06 15-Sep-06 18-Sep-06

3471.6 3478.6 3492.75

865.5 877.9 883.05

19-Sep-06 20-Sep-06 21-Sep-06

3457.35 3502.8 3553.05

881.05 875.7 883.45

22-Sep-06 25-Sep-06 26-Sep-06

3544.05 3523.45 3571.75

875.85 878.3 888.65

27-Sep-06 28-Sep-06 29-Sep-06

3579.3 3571.75 3588.4

899.25 929.1 925.35

3 -Oct-06 4 -Oct-06 5 -Oct-06

3569.6 3515.35 3564.9

919.75 890.15 931

9 -Oct-06 10-Oct-06 11-Oct-06

3567.15 3571.05 3558.55

933.75 929.9 938

12-Oct-06 13-Oct-06 16-Oct-06

3621.05 3676.05 3723.95

965.85 959.15 987.75

17-Oct-06 18-Oct-06 19-Oct-06

3715 3710.65 3677.8

1048.8 1007.8 979.85

20-Oct-06 21-Oct-06 23-Oct-06

3676.85 3683.5 3657.3

963.5 960.15 960.95

26-Oct-06 27-Oct-06 30-Oct-06

3677.55 3739.35 3769.1

969.5 999.8 999.3

31-Oct-06 1-Nov-06 2-Nov-06

3744.1 3767.05 3791.2

1029.35 1004.6 998.95 (Contd.)

18

Cases in Corporate Finance

(Exhibit 2 Contd.) Date

NIFTY

HDFC Bank Ltd

3-Nov-06

3805.35

1010.55

6-Nov-06 7-Nov-06 8-Nov-06

3809.25 3798.75 3777.3

1001.55 998.9 994.85

9-Nov-06 10-Nov-06 13-Nov-06

3796.4 3834.75 3858.75

1002.6 1017.8 1044.5

14-Nov-06 15-Nov-06 16-Nov-06

3865.9 3876.3 3876.85

1055.8 1065.65 1076.45

17-Nov-06 20-Nov-06 21-Nov-06

3852.8 3856.15 3918.25

1144.35 1126.55 1086.5

22-Nov-06 23-Nov-06 24-Nov-06

3954.75 3945.45 3950.85

1092.4 1077.5 1113.05

27-Nov-06 28-Nov-06 29-Nov-06

3968.9 3921.75 3928.2

1106 1110.95 1087.2

30-Nov-06 1-Dec-06 4-Dec-06

3954.5 3997.6 4001

1087.35 1121.8 1123.7

5-Dec-06 6-Dec-06 7-Dec-06

4015.75 4015.95 4015.35

1100.35 1085.7 1087.25

8-Dec-06 11-Dec-06 12-Dec-06

3962 3849.5 3716.9

1106.15 1085.85 1032.7

13-Dec-06 14-Dec-06 15-Dec-06

3765.2 3843.05 3888.65

1028.15 1039.1 1045.75

18-Dec-06 19-Dec-06 20-Dec-06

3928.75 3832 3815.55

1056.4 1066.7 1038.75

21-Dec-06 22-Dec-06 26-Dec-06 27-Dec-06

3833.5 3871.15 3940.5 3974.25

1020.7 1009.3 1005.8 1030.85

28-Dec-06 29-Dec-06 2-Jan-07

3970.55 3966.4 4007.4

1059.7 1080.05 1067.95

3-Jan-07

4024.05

1070 (Contd.)

Case 2: Valuation Problem Set (A) 19

(Exhibit 2 Contd.) Date

NIFTY

HDFC Bank Ltd

4-Jan-07 5-Jan-07 8-Jan-07

3988.8 3983.4 3933.4

1065.3 1050.05 1056.9

9-Jan-07 10-Jan-07 11-Jan-07

3911.4 3850.3 3942.25

1024.95 1013.9 998.65

12-Jan-07 15-Jan-07 16-Jan-07

4052.45 4078.4 4080.5

996.15 1061.6 1094

17-Jan-07 18-Jan-07 19-Jan-07

4076.45 4109.05 4090.15

1096.1 1061.15 1061.05

22-Jan-07 23-Jan-07 24-Jan-07

4102.45 4066.1 4089.9

1068.4 1056.3 1032.9

25-Jan-07 29-Jan-07 31-Jan-07

4147.7 4124.45 4082.7

1058.45 1066.1 1062.4

1-Feb-07 2-Feb-07 5-Feb-07

4137.2 4183.5 4215.35

1078.6 1103.95 1106.1

6-Feb-07 7-Feb-07 8-Feb-07

4195.9 4224.25 4223.4

1103.35 1089.3 1101.95

9-Feb-07 12-Feb-07 13-Feb-07

4187.4 4058.3 4044.55

1109.8 1113.8 1096.05

14-Feb-07 15-Feb-07 19-Feb-07

4047.1 4146.2 4164.55

1068.7 1017.25 1041.8

20-Feb-07 21-Feb-07 22-Feb-07

4106.95 4096.2 4040

1033.25 1031.6 1016

23-Feb-07 26-Feb-07 27-Feb-07

3938.95 3942 3893.9

987.3 958.2 951.75

28-Feb-07 1-Mar-07 2-Mar-07

3745.3 3811.2 3726.75

975.9 935 980.3

5-Mar-07 6-Mar-07 7-Mar-07

3576.5 3655.65 3626.85

937.6 928.05 927.95 (Contd.)

20

Cases in Corporate Finance

(Exhibit 2 Contd.) Date

NIFTY

HDFC Bank Ltd

8-Mar-07

3761.65

915.55

9-Mar-07 12-Mar-07 13-Mar-07

3718 3734.6 3770.55

974.15 976.9 950.05

14-Mar-07 15-Mar-07 16-Mar-07

3641.1 3643.6 3608.55

960.15 932.95 918.4

19-Mar-07 20-Mar-07 21-Mar-07

3678.9 3697.6 3764.55

903.5 924.65 955.25

22-Mar-07 23-Mar-07 26-Mar-07

3875.9 3861.05 3819.95

965.6 1025.9 1011.15

28-Mar-07 29-Mar-07 30-Mar-07 2 -Apr-07

3761.1 3798.1 3821.55 3633.6

973.2 958.45 933.75 954.15

3 -Apr-07 4 -Apr-07 5 -Apr-07

3690.65 3733.25 3752

901.35 914.2 925.05

9 -Apr-07 10-Apr-07 11-Apr-07

3843.5 3848.15 3862.65

942.6 971.15 991.95

12-Apr-07 13-Apr-07 16-Apr-07

3829.85 3917.35 4013.35

979.35 958.35 981.2

17-Apr-07 18-Apr-07 19-Apr-07

3984.95 4011.6 3997.65

974.95 978.05 980.4

20-Apr-07 23-Apr-07 24-Apr-07

4083.55 4085.1 4141.8

982.45 994.6 986.8

25-Apr-07 26-Apr-07 27-Apr-07

4167.3 4177.85 4083.5

1013.75 1031 1034.45

30-Apr-07 3-May-07 4-May-07

4087.9 4150.85 4117.35

1014.6 1024.15 1004.6

7-May-07 8-May-07 9-May-07

4111.15 4077 4079.3

1007.75 1000.05 991.3

10-May-07

4066.8

994.7 (Contd.)

Case 2: Valuation Problem Set (A) 21

(Exhibit 2 Contd.) Date

NIFTY

HDFC Bank Ltd

11-May-07

4076.65

1011.8

14-May-07 15-May-07 16-May-07

4134.3 4120.3 4170.95

992.6 995.9 1011.05

17-May-07 18-May-07 21-May-07

4219.55 4214.5 4260.9

1035.45 1042.05 1070.3

22-May-07 23-May-07 24-May-07

4278.1 4246.2 4204.9

1106.8 1115.1 1114.65

25-May-07 28-May-07 29-May-07

4248.15 4256.55 4293.25

1091.15 1069.2 1127.15

30-May-07 31-May-07 1-Jun-07 4-Jun-07

4249.65 4295.8 4297.05 4267.05

1144.4 1104.05 1147.6 1153.45

5-Jun-07 6-Jun-07 7-Jun-07

4284.65 4198.25 4179.5

1168.4 1159.6 1127.2

8-Jun-07 11-Jun-07 12-Jun-07

4145 4145.6 4155.2

1105.55 1090.95 1097.35

13-Jun-07 14-Jun-07 15-Jun-07

4113.05 4170 4171.45

1088.15 1082.9 1096.4

18-Jun-07 19-Jun-07 20-Jun-07

4147.1 4214.3 4248.65

1110.35 1088.45 1099.95

21-Jun-07 22-Jun-07 25-Jun-07

4267.4 4252.05 4259.4

1100.05 1101.8 1103

26-Jun-07 27-Jun-07 28-Jun-07

4285.7 4263.95 4282

1099.8 1098.7 1090.35

29-Jun-07 2 -Jul-07 3 -Jul-07

4318.3 4313.75 4357.55

1097.3 1146.75 1147.55

4 -Jul-07 5 -Jul-07 6 -Jul-07

4359.3 4353.95 4384.85

1150.5 1150.75 1129.1

9 -Jul-07

4419.4

1158.3 (Contd.)

22

Cases in Corporate Finance

(Exhibit 2 Contd.) Date

NIFTY

HDFC Bank Ltd

10 -Jul-07 11 -Jul-07

4406.05 4387.15

1167.6 1149.3

12 -Jul-07 13 -Jul-07 16 -Jul-07

4446.15 4504.55 4512.15

1148.75 1201.45 1226.4

17 -Jul-07 18 -Jul-07 19 -Jul-07

4496.75 4499.55 4562.1

1217.65 1199.3 1200.05

20 -Jul-07 23 -Jul-07 24 -Jul-07

4566.05 4619.35 4620.75

1209.25 1200.9 1230.3

25 -Jul-07 26 -Jul-07 27 -Jul-07

4588.7 4619.8 4445.2

1248.9 1239.05 1217.25

30 -Jul-07 31 -Jul-07 1-Aug-07

4440.05 4528.85 4345.85

1169.35 1168.85 1200.6

2-Aug-07 3-Aug-07 6-Aug-07

4356.35 4401.55 4339.5

1161.35 1152.4 1155

7-Aug-07 8-Aug-07 9-Aug-07

4356.35 4462.1 4403.2

1132.5 1141.4 1171.75

10-Aug-07 13-Aug-07 14-Aug-07

4333.35 4373.65 4370.2

1155.65 1130.5 1135.65

16-Aug-07 17-Aug-07 20-Aug-07

4178.6 4108.05 4209.05

1147.65 1094 1068.1

21-Aug-07 22-Aug-07 23-Aug-07

4074.9 4153.15 4114.95

1110.9 1103.95 1117.4

24-Aug-07 27-Aug-07 28-Aug-07

4190.15 4302.6 4320.7

1100.15 1097.7 1119.6

29-Aug-07 30-Aug-07 31-Aug-07

4359.3 4412.3 4464

1150.6 1162.55 1180.6

3-Sep-07 4-Sep-07 5-Sep-07

4474.75 4479.25 4475.85

1171.7 1176.4 1176.45

6-Sep-07

4518.6

1172.45 (Contd.)

Case 2: Valuation Problem Set (A) 23

(Exhibit 2 Contd.) NIFTY

HDFC Bank Ltd

7-Sep-07

Date

4509.5

1184.6

10-Sep-07 11-Sep-07 12-Sep-07

4507.85 4497.05 4496.85

1196.55 1196.1 1187.8

13-Sep-07 14-Sep-07 17-Sep-07

4528.95 4518 4494.65

1182.15 1213.5 1232.7

18-Sep-07 19-Sep-07 20-Sep-07

4546.2 4732.35 4747.55

1226.15 1231.15 1324.3

21-Sep-07 24-Sep-07 25-Sep-07

4837.55 4932.2 4938.85

1326.2 1318.45 1346.5

26-Sep-07 27-Sep-07 28-Sep-07

4940.5 5000.55 5021.35

1396.35 1375.7 1433

1 -Oct-07 3 -Oct-07 4 -Oct-07

5068.95 5210.8 5208.65

1435.6 1411.65 1424.8

5 -Oct-07 8 -Oct-07 9 -Oct-07

5185.85 5085.1 5327.25

1409.7 1403.15 1407.35

10-Oct-07 11-Oct-07 12-Oct-07

5441.45 5524.85 5428.25

1421.15 1416.95 1460.7

15-Oct-07 16-Oct-07 17-Oct-07

5670.4 5668.05 5559.3

1432.7 1499.2 1507.75

18-Oct-07 19-Oct-07 22-Oct-07

5351 5215.3 5184

1462.75 1388.2 1366.35

23-Oct-07 24-Oct-07 25-Oct-07

5473.7 5496.15 5568.95

1371.9 1488.2 1513.95

26-Oct-07 29-Oct-07 30-Oct-07

5702.3 5905.9 5868.75

1554 1546.5 1646.95

31-Oct-07 1-Nov-07 31-Oct-07

5900.65 7163.3 7121.96

1620.55 1653.4 1653.4

1-Nov-07 Source: NSE.

1690.2

24

Cases in Corporate Finance

Exhibit 3 Daily Returns of HDFC Stock and Bombay Stock Exchange Sensitive Index Date

BSE Returns X

HDFC Bank Returns Y

2-Jan-06

–0.08289

0.663139

3-Jan-06 4-Jan-06 5-Jan-06

1.58922 1.139593 –0.31447

–0.02102 2.628628 1.01769

6-Jan-06 9-Jan-06 10-Jan-06

0.234463 –0.58961 –1.44155

3.982421 –0.53319 –2.15729

12-Jan-06 13-Jan-06 16-Jan-06

–0.68203 –0.07132 –0.67206

–0.22717 –2.24335 1.575558

17-Jan-06 18-Jan-06 19-Jan-06 20-Jan-06

0.031575 –0.82241 2.298342 0.752605

1.025088 –0.5741 –2.18209 –0.45302

23-Jan-06 24-Jan-06 25-Jan-06

–0.58881 0.898266 1.422211

–0.77915 –0.50035 0.419053

27-Jan-06 30-Jan-06 31-Jan-06

1.910541 –0.22045 0.719462

2.531646 0.875051 2.54186

1-Feb-06 2-Feb-06 3-Feb-06

–0.6112 –0.1561 –1.02897

–3.10184 0.094748 –1.03448

6-Feb-06 7-Feb-06 8-Feb-06

2.441242 1.020598 –0.37154

1.769488 3.484157 –1.07687

10-Feb-06 13-Feb-06 14-Feb-06

0.658548 0.615965 –0.85145

–0.05246 –2.04711 0.194253

15-Feb-06 16-Feb-06 17-Feb-06

0.26322 0.109956 –1.41432

–0.55489 2.184874 –2.32237

20-Feb-06 21-Feb-06 22-Feb-06

0.983758 0.881113 0.552807

–2.71435 0.360011 0.255243

23-Feb-06 24-Feb-06 27-Feb-06

0.192971 –0.42259 0.797294

–0.6468 –1.45439 2.347319

28-Feb-06 1-Mar-06 2-Mar-06

0.857316 1.882599 0.580287

1.236009 1.315879 1.526411

3-Mar-06

–0.29501

0.19123 (Contd.)

Case 2: Valuation Problem Set (A) 25

(Exhibit 3 Contd.) Date

BSE Returns X

HDFC Bank Returns Y

6-Mar-06 7-Mar-06

1.320664 –0.09026

0.052652 –0.30917

8-Mar-06 9-Mar-06 10-Mar-06

–2.02151 0.615576 1.81226

0.30353 –1.29597 –0.15996

13-Mar-06 14-Mar-06 16-Mar-06

0.3581 –0.01842 0.713035

2.703605 –0.94248 0.734908

17-Mar-06 20-Mar-06 21-Mar-06

–0.17189 0.746498 –0.32821

–0.43643 0.170101 –1.40422

22-Mar-06 23-Mar-06 24-Mar-06

–0.5855 –0.00701 1.01203

0.337838 –2.03341 –0.95694

27-Mar-06 28-Mar-06 29-Mar-06

1.175493 0.063273 0.879034

0.462679 0.602777 0.477986

30-Mar-06 31-Mar-06 3-Apr-06

1.104844 –0.2395 2.521286

4.455611 –0.67351 –0.05166

4-Apr-06 5-Apr-06 7-Apr-06

0.636871 0.935641 –1.34044

7.624217 0.978568 –2.77051

10-Apr-06 12-Apr-06 13-Apr-06

0.630833 –2.63081 –1.04353

0.929436 –1.97504 –0.62423

17-Apr-06 18-Apr-06 19-Apr-06

2.6915 2.442789 0.629443

1.324709 2.436779 1.683744

20-Apr-06 21-Apr-06 24-Apr-06

1.206878 –0.07683 –0.95642

0.176783 –0.15882 –3.09315

25-Apr-06 26-Apr-06 27-Apr-06

–2.25308 2.504984 –0.86702

0.273589 1.503668 –1.53515

28-Apr-06 29-Apr-06 2-May-06

0.142881 1.60843 1.46331

–0.83111 1.033829 3.087915

3-May-06 4-May-06 5-May-06

0.752448 0.29982 0.097752

1.397862 2.380677 –0.57709 (Contd.)

26

Cases in Corporate Finance

(Exhibit 3 Contd.) Date

BSE Returns X

HDFC Bank Returns Y

8-May-06 9-May-06

0.831493 0.412358

–0.29022 –2.67664

10-May-06 11-May-06 12-May-06

0.787287 –1.40315 –1.20865

2.157978 –0.06314 0.551407

15-May-06 16-May-06 17-May-06

–3.76806 0.435875 2.897826

–3.62733 0.491968 –0.40109

18-May-06 19-May-06 22-May-06

–6.76373 –3.97509 –4.1764

–2.91958 –1.22003 –2.80368

23-May-06 24-May-06 25-May-06

3.253363 –2.30652 0.881194

–0.73067 –1.6129 –1.35961

26-May-06 29-May-06 30-May-06

1.34095 0.405112 –0.61282

2.08402 –1.24685 –1.85791

31-May-06 1-Jun-06 2-Jun-06

–3.59723 –3.14648 3.772159

–0.65325 –0.87896 3.574088

5-Jun-06 6-Jun-06 7-Jun-06

–2.27579 –2.50806 –2.0142

–3.35272 –2.27211 –0.25602

8-Jun-06 9-Jun-06 12-Jun-06

–4.72442 5.536365 –3.40769

–3.89872 2.89468 –2.86937

13-Jun-06 14-Jun-06 15-Jun-06 16-Jun-06

–4.36359 –1.46988 6.894273 3.55629

–5.86493 –1.9489 9.194773 5.274473

19-Jun-06 20-Jun-06 21-Jun-06

1.146541 –1.75358 2.215521

0.245065 –3.71452 0.014105

22-Jun-06 23-Jun-06 25-Jun-06

2.347975 1.220528 0.111813

3.08864 2.524112 –1.06085

26-Jun-06 27-Jun-06 28-Jun-06

–3.56163 1.084937 –0.20993

2.717648 –2.69827 –1.94319

29-Jun-06 30-Jun-06 3-Jul-06

0.320444 4.399557 0.810708

3.123925 6.218723 –2.19235 (Contd.)

Case 2: Valuation Problem Set (A) 27

(Exhibit 3 Contd.) Date

BSE Returns X

HDFC Bank Returns Y

4-Jul-06 5-Jul-06 6-Jul-06

–0.30892 2.414319 –1.38897

1.123956 2.559543 –0.91652

7-Jul-06 10-Jul-06 11-Jul-06 12-Jul-06

–2.40008 1.662967 –0.6547 2.974652

–2.5875 –0.08982 –2.18983 –0.04596

13-Jul-06 14-Jul-06 17-Jul-06

–0.65498 –1.66027 –3.60547

–1.95087 –2.28445 –2.99602

18-Jul-06 19-Jul-06 20-Jul-06

–0.64547 –2.14574 3.453465

0.395788 –1.83738 4.195353

21-Jul-06 24-Jul-06 25-Jul-06

–2.57927 1.283573 1.960184

–2.28509 2.76819 5.003427

26-Jul-06 27-Jul-06 28-Jul-06

1.936132 1.170922 –0.57124

1.971279 0.902573 0.932564

31-Jul-06 1-Aug-06 2-Aug-06

0.595961 0.072413 1.15824

3-Aug-06 4-Aug-06 7-Aug-06

0.431861 –0.51862 –0.49574

2.321257 0.319609 0.387306

8-Aug-06 9-Aug-06 10-Aug-06

1.871236 1.182119 0.0358

1.250778 –0.57771 –0.42035

11-Aug-06 14-Aug-06 16-Aug-06

0.38828 1.076886 1.196147

0.645602 –0.39474 4.792866

17-Aug-06 18-Aug-06 21-Aug-06

0.254797 –0.10246 0.400847

0.295456 –0.88965 –0.42207

22-Aug-06 23-Aug-06 24-Aug-06

–0.0787 –0.83433 1.098482

2.525222 –0.66962 0.046896

25-Aug-06 28-Aug-06 29-Aug-06

0.34903 0.408911 0.75158

–0.39257 –0.53529 0

30-Aug-06 31-Aug-06

0.145812 –0.21213

–0.64463 1.434524

–0.06285 –1.74214 –0.17922

(Contd.)

28

Cases in Corporate Finance

(Exhibit 3 Contd.) Date

BSE Returns X

HDFC Bank Returns Y

1-Sep-06

0.675012

2.840209

4-Sep-06 5-Sep-06 6-Sep-06

1.156306 –0.08066 0.240327

0.462197 –0.63615 –1.22328

7-Sep-06 8-Sep-06 11-Sep-06

–0.66503 0.546658 –3.08726

–1.76505 0.053019 –3.10881

12-Sep-06 13-Sep-06 14-Sep-06

0.95319 1.998149 0.666146

2.157268 3.955743 –0.94987

15-Sep-06 18-Sep-06 19-Sep-06

0.305437 0.513839 –0.83529

1.432698 0.586627 –0.22649

20-Sep-06 21-Sep-06 22-Sep-06

1.158434 1.363681 –0.30544

–0.60723 0.885006 –0.86026

25-Sep-06 26-Sep-06 27-Sep-06

–0.51378 1.2098 0.371068

0.279728 1.178413 1.192821

28-Sep-06 29-Sep-06 3-Oct-06

0.111831 0.595118 –0.70682

3.319433 –0.40362 –0.60518

4-Oct-06 5-Oct-06 6-Oct-06

–1.31308 1.519173 –0.13399

–3.21827 4.589114 0.295381

9-Oct-06 10-Oct-06 11-Oct-06

–0.05641 –0.01666 –0.08315

–0.41232 0.871061 2.969083

12-Oct-06 13-Oct-06 16-Oct-06

1.493424 1.582711 1.505604

–0.69369 2.981807 6.180714

17-Oct-06 18-Oct-06 19-Oct-06

–0.34305 –0.19676 –1.04904

–3.90923 –2.77337 –1.66862

20-Oct-06 21-Oct-06 23-Oct-06

–0.11153 0.215746 –0.89143

–0.34769 0.08332 0.889745

26-Oct-06 27-Oct-06 30-Oct-06

0.59517 1.64115 0.909985

3.125322 –0.05001 3.007105

31-Oct-06 1-Nov-06

–0.4788 0.548839

–2.40443 –0.56241 (Contd.)

Case 2: Valuation Problem Set (A) 29

(Exhibit 3 Contd.) Date 2-Nov-06 3-Nov-06 6-Nov-06 7-Nov-06 8-Nov-06

BSE Returns X 0.445637 0.30303 0.42724 –0.22924 –0.6396

HDFC Bank Returns Y 1.161219 –0.8906 –0.26459 –0.40545 0.779012

9-Nov-06 10-Nov-06 13-Nov-06

0.497074 1.106909 0.87398

1.516058 2.623305 1.081857

14-Nov-06 15-Nov-06 16-Nov-06

0.197776 0.326766 0.271134

0.932942 1.013466 6.307771

17-Nov-06 20-Nov-06 21-Nov-06

–0.56575 0.009159 1.385333

–1.55547 –3.5551 0.543028

22-Nov-06 23-Nov-06 24-Nov-06

0.659187 –0.1875 0.164464

–1.36397 3.299304 –0.63339

27-Nov-06 27-Nov-06 28-Nov-06

0.512722 –1.24615 0.108661

0.447559 –2.13781 0.013797

29-Nov-06 30-Nov-06 1-Dec-06

0.584428 1.084015 0.213438

3.168253 0.169371 –2.07796

4-Dec-06 5-Dec-06 6-Dec-06

0.456382 0.081434 0.165101

–1.33139 0.142765 1.738331

7-Dec-06 8-Dec-06 11-Dec-06 12-Dec-06

–1.2349 –2.89909 –3.01811 1.43378

–1.83519 –4.89478 –0.44059 1.06502

13-Dec-06 14-Dec-06 15-Dec-06

2.320098 0.944306 0.856218

0.639977 1.018408 0.975009

18-Dec-06 19-Dec-06 20-Dec-06

–2.54226 –0.31236 0.334702

–2.62023 –1.73767 –1.11688

21-Dec-06 22-Dec-06 26-Dec-06

0.649092 1.756269 1.104072

–0.34677 2.490555 2.798661

27-Dec-06 28-Dec-06 29-Dec-06

–0.09632 –0.42921 1.126648

1.920355 –1.12032 0.191957 (Contd.)

30

Cases in Corporate Finance

(Exhibit 3 Contd.) Date

BSE Returns X

HDFC Bank Returns Y

2-Jan-07 3-Jan-07

0.521294 –1.02184

–0.43925 –1.43152

4-Jan-07 5-Jan-07 8-Jan-07

–0.08067 –1.50333 –0.62862

0.65235 –3.02299 –1.0781

9-Jan-07 10-Jan-07 11-Jan-07

–1.50498 2.00978 3.123975

–1.50409 –0.25034 6.570296

12-Jan-07 15-Jan-07 16-Jan-07

0.520114 –0.10552 0.117678

3.051997 0.191956 –3.18858

17-Jan-07 18-Jan-07 19-Jan-07

0.611478 –0.24645 0.187059

–0.00942 0.69271 –1.13253

22-Jan-07 23-Jan-07 24-Jan-07

–1.18233 0.492976 1.220796

–2.21528 2.473618 0.722755

25-Jan-07 29-Jan-07 31-Jan-07

–0.49542 –0.85168 1.250876

–0.34706 1.524849 2.350269

1-Feb-07 2-Feb-07 5-Feb-07

0.957372 0.778477 –0.25978

0.194755 –0.24862 –1.27339

6-Feb-07 7-Feb-07 8-Feb-07

1.139231 0.061189 –0.77252

1.161296 0.712374 0.360425

9-Feb-07 12-Feb-07 13-Feb-07

–2.39495 –0.70271 –0.5754

–1.59364 –2.49532 –4.81426

14-Feb-07 15-Feb-07 19-Feb-07

2.467184 0.329838 –1.03812

2.413369 –0.82069 –0.15969

20-Feb-07 21-Feb-07 22-Feb-07

–0.45526 –1.17828 –2.77278

–1.51221 –2.8248 –2.94743

23-Feb-07 26-Feb-07 27-Feb-07

0.124628 –1.25052 –4.01177

–0.67314 2.537431 –4.191

28-Feb-07 1-Mar-07 2-Mar-07

1.71169 –2.07773 –3.65579

4.84492 –4.35581 –1.01856

5-Mar-07

2.271841

–0.01078 (Contd.)

Case 2: Valuation Problem Set (A) 31

(Exhibit 3 Contd.) Date

BSE Returns X

HDFC Bank Returns Y

6-Mar-07 7-Mar-07 8-Mar-07

–0.92415 3.732984 –1.25953

–1.33628 6.400524 0.282297

9-Mar-07 12-Mar-07 13-Mar-07

0.136903 0.622741 –3.49196

–2.74849 1.063102 –2.83289

14-Mar-07 15-Mar-07 16-Mar-07

0.113571 –0.90443 1.726332

–1.55957 –1.62239 2.340897

19-Mar-07 20-Mar-07 21-Mar-07

0.482009 1.888408 2.797415

3.30936 1.083486 6.244822

22-Mar-07 23-Mar-07 26-Mar-07

–0.16607 –1.2164 –1.82851

–1.43776 –3.75315 –1.51562

28-Mar-07 29-Mar-07 30-Mar-07

0.739813 0.712191 –4.71791

–2.57708 2.184739 –5.53372

2-Apr-07 3-Apr-07 4-Apr-07

1.35853 1.284716 0.542045

1.425639 1.18683 1.897195

5-Apr-07 9-Apr-07 10-Apr-07

2.502007 0.089545 –0.04777

3.028856 2.141791 –1.27023

11-Apr-07 12-Apr-07 13-Apr-07

–0.52665 2.060957 2.327392

–2.14428 2.384306 –0.63698

16-Apr-07 17-Apr-07 18-Apr-07

–0.64649 0.478796 –0.38392

0.317965 0.240274 0.209098

19-Apr-07 20-Apr-07 23-Apr-07

2.039032 0.222487 1.496159

1.236704 –0.78423 2.73105

24-Apr-07 25-Apr-07 26-Apr-07

0.57333 0.078142 –2.25106

1.701603 0.334627 –1.91889

27-Apr-07 30-Apr-07 3-May-07

–0.26034 1.483813 –1.02243

0.941258 –1.9089 0.313558

4-May-07 7-May-07 8-May-07

–0.39485 –0.81986 0.116596

–0.76408 –0.87496 0.342984 (Contd.)

32

Cases in Corporate Finance

(Exhibit 3 Contd.) Date

BSE Returns X

HDFC Bank Returns Y

9-May-07 10-May-07 11-May-07

–0.07459 0.18103 1.230052

1.719111 –1.89761 0.33246

14-May-07 15-May-07 16-May-07

–0.26157 1.421317 1.220331

1.521237 2.413333 0.637404

17-May-07 18-May-07 21-May-07

0.025875 0.805332 0.243574

2.711002 3.410259 0.74991

22-May-07 23-May-07 24-May-07

–0.62586 –1.01056 0.846385

–0.04036 –2.10829 –2.01164

25-May-07 28-May-07 29-May-07

0.41455 0.766223 –0.66742

5.41994 1.530409 –3.52587

30-May-07 31-May-07 1-Jun-07

0.923437 0.180756 –0.51459

3.944568 0.509759 1.296112

4-Jun-07 5-Jun-07 6-Jun-07

0.2707 –1.92005 –0.48927

–0.75317 –2.79407 –1.92069

7-Jun-07 8-Jun-07 11-Jun-07

–0.8626 0.139365 0.33756

–1.32061 0.586645 –0.83838

12-Jun-07 13-Jun-07 14-Jun-07

–0.90525 1.43319 –0.28873

–0.48247 1.246653 1.272346

15-Jun-07 18-Jun-07 19-Jun-07

–0.58301 1.52953 0.814592

–1.97235 1.056548 0.009091

20-Jun-07 21-Jun-07 22-Jun-07

0.605678 –0.21987 0.140731

0.159084 0.108913 –0.29012

25-Jun-07 26-Jun-07 27-Jun-07

0.092216 –0.48286 0.509387

–0.10002 –0.75999 0.63741

28-Jun-07 29-Jun-07 2- Jul-07

1.006166 0.093853 0.970046

4.506516 0.069762 0.257069

3-Jul-07 4-Jul-07 5-Jul-07

0.497957 –0.12332 0.687867

0.02173 –1.88138 2.586131 (Contd.)

Case 2: Valuation Problem Set (A) 33

(Exhibit 3 Contd.) Date

BSE Returns X

HDFC Bank Returns Y

6-Jul-07 9-Jul-07

0.545371 –0.23827

0.802901 –1.56732

10-Jul-07 11-Jul-07 12-Jul-07 13-Jul-07

–0.6613 1.216717 1.197187 0.252083

–0.04786 4.587595 2.076657 –0.71347

16-Jul-07 17-Jul-07 18-Jul-07

–0.13977 0.074232 1.627065

–1.507 0.062536 0.766635

19-Jul-07 20-Jul-07 23-Jul-07

0.099163 1.070634 0.398673

–0.69051 2.448164 1.511826

24-Jul-07 25-Jul-07 26-Jul-07

–0.60519 0.490339 –3.43388

–0.78869 –1.75941 –3.9351

27-Jul-07 30-Jul-07 31-Jul-07

0.172896 1.900804 –3.95615

–0.04276 2.716345 –3.2692

1-Aug-07 2-Aug-07 3-Aug-07

0.334298 1.018971 –1.55479

–0.77065 0.225616 –1.94805

6-Aug-07 7-Aug-07 8-Aug-07

0.199557 2.512662 –1.35766

0.785872 2.659015 –1.37401

9-Aug-07 10-Aug-07 13-Aug-07

–1.53575 1.001866 –0.10854

–2.17626 0.455551 1.056664

14-Aug-07 16-Aug-07 17-Aug-07

–4.28441 –1.50917 2.022626

–4.67477 –2.36746 4.007115

20-Aug-07 21-Aug-07 22-Aug-07

–3.03891 1.855372 –0.5943

–0.62562 1.218352 –1.54376

23-Aug-07 24-Aug-07 27-Aug-07

1.841926 2.894376 0.517505

–0.2227 1.995081 2.768846

28-Aug-07 29-Aug-07 30-Aug-07

0.495 0.858398 1.301834

1.038589 1.552621 –0.75385

31-Aug-07 3-Sep-07 4-Sep-07

0.675323 0.281091 –0.12447

0.401127 0.00425 –0.34001 (Contd.)

34

Cases in Corporate Finance

(Exhibit 3 Contd.) Date

BSE Returns X

HDFC Bank Returns Y

5-Sep-07

1.101634

1.036292

6-Sep-07 7-Sep-07 10-Sep-07

–0.16579 0.041115 –0.34661

1.008779 –0.03761 –0.69392

11-Sep-07 12-Sep-07 13-Sep-07

–0.24069 0.703499 –0.06814

–0.47567 2.651948 1.5822

14-Sep-07 17-Sep-07 18-Sep-07

–0.63683 1.062213 4.171453

–0.53135 0.40778 7.566097

19-Sep-07 20-Sep-07 21-Sep-07

0.154386 1.322979 1.700049

0.143472 –0.58438 2.127498

24-Sep-07 25-Sep-07 26-Sep-07

0.318833 0.129293 1.354321

3.702191 –1.47886 4.165152

27-Sep-07 28-Sep-07 1 -Oct-07

0.819448 0.21699 2.991698

0.181438 –1.66829 0.931534

3 -Oct-07 4 -Oct-07 5 -Oct-07

–0.39166 –0.02126 –1.58648

–1.0598 –0.46464 0.299327

8 -Oct-07 9 -Oct-07 10-Oct-07

4.509933 2.067861 0.835127

0.980566 –0.29554 3.087618

11-Oct-07 12-Oct-07 15-Oct-07

–2.09965 3.472657 –0.03573

–1.91689 4.641586 0.570304

16-Oct-07 17-Oct-07 18-Oct-07

–1.76382 –3.83328 –2.43583

–2.98458 –5.09656 –1.57398

19-Oct-07 22-Oct-07 23-Oct-07

0.307574 4.9895 0.108528

0.406192 8.477294 1.730278

24-Oct-07 25-Oct-07 26-Oct-07

1.393514 2.516023 3.816939

2.645398 –0.48263 6.495312

29-Oct-07 30-Oct-07

–0.97189 0.275381

–1.60296 2.02709

Source: NSE.

Case 2: Valuation Problem Set (A) 35

Exhibit 4 Date

Weekly Stock Prices of HDFC, Sensex, and Nifty for 2006-07 NIFTY

HDFC Bank Ltd Closing Price

BSE Sensex

2-Jan-06 3-Jan-06 4-Jan-06 5-Jan-06

3352.66 3408.7 3433.58 3428.2

713.45 713.3 732.05 739.5

9390.14 9539.37 9648.08 9617.74

6-Jan-06 9-Jan-06 10-Jan-06

3444.93 3440.32 3393.86

768.95 764.85 748.35

9640.29 9583.45 9445.3

12-Jan-06 13-Jan-06 16-Jan-06

3370.1 3369.92 3350.35

746.65 729.9 741.4

9380.88 9374.19 9311.19

17-Jan-06 18-Jan-06 19-Jan-06

3345.62 3322.39 3395.3

749 744.7 728.45

9314.13 9237.53 9449.84

20-Jan-06 23-Jan-06 24-Jan-06

3430.9 3410.92 3439.52

725.15 719.5 715.9

9520.96 9464.9 9549.92

25-Jan-06 27-Jan-06 30-Jan-06

3478.06 3528.22 3518.46

718.9 737.1 743.55

9685.74 9870.79 9849.03

31-Jan-06 1-Feb-06 2-Feb-06

3549.92 3516.06 3511.21

762.45 738.8 739.5

9919.89 9859.26 9843.87

3-Feb-06 6-Feb-06 7-Feb-06

3479.44 3550.26 3573.51

731.85 744.8 770.75

9742.58 9980.42 10082.28

8-Feb-06 10-Feb-06 13-Feb-06

3560.32 3582.33 3598.93

762.45 762.05 746.45

10044.82 10110.97 10173.25

14-Feb-06 15-Feb-06 16-Feb-06

3571.01 3576.51 3575.8

747.9 743.75 760

10086.63 10113.18 10124.3

17-Feb-06 20-Feb-06 21-Feb-06

3528.34 3557.93 3593.03

742.35 722.2 724.8

9981.11 10079.3 10168.11

22-Feb-06 23-Feb-06 24-Feb-06

3611.14 3624.52 3610.25

726.65 721.95 711.45

10224.32 10244.05 10200.76

27-Feb-06 28-Feb-06 1-Mar-06

3630.85 3639.43 3696.72

728.15 737.15 746.85

10282.09 10370.24 10565.47

2-Mar-06 3-Mar-06

3729.39 3725.42

758.25 759.7

10626.78 10595.43 (Contd.)

36

Cases in Corporate Finance

(Exhibit 4 Contd.) Date

NIFTY

HDFC Bank Ltd Closing Price

BSE Sensex

6-Mar-06 7-Mar-06 8-Mar-06

3776.38 3767.38 3689.14

760.1 757.75 760.05

10735.36 10725.67 10508.85

9-Mar-06 10-Mar-06 13-Mar-06

3703.82 3768.69 3790.88

750.2 749 769.25

10573.54 10765.16 10803.71

14-Mar-06 16-Mar-06 17-Mar-06

3782.24 3819.23 3828.05

762 767.6 764.25

10801.72 10878.74 10860.04

20-Mar-06 21-Mar-06 22-Mar-06

3865.45 3861.49 3835.71

765.55 754.8 757.35

10941.11 10905.2 10841.35

23-Mar-06 24-Mar-06 27-Mar-06

3844 3883.16 3932.71

741.95 734.85 738.25

10840.59 10950.3 11079.02

28-Mar-06 29-Mar-06 30-Mar-06

3936.68 3971.57 4048.24

742.7 746.25 779.5

11086.03 11183.48 11307.04

31-Mar-06 3-Apr-06 4-Apr-06

4028.82 4112.59 4124.25

774.25 773.85 832.85

11279.96 11564.36 11638.01

5-Apr-06 7-Apr-06 10-Apr-06

4157.11 4090.68 4118.69

841 817.7 825.3

11746.9 11589.44 11662.55

12-Apr-06 13-Apr-06 17-Apr-06

4002.12 3961.27 4055.58

809 803.95 814.6

11355.73 11237.23 11539.68

18-Apr-06 19-Apr-06 20-Apr-06

4165.64 4186.65 4231.23

834.45 848.5 850

11821.57 11895.98 12039.55

21-Apr-06 24-Apr-06 25-Apr-06

4230.7 4202.1 4100.25

848.65 822.4 824.65

12030.3 11915.24 11646.78

26-Apr-06 27-Apr-06 28-Apr-06

4210.49 4154.07 4155.54

837.05 824.2 817.35

11938.53 11835.02 11851.93

29-Apr-06 2-May-06 3-May-06

4213.88 4270.56 4304.67

825.8 851.3 863.2

12042.56 12218.78 12310.72

4-May-06 5-May-06 8-May-06

4321.72 4340.14 4374.73

883.75 878.65 876.1

12347.63 12359.7 12462.47 (Contd.)

Case 2: Valuation Problem Set (A) 37

(Exhibit 4 Contd.) Date

NIFTY

HDFC Bank Ltd Closing Price

BSE Sensex

9-May-06 10-May-06

4407.18 4447.1

852.65 871.05

12513.86 12612.38

11-May-06 12-May-06 15-May-06 16-May-06

4384.45 4324.1 4149.84 4173.95

870.5 875.3 843.55 847.7

12435.41 12285.11 11822.2 11873.73

17-May-06 18-May-06 19-May-06

4306.39 4015 3846.76

844.3 819.65 809.65

12217.81 11391.43 10938.61

22-May-06 23-May-06 24-May-06

3650.63 3790.43 3691.15

786.95 781.2 768.6

10481.77 10822.78 10573.15

25-May-06 26-May-06 29-May-06

3767.26 3806.63 3812.92

758.15 773.95 764.3

10666.32 10809.35 10853.14

30-May-06 31-May-06 1-Jun-06

3777.81 3642.31 3516.37

750.1 745.2 738.65

10786.63 10398.61 10071.42

2-Jun-06 5-Jun-06 6-Jun-06

3669.62 3580.95 3486.76

765.05 739.4 722.6

10451.33 10213.48 9957.32

7-Jun-06 8-Jun-06 9-Jun-06

3395.53 3233.97 3402.47

720.75 692.65 712.7

9756.76 9295.81 9810.46

12-Jun-06 13-Jun-06 14-Jun-06

3296.29 3161.5 3125.3

692.25 651.65 638.95

9476.15 9062.65 8929.44

15-Jun-06 16-Jun-06 19-Jun-06

3322.86 3432.03 3465.15

697.7 734.5 736.3

9545.06 9884.51 9997.84

20-Jun-06 21-Jun-06 22-Jun-06

3399.1 3473.05 3557.96

708.95 709.05 730.95

9822.52 10040.14 10275.88

23-Jun-06 25-Jun-06 26-Jun-06

3616.01 3625.04 3497.76

749.4 741.45 761.6

10401.3 10412.93 10042.06

27-Jun-06 28-Jun-06 29-Jun-06

3544.41 3542.81 3565.64

741.05 726.65 749.35

10151.01 10129.7 10162.16

30-Jun-06 3-Jul-06 4-Jul-06

3721.71 3748.77 3734.14

795.95 778.5 787.25

10609.25 10695.26 10662.22 (Contd.)

38

Cases in Corporate Finance

(Exhibit 4 Contd.) Date

NIFTY

HDFC Bank Ltd Closing Price

BSE Sensex

5-Jul-06 6-Jul-06

3803.68 3756.97

807.4 800

10919.64 10767.97

7-Jul-06 10-Jul-06 11-Jul-06

3661.52 3742.39 3711.6

779.3 778.6 761.55

10509.53 10684.3 10614.35

12-Jul-06 13-Jul-06 14-Jul-06

3806.59 3774.9 3720.7

761.2 746.35 729.3

10930.09 10858.5 10678.22

17-Jul-06 18-Jul-06 19-Jul-06

3582.75 3566.19 3493.65

707.45 710.25 697.2

10293.22 10226.78 10007.34

20-Jul-06 21-Jul-06 24-Jul-06

3601.22 3508.38 3557.04

726.45 709.85 729.5

10352.94 10085.91 10215.37

25-Jul-06 26-Jul-06 27-Jul-06

3622.15 3705.12 3759.92

766 781.1 788.15

10415.61 10617.27 10741.59

28-Jul-06 31-Jul-06 1-Aug-06

3730.68 3745.46 3750.94

795.5 795 781.15

10680.23 10743.88 10751.66

2-Aug-06 3-Aug-06 4-Aug-06

3791.81 3801.22 3785.43

779.75 797.85 800.4

10876.19 10923.16 10866.51

7-Aug-06 8-Aug-06 9-Aug-06

3754.87 3829.33 3880.02

803.5 813.55 808.85

10812.64 11014.97 11145.18

10-Aug-06 11-Aug-06 14-Aug-06

3887.22 3904.83 3952.53

805.45 810.65 807.45

11149.17 11192.46 11312.99

16-Aug-06 17-Aug-06 18-Aug-06

4003.77 4001.21 4005.15

846.15 848.65 841.1

11448.31 11477.48 11465.72

21-Aug-06 22-Aug-06 23-Aug-06

4016.18 4014.51 3980.36

837.55 858.7 852.95

11511.68 11502.62 11406.65

24-Aug-06 25-Aug-06 28-Aug-06

4021.65 4040.2 4058.28

853.35 850 845.45

11531.95 11572.2 11619.52

29-Aug-06 30-Aug-06 31-Aug-06

4087.63 4093.18 4073.55

845.45 840 852.05

11706.85 11723.92 11699.05

1-Sep-06

4099.37

876.25

11778.02 (Contd.)

Case 2: Valuation Problem Set (A) 39

(Exhibit 4 Contd.) Date

NIFTY

HDFC Bank Ltd Closing Price

BSE Sensex

4-Sep-06 5-Sep-06 6-Sep-06

4148.77 4145.07 4155.31

880.3 874.7 864

11914.21 11904.6 11933.21

7-Sep-06 8-Sep-06 11-Sep-06

4128.48 4148.68 4022.83

848.75 849.2 822.8

11853.85 11918.65 11550.69

12-Sep-06 13-Sep-06 14-Sep-06

4051.22 4128.48 4148.85

840.55 873.8 865.5

11660.79 11893.79 11973.02

15-Sep-06 18-Sep-06 19-Sep-06

4157.22 4174.26 4131.95

877.9 883.05 881.05

12009.59 12071.3 11970.47

20-Sep-06 21-Sep-06 22-Sep-06

4186.27 4246.33 4235.96

875.7 883.45 875.85

12109.14 12274.27 12236.78

25-Sep-06 26-Sep-06 27-Sep-06

4211.34 4269.07 4278.1

878.3 888.65 899.25

12173.91 12321.19 12366.91

28-Sep-06 29-Sep-06 3-Oct-06

4269.07 4288.97 4266.5

929.1 925.35 919.75

12380.74 12454.42 12366.39

4-Oct-06 5-Oct-06 6-Oct-06

4201.66 4260.89 4266.62

890.15 931 933.75

12204.01 12389.41 12372.81

9-Oct-06 10-Oct-06 11-Oct-06

4263.57 4268.24 4253.3

929.9 938 965.85

12365.83 12363.77 12353.49

12-Oct-06 13-Oct-06 16-Oct-06

4328 4393.74 4450.99

959.15 987.75 1048.8

12537.98 12736.42 12928.18

17-Oct-06 18-Oct-06 19-Oct-06

4440.29 4435.09 4396.38

1007.8 979.85 963.5

12883.83 12858.48 12723.59

20-Oct-06 21-Oct-06 23-Oct-06

4395.51 4403.46 4372.72

960.15 960.95 969.5

12709.4 12736.82 12623.28

26-Oct-06 27-Oct-06 30-Oct-06

4396.93 4470.82 4506.39

999.8 999.3 1029.35

12698.41 12906.81 13024.26

31-Oct-06 1-Nov-06 2-Nov-06

4476.5 4503.94 4533.42

1004.6 998.95 1010.55

12961.9 13033.04 13091.12 (Contd.)

40

Cases in Corporate Finance

(Exhibit 4 Contd.) Date

NIFTY

HDFC Bank Ltd Closing Price

BSE Sensex

3-Nov-06 6-Nov-06

4550.45 4555.12

1001.55 998.9

13130.79 13186.89

7-Nov-06 8-Nov-06 9-Nov-06

4542.56 4516.91 4539.88

994.85 1002.6 1017.8

13156.66 13072.51 13137.49

10-Nov-06 13-Nov-06 14-Nov-06

4585.74 4614.44 4622.99

1044.5 1055.8 1065.65

13282.91 13399 13425.5

15-Nov-06 16-Nov-06 17-Nov-06

4635.61 4636.27 4607.51

1076.45 1144.35 1126.55

13469.37 13505.89 13429.48

20-Nov-06 21-Nov-06 22-Nov-06

4611.51 4685.78 4729.43

1086.5 1092.4 1077.5

13430.71 13616.77 13706.53

23-Nov-06 24-Nov-06 27-Nov-06

4718.31 4724.76 4689.96

1113.05 1106 1110.95

13680.83 13703.33 13773.59

28-Nov-06 29-Nov-06 30-Nov-06

4697.68 4729.13 4780.67

1087.2 1087.35 1121.8

13601.95 13616.73 13696.31

1-Dec-06 4-Dec-06 5-Dec-06

4785 4802.64 4802.88

1123.7 1100.35 1085.7

13844.78 13874.33 13937.65

6-Dec-06 7-Dec-06 8-Dec-06

4802.16 4738.36 4603.81

1087.25 1106.15 1085.85

13949 13972.03 13799.49

11-Dec-06 12-Dec-06 13-Dec-06

4445.23 4502.99 4596.1

1032.7 1028.15 1039.1

13399.43 12995.02 13181.34

14-Dec-06 15-Dec-06 18-Dec-06

4650.63 4704.24 4588.39

1045.75 1056.4 1066.7

13487.16 13614.52 13731.09

19-Dec-06 20-Dec-06 21-Dec-06

4568.69 4590.19 4635.27

1038.75 1020.7 1009.3

13382.01 13340.21 13384.86

22-Dec-06 26-Dec-06 27-Dec-06

4718.31 4767.87 4763.43

1005.8 1030.85 1059.7

13471.74 13708.34 13859.69

28-Dec-06 29-Dec-06 2-Jan-07

4758.45 4807.77 4827.74

1080.05 1067.95 1070

13846.34 13786.91 13942.24

3-Jan-07

4785.45

1065.3

14014.92 (Contd.)

Case 2: Valuation Problem Set (A) 41

(Exhibit 4 Contd.) Date

NIFTY

HDFC Bank Ltd Closing Price

BSE Sensex

4-Jan-07 5-Jan-07 8-Jan-07

4778.97 4718.99 4692.59

1050.05 1056.9 1024.95

13871.71 13860.52 13652.15

9-Jan-07 10-Jan-07 11-Jan-07

4619.29 4729.61 4861.82

1013.9 998.65 996.15

13566.33 13362.16 13630.71

12-Jan-07 15-Jan-07 16-Jan-07

4893.39 4895.91 4891.05

1061.6 1094 1096.1

14056.53 14129.64 14114.73

17-Jan-07 18-Jan-07 19-Jan-07

4930.16 4907.74 4923.09

1061.15 1061.05 1068.4

14131.34 14217.75 14182.71

22-Jan-07 23-Jan-07 24-Jan-07

4879.47 4908.03 4977.39

1056.3 1032.9 1058.45

14209.24 14041.24 14110.46

25-Jan-07 29-Jan-07 31-Jan-07

4949.49 4899.39 4966.14

1066.1 1062.4 1078.6

14282.72 14211.96 14090.92

1-Feb-07 2-Feb-07 5-Feb-07

5021.71 5059.94 5037.05

1103.95 1106.1 1103.35

14267.18 14403.77 14515.9

6-Feb-07 7-Feb-07 8-Feb-07

5071.08 5070.06 5026.84

1089.3 1101.95 1109.8

14478.19 14643.13 14652.09

9-Feb-07 12-Feb-07 13-Feb-07

4879.72 4863.8 4867.12

1113.8 1096.05 1068.7

14538.9 14190.7 14090.98

14-Feb-07 15-Feb-07 19-Feb-07

4986.3 5008.75 4939.47

1017.25 1041.8 1033.25

14009.9 14355.55 14402.9

20-Feb-07 21-Feb-07 22-Feb-07

4926.78 4859.19 4737.65

1031.6 1016 987.3

14253.38 14188.49 14021.31

23-Feb-07 26-Feb-07 27-Feb-07

4741.32 4683.46 4504.73

958.2 951.75 975.9

13632.53 13649.52 13478.83

28-Feb-07 1-Mar-07 2-Mar-07

4583.99 4482.42 4301.7

935 980.3 937.6

12938.09 13159.55 12886.13

5-Mar-07 6-Mar-07 7-Mar-07

4396.9 4362.36 4524.5

928.05 927.95 915.55

12415.04 12697.09 12579.75 (Contd.)

42

Cases in Corporate Finance

(Exhibit 4 Contd.) Date

NIFTY

8-Mar-07 9-Mar-07

4472.42 4492.39

HDFC Bank Ltd Closing Price 974.15 976.9

BSE Sensex 13049.35 12884.99

12-Mar-07 13-Mar-07 14-Mar-07 15-Mar-07

4535.63 4380.97 4384.74 4343.36

950.05 960.15 932.95 918.4

12902.63 12982.98 12529.62 12543.85

16-Mar-07 19-Mar-07 20-Mar-07

4428.04 4450.55 4534.62

903.5 924.65 955.25

12430.4 12644.99 12705.94

21-Mar-07 22-Mar-07 23-Mar-07

4668.95 4651.43 4603.34

965.6 1025.9 1011.15

12945.88 13308.03 13285.93

26-Mar-07 28-Mar-07 29-Mar-07

4533.03 4577.63 4605.89

973.2 958.45 933.75

13124.32 12884.34 12979.66

30-Mar-07 2-Apr-07 3-Apr-07

4379.37 4448.12 4499.91

954.15 901.35 914.2

13072.1 12455.37 12624.58

4-Apr-07 5-Apr-07 9-Apr-07

4522.51 4632.8 4638.41

925.05 942.6 971.15

12786.77 12856.08 13177.74

10-Apr-07 11-Apr-07 12-Apr-07

4655.88 4616.35 4721.82

991.95 979.35 958.35

13189.54 13183.24 13113.81

13-Apr-07 16-Apr-07 17-Apr-07

4837.53 4803.3 4835.42

981.2 974.95 978.05

13384.08 13695.58 13607.04

18-Apr-07 19-Apr-07 20-Apr-07

4818.61 4923.47 4931.08

980.4 982.45 994.6

13672.19 13619.7 13897.41

23-Apr-07 24-Apr-07 25-Apr-07

4999.52 5030.3 5043.03

986.8 1013.75 1031

13928.33 14136.72 14217.77

26-Apr-07 27-Apr-07 30-Apr-07

4929.15 4934.46 5010.44

1034.45 1014.6 1024.15

14228.88 13908.58 13872.37

3-May-07 4-May-07 7-May-07

4970 4962.52 4921.3

1004.6 1007.75 1000.05

14078.21 13934.27 13879.25

8-May-07 9-May-07 10-May-07

4924.08 4908.99 4920.88

991.3 994.7 1011.8

13765.46 13781.51 13771.23 (Contd.)

Case 2: Valuation Problem Set (A) 43

(Exhibit 4 Contd.) Date

NIFTY

HDFC Bank Ltd Closing Price

BSE Sensex

11-May-07 14-May-07

4990.55 4973.65

992.6 995.9

13796.16 13965.86

15-May-07 16-May-07 17-May-07

5034.79 5093.9 5087.8

1011.05 1035.45 1042.05

13929.33 14127.31 14299.71

18-May-07 21-May-07 22-May-07

5143.81 5164.58 5126.07

1070.3 1106.8 1115.1

14303.41 14418.6 14453.72

23-May-07 24-May-07 25-May-07

5076.21 5128.42 5138.56

1114.65 1091.15 1069.2

14363.26 14218.11 14338.45

28-May-07 29-May-07 30-May-07

5182.87 5130.23 5185.95

1127.15 1144.4 1104.05

14397.89 14508.21 14411.38

31-May-07 1-Jun-07 4-Jun-07

5188.58 5152.36 5173.61

1147.6 1153.45 1168.4

14544.46 14570.75 14495.77

5-Jun-07 6-Jun-07 7-Jun-07

5069.99 5047.71 5007.87

1159.6 1127.2 1105.55

14535.01 14255.93 14186.18

8-Jun-07 11-Jun-07 12-Jun-07

5008.59 5021.28 4971.76

1090.95 1097.35 1088.15

14063.81 14083.41 14130.95

13-Jun-07 14-Jun-07 15-Jun-07

5042.38 5044.9 5015.45

1082.9 1096.4 1110.35

14003.03 14203.72 14162.71

18-Jun-07 19-Jun-07 20-Jun-07 21-Jun-07

5096.72 5138.26 5160.94 5142.38

1088.45 1099.95 1100.05 1101.8

14080.14 14295.5 14411.95 14499.24

22-Jun-07 25-Jun-07 26-Jun-07

5151.26 5183.07 5156.77

1103 1099.8 1098.7

14467.36 14487.72 14501.08

27-Jun-07 28-Jun-07 29-Jun-07

5179.91 5223.82 5218.32

1090.35 1097.3 1146.75

14431.06 14504.57 14650.51

2-Jul-07 3-Jul-07 4-Jul-07

5271.3 5273.42 5267.33

1147.55 1150.5 1150.75

14664.26 14806.51 14880.24

5-Jul-07 6-Jul-07 9-Jul-07

5304.84 5346.64 5331.14

1129.1 1158.3 1167.6

14861.89 14964.12 15045.73 (Contd.)

44

Cases in Corporate Finance

(Exhibit 4 Contd.) Date

NIFTY

HDFC Bank Ltd Closing Price

BSE Sensex

10-Jul-07 11-Jul-07

5308.27 5379.66

1149.3 1148.75

15009.88 14910.62

12-Jul-07 13-Jul-07 16-Jul-07

5450.57 5462.01 5443.84

1201.45 1226.4 1217.65

15092.04 15272.72 15311.22

17-Jul-07 18-Jul-07 19-Jul-07

5447.23 5522.95 5527.74

1199.3 1200.05 1209.25

15289.82 15301.17 15550.13

20-Jul-07 23-Jul-07 24-Jul-07

5592.26 5593.96 5555.16

1200.9 1230.3 1248.9

15565.55 15732.2 15794.92

25-Jul-07 26-Jul-07 27-Jul-07

5592.81 5381.97 5375.74

1239.05 1217.25 1169.35

15699.33 15776.31 15234.57

30-Jul-07 31-Jul-07 1-Aug-07

5483.25 5261.69 5274.76

1168.85 1200.6 1161.35

15260.91 15550.99 14935.77

2-Aug-07 3-Aug-07 6-Aug-07

5330.23 5255.08 5276.76

1152.4 1155 1132.5

14985.7 15138.4 14903.03

7-Aug-07 8-Aug-07 9-Aug-07

5406.51 5335.14 5250.51

1141.4 1171.75 1155.65

14932.77 15307.98 15100.15

10-Aug-07 13-Aug-07 14-Aug-07

5299.34 5295.27 5063.42

1130.5 1135.65 1147.65

14868.25 15017.21 15000.91

16-Aug-07 17-Aug-07 20-Aug-07

4978.73 5101.1 4938.51

1094 1068.1 1110.9

14358.21 14141.52 14427.55

21-Aug-07 22-Aug-07 23-Aug-07

5033.64 4987.63 5078.77

1103.95 1117.4 1100.15

13989.11 14248.66 14163.98

24-Aug-07 27-Aug-07 28-Aug-07

5215.11 5237.01 5283.81

1097.7 1119.6 1150.6

14424.87 14842.38 14919.19

29-Aug-07 30-Aug-07 31-Aug-07

5348.64 5411.29 5424.33

1162.55 1180.6 1171.7

14993.04 15121.74 15318.6

3-Sep-07 4-Sep-07 5-Sep-07

5430.49 5426.37 5478.17

1176.4 1176.45 1172.45

15422.05 15465.4 15446.15

6-Sep-07

5467.13

1184.6

15616.31 (Contd.)

Case 2: Valuation Problem Set (A) 45

(Exhibit 4 Contd.) Date

NIFTY

7-Sep-07 10-Sep-07 11-Sep-07

5470.46 5457.35 5457.12

1196.55 1196.1 1187.8

15590.42 15596.83 15542.77

12-Sep-07 13-Sep-07 14-Sep-07

5496.07 5483.09 5454.74

1182.15 1213.5 1232.7

15505.36 15614.44 15603.8

17-Sep-07 18-Sep-07 19-Sep-07

5517.33 5743.32 5761.77

1226.15 1231.15 1324.3

15504.43 15669.12 16322.75

20-Sep-07 21-Sep-07 24-Sep-07

5871 5985.91 5993.99

1326.2 1318.45 1346.5

16347.95 16564.23 16845.83

25-Sep-07 26-Sep-07 27-Sep-07

5995.94 6068.83 6094.11

1396.35 1375.7 1433

16899.54 16921.39 17150.56

28-Sep-07 1 -Oct-07 3 -Oct-07

6151.88 6323.99 6321.38

1435.6 1411.65 1424.8

17291.1 17328.62 17847.04

4 -Oct-07 5 -Oct-07 8 -Oct-07

6293.71 6171.46 6465.33

1409.7 1403.15 1407.35

17777.14 17773.36 17491.39

9 -Oct-07 10-Oct-07 11-Oct-07

6603.91 6705.13 6587.9

1421.15 1416.95 1460.7

18280.24 18658.25 18814.07

12-Oct-07 15-Oct-07 16-Oct-07

6881.82 6878.92 6746.99

1432.7 1499.2 1507.75

18419.04 19058.67 19051.86

17-Oct-07 18-Oct-07 19-Oct-07

6494.74 6330.03 6292.55

1462.75 1388.2 1366.35

18715.82 17998.39 17559.98

22-Oct-07 23-Oct-07 24-Oct-07

6644.48 6671.7 6760.63

1371.9 1488.2 1513.95

17613.99 18492.84 18512.91

25-Oct-07 26-Oct-07 29-Oct-07

6922.5 7169.67 7124.58

1554 1546.5 1646.95

18770.89 19243.17 19977.67

30-Oct-07 31-Oct-07

7163.3 7121.96

1620.55 1653.4

19783.51 19837.99

Source: NSE

HDFC Bank Ltd Closing Price

BSE Sensex

46

Cases in Corporate Finance

Exhibit 5

Monthly Returns of HDFC, Sensex and Nifty, 2002-07 Nifty Returns

HDFC Bank Returns

BSE Index Returns

Nov-02 Dec-02 Jan-03

10.3736 2.3972 –5.2993

2.7390 10.8517 9.9722

9.4300 3.2694 –4.1220

Feb-03 Mar-03 Apr-03

0.7676 –7.6168 –5.1052

4.8688 –3.4177 5.4204

0.1168 –6.9738 –3.9326

May-03 Jun-03 Jul-03

7.3004 11.7224 4.8775

–2.9691 5.9754 1.5888

7.2176 12.4985 5.2208

Aug-03 Sep-03 Oct-03

13.4476 2.9907 9.5049

3.4910 –1.2390 11.5799

11.2552 2.9708 10.1410

Nov-03 Dec-03 Jan-04

0.8491 13.3985 –5.3602

–5.2895 17.3012 –5.9185

–0.3597 13.1395 –3.7157

Feb-04 Mar-04 Apr-04

1.7694 –4.3612 –1.2942

11.2712 0.0528 –1.6391

0.8278 –3.9939 –1.4939

May-04 Jun-04 Jul-04

–16.0242 –0.1525 6.1866

–7.0152 5.1928 0.9688

–14.7784 –0.8202 6.0785

Aug-04 Sep-04 Oct-04

–0.4454 6.7290 0.6619

–1.1428 9.0761 1.0590

–0.2009 7.1535 –0.0576

Nov-04 Dec-04 Jan-05

8.9584 6.0371 –2.7139

17.8410 7.4992 7.4917

9.2949 6.0191 –1.8454

Feb-05 Mar-05 Apr-05

2.1069 –2.3388 –7.9873

4.8469 –5.6618 –3.0006

2.4630 –2.3795 –6.8221

May-05 Jun-05 Jul-05

8.9109 6.3735 4.5391

–0.0371 18.6771 13.1705

8.3930 6.8939 5.8891

Aug-05 Sep-05 Oct-05

2.8731 8.1326 –9.8515

–5.3585 8.4355 –10.3451

1.7730 9.6282 –9.2592

Nov-05 Dec-05 Jan-06

11.1239 5.0983 5.8234

9.1270 1.7223 6.8680

10.6332 5.0661 5.6416

Feb-06 Mar-06

3.4713 8.9478

–0.2233 3.6687

5.1827 6.7625 (Contd.)

Case 2: Valuation Problem Set (A) 47

(Exhibit 5 Contd.) Nifty Returns

HDFC Bank Returns

BSE Index Returns

Apr-06 May-06

2.4271 –14.8220

6.7132 –12.4633

4.1351 –14.8965

Jun-06 Jul-06 Aug-06 Sep-06

5.6022 –0.2460 8.4535 4.4521

7.7574 2.1195 9.0764 5.6034

5.3402 0.4546 8.8116 5.7429

Oct-06 Nov-06 Dec-06

4.8885 4.9760 –0.7805

11.9163 8.2371 –3.7217

5.3198 5.0520 1.0954

Jan-07 Feb-07 Mar-07

1.8790 -9.4726 0.2716

–0.5197 –9.5216 –0.1337

3.0830 –4.3439 0.3213

Apr-07 May-07 Jun-07

12.5028 3.4921 0.4945

6.3355 7.8016 –4.3831

6.3990 3.8855 –0.2743

Jul-07 Aug-07 Sep-07

0.7441 2.7187 12.2152

4.6959 –1.6658 22.3009

6.1464 –2.7603 11.9591

Oct-07

16.4077

12.8831

14.4144

Source: NSE.

CASE

3

Reliance Capital

DESCRIPTION The case introduces risk and return of investing in stocks in the context of a mutual fund.

LEARNING OBJECTIVE To introduce risk and return of investments in stocks and mutual funds.

SUBJECTS COVERED Investment management, Security Analysis, Portfolio Management.

This case was prepared by Prof Vishwanath S. R. with the assistance of Anu Kumari, Abhinav Tiwari and Akash Chibber, PGDBM ’07, IMT, Nagpur, as the basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.

Case 3: Reliance Capital

49

In the summer of 2008, Sunil Singhania, the fund manager of Reliance Growth Fund was reviewing the composition and performance of the fund and its holdings. The fund followed an investment approach that focused on individual stocks, rather than on sectoral allocations. At times, this led to concentrated exposures to select sectors. This had an impact on the return and risk of the portfolio. Singhania wanted to review the performance in the light of increased volatility of the Indian stock market. Reliance Growth Fund is a mid-cap focused fund. Mid-cap stocks with a market capitalisation ranging from Rs. 1,000 to Rs. 5,000 crore make up the bulk of the Reliance Growth Fund’s portfolio. The fund adheres roughly to a 70:30 mix between mid-cap and large-cap stocks. Reliance Growth Fund was initially launched as a seven year closed end scheme that was converted into an open end scheme in 1999. In the Money Control ranking of 210 equity diversified funds in 2008, Reliance growth fund came first on the basis of 5 year returns (1154.9%) and 7th on the basis of three-year returns (214.7%).1

RELIANCE CAPITAL BACKGROUND2 Reliance Capital Ltd is a part of the Reliance—Anil Dhirubhai Ambani Group, and is ranked among the 15 most valuable private companies in India. Reliance Capital is one of India’s leading and fastest growing private sector financial services companies, and ranks among the top 3 private sector financial services and banking groups, in terms of net worth. Reliance Capital has interests in asset management and mutual funds, life and general insurance, private equity and proprietary investments, stock broking, depository services, distribution of financial products, consumer finance and other activities in financial services. Reliance Mutual Fund (RMF) is one of India’s leading Mutual Funds, with Assets Under Management (AUM) of Rs. 80,779 crores (AUM as on December 31st, 2007) and an investor base of over 4.367million. RMF offers investors a well-rounded portfolio of products to meet varying investor requirements and has presence in 115 cities across the country. Reliance Mutual Fund constantly endeavors to launch innovative products and customer service initiatives to increase value to investors. Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management Limited., a subsidiary of Reliance Capital Limited, which holds 93.37% of the paid-up capital of RCAM. RMF has been one of the fastest growing mutual fund companies in India, registering growth of over 100% in the last few years. Over March–May 2007, the asset management business registered an increase of 27% in AUM; importantly, AUM crossed the Rs. 500 bn mark in May 2007 (Rs. 591 bn as on 31 May 2007). Exhibit 1 presents the list of fund offerings by RMF. RMF has been a consistent performer with Reliance Growth Fund and Reliance Vision Fund being ranked as the top two funds globally based on their 5-year performance track record. The ranking is

1. www.moneycontrol.com as of Feb 25, 2008. 2. This section draws from the information on the Reliance Mutual Fund and Reliance Capital websites www.reliancemutualfund.com and www.reliancecapital.com

50

Cases in Corporate Finance

as per data from the internationally acclaimed Lipper, which benchmarked top 20 performers from a global universe of open-ended equity funds.

THE MUTUAL FUND INDUSTRY A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciation realised by the scheme is shared by its unitholders in proportion to the number of units owned by them. Thus, a mutual fund is the most suitable investment for an investor as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. There are two types of schemes – open ended and closed ended. An open-ended fund is available for subscription throughout the year. These do not have a fixed maturity. Investors can buy and sell units at NAV (net asset value) related prices.3 A closed ended fund, in contrast, has a fixed maturity, typically 3–15 years. The fund is open for subscription only for a specified period of time. Investors can invest in the scheme at the time of floatation and thereafter, buy and sell units of the scheme on the stock exchange where the scheme is listed. Some funds repurchase units from investors from time to time at NAV related prices. Historically, UTI has been the leader in the mutual fund industry. A new era in the mutual fund industry began with the entry of private sector funds in 1993, posting a serious competition to the existing public sector funds. The entry of foreign companies has upgraded the sophistication and service levels of the mutual fund industry in general. Exhibit 2 gives a partial list of the top asset management companies operating in India.

Choosing an Investment Philosophy Fund managers invest in various asset classes like stocks, bonds, and treasuries to achieve a particular investment objective. Stocks being riskier than bonds, Treasury Bills usually yield higher returns. Exhibit 3 displays the data on annual real returns to equities, bonds, and bills around the world. Mutual funds are generally categorised according to risk and return as shown below. Money Market Funds Low risk

Bond/ Income

Growth and Income

Growth

Global/ International High Risk

Objective: The objective of money market funds is Capital Preservation whereas that of international investments is Growth Potential. International markets have yielded fantastic returns in the last few 3. NAV is discussed later.

Case 3: Reliance Capital

51

years because of economic expansion in many developing countries. Exhibit 4 presents data on returns and volatility of returns in developed and emerging markets.

Money Market Funds There are all no-load funds, and pay dividends daily, though they may only be credited monthly. Their income generally reflects short-term interest rates, because by law, their investments are restricted to certain high-quality, short-term investments issued by the government, corporations, and state and local governments. Money market funds have low risk, but unlike money market bank accounts, money market mutual funds are neither insured nor guaranteed by the Deposit Insurance. Historically, the returns for money market funds have been lower than for either bond or stock funds. That’s why inflation risk—the risk that inflation will outpace and erode investment returns over time—is a risk with these funds. Capital losses have been rare, but are possible.

Debt/Income Schemes The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long-term investors may not bother about these fluctuations.

Sector Specific Schemes These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents (e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), petroleum stocks, etc.). The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/ industries and must exit at an appropriate time. They may also seek the advice of an expert.

Equity/Growth Schemes The aim of growth funds is to provide capital appreciation over the medium to long-term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors

52

Cases in Corporate Finance

to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Numerous studies dating back to early 1900s show that equities do well in the long run. Exhibit 5 presents the data on returns to stocks for the period 1925–2001. Academic studies continue to debate on the future performance of equities and on how much stocks are likely to earn over and above the risk free return—the so called equity premium puzzle.

Determining the Composition of the Fund Reliance Growth has been a top performer posting an annualised return of 33.94% returns since inception, compared with 13.92% of its benchmark, the BSE 100. Over the past three year and five year periods, returns have been exceptional at 52.37% and 63.54% respectively, in comparison with the 32.23% and 32.66% return of the benchmark index over the same time frame. In the recent six month to one year horizon too, a period in the stock market which saw superior gains from large cap stocks, Reliance Growth has returned 30.52% and 33.95% gains respectively, as against the category median figures of 22.82% and 25.80%. In order to contain the fund’s risk, fund managers often benchmark the median volatility and beta of the peer group of diversified equity funds. One way to contain the volatility of the fund is to choose stocks with low or negative correlation with each other or to diversify across stocks and sectors so that unsystematic risk is diversified away. Compared to many of its peers, Reliance Growth’s portfolio is more diversified with the top three sectors and the top ten stocks contributing at a significantly lower level (about 30%) to the total portfolio value. A relatively high percent of the portfolio (about 12% as at January 2006) is in debt/cash as well.4 The fund has invested across a range of sectors and has been fairly consistent in keeping many of the top stocks in the portfolio unchanged over the past one year. The top three sectors the fund has been invested in are metals, industrial goods and software. In January, the fund increased its exposure to metals, petroleum and auto sector while paring exposure to capital goods, pharmaceuticals and software sectors. Exhibit 6 presents the composition of the Reliance Growth Fund. The top five holdings of the fund are JSW Steel, Gujarat Mineral Development Corporation, Reliance Industries, BEML, Jindal Saw, Adani Enterprises, Jaiprakash Associates and Divi’s Lab. The fund has also invested in new issues and has added the newly listed Cambridge Solutions to its portfolio. It is sometimes said that it is companies that emerge, not markets. Kela, a fund manager with Reliance, agreed: The mid-cap stocks have run up appreciably in the beginning of 2007. We (fund management team) believe in the mid-cap story of India over the next three to five years and will continue to find compelling mid-cap ideas. Sunil Singhania added: We follow an opportunistic way of investing. By this, we mean that there is no growth or value bias. This changes as per market conditions. For example, till 2004, the fund was focusing on trading more often as 4. Cash levels are maintained as part of an overall investment strategy.

Case 3: Reliance Capital

53

we did not feel that Indian markets had entered a cyclical bull run. However, as soon as we were convinced about the structural growth story in India, we started getting overweight on sectors and companies where we believed growth would be rapid. This turned out well for us and we were really able to benefit from the stupendous growth in Indian economy and rise in profits of Indian corporates. From our portfolio construction and strategy perspective, the portfolio is always diversified. We try to restrict exposure to a single sector to 17–20%. We also restrict exposure of a single stock to a maximum of 5–6%. We also have a strong research team. This, along with a strong experienced fund management team, enables us to be very successful in bottom up stock picking. Another key reason for the success of the fund has been holding on to our right belts. It is easy to buy stocks, but big money is made only if the stocks are held on and not sold early. Thus, our in-house research and constant updation of investee companies has ensured that we held on to the good stocks. In some cases we still own those stocks despite them having gone up by 30–100 times. Exhibit 7 presents returns to stocks in the fund portfolio.

Measuring Fund Performance In order to evaluate the fund, Singhania had to estimate fund returns and the volatility of fund returns. As with other investments, one measures a mutual fund’s past performance in terms of “total return”. Total return is the combination of any income from interest, dividends and capital gains during a period, plus any gain or loss in net asset value over that time. Total return = income + dividends + capital gains + gain (loss) in NAV 5 A fund’s monthly return, say, can be expressed as: Rt =

NAVt + DISTt – NAVt – 1 NAVt – 1

where Rt is the return in month t, NAVt is the closing net asset value of the fund on the last trading day of the month, NAVt – 1 is the closing net asset value of the fund on the last day of the previous month, and DIST t is income and capital gains distributions during the month. The return is calculated net of management fees and other expenses. Exhibit 8 presents the daily returns to the Reliance growth fund based on NAV changes. The fund’s raw return is often compared with a benchmark index such as BSE 100 to estimate the relative performance of the fund. Since the Growth Fund invests in mid-cap as well as large-cap stocks, the BSE 100 (instead of Sensex or Nifty) is used as a benchmark. Exhibit 9 presents the returns on the BSE 100 index. 5. The NAV (Net Asset Value) is the share price of the fund, obtained by dividing the value of the fund’s holdings by the number of outstanding shares. The share price is what you would have to pay to buy into the mutual fund, plus any fees. The change in NAV, reported at the end of every market day, reflects the increase or decrease in the value per share. NAV = Value of Fund / Number of shares If, for example, the value of fund is $100,000,000 and 10,000,000 shares are outstanding, the NAV is $10 per share.

54

Cases in Corporate Finance

Exhibit 1

Fund Offerings by Reliance Mutual Fund

Reliance Growth Fund (September 1995) Reliance Vision Fund (September 1995) Reliance Income Fund (December 1997) Reliance Liquid Fund (March 1998) Reliance Medium Term Fund (August 2000) Reliance Short Term Fund (December 2002) Reliance Gilt Securities Fund (July 2003) Reliance Banking Fund (May 2003) Reliance Monthly Income Plan (December 2003) Reliance Media & Entertainment Fund (September 2004) Reliance Diversified Power Sector Fund (March 2004) Reliance Pharma Fund (May 2004) Reliance Floating Rate Fund (August 2004) Reliance NRI Equity Fund (October 2004) Reliance NRI Income Fund (October 2004) Reliance Equity Opportunities Fund (February 2005) Reliance Reliance Reliance Reliance

Index Fund (February 2005) Regular Savings Fund (May 2005) Liquidity Fund (June 2005) Tax Saver (ELSS) Fund (July 2005)

Reliance Fixed Tenor Fund (November 2005) Reliance Equity Fund (February 2006) Reliance Fixed Horizon Fund (April 2006) Reliance Fixed Horizon Fund I (August 2006) Reliance Fixed Horizon Fund II (November 2006) Reliance Long Term Equity Fund (November 2006) Reliance Fixed Horizon Fund III (March 2007) Reliance Interval Fund (March 2007) Reliance Liquid Plus Fund (March 2007) Reliance Long Term Equity Fund (Nov 2006)

Exhibit 2

Top Asset Management Companies (by Assets Under Management) as on December 31, 2007

Name

Assets Under Management (INR Crore)

Reliance Capital Asset Management UTI Asset Management

80780 56853

Standard Chartered Asset Management ICICI Prudential Asset management HDFC Asset Management Co Birla Sun Life Asset Management

83458 56773 48561 31819

Franklin Templeton Asset management SBI Funds Management Private Ltd Tata Asset Management

31175 29241 23518

Source: AMFI.

Case 3: Reliance Capital

Exhibit 3

Annualised Real Returns on Major Asset Categories Around the World, 1990–2000 %

Country

Equities

Bonds

Bills

Australia Belgium Canada

7.5 2.5 6.4

1.1 –0.4 1.8

0.4 –0.3 1.7

Denmark France Germany

4.6 3.8 3.6

2.5 –1.0 –2.2

2.8 –3.3 –0.6

Japan The Netherlands Spain

4.5 5.8 3.6

–1.6 1.1 1.2

–2.0 0.7 0.4

Sweden U.K. U.S.

7.6 5.8 6.7

2.4 1.3 1.6

2.0 1.0 0.9

Source: Dimson, Marsh and Staunton (2002).

Exhibit 4

55

Characteristics of Emerging and Developed Markets

Country

Mkt. Cap $m

Std.

Mean Return

Sep 1995

Deviation %

Annualized %

18783 106821

93.1 64

42.0 33.1

Colombia India Indonesia

9079 66772 26995

31.4 29.5 30.8

39.7 17.4 3.3

Mexico Philippines

65585 32829

46.5 37.4

20.8 42.9

Australia Canada Germany

137352 193156 344087

26.6 19.6 22.4

15.1 9.7 14.1

Japan Switzerland U.K.

2050510 285171 842965

25.1 19.2 21.5

17.8 14.2 16.4

U.S.

3540304

15.0

14.8

Emerging Markets Argentina Brazil

Developed Markets

Source: Erb et al (1996).

56

Cases in Corporate Finance

Exhibit 5

Annual Stock Returns Around the World

Annual Total Real Stock Market Returns Decade US

Europe

EAFE

1920s 1930s

16.0% 1.4%

11.0% 3.9%

7.8% 4.6%

1940s 1950s 1960s

3.2% 16.7% 5.1%

–10.5% 18.5% 2.1%

–9.6% 18.2% 2.5%

1970s 1980s 1990s

–1.4% 11.8% 14.8%

1.1% 12.7% 11.2%

2.5% 16.8% 4.3%

Annual Equity Returns, 1925–2001 Country Australia Canada France Germany

1925–1949 3.74%

1949–1979

1979–2001

8.38% 8.58%

7.00% 7.00% 5.72% 5.01%

0.98% –1.74% 2.94% 3.13%

Italy Japan United Kingdom

9.42% 7.12% 0.94%

1.91% 11.02% 4.89%

1.45% –1.80% 5.01%

United States

2.94%

7.62%

3.99%

Annual Equity Returns After Inflation During the 20 th Century Country Australia France Germany Italy Japan United Kingdom United States World

1899–1949

1949–1999

9.31% 0.03%

6.98% 8.14%

–5.38% –2.36% –11.12%

9.29% 5.25% 18.73%

2.13% 4.84% 2.81%

8.23% 9.21% 8.53%

Case 3: Reliance Capital

Exhibit 6

Portfolio of Reliance Growth Fund as on October 31, 2007

Holdings Equities

Weight

Divi’s Laboratories Ltd Gujarat Mineral Development Corporation Ltd Jindal Steel & Power Ltd

0.0505 0.0443 0.0436

Reliance Industries Ltd Jindal Saw Ltd Adani Enterprises Ltd

0.0417 0.0368 0.0364

Jaiprakash Associates Ltd JSW Steel Ltd Reliance Communication Ltd

0.034 0.0326 0.0316

Bharat Earth Movers Ltd Maruti Bank of Baroda

0.03 0.0237 0.0223

State Bank of India Ltd Reliance Energy Ltd. United Phosporous Ltd.

0.0219 0.0216 0.021

Gujarat State Fertilizers and Chemicals Crompton Greaves Ltd. Bombay Dyeing Ltd.

0.0199 0.0187 0.018

Jain Irrigation Ltd. Dena Bank Escorts Ltd

0.0175 0.0159 0.0141

Northgate Technologies Ltd Bharati Shipyard Ltd Orient Paper & Industries Ltd

0.0139 0.0139 0.0137

Lupin Ltd Ashapura Mine Chemical Ltd Radico Khaitan Ltd

0.0129 0.0121 0.0116

HCL Technologies Ltd Gammon India Ltd

0.0109 0.0106

Equity less than 1% of corpus Debt, derivatives, cash and other receivables Grand Total Source: Reliance Mutual Fund.

20.9 9.5 100

57

58

Cases in Corporate Finance

Exhibit 7

Returns for Reliance Growth Fund Stocks6

Divi’s Lab, Gammon India, HCL Technologies, Radico Khaitan, Ashapura Mine Chemicals, Lupin Date

Daily

Daily

Daily

Daily

Daily

Daily

Returns

Returns

Returns

Returns

Returns

Returns

01/11/2008 01/10/2008 01/09/2008 01/08/2008

1.70 –5.60 –0.22 –1.92

–2.67 5.16 1.31 –5.72

–2.45 –1.28 –0.41 0.52

–0.47 –3.01 –2.35 –5.43

–3.19 –4.27 1.49 –7.21

0.68 –2.74 –0.29 –3.73

01/07/2008 01/04/2008 01/03/2008

–0.88 0.21 –0.09

–8.02 10.62 8.05

–4.68 1.11 –1.10

2.86 –0.94 –4.24

–1.14 2.52 –2.63

3.36 –0.26 –1.62

01/02/2008 01/01/2008 12/31/2007

0.42 0.61 –0.56

8.87 0.92 1.82

–2.74 –2.46 1.04

0.60 4.06 2.90

12.47 1.92 –1.66

–0.08 –1.38 1.00

12/28/2007 12/27/2007 12/26/2007

5.35 –1.52 2.07

–1.42 1.51 –0.39

3.05 –1.30 –1.51

–0.32 –0.87 3.90

–0.37 0.74 4.09

1.09 –0.82 –1.20

12/24/2007 12/20/2007 12/19/2007

2.56 1.09 –0.19

7.45 –4.15 –0.76

5.39 3.15 0.23

2.71 –2.11 –1.87

0.63 –4.84 0.30

0.68 –0.06 4.96

12/18/2007 12/17/2007 12/14/2007

–0.80 –6.30 –1.00

–0.36 –5.82 2.45

–0.76 –1.56 0.03

1.08 –6.78 –1.73

0.57 –7.20 6.04

–1.03 –5.28 6.48

12/13/2007 12/12/2007 12/11/2007

5.05 0.44 0.99

–0.46 1.08 –0.95

–3.24 0.39 1.65

3.20 3.43 –2.21

2.05 1.96 –1.90

3.21 3.05 –0.11

12/10/2007 12/07/2007 12/06/2007

–2.11 0.92 –1.08

1.88 –2.09 6.61

–1.97 2.45 –0.56

7.15 0.37 2.79

2.67 5.13 2.57

–0.44 2.44 0.95

12/05/2007 12/04/2007 12/03/2007

8.74 –0.60 2.39

3.15 –0.76 –0.82

0.39 –0.34 –2.69

4.67 2.79 0.07

–2.33 –1.63 6.01

3.77 0.12 0.58

11/30/2007 11/29/2007 11/28/2007

1.99 –1.82 –0.40

2.75 –1.78 3.80

2.19 3.18 –0.72

–2.23 –1.80 –2.33

2.90 1.38 –3.82

–0.01 –1.03 –0.96

11/27/2007 11/26/2007 11/23/2007

–0.23 2.20 3.61

–2.86 3.55 –1.99

–1.34 2.09 4.42

–0.86 –1.71 –0.53

–1.19 0.22 –0.62

0.62 0.81 –1.59

11/22/2007 11/21/2007 11/20/2007

–2.62 –8.18 9.17

–0.86 –4.15 –2.25

1.32 –1.15 –1.89

–1.68 –3.27 0.41

0.54 –7.99 1.12

–1.10 –2.51 –0.56

11/19/2007 11/16/2007 11/15/2007

–0.06 –1.42 0.40

0.56 0.17 0.13

1.23 –1.52 –1.53

–0.24 –0.73 –1.56

4.80 –4.50 –3.57

2.12 –0.74 –1.38

6. This data is from National Stock Exchange.

(Contd.)

Case 3: Reliance Capital

59

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

11/14/2007 11/13/2007 11/12/2007

1.63 3.99 –2.41

–3.58 10.00 –1.66

2.90 –0.73 –1.96

3.80 –1.65 –2.41

0.79 1.91 –4.17

2.48 1.26 –1.84

11/09/2007 11/08/2007 11/07/2007

–1.57 –1.88 –1.66

2.59 –4.11 –1.04

–3.25 5.37 –3.43

3.14 –0.27 –0.32

1.85 –2.39 –5.78

0.47 –1.34 1.33

11/06/2007 11/05/2007 11/02/2007

–3.00 –3.70 4.20

1.26 –0.13 –0.61

–0.44 2.11 –2.95

–5.93 –0.33 –0.49

4.52 5.40 3.61

–1.92 –1.35 –1.37

11/01/2007 10/31/2007 10/30/2007

–3.21 2.78 –2.71

–0.36 –1.78 0.18

–0.34 –0.30 0.45

–1.97 –2.83 –0.70

9.39 5.52 –4.24

–2.16 –2.79 –2.29

10/29/2007 10/26/2007 10/25/2007

4.62 12.13 0.26

4.90 12.40 0.80

0.88 2.53 0.67

–1.81 –1.53 2.50

13.19 4.89 4.41

–0.83 –1.33 0.82

10/24/2007 10/23/2007 10/22/2007

0.68 6.88 3.64

–1.37 4.85 –1.26

–0.60 –1.04 –0.46

1.20 4.87 4.49

1.64 0.37 0.08

5.96 3.61 –0.78

10/19/2007 10/18/2007 10/17/2007

–4.59 –4.88 –5.35

–3.81 0.56 –1.60

–0.08 –1.36 2.18

–3.74 –0.68 –5.45

–2.27 –7.01 0.24

–2.05 –2.70 –0.71

10/16/2007 10/15/2007 10/12/2007

5.46 3.91 –2.53

2.47 –0.85 –2.34

–3.34 0.43 –0.21

0.34 –0.13 –1.48

2.08 4.39 –1.21

–0.45 2.24 0.97

10/11/2007 10/10/2007 10/09/2007

3.97 –1.12 5.34

4.34 –0.28 6.66

–5.35 3.42 3.39

1.13 0.81 –2.66

3.28 5.20 0.57

0.53 0.48 1.20

10/08/2007 10/05/2007 10/04/2007 10/03/2007

–3.83 1.87 0.45 0.25

–5.10 –0.69 –3.24 1.75

0.98 0.13 0.05 3.44

–1.22 –2.22 5.30 3.65

1.03 –2.22 4.00 –1.26

–4.41 0.72 –1.49 1.90

10/01/2007 09/28/2007 09/27/2007

10.12 1.31 –0.56

4.26 0.61 6.12

–1.65 –2.04 3.05

0.13 –0.79 –0.68

4.62 2.99 –1.27

2.09 0.21 0.85

09/26/2007 09/25/2007 09/24/2007

–1.29 1.38 –1.17

0.79 3.13 0.71

5.81 0.68 0.49

2.59 –4.09 –4.41

2.84 –1.73 1.71

0.85 –0.26 –0.10

09/21/2007 09/20/2007 09/19/2007

–1.63 2.05 2.91

0.06 0.06 0.29

0.82 –3.05 1.19

–2.42 –4.48 2.92

2.73 5.84 1.74

–1.69 –1.36 0.46

09/18/2007

1.38

–0.19

0.90

8.59

2.93

0.06 (Contd.)

60

Cases in Corporate Finance

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

09/17/2007 09/14/2007 09/13/2007

–0.97 –2.65 0.57

–2.22 1.97 0.54

–0.52 –1.57 0.80

–0.05 3.63 8.27

–0.07 –0.29 0.21

0.03 –2.69 2.43

09/12/2007 09/11/2007 09/10/2007

0.13 –1.82 1.04

–2.16 0.76 –8.78

–1.24 –2.93 –5.23

–1.96 0.11 2.56

–0.17 0.00 –0.41

–0.83 –2.26 0.67

09/07/2007 09/06/2007 09/05/2007

4.54 –0.57 –1.22

0.74 0.44 0.32

–1.63 0.57 1.61

2.35 –0.18 0.12

–1.10 0.77 –1.89

–0.63 0.23 –1.15

09/04/2007 09/03/2007 08/31/2007

–0.55 1.01 2.64

1.45 –3.02 1.97

–0.66 2.32 1.64

0.12 0.00 –1.21

0.39 0.51 0.35

3.28 2.00 0.95

08/30/2007 08/29/2007 08/28/2007

–0.67 1.74 1.19

1.58 5.64 0.80

3.16 –0.34 1.95

0.68 1.87 0.85

1.73 0.02 2.78

–2.25 –0.68 –0.70

08/27/2007 08/24/2007 08/23/2007

5.44 4.80 –1.78

4.00 0.54 1.75

2.95 –2.09 –4.12

4.82 0.22 –2.95

3.52 3.59 –2.35

5.03 1.65 –1.92

08/22/2007 08/21/2007 08/20/2007

0.35 –8.35 –1.21

1.44 –3.44 –2.07

1.74 –5.56 2.08

1.64 –3.33 1.55

1.43 –3.60 1.06

0.99 –3.23 –1.18

08/17/2007 08/16/2007 08/14/2007

–3.95 –4.85 –1.87

–2.40 –1.53 0.23

–2.48 –3.48 0.58

–0.62 –2.05 –1.10

–3.24 –3.85 –1.62

–1.98 –2.22 –0.52

08/13/2007 08/10/2007 08/09/2007

0.41 –1.11 0.89

–0.95 –0.47 –3.53

–0.64 2.39 –1.28

0.57 –0.74 –1.29

2.76 –3.19 2.15

–0.43 –2.18 –0.38

08/08/2007 08/07/2007 08/06/2007

1.97 –2.19 –2.76

2.30 –1.23 3.32

6.02 0.10 –0.17

0.50 2.33 –6.85

–0.71 2.10 –2.00

2.54 –0.32 –0.95

08/03/2007 08/02/2007 08/01/2007

2.23 –0.43 –4.51

–0.43 –1.33 –1.26

0.22 –0.07 –5.34

2.57 1.82 –6.90

2.44 3.09 –3.89

1.48 0.35 –2.91

07/31/2007 07/30/2007 07/27/2007

–1.96 0.52 –3.27

–4.37 –0.38 –6.21

2.16 –1.11 –4.62

–0.38 –3.04 2.91

–0.45 7.06 –3.49

3.82 –0.02 –5.42

07/26/2007 07/25/2007 07/24/2007

0.87 0.11 –1.10

1.05 –0.79 –1.15

1.81 1.63 –1.87

0.41 –1.38 –3.86

1.07 –5.09 –2.60

0.09 –3.50 0.02

07/23/2007

0.34

3.44

–1.44

–2.67

3.52

–1.89 (Contd.)

Case 3: Reliance Capital

61

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

07/20/2007 07/19/2007 07/18/2007

0.81 0.62 3.49

1.67 0.04 0.29

–0.50 –1.50 –1.19

1.33 2.27 3.94

–1.34 2.57 –1.24

–1.92 –1.99 1.15

07/17/2007 07/16/2007 07/13/2007

–0.39 –0.01 –2.84

2.48 0.48 0.43

3.15 –2.04 –0.67

4.58 1.35 –1.67

–2.55 –0.03 –3.23

–0.32 0.66 0.48

07/12/2007 07/11/2007 07/10/2007

3.40 –0.15 –0.12

4.44 2.85 –0.90

–0.97 –0.76 0.38

1.70 –1.00 –1.46

–0.88 –0.49 –0.12

0.13 –0.99 –0.98

07/09/2007 07/06/2007 07/05/2007

9.79 –0.05 –1.44

–0.49 0.91 0.63

0.83 2.46 –0.86

11.78 6.60 2.79

3.77 5.52 1.79

0.52 –0.79 –1.74

07/04/2007 07/03/2007 07/02/2007

–0.12 –0.54 6.85

0.01 2.12 1.40

–0.88 –0.33 –2.25

1.25 0.60 2.52

2.18 0.21 –1.56

2.28 –1.01 –1.06

06/29/2007 06/28/2007 06/27/2007

–0.63 –2.20 –0.32

1.06 0.16 –3.50

3.12 1.08 0.86

–0.61 –0.04 0.83

1.91 –4.49 0.75

1.15 1.81 0.27

06/26/2007 06/25/2007 06/22/2007

0.15 –0.91 –0.23

–2.66 –2.24 12.83

0.82 –1.67 –1.54

–0.96 –0.07 –0.25

–3.64 2.37 5.00

0.13 0.95 0.19

06/21/2007 06/20/2007 06/19/2007

–3.35 7.18 2.50

–1.51 2.49 0.05

–0.58 0.42 –0.04

0.25 0.57 3.52

1.91 4.99 –0.03

1.93 –0.56 0.41

06/18/2007 06/15/2007 06/14/2007

6.79 0.82 0.56

–2.66 2.15 2.43

–0.77 –0.34 0.82

–0.48 –0.22 0.63

0.90 1.61 2.18

0.00 1.02 1.26

06/13/2007 06/12/2007 06/11/2007

1.40 3.12 4.44

0.01 –1.70 1.57

–0.58 –1.92 –0.92

–2.25 –0.79 0.87

4.03 1.36 –2.23

0.35 0.98 –3.27

06/08/2007 06/07/2007 06/06/2007

–0.56 2.01 –1.02

–4.28 –0.56 0.73

0.75 2.41 –0.78

–1.54 2.83 –2.71

4.87 1.38 –2.90

–0.46 –2.14 –2.82

06/05/2007 06/04/2007 06/01/2007

–1.40 –1.64 0.08

–0.55 0.10 3.32

0.10 –1.55 0.44

–0.07 –0.14 –1.09

4.98 5.00 –1.81

0.01 0.37 1.57

05/31/2007 05/30/2007 05/29/2007

1.07 –1.93 1.88

0.40 1.64 –1.61

0.63 –0.28 0.06

–0.63 –3.06 3.15

0.33 –3.55 10.00

0.52 –1.78 2.70

05/28/2007

3.98

–0.38

–2.18

1.53

3.62

1.57 (Contd.)

62

Cases in Corporate Finance

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

05/25/2007

–0.25

–3.36

3.33

–2.29

3.34

–1.22

05/24/2007 05/23/2007 05/22/2007

16.78 1.85 2.52

0.76 –1.01 2.15

1.77 –3.29 –1.23

1.59 –5.25 –1.03

4.94 4.35 –1.56

–1.45 –0.86 –0.39

05/21/2007 05/18/2007 05/17/2007

–1.04 0.05 1.02

–0.19 –1.23 1.80

–1.30 2.01 2.71

6.22 5.06 0.63

1.03 –1.38 1.52

0.60 0.72 –0.32

05/16/2007 05/15/2007 05/14/2007

0.22 0.01 0.71

5.64 7.09 3.09

2.54 –0.41 –0.05

0.26 2.09 0.31

0.46 1.02 0.22

–0.52 1.05 0.04

05/11/2007 05/10/2007 05/09/2007

2.73 –0.54 2.62

0.55 1.09 –3.13

1.66 –0.41 –1.49

–0.76 0.34 0.53

1.02 –0.54 1.57

–0.90 0.63 –1.79

05/08/2007 05/07/2007 05/04/2007

–2.64 –0.39 1.75

–2.56 –2.21 0.24

–1.62 –0.37 –1.51

–2.06 –1.26 4.12

–1.30 1.07 0.00

–0.82 –1.28 1.64

05/03/2007 04/30/2007 04/27/2007

2.05 2.33 –1.32

1.78 1.26 4.77

2.75 2.52 0.12

–0.76 –0.87 0.49

–0.45 0.24 –0.69

2.94 1.23 –1.81

04/26/2007 04/25/2007 04/24/2007

5.65 –0.90 0.69

–2.31 1.09 1.29

–2.06 –0.84 1.85

0.08 0.57 0.00

0.05 –0.80 1.01

0.25 –0.87 3.36

04/23/2007 04/20/2007 04/19/2007

–1.25 1.20 –0.83

2.34 –1.09 –1.33

–1.83 3.95 –0.39

0.27 0.19 –0.46

–0.06 0.24 –1.16

1.89 1.60 0.98

04/18/2007 04/17/2007 04/16/2007

1.42 –1.90 1.23

–2.32 3.41 0.93

7.22 –2.22 0.23

0.85 –1.48 0.77

–0.20 –1.95 2.63

0.40 –1.02 5.22

04/13/2007 04/12/2007 04/11/2007

2.29 –0.40 –0.99

1.82 0.73 5.26

7.30 0.02 –0.67

–1.66 0.08 0.11

2.13 0.30 0.65

1.19 1.42 –1.50

04/10/2007 04/09/2007 04/05/2007

1.44 5.83 0.94

0.17 1.47 2.60

–1.58 2.14 –0.17

0.84 1.00 –0.34

1.89 –0.28 0.33

–1.44 –0.16 2.90

04/04/2007 04/03/2007 04/02/2007

3.90 0.30 –2.06

–1.77 0.55 –3.12

3.50 2.19 –6.47

0.54 0.15 –2.00

0.95 –0.17 –0.26

2.36 –0.07 –0.40

03/30/2007 03/29/2007 03/28/2007

2.36 2.00 –2.29

–0.25 0.50 –0.38

–2.40 3.76 –4.75

1.07 –0.42 0.27

–0.09 0.50 –0.07

4.82 –0.78 –1.52 (Contd.)

Case 3: Reliance Capital

63

(Exhibit 7 Contd.) Date

Daily

Daily

Daily

Daily

Daily

Daily

Returns

Returns

Returns

Returns

Returns

Returns

03/26/2007 03/23/2007

–0.60 1.09

–2.81 3.69

–0.38 2.18

0.73 –2.22

–0.78 –1.09

–0.90 0.90

03/22/2007 03/21/2007 03/20/2007

1.73 1.06 0.16

4.00 –0.81 –0.15

–0.20 –1.49 –0.54

0.34 –2.32 –0.55

–0.19 1.20 0.98

0.14 –0.19 0.67

03/19/2007 03/16/2007 03/15/2007

2.23 –0.73 1.23

1.18 –2.05 1.45

1.51 –3.71 –1.54

2.59 2.15 –0.57

0.26 1.06 0.95

3.50 –0.22 –0.32

03/14/2007 03/13/2007 03/12/2007

–3.16 3.57 0.17

–8.68 0.54 4.54

–1.65 0.12 2.50

–4.42 1.22 –1.31

–0.15 0.34 1.96

–2.27 0.82 –0.15

03/09/2007 03/08/2007 03/07/2007

–2.71 9.52 –4.12

4.66 8.96 –5.23

–1.01 1.97 –0.99

–2.59 8.31 –5.35

2.37 –7.52 0.84

–3.66 4.88 –0.94

03/06/2007 03/05/2007 03/02/2007

4.38 –8.54 –3.28

–5.24 –3.81 –2.01

2.53 –3.43 –0.08

–1.89 –2.74 –0.03

–1.71 –2.12 –0.73

2.01 –5.52 –1.15

03/01/2007 02/28/2007 02/27/2007

3.12 –6.57 –2.96

–1.90 –19.92 1.17

5.96 –9.74 –0.53

1.95 –2.95 –3.77

0.80 –3.93 1.07

0.83 –2.77 –0.54

02/26/2007 02/23/2007 02/22/2007

–0.42 –0.34 –2.90

0.62 –0.04 0.89

–1.16 –1.84 –1.78

–2.10 –2.95 –0.56

0.02 –1.18 –0.18

0.31 –3.33 1.41

02/21/2007 02/20/2007 02/19/2007

–2.06 –1.32 –0.31

1.62 –0.60 0.18

0.48 0.12 2.68

0.50 –1.42 0.06

–0.48 –0.28 –0.20

8.34 –0.94 –1.19

02/15/2007 02/14/2007 02/13/2007

3.27 1.36 0.36

5.39 1.26 1.32

1.91 1.56 –0.66

0.62 –2.61 –2.51

4.30 1.42 –1.40

2.97 –0.50 –1.03

02/12/2007 02/09/2007 02/08/2007

–2.80 –1.82 –0.65

1.03 –6.88 –2.34

–0.62 –0.02 –1.27

0.65 0.06 –3.84

1.66 –6.83 0.75

–2.90 –2.77 –1.55

02/07/2007 02/06/2007 02/05/2007

0.35 0.11 2.75

–1.33 –5.44 –0.82

1.83 0.86 –0.44

0.23 0.14 0.32

–2.17 –2.58 –0.47

3.06 –1.32 1.04

02/02/2007 02/01/2007 01/31/2007

0.29 3.47 5.04

7.67 1.54 –0.55

0.97 –0.08 –1.86

7.97 –0.53 0.81

2.09 0.86 –3.48

2.50 0.40 1.80

01/29/2007 01/25/2007

–1.50 0.52

–0.08 –1.63

–0.55 0.58

–0.37 0.22

–0.85 7.74

2.07 –1.30 (Contd.)

64

Cases in Corporate Finance

(Exhibit 7 Contd.) Date

Daily

Daily

Daily

Daily

Daily

Daily

Returns

Returns

Returns

Returns

Returns

Returns

01/24/2007 01/23/2007

0.52 –1.05

0.48 0.98

–0.11 0.17

3.19 –2.23

1.21 –2.59

0.22 –0.98

01/22/2007 01/19/2007 01/18/2007

–0.27 –0.23 –0.73

0.26 –0.29 –0.96

–0.08 0.82 1.45

0.54 –1.50 –0.65

3.14 2.35 –0.14

3.79 –1.02 –0.29

01/17/2007 01/16/2007 01/15/2007

6.20 –0.17 –0.10

–0.28 0.32 –0.17

1.07 1.44 –0.57

3.99 –1.46 –4.08

1.86 –0.52 1.55

–0.56 –0.47 –0.99

01/12/2007 01/11/2007 01/10/2007

1.41 0.44 –1.30

–0.30 –0.27 –1.48

4.25 3.07 –1.68

–1.50 0.91 3.44

0.05 –1.03 –0.30

2.87 1.92 –2.93

01/09/2007 01/08/2007 01/05/2007

–2.44 –1.39 –0.67

0.51 –3.07 –0.20

–0.30 –2.42 –0.60

–2.38 0.28 –1.57

–0.37 –0.55 –1.19

–1.74 –2.02 –1.67

01/04/2007 01/03/2007 01/02/2007

–0.26 1.68 0.39

–1.44 –3.75 2.23

–1.85 –0.93 –1.69

2.60 –1.64 –0.12

0.15 1.26 –2.95

0.39 –0.48 –0.20

Orient Paper, Bharati Shipyard, Northgate Technologies, Escorts Ltd, Dena Bank, Jain Irrigation Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

01/11/2008 01/10/2008

–1.77 –0.98

2.52 –1.40

0.49 –5.57

–2.11 –3.84

0.06 –4.50

–0.82 0.05

01/09/2008 01/08/2008 01/07/2008 01/04/2008

0.07 –0.19 3.38 0.67

1.22 –2.75 –2.05 1.87

–2.21 –3.22 –1.93 1.48

–0.83 –4.17 –0.76 –1.97

–1.93 –3.57 0.48 –0.21

–4.52 –5.82 7.71 4.15

01/03/2008 01/02/2008 01/01/2008

–0.78 1.11 –1.28

–3.40 3.74 6.93

–2.94 –2.04 –1.31

2.26 3.28 –2.22

–2.09 4.02 7.99

0.45 –1.05 –1.45

12/31/2007 12/28/2007 12/27/2007

0.70 –1.96 2.16

5.51 –2.84 0.11

4.52 0.78 –1.71

5.94 3.76 –1.96

2.22 1.96 –2.33

4.02 –2.48 –1.16

12/26/2007 12/24/2007 12/20/2007

1.49 2.07 –0.23

–3.10 –0.81 9.60

–2.29 2.18 –3.92

2.59 1.28 –2.16

1.64 1.23 –1.16

–0.58 3.85 6.99

12/19/2007 12/18/2007

–1.61 –0.43

–0.03 0.15

0.99 6.25

1.96 –0.72

0.55 –0.55

–7.25 –0.54 (Contd.)

Case 3: Reliance Capital

65

(Exhibit 7 Contd.) Date 12/17/2007 12/14/2007

Daily Returns –4.54 4.04

Daily Returns –1.72 1.61

Daily Returns –1.38 –0.63

Daily Returns –7.64 3.73

Daily Returns –5.95 –1.80

Daily Returns –2.23 –0.49

12/13/2007 12/12/2007 12/11/2007

1.39 –1.91 4.31

3.57 –1.09 0.32

–0.63 0.21 1.16

–2.46 –1.23 0.25

–0.06 0.22 2.07

2.22 –1.92 –4.47

12/10/2007 12/07/2007 12/06/2007

–1.71 –2.75 –0.16

–1.15 1.39 0.63

–1.59 –2.31 –0.53

0.22 –2.05 –3.88

2.29 –1.73 –1.98

–2.16 –1.55 –1.98

12/05/2007 12/04/2007 12/03/2007

0.31 0.61 1.77

–1.61 –2.53 0.93

0.44 –0.82 –1.54

7.47 0.78 1.38

7.41 –0.12 1.17

–5.49 19.11 3.09

11/30/2007 11/29/2007 11/28/2007

–0.84 –0.81 –0.41

–0.04 1.14 –0.38

4.68 4.48 1.94

–1.10 –1.91 –0.16

4.09 –3.10 2.02

3.15 1.09 –0.63

11/27/2007 11/26/2007 11/23/2007 11/22/2007

0.62 0.79 5.38 –1.29

–0.67 1.14 0.39 –3.17

1.40 3.42 2.18 –0.30

3.48 2.77 8.42 –4.41

–1.19 0.95 1.99 1.77

–1.48 –2.23 1.29 5.36

11/21/2007 11/20/2007 11/19/2007 11/16/2007

–4.55 0.18 0.82 0.40

–0.25 –2.24 2.15 –1.48

–0.65 –2.77 –3.98 –4.08

–11.60 0.94 12.74 14.64

–11.52 –1.76 5.58 2.71

1.63 0.31 –0.18 –0.03

11/15/2007 11/14/2007 11/13/2007

2.54 –2.71 0.21

4.44 1.18 –3.22

–0.33 –0.15 1.31

8.82 3.26 2.18

–0.86 1.11 2.21

–0.32 0.03 –0.75

11/12/2007 11/09/2007 11/08/2007

–1.34 2.75 0.79

–0.53 2.09 0.33

–0.72 –1.04 2.24

–0.32 0.28 –2.88

–1.49 1.39 2.79

1.93 0.70 –1.45

11/07/2007 11/06/2007 11/05/2007

9.50 –2.03 0.16

5.51 –0.87 –0.79

–3.46 0.50 –1.71

–0.27 –2.79 0.39

3.84 1.64 0.76

2.05 –1.04 –1.45

11/02/2007 11/01/2007 10/31/2007

–0.82 0.90 0.06

–0.93 3.84 3.12

–0.20 –1.07 3.41

1.20 –5.68 0.25

11.20 –0.46 2.26

–0.96 0.06 0.45

10/30/2007 10/29/2007 10/26/2007

–0.41 –0.98 1.56

–3.64 6.41 –1.52

–3.36 4.17 –0.35

2.93 2.47 3.90

6.04 1.85 5.05

0.00 –1.66 4.62

10/25/2007 10/24/2007 10/23/2007

3.18 3.32 9.15

4.89 –0.53 0.22

–1.16 –2.32 2.74

–1.76 –1.16 6.10

–4.48 1.03 9.55

4.86 0.10 5.05

10/22/2007

–0.42

–2.15

–4.42

1.54

–0.09

0.12 (Contd.)

66

Cases in Corporate Finance

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

10/19/2007 10/18/2007 10/17/2007

–2.33 2.14 –1.39

2.80 –1.39 –3.52

–4.84 –4.97 –0.57

–5.06 –5.35 –6.98

–4.13 –3.88 –5.15

–5.02 3.63 –1.79

10/16/2007 10/15/2007 10/12/2007

–0.55 0.87 –0.18

2.15 1.10 7.59

0.01 0.41 –0.43

0.36 1.72 –8.68

0.66 –0.16 –0.49

–3.18 2.06 –0.52

10/11/2007 10/10/2007 10/09/2007

–0.44 –0.11 1.55

–0.79 –1.52 0.52

2.86 –1.08 4.53

5.95 1.33 6.55

–0.16 2.51 5.10

–0.27 –1.02 0.06

10/08/2007 10/05/2007 10/04/2007

–3.58 –1.62 0.15

–5.95 –2.52 –1.61

–4.33 –3.55 –2.47

–4.81 1.78 2.81

–8.01 –3.06 –1.70

–2.82 0.66 0.50

10/03/2007 10/01/2007 09/28/2007

3.78 1.59 –0.81

0.92 8.21 0.18

4.99 5.00 2.75

–2.78 1.81 2.02

–3.35 –0.45 2.90

0.08 0.60 –0.79

09/27/2007 09/26/2007 09/25/2007

–1.47 –0.71 0.58

0.05 –1.56 3.04

3.62 –2.06 –3.56

1.40 1.82 –2.60

–2.38 0.22 –2.83

4.73 2.19 –0.10

09/24/2007 09/21/2007 09/20/2007

–0.63 4.24 –0.72

0.10 3.88 –0.59

–0.06 –2.37 –0.04

–3.71 7.58 3.05

2.61 0.75 –0.60

–2.83 –1.93 8.15

09/19/2007 09/18/2007 09/17/2007

1.16 0.72 –0.22

1.46 –1.21 –0.04

0.90 0.04 –0.43

–1.19 6.47 –0.19

0.98 3.51 0.31

5.52 0.51 0.38

09/14/2007 09/13/2007 09/12/2007

0.51 0.39 0.00

2.39 0.38 –1.26

1.61 –2.63 –1.75

–3.92 0.85 –0.33

–2.37 0.23 –0.23

–2.05 –0.13 1.34

09/11/2007 09/10/2007 09/07/2007

0.09 0.91 8.28

–0.36 –1.04 1.97

–1.38 –0.89 –2.08

–1.89 6.20 –1.35

–1.28 3.51 –1.84

–1.41 –0.99 –0.22

09/06/2007 09/05/2007 09/04/2007

2.63 1.83 2.64

–0.44 –0.02 0.11

0.11 –0.76 –0.49

–1.66 11.63 –1.15

5.92 –3.22 4.68

–1.06 0.12 0.79

09/03/2007 08/31/2007 08/30/2007

2.59 1.02 0.95

0.22 0.47 1.45

4.67 5.00 4.95

0.47 5.60 5.50

6.10 2.41 –1.50

3.64 5.10 –1.49

08/29/2007 08/28/2007 08/27/2007

0.28 1.80 0.84

1.45 –0.74 0.13

1.63 –1.89 3.52

4.46 3.28 3.13

–0.35 2.70 5.11

–1.03 –0.51 –0.39

08/24/2007 08/23/2007

1.85 1.78

0.41 –1.38

0.05 –1.08

5.06 –3.31

1.34 –1.42

–2.83 –0.82 (Contd.)

Case 3: Reliance Capital

67

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

08/22/2007 08/21/2007

0.34 –3.78

–0.08 –4.66

0.27 –3.01

–8.14 –6.32

0.95 –4.64

1.76 –2.69

08/20/2007 08/17/2007 08/16/2007

–1.17 –1.27 –2.24

–1.53 1.02 –0.38

2.62 –2.07 –3.50

1.91 –3.58 –3.30

2.23 –1.47 –4.05

1.03 5.32 –5.66

08/14/2007 08/13/2007 08/10/2007

–1.70 2.89 –3.33

–1.63 –1.30 2.51

1.17 –1.27 –0.42

1.48 0.94 –1.37

–0.96 –0.26 2.04

–1.19 –1.39 –2.79

08/09/2007 08/08/2007 08/07/2007

–1.91 –1.36 1.88

–1.99 –2.03 1.26

–1.08 –0.26 –3.07

–1.13 1.70 0.66

–2.76 5.45 3.58

–3.23 1.94 –4.41

08/06/2007 08/03/2007 08/02/2007

0.60 1.91 1.63

5.33 1.55 1.48

–2.38 0.42 1.34

–2.53 –0.11 –3.38

1.24 1.25 2.07

3.17 4.15 0.29

08/01/2007 07/31/2007 07/30/2007

–6.04 0.11 2.44

–1.43 3.16 –2.17

–3.05 0.47 0.98

–7.77 2.76 –2.64

–6.54 –0.28 –0.82

–4.35 –0.86 –2.14

07/27/2007 07/26/2007 07/25/2007

–0.12 –1.05 –1.65

–0.41 4.68 –2.15

–0.91 –0.47 0.08

–4.32 1.73 –2.01

–5.51 2.20 –4.93

2.35 1.82 0.73

07/24/2007 07/23/2007 07/20/2007

–3.25 1.57 1.82

1.76 –1.01 –2.76

–1.46 –0.37 –0.65

–2.59 0.04 –1.75

6.88 1.36 –2.99

–0.08 0.18 0.08

07/19/2007 07/18/2007 07/17/2007

0.17 –0.15 –1.91

2.57 –1.38 –0.27

0.58 –1.50 –0.63

–0.57 –0.99 –1.53

0.00 1.70 1.91

1.78 0.09 0.65

07/16/2007 07/13/2007 07/12/2007

4.65 4.34 1.60

–1.27 1.85 –2.05

–2.88 0.07 0.51

0.30 –1.14 0.21

5.27 –1.88 0.66

0.70 3.57 –3.09

07/11/2007 07/10/2007 07/09/2007

2.00 –2.29 –1.14

4.52 0.05 0.58

0.72 0.11 –1.42

–2.67 6.24 0.22

0.96 0.19 7.63

–1.19 2.41 1.55

07/06/2007 07/05/2007 07/04/2007

0.61 –1.84 1.72

–0.94 1.49 4.53

–0.13 –0.87 2.44

–1.30 –1.99 –1.99

–1.42 –0.51 –1.49

–2.05 0.18 2.43

07/03/2007 07/02/2007 06/29/2007

1.90 –1.78 0.82

2.04 0.04 –0.38

5.00 0.53 5.00

7.69 2.15 0.87

1.11 6.32 3.55

–0.59 0.55 2.20

06/28/2007 06/27/2007 06/26/2007

4.61 4.51 2.83

–0.02 –0.89 –0.41

2.38 0.14 –4.14

–2.64 –0.04 0.31

–2.38 0.22 –0.65

–1.29 –0.78 –1.49 (Contd.)

68

Cases in Corporate Finance

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

06/25/2007 06/22/2007

–0.53 –0.05

2.19 –1.64

0.44 5.00

–0.58 –1.28

–0.54 –0.64

2.03 –0.05

06/21/2007 06/20/2007 06/19/2007

–0.24 –1.05 –0.78

–0.61 4.31 –2.42

5.00 5.00 5.00

–0.09 0.98 0.22

–2.69 2.66 5.15

–2.49 0.55 0.07

06/18/2007 06/15/2007 06/14/2007

–2.69 –1.97 4.78

–1.95 4.01 1.00

2.67 –1.78 0.83

–0.53 –1.18 3.07

–0.11 –1.97 3.40

3.61 0.38 0.72

06/13/2007 06/12/2007 06/11/2007

–1.12 –2.49 –4.07

–0.43 0.53 1.72

0.61 –1.61 2.57

–2.04 3.06 –0.36

–1.12 –3.15 –3.15

–1.01 –0.99 2.33

06/08/2007 06/07/2007 06/06/2007

0.11 0.92 3.18

–0.92 –0.60 –1.13

0.75 –4.43 –5.00

–2.96 –4.22 –2.83

7.09 1.02 –2.98

–2.38 2.15 –2.81

06/05/2007 06/04/2007 06/01/2007

–3.83 –2.16 1.69

–0.08 –0.53 1.14

–2.46 3.80 5.00

1.29 –3.57 0.81

4.49 –3.02 –0.11

–0.22 3.56 –1.11

05/31/2007 05/30/2007 05/29/2007

0.92 –0.96 1.44

4.34 2.54 1.48

3.84 –3.97 –1.25

–1.12 –1.65 –0.20

4.31 –6.43 –1.50

–1.56 0.00 2.11

05/28/2007 05/25/2007 05/24/2007

2.68 –3.49 –3.28

3.64 1.99 –1.44

10.00 10.00 4.87

0.43 0.87 –1.49

5.79 2.56 –0.69

3.39 0.96 –1.03

05/23/2007 05/22/2007 05/21/2007

–2.16 –0.43 –0.27

0.18 –3.18 0.82

–0.82 –3.36 0.79

0.20 –1.43 –0.65

–6.18 –0.65 –1.59

0.07 –0.64 1.06

05/18/2007 05/17/2007 05/16/2007

–1.54 3.68 2.13

1.98 –1.95 3.53

2.97 2.83 1.76

1.13 2.06 0.76

6.43 –1.88 11.62

0.12 1.47 –0.76

05/15/2007 05/14/2007 05/11/2007

–2.21 1.27 –0.99

1.48 –1.35 1.45

–0.56 0.52 –0.84

–0.08 0.76 –0.84

–0.86 6.11 0.00

–0.66 1.76 –1.49

05/10/2007 05/09/2007 05/08/2007

–1.95 –2.52 0.20

–1.86 –0.43 –1.06

1.83 –0.99 –2.60

–0.48 0.48 –1.80

4.34 6.50 –2.40

0.72 –0.18 –0.94

05/07/2007 05/04/2007 05/03/2007

–2.90 0.37 2.56

1.12 1.50 –1.90

–1.20 1.23 –1.52

–2.03 –0.61 –0.19

–1.53 –2.17 –0.27

2.99 –1.77 1.82

04/30/2007 04/27/2007 04/26/2007

3.95 –2.80 1.13

2.31 0.18 –0.73

4.06 3.83 –0.10

4.00 1.53 –1.97

–1.99 0.40 1.63

2.94 0.17 –0.37 (Contd.)

Case 3: Reliance Capital

69

(Exhibit 7 Contd.) Date

Daily

Daily

Daily

Daily

Daily

Daily

Returns

Returns

Returns

Returns

Returns

Returns

04/25/2007

–0.29

0.06

–3.80

–0.70

5.43

0.34

04/24/2007 04/23/2007 04/20/2007 04/19/2007

–0.69 1.34 3.07 3.53

2.48 –0.93 1.80 –0.15

–0.34 –3.76 –0.43 0.08

0.51 0.43 3.64 –1.37

2.79 –0.87 –2.28 –0.71

–1.40 –1.05 1.92 2.77

04/18/2007 04/17/2007 04/16/2007

5.16 2.37 2.41

–0.93 3.76 1.34

–2.72 –1.50 5.00

0.24 –2.25 1.16

0.85 0.72 0.29

–0.43 0.53 0.11

04/13/2007 04/12/2007 04/11/2007

1.72 –0.54 –1.12

–0.53 2.47 4.30

4.41 –0.01 0.05

4.00 –2.32 –1.05

2.51 –1.74 –0.72

1.75 –0.09 0.19

04/10/2007 04/09/2007 04/05/2007

–0.18 2.21 1.19

4.90 0.47 –0.72

–0.16 –0.28 0.38

6.15 4.09 3.78

0.00 1.16 –1.58

–0.32 0.17 –1.35

04/04/2007 04/03/2007 04/02/2007

–2.91 –2.22 –5.97

–0.32 3.02 –3.21

–0.78 –3.64 1.94

0.32 –1.55 –4.98

2.50 4.29 –6.71

–0.34 0.32 –1.56

03/30/2007 03/29/2007 03/28/2007

3.13 0.34 –0.08

2.32 1.43 1.82

2.61 0.02 0.07

–0.52 –2.03 –3.81

4.01 –0.44 –3.43

–0.55 2.25 –1.04

03/26/2007 03/23/2007 03/22/2007

–1.09 2.07 0.01

–0.93 0.53 0.64

0.16 0.05 –0.24

2.75 1.74 2.84

3.55 0.00 3.68

0.67 –0.24 0.41

03/21/2007 03/20/2007 03/19/2007

–0.17 0.45 1.25

2.95 0.27 –2.02

–1.53 1.49 –0.12

0.79 –0.57 1.55

4.32 6.11 –0.84

–0.04 1.54 –0.25

03/16/2007 03/15/2007 03/14/2007

–1.54 3.14 –1.62

–2.61 0.38 –4.88

–0.05 –0.40 –1.44

0.81 –0.09 –4.40

0.68 –1.01 –3.40

–1.17 0.86 –3.51

03/13/2007 03/12/2007 03/09/2007

3.63 3.31 –7.55

1.13 –0.63 –1.52

0.10 0.78 –0.05

3.13 1.52 –2.49

–0.48 0.32 –0.48

1.28 1.50 –3.25

03/08/2007 03/07/2007 03/06/2007

4.84 –6.61 1.12

–1.30 –2.23 –0.77

–0.06 –1.08 3.64

5.43 –2.86 –2.10

–0.80 –1.26 0.63

0.58 3.73 –0.61

03/05/2007 03/02/2007 03/01/2007

–2.10 –0.45 –3.36

–4.19 1.24 3.40

–4.99 –3.64 –5.00

–10.25 0.32 1.16

–6.25 –1.75 0.15

–2.86 –1.90 4.56

02/28/2007 02/27/2007 02/26/2007

–8.97 2.47 –0.16

0.08 –0.26 –0.90

–3.19 0.07 0.24

–6.69 –1.32 –0.58

–6.44 2.67 4.71

–7.55 –1.10 2.97 (Contd.)

70

Cases in Corporate Finance

(Exhibit 7 Contd.) Date 02/23/2007 02/22/2007

Daily Returns –5.97 –1.33

Daily Returns –3.24 2.72

Daily Returns –1.06 –0.94

Daily Returns –4.99 1.16

Daily Returns 1.04 –2.75

Daily Returns 1.53 –1.93

02/21/2007 02/20/2007 02/19/2007

–0.85 –0.68 2.10

–0.70 –1.22 –0.63

1.24 0.19 –0.02

1.68 –2.09 –0.45

–1.00 –1.41 –1.67

0.14 –0.70 2.17

02/15/2007 02/14/2007 02/13/2007

1.36 –0.08 0.18

3.34 1.02 –0.49

–0.45 –1.92 2.55

4.85 6.11 2.62

4.50 –1.99 –0.99

0.90 –0.0 –0.41

02/12/2007 02/09/2007 02/08/2007

–7.68 –5.34 0.60

–4.09 –2.34 1.13

–0.54 3.09 0.78

–10.25 –6.02 0.95

–5.08 –1.84 –0.13

0.37 1.79 0.81

02/07/2007 02/06/2007 02/05/2007 02/02/2007

0.01 –0.10 –2.00 1.23

–1.96 –0.95 0.30 0.48

0.18 –1.03 –2.82 –4.47

–0.44 –3.25 9.05 4.25

–0.78 –1.79 –1.01 0.25

0.19 –2.34 6.53 0.09

02/01/2007 01/31/2007 01/29/2007

0.22 –3.62 3.74

–4.96 2.99 0.62

3.53 –5.00 –5.00

11.28 –0.16 3.09

–0.13 –0.13 4.35

0.88 –2.30 –1.11

01/25/2007 01/24/2007 01/23/2007

–0.69 0.16 –4.92

–0.26 –1.52 –1.01

–0.42 4.05 –1.82

5.97 –0.76 –0.80

–1.81 1.85 –2.45

0.92 1.38 –0.55

01/22/2007 01/19/2007 01/18/2007

0.04 0.13 0.78

0.12 –1.17 –0.88

3.97 0.11 0.05

2.40 –0.94 –2.28

–1.15 –2.96 1.25

0.71 0.86 2.78

01/17/2007 01/16/2007 01/15/2007

0.85 –0.08 0.99

5.84 0.29 2.24

0.58 3.16 –0.45

1.60 0.72 0.59

1.52 –1.38 3.50

0.22 0.84 0.58

01/12/2007 01/11/2007 01/10/2007

1.01 1.35 –3.12

3.08 0.57 –1.71

–3.08 4.81 –4.74

0.68 2.32 –2.76

2.25 0.40 –0.92

–0.09 0.92 –0.84

01/09/2007 01/08/2007 01/05/2007

–0.91 –2.06 –1.36

0.51 –3.13 –1.81

4.53 5.00 5.00

–0.67 –1.02 –1.27

–1.94 2.11 –0.92

0.28 –2.96 0.06

01/04/2007 01/03/2007 01/02/2007

–0.84 1.97 9.68

5.34 3.61 –0.16

5.00 5.00 1.14

0.13 0.93 1.30

2.14 0.67 0.54

–0.83 0.60 2.21 (Contd.)

Case 3: Reliance Capital

71

(Exhibit 7 Contd.)

Bombay Dyeing, Crompton Greaves, GSFC, United Phosphorus, Reliance Energy, SBI Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

01/11/2008 01/10/2008

7.70 –7.64

–0.18 –0.51

–3.54 1.47

–2.09 4.23

0.85 –3.91

1.19 –2.20

01/09/2008 01/08/2008 01/07/2008

0.65 –5.11 0.79

–2.45 –2.50 –1.98

–3.12 –6.85 –5.19

3.50 –2.12 0.67

1.16 –1.86 2.94

–0.10 2.59 0.51

01/04/2008 01/03/2008 01/02/2008

6.24 2.40 19.11

–0.23 3.16 –0.97

4.76 –3.09 –0.11

1.65 0.35 5.84

–0.28 6.42 3.80

–0.23 –1.02 1.49

01/01/2008 12/31/2007 12/28/2007

0.13 0.89 1.88

–1.32 0.57 0.36

2.84 7.39 0.43

1.55 0.32 1.50

6.76 –0.96 0.97

0.60 –0.56 0.07

12/27/2007 12/26/2007 12/24/2007

2.18 2.49 2.60

0.49 6.09 –1.74

3.99 7.43 4.85

–0.32 –1.32 –0.26

1.07 2.58 6.14

–0.69 2.97 2.86

12/20/2007 12/19/2007 12/18/2007

–0.99 –1.25 –1.43

0.93 –1.74 0.17

2.38 –5.33 –2.61

–0.24 –1.56 –0.32

3.04 4.12 –1.14

0.31 –1.97 –0.47

12/17/2007 12/14/2007 12/13/2007

–3.66 –0.02 –2.73

–5.97 –2.53 –1.35

–2.70 4.94 –0.02

–0.43 –0.71 –0.63

–4.22 –0.11 –1.05

–3.98 0.68 –1.89

12/12/2007 12/11/2007 12/10/2007

1.37 1.75 1.30

0.16 1.34 –1.11

–0.23 –0.53 1.94

4.32 1.15 –0.10

–0.72 –0.02 0.72

–0.22 0.88 –0.50

12/07/2007 12/06/2007 12/05/2007

–4.07 –3.37 2.32

–3.05 0.60 1.05

–2.51 1.42 –1.19

–0.40 1.60 0.12

–0.74 3.13 –0.29

1.67 0.55 2.85

12/04/2007 12/03/2007 11/30/2007

6.25 –1.09 5.70

–1.61 0.78 3.22

1.45 5.75 3.58

–0.35 –0.58 2.46

–0.37 9.32 4.47

–0.32 1.07 1.34

11/29/2007 11/28/2007 11/27/2007

3.06 0.29 –1.20

0.46 –2.71 –3.22

1.68 –3.81 –0.15

–0.09 –0.15 4.51

–2.37 –2.93 –1.91

0.79 –0.93 1.38

11/26/2007 11/23/2007 11/22/2007

3.05 0.56 –2.37

8.45 0.69 –2.33

–3.40 1.76 –2.41

–1.23 –1.44 –1.99

3.74 7.48 –5.18

–0.40 0.42 4.04

11/21/2007 11/20/2007 11/19/2007

–2.94 –0.13 0.53

–3.33 –4.02 5.12

–9.19 –2.39 1.22

–1.46 –0.16 –0.29

–5.65 –1.80 0.08

–5.48 –1.10 –0.89

11/16/2007

–1.20

–1.68

0.12

–2.29

–1.53

0.76 (Contd.)

72

Cases in Corporate Finance

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

11/15/2007 11/14/2007 11/13/2007

–0.82 5.41 2.11

–1.08 2.37 2.93

–0.23 6.34 7.58

4.98 5.72 0.59

–3.45 3.59 1.92

–1.62 2.20 2.62

11/12/2007 11/09/2007 11/08/2007

–2.43 –0.61 –1.75

0.01 0.69 –0.67

–2.56 0.20 –1.08

–6.05 1.58 –3.19

–1.04 –0.69 1.75

3.45 –1.01 –3.65

11/07/2007 11/06/2007 11/05/2007

–0.48 0.19 –3.60

–4.24 –1.40 5.27

2.78 6.45 –0.83

–3.73 1.97 –3.07

–1.40 1.32 –1.70

2.66 –1.41 –0.51

11/02/2007 11/01/2007 10/31/2007

2.10 –5.20 2.03

–1.26 1.95 0.31

–0.18 –0.33 2.28

–1.08 1.87 –3.91

4.78 –5.30 4.34

8.74 0.13 0.29

10/30/2007 10/29/2007 10/26/2007

–3.44 7.72 4.87

–2.97 –0.39 7.44

0.92 –3.47 1.98

–0.28 1.01 2.14

3.91 3.10 1.24

–2.63 1.63 7.17

10/25/2007 10/24/2007 10/23/2007

–0.36 –0.41 3.68

3.73 3.19 10.29

0.14 2.23 7.06

–1.14 –1.52 5.17

–0.26 8.58 11.18

1.92 5.25 5.85

10/22/2007 10/19/2007 10/18/2007

4.32 –6.23 –4.69

1.94 –4.14 –6.77

0.66 –1.48 0.46

2.77 –5.90 –1.96

2.76 –16.22 –9.71

2.70 –0.59 –8.26

10/17/2007 10/16/2007 10/15/2007

–3.87 1.01 1.72

0.80 0.12 3.70

–0.63 –2.54 2.07

0.23 –3.53 5.41

–7.46 3.09 12.90

–4.98 –1.67 5.08

10/12/2007 10/11/2007 10/10/2007

–1.31 3.41 3.78

1.46 2.55 0.13

–1.49 –0.13 0.47

1.42 –2.03 –1.19

2.41 0.76 3.40

–4.23 1.08 1.80

10/09/2007 10/08/2007 10/05/2007

4.08 –4.24 –4.01

1.62 –3.54 1.66

3.13 –6.95 1.79

1.54 1.03 –4.50

11.17 –4.67 –2.08

6.01 –4.33 –1.95

10/04/2007 10/03/2007 10/01/2007

0.99 0.36 –0.01

–2.82 –0.65 4.18

3.03 –5.89 2.40

–3.96 –0.61 –0.19

1.89 7.48 11.94

–0.47 0.84 –2.93

09/28/2007 09/27/2007 09/26/2007

1.01 –2.29 2.60

0.27 –1.53 –0.41

4.05 0.72 1.86

4.25 1.81 3.28

7.90 8.87 –5.63

3.43 2.05 2.45

09/25/2007 09/24/2007 09/21/2007

–2.65 –0.73 –1.11

0.95 3.39 0.50

–0.59 –1.17 1.08

–4.83 –3.03 –0.18

–0.57 8.33 2.22

–1.60 1.38 2.78

09/20/2007 09/19/2007

4.33 2.96

1.65 2.22

0.93 0.09

3.48 1.85

4.40 2.10

–0.60 4.52 (Contd.)

Case 3: Reliance Capital

73

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

09/18/2007 09/17/2007

3.01 0.67

0.13 0.90

1.76 0.64

3.94 1.60

2.08 2.85

2.85 –0.42

09/14/2007 09/13/2007 09/12/2007

–1.50 1.17 2.20

–2.20 0.24 –2.14

–2.70 –1.69 –0.71

–1.63 0.46 3.48

–0.78 –0.53 3.97

–1.33 3.18 0.12

09/11/2007 09/10/2007 09/07/2007

–1.73 2.44 4.54

–1.84 1.13 3.15

0.32 2.35 –0.79

1.73 3.24 –0.71

–0.47 1.63 –1.16

–1.12 1.26 –0.72

09/06/2007 09/05/2007 09/04/2007

1.10 –0.69 –0.78

2.11 –2.02 0.26

0.22 –2.83 3.25

–1.42 –0.33 0.45

4.50 –0.01 5.98

2.35 –0.99 0.30

09/03/2007 08/31/2007 08/30/2007

1.91 6.33 –0.26

2.01 2.62 0.34

–0.33 10.52 –0.92

0.83 3.78 0.09

–0.36 1.70 –1.97

0.38 1.73 –0.17

08/29/2007 08/28/2007 08/27/2007

0.18 2.40 5.25

–2.51 4.66 5.72

–0.50 –0.67 1.62

0.02 –0.28 1.99

2.04 0.62 3.58

1.69 –0.50 6.17

08/24/2007 08/23/2007 08/22/2007

1.46 –0.51 –0.67

3.44 –1.44 –0.81

–1.43 –4.01 5.98

–0.40 1.82 1.67

4.22 –2.63 4.74

3.62 –2.94 –0.40

08/21/2007 08/20/2007 08/17/2007

–2.18 0.07 –2.32

–3.17 2.13 –2.76

–8.96 11.52 2.32

–3.34 0.54 –2.18

–4.60 0.84 0.26

–5.59 2.04 –0.14

08/16/2007 08/14/2007 08/13/2007

–5.05 –0.49 0.87

–5.93 2.63 –0.63

–8.20 –1.01 –0.71

–1.64 –3.03 3.83

–4.80 0.05 0.67

–5.78 0.10 0.38

08/10/2007 08/09/2007 08/08/2007

–2.88 –2.00 0.59

1.71 –4.64 3.26

–3.64 0.40 –1.00

–2.32 –2.00 –0.31

–1.27 –3.22 2.41

–2.57 –3.30 1.35

08/07/2007 08/06/2007 08/03/2007

1.71 –2.22 1.71

1.46 0.26 1.31

–0.54 –1.43 4.42

0.62 0.42 0.78

2.98 –1.43 0.16

0.08 2.80 2.72

08/02/2007 08/01/2007 07/31/2007

0.61 –5.96 1.73

4.36 –6.33 7.05

0.97 –7.21 6.72

4.30 4.12 2.27

2.01 –7.08 1.69

2.87 –4.69 2.88

07/30/2007 07/27/2007 07/26/2007

1.37 –5.32 5.53

–3.02 1.40 1.70

4.92 –1.29 –1.77

–2.52 –1.11 –1.27

2.20 –4.56 2.80

5.26 –3.28 –1.11

07/25/2007 07/24/2007 07/23/2007

–2.66 –3.89 1.54

–0.33 0.92 3.02

–0.14 6.44 –2.17

–2.17 3.00 1.36

0.36 8.46 3.86

–0.42 –0.77 0.24 (Contd.)

74

Cases in Corporate Finance

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

07/20/2007

–0.68

–1.35

–2.06

07/19/2007 07/18/2007 07/17/2007

0.08 –0.84 –3.31

1.93 2.66 –1.30

3.87 1.29 2.14

07/16/2007 07/13/2007 07/12/2007

4.57 0.03 –0.49

–0.21 –0.29 1.60

7.71 2.19 4.55

07/11/2007 07/10/2007 07/09/2007

4.20 –1.26 0.96

–1.41 –0.17 –0.76

07/06/2007 07/05/2007 07/04/2007

0.98 –4.92 4.42

07/03/2007 07/02/2007 06/29/2007

Daily Returns

Daily Returns

Daily Returns

2.93

0.34

–0.76

–1.61 0.10 –0.16

–0.41 –1.40 –1.04

1.31 –0.31 –2.09

–2.80 3.02 1.69

4.54 1.01 6.82

3.83 –0.22 0.98

0.72 –1.08 2.99

–1.92 0.54 –1.32

2.14 –0.45 2.94

–0.53 –1.31 1.36

3.15 0.00 –3.15

–0.15 –2.09 –2.52

0.84 0.96 –4.82

1.12 –3.27 –0.48

0.22 –1.06 –1.20

2.47 1.02 4.26

0.17 3.36 2.10

–0.03 1.39 1.70

1.23 0.85 3.44

–1.60 1.66 5.78

3.37 0.36 3.74

06/28/2007 06/27/2007 06/26/2007

–0.96 0.29 –0.11

0.49 –2.35 4.27

0.32 0.61 –0.41

0.43 –0.12 –0.43

0.41 –1.97 –0.16

1.60 –0.70 0.62

06/25/2007 06/22/2007 06/21/2007

0.07 1.25 1.06

–0.27 –1.26 0.35

–0.98 0.61 –0.03

–0.68 0.17 –1.18

0.09 5.32 4.16

–0.50 0.71 1.43

06/20/2007 06/19/2007 06/18/2007

–0.25 1.87 –1.81

–0.16 1.32 0.14

0.00 –0.23 –1.14

2.51 –0.53 –4.07

0.44 1.06 –0.27

3.85 4.10 –0.40

06/15/2007 06/14/2007 06/13/2007

–0.59 0.53 –0.02

–0.90 1.01 –1.37

0.29 –0.45 –1.37

9.36 3.15 1.18

0.93 1.22 0.62

0.73 1.91 –3.19

06/12/2007 06/11/2007 06/08/2007

–2.36 –0.54 –1.30

0.41 0.45 –0.33

–0.56 –1.48 0.19

1.22 –0.68 –0.53

0.14 –0.86 –1.37

–0.59 –1.25 –0.27

06/07/2007 06/06/2007 06/05/2007

–1.10 –3.72 4.77

–3.60 –1.63 2.88

0.83 –1.88 –0.46

–0.47 –3.60 –0.71

–0.94 –3.17 1.72

–2.00 –3.35 2.10

06/04/2007 06/01/2007 05/31/2007

1.24 2.10 –2.59

–0.02 1.48 4.43

1.40 4.30 0.95

–1.47 3.51 –1.40

–0.08 0.38 0.93

2.07 1.90 2.09

05/30/2007 05/29/2007 05/28/2007

0.07 –0.46 0.86

–6.05 4.54 6.40

0.96 –0.46 0.56

–1.24 –0.67 –0.05

–3.71 0.87 –0.94

0.21 1.22 0.59

05/25/2007

–0.45

0.80

0.03

–0.12

0.83

1.05 (Contd.)

Case 3: Reliance Capital

75

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

05/24/2007 05/23/2007 05/22/2007

–2.91 1.48 –1.03

1.43 1.19 –0.98

0.23 –0.12 0.12

1.23 0.52 –0.47

–3.38 3.55 –0.15

–1.60 –1.42 –1.64

05/21/2007 05/18/2007 05/17/2007

1.22 –2.50 0.90

–2.09 –0.29 0.36

0.38 –0.47 0.98

0.93 –1.72 –1.72

7.90 0.26 0.79

1.59 –0.18 3.40

05/16/2007 05/15/2007 05/14/2007

4.85 –0.39 –0.51

–2.00 1.71 7.07

1.41 4.02 1.49

1.96 0.17 –2.72

–0.51 –0.56 0.53

4.71 1.73 4.92

05/11/2007 05/10/2007 05/09/2007

–0.36 0.05 2.94

–0.89 –3.10 –1.61

–2.14 –0.40 –1.79

2.37 –0.82 –1.23

–1.20 –0.87 2.72

2.29 0.05 3.83

05/08/2007 05/07/2007 05/04/2007

–0.43 –1.95 0.21

0.50 0.23 –0.61

–1.73 –6.80 0.50

–2.01 –1.97 –6.20

–1.35 –0.61 0.64

–3.36 –0.85 0.58

05/03/2007 04/30/2007 04/27/2007

2.45 –0.31 –1.09

1.36 1.34 3.33

0.14 0.53 –2.09

–0.23 –1.83 –0.66

0.79 –0.10 –1.63

1.54 0.59 –4.12

04/26/2007 04/25/2007 04/24/2007

–3.23 1.23 3.84

–0.40 –0.59 0.02

0.08 3.06 0.11

–0.19 1.06 –0.07

–1.18 –0.30 0.42

0.61 0.55 6.88

04/23/2007 04/20/2007 04/19/2007

0.02 0.58 –1.85

–1.21 2.04 –0.09

–1.89 1.79 –0.90

–1.44 0.86 –1.70

2.33 1.13 –0.95

–1.36 2.03 1.72

04/18/2007 04/17/2007 04/16/2007

–0.11 0.48 3.12

–0.64 –0.94 5.53

1.08 –0.11 0.43

1.31 –0.50 3.97

0.82 0.35 0.29

2.65 –0.50 1.45

04/13/2007 04/12/2007 04/11/2007

1.42 –1.99 1.84

0.12 –2.32 –0.41

–2.31 0.96 2.65

3.89 0.38 –2.34

–0.27 –1.24 0.16

3.24 –1.36 –0.86

04/10/2007 04/09/2007 04/05/2007

0.60 4.11 1.02

2.82 2.64 0.38

0.38 0.58 –0.81

–2.66 1.07 –0.08

–0.59 2.40 2.73

0.10 4.30 1.32

04/04/2007 04/03/2007 04/02/2007

1.29 0.53 –10.13

6.80 –3.49 –4.44

–2.06 2.64 –1.54

4.09 0.86 –3.74

1.27 0.96 –3.72

0.95 –0.38 –6.31

03/30/2007 03/29/2007 03/28/2007

1.90 –0.53 –3.88

2.73 1.60 –2.30

–1.35 4.45 1.19

–0.22 2.33 –5.30

1.43 1.20 1.41

0.65 1.26 –3.89

03/26/2007 03/23/2007

–2.04 0.04

–2.61 5.35

–1.21 –2.08

–0.01 1.99

–2.16 –1.19

–1.31 –0.14 (Contd.)

76

Cases in Corporate Finance

(Exhibit 7 Contd.) Date

Daily

Daily

Daily

Daily

Daily

Daily

Returns

Returns

Returns

Returns

Returns

Returns

03/22/2007

1.10

2.94

2.33

3.51

0.18

4.72

03/21/2007 03/20/2007 03/19/2007

–0.82 2.07 4.26

4.46 0.51 –0.17

0.59 1.91 –2.36

1.02 1.61 0.18

3.14 4.09 0.41

3.10 2.62 1.52

03/16/2007 03/15/2007 03/14/2007

–2.08 0.26 –6.35

–1.83 0.42 –4.43

–0.24 –3.03 –1.52

–1.65 1.26 –0.66

–1.45 0.78 –1.55

–0.81 –2.70 –3.39

03/13/2007 03/12/2007 03/09/2007

7.87 3.75 9.84

–4.26 4.04 0.88

0.00 –2.71 –1.40

–1.90 1.37 3.40

–1.74 –1.50 –1.82

0.40 –0.74 –1.62

03/08/2007 03/07/2007 03/06/2007

6.30 –5.01 2.84

5.81 –2.94 –1.36

1.31 –1.67 –2.26

1.37 3.47 –1.70

2.31 0.89 1.04

3.71 –2.69 3.00

03/05/2007 03/02/2007 03/01/2007

–12.15 –7.32 0.91

–7.76 –0.55 1.72

0.42 –0.18 1.33

–5.21 –3.65 1.91

–1.10 –1.09 0.25

–4.57 –4.19 1.29

02/28/2007 02/27/2007 02/26/2007

–5.47 0.99 –0.72

–1.23 0.13 2.46

–5.19 0.23 –1.62

–2.96 2.00 1.39

–4.73 –0.76 0.74

–2.77 –1.84 2.87

02/23/2007 02/22/2007 02/21/2007

–0.14 –4.02 0.13

–2.75 –1.98 1.49

–1.88 –1.68 –0.74

–2.74 –0.29 0.77

–1.95 –1.69 0.23

–1.97 –2.41 0.01

02/20/2007 02/19/2007 02/15/2007

–0.19 –0.39 4.77

–2.30 –1.36 5.10

–0.92 2.08 1.12

–1.66 1.26 2.14

–2.76 –1.19 –0.80

–2.16 0.67 1.99

02/14/2007 02/13/2007 02/12/2007

–4.17 2.18 –7.48

–2.81 2.33 –2.53

–2.96 –3.26 1.73

–0.66 –0.76 –0.66

1.34 0.85 –3.74

–6.09 –0.77 –1.32

02/09/2007 02/08/2007 02/07/2007

–1.70 –3.67 –3.33

–0.12 0.59 –2.79

3.93 5.74 0.15

–0.49 –1.51 1.82

–1.83 1.26 –0.26

–0.58 0.66 0.08

02/06/2007 02/05/2007 02/02/2007

–0.85 0.09 0.97

–0.87 2.24 3.99

–0.74 0.85 1.07

–1.56 0.21 –1.80

2.14 2.70 1.83

–0.08 1.31 –1.81

02/01/2007 01/31/2007 01/29/2007

–0.33 –2.22 0.10

1.74 –4.72 –4.08

0.39 –0.47 1.08

2.15 2.58 2.25

2.12 1.51 0.77

5.72 –1.50 –1.73

01/25/2007 01/24/2007 01/23/2007

–0.04 0.54 –0.46

1.25 2.37 0.63

–0.08 0.39 –3.75

–0.82 0.24 –3.11

–0.64 0.44 –0.53

0.24 –0.09 –4.10

01/22/2007

–0.56

–1.06

–1.23

–1.22

–1.68

0.23 (Contd.)

Case 3: Reliance Capital

77

(Exhibit 7 Contd.) Date

Daily

Daily

Daily

Daily

Daily

Daily

Returns

Returns

Returns

Returns

Returns

Returns

01/19/2007 01/18/2007 01/17/2007

–1.10 –0.61 0.02

–1.42 –0.40 –0.59

0.60 –0.03 –1.17

–2.24 –0.55 6.36

–2.58 –1.24 0.43

–0.83 0.72 1.12

01/16/2007 01/15/2007 01/12/2007

0.91 –1.43 1.13

–2.16 0.02 –0.69

0.15 0.38 –2.39

0.65 4.34 4.09

–0.15 1.62 2.21

–1.04 –0.12 6.39

01/11/2007 01/10/2007 01/09/2007

2.32 –3.18 –3.28

0.57 2.35 –2.48

5.76 –2.34 0.89

1.52 –0.66 –2.02

1.72 –2.04 –1.33

1.15 –3.20 –3.17

01/08/2007 01/05/2007 01/04/2007

–1.63 –1.90 0.62

–2.00 –2.80 5.73

0.36 –1.01 5.55

–2.32 0.82 –2.48

–0.46 –1.02 0.91

–2.52 0.04 –1.69

01/03/2007 01/02/2007

1.20 0.99

–0.35 4.07

1.85 1.91

3.28 –1.12

0.35 0.69

0.88 0.66

Bank of Baroda, Maruti, BEML, Reliance Comm., JSW Steel, Jaiprakash Associates Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

01/11/2008

0.11

–0.99

–0.44

–0.31

0.29

3.59

01/10/2008 01/09/2008 01/08/2008

–4.09 2.24 –3.24

–1.95 –1.48 –2.43

–4.77 –1.05 –2.02

–3.02 2.05 1.80

–2.36 –2.98 –2.52

–7.54 0.89 –2.33

01/07/2008 01/04/2008 01/03/2008

–2.92 –1.93 1.18

–0.15 –1.08 –1.94

–1.00 2.77 –0.86

3.95 3.63 0.05

–2.94 –0.46 3.14

–2.44 2.43 6.47

01/02/2008 01/01/2008 12/31/2007

2.22 3.31 0.63

0.26 0.17 0.59

3.96 –0.20 –0.44

–1.06 –0.75 1.90

–1.48 0.14 0.05

4.49 –0.13 0.74

12/28/2007 12/27/2007 12/26/2007

5.96 2.44 1.21

–1.05 0.14 0.31

–0.01 2.36 3.79

0.25 –1.66 2.46

1.07 4.01 1.04

–0.65 –1.39 2.70

12/24/2007 12/20/2007 12/19/2007

2.92 –1.72 –2.18

–0.18 –0.34 –2.39

2.76 0.87 –2.45

2.66 –0.63 –0.48

0.55 1.16 2.54

4.94 1.65 3.73

12/18/2007 12/17/2007 12/14/2007

1.31 –3.90 –1.12

0.93 –3.07 0.39

–2.87 –2.05 –2.75

–0.47 –5.55 –0.28

2.24 –12.98 0.18

–5.22 –7.05 4.07

12/13/2007

2.78

–3.45

–2.30

–0.48

7.84

2.69 (Contd.)

78

Cases in Corporate Finance

(Exhibit 7 Contd.) Date

Daily

Daily

Daily

Daily

Daily

Daily

Returns

Returns

Returns

Returns

Returns

Returns

12/12/2007

6.52

–0.29

–0.73

3.51

2.82

4.63

12/11/2007 12/10/2007 12/07/2007 12/06/2007

1.44 0.40 –0.20 –2.62

3.17 0.30 0.09 0.89

–0.19 0.60 –0.22 –1.26

1.43 –0.67 2.17 0.15

–0.56 0.35 3.38 3.31

0.30 –1.65 3.04 –3.33

12/05/2007 12/04/2007 12/03/2007

4.45 0.96 0.01

0.39 –0.39 1.96

2.39 3.20 1.40

0.82 0.00 5.48

4.19 2.46 4.85

0.65 3.79 3.62

11/30/2007 11/29/2007 11/28/2007

7.58 –2.18 1.23

2.21 2.46 3.11

1.00 –2.81 –2.08

1.47 –1.98 –0.89

4.42 0.59 –2.97

0.39 0.61 4.70

11/27/2007 11/26/2007 11/23/2007

–0.46 2.07 –2.05

–1.55 0.60 –2.07

–2.02 9.26 –1.28

–0.49 0.87 1.23

0.59 6.64 1.27

2.08 3.28 0.06

11/22/2007 11/21/2007 11/20/2007

0.84 –6.94 –3.08

1.65 –5.85 –4.11

–2.50 –3.69 –2.54

–1.20 –3.86 –0.13

–0.21 –4.46 –1.44

4.91 –6.41 –3.43

11/19/2007 11/16/2007 11/15/2007

1.72 1.05 –0.82

0.39 1.35 –0.30

3.08 –1.22 2.81

0.35 –2.31 –0.01

0.01 0.10 3.41

12.71 0.54 –0.54

11/14/2007 11/13/2007 11/12/2007

3.95 4.93 –2.41

3.46 1.07 0.27

5.40 3.71 –0.14

2.42 1.82 –2.08

6.07 2.09 –3.73

2.52 3.04 –3.50

11/09/2007 11/08/2007 11/07/2007

–0.46 –0.70 2.70

–0.37 –0.27 2.43

–0.85 –0.55 0.70

0.66 –3.01 –2.50

–1.30 –2.69 0.93

–0.51 –3.35 1.66

11/06/2007 11/05/2007 11/02/2007

–6.12 2.75 6.54

–2.24 –2.53 1.76

–0.46 3.75 1.81

–4.35 –0.81 –0.63

1.39 –1.04 –1.21

3.58 1.83 4.33

11/01/2007 10/31/2007 10/30/2007

2.22 4.90 0.15

–6.51 –1.32 –8.46

–3.34 –1.57 –0.85

2.42 0.67 –1.14

–2.34 0.87 –2.18

–4.95 –1.20 5.10

10/29/2007 10/26/2007 10/25/2007

1.67 3.39 4.03

0.61 1.91 3.61

–0.84 7.48 0.68

1.45 1.89 0.33

0.62 –1.22 –3.92

3.84 12.92 –1.07

10/24/2007 10/23/2007 10/22/2007

2.74 6.97 –1.35

1.41 4.68 –1.92

–0.57 7.39 1.79

–1.00 4.86 –0.92

9.18 6.64 1.24

2.21 12.08 –0.96

10/19/2007 10/18/2007 10/17/2007

–2.40 –5.96 –4.89

–6.47 –2.14 –1.09

–2.39 –6.74 –3.51

2.21 –3.51 –3.06

1.66 –6.97 –6.40

–2.76 –10.26 –6.71 (Contd.)

Case 3: Reliance Capital

79

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

10/16/2007

–0.88

2.28

5.87

1.06

–1.72

2.70

10/15/2007 10/12/2007 10/11/2007

2.30 –3.47 2.32

5.79 –1.95 1.59

6.51 –2.79 –0.09

4.87 –3.14 2.31

12.05 1.15 –0.51

1.52 –0.61 –1.79

10/10/2007 10/09/2007 10/08/2007

–1.75 3.39 –4.31

–0.39 7.80 –0.90

2.96 2.74 –4.00

2.62 10.13 –0.60

3.44 5.69 –5.58

12.93 3.08 1.89

10/05/2007 10/04/2007 10/03/2007

–3.69 1.07 –0.05

–0.63 2.10 2.83

–5.24 5.66 4.55

1.62 –1.27 5.03

–6.58 5.22 3.12

–3.80 –4.02 2.62

10/01/2007 09/28/2007 09/27/2007

1.78 1.32 0.91

–0.78 2.39 1.45

3.94 –0.33 2.96

4.48 0.49 –1.21

–1.27 3.38 2.36

4.98 4.86 –0.19

09/26/2007 09/25/2007 09/24/2007

–0.39 –1.69 4.28

–2.92 1.12 5.45

–2.69 1.84 0.09

–0.74 –0.65 3.26

4.38 4.38 1.76

3.05 –0.56 4.88

09/21/2007 09/20/2007 09/19/2007

0.77 –2.27 7.32

2.14 –1.71 5.76

–0.08 2.15 0.15

2.28 0.44 4.96

0.91 1.82 2.73

1.75 –1.44 0.12

09/18/2007 09/17/2007 09/14/2007

4.48 –0.37 0.46

0.11 1.00 –2.95

0.35 0.44 –1.66

1.22 –2.26 –1.34

1.10 –0.35 0.41

0.95 0.91 –1.01

09/13/2007 09/12/2007 09/11/2007

1.87 0.51 –0.70

3.82 –0.29 –1.65

2.07 –0.14 0.29

1.56 –0.17 –0.25

–0.24 1.33 –0.63

1.06 2.36 0.30

09/10/2007 09/07/2007 09/06/2007 09/05/2007

1.24 –2.43 1.99 –2.52

0.38 –1.01 1.00 –2.34

0.16 –0.29 –0.16 0.24

0.00 0.82 0.19 –0.54

–3.69 1.80 1.39 2.68

1.47 –0.63 1.77 –1.69

09/04/2007 09/03/2007 08/31/2007

0.37 5.53 1.29

1.49 1.46 4.13

–0.43 0.46 6.62

–0.53 0.29 1.61

0.73 2.46 3.94

0.56 0.00 1.55

08/30/2007 08/29/2007 08/28/2007

0.80 –0.49 0.34

–0.02 0.17 0.21

–3.71 0.77 –0.75

2.77 0.03 –0.25

–0.35 1.70 –0.39

–1.83 0.41 0.24

08/27/2007 08/24/2007 08/23/2007

3.57 0.60 –0.94

5.13 1.69 1.36

1.60 3.19 2.17

4.45 2.39 –1.64

7.06 10.13 –4.42

7.92 2.18 2.00

08/22/2007 08/21/2007 08/20/2007

–3.89 –1.89 1.73

–0.16 –1.82 0.28

0.35 –1.91 0.79

2.40 –4.75 2.94

0.80 –6.55 1.53

0.30 –1.43 2.91 (Contd.)

80

Cases in Corporate Finance

(Exhibit 7 Contd.) Date

Daily

Daily

Daily

Daily

Daily

Daily

Returns

Returns

Returns

Returns

Returns

Returns

08/17/2007

–2.63

–1.40

–3.20

–0.39

–7.55

–1.06

08/16/2007 08/14/2007 08/13/2007 08/10/2007

–6.67 –0.41 –0.03 –1.56

–3.78 –0.97 2.47 –2.24

–3.28 –1.71 1.75 –2.45

–5.55 –0.72 1.33 –2.87

–4.97 2.72 0.14 –1.26

–6.65 0.98 5.15 –1.93

08/09/2007 08/08/2007 08/07/2007

–5.16 3.56 2.62

–1.03 1.54 –0.06

–0.31 1.62 1.13

–1.36 2.22 0.15

–2.86 0.90 0.50

–4.32 2.19 2.87

08/06/2007 08/03/2007 08/02/2007

–0.24 1.54 1.51

–2.95 1.67 1.86

–1.35 –0.20 0.40

–2.92 1.02 2.15

–4.97 –2.02 –0.76

–0.64 2.77 0.91

08/01/2007 07/31/2007 07/30/2007

–4.25 2.32 1.33

–2.63 –0.50 2.13

–2.80 0.77 –0.32

–5.05 3.35 0.62

–5.10 1.31 0.41

–4.69 2.88 3.88

07/27/2007 07/26/2007 07/25/2007

–4.66 –1.08 –2.26

–1.35 3.88 –1.17

–4.08 2.11 1.37

–5.65 0.41 –1.78

–3.20 3.07 –1.46

–6.63 –1.06 –2.83

07/24/2007 07/23/2007 07/20/2007

3.26 –1.07 0.90

–1.74 0.68 0.16

1.96 2.18 –2.82

–1.04 0.00 0.74

0.55 1.59 2.55

0.58 3.65 0.37

07/19/2007 07/18/2007 07/17/2007

1.40 –0.69 0.52

0.57 –0.62 –0.10

3.12 0.15 –2.22

2.13 1.14 –2.31

1.59 –1.03 –3.10

0.88 0.62 –2.28

07/16/2007 07/13/2007 07/12/2007

6.23 0.07 1.84

–0.61 0.65 2.70

–3.56 –0.46 0.82

3.49 –1.21 4.04

–0.15 5.17 2.86

–3.63 1.06 3.84

07/11/2007 07/10/2007 07/09/2007

1.18 –1.24 2.83

–0.87 2.38 –0.22

1.41 –0.62 –2.05

–0.54 –1.76 0.34

2.09 3.48 1.66

2.73 –2.15 0.69

07/06/2007 07/05/2007 07/04/2007

–0.39 –0.59 –0.69

–1.16 1.77 0.91

4.87 –1.78 6.42

1.00 0.57 1.00

–0.99 –1.50 2.91

5.27 1.20 –1.11

07/03/2007 07/02/2007 06/29/2007

3.23 –1.42 4.08

1.65 3.80 –0.91

4.15 –2.84 –2.55

1.30 2.45 1.34

2.49 –1.08 1.87

2.57 2.35 2.47

06/28/2007 06/27/2007 06/26/2007

0.13 –2.92 –1.42

–0.25 –0.71 0.52

0.67 0.63 2.17

–0.92 –2.05 0.62

–0.59 –0.58 –0.19

2.78 –1.43 –0.75

06/25/2007 06/22/2007 06/21/2007

1.88 0.57 –2.18

–1.14 0.07 –0.94

–3.81 3.60 0.78

1.83 –0.78 2.22

1.04 –0.44 –0.46

–2.17 3.81 1.54 (Contd.)

Case 3: Reliance Capital

81

(Exhibit 7 Contd.) Date

Daily

Daily

Daily

Daily

Daily

Daily

Returns

Returns

Returns

Returns

Returns

Returns

06/20/2007

1.56

2.32

0.22

0.46

1.95

0.24

06/19/2007 06/18/2007 06/15/2007

2.29 0.35 –1.01

1.10 0.33 1.62

–1.81 3.11 4.70

3.07 –0.89 0.36

3.81 –1.84 0.42

1.47 –0.71 2.05

06/14/2007 06/13/2007 06/12/2007

5.52 –1.45 –2.87

1.15 0.15 –1.98

2.47 –0.01 –1.03

1.18 –2.46 –1.43

5.07 –1.55 –2.26

2.44 –0.02 1.52

06/11/2007 06/08/2007 06/07/2007

–2.04 0.47 –3.36

–0.37 –3.16 –2.10

–0.78 1.17 –1.60

–2.18 –0.67 0.80

–0.79 –0.02 0.67

1.43 –2.74 –2.45

06/06/2007 06/05/2007 06/04/2007

–2.82 2.37 0.94

–2.84 –0.82 –0.55

–2.68 4.35 –1.21

0.98 0.47 0.46

–3.67 –0.84 –0.67

–1.31 0.37 –2.18

06/01/2007 05/31/2007 05/30/2007

–1.33 1.42 –1.36

–0.83 1.84 –2.10

2.19 0.60 –1.76

0.15 0.72 –3.79

0.31 –1.53 –3.25

0.28 2.50 –1.60

05/29/2007 05/28/2007 05/25/2007

–0.40 2.14 0.61

–0.59 1.87 –0.14

0.76 1.01 1.56

2.05 1.28 2.14

1.44 2.32 0.21

3.05 3.00 –0.13

05/24/2007 05/23/2007 05/22/2007

–1.34 –2.61 –2.46

–0.51 –1.78 1.16

–0.54 0.46 –1.44

–3.28 –2.46 3.37

–1.43 0.34 3.10

2.03 –3.29 –1.29

05/21/2007 05/18/2007 05/17/2007

2.10 –1.44 3.41

1.58 –0.94 1.60

–0.55 4.32 1.97

2.11 –0.79 1.84

0.17 –1.80 –0.27

–0.42 2.92 6.08

05/16/2007 05/15/2007 05/14/2007 05/11/2007

0.46 1.63 4.31 3.17

–0.47 0.30 1.07 0.08

–0.20 2.19 0.79 –0.23

3.25 –1.43 0.87 2.86

1.70 –0.90 1.19 0.50

0.75 0.87 –0.81 5.79

05/10/2007 05/09/2007 05/08/2007

3.10 2.62 –1.35

–1.02 0.30 –0.59

–0.56 –0.42 –1.44

0.24 0.29 –0.90

–0.15 1.76 –1.99

–2.50 –2.45 –1.36

05/07/2007 05/04/2007 05/03/2007

–1.54 –0.51 3.96

–0.16 –0.98 1.41

–1.06 –1.15 0.98

–0.78 –0.34 –1.12

–0.61 –2.64 6.22

–1.99 2.35 1.56

04/30/2007 04/27/2007 04/26/2007

–2.86 –1.16 0.16

1.02 –0.23 0.98

0.99 2.34 –1.06

3.68 –2.83 –0.35

1.53 –2.44 0.95

–0.81 –1.91 –0.35

04/25/2007 04/24/2007 04/23/2007

2.64 6.03 –1.91

–0.67 3.52 –1.15

–0.45 0.41 0.19

0.08 2.12 1.87

–0.09 –1.47 –0.09

2.40 3.32 1.05 (Contd.)

82

Cases in Corporate Finance

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

04/20/2007 04/19/2007 04/18/2007

–1.08 –0.49 –0.64

0.19 0.91 0.81

1.71 –1.54 –1.86

4.97 –0.07 0.58

0.35 3.09 2.28

1.37 0.53 –3.35

04/17/2007 04/16/2007 04/13/2007

1.95 1.61 3.56

–2.02 0.63 1.66

–1.45 0.23 –0.04

–0.96 3.63 3.08

–3.22 4.51 3.67

1.17 4.31 0.63

04/12/2007 04/11/2007 04/10/2007

–1.11 –0.07 –1.69

–2.86 –0.50 –0.52

–0.29 –0.66 0.16

–0.91 –1.41 0.71

–0.30 0.52 4.75

1.34 –1.72 7.11

04/09/2007 04/05/2007 04/04/2007

5.85 4.28 0.74

4.57 1.38 –1.39

0.40 –0.34 0.04

4.57 –0.09 –0.95

2.38 4.91 –1.02

1.84 0.52 –3.28

04/03/2007 04/02/2007 03/30/2007

0.90 –6.71 0.98

0.34 –8.09 1.10

–5.15 –2.07 3.29

1.20 –5.51 0.24

0.56 –3.52 3.91

–1.32 –0.92 2.03

03/29/2007 03/28/2007 03/26/2007

–1.11 –0.46 –1.92

1.51 –2.47 –2.48

–0.69 –1.24 –0.68

0.13 –1.84 0.18

1.07 –0.06 –0.16

–0.36 –2.12 –2.36

03/23/2007 03/22/2007 03/21/2007

–2.51 6.38 6.71

1.04 4.95 0.31

1.12 1.30 –0.73

–0.19 4.00 2.41

1.94 1.42 0.54

1.27 1.22 –0.20

03/20/2007 03/19/2007 03/16/2007

2.36 1.06 –1.73

–0.01 1.30 –2.25

2.10 –0.23 0.64

0.81 5.36 –3.52

–2.43 3.75 –1.80

–0.34 1.39 –2.22

03/15/2007 03/14/2007 03/13/2007

–1.68 –2.80 –0.19

0.77 –1.57 0.82

1.40 –1.97 0.33

–1.98 –4.36 0.06

0.66 –3.06 2.29

–1.81 –1.42 4.15

03/12/2007 03/09/2007 03/08/2007

2.51 –2.71 8.52

1.23 –0.73 2.17

0.45 0.75 1.59

–1.50 –2.60 5.62

0.46 1.95 8.02

–1.24 –4.37 13.02

03/07/2007 03/06/2007 03/05/2007

–5.61 –2.09 –4.41

–1.66 1.33 –6.56

–3.92 3.32 –5.06

2.51 0.58 –4.01

–5.26 1.48 –8.85

–5.88 3.50 –5.49

03/02/2007 03/01/2007 02/28/2007

–3.54 1.59 –1.61

–0.79 0.11 –5.40

–1.23 –2.35 –1.43

–3.01 5.09 –4.54

–2.00 2.32 –3.35

3.62 –2.37 –7.97

02/27/2007 02/26/2007 02/23/2007

2.10 2.36 –1.04

1.53 1.27 –1.81

–0.37 2.99 –4.24

0.22 –1.49 –4.04

–0.63 5.95 2.03

2.35 0.42 –7.89

02/22/2007 02/21/2007

–4.11 –0.22

–2.38 0.74

–0.40 0.99

0.90 –1.24

0.10 –0.31

–0.41 0.08 (Contd.)

Case 3: Reliance Capital

83

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

02/20/2007

–0.68

02/19/2007 02/15/2007 02/14/2007

–2.13 2.27 –3.05

–2.20

–0.59

2.47 4.05 –3.77

–0.62 7.08 –1.55

–2.34

0.59

–3.36

–0.75 3.37 2.32

–3.01 4.36 1.25

1.96 2.29 –2.96

02/13/2007 02/12/2007 02/09/2007

–0.47 –1.18 –1.37

–2.34 –3.09 –2.26

–1.30 –6.10 –3.24

–3.07 –4.32 –2.75

1.72 –3.26 –2.61

–1.82 –0.58 –2.70

02/08/2007 02/07/2007 02/06/2007

–2.58 0.02 0.34

1.28 –0.14 –1.15

2.80 6.29 2.05

0.67 –0.70 –5.04

–1.32 0.69 1.56

–1.59 –1.48 –0.65

02/05/2007 02/02/2007 02/01/2007

–0.48 –2.71 2.06

1.97 0.57 0.29

1.07 0.79 –1.84

5.00 3.54 2.78

–1.63 –0.71 1.50

0.63 –0.01 0.17

01/31/2007 01/29/2007 01/25/2007

0.95 –3.17 3.88

–0.04 –0.80 1.35

–0.58 –2.12 4.08

1.21 4.20 0.51

3.35 0.20 3.05

–0.47 –1.06 0.19

01/24/2007 01/23/2007 01/22/2007

4.59 0.75 –0.83

1.37 –2.05 3.05

–4.37 –2.15 0.48

–1.39 –1.42 0.20

6.49 –4.23 –0.38

–0.86 –2.77 –0.54

01/19/2007 01/18/2007 01/17/2007

–0.61 –0.46 –0.19

–0.81 1.16 –0.31

–1.79 –1.97 1.06

2.34 –1.33 2.75

–0.34 –2.51 3.68

1.28 –0.10 –2.34

01/16/2007 01/15/2007 01/12/2007

–0.19 –0.60 6.35

0.52 –1.62 1.64

–2.79 4.26 3.86

0.12 –0.89 1.60

0.86 0.10 2.46

3.62 –0.54 2.63

01/11/2007 01/10/2007 01/09/2007

–0.29 –1.18 –3.70

2.86 –0.60 –1.25

–0.21 –1.81 3.51

4.83 –3.72 –2.84

1.60 –2.11 4.99

1.79 0.46 0.93

01/08/2007 01/05/2007 01/04/2007

–1.39 –1.31 –1.15

–4.09 –3.31 –0.71

1.04 0.18 1.32

–2.64 –3.79 –1.70

–1.99 1.15 –2.98

–2.53 –2.07 –2.30

01/03/2007 01/02/2007

2.23 0.94

0.55 4.52

0.53 5.44

0.44 –0.12

2.20 2.25

–0.12 1.25

Adani Exports, Jindal Saw, Reliance Industries, Jindal Steel & Power, GMDC Date

Daily Returns

Daily Returns

01/11/2008

–4.91

–0.55

Daily Returns 3.34

Daily Returns –1.20

Daily Returns –1.99

01/10/2008 01/09/2008

–3.73 –3.87

–2.74 –3.12

–0.16 –0.61

–3.87 –1.21

–0.94 –1.33 (Contd.)

84

Cases in Corporate Finance

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

01/08/2008 01/07/2008

–2.52 –1.33

–3.23 –0.68

Daily Returns 1.16 1.00

Daily Returns –1.13 –2.31

Daily Returns 1.26 0.21

01/04/2008 01/03/2008 01/02/2008

–0.37 0.65 4.96

–1.35 5.33 4.24

2.86 1.44 0.52

1.57 2.09 4.11

–0.55 –1.92 –2.56

01/01/2008 12/31/2007 12/28/2007

5.00 5.00 5.00

0.82 1.89 2.70

–1.18 –0.60 0.14

–0.64 1.19 5.38

–0.68 3.48 3.11

12/27/2007 12/26/2007 12/24/2007

5.00 5.00 5.00

0.01 1.60 6.93

–0.08 3.90 2.70

–1.71 3.56 2.51

0.07 0.69 4.98

12/20/2007 12/19/2007 12/18/2007

0.70 3.17 –4.04

0.87 3.15 –1.86

0.37 –0.88 –1.75

1.33 1.01 –6.11

–1.40 –0.17 0.50

12/17/2007 12/14/2007 12/13/2007

–0.92 –0.57 5.00

–10.06 –0.21 –0.07

–3.86 1.99 –1.88

–9.57 –0.15 –1.96

–3.09 –2.52 1.99

12/12/2007 12/11/2007 12/10/2007

4.68 4.98 –0.03

12.35 –2.11 4.57

0.28 1.99 –0.67

5.52 3.70 –1.91

–1.00 –0.60 –1.25

12/07/2007 12/06/2007 12/05/2007

–1.08 0.20 1.21

–0.58 –5.25 5.61

–1.14 –0.97 1.36

–0.13 –1.29 –0.93

–2.23 –3.41 0.11

12/04/2007 12/03/2007 11/30/2007

–0.70 –0.21 1.14

0.92 6.14 –1.49

–2.33 2.86 1.15

9.27 4.87 6.15

4.94 4.87 0.21

11/29/2007 11/28/2007 11/27/2007 11/26/2007

0.99 –4.60 –5.00 1.57

0.59 8.26 –3.28 8.80

1.15 –1.96 –1.42 2.54

–3.20 –1.03 –5.94 16.74

–2.55 4.48 –4.62 0.96

11/23/2007 11/22/2007 11/21/2007

4.41 –1.94 –3.54

0.46 –5.79 –7.00

3.03 0.25 –2.33

20.70 –0.22 –8.29

–5.00 –5.00 –5.00

11/20/2007 11/19/2007 11/16/2007

–1.57 4.93 –0.99

–4.46 –1.98 7.01

–2.30 –0.81 0.14

–1.04 4.94 –1.34

–3.03 5.00 –3.27

11/15/2007 11/14/2007 11/13/2007

–0.21 5.00 3.07

5.03 8.20 –0.99

–0.55 7.11 0.71

–4.79 0.58 3.86

–0.83 –2.03 –3.92

11/12/2007 11/09/2007 11/08/2007

–2.60 0.02 0.04

–3.39 2.59 –4.01

–2.15 –0.26 –0.72

2.67 –2.36 –7.64

1.83 5.00 4.16 (Contd.)

Case 3: Reliance Capital

85

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

11/07/2007

0.34

5.15

4.04

–4.22

–4.97

11/06/2007 11/05/2007 11/02/2007

–0.06 0.45 –3.97

–3.13 –4.63 –1.55

–0.31 –1.81 1.54

–5.17 0.94 4.59

4.49 5.00 5.00

11/01/2007 10/31/2007 10/30/2007

4.20 –2.33 –4.25

5.38 11.99 –4.82

–3.99 0.43 –2.02

1.86 25.64 6.47

–1.18 5.00 –2.00

10/29/2007 10/26/2007 10/25/2007

1.46 6.43 4.19

19.99 –0.13 0.50

5.03 2.44 0.71

5.99 5.72 5.92

5.00 5.00 4.75

10/24/2007 10/23/2007 10/22/2007

1.84 10.00 9.59

3.84 0.85 2.96

0.31 7.83 –2.29

2.27 12.81 –0.18

5.00 –3.20 –5.00

10/19/2007 10/18/2007 10/17/2007

–6.91 –4.89 –3.14

–3.86 –4.42 –2.65

–4.14 –4.25 1.59

–8.83 –4.64 –3.44

–5.00 –5.00 10.00

10/16/2007 10/15/2007 10/12/2007

–2.44 3.79 –4.77

4.73 0.44 –1.90

–0.59 3.79 –2.39

0.92 5.99 –1.45

10.00 10.00 10.00

10/11/2007 10/10/2007 10/09/2007

0.11 3.59 10.00

3.75 0.60 0.74

0.47 0.65 7.59

–0.95 10.61 0.15

3.08 20.00 10.09

10/08/2007 10/05/2007 10/04/2007

–7.74 9.26 –0.29

–1.33 –0.88 –3.33

–2.70 2.53 1.21

3.47 2.81 16.95

–2.08 1.03 0.88

10/03/2007 10/01/2007 09/28/2007

5.39 10.30 12.90

–4.39 –1.65 –1.99

4.55 –0.30 –1.03

3.62 0.17 1.64

8.60 4.87 –2.84

09/27/2007 09/26/2007 09/25/2007

0.20 –0.85 0.43

–0.22 0.61 2.98

–0.08 –3.24 1.82

–2.42 –4.45 –3.34

3.12 –2.53 –1.47

09/24/2007 09/21/2007 09/20/2007

3.23 1.37 1.31

–1.31 1.01 2.74

3.62 3.75 0.88

5.34 9.66 4.54

3.60 8.56 –1.47

09/19/2007 09/18/2007 09/17/2007

1.42 11.95 4.77

0.71 –0.47 0.52

5.56 1.48 –0.30

0.53 0.91 0.00

3.70 –0.83 6.59

09/14/2007 09/13/2007 09/12/2007

2.76 6.93 –2.10

2.45 –1.69 2.25

0.39 0.67 1.34

0.53 5.36 5.16

0.99 1.11 0.44

09/11/2007 09/10/2007

–0.40 2.06

–0.68 –0.10

–0.05 1.32

4.80 1.08

–0.92 1.60 (Contd.)

86

Cases in Corporate Finance

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

09/07/2007 09/06/2007

Daily Returns 1.50 0.64

Daily Returns 1.11 0.14

–1.10 1.32

–0.83 –1.16

Daily Returns –2.21 0.15

09/05/2007 09/04/2007 09/03/2007

–2.90 –5.21 11.56

–0.81 2.34 2.86

–0.71 0.82 –0.20

–1.03 0.50 1.87

–0.26 –1.20 2.41

08/31/2007 08/30/2007 08/29/2007

2.56 –0.48 –0.83

–0.19 0.76 1.74

2.73 0.93 0.52

2.99 1.22 2.26

–3.19 1.33 3.07

08/28/2007 08/27/2007 08/24/2007

0.13 –0.01 2.40

–1.43 0.09 –0.05

2.58 3.29 1.83

–0.06 2.64 0.13

–0.64 0.89 1.15

08/23/2007 08/22/2007 08/21/2007

–1.83 0.34 0.22

–4.15 –0.52 –3.83

–1.46 1.20 –2.48

–2.70 –0.87 –3.45

–3.15 0.75 –3.76

08/20/2007 08/17/2007 08/16/2007

1.37 –2.37 –3.42

1.68 –2.07 –2.87

2.22 0.78 –5.06

2.61 –2.23 –2.56

0.32 –0.99 –1.82

08/14/2007 08/13/2007 08/10/2007

1.23 –0.07 –1.53

0.78 3.02 –1.54

0.16 1.00 –1.70

2.35 4.92 –3.11

–0.88 3.27 1.01

08/09/2007 08/08/2007 08/07/2007

–2.35 2.13 1.74

–1.54 –1.21 –2.87

–1.79 3.87 1.33

–3.06 0.78 0.52

–5.07 0.03 3.36

08/06/2007 08/03/2007 08/02/2007

1.41 5.89 2.45

–2.39 2.74 0.20

–1.06 –0.02 0.20

–2.99 –1.72 –0.41

1.34 2.75 –0.44

08/01/2007 07/31/2007 07/30/2007 07/27/2007

–5.73 5.39 2.41 –5.58

–2.76 0.74 4.14 –4.30

–4.98 2.41 –1.00 –3.84

–2.84 4.58 3.05 –3.08

–5.63 –1.51 1.16 0.28

07/26/2007 07/25/2007 07/24/2007

0.09 0.11 2.18

0.23 –1.71 –1.06

1.98 –0.43 0.04

–0.40 –3.44 –0.01

2.64 0.40 –1.29

07/23/2007 07/20/2007 07/19/2007

–0.48 0.75 1.90

–0.38 1.72 2.28

1.27 –0.50 4.20

4.96 –1.11 5.07

2.36 2.02 –2.75

07/18/2007 07/17/2007 07/16/2007

0.32 –1.25 1.33

0.52 –2.04 1.37

–0.40 2.86 0.46

–0.91 0.19 0.99

1.32 –2.70 3.33

07/13/2007 07/12/2007 07/11/2007

5.56 4.83 1.10

1.14 0.73 –3.01

2.89 1.01 –0.03

1.23 3.83 1.25

9.19 1.33 0.47

07/10/2007

0.69

–1.92

–0.51

0.58

–2.02 (Contd.)

Case 3: Reliance Capital

87

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

07/09/2007 07/06/2007 07/05/2007

1.94 –0.93 –1.92

0.16 0.93 0.90

–0.03 0.21 –0.45

–0.98 0.81 –1.11

0.51 2.07 –1.05

07/04/2007 07/03/2007 07/02/2007

0.74 2.33 –1.28

0.60 –0.62 0.44

0.60 1.24 –0.93

2.07 1.49 1.09

–1.99 –1.90 4.94

06/29/2007 06/28/2007 06/27/2007

1.72 3.73 1.23

0.02 0.67 –0.58

0.48 –0.32 –0.34

2.56 –1.26 –0.38

–2.49 –0.28 2.47

06/26/2007 06/25/2007 06/22/2007

3.74 2.00 –0.49

1.09 3.69 –1.44

–0.15 0.12 –1.68

–0.97 –1.70 –0.29

7.48 3.86 4.48

06/21/2007 06/20/2007 06/19/2007

–0.43 2.32 0.74

–0.83 7.14 3.58

0.06 0.28 3.34

2.98 0.00 1.44

1.02 –1.26 0.02

06/18/2007 06/15/2007 06/14/2007

0.87 –0.28 1.35

2.29 0.37 2.65

–0.52 –0.96 1.36

–0.50 0.84 2.11

–0.96 1.67 1.82

06/13/2007 06/12/2007 06/11/2007

–0.79 –0.17 0.41

–1.30 –2.26 2.00

–1.53 1.88 0.48

0.07 –3.70 –1.25

0.19 –0.11 0.11

06/08/2007 06/07/2007 06/06/2007

–0.45 –0.25 –1.21

0.19 0.35 –0.13

–0.46 –1.15 –3.31

–2.06 –0.03 –1.39

–0.02 0.09 –1.19

06/05/2007 06/04/2007 06/01/2007

0.80 –0.65 1.32

–0.03 1.09 0.17

0.30 –0.60 –0.56

–3.30 12.00 3.22

–1.55 3.06 3.64

05/31/2007 05/30/2007 05/29/2007

8.88 1.88 –9.99

1.03 –1.52 1.79

0.41 –0.10 1.85

0.48 –1.62 0.52

1.21 –2.48 1.16

05/28/2007 05/25/2007 05/24/2007

–0.67 0.61 –2.86

–1.46 1.49 –0.33

–0.23 0.08 –1.73

1.16 1.83 1.08

0.26 –1.14 0.13

05/23/2007 05/22/2007 05/21/2007

1.00 1.97 –5.60

–0.69 –3.58 6.62

–1.10 0.78 3.66

–0.14 –1.29 –1.90

–1.61 –0.68 0.40

05/18/2007 05/17/2007 05/16/2007

7.37 1.33 0.68

–1.16 –2.60 1.30

0.86 3.09 2.29

0.16 2.92 1.66

0.00 –3.96 3.84

05/15/2007 05/14/2007 05/11/2007 05/10/2007

1.83 1.89 –0.54 –0.41

1.01 0.47 1.12 2.86

–1.42 1.93 0.56 –0.98

0.83 0.32 3.19 1.25

–3.43 1.68 9.88 0.00 (Contd.)

88

Cases in Corporate Finance

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

05/09/2007 05/08/2007 05/07/2007

0.66 –0.74 0.38

0.04 –1.83 –0.04

0.22 –0.73 1.45

0.13 0.61 –1.56

Daily Returns –1.36 –0.69 0.66

05/04/2007 05/03/2007 04/30/2007

–0.49 –0.18 1.30

1.50 0.79 –0.33

–2.50 4.04 1.42

–2.39 3.12 4.83

2.54 20.00 –0.36

04/27/2007 04/26/2007 04/25/2007

–3.06 0.35 1.60

0.07 –3.74 0.09

–3.67 –0.19 1.23

–0.40 0.76 0.24

–1.89 –0.16 –0.20

04/24/2007 04/23/2007 04/20/2007

0.34 –0.43 0.52

0.69 1.85 1.93

1.70 0.83 3.24

–1.31 5.43 4.66

0.96 0.98 4.52

04/19/2007 04/18/2007 04/17/2007

0.23 –0.32 –0.83

0.28 –0.76 3.10

0.43 0.70 1.10

–0.95 –0.51 –0.65

3.24 1.74 0.21

04/16/2007 04/13/2007 04/12/2007

0.97 1.42 0.09

3.13 1.10 0.28

3.50 1.66 0.05

–0.32 3.43 –4.01

0.96 –1.59 –0.15

04/11/2007 04/10/2007 04/09/2007

0.07 –0.02 2.95

2.89 1.68 1.48

0.37 –0.14 1.93

4.90 2.28 1.76

0.63 2.35 –1.12

04/05/2007 04/04/2007 04/03/2007

0.47 1.79 1.22

1.13 –0.13 –3.00

–0.41 1.64 2.11

3.87 1.57 0.66

0.21 5.32 0.85

04/02/2007 03/30/2007 03/29/2007

–2.57 1.25 2.90

–5.09 2.66 2.15

–4.01 0.90 0.55

–5.46 1.50 –0.98

–4.94 4.29 0.81

03/28/2007 03/26/2007 03/23/2007

–1.99 –0.10 1.30

0.02 –0.69 0.24

–1.21 –1.02 0.36

–0.85 2.78 0.66

–1.22 –2.84 –2.14

03/22/2007 03/21/2007 03/20/2007

2.86 1.75 –1.22

0.86 –0.36 2.57

2.55 1.44 0.54

3.53 3.14 –0.21

1.35 1.57 3.46

03/19/2007 03/16/2007 03/15/2007

1.65 –0.23 0.60

1.09 –0.73 –1.45

1.09 1.25 –0.10

2.74 –0.14 0.45

0.47 0.00 1.60

03/14/2007 03/13/2007 03/12/2007

–3.02 0.91 2.42

1.06 1.08 –0.13

–3.15 0.83 –0.19

–0.90 1.07 1.81

–2.03 –1.83 2.99

03/09/2007 03/08/2007 03/07/2007 03/06/2007

–0.52 3.73 –0.24 –3.59

–0.12 0.12 1.86 –0.27

–1.22 3.53 –0.77 3.19

–2.24 1.22 –4.69 –1.59

1.56 4.10 –2.91 –1.75 (Contd.)

Case 3: Reliance Capital

89

(Exhibit 7 Contd.) Date

Daily Returns

Daily Returns

Daily Returns

Daily Returns

Daily Returns

03/05/2007 03/02/2007 03/01/2007

–6.36 –1.12 –0.52

–3.75 –1.05 1.58

–4.41 –3.61 0.90

–5.37 –0.35 0.70

0.41 –0.41 0.82

02/28/2007 02/27/2007 02/26/2007 02/23/2007

–0.99 –0.68 0.28 –2.18

–2.75 –2.86 2.27 –2.31

–3.58 –0.16 –0.40 –0.07

–2.40 0.16 –0.24 0.35

–3.84 2.30 2.04 4.18

02/22/2007 02/21/2007 02/20/2007

0.55 –0.69 –1.64

4.59 –0.68 –0.31

0.54 –0.59 –0.26

–2.39 0.73 –0.56

0.13 1.18 –2.36

02/19/2007 02/15/2007 02/14/2007

–2.05 –0.87 6.23

–0.81 5.23 1.39

0.81 2.16 0.77

2.94 1.85 –3.22

0.76 2.91 –0.92

02/13/2007 02/12/2007 02/09/2007

2.45 –6.98 –4.95

1.34 –3.08 –0.37

0.79 –2.33 –0.51

2.41 –3.66 –3.40

1.58 –1.61 –0.40

02/08/2007 02/07/2007 02/06/2007

–1.66 –3.88 4.93

–0.17 0.78 –0.68

0.07 0.39 0.08

–2.27 1.07 –1.16

–0.16 –1.95 –0.50

02/05/2007 02/02/2007 02/01/2007

–0.04 0.74 3.30

0.69 –0.02 1.22

1.14 –0.24 0.80

2.23 6.08 2.29

0.66 –1.49 1.21

01/31/2007 01/29/2007 01/25/2007

4.02 –0.29 0.63

–0.29 –0.21 6.17

–1.24 0.89 0.07

0.00 1.06 6.26

9.67 2.57 0.91

01/24/2007 01/23/2007 01/22/2007

0.20 –0.88 –0.27

2.09 –0.47 –1.85

0.58 –0.92 –0.49

2.28 –0.38 –1.22

–0.32 –1.13 –1.27

01/19/2007 01/18/2007 01/17/2007

–1.85 –0.96 2.78

–2.09 4.65 –1.28

0.97 1.27 0.21

–1.54 –0.42 1.04

–0.52 –0.96 –0.59

01/16/2007 01/15/2007 01/12/2007

–1.42 0.36 1.19

–1.42 9.35 4.86

–1.29 1.83 3.47

–1.59 2.19 2.02

–1.71 –0.42 –0.04

01/11/2007 01/10/2007 01/09/2007

1.16 –1.96 –3.46

0.69 0.40 0.09

1.72 –0.56 0.26

–0.18 –2.24 0.07

3.16 –2.22 –0.52

01/08/2007 01/05/2007 01/04/2007

–1.04 3.48 –1.33

–1.30 –1.29 –0.85

–0.89 0.64 –0.35

–1.88 0.67 –1.36

5.22 0.93 0.53

01/03/2007 01/02/2007

–0.65 1.58

0.84 0.73

0.25 0.89

–1.68 –0.02

0.27 2.61

90

Cases in Corporate Finance

Exhibit 8 Date

NAV of Reliance Growth Fund Date

NAV

1/11/2008 1/10/2008 1/9/2008 1/8/2008

462.44 463.56 476.99 479.94

NAV

11/8/2007 11/7/2007 11/6/2007 11/5/2007

398.6 403.15 403.66 405.81

1/7/2008 1/4/2008 1/3/2008

489.92 491 487.7

11/2/2007 11/1/2007 10/31/2007

406.43 401.88 404.79

1/2/2008 1/1/2008 12/31/2007

484.58 476.85 471.73

10/30/2007 10/29/2007 10/26/2007

396.69 399.4 390.76

12/28/2007 12/27/2007 12/26/2007

464.41 457.13 456.26

10/25/2007 10/24/2007 10/23/2007

378.28 374.47 369.43

12/24/2007 12/20/2007 12/19/2007

447.91 438.02 435.8

10/22/2007 10/19/2007 10/18/2007

352.39 351.02 362.24

12/18/2007 12/17/2007 12/14/2007

435.82 439.1 458.07

10/17/2007 10/16/2007 10/15/2007

374.4 382.2 379

12/13/2007 12/12/2007 12/11/2007

456.23 454.34 446.58

10/12/2007 10/11/2007 10/10/2007

367.99 370.94 367.26

12/10/2007 12/7/2007 12/6/2007

442.54 441.56 441.31

10/9/2007 10/8/2007 10/5/2007

359.78 347.98 358.49

12/5/2007 12/4/2007 12/3/2007

444.28 435.42 428.76

10/4/2007 10/3/2007 10/1/2007

360.39 357.81 354.09

11/30/2007 11/29/2007 11/28/2007

419.16 410.63 412.37

9/28/2007 9/27/2007 9/26/2007

347.84 343.15 341.86

11/27/2007 11/26/2007 11/23/2007

412.7 415.83 405.98

9/25/2007 9/24/2007 9/21/2007

341.03 340.86 337.51

11/22/2007 11/21/2007 11/20/2007

398.79 403.33 420.83

9/20/2007 9/19/2007 9/18/2007

334.42 332.71 326.9

11/19/2007 11/16/2007 11/15/2007

424.3 415.9 415.08

9/17/2007 9/14/2007 9/13/2007

322.96 321.76 323.67

11/14/2007 11/13/2007 11/12/2007

412.4 402.97 396.23

9/12/2007 9/11/2007 9/10/2007

320.93 320.15 321.28 (Contd.)

Case 3: Reliance Capital

91

(Exhibit 8 Contd.) Date

NAV

Date

NAV

9/7/2007

320.03

7/9/2007

317.5

9/6/2007 9/5/2007 9/4/2007

319.45 316.87 317.89

7/6/2007 7/5/2007 7/4/2007

314.03 311.86 313.77

9/3/2007 8/31/2007 8/30/2007

316.29 311.78 305.41

7/3/2007 7/2/2007 6/29/2007

312.52 309.27 307.46

8/29/2007 8/28/2007 8/27/2007

305 302.89 301.75

6/28/2007 6/27/2007 6/26/2007

304.16 303.66 304.07

8/24/2007 8/23/2007 8/22/2007

293.09 288.14 291.72

6/25/2007 6/22/2007 6/21/2007

303.39 303.01 301.6

8/21/2007 8/20/2007 8/17/2007 8/16/2007

290.64 301.17 296.73 301.14

6/20/2007 6/19/2007 6/18/2007 6/15/2007

301.01 296.94 293.31 293.18

8/14/2007 8/13/2007 8/10/2007

311.6 312.03 308.98

6/14/2007 6/13/2007 6/12/2007

291.79 287.71 288.62

8/9/2007 8/8/2007 8/7/2007

313.05 318.48 314.71

6/11/2007 6/8/2007 6/7/2007

290.43 290.83 292.5

8/6/2007 8/3/2007 8/2/2007

313.44 316.56 312.6

6/6/2007 6/5/2007 6/4/2007

293.85 298.36 297.06

8/1/2007 7/31/2007 7/30/2007

311.59 324.13 319.61

6/1/2007 5/31/2007 5/30/2007

296.98 294.39 292.04

7/27/2007 7/26/2007 7/25/2007

318.41 327.23 325.3

5/29/2007 5/28/2007 5/25/2007

295.67 293.85 290.44

7/24/2007 7/23/2007 7/20/2007

328.68 329.38 328.05

5/24/2007 5/23/2007 5/22/2007

288.64 288.96 290.45

7/19/2007 7/18/2007 7/17/2007

328.33 324.52 324.35

5/21/2007 5/18/2007 5/17/2007

290.93 288.75 287.45

7/16/2007 7/13/2007 7/12/2007

326.61 324.04 322.27

5/16/2007 5/15/2007 5/14/2007

285.72 282.55 281.13

7/11/2007 7/10/2007

318.25 317.25

5/11/2007 5/10/2007

277.7 275.34 (Contd.)

92

Cases in Corporate Finance

(Exhibit 8 Contd.) Date

NAV

Date

NAV

5/9/2007 5/8/2007

274.86 274.16

3/6/2007 3/5/2007

250.26 249.28

5/7/2007 5/4/2007 5/3/2007

277.03 278.36 279.42

3/2/2007 3/1/2007 2/28/2007

259.58 262.09 260.73

4/30/2007 4/27/2007 4/26/2007

275.5 273.68 276.26

2/27/2007 2/26/2007 2/23/2007

270.28 270.38 268.6

4/25/2007 4/24/2007 4/23/2007

276.93 275.86 274.56

2/22/2007 2/21/2007 2/20/2007

273.21 275.42 275.01

4/20/2007 4/19/2007 4/18/2007

274.24 270.95 270.51

2/19/2007 2/15/2007 2/14/2007

276.86 276.96 270.11

4/17/2007 4/16/2007 4/13/2007

269.46 270.7 265.9

2/13/2007 2/12/2007 2/9/2007

270.35 270.74 278.73

4/12/2007 4/11/2007 4/10/2007

262 262.8 262.28

2/8/2007 2/7/2007 2/6/2007

282.86 283.19 282.3

4/9/2007 4/5/2007 4/4/2007

260.28 256.03 253.67

2/5/2007 2/2/2007 2/1/2007

282.6 281.08 279.4

4/3/2007 4/2/2007 3/31/2007

252.1 251.78 259.54

1/31/2007 1/29/2007 1/25/2007

276.61 277.45 278.54

3/30/2007 3/29/2007 3/28/2007

259.54 256.15 254.89

1/24/2007 1/23/2007 1/22/2007

276.23 274.57 278.48

3/26/2007 3/23/2007 3/22/2007

258.44 259.81 258.76

1/19/2007 1/18/2007 1/17/2007

278.69 279.61 278.92

3/21/2007 3/20/2007 3/19/2007

254.83 253.84 251.32

1/16/2007 1/15/2007 1/12/2007

276.25 276.49 274.18

3/16/2007 3/15/2007 3/14/2007

248.47 250.46 249.99

1/11/2007 1/10/2007 1/9/2007

270.33 266.75 269.7

3/13/2007 3/12/2007 3/9/2007

255.74 253.07 251.96

1/8/2007 1/5/2007 1/4/2007

270.68 272.27 272.41

3/8/2007 3/7/2007

253.48 245.8

1/3/2007 1/2/2007

272.22 270.05 (Contd.)

Case 3: Reliance Capital

93

(Exhibit 8 Contd.) Date

NAV

Date

NAV

12/29/2006 12/28/2006

266.74 263.44

10/30/2006 10/27/2006

249.82 248.22

12/27/2006 12/26/2006 12/22/2006 12/21/2006

262.2 260.51 259.03 256.58

10/26/2006 10/23/2006 10/20/2006 10/19/2006

244.92 243.41 242.84 241.21

12/20/2006 12/19/2006 12/18/2006

254.5 254.07 257.72

10/18/2006 10/17/2006 10/16/2006

242.31 241.53 241.39

12/15/2006 12/14/2006 12/13/2006

257.1 254.34 248.44

10/13/2006 10/12/2006 10/11/2006

240.51 239.99 237.78

12/12/2006 12/11/2006 12/8/2006

244.09 253.48 259.24

10/10/2006 10/9/2006 10/6/2006

240.8 241.38 239.67

12/7/2006 12/6/2006 12/5/2006

261.77 261.75 263.15

10/5/2006 10/4/2006 10/3/2006

237.19 233.13 234.47

12/4/2006 12/1/2006 11/30/2006

262.81 261.78 257.79

9/29/2006 9/28/2006 9/27/2006

234.8 231.76 231.37

11/29/2006 11/28/2006 11/27/2006

258.11 255.6 258.08

9/26/2006 9/25/2006 9/22/2006

229.97 228.64 228.49

11/24/2006 11/23/2006 11/22/2006

257.03 255.88 255.86

9/21/2006 9/20/2006 9/19/2006

227.6 225.83 224.66

11/21/2006 11/20/2006 11/17/2006

254.43 250.36 251.75

9/18/2006 9/15/2006 9/14/2006

226.64 224.46 224.13

11/16/2006 11/15/2006 11/14/2006

256.51 256.92 255.57

9/13/2006 9/12/2006 9/11/2006

223.49 219.79 217.79

11/13/2006 11/10/2006 11/9/2006

257.88 255.64 252.95

9/8/2006 9/7/2006 9/6/2006

224.98 223.69 223.06

11/8/2006 11/7/2006 11/6/2006

252.36 254.5 254.05

9/5/2006 9/4/2006 9/1/2006

223.06 221.39 218.12

11/3/2006 11/2/2006 11/1/2006

251.16 251.24 250.23

8/31/2006 8/30/2006 8/29/2006

215.98 218.03 218.42

10/31/2006

248.35

8/28/2006

218.99 (Contd.)

94

Cases in Corporate Finance

(Exhibit 8 Contd.) Date

NAV

Date

NAV

8/25/2006 8/24/2006

218.66 217.17

6/30/2006 6/29/2006

199.52 191.36

8/23/2006 8/22/2006 8/21/2006

215.91 218.7 217.42

6/28/2006 6/27/2006 6/26/2006

189.99 192.25 192.99

8/18/2006 8/17/2006 8/16/2006

215.11 214.39 215.34

6/25/2006 6/24/2006 6/23/2006

199.9 199.91 199.92

8/14/2006 8/11/2006 8/10/2006

212.2 207.81 204.79

6/22/2006 6/21/2006 6/20/2006

199.17 195.73 190.37

8/9/2006 8/8/2006 8/7/2006

202.7 199.15 196.43

6/19/2006 6/18/2006 6/17/2006

190.42 186.34 186.35

8/4/2006 8/3/2006 8/2/2006

196.54 197.58 196

6/16/2006 6/15/2006 6/14/2006

186.36 180.54 170.8

8/1/2006 7/31/2006 7/28/2006

193.2 193.62 191.92

6/13/2006 6/12/2006 6/11/2006

175.54 186.28 188.24

7/27/2006 7/26/2006 7/25/2006

189.84 188.43 186.45

6/10/2006 6/9/2006 6/8/2006

188.25 188.26 176.47

7/24/2006 7/21/2006 7/20/2006

183.75 184.18 188.35

6/7/2006 6/6/2006 6/5/2006

192.63 204.56 211.68

7/19/2006 7/18/2006 7/17/2006

185.38 191.33 194.42

6/4/2006 6/3/2006 6/2/2006

215.3 215.3 215.31

7/14/2006 7/13/2006 7/12/2006

199.52 201.49 202.34

6/1/2006 5/31/2006 5/30/2006

215.11 220.55 228.16

7/11/2006 7/10/2006 7/9/2006

199.35 198.76 197.61

5/29/2006 5/28/2006 5/27/2006

229.13 227.52 227.53

7/8/2006 7/7/2006 7/6/2006

197.62 197.62 200.45

5/26/2006 5/25/2006 5/24/2006

227.54 222.9 223.56

7/5/2006 7/4/2006 7/3/2006

201.32 199.6 200.08

5/23/2006 5/22/2006 5/21/2006

224.88 216.17 229.23

7/2/2006 7/1/2006

199.5 199.51

5/20/2006 5/19/2006

229.24 229.25 (Contd.)

Case 3: Reliance Capital

95

(Exhibit 8 Contd.) Date

NAV

Date

NAV

5/18/2006 5/17/2006 5/16/2006

237.27 254.42 244.96

3/31/2006 3/30/2006 3/29/2006

229.76 227.45 224.98

5/15/2006 5/14/2006 5/13/2006

246.44 254.03 254.04

3/28/2006 3/27/2006 3/26/2006

223.12 224.14 221.76

5/12/2006 5/11/2006 5/10/2006

254.05 256.64 259.84

3/25/2006 3/24/2006 3/23/2006

221.77 221.78 220.6

5/9/2006 5/8/2006 5/7/2006

258.35 257.56 255.58

3/22/2006 3/21/2006 3/20/2006

220.36 221.69 221.98

5/6/2006 5/5/2006 5/4/2006

255.59 255.6 255.08

3/19/2006 3/18/2006 3/17/2006

220.23 220.24 220.25

5/3/2006 5/2/2006 4/28/2006 4/27/2006

254.56 254.42 247.31 247.14

3/16/2006 3/15/2006 3/14/2006 3/13/2006

220.89 219.52 219.53 220.61

4/26/2006 4/25/2006 4/24/2006

244.79 241.16 245.42

3/12/2006 3/11/2006 3/10/2006

219.98 219.99 220

4/23/2006 4/22/2006 4/21/2006

243.74 243.75 243.76

3/9/2006 3/8/2006 3/7/2006

217.25 215.68 218.39

4/20/2006 4/19/2006 4/18/2006

243.61 239.77 238.76

3/6/2006 3/5/2006 3/4/2006

216.46 213.59 213.6

4/17/2006 4/16/2006 4/15/2006

235.06 231.34 231.35

3/3/2006 3/2/2006 3/1/2006

213.6 211.98 210.22

4/14/2006 4/13/2006 4/12/2006

231.36 231.37 234.79

2/28/2006 2/27/2006 2/26/2006

205.73 205.64 204.88

4/11/2006 4/10/2006 4/9/2006

240.13 240.14 237.03

2/25/2006 2/24/2006 2/23/2006

204.89 204.9 204.46

4/8/2006 4/7/2006 4/6/2006

237.04 237.05 239.79

2/22/2006 2/21/2006 2/20/2006

205 205.1 203.38

4/5/2006 4/4/2006 4/3/2006

239.8 235.68 234.45

2/19/2006 2/18/2006 2/17/2006

204.45 204.45 204.46 (Contd.)

96

Cases in Corporate Finance

(Exhibit 8 Contd.) Date

NAV

Date

NAV

2/16/2006

207.29

1/26/2006

201.71

2/15/2006 2/14/2006 2/13/2006

206.76 207.76 208.13

1/25/2006 1/24/2006 1/23/2006

201.72 202.17 201.06

2/12/2006 2/11/2006 2/10/2006

206.26 206.26 206.27

1/22/2006 1/21/2006 1/20/2006

201.77 201.77 201.78

2/9/2006 2/8/2006 2/7/2006

204 204 203.35

1/19/2006 1/18/2006 1/17/2006

200.07 195.28 196.6

2/6/2006 2/3/2006 2/2/2006

202.52 200.86 201.36

1/16/2006 1/15/2006 1/14/2006

197.71 199.29 199.3

2/1/2006 1/31/2006 1/30/2006 1/27/2006

201.18 202.92 202.58 204.95

1/13/2006 1/12/2006 1/11/2006 1/10/2006

199.3 197.55 196.95 196.96

Exhibit 9 Date

Daily Returns of BSE 100 Index % Daily Returns

Date

Daily Returns

Date

Daily Returns

01/11/2008 01/10/2008

1.70 –5.60

12/12/2007 12/11/2007

0.44 0.99

11/14/2007 11/13/2007

1.63 3.99

01/09/2008 01/08/2008 01/07/2008

–0.22 –1.92 –0.88

12/10/2007 12/07/2007 12/06/2007

–2.11 0.92 –1.08

11/12/2007 11/09/2007 11/08/2007

–2.41 –1.57 –1.88

01/04/2008 01/03/2008 01/02/2008

0.21 –0.09 0.42

12/05/2007 12/04/2007 12/03/2007

8.74 –0.60 2.39

11/07/2007 11/06/2007 11/05/2007

–1.66 –3.00 –3.70

01/01/2008 12/31/2007 12/28/2007

0.61 –0.56 5.35

11/30/2007 11/29/2007 11/28/2007

1.99 –1.82 –0.40

11/02/2007 11/01/2007 10/31/2007

4.20 –3.21 2.78

12/27/2007 12/26/2007 12/24/2007

–1.52 2.07 2.56

11/27/2007 11/26/2007 11/23/2007

–0.23 2.20 3.61

10/30/2007 10/29/2007 10/26/2007

–2.71 4.62 12.13

12/20/2007 12/19/2007 12/18/2007

1.09 –0.19 –0.80

11/22/2007 11/21/2007 11/20/2007

–2.62 –8.18 9.17

10/25/2007 10/24/2007 10/23/2007

0.26 0.68 6.88

12/17/2007 12/14/2007 12/13/2007

–6.30 –1.00 5.05

11/19/2007 11/16/2007 11/15/2007

–0.06 –1.42 0.40

10/22/2007 10/19/2007 10/18/2007

3.64 –4.59 –4.88 (Contd.)

Case 3: Reliance Capital

97

(Exhibit 9 Contd.) Date

Daily Returns

Date

Daily Returns

Date

Daily Returns

10/17/2007 10/16/2007 10/15/2007

–5.35 5.46 3.91

08/17/2007 08/16/2007 08/14/2007

–3.95 –4.85 –1.87

06/19/2007 06/18/2007 05/10/2007

2.50 6.79 –0.54

10/12/2007 10/11/2007 10/10/2007 10/09/2007

–2.53 3.97 –1.12 5.34

08/13/2007 08/10/2007 08/09/2007 08/08/2007

0.41 –1.11 0.89 1.97

05/09/2007 05/08/2007 05/07/2007 05/04/2007

2.62 –2.64 –0.39 1.75

10/08/2007 10/05/2007 10/04/2007

–3.83 1.87 0.45

08/07/2007 08/06/2007 08/03/2007

–2.19 –2.76 2.23

05/03/2007 04/30/2007 04/27/2007

2.05 2.33 –1.32

10/03/2007 10/01/2007 09/28/2007

0.25 10.12 1.31

08/02/2007 08/01/2007 07/31/2007

–0.43 –4.51 –1.96

04/26/2007 04/25/2007 04/24/2007

5.65 –0.90 0.69

09/27/2007 09/26/2007 09/25/2007

–0.56 –1.29 1.38

07/30/2007 07/27/2007 07/26/2007

0.52 –3.27 0.87

04/23/2007 04/20/2007 04/19/2007

–1.25 1.20 –0.83

09/24/2007 09/21/2007 09/20/2007

–1.17 –1.63 2.05

07/25/2007 07/24/2007 07/23/2007

0.11 –1.10 0.34

04/18/2007 04/17/2007 04/16/2007

1.42 –1.90 1.23

09/19/2007 09/18/2007 09/17/2007

2.91 1.38 –0.97

07/20/2007 07/19/2007 07/18/2007

0.81 0.62 3.49

04/13/2007 04/12/2007 04/11/2007

2.29 –0.40 –0.99

09/14/2007 09/13/2007 09/12/2007

–2.65 0.57 0.13

07/17/2007 07/16/2007 07/13/2007

–0.39 –0.01 –2.84

04/10/2007 04/09/2007 04/05/2007

1.44 5.83 0.94

09/11/2007 09/10/2007 09/07/2007

–1.82 1.04 4.54

07/12/2007 07/11/2007 07/10/2007

3.40 –0.15 –0.12

04/04/2007 04/03/2007 04/02/2007

3.90 0.30 –2.06

09/06/2007 09/05/2007 09/04/2007

–0.57 –1.22 –0.55

07/09/2007 07/06/2007 07/05/2007

9.79 –0.05 –1.44

03/30/2007 03/29/2007 03/28/2007

2.36 2.00 –2.29

09/03/2007 08/31/2007 08/30/2007

1.01 2.64 –0.67

07/04/2007 07/03/2007 07/02/2007

–0.12 –0.54 6.85

03/26/2007 03/23/2007 03/22/2007

–0.60 1.09 1.73

08/29/2007 08/28/2007 08/27/2007

1.74 1.19 5.44

06/29/2007 06/28/2007 06/27/2007

–0.63 –2.20 –0.32

03/21/2007 03/20/2007 03/19/2007

1.06 0.16 2.23

08/24/2007 08/23/2007 08/22/2007

4.80 –1.78 0.35

06/26/2007 06/25/2007 06/22/2007

0.15 –0.91 –0.23

03/16/2007 03/15/2007 03/14/2007

–0.73 1.23 –3.16

08/21/2007 08/20/2007

–8.35 –1.21

06/21/2007 06/20/2007

–3.35 7.18

03/13/2007 03/12/2007

3.57 0.17 (Contd.)

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(Exhibit 9 Contd.) Date

Daily Returns

Date

Daily Returns

Date

Daily Returns

03/09/2007 03/08/2007

–2.71 9.52

02/15/2007 02/14/2007

3.27 1.36

01/23/2007 01/22/2007

–1.05 –0.27

03/07/2007 03/06/2007 03/05/2007

–4.12 4.38 –8.54

02/13/2007 02/12/2007 02/09/2007

0.36 –2.80 –1.82

01/19/2007 01/17/2007 01/16/2007

–0.23 6.20 –0.17

03/02/2007 03/01/2007 02/28/2007

–3.28 3.12 –6.57

02/08/2007 02/07/2007 02/06/2007

–0.65 0.35 0.11

01/15/2007 01/12/2007 01/11/2007

–0.10 1.41 0.44

02/27/2007 02/26/2007 02/23/2007

–2.96 –0.42 –0.34

02/05/2007 02/02/2007 02/01/2007

2.75 0.29 3.47

01/10/2007 01/09/2007 01/08/2007

–1.30 –2.44 –1.39

02/22/2007 02/21/2007 02/20/2007

–2.90 –2.06 –1.32

01/31/2007 01/29/2007 01/25/2007

5.04 –1.50 0.52

01/05/2007 01/04/2007 01/03/2007

–0.67 –0.26 1.68

02/19/2007

–0.31

01/24/2007

0.52

01/02/2007

0.39

Exhibit 10

Capital Market Data

1 year T Bill Rate = 7.77% 10 year T Bond Rate = 7.9%

30 year T Bond rate = 8.24% Market Risk Premium = 9%

CASE

4

Cost of Capital for Utilities in India DESCRIPTION The case presents the cost of capital estimation procedure for utilities in India.

LEARNING OBJECTIVE To introduce issues in cost of capital estimation.

SUBJECTS COVERED Financial Management, Utilities, Cost of Capital.

This case was prepared by Prof Vishwanath S. R. of Institute of Management Technology, Nagpur, India for the sole purpose of aiding classroom discussion. Cases are not intended to serve as endorsements, or sources of data, or illustrations of effective or ineffective management.

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In the fall of 2007, the CERC (Central Electricity Regulatory Commission) was reviewing the discount rate for bid evaluation, which had risen from 6.19% in 2005 (the prevailing 10 year treasury rate) to 10.6% in 2006 and further on to 11.10% in April 2007. As the apex regulatory body for Electricity Regulation, it performed the role of regulating tariffs of electricity generating companies. In the last eight and half years of tariff regulation by the Commission, staring from May 1999, many changes and developments had taken place in the power and financial sectors in India. The Commission, while framing regulations for the previous periods, had recognised that Return on Capital Employed (ROCE) approach is preferable but because of lack of benchmarking for DebtEquity mix, fluid situation in regard to interest rate and debt market in India, had decided to adopt Return on Equity (ROE) approach. With the listing of major power utilities on stock exchanges, permission for 100% FDI in power sector, development of debt market in India, stabilising trends of interest rate and accessibility of Indian companies to foreign market for debt and equity, the ground situation had changed to a great extent. Hence, the CERC felt the need for a fresh look at the approach for rate of return, that is, whether ROE approach or the ROCE approach was better. The Commission had specified a post-tax ROE rate of 16% for the tariff period 2001–04 and 14% for the tariff period 2004–09. In early 2008 it felt the need to review rate of return on equity considering the prevailing equity market expectation, risk perception (Beta) of power sector, etc. in case ROE approach is to be adopted. Another factor that the commission wanted to review is whether the Commission should adopt a fixed rate of return (as has been followed in the past), or to link the rate of return to market rate considering the risk perception. If rate of return is to be linked to market rate, the criteria to be adopted for arriving at the rate of return.

ENERGY REGULATION INDIA CERC was initially constituted under the Electricity Regulatory Commissions Act, 1998 on the 24th July 1998. CERC is a statutory body functioning under section 76 of the Electricity Act 2003. As entrusted by the Electricity Act 2003, the Commission has the responsibility to discharge the following functions: · To regulate the tariff of generating companies owned or controlled by the Central Government; · To regulate the tariff of generating companies other than those owned or controlled by the Central Government specified in clause (a), if such generating companies enter into or otherwise have a composite scheme for generation and sale of electricity in more than one State; · To regulate the inter-State transmission of electricity; · To determine tariff for inter-State transmission of electricity; · To issue licenses to persons, to function as transmission licensee and electricity trader with respect to their inter-State operations; · To specify and enforce the standards with respect to quality, continuity and reliability of service by licensees; · To fix the trading margin in the inter-State trading of electricity if considered necessary.

Case 4: Cost of Capital for Utilities in India 101

The mission of the Commission is to promote competition, efficiency and economy in bulk power markets, improve the quality of supply, promote investments and advise government on the removal of institutional barriers to bridge the demand—supply gap and thus foster the interests of consumers. In pursuit of these objectives, the Commission aims to improve the operations and management of the regional transmission systems through Indian Electricity Grid Code (IEGC), Availability Based Tariff (ABT), etc. Cost of capital being an important component of the overall tariff, the CERC’s decision in respect of the cost of capital would have significant bearing on the tariffs. One of the functions of CERC (as outlined above) is to aid and advise the central government in the formulation of tariff policy, which shall be fair to the consumers and facilitate mobilisation of adequate resources for the power sector. Thus, while determining the capital-related costs, CERC’s primary endeavour has been to balance its twin objectives of providing a stream of income to investors sufficient enough to attract investment into the industry while ensuring fair deal to the consumers. With the above objectives in mind, Crisil Advisory Services, a subsidiary of Credit Rating Information Services of India Ltd (an affiliate of S&P, USA) was mandated to carry out a study on the optimum cost of capital in 2000, which would be used for tariff determination for central sector power utilities.

The Indian Power Sector The power sector has registered significant progress since the process of planned development of the economy began in 1950. Hydropower and coal-based thermal power have been the main sources of generating electricity. Nuclear power development is at a slower pace, which was introduced, in the late sixties. The concept of operating power systems on a regional basis crossing the political boundaries of states was introduced in the early sixties. Despite the growth installed capacity, the power supply industry has been under constant pressure to bridge the gap between supply and demand. The Power Sector used to get 18–20% of the total Public Sector outlay in initial plan periods. Remarkable growth and progress have led to extensive use of electricity in all the sectors of economy in the successive five years plans. Over the years (since 1950) the installed capacity of Power Plants (Utilities) has increased to 89090 MW (31.3.1998) from a meagre 1713 MW in 1950, registering a 52 fold increase in 48 years. Similarly, the electricity generation increased from about 5.1 billion units to 420 Billion units—an 82 fold increase. The per capita consumption of electricity in the country also increased from 15 kWh in 1950 to about 338 kWh in 1997–98, which is about 23 times. In the field of Rural Electrification, India has made a tremendous progress. About 85% of the villages have been electrified except far-flung areas in North Eastern states, where it is difficult to extend the grid supply.

Structure of the Power Industry In December 1950, about 63% of the installed capacity in the Utilities was in the private sector and about 37% was in the public sector. The Industrial Policy Resolution of 1956 envisaged the generation, transmission and distribution of power almost exclusively in the public sector. As a result

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of this Resolution and facilitated by the Electricity (Supply) Act, 1948, the electricity industry developed rapidly in the State Sector. In the Constitution of India, “Electricity” is a subject that falls within the concurrent jurisdiction of the Centre and the States. The Electricity (Supply) Act, 1948, provides an elaborate institutional frame work and financing norms of the performance of the electricity industry in the country. The Act envisaged creation of State Electricity Boards (SEBs) for planning and implementing the power development programmes in their respective States. The Act also provided for creation of central generation companies for setting up and operating generating facilities in the Central Sector. The Central Electricity Authority constituted under the Act is responsible for power planning at the national level. In addition, the Electricity (Supply) Act also allowed from the beginning the private licensees to distribute and/or generate electricity in the specified areas designated by the concerned State Government/SEB. During the post-independence period, the various States played a predominant role in the power development. Most of the States have established State Electricity Boards. In some of these States, separate corporations have also been established to install and operate generation facilities. In the rest of the smaller States and UTs, the power systems are managed and operated by the respective electricity departments. In a few States, private licencees are also operating in certain urban areas. From the Fifth Plan onwards i.e. 1974–79, the Government of India got involved in a big way in the generation and bulk transmission of power to supplement the efforts at the State level and took upon itself the responsibility of setting up large power projects to develop the coal and hydroelectric resources in the country as a supplementary effort in meeting the country’s power requirements. The National thermal Power Corporation (NTPC) and National Hydro-electric Power Corporation (NHPC) were set up for these purposes in 1975. North-Eastern Electric Power Corporation (NEEPCO) was set up in 1976 to implement the regional power projects in the North-East. Subsequently, two more power generation corporations were set up in 1988 viz. Tehri Hydro Development Corporation (THDC) and Nathpa Jhakri Power Corporation (NJPC). To construct, operate and maintain the inter-State and interregional transmission systems, the National Power Transmission Corporation (NPTC) was set up in 1989. The corporation was renamed as POWER GRID in 1992. The Government of India announced the Policy of Liberalisation in 1991 and consequent amendments in Electricity (Supply) Act have opened new vistas to involve private efforts and investments in electricity industry. Considerable emphasis has been placed on attracting private investment and the major policy changes have been announced by the Government in this regard: · The Electricity (Supply) Act, 1948 was amended in 1991 to provide for creation of private generating companies for setting up power generating facilities and selling the power in bulk to the grid or other persons. · Financial Environment for private sector units modified to allow liberal capital structuring and an attractive return on investment. Up to hundred percent (100%) foreign equity participation can be permitted for projects set up by foreign private investors in the Indian Electricity Sector.

Case 4: Cost of Capital for Utilities in India 103

· Administrative and Legal environment modified to simplify the procedures for clearances of the projects. · Policy guidelines for private sector participation in the renovation and modernisation of power plants issued in 1995. · In 1995, the policy for Mega power projects of capacity 1000 MW or more and supplying power to more than one state introduced. The Mega projects to be set up in the regions having coal and hydel potential or in the coastal regions based on imported fuel. The Mega policy has since been refined and Power Trading Corporation (PTC) incorporated recently to promote and monitor the Mega Power Projects. PTC would purchase power from the Mega Private Projects and sell it to the identified SEBs. · In 1995, the Government of India came out with liquid fuel policy permitting liquid fuel based power plants to achieve the quick capacity addition so as to avert a severe power crisis. Liquid fuel linkages (Naphtha) were approved for about 12000 MW Power plant capacity. The nontraditional fuels have also been permitted for power generation. · GOI has promulgated Electricity Regulatory Commission Act, 1998 for setting up of Independent Regulatory bodies both at the Central level and at the State level viz. The Central Electricity Regulatory Commission (CERC) and the State Electricity Regulatory Commission (SERCs) at the Central and the State levels respectively. The main function of the CERC are to regulate the tariff of generating companies owned or controlled by the Central Government, to regulate the tariff of generating companies, other than those owned or controlled by the Central Government, if such generating companies enter into or otherwise have a composite scheme for generation and sale of electricity in more than one State to regulate the inter-State transmission of energy including tariff of the transmission utilities, to regulate inter-State bulk sale of power and to aid and advise the Central Government in formulation of tariff policy. · The main functions of the SERC would be to determine the tariff for electricity wholesale bulk, grid or retail, to determine the tariff payable for use by the transmission facilities to regulate power purchase and procurement process of transmission utilities and distribution utilities, to promote competition, efficiency and economy in the activities of the electricity industries etc. Subsequently, as and when each State Government notifies, other regulatory functions would also be assigned to SERCs. · The Electricity Laws (Amendment) Act, 1998 passed with a view to make transmission as a separate activity for inviting greater participation in investment from public and private sectors. The participation by private sector in the area of transmission is proposed to be limited to construction and maintenance of transmission lines for operation under the supervision and control of Central Transmission Utility (CTU)/State Transmission Utility (STU). On selection of the private company, the CTU/STU would recommend to the CERC/SERC for issue of transmission licence to the private company. · The Electricity Laws (Amendment) Act, 1998 provides for creation of Central and State Transmission utilities. The function of the Central Transmission Utility shall be to undertake transmission of energy through inter-State transmission system and discharge all functions of

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planning and coordination relating to inter-State transmission system with State Transmission Utilities, Central Government, State Governments, generating companies etc. Power Grid Corporation of India Limited will be Central Transmission Utility. · The function of the State Transmission Utility shall be to undertake transmission of energy through intra-State transmission system and discharge all functions of planning and coordination relating to intra-State transmission system with Central Transmission Utility, State Governments, generating companies etc.

Generation Mix The share of hydel generation in the total generating capacity of the country has declined from 34 percent at the end of the Sixth Plan to 29 percent at the end of the Seventh Plan and further to 25.5 percent at the end of the Eighth Plan. The share is likely to decline even further unless suitable corrective measures are initiated immediately. Hydel power projects, with storage facilities, provide peak time support to the power system. Inadequate hydel support in some of the regions is adversely affecting the performance of the thermal power plants. In Western and Eastern regions, peaking power is being provided by thermal plants, some of which have to back down during off peak hours. In order to optimally utilise the dispersed sources for power generation, it was decided right at the beginning of the 1960’s, that the country would be divided into 5 regions and the planning process would aim at achieving regional self-sufficiency. The planning was so far based on a Region as a unit for planning, and accordingly the power systems have been developed and operated on regional basis. Today, strong integrated grids exist in all the five regions of the country and the energy resources developed are widely utilised within the regional grids. Presently, the Eastern and North-Eastern Regions are operating in parallel. With the proposed inter-regional links being developed, it is envisaged that it would be possible for power to flow anywhere in the country with the concept of National Grid becoming a reality during the 12th Plan Period.

Private Sector Participation In order to attract private investment in the power sector, the Government of India allows 100 percent foreign direct investment in all segments of power sector including power trading. Further, fiscal incentives like zero customs duty on import of capital goods for Mega Power Projects and Income tax holiday for generating plants for 10 years are also provided. The initial response of the domestic and foreign investors to the policy of private participation in power sector was encouraging. However, many projects have encountered unforeseen delays. There have been delays relating to finalisation of power purchase agreements, guarantees and counterguarantees, environmental clearances, matching transmission networks and legally enforceable contracts for fuel supplies. The shortfall in the private sector was due to the emergence of a number of constraints, which were not anticipated at the time the policy was formulated. The most important is that lenders are not willing to finance large independent power projects, selling power to a monopoly buyer such as SEB, which is not financially sound because of the payment risk involved if

Case 4: Cost of Capital for Utilities in India 105

SEBs do not pay for electricity generated by the IPP. Uncertainties about fuel supply arrangements and the difficulty in negotiating arrangements with public sector fuel suppliers, which concern penalties for non-performance, is another area of potential difficulty. It is important to resolve these difficulties and evolve a framework of policy which can ensure a reasonable distribution of risks which make power sector projects financially attractive. The capacity addition programme for the 9th Plan envisaged around 17,588 MW to be added by private generating companies. In order to achieve the targeted private sector capacity addition during the Ninth Plan, the following additional facilitating measures have recently been suggested by the promoters. Most of these have been accepted while some of them are under the consideration of the Government. Exhibit 1 displays the data on installed capacity.

Tariff Regulation The SEBs have been used as an instrument to deliver subsidies to the poor and to agriculture—partly due to controls on food prices reducing farmers’ incomes. As a consequence, the power sector suffers from both inadequate tariff levels relative to costs, and extensive cross-subsidies. In 1998–99, the average tariff for All-India was estimated at only 80% of average unit costs.1 The most important cause of the problems being faced in the power sector is the irrational and unremunerative tariff structure. Although the tariff is fixed and realised by SEBs, the State Governments have constantly interfered in tariff setting without subsidising SEBs for the losses arising out of State Governments desire to provide power at concessional rates to certain sectors, especially agriculture. Power Supply to agriculture and domestic consumers is heavily subsidised. Only a part of this subsidy is recovered by SEBs through cross subsidization of tariff from commercial and industrial consumers. The SEBs, in the process, have been incurring heavy losses. If the SEBs were to continue to operate on the same lines, their internal resources generation during the next ten years will be negative, being of the order of Rs. (–) 77,000 crore. This raises serious doubts about the ability of the States to contribute their share to capacity addition during the Ninth Plan and thereafter. This highlights the importance of initiating power sector reforms at the earliest and the need for tariff rationalisation. Under the 1948 Electricity Act, SEBs are obliged to set tariffs at a level sufficient to earn a 3% return on net fixed assets, after taking into account subsidies from state governments.2 The scale of such subsidies is a major drain on state finances—with gross subsidies amounting to some Rs. 30,345 crore (US$ 7 billion) in 1998–99, of which 74% was to agriculture.3 However, in many cases, state governments fail to pay these subsidies in cash, instead writing off debts. As a consequence, the cash shortage in the sector is exacerbated. 1. TERI, 1999, Teri Energy Data Directory and Yearbook 1999–00, Delhi. 2. A 3% return bears little relation to the actual costs of financing new investments, even if all billed revenues were collected and state government subsidies paid in cash. As a comparison, the current Reserve Bank of India Rate is 8%, while 1-year Government debt (the closest approximation to a risk-free investment available) yields 9.6%. 3. The Economic Times Mumbai, 29th February 2000.

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Large-scale cross-subsidies from industrial and commercial customers to agricultural and domestic consumers are a further major concern. Such cross-subsidies distort the demand for electricity by failing to signal its true cost to consumers. They are also leading to increased switching to captive generation by large consumers—making the current levels of cross-subsidies increasingly unsustainable. At the same time, farmers pay for this policy through poor service quality due to inadequate investment and maintenance of the system. Numerous studies have highlighted this and the willingness of farmers to pay significantly higher sums for reliable power.

Power Sector Reforms The Orissa Government was the first to introduce major reforms in power sector through enactment of Orissa Reforms Act, 1995. Under this Act, Orissa Generating Company, Orissa Grid Company and Orissa Electricity Regulatory Commission have been formed. Similarly, the Haryana Government has also initiated reform programme by unbundling the State Electricity Board into separate companies and Haryana Electricity Regulatory Commission has already been constituted. With a view to improve the functioning of State Electricity Boards, the Government promulgated the State Electricity Regulatory Commission Act for establishment of Central Electricity Regulatory Commission at the national level and State Electricity Regulatory Commission in the States for rationalisation of tariff and the matters related thereto. Subsequent to the enactment of ERC Act, 1998, more and more States are coming up with an action plan to undertake the reform programmes. In this respect, Governments of states of Uttar Pradesh, Rajasthan, Madhya Pradesh, Goa, Karnataka and Maharashtra have referred their proposals for setting up independent regulatory mechanism in their States. The Electricity (Amendment) Act 1998 was passed with a view to make transmission as a separate activity for inviting greater participation in investment from public and private sectors. The participation by private sector in the area of transmission is proposed to be limited to construction and maintenance of transmission lines for operation under the supervision and control of Central Transmission Utility (CTU)/State Transmission Utility (STU). On selection of the private company, the CTU/STU would recommend to the CERC/SERC for issue of transmission license to the private company. In this regard, the Government of (state of ) Karnataka is the first to invite private sector participation in transmission by setting up joint-venture company. Other States are also in the process of introducing the reforms in the transmission sector. In view of the urgent need to reduce transmission and distribution losses and to ensure availability of reliable power supply to the consumers reforms in the distribution sectors have also been considered by establishing distribution companies in different regions of the State. The Governments of states of Orissa and Haryana have already initiated reforms in the distribution sector by setting up distribution companies for each zone within their States.

Estimation of Discount Rates The weighted average cost of capital for a corporation is the weighted average of costs of various sources of finance.

Case 4: Cost of Capital for Utilities in India 107

WACC = Ke [E/V] + Kd (1 – T) [D/V] + Kp [PS/V] where Ke = cost of equity Kd = pre-tax cost of debt Kp = cost of preferred stock T = tax rate E, D, and PS are amounts of equity, debt and preferred stock in the capital structure. V = market value of all securities (E + D + PS) The weighted average cost of capital is the hurdle rate to be applied to projects that have similar risk characteristics (and financing) as the corporation. That is, investments should earn the hurdle rate to meet investors’ expectation. In determining the cost of capital for utilities, CAS considered two options: · The benchmark cost of equity, cost of debt, leverage and tax rate is used to determine a benchmark cost of capital for a utility. · The cost of equity alone is estimated. The cost of debt and leverage is considered as actually contracted by the firm. In the UK, the regulator has been calculating the Cost of Capital to be permitted. A minimum investment grade credit rating is assumed to calculate the benchmark leverage and Cost of Debt. The regulator in Victoria, Australia; has also considered a similar approach in its discussion paper while seeking comments on issues such as the debt market in Australia not having sufficient depth. In the USA, in most states, the cost of debt used in determining the Cost of Capital is the actual cost of debt, i.e. the annual interest costs plus amortisation of issuance expenses expressed as a ratio to the net proceeds of the debt issuance. The actual debt equity mix of the utility is normally used in the calculation. However, if the utility’s capital structure seems “unusual” in some regard—say the under utilisation of leverage—the regulator would do one of the two things: 1. “Impute” a hypothetical capital structure. 2. Reduce the “indicated” cost of equity to reflect the greater financial safety of a utility with little leverage. The cost of capital approach, though grounded in theory, is difficult to apply in many emerging markets, because (a) the debt market lacks depth, (b) it is difficult to develop a benchmark cost of debt, (c) the commercial benchmark cost of debt may not be representative of the actual cost of debt to a utility as some of them have access to cheaper sources of funding (e.g. government or bilateral/ multilateral agencies), and (d) difficulty in prescribing a benchmark debt ratio. Under the cost of equity approach, the commission would prescribe only the cost of equity, which can be measured in a number of ways like the capital asset pricing model, risk premium approach and the dividend discount model.

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Various generation and transmission assets like the existing assets of the Central Sector Utilities (CSUs), 4 Capacity addition by the CSUs, Capacity addition through separate company with negotiated tariffs, Capacity addition through separate company (public sector, joint sector or private sector) with tariffs decided through competitive bidding are subject to CERC regulations. CERC was, therefore, confronted with the issue of whether to determine the appropriate cost of capital (a) for each plant considering different risks in different plants, or (b) for each Company considering the risks at the company level, or (c) for each sub-sector (such as thermal generation, hydel generation, etc.) considering the risks at sub-sector level. In the USA, vertically integrated utilities are subject to regulation. Differential risks in terms of fuel mix for generation are generally not considered for vertically integrated utilities, unless the utility in question has an unusually large degree of nuclear generation exposure. Transmission and distribution companies are considered to be less risky than generation or vertically integrated utilities, and hence their expected return on equity is lower. In estimating the cost of equity to a utility, regulatory bodies rarely use data on that utility alone. Rather, samples of similar utilities5 are analysed, and by choosing an appropriate sample, the risks of the sector are taken into account for arriving at the cost of capital for the company. The regulator in UK recognises that risks in transmission, distribution and supply businesses are different, and makes appropriate adjustments in the cost of capital calculation for this difference. Once cost of capital is established for one sector (such as distribution), it is applied to all the distribution companies irrespective of their specific risks.

Determining the Cost of Equity In determining the cost of equity, CAS considered a variety of approaches such as the Dividend Growth Model, Country Risk Premium model, the Arbitrage Pricing Model and Capital Asset Pricing Model (CAPM). The Dividend Growth Model is based on the premise that the value of a stock is equal to the present value of the future dividend stream from that stock. The cost of equity is assumed to be the discount rate, which equates the stock’s current market value with the present value of the stock’s dividend stream. The general simplified formula for DGM is: re = D1/P0 + g where n

re is the cost of equity

n

D1 is the expected dividend

4. North East Electric Power Corporation, National Hydro Power Corporation, Neyveli Lignite Corporation, Power Grid Corporation of India Ltd are some central sector utilities. 5. Factors such as size, extent of diversification of service area/consumer types etc. are considered in selecting the sample.

Case 4: Cost of Capital for Utilities in India 109

n

P0 is the current share price (which can be taken as book value of share for unlisted companies)

n

g is the expected rate of growth in dividends

The Capital Asset Pricing Model (CAPM) approach is a generally accepted methodology for determining the Cost of Equity. CAPM is based on the portfolio theory of finance in which risks are classified into: · Systematic risk—risk applicable to the market as a whole, such as inflation, tax rises, interest rates, etc. · Unsystematic risk—residual risk unique to an individual firm or a small group of companies that form a subset of the market. The theory hypothesises that firm specific risks can be eliminated through diversification and hence, only systematic risks determine the return expectation of investors. The basis of CAPM is the relationship between risk and return. Whilst there has been considerable debate on the strength of the risk/return relationship, evidence indicates that there is a strong linear and positive relationship over the long term, which can be expressed by the following formula E(re) = Rf + Equity Beta * [E(rm) – rf ] where n

E(re) is the expected rate of return on equity (cost of equity)

n

Rf is the risk-free rate of return (e.g. return on government bonds)

n

E(rm ) is the expected rate of return on a market portfolio

n

Equity Beta is the coefficient reflecting the volatility (risk) of the stock relative to the market, which measures the systematic risk of the stock

Critics, often question the underlying assumptions in CAPM, such as existence of riskless returns, fully informed investors, etc. Further, CAPM requires substantial information on stock prices and requires that shares of the company be traded in a well-functioning stock market where risk and return are appropriately valued. This poses implementation difficulties in the application of CAPM, especially in the context of developing markets such as India. The Country Risk Premium method is an appropriate method for cost of equity determination where information about stock prices is not available or reliable. This method involves deriving a company’s cost of equity capital based on the return on equity for a sample of ‘comparable companies’ in a foreign country after adjusting it for the country risk premium. Such a methodology may be particularly applicable in determination of cost of equity for foreign investors. It is possible to calculate the required return on equity for the electricity sector in the US or UK, and then estimate the premium required for the country risk associated with an investment in India. Thus, the required return on equity for an investment in the Indian power sector would be: Re (for an Indian company) = Re (for a foreign company in a similar business) + country risk premium for India

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Alternately, the following formula can also be used assuming that the Country Risk Premium is measured as the difference of the risk free rates in the two countries: Re (for an Indian company) = Rf (India) + {Beta of foreign company * Foreign Market Risk Premium} Return on equity for foreign companies can be estimated by the market rate of return on equity for listed power sector utilities in other countries. Country risk premium is normally calculated as the difference between the risk free rates between two countries. Argentina’s gas regulator, Ente Naal Regulador de Gas, has used this model in its 1996–97 gas price review. It used USA as the reference country and calculated the return requirement for gas companies there and then applied a risk premium equal to the difference between the rate of return on a foreign currency-denominated Argentine bond and USA Treasury bond.

Application of CAPM Estimation of CAPM parameters involves estimation of risk free rate, beta and risk premium. An important factor that may influence the selection of the risk-free rate is the frequency of regulatory determinations for which CAPM is applied. Some argue that an appropriate term for calculating the risk free interest rate for CAPM is the term between pricing reviews. Another argument is that the term of the risk free rate should be consistent with the methodology used to measure the market risk premium. Yet another argument is that when determining expected returns, consideration needs to be given to the investors’ planning horizons. Exhibit 2 displays data on T-Bill and T-Bond Rates. Equity Beta is the measure of the expected volatility of a particular stock relative to a welldiversified market portfolio. It measures the systematic risk of a stock, i.e. the risk that cannot be eliminated in a well-balanced, diversified portfolio. The beta of equity is calculated as the covariance between its return and the return on a well-diversified market portfolio, divided by the variance of the return on a well-diversified market portfolio. Equity Beta (be ) = Covariance (r, rm ) / Variance (rm ) where n

r is the return from the equity investment in a single stock

n

rm is the return from the equity investment in the well-diversified market portfolio

In practice, beta is estimated by regressing stock returns (say, for 2 years) and market returns (i.e. index returns). The slope of the regression line provides an estimate of beta. The measured equity beta for a particular firm relates to the unique capital structure of that firm and that a change in the capital structure will change the degree of financial risk borne by the equity holders and hence the equity beta. A common practice to allow equity betas to be compared across firms with different capital structures is to adjust the estimated equity beta into the equivalent asset

Case 4: Cost of Capital for Utilities in India 111

beta (which is the equity beta that would apply if the assets were financed wholly with equity) using the following formula: bA = be / {1+ (1 – T )*(D/E)}6 where n

bA is the Asset beta or unlevered beta of the firm

n

be is the Equity beta or levered beta of the firm

n

T is the marginal tax-rate of the firm

n

D/E is the debt-equity ratio of the firm

As an asset beta does not depend on the financial risks associated with leverage, it can be compared with other asset betas derived from different capital structures. The asset beta can then be adjusted into an equity beta that is consistent with the target firm’s level of leverage and compared, say, to equity betas that can be estimated directly from the market. Exhibit 3 provides estimates of beta for all publicly listed power generation, distribution, and transmission companies. The market risk premium, as measured and applied in practice, is the premium above the riskfree rate of return that investors expect to earn on a well-diversified portfolio of equities. The premium is measured over some historical period or forecasted for some future time period. In determining the premium consideration should be given to the choice of the market index, time period over which the premium is measured, the type of averaging to be applied (i.e. arithmetic or geometric mean) and the choice of the risk free rate. Exhibit 4 provides estimates of risk premium for several countries.

Rate Base Rate base on which the above rate of return would be applied is an equally important issue. CAPM computes market return on equity, which is an indicator of cost of equity, where equity is, interpreted as “net worth” of the company i.e. all the capital belonging to the shareholders of the company. The manner of application of rate of return on the rate base should ensure that all the capital that is financing the “useful”7 assets of the company is appropriately serviced. Two methods of application of rate of return on the rate base were considered by CAS. Under the first method, the assets considered “not useful” are subtracted from the total assets and the cost of capital is applied on this base. This provides the capital cost related component of tariff. To illustrate, if the useful assets were Rs. 77 crores8 and the cost of capital is 18.4%, the capital cost would be Rs. 14.2 crore. 6. The other relationship is bA = be (E/V) assuming debt beta is zero. 7. “Useful” assets are those necessarily required for business of power generation/transmission. These would be determined by the “usefulness” tests applied at the time of investment approval. 8. INR 1 crore = INR 10 million.

112

Cases in Corporate Finance

Under the second method, separate costs of equity, long-term debt and short-term debt are applied on adjusted net worth,9 total long-term debt and current assets to arrive at the capital cost.

Exhibit 1

Total Installed Capacity Sector

MW

State Sector

% age

74,453.76

Central Sector Private Sector Total

52.5

47,350.99 19,275.09 1, 41, 079.84

Fuel

34.0 13.5%

MW

% age

Total Thermal Coal

90, 895.84 75, 002.38

64.6 53.3

Gas Oil

14, 691.71 1201.75 35, 208.76

10.5 0.9 24.7

4, 120.00 10, 855.24 1, 41, 079.84

2.9 7.7

Hydro Nuclear Renewable Total Source: Power Ministry, January 2008.

Exhibit 2 Te n o r

Yields on Treasury and Corporate Securities Issuer

Rating

Yield %

1 Year 3 Year

Government Government

NA NA

7.77 7.68

4 Year 5 Year 9 Year

Government Government Government

NA NA NA

7.69 7.7 7.76

10 Year 30 Year 3 Year

Government Government IDFC10

NA NA AAA

7.79 8.24 9.31

4 Year 5 Year 9 Year

PFC11 IDFC PFC

AAA AAA AAA

9.31 9.38 9.21

10 Year

IDFC

AAA

9.3

Source: Reserve Bank of India, FIMMDA.

9. Adjusted Net worth = Total Net Fixed Assets Plus Capital Work in Progress Plus investments required by statute Less Long Term Loans. 10. Infrastructure Development Finance Company. 11. Power Finance Corporation.

Case 4: Cost of Capital for Utilities in India 113

Exhibit 3

Beta Estimates (vis-à-vis Bombay Stock Exchange Sensitive Index) and Other Financial Details for Power Distribution Companies (Market Capitalization in Rs Crore) bE

Market Cap

D/E

D/V

E/V

b A 12

CESC Energy Development

1.0134 0.6831

3186.87 147.13

1.38 0.18

0.58 0.16

0.42 0.84

0.425 0.573

Entegra Ltd Gujarat Industries Power Co Jaiprakash Hydro Power

0.7964 0.7781 1.4664

83.90 834.14 1394.44

1.31 0.57 1.34

0.57 0.37 0.58

0.43 0.63 0.42

0.342 0.49 0.615

Neyveli Lignite NTPC Reliance Energy

1.6006 1.0821 NA

8455.66 123475.76 11315.66

0.17 0.47 0.65

0.15 0.32 0.40

0.85 0.68 0.60

1.360 0.735 NA

Tata Power Co Torrent Power

1.1542 1.1171

10082.02 2782.73

0.55 0.53

0.36 0.35

0.64 0.65

0.738 0.726

Company

Source: Prowess, Capitaline.

Exhibit 4 Country

Market Risk Premium Index

MRP %

Rf %

Historical Premium %

Measurement Period

Singapore

STI

6

4

8

87–95

Taiwan Korea Malaysia

TWSE KOSPI KLSE

6.5 6.5 8

7 10 7

10 6 8.5

86–96 85–96 85–96

Hong Kong Thailand India

HIS SET BSE 100

7.5 9 8

8 13.5 13

8.8 14 10.5

69–96 86–96 91.96

India13

BSE 30

8.2

Source: C S First Boston.

12. bA = be (E/V) assuming debt beta is zero. 13. This is another study by CRISIL Advisory Services.

CASE

5

Financial Statements and Industry Structure, 2007 DESCRIPTION Demonstrate how financial statements reflect industry characteristics.

LEARNING OBJECTIVE Predict the firm and its industry group using disguised financial statements.

SUBJECTS COVERED Financial Management, Financial Ratios.

This case was prepared by Vishwanath S.R. of Institute of Management Technology, Nagpur.

Case 5: Financial Statements and Industry Structure, 2007

115

Susy Thomas, after graduating from a premier Business school joined a prominent investment bank as an Equity Analyst. In the first year of training, she was given an assignment in Financial Statement Analysis. She was given the financial statements of 8 companies drawn from 8 different industry groups. Exhibits 1, 2 and 3 present the balance sheets, percent balance sheets, and select financial data. She was asked to match the Eight companies with the (Eight) set of financial data. The companies in the set belong to one of the following groups: · Power Generation

· Internet Service provider

· Pharmaceuticals

· Advertising

· IT software

· Banking

· Airline She was told that in order to disguise the identity of the bank, loans/advances were classified as receivables and deposits as accounts payable. Help Susy identify the companies. Exhibit 1

Structure of Assets

Company

A Mar 2007

B Mar 2007

C Mar 2007

D Mar 2007

E Mar 2006

F Jun 2006

Net fixed assets Capital WIP Investments

3811.35 781.05 3570.15

937.89 280.61 830.21

3107.00 957.00 839.00

7135.87 3994.52 68.93

144.82 1.94 69.60

2.00 0.00 0.00

91257.83

Deferred tax assets Inventories Receivables

63.25 396.42 2277.65

17.17 487.60 2067.09

79.00 0.00 3359.00

37.85 438.99 1842.87

0.00 2.92 145.31

0.00 0.00 1.88

1264.29 0.16 211505.58

Sundry debtors Cash & bank balance Intangible / DRE not written off

1478.22 1367.72 6.18

1055.71 1456.71 24.74

2292.00 5602.00 0.00

603.90 1082.61 156.14

83.12 269.13 2.55

1.49 0.00 0.00

NA 37121.32 133.25

11492.72

5821.41

12986.00

10763.26

634.33

3.88

345312.46

F

G

Total assets

Structure of Total Assets (%)

A

B

33.16

16.11

23.93

66.30

22.83

51.55

1.17

Capital WIP Investments Deferred tax assets

6.80 31.06 0.55

4.82 14.26 0.29

7.37 6.46 0.61

37.11 0.64 0.35

0.31 10.97 0.00

0.00 0.00 0.00

0.00 26.43 0.37

Inventories Receivables Sundry debtors

3.45 19.82 12.86

8.38 35.51 18.13

0.00 25.87 17.65

4.08 17.12 5.61

0.46 22.91 13.10

0.00 48.45 38.40

0.00 61.25 NA

11.90 0.05 100.00

25.02 0.42 100.00

43.14 0.00 100.00

10.06 1.45 100.00

42.43 0.40 100.00

0.00 0.00 100.00

10.75 0.04 100.00

Source: CMIE Prowess.

D

E

4030.03

Net fixed assets

Cash & bank balance Intangible / DRE not written off Total assets

C

G Mar 2007

116

Cases in Corporate Finance

Exhibit 2

Structure of Liabilities

Company

A Mar 2007

B Mar 2007

C Mar 2007

D Mar 2007

E Mar 2006

F Jun 2006

G Mar 2007

Net worth Paid-up equity capital

6033.11 197.92

4373.36 83.96

11162.00 286.00

2237.25 86.33

411.19 42.39

3.47 4.35

24663.26 899.35

Preference capital Reserves & surplus Free reserves

0.00 5835.19 4273.44

0.00 4289.40 4270.81

0.00 10876.00 10870.00

0.00 2150.92 1962.90

0.00 368.80 1599.76

0.00 –0.88 0.00

350 23413.91 17992.16

Borrowings Deferred tax liabilities Current liabilities & provisions

3633.36 68.95 1757.30

329.90 74.91 1043.24

0.00 0.00 1824.00

6210.91 368.91 1946.19

0.53 0.00 222.61

0.16 0.00 0.25

70661.14 654.33 249333.73

11492.72

5821.41

12986.00

10763.26

634.33

3.88

345312.46

D

E

F

Total liabilities

Structure of Total Liabilities (%)

A

B

Net worth Paid-up equity capital

52.50 1.72

75.13 1.44

85.95 2.20

20.79 0.80

64.82 6.68

89.43 112.11

7.14 0.26

Preference capital Reserves & surplus Free reserves

0.00 50.77 37.18

0.00 73.68 73.36

0.00 83.75 83.71

0.00 19.98 18.24

0.00 58.14 252.20

0.00 –22.68 0.00

0.10 6.78 5.21

Borrowings Deferred tax liabilities Current liabilities & provisions

31.61 0.60 15.29

5.67 1.29 17.92

0.00 0.00 14.05

57.70 3.43 18.08

0.08 0.00 35.09

4.12 0.00 6.44

20.46 0.19 72.21

100.00

100.00

100.00

100.00

100.00

100.00

100.00

Total liabilities

Composition of Total Burrowings (%)

C

G

A

B

C

D

E

F

Bank borrowings Short-term

0.41 0.41

97.34 97.34

0.00 0.00

47.83 13.78

0.00 0.00

100.00 0.00

0.00 0.00

Long-term FI borrowings Govt. / sales tax deferral borrowings

0.00 0.00 0.00

0.00 0.58 0.00

0.00 0.00 0.00

34.05 7.33 0.00

0.00 0.00 0.00

100.00 0.00 0.00

0.00 0.00 0.00

22.67 0.00 47.15

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 5.68

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

14.04 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

13.76 0.00 1.96

0.00 0.00 2.08

0.00 0.00 0.00

0.00 39.16 0.00

0.00 100.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

100.00

100.00

0.00

100.00

100.00

100.00

100.00

Debentures / bonds Fixed deposits Foreign borrowings Borrowings from corporate bodies Group / associate cos. Borrowings from promoters / directors Commercial paper Hire purchase borrowings Other borrowings Total Borrowings Source: CMIE Prowess.

G

Case 5: Financial Statements and Industry Structure, 2007

Exhibit 3

117

Imporatant Financial Ratios A

Current Ratio Quick Ratio Debt Equity Ratio

B

C

D

E

F

G

2.3 2.074 0.602

3.845 3.378 0.075

4.913 4.913 0

1.729 1.503 2.776

1.875 1.862 0.001

7.52 7.52 0.046

0.997 0.997 2.865

5 14.23% 94

27.29 27.30% 68

90.21 28.78% 53

90.21 53.46% 27

–0.15 –1.30% 58

NA –31.82% 351

1.25 13.53% NA

Creditors Payment Period (Days)* 59 Working Capital Cycle (Days)* 88 R&D / Sales 0.10%

83 98 6.65%

NA NA NA

NA NA NA

NA NA NA

NA NA NA

NA NA NA

Return on Investment Fixed Asset Turnover Working Capital Turnover

30.15% 4.6 1.45

38.79% 4.23 1.84

51.25% 0.99 4.99

–0.13% 3.2 2.38

–9.37% 0.55 0.67

21.46% 5.71 –32.54

Interest Coverage Ratio Net Profit / Net Sales Debtors Collection Period (Days)

* Source: CMIE Prowess.

9.91% 1.29 2.14

CASE

6

The Use of Cash Flow Statements

DESCRIPTION The case presents the cash flow statements of three companies drawn from India and the U.S.

LEARNING OBJECTIVE To introduce analysis of cash flow statements.

SUBJECTS COVERED Cash Flow, Financial Reporting, Financial Analysis, Security Analysis.

This case was prepared by Prof Vishwanath S. R. and Pallavi Goyal (PGDM ’08) of Institute of Management Technology, Nagpur, India for the sole purpose of aiding classroom discussion. Cases are not intended to serve as endorsements, or sources of data, or illustrations of effective or ineffective management.

Case 6: The Use of Cash Flow Statements

119

John Mathew, a student of the MBA programme at one of the premier business schools, had joined a Bank as an intern in the summer of 2006. He was assigned the task of preparing research reports on some steel firms with whom the bank had a relationship. As part of a week-long training in the analysis of financial statements, he was provided the cash flow statements of three companies (whose identities were disguised) and was asked to comment on their financial performance. In his eagerness to get the analysis right, John Mathew called Anwar Ali, a finance professor at his business school, to ask if he could spend some time with him to guide him. They agreed to meet over that evening.

THE CONVERSATION John Mathew went to see Anwar Ali that evening at 4 pm. Because of an undergraduate degree in Engineering, John Mathew was not sure if he was particularly good at financial statement analysis, which he thought came naturally to those with commerce and accounting backgrounds. After asking a few questions about how John Mathew had fared in the first year accounting and finance courses in the MBA program, Anwar Ali handed over the cash flow statements of three companies drawn from India and the US and started explaining. Anwar Ali: A cash flow statement tries to explain the change in cash position between two balance sheet dates. Thus, an increase in plant and machinery will be recorded as a use in funds flow statement but may not be recorded in cash flow statement if it does not involve a cash outlay during the period. In short, non-cash transactions do not enter the cash flow statement. The net cash flow is simply the net of all inflows and outflows during the period. The cash flow statement is helpful in a number of situations where cash flows are important. These include: · Analysis of credit proposals · Firm’s need for external financing and the use of its long-term debt. · Firm’s ability to meet current and long-term cash obligations. · Ability of the firm’s operations to generate cash. Thus, Cash balance at the beginning of the year + net cash flow during the year = cash balance at the end of the year. John Mathew: Why focus on a cash flow statement? Anwar Ali: Net income reported on the income statement provides an important measure of performance. However, in the absence of cash flow, income does not pay the bills. Interest and dividend payments, required principal reductions on debt, and capital expenditures for plant and equipment and for expansion cannot be made without cash. Cash provided by operating activities, also known as, operating cash flow, is a primary source of cash to meet these needs. In the absence of operating cash flow, cash from other sources can be used to cover cash requirements. For example, cash can be obtained by new debt or equity issues or non-recurring asset sales. These non-operating cash flows

120

Cases in Corporate Finance

can be relied upon only in the short run. In the long run, operating cash flow is the only reliable source of cash available to meet recurring needs. Indeed, the cash flow statement provides more information than the balance sheet or the income statement. It can help unearth valuable information relating operating, investing and financing activities of the firm. John Mathew: How is cash flow statement presented? Anwar Ali: Items on the cash flow statement come from two sources: (1) income statement items, and (2) changes in balance sheet accounts. It is useful to classify cash flows on the basis of activities. The standard practice for preparing the cash flow statement is to classify activities into operating, investing and financing activities and record cash flow under each heading. Cash Flow from operations + Cash flow from Investment activities + Cash Flow from financing activities + Net effect of exchange rate changes on cash = Net increase (decrease) in cash Operating activities are related to the firm’s ongoing ability to generate cash from operations. This includes information on cash receipts from customers for sales and service, cash payments related to vendors, employees, taxes and interest. The net of all these gives cash flow from operations. Investment activities relate to change in non current assets. This includes information on capital expenditure to acquire fixed assets and proceeds from sale of non-current assets. Only cash transactions get reflected. Cash flows from investing activities are cash flows associated with purchases and sales of non current assets such as building and equipment etc. The section also contains purchase and sale of short-term investments Financing activities relate to changes in borrowings and owners’ equity. This includes information on cash proceeds from issuing equity and short-term and long-term debt, and cash outflow due to repurchase of shares. Dividend payment is also a financing activity. Cash flows from financing activities include issuance and repayment of debt, issuance of common stock, and payment of dividends. Interest on debt, however, is clubbed under cash from operating activities. Key elements include: · Cash dividends paid · Increases or decreases in short-term borrowings · Long-term borrowings and repayments · Stock sales and repurchases John Mathew: What type of analysis can be done with cash flow statements? How do we interpret the statement? Anwar Ali: The cash flow pattern depends on the nature of business and the life cycle of the company. Start up companies in high growth industries will have negative cash flow because of high capital

Case 6: The Use of Cash Flow Statements

121

expenditure in relation to the level of earnings. The gap is to be met by selling debt or equity. Established growth companies can meet their investment requirements from internally generated funds. Mature companies will have modest capital expenditure requirements. Their cash flow from Operations will be slightly more than the reinvestments. Those firms in the declining phase will have surplus cash from operations which could be returned to shareholders, payoff debt or revitalise product lines. Turnarounds are characterised by cash inflows due to freeing up of assets and income statement losses. Thus, the cash flow pattern indicates the position of a company in its business life cycle and the nature of its model. To start with, cash flow from operations should be positive and growing. Secondly, see whether the company is investing to grow, i.e. whether investments are more than depreciation. Healthy companies typically purchase more assets than they sell. So, cash flow from investing will usually be negative. To judge whether a company is doing well or not, one must use evidence from all pieces and put them together. An analyst can prepare a checklist of major sources and uses as well as trends in cash flow from operations, net income, dividend, and working capital accounts. In evaluating the cash flow statement, you are evaluating many pieces of evidence to produce an overall picture. The best way to learn the analysis is to actually go through the statements of actual companies. I have written out some questions to guide your analysis. You can apply this framework to all the three companies. Meet me tomorrow with your analysis. After this exercise you will be capable of handling your assignment at the bank. John Mathew: Thank you.

Assignment Questions Exhibits 1, 2 and 3 contains the cash flow statements of three companies drawn from India and the U.S. After examining the cash flows of each company for three years, answer the following questions for each company every year. · What were the major sources and uses of cash? · Compare cash flow from operations with net income and reconcile the difference · Was the firm able to cover capital expenditure with CFO? Similarly, compare CFO with Capital expenditure and dividends · Did the firm invest the excess cash? · Examine the working capital accounts and check whether they are sources or uses of cash · What are the other major items affecting cash flow? · Comment on the trends in: Net Income CFO

122

Cases in Corporate Finance

Capital expenditure Dividends Borrowing Working Capital Management · What is your overall assessment of the financial position of the company? Exhibit 1 A

Company J Statement of Cash Flows (in Rs Lac1 ) 2006

2005

72,226

58,213

17814

42,589 –27,037 –5,253

47,527 345 –1,380

53310 –3859 –408

Interest Expense Interest on bank and other deposits Excess Provision no longer required

24,160 –5,542 –4,101

25,369 –3,064 –1,882

28,914 NA –54

Provision for doubtful debts no longer required Provision for leave encashment and gratuity Exchange difference on translation (Net)

–20 2,627 –1,468

–6 735 –822

NA 474 –1610

247 14 2,325

281 NA 3,446

90 NA 1899

Operating Profit Before working capital changes Changes in inventories Changes in sundry debtors

100,767 –11,546 –18,427

128,762 –3781 –1,272

96,572 –4389 –1780

Changes in loans and advances Changes in liabilities and provisions Cash generated from operations

–26,513 29,863 74,144

–853 17,317 140,173

6737 –1148 105,477

Income tax refunded/paid wealth tax paid Net Cash from operating activities

–13,392 –4 60748

–4,666 –3 135,504

93 –3 105567

Cash flow from investing activities Capital Expenditure– aircraft and others Proceeds from sale of fixed assets

–279457 46,282

9871 52

–23669 8637

Purchase of investments Changes in fixed deposits with banks

–545424 34549

–508116 35917

–291047 273913

Cash flow from operating activities Net Profit Before Taxes Adjustments for: Depreciation/Amortization & stock obsolescence (Profit)/Loss on sale of fixed assets (Net) (Profit)/Loss on sale of investments/dividend on investment

Provision for doubtful debts Bad debts written off Inventory scrapped during the year

B

2004

(Contd.)

1. INR 1 lac = INR 100,000. It is a common practice in India to quote currency in lac and crore. INR 1 crore = INR 10 million. The cash flow statements are from CMIE Prowess and the respective companies.

Case 6: The Use of Cash Flow Statements

123

(Exhibit 1 Contd.) 2006

2005

2004

5367

2596

171

150000 –50000 691527

NA NA 372985

NA –247156

280 –177992

NA NA NA

156696 –6983 –5852

Share issue expenses paid Increase/(Decrease) in term loans and subordinated debt Interest Paid

NA 191738 –30005

–2103 –27558 –22668

–46775 –30290

Dividend paid (including tax on dividend) Net Cash from financing activities Net Change in Cash (A+B+C)

–2950 158783 –27625

NA 91533 49045

–77065 –3492

50401 22776

1356 50401

4848 1356

Interest received on bank and other deposits Deposit in escrow account Advance paid as per share purchase agreement Sale of investments

C

Dividend received Net Cash used for investing activities Cash flow from financing activities Proceeds from issue of Share Capital Preference share repayment Premium on redemption of Preference shares

Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year

Exhibit 2 A

–31995

Company I Statement of Cash Flows (in Rs. crore2 ) 2006

2005

2724

2184

NA 409

1 268

–0.04 230.9

Interest and dividend income Provision for investments Effect of exchange differences on

–203 NA –7

–109 NA –4

–100.28 9.67 6.59

translation of foreign currency cash and cash equivalents Changes in current assets and liabilities Sundry debtors

–265

–621

–120.37

Loans and advances Current liabilities and provisions Income taxes paid

–94 221 –548

–110 33 –283

–1.34 245.5 –107.13

Net cash generated by operating activities

2237

1359

1633

Cash flows from operating activities Net Profit before tax and exceptional item Adjustments to reconcile net profit before tax to cash provided by operating activities: (Profit)/Loss on sale of fixed assets Depreciation and amortization

2004 1470

(Contd.)

2. INR 1 crore = INR 10 million. Currency units are usually quoted in crores rather than millions in India.

124

Cases in Corporate Finance

(Exhibit 2 Contd.)

B

2006

2005

2004

–1048 NA

–794 1

–429 1.43

–31 484 203

–63 –238 109

–83.49 –920.36 100.28

Cash flow from investing activities before exceptional items Income from sale of investment in Yantra Corporation Less: Tax on the above

–392 NA NA

–985 49 4

–1332 NA NA

Net income from sale of investment in Yantra Corporation Cash Used in Investing Activities

NA –392

45 –940

NA –1332

646 –352 –50

441 –903 –118

122.27 –192.14 –24.61

244 7

–580 4

–94.48 –6.59

2096 1683 3779

–157 1840 1683

200.89 1638.51 1839.4

2005

2004

2003

–9939 585

–242 760

282 833

Deferred Taxes Accounting Change Discontinued Operations

–610 0 19

–226 0 –28

150 –181 –25

Unusual Items Equity in Net earnings/loss Other non cash items

4245 13 5153

–352 40 96

–285 65 136

Non cash items Cash taxes paid, supplemental Cash interest paid, Suppl

9429 26 1316

–245 23 939

–289 18 463

Accounts receivable Other assets Payables/Accrued

–42 –117 –111

–99 –214 232

–221 –304 –112

Changes in working capital Total cash from operations

–330 –690

–138 –19

–610 266

Cash flows from investing activities Purchase of fixed assets and change in capital work in progress Proceeds on disposal of fixed assets Investment in subsidiaries Investments in securities Interest and dividend income

C

Cash flows from Financing Activities Proceeds from issuance of share capital on exercise of stock options Dividends paid during the year Dividend tax paid during the year Net cash used in financing activities Effect of exchange differences in translation of foreign currency cash and cash equivalents Net (decrease)/increase in cash and cash equivalents Cash and Cash equivalents at the beginning of the year Cash and equivalents at the end of the year

Exhibit 3 A

Company C Statement of Cash Flows ($m )

Cash flow from operating activities Net Income Depreciation/Depletion

(Contd.)

Case 6: The Use of Cash Flow Statements

(Exhibit 3 Contd.)

B

C

2005

2004

Cash flow from investing activities Capital Expenditures

2003

–774

–1545

–1886

Acqisition of business Sale of Business Sale of fixed assets

0 0 2066

–188 85 1066

–7 0 20

Sale/maturity of investment Investment, Net Other investing cash flow

37 133 –544

0 94 86

0 0 –829

Other investment cash flow items, net Total Cash from Investing

1691 917

1144 –401

–629 –2515

–585 0 –173

–456 0 –154

–153 16 –96

1664 –1066 598

4611 –4712 778

2199 –3234 2857

425 –160 0

623 167 16

2761 2624 13

68 718 786

–237 955 718

387 567 955

760 1316 26

833 939 23

732 463 18

Cash flow from financing activities Financing cash flow items Issuance (retirement) of stock, net Short Term Debt, Net Long Term Debt Issued Long Term Debt Reduction Long Term debt, Net Issuance (retirement) of debt, Net Total cash from financing Foreign Exchange effects Net change in cash Net cash-beginning balance/reserved for future use Net cash-End Balance/Reserved for future use Depreciation supplemental Cash interest paid, suppl Cash taxes paid, suppl

125

CASE

7

Financial Performance of Major Steel Firms DESCRIPTION The balance sheet, income statement and cash flow statements of major steel firms in India are presented. Students are required to assess the financial performance of these firms.

LEARNING OBJECTIVE To introduce financial statement analysis.

SUBJECTS COVERED Financial Management, Security Analysis.

This case was prepared by Professor Vishwanath S. R., and Amol Sangeet (MBA ’09) Institute of Management Technology, Nagpur, India for the sole purpose of aiding class discussion. Cases are not meant to serve as endorsements, or sources of data, or illustrations of effective or ineffective management.

Case 7: Financial Performance of Major Steel Firms 127

India is among the largest steel manufacturers in the world. The top three steel producers account for about 50% of steel production in the country. The steel industry can be broadly classified on the basis of the process of manufacture into primary producers or the integrated steel plants and the secondary steel producers which includes the mini steel plants and induction furnace units. Steel can be manufactured by either of two processes—the Blast furnace process or the Electric arc furnace process. The integrated plants use the former method. In this process iron ore is reduced in the presence of coke to get hot metal which is further refined to get liquid steel. Liquid steel is cast directly into blooms, slabs and billets using continuous casting method. The mini steel plants employ the electric arc furnace to manufacture liquid steel. In the EAF process, a mixture of scrap and sponge iron is melted in an electric furnace and then refined to produce molten steel. Molten steel is further cast using the continuous casting or ingot casting route. Semi-finished steel is later processed in different rolling mills to manufacture flat or long steel products. Currently, the blast furnace method dominates steel production worldwide. The EAF method is likely to gain importance in future due to lower capital costs and flexibility in product mix. The steel industry is undergoing dramatic change. Long plagued by over capacity and high exit barriers, the steel industry was prone to cyclicality and decades of declining prices. Buoyed by the demand for steel from China’s booming economy, the global steel production has grown at 7% during 2002–06. The increase in demand has also pushed up price substantially. The Indian Steel Industry is dominated by Steel Authority of India, Tata Steel, JSW Steel, Ispat Industries Ltd., and Jindal Stainless.

COMPANY BACKGROUNDS Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a fully integrated iron and steel maker, producing both basic and special steels for domestic construction, engineering, power, railway, automotive and defence industries and for sale in export markets. Ranked amongst the top ten public sector companies in India in terms of turnover, SAIL manufactures and sells a broad range of steel products, including hot and cold rolled sheets and coils, galvanised sheets, electrical sheets, structurals, railway products, plates, bars and rods, stainless steel and other alloy steels. SAIL produces iron and steel at five integrated plants and three special steel plants, located principally in the eastern and central regions of India and situated close to domestic sources of raw materials, including the Company’s iron ore, limestone and dolomite mines. The company has the distinction of being India’s largest producer of iron ore and of having the country’s second largest mines network. This gives SAIL a competitive edge in terms of captive availability of iron ore, limestone, and dolomite which are inputs for steel making. (www.sail.co.in)

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Cases in Corporate Finance

Tata Steel Established in 1907, Tata Steel is Asia’s first and India’s largest private sector steel company. Tata Steel is among the lowest cost producers of steel in the world. Its captive raw material resources and the state-of-the-art 5 MTPA (million tonne per annum) plant at Jamshedpur, in Jharkhand State, India, give it a competitive edge. Determined to be a major global steel player, Tata Steel has recently included in its fold NatSteel, Asia (2 MTPA) and Millenium Steel (now Tata Steel Thailand) (1.7 MTPA), creating a manufacturing network in eight markets in South East Asia and Pacific rim countries. Soon, the Jamshedpur plant will expand its capacity from 5 MTPA to 7 MTPA by 2008. The Company plans to enhance its capacity manifold, through organic growth and investments. The Company’s wire manufacturing unit in Sri Lanka is known as Lanka Special Steel, while the joint venture in Thailand for limestone mining is known as Sila Eastern. Tata Steel’s products include hot and cold rolled coils and sheets, galvanised sheets, tubes, wire rods, construction rebars, rings and bearings. In an attempt to ‘decommoditise’ steel, the company has introduced brands like Tata Steelium (the world’s first branded Cold Rolled Steel), Tata Shaktee (Galvanised Corrugated Sheets), Tata Tiscon (re-bars), Tata Bearings, Tata Agrico (hand tools and implements), Tata Wiron (galvanised wire products), Tata Pipes (pipes for construction) and Tata Structura (contemporary construction material). The company has launched the Customer Value Management initiative with the objective of creating complete understanding of customer problems and finding solutions jointly. The company’s Retail Value Management addresses the needs of distributors, retailers and end consumers. The company has also launched India’s first steel retail store—steeljunction—for making steel shopping a happy and memorable experience. (www.tatasteel.com)

JSW Steel Ltd JSW is a fully integrated steel plant having units across Karnataka and Maharashtra producing from pellets to colour coated steel. JSW’s history can be traced back to 1982, when the Jindal Group acquired Piramal Steel Ltd which operated a mini steel mill at Tarapur in Maharashtra. The Jindals, who had wide experience in the steel industry, renamed it as Jindal Iron and Steel Co Ltd (JISCO) now known as JSW Steel Limited (Downstream). In 1994, to achieve the vision of moving up the value chain and building a strong, resilient company, JISCO promoted Jindal Vijayanagar Steel Ltd (JVSL) now known as JSW Steel Limited (Upstream). Its plant is located at Toranagallu in the BellaryHospet area of Karnataka, the heart of the high-grade iron ore belt, and spread over 3,700 acres of land. It is just 340 kms from Bangalore, and well connected to Goa and Chennai ports. (http:// www.jsw.in)

Essar Steel Holdings Limited Essar Steel Holdings Limited is a global producer of steel with a footprint covering India, Canada, USA, Middle East and Asia. It is a fully integrated flat carbon steel manufacturer—from iron ore to ready-to-market products. Its products find wide acceptance in highly discerning consumer sectors, such as automotive, white goods, construction, engineering and shipbuilding. It is the India’s largest exporter of flat steel products. (www.essarsteel.com)

Case 7: Financial Performance of Major Steel Firms 129

Ispat Industries Limited IIL is one of the leading integrated steel makers and the largest private sector producer of hot rolled coils in India. Set up as Nippon Denro Ispat Limited in 1985, by founding chairman Mr M L Mittal, IIL has steadily grown into a Rs. 7,000 crore company, assuming its position as flagship of the Ispat Group. IIL is the leader in the national specialty steel market. The company’s core competency is the production of high quality steel, for which it employs cutting edge technologies and stringent quality standards. It produces world-class sponge iron, galvanised sheets and cold rolled coils, in addition to hot rolled coils, through its two state-of-the art integrated steel plants, located at Dolvi and Kalmeshwar in the state of Maharashtra. The Dolvi complex houses the 3 million tonne per annum hot rolled coils plant, that combines the latest technologies—the Conarc process for steel making and the compact strip process (CSP)—introduced for the first time in Asia. The complex also has a 1.6 million tonne per annum sponge iron (DRI) plant, which was commissioned in 1994 as the world’s largest and most efficient gas-based single mega module plant. Moreover, the Dolvi complex is home to a 2 million tonne blast furnace and also boasts a mechanised multi-functional jetty situated nearby, that facilitates the automation of raw material handling. A new 2.24 million tonnes per annum sinter plant, a 1260 tonnes per day oxygen and a new electric arc furnace have also been commissioned at IIL Dolvi. Ispat is the only steel maker in India and among a few in the world to have total flexibility in choice of steel making route, be it the conventional blast furnace route or the electric arc furnace route. Its dual technology allows Ispat the freedom to choose its raw material feed, be it pig iron, sponge iron, iron ore, scrap or any combination of various feeds. It also has total flexibility in choosing its energy source, be it electricity, coal or gas. The Kalmeshwar complex houses Ispat’s 0.4 million tonnes cold rolling complex, which also includes the galvanised plain/ galvanised corrugated (GP/GC) lines and India’s first colour coating mill. With investments of over US $2 billion, IIL is the seventh largest Indian private sector company in terms of fixed assets. It aims to consolidate its market leadership in the national specialty steel market by capitalising on the proximity of its manufacturing facilities to major consumers of flat steel products in Maharashtra, while increasing its presence in international markets by using its convenient port location. (http:// www.ispatind.com)

Jindal Organization Jindal Organization, set up in 1970 by the steel visionary Mr OP Jindal, has grown from an indigenous single-unit steel plant in Hisar, Haryana to the present multi-billion, multi-national and multi-product steel conglomerate. The organisation is still expanding, integrating, amalgamating and growing. Jindal Stainless is an ISO: 9001 & ISO: 14001 company is the flagship company of the Jindal Organization. The company today, has come a long way from a single factory establishment, started in 1970. As the numero uno, it has taken on the task of making stainless steel a part of everybody’s life by taking a 360 degrees approach from production of raw materials to supply of architecture and lifestyle related products. At Hisar, Jindal Stainless has India’s only composite stainless steel plant for the manufacture of Stainless Steel Slabs, Blooms, Hot rolled and Cold Rolled Coils, 60% of which are exported worldwide.

130

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Cases in Corporate Finance

Precision Strips

The company produces stainless steel precision strips in various grades. These strips are produced in narrow 20-Hi mills in the precision cold rolling unit.

·

Blade Steel

The company is the exclusive producer of stainless steel strips for making razor and surgical blades in India.

·

Coin Blanks

Besides supplying CR Strips to the Government of India, the plant at Hisar houses a coin blanking line for supply of coin blanks to the Indian Mint and Mints in the global markets. Jindal Stainless has a Ferro Alloy Plant at Vizag with an installed capacity of 40,000 metric tonnes per annum. Jindal Stainless is setting up a Greenfield integrated Stainless Steel project in the state of Orissa with capacity of 1.6 million tonnes per annum (http://www.jindalstainless.com) Exhibits 1 through 4 present the financial statements of these firms. Exhibit 5 presents stock market and other select valuation metrics for Tata Steel.

Suggested Assignment Questions 1. Prepare common size financial statements for all the firms. 2. See the common size balance sheets. Compare 2007 to 2006. Why do current assets vary across firms? Why does borrowing vary from 9.32% to 56.71% across firms? 3. See the common size income statements. Compare 2007 to 2006. Which firm is the most profitable? Why does net income vary from –0.07% to 21.35% across firms? 4. Evaluate each company in terms of growth in total assets, long-term debt, stockholders equity, sales, operating profit, pretax income and net income for 2001. 5. Look at the financial ratios for these firms. Which firm has the most (least) liquidity as of 2007? Can a firm have too much liquidity? Which firm is best (worst) at managing assets as of 2007? Which firm is the most (least) financially leveraged as of 2007? Do you expect steel firms to be highly leveraged? Why? Can a firm have too much or too little debt? 6. See the cash flow statements. Why did cash flow from operations increase from Rs. 46172.50 m to Rs. 91008.90 m for SAIL? Did all firms experience an increase in cash flow from operations? If not, why? Is the cash flow from operations more or less than the cash flow from investing activities for these firms? If yes, why? If not, why? For Tata Steel, the cash flow from operations in 2007 was Rs. 49992.20 m whereas the cash flow from investing was Rs. 53276 m. Where did Tata Steel get the additional cash to finance the investment? Can this situation continue indefinitely? 7. What were the factors that caused the change in return on equity for each company? Perform a Du Pont Analysis. 8. Evaluate Tata Steel on the basis of stock market performance; calculate EVA and MVA. Use the data provided in Exhibit 5.

Case 7: Financial Performance of Major Steel Firms 131

9. Academic studies suggest the take over candidates are often firms with low leverage and poor operating performance. Are any of these firms good take over candidates? Why? Exhibit 1

Liabilities of Steel Firms

SAIL and Tata Steel (INR crore1) SAIL Mar 2007

Tata Steel Mar 2006

Mar 2007

Mar 2006

17313.15 5000.00 4130.40

12601.41 5000.00 4130.40

13949.09 1750.00 581.07

9755.30 600.00 554.07

4130.40 0.00 0.00

4130.40 0.00 0.00

580.67 0.00 257.93

553.67 0.00 257.93

Buy back amount Buy back shares (nos.) Reserves & surplus

0.00 0.00 13182.75

0.00 0.00 8471.01

0.00 0.00 13368.42

0.00 0.00 9201.63

Borrowings Deferred tax liabilities Current liabilities & provisions

3291.52 2707.79 12011.86

3388.45 2889.53 11765.05

9645.33 1718.96 6782.33

2516.15 1716.40 5269.51

Current liabilities Provisions Total liabilities

6287.20 5724.66 35324.32

6100.87 5664.18 30644.44

3670.26 3112.07 32095.71

2835.99 2433.52 19257.36

Net worth Authorized capital Issued equity capital Paid-up equity capital Preference capital Bonus equity capital

J S W Steel Ltd. and Essar Steel (INR crore) JSW Steel Mar 2007 Mar 2006 Net worth

Essar Steel Mar 2007 Mar 2006

5572.29

4356.22

4467.95

4031.47

Authorized capital Issued equity capital Paid-up equity capital

2000.00 163.98 225.01

2000.00 156.98 218.03

3520.00 1139.81 1140.48

3520.00 580.50 581.17

Preference capital Bonus equity capital Buy back amount

279.03 0.00 0.00

279.03 0.00 0.00

246.52 3.99 0.00

2204.12 3.99 0.00

Buy back shares (nos.) Reserves & surplus Borrowings

0.00 5068.25 4173.03

0.00 3859.16 4096.05

0.00 3080.95 6943.24

0.00 1246.18 7047.16

Deferred tax liabilities Current liabilities & provisions Current liabilities

1130.09 2323.55 2232.27

898.55 2148.78 1918.34

957.02 3728.80 3619.69

930.52 2707.98 2680.34

91.28 13198.96

230.44 11499.60

109.11 16097.01

27.64 14717.13

Provisions Total liabilities

1. INR 1 crore = INR 10 million. It is customary to quote in crores rather than millions in India.

(Contd.)

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Cases in Corporate Finance

(Exhibit 1 Contd.)

Ispat Industries Ltd. and Jindal Stainless (INR Crore) Ispat Industries Mar 2007

Jindal

Mar 2006

Mar 2007

Mar 2006

2941.67 4000.00 1222.44 1218.40

2049.81 4000.00 1222.44 1218.38

1401.77 54.90 27.64 27.64

1009.20 54.90 26.11 26.11

Preference capital Bonus equity capital Buy back amount

1070.34 0.00 0.00

1070.32 0.00 0.00

0.00 5.15 0.00

0.00 5.15 0.00

Buy back shares (nos.) Reserves & surplus Borrowings

0.00 652.93 8315.50

0.00 -238.89 8089.58

0.00 1374.13 2656.32

0.00 983.09 2193.81

Deferred tax liabilities Current liabilities & provisions Current liabilities

1241.43 2165.75 2136.94

1139.44 2415.76 2403.34

394.37 2021.41 1787.95

280.88 1156.05 980.51

28.81 14664.35

12.42 13694.59

233.46 6473.87

175.54 4639.94

Net worth Authorized capital Issued equity capital Paid-up equity capital

Provisions Total liabilities Source: CMIE Prowess database.

Exhibit 2 Assets of Steel Firms

Steel Authority of India Ltd. and Tata Steel (INR crore) SAIL

Tata Steel Mar 2007 Mar 2006

Mar 2007

Mar 2006

12694.31 0.00 513.79

12778.89 0.00 292.00

11010.96 0.00 6106.18

9849.81 0.00 4069.96

Deferred tax assets Inventories Raw materials and stores

1295.13 6651.47 3137.50

1405.07 6210.06 2985.24

970.02 2332.98 1225.96

759.40 2174.75 1150.20

Raw materials Stores and spares Finished and semi-finished goods

1780.83 1356.67 3513.97

1769.97 1215.27 3224.82

720.52 505.44 1107.02

707.54 442.66 1024.55

Finished goods Semi-finished goods Incomplete construction contracts

3513.97 0.00 0.00

3224.82 0.00 0.00

1078.08 28.94 0.00

1000.62 23.93 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

4291.20

3428.77

3762.09

Net fixed assets Revalued assets Investments

Stock real estate Stock of shares / securities Other stock Receivables

1846.54 (Contd.)

Case 7: Financial Performance of Major Steel Firms 133

(Exhibit 2 Contd.) SAIL Sundry debtors Debtors exceeding six months Accrued income Advances / loans to corporate bodies Group / associate cos. Other cos. Deposits with govt. / agencies Advance payment of tax Other receivables Cash & bank balance Intangible / DRE not written off Total assets

Mar 2007 2314.75 72.63 152.56 16.42 16.42 0.00 108.30 10.50 1688.67 9609.83 268.59 35324.32

Mar 2006 1881.73 116.00 85.48 16.42 16.42 0.00 132.73 10.23 1302.18 6172.64 357.01 30644.44

Tata Steel Mar 2007 Mar 2006 631.63 539.40 27.49 49.55 0.20 0.20 378.58 323.72 376.58 321.72 2.00 2.00 308.15 337.83 70.85 75.02 2372.68 570.37 7681.35 288.39 232.13 268.51 32095.71 19257.36

J S W Steel Ltd. and Essar Steel (INR crore) JSW Steel Mar 2007 Mar 2006 Net fixed assets Revalued assets Investments Deferred tax assets Inventories Raw materials and stores Raw materials Stores and spares Finished and semi-finished goods Finished goods Semi-finished goods Incomplete construction contracts Stock real estate Stock of shares / securities Other stock Receivables Sundry debtors Debtors exceeding six months Accrued income Advances / loans to corporate bodies Group / associate cos. Other cos. Deposits with govt. / agencies Advance payment of tax Other receivables Cash & bank balance Intangible / DRE not written off Total assets

10189.64 0.00 210.15 117.43 1011.35 777.17 611.44 165.73 234.18 195.29 38.89 0.00 0.00 0.00 0.00 1135.33 245.16 54.36 0.00 0.00 0.00 0.00 93.51 110.66 686.00 337.80 197.26 13198.96

8379.88 0.00 89.14 156.52 924.23 623.52 481.63 141.89 300.71 237.26 63.45 0.00 0.00 0.00 0.00 1546.87 241.26 56.50 0.00 0.00 0.00 0.00 104.46 50.26 1150.89 98.87 304.09 11499.60

Essar Steel Mar 2007 Mar 2006 9997.37 0.00 433.43 1195.25 2328.77 1123.81 528.84 594.97 1204.96 527.24 677.72 0.00 0.00 0.00 0.00 1709.33 546.85 232.27 4.51 101.92 101.92 0.00 71.56 73.55 910.94 432.86 0.00 16097.01

9285.81 0.00 182.97 1356.27 1485.34 1153.18 651.87 501.31 332.16 238.69 93.47 0.00 0.00 0.00 0.00 1680.95 540.16 103.11 4.51 10.38 10.38 0.00 132.23 52.01 941.66 725.79 0.00 14717.13 (Contd.)

134

Cases in Corporate Finance

(Exhibit 2 Contd.)

Ispat Industries and Jindal Stainless (INR crore) Ispat Industries Mar 2007 Mar 2006

Jindal Mar 2007

Mar 2006

Net fixed assets Revalued assets

9878.01 1240.00

9517.28 328.49

3764.88 0.00

2583.88 0.00

Investments Deferred tax assets Inventories

113.59 1865.04 1056.19

113.32 1767.74 985.61

188.56 2.79 1069.74

310.22 2.58 687.37

Raw materials and stores Raw materials Stores and spares

700.46 534.52 165.94

653.30 515.77 137.53

549.51 482.36 67.15

294.48 229.42 65.06

Finished and semi-finished goods Finished goods Semi-finished goods

250.73 239.68 11.05

227.31 219.15 8.16

520.23 329.95 190.28

392.89 290.51 102.38

Incomplete construction contracts Stock real estate Stock of shares / securities

0.00 105.00 0.00

0.00 105.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 1423.87 645.02

0.00 1181.78 594.13

0.00 1233.50 580.42

0.00 839.88 350.43

Debtors exceeding six months Accrued income Advances / loans to corporate bodies

71.57 2.46 302.14

138.09 2.65 282.83

38.21 0.20 44.12

13.84 8.94 96.45

Group / associate cos. Other cos. Deposits with govt. / agencies

302.14 0.00 62.01

282.83 0.00 54.26

44.12 0.00 0.05

35.99 60.46 0.12

Advance payment of tax Other receivables Cash & bank balance

1.90 410.34 327.65

1.44 246.47 128.86

198.32 410.39 196.21

167.14 216.80 197.05

0.00 14664.35

0.00 13694.59

18.19 6473.87

18.96 4639.94

Other stock Receivables Sundry debtors

Intangible / DRE not written off Total assets Source: CMIE Prowess database.

Exhibit 3 Income Statements

Steel Authority of India Ltd. and Tata Steel (INR crore)

Income Sales Other income Change in stocks

SAIL Mar 2007

Mar 2006

Tata Steel Mar 2007 Mar 2006

41288.89

34288.05

19772.13

17136.08

1134.64 289.15

764.46 1131.31

484.29 82.47

261.95 104.91 (Contd.)

Case 7: Financial Performance of Major Steel Firms 135

(Exhibit 3 Contd.) SAIL Mar 2007 Non-recurring income

Tata Steel Mar 2006

Mar 2007

Mar 2006

303.46

388.70

189.82

163.96

Total Income Expenditure Raw materials, stores, etc.

43016.14   15259.95

36572.52   14129.12

20528.71 4645.06 1454.83

17666.90 3762.03 1351.51

Wages & salaries Energy (power & fuel) Indirect taxes (excise, etc.)

5131.38 2584.60 5419.50

4182.86 2495.47 4625.10

1027.84 2360.84 64.71

897.57 2060.48 80.75

Advertising & marketing expenses Distribution expenses Others

82.80 872.87 2609.13

61.27 982.12 2485.45

1117.45 2654.41 236.02

1004.32 2365.79 112.62

Less: expenses capitalised Non-recurring expenses Total Expenses

67.43 51.84 32079.50

47.66 31.03 29040.08

14.67 13575.83

41.14 11676.21

Profits / losses PBDIT Financial charges (incl. lease rent)

  11071.50 332.13

  7627.76 467.76

7424.92 251.87 7173.05

6215.93 175.70 6040.23

PBDT Depreciation PBT

10739.37 1211.48 9527.89

7160.00 1207.30 5952.70

804.72 6368.33 2146.18

733.96 5306.27 1799.89

Tax provision PAT Appropriation of profits 

3325.60 6202.29  

1939.73 4012.97

4222.15

3506.38

Dividends Retained earnings

1478.40 4723.89

941.94 3071.03

1104.33 3117.82

820.43 2685.95

JSW Steel and Essar Steel (INR Crore) JSW Steel Mar 2007 Mar 2006 Income Sales

Essar Steel Mar 2007 Mar 2006

9486.32

6876.53

9000.46

6850.45

43.69 -66.54 84.88

17.00 139.29 450.15

135.23 872.66 34.68

49.98 89.74 349.09

TOTAL INCOME Expenditure Raw materials, stores, etc.

9548.35

7482.97

10043.03

7339.26

4526.21

3491.26

3594.68

2339.44

Wages & salaries Energy (power & fuel) Indirect taxes (excise, etc.)

175.47 393.10 749.37

127.04 420.19 600.50

149.78 2549.41 912.98

95.86 1796.90 681.79

37.15

31.82

199.81

155.45

Other income Change in stocks Non-recurring income

Advertising & marketing expenses

(Contd.)

136

Cases in Corporate Finance

(Exhibit 3 Contd.) JSW Steel Mar 2007 Distribution expenses Others Less: expenses capitalized

Essar Steel

Mar 2006

Mar 2007

Mar 2006

469.37 356.42 0.00

381.07 272.14 0.00

137.32 345.57 0.00

79.45 351.55 18.76

Non-recurring expenses TOTAL EXPENSES Profits / losses

1.82 6708.91

8.20 5332.22

37.54 7927.09

89.24 5608.44

PBDIT Financial charges (incl. lease rent) PBDT

2839.44 409.88 2429.56

2150.75 371.30 1779.45

2115.94 800.08 1315.86

1768.34 567.97 1200.37

Depreciation PBT1931.33 Tax provision

498.23 1373.63 639.33

405.82 684.82 517.10

631.04 699.51 248.33

500.86

PAT 1292.00 Appropriation of profits Dividends Retained earnings

856.53   266.37 1025.63

436.49

530.18

175.01 681.52

0.00 436.49

169.33

0.00 530.18

Ispat Industries and Jindal Stainless (INR crore) Ispat Industries Mar 2007 Mar 2006 Income Sales Other income Change in stocks Non-recurring income TOTAL INCOME Expenditure Raw materials, stores, etc. Wages & salaries Energy (power & fuel) Indirect taxes (excise, etc.) Advertising & marketing expenses Distribution expenses Others Less: expenses capitalized Non-recurring expenses TOTAL EXPENSES Profits / losses PBDIT Financial charges (incl. lease rent)

Jindal Stainless Mar 2007 Mar 2006

  13967.14

  9817.54

5365.57

  3595.35

88.49 23.42 72.64

25.76 84.68 425.13

98.45 127.34 14.06

42.95 83.00 10.13

14151.69

10353.11

5605.42

3731.43

9656.09 165.34

7419.46 131.55

3453.41 73.52

2369.34 53.48

1153.52 892.81 70.82

849.86 639.13 137.08

436.13 397.41 80.79

300.74 340.30 33.50

150.89 292.92 4.71

122.33 274.70 12.19

100.01 111.61 0.00

64.72 96.25 0.00

22.03 12409.13

21.78 9608.08

26.57 4679.45

12.74 3271.07

1751.98 1124.78

769.41 1006.16

925.97 157.45

460.36 84.17 (Contd.)

Case 7: Financial Performance of Major Steel Firms 137

(Exhibit 3 Contd.) Ispat Industries Mar 2007 Mar 2006

Jindal Stainless Mar 2007 Mar 2006

PBDT Depreciation PBT3.37

627.20 623.83 –808.18

–236.75 571.43 552.42

768.52 216.10 240.07

376.19 136.12

Tax provision PAT -9.53 Appropriation of profits

12.90 –812.67  

4.49 353.01  

199.41 159.73

80.34

0.00 –9.53

0.00 -812.67

31.85 321.16

23.82 135.91

Dividends Retained earnings Source: CMIE Prowess database.

Exhibit 4 Cash Flow Statements

SAIL and Tata Steel (INR crore) SAIL Mar 2007

Tata Steel

Mar 2006

Mar 2007

Mar 2006

Net profit before tax & extra ord. items Add: depreciation Interest payable

9422.62 1236.75 215.25

5705.74 1217.47 467.76

6262.62 819.29 251.25

5240.76 775.10 174.51

Gain or loss on forex transactions Write offs / amortization Profit on sale of investments

–5.61 131.93 0.00

–20.54 188.20 0.00

–82.69 217.20 –15.63

–37.73 57.75 –9.95

–13.97 –752.60 –17.34

–58.24 –461.49 –13.66

–11.19 –77.35 –324.16

–41.00 –50.00 –166.08

–180.48 10036.55 –832.15

428.92 7454.16 –1149.52

0.10 7039.44 –21.94

0.00 5943.36 –175.94

–441.41 337.90 0.00

–1766.94 79.55 0.00

–158.22 512.04 0.00

–302.35 139.60 0.00

9100.89 –3427.31 –136.13

4617.25 –746.45 –176.68

7371.32 –2034.59 0.00

5604.67 –1747.11 0.00

5537.45 76.21 5613.66 –587.53

3694.12 –46.87 3647.25 –338.01

5336.73 –337.51 4999.22 –5427.60

3857.56 –278.07 3579.49 –2464.59

–1137.66

–896.65

–2007.68

–1527.58

Profit on sale of assets Interest income Dividend income Other income / provision adjustments Cash flow before working cap. changes Trade receivables Inventories Trade payables Others Cash flow from operations Direct taxes paid Dividend tax paid Cash flow before extra ord. items Extraordinary items Cash flow from operating activities Net cash used in investing activities Purchase of fixed assets

(Contd.)

138

Cases in Corporate Finance

(Exhibit 4 Contd.) Mar 2007 Sale of fixed assets Acquisition / merger of cos. Purchase of investments

SAIL Mar 2006

Mar 2007

Tata Steel Mar 2006

46.82 0.00 –225.00

87.65 0.00 –60.17

17.85 0.00 –18424.30

44.00 0.00 –8314.72

0.00 0.00 25.45

0.00 0.00 –0.83

14623.48 0.00 0.00

7089.51 0.00 0.00

0.00 685.52 17.34

0.00 518.33 13.66

–20.00 58.89 324.16

0.00 78.12 166.08

0.00 –1588.94 0.00

0.00 –3396.75 0.00

0.00 7821.34 1398.79

0.00 –1073.23 0.00

Total proceeds from borrowings Proceeds from long-term borrowings Proceeds from short-term borrowings

0.00 0.00 0.00

0.00 0.00 0.00

8190.75 0.00 0.00

535.64 0.00 0.00

Total Repayment of borrowings Repayment of long-term borrowings Repayment of short-term borrowings

–111.49 0.00 0.00

–1515.63 0.00 0.00

–916.31 0.00 0.00

–758.96 0.00 0.00

Share issue expenses Interest paid Dividend paid

0.00 –509.16 –970.64

0.00 –621.56 –1259.77

0.00 –227.85 –717.69

0.00 –180.21 –713.46

Other cash from financing activities Net cash flow Opening cash balance

2.35 3437.19 6172.64

0.21 –87.51 6260.15

93.65 7392.96 288.39

43.76 41.67 246.72

Closing cash balance

9609.83

6172.64

7681.35

288.39

Sale of investments Project expenses Loan to group / subsidiary cos. Loan to other cos. Interest received Dividend received Other income Net cash used in financing activities Proceeds from share issues

JSW and Essar (INR crore) JSW Steel Mar 2007 Mar 2006

Essar Steel Mar 2007 Mar 2006

Net profit before tax & extra ord. items Add: depreciation

1915.18 498.23

1301.89 405.82

706.27 631.04

784.34 482.10

Interest payable Gain or loss on forex transactions Write offs / amortization

288.24 –0.25 109.02

287.84 1.42 61.79

617.94 0.00 0.00

422.67 0.00 0.00

0.00 –0.77 –7.27

–369.20 –0.14 –4.69

10.66 –0.05 0.00

–15.78 –178.39 0.00

–0.34 –8.35 2793.69

–0.03 –2.01 1682.69

–0.12 –6.43 1959.31

–0.78 –0.57 1493.59

324.69 –87.12 281.71

–22.03 –180.15 465.74

–130.11 –843.43 1037.64

–225.71 –516.22 603.14 (Contd.)

Profit on sale of investments Profit on sale of assets Interest income Dividend income Other income / provision adjustments Cash flow before working cap. changes Trade receivables Inventories Trade payables

Case 7: Financial Performance of Major Steel Firms 139

(Exhibit 4 Contd.)

Others Cash flow from operations Direct taxes paid

JSW Steel Mar 2007 Mar 2006 0.00 0.00 3312.97 1946.25 –284.82 –69.25

Essar Steel Mar 2007 Mar 2006 0.00 0.00 2023.41 1354.80 –26.34 –25.75

Dividend tax paid Cash flow before extra ord. items Extraordinary items Cash flow from operating activities

0.00 3028.15 0.00 3028.15

0.00 1877.00 –13.41 1863.59

0.00 1997.07 0.00 1997.07

0.00 1329.05 0.00 1329.05

Net cash used in investing activities Purchase of fixed assets Sale of fixed assets

–2450.44 –2346.84 0.32

–1592.74 –1597.13 1.49

–1423.02 –1321.25 0.52

–3173.65 –1372.29 0.52

0.00 –107.86 0.00

0.00 0.00 0.00

0.00 –478.12 317.31

–1841.71 –800.21 810.19

Project expenses Loan to group / subsidiary cos. Loan to other cos.

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

Interest received Dividend received Other income

3.60 0.34 0.00

2.87 0.03 0.00

58.52 0.00 0.00

29.87 –0.02 0.00

–384.39 212.19 1242.74

–265.00 240.79 2184.77

–866.98 0.00 2019.47

2319.10 1957.60 4626.29

Proceeds from long-term borrowings Proceeds from short-term borrowings Total Repayment of borrowings

1242.74 0.00 –1104.43

2088.25 96.52 –2278.44

0.00 0.00 –1997.10

0.00 0.00 –3478.16

Repayment of long-term borrowings Repayment of short-term borrowings Share issue expenses

–1017.67 –86.76 0.00

–2278.44 0.00 0.00

–8.34 0.00 0.00

–7.03 0.00 0.00

–326.16 –408.73 0.00

–306.73 –105.39 0.00

–889.35 0.00 0.00

–786.63 0.00 0.00

193.32 49.08 242.40

5.85 43.23 49.08

–292.93 725.79 432.86

474.50 251.29 725.79

Acquisition / merger of cos. Purchase of investments Sale of investments

Net cash used in financing activities Proceeds from share issues Total proceeds from borrowings

Interest paid Dividend paid Other cash from financing activities Net cash flow Opening cash balance Closing cash balance

Ispat Industries and Jindal (INR crore) Mar 2007 Net profit before tax & extra ord. items Add: depreciation Interest payable

Ispat Mar 2006

Mar 2007

Jindal Mar 2006

3.37

–1196.85

557.73

242.77

623.83 1022.38

571.43 936.81

216.10 119.35

136.11 55.81 (Contd.)

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(Exhibit 4 Contd.) Ispat Mar 2007 Gain or loss on forex transactions Write offs / amortization

Jindal

Mar 2006

Mar 2007

Mar 2006

–56.43 1.66

36.00 10.02

–28.52 0.47

–0.30 0.36

0.00 13.47 0.00

0.00 15.17 0.00

–5.34 17.27 0.00

1.54 1.98 0.00

0.00 –38.46 1569.82

0.00 –17.08 355.50

–0.12 –1.13 875.81

–4.82 –1.65 431.80

–242.24 –53.33 162.70

2.32 –74.51 548.84

–367.01 –382.37 796.86

–101.86 –171.01 204.23

Others Cash flow from operations Direct taxes paid

0.00 1436.95 –3.56

0.00 832.15 –5.12

0.00 923.29 –70.66

0.00 363.16 –48.84

Dividend tax paid Cash flow before extra ord. items Extraordinary items Cash flow from operating activities

0.00 1433.39 0.00 1433.39

0.00 827.03 0.00 827.03

0.00 852.63 0.00 852.63

0.00 314.32 0.00 314.32

Net cash used in investing activities Purchase of fixed assets Sale of fixed assets

–295.02 –308.45 0.49

–213.54 –237.02 36.41

–1167.36 0.00 10.33

–997.13 0.00 10.77

0.00 –0.05 0.00

9.42 0.00 0.00

0.00 –11.93 153.04

–1.13 –105.27 0.00

Project expenses Loan to group / subsidiary cos. Loan to other cos.

0.00 0.00 0.00

0.00 0.00 0.00

–1372.13 –3.35 0.00

–937.84 –12.55 0.00

Interest received Dividend received Other income

6.80 0.00 6.19

4.41 0.00 –26.76

56.56 0.12 0.00

44.07 4.82 0.00

–957.07 0.09 600.01

–622.99 –0.11 480.15

313.90 85.18 468.63

823.11 0.00 917.17

Proceeds from long-term borrowings Proceeds from short-term borrowings Total Repayment of borrowings

420.82 179.19 –340.60

177.08 303.07 –327.53

0.00 0.00 0.00

0.00 0.00 0.00

Repayment of long-term borrowings Repayment of short-term borrowings

–340.60 0.00

–327.53 0.00

0.00 0.00

0.00 0.00

Profit on sale of investments Profit on sale of assets Interest income Dividend income Other income / provision adjustments Cash flow before working cap. changes Trade receivables Inventories Trade payables

Acquisition / merger of cos. Purchase of investments Sale of investments

Net cash used in financing activities Proceeds from share issues Total proceeds from borrowings

(Contd.)

Case 7: Financial Performance of Major Steel Firms 141

(Exhibit 4 Contd.) Ispat Mar 2007 Share issue expenses Interest paid

Jindal

Mar 2006

Mar 2007

Mar 2006

0.00 –1216.57

0.00 –775.50

0.00 –216.17

0.00 –79.10

Dividend paid Other cash from financing activities Net cash flow

0.00 0.00 181.30

0.00 0.00 –9.50

–23.74 0.00 –0.83

–14.96 0.00 140.30

Opening cash balance Closing cash balance

71.13 252.43

80.63 71.13

197.07 196.24

56.77 197.07

Source: CMIE Prowess database.

Exhibit 5

Investment Indicators of Tata Steel

As of November 23, 2007 Beta P/E

1.13 11.83

P/BV Dividend Yield % Dividend Payout %

2.8 1.89 26.16

Stock returns % 30 year T Bond rate Market Risk Premium

78.64 8.24% 9%

For 2005-06 and 2004-05 ROIC WACC As of 31st March 2007 (Rs cr) Market Capitalization Book Value of debt Book Value of Equity Source: CMIE Prowess Database.

36.93% 12.62%

29688 2516.15 9502.03

38.95% 12.15%

CASE

8

Value Based Management at Marico Ltd. DESCRIPTION The case presents measures of financial performance and health for Marico. The measures include economic profit (also known as Economic Value Added) and other classic measures, such as financial ratios and stock price performance. Students are asked to evaluate the strategy and estimate the potential value creation ability of Marico.

LEARNING OBJECTIVE To introduce principles of value-based management. To interpret the range of financial criteria presented and reflect on the consistency of those criteria in measuring value creation of firms.

SUBJECTS COVERED Financial Management, Financial analysis, EVA, Value. This case was prepared by Vishwanath S.R. of Institute of Management Technology, Nagpur.

Case 8: Value Based Management at Marico Ltd.

143

Our Chief Financial Officer was doing an excellent job. We moved him out. So he could move in as Chief of HR and Strategy. Most companies encourage top performers to only keep at what they do best. Marico does quite the contrary. We believe, to accelerate growth, you need fertile minds that bring fresh insights and perspectives to the table….. Harsh Mariwala, CEO Analyst Meet May 03, 2007 Milind Sarwate, a Chartered Accountant, Cost Accountant and Company Secretary by profession joined Marico in 1998. He was the Chief Financial Officer, in charge of the core Finance functions as also Information Systems Function, Legal and Secretarial of Marico Industries. In 2007 when he stepped down as CFO the company was in excellent shape. The return on capital employed was in excess of 30% for over a decade; profits had grown at a compound annual growth rate of 13%; the company had paid dividends consecutively for many years and Marico had provided significantly above average total shareholder returns. Exhibits 1, 2 and 3 present the financial highlights, financial statements and stock price performance of Marico. Milind explained the corporate philosophy and growth strategy of Marico:1 We are typically not a sloganeering company. However, if I have to loosely express our goal, it would be to keep moving up the value chain through products and services aimed at consumers in the space of beauty and wellness. It will be our endeavour to maintain the track record, move up the value chain and deliver sustainable profitable growth. FY 05 saw Marico cross the landmark of a turnover of Rs. 1000 crore. Just as we were achieving one target, we set ourselves a new one of achieving a turnover of Rs 2000 crore by FY2009. The new target makes it imperative for us to go for accelerated growth—a run rate of 15% to 20% as compared to the band of 10% to15% that we used to display earlier. Towards this, we have deployed the following broad strategies:

ORGANIC GROWTH · Expand the size of the market for dominant brands such as Parachute, Saffola, Mediker, Kaya and Revive. · Increase market share in categories where we face significant competition such as hair oils in India and hair creams in the Middle East. · Prototype continuously and Roll out new products and services in existing and new business segments. We have rolled out in the recent past products such as Hair and Care Silk-n-Shine, Parachute after 1. www.equitymaster.com

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Shower hair cream and hair gel and Parachute Therapie an anti-hairfall solution. We are currently prototyping, in Andhra Pradesh, Parachute Hair Perfect, a leave-in moisturiser and in Mumbai, Saffola Atta Mix, a functional food that helps in the management of cholesterol. · Expand International operations beyond the Gulf and Bangladesh. Marico recently acquired two hair care brands, Fiancée and HairCode in Egypt, marking its entry into the North African market.

INORGANIC GROWTH · Aggressively pursue inorganic growth, both in India and overseas. During the period since May 2005, Marico has successfully concluded six brand acquisitions, two each in India, Bangladesh and Egypt. · The company has been continuously investing in brand building - in both strengthening its existing ones and nurturing new ones. This investment leads to a strong franchise and creates brands with a premium pricing power. This contributes to improved margins. · Parachute and Saffola are amongst the top 100 most respected brands in the country. Besides, the company has made a conscious effort to focus on its higher, this margin portfolio which now contributes to about 80% of revenue. The entry into the solutions business through Kaya also has the potential of improving the margin profile for the company.

COMPANY BACKGROUND Marico Ltd is a family-owned company, incorporated on October 13, 1988, as Marico Foods Ltd.2 The name was changed to Marico Industries Ltd with effect from October 31, 1989. In April 1990, the company commenced commercial operations by taking over the business of the consumer products division of The Bombay Oil Industries Ltd (BOIL). Marico later changed its name to Marico Ltd on April 25, 2005. Marico largely continues to be a family-owned company with the promoters Harsh Mariwala and family holding 63.45% of the total shares as on September 30, 2007. Though the company is familyowned, it is managed by professionals and the unique rotation policy of the company is also wellknown. Marico is a flat organization with only five levels of reporting between the Managing Director and an operator on the shop floor. This flat structure helped the company in being more responsive to the environment while providing enriched roles for members. Keeping in mind the fast and ever changing business environs, Marico’s structure is dynamic and constantly evolving.

Marico’s Businesses Marico undertook an organizational restructuring exercise, which resulted in the Marico Group business organisation being restructured into three strategic business units (SBUs)—consumer products business (personal and nature care and wellness and new products), Kaya Business (Kaya Skin clinics and Kaya Life) and the international business (which comprises the international FMCG business and the Sundari business). 2. This section is based on the information on the company’s website.

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The Consumer Products Business houses well-known brands such as Parachute, Saffola, Sweekar, Hair and Care, Nihar, Shanti, Mediker, Revive, Manjal, among others, which occupy leadership positions with significant market shares in most categories- Coconut Oil, Hair Oils, Post wash hair care, Anti-lice Treatment, Premium Refined Edible Oils, niche Fabric Care etc. Every month, over 70 million consumer packs from Marico reach approximately 130 million consumers in about 23 million households, through a widespread distribution network of more than 2.5 million outlets in India and overseas. The International Business Group was formed in early 90’s to cater mainly to the demand of Indians settled abroad. The Business was then small and it has over the years assumed increasing proportions with a phenomenal top line growth rate of more than 30%. Initially Marico exported only Parachute Coconut Oil. Now it caters to varying needs of customers in different countries with a host of varied offerings. To cater to customers who belong to diverse cultures and consumer habits the International Business Group has been customising its products. For example, it offers perfumed oils to consumers in Bangladesh and Hair Creams and Hair Oils (with lower coconut oil content) to Arabs in the Gulf. Market shares of Marico’s brands overseas have been rising. Parachute Coconut Oil is the market leader in Bangladesh with almost half the market share while other hair oils and hair care products have been consolidating their share of the market. Hair Cream in Gulf is increasingly growing into a big brand. The International Business Group’s turnover has increased from Rs. 63 crore in FY 02-03 to Rs. 300+ crore in FY 07-08 Kaya Ltd (erstwhile Kaya Skin Care Ltd.) was an entrepreneurial leap of faithmarking Marico’s entry into skin care solutions business. It was a true reflection of uncommon sense for a company in hair care products to move, instead of merely logical product extensions, straight into skin care services. It attempted to leverage Marico’s strengths in the Personal Care business and in-depth understanding of the needs of the Indian consumer and her/his desire to enhance her/his natural beauty with the best cosmetic dermatology procedures available internationally. Kaya Ltd. has been focused on meeting the emerging needs of the modern day consumers by providing useful and effective services in the beauty and wellness space. The pioneering effort has been in the area of skin care with Kaya Skin Clinic. For over 5 years, Kaya Skin Clinic has refined the standards and professionalisms of the skin care industry through innovative, world class treatments and services that have been tailor made to suit Indian skin. Domestically, it has manufacturing facilities in eight different locations. As part of its international acquisition agreements with Fiancee and Enaleni, it will also acquire their manufacturing facilities in Cairo and Durban, respectively. The company runs its international business and ‘Kaya’ clinics through separate 100% owned subsidiaries. The details are shown in Table A:

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Table A

Marico’s Subsidiaries Subsidiary

Country

Marico Bangladesh Ltd.

Bangladesh

MBL Industries Ltd. Kaya Skincare Ltd. Marico Middle East FZE

Bangladesh India UAE

Kaya Middle East FZE MEL Consumer Care SAE

UAE Egypt

Sundari LLC

USA

Source: Kotak Securities.

Marico has endeavoured to move up the value-chain with consistent and de-risked growth strategies. As a part of this, Marico has realigned its product portfolio, enabling increased focus on high margin products and businesses. It has built a strong brand portfolio catering predominantly to urban markets. Table B presents the market share of various products. Table B

Market Share Data

Category

Brand

Market share %

Rank

% of sales

Coconut oil (India) Coconut Oil (Bangladesh) Refined Safflower Oil Antilice treatment

Parachute

~ 48

1

40.0

Parachute Saffola Mediker

~ 60 ~ 98 ~ 96

1 1 1

15.0 21.5 4.9

Instant Fabric Starch Hair Oils Shanti Amla,

Revive Parachute Jasmine,

~ 95

1

12.4

~24%

2

6.0

Hair and Care, Nihar Source: Kotak Securities.

While Marico has been successful in some segments it has had disappointing experience in certain other segments. Sil was added to Marico’s product portfolio with the acquisition of Kannur Foods in 1993. It is the second largest brand of jams in India with a market share of around 8%. The Sil brand extends to a range of products such as jams, sauces, baked beans, Chinese vinegar, sweet corn soup and mayonnaise. Sil, part of Marico’s non-focus portfolio, was contributing around 1% (Rs. 20 crore) to the company’s top line with an operating profit margin of around 20% (Rs. 4 crore). Sil faces tough competition from brands like Kissan and Maggie, which have strong traction in India’s processed food market. Since it was a non-focus brand, the company did not undertake any major brandbuilding activity for it and this resulted in flattish sales over the last few years.

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Marico exited from its processed food business by divesting its brand Sil to Scandic Food Pvt Ltd, the Indian subsidiary of Good Food Group A/S in early 2008. Marico has segregated its brand portfolio into focus and non-focus brands. The focus brands comprise the aforementioned brands and have significant market shares in their product categories. The share of these focus brands have been increasing over the years. In 2007, the portfolio grew 39% and contributed 79% to group revenues as compared to 78% in 2006. With over 90% of the brand building efforts directed towards this high margin portfolio, analysts expected to see an increasing contribution coming from this portfolio. Marico controls 58% of the Rs. 11 bn domestic coconut oil market (Source: AC Nielsen survey). The domestic coconut oil market is expected to grow at a rate of 10-12% on the back of a growing population and increasing conversions from loose oil customers to packaged oil users. Marico has consolidated its position in the coconut oils segment by making strategic acquisitions of Oil of Malabar and Nihar in 1999 and 2006, respectively. Parachute, the flagship brand, contributes approximately 40% of the group revenues. In 2007, volumes for parachute rigid packs grew 12% over 2006. Marico’s second flagship brand, Saffola, operates in the premium edible oil segment. In 2007, the Saffola franchise registered a volume growth of 18%, contributing almost 20% of the group revenues. With growing demand from international markets, Saffola was expected to grow at a strong pace taking its contribution to over 20% of the group revenues. Table C presents the details of competition faced by Marico in various product categories. Table C

Competition

Category

Brand

Competition

Coconut Oils# Hair Oils

Parachute, Nihar, Oil of Malabar Parachute Jasmine, Parachute Advansed, Shanti Badam Amla, Hair & Care, Nihar

Dabur Dabur, Emami, Bajaj, HUL

Edible Oils Skin Care Others

Saffola, Sweekar Kaya Skin Clinics,Sundari Spa Mediker, Parachute After Shower,

Agrotech, Adani Unorganised players Various players

Revive, Silk-n-Shine, Sil, Sparsh, Manjal, Saffola Salt Source: Kotak Securities.

Exhibit 4 provides a summary of financial indicators and a description of major FMCG companies. Besides organic growth, Marico is open to exploring acquisitions in the chosen strategic turfs of beauty and wellness. The past acquisitions of Marico have not only consolidated its market standing (for example, Nihar) but also thrown open new opportunities of growth. In 2007, Marico achieved a turnover growth of 36%, wherein acquisitions made by company contributed 14% of the growth. The key acquisitions in the recent past are presented in Exhibit 5.

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Cases in Corporate Finance

Milind explained:3 One of the avenues for growth that the company has identified for itself is acquisitions both in India and overseas. This is likely to continue. We would like to consider opportunities that have a close fit with our chosen segments of hair care, skin care and health care. Apart from contributing to the overall growth agenda, the acquisitions that we made in the past each served a strategic purpose. Camelia and Aromatic signified Marico’s entry into the large soap category in Bangladesh. These would enable Marico to leverage its extensive distribution network, built through the leadership already established in coconut oil through Parachute. Manjal, a Soap Brand in Kerala India, enabled Marico’s entry into the soaps category in India, with a brand, uniquely positioned in the herbal category. Nihar, a Coconut Oil and Hair Oil Brand in India, enabled Marico to buy out a significant competitor (HLL) and pre-empt potential competitors from entering Marico’s categories. The acquisition also bolstered Marico’s distribution in the Eastern region. Fiancée and HairCode, Hair care and Skin care brands in Egypt paved the way for entry into a new geography (North Africa), significantly shortening the learning curve and the time taken to create a new brand or build equity for Marico’s existing brands. These profitable brands would also de-risk the Marico portfolio from dependence on its flagship profit generators.

VBM Initiatives Marico manages its product portfolio using a growth-margin matrix. All products are plotted on a growth-margin matrix to examine strategies for different products. Hair care brands like Mediker, Shanti, Jasmine, and H&C, and Coconut oil (Parachute) are high margin, high growth brands. Popular edible oil (Sweekar) is a low margin, low growth brand. Premium edible oils (Saffola) and Fabric Care (Revive) are moderate margin, moderate growth brands. Marico uses a “simplified” Economic Value Added metric to evaluate the performance of its initiatives. SEVA is defined as EBIT—cost of all capital employed. It uses SEVA for brand acquisitions, new product launches, new locations, portfolio choice, capital expenditure, brand development and a host of short-term decisions. In defining SEVA, Marico did not consider any tricky adjustments to R&D, intangibles, etc unlike Stern, Stewart and Co, the EVA compensation consulting company that popularised the concept. Other VBM initiatives include total cost management with the help of Accenture and IT initiatives. Marico has implemented supply chain management software, distributor software, and E procurement software to streamline its operations.

Situation in 2007 The buying patterns of the Indian consumer are undergoing a structural shift from being price sensitive to quality sensitive. Robust economic growth, higher salaries and improving standards of 3. www.myiris.com

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living have led to consumers opting for quality, albeit pricey, products. In 2007, all businesses of Marico recorded high growth: domestic business grew at 32%; international business at 65%; Kaya at 57%; and Sundari at 31%. Harsh Mariwala said in an analyst conference that Marico would consider four growth strategies for the future: · Consumer Product Business—India and overseas n

Expand market size in dominant brands

n

Prototype and roll out new products

n

Explore new territories in international business

· Kaya-Saturate India and grow in Middle East · Sundari-Gain achieve critical size to achieve turnaround · Inorganic growth In December 2006, Marico raised Rs. 151 crore in equity and split its stock to Re. 1 (from Rs. 10) in February 2007 to bolster the equity base of the company and bring down the stock price to an affordable trading range so that many investors can purchase the companies shares. Milind expected Capital expenditure to be about Rs. 175 crore to set up more Kaya clinics, upgrade packaging, and for a new corporate office over the next three years. As of March 2007, debt/equity stood at 1.33. Over the previous three years Marico had paid out 40–50% of its profits in dividends. The stock price of Marico stood at Rs. 68 on January 1, 2008. In early 2008, five brokerage houses—Kotak Securities, Morgan Stanley, Motilal Oswal, Joindre Capital Services Ltd and Sharekhan issued bullish reports on Marico recommending a “buy”; and two brokerage houses—SS Kantilal Ishwarlal and Lehman Brothers issued a “neutral” recommendation.

Exhibit 1

Marico Financial Highlights

Sales

Net profits

Return on

EVA

Share of

(Rs. crore)

(Rs. crore)

Net Worth %

(Rs. crore)

International

Business %

888 1007 1144

59 70 87

31 35 36

38 46 51

9 10 11

1557 1907 21%

113 169 30%

50 67

79 132

14 18

2003–04 2004–05 2005–06 2006–07 2007–08 CAGR

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Exhibit 2

Historical Balance Sheets of Marico (Rs. crore) 2007

2006

2005

2004

2003

SOURCES OF FUNDS: Share Capital Reserves Total

60.9 122.59

58 219.36

58 160.55

29 150.93

58 131.22

Total Shareholders Funds Secured Loans Unsecured Loans Total Debt

183.49 50.48 116.77 167.25

277.36 203.25 20.12 223.37

218.55 3.25 60.78 64.03

179.93 0 9.38 9.38

189.22 0 10.33 10.33

Total Liabilities APPLICATION OF FUNDS: Gross Block

350.74

500.73

282.58

189.31

199.55

217.7

402.14

170.42

152.48

141.85

Less: Accumulated Depreciation Less: Impairment of Assets Net Block

110.45 8.36 98.89

104.92 7.64 289.58

76.07 5.24 89.11

66.15 4.17 82.16

57.34 0 84.51

0 8.97 80.91

0 18.97 36.39

0 11.65 29.09

0 7.6 14.43

0 11.98 20.3

Current Assets, Loans and Advances Inventories Sundry Debtors

196.21 41.29

119.59 49.6

112.47 46.64

94.71 33.46

88.86 25.25

Cash and Bank Loans and Advances Total Current Assets

24.8 109.06 371.36

28.08 128.07 325.34

17.81 90.71 267.63

23.66 37.42 189.25

18.29 34.95 167.35

Less : Current Liabilities and Provisions Current Liabilities Provisions

311.64 12.77

140.78 20.49

93.79 15.06

85.67 12.22

68.6 9.91

Total Current Liabilities Net Current Assets Miscellaneous Expenses not written off

324.41 46.95 0

161.27 164.07 0

108.85 158.78 0

97.89 91.36 0

78.51 88.84 0

Deferred Tax Assets Deferred Tax Liability Net Deferred Tax

118.99 3.97 115.02

3.84 12.12 -8.28

2.44 8.49 -6.05

2.47 8.71 -6.24

2.21 8.29 -6.08

Total Assets

350.74

500.73

282.58

189.31

199.55

2007

2006

2005

2004

2003

1374 2.33 1371.67

1046.22 1.31 1044.91

947.27 5.21 942.06

852.56 5.28 847.28

739.21 2.05 737.16

12.63

13.11

10.78

5.92

11.87

Lease Adjustment Capital Work in Progress Investments

Historical Income Statements INCOME: Sales Turnover Excise Duty Net Sales Other Income

(Contd.)

Case 8: Value Based Management at Marico Ltd.

151

(Exhibit 2 Contd.)

Stock Adjustments Total Income EXPENDITURE: Raw Materials

2007 41.14

2006 5.82

2005 0.99

2004 –1.55

2003 3.07

1425.44

1063.84

953.83

851.65

752.1

654.23

481.57

523.38

475.45

406.21

Power & Fuel Cost Employee Cost Other Manufacturing Expenses

4.97 55.8 198.14

4.13 60.99 145.28

3.97 40.96 117.06

3.87 40.28 105.72

3.47 33.5 96.25

Selling and Administration Expenses Miscellaneous Expenses Less: Pre-operative Expenses Capitalized

289.21 17.11 0

215.3 9.35 0

158.71 17.54 0

130.4 19.2 0

114.28 15.8 0

Total Expenditure Operating Profit Interest

1219.46 205.98 20.01

916.62 147.22 5.02

861.62 92.21 3.02

774.92 76.73 2.3

669.51 82.59 1.85

Gross Profit Depreciation Profit Before Tax

185.97 35.19 150.78

142.2 33.23 108.97

89.19 11.6 77.59

74.43 11.05 63.38

80.74 21.71 59.03

Ta x Fringe Benefit tax Deferred Tax

15.86 3 15.76

4.72 2.2 3.19

4 0 –0.2

5.23 0 0.15

5.86 0 0.09

Reported Net Profit Extraordinary Items Adjusted Net Profit

116.16 –1.56 117.72

98.86 –12.65 111.51

73.79 0.35 73.44

58 –0.45 58.45

53.08 0.47 52.61

Adjst. below Net Profit P & L Balance brought forward Statutory Appropriations

0 191.36 0

0 143.39 0

0 112.15 0

0 94.09 0

0 91.04 0

Appropriations P & L Balance carried down Dividend

238.04 69.48 39.06

50.89 191.36 35.96

42.55 143.39 31.03

39.94 112.15 24.65

50.03 94.09 13.78

Preference Dividend Equity Dividend % Earnings Per Share-Unit Curr Book Value-Unit Curr

1.65 65.5 1.79 3.01

0 62 16.18 47.82

0 53.5 12.01 37.68

2.32 85 18.01 62.04

1.16 55 17.65 55.25

2007

2006

2005

2004

2003

Price Earning (P/E) Price to Book Value ( P/BV)

34.25 20.37

33.36 11.29

20.23 6.45

14.54 4.22

8.41 2.69

Price/Cash EPS (P/CEPS) EV/EBIDTA Market Cap/Sales

25.93 18.82 2.72

24.64 22.59 2.99

17.35 15.79 1.49

12 9.71 0.89

5.91 5.12 0.58

 ROE (%)

49.7

44.97

37.04

32.74

29.12

Key Ratios

(Contd.)

152

Cases in Corporate Finance

(Exhibit 2 Contd.) 2007

2006

2005

2004

2003

40.12 0.43 1.18

32.74 0.4 1.58

34.16 0 1.55

33.78 0 1.7

30.37 0.01 1.72

Turnover Ratios Fixed Assets Inventory

4.43 8.7

3.65 9.02

5.87 9.14

5.79 9.29

4.53 8.66

Debtors Interest Cover Ratio EBIT Margin (%)

30.23 8.54 12.43

21.74 25.55 12.26

23.65 26.69 8.51

29.04 28.56 7.7

27.17 32.91 8.24

EBDT Margin (%) Cash Profit Margin (%)

13.53 11.02

14.95 13.83

9.42 9.01

8.73 8.1

10.92 10.12

ROCE (%) Long Term Debt-Equity Ratio Current Ratio

Source: CMIE Prowess Book Value Per share = Rs. 4.66 Market Price Per share = Rs. 64.6 Pay out ratio = 73.51% Dividend yield = 0.75

10 Year Stock Price History

Source: Business Week.

Exhibit 3

Case 8: Value Based Management at Marico Ltd. 153

154

Cases in Corporate Finance

Exhibit 4

Summary Financial Statistics for FMCG Companies

Company

Mkt Cap (Rs. b)

ROE%

P/E

EV/EBITDA

FY 09

FY 10

FY 09

FY10

FY 09

E

E

E

E

E

FY 10 E

Colgate Palmolive

49.3

123.8

89.0

17.7

14.8

17.7

14.0

Dabur Godrej Consumer Hindustan Unilever

71.4 34.5 453.8

49.6 50.1 126.9

45.1 34.5 126.2

18.8 17.2 22.7

16.1 14.8 19.4

15.0 12.5 19.6

12.5 10.7 17.0

ITC Marico Nestle

692.1 34 154.2

27.2 50.5 120.4

28.5 44.9 127.6

20.0 18.0 28.7

16.7 15.2 24.0

13.4 18.3 18.3

10.9 15.3 15.3

46.9

12.2

12.8

10.8

9.4

7.9

6.9

Tata Tea

Source: Morgan Stanley research.

Analyst forecast of free cash flow and valuation data for Marico are presented in Exhibit 6. Exhibit 7 presents the stock returns and the excess returns over the index.

BRIEF DESCRIPTION OF SOME FMCG COMPANIES Colgate Palmolive The small soap and candle business that William Colgate began in New York City early in the 19th century is now, more than 200 years later, Colgate Palmolive is a truly global company serving hundreds of millions of consumers worldwide. With global brands sold in over 200 countries; Colgate, Mennen, Palmolive, Ajax, Softsoap, and Hill’s Pet Nutrition are among the world’s most recognisable household names, trusted and relied upon by consumers everywhere. Colgate’s products are organised into four segments: · Oral care comprising of toothpaste, toothbrush, tooth powder, and whitening products · Personal Care products comprising of body wash, liquid hand wash, shave preps, skin care and hair care products · Household care items · Dental products

Dabur India Limited Over 120 years old, Dabur India Limited is India’s 4th largest FMCG company with interests in health care, personal care and food products. The company’s name is generic to ‘ayurvedic’ products in India. It has four Strategic Business Units (SBU) viz. Consumer Care Division (CCD), Consumer Health Care Division (CHD), Food Business Division (FBD) (now merged with CCD) and

Case 8: Value Based Management at Marico Ltd.

155

International Business Division (IBD) which together sell more than 350 products. It has extremely strong brands like Vatika, Babool, Dabur Lal Dant Manjan, Chyawanprash, Hajmola, Odomos, and Real etc across its business segments. The top 5 brands earn around Rs. 1 bn of revenues. Started in 1897 as a locks’ manufacturing company, the Godrej Group is today one of the most accomplished and diversified business houses in India. Godrej Consumer Products is organised into eight product categories and brands: · Soaps (Cinthol, Shikakai, Evita) · Toiletries (Cinthol powder, shave preps, deodorants) · Hair Care (renew, godrej hair dye) · Household care (Glossy, dish wash) · Fabric care (Ezee) · Keyline brands (cuticura, aapri, nulon) · Rapidol brands (hair colour brands like Sofelene and Inecto) · SCA Hygiene brands (sanitary napkins and diapers)

Hindustan Unilever Limited Hindustan Unilever Limited, formerly Hindustan Lever Limited, is India’s largest consumer products company and was formed in 1933 as Lever Brothers India Limited. HUL is the market leader in Indian products such as tea, soaps, detergents, as its products have become daily household name in India. Some of its brands include Kwality Wall’s ice cream, Lifebuoy, Lux, Breeze, Liril, Rexona, Hamam, Moti soaps, Lipton tea, Brooke Bond tea, Bru Coffee, Pepsodent and Close Up toothpaste and brushes, and Surf , Rin and Wheel laundry detergents, Kissan squashes and jams, Annapurna salt and atta, Pond’s talcs and creams, vaseline lotions, Fair & Lovely creams, Lakme beauty products, Clinic Plus, Clinic All Clear, sunsilk and Dove shampoos, Vim dishwash, Ala bleach and Domex disinfectant.Rexona,Modern Bread and Axe deosprays.

ITC Limited ITC Limited operates in the consumer goods, hospitality, materials, information technology, and agricultural sectors in India and internationally. It operates in four segments: Fast Moving Consumer Goods (FMCG); Hotels; Paperboards, Paper, and Packaging; and Agri-business. The FMCG segment offers cigarettes; food products comprising branded and packaged foods, as well as confectionery, staples, and snack foods; lifestyle products, including apparel and fashion accessories that are sold through its ‘Wills Lifestyle’ specialty stores; greeting cards, gifts, and stationery products; match boxes; and incense sticks. The Hotels segment operates hotels comprising super deluxe and five star hotels, heritage palaces, havelis and resorts, and budget hotels. The Paperboards, Paper, and Packaging segment’s paper products comprise cast coated/specialty boards, liquid packaging boards, virgin boards, recycled boards, and gypsum base boards, as well as cigarette tissues, plug wrap,

156

Cases in Corporate Finance

printed tipping papers, and metallising base; and packaging products include flip-top boxes, display outers, shells and slides, folding cartons, shoulder boxes, and bundle wraps. The Agri-business segment exports agricultural products, including feed ingredients, food grains, edible nuts, marine products, processed fruits, and coffee spices. It also trades cigarette tobaccos. In addition, ITC provides information technology services, such as CRM; product life cycle management and engineering services; ERP; supply chain management; e-business, B2B, B2C, and community portals; and business process outsourcing services. It also owns the Classic Golf Resort, a 27-hole golf course. Additionally, the company operates food retail chain under the ‘Choupal Saagars’ brand. ITC was incorporated in 1910 under the name Imperial Tobacco Company of India Limited and changed its name to I.T.C. Limited in 1974. Further, it changed its name to ITC Limited in 2001.

Tata Tea Limited Tata Tea Limited, together with its subsidiaries, engages in processing, producing, marketing, and distributing tea products primarily in India. It also involves in the cultivation and manufacture of black tea and instant tea, tea buying/blending, and sale of tea in bulk or value added form. The company’s products include bulk tea, instant tea, packet tea, coffee, and strawberry.

Exhibit 5

Acquisitions by Marico Brand

Year of acquisition

Mediker

1999

India

Oil of Malabar Sundari Camelia

1999 2003 2006

India USA Bangladesh

Aromatic Manjal Nihar Fiancée

2006 2006 2006 2007

Bangladesh India (South) India Egypt

Haircode Enaleni

2007 2008

Egypt South Africa

Source: Company.

Location

Case 8: Value Based Management at Marico Ltd.

Exhibit 6

157

Forecast of Free Cash Flows and Valuation Data for Marico 2008

2009

2010

2011

2012

(Rs. m) 2013

PAT

1796

2235

2876

3534

4117

4788

Add: Add: Less:

Depreciation Interest (1-tax rate) Capex

303 162 588

371 159 810

384 157 162

398 155 162

411 152 162

425 149 425

Less:

Change in NWC

FCFF

317

240

308

292

302

348

1356

1715

2947

3633

4216

4589

Last closing price

Mean closing price

Source: Kotak Securities Terminal growth rate = 4% Beta = 0.6 Risk free rate = 8% Market risk premium = 6% Cost of debt = 8.1% WACC = 11.4% Net debt = Rs 1344 m

Exhibit 7 Date range From

Stock Returns To

First closing price (Rs.)

Returns

Excess returns %

Mean returns

(%)

1/3/2006 3/4/2006 2/5/2006

31/03/2006 29/04/2006 31/05/2006

40.125 55.57 53.915

53.975 54.585 45.255

49.856591 54.376944 50.7425

33.6676573 1.50140892 –17.0926079

23.755473 –5.528466 –3.179242

1.360588 0.098433 –0.7859

1/6/2006 3/7/2006 1/8/2006

30/06/2006 31/07/2006 31/08/2006

43.62 45.27 49.375

44.605 48.855 51.04

41.480652 47.609286 50.008864

–1.43630538 9.83110862 4.47241838

3.0323246 10.140277 –5.448534

0.081008 0.485881 0.206711

1/9/2006 3/10/2006 1/11/2006

29/09/2006 31/10/2006 30/11/2006

51.225 52.39 52.95

52 52.73 52.4

51.584524 51.838 51.509318

1.88087774 1.69526443 –0.6258297

–4.836659 –3.26356 –6.164286

0.094001 0.087864 –0.02422

1/12/2006 2/1/2007 1/2/2007

29/12/2006 31/01/2007 28/02/2007

53.11 54.725 57.6

53.965 57.52 61.45

54.36475 55.73725 57.871053

2.98664122 6.91227415 6.83240612

2.0257689 3.3676588 15.311509

0.161857 0.344335 0.363467

1/3/2007 2/4/2007 3/5/2007

30/03/2007 30/04/2007 31/05/2007

60 59.6 54.85

61.3 54.8 57.65

55.816667 58.83 57.47619

0.07951922 –10.6035889 5.20072993

1/6/2007 2/7/2007 1/8/2007

29/06/2007 31/07/2007 31/08/2007

57.6 55.55 56.2

55.2 55.85 57.8

56.038095 55.556818 57.520455

–4.24978317 1.42166434 3.49149508

–6.481974 –3.383225 4.4116966

–0.20153 0.073405 0.177626

3/9/2007 1/10/2007 1/11/2007

28/09/2007 31/10/2007 30/11/2007

58.95 61 69.5

60.8 67.4 65.4

59.31 62.8 68.463636

5.19031142 10.8552632 –2.96735905

–9.259834 –9.341488 –2.873293

0.26403 0.491319 –0.10872

3/12/2007

31/12/2007

68.7

68.65

69.102632

4.96941896

–6.860549

0.273018

–0.892269 –18.2639 –0.845701

0.036404 –0.53585 0.257784

(Contd.)

158

Cases in Corporate Finance

(Exhibit 7 Contd.) Adj. Date

closing price (Rs.)

P/E

P/B

Nifty closing

Excess returns over Nifty (%)

Sensex closing

Excess returns over Sensex (%)

 2-Jan-08 3-Jan-08

70.5 78.5

31.9715 35.5994

15.1157 16.8309

6179.4 6178.55

–1.064444176 11.36127311

20465.3 20345.2

–1.304761232 11.93436473

4-Jan-08 7-Jan-08 8-Jan-08

79.4 78.3 75.75

36.0076 35.5087 34.3523

17.0239 16.788 16.2413

6274.3 6279.1 6287.85

–0.403219542 –1.461892986 –3.396056162

20686.89 20812.65 20873.33

–0.532965662 –1.993311677 –3.548258435

9-Jan-08 10-Jan-08 11-Jan-08

74.95 71.2 68.15

33.9895 32.2889 30.9058

16.0698 15.2657 14.6118

6272 6156.95 6200.1

–0.804032167 –3.168992445 –4.984541882

20869.78 20582.08 20827.45

–1.039098262 –3.624787245 –5.475861428

14-Jan-08 15-Jan-08 16-Jan-08

67.2 67.65 67.2

30.4749 30.679 30.4749

14.4081 14.5046 14.4081

6206.8 6074.25 5935.75

–1.502046632 2.805203855 1.614928417

20728.05 20251.09 19868.11

–0.916729082 2.970679375 1.225968994

17-Jan-08 18-Jan-08 21-Jan-08

66.85 65.25 58.4

30.3162 29.5906 26.4842

14.3331 13.99 12.5213

5913.2 5705.3 5208.8

–0.140931889 1.122444715 –1.795649713

19700.82 19013.7 17605.35

0.321169253 1.094355505 –3.091056727

22-Jan-08 23-Jan-08 24-Jan-08

53.6 59.45 59.7

24.3074 26.9603 27.0737

11.4922 12.7465 12.8001

4899.3 5203.4 5033.45

–2.277310474 4.70716994 3.686655128

16729.94 17594.07 17221.74

–3.246769127 5.749008159 2.536745834

25-Jan-08 28-Jan-08 29-Jan-08

61.7 65.9 64.75

27.9807 29.8854 29.3639

13.2289 14.1294 13.8828

5383.35 5274.1 5280.8

–3.60141075 8.836536762 –1.872104178

18361.66 18152.78 18091.94

–3.268991905 7.944719058 –1.409913009

30-Jan-08 31-Jan-08 1-Feb-08

62.4 63.7 64.95

28.2982 28.8877 29.4546

13.379 13.6577 13.9257

5167.6 5137.45 5317.25

–1.485729025 2.666776324 –1.537467361

17758.64 17648.71 18242.58

–1.787086801 2.702355961 –1.402625095

4-Feb-08 5-Feb-08 6-Feb-08

65.55 66.35 65.15

29.7267 30.0895 29.5453

14.0543 14.2259 13.9686

5463.5 5483.9 5322.55

–1.826694393 0.847055387 1.133658323

18660.32 18663.16 18139.49

–1.366129796 1.20522295 0.997311302

7-Feb-08 8-Feb-08 11-Feb-08

64.5 63.05 62.85

29.2505 28.5929 28.5022

13.8292 13.5183 13.4754

5133.25 5120.35 4857

2.558868311 –1.996759235 4.825994537

17526.93 17464.89 16630.91

2.379244068 –1.894092438 4.457971812

12-Feb-08 13-Feb-08 14-Feb-08

62.75 61.65 63.6

28.4569 27.958 28.8424

13.454 13.2182 13.6362

4838.25 4929.45 5202

0.226931776 –3.637967121 –2.365997361

16608.01 16949.14 17766.63

–0.021413578 –3.806996927 –1.660177538

15-Feb-08 18-Feb-08 19-Feb-08 20-Feb-08

63.4 62.8 65.05 62.6

28.7517 28.4796 29.4999 28.3889

13.5934 13.4647 13.9471 13.4218

5302.9 5276.9 5280.8 5154.45

–2.254104009 –0.456074478 3.508895519 –1.373703685

18115.25 18048.05 18075.66 17617.6

–2.276683342 –0.575414069 3.429822032 –1.232207588

21-Feb-08 22-Feb-08 25-Feb-08

62.55 62.2 63.55

28.3662 28.2075 28.8197

13.4111 13.3361 13.6255

5191.8 5110.75 5200.7

–0.804488798 1.001563247 0.410402353

17734.68 17349.07 17650.57

–0.744434914 1.614775005 0.432572693 (Contd.)

Case 8: Value Based Management at Marico Ltd.

159

(Exhibit 7 Contd.) Adj. Date

closing price (Rs.)

P/E

P/B

Nifty closing

Excess returns over Nifty (%)

Sensex closing

Excess returns over Sensex (%)

26-Feb-08

62.85

28.5022

13.4754

5270.05

–2.434969226

17806.19

–1.983166129

27-Feb-08 28-Feb-08 29-Feb-08

64.5 62.85 62.95

29.2505 28.5022 28.5476

13.8292 13.4754 13.4969

5268.4 5285.1 5223.5

2.65660733 –2.875123819 1.32464985

17825.99 17824.48 17578.72

2.514101043 –2.549668757 1.53788694

3-Mar-08 4-Mar-08 5-Mar-08

60.7 63.25 63

27.5272 28.6836 28.5703

13.0145 13.5612 13.5076

4953 4864.25 4921.4

1.604254859 5.992831795 –1.570155411

16677.88 16339.89 16542.08

1.550339915 6.227564987 –1.632658148

7-Mar-08 10-Mar-08 11-Mar-08

61 62.35 65.3

27.6633 28.2755 29.6133

13.0788 13.3682 14.0007

4771.6 4800.4 4865.9

–0.130753863 1.609543625 3.366885625

15975.52 15923.72 16123.15

0.250359103 2.537360851 3.478946896

12-Mar-08 13-Mar-08 14-Mar-08

62.95 62.1 62.9

28.5476 28.1621 28.5249

13.4969 13.3146 13.4862

4872 4623.6 4745.8

–3.7241371 3.748244169 –1.354717427

16127.98 15357.35 15760.52

–3.62873181 3.427939733 –1.337012846

17-Mar-08 18-Mar-08 19-Mar-08

60.3 62.65 62.15

27.3458 28.4115 28.1848

12.9287 13.4326 13.3254

4503.1 4533 4573.95

0.980450223 3.233193732 –1.701459845

14809.49 14833.46 14994.83

1.900709905 3.735325088 –1.885962948

24-Mar-08 25-Mar-08 26-Mar-08

62.95 65.3 66.05

28.5476 29.6133 29.9534

13.4969 14.0007 14.1615

4609.85 4877.5 4828.85

0.502328777 –2.072924225 2.145982388

15289.4 16217.49 16086.83

–0.677268723 –2.337031653 1.954218557

27-Mar-08

64.6

29.2959

13.8507

4830.25

–2.224298996

16015.56

–1.752273372

Source: Capitaline.

Module 2 CAPITAL BUDGETING AND DISCOUNTED CASH FLOW VALUATION

9. 10. 11. 12.

Valuation Problem Set (B) Indian Premier League Option Pricing Problem Set Tata Steel: The Bid for Corus

CASE

9

Valuation Problem Set (B) DESCRIPTION Valuation problems: (1) build a simple proforma, (2) determinants and use of valuation metrics like P/E, P/B, (3) value a public company’s stock, (4) free cash flow valuation, and (5) evaluate a proposed high-leverage, project finance transaction.

LEARNING OBJECTIVE To help students gain familiarity with practical applications of valuation techniques.

SUBJECTS COVERED Financial Management, Security Analysis.

Professor Vishwanath S. R. prepared this problem set as the basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.

164

Cases in Corporate Finance

Problem 1: Divisional Cost of Capital ITC Ltd has transformed itself from a pure tobacco company into a diversified conglomerate with businesses spanning from agri-products to organized retail. The business mix of ITC is given below: · Cigarettes contribute 70% of overall revenues. · Fast Moving Consumer Goods comprising of branded packaged food, stationery, lifestyle retailing and safety matches. The FMCG business contributes 10% of revenues. · Hotels, Agri business, Paperboards, paper and packaging contribute the remaining The revenues for all the segments, asset betas and market Capitalisation-to-Revenue multiples of comparable companies are given below: Segment

Revenues

Revenue Multiple for segment

Asset Beta for comparable firms

Agri Business Tobacco Hotels

1954.67 11,329.74 777.85

0.81 3.38 4

0.36 0.52 0.16

Paper FMCG

1150.25 1011.92

0.61 1.99

0.25 0.35

Firm

16,224.43

Estimate the beta for the firm. Compare this estimate with the stock market derived beta for ITC as a whole.

Problem 2: Proforma Financial Statements Part A Create a three year proforma income statement, balance sheet, and cash flow statement for Steel Authority of India based on historical performance and your assumptions on likely projected growth rates, profitability asset intensity and liability structure. Assume a sales growth rate of 10%.

Part B How much excess cash will SAIL generate over the next three years? How much can it afford to pay out in dividends? Summary financial information is provided in Exhibit 1. You may use any other publicly available information.

Problem 3: Valuation Metrics Analysts use a number of metrics for stock picking. Some of the popular ones are EV/IC, P/B and P/E multiples.

Case 9: Valuation Problem Set (B) 165

(ROIC - g ) EV/IC = (WACC - g ) where

EV = Enterprise value or value of the company IC = Invested Capital g = Growth rate in Invested Capital, NOPAT and FCFF P/E = pay out ratio/k-g OR P/E = 1/k-g P/B = 1 + [(ROE-k)/k-g)]

Consider the following data for Infosys Technologies in 2007: Book value of Equity Rs cr Net Income Rs crore

11162 3783

ROE %

41.90

Beta

0.99

Risk free rate %

8.2

Market risk premium %

9

Cost of equity % No. of shares

17.11 571553937

ROIC %

45.99

Payout Ratio

17.74%

Calculate the intrinsic value of shares for various sustainable growth rates like 0%, 5%, and 8%. What is the optimal sustainable growth rate (or alternatively, pay out ratio) for Infosys? Also calculate P/E and P/B ratio.

Problem 4: FCF Valuation Exhibit 2 presents the FCF forecast for Trent Ltd. Assume the following data: n

Risk free rate = 6%

n

Beta = 0.65844

n

Market Risk Premium = 9%

n

D/V = 0

Estimate the value of Trent’s equity assuming that the company grows at 8% in perpetuity after 2007.

Problem 5: Valuing a Public Company’s Stock Tata Steel was trading at INR 750.40 on February 8, 2008.

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Part A Is it fairly priced from a DCF perspective? What assumptions does the market seem to be making about Tata Steel’s future sales growth, profitability, and asset intensity?

Part B Based on your analysis would you buy at its current price? Why or why not? Summary financial information for the company is given in Exhibit 3. Use any other publicly available information. Also assume that the WACC is 12.62%.

Problem 6: Evaluate a Project Finance Transaction An Engineering company is in the process of setting up a captive power project. The free cash flows to firm and free cash flows to equity of the project, debt service schedule, project leverage and capital market/comparable company data are given in Exhibits 4a, 4b, 4c and 4d. Estimate the IRR of equity, debt and total investment. The project would have an average debt/equity ratio of 76%. Estimate the NPV of the project using equity cash flows. What is the impact of changing capital structure on the NPV? Exhibit 1

Summary Financial Information for Steel Authority of India (Rs million) 3/07

Income Statement Total revenue

339,231.2

COGS SG&A EBITDA

(201,795.1) (57,794.6) 102,136.3

Depreciation and amortisation EBIT Interest Income

(12,114.8) 90021.5 7526.0

Interest expense Pre tax profit Income tax

(3321.3) 94226.2 (32203.3)

Net Income

62022.9

Balance Sheet Cash and equivalents Accounts receivable Inventory Other current assets Total current assets Net Intangibles

96098.3 23147.5 66514.7 18025.7 203786.2 1291.5 (Contd.)

Case 9: Valuation Problem Set (B) 167

(Exhibit 1 contd.) Total Investments

5137.9

Total Assets Accounts Payable Short term debt

338553.1 21833.1 6372.1

Other current liabilities Long Term debt Other long term liabilities

87656.7 35233.1 14126.6

Total Liabilities Common stock and premium Other common equity

165421.6 41304 131827.5

Total Liabilities and equity

338553.1

Cash flow statement Net income Depreciation add back

62022.9 12114.8

Net Inc/(dec) working capital Other operating cash flow Cash flow from operations

(5411.2) (6122.9) 61031.8

Capital expenditure Others Cash flow from investments

(10908.4) (1822.1) (12730.5)

Dividends paid Inc/(dec) in debt Other financing flows

(11067.7) (1114.9) (1746.8)

Cash flow from financing Total cash flow Growth, ratios and margins %

(13929.4) 34371.9

Sales growth EBITDA growth EBIT growth

21.9 47.6 57.6

Net income growth Gross margin EBITDA margin

54.6 40.5 30.1

BIT margin ROE ROA

26.5 41.5 19.7

Inventory days Receivables days Payables days Source: Goldman Sachs research, “India: Steel Integrated”, October 19, 2007.

116.3 22.6 38.8

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Exhibit 2

Free Cash Flow Forecast for Trent Ltd. (Rs. crore) 2004

2005

2006

2007

EBIT Less: taxes NOPLAT

2002 44 3 41

68 –27 95

103 17 87

129 29 100

266 64 202

413 103 310

Add: Depreciation Gross cash flow Less: Increase in working

24 65

27 123

31 117

45 146

71 273

89 399

–322 387 79

159 –36 81

8 109 141

26 120 159

75 198 414

125 274 291

Capital Operating cash flow Less: Capex

2003

Increase in other assets Less: Inc/(dec) in Investments

10

4

–6

–63

31

–19

241

–130

–24

27

0

0

Plus: Gain on sale of Extraordinary items

–19

28

–9

1

0

0

39

–19

–12

–2

–247

1

= FREE CASH FLOW

Exhibit 3

Summary Financial Information for Tatal Steel (Rs million) 3/07

Income Statement Total revenue COGS SG&A EBITDA

251177.8 (171.272.5) (19049.6) 76145.3

Depreciation and amortisation EBIT Interest Income Interest expense

(10109.8) 66035.5 0 4111.9

Pre tax profit Income from uncons. Subs Income tax

791.8 (21474.1)

Minorities Net Income Balance Sheet

(675.2) 40566.1

Cash and equivalents Accounts receivable Inventory

108879.6 16865.3 38881.3

Other current assets Total current assets Net Intangibles

19815.0 184441.2 4294.3 (Contd.)

Case 9: Valuation Problem Set (B) 169

(Exhibit 3 contd.) Total Investments Total assets Accounts Payable Short term debt Other current liabilities Long Term debt

164975 495915.8 17915.9 13901.5 57321.7 89139.1

Other long term liabilities Total Liabilities Common stock and premium

235353.8 343709.9 7270.6

Other common equity Total Liabilities and equity

138951.4 495915.8

Cash flow statement Net income

40566.1

Depreciation add back Net Inc/(dec) working capital Other operating cash flow

10109.8 2538.7 (2208.3)

Cash flow from operations Capital expenditure Others

50946.8 (29270.8) (131,481.3)

Cash flow from investments Dividends paid Inc/(dec) in debt

(160,763.2) (7116.6) 201,692.7

Common stcok issuance/repurchase Other financing flows Cash flow from financing

15458.5 893.9 210,928.5

Total cash flow Growth, ratios and margins % Sales growth

101,112.1 24.1

EBITDA growth EBIT growth Net income growth

18.2 18.3 11.3

Gross margin EBITDA margin EBIT margin

31.8 30.3 26.3

ROE ROA Inventory days

32.6 11.6 71.0

Receivables days Payables days

21.1 51.3

Source: Goldman Sachs research, “India: Steel Integrated”, October 19, 2007.

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Exhibit 4a

Free Cash to Firm and Free Cash Flow to Equity for the Power Project

Year

Investment

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

979 2930 1720

Free cash flow to firm

790 1220 1257 1227 1226 1332 1238 900 879 703 528 172 337 232 235 181 242 -293 349 156

Year

Equity Investment

Equity Cash flow (dividend)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

1224

143 382 340 335 315 413 414 292 401 258 112 1 274 195 192 154 199 0 283 138

Salvage Value

1071

Case 9: Valuation Problem Set (B) 171

Exhibit 4b Year

Drawings

Debt service

2000 2001 2002 2003

–3877

730 699 911 888

2004 2005 2006

864 889 875

2007 2008

677 583

Exhibit 4c Year

Debt Service Schedule

Project Leverage Equity

Debt

D/V

1998 1999

0 18

979 3946

1 0.995

2000 2001 2002

1417 1414 1490

3238 3120 2757

0.695 0.688 0.649

2003 2004 2005

1561 1716 1639

2374 1965 1538

0.603 0.533 0.484

2006 2007 2008

1686 1721 1613

1071 575 40

0.388 0.25 0.02

2009 2010 2011

1644 1658 1658

0 0 0

0 0 0

2012 2013 2014

1692 1716 1739

0 0 0

0 0 0

2015 2016 2017

1758 1782 1520

0 0 0

0 0 0

2018 2019

1555 1572

0 0

0 0

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Exhibit 4d

Capital Market and Comparable Company Data (Rs. L) BSES

Tata Power

CESC

18219 21369 10914

11585 16646 12255

16729 505 2931

Total Debt / Equity L.T. Debt / Equity E/V

0.51 0.51 0.66

0.74 0.74 0.57

6.42 5.8 0.14

Capital Market Data Levered beta Average asset beta

1.01 0.54

0.76

0.46

Risk free rate Market Risk Premium

12.5% 9%

Sales Net Worth L.T. Debt

CASE

10

Indian Premier League

DESCRIPTION The Indian Premier League (IPL) conceived by the Board of control for cricket in India (BCCI) is a T20 format cricket competition. The case tracks the development of the plan and launch of the first season of play.

LEARNING OBJECTIVE The case asks how attractive the plan is to all the parties involved and requires students to assess the risk and reward of the plan. To help students gain familiarity with performing discounted cash flow analysis.

SUBJECTS COVERED Financial Management, Capital Budgeting, Discounted Cash Flow Analysis, Sports.

This case was prepared by Vishwanath S.R. of Institute of Management Technology, Nagpur.

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Cricket has been crying out for something like this and I am sure this is just the beginning Rahul Dravid, Indian Cricket Team Captain The concept of having franchise is potentially a mind-blowing idea. To me potential is huge and I am for it. Glenn McGrath, Australian Bowling Great In September 2007, the Board of Control for Cricket in India (BCCI) launched the Indian Premier League (IPL) on the lines of football’s English Premier League and the National Basketball League (NBA) of the U.S. In an apparent reaction to Essel Group’s Indian Cricket League (ICL) that had generated much debate, the BCCI paraded Australia bowler Glenn McGrath and former New Zealand captain Stephen Fleming to support the IPL. India’s captain Rahul Dravid, Sachin Tendulkar, Sourav Ganguly and Anil Kumble were also part of the launch attended by the President of the International Cricket Council (ICC), Ray Mali, and chiefs of various cricket boards. On the occasion, the BCCI and the ICC also unveiled a $5 million prize money Champions Twenty 20 League. The added incentive of being part of the IPL would be the chance to play in the Champions Twenty20 League to be organised by the ICC. Just as in the UEFA Champions League, the winner and runner-up team of the IPL would qualify for the Champions League, to be played in October 2008. For a start, domestic Twenty20 leagues would be conducted by the cricket boards of Australia, South Africa and England, to have an eightteam Champions League.

INDIAN PREMIER LEAGUE The Indian Premier League is a Twenty20 cricket competition created by the Board of Control for Cricket in India. The first season began on April 18, 2008 and ended on June 1, 2008 with 59 matches spread over 44 days. The matches were primarily played under lights with play beginning at 5 p.m. Two matches were scheduled for each day. Teams played each other twice in a round robin system, and the top four ranking sides progressed to the semi-finals. The BCCI set up a governing council to run the IPL as a virtual company. The IPL governing council has a five-year term and runs, operates and manages the league independently of the BCCI. The council comprises former BCCI President IS Bindra, Vice-Presidents Rajiv Shukla, Chirayu Amin and Lalit Modi, Arun Jaitley, and former cricketers, Mansur Ali Khan Pataudi, Sunil Gavaskar and Ravi Shastri. While the BCCI officials are honorary members, Pataudi, Gavaskar and Shastri are paid for their services. The IPL initially started with eight teams and offered $3 million in prize money, making it the richest tournament in domestic cricket. The eight teams taking part were Kolkata Knight Riders,

Case 10: Indian Premier League 175

Chennai Super Kings, Mumbai Indians, Deccan Chargers, Rajasthan Royals, Royal Challengers Bangalore, Delhi Daredevils, and Kings XI Punjab. The IPL is a franchise-model wherein companies and sponsors are allowed to buy and run teams. Player buy-outs is an added feature—something that cricket is not accustomed to. Under the franchise model, a sponsor wanting to have a team pays a stipulated fee to the BCCI to get ownership. The franchisee also shares revenues with the cricket board. The franchisee, however, collects the gate money and the income from in-stadium advertisements and, at a later stage, lists the team on the stock exchange and trade. The teams comprise a minimum 16 players with the condition that at least four players are from the region. Also four under-21 players have to be included in the teams. There is, however, no cap on the salary being offered to the designated players and the teams can make buy-outs of any player just like in professional football.

History of Cricket Cricket has been an established team sport for hundreds of years and is thought to be the second most popular sport in the world, after football. More than 100 countries are affiliated to the International Cricket Council, cricket’s international governing body. The sport’s modern form originated in England, and is most popular in the present and former members of the Commonwealth. In many countries including Bangladesh, India, Pakistan, Sri Lanka and the Englishspeaking countries of the Caribbean, cricket is the most popular sport. In Australa, while other sports are more popular in particular areas, cricket has been described as the “national sport” and has had a role in forming the national identity. It is also a major sport in England, New Zealand, South Africa and Zimbabwe. Many countries also have well-established amateur club competitions, including the Netherlands, Kenya, Nepal and Argentina. Cricket is internationally governed by International Cricket Council (ICC), which is headquartered in Dubai and includes representatives from the ten Test-playing nations and an elected panel representing non-Test-playing nations. Each nation has a national cricket board which regulates cricket matches played in its country. The cricket board also selects the national squad and organises home and tours away from home for the national team.

Forms of Cricket There are many different types and grades of cricket; those played professionally at an international level are test cricket, one-day international cricket and Twenty20 cricket.

Test Cricket This is a form of international cricket started during the 1876/77 English cricket team’s tour of Australia. The very first Test match began on 15th March 1877; Australia won by 45 runs. The Test cricket series between England and Australia is now called The Ashes. Since then, over 1,800 Test matches have been played and the number of Test playing nations has increased to ten with

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Bangladesh, the most recent nation elevated to test status, making its debut in 2000. Test matches are two innings per side, and are nowadays restricted to a maximum of five days. In the past, Tests have been played over three, four, or six days, and some have been “Timeless”—played to a finish with no maximum duration. Tests that are not finished within the allotted time are drawn.

One-day Cricket Limited overs matches, also known as “one-day cricket”, were introduced in the English domestic season of 1963 in response to demands for a shorter and more dramatic form of cricket. One-day, single-innings, matches often took place before this, but the innovation was the limiting of each side’s innings to an agreed number of overs (nowadays usually 40 or 50). The idea was taken up in the international arena in 1971, during England’s tour of Australia, when a match was played on the scheduled fifth day of the rained-off third Test. The one-day game has since become a crowd-pleaser and TV-audience-generator across the globe, hastened in part by the success of the inaugural World Cup in 1975. The abbreviations “ODI” (One Day International) or sometimes “LOI” (Limited Overs International) are used for international matches of this type. Innovations have included the introduction of colored clothing, distinct tournaments, and “day-night” matches (where play extends into the night under floodlights); together with frequent nail-biting finishes and the impossibility of either side opting to play for a draw, these have seen ODI cricket gain many supporters.

Twenty20 Cricket This was first played in English domestic cricket in 2003 to popularise first-class cricket and attract more spectators. It has since spread to many other countries. A Twenty20 match consists of 20 overs for each side, a “free hit” after an illegal no-ball is bowled, short boundaries, batting-friendly pitches, and other rules designed to attract spectators who would not attend the slower-paced one-day games or test matches. The first men’s Twenty20 international was between Australia and New Zealand in 2005, the first women’s Twenty20 international having been between England and New Zealand in 2004. From 2007 to 2015 the Twenty20 World Championship will be held every two years; the first was staged in South Africa in 2007, and was won by India. It has an abbreviation as T20. Exhibit 1 presents the ranking of world cricket teams in both one day international and in test cricket.

Professional Leagues The IPL has been modeled along the lines of English Premier League (football) in the UK and Major League Baseball in the U.S. The Premier league in the UK was set up in August 1992 as a response to crumbling football stadiums and hooliganism. On February 20, 1992 the first division clubs resigned from the Football league and three months later the Premier League was established as a limited company. Barclays took over as the sponsor in 2004 with their renewal price coming in at £65.8 m. The League has 20 clubs and attracts more than 250 foreign players from around the world. The Premier

Case 10: Indian Premier League 177

league is owned by 20 shareholders—the member clubs, whose membership in the league is dependent on the performance of their football team in the Barclays Premier League. Over the years television and sponsorship rights have grown enormously. To televise the matches from 2007–10, Sky and Setanta have paid a staggering £1.7 b. In the UK, several soccer clubs are listed on the London Stock Exchange and the Alternative Investment market. Exhibit 2 presents a list of listed Soccer clubs in the UK.

IPL Fixtures In the IPL, T20 teams play each other twice in a round robin system, with equal number of home and away matches. That is, each of the eight teams plays 7 matches at home and 7 matches in the remaining venues. The top four ranking sides progress to the semi-finals. The inaugural 2008 tournament that started on 18 April 2008 in Bangalore and lasted for 45 days, with 59 matches took place (56 league matches plus two semi finals and one final). And it ended on 1 June 2008 when the final was played at the D Y Patil Stadium, Navi Mumbai.

Franchises The winning bidders for the eight franchises were announced on 24 January 2008. While the total base price for auction was US$ 400 million, the auction fetched US$ 723.59 million. The official list of franchise owners announced and the winning bids were as follows. Franchise

Owner(s)

Price USD

Mumbai Indians Royal Challengers Bangalore Hyderabad Deccan Chargers

Reliance Industries UB group Deccan Chronicle

111.9 m 111.6 m 107 m

Chennai Super Kings Delhi Daredevils Kings XI Punjab

India Cements GMR Holdings Preity Zinta, Ness

91 m 84 m

Kolkata Knight Riders

Wadia, Karan Paul, Mohit Burman Shahrukh Khan

Rajasthan Royals

Juhi Chawla Jai Mehta Emerging Media

76 m

75.09 m 67 m

Revenues One of the sources of revenue for a franchisee is the in-stadium advertisements and ticket fee. Each team plays 14 matches and each franchisee is entitled to half the total amount of ticket fee collected in each match. 20% of the tickets are allocated to IPL. Tickets were sold through Reliance Mobile, Big Bazaar, E Zone, Pantaloons, and central outlets. Further, ticket prices varied according to teams played.

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Exhibit 3 presents a list of venues for the matches and the price list. Another source of revenue for the franchisee is merchandising. T Shirts and caps with team names were expected to be sold at Rs. 300 and Rs. 175 respectively.

Expenses A franchisee has to pay 10% of total franchisee costs every year to IPL. Assuming that a team is bought by a franchise at US$ 100 mn—it would have to pay US$ 10 mn per year to IPL. Franchisees have acquired players at a total cost of US$ 4–6 mn per year. This includes cost of managers and coaches. Each franchise has 18–22 players who are tradable after a year. The players have a three year contract with the franchise. Each franchise is expected to incur a marketing cost of US$ 3–4 mn for promoting its team. The franchises have to contract stadiums for seven matches at BCCI agreed rates. On an average, the expense is Rs. 2.5 mn per match. Other expenses include administration and event management.

Television and Sponsorship Rights Television One of the major sources of revenue to the BCCI and franchises is the sale of television and sponsorship rights. The BCCI issued tender forms for broadcasting rights of the Indian Premier League (IPL) in November 2007. Three broadcasters Nimbus Communications, Sony Entertainment Television and ESPN-Star Sports made their presentations to the BCCI. In 2006, Nimbus Communications astounded the broadcasting world by winning the rights to cricket matches in India for an unheard of $ 612 million—about Rs. 2,724 crore at the prevailing exchange rate—for four years up to 2010. Likewise, Zee Sports acquired the telecast rights for 25 one-day international matches involving India at neutral international venues for five-years, estimated at $ 200 million (about Rs. 800 crore). On 15 January 2008, BCCI announced that a consortium consisting of India’s Sony Entertainment Television network and Singapore-based World Sport group secured the global broadcasting rights of the Indian Premier League. The record deal has a duration of ten years at a cost of US$ 1.026 billion. As part of the deal, the consortium would pay the BCCI US$ 918 million for the television broadcast rights and US$ 108 million for the promotion of the tournament over the next 10 years. Of this US$ 918 million, Sony has to pay US$ 316 mn for rights of broadcasting for the first five years, and then pay US$ 608 mn—if this format has been remunerative in the first five years. In the first year, payouts are not dependent on TRPs. However, TRPs would drive payouts from the second year. The franchisee will have a share of 80% in the first year, decreasing to 60% in the fifth year of broadcasting rights, and the balance would go to IPL. There is an overall cap of US$ 918 million on the rights which can be shared with the franchisees. Sony-WSG then re-sold parts of the broadcasting rights geographically to other companies. Below is a summary of the broadcasting rights around the world.

Case 10: Indian Premier League 179

Winning Bidder

Regional Broadcasting Rights

Terms of Deal

Sony/WSG Network Ten

Global Rights, India Australia

10 years at $1.026 b 5 years at A$ 10–15 m

Setanta Sports Arab Digital Distribution Willow TV

UK and Ireland Middle East North America

5 years, terms NA 10 years, terms NA 5 years, terms NA

SuperSport Geo Super Asian TV network

South Africa Pakistan Canada

Terms NA Terms NA 5 years, terms NA

Exhibit 4 presents the cash flows for Sony. Exhibit 5 presents financial data for listed media companies.

Sponsorship Rights Real estate developer DLF Universal secured exclusive rights to the Indian Premier League title sponsorship worth INR 200 crore (over US$ 50 million) for five years. Hero Honda was selected as an associate sponsor for five years in a deal worth US$ 22.5 million. The Title sponsorship right was won by DLF through an open bid process with a highest bid of Rs. 40 crore per annum. The deal gives DLF Ltd., exclusive Title Sponsorship rights for a period of five years valuing the Title Sponsorship in excess of Rs. 200 crores. The Title Sponsorship race was closely contested between DLF Limited, the World Sports Group (WSG) who had bid on behalf of Hero Honda Motors (India) Ltd, Percept D’Mark and 21st Century Media. 60% of the amount collected from sponsors would be distributed equally among the franchises. In addition, Pepsi secured the title as the tournament’s Official Beverage by signing a five year deal worth USD 12.5 million. The proceeds of the latter are to be shared equally by the league’s franchise owners. Kingfisher Airlines has been named IPL’s umpire partner with rights to advertise of umpire’s clothes and also sponsoring third umpire decisions for five years. The deal is worth Rs. 106 crores (approximately US$ 26.5 million).

Player Signings Like in the Premier Leagues, franchises bid to get the players they wish to recruit. Players signing up with Indian Premier League (IPL) will have to agree to a two-year waiting period between retiring from international cricket and joining the league. Interested players will have to get No-Objection Certificates (NOC) from their country’s board. Players will have to think twice if they are considering an early retirement to join the IPL. This move was considered necessary to discourage players from retiring before their home boards want them to. In December, the IPL announced a player pool-the list of players who have agreed to play for IPL. Shane Warne, the Australian spin legend was signed up at a cost of US$ 400,000 for the first season.

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The fee quoted for Warne is the signing amount for him to be part of the player pool from which franchises will bid for the rights to employ players within their ranks. The second-highest signing-on fee of US$ 350,000 was paid to Glenn McGrath of Australia. Stephen Fleming of New Zealand was also paid US$ 350,000. Mohammad Yousuf and Shoaib Malik of Pakistan signed up with the IPL for US$ 330,000. The players were paid in full or were given a sizeable advance. The 29 others who have received contracts (in USD) are: Australia Justin Langer 175,000 Sri Lanka Farveez Maharoof: 150,000, Kumar Sangakkara: 250,000, Mahela Jaywardene: 250,000, Muttiah Muralitharan: 250,000, Sanath Jayasuriya: 250,000, Nuwan Zoysa: 100,000, Dilhara Fernando: 150,000, Chaminda Vaas: 175,000, Lasith Malinga: 200,000 Pakistan Mohammad Asif 225,000, Shahid Afridi: 225,000, Shoaib Akhtar: 225,000, Younus Khan: 225,000 West Indies Shivnarine Chanderpaul 175,000 New Zealand Daniel Vettori 225,000, Jacob Oram 200,000, Scott Styris 150,000, Brendon McCullum 175,000 South Africa Loots Bosman 150,000, AB de Villiers 175,000, Albie Morkel 200,000, Graeme Smith 225,000, Herschelle Gibbs 225,000, Shaun Pollock 200,000, Ashwell Prince 150,000, Makhaya Ntini 175,000, Mark Boucher 175,000, Jacques Kallis 200,000. In February, IPL issued a set of uniform guidelines to all its eight franchisees giving them a clear overview of the process and rules of the DLF IPL Player Auction. The Player Auction will be a private auction, conducted by an independent professional auctioneer Mr. Richard Madley who will also be the sole arbiter as to all aspects of the Auction. The Auction would be an open auction with each player being individually put up for bidding by the franchises. The highest bid that is accepted by the auctioneer shall be the buyer at that price. There were around 78 players in the Auction—a combination of Indian national team and foreign cricketers. Each player has an annual “base player fee”. The base player fee will be the fee at which the bidding for that player starts. This base player fee assumes that the player is available for the entire season of the DLF Indian Premier League season, including, if applicable, the Champions Tournament. This fee will be adjusted on a pro-rata basis, depending on the player’s availability for the DLF IPL season in the first year. Players in the Auction would be arranged into “sets” of approximately 12 according to their base player fee, their cricketing specialism and their expected availability for the 2008 DLF IPL season. Interestingly, if a player who on the day of the Auction, is expected to be unavailable in 2008, subsequently, becomes available (e.g. through retirement, non-selection by national team or tour cancellation), provided that the player is able to obtain a No Objection Certificate for the 2008 season from his home board, such player may, at the DLF IPL’s discretion, could become part of the relevant Franchise’s squad for that season.

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In advance of the Auction, Franchises were issued a list of the players that would be auctioned, the composition of the sets and the order in which the sets will be auctioned. For each player, the following information were be included: name, nationality, specialism, base player fee, and expected “percentage availability” for the 2008 DLF IPL season. The minimum “percentage availability” for any player included in the Auction was 25%. Thus, even if a player is expected to be either completely unavailable or only available for less than four of the DLF IPL matches in 2008, 25% of the player fee bid for that player in the Auction will count against the $5 m purse. For example, the purchase for $400,000 of a player, who is expected to be completely unavailable in 2008, will cause a deduction of $100,000 from the Franchise’s overall $5 m purse. Each player was the subject of an open auction with the auctioneer controlling the process. Bidders will raise a paddle to indicate a bid (only one official bidder per Franchise). Each bid will represent the player fee per season to be paid by the Franchise to the player for each of the seasons 2008, 2009 and 2010, ignoring any periods of unavailability. As each player is sold, the Franchise was required to sign a form confirming the terms of the agreement (name of player, player fee agreed). The player fee will be deemed to include any fee that may be payable to the player’s agent. Following the conclusion of each set, there would be a break to allow Franchises time to re-evaluate their tactics. Players for whom no bids are received when they are initially presented for auction, will be placed in a final set and will be represented for auction once all of the initial sets have been concluded. Franchises may not buy foreign players in advance of the Auction (whether such players are amongst the list of players to be auctioned or otherwise). After the Auction, Franchises are free to purchase additional foreign players subject to the franchises informing the BCCI / DLF IPL of any such additional foreign players. The BCCI/DLF IPL would approach the desired players on behalf of the Franchise in an attempt to negotiate the contracted fee up to an amount set by the Franchise, and will endeavor to obtain a No Objection Certificate from that player’s home board. If more than one Franchise is interested in a particular player, the DLF IPL may hold a further Auction to determine which Franchise will sign that player. The fees paid to any such additional foreign players for 2008 (when added to the total player fees for 2008 committed by the Franchise in the Auction), must not exceed the maximum purse of $5m. Indian players who are not in the Auction can be signed at any time. The contract with the player would be for a fixed term of three years. The Franchise is obligated to sign both agreements in respect of players that it buys during the Auction. The player fee would be inclusive of the fee that is due to the player’s agent.

Squad Rules Each DLF IPL franchise squad must have a minimum of 16 players per squad. This will include a maximum of 8 currently available foreign players per squad (any foreign players in a Franchise’s squad who are not available for any reason will not count towards the total). Each franchise can have a maximum of 4 foreign players in the playing XI for each match.

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The squad will additionally consist of a minimum 4 under 22 players (the catchment players and the Indian national players, if so qualified, can be counted for the purpose of this rule. Foreign players may not be counted for the purpose of this rule). These players must be under 22 years old on 1 April of the relevant season. The players’ auctions were held on February 20. The IPL placed icon status on a select few Indian players. These players were Rahul Dravid, Saurav Ganguly, Sachin Tendulkar, Yuvraj Singh, and Virender Sehwag. VVS Laxman initially named an icon player, later voluntarily opted out of his icon status to give his team (Deccan Chargers) more money to bid for players. An icon player is a player who can only play for his home city in the competition. Each team is assigned at most one icon player. Unlike all the other players initially recruited by teams, the icon players were not bid for in the player auction. The salary of each icon player is 15% more than the next highest earner in their team. Further, IPL has prescribed a salary cap of $5 m per team. The purpose behind designating the Icon Players is to ensure that top draw players will represent their respective city sides, which is important for the league to increase fan support and interest among the locals. All the franchises with icon players felt that having the icon player was a handicap in the player auction, as the money spent on the icon resulted in less room under the salary cap to purchase other players. Exhibit 5 presents the bidding/sign in price for all the players in the 8 teams.

Determination of Points and Net Run Rate The selection of teams for semi finals and finals depends on the points and the net run rate scored by a team. Net Run Rate (NRR) is a statistic used in the sport of cricket. It is the most commonly used method of separating teams in one-day league competitions, effectively acting as the Cricket equivalent of “goal difference” in football. The net run rate in a single game is the run rate per over that a team scores, minus the run rate per over that is scored against them. If a team has won more matches, its Net Run Rate (NRR) would be positive, however if it has lost majority of matches, the NRR would be negative. If it won the same number of matches as it has lost, then the NRR can be negative or positive, depending upon the margin of your victories or defeats.

League Payments and Prize Money At the end of each Season, Teams will receive a sum determined by their final League position before the semi-finals and grand final and following staging of the semi-finals and grand final as follows:

(a) End of Regular Season (i) Each Season a sum of money will be designated (in accordance with the method of calculation set out in the Franchise Agreement) and made available by IPL; and

Case 10: Indian Premier League 183

(ii) Each Team, will, at the end of each Season be given a certain number of “League Points” depending on its final position in the League table before the semi-finals and the grand final for that Season. For the avoidance of doubt “League Points” are used only for the determination of each Franchisee’s share of the abovementioned sum and shall not be added to the points achieved by teams in the League table. The Team finishing last will always receive one League Point, and working up the table (until the top team), the Team finishing in the next position up shall be given one more League Point than the Team finishing immediately below it in the table so that if (by way of example only) there are 8 Teams in the League, League Points will be allocated as follows: Final League Table

League Points

Team Position 1 2

8 7

3 4 5

6 5 4

6 7 8

3 2 1

(iii) The total aforementioned sum will be divided by the total number of League Points allocated (so that, for example, if there are 8 Teams in the League, and, as a consequence, 36 League Points have been allocated, the total sum will be divided by 36) to determine the amount of a “League Share”. (iv) Each Team in the table shall receive a proportion of the sum referred to above which is equivalent to one League Share per League Point held by that Team (so that, for example, in a League of 8 Teams, the first placed Team shall receive 8/36 of the sum referred to above, the second placed Team will receive 7/36 of the sum and so on until the last placed Team which will receive 1/36 of the amount).

(b) End of Season Prize Money (i) IPL will determine the amount of a total prize fund in respect of each Season which will be distributed between the Teams in the League following the semi-finals and grand final of that Season by reference to each Team’s performance in the League and, where appropriate, in the semi-finals and grand final. For the 2008 and each subsequent Season until such time as IPL decides otherwise, the total prize fund is US$ 3 million and will be allocated as follows:

184

Cases in Corporate Finance

Finals/League Position

Prize (US$)

Final Winner Runner up

1,200,000 600,000

Each losing Semi Finalist 5th place in the League table 6th place in the League table

300,000 200,000 175,000

7th place in the League table 8th place in the League table

125,000 100,000

Controversies In organising the matches, BCCI found itself in the middle of many controversies.

Conflicts with Cricket Boards The BCCI came into conflicts of interest with various cricket boards around the world as a result of the IPL. The main point of contention was that signed players should always be available to their country for international tours, even if it overlaps with the IPL season. To address this, the BCCI officially requested that the ICC institute a time period in the International Tours Program solely for the IPL season. This request was not granted at a subsequent meeting held by the ICC.

Media Restrictions Initially, the IPL enforced strict guidelines to media covering Premier League matches, consistent with their desire to use the same model sports leagues in North America use in regards to media coverage. Notable guidelines imposed included the restriction to use images taken during the event unless purchased from cricket.com, owned by Live Current Media Inc (who won the rights to such images) and the prohibition of live coverage from the cricket grounds. Media agencies also had to agree to upload all images taken at IPL matches to the official website. This was deemed unacceptable by print media around the world. Upon the threat of boycott, the IPL eased up on several of the restrictions.

Cheerleaders The IPL has been criticised by a few politicians and feminists for bringing in foreign cheerleaders, which is seen by many to not be in the traditional spirit of the game, as well as being against some Indian sensibilities. Two cheerleaders from London were asked to leave the ground at Mohali because of the color of their skin by Wizcraft International Entertainment, which handles the team Kings XI Punjab. The girls did not lodge a formal complaint though.

Case 10: Indian Premier League 185

Exhibit 1

World Cricket Team Rankings Test Cricket

ODI

1. 2. 3.

Australia India S Africa

S Africa Australia N Zealand

4. 5. 6.

England Sri Lanka Pakistan

India Pakistan England

7. 8. 9.

N Zealand West Indies Bangladesh

Sri Lanka W Indies Bangladesh

Source: ICC.

Exhibit 2

Publicly Traded English Soccer Clubs

Soccer Clubs listed on LSE Aston Villa Bolton Wanderers Leeds united Hearth of Midlothian Leicester City Soccer investments Manchester United Mill Wall Newcastle United Sheffield United Southhampton Leisure holding Sunderland Tottenham Hotspur Celtic Glasgow Soccer Clubs listed on AIM Birmingham City Celtic Glasgow Charlton Athletic Chelsea village Queens Park rangers Nottingham Forrest Preston North End West Bromwich Traded via OFEX Arsenal Liverpool

186

Cases in Corporate Finance

Exhibit 3

List of Venues and Price List

Matches in Bangalore Location Seating Capacity

: Chinnaswamy Stadium : 40,000

Price List Price Category

Price INR

Antiquity members stand m3 Antiquity members stand m4

2725.00 1090.00

Bagpiper special view Bagpiper std view McDowell’s best view (a)

1090.00 220 545.00

McDowell’s best view (b) McDowell’s best view (C) Royal Challenge executive (e)

545.00 545.00 2725.00

Royal Challenge north terrace (n) Royal challenge pavilion (p4) Royal challenge terrace (t)

2725.00 5450.00 4360.00

Matches in Chennai Location Seating Capacity

: M A Chidambaram Stadium, Chepauk : 50,000

Price List Stand Name

Price INR

Stand A

1000

Stand D Stand D Spl Stand E & G

500 1500 600

Stand F & H T3 Pavilion Terrace

800 2000 4000

Matches in Delhi Location: Feroz Shah Kotla Capacity: NA Stand Name

Price INR

S Side Old CH-C1 S Side Old CH-CH

4000 4000

E Stand SeHilla

500 1500 (Contd.)

Case 10: Indian Premier League 187

(Exhibit 3 Contd.) Matches in Hyderabad Location: Rajiv Gandhi International Stadium Seating Capacity: NA North Pavillion – Terrace Rs 1000, Ground floor and 1st floor- Rs. 2000 East Pavillion – Terrace, Ground and First floor-Rs. 250 South Pavillion – Terrace- 1500, Ground and 1st floor-Rs. 2500 West pavilion- terrace and ground floor- Rs. 500 Matches in Jaipur Location: Sawai Mansingh Stadium Seating Capacity: NA Price Category

Price INR

North east lawn North east stand ii North west lawn North west stand I North west stand ii South east lawn South east stand I South east stand ii South west lawn South west stand ii West north 2nd floor West north lawn West north stand West south 2nd floor West south lawn West south stand

600.00  500 600 500 500 1500 1000 1000 1500 1000 600 800 400 600 800 400

Matches in Mohali Location: Punjab C A Stadium Seating Capacity: NA Category

Price INR

Grandstand - chair block (gate 12) Grandstand - chair block (gate 6) Grandstand - pavilion terrace Grandstand - pcc member´s block Grandstand - student´s block (gate 11) Grandstand - student´s block (gate 7) Grandstand - vip block North pavilion South end pavilion - level 1 South end pavilion - level 2 South end pavilion - level 3 (a/c lounge with f & b)

250 250 1500 400 50 50 400 1000 12000 12000 7000 (Contd.)

188

Cases in Corporate Finance

(Exhibit 3 Contd.) Matches in Mumbai Locations: Wankhede Stadium and DY Patil Stadium Seating Capacity: 40,000 and 60,000 respectively Price List: NA Matches in Kolkata Location: Eden Gardens Seating capacity: 90,000 Price List: NA

Exhibit 4

Cash Flows for Sony (Rs. million) 1

2

3

4

5

6

7

8

9

10

Ad inflows Promotions Outflows

2725 432 2448

3134 432 2448

3604 432 2448

4144 432 2448

4766 432 2448

5243 432 4896

5767 432 4896

6344 432 4896

6978 432 4896

7676 432 4896

Profit/Loss

–155

254

724

1264

1886

-85

439

1016

1650

2348

Source: Alchemy Share and Stock brokers.

Exhibit 5

Financial Data for Listed Media Companies (INR crore)

Company Name

Finance

Months

Borrowings

Beta

year

365 days Avg. Market Cap.

Aastha Broadcasting Network Ltd. Adlabs Films Ltd. Balaji Telefilms Ltd.

2007/03 2007/06 2007/03

NA 15 12

NA 586.65 0

1.26 1.41 0.91

50.01 3329.85 1619.27

Dish T V India Ltd. Network 18 Media & Inv. Ltd. Sun T V Network Ltd.

2007/03 2007/03 2007/03

12 12 12

192.2 465.01 86.88

NA 1.34 0.89

3109.57 1877.92 13627.12

U T V Software Communications Ltd. Zee Entertainment Enterprises Ltd.

2007/03 2007/03

12 12

167.47 322.57

0.86 1.03

1735.23 12307.25

Source: Prowess.

Case 10: Indian Premier League 189

Exhibit 6

Composition of Teams and Player Compensation

Punjab Kings XI Player Yuvraj Singh Gagandeep Singh Karan Goel Luke Pankaj Dharmani Ramnaresh Sarwan Sreesanth Sunny VRV Singh Ajitesh Irfan Pathan Sangakkara Mahela Jayawardane Piyush Chawla Rishi Dhawan

Sign-in/Bid Price ($) 1,063,750

54,000 225,000 625,000

925,000 700,000 475,000 400,000

Shaun Marsh Tanmay Srivastava Wilkin Mota Brett Lee James Hopes Kyle Mills

900,000 300,000 150,000

Nitin Saini Ramesh Powar Sahil Kukreja

170,000

Simon Katich Uday Kaul Tom Moody (Coach) TOTAL

200,000

6.6 m

Royal Challengers Bangalore Player Rahul Dravid Balachandra Akhil Dale Steyn

Bidding/Sign in Price ($) 1,035,000 325,000

Jagadeesh Arunkumar Misbah-ul-Haq Ross Taylor

125,000 100,000

Sunil Joshi Wasim Jaffer Abdul Razzak

150,000 120,000 (Contd.)

190

Cases in Corporate Finance

(Exhibit 6 contd.) Player

Bidding/Sign in Price ($)

Bharat Chippli Devraj Patil K P Appanna Nathan Bracken Chanderpaul Vinay Kumar

325,000 200,000

Zaheer Khan Anil Kumble Cameron White

450,000 500,000 500,000

Jacques kallis Marc Boucher Praveen Kumar

900,000 450,000

Goswami Virat Kohli Venkatesh Prasad (coach) Total Chennai Super Kings Player M S Dhoni Arun Karthik Albie Morkel Balaji Hayden Einstein Ashwin Stephen Fleming Suresh Raina Mukund Oram Ntini Michael Hussey Amarnath Jakati Badrinath Sivaramakrishnan Joginder Sharma Gony Mutthiah Muralitharan Parthiv Patel Anirudha Suresh Kumar Vilas Kepler Wessles (Coach) Total

5.7 m

Sign in/Bid Price ($) 1,500,000 675,000 375,000

350,000 650,000 675,000 200,000 350,000

225,000 600,000 325,000

6.2 m (Contd.)

Case 10: Indian Premier League 191

(Exhibit 6 contd.) Delhi Daredevils Player

Bid/Sign in Price ($)

Sehwag Geeves

833,750 50,000

Maharoof Tiwary Asif

225,000 675,000 650,000

Dhawan Dishan AB de Villiers

250,000 300,000

Vettori Gambhir Tehlan Sangwan S Malik Yo Mahesh Amit Mishra Dinesh Karthi Glenn McGrath

625,000 725,000

500,000

525,000 350,000

Manhas Rajat Bhatia Yadav Nagar Shipperd (Coach) Total

Deccan Chargers Player

6.4 m

Bid/Sign in Price ($)

VVS Laxman

375,000

Arjun Yadav D Kalyankrishna Herschelle Gibbs

575,000

PM Sarvesh Kumar RP Singh Shahid Afridi

875,000 675,000

Adam Gilchrist (wk) Chamara Silva Dwaraka Ravi Teja

700,000 100,000

Nuwan Zoysa Pragyan Ojha Sanjay Bangar

110,000

(Contd.)

192

Cases in Corporate Finance

(Exhibit 6 contd.) Player Venugopal Rao Andrew Symonds Chaminda Vaas Halhadar Das (wk) Vijaykumar Rohit Sharma Styris Robin Singh (Coach) Total Mumbai Indians Player Tendulkar Chavan Dhawal Bravo Harbhajan Ronchi Pinal Shah Rohan Raje Shaun Pollock

Bid/Sign in Price ($) 1,350,000 200,000

750,000 175,000 6.0 m

Bid/Sign in Price ($) 1,121,250

850,000

550,000

Vikrant Abhishek Nayar Ashish Nehra Dilhara Dwayne Lasith

150,000 350,000

Manish Pandey Rajesh Pawar Sanath Jayasuriya

975,000

Chitnis Takawale Rahane Prince Thornely Dhiman

175,000 25,000

Bosman Khote Robin Uthappa

175,000 800,000

Saurabh Tiwary Swapnil Singh Lalchand Rajput (Coach) Total

5.4 m (Contd.)

Case 10: Indian Premier League 193

(Exhibit 6 contd.) Kolkata Knight Riders Player S Ganguly

Sign in/Bid Price ($) 1,092,5000

Dinda Pujara Debabrata Das

62,500 62,500 62,500

Laxmi Shukla Rohan Banerjee Lahiri

62,500 62,500 62500

Taibu Saha Chopra

125,000 62,500 62,500

Hodge Gayle Iqbal Abdulla

62,500 800,000 30,000

Hafeez Ponting Siddharth

100,000 400,000 30,000

Umar Gul Ajit Agarkar McCullum

150,000 350,000 700,000

David Hussey Ishant Sharma Murali Karthik

625,000 950,000 425,000

Salman Butt S Akhtar Yashpal Singh

100,000 450,000 62,500

Ranadeb Bose Buchanan (Coach) Total

62,500 6.2 m

Rajasthan Royals Player

Sign in/Bid Price ($)

Shane Warne Lehman Graeme Smith

450,000

Akmal Morne Morkel Pankaj Singh

150,000 60,000

Shane Watson Aditya Angle Dimitri

125,000 100,000 (Contd.)

194

Cases in Corporate Finance

(Exhibit 6 contd.) Player Jaydev Shah Mahesh Rawat Munaf Patel

Sign in/Bid Price ($)

275,000

Parag More Siddharth Trivedi Sumit Khatri Revandkar Dinesh Salunke Justin Langer Md Kaif Niraj Patel Ravindra Jadeja Swapnil Younus Khan Yusuf Pathan Sohail Tanvir Taruwar Kohli Total

475,000 100,000 3.6 m

References 1. DLF wins title sponsorship rights for IPL, Business Standard, February 14, 2008 2. www.premierleaguecricket.in 3. www.specials.rediff.com 4. www.cricinfo.com 5. www.indianpremierleaguecricket.com 6. www.crichome.worldpress.com 7. www.business-standard.com 8. www.iplt20.com

CASE

11

Option Pricing Problem Set DESCRIPTION This case presents seven exercises designed to introduce students to option pricing using the Black-Scholes/Merton’s model and binomialtree analysis and its application in capital budgeting.

LEARNING OBJECTIVE To analyse plain-vanilla call and put option prices.

SUBJECTS COVERED Capital Budgeting, Option Pricing, Valuation.

Professor Vishwanath S. R. prepared this problem set with the assistance of Abhinav Tiwari (PGDM ’08) and Anu Kumari (PGDM ’08) as the basis for class discussion rather than to illustrate effective or ineffective management.

196

Cases in Corporate Finance

Problem 1: Using Option Pricing Tables Refer to the call and put option prices on the Infosys technologies quoted in Exhibit 1. Is the Feb 28, Rs. 1710 call option fairly priced? Why does the option have value despite the fact that the exercise price of the option is more than the prevailing stock price? Use the option pricing table in Appendix A.

Problem 2: Application of Black Scholes Estimate the intrinsic value of the Rs. 1530 strike call option on Infosys. Repeat analysis for Rs. 1470 put option. Use the Black-Scholes formula. Refer to other data given below: Risk free rate (1 year) = 7.51% Dividend Yield = 0.80% Daily standard deviation = 2.34% or 36.99% p.a. 3 Month Volatility (standard deviation) of Infosys stock returns (from Prowess Database) = 5.28% 1 Month Volatility (from Prowess) = 5.11%

Problem 3: Estimation of Implied Volatility Refer to the Feb 28, Rs 900 strike price, call option on TCS in Exhibit 2. What is the volatility implied by the call option price. Risk free rate (1 year) = 7.51% Dividend Yield = 1.35%

Actual Volatility Daily standard deviation = 1.73% or 27.35% p.a. 3 Month Volatility (standard deviation) of TCS stock returns = 2.88% 1 Month Volatility = 1.97%

Problem 4: Binomial Trees Refer to the Rs. 2500 call option on Reliance Industries stock in Exhibit 3. Is the call option fairly priced? Use binomial method. The following data is available: Risk free rate (1 year) = 7.51% Dividend Yield = 0.39% Daily standard deviation = 2.72% or 43% p.a. 3 Month Volatility (standard deviation) of Reliance stock returns (from Prowess) = 7.05% 1 Month Volatility (from Prowess) = 7.05%

Case 11: Option Pricing Problem Set 197

Problem 5: Put-Call Parity Refer to the Rs. 2280 call option and put option price quotes on Reliance stock. Do these prices conform to the put-call parity relationship?

Problem 6: Real Options A Company has the following projects. Calculate NPV and then classify them on the basis of exercise decision (exercise now and so on). Variable

A

B

C

D

S ($m) X ($m) T (Years)

100 90 0.0

100 90 2.0

100 110 0.0

100 110 1.0

s per year Rf = 6%

0.30

0.30

0.30

0.30

Problem 7: Real Options An oil company has an investment opportunity to develop some reserves. The PV of future cash flows is currently $ 100 m. They can look into the investment now by incurring an expenditure of $ 80 m. Alternatively they may wait for two years by paying an up-front fee of $ 6 m and then make an investment of $ 90 m to develop the reserves. Based on the volatility of price of oil, the annual standard deviation of returns for the oil field is 35%. Interest rates are 8%. Exhibit 1

Options Price Quotation for Infosys Technologies (End of Day Quotes on NSE as on Feb 19 2008)

Stock Price = Rs. 1565.30 Expiry Date

Strike Price (Rs)

Put/Call

Open (Rs)

High (Rs)

Low (Rs)

Close (Rs)

Volume

Value Open (Rs m) Interest

Feb 28 Feb 28

1,710 1,530

CA CA

6.00 70.00

7.50 70.00

5.80 42.20

6.10 43.00

10 6

1.72 0.95

28,600 5,600

Feb 28 Feb 28 Feb 28

1,800 1,650 1,500

CA CA CA

3.00 14.10 86.00

3.00 14.85 94.00

3.00 10.10 71.05

3.00 12.60 82.00

6 22 12

1.08 3.66 1.90

25,500 25,500 13,300

Feb 28 Feb 28 Feb 28

1,470 1,590 1,620

CA CA CA

90.00 23.00 20.00

90.00 34.95 23.50

90.00 22.05 16.00

90.00 27.30 19.50

1 44 42

0.16 7.12 6.89

1,000 26,600 43,100

Feb 28 Feb 28

1,560 1,500

CA PA

38.00 18.00

50.00 26.80

32.00 16.50

41.55 21.00

80 29

12.82 4.41

23,100 15,900 (Contd.)

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Cases in Corporate Finance

(Exhibit 1 Contd.) Expiry Date

Strike Price (Rs)

Put/Call

Open (Rs)

High (Rs)

Low (Rs)

Close (Rs)

Volume

Value Open (Rs m) Interest

Feb 28

1,530

PA

30.00

30.00

30.00

30.00

1

0.16

1,400

Feb 28 Feb 28 Feb 28

1,590 1,470 1,620

PA PA PA

70.00 12.00 67.00

70.00 18.00 85.00

70.00 12.00 67.00

70.00 18.00 85.00

1 2 2

0.17 0.30 0.34

2,600 4,000 700

Feb 28

1,560

PA

50.00

52.20

31.80

39.70

24

3.85

4,200

Source: Equity Master.

Exhibit 2

Options Price Quotation for TCS (End of Day Quotes on NSE as on Feb 19, 2008)

Stock Price = Rs. 884.5 Expiry Date

Strike Price (Rs)

Put/Call

Open (Rs)

High (Rs)

Low (Rs)

Close (Rs)

Volume

Value Open (Rs m) Interest

Feb 28 Feb 28

900 860

CA CA

18.45 34.00

22.15 34.50

15.00 32.00

18.65 34.50

33 10

7.58 2.23

19,000 2,500

Feb 28 Feb 28

880 1,000

CA CA

25.50 3.85

25.50 4.00

22.00 3.85

25.00 4.00

5 5

1.13 1.25

1,250 12,750

Source: Equity Master.

Exhibit 3

Options Price Quotation for Reliance (End of Day Quotes on NSE as on February 19, 2008)

Stock Price = Rs. 2481 Expiry

Strike

Open

High

Low

Close

(Rs)

(Rs)

(Rs)

(Rs)

PA CA PA

18.00 280.00 8.00

18.00 280.00 10.00

18.00 280.00 8.00

18.00 280.00 9.25

1 1 8

0.17 0.19 1.37

1,875 750 17,775

2,310 2,310 2,400

CA PA CA

289.00 11.25 209.00

289.00 11.90 230.00

262.05 7.10 162.55

262.05 11.55 171.50

11 40 1,105

2.13 6.96 216.13

33,825 34,125 96,825

Feb 28 Feb 28 Feb 28

2,400 2,450 2,500

PA CA CA

15.10 120.10 114.00

24.00 120.10 147.90

12.50 120.10 94.00

21.60 120.10 103.15

1,659 1 484

300.57 0.19 95.45

279,375 750 111,000

Feb 28 Feb 28 Feb 28

2,500 2,550 2,550

PA CA PA

39.00 90.00 50.00

60.00 109.90 65.00

27.55 66.00 38.00

53.45 68.25 65.00

676 81 34

128.78 16.05 6.62

74,775 16,125 1,875

Feb 28

2,600

CA

73.20

84.00

46.60

50.85

2,160

432.15

260,400

Date

Price (Rs)

Feb 28 Feb 28 Feb 28

2,250 2,280 2,280

Feb 28 Feb 28 Feb 28

Put/Call

Volume

Value

Open

(Rs m) Interest

(Contd.)

Case 11: Option Pricing Problem Set 199

(Exhibit 3 Contd.) Expiry Date

Strike Price (Rs)

Put/Call

Open (Rs)

High (Rs)

Low (Rs)

Close (Rs)

Feb 28 Feb 28

2,600 2,650

PA CA

88.00 52.20

110.00 57.80

64.00 32.00

103.15 35.70

340 182

68.30 36.83

27,525 21,300

Feb 28 Feb 28 Feb 28

2,700 2,700 2,750

CA PA CA

32.45 149.00 18.50

34.95 168.00 20.00

19.50 117.00 15.00

20.75 168.00 15.50

1,220 8 33

249.66 1.70 6.85

341,925 1,200 14,250

Feb 28 Feb 28 Feb 28

2,800 2,900 3,000

CA CA CA

12.00 10.00 5.05

15.45 10.00 5.65

7.00 5.00 4.00

9.10 5.00 5.35

304 17 20

64.12 3.71 4.51

125,325 47,100 126,300

Feb 28 Mar 27 Mar 27

3,100 2,500 2,600

CA PA CA

1.40 105.00 160.00

1.40 105.00 160.00

1.40 105.00 135.00

1.40 105.00 135.00

2 1 3

0.47 0.20 0.62

63,525 150 225

Apr 24

2,600

CA

589.80

589.80

589.80

589.80

1

0.24

150

Appendix A

Volume

Value Open (Rs m) Interest

Option Pricing Table Option value (%)

Share price / PV of Exercise price

0.25

(Annual s * Square root of time) 0.5 0.75

1.0

0.5 0.6

0 0

3 5

10 14

19 24

0.7 0.8 0.9

1 3 6

8 12 16

18 22 26

28 32 35

1.0

10

20

29

38

CASE

12

Tata Steel: The Bid for Corus

DESCRIPTION The case documents a high profile cross border acquisition by an Indian company. Students are required to assess the strategic motives of these firms and perform a valuation analysis.

LEARNING OBJECTIVE To introduce issues in a cross border, high leverage acquisition

SUBJECTS COVERED Financial Management, Mergers and Acquisitions.

This case was prepared by Vishwanath S.R. of Institute of Management Technology, Nagpur and Rajesh Haldipur of SDM Institute for Management Development, Mysore.

Case 12: Tata Steel: The Bid for Corus 201

INTRODUCTION On October 20, 2006, the boards of Tata Steel and Corus announced their agreement on the terms of the recommended acquisition of the entire issued and to be issued share capital of Corus at a price of 455 pence in cash for each Corus Share, valuing Corus at £4.3 billion. Tata Steel said its 455-pencea-share offer for Corus represents on an enterprise value, a price earning ratio of 7.9 times Corus’ ’06 earnings and includes a premium of approximately 26.2% to the average closing mid-market price of 360.5 pence. Details of the merger were likely to be decided by a strategic and integration committee that would develop and execute the integration and growth plans for the combined entity. Corus is much larger than Tata Steel, both in volumes and sales figures. Globally, it is ranked ninth in terms of volume. Tata Steel, in comparison, is ranked 58. Ratan Tata, Chairman of Tata Steel, said1: “This proposed acquisition represents a defining moment for Tata Steel and is entirely consistent with our strategy of growth through international expansion. Corus and Tata Steel are companies with long, proud histories. We have compatible cultures of commitment to stakeholders and complementary strengths in technology, efficiency, product mix and geographical spread. Together, we will be even better equipped to remain at the leading edge of the fast changing steel industry.” Jim Leng, Chairman of Corus, said: “This offer from Tata Steel reflects the substantial value created for Corus shareholders since the placing and open offer and launch of our “Restoring Success” programme in 2003. In the middle of last year, my board agreed a strategic way forward for Corus to seek access to low cost production and high growth markets. Consistent with this, the Company held talks with a number of parties from Brazil, Russia and India. This transaction represents the culmination of these talks. This combination with Tata, for Corus shareholders and employees alike, represents the right partner at the right time at the right price and on the right terms. This creates a well balanced company, strategically well placed to compete in an increasingly competitive global environment.” Tata Steel offered to fund upfront the IAS 19 deficit on the Corus Engineering Steels Pension Scheme by paying £126 million into the scheme; and to increase the contribution rate on the British Steel Pension Scheme from 10 percent to 12 percent until 31 March 2009. The Acquisition would be made by Tata Steel UK, a wholly-owned indirect subsidiary of Tata Steel. The Corus Directors unanimously recommended that Corus Shareholders vote in favor of the Scheme after taking advice from Credit Suisse, J P Morgan Cazenove and HSBC. If the deal sailed through, they would be the fifth largest global steel producer with proforma crude steel production of 23.5 million tonnes in 2005. Tata Steel announced that it was keen to retain Corus’s management, including Chief Executive, Philippe Varin. The combination is strategically compelling, creating a vertically integrated global steel group. The acquisition would position the combined group as the fifth largest steel company in the world by production, with a meaningful presence in both Europe and Asia. The powerful combination of low cost upstream production in India with the high end downstream processing facilities of Corus will improve the competitiveness of the European operations of Corus significantly. The combination 1. www.bizjournals.com

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will also allow the cross-fertilisation of research and development capabilities in the automotive, packaging and construction sectors and there will be a transfer, from Europe to India, of technology, best practices and expertise of senior Corus management. In addition, Tata Steel will retain access to low cost raw materials and slab for the enlarged group, and exposure to high growth in emerging markets, whilst gaining price stability in developed markets. As per the agreement, 75 percent of Corus shareholders would have to tender their shares for the acquisition to be complete. When complete, this would be the largest takeover by an Indian company overseas. The deal would also catapult the combined entity to among the world’s largest steel companies with a total capacity of about 24 million tonnes per year. The new, combined entity of Tata Steel-Corus would have a capacity of 40 million tonne by 2011-12 and a turnover of $32 billion by 2011-12 with an EBIDTA margin of 25%”. The Tata Steel has developed a six-pronged strategy in 2003, where the target was to increase capacity from 4 million tonne to 30 million tonne by 2015. The $8 billion Tata Steel-Corus deal would be at No. 5 among the top deals witnessed by the steel industry over the last few years.

Steel Industry Background2 Steel is an alloy of iron and carbon containing less than 2% carbon and 1% manganese and small amounts of silicon, phosphorus, sulphur and oxygen. Steel is the most important engineering and construction material in the world. It is used in every aspect of our lives, from automotive manufacture to construction products, from steel toecaps for protective footwear to refrigerators and washing machines and from cargo ships to the finest scalpel for hospital surgery. Most steel is made via one of two basic routes: n

Integrated (blast furnace and basic oxygen furnace).

n

Electric arc furnace (EAF).

The integrated route uses raw materials (that is, iron ore, limestone and coke) and scrap to create steel. The EAF method uses scrap as its principal input. The EAF method is much easier and faster since it only requires scrap steel. Recycled steel is introduced into a furnace and re-melted along with some other additions to produce the end product. Steel can be produced by other methods such as open hearth. However, the amount of steel produced by these methods decreases every year. Of the steel produced in 2005, 65.4% was produced via the integrated route, 31.7% via EAF and 2.9% via the open hearth and other methods. At a steel mill, the crude steel production process turns molten steel into ingots, blooms, billets or slabs. These are called semi-finished products. Semi-finished products are solid blocks of steel, usually with a square or rectangular cross-section.

2. This section draws from the information on the International Iron and Steel Institute website http:// www.worldsteel.org

Case 12: Tata Steel: The Bid for Corus 203

Finished steel products are forged from semi-finished products. They are classified as follows: n

Cold-finished bars and flats (bright bars)

n

Cold-finished sections including forged and cold-formed sections

n

Cold-rolled narrow strip

n

Cold-rolled plate and sheet in coil and lengths

n

Deformed reinforcing bars

n

Drawn wire

n

Forged bars

n

Forgings (unworked)

n

Heavy sections, piling and welded structural sections

n

Hot-rolled bars and flats in lengths

n

Hot-rolled light sections

n

Hot-rolled narrow strip including universal plates

n

Hot-rolled rod in a coil (including reinforcement bar in a coil)

n

Hot-rolled wide strip, plate and sheet

n

Points, switches, crossings, tyres, wheels and axles

n

Rails and rolled accessories

n

Silicon electrical sheet and strip

n

Steel castings (unworked)

n

Steel tubes (seamless and welded, and steel tube fittings)

n

Tinmill products

n

Zinc- and other-coated sheet and strip

A flat steel product is typically made by rolling steel through sets of rollers to produce the final thickness. There are two types of flat steel products: n

n

Plate products. Vary in thickness from 10 mm to 200 mm. Plate products are used for ship building, construction, large diameter welded pipes and boiler applications. Strip products. Can be hot or cold rolled and vary in thickness from 1 mm to 10 mm. Thin flat products are used in automotive body panels, domestic white goods (for example, refrigerators and washing machines), steel (or tin) cans, and a number of other products from office furniture to heart pacemakers.

A long product is a rod, a bar or a section. Typical rod products are the reinforcing rods used in concrete, engineering products, gears, tools etc. are typical of bar products and sections are the large rolled steel joists (RSJ) that are used in building projects. Wire-drawn products and seamless pipes are also part of the long products group. Supply of raw materials is a key issue for the world steel industry. IISI manages projects which look at the availability of raw materials such as iron ore, coking coal, freight and scrap.

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Scrap iron is mainly used in electric arc furnace steelmaking. The scrap arising in the making and using of steel, obsolete scrap from demolished structures and end-of life vehicles and machinery is recycled to make new steel. About 500 million tonnes of scrap are melted each year. Iron ore and coking coal are used mainly in the blast furnace process of iron making. For this process, coking coal is turned into coke, an almost pure form of carbon which is used as the main fuel and reductant in a blast furnace. Typically, it takes 1.5 tonnes of iron ore and about 450 kg of coke to produce a ton of pig iron, the raw iron that comes out of a blast furnace. Some of the coke can be replaced by injecting pulverized coal into the blast furnace. Iron is a common mineral on the earth’s surface. Most iron ore is extracted in opencast mines in Australia and Brazil, carried to dedicated ports by rail, and then shipped to steel plants in Asia and Europe. Iron ore and coking coal are primarily shipped in capesize vessels, huge bulk carriers that can hold a cargo of 140,000 ton or more. Sea freight is an area of major concern for steelmakers today, as the high demand for raw materials is causing backlogs at ports, with vessels delayed in queues. Since the World War II, the steel industry has experienced three distinct phases- growth (1950–73), stagnation (1974–2001) and boom (2002–06).3 The demand for steel grew at an annual rate of 5.8% during 1950–73 as the industrialising nations were building their civil infrastructure. The oil shocks of 1973 through 1979 slowed consumption in the second phase. The production of crude steel grew at 0.6% p.a. over the entire period. Steel prices declined by 2-3% p.a. During 1999–2001 the industry’s overcapacity hovered near 25% globally. Only a few companies were able to sustain. Since 2002, the annual steel production has grown at 7–8% driven almost entirely by the double digit growth in China. The huge demand from china has caused a commensurate leap in steel prices. The industry has experienced a drop in the over capacity from 23% in 2001 to about 17% from 2003–05. But the demand from China has also witnessed a structural change. From 2002–04 China’s capacity for producing crude steel increased on average by 55%. By 2005, China became a net exporter of steel. In the first half of 2006, China overtook Japan, Russia and the EU 25 to become the world’s largest steel exporting country. Exhibit 1 presents the list of top steel-producing countries as of 2005 and Exhibit 2 presents the historical steel prices.

Competition: US, Europe and Emerging Markets In the past, industry consolidation contributed to reduced cyclicality. The top 10 steel-makers represent about 28% of global production. Besides Arcelor Mittal, four of the top 10 are in Asia, three in Europe and two in the U.S. In addition to China’s plan for consolidation, many of the leading steel producers have ambitious growth plans that will entail further consolidation. Lakshmi Mittal, the CEO of Arcelor Mittal stated in June 2006 that winning companies in the steel industry will have somewhere between 150 m–200 m tons of annual capacity by 2015 and that scale is crucial in the pursuit of value. 3. This section is based on Deforche, Filiep, “Beyond the Boom: The Outlook for Global Steel”, Boston Consulting Group, February 2007.

Case 12: Tata Steel: The Bid for Corus 205

Shanghai Baosteel, which, although founded in 1998, is already the world’s fifth largest steel-maker producing 22.7 m tons in 2005. The potential acquisition of Corus by Tata Steel would create a new entity with a production volume close to Baosteel’s. Exhibit 3 provides a list of Global Steel Manufacturers and a brief description of top five steel companies. Exhibit 4 provides a comparison of financial indicators of major steel firms.

Tata Steel Background Tata Steel is the largest, flagship company of the Tata Group of Companies, headquartered in Mumbai, India.4 The Tata Group is the oldest, largest, most respected industrial house in India. At last count, it had 96 operating companies categorised into 7 businesses, and include India’s largest companies in the fields of steel, automobiles, chemicals, hotels, software, etc. Established in 1907, Tata Steel is Asia’s first and India’s largest private sector steel company. Tata Steel is among the lowest cost producers of steel in the world and one of the few select steel companies in the world that is EVA-positive (Economic Value Added). Concerns over the availability of iron ore and coal, and the resultant volatility in prices, meant that most Indian steel producers had to integrate backwards in order to have greater access and pricing power over these commodities. Tata Steel has its own iron ore, coal and chrome mines and reserves (on long term leases from the Government of India), and hence, is largely self-sufficient in most critical raw materials. However, it does not have the right to export the ores and coal outside India. Its captive raw material resources and the state-of-the-art 5 MTPA (million tonne per annum) plant at Jamshedpur, in Jharkhand State, India, gives it a competitive edge. Determined to be a major global steel player, Tata Steel has recently included in its fold NatSteel, Asia (2 MTPA) and Millennium Steel (1.7 MTPA) creating a manufacturing network in eight markets in South East Asia and Pacific Rim countries. The Jamshedpur plant is expected to expand its capacity from 5 MTPA to 7 MTPA by 2008. The Company plans to enhance its capacity manifold through organic growth and investments. The Company’s wire manufacturing unit in Sri Lanka is known as Lanka Special Steel, while the joint venture in Thailand for limestone mining is known as Sila Eastern. Tata Steel’s products are targeted at the quality conscious auto sector and the burgeoning construction industry. With wire manufacturing facilities in India, Sri Lanka and Thailand, the Company plans to emerge as a major global player in the wire business. Tata Steel’s products include hot and cold rolled coils and sheets, galvanised sheets, tubes, wire rods, construction rebars, rings and bearings. In an attempt to ‘decommoditise’ steel, the company has introduced brands like Tata Steelium (the world’s first branded Cold Rolled Steel), Tata Shaktee (Galvanised Corrugated Sheets), Tata Tiscon (re-bars), Tata Bearings, Tata Agrico (hand tools and implements), Tata Wiron (galvanised wire products), Tata Pipes (pipes for construction) and Tata Structura (contemporary construction material). The company has launched the Customer Value Management initiative with the objective of creating complete understanding of customer problems and finding solutions jointly. The company’s Retail Value Management addresses the needs of distributors, retailers and end consumers. The company has also 4. www.tatasteel.com

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launched India’s first steel retail store—steel junction—for making steel shopping a happy and memorable experience. Tata Steel’s profitability ranks among the best in the industry. It posted comparatively good results for the year ended March 2006. Consolidated sales grew at 26% to Rs. 20,244 crore. Operating margins were a robust 31% in fiscal 2006. Consolidated profits for the year stood at Rs. 3,721 crore, an increase of 4%. It bought NatSteel in 2004 for Rs. 1,313 crore and Millennium Steel for Rs. 675 crore in 2005. In 2006, Tata Steel was ranked once again the best steel making company in the world by World Steel Dynamics Inc. USA (WSD) based on a study of 22 world class steel-makers—consecutively for the second time. The WSD report of February 2006 covered the study of all the leading steel manufacturing companies across the globe including POSCO, Arcelor, Nippon Steel, Bao Steel, Thyssen Krupp on 20 different parameters. Emerging out of the study, Tata Steel was ranked first with a weighted average score of 8.51 as against a score of 8.11 in 2005. POSCO of South Korea followed in the second place with 8.41. Tata Steel has been continuously marching towards becoming a global steel enterprise and aspires to become a 15 MT steel producer by 2010. It is also developing a deep-sea port in Orissa along with Larsen and Toubro to facilitate the flow of inbound and outbound commodities. Apart from the main steel division, Tata Steel’s operations are grouped under strategic profit centres like tubes, growth shop (for its steel plant and material handling equipment), bearings, ferro alloys and minerals, rings, agrico and wires. Tata Steel has numerous joint ventures and subsidiaries. Among them are: n

Tinplate Company of India

n

Tayo Rolls

n

Tata Ryerson

n

Tata Refactories

n

Tata Sponge Iron

n

Tata Metaliks

n

Tata Pigments

n

Jamipol

n

TM International Logistics

n

mJunction services

n

TRF

n

Jamshedpur Utility and Service Company (JUSCO)

n

The Indian Steel and Wire Products (ISWP)

n

Lanka Special Steel

n

Sila Eastern Company

Exhibits 5 and 6 present the consolidated balance sheets and income statements for Tata Steel.

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Corus Group Background5 Corus was formed on 6th October 1999, through the merger of British Steel and Koninklijke Hoogovens. Koninklijke Hoogovens was founded in the Hague to enable the Dutch industry to become less dependent on imports. In 1990, the Hoogovens group had five divisions; Steel, Aluminum, Technical Services, Subcontracting, and the newly formed Steel Processing and Trading. In 1999, the trend towards greater rationalisation in the European steel industry led to the merger discussions with British Steel. At that time Hoogovens had 17 business units with a turnover of 4.9 b Euro. The British Steel Corporation was formed from the UK’s 14 main steel producing companies. In 1987, the UK government formally announced its intention to privatise the British Steel Corporation. The British Steel Act 1988 transferred the assets of the corporation to British Steel, a company registered under the Companies Act. The early 1990s saw reduced demand and it was not until 1993 that growth in the UK economy gradually gathered pace and was reflected in a partial recovery in steel demand and prices. The trend continued into 1994 and helped by continuing efficiency and productivity gains, British Steel returned to profit. On October 6, 1999, the merger of Hoogovens with British steel to form Corus came into effect. Corus has manufacturing operations in many countries with major plants located in the UK, The Netherlands, Germany, France, Norway and Belgium. The company produced around 18 million tonnes of crude steel in 2005, which represented approximately 10% of total EU production and positioned the company as the 9th largest steel producer in the world and the 2nd largest producer in Europe. Corus produces carbon steel by the basic oxygen steelmaking method in the UK at Port Talbot, Teesside and Scunthorpe and in The Netherlands at IJ muiden. In addition, carbon steel is produced by the Electric Arc Furnace method in the UK at Rotherham. Corus has approximately 50% of the UK carbon steels market and around 11% of the European (including UK) carbon steels market. In 2005, Corus generated turnover of £9.1 billion and produced 19 million tonnes of steel and delivered over 0.6 mt of aluminium. At the end of December 2005, Corus had 47,300 employees. From October 2003, Corus has been structured into four main divisions: Strip Products, Long Products, Aluminium and Distribution and Building Systems. Corus has a strategy focused around carbon steel, with the intention of: · Ensuring that upstream steelmaking facilities are optimised and that the leading position of its I J muiden site is maintained. · Pursuing selective growth of downstream businesses · Seeking opportunities to participate in the ongoing consolidation of the world’s steel industry. Following his appointment as Chief Executive of Corus with effect from 1 May 2003, Philippe Varin carried out an intensive and detailed review of the Group’s activities. As a result, a number of key initiatives were launched, known as the ‘Restoring Success’ initiatives. These focus on 5. www.corusgroup.com

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introducing new leadership and instilling a new corporate culture across the Group, aligning the financial resources available to the Group with its future strategic needs, and returning all parts of the Group to acceptable levels of profitability. The latter will be done by building on our ‘Restoring Success’ initiatives—existing cost reduction programmes, implementing restructuring proposals for the UK asset base and initiating Group-wide efficiency measures.

Restoring Success The Restoring Success programme, launched in June 2003, was designed to deliver a £680 m improvement in earnings before interest, tax and amortisation by the end of 2006.6 During 2005, the company continued to make good progress and achieved approximately 80% of the overall target. Apart from savings through cost reduction and improved operational efficiency, action plans are also focused on improving our safety record and achieving best in class customer service. · Safety—During 2005, Corus saw a further 24% reduction in the frequency of lost time injuries, a good lead indicator of performance. · Service—As part of its Restoring Success programme, Corus set out to improve the percentage of deliveries made on time, from 74% in 2003, to 90% by the end of 2006. Significant and sustainable progress was made in this area, with 85% of deliveries having met this target during 2005. · Savings—By the end of December 2005, Corus had achieved nearly 80% (£555 m) of the £680 m per annum savings that it had committed to deliver by the end of 2006. The Group’s aim is to close the competitive gap that currently exists between Corus and its European peer group. Corus estimates that this gap in 2003 was some 6% at the EBITDA margin level (i.e. EBITDA to turnover) when measured against the average of its European competitors. Full implementation of the ‘Restoring Success’ initiatives above is designed to close the current competitive gap by the end of 2006. Exhibits 7, 8 and 9 present the consolidated financial statements of Corus group.

The Corus Acquisition Opportunity Corus’ half yearly operating profits in 2006 dropped by 37% to £305 m in comparison to 2005 because of increasing raw material costs. Prices for raw materials such as iron ore, coke, coking coal and scrap have risen dramatically since 2002 (see Exhibits 10 and 11 for input costs). In the case of iron ore, three companies—BHP Billiton of Australia, Companhia Vale do Rio Doce of Brazil and Rio Tinto of Britain control more than 70% of the export market. The company expected the raw material cost to be 400 m more in 2006 if the prices increased at the same rate. Philippe Varin announced in a press conference, “We identified the need to have a strategic partner and a presence in a lower-cost country with a growing economy and raw material availability and where we could use and fully exploit our technology. As to where, we had an initial focus on Brazil, on Russia and, of course, on India. Our subsequent travels and discussions in the past year were 6. Tata Steel Finance webcast, October 20, 2006.

Case 12: Tata Steel: The Bid for Corus 209

diligent and comprehensive. India, with its strong and growing economy, indigenous raw materials, rising consumer demand and infrastructure needs, plus the country’s long relationship with the UK, was always a favoured location. Philippe and I travelled to India to meet Ratan Tata and his team in November of 2005. Over the next several months, we had several meetings, and our respective teams examined various business options, from JV (joint venture) to new plants and technology transfer. It became increasingly clear that the best long-term solution could only be realised through a complete merger of our two businesses, the result of which is today’s announcement, which carries the unanimous recommendation of my Board. This will be a unique global partnership”.7 Tata Steel has high quality captive sources for its raw materials and has nearly 5 m tonnes (mt) of capacity and less than 0.5 mt of value-added steel capacity. Corus’ steel-making capacity, by contrast, stands at 18 mt. It has no captive sources for raw materials, but has significant capacities in valueadded steel. While for Tata Steel flat products form 69% of its production with long products forming the rest 31%, Corus has flat products accounting for 42% of its total production and a significant 31% coming from its distribution and building systems division, that is a value-added segment. The Corus management team led by Jim Leng and Varin approached the Tata Steel Board and top management for a possible acquisition. On October 17, 2006 Tata Steel announced that it is in discussions with the Board and Management of Corus Group Plc and it has made an indicative nonbinding offer to acquire 100% equity in Corus Group Plc, through a recommendatory offer route at 455 p. per share in cash amounting to an Enterprise value of approx. USD 10 billion. A key objective for Tata Steel in this acquisition was gaining finishing expertise in European markets, where it can export semi-finished steel from its plants in India. It could also shift part of the steel-making capacities to India, where it is already planning a massive expansion. Muthuraman, the Managing Director of Tata Steel explained: The cash cost of Tata Steel is around $160 per tonne. I believe that the cost at Port Talbot (where Corus has a plant) is perhaps roughly twice of that. Between the two teams, we see potential for significant synergies in the area of manufacturing, in shared services, in logistics, in the marketplace, sharing best practices. We do see significant synergies and a possibility of cost reduction. Exhibit 12 presents a comparison of steel making costs around the world.

STRUCTURING AND PRICING A DEAL Financing Structure Financing India’s largest leveraged buyout comprised of a $3.88 billion equity contribution from Tata Steel, a fully underwritten non-recourse debt package of $5.63 billion, and a revolving credit facility of $669 million. As per the acquisition plan, a special purpose vehicle, a wholly owned subsidiary, called Tata Steel UK would be set up by Tata Steel. The acquisition was proposed to be effected under section 425 of the English Companies Act 1985 and upon approval from the Corus shareholders. Tata Steel UK would offer a price of 455 pence per Corus share valuing Corus at £4.3 b ($8.04 b). This price 7. Tata Steel Finance webcast, October 20, 2006.

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represented a multiple of 7.9 times the EBITDA of Corus from continuing operations for the twelve months to July 1, 2006. The acquisition was to be structured as a 100 percent leveraged buy out funded through cash resources and loans raised by Tata Steel and the SPV. Under the plan, Tata Steel UK would arrange a loan of £1.6 b ($3056 m), a revolving credit facility and a bridge loan and the rest would come from Tata Steel (to the SPV). Tata Steel appointed Credit Suisse, ABN Amro and Deutsche Bank to arrange financing. Of the £3.3 billion of financing being raised at the SPV level, Credit Suisse would provide 45% and ABN AMRO and Deutsche 27.5% each. The $1.8 billion bridge debt being raised at the Tata Steel level in India would be shared between Standard Chartered and ABN AMRO. The financing structure and the break up of sources are shown in Exhibits 13 and 14.

Operational Structure One of the biggest concerns Tata executives had was whether the inevitable cultural conflicts between the organisations would pose significant operating problems. Integrating a large company that operated on a different continent with diverse cultures and operating environments was going to be no small task. Exacerbating this problem was the fact that Corus itself was formed by the merger of an English and a Dutch company that had different cultures and profitability. In line with the Tata Group’s approach to acquisitions, Tata Steel announced its intention to continue with the senior management of Corus. Appointments to the Tata Steel and Corus were to provide common platform for strategy and integration. According to the plan, Ratan Tata would be the chairman of both Tata Steel and Corus and Jim Leng would serve as deputy chairman of Tata Steel and Corus. Three board members (including the CEOs) of each company would serve on the other company’s board. A strategic and integration committee comprising of Ratan Tata, the CEOs and senior management professionals of both companies was formed to develop and execute the integration plan and further growth plans. Appropriate cross functional teams were to be formed to execute the integration plan.

Strategy Muthuraman, the Managing Director of Tata Steel had a number of things to consider in negotiating a deal for Corus. First of all, Tata Steel could not make an all cash offer and assume the assets and liabilities of Corus on its balance sheet because of the sheer size. Second, both companies had to convince their shareholders about the strategic and financial benefits to the companies. Shareholders would be concerned about the size of the premium and the potential dilution in earnings per share. Muthuraman explained in a conference8: While we have been talking about strategy in this world of consolidation and growing in size, both in geography and in size, Tata Steel has been planning its long-term strategy. Tata Steel’s strategy, in terms of what it wanted to do over a period of time of 10 years, between 2002–03 and 2015, was to grow from four million tonnes per annum, which we were at that time, to about 30 million tonnes plus, beyond the shores 8. Tata Steel Finance webcast, October 20, 2006.

Case 12: Tata Steel: The Bid for Corus 211

of India, multinational, and continuing to be in a low-cost position and continuing to be EVA positive. That strategy had six elements. One of them was that we would build a strong base in India, which is why we’re expanding Jamshedpur from five to 10 million, and we’re building three greenfield projects. The second part of the strategy was that we’d adopt a de-integrated strategy where we believed that the world steel industry, over the last 150 years or so, had adopted a certain model of making from iron to finished steel in one location, irrespective of where the raw materials were. We always believed that this model will change, because steel has to compete with other materials and, for the sustainable competitiveness of steel, it is necessary that this business model will undergo a change. We wanted to be at the forefront of that change in business model, so we said we would look for private steelmaking in countries which are rich in iron ore and coal or gas. So, we thought of plants in India, we thought of plants in Bangladesh, and we thought of plants in Iran. The third part of the strategy was raw material security. It’s important that we have raw material security to be competitive and sustainable in this world. We have raw material security on a 100% basis for our existing operations in Jamshedpur. We have a large extent of self-sufficiency for coal. Each of our three greenfield projects in India will carry with it raw material iron ore security. We have some strategic types and some strategic positions in terms of coal and limestone beyond the shores of India. We said we should continue to look for raw material security, both in India and overseas. The next part of our strategy was getting more out of steel, which is by branding, by going downstream, by positioning the products, getting into construction solutions and so on. It is with that aim we formed the joint venture with BlueScope. It is with that strategy that we started having a joint venture with Ryerson of the US, for going downstream into processed materials. The next part of the strategy was control over logistics. No large company—no large steel company—can be sustainably competitive over a period of time without some control on the efficiency and costs of logistics, so we decided to build a port in Orissa to connect Indian operations with our overseas operations. We decided to start a shipping company with NYK of Japan, and these are all in progress. Our acquisition of Corus and our partner in Corus to form a joint entity is part of this strategy, and it is part of this strategy that we have been talking about for the last few years. Just like Mr Leng mentioned, Corus had a strategy, and the partnership with Tata Steel was part of that strategy. We have looked at it exactly in the same manner, and we believe that this entity, which will become, in terms of scale, number five in the world, has the potential to consolidate the steel industry even further. Indeed there was very little shared territory in the markets the companies served. Tata Steel has a strong position in India, Singapore, Thailand and other parts of Asia whereas Corus has a strong presence in Europe. Exhibit 15 presents a summary of production and distribution facilities of the combined entity.

Synergy The merger of Tata Steel with Corus was expected to lead to a saving of $130 million savings in 2007 till March 2008 and $400 million to the company every year after three years. The Corus group has

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developed a breakthrough technology to reduce cost of steel production and Tata Steel was planning to adopt the technology in the near future.

DEMAND ANALYSIS Domestic Market To establish a base, case analysts and investment bankers made use of base case forecasts of production and demand for steel in India and the rest of the world, as well as the outlook for steel prices.9 According to government estimates, domestic consumption of steel in India was expected to go up to 60 mt by 2010 from the prevailing 35 mt, and to 100 mt by 2020. The planned capacity expansions would lead to a capacity of 70 mt by 2020. Assuming a CAGR growth of 6 percent in steel demand, the domestic demand should be around 90 million tonnes by 2020. Also, most steel companies in India have strong balance-sheets, which will help them carry on with their expansion plans. For example, companies like Steel Authority of India Ltd are almost debt free. India has a per capita consumption of steel of around 30 kgs against 180 kgs in China and an average of over 400 kgs in the developed countries. Analysts point out that India’s steel consumption has stagnated at around 30 kgs, despite increasing steel production, mainly because of an increasing population. According to a report by Organisation for Economic Co-operation and Development, world steel supply was likely to expand dramatically over the next two to four years. According to the report, much of this unprecedented investment is occurring as a result of decisions by governments to support the expansion of domestic steel-making capability. The report warned that these statesupported expansions would lead to growing steel trade disputes and a return of over-capacity conditions within the next few years. It also noted that the planned capacity expansions would represent a structural problem for the global steel industry to the extent that production exceeds the projected increase in demand for steel between 2005 and 2008. The OECD report projects Indian steel consumption to grow by only 3.5 percent in 2005 from the levels a year ago. It says the gap between demand and supply would mean that the vast majority of India’s new production capacity will be for export. According to some analysts, demand from the US, Japan and China is expected to slow down, which, coupled with the tightening availability of raw materials, will lead to softer prices in the short to medium term. Further, new capacities were expected to come into play only around 2008. So, analysts expected a drop in prices around that time. But, in the short-term they expected HRC (hot rolled coil) prices to hover around $480–500 range in the short-term. But there were worries about the long-term.

Global Market Global apparent consumption of steel increased at an average pace of more than 7 percent per annum since 2002 to reach a record level of 1.113 billion tonnes in 2006. To meet this rise in demand, steel production growth has accelerated sharply, reaching 1.24 billion tonnes in 2006, up by as much as 9. ABN AMRO Research, June 14, 2007.

Case 12: Tata Steel: The Bid for Corus 213

393 million tonnes (or 46%) compared to its level of 850 million tonnes in 2001. This growth in demand for steel is creating a favourable situation for many steel-makers. Steel prices and the prices of some raw materials in some markets are two times higher or more compared to levels prevailing in 2001. China’s apparent crude steel consumption has doubled between 2000 and 2005 to reach 398 million tonnes in 2006. The economy now accounts for around 32 percent of the world’s apparent steel consumption. The rapid expansion of China’s industrial production and its strong urbanisation trend will ensure that steel consumption continues to rise, though growth should moderate slightly in coming years from the double-digit rates observed in recent years. In India, there is enormous potential for growth in steel consumption. Heavy investment in developing the country’s infrastructure, such as railways, ports, and roads will fuel growth in the steelintensive construction sector. In Russia, steel consumption prospects are favorable, supported by the consumer boom, which is now spreading to automobiles and housing, as well as the replacement of ageing infrastructure. Brazilian demand for steel will continue to be supported in the future by the country’s automotive and construction sectors. Steel consumption in the Middle East is expanding rapidly from a relatively low level of 37 million tonnes. Massive infrastructure and other building activity are driving this development. In NAFTA, housing market problems and a slowdown in manufacturing activity in the US could contribute to a reduction in steel consumption this year from around 155 million tonnes in 2006, while a recovery in demand could take place in 2008 as economic growth reaccelerates. Steel consumption in the EU-27 is expected to stay on a gradual growth path in 2007 and 2008, thanks to the relatively healthy outlook for domestic as well as external demand for products manufactured in steel-using industries.

GLOBAL STEEL PRODUCTION World production of steel has posted a dramatic acceleration in growth between 2001 and 2006. China accounted for more than two-thirds of the increase in world steel production seen over the last five years, i.e., Chinese production surged from 151 million tonnes in 2001 to as much as 423 million tonnes by 2006. As a result, China’s share of world production nearly doubled over the past five years, rising from 17.7 percent in 2001 to 34 percent by 2006. In India, the world’s seventh largest producer of steel, production reached 44 million tonnes in 2006. In the future, Indian steel production capacities and volumes are expected to increase strongly in order to meet demand for steel from a growing industrial sector and expanding infrastructure building. Russian steel production, which grew from 59 million tonnes in 2001 to 71 million tonnes in 2006, is expected to increase steadily over the next few years, supported by growing electric-arc furnace capacity that will gradually replace the outdated open-hearth process. The rest of Asia (excl. China), NAFTA and the EU-25 have seen their shares of world steel production decline over recent years. Supported by strong Chinese demand for high quality steel products, Japanese crude steel production reached 116 million tonnes in 2006, its highest level

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recorded since the early 1970s. US crude steel production has increased from 90 million tonnes in 2001 to around 99 million tonnes last year driven by electric-arc furnace production. Crude steel production in the EU-25 rose to 198.5 million tonnes last year. Growth has been slightly faster in the new Member States, though from a much lower base. Exhibits 16 through 20 present forecasts for Tata Steel and Corus, details of comparable transactions, trading multiples of steel firms, and capital market data.

Problems While the merger would instantly transform the combined companies into the fifth largest steel firm in the world, successfully completing the transaction was not without problems. At the antitrust level, the combination would be subject to an EEC review. At the level of the structure of the deal, will the company’s balance sheet take the strain if the Corus deal cost it way over USD 10 billion? And would it be worth it? Tata Steel has free reserves of Rs. 8,900 crore and its debt equity ratio is a very healthy 0.3. By global standards, there would be a lot of scope for leverage, but the Tatas always took pride on maintaining the lowest debt-equity ratios. Finally, the takeover panel of UK could auction Corus if a competitive situation continued beyond January 30. The panel may also decide on a sealed process where bidders’ offers are final or a standard auction held over a period.

THE CSN BID As expected by observers, CSN announced on November 11, 2006, that it had made an informal bid approach to Corus, setting the stage for a bidding war and throwing Tata Steel’s agreed takeover into jeopardy. CSN’s offer of 475 pence per share for Corus, which would value the firm at $5.3 billion pounds, including debt, topped Tata’s bid of 455 pence. Both companies have a significant presence in the manufacture of tinplate in Europe. Interestingly, in 2002, Corus had made an offer for CSN, but it was shelved over debt concerns. Companhia Siderúrgica Nacional was founded on April 9, 1941, becoming operational on October 1, 1946. As the first integrated flat steel producer in Brazil, CSN played a historical role in the country’s industrialisation process. Steel from its mills permitted the implantation of the nation’s first domestic industries, the nucleus of the modern day Brazilian industrial park. Privatised in 1993, with over six decades in the market, the company continues to make history. A listed public company, with shares traded on the São Paulo and New York (NYSE) stock exchanges, CSN is one of the largest and most competitive integrated steel companies in Latin America. With an annual production capacity of 5.8 million tonnes and around eight thousand employees, CSN is focused on steel production, mining and infrastructure. The company has one of the most comprehensive lines of high added value flat steel on offer throughout the continent. The acquisition of the assets of Heartland Steel and the subsequent incorporation of CSN LLC in the United States in 2001 was the first step towards the internationalisation of the company.

Case 12: Tata Steel: The Bid for Corus 215

Currently, company assets consist of an integrated steel mill, five industrial units, two of them abroad (the United States and Portugal), iron ore, limestone and dolomite mines, a major flat steel distributor, port terminals, as well as shares in railroads and two hydroelectric plants. Even as Tata Steel was mulling over its next move in the race for Corus Group, CSN, along with bankers and brokers allied to it, scaled up its holding in the Corus group to a little less than 23 percent. The combined holding of CSN and its allies stood at 19.5 percent on November 25. The increased holding came from UBS AG, which emerged as the largest shareholder in Corus with 10.23 percent stake. UBS was acting as a joint broker to CSN for this deal. CSN’s other financial advisors Barclays Capital and Goldman Sachs, held 4.7 percent and 4.01 percent in Corus respectively. Further, the Brazilian steelmaker held a 3.8 percent stake in Corus. The combined holding was inching towards the crucial 25 percent that could block Tata Steel’s offer at the extraordinary general meeting if such a situation were to arise. According to the rules, a resolution pertaining to the bid would have to garner support from 50 percent of shareholders and 75 percent of shares at the EGM, which was adjourned to December 20. Corus had around 158,000 registered shareholders. Institutional investors accounted for around 90 percent of the total shareholders. The remaining 10 percent was held by individual investors. As of November, the major shareholders in the Corus group apart from the ones connected to Corus were Standard Life Investments at 7.81 percent, Legal & General Investment Management at 3.82 percent, Lehman Brothers at 3.45 percent and Capital Group at 3.05 percent. The UK takeover regulator had set a deadline of January 30 for the two bidders to make their final offers. The commission had set a provisional deadline of February 5 for ruling on the proposed transaction of CSN. As on December 7, Deutsche Bank, the financial advisor to Tata Steel, had 4,786,061 Corus shares. The chronology of bidding events is presented in Exhibit 21 and a summary of the UK takeover code is presented in Exhibit 22. Exhibit 23 presents a comparison of the two bidders.

Market Reaction Tata Steel share prices fell upon announcement of the acquisition and continued to slide during the next two months. After a battering of two-and-a-half months (in December), shares of Tata Steel staged a partial recovery with a gain of over 5 percent with some market players speculating that the company might withdraw its bid to acquire Anglo-Dutch steelmaker Corus. Tata Steel shares had lost about 20 percent ever since the reports first poured early in October that it was planning to acquire Corus, as it was felt that the costly takeover would have an adverse impact in the company’s balance sheet. The brokers said the deal might have significant long-term synergies, but market players were worried about the adverse impact in the short-term. Tata Steel’s share price closed 5.4 percent higher at Rs. 459.25, after hitting an intra-day high of Rs. 461.45 at the Bombay Stock Exchange. However, the stock was still 14 percent below the level it was trading at in the beginning of October. Exhibits 24 and 25 present the stock price history of Tata Steel, and Corus. Interestingly, the CSN stock price went up when it announced its bid.

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Exhibit 1

Top Steel Producing Countries (in million tonnes) Country

Capacity

China

349.4

Japan U.S.A Russia

12.5 94.9 66.1

South Korea Germany Ukraine

47.8 44.5 38.6

India Brazil France

38.1 31.6 19.5

Spain U.K.

17.8 13.2

Source: International Iron and Steel Institute.

Exhibit 2

World Carbon Steel Transaction Prices

World Steel Prices

Hot Rolled Steel Coil

US $/tonne

Hot Rolled

Cold Rolled

Steel Plate

Steel Coil

Steel Wire Rod

Medium Steel Sections

Jan-06 Feb-06 Mar-06

510 503 516

649 646 651

613 607 620

446 447 462

602 602 612

Apr-06 May-06 Jun-06

538 569 599

670 717 741

636 668 703

480 495 513

631 666 685

Jul-06 Aug-06 Sep-06

597 599 591

736 737 755

702 704 691

517 519 521

703 705 716

Oct-06 Nov-06 Dec-06

569 560 558

740 743 757

664 658 665

507 501 499

701 718 734

Jan-07 Feb-07 Mar-07

549 562 577

747 748 758

647 654 670

495 507 533

735 751 768

Apr-07 May-07 Jun-07 Jul-07

617 623 611 599

788 800 800 808

698 696 686 681

577 606 602 590

798 815 812 819

Aug-07

603

814

686

594

825

Source: www.meps.co.uk.

Case 12: Tata Steel: The Bid for Corus 217

Exhibit 3

Global Steel Manufacturers

(Output in million metric tonnes crude steel; the country/region of producer’s basing specified in brackets) Rank

Capacity

Company

Market Share %

1.

63.0

Mittal Steel Company NV (Global)

5.56

2. 3. 4.

46.7 32.0 30.5

Arcelor (Europe) Nippon Steel (Japan) POSCO (South Korea)

4.15 2.82 2.74

5. 6. 7.

29.9 23.8 19.3

JFE (Japan) Shanghai Baosteel Group Corporation (China) United States Steel Corporation (United States)

2.65 2.12 1.77

8. 9. 10.

18.4 18.2 17.5

Nucor Corporation (United States) Corus Group (Europe) Riva Group (Europe)

1.59 1.59 1.59

11. 12. 13.

16.5 16.1 13.9

ThyssenKrupp (Germany) Tangshan (China) Evraz Holding (Russia)

1.50 N.A N.A

14. 15.

13.7 13.6

Gerdau (Brazil) Severstal (Russia)

N.A N.A

Source: International Iron and Steel Institute.

DESCRIPTION OF TOP 5 PLAYERS Mittal Steel Company N V is the world’s largest steel producer by volume, and also the largest in turnover. CEO Lakshmi Mittal’s family owns 88% of the company. Mittal Steel is based in Rotterdam but is managed from London by Mittal and his son Aditya. It was formed when Ispat International N.V. acquired LNM Holdings NV (both were already controlled by Lakshmi Mittal) and merged with International Steel Group Inc. (the remnants of Bethlehem Steel, Republic Steel and LTV Steel) in 2005. On 25 June 2006, Mittal Steel decided to merge with Arcelor, with the new company to be called Arcelor Mittal. The merger has been successfully approved by shareholders and directors of Arcelor making LN Mittal the largest steel maker in the world. Arcelor S.A. is the world’s largest steel producer in terms of turnover and the second largest in terms of steel output, with a turnover of =C 30.2 billion and shipments of 45 million metric tonnes of steel in 2004. It is registered in Luxembourg, with its headquarters located on Avenue De La Liberte, in Luxembourg City. The company was created by a merger of the former companies Arcelia (Spain), Usinor (France) and Arbed (Luxembourg) in 2001. On 25 June 2006, Arcelor announced the decision to merge with Mittal Steel Company, with the new company to be called Arcelor Mittal. Nippon Steel Corporation (Shin Nippon Seitetsu Kabushiki-gaisha), also referred to as Shinnittetsu, was formed in 1970. Following the merger of Mittal Steel Company and Arcelor, it is now the world’s second-largest steel producer.

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The Pohang Iron and Steel Company, or POSCO, is the third largest steel producer in the world based in Pohang, South Korea. Currently, POSCO operates two steel mills in the country, one in Pohang and the other in Gwangyang. In addition, POSCO operates a joint venture with US Steel, USS-POSCO, which is located in Pittsburg, California. Along with Samsung Electronics, POSCO is viewed by many Koreans as a symbol of national pride and ‘can do’ spirit. With the strong Korean ship building and automobile industry dependent on POSCO for steel, it has been seen as the bedrock of Korea’s industrial development over the past 40 years. JFE Holdings, Inc. is a corporation headquartered in Tokyo, Japan. It was formed in 2002 by the merger of NKK (Nihon Kôkan Kabushiki-gaisha) and Kawasaki Steel Corporation. JFE’s main business is steel production, although it also engages in engineering, construction, logistics, and chemicals. The company also operates several overseas subsidiaries, including California Steel in the United States, Fujian Sino-Japan Metal in China, and Minas da Serra Geral in Brazil. NKK is part of Techint since 1999. Exhibit 4

Comparative Performance of World Steel Manufacturers

Company

Net Sales

Arcelor Mittal

88576

Op Profit/tonne ($) Net Income 105

7973

8.9

107,182

POSCO Baoshan Iron US Steel

25842 71129 15715

170 145 73

3314 4389 1374

12.8 6.1 8.7

58,825 47,705 12,413

Nucor Thyssen Krupp

16592.98 47125

95 89

ROS %

1471.95 1117

8.87 2.3

Mkt Cap ($m)

16,895 29,994

2007E Company

ROA %

ROE%

EV/MT ($)

P/E

P/B

EV/EBITDA

Arcelor Mittal POSCO

6.8 11.3

11.1 15.7

1192 1807

11x 13.9x

2.1x 2.2x

7.3x 7.9

Baoshan Iron U S Steel Nucor

5.98 16.8 17

5.9 31.4 29.38

2512 662 762

23.7x 10.1 11.5x

3.9x 2.0x 3.0x

11.2x 7.2 5.8x

7.4

21.4

NA

8.4x

2.1x

4.8x

Thyssen Krupp Company

Market Share %

Arcelor Mittal POSCO

9.71 2.74

Baoshan US Steel Nucor

2.12 1.77 1.58

Thyssen

1.50

Source: Goldman Sachs, Companies and Case writer estimates.

Notes: Currency Units- Arcelor Mittal, U S Steel, Nucor in $m, POSCO in KRW billion, Baosteel in Rmb m; Thyssen Krupp in =C m. Results are for 2006 for all companies except Baosteel, which is for the first half of 2006.

Case 12: Tata Steel: The Bid for Corus 219

Exhibit 5

Tata Steel Consolidated Balance Sheet (INR crore10)

Liabilities Net worth Authorised capital Issued equity capital Paid-up equity capital Preference capital Bonus equity capital Buy back amount Buy back shares (nos.) Reserves & surplus Borrowings Deferred tax liabilities Current liabilities & provisions Current liabilities Provisions Total liabilities

Mar 2006

Mar 2005

Mar 2004

Mar 2003

9755.30 600.00 554.07 553.67 0.00 257.93 0.00 0.00 9201.63 2516.15 1716.40 5269.51 2835.99 2433.52 19257.36

7059.92 600.00 554.07 553.67 0.00 265.83 0.00 0.00 6506.25 2739.68 1607.41 5288.60 2640.04 2648.56 16695.61

4515.86 440.00 369.58 369.18 0.00 81.35 0.00 0.00 4146.68 3382.12 1690.56 4345.38 2163.79 2181.59 13933.92

3186.02 440.00 368.37 369.18 0.00 81.35 0.00 0.00 2816.84 4225.40 1676.74 4173.38 1881.02 2292.36 13261.54

9849.81 0.00 4069.96 759.40 2174.75 1150.20 707.54 442.66 1024.55 1000.62 23.93 0.00 0.00 0.00 0.00 1846.54 539.40 49.55 0.20 323.72 321.72 2.00 337.83 75.02 570.37 288.39 268.51 19257.36

9094.84 0.00 2463.25 777.99 1872.40 952.76 603.70 349.06 919.64 887.22 32.42 0.00 0.00 0.00 0.00 2008.19 581.82 33.65 0.20 692.06 690.06 2.00 299.71 44.02 390.38 246.72 232.22 16695.61

7857.85 0.00 2201.42 850.60 1249.08 618.99 292.82 326.17 630.09 620.81 9.28 0.00 0.00 0.00 0.00 1368.26 651.30 39.57 0.20 136.51 134.51 2.00 187.42 39.83 353.00 250.74 155.97 13933.92

7543.80 0.54 1201.56 836.52 1152.95 581.52 262.30 319.22 571.43 556.78 14.65 0.00 0.00 0.00 0.00 2153.59 958.47 124.55 2.89 163.93 107.72 56.21 164.54 425.66 438.10 373.12 0.00 13261.54

Assets Net fixed assets Revalued assets Investments Deferred tax assets Inventories Raw materials and stores Raw materials Stores and spares Finished and semi-finished goods Finished goods Semi-finished goods Incomplete construction contracts Stock real estate Stock of shares / securities Other stock Receivables Sundry debtors Debtors exceeding six months Accrued income Advances / loans to corporate bodies Group / associate cos. Other cos. Deposits with govt. / agencies Advance payment of tax Other receivables Cash & bank balance Intangible / DRE not written off Total assets

10. I crore is 10 m. It is customary in India to quote currency in crores rather than millions.

220

Cases in Corporate Finance

Exhibit 6

Tata Steel Consolidated Income Statement (INR crore) Mar 2006

Income

 

Mar 2005

Mar 2004

 

 

Mar 2003  

Sales Other income Change in stocks

17136.08 261.95 104.91

15870.77 159.52 289.55

12656.73 134.60 80.31

10516.72 64.09 15.03

Non-recurring income TOTAL INCOME Expenditure

163.96 17666.90

277.98 16597.82

182.46 13054.10

99.24 10695.08

Raw materials, stores, etc. Wages and salaries Energy (power and fuel) Indirect taxes (excise, etc.)

3762.03 1351.51 897.57 2060.48

3641.75 1291.00 778.30 1467.30

3458.85 1349.59 724.62 1261.38

2984.90 1217.72 787.75 1107.12

Advertising & marketing expenses Distribution expenses Others

80.75 1004.32 2365.79

86.18 936.68 2311.34

81.90 748.44 1990.73

87.19 695.77 1623.74

112.62 41.14 11676.21

204.82 30.05 10747.42

151.84 41.44 9808.79

60.79 43.43 8608.41

Profits / losses PBDIT Financial charges (incl. lease rent)

  6215.93 175.70

  6260.04 211.28

  3548.99 256.96

  2208.25 362.52

PBDT Depreciation PBT 5306.27

6040.23 733.96 5429.98

6048.76 618.78 2666.92

3292.03 625.11 1274.79

1845.73 570.94

Tax provision PAT 3506.38 Appropriation of profits

1799.89 3474.16  

1955.82 1746.22

920.70 1012.31

262.48

Dividends Retained earnings

820.43 2685.95

821.37 2652.79

416.25 1329.97

333.01 679.30

Less: expenses capitalised Non-recurring expenses TOTAL EXPENSES

Source: Prowess.

Exhibit 7

Corus Consolidated Balance Sheet (£m)

Non Current Assets Current Assets TOTAL ASSETS Current Liabilities Non Current Liabilities TOTAL LIABILITIES NET ASSETS/TOTAL EQUITY Source: Annual report.

2006

2005

2004

3668 4412

3496 4446

3577 3714

8080 –2348 –1798 –4146

7942 –2467 –2097 –4564

7291 –2397 –1836 –4233

3934

3378

3058

Case 12: Tata Steel: The Bid for Corus 221

Exhibit 8

Corus Consolidated Income Statement (£m) 2006

2005

2004

Group Turnover Total operating costs

9733 –9,276

9155 –8512

8373 –7756

Group operating profit Finance costs Finance income

457 –202 34

643 –127 31

617 –123 12

24

1

21

Share of post-tax profits of joint ventures  and associated undertakings Profit before taxation

313

548

527

–116 194 35

-119 432 19

408 33

Profit after taxation Attributable to: Equity holders of the parent

229

451

441

223

452

447

Minority interests

6 229 21.01

–1 451 48.14

–6 441 46.4

20.38

46.21

Taxation-119 Profit after taxation from continuing operations Profit after tax from discontinued operations

Basic earnings per ordinary share from continuing op (pence) Diluted earnings per ordinary share from cont. op. (pence)

43.48

Source: Annual report.

Exhibit 9

Corus Cash Flow Statements (£m) 2006

2005

2004

Cash Generated from Operations Net Cash Flow from Operating act

373 125

939 657

578 363

Net Cash Flow from Investing Act Net Cash Flow financing activities (Decrease)/Increase in cash and eq.

99 -244 -20

-354 -33 270

-200 55 218

Cash and equivalents at the beginning

825

557

340

Cash and eq. at the end

798

825

557

Source: Annual report.

222

Cases in Corporate Finance

Exhibit 10

Input Prices11

Year/

Thermal Coal US

Coking Coal US

Iron Ore US

Natural Gas US

Steel Scrap US

Electricity US

Month

$/tonne

$/tonne

cents/tonne

$/000 m3

$/tonne

Cents/KWh

2003 M4 2003 M5 2003 M6

25.10 25.00 25.80

50.37

32.00 32.00 32.00

128.80 128.80 128.90

124-131 115-120 120-125

4.99 5.06 5.28

2003 M7 2004 M1 2004 M2

26.10 40.40 44.70

50.14 53.81

32.00 37.90 37.90

130.00 122.00 122.00

132-135 225-230 255-260

5.54 5.01 5.04

2004 M3 2004 M4 2004 M5

52.40 57.10 60.50

37.90 37.90 37.90

122.00 125.30 125.30

220-225 200-205 150-160

5.04 5.09 5.18

2004 M6 2004 M10 2005 M1

63.80 60.70 56.80

37.90 37.90 65.00

125.30 156.20 182.20

170-175 235-240 200-210

5.46 5.25 5.23

2005 M2 2005 M3 2005 M12

53.50 54.60 41.00

65.00 65.00 65.00

182.20 182.20 250.60

200-205 200-205 180-190

5.26 5.30 5.94

2006 M1

46.30

77.35

275.80

185-190

5.79

Exhibit 11 US $/hour

59.46

68.87 82.70

90.20

International Labor Cost Comparisons 2000

2001

2002

2003

2004

2005

Australia Brazil

14.4 3.5

13.3 3

15.4 2.6

19.8 2.7

23.1 3

24.6 3.2

Canada China Czech Republic

16.5 0.6 2.8

16.2 0.7 3.1

16.7 0.8 3.8

19.4 0.9 4.7

21.4 1 5.4

23.7 1.1 6.1

France Germany India

15.5 22.7 0.6

15.7 22.5 0.6

17.1 24.2 0.7

21.1 29.6 0.7

23.9 32.5 0.8

25.3 34.1 0.9

Italy

13.8

13.6

14.8

18.1

20.5

21.7 (Contd.)

11. Notes (1) Coal is Australian thermal coal, 1200 btu/pound, less than 1% sulfur, 14% ash, f.o.b. Newcastle/Port Kembla, US$ per metric tonne. (2) Iron ore is 67.55% iron content, fine, contract price to Europe, FOB Ponta da Madeira, US cents per dry metric tonne unit. (3) Natural gas is Russian natural gas, border price in Germany, US$ per thousands of cubic meters of gas.

Case 12: Tata Steel: The Bid for Corus 223

(Exhibit 11 Contd.) 2000

2001

2002

2003

2004

2005

Japan Kazakhstan Korea

US $/hour

22 0.5 8.2

19.4 0.7 7.7

18.7 0.7 8.8

20.3 0.9 10

21.9 0.9 11.5

21.4 1 14.1

Mexico Spain Sweden

2.2 10.7 20.2

2.5 10.8 18.4

2.6 11.9 20.2

2.5 15 25.2

2.5 17.1 28.4

2.5 17.6 29.7

Taiwan Ukraine United Kingdom

6.2 0.3 16.7

6.1 0.4 16.8

5.6 0.5 18.3

5.7 0.7 21.2

6 0.7 24.7

6.4 0.8 26

United States

19.7

20.6

21.4

22.3

23.2

23.8

Source: U.S. Department of Labor, Bureau of Labor Statistics. 2005 and all other estimates by Metals Consulting International Limited (MCI).

Exhibit 12

Comparison of Steel Making Costs Country

Pre tax Total cost ($ per tonne)

US Japan

483 475

UK Canada Korea

421 472 335

Taiwan CIS China

458 331 421

Production Cost North America

Slab Cost ($ per tonne) North America—base 100 100©f

Europe Japan/Korea RoW

100 96 91

China India

87 81

Source: Tata Steel, World Steel Dynamics.

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Cases in Corporate Finance

Exhibit 13

Financing Structure

Source: Tata Steel.

Exhibit 14

Funding Break Up In Rupees Crores Equity

Debt

Internal Generation External Commercial

3,000

 

 

 

 

 

700

Borrowings Pref Share Issue to Tata Sons Rights Issue of equity shares

2,170 2,770 3,655

     

     

     

     

     

500  640  862 

Rights Issue of Convertible Preference Shares 4,350 Foreign issue of an equity-related

 

 

 

 

 

1,000

1,805 17,750

   

  17,750

  1,687

   

  1,687

398 4,100

   

  4,100

 

26,582 23,277

26,582  

  2,137

3,620 3,170

3,620 5,307

  5,194

6,140 5,377

6,140 10,571

 

5,412

5,412

 

 

—

 

1,250

1,250

Source

instrument in such form as may be considered appropriate Total Equity Long-term non-recourse debt from consortium of banks After re-financing Quasi - Equity funding at Tata Steel Asia Singapore Long term Capital funding at

In Million Pounds Total Equity

Debt

In Million Dollars Total E q u i t y

Debt

Total

     

(Contd.)

Case 12: Tata Steel: The Bid for Corus 225

(Exhibit 14 Contd.)

Source

In Rupees Crores Equity   17,750

Tata Steel Asia Singapore

Debt

In Million Pounds Total Equity

6,104 38,098

6,104 55,848

  1,687

Debt

In Million Dollars Total E q u i t y

Debt

Total

  3,620

— 5,307

1,410 8,800

1,410 12,900

  4,100

Source: Case writer.

Notes Figures at 4, 5 and 6 above are approximate estimates sourced from Company Press Releases. Actual amounts may vary slightly. For above, Tata Steel is raising debt equivalent to amount at 2 above, which is 12% of total amount. Tata Steel would be raising additional equity share capital of the face value in the range of about Rs. 250–280 crores depending on the final pricing of the various issues. This increase in the equity capital will come into effect only in stages during the three financial years 2007–08 to 2009–10 which will therefore ease the burden of servicing. The post-tax cost of this total financing package for equity contribution is expected to be 4.3% p.a. Item at 8 above reduced to GBP3170 million after refinancing vide Press Release dated 3 May 2007. Simultaneously, Equity has gone up by GBP 450 million due to additional equity provided by Tata Steel/ Tata Steel Asia.

Exhibit 15

Distribution of Production and Distribution Facilities of the Combined Enitity

Country

Facilities

UK and Ireland

4 Production Crude Steel Capacity: 14 mtpa 16 manufacturing plants 33 distribution centres 19 manufacturing plants 13 distribution centres 1 production 6.8 mtpa capacity 6 manufacturing locations 3 distribution centres 3 manufacturing 2 distribution 1 production facility 5 mtpa capacity 22 distribution centres 3 production 1.2 mtpa capacity 3 distribution centres 1 production facility 0.6 m tpa 4 distribution centres

EU (excl. UK and Netherlands) Netherlands

USA India

Thailand

South East Asia

Source: Tata Steel.

226

Cases in Corporate Finance

Exhibit 16

The Corus Acquisition Economics

Tata Steel

Corus

Combined

Sales ($m) EBITDA ($m) Net Profit ($m)

5007 1480 840

19367 1962 861

24374 3442 1701

Crude Steel Production (m ton) Market capitalization ($m)

5.3 6510

18.2 8227

23.5 14737

Exhibit 17

Recent Steel Acquisitions and Corus Financial Data

Date

Acquirer

Target

Region

Jan 07

Nucor

Harris

Canada

EV/EBITDA 9.0

Dec 06 Dec 06 June 06

Evraz Arcelor Mittal One Steel

Oregon Steel Sicartsa SMorgon

US Mexico Australia

5.8 5.7 9.9

June 06 May 06 Nov 05

Mittal Arcelor Arcelor

Arcelor Severstal Dofasco

Europe Russia N America

5.5 5.6 6.1

Oct 05 Sep 05 Oct 04

Mittal Oyak Mittal

Krivorizhstal Erdemir ISG

Ukraine Turkey N America

4.7 7.3 5.5

Oct 04

Arcelor

CST

L America

3.8

Average

6.4 2006

2005

2004

Shares in Issue Historic P/E Employees

967.69 m 11.95 45000

48000

49000

Net Profit £m Capex £m Depreciation £m

451 449 259

440 423 263

-305 375 267

Sales per Geographic area UK Europe

27% 79%

Asia/Pacific North America Rest of the world

9% 9% 3%

Analyst estimate for 2006 EBITDA £m EBIT £m

840 559.36

2003

2002

-458

-419

Case 12: Tata Steel: The Bid for Corus 227

Exhibit 18

Trading Multiples of Major Steel Firms

2007E P/E Multiples (X) Company

Multiple

Nucor

11.7

ThyssenKrupp US Steel Corus

10.3 9.1 8.9

Nippon Steel JFE POSCO Arcelor Mittal

8.9 8.8 5.7 5.0

Average

8.55

Source: Arcelor Mittal.

Exhibit 19

Forecasts for Tata Steel

Assumptions 2006A

2007E

2008E

2009E

Saleable steel sales volume % change YoY

4.42 12.2

4.86 10.3

5.17 6.4

5.62 8.7

Average Realization (Rs/ton) Other revenues Imported Coking Coal

24069 38384

25070 42671

24491 44935

22994 45302

6892 536

6540 545

5007 545

4048 535

Cost (Rs/tonne) Coke rate Free Cash Flow Components Net Sales

(Rs m) 151394

171528

177903

180516

EBITDA Depreciation Net Fixed Assets

58787 7751 87074

69565 7791 81539

81903 7755 79595

85917 8735 120383

Net Current Assets Terminal Growth Rate Net Debt

4289 2% 26400

20499

29353

30269

2006 A

2007 A

2008 F

(Rs m) 2009 F

2010 F

204910 –139061 65849.5 –8603.7 57245.8 –19328 –7143.7

256514 –177632 68772.4 –10110 68772.4 –35000 –5579.3

1173388 –994468 140069 –38850 140069 –82320 –21692

Source: Morgan Stanley, Feb 1, 2007. ABN Amro Forecast Revenue Cost of sales EBITDA Depreciation EBIT Capex Change in WC

Source: ABN AMRO Research, June 14, 2007.

1188933 –990609 157772 –40551 157772 –61575 –649.7

1232227 –1004239 184194 –43795 184194 –61400 –1795.7

228

Cases in Corporate Finance

Exhibit 20

Select Financial Market Data

India and Tata Steel

UK and Corus Group

10 Year T Bond Rate Market Risk Premium Beta (Tata Steel) Cost of Debt

7% 9% 1.12 7.5%

% of Equity % of Debt Tax rate

45 55 33.1%

FX rates using average appreciation/depreciation (Rs/£) 2003–04 2004–05 77.74

Exhibit 21

4.4% 4.5%12 1.54 (Corus)13

82.94

2005–06 79.22

Spot Rate14 85.73

Tata Steel—Corus Chronology of Events Tata says “considering” bid for Corus. Corus agrees 455 p a share offer from India’s Tata Steel, valuing the group at £4.3 bn. But Standard Life, the largest investor in Corus, with a 7.9% stake, says it thinks the terms are too low. Sir Anthony Bamford, one of Britain’s leading industrialists, says he agrees that Tata’s first bid is too low and that it would damage Britain’s manufacturing industry. Russia’s Severstal rules itself out as a rival bidder. CSN announces indicative bid of 475 p a share.

n

October 5: October 20:

n

October 26:

n n

November 3: November 17:

n

November 27:

n n

November 29: December 10:

n

December 11:

CSN raises its terms to 515 p, valuing Corus at £4.9 bn. Corus directors switch their recommendation to the Brazilians.

n

December 19:

The Takeover Panel imposes a January 30 deadline on Brazilian group CSN and its Indian rival Tata to launch a revised deal for control of Corus. Corus shares are still ahead of the CSN terms, at 529 p.

n

Jan 2, 2007

Tatas decide to raise its bid for Corus by 10% to 550 p after several meetings with its bankers in a determined attempt to defeat a rival offer from Brazil.

n

Corus postpones Extraordinary General Meeting which was to vote on the first Tata deal to allow CSN more time to formalize its offer. Corus reports a 60% surge in third-quarter profits on the back of booming European demand for steel. In a late night announcement, Tata Steel ups its offer to 500p a share, valuing Corus at £4.7 bn.

12. This is the result of a study by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School. 13. Based on the stock prices in the last half of 2006 to March 30, 2007. 14. Spot Rate is on October 1, 2006.

Case 12: Tata Steel: The Bid for Corus 229

Exhibit 22

City Code on Takeovers and Mergers (UK)

The City’s code applies to all listed and unlisted public companies, and also some private ones which have had shares listed on the London Stock Exchange within the previous ten years. It also protects shareholders involved in the bid. The City Code on Takeovers and Mergers was last fully revised and reissued in July 2000. The code sets out General Principles and is enforced by the Panel on Takeovers and Mergers. The panel is a self-regulating body. However, decisions are subject to judicial review. There may also be some legitimate doubt as to whether the Panel’s structure is compatible with Art 6(1) of the European Convention on Human Rights. The code’s objectives are as follows: n Equality of treatment of shareholders; n Equality and sufficiency of disclosure for shareholders; n n n

n

Careful and responsible consideration of the terms of the offer by the offeror company; Prevention of the creation of false markets; Acceptance or rejection of the offer by shareholders of the target without interference of selfish advice by their Board of Directors; and Proper organisation of persons acting together to ensure they can all fulfill their obligations under the offer.

The code lays down that: n The acquirer of 30 percent of the shares of a company within the code must make an offer to all the holders of voting shares. n The price at which the offer is to be made is the highest at which the target company’s shares have been dealt in by the offeror within the 12 months preceding the acquisition of the 30 per cent stake. The Substantial Acquisitions Rules are concerned with the speed of acquisition and disclosure requirements where shares (and rights over shares) are required which confer 15 percent to 30 per cent of the voting power in a public company whose shares are dealt with on either the London Stock Exchange or the Alternative Investment Market. These rules are enforced by the Panel. The salient features of the code are discussed below: 1. 2.

All shareholders of the same class of an offeree company must be treated similarly by an offeror; During the course of an offer, or when an offer is in contemplation, neither an offeror, nor the offeree company, nor any of their respective advisers may furnish information to some shareholders which is not made available to all shareholders. This principle does not apply to the furnishing of information in confidence by the offeror company to a bona fide potential offeror or vice versa;

3.

An offeror should only announce an offer after the most careful and responsible consideration. Such an announcement should be made only when the offeror has every reason to believe that it can and will continue to be able to implement the offer: responsibility in this connection also rests on the financial adviser to the offeror;

4.

Shareholders must be given sufficient information and advice to enable them to reach a properly informed decision and must have sufficient time to do so. No relevant information should be withheld from them;

5.

Any document or advertisement addressed to shareholders containing information or advice from an offeror or the board of the offeree company or their respective advisers must, as is the case with a prospectus, be prepared with the highest standards of care and accuracy;

6.

All parties to an offer must use every endeavour to prevent the creation of a false market in the securities of an offeror or the offeree company. Parties involved in offers must take care that statements are not made which may mislead shareholders or the market; At no time after a bonafide offer has been communicated to the board of the offeree company, or after the board of the offeree company has reason to believe that a bonafide offer might be imminent, may action be taken by the board of the offeree company in relation to the affairs of the company, without the approval of the shareholders in general meeting, which could effectively result in any bonafide offer being frustrated or in the shareholders being denied an opportunity to decide on its merits; Rights of control must be exercised in good faith and the oppression of a minority is wholly unacceptable; Directors of an offeror and the offeree company must always, in advising their shareholders, act only in their capacity as directors and not have regard to their personal or family shareholdings or to their personal relationships with the companies.

7.

8. 9.

(Contd.)

230

Cases in Corporate Finance

(Exhibit 22 Contd.)

10.

It is the shareholders’ interests taken as a whole, together with those of employees and creditors, which should be considered when the directors are giving advice to shareholders. Directors of the offeree company should give careful consideration before they enter into any commitment with an offeror (or anyone else) which would restrict their freedom to advise their shareholders in the future. Such commitments may give rise to conflicts of interest or result in a breach of the directors’ fiduciary duties; Where control of a company is acquired by a person, or persons acting in concert, a general offer to all other shareholders is normally required; a similar obligation may arise if control is consolidated. Where an acquisition is contemplated as a result of which a person may incur such an obligation, he must, before making the acquisition, ensure that he can and will continue to be able to implement such an offer.

Exhibit 23

Comparison of the Bidders Tata Steel

CSN

Steel Production (mtpa)

8.7

5.8

Revenues $b Operating Margins % Manufacturing Locations

4.6 40 11

3.8 32 3

180 753.5

190 4369.9

Net Debt $m Equity $m Debt/Equity (gross)

0 2293.9 0.3

2869.6 1051.4 4.2

Debt/Equity (Net) 2005 Total Assets $m Cash flow from operating

0.0 7157

2.7

Activities $m Net Profit Margin %

1757 18.24

Cost of slab production (per tonne in $) Gross Debt $m

Exhibit 24

17.90

Stock Price History of Tata Steel (in Rupees) – 999.24 – 869.67 – 740.10 – 610.53 – 480.95 – 6,169,277 – 4,954,501 – 3,739,725 – 2,524,949 – 1,310,173 –

–

7/9/2007

–

–

22/5/2007

–

–

–

23/1/2007

–

–

3/10/2006

31/2/2007

23/4/2008 © Asiancerc.com.

28 Nov 03

20 Oct 04

24 Jul 03

8 Jul 05

58 May 05

22 Dec 04

26 Sept 03

17 Aug 04

15 Jun 04

7 Apr 04

4 Feb 04

15. During 2003–06 the FTSE 100 increased from less than 4000 to about 6000.

Source: London Stock Exchange.

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

500.00

550.00

600.00

Stock Price History of Corus (in Pence)15

28 Feb 05

Exhibit 25

Case 12: Tata Steel: The Bid for Corus 231

13 Feb 07 7 Dec 06

5 Oct 06 2 Aug 06

31 May 06

23 Mar 06 19 Jan 06

14 Nov 50 12 Sep 05

Module 3 WORKING CAPITAL MANAGEMENT

13. Working Capital Management at Excel Crop Care Ltd.

CASE

13

Working Capital Management at Excel Crop Care Ltd. DESCRIPTION In 2006, a divisional manager at ECCL commissioned a study to improve the overall working capital management. Students are asked to make interfirm comparisons and estimate the likely savings from improvements.

LEARNING OBJECTIVE To introduce issues in overall working capital management. To explore a range of issues in working capital management with a primary focus on accounts receivable and inventory; extend students’ skills in financial statement modeling and analysis; and examine some of the challenges in financial (and general) management of firms in developing countries.

SUBJECTS COVERED Financial Management, Working Capital Management. This case was prepared by Vishwanath S.R. of Institute of Management Technology, Nagpur.

236

Cases in Corporate Finance

In the summer of 2006, Nirmal Raj, a Zonal manager at Excel Crop Care Ltd commissioned a study to analyse the components of working capital and compare them with the company’s peer group. In particular, he wanted to understand the impact of bringing down the components of the working capital cycle to the level of competition.

COMPANY BACKGROUND Excel Industries Limited, ECCL’s founding company, started off in a kitchen laboratory in 1941.1 The company achieved over 100 product and process breakthroughs that are serving the specific needs of various clients even now. Excel Industries is the first company in Asia and third in the world to make Endosulfan Technical; the first in Asia to make Butene Diol; the second in the world to develop Glyphosate Technical and the third company in the world to develop Aluminium Phosphide. Excel Industries has received various awards in recognition of their dedication and excellence in the field of chemicals. In 2003, Excel Industries spun off the Agriculture business unit into Excel Crop Care Ltd and got it listed on National Stock Exchange, Bombay Stock Exchange and Delhi Stock Exchange. ECCL has become one of India’s leading producers of agricultural chemicals, with annual revenue of approximately US$100 million. The company is still growing, and it currently does business throughout Asia, Europe, Central and South America and the United States. ECCL employs more than 1,300 people at numerous locations around the world, and it delivers a range of market-leading chemical brands through a distribution network of 40,000 dealers. ECCL operates 26 offices (including sales depots and corporate headquarters), three manufacturing plants and two distribution warehouses. The company ran its primary business functions— namely, purchasing, finance, sales and costing—on a customised application that leveraged an Oracle database and D2K technology for its front end. The application ran on Intel processor-based servers with built-in storage capabilities. Excel Crop Care’s Technical Actives, bulk and branded formulations are presently registered and marketed in Asia Pacific, South Asia, West Asia, Africa, Europe (West and East including CIS countries) Central and South America and the USA. Exports accounted for about 25% of the turnover, but the company expected exports to play a more significant role in the company’s business in the coming years. Besides the necessary infrastructure at the plants, ECCL has a subsidiary in Antwerp. Exhibit 1 presents the financial statements of ECCL.

INDUSTRY BACKGROUND The pesticide industry or the agrochemicals industry (referred to as the PAC industry) primarily consists of insecticides, herbicides and fungicides. While farmers have been doing pest management since the onset of agricultural production, the discovery of the pesticidal properties of synthetic chemicals in the middle of the 20th century has transformed agriculture. DDT was discovered as an insecticide in 1939 and was used extensively in agriculture, and for public health programmes. Subsequently, other insecticides, herbicides, and fungicides were developed. 1. This section is based on the information on the company’s website.

Case 13: Working Capital Management at Excel Crop Care Ltd.

237

Their large-scale use started in farming in industrialised countries, resulting in large increases in production and/or cost savings on labour. The first Green Revolution, which began in the 1960s, made high-yielding crop varieties available to developing countries, especially in Asia. Exploitation of the production potential of these varieties stimulated the use of fertiliser and pesticides. This dynamic change led to large increases in food production in many countries but also to growing pesticide use. PACs provide vital inputs to crop protection and act as a vital input to agricultural produce. In a worldwide study of eight crops, it has been estimated that the global harvest losses due to pests was about 42% of attainable production. Higher yields can be assured by reducing crop losses caused by weeds, pests and insects. PAC have assisted in controlling pests and maintaining the availability of low cost and high quality food. They also allow for improved storage and distribution of crops, fruits, and grains. The importance of PACs in India derives from the fact that India is an agrarian society. Agriculture is the backbone of the Indian economy and contributes 22% of India’s GDP. Nearly 70% of the country’s workforce derives its livelihood from agriculture. Higher crop productivity can be achieved through high-grade crop protection, and the challenge is to prevent or reduce pest related crop losses, which are presently estimated at around 20–25% of crops sown, i.e., approximately Rs. 250–300 billion per annum. Pesticide use significantly contributes for enhancing agricultural production.

CATEGORIES OF PESTICIDES Pesticides are often referred to according to the type of pest they control. In such a classification, pesticides are normally categorised into the following major categories: 1. Insecticides act against insects which feed on crops, leaves, roots, and other parts of plants. 2. Herbicides (also known as weedicides) act against weeds or unwanted plants compete with the crop for nutrients, light, water and space. 3. Fungicides act against bacteria, fungi, virus and mycoplasma which cause various diseases in plants. Other categories of pesticides include: 1. Algaecides control algae in lakes, canals, swimming pools, water tanks, and other sites. 2. Antifouling agents kill or repel organisms that attach to underwater surfaces. 3. Antimicrobials kill microorganisms (such as bacteria and viruses). 4. Fumigants produce gas or vapour intended to destroy pests in buildings or soil. 5. Miticides kill mites that feed on plants and animals. 6. Ovicides kill eggs of insects and mites. 7. Repellents repel pests, including insects (such as mosquitoes) and birds. 8. Rodenticides control mice and other rodents.

238

Cases in Corporate Finance

The Indian PAC industry primarily comprises of insecticides, fungicides, and herbicides/ weedicides. Insecticides dominate consumption with around 61% of estimated consumption of PAC, followed by fungicides (18%), herbicides/weedicides (16%), and others (5%). Insecticides are used mainly for rice, cotton and vegetables; herbicides for rubber, oil palm, tea, and coffee; and fungicides for tobacco, vegetables and bananas. The per hectare consumption of pesticides in India is estimated at 0.5 kg. However, this is not uniform. It varies vastly across the country with the agro-ecological settings, cropping pattern, irrigation facilities, intensity of pests and diseases, resistance and resurgence of insect pests, etc.

The Global Market for Pesticides The global market for chemical pesticides/agrochemicals was estimated at around US$ 26.71 billion in 2003. Herbicides comprised 44% of the world market, followed by insecticides (27%), fungicides (20%), and others (9%). The market increased by 6.2% during 2003. In the period since 1990, the world market has increased from US$ 23.17 billion, at an annual average of 1.1% (see Exhibit 2). Market conditions that prevailed in 2003 were far more favourable than in the recent past, and if it had not been for the drought that affected Northern European countries, the industry would have recorded higher growth. Apart from the drought in Northern Europe, the major factors that affected the market were a general improvement in commodity prices (except in rice) that benefited farm incomes in the major developed markets; significant economic improvement in Latin America that gave farmers increased access to credit and hence, ability to purchase agrochemicals; recovery from drought in Canada, India, Australia and much of Asia, and the 2002 Farm Act in the US and the midterm common agricultural policy (CAP) reform in the European Union (EU) that gives farmers a greater surety in their income position in the future. On the negative side, increasing generic competition and price reductions reduced values; further rice acreage reduction and a competitive market situation resulted in a continuation of the market downturn in Japan and a continued increase in GM acreages resulted in value being taken from the conventional crop protection market, particularly the herbicides sector. The markets for chemical pesticides have undergone rapid changes over the last decade. Overall pesticide use worldwide over the last decade has remained constant or declined. The reduction can be explained partly by changing crop prices, greater efficiency of pesticide use as a result of improvements in pest management practices and technology, increased adoption of genetically modified (GM) crops, and IPM techniques aimed at both improving pest management practices, and in some cases targeting a reduction in pesticide use. In 2003, the market for GM crops increased by 19% to reach US$ 3.94 billion. The majority of these sales continue to be derived from North and Latin America, although uptake in other regions is increasing, particularly in China and India. The focus of GM crop development is in the soyabean, maize, cotton and canola sectors, however in many of the countries where GM varieties have been accepted, the area cultivated with these varieties is now approaching maturity.

Case 13: Working Capital Management at Excel Crop Care Ltd.

239

The global agrochemicals market is estimated to have recorded positive growth during 2004, due to recovery from some of the negative factors that affected the market in 2003. In Northern Europe, a return to more normal weather conditions has benefited agrochemical usage. In Latin America, economic recovery continues to re-invigorate the agricultural economy, with agrochemical sales also benefiting from the soyabean rust outbreak. In North America, planted acreages of maize, soyabean and cotton have all risen, although much of the increase has been with GM varieties. In East Europe, more clement weather conditions have resulted in improved markets in Russia and the Ukraine, whilst Central Europe has benefited from drought recovery and greater access to EU markets for the new Member States. In Asia, while deficit rainfall conditions affected demand, the Chinese government called for increased grain production and started paying subsidies direct to cereal farmers.

The Domestic Market The Indian PAC sector had estimated revenues of Rs. 40 billion during FY2004. The sector exports a significant proportion of production, with exports of Rs. 17.46 billion during FY2004, representing 0.8% of India’s total exports. The Indian PAC industry is fragmented with 30-40 large manufacturers and 600 formulators. The organised sector comprises multinational corporations (MNCs) and Indian companies. Besides the presence of MNCs such as Monsanto, Bayer, and Syngenta, there are many major Indian companies such as United Phosphorous, Excel Industries, and Rallis India (see Exhibits 3 and 4 for a brief description of the major companies and their financials). Traditionally, the Indian companies in the PAC market have focused on marketing generic and off patent products, whereas the MNCs have focused on high-end specialty products. The Indian companies are playing to their basic strengths, which are low-cost manufacturing, applied research and extensive distribution. Indian companies focus on applied research, which include developing processes to manufacture off-patent products, more effective methods of delivering existing products, and new formulations (or combinations) of generic products. They generally do not have the financial and technical resources for undertaking basic research.

Cyclical Nature of Demand Overall pesticide usage by farmers depends on a multitude of factors, such as climatic conditions, the area under cultivation, composition and variety of crops, pest and disease pressures, farm incomes, pesticide cost/crop price ratios, pesticide policies and management practices. The demand for PAC in India is seasonal and cyclical as it largely depends on agricultural production. PAC demand is skewed in favor of kharif crops, 2 with kharif crops accounting for around 70% of annual consumption of PAC. The peak consumption of PAC is during JulyNovember. As the business is highly seasonal, PAC companies have to build up inventory in advance of the season by making assumptions about the monsoon and crop acreage situation. 2. A crop sown in early summer for harvesting in the autumn.

240

Cases in Corporate Finance

The overall PAC consumption primarily depends on agricultural production, which in turn is highly dependent on rainfall. The ratio of net irrigated area to net sown area is around 39% in India. Droughts/deficient monsoons not only adversely impact kharif sowing season (beginning in July) but also kharif production. They also impact water reservoirs and Rabi 3 production in the winter. Adverse monsoons also impact the loan repaying ability of farmers. Apart from agricultural production growth, consumption of PAC also depends on the pest pressure. If weather conditions are such that there are more insects, then farmers are likely to use more insecticides. Even if monsoons are adequate, the attack of insects or diseases may or may not be very high. Demand growth is a very complex result of various weather conditions, and unpredictable events like pest pressure and attack of disease also impact PAC consumption. Because of declining domestic consumption, production has also declined in recent years. As compared with capacity of 145,000 MT during FY2004, overall capacity utilisation was 47% during FY2004 (44% in insecticides, 37% in herbicides/weedicides, 76% in fungicides, and 43% in other pesticides). Exhibit 5 presents data on pesticide consumption, installed capacity and production.

Export Market Because of the cyclical nature of PAC consumption in India, and the long-term trend of declining demand, the PAC industry in India has resorted to increased exports for better capacity utilisation. The export market often provides a cushion to the vagaries of the domestic market. Out of the combined turnover of Rs. 40 billion, the export turnover is around Rs. 17.5 billion. Companies such as United Phosphorus, Excel Industries, etc. are significant players for generic crop protection products. An export-oriented strategy for the Indian PAC has the potential to deliver rapid expansion in volumes and provide better insulation from the cyclicalities of the domestic market. While exports increased 23.9% during FY2004 in volume terms to 68,981 MT, the growth in value terms was 17.3%. However, because of increased domestic demand, imports increased from 6,795 MT during FY2003 to 12,647 MT during FY2004. During FY2004, insecticides accounted for 71% of exports in volume, and 83% of exports in value. The Indian PAC industry exports primarily to US, Argentina, France, Brazil, and Netherlands. The US was the largest market for Indian pesticide exports during FY2004, accounting for 9.1% of total exports, followed by France (7.9%), and Netherlands (7.5%). India is one of the largest producers of pesticides in Asia. Total world pesticide exports from all countries increased from US$ 10.27 billion in 2002 to US$ 12.42 billion in 2003, caused by higher pesticide usage. Amongst the developing countries, India is the second-largest exporter of pesticides, besides China. India accounted for 3% of the world export of pesticides in 2003, as compared with 5.9% for China. In terms of market share of exports of various pesticide products, Indian exports of insecticides aggregated US$ 313 million during 2003, accounting for 10.4% of total worldwide insecticide exports of US$ 3,011 million. India’s share has declined from 11.4%. Exhibit 6 presents the statistics on exports from India. 3. Rabi is a name originated from Arabic. Meaning of Rabi is “spring”.

Case 13: Working Capital Management at Excel Crop Care Ltd.

241

Regulation The PAC industry is highly sensitive to Government’s policies. The industry is regulated by two ministries. While the Department of Chemicals and Petrochemicals under Ministry of Chemicals and Fertilizers promotes production of pesticides; the Ministry of Agriculture monitors the quality and supply of pesticides. Since pesticides are toxic and hazardous to humans and environment, and also enter into the food chain, the Government of India (GoI) regulates manufacture, sale, transport, export/import under Insecticides Act, 1968. Under the Act, no pesticides are allowed for production/ import without registration. The PAC industry developed in India because of the GoI’s policies of self-reliance across the board, protection of domestic industry, and assured demand because of the large agricultural production. The GoI has also been framing various policies towards financing of farmers. Effective 1998-99, banks have been issuing Kisan4 Credit Cards to farmers on the basis of their landholdings so that the farmers can use them to readily purchase agricultural inputs such as seeds, fertilisers, and pesticides and draw for their production needs. Over the last couple of Industry years, the Kisan Credit Card Scheme has emerged as an effective tool for catering to the short-term credit requirements of the farmers. In recent years, because of increased self-reliance in PAC production, the Government of India has reduced customs duties on imports of PAC. While the Union Budget 2003–04 resulted in reduction in customs duty to 25% on all pesticides, the Mini-Budget reduced peak customs duty to 20%. The Union Budget for 2005–06 reduced the peak rate of customs duty to 15%. In the Union Budget for 2000–01, the GoI also increased excise duty on pesticides from 8% to 16%. India has recently approved the planting of a GM-variety of insect-resistant biotech cotton (Bt. Cotton) that reduces the need for pesticides. India commercialized Bt. cotton for the first time in 2002. Only a mere 80,000 acres was cultivated with Bt. cotton in 2002. However, while area increased by 100% in 2003, and 400% in 2004; GM crop area (as percent of acreage in cotton) increased from 0.7% in 2003 to around 6% in 2004. In China and India, where farmers work under harsh conditions and often suffer from the effects of their own pesticide spraying, biotech crops are argued to be beneficial. The Seeds Policy, 2001, has claimed that Bt. Cotton can significantly increase crop yields. With GM cotton, the consumption of pesticides can also reduce. However, there is also a cautionary message in the Policy that there is a need to adhere to safety norms like environmental, health and biodiversity safety before commercial release.

Pesticide Resistance in Agriculture Pesticide resistance in agriculture was first noticed in India in 1963 when a number of serious pests were reported to have become resistant to DDT and HCH (two of the most commonly used pesticides during the 1960s and 1970s). Since then the number of pests with pesticide resistance has increased. During 1984–86, the excessive and indiscriminate use of pesticides on cotton created another undesirable situation viz., development of resistance in Helicoverpa armigera. 4. Kisan is the Indian word for farmer.

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Cases in Corporate Finance

The recent experience in the states of Punjab, Rajasthan and Haryana during 2000–01crop season is a repeat story of Helicoverpa armigera damage on cotton. In addition, wide spread resurgence of whitefly in cotton in the Indian states of Andhra Pradesh, Gujarat, Karnataka, Tamil Nadu and Maharashtra has also been reported in the past due to pesticide use and misuse. The most serious problem of resistance is witnessed in cotton, for which American bollworm is a serious pest. The bollworm has developed resistance to almost all pesticides in a number of regions, and is particularly serious in parts of Indian states of Punjab, Haryana, Andhra Pradesh, Karnataka and Maharashtra. Growing pesticide resistance has meant that a large proportion of agricultural production is lost to pests. According to some estimates, these losses amount to anywhere between 20–30% of total production. The losses are particularly serious in cotton. For example, cotton production in Punjab declined by about 50% during 1997 and 1998, causing a number of cotton farmers to commit suicide in the affected areas. Pesticide resistance has mainly been caused by excessive and indiscriminate use of pesticides. Pesticides of spurious quality, which are commonly sold in small towns and villages, have also contributed to resistance in many areas. For example, in Bidar (a city in Karnataka state) where the problem of pest resistance became extremely serious, more than 50 brands of pesticides were found to be sub-standard in 1998–99. In another incident, the licenses of 115 pesticide producers were cancelled in Punjab for sub-standard pesticide. Sub-standard pesticides contribute to resistance as the pests are repeatedly exposed to a low concentration of pesticides. This contributes to the build-up of resistance, without destroying the pests. during 2002. The PAC industry of the industrialised countries has witnessed consolidation through acquisitions and mergers resulting in a few global research-based companies. The 27 large and medium-sized research-based agrochemical companies that existed in 1983 declined to 8 in 2003—Syngenta, Monsanto, DuPont, BASF, Bayer, Dow AgroSciences, Sumitomo, and FMC. The six largest multinational agrochemical corporations account for about 85% of the total annual worldwide pesticide sales.

ECCL’S WORKING CAPITAL MANAGEMENT Due to the seasonal nature of this industry, ECCL sells mainly on credit (about 90%). Although sales of agri-inputs like fertilizer and seed is on cash, sale of pesticides is mainly on credit. This is a practice followed across the industry. ECCL being a pesticide manufacturing company, has maximum credit sales. Thus, the credit period depends on the nature of the business. ECCL follows a 2-level or 3-level distribution channel. The intermediaries include dealers and retailers. ECCL extends direct credit to dealers. These dealers/retailers then extend this credit onto the farmers who are the end customers. Credit Period: Credit is extended for 90 days. However, in practice the credit period does get extended to 120/180 days.

Case 13: Working Capital Management at Excel Crop Care Ltd.

243

Credit Granting Criteria At ECCL, the criteria for extending credit and control of receivables are as follows: n

n

n

n

n

In case of new customers, the maximum credit period is fixed as 90 days. Thus, no further dealings are done if the outstanding amount goes beyond 90 days. Minimum 2 years of business with ECCL: The longer the debtor has had a good business relation with ECCL, the more liberal do the credit terms become towards those debtors. In case of new trade relations, the credit terms followed are comparatively strict. This is due to lack of business dealing experience of the company with these new debtors. Type of business: Most of the dealers with ECCL deal not only in pesticide but in fertiliser and seeds as well. Dealers who are also in the business of fertiliser and seed are offered a comparatively liberal credit period. These dealers are relatively regular in payment since the business of fertiliser and seed is mainly on cash unlike pesticides. Whereas if a dealer is restricted to a business purely of pesticides, payment is often untimely. A lot of such cases even result in bad debts. Payment performance: The mode of payment mainly being cheque, a change is kept on the payment history. Dishonored cheques indicate bad dealer performance. Type of collateral and security extended: Amount extended as credit also depends on the security or collateral extended by the dealer. More the collateral greater the credit limit.

Control of Receivables n

n

Monthly monitoring Ageing schedule: This report is generated every month in all the four zones. It includes the list of all the dealers with outstanding amounts arranged in different slots of 90 days, 120 days, 180 days and bad debts going above 180 days. This report helps track the dealers likely to become bad debts. It also gives a clear picture of the volume of debts going bad on a monthly basis. Sending reminders to debtors at the end of credit period: Debtors are followed up regularly once the credit period ends. As the outstanding amount keeps on ageing, the collection process is made more aggressive. In case of debts going bad, that is, going beyond 180 days threats of legal action is sent to the debtors. In appropriate cases, legal actions on overdue account are exercised.

Inventory Control Excel Crop Care Ltd. carries a range of 53 items with a total inventory valuation of Rs. 6925.74 lakhs. The break-up of inventory at end 2005 is presented in Exhibit 7. Inventory valuation is done using the First-In-First-Out method. The business is seasonal and the demand is very erratic since sales are dependent on monsoons. Demand is forecasted at the beginning of each year, which is called the Annual Operations plan—demand is forecasted month-wise, pack-wise, product-wise for the entire

244

Cases in Corporate Finance

year based on the previous year’s performance zone wise. On the 20th of each month, a rolling plan for that particular month is generated. It gives the current status of requirement, which is used to alter the OPG. Here, a 3-month plan is drawn. Stock requisition plan is sent at the beginning of every month to the mother godown, from where the stock is transferred to the zonal godown.

Cash Management The company managed all its expenses and receipts through a single Cash Credit Account with Bank of India, the main operating account of the company. The Company adopted a Hub and Spoke approach for its cash management system. For this purpose, the company utilised the services of Citibank to provide with Cash Management Service (CMS). Under CMS, the bank collects checks on a daily basis from all the C&F agents as well as from its zonal offices and gives credit for the same immediately or on the next day, depending upon the bank location where the cheque has been drawn upon. The amount of these cheques is credited to the Bank of India A/C in Mumbai, operated by the Head Office. No cash is maintained by the company at any of its zonal offices and all the collections is transmitted to the Head Office. The cash requirement of its zonal offices is met by the head office by transferring cash to their account as and when they are in need of funds. The company maintains adequate check on all its cash expenses by allowing cash payments only against proper vouchers signed and sanctioned by the required authority. Moreover, all cash payments in excess of Rs. 5000 is made only against vouchers with a revenue stamp on it. The company or any of its zonal offices follow the system of preparation of cash budget for a particular period. Cash would be withdrawn from the bank as and when required. The company maintained cash at its head office to meet its expenses for 5–6 days. Similarly, the zonal offices of the company at Ahmedabad and Delhi maintained cash for around 7 days. Each zonal office prepared a quarterly MIS report. These reports gave details of the cash and bank balances at each of its zonal offices as well as the details of the checks in process over various periods, say, 0–30 days, 30–60 days and 60 days and above. Exhibit 8 presents some of the cash management ratios for ECCL and Rallis, a competitor. Exhibit 9 presents the components of working capital cycle for ECCL and some of its major competitors. Exhibit 10 presents some working capital ratios for some of the major PAC companies.

Case 13: Working Capital Management at Excel Crop Care Ltd.

Exhibit 1

245

Excel Crop Care Balance Sheet (Rs. crore)

Liabilities March 03

March 04

March 05

Sources of Funds Total Share Capital

0.05

5.50

5.50

Equity Share Capital Share Application Money Preference Share Capital

0.05 5.45 0.00

5.50 0.00 0.00

5.50 0.00 0.00

46.19 0.00 51.69

53.38 0.00 58.88

68.57 0.00 74.07

Secured Loans Unsecured Loans Total Debt

66.84 36.19 103.03

57.22 37.42 94.64

31.61 59.79 91.40

Total Liabilities

154.72

153.52

165.47

Application of Funds Gross Block Less: Accum. Depreciation Net Block

77.89 35.35 42.54

91.83 38.43 53.40

101.58 39.62 61.96

Capital Work in Progress Investments Inventories

8.61 0.34 52.74

4.68 1.93 52.46

0.29 1.93 69.26

Sundry Debtors Cash and Bank Balance Total Current Assets

64.36 11.93 129.03

75.17 14.51 142.14

84.13 8.75 162.14

Loans and Advances Fixed Deposits Total CA, Loans and Advances

30.84 0.00 159.87

24.50 0.00 166.64

25.76 0.51 188.41

Deferred Credit Current Liabilities Provisions

0.00 60.73 3.66

0.00 74.66 3.50

0.00 84.30 6.10

Total CL and Provisions Net Current Assets Miscellaneous Expenses

64.39 95.48 7.75

78.16 88.48 5.03

90.40 98.01 3.28

154.72 45.62 4,624.00

153.52 106.42 53.50

165.47 102.12 67.30

Reserves Revaluation Reserves Net worth

Assets

Total Assets Contingent Liabilities Book Value (Rs)

March 03

March 04

288.74 26.34 262.40

320.87 26.84 294.03

March 05

Income Sales Turnover Excise Duty Net Sales

421.93 36.73 385.20 (Contd.)

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Cases in Corporate Finance

(Exhibit 1 Contd.) March 03 Other Income

March 04

March 05

–1.13

0.93

1.16

Stock Adjustments Total Income Expenditure

2.64 263.91

–3.75 291.21

8.83 395.19

Raw Materials Power and Fuel Cost Employee Cost Other Manufacturing Expenses

158.83 7.97 22.07 9.76

168.94 8.84 23.42 9.44

237.85 10.81 25.81 9.75

27.25 13.51 0.00

32.08 14.63 0.00

44.97 17.80 0.00

239.39 25.65 24.52

257.35 32.93 33.86

346.99 47.04 48.20

12.33 12.19 4.12

10.16 23.70 4.06

6.99 41.21 4.76

Other Written Off Profit Before Tax Extra-ordinary items

2.37 5.70 1.15

2.72 16.92 0.13

2.31 34.14 0.69

PBT (Post Extra-ordinary Items) Ta x Reported Net Profit

6.85 2.42 3.84

17.05 5.72 10.29

34.83 11.98 22.22

Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalized Total Expenses Operating Profit PBDIT Interest PBDT Depreciation

Cash Flow Statement (Rs crore) March 2003 Net Profit Before Tax Net Cash From Operating Activities Net Cash (used in)/from Investing Activities Net Cash (used in)/from Financing Activities Net (decrease)/increase In Cash and Cash Equivalents Opening Cash and Cash Equivalents Closing Cash and Cash Equivalents Dividend and per share data Dividend Data Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) Source: Public datasets.

March 2004

March 2005

6.26 10.86 –5.55 –8.82

16.11 25.49 –12.68 –10.22

34.19 13.13 –12.85 –5.35

–3.50 15.43 11.93

2.58 11.93 14.51

–5.06 14.32 9.26

80.56 0.00 1.65 0.21

88.41 0.00 2.75 0.35

109.14 0.00 4.13 0.59

1.00 383.59 30.00 4,624.00

110.06 9.35 50.00 53.50

110.06 20.19 75.00 67.30

Case 13: Working Capital Management at Excel Crop Care Ltd.

Exhibit 2

247

World Market for Pesticides

Market Size (US$ mn.) Growth

35,000

15%

30,000 10% 25,000 20,000

5%

15,000

0%

10,000 –5%

5,000 0

–10%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Compiled by INGRES

Exhibit 3

Description of Major Agrochemicals Companies5

Bayer Crop Science Bayer CropScience is one of the world’s leading innovative crop science companies in the areas of crop protection, agricultural pestcontrol, seeds and plant biotechnology. It has an annual sale of about EUR 6 billion. The company is structured into 6 business operations units: four regional crop protection units and two units responsible for Environmental Science and BioScience—offering an outstanding range of products and extensive service backup for modern, sustainable agriculture as well as for non-agricultural applications. Headquartered in Monheim, Germany, Bayer CropScience has a global workforce of about 18,800 and is represented in more than 120 countries. Monsanto India Ltd. Monsanto India is a 74% subsidiary of Monsanto Company, USA, a global leader in agricultural solutions. Monsanto India is engaged in the business of production and sale of agricultural inputs, i.e., chemicals and hybrid seeds. In FY03, while agrochemicals business contribute 68% to gross revenues, seeds business made up for the rest. The major segments in the agrochemicals business are herbicides and traits. Monsanto India was able to perform strongly in FY03 despite poor monsoons on account of a change in its sales mix in favour of seeds. Monsanto’s increased focus on seeds business has helped the company improve its seed quality. The company is now recognised as one of the most reliable provider of high quality seeds throughout South East Asia. In FY03, Monsanto notched annual seeds production of 19,000 tonnes. However, the company’s herbicide business continues to be under pressure due to the introduction of new molecules and competition from generics. In the seed business, innovative advertisement and farmer communication helped Monsanto India improve its brand image. Resultantly, the company’s maize and sunflower seeds business recorded strong growth. Given Monsanto India’s brand image and strong pipeline, the company is likely to further improve its performance in this segment. Good monsoon has further improved the prospects of this industry. In the agrochemicals business, poor monsoon and a consequent reduction in the farm area under cultivation coupled with severe competition from spurious materials has resulted in a reduction in the prices of agrochemicals, higher inventories and has affected the performance of the company in this segment. (Contd.)

5. These are from the company websites.

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Cases in Corporate Finance

(Exhibit 3 Contd.) Syngenta India Ltd. Syngenta India, which came into being as a separate agri-business company with effect from April 1, 2000, is vested with the agrochemical and seeds business of Novartis India; the latter now retains the pharma business alone. Syngenta has inherited a fairly strong brand portfolio from Novartis India, including such brands as Curacron, Rifit, Topas and Polytrin. The company ranks only behind Rallis in terms of market share in the domestic crop protection, traditional phosphorous-based insecticides contribute a substantial portion of the company’s agrochemical revenues. Rallis India Ltd. Rallis India Ltd., a Tata enterprise, has emerged as a focused player in the crop protection business. Over the past two years, the company divested its unrelated businesses including pharmaceuticals, gelatine and knowledge services, utilising the realised proceeds to retire its debt. This operational and debt restructuring measures have helped Rallis report a sharp turnaround in its financial performance for 2005. With its robust pipeline of new products and given its strengths in low-cost manufacturing and an extensive distribution network, the company is poised to do well in future. Rallis has always been the Indian farmer’s close friend. Its comprehensive range of agro inputs and services are spread across 80% of India’s districts through an extensive distribution network of loyal and supportive dealers and retailers. The company’s vast experience and extensive research in agricultural products has geared us up to meet global challenges. It’s little wonder then that Rallis has emerged as one of the leaders in the Indian Agrochemical Industry. United Phosphorus Ltd. United Phosphorus is India’s largest producer of crop protection products like fumigants, fungicides, insecticides, rodenticides and herbicides. It is the world’s fourth largest generic agrochemical company and the largest producer of Aluminium Phosphide and Napropamide. The company has built a global network through acquisitions, strategic alliances and subsidiaries. It operates across seven manufacturing sites, six in India and one in Europe.

Exhibit 4

Financial Statements of Major PAC Companies 2006 (in INR crore) UPL

Bayer

Monsanto

Rallis

Syngenta

Sales

1669

848.78

331.6

118.59

831.3

EBITDA Net Profit Net Fixed Assets

490 215 652

126.69 56.8 1516.79

69.2 72.77 75.44

1.43 3.07 161.39

115.2 63.17 142.57

Net Worth Debt/Equity Net Profit Margin

1276 0.95 12.94%

331.4 0.32 6.69%

327.02 0 21.9%

87.61 2.32 6.89%

432.62 0.01 7.5%

RONW % Fixed Assets Turnover

16.93

17.1

23

43.71

14.6

1.5

2.35

3.29

2.23

3.91

Inventory Turnover Payout ratio

7.89 18.61

4.80 19.50

3.60 175.82

4.68 18.02

5.37 43.13

Source: Companies, Rediff.com, case writer estimates.

Case 13: Working Capital Management at Excel Crop Care Ltd.

Exhibit 5

249

Pesticides Consumption and Agricultural Production

Pesticides consumption and Agricultural production FY

1998

1999

2000

2001

2002

2003

2004 2005

PAC Consumption-MT Agri Production growth % Food grains-MT

52239 -5.8 192.3

49157 7.6 203.6

46195 -1.3 209.8

43584 -6.3 198.6

47020 7.6 212.9

48000 -15.2 174.2

49000 19.6 213.5

210.4

Pesticides Installed Capacity and production FY

2000

2001

2002

2003

2004

Insecticides Fungicides Herbicides/weedicides

96.6 12.5 16.1

NA NA NA

103.4 14.09 16.59

99.9 16.1 18.54

112.1 16 13.2

Others Production Insecticides

3.65

NA

3.61

3.65

3.7

70.2

69.7

59.44

49.89

49.4

Fungicides Herbicides/weedicides  

12.6 10 2.54

12.09 7.25 3.22

13.59 6.1 2.67

12.27 3.44 2.37

12.1 4.9 1.6

2003

2004

Installed capacity

Source: INGRES.

Exhibit 6

Pesticide Production, Consumption, and Exports

Pesticide production, domestic consumption and exports (MT) 2000

2001

2002

Production

95.33

92.27

81.9

67.97

68

Domestic Consumption Exports

46.2 40.65

43.58 47.92

47.02 50.09

48 55.69

49 68.98

2003

2004

2005 (9 months) 32255 10568

Exports—MT FY

2002

Insecticides Fungicides

37816 7515

42978 7682

49072 12083

Herbicides Others

2237 2517

2093 2940

3032 4794

2641 3601

FY

2002

2003

2004

2005

Insecticides Fungicides

12197 722

13305 814

14562 1362

(9 months) 10751 1558

381 264

436 320

424 1107

383 718

Exports—Rs million

Herbicides Others

(Contd.)

250

Cases in Corporate Finance

(Exhibit 6 Contd.) Exports—Price realization Rs/Kg FY

2002

2003

2004

2005

Insecticides Fungicides

323 96

310 106

297 113

(9 months) 305 147

Herbicides Others

170 105

208 109

140 231

145 199

Region-wise exports Rs million

France US Netherlands

2000

2001

2002

654 810 1569

1100 1027 1636

1161 1140 1543

146 395 200

392 275 260

6277

7465

Brazil Belgium Argentina Others

2003

2004

3005

3 year CAGR

1451 1684 944

1377 1592 1309

1266 970 807

7.80% 15.7 -7.2

291 386 406

606 540 1018

969 700 521

741 705 568

35.2 36.5 26.1

8638

8632

10988

8352

12.4

Source: INGRES.

Break up of Inventory Held as at 31st March 2005 (in INR lakhs)

Exhibit 7

Stores and Spares Containers Stock-in-trade

98.92 248.79

Finished Products Semi finished products Traded products

3201.29 778.57 459.64

Raw Materials

2139.16

TOTAL

Exhibit 8

6578.76 6925.74

Cash Management Ratios for ECCL and Rallis in 2005 ECCL

Rallis

Cash/Total Assets %

3.8

3.05

Cash/NWC % Interval Measure (in days)

8.5 12

14.50 8

Case 13: Working Capital Management at Excel Crop Care Ltd.

Exhibit 9

251

Working Capital Cycle for PAC Companies (in days) EXCEL CROP CARE Rallis U P L Monsanto 2002–03 2003–04 2004–05 2004–05 2004–05 2004–05

Syngenta 2004–05

Raw Material Holding Period WIP Holding Period

52 18

36 19

37 15

53 7

27 6

90 NA

81 22

FG Holding Period Traded Goods Holding Period Debtors Collection Period

44 51 88

35 54 84

41 32 73

60 0 77

27 23 114

62 NA 3

60 0 3

Credit Period Working Capital Cycle

112 90

111 63

96 59

135 62

135 37*

56 NA

70 126

* WC cycle does not exclude credit period available for expenses Source: Company, case writer estimates, analyst reports.

Exhibit 10

Working Capital Ratios for PAC Companies (in %)

Ratio

EXCEL CROP CARE Rallis U P L M o n s a n t o Syngenta Bayer Crop 2002–03 2003–04 2004–05 2004–05 2004–05 2004–05 2004–05 Science 04–05

Inventory/CA Sundry debtor/CA

33.11 38.6

31.67 42.78

36.97 43.67

44.62 32.4

15.42 37.44

34.63 -9.18

36.62 11.91

34.58 40.57

Cash and bank/CA 7.49 Sundry creditor/CA 28.91 Bad debts/total sales 0.46

8.76 35.28 1.1

4.94 37.42 1.29

4.96 43.6 0.07

0.47 28.2 0.22

31.49 -3.88 0.28

37.2 21.22 0.3

13.54 45.05 0.07

Source: Company, case writer estimates, analyst reports.

References 1. www.indiainfoline.com 2. http://icra.in 3. http://myiris.in

Module 4 CAPITAL STRUCTURE, SHORT-TERM AND LONG-TERM FINANCING

14. 15. 16. 17. 18.

Trent Ltd. Rights Issue of Convertibles and Warrants Financial Instruments Problem Set BGR Energy Systems Initial Public Offering Shree Cement Ltd. Fujairah Bank

CASE

14

Trent Ltd. Rights Issue of Convertibles and Warrants DESCRIPTION Trent Ltd is faced with a large need for external financing to support growth. The case illustrates the value of convertible debt and warrant as a financing instrument in these circumstances.

LEARNING OBJECTIVE To introduce issues in the design of securities.

SUBJECTS COVERED Financial Management, Financing, Security Analysis.

This case was prepared by Vishwanath S.R. of Institute of Management Technology, Nagpur.

256

Cases in Corporate Finance

INTRODUCTION On January 25, 2005, Trent Ltd announced its plan to raise Rs. 118.1 crore through an issue of partly convertible debentures with warrants on rights basis. The company said the securities would be issued to the existing shareholders in the ratio of 1:10 and get listed in July 2005. In early 2005, the company’s stock was trading at around Rs. 505. Under the plan, the instrument would have a face value of Rs. 900 each and consist of three parts: n

n

n

Part ‘A’ would be converted into one equity share (of face value of Rs.10) at a price of Rs. 400 on allotment; Part ‘B’ would be one non-convertible debenture of Rs. 500 with a coupon rate of 2 percent and a redemption premium payable on maturity so as to give a yield to maturity of 5.5 percent per annum over the five-year period, and Part ‘C’ would be one warrant entitling the holder to acquire against payment in cash, one share of Trent. The Warrant holder was entitled to apply for one equity share of Rs. 10 each at a premium of Rs. 640 each within 30 days after the expiry of 54 months from 7th July 2005, being the date of allotment.

The Non-Convertible Debenture of face value of Rs. 500 are redeemable at a premium of Rs. 98 each on 7th July, 2010. The Non-Convertible Debentures are secured by way of charge on assets of the Company costing at least 1.33 times of the value of the Debentures in favour of the Debenture Trustees. The premium payable on redemption of Debentures amounting to Rs. 1,283.85 lakhs would be fully provided and debited to Securities Premium Account. The said terms also provided that in the event the Company proposes to issue further securities (new Rights Issue) during the tenure of the warrants, the right of the warrant holder to apply for equity shares, may, at the option of the warrant holder, be advanced. According to the plan 13, 10, 047 equity shares would be allotted as fully paid up on conversion of Partly Convertible Debentures and 13,10,047 warrants to the shareholders. The details of the issue are provided in Exhibit 1.

Convertibles and Warrants Convertible bonds are hybrid instruments. A convertible bond gets converted into shares of the company at a specified price after a specified period of time at one stroke or in instalments. The holder of a convert is entitled to receive interest on the convertible portion till conversion. Thus, a convert is a package of straight debt and equity option. The option to convert is usually at the discretion of the holder and will only be exercised when the holder finds such an exercise desirable and is willing to go for it. Like convertible bonds, warrants allow the bondholder to purchase a given number of shares at a certain price. However, while the conversion feature is built into the price of a convertible bond, it is a separate component of a bond with a warrant attached.

Case 14: Trent Ltd. Rights Issue of Convertibles and Warrants

257

With a convertible bond, at or before the maturity date the bondholder either receives the face value of the bond or the number of shares into which the bond is convertible. For a bond issued with warrants, the bondholder gets a straight bond, and also receives warrants giving the right to purchase shares at a given price. These warrants are usually detachable from the bond, meaning they can be sold separately if the bondholder no longer wants the option. Warrants can also be detached and separately listed on a stock exchange for trading purposes. The issuer of the warrant receives the price of the warrant at the time of issue and the exercise price when the option is exercised. The company gets equity investment if the investor exercises the option.

COMPANY DESCRIPTION Trent (Lakme), formerly Lakme, forayed into retailing business after selling off its cosmetics business to Hindustan Lever in 1998. The company was renamed as Trent after the acquisition of Littlewoods Department Store in Bangalore for Rs. 1,110 million. Thereafter, it started a chain of retail stores called Westside. Trent Limited operates a chain of departmental stores under the name ‘Westside’ in India. Its stores offer men’s wear, women’s wear, kid’s wear, footwear, cosmetics, perfumes, handbags, household accessories, lingerie, and gifts. As of December 31, 2006, the company operated 27 Westside departmental stores in Mumbai, Bangalore, Hyderabad, Jaipur, Chennai, Pune, Delhi, Noida, Gurgaon, Ghaziabad, Kolkata, Nagpur, Indore, Ahmedabad, Lucknow, Surat, and Mysore. In addition, it operates nine departmental stores under the name ‘landmark’, which engage in the retail of books, toys, stationery, and music. Landmark Limited operates as a book retailer in India. It offers books in various categories, such as architecture, art and culture, astronomy, biography, business, cookery, cinema, crime and police, computer, current affairs, dance, drama, education and training, engineering, fiction, foreign language study, general knowledge, geography, geology, health and fitness, history, humour, indoor games, marketing, fiction, religion, novels, law/legal profession, literature, and literary studies. The company also provides music and movies in cassettes and CDs/DVDs; stationery, which includes office utilities, diaries, files, folders, writing instruments, gift wrapping papers, table accessories, notepads, notebooks, greeting cards, and annual planners; magazines; toys; and gifts. In addition, Landmark offers home stores, which include candles, mats, crockery, bathroom accessories, lamps, furniture, iron products, flowers, vases, photo frames, bedspreads, cushion covers, curtains, wall hangings, runners, table linens, jewellery, crystals, watches, sunglasses, luggage, perfumes, and leather products. The company was founded in 1987 and is based in Chennai, India. Landmark Limited operates as a subsidiary of Trent Ltd. Each Westside store covers an area of 20,000 sq. ft. of stocking apparel, home furnishings, cosmetics, toys and tableware. Other than cosmetics and toys, all products are sold under the Westside brand. The subsidiaries Trent Brands, Flora Services, (sourcing activities, warehousing clearing and forwarding) and Satnam Developers and Finance (real estate constructor and developer) help Trent in its operations.

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Cases in Corporate Finance

The acquisition of Landmark, a Chennai-based retail chain for Rs. 1,030 million is a strategic move ahead as both have similar customer profiles and have plans of expansion in metros and first class cities only. Landmark began operations in 1987 with its first store in Chennai with a floor space of 5500 sq. ft. At present, Landmark has 10 stores, varying in size from 12,000 sq. ft. to 45,000 sq. ft, 3 in Chennai and 1 each in Bangalore, Gurgaon, Mumbai, Vadodara, Gurgaon, Pune, Lucknow and Ahmedabad. Until 1996, Landmark’s product portfolio comprised books, stationery, and greeting cards. It was later that music was added to it. Landmark also sparked the trend of stocking curios, toys and other gift items. Trent ventured into the hypermarket business in 2004 under the name ‘Star India Bazaar’. A hypermarket is a super store which combines a supermarket and a departmental store. The result is a very large retail facility which carries an enormous range of products under one roof, including full lines of groceries and general merchandise. When they are planned, constructed, and executed correctly, a consumer can ideally satisfy all of their routine weekly shopping needs in one trip. Trent opened its first hyper market in Ahmedabad. The Star India Bazaar in Ahmedabad covers over 54,000 sq. ft and is spread over two floors. The new store offers customers a wide choice of products that include staple foods, beverages, health and beauty products, vegetables, fruits, dairy products, consumer electronics and household items at the most affordable prices. Star India Bazaar also includes a large range of fashionable in-house garments for men, women and children, exclusively available at the store. During 2002–03, the company opened two new stores, one each at Delhi and Nagpur. During the 2003–04, the company opened two new retail outlets at Kala Ghoda, Mumbai in April 2003 and near Law Gardens, Ahmedabad in June, 2003. With the addition of the Noida and North Mumbai stores, the total retail space went up, by 34,000 square feet, to 1.84 lakh square feet. Five more properties opened by the end of the financial year 2004. Going forward, Trent has plans to expand by starting six to eight Westside stores every fiscal. Trent aims to expand to 100 stores across formats by financial year 2010. It planned to open 17 stores between 2006 and 2008.

Industry Background Even though India has well over 5 million retail outlets of all sizes and styles (or non-styles), the country sorely lacks anything that can resemble a retailing industry in the modern sense of the term. This presents international retailing specialists with a great opportunity. It was only in the year 2000 that the global management consultancy A T Kearney put a figure to it: Rs. 400,000 crore which will increase to Rs. 800,000 crore by the year 2005—an annual increase of 20 percent. Retailing in India is thoroughly unorganised. There is no supply chain management perspective. According to a survey by A T Kearney, an overwhelming proportion of the Rs. 400,000 crore retail market is unorganised. In fact, only a Rs. 20,000 crore segment of the market is organised. As much as 96 percent of the 5 million-plus outlets are smaller than 500 square feet in area. This means that India per capita retailing space is about 2 square feet (compared to 16 square feet in the United States). India’s per capita retailing space is thus the lowest in the world.

Case 14: Trent Ltd. Rights Issue of Convertibles and Warrants

259

Just over 8 percent of India’s population is engaged in retailing (compared to 20 percent in the United States). There is no data on this sector’s contribution to the GDP. According to A T Kearney, from a size of only Rs. 20,000 crore, the organised retail industry will grow to Rs. 160,000 crore by 2005. The total retail market, however, as indicated above will grow 20 percent annually from Rs. 400,000 crore in 2000 to Rs. 800,000 crore by 2005. Given the size, and the geographical, cultural and socio-economic diversity of India, there is no role model for Indian suppliers and retailers to adapt or expand in the Indian context. The biggest challenge facing the organised retail industry in India is competition from the unorganised sector. Traditional retailing has established in India for some centuries. It is a low cost structure, mostly owner-operated, has negligible real estate and labour costs and little or no taxes to pay. Consumer familiarity that runs from generation to generation is one big advantage for the traditional retailing sector. In contrast, players in the organised sector have big expenses to meet, and yet have to keep prices low enough to be able to compete with the traditional sector. High costs for the organised sector arises from: higher labour costs, social security to employees, high quality real estate, much bigger premises, comfort facilities such as air-conditioning, back-up power supply, taxes etc. Organised retailing also has to cope with the middle class psychology that the bigger and brighter a sales outlet is, the more expensive it will be. The above should not be seen as a gloomy foreboding from global retail operators. International retail majors such as Benetton, Dairy Farm and Levis have already entered the market. Lifestyles in India are changing and the concept of “value for money” is picking up. India’s first true shopping mall—complete with food courts, recreation facilities and large car parking space—was inaugurated as lately as in 1999 in Mumbai (Crossroads). Local companies and local-foreign joint ventures are expected to more advantageously positioned than the purely foreign ones in the fledgling organised India’s retailing industry. These drawbacks present opportunity to international and/or professionally managed Indian corporations to pioneer a modern retailing industry in India and benefit from it. The prospects are very encouraging. The first steps towards sophisticated retailing are being taken, and “Crossroads” is the best example of this awakening. More such malls have been planned in the other big cities of India. An FDI Confidence Index survey done by A T Kearney, retail industry is one of the most attractive sectors for FDI (foreign direct investment) in India and foreign retail chains would make an impact circa 2003. Organised retail stores fall into several store categories:

Supermarkets A supermarket is a self-service store offering a wide variety of food and household merchandise, organised into departments. It is larger in size and has a wider selection than a traditional grocery store and it is smaller than a hypermarket or superstore.

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Cases in Corporate Finance

The supermarket typically comprises meat, fresh produce, dairy, and baked goods departments along with shelf space reserved for canned and packaged goods as well as for various non-food items such as household cleaners, pharmacy products, and pet supplies. Most supermarkets also sell a variety of other household products that are consumed regularly, such as alcohol (where permitted), household cleaning products, medicine, clothes, and some sell a much wider range of non-food products. The traditional suburban supermarket occupies a large amount of floor space, usually on a single level, and is situated near a residential area in order to be convenient to consumers. Its basic appeal is the availability of a broad selection of goods under a single roof at relatively low prices. Other advantages include ease of parking and, frequently, the convenience of shopping hours that extend far into the evening or even 24 hours a day. Supermarkets usually make massive outlays of newspaper and other advertising and often present elaborate in-store displays of products. The stores often are part of a corporate chain that owns or controls (sometimes by franchise), other supermarkets located nearby—even transnationally—thus increasing opportunities for economies of scale. Big-box store is a term that refers to a style of physically large chain store, and by extension to the company behind the store. The terms superstore, megastore, and supercenter also refer to these retail establishments. Typical characteristics include the following: · Large, free-standing, rectangular, generally single-floor structure built on a concrete slab. · Floor space several times greater than traditional retailers in the sector. · Location in suburban or rural areas. Generally, big-box stores can be broken down into two categories: general merchandisers, such as Wal Mart and so-called category killers—such as Home Depot and Barnes and Noble—which specialize in goods within a specific range, such as hardware and books. Hypermarkets, like other big-box stores, typically have business models focusing on high volume, low-margin sales. Because of their large footprints—a typical Wal-Mart Supercenter covers 14,000 sq m (150,000 sq ft), a typical Carrefour 19,500 m² (210,000 square feet)—and the need for many shoppers to carry large quantities of goods, many hypermarkets choose suburban or out-of-town locations that are easily accessible by automobile. In India, Reliance retail and Spencers Hyper are the major hypermarket chains, though the recent opening up of the retail sector to foreign investors is likely to increase the numbers exponentially.

Choosing between Alternatives In light of the planned expansion of stores and the entry into hypermarkets, the company had to trade off the benefits and costs of various alternatives. Issuing debt had several advantages like tax deductibility of interest expense. The flip side of the coin is that introducing debt in the capital structure would make earnings more volatile.

Case 14: Trent Ltd. Rights Issue of Convertibles and Warrants

261

The time was ripe for an equity issue because the Indian stock market had experienced a boom. The company was trading at a price-earnings multiple of around 21 whereas Shoppers Stop and Pantaloon were trading at 60–65 times earnings. Consequently, analysts were bullish on the stock. Trent also had the choice of issuing either convertible bonds that usually get converted into shares at the option of the investor or warrants that entitle the investors to get a certain number of shares. Often convertibles are viewed as delayed equity. If the managers of a company expect the firm’s stock price to rise and expect investors to exercise their option of conversion, a convertible, as opposed to an outright equity issue will result in lower dilution. Since the investor has an option of conversion, the coupon on convertibles tends to lower than their non-convertible counterparts. For this reason, some managers consider convertibles ‘cheap’. Straight debt suffers from the moral hazard problem. That is, the company’s risk can be shifted from equity to debt by taking on riskier projects. Since shareholders have limited liability, they enjoy all the upside potential but lose nothing in case of project failure. Smart bondholders realise this and demand higher coupon. The cost of moral hazard problem is borne by shareholders. Since holders of a convertible have a choice to convert debt into equity, the agency problem is reduced. At times, the managers of a company may have better information than outside investors about the company’s prospects. If the company’s shares are undervalued by the market, the managers of the company have a disincentive to issue equity. They may issue debt. But debt increases the probability of bankruptcy. Convertibles fall inbetween. Apart from cost considerations Trent also had to take into account the market reaction to the securities issued. Exhibit 8 provides some capital market and company data. Exhibit 1

Details of the Securities Offered

Series

EQ

N1

W1

Security ISIN

Equity shares INE849A01012

Non Convertible Debenture INE849A07019

Detachable Warrants INE849A13017

Face Value Paid up value No. of securities

Rs. 10/Rs. 10/13,10,047

Rs. 500/Rs. 500/13,10,047

NIL NIL 13,10,047

Issue Price Distinctive numbers

Rs. 400/From 13421415 To 14731461

Rs. 500/From 1 To 1310047

Not Applicable From 1400001  To 2710047

Date of Redemption / Conversion Redemption price

Not Applicable

July 7, 2010

January 7, 2010

Not Applicable

Rs. 598/-

Not Applicable

Coupon rate Interest payment date

Not Applicable Not Applicable

Not Applicable Not Applicable

Terms of Conversion

Not Applicable

2% per annum Interest payable annually on July 7, every year. Not Applicable

Converted into one Equity shares on payment of Rs. 650 per share. (Contd.)

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Cases in Corporate Finance

(Exhibit 1 Contd.) Market lot Pari Passu

1 Yes

Lock-in shares Remark

Not Applicable The Warrant holder will be entitle to exercise his right to apply for one Equity share of Rs. 10 each at a premium of Rs. 640 for each share payable in cash in full during the warrant exercise period which is a period of 30 days after the expiry of 54 months from the date of allotment.

Source: National Stock Exchange.

Exhibit 2

List of Warrants Listed on National Stock Exchange

Symbol

Name of Company

BAJAUTOFIN

Bajaj Auto Finance Ltd

Date of Listing 19-Feb-07

CHOLADBS ESCORTS HBSTOCK

Cholamandalam Investment And Finance Company Ltd Escorts Ltd HB Stockholdings Limited

13-Nov-07 25-Sep-96 15-Oct-97

ICICI MORARJETEX ORBITCORP

ICICI Ltd Morarjee Textiles Limited Orbit Corporation Limited

4-Jul-97 7-Feb-08 12-Apr-07

RJL TRENT

Renaissance Jewellery Limited Trent Ltd

12-Dec-07 15-Jul-05

Source: National Stock Exchange.

Exhibit 3

Balance Sheet (INR crore) 2005/03

2004/03

2003/03

SOURCES OF FUNDS : Share Capital

13.12

13.12

13.12

Reserves Total Total Shareholders Funds Secured Loans

204.02 217.14 0

193.95 207.07 0

184.89 198.01 0

Unsecured Loans Total Debt Total Liabilities

0.26 0.26 217.4

0.28 0.28 207.35

0.28 0.28 198.29

APPLICATION OF FUNDS : Gross Block Less: Accumulated Depreciation

76.52 17.66

63.04 13.36

50.64 11.94

Less: Impairment of Assets Net Block Lease Adjustment

0 58.86 0

0 49.68 0

0 38.7 0

3.63 113.13

1.45 110.45

1.41 112.82

Capital Work in Progress Investments Current Assets, Loans & Advances

(Contd.)

Case 14: Trent Ltd. Rights Issue of Convertibles and Warrants

263

(Exhibit 3 Contd.) 2005/03 37.63 1.62

2004/03 23.97 1.3

2003/03 17.25 1.02

8.34 58.92 106.51

7.04 60.79 93.1

6.06 57.84 82.17

Less: Current Liabilities and Provisions Current Liabilities Provisions

47.3 10.75

32.14 9.95

24.58 9.14

Total Current Liabilities Net Current Assets Miscellaneous Expenses not written off

58.05 48.46 0.42

42.09 51.01 1.52

33.72 48.45 3.47

Deferred Tax Assets Deferred Tax Liability Net Deferred Tax

0.31 7.41 –7.1

0.5 7.26 –6.76

0.77 7.33 –6.56

Total Assets Contingent Liabilities

217.4 73.07

207.35 12.61

198.29 12.32

2005/03

2004/03

2003/03

INCOME: Sales Turnover

234.48

155.13

112.41

Excise Duty Net Sales Other Income Stock Adjustments

0.16 234.32 11.61 14.72

0.72 154.41 11.26 5.81

0.72 111.69 7.69 3.43

Total Income EXPENDITURE: Raw Materials

260.65

171.48

122.81

130.2

Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets

Source: Company, public databases.

Exhibit 4

Income Statement (INR crore)

76.48

53.69

Power and Fuel Cost Employee Cost Other Manufacturing Expenses

6.8 13.78 8.32

4.93 10.11 5.29

3.18 7.09 4.58

Selling and Administration Expenses Miscellaneous Expenses Less: Pre-operative Expenses Capitalised

61.76 9.35 0

42.11 8.01 0

30.71 8.03 0

230.21 30.44 1.34

146.93 24.55 1.01

107.28 15.53 0.74

29.1 4.54 24.56

23.54 3.06 20.48

14.79 2.75 12.04

Total Expenditure Operating Profit Interest Gross Profit Depreciation Profit Before Tax

(Contd.)

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Cases in Corporate Finance

(Exhibit 4 Contd.) 2005/03 5.17

2004/03 3.08

2003/03 –5.08

Fringe Benefit tax Deferred Tax Reported Net Profit

0 0.33 19.06

0 0.2 17.2

0 0.23 16.89

Extraordinary Items Adjusted Net Profit Adjst. below Net Profit

3.96 15.1 0

2.96 14.24 0

–2.07 18.96 0

P&L Balance brought forward Statutory Appropriations Appropriations

15.21 0 18.99

16.15 0 18.14

9.09 0 9.83

P&L Balance carried down Dividend Preference Dividend

15.28 7.87 0

15.21 7.21 0

16.15 7.21 0

Equity Dividend % Earnings Per Share-Unit Curr

60 13.67

55 12.4

55 12.16

2005/03

2004/03

2003/03

0 0

0 0

0 0

Ta x

Source: Company, public databases.

Exhibit 5

Key Ratios

Debt-Equity Ratio Long Term Debt-Equity Ratio Current Ratio Interest Cover Ratio RONW (%)

1.75 15.56 7.12

1.95 17.77 7.03

1.93 20.69 9.79

 PBIDT/Sales (%)

12.98

15.83

13.82

Source: Company, public databases.

Exhibit 6

Capital History of Trent Ltd

Year

Capital

Reserves and surplus

Borrowings

1995–96

671.07

13143.59

617.12

1996–97 1997–98 1998–99

1342.14 1342.14 1311.78

13188.03 14199.53 17238.53

286.79 352.63 308.63

1999–2000 2000–01 2001–02

1311.78 1311.78 1311.78

17762.62 17762.3 17762

180.06 110 30.21

2002–03 2003–04 2004–05

1311.78 1311.78 1311.78

17613.7 18488.92 19394.94

28.65 27.89 25.88

Source: Company.

Case 14: Trent Ltd. Rights Issue of Convertibles and Warrants

Exhibit 7

265

Description of Major Retail Firms in India

Pantaloon Retail (India) Limited operates a chain of retail stores in India. Its retail formats include e-tailing, Food, Home and Electronics, Telecom and IT, General Merchandise, Leisure and Entertainment, Wellness and Beauty, and Books and Music. The e-tailing format operates an e-commerce site Futurebazaar.com that offers various products. The Food format includes the operation of food and beverage stores, such as Brew Bar, Cafe Bollywood, Chamosa, Food Bazaar, and Sports Bar. The Home and Electronics format consists of stores that supply lifestyle furniture; home furniture; consumer durables and electronics; mechanical tools and drill machines; and other home furnishings products. The Telecom and IT format offers gadgets, gizmos, and tech junkies, such as mobile phones, accessories, download kiosks, airtime recharges, digital cameras, car phone accessories, cellular handsets, and personal gadgets. The General Merchandise retail format comprises stores, which offer casual wear, ethnic wear, formal wear, party wear, and sportswear for men, women, and kids; sunglasses, eyewear, watches, innerwear, fragrances, socks, and accessories; and gold and diamond jewelry and other life style products. The Leisure and Entertainment format includes Bowling Co., a family entertainment centre that offers leisure and entertainment options; and F 123, an entertainment zone, which provides gaming options, fun foods, and services for junior and adult banqueting. The Wellness and Beauty format offers health treatments; beauty saloon for men and women; and beauty products, such as colour cosmetics, fragrances, herbal and specialty skin items, hair products, and bath accessories. The Books and Music format offers books, multimedia, toys, and stationery and gifts. As of September 26, 2007, Pantaloon Retail operated 400 stores in 40 cities in India. The company, formerly known as Manz Wear Private Limited, was incorporated in 1987 and is headquartered in Mumbai, India. Shopper’s Stop Limited, together with its subsidiaries, engages in retailing of various household and consumer products through departmental store facilities in India. It retails apparel, accessories, cosmetics, home and kitchenware, and other products. The company also offers a range of branded and owned label apparel, cosmetics, personal accessories, jewellery, leather goods, home wares, electronics, books, and other items, such as music, toys, and stationery for men, women, and kids through departmental and concessionaire stores. As of March 14, 2008, it operated 24 stores, as well as had 20 franchise stores. Shopper’s Stop was founded in 1991 and is based in Mumbai, India. Vishal Retail Limited operates retail stores in India. Its stores sell readymade apparels for men, women, boys, girls, and infants; and a range of household merchandise and other consumer goods, such as footwear, toys, watches, toiletries, grocery items, sports items, crockery, and gift and novelties. As of April 16, 2008, the company operated 104 retail stores. Vishal Retail Limited was founded in 1986 and is based in New Delhi, India. Reliance Retail is the retail business wing of the Reliance business. Many brands like Reliance Fresh, Reliance Footprint, Reliance Time out, Reliance digital, Reliance Wellness and Reliance Jewel come under the Reliance Retail brand. In November 2007, Reliance announced its foray into the branded jewellery market.

Exhibit 8

Company and Capital Market Data

No. of Shares outstanding Dividend yield %

1, 31, 17, 764 1.365

Volatility of stock returns % 1 month 3 month

7.70 8.42

Annual 5 year T Bond rate %

5.77 7

References 1. Trent Ltd., BRICS Securities Ltd., November 4, 2004 2. Trent Ltd., BRICS Securities Ltd., June 2005 3. Trent Ltd., Enam Securities India Research, June 2006 4. Trent Ltd., Deutsche Bank, July 2006 5. Trent Ltd., First Global, October 2005

CASE

15

Financial Instruments Problem Set

DESCRIPTION The problem set covers valuation of some innovative financial instruments.

LEARNING OBJECTIVE To introduce valuation of seven innovative financial instruments.

SUBJECTS COVERED Convertibles, Financing, Security Design.

This case was prepared by Vishwanath S.R. of Institute of Management Technology, Nagpur.

Case 15: Financial Instruments Problem Set 267

Problem 1: Valuation of (Foreign Currency) Convertible Bonds The Indian economy has grown at an average of 8.5 percent over the last four years. This represents the highest four-year average growth in India’s economic history. While non-farm credit has increased by 30 percent over the last two years, corporate capital expenditure has tripled. While the most preferred mode of financing such expenditures has been the equity market, the foreign currency convertible bond route (FCCB) hasn’t lagged behind. Data from Reserve Bank of India suggests that the FCCB issuance which was close to zero in 2002 has risen in a non-linear manner to a level closer to US$ 4.5 billion in 2005. India now accounts for seven percent of global FCCB issuance and 65 percent of Asian issuance in 2006. It is also worth noting that while most of the issues carried zero coupon rates, the conversion price of FCCBs issued by Indian companies were fairly attractive (at a considerable premium to the market price as on the date of issuance). While most FCCBs have been structured in US dollars, instruments are now being engineered in Japanese yen and euros considering the swap rate/FX outlook. The issuance of FCCBs by Indian companies is given below. Year

FCCB Funding ($b)

1998 1999 2000

0 0 0

2001 2002 2003 2004

0.13 0.23 2.36 3.86

2005

4.48

In 1993, Essar Gujarat issued Euro Convertible bonds. The terms of the issue are given below: Face Value = 1000 Maturity = 5 years Currency = US dollars Coupon = 5% Conversion Price = Rs. 62.21 = $1.98 (at the prevailing exchange rate) Conversion Premium = 5% Conversion right = any time up till maturity Call Provision = Company can call the bond at any time after 2 years if dollar price of Essar shares exceeds 130% of the conversion price. Bondholder can opt for conversion. Otherwise, the bond would be redeemed at par. Volatility of stock returns of Essar stock (in dollars) = 40% 5 year yield on US treasury bonds (in dollars) = 6% Dividend yield on the underlying stock = 5% Yield on comparable straight bonds = 8.5%

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Cases in Corporate Finance

Problem 2: PERCS Mandatory convertibles are equity linked securities that pay a higher dividend (compared to the company’s common stock) for a certain number of years and then get converted into common shares on a specified date. These securities have limited capital appreciation potential. In other words, the issuer puts a cap on the appreciation by specifying the conversion terms. Morgan Stanley’s PERCS and PEPS, Merrill Lynch’s PRIDES, Salomon Brothers’ DECS and Goldman Sachs’ ACES are examples of mandatory convertibles. 1 Mandatory convertibles, unlike ordinary convertibles, are often issued and established by large issuers. But the purpose is similar. They help large, high leveraged companies that are seeking equity capital, but want to avoid unnecessary dilution.2 A PERCS is like a covered call write3. Covered call writing is being long an underlying instrument (say, stock) and being short a call on that instrument. The maximum profit potential is equal to the strike price of the option minus the price of the underlying instrument plus the call price. The short call limits the profit potential of the underlying asset but it buffers the long position from the losses by the amount of the premium received. The holders of PERCS enjoy higher dividends for a certain number of years (three, in case of Avon) and in return give up a call option. That is,

Pp = P + PV [Dp – Ds] – Call

where Pp = price of PERCS, Dp and Ds are dividend payments on the PERCS and common stock respectively, P is the current market price of the share and Call is the value of the call option on the company’s stock expiring at the PERCS maturity. A company had issued PERCS three years ago. The instrument is trading at $44 and the underlying stock is trading at $42. The instrument pays quarterly dividend of $0.5 whereas the underlying stock does not. The instrument has two more years to mature. Calculate the value of the call option embedded in the PERCS assuming that the interest rate on subordinated debt of approximately the same duration as the PERCS is 6%.

Problem 3: PEPS Participating Equity Preferred Shares (PEPS) are convertible securities designed to provide investors with high current income and equity participation. These securities mandatorily convert into shares or mature in 3–5 years. The issue price is set equal to the price of the stock into which it converts and conversion premiums range from 18–23%. The current yield on the security is usually 5–7% more than the dividend yield on the underlying common stock. The maximum number of shares PEPS holders will typically receive is one. The characteristics of PEPS are described below. 1. PERCS is the acronym for Preferred Equity Redemption Cumulative Stock; PEPS is Preferred Equity Participation Securities; DECS is Debt Exchangeable for Common Stock; PRIDES is Preferred Redeemable Increased Dividend Securities; ACES is Automatically Convertible Enhanced Securities. 2. Enrique Arzac (1997). 3. A standard derivatives text would discuss options and option strategies in greater detail.

Case 15: Financial Instruments Problem Set 269

n

The conversion price of the PEPS is lower than the conversion price of a normal convertible. Consequently, PEPS has more equity sensitivity than an ordinary convertible.

n

A PEPS has a lower bond floor than an ordinary convertible but a higher coupon.

n

PEPS are usually issued by mid-large cap companies aimed at yield oriented investors.

n

By design, PEPS units offer low downside protection.

n

They mandatorily convert into stock or mature in 3–5 years.

n

n

These are suitable for investors who have a bullish view on the common stock and in need of common stock. Since they have higher equity content than ordinary convertibles, rating agencies consider them ‘equity like’.

n

The issuer gets a tax shield on the coupon.

n

The issue price of the PEPS equals the prevailing stock price.

n

The maturity is usually 3–5 years.

The conversion premium in case of PEPS, unlike ordinary convertibles, is not fixed because the conversion ratio (the number of shares investors receive by converting) is not fixed. It depends on the underlying stock price upon maturity. A typical pay off diagram from PEPS is shown below: The PEPS price is on the Y-axis. A typical design provides 1.0 share if the stock price at maturity is below the issue price, a fraction of a share equal to the ratio of issue price to price at maturity if the stock price is in between issue price and conversion price; and a minimum number of shares (say 0.8), if the price at maturity is above the conversion price. Assume that the issue price is Rs. 20 and the conversion price is Rs. 25. If the ending stock price is Rs. 40, an investor would get 0.8 shares and his investment is worth 0.8 * 40 = Rs. 32. PEPS is a combination of: n

The underlying common stock

n

Plus (out-of-the money call struck on the stock at the conversion price) * conversion ratio

n

Minus at-the-money call struck on the stock at issue price

n

Plus Present value of incremental income over the common dividend

Given below are the details of a PEPS issue by KN energy.

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Cases in Corporate Finance

PEPS issue Price: $43.00 Underlying Common Price: $43.00 Conversion Premium: 20% Minimum Conversion Ratio: 0.8333 Maximum Conversion Ratio: 1.000 PEPS yield: 8.25% Common Yield: 2.6% Annual Coupon Payment: $3.54 Expiration Date: 11/30/2001 Call Protection: Life Evaluate the instrument.

Problem 4: Unbundled Stock Units In December 1988, American Express, Dow Chemical, Pfizer and Sara Lee announced plans to offer “Unbundled Stock Units”. Holders of shares in these companies could surrender their shares in exchange for USUs. In exchange for shares, the shareholders would get three certificates representing ownership of USUs . The units could be unbundled and traded separately. For each USU, the three different claims were: an Equity Appreciation Certificate, an Incremental Dividend preferred Share, a Priority Income Claim. The PIC was entitled to quarterly dividends equal to the current dividend on the common. This dividend was to be continued even if the dividend on the common was increased or decreased. The IDP was entitled to dividend equal to any amount by which the common dividend was raised above the current amount. If the dividend on the common was cut, the IDP received no dividends. The Equity Appreciation Certificate received no dividends. The trust was to be dissolved after 30 years. At that time, the PIC entitled to a balloon specified in the contract. The IDP holders were paid a nominal sum. The EAC holders would receive excess of the stock price above the PIC and IDP guarantees. The cash flows for the 3 claims are given below: PIC

For the 30 years, the PIC would receive quarterly interest payments equal in amount to the current common dividend. It would also get a balloon payment at the end of thirty years. The interest on PIC would be tax deductible for the company.

IDP

For 30 years, the IDP was entitled to quarterly dividend payments equal to the excess of common dividend over the current dividend. After 30 years the IDP would receive a small residual payment.

EAC

No payment for 30 years. After 30 years, EAC would receive the amount by which the stock price exceeded the payments to the PIC and IDP shares.

For the sake of illustration let’s use the American Express data.4 Before the announcement of the issue, American Express shares were trading at $26.875 and had an annual dividend of 84 c per year 4. This example is based on an unpublished manuscript by Prof Jonathan Ingersoll of Yale University.

Case 15: Financial Instruments Problem Set 271

(or 21 c per quarter). The balloon payment was $75. The IDP terminal payment was $2 at the end of thirty years. Other information: Annual interest rate = 9.8 % compounded semiannually. Annual log standard deviation of stock returns = 33%

Problem 5: SIGNs In 1991, the Republic of Austria offered $100 m principal amount of stock index growth notes (SIGNs) in the United States.5 The SIGNs mature in 5.5 years and do not make any interest payments prior to maturity. The single interest payment payable at maturity is equal to the greater of zero and ì Pm - 336.69 ü ý î 336.69 þ

10 í

where Pm denotes the average closing value of the S&P 500 for the 30 business days immediately preceding the second business day prior to the maturity date. The initial offering price was $10 per SIGN. If the value of the index is below 336.69 on the maturity date, an investor receives $10. If the value exceeds 336.69, the investor gets $10 plus $10 * percentage appreciation in the index above 336.69. When the issue was announced, the value of S&P 500 was 336.07. The Republic of Austria has issued US dollar denominated zero coupon bonds maturing in 1995. The yield on this bond is 8.05% p.a. semiannually compounded. The dividend yield on the index is 3.3%. The continuously compounded treasury yield is 7.60%. The volatility implied by S&P 500 call option of relevant maturity is 17.98%. Estimate the value of SIGNs. What other factors would you consider in pricing the instrument?

Problem 6: SPIN On September 1, 1986, Salomon Brothers issued Standard & Poor’s 500 Indexed Note (SPIN) to the public at par for a total of $100,000,000.6 The SPIN is a four-year 2% (payable 1% every six months) coupon bond, which at maturity pays its holder: (1) The principal amount of $1000 per bond and accrued interest plus (2) The excess, if any, of the S&P 500 index value over the initial (exercise) value of the index times some determined multiplier. The exercise price of the call option and the multiplier were fixed at 270.38 and 3.6985. The multiplier represents the number of call options on the S&P 500 index that the investor receives for every $1000 in bond principal held. The option is European type.

5. This is based on John Finnerty, “Interpreting SIGNs”, Financial Management, Summer, 1993. 6. Chen K C, and Stephen Sears, “Pricing the SPIN”, Financial Management, Summer, 1990.

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The value of a SPIN can be written as: SPIN = Bond + (Call option * Multiplier) Assume the following data: Yield on comparable bonds = 8% p.a. S&P 500 price volatility = 18.4% p.a. X = 270.38 r = risk free rate = 6.5% S = current value of the S&P 500 index, adjusted for the present value of the expected dividends over the remaining life of the option. Dividend on S&P 500 index= $8.28 Estimated average annual growth in dividends = 5.4% Current value of S&P index = 250 Estimate the value of SPIN. Use the Black-Scholes dividend adjusted model to calculate the value of call option.

Problem 7: LYONs In 1985, Merrill Lynch introduced a complex security christened Liquid Yield Option Notes (LYON). 7 A LYON is a zero coupon, callable, convertible and puttable bond. The instrument is issued at a discount from the par value. The investor can convert the LYON into a fixed number of shares (conversion ratio). The instrument also provides the investor an option to put the bond at predetermined strike prices on pre-specified dates. Finally, the issuer has the option to call the bond at fixed exercise prices. LYONs are valued on the basis of: n n n n n n n n n

Interest rate of intermediate term bond Stock price Stock price volatility Dividend yield LYON maturity Conversion ratio Face value Call prices, and Put prices

Waste Management Inc. issued LYONs on April 12, 1985. Each LYON had a face value of $1000 and matures on January 21, 2001.8 If the security has not been called, converted, or redeemed (i.e. 7. T Anne Coxe, “Convertible Structures: Evolution Continues”, in Izzy Nelken, ed., Handbook of Hybrid Instruments, John Wiley & Sons, 2001. 8. This is based on McConnell, John and Eduardo Schwartz, “LYON Taming”, Journal of Finance, July 1986.

Case 15: Financial Instruments Problem Set 273

put to the issuer) prior to that date, and if the issuer does not default, the investor receives $1000 per bond. At any time prior to maturity (or on the maturity date), the investor may elect to convert the bond into 4.36 shares of Waste Management common stock. Additionally the investor can elect to put the bond to Waste Management beginning on June 30, 1988, and on each subsequent anniversary date, at fixed exercise prices that escalate through time. The put exercise prices are: Date

Put Price

June 30, 1988 June 30, 1989

$301.87 333.51

June 30, 1990 June 30, 1991 June 30, 1992

375.58 431.08 470.75

June 30, 1993 June 30, 1994 June 30, 1995

514.07 561.38 613.04

June 30, 1996 June 30, 1997 June 30, 1998

669.45 731.06 798.34

June 30, 1999 June 30, 2000

871.80 952.04

Waste Management can elect to call the LYON at fixed exercise prices that escalate through time. Further, Waste Management may not call the bond prior to June 30, 1987 unless the price of the Waste Management common stock rises above $86.01. On the LYON issue date, the Waste Management stock price was $52.125. The LYON call prices are: At issuance June 30, 1986

$272.50 $297.83

June 30, 1987 June 30, 1988 June 30, 1989

$321.13 $346.77 $374.99

June 30, 1990 June 30, 1991 June 30, 1992

$406.00 $440.08 $477.50

June 30, 1993 June 30, 1994 June 30, 1995

$518.57 $563.63 $613.04

June 30, 1996 June 30, 1997 June 30, 1998

$669.45 $731.06 $798.34

June 30, 1999 June 30, 2000 At Maturity

$871.80 $952.03 $1000.00

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Cases in Corporate Finance

On April 12, 1985 the Waste Management LYON was issued at a price of $250 per bond. Assume the following data: Volatility of Waste Management common stock = 30% Interest rate= 11.21% per year Dividend yield of the stock = 1.6% Estimate the theoretical price of the Waste Management LYON.

CASE

16

BGR Energy Systems’ Initial Public Offering DESCRIPTION The case presents the initial public offering of shares by a rapidly growing firm. Students are asked to evaluate the attractiveness of investing in the company’s shares from the investors’ perspective.

LEARNING OBJECTIVE To introduce issues in going public and IPO valuation.

SUBJECTS COVERED Financial Management.

This case was prepared by Vishwanath S.R. of Institute of Management Technology, Nagpur.

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Cases in Corporate Finance

INTRODUCTION In December 2007, BGR Energy Systems announced its decision to go public. Under the plan, the company would offer 8,636,000 shares to the public and 500,000 shares to employees. The maximum subscription amount for retail investors would be Rs. 100,000. The issue would be 100% book built and the price would be in the band of Rs. 425–Rs. 480 per share. Upon completion of the issue the company would get listed on the National Stock Exchange and Bombay Stock Exchange. The company appointed SBI Capital Markets, Kotak Mahindra Capital, UBS Securities India and CLSA India as lead managers to the issue. In book building, a syndicate of investment banks brings an issuer’s equity to the market. One of the investment banks acts as arranger with the rest of the members acting as underwriters. The arranger gives notice of a possible price range. The underwriters sell equity on a best efforts basis. Orders for equity over the stated price range are collected by underwriters and returned to the arranger. Thus, book building assesses not only price, but also volume at each price level. The arranger has the final responsibility of setting the actual price at which equity will be issued and its allocation to investors. The price, thus, reflects market demand. The issue has two components— placement portion and public portion. The placement portion is targeted at institutional investors like Mutual funds. The book runner drafts the preliminary prospectus and files the prospectus with the concerned authority (SEBI) for approval. The preliminary prospectus does not contain the issue price. On obtaining the authority’s approval, the book runner circulates the preliminary prospectus with intermediaries like merchant banks and brokers inviting them to join the syndicate. The revised version of the prospectus indicates the price range. The intermediaries, in turn, circulate the prospectus among their clients and place one order for the total quantity on behalf of all clients. The book runner ‘builds the book’, records information like name of the intermediary, number and price at which the buyer is willing to buy etc. The book is kept open till the issue gets enough orders. The book runner then, in consultation with the issuer, prices the issue, decides on the amount of underwriting and allocation of securities. The final prospectus is filed with the concerned authority (SEBI). The issuer advertises the prospectus announcement in the newspaper the next day. The issue opens 10 days after the announcement and is kept open for three days. Syndicate members send their completed application. Allotment is made partly on a firm basis and partly on the basis of public subscription. If the public portion is undersubscribed, the syndicate members will receive allotment in the public portion also. Likewise, if the issue is over subscribed, the syndicate member gets a refund. Securities are allotted and listed on stock exchanges for trading purposes. The issue of 91.36 lakh equity shares was aimed at raising Rs. 388.3–Rs. 438.5 crore (depending on the price band of Rs. 425–480 per share). The energy equipment business is working capital intensive and requires significant amount of working capital. The company availed a major portion of working capital in the ordinary course of business from its banks as loans. At the time of the issue, the company had received sanction of aggregate fund based limits of Rs. 5,590 million and non-fund based limits of Rs. 8,020 million. As per the lending practice of banks, BGR was required to bring in part of the working capital out of net owned funds. Net owned funds are required is to be provided by shareholders by way of share capital, share premium and reserves and surplus.

Case 16: BGR Energy Systems’ Initial Public Offering 277

The objectives of the issue were to augment long-term working capital requirement, expand the production capacity by establishing additional manufacturing facilities in the Mundra special economic zone in Gujarat, China and Bahrain in the Middle East, and to fund corporate expenditure. The plants to manufacture finned tubes in China and Bahrain were expected to offer proximity to customers in that region. The details of the utilisation of issue proceeds are provided in Table A. Table A

Utilization of Issue Proceeds (Rs crore)

Expenditure items

Total

Estimated

Estimated

cost

amount to

amount to be

be financed

utilised by

from the proceeds March 31 (1) (2) (3)

Augment long-term working capital Establish manufacturing

214.5

2008

2009

125

125

82.6

80

41.8

38.2

and assembly facilities Fund expenditure for general corporate purpose

–

–

–

–

Total

–

–

–

–

The issue consisted of a fresh issue of 4,320,000 equity shares and an offer of sale of 4,816,000 equity share by the promoters. The company entered into an agreement with Citigroup Venture Capital and Reliance Capital for subscription/purchase of 4,320,000 shares (placement of 2,880,000 shares and transfer by promoter of 1,440,000 shares). Pursuant to the above, the company planned to raise between Rs. 122.4–Rs. 129.6 crore. The shareholding pattern before and after the issue are shown in Table B. Table B

Shareholding Pattern Pre-Issue

Promoter and promoter group Pre-IPO investors Public Employees Total

Post-Issue

No of shares

%

No of shares

%

64,800,000

100.0

58,544,000

81.3

0 0 0

0.0 0.0 0.0

4,320,000 8,636,000 500,000

6.0 12.0 0.7

64,800,000

100.0

72,000,000

100.0

278

Cases in Corporate Finance

BGR ENERGY SYSTEMS1 The company was originally incorporated in 1985 as a joint venture between GEA Energietechnik GmbH, Germany and the promoter, Raghupathy, to produce and sell on-line condenser tube cleaning systems, debris filters, and rubber cleaning balls used in Thermal and nuclear power plants. In 1993 Raghupathy and his family members became the sole shareholders of the company and began to expand the range of product and services in the power and oil and gas industries. The company was renamed BGR Energy Systems in 2007. Exhibits 1 through 4 present the financial statements and key ratios for BGR.

Industry Background Power The International Energy Agency estimates that more than $16 trillion or $550 b a year needs to be invested in energy supply infrastructure worldwide over the three decades to 2030, an amount equal to 1% of projected gross domestic product. The average annual rate of investment is projected to rise from $455 b in the decade 2001–10 to $632 b in the decade 2021–30. According to CRIS INFAC, over the next five years, Indian investment in generation capacity is expected to increase, with the central sector accounting for the largest share of such increase. Thus, based on the above expansion, the construction investment is expected to be approximately Rs. 450 billion from 2005–06 to 2009–10. CRIS INFAC expects the impact of generation delicensing in the Electricity Act will be felt largely in the period from 2002–12, given the minimum three year construction period for Greenfield power projects. The Indian government has an objective of achieving “Power for all by 2012”. The development of the power sector traditionally has been the responsibility of the government through the central and state utilities, with a relatively insignificant contribution by the private sector. In order to reduce the gap between demand and supply, the Indian government formulated policies in 1991 for increasing the role of the private sector in power sector. On the other side, the dependence on captive power has been increasing, due to the continuing shortage of power generation and India’s economic growth. Currently, captive power capacity accounts for 16% (19,103 MW), of total installed capacity in India in 2004–05. The Electricity Act provides imputes to captive generators by exempting them from license requirements. This results in an increase in captive power capacity addition by industrial units. Reliability of power supply and better economics are other factors pushing industries to opt for captive generations. On an average, the cost of setting up a 1 MW plant in the private sector is assumed to be Rs. 40–50 mn. for coal-based plants, Rs. 25-40 mn. for gas/naphtha based plants and Rs. 45–60 mn. for hydroelectric plants. Oil and Gas Demand for engineering construction services in the oil and gas is dependent on the level of exploration, production, storage, refining and transportation activity in the oil and gas

1. This description is from the details available on the company’s website.

Case 16: BGR Energy Systems’ Initial Public Offering 279

industry and the corresponding capital spending by energy industry conglomerates. The oil and gas sector has been one of the key industry focus areas of the engineering, procurement and construction industry. The IEA has estimated that India will receive investments in the energy industry of approximately US$ 900 bn. over the next 25 years. Further there will also be investment from the private players like Reliance and Craine Industries.

BGR’S BUSINESSES AND COMPETITION The company operates in two main segments: The company carries out business in two segments: supply of systems and equipment and turnkey engineering project contracting. In the systems and equipment business, the company designs, manufactures, sells and services a range of systems and equipment for power, oil and gas, refinery, petrochemical and process industries. In the turnkey engineering project contracting business, the company carries out engineering, manufacturing, procurement, construction and commissioning of projects in power and oil and gas sector. The company currently executes turnkey contracts to supply balance of plant (BOP) equipment, services and civil work for power generation projects. It supplies all equipment barring boilers, turbines and generators. Having completed various BOP contracts, the company has now changed its focus to engineering, procurement and construction (EPC) contracting, in which BGR designs, engineers and supplies all the equipment needed in the power plant. The company has also an infrastructure business intended to provide construction services and technology. BOP is the weakest link in Indian Power Equipment space as there are very few companies in the field. Typically, the BOP package accounts for 40% of the power plant cost and power producer manufactures about 40% of the BOP equipment in-house, giving BOP suppliers an edge. Order inflow for the industry continues to be strong as the power sector continues to attract investment as well as due to no let down in capacity building in the manufacturing sector. BGR’s business is divided into seven key areas.

Power Plant Business BGR boasts itself to be one of the first companies to develop the BOP concept in India. It provides services for both gas and coal-fired plants. The company manufactures approximately 40–50% of the materials included in BOP, in-house, while the rest of the materials are sourced from outside. After successfully executing a number of BOP contracts, the company has started taking up EPC contracts now. Till date, the power plant division has completed three projects and is currently executing four other. Key competitors in this segment include Bharat Heavy Electricals Ltd (BHEL), Larsen and Toubro (L&T), Tata Projects, Punj Lloyd Ltd and Reliance Energy.

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Captive Power Business Established in 2006, the captive power business provides services to standalone power plants and public utility projects in India. The division executes projects ranging from 25–150 megawatt (MW) and is currently working on two projects. Key competitors in this segment include Cethar Vessels Pvt Ltd (CVL), Tata Projects, Indure Ltd, L&T and Greenesol Power System Pvt Ltd for projects under 50 MW and L&T, BHEL, Thermax, and Tata Projects for projects over 50 MW.

Oil and Gas Equipment Business Started in 2001, the oil and gas equipment business provides range of services mainly those needed to transport oil or gas between well-head and end users. Manufacturing activities for this business are carried out by the subsidiary Progen. Customers include industries focused on oil and gas fields, cross country pipelines, refineries, petrochemicals and power plants. Key domestic competitors include Gastech Process Engineering India Ltd and Multitex Filteration Engineering Ltd. And foreign competitors include Equinox Hydrocarbon Processing Facilities (Canada), Kar group, Kurdistan and Petral Resources from France.

Air Fin Cooler Business The Air Fin Cooler business designs, manufactures and markets air-cooled heat exchangers, aircooled radiators and finned tubes used in oil and gas, power, process and petrochemical industries. The manufacturing facility is located in Panjetty near Chennai. For 18 months ended March 31, 2007, the Air Fin Cooler division clocked a revenue of Rs. 96.9 crore. Key domestic competitors in this segment include Paharpur Cooling Towers and GEI Industrial Systems and international competitors include Samyoung Science and Technology, Korea Heat Exchangers Industries Ltd, FBM Hudson and GEA Battignolles Techniques Termiques.

Environmental Engineering Business The environmental engineering business supplies a range of products and services to customers across India and abroad. Originally started to provide de-aerators domestically, the company has now diversified into water treatment, demineralisation plants for power projects, effluent treatment and recycling and reverse osmosis-based desalination plants. The company claims to have manufactured the largest de-aerator in India for Nuclear Power Corporation facility at Tarapur with a capacity of 3.103 tonne per hour. Key competitors in this segment include BHEL, L&T, Thermax, Allied Energy Systems Pvt Ltd, VATech Wabag, Ion Exchange Ltd.

Case 16: BGR Energy Systems’ Initial Public Offering 281

Electrical Power Business Started in 2003, the Electrical power business works in conjunction with other businesses of the company by supplying electrical systems and equipment for power stations, refineries and petrochemical operations. This line of business undertakes turnkey contracts to set up transmission and distribution networks, gas insulated substations, switchgears and other electrical projects. Key competitors in this segment include ABB Ltd, L&T, Crompton Greaves, Areva T&D, Siemens and IVRCL.

Infrastructure Business The Infrastructure business was set up to address growing demand for products and services for the construction of roads, ports and airports. The company claims to be capable of providing advanced technology for complex infrastructure projects. The focus here is on built-operate-transfer (BOT) projects in India, tunneling, BOT and specialised construction projects related to airports and seaports, and multi-level parking in metro cities. Key competitors in this segment include L&T, IVRCL, Gammon India and Reliance. To strengthen its position among competitors, BGR has entered into alliances for its different business segments. For instance, it has formed global marketing agreements with Samsung (for air-fin coolers); Termomeccanica Ecologia, Italy, for environmental engineering; SK Engineering and Construction, Korea, to jointly explore opportunities in the domestic market for infrastructure projects; and Ariel Corporation for oil and gas equipment. The break-up of revenues from different businesses is given in Exhibit 5. At the time of the issue, BGR had an order book of Rs. 3321.2 crore from all its businesses. Exhibit 6 provides a summary of financial information for some of the major peer companies and BGR.

PREPARING TO GO PUBLIC The process of preparing the company to go public is time consuming. BGR had hoped to take the company public in order to build the brand and raise additional capital. The senior management at BGR was aware that the IPO would be the first day of its public life and believed that it was very important to meet the company’s responsibilities to its new shareholders and for life in the public spot light. The company’s executives spent several months preparing the company to take it public, developing the infrastructure and systems that would enable it to meet the demands placed on public companies. While the IPO brought additional capital, a stock market listing entailed costs like investment bankers fees, stock exchange listing fees, IPO grading fee2 and so on. The issue expenses could be as high as 6% of net proceeds. In addition to the explicit cost of going public, there is also an implicit cost in going public- public issues often list at a price much higher than the issue price, a 2. In 2007, the Securities Exchange Board of India made it mandatory that all IPOs must get a grading from one of the credit rating agencies like Crisil, ICRA, CARE and Fitch. The grading is on a 5 point scale with 1 indicating poor fundamentals and 5 indicating strong fundamentals. The cost of grading works out to Rs. 500,000 and takes about 3–4 weeks.

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Cases in Corporate Finance

phenomenon called IPO underpricing. In the early 90s an average IPO produced 35.3% returns upon listing.3

Market Conditions Apart from the costs of going public, other issues included possibility of poor response from investors and the issue getting listed below the issue price. Companies like Wockhardt and Emaar MGF had to cancel their IPO due to poor market conditions and companies like Reliance Power had seen their issue open at a discount of 35% in the recent past. After a big initial public offering season in 2006, some 150 companies were expected to raise up to $10 billion in new listings in 2007. A combination of near double-digit economic growth, a roaring bull market, and expansion-minded executives had set the stage for another year of highvolume initial public offering activity in India. And this year could be a record-buster, felt the market watchers. One reason was the Bombay Stock Exchange’s benchmark Sensex Index, which delivered a nearly 50% return in 2006, was up about 2.2% by January 2007. More than 30 companies had already filed or received approval from the Securities and Exchange Board of India to raise $6.3 billion in early 2007. About 80 companies raised $5.4 billion in 2006. And some investors were rewarded handsomely, particularly with companies in high-growth sectors. Energy transportation company, Gujarat State Petronet, which operates the second-largest pipeline in India, raised $84 million in its IPO in February 2006 and shares jumped 75% during its first day of trading. IT Service firm Tech Mahindra was another winner. Its shares more than doubled to 743 rupees ($16.84) since its IPO in August 2006. Even so, investing in India IPOs overall has been a risky affair. About 50% of the Class of 2006 initial offerings was trading at break-even or below their listed price in 2007. One of the real disappointments in 2006 was Jet Airways, India’s biggest domestic airliner. It launched trading a year back just as oil prices started their ascent to record levels by mid-year and budget carriers started to pressure margins. Jet’s share price is off 30% to 763.95 rupees ($17.32) from its initial trading price back in February, 2005. No-frills carrier Air Deccan, which also debuted a year back, has fared better and now trades at $3.40 per share vs. a listing price of $2.20. Exhibit 7 presents a list of IPOs in 2007.

Preparing the Prospectus Having selected lead managers, the company’s officials turned their attention to the preparation of the prospectus. The Securities Exchange Board of India (Act) requires all companies to prepare a prospectus for distribution of securities to investors. The contents of the prospectus and 3. Loughran, Tim, Jay Ritter and Kristian Rydqvist, “Initial Public Offerings: International Insights”, Pacific Basin Journal, Vol 2, June 1994.

Case 16: BGR Energy Systems’ Initial Public Offering 283

supplemental financial information are governed by the SEBI regulations. The prospectus is an important document. The company and its management team are liable for information provided in the prospectus and for omission of any material information. The company’s investment banker drafts the prospectus after conducting due diligence investigation of the firm in consultation with the accountant and the legal counsel. The prospectus gives the details of the company’s business and management, names of principal shareholders and their level of ownership, audited financial statements, underwriting agreement, information on the use of proceeds, dividend policy and capitalisation. A discussion of management’s perception of all risk factors and competitive position is also included. The company has to file the draft prospectus with SEBI through a merchant banker. After the preparation of prospectus, the merchant banker along with the due diligence certificates and other compliances sends the same to SEBI for vetting. On receiving the same, the Board scrutinises it and may suggest changes within 21 days of receipt of prospectus. A company can come out with a public issue any time within 365 days from the date of the letter from SEBI, or if no letter is received from SEBI, within 365 days from the date of expiry of 21 days of submission of prospectus with SEBI. If the issue size is up to Rs. 20 crores, then the merchant bankers are required to file prospectus with the regional office of SEBI falling under the jurisdiction in which registered office of the company is situated. If the issue size is more than Rs. 20 crore, merchant bankers are required to file prospectus at SEBI, Mumbai office. A prospectus is also filed with the concerned stock exchanges along with the application for listing its securities. After making changes, if any, made by SEBI/Stock Exchanges, the final Prospectus duly signed by all the Directors (or by Authorised Representatives through its Power of Attorney) must be filed with the Registrar of Companies (ROC) along with the copy of all material documents. The ROC may suggest changes which should also be reported to SEBI / Stock Exchanges. The date on which ROC Card is obtained is the date of the prospectus. The draft offer document filed with the SEBI shall be made public for a period of 21 days from the date of filing the offer document with the SEBI. Once the registration statement is approved by the SEBI, the marketing of the offering begins. After the preparation of the prospectus, the company sets out on a road show to address potential investors. A typical road show lasts 3–4 weeks. A timeline diagram of the IPO process is given in Exhibit 8. Once the stock is listed, the underwriter has the obligation to stabilise the price and provide analyst recommendations.

Pricing and Valuation Finally, the company had to make sure the issue price was right. If the price were to be low, the issue would be hopelessly oversubscribed whereas if the price were to be high there was a possibility that the stock would list at below the issue price. In determining the initial public offering price, the factors that would be considered are the prevailing market and general economic condition, the history of and prospects for the company and industry, an assessment of the company’s management and its operating results and the market prices of securities and certain financial and operating information as they relate to market valuations of companies engaged in activities similar to those of the company. The company could either perform a discounted cash flow valuation or compare the valuation multiples with those of the peer group companies. The DCF approach involved forecasting of cash flows to equity and estimation of appropriate discount rate to discount cash flows. The value of equity thus arrived, is divided by the

284

Cases in Corporate Finance

number of shares outstanding to arrive at the intrinsic value. Exhibit 9 presents the free cash flow to equity in 2007. Under the relative valuation, the objective was to find out if BGR was under or over valued relative to peer companies. Credit Rating agency, ICRA assigned a grading of 3 to the BGR IPO suggesting “average fundamentals” and four brokerage houses- Asit C Mehta Investments, Sharekhan, Mansukh Investments, and Jaypee Capital Services gave a “subscribe” recommendation. Exhibit 1

Income Statement (Rs crore)

Particulars

2002

2003

2004

2005

March 2007*

31, June 30, 2007**

Net sales Total operating expenses Operating profit

125.2 110.1 15.1

158.3 142.6 15.7

270.7 249.7 21.0

295.8 267.3 28.5

786.8 699.0 87.8

239.6 210.1 29.5

Other income Interest Depreciation

0.2 5.2 1.7

0.4 4.7 1.8

0.2 4.7 2.1

-0.1 6.1 3.2

0.3 18.0 8.9

0.6 3.5 1.3

PBT Ta x Reported PAT

8.4 2.0 6.4

9.6 2.0 7.5

14.4 3.2 11.2

19.0 5.4 13.5

61.3 21.3 40.0

25.2 7.8 17.5

Adjustments Adjusted PAT OPM

0.1 6.5 12.1

0.1 7.6 9.9

0.0 11.2 7.7

-0.1 13.4 9.6

0.9 40.8 11.2

0.0 17.5 12.3

5.2

4.8

4.1

4.5

5.2

7.3

NPM

Source: Company, analyst reports.

Exhibit 2

Balance Sheet (Rs crore)

Particulars

2002

2003

2004

2005

March 31, 2007*

June 30, 2007**

Share capital Reserves and surplus Net worth

5.4 12.4 17.8

5.4 18.7 24.1

10.8 21.9 32.7

10.8 32.8 43.6

10.8 72.1 82.9

10.8 88.6 99.4

Total debt Minority interest Capital employed

46.0 0.1 63.9

53.0 0.1 77.1

56.2 0.1 89.1

88.9 0.2 132.8

246.4 1.5 330.9

267.7 2.1 369.3

Net fixed assets CWIP Intangible assets

19.4 0.0 0.5

18.5 0.0 0.5

24.5 0.2 0.5

33.0 0.6 0.5

38.4 3.0 0.5

43.3 1.0 0.6

Investments Net current assets Capital deployed

0.1 43.9 63.9

0.1 58.1 77.1

0.1 63.8 89.1

0.1 98.6 132.8

0.3 288.7 330.9

0.5 323.8 369.3

*Eighteen months

**Three months

Case 16: BGR Energy Systems’ Initial Public Offering 285

Exhibit 3

Cash flow Statement (Rs m)

Particulars

FY02

Net cash flow from Operating activities Net cash flow from Investing activities Cash Flow from Financing activities Net (Decrease)/Increase in cash Cash at the Beginning of the year Cash at the end of the year

FY 03

FY 04

FY 05

FY 07 (18M)

154.53 (6.40) (145.08)

6.61 (9.64) 10.01

264.01 (85.29) (23.13)

(156.88) (128.66) 241.79

(462.50) (169.71) 1,376.20

Q1FY08 (4.12) (35.74) 175.41

3.05 63.16 66.21

6.98 66.22 73.20

155.59 73.20 228.79

(43.75) 228.79 185.04

743.99 185.03 929.02

135.55 929.02 1,064.57

Source: Company, Analyst reports.

Exhibit 4

Key Financial Ratios (2002, 03, 04, 05, 07 (18 m), and Q1 FY08)

Profitability Ratios Operating Profit Margin (%) PAT Margin (%) RONW (%)

12% 5% 36%

10% 5% 31%

8% 4% 34%

10% 5% 31%

11% 5% 48%

12% 7% 18%

ROCE (%)

21%

19%

21%

19%

24%

8%

Adjusted EPS (Rs.) CEPS (Rs.)

11.66 14.82

13.75 16.97

10.26 12.19

12.44 15.42

37.00 45.23

16.19 17.41

BV Per Share (Rs.) P/E (x) at Lower band P/E (x) at Higher band

32.43 36.45 41.17

43.82 30.92 34.92

30.06 41.40 46.76

40.06 34.16 38.58

76.78 11.49 12.97

92.04 26.25 29.65

P/BV (x) at Lower band P/BV (x) at Higher band

13.11 14.80

9.70 10.95

14.14 15.97

10.61 11.98

5.54 6.25

4.62 5.21

Debt/Equity

2.59

2.20

1.72

2.04

2.97

2.69

Current Ratio Quick Ratio

2.19 1.96

2.32 2.06

1.96 1.78

2.19 1.96

1.98 1.88

1.90 1.83

Inventory Turnover (x)

14.8

13.6

21.9

15.8

26.8

9.3

Debtors Turnover (x) Fixed Asset Turnover (x)

2.2 4.3

2.1 5.2

3.6 7.0

2.5 6.0

2.1 12.4

0.6 3.7

Per Share Data

Capital Structure Ratios

Turnover Ratios

Source: Analyst reports.

286

Cases in Corporate Finance

Exhibit 5

Break-up of Revenues

Source: Company, analyst reports.

1 2 3 4

= Power Projects Business = Captive Power Business = Oil and Gas equipment = Air fin coolers business

Exhibit 6

5 = Environment Engineering Business 6 = Electrical Projects 7 = Infrastructure Business 8 = Progen (subsidiary)

Peer Comparison

Company Name

EPS

P/E

EBITDA Margin %

NAV

ROE %

ABB Alstom Projects Areva T&D

19.40 17.20 40.50

74.40 54.60 45.50

12.16 12.32 13.46

55.70 49.50 77.70

32.90 34.60 24.40

BHEL Crompton Greaves Thermax

50.40 6.00 19.40

47.90 59.90 43.50

21.31 10.36 14.61

179.50 18.00 48.60

25.2 32.60 35.50

BGR Energy Systems Ltd.

4.15

102.40-115.66

11.15

12.80

39.00

Company

Market Cap

Order Book

Market Cap/Order Book

ABB India Areva BHEL

33967.8 10839.3 135169

4901.1 2200 72600

6.9 4.9 1.9

Crompton Greaves L&T Siemens Thermax

15672.6 121619 31029.7 10557.8

5211 44000 9407 3234

3 2.8 3.3 3.3

BGR @ Rs. 425 BGR @ Rs. 480 Source: Analyst reports.

3060

3321.2 3321.2

0.9 1 (Contd.)

Case 16: BGR Energy Systems’ Initial Public Offering 287

(Exhibit 6 Contd.) Company Data and Industry P/E Multiple Year Ended

EPS

Weight

2004

1.7

1

2005 2007

2.05 4.15

2 3

Weighted Average

3.04

Industry P/E Highest Lowest Industry Av

Exhibit 7

74.40 43.50 56.24

List of IPOs in 2007

IPO

Issue Open

Issue Close

Price Range (Rs)

Precision Pipes & profiles company Porwal Auto components Manaksia Ltd

17–Dec 17–Dec 17–Dec

20–Dec 20–Dec 19–Dec

140–150 68–75 140–160

Aries Agro Brigade Enterprises BGR Energy

14–Dec 10–Dec 5–Dec

19–Dec 13–Dec 12–Dec

120–130 351–390 425–480

eClerx Services Burnpur Cements Jyothi Laboratories

4–Dec 8–Nov 22–Nov

7–Dec 3–Dec 27–Nov

270–315 12 620–690

Kolte Patil developers Edelweisss Capital Mundra Port and SEZ Allied Computers International

19–Nov 15–Nov 1–Nov 19–Oct

22–Nov 20–Nov 7–Nov 23–Oct

125–145 725–825 400–440 12

Rathi Bars

18–Oct

23–Oct

35

Source: National Stock Exchange.

Exhibit 8 S.No.

IPO Time Line – IPO Calendar Day No.

No.of Days

A 1 2

Event

T-0 T-1

1 1

Share Transfer to increase number of members to 7 Board Meeting and Resolution

3 4 5

T-2 T-23 T-24

21 1 1

Notice for shareholders meeting Shareholders meeting and special resolution Filing of Form 23 with ROC

6

T-25

1

Filing of Statement in Lieu of Prospectus with ROC (Contd.)

288

Cases in Corporate Finance

(Exhibit 8 Contd.) S.No.

Day No.

No.of Days

Event

7

T-26

1

Amendment of MOA & AOA

8 9 10

T-27 T-32 T-33

5 1 30

Conversion into a Public Limited Company Notice for Statutory Meeting Statutory Meeting and Statutory Report

11 B 1

T-63

1

T-64

1

Copy of Statutory Report to ROC Preparation and Regulatory Approvals Board Resolution for issue of shares

2 3 4

T-65 T-86 T-87

21 1 10

Shareholders Resolution Filing Form 23 with ROC Appointment of Merchant Banker

5 6 7

T-97 T-127 T-137

30 10 5

Due Diligence Audit by the merchant banker Preparation of Prospectus In Principle approval for Listing

8 9 10

T-142 T-167 T-174

25 7 5

Vetting of Prospectus SEBI Compliance. ROC Card

11 C 1

T-179

2

1% Security Deposit and Promoters Contribution Marketing & Research Investor Targeting

T-181

3

2 3 D

T-184 T-191

7 7

Research and Sales Calls Marketing Efforts Execution

1 2 3

T-198 T-208 T-211

10 3 10

Book Open and Close for Book Building Price Discovery Public Offer opens

E 1 2

T-221 T-231

10 7

Post Issue Obligations Registry works Allotment of shares

3 4 5

T-238 T-243 T-246

5 3 5

Administrative Duties Return of Allotment Listing and Trading of Securities

6 7 8

T-251 — —

— — —

Commencement of Trading Investor Grievance Handling Refund of security deposit

Exhibit 9

Free Cash Flow to Equity as on March 31, 2007 (18 months), Rs million Net Income – Capital Expenditure + Current depreciation – Change in working capital + Increase in long term debt = Free Cash flow to equity

Source: Analyst reports.

399.64 137.28 88.80 1156.93 1575.14 769.37

Case 16: BGR Energy Systems’ Initial Public Offering 289

Exhibit 10

Capital Market and Comparable Company Data

Comparable Company Data Energy Equipment

Financial

Market Cap.

Companies

Year Ending

Debt

Beta

BHEL Alstom Projects L&T

2007 2007 2007

89.33 2.25 2077.75

1.1041 1.0521 1.1138

55334.12 2650.64 45635.74

Thermax ABB India Areva T&D

2007 2007 2007

0.00 0.56 101.21

0.5945 0.8079 0.8422

4568.81 32046.70 11491.15

Siemens Crompton Greaves

2007 2007

1.53 270.04

0.9182 0.8880

31922.72 7310.84

Rs. Crore

as on FY end Rs. Crore

Source: Capitaline.

Capital Market Related Data 10 Year T Bond Rate

7%

Market Risk Premium

9%

References 1. Mehta, Chintan, “BGR Energy Systems IPO Note”, Asit C. Mehta Investment Intermediates Ltd., December 4, 2007 2. BGR Energy Systems IPO Flash, Sharekhan, December 3, 2007 3. BGR Energy Systems Ltd.: Power play, Mansukh Investment and Trading Solutions 4. BGR Energy Systems, Jaypee Capital Services

CASE

17

Shree Cement Ltd.

DESCRIPTION SCL is faced with a need for increased bank financing due to the setting up of a captive power plant and general increase in production. The case allows students to practice ratio analysis and determine maximum permissible bank finance.

LEARNING OBJECTIVE To introduce the assessment of limits by banks in the context of working capital lending.

SUBJECTS COVERED Financial Management, Working Capital.

This case was prepared by Vishwanath S.R. of Institute of Management Technology, Nagpur.

Case 17: Shree Cement Ltd.

291

In April, 2001, Murli Krishna, a Relationship Manager at ICICI Bank Ltd sat down to review an enhancement-cum-renewal of credit line for Shree Cement Ltd (SCL). The bank first developed a relationship with SCL in November 1999, when it financed a Working Capital Loan along with 4 other banks. The company had maintained a good relationship with the bank. Exhibits 1 and 2 provide the details of working capital facilities used by SCL and an operational review of the account. The company had embarked on a captive power plant of 36 megawatts. SCL had continuously modernized and upgraded its production facilities. It is one of the lowest cost producers of cement in India. For 2001–02, working capital requirement of the company had been assessed at Rs. 65 crore of fund based and Rs. 49.20 crore of non-fund based limits. The company approached ICICI bank to enhance fund-based limits from Rs. 11.80 crore to Rs. 17.80 crore and renew non-fund based limits at the existing level.

COMPANY BACKGROUND SCL was incorporated in 1979 for setting up a cement plant with a capacity to manufacture 600,000 tonnes per annum near Ajmer in Rajasthan. The plant commenced commercial production in 1985. The capacity of the plant was subsequently expanded to 760,000 tonnes per annum. In 1995, the company undertook an expansion scheme for setting up a second cement plant with a capacity of 12.4 lac tonnes per annum at its existing location, adjacent to the first plant. The second plant commenced commercial production in November 1997. The company undertook a modernisationcum-debottlenecking scheme in the second plant in 2000–01. The rated capacity of SCL had increased by 6 lac tonnes per annum with effect from December 2001. The company had an aggregate capacity of 26 lakh tonnes per annum of cement. Its major production performance indicators met international benchmarks. SCL had an installed capacity of 2 MT and operating at 125–135% of capacity. It had the flexibility to manufacture both varieties of Cement—OPC and PPC.

Manufacturing Process SCL had 2 dry process cement manufacturing plants namely, Shree Cements and Raj Cements with oreheater, precalciner, rotary kiln for producing OPC and PPC confirming to BIS (Bureau of Indian Standards) specifications. M/s FL Smidth & Co., Denmark, supplied Shree Cement plant of 7.60 L tonnes p.a., through their Spanish subsidiary FLT Ltd and their Indian licensee L&T Ltd. The new plant, “Raj Cements” had state of art technology with 6 stage pre heater (as against conventional 4–5 stage) and had an annual rated capacity of 12.4 lakh tonnes. The raw material, i.e., limestone is procured from mines taken on lease by SCL from the Govt. of Rajasthan. The lease was for a period of 20 years beginning 1980, which is further renewable for the same period. These mines covering an area of 10 sq. km in Beawar, have adequate reserves (64.8 mn tons of limestone), which is sufficient to meet the requirements of both the plants for the next 30 years. The company had already applied for extension of the lease period and was confident of getting the same shortly.

292

Cases in Corporate Finance

The mining cost is borne by the lessee (SCL) and royalty at a fixed rate is paid to the Govt. of Rajasthan. Gypsum is obtained from the Rajasthan State Mineral Development Corporation Ltd (RSMDC) and coal is either imported or purchased from suppliers in Bihar. However, due to lower cost and better calorific value, the company has started using pet coke mainly procured from Reliance Petroleum. SCL proposed to use 75% indigenous pet coke and 25% imported coal as fuel mix for production of clinker. The arrangements for supply of other raw materials such as pozzolana, sweetener, laterite, etc were considered to adequate. SCL was putting up a captive power generation facility to meet its requirement to avert disturbances caused by power breakdowns and to minimise power costs. SCL’s requirement of energy, per ton of cement produced had declined from 88 units/tonne in 1996-97 to 78 units/tonne in 2000–01. According to a study of cement factory performance conducted by Whithopleman and the International Cement Review, SCL’s plant had the lowest power cost per tonne of cement in the world and is also one of the best in terms of thermal efficiency. To ensure adequate water supply, SCL had made their own arrangements by digging wells in the factory premises as also by procuring water from hired wells in the nearby areas. Limestone is mined from the captive quarry by blasting. It is then fed into the crusher. Limestone, which is in the form of boulders, is broken into smaller units. The blended limestone is reclaimed and stored in a hopper. Weigh feeders regulate the proportion of limestone and additives to be mixed to get the desired raw material mix. Hot exhaust gases from the kiln are used to dry the raw material. Coal is crushed to the desired size by coal crusher. The raw meal is continuously blended to reduce quality variation. The blended raw meal is fed to the kiln. The kiln feed is controlled and the quality of blended material is checked periodically. The burned semi solid product that emerges from the kiln in the form of nodules is called clinker. This is then discharged to a cooler. The ground clinker and ground slag are stored separately. They are then weighed and mixed to ensure uniform particle distribution to give best quality of cement.

Technology The company’s plants are relatively younger and represent a more contemporary technology viz. Rotary Kiln Technology. The company had constantly modernised and upgraded its facilities to remain abreast of the latest technological developments in the cement industry. The plant has the world’s highest kiln productivity.

Raw Materials Limestone, coal / pet coke, gypsum, clay, iron ore, and fly ash are the main raw materials. Limestone is mined from leased mines while other raw materials are sourced from suppliers. Other inputs like manpower and water are easily available. As a result of superior efficiency, the company was able to post higher profits even during recessionary phases when realisations were lower. To reduce cost as well as to move towards ecofriendly and energy saving methods, SCL undertook a modernisation scheme envisaging substitution

Case 17: Shree Cement Ltd.

293

of the use of conventional fuel (coal) with petroleum waste (pet coke), which was successfully implemented. SCL has an extensive sales network comprising a centralised marketing office in Delhi, supported by 70 depots. Its brands, “Shree Ultra”, “Shree TUFF CementO”, are well accepted in the northern and western markets. SCL has emerged as an established player in the cement industry and its modern and technologically superior production facilities are expected to enhance its competitive ability.

THE CEMENT INDUSTRY The cement industry in India is worth more than Rs. 25,000 crores. India is the second largest producer of cement in the world after China. The industry, till 1980, was under strict government controls with capacity additions being subject to licensing as also pricing and distribution being controlled by the government that resulted in slow growth of the industry. The controls were gradually relaxed during the 1980s with prices and distribution being decontrolled in 1989 and the industry being delicensed in 1991. The Indian cement industry is a perfect example of a fragmented structure. Spread across the length and breadth of the country, there are 113 large plants, owned by 53 companies, with an installed capacity of 110.10 million tonnes (MT) per annum. The cement production in FY 2000–01 was 93.42 million tonnes as against 94.01 MT in FY 1999–2000, indicating negative growth of 1%. Over the previous two-three years, many multinational companies like Lafarge, Blue Circle, and Italcementi had entered the Indian market mainly by acquiring existing capacities leading to consolidation within the industry.

Demand Demand for cement is linked to economic activity and primarily dependent on the construction industry. There has been a drop in the demand of cement due to a slowdown in the economy and a lull in construction activity during the period 1997–99. The unfavourable demand scenario had been further compounded by the fact that government purchase of cement in 1997–98 had come down from 30% to 20% of the total demand. This resulted in an intense downward pressure on prices. The situation was amplified further by increased input costs mainly on account of higher prices of coal, power and petroleum products besides freight costs.

Supply The Indian Cement industry is highly fragmented with 53 companies owning 113 large-scale cement plants. The capacity can be broadly divided into large and mini cement plans and the industry is highly regional in nature with a few dominant producers in each regional market. The formation of these regional markets is determined on their proximity to limestone deposits, which is the principal raw material for production of cement. The availability of limestone is concentrated in a few states such as Madhya Pradesh, Rajasthan, Gujarat, Maharashtra and Andhra Pradesh, implying that cement plants have to be located in these states. Madhya Pradesh accounts for 24% of the installed capacity, Andhra Pradesh 15% and Rajasthan 14%.

294

Cases in Corporate Finance

The capacity, production and consumption of cement for the previous four years ended March 31st, 2001 are given in Table A: Table A

Capacity, Production and Consumption of Cement (MT) 1998

1999

2000

2001

Operative Capacity

94.00

106.60

104.00

110.10

Production Capacity Utilisation Consumption

76.70 81.6% 73.90

81.70 76.6% 79.80

94.00 90.30% 92.00

93.40 84.8% 90.00

The aggregate installed capacity in view of the various capacity expansions proposed was expected to be as under: Capacity as on

Total Capacity (MT)

2002 2003

121.40 128.70

2004

140.90

International Market Cement is a low value bulk commodity signifying that the incidence of the freight cost on cement is very high. International cement prices are also higher than India and therefore, imports threat is low. The ex- factory price of cement in Thailand is Rs. 2100 per tonne and Rs. 3450 per tonne in USA compared to the prevailing price of Rs. 2250 per tonne in India. India, therefore, can be considered as competitive in terms of cost of production of cement.

Regulations The cement industry continues to be regulated in terms of high excise and import duty. The duty structure of excise and import duties on cement is given in Table B: Table B

Excise and Import Duty Structure 2001–02 Budget

2000–01 Budget

Excise duty (Rs per ton) Cement—Large Plants

350

350

Cement—Mini Plants Import Duty

200 25%

200 38.5%

There are no government regulations on the Cement industry since 1991. The WTO impact on cement industry is expected to be insignificant.

Case 17: Shree Cement Ltd.

295

Outlook The over supply situation in the market was expected to see correction with no major capacities in the pipeline and outlook on cement prices appear to be positive. The cement manufacturers joined hands to cut production by 10%–15% across all regions in a bid to stem the fall of cement prices during monsoon. Having sorted out their differences, the manufacturers also increased the prices by Rs. 15–Rs. 18 per bag in the non-trade segment from July 1st, 2001 and prices in the trade segment were hiked by Rs. 5–Rs. 8 per bag from July 4th, 2001. The government’s ambitious road building programme and promise to invest heavily in housing, augured well for the cement industry. The union budget in 2001 gave a boost to the cement sector by allocating higher funds for rural housing. Additionally, Rs. 54000 crores was allocated for the national road development scheme for construction of 10,000 km of 4-lane roads for connecting the four metros. From long-term perspective, the government’s ambitious proposal to widen the road network between the four metros cities of the country—The Golden Quadrilateral—and introduce north-south as well as east-west corridors are expected to generate large demand for cement across the country. Hike in credit flow to the agricultural sector was also expected to lead to increased spending on housing construction. Rural housing was, therefore, expected to continue fuelling the demand growth especially in northern states of Uttar Pradesh, Punjab, Haryana and Delhi. Rebuilding of the areas affected by the January 2001 earthquake in Gujarat was also expected to boost cement demand. As major capacity additions were expected only by FY 2002–03, the demand growth was expected to lead to firming up of prices in the medium term.

SCL’s Competitive Position In 2000–01, SCL had a market share of approximately 12% in the northern region of the country. Its major competitors are Ambuja Cement Limited and Mangalam Cement Limited. SCL has an extensive sales network through a central marketing division at Delhi, 15 regional offices, 70 depots and 2200 dealers. SCL is an important player in the northern and western markets, particularly Rajasthan, Haryana, Punjab, Uttar Pradesh and western Madhya Pradesh. Its brands are well accepted in the market. About 25% of the company’s output is sold directly to the government institutions. The company’s plant is ideally located and fully equipped with modern day production facilities.

Present Proposal SCL enjoyed fund-based limits of Rs. 58 crores and non-fund based limits of Rs. 49.20 crores from a consortium of banks with State Bank of Bikaner and Jaipur in the lead. The company sought enhancement of fund-based limits to Rs. 65 crores. Non-fund based limits were to be maintained at the existing level. ICICI Bank’s share in the consortium was 20%. SCL enjoyed a fund-based limit of Rs. 11.80 crores and a non-fund based limit of Rs. 10 crores from the bank.

296

Cases in Corporate Finance

SCL had requested for 50% of fund-based limits as cash credit and 50% as Working Capital Demand Loan instead of the existing 20%–80%. Other banks were inclined to consider the request favourably. The limits were to be allocated as in Exhibit 3. The key financial indicators and the details of inventory and receivables for SCL are provided in Exhibits 4 and 5. Exhibit 1

Working Capital Facilities Availed from Banks

As on 31/10/01 Name of the bank SBBJ SBI ICICI Bank UTI Bank Union Bank Total

Facility

Limit

(%)

Balance

Fund Non-Fund Fund Non-Fund Fund Non-Fund Fund Non-Fund Fund Non-Fund Fund Non-Fund

23.60 19.60 11.80 9.80 11.80 10.00 5.90 4.90 5.90 4.90 59.00 49.20

40%

20.84 5.70 10.50 — 11.78 — 4.97 1.25 5.99 — 54.08 6.95

20% 20% 10% 10% 100%

Rs Crores Overdue, if any — — — — — — — — — — —

Source: ICICI Bank.

Exhibit 2

Operation Review

(For the period 15 th November 2000 to 27 th November 2001) 1

2 3

4 5 6

7 8

SECURITY POSITION (a) Whether drawing in the accounts were within the sanctioned limits. (b) Insurance Cover (c) Position vis-à-vis creation of security TERM LOANS CASH CREDIT ACCOUNT (a) Credit Summation (b) Debit Summation (c) Average Utilisation (d) Whether any cheque was returned for financial reasons during the year? (e) Interest Income (f) Yield INLAND BILLS PURCHASED / DISCOUNTED FOREIGN EXCHANGE BUSINESS LETTERS OF CREDIT (a) Total amount of LCs (b) Whether bills under LCs retired promptly (c) Commission GUARANTEES ANY OTHER COMMENTS

Source: ICICI Bank.

Yes Inadequate Completed Not applicable Rs. 137.53 crores Rs. 143.60 crores Rs. 9.27 crores No Rs. 1.05 Crore 11.33% NIL NIL Rs. 0.97 crore Yes Rs. 0.05 crore NIL NONE

Case 17: Shree Cement Ltd.

Exhibit 3

297

Allocation of Limits

Name of the Bank

Present Limits As on 31-03-01

%

Proposed Limits For FY 2001–02

(Rs Crore) %

Fund

Non-Fund

Fund

Non-Fund

Based

Based

Based

Based

SBBJ

23.6

19.60

40

23.6

19.60

36.30

SBI UTI Bank Union Bank

11.8 5.90 5.90

9.80 4.90 4.90

20 10 10

11.8 5.9 5.9

9.80 4.90 4.90

18.15 9.10 9.10

ICICI Bank Total

11.8 59.0

10.00 49.20

20 100

17.8 65.0

10.00 49.20

27.35 100

Source: ICICI Bank.

Exhibit 4

Key Financial Indicators (Rs crore)

Sr. No.

Year Ended/ Ending June 30 th

1 2 3

Net Sales EBITDA Profit Before Tax

4 5 6

Profit after tax Net cash accruals EBITDA/sales (%)

15 40 19.90

19 46 18.95

26 46 19.98

39 60 23.08

60 84 25.82

7 8 9

PAT/Sales (%) Dividend/PAT (%) Gross Block

3.75 — 772

4.06 — 810

5.45 22.79 835

8.04 18.21 900

11.60 11.89 965

10 11 12

Net Block Paid-up Capital TNW

611 35 212

622 35 231

628 35 232

637 35 264

643 35 317

13 14 15

Group Investments Adjusted TNW LTD/TNW

— 212 1.50

— 231 1.06

— 232 1.32

— 264 1.23

— 317 1.06

16 17 18

DFS/TNW TOL/TNW Current Assets

1.35 1.97 171

1.36 1.66 197

1.31 1.70 146

1.35 1.65 190

1.19 1.37 203

19 20 21

Current Liabilities Net Working Capital Current ratio

133 38 1.29

140 58 1.41

127 19 1.15

166 25 1.15

156 47 1.30

No of Months

2000 Actual

2001 Estimate

2001 Actual

2002 Estimate

2003 Estimate

12

12

12

12

12

409 81 15

478 91 21

479 96 26

486 112 42

516 133 65

Source: ICICI Bank.

Note: TNW excludes revaluation reserve. However, it is included in the gross and net block figures. Revaluation reserve as on June 30, 2001 was Rs. 165.30 crores.

298

Cases in Corporate Finance

Exhibit 5

Inventory, Receivables and Creditors Levels (Rs. In crore)

Assets/Liabilities Actual (30.0.01) Months Amount

Estimated (30.06.02) Months Amount

Estimated (30.06.03) Months Amount

Raw Material – Indigenous

0.74

7.66

1.35

13.11

1.35

13.27

– Imported Stock in process Finished goods

14.84 0.05 0.25

0.94 1.19 5.73

6.62 0.50 0.66

10.09 11.21 14.40

10.23 0.50 0.67

15.64 11.41 14.81

Receivables – Domestic – Exports

0.59 —

27.17 —

0.88 —

42.00 —

0.89 —

45.00 —

Consumables – Indigenous – Imported

— 21.04

— 19.20

— 20.00

— 26.00

— 20.00

— 27.00

1.17

10.85

1.36

16.93

1.78

21.16

Trade creditors Source: ICICI Bank.

CASE

18

Fujairah Bank

DESCRIPTION A credit analyst at a major UAE Bank receives a proposal from an existing customer for enhancement of working capital limits. The case provides an understanding of the commercial banking industry and the role of a loan officer, and asks the student to assess a proposed loan. The case provides an opportunity for financial statement analysis.

LEARNING OBJECTIVE To introduce issues credit analysis and working capital estimation.

SUBJECTS COVERED Financial Management, Financing, Working Capital, Loan Evaluation.

This case was prepared by Vishwanath S.R. of Institute of Management Technology, Nagpur.

300

Cases in Corporate Finance

In early 2006, Louna Zaarour, a credit analyst with Fujairah Bank received a proposal from Azmi garments, an existing client, to enhance Murabaha (working capital finance) facility by AED2 m.1

COMPANY BACKGROUND The Azmi group was established in 1970 in India. Over the years, it expanded and relocated to the UAE and set up factories in the Emirates of Ajman and Sharjah in 1988 as a limited liability company with a paid up capital of AED 250,000. The company has three shareholders. Since then, the company has not only grown in size in the UAE, but also has set up manufacturing facilities in Kenya and Jordan. The company is managed by Mohammad Azmi with the help of his son. They are the two beneficial shareholders in the company. The company employs 250 workers at the factory and another 16 in staff functions. The company is engaged in the manufacturing of knit and woven garments. These garments are exported to the US against orders from their existing clients. Azmi garments has a stable customer base that includes some of the most quality conscious buyers and merchandisers in the world like J C Penny, Wal Mart, Tommy Hilfiger, Hangtem and Fubu Gap. The company manufactures a wide range of garments as per the customer specifications. About 85% of the company’s exports are backed by sight LC and 15% are against delivery.2 The US market represents 80% of exports and the remaining are from Europe. The basic raw materials are imported from Taiwan, China, India, Pakistan etc. Synthetic fabric is imported from Far East and cotton from the Indian sub-continent. The orders received from buyers by export LC’s for UAE and Kenya are routed only through UAE banks for better control. The fabrics required for the Kenya facility is shipped directly from suppliers to Kenya. Also, the finished goods are shipped directly to buyers as per LC instructions.

Banking History with Fujairah Bank Azmi Garments had been banking with Fujairah Bank since 2003 and was approved financial facility of AED 3.75 m to purchase the garments factory against mortgage of the property (land + factory) in favour of the bank valued at AED 9.5 m and personal guarantees and post-dated checks drawn on their account with Fujairah Bank. This facility, in Islamic Finance parlance, is termed Ijarah. Ijarah means lease, rent or wage. Generally, Ijarah concept means selling benefit or use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer, the use of service of assets/equipments such as plant, office automation, motor vehicle for a fixed period and price.

1. The names of the entities and persons have been changed to preserve confidentiality. 2. That is, payment is made against delivery.

Case 18: Fujairah Bank

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The turnover details of the account for the previous 12 months are provided in Table A. Table A Turnover of Azmi Account Current Account

Turnover

Maximum

Minimum

Credit Debit Average balance

AED 9m AED 9.94m AED 30,000

3.33 m 2.737m

85,000 6000

Fujairah Bank h]ad earned a commission of AED 28,000 from guarantees and letter of credit issued and an interest of AED 298,000 from loan facilities. The company enjoyed facilities totaling AED 16.614 m with banks that included a long term loan facility of AED 2.604 m with Fujairah Bank. Azmi Garments had account with five banks and had satisfactory borrowing relationship with all of them. In order to estimate the size of total limits that Azmi Garments enjoyed with all banks and Fujairah bank’s share in the limits, Louna obtained the necessary information from the UAE Central Bank Risk Bureau. The same is displayed in Table B. Table B

UAE Central Bank Risk Bureau Estimates of Azmi Garments Limits

Facility

Limit

Direct Indirect

27.542 m 13.526 m

Outstanding 19.927 m 4.416 m

Fujairah bank’s

Fujairah bank’s

Limit

Outstanding

5.178 m 6m

5.178 m 1.715 m

Exhibits 1 and 2 provide the financial summary, financial ratios, and the details of assessment of working capital for Azmi Garments. Exhibit 1

Summary Financial Information and Financial Ratios

Profitability Measures % Gross Profit margin Cost of goods sold Operating Profit Operating expenses Net profit margin Growth measures % Sales growth Tangible net worth growth

2005

2004

2003

15.78 83.09

13.17 85.41

12.13 86.09

7.26 1.46 0.04

5.17 1.32 0.04

4.81 1.23 0.13

–10.42 64

27.55 13 (Contd.)

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Cases in Corporate Finance

Exhibit 1 (Contd.) 2005 Efficiency and liquidity measures Days receivables

2004

2003

27

36

53

Days payable Stock turnover days Asset Turnover

25 66 1.46

24 56 1.93

38 55 1.6

Current ratio Quick ratio Conversion cycle

1.46 0.88 94

1.32 0.83 93

1.31 0.91 108

20 22 39

28 20 37

34 28 31

0.7

1.36

1.51

ROCE ROE ROS

4.74 0.1 2.88

5.86 0.19 2.57

4.89 0.52 2.59

ROA Coverage measures Interest Cover

0.06

0.08

0.21

1.01

1.02

1.05

Total coverage Cash flow and other indicators Net cash flow from operations

1.37

1.21

1.14

Debtors/CA % Creditors/CL % Inventory/CA % Leverage measures Debt/Equity Return measures %

4772

117

Operating capital employed Working capital/sales % Current assets

42498 11.99 31322

32749 8.6 32737

32027 10.07 30465

Current liabilities Working capital Total debt

21484 9848 23158

24852 7885 27442

23229 7236 26964

Exhibit 1a

Summary Financial Information

Turnover m Gross Profit m Net Profit Management fees @5% of Revenue in m Operating Profit m Other income Operating cash flow

82.131 12.963 33K

91.689 12.073 39K

4.10 5.96

2.83

883K 6.954m

419K (Contd.)

3. Azmi did not deduct 5% of revenues as management fees as a thumb rule.

Case 18: Fujairah Bank

(Exhibit 1a Contd.) Debtors ageing analysis (as on December 31, 2005) Up to 90 days 92% 91–180 days 1% 180 days and above Creditors ageing analysis Up to 90 days

70%

91–180 days 180 days and above

29% 1%

Exhibit 2

7%

Assessment of Working Capital for the Year 2006

(in AED ‘000)

Actual for 2005 Sales COGS % of COGS over sales

82131 68240 83

Days Receivables Days Payable Stock Turnover Days

27 25 66

Other Current Assets Other Creditors Existing Bank finance

12797 226 27542

Projections for 2006 Sales COGS (83% of projected sales)

90000 74778

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