Term Paper: Corporate Finance -MGT 221

Topic Company Analysis–J.K TYRE & INDUSTRIES LTD

Name of the Student : Amal Alex Kuruvilla

Program : MBA

Registration Number : 20192MBA0481

Semester : 1st

Section :I

Faculty Guide : Prof. Dr. Krishna Kumar

Date of Submission : 20th May, 2020

Introduction
Corporate finance refers to activities and transactions related to raising capital for the
creation, development and acquisition of a business. It is directly related to company
decisions which have financial or monetary impacts. It can be considered as a liaison between
the capital market and the organisation. The corporate finance definition also encompasses
effective resource utilisation and expenditure minimisation. Factors that contribute to its
decision include term requirements of the company, urgency, risk appetite, etc.
The five basic corporate functions are financing, capital budgeting, financial management,
corporate governance, and risk management. The financial management decision concerns
management of its internal cash flows and its mix of external debt and equity. Its financing
needs are related to how much internal capital the firm can generate and its choice of debt of
equity financing. A Board of Directors, which generally makes major financing and
investment decisions governs companies, and all of the decisions will depend on the risk
involved. With all of the functions, it is important to understand how value is created.

Important Activities that Direct Corporate Finance

➢ Investments & Capital Budgeting

Investing and capital budgeting includes planning where to place the company’s long-term
capital assets in order to generate the highest risk-adjusted returns. This mainly consists of
deciding whether or not to pursue an investment opportunity, and is accomplished through
extensive financial analysis.
By using financial accounting tools, a company identifies capital expenditures, estimates cash
flows from proposed capital projects, compares planned investments with projected income,
and decides which projects to include in the capital budget.
Financial modelling is used to estimate the economic impact of an investment opportunity
and compare alternative projects. An analyst will often use the Internal Rate of Return (IRR)
in conjunction with Net Present Value (NPV) to compare projects and pick the optimal one.

➢ Capital Financing
This core activity includes decisions on how to optimally finance the capital investments
(discussed above) through the business’ equity, debt, or a mix of both. Long-term funding for
major capital expenditures or investments may be obtained from selling company stocks or
issuing debt securities in the market through investment banks.
Balancing the two sources of funding (equity and debt) should be closely managed because
having too much debt may increase the risk of default in repayment, while depending too
heavily on equity may dilute earnings and value for original investors.
Ultimately, it’s the job of corporate finance professionals to optimize the company’s capital
structure by lowering its Weighted Average Cost of Capital (WACC) as much as possible.
 ➢ Dividends and Return of Capital
This activity requires corporate managers to decide whether to retain a business’s excess
earnings for future investments and operational requirements or to distribute the earnings to
shareholders in the form of dividends or share buybacks.
Retained earnings that are not distributed back to shareholders may be used to fund a
business’ expansion. This can often be the best source of funds, as it does not incur additional
debts nor dilute the value of equity by issuing more shares.
At the end of the day, if corporate managers believe they can earn a rate of return on a capital
investment that’s greater than the company’s cost of capital, they should pursue it. Otherwise,
they should return excess capital to shareholders via dividends or share buybacks

J.K Tyre & Industries Ltd

Part of the JK Organisation, JK Tyre & Industries Ltd is a leading tyre manufacturer in
India and amongst the top 25 manufacturers in the world with a wide range of products
catering to diverse business segments in the automobile industry. JK Tyre is the only tyre
manufacturer in India to be included in the list of Superbrand in 2017, the sixth time the
honour has been conferred upon the company
JK Tyre has global presence in 100 countries across six continents, backed by production
support from 12 plants - 9 in India and 3 in Mexico. Currently, the capacity across all its
plants is about 35 million tyres per annum. In April 2016, JK Tyre acquired Cavendish
India Limited from Birla Tyres. While acquisition added three modern plants to its
portfolio taking the total count to 12, it helped the tyre major foray into the two/three
wheeler segment as well. In 2018, the company inaugurated its state-of-the-art
Raghupati Singhania Centre of Excellence (RPSCOE) at Mysore.

Vision
 To be amongst the most trusted companies with a global tyre brand

Mission
 Be a Customer Obsessed Company - Customer First 24x7
 Most profitable tyre company in India - deliver enhanced value to all stakeholders
 No. 1 tyre brand in India and amongst leading tyre brands globally
 Lead with premium products through technological edge
 Enhance global presence through acquisitions/JV/strategic partnerships
 Be a socially responsible corporate citizen
 Be a learning & innovative organisation with a motivated team

Balance sheet of J.K Tyre & Industries Ltd (INR Lakhs)

Particulars Mar-15 Mar-16 Mar-17 Mar-18 Mar-19
Equities & Liabilities

Share Capital 126.87 126.87 126.87 126.87 126.87

Reserve & Surplus 788.91 1038.83 1356.19 1669.47 2015.8
Current Liabilities 853.84 990.1 1253.91 1265.82 1367.47
Other Liabilities 79.31 95.44 139.16 163.65 198.9
Total Liabilities 1848.93 2251.24 2876.13 3225.81 3709.04
Assets

Fixed Assets 395.89 402.87 4427.35 478.97 551.54

Current Assets 1401.96 1795.82 2233.24 2148.36 2463.71
Other Assets 51.08 52.55 215.54 598.48 693.79
Total Assets 1848.93 2251.24 2876.13 3225.81 3709.04
Other Info

Contingent Liabilities 286.93 1060.59 1720.85 1465.61 1490.44

1. Critically evaluate the various long-term sources of finance of the company.

Long term financing means financing by loan or borrowing for a term of more than one year
by way of issuing equity shares, by the form of debt financing, by long term loans, leases or
bonds and it is done for usually big projects financing and expansion of company and such
long term financing is generally of high amount.

Long-term financing sources can be in the form of:

➢ Share capital or equity shares

➢ Preference capital or preference shares

➢ Retained earnings or internal accounts

➢ Debenture/bonds

➢ Term loans from financial institutions, Government and Commercial Banks.

➢ Venture funding

➢ Asset securitization
Table 2: Issue of equity share capital

On analysing the financial statement of the last 5 years we can see that there has
been a steady increase in the investment of the J.K Tyre & Industries Ltd. The
value of total assets too have increased by a good amount. The company derives
its main source of finance by issuing Equity Shares. We can see from the Table
2 that the company issues equal number of Equity Shares at INR 10 per share.
Each holder of equity shares is entitled to one vote per share. The dividend, if
declared, are paid in Indian rupees. The dividend, if any, proposed by the Board
of Directors is subject to the approval of the shareholders in the ensuing Annual
General Meeting.
Balance Sheet of J.K Tyre & Industries Ltd as on 31th March, 2015
Standalone Balance Sheet of J.K Tyre & Industries Ltd as on 31th March, 2015
2. Analyse the various capital budgeting decision made by the firm.
What is a Budget?
A budget is an estimation of revenue and expenses over a specified future period of time and is
usually compiled and re-evaluated on a periodic basis. Budgets can be made for a person, a
group of people, a business, a government, or just about anything else that makes and spends
money.

What is Budgeting?
Budgeting is the formal process of financial planning using estimated financial and
accounting data. It is the entire process of designing, implementing & operating budgets. The
main emphasis of this process is on provisioning of resources to support plans which are
being implemented.
Budgeting helps in functioning in a systematic way. It helps in improving coordination and
makes communicating easier. It also provided a basis for control and performance evaluation.

➢ Net Profit Margin

Particulars Mar '15 Mar '16 Mar '17 Mar '18 Mar '19

Net Profit Margin (%) 6.39 6.97 7.87 7.25 7.54

Higher net profit means that the company is more efficient at converting sales into actual
profit. From the above table it is observed the company is consistent in generating greater
profits in evert year with some ups and downs. But we can see that the company has been
able to maintain a decent amount of profit every year.

➢ Total Assets Turnover Ratio

Particulars Mar '15 Mar '16 Mar '17 Mar '18 Mar '19

Total Assets Turnover Ratio 3.65 2.97 2.67 2.7 2.53

The higher the asset turnover ratio, the better the company is performing, since higher ratios
imply that the company is generating more revenue per Rs. Of asset. The pattern of the same
is not very consistent as the table shows.
When a company’s Assets Turnover Ratio is greater than 1, we can say that the company is
doing well and has been able to generate enough revenue for itself out of the total assets. We
can see a minor decline in the ratio every year 2015 onwards.
 ➢ Return on Capital Employed
Particulars Mar '15 Mar '16 Mar '17 Mar '18 Mar '19

Return on Capital Employed (%) 33.36 31.04 31.98 30.35 29.66

Capital employed is the total amount of capital that a company has utilized in order to generate
profits. When we compare the data from the above table, we can see that the capital utilized to
generate profit is max in the year 2015 and least in the year 2019. But still the company has
managed to make decent profits.

3. Assess the working capital condition of the company.

➢ Working Capital
Working Capital is a measure of company efficiency and operating liquidity. The working
capital is usually calculated by subtracting Current Liabilities from Current Assets. It is an
important indicator of the firm’s ability to continue its normal operations without additional
debt obligations.

Working Capital = Current Assets - Current Liabilities

Working Capital can be positive or negative, depending on how much of current debt the
company is carrying on its balance sheet. In general terms, companies that have a lot of
working capital will experience more growth in the near future since they can expand and
improve their operations using existing resources.
On the other hand, companies with small or negative working capital may lack the funds
necessary for growth or future operation. Working Capital also shows if the company has
sufficient liquid resources to satisfy short-term liabilities and operational expenses. There are
four conditions that determine the working capital:

• If Current Assets increases => Working capital increases

• If Current Assets decreases => Working capital decreases
• If Current Liabilities Increases => Working capital decreases
• If Current Liabilities decreases => Working capital increases

Thus, we can conclude that the Working capital is directly proportional to the current assets
and inversely proportional to the current liabilities.
Working capital analysis is used to determine the liquidity and sufficiency of current assets in
comparison to current liabilities. This information is needed to determine whether an
organization needs additional long-term funding for its operations, or whether it should plan
to shift excess cash into longer-term investment vehicles.
The working capital analysis can be done using the ratios like Current ratio, Quick ratio, Cash
ratio etc.

➢ Current Ratio

The current ratio is a liquidity ratio that measures whether a firm has enough resources to
meet its short-term obligations. It compares a firm's current assets to its current liabilities.
Current ratio is an indication of a firm's liquidity.

If current liabilities exceed current assets the current ratio will be less than 1. A current ratio
of less than 1 indicates that the company may have problems meeting its short-term
obligations. Some types of businesses can operate with a current ratio of less than one,
however. If inventory turns into cash much more rapidly than the accounts payable become
due, then the firm's current ratio can comfortably remain less than one. Inventory is valued at
the cost of acquiring it and the firm intends to sell the inventory for more than this cost. The
sale will therefore generate substantially more cash than the value of inventory on the balance
sheet. Low current ratios can also be justified for businesses that can collect cash from
customers long before they need to pay their suppliers.

➢ Quick Ratio

The quick ratio is an indicator of a company’s short-term liquidity position and measures a
company’s ability to meet its short-term obligations with its most liquid assets. Since it
indicates the company’s ability to instantly use its near-cash assets (assets that can be
converted quickly to cash) to pay down its current liabilities, it is also called the acid test
ratio. An acid test is a quick test designed to produce instant results—hence, the name.

A result of 1 is considered to be the normal quick ratio. It indicates that the company is fully
equipped with exactly enough assets to be instantly liquidated to pay off its current liabilities.
A company that has a quick ratio of less than 1 may not be able to fully pay off its current
liabilities in the short term, while a company having a quick ratio higher than 1 can instantly
get rid of its current liabilities.

Table 5: Working Capital (INR Lakhs)

 Particulars Mar-15 Mar-16 Mar-17 Mar-18 Mar-19
Current Assets 1401.96 1795.82 2233.24 2148.36 2463.71
Current Liabilities 853.84 990.1 1253.91 1265.82 1367.47
Working Capital 548.12 805.72 979.33 882.54 1096.24
Current Ratio 1.6 1.81 1.7 1.6 1.8
Quick Ratio 0.84 1.07 1.02 1.02 1.01

From the above table we can say the Whirlpool India company is in a very comfortable
position in terms of working capital. A current ratio of 2: 1 is considered to be the ideal to
provide a reasonable level of comfort. As we can see the current ratio of the company is
around 1.7:1 every year, this shows that the value of current assets is more than that of
current liabilities.
This puts the company in a save situation in case of liquidity.

4. Discuss on the dividend decision of the firm.

Performance of the Company

The Company had a strong revenue growth driven by both internal and external factors. Strong
macroeconomic indicators drove the overall durable industry growth. In addition, our
continuous focus on product leadership, channel expansion and sales execution helped us
grow ahead of industry. The Company’s performance has been very encouraging with 11.7%
increase in Revenue from operations (net of excise duty) and 15.8% increase in profit before
tax vs previous year.
There have been no significant changes were reported in the above key financial ratios from
previous year.
Key Financial Ratios

Particulars Mar-18 Mar-19

Debtor Turnover ratio 21.7 21.8
Inventory turnover ratio 3.7 4.0
Interest coverage ratio - -
Current ratio 1.70 1.80
Debt Equity Ratio - -
Operating Profit Margin 9.49 9.84
Net Profit Margin 7.26 7.54
Return on Net Worth 19.52 19.00

Share Capital
The paid-up capital of the Company as on 31st March, 2019 was INR 12,687.18 lacs. During
the year under review, the Company did not issue any class or category of shares, Employee
Stock Options, Convertible securities and consequently there is no change in the capital
structure since previous year.

For the year ending March 2019 J.K Tyre & Industries Ltd. has declared an equity
dividend of 50.00% amounting to Rs 5 per share. At the current share price of Rs
1932.5 this results in a dividend yield of 0.26%.

The company has a good dividend track report and has consistently declared dividends for the
last 5 years.

Earnings per share

Basic earnings per share is calculated by dividing the net profit or loss attributable to equity
holder of the Company by the weighted average number of Equity shares outstanding during
the period. The weighted average number of Equity shares outstanding during the period is
adjusted for events such as bonus issue, bonus element in a rights issue, that have changed the
number of Equity shares outstanding, without a corresponding change in resources.

Dividend & Transfer to Reserves

In the year 2019 as per the Dividend Distribution Policy of the Company recommend the
payment of a final dividend at the rate of INR 5/- per share for the year ended 31st March,
2019 on 126,871,830 equity shares of INR 10/- each. The Board of Directors has decided to
retain the entire amount of profits for FY 2018-19 in the retained earnings. Upon approval of
the above dividend by members at the ensuing Annual General Meeting, an amount of INR
1303.94 Lacs would be paid as dividend distribution tax on the dividend.
Bibliography

• https://www.ukessays.com/essays/finance/the-five-basic-corporate-finance-functionsfinance-
essay.php
• https://www.moneycontrol.com/india/stockpricequote/consumer
• https://en.wikipedia.org/wiki/Current_ratio
• https://www.moneycontrol.com/stocks/company_info/print_main.php