Project Final Chapss PRNT

CHAPTER - 1
INTRODUCTION TO THE STUDY
1.1 INTRODUCTION
Finance holds the key to all human activity. It is guide for regulating investment decisions
and expenditure and endeavors to squeeze the most out of every available rupee. The
government too, treats it as signpost, a beckon to responsibility that covers men, money, material
and management. Out of these finance is a resource and it has to be managed efficiently for the
successful functioning of an enterprise. Financial management is that managerial activity which
is concerned with the planning and controlling of the financial resources. Business concerns
needs finance to meet their requirements in the economic world. Any kind of business activity
depends on the finance. Hence, it is called as lifeblood of business organization. Whether the
business concerns are big or small, they need finance to fulfill their business activities.
In the modern world, all the activities are concerned with the economic activities and
very particular to earning profit through any venture or activities. The entire business activities
are directly related with making profit. (According to the economics concept of factors of
production, rent given to landlord, wage given to labor, interest given to capital and profit given
to shareholders or proprietors), a business concern needs finance to meet all the requirements.
Hence finance may be called as capital, investment, fund etc., but each term is having different
meanings and unique characters. Increasing the profit is the main aim of any kind of economic
activity.
Capital structure is considered as one of the interesting issues in corporate finance. Over
the past several years, a lot of researchers have already studied about capital structure theory
which is considered as one of the most contentious topics in corporate finance literature. Most of
them have empirically studied the determinants of capital structure in many countries such as
South Korea, China, Japan, Thailand, and etc. particularly, most of them have tried to examine
mainly the factors (i.e. size, growth, profitability, and collateral) that could determine the capital
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structure in any particular country. However, a few of them have put an attention on the implied
relationship between liquidity and capital structure especially in emerging countries.
With respect to empirical researches regarding liquidity, liquidity is defined as the ability to
trade large quantities quickly, at low cost, and without moving the price very much. By this
definition, it is implicitly implied that (a) the costs of a transaction should be low, (b)a large
transaction should have no lasting effects on the market price, and (c) the waiting time for a
prospective trader should be small. In addition, liquid stocks are the ones that could be easily
bought and sold. To the extent of stock market liquidity, it is very obvious to state that liquidity
is the major concern for those who invest in financial markets. The aim of the study is to
examine the relationship between liquidity and capital structure
IMPORTANCE OF FINANCIAL MANAGEMENT

Finance is the lifeblood of business organization. It needs to meet the requirement of the
business concern. Each and every business concern must maintain adequate amount of finance
for their smooth running of the business concern and also maintain the business carefully to
achieve the goal of the business concern. The business goal can be achieved only with the help of
effective management of finance. We can’t neglect the importance of finance at any time at and
at any situation. Some of the importance of the financial management is as follows:
Financial Planning
Financial management helps to determine the financial requirement of the business
concern and leads to take financial planning of the concern. Financial planning is an important
part of the business concern, which helps to promotion of an enterprise.
Acquisition of Funds
Financial management involves the acquisition of required finance to the business
concern. Acquiring needed funds play a major part of the financial management, which involve
possible source of finance at minimum cost.
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Proper Use of Funds
Proper use and allocation of funds leads to improve the operational efficiency of the
business concern. When the finance manager uses the funds properly, they can reduce the cost of
capital and increase the value of the firm.
Financial Decision
Financial management helps to take sound financial decision in the business concern.
Financial decision will affect the entire business operation of the concern. Because there is a
direct relationship with various department functions such as marketing, production personnel,
etc.
Improve Profitability
Profitability of the concern purely depends on the effectiveness and proper utilization of
Funds by the business concern. Financial management helps to improve the profitability position
of the concern with the help of strong financial control devices such as budgetary control, ratio
analysis and cost volume profit analysis.
Increase the Value of the Firm

Financial management is very important in the field of increasing the wealth of the
investors and the business concern. Ultimate aim of any business concern will achieve the
maximum profit and higher profitability leads to maximize the wealth of the investors as well as
the nation.
Promoting Savings
Savings are possible only when the business concern earns higher profitability and
maximizing wealth. Effective financial management helps to promoting and mobilizing
individual and corporate savings. Nowadays financial management is also popularly known as
business finance or corporate finances. The business concern or corporate sectors cannot
function without the importance of the financial management.
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CAPITAL STRUCTURE
Capital structure refers to the kinds of securities and the proportionate amounts that make
up capitalization. It is the mix of different sources of long-term sources such as equity shares,
preference shares, debentures, long-term loans and retained earnings. The term capital structure
refers to the relationship between the various long-term source of financing such as equity
capital, preference share capital and debt capital. Deciding the suitable capital structure is the
important decision of the financial management because it is closely related to the value of the
firm.
Capital structure is the permanent financing of the company represented primarily by long-term
debt and equity. “According to the definition of Presana Chandra, “The composition of a
firm’s financing consists of equity, preference, and debt”.
DETERMINANTS OF CAPITAL STRUCTURE
The following are the determinants or factors which determine the capital structure of
a business enterprise.
Cost of fixed assets

The fixed capital of a business enterprise is invested in fixed assets. The fixed assets are not
fixed in value; in fact, their value may record an increase or decrease in course of time. They are
fixed in the sense that without them the business cannot be carried on. Further, they remain in the
business for a longer time. Hence, while making an assessment of the capital requirement the
cost of fixed assets also be kept in mind
Size of the business enterprise

The capital structure of a business enterprise is also influenced by the size of business enterprise.
It may be small, medium or large. A large sized business enterprise requires much more capital
as compared to a small – sized business enterprise.
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Nature of the business organization
The capital structure of a business enterprise is also influenced by nature of business
Organization. It may be manufacturing, financing, trading or public utility type.
Period of finance
Period of finance, i.e., short, medium or long term is also another factor which determines the
capital structure of a business enterprise. For example, short term finances are raised through
borrowings as compared to long term finance which is raised through issue of shares, stocks etc.
The purpose of financing

The purpose of financing should also be kept in mind in determining the capital structure of a
business enterprise. The funds may be required either for betterment expenditure or for some
productive purposes. The betterment expenditure, being non-productive, may be incurred out of
funds raised by issue of shares or from retained profits. On the contrary, funds for productive
purposes may be raised through borrowings.
Elasticity of capital structure

The capital structure of a business enterprise should be quite elastic so as to meet the future
requirements of the capital also. For this purpose the amount of authorized capital should be
fixed at a higher level as compared to present needs
WORKING CAPITAL MANAGEMENT
Working capital management is also one of the important parts of the financial management.
It is concerned with short-term finance of the business concern which is a closely related trade
between profitability and liquidity. Efficient working capital management leads to improve the
operating performance of the business concern and it helps to meet the short term Liquidity.
Hence study of working capital management is not only an important part of financial
management but also is a part overall management of the business concern. Working capital is
described as the capital which is not fixed but the more common uses of the working capital is to
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consider it as the difference between the book value of current assets and current liabilities
According to the definition of Weston and Brigham, “Working Capital refers to a firm’s
investment in short-term assets, cash, short-term securities, accounts receivables and
inventories”.
Gross Working Capital

Gross Working Capital is the general concept which determines the working capital
concept. Thus, the gross working capital is the capital invested in total current assets of the
business concern.
Gross Working Capital is simply called as the total current assets of the concern.
GWC = CA
Net Working Capital
Net Working Capital is the specific concept, which, considers both current assets and
Current liability of the concern. Net Working Capital is the excess of current assets over the
current liability of the concern during a particular period.
If the current assets exceed the current liabilities it is said to be positive working capital; it is
reverse, it is said to be Negative working capital.
NWC = C A – CL
LIQUIDITY
Liquidity is a financial institution’s capacity to readily meet its cash and collateral obligations at
a reasonable cost. Maintaining an adequate level of liquidity depends on the institution’s ability
to efficiently meet both expected and unexpected cash flows and collateral needs without
adversely affecting either daily operations or the financial condition of the institution. A bank’s
liquidity exists in its assets readily convertible to cash; net operating cash flows, and its ability to
acquire funding through deposits, borrowings, and capital injections.
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IMPORTANCE OF LIQUIDITY
 Appropriate corporate governance and active involvement by management.

 Appropriate strategies, policies, procedures, and limits used to manage and control
liquidity risk, even in stressed conditions
 Appropriate liquidity risk measurement and monitoring systems.
 Management of intraday liquidity and collateral.
 Maintaining an appropriately diverse mix of existing and potential future funding
sources.
 Adequate levels of highly liquid marketable securities, with no legal, regulatory, or
operational impediments, which can be used to meet liquidity needs in stressful
situations.
 Comprehensive contingency funding plans (CFP) sufficient to address potential adverse
liquidity event sand emergency cash flow needs.
 Adequate internal controls surrounding all aspects of liquidity risk management.
RELATIONSHIP BETWEEN LIQUIDITY AND CAPITAL STRUCTURE
Liquidity is the extent to which a company's assets or securities can be easily converted into
cash without losing too much value or at low cost. Liquidity is important for the companies in
such way that it provides an opportunity to survive in the period of low earnings as on that time
external financing is not easily available or at higher cost.
A well understood phenomena in finance is; "higher the risk, higher will be the return”. To get
higher profit investor should have to bear higher returns hence these two factors are related.
Holding an asset in liquid form also has drawback that firm frequently sacrifice an opportunity to
invest in project which can give higher returns in stake of higher risk.
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When firms need finances and in case of external finances which are only available at higher cost
than retain earnings can serve as liquid asset and firm can enjoy it at lower cost which is
opportunity cost of that fund, which firm have in shape of retain earnings. So leverage and
liquidity may have positive or negative relationship which varies by different factors.
It can be assume that liquidity may have relationship with firms capital structure which include
different types of funds choices by firms which are usually debt financing, equity and preferred
stocks, it can vary from firm to firm depending upon its financial positions and type of business.
To measure the relationship, there are different ratios by which liquidity can be measured and so
for the capital structure also. Profitability is another important factor which is always under great
concern with the firm's operations. long term debt ratio, short term debt ratio, total debt ratio as
proxy for capital structure and current ratio, quick ratio fir liquidity and for the firms
performance gross profit ratio, return on equity ratio and earnings per share ratio can be used.
There is always a tradeoff between short-term and long-term capital. Hence an attempt was made
to understand the impact of the liquidity has on the capital structure.
1.2 STATEMENT OF THE PROBLEM

The current study has been undertaken to analyze the functioning of “Harrisons Malayalam
Limited, Lockhart Tea Factory, Munnar” to evaluate the performance of the company for the
past five years and to suggest remedies wherever possible and to find out the relationship of
liquidity and capital structure of the company, so as to set the company’s progress on the right
path and to see if it able to achieve its objectives.
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1.3OBJECTIVES OF THE STUDY
Primary objective:
“To study the impact of liquidity on the capital structure of Harrisons Malayalam
Limited, Lockhart Tea Factory, Munnar”
Secondary objectives:
 To analyze the capital structure of the company.

 To study about the liquidity position of the company.
 To find out the relationship between liquidity and capital structure of Harrisons
Malayalam Ltd, Lockhart Tea Factory, Munnar.
 To give suggestion to maintain optimum Capital structure and Liquidity.
1.4 SCOPE OF THE STUDY
It is done through Balance Sheet of Company. The data’s are from the company’s balance sheet,
profit & loss account and annual reports for a period of five years from 2011 to 2015. This study
will let us know the relationship of liquidity and capital structure by using Correlation
Coefficient technique, Mean and Ratios are used which shows us the direction with which the
organization is moving, the operating performance of the company and also it will help us to
know the credit worthiness and financial position of the firm. Helps to analyze the strength and
weakness of the company in financial terms
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1.5 LIMITATIONS THE STUDY
If companies ignore the impact of inflation or price level changes in the financial
statements or if financial statements are based on historical costs. Then it becomes limitation of
ratio analysis. Another problem is that it depends on quality of financial statements. For
example: if there is no transparency / disclosure of real things in the statements it becomes
problem to analyst. But now a day’s it doesn’t hold well, because, every company has to disclose
its information according to accounting standards, in the annual reports. Another drawback is
that the data is collected from secondary source so it may not be reliable one. The study is
limited to five years.
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CHAPTER – 2
CONCEPTUAL FRAMEWORK & REVIEW OF LITERATURE
2.1 CONCEPTUAL FRAMEWORK
Meaning and Definition of ratio analysis
Ratio analysis is one of the powerful techniques which are widely used for interpreting
financial statements. This technique serves as a tool for assessing the financial soundness of the
business. It can be used to compare the risk and return relationship of firms of different sizes.
The term ratio refers to the numerical or quantitative relationship between two items/ variables.
The idea of ratio analysis was introduced by Alexander Wall for the first time in 1919.
Ratios are quantitative relationship between two or more variables taken from financial
statements.
Ratio analysis is defined as, “the systemic use of ratio to interpret the financial statement
so that the strength and weakness of the firm a well as its historical performance and current
financial condition can be determined.
In the financial statement we can find many items are co-related with each other for
example current assets and current liabilities, capital and long term debt, gross profit and net
profit purchase and sales etc.
1).Liquidity Ratios
Liquidity of the company means its ability to meet its current and short term obligations
when they become due for payment. It reflects the short financial strengths and solvency of a
company. The short term creditors of the company are interested in the short solvency or
liquidity of the company. But, from the point of utilization of funds liquidity or excess of it may
end with the funds lying idle. Hence, a proper balance between the two contradictory
requirements i.e. liquidity and profitability is required for the efficient financial management.
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The following are the some ratios, which give indication about the liquidity of the
company. These ratios are as follows.
Current Ratio:
The current ratio is the ratio of current assets to the current liabilities. It is calculated by
dividing current assets by current liabilities.
Current Ratio = Current Assets/Current Liabilities
The current assets of the company represent such assets, which can be converted into
cash within sort time or period which is normally not exceeding one year and includes cash and
bank balances, marketable securities, inventory of raw material, work in process and finished
goods, net debtors, bills receivable. Similarly total of current liabilities includes sort term
liabilities namely trade debtors, bills payable, outstanding expenses etc.
The current ratio is measure of short term solvency of the company. It indicates the rupee
of current asset available for each rupee of current liability. The higher the current ratio the
larger the amount of rupees available per rupee of current liability and the greater the safety of
the sort term creditors.
A high ratio indicates better liquidity position. But, it should be noted that very high
current ratio is the indicative of ineffective utilization of current assets due to high amount of
fund locked in high level of current, assets (i.e. generally a high amount of inventory). The norm
for this ratio is 2:1 which means even if 50% of the current assets are available for the
liquidation; it can meet the current liabilities. The high ratio is also possible when the long term
sources of funds are available for financing the part of the current assets. This avoids the
embarrassing situations where the sort obligations can be met due to temporary liquidity
crunch.
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This is due low reliance on sort-funds, a standard norm of the current ratio depends on the type
of the industry as this govern the level of current assets requirements (e.g. public utility
companies have low requirement of the current assets while the whole-sellers require high level
of current assets.
Acid Test Ratio:
This ratio tries to overcome the defect of the current ratio. This ratio considers the
qualitative aspects of the current assets. It projects relatively clear picture than the current ratio.
This distinguishes the relative liquidity of different current assets. This is called quick ratio, as it
is a measurement of a company’s ability to pay off its current liabilities. The acid test ratio is
ratio of quick current assets and quick current liabilities.
Acid Test Ratio = Quick Assets/Quick Liabilities
The quick assets refer to current assets, which can be converted in to cash immediately. It
excludes the inventory from the current assets, which are the most liquid assets. To get converted
into cash the inventory should be converted in to the debtors first and ten in to cash, unless it sold
on cash basis the norm for this ratio is 1:1. This ratio provides check on the liquidity position of
the company. It is more rigorous and penetrating test for the liquidity position of a company.
Similarly to the current ratio, changes from industry to industry.
Cash ratio:
It calculated as follows:
Cash ratio = Cash / Current liability
Here, trade investment; marketable securities are equivalent of cash. And therefore they
may be included in the computation of cash ratio. The standard rate for this ratio 0.5:1. This ratio
also indicates liquidity position and company and firms commitment to meet its short -term
liabilities
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2).Structure of current assets:
Cash to current assets:
Cash to current asset ratio = cash/ current assets
Cash to current asset ratio measures a company’s liquidity basing how liquid a company is by its
cash and cash equivalents and marketable securities alone. a high or increasing cash to current
assets ratio is generally a positive sign, showing the company’s most liquid assets represent a
larger portion of its total current assets.it also indicates the company may be better able to
convert its liquid assets , such as inventory , into cash
Inventory to current assets:
Maintaining the right amount of inventory is an important part of managing small business
resources and cash flow. Too much inventory takes up valuable resources and cash that cannot
be used for other purposes, while too little might not be enough to meet customer demand
Inventory to current asset ratio= inventory /current assets
Financial Asset to Current Assets:
Financial is an intangible asset whose value is derived from a contractual claim, such as bank
deposits, bonds and stocks. It is more liquid than other tangible assets. current assets an item on
the entity’s balance sheet that is either cash, a cash equivalent, or which can be converted into
cash within one year. Some of the current assets are cash prepaid expenses, accounts receivable,
inventory.
Financial asset to current asset ratio = financial asset / current asset
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3). Leverage or Capital Structure Ratios:
Meaning of Leverage
The term leverage refers to an increased means of accomplishing some purpose. Leverage is
used to lifting heavy objects, which may not be otherwise possible. In the financial point of view,
leverage refers to furnish the ability to use fixed cost assets or funds to increase the return to its
shareholders.
Definition of Leverage
James Horne has defined leverage as, “the employment of an asset or fund for which the
Firm’s pays a fixed cost or fixed return.
The long term creditors would judge the soundness of a firm on the basis of the long term
installment of the principal on due debts or in lump-sum at the time of maturity. The long term
solvency of a firm can be examined by using leverage or capital structure ratios. Those ratios are
as follows;
Debt Ratio:
This is a ratio between total debts and total assets.
Debt Ratio = Total Debt / Total Assets
This ratio represents contribution of the outside fund in the total assets of a company. It shows
the proportion of total assets financed by the outside funds. A low ratio is desirable from point of
view of creditors as there is a sufficient margin of safety is available to term. The creditors are at
higher risk, when this ratio is on the higher side. This may be due to over valuation of the assets
or due to the method of charging depreciation on the assets.
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Debt-Equity Ratio: This ratio represents relation between borrowed funds and Owners equity
capital is a popular measure of long term solvency of a firm. The relationship of the debt equity
ratio shown by:
Debt-Equity Ratio = Total debt / Total equity
The equity ratio is an important tool of financial analysis to apprise financial structure Of firm.
It has important view point of the debt holders, owners and the firm itself what Is the relationship
between debt & equity? There cannot be rigid rule. It will depend upon Circumstances,
prevailing practices, type & size of the business, nature of the industry and degree of risk
involved and so on. For example, firm’s having a stable income or a firm producing basic pro
ducts can afford to have a higher (i.e.3:2 better)
Long term debt ratio

In risk analysis, a way to determine a company’s leverage. The ratio is calculated by
taking the company’s long term debt and dividing it by the sum of its long term debt and its
preferred and common stock. The greater a company’s leverage, the higher the ratio.
Generally, companies with higher ratios are thought to be more risky because they have
more liabilities and less equity
Long term debt ratio = long term debt / total assets
Short term debt ratio
Short term debt is listed on the balance sheet, and is often the debt the company has
accumulated that is due in less a year and that have interest applied to the debt. Short term debt
often carries the highest interest rates of all company’s debt. Bank loans, notes commercial
paper, and short term lines of credit are examples of short term debt It is useful for a company to
leverage its operations a little further, however companies relying too much on this can quickly
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get overwhelmed with debt, crippling its operations as it has to spend its earnings on debt and
interest repayment instead of improving the company
Short term debt ratio = Short term debt/ total assets
Equity to capital ratio:
A computation that indicates the financial strength of a company. The ratio is equal to the fixed
assets of a company divided by its equity capital .Equity capital is the amount of money invested
in a company by its shareholders. If the ratio is greater than 1, some of the company’s assets
have been financed by debt.
Equity to capital ratio = Equity / Capital
Capital Structure:
Meaning
Capital structure refers to the way a corporation finances its assets through some combination of
equity, debt, or hybrid securities. A firm's capital structure is the composition or 'structure' of its
liabilities. For example, a firm that sells 20 billion dollars in equity and 80 billion dollars in debt
is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total
financing, 80% in this example is referred to as the firm's leverage. In reality, capital structure
may be highly complex and include dozens of sources. Gearing Ratio is the proportion of the
capital employed by the firm which comes from outside of the business, such as by taking a short
term loan.
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Definition
According to the definition of Gerestenbeg, “Capital Structure of a company refers to the

composition or make up of its capitalization and it includes all long-term capital resources”.
According to the definition of R.H. Wessel, “The long term sources of fund employed in a
business enterprise”.
Liquidity:
Meaning:
Liquidity is a financial institution’s capacity to readily meet its cash and collateral
obligations at a reasonable cost. Maintaining an adequate level of liquidity depends on the
institution’s ability to efficiently meet both expected and unexpected cash flows and collateral
needs without adversely affecting either daily operations or the financial condition of the
institution.
Definition
“The amount of cash a company has on hand or can generate quickly reveals how healthy the
company is financially. High levels of available cash indicate that the business can pay off debt
easily when due dates occur. The types of assets a company has and the marketability of those
assets are where a discussion of financial liquidity begins”. - Alex Burke
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2.2 REVIEW OF LITERATURE
Douglas and Alan (2006) studied an incentive-aligning role of debt in the presence of optimal
compensation contracts. Empirically, the analysis predicts a negative relationship between
leverage and market-to-book that is reversed at 35 extreme market-to-book ratio, a negative
relationship between leverage and profitability, a negative relationship between leverage and
pay-for-performance and a positive relationship between pay-for-performance and investment
Opportunities.
Brounen, Dirk, De Jong, Abe, Koedijk and Kees (2006) conducted an international survey
among 313 CFOs on capital structure choice. They documented several interesting insights on
how theoretical concepts are being applied by professionals in the UK, the Netherlands,
Germany and France and they directly compared the results with previous findings of the US.
Their results emphasize the presence of pecking-order behavior. Overall, they find remarkably
low disparities across countries, despite the presence of significant institutional differences. The
findings revealed that private firms differ in many respects from publicly listed firms, e.g. listed
firms use their stock price for the timing of new issues.
Martin Hovey (2007) studied liquidity, profitability and ownership structure of listed firms in
China. Regression analysis was used to find the relationship between the variables like liquidity,
profitability and ownership structure during the periods 1997 to 2005. The study concluded that
leverage has a significant relationship with profitability.
Mallikarjunappa (2007) In his study “Factors Determining the Capital Structure of
Pharmaceutical Companies in India”, made an attempt to test the important determinants of the
capital structure of companies taking profitability, collateral value of assets, growth, debt
services capacity, size, tax rate, non-debt tax shield, liquidity, uniqueness and business risk as the
determinants and the Debt-Equity Ratio (DER) as the dependent variable. Multiple regression
models were used for the pooled data of pharmaceutical companies in India. The period of study
was from 1993 to 2002. The result indicated that the regression was a good fit and the
independent variables together determine the capital structure of companies.
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Sumitra Das and Malabika Roy (2007) investigated empirically whether inter-industry
differences exist in the capital structure of Indian firms. The analysis covers the pre and post-
liberalization periods separately to indicate if there was a clear break in the financing pattern of
the Indian firms due to the policy change. The conclusion is that, though differences in firm size
contributes to the existing variation in financial leverage ratio across industry-classes to some
extent, the nature of the industry itself or more precisely the differences in the fund requirement
of industry groups based on the technology used was the major source of the existing variation.
However, it is hard pressed to find tight evidence of the existence of credit constraints on firms,
especially in a developing country like India..
Christina (2008) conducted a research to determine the nature of capital structure across non-
finance industries in Indonesia, whether they prefer to use debt or equity as their source of
financing. The findings of the study confirm that, first of all capital structure varies across
industries. Each industry would have 40 different decisions regarding its optimal capital structure
depends on several factors. This leads to the second findings in which it proves that there is
negative significant relationship between profitability and leverage, positive significant
relationship between company’s size and leverage and negative relationship between dividend
payout and leverage. Finally, this research also verified that there was no relationship between
leverage and company’s growth of share price, which means that the growth of share price was
not influenced by the company’s capital structure decision.
Gunasekaran (2008) in his article studied the major factors influencing the capital structure of
Indian industries. He found that collateral value of assets and liquid assets in aluminum industry;
corporate size, liquid assets and business risk in automobile industry; growth rate and liquid
assets in cement industry; profitability and trading on equity in chemical industry; business risk
and debt service capacity in Electronics industry; trading on equity in engineering industry;
trading on equity, asset structure and corporate size in IT industry; collateral value of assets in
leather industry; liquid assets and asset structure in paper industry have affected the capital
structure. The collateral value of assets has maximum influence on the capital structure among
the public sector companies and asset structure has similar influence on capital structure among
the private sector companies.
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Shanmugasundaram (2008) made an attempt to explain the variations in the capital structure of
pharmaceutical companies to see whether there was any shift in the capital structure in the same
period. The results were broadly consistent with the capital structure theories. The most
important explanatory variable for the capital structure pattern was the asset type measured by
the proportion of fixed asset to total assets. This showed a positive significant relationship with
debt equity ratio in domestic pharmaceutical companies, an insignificant relation in case of
multinational companies.
Balram Dogra and Shaveta Gupta (2009) examined the sources of funds of SME sector
operating in the state of Punjab. For this purpose, a survey of 50 SMEs was conducted. The study
brings into light that a majority of SMEs are still relying on their own funds and comparatively
less on borrowed funds. The decision to rely on own funds was not influenced by any of the
factors, other than their attitude towards external funds. The Pearson Chi-square statistics in this
42 regard revealed that there was a highly significant association of capital structure with type of
the firm, age of the firm, growth of the firm, degree of competition and level of capital
investment but not by owner’s qualification.
Malabika Deo and Jackine (2009) concluded that the firms do not have a specific norm or
preference for debt choices. Based on the quantity of requirement of funds and the firm’s
repayment ability, the debt choices of the firm differ. It was found that the firms that have higher
profitability and higher tangibility preferred long- term debt. The study also concludes that, the
ratio of total debt in the firm’s overall capital structure depends mainly on the major
determinants such as collateral value that is the tangibility of the firm, its profitability and the
bankruptcy costs are associated with the debt ownership structure.
Sanjay Bhayani (2010) made an attempt to explain the determination of variables of capital
structure in the pharmaceutical firms of India. The study has tried to understand the role of
knowledge capital and other intangible assets in capital structure decision of Indian
pharmaceutical firms. The empirical results indicate that the regression was a good fit and
independent variables together determine the capital structure of firms. Further the results
showed that the leverage was negatively related to tangibility of assets, non-debt tax shields and
Intangible assets. Research and development expenditure and profitability are positively related
to leverage. Intangible assets are important variable among the determinants of capital structure
of Indian pharmaceutical firms.
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Virani Varsha (2010) studied the empirical evidence of capital expenditure decisions and
dividend decisions in primary Pantaloons India Limited. The study finds that there was a positive
relationship between debt-equity ratio and earnings per share. The study concludes that the
degree of financial leverage have positive impact on capital structure decisions.
Shilpa Peswani (2011) compared high and low leveraged FMCG companies in India. The study
found that there was substantial difference in the capital structure of BIL and Marico. The
difference was due to the source of financing of these two companies for their expansion project.
BIL has low degree of leverage and MIL has comparatively higher degree of leverage. Though
profitability of the company is not entirely dependent on the sources of financing but the return
to equity holders vary according to the sources of capital funding adopted by the company.
Alicia, Robb and David Robinson (2012) studied capital structure choices that entrepreneurs
make in their firms' initial year of operation, using restricted-access data from the Kauffman
Firm Survey. Firms rely heavily on external debt sources, such as bank financing, and less
extensively on friends and family-based funding sources. Many startups receive debt financed
through the personal balance sheets of the entrepreneur, effectively resulting in the entrepreneur
holding levered equity claims in their startups. This fact is robust to numerous controls, including
credit quality. The reliance on external debt underscores the importance of credit markets for the
success of nascent business activity.
David, McMillan and Omar Camara (2012) used dynamic panel estimators to test whether
there are differences in the speed of capital structure adjustment between US-based
multinationals and domestic corporations and why such differences may occur. The results show
that average domestic corporations adjust to target leverage faster than multinationals. This
provides support for the market-timing, pecking order and dynamic trade-off theories of capital
structure. Further they identified the overall relatively faster capital structure adjustment speed of
domestic corporations to relatively higher equity returns for multinational corporations,
relatively lower incidence of under-leverage for domestic corporations and the relatively higher
incidence of above-target leverage for domestic corporations. Further, tests show that agency
costs, financial flexibility
22
CHAPTER- 3
INDUSTRY & COMPANY PROFILE
3.1 INDUSTRY PROFILE
1. Evolution of the Tea Industry

History of Tea Leaf — the origin of the tea bush has been contested by scholars. It is native to
certain areas ranging from the interior of Southern China to the border of Assam. Tea has only
one species which is called “Camellia Sinosis [(L).O.Kuntze]. It came to the light in Fourth
century and by about 650 A.D. during the TS’ang dynasty the growing popularity of tea induced
farmers in most provinces in China to cultivate Tea and subsequently became an article of
commerce. In the early years of 780 A.D., LuYu commissioned the first book on tea entitled
“Chaching” a tea classic. The first printed reference by a European writer about the mysterious
Chinese drink was dated to 1559 A.D. The knowledge of tea travelled slowly from East to West.
The Dutch Merchants established a trading base at Benton by 1596. The first consignment of tea
from China was transported to Benton in 1606 and from there it was shipped to-non-tea-
conscious Europe. By the mid-1650s, a quick brisk trade in tea was made with Holland. In
France, the future of tea was linked with the Sterling Company.
Beginning of Tea in India — the discovery of indigenous tea in Assam in 1823 led to the
origins of the tea industry in India. However, the Calcutta Agricultural Society differs from the
above opinion. It has consistently held that in the early 1700's, the ships of the East India
Company frequently brought the tea plants in the country by way of curiosity. Col. Kyd, a
resident of Calcutta and a famous botanist, saw tea plants growing in his garden in 1780. This
information was sent to Sir Joseph Bank and in 1782 his garden was handed over to Botanical
Garden of Calcutta. In 1788, Sir Joseph Bank recorded the existence of indigenous tea growing
wild in Coochbehar and Rangpur districts of Bengal and suggested the cultivation of this plant.
The wild teas of Coochbehar confirmed the first discovery of indigenous tea in India.
Birth of Indian Tea Industry — the birth of Indian tea industry was marked by the discovery of
indigenous teas plant in Assam in 1823 by Robert Bush. This received momentum when the East
India Company in 1833 lost the tea trading monopoly in China. In 1835, a scientific deputation
23
was sent to Assam to report on prospects of the tea industry and the team saw tea plants in many
parts in the hills between Assam and Burma. In 1836, C.A. Bruce was made the Superintendent
of Tea Forests. Among others, he formed the Bengal Tea Company at Calcutta with the objective
of purchasing the produce from the East India Company’s tea plantations in India. A similar
Company was also established in the same year in London with the same objectives. In 1839 the
first consignment of tea from India (eight chests) was shipped to London and it was auctioned at
a price ranging from six to thirty four shillings per pound. In 1840, two thirds of experimental
teas were handed over to new company. In 1852, the first tea company in India paid its final
dividends. The second limited company in 1859 was formed in Assam called Jorhat Company.
During 1862-67, tea cultivation started in Chittagong and Chotta Nagpur. Ultimately tea
cultivation was commissioned in many districts in India wherever there was some hope of a
success. Within a few months; India along with Sri Lanka dominated the world tea trade/market.
Tea Trade — In 1874 the land located in the East of Teesta river was explored with the foreign
liability of growing tea plants. By 1876 as many as 13 gardens had started cultivating tea. In
1878 the first two Indian tea gardens by name Megalkat Tea Estate and Indian Tea Company
Ltd. Were established though the Company actually received a grant of 741 acres on 19 March
1981. The first tea auction started on May 26, 1841 in London under the pioneering leadership of
Lyal & Co., Mincing Lane, London was the Centre of World Tea activities prior to World War
II. The first tea auction in Calcutta in December 27, 1861 and the second in Cochin in 1947 for
South Indian teas were held. Subsequently, many tea auction Centre’s were opened in Coonoor,
Guwahati, Amritsar, Siliguri etc.
2. Tea in India and World
i. Introduction — the ‘Plantation Industry’, which was developed over 150 years, has a colonial
origin. It is now a valuable asset to the nation. Plantation industry is a branch of agriculture in the
broader sense. The organization of modern plantation relates more to the factory than to the
farm. Generally, there is a specialization in one crop, which is produced on a large scale for
export and for maintenance work. The output is continuous throughout the year. The major
plantation crops like tea, coffee, rubber and cardamom have now developed to a large extent.
ii. Plantation Industry — In India, plantations account for 0.8 per cent of the total cultivable
land. They also contribute 5 per cent to the national income in agriculture. Besides they provide
more employment per rupee of investment in the country than either agriculture or in industry.
24
Plantation industry employs a large amount of labour force especially women workers which are
highest compared to any industry. Moreover, this industry helps in the development of other
industries. Among the different plantation crops, tea is considered to be the most important crop
in our country. It is the second biggest foreign exchange earner and is exported to about 80
countries. It also contributes a sizeable amount to the national income. Moreover, it provides
direct gainful employment to a large number of people and helps in providing indirect
employment in various sectors like road construction, transportation, building of warehouses,
manufacture of plywood tea chest, aluminum foil, tinplate, metal fittings, paper, card board,
fertilizers, insecticides, pesticides, coal, iron, steel, etc. Apart from its contribution to the
economy of India, tea today provides to the common man a pleasant and stimulating
nonalcoholic beverage.
iii. Tea: Agriculture as well as Industry — Tea can be placed both under agriculture and
industry. It is industry in the 5 sense that tea is a processed and manufactured commodity, which
is subject to excise duty and cess. It is also an agricultural crop because it is grown on land and
thus agricultural income tax is also levied on it. Moreover, tea plantation is governed by both
agricultural and industrial rules and regulations. The tea crop involves both agricultural and
industrial operations. Agricultural operations like cultivation, plucking, manuring, irrigation,
weed control, disease control, pest control, transportation of green leaf and uprooting are
undertaken for growing tea. The final product of tea comes through various processing and
manufacturing stages like withering, rolling, fermenting, drying, weighing, sorting, cutting that
place it under industry. Thus the tea plantation, though a big agricultural enterprise, has also
some characteristics of industry. The establishments and operations of such industry require
massive investment of capital. Modern technical equipment is also necessary for processing the
product. An outstanding feature of the plantation economy is that a large portion of tea has been
sold in the internal markets from the very inception of this industry. This has, therefore, made it
necessary to have well-organized marketing services. The requirement of capital, technical
know-how and organized marketing services explain why, the unit of production of tea has taken
the shape of a large industrial establishment.
iv. India’s Place in the World of Tea— the number of tea producing countries in the world has
been increasing since 1950 and at present there are more than 80 such countries. Among the
principal tea producing countries in the world, India occupies the first place in terms of area.
25
India’s area under tea presents appreciable increase during the period from 1961 to 2002 and the
world’s tea area exhibited a significant rise. While the world tea area increased by 186 per cent,
India’s rose by just 54 per cent. India’s tea area as percentage to world tea area has declined over
the years from 34.33 per cent to 18.54 per cent. In absolute terms, India’s total area in 1961 was
331 thousand hector which increased to 511 thousand hector. In 2002. Similarly, the world’s area
under tea was 964 thousand hector in 1961 and 2756 thousand hector in 2002.
THE INDIAN TEA INDUSTRY
Tea is globally one of the most popular and cheapest beverages with major production
Centre’s in India, China, Kenya, Sri Lanka, Turkey & Vietnam. The tea industry is one of the
oldest organized industries in India with a large network of tea producers, retailers, distributors,
auctioneers, exporters and packers. Total tea production in the world has exceeded 4 billion kgs
with India producing about 1 billion kg of tea. During 2008 to 2013, black tea production in
India increased at a compounded annual growth rate (CAGR) of 1.6% while consumption rose at
a CAGR of 2.3%. India's total annual tea production in 2013 is estimated at 1200 million kgs out
of which 65%, approximately 850 to 900 million kgs, is produced by the big tea gardens while
about 250 million kgs tea is produced by small tea growers with land area ranging from 2 to 20
hectares. Tea export has remained flat over the years due to increasing competition in the global
market and declining quality of tea produced in India. Thus the prices in the industry are
expected to be stable with domestic consumption expected to be rising steadily.
TEA MARKET OVERVIEW
The Tea Industry in India derives its importance by being one of the major foreign exchange
earners and for playing a vital role towards employment generation as the industry is highly
labour intensive. India is the second largest producer of tea in the world and contributes to
around 30% of the global tea production. The market size of tea is estimated to be approx.
`10,000 Crore with a penetration of more than 90% in the domestic market. With an export of
approx. 210 million kg of tea, India stands as the fourth largest exporter of tea in the world with
China ranking at the first position. The tea sector in the country is largely organized since 72% of
the total area under tea cultivation and 74% of the total production comes from the organized
sector.
26
Tea in India is grown over an area of 600000 hectare (ha) which accounts for 16% of the total
area under tea cultivation in the world. The Indian tea industry is having thousands of tea
gardens spread across various states of India. In West Bengal and Assam there are around 8,500
tea estates, while in the southern states of Kerala, Karnataka and Tamil Nadu there are another
5,500 tea estates. Assam produces over half of India’s tea and accounts for over 12% of the
annual global tea yield, according to ASSOCHAM.
Market Segmentation
Indian tea market is huge with large number of local and regional players. With the passage of
time and due to change in the consumption pattern, there has been diversification and value
addition in tea production. In India, tea is consumed in two forms: packaged (branded) or loose.
While a major share of the market is of loose tea suppliers, branded tea manufacturers are also
fast increasing their market share. The demand for packet tea is driven by rising consumer
incomes, quality of tea and product diversification with flavored tea production. The share of
CTC tea constitutes 80% of the tea market followed by Orthodox Tea &Darjeeling Tea. Apart
from them there are also a variety of flavored teas such as green tea, earl grey tea, jasmine tea,
ginseng oolong, masala chai, green lemon tea, etc
CTC (cut, twist and curl) tea is the major contributor in the tea market segment but with the
increasing consciousness on the health issues, green tea sales are picking up. Specialty tea
market in India is growing at the rate of 25% annually.
Tea Production to remain stable
Tea production is expected to inch up marginally higher than last year in 2013-14 on account of
better productivity from North India. India is the second largest producer of tea in the world with
a 25% share of total production, but the country consumes 75-80% of its own production.
Annual production of tea in 2013 stood at 1200 million kg, with North India accounting for 79%
in total production and the rest coming from South India. Tea production in India in 2013 grew
by 6.5% with a production of 1200 million kgs as compared to 1,126 million kgs in 2012. The
production increase had little impact on exports as the majority of this tea was CTC grade and
effectively all was consumed by the fast-growing domestic market.
Price Realization
Although tea is produced in 14 States in India, five of them—Assam and West Bengal in North
27
India, and Tamil Nadu, Kerala and Karnataka in South India account for over 98% of India‘s tea
production. In India more than 50% sales of tea are routed through auction at various auction
Centre’s located in North & South India. Tea generally moves directly from factory either to
auction Centre for sale or for direct sale to national or international buyers. Auction buying is
much more fragmented and there exists a sizable gap between wholesale and retail prices. There
is also a clear seasonality in prices of tea within a year. Another of the variable explaining the
variance in auction prices is unit export price. Higher export price raises the bargaining position
of sellers at auctions. Export volume also has an influence on the price formation at auctions as
higher export reduces domestic availability and hikes up domestic price. Further, lots offered and
quantity sold is inversely related with average price realization at auction.
28
COMPANY PROFILE
3.2 COMPANY PROFILE
Lockhart one of the early estates established by a pioneer Mr. Baron John Rosenberg
and his son Barron Otto in High Range Kannan Devan hills, initially named Lockhart and
Manale in the year 1879. Manale area was the first estate Cinchona planting. The estate was later
sold to Malayalam Rubber and products Co .Ltd, a subsidiary of Harrisons and Crossfields Ltd in
1910. Mr. C .Fraser was the first manager of the estate.
Lockhart Tea Estate situated in Devikulam and 8 km away from Munnar town at an
altitude of over 5500 feet MSL has a total area of 1046.54 hectares of which 686.86 hectares is
under tea plantation. The main categories of tea manufactured here are Orthodox Tea, Green
Tea, and specialty tea. The tea produced here has a clean and medium toned fragrance of sweet
biscuit in a dip of malt. The liquor is golden yellow and is strong boded with a lively briskness.
Once or twice in a year when the estate is covered with frost, the temperature goes below -
4 degree Celsius. The tender leaves which get attested are converted to high priced unique
special teas which are known as Frost tea. The tea thus produced has a unique taste and highly
fragrant liquor.
The estate has 430 permanent workers and 25 temporary workers. Most of the workers are
women. Lockhart factory lies sprawling in an area of 1.5 hectares. The factory modernized in
April 2009 and now has the production capacity of 22000 Kg green leaf per day. At the Lockhart
factory 75% of the production goes international markets.
29
The estate is having 5 divisions namely Lockhart, Manale, Panniar, Poopara and
Anainrangal. The estate is following UPASI recommendations for the agricultural operations.
Lockhart is Kochi based Harrisons Malayalam Ltd (RP Sanjiv Goenka Group) tea plantation.
Lockhart estate in Munnar has obtained trustea verification. In addition to trustea, it is a
participant in ethical tea partnership program and certified under rainforest Alliance and UTZ,
reinforcing management commitment to responsible sourcing methods. Lockhart is the second
one to get such multiple certifications after Wentworth estate in Niligiri district of Tamilnadu.
“Working towards trustea Code implementation has been a good learning experience.
Support from the team in gap analysis and insights into corrective measures were really useful.
By being trustea verified has increased the responsibility towards environment, wildlife and
neighboring communities.” –Mr. Devadas, Group Manager –High Range Group.
Since Tyroon’s factory was already ISO and HACCP certified, a certain basic level of
hygiene already existed. Nevertheless, the TRUSTEA implementation team helped the company
further its disaster management practice by working on a much improved system. Regular
training at the factory helps workers understand the urgent need to improve hygiene while
working. This was enforced via a uniform changing room at the entrance of the factory and
regular washing of hands on entry and exit of the factory. Additionally, the factory team
innovated with a soak-pit that works on the principle of sedimentation of waste water to purify it
before the water exits the factory. Similar soak-pits have also been constructed at the field where
waste water exits the estate premises.
30
Impact on Social and Environment Aspects
Intensive trainings were conducted for employees on occupational health and safety
measures. Workers have been encouraged to use personal protection equipment’s while
undertaking their works. It has created large scale health and safety awareness in all the
employees of the estate and is benefited to everyone.
Initiated collection, segregation and effective disposal of various wastes generated in the
estate. Thrust is given to explain the hazardous aspects of plastic pollution and this was
communicated down below and the practice of collection and segregation is adopted in the
routine life of the employees.
Buffer zones / no spray zones have been established along the roads, natural water bodies
and other areas where human activity is involved to avoid any pollution and contamination.
Stores have been modified as per the Code standards and safety measures have been put in
place. Now all the stores have got a new look with everything inside arranged in a systematic
manner. Wash and changing room have been created.
Soak pits have been made near labour lines, bungalows, dispensaries, stores and factory
to ensure treatment of waste water generated, ensure product safety. Soil and water conservation
works are undertaken on a large scale.
Weekly communication meetings are held to guarantee better feedback on each of the
contributed and performed.
31
Stringent measures are undertaken in processing area to enhance tea quality and safety.
Energy conservation and its usage are closely monitored. TQMs are done to solve identified
problems and ensure smooth functioning of the factory. Efforts are focused towards making
Lockhart a model Factory.
CSR Activities at Lockhart
The guiding principle of Lockhart’s Corporate Social Responsibility programs is “impact
through Empowerment”. “Environment, health and education” are the core areas of our CSR
programs. Native tree species are planted in vacant blocks of the estate. Waste management
procedures are adopted by segregating degradable and non-degradable wastes at each line unit.
Regular health checkups are carried for all the workers. Free medical / eye camps are
organized for orphanages, old age homes and nearby villages. Awareness camps are conducted
on HIV/AIDS, Water born and Air borne diseases which have benefited local communities
Conducting free tuition classes for school going children. Providing Scholarships for
merit students and note books for poor students. Conducting sports events for the dependents of
the workers.
32
RPG GROUP
The RPG Group is an industrial conglomerates headquartered in Mumbai, India. It was

founded by R.P.Goenka in 1979, and initially encompassed the Phillips Carbon black, Asian
Cables, Agar Para jute and Murphy India companies. R.P.Goenka held the title of Chairman
Emeritus until his death in 2013, while the Chairmanship has assumed by his son Harsh Goenka.
Today the RPG Group companies have over 15 companies in the areas of Infrastructure, types
Technology. Some of the companies it holds are CEAT Tires, Information Technologies Ltd,
Infrastructure Company KEC International Ltd, and Pharmaceutical Company, RPG Life
Science Ltd
HISTORY
Harrisons Malayalam Limited (HML) is the most successful integrated agricultural

operation in south India. One of the oldest – with a history that goes back hundred and fifty years
it has been a pioneer in corporate farming and has over this period, established and run
plantations for Tea, Rubber, Cocoa, Coffee and a wide variety of species.
Today the company cultivates about 14,000 hectare and processes produce from other
farmlands in its neighborhood. Rubber, Tea and pineapple, respectively on 7400, 6000, and 1000
hectares of own farmland give the company its primary products.
With a production of an about 9000 tons of Rubber, 20,000 tons of Tea and 25,000 tons of
pineapple, HML is South India’s largest agriculture operation.
The company also produces smaller quantities of a variety of other exotic horticultural crops
like Nut, Cardamom, Cocoa, Coffee, Coconut, Pepper and Vanilla as well as limited quantities
CTC, on Orthodox Tea, Rubber in concentrated Rubber latex, block and sheet Rubber forms.
Fresh Pineapple is the other large produce. Being the industry leader in natural rubber
production, HML is known for its high quality natural in the local and export markets.
33
Exotic horticulture being a labour intensive activity the company has been a major employer
of people. It today has a workforce about 15,000. Operating in rural India, the company has been
responsible for bringing economic activity to remote part of this region and providing basic
amenities including healthcare to a population otherwise deprived of such support.
Over half of the workforce is of women. Equal status is accorded to them and they earn
same salaries / wages as their male counterparts. Over its history, the company has built many of
tea factories and commercial premises and bridges in the region. The activity is constitutes today
the company’s Engineering Divisions takes up independent civil and electrical projects. The
company is part of RPG Enterprise one of the largest and well respected industrial groups in
India. The group has turnover of around Rs. 73 Billion and interests in toys’, cables, power
transmission, telecommunications, pharmaceuticals, specialty chemicals, retail and consumer
marketing, hotel and tourism, entertainment and agri-business. Listed on the National, Bombay
and Cochin stock exchanges, HML has a paid capital of Rs. 184.50 million and a shareholders
base around 33,000.
Harrisons Malayalam Ltd (HML) is a member of RPG enterprises, which is one of the
top five industrial groups, with technology to 15 fortune companies which gives it a footing on a
global canvas. RPG is committed to Total Quality Management (TQM) in all their activities,
ranging from plantation to tires, cables and power Transmission, Pharmaceuticals, Hotel and
Tourism Telecommunication, Agri Business, Retail, Specialty Chemicals, Consumers Marketing
and Entertainment. The group has a turnover of over Rs. 65bn($1.Bn.)
Harrisons Malayalam Ltd is one of the oldest companies of RPG group, and its history
can be traced back to the year 1844 Liverpool UK. The company’s Indian operation began in
1907 when an office was opened in Quilon Kerala. The Indian operations were carried out by
two companies Harrisons & Crossfield (India) Ltd and Malayalam plantation (India) Ltd, which
were subsequently merged into one company in 1984 to from Harrisons Malayalam Ltd. The
company was part of Harrisons & Crossfield. UK till 1988, and with the abolition of managing
agency system and introduction of Foreign exchange regulation act (FERA),HML became a
widely public sector company and an RPG enterprise.
34
Presently HML is one of the largest plantation company base in South India with the
turnover of the Rs. 150 crores. Its business activities are spread over a wide field of activities
like, agriculture (principally Tea and Rubber), Biotechnology (Tissue culture), Travel and
Tourism, Shipping, Cargo and Forwarding Engineering and Consumer Marketing.
HML has 20000 hectares of land under its fold, of which 6000 hectares is planted with
Tea 6000 hectares with Rubber and 10000 hectares under fuel and private forest. HML is a well-
diversified single largest producer of natural rubber in the country, and the second largest
producer of Tea in South India. HML currently produces 17 million Kg of tea from its estates
located in diverse agro-climate conditions. The company has modern CTC tea factories,
including a new factory with 4 lines CTC capacity put at Achoor estate. HML enjoys the
consumer’s flexibility to produce diverse types of CTC Tea factories estate. HML enjoys the
consumers to produce diverse types of CTC and Orthodox teas according to the market demands
and consumers need. Apart from the above, HML is one of the largest players in the Cochin Tea
Auctions, offering around 15% of the total traded volume.
The company currently produces 17 million Kg of tea and 11 million Kg of Rubber

valued at Rs. 122 Crores. Both tea and rubber produced by HML has acquired a brand status at
the auctions, and commands a premium and are on the top of list both in terms of quality and
price realization.
To provide customers with value added products, HML entered in to the highly
competitive branded tea market in the year 1992 in the states of Andhra Pradesh, Kerala,
Karnataka and Tamilnadu. The brands Sponsors, Harrisons Gold, Mountain Mist and Surya have
become popular with the consumers.
Presently, the consumers marketing division act as primary consumers of our plantations.
With aggressive marketing and development of distribution channels. HML is among the top
three companies in this market. Our success is attributed to the superior blends based three on
consumer preferences and our obsession for products quality. Long term goal of the company is
to reach out to the newer markets in India and abroad thus globalize the brands. Apart from the
above activities, the CMD provides series to various tea growers in the form of warehousing.
HML warehouse is the most modern and one of the largest located at the south Indian
Manchester, Coimbatore.
35
CHAPTER -4
RESEARCH METHODOLOGY
INTRODUCTION
Research methodology is a way to systematically solve the research problems. It includes the
overall research design, the sampling, and data collection method and analysis procedure.
4.1 RESEARCH DESIGN
A research design is the arrangement of condition for collection and analysis of data a
manner, which may result in an economy in procedure. It stands for advance planning for
collection of the relevant data and the techniques to be used in analysis, keeping in view the
objectives of the research and availability of time. The research used here for the study is
Analytical research. Analytical research is quite informal, it relays on the secondary data. The
results are usually used for making decision by themselves.
4.2 SOURCES OF DATA
The information necessary for this study is collected using secondary source:
Secondary sources: - 1) Annual reports of the company
2) Balance sheet of the company
3) Related information from internet
4) Books and Publications.
36
4.3 PERIOD OF STUDY
Data of five financial years are used for the purpose of study. Five years of study ranges
from 2010-2011 to 2014-2015.
4.4 TOOLS USED FOR ANALYSIS
 Ratio analysis
 Mean
 Standard Deviation
 Correlation
RATIO ANALYSIS:
so that the strength and weakness of the firm as well as its historical performance and current
MEAN:
A mean is the simple mathematical average of a set of two or more numbers. Statistical mean
refers to the mean or average that is used to drive the central tendency of the data in question. It
is determined by adding all the data points in a population and then dividing the total by the
number of points. The resulting number is known as the mean or the average.
37
STANDARD DEVIATION:
A measure of the range values is a set of numbers.” Standard deviation is a statistic used as a
measure of the dispersion or variation in a distribution, equal to the square root of the arithmetic
mean of the deviations from the arithmetic mean.”
CORRELATION:
“Correlation is any of a broad class of statistical relationships involving dependence, though in

common usage it most often refers to the extent to which two variables have a linear relationship
with each other.”
38
CHAPTER -5
DATA ANALYSIS AND INTERPRETATION
RATIO ANALYSIS
The idea of ratio analysis was introduced by Alexander Wall for the first time in 1919.
Ratios are quantitative relationship between two or more variables taken from financial
statements.
so that the strength and weakness of the firm a well as its historical performance and current
LIQUIDITY RATIO
Liquidity ratios may be defined as financial ratio, which thorough tight on short term
slovenly of firm. Liquidity Ratio measures the ability of the firm to meet its current obligations.
Liquidity ratio needs establishing a relationship between cash and other current assets to current
obligations to provide quick measures of liquidity. A firm should ensure that it doesn’t suffer
from lack of liquidity and also that it does not have excess liquidity. Failure of a company to
meet its obligations due to lack of sufficient liquidity, will result in a poor creditworthiness, loss
of creditor’s confidence.
Liquidity is perquisite for the survival of firm. The short-term creditors of firm are
interested in short-term solvency / liquidity of firm. But liquidity implies from the viewpoint
utilization of funds of the firm, that funds are idle or they even very little. So liquidity ratio
39
measure ability of a firm to meet its short- term obligations and reflect short- term financial
strength / solvency of firm.
This ratio helps to know the liquidity of the firm i.e. ability to meet its short term obligations or
current liabilities. The solvency of the firm can be determined in the following ratios.
1) CURRENT RATIO:
This ratio is an indicator of firm’s commitment to meet its short- term liabilities. Higher ratio,
better the coverage, 2:1 ratio is treats as standard ratio. This ratio is also called as solvency /
working capital ratio.
The current ratio is the ratio of the current assets and current liabilities. It is calculated by
dividing current assets by current liabilities.
Current ratio = current assets / current liability
The current ratio is a measure of short- term solvency of the company. It indicates the rupee of
current assets available for each rupee of current liability. The higher the current ratio the larger
the amount of rupees available per rupee of current liability and the greater the safety of the
short- term creditors. This margin of safety to the creditors is essential due to the unevenness of
the flow of funds through current assets and current account. The current liabilities can be settled
by making the payment whereas the current assets available to liquidate them are subject to
shrinkage of various reasons like obsolescence of inventory, bad debts, and unexpected losses
and so on. Thus current ratio represents the short- term liquidity “Buffer”.
40
TABLE 5.1: CURRENT RATIO (AMOUNT IN CRORES)
YEAR 2010-11 2011-12 2012-13 2013-14 2014-15
CURRENT 206.14 213.90 84.37 237.90 215.60

ASSET
CURRENT 234.01 241.61 128.49 253.56 268.09
LIABILITY
CURRENT 0.88 0.89 0.66 0.94 0.80
RATIO
SOURCE: ANNUAL REPORTS OF COMPANY
Interpretation:
The ratio is quite low all the years, when compared with the conventional standard
2:1.throughout the given five years the ratio is below 2 so it is a bad sign for the company to
meet the short term liability with ease. But in the year 2013-14 it’s good to some extent because
the ratio is near to 1, which can at least meet the current liability with the current asset.
41
CHART 5.1: CURRENT RATIO
CURRENT RATIO
1 0.94
0.88 0.89
0.9
0.8
CURRENT RATIO IN TIMES
0.8
0.7 0.66
0.6
0.5
0.4 CURRENT RATIO
0.3
0.2
0.1
0
2010-11 2011-12 2012-13 2013-14 2014-15
YEAR
42
2) QUICK / ACID TEST / LIQUID RATIO:
Liquid ratio is indication of availability of quick assets to honor its immediate claims
Higher the ratio betters the coverage. And the standard ratio is 1:1. An asset is liquid if it can be
converted into cash immediately without loss of value. Hence cash is most liquid assets after
assets which are considered to be relatively liquid are; Debtor’s balance, marketable securities
etc. inventories considered to be less liquid therefore they require some time form relishing into
cash and their value also has tendency to fluctuate.
The ratio is calculated as follows:
Quick ratio = Quick Assets / Current Liabilities
TABLE 5.2: QUICK RATIO (AMOUNT IN CRORES)

YEAR 2010-11 2011-12 2012-13 2013-14 2014-15
QUICK 180.28 195.01 63.77 212.48 192.78

ASSETS
CURRENT 234.01 241.61 128.49 253.56 268.09
LIABILITY
QUICK 0.77 0.80 0.50 0.84 0.72
RATIO
Interpretation:
The ratio is moderate during the year 2010-11, 2011-12 and 2013-14 when compared with the
conventional standard 1:1, which is quite satisfactory. But in the year 2012-13 the ratio is
decreased to 0.50 which indicates that the company struggled to maintain or grow sales, paying
bills too quickly or collecting receivables too slowly.
43
CHART 5.2: QUICK RATIOS
QUICK RATIO
0.9 0.84
0.8
0.8 0.77
0.72
0.7
RATIO IN TIMES
0.6
0.5
0.5
0.4
0.3 QUICK RATIO
0.2
0.1
0
2010-11 2011-12 2012-13 2013-14 2014-15
YEAR
44
3) CASH / ABSOLUTE LIQUID RATIO:
It calculated as follows:
Cash ratio = Cash / Current liability
Here, trade investment; marketable securities are equivalent of cash. And therefore
they may be included in the computation of cash ratio. The standard rate for this ratio 0.5:1. This
ratio also indicates liquidity position and company and firms commitment to meet its short -term
liabilities
TABLE 5.3: CASH RATIO (AMOUNT IN CRORES)

YEAR 2010-11 2011-12 2012-13 2013-14 2014-15
CASH 9.63 14.39 20.25 16.71 9.43
CURRENT 234.01 241.61 128.49 253.56 268.09

LIABILITY
CASH 0.04 0.06 0.16 0.07 0.04
RATIO
Interpretation:
Cash ratio is much less than the conventional standard of 0.5:1 for all the five years from 2010-
11 to 2014-2015, which indicates that the company needs more than just its reserves to pay off
its current debt. It can be inferred that the liquidity of the company is very low during these
periods.
45
CHART5.3: CASH RATIO
CASH RATIO
0.18
0.16
0.16
CASH RATIO IN TIMES
0.14
0.12
0.1
0.08 0.07
0.06
0.06 CASH RATIO
0.04 0.04
0.04
0.02
0
2010-11 2011-12 2012-13 2013-14 2014-15
YEAR
46
STRUCTURE OF CURRENT ASSETS
1) CASH TO CURRENT ASSETS:
Cash to current asset ratio = cash / current assets
Cash to current asset ratio measures a company’s liquidity basing how liquid a company is by its
cash and cash equivalents and marketable securities alone. High or increasing cash to current
assets ratio is generally a positive sign, showing the company’s most liquid assets represent a
larger portion of its total current assets.it also indicates the company may be better able to
convert its liquid assets, such as inventory, into cash
TABLE 5.4: CASH TO CURRENT ASSETS RATIO (AMOUNT IN CRORES)

YEAR 2010-11 2011-12 2012-13 2013-14 2014-15
CASH 9.63 14.39 20.25 16.71 9.43
CURRENT 206.14 213.90 84.37 237.90 215.60

ASSETS
CASH TO 0.05 0.07 0.24 0.07 0.04
CURRENT
ASSETS
RATIO
Interpretation:
When compared with the standard ratio 1:1 the ratios of the accounting years 2010-11 to
2014 -15 is comparatively low .the ratio goes on like this 0.05,0.07,0.24,0.07,0.04.This shows
that the company has less liquidity and it cannot meet its immediate liability with ease and has to
go for some other sources to meet its current liability.
47
CHART 5.4: CASH TO CURRENT ASSETS RATIO
CASH TO CURRENT ASSETS

0.3
0.25 0.24
RATIO IN TIMES
0.2
0.15
0.1 CASH TO CURRENT

0.07 0.07
ASSETS RATIO
0.05
0.05 0.04
0
2010-11 2011-12 2012-13 2013-14 2014-15
YEAR
48
2) INVENTORY TO CURRENT ASSETS:
Maintaining the right amount of inventory is an important part of managing small business
resources and cash flow. Too much inventory takes up valuable resources and cash that cannot
be used for other purposes, while too little might not be enough to meet customer demand
Inventory to current asset ratio= inventory /current assets
TABLE 5.5: INVENTORY TO CURRENT ASSETS RATIO (AMOUNT IN CRORES)

YEAR 2010-11 2011-12 2012-13 2013-14 2014-15
INVENTORY 25.86 18.89 20.60 25.42 22.82
CURRENT 206.14 213.90 84.37 237.90 215.60

ASSETS
INVENTORY 0.13 0.09 0.24 0.11 0.11
TO
CURRENT
ASSETRATIO
Interpretation:
The ratios for the five years are less than 1; the ratios are 0.13, 0.09, 0.24, 0.11, and 0.11 it is a
good sign by the company that it maintains less inventory this shows the company does not
spend much on the inventory, too much of inventory takes up valuable resources and cash that
cannot be used for other purposes
49
CHART: 5.5 INVENTORY TO CURRENT ASSET RATIO
INVENTORY TO CURRENT ASSET RATIO

0.3
0.25 0.24
RATIO IN TIMES
0.2
0.15 0.13
0.11 0.11
0.1 0.09 INVENTORY TO CURRENT
ASSET RATIO
0.05
0
2010-11 2011-12 2012-13 2013-14 2014-15
YEAR
50
3) FINANCIAL ASSETS TO CURRENT ASSETS:
Financial is an intangible asset whose value is derived from a contractual claim, such
as bank deposits, bonds and stocks. It is more liquid than other tangible assets. Current assets an
item on the entity’s balance sheet that is either cash, a cash equivalent, or which can be
converted into cash within one year. Some of the current assets are cash prepaid expenses,
accounts receivable, inventory.
Financial asset to current asset ratio = financial asset / current asset
TABLE 5.6: FINANCIAL ASSET TO CURRENT ASSET (AMOUNT IN CRORES)

YEAR 2010-11 2011-12 2012-13 2013-14 2014-15
FINANCIAL 206.14 213.90 84.37 237.90 215.60

ASSET
CURRENT 206.14 213.90 84.37 237.90 215.60
ASSET
FINANCIAL 1 1 1 1 1
ASSET TO
CURRENT
ASSET RATIO
Interpretation:
The table shows the ratio of financial assets to current assets for the year 2010-11 to 2014-2015
as 1 which denotes the assets are in a balanced condition even if the current assets is not
available for the liquidity the financial assets can be used for the payment of current liability
51
CHART 5.6: FINANCIAL ASSETS TO CURENT ASSET RATIO
FINANCIAL ASSETS TO CURRENT ASSET RATIO

1.2
1 1 1 1 1
1
0.8
RATIO IN TIMES
0.6
0.4 FINANCIAL ASSET TO

CURRENT ASSET RATIO
0.2
0
2010-11 2011-12 2012-13 2013-14 2014-15
YEAR
52
LEVERAGE RATIO
Leverage ratio is also called as capital structure ratio. It relates to the study of various
types of capital structure of firm. The long- term solvency of a company can be examined by
using leverages or capital structure ratios. These ratios are for long-term creditors to judge the
long-term financial strength of the company. The aspects that are mainly considered for this are:
1. Ability to repay the principal when due and
2. Regular payment of the interest.
1) DEBT RATIO:
It expresses outside liabilities i.e. both long -term and short-term in relation to total
capitalization of firm.
It is calculated as follows:
Debt ratio = Total Debt / Total Assets
Generally creditors will prefer low debt ratio, since lower the ratio, higher the caution against
creditors losses in the event of liquidation. Conversely, owners may prefer high debt ratio either
 To magnify earnings or
 Because issuing new share means giving up some degree of control
But a high debt ratio may create problem with respect to future financing since creditors may
reluctant to lend the firm more money unless equity base is increased.
53
TABLE 5.7: DEBT RATIO (AMOUNT IN CRORES)
YEAR 2010-11 2011-12 2012-13 2013-14 2014-15
TOTAL 113.17 101.26 112.89 109.61 112.54

DEBT
TOTAL 643.37 651.81 530.10 680.61 652.70
ASSET
DEBT 0.18 0.16 0.21 0.16 0.17
RATIO
Interpretation:
Ratio is fluctuating in between the range of 0.16 to 0.21 during the period of study. In the year
2010-11 the ratio is 0.18 and it is decreased to 0.16 in 2011-12. Again the ratio is increased to
0.21 in the year 2012-13. Which indicates that lenders are financing one-third of the total assets
and remaining two- third is financed by owners of the firm, indicating that the firm is more
dependent on owners fund to meet its long-term liabilities.
54
CHART 5.7: DEBT RATIO
DEBT RATIO
0.25
0.21
0.2
0.18
0.17
RATIO IN TIMES
0.16 0.16
0.15
0.1
DEBT RATIO
0.05
0
2010-11 2011-12 2012-13 2013-14 2014-15
YEAR
55
2) DEBT-EQUITY RATIO
It measures the relation between debt and equity in the capital structure of the firm. In
other word, this ratio shows the relationship between the borrowed capital and owner’s capital.
This ratio shows relative claim of the creditors and shareholders against the assets of the
company. It is expressed as:
Debt equity ratio = Total Debt / Total Equity
Generally higher the ratio greater is the possibility of increasing the ROR to equity & vice
versa. A high debt equity ratio may be adopted to take advantage of cheaper debt capital. The
ratio indicates the extent to which the firm depends upon outside for its existence. The ratio
provides margin of safety to the creditors. It tells owners the extent to which they can gain
benefits of maintaining control with a limit investment
56
TABLE 5.8: DEBT-EQUITY RATIO (AMOUNT IN CRORES)
YEAR 2010-11 2011-12 2012-13 2013-14 2014-15
TOTAL 113.17 101.26 112.89 109.61 112.54

DEBT
TOTAL 184.5 184.5 184.5 184.5 184.5
EQUITY
DEBT 0.61 0.54 0.61 0.59 0.61
EQUITY
RATIO
Interpretation:
The debt equity ratio for all the years from 2010-11 to 2014-15 shows that the ratio is fluctuating
in between the range of 0.54 to 0.61 during the period of study. Which indicates that the
Company depends more on internal sources than on external sources i.e. it indicates that
company depends upon insiders i.e. on shareholders fund & and it also indicates that company is
having sound financial position.
57
CHART 5.8: DEBT EQUITY RATIO
DEBT EQUITY RATIO

0.62
0.6
0.58
RATIO IN TIMES
0.56
0.54 DEBT EQUITY RATIO
0.52
0.5
2010-11 2011-12 2012-13 2013-14 2014-15
YEAR
58
3) LONG-TERM DEBT RATIO
In risk analysis, the way to determine a company’s leverage is as the ratio is calculated by
taking the company’s long term debt and dividing it by the sum of its long term debt and its
preferred and common stock. The greater a company’s leverage, the higher the ratio. Generally,
companies with higher ratios are thought to be more risky because they have more liabilities and
less equity
Long term debt ratio = long term debt / total asset
TABLE 5.9: LONG TERM DEBT-EQUITY RATIO (AMOUNT IN CRORES)
YEAR 2010-11 2011-12 2012-13 2013-14 2014-15
LONG 91.87 91.21 81.94 105.13 97.94

TERM
DEBT
TOTAL 643.37 651.81 530.10 680.61 652.70
ASSET
LONG 0.14 0.13 0.15 0.15 0.15
TERM
DEBT
RATIO
Interpretation:
The ratios of long term debt in the period of study is very low for the year 2010-11 it starts with
0.14 and decreases to 0.13 in the next year 2011-12 and it stays at 0.15 for the next three years
2012-13 to 2014-15. This shows that company has less liability and more equity.
59
CHART 5.9: LONG TERM DEBT RATIO
LONG TERM DEBT RATIO

0.155
0.15 0.15 0.15
0.15
0.145
RATIO IN TIMES
0.14
0.14
0.135
0.13 LONG TERM DEBT RATIO
0.13
0.125
0.12
2010-11 2011-12 2012-13 2013-14 2014-15
YEAR
60
4). SHORT -TERM DEBT RATIO
Short term debt is listed on the balance sheet, and is often the debt the company has
accumulated that is due in less a year and that have interest applied to the debt. Short term debt
often carries the highest interest rates of all company’s debt. Bank loans, notes commercial
paper, and short term lines of credit are examples of short term debt It is useful for a company to
leverage its operations a little further, however companies relying too much on this can quickly
get overwhelmed with debt, crippling its operations as it has to spend its earnings on debt and
interest repayment instead of improving the company
Short term debt ratio = Short term debt / total assets
TABLE 5.10: SHORT TERM DEBT RATIO (AMOUNT IN CRORES)
YEAR 2010-11 2011-12 2012-13 2013-14 2014-15
SHORT 234.01 241.61 128.49 253.56 268.09

TERM
DEBT
TOTAL 643.37 651.81 530.10 680.61 652.70
ASSET
SHORT 0.36 0.37 0.24 0.66 0.41
TERM
DEBT
RATIO
Interpretation:
The short term debt during the period 2010-11 is 0.36 , 0.37 in 2011-12, and it decreased to 0.24
In 2012-2013 , increased in the next year and again decreases in the last year 2014-15.this is
good sign for the company i.e., the company can easily meet its short term debt with the asset the
company owns.
61
CHART 5.10: SHORT TERM DEBT RATIO
SHORT TERM DEBT RATIO

0.7 0.66
0.6
0.5
RATIO IN TIMES
0.41
0.4 0.36 0.37
0.3
0.24
SHORT TERM DEBT RATIO
0.2
0.1
0
2010-11 2011-12 2012-13 2013-14 2014-15
YEAR
62
5).EQUITY TO CAPITAL RATIO
It is a computation that indicates the financial strength of a company. The ratio is equal to the
fixed assets of a company divided by its equity capital .Equity capital is the amount of money
invested in a company by its shareholders. If the ratio is greater than 1, some of the company’s
assets have been financed by debt.
Equity to capital ratio = Equity / Capital
TABLE 5.11: EQUITY TO CAPITAL RATIO (AMOUNT IN CRORES)

YEAR 2010-11 2011-12 2012-13 2013-14 2014-15
EQUITY 184.50 184.50 184.50 184.50 184.50
CAPITAL 335.94 337.45 338.11 340.37 305.11
EQUITY TO 0.55 0.54 0.54 0.54 0.60

CAPITAL
Interpretation:
The equity to capital ratio for the year 2010-11 is 0.55 and for next 3 years it is 0.54, and during
the year 2014-15 it is 0.60. Throughout the period of study the ratio is below 1 which is a good in
indication that the company’s assets are not financed by debt, where the debt of the company
will be less.
63
CHART 5.11: EQUITY TO CAPITAL RATIO
EQUITY TO CAPITAL RATIO

0.61
0.6
0.6
0.59
RATIO IN TIMES
0.58
0.57
0.56
0.55
0.55
0.54 0.54 0.54 EQUITY TO CAPITAL
0.54
0.53
0.52
0.51
2010-11 2011-12 2012-13 2013-14 2014-15
YEAR
64
TAB LE 5.12: MEAN AND STANDARD DEVIATION OF LIQUIDITY RATIOS
Standard
Ratio Formula Mean deviation
Liquidity ratios
Current ratio Current asset / current liability 0.83 1.58

Quick ratio (Current assets –inventory 0.73 1.58
) /current liability
Cash ratio Cash / current liability 0.08 1.30
AVERAGE [0.55] [1.49]
Interpretation:
From the table it is clear that the mean of the liquidity ratios are 0.83, 0.73, 0.08 and standard
deviation of 1.58, 1.58, 1.30 respectively which shows on an average the liquidity ratio is 0.55
during the period with standard deviation 1.49 which denotes the liquidity ratio that on an
average has only 55 paisa of assets to pay off every rupee of its short term liabilities. This
signifies that the short term solvency of the firm is under serious strain as its liquidity position is
highly vulnerable. Obviously, there is an urgent need to augment the proportion of both current
asset and quick asset to improve the liquidity of the company in the short run .Cash ratio shows
the mean of 0.08 against the liberal standard 0.5 it shows the credit score of the is one of the
lowest. This does not augur well for either the company or its shareholders.
65
TAB LE 5.13: MEAN, STANDARD DEVIATION AND COEFFICIENT OF VARIANCE
YEARS DEBT EQUITY RATIO

2010-11 0.61
2011-12 0.54
2012-13 0.61
2013-14 0.59
2014-15 0.61
MEAN 5.94
STANDARD 0.89
DEVIATION
COEFFICIENT OF 14.9%
VARIANCE
Interpretation:
The table shows that the average value of this ratio is 5.94, the standard deviation of 0.89 and
absolute C.V of 14.9%. The mean value shows that the debt of the firm is lesser than the total
equity. The percentage of C.V is moderate which indicates the moderate consistency in this ratio.
This can be inferred that the long term solvency position of company is good and manageable.
However the company’s profit has been improved a bit which is a good sign for the company
indicating its current financial health.
66
TABLE 5.14:
The Correlation Coefficients between Liquidity Ratio and Leverage Ratios
Debt ratio Debt to equity

Current ratio (-0.843) (-0.360)
0.036 0.276
Quick ratio (-0.849) (-0.316)
0.034 0.302
Cash ratio (0.265) (0.383)
0.333 0.262
Interpretation:
From the table it can be concluded that there is a statistically significant negative correlation
between the current ratio and debt ratios. As the ratio of current assets to current liability
increases, the debt ratio decreases. The more liquid the firm is, it is the less leveraged. The
relation between the current ratio and debt equity ratio implies that an increase in liquidity
reduces the debt to equity ratio or reduces the leverage of the firm. Only debt ratio and quick
ratio has significant and it’s positive it shows the high level of leverage.
67
TABLE 5.15:
The Correlation Coefficient between Current assets and Leverage Ratio
debt ratio Debt to equity

ratio
Cash to current assets ( 0.437) (0.439)
0.231 0.230
Inventory to current (0.942) (0.877)
assets 0.008 0.025
Financial assets to (-0.243) (-0.474)
current assets 0.347 0.210
Interpretation:
The table shows that there is no significant correlation between the structure of current assets and
leverage. When a firm increases the share of cash in current assets, it increases its debt regardless
of whether it is manifested through the ratio of total liabilities to total assets, total liabilities and
capital.it shows the firm has less liquid assets. There is positive correlation between the
proportion of inventories in current assets and leverage of the firm. Since the inventory is illiquid
asset, this indicates that the increase in illiquid assets results in increase of firm leverage.
Financial assets and debt ratios shows no statistically significant correlation.
68
TABLE 5.16:
The Correlation Coefficient between Liquidity and Long-term and short-term Leverage
LONG TERM DEBT RATIO SHORT TERM DEBT RATIO

Current ratio (-0.443) (0.684)
0.227 0.102
Quick ratio (-0.354) (0.700)
0.280 0.094
Cash ratio (0.343) (-0.243)
0.286 0.347
Interpretation:
The above table shows that there is no significant between the liquidity and short term leverage.
By decreasing the ratio of current assets to current liabilities, short term leveraged will be
decreased. This means there is a decrease of cash and receivables in relation to current liabilities.
In such situation there is a need to borrow. Increasing the cash ratio also leads to reduced short
term leverage, and such a correlation is statistically significant and logical. This result shows that
liquidity is affected by long term debt than short term debt. This shows there is negative
correlation between the ratios.
69
TABLE 5.17:
The Correlation Coefficient between Current assets Structure and Long-term and Short-
term Leverage
LONG TERM DEBT RATIO SHORT TERM DEBT RATIO

Cash to current assets (-0.196) (-0.693)
0.376 0.097
Inventory to current (0.539) (-0.693)
assets 0.174 0.097
Financial assets to (0.707) (0.600)

current assets 0.091 0.142
Interpretation:
The table shows that there is a statistically no significant correlation between the structure of
current assets and long term and short term debt ratios. Increasing the share of cash in current
assets leads to decreasing of long term as well as short term leverage. Increasing of inventories in
current assets leads to an increase in both types of leverage this shows that the firms with more
liquid assets are less leveraged
70
FINDINGS
RATIOS
 The current ratio is quite low all the years, so it is a bad sign for the company to meet the
short term liability.
 The quick ratio is moderate during the year 2010-11, 2011-12, 2013-14 when compared
with the conventional standard 1:1, which is quite satisfactory.
 Cash ratio is much less than the conventional standard of 0.5:1 for all the five years,
which indicates that the company needs more than just its reserves to pay off its current
debt.
 The cash to current asset ratio shows that the company has less liquidity and it cannot
meet its immediate liability with ease
 The company maintains minimum inventories, where the available resources are utilized
well and the funds are not stacked in the form of inventory.
 The debt ratio indicates that two-third of the business is financed by owners of the firm,
indicating that firm is more dependent on owners fund to meet its long-term liabilities.
 Company depends more on internal sources than on external sources i.e.it depends upon
insiders and it also indicates that company is having sound financial position.
 From the long-term debt ratio it is clear that the company has less liability but it has
more equity and the short term debt can be easily met with the asset the company owns.
 The company has less debt which is good sign for the company.
71
MEAN AND STANDARD DEVIATION
 The liquidity ratio that on an average has only 55 paisa of assets to pay off every rupee of its short
term liabilities. This signifies that the short term solvency of the firm is under serious strain as its
liquidity position is highly vulnerable
 Cash ratio shows the mean of 0.08 against the liberal standard 0.5 it shows the credit score of the
firm is one of the lowest. This does not augur well for either the company or its shareholders.
 The percentage of C.V is moderate which indicates the moderate consistency in this ratio. This
can be inferred that the long term solvency position of company is good and manageable.
CORRELATION
 The relationship between the current ratio and debt ratio implies that an increase in
liquidity reduces the debt to equity ratio or reduces the leverage of the firm. Only debt
ratio and quick ratio are significant and is positive. It shows the high level of leverage.
 Liquidity is affected by long term debt than short term debt. Also shows there is negative
correlation between the ratios. There is a decrease of cash and cash receivables in relation
to current liability, which may lead to borrow.
 Increasing of inventories in current assets leads to an increase in both types of leverage
here the inventories are good and the company is highly leveraged.
72
SUGGESTIONS
 The company has to take some measures to increase their current assets in order to
maintain 2:1 current ratio.
 Company is suggested to maintain sufficient amount of cash & bank balance to pay its
quick liabilities, which will increase its credit worthiness & goodwill
 Liquidity position of the company is quite high; hence it should decrease investments in
current assets. Hence they have to modify their credit policy to reduce debtors. And also
they should think about these short-term investments in others such as expansion of the
business.
 Company should improve its credit policy for the better management of credit and to earn
more profit
 Company instead of depending fully on internal funds, it can also study the feasibility of
borrowing funds from external sources, so it can still expand its production capacity
considering the demand.
 The company has less liquidity so it has to concentrate on its liquidity position to
maintain a good liquidity position if not it has to go for borrowing , so to avoid it
liquidity has to be maintained.
 Always having a high leverage is not good so it has to be balanced.
 The company can utilize the funds effectively ,they can invest or can use the funds for the
expansion of the business
73
CONCLUSION
From the overall study it is concluded that the firm’s liquidity position is week where the firm
cannot meet its financial obligations with ease, but at the same time it is highly leveraged i.e the
capital structure is operating well. The liquid assets of the firm is less so the leverage of it is
high. The firms is not utilising the funds and profits effectively as the firm is fully dependent on
ownership funds it can go for external funds and the funds can be utilised for expansion of the
business or it can be invested in some other fields in order to get good profit in the forthcoming
years.Apart from this the company is doing good in all other aspects if the profit has to be
increased the company have to maintain a good liquidity position and have to utilise the funds
effectively.
74
APPENDIX
Balance Sheet as at March 31, 2015

Note As at As at
March 31, 2015 March 31, 2014
Rs. Lacs Rs. Lacs
EQUITY AND LIABILITIES

Shareholders' Fund
Share Capital 2 1,845.43 1,845.43
Reserves and Surplus 3 26,820.70 30,346.57
28,666.13 32,192.00
Non-current Liabilities
Long term borrowings 4 5,929.77 6,881.04
Long term provisions 5 3,864.45 3,632.14
9,794.22 10,513.18
Current Liabilities
Short term borrowings 6 4,320.29 3,803.55
Trade payables 7 1,904.27 1,760.99
Other current liabilities 8 5,353.74 4,409.96
Short term provisions 9 1,269.38 1,443.10
12,847.68 11,417.60
Total 51,308.03 54,122.78
ASSETS
Non current assets
Fixed assets 10
Tangible assets 42,715.70 42,944.77
Intangible assets 59.00 -
Capital Work in progress 182.87 161.55
Intangible assets under development - 53.94
Non current investments 11 6.02 6.02
Long term loans and advances 12 744.95 804.14
Other non current assets 13 1.73 300.89
43,710.27 44,271.31
Current assets
Current investments 14 15.00 15.00
Inventories 15 2,281.70 2,541.90
Trade receivables 16 1,277.55 1,485.65
Cash and bank balances 17 942.86 1,670.81
Short term loans and advances 18 2,254.36 2,669.90
Other current assets 19 826.29 1,468.21
7,597.76 9,851.47
Total 51,308.03 54,122.78
The notes are an integral part of these financial statements
75
Statement of Profit and Loss for the year ended March 31,
2015
Note Year ended Year ended
March 31, 2015 March 31, 2014
Rs. Lacs Rs. Lacs
Revenue from operations 20 32,663.86 36,419.09

Other income 21 326.46 266.03
Total revenue 32,990.32 36,685.12
Expenses
Cost of materials consumed 22 9,041.07 10,433.99
Purchases of stock in trade 23 389.49 310.07
Changes in inventories of finished goods 24 64.71 (378.38)
Employee benefits expenses 25 13,233.14 12,288.41
Other expenses 26 11,644.92 11,365.20
Depreciation expenses 10 721.39 631.31
Finance cost 27 1,429.84 1,510.72
Total expenses 36,524.56 36,161.32
Profit/(Loss) before extraordinary item and tax (3,534.24) 523.80
Extraordinary item (net) 42 13.95 25.63
Profit/(Loss) before tax (3,520.29) 549.43
Tax expenses
Current tax - 70.00
Profit/(Loss) for the year from continuing operations (3,520.29) 479.43
(Loss) from discontinuing operations 45 (b) (5.58) (37.93)
Tax expense of discontinuing operations - -
(Loss) from discontinuing operations after tax 45 (b) (5.58) (37.93)
Profit/(Loss) for the year (3,525.87) 441.50
Earnings/(Loss) per equity share 40
Equity shares of par value Rs.10/- each
Basic and diluted (including extraordinary item) (19.10) 2.39
Basic and diluted (excluding extraordinary item) (19.18) 2.38
The notes are an integral part of these financial statements
76
Financial Performance
10 year track record
Rs. Crore
05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15
Profit & Loss Account
Total Income 151.39 208.56 209.14 292.58 350.65 366.55 368.91 349.93 386.86 334.36
Personnel cost 62.66 65.69 70.02 89.33 103.13 104.59 111.14 116.21 123.90 133.01
Raw materials & Purchases 13.41 50.95 52.69 92.62 126.18 115.93 93.83 89.07 107.44 94.31
Power & Fuel 10.52 11.20 11.05 14.12 15.10 14.91 16.60 19.62 20.43 21.31
Cultivation & Other Operating
38.34 41.32 42.73 58.09 66.32 97.32 104.15 91.86 99.81 89.30
Expenses
Depreciation 3.04 2.97 3.00 3.42 4.40 6.11 6.49 6.76 6.47 7.29
127.97 172.13 179.49 257.58 315.13 338.86 332.21 323.52 358.05 345.22
Selling Expenses 8.66 10.47 12.09 15.62 10.62 10.63 9.37 8.35 8.85 10.24
Cost of Sales 136.63 182.60 191.58 273.20 325.75 349.49 341.58 331.87 366.90 355.46
PBIT @ 14.76 25.96 17.56 19.38 24.90 17.06 27.33 18.06 19.96 (21.10)
PBT @ 5.31 15.06 6.99 8.01 12.36 5.25 10.45 3.48 4.86 (35.26)
Earnings per Share of Rs 10/- Rs 2.50 Rs 7.65 Rs 3.35 Rs 3.27 Rs 5.37 Rs 2.14 Rs 2.55 Rs 1.24 Rs 2.38 Rs (19.18)
Dividend per Share of Rs 10/- Rs 1.00 Rs 1.50 Rs 1.50 Rs 1.50 Rs 2.00 Rs 1.50 Rs 1.50 Rs 0.75 Re1.00 Nil
Balance Sheet
Fixed Assets 184.11 182.44 181.36 183.33 421.58 425.52 426.67 433.06 431.60 429.58
Investments 12.11 12.10 12.10 12.10 0.01 0.01 0.21 0.21 0.21 0.21
Current Assets 242.86 253.21 270.76 260.04 76.85 87.05 88.56 96.82 109.41 83.29
Total Assets 439.08 447.75 464.22 455.47 498.44 512.58 515.44 530.09 541.22 513.08
Share Capital 18.45 18.45 18.45 18.45 18.45 18.45 18.45 18.45 18.45 18.45
Reserves & Surplus 283.23 294.11 287.05 289.85 298.31 299.03 300.53 301.21 303.46 268.21
Loan Funds 97.77 76.66 85.49 92.87 104.29 113.28 91.21 81.94 105.13 97.94
Current Liabilities 39.63 58.53 73.23 54.30 77.39 81.82 105.25 128.49 114.18 128.48
Total Liabilities 439.08 447.75 464.22 455.47 498.44 512.58 515.44 530.09 541.22 513.08
@ Before Exceptional / Extraordinary Items
77
BIBLIOGRAPHY
BOOKS
 Shashi K Gupta,R.K Sharma, “Financial Management” Kalyani Publishers India

 Kothari. C. R, (2004): Research Methodology- Methods and Techniques, New Age
International Private Limited.
 Financial Management by “Khan and Jain”.
MANUAL
 Annual Report of Harrisons Malayalam Ltd, Lockhart Tea Factory Devikulam.
WEBSITES
 WWW.harrisonsmalayalamltd.com
 WWW.lockhartteafactory.com
 WWW.NDTVProfit.com
 WWW.Moneycontrol.com
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CHAPTER - 1

INTRODUCTION TO THE STUDY

IMPORTANCE OF FINANCIAL MANAGEMENT

Increase the Value of the Firm

DETERMINANTS OF CAPITAL STRUCTURE

Cost of fixed assets

Size of the business enterprise

The purpose of financing

Elasticity of capital structure

WORKING CAPITAL MANAGEMENT

Gross Working Capital

 Appropriate corporate governance and active involvement by management.

RELATIONSHIP BETWEEN LIQUIDITY AND CAPITAL STRUCTURE

1.2 STATEMENT OF THE PROBLEM

 To analyze the capital structure of the company.

1.4 SCOPE OF THE STUDY

weakness of the company in financial terms

2.1 CONCEPTUAL FRAMEWORK

Meaning and Definition of ratio analysis

Current Ratio = Current Assets/Current Liabilities

Acid Test Ratio:

Acid Test Ratio = Quick Assets/Quick Liabilities

Cash ratio = Cash / Current liability

Cash to current assets:

Cash to current asset ratio = cash/ current assets

Inventory to current asset ratio= inventory /current assets

Financial Asset to Current Assets:

Financial asset to current asset ratio = financial asset / current asset

This is a ratio between total debts and total assets.

Debt Ratio = Total Debt / Total Assets

Debt-Equity Ratio = Total debt / Total equity

Long term debt ratio

Long term debt ratio = long term debt / total assets

Short term debt ratio

Short term debt ratio = Short term debt/ total assets

Equity to capital ratio:

Equity to capital ratio = Equity / Capital

According to the definition of Gerestenbeg, “Capital Structure of a company refers to the

3.1 INDUSTRY PROFILE

1. Evolution of the Tea Industry

3.2 COMPANY PROFILE

1910. Mr. C .Fraser was the first manager of the estate.

factory 75% of the production goes international markets.

Lockhart estate in Munnar has obtained trustea verification. In addition to trustea, it is a

reinforcing management commitment to responsible sourcing methods. Lockhart is the second

neighboring communities.” –Mr. Devadas, Group Manager –High Range Group.

waste water exits the estate premises.

employees of the estate and is benefited to everyone.

routine life of the employees.

manner. Wash and changing room have been created.

works are undertaken on a large scale.

contributed and performed.

Lockhart a model Factory.

CSR Activities at Lockhart

The guiding principle of Lockhart’s Corporate Social Responsibility programs is “impact

The RPG Group is an industrial conglomerates headquartered in Mumbai, India. It was

Harrisons Malayalam Limited (HML) is the most successful integrated agricultural

The company currently produces 17 million Kg of tea and 11 million Kg of Rubber

4.1 RESEARCH DESIGN

4.2 SOURCES OF DATA

Secondary sources: - 1) Annual reports of the company

2) Balance sheet of the company

3) Related information from internet