Sagar Final Project

Analysis of Capital Structure of Tata Steel____________ 1
INTRODUCTION
ABOUT TATA STEEL
Established in 1907, Tata Steel is Asia's first and India's largest private sector steel company. Tata Steel is among the lowest cost producers of steel in the world and one of the few select steel companies in the world that is EVA (Economic Value Added). Its captive raw material resources and the state of the art 5 MTPA (million tonne per annum) plant at Jamshedpur, in Jharkhand State, India give it a competitive edge. Determined to be a major global steel player, Tata Steel has recently included in its fold NatSteel, Asia (2 MTPA) and Millennium Steel (1.7 MTPA) creating a manufacturing network in eight markets in South East Asia and Pacific Rim countries. Soon the Jamshedpur plant will expand its capacity from 5 MTPA to 7 MTPA by 2008. The Company plans to enhance its capacity, manifold through organic growth and investments. The Company's wire manufacturing unit in Sri Lanka is known as Lanka Special Steel, while the joint venture in Thailand for limestone mining is known as Sila Eastern. Tata steel has been recognized by world steel dynamics as a world class steel maker. The steel company caters to a wide gamut of customers in India & abroad. They include automobile manufacturer producers of white goods, construction industry, and consumer of tubes, bearings, agriculture implements, etc. Its well known branded products are Tata Steelium, Tata Tiscon, Tata Pipes, Tata Bearings & Tata Agro. The intrinsic strength of the company such as low operating costs, special organization culture & good profitability has been widely appreciated.
Department of Management Studies & Research Tirpude College of Social Work, Nagpur Report Submitted By: Sagar Thutheja
PRODUCTS
Bearings Hot & cold rolled coils & sheets Wire Rebar Rings Freeo alloy & minerals Flat products Long products
BEARINGS
TATA STEEL LIMITED; is one of India's largest qualities bearing manufacturers. Tata Bearings has successfully challenged the TPM Award from JIPM in 2004 and is the only Bearings' Manufacturer in India to win the TPM Award from JIPM for Tata Steel, entering the Bearings Business was a logical step towards forward integration since it already had steel making & ring making facilities . Tata bearings, a ISO 9001:2000/QS 9000 (certificate for product & process quality), ISO/TS 16949-2002(quality certificate for automotive parts), ISO140011996(certificate for conforming to Environmental Standards) & ISO 18001Department of Management Studies & Research Tirpude College of Social Work, Nagpur Report Submitted By: Sagar Thutheja
Analysis of Capital Structure of Tata Steel____________ 3 1999(certificate for conforming to Occupational Health & Safety Management standards) certified division of Tata Steel's Bearing Division was set up in the year 1978 by Metal Box (India) Ltd., an MNC, with technology from SNR, France. Tata Steel Limited took over the plant in 1983 and expanded the capacity to 15 million by 1995.By 2005; the division produced over 28 Mn bearings and is still expanding. This division manufactures Ball Bearings, Double Row Self - Aligning Bearings, Magneto Bearings, Clutch Release Bearings & Tapered Bearings. The plant is at Kharagpur, 120 km from Kolkata, in Eastern India.
Different types of bearings
Self - Aligning Clutch Release Bearings Double Row Self - Aligning Ball Bearings Tapered Roller Bearings Magneto Bearings Double - Row Angular Contact Ball Bearings Clutch Release Bearings Special Purpose Ball Bearings Non Standard Ball Bearings Center Bearings Deep Groove Ball Bearings
RINGS
Rings Division is a part of Rings & Agrico Profit Centers of the Tata Steel Limited. It was formed in October 1993 to meet the demands of competitive environment consequent to economic liberalization and to have an organizational structure conducive to improving accountability and responsiveness. The division has two production units Ring Plant & Ring Rolling Mill and Agrico. Ring Plant was founded in October 1984 and is located inside Tata Steel main works, having two manufacturing lines Hatebur a closed die high speed hot forming line and Banning (Radial Axial Ring Rolling Mill) a closed die hot forming-cum-rolling line. Ring Rolling Mill at Adityapur complex founded in January 1971 has a Wagner Machine closed die hot forming-cum-radial rolling line with calibrating facility. Both Ring Plant and Ring Rolling Mills are certified ISO 9002/QS 9000 Units in the year 2000. We have advanced and sophisticated laboratories of Scientific Services and most modern analytical equipments of R&D, Tata Steel Limited. The division is actively considering the technological up gradation of Hatebur and Banning Mill and also looking for a Technological tie-up with FAG-Germany and Timken, USA to meet the challenges and become World Class producer of Rings The division produces ring and annual products at Ring Plant and Ring Rolling Mill for Ball Bearings, Taper Roller Bearings Cylindrical Roller Bearings, Spherical Roller Bearings and Auto-Components.
DIFFERENT TYPES OF RINGS

Rings for Cylindrical, Spherical, Taper Roller and Ball Bearing Gear Blanks Crown Wheel Shifter Sleeve Helical Gear
WIRE
Tata steel Wire Division is amongst the top 5 wire manufacturer in world & largest in India. Tata Steel Wire Division is an integrated wire manufacturer with in house steel making and wire rod rolling. It operates multiple wire drawing plants around the Indian sub -continent. Tata steel Wire Division with its wealth of experience and expertise in wire industry coupled with latest technology meets the most exacting specifications and requirements of customers. Wire Division's products are well established across the markets of Europe, USA, Middle East Asia, Australasia, South Asia and Far East Asia. We are a part of the $US 17 billion Tata group and long product division of Tata steel Limited. We manufacture a wide range of wires catering to the needs of the various industry segments such as automobile, infrastructure, power and general engineering Wire Division is the leading producer of steel wire, with a 30% market share of the organized wire market. We have wire-manufacturing facilities across the Indian sub-continent.
Analysis of Capital Structure of Tata Steel____________ 6 Tata Steel Limited (Wire Division) exports wires to discerning customers in over 40 countries around the world and 7 continents.
DIFFERENT TYPES OF WIRE

Construction: 1. PC Stand 2. PC Wire Automotive: 1. Tyre Bead 2. Ball Bearing 3. Spoke Wire 4. Spring Wire Cable & Conductor: 1. ACSR 2. Cable Armor 3. Fencing / Agricultural 4. Galvanized Welding Industry: 1. MIG Welding Wire Textile Industry: 1. Card Clothing Wire Others: Department of Management Studies & Research Tirpude College of Social Work, Nagpur Report Submitted By: Sagar Thutheja
1.
Analysis of Capital Structure of Tata Steel____________ 7 Steel Wool Wire
AGRICO
TATA Agrico, a division of Tata Steel is the pioneer manufacturer of superior quality agricultural implements in the country. Since 1925, it has been the leading manufacturer of Shovels, Powrahs, Crowbars, Kudalies, Pickaxe and Hammers. These implements cater to the needs of Agricultural, Horticulture Industry, Maintenance of Roads, Dams, Railway- Tracks, Collieries, etc., in India and abroad. The Division is the first manufacturer of agricultural implements (Hand tools) in India to achieve ISO: 9002 Certification in 1994 TATA Agrico implements are manufactured in one piece from Tata High Carbon Steel by forging. The skill and knowledge acquired over half a century, modem methods of manufacture such as forging, and heat treatment and strict supervision at every stage of manufacture, guarantee consistently good quality and durability of Agrico products. The high quality of TATA Agrico implements makes them the first choice of Agriculturists, Government Agricultural Departments, The Railways, Defence Services, Collieries and Central and State Government Departments
DIFFERENT TYPES OF AGRICO PRODUCTS

Hoes Sickles Pick axes Crowbars Shoves
Analysis of Capital Structure of Tata Steel____________ 8 Hammers
FERRO ALLOY & MINERALS
Ferro Alloys & Minerals Division (FA&MD), a profit centre of Tata Steel Limited, was formed in 1993 with a clear objective of focusing its business on a long-term basis in the areas of Ferro Alloys and Minerals. Although Chrome & Manganese business form the mainstay, FA&MD also deals with Iron ore, Dolomite, Coal, Coke, other ferro alloys & minerals through various national and international business partners in order to provide a comprehensive package to our valued customers. The business turnover of FA&MD was approx Rs.1500 Cores (US$ 340 million) in FY 2004-2005. The Ferro Alloys and Minerals Division has leveraged the core strengths of the company to grow successfully into a strong entity, fully equipped to handle exports, imports and trading in Ferro Alloys and Minerals. All the plants and mines of FA&MD are certified to ISO-9001(2000) and ISO-14000 Environment Management System by Indian Register of Quality Systems.
RELEVANCE OF THE STUDY

The changes in the financial scenario have got an impact on the capital structure pattern of the corporate units. The study provides enough insight into analyzing the capital structure of TATA STEEL and also trying to figure out the reason for the changes that has affected the capital structure. The study strives to determine the factors, which significantly influence the corporate capital structure. As such the study is expected to help the corporate management, the financer, and the investor at large, to take valuable decision at their own end. The study has academic relevance too in So far as new theoretical and practical knowledge would be added to the existing stocks of knowledge.
OBJECTIVE OF THE STUDY

A. B. C. D. To study the capital structure theories To study the capital structure of TATA STEEL. To analyze the changes in the capital structure of TATA STEEL. To find out the reasons for and the effects of the changes those have taken place.
SCOPE OF THE STUDY

In this project a thorough analysis of the capital structure of TATA STEEL has been done. The scope of the study is limited to the changes that has take place in capital structure of TATA STEEL. Five year data from the financial statements has been thoroughly studied to get a clear picture as to what changes have been brought by the company to attain the optimal capital structure.
LIMITATION OF THE STUDY:

The limitation of the study is that it is based only on the data of five years. The study has its scope limited to only TATA STEEL. The scope of analysis is limited only to a single company of the steel industry and no general conclusion can be drawn. The study is limited to only the data that was made available.
PLAN OF THE STUDY:

The entire study has been divided into nine chapters the first chapter deals with brief introduction of the company profile, the objective of the study and relevance of the study. The second chapter gives a brief of the research mythology adopted. The third chapter deals with the meaning of capital structure and rations affecting capital structure. The fourth chapter deals with the various theories of the capital structure and also showing how each of the theories is relevant or irrelevant. The fifth chapter gives a brief of the capital structure of Tata steel, examining all the changes that have taken place during the last five years. The sixth chapter deals with the interpretation and analysis of the study we have done in the previous year, giving reasons for and effects of the changes that have occurred during the five year span. The seventh chapter is about the conclusion that we can draw from the data that we have analyzed and interpreted. The eight chapter deals with the suggestions that have been thought of after studying capital structure of Tata steel. The last chapter is the bibliography of the references that have been used.
Project profile:
The project of the analysis of the capital structure of Tata steel basically deals with the investigation of the changes in the capital structure of the company during the past five years. Any company has the basic objective of maximization of the wealth of the shareholders wealth for which it designs its policies in such a way so as to contribute to this effect. Every firm resource in order to meet its Department of Management Studies & Research Tirpude College of Social Work, Nagpur Report Submitted By: Sagar Thutheja
Analysis of Capital Structure of Tata Steel____________ 14 demands. Funds for this purpose may be acquired from varied sources and the finance manager has to decide on the best option, which suits the current requirements of the company. Capital structure decisions are based on deciding the correct mix of debt and equity so that it helps the organization to flourish. Various theories have been paragraphed for the purpose of designing an optimum capital structure. The project also takes inside view of the theories and how the influence the capital structure. A thorough investigation of the various theories in line with the changing structure of Tata steel has been done. All the companies should have well defines capital structure policy, otherwise it may face problems of raising funds and financing the projects a in the long term. An appropriate capital structure decision may improve the value as well as the solvency position of the company. There would be two opposite effects if debt exists in the capital structure the overall cost of capital may reduce as proportion of debt increases due to low cost of debt. On the other hand due to fixed contractual risk of the company increases- this again increases the weight average cost of capital. It is said that optimum capital structure implies a ratio of debt and equity at which the weight average cost of capital would be least and market value of the shares of the firm would be the highest.
CAPITAL STRUCTURE
Definitions: Capital structure is the mixture of sources of funds a firm uses (debt, preferred stock, common stock). Capital structure can be viewed as the permanent financing the firm represented primarily by long-term debt, preferred stock, and common equity but excluding all short term credit. A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds In other words capitals may be expressed as: Capital = total assets Current Liabilities. Further, capital of a firm may be broadly categorized as equity and debt Equity consists of the following: Equity share capital+ preferred share capital+ share premium+ free reserves +surplus profits +discretionary provision for contingencies +development rebate reserves. Debt consists of the following: All borrowings from government and semi government , statutory financial corporation and other agencies +term loans from banks financial institutions etc.+ debentures and all deferred payment liabilities Department of Management Studies & Research Tirpude College of Social Work, Nagpur Report Submitted By: Sagar Thutheja
Analysis of Capital Structure of Tata Steel____________ 16 The amount of debt that a firm uses to finance its assets is called leverage. A firm with a lot of debt in its capital structure is said to be highly levered. A firm with no debt is said to be unleveled. The total capital structure of the firm is represented as in the figure below:
TOTAL CAPITAL
EQUITY CAPITAL
DEBT CAPITAL
Equity share capital Preferred share capital share premium
Term loans Debentures Deferred payments Other long term loans
RESEARCH METHODOLOGY
Introduction: Research is the process of a systematic and in-depth study or search of any particular topic, subject or area of investigation, backed by the collection, complication, presentation and interpretation of relevant details or data. It is a careful search or enquiry into any subject matter, which is an endeavor to discover to find out valuable facts, which would be useful for further application or utilization. The research that involves scientific theories, the discovery of new techniques, a modifications of old concepts or knocking of an existing theory, concept or technique. It may develop a hypothesis and test it. It may also establish relationships between variables and identity the means for problem solving. The research procedure involves the following basic elements: 1. Selection of Subject. 2. Selection of Title of Dissertation. 3. Selection of Time Period. 4. Collection of Data. 5. Reliability of Data. 6. Analysis of Data. 7. Reporting. Research wants to make familiar, how his research work is associated with the above-mentioned elements: 1. Selection of Subject: The selection of a subject for research is a commitment of ones time and efforts in a particular direction. There should not be any haste in deciding on the topic, nor in defining any scope. The research subject may be selected from the following sources: a) Theory of ones own interest, b) Local / Daily problems, Department of Management Studies & Research Tirpude College of Social Work, Nagpur Report Submitted By: Sagar Thutheja
Analysis of Capital Structure of Tata Steel____________ 18 c) Technological changes, d) Unexplored areas, e) Discussions with research advisor or guide.
Researcher had chosen the subject for its research work from the source of Working field listed above, because researches is associated with the personnel who deals in the financial management aspect of the enterprises, and the thinks that he can easily and smoothly carryout this research work on the subject concerned. Objects behind selection of the subject: Researcher had selected the subject for accomplishing the following objects: (i) (ii) activities. (iii) company. (iv) company. (v) (vi) (vii) To investigate the future potential of the company. To know whether the resources are productively utilized. To know whether the shareholders and investors / lenders To determine the profitability and future prospects of the To determine long term and short-term solvency of the To ascertain the financial position of the company. To examine the earning capacity and efficiency of business
of the company are getting their due share of dividend, interest and repayment of loans. (viii) (ix) To study the trend of the changes in the financial position To know about the financial policies adopted by the of the company. management of the company for its smooth and rapid progress / development.
Analysis of Capital Structure of Tata Steel____________ 19 2. Selection of Title of Dissertation: Keeping in view the nature and object behind the selection of subject under research, this dissertation is title as CAPITAL STRUCTURE OF TATA STEEL.
3. Selection of Time Period:

The five year period is chosen for the study of the above subject. The period starts from financial accounting year 2002 to financial accounting year 2006. Reasons behind selection of five year time period: Researcher feels that five year time period is sufficient for the capital structure of company. Researchers also feel that the objects for which research is undertaken can be fulfilled by considering above mentioned time period.
4. Collection of Data:
The data required and necessary for the research study may be obtained from the following means: (i) Documentary i.e. published and unpublished. The data for the research study may be classified into two groups: (i) Documentary source: (a) Researcher has collected the data, quantitative and theoretical form documentary source of the company, which includes published and unpublished matter both. This documentary source is the secondary data. Researcher has collected from published audited annual reports of the Department of Management Studies & Research Tirpude College of Social Work, Nagpur Report Submitted By: Sagar Thutheja
Analysis of Capital Structure of Tata Steel____________ 20 company and unpublished data from the books and other related papers of the company. (b) Researcher has also collected data from websites of the company and also other business websites. Researcher has also taken help from his guide.
5. Reliability of Data:
Researcher feels that data collected for the research work is quite reliable and authentic. This is because the data has been collected from audited annual reports of the company. Researcher fully satisfied with the data collected and means for the research work.
6. Analysis of Data:
The data collected for the research purpose is analyzed by ratio analysis. Researcher has chosen the above tool for his research work and feels that they will serve the best to the title of the research study.
7. Reporting:
In this study the structure analysis is adopted for capital structure of the company.
CAPITAL STRUCTURE RATIOS

To have a better understanding of the mix of debt and equity in the capital structure that has been employed by TATA STEEL we resort to ratio analysis. The analysis becomes much simpler by adopting this technique of finding out the relation between the related terms as ratios the important ratios pertaining to capital are as follows:A) Liquidity Ratios B) Leverage Ratios C) Activity Ratios D) Profitability Ratios The capital structure ratios help in examining the long term solvency of the firm. The capital structure ratios are also called leverage ratios. The leverage or capital structure ratios may be defined as financial ratios which through light on the long term solvency of a firm as reflected in its ability to assure the long term creditors with regards to i. ii. Periodic payment of interest during the period of loan and Repayment of principal on maturity or in predetermined installments on due dates. A) Liquidity Ratios:
Analysis of Capital Structure of Tata Steel____________ 22 The liquidity refers to the maintenance of cash, bank balance and those assets, which are easily convertible into cash in order to meet the liabilities as when arising. So, the Liquidity Ratios study the firms short-term solvency and its ability to pay off the liabilities. The Liquidity Ratios provide a quick measure of liquidity of the firm by establishing a relationship between its current assets and its current liabilities. The Liquidity Ratios are also called the Balance Sheet ratios because the information required for calculation of Liquidity Ratios is available in the Balance Sheet only. Some of the common liquidity ratios are: (i) Current Ratio: It is the most common and popular measure of studying the liquidity of a firm. It is calculated as follows: Current Ratio = Current Assets Current Liabilities The current assets include those assets, which are in form of cash, near cash or convertible into cash with in a period of 1 year. The term current assets also include prepaid expenses and short investments, if any. The current liabilities include all types of liabilities which will mature for payment within a period of one year e.g. bank overdraft, bills payable, trade creditors, outstanding expenses, provision for tax, proposed dividend, unclaimed dividend, accrued interest etc. The Current Ratio throws light on the firms ability to pay its current liabilities out of its current assets. The Current Ratio calculated as above is to be compared with a standard ratio. Generally, a Current Ratio of 2 times or 2:1 is considered to be satisfactory. B) Leverage Ratios: This ratio calculates the proportionate contributions of owners and creditors to a business, sometimes a point of contention between the two parties. Creditors like owners to participate to secure their margin of safety, while management Department of Management Studies & Research Tirpude College of Social Work, Nagpur Report Submitted By: Sagar Thutheja
Analysis of Capital Structure of Tata Steel____________ 23 enjoys the greater opportunities for risk shifting and multiplying return on equity that debt offers. (i) Debt Equity Ratio: Capital is derived from two sources: shares and loans. It is quite likely for only shares to be issued when company is formed, but loans are invariably raised at some later date. There are numerous reasons for issuing loan capital. For instance, owners might want to increase their investment but avoid the risk, which attaches to share capital, and they can do this by making secured loan. In either case, the effect is to introduce an element of gearing or leverage into the capital structure of the company. There are numerous ways so but the debt equity ratio is perhaps most commonly used. Debt Equity Ratio = Long Term Debt Shareholders funds This ratio indicates the relationship between loan funds and net worth of the company, which is known as gearing. If the proportion of debt to equity is low, a company is said to be low-geared, and vice-versa. A debt equity ratio of 2:1 is the norm accepted by financial institutions for financing of project. The higher the gearing, the more volatile the return to shareholders. (ii) Interest Coverage Ratio: This ratio is also called the times interest earned ratio and it measures the ability of the firm to pay the fixed interest liability. The Interest Coverage Ratio may be calculated as follows: Interest Coverage Ratio = EBIT Interest Where EBIT = Earning Before Interest & Taxes, and Interest = Fixed interest liability of the firm. It may be observed that EBIT is the operating profit of the firm, therefore the Interest Coverage Ratio measures as to how many times the interest liability Department of Management Studies & Research Tirpude College of Social Work, Nagpur Report Submitted By: Sagar Thutheja
Analysis of Capital Structure of Tata Steel____________ 24 of the firm is covered with the operating profits of the firm. This ratio gives an idea as to how much fall in EBIT, the firm can sustain before it commits a default in payment of the interest liability. The higher the Interest Coverage Ratio, the better it is both for the firm and for the lenders.
B) Debt to total capital ratio:It is calculated by relating the total debt to the total asset of the firm. The debt of the firm comprises long term debts plus current liabilities. The total assets consist of permanent capital plus current liability. Thus
Debt to total asset ratio = Total debt Total assets
Total debt Permanent capital + current liabilities
Still another variant of d/e ratio is to relate the owners proprietors funds with total assets. This is called the proprietary ratio. The ratio indicates the proportional of total assets financed by owners i.e.
Proprietors funds Total assets
Analysis of Capital Structure of Tata Steel____________ 25 Also the relationship between equity funds ( also referred to as net worth) and fixed income bearing funds (preference shares, debentures and other borrowed funds ) called the capital gearing ratio, is useful when the objective is to show the effects of the use of fixed interest/ dividend source of funds on the earnings available to the equity shareholders.
LONG TERM DEBT TO PERMANENT CAPITAL RATIO:This ratio is a variation from the widely used debt equity ratio. As per the traditional accounting convention the long term debt is considered at par with the capital of the organization because of its nature. This ratio is calculated to know the degree of long term debt involved in the organization to the permanent capital. The formula is as under:Long term debt to Permanent Capital Ratio = Long term debt Permanent capital
B)
Activity Ratios: The Activity Ratios are also called the Turnover Ratios or Performance Ratios. An Activity Ratios is a measure of movement and thus indicates as to how frequently an account has moved/turned over during a period. It shows as to how efficiently and effectively the assets of the firm are being utilized. The Activity Ratios therefore, measure the effectiveness with which the firm uses its resources. These ratios are usually calculated with reference to sales/cost of goods sold and are expressed in terms of rate or times. The Activity Ratios may be calculated for all the specific assets; however, some of the important activity ratios are as follows: (i) Inventory Turnover Ratio:
Analysis of Capital Structure of Tata Steel____________ 26 The Inventory Turnover Ratio is also known as Stock Turnover Ratio. It established the relationship between the cost of goods sold during the year and the average inventory held during the year by the firm. It is calculated as follows: Inventory Turnover Ratio = Cost of Goods Sold Average Inventory Where, Average Inventory = Opening Stock + Closing Stock 2 Cost of Goods Sold = Opening Stock + Purchase Closing Stock = Net Sales Gross Profit. There is no ideal ratio for evaluating an I/T Ratio of a firm so it should be compared with the I/T Ratio of other firm or past I/T Ratios of the same firm. The higher the inventory turnover rate means the more efficiently a company is able to grow sales volume. (ii) Debtors Turnover Ratio: The debtors turnover ratio reveals the velocity of receivables collection by matching the annual credit sales to the average receivables. In case the firm sells goods on credit, the realization of sells revenue is delayed and the receivables (both debtors and/or bills) are created. The cash is realized from these receivables at later stage. The speed with which these receivables are collected affects the liquidity position of the firm. This ratio attempts to throw light on the collection and credit policies of the firm. This ratio is calculated as follows: Debtors Turnover Ratio = Credit Sales____________ Average Debtors + Bills Receivables
C) Profitability Ratios: The Profitability Ratios measure the profitability or the operational efficiency of the firm. There are two groups of person who specifically interested in the analysis of the profitability of the firm. These are (i) the management, which is interested in the overall profitability and operational efficiency of the firm, and (ii) the equity shareholders who are interested in the ultimate returns available to them. The performance of the firm can be evaluated in terms of its Department of Management Studies & Research Tirpude College of Social Work, Nagpur Report Submitted By: Sagar Thutheja
Analysis of Capital Structure of Tata Steel____________ 27 earnings with reference to a given level of assets or sales or owner interest etc. Broadly, the Profitability Ratios are calculated by relating the returns with the (i) sales of the firm (ii) assets of the firm and (iii) the owners contribution.
(i)
Gross Profit Ratio: The Gross Profit Ratio is also called the average mark up ratio. This ratio measures the efficiency of the companys operations. This ratio represents the excess of sales proceeds during the period under observations over their cost. It is calculated by comparing the gross profit of the firm with the net sales as follows: Gross Profit Ratio = Gross Profit x 100 Net Sales The gross profit is the difference between the sales revenue and the cost of generating those sales. Therefore, the gross profit amount and the gross profit ratio depend upon the relationship between the selling price and the cost of production including direct expenses. The gross profit ratio reflects the efficiency with which the firm produces/purchases the goods. (ii) Net Profit Ratio:
The Net Profit Ratio establishes the relationship between the net profit (after tax) of the firm and the net sales. It is calculated as follows: Net Profit Ratio = Net Profit x 100 Net Sales The Net Profit Ratio measures the efficiency of the management in generating additional revenue over and above the total cost of operations. The Net Profit Ratio shows the overall efficiency in manufacturing, administrative, selling and distributing the product. This ratio is designed to focus attention on the net profit margin arising from business operations before interest and tax is deducted.
Analysis of Capital Structure of Tata Steel____________ 28 The higher the profit margin, the more pricing flexibility a firm may have in its operations or the greater cost control initiated by management.
(vii) Return on Net Worth: The Return on Net Worth examines profitability from the perspective of the equity investors by relating profits available for the equity shareholders with the book value of the equity investment. The return from the point of view of equity shareholders may be calculated by comparing the net profit less preference dividend with their total contribution in the firm. It is calculated as follows: Return on Net Worth = Net Profit After Tax x 100 Average Total Shareholders Equity The Return on Net Worth indicates as to how well the funds of the owner have been used by the firm. It also examines whether the firm has been able to earn satisfactory return for the owners or not. (viii) Return on Capital Employed (RCE): The profitability of the firm can be analyzed from the point of view of the total funds employed in the firm. The term funds employed or the capital employed refers to the total long-term sources of funds. It means that the capital employed comprises of shareholders funds plus long-term debts. It is calculated as follows: Return on Capital Employed (RCE) = Net Profit x 100 Total Capital Employed (ix) Earnings Per Share (EPS): Department of Management Studies & Research Tirpude College of Social Work, Nagpur Report Submitted By: Sagar Thutheja
Analysis of Capital Structure of Tata Steel____________ 29 The EPS is one of the important measures of economic performance of a corporate entity. The flow of capital market conditions would be made on the evaluation of EPS. A higher EPS means better capital productivity. It is calculated as follows: Earnings Per Share = Net Profit_____ Number of Equity Share EPS is one of the major factors affecting the dividend policy of the firm and the market prices of the company. Growth in EPS is more relevant for pricing of shares from absolute EPS. A steady growth in EPS indicates a good track of profitability.
(xi) Dividend Pay-out Ratio: The dividend pay-out ratio is the ratio between the DPS and the EPS of the firm i.e. it refers to the proportion of the EPS which has been distributed by the company as dividends. It may be noted that the DPS and the DP ratio both depends upon the statutory provisions relating to compulsory appropriations of profits. It is calculated as follows: Dividend Pay-out Ratio = Dividend Per Equity Share Earnings Per Share
Calculations of Capital Structure Ratios:

A) 1. 2002 1.54 2003 1.36 LIQUIDITY RATIOS: Current Ratio 2004 1.03 2005 1.10 2006 1.11
B) 1.
LEVERAGE RATIOS: Debt Equity Ratio:
2002 2.78
2003 1.84
2004 0.95
2005 0.54
2006 0.29
2) Debt To Total Equity Ratio: 2002 2003 2004 2005 2006
74:26
Analysis of Capital Structure of Tata Steel____________ 31 65:35 49:51 35:65 22:78
3) Interest Coverage Ratio: 2002 1.68 2003 5.14 2004 22.82 2005 29.36 2006 45.24
C)
1)
ACTIVITY RATIOS:
EBIDTA / Turnover
2002 20.23% 2) PBT / Turnover
2003 28.82%
2004 36.61%
2005 42.48%
2006 40.19%
2002 3.70%
2003 14.39%
2004 24.59%
2005 36.17%
2006 34.40%
3) Assets Turnover Ratio
2002 63.28%
2003 78.16%
2004 100.71%
2005 110.15%
2006 107.99%
4) Asset Inventory Turnover Ratio Department of Management Studies & Research Tirpude College of Social Work, Nagpur Report Submitted By: Sagar Thutheja
2002 8.95%
Analysis of Capital Structure of Tata Steel____________ 32 2003 2004 2005 2006 7.72% 7.37% 7.70% 9.49%
5) Asset debtor turnover ratio
2002 15.48%
2003 10.38%
2004 6.75%
2005 3.88%
2006 3.27%
D) PROFITABILITY RATIOS:
1) Gross profit Ratio 2002 1.56 2003 1.64 2004 1.69 2005 1.65 2006 1.68
2) Net Profit Ratio 2002 66.81 2003 86.35 2004 118.16 2005 123.68 2006 171.68
3) Return On Average Capital Employed
2002 6.51%
2003 16.29%
2004 28.10%
2005 49.69%
2006 40.76%
4) Return On Average Net Worth 2002 6.38% 2003 35.88% 2004 46.28% 2005 62.01% 2006 42.90%
5) Earning per share 2002 5.51 2003 27.43 2004 31.55 2005 62.77 2006 63.35
6) Dividend Payout Ratio 2002 72.91% 2003 32.90% 2004 23.89% 2005 23.61% 2006 23.40%
7) Profit Earning Ratio 2002 17.72 2003 4.88 2004 12.16 2005 6.39 2006 8.47
INFERENCES
D) 2.
LIQUIDITY RATIOS: Current Ratio
2002 2003 2004 2005 2006
1.54 1.36 1.03 1.1 1.11
CURRENT RATIO 2 1.54 1.5 1 0.5 0 2002 2003 2004 YEARS 2005 2006 1.36 1.03 1.1 1.11
Analysis of Capital Structure of Tata Steel____________ 35 According to Indian norm, it is sustainable but Internationally it is below the standard norm. Thus the company has insufficient funds to meet its working capital requirements. It indicates a definite weakening in the financial position of the firm. This will help the global companies to overcome this company due to weakening in the financial position of the firm.
E)
LEVERAGE RATIOS:
2.
Debt Equity Ratio:
DEBT EQUITY RATIO 3 2 1 0 2.78 1.84 0.95 0.54 0.29

200 2 200 DEBT EQUITY 3 RATIO 200 4 200 5 200 6 2.78 1.84 0.95 0.54 0.29
2002 2003 2004 2005 2006 YEARS
Analysis of Capital Structure of Tata Steel____________ 36 increasing cash accrual & debt repayment. In general, the lower the debt-equity ratio, the higher the degree of protection enjoyed by the creditors.
2) Debt To Total Equity Ratio:
DEBT TO TOTAL EQUITY 3 2.5 2 1.5 1 0.5 0 2002 2003 2004 YEARS 2005 2006 1.85 0.96 0.53 0.97 2.84
2002 2003 2004 2005 2006
2.84 1.85 0.96 0.53 0.97
3) Interest Coverage Ratio:

INTEREST COVERAGE RATIO 50 40 30 20 10 0 2002 2003 2004 YEARS 2005 2006 1.86 5.14 22.82 29.36 45.24
2002 2003 2004 2005 2006
1.86 5.14 22.8 2 29.3 6 45.2 4
The overall interest coverage ratios are higher than the standard norm, which indicate a better sign both for the firm and for the lenders. For the firm the profitability of committing default is reduced and for the lenders the firm is considered to be less risky.
F)
2)
ACTIVITY RATIOS:
EBIDTA / Turnover
EBIDTA/TURNOVER 50 40 30 20 10 0 2002 2003 2004 YEARS 2005 2006 28.82 20.23 36.61 42.48
40.19
2002 2003 2004 2005 2006
20.23 28.82 36.61 42.48 40.19
2) PBT / Turnover
PBT/TURNOVER 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2002 2003 2004 YEARS 2005 2006 28.82% 20.23% 36.61% 42.48% 34.40%
2002 2003 2004 2005 2006
20.23 % 28.82 % 36.61 % 42.48 % 34.40 %
3) Assets Turnover Ratio
ASSETS TURNOVER RATIO 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 2002 2003 2004 YEARS 2005 2006 63.28% 78.16% 100.71% 110.15% 107.99%
200 2 200 3 200 4 200 5 200 6
63.28% 78.16% 100.71 % 110.15 % 107.99 %
Analysis of Capital Structure of Tata Steel____________ 39 This ratio in general is satisfactory & increasing every year. This increase is due to the replacement of an asset at an increased price or due to the purchase of an additional asset intended to increase production capacity. In FY 06 it decreases due to increase in sales of a fixed assets. The latter transaction might be expected to result in increased sales whereas the former would more probably be reflected in reduced operating costs.
4) Inventory Turnover Ratio
INVENTORY TURNOVER RATIO 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2002 2003 2004 YEARS 2005 2006 8.95% 7.72% 7.37% 7.70% 9.49%
2002 2003 2004 2005 2006
8.95% 7.72% 7.37% 7.70% 9.49%
Analysis of Capital Structure of Tata Steel____________ 40 This ratio measures the velocity of conversion of stocks into sales. In FY 02 it was 8.95% whereas in FY 06 it is 9.49%. This indicates that either inventory is decreasing or sales are rising. The higher the ratio, the more efficient the management of inventories. This shows that the company has improved over the years & has no financial problem.
5) Debtor Turnover Ratio
DEBTORS TURNOVER RATIO 20.00% 15.48% 15.00% 10.38% 10.00% 5.00% 0.00% 2002 2003 2004 YEARS 2005 2006 6.75% 3.88% 3.27%
2002 2003 2004 2005 2006
15.48 % 10.38 % 6.75% 3.88% 3.27%
Analysis of Capital Structure of Tata Steel____________ 41 This ratio in FY 02 was 15.48%. It is declining throughout the study period which shows that the companys fund is blocked for a long time in debtors. The company has not been efficient in converting debtors into cash.
D) PROFITABILITY RATIOS:
1) Gross profit Ratio

GROSS PROFIT RATIO 1.7 1.65 1.6 1.55 1.5 1.45 2002 2003 2004 YEARS 2005 2006 1.56 1.64 1.69 1.65 1.68
2002 2003 2004 2005 2006
1.56 1.64 1.69 1.65 1.68
The gross profit is almost constant throughout the study period from FY 02 - 06 which indicate that there is decrease in cost of goods sold, which has increase the profitability of the company. It is due to increased in sales & reduction in cost of goods sold.
2) Net Profit Ratio

NET PROFIT RATIO 200 150 100 50 0 2002 2003 2004 YEARS 2005 2006 66.81 86.35 118.16 123.68 171.68
2002 2003 2004 2005 2006
66.81 86.35 118.1 6 123.6 8 171.6 8
The net profit has shown a good performance from FY 02 - 06. This indicates that there is improvement in the operational efficiency of the business.
3) Return On Capital Employed
RETURN ON CAPITAL EMPLOYED 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2002 2003 2004 YEARS 2005 2006 6.51% 16.29% 28.10% 49.69% 40.76%
2002 2003 2004 2005 2006
6.51% 16.29 % 28.10 % 49.69 % 40.76 %
This ratio has also shown increase from FY 02 - 05 but decrease in FY 06. This is due to the effect of taxation and not due to the capital structure. 4) Return On Net Worth

RETURN ON NET WORTH 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 62.01% 46.28% 35.88% 42.90%
2002 2003 2004
6.38% 2002 2003 2004 YEARS 2005 2006
2005 2006
6.38% 35.88 % 46.28 % 62.01 % 42.90 %
This ratio has shown increase from FY 02 - 05 but decrease in FY 06 . This reflects the productivity of the ownership (risk) capital employed in the firm. 5) Earnings per share
2002 2003 2004 2005 2006
5.51 27.43 31.55 62.77 63.35
EARNINGS PERSHARE 70 60 50 40 30 20 10 0 31.55 62.77 63.35
27.43 5.51 2002 2003
2004 YEARS
2005
2006
The EPS of the company is increase from FY 02 - 05 but decrease in FY 06. This decrease is due to the decrease in net profit as compared to number of equity shares. 6) Dividend Payout Ratio

DIVIDEND PAYOUT RATIO 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 72.91%
2002
32.90% 23.89% 23.61% 23.40%
2003 2004 2005
2002
2003 YEARS
2004
2005
2006
2006
72.91 % 32.90 % 23.89 % 23.61 % 23.40 %
This ratio is not stable throughout the study period. This shows that the dividend policy adopted by the company is liberal which reflects that the company is not conservative in distributing dividends.
7) Profit Earning Ratio
PROFIT EARNING RATIO 20.00% 15.00% 10.00% 5.00% 0.00% 2002 2003 YEARS 2004 2005 2006 4.88% 17.72% 12.16% 6.39% 8.47%
2002 2003 2004 2005 2006
17.72 % 4.88% 12.16 % 6.39% 8.47%
SUGGESTIONS
Analysis of Capital Structure of Tata Steel____________ 47 After analysis and interpretation of the Capital Structure of Tata Steel, the following are the suggestions for the betterment of the company : It is emphasized here that one has to keep in mind; there will be always scope for future development in any concern and in any department. 1. The company should try to improve its current ratio, as some margin is required to protect the interest of the creditors and to provide cushion to the firm in adverse circumstances. It should try to maintain its current assets by proper inventory management because even a slight decline in the value of current assets will adversely affect its ability to meet its working requirements and therefore from the viewpoint of creditors, it is more risky venture. This will indicate lack of liquidity and shortage of working capital. To overcome this situation, the company could raise funds by the source of banks. Company should try to increase its current assets in order to meet its short-term liabilities in time. 2. Another area where the management needs to draw its attention as far as working capital management is concerned is to manage its debtors. Although the company demands an open letter of credit from all customers, the credit policy needs to be tightened especially with the increase number of plants, which would lead to the substantial amount of investments in debtors. 3. The company should minimize external financing to lower the interest burden which will help to enhance the shareholders ability to earn and will lower the risk for them.
4. The company should try to improve debtors turnover proportion. This will help the company to convert debtors into cash. Department of Management Studies & Research Tirpude College of Social Work, Nagpur Report Submitted By: Sagar Thutheja
Analysis of Capital Structure of Tata Steel____________ 48 The company should make credit sales to those customers from whom the amount can be collect more quickly. The more quickly the debtor pay, the less the risk from bad debts, and so the lower the expenses of collection and increase the liquidity of firm. 5. The company should try and increase it dividend payout ratio. Whenever profit incur the company should try to give more dividend to both equity and preference shareholders. Increasingly these ratios will definitely helps the market share price to shoot up.
CONCLUSION
Analysis of Capital Structure of Tata Steel____________ 49 After analyzing and interpreting the whole Capital Structure of Tata Steel for a five years starting from 2001-02 to 2005-06 and on the basis of annual reports, the researcher have arrived at inferences which are shown at the end of analysis. On the basis of inferences the researcher has arrived on final conclusions. They are as follows: A) Liquidity Position: The Liquidity position of the company is good during the year. It can be judged by the satisfactory result of quick ratio and absolute ratio during the period, when these ratios are equal to or more than the ideal ratios. The current ratio is slightly lower than the ideal ratio. It shows In overall the liquidity position of the company is good which shows the managerial efficiency in utilizing current assets in the business. the companys ability to meet its current requirements.
B) Leverage Position: The Leverage position of the company is good in short term as well as in long term position of the company due to higher interest coverage ratio, dividend coverage ratio and proprietary ratio in previous years.
C)
Activity Position: The business activity of the company is efficient and effective during the period, which is beneficial to the liquidity, leverage and profitability position of the company.
Analysis of Capital Structure of Tata Steel____________ 50 The increasing inventory turnover ratio and assets turnover ratio
highlights the overall effective and efficiency of the business activities and management in making productive utilization of the assets and capital of the company so that there is better profitability during the period. But the debtors turnover ratio is decreasing which shows that the company is not efficient in converting debtors into cash.
D) Profitability Position: The gross profit of the company is declining, which has affected Beside this ratio, the overall profitability of the company is the profitability of the company. satisfactory during the study period, which is the positive sign for the company. The profitability has also affected due to decrease in return on total shareholders equity ratio, which reflects the productivity of ownership capital employed in the firm and also due to earning per share ratio. Therefore the overall financial position of the company is good, on the basis of determinants of ratio analysis i.e. Liquidity, Leverage, Activity and Profitability Ratios. The financial position of the company can be said sound in short term and long term, which indicates that there may be no financial crisis in future.
BIBLIOGRAPHY
o Books Referred
1) Financial Management 2) Financial Management 3) Analysis of Financial Statements
Authors
R.P.Rustagi I.M.Pandey Vivek Sharma
o Website :
www.tatasteel.com
o Other : Annual Reports of Tata Steel.

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Analysis of Capital Structure of Tata Steel____________ 1

Analysis of Capital Structure of Tata Steel____________ 2

Different types of bearings

Analysis of Capital Structure of Tata Steel____________ 4

Analysis of Capital Structure of Tata Steel____________ 5

DIFFERENT TYPES OF RINGS

DIFFERENT TYPES OF WIRE

Analysis of Capital Structure of Tata Steel____________ 7 Steel Wool Wire

DIFFERENT TYPES OF AGRICO PRODUCTS

Analysis of Capital Structure of Tata Steel____________ 8 Hammers

FERRO ALLOY & MINERALS

Analysis of Capital Structure of Tata Steel____________ 9

RELEVANCE OF THE STUDY

Analysis of Capital Structure of Tata Steel____________ 10

OBJECTIVE OF THE STUDY

Analysis of Capital Structure of Tata Steel____________ 11

SCOPE OF THE STUDY

Analysis of Capital Structure of Tata Steel____________ 12

LIMITATION OF THE STUDY:

Analysis of Capital Structure of Tata Steel____________ 13

PLAN OF THE STUDY:

Analysis of Capital Structure of Tata Steel____________ 15

Equity share capital Preferred share capital share premium

Term loans Debentures Deferred payments Other long term loans

Analysis of Capital Structure of Tata Steel____________ 17

3. Selection of Time Period:

Analysis of Capital Structure of Tata Steel____________ 21

CAPITAL STRUCTURE RATIOS

Debt to total asset ratio = Total debt Total assets

Total debt Permanent capital + current liabilities

Proprietors funds Total assets

Analysis of Capital Structure of Tata Steel____________ 30

Calculations of Capital Structure Ratios:

LEVERAGE RATIOS: Debt Equity Ratio:

2) Debt To Total Equity Ratio: 2002 2003 2004 2005 2006

Analysis of Capital Structure of Tata Steel____________ 31 65:35 49:51 35:65 22:78

2002 20.23% 2) PBT / Turnover

3) Assets Turnover Ratio

5) Asset debtor turnover ratio

3) Return On Average Capital Employed

Analysis of Capital Structure of Tata Steel____________ 33

Analysis of Capital Structure of Tata Steel____________ 34

LIQUIDITY RATIOS: Current Ratio

2002 2003 2004 2005 2006

1.54 1.36 1.03 1.1 1.11

Debt Equity Ratio:

DEBT EQUITY RATIO 3 2 1 0 2.78 1.84 0.95 0.54 0.29

2002 2003 2004 2005 2006 YEARS

2) Debt To Total Equity Ratio:

2002 2003 2004 2005 2006

2.84 1.85 0.96 0.53 0.97

3) Interest Coverage Ratio:

Analysis of Capital Structure of Tata Steel____________ 37

2002 2003 2004 2005 2006

1.86 5.14 22.8 2 29.3 6 45.2 4

2002 2003 2004 2005 2006

20.23 28.82 36.61 42.48 40.19

Analysis of Capital Structure of Tata Steel____________ 38

2002 2003 2004 2005 2006

20.23 % 28.82 % 36.61 % 42.48 % 34.40 %

3) Assets Turnover Ratio

200 2 200 3 200 4 200 5 200 6

63.28% 78.16% 100.71 % 110.15 % 107.99 %