Professional Documents
Culture Documents
Submit To
Submit By Md. Jahidul Islam; ID: MBA-05014570 Jabun Nahar; ID: MBA 05014443 Rajib Kumar Saha; ID: MBA 05014533
Letter of Transmittal
April 17, 2013 Mohammad Salahuddin Chowdhury, ACA Assistant Professor, Dept. of Finance, University of Dhaka Subject: Submission of Assignment titled Capital Structure Analysis of Lafarge Surma Cement Limited. Dear Sir, This is informing you that I have done this assignment on Capital Structure Analysis of Lafarge Surma Cement Limited. It is a great pleasure for me to present you such type of assignment. To prepare this assignment I collect essential data. I learnt a lot of unknown issues of direct Marketing, while preparing this assignment. This assignment was a challenging experiences for us a theoretical as well as practical. I tried my best to make the assignment a sound one as per your valuable counseling and proper guidance. I express our gratitude to you for giving us the opportunity to making this assignment. I would be obliged if you kindly call me for any explanation or any query about the assignment as and when deemed necessary. Within the time limit, I have tried my best to compile the pertinent information as comprehensively as possible and if you need any further information, I will be glad to assist you. Thanking you,
On behalf of my group
___________________________
Md. Jahidul Islam MBA: 05014570 Dept. of Business Administration Stamford University Bangladesh
Executive Summary
Capital structure, the mixture of a firm's debt and equity, is important because it costs company money to borrow. Capital structure also matters because of the different tax implications of debt vs. equity and the impact of corporate taxes on a firm's profitability. Firms must be prudent in their borrowing activities to avoid excessive risk and the possibility of financial distress or even bankruptcy. A firm's debt-to-equity ratio also impacts the firm's borrowing costs and its value to shareholders. The debt-to-equity ratio is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. The target (optimal) capital structure is simply defined as the mix of debt, preferred stock and common equity that will optimize the company's stock price. As a company raises new capital it will focus on maintaining this target (optimal) capital structure.
Table of Contents
1. Introduction 2. Capital Structure
Clarifying Capital Structure-Related Terminology Capital Ratios and Indicators Additional Evaluative Debt-Equity Considerations Factors That Influence a Company's Capital-Structure Decision
1 2
2 3 3 4
5
6 6 6 7 7
8
8 9 9 10
5.
Data Analysis
Findings from Annual Report Analysis Comparison of Balance Sheet & Income Statement Items Cross Table Analysis of Ratios
12
12 12 14
6. Conclusion
16
Introduction
Capital structure, the mixture of a firm's debt and equity, is important because it costs company money to borrow. Capital structure also matters because of the different tax implications of debt vs. equity and the impact of corporate taxes on a firm's profitability. Firms must be prudent in their borrowing activities to avoid excessive risk and the possibility of financial distress or even bankruptcy. A firm's debt-to-equity ratio also impacts the firm's borrowing costs and its value to shareholders. The debt-to-equity ratio is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this financing increases earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. Insufficient returns can lead to bankruptcy and leave shareholders with nothing. The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies tend to have a debt/equity ratio of under 0.5. (Read more in Spotting Companies In Financial Distress and Debt Ratios: Introduction.) A company can change its capital structure by issuing debt to buy back outstanding equities or by issuing new stock and using the proceeds to repay debt. Issuing new debt increases the debt-to-equity ratio; issuing new equity lowers the debt-to-equity ratio. As you will recall from Section 13 of this walkthrough, minimizing the weighted average cost of capital (WACC) maximizes the firm's value. This means that the optimal capital structure for a firm is the one that minimizes WACC.
Capital Structure
For stock investors that favor companies with good fundamentals, a strong balance sheet is an important consideration for investing in a company's stock. The strength of a company' balance sheet can be evaluated by three broad categories of investment-quality measurements: working capital adequacy, asset performance and capital structure. In this section, we'll consider the importance of capital structure. A company's capitalization (not to be confused with market capitalization) describes its composition of permanent or long-term capital, which consists of a combination of debt and equity. A company's reasonable, proportional use of debt and equity to support its assets is a key indicator of balance sheet strength. A healthy capital structure that reflects a low level of debt and a corresponding high level of equity is a very positive sign of financial fitness. (Learn about market capitalization in Market Capitalization Defined).
4. Management Style Management styles range from aggressive to conservative. The more conservative a management's approach is, the less inclined it is to use debt to increase profits. An aggressive management may try to grow the firm quickly, using significant amounts of debt to ramp up the growth of the company's earnings per share (EPS). 5. Growth Rate Firms that are in the growth stage of their cycle typically finance that growth through debt by borrowing money to grow faster. The conflict that arises with this method is that the revenues of growth firms are typically unstable and unproven. As such, a high debt load is usually not appropriate. More stable and mature firms typically need less debt to finance growth as their revenues are stable and proven. These firms also generate cash flow, which can be used to finance projects when they arise. 6. Market Conditions Market conditions can have a significant impact on a company's capital-structure condition. Suppose a firm needs to borrow funds for a new plant. If the market is struggling, meaning that investors are limiting companies' access to capital because of market concerns, the interest rate to borrow may be higher than a company would want to pay. In that situation, it may be prudent for a company to wait until market conditions return to a more normal state before the company tries to access funds for the plant. (Read more about market conditions in The Cost Of Unemployment To The Economy and Betting On The Economy: What Are The Odds?)
Future Prospect
The industry realized about 20% sales growth in 2009, mostly because of the latent demand from last years. On a secular basis, ongoing demand growth is expected to be about 8%, the outlook for the cement industry seems positive for a number of reasons. First, the government seems to be on a war footing to increase both the amount and the efficiency of spending in social and physical infrastructure under the Annual Development Programs (ADP). Second, the private sector is also energized because of certain tax advantages for undeclared funds if they are invested in real estate. Third, a number of large infrastructure construction projects (such as the Padma Bridge) are on the horizon. Both the government and the private sector are soliciting funds for such projects. If implemented, these projects would significantly improve demand for construction materials.
Market Share
The largest 10 cement manufacturers hold about 70% of the market share. While Heidelberg, Holcim and Lafarge are the leaders among multinational cement manufacturers; Shah, Akij and MI are the leading domestic manufacturers. Shah cement is the market leader with close to 12% of the market share, closely followed by Heidelberg with about 10% of the market share.
government revenue to the national exchequer of Bangladesh. About 5,000 people depend on our business directly or indirectly for their livelihood. We believe that cement is an essential material that addresses vital needs of the construction sector. We are optimistic to meet the growing needs for housing and infrastructure in the construction sector of Bangladesh.
Basic Information
Authorized Capital in BDT* (mn) Paid-up (mn) Face Value Total no. of Securities 10.0 1161373500 Market Lot Business Segment 500 Cement Capital in BDT* 11614.0 52 Week's Range 28.4 - 45 14000.0
Composition of the Shareholders Surma Holdings B.V. Surma holding B.V. was incorporated in the Netherlands, which owns 58.87% of Lafarge Surma Cement Ltd. Lafarge Group of France and Cementos Molins of Spain each owns 50% share of Surma Holding B.V. Lafarge Group One of the major sponsors, Lafarge Group holds worlds top -ranking position in Building Materials, with about 68,000 employees in 64 countries. Lafarge was founded in France in 1833. Through the years since its inception, it has been growing steadily to take lead in the production of different kinds of construction materials and has established itself as the world leader in construction material business. In 2010, for the sixth consecutive year, Lafarge has been listed as one of the 100 most sustainable companies in the world.
Cementos Molins Another major sponsor, Cementos Molins, based in Barcelona, Spain, is a renowned cement company founded in 1928. With over 75 years of experience in manufacturing cement, Cementos Molins has industrial operations also in Mexico, Argentina, Uruguay and Tunisia. Lafarge and Cementos Molins as major sponsors, the equity partners are Asian Development Bank (ADB), International Finance Corporation (IFC) and Islam Group and Sinha Group from Bangladesh. The financiers to the project include Asian Development Bank (ADB), International Finance Corporation (IFC), German Development Bank (DEG), European Investment Bank (EIB), the Netherlands Development Finance Company (FMO) and local Standard Chartered Bank and AB Bank Limited. In addition to that Citibank N.A., HSBC, Commercial Bank of Ceylon PLC, Uttara Bank Limited, The Trust Bank Limited, Eastern Bank Limited have participated in working capital management of the Company.
Foreign 2%
Institutions 9%
Director 59%
Govt. 0%
Data Analysis
Findings from Annual Report Analysis
Findings from the Financial Statement analysis of the above mentioned five Cement Companies. Lafarge Surma Cement Limited (Tk. In million)
Year 2010 2009 2008 2007 2006 Total Assets 16,558 17,291 17,829 17,729 17,116 Debt 10,393 8,222 9,504 10,995 11,121 Equity 2,768 4,430 3,427 3,253 4,808 Debt Ratio 62.77% 47.55% 53.31% 62.02% 64.97% D/E Ratio 375.47% 185.60% 277.33% 338.00% 231.30% EBIT 660 2,332 1,707 (239) (521) Interest Exp 1087 870 1224 1138 163 Interest Coverage Ratio 0.61 2.68 1.39 -0.21 -3.20
Laferge surma has the highest assets base Debt ratio and D/E ratio is decreasing steadily, which shows that it is increased depending on equity rather than debt.
Sales
8000 6000 4000 2000 0 Sales
2006
2007
2008
2009
2010
Total Assets
Years Lafarge Surma 2010 16,558 2009 17,291 2008 17,829 2007 17,729 (Tk. In million) 2006 17,116
Total Assets
18000 17000 16000 15000 2006 2007 2008 2009 2010
Total Assets
Equity
Years Lafarge Surma 2010 4,229 2009 4,430 2008 3,427 2007 3,253 (Tk. In million) 2006 4,808
Equity
6000 4000 2000 0 2006 2007 2008 2009 2010 Equity
-40.00%
Current Ratio= Current Assets/Current Liabilities Lafarge Surma 2010 2009 Current Ratio 0.25 1.93
2008 0.32
2007 0.26
2006 0.53
Current Ratio
2 1 0 2006 2007 2008 2009 2010 Current Ratio
Debt-Equity Ratio = Total Debt/Total Assets Lafarge Surma 2010 2009 Debt Ratio 62.77% 47.55%
2008 53.31%
2007 62.02%
2006 64.97%
Debt-Equity Ratio
100.00% 50.00% 0.00% 2006 2007 2008 2009 2010 Debt-Equity Ratio
Debt-Equity Ratio = Total Debt/Total Equity Lafarge Surma 2010 2009 D/E Ratio 375.47% 185.60%
2008 277.33%
2007 338.00%
2006 231.30%
Debt-Equity Ratio
400.00% 300.00% 200.00% 100.00% 0.00% 2006 2007 2008 2009 2010
Debt-Equity Ratio
Interest Coverage Ratio = EBIT/Interest Expense Lafarge Surma Interest Coverage Ratio 2010 0.61 2009 2.68 2008 1.39 2007 (0.21) 2006 (3.20)
Conclusion
Even in the worst case that the Court puts a permanent ban on mining, LSCL is not without options. How-ever, under any of these scenarios, the profitability of the company would suffer. There are other quarries in the region whose product are traded in the open market. Transport of lime-stone by boat and trucks is already an established practice for Chattak Cement Factory, a government owned manufacturer in the same area. Although it would need substantial capacity building, LSCL can meet part of its limestone requirement from importing locally traded limestone. Import of clinkers like other cement manufacturers is also an option, although very costly for LSCL. In such a case, the company would have to import cement via Chittagong, transport it to current plants in Sunamganj for grinding, and then send it back to Dhaka and other distribution centers. This may involve relocation of its grinding plant. Acquiring other grinders may also be an option for LSCL, although that would require additional capital outlay. As the cement sector consolidates, the larger companies such as LSCL gains market shares at the cost of smaller manufacturers. It is expected that in the end only the ten or so manufacturers, who cur-rently hold about 70% of the market share would survive. In such a case, Lafarge can shift its manufac-turing from Sunamganj to Dhaka by acquiring the facilities of the marginal producers.
References
http://www.lafarge-bd.com
http://www.dsebd.org/ http://www.google.com.bd/ http://www.stockbangladesh.com/ http://en.wikipedia.org/wiki/ Annual_Report_Of_ Lafarge_ Surma _ Cement_Year_2010 Annual_Report_Of_ Lafarge_ Surma _ Cement_Year_2009 Annual_Report_Of_ Lafarge_ Surma _ Cement_Year_2008 Annual_Report_Of_ Lafarge_ Surma _ Cement_Year_2007 Annual_Report_Of_ Lafarge_ Surma _ Cement_Year_2006